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Volume 90 □ Number 3 □ Summer 2004

Federal Reserve

BULLETIN

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

P u b l ic a t io 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
265 MONETARY POLICY REPORT TO THE
C o n g r e ss
The economic expansion in the United States
became increasingly well established in the first
half of 2004, but the pace of inflation picked up
from its very low rate in 2003. At the time of the
February Monetary Policy Report to the Con
gress, considerable evidence suggested that the
U.S. economy had moved into a period of morevigorous expansion. Nonetheless, some busi
nesses remained cautious about hiring and
investment. In the event, businesses stepped up
their hiring in the spring, and capital spending
seems to have continued apace.
Over the first half of this year, energy prices
soared, and inflation in core consumer prices
increased. To some extent, the upturn in core
inflation reflected the indirect effects of higher
energy prices. In addition, strengthening aggre
gate demand worldwide induced a surge in the
prices of many primary commodities and indus
trial materials, and the decline in the dollar in
2003 put upward pressure on import prices. In
this environment, firms were better able to pass
on the higher costs of imports, raise the prices of
domestically produced items that compete with
imports, and in many cases boost their profit
margins.
Monetary policy was very accommodative at
the start of 2004 as the Federal Open Market
Committee (FOMC) sought to provide continu
ing support to the economic expansion. Follow
ing some upbeat labor market reports, solid
growth in output, and a pickup in core consumer
price inflation, the FOMC announced at its May
meeting that it believed that the monetary policy
accommodation then in place could be
“removed at a pace that is likely to be mea
sured.” At its June meeting, the FOMC decided
to begin moving the federal funds rate back
toward a more neutral setting.
Although some of the recent data have been
on the soft side, the available information on the
outlook for the U.S. economy is, on balance,
positive. The prospects also seem favorable for
inflation to remain contained in the period
ahead.

289 SUMMARY OF PAPERS PRESENTED AT THE
CONFERENCE “MODELS AND MONETARY
P o l ic y : R e s e a r c h in t h e Tr a d it io n o f
D a l e H e n d e r s o n , R ic h a r d P o rter , a n d
P e t e r Tin s l e y ”
On March 26 and 27, 2004, the Federal Reserve
Board held a conference in Washington, D.C.,
on the application of economic models to the
analysis of monetary policy issues. The papers
presented at the conference addressed several
topics that, because they are of interest to central
bankers, have been a prominent feature of Fed
eral Reserve research over the years. In particu
lar, the papers represent research in the tradition
of work carried out over the past thirty-five
years at the Federal Reserve by three prominent
staff economists—Dale W. Henderson, Rich
ard D. Porter, and Peter A. Tinsley. Thus, the
conference partly served as a celebration of the
contributions made by these individuals to
policy-related research since the late 1960s.
Among the specific topics addressed at the
conference were the influence of uncertainty on
policymaking; the design of formal rules to
guide policy actions; the role of money in the
transmission of monetary policy; the determina
tion of asset prices; and econometric techniques
for estimating dynamic models of the economy.

297 C r e d it R e p o r t A c c u r a c y
to C r e d it

and

A c c e ss

Data that credit-reporting agencies maintain
on consumers’ credit-related experiences play
a central role in U.S. credit markets. Analysts
widely agree that the data enable these markets
to function more efficiently and at lower cost
than would otherwise be possible. Despite the
great benefits of the current system, however,
some analysts have raised concerns about the
accuracy, timeliness, completeness, and consis
tency of consumer credit records and about the
effects of data problems on the availability and
cost of credit.
In this article, the authors expand on the avail
able research by quantifying the effects of credit

record limitations on the access to credit. Using
the credit records of a nationally representative
sample of individuals, the authors examine the
possible effects of data problems on consumers
by estimating the changes in consumers’ credit
history scores that would result from “correct
ing” the problems in their credit records. More
over, the authors report results for consumer
groups segmented by strength of credit his
tory (credit history score range), depth of
credit history (number of credit accounts in
a credit record), and selected demographic
characteristics.
323 R e p o r t

C o n d it io n
o f t h e U.S. B a n k in g In d u s t r y :
F ir s t Q u arter , 2004
o n th e

Assets at reporting bank holding companies rose
$325 billion (or 3.7 percent) in the first quarter
of 2004 as the “fifty large” bank holding com
panies acquired investment securities as part of
broader efforts to adjust interest rate sensitivity.
Nonperforming assets and net charge-offs con
tinued their sustained decline. Net income of
reporting bank holding companies, which rose
to nearly $30 billion for the quarter, was sup
ported by stronger net interest income, lower
provisions for loan losses, and significant gains
associated with the sale of investment securities
previously held in portfolio. More than one-third
of the quarterly increase in net income was pro
vided by “all other” bank holding companies as
provisions for loan losses declined dramatically,
in part because of seasonal influences. Earnings
of these institutions had declined in the previous
two quarters.
328 S t a f f S t u d y S u m m a r y
Mergers and acquisitions have significantly
changed the U.S. banking industry over the past
quarter century. Staff Study 176, Bank Merger
Activity in the United States, 1994-2003, ana
lyzes patterns in detailed and comprehensive
data for the 3,517 mergers consummated among
commercial banks and thrift institutions from
1994 to 2003.
329 A n n o u n c e m e n t s
Statement by Chairman Alan Greenspan on
nomination for fifth term
Chairman Greenspan takes oath of office

Federal Open Market Committee statements
Proposed amendment to Regulation J
Amendments to Regulation V
Amendments to Regulation CC, Appendix A
Final amendments to Regulation CC and its
commentary to implement Check 21 Act
Proposed amendments published to Regula
tion DD
Withdrawal of proposed revisions to Regula
tions B, E, M, Z, and DD
Intent to withdraw proposed amendments to
Community Reinvestment Act regulations
Board o f Governors requests comment
Proposed revision to policy statement on pay
ments system risk
Proposed
securities

rule

retain

trust

preferred

Adequacy of existing disclosures of debit card
fees
Prescreened solicitations for credit or insurance
Proposed revisions to bank holding company
rating system
Bank Regulatory Agencies
Rollout delayed of web-based central data
repository for bank financial data
Issuance o f rules and guidance
Rule on use of medical information for credit
eligibility
Guidance on overdraft protection programs
Rule on affiliate marketing opt outs
Final rule on capital requirements for assetbacked commercial paper programs
Bank Secrecy Act examination procedures
Regulatory agencies request comment
Statement concerning complex structured
finance activities
Disposal of consumer information
Board begins 2004 Survey of Consumer
Finances
Board begins
Finances

Survey

of Small

Business

Federal Reserve Banks announce strategy to
meet evolving demands of payments system

Appointment of Jeffrey M. Lacker as President,
Federal Reserve Bank of Richmond
Federal Open Market Committee schedule for
2005
United States unveils new $50 note
Businesses, banks, and cash-handling equipment
manufacturers get final alert to prepare for new
$50 note
Publication of revised capital framework and
U.S. implementation plans

Board closed on day of mourning
Enforcement actions
Changes in Board staff
352 Legal Developments
Various bank holding company, bank service
corporation, and bank merger orders
420 BOARD OF GOVERNORS AND OFFICIAL
S taff

Publication of the May 2004 update to the Com
mercial Bank Examination Manual

422 FEDERAL OPEN MARKET COMMITTEE AND
S t a f f ; A d v is o r y C o u n c il s

Publication of the June 2004 update to the Bank
Holding Company Supervision Manual

424 FEDERAL RESERVE BOARD PUBLICATIONS

Support of plan to develop new central banking
publication

426 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

Release of minutes to discount rate meetings
Announcement of meeting of the Consumer
Advisory Council
Board seeks nominations for appointment to
Consumer Advisory Council

428 M a p s

o f th e

F e d e r a l R e s e r v e S y st e m

430 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 July 20, 2004,
pursuant to section 2B o f the Federal Reserve Act

MONETARY POLICY AND THE
E c o n o m ic O u t l o o k
The economic expansion in the United States became
increasingly well established in the first half of 2004,
but the pace of inflation picked up from its very low
rate in 2003. At the time of the February Monetary
Policy Report to the Congress, considerable evidence
was already in hand indicating that the U.S. economy
had made the transition from a period of subpar
growth to one of more-vigorous expansion. Never
theless, job creation remained limited, and gains in
investment, although sizable, still seemed restrained
by a lingering caution on the part of some businesses.
In the event, businesses stepped up their hiring in the
spring, and capital spending seems to have continued
apace.
Over the first half of this year, energy prices
soared; moreover, inflation in core consumer
prices—as measured by the price index for personal
consumption expenditures excluding the direct effects
of movements in food and energy prices—increased
from an exceptionally low rate of 1 percent over the
four quarters of 2003 to an annual rate of a little more
than 2 percent. To some extent, the upturn in core
inflation reflected the indirect effects of higher energy
prices, but other forces also played a role. Strengthen
ing aggregate demand both at home and abroad
induced a surge in the prices of many primary com
modities and industrial materials. In addition, the
decline in the foreign exchange value of the dollar in
2003 put upward pressure on the prices of imported
goods and services. With strong demand in the
United States and increased utilization of the produc
tive capacity of the economy, firms were better able
to pass on the higher costs of imports, raise the prices
of domestically produced items that compete with
imports, and in many cases boost their profit margins.
Likely in response to the faster rate of price increases
experienced this year, surveys suggest that near-term
inflation expectations have moved up somewhat; still,
expectations for price inflation over the longer term
have remained in their recent range.

Monetary policy was very accommodative at the
start of 2004 as the Federal Open Market Committee
(FOMC) sought to provide continuing support to an
economic expansion that had yet to produce a sus
tained improvement in the labor market and to ensure
that the previous year’s threat of an unwelcome disin
flation would continue to recede. Although real GDP
had accelerated sharply in the second half of 2003,
the incoming data through the time of the March
meeting suggested that employment was growing
only slowly, as employers were relying on increased
production efficiencies to satisfy considerable gains
in aggregate demand. Surging oil prices were boost
ing overall inflation, while core inflation—though
no longer declining—was still low. With subsequent
labor market reports suggesting that hiring was on a
stronger track, growth in output continuing at a solid
pace, and core consumer price inflation possibly run
ning higher, the FOMC announced in May that it
saw the risks to the goal of price stability as having
moved into balance. Even so, the Committee stated
that it believed that the monetary policy accommoda
tion then in place could be “removed at a pace that
is likely to be measured.” Indeed, at its June meeting,
the FOMC decided that sufficient evidence was in
hand to begin moving the federal funds rate back
toward a more neutral setting and raised the federal
funds rate !A percentage point to VA percent, a
decision that was widely anticipated by market
participants.
Although some of the recent data have been on the
soft side, the available information on the outlook for
the U.S. economy is, on balance, positive. House
holds are enjoying a generally improving job market,
rising real incomes, and greater wealth, all of which
are providing them with the confidence and where
withal to spend. In the business sector, capital spend
ing apparently is continuing to increase briskly, bol
stered by expectations of strong sales as well as by
booming profits and supportive financial conditions;
investment should also continue to be buoyed by
firms’ adoption of productivity-enhancing technolo
gies. Moreover, inventories appear to be lean relative
to sales even after taking account of the substantial
improvements firms have made in managing their
stocks, suggesting that stockbuilding may provide
some impetus to production in the near term. The

266

Federal Reserve Bulletin □ Summer 2004

brightening outlook for economic activity abroad
suggests that demand for U.S. exports should grow
and provide a further lift to domestic production.
The prospects also seem favorable for inflation to
remain contained in the period ahead. For one reason,
some of the forces that contributed to the upturn in
core inflation in the first half of 2004 are likely to
prove transitory. In particular, the upward impetus
from the rise in energy and commodity prices is
likely to lessen in coming quarters. For another
reason, the evidence suggests that the productive
capacity of the economy is still not being fully used
and that the attendant slack is probably exerting
some downward pressure on inflation. If—as seems
likely—the economy approaches full utilization of its
productive capacity only gradually, that downward
pressure should persist for a time. Moreover, produc
tivity remains on a solid uptrend and should continue
to restrain costs. To date, the gains in productivity
have helped to boost profit margins. As firms com
pete to take advantage of profit opportunities, they
may eventually be forced to absorb a portion of any
increases in labor and other costs that occur. But
history suggests that the absorption of costs has
limits. Indeed, unit labor costs have turned up of late,
as productivity growth has slowed below the rate of
increase in hourly compensation. If increases in those
costs were to develop any upward momentum, the
well-behaved nature of inflation in recent years could
be jeopardized.
M onetary Policy, Financial M arkets, and the
Economy over the First H a lf o f 2004
At the beginning of 2004, the FOMC was growing
more confident that the economic expansion was

likely to be self-sustaining, particularly in light of the
significant firming of business outlays and the contin
ued strength in household spending. Moreover, stimu
lative fiscal and monetary policies, in conjunction
with receptive financial markets, appeared likely to
provide substantial support to economic activity and
to ward off any further disinflation. However, the
Committee remained concerned about the persistent
weakness in the labor market. At its January meeting,
the FOMC left the target for the federal funds rate
at 1 percent. The Committee generally felt that the
apparent slack in labor and product markets and
continued strong productivity growth were likely to
keep the underlying trend in inflation subdued, but it
nevertheless was cognizant that a highly accommo
dative stance for monetary policy could not be main
tained indefinitely. Given these considerations, the
Committee modified the language of its policy state
ment to gain greater flexibility to firm policy should
circumstances warrant. The Committee achieved this
added flexibility by removing its assessment that
monetary policy would be accommodative for “a
considerable period” and instead saying that the
Committee could be “patient” in removing its policy
accommodation.
At the time of the March FOMC meeting, the
Committee believed that conditions were mostly in
place for further solid economic growth. Industrial
production had picked up broadly, and consumer and
business spending continued to expand briskly. How
ever, the employment reports for January and Feb
ruary still painted a picture of subdued hiring. With
financial markets quite accommodative, the Commit
tee recognized that maintaining the current stance
of policy could fuel inflation pressures and perhaps
encourage excessive risk-taking by financial market

S e le c te d interest rates
Percent

Ten-year Treasury

Two-year Treasury

—

Intended federal funds rate

N o t e . The data are daily and extend through July 14, 2004. The dates on the horizontal axis are those of FOMC meetings.

— 6
—

—

Monetary Policy Report to the Congress

participants. The Committee concluded that the low
level of core consumer price inflation and continued
evidence of weak hiring argued for the retention of
both its 1 percent target for the federal funds rate and
the wording in its statement that the Committee could
be “patient” with respect to changes in monetary
policy.
At the May FOMC meeting, members noted a
distinct improvement in the economic outlook. The
labor market figures reported for March had proved
to be strong, and the reports for the two previous
months had been revised upward significantly. Con
sumer price inflation in the first quarter of the year
was faster than it had been in the previous quarter.
Although much of this rise was due to escalating
energy costs, core inflation also stepped up, and
survey-based measures of near-term inflation expec
tations had edged higher. In response to the indica
tions of rising aggregate demand and a strengthening
job market, yields on Treasury securities had risen
appreciably. Accordingly, the Committee was of the
view that the expansion would be vigorous and
believed that the odds of any further disinflation had
been substantially reduced. On the basis of the evolv
ing outlook for economic activity and prices, the
Committee revised its assessment of risks to indicate
that the upside and downside risks for inflation had
moved into balance. To underscore its belief that
policy would probably soon need to move toward a
more neutral stance while emphasizing that this pro
cess was not expected to be rapid, the Committee
stated its judgment that monetary policy accommo
dation “can be removed at a pace that is likely to be
measured.”
At the time of the June FOMC meeting, incoming
information tended to confirm that the economy was
expanding at a solid pace but also indicated that
inflation was higher than had been anticipated.
Quotes on near-term money market futures and
options suggested that market participants were
nearly certain of an increase of 25 basis points in the
target for the federal funds rate at that meeting and
had priced in a cumulative increase of about 2 lA per
centage points in the federal funds rate over the next
year. The Committee agreed that the current substan
tial degree of policy accommodation was no longer
warranted and decided to increase its target for the
federal funds rate 25 basis points. The Committee
noted that it considered the risks to both sustainable
economic growth and stable prices to be roughly
balanced and maintained its appraisal that policy
accommodation “can be removed at a pace that is
likely to be measured” but also emphasized that
it will “respond to changes in economic prospects

267

as needed to fulfill its obligation to maintain price
stability.”
Economic Projections fo r 2004 and 2005
In conjunction with the FOMC meeting at the end of
June, the members of the Board of Governors and the
Federal Reserve Bank presidents, all of whom partici
pate in the deliberations of the FOMC, were asked
to provide economic projections for 2004 and 2005.
The central tendency of the FOMC participants’
forecasts for the increase in real GDP is 4Vz percent
to 43/4 percent over the four quarters of 2004 and
3V2 percent to 4 percent in 2005. The civilian unem
ployment rate is expected to lie between 5lA percent
and 5V2 percent in the fourth quarter of 2004 and to
decline to between 5 percent and 5lA percent by the
fourth quarter of 2005.
Starting with this report, the Federal Reserve will
provide projections for the price index for personal
consumption expenditures excluding food and energy
(core PCE), which the Committee believes is better
as an indicator of underlying inflation trends than is
the overall PCE price measure previously featured.
Core PCE inflation appears to have run a little above
an annual rate of 2 percent in the first half of 2004;
for 2004 as a whole, most FOMC participants expect
it to lie between l 3/4 percent and 2 percent. For 2005,
the central tendency of the projections for core PCE
inflation is 1V2 percent to 2 percent.
E c o n o m ic p ro je c tio n s f o r 2 0 0 4 a nd 2 0 0 5
Percent

Indicator

Federal Reserve Governors
and
Reserve Bank presidents
Central
tendency

Range
2004
Change, fourth quarter
to fourth quarter1
Nominal GDP ...................................
Real GDP ...........................................
PCE price index
excluding food and energy__

1*4-2

1%-2

Average level, fourth quarter
Civilian unemployment rate ...........

5'/4-5'/2

5>/4-5>/2

‘' '
6-7
4—4%

■

-■ .
6*4-6%
4>/2-4%

2005
Change, fourth quarter
■M
to fourth quarter1
Nominal GDP ...................................
Real GDP ...........................................
PCE price index
excluding food and energy___
Average level, fourth quarter
Civilian unemployment rate ...........

l
11
4%-6*4
3*4-4

3*4-4

1*4-2%

1*4-2

5-5 V4

514-6

5-51/4

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

268

Federal Reserve Bulletin □ Summer 2004

W e a lth -to -in c o m e ra tio

ECONOMIC AND FINANCIAL DEVELOPMENTS
IN 2004

Ratio

After having surged in the second half of 2003,
economic activity continued to expand at a solid pace
in the first half of 2004. In the labor market, payroll
employment started to increase last fall after a long
string of declines and picked up further during the
first half of this year. Headline inflation has been
boosted significantly by the jump in energy prices
this year, but core inflation has also moved up from
the exceptionally low levels of late 2003.
C h a n g e in re a l G D P
1984

1988

1992

1996

2000

2004

Percent, annual rate
N o t e . The

data are quarterly and extend through 2004:Q1. The
wealth-to-income ratio is the ratio of household net worth to disposable
personal income.

1998

2000

2002

2004

N o t e . Here and in subsequent charts, except as noted, change for a given
period is measured to its final quarter from the final quarter o f the preceding
period.

The Household Sector
Consumer Spending
Consumer spending, which had gathered a good bit
of steam in the second half of 2003, continued to
move higher in the first half of 2004. The growth in

spending was spurred by substantial gains in income.
In addition, household wealth has risen sharply over
the past year, and consumer surveys indicate that
individuals are generally upbeat in their assess
ments of the economy’s prospects and of their own
situations.
Personal consumption expenditures rose at an
annual rate of 3 3/ 4 percent in real terms in the first
quarter. Spending on light motor vehicles, which had
been supported in late 2003 by aggressive price and
financing incentives, slipped somewhat in early 2004.
But outlays for goods other than motor vehicles,
which had risen 6 V2 percent in real terms in 2003,
posted another huge increase in the first quarter;
spending on services also perked up after having
advanced only modestly in 2003. The available data
point to a much smaller increase in consumer spendP e rs o n a l s a v in g ra te

C h a n g e in re a l in c o m e a n d c o n s u m p tio n

Percent
Percent, annual rate

□ Disposable personal income
I Personal consumption expenditures
—

1984
1998

2000

2002

2004

1988

1992

1996

2000

2004

N o t e . The data are quarterly; the reading for 2004:Q2 is the average for

April and May.

Monetary Policy Report to the Congress

ing in the second quarter; the deceleration mainly
reflects a sharp slowing in the growth of outlays on
goods other than motor vehicles.
Real disposable personal income (DPI)—that is,
after-tax income adjusted for inflation—rose at an
annual rate of nearly 4 percent between the fourth
quarter of 2003 and May 2004, a gain about in line
with its rate of growth last year. To be sure, the rise in
energy prices cut into the growth of real income in
the first half of the year. However, aggregate wages
and salaries, boosted by increases in both employ
ment and earnings, rose appreciably in nominal
terms. In addition, last year’s tax legislation, which
had already reduced withholding rates in mid-2003,
added further to households’ cash flow by increasing
refunds and lowering final settlements this spring.
Household wealth increased only about in line with
nominal DPI in the first quarter of 2004, and the
wealth-to-income ratio was likely little changed in
the second quarter as well. Nonetheless, the increase
in wealth over the past year has been considerable—
and probably large enough to more or less offset
any lingering restraint on spending growth from the
earlier declines in stock prices. Thus, with wealth
approximately a neutral influence on the growth of
spending of late, the personal saving rate has held
fairly steady. In fact, the average saving rate over the
first five months of the year—at 2lA percent of DPI—
was very close to the annual figures for 2002 and
2003.
Residential Investment
Activity in the housing sector remained torrid in the
first half of 2004. Although starts in the single-family
P riv a te h o u s in g starts
Millions o f units, annual rate

Multifamily

1992

1994

1996

1998

2000

2002

2004

N ote. The data are quarterly; the readings for 2004:Q2 are the averages for
April and May.

269

M o rtg a g e ra tes
Percent

Fixed rate

.
W V

A,
V

—

Adjustable rate

1 1

1
2001

1
2002

1
2003

1
2004

N ote. The data, which are weekly and extend through July 14, 2004, are
contract rates on thirty-year mortgages.
Source . Federal Home Loan Mortgage Corporation.

sector faltered a bit early in the year, in part because
of unusually adverse weather, they subsequently
snapped back and reached an annual rate of more
than 1.6 million units in April and May—SV2 percent
greater than the already rapid pace for 2003 as a
whole. Sales of new and existing homes have also
been exceptionally strong, and they hit record highs
in May. In general, housing activity has been sup
ported by the favorable developments regarding jobs
and income and, especially early in the year, by low
mortgage rates. Rates on thirty-year fixed-rate mort
gages, which had dipped to 51/2 percent in March,
rose markedly in the spring; they have edged down in
recent weeks and now stand at 6 percent, a level still
quite low by historical standards.
Home prices have continued to rise rapidly. For
example, the national repeat-sales price index from
the Office of Federal Housing Enterprise Oversight—
which partially adjusts for shifts in the quality of
homes sold—rose I 3A percent over the year ending
in the first quarter (the latest available data), a rate
similar to the average annual gain since late 2000.
By this measure—and many others—house price
increases have outstripped gains in incomes as well
as in rents in recent years.
Starts in the multifamily sector averaged an annual
rate of 360,000 units over the first five months of the
year, a pace slightly faster than that of the past
several years. Low interest rates have apparently
helped maintain the profitability of apartment con
struction, given that other fundamental determinants
of activity in the sector have been weak: In particular,
rents have remained soft, and in the first quarter,
vacancy rates for multifamily rental properties
reached a new high.

270

Federal Reserve Bulletin □ Summer 2004

Household Finance
Household debt rose at an annual rate of about
103/4 percent in the first quarter of 2004. The espe
cially rapid growth of mortgage debt was driven by
the strong pace of activity in the housing market and
the renewed wave of mortgage refinancing. However,
the second-quarter rise in interest rates appears to
have slowed the rate of refinancing and, conse
quently, the amount of equity being extracted from
the value of homes through such transactions. Con
sumer credit—which constitutes the bulk of house
hold debt aside from mortgage borrowing—expanded
at an annual rate of about 6 percent over the first
quarter of the year and at roughly a 4 percent pace in
April and May. The growth of consumer credit likely
has continued to be restrained by the substitution
toward mortgage debt as a means to finance house
hold expenditures.
Low interest rates, in concert with strong growth
in disposable personal income, have helped to keep
financial obligations manageable for most house
holds. In the first quarter of the year, the debt service
ratio and the financial obligations ratio for the house
hold sector in the aggregate, both of which gauge
pre-committed expenditures relative to disposable
income, continued to edge down from their peaks in
2001. Other indicators also suggest that the financial
well-being of households has stabilized and may be
improving. Delinquencies on credit card and auto
loans generally declined in the first three months of
the year, and bankruptcy rates, while still high,
stepped down in the first quarter from their recent
peak.
Rapid increases in home prices have continued to
buoy household net worth this year. In contrast, stock
M o rtg a g e re fin a n c in g a p p lic a tio n in d e x

H o u s e h o ld fin a n c ia l o b lig a tio n s ra tio
Percent

1992

1994

1996

1998

2000

2002

2004

N ote. The data are quarterly and extend through 2004:Q1. The financial
obligations ratio equals the sum of required payments on mortgage and con
sumer debt, automobile leases, rent on tenant-occupied property, home
owners’ insurance, and property taxes, all divided by disposable personal
income.

D e lin q u e n c y ra tes o n se le c te d ty p e s o f h o u s e h o ld lo a n s
Percent

2002

2004

N ote. The data are quarterly and extend through 2004:Q1.
Source. For mortgages, the Mortgage Bankers Association; for auto loans,
the Big Three automakers; for credit cards, Moody’s Investors Service.

prices are about unchanged. Although news on earn
ings and economic activity has generally been favor
able, rising oil prices and interest rates and, perhaps,
heightened geopolitical concerns have weighed on
investor sentiment. Nevertheless, inflows into equity
mutual funds have been even stronger thus far in
2004 than they were last year.

The Business Sector
Fixed Investment

N ote . The data are monthly and extend through June 2004.
Source. Mortgage Bankers Association.

For the most part, businesses appear to be shaking off
the extraordinary reluctance to undertake new invest
ment projects that was evident in 2002 and 2003.

Monetary Policy Report to the Congress

C h a n g e in re a l b u s in e s s fix e d in v e s tm e n t

1998

1999

2000

2001

2002

2003

2004

Note. High-tech equipment consists of computers and peripheral equip
ment andcommunications equipment.

Indeed, although outlays on nonresidential construc
tion have not yet turned up decisively, real spending
on equipment and software (E&S) has been advanc
ing briskly. The broadly based growth in E&S spend
ing has been driven by increasingly favorable funda
mentals: positive expectations for sales, high levels
of corporate profits and cash flow, a desire to replace
or upgrade aging equipment after a period of weak
investment spending, and the continued low cost of
capital.
Real E&S spending rose at an annual rate of more
than 15 percent in the second half of last year, and it
posted another sizable increase in the first quarter of
2004 despite flat business purchases of motor vehi
cles and a dip in deliveries of aircraft. Excluding
transportation equipment, real spending on E&S rose
at an annual rate of W h percent in the first quarter.
In the high-tech category, real purchases of comput
ers and software remained on the solid uptrend that
has been evident for the past couple of years, and real
outlays on communications equipment increased
further, reaching a level about 20 percent above the
low in the fourth quarter of 2002. Spending for
equipment other than high-tech and transportation,

271

which accounts for about 40 percent of E&S (mea
sured in nominal terms), also rose markedly in the
first quarter. Such spending tends to be particularly
sensitive to the prospects for aggregate demand. In
addition, it may be receiving a lift from the partialexpensing tax provision, which is especially valuable
for equipment with relatively long service lives for
tax purposes; that provision is slated to expire at the
end of 2004.
Equipment spending appears to have posted
another solid increase in the second quarter. Outlays
on transportation equipment seem to have rebounded,
and the incoming data on high-tech equipment point
to robust real expenditures. Some indicators for
spending on other nontransportation equipment have
been a bit soft recently. But the May level of ship
ments for this broad category was still above that
of the first quarter, and backlogs of unfilled orders,
which have risen impressively over the past year,
continued to build.
Real nonresidential construction has remained
about unchanged, on net, since the steep decline in
2001 and 2002. Construction of office buildings
is still running at roughly half the pace of 2000,
although vacancy rates have stabilized—albeit at very
high levels—and the decline in rents has slowed.
Factory construction also remains sluggish. Construc
tion of retail and wholesale facilities, in contrast, has
held up fairly well, a performance consistent with the
strength in consumer spending. Outlays on buildings
for health care and education also have been reason
ably well sustained.

Inventory Investment
Inventory investment has generally remained sub
dued even as final sales have strengthened. Although
real nonfarm inventory investment picked up to an
annual rate of $30 billion in the first quarter, the
accumulation occurred almost entirely in the motor
vehicle sector, in which sagging sales and a high
level of production early in the year created a notice
able bulge in dealer stocks, especially of light trucks.
In the second quarter, the automakers reduced assem
blies; but with sales running only a little above their
first-quarter pace on average, inventories of motor
vehicles remained elevated. Outside the motor vehi
cle industry, nonfarm inventories increased at a mea
ger $6 billion annual rate in real terms in the first
quarter, and the available data point to only a moder
ate step-up in real stockbuilding, on balance, in April
and May. In general, non-auto inventories appear
lean relative to sales, even after factoring in the

272

Federal Reserve Bulletin □ Summer 2004

downward trend in inventory-sales ratios that has
accompanied the ongoing improvements in supplychain and logistics management.

Major components of net business financing
Billions of dollars

Q Commercial paper
□ Bonds
■ Bank loans
Sum of major
components

—

Corporate Profits and Business Finance
Continuing the gains of last year, profits of the busi
ness sector to date have remained strong. In the first
quarter of 2004, earnings per share for S&P 500 firms
were about 26 percent higher than their level four
quarters earlier, and before-tax profits of nonfinan
cial corporations as a share of GDP from that sector
edged up following a steep increase in 2003. A jump
in profits in the petroleum and gas industries owing to
higher oil prices was responsible for much of the rise
in earnings. However, firms across many industries,
with the notable exception of telecommunication ser
vices, registered solid gains in earnings. In response
to this pattern of higher profits, analysts have been
steadily marking up their forecasts for earnings in
subsequent quarters.
Net equity issuance has remained negative this
year. Seasoned offerings have been scarce, the pace
of initial public offerings has only inched up, and
share retirements have continued to be strong. Corpo
rations have continued to repurchase shares at a rapid
rate to manage their cash positions, even as they have
increased dividend payments.
Firms relied heavily on their elevated profits and
substantial cash holdings to finance their investment
in inventories and fixed capital in the first half of
2004. As a result, the growth of nonfinancial business
debt remained modest. Much of the proceeds from
Before-tax profits of nonfinancial corporations
as a percent of sector GDP

I_I___________ I_____ l__ i__ I__ i__ i__ i
2002

2003

I_I

2004

Note. Seasonally adjusted annual rate for nonfinancial corporate business.
The data for the sum of major components are quarterly. The data for
2004:Q2 are estimated.

bond issuance was used to pay down higher-cost
debt, and the timing of the issuance of investmentgrade bonds in particular was influenced by move
ments in interest rates; issuance spiked in March in
the wake of the drop in yields but subsided in April
as rates rebounded. Short-term debt financing showed
signs of turning around after contracting over the
previous three years. Commercial paper outstanding
expanded in the first two quarters of 2004. Business
loans at banks have fallen on balance so far this year
but at a much slower pace than in 2003. The Federal
Reserve’s Senior Loan Officer Opinion Survey con
ducted in April 2004 indicated that demand for busi
ness loans had begun to expand and that commercial
banks had again eased both standards and terms on
these loans over the previous three months.
Corporate bond yields
Percent

Percent

—

—
'— -v /

—

\ High-yield

—
\A A

—

8
V ""

—

6
1

l l . U .1 j I . I.1J..I I...1 .i
1979

1984

I M i,:
1989

1994

1999

I.I.J l
2004

Note. The data are quarterly and extend through 2004:Q1. Profits are from
domestic operations of nonfinancial corporations, with inventory valuation
and capital consumption adjustments.

2000

2002

2004

Note. The data are monthly averages of daily data. The final observation
is the average of trading days through July 14, 2004. The AA rate is 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.

Monetary Policy Report to the Congress

Net percentage of domestic banks tightening
standards on commercial and industrial loans
to large and medium-sized firms

1990

1992

1994

1996

1998

2000

2002

273

Default rate on outstanding bonds
Percent

2004

Note. The data are based on a survey generally conducted four times per
year; the last reading is from the April 2004 survey. Large and medium-sized
firms are those with annual sales o f $50 million or more. Net percentage is
the percentage reporting a tightening less the percentage reporting an easing.
Source. Federal Reserve, Senior Loan Officer Opinion Survey on Bank
Lending Practices.

Strong profits, low interest rates, and continued
deleveraging helped improve the credit quality of
nonfinancial firms over the first half of the year. In
the second quarter, the delinquency rate on business
loans dropped for the sixth consecutive quarter; the
continued decline has reversed a large part of the
preceding run-up. Early in the year the twelve-month
trailing default rate on outstanding bonds fell into
the relatively low range observed over much of the
1990s, and in June it registered another decline.
Moreover, in the first part of the year, the pace of
upgrades of bond ratings by Moody’s Investors Ser
vice rose while the pace of downgrades fell.

Note. The default rate is monthly and extends through June 2004. The rate
for a given month is the face value of bonds that defaulted in the twelve
months ending in that month divided by the face value of all bonds
outstanding at the end of the calendar quarter immediately preceding the
twelve-month period.
Source. Moody’s Investors Service.

Borrowing against commercial real estate assets
continued at a rapid pace during the first half of this
year. Anecdotal reports suggest that some firms were
using mortgages on commercial property to lock in
low-cost, long-term funding. Despite the persistently
high vacancy rates for most types of commercial
property, the loans backed by these assets have con
tinued to perform well. Delinquency rates on com
mercial mortgages held by banks and insurance com
panies remained very low in the first quarter. A drop
in delinquencies on commercial-mortgage-backed
securities (CMBS) in recent months has partially
reversed last year’s rise, and the narrow risk spreads
Ratings changes of nonfinancial corporate bonds

Delinquency rates on selected types of loans at banks

Percent
Percent

__ Upgrades

Commercial and industrial

1997

1998

1999

2000

2001

2002

2003

2004_________

Note. Data are at an annual rate; for 2004, they are the annualized values
N o t e . The data, from bank Call Reports, are quarterly, are seasonally

adjusted, and extend through 2004:Q1.

of monthly data through May. Debt upgrades and downgrades are expressed
as a percentage of the par value of all bonds outstanding.
Source. Moody’s Investors Service.

274

Federal Reserve Bulletin □ Summer 2004

on CMBS suggest that investors have limited con
cerns about loan quality.

Change in real government expenditures
on consumption and investment
Percent, annual rate

□

The Government Sector

Federal

—

Federal Government
The deficit in the federal unified budget has contin
ued to widen. Over the twelve months ending in June,
the unified budget recorded a deficit of $431 billion,
$ 1 2 0 billion more than during the comparable period
last year and equal to nearly 4 percent of nominal
GDR In large part, the rise in the deficit is attribut
able to further rapid increases in spending on defense
and other programs and the loss of revenues resulting
from the tax legislation enacted in recent years. In
addition, interest costs, which fell sharply between
fiscal 1997 and fiscal 2003 as a result of budget
surpluses and declining interest rates, have leveled
off and thus are no longer a significant factor helping
to restrain the deficit. The primary deficit, which
excludes net interest, totaled $276 billion over the
twelve months ending in June, also approximately
$120 billion more than over the year ending in June
2003.
Over the twelve months ending in June, nominal
federal spending was nearly 7 percent higher than
during the same period a year earlier and stood at
about 20 percent of nominal GDP—virtually the
same as in fiscal 2003 but IV2 percentage points
above the recent low in fiscal 2000. Spurred by the
war in Iraq, defense spending ramped up another
14 percent; outlays for nondefense discretionary pro
grams, which include homeland security, moved up
Federal receipts and expenditures

+
— 0
—

1998

2000

2002

2004

further as well. Spending on the major health pro
grams rose at a rapid clip, in part because the Jobs
and Growth Tax Relief Reconciliation Act of 2003
(JGTRRA) temporarily increased grants to the states
under the Medicaid program and boosted payments
to some Medicare providers. In addition, as noted,
net interest payments, which had plummeted between
1997 and 2003, flattened out. Real federal expendi
tures for consumption and gross investment—the part
of government spending that is a component of real
GDP—rose at an annual rate of 8 V2 percent in the
first calendar quarter of 2004; that increase reflected
a surge in real defense spending, which now stands
more than 30 percent above the levels that prevailed,
on average, from 1997 to 2000.
Federal receipts in the twelve months ending in
June were 1V2 percent higher than during the compa
rable period of the previous year after having fallen
Net saving

Percent o f nominal GDP
Percent o f nominal GDP

Note. The budget data are from the unified budget; through 2003 they are
for fiscal years (October through September), and GDP is for Q4 to Q3. For
2004, the budget data are for the twelve months ending in June, and GDP is
for 2003:Q4 to 2004:Q1.

2002 2004

Note. The data are quarterly and extend through 2004:Q1. Nonfederal
saving is the sum of personal and net business saving and the net saving of
state and local governments.

Monetary Policy Report to the Congress

Federal government debt held by the public
Percent o f nominal GDP

—

275

impinge on private capital formation and thus slow
the rise of living standards.
Reflecting the need to finance the sizable federal
budget deficit, federal debt held by the public
expanded at an annual rate of 11% percent in the first
half of the year. The ratio of this debt to nominal
GDP now exceeds 36 percent. The Treasury tilted its
issuance toward longer-term and inflation-indexed
securities somewhat, and announced semiannual issu
ance of a twenty-year inflation-protected bond begin
ning in July and a five-year inflation-protected note
beginning in October.

1 111 11I I I 1111 11II 11II I I 1 1111111 1II I I 111 111111 1
1964

1974

1984

1994

2004

State and Local Governments

Note. Through 2003, 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 2004:Q1. Excludes securities held as investments o f federal gov
ernment accounts.

markedly between fiscal 2000 and fiscal 2003.
Receipts received a substantial boost over the past
year from a strong gain in corporate taxes, which
were lifted by robust profits. Social insurance taxes,
which tend to move in line with wages and salaries,
also increased. But individual income taxes were
below last year’s level: Although taxable incomes
rose moderately, collections were reduced by the
lower withholding rates in place since mid-2003 and
by the effects of JGTRRA on refunds and final settle
ments this spring.
The deterioration in the unified budget since 2000
has been mirrored in a sharp downswing in federal
saving—essentially, the unified surplus or deficit
adjusted to conform to the accounting practices fol
lowed in the national income and product accounts
(NIPA). Gross federal saving fell from a high of
nearly 3 percent of nominal GDP in 2000 to negative
3 percent of GDP in the first quarter of 2004; mea
sured net of estimated depreciation, federal saving
fell from 2 percent of GDP to negative 4 percent of
GDP over this period. In the past couple of years, the
rise in business saving from the rebound in profits
and reductions in corporate taxes has cushioned to
some extent the effect of growing budget deficits
on national saving. In fact, because of the dramatic
increase in business saving in recent quarters,
national saving has recovered some from the extreme
lows of early 2003. Even so, as of the first quarter of
2004, national saving (measured net of estimated
depreciation) was still equal to just about 2 l/z percent
of GDP, compared with a recent high of 6 V2 per
cent in 1998. If not reversed over the longer haul,
such low levels of national saving could eventually

States and localities have started to see some
improvement in their budget positions after having
gone through several difficult years. Strong growth
in household income and consumer spending has
boosted revenues in recent quarters, as have the addi
tional federal grants authorized under JGTRRA. And
although rising medical costs and security needs have
continued to put upward pressure on spending, state
and local governments have generally held the line
on hiring and have kept other outlays in check. The
restraint on spending, in combination with a draw
down of reserve funds and some increases in taxes,
has helped states and localities satisfy their balancedbudget requirements. In fact, between the third quar
ter of 2003 and the first quarter of 2004, NIPA net
saving (excluding social insurance funds) for this
sector averaged $21 billion at an annual rate (lA per
cent of nominal GDP), compared with negative

State and local government net saving
Percent of nominal GDP

1984

1988

1992

1996

2000

2004

Note. The data, which are quarterly, are on a national income and product
account basis and extend through 2004:Q1. Net saving excludes social
insurance funds.

276

Federal Reserve Bulletin □ Summer 2004

$7 billion in 2002 and negative $31 billion in the first
half of 2003. (Net saving is roughly similar to the
surplus or deficit in an operating budget.) Although
a few states are still struggling with strained fiscal
situations, most have entered fiscal 2005 (which
started on July 1 in all but four states) with expecta
tions of respectable growth in revenues and with
budgets in place that allow for some increases in
spending on high-priority services and some rebuild
ing of reserve funds.
Real consumption and investment spending by
state and local governments was essentially flat in the
first quarter of 2004; available indicators point to a
moderate increase in the second quarter. Outlays for
consumption items, which were little changed in
2003, appear to have remained subdued throughout
the first half of the year. Investment expenditures also
were about unchanged in the first quarter, but they
turned up sharply in the spring, mainly because of a
jump in spending on highways.
Significant demand for infrastructure spending and
favorable interest rates led to robust issuance of state
and local government debt to finance capital expendi
tures and to advance refund higher-cost debt. Never
theless, over the first half of the year, net issuance
edged down from its rapid pace in 2003 to about a
6 percent annual rate. The deceleration reflected a
decline in short-term borrowing as improvements in
the fiscal positions of state and local governments
lessened the need for temporary funding of budget
shortfalls.
The credit quality of municipal borrowers has sta
bilized after two years of deterioration; for the year to
date, upgrades and downgrades of credit ratings have
been roughly equal. In a marked change from last
year’s sentiment, rating agencies have begun to
express guarded optimism about the credit quality of
states because of improvements in state revenue flows
and restraint on spending.

U.S. trade and current account balances

11 I i i i i i i i i i i i I i i i I ii ) I i i i I i i i I i i 11
1997

1998

1999

2000

2001

2002

2003

N o t e . The data are quarterly and extend through 2004:Q1.
S o u r c e . Department of Commerce.

International Trade
The U.S. trade deficit in goods and services registered
$548 billion at an annual rate in the first quarter,
about $46 billion larger than in the fourth quarter of
2003. On average, data for April and May suggest
that the trade deficit continued to widen in the second
quarter.
Real exports of goods and services increased at an
annual rate of IV 2 percent in the first quarter of 2004,
well off the blistering 20 percent pace of the fourth
quarter but still above the average for 2003. Solid
gains in exports since mid-2003 arose in part from
the strong economic performance of many of our
major trading partners. In addition, the net decline in
the exchange value of the dollar since 2002 continued
to make U.S. goods and services more competitive
abroad. Increases in exports of U.S. goods were wideChange in real imports and exports of goods and services

The External Sector
In the first quarter of 2004, the U.S. current account
deficit expanded to an annual rate of $580 billion, or
about 5 percent of GDR As in the past, the widening
was driven primarily by a larger deficit in trade of
goods and services. The surplus on net investment
income declined in the first quarter but remained well
above its average value in the previous year. The
deficit on net unilateral transfers rose because of a
concentration of disbursements of government grants
in the first quarter.

2004

1998
2000
2002
2004
_____________________________________
S o u r c e . Department of Commerce.

Monetary Policy Report to the Congress

Prices of oil and of nonfuel commodities
January 2001 = 100

Nonfuel

. 11 1 I. .
2001 ________

- 1 1 1 ■ 1 i 1 1 1 1 I 1 1 1 1 1 1. 1— I

2003

2004

Note. The data are monthly and extend through June 2004. The oil price is
the spot price of West Texas intermediate crude oil. The price o f nonfuel
commodities is an index o f forty-five primary-commodity prices from the
International Monetary Fund.

spread across our major trading partners, with the
exception of Japan, and were concentrated in real
exports of capital goods, industrial supplies, and con
sumer goods. Real exports of agricultural products
fell sharply, hurt by foreign bans on U.S. beef prod
ucts following reports of mad cow disease in a U.S.
herd. Exports of services rose moderately.
Prices of total exports rose at an annual rate of
5% percent in the first quarter, boosted by another
jump in agricultural prices along with substantial
increases in the prices of other primary commodities
and industrial supplies. Prices of U.S. agricultural
exports have been pushed up by very strong global
demand, particularly from China. For specific prodPrices of major nonfuel commodities

--------------------------------------------------------------! ------------------------------

January 2003 = 100

277

ucts, such as cotton and soybeans, lower production
in some countries also contributed to price run-ups.
More recently, prices of soybeans and other agricul
tural products have eased in the face of a slowing in
the growth of demand from China and the anticipa
tion of larger harvests. Even so, available data point
to continued strong increases in export prices in the
second quarter.
Supported by solid U.S. economic growth, real
imports of goods and services rose at an annual rate
of IOV2 percent in the first quarter. This increase was
below the fourth-quarter pace but still roughly double
the rate of increase for 2003 as a whole. Real imports
of goods were boosted by a sharp increase in oil
imports. Gains in imports of non-oil goods were also
sizable and widespread across categories. Imports of
services grew slightly in the first quarter.
The spot price of West Texas intermediate (WTI)
crude oil surged above $40 per barrel in May and has
since fluctuated close to that level. The run-up in the
price since the beginning of the year has been driven
by surprisingly strong global demand for oil. Supply
issues have been important as well. These were
mainly continued violence in Iraq, including the
sabotage of oil facilities, attacks on foreigners in
Saudi Arabia, ongoing unrest in Nigeria, political
turmoil in Venezuela, and tax payment difficulties at
a major Russian oil company. The recent increase in
OPEC production (mainly by Saudi Arabia) has eased
the upward pressure on prices a bit, but they have
remained elevated.
Prices of imported non-oil goods rose at an annual
rate of 5Vi percent in the first quarter after minimal
increases in the second half of 2003. Prices for
imported consumer goods rose at an annual rate of
23/4 percent after being flat in 2003. Skyrocketing
global commodity prices last year and early this year
boosted prices of imported industrial supplies (espe
cially metals) and of foods, feed, and beverages. The
jump in commodity prices reflected strong demand,
the net depreciation of the dollar over the past two
years, and the limited expansion in supply of many
commodities since the 2001 trough in commodity
prices. Available data suggest a modest stepdown in
the rate of increase of import prices in the second
quarter; the move in part reflects a flattening of
consumer goods prices.

J---1
---1
-2004

The Financial Account

N o t e . The data are monthly and extend through June 2004. The metals

category includes aluminum, copper, and iron ore; food includes cereals,
vegetable oils and protein meals, seafood, and meat; agricultural raw mate
rials consists o f timber, cotton, wool, rubber, and hides; beverages consists of
coffee, cocoa beans, and tea.
S o u r c e . International Monetary Fund.

The U.S. current account deficit has continued to be
financed largely by foreign flows into U.S. bonds.
Foreign official inflows, already sizable in 2003, rose

278

Federal Reserve Bulletin □ Summer 2004

U.S. net financial inflows
Billions of dollars

□ Official
■ Private

equities by private U.S. investors appear to be
strengthening, but U.S. investors still show no appe
tite for foreign bonds.
Direct investment into the United States in the first
quarter continued to be restrained by the slowdown
of global mergers and acquisitions since 2002. In
contrast, U.S. direct investment abroad was strong in
2003 and in the first quarter of 2004, as the effect of
fewer mergers and acquisitions was offset by sizable
reinvested earnings.

The Labor M arket
2001

2002

2003

Employment and Unemployment

2004

S o u r c e . Department o f Commerce.

sharply in the first quarter of 2004 and then moder
ated somewhat. Similarly, private foreign purchases
of U.S. bonds, which were significant in 2003,
increased sharply in the first quarter and also appear
to have moderated in the second quarter. In contrast,
foreign demand for U.S. equities was weak in 2003
and has remained so in 2004. Purchases of foreign
U.S. net international securities transactions
Billions of dollars

Net private foreign purchases o f U.S. securities
□ Bonds
■ Equities

—

175

—

150

—

125

—

100

—

The demand for labor turned up in late 2003 after an
extended period of weakness, and it has gathered
additional steam this year. After averaging about
60,000 per month in the fourth quarter of 2003, gains
in private nonfarm payroll employment rose to an
average of about 200,000 per month in the first half
of 2004. The job gains were especially large in
March, April, and May but ebbed somewhat in June.
The civilian unemployment rate, which had fallen
from a recent peak of 6.3 percent in June 2003 to
5.7 percent in December 2003, was little changed
over the first half of the year. In June, it stood at
5.6 percent.
The increases in payrolls over the first half of 2004
were widespread. Especially notable was the turn
around in the manufacturing sector, in which employ
ment bottomed out in January and then rose a
cumulative 65,000 jobs through June. The rise in
manufacturing jobs was concentrated in the durable
goods industries—in particular, those making fabri
cated metals and other construction-related products,
Net change in payroll employment

Net private U.S. purchases o f foreign securities

m
100

0 Bonds
■ Equities

l l . l ■ ..lll ll
I

2001

2002

I____ L

2003

2004

S o u r c e . Department of Commerce and the Federal Reserve Board.

1994

1996

N o t e . Private nonfarm.

1998

2000

2002

I
2004

Monetary Policy Report to the Congress

Civilian unemployment rate

279

Change in output per hour
Percent, annual rate

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

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

computers and electronic equipment, and machinery.
After a long string of declines, employment at pro
ducers of nondurable goods was little changed, on
net, over the first half. Job gains in virtually all other
major sectors have been greater this year than last. In
particular, hiring in retail trade, which had been lack
luster in 2003, turned up appreciably, and construc
tion employment increased further. The professional
and business services sector also posted a sizable
rise, in part because the rebound in manufacturing
activity lifted hiring at temporary-help firms. A clear
indication of the breadth of the employment increases
is provided by the six-month diffusion index com
piled by the Bureau of Labor Statistics (BLS). The
index is equal to the percentage of industries that
increased employment over the most recent six
months plus one-half the percentage with unchanged
employment; in June, the index moved up to its
highest level since April 2000.

lean capital budgets, and an extraordinary reluctance
of firms to add to payrolls, businesses appear to have
raised their productivity mainly through changes in
organizational structures and better use of the capital
already in place. With hiring having picked up of
late, measured productivity growth may slow in com
ing quarters; but if recent experience is any guide,
businesses will continue to focus on achieving struc
tural improvements in the efficiency of their opera
tions. The upswing in investment spending now
under way also bodes well for sustained favorable
productivity performance in the period ahead.
The rapid productivity growth in recent years has
helped to bolster increases in hourly compensation
in the face of the soft labor market and the low
consumer price inflation in 2003. As a result,
increases in the employment cost index (ECI) mea-

Productivity and Labor Costs
Gains in labor productivity have slowed somewhat in
recent quarters after the spectacular increases of mid2003. Still, according to the currently published data,
output per hour in the nonfarm business sector rose a
remarkable 5Vz percent over the year ending in the
first quarter. Over the past three years, increases in
productivity have averaged more than 4 percent per
year, compared with average increases of about
2Vi percent per year in the second half of the 1990s.
During that earlier period, an expansion of the capi
tal stock was an important source of productivity
growth. However, in the more recent period, when
the business environment—at least until the past few
quarters—was characterized by sluggish demand,

1996

1998

2000

2002

2004

N ote. The data extend through 2004:Q1. 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.

280

Federal Reserve Bulletin □ Summer 2004

Change in unit labor costs

N o t e . Nonfarm business sector.

sure of hourly compensation, which is based on a
survey of private nonfarm businesses conducted quar
terly by the BLS, have held fairly steady of late.
In fact, the rise in the ECI over the twelve months
ending in March—at a shade less than 4 percent—
was virtually the same as the increases over the
preceding two years. Benefit costs, which rose 7 per
cent over the year ending in March, have continued
to be the fastest rising portion of hourly compensa
tion; health insurance costs have remained on a steep
uptrend, and employers have boosted their contribu
tions to defined-benefit retirement plans to make up
for earlier stock market losses. The rising benefit
costs have likely exerted some downward pressure on
wages, which rose just 2 lA percent over the twelve
months ending in March; the twelve-month change
in the wage component of the ECI, which was close
to 4 percent in 2000 and 2001, has been in the range
of 2Vi percent to 3 percent since late 2002.
The change in compensation per hour in the non
farm business (NFB) sector—an alternative measure
of hourly compensation based on data constructed for
the NIPA—has swung widely in recent years. Fluc
tuations in the value of stock option exercises, which
are excluded from the ECI but included in the NFB
measure, likely account for some of the differential
movements in the two series. The four-quarter change
in the NFB measure bottomed out at a bit less
than 2 percent in 2002, when the value of exercised
options was dropping; it has moved up steadily since
that time and, in the first quarter, stood at AV2 per
cent—a rate not much different from the increase in
the ECI. With productivity growth slowing to a pace
below that of NFB hourly compensation, unit labor
costs rose in both the fourth and first quarters after
having trended down over the preceding two years.

Prices
Inflation moved higher in the first half of 2004. After
rising just 1Vi percent over the four quarters of 2003,
the price index for personal consumption expendi
tures (PCE) increased at an annual rate of 3 1/2 percent
between the fourth quarter of 2003 and May 2004. In
that period, energy prices soared, and increases in
core consumer prices picked up to an annual rate
of 2 lA percent—more than 1 percentage point faster
than the increase in 2003. Data for the consumer
price index (CPI) are available through June and
show some moderation in the core component of the
series. Over the first half of the year, the core CPI
rose at an annual rate of 2 Vi percent, compared with
an increase of VA percent over the four quarters of
2003.
Reflecting the surge in crude oil prices, PCE
energy prices rose at an annual rate of more than
25 percent in the first quarter; they apparently posted
another outsized increase in the second quarter. Gaso
line prices increased rapidly through May as crude oil
costs rose and as price markups were boosted by
strong demand and lean inventories; although gaso
line prices have fallen on balance since late May,
they are currently nearly 30 percent above their level
at the end of last year. As for natural gas, which can
often substitute for fuel oil in the industrial sector,
spot prices were elevated at the start of the year, fell
somewhat in February and March, and trended up
over the spring. The higher spot prices for natural gas
this spring pushed up prices paid by consumers
through June. PCE electricity prices appear to have
risen at an annual rate of 3 percent over the first half
of the year, a pace similar to that in 2003.

Change in PCE price index

BBS
Percent, annual rate

□ Total
■ Excluding food and energy

N o t e . The data are for personal consumption expenditures (PCE). The
changes for 2004 are from 2003:Q4 to May 2004.

Monetary Policy Report to the Congress

Change in consumer prices excluding food and energy

---------

2004

Note. The data for the CPI extend through June 2004; for PCE, they
extend through May 2004.

Although volatile from month to month, consumer
food prices rose moderately on balance over the first
half of 2004 after having moved up in late 2003.
Robust global demand is imparting upward impetus
to food prices, but U.S. producers are in the process
of boosting supply, which should help restrain
increases in retail food prices in coming quarters.
The step-up in core PCE inflation this year has
been especially pronounced in a few categories. In
particular, prices of motor vehicles have firmed after
a noticeable decrease in 2003. In addition, increases
in shelter costs, which were surprisingly low in 2003,
are now running more in line with earlier trends.
Core inflation has also been lifted this year by sub
stantial increases, on balance, in a number of catego
ries for which prices cannot be derived from market
transactions and thus must be imputed by the Bureau
of Economic Analysis—for example, prices of finan
cial services provided by banks without explicit
charge. These non-market-based prices, which were
about flat in 2003, are difficult to estimate, and the
imputed figures tend to be volatile.
A number of factors have contributed to the run-up
in core inflation this year. Higher oil prices have
doubtless raised the cost of producing other goods
and services. So have the steep increases in prices
of non-oil commodities such as copper and lumber,
which came about as economic activity strengthened
worldwide and as industrial capacity utilization both
here and abroad tightened. Likewise, the decline in
the dollar has boosted non-oil import prices and thus
the costs of inputs for many domestic producers. The
weaker dollar has also likely lessened the pressure on
firms facing foreign competition to hold the line on
prices—a consideration that is probably contributing
to the widespread perception that firms’ pricing

281

power has increased lately. Moreover, unit labor costs
have edged up recently after having declined notice
ably in 2002 and 2003.
From a cyclical perspective, the sharp upturn in
commodity prices is not surprising, given the pickup
in the growth of industrial production. In fact, such
large increases in commodity prices are typical as
economic activity accelerates and capacity utilization
rises—especially for products for which the supply is
relatively fixed in the short run. Some portion of
these increases usually proves transitory. More
important, cyclical swings in commodity prices tend
to have only a minor effect on overall inflation, both
because they account for a small share of total costs
and because changes in commodity prices tend to be
partly absorbed in firms’ profit margins, at least for a
time.
The faster rate of inflation this year underscores
the difficulty of gauging price pressures. Neverthe
less, on the whole, the evidence suggests that slack
remains in labor and product markets, which should
be exerting some downward pressure on inflation.
The unemployment rate—at 5Vi percent currently—
is not significantly lower than it was through much
of 2002 and 2003, when core inflation was trending
down. And despite the run-up this year, capacity
utilization in the manufacturing sector is still below
its longer-run average. In addition, the strong upward
trend in productivity is continuing to help keep the
rise in labor costs muted, and profit margins are
sufficiently wide to give firms scope to absorb cost
increases for a while without putting undue upward
pressure on prices.
The upturn in actual inflation has been echoed in
some measures of inflation expectations. For exam
ple, according to the Michigan Survey Research
Center, the median expectation for inflation over the
coming year has averaged slightly more than 3 per
cent since early spring after hovering in the area of
2'A percent to 23/4 percent in 2003 and early 2004.
The median expectation for inflation over the next
five to ten years has been running a bit below 3 per
cent in recent months, a reading similar to the figures
for 2002 and 2003. According to the Survey of
Professional Forecasters conducted by the Federal
Reserve Bank of Philadelphia, expectations of infla
tion over the next ten years held steady in June at
2xh percent. Inflation compensation over the next five
years as measured by the spread between the yield on
nominal Treasury securities and their indexed coun
terparts rose noticeably during the first half of 2004.
To be sure, inflation compensation is also influenced
by perceptions of inflation risk and the secular
increase in demand for inflation-indexed debt, but

282

Federal Reserve Bulletin □ Summer 2004

Alternative measures of price change

Interest rates on selected Treasury securities

Percent
Percent

Price measure

2002 to 2003

2003 to 2004

_ ____ .

Chain-type (Q l to Q l)
Personal consumption expenditures . ..
Excluding food and energy...............

1.7
2.3
2.4
1.6

1.8
1.7
1.6
1.3

2.2
1.5

2.8
1.8

Fixed-weight (Q2 to Q2)

Note. Changes are based onquarterly averages of seasonally adjusteddata.

the rise in near-term inflation compensation likely
reflects, at least in part, higher inflation expectations.
Similar to the survey-based measures of longer-run
inflation expectations, inflation compensation for the
period five years to ten years ahead was little changed
on net over the first half of the year.
Broader NIPA price measures are available only
through the first quarter, and the four-quarter changes
in these series do not show the rise in inflation
indicated by the monthly data discussed above. In
particular, the rate of increase in the price index for
GDP over the year ending in the first quarter was just
PA percent, the same as over the preceding year. The
four-quarter change in the price index for gross
domestic purchases—which is defined as the prices
paid for purchases of domestic and imported con
sumption, investment, and government goods and
services—dropped from 2XA percent to PA percent
over the same period; the deceleration reflects mainly
the effects of energy prices, which rose even more
rapidly over the year ending in the first quarter of
2003 than they did over the most recent year.

Three-month

Note. The data are daily and extend through July 14, 2004.

net, about 30 to 45 basis points. Although interest
rates rose immediately after the FOMC’s January
meeting in response to the Committee’s decision to
remove its statement that monetary policy could
remain accommodative for “a considerable period,”
the increase proved to be short lived. Weak employ
ment reports released in early February and early
March prompted yields to fall amid doubts about
the strength of the economic expansion. Federal
funds futures contracts at the end of March appeared
to indicate that market participants placed small odds
on a tightening of monetary policy before late 2004,
and contracts also seemed to price in only a gradual
increase in the federal funds rate during 2005.
Interest rates backed up in the second quarter as
data releases increasingly suggested that the eco-

U.S. Financial M arkets
As 2004 opened, financial market conditions were
quite accommodative, with low corporate bond
yields, narrow risk spreads, and relatively easy terms
and standards on bank lending. Although equity
prices changed little, and interest rates rose on bal
ance in response to positive economic news and
expectations of a tightening of monetary policy,
financial conditions in the first half of the year
remained supportive of economic growth. Business
borrowing nevertheless remained tentative, while
increases in the debt of the federal government and of
households were sizable.
Interest Rates
From the end of 2003 through the end of March,
yields on nominal Treasury coupon securities fell, on

Implied volatility of short-term interest rates
Basis points

2001

2002

2003

2004

Note. The data are daily and extend through July 14, 2004. The series
shown is the implied volatility of the three-month Eurodollar rate over the
coming four months, as calculated from option prices.

Monetary Policy Report to the Congress

Equity Markets

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

1 1 1 I I I I 1 I I I 1 1 1 I t I I..J . I.

2002

2003

283

..1..A ...L-.L.-1—I-- 1--i_j

2004

Note. The data are daily and extend through July 14, 2004. The spreads
compare the yields on the Merrill Lynch AA, BBB, and 175 high-yield
indexes with the yield on the ten-year off-the-run Treasury note.

Over the first half of 2004, equity prices were subject
to the strong crosscurrents of robust earnings reports,
rising interest rates, fluctuating fears about geopoliti
cal developments, and sharply higher oil prices. On
balance, broad equity price indexes at the end of June
had edged about 2 xh percent to VA percent above
year-end levels after having surged 25-30 percent
over the course of 2003. Over the first half, analysts
raised their estimates of profits for coming quarters;
the upward revision outstripped the more modest
increase in equity prices and boosted the ratio of
expected year-ahead earnings to stock prices. With
real interest rates higher, however, the difference
between the earnings-price ratio and the real ten-year
Major stock price indexes
January 2, 2002 = 100

nomic expansion would remain vigorous. Yields on
the two-year and ten-year nominal Treasury notes
ended the first half of the year 90 and 36 basis points
higher, respectively, than at the end of 2003, as
markets adjusted to the greater likelihood of an ear
lier onset and more rapid pace of monetary policy
tightening. The surprisingly strong employment
reports published in April and May, higher-thanexpected readings on core inflation, and surging oil
prices all spurred increases in Treasury yields. After
the release of the employment report in May, federal
funds futures contracts priced in a hike in the target
federal funds rate at the June FOMC meeting and
a more rapid tightening of monetary policy than
had been anticipated. With the evolving outlook for
monetary policy, the volatility of short-term interest
rates implied by option prices jumped in the first half
of the year after staying in a relatively low range in
2003. Near-term interest rates declined a bit after the
Committee’s decision at its June meeting to raise the
intended federal funds rate 25 basis points; the Com
mittee’s reaffirmation that policy accommodation
likely could be removed at a “measured” pace appar
ently reassured investors that a steep rise in the
federal funds rate probably was not in train.
Yields on investment-grade corporate debt moved
roughly in line with those on comparable nominal
Treasury securities over the first half of the year,
producing little net change in risk spreads from their
level at the end of last year. Spreads on speculativegrade debt over Treasury debt declined a bit further
after having narrowed sharply during 2003 as the
economic expansion was seen as gathering steam.

2002

2003

2004

Note. The data are daily and extend through July 14, 2004.

S&P 500 forward earnings-price ratio
and the real interest rate
Percent

—

1990

1992

1994

1996

1998

2000

2002

2004

Note. The data are monthly and extend through June 2004. The forward
earnings-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.

284

Federal Reserve Bulletin □ Summer 2004

Treasury yield—a crude measure of the equity risk
premium—changed little to remain close to its aver
age value over the past two decades and above its
level during the late 1990s.

Debt and Financial Intermediation
Aggregate debt of the domestic nonfinancial sectors
expanded at an annual rate of about 8 V2 percent in
the first quarter of 2004, a gain similar to last year’s
increase. Debt growth in the business sector has
remained subdued so far this year, as ample internal
funding has limited the need for external finance. In
contrast, household debt has continued to expand
rapidly, spurred by an elevated pace of home pur
chases and cash-outs from mortgage refinancing. The
large federal budget deficit led to another sharp
increase in Treasury debt in the first half of this year.
Municipal borrowing moderated somewhat, on
Change in domestic nonfinancial debt
Percent

balance, in the first half of the year, as the improv
ing fiscal condition of state and local governments
reduced the need for short-term borrowing to cover
budget gaps.
The growth of credit on the books of depository
institutions picked up to an annual rate of 14 percent
in the first quarter of 2004. Financing secured by
residential real estate—including home mortgages,
home equity loans, and mortgage-backed securities—
drove the expansion. In contrast, business loans con
tinued to run off, falling at an annual rate of about
5 percent in the first half of the year after a 10 percent
drop in 2003. The deceleration was consistent with
some signs that demand for business loans was begin
ning to recover as well as with an easing of standards
and terms on these loans.

The M2 Monetary Aggregates
In the first half of 2004, short-term interest rates were
stable and M2 grew at an annual rate of 6 V2 per
cent—a pace that was roughly in line with estimates
of nominal GDP—after contracting at a record rate in
the fourth quarter of 2003. Liquid deposits—the larg
est component of M2—had been depressed late last
year by the ebbing of last summer’s mortgage refi
nancing boom. Mortgage refinancings tend to boost
M2 as the proceeds are temporarily placed in noninterest-bearing deposit accounts pending disburse
ment of funds to the holders of mortgage-backed
securities. When refinancings slowed last year, the
decline in such escrow accounts held down the
growth of liquid deposits. In the first half of this year,
M2 probably received a boost from the new round of
M2 growth rate
Percent, annual rate

Federal,
held by public

Note. For 2004, change is from 2003:Q4 to 2004:Q1 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 o f 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.

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.

Monetary Policy Report to the Congress

mortgage refinancings that followed the first-quarter
decline in mortgage interest rates. The strength in
liquid deposits was partly offset, however, by contin
ued weakness in money market mutual funds and
small time deposits. Given the recent very low yields
on these two components of M2, households likely
viewed them as less attractive savings vehicles than
other assets.

285

Equity indexes in selected foreign industrial countries
Week ending January 3, 2003 = 100

Canada

International Developm ents

United Kingdom
Euro area

Foreign economic activity expanded in the first half
of this year at a pace only slightly below the rapid
increase in the second half of 2003. Global trade has
been boosted by strong demand, especially from the
United States and China. The run-up in oil and com
modity prices has contributed to rising, though still
moderate, inflation across the industrial and develop
ing countries.
By the end of the first half of this year, monetary
policy in most major foreign economies had either
tightened or assumed a less accommodative tone.
Citing high rates of capacity utilization and mounting
inflationary pressures, the Bank of England has raised
its target rate 100 basis points since early November.
Mexico and China also have tightened policy. Else
where, including the euro area, Canada, and Japan,
central banks most recently have kept policy
unchanged after easing previously. In general, official
statements are expressing increasing concern over the
inflationary risks associated with stronger economic
activity and higher world energy and commodity
prices.

Note. The data are weekly. The last observation for each series is the
average of trading days through July 14, 2004.

In foreign financial markets, equity price perfor
mance has been more mixed so far in 2004 than
during the second half of 2003; sharply rising interest
rates over the past few months have weighed on
equity valuations, damping the effects of an improved
earnings outlook. Since year-end, stock prices in
Europe and Canada have changed little, on balance.
In contrast, rapidly improving economic conditions
in Japan have helped boost Japanese equity prices
about 10 percent. Other Asian stock price indexes
have fallen, on average, in part because of concerns
about the possibility of an acute slowdown in China.
Mexican stocks have been bolstered by strong earn
ings growth of leading Mexican communications
firms and, more generally, by the strengthening U.S.
Equity indexes in selected emerging-market economies

Official interest rates in selected foreign industrial countries

W eek ending January 3, 2003 = 100

Percent

Argentina
Brazil
United Kingdom

,Canada

Note. The data are as o f month-end; the last observation for each series is
the average o f trading days through July 14, 2004. 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.

Asian
emerging-market
economies

Note. The data are weekly. The last observation for each series is the
average of trading days through July 14, 2004. The Asian emerging-market
economies are China, Hong Kong, India, Indonesia, Malaysia, Pakistan, the
Philippines, Singapore, South Korea, Taiwan, and Thailand; the index weight
for each of these economies is its market capitalization as a share of the
group’s total.

286

Federal Reserve Bulletin □ Summer 2004

Spread on internationally issued
sovereign debt of emerging-market economies

U.S. dollar exchange rate against
selected major currencies
Percentage points

—

U.K.
pound
1, 1, ,

1111

. ,
2002

1 11

1i I . i i . . i i . i . . I . . i . . i . . i . . I . . i . . i . . i . I

1 .................................... 1 ..........................i , l
2004
2003

2002

Note. The data are weekly averages. The last observation is the average of
trading days through July 14, 2004. The series shown is the J.P. Morgan
Emerging Market Bond Index Plus (EMBI+), which is the spread o f the yield
of certain dollar-denominated sovereign debt instruments o f emerging-market
economies over U.S. Treasury securities; over the period shown, the index
encompassed nineteen countries.

expansion. Foreign long-term interest rates rose
rapidly in the second quarter as new data (including
from the United States) showing faster growth and
higher inflation led market participants to expect
more-aggressive monetary tightening. Over the first
half of the year, the spread on internationally issued
sovereign debt of emerging-market economies over
U.S. Treasuries moved up somewhat from its very
low level.
After depreciating over the previous two years, the
value of the dollar rose slightly, on balance, in the
first half of 2004. The firming of the dollar has been
U.S. dollar nominal exchange rate, broad index
January 2001 = 100

—

1 , 1 , , I , , l , , l , , 1 . , i ..............
2001
2002

—

105

—

100

—

• 1, , i , , i , , i , , 1 . . i . . i , , i . 1

2003

2004

Note. The data are monthly and are in foreign currency units per dollar.
The last observation is the average o f trading days through July 14,2004. The
broad index is a weighted average o f the foreign exchange values o f the U.S.
dollar against the currencies of 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.

2003

2004

Note. The data are weekly and are in foreign currency units per dollar.
The last observation for each series is the average of trading days through
July 14, 2004.

attributed to perceptions by market participants that
near-term monetary tightening in the United States
would be faster than such tightening abroad.

Industrial Economies
A broadly based recovery appears to have been estab
lished in Japan over the first half of 2004. Real GDP
rose at an annual rate of more than 6 percent in the
first quarter after an even greater increase in the
fourth quarter. Aided by demand from China, growth
of Japanese real exports remained robust. Personal
consumption and business investment also firmed.
More-recent indicators show that domestic strength
continued in the spring with large gains in household
expenditures and improved labor market conditions.
Deflation continued to wane in Japan. Consumer
price deflation over the first half of the year was
slight, and wholesale prices increased. In financial
markets, the stronger economy boosted equity mar
kets and helped drive up the yield on the ten-year
bellwether government bond to more than l 3/4 per
cent from its June 2003 record low of about V2 per
cent. After making substantial sales of yen for dollars
in the first quarter, Japanese authorities ceased inter
vention in mid-March. Even so, the yen depreciated
early in the second quarter before appreciating to
around ¥109 per dollar.
Economic conditions in the euro area firmed over
the first half of 2004, but performance varied across
countries, and the region as a whole continues to
lag the global upturn. Real GDP in the euro area
increased at an annual rate of 2 V a percent in the first
quarter; output in France, Spain, and several smaller

Monetary Policy Report to the Congress

member countries rose relatively briskly, while
growth in Germany and Italy was less robust. In the
first quarter, domestic demand firmed noticeably,
except in Germany, where growth was due entirely
to a spike in exports. German consumer spending
remains anemic, held down by a weak labor market
and low consumer confidence. Euro-area indicators
for the second quarter initially were upbeat, but morerecent data have been mixed. Labor markets have yet
to benefit from the recovery, and the average unem
ployment rate in the region edged up to 9 percent
in the spring. Inflation for the euro area over the
twelve months ending in June was near V h percent, a
rate above the European Central Bank’s mediumterm goal of less than, but close to, 2 percent. Exclud
ing energy, food, alcohol, and tobacco, prices rose
slightly less than 2 percent over the same period.
Economic expansion in the United Kingdom con
tinued unabated over the first half of 2004. Labor
markets tightened further; the unemployment rate
edged down to its lowest level in almost three
decades, and labor earnings posted solid gains.
Despite the strong economy, consumer price inflation
over the twelve months ending in June was 1Vi per
cent, remaining below the central bank’s official tar
get rate of 2 percent. Conditions in the U.K. housing
market, however, remained red hot, with double-digit
price increases, high levels of household mortgage
and consumer borrowing, and sizable withdrawals of
home equity.
The Canadian economy picked up steam in the first
half of 2004 after a year plagued with difficulties
including SARS, mad cow disease, and a regional
power outage. Sizable gains in consumption and
investment boosted output in the first quarter, and
indicators are pointing to continued good perfor
mance in these sectors. Export growth was strong, as
the robust economic performance of the United States
appears to have outweighed the negative effect of
Canadian dollar appreciation on trade. The unem
ployment rate was relatively stable over the first half,
and employment bounced back in the second quarter
from a first-quarter lull. Consumer price inflation
decreased early in the year, but energy costs helped
drive up the rate to 2 Vi percent over the twelve
months ending in June. Prices excluding food,
energy, and indirect taxes have remained more sub
dued, rising slightly less than W i percent over the
same period.
Emerging-Market Economies
Estimates suggest that real GDP in China surged in
the first quarter with continued outsized gains in

287

fixed-asset investment. Fears of overinvestment, par
ticularly in the steel, cement, and aluminum indus
tries, led Chinese officials to intensify their tightening
measures early in the second quarter. These measures
included increases in reserve requirements and in
some interest rates as well as stricter criteria for the
approval of investment projects. A sharp slowdown
in estimated real GDP for the second quarter suggests
that these steps are working. Despite the recent slow
ing in growth, Chinese exports and imports soared
in the first half of the year, and trade was close to
balanced.
Growth in the other Asian emerging-market econo
mies slowed only moderately in the first quarter from
the fast pace at the end of last year. Exports, which
continued to be the driving force behind that growth,
were fueled by Chinese demand as well as by the
recovery in the global high-tech market and stronger
world demand overall. Consumer demand generally
rose across the region with the notable exception of
Korea, where high levels of consumer debt are
weighing on spending. Although still only moderate,
inflation across the Asian emerging-market econo
mies is beginning to rise as stronger aggregate
demand takes hold and higher energy and commodity
prices pass through to prices more generally.
The Mexican economy has been propelled this
year by strong demand from the United States. Gains
have been broadly based, with sharp increases in
industrial production, exports, construction, and retail
sales. Employment in the industries most closely
linked to U.S. trade also has started to increase.
Responding to a rise in twelve-month inflation to
slightly above its 2 percent to 4 percent target range,
the Bank of Mexico has tightened policy several
times so far this year. Elevated oil prices boosted the
Mexican public-sector fiscal surplus to a record high
during the first five months of the year and facilitated
an increase in federal transfers to state governments.
In Brazil, GDP grew robustly in the first quarter,
and indications are that economic activity continued
to expand in the second quarter with support from
strong external demand. Job growth has been robust,
although unemployment has remained high. Inflation,
however, continues to concern authorities. Asset
prices weakened earlier this year, in part because of
rising global interest rates but also because of market
participants’ unease about the direction of structural
and fiscal reforms; since then, asset prices have par
tially rebounded.
The recovery in Argentina has continued at a rapid
pace in recent quarters, but limited investment in the
energy sector, reflecting a lack of structural reforms,
has forced the government to import electricity, natu

288

Federal Reserve Bulletin □ Summer 2004

ral gas, and fuel oil from neighboring countries.
Creditors have shown little enthusiasm for the coun
try’s latest debt restructuring plan, and the federal

government faces difficult challenges in normalizing
its international financial situation and reforming its
fiscal relations with the provinces.
□

289

Summary of Papers Presented at the Conference
“Models and Monetary Policy: Research in the
Tradition of Dale Henderson, Richard Porter,
and Peter Tinsley”
Jon Faust, o f the Board’s Division o f International
Finance; Athanasios Orphanides, o f the Board’s
Division o f Monetary Affairs; and David L. Reifschneider, o f the Board’s Division of Research and
Statistics, prepared this article.
On March 26 and 27, 2004, the Federal Reserve
Board held a conference in Washington, D.C., on the
application of economic models to the analysis of
monetary policy issues. The papers presented at the
conference addressed several topics that, because
they are of interest to central bankers, have been a
prominent feature of Federal Reserve research over
the years. In particular, the papers represent research
in the tradition of work carried out over the past
thirty-five years at the Federal Reserve by three
prominent staff economists—Dale W. Henderson,
Richard D. Porter, and Peter A. Tinsley. Thus, the
conference partly served as a celebration of the con
tributions made by these individuals to policy-related
research since the late 1960s.
Among the specific topics addressed at the confer
ence were the influence of uncertainty on policymak
ing; the design of formal rules to guide policy actions;
the role of money in the transmission of monetary
policy; the determination of asset prices; and econo
metric techniques for estimating dynamic models of
the economy. This summary discusses the papers in
the order presented at the conference.1

1.
The conference sessions also included a panel consisting of
Ben S. Bernanke, William Poole, and John B. Taylor, who discussed
the current state o f central bank research and likely directions for
future work. A list of the conference papers appears at the end of this
article along with an alphabetical list of authors and their affiliations at
the time o f the conference. For a limited period, the papers will be
available at www.federalreserve.gov/events/conferences/mmp2004/
program.htm. In early 2005, the Federal Reserve Board will publish a
conference volume that will include a revised version of each confer
ence paper, commentaries on each paper by the conference discus
sants, and an appreciation summarizing the careers o f Henderson,
Porter, and Tinsley.

L a r s P e t e r FIa n s e n

and

Th o m a s J. Sa r g e n t

One way that economists gain insights about how
to make sound economic decisions in an uncertain
world is to study simple problems in which the
optimal way to behave can be unambiguously
derived. In the 1950s, Herbert Simon and Henri Theil
derived a simple principle that has been central to
the study of economic decisionmaking under uncer
tainty.2 Under their assumptions, they show that the
optimal choice under uncertainty can be derived in
two steps: First, form your best forecast of the rele
vant unknown variables, and second, act as you
would if you were certain that your forecast would
come true. This result has come to be known as the
certainty-equivalence principle: Once one forms the
best forecast of future conditions, the nature and the
degree of uncertainty play no further role in decision
making. As might be expected, certainty equivalence
applies only under very restrictive conditions, and
economists have extensively studied cases in which
the certainty-equivalence principle does not generate
the best possible decisions. Nonetheless, certainty
equivalence remains an important benchmark case
to consider and has proven extremely useful both in
understanding more-complicated theoretical cases
and in thinking about real-world problems.
A critical assumption underlying the certaintyequivalence principle is that decisionmakers, be they
households, firms, or policymakers, know the true
model of the economy. No one knows, of course, the
full, true nature of the economy. Thus, households,
firms, and policymakers may find it appropriate to
take this uncertainty into account in deciding how to
act. In “ ‘Certainty Equivalence’ and ‘Model Uncer
tainty’,” Lars Peter Hansen and Thomas J. Sargent
consider economic decisionmaking under model
2.
Herbert Simon (1956), “Dynamic Programming under Uncer
tainty with a Quadratic Criterion Function,” Econometrica, vol. 24,
pp. 74-81; and Henri Theil (1957), “A Note on Certainty Equivalence
in Dynamic Planning,” Econometrica, vol. 25, pp. 346-49.

290

Federal Reserve Bulletin □ Summer 2004

uncertainty. In their paper, the decisionmaker does
not know the true model of the economy but knows
only a set of models containing the true model. The
authors’ approach differs from Bayesian decision
theory, in which the decisionmaker assigns to each
model a probability that it is the true one and then
chooses the decision that is the best response on
average across all the competing models. Instead,
Hansen and Sargent consider a form of “robust deci
sionmaking” in which the decisionmaker chooses
the decision that maximizes his or her welfare in the
worst-case scenario—that is, when the true model
turns out to be the worst possible model from the
standpoint of the agent. Robust decisionmaking is
quite complicated, especially if what happens to be
the worst-case model depends on which decision the
agent chooses.
The paper shows that, even under this cautious
approach to taking account of model uncertainty,
a surprising and useful version of the certaintyequivalence principle prevails. Once again, the
optimal decision under uncertainty can be seen as
the solution of an equivalent problem under certainty.
In this case, however, one does not take as certain
the best objective forecast of the relevant variables;
rather, the forecast is “tilted” or “twisted” in a par
ticular way to reflect the agent’s desire to minimize
suffering if the worst-case model prevails. The results
of the paper shed light on the nature of the cautious
behavior induced by the desire for decisions that are
robust in this way.
The paper also provides important insights into
the way to analyze this sort of decisionmaking. The
solution is cast as the result of an imaginary twoplayer game in which a fictional opposing player
maliciously chooses the worst possible model for the
agent. Further, the paper shows that the robust deci
sionmaking can be interpreted as a form of Bayesian
decisionmaking in which, once again, the probabili
ties of outcomes are twisted in a particular way to
reflect the desire for robustness.

J o h n C. Wil l ia m s
The pervasive nature of structural change in the econ
omy presents a great challenge for macroeconomic
modeling and policy analysis, in no small part
because it significantly complicates the estimation of
the data-generating processes of key unobserved vari
ables, such as the natural rates of interest and unem
ployment. Traditionally, evaluating macroeconomic
policy using econometrics has involved two steps.
The first step tackles the estimation of a model of the

economy, including the unobserved natural rates of
interest and unemployment. In the second step, the
best policy is selected by employing the estimated
model and natural rate variables as if they were free
of estimation error. This two-step approach has
proven attractive because separating model estima
tion from policy selection simplifies analysis. Under
certain strong assumptions, the certainty-equivalence
principle suggests that one can find the best policy
by first modeling key variables and then choosing
the policy as if the model’s forecasts were certain to
come true.3
Because the certainty-equivalence principle
assumes knowledge of the true model of the econ
omy, it implies precise knowledge of the equations
determining unobserved variables such as the natural
rates of interest and unemployment, a requirement
that is surely not satisfied in the case of monetary
policymaking. The uncertainty regarding modeling
these natural rates has many sources, but one of the
most important seems to be the presence of structural
change in the macroeconomy.
In “Robust Estimation and Monetary Policy with
Unobserved Structural Change,” John C. Williams
examines, through an estimated model of the U.S.
economy, the quantitative significance of structural
change for the implementation of monetary policy.
Williams first documents the considerable uncer
tainty associated with modeling the natural rates
of interest and unemployment. The data are insuffi
ciently informative to allow a clear choice among
alternative estimated models for either natural rate.
Importantly, as Williams shows, the policy suggested
by applying the certainty-equivalence principle to
one of these models often will lead to very poor
policy outcomes if one of the other models happens
to be true. The problem seems to arise mainly from
the differences in the natural rate models. The costs
of improperly ignoring uncertainty about the natural
rates are especially pronounced in terms of the vari
ability of inflation. The certainty-equivalent policies
suggest that policymakers have considerable ability
to limit fluctuations in both output and inflation, but
this result seems to rest heavily on the model in
question being exactly correct. When applied in other
models that fit the data about as well, the suggested
policies are often far from optimal.
In light of his finding, Williams investigates alter
native solutions to the joint problem of estimation
and policy feedback in the presence of uncertainty
about how to model the natural rates of interest
3.
As discussed earlier, the first step involves forming a “best
forecast” of key variables. Under standard assumptions, that forecast
will come from estimating the correct econometric model.

Summary of Papers Presented at the Conference “Models and Monetary Policy ”

and unemployment. He identifies strategies that are
robust in the sense of providing very good policy
outcomes no matter which model is correct. He finds
that estimating these natural rates using simple esti
mators such as weighted averages of sample means
performs well for the purpose of formulating robust
policy. He also finds that, with these estimators, the
optimal policy under uncertainty incorporates a sig
nificant degree of policy inertia—that is, a depen
dence of the current interest rate setting on its value
in the previous period—and responds less aggres
sively to perceived unemployment gaps than cer
tainty equivalence would suggest. Finally, he shows
that adopting this joint estimation and control proce
dure proves highly effective at mitigating the effects
of misspecification and mismeasurement of the natu
ral rates of interest and unemployment.

JEFFREY C. FUHRER AND GIOVANNI P. OLIVEI

Understanding why important economic indicators
such as unemployment, output, and inflation gradu
ally rise and fall over the business cycle is of central
importance to many macroeconomic issues, includ
ing the optimal conduct of monetary policy. At least
since the work of John Maynard Keynes, macro
economists have debated the business-cycle role of
“sticky” prices and wages—prices and wages that
respond only sluggishly to new conditions. Sticky
prices have the potential to give a special role to
expectations of future economic conditions. If, say, a
manufacturer is going to post and maintain a price for
an extended period, he or she needs to take account
of not only current conditions but also the conditions
expected to prevail over the extended period. The
nature and the degree of such forward-looking pricesetting behavior have important consequences for an
understanding of the optimal response of monetary
policy to the business cycle; hence, building an
empirical model that provides a realistic account of
the way expectations feed into prices and wages is a
critical—and hotly debated—area of research.
The central issue in this research concerns the
degree to which price setters look to the future. Are
they inertial, that is, focused on current or past con
ditions? Or are they mainly forward looking, that is,
focused on projected conditions in the period over
which the price will hold? The difficulty in this
literature is that, in either case, current prices could
explain future prices. In the inertial explanation, cur
rent prices are a fairly direct determinant of future
prices. Under the forward-looking explanation, last
month’s prices explain next month’s because past

291

prices are a good predictor of future prices. If pricing
behavior is somewhat inertial, both these explana
tions are likely to be correct, and sorting out their
relative importance raises subtle econometric issues.
Clearly, if one can find economic variables that
behave very differently depending on which case
is correct, these variables can be used to help
settle the issue. Econometricians call such variables
instruments.4
In “Estimating Forward-Looking Euler Equations
with GMM Estimators: An Optimal Instruments
Approach,” Jeffrey C. Fuhrer and Giovanni P. Olivei
compare different methods for choosing instrumental
variables in the estimation of forward-looking output
and inflation equations.5 They follow earlier work in
showing that the instrumental variables used in con
ventional estimation of such equations are weak—the
behavior of the instruments in the forward-looking
case do not differ much from that in the inertial case.
To mitigate this problem, the authors propose an
estimation procedure based on instrumental variables
that exploits more completely the differential predic
tions of the two theories.6 They call this procedure an
“optimal instruments” approach and show that it has
some desirable statistical properties (for example, it
shares some of the properties of maximum-likelihood
estimation). The authors use computer simulations to
show that the new approach substantially resolves the
weak-instruments problem and that, in contrast with
the conventional method, the estimates of key param
eters obtained using the new method tend to be about
right on average. Further, the optimal-instruments
method provides a more stringent test of the hypoth
esis of forward-looking behavior because the method
more completely assesses the predictions of the
model.
The authors show, through simulations, that the
estimates made with the optimal-instruments
approach should be more reliable than those made
with conventional techniques; then they apply the
method to equations for output and for inflation using
U.S. data. For both relations, the estimates using
the new method indicate a much larger inertial
component, and hence a smaller role for forward4. To clearly resolve which theory is correct, econometricians
need variables that meet certain conditions for valid instruments. In
the current case, the goal is to estimate the role o f expected future
conditions— as opposed to recent past conditions— in setting prices.
Because price expectations are not directly observed in the economy, a
useful instrumental variable would, say, rise when price expectations
rise for reasons other than a rise in current prices.
5. GMM is the abbreviation for general method o f moments.
6. More formally, the instruments are based on imposing the
restrictions o f the forward-looking model regarding how current
variables should affect expectations of the future.

292

Federal Reserve Bulletin □ Summer 2004

looking behavior, than is suggested by conventional
estimation.

PIERPAOLO BENIGNO
AND MICHAEL WOODFORD
In “Optimal Stabilization Policy when Wages and
Prices Are Sticky: The Case of a Distorted Steady
State,” Pierpaolo Benigno and Michael Woodford
consider the optimal design of monetary policy when
both prices and wages display considerable inertia.
The authors are especially interested in whether the
recent findings of Christopher J. Erceg, Dale W.
Henderson, and Andrew T. Levin hold in the context
of a more general model of the economy.7 In their
model, Erceg, Henderson, and Levin assumed the
existence of output and employment subsidies that
eliminate any distortions arising from the market
power of monopolistically competitive firms. As a
result, a monetary policy that stabilizes prices yields
a steady-state level of output that is efficient. Benigno
and Woodford point out, however, that the property
of efficiency does not hold in the absence of such
subsidies. Under more-realistic assumptions about
subsidies and taxes, stabilization policy will influence
not only the steady-state variability of wages, prices,
and output but also the average equilibrium levels of
these factors. Thus, optimal monetary policy under
these more-general conditions involves a more com
plicated set of tradeoffs and may imply central bank
behavior that differs significantly from that derived
from a simpler model.
To investigate this possibility, Benigno and Wood
ford extend the analysis of Erceg, Henderson, and
Levin by using a model in which the steady-state
level of output under a zero-inflation policy is suboptimal because of tax distortions and market power.
Like the previous researchers, Benigno and Wood
ford find that the expected utility of the representative
household can be approximated by a quadratic loss
function with no linear terms, a result implying that
the welfare associated with a given policy rule can
still be readily evaluated (to second-order accuracy)
using a first-order-accurate solution of the model.
Also, they continue to find that the welfare-theoretic
loss function has three terms capturing the distortions
arising from nonzero levels of wage inflation, price
inflation, and an appropriately defined measure of the
output gap.
7.
Christopher J. Erceg, Dale W. Henderson, and Andrew T. Levin
(2000), “Optimal Monetary Policy with Staggered Wage and Price
Contracts,” Journal o f M onetary Economics, vol. 46 (October),
pp. 281-313.

The existence of a distorted steady state in the
more-general model, however, does influence the
weight placed on each of the three objectives. In
addition, tax distortions and market power alter the
definition of target output used to compute the output
gap, thereby causing the target rate of output to
diverge from the equilibrium output level that would
obtain under fully flexible wages and prices. As a
result, the simple policy rules of the sort that Erceg,
Henderson, and Levin considered—that is, rules that
stabilize a weighted average of wage and price infla
tion with no reference to the output gap, or rules that
stabilize a weighted average of price inflation and
the output gap with no reference to wages—appear to
be poorer in their approximation of the fully optimal
strategy.
Nonetheless, Benigno and Woodford find that the
main conclusion of the earlier work remains valid:
If wages are sticky, then variations in wages give rise
to distortions similar to those caused by variations
in sticky prices, and monetary policy should act to
mitigate welfare losses associated with both factors.
Under such circumstances, targeting price inflation
alone will be suboptimal, and appreciable welfare
gains will ensue from targeting prices, wages, and the
output gap.

MATTHEW B. CANZONERI, ROBERT E. CUMBY,
AND BEHZAD T. DIBA
Since the early 1990s, many central banks have
adopted price inflation targeting as a framework for
implementing monetary policy. Although central
banks have chosen this strategy for various reasons,
the literature on monetary policy design suggests one
motivation: avoiding persistent movements in the
price level, which give rise to economic distortions
that reduce the welfare of households. This reduction
in welfare arises in the context of a class of models
that economists often use to characterize the work
ings of the economy—the so-called New Neoclassi
cal Synthesis (NNS). If prices exhibit significant iner
tia, policymakers avoid the loss of household welfare
in an optimal way if they fix the aggregate price
level. However, the recent work of Erceg, Henderson,
and Levin has called this conclusion into question.8
In particular, their findings suggest that if the NNS
model is generalized to allow for inertia in nominal
wages, then, by targeting prices alone, the central
bank no longer maximizes consumer welfare. To do
so, it must instead respond to movements in both
8. Erceg, Henderson, and Levin, “Optimal Monetary Policy.”

Summary of Papers Presented at the Conference “Models and Monetary Policy”

prices and nominal wages or to movements in prices
and one of the main determinants of wages, the
output gap.
In “Price and Wage Inflation Targeting: Variations
on a Theme by Erceg, Henderson, and Levin,”
Matthew B. Canzoneri, Robert E. Cumby, and
Behzad T. Diba expand upon this recent work by
investigating the potential benefits of targeting both
prices and nominal wages. They use the standard
NNS model to see how social welfare is influenced
by the adoption of different monetary policy rules for
responding to macroeconomic disturbances. They use
variations of the NSS model to determine which
aspects of the economy have an important bearing
on the relative merits of price and wage targeting.
Among the variations are specifications with and
without distortions arising from monopolistic compe
tition; specifications with different treatments of capi
tal and its role in the production process; and speci
fications that allow for random disturbances to
consumer spending and for productivity shocks.
Canzoneri, Cumby, and Diba derive three main
conclusions from their analysis. First, they find that
incorporating capital into the model has a significant
quantitative effect on their results. The way in which
capital enters the model appears to be less important,
however; in particular, making the sale of existing
capital uneconomic, a move implying that existing
capital is firm-specific, does not have large normative
implications. Second, under a policy that adjusts
interest rates to inflation prospects alone, a level of
price fluctuation exists below which rate tightening
does not pay. In contrast, under a policy that targets
only wages, the tighter the targeting rule, the better.
Third, and perhaps most surprising, a policy of
aggressively targeting nominal wages leads to better
outcomes than a policy of targeting only price infla
tion. For example, for a particular specification of the
economic model, targeting price inflation imposes
welfare costs that are greater than those imposed
by a wage-targeting strategy designed to yield the
same volatility of price inflation. Finally, Canzoneri,
Cumby, and Diba find that hybrid rules—those in
which interest rates respond to movements in both
prices and wages—do not lead to much better policy
outcomes than does a policy of aggressively targeting
nominal wages, a finding that contrasts with previous
findings in this field.

B e n n e t t T. M c Ca l l u m

and

E d w a rd N e l s o n

In their paper “Targeting vs. Instrument Rules for
Monetary Policy,” Bennett T. McCallum and Edward

293

Nelson compare alternative ways to characterize rulebased monetary policy. Traditionally, the term mone
tary policy rule has been used in the sense of “instru
ment rules”—specific formulas for setting the federal
funds rate, money growth, or some other controllable
instrument in response to current economic condi
tions, as measured by recent data or forecasts. How
ever, in the ongoing debate regarding the best way to
characterize rule-based monetary policy, so-called
targeting rules have been proposed as an alterna
tive. Unlike instrument rules, targeting rules do not
describe explicitly how the policy instrument must be
set. Rather, they convey the implicit prescription that
policy must attain the policymaker’s objective.
Two variants of these implicit rules have been
suggested. A general targeting rule describes the
specification of a central bank’s objective function,
whereas a specific targeting rule is a description of
optimal policy behavior derived from both the central
bank’s objective function and a model of the econ
omy.9 With regard to the general targeting rule,
McCallum and Nelson argue that referring to the
specification of the policymaker’s objective as a rule
seems inappropriate. Instead, they think that clearly
distinguishing between the terms objectives and rules
is useful in policy analysis.
McCallum and Nelson examine in detail the spe
cific targeting rules approach and compare it with the
instrument-rules approach. Because specific targeting
rules are, by definition, optimality conditions, their
implicit policy prescriptions might seem better suited
for describing optimal policy, such as the optimalcontrol approach to monetary policy design. As
McCallum and Nelson point out, however, conditions
that imply optimality in one model may be highly
inappropriate in other specifications, as is the case
with any optimal-control exercise. The optimality of
the suggested solution is conditioned on accepting
the assumed model structure as true beyond any
doubt, a stance that is untenable in light of the
ongoing dispute among economists concerning the
proper specification of a model for the macro
economy. Thus, McCallum and Nelson argue in
favor of the traditional policy rules analysis, which
attempts to identify simple rules that are robust to
alternative model specifications.
The authors examine some possible limitations of
simple rules that have sometimes been cited as argu
ments in favor of specific targeting rules: (1) Simple
rules may omit from consideration important factors
not included in the rule, (2) they may require judg
9 The descriptio„ of the optimal behavior geI,erally comes in ^
form o f a first-order condition for optimal policy.

294

Federal Reserve Bulletin □ Summer 2004

mental adjustments, (3) they cannot be seen as onceand-for-all commitments because they must allow for
modifications reflecting improvements to our knowl
edge, and (4) they may not accurately reflect the
current practice of central banks. After examining
these limitations in detail, McCallum and Nelson
conclude that they do not present any compelling
argument for preferring the specific targeting rules
approach over the traditional policy rules analysis. In
addition, McCallum and Nelson conduct several ana
lytical exercises to examine whether implementation
of targeting rules might result in lower interest rate
variability relative to that associated with simple
instrument rules. They show that, in their framework,
once the relevant policy implementation errors for
the two alternative approaches are properly accounted
for, targeting rules generally result in greater interest
rate variability.

D a v id L. K e l l y

and

S teph en E Le ro y

The concept of liquidity plays a central role in the
understanding of asset markets. One commonly
thinks of money as the most liquid asset and of
physical assets such as factories and houses as very
illiquid. However, formal modeling of the features
that make some assets more liquid than others has
proven very difficult. Although everyone may agree
that an asset is illiquid if it is difficult, costly, or time
consuming to sell at a price close to its fair market
value, the precise meanings of “difficult” and “fair”
are not obvious in this context. Economists often use
the term frictions to describe the collection of factors
that make some assets less liquid than others. In part
because modeling these frictions has proven so diffi
cult, an important branch of research in macroeco
nomics omits them or treats them in an elementary
manner. Under standard simplifications, for example,
monetary policy makers can ignore the fact that facto
ries are less liquid than Treasury bills.
In “Liquidity and Fire Sales,” David L. Kelly
and Stephen F. LeRoy study one familiar aspect of
liquidity—the fact that, for certain illiquid assets, the
price they could fetch if the seller had to sell imme
diately might be considerably below what the assets
could fetch if the seller waited for “the right” buyer.
In this sense, houses are illiquid assets, whereas
certain financial assets, such as Treasury bills, are
quite liquid. Of course, sellers of houses generally
attempt to be patient so that they can obtain some
thing close to the best possible price, but occasionally
one finds houses “priced to sell” by someone who
has reason to be less patient. The latter case is a “fire

sale”—the sale of an asset at a price lower than the
price that potential buyers, if they could be identified,
would willingly pay.
Kelly and LeRoy formally study the notions of
liquidity and fire sales as manifested in the market for
the assets of a firm. The broadest features of the issue
that the authors identify are relatively straightforward
to understand. If the current owners are profitably
operating the firm, they may be willing to sell it at an
attractive price, but they will be in no hurry to do so.
They certainly will not sell the firm at a fire-sale
price. If the owners are currently operating at a loss,
however, they may be able to find buyers who could
operate the firm more profitably. The question for the
current owners then becomes how aggressively to
price the firm’s assets. If the possible buyers have a
wide range of valuations for the assets, then pricing
becomes difficult. If the owner sets a fire-sale price,
he or she may quickly find a willing buyer and limit
the losses. Setting a higher price means waiting
longer to find a buyer who values the assets most
highly. This tactic is sensible if the higher price more
than covers the extra losses incurred by waiting. The
reasoning is sound, but it does not answer the ques
tion of exactly how various factors affect the price.
Economists have derived useful formulas describ
ing the pricing of liquid assets, such as the BlackScholes option pricing formula, but they have found
that deriving expressions for the pricing of illiquid
assets is more difficult. This paper, which extends
some earlier work by the authors and others aimed at
deriving concrete implications of illiquidity, is com
posed mainly of an extended example. The example
illustrates why fire-sale discounts occur in illiquid
markets; it also shows that, in such markets, the
fire-sale discounts may be sizable, whereas in liquid
markets, a small discount is sufficient to ensure a
quick sale.

MARVIN GOODFRIEND
Monetary policy analysis is commonly examined in
the context of models with a greatly simplified
mechanism of monetary transmission. Such models
ignore the central bank’s control of the money supply
and focus exclusively on the short-run nominal inter
est rate for monetary policy. Invariably, such models
also fail to draw a distinction between narrow money
(bank reserves) and broad money (bank deposits) and
rule out, by assumption, financial frictions that may
be important for understanding the role of financial
intermediation in the economy.

Summary of Papers Presented at the Conference “Models and Monetary Policy”

In his paper “Narrow Money, Broad Money, and
the Transmission of Monetary Policy,” Marvin Goodfriend develops a framework that integrates broad
money demand with loan production, asset pricing,
and arbitrage between banking and asset markets in
order to explore the supply of and demand for broad
money and the potential role of broad money in
monetary transmission. The demand for broad money
arises from at least two problems: First, not all
markets that agents might want to use exist; second,
agents are subject to uninsurable, idiosyncratic
shocks.10 Banks hold household demand deposits and
use funds to make loans, subject to the collateral
available in the economy and the effort needed to
monitor loan performance. Goodfriend shows that the
resulting macroeconomic equilibrium is considerably
more complex than that obtained in traditional,
greatly simplified monetary models. For instance,
among the standard factors determining the observed
net real returns on capital and bonds is the time

10. For example, when setting out on a sunny day, one must
consider that trading one’s bottle of sunscreen for an umbrella may be
difficult should the weather change. One could hope to find a market
in which to complete this trade or to buy insurance against this
outcome, but carrying money with which to buy an umbrella should
the need arise may be simpler.

295

preference of agents—the rate at which agents trade
consumption today for consumption tomorrow. But
the return on capital and bonds also depends on the
broad liquidity services they may provide as collat
eral for loans.
Goodfriend uses the model to explore the links
between the broad liquidity services that bank depos
its provide and the scope for monetary policy makers
to use the instruments of narrow money and the
nominal interest rate to manage, react to, and take
account of broad liquidity. Among other things,
Goodfriend shows how the neutral level of an inter
bank interest rate policy instrument depends on fac
tors affecting the provision of broad liquidity. He
demonstrates that, although interest rate policy auto
matically insulates the economy against shocks to
narrow liquidity, such policy must be modified to
offset the effect on the economy of shocks to broad
liquidity. In general, broad-liquidity conditions need
to be taken into account in the pursuit of interest rate
policy because (1) they influence the link between the
interbank rate and market interest rates through their
effect on the premium firms must pay to raise funds
to finance illiquid investments and (2) they affect the
behavior of market interest rates that the central bank
must target in order to maintain overall macroeco
nomic stability with stable prices.

The lists o f papers and authors appear on page 296.

296

Federal Reserve Bulletin □ Summer 2004

C onference Pa pers

A u tho rs

Benigno, Pierpaolo, and Michael Woodford. “Opti
mal Stabilization Policy when Wages and Prices
Are Sticky: The Case of a Distorted Steady State.”

Affiliations are as of the time of the conference.

Canzoneri, Matthew B., Robert E. Cumby, and
Behzad T. Diba. “Price and Wage Inflation Target
ing: Variations on a Theme by Erceg, Henderson,
and Levin.”
Fuhrer, Jeffrey C., and Giovanni P. Olivei. “Estimat
ing Forward-Looking Euler Equations with GMM
Estimators: An Optimal Instruments Approach.”
Goodfriend, Marvin. “Narrow Money, Broad Money,
and the Transmission of Monetary Policy.”
Hansen, Lars Peter, and Thomas J. Sargent. “ ‘Cer
tainty Equivalence’ and ‘Model Uncertainty’.”
Kelly, David L., and Stephen F. LeRoy. “Liquidity
and Fire Sales.”

Pierpaolo Benigno
New York University
Matthew B. Canzoneri
Georgetown University
Robert E. Cumby
Georgetown University
Behzad T. Diba
Georgetown University
Jeffery C. Fuhrer
Federal Reserve Bank o f Boston
Marvin Goodfriend
Federal Reserve Bank o f Richmond
Lars Peter Hansen
University o f Chicago
David L. Kelly
University o f Miami

McCallum, Bennett T., and Edward Nelson. “Target
ing vs. Instrument Rules for Monetary Policy.”

Stephen F. LeRoy
University o f California, Santa Barbara

Williams, John C. “Robust Estimation and Monetary
Policy with Unobserved Structural Change.”

Bennett T. McCallum
Carnegie Mellon University and National Bureau
o f Economic Research

Edward Nelson
Federal Reserve Bank o f St. Louis and Centre fo r
Economic Policy Research
Giovanni P. Olivei
Federal Reserve Bank o f Boston
Thomas J. Sargent
New York University and Hoover Institution, Stanford
University
John C. Williams
Federal Reserve Bank o f San Francisco
Michael Woodford
Princeton University

□

297

Credit Report Accuracy and Access to Credit
Robert B. Avery, Paul S. Calem, and Glenn B. Canner,
o f the Board’s Division o f Research and Statistics,
prepared this article. Shannon C. Mok provided
research assistance.
Information that credit-reporting agencies maintain
on consumers’ credit-related experiences plays a cen
tral role in U.S. credit markets. Creditors consider
such data a primary factor when they monitor the
credit circumstances of current customers and evalu
ate the creditworthiness of prospective borrowers.
Analysts widely agree that the data enable domestic
consumer credit markets to function more efficiently
and at lower cost than would otherwise be possible.
Despite the great benefits of the current system,
however, some analysts have raised concerns about
the accuracy, completeness, timeliness, and consis
tency of consumer credit records and about the effects
of data limitations on the availability and cost of
credit. These concerns have grown as creditors have
begun to rely more on “credit history scores” (statis
tical characterizations of an individual’s creditworthi
ness based exclusively on credit record information)
and less on labor-intensive reviews of the detailed
information in credit reports. Moreover, decision
makers in areas unrelated to consumer credit, includ
ing employment screening and underwriting of prop
erty and casualty insurance, increasingly depend on
credit records, as studies have shown that such
records have predictive value.
A previous article in this publication examined
in detail the credit records of a large, nationally
representative sample of individuals as of June 30,
1999.1 That analysis revealed the breadth and depth
of the information in credit records. It also found,
however, that key aspects of the data may be ambig
uous, duplicative, or incomplete and that such limi
tations have the potential to harm or to benefit
consumers.
Although the earlier analysis contributed to the
debate about the quality of the information in credit
records, it did not attempt to quantify the effects of
data limitations on consumers’ access to credit. To
1.
Robert B. Avery, Raphael W. Bostic, Paul S. Calem, and
Glenn B. Canner (2003), “An Overview of Consumer Data and Credit
Reporting,” Federal Reserve Bulletin, vol. 89 (February), pp. 47-73.

date, publicly available information about the extent
of data quality problems has been limited, as has
research on the effects of those problems.2 The lack
of information has inhibited discussion of the prob
lems and of the appropriate ways to address them.
The main reason for the lack of information is
that conducting research on the effects of data limita
tions on access to credit is complicated. Two factors
account for the complexity. First, the effects vary
depending on the overall composition of the affected
individual’s credit record. For example, a minor error
in a credit record is likely to have little or no effect on
access to credit for an individual with many reported
account histories, but the same error may have a
significant effect on access to credit for someone with
only a few reported account histories. Second, assess
ments of the effects of data limitations require
detailed knowledge of the model used to evaluate an
individual’s credit history and of the credit-risk fac
tors that compose the model. Because information
about credit-scoring models and their factors is ordi
narily proprietary, it is difficult to obtain.
In this article, we expand on the available research
by presenting an analysis that tackles these complexi
ties and quantifies the effects of credit record limi
tations on the access to credit.3 The analysis consid
ers the credit records of a nationally representative
sample of individuals, drawn as of June 30, 2003,
that incorporates improvements in the reporting sys
tem over the past few years and, consequently, better
reflects today’s circumstances. We examine the pos
sible effects of data limitations on consumers by
estimating the changes in consumers’ credit history
scores that would result from “correcting” data prob
lems in their credit records. We also investigate
2. General Accounting Office (2003), Consumer Credit: Limited
Information Exists on Extent o f Credit Report Errors and Their
Implications fo r Consumers, report prepared for the Senate Commit
tee on Banking, Housing, and Urban Affairs, GAO-03-1036T, July 31,
pp. 1-18. In 2004, the General Accounting Office became the Govern
ment Accountability Office.
3. This analysis builds on recent research that attempted to quantify
the effects of credit record limitations on the access to credit. See
Robert B. Avery, Paul S. Calem, and Glenn B. Canner (2003), “Credit
Reporting and the Practical Implications o f Inaccurate or Missing
Information in Underwriting Decisions,” paper presented at “Build
ing Assets, Building Credit: A Symposium on Improving Financial
Services in Low-income Communities,” Joint Center for Housing
Studies, Harvard University, November 18-19.

298

Federal Reserve Bulletin □ Summer 2004

whether different patterns emerge when individuals
in the sample are grouped by strength of credit his
tory (credit history score range), depth of credit his
tory (number of credit accounts in a credit record),
and selected demographic characteristics (age, rela
tive income of census tract of residence, and percent
age of minorities in census tract of residence). Such
segmentation allows us to determine whether the
effects of data limitations differ for various subgroups
of the population.

C o n su m e r C r e d it R e p o r t s
A consumer credit report is the organized presenta
tion of information about an individual’s credit record
that a credit-reporting agency communicates to those
requesting information about the credit history of an
individual. It includes information on an individual’s
experiences with credit, leases, non-credit-related
bills, collection agency actions, monetary-related
public records, and inquiries about the individual’s
credit history. Credit reports, along with credit
history scores derived from the records of creditreporting agencies, have long been considered one
of the primary factors in credit evaluations and
loan pricing decisions. They are also widely used
to select individuals to contact for prescreened
credit solicitations. More recently, credit reports and
credit history scores have often been used in identi
fying potential customers for property and casualty
insurance and in underwriting and pricing such
insurance.4
The three national credit-reporting agencies—
Equifax, Experian, and Trans Union—seek to collect
comprehensive information on all lending to indi
viduals in the United States, and as a consequence,
the information that each agency maintains is vast.
Each one has records on perhaps as many as 1.5 bil
lion credit accounts held by approximately 210 mil
lion individuals.5 Together, these agencies generate
more than 1 billion credit reports each year, provid
ing the vast majority of the reports for creditors,
employers, and insurers. One study found that con-

4. For purposes o f insurance, the scores are typically referred to as
insurance scores.
5. John A. Ford (2003), chief privacy officer o f Equifax, Inc., in
Fair Credit Reporting Act: How It Functions fo r Consumers and the
Economy, hearing before the Subcommittee on Financial Institutions
and Consumer Credit o f the House Committee on Financial Services,
House Hearing 108-33, 108 Cong. 2 Sess. (Washington: Government
Printing Office), June 4. Also see Consumer Data Industry Asso
ciation (formerly Associated Credit Bureaus), “About CDIA,”
www.cdiaonline.org.

sumers receive only about 16 million of the credit
reports distributed each year.6
Credit-reporting agencies collect information from
“reporters”—creditors, governmental entities, collec
tion agencies, and third-party intermediaries. They
generally collect data every month, and they typically
update their credit records within one to seven days
after receiving new information. According to indus
try sources, each agency receives more than 2 bil
lion items of information each month. To facili
tate the collection process and to reduce reporting
costs, the agencies have implemented procedures
to have data submitted in a standard format, the
so-called Metro format.7 Data may be submitted
through various media, including CD-ROM and elec
tronic data transfer. Reporters submit information
voluntarily: No state or federal law requires them
to report data to the agencies or to use a particular
format for their reporting. As a result, the complete
ness and frequency of reporting can vary.

Using Credit Records to Evaluate
Creditworthiness
In developing credit history scores, builders of creditscoring models consider a wide variety of summary
factors drawn from credit records. In most cases, the
factors are constructed by combining information
from different items within an individual’s credit
record. These factors compose the key elements of
credit models used to generate credit history scores.
Although hundreds of factors may be created from
credit records, those used in credit-scoring models
are the ones proven statistically to be the most valid
predictors of future credit performance. The factors
and the weights assigned to each one can vary across
evaluators and their different models, but the factors
generally fall into four broad areas: payment history,
consumer indebtedness, length of credit history, and
the acquisition of new credit.8

6. Loretta Nott and Angle A. Welborn (2003), A Consumer’s
Access to a Free Credit Report: A Legal and Economic Analysis,
report to the Congress by the Congressional Research Service,
September 16, pp. 1-14.
7. Currently, reporters may submit data in the Metro I or Metro II
format. As o f 2005, the Metro II format will be required for all
submissions.
8. For a more detailed discussion of factors considered in credit
evaluation, including the relative weights assigned to different
factors, see the description on the website of Fair Isaac Corporation,
www.myfico.com. Also see Robert B. Avery, Raphael W. Bostic,
Paul S. Calem, and Glenn B. Canner (1996), “Credit Risk, Credit
Scoring, and the Performance of Home Mortgages,” Federal Reserve
Bulletin, vol. 82 (July), pp. 621—48.

Credit Report Accuracy and Access to Credit

Payment History
The most important factors considered in credit
evaluation are those that relate to an individual’s
history of repaying loans and any evidence of non
credit-related collections or money-related public
actions. Credit evaluators consider whether an indi
vidual has a history of repaying balances on credit
accounts in a timely fashion. The analysis takes into
account not only the frequency of any repayment
problems but also their severity (lateness), date of
occurrence (newness), and dollar magnitude. Eval
uators assess repayment performance on the full
range of accounts that an individual holds, dis
tinguishing accounts by type (such as revolving,
installment, or mortgage) and by source (such as
banking institution, finance company, or retailer).
In general, an individual with serious deficien
cies in repayment performance, such as a credit
account that is currently delinquent, will find quali
fying for new credit difficult, may face higher inter
est rates for the credit received, or may be lim
ited in further borrowing on existing revolving
accounts.

Consumer Indebtedness
When evaluating credit, creditors consider the type
and amount of debt an individual has and the rate of
credit utilization. For revolving accounts, the rate
of credit utilization is measured as the proportion of
available credit in use (outstanding balance divided
by the maximum amount the individual is autho
rized to borrow, referred to as the credit limit). For
installment and mortgage accounts, credit utiliza
tion is generally measured as the proportion of the
original loan amount that is unpaid. High rates of
credit utilization are generally viewed as an addi
tional risk factor in credit evaluations, as they may
indicate that an individual has tapped all available
credit to deal with a financial setback, such as a loss
of income.

Length of Credit History
Credit evaluators consider the length of a person’s
credit history because it provides information about
how long the individual has been involved in credit
markets and about whether he or she has obtained
credit recently. The age of the account is relevant to
an evaluation of credit quality because the longer the
account has been open, the more information it con

299

veys about an individual’s willingness and ability to
make payments as scheduled. New accounts may
convey little information other than that a consumer
has had a recent need for additional credit and has
been approved for credit.

Acquisition of New Credit
Whether a person is seeking new credit provides
information about the credit risk posed by the indi
vidual. The number of new accounts the individual
has recently established and the number of attempts
to obtain additional loans, as conveyed by records of
recent creditor inquiries (requests for credit reports),
all provide a picture of the individual’s recent credit
profile.9 Attempts to open a relatively large num
ber of new accounts may signal that a person risks
becoming overextended.

Calculating a Credit H istory Score
Statistical modelers working with data from creditreporting agencies construct credit history scores
using selected factors of the types described above.
Modelers divide each factor into ranges and assign
each range a point count. The score for an individual
is the sum of these points over all factors considered
in the model. Typically, the points and the factors
used in the model are derived from a statistical analy
sis of the relationship between the factors at an initial
date and the credit performance over a subsequent
period.

Role o f the Fair Credit Reporting A ct
Although participation by reporters in the creditreporting process is voluntary, reporters are subject
to rules and regulations spelled out in the Fair Credit
Reporting Act (FCRA). The FCRA regulates access
to credit information and prescribes how the agencies
are to maintain each credit report they hold.10 Under
the FCRA, only persons with a permissible pur9. Inquiries made to create a mailing list for sending prescreened
solicitations or to monitor existing account relationships are omitted
from the credit reports. Also omitted are individuals’ requests for
copies o f their own reports.
10. For a discussion o f how the FCRA governs and encourages
accurate credit reporting, see Michael Staten and Fred Cate (2003),
“Does the Fair Credit Reporting Act Promote Accurate Credit Report
ing?” paper presented at “Building Assets, Building Credit: A Sym
posium on Improving Financial Services in Low-Income Commu
nities,” Joint Center for Housing Studies, Harvard University,
November 18-19.

300

Federal Reserve Bulletin □ Summer 2004

Provisions of the Fair and Accurate Credit
Transactions Act of 2003
The Fair and Accurate Credit Transactions Act of 2003
amended the Fair Credit Reporting Act in several ways.
The amendments, known collectively as the FACT Act,
seek to (1) improve the use of credit information and give
consumers greater access to such information, (2) prevent
identity theft and facilitate credit history restitution,
(3) enhance the accuracy of consumer report information,
(4) limit the sharing and use of medical information in
the financial system, and (5) improve financial literacy
and education.
The amendments that address the use and availability
of credit information provide the following consumer
rights and protections:
• The right to obtain a free copy o f a consumer
report. A consumer may request a free credit report once

a year from each of the national credit-reporting agen
cies, and each agency must establish a toll-free telephone
number to receive the requests. A consumer may also
obtain a credit history score and related information from
each agency for a “fair and reasonable” fee. For a given
credit history score, related information includes the
range of possible scores under the model used to produce
the score, a list of the key factors (not to exceed four) that
adversely affected the score, the date the score was
established, and the name of the entity that provided the
score.
• The right to be told when, as a result o f negative
information in a credit report, a creditor has offered
a consumer credit on terms that are materially less
favorable than those offered to most other consumers.

At the time of notification, the creditor must provide a
statement that explains the consumer’s right to obtain a
free credit report from a credit-reporting agency and that
provides contact information for obtaining the report (as
of this writing, the rules for implementing this provision
were not yet final).
• Protection against faulty reporting o f credit record
data. Federal supervisors of financial institutions must

establish and maintain guidelines regarding the accuracy
and integrity of the information that data reporters submit
to credit-reporting agencies. In certain circumstances, a
data reporter must reinvestigate a dispute involving the
information it reported.

pose for obtaining a credit report—for example, to
facilitate a credit transaction, to screen prospective
employees, or to underwrite property and casualty
insurance involving a consumer—may have access
to this credit information. The FCRA prohibits a

reporter from furnishing any information to a creditreporting agency if the reporter knows or consciously
avoids knowing that the information is inaccurate,
and the act requires reporters to help correct errors
that consumers have identified.
The FCRA also prescribes the responsibilities of
the reporters and the agencies when a consumer
challenges the accuracy of information in a credit
record. Within thirty days after a dispute has been
filed, a credit-reporting agency must remove or cor
rect inaccurate, incomplete, or unverified information
in a consumer’s credit record. In addition, anyone
using information in a credit report to take adverse
action against a consumer (for example, denying a
request for credit) must notify the consumer that the
report has been used in the decision. Such consumers
are entitled to free copies of their reports.11
Amendments to the FCRA—enacted December 4,
2003, as the Fair and Accurate Credit Transactions
Act (FACT Act)—expand consumer access to credit
reports and credit history scores and address issues
of data accuracy and identity theft (see box “Provi
sions of the Fair and Accurate Credit Transactions
Act of 2003” ). The provisions also expand the duties
of creditors to advise a consumer when, as a con
sequence of information in a credit report, the
consumer is offered credit on terms materially less
favorable than those made available to most other
customers. For the most part, the amendments will
become effective at the end of 2004.

Accuracy, Completeness, Timeliness, and
Consistency o f Credit Record Information
Credit-reporting agencies use various techniques and
editing procedures to process the information they
receive and to assess its accuracy, completeness,
timeliness, and consistency. If they discover or sus
pect that the data contain errors, they return the data
to the reporter for resubmission with any necessary
corrections.12 Otherwise, the agencies compile and
process the newly received data to create or update
the record of an individual’s credit experiences. This
processing can sometimes be difficult and has the
11. About 85 percent o f the credit reports that consumers receive
each year are associated with adverse actions. See Nott and Welborn,
A Consumer’s Access to a Free Credit Report, p. 10.
12. For example, if a reporter submits a file that includes a much
larger or a much smaller number o f records than have historically
been received, then the agency will flag the file for review. Similarly,
if an unexpectedly large or an unexpectedly small percentage o f the
data items have a given characteristic (for example, the number of
accounts sixty or more days late exceeds a designated threshold), then
the agency will also flag the data for review.

Credit Report Accuracy and Access to Credit

potential for error. For example, because data report
ing is voluntary and because the ability of the agen
cies to enforce certain standards is limited, the agen
cies have had to devise techniques for recognizing
that sometimes data items reported with the same
identifying information, such as the same name, may
actually be associated with different individuals.
Similarly, a social security number may be missing
from or may be reported incorrectly in reported infor
mation on an individual. In such cases, the likelihood
of associating the reported item with the wrong per
son increases significantly.
Although the agencies’ data are extensive, they are
incomplete in two respects. First, not all information
on credit accounts held by individuals is reported
to the agencies. Some small retailers and mortgage
and finance companies do not report to the agencies,
and individuals, employers, insurance companies,
and foreign entities typically do not report loans
they extend. Also, information on student loans is
not always reported. Second, some accounts that are
reported contain incomplete or out-of-date informa
tion. Sometimes creditors do not report or update
information on the credit accounts of consumers who
consistently make their required payments as sched
uled or on the accounts of those who have been
seriously delinquent in their payments, particularly
accounts with no change in status. Similarly, credit
limits established on revolving accounts, such as
credit cards, are not always reported or updated.
Moreover, creditors may not notify the agencies when
an account has been closed, transferred, or assigned
a new payment status. For example, sometimes
creditors fail to report delinquent payments that are
fewer than thirty or sixty days past due, and they
report changes in payment status only when a more
serious payment problem arises. Each of these
possibilities contributes to problems of data com
pleteness and integrity, and each has the potential
to compromise the evaluation of an individual’s
creditworthiness.
Another problem that may compromise credit
evaluations concerns the timeliness of the data. The
information reported on credit accounts reflects each
account’s payment status and outstanding balance as
of a date shortly before the information is forwarded
to the agencies. Thus, the information is sensitive to
the date on which the information is forwarded. For
example, a credit account reported the day after a
creditor has posted a payment to the account will
show a smaller balance than will the same account
reported the day before the posting. Similarly, the
payment status reflected in a credit report is sensitive
to timing; the record on an account may indicate no

301

late payment problems on a given day but may show
a delinquency if reported to the agency one or two
days later.
Besides the accuracy, completeness, and timeliness
of information in a given credit record, the consis
tency of information about an individual across agen
cies is an issue of concern. The information may
differ from agency to agency for several reasons.
First, the rules governing the processing of reported
information differ across agencies. For example, each
agency has its own rules for determining whether
identifying information is sufficient to link reported
information to a single individual. The inability to
link reported information accurately in all cases can
be an important source of data quality concerns
because it results in the creation of “fragmentary
files”—that is, multiple and therefore incomplete
credit reports for the same individual—and some
times in the assignment of the wrong credit records
to an individual. Fragmentary files often result
because consumers use different addresses or names
(for example, after a marriage or a divorce), in some
cases fraudulently, to obtain credit or other services.
Each agency also has its own rules governing
the treatment of out-of-date information, such as
accounts last reported to have a positive balance.
Second, the agencies receive and post information at
different times. Third, a given reporter may provide
information to one or two of the agencies but not to
all three. Finally, changes made to disputed informa
tion may be reflected only in the credit records of the
agency that received the disputed claim.
Although the agencies endeavor to maintain highquality data and accurate files, the degree to which
consumer credit reports are accurate, complete,
timely, or consistent across agencies is in dispute.
Moreover, analysts disagree on the extent to which
data errors and omissions affect credit history scores.
A recent analysis by the General Accounting Office
(GAO) cites information drawn from the relatively
few studies that have attempted to address data accu
racy and importance.13 Specifically, the GAO cites
a 2002 joint study by the Consumer Federation of
America and the National Credit Reporting Associa
tion that found evidence that the information included
in the credit reports of any given individual can differ
widely across agencies.14 This study also found that
credit history scores based on data from the agencies
can vary substantially regardless of whether the indi
vidual has a generally good or a generally bad credit
13. General Accounting Office, Consumer Credit.
14. Consumer Federation of America and National Credit Report
ing Association (2002), Credit Score Accuracy and Implications f o r
Consumers, December 17, www.consumerfed.org.

302

Federal Reserve Bulletin □ Summer 2004

history. As a consequence, the study concluded, “mil
lions of consumers are at risk of being penalized by
inaccurate credit report information and inaccurate
credit scores.” 15
The GAO report also discusses research on errors
and omissions that occur within the credit files of
a single agency. The report highlights different per
spectives on the data quality issue. For example, one
investigation by a consumer organization estimated
that up to 79 percent of credit reports may contain
some type of error and that about 25 percent of all
consumer credit reports may contain errors that can
result in the denial of access to credit.16 A study by
Arthur Andersen and Company reviewing the out
comes for individuals who were denied credit and
then disputed information in their credit reports con
cluded, however, that only a small proportion of the
individuals were denied credit because of inaccurate
information in their credit reports.17

Th e F e d e r a l R e s e r v e Sa m p l e

C r e d it

records

The Federal Reserve Board obtained from one of the
three national credit-reporting agencies the credit
records (excluding any identifying personal or credi
tor information) of a nationally representative ran
dom sample of 301,000 individuals as of June 30,
2003.18 The sample data omitted home addresses but
15. Consumer Federation o f America and National Credit Report
ing Association, Credit Score Accuracy and Implications fo r Consum
ers. The study found that the difference between the high and the low
credit history scores for an individual across the three agencies
averaged 41 points (on a scale of 300 to 850) and that about 4 percent
o f individuals had score differences o f 100 points or more.
16. Alison Cassady and Edmund Mierzwinski (2004), Mistakes
D o Happen: A Look at Errors in Consumer Credit Reports, National
Association o f State Public Interest Research Groups, June,
www.uspirg.org. A lso see Jon Golinger and Edmund Mierzwinski
(1998), Mistakes Do Happen: Credit Report Errors Mean Consumers
Lose, U.S. Public Interest Research Group, March, www.uspirg.org.
17. Consumer Data Industry Association (1998), press release,
March 12, www.cdiaonline.org. Also see Robert M. Hunt (2002),
“The Development and Regulation of Consumer Credit Reporting in
America,” Working Paper No. 02-21 (Philadelphia: Federal Reserve
Bank o f Philadelphia, November). The study found that 8 percent of
the consumers who were denied credit requested copies o f their credit
reports. O f these consumers, 25 percent found and disputed errors. Of
those consumers who found errors, about 12 percent (3 percent of
those who requested credit reports) eventually received credit because
o f favorable dispute resolutions.
18. Agency files include personal identifying information that
enables the agencies to distinguish among individuals and construct
a full record o f each individual’s credit-related activities. The records
received by the Federal Reserve excluded the personal identifying
information that agency files contain— the consumer’s name, current
and previous addresses, and social security number— as well as other
personal information that credit files sometimes contain— telephone

included census tracts, states, and counties of resi
dence. We used this geographic information with
census 2000 files—which provide population charac
teristics, such as income, race, and ethnicity, by cen
sus tract of residence—to analyze the credit record
data.
Four general types of credit-related information
appear in credit records, including those in the Fed
eral Reserve sample: (1) detailed information from
creditors (and some other entities such as utility
companies) on credit accounts—that is, current
and past loans, leases, and non-credit-related bills;
(2) information reported by collection agencies on
actions associated with credit accounts and noncredit-related bills, such as unpaid medical or utility
bills; (3) information purchased from third parties
about monetary-related public records, such as
records of bankruptcy, foreclosure, tax liens (local,
state, or federal), lawsuits, garnishments, and other
civil judgments; and (4) information about inquiries
from creditors regarding an individual’s credit record.
Credit accounts constitute the bulk of the informa
tion in the typical individual’s credit record, and thus
they compose the bulk of the information that the
agencies maintain. Credit account records contain a
wide range of details about each account, including
the date that an account was established; the type of
account, such as revolving, installment, or mortgage;
the current balance owed; the highest balance owed;
credit limits if applicable; and payment performance
information, such as the extent to which payments
are or have been in arrears for accounts in default.
A basic element of agency data is information on
the open or closed status of each account. An account
is considered open if a credit relationship is ongoing
and closed if the consumer can no longer use the
account. Another important element of account infor
mation is the date on which the information was most
recently reported. The date is critical in determining
whether the information on the account in the credit
agency files is current or stale (unreported for some
time and therefore potentially in need of updating).
Significantly less-detailed information is available
on collection agency accounts, public records, and
creditor inquiries about a consumer’s credit history.
Generally, only the amount of the collection or public
record claim, the name of the creditor, and the date
last reported are available. For creditor inquiries,
information is even more limited and includes just
the type of inquirer and the date of the inquiry. The
numbers, name o f spouse, number o f dependents, income, and
employment information. Under the terms o f the contract with the
credit-reporting agency, the data received by the Federal Reserve
cannot be released to the public.

Credit Report Accuracy and Access to Credit

Individuals with credit-reporting agency records,
by type of information in credit record,
as of June 30, 2003

Distribution of individuals, by credit history score
Percent

Number

Share of sample
(percent)

Sample size ...............................................

301,536

100.0

Credit account ...........................................

259,211

86.0

Collection agency account ......................

109,964

36.5

Type of information in credit record

303

Public record...............................................

36,742

12.2

Creditor inquiry1 .......................................

188,616

62.6

None of the above ...................................

M em o

Credit account only ..................................
Collection agency account only .............
Public record o n ly .....................................
Creditor inquiry only1 ..............................

63,501
34,978
53
31

21.1
11.6
*
*

Credit account and
Collection agency account...................
Public record .........................................
Creditor inquiry1 ...................................

67,747
34,715
182,553

22.5
11.5
60.5

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

Note . In this and subsequent tables, components may not sum to totals
because of rounding.
1. Item includes only inquiries made within two years of the date the sample
was drawn.
* Less than 0.5 percent.

agencies generally retain inquiry information for
twenty-four months.
In aggregate, the Federal Reserve sample con
tained information on about 3.7 million credit
accounts, more than 318,000 collection-related
actions, roughly 65,000 monetary-related public
record actions, and about 913,000 creditor inquiries.
Not every individual had information of each type. In
the sample, approximately 260,000, or 86 percent, of
the individuals had records of credit accounts as of
the date the sample was drawn (table l).19 Although
a large portion of individuals had items indicating
collection agency accounts, public record actions, or
creditor inquiries, only a very small share (well less
than 1 percent) of the individuals with credit records
had only public record items or only records of
creditor inquiries. However, for about 12 percent of
the individuals, the only items in their credit records
were collection actions.

Below 550

550-600

601-660

661-700

701 and above

Credit history score
N ote. Data are from a Federal Reserve sample drawn as of June 30, 2003.
The distribution is composed o f individuals in the sample who had been
assigned credit history scores. Authors have adjusted the scores, which are
proprietary, to match the distribution of the more familiar FICO credit history
scores, developed by Fair Isaac Corporation.

etary credit-risk-scoring model as of the date the
sample was drawn to generate the scores (one for
each individual), which it constructed from selected
factors of the type described previously. The propri
etary credit-risk score is like other commonly used
consumer credit history scores in that larger values
indicate greater creditworthiness. The agency did not
assign scores to anyone who did not have a credit
account. A small proportion of individuals without
scores did have credit accounts, but most of these
individuals were not legally responsible for any debt
owed.
To facilitate this discussion, we have adjusted the
proprietary credit-risk scores assigned to individuals
in the Federal Reserve sample to match the distribu
tion of the more familiar FICO credit history scores,
for which information is publicly available.20 Among
the individuals in our sample who had scores, about
60 percent had adjusted scores of 701 or above
(chart 1). Individuals with FICO scores in this range
are relatively good credit risks. According to Fair
Isaac Corporation, less than 5 percent of such con

Credit History Scores in the Sample
The credit-reporting agency provided credit history
scores for about 250,000, or 83 percent, of the indi
viduals in the sample. The agency used its propri-

19.
The credit account information was provided by 92,000 report
ers, 23,000 o f which had reported within three months of the date the
sample was drawn.

20.
For a national distribution o f FICO scores, see
www.myfico.com/myfico/creditcentral/scoringworks.asp. All three
agencies use versions o f the FICO score, which is generated from
software developed by the Fair Isaac Corporation. Each agency gives
the score a different name. Equifax calls it the Beacon score; Experian, the Experian/Fair Isaac Risk score; and Trans Union, the Empirica score. In developing the scores, Fair Isaac used the same
methods at each agency but estimated the FICO model differently at
each one, using separate samples. Thus, just as the information about
an individual can differ across the three companies, so can the FICO
model.

304

Federal Reserve Bulletin □ Summer 2004

sumers are likely to become seriously delinquent on
any debt payment over the next two years.21 In con
trast, about 13 percent of individuals in our sample
had adjusted scores at or below 600. According to
Fair Isaac, more than half of these consumers are
likely to become seriously delinquent on a loan over
the next two years.
Because credit history scores can be used to mea
sure credit risk, creditors use them, along with other
measures of creditworthiness, such as collateral,
income, and employment information, to determine
whether to extend credit and, if so, on what terms.
Credit history scores are closely aligned with the
interest rates offered on loans—that is, higher scores
are associated with lower interest rates. For example,
as of August 30, 2004, the national average interest
rate for a thirty-year fixed-rate conventional mort
gage for an individual with a FICO score of 720 or
more was 5.75 percent, whereas the average interest
rate for someone with a score below 560 was
9.29 percent.22

Assessing the Effects o f Data Limitations
The analysis to assess the potential effects of data
limitations on an individual’s access to credit
involves two steps: identifying data problems in an
individual’s credit record and simulating the effects
of “correcting” each problem on the availability or
price of credit as represented by the change in the
individual’s credit history score. To conduct this exer
cise, one must know (1) the factors used to construct
the score, (2) the points assigned to these factors in
deriving an individual’s score, and (3) the process
used to create the underlying factors from the original
credit records.
The Federal Reserve’s sample includes all the
information that would be necessary to construct any
credit history score and its underlying factors from
the original credit records. However, the details of
the credit-reporting agency’s credit-scoring model,
including the factors and point scales used in the
model, are proprietary and were not made available
to the Federal Reserve. Nevertheless, we were able to
approximate the model by using three types of infor

21. The term “seriously delinquent” means falling behind on a
loan payment ninety days or more, defaulting on a loan, or filing for
bankruptcy.
22. See www.m yfico.com . Loan rate includes 1 discount percent
age point and is based on a loan amount of $150,000 for a single
family, owner-occupied property and on an 80 percent loan-to-value
ratio. As the data on the web site show, interest rates vary little by
credit history score for individuals with scores above 700.

mation: (1) the proprietary credit-risk score assigned
to each individual in our sample; (2) a large set of
credit factors for each individual—a subset of which
was known to comprise the factors used in the propri
etary credit-scoring model; and (3) detailed accountlevel information in each individual’s credit record.
We used the first two items to construct an approxi
mation of the proprietary credit-scoring model,
employing regression techniques to estimate the
points to assign to each factor. We used the second
and third items to “reverse-engineer” the credit
factors included in our version of the credit-scoring
model. This information enabled us to recalculate
how the factors—and ultimately the credit history
scores—would change if alterations were made to the
underlying credit records so that we could simulate
the effects of correcting a data problem or omission.
Because of the numerous potential factors and
specifications that could have been used to construct
the proprietary credit-risk score, our version of the
credit-scoring model undoubtedly differs from the
actual proprietary model. However, we were able to
identify almost exactly the process used to construct
the factors in the actual model from the underly
ing credit records. Moreover, the approximated and
actual model scores corresponded quite closely. Thus,
we believe that our approximation of the scoring
process provides a reasonable estimate of the poten
tial effects of a change in a credit record item on an
individual’s credit history score.
Other model builders consider different credit-risk
factors in creating their scoring models, assign differ
ent points to the factors, and employ different rules
for constructing the factors. As a consequence, even
if we had identified the proprietary model exactly,
the results of our analysis would not necessarily have
been the same as those implied by other models.
Nevertheless, our results should be viewed as indi
cative of the implications of data quality issues for
scoring models in general and as applicable in many,
if not all, respects.

D a t a Q u a l it y

is s u e s

As noted earlier, a previous article in this publication
examined in detail the credit records of a sample of
individuals as of June 30, 1999, and found that key
aspects of the data were ambiguous, duplicative, or
incomplete. The article highlighted four areas of
concern: (1) The current status of “stale” accounts,
which show positive balances (amounts owed that
are greater than zero) but are not currently reported,
is ambiguous; (2) some creditors fail to report

Credit Report Accuracy and Access to Credit

credit account information, including nonderogatory
accounts (accounts whose payments are being made
as scheduled) or minor delinquencies (accounts 30 to
119 days in arrears); (3) credit limits are sometimes
unreported; and (4) the reporting of data on collection
agency accounts and public records may be inconsis
tent or may contain redundancies, and some of the
items regarding creditor inquiries are often missing.
Our simulations, discussed below, address these areas
of concern.

Am biguous Status o f Stale Accounts
A primary concern about data quality involves stale
accounts. About 29 percent of all accounts in the
sample showed positive balances at their most recent
reporting, but the report date was more than three
months before the sample was drawn. These accounts
fell into one of three categories based on their status
when last reported: major derogatory (accounts that
are 120 days or more in arrears and involve a
payment plan, repossession, charge-off, collection
action, bankruptcy, or foreclosure), minor delin
quency, or paid as agreed. Of all stale accounts with a
positive balance at last report, about 15 percent were
reported to be major derogatories, 3 percent were
minor delinquencies, and 82 percent were paid as
agreed.
Analysis of the credit records in the sample sug
gests that many of these stale accounts, particularly
those involving mortgages and installment loans,
were likely to have been closed or transferred but
were not reported as such. Many were reported by
creditors that were no longer reporting data to the
agency about any individuals when the sample was
drawn, and thus information on these accounts was
unlikely to be up to date. The significant fraction
of positive-balance stale accounts that were likely
closed or transferred implies that some consumers
will show higher current balances and a larger num
ber of open accounts than they actually hold.
Because the current status of stale accounts is often
unclear, users of consumer credit reports must obtain
additional information or make assumptions about
the status. In credit-scoring models, such assump
tions are inherent in “ stale-account rules” that credit
modelers typically apply when they calculate an indi
vidual’s credit history score. A stale-account rule
defines the period for which reporting is considered
current and thus identifies stale accounts. The rule
also dictates how accounts identified as stale should
be treated. In most cases, the rule treats them as
closed accounts with zero balances.

305

To some extent, rules that consider stale accounts
closed and paid off may mitigate concerns about stale
account information. Another possible mitigating fac
tor is that consumers who review their credit reports
for mistakes are likely to catch stale-account errors
and to have them corrected. Nevertheless, staleaccount rules and consumer action can only partially
correct the problem of noncurrent information in
credit account records. For example, a rule that is
conservative in identifying stale accounts may permit
noncurrent information to be used over an extended
period, whereas an overly aggressive rule may nullify
information that is still current.

Failure to Report Credit Account Information
Some reporters provide incomplete performance
information on their accounts, and others fail to
report any information about some credit accounts.
For example, in the Federal Reserve sample, 2.7 per
cent of the large creditors reported only credit
accounts with payment problems.23 The failure to
report accounts in good standing likely affected the
credit evaluations of consumers with such accounts.
The way in which credit evaluations are affected
depends on the circumstances of an account. For
consumers with a low utilization of nonreported
accounts, the failure to report may worsen their credit
evaluations. For consumers with a high utilization of
nonreported accounts, however, the failure to report
may result in better credit evaluations than are
warranted.
In addition, some creditors report minor delin
quent accounts as performing satisfactorily until the
accounts become seriously delinquent. Almost 6 per
cent of the large creditors in the Federal Reserve
sample followed this practice. Because the credit
histories for consumers who fall behind in their pay
ments to such lenders appear somewhat better in the
credit records than they actually are, these consumers
may benefit from such underreporting.
Finally, some lenders withhold account informa
tion. For example, in 2003, Sallie Mae, the nation’s
largest provider of student loans, decided to withhold
information on its accounts from two of the three
credit-reporting agencies. Clearly, while this policy
was in effect, the failure to report information harmed
some consumers and benefited others depending on
23.
Some lenders, particularly those that specialize in lending to
higher-risk individuals (referred to here as subprime lenders), choose
to withhold positive performance information about their customers
for competitive advantage.

306

Federal Reserve Bulletin □ Summer 2004

whether the withheld information was favorable or
unfavorable.

Unreported Credit Limits
A key factor that credit evaluators consider when
they assess the creditworthiness of an individual is
credit utilization. If a creditor fails to report a credit
limit for an account, credit evaluators must either
ignore utilization or use a substitute measure such as
the highest-balance level—that is, the largest amount
ever owed on the account. Substituting the highestbalance level for the credit limit generally results
in a higher estimate of credit utilization because
the highest-balance amount is typically lower than
the credit limit; the higher estimate leads, in turn, to
a higher perceived level of credit risk for affected
consumers.
For the June 30, 1999, sample of individuals,
proper utilization rates could not be calculated (the
highest-balance levels had to be used) for about onethird of the open revolving accounts because the
creditors had not reported the credit limits. At that
time, about 70 percent of the consumers in the sample
had missing credit limits on one or more of their
revolving accounts. Circumstances have improved
substantially since then because public and private
efforts to encourage the reporting of credit limits
have resulted in more-consistent reporting. Neverthe
less, in the sample drawn as of June 30, 2003, credit
limits were missing for about 14 percent of revolving
accounts, and the omissions affected about 46 percent
of the consumers in the sample. Thus, although the
incidence of missing credit limits has fallen substan
tially, it remains an important data quality issue.

Problems with Collection Agency Accounts,
Public Records, and Creditor Inquiries
Data on collection agency accounts, public records,
and creditor inquiries are a source of inconsistency,
redundancy, and missing information in credit
records.

Collection Agency Accounts
Evidence suggests that collection agencies handle
claims in an inconsistent manner. Most notably, some
collection agencies may report only larger collection
amounts to credit-reporting agencies, whereas others

may report claims of any size.24 Inconsistent report
ing does not imply inaccuracy of the information that
does get reported, but it does imply some arbitrari
ness in the way individuals with collections are
treated. Those whose collection items happen to
be reported to the credit-reporting agency will have
lower credit history scores than will those whose
collection items go unreported. This situation raises
the question as to the extent and effect of such
arbitrary differences in treatment, particularly for
small collection amounts. In addition, anecdotes
abound about consumers who have had difficulty
resolving disputes over collection items or who have
had trouble removing erroneous items from their
credit records.
Another potentially important data quality issue for
collection agency accounts is duplication of accounts
within collection agency records. Duplications can
occur, for example, when a collection company trans
fers a claim to another collection company. Dupli
cations can also occur when a debt in collection is
satisfied but the paid collection is recorded as a
separate line item by the collection agency. Analysis
of the collection agency accounts in the latest Federal
Reserve sample suggests that about 5 percent of
collection items are likely duplications resulting from
such transfers or payouts.
Credit evaluators also have some concern about
the appropriateness of using medical collection items
in credit evaluations because these items (1) are
relatively more likely to be in dispute, (2) are incon
sistently reported, (3) may be of questionable value
in predicting future payment performance, or (4) raise
issues of rights to privacy and fair treatment of the
disabled or ill. The last concern recently received
special attention with the inclusion of provisions in
the FACT Act that address medical-related collec
tions. One provision requires the credit-reporting
agencies to restrict information that identifies the
provider or the nature of medical services, products,
or devices unless the agencies have a consumer’s
affirmative consent. In the future, the agencies may
be able to meet this requirement by using a code,
with the name of the creditor suppressed, to distin
guish medical-related collections from other collec
tions. Because the coding system is prospective, how
ever, even if implemented today, years may pass
before all the collection items in the agency files have
this code. In the interim, if the name of the creditor
is suppressed, distinguishing medical collection items
24.
One indication o f the inconsistent reporting o f collection items
is the wide dispersion across states in the ratio of small collection
items to all collection agency accounts. The percentage ranges from
30 percent to 60 percent.

Credit Report Accuracy and Access to Credit

307

will depend on the ability of the credit-reporting
agencies to mechanically code historical data. If such
coding is done imperfectly, it may adversely affect
consumers who deal with creditors that want to dis
count collection items involving medical incidents.
(As of September 2004, at least one of the agencies
had developed a system that suppresses the name of
the creditor and uses a code to distinguish medicalrelated collections.)

code that identifies the type of credit sought from
the inquiring lender—is generally not available in
inquiry records (it is missing from 99 percent of
the inquiries in the Federal Reserve sample). Conse
quently, credit evaluators must use less reliable rules,
potentially harming consumers who are simply shop
ping for a single loan by failing to distinguish them
sufficiently from consumers who are seeking an
excessive amount of credit.

Public Records

DESIGN OF THE SIMULATIONS

Public records suffer from similar consistency and
duplication problems that affect collection items. In
particular, a single episode can result in one or more
public record items depending on how it is recorded.
For example, tax liens can be recorded on a con
solidated basis or treated as separate items. Similarly,
amendments to a public record filing, such as a
bankruptcy or a foreclosure, can be treated as
updates, which result in no change in the number of
items, or as new filings.
In addition, evidence suggests that the creditreporting agencies inconsistently gather information
on lawsuits that the courts have not yet acted on, in
part because some agency officials believe that the
mere filing of a lawsuit does not necessarily relate
to future credit performance. For the most part, such
lawsuits are missing from the public records. How
ever, for idiosyncratic reasons, some lawsuits have
been reported in nonrandom ways. Specifically,
80 percent of the lawsuits in the Federal Reserve
sample came from only two states, an indication that
residents of these states may be at a disadvantage in
credit evaluations.
About one-fourth of non-bankruptcy-related public
records reflect dismissals. In such cases, the courts
seem to have determined that the individuals are not
legally liable. Such information may be of question
able value for credit evaluations.

We designed a series of simulations to estimate the
potential effects of the data quality issues identified in
the preceding section. Each simulation identified a
set of “data problems” or potential problems, applied
a plausible “correction” to each problem, and used
an approximation of the proprietary credit-risk model
to evaluate the effect of the correction on the credit
history scores of individuals who had the problem in
their credit records.25 We estimated how many con
sumers each data problem affected; and for those who
were affected, we estimated how many would see a
decrease or an increase in their scores and by how
much when the problem was corrected.

Creditor Inquiries
Although credit evaluators use information on credi
tor inquiries to predict future loan performance, the
value of this information is limited in an important
way. Ideally, credit evaluators would use such infor
mation to distinguish the consumers who are seeking
multiple loans to greatly expand their borrowing from
the consumers who are shopping for the best terms
for a single loan. However, the information that
evaluators need to make this distinction—that is, a

Selecting Factors in the Approxim ated M odel
The first step in setting up the simulations was select
ing the factors to be used in the approximated
credit-scoring model. The approximated model used
seventy-three factors, including the number of credit
accounts of different types and the various char
acterizations of payment history patterns, such as
the number of accounts with all payments made on
time, in various stages of delinquency, or with major
derogatory status. Also included were measures
of outstanding balances, credit limits on revolving
accounts, ages of credit accounts, variables derived
from collection agency accounts and public records,
and account inquiry information. Our discussions
with credit evaluators suggested that most credit his
tory models are based on a smaller number of factors
than were included here. However, most of the “addi
tional” variables in our model were decompositions
or interactions that involved more general factors and
were unlikely to lead to significant distortions in our
representations of the effects of data quality issues.
25.
We use the terms “data problem” and “correction” in their
broadest sense. For example, “data problem” may mean an actual
problem or only a potential problem. Similarly, “correction” may
mean a solution to a problem or simply a “best guess” at a solution.

308

Federal Reserve Bulletin □ Summer 2004

Share of individuals with selected factors used in credit evaluation, distributed by type of account
Percent except as noted
Factor used in
credit evaluation
Number o f credit accounts
No account................................
1 ...............................
2 ................................................
3-5 .............................................
6-8 .............................................
9 or more ..................................
Total ..................................
Number o f open credit
accounts paid as agreed
0 ...............................
1 ...............................
2 .................................................
3-5 .............................................
6-8 .............................................
9 or more ..................................
Total ..................................

Type o f account
Revolving Installment Mortgage

3
13
7
18
16
43
100

17
13
9
23
16
22
100

26
16
12
22
11
12
100

58
25
10
6
1
0
100

55
14
11
16
3
1
100

71
24
4
1
0
0
100

Total

0
9
5
12
11
62
100

10
13
9
21
17
30
100

Number of credit accounts
opened in most-recent
12 months1
0 ...............................
1 ...............................
2 or more ..................................
Total ..................................

75
17
8
100

79
15
6
100

89
9
2
100

46
25
29
100

Years since most-recent
credit account opened1
0 ...............................
Less than 1 ................................
1-2 .............................................
3-4 .............................................
5 or more ..................................
Total ..................................

26
22
23
10
19
100

26
20
25
13
16
100

55
10
11
7
17
100

0
51
29
9
11
100

Age o f oldest credit account
(years)2
No oldest account.....................
Less than 1 ................................
1-4 .............................................
5-9 .............................................
10 or more ................................
Total ..................................

7
2
14
19
58
100

54
2
10
19
15
100

Amount owed on
nonmortgage credit accounts
(dollars)
0 ...............................
1-499 .........................................
500-999 ...................................
1,000-4,999 ..............................
5,000-9,999 ..............................
10,000 or more ........................
Total .................................

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

Utilization rate fo r revolving
accounts (percent)3
No account or not
calculable ........................
0 ...............................
1 - 2 4 ...........................................
25-49 .........................................
50 or more ................................
Total .................................
Share o f individuals with
credit accounts never
delinquent
0 ...............................
1 - 2 0 ...........................................
21-60 .........................................
61-90 .........................................
91 or more ...............................
Total .................................

55
1
9
12
22
100

19
11
5
16
10
39
100

13
24
33
11
19
100

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

0
2
13
20
65
100

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

7
2
14
21
56
100

Note. Data include only individuals with at least one credit account (of any
type) and a credit history score.
1. Data for revolving accounts include only bank-issued credit cards.
2. Data for installment accounts include only bank-issued installment loans.
3. Utilization rate is the proportion of available credit in use (outstanding
balance divided by the credit limit—that is, the maximum amount an individual

Factor used in
credit evaluation

Type of account
Revolving Installment Mortgage

Number o f credit accounts
30 days past due in past
12 months
0 .........................................
1 .........................................
2 ..............................................
3 or m ore...............................
Total ..............................

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

Number o f credit accounts
60 days past due in past
12 months
0 .........................................
1 .........................................
2 ..............................................
3 or m ore...............................
Total ..............................

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

Number o f credit accounts
90 days past due in past
12 months
0 .........................................
1 .........................................
2 ..............................................
3 or m ore...............................
Total ............................ .

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

Number o f credit accounts
more than 90 days past due
0 .........................................
1 .........................................
2 ..............................................
3 or m ore...............................
Total ..............................

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

Worst delinquency ever on
credit account (number of
days delinquent)
0 .........................................
3 0 ............................................
6 0 ............................................
9 0 ............................................
120 .........................................
More than 120 ......................
Total ............................ .

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

Balance owed on collection
accounts (dollars)
No collection account or
zero balance o w e d .......
1-99 .......................................
100-499 .................................
500-999 .................................
1,000 or m ore.......................
Total ............................
Number o f public records
0 .........................................
1 .........................................
2 or m ore..............................
Total .............................
Number o f creditor inquiries
in past 6 months
0 .........................................
1 ........................................
2 .............................................
3
4 or m ore..............................
Total ............................

Total

75
13
5
7

100

82
10

4
4

100

86
8
3
3

100
68
11

6
15
100

12
5

2
4
26

100

73
2
9
5

II
100
86
9
5

100
55

100

is authorized to borrow). The rate cannot be calculated in all cases because of
unreported information on credit limit, highest balance, or outstanding balance.
. . . Not applicable,
n.a. Not available.

Credit Report Accuracy and Access to Credit

We report many of the factors used in our model
and show the distribution of individuals in the sample
across each factor (table 2). For example, more than
60 percent of the individuals in the sample who had
a record of a credit account had information on nine
or more accounts, and more than half the individuals
had opened at least one new account within twelve
months of the date the sample was drawn. The pat
terns show that payment performance varies greatly
among individuals: Although about two-thirds of
individuals had never been more than ninety days
past due on a credit account, 15 percent had been this
late on three or more accounts. In addition, nearly
15 percent had a record of at least one bankruptcy,
tax lien, or other monetary-related public action, each
of which weighs heavily in credit evaluations.

Estimating the Approxim ated M odel
To estimate our approximation of the proprietary
credit-scoring model, we used standard statistical
regression techniques to fit the actual proprietary
credit-risk score against the selected credit factors for
the individuals in the sample data. Although credit
modelers typically break factors into ranges, because
we did not know the break points that had been
selected, we approximated the process with linear
splines.26 For the estimation, the sample included
only individuals with proprietary credit-risk scores
who had not filed for bankruptcy. Our simulations
were also restricted to this sample.27
We estimated the regression equation separately
for three subpopulations. The first group consisted of
individuals with one or more major derogatory credit
accounts in their credit records. Both the second
and third groups consisted of individuals who had
no major derogatory accounts, but individuals in the
second group had no more than two credit accounts
whereas those in the third group had more than two
credit accounts. We conducted the analysis in this
way because allowing the estimated coefficients to
26. The use o f linear approximations rather than ranges is likely to
mean that our simulations implied more small but consistent changes
in credit history scores when factors were altered than would the
“true” model, which divides consumers into two groups: those whose
scores did not change because they stayed within the same range and
those whose scores changed more substantially because they moved to
a different range.
27. Although individuals who had filed for bankruptcy or did not
have a proprietary credit-risk score were excluded from our analysis,
these individuals may also have been affected by data quality prob
lems. However, because they had not been scored or they had filed
for bankruptcy, they were likely subject to a different type o f credit
review process, one that may have provided greater opportunities for
the loan underwriter to identify and address data quality problems.

309

differ across population subgroups provided a notice
ably better fit. The approach was also consistent with
the common industry practice of using different
“scorecards” for different subpopulations. The R2 (a
statistic characterizing how well a model fits the data)
for each of the three subpopulation regressions was
about 0.85, and the combined R2 for the full popula
tion was about 0.94.
Proprietary considerations constrain our ability to
report details of the regression equation specification
or the coefficient estimates. However, a few variables
in the estimated credit-scoring model were statisti
cally insignificant and sometimes exhibited an unex
pected relationship to the credit history score. As a
consequence, as will be seen below, simulations of
the effects of changes in an individual’s credit record
led in a few instances to anomalous outcomes in the
sense that some scores moved in unexpected direc
tions when changes in the individual’s credit record
were simulated.
Conducting the Simulations
As noted, the simulations identified problems in the
data and applied hypothetical corrections to them.
Only in the case of missing credit limits, however,
could we identify the problem unambiguously. In
other cases—specifically, stale accounts and the data
quality issues associated with collections, public
records, and inquiries—we could determine only that
the information was likely inaccurate, incomplete, or
of questionable value.28 Finally, in other situations,
a data problem was unobservable, such as when
accounts were unreported or inconsistently reported.
In these situations, we could identify only the poten
tial effect on credit history scores of correcting the
problem but not the proportion of people affected.
We conducted fifteen simulations: three that
addressed issues related to stale credit accounts, four
that pertained to nonreported credit account informa
tion, and eight that addressed data quality issues for
collection agency accounts, public record items, and
creditor inquiries.
Stale Accounts Last Reported as Paid as Agreed
or as Minor Delinquencies
Recognizing the prevalence of stale accounts in credit
records, most credit-scoring modelers apply stale28.
In the case o f stale accounts, the information was clearly
outdated. In the case of inquiries, the information was incomplete in
that we could not determine whether the inquiries were associated
with shopping for a single loan.

310

Federal Reserve Bulletin □ Summer 2004

account rules to such accounts when they develop
credit evaluation models. For credit accounts that
have never been in major derogatory status (paid-asagreed accounts or accounts with only minor delin
quencies recorded), the rules typically retain the his
toric information on payment performance but dictate
that certain accounts that have gone unreported for an
extended period no longer have balances outstanding.
Any balances shown at last report for these accounts
are reset to zero.
In reverse-engineering the factors used in this
analysis, we discovered that the credit-reporting
agency had imposed a one-year stale-account rule
when it created most factors related to paid-as-agreed
accounts and to accounts with only minor delinquen
cies. Our simulation examined the effects on these
accounts of a more-aggressive stale-account rule, one
that redefined stale accounts on the basis of a threemonth period for current reporting.29

Stale Accounts with Major Derogatories
Some stale accounts were last reported in major
derogatory status. Here the payment status was more
likely to have remained the same since the last report
than it was in the case of stale accounts that were
paid as agreed or showed only minor delinquencies
at last report. Many seriously delinquent accounts
can remain in that state for an extended period with
no change in status (and thus the account information
need not be updated). However, in several situa
tions, the reported account status is likely to be no
longer accurate, such as when a consumer has taken
out a new mortgage after the date on which the stale
major derogatory was last reported. Generally, a
mortgage lender will not extend a new loan until
a consumer pays off (or otherwise addresses) all
major derogatories. Another situation in which the
reported account status is likely to be inaccurate
is when the account creditor no longer reports about
any individuals. In this case, the account has prob
ably been paid off or transferred.
We evaluated the effect of non-updating of credit
account information in these situations by treating as
paid off all stale major derogatories for which (1) the
consumer had taken out a new mortgage after the
date on which the major derogatory was last reported
29.
Analysis o f the patterns o f verification showed that the vast
majority o f open accounts were verified by the reporter every month
or two. Thus, in choosing a three-month rule, we simulated the effect
o f a maximally aggressive stale-account rule on the likely inaccuracy
associated with the account information. We had no obvious way of
simulating the effect o f lengthening the time period.

or (2) the creditor for the derogatory account had not
reported information on any consumer within three
months of the date on which the sample was drawn.
The credit-reporting agency had imposed a one-year
stale-account rule when it created factors related to
major derogatory accounts. The rule implied that
paying off a major derogatory account that had not
been reported within a year generally would have no
effect on an individual’s credit history score. Thus,
we again restricted our analysis of the effect of stale
accounts to those that had last been reported three to
twelve months before the date on which the sample
was drawn.

Failure of Some Subprime Creditors to Report
Accounts
As a potential source of data inaccuracy, the failure
of some subprime creditors (lenders that specialize
in loans for high-risk individuals) to report accounts
differs from the others studied here in that non
reporting is by definition unobservable. Conse
quently, the task for researchers is conceptually more
difficult, and simulations cannot address the inci
dence of such nonreporting. To simulate the potential
effect of such creditor behavior, we chose a random,
never-delinquent mortgage, installment, or revolving
account at a subprime lender for each individual with
such an account and rescored the individual as if the
account had not been reported. We defined subprime
lenders as those that were reporting credit accounts as
of th e d ate th e sam p le w as d raw n an d for which more
than one-half of their customers in the sample had
credit history scores in the high-risk range (a score
below 600).

Failure of the Largest Student Loan Creditor to
Report Any Accounts
As noted above, in 2003 Sallie Mae stopped report
ing information on its accounts to two of the three
largest credit-reporting agencies. Moreover, Sallie
Mae asked that the agencies suppress all historic
information on the accounts it had previously
reported. By the time the Federal Reserve sample
was drawn, Sallie Mae had reversed its initial deci
sion. Our sample omits information that would
allow us to identify Sallie Mae specifically. Thus, to
approximate the potential effect of Sallie Mae’s origi
nal decision, we deleted information on the loans of
random student-loan lenders—representing approxi
mately the same number of student loans that Sallie

Credit Report Accuracy and Access to Credit

Mae stopped reporting—from the credit records
in the Federal Reserve sample, and we rescored the
affected individuals.
Failure of Some Creditors to Report Minor
Delinquencies
Our review of the sample indicates that a small
percentage of lenders fail to report that paid-asagreed accounts have become minor delinquencies.
Rather, the lenders report the accounts as paid as
agreed until the accounts become major derogatories.
To simulate the potential effects of unreported minor
delinquencies, for each individual we randomly
selected a currently reported account that was not in
major derogatory status, was associated with a lender
that did report minor delinquencies for each indi
vidual, and had been thirty or sixty days delinquent
at least once. We assigned “paying as agreed” per
formance status to each thirty- and sixty-day delin
quency in the selected account’s performance record.
This adjustment replicates what the credit record
would show for a lender that reported thirty- and
sixty-day minor delinquencies to be paid as agreed.
Failure of Some Creditors to Report Credit Limits
on Revolving Accounts
As noted, about 14 percent of revolving credit
accounts were reported without information about
credit limits, affecting roughly 46 percent of the
individuals in the Federal Reserve sample. Therefore,
credit evaluators must use other means to derive
credit utilization rates for these individuals. The most
common approach (and the one that model develop
ers customarily use for credit-risk factors) is to substi
tute the highest balance for the missing credit limit;
the typical result is higher calculated utilization rates
than if the credit limits had been reported.
We simulated the effects of the nonreporting of
credit limits on individuals by creating an estimated
credit limit for each revolving account without a
reported limit. Because information on the true credit
limit in these cases was missing, the simulation in
effect compared our method of calculating credit
utilization rates with that of the credit-reporting
agency. The primary difference between the two esti
mation procedures is that our approach is statistically
unbiased, whereas the agency’s method, which relies
on the highest-balance amount, tends to be biased
upward. That is, our estimates reflect the “best
guess” for the missing credit limit based on other
information in the individual’s credit record. Specifi

311

cally, we used samples of accounts of individuals
with reported credit limits to estimate a regression
model that predicted the credit limits for revolving
accounts with missing limits.30
Duplications in Collection Agency Accounts
A review of the sample credit records suggests that
some collection agency accounts may be duplicated.
Duplication can occur because of changed account
numbers or transfers of accounts from one collection
agency to another. To address the potential effects of
this problem, we conducted simulations that consoli
dated likely duplicated collection account records
into single items. We identified simulated duplicates
in two ways. One procedure was to match the collec
tion amount and the identity of the creditor when
one account was reported paid and the other unpaid.
The second procedure was to identify likely account
transfers that were not reported as such to the creditreporting agencies.
Additional duplicate collection agency accounts
likely exist in the data but are difficult to identify. For
example, accounts that match on collection amount
and identity of the original creditor but that are
reported by a single agency with reporting dates that
are close in time may be duplicates, but they may just
as likely result from repeated missed payments of the
same amount. Accounts that match on identity of
the original creditor and are spaced apart in time but
do not match on amount could indicate a new report
filed after a partial payment was received, in which
case they would involve duplication. Alternatively,
they could reflect separate incidents of missed pay
ments with the same creditor.
Inconsistent Reporting of Small Collection Agency
Accounts
Analysis of collection accounts reveals that many are
for very small amounts that may be inconsistently
reported. Recognizing this possibility, some credit
evaluators choose to exclude small collection
accounts from credit evaluations. To test the effect
of inconsistently reported small collection items on
30.
Independent factors used in the estimation included outstand
ing balance and highest-balance level, the age and type of account, the
type of lender, balances and limits on other accounts, and payment
performance information. The resulting distribution of estimated credit
limits and utilization for accounts with imputed limits was virtually
identical to the distribution o f accounts with reported limits within the
population, an indication that missing limits are primarily a function
o f the lender and are almost always unrelated to the characteristics of
the account.

312

Federal Reserve Bulletin □ Summer 2004

credit history scores, we removed all collection
records involving items under $100 from the credit
records.
Medical Collection Items
Some credit evaluators report that they remove
collection accounts related to medical services
from credit evaluations because such accounts often
involve disputes with insurance companies over lia
bility for the accounts or because the accounts may
not indicate future performance on loans. Unfortu
nately, evaluators must use manual overrides based
on the creditors’ identities to remove medical collec
tion accounts because the credit record data lack a
code identifying claims associated with medical ser
vices. The absence of a code means that this process
cannot be used in automated calculations of credit
history scores. To test the potential effect of including
medical collection items in the calculation of credit
history scores, we developed a medical collection
code based on an inspection of the creditor name,
and we used the code to identify medical collection
accounts to drop from the credit history score
calculation (as noted earlier, as of this writing, at least
one of the agencies had developed such a code,
potentially reducing the relevance of this simulation).

suggests that some records may be duplicated. To
address the potential effects of this problem, we
conducted simulations that removed likely duplicates
of public record items. We identified duplicates by
matches on the recording date, amount owed, and
creditor. In many instances, the duplicates involved
the original filing of a judgment or lien, which was
followed by a record of a paid judgment or lien with
all information identical to that in the first record. In
other instances, second or third filings may have
ended up as duplicates with the same (or almost
identical) information.
Inconsistent Reporting of Lawsuits and Dismissed
Items in Public Records
As noted earlier, our analysis of credit record files in
the Federal Reserve sample suggests that lawsuits are
inconsistently included in the credit-reporting agency
files. An additional issue concerns the inclusion in
the public records of dismissed liens, judgments, or
suits, which may be of questionable value for predict
ing credit performance. To simulate the potential
effects of including these items in the calculation of
credit history scores, we removed all lawsuits and
dismissals from the credit records of individuals with
such items.

Potentially Misassigned Collection Agency
Accounts

Failure to Consolidate Multiple Inquiries
for the Same Loan

Most (72 percent) of the individuals in the sample
with a non-credit-related collection agency account
also had a credit-related major derogatory. About
45 percent of those individuals with information
reported by a single collection agency had no creditrelated major derogatories. In contrast, only about
15 percent of those with information reported by
more than one collection agency had no credit-related
major derogatories. These patterns suggest that mis
assigned collection agency accounts may be more
common among those with information reported by a
single collection agency. We simulated the effects of
correcting such misassigned collections by dropping
the collection accounts of individuals who had infor
mation reported by one collection agency but had no
credit-related major derogatories.

Analysts have cautioned that simple counts of inquir
ies in scoring models may unfairly penalize consum
ers who shop for credit. However, the information
needed to help distinguish consumers shopping to
obtain a single loan from those seeking to obtain
multiple loans is generally not available in credit
records because of incomplete reporting of the type
of inquiry.
To simulate the potential magnitude of the effect of
incomplete reporting of the type of inquiry, we con
ducted two experiments. First, we identified all indi
viduals in the sample who had taken out a mortgage
or an auto loan in the two years before the sample
was drawn. For each loan type, we consolidated into
a single inquiry the multiple inquiries that had
occurred in the two-month period preceding the date
on which the loan was opened (if any non-auto or
non-mortgage loans were also taken out during this
period, we did not consolidate any inquiries). The
second simulation was somewhat broader. We
divided all inquiries into three groups based on the
type of inquirer as a proxy for the likelihood that

Duplications in Public Records
As with our analysis of collection agency accounts,
our review of the sample public record reports

Credit Report Accuracy and Access to Credit

the consumer was shopping for a single loan or
potentially “bulking up on credit.” The first group
represented inquiries that were unlikely to be creditrelated, including inquiries from insurance compa
nies, utilities, and collection agencies. The second
group involved inquiries likely related to the pur
chase of a single large item, such as inquiries from
auto companies or real estate firms. We put all other
inquiries in the third group. Inquiries from the first
group were dropped in the simulation because they
did not appear to be credit related. For the second
group, we consolidated all inquiries within a twoweek period into a single inquiry. Only inquiries
from the third group were left unchanged.

313

Distribution of individuals, by credit history score and
by selected demographic characteristics

A ge o f individual (years)
■
□
□

Under 35
35-55
Over 55

Analyzing the Populations o f Interest
Each of the data quality issues that we focus on may
have different implications for different individuals
depending on the individuals’ credit characteristics.
For example, the effect of a missing credit limit will
be different for individuals who have many open
revolving accounts than for those who have few.
Therefore, we also examined the effect of these data
quality issues for three subpopulations of interest.
Because data quality problems are less likely to affect
the access to credit of individuals with relatively high
credit history scores, we divided the analysis pop
ulation (the same one used to estimate the approxi
mated model) into categories based on credit history
score. We also categorized the analysis population
by depth of credit file and by selected demographic
characteristics.
For the analysis by credit history scores, we sorted
individuals into one of three risk groups based on
their proprietary credit-risk scores. The first group
included individuals whose scores were 661 or above
(74 percent of the sample population), the second
group included individuals with scores between 600
and 660 (13 percent of the sample), and the third
group included individuals whose scores were below
600 (13 percent of the sample).31
31.
Individuals with credit scores above 660 have scores suffi
ciently high that they are likely to qualify for the lowest interest rates
available on loans, and individuals with scores below 600 have scores
sufficiently low that they are likely to be denied credit or to pay
substantially higher rates than those charged to better-qualified bor
rowers. Individuals in the middle category have scores that place them
at the margin.
The credit history score ranges used here are not immutable; in
practice, the bounds o f these ranges vary somewhat by loan product
and by the appetite for risk o f individual market participants. More
over, credit history is only one factor considered in credit underwrit
ing, although an important one, and so a low credit history score may
be offset by, for example, a low debt-to-income ratio, a significant
down payment, collateral, or potential for strong future earnings.

Percentage o f minorities in census tract
■ Less than 10
□ 10-80
□ More than 80

Below 550

550-600

601-660

661-700

701 and above

Credit history score
N o t e . See note to chart 1 . Income categories are defined as follows: low or
moderate, less than 80 percent of the median family income of individual’s
metropolitan statistical area (MSA) or of nonmetropolitan portion of individu
al’s state; middle, 80-119 percent of the median family income of individual’s
MSA or of nonmetropolitan portion of individual’s state; high, 120 percent or
more of the median family income of individual’s MSA or of nonmetropolitan
portion of individual’s state.

For the analysis by depth of credit file, we sorted
individuals with records of credit accounts into two
groups based on the number of credit accounts in
their credit records. One group consisted of individu
als with “thin files”—that is, files with fewer than
four credit accounts. The second group consisted of
all other individuals. Individuals with thin files, who

314

Federal Reserve Bulletin □ Summer 2004

accounted for about 19 percent of the sample, are
an important segment of the population to examine
because their credit history scores may exhibit rela
tively greater sensitivity to data problems. A data
problem affecting a particular account may be more
likely to have a substantial effect on the credit history
score of an individual with a thin file because of a
lack of information from other accounts that could
dilute the effect of the problem.
For the other analyses, we investigated whether
different patterns emerge when individuals are
grouped by age, relative income of census tract of
residence, and percentage of minorities in census
tract of residence. Such segmentation allows us to
determine whether issues of data accuracy and com
pleteness likely affect various subgroups of the popu
lation in different ways. For example, residents of
higher-income census tracts may, on average, have
more revolving accounts than residents of lowerincome areas and therefore may face a greater prob
ability of encountering a missing credit limit. We
report the distribution of proprietary credit-risk scores

for these various subgroups (chart 2).32 In general,
younger individuals, those who live in lower-income
areas, and those who live in areas with high minority
populations have lower scores.

RESULTS
First, we report the proportion of individuals who are
affected by a simulated change in (correction to) the
credit records—that is, the proportion subject to the
data quality issue in question (table 3). Second, we
report the proportion among those affected by the
simulated change in credit records for which the net
effect on approximated credit history scores was zero.
Third, we report the proportions of individuals
among those affected by the simulated change for
which approximated credit history scores changed
32.
Scores in chart 2 are somewhat higher than scores for individu
als in the simulation samples, which exclude individuals who have
had bankruptcies.

E stim ated effe cts o f data “ correction s” on the credit history scores o f in d ivid u als, by data p roblem corrected
Percent except as noted
Distribution of individuals affected

Memo
Mean change in points

Effect on credit history score
Data problem corrected

Individuals
affected

5.2
14.5
.0

100.0
100.0
100.0

-8.1
-12.6
-1.9

4.4
8.6
1.2

17.9

3.7

100.0

-6 .0

6.2

Decrease
No change

Involving credit accounts
Failure to close a
Paid-as-agreed account ........................
Minor delinquent account..................... m
Major derogatory account.....................
Failure of a subprime lender to report
a paid-as-agreed account .................
Failure of largest student loan
creditor to report................................
Failure to report a
Minor delinquency ................................
Credit limit .............................................

Total

Individuals
with
decrease
in score

Increase

1-9 points

10 or more
points

1-9 points

10 or more
points

4.7

10.9
4.5
82.3

27.0
20.0
9.2

8.1
17.8
.3

48.7
43.1
8.2

n.c.

28.5

41.0

8.9

12.9
1.3

Individuals
with
increase
in score

3.5

16.1

45.0

13.1

21.5

4.4

100.0

-7 .0

7.5

n.c.
33.0

15.1
31.7

39.3
1.7

20.8
.0

22.4
53.3

2.4
13.3

100.0
100.0

-11.0
-1.4

4.0
6.1

1.2

6.8

1.1

67.4

24.7

100.0

-1.4

8.5

11.1
15.5

41.2
11.8

7.0
5.4

1.2
1.5

41.7
49.6

8.9
31.6

100.0
100.0

-4.3
-5.9

5.8
11.2

8.2

12.8

9.0

3.4

42.8

31.9

100.0

-6.9

13.4

Involving public records
Reporting of duplicate public records . ..
Inclusion of lawsuits and dism issals.......

.4
1.1

38.6
18.5

1.9
3.8

.0
1.0

59.4
53.1

.1
23.6

100.0
100.0

-1.9
-5.9

1.3
9.1

Involving creditor inquiries
Failure to consolidate
Multiple inquiries for auto and
mortgage loans ..............................
Other multiple inquiries........................

3.7
14.6

16.8
5.2

8.3
4.9

.5
.1

73.8
85.4

.7
4.4

100.0
100.0

-2.9
-2.3

2.3
4.2

Involving collection agency accounts
Failure to eliminate duplicate
collection agency accounts .............
Reporting of
Collection agency accounts
under $ 1 0 0 .....................................
Medical collection accounts.................
Potentially misassigned collection
accounts .........................................

N o t e . The table reports the effect of “correcting” a data problem. Individuals whose scores increase because of a correction would be better off if the
problem were corrected.

n.c. Not calculable,

Credit Report Accuracy and Access to Credit

materially—that is, increased or decreased 10 or more
points. These calculations provide insight into the
proportion of consumers who may or may not face
a change in credit terms (either a higher or a lower
interest rate) or who may be unable to gain access
to credit because of the particular data problem. Also,
to provide another basis for determining how much
variation in credit history scores may occur when
simulated corrections are made to individuals’ credit
records, we present the overall mean change in credit
history scores for the individuals who were materi
ally affected. Because the hypothesized correction
may increase or decrease an individual’s credit his
tory score depending on the nature of the problem
and the composition of the individual’s credit record,
the mean change for individuals with a decrease in
score and the mean change for those with an increase
in score are shown separately.
For each simulation, the overall effect of a simu
lated change on an individual can be either positive
or negative. Some of the effect is undoubtedly due
to imprecision in our approximation of the creditscoring model or to consumers’ being shifted from
one “scorecard” to another. However, we believe the
results mainly reflect the complexity of interactions
among the various factors that produce a credit his
tory score. For example, a failure to report a paidas-agreed account as closed can help individuals
with few active and paid-as-agreed credit accounts
but can hurt individuals with a substantial number of
accounts that have high balances and utilization rates.

Effects o f Stale Accounts
The first group of simulations presented in the table
involved hypothetical corrections to selected credit
account records. The first three of these pertained to
the use of a more aggressive stale-account rule that
designated accounts as stale after three months of
nonreporting and treated the accounts as being closed
and having a zero balance. Several conclusions
emerged from these simulations. On the one hand, a
significant proportion of consumers appeared to be
subject to stale credit account issues. Almost onefifth of the individuals in the Federal Reserve sample
had at least one stale credit account as defined by the
assumptions of the first three simulations. Further,
21 percent of the individuals with stale major deroga
tories (percentage not shown in table) had at least one
account that met the conditions of the third simula
tion and thus had potentially been paid off.
On the other hand, the application of the more
aggressive stale-account rule appeared to have only

315

a modest effect on the credit history scores of these
individuals. Our simulations suggest that more than
80 percent of the individuals with stale major deroga
tories would have shown no change in score if
they had paid off the account the month after the
date on which the lender last reported it and the
lender had reported the payoff to the credit-reporting
agency. The effect of paying off accounts was some
what larger for paid-as-agreed accounts and for those
with minor delinquencies, but even here most con
sumers showed changes of fewer than 10 points.
One likely explanation for the relatively minor effect
of the corrections on individuals is the large num
ber of credit accounts in the typical consumer’s
file. For example, consumers with a stale paid-asagreed account had, on average, almost sixteen
credit accounts, and 90 percent of these consumers
had at least five.
Many of the credit-risk factors reflect “extreme”
values such as the age of the oldest account or the
number of months since the most-recent delinquency.
These factors will change as the result of a correc
tion only if the affected account is the “marginal”
account—for example, the oldest or the most recently
delinquent. Moreover, although factors reflecting
sums, such as total balances, will be sensitive to
changes in any account, the effect of the change will
be reduced if many other accounts contribute to the
factor. Another explanation for the relatively minor
effects of the corrections for stale accounts prob
ably lies in the rules used to calculate the factors
employed by credit modelers. For example, modelers
appear to place little weight on outstanding balances
for major derogatory accounts, perhaps recognizing
the inconsistency in the reporting of account payoffs.
Thus, when payoffs are recorded, the effect on scores
is minimal.

Effects o f Unreported Credit A ccount
Information
We conducted an additional four simulations for
data problems in credit accounts. The simulations
addressed the nonreporting of certain categories of
accounts (paid-as-agreed accounts of a subprime
lender and accounts of the largest student loan credi
tor) and of certain types of information (minor delin
quencies and credit limits).
We could not determine the incidence of subprime
creditors’ failure to report paid-as-agreed credit
accounts. By our estimates, Sallie Mae’s failure to
report loans affected less than 4 percent of individu
als. Nonreporting of these types of accounts appeared

316

Federal Reserve Bulletin □ Summer 2004

Estimated effects of data “corrections” on the credit history scores of individuals, by data problem corrected,
for selected credit history score ranges
Percent except as noted
Distribution of individuals affected

Memo

Effect on credit history score
Data problem corrected

Individuals
alfected

Decrease
No change
1-9 points

Mean change in points
Increase

10or more
points

1-9 points

Total

Individuals
with
decrease
in score

Individuals
with
increase
in score

-6.1
-20.2
-1.8

4.5
5.0

-4 3

3.0

-6.1

3.8

-9.3
-1.1

3.0
5.1

10or more
points

Individuals with credit history scores above 660
Involving credit accounts
Failure to close a
Paid-as-agreed account ........................
Minor delinquent account....................
Major derogatory account.....................
Failure of a subprime lender to report
a paid-as-agreed account .................
Failure of largest student loan
creditor to report................................
Failure to report a
Minor delinquency ................................
Credit limit .............................................
Involving collection agency accounts
Failure to eliminate duplicate
collection agency accounts .............
Reporting of
Collection agency accounts
under $ 1 0 0 .....................................
Medical collection accounts.................
Potentially misassigned collection
accounts .........................................

13.6

11.3
3.1
89.1

22.0
19.2
6.1

n.c.

45.5

30.1

3.2

19.3

50.4

n.c.
35.8

19.6
34.8

45.7
1.4

11.7

3.6
6.5

21.8

9.3

5.2

5.4

.2
1.2

Involving public records
Reporting of duplicate public records . ..
Inclusion of lawsuits and dismissals

Involving creditor inquiries
Failure to consolidate
Multiple inquiries for auto and
mortgage loans ..............................
Other multiple inquiries........................

12.2

3.4

55.8
21.7
4.6

6.2
3.1
.0

20.3

1.3

9.7

19.3

1.3

20.0
.0

14.2
54.1

.6
9.7

100.0
100.0
100.0
100.0
100.0
100.0
100.0

81.4

6.6

100.0

-1.0

4.6

8.0

2.7
2.9

42.8
35.7

23.4
48.3

-5.8
-6.8

16.6

4.7

11.0

4.4

31.4

48.6

100.0
100.0
100.0

-1.6

6.4

39.1
19.2

2.3
5.0

1.7

58.6
45.5

28.7

100.0
100.0

-1.0
-7.0

1.1
10.8

10.9
3.1

3.8
1.4

.0
.0

84.7
94.0

.7
1.5

100.0
100.0

-1 .6
-1.4

2.3
3.6

-6 .4
-11.9
-1.7

3.3
4.9
1.3

-4 .2

4.9

-9.5

6.0

-11.7
-1.8

3.7
7.8

4.7
52.9

.2
2.8

1.0

10.6

Individuals with credit history scores between 600 and 660
Involving credit accounts
Failure to close a
Paid-as-agreed account ........................
Minor delinquent account.....................
Major derogatory account.....................
Failure of a subprime lender to report
a paid-as-agreed account .................
Failure of largest student loan
creditor to report................................
Failure to report a
Minor delinquency ................................
Credit limit .............................................
Involving collection agency accounts
Failure to eliminate duplicate
collection agency accounts .............
Reporting of
Collection agency accounts
under $ 1 0 0 .....................................
Medical collection accounts.................
Potentially misassigned collection
accounts .........................................

12.1
2.6
10.2

11.0
4.0
87.9

49.4
27.2
6.4

22.6
.1

13.0

25.4
41.7
5.7

1.3
4.6

n.c.

48.6

6.4

19.4

3.5

3.8

22.2
8.1

33.7

17.6

33.0

7.6

n.c.
28.4

11.0
14.4

33.1
2.3

21.5

31.2
57.2

3.2
26.1

100.0
100.0
100.0
100.0
100.0
100.0
100.0

3.0

8.6

80.7

9.9

100.0

-1 .0

5.3

28.1
38.8

43.6

11.1

5.7
4.4

1.2
1.7

42.7
56.5

6.9
26.4

-5.1
-7.2

4.4
9.2

11.8

18.1

9.7

6.9

48.1

17.2

100.0
100.0
100.0

-9.8

9.6

44.3

1.0
2.2

.0
.2

54.7
62.2

14.7

100.0
100.0

-1.0
-4 .2

6.4

.1
.0

51.6
80.9

1.3

100.0
100.0

-1.9
-1.5

Involving public records
Reporting of duplicate public records . ..
Inclusion of lawsuits and dismissals.......

2.1

Involving creditor inquiries
Failure to consolidate
Multiple inquiries for auto and
mortgage loans ..............................
Other multiple inquiries........................

5.0
17.0

20.8

32.7

10.0

15.1
7.8

1.1

2.0
3.9

Credit Report Accuracy and Access to Credit

317

4.—Continued

Memo

Distribution of individuals affected
Effect on credit history score
Data problem corrected

Individuals
affected

Decrease
No change
1-9 points

Mean change in points
Increase

10or more
points

1-9 points

Total

Individuals
with
decrease
in score

Individuals
with
increase
in score

-16.8
-9.7
-2 .0

3.3
9.8
i.3

-8.1

12.4

-13.1

16.1

-17.0
-1.9

5.3
13.1

10or more
points

Individuals with credit history scores below 600
Involving credit accounts
Failure to close a
Paid-as-agreed account ........................
Minor delinquent a ccount....................
Major derogatory account.....................
Failure of a subprime lender to report
a paid-as-agreed account .................
Failure of largest student loan
creditor to report................................
Failure to report a
Minor delinquency ................................
Credit limit .............................................
Involving collection agency accounts
Failure to eliminate duplicate
collection agency accounts .............
Reporting of
Collection agency accounts
under $ 1 0 0 .....................................
Medical collection accounts.................
Potentially misassigned collection
accounts .........................................
Involving public records
Reporting of duplicate public records . ..
Inclusion of lawsuits and dismissals
Involving creditor inquiries
Failure to consolidate
Multiple inquiries for auto and
mortgage loans ..............................
Other multiple inquiries........................

4.8

8.5

30.0

24.7

21.3

15.7

n.c.
19.3

5.8
19.9

26.0
4.2

22.7

38.5
37.7

7.0
38.1

100.0
100.0
100.0
100.0
100.0
100.0
100.0

6.8

5.2

1.4

58.9

34.6

100.0

-1.5

10.6

43.2
51.6

50.7
18.0

6.7
4.1

40.4
55.9

2.0
21.7

2.6
8.0

22.6

5.7

57.8

13.9

100.0
100.0
100.0

-2 .4
-2.7

23.5

.2
.1

-1 .6

6.4

34.1
15.1

1.8

3.1

63.7
59.8

.4
21.7

100.0
100.0

-3.8
-2.5

8.5

27.7
8.5

23.5
13.1

3.7

44.4
62.9

.8
14.9

100.0
100.0

-4.6
-2.9

7.0
5.0
77.3

46.0
17.3
11.7

35.8
9.9
.4

10.4
47.4

20.4

n.c.

7.2

52.4

19.8

13.1

7.6

1.0
2.6

4.3
28.2

to have only a modest effect on the credit history
scores of affected individuals. For example, the sim
ulation results indicate that if nonreporting by a
subprime lender or by Sallie Mae had been corrected,
in each case less than 5 percent of affected individu
als would have gained 10 percentage points or more
in their credit history scores. Moreover, such nonre
porting may help or hurt the individuals. For exam
ple, the simulations suggest that, on average, consum
ers were helped by Sallie Mae’s not reporting their
loans, a somewhat surprising result. Fifty-eight per
cent of affected individuals would have experienced
decreases in their credit history scores if the accounts
had been reported. However, the median number
of credit accounts for individuals with a corrected
student loan account was twenty-two, a figure well
above average for all individuals. Thus, the posi
tive effects on credit history scores of reducing indi

.8
.1

9.1
7.1
22.9

10.6

1.8

2.2
6.5

viduals’ outstanding balances by not reporting their
student loans may have outweighed the negative
effects of eliminating one additional paid-as-agreed
account.
We also could not determine the proportion of
individuals affected by creditors’ suppression of
minor delinquencies; however, we could estimate the
impact of the suppression on affected individuals.
The simulation suggests that when suppression
occurs, it is likely to improve the credit history
scores of many affected individuals by a significant
amount.

Effects o f Unreported Credit Limits
Nonreporting of credit limits affects a substantial
number of individuals (33 percent of the individuals

318

Federal Reserve Bulletin □ Summer 2004

in the simulations), but the effect tends to be small.
The likely reason for this result is that affected indi
viduals tend to have a large number of credit accounts
in their credit records (eighteen on average), while
the frequency of accounts missing limits is low.
Thus, accounts with missing limits tend to have
a small effect on the overall utilization rates of
individuals.
Unlike the results in most of the other simulations,
the effects of missing credit limits were predomi
nantly in one direction—most affected individuals’
scores would have likely been higher if missing credit
limits had been reported. This finding suggests that
the rule that credit modelers typically adopt for
addressing missing limits—use of the reported
highest-balance amount—is likely biased. To further
test this conjecture, we examined credit accounts for
which the credit limit was reported and compared the
actual limit with the estimated limit that credit model
ers would have applied if the limit had not been
reported. On average, the rule that the creditreporting agencies used when they constructed utili
zation rates would imply a credit limit of less than
one-half the actual limit. The rule would imply a
lower credit limit than the actual limit in about
90 percent of the cases. In contrast, our rule, as noted
earlier, was statistically unbiased.

collection accounts weigh heavily in the scoring
model and that most individuals have relatively few
such accounts and thus are affected more signifi
cantly when a problem occurs in any given account.
Public Records
Both simulations that addressed potential data prob
lems or inconsistencies in public records indicated
that the proportion of individuals affected was small
(1 percent or less). However, the effects of the correc
tions differed significantly between the two simula
tions. In the simulation involving duplicate public
record items, less than 1 percent of affected individu
als experienced increases in their credit history scores
of 10 points or more, whereas in the simulation
involving lawsuits and dismissals, nearly one-fourth
of affected individuals did so. This dichotomy reflects
an important distinction between duplicate public
records and lawsuits and dismissals. Whereas remov
ing a lawsuit or a dismissal may completely eliminate
adverse public record items from an individual’s
credit record, eliminating a duplicate record cannot
do so.
Creditor Inquiries

Results for eight simulations involving collection
agency accounts, public records, and creditor inquir
ies were varied.

The simulation that consolidated inquiries related to
auto and mortgage loans affected only 4 percent of
individuals in the sample; the broader consolidation
simulation affected about 15 percent of individuals.
In both cases, the size of the effect was modest
and almost always resulted in a higher score. Only a
small percentage of individuals experienced increases
in their scores of more than 10 points.

Collection Agency Accounts

Differences across Subpopulations

The proportion of individuals affected by potential
data problems or inconsistencies in reporting by col
lection agencies ranged from 16 percent for reporting
of medical collection items to only about 1 percent
for duplication of collection items, although, as noted,
our ability to detect such duplications was limited.
However, the effect of corrections on affected indi
viduals tended to be large, particularly in comparison
with simulated problems in credit accounts, and was
generally associated with increases in credit history
scores. For example, for three of the four collec
tion account simulations, one-fourth or more of the
affected individuals showed increases of 10 points
or more in their scores. These results illustrate that

Individuals with scores below 600 tended to have the
highest frequency of data problems, and those with
scores above 660 had the lowest incidence (table 4).
Two exceptions to this pattern occurred in the simu
lations involving the failure to close stale paid-asagreed accounts and the failure to report a credit
limit. Here individuals in the highest score range
showed the largest incidence of data problems pri
marily because they tended to have more credit
accounts. Significant differences were also apparent
in the impact of simulated corrections on affected
individuals across the three groups. Generally, indi
viduals with scores below 600 were the most likely to
experience a score increase of 10 points or more in

Effects o f Problems with Collection Agency
Accounts, Public Records, and Creditor
Inquiries

Credit Report Accuracy and Access to Credit

319

Estimated effects of data “corrections” on the credit history scores of individuals with “thin” files, by data problem corrected
Percent except as noted
Memo

Distribution of individuals affected

Mean change in points

Effect on credit history score
Data problem corrected

Individuals
affected

Decrease
No change
1-9 points

Increase

10or more
points

1-9 points

Total

Individuals
with
decrease
in score

Individuals
with
increase
in score

-17.0
-16.0
-1.8

11.3
3.7
1.5

-12.3
-20.8

6.8
6.8

-24.9
-1.2

9.8
13.2

10or more
points

14.1
36.0

16.9
44.3

100.0
100.0
100.0
100.0
100.0
100.0
100.0

82.4

9.5

100.0

-1 .0

5.1

10.6

3.0
1.7

35.8
52.0

12.6

34.9

-5.1
-8.7

9.5
14.7

8.6

16.3

4.1

3.1

32.7

43.7

100.0
100.0
100.0

-10.7

26.6

Involving public records
Reporting of duplicate public records . ..
Inclusion of lawsuits and dism issals.......

.3
.7

50.4
22.4

1.7

1.6

.0
.6

47.9
52.3

23.0

100.0
100.0

-1 .0
-6.3

13.4

Involving creditor inquiries
Failure to consolidate
Multiple inquiries for auto and
mortgage loans ..............................
Other multiple inquiries........................

.9
9.5

19.1
4.9

7.2
3.4

.0
.0

69.2
87.0

4.5
4.7

100.0
100.0

-2.1
-1.5

3.4
4.8

3.2
.7
2.4
n.c.

1.0

44.1

22.0
.0

15.8
45.1
5.9

14.9
2.4

88.7

21.7
22.4
5.4

4.4

35.9

38.0

16.4

5.4

3.6

8.1

3.4

33.6

51.8

n.c.
9.1

4.3
18.2

18.1
1.4

46.6

1.9

7.4

15.2
20.9

48.0

Note . See note to table 3. A “ thin” file has a record of a credit account but
has fewer than four such accounts.

response to corrections of data problems. Collection
account problems provided an exception to this pat
tern: Affected individuals in the credit history score
range above 660 were the most likely to experience
large score increases. The reason for this result is
that relatively high-score individuals with collec
tion agency accounts generally have no other major
derogatory information in their credit records and
thus can show significant score increases when a
derogatory is corrected.
For individuals with thin files, the incidence of
data quality issues involving credit accounts was
generally lower than that for all individuals, but the
incidence of issues involving collection agency
accounts was somewhat higher (compare table 5 with
table 3). The result regarding credit accounts reflects
the smaller number of accounts in the credit records
of individuals with thin files and, consequently, the
generally lower probability that such individuals will
have data quality issues. The result concerning col
lection agency accounts is due to the higher probabil
ity that people with thin files will have such accounts.
However, in simulations involving corrections to

8.0

3.2

1.0

n.c. Not calculable.

credit accounts, the effects on the credit history scores
of individuals with thin files were either similar to or
substantially larger than the effects on the scores of
persons in the general population. For example, cor
recting a failure to close a paid-as-agreed account
resulted in a decline in credit history score that was
twice as large, on average, for individuals with thin
files as it was for those in the population at large.
In general, older individuals and those living in
higher-income and nonminority neighborhoods had
the lowest incidence of data problems (table 6). The
most-notable exception to this pattern was for failure
to report a credit limit, which was less common
among younger individuals and among individuals
living in lower-income and predominantly minority
neighborhoods. We do not report the changes in
credit history scores of affected individuals for these
decompositions of the sample because the compari
sons are difficult to interpret without also accounting
for differences in the incidence of thin files and in
credit history scores across groups. In most cases, the
effects of data quality problems were similar across
groups after controlling for the differences in depth of

320

Federal Reserve Bulletin □ Summer 2004

Share of individuals affected by data problems in credit records, distributed by selected demographic characteristics
Percent except as noted
Age
(years)

Share of minorities
in census tract
(percent)

Income of census tract1

Data problem

Involving credit accounts
Failure to close a
Paid-as-agreed account ........................
Minor delinquent account.....................
Major derogatory account.....................
Failure of a subprime lender to report
a paid-as-agreed account .................
Failure of largest student loan
creditor to report................................
Failure to report a
Minor delinquency ................................
Credit limit .............................................
Involving collection agency accounts
Failure to eliminate duplicate
collection agency accounts .............
Reporting of
Collection agency accounts
under $ 1 0 0 .....................................
Medical collection accounts.................
Potentially misassigned collection
accounts .........................................

Under 35

35-55

Over 55

Low or
moderate

16.9

16.6
1.4

10.1
.6

11.3

2.0

5.5

6.2

n.c.

9.0

3.2

n.c.
31.5

n.c.
40.3

Middle

High

13.1
1.3
4.7

n.c.
3.4

n.c.
37.4

2.9
n.c.

Less than

10-80

13.7

13.4
3.2

12.9
1.3
5.1

11.3

3.1

n.c.

3.3

3.8

3.0

3.8

3.3

n.c.
27.7

n.c.
31.7

n.c.
40.0

n.c.
33.7

n.c.
33.5

n.c.
28.0

2.3

1.1

1.4

2.7

17.0

11.1

1.8
6.8

1.2

15.1
19.5

11.5
16.5

5.0
8.3

10.8

8.8

5.3

Involving public records
Reporting of duplicate public records . ..
Inclusion of lawsuits and dism issals.......

.2
.6

.5
1.7

1.1

1.2

1.1

1.0

Involving creditor inquiries
Failure to consolidate
Multiple inquiries for auto and
mortgage loans ..............................
Other multiple inquiries........................

5.4
19.6

5.3
17.7

2.1
10.0

3.3
15.9

3.7
14.1

3.9
14.6

12.8

See note to table 3.
1. For definition of income of census tract, see note to chart 2.

N o te .

file and in credit history score. Exceptions generally
involved instances in which either the youngest or the
oldest age group was disproportionately affected. For
example, individuals over age 55 were more likely
to have increases of more than 10 points in their
credit history scores when medical collections were
dropped, and individuals under age 35 were more
likely to have large increases in their scores when
nonreporting of a credit limit was corrected.

Sum m ary

and

C o n c l u s io n s

Available evidence indicates that the information that
credit-reporting agencies maintain on the creditrelated experiences of consumers, and the credit his
tory scoring models derived from these experiences,
have substantially improved the overall quality of
credit decisions while reducing the costs of such
decisionmaking. The availability of these data has
also greatly enhanced the process of screening pro
spective customers to facilitate the marketing of
credit and insurance products, thereby reducing the
costs of such marketing by limiting solicitations to

22.8
11.6
.4

1.0

1.9

More than
80

2.1
8.0

15.7

6.4
9.3

8.7
12.7

11.7
16.1

16.9
22.3

7.9

6.1

6.4

8.5

13.1

1.2

.3
1.4

3.7
15.3

3.3
17.5

3.8

n.c. Not calculable.

customers who are most likely to qualify for the
products. If not for the information that the agencies
maintain, consumers on the whole would receive less
credit at higher prices. Moreover, the credit-reporting
system has become more comprehensive over the
past decade or so with notable improvements, such as
the adoption of common formats for reporting infor
mation and the enhanced reporting of information on
credit limits and mortgages. Recent congressional
amendments to the FCRA have advanced prospects
for future improvements as consumer access to credit
records and credit history scores has improved.
Despite the benefits of the credit-reporting system,
analysts have raised concerns about the accuracy,
completeness, timeliness, and consistency of agency
records and about the effects of these shortcomings
on the cost and availability of credit. Clearly, for the
benefits of the credit-reporting system to be realized,
some reasonable degree of accuracy and complete
ness of credit reports is required. Moreover, the more
accurate and complete the information assembled by
credit-reporting agencies, the greater the potential for
more efficiency in the credit-granting process and a
reduction in costs to the advantage of both consumers

Credit Report Accuracy and Access to Credit

and creditors. Over the years, a number of studies
have focused on the contents of credit records but
have reached quite different conclusions about the
degree to which such information is accurate and
complete and about the implications of data limita
tions for credit availability and pricing.
This study extends earlier research and assesses the
effects of data limitations and ambiguities in credit
reports on the availability and pricing of credit by
using a large, nationally representative sample of
individuals with credit records from one of the three
national credit-reporting agencies. Specifically, we
estimate the proportion of individuals who are likely
to be materially affected by a number of different
data problems, and we quantify the likely effect of
each problem on the credit history scores of individu
als. Because such effects can vary across different
populations, we also separately evaluate the effects
on individuals in different credit-risk categories and
in different groups classified by age and by income
and minority population of the neighborhoods where
they live. We emphasize that we use the terms “data
problem” and “correction” in their broadest sense,
as we do not necessarily observe actual errors and the
appropriate correction is sometimes unclear.
This analysis of the effects of data problems on
credit history scores indicates that the proportion of
individuals affected by any single type of data prob
lem appears to be small, with the exception of miss
ing credit limits, which affected almost one-third of
the individuals in the sample used for the simula
tions. Moreover, in most cases, the effect of each type
of problem on the credit history scores of affected
individuals was modest. Two principal reasons
explain this result. First, most individuals have a
large number of credit accounts, and thus problems in
any given account have only a relatively small effect
on the individuals’ overall credit profiles. Second,
credit modelers recognize many of these data prob
lems when they construct and weight the factors used
in credit history scoring models. Therefore, correct
ing the problems identified here is unlikely to sub
stantially change the risk evaluation and access to
credit for the typical individual.
The analysis suggests, however, that the effects of
data problems may be more substantial in some cases
than in others. In particular, problems with collection
accounts are much more likely to have significant
effects on the credit history scores of affected indi
viduals. Missing credit limits, simply because they
occur so frequently, also represent an important data
quality problem. In general, individuals with rela
tively low credit history scores or those with thin files
are more likely to experience significant effects when

321

a data problem arises. The incidence of problems also
varies across groups, with older individuals, those
with higher credit history scores, and those living in
higher-income and nonminority neighborhoods
showing the lowest incidence.
Our analysis shows that predicting the effects of
“correcting” errors is not straightforward. Some
times, effects were counterintuitive. For example, our
analysis suggests that about one-fourth of the indi
viduals affected by lenders’ failure to report student
loans would show increases in their credit history
scores as a result. This outcome occurs in part
because, somewhat surprisingly, individuals with stu
dent loans have more accounts than does the average
individual. The complexity of the results is under
scored by the fact that some individuals show
increases and some show decreases for every simu
lation. In large part, this result occurs because the
corrections typically affect more than one factor,
moving scores in different directions. This is particu
larly true for problems with credit accounts, which
are likely to involve multiple factors.
The research here highlights the importance of data
reporters’ supplying complete information in a timely
manner. How such reporting can be fully achieved
in a voluntary system is unclear. The current system
relies heavily on consumers to identify and dispute
“incorrect” or missing items in their credit reports.
One problem with this approach is that consumers
have no incentive to challenge information that is
favorable to them, even if it is in error. Our research
indicates that even when data are incomplete or in
error, they often have little or no bearing on an
individual’s credit history score or access to credit.
Currently, consumers have access only to general
information about the types of factors that are
weighed in credit evaluation, or in the case of credit
denials, the chief reasons for the adverse action. On
the one hand, lack of specific information may lead
some consumers to believe that virtually any data
quality issue is pertinent and should be disputed,
causing the credit-reporting agencies and reporters
to incur unnecessary costs to correct or update files.
On the other hand, consumers may be unaware of the
potential importance of specific data issues, such as
missing credit limits, and may not take appropriate
action. Some of these problems may be addressed
by consumer education, whereas others are likely to
continue for the foreseeable future.
Before these results are taken as definitive esti
mates of the effects of data quality issues on credit
availability, several important caveats must be made.
First, we have investigated only some potential
sources of error. Most notably, we can say nothing

322

Federal Reserve Bulletin □ Summer 2004

about the consequences of mistakenly including
account records that do not belong to an individual in
the individual’s file. Second, we have used only one
credit-scoring model to simulate our results and have
relied on our approximation to the model to quan
tify our results. Third, we have omitted manual
reviews of credit records, which are part of many
underwriting systems. Such systems identify and
address many data quality issues. Finally, we have
used data from only one credit-reporting agency.
Creditors, particularly in the mortgage market, typi
cally obtain data from all three national creditreporting agencies for credit underwriting. Reconcil
ing inconsistencies in data across the three agencies
can lead to corrections of many of the data quality
issues we have identified.
Moreover, we have analyzed only the potential
effects on credit history scores of addressing data
quality issues. We have said nothing about how such

problems could be corrected, how much the correc
tions might cost, or what potential gains in efficiency
might result from developing models based on more
complete and accurate data. If the current level of
accuracy and completeness is socially inefficient,
reaching the optimal level may be difficult. Credit
information has aspects of a classic public good. The
parties that bear the costs of correcting errors or
providing more timely and complete information may
not receive much benefit from the improvement in
accuracy. Further remedies, such as imposing addi
tional legal liability penalties, may, in a system
of voluntary reporting, lead to unintended conse
quences, including less information reporting and a
less efficient and effective system. Policymakers need
to weigh all of these considerations when they deter
mine whether the current credit-reporting system
should be changed and, if so, what changes should be
made.
□

323

Report on the Condition of the U.S. Banking
Industry: First Quarter, 2004
Assets at reporting bank holding companies rose
$325 billion (or 3.7 percent) in the first quarter,
primarily because the fifty large bank holding compa
nies were active acquirers of investment securities
during the period.1 Aggregate securities and money
market assets increased $260 billion, with nearly all
of that increase occurring at the fifty large bank
holding companies. Growth in investment securities
at large institutions was associated with broader
efforts, including derivatives transactions, intended to
adjust interest rate sensitivity. The notional value of
derivatives outstanding rose $6.3 trillion, or nearly
9 percent.
Loans grew only $75 billion, influenced by growth
in holdings of mortgage loans but also by continuing
softness in the commercial and industrial loan cate
gory. Unused commitments to lend grew more sig
nificantly ($100 billion, or 2.5 percent), with most of
the growth occurring in credit cards and home equity
lines of credit at large institutions.
Deposits grew $140 billion, a healthy 3 percent,
but not sufficient to fund the quarter’s asset growth.
Accordingly, nondeposit borrowings rose $125 bil
lion, or nearly 5 percent. Robust asset growth also
contributed to a small decline in the total risk-based

1. The panel o f fifty large bank holding companies has been
updated on the basis o f year-end 2003 data. Data contained in this
report do not reflect administrative changes in the organizational
structure o f HSBC and its U.S. affiliates made during the first quarter
o f 2004. Therefore, these data do not reflect the ownership of House
hold International (total assets of about $140 billion) by HSBC’s U.S.
affiliates. These administrative changes will be fully incorporated into
subsequent reports.

and leverage capital ratios, which nonetheless remain
well above regulatory minimum standards.
Net income of reporting bank holding companies
reached nearly $30 billion for the quarter, an increase
of $1.6 billion from the fourth quarter of 2003.
Stronger net interest income (fueled by asset growth)
and lower provisions for loan losses provided much
of the improvement, along with $2.0 billion in gains
associated with the sale of investment securities.
Nonperforming assets and net charge-offs contin
ued their sustained decline—falling to roughly 1 per
cent of loans and 0.63 percent of average loans,
respectively—allowing for the lower provisions.
Non-interest income rose only modestly for the
quarter as revenues generated by the origination and
sale of new residential mortgage loans fell, influ
enced by earlier increases in mortgage interest rates
and the corresponding slowdown in residential mort
gage refinancings. However, market-sensitive reve
nues and fees from servicing existing mortgages pro
vided some support.
More than one-third of the quarterly increase in net
income was provided by other bank holding com
panies, as shown in table 3. Profits at these other
(smaller) bank holding companies improved $0.6 bil
lion, or 14 percent, in the first quarter after two
quarters of declining earnings. Much of this improve
ment was attributable to dramatically lower provi
sions for loan losses—down nearly 30 percent, which
in turn reflected seasonal influences more than it
reflected the credit cycle. Provisions for loan losses
declined a similar proportion in the first quarter of
2003.

Tables start on page 324.

324

Federal Reserve Bulletin □ Summer 2004

Financial characteristics of all reporting bank holding companies in the United States
Millions of dollars except as noted, not seasonally adjusted
2002
Account or ratio1- 2

1999

2000

2001

2002

2003

2004

2003
Q3

Balance sheet
6,223,385

6,716,552

7,448,060

7,941,074

8,819,602

7,787,276

7,941,074

8,176,833

8,672,207

8,693,939

8,819,602

9,144,284

Loans ........................................................... 3,383,994
Securities and money m a rk e t.................. 2,082,339
Allowance for loan losses ......................
-54,361
Other ...........................................................
811,413

3,703,287
2,190,998
-58,811
881,078

3,804,665
2,558,749
-66,746
1,151,392

4,044,385
2,853,808
-71,958
1,114,840

4,393,737
3,285,958
-72,217
1,212,124

3,912,145
2,854,868
-70,307
1,090,570

4,044,385
2,853,808
-71,958
1,114,840

4,112,536
3,007,215
-71,713
1,128,796

4,265,235
3,214,738
-72,001
1,264,236

4,336,327
3,172,498
-71,413
1,256,527

4,393,737
3,285,958
-72,217
1,212,124

4,469,919
3,544,192
-71,474
1,201,647

Total lia b ilities..........................................

5,757,257

6,201,603

6,866,719

7,305,988

8,123,754

7,166,274

7,305,988

7,527,389

7,998,682

8,013,405

8,123,754

8,425,004

D eposits....................................................... 3,499,625
Borrowings ................................................. 1,776,050
O ther3 .........................................................
481,583

3,754,638
1,983,017
463,948

4,005,863
2,061,127
799,729

4,332,313
2,228,020
745,655

4,674,254
2,610,397
839,103

4,162,946
2,264,667
738,661

4,332,313
2,228,020
745,655

4,426,401
2,315,467
785,521

4,571,789
2,508,601
918,292

4,576,474
2,553,019
883,912

4,674,254
2,610,397
839,103

4,814,070
2,735,280
875,655

466,129

514,949

581,341

635,087

695,848

621,002

635,087

649,444

673,525

680,534

695,848

719,280

Off-balance-sheet
Unused commitments to lend4 ................ 3,093,729
n.a.
Securitizations outstanding5 ....................
Derivatives (notional value, billions)6 . .
37,924

3,297,511
n.a.
43,599

3,481,744
276,717
48,261

3,650,670
295,001
57,864

4,097,529
298,348
72,870

3,610,928
287,846
55,464

3,650,670
295,001
57,864

3,714,160
284,429
64,116

3,756,486
285,286
68,330

3,887,356
290,328
69,411

4,097,529
298,348
72,870

4,201,380
293,705
79,188

76,961
187,552
20,071
174,461
225,390
3,117

72,557
195,769
26,874
197,724
254,820
-614

65,488
221,626
39,522
214,093
297,197
4,297

84,678
242,923
42,928
215,879
292,050
4,503

106,603
254,199
31,535
245,080
311,087
5,764

21,535
60,163
11,150
53,645
71,545
1,772

18,732
61,700
11,545
56,758
79,033
1,644

24,777
62,279
8,574
57,426
74,222
1,854

26,348
63,168
8,428
61,698
77,554
2,675

27,265
63,899
7,110
61,379
78,017
583

28,321
65,038
7,425
64,610
81,360
664

29,905
66,367
6,006
65,038
81,457
1,973

Total assets ................................................

Total equity ..............................................

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

17.44
1.30
3.71
60.91

15.14
1.12
3.56
62.61

11.76
.90
3.58
65.75

14.05
1.10
3.72
62.40

16.23
1.26
3.49
61.52

14.18
1.12
3.68
62.72

12.13
.94
3.63
65.65

15.65
1.22
3.58
62.01

16.13
1.25
3.50
62.59

16.42
1.26
3.43
62.20

16.70
1.29
3.46
62.39

17.19
1.33
3.42
62.17

.85
.54
96.70

1.09
.65
98.63

1.45
.89
94.98

1.46
1.02
93.35

1.16
.81
94.00

1.65
1.08
93.98

1.46
1.02
93.35

1.43
.84
92.91

1.34
.80
93.29

1.24
.75
94.75

1.16
.83
94.00

1.04
.63
92.85

Regulatory capital ratios
Tier 1 risk-based........................................
Total risk-based..........................................
Leverage .....................................................

8.80
11.73
7.00

8.83
11.80
6.80

8.91
11.91
6.66

9.21
12.29
6.70

9.55
12.58
6.84

9.33
12.37
6.79

9.21
12.29
6.70

9.33
12.42
6.72

9.29
12.30
6.75

9.51
12.52
6.74

9.55
12.58
6.84

9.55
12.52
6.83

Number of reporting bank holding
companies ..........................................

1,647

1,727

1,842

1,979

2,134

1,946

1,979

2,036

2,064

2,120

2,134

2,191

Footnotes appear on p. 327.

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

325

Financial characteristics of fifty large bank holding companies in the United States
Millions of dollars except as noted, not seasonally adjusted
2003

2002
Account or ratio2' 9

1999

2000

2001

2002

2004

2003
Q3

Balance sheet
5,044,007

5,415,534

5,771,881

6,113,304

6,754,540

6,003,515

6,113,304

6,283,387

6,670,009

6,682,600

6,754,540

7,045,844

Loans ........................................................... 2,638,594
Securities and money m a rk e t.................. 1,744,617
Allowance for loan losses ......................
-43,972
O t h e r ............................................................
704,768

2,869,704
1,827,922
-47,022
764,930

2,882,304
2,025,282
-53,709
918,005

3,052,011
2,249,617
-57,499
869,175

3,289,320
2,589,207
-56,862
932,875

2,938,492
2,267,847
-56,209
853,385

3,052,011
2,249,617
-57,499
869,175

3,099,399
2,362,594
-56,839
878,234

3,204,451
2,527,960
-56,748
994,346

3,258,498
2,493,425
-55,951
986,628

3,289,320
2,589,207
-56,862
932,875

3,347,029
2,832,561
-55,742
921,996

Total lia b ilities..........................................

5,012,301

5,332,921

5,638,416

6,238,516

5,539,009

5,638,416

5,799,916

6,170,671

6,176,065

6,238,516

6,511,119

3,186,709
2,001,008
450,699

3,427,557
2,314,793
496,166

3,044,933
2,040,619
453,456

3,186,709
2,001,008
450,699

3,244,626
2,075,842
479,448

3,359,696
2,225,926
585,050

3,353,369
2,271,690
551,006

3,427,557
2,314,793
496,166

3,543,238
2,451,353
516,528

Total a s s e ts................................................

4,677,788

D eposits.......................................................
Borrowings ................................................
O ther3 .........................................................

2,627,896
1,596,140
453,752

2,788,209
1,788,955
435,138

2,959,554
1,843,867
529,501

Total equity ..............................................

366,220

403,233

438,960

474,889

516,024

464,506

474,889

483,472

499,338

506,535

516,024

534,726

Off-balance-sheet
Unused commitments to lend4 ................ 2,866,318
Securitizations outstanding5 ....................
n.a.
Derivatives (notional value, billions)6 . .
37,876

3,061,455
n.a.
43,521

3,223,389
271,522
48,130

3,368,731
289,125
57,731

3,781,780
292,178
72,663

3,330,997
282,997
55,315

3,368,731
289,125
57,731

3,420,124
278,455
63,959

3,451,764
278,920
68,144

3,574,976
283,990
69,220

3,781,780
292,178
72,663

3,878,766
289,460
78,941

63,918
145,090
17,050
155,301
186,077
2,224

59,154
149,712
22,980
177,094
211,635
-611

50,885
161,777
34,231
168,028
217,391
4,229

66,424
178,377
36,912
165,358
208,612
4,863

85,402
186,654
26,710
188,222
221,559
5,122

16,779
43,504
9,649
41,425
51,005
1,951

14,247
45,830
9,822
42,421
56,518
1,753

19,688
45,721
7,430
44,170
52,831
1,727

20,863
46,238
7,140
47,292
55,210
2,308

21,969
47,170
5,874
47,221
55,983
469

22,990
47,710
6,266
49,571
57,601
631

24,124
48,895
5,175
50,649
58,579
1,585

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 a s s e ts .....................................
Net charge-offs to average loans ...........
Loans to deposits ......................................

18.61
1.33
3.58
60.46

15.81
1.13
3.42
62.51

12.09
.90
3.35
63.03

14.64
1.12
3.53
59.49

17.49
1.31
3.33
58.35

14.71
1.13
3.44
60.21

12.33
.93
3.48
62.85

16.68
1.26
3.41
59.07

17.24
1.29
3.32
59.46

17.78
1.31
3.28
59.24

18.22
1.37
3.31
58.80

18.61
1.39
3.26
59.23

.90
.61
100.41

1.19
.74
102.92

1.59
1.02
97.39

1.59
1.18
95.77

1.24
.94
95.97

1.84
1.28
96.50

1.59
1.18
95.77

1.52
1.01
95.52

1.42
.94
95.38

1.31
.86
97.17

1.24
.94
95.97

1.08
.76
94.46

8.09
11.32
6.61

8.17
11.45
6.40

8.19
11.56
6.20

8.47
11.94
6.20

8.74
12.14
6.29

8.63
12.09
6.32

8.47
11.94
6.20

8.57
12.05
6.21

8.50
11.89
6.23

8.76
12.14
6.23

8.74
12.14
6.29

8.74
12.06
6.27

Footnotes appear on p. 327.

326

Federal Reserve Bulletin □ Summer 2004

Financial characteristics of all other reporting bank holding companies in the United States
Millions of dollars except as noted, not seasonally adjusted
2002
Account1' 10

1999

2000

2001

2002

2003

2004

2003
Q3

Balance sheet
Total a s s e ts .................................................

1,150,598

1,267,495

1,374,372

1,510,055

1,654,954

1,474,065

1,510,055

1,560,906

1,610,240

1,619,654

1,654,954

1,678,459

L o a n s ............................................................
Securities and money m a rk e t..................
Allowance for loan losses ......................
Other ............................................................

734,118
321,785
-10,212
104,907

820,595
344,394
-11,580
114,086

874,164
382,380
-12,697
130,525

945,177
435,754
-14,047
143,171

1,033,891
480,900
-14,964
155,128

925,905
424,233
-13,759
137,686

945,177
435,754
-14,047
143,171

964,523
466,110
-14,458
144,731

993,042
480,658
-14,746
151,287

1,008,162
474,675
-15,003
151,820

1,033,891
480,900
-14,964
155,128

1,052,311
489,879
-15,347
151,616

Total lia b ilitie s..........................................

1,052,605

1,157,787

1,252,341

1,372,425

1,504,937

1,338,734

1,372,425

1,418,270

1,463,155

1,472,908

1,504,937

1,525,064

D eposits........................................................
Borrowings .................................................
O ther3 ..........................................................

871,728
158,337
22,540

966,346
164,375
27,066

1,040,061
183,790
28,491

1,136,674
201,571
34,179

1,234,440
232,986
37,510

1,111,248
193,152
34,333

1,136,674
201,571
34,179

1,172,534
208,955
36,781

1,201,071
223,476
38,607

1,211,527
224,492
36,889

1,234,440
232,986
37,510

1,256,851
224,877
43,336

Total equity ..............................................

97,994

109,708

122,031

137,630

150,017

135,332

137,630

142,636

147,085

146,746

150,017

153,395

Off-balance-sheet
Unused commitments to lend4 ................
Securitizations outstanding5 ....................
Derivatives (notional value, billions)6 . .

216,083
n.a.
35

227,707
n.a.
65

248,671
4,871
102

270,590
5,137
101

303,309
5,026
110

268,346
4,398
120

270,590
5,137
101

282,775
5,172
113

293,012
5.368
119

300,237
5,260
114

303,309
5,026
110

309,232
3,121
137

12,895
42,379
2,927
17,359
37,797
825

13,383
46,063
3,751
18,696
41,444
-9

14,546
48,534
4,856
23,897
46,689
111

17,586
53,713
5,386
26,230
49,510
722

18,929
55.847
4,609
29,671
54,195
1,074

4,576
13,796
1,424
6,633
12,391
261

4,297
13,531
1,519
7,031
13,037
188

4,714
13,775
1,077
7,084
13,010
302

4,928
13,966
1,199
7,791
13,651
432

4,825
13,873
1,116
7,447
13,389
140

4,462
14,233
1,218
7,349
14,145
201

5,088
14,456
866
7,221
13,772
328

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

13.26
1.16
4.27
62.47

12.99
1.11
4.24
62.35

12.32
1.11
4.12
63.53

13.60
1.24
4.21
60.91

13.15
1.20
3.94
62.59

13.86
1.27
4.31
60.31

12.72
1.16
4.08
63.13

13.46
1.24
4.03
61.72

13.69
1.25
3.97
63.42

13.42
1.21
3.87
62.56

12.08
1.09
3.89
65.45

13.59
1.23
3.92
62.84

.69
.30
84.21

.76
.32
84.92

.97
.44
84.05

1.02
.47
83.15

.97
.40
83.75

1.03
.46
83.32

1.02
.53
83.15

1.13
.32
82.26

1.08
.39
82.68

1.02
.36
83.21

.97
.52
83.75

.96
.24
83.73

Regulatory capital ratios
Tier 1 risk-based........................................
Total risk-based ..........................................
Leverage .....................................................

12.24
13.71
8.65

11.90
13.39
8.57

12.16
13.79
8.74

12.39
14.06
8.86

12.53
14.27
9.00

12.50
14.15
8.97

12.39
14.06
8.86

12.55
14.24
8.95

12.49
14.21
8.91

12.51
14.25
8.92

12.53
14.27
9.00

12.51
14.24
9.06

Number of other reporting bank holding
companies ..........................................

1,570

1,663

1,788

1,925

2,080

1,892

1,925

1,982

2,010

2,066

2,080

2,137

Footnotes appear on p. 327.

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

327

Nonfinancial characteristics of all reporting bank holding companies in the United States
Millions of dollars except as noted, not seasonally adjusted
2002
Account

Bank holding companies that qualify as
financial holding companies 12
Domestic
Number ...................................................
Total assets ............................................
Foreign-owned 13
N u m b e r...................................................
Total assets ............................................

1999

2000

2001

2002

2004

2003

2003
Q3

n.a.
n.a.

299
4,494,270

388
5,436,785

434
5,916,859

451
6,605,638

415
5,706,966

434
5,916,859

437
6,061,696

440
6,433,736

448
6,447,130

451
6,605,638

462
6,839,802

n.a.
n.a.

9
502,506

10
621,442

11
616,254

12
710,441

11
689,804

11
616,254

11
648,017

11
732,695

11
729,244

12
710,441

13
856,185

5,673,702

6,129,534

6,415,909

6,897,447

7,397,878

6,762,780

6,897,447

7,031,274

7,325,357

7,293,984

7,397,878

7,614,338

By ownership
Reporting bank holding companies . . 5,226,027
Other bank holding companies .........
226,916
220,759
Independent banks ...............................

5,657,210
229,274
243,050

5,942,575
230,464
242,870

6,429,738
227,017
240,692

6,941,083
219,223
237,572

6,296,385
226,602
239,793

6,429,738
227,017
240,692

6,577,712
222,670
230,893

6,863,188
222,997
239,172

6,842,825
217,036
234,122

6,941,083
219,223
237,572

7,165,394
213,356
235,589

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

411,926
656,775
133,056
170,600
686,423

338,384
703,738
56,063
144,814
493,777

350,633
630,851
107,422
145,344
561,712

359,968
709,839
126,375
154,812
524,709

383,999
659,701
124,640
160,515
737,434

398,378
686,049
143,578
162,789
736,515

411,926
656,775
133,056
170,600
686,423

428,085
713,794
139,713
195,472
698,281

Total U.S. commercial bank
assets 14 ..............................................

Assets associated with nonbanking
activities - 15
Insurance .....................................................
Securities broker-dealers ........................
Thrift institutions ......................................
Foreign nonbank institutions ..................
Other nonbank institutions ......................
Number o f bank holding companies
engaged in nonbanking activities 12- 15
Insurance .....................................................
Securities broker-dealers ........................
Thrift institutions ......................................
Foreign nonbank institutions ..................
Other nonbank in stitu tio n s......................

n.a.
n.a.
117,699
78,712
879,793

57
25
559

50
25
633

143
n.a.
38
32
743

86
47
32
37
880

101
50
27
41
1,043

91
47
37
38
835

86
47
32
37
880

90
48
31
38
913

91
50
31
40
945

100
46
29
39
992

101
50
27
41
1,043

99
49
29
41
1,031

18
535,024

21
636,669

23
764,411

26
762,901

28
934,781

24
827,867

26
762,901

26
799,540

27
946,847

28
947,932

28
934,781

28
1,007,694

Employees of reporting bank holding
companies (full-time equivalent) . . 1,775,418

1,859,930

1,985,981

1,992,559

2,034,358

1,979,260

1,992,559

2,000,168

2,019,953

2,031,029

2,034,358

2,099,709

5,415,534
5,319,129

5,771,881
5,732,621

6,113,304
6,032,000

6,754,540
6,666,488

6,003,515
5,951,115

6,113,304
6,032,000

6,283,387
6,203,000

6,670,009
6,587,000

6,682,600
6,602,255

6,754,540
6,666,488

7,045,844
7,045,844

79.20

77.00

76.00

75.60

76.40

76.00

75.90

76.00

75.90

75.60

77.10

Foreign-owned bank holding
companies 13
Number .......................................................
Total assets .................................................

n.a.
n.a.

Assets o f fifty large bank holding
companies 9-17
Fixed panel (from table 2 ) ...................... 5,044,007
Fifty large as of reporting date ............. 4,809,785
Percent of all reporting
77.30
bank holding com panies..................

n.a.
n.a.

N o t e . A ll 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 or restatements to bank holding company 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 neces
sary 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. Exclude qualifying institutions that are not reporting bank holding companies.
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.

328

Staff Studies
The staff members o f the Board o f Governors o f the
Federal Reserve System and of the Federal Reserve
Banks undertake studies that cover a wide range of
economic and financial subjects. From time to time,
the studies that are o f general interest are published
in the Staff Studies series and summarized in the
Federal Reserve Bulletin. The analyses and con
clusions set forth are those o f the authors and do not

necessarily indicate concurrence by the Board o f
Governors, by the Federal Reserve Banks, or by
members o f their staffs.
Single copies o f the full text o f each study are
available without charge. The titles available are
shown under “Staff Studies” in the list of Federal
Reserve Board publications at the back o f each
Bulletin.

S t a f f S t u d y 176: S u m m a r y

B a n k M e r g e r A c t iv it y

in t h e

Un it e d S t a t e s , 1994-2003

Steven J. P illoff
Mergers and acquisitions have significantly changed
the U.S. banking industry over the past quarter cen
tury. This study examines patterns in the 3,517 merg
ers consummated among commercial banks and thrift
institutions (savings banks, savings and loan associa
tions, and industrial banks) during the ten years from
1994 to 2003. The data used in this study include the
vast majority of consolidation activity that took place
during the period and are more detailed and compre
hensive than any data available for the years preced
ing 1994.
About $3.1 trillion in assets, $2.1 trillion in depos
its, and 47,300 offices were acquired during the
ten-year period. The annual number of mergers
was fairly steady between 1994 and 1998 and then
declined to a much lower level by 2003. Roughly
three-fourths of all deals involved two commer
cial banking organizations. The remaining mergers
involved a thrift institution as the acquirer, the target,
or both. The target in the median merger during the
period had $102 million in assets, $86 million in
deposits, and 3 offices. Mean (average) values are
substantially higher because of a relatively small
number of extremely large deals: $874 million in
assets, $601 million in deposits, and 13 offices.
Whether calculated as a mean or median, roughly
5 percent of the industry’s assets, deposits, and
offices were acquired in mergers in the typical year in

the period. The peak was in 1998. The number of
deals completed then (493) was not far larger than the
number in earlier years, but the aggregate amounts of
assets and deposits purchased in 1998 were roughly
twice the second-highest annual levels of the period
(recorded in 1996).
Most deals involved the acquisition of a small
organization with operations in a fairly limited geo
graphic area. In the aggregate these small mergers
tended to account for a relatively small share of the
assets, deposits, and offices that were purchased. In
contrast, the few acquisitions of very large banks
accounted for a large share of the assets, deposits,
and offices acquired, and they were responsible for
many of the changes to the banking industry caused
by consolidation.
Urban markets had disproportionately more merg
ers than rural markets, and mergers with targets in
urban areas accounted for an even larger share of
acquired deposits and offices. Urban markets were
also more likely than rural markets to be the location
of a merger in which the acquirer already had an
office in the market.
Acquisitions took place in every state, but the level
of activity varied greatly by state. The large majority
of mergers involved a target that operated in a single
state and an acquirer with at least one office in that
state.
□

329

Announcements
S t a t e m e n t b y Ch a ir m a n A l a n G r e e n s p a n
o n N o m in a t io n f o r F if t h Te r m
“I am honored to be nominated by President Bush
and, if confirmed by the Senate, to continue my
service as Chairman of the Board of Governors of the
Federal Reserve System.”

Ch a ir m a n G r e e n s p a n
Of f ic e

ta k e s

Oa t h

Chairman Alan Greenspan on June 19, 2004, took the
oath of office as Chairman of the Board of Governors
of the Federal Reserve System for a fifth four-year
term commencing on June 20, 2004. The oath was
administered by Vice President Dick Cheney at the
Colorado home of former President Gerald Ford.
Witnesses included President and Mrs. Ford and
Chairman Greenspan’s wife, Andrea Mitchell.
President Bush nominated Dr. Greenspan on
May 18, 2004, and he was confirmed by the Senate
on June 17, 2004. He originally took office on
August 11, 1987.

FEDERAL OPEN MARKET COMMITTEE
Statem ents
The Federal Open Market Committee decided on
May 4, 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 rate and hiring appears to have picked up.
Although incoming inflation data have moved some
what higher, long-term inflation expectations appear
to have remained well contained.
The Committee perceives the upside and downside
risks to the attainment of sustainable growth for the
next few quarters are roughly equal. Similarly, the
risks to the goal of price stability have moved into
balance. At this juncture, with inflation low and

resource use slack, the Committee believes that pol
icy accommodation can be removed at a pace that is
likely to be measured.
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.
The Federal Open Market Committee decided on
June 30, 2004, to raise its target for the federal funds
rate 25 basis points to 1X
U percent.
The Committee believes that, even after this action,
the stance of monetary policy remains accommoda
tive and, coupled with robust underlying growth
in productivity, is providing ongoing support to eco
nomic activity. The evidence accumulated over the
intermeeting period indicates that output is continu
ing to expand at a solid pace and labor market condi
tions have improved. Although incoming inflation
data are somewhat elevated, a portion of the increase
in recent months appears to have been due to transi
tory factors.
The Committee perceives the upside and downside
risks to the attainment of both sustainable growth and
price stability for the next few quarters are roughly
equal. With underlying inflation still expected to be
relatively low, the Committee believes that policy
accommodation can be removed at a pace that is
likely to be measured. Nonetheless, the Committee
will respond to changes in economic prospects as
needed to fulfill its obligation to maintain price
stability.
Voting for the FOMC monetary policy action were:
Alan Greenspan, Chairman; Timothy F. Geithner,
Vice Chairman; 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.
In a related action, the Board of Governors
approved a 25 basis point increase in the discount
rate to 21/4 percent. In taking this action, the Board
approved the requests submitted by the Boards of
Directors of the Federal Reserve Banks of Boston,

330

Federal Reserve Bulletin □ Summer 2004

New York, Philadelphia, Cleveland, Richmond,
Atlanta, Chicago, St. Louis, Minneapolis, Kansas
City, Dallas, and San Francisco.
Pr o p o se d A m e n d m e n t

R e g u l a t io n J

The Federal Reserve Board on June 4, 2004, pro
posed amending Regulation J, (Collection of Checks
and Other Items by Federal Reserve Banks and Funds
Transfers through Fed wire), which governs Reserve
Banks’ collection of checks and other cash items, to
cover the entire range of check-processing services
that the Reserve Banks plan to offer once the Check
Clearing for the 21st Century Act takes effect on
October 28, 2004.
The Check 21 Act permits banks to use substitute
checks in place of original checks in the check collec
tion or return process. The act does not require any
bank to accept checks electronically, but facilitates
the use of electronic transmission between banks
that agree to use that technology. In light of the act’s
provisions, the Reserve Banks plan to offer a wider
range of electronic check-processing services. The
proposed amendments would bring electronic items
within the scope of Regulation J and would establish
new warranties and an indemnity that would apply to
electronic items for which there is no other warranty
and indemnity protection.
Am endm ents

R e g u l a t io n

The Federal Reserve Board on June 8, 2004, issued
amendments to Regulation V (Fair Credit Reporting),
which implements the Fair Credit Reporting Act
(FCRA), that would add model notices for financial
institutions to use if they furnish negative informa
tion to consumer reporting agencies. The amend
ments also provide guidance to financial institutions
regarding the use of the model notices. The Board
is publishing the model notices pursuant to the Fair
and Accurate Credit Transactions Act (FACT Act)
amendments to the FCRA.
The FACT Act provides that if any financial insti
tution (1) extends credit and regularly and in the
ordinary course of business furnishes information to
a nationwide consumer reporting agency; and (2) fur
nishes negative information to such an agency regard
ing 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 privacy
provisions of the Gramm-Leach-Bliley Act. The
term financial institution includes not only institu
tions regulated by the Board and other federal bank
ing agencies, but also includes other financial enti
ties, such as merchant creditors that extend credit
and report negative information. The Board’s model
notices can be used by all financial institutions, as
defined by the act.
The amendments became effective July 16, 2004.

A m endm ents
A p p e n d ix A

R e g u l a t io n CC,

Restructuring o f Check-Processing Operations
in the Eleventh, Seventh, Eighth, Fourth, and
Fifth Districts
The Federal Reserve Board on May 4, 2004,
announced amendments to Appendix A of Regu
lation CC (Availability of Funds and Collection
of Checks), effective July 10, 2004, that reflect
the restructuring of the Federal Reserve’s checkprocessing operations in the Eleventh District.
On May 17, 2004, the Federal Reserve Board
announced amendments to Appendix A of Regula
tion CC, that reflect the restructuring of the Federal
Reserve’s check-processing operations in the Sev
enth and Eighth Districts.
On June 22, 2004, the Federal Reserve Board
announced amendments to Appendix A of Regula
tion CC, that reflect the restructuring of the Federal
Reserve’s check-processing operations in the Fourth,
Fifth, and Eighth Districts.
These amendments are part of a series of amend
ments 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 July 10, 2004, the San Antonio office of the
Federal Reserve Bank of Dallas no longer processes
checks, and banks served by that office for checkprocessing purposes were reassigned to the Reserve
Bank’s head office in Dallas. To reflect this opera
tional change, the final rule deletes the reference in
appendix A to the San Antonio office and reassigns
the routing numbers listed thereunder to the Reserve
Bank’s head office.

Announcements

As of July 24, 2004, the Little Rock office of the
Federal Reserve Bank of St. Louis no longer pro
cesses checks, and banks served by that office for
check-processing purposes have been reassigned to
the Reserve Bank’s Memphis office.
As of August 7, 2004, the Milwaukee office of the
Federal Reserve Bank of Chicago no longer pro
cesses checks, and banks served by that office have
been reassigned to the Reserve Bank’s head office.
To reflect these operational changes, the final rule
(1) deletes the reference in appendix A to the
St. Louis Reserve Bank’s Little Rock office and
reassigns the routing numbers listed thereunder to the
Reserve Bank’s Memphis office, effective July 24,
2004, and (2) deletes the reference in appendix A to
the Chicago Reserve Bank’s Milwaukee office and
reassigns the routing numbers listed thereunder to the
Reserve Bank’s head office, effective August 7, 2004.
As of August 28, 2004, the Columbia office of the
Federal Reserve Bank of Richmond no longer pro
cesses checks, and banks served by that office have
been reassigned to that Reserve Bank’s Charlotte
office.
Also as of August 28, 2004, the Louisville office
of the Federal Reserve Bank of St. Louis no longer
processes checks, and banks served by that office for
check-processing purposes have been reassigned to
the Cincinnati office of the Federal Reserve Bank of
Cleveland.
To reflect these operational changes, the final rule
(1) deletes the reference in appendix A to the Rich
mond Reserve Bank’s Columbia office and reassigns
the routing numbers listed thereunder to that Reserve
Bank’s Charlotte office, and (2) deletes the reference
in appendix A to the St. Louis Reserve Bank’s Louis
ville office and reassigns the routing numbers listed
thereunder to the Cleveland Reserve Bank’s Cincin
nati office. To coincide with the effective date of the
underlying check-processing changes, the amend
ments were effective August 28, 2004.
As a result of these changes, some checks depos
ited in the affected regions that were nonlocal checks
have become local checks that are subject to shorter
permissible hold periods.

F in a l A m e n d m e n t s to R e g u l a t io n CC
C o m m e n t a r y to I m p l e m e n t
Ch e c k 21 A c t

a n d it s

The Federal Reserve Board on July 26, 2004,
released final amendments to Regulation CC and its
commentary to implement the Check Clearing for the
21st Century Act (Check 21 Act), which was enacted

331

on October 28, 2003, and becomes effective on Octo
ber 28, 2004.
To facilitate check truncation and electronic check
exchange, the Check 21 Act authorizes a new nego
tiable instrument called a substitute check. A substi
tute check is a paper reproduction of the original
check that contains an image of the front and back
of the original check and can be processed just like
the original check. The Check 21 Act provides
that a properly prepared substitute check is the legal
equivalent of the original check for all purposes. The
Check 21 Act does not require any bank to create
substitute checks or to accept checks electronically.
The Check 21 Act includes new warranties, an
indemnity, and expedited re-credit procedures that
protect substitute check recipients.
The Board’s amendments: (1) set forth the require
ments of the Check 21 Act that apply to banks;
(2) provide a model disclosure and model notices
relating to substitute checks; and (3) set forth bank
endorsement and identification requirements for sub
stitute checks. The amendments also clarify some
existing provisions of the rule and commentary.
Pr o p o s e d A m e n d m e n t s
R e g u l a t io n d d

p u b l is h e d to

The Federal Reserve Board on May 28, 2004, pub
lished proposed amendments to Regulation DD
(Truth in Savings), which implements the Truth in
Savings Act, and the regulation’s official staff com
mentary to address concerns about the uniformity
and adequacy of information provided to consumers
when they overdraw their accounts. The proposed
amendments, in part, address a specific service
offered by depository institutions, commonly referred
to as bounced-check protection or courtesy overdraft
protection.
Depository institutions sometimes offer courtesy
overdraft protection to deposit account customers as
an alternative to a traditional overdraft line of credit.
To address concerns about the marketing of this
service, a proposed revision to the regulation would
expand the prohibition against misleading advertise
ments to cover communications with current custom
ers about existing accounts. The staff commentary
would provide examples. Other proposed revisions to
Regulation DD would require additional fee and other
disclosures about courtesy overdraft services, includ
ing in advertisements.
The Board is also proposing amendments of gen
eral applicability that would require institutions to
provide more uniform disclosures about overdraft
and returned-item fees.

332

Federal Reserve Bulletin □ Summer 2004

In addition, the member agencies of the Federal
Financial Institutions Examination Council published
proposed guidance to assist insured depository insti
tutions in the responsible disclosure and administra
tion of overdraft protection services.

With d r a w a l o f
R e g u l a t io n s b,

p r o p o s e d r e v is io n s to
e , M, Z, a n d d d

The Federal Reserve Board on June 22, 2004, with
drew proposed revisions to Regulation B (Equal
Credit Opportunity), Regulation E (Electronic Fund
Transfers), Regulation M (Consumer Leasing), Reg
ulation Z (Truth in Lending), and Regulation DD
(Truth in Savings). The proposed revisions, pub
lished in December 2003, sought to define more
specifically the standard for providing clear and con
spicuous disclosures and to provide a more-uniform
standard among the Board’s regulations.
The revisions were intended to help ensure that
consumers receive noticeable and understandable
information that is required by law in connection
with obtaining consumer financial products and ser
vices. In response to concerns raised by commenters,
the Board has determined that this goal should be
achieved by developing proposals that focus on
improving the effectiveness of individual disclosures
rather than the adoption of general definitions and
standards applicable across the five regulations. This
effort will be undertaken in connection with the
Board’s periodic review of its regulations; an advance
notice of proposed rulemaking is expected to be
issued later this year under Regulation Z, focused on
disclosures for open-end credit accounts.
Although the December 2003 proposals are with
drawn, they reflect principles that institutions may
find useful in creating disclosures that are clear and
conspicuous. These approaches will also help inform
the Board’s review of individual disclosures.

I n t e n t to Wit h d r a w p r o p o s e d
A m e n d m e n t s to C o m m u n it y
R e in v e s t m e n t A c t r e g u l a t io n s
The Federal Reserve Board on July 16, 2004,
announced its intention to withdraw proposed
amendments to its Community Reinvestment Act
(CRA) regulations Regulation BB, Community
Reinvestment).
In February 2004, the Board, along with the Office
of the Comptroller of the Currency, the Office of
Thrift Supervision, and the Federal Deposit Insurance

Corporation, proposed revisions to the agencies’
CRA regulations. The key aspects of the proposal
were: (1) to raise the small-bank asset threshold from
$250 million to $500 million thereby allowing more
banks to benefit from streamlined CRA evaluations;
and (2) to allow examiners to reduce a depository
institution’s CRA rating if the institution engaged in
a pattern or practice of abusive asset-based lending.
Although community banks strongly favor raising
the threshold, it is uncertain that the cost savings to
the average community bank of being “small” rather
than “large” under the proposal would be signifi
cant. On the other side, the proposal’s cost in the
form of a potential reduction in community develop
ment capital in a significant number of rural commu
nities is also uncertain, but potentially large in at least
some communities. On balance, the Board does not
believe that the cost savings of the proposal clearly
justify the potential adverse effects on certain rural
communities.
The commenters were united in their opposition to
the proposal to define a single abusive lending prac
tice in the CRA regulations (abusive asset-based
lending) to the exclusion of other abusive practices.
For these reasons, the Board is withdrawing the
entire proposal.

B o ard

Go verno rs R eq u ests Co m m en t

Proposed Revision to Policy Statem ent on
Payments System Risk
The Federal Reserve Board on April 21, 2004,
requested comment on proposed revisions to Part II
of its Policy Statement on Payments System Risk
(PSR Policy), which addresses risk management in
payments and securities settlement systems.
The proposed revisions update the policy in light
of current industry and supervisory risk management
approaches and new international risk manage
ment standards for payments and securities settle
ment systems. In addition, they provide further clari
fication regarding the policy’s objectives, scope, and
application.
The key revisions include an expansion of the
policy’s scope to include those Federal Reserve Bank
payments and securities settlement systems that meet
the policy’s application criteria, revised general risk
management expectations for systems subject to the
policy, and the incorporation of both the Core Prin
ciples for Systemically Important Payment Systems
(Core Principles) and the Recommendations for
Securities Settlement Systems (Recommendations).

Announcements

The Core Principals were developed by the Commit
tee on Payment and Settlement Systems (CPSS) of
the central banks of the Group of Ten countries. The
Recommendations were developed by the CPSS and
the Technical Committee of the International Organi
zation of Securities Commissions.

Proposed Rule to Retain Trust Preferred
Securities
The Federal Reserve Board on May 6, 2004,
requested public comment on a proposed rule that
would retain trust preferred securities in the tier 1
capital of bank holding companies (BHCs), but with
stricter quantitative limits and clearer qualitative
standards.
Under the proposal, after a three-year transition
period, the aggregate amount of trust preferred secu
rities and certain other capital elements would be
limited to 25 percent of tier 1 capital elements, net of
goodwill. The amount of trust preferred securities
and certain other elements in excess of the limit could
be included in tier 2 capital, subject to restrictions.
Internationally active BHCs would generally be
expected to limit trust preferred securities and certain
other capital elements to 15 percent of tier 1 capital
elements, net of goodwill.
Comments were requested by July 11, 2004.
The proposed revisions address supervisory con
cerns, competitive equity considerations, and recent
changes in accounting for trust preferred securities
under generally accepted accounting principles
(GAAP). The proposal also would strengthen the
definition of regulatory capital by incorporating long
standing policies that are not explicitly set forth in the
Board’s current capital guidelines.
However, the proposal would not affect the way
BHCs account for trust preferred securities on their
regulatory reports filed with the Federal Reserve.
Consistent with longstanding Federal Reserve direc
tion, BHCs follow GAAP in accounting for these
instruments for regulatory reporting purposes.

Adequacy o f Existing Disclosures o f D ebit
Card Fees
The Federal Reserve Board on May 18, 2004,
announced that it will conduct a study on debit card
fees and requested public comment on the adequacy
of existing disclosures of such fees to consumers.
Members of the Senate Banking, Housing, and
Urban Affairs Committee asked the Board to study

333

debit card fees imposed by financial institutions when
their customers complete a point-of-sale debit trans
action by providing their personal identification
number, or PIN. This request reflected their concern
that consumers may be unaware, or not adequately
informed, that their bank may impose fees when the
consumer chooses to use a PIN, rather than a signa
ture, to authorize a transaction at point-of-sale.
The Electronic Fund Transfers Act (EFTA) sets
forth the existing disclosure requirements governing
electronic fund transfers (EFTs), and provides a basic
framework for establishing the rights, liabilities, and
responsibilities of participants in EFT systems. The
types of transfers covered by the EFTA include trans
fers initiated through point-of-sale terminals, auto
mated teller machines, and others. The statute and its
implementing regulation (Regulation E, Electronic
Fund Transfers) require the initial disclosure of speci
fied terms and conditions of an EFT service, includ
ing fees, and further require terminal receipts and
periodic account activity statements.
In connection with the study, the Board is solicit
ing comment on whether the existing disclosures
required by the EFTA effectively make consumers
aware of the imposition of debit card transaction fees
by their financial institution when they choose to use
a PIN. The Board also seeks the public’s views on the
need for, and the potential benefits of, requiring addi
tional disclosures in each periodic account activity
statement to reflect such debit card fees.
This Federal Register solicitation of comment is
one element of the broader study requested, in which
the Board has also been asked to study the prevalence
of debit card PIN-use fees being imposed, and the
feasibility of requiring real-time disclosure of such
fees at the point of sale, among other issues.
Public comment on the specific issues identified
will assist the Board in preparing the study and report
that will be submitted to members of the Congress in
November 2004.

Prescreened Solicitations fo r Credit or
Insurance
The Federal Reserve Board on May 18, 2004,
requested public comment on a Board study and a
report to the Congress on prescreened solicitations
for credit or insurance.
The Fair and Accurate Credit Transactions Act of
2003 (FACT Act), which generally amends the Fair
Credit Reporting Act (FCRA), requires the Board to
conduct a study concerning prescreened solicitations.
Under the FCRA, creditors and insurers in specific

334

Federal Reserve Bulletin □ Summer 2004

circumstances may use certain consumer reports as
the basis for sending unsolicited offers of credit or
insurance to consumers who meet certain criteria
for credit worthiness or insurability (so-called pre
screened solicitations).
The FCRA provides a mechanism by which con
sumers can elect not to receive these prescreened
solicitations, by directing consumer reporting agen
cies to exclude the consumer’s name and address
from lists provided by these agencies to creditors or
insurers for use in sending prescreened solicitations.
Section 213(e) of the FACT Act requires the Board to
conduct a study of the ability of consumers to avoid
receiving these prescreened solicitations (including
using the mechanism described above), and the
potential effect of any further restrictions on provid
ing consumers with such prescreened solicitations.
The Board is requesting public comment on a
number of issues to assist in preparation of the study
and a report that the Board must submit to the Con
gress by December 4, 2004.

Proposed Revisions to Bank H olding Company
Rating System
The Federal Reserve on July 23, 2004, requested
public comment on proposed revisions that would
better align the bank holding company rating system
with current supervisory practices.
The proposed rating system incorporates an
increased emphasis on risk management, a more flex
ible and comprehensive evaluation of financial condi
tion, and an explicit determination of the likelihood
that the nondepository entities of a holding company
will have a significant negative effect on the deposi
tory subsidiaries.
Under the revised rating system, each holding com
pany would be assigned a composite rating (C) based
on an evaluation and rating of three essential compo
nents of an institution’s financial condition and opera
tions: risk management (R); financial condition (F);
and potential impact (I) of the parent company and
nondepository subsidiaries on the subsidiary deposi
tory institutions. A fourth component in the rating
system, (D), would generally mirror the primary
supervisors’ assessment of the subsidiary depository
institutions. (A simplified version of the rating sys
tem would be applied to noncomplex bank holding
companies with assets of less than $1 billion.)
To provide a consistent framework for assessing
risk management, the risk-management component is
supported by four qualitatively rated subcomponents:
competence of board and senior management; poli

cies, procedures, and limits; risk monitoring and man
agement information systems; and internal controls.
The financial condition component is supported
by four numerically rated subcomponents: capital
adequacy, asset quality, earnings, and liquidity.
The proposal also contains guidance on implemen
tation of the revised rating system based on holding
company size and complexity.

Ba n k R e g u l a t o r y A g e n c ie s
Rollout D elayed o f W eb-Based Central Data
Repository fo r Bank Financial Data
The federal banking agencies announced on July 22,
2004, that they would postpone the rollout of the
Central Data Repository (CDR)—an Internet-based
system created to modernize and streamline the way
that the agencies collect, validate, and distribute
financial data, or Call Reports, submitted by banks.
Originally scheduled to be implemented on Octo
ber 1, 2004, the system’s start date will be delayed to
address industry feedback and allow more time for
testing and enrollment. A new timeline for implemen
tation was announced in August.
The decision to delay implementation of the CDR
was made to address delays in system development
and testing. Moreover, the agencies had received an
increasing number of questions and concerns about
the new system from banks, industry trade associa
tions, software vendors, and other stakeholders.
Initial testing of the system demonstrated that the
technology chosen is sound and that the XBRL stan
dard underlying the system’s framework will perform
as required. However, Call Report data represent
a critical source of information for the bank super
vision process, and the banking agencies determined
that a postponement was warranted.
The agencies are considering alternative plans for
the CDR rollout, including phasing in the new tech
nology and business models in separate reporting
quarters. For now, the agencies will continue to col
lect, validate, and manage Call Report data using
their existing processing systems. This includes the
retention of Electronic Data Services Corporation as
the agencies’ electronic collection agent for Call
Report data. Accordingly, banks will continue filing
their Call Report in the same manner until they are
notified by the agencies to begin using the new CDR
system.
This initiative—the Call Report Modernization
Project—is an interagency effort under the auspices
of the Federal Financial Institutions Examination

Announcements

Council (FFIEC). Additional project details and other
important information are posted on the FFIEC’s web
site at www.FFIEC.gov/FIND.

Issuance o f Rules and Guidance
Rule on Use of Medical Information for Credit
Eligibility
The federal bank, thrift institution, and credit union
regulatory agencies on April 23, 2004, issued for
publication in the Federal Register a proposed rule
under the Fair Credit Reporting Act (FCRA) that
would incorporate the statutory prohibition on obtain
ing or using medical information in connection with
credit eligibility determinations and, as required by
the statute, create certain exceptions to be applied in
limited circumstances.
Section 411 of the Fair and Accurate Credit Trans
actions Act of 2003 (FACT Act) amends the FCRA
to provide that a creditor may not obtain or use
medical information in connection with any determi
nation of a consumer’s eligibility, or continued eligi
bility, for credit, except as permitted by regulations.
The FACT Act requires the agencies to prescribe
regulations that permit creditors to obtain and use
medical information for eligibility purposes when
necessary and appropriate to protect legitimate opera
tional, transactional, risk, consumer, and other needs.
The FACT Act further provides that the regulations
creating these exceptions would be issued in final
form within six months of the date of enactment of
the FACT Act, or June 4, 2004.
As required by section 411, the proposed regu
lations would grant exceptions to allow creditors to
obtain or use medical information in those circum
stances that the agencies believe are necessary and
appropriate in connection with determinations of con
sumer eligibility for credit.
Section 411 of the FACT Act also amends the
FCRA to limit the ability of creditors and others to
share medical-related information with affiliates,
except as permitted by the statute, regulation, or
order. The proposed rule would enumerate situations
in which creditors would be permitted to share medi
cal information among affiliates.
The proposed rule was issued by the Board of
Governors of the Federal Reserve System, the Fed
eral Deposit Insurance Corporation, the National
Credit Union Administration, the Office of the Comp
troller of the Currency, and the Office of Thrift Super
vision. The rules of each agency are substantively
identical.

335

Guidance on Overdraft Protection Programs
The federal financial institutions supervisory agen
cies on May 28, 2004, issued proposed guidance to
assist insured depository institutions in the respon
sible disclosure and administration of overdraft pro
tection services.
The proposed guidance identifies concerns raised
by institutions, financial supervisors, and the public
about the marketing, disclosure, and implementation
of overdraft protection programs. To address these
concerns, the proposed guidance: (1) seeks to ensure
that financial institutions adopt adequate policies and
procedures to address the credit, operational, and
other risks associated with overdraft protection ser
vices; (2) alerts institutions offering these services to
the need to comply with all applicable federal and
state laws; and (3) sets forth examples of best prac
tices that are currently observed in, or recommended
by, the industry.
The proposal is being issued under the auspices of
the Federal Financial Institutions Examination Coun
cil (FFIEC) by its member agencies: the Board of
Governors of the Federal Reserve System, the Fed
eral Deposit Insurance Corporation, the National
Credit Union Administration, the Office of the Comp
troller of the Currency, and the Office of Thrift
Supervision.

Rule on Affiliate Marketing Opt Outs
The federal financial institutions supervisory agen
cies on July 2, 2004, issued proposed regulations that
would give consumers the chance to opt out before a
financial institution uses information provided by an
affiliated company to market its products and services
to the consumer.
The proposed rulemaking would implement the
affiliate marketing provisions in section 214 of the
Fair and Accurate Credit Transactions Act of 2003
(FACT Act), which adds a new section 624 to the
Fair Credit Reporting Act (FCRA). The proposal
generally would prohibit an institution from using
certain information about a consumer it receives from
an affiliate to make a solicitation to the consumer
unless the consumer has been given notice and an
opportunity to opt out of the solicitation. An institu
tion that has a pre-existing business relationship with
the consumer would not be subject to this market
ing limitation. Nothing in the new affiliate marketing
opt out supercedes or replaces the provisions in
section 603 of the FCRA concerning the right to
opt out of the sharing of information among affiliates,

336

Federal Reserve Bulletin □ Summer 2004

although there is some overlap between the two opt
out requirements.
The proposal was issued by the Board of Gover
nors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the National Credit
Union Administration, the Office of the Comptroller
of the Currency, and the Office of Thrift Supervision.

Final Rule on Capital Requirements for
Asset-Backed Commercial Paper Programs
The federal banking and thrift institution regulatory
agencies on July 20, 2004, issued a final rule amend
ing their risk-based capital standards. The rule per
mits sponsoring banks, bank holding companies, and
thrift institutions (banking organizations) to continue
to exclude from their risk-weighted asset base, for
purposes of calculating the risk-based capital ratios
asset-backed commercial paper (ABCP) program,
assets that are consolidated onto sponsoring banking
organizations’ balance sheets as a result of Financial
Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities, as revised
(FIN 46R). This provision of the final rule will make
permanent an existing interim final rule.
The final rule also requires banking organizations
to hold risk-based capital against eligible ABCP
liquidity facilities with an original maturity of one
year or less that provide liquidity support to ABCP
by imposing a 10 percent credit conversion factor on
such facilities. Eligible ABCP liquidity facilities with
an original maturity exceeding one year remain sub
ject to the current 50 percent credit conversion factor.
Ineligible liquidity facilities are treated as direct
credit substitutes or recourse obligations and are
subject to a 100 percent credit conversion factor.
The resulting credit equivalent amount is then risk
weighted according to the underlying assets, after
consideration of any collateral, guarantees, or exter
nal ratings, if applicable. All liquidity facilities that
provide liquidity support to ABCP will be treated as
eligible liquidity facilities for a one-year transition
period.
The rule, which will be published shortly in the
Federal Register, becomes effective on Septem
ber 30, 2004.

Bank Secrecy Act Examination Procedures
The federal financial institutions regulatory agencies
on July 28, 2004, issued Bank Secrecy Act (BSA)
procedures for examining each domestic and foreign

banking organization’s customer identification pro
gram (CIP), which is required by section 326 of
the USA Patriot Act (codified in the BSA at 31 U.S.C.
5318(/)). The procedures are designed to help
financial institutions fully implement the new CIP
requirements and facilitate a consistent supervisory
approach among the federal financial institutions
regulatory agencies.
The USA Patriot Act, signed into law on Octo
ber 26, 2001, establishes new and enhanced measures
to prevent, detect, and prosecute money laundering
and terrorism. The regulation implementing sec
tion 326 of the act requires each financial institution
to implement a written CIP that includes certain
minimum requirements and is appropriate for its size
and type of business. The CIP must be incorporated
into the financial institution’s anti-money laundering
compliance program, which is subject to approval
by the financial institution organization’s board of
directors.
Compliance with the regulation was required by
October 1, 2003.

Regulatory Agencies Request Comment
Statement Concerning Complex Structured Finance
Activities
Five federal agencies on May 14, 2004, requested
public comment on a proposed statement describing
internal controls and risk management procedures
that the agencies believe will assist financial insti
tutions that engage in complex structured finance
activities to identify and address the risks associated
with such transactions.
As recent events have highlighted, a financial insti
tution may assume substantial reputational and legal
risk if the institution enters into a complex structured
finance transaction with a customer and the customer
uses the transaction to circumvent regulatory or
financial reporting requirements, evade tax liabilities,
or further other illegal or improper behavior.
The interagency statement describes the types of
internal controls and risk management procedures
that should help financial institutions effectively man
age and address the reputational, legal, and other
risks associated with their complex structured finance
activities and operate in accordance with applicable
law. The statement, among other things, provides that
financial institutions engaged in complex structured
finance activities should have effective policies and
procedures in place to

Announcements

• identify those complex structured finance trans
actions that may involve heightened reputational and
legal risk;
• ensure that these transactions receive enhanced
scrutiny by the institution; and
• ensure that the institution does not participate in
illegal or inappropriate transactions.
The statement also emphasizes the critical role of
an institution’s board of directors and senior man
agement in establishing a corporate-wide culture that
fosters integrity, compliance with the law, and overall
good business ethics.
The proposed statement was issued by the Securi
ties and Exchange Commission, the Board of Gov
ernors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Office of the
Comptroller of the Currency, and the Office of Thrift
Supervision. The statement would represent supervi
sory guidance for institutions supervised by the four
banking agencies and a policy statement for institu
tions supervised by the Securities and Exchange
Commission.
On June 18, 2004, the five federal agencies agreed
to extend for thirty days the comment period on the
proposed Interagency Statement on Sound Practices
Concerning Complex Structured Finance Activities,
published in the Federal Register on May 19, 2004.
In a letter submitted to the five agencies on
June 10, 2004, eight trade associations representing
financial institutions asked the agencies to provide
the public with an additional thirty-day period to
review, analyze, and submit comments on the pro
posed interagency statement.
The extended public comment period on the inter
agency statement ended July 19, 2004. The scope and
comment process for the interagency statement
remained as stated in the original Federal Register
notice of May 19, 2004.

Disposal of Consumer Information
The federal bank and thrift institution regulatory
agencies on June 8, 2004, invited public comment on
an interagency proposal to require financial insti
tutions to adopt measures for properly disposing of
consumer information derived from credit reports.
Current law requires financial institutions to pro
tect customer information by implementing informa
tion security programs. The proposed rules would
require institutions to make adjustments to their infor
mation security programs to properly dispose of the

337

types of consumer information that are not already
protected. This would include information from credit
reports about a financial institution’s employee or
about an individual whose application for a product
or service is denied.
The agencies’ proposal implements section 216
of the Fair and Accurate Credit Transactions Act of
2003 (FACT Act). Although not imposing significant
additional burden, the proposed rules would make
amendments to include this new statutory require
ment in the Interagency Guidelines Establishing
Standards for Safeguarding Customer Information,
which were adopted in 2001. The agencies’ proposed
rules add a new definition of consumer information
and a provision to require financial institutions to
implement appropriate measures to properly dispose
of consumer information.
The proposal would take effect three months after a
final rule is adopted.

B o ar d B e g in s 2004 S u r v e y
F in a n c e s

Co n su m e r

The Federal Reserve Board announced on May 25,
2004, that in June, it would begin a statistical
study of household finances, the Survey of Consumer
Finances, that will provide policymakers with impor
tant insight into the economic condition of all types
of American families.
The survey, undertaken every three years since
1983, is being conducted for the Board by NORC, a
social science research organization at the University
of Chicago, through December 2004.
The data collected will provide a representative
picture of what Americans own—from houses and
cars to stocks and bonds—how and how much they
borrow and how they bank. Past study results have
been important in policy discussions regarding pen
sion and social security reform, tax policy, deposit
insurance reform, and a broad range of other areas.
“Although good overall information on the state of
the major sectors of the economy is available reg
ularly, our knowledge about the financial circum
stances faced by different types of households is
much more limited,” Alan Greenspan, Chairman of
the Board of Governors of the Federal Reserve Sys
tem, said in a letter to prospective survey partici
pants. “Our survey fills a key part of this gap,” he
said.
The 2004 survey will contain a new section on the
pension entitlements that families have. Earlier ver
sions of the survey have collected data separately on
traditional defined-benefit pension plans and account-

338

Federal Reserve Bulletin □ Summer 2004

based plans, such as 401(k) accounts. In recent years,
classification and measurement of pensions have been
complicated by the growth of pension arrangements
that combine aspects of both types of plans—
particularly defined benefit plans with a specified
cash settlement option in lieu of regular retirement
payments, such as in a cash balance plan. The new
question sequence will focus more on attributes of
plans instead of asking the survey participants to
make rigid distinctions between abstract types of
plans that they may not understand fully.
Participants in the study are chosen at random from
seventy-nine areas across the United States, using
a scientific sampling procedure. A representative of
NORC contacts each potential participant person
ally to explain the study and request time for an
interview.
“Let me assure you that protecting the privacy of
survey participants has the highest priority in our data
collection system,” Mr. Greenspan said. NORC uses
names and addresses only for the administration of
the survey, and that identifying information will be
destroyed at the close of the 2004 study. NORC is
required never to give the names and addresses of
participants to anyone at the Federal Reserve or any
where else.
Information provided by survey participants is also
protected by the Confidential Information Protection
and Statistical Efficiency Act of 2002. This act pro
hibits the Federal Reserve or any of its employees or
agents (including NORC) from using the information
provided by a participant for any nonstatistical pur
pose, or from disclosing the information in a way that
would identify the participant without the partici
pant’s consent. To help ensure compliance, the act
includes strong criminal penalties for any person that
violates the act’s protections.
Summary results for the 2004 study will be pub
lished in early 2006 after all data from the survey
have been assessed and analyzed.

BOARD BEGINS SURVEY OF SMALL BUSINESS
F in a n c e s
The Federal Reserve Board on June 10, 2004,
announced that it had begun the latest Survey of
Small Business Finances in June 2004, the fourth in a
series since 1988 aimed at increasing policymakers’
understanding of the ways economic and regulatory
changes affect small firms’ access to credit.
On behalf of the Board, NORC (a social science
research organization at the University of Chicago) is
collecting information from small businesses about

their finances in 2003. Through the end of 2004, it
will conduct telephone interviews with 4,000 execu
tives at firms of fewer than 500 employees.
In a letter, Federal Reserve Chairman Alan
Greenspan encouraged the business owners that were
randomly selected for the survey to participate, not
ing that the data collected by past surveys have been
critical for policy decisions at the Federal Reserve
and in other parts of government.
“The Federal Reserve Board is concerned with the
ways in which economic and regulatory changes
affect small businesses. . . . Such changes can, in
turn, have important implications for economic
policymaking,” he wrote.
The last survey collected information on small
business finances in 1998. Both the state of the econ
omy and the use of technology are very different
today than they were then. The Board plans to pub
lish findings from the new study in early 2006 after
all the data have been collected and analyzed.
Participants are randomly selected from all fifty
states and the District of Columbia using scientific
sampling methods. They will be asked about their use
of credit and other financial services and their expe
rience in obtaining credit during 2003. Informa
tion will be collected about firms’ assets, liabilities,
income, and expenses.
Participation is voluntary but a broad sample will
help government policymakers more clearly under
stand the effect of their actions on small businesses.
The names and addresses of participants and any
other identifying information will be held in the
strictest confidence. Information provided by sur
vey participants is also protected by the Confidential
Information Protection and Statistical Efficiency Act
of 2002. This act prohibits the Federal Reserve or any
of its employees or agents (including NORC) from
using the information provided by a participant for
any nonstatistical purpose, or from disclosing the
information in a way that would identify the partici
pant without the participant’s consent. To help ensure
compliance, the act includes strong criminal penalties
for any person that violates the act’s protections.
More information is available on the Federal
Reserve’s web site at www.federalreserve.gov/ssbf
or NORC’s site at www.norc.uchicago.edu/ssbf.

Fe d e r a l R e s e r v e Ba n k s a n n o u n c e
S t r a t e g y to M e e t E v o l v in g D e m a n d s
Pa y m e n t s S y s t e m

The Federal Reserve Banks on June 16, 2004,
announced a strategy to accommodate the evolution

Announcements

of the nation’s payments system from paper check
processing to electronic processing, a development
driven by a significant broad-based change in user
preference. The Reserve Banks’ strategy entails
launching new products and services to support the
implementation of the Check 21 Act in October 2004,
as well as streamlining its check-processing infra
structure by discontinuing check processing at loca
tions to be announced later this year. Even with these
changes, the Federal Reserve Banks will continue to
provide check-processing services on a national basis.
In this effort, Reserve Banks will provide opportu
nities through their Check 21 products and services
for financial institutions to make use of electronic
check services as a means of reducing their overall
check operating costs. These steps should also reduce
the time during which industry participants and the
Reserve Banks must support significant investments
in dual processing platforms.
“These steps are part of a forward-looking strategy
that acknowledges the financial services industry’s
ongoing evolution from paper to electronic process
ing,” said Gary Stern, President of the Federal
Reserve Bank of Minneapolis and Chairman of the
Reserve Banks’ Financial Services Policy Commit
tee. “This shift is good for consumers and good for
the financial services industry, and the Fed has
encouraged this evolution for a number of years. As
the payments system moves to accommodate more
electronic options, the Fed will embrace a strategy
that will respond to the marketplace as necessary.”
As part of this strategy, the Reserve Banks will
also undertake a thorough annual review of their
existing check-processing infrastructure, including
potentially discontinuing paper check processing at
some locations as the market evolves. Currently,
the Reserve Banks are examining their existing
check facilities and within the next few months will
announce the discontinuation of some additional
check-processing facilities through 2005.
The criteria for decisions about infrastructure
changes will closely parallel those used in the
Reserve Banks’ check reengineering initiative
announced in 2003, and will rely on an evaluation of
volume levels, business retention plans, effects on
local markets, and other data. Last year, the Fed
eral Reserve announced a restructuring of its checkprocessing operations from forty-five to thirty-two
sites by year-end 2004.
In 2003, Reserve Banks’ check volume declined at
about a 5 percent rate. For 2004, check volumes have
declined at an accelerated pace compared to the same
period last year. A 2001 Federal Reserve study
revealed that about 42 billion checks were written

339

that year in the United States, considerably lower
than industry estimates. Those volumes are expected
to continue to decline in coming years. The Reserve
Banks will continue to assist the nation’s financial
services industry by conducting research related to
the nation’s payments system. The results of the most
recent study will be available later this year.
“The Federal Reserve Banks are committed to
their role in providing payments services, and that
means responding to the changing demands of the
industry,” Stern said.
This long-term check-processing strategy will
allow the Reserve Banks to better meet the expec
tations of the 1980 Monetary Control Act. That act
requires the Reserve Banks to set prices to recover,
over the long run, their total operating costs of pro
viding payment services to depository institutions, as
well as the imputed costs they would have incurred
and the imputed profits they would have expected
to earn had the services been provided by a private
business firm.
“To date, the transfer of Fed check-processing
activities to other Fed sites has occurred smoothly,
with deposit times and availability transitioning as
close to existing service levels as possible,” Stern
said. “We expect a smooth transition for the next
round of restructuring.”
As before, the Reserve Banks will offer a variety
of programs to affected staff. These programs include
separation packages, extended medical coverage, and
career transition assistance.
“While the changes in payments technology are
good for consumers and make the industry more
efficient, these changes mean that the Reserve Banks
will be losing dedicated management and staff,”
Stern said. “While regrettable, these job reductions
are an outgrowth of change, and the Reserve Banks
will do their best to make this transition as smooth as
possible for affected employees.”

A p p o in t m e n t o f J e f f r e y m . l a c k e r 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
R ic h m o n d
Jeffrey M. Lacker has been appointed president of
the Federal Reserve Bank of Richmond, effective
August 1, 2004. He succeeds J. Alfred Broaddus, Jr.,
who last November, announced his intention to
retire. Lacker is currently senior vice president and
director of research at the Federal Reserve Bank of
Richmond.
The appointment was made by the Board of Direc
tors of the Federal Reserve Bank of Richmond and

340

Federal Reserve Bulletin □ Summer 2004

approved by the Board of Governors of the Federal
Reserve System in Washington, D.C. Wesley S.
Williams, Jr., Chairman of the Federal Reserve
Bank of Richmond’s Board of Directors, made the
announcement on June 17, 2004.
Commenting on the announcement, Williams said,
“After conducting a nationwide search, I am pleased
to say that Jeff Lacker, the Bank’s current director
of research, proved to be a natural choice to lead
the Federal Reserve Bank of Richmond. Jeff is a
respected economist with sound knowledge of mone
tary policy, the nation’s banking system, and the
Federal Reserve’s role in the payments system. Jeff
has the rare combination of knowledge and Federal
Reserve experience to provide the vision needed in
facing the challenges of the future. Additionally, he
is a brilliant manager, and is uniquely attuned to the
community development responsibilities of the Fed
eral Reserve Banks and System. My colleagues on the
Richmond Fed board concluded that Jeff was clearly
the best possible choice to carry forward the laudable
traditions of this great institution, and to serve our
Fifth District communities.”

Williams also expressed appreciation to Al Broaddus for his thirty-four years of service to the Fed
eral Reserve Bank of Richmond, and for his count
less contributions to the Federal Reserve System.
Broaddus turned sixty-five in July, the age at which
Federal Reserve Bank presidents usually retire.
“ It has been a great pleasure working with Al Broad
dus,” Lacker said. “ He leaves behind an outstanding
legacy of contributions to monetary policy, the Rich
mond Fed, and the Federal Reserve System. I am
honored to have been chosen for this post, and I look
forward to working with community, business, and
banking leaders around the District.”

Lacker is only the seventh person to lead the
Richmond Federal Reserve Bank in its ninety-year
history.
“ I have known and worked closely with Jeff for many
years,” Broaddus said. “ He is a strong and collegial
leader and an excellent economist. He is a superb
choice to lead our Bank on the next stage of its long
journey of distinguished public service.”

Jeff Lacker, forty-eight, is a graduate of Franklin
and Marshall College and received a Ph.D. in eco
nomics from the University of Wisconsin. Lacker
was an assistant professor of economics at the Krannert School of Management, Purdue University, from
1984 to 1989. He joined the Bank in 1989 as an
economist in the banking area of the Research
Department. Lacker was named research officer in

1994, vice president in 1996, and senior vice presi
dent and director of research in May 1999.

FEDERAL O PEN M ARKET COMMITTEE
S c h e d u l e f o r 2005

The Federal Open Market Committee on June 25,
2004, announced its tentative meeting schedule
for 2005: February 1-2 (Tuesday-Wednesday),
March 22, May 3, June 29-30 (WednesdayThursday), August 9, September 20, November 1,
and December 13, 2005; and January 31-February 1,
2006 (Tuesday-Wednesday).

Un it e d S t a t e s Un v e il s N e w $50 N o t e
U.S. government officials from the Department of the
Treasury, the Federal Reserve, and the United States
Secret Service, on April 26, 2004, unveiled the new
$50 note design with enhanced security features,
subtle background colors of blue and red, images of a
waving American flag, and a small metallic silverblue star.
The new design is part of the government’s
ongoing efforts to stay ahead of counterfeiting and
to protect the integrity of U.S. currency. The new
$50 note, which is planned to be issued in late
September or early October, is the second denomina
tion in the Series 2004 currency. The first was the
$20 note, which began circulating in October 2003.
“U.S. currency is a worldwide symbol of security
and integrity. These new designs help us keep it that
way, by protecting against counterfeiting and mak
ing it easier for people to confirm the authenticity
of their hard-earned money,” U.S. Treasury Secre
tary John W. Snow said. “In addition to keeping our
currency safe from counterfeiters, the President’s
economic policies are ensuring that more of those
dollars stay in the pockets of American families.”
Snow was joined at the unveiling of the new
$50 note’s design by Federal Reserve Board Gover
nor Mark W. Olson, Tom Ferguson, Director of the
Treasury’s Bureau of Engraving and Printing, which
produces U.S. currency, and C. Danny Spriggs,
Deputy Director of the United States Secret Service,
the law enforcement agency responsible for combat
ing counterfeiting.
The new $50 note was unveiled at the Bureau of
Engraving and Printing’s Western Currency Facility
(WCF) in Fort Worth, Texas, and the occasion also
marked the grand opening of the WCF’s new Visitor
Center. The Visitor Center, which plans to welcome

Announcements

500,000 guests annually, offers free tours to the pub
lic five days a week since opening on April 27, 2004,
and provides a much anticipated tourism draw to the
Dallas-Fort Worth community. At the Visitor Center,
guests enjoy tours of the production facility, learn
about the technology and history of U.S. currency
through interactive displays, and purchase moneythemed items and souvenirs in the gift shop.
The WCF, which prints 55 percent of all U.S. paper
currency, is the only location other than the Bureau’s
Washington, D.C., facility that prints the nation’s
currency, and it will also be printing the first run of
the newly redesigned $50 note.
The new $50 notes will be safer, smarter, and
a more secure currency: safer because they will be
harder to fake and easier to check; smarter to stay
ahead of tech-savvy counterfeiters; and more secure
to protect the integrity of U.S. currency.
“We want the public to know how to use the
security features to protect their hard-earned money,”
said Spriggs. “The combined efforts of public edu
cation, aggressive law enforcement, and improved
currency security features have increased public
awareness and have helped in the fight against
counterfeiting.”
Despite counterfeiters’ increasing use of technol
ogy, advanced counterfeit deterrence efforts on the
part of the authorities have kept counterfeiting at
low levels. Current estimates put the rate of counter
feit $50 notes in circulation worldwide at less than
one note for every 25,000 genuine $50 notes in
circulation.
“A sound currency, which this new $50 note will
foster, is a pivotal factor in the strength of our econ
omy,” said Olson. He said that preparations for
issuing the new $50 note will include educational
outreach to businesses, financial institutions, and con
sumers that use the denomination most. “Our objec
tive is a smooth transition for the newly designed
currency into daily cash transactions. For that to
happen, it must be recognized and honored as legal
tender, and those who use it and handle it must know
how to verify its authenticity.”
The $50 note will be followed later by a new
$100 note. Decisions on new designs for the $5 and
$10 notes are still under consideration, but a redesign
of the $1 and $2 notes is not planned. Even after the
new money is issued, older-design notes will remain
legal tender.
Because counterfeiters are turning increasingly to
digital methods and as advances in technology make
digital counterfeiting easier and cheaper, the govern
ment is staying ahead of counterfeiters by updating
the currency every seven to ten years.

341

“We have to stay ahead of technology, which is
developing and progressing at an ever-increasing rate.
Items like digital printers and higher quality scanners
are becoming more readily available at cheaper
prices,” said Ferguson. “So we have to make our cur
rency notes safer, smarter, and more secure in order
to stay ahead of the would-be counterfeiters.”

The New Color o f M oney
Although consumers should not use color to check
the authenticity of their currency (relying instead
on user-friendly security features), color does add
complexity to the note, making counterfeiting more
difficult. Different colors will be used for differ
ent denominations, which will help everyone—
particularly those who are visually impaired—to tell
denominations apart.
The new notes feature subtle background colors
and highlight historical symbols of Americana. The
$50 note, which will be issued in late 2004, includes
subtle background colors of blue and red, and images
of a waving American flag and a small metallic
silver-blue star.

Security Features
The new $50 design retains three important security
features that were first introduced in the 1990s and
are easy for consumers and merchants alike to check:
• watermark: a faint image, similar to the portrait,
which is part of the paper itself and is visible from
both sides when held up to the light.
• security thread: also visible from both sides
when held up to the light, this vertical strip of plastic
is embedded in the paper and spells out the denomi
nation in tiny print.
• color-shifting ink: the numeral in the lower right
corner on the face of the note, indicating its denomi
nation, changes color when the note is tilted.
Because these features are difficult for counterfeit
ers to reproduce well, they often do not try. Counter
feiters are hoping that cash-handlers and the public
will not check their money closely.

Counterfeiting: Increasingly D igital
Counterfeiters are increasingly turning to digital
methods, as advances in technology make digital

342

Federal Reserve Bulletin □ Summer 2004

counterfeiting of currency easier and cheaper. In
1995, less than 1 percent of counterfeit notes detected
in the United States were digitally produced. Since
then, digital equipment has become more readily
available to the general public, and as a result, the
amount of digitally produced counterfeit notes has
risen. Over the past several years, the amount of
digitally produced counterfeit notes has remained
steady at about 40 percent.
Law enforcement has remained aggressive. In
2003, the United States Secret Service made 469
seizures of digital equipment involved in currency
counterfeiting, such as personal computers, and
made more than 3,640 arrests in the United States
for currency counterfeiting activities. The convic
tion rate for counterfeiting prosecutions is about
99 percent.

Public Education
Public recognition of the currency features, which
increased to 85 percent in the United States as a
result of the public education effort for the new
$20 note, is an important factor in counterfeit
deterrence.
Because the improved security features are more
effective if the public knows about them, the U.S.
government is undertaking a broad public educa
tion program. This program will ensure that people
all over the world know the new currency is com
ing, and help them recognize and use the security
features. The outreach will include cash-handlers,
merchants, business and industry associations, and
the media. There is nearly $700 billion in circula
tion worldwide and as much as two-thirds of U.S.
currency is held outside the United States, there
fore, the public education program will extend
worldwide.
To learn more about the new currency and to
download images of the new currency designs, visit
w w w.moneyfactory.com/newmoney.

b u s in e s s e s ,

Ba n k s , a n d Ca s h -Ha n d l in g
E q u ip m e n t M a n u f a c t u r e r s G e t F in a l
A l e r t to P rep a r e F o r N e w $50 N o t e
Treasury and Federal Reserve Announce
Safer, Smarter, M ore Secure $50 Note
to Begin Circulating Septem ber 28, 2004
The newly redesigned Series 2004 $50 notes, featur
ing subtle background colors of blue and red, images

of a waving American flag, and a small metallic
silver-blue star, will be issued beginning on Septem
ber 28, 2004, the U.S. government announced on
June 30, 2004. On the day of issue, the Federal
Reserve Banks will begin distributing the new notes
to the public through commercial banks.
The June 30, 2004, announcement of the
$50 note’s day of issue signals to banks and busi
nesses that they should make final preparations for
the new notes. For some businesses, preparations
include training cash-handling employees on how to
use the notes’ security features, for others it entails
making technical adjustments to ATMs or machines
with cash receptors, such as vending or automated
checkout machines.
“The enhanced security features in this series of
notes help ensure that U.S. currency will continue
to represent the trust, value, and confidence that
people all over the world have grown to rely on and
expect,” said Federal Reserve Board Governor
Mark W. Olson. “As always, all new notes will
co-circulate with the older designs. All notes are
good for good.”
“The objective of the new currency program is
a safer, smarter, and more secure currency and its
smooth transition into daily commerce,” said Tom
Ferguson, Director of the Treasury’s Bureau of
Engraving and Printing (BEP). “To that end, we have
been working with the appropriate machine manufac
turers for nearly two years to ensure they have the
information they need to make their equipment com
patible with each newly redesigned note that is intro
duced into circulation.”

Public Education
A variety of training materials—such as posters,
training videos, and brochures—is available in
twenty-four languages. The materials can be down
loaded or ordered through www.moneyfactory.com/
newmoney.
Since the Treasury’s Bureau of Engraving and
Printing (BEP) began taking orders in May 2003,
more than 46 million pieces of training materials
have been ordered by businesses and other orga
nizations to help them train their cash-handling
employees about the notes’ enhanced security
features.
Additional text that appeared in this press release
was also stated in the announcement released
on April 26, 2004, “United States Unveils New
$50 Note," which appears on page 340 o f this
issue.

Announcements

PUBLICATION OF REVISED CAPITAL
F r a m e w o r k a n d U.S. im p l e m e n t a t io n
plans

The Basel Committee on Banking Supervision on
June 26, 2004, released its document “International
Convergence of Capital Measurement and Capital
Standards: A Revised Framework.” The Framework
(also referred to as Basel II) represents the outcome
of the work of the Basel Committee, with active
participation by the United States banking and thrift
institution agencies (Agencies), over recent years to
secure international convergence on revisions to
regulations and standards governing the capital ade
quacy of internationally active banking organiza
tions. The Framework will form the basis upon which
the Agencies, and representatives of the other Basel
Committee member countries, develop proposed
revisions to existing capital adequacy regulations and
standards.
The Framework is available on the Basel Com
mittee’s web site at www.bis.org, the Office of the
Comptroller of the Currency’s (OCC) web site at
www.occ.treas.gov, the Federal Reserve Board’s (Fed
eral Reserve) web site at www.federalreserve.gov,
the Federal Deposit Insurance Corporation’s (FDIC)
web site at www.fdic.gov, and the Office of Thrift
Supervision’s (OTS) web site at www.ots.treas.gov.

343

Before implementation, it is expected that insti
tutions using Framework-based regulations and
guidance will first be subject to a year of parallel
running; for example, application of the advanced
approaches in tandem with the current risk-based
capital regime, beginning in January 2007. The Agen
cies anticipate that the Framework would become
fully effective in the United States in January 2008.
The Agencies plan to apply prudential floors to riskbased regulatory capital calculations in the two years
immediately after adoption of the Framework. Quali
fied institutions that opt in to the Framework subse
quent to the initial implementation period would be
subject to a similar phase-in schedule (for example,
parallel running and floors).
Given the investments needed to qualify for the
advanced approaches of the Framework, the Agen
cies believe that it would be prudent for banking
organizations that expect to adopt the Framework
on or near the effective date to begin planning
their implementation efforts. To facilitate such
efforts, the Agencies have described below the
significant milestones in the development of
Framework-based regulations, guidance, and poli
cies. Additional information on these activities will
be forthcoming.

Supervisory Guidance
U.S. Implem entation Plans
As noted, the Framework would form the basis upon
which the Agencies develop proposed revisions to
their existing risk-based capital adequacy regulations.
As previously announced, the Agencies expect that
only a small number of large, internationally active
U.S. banking organizations would be required to use
the Framework, and that those institutions would use
only the most advanced approaches for determining
their risk-based capital requirements. Application of
the Framework’s advanced approaches to other quali
fying U.S. banking organizations would be at the
banking organization’s option.
The Agencies have developed a comprehensive
plan to incorporate the advanced risk and capital
measurement methodologies of the Framework into
regulations and supervisory guidance for U.S. institu
tions. This plan would ensure that U.S. implementa
tion efforts are consistent with the Framework; reflect
the unique statutory, regulatory, and supervisory pro
cesses in the United States; and appropriately seek
and consider comments on individual aspects of the
plan from all interested parties.

The Agencies are developing supervisory guidance
for various portfolios and risk exposures addressed
by the Framework. This guidance is intended to
provide U.S. institutions and supervisors with a clear
description of the essential components and char
acteristics of the measurement and management
structure for these risks and to describe relevant
supervisory expectations for banking organizations
adopting a Framework-based process for the deter
mination of minimum regulatory risk-based capital
requirements.
The Agencies have previously published, for
notice and comment, draft supervisory guidance
on Internal Ratings-Based Systems (IRB) for Cor
porate Credit and on the Advanced Measurement
Approaches (AMA) for Operational Risk. See
68 Federal Register 45949 (August 4, 2003). The
Agencies expect to publish, for notice and comment,
draft supervisory guidance on IRB Systems for Retail
Credit in the third quarter of 2004. Over the course of
the next year, the Agencies will publish for comment
additional guidance on other aspects of IRB Systems.
Institutions that expect to adopt the Framework are
encouraged to consider the supervisory standards

344

Federal Reserve Bulletin □ Summer 2004

articulated in the guidance in developing their imple
mentation plans for the adoption of Frameworkbased systems. Specifically, institutions should
begin to self-assess the extent to which their sys
tems and processes comply with or differ from pro
posed supervisory standards. The Agencies expect
to publish additional information regarding the
process that will be used to assess individual insti
tutions’ efforts to meet IRB and AM A qualifying
standards.

Additional Quantitative Impact Study
Later, the Agencies will conduct a fourth Quantita
tive Impact Study (QIS-4) to evaluate the potential
effects of a U.S. implementation of the Framework.
QIS-4 will assist banking organizations and their
supervisors in better understanding the implications
of this proposal on the regulatory capital require
ments of individual institutions and may provide
some insight with regard to the competitive implica
tions of the new rules. A full or partial recalibration
of the Framework may be considered based on the
results of the QIS-4 exercise.
Although other countries may undertake joint or
independent reviews similar to QIS-4, the forthcom
ing study, as implemented in the United States, will
be tailored to the domestic interests of the Agencies
and will focus on the effect of the proposal on U.S.
banking organizations, especially those large inter
nationally active institutions that the Agencies have
proposed to require to conform to Framework-based
regulations. Other institutions that anticipate adher
ing to Framework-based regulations on a voluntary
basis may also participate in the study in order to
understand better the nature of the internal risk
measurement information that the new rules would
require and to estimate their resulting capital
requirements.
As before, the Agencies will request that par
ticipants submit requested information by com
pleting a series of computerized spreadsheets—
the Agencies will ensure consistency in responses
through detailed instructions, questionnaires, and
supervisory oversight. The Agencies expect to final
ize and distribute survey materials to participating
institutions in October 2004 and to request that insti
tutions complete and return the survey results by
mid-January 2005. Institutions that want to partici
pate in the study were advised to discuss the project
with their federal supervisor(s) by the end of July
2004.

Revision o f Capital Adequacy Regulations
In August 2003, the Agencies published for notice
and comment an advance notice of proposed rulemaking (ANPR), discussing possible revisions to U.S.
risk-based capital adequacy regulations relating to an
earlier iteration of the Framework. See 68 Federal
Register 45900 (August 4, 2003). With the publica
tion of the Framework, the Agencies will continue
this rulemaking process.
As provided in the ANPR, the Agencies expect
that some U.S. banking organizations would use the
most advanced approaches set forth in the Frame
work to determine their risk-based capital require
ments, while others would continue to apply the
existing capital rules. As a result, the United States
would have a bifurcated regulatory capital frame
work. In conjunction with the assessment of U.S. riskbased capital adequacy regulations relating to the
Framework, the Agencies are assessing possible
changes to capital regulations for U.S. institutions
that are not subject to Framework-based regulations.
Importantly, all U.S. banking organizations would
continue to be subject to a leverage ratio requirement
under existing regulations, and Prompt Corrective
Action (PCA) legislation and implementing regula
tions would remain in effect.
The Agencies expect that a notice of proposed
rulemaking on possible revisions to risk-based capital
adequacy regulations relating to the Framework will
be published in mid-2005. After fully considering all
comments, the Agencies expect to be in a position
to publish final rules on this proposal in the second
quarter of 2006. Possible changes to capital regula
tions for U.S. institutions that are not subject to the
Framework-based regulations would be considered
and addressed in this same general timeframe.

PUBLICATION OF THE M AY 2004 UPDATE
t o t h e C o m m e r c ia l b a n k E x a m in a t io n

Man u al
The May 2004 update to the Commercial Bank
Examination Manual has been published (Supple
ment No. 21), and the publisher has sent copies to
each Reserve Bank for distribution to examiners and
other staff members. The new supplement includes
supervisory and examination guidance on the follow
ing subjects:
1.
Rules on the Authority to take Disciplinary Actions
against Independent Accountants and Accounting Firms
that Perform Audit and Attestation Services. The federal

Announcements

banking agencies (the agencies) jointly issued rules, as
implemented by 12 CFR 363, that govern the agencies’
authority to take disciplinary actions against independent
accountants and accounting firms that perform audit and
attestation services that are required by section 36 of the
Federal Deposit Insurance Act. See the Board’s August 8 ,
2003, press release.
Attestation services address management’s assertions
concerning internal controls over financial reporting by an
independent public accountant. A federally insured deposi
tory institution must include the accountant’s audit and
attestation reports in its annual report. The rules, effective
October 1, 2003, established procedures under which the
agencies can, for good cause, remove, suspend, or bar an
accountant or firm from performing audit and attestation
services for federally insured depository institutions with
assets of $500 million or more.
2. Mortgage Banking. The loan portfolio management
section was revised to provide references to accounting
pronouncements (that are consistent with the bank Call
R eport’s instructions) that apply to mortgage banking
transactions and activities. Also, comprehensive mortgage
banking examination procedures are provided in the manu
al’s appendix, inclusive of the examination procedures and
valuation concerns found in the February 25, 2003, Inter
agency Advisory on Mortgage Banking, “ Risk M anage
ment and Valuation of Mortgage Servicing Assets Arising
from Mortgage Banking Activities” ; the mortgage banking
examination modules; and many of the inspection (exami
nation) procedures found in the mortgage banking sec
tion 3070.0 of the Bank Holding Company Supervision
Manual. See SR letter 03-4.
3. Interagency Statement on Independent Appraisal and
Evaluation Functions. The section on real estate appraisals
and evaluations and the respective examination procedures
and internal control questionnaire were revised to incor
porate this October 27, 2003, interagency statement. The
statement emphasizes that a banking institution’s board of
directors is responsible for reviewing and adopting policies
and procedures that establish and maintain an effective,
independent real estate appraisal and evaluation program
(the program) for all of its lending functions. Concerns
about the independence of appraisals and evaluations arise
from the risk that improperly prepared appraisals may
undermine the integrity of credit-underwriting processes.
An institution’s lending functions should not have undue
influence that might compromise the program ’s indepen
dence. See SR letter 03-18.
4. Interagency Policy on Banks and Thrift Institutions
Providing Financial Support to Funds Advised by the
Banking Organization or its Affiliates. New sections dis
cuss this January 5, 2004, policy that alerts banking organi
zations, including their boards of directors and senior man
agement, of the safety-and-soundness implications of and
the legal impediments to a bank providing financial sup
port to investment funds advised by the bank, its subsidi
aries, or affiliates (that is, an affiliated investment fund).
The interagency policy emphasizes the following three
core principles. A bank should not (1) inappropriately
place its resources and reputation at risk for the benefit of
affiliated investment funds’ investors and creditors; ( 2 ) vio

345

late the limits and requirements contained in Federal
Reserve Act sections 23A and 23B and Regulation W,
other applicable legal requirements, or any special super
visory condition imposed by the agencies; or (3) create an
expectation that the bank will prop up the advised fund (or
funds). See SR letter 04-1.
5.
Foreign Banking Offices and Organizations. The sec
tion on bank-related organizations was revised to include
brief definitions and descriptions on limited Regulation K
authorized activities and services that are applicable to
foreign bank offices and organizations (that is, foreign
bank branches, agencies, commercial lending companies,
representative offices, and correspondent banks). Also, for
the purposes of sections 23A and 23B, the definition of
affiliate was further clarified and expanded based upon the
provisions of the Board’s Regulation W.
A more detailed summary of changes is included
with the update package. Copies of the new supple
ment were shipped directly by the publisher to the
Reserve Banks for the distribution to examiners and
other System staff. The public may obtain the Manual
and the updates (including pricing information) from
Publications Fulfillment, Mail Stop 127, Board of
Governors of the Federal Reserve System, Wash
ington, DC 20551 (or charge by facsimile at 202728-5886). The Manual is also available on the
Board’s public web site at www.federalreserve.gov/
boarddocs/supmanual/.

PUBLICATION OF THE JUNE 2004 U PD A TE
t o t h e Ba n k H o l d in g C o m p a n y
S u p e r v is io n M a n u a l

The June 2004 update to the Bank Holding Company
Supervision Manual, Supplement No. 26, has been
published and is now available. The Manual com
prises the Federal Reserve System’s regulatory,
supervisory, and inspection guidance for bank hold
ing companies (BHCs). The new supplement includes
supervisory and BHC inspection guidance on the
following subjects:
1.
Filing a Required Change in Control Notice. The
Control and Ownership (Change in Control) section is
revised to emphasize that any person (acting directly or
indirectly) seeking to acquire control of a state member
bank (SMB) or BHC should understand the requirements
for filing a notice under the Change in Bank Control Act.
The complexity of an ownership position sometimes does
not lend itself to easy interpretation of the requirements
to file a notice. W hen it is unclear whether a notice is
required, the potential filer (or filers) or the affected SMB
or BHC is encouraged to contact staff at a Federal Reserve
Bank or the Board for guidance.
Prior notice is required by any person (defined in the
section) that seeks to acquire control of an SMB or BHC.

346

Federal Reserve Bulletin □ Summer 2004

Control of a banking organization occurs whenever a per
son acquires ownership, control, or the power to vote
25 percent or more of any class of voting securities of
the institution. Section 225.41 of Regulation Y (12 CFR
225.41), details the specific types of transactions that
require prior notice under the Change in Bank Control Act.
Certain other “rebuttable” presumptions of control are
outlined in section 225.41, which may also require the
filing of a notice, including (under certain circumstances) a
proposed acquisition that would result in the person own
ing or controlling the power to vote 1 0 percent or more of
any class of voting securities. See SR letter 03-19.
2. Joint Rules on the Authority to take Disciplinary
Actions against Independent Accountants and Accounting
Firms that Perform Audit and Attestation Services. The
federal banking agencies (the agencies) jointly issued rules,
as implemented by 12 CFR 363, that govern the agencies’
authority to take disciplinary actions against independent
accountants and accounting firms that perform audit and
attestation services that are required by section 36 of the
Federal Deposit Insurance Act. See the Board’s August 8 ,
2003, press release.
Attestation services address management’s assertions
concerning internal controls over financial reporting by
an independent public accountant. A federally insured
depository institution must include the accountant’s audit
and attestation reports in its annual report. The rules estab
lished, effective October 1, 2003, the practices and proce
dures under which the agencies can, for good cause,
remove, suspend, or bar an accountant or firm from per
forming audit and attestation services for federally insured
depository institutions that have total assets of $500 mil
lion or more.
3. Enhanced Framework fo r the Supervision o f Con
sumer Compliance Risk. The section on the risk-focused
supervisory framework for large complex banking organi
zations (LCBOs) has been revised to incorporate this new
guidance that was developed by the Board’s Division of
Banking Supervision and Regulation and its Division of
Consumer and Community Affairs. The guidance applies
to LCBOs and large banking organizations (LBOs) that are
subject to the Federal Reserve System’s continuous super
vision program. Under this guidance, consumer compli
ance examiners, working in conjunction with the safety
and soundness examiners, are to incorporate the banking
organization’s consumer compliance risk assessment into
its overall risk assessment and planned supervisory activi
ties for LCBOs and LBOs. See SR letter 03-22.
4. Interagency Policy on Banks and Thrift Institutions
Providing Financial Support to Funds Advised by the
Banking Organization or its Affiliates. The January 5,
2004, interagency policy alerts banking organizations,
including their boards of directors and senior manage
ment, of the safety-and-soundness implications of, and
the legal impediments to, a bank providing financial sup
port to investment funds advised by the bank, its sub
sidiaries, or its affiliates (that is, an affiliated investment
fund).
The interagency policy emphasizes three core principles:
a bank should not ( 1 ) inappropriately place its resources

and reputation at risk for the benefit of an affiliated invest
ment fund’s investors and creditors; ( 2 ) violate the limits
and requirements contained in the Federal Reserve A ct’s
sections 23A and 23B, Regulation W, other applicable
legal requirements, or in any special supervisory condition
imposed by the agencies; or (3) create an expectation that
the bank will support the advised fund (or funds).
In addition, bank-affiliated investment advisers are
encouraged to establish alternative sources of financial
support to avoid seeking support from affiliated banks. A
bank’s investment advisory services can pose material
risks to the bank’s liquidity, earnings, capital, and reputa
tion and can harm investors, if the risks are not effectively
controlled. Bank management is expected to notify and
consult with its appropriate federal banking agency before
(or immediately after, in the event of an emergency) pro
viding material financial support to an affiliated investment
fund. The inspection objectives and inspection procedures
have been developed to focus on a BH C’s oversight
responsibilities for its bank and nonbank subsidiaries that
advise investment funds. See SR letter 04-1.
5. Interagency Statement on Independent Appraisal and
Evaluation Functions. The section on real estate appraisals
and evaluations has been updated to incorporate this
October 27, 2003, interagency statement. The statement
emphasizes that a banking institution’s board of directors
is responsible for reviewing and adopting policies and
procedures that establish and maintain an effective, inde
pendent real estate appraisal and evaluation program for
all of its lending functions. Concerns about the inde
pendence of appraisals and evaluations arise from the
risk that improperly prepared appraisals may undermine
the integrity of credit-underwriting processes. See
SR letter 03-18.
6 . Nonbanking Activities. The sections on engaging in
EDP Servicing Company Activities and activities involving
Electronic Benefit Transfer, Stored-Value Card, and Elec
tronic Data Interchange Service have been revised. The
changes incorporate the current revenue limit of 49 per
cent (previously 30 percent) that the Board approved on
November 26, 2003 (effective January 8 , 2004). These
services may be provided to others (outside third parties)
if the total annual revenues derived from those activities
involving data processing, data storage, and data trans
mission services (that are not financial, banking, or eco
nomic related) do not exceed the revised limit. BHCs
may request permission to administer the 49 percent
revenue test on a business-line or multiple-entity basis.
See section 225.28(b)(14) of Regulation Y (12 CFR
225.28(b)(14).

A more detailed summary of changes is included
with the update package. The Manual and updates,
including pricing information, are available from
Publications Fulfillment, Mail Stop 127, Board of
Governors of the Federal Reserve System, Wash
ington, DC 20551 (or charge by facsimile: 202728-5886). The Manual is also available on the
Board’s public web site at www.federalreserve.gov/
boarddocs/supmanual/.

Announcements

SUPPORT OF P LA N TO DEVELOP N EW
C e n t r a l Ba n k i n g P u b l ic a t io n

The Federal Reserve Board on July 26, 2004,
announced plans to support the development of a new
publication focused on central bank theory and prac
tice and issued a call for research papers. The Inter
national Journal of Central Banking (IJCB) will be a
joint project of the Bank for International Settlements
(BIS), the European Central Bank, and each of the
Group of Ten (G-10) central banks, with participation
expected from other central banks. The G-10 central
banks are the Bank of Canada, the Bank of England,
the Bank of France, the Bank of Italy, the Bank of
Japan, the Deutsche Bundesbank, the Federal Reserve
Board, the National Bank of Belgium, the Nether
lands Bank, the Sveriges Riksbank, and the Swiss
National Bank.
The IJCB will publish refereed articles of high
analytical quality for a professional audience. The
journal will feature policy-relevant articles on any
aspect of the theory and practice of central banking,
with special emphasis on research bearing on mone
tary and financial stability. The objectives of the
IJCB are to widely disseminate the best policy
relevant and applied research on central banking and
to promote communication among researchers both
inside and outside of central banks. Federal Reserve
Board Governor Ben S. Bernanke will serve as the
initial managing editor, and will work with designees
from the sponsoring institutions to develop the jour
nal. Governor Donald L. Kohn has agreed to serve as
the Board’s representative to the journal’s governing
committee.
European Central Bank economist Dr. Frank Smets
and Bank of Japan policy board member Dr. Kazuo
Ueda will serve as IJCB co-editors. The journal board
will appoint additional co-editors as well as a small
group of associate editors to help coordinate solicita
tion and review of articles.
The BIS will host the journal’s web site, which
will be accessible to readers free of charge. Print
copies will be available by subscription. The IJCB
sponsors held their initial meeting in July and have a
goal of publishing the first quarterly issue in early
2005.

R e l e a s e o f M in u t e s
M e e t in g s

D is c o u n t Ra t e

The Federal Reserve Board on May 13, 2004,
released the minutes of its discount rate meetings
from February 9, 2004, through March 15, 2004.

347

On July 8, 2004, the Federal Reserve Board
released the minutes of its discount rate meetings
from March 29, 2004, through May 3, 2004.
A n n o u n c e m e n t o f M e e t in g o f
C o n s u m e r A d v is o r y C o u n c il

the

The Board of Governors of the Federal Reserve Sys
tem on June 1, 2004, announced that the Consumer
Advisory Council would hold its next meeting on
Thursday, June 24, 2004. The meeting took place in
Dining Room E, Terrace level, in the Board’s Martin
Building. The session began at 9 a.m. EDT and was
open to the public.
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. Time permitting,
the Council planned to discuss the following topics:
• courtesy overdraft protection
• foreign bank remittances and access to financial
services by new immigrants
• economic growth and the regulatory paperwork
reduction act of 1996
• proposed rules to the Community Reinvestment
Act
Reports by committees and other matters initiated
by the Council members were also discussed. The
Board invited comments from the public.
B o a r d Se e k s N o m in a t io n s f o r
A p p o in t m e n t s t o C o n s u m e r A d v is o r y
C o u n c il

The Federal Reserve Board announced on June 17,
2004, that it is seeking nominations for appointments
to its Consumer Advisory Council. Eleven new mem
bers will be appointed to serve three-year terms
beginning in January 2005.
The Council advises the Board on the exercise of
its responsibilities under various consumer financial
services laws and on other matters on which the
Board seeks advice. The group meets in Washing
ton, D.C., three times a year.
Nominations should include a resume and the fol
lowing information about nominees:
• complete name, title, address, telephone, e-mail
address, and fax numbers;
• organization’s name, brief description of organi
zation, address, telephone, and fax numbers;

348

Federal Reserve Bulletin □ Summer 2004

• past and present positions;
• knowledge, interests, or experience related to
community reinvestment, consumer protection regu
lations, consumer credit, or other consumer financial
services; and
• positions held in community and banking asso
ciations, councils, and boards.

Foreign Assets Control in the preparation of this
order. The order is being issued in coordination with
a separate action being taken by the Swiss Federal
Banking Commission.

Nominations should also include the complete
name, organization name, title, address, telephone,
e-mail address, and fax numbers for the nominator.
Letters of nomination with complete information,
including a resume for each nominee, were to be
received by August 27, 2004, and nominations
received after that date may not be considered.

The Federal Reserve Board on June 17, 2004,
announced the issuance of a final decision and order
of prohibition against Stephanie Edmond, a former
employee of First Tennessee Bank, N.A., Memphis,
Tennessee, as well as Bank of America, N.A., Char
lotte, North Carolina. The order, the result of an
action brought by the Office of the Comptroller of the
Currency, prohibits Ms. Edmond from participating
in the conduct of the affairs of any financial institu
tion or holding company.

B oard Clo se d

Cease and D esist Orders

for

Day

o u r n in g

The Board of Governors of the Federal Reserve Sys
tem in Washington, D.C., announced on June 7,
2004, that it would be closed on Friday, June 11,
2004, in observance of the national day of mourning
for former President Ronald Reagan.
The twelve regional Reserve Banks remained open
and operating during normal business hours and pro
vided all financial services as usual.

The Federal Reserve Board on May 10, 2004,
announced the issuance of a cease and desist order
against CAB Holding, LLC, Wilmington, Delaware,
and Paul Shi H. Huang, the sole shareholder of CAB
Holding, LLC.
The order addresses the violation of certain con
ditions imposed in writing on CAB Holding and
Mr. Huang in connection with the acquisition of The
Chinese American Bank, New York, New York.

En f o r c em e n t A

The Federal Reserve Board on May 14, 2004,
announced the issuance of a consent order to cease
and desist against Riggs National Corporation, Wash
ington, D.C., a bank holding company, and Riggs
International Banking Corporation, Miami, Florida,
an Edge corporation.
Riggs National Corporation and Riggs Interna
tional Banking Corporation, without admitting to
any allegations, consented to the issuance of the
order in connection with deficiencies relating to the
lack of oversight, internal controls, and procedures to
ensure compliance with the Bank Secrecy Act.
In separate, coordinated actions, the Office of
the Comptroller of the Currency and the Financial
Crimes Enforcement Network announced the issu
ance of a consent order and the assessment of a civil
money penalty against Riggs Bank, N.A., a subsidi
ary of Riggs National Corporation and the parent of
Riggs International Banking Corporation. The order
and penalty relate to violations of the Bank Secrecy
Act.

c t io n s

The Federal Reserve Board on May 10, 2004,
announced the issuance of an order of assessment of
a civil money penalty in the amount of $100 million
against UBS, AG, Zurich, Switzerland, a foreign
bank.
UBS, without admitting to any allegations, con
sented to the issuance of the order in connection with
U.S. dollar banknote transactions with counterparties
in jurisdictions subject to sanctions under U.S. law,
specifically Cuba, Libya, Iran, and Yugoslavia.
The transactions were conducted through UBS’s
Extended Custodial Inventory (ECI) facility in Zur
ich, Switzerland, which was operated pursuant to a
contract with the Federal Reserve Bank of New York.
The Reserve Bank determined that certain former
officers and employees of UBS engaged in inten
tional acts aimed at concealing the transactions and
terminated the contract in October 2003.
ECIs are overseas cash depots, operated by banks
on behalf of the Federal Reserve, to facilitate distri
bution and repatriation of U.S. currency.
The Board acknowledged the cooperation of the
U.S. Department of the Treasury and its Office of

The Federal Reserve Board on May 27, 2004,
announced the issuance of a consent order to cease
and desist and order of assessment of civil money

Announcements

penalty against Citigroup Inc., New York, New York,
a bank holding company, and CitiFinancial Credit
Company, Baltimore, Maryland, a nonbank subsidi
ary of Citigroup.
The order assesses a civil money penalty against
CitiFinancial and requires CitiFinancial to pay resti
tution to certain subprime personal and home mort
gage borrowers. The civil money penalty is $70 mil
lion, subject to a partial credit for restitution. The
order also requires Citigroup and CitiFinancial to
take steps to maintain and enhance compliance with
consumer protection laws.
Citigroup and CitiFinancial, without admitting any
allegations, consented to the issuance of the order in
connection with CitiFinancial’s lending activities and
its conduct during an examination by the Federal
Reserve Bank of New York.

Written Agreements
The Federal Reserve Board on April 30, 2004,
announced the execution of a written agreement by
and among Cache Valley Banking Company, Logan,
Utah; the Cache Valley Bank, Logan, Utah; the Utah
State Department of Financial Institutions, Salt Lake
City, Utah; and the Federal Reserve Bank of
San Francisco.
The Federal Reserve Board on May 14, 2004,
announced the execution of a written agreement by
and among Putnam-Greene Financial Corporation,
Eatonton, Georgia; The Citizens Bank of Cochran,
Cochran, Georgia; the Banking Commissioner of the
State of Georgia, Atlanta, Georgia; and the Federal
Reserve Bank of Atlanta.
The Federal Reserve Board on June 1, 2004,
announced the execution of a written agreement by
and between CIB Marine Bancshares, Inc., Pewaukee, Wisconsin, and the Federal Reserve Bank of
Chicago.
The Federal Reserve Board on June 3, 2004,
announced the execution of a written agreement by
and among Utah Bancshares, Ephraim, Utah; the
Bank of Ephraim, Ephraim, Utah; the Utah State
Department of Financial Institutions, Salt Lake
City, Utah; and the Federal Reserve Bank of
San Francisco.
The Federal Reserve Board on July 2, 2004,
announced the execution of a written agreement by

349

and between Kenco Bancshares, Inc., Jayton, Texas,
and the Federal Reserve Bank of Dallas.
The written agreement addresses, among other
things, a violation of a written condition imposed by
the Federal Reserve in connection with an application
involving Kenco Bancshares, Inc.
The Federal Reserve Board on July 12, 2004,
announced the execution of a written agreement by
and among the First Midwest Bank, Itasca, Illinois;
the Illinois Department of Financial and Profes
sional Regulation; and the Federal Reserve Bank of
Chicago.
The Federal Reserve Board, the New York State
Banking Department, and the Illinois Department of
Financial and Professional Regulation on July 26,
2004, announced the execution of a written agree
ment by and among ABN AMRO Bank, N.V.,
Amsterdam, The Netherlands; ABN AMRO’s branch
in New York, New York; the Federal Reserve Bank
of Chicago; the Federal Reserve Bank of New York;
the New York State Banking Department; and the
Illinois Department of Financial and Professional
Regulation.
The written agreement addresses Bank Secrecy
Act and anti-money laundering compliance at ABN
AMRO’s New York branch, including policies and
practices relating to the provision of correspondent
banking services.

Termination o f Enforcem ent Actions
The Federal Reserve Board on April 30, 2004,
announced the termination of the enforcement actions
listed below. The Federal Reserve’s enforcement
action web site, www.federalreserve.gov/boarddocs/
enforcement, reports the terminations as they occur.
• Korea Exchange Bank, Seoul, Korea, and its
affiliated branches and agency offices
Order of consent dated May 16, 2000
Terminated April 22, 2004
• First American Bank, Elk Grove Village, Illinois
Written agreement dated September 26, 2003
Terminated February 19, 2004
• First State Bank of West Manchester, West
Manchester, Ohio
Written agreement dated April 25, 2003
Terminated February 18, 2004
• Madison Bank, Blue Bell, Pennsylvania
Written agreement dated June 20, 2002
Terminated February 9, 2004

350

Federal Reserve Bulletin □ Summer 2004

• Midstate Bancorp, Inc., Hinton, Oklahoma
Written agreement dated March 1, 2003
Terminated December 2, 2003
• Bank of Ephraim, Ephraim, Utah
Written agreement dated October 26, 2001
Terminated November 11, 2003
• MSB Shares, Inc., and MidSouth Bank, Jones
boro, Arkansas
Written agreement dated February 5, 2002
Terminated October 23, 2003
• Texas Coastal Bank, Pasadena, Texas
Cease and desist order dated May 16, 1995
Terminated October 22, 2003
• O.A.K. Financial Corporation and Byron Center
State Bank, Byron Center, Michigan
Written agreement dated October 4, 2002
Terminated October 16, 2003
On June 1, 2004, the Federal Reserve Board
announced the termination of the enforcement action
listed below.
• The Marathon Bank, Winchester, Virginia
Written agreement dated May 20, 2003
Terminated April 30, 2004
Ch an g e s

in b o a r d s t a f f

General Counsel Virgil Mattingly retired on June 30,
2004, after thirty years of service with the Federal
Reserve Board, including twenty-five years as a
member of the Board’s official staff.
Stephen C. Schemering, Senior Adviser and former
Deputy Director in the Division of Banking Super
vision and Regulation, retired from the Board on
June 4, 2004, after nearly thirty years of service.
Steve Siciliano, Assistant General Counsel in the
Legal Division, retired from the Board on June 30,
2004, after thirty-one years of service.
The Board of Governors on June 29, 2004,
announced the selection of Scott G. Alvarez as its
general counsel, effective July 1, 2004.
Mr. Alvarez succeeds Virgil Mattingly, who
announced in April his intention to retire.
The Board of Governors approved on July 22,
2004, the following officer promotions and appoint
ments in the Division of Research and Statistics.
• David L. Reifschneider, Assistant Director, pro
moted to deputy associate director

• William L. Wascher III, Assistant Director, pro
moted to deputy associate director
• J. Nellie Liang, Assistant Director and Chief,
promoted to assistant director with line responsibility
for the Capital Markets and Flow of Funds Sections
• S. Wayne Passmore, Assistant Director and
Chief, promoted to assistant director with line respon
sibility for the Household and Real Estate Finance
Section
• Douglas Elmendorf appointed assistant director
and chief of the Macroeconomic Analysis Section
• Diana Hancock appointed assistant director and
chief of the Monetary and Financial Studies Section
• Daniel Sichel appointed assistant director with
line responsibility for the Fiscal Analysis Section
David L. Reifschneider joined the Board in 1982
as an economist in the National Income Section. He
was promoted to senior economist in 1989, and was
named chief of the Macroeconomics and Quantitative
Studies Section in 1996. He was promoted to the
official staff as assistant director in 2000. Mr. Reif
schneider received his Ph.D. from the University of
Wisconsin.
William L. Wascher III began his Board career
in 1983 as an economist in the Wages, Prices, and
Productivity Section. He was promoted to senior
economist in 1989. Mr. Wascher served as senior
economist at the Council of Economic Advisers in
1989 and 1990. He has also been a visiting economist
at the Bank for International Settlements. In 1998,
he was promoted to chief of the Wages, Prices, and
Productivity Section, and in 2000, he was made
chief of the Macroeconomic Analysis Section.
Mr. Wascher was appointed to the official staff as
assistant director in 2001. He received his Ph.D. in
economics from the University of Pennsylvania.
J. Nellie Liang joined the Division of Research and
Statistics in 1986 as an economist in the Financial
Structure Section. In 1994, she moved to the Capital
Markets Section and was named chief of the section
in 1997. She was appointed to the official staff in
2001 as assistant director and chief. Ms. Liang
received her Ph.D. in economics from the University
of Maryland.
S. Wayne Passmore began his career at the Federal
Reserve Bank of New York in 1984. He moved
briefly to the Board as a staff economist in 1987,
before taking a position as assistant vice president
at the Federal Home Loan Bank in San Francisco.
Mr. Passmore returned to the Board in 1990 as a
senior economist in the Capital Markets Section. He
was promoted to chief of the Financial Institutions
Section in 1997, a section that was the predecessor of

Announcements

the current Household and Real Estate Finance Sec
tion. He was promoted to the official staff in 2000 as
assistant director and chief. He received his doctoral
degree from the University of Michigan.
Douglas Elmendorf joined the Board in 1995 as
an economist in the Division of Monetary Affairs. In
1998, he took a leave of absence to serve on the staff
of the Council of Economic Advisers. In 1999, he
joined the Treasury Department as a deputy assistant
secretary. Mr. Elmendorf rejoined the Board in 2001
as a senior economist in the Macroeconomic Analy
sis Section in the Division of Research and Statistics.
Since 2002, he has served as chief of that section. He
received his Ph.D. in economics from Harvard Uni
versity in 1989.
Diana Hancock joined the Board in 1991 as an
economist in the Division of Monetary Affairs, and
then served in the Division of Reserve Bank Opera
tions and Payment Systems, where she was promoted

351

to senior economist in 1996. She joined the Monetary
and Financial Studies Section in the Division of
Research and Statistics in 1997, and was named chief
of the section in 1999. Ms. Hancock received her
Ph.D. in economics from the University of British
Columbia.
Daniel Sichel joined the Board in 1988 as an
economist in the Economic Activity Section in the
Division of Research and Statistics. He left the Board
in 1993 to become a research associate at the Brook
ings Institution. In 1995, Mr. Sichel joined the Trea
sury Department as deputy assistant secretary for
macroeconomic analysis. He re-joined the Board in
1996 as a senior economist in the Economic Activity
Section. Mr. Sichel worked in the Industrial Output
Section before joining the Capital Markets Section.
He received his Ph.D. in economics from Princeton
University.
□

352

Legal Developments

Ord ers I ssu ed Un d e r Ba n k
C o m p an y A c t

h o l d in g

O rders Issued U nder Section 3 o f the B ank Holding
Com pany A ct

JP Morgan Chase & Co.
New York, New York
Order Approving the M erger of Financial Holding
Companies
JP 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 under section 3 of the BHC Act (12 U.S.C.
§1842) to merge with Bank One C orporation 1 and to
acquire Bank One Corporation’s subsidiary banks, includ
ing its lead subsidiary bank, Bank One, National Associa
tion, also in Chicago ( “ Bank O ne ” ) . 2
JP Morgan, with total consolidated assets of approxi
mately $771 billion, is the third largest insured depository
organization in the United States ,3 controlling deposits of
$197.2 billion, which represents approximately 3.8 percent
of total deposits of insured depository institutions in the
United States .4 JP M organ operates insured depository
institutions in California, Connecticut, Delaware, Florida,
New Jersey, New York, and Texas 5 and engages nation
1. JP Morgan and Bank One Corporation also have requested
the Board’s approval to hold and exercise options to purchase up to
19.9 percent o f each other’s common stock. Both options would
expire on consummation of the proposal.
2. Bank One Corporation also owns Bank One, National Associa
tion ( “Bank One-Ohio” ) and Bank One Trust Company, both in
Columbus, Ohio; Bank One, Dearborn, National Association, Dear
born, Michigan ( “Bank One-Dearborn” ); and Bank One, Delaware,
National Association, Wilmington, Delaware.
3. Asset data for JP Morgan are as of December 31, 2003, and
nationwide ranking data are as of September 30, 2003, and are
adjusted to reflect mergers and acquisitions completed through May
2004.
4. Deposit data are as o f December 31, 2003, and reflect the
unadjusted total o f the deposits reported by each organization’s
insured depository institutions in their Consolidated Reports of Con
dition and Income for December 31, 2003. In this context, insured
depository institutions include commercial banks, savings banks, and
savings associations .
5. JP Morgan owns JPMorgan Chase Bank, New York, New York
( “JP Morgan Bank” ); Chase Manhattan Bank USA, National Asso
ciation, Newark, Delaware ( “Chase U S A “); and JP Morgan Trust
Company, N.A., Los Angeles, California ( “JP Morgan Trust” ).

wide in numerous nonbanking activities that are perm is
sible under the BHC Act.
Bank One Corporation, with total consolidated assets of
approximately $327 billion, is the sixth largest depository
organization in the United States, controlling deposits of
approximately $147.4 billion, which represents approxi
mately 2 . 8 percent of total deposits of insured depository
institutions in the United States. Bank One Corporation
operates depository institutions in Arizona, Colorado,
Delaware, Florida, Illinois, Indiana, Kentucky, Louisiana,
Michigan, Ohio, Oklahoma, Texas, Utah, West Virginia,
and Wisconsin. It also engages in a broad range of per
missible nonbanking activities in the United States and
abroad .6
On consummation of the proposal, JP Morgan would
become the second largest insured depository organization
in the United States, with total consolidated assets of
approximately $1.1 trillion and total deposits of $344.6 bil
lion, representing approximately 6.7 percent of total depos
its of insured depository institutions in the United States.

Factors Governing Board Review of 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 com
munities 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 institu
tions 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,
On January 30, 2004, the Board approved JP Morgan’s acquisition of
Chase FSB, Newark, Delaware, a de novo federal savings bank that
JP Morgan subsequently elected not to establish.
6.
JP Morgan proposes to acquire Bank One Corporation’s domes
tic and foreign nonbanking subsidiaries, all of which are engaged in
permissible activities listed in section 4(k)(4)(A)-(H ) of the BHC Act,
pursuant to section 4(k) and the post-transaction notice procedures of
section 225.87 of Regulation Y. JP Morgan also proposes to acquire
Bank One Corporation’s Edge and Agreement corporations, which are
organized under sections 25 and 25A of the Federal Reserve Act.
(12 U.S.C. §601 et seq.; 12 U.S.C. §611 et seq.).

353

as well as compliance with other provisions of the R iegleNeal Interstate Banking and Branching Efficiency Act of
1994 ( “Riegle-N eal A ct ” ) . 7
Public Comment on the Proposal
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(69 Federal Register 7,748 and 17,664 (2004)), and the
time for filing comments has expired. Because of the
extensive public interest in the proposal, the Board held
public meetings in New York and Chicago and provided an
extended comment period of 81 days to allow interested
persons an opportunity to present oral or written testimony
on the factors that the Board must review under the BHC
A ct .8 More than 150 people testified at the public meetings,
many of whom also submitted written comments. Approxi
mately 290 additional commenters submitted written
comments.
A large number of commenters supported the proposal
and commended JP Morgan and Bank One Corporation
for their commitment to local communities and for their
leadership in community development activities. These
commenters praised both institutions’ records of providing
affordable mortgage loans, investments, grants and loans in
support of economic and community revitalization projects,
charitable contributions in local communities, and other
community services. Many of the commenters also praised
JP M organ’s nationwide $800 billion, ten-year community
economic development plan ( “ Community Development
Initiative” ) that was announced at the public meeting in
New York.
Many commenters, however, expressed concern about
the proposal or opposed the acquisition. M ost of these
comments alleged general or specific deficiencies in the
record o f performance of JP Morgan or Bank One Corpora
tion in helping to meet the credit needs of their communi
ties under the CRA. Several commenters believed that the
merger would reduce competition for banking services,
substantially increase concentration in the banking indus
try, and result in the loss of local control over lending and
investment decisions. Many commenters were generally
troubled by the size of the acquisition and alleged deficien
cies in the Community Development Initiative. Some com
menters expressing concerns had enjoyed positive experi
ences with either JP Morgan or Bank One Corporation and
were concerned about the effect of the merger on their
relationships in the future.
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 JP M organ and Bank One Corporation,
7. Pub. L. No. 103-328, 108 Stat. 2338 (1994).
8. The New York public meeting was held on April 15, 2004, and
the Chicago public meeting was held on April 23.

various reports filed by the relevant companies, publicly
available information, and other reports. In addition, the
Board reviewed confidential supervisory information,
including examination reports of the bank holding com
panies and the depository institutions involved and infor
mation provided 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
The Board may not approve an interstate proposal under
section 3(d) of the BHC Act if the applicant controls, or
upon consummation 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. On consummation of this proposal, JP Morgan
would control approximately 6.7 percent of deposits
nationwide. Accordingly, Board approval of this proposal
is not barred by the nationwide deposit limitation in sec
tion 3(d).
Section 3(d) 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 JP Morgan is New York ,9
and Bank One Corporation’s subsidiary banks are located
in Arizona, Colorado, Delaware, Florida, Illinois, Indiana,
Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Texas,
Utah, West Virginia, and W isconsin . 10
Based on a review of all the facts of record, including
relevant state statutes, the Board finds that all the condi
tions for an interstate acquisition enum erated in sec
tion 3(d) are met in this case . 11 In light of all the facts of
9. 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.
10. For purposes of the Riegle-N eal Act, the Board considers a
bank to be located in the states in which the bank is chartered or
headquartered or operates a branch. See 12 U.S.C. §§ 1841(o)(4)-(7)
and 1842(d)(1)(A) and (d)(2)(B).
11. See 12 U.S.C. §§ 1842(d)( 1)(A )-(B ) and 1842(d)(2)(A)-(B).
JP Morgan is adequately capitalized and adequately managed, as
defined by applicable law. In addition, on consummation o f the
proposal, JP Morgan would control less than 30 percent of, or less
than the applicable state deposit cap for, the total deposits of insured
depository institutions in each of Arizona, Colorado, Delaware,
Florida, Illinois, Indiana, Kentucky, Louisiana, Michigan, Ohio, Okla
homa, Texas, Utah, West Virginia, and Wisconsin. Two commenters
contended that, on consummation of this proposal, JP Morgan’s
deposits in Texas would exceed the state’s deposit cap. The Texas
Banking Commissioner has informed the Board that consummation of
the proposal would comply with all the requirements o f Texas law. All
o f Bank One Corporation’s subsidiary banks have been in existence
for more than five years, and all other requirements under section 3(d)
o f the BHC Act also would be met on consummation of this proposal.

354

Federal Reserve Bulletin □ Summer 2004

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 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 . 12
JP Morgan and Bank One Corporation compete directly
in seven local banking markets in Delaware, Florida, and
Texas . 13 The Board has reviewed the competitive effects
of the proposal in each of these banking markets in light
of all the facts of record, including public comments on the
proposal . 14 In particular, the Board has considered the
number of competitors that would remain in the markets,
the relative shares of total deposits in depository institu
tions in the markets ( “ market deposits” ) controlled by
JP Morgan and Bank One Corporation , 15 the concentration
level of market deposits and the increase in this level as
measured by the HHI under the DOJ Merger Guidelines,
and other characteristics of the markets . 16
12. S ee 12 U.S.C. § 1842(c)(1).
13. These banking markets are described in appendix A.
14. Some commenters alleged that approval of this proposal would
adversely affect competition among credit card issuers. The Board
continues to believe that the appropriate product market for analyzing
the competitive effects o f bank mergers and acquisitions is the cluster
of products and services offered by banking institutions. This approach
is based on Supreme Court precedent, which emphasizes that it is the
cluster of products and services that, as a matter of trade reality, makes
banking a distinct line o f commerce. S e e U n ite d S ta te s v. P h ila d e lp h ia
N a tio n a l B a n k , 374 U.S. 321, 357 (1963); accord, U n ite d S ta te s v.
C o n n e c tic u t N a tio n a l B a n k , 418 U.S. 656 (1974); U n ite d S ta te s v.
P h illip s b u r g N a tio n a l B a n k , 399 U.S. 350 (1969). Even if the approach
advocated by the commenters were adopted, the Board notes that the
increase in the Herfindahl-Hirschman Index ( “HHI” ) and the result
ing HHI would be within Department of Justice Merger Guidelines
( “DOJ Merger Guidelines” ), 49 F e d e r a l R e g is te r 26,823 (1984).
Accordingly, the Board concludes that the proposal would not result
in significantly adverse competitive effects on credit card issuance,
because that activity is conducted on a national or global scale, with
numerous other large financial organizations providing the service.
15. Market share data are as of June 30, 2003, and are based on
calculations in which the deposits o f thrift institutions are included at
50 percent. The Board previously has indicated that thrift institutions
have become, or have the potential to become, significant competitors
o f commercial banks. S ee, e .g ., M id w e s t F in a n c ia l G ro u p , 75 F e d e r a l
R e s e r v e B u lle tin 386 (1989); N a tio n a l C ity C o r p o r a tio n , 70 F e d e r a l
R e s e r v e B u lle tin 743 (1984). Thus, the Board regularly has included
thrift deposits in the market share calculation on a 50 percent weighted
basis. S ee, e .g ., F ir s t H a w a iia n , In c ., 77 F e d e r a l R e s e r v e B u lle tin 52
(1991). Some thrifts meet the Board’s criteria for increased weight in
the calculation o f market competition, and their deposits are weighted
at 100 percent.
16. Under the DOJ Merger Guidelines, a market is considered
unconcentrated if the post-merger HHI is less than 1000, moderately
concentrated if the post-merger HHI is between 1000 and 1800, and

Consummation of the proposal would be consistent with
DOJ Merger Guidelines and Board precedent in six of
these banking markets. After consummation, one market
would remain unconcentrated and four markets would be
moderately concentrated . 17 The remaining market would
be highly concentrated, but with only a modest increase in
concentration . 18 In addition, numerous competitors would
remain in each of these banking markets after consumma
tion of the proposal. 19
Houston Banking Market
The structural effects of the proposal in the Houston,
Texas, banking market ( “ Houston banking m arket” ), as
measured by the HHI on the basis of deposits, would
substantially exceed the DOJ Guidelines. According to
the Summary of Deposits ( “ SOD” ) for June 30, 2003,
JP Morgan operates the largest depository institution in the
Houston banking market, controlling deposits of $32.7 bil
lion, which represents approximately 41.6 percent of mar
ket deposits. Bank One Corporation operates the fourth
largest depository institution in the market, controlling
deposits of $4.3 billion, which represents approximately
5.5 percent of market deposits. After the proposed merger,
JP Morgan would continue to operate the largest deposi
tory institution in the market, controlling deposits of
approximately $37 billion, which represents approximately
47.1 percent of market deposits. Based on market deposits,
the HHI would increase by 459 points to 2421. As indi
cated in the DOJ Merger Guidelines and Board precedent,
the Board conducts an in-depth review of the competitive
effects of a merger in any highly concentrated market that
experiences a significant change in the HHI for deposits.
As the HHI increases or the change in the HHI resulting
from a proposal becomes larger, increasingly stronger miti
gating factors are required to support a determination that
the competitive effects of the proposal are not significantly
adverse.
JP Morgan has argued that, for purposes of evaluating
the competitive effects of the proposal in the Houston
banking market, the Board should exclude deposits from
various JP Morgan business lines that are national or
international in nature ( “ national business line deposits” )
and booked at JP M organ’s largest Houston branch ( “ Main
highly concentrated if the post-merger HHI is more than 1800. The
DOJ has informed the Board that a bank merger or acquisition
generally will not be challenged (in the absence of other factors
indicating anticompetitive effects) unless the post-merger HHI is at
least 1800 and the merger increases the HHI by more than 200 points.
The DOJ has stated that the higher than normal HHI thresholds for
screening bank mergers for anticompetitive effects implicitly recog
nize the competitive effects o f limited-purpose lenders and other
nondepository financial institutions.
17. The Fort Worth, Texas, banking market would remain uncon
centrated and the Austin, Dallas, and San Antonio banking markets,
all in Texas, and the West Palm Beach, Florida, banking market would
be moderately concentrated.
18. The HHI would increase by only 91 points in the highly
concentrated Wilmington, Delaware, banking market.
19. Market data for these banking markets are provided in appen
dix B.

Legal Developments

Houston Branch ” ) . 20 Approximately $21.9 billion of the
deposits in the Main Houston Branch are deposits of
JP M organ’s Treasury and Securities Services ( “TSS” ),
investment banking, and mortgage escrow businesses.
These deposits previously were maintained at JP Morgan
Bank’s main office in New York and were assigned to the
Main Houston Branch over a three-year period that began
in 2001 for business reasons unrelated to JP M organ’s
efforts to compete in the Houston banking market. Less
than 5 percent of these deposits are held in the accounts of
customers whose addresses are in the Houston banking
market. Furthermore, JP M organ contends that almost half
of the national business line deposits are not, as a practi
cal matter, available to fund lending by JP Morgan in the
Houston banking market. JP Morgan asserts that inclusion
of these deposits in calculations of market share indices for
JP Morgan in the Houston banking market would distort
the measures of its competitive position.
TSS has three business units: Institutional Trust Ser
vices, Investor Services, and Treasury Services. The TSS
business units provide financial services, primarily to larger
corporate customers located throughout the United States,
Europe, and Asia. As of June 30, 2003, the TSS Treasury
Services business unit accounted for $11.2 billion of the
deposits booked to the Main Houston Branch. The TSS
Investor Services and Institutional Trust Services business
units accounted for $7.2 billion and $605 million, respec
tively, of the deposits maintained at the Main Houston
branch. JP M organ’s investment banking business controls
$718.5 million in deposits at the Main Houston Branch,
and mortgage escrow deposits total $ 2 . 2 billion at the
branch.
In conducting its competitive analysis in previous cases,
the Board has adjusted the market deposits held by an
applicant to exclude specified types of deposits only in rare
situations in which evidence supported a finding that the
excluded deposits were not, as a legal matter, available for
use in that market, and data were available to make compa
rable adjustments to the market shares for all other market
participants .21 In light of the arguments and data provided
by JP Morgan, the Board has conducted a more detailed
analysis of its measures for predicting the likely competi
tive effects of the transaction in this case. As an initial step,
the Board examined several alternative measures of con
centration in the Houston banking market, together with
other relevant data. These alternative concentration mea
sures for the market include HHIs based on the number of
20. JP Morgan also argues that the Board’s market share calcu
lations should include at 100 percent the deposits of Washington
Mutual, Inc., Stockton, California, a large thrift that operates in the
Houston banking market, and should include at 50 percent the depos
its o f several credit unions that also compete in this market. Based on
a review o f the commercial lending and other activities of Washington
Mutual, Inc. in Texas, the Board has determined that the thrift’s
deposit weighting should remain at 50 percent. The Board also
reviewed the credit unions identified by JP Morgan and determined
that they do not meet the criteria for increased weighting under Board
precedent.
21. See First Security Corp., 86 Federal Reserve Bulletin 122
(2000).

355

branches, the dollar amount of small business loan origina
tions, and the dollar amount of mortgage loan origina
tions .22 For each of these measures, the increase in the HHI
is less than 100 points and the resulting HHI is well below
1000. All changes in the alternative measures are mod
est and are indicative of a significantly smaller effect on
competition than suggested by indices based on deposits.
Accordingly, these alternative HHI calculations support the
proposition that the SOD data overstate the competitive
effects of the proposal in the Houston banking market.
Moreover, although JP Morgan holds $32.7 billion in
deposits in the Houston banking market based on SOD
data, its offices there hold only $5.2 billion in loans, by
far the lowest loan-to-deposit ratio for JP M organ in any
banking market in Texas. This unusually low loan-todeposit ratio is also consistent with the proposition that
SOD deposit data significantly overstate JP M organ’s pres
ence in the Houston banking market.
In addition, data for the Houston banking market indi
cate that the decision by JP Morgan to maintain national
business line deposits there did not affect deposit interest
rates in the banking market. An analysis of the pricing of
retail banking products in the Houston banking market
and other banking markets in Texas (Austin, Dallas, and
San Antonio) revealed that, from January 1, 2000, through
December 31, 2003, the average interest rate on deposits
in the Houston Metropolitan Statistical Area ( “ MSA” ) did
not deviate significantly from the average rates offered
in three other Texas MSAs. In addition, the movement of
these deposits to the Houston banking market has not
caused a significant change in JP M organ’s pricing behav
ior. From January 1, 2000, through December 31, 2003,
JP M organ’s interest rates on deposits did not significantly
deviate from those rates offered by its competitors in the
Houston MSA.
As noted above, JP Morgan states that approximately
half of its national business line deposits are subject to
practical restrictions that constrain the organization’s abil
ity to use the deposits to support general banking activities.
Some of these deposits are maintained in volatile invest
ment accounts. Other national business line deposits are
used to fund collateral requirements related to the deposits
or are regularly extended by JP M organ Bank to depositors
as overdraft loans or other forms of credit. JP M organ also
states that the deposit balances held by TSS’s Treasury
Services unit are sufficient to fund only part of the credit
demands of the unit’s customers.
There also is no evidence in the record that the national
business line deposits were moved to Houston or from
another branch in an attempt to manipulate the SOD data
used for competitive analyses by the appropriate federal
supervisory agency. Rather, JP M organ has provided evi
dence to demonstrate that the national business line depos
its were placed in the Main Houston Branch for business
reasons unrelated to JP M organ’s efforts to compete in
Houston.
22.
The HHI for small business loans is based on loans to busi
nesses originated in amounts of $1 million or less.

356

Federal Reserve Bulletin □ Summer 2004

Based on this review, the Board concludes that the
SOD data substantially overstate the effective presence of
JP M organ in the Houston banking market and thus
overstate the competitive effect of this acquisition in the
market .23
To account for this overstatement, the Board has consid
ered the structural effects of the proposal after adjusting
market deposits to exclude the portion of national business
line deposits in the Main Houston Branch that are attribut
able to customers with mailing addresses outside the Hous
ton banking market who also do not have a presence in the
Houston banking market. The total amount of national
business line deposits that are unrelated to Houston is
approximately $17.2 billion .24
To account for the possibility that other market competi
tors might maintain similar deposits in the Houston bank
ing market, the Board has considered several methods for
approximating the amount of their national business line
deposits and has excluded those deposits in analyzing the
competitive effects of the proposal. After making these
adjustments, the structural effects of the proposal in the
Houston banking market are either within or moderately
exceed the DOJ M erger Guidelines, depending on which
method is used to adjust the competitors’ deposits .25
23. A commenter noted that JP Morgan instituted numerous
changes in its SOD data immediately before submitting this proposal
and maintained that the Board should prevent large banking organi
zation from arbitrarily shifting deposits through amendments to SOD
data. These changes are separate from the considerations discussed
above. JP Morgan has provided information about the changes to
support its contention that they were principally to correct errors in the
SOD data as originally reported.
24. Approximately $21.9 billion in deposits have been identified
by JP Morgan as national business line deposits. If those deposits
were excluded from the calculation of the competitive effect of this
proposal, JP Morgan would have a pro forma market share of 26.6 per
cent and the banking market’s HHI would increase by 290 points to
1104. O f the $21.9 billion in deposits, approximately $20.9 billion is
attributable to customers with addresses outside the Houston banking
market. If $20.9 billion in deposits were excluded from the calcula
tions, JP Morgan would have a pro forma market share of 27.9 percent
and the HHI would increase 306 points to 1159. O f this $20.9 billion,
$3.7 billion in deposits is attributable to customers with addresses
outside the Houston market, but who maintain a physical presence
(e.g., retail establishment, manufacturing plant, or business office) in
the Houston banking market. If the $17.2 billion in deposits associated
with customers with non-Houston addresses and no physical presence
in the Houston banking market were excluded from the calculation,
the pro forma market share o f JP Morgan would be 32.2 percent and
the HHI would increase 356 points to 1375. All of these increases are
within the DOJ Merger Guidelines.
25. The Board considered three methods for approximating compa
rable deposits held by competitors in the Houston banking market.
The first method excluded deposits in the largest branch of every
market competitor, including competitors headquartered in Texas and
competitors controlled by out-of-state banking organizations. This
method likely overstates the amount of out-of-market deposits held by
competitors in the Houston banking market and, therefore, understates
the competitive strength of those institutions. The second method
excluded deposits in the largest branch of all out-of-state market
competitors. The third method excluded from each out-of-state institu
tion’s Houston deposits the same percentage o f deposits that were
excluded from JP Morgan’s Houston deposits (53 percent). Under
these methods, the HHIs increased by 577 to 1985, by 432 to 1532,
and by 492 to 1748, respectively.

The Board also examined other aspects of the structure
of the Houston banking market. After consummation of the
proposal, 85 depository institutions would compete in the
Houston banking market, including three insured deposi
tory institutions that each would control more than 6 per
cent of market deposits. The second and third largest
competitors in the market currently rank among the five
largest bank holding companies nationally by asset data as
of December 31, 2003. Two of JP M organ’s bank com peti
tors also operate similar branch networks in the market.
In addition, the Houston banking market is attractive for
entry by out-of-market competitors. Seven de novo banks
have been chartered since 1998, and five existing banking
organizations have entered the market through branching
since 2000. Moreover, demographic data indicate that the
Houston banking market will likely remain attractive for
entry. The Houston MSA is the second most populous of
25 MSAs in Texas, and since 2000, its population growth
has exceeded the average population growth in all other
Texas MSAs.
Based on a careful review of these and other facts of
record, the Board concludes that the SOD data overstate
the competitive effect of the proposal in the Houston
banking market and that the characteristics of the market
further mitigate the transaction’s potential anticompetitive
effects. Although the analysis and data in this case are
more complex than in previous cases, the Board believes
that, together and under the particular circumstances of this
case, they provide a more accurate picture of the likely
competitive effects of the proposed transaction.
The Board also has consulted with and considered the
views of the DOJ on the competitive effects of the proposal
in the Houston banking market. The DOJ has advised the
Board that consummation likely would not have a signifi
cantly adverse effect on competition in any relevant mar
ket. In addition, the Board has requested the views of the
Comptroller of the Currency ( “ O CC” ) on the competitive
effects of the proposal, and the OCC has not indicated that
it raises competitive issues.
In this light, and based on all the facts of record, the
Board concludes that consummation of the proposal would
not have a significantly adverse effect on competition or on
the concentration of banking resources in the Houston
banking market or in any relevant banking market. Accord
ingly, competitive considerations are consistent with
approval.
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 JP Morgan, Bank One Corporation, 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

Legal Developments

received from the primary federal supervisors of the orga
nizations and institutions involved in the proposal, the
Federal Reserve System’s confidential supervisory infor
mation, and public comments on the proposal. In addition,
the Board has consulted with the relevant supervisory
agencies, including the OCC, the primary supervisor for
two of JP M organ’s banks and all of Bank One Corpora
tion’s banks. The Board also has considered publicly avail
able financial and other information on the organizations
and their subsidiaries and all information on the proposal’s
financial and managerial aspects submitted by JP Morgan
and Bank One Corporation during the application process.
In addition, the Board has considered the public com
ments that relate to these factors. Commenters expressed
concern about the size of the combined organization and
questioned whether the Board and other federal agencies
have the ability to supervise the combined organization
and whether the combined organization presents special
risks to the federal deposit insurance funds or the financial
system in general.
In evaluating financial factors in expansionary proposals
by banking organizations, the Board consistently has con
sidered capital adequacy to be an especially important
factor. JP Morgan, Bank One Corporation, 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 an exchange of
shares and would not increase the debt service require
ments of the combined company. In addition, the Board
has carefully reviewed other indicators of the financial
strength and resources of the companies involved, includ
ing the earnings performance and asset quality of the
subsidiary depository institutions. The Board has also con
sidered the ability of the organizations to absorb the costs
of the merger and their proposed integration.
The Board has considered the managerial resources of
the proposed combined organization. JP Morgan, Bank
One Corporation, and their subsidiary depository institu
tions are considered well managed overall. The Board has
considered its experience and that of the other r e le v a n t
banking supervisory agencies with the organizations and
their records of compliance with applicable banking law .26
The Board also has reviewed carefully the examination
records of JP Morgan, Bank One Corporation, and their
subsidiary depository institutions, including assessments of
their risk management systems and other policies.
Senior management of the combined organization pro
poses to draw from the senior executives of JP Morgan and
Bank One Corporation based on the individual manage
ment strengths of each company. In this case, senior execu
tives of the two companies have formed a transition team
to plan and manage the integration into the combined
organization. Both companies have experience with large
26.
Some commenters criticized the management o f JP Morgan
and Bank One Corporation based on the existence of private litigation
alleging infringement of patent rights related to digital capturing,
processing, and archiving o f checks and other improprieties. These are
isolated private disputes that are within the jurisdiction o f the courts to
resolve.

357

mergers and have indicated that they are devoting signifi
cant resources to address all aspects of the merger process.
The Board and other financial supervisory agencies have
extensive experience supervising JP Morgan, Bank One
Corporation, and their subsidiary depository institutions, as
well as other banking organizations that operate across
multiple states or regions. The Board already has instituted
an enhanced supervisory program that will permit it to
monitor and supervise the combined organization effec
tively on a consolidated basis. This program involves,
among other things, continuous holding company super
vision, including both on- and ofif-site reviews o f 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 JP M organ for ensuring compliance with
applicable banking, consumer, and other laws.
Consistent with the provisions of section 5 of the BHC
Act, as amended by the G ram m -Leach-Bliley Act , 27 the
Board relies on the SEC and other appropriate functional
regulators to provide examination and other supervisory
information about functionally regulated subsidiaries in
order for the Board to fulfill its responsibilities as holding
company supervisor o f the combined entity .28 The Board
has consulted with the SEC and the other relevant agencies
on JP M organ’s management and compliance efforts. The
Board also has taken account of publicly reported issues
raised about the past practices of JP M organ and Bank One
Corporation and the efforts and successes of their manage
ment to address these matters when they were raised .29
Based on these and all the facts of record, including a
review of the comments received, the Board concludes that
considerations relating to the financial and managerial
resources and future prospects of JP Morgan, Bank One
Corporation, and their respective subsidiaries are consis
tent with approval o f the proposal, as are the other super
27. Pub. L. No. 106-102, 113 Stat. 1338 (1999).
28. For additional information about the Board’s supervisory pro
gram for large, complex banking organizations, such as JP Morgan,
see Supervision o f Large Complex Banking Organizations, 87 Federal
Reserve Bulletin 47 (2001).
29. A commenter provided press reports of litigation involving the
acquisition of a small number of mortgage loans from a mortgage
broker by Chase Manhattan Mortgage Corporation ( “CMMC” ),
a subsidiary o f JP Morgan Bank. The commenter asserted that
JP Morgan and CMMC lacked adequate policies and procedures for
monitoring the acquisition of loans in the secondary market. The
Board previously has considered similar comments in the context of
recent applications by JP Morgan Bank or JP Morgan, and hereby
adopts its findings in those cases. See JPMorgan Chase Bank, 89 Fed
eral Reserve Bulletin 511 (2003) ( “JP Morgan/Bank One Corporation
Order”) and JP Morgan Chase & Co., 90 Federal Reserve Bulletin
212 (2004) ( “JP Morgan/Chase FSB Order” ). The commenter also
raised concerns about an investigation by the Oregon Department of
Justice ( “Oregon DOJ” ) into the alleged use by borrowers of fraudu
lent Social Security numbers in three mortgage loans underwritten
by CMMC. The Board previously addressed these concerns in the
JP Morgan/Chase FSB Order. As the Board noted in that order, the
Oregon DOJ closed its inquiry into this matter on June 10, 2003.

358

Federal Reserve Bulletin □ Summer 2004

visory factors that the Board must consider under section 3
of the BHC A ct .30
Convenience and Needs Considerations
Section 3 of the BHC Act requires the Board to consider
the effects of the proposal on the convenience and needs of
the communities to be served and to take into account the
records of the relevant insured depository institutions under
the CRA. The CRA requires the federal financial super
visory 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 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
carefully considered the convenience and needs factor and
the CRA performance records of the subsidiary depository
institutions of JP M organ and Bank One Corporation,
including public comments on the effect the proposal
would have on the communities to be served by the result
ing organization.
A. Sum m ary o f Public Com m ents on Convenience
and N eeds
In response to the Board’s request for public comment on
the proposal, more than 440 commenters submitted their
views or testified at the public meetings on the proposal.
Approximately 300 commenters commended JP Morgan or
Bank One Corporation for the financial and technical sup
port provided to their community development organiza
tions or related their favorable experiences with specific
programs or services offered by JP Morgan or Bank One
Corporation. Many of these commenters also expressed
their support for the proposal.
More than 140 commenters expressed concern about the
lending records of JP Morgan or Bank One Corporation,
recommended approval of the proposal only if subject to
conditions suggested by the commenter, expressed concern
about large bank mergers in general, or opposed the pro
posal. Some of these commenters alleged that community
lending and philanthropy deteriorated at JP Morgan after
the merger between JP Morgan and Chase Manhattan in
2001.31 Approximately 40 commenters opposed the pro30. Several commenters expressed concerns about the potential
loss o f jobs in New York or Chicago and about the degree o f diversity
in senior management positions in both organizations. These concerns
are outside the statutory factors that the Board is authorized to
consider when reviewing an application under the BHC Act. See
Western Bancshares, Inc. v. Board o f Governors, 480 F.2d 749 (10th
Cir. 1973).
31. Some commenters alleged that mismanagement of accounts,
service interruptions, mishandled transactions, and other irregularities
occurred after acquisitions by JP Morgan and Bank One Corporation.
The Board has reviewed these comments about individual accounts
and transactions in light o f the facts of record, including information
provided by JP Morgan and Bank One Corporation. These letters have

posal, criticizing the consumer and small business lending
of JP Morgan or Bank One Corporation .32 Commenters
also criticized JP M organ or Bank One Corporation for
their activities related to subprime lending. Several com
menters contended that data submitted under the Home
Mortgage Disclosure Act (12 U.S.C. §2801 et seq.)
( “ HMDA” ) demonstrated that JP M organ and Bank One
Corporation engaged in disparate treatment of minority
individuals in home mortgage lending in certain markets.
In addition, several commenters asserted that JP Morgan
and Bank One Corporation are plaintiffs in an unusually
large number of foreclosures in certain markets and
expressed concern that these cases resulted from unscrupu
lous practices by both organizations .33 Some commenters
criticized Bank One Corporation’s involvement in taxrefund-anticipation lending and urged the Board to condi
tion approval of the proposal on a pledge to discontinue
this activity . 34 In addition, several commenters expressed
concerns about possible branch closures resulting from the
proposed merger.
B. CRA Perform ance E valuations
As provided in the BHC Act, the Board has evaluated the
convenience and needs factor in light o f the appropriate
federal supervisors’ examinations o f the CRA performance
also been forwarded to the consumer complaint function at the OCC
and the Board, the primary supervisors of the subsidiary banks o f
JP Morgan and Bank One Corporation.
32. Several commenters asserted that JP Morgan has a poor record
of CRA performance in California. The only banking presence that
JP Morgan has in California is JP Morgan Trust, which offers private
banking and trust services and is examined as a “wholesale” bank for
CRA purposes. JP Morgan Trust’s total deposits were $106.9 million
as of its most recent CRA examination and only $17.8 million of that
amount was on deposit at the bank’s main office in Los Angeles,
which is the b a n k ’s only C alifo rn ia branch that accepts deposits.
33. The Board notes that JP Morgan and Bank One Corporation act
as loan servicers or trustees for a large number of mortgages. The
legal capacity in which either institution is involved in a foreclosure
may not be readily apparent from court records. Foreclosure actions
in an institution’s capacity as a loan servicer or trustee would not
indicate safety and soundness issues or a failure to meet the conve
nience and needs of the communities served by the institution. The
Board notes, however, that JP Morgan has implemented a program to
assist borrowers facing foreclosure by providing counseling and refi
nancing. On consummation of this proposal, JP Morgan would be
better able to assist in mitigating borrowers’ losses through local
branch staff in areas currently served by Bank One Corporation.
34. Bank One-Ohio offers tax-refund-anticipation loans to custom
ers through independent tax preparers. All underwriting credit deci
sions are made by Bank One-Ohio using credit criteria consistent with
safe and sound banking practices and in compliance with applicable
laws. Bank One Corporation also provides financing to its customers
engaged in the business of tax-refund-anticipation lending, but is not
involved in the lending practices or credit decisions o f these lenders.
The credit documents executed in connection with the financing,
however, require these lenders to comply with applicable laws. The
Board expects all bank holding companies and their affiliates to
conduct tax-refund-anticipation lending free from any abusive lending
practices and in compliance with all applicable law, including fair
lending laws. The Federal Trade Commission ( “FTC” ), Department
of Housing and Urban Development ( “H U D ” ), and DOJ are respon
sible for enforcing compliance by nondepository institutions with
laws governing the activity.

Legal Developments

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.35
JP M organ’s lead bank, JP Morgan Bank, received an
“ outstanding” rating at its most recent CRA performance
evaluation by the Federal Reserve Bank of New York, as
of September 8 , 2003. JP M organ’s other subsidiary banks
also received “outstanding” ratings from the OCC at their
most recent CRA evaluations: Chase USA, as of March 3,
2003, and JP Morgan Trust, as of November 4, 2002.
Bank One Corporation’s lead bank, Bank One, which
accounts for approximately 75 percent of the total consoli
dated assets of Bank One Corporation. It is the successor to
Bank One, N.A., Illinois, Chicago, Illinois ( “ Bank OneIllinois” ), which received a “ satisfactory” rating at its
most recent CRA performance evaluation by the OCC, as
of March 31, 2000 ( “ Bank One Evaluation ” ) . 36 All of
Bank One Corporation’s other subsidiary banks received
either “ outstanding” or “ satisfactory” ratings at the most
recent evaluations of their CRA performance .37
C. CR A Perform ance o f JP M organ
1. JP Morgan Bank
Overview. As noted above, JP Morgan Bank received an
overall “ outstanding” rating for performance under the
CRA during the evaluation period . 38 The bank also
received an “ outstanding” rating under the lending test.
Examiners concluded that JP Morgan Bank’s lending activ
ity showed excellent responsiveness to retail credit needs
in its assessment areas, as measured by the number and
dollar amount of HMDA-reportable and small business
loans originated and purchased in each area. In particular,
examiners characterized lending activity in the bank’s pri
mary assessment area, which included New York City,

35. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001). A
commenter, however, suggested that JP Morgan Bank manipulates its
CRA performance evaluations by significantly increasing its percent
age o f loans to LMI and minority individuals in the year preceding its
CRA evaluation and that its performance diminishes in the years after
an evaluation. CRA evaluations measure performance during the
applicable period and do not give undue weight or consideration to a
bank’s increased performance within that time period. If a bank’s
CRA performance was uneven during the evaluation period, the Board
expects that its CRA performance evaluation would reflect such an
inconsistent performance.
36. After the Bank One Evaluation, Bank One Corporation merged
16 o f its subsidiary banks into Bank One and Bank One-Ohio
( “Merged Lead Banks”). Each of the banks that was merged into the
Merged Lead Banks received a “satisfactory” or “outstanding” rating
at its most recent CRA performance evaluation by the appropriate
federal financial supervisory agency.
37. The CRA performance ratings of all of Bank One Corpora
tion’s subsidiary depository institutions are provided in appendix C.
38. The evaluation period was from January 1, 2001, to Decem
ber 31, 2002.

359

Long Island, Northern New Jersey, and parts of Connecti
cut and Pennsylvania as excellent and lending activity in
the Texas and upstate New York assessment areas as good.
During the evaluation period, the bank and its affiliates
originated or purchased more than 266,000 HMDAreportable and small business loans totaling approximately
$32.8 billion .39 Examiners also noted that overall loan
volume had increased 44 percent since the bank’s previous
examination. Although a significant part of the growth was
attributable to the volume of refinancings, small business
lending increased 22 percent. Examiners also reported that
the overall geographic distribution of HMDA-reportable
and small business lending reflected good loan penetration
in LMI geographies across all assessment areas reviewed.
Examiners noted that JP Morgan Bank’s LMI Mortgage
Subsidy Program helped increase the bank’s mortgage
loan penetration in LMI geographies. Under this program,
borrowers purchasing properties in LMI geographies of
the bank’s assessment areas are eligible for a 2 percent
subsidy, up to a maximum of $4,000, on loans of up to
$200,000. More than 5,200 loans were made under this
program during the examination period. Examiners also
concluded that various innovative and flexible lending
products enhanced lending to LMI borrowers and small
businesses, noting that JP M organ Bank’s Residential
Lending Group ( “R LG ” ) worked with local community
organizations to develop new lending products and
enhance existing products designed for LMI families.
Many of RLG ’s flexible lending products provide lower
down-payment requirements to first-time home buyers.
During the examination period, more than 12,000 such
loans were originated in the bank’s assessment areas.
Examiners also concluded that JP Morgan Bank’s per
formance record for community development lending was
outstanding overall and in each assessment area; the bank
made more than $1.3 billion in community development
loans during the examination period. Examiners stated that
this type of lending was responsive to the credit needs
identified by the bank’s community contacts and that
affordable housing initiatives totaled $927 million or
70 percent of its community development lending. Overall,
JP Morgan Bank’s community development lending sup
ported the financing of more than 11,500 units of afford
able housing throughout its assessment areas.
JP Morgan Bank also was rated “ outstanding” for its
investment performance in light of its excellent record in
the bank’s assessment areas. Overall, JP Morgan Bank’s
significant portfolio of qualified investments and grants,
totaling $ 1.1 billion, included $313 million in new invest
ments since the previous examination. These investments
focused on affordable housing, economic development,
community services, and revitalization and stabilization
projects. Examiners concluded that the bank’s investments
reflected excellent responsiveness to the most significant

39.
The Reserve Bank considered home purchase and refinance
and small business loans by JP Morgan Bank and its affiliates, CMMC
and Chase USA, for purposes of the CRA performance examination.

360

Federal Reserve Bulletin □ Summer 2004

credit and community development needs in the bank’s
assessment areas .40
JP Morgan Bank received an “ outstanding” rating on
the service test in light of its performance in all assessment
areas. In particular, examiners noted that its branches were
readily accessible to all portions of the bank’s assessment
areas. Examiners reported that JP Morgan Bank opened
and closed branches and automated teller machines
(“ATMs” ) during the evaluation period, concluding that
these changes did not adversely affect the overall accessi
bility of the bank’s delivery network. In addition, examin
ers noted that extended morning, evening, and weekend
hours were tailored to accommodate the convenience and
needs of the assessment areas, particularly LMI areas.
Examiners also noted that JP Morgan Bank offered mul
tiple alternative delivery systems that enhanced the distri
bution of banking services, such as a network of 329 ATMs
in which 28 percent were in LMI areas. Many of these
ATMs feature instructions in Spanish, Korean, Chinese,
French, Italian, Russian, or Portuguese. Examiners stated
that JP Morgan Bank offered Chase Online Banking for
Small Businesses, which allowed customers to view busi
ness and personal accounts together and pay employees
electronically. In addition, they reported that JP Morgan
Bank offered Ready Pay Electronic Transfer Accounts to
provide people without bank accounts an opportunity to
receive direct deposits of government payments.
New York. JP M organ Bank received an “ outstanding”
rating under the lending test in its New York assessment
area 41 Examiners concluded that an analysis of the bank’s
lending activity, distribution of loans among borrowers of
different income levels and businesses of different sizes,
and community development loans demonstrated excellent
performance with good geographic loan distribution. Spe
cifically, examiners noted that the overall geographic dis
tribution of HMDA-reportable and small business loans
reflected good penetration in LMI geographies. Examiners
also concluded that home purchase and refinance lend
ing by JP Morgan Bank in LMI geographies generally
exceeded the performance of the aggregate lenders 42 in
low-income census tracts and moderate-income census
tracts. In addition, examiners found that JP M organ Bank’s
performance equaled or exceeded the performance of the
aggregate lenders in home purchase and refinance lending
to LMI borrowers.
Examiners also commented favorably on JP Morgan
Bank’s performance in small business lending, noting that

40. Several commenters contended that JP Morgan should be
required to donate a specified percentage of its pretax income to
charities. JP Morgan responded that it has a record o f providing
significant philanthropic donations in all the communities that it
serves. The Board notes that neither the CRA nor the agencies’
implementing rules require that institutions make charitable donations.
41. The New York assessment area consists of the consolidated
metropolitan statistical area ( “CMSA” ) (New York-Northern New
Jersey-Long Island, New York-NJ-CT-PA).
42. The lending data of lenders in the aggregate ( “aggregate lend
ers” ) represent the cumulative lending for all financial institutions that
have reported HMDA data in a particular area.

the overall distribution of small business loans across dif
ferent income-level geographies was good and that perfor
mance in LMI census tracts equaled or exceeded the aggre
gate lenders’ performance. The distribution of loans to
businesses of different sizes was considered excellent in
light of the proportion of loans for $ 1 0 0 , 0 0 0 or less, the
number of assessment area loans to businesses with gross
annual revenues of $1 million or less, and JP Morgan
Bank’s performance relative to the aggregate lenders.
JP Morgan Bank’s performance under the investment
test was rated “ outstanding” by examiners, who cited the
bank’s level of qualified community development invest
ments and grants as indicating excellent responsiveness
to credit and community development needs. Examiners
noted that the bank’s investments exhibited excellent
responsiveness to the need for affordable housing (iden
tified as a critical need in the New York assessment
area), with investments of approximately $717 million in
low-income-housing tax credits ( “ LIHTC” ) that benefited
its assessment area for New York, New Jersey, and
Connecticut.
JP Morgan Bank’s performance under the service test
was rated “ outstanding” in light of its excellent branch
distribution and volume of community development ser
vices in its assessment area. O f the 368 branches in the
bank’s assessment area, 73 or 20 percent were in LMI
areas. Examiners reported that 44 percent of JP Morgan
Bank’s branches were in or adjacent to LMI census tracts
(four branches were in census tracts with no designated
income level). Examiners concluded that alternative deliv
ery systems somewhat enhanced the bank’s performance in
the assessment area and noted that 31 percent o f its off-site
ATMs in the assessment area were in LMI areas. In addi
tion, examiners noted that JP Morgan Bank had 15 mort
gage offices in the assessment area, including two in LMI
census tracts. They also reported that JP Morgan Bank’s
products and services were tailored to accommodate the
convenience and needs of the assessment area, including
LMI areas 43
In addition, examiners reported that JP Morgan Bank
was a leader in providing community development services
in the assessment area. They noted that JP Morgan Bank
officers served on 240 boards of qualifying community
development organizations in the assessment area and that
the bank participated in more than 480 seminars that pro
moted financial literacy.
Texas. JP M organ Bank’s rating for CRA performance
in Texas was “ outstanding.” Examiners identified such
factors as good responsiveness to assessment-area credit
needs, good geographic distribution of loans in the bank’s
43.
Some commenters recommended that JP Morgan initiate cer
tain changes to the electronic benefits transfer ( “EBT” ) business that
it purchased from Citigroup Inc., New York, New York. EBT in
New York provides cash access for the Temporary Assistance for
Needy Families program ( “TANF” ). In response to these suggestions,
JP Morgan indicated that it plans to use its ATM network to provide
recipients of TANF benefits with access to cash free o f charge.
JP Morgan also noted that several of the commenters’ requests were
matters to be addressed by the State of N ew York or the NYCE ATM
Network.

Legal Developments

assessment areas, good distribution of loans among indi
viduals of different income levels and businesses of differ
ent sizes, an excellent level of community development
lending, an excellent level of qualified investments, and
readily accessible delivery systems for banking services to
geographies and individuals of different income levels to
support the rating .44
JP Morgan Bank’s performance on the lending test in
Texas was rated “ high satisfactory,” based primarily on a
good performance in the D allas-Fort Worth and H oustonGalveston-Brazoria CMSAs, and an adequate performance
in the El Paso MSA. Examiners concluded that JP Morgan
Bank’s responsiveness to retail credit needs in the Texas
assessment area was good relative to the bank’s capacity
and performance, noting that the bank and its mortgage
affiliate originated and purchased more than 95,000 loans
totaling approximately $10.7 billion during the examina
tion period. The overall geographic distribution of HMDAreportable and small business loans reflected good penetra
tion in LMI geographies.
Examiners also concluded that JP Morgan Bank’s com
munity development lending performance was outstanding
during the examination period, with loan commitments
in the Texas assessment area totaling $234 million. These
loans financed 4,400 units of affordable housing.
JP Morgan Bank’s performance on the investment test
in Texas was rated “ outstanding.” Examiners noted that
JP Morgan Bank had a high level of qualified investments
that exhibited excellent responsiveness to community
development n ee d s 45 At the examination, these invest
ments totaled $161 million or 15 percent of the bank’s
qualified investments. A majority of the qualified invest
ments were directed to affordable housing initiatives.
JP Morgan Bank’s performance on the investment test
varied across its assessment area. Examiners reported that
the bank made a significant number of investments in the
D allas-Fort Worth CMSA and fewer investments in the
H ouston-G alveston-Brazoria CMSA and El Paso MSA,
but that all these areas benefited from the bank’s affordable
housing initiatives that were implemented statewide.
JP Morgan bank’s overall performance in the Texas
assessment area was rated “outstanding,” in light of its
performance in the D allas-Forth Worth and H oustonGalveston-Brazoria CMSAs and the El Paso MSA. The
bank’s delivery systems were readily accessible to all
geographies in the assessment area, including LMI areas.
The percentage of branches in or adjacent to LMI areas
exceeded 40 percent in the three largest areas in the Texas
assessment area.

44. The examiners’ conclusions on CRA performance in Texas
were based predominantly on JP Morgan Bank’s performance in the
Dallas and Houston CMSAs and the El Paso MSA. Together, these
areas had a majority o f the bank’s deposits, branches, and HMDAreportable and small business loans and the assessment area’s popula
tion, LMI census tracts, owner-occupied housing units, and business
establishments in Texas. JP Morgan’s assessment area encompassed
the State o f Texas.
45. A qualified investment is any lawful investment, deposit, or
grant that has as its primary purpose community development.

361

2003 Performance. JP Morgan Bank represented that its
total home mortgage originations and purchase lending
in its assessment areas in 2003, which includes a period
of time after its most recent CRA performance evaluation,
amounted to more than 157,000 loans totaling $32.6 bil
lion. O f these loans, 11 percent were in LMI census tracts
and 17 percent were to LMI borrowers. During 2003,
JP Morgan Bank’s small business lending originations
in its assessment areas totaled more than 80,000 loans,
for $4.1 billion dollars. Approximately 28 percent of these
loans were in LMI census tracts. JP Morgan Bank also
noted that in 2003, it originated more than 46,000 loans to
businesses with revenues of $ 1 million or less, representing
almost 60 percent of JP Morgan Bank’s total small busi
ness loan originations.
JP Morgan Bank also stated that it continued in 2003
to provide financing for affordable housing and economic
development projects in LMI communities by focusing
on LMI housing development and rehabilitation through
construction lending, interim financing, permanent financ
ing, and letters of credit; commercial revitalization projects
in LMI communities; technical assistance to inter
mediaries; community development loans; and bridge
lending to facilitate LIHTC investments. The bank also
made more than 300 loans totaling more than $1.2 bil
lion for affordable housing and economic development
projects in 2003. For example, it provided a $45 m il
lion revolving credit facility to be used as bridge financing
for low-income housing investments in limited partner
ships that qualify for LIHTCs. JP Morgan Bank will under
write the entire facility, syndicate a portion to one or
two banks, and retain a $20 million share. The facility
will invest in low-income multifamily residential housing
nationwide.
JP Morgan Bank also stated that it provided a five-year
renewal of three lines of credit for the areas served by the
Community Preservation Corporation ( “ CPC ” ) in downstate New York ($31 million), upstate New York ($3.2 mil
lion), and New Jersey ($5 million). CPC has financed
almost 85,000 housing units in approximately 2,000
separate projects in New York and New Jersey in the last
26 years.
As of December 2003, JP Morgan Bank’s qualified
community development investments totaled almost
$1.4 billion. Approximately $1.2 billion of these invest
ments were in the New York Tri-State area and $207 mil
lion were in Texas. New commitments in 2003 totaled
$177 million, and the bank provided more than
$25.7 million in grants eligible for consideration under
the CRA. JP Morgan Bank also had $1.2 billion in out
standing LIHTC investments in its assessment areas,
of which $175 million were new investments made in
2003.

2. Chase USA
Overview. Chase USA also received an “ outstanding”
rating at its most recent CRA performance examination by

362

Federal Reserve Bulletin □ Summer 2004

the OCC .46 The bank primarily engages in credit card
lending nationwide and does not operate any branches 47
Examiners commended Chase USA for good lending activ
ity in its assessment area, excellent borrower distribution
of home mortgage loans, and good geographic distribution
of home mortgage loans and awarded the bank “ outstand
ing” ratings on the lending, investment, and service tests .48
Examiners also concluded that community development
lending and flexible loan programs had an overall positive
impact on the lending test and that the bank exhibited
excellent responsiveness to the credit and community
development needs of its assessment area through high
levels of qualified investments and grants.
Mortgage loans represented 87 percent of the loans
originated by Chase USA in its New Castle County assess
ment area and loans to small businesses comprised approxi
mately 13 percent. Approximately 62 percent of the home
mortgage loans made by Chase USA in its assessment area
were for home purchase, and the remaining loans were
for home refinance. During the evaluation period, Chase
USA’s home mortgage loans originations almost doubled
to approximately 2,570 loans and more than doubled in
total dollar amount to $377 million. Chase USA ranked
second in home purchase lending in the New Castle County
assessment area and fourth in home refinance lending.
Examiners reported that Chase USA’s distribution of home
mortgage loans was considered good in light of the demo
graphics of the assessment area, where less than 16 percent
of owner-occupied housing units were in LMI geographies.
Examiners considered the geographic distribution of
Chase USA’s loans to small business to be adequate. The
bank’s market share of loans to small businesses in the
assessment area’s two LMI geographies was substan
tially comparable with its overall market share in each
geography.
In addition, examiners reported that Chase USA’s com
munity development lending adequately addressed the
community development needs of the New Castle County
assessment area. They noted that Chase USA and its affili
ates originated 24 community development loans totaling
almost $ 1 0 0 million in the assessment area or the broader
46. The performance evaluation was as of March 3, 2003, and
covered the period from January 1, 1999, through December 31, 2002.
At the request o f Chase USA, the CRA performance examination
included the activities of JP Morgan Bank, CMMC, JP Morgan Chase
Community Development Corporation, Chase Community Develop
ment Corporation, and JP Morgan Mortgage Capital.
47. Chase USA focuses on nationwide retail lending and is the fifth
largest credit card issuer in the country. It obtains deposits through the
treasury desk o f JP Morgan Bank and through private banking depos
its. A majority o f these deposits are from outside its New Castle
County, Delaware, assessment area.
48. Commenters questioned the accuracy of the OCC’s rating,
noting that Chase USA closed its branch in Bellefonte, Delaware.
That branch was originally opened in Bellefonte, a town with a
population of less than 5,000 persons, to permit Chase USA to sell
insurance products nationwide. After the Gramm-Leach-Bliley Act,
Chase USA no longer required this branch. Chase USA’s main office,
which provided banking services primarily to employees, was closed
during the performance evaluation period and relocated to Newark,
Delaware.

regional area during the evaluation period. In addition,
Chase USA issued six letters of credit for community
development purposes totaling $30 million. For exam
ple, the Chase Community Development Corporation
( “ CCD C” ) provided a ten-month, $3 million credit facility
that financed the construction of a charter school in a
moderate-income geography of Wilmington, Delaware.
Student from LMI families residing in LMI communities
were expected to comprise most of the school’s student
body. CCDC also originated a $2.6 million construction
loan to assist in rehabilitating a co-op building in the New
Castle County assessment area into a 50-unit apartment
complex for LMI senior citizens.
During the evaluation period, Chase USA and its affili
ates made commitments of $23.4 million for qualified
investments in the New Castle County assessment area,
which increased its total outstanding com mitm ents to
$36.8 million. Examiners stated that Chase USA had taken
a leadership role in several of the investments. Some
investments were innovative or complex and accommo
dated the identified needs in the assessment area.
2003 Performance. In 2003, Chase USA’s mortgage
originations and purchases in its assessment area totaled
more than 3,600 loans for approximately $562 million, of
which 12 percent were to borrowers in LMI census tracts
and 34 percent were to LMI borrowers. Chase USA origi
nated approximately 290 loans for $3 million, of which
25.3 percent were to businesses in LMI census tracts.
Chase USA increased its community development lending,
making approximately $80 million in community develop
ment loans in 2003. For example, Chase USA provided a
$5.6 million construction loan to finance the development
of 96 units of family rental housing on a 15-acre site in
Salisbury, Maryland. As of December 2003, Chase USA
funded an additional $1.2 million in grants. Chase USA
a l s o made $2.7 m i l l i o n in new investments in LIHTCs in
2003.

D. CR A P erform ance o f Bank O ne C orporation
As previously discussed, the most recent CRA perfor
mance evaluations of Bank One Corporation’s subsidiary
banks predate the current structure of the organization.
Therefore, in addition to reviewing the relevant CRA per
formance evaluations, the Board also has evaluated exten
sive information submitted by Bank One Corporation about
the CRA performance of its banks after their most recent
CRA performance evaluations.
Overview. As noted above, the Merged Lead Banks all
received “ outstanding” or “ satisfactory” ratings at their
most recent CRA evaluations. Examiners determined that
Bank One-Illinois demonstrated adequate responsiveness
to the credit needs of its communities, including LMI
borrowers and geographies. Examiners also reported that
the Merged Lead Banks offered a variety of products and
programs to assist in meeting the housing-related credit
needs of LMI individuals and in LMI communities.

Legal Developments

Bank One has continued to provide home mortgage
loans to consumers throughout its assessment areas, includ
ing those assessment areas previously served by its prede
cessor institutions. Bank One Corporation has represented
that, from 2000 through 2003, Bank One originated or
purchased approximately $27.5 billion in home mortgage
loans and that approximately 17.4 percent and 29.6 percent
of these loans by number were originated in LMI geogra
phies and to LMI borrowers, respectively. Bank One Cor
poration also has represented that Bank One continues
to participate in a variety of programs designed to assist
the housing-credit needs of LMI individuals. For example,
Bank One participates in and funds a program to subsidize
down-payment and closing costs in connection with home
mortgage loans for LMI borrowers. Bank One Corporation
has represented that home mortgage loans totaling more
than $37 million were originated in connection with Bank
One’s participation in this subsidy program in 2003.
In general, examiners favorably commented on the small
business lending records of the Merged Lead Banks. For
example, the Bank One Evaluation reported that Bank
One-Illinois was the largest local small business lender in
its Chicago assessment area. In addition, examiners favor
ably noted the small business lending penetration of the
Merged Lead Banks in LMI geographies in their Dallas,
Detroit, Houston, Indianapolis, and Phoenix assessment
areas.
Bank One Corporation reported that, from 2000 through
2003, the Merged Lead Banks have originated more than
250,000 loans to small businesses throughout its assess
ment areas, of which approximately 13.9 percent were to
small businesses in LMI geographies .49 Bank One Corpora
tion also has initiated a Business Banker program through
which certain Bank One employees are assigned to Bank
One branches selected specifically for the convenience of
small business customers. Bank One employees in the
Business Banker program focus exclusively on small busi
nesses requiring loans of less than $250,000. In addition,
Bank One has represented that in 2003, it originated
approximately $22 million in loans through its Community
Express Loan program offered in partnership with the
Small Business Administration ( “ SBA” ). Bank One also
launched in the same year an SBA-guaranteed revolving

49.
A commenter criticized Bank One Corporation’s management
o f farm properties through Bank One Farm and Ranch Management
( “BOFRM” ), contending that its primary orientation is towards “cash
rent” programs that require substantial initial payments from farmers
who lease farmland from BOFRM. BOFRM manages farms for both
trust and agency accounts. According to the commenter, these credit
arrangements generally do not benefit small independent farming
enterprises and negatively affect rural economies. JP Morgan stated
that BOFRM rents approximately 95 percent of its farms to family
farmers. JP Morgan also stated that Bank One Corporation’s agricul
tural loan products are structured flexibly to meet the needs of the
individual businesses, which generally require working capital to meet
cash flow needs, and funding to purchase equipment and other large
assets and to purchase or improve real estate. JP Morgan represented
that, under Bank One’s Agricultural Financing Policy, specialized
agricultural lenders have the discretion to adjust the commercial
lending products to the special credit needs of agricultural businesses.

363

line of credit for small businesses, including firms that
might not have otherwise qualify for credit without the
SBA’s guarantee.
Examiners noted the positive impact of Bank OneIllinois’s community development lending on its overall
lending activities and generally praised the community
development lending activities of the Merged Lead
Banks .50 Examiners also reported that the M erged Lead
Banks offered an array of consumer and business loan
products, including products with flexible underwriting
criteria that assisted LMI customers who might not have
qualified for credit under traditional underwriting stan
dards. Bank One has represented that it continues to pro
vide community development loans throughout its assess
ment areas for projects that support affordable housing;
economic development; and medical, employment, or other
social services in LMI geographies.
Examiners reported that the qualified investment activi
ties of Bank One and the Merged Lead Banks were respon
sive to the small business and affordable housing needs
of their communities. Bank One has represented that it
made community development investments totaling more
than $859 million throughout its assessment areas since the
Bank One Evaluation. These investments benefited a vari
ety of organizations and projects, including programs that
provide affordable housing, social services for at-risk chil
dren, credit and technical assistance for small businesses,
and financial literacy education for low-income persons.
Examiners generally reported that the delivery systems
of Bank One Corporation and the Merged Lead Banks for
banking services were adequately accessible throughout
their assessment areas. Bank One has represented that,
as of December 31, 2003, approximately 27 percent of its
branches and 26 percent of its ATMs were in LMI geogra
phies. Moreover, Bank One has indicated that from 2000 to
2003, it has opened 21 new branches in LMI census tracts.
Chicago. Examiners most recently evaluated Bank One
Corporation’s CRA performance record in the Chicago
MSA as part of the Bank One Evaluation and the evalua
tions of American National Bank and Trust Company
of Chicago, Chicago, Illinois ( “American N ational” )
( “American National Evaluation” ) and Bank One, Illinois,
National Association, Springfield, Illinois ( “ Bank OneSpringfield” ) ( “ Bank One- Springfield Evaluation ” ) . 51
Examiners determined that the lending records of Bank
One-Illinois, American National, and Bank OneSpringfield demonstrated adequate responsiveness to the
credit needs of their communities, which included LMI
borrowers and geographies. Moreover, examiners com
mended American National’s lending record in the Chi
cago MSA and noted a good distribution of the bank’s
50. Examiners described as good or excellent the community
development lending by Bank One, Arizona, National Association,
Phoenix, Arizona; Bank One, Indiana, National Association, India
napolis, Indiana; and Bank One, Texas, National Association, Dallas,
Texas. In addition, examiners characterized Bank One-Dearborn as a
leader in making community development loans in the Detroit MSA.
51. The assessment areas of Bank One and American National for
their respective CRA evaluations included the entire Chicago MSA.

364

Federal Reserve Bulletin □ Summer 2004

home mortgage loans among borrowers of all income
levels.
Examiners commended Bank One-Illinois’s home mort
gage loan penetration in LMI census tracts. During the
evaluation period, Bank One-Illinois originated 16.4 per
cent of its total home mortgage loans to borrowers in LMI
census tracts, which examiners noted exceeded the percent
age of owner-occupied units in those areas. The Bank One
Evaluation also reported that Bank One-Illinois’s home
improvement and refinance loan penetration among LMI
borrowers was good and that its total home mortgage loan
distribution among borrowers of all income levels was
adequate. In addition, examiners determined that the over
all distribution of home mortgage loans for American
National and Bank One-Springfield among census tracts of
various income levels, including LMI geographies, was
good in the Chicago MSA. Bank One indicated that in
2003, it originated approximately 22.5 percent of its total
home mortgage loans in the Chicago MSA to borrowers in
LMI census tracts and approximately 30.1 percent to LMI
borrowers.
Examiners reported that the geographic distribution of
small loans to businesses by Bank One-Illinois and Ameri
can National was adequate and that the distribution of such
loans in moderate-income areas was good .52 During their
evaluation periods, Bank One-Illinois, American National,
and Bank One-Springfield provided 13.3 percent, 12.9 per
cent, and 9.3 percent of their small loans to businesses,
respectively, to firms in LMI geographies. In addition,
examiners noted that all three banks provided a variety of
SBA-sponsored loan products.
Bank One Corporation reported that from 2000 through
2003, Bank One provided more than 47,000 loans to small
businesses in the Chicago MSA. In addition, Bank One
Corporation represented that in 2003, approximately
13 percent of its loans to small businesses in the Chicago
MSA were originated to firms in LMI census tracts.
The Bank One-Illinois, American National, and Bank
One-Springfield Evaluations noted that community devel
opment lending primarily related to the development of
affordable housing, which examiners identified as a signifi
cant credit need in the Chicago MSA. Examiners reported
that Bank One-Illinois and American National engaged in
an adequate volume of community development lending
activities in the Chicago MSA. Community development
lending by all three banks helped construct or renovate a
total of 3,227 units of affordable housing during their
evaluation periods.
Bank One has continued to engage actively in commu
nity development lending in the Chicago MSA. For exam
ple, Bank One states that it has provided more than
$55 million in collateral trust notes from 2000 through
2003 to a community development financial institution that
specializes in financing affordable multifamily housing.

Examiners commented favorably on the community
development investments of Bank One-Illinois in its Chi
cago assessment area. The Bank One Evaluation also noted
that the bank’s investment activities demonstrated excel
lent responsiveness to the most significant credit needs of
its Chicago assessment area. In addition, examiners noted
that Bank One-Illinois and American National provided an
adequate level of community development investments in
the Chicago MSA. Bank One-Illinois, American National,
and Bank One-Springfield maintained a total o f approxi
mately $132.1 million in qualified investments in their
Chicago assessment areas during their evaluation periods.
Examiners noted that the community development invest
ments of all three banks included complex qualified invest
ments. Bank One-Illinois, American National, and Bank
One-Springfield made community development invest
ments in a variety of programs, including projects related
to the development of affordable housing and small busi
nesses. The Bank One Evaluation noted that the bank’s
community development investments in Chicago had
facilitated the development or preservation of more than
5,550 housing units.
Bank One has continued to make qualified community
development investments in the Chicago MSA, such as an
$8.9 million investment in a mixed-income senior housing
complex in an LMI community. In addition, Bank One
reported that it provided approximately $4.2 million in
capital to a 107-unit multifamily housing project in Chi
cago by purchasing tax credits.
Examiners also determined that Bank One-Illinois,
American National, and Bank One-Springfield each pro
vided an adequate level of banking services in the Chicago
MSA, including LMI communities, and that the banks’
delivery systems for those services were adequately acces
sible to all portions of their assessment areas. Examiners
reported that, during the evaluation period, Bank OneIllinois’s record of opening and closing branches in the
Chicago MSA resulted in more services in LMI areas and
to LMI individuals. They also noted that all three banks
offered alternative delivery systems, including ATMs,
24-hour telephone banking, and Internet banking.
In addition, examiners reported favorably on the com
munity development services of Bank One-Illinois, Ameri
can National, and Bank One-Springfield in their Chicago
assessment areas. These services included offering lowcost checking accounts for individuals with no previous
banking experience and providing technical assistance to
organizations that provided affordable housing and small
business loans.
Ohio. As previously noted, Bank One-Ohio received a
“ satisfactory” rating at its most recent CRA evaluation
( “ Bank One-Ohio Evaluation” ). This evaluation indicated
that the bank’s lending record demonstrated a good respon
siveness to the credit needs of its communities .53 Exam in

52.
The Bank One-Illinois and American National CRA perfor
mance examinations reported that the volume of small loans to busi
nesses was adequate.

53.
The review period was from March 1998 to March 2000. Bank
One-Ohio’s assessment areas for the evaluation included the Akron,
Canton, Cleveland, Dayton, Hamilton-Middletown, Lima, Mansfield,
Parkersburg-Marietta, and Youngstown MSAs in Ohio; the Cincinnati

Legal Developments

ers commended the distribution of Bank One-Ohio’s home
mortgage lending among geographies and borrowers of
different income levels throughout its assessment areas,
including the Cincinnati MMA and the Cleveland MSA.
For example, in the Cincinnati MMA, Bank One-Ohio
provided approximately 15 percent of its home mortgage
loans in LMI census tracts, which exceeded the percentage
of owner-occupied units in those areas. Bank One Corpora
tion has represented that from 2000 to 2003, Bank OneOhio originated more than 77,200 home mortgage loans in
its Ohio assessment areas, of which approximately 17 per
cent were in LMI census tracts and approximately 33 per
cent were to LMI borrowers.
Examiners noted that the volume and geographic distri
bution of Bank One-Ohio’s small loans to businesses was
good. For example, in the Columbus MSA, Bank OneOhio provided approximately 23 percent of its small loans
to businesses to firms in LMI census tracts. In addition,
examiners noted that Bank One-Ohio offered a variety
o f SBA-sponsored loan products. Bank One Corporation
reported that from 2000 to 2003, Bank One-Ohio provided
approximately 40,350 small loans to businesses in its Ohio
assessment areas, of which almost 18 percent were origi
nated to businesses in LMI census tracts.
The Bank One-Ohio Evaluation noted that the bank’s
overall community development lending was adequate;
however, examiners characterized the bank as a leader in
community development lending in the Cincinnati MMA.
For example, Bank One-Ohio participated in the structur
ing and financing of a community development fund that
renovated affordable housing and supported economic
development projects in low-income areas in the Cincin
nati MMA. Bank One Corporation represented that, since
the Bank One-Ohio Evaluation, the bank has provided
more than $9.6 million in community development loans
to support affordable housing, economic development, and
educational and vocational training in its Ohio assessment
areas.
Examiners reported that Bank One-Ohio adequately
responded to community needs in Ohio through its commu
nity development investments. In addition, examiners com
mended Bank One-Ohio’s community development invest
ment activities in the Cincinnati MMA and praised the
bank’s use of complex qualifying investments. During the
evaluation period, Bank One-Ohio made community devel
opment investments totaling $44.2 million throughout its
assessments areas, including investments in projects that
provided housing, job-training services, and adult educa
tion for LMI individuals. Moreover, examiners noted that
Bank One-Ohio’s community development investments
facilitated the development or renovation of more than
2,100 units of affordable housing. Bank One Corporation
states that the bank has made more than $155 million in
qualified community development investments and dona
tions since the Bank One-Ohio Evaluation.
multistate metropolitan area ( “MMA” ) in Ohio and Kentucky; and the
non-MSA communities o f Athens, Portsmouth, Sidney, AshlandWooster, Findley-Marion, and Zanesville, all in Ohio.

365

E. H M D A D ata and Fair Lending Record
The Board also has carefully considered the lending
records of JP M organ and Bank One Corporation in light
of comments on the HMDA data reported by their subsidi
aries .54 Based on 2002 HMDA data, several commenters
alleged that JP Morgan Bank, Chase Mortgage, Chase
USA, and Bank One disproportionately excluded or denied
African-American and Hispanic applicants for home mort
gage loans in various MSAs in several states and did
not adequately serve LMI geographies and individuals
and small businesses .55 These commenters asserted that
JP M organ’s denial rates for minority applicants were
higher than the rates for nonminority applicants and that
JP M organ’s denial disparity ratios compared unfavorably
with those ratios for the aggregate lenders in certain MSAs.
In the JP Morgan/Bank One Corporation Order and the
JP Morgan/ChaseFSB Order, the Board considered sub
stantially similar comments about JP M organ’s HMDA
data for MSAs in several of these states, and the Board’s
HMDA analysis in those orders is incorporated by
reference .56
The 2002 data indicate that JP M organ’s denial disparity
ratios 57 for African-American and Hispanic applicants for
HMDA-reportable loans overall were comparable with or
more favorable than those ratios for the aggregate lenders
in all markets reviewed, with the exception of Florida .58
JP M organ’s percentages of total HMDA-reportable loans
to African-Americans and Hispanic borrowers generally
were comparable with or exceeded the total percentages
for aggregate lenders in most of the areas reviewed. More
over, JP M organ’s percentage of total HMDA-reportable
loans to borrowers in minority census tracts generally was

54. The Board analyzed 2001 and 2002 HMDA data for JP Morgan
Bank and Bank One and reviewed HMDA-reportable loan origina
tions in various MSAs and states. The data for each state consisted
o f total mortgage originations in metropolitan areas included in the
assessment areas of both banks.
55. Several commenters criticized the lending performance of
JP Morgan or Bank One in markets where they had no branches and,
therefore, no obligations under the CRA.
56. The Board reviewed the following MSAs in the JP Morgan/
Bank One Corporation Order: Benton Harbor and Detroit, both in
Michigan; Boston, Massachusetts; Dallas, Texas; Memphis, Tennes
see; Raleigh, North Carolina; Richmond, Virginia; San Francisco,
California; St. Louis, Missouri; and Washington, D.C. In the JP Mor
gan/Chase FSB Order, the Board reviewed the following MSAs:
Denver, Colorado; Jackson, Mississippi; Portland, Oregon; and
Seattle, Washington. Commenters on this proposal cited these MSAs
again. The only MSAs identified by commenters that were not
discussed in the two previous JP Morgan orders were Little Rock,
Arkansas; Tucson, Arizona; and Milwaukee, Wisconsin. HMDA
data for these additional M SAs indicate that the percentage of
JP Morgan’s loan originations to African Americans and Hispanics
equaled or exceeded those percentages for the aggregate lenders.
57. The denial disparity ratio equals the denial rate of a particular
racial category (e.g., African Americans) divided by the denial rate for
whites.
58. JP Morgan operates in a portion of Florida through branches
of JP Morgan Trust. As previously noted, the bank is a wholesale
institution that does not engage in retail bank activities.

366

Federal Reserve Bulletin □ Summer 2004

comparable with or exceeded the total percentage for
aggregate lenders in the areas reviewed .59
The 2002 data indicate that Bank One’s denial disparity
ratios for African-American and Hispanic applicants for
HMDA-reportable loans overall in the areas reviewed gen
erally were comparable with or more favorable than those
ratios for the aggregate lenders .60 These data also indicate
that Bank O ne’s percentage of total HMDA-reportable
loans to borrowers in minority census tracts generally was
comparable with or exceeded the total percentage for the
aggregate lenders .61 Moreover, Bank One Corporation’s
percentage of total HMDA-reportable loans to AfricanAmerican and Hispanic borrowers generally was compa
rable with or exceeded the total percentage for the aggre
gate lenders in the markets reviewed.
Although the HMDA data may reflect certain disparities
in the rates of loan application, originations, and denials
among members of different racial groups and persons
with different income levels in certain local areas, the
HMDA data generally do not indicate that JP Morgan and
Bank One Corporation are excluding any race, income
segment of the population, or geographic area on a prohib
ited basis. The Board nevertheless is concerned when
HMDA data for an institution indicate disparities in lend
ing 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 or
income level. The Board recognizes, however, that HMDA
data alone provide an incomplete measure of an institu
tion’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
covered loans .62 HMDA data, therefore, have limitations
that make them an inadequate basis, absent other informa
tion, 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

59. For purposes o f this HMDA analysis, a minority census tract
means a census tract with a minority population of 80 percent or more.
60. One commenter alleged disparities in Bank One’s mortgage
lending record in the New Orleans, Louisiana, and Phoenix, Arizona,
MSAs. The OCC reviewed and rejected this allegation in connection
with its approval of JP Morgan’s acquisition of Bank One’s corporate
trust business in November 2003. The Board also notes that Bank
One’s HMDA-related lending in the Phoenix MSA equals or exceeds
such lending by the aggregate lenders, including loans to all applicant
groups that are frequently underserved.
61. Delaware was the only assessment area where Bank One’s
lending in minority census tracts was less favorable than the aggregate
lenders. Bank One does not operate a retail branch in the state.
62. 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.

tion, including examination reports that provide an on-site
evaluation of compliance by the subsidiary depository
institutions of JP Morgan and Bank One Corporation with
fair lending laws. Examiners noted no fair lending law
issues or concerns in the CRA performance evaluations
of the depository institutions controlled by JP M organ or
Bank One Corporation.
The record also indicates that JP Morgan and Bank One
Corporation have taken steps to ensure compliance with
fair lending laws. Both organizations have instituted
corporate-wide policies and procedures to help ensure com
pliance with all fair lending and other consumer protection
laws and regulations. These programs include file reviews
for compliance with federal and state fair lending and other
consumer protection rules and regulations, fair lending
policies, and testing the integrity of HMDA data. JP M or
gan and Bank One Corporation also conduct regular com
pliance and fair lending training for their employees.
JP Morgan has stated that it is reviewing the compliance
programs of Bank One Corporation and that, on consum
mation of the transaction, the combined organization will
adopt the best practices of both JP Morgan and Bank One
Corporation.
The Board also has considered the HMDA data in light
of the programs described above and the overall perfor
mance records of the subsidiary banks of JP M organ and
Bank One Corporation under the CRA. These established
efforts demonstrate that the banks are actively helping to
meet the credit needs of their entire communities.
F. Subprim e L ending and A busive Lending Practices
As previously noted, a number of commenters cited con
cerns about the subprime mortgage lending and related
activities of JP Morgan and Bank One Corporation. These
commenters expressed concern that both organizations
originate subprime loans and other alternative loan prod
ucts and criticized the role of JP Morgan in purchasing
subprime loans from other lenders, securitizing packages
of subprime loans, purchasing securitized packages of
subprime loans, and servicing or acting as trustee of record
for subprime loan pools. Commenters generally argued
that JP Morgan purchased subprime loans and securitized
packages of subprime loans without performing adequate
due diligence to screen for “predatory” loans. Other com
menters expressed concern that JP Morgan and Bank One
Corporation were financing unaffiliated lenders who pro
vided subprime mortgage loans and alternative products
such as payday loans.
JP Morgan Bank, Chase USA, and CMMC originate
subprime mortgage loans. Bank One Corporation and its
subsidiaries, however, do not engage in this activity .63
CMMC services subprime mortgage loans and purchases
subprime loans in the secondary market. JP M organ
63.
Bank One does not originate subprime mortgage loans through
brokers or purchase loans from correspondent lenders. It also does not
originate or purchase “high cost” mortgage loans, as defined in the
Home Ownership and Equity Protection Act ( “HOEPA” ), and origi
nates prime mortgage loans only for sale in the secondary market.

Legal Developments

Securities, Inc. ( “JPM SI” ), a subsidiary of JP Morgan,
securitizes subprime mortgage loans originated by CMMC,
its affiliates, and third parties. As an underwriter of
mortgage-related asset-backed securities, JPMSI does not
control the selection criteria for the loans and receivables
in the loan pools that it securitizes and plays no role in the
lending practices or credit review processes of the lenders
involved .64 JP Morgan Bank is a warehouse lender pro
viding temporary financing to mortgage lenders, including
non-affiliated subprime mortgage lenders. The bank also
serves as a trustee for securities backed by mortgages or
other assets, including subprime mortgage loans. Bank One
also participates in the securitization of mortgage loans as
an underwriter of mortgage-backed securities and provides
warehouse lines of credit to some mortgage lenders
engaged in subprime lending. In addition, JP M organ and
Bank One Corporation lend to companies that make pay
day or tax-anticipation-refund loans.
The Board has previously noted that subprime lending
is a permissible activity and can provide needed credit
to consumers who have difficulty meeting conventional
underwriting criteria .65 The Board continues to expect all
bank holding companies and their affiliates to conduct their
operations related to subprime lending free of any abusive
lending practices and in compliance with all applicable
law, including fair lending law s .66
JP Morgan has a number of policies and procedures in
place to ensure that its activities are conducted in compli
ance with applicable fair lending laws and are not abusive.
JP M organ’s subsidiary, CMMC, has developed lending
practices that are used by all of the subsidiary’s mortgage
lending affiliates. CM M C’s mortgage-underwriting proce
dures assess the borrow er’s ability to repay the mortgage
debt as well as the borrow er’s total debt. Applications are
also reviewed for loan-to-value ratios and credit bureau
scores to determine if the applicant is eligible for a prime
mortgage loan from a JP Morgan subsidiary. Qualified
applicants are offered the opportunity to have their applica
tions processed as prime mortgage loans. CM M C’s lending
procedures also prohibit HOEPA loans, mandatory prepay
ment penalties, short-term subprime loans with balloon
payments, loan-to-value ratios in excess of 1 0 0 percent,
and mandatory arbitration. As discussed above, JP Morgan
has implemented corporate-wide policies and procedures
to help ensure compliance with all fair lending and other
consumer protection laws. In addition, CM M C’s proce
dures require reappraisal of any real estate if questions are
raised about its value. This process uses software programs
that review recent sales and foreclosures in the area to
identify real estate that might be overvalued.

64. JPMSI does not underwrite HOEPA mortgages or other “high
cost” mortgages as defined under state law.
65. See, e.g., Bank o f America Corporation, 90 Federal Reserve
Bulletin 217 (2004) ( “Bank o f America Order” ); Royal Bank o f
Canada, 88 Federal Reserve Bulletin 385 (2002).
66. The Board notes that the OCC has responsibility for enforcing
compliance with fair lending laws by national banks and that the FTC,
HUD, and DOJ have primary responsibility for enforcing such compli
ance by nondepository institutions.

367

JP Morgan has implemented a system of due diligence
to help ensure that it does not purchase or otherwise invest
in “predatory” subprime loans. These practices include
requiring originating lenders to meet specific criteria estab
lished by CMMC, conducting on-site due diligence of the
lender and its operations before purchasing their loans,
and obtaining representation and warranties in the purchase
agreements that the loans are not “ high cost,” “predatory,”
or abusive under federal, state, or local laws and ordi
nances and that the lender uses procedures to ensure that
no such loans are sold .67
In addition, JP Morgan follows 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. The loan sampling process includes
obtaining a secondary value on the mortgaged property,
performing cost tests before purchase, and performing tar
geted reviews of purchased loans. The review also seeks
to identify any instances o f “ equity stripping.” Moreover,
JP M organ conducts a due diligence review of firms selling
subprime loans and the firms selected to service loans in
each securitization to help prevent the purchase and securi
tization of loans that are not in compliance with applicable
federal and state consumer protection law s .68
JP Morgan and Bank One Corporation consider the
reputation of potential customers engaged in subprime
lending that apply for warehouse lines of credit and have
other protections in place to limit transactions with lenders
that might originate loans with abusive terms. These prac
tices include accepting only conforming mortgages as col
lateral for a warehouse line of credit and obtaining repre
sentations and warranties in loan agreements that confirm
the borrower’s compliance with all applicable laws. When
providing warehouse lines of credit to lenders making
tax-refund-anticipation and payday loans, JP M organ and
Bank One Corporation state that their credit evaluations of
these types of lenders include, as applicable, the custom
er’s reputation and other character-related issues, as well as
any issues peculiar to the borrower’s business or opera-

67. Several commenters discussed a well-publicized series of fore
closures involving mortgages originated by JP Morgan on homes
purchased in the Poconos during the last decade. The Board previ
ously has considered comments about these mortgages in the context
of recent applications by JP Morgan or JP Morgan Bank and hereby
adopts the findings in those cases. The Board notes, moreover, that
JP Morgan has implemented a plan to stabilize the community by
reducing mortgage interest rates and the outstanding principal bal
ances to reflect the current value of the properties. More than 200
affected borrowers have accepted loan modification.
68. One commenter also stated that Fairbanks Capital Corporation,
a loan servicer used by JP Morgan and Bank One Corporation,
engaged in illegal practices in servicing subprime loans. The com
menter’s allegations were addressed in a settlement with the FTC and
HUD dated November 12, 2003, by Fairbanks Capital Holding Corpo
ration, which included its wholly owned subsidiary, Fairbanks Capital
Corporation, and the founder o f both entities. Neither JP Morgan nor
Bank One Corporation was implicated in the complaint filed jointly
by the FTC and HUD. The settlements resolved the complaint’s
allegations, enjoined the defendants from future law violations, and
imposed restrictions on their business practices.

368

Federal Reserve Bulletin □ Summer 2004

tions that might affect credit risk. These policies and proce
dures are designed to reduce the likelihood that either
organization will be involved in “predatory” or abusive
lending practices. Moreover, neither JP M organ nor Bank
One Corporation plays any role in the lending practices or
credit review processes of these lenders.

branch. In addition, the Board notes that the Board and the
OCC, as the appropriate federal supervisors of JP M organ
Bank and Bank One Corporation’s subsidiary banks will
continue to review the banks’ branch closing record in the
course of conducting CRA performance evaluations.
H. O ther M atters

G. Branch Closings
Several commenters expressed concerns that the proposed
merger would result in possible branch closings and the
Board has carefully considered these comments in light of
all the facts of record. JP Morgan has represented that any
merger-related branch closings, relocations, or consolida
tions would be determined after the proposed merger of
JP Morgan Bank and Merged Lead Banks later this year.
The Board notes that there is little geographic overlap
between the branches of the subsidiary banks of JP Morgan
and Bank One Corporation. JP Morgan also represents that
no decision has been made on which organization’s branch
closure policy would be in effect after consummation of
the proposed merger. Both policies require review of a
number of factors before closing or consolidating a branch,
including an assessment of the branch, the demographics
of the market, a profile of the community where the branch
is located, and the effect of the proposed action on cus
tomers. The most recent CRA evaluations of JP Morgan
B ank 69 and Bank O ne-Illinois 70 noted favorably the banks’
records of opening and closing branches.
The Board also has considered the fact that federal
banking law provides a specific mechanism for addressing
branch closings .71 Federal law requires an insured deposi
tory institution to provide notice to the public and to the
appropriate federal supervisory agency before closing a
69. Examiners stated that JP Morgan Bank’s record of opening and
closing branches did not adversely affect the accessibility of the
bank’s delivery systems. JP Morgan Bank sold, relocated, or consoli
dated 23 branches during its most recent CRA evaluation period. Ten
branches were consolidated into other branches of the bank, twelve
branches were relocated, and one branch was sold. One branch was
relocated from a middle-income to a moderate-income census tract,
and the remaining relocations involved census tracts with the same
income levels. Of the ten consolidations, only two changed from LMI
census tracts to non-LMI census tracts. The remaining consolidations
involved census tracts with the same income levels.
JP Morgan reported that in 2003, JP Morgan Bank closed one LMI
branch in Austin, Texas; consolidated one non-LMI branch into a
nearby non-LMI branch in Mount Kisco, New York; and relocated
one branch in Brooklyn, New York, and Bridgeport and Ridgefield,
both in Connecticut. The relocations did not change the census-tractincome designation of the branches. JP Morgan Bank also opened a
non-LMI branch in Pearland, Texas.
70. Bank One currently is expanding its branch network and has
opened 58 branches in 2003. It recently announced plans to open
100 branches each year for the next three years.
71. Section 42 o f the Federal Deposit Insurance Act ((12 U.S.C.
§ 1831r-l), 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 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.

Many commenters discussed JP M organ’s Community
Development Initiative. A number of commenters praised
the Initiative as indicative of JP M organ’s commitment
to the communities it serves. Other commenters, however,
expressed concerns about the Community Development
Initiative. Some criticized it for providing insufficient fund
ing for loans, investments, and grants or for lacking spe
cific lending and investment commitments by locality,
product, or program. Others urged the Board to require
JP Morgan to enter into or renew agreements with certain
community organizations.
As the Board previously has explained, in order to
approve a proposal to acquire an insured depository institu
tion, an applicant must demonstrate a satisfactory record of
performance under the CRA without reliance on plans or
commitments for future action .72 Moreover, the Board has
consistently stated that neither the CRA nor the federal
banking agencies’ CRA regulations require depository
institutions to make pledges or enter into commitments
or agreements with any organization. The Board views the
enforceability of pledges, initiatives, and agreements with
third parties as matters outside the scope of the CRA .73 In
this case, as in past cases, the Board instead has focused on
the demonstrated CRA performance record of the 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 the proposal under the convenience and
needs factor. In reviewing future applications by JP M or
gan under this factor, the Board similarly will review
JP M organ’s actual CRA performance record and the pro
grams it has in place to meet the credit needs of its
communities at the time of such review.
I. Conclusion on C onvenience and N eeds
Considerations
The Board recognizes that this proposal represents a sig
nificant expansion of JP Morgan and its scope of opera
tions. Accordingly, an important component of the Board’s
review has been its consideration of the effects of the
proposal on the convenience and needs of all the communi
ties served by JP M organ and Bank One Corporation.
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 of the deposi
tory institutions of JP Morgan and Bank One Corporation.

72. See Bank of America Order; NationsBank, 84 Federal Reserve
Bulletin 858 (1998).
73. See, e.g., Bank of America Order at 52; Citigroup Inc., 88 Fed
eral Reserve Bulletin 485, 488 (2002).

Legal Developments

A significant number of commenters have expressed sup
port for the proposal based on the records of both organiza
tions in helping to serve the banking needs and, in particu
lar, the lending needs of their entire communities, including
LMI areas. Other commenters have expressed concern
about specific aspects of JP M organ’s or Bank One Cor
poration’s record of performance under the CRA in their
assessment areas and have expressed reservations about
whether the resulting organization would be as responsive
to the banking and credit needs of its community as the two
organizations are now. The Board has carefully considered
these concerns in the context of the overall CRA records
of JP Morgan and Bank One Corporation, reports of exami
nations of CRA performance, and information provided
by JP Morgan, including its responses to comments. The
Board also has considered information submitted by
JP Morgan concerning its performance under the CRA
since its last CRA performance evaluation.
As discussed in this order, the record of this proposal
demonstrates that the subsidiary depository institutions of
JP Morgan and Bank One Corporation have strong records
of meeting the credit needs of their communities. The
Board expects the resulting organization to continue to
help serve the banking and credit needs of all its communi
ties, including LMI neighborhoods. Based on all the facts
of record, and for the reasons discussed above, the Board
concludes that considerations relating to the convenience
and needs factor, including the CRA performance records
of the relevant depository institutions, 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 New York and Chicago. A number of com
menters requested that the Board hold additional public
meetings or hearings, including at locations in Florida,
Texas, and California. 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 .74 As previously discussed, more than 150 interested
persons appeared and provided oral testimony at the two
public meetings held by the Board. Attendees included
various elected officials, members of community groups,
and representatives of businesses and business groups from
cities and towns nationwide. In addition, the Board pro
vided a period of more than 80 days for interested persons
to submit written comments on the proposal. More than
260 interested persons who did not testify at the public
meetings provided written comments.
In the Board’s view, interested persons have had ample
opportunity to submit their views on this proposal. Numer
ous commenters, in fact, submitted substantial materials
74.
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 a bank to be acquired makes a timely written
recommendation o f denial. (12 U.S.C. § 1842(b). In this case, the
Board has not received such a recommendation from any state or
federal supervisory authority.

369

that have been considered carefully by the Board in acting
on the proposal. Commenters requesting additional public
meetings have failed to demonstrate why their written
comments do not adequately present their views, evidence,
and allegations. They also have not shown why the public
meetings in New York and Chicago and the extended
comment period did not provide an adequate opportunity
for all interested persons 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
meetings or hearings are not required and are not necessary
or warranted to clarify the factual record on the proposal.
Accordingly, the requests for additional public meetings or
hearings are hereby denied .75
Conclusion
Based on the foregoing, and in light of all the facts of
record, the Board has determined that the applications
should be, and hereby are, approved. In reaching 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.
Approval of the applications is specifically conditioned
on compliance by JP M organ with all the commitments
made to the Board in connection with the proposal and
with the conditions stated or referenced in this order. For
purposes of this transaction, these commitments and condi
tions 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.
75.
A number of commenters requested that the Board delay action
on the proposal or extend the comment period until JP Morgan:
(i) Provides more detail about its Community Development
Initiative,
(ii) Enters into a written, detailed, and publicly verifiable CRA
agreement negotiated with community groups, or
(iii) Enters into new CRA agreements with local community
groups.
The Board believes that the record in this case does not warrant
postponing its consideration of the proposal. During the application
process, the Board has accumulated a significant record, including
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 regula
tions 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 perfor
mance of an organization and does not require that the organization
enter into contracts or agreements with others to implement 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 o f 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 informational insufficiency, is not
warranted.

370

Federal Reserve Bulletin □ Summer 2004

The merger of JP M organ and Bank One Corporation
and the acquisition of Bank One Corporation’s subsidiary
banks shall not be consummated before the fifteenth calen
dar 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 New York, acting pursuant to delegated
authority.
By order of the Board of Governors, effective June 14,
2004.

Houston

Voting for this action: Chairman Greenspan, Vice Chairman Fergu
son, and Governors Gramlich, Bies, Olson, and Bernanke. Absent and
not voting: Governor Kohn.

Banking Market Data

R obert

d e V.

F r ie r s o n

Deputy Secretary o f the Board

A ppendix A
Banking Markets in which JP Morgan and Bank One
Corporation Compete Directly
D elaw are Banking M arket
Wilmington
New Castle
Maryland.

County,

Delaware,

and

Cecil

County,

Houston Ranally M etropolitan Area and M ontgomery
County.
San Antonio
San Antonio MSA and Kendall County.

A ppendix B

Unconcentrated Banking Market
Fort Worth, Texas
JP Morgan operates the seventh largest depository institu
tion in the market, controlling deposits of $512.3 million,
representing approximately 4 percent of market deposits.
Bank One Corporation operates the largest depository insti
tution in the market, controlling deposits of $ 2 . 1 billion,
representing approximately 16.1 percent of market depos
its. After the proposed merger, JP Morgan would operate
the largest depository institution in the market, controlling
deposits of approxim ately $ 2 . 6 billion, representing
approximately 20.2 percent of market deposits. The HHI
would increase by 130 points to 991, and 59 depository
institutions would remain in the banking market.
Moderately Concentrated Banking Markets

Florida Banking M arket
Austin, Texas
West Palm Beach
The portion of Palm Beach County east of Loxahatchee
and the towns of Indiantown and Hobe Sound.
Texas Banking M arkets
Austin
Austin MSA.
Dallas
Dallas and Rockwall Counties; the southeastern portion of
Denton County, including the towns of Denton and Lewis
ville; the southwestern portion of Collin County, includ
ing the towns of McKinney and Plano; and the towns of
Arlington, Ferris, Forney, Grapevine, Midlothian, Terrell,
and Waxahachie.
Fort Worth
Johnson and Parker Counties; Tarrant County, excluding
the towns of Grapevine and Arlington; and the southwest
ern portion of Denton County, including the towns of
Roanoke and Justin; and the towns of Boyd, Newark, and
Rhome.

JP Morgan operates the fourth largest depository institution
in the market, controlling deposits of $933.3 million, repre
senting approximately 7.7 percent of market deposits. Bank
One Corporation operates the third largest depository insti
tution in the market, controlling deposits of $1.5 billion,
representing approximately 1 2 . 2 percent of market depos
its. After the proposed merger, JP Morgan would operate
the largest depository institution in the market, control
ling deposits of approximately $2.4 billion, representing
approximately 19.9 percent of market deposits. The HHI
would increase by 188 points to 1097, and 58 depository
institutions would remain in the banking market.
Dallas, Texas
JP Morgan operates the fourth largest depository institution
in the market, controlling deposits of $7.4 billion, repre
senting approximately 1 1 . 6 percent of market deposits.
Bank One Corporation operates the second largest deposi
tory institution in the market, controlling deposits of
$ 8 .1 billion, representing approximately 1 2 . 6 percent of
market deposits. After the proposed merger, JP M organ
would operate the largest depository institution in the
market, controlling deposits of $15.5 billion, representing
approximately 24.2 percent of market deposits. The HHI

Legal Developments

would increase by 292 points to 1321, and 113 depository
institutions would remain in the banking market.
San Antonio, Texas
JP Morgan operates the ninth largest depository institution
in the market, controlling deposits of $448.8 million, repre
senting approximately 2.3 percent of market deposits. Bank
One Corporation operates the sixth largest depository insti
tution in the market, controlling deposits of $569 million,
representing approximately 3 percent of market deposits.
After the proposed merger, JP Morgan would operate the
sixth largest depository institution in the market, control
ling deposits of approximately $ 1 billion, representing
approximately 5.3 percent of market deposits. The HHI
would increase by 14 points to 1530, and 50 depository
institutions would remain in the banking market.
West Palm Beach, Florida
JP Morgan operates the 31st largest depository institution
in the market, controlling deposits of $65.8 million, repre
senting less than 1 percent of market deposits. Bank One
Corporation operates the 27th largest depository institution
in the market, controlling deposits of $94.4 million, repre

371

senting less than 1 percent of market deposits. After the
proposed merger, JP Morgan would operate the 18th larg
est depository institution in the market, controlling depos
its of $160.2 million, representing less than 1 percent of
market deposits. The HHI would increase by less than
1 point to 1325, and 55 depository institutions would
remain in the banking market.
Highly Concentrated Banking Market
Wilmington, Delaware
JP M organ operates the second largest depository institu
tion in the market, controlling deposits of $ 6 . 6 billion,
representing 10.7 percent of market deposits. Bank One
Corporation operates the sixth largest depository institution
in the market, controlling deposits of $ 2 . 6 billion, repre
senting 4.3 percent of market deposits. After the proposed
merger, JP Morgan would remain the second largest
depository institution in the market, controlling deposits
of approximately $9.3 billion, representing approximately
14.9 percent of market deposits. The HHI would increase
by 91 points to 3060, and 33 depository institutions would
remain in the banking market.

Appendix C
CRA Performance Evaluations of Bank One Corporation’s Subsidiary Depository Institutions
1.

Subsidiary Depository Institutions in Operation 76

Subsidiary Depository Institution

CRA Performance Rating

Date

Agency

Bank One-Dearborn

Outstanding

March 2001

OCC

Bank One-Ohio

Satisfactory

M arch 2000

OCC

First USA Bank N.A.,
Wilmington, D elaw are 77

Outstanding

March 2002

OCC

76. Bank One Trust Company, National Association, Columbus,
Ohio, is not examined for CRA performance because it is a specialpurpose entity that is exempt from CRA requirements.

77. First USA Bank N.A. now does business as Bank One, Delaware, National Association,

372

Federal Reserve Bulletin □ Summer 2004

Entities Merged into Bank One

Subsidiary Depository Institution

CRA Performance Rating

Date

Agency

American National
Bank One, Arizona,
National Association,
Phoenix, Arizona
Bank One, Colorado,
National Association,
Denver, Colorado
Bank One, Florida,
Venice, Florida
Bank One-Illinois
Bank One, Indiana,
National Association,
Indianapolis, Indiana
Bank One, Kentucky,
National Association,
Louisville, Kentucky
Bank One, Louisiana,
National Association,
Baton Rouge, Louisiana
Bank One, Michigan,
National Association,
Detroit, Michigan
Bank One, Oklahoma,
National Association,
Oklahoma City, Oklahoma
Bank One-Springfield
Bank One, Texas,
National Association,
Dallas, Texas
Bank One, Utah,
National Association,
Salt Lake City, Utah
Bank One, Wisconsin,
Milwaukee, Wisconsin

Satisfactory
Satisfactory

December 1999
June 1999

occ
occ

Outstanding

M arch 2000

occ

Satisfactory

September 1999

FDIC

Satisfactory
Satisfactory

March 31, 2000
June 1999

OCC
OCC

Satisfactory

March 2000

OCC

Satisfactory

June 1999

OCC

Outstanding

December 2000

occ

Satisfactory

June 1999

occ

Satisfactory
Satisfactory

December 1999
M arch 2000

occ
occ

Outstanding

M arch 2000

occ

Outstanding

February 2000

FDIC

Subsidiary Depository Institution

CRA Performance Rating

Date

Agency

Bank One, West Virginia,
Huntington, National Association,
Huntington, West Virginia
Bank One, West Virginia,
Wheeling, National Association,
Wheeling, West Virginia

Satisfactory

M arch 2000

OCC

Satisfactory

March 2000

occ

Entities Merged into Bank One-Ohio

Legal Developments

Manulife Financial Corporation
Toronto, Canada
John Hancock Financial Services, Inc.
Boston, M assachusetts
Order Approving Formation of Bank Holding Companies
and Elections of Financial Holding Company Status
M anulife Financial Corporation ( “ M anulife” ) has re
quested the Board’s approval under section 3 of the Bank
Holding Company Act ( “ BHC A ct ” ) 1 to become a bank
holding company and acquire all the voting shares of
John Hancock Financial Services, Inc. (“John Hancock” )
(together, “Applicants” ), and thereby indirectly acquire
First Signature Bank and Trust Company, Portsmouth,
New Hampshire ( “ First Signature” ), a wholly owned
direct subsidiary of John Hancock .2 John Hancock has also
requested the Board’s approval to become a bank holding
company and retain control of First Signature .3 As part of
the proposal, Manulife and John Hancock have filed with
the Board elections to become financial holding companies
pursuant to sections 4(k) and (/) of the BHC Act and
section 225.82 of the Board’s Regulation Y.4
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
( 6 8 Federal Register 70,506 (2003)). The time for filing
comments has expired, and the Board has considered the
proposal in light of the factors set forth in section 3 of the
BHC Act.
Manulife, with total assets of $115.3 billion, is a Cana
dian insurance and financial services firm engaged princi
pally in the business of underwriting life and health insur
ance and in reinsurance activities .5 Manulife also engages
in a variety of other financial activities in Canada, the
United States, and other countries, including investment
advisory and management services and securities broker
age activities. Manulife principally operates in the United
States through subsidiaries that include two insurance com-

1. 12 U.S.C. §1842.
2. Manulife proposes to acquire John Hancock through a merger
with a newly formed direct subsidiary of Manulife. After the merger,
John Hancock would be a wholly owned direct subsidiary of Manulife.
3. John Hancock holds First Signature in accordance with grand
father rights under section 4 (f) of the BHC Act (12 U.S.C. § 1843(f)),
which exempts from treatment as a bank holding company a company
that has continually owned an institution that became a bank as a
result of the enactment o f the Competitive Equality Banking Act of
1987 (Pub. L. No. 100-86 (1987)). First Signature is an insured bank
that currently accepts demand deposits but does not make commercial
loans. On consummation o f this proposal, neither John Hancock nor
Manulife would be entitled to the exemption under section 4 (f) of the
BHC Act.
4. 12 U.S.C. §§ 1843(k) & (/); 12 CFR 225.82.
5. Asset data are as o f December 31, 2003. Manulife was incorpo
rated under Canada’s Insurance Companies Act in 1999 to become the
holding company for The Manufacturers Life Insurance Company
( “Manufacturers Life” ), which converted from mutual to stock orga
nization in September 1999. Manufacturers Life is now a life insur
ance company with common shares and a wholly owned direct subsid
iary o f Manulife.

373

panies, a registered investment advisor, and a registered
open-end investment management company. Through these
subsidiaries, M anulife offers individual life insurance,
group pension, and annuity products and distributes edu
cational savings plans and managed account products in
every state in the United States. M anulife’s only subsidiary
bank, M anulife Bank of Canada, Waterloo, Ontario
( “Manulife Bank” ), has no banking operations in the
United States .6
John Hancock, with total assets of $111.3 billion, is an
insurance and financial services company engaged princi
pally in underwriting life and long-term care insurance .7
John Hancock also provides annuities, mutual funds, and
other investment products, as well as investment advisory
and management services, to retail and institutional cus
tomers in the United States and internationally. First Signa
ture is a New Hampshire state chartered bank and John
H ancock’s only subsidiary depository institution. First Sig
nature, the 8 th largest depository institution in New Hamp
shire, controls assets of $355 million, which represents less
than 2 percent of assets held by banks in the state . 8
The combined organization would be the second largest
life insurer in North America by market capitalization.
Factors Under the Bank Holding Company Act
The BHC Act sets forth the factors the Board must con
sider when reviewing the formation of a bank holding
company or the acquisition of a bank. These factors are the
competitive effects of the proposal in the relevant geo
graphic markets; the financial and managerial resources
and future prospects of the companies and banks involved
in the proposal; the convenience and needs of the commu
nities to be served, including the records of performance of
the insured depository institutions involved in the transac
tion under the Community Reinvestment Act ( “ CRA ” ) 9
and the availability of information to determine and enforce
compliance with the BHC Act and other applicable federal
laws . 10
The Board has considered these factors in light of a
record that includes information provided by Applicants,
confidential supervisory and examination information, and
publicly reported financial and other information. The
Board also has contacted and considered information pro

6. Manulife Bank, a wholly owned subsidiary of Manufacturers
Life, was established in 1993 as the first federally regulated bank in
Canada owned by an insurance company.
7. Asset data are as of December 31, 2003. John Hancock was
incorporated in 1999 to become the holding company for John Han
cock Mutual Life Insurance Company ( “John Hancock Life” ), which
converted from mutual to stock organization on February 1, 2000.
John Hancock Life is now a life insurance company with common
shares and a wholly owned direct subsidiary of John Hancock.
8. Asset and ranking data are as of December 31, 2003.
9. 12 U.S.C. §2901 et seq.
10. 12 U.S.C. § 1842(c). In cases involving interstate bank acqui
sitions by bank holding companies, the Board also must consider the
concentration of deposits nationwide and in certain individual states,
as well as compliance with the other provisions of section 3(d) of the
BHC Act (12 U.S.C. § 1842(d)).

374

Federal Reserve Bulletin □ Summer 2004

vided by Canada’s Office of the Superintendent of Finan
cial Institutions ( “ O SFI” ), the primary home country
supervisor of Manulife and Manulife Bank, and the appro
priate federal and state agencies, including the relevant
state insurance commissioners, the Federal Deposit Insur
ance Corporation ( “ FD IC” ), and the Securities and
Exchange Commission ( “ SEC ” ) . 11
Competitive Considerations
Section 3 of the BHC Act prohibits the Board from approv
ing a proposal that would result in a monopoly or be in
furtherance of any combination to monopolize or attempt
to monopolize the business of banking in any part of the
United States. The BHC Act also prohibits the Board from
approving a proposed bank acquisition that would substan
tially lessen competition in any relevant banking market
unless the anticompetitive effects of the proposal in that
banking market are clearly outweighed in the public inter
est by the probable effects of the proposal in meeting the
convenience and needs of the community to be served . 12
The proposal involves the acquisition of a bank by
Manulife, which does not have any banking operations in
any banking market in the United States. Based on all the
facts of record, the Board concludes that consummation
of the proposal would not have a significantly adverse
effect on competition or on the concentration of banking
resources in any relevant banking market, and that com
petitive considerations are consistent with approval . 13
Financial and Managerial Factors
As previously noted, the BHC Act requires the Board to
consider the financial and managerial resources and future
prospects of the companies and banks involved in an
acquisition . 14 The Board has reviewed information pro
vided by Manulife and John Hancock, publicly reported
and other financial information, and confidential examina
tion and other supervisory information evaluating the
financial and managerial strength of Manulife, John Han
cock, and First Signature. In addition, the Board has con
sulted relevant supervisory authorities in the United States
and Canada.
The Board has consistently considered capital adequacy
to be an especially important aspect of the analysis of

11. The proposal is also subject to approval by the insurance
commissioners o f Massachusetts, Delaware, and Vermont, the states
in which John Hancock’s U.S. insurance company subsidiaries are
domiciled, and by OSFI.
12. 12 U.S.C. § 1842(c)(1).
13. The combination of the nonbanking businesses of Manulife and
John Hancock is subject to review for its potential effect on competi
tion by several federal, state, and foreign regulators. The Applicants
filed a pre-merger notification with the Federal Trade Commission
and the Antitrust Division of the Department of Justice ( “DOJ” )
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
(15 U.S.C. § 18a), and the DOJ granted early termination of the
statutory waiting period on November 13, 2003.
14. 12 U.S.C. § 1842(c)(2).

financial factors . 15 M anulife’s capital levels are considered
equivalent to those that would be required of a U.S. bank
ing organization under similar circumstances. All the sub
sidiaries of Manulife and John Hancock that are subject to
regulatory capital requirements currently exceed those
minimum regulatory capital requirements. In addition, First
Signature is well capitalized under relevant federal guide
lines, and would remain so on consummation. Other finan
cial factors are also consistent with approval . 16
The Board has carefully considered the managerial
resources of Manulife, John Hancock, and First Signa
ture in light of all the facts of record, including a public
comment on the proposal. 17 The Board notes that First
Signature is considered well managed, and is expected to
remain so after consummation. Based on all the facts of
record, the Board has concluded that the financial and
managerial resources and future prospects of Applicants
and First Signature are consistent with approval under
section 3 of the BHC Act.
Convenience and Needs Considerations
In acting on the proposal, the Board must consider the
effects of the proposal on the convenience and needs of the
communities to be served and take into account the records
of the relevant insured depository institutions under the
CRA. An institution’s most recent CRA perform ance
evaluation is a particularly important consideration in
the applications process because it represents a detailed,
on-site evaluation of the institution’s overall record of
performance under the CRA by its appropriate federal
supervisor . 18
The Board has carefully considered the effects of the
proposal on the convenience and needs of the communities
to be served in light of all the facts of record, including the
CRA performance record of First Signature, information
provided by Applicants, and a public comment received on
15. See Chemical Banking Corporation, 82 Federal Reserve Bulle
tin 230 (1996).
16. A commenter expressed concern about press reports discussing
a potential financial exposure of Manulife and John Hancock through
John Hancock’s holding of $152 million in public and private bonds
issued by Parmalat Finanzaria SpA, an unaffiliated foreign company.
The Board notes that the investment represented 0.1 percent of John
Hancock’s total assets and that John Hancock charged off most of that
investment in 2003.
17. Citing various press reports, a commenter asserted that the
activities of Manulife and John Hancock overseas have caused finan
cial harm to individuals, damaged the environment, or caused other
societal harm. The commenter also voiced concern about requests
for information issued to Manulife by U.S. and Canadian regulators
seeking information related to mutual fund activities. The commenter
suggested that these issues reflect negatively on the managerial
resources of Applicants. The Board notes that these contentions con
tain no evidence of illegality on the part of Manulife, nor do the press
accounts indicate regulatory actions that would affect adversely the
safety and soundness of the institutions involved in the proposal. The
Board has consulted with and considered information received from
the relevant supervisors and notes that, if any illegal activity is found,
these agencies have ample authority to address such matters.
18. Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).

Legal Developments

the proposal. Manulife currently does not control an institu
tion subject to evaluation under the CRA. First Signature,
the insured bank owned by John Hancock, received an
overall rating of “ satisfactory” at its most recent CRA
performance examination by its primary federal supervisor,
the FDIC, as of December 1, 1999. First Signature does
not make commercial loans and has been designated as a
wholesale institution for purposes of evaluation under the
CRA . 19
At the most recent examination, examiners characterized
First Signature’s loan products that target low- and
moderate-income individuals as “ flexible and innovative.”
In considering First Signature’s community development
outreach, examiners reported that First Signature actively
pursued opportunities to offer its specialized community
development loan products, and that the Bank played a
leadership role in many community development activities
and organizations, including two affordable housing loan
consortiums in New Hampshire.
Based on these and all the facts of record, the Board has
concluded that considerations relating to the convenience
and needs of the communities to be served, including the
CRA performance records of the institutions involved, are
consistent with approval.
Other Supervisory Considerations
The Board notes that a substantial portion of the U.S.
activities of Manulife and John Hancock are subject to
functional regulation by state insurance commissioners or
the SEC. The Board will, consistent with the provisions
of section 5 of the BHC Act as amended by the G ram m Leach-Bliley Act, rely on the appropriate state insurance
regulators and the SEC for examination and other super
visory information in fulfilling the Board’s responsibilities
as a holding company supervisor.
The Board also has considered the supervision of Manu
life as a diversified financial services company organized
in Canada. OSFI is the consolidated supervisor for M anu
life and Manulife Bank and has legislative authority to
supervise and set capital requirements for diversified finan
cial services companies in Canada, including insurance
holding companies. OSFI conducts inspections of Manu
life and its subsidiaries, including Manulife Bank, and
requires Manulife to submit reports about its operations on
a consolidated basis. OSFI has stated that it supervises
19.
See 12 CFR 345.25(a). A commenter objecting to the pro
posal expressed concern that John Hancock planned to expand the
activities o f First Signature to those o f a full-service bank without
submitting a CRA plan as part o f its application. Although on consum
mation o f this proposal John Hancock could expand the scope of First
Signature’s activities, Applicants have stated that there are no current
plans to do so. Moreover, the CRA requires that, in considering an
acquisition proposal, the Board carefully review the existing CRA
performance records o f the relevant depository institutions. First Sig
nature’s future activities, performance under the CRA, and continued
qualification as a wholesale institution will be reviewed by the FDIC
in connection with future CRA evaluations o f First Signature, and the
Board will consider the actual CRA performance record in any subse
quent application by Applicants to acquire a depository institution.

375

Manulife Bank in the same manner that it supervises other
Canadian banks that the Board has previously determined
to be subject to comprehensive consolidated supervision .20
OSFI also may review material dealings between Manulife
and its subsidiaries and has authority to require Manulife to
take measures necessary to ensure the safety and sound
ness of the Manulife organization.
In accordance with section 3 of the BHC Act, Manulife
has provided adequate assurances that it will make avail
able to the Board information on its operations and activi
ties and those of its affiliates that the Board deems appro
priate to determine and enforce compliance with the BHC
A ct .21 The Board has reviewed the restrictions on disclo
sure in jurisdictions where M anulife would have material
operations and has communicated with relevant govern
ment authorities concerning access to information. M anu
life has committed that, to the extent not prohibited by
applicable law, it will make available to the Board such
information on the operations of its affiliates that the Board
deems necessary to determine and enforce compliance with
the BHC Act and other applicable federal law. Manulife
also has committed to cooperate with the Board to obtain
any waivers or exemptions that may be necessary to enable
its affiliates to make any such information available to the
Board. In light of these commitments, the Board has con
cluded that Manulife has provided adequate assurances
of access to any appropriate information the Board may
request.
For these reasons, and based on all the facts of record,
the Board has concluded that the supervisory factors it is
required to consider under section 3(c)(3) of the BHC Act
are consistent with approval.

Foreign Activities
Manulife Bank does not have operations in the United
States. Accordingly, Manulife is not eligible under sec
tion 211.23(c) of Regulation K for the exemptions avail
able to a qualifying foreign banking organization
( “ QFBO ” ) . 22 Manulife has, therefore, requested that the
Board make a specific determination of eligibility pursuant
to section 211.23(e).23 Based on all the facts of record, the
Board has determined pursuant to section 211.23(e) that on
consummation Manulife would be eligible for the exemp
tions available to a QFBO under section 211.23(c) of
Regulation K and would not be eligible for the limited
commercial and industrial activities exemption under sec
tion 211.23(f)(5)(iii).24

20. See Canadian Imperial Bank o f Commerce, 85 Federal Reserve
Bulletin 733 (1999); Royal Bank o f Canada, 83 Federal Reserve
Bulletin 442 (1997); National Bank o f Canada, 82 Federal Reserve
Bulletin 769 (1996); Bank o f Montreal, 80 Federal Reserve Bulletin
925 (1994).
21. See 12 U.S.C. § 1842(c)(3)(A).
22. 12 CFR 211.23(c).
23. 12 CFR 211.23(e).
24. 12 CFR 211.23(f)(5)(iii). The Board has considered the factors
specified in section 211.23(e) as they relate to Manulife’s opera-

376

Federal Reserve Bulletin □ Summer 2004

Other Issues
As noted above, Manulife and John Hancock engage pri
marily in a variety of insurance underwriting and sales
activities, including underwriting life, health, and long
term care insurance, as well as reinsurance activities. Both
companies also provide investment advisory and manage
ment services. These activities are permissible under the
BHC Act for financial holding companies and, as described
below, Manulife and John Hancock have elected to be
financial holding companies for purposes of the BHC Act.
Manulife and John Hancock also engage in a limited
number of activities that have not been approved under the
BHC Act, including certain real estate investment, devel
opment, and management activities. Section 4(a)(2) of the
BHC Act requires each company that becomes a bank
holding company to conform its nonbanking activities and
investments to the requirements of the BHC Act within
two years from the date it becomes a bank holding com
pany. The Board may extend this period for up to three
years.25 The Board’s action on the proposal is subject to
the condition that Applicants take all actions necessary to
conform their activities and investments to the require
ments of the BHC Act and the Board’s regulations there
under in a manner acceptable to the Board, including by
divestiture if necessary, within two years of the date of
consummation of the proposal or such extended time
period that the Board, in its discretion, may grant.
Approval o f Bank Holding Company Formations
Based on the foregoing, and in light of all the facts of
record, the Board has determined that the applications to
form bank holding companies should be, and hereby are,
official.26 In reaching its conclusion, the Board has considtions and has determined that these factors are consistent with
approval.
A commenter opposing Manulife’s request for eligibility for the
QFBO exemptions asserted that Manulife does not meet the definition
o f a foreign banking organization on technical grounds. The com
menter also asserted that John Hancock would inappropriately benefit
from a determination that Manulife is entitled to the QFBO exemp
tions. As noted above, however, the Board, after consideration of the
required factors, has made a specific determination of eligibility
pursuant to section 211.23(e). This QFBO determination does not
apply to the non-U.S. operations of a domestic organization such as
John Hancock.
25. Section 4(a)(2) authorizes the Board, on request, to grant up to
three one-year extensions of this conformance period, if the Board
finds that the extensions “would not be detrimental to the public
interest.” (12 U.S.C. § 1843(a)(2).
26. A commenter requested that the Board extend the comment
period on this proposal. The Board has accumulated a significant
record in this case, including reports of examination, supervisory
information, public reports and information, and public comment. In
the Board’s view, interested persons have had ample opportunity to
submit views on the proposal and, in fact, the commenter has provided
written submissions that the Board has considered carefully in acting
on the proposal. The commenter’s request for additional time to
comment does not identify extraordinary circumstances that would
justify an extension of the public comment period for this case.
Moreover, the BHC Act and Regulation Y require the Board to act on
proposals submitted under those provisions within certain time

ered all the facts of record in light of the factors it is
required to consider under the BHC Act and other applica
ble statutes.27
Financial Holding Company Determination
Maulife and John Hancock have filed with the Board
elections to become financial holding companies pursuant
to sections 4(k) and (/) of the BHC Act and section 225.82
of Regulation Y. M anulife and John Hancock have certi
fied that First Signature is well capitalized and well man
aged and would continue to be so on consummation,
and they have provided all the information required by
Regulation Y.
As discussed above, the Board has reviewed the exami
nation ratings received by First Signature under the CRA
and other relevant examinations and information.28 Based
on all the facts of record, the Board has determined that
these elections to become financial holding companies will
become effective on consummation of the proposal,29 as
long as First Signature continues to be well capitalized and
well managed and has at least a “ satisfactory” CRA rating
on that date.
Conclusion
The Board’s actions on this proposal are conditioned on
compliance by Manulife and John Hancock with all the
commitments made to the Board in connection with the
proposal and with the conditions stated or referred to in
this order, and receipt of all necessary regulatory approv
als. For the purpose of these actions, these commitments
periods. (12 U.S.C. § 1842(b); 12 CFR 225.15(d). Based on a review
of all the facts of record, the Board has concluded that the record in
this case is sufficient to warrant Board action at this time and that an
extension of the comment period is not warranted. Accordingly, the
request for an extension of the comment period is denied.
27. The commenter also requested that the Board hold a public
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 any of the banks to be acquired
makes a timely recommendation of denial of the application. The
Board has not received such a recommendation. Under its regulations,
the Board also may, in its discretion, hold a public meeting or hear
ing on an application to acquire a bank if a meeting or hearing is
necessary or appropriate to clarify factual issues related to the applica
tion and to provide an opportunity for testimony. 12 CFR 225.16(e).
The Board has considered carefully commenter’s request in light o f all
the facts of record. As noted above, interested persons, including the
commenter, have had ample opportunity to submit comments on the
proposal, and the commenter has submitted written comments that the
Board has considered carefully in acting on the proposal. The com
menter’s request fails to demonstrate why its written comments do not
present its views adequately or why a meeting or hearing otherwise
would be necessary or appropriate. 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 on the proposal is denied.
28. See 12 U.S.C. § 2903(c).
29. Manulife intends to acquire John Hancock’s direct and indirect
nonbanking subsidiaries pursuant to section 4(k) of the BHC Act
(12 U.S.C. §1843(k)) and the post-transaction notice procedures of
section 225.87 o f Regulation Y (12 CFR 225.87).

Legal Developments

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 First Signature shall not be consum
mated before the fifteenth calendar day after the effective
date of this order, or later than three months after the
effective date of this order, unless such periods are
extended for good cause by the Board or the Federal
Reserve Bank of Boston, acting pursuant to delegated
authority.
By order of the Board of Governors, effective April 5,
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 e V. F r ie r s o n

Deputy Secretary o f the Board

Mountain Home Bancshares, Inc.
Mountain Home, Arkansas
Order Approving the Acquisition of a Bank Holding
Company
Mountain Home Bancshares, Inc. ( “ Mountain H om e” ), a
bank 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 Pocahontas Bankstock, Inc.
( “ Pocahontas” ) and its subsidiary bank, Bank of Pocahon
tas ( “ BOP” ), both in Pocahontas, Arkansas.1
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(69 Federal Register 20,623 (2004)). The time for filing
comments has expired, and the Board has considered the
proposal and all comments received in light of the factors
set forth in section 3 of the BHC Act.
Mountain Home is the 33rd largest depository organi
zation in Arkansas, with total consolidated assets of
$268.4 million. It controls First National Bank and Trust
Company of Mountain Home ( “First N ational” ), M oun
tain Home, Arkansas, with deposits of $205.1 million,
which represents less than 1 percent of total deposits of
insured depository institutions in Arkansas ( “ state depos
its” ).2 Pocahontas, with total consolidated assets of
$129.7 million, is the 73rd largest depository organization
in Arkansas, controlling deposits of $108 million. On con
summation of the proposal, M ountain Home would become
the 22nd largest depository organization in Arkansas, with
total consolidated assets of approximately $398 million
and deposits of approximately $313.2 million, which repre
sents less than 1 percent of state deposits.
1. After consummation o f the proposal, Mountain Home would
operate BOP as a subsidiary bank for a period of time.
2. Asset data are as o f December 31, 2003, and statewide deposit
and ranking data are as of June 30, 2003.

377

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 out
weighed in the public interest by the probable effect of the
proposal in meeting the convenience and needs of the
community to be served.3
Mountain Home and Pocahontas do not compete directly
in any relevant banking market. Based on all the facts of
record, the Board has concluded that consummation of the
proposal would have no adverse effect on competition or
on the concentration of banking resources in any relevant
banking market. Accordingly, the Board has determined
that competitive factors are consistent with approval of the
proposal.
Financial, Managerial, and Supervisory Considerations
Section 3 of the BHC Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and banks involved in the proposal and
certain other supervisory factors. The Board has 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 agencies that supervise the institutions, information
provided by Mountain Home, and public comment on the
proposal.
Mountain Home is well capitalized and will remain so
on consummation of the proposal. In addition, the Board
has consulted with the Office of the Comptroller of the
Currency ( “ O CC” ), the primary federal supervisor of First
National, about the proposal. The Board also has consid
ered the managerial resources of M ountain Home and
Pocahontas, including the management officials proposed
for Pocahontas, and the examination records of those orga
nizations and BOP, including their risk management sys
tems and other policies.
A commenter opposing the proposal asserted that Poca
hontas and BOP did not comply with a Cease and Desist
Order issued to Pocahontas by the Federal Deposit Insur
ance Corporation ( “ FD IC” ) regarding shareholder report
ing requirements. The Cease and Desist Order was termi
nated by the FDIC on August 28, 2003.4 The Board has

3. 12 U.S.C. § 1842(c)(1).
4. The commenter also contended that Pocahontas and BOP vio
lated provisions o f state law on minority shareholder rights and
shareholder meeting requirements. In addition, the commenter alleged
that he has not been provided with sufficient financial information
about the proposed transaction to be able to determine the value of his
stock ownership as a result of the proposal. Mountain Home stated
that in accordance with its bylaws and with Arkansas law, Pocahontas
will send advance notice of a special meeting to its shareholders that

378

Federal Reserve Bulletin □ Summer 2004

considered the information provided by Mountain Home
and Pocahontas in response to the comment and has
reviewed confidential supervisory information about these
matters.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and future prospects of Mountain Home, Poca
hontas, and BOP are consistent with approval, as are the
other supervisory factors under the BHC Act.
Convenience and Needs Considerations
In acting on a proposal under section 3 of the BHC Act, the
Board is required to consider the effects of the proposal on
the convenience and needs of the communities to be served
and to take into account the records of the relevant insured
depository institution under the Community Reinvestment
Act ( “ CRA” ).5 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 requires the appropriate federal financial
supervisory agency to take into account an institution’s
record of meeting the credit needs of its entire community,
including low- and moderate-income neighborhoods, in
evaluating bank expansionary proposals.
The Board has considered carefully the convenience and
needs factor and the CRA performance records of the
subsidiary banks of M ountain Home and Pocahontas in
light of all the facts of record. Considerations relating to
the convenience and needs of the community, including the
performance records of First National and BOP, are consis
tent with approval.6
Conclusion
Based on the foregoing and all the facts of record, the
Board has determined that the application should be, and
hereby is, approved. In reaching its conclusion, the Board
has considered all the facts of record in light of the factors
that it is required to consider under the BHC Act and other
applicable statutes. The Board’s approval is specifically
conditioned on compliance by Mountain Home with the
conditions imposed in this order and the commitments
made to the Board in connection with the application. For

will include all the information necessary to vote on the proposal. The
Board has consulted with the Arkansas State Banking Commission in
light o f the commenter’s concerns. Moreover, courts have concluded
that the Board’s limited jurisdiction to review applications under the
BHC Act does not authorize it to consider matters relating to share
holder relations and appropriate shareholder compensation. See West
ern Bancshares, Inc. v. Board o f Governors, 480 F.2d 749 (10th Cir.
1973). These matters are governed by state corporate law and may be
adjudicated by a court with jurisdiction to provide commenter with
relief, if appropriate.
5. 12 U.S.C. §2901 et seq.
6. At its most recent CRA evaluation by the OCC, First National
received an overall “outstanding” rating, as of November 4, 2002.
BOP received an overall “satisfactory” rating at its most recent CRA
performance evaluation by the FDIC, as of November 1, 2002.

purposes of these actions, 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 acquisition of Pocahontas may not be consummated
before the fifteenth calendar day after the effective date of
this order, or later than three months after the effective date
of this order, unless such period is extended for good cause
by the Board or the Federal Reserve Bank of St. Louis,
acting pursuant to delegated authority.
By order of the Board of Governors, effective June 7,
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 e V. F r i e r s o n

Deputy Secretary o f the Board

Sky Financial Group, Inc.
Bowling Green, Ohio
Order Approving the Acquisition of a Financial Holding
Company and the Merger of Banks
Sky Financial Group, Inc. ( “ Sky Financial” ), 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 Second Bancorp, Incorporated ( “ Sec
ond Bancorp” ) and its subsidiary bank, The Second
National Bank of Warren ( “ Second Bank” ), both in War
ren, Ohio. Sky Financial’s subsidiary state member bank,
Sky Bank, Salineville, Ohio, has requested the Board’s
approval under section 18(c) of the Federal Deposit Insur
ance Act (12 U.S.C. § 1828(c)) (the “ Bank Merger A ct” ) to
merge with Second Bank, with Sky Bank as the surviving
bank. In addition, Sky Bank has requested the Board’s
approval under section 9 of the Federal Reserve Act
( “ FRA” ) (12 U.S.C. §321) to establish branches at the
locations of Second Bank’s branches.1
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in
accordance with the BHC Act, the Bank Merger Act, and
the B oard’s Rules of Procedure (12 CFR § 262.3(b)) in
the Federal Register (69 Federal Register 17,416 (2004))
and locally. As required by the Bank Merger Act, reports
of the competitive effects of the merger were requested
from the United States Attorney General and the appropri
ate banking agencies. The time for filing comments has
expired, and the Board has considered the proposal and all
comments received in light of the factors set forth in
section 3 the BHC Act, the Bank Merger Act, and the FRA.
Sky Financial, with total consolidated assets of approxi
mately $12.9 billion, operates branches in Ohio, Pennsyl-

1. T hese branches are listed in appendix A.

Legal Developments

vania, Michigan, Indiana, and West Virginia. Sky Financial
controls the tenth largest insured depository institution in
Ohio, controlling deposits of approximately $6.1 billion,
which represents approximately 2.9 percent of total depos
its in insured depository institutions in the state ( “ state
deposits” ).2 Second Bancorp, with total consolidated assets
of approximately $2.1 billion, controls the 15th largest
insured depository institution in Ohio, controlling approxi
mately $1.2 billion in deposits, which represents less than
1 percent of state deposits. On consummation of the pro
posal, Sky Financial would control the ninth largest insured
depository institution in Ohio, controlling deposits of
approximately $7.3 billion, which represents 3.4 percent of
state deposits.
Competitive Considerations
Section 3 of the BHC Act and the Bank Merger Act
prohibit the Board from approving a proposal that would
result in a monopoly or would be in furtherance of any
attempt to monopolize the business of banking in any
relevant banking market. The BHC Act and the Bank
Merger Act also prohibit the Board from approving a
proposed bank acquisition that would substantially lessen
competition in any relevant banking market, unless the
Board finds that the anticompetitive effects of the proposal
clearly are 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.3
Sky Financial and Second Bancorp compete directly
in the Akron, Ashtabula, Canton, Cleveland, and
Youngstown-Warren banking markets in Ohio.4 The Board
has reviewed carefully the competitive effects of the pro
posal in each of these banking markets in light of all the
facts of record. In particular, the Board has considered the
number of competitors that would remain in the markets,
the share of total deposits in depository institutions in the
markets ( “ market deposits” ) controlled by Sky Financial
and Second Bancorp,5 the concentration level of market
deposits and the increase in this level as measured by the
Herfindahl-Hirschman Index ( “ H H I” ) under the Depart
ment of Justice M erger Guidelines ( “ DOJ Guide
lines” ),6 and other characteristics of the markets.
2. Asset data are as o f December 31, 2003, and deposit data are
as of June 30, 2003. In this context, the term “insured depository
institution” includes insured commercial banks, savings associations,
and savings banks.
3. 12 U.S.C. § 1842(c)(1).
4. These banking markets are described in Appendix B.
5. Market share data are as o f June 30, 2003, and are based on
calculations in which the deposits of thrift institutions are included at
50 percent. The Board previously has indicated that thrift institutions
have become, or have the potential to become, significant competitors
o f commercial banks. S ee, e .g ., M id w e s t F in a n c ia l G r o u p , 75 F e d e r a l
R e s e r v e B u lle tin 386 (1989); N a tio n a l C ity C o r p o r a tio n , 70 Federal
Reserve Board 743 (1984). Thus, the Board regularly has included
thrift deposits in the market share calculation on a 50 percent weighted
basis. S ee, e .g ., F ir s t H a w a iia n , In c., 1 1 F e d e r a l R e s e r v e B u lle tin 52
(1991).
6. Under the DOJ Guidelines, 49 F e d e r a l R e g is te r 26,823 (1984), a
market is considered moderately concentrated if the post-merger HHI

379

Several factors indicate that the likely effect of consum
mation of this proposal on competition in these markets
would not be significantly adverse.7 Consummation of the
proposal would be consistent with Board precedent and the
DOJ Guidelines in the Akron, Canton, and YoungstownWarren banking markets. These banking markets would
remain moderately concentrated, and the increase in con
centration in the Akron and Canton markets is small. The
Cleveland market would remain highly concentrated on
consummation, but the HHI would increase by only one
point. In addition, more than ten competitors would remain
in each of these markets.
The Ashtabula market would exceed DOJ Guidelines
after consummation. Sky Financial would become the larg
est depository institution in the market and the HHI would
increase by 289 points to 1,917. Although the Ashtabula
market would become highly concentrated, numerous com
petitors would remain in the market. O f the nine remaining
firms in the Ashtabula market, three firms, in addition to
Sky Financial, would each control 18 percent or more of
market deposits. The Ashtabula market also is attractive to
entry, as demonstrated by the de novo entry of a bank there
within the past year.
The Department o f Justice has conducted a detailed
review of the competitive effects of the proposal and has
advised the Board that consummation of the proposal
would not have a significantly adverse effect on com pe
tition in the Akron, Ashtabula, Canton, Cleveland, or
Youngstown-Warren banking markets or any other rele
vant banking market. The appropriate banking agencies
have been afforded an opportunity to comment and have
not objected to the proposal.
Based on all the facts of record, the Board concludes
that consummation of the proposal is not likely to have a
significantly adverse effect on competition or on the con
centration of banking resources in any relevant banking
market and that competitive considerations are consistent
with approval.
Financial, Managerial, and Other Considerations
Section 3 of the BHC Act and the Bank Merger Act require
the Board to consider the financial and managerial
resources and future prospects of the companies and banks
involved in the proposal. The Board has considered care
fully these factors in light of all the facts of record, includ
ing reports of examination, other confidential supervisory
information received from the primary federal banking
is between 1000 and 1800 and is considered highly concentrated if the
post-merger HHI is more than 1800. The Department of Justice has
informed the Board that a bank merger or acquisition generally will
not be challenged (in the absence of other factors indicating anticom
petitive effects) unless the post-merger HHI is at least 1800 and the
merger increases the HHI by more than 200 points. The Department
of Justice has stated that the higher than normal HHI thresholds for
screening bank mergers for anticompetitive effects implicitly recog
nize the competitive effects o f limited-purpose lenders and other
nondepository financial institutions.
7.
The effects of the proposal on the concentration of banking
resources in these markets are described in appendix C.

380

Federal Reserve Bulletin □ Summer 2004

agency that supervises each institution, and information
provided by Sky Financial. Based on all the facts of record,
the Board has concluded that considerations relating to the
financial and managerial resources and future prospects
of Sky Financial and Second Bancorp are consistent with
approval, as are the other supervisory factors required to be
considered under the BHC Act. In addition, considerations
related to the convenience and needs of the communities to
be served, including the records of performance of the
relevant insured depository institutions under the Com
munity Reinvestment Act ( “ CRA” ), are consistent with
approval.
As noted above, Sky Bank also has applied under sec
tion 9 of the FRA to establish branches at the locations of
Second Bank’s branches in Ohio. The Board has consid
ered the factors it is required to consider under section 9 of
the FRA and, for the reasons discussed in this order, finds
those factors to be consistent with approval.
Conclusion
Based on the foregoing and in light of all the facts of
record, the Board has determined that the applications
should be, and hereby are, approved. In reaching 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, the Bank Merger Act, the FRA, and other
applicable statutes. The Board’s approval is specifically
conditioned on compliance by Sky Financial with all the
representations and commitments made to the Board in
connection with the applications and the receipt of all other
required regulatory approvals. These representations, com
mitments, 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 transaction shall not be consummated before the
fifteenth calendar day after the effective date of this order
or later than three months after the effective date of this
order, unless such period is extended for good cause by the
Board or by the Federal Reserve Bank of Cleveland, acting
pursuant to delegated authority.
By order of the Board of Governors, effective May 24,
2004.

8.
12 U.S.C. §2901 et seq. The Interagency Questions and
Answers Regarding Community Reinvestment provides that an insti
tution’s most recent CRA performance evaluation is an 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. 66 Fed
eral Register 36,620 and 36,639 (2001). Sky Bank received a “satis
factory” rating at its most recent CRA performance evaluation by the
Federal Reserve Bank of Cleveland, as of October 14, 2003. Second
Bank received a “satisfactory” rating at its most recent CRA perfor
mance evaluation by the Office of the Comptroller of the Currency, as
of June 26, 2000. Sky Trust, National Association, Pepper Pike, Ohio,
is a special-purpose bank that is not subject to the CRA.

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 e V. F r i e r s o n

Deputy Secretary o f the Board

A ppendix A
Branches in Ohio to be Established by Sky Bank
Akron
76 South Main Street, Suite 100
Ashtabula
4366 Main Avenue
Aurora
215 West Garfield Road
Beachwood
25201 Chagrin Boulevard, Suite 120
Canfield
6515 Tippecanoe Road
Canton
5310 Fulton Road, NW
Conneaut
328 Main Street
Cortland
259 South High Street
Fairlawn
3737 West M arket Street
Garrettsville
8045 State Street
Girard
29 East Liberty Street
Hubbard
24 West Liberty Street
Hudson
5801 Darrow Road,
3477 Massillon Road
Jefferson
36 West Jefferson Street
Kent
1590 South Water Street
Lordstown
6749 Tod Avenue, SW
Medina
1065 North Court Street
Newton Falls
215 East Broad Street

Legal Developments

381

Niles
5555 Youngstown-Warren Road

townships in Portage County; and the City of Vermillion in
Erie County.

North Olmstead
26642 Brookpark Road Extension

Youngstown-Warren

Poland
2 South Main Street
Ravenna
165 North Chestnut Street
Rock Creek
3273 Main Street
Streetsboro
1190 State Route 303
Twinsburg
10071 Darrow Road
Warren
2107 Elm Road, NE
4349 Mahoning Avenue, NW
108 Main Avenue, SW
525 Niles-Cortland Road, SE
2595 Parkman Road, NW
Wooster
445 West Milltown Road

A ppendix B
Ohio Banking Market Definitions
Akron
The southern two-thirds of Summit and Portage Counties;
the M edina County townships of Sharon, Homer, Harrisville, Westfield, Guilford, and Wadsworth; Smith township
in M ahoning County; Lawrence township and the western
half of Lake township in Stark County; and Milton and
Chippewa townships in Wayne County.
Ashtabula
Ashtabula County.
Canton
Stark County, excluding Lawrence township and the west
ern half of Lake township; Carroll County; Smith township
in Mahoning County; and Lawrence and Sandy townships
in Tuscarawas County.
Cleveland
Cuyahoga, Lake, Lorain, and Geauga Counties; Sagamore
Hills, Northfield Center, Twinsburg, Richfield, Boston, and
Hudson townships in Summit County; Medina County,
excluding Homer, Harrisville, Westfield, Guilford, Wads
worth, and Sharon townships; Aurora and Streetsboro

Mahoning County, excluding Smith township; Trumbull
County, excluding Brookfield and Hartford townships; and
Columbiana Village and Fairfield township in Columbiana
County.
A ppendix C
Ohio Banking Markets in which Sky Financial and Second
Bancorp Compete Directly
Akron
Sky Financial operates the 19th largest insured deposi
tory institution in the Akron banking market, controlling
approximately $42 million in deposits, representing less
than 1 percent of market deposits. Second Bancorp oper
ates the 12th largest insured depository institution in the
market, controlling $134 million in deposits, representing
1.7 percent of market deposits. On consummation of the
proposal, Sky Financial would operate the tenth largest
insured depository institution in the market, controlling
deposits of approximately $176 million, representing
approximately 2.3 percent of market deposits. The HHI
would increase 2 points to 1,390. Twenty-four competitors
would remain in the market.
Astabula
Sky Financial operates the fourth largest insured deposi
tory institution in the Ashtabula banking market, control
ling $118.5 million in deposits, representing 12.2 percent
of market deposits. Second Bancorp operates the fifth
largest insured depository institution in the market, control
ling $115.7 million in deposits, representing 11.9 percent
of market deposits. On consummation of the proposal,
Sky Financial would operate the largest insured deposi
tory institution in the market, controlling deposits of
approximately $234.2 million, representing approximately
24.2 percent of market deposits. The HHI would increase
289 points to 1,917. Eight competitors would remain in the
market.
Canton
Sky Financial operates the sixth largest insured depository
institution in the Canton banking market, controlling
$368.9 million in deposits, representing 7.7 percent of
market deposits. Second Bancorp operates the 17th largest
insured depository institution in the market, controlling
$13.8 million in deposits, representing less than 1 percent
of market deposits. On consummation of the proposal, Sky
Financial would remain the sixth largest insured depository
institution in the market, controlling deposits of approxi
mately $382.7 million, representing approximately 8 per

382

Federal Reserve Bulletin □ Summer 2004

cent of market deposits. The HHI would increase 4 points
to 1,434. Sixteen competitors would remain in the market.
Cleveland
Sky Financial operates the tenth largest insured depository
institution in the Cleveland banking market, controlling
approximately $1.1 billion in deposits, representing 1.8 per
cent of market deposits. Second Bancorp operates the
17th largest insured depository institution in the market,
controlling approximately $185 million in deposits, repre
senting less than 1 percent of market deposits. On consum
mation of the proposal, Sky Financial would remain the
tenth largest insured depository institution in the market,
controlling deposits of approximately $1.2 billion, repre
senting approximately 2.1 percent of market deposits. The
HHI would increase 1 point to 1,926. Thirty-seven com
petitors would remain in the market.
Youngstown-War ren
Sky Financial operates the largest insured depository insti
tution in the Youngstown-W arren banking market, control
ling $773.9 million in deposits, representing 14.5 percent
of market deposits. Second Bancorp operates the fourth
largest insured depository institution in the market, control
ling $702.7 million in deposits, representing 13.2 percent
of market deposits. On consummation of the proposal,
Sky Financial would operate the largest insured deposi
tory institution in the market, controlling deposits of
approximately $1.6 billion, representing approximately
27.7 percent of market deposits. The HHI would increase
383 points to 1,491. Eleven competitors would remain in
the market.

Notice of the proposal, affording interested persons
an opportunity to submit comments, has been published
(69 Federal Register 8,660 (2004)). 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.
National City, with total consolidated assets of
$116.4 billion, is the 11th largest depository organization in
the United States, controlling deposits of $75.2 billion,
which represents approximately 1.3 percent of total depos
its in insured depository institutions in the United States.1
National City is the third largest insured depository organi
zation in Ohio, controlling deposits of $23.7 billion, which
represents approximately 11.2 percent of total deposits
in insured depository institutions in the state ( “ state
deposits” ). National City also operates subsidiary insured
depository institutions in Illinois, Indiana, Kentucky,
Michigan, Missouri, and Pennsylvania.
Provident, with total consolidated assets of approxi
mately $17.1 billion, is the seventh largest insured deposi
tory organization in Ohio, controlling deposits of $10.3 bil
lion, which represents approximately 4.9 percent of state
deposits. Provident Bank operates branches in Ohio and
Kentucky.
On consummation of this proposal, National City would
become the tenth largest insured depository organization
in the United States, with total consolidated assets of
$133.5 billion, and would control approximately 1.4 per
cent of total deposits in insured depository institutions in
the United States.2 National City would become the largest
insured depository organization in Ohio, controlling depos
its of approximately $34 billion, which represents approxi
mately 16.1 percent of state deposits.
Interstate Analysis

Order Approving the Acquisition of a Bank Holding
Company

Section 3(d) of the BHC Act allows the Board to approve
an application by a bank holding company to acquire
control of a bank located in a state other than the home
state of such bank holding company if certain conditions
are met.3 For purposes of the BHC Act, the home state
of National City is Ohio, and Provident is located in
Kentucky and Ohio.4 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 enumer

National City Corporation ( “ National City” ), a financial
holding company within the meaning of the Bank Hold
ing 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 Provident Financial Group,
Inc. (“ Provident” ) and its subsidiary bank, The Provident
Bank ( “ Provident Bank” ), both in Cincinnati, Ohio.
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 section 225.28(b)(6) of the
B oard’s Regulation Y (12 CFR 225.28(b)(6)) to acquire a
nonbanking subsidiary of Provident and thereby engage in
permissible investment advisory activities.

1. Asset, nationwide deposit, and ranking data are as o f Decem
ber 31, 2003, and statewide deposit and ranking data are as of June 30,
2003.
2. All data include National City after consummation o f the
proposal to acquire Allegiant Bancorp, Inc., St. Louis, Missouri
( “Allegiant” ). The Allegiant proposal was approved by the Board on
March 15, 2004. See National City Corporation, 90 Federal Reserve
Bulletin 236 (2004) ( “National City/Allegiant Order” ).
3. A bank holding company’s home state is that state in which the
total deposits of all banking subsidiaries of such 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).
4. For purposes of section 3(d) of the BHC Act, the Board consid
ers a bank to be located in the states in which the bank is chartered,
headquartered, or operates a branch.

Orders Issued Under Sections 3 and 4 of the
Bank Holding Company Act
N ational City Corporation
Cleveland, Ohio

Legal Developments

ated in section 3(d) are met in this case.5 In light of all the
facts of record, the Board is permitted to approve the
proposal under section 3(d) of the BHC Act.
Competitive Considerations
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 out
weighed in the public interest by the probable effect of the
proposal in meeting the convenience and needs of the
community to be served.6
National City and Provident compete directly in the
Cleveland, Columbus, Dayton, and Springfield banking
markets, all in Ohio.7 The Board has reviewed carefully the
competitive effects of the proposal in each of these banking
markets in light of all the facts of record. In particular, the
Board has considered the number of competitors that would
remain in the markets, the relative shares of total deposits
in depository institutions in the markets ( “ market depos
its” ) controlled by National City and Provident,8 the con
centration 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 Guide
lines ( “DOJ Guidelines” ),9 and other characteristics of the
markets.
5. S e e 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 o f deposits of insured depository institutions in the United
States and less than 15 percent of the total deposits o f insured
depository institutions in Kentucky, the only applicable state limita
tion on the amount o f deposits a bank holding company can acquire in
this transaction. S e e Ky. Rev. Stat. Ann. §287.900 (Supp. 2003).
6. 12 U.S.C. § 1842(c)(1).
7. These banking markets are described in appendix A.
8. Market share data are as of June 30, 2003, and are based on
calculations in which the deposits of thrift institutions are included at
50 percent. The Board previously has indicated that thrift institutions
have become, or have the potential to become, significant competitors
of commercial banks. S ee, e.g ., M id w e s t F in a n c ia l G ro u p , 75 F e d e r a l
R e s e r v e B u lle tin 386 (1989); N a tio n a l C ity C o r p o r a tio n , 70 F e d e r a l
R e s e r v e B u lle tin 743 (1984). Thus, the Board regularly has included
thrift deposits in the market share calculation on a 50 percent weighted
basis. S ee, e.g ., F ir s t H a w a iia n , In c ., 77 F e d e r a l R e s e r v e B u lle tin 52
(1991).
9. Under the DOJ Guidelines, 49 F e d e r a l R e g is te r 26,823 (1984), a
market is considered moderately concentrated if the post-merger HHI
is between 1000 and 1800 and highly concentrated if the post-merger
HHI is more than 1800. The Department of Justice has informed the
Board that a bank merger or acquisition generally will not be chal
lenged (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 Department of Justice
has stated that the higher than normal HHI thresholds for screen
ing bank mergers for anticompetitive effects implicitly recognize the
competitive effects o f limited-purpose lenders and other nondeposi
tory financial institutions.

383

Consummation of the proposal would be consistent with
Board precedent and the DOJ Guidelines in each of these
banking m arkets.10 After consummation of the proposal,
the Dayton banking market would remain moderately con
centrated, as measured by the HHI, and numerous competi
tors would remain in the market. Although the Cleveland,
Columbus, and Springfield banking markets would remain
highly concentrated, the change in market shares would
be small and numerous competitors would remain in the
markets.
The Department of Justice also has conducted a detailed
review of the competitive effects of the proposal and has
advised the Board that consummation of the proposal
would not have a significantly adverse effect on competi
tion in the Cleveland, Columbus, Dayton, or Springfield
banking markets or in any other relevant banking market.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a signifi
cantly adverse effect on competition or on the concentra
tion of banking resources in any relevant banking market
and that competitive considerations are consistent with
approval.
Financial, Managerial, and Supervisory Considerations
Section 3 of the BHC Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and 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 well capitalized and will remain so on
consummation of the proposal.11 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, about the proposal.12 The Board also has
considered the managerial resources and the examination
records of National City and Provident and the subsidiary
depository institution to be acquired, including its risk
management systems and other policies.13 Based on all the
10. The effects of the proposal on the concentration of banking
resources in these markets are described in appendix B.
11. A commenter alleged that the compensation under severance
agreements for Provident’s senior management is excessive. The
Board notes that the severance agreements have been disclosed to
shareholders and that National City will remain well capitalized on
consummation of the proposal.
12. A commenter also expressed concern that Provident restated its
earnings for the years 1997 through 2002. The Board monitored the
restatement by Provident and has consulted with the Securities and
Exchange Commission regarding this matter.
13. One commenter criticized National City for lobbying against
state and local efforts to enact and enforce anti-predatory lending laws
and ordinances. Two commenters expressed concern that the proposal
might result in a loss of jobs. The Board notes that the commenters do
not allege and have provided no evidence that National City engaged
in any illegal activity or other action that has affected, or may

384

Federal Reserve Bulletin □ Summer 2004

facts of record, the Board has concluded that consider
ations relating to the financial and managerial resources
and future prospects of National City, Provident, and Provi
dent Bank are consistent with approval, as are the other
supervisory factors under the BHC Act.
Convenience and Needs Considerations
In acting on a proposal under section 3 of the BHC Act, the
Board is required to consider the effects of the proposal on
the convenience and needs of the communities to be served
and to take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ( “ CRA” ).14 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
subsidiary banks of National City and Provident in light of
all the facts of record, including public comment on the
proposal. The Board recently considered the convenience
and needs factor in National City’s proposal to acquire
Allegiant. In that proposal, the Board conducted a detailed
review of the CRA performance records of the insured
depository institutions controlled by National City, the
lending records of all the National City bank and nonbank
lending subsidiaries, including an analysis of data reported
by National City under the Home Mortgage Disclosure Act
( “ HMDA” ),15 and the branch closing policies of National
City and found the record of the Allegiant proposal to be
consistent with approval.
A. Sum m ary o f Public Com m ents on Convenience
and N eeds C onsiderations
In response to the Board’s request for public comment on
this proposal, approximately 56 commenters submitted
their views. O f these commenters, approximately 51 com
menters supported the proposal by generally commending
National City or Provident for providing financial and
technical support to their community development organi
zations or businesses. Other commenters related their
favorable experiences with specific programs or services
offered by National City or Provident.
Five commenters opposed the proposal. These comment
ers expressed concern about the subprime lending activi
ties of First Franklin Financial Corporation, San Jose,
California ( “ First Franklin” ), a subsidiary of National City
reasonably be expected to affect, the safety and soundness of the
institutions involved in this proposal or other factors that the Board
must consider under the BHC Act.
14. 12 U.S.C. §2901 et seq.
15. 12 U.S.C. §2801 et seq.

Bank of Indiana, Indianapolis, Indiana ( “NC Indiana” ),
that originates home mortgage loans, including subprime
loans. Commenters also asserted, based on data reported
under the HMDA, that National City engages in discrimi
natory treatment of African-American and Hispanic indi
viduals in its home mortgage lending operations. In addi
tion, commenters expressed concern about potential branch
closings resulting from this proposal and the percentage of
Provident Bank branches in LMI and predominantly minor
ity areas.
B. C R 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 m ost recent CRA perform ance
evaluation is a particularly important consideration in
the applications process because it represents a detailed,
on-site evaluation of the institution’s overall record of
performance under the CRA by its appropriate federal
supervisor.16 At their most recent CRA evaluations by the
OCC, National City Bank, Cleveland ( “ NC B ank” ),
National City’s largest bank as measured by total deposits,
received an “ outstanding” rating, and NC Indiana,
National City’s largest bank as measured by total assets,
received a “ satisfactory” rating.17 In addition, National
City’s six other subsidiary banks received either “ outstand
ing” or “ satisfactory” ratings at their most recent CRA
evaluations.18
The Board has carefully reviewed the CRA performance
records of the insured depository institution subsidiaries of
National City. A summary of the most recent CRA evalua
tions of NC Bank and NC Indiana was included in the
National City/Allegiant Order. Based on its review of the
record in this case, the Board hereby reaffirms and adopts
the facts and findings detailed in the National C ity/
Allegiant Order.
NC Bank’s most recent CRA evaluation characterized
its overall record of home mortgage and small business
lending as excellent19 and praised the bank’s level of
community development lending. Examiners noted favor
ably the use of several flexible lending products designed
to address affordable housing needs of LMI individuals
and commended the bank’s level of qualified investments.
16. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
17. Both ratings are as of February 22, 2000.
18. Appendix C lists the most recent CRA ratings of National
City’s bank subsidiaries, including the recently acquired Allegiant
Bank, St. Louis, Missouri.
19. In evaluating the records of performance under the CRA of 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 of
NC Indiana); National City Mortgage Services, Kalamazoo, Michigan
( “NC Mortgage Services” ) (a subsidiary of National City Bank o f
Michigan/Illinois, Bannockburn, Illinois); and other bank and non
bank affiliates of NC Bank.

Legal Developments

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 perform ance evaluation, examiners com
mended the bank’s record of home mortgage lending
among borrowers of different income levels and its com
munity development lending. NC Indiana’s most recent
evaluation also commended its strong level of qualified
investments and characterized the distribution of the bank’s
branches throughout its assessment area, including LMI
geographies, as excellent.
Provident Bank, Provident’s only subsidiary bank,
received an “ outstanding” rating at its most recent CRA
performance evaluation by the Federal Reserve Bank of
Cleveland, as of March 11, 2002. National City has indi
cated that its CRA and consumer compliance programs
would be implemented at Provident on consummation of
the proposal.
At Provident Bank’s most recent CRA performance
evaluation, examiners concluded that the bank’s lend
ing activity reflected an excellent responsiveness to
assessment-area credit needs. Examiners commended
Provident Bank’s home mortgage lending record and noted
that it demonstrated an excellent geographic distribution
of HMDA-reportable loans, especially in LMI areas and
among borrowers of different incomes. They also reported
that the bank had a good geographic distribution of small
business loans. In addition, examiners commended the
bank for its significant level of community development
lending and investments and reported that such invest
ments supported the development of LMI housing. They
indicated that Provident Bank has taken a leadership role
in community development services, noting that the bank
provides services that promote affordable housing and eco
nomic development. In addition, examiners stated that
Provident Bank’s branches and automated teller machines
are reasonably accessible to all segments of the bank’s
assessment areas.
C. H M D A D ata, Subprim e Lending, and Fair L ending
Record
The Board has carefully considered the lending record
of and HMDA data reported by National City in light of
public comment. Based on their review of HMDA data,
commenters primarily contended that National City’s lend
ing operations are organized in a manner to direct First
Franklin’s higher priced loans disproportionately to minor
ity and LMI borrowers and in LMI and predominantly
minority communities, as compared with the other subsidi
aries of National City engaged in home mortgage lending,
including National City’s bank subsidiaries, NC Mortgage,
and NC Mortgage Services (collectively, “ National City
Lenders” ).20 In addition, commenters criticized other

20.
Two commenters asserted that First Franklin’s market share is
disproportionately concentrated in LMI and predominantly minority
areas in Ohio and that the National City Lenders have ignored these

385

aspects of the lending activities of First Franklin and the
National City Lenders.21
The Board reviewed HMDA data reported by all of
National C ity’s bank and nonbank lending subsidiaries in
the MSAs identified by the commenters and focused its
analysis on the MSAs that comprise the assessment areas
of the National City Lenders in Ohio, Illinois, Indiana,
Kentucky, and Michigan. The analysis included a compari
son of the HMDA data of First Franklin with combined
data submitted by the National City Lenders.22
An analysis of 2002 HMDA data does not support the
contention that National City disproportionately directs
First Franklin’s loans to minority and LMI borrowers and
in LMI and predominantly minority communities as com
pared with the National City Lenders. The 2002 HMDA
data indicate that the National City Lenders extended a
larger number of HMDA-reportable loans to AfricanAmerican borrowers than did First Franklin in the MSAs
reviewed. In addition, the percentage and number of
HMDA-reportable loans by the National City Lenders to
Hispanics were generally comparable with or exceeded the
percentage and number for First Franklin in each of the
MSAs reviewed. The HMDA data indicate that the percent
age of total HMDA-reportable loans made to AfricanAmerican and Hispanic borrowers and in LMI and minor
ity census tracts23 by the National City Lenders generally
remained the same or increased from 2002 to 2003. The
HMDA data also indicate the National City Lenders gener
ally performed favorably when compared with the aggre
gate lenders. The percentage of total HM DA-reportable
loans originated to African-American and Hispanic bor
rowers by the National City Lenders was comparable to the
aggregate lenders in most of the MSAs reviewed.
Moreover, the denial disparity ratios24 of the National
City Lenders for African-American and Hispanic appli
cants for total HMDA-reportable loans were generally
comparable to or lower than those of aggregate lenders in a

areas. Another commenter asserted that, in 2002, First Franklin origi
nated a higher volume and a larger percentage of its HMDA-reportable
loans to African-American or Hispanic borrowers than NC Bank. The
commenter compared 2002 HMDA data reported by First Franklin
and NC Bank in the Metropolitan Statistical Areas ( “M SAs” ) of
Cincinnati, Columbus, and Dayton, but did not include HMDA data
reported by other National City lending subsidiaries in those areas.
21. Commenters criticized First Franklin’s use of loan brokers to
distribute its products, including the payment of yield spread premi
ums to brokers. Another commenter criticized the level of due dili
gence performed by Provident in providing warehouse lines of credit
to subprime lenders and criticized National City for financing payday
lending operations.
22. The Board analyzed HMDA data for 2001 through 2003 for
National City and HMDA data for 2001 and 2002 for the aggregate of
lenders in the areas reviewed ( “aggregate lenders” ). The 2003 HMDA
data are preliminary and 2003 data for the aggregate lenders are not
yet available.
23. For purposes o f this HMDA analysis, minority census tract
means a census tract with a minority population o f 80 percent or more.
24. The denial disparity ratio equals the denial rate for a particular
racial category (for example, African American) divided by the denial
rate for whites.

386

Federal Reserve Bulletin □ Summer 2004

majority of the MSAs reviewed.25 In addition, the National
City Lenders’ origination rates for total HMDA-reportable
loans to Hispanics and African Americans were compa
rable to or exceeded the rates for aggregate lenders in each
of the MSAs reviewed.26
The Board recognizes 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 informa
tion about covered loans. Because of the limitations of
HMDA data, the Board has considered these data carefully
in light of other information, including public and confi
dential supervisory information, information on the use of
loan brokers by First Franklin to distribute its loans, and
information submitted by National City on its policies and
procedures to ensure compliance with fair lending laws
and to guard against abusive lending practices.
Examiners found no evidence of prohibited discrimina
tion or other illegal credit practices at any of National
City’s subsidiary banks or the lending subsidiaries of these
banks at their most recent CRA performance evaluations.
The Board also consulted with the OCC, which has respon
sibility for enforcing compliance with fair lending laws by
national banks and their subsidiaries, about this proposal,
the comments received by the Board criticizing the lending
activities of First Franklin, and the record of performance
of National C ity’s banks and their subsidiaries since the
last examination.
As discussed in the National City/Allegiant Order,
National City has taken several affirmative steps to ensure
compliance with fair lending laws and to prevent abusive
lending practices at First Franklin and the National City
Lenders. National City represented that all loan applicants
are evaluated individually on their credit qualifications and
the loans they receive are based on those qualifications.
National City has a centralized compliance function and
has implemented corporate-wide compliance policies and
procedures to help ensure that all the business lines of
National City, including First Franklin, comply with fair
lending and other consumer protection laws and regu
lations. Compliance officers and staff are responsible for
compliance training and monitoring. National City also
conducts file reviews for compliance with federal and state
consumer protection rules and regulations for all product
lines and origination sources, including First Franklin. In
addition, National City regularly performs self-assessments
of its fair lending law compliance and fair lending policy
training for its employees. National City represented that
its corporate consumer compliance program will be imple
mented at Provident Bank after consummation of the
proposal.27
25. Two commenters also alleged that the denial disparity ratios of
some o f National City’s bank subsidiaries in certain markets indicated
that the banks disproportionately denied African-American or His
panic applicants for home mortgage loans.
26. The origination rate equals the total number of loans originated
to applicants of a particular racial category divided by the total
number o f applications received from members of that racial category.
27. Based on a review of a sample of First Franklin’s loans that
ended in foreclosure, one commenter expressed concern about certain

The Board also reviewed the use of loan brokers by First
Franklin in distributing its loan products and concluded
that this practice does not appear to have resulted in the
disparate treatment of minorities or LMI individuals.
National City represented that First Franklin has im ple
mented a detailed program for establishing relationships
with brokers, which includes the review of a prospective
broker’s license status, financial condition, and back
ground. In addition, National City stated that, although the
National City Lenders and First Franklin have relationships
with brokers and correspondents that provide subprime
credit as some portion of their business, National City does
not pursue business relationships with brokers or corre
spondents that originate subprime loans exclusively.
National City also represented that loan brokers are not
chosen based on their geographic location or the income,
race, or ethnicity of residents in the brokers’ locations.
The Board also has considered the HMDA data,
subprime lending, and fair lending record of National City
in light of other information, including the CRA perfor
mance records of National C ity’s subsidiary banks dis
cussed above and in the National City/Allegiant Order, and
public comment. These records demonstrate that National
City is active in helping to meet the credit needs of its
entire community.
D. Branch C losings
One commenter expressed concern about the effect of
branch closings that might result from this proposal. The
Board has considered those concerns in light of all the facts
of record. National City represented that it is in the process
of determining whether to close branches in markets where
there is overlap and that any closures or consolidations of
branches will be conducted in accordance with National
C ity’s Branch Closing Policy and Procedures. The Board
carefully considered National City’s branch closing policy
and its record of opening and closing branches in the
National City/Allegiant Order. In addition, examiners
reviewed National C ity’s branch closing policy as part of
the most recent CRA evaluations of each of National
C ity’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

terms, such as high interest rates with balloon payments, prepayment
penalties, and adjustable interest rates, including “teaser rates,” and
other lending practices of First Franklin. In addition, commenters
criticized National City for not having procedures for referring to the
National City Lenders loan applicants of First Franklin who qualify
for credit at those affiliates. As discussed above, National City has
represented that all loan applicants are evaluated individually on their
credit qualifications and the loans they receive are based on those
qualifications. In addition, National City has a substantial compliance
program in place to ensure that First Franklin does not engage in
abusive lending practices. The Board also notes that the terms o f loans
offered by First Franklin that were criticized by the commenter are
not, in and of themselves, abusive, and the fact that some o f these
terms are present in foreclosed loans does not itself indicate that these
terms are inappropriate or abusive.

Legal Developments

branch closings.28 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 OCC, as the appropriate
federal supervisor of NC Bank, will continue to review the
bank’s branch closing record in the course of conducting
CRA performance evaluations.
E. 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 comments on the proposal, and confidential
supervisory information. Based on a review of the entire
record, and for the reasons discussed above and in the
National City/Allegiant Order, the Board concludes that
considerations relating to the convenience and needs fac
tor, including the CRA performance records of 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 Provident Invest
ment Advisors, Inc., also in Cincinnati (“Investment Advi
sors” ), which engages in investment advisory activities.
The Board has determined by regulation that this activity is
permissible for bank holding companies under the Board’s
Regulation Y,29 and National City has committed to con
duct these activities in accordance with the Board’s regu
lations and orders for bank holding companies engaged in
these activities.
To approve the notice, the Board must determine that
National City’s acquisition of Investment Advisors and the
performance of the proposed activities “ can reasonably be
expected to produce benefits to the public . . . that out
weigh possible adverse effects, such as undue concentra
tion of resources, decreased or unfair competition, conflicts
of interests, or unsound banking practices.” 30 As part of
its evaluation of these factors, the Board has considered
the financial and managerial resources of National City, its
subsidiaries, and the company to be acquired, and the
effect of the proposed transaction on those resources. For
the reasons noted above, and based on all the facts of
record, the Board concludes that financial and managerial
considerations are consistent with approval of the notice.
The Board also has considered the competitive effects
of National City’s proposed acquisition of Provident’s
28. Section 42 o f the Federal Deposit Insurance Act (12 U.S.C.
§ 183lr -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.
29. See 12 CFR 225.28(b)(6).
30. See 12 U.S.C. § 1843(j)(2)(A).

387

nonbanking subsidiary in light of all the facts of record.
National City and Provident engage in activities related to
investment advice. The market for the activity is regional
or national in scope and unconcentrated. The record in this
case also indicates that there are numerous providers of
these services. Accordingly, the Board concludes that
National City’s acquisition of Investment Advisors would
not have a significantly adverse effect on competition in
any relevant market.
National City has indicated that the proposal would
allow National City to provide an expanded array o f ser
vices to individuals, businesses, and governmental units in
a wider geographic area and provide customers of Provi
dent a full array of brokerage services. Based on all the
facts of record, the Board has determined that consumma
tion 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.
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.31 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.32 The Board’s
31. A commenter requested that the Board extend the comment
period on this proposal. The Board has accumulated a significant
record in this case, including reports of examination, supervisory
information, public reports and information, and public comment. In
the Board’s view, interested persons had ample opportunity to submit
views on the proposal and, in fact, the commenter has provided
written submissions that the Board has considered carefully in acting
on this proposal. The commenter’s request for additional time to
comment does not identify extraordinary circumstances that would
justify an extension of the public comment period for this case.
Moreover, the BHC Act and Regulation Y require the Board to act on
proposals submitted under those provisions within certain time
periods. 12 U.S.C. § 1842(b); 12 CFR 225.15(d). Based on a review
of all the facts of record, the Board has concluded that the record in
this case is sufficient to warrant Board action at this time and that an
extension of the comment period is not warranted. Accordingly, the
request for an extension of the comment period is denied.
32. Commenters also requested that the Board hold a public meet
ing 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 o f denial o f 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 CFR 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 manner. 12 CFR
225.25(a)(2). The Board has considered carefully the commenters’
requests in light of all the facts of record. In the Board’s view, the
commenters had ample opportunity to submit their views and sub
mitted written comments that have been considered carefully by the
Board in acting on the proposal. The commenters’ requests fail to
demonstrate why written comments do not present their evidence

388

Federal Reserve Bulletin □ Summer 2004

approval is specifically conditioned on compliance by
National City with the conditions imposed in this order and
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 is also subject to all the conditions set forth
in Regulation Y, including those in sections 225.7 and
225.25(c) (12 CFR 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
of the BHC Act and the Board’s regulations and orders
issued thereunder. The commitments made to the Board
in the application process are deemed to be conditions
imposed in writing by the Board in connection with its
findings and decisions and, as such, may be enforced in
proceedings under applicable law.
The acquisition of Provident Bank may not be consum
mated before the fifteenth calendar day after the effective
date of this order, or later than three months after the
effective date of this order unless such period is extended
for good cause by the Board or the Federal Reserve Bank
of Cleveland, acting pursuant to delegated authority.
By order of the Board of Governors, effective June 8,
2004.
Voting for this action: Chairman Greenspan, Vice Chairman Fergu
son, and Governors Gramlich, Bies, Olson, Bernanke, and Kohn.

Dayton
Montgomery, Miami, and Greene Counties; Bethel and
Mad River townships in Clark County; and Clear Creek,
Wayne, and Massie townships in Warren County.
Springfield
Clark County, excluding Bethel and Mad River townships.

A ppendix B
Ohio Banking Markets in which National City and Provi
dent Compete Directly
Cleveland
National City operates the second largest depository insti
tution in the Cleveland banking market, controlling $15 bil
lion in deposits, representing 25.8 percent of market
deposits. Provident operates the 25th largest depository
institution in the market, controlling $65.8 million in
deposits, representing less than 1 percent of market depos
its. On consummation of the proposal, National City would
operate the second largest depository institution in the
market, controlling deposits of $15 billion, representing
approximately 25.9 percent of market deposits. The HHI
would increase 6 points to 1,990. Thirty-seven bank and
thrift competitors would remain in the market.

R o b e r t d e V. F r ie r s o n

Deputy Secretary o f the Board

A ppendix A
Ohio Banking Market Definitions
Cleveland
Cuyahoga, Lake, Lorain, and Geauga Counties; Sagamore
Hills, Northfield Center, Twinsburg, Richfield, Boston, and
Hudson townships in Summit County; Medina County,
excluding Homer, Harrisville, Westfield, Guilford, Wads
worth and Sharon townships; Aurora and Streetsboro town
ships in Portage County; and the City of Vermillion in Erie
County.
Columbus
Franklin, Delaware, Fairfield, Licking, Madison, Pick
away, and Union Counties; Perry township in Hocking
County; and Thorn township in Perry County.

adequately and fail to identify disputed issues o f 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 requests for a public
meeting or hearing on the proposal are denied.

Columbus
National City operates the fourth largest depository institu
tion in the Columbus banking market, controlling $2.3 bil
lion in deposits, representing 8.3 percent of market
deposits. Provident operates the 40th largest depository
institution in the market, controlling $29.4 million in
deposits, representing less than 1 percent of market depos
its. On consummation of the proposal, National City would
operate the fourth largest depository institution in the mar
ket, controlling deposits of $2.3 billion, representing
approximately 8.4 percent of market deposits. The HHI
would increase 2 points to 1,996. Fifty-one bank and thrift
competitors would remain in the market.
Dayton
National City operates the third largest depository institu
tion in the Dayton banking market, controlling $1.4 billion
in deposits, representing 15.3 percent of market deposits.
Provident operates the sixth largest depository institution
in the market, controlling $446.5 million in deposits, repre
senting 5 percent of market deposits. On consummation of
the proposal, National City would operate the second larg
est depository institution in the market, controlling depos
its of $1.8 billion, representing approximately 20.4 percent
of market deposits. The HHI would increase 155 points
to 1,657. Twenty-six bank and thrift competitors would
remain in the market.

Legal Developments

Springfield
National City operates the third largest depository insti
tution in the Springfield banking market, controlling
$187 million in deposits, representing 19.3 percent of
market deposits. Provident operates the seventh largest
depository institution in the market, controlling $36.6 m il
lion in deposits, representing 3.8 percent of market depos

389

its. On consummation of the proposal, National City would
operate the third largest depository institution in the mar
ket, controlling $223.5 million in deposits, representing
approximately 23.1 percent of market deposits. The HHI
would increase 146 points to 1,967. Eight bank and thrift
competitors would remain in the market.

A ppendix C
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
8. Allegiant Bank,
St. Louis, Missouri

Outstanding

February 2000

OCC

Satisfactory

February 2000

OCC

Outstanding

May 1999

FDIC

Satisfactory

February 2000

OCC

Outstanding

February 2000

OCC

Outstanding

February 2000

OCC

Satisfactory

February 2000

OCC

Satisfactory

October 2001

FDIC

N ew Regions Financial Corporation
Birmingham, Alabama
Regions Financial Corporation
Birmingham, Alabam a
Order Approving the Formation of a Bank Holding Com
pany, the Acquisition of a Bank Holding Company and a
Savings Association, the Merger of Bank Holding Com
panies, and Election of Financial Holding Company Status
Regions Financial Corporation ( “Regions” ) has requested
the Board’s approval under section 3 of the Bank Hold
ing Company Act (“ BHC A ct” ) 1 of its proposal to acquire
Union Planters Corporation ( “ Union Planters” ), and
thereby indirectly acquire its subsidiary banks, Union
Planters Bank, National Association (“ UPB-NA” ), both
in Memphis, and Union Planters Bank of the Lakeway
Area ( “Lakeway Bank” ), Morristown, all in Tennessee.2
Regions proposes to acquire Union Planters through a
series of transactions that include the formation of a new
1. 12 U.S.C. §1842.
2. New Regions expects at a later date to merge the subsidiary
banks that it would control on consummation of the proposal. The
Board’s action at this time is limited to reviewing the proposed
acquisition under the BHC Act. A subsequent bank merger may
require further review under the Bank Merger Act (12 U.S.C.
§ 1828(c)).

bank holding company, New Regions Financial Corpora
tion ( “ New Regions” ).3 New Regions also has filed with
the Board an election to become a financial holding com
pany pursuant to sections 4(k) and (/) of the BHC Act and
section 225.82 of Regulation Y.4 In addition, New Regions
proposes to acquire Union Planters Hong Kong, Inc., also
in Memphis, an agreement corporation subsidiary of
UPB-NA, pursuant to section 25 of the Federal Reserve
Act and section 211.5 of the Board’s Regulation K.5
3. In addition, New Regions has filed a notice under sec
tions 4(c)(8) and 4(j) of the BHC Act and section 225.24 of the
Board’s Regulation Y to acquire Regions Morgan Keegan Trust,
F.S.B. ( “Regions FSB” ), also in Birmingham. 12 U.S.C. §§ 1843(c)(8)
and (j); 12 CFR 225.24.
4. 12 U.S.C. §§ 1843(k) & (/); 12 CFR 225.82. New Regions
would acquire Regions’ remaining nonbanking companies under sec
tion 4(k) and the post-transaction notice procedures of section 225.87
of Regulation Y (12 CFR 225.87): Union Planters Investment
Advisors Inc., also in Memphis, which engages in asset management
and investment advisory services; and Union Planters’ interest in
FundsXpress, Inc., Austin, Texas, which engages in data processing.
In addition to the financial holding company election by New
Regions, two Union Planters mid-tier bank holding companies, Union
Planters Holding Corporation in Memphis ( “UPHC” ) and Franklin
Financial Group Incorporated in Morristown ( “Franklin Financial” ),
have elected to become financial holding companies. On consumma
tion of the proposal, New Regions would operate UPHC and Franklin
Financial as direct subsidiaries.
5. 12 U.S.C. §601 etseqr, 12 CFR 211.5.

390

Federal Reserve Bulletin □ Summer 2004

Notice of the proposal, affording interested persons
an opportunity to submit comments, has been published
(69 Federal Register 9,828 (2004)). 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.
Regions, with total consolidated assets of approximately
$48.9 billion, is the 27th largest depository organization in
the United States,6 controlling deposits of approximately
$31.9 billion, which represents less than 1 percent of total
deposits in insured depository institutions in the United
States.7 Regions operates subsidiary depository institutions
in Alabama, Arkansas, Florida, Georgia, Louisiana, North
Carolina, South Carolina, Tennessee, and Texas.
Union Planters, with total consolidated assets of approxi
mately $31.5 billion, is the 39th largest depository orga
nization in the United States, controlling deposits of
$22.8 billion, which represents less than 1 percent of total
deposits in insured depository institutions in the United
States. Union Planters operates depository institutions
in Alabama, Arkansas, Florida, Illinois, Indiana, Iowa,
Kentucky, Louisiana, Mississippi, Missouri, Tennessee,
and Texas. It also engages in a broad range of permissible
nonbanking activities nationwide.
On consummation of the proposal, New Regions would
become the 21st largest depository organization in the
United States, controlling deposits of approximately
$54.8 billion, with total consolidated assets of approxi
mately $80.4 billion, and would control less than 1 percent
of total deposits in insured depository institutions in the
United States. The combined organization would operate
under the name of Regions Financial Corporation.

All the conditions for an interstate acquisition enum er
ated in section 3(d) of the BHC Act are met in this case.
Regions currently is, and New Regions would be on con
summation of this proposal, adequately capitalized and
adequately managed, as defined by applicable law .10 Each
subsidiary bank of Union Planters located in a state with a
minimum age requirement has been in existence and oper
ated continuously for at least the period of time required
by applicable state law .11 On consummation of the pro
posal, New Regions and its affiliates would control less
than 30 percent, or the applicable percentage established
by state law, of total deposits held in each of these states
by insured depository institutions. Section 3(d) requires
review of a state deposit cap in each state in which both
Regions and Union Planters currently are located.12 All
other requirements of section 3(d) would be met in this
case. Accordingly, based on all the facts of record, the
Board is permitted to approve the proposal under sec
tion 3(d) of the BHC Act.
Competitive Considerations

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 the bank holding company if certain conditions
are met. For purposes of the BHC Act, the home state of
New Regions will be Alabama,8 and Union Planters’ sub
sidiary banks are located in Alabama, Arkansas, Florida,
Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi,
Missouri, Tennessee, and Texas.9

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.13
Regions and Union Planters compete directly in 21 local
banking markets, primarily in Alabama, Arkansas, Florida,
Louisiana, Tennessee, and Texas.14 The Board has
reviewed the competitive effects of the proposal in each of
these banking markets in light of all the facts of record. In
particular, the Board has considered the number of com
petitors that would remain in the markets, the relative
shares of total deposits in depository institutions in the
markets ( “ market deposits” ) controlled by Regions and
Union Planters,15 the concentration level of market depos
its and the increase in this level as measured by the
Herfindahl-Hirschman Index ( “ H H I” ) under the Depart

6. Asset data are as of March 31, 2004, and national ranking data
are as o f December 31, 2003.
7. Deposit data are as of June 30, 2003, and reflect the total of
the deposits reported by each organization’s insured depository insti
tutions in their Consolidated Reports of Condition and Income for
June 30, 2003. In this context, insured depository institutions include
commercial banks, savings banks, and savings associations.
8. 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 July 1, 1966, or the date on which the company became a bank
holding company, whichever is later. 12 U.S.C. § 1841(o)(4)(C).
9. For purposes section 3(d), the Board considers a bank to be
located in the states in which the bank is chartered or headquartered or
operates a branch. S e e 12 U.S.C. §§ 1841(o)(4)-(7) and 1842(d)(1)(A)
and (d)(2)(B).

10. S e e 12 U.S.C. § 1842(d)(1)(A).
11. S e e 12 U.S.C. § 1842(d)(1)(B).
12. S e e 12 U.S.C. § 1842(d)(2)(A) and (B). S e e Ark. Code §23-48406(a) (2004); Fla. Stat. Ann. §658.295(8)(b) (2004); Tenn. Code
Ann. §45-2-1404 (2004); and Tex. Code Ann. § 203.002(a) (2004).
13. S e e 12 U.S.C. § 1842(c)(1).
14. These banking markets are described in appendix A.
15. Market share data are as of June 30, 2003, and are based on
calculations in which the deposits of thrift institutions are included at
50 percent. The Board previously has indicated that thrift institutions
have become, or have the potential to become, significant competitors
of commercial banks. S ee, e .g ., M id w e s t F in a n c ia l G ro u p , 75 F e d e r a l
R e s e r v e B u lle tin 386 (1989); N a tio n a l C ity C o r p o r a tio n , 70 F e d e r a l
R e s e r v e B u lle tin 743 (1984). Thus, the Board regularly has included
thrift deposits in the market share calculation on a 50 percent weighted
basis. See, e .g ., F ir s t H a w a iia n , In c ., 1 1 F e d e r a l R e s e r v e B u lle tin 52
(1991).

Interstate Analysis

Legal Developments

ment of Justice Merger Guidelines ( “ DOJ Guidelines” ),
and other characteristics of the markets.16
Consummation of the proposed acquisition of Union
Planters would be consistent with Board precedent and
DOJ Guidelines in each of the banking markets affected
by the proposal. After consummation, one banking market
would be considered unconcentrated, eleven banking mar
kets would be considered moderately concentrated, and
nine banking markets would be considered highly concen
trated, but with only small or modest increases in concen
tration.17 O f the banking markets that would be considered
highly concentrated after consummation of the proposal,
all but the Newport, Arkansas, banking market ( “ Newport
banking market” ) would have several competitors remain
ing in the market. In the Newport banking market, the HHI
would increase by only 106 points. After consummation of
the proposal, New Regions would control approximately
23.4 percent of market deposits, while its two remaining
competitors in the market would control 53.8 percent and
22.7 percent of market deposits.
The Department of Justice has reviewed the proposal
and advised the Board that consummation would not likely
have a significantly adverse effect on competition in any
relevant market. The Board has requested the views of the
Office of the Comptroller of the Currency ( “ O CC” ) and
the Office of Thrift Supervision ( “ OTS” ) on the competi
tive effects of the proposal. No agency has indicated that
the proposal raises competitive issues.
Based on all the facts of record, the Board concludes
that consummation of the proposal would not have a sig
nificantly adverse effect on competition or on the concen
tration of banking resources in any relevant banking
market. Accordingly, the Board has determined that com
petitive considerations are consistent with approval.
Financial, Managerial, and Other Supervisory Factors
In applications and notices involving the acquisition of
bank holding companies and their insured depository insti
tutions, the BHC Act requires the Board to consider the
financial and managerial resources and future prospects of
the companies and depository institutions involved in the
proposal and certain other supervisory factors. The Board
has considered, among other things, confidential reports of
examination, other confidential supervisory information
from the primary federal supervisors for the depository
16. Under the DOJ Guidelines, 49 Federal Register 26,823 (1984),
a market is considered unconcentrated if the post-merger HHI is less
than 1000, moderately concentrated if the post-merger HHI is between
1000 and 1800, and highly concentrated if the post-merger HHI is
more than 1800. The Department of Justice has informed the Board
that a bank merger or acquisition generally will not be challenged (in
the absence 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 Department of 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.
17. Market data for these banking markets are provided in
appendix B.

391

institutions controlled by Regions and Union Planters, and
public comments on the proposal.18
Regions, Union Planters, and their subsidiary depository
institutions currently are well capitalized and well man
aged, and New Regions and each depository institution that
it would control would be well capitalized on consumma
tion of the proposal. In addition, the Board has consulted
with the OCC, the Federal Deposit Insurance Corporation
( “FD IC” ), and the OTS, the primary federal supervisors of
UPB-NA, Lakeway Bank, and Regions FSB, respectively,
on the proposal.19 The Board also has considered Regions’
plans to implement the proposed acquisition, including
its available managerial resources and Regions’ record of
successfully integrating acquired institutions into its exist
ing operations. Based on all the facts of record, the Board
has concluded that considerations relating to the finan
cial and managerial resources and future prospects of
New Regions and the depository institutions involved in
the proposal are consistent with approval, as are the other
supervisory factors under the BHC Act.20
Convenience and Needs Considerations
In acting on a proposal under section 3 of the BHC Act, the
Board is required to consider the effects of the proposal on
the convenience and needs of the communities to be served
and to take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ( “ CRA” ).21 The Board also reviews the records of
performance under the CRA of the relevant depository
institutions 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 requires

18. Onter suggested that the Board encourage Regions Bank, also
in Birmingham, to commit to a supplier diversity program and to
provide representation by Florida residents in its management that
is commensurate with the bank’s share of state deposits. Although
the Board fully supports programs designed to promote equal oppor
tunity and economic opportunities for all members of society, the
comments about supplier diversity programs are beyond the factors
the Board is authorized to consider under the BHC Act. See, e.g.,
Deutsche Bank AG, 86 Federal Reserve Bulletin 509, 513 (1999). The
Board also notes that federal banking laws do not impose residency
requirements on the management o f bank holding companies. As
described above, the Board has carefully considered the competence
and experience of Regions’ management in its review of the proposal.
19. The Board is the primary federal supervisor of Regions Bank.
20. commenter asserted that a UPB-NA subsidiary has originated
loans to a company that is controlled by an individual with alleged
connections to organized crime. This assertion was based on allega
tions in press reports from 1999 and 2000 that cite determinations in
1980 and 1992 by the New Jersey Casino Control Commission. The
allegations appear to involve the individual’s business transactions
and activities during the 1960s and 1970s. The Board has carefully
reviewed these allegations in light of all facts of record, including
relevant reports of examination by federal regulators, and has con
sulted the OCC concerning the relationship between the UPB-NA
subsidiary and the company involved.
21. 12 U.S.C. §2901 et seq.

392

Federal Reserve Bulletin □ Summer 2004

the appropriate federal financial supervisory agency to take
into account an institution’s record of meeting the credit
needs of its entire community, including low- and
moderate-income ( “ 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
subsidiary depository institutions of Regions and Union
Planters in light of all the facts of record, including public
comments on the proposal. Three commenters opposed the
proposal and collectively asserted that:
(i) Regions’ and Union Planters’ subsidiary banks
have inadequate or inconsistent records of making
qualified investments under the CRA in the com
munities that they serve;
(ii) Regions engages in an insufficient volume of small
business lending in amounts of $100,000 or less in
certain markets; and
(iii) Regions should provide more prime-rate home
mortgage loans to LMI and minority individuals,
small business loans to businesses owned by minor
ity individuals or women, economic development
investments, and charitable donations to under
served communities.22 Commenters also asserted
that data reported under the Home Mortgage Dis
closure Act ( “ HMDA” ) 23 indicate that Regions
and Union Planters engage in disparate treatment
of African-American and Hispanic individuals in
their home mortgage lending operations. In addi
tion, one commenter expressed concern about pos
sible branch closings after consummation of the
proposal.24
22. One commenter suggested that, in light of Regions’ share
o f Florida deposits, the Board should encourage or require Regions to
become the regional leader for each of these lending categories or
activities. In addition, the commenter contended that the Board should
not approve the proposal because Regions had not made a CRArelated commitment to minority communities in Florida. 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 organiza
tion. S ee, e.g ., B a n k o f A m e r ic a C o r p o r a tio n , 90 F e d e r a l R e s e r v e
B u lle tin 217 (2004); C itig r o u p In c., 88 F e d e r a l R e s e r v e B u lle tin 485
(2002). The commenter also suggested that Regions should commit a
specific percentage of its pretax profits to philanthropic contributions
in light o f its share o f Florida deposits. The Board notes that neither
the CRA nor the agencies’ implementing rules require that financial
institutions engage in any type of philanthropy.
23. 12 U.S.C. §2801 e t s e q .
24. This commenter also expressed concern about Regions Bank
and a UPB-NA subsidiary allegedly financing payday and car-title
lending companies. Regions responded that Regions Bank and Union
Planters have depository relationships with, and provide warehouse
credit facilities to, entities engaged in payday and car-title lending.
These payday and car-title lenders are licensed by the states where
they operate and are subject to applicable state law. Regions stated
that neither it nor Union Planters plays any role in the lending
practices or credit review processes of their payday and car-title
lender customers. The record in this case does not indicate that
Regions, Union Planters, or any direct or indirect subsidiary of either
organization engages in payday or car-title lending activities directly
or through agency arrangements.

A. CRA P erform ance E valuations
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 insured depository institutions of
both organizations. An institution’s most recent CRA per
formance evaluation is a particularly important consider
ation in the applications process because it represents a
detailed, on-site evaluation of the institution’s overall
record of performance under the CRA by its appropriate
federal supervisor.25
Regions Bank received a “ satisfactory” rating at its
most recent CRA performance evaluation by the Fed
eral Reserve Bank of Atlanta, as of October 22, 2001.26
In addition, Union Planters’ largest subsidiary bank,
UPB-NA, received a “ satisfactory” rating at its most recent
CRA performance evaluation by the OCC, as of Decem
ber 31, 1999. Union Planters also controls Lakeway Bank,
which received a “ satisfactory” rating at its most recent
CRA performance evaluation by the FDIC, as of June 11,

2001.
New Regions has represented that it would continue the
existing CRA program of each depository institution after
consummation of this proposal.
B. CRA Perform ance o f Regions Bank
As noted above, Regions Bank received an overall “ satis
factory” rating for performance under the CRA.27 Exam in
ers found that Regions Bank exhibited a good level of
responsiveness to the credit and community development
needs of its overall assessment area. In particular, examin
ers commended the bank’s loan distribution in LMI geog
raphies for HMDA-reportable and small business loans.28
Examiners also favorably noted Regions Bank’s use of
flexible lending programs to serve the credit needs of its
overall assessment area, noting that the bank originated
almost 3,000 loans totaling more than $242 million under
those programs during its CRA evaluation period.
In addition, Regions Bank originated or purchased more
than 6,700 HMDA-reportable loans totaling approximately
$468 million to borrowers in LMI census tracts and more
than 13,500 such loans totaling approximately $672 mil

25. S e e I n te r a g e n c y Q u e s tio n s a n d A n s w e r s R e g a r d in g C o m m u n ity
R e in v e s tm e n t, 6 6 F e d e r a l R e g is te r 36,620 and 36,639 (2001).

26. Regions FSB, the only other insured depository institution
controlled by Regions, is not examined by the OTS for CRA perfor
mance because it engages only in trust activities.
27. As part of the 2001 performance evaluation, 16 of Regions
Bank’s 91 assessment areas received full-scope reviews. The overall
rating for Regions Bank is a composite of the bank’s state ratings,
which were derived from the full-scope reviews of its assessment
areas. The evaluation period was January 1, 2000, through June 30,

2001 .
28. In this context, “small loans to businesses” are loans with
original amounts totaling $1 million or less and “small business
loans” are business loans in amounts of $1 million or less.

Legal Developments

lion to LMI individuals during the evaluation period.29
It also originated or purchased more than 8,400 small
business loans totaling approximately $697 million to busi
nesses in LMI census tracts. Examiners noted that the bank
originated almost $50 million in community development
loans during the evaluation period, thereby exhibiting an
adequate level of community development lending.
During 2002 and 2003, Regions Bank originated or
purchased more than 88,000 HMDA-reportable loans total
ing approximately $9.3 billion, and more than 71,000 small
business loans totaling almost $7.5 billion in its overall
assessment area.30 During the same time period, Regions
Bank also engaged in a significant volume and amount of
community development lending. The bank originated or
purchased 479 community development loans totaling
approximately $673 million in its overall assessment area.
These loans generally were to entities engaged in the
construction and renovation of affordable housing in LMI
areas, for LMI individuals, or for senior citizens.
Examiners characterized as excellent the bank’s volume
of qualified community development investments and
grants. They reported that Regions Bank made qualified
investments totaling approximately $166 million and pro
vided an additional $4.3 million in grants and contributions
during its CRA evaluation period, thereby contributing
to the bank’s overall qualified investment portfolio of
approximately $7.9 billion, as of September 2001. In addi
tion, examiners commended Regions Bank’s extensive use
of investments to support community development initia
tives both inside and outside the bank’s assessment areas.
Examiners also praised the bank for frequently acting as a
leading investor in or grantor to various community devel
opment initiatives that did not routinely receive private
funding.
Since its most recent CRA performance evaluation,
Regions Bank has initiated several efforts to further
strengthen its overall investment performance. The bank
created the CRA Investment Committee to assess invest
ment opportunities in all the bank’s assessment areas.
Regions Bank has also designated community develop
ment managers for each state where the bank operates.
These managers work with community development orga29. Examiners included the HMDA-reportable lending by Regions
Mortgage, Inc., Montgomery, Alabama ( “RMI” ), in their assessment
of Regions Bank’s CRA performance.
30. A commenter criticized the percentage of Regions Bank’s
small business loans originated in amounts of less than $100,000 in
Arkansas, Louisiana, and Mississippi, stating that such loans were
needed the most by minority- and female-owned businesses. Based on
2002 data on small business lending for the portions o f Arkansas and
Louisiana included in Regions Bank’s combined assessment area,
small business loans o f $100,000 or less comprised 81.5 percent and
75.5 percent, respectively, of the bank’s small business loan origina
tions in those states. Although Mississippi is outside Regions Bank’s
combined CRA assessment area, the Board considered the bank’s
statewide small business lending data for 2002. The data indicate that
56.6 percent o f the small business loans originated by the bank in
Mississippi were in amounts o f $100,000 or less. Examiners reviewed
the geographic distribution o f small business loans and the distribu
tion of loans to businesses o f different sizes and considered these
distributions acceptable.

393

nizations in their respective states to identify and pursue
lending, investment, and service opportunities.
During the period 2001 through 2003, Regions Bank
invested approximately $214.5 million in qualified lowincome-housing tax credits and $2 million in qualified
community development projects or entities throughout its
overall assessment area. For example, the bank made direct
investments in 2002 that provided technical and financial
assistance to nonprofit community development corpora
tions, minority-owned small businesses, and other commu
nity organizations in Alabama. Regions Bank was also a
founding member of an organization designed to address a
critical need for affordable housing in central Alabama and
made an equity investment in and a charitable contribution
to this organization totaling $1 million during this period.
Examiners noted that 18 percent of the bank’s branches
were in LMI census tracts, which reasonably correlated
with the percentage of families and businesses through
out Regions Bank’s combined assessment area that were
in LMI census tracts. Examiners considered Regions
Bank’s branches and alternative delivery systems, includ
ing ATMs, to be reasonably accessible to bank customers
and the bank’s hours of operation to be convenient for
essentially all portions of its overall assessment area. They
also noted that Regions Bank provided an adequate level of
community development services, which included efforts
by board members, officers, and employees of the bank to
use their financial expertise to provide financial services
that benefited the residents of its overall assessment area.
Examiners found that the bank’s community development
services were highly responsive to affordable housing
needs.
C. CR A Perform ance o f U nion Planters Bank
As noted above, UPB-NA received an overall “ satisfac
tory” rating for performance under the CRA from the
OCC, as of December 1999.31 During its CRA evaluation
period, UPB-NA purchased and originated more than
17,000 HM DA-reportable loans totaling approximately
$1.5 billion in the six MSAs that represented approxi
mately 63 percent of UPB-NA’s deposits ( “ Representative
M SAs” ).32 Examiners noted that UPB-NA’s overall lend
ing record demonstrated an adequate distribution of loans
to LMI borrowers and borrowers in LMI census tracts.
During the evaluation period, the bank’s percentage of
home purchase and home improvement loans to borrowers
in LMI areas generally exceeded the percentage of owneroccupied homes in those areas. Examiners determined that
31. UPB-NA’s 1999 CRA performance rating was a composite of
the ratings for the bank’s two multistate Metropolitan Statistical Areas
( “M SAs” ) and twelve states. The bank’s state ratings were based on
the assessment areas in each state receiving full-scope reviews. The
evaluation period was January 1, 1998, through December 31, 1999.
32. These areas are the Miami and Ft. Lauderdale, Florida, MSAs
(17.5 percent of UPB-NA’s deposits); the Nashville, Tennessee, MSA
(14 percent of UPB-NA’s deposits); the St. Louis, Missouri/Illinois,
MSA (12 percent of UPB-NA’s deposits); the Memphis, Tennessee/
Arkansas/Mississippi, MSA (10 percent o f UPB-NA’s deposits); and
the Jackson, Mississippi, MSA (9.7 percent of UPB-NA’s deposits).

394

Federal Reserve Bulletin □ Summer 2004

UPB- NA’s distribution of HMDA-reportable loans in LMI
census tracts was adequate or better in four of the six
Representative MSAs and that its distribution of such loans
to LMI individuals was good or excellent in four of the six
Representative MSAs.
UPB-NA purchased or originated more than 7,200 small
loans to businesses totaling approximately $660 million in
the Representative MSAs during the evaluation period.
Examiners found that UPB-NA’s record for originating and
purchasing such loans showed good geographic distribu
tion in these areas, including LMI communities. Examiners
noted that UPB-NA’s level for originating small loans to
businesses in LMI census tracts was adequate or better
in all six Representative MSAs, with an excellent level of
distribution in four of the six Representative MSAs. In the
four Representative MSAs where small loans to farms
comprised a material portion of the bank’s lending record,
UPB-NA originated or purchased approximately 580 such
loans totaling almost $31 million during its CRA evalua
tion period.33
Examiners stated that UPB-NA’s volume and amount
of community development lending activities positively
affected the bank’s lending ratings in five of the six Repre
sentative MSAs. Examiners found that UPB-NA originated
47 community development loans in the Representative
MSAs totaling approximately $44 million during the CRA
evaluation period. These loans primarily supported afford
able housing initiatives for LMI individuals and other
kinds of initiatives to revitalize LMI census tracts.
According to information provided by Regions,
UPB-NA originated or purchased in its overall assessment
area almost 160,000 HMDA-reportable loans totaling more
than $15.5 billion and almost 60,700 small business loans
totaling approximately $5.8 billion during the period 2000
through 2003. Regions also represented that UPB-NA
originated almost 260 community development loans total
ing more than $137 million in its combined assessment
area during the same time period. Excluding loans in
multistate MSAs, these loans totaled more than $45 million
in Mississippi, more than $17 million in Tennessee, and
more than $6.5 million in Louisiana. UPB-NA’s commu
nity development loans generally supported the construc
tion of housing for LMI individuals, including elderly and
disabled low-income individuals.
During the evaluation period, UPB-NA made more than
130 qualified investments totaling approximately $47 mil
lion in the Representative MSAs, primarily in securities
backed by affordable housing mortgages. UPB-NA also
made qualified investments in these MSAs in support of
local community organizations dedicated to providing
affordable housing and other community service and revi
talization initiatives that benefited LMI census tracts and
individuals.
Regions represented that UPB-NA made more than
1,200 investments totaling more than $23 million in CRA
33.
Small loans to farms are loans with original amounts of
$500,000 or less. Data on the small loans to farms in these areas do
not include the Miami and Ft. Lauderdale MSAs.

qualified projects in its assessment areas during the period
2000 through 2003. These investments totaled more than
$750,000 in Florida, more than $7 million in Mississippi,
and more than $5 million in Tennessee. Many of the
investments were in the form of grants or donations to
organizations serving the needs of LMI individuals and
communities.34
Examiners noted that the bank’s branches and ATMs
were generally accessible to the communities it serves.
They also noted, however, that UPB-NA provided few
community development services in its assessment areas
during the CRA evaluation period.
D. H M D A, Subprim e, and Fair Lending R ecords
The Board has carefully considered the lending records of,
and HMDA data reported by, Regions and Union Planters
in light of the comments received. Based on a review of
2002 HMDA data, one commenter alleged that Regions
has organized its mortgage lending operations in a manner
that disproportionately directs higher cost subprime mort
gage loans from a Regions Bank subsidiary, EquiFirst
Corporation, Charlotte, North Carolina ( “ EquiFirst” ),35
to minority borrowers as compared with Regions’ prime
mortgage lending, which is conducted by Regions Bank
through RMI.36 In addition, the commenter alleged that

34. One commenter criticized UPB-NA’s record for making quali
fied investments in Illinois and Iowa. According to information pro
vided by Regions, UPB-NA has actively pursued qualified investment
opportunities in its Illinois and Iowa assessment areas since its most
recent CRA performance evaluation. These efforts have resulted in
UPB-NA making qualified investments of more than $2 million in
Illinois and tripling the amount of its qualified investments in Iowa
since the bank’s most recent CRA performance evaluation.
35. Regions stated that EquiFirst relies on a network of indepen
dent mortgage brokers to originate its loans who use underwriting
standards that are commonly accepted in the secondary market and
that Regions sells the loans EquiFirst originates in this market.
Regions also represented that the brokers in the EquiFirst network
offer their clients a variety of prime and subprime mortgage loan
products from EquiFirst and other mortgage lenders. In addition,
Regions noted that the independent mortgage brokers generally pro
vide their customers with options on available mortgage loan prod
ucts, including the type of products (prime or subprime) and the
provider (EquiFirst or another lender). In particular, Regions repre
sented that EquiFirst does not require its brokers to offer EquiFirst
products exclusively.
36. Specifically, the commenter compared 2002 HMDA data
reported for RMI and EquiFirst in the following MSAs: Atlanta,
Birmingham, Montgomery, New Orleans, Memphis, and Nashville.
The commenter asserted that RMI originated mortgage loans to white
borrowers in greater volume and with greater frequency than to
African-American borrowers in each MSA during 2002. The com
menter also made the same allegations about Hispanic borrowers in
the Orlando MSA. In addition, this commenter stated that EquiFirst
originated a larger number of “higher cost” mortgage loans to minor
ity borrowers than to white borrowers.
As the Board previously has noted, subprime lending is a per
missible activity that provides needed credit to consumers who have
difficulty meeting conventional underwriting criteria. See Royal Bank
o f Canada, 88 Federal Reserve Bulletin 385, 388, n. 18 (2002). The
Board continues to expect all bank holding companies and their
affiliates to conduct their subprime lending operations without any
abusive lending practices and in compliance with all applicable laws.

Legal Developments

Regions Bank disproportionately denied applications for
HMDA-reportable loans by minorities.37
The Board reviewed HMDA data reported by Regions
Bank, including RMI (collectively, “ Regions Prime Lend
ers” ) and EquiFirst in the MSAs identified by the com
menter and other major markets served by Regions Bank.38
The Board compared the HMDA data of the Regions Prime
Lenders with the data of EquiFirst and the aggregate of
lenders ( “ aggregate lenders” ) in the MSAs reviewed.39
HMDA data for 2002 indicate that in most of the MSAs
reviewed, the number of HMDA-reportable loans origi
nated by the Regions Prime Lenders to African Americans
as a percentage of their total HMDA lending was lower
than the percentage for aggregate lenders. These data also
show a more pronounced disparity between the proportion
of loans originated by the Regions Prime Lenders to Afri
can Americans in the Atlanta MSA and the proportion of
loans originated by aggregate lenders. African Americans
comprise almost 30 percent of the population in the
Atlanta MSA, and the percentage of applications received
by the Regions Prime Lenders from African Americans
was significantly lower than the percentage for aggregate
lenders.40
The data also indicate, however, that the percentage of
loans extended by the Regions Prime Lenders to African
Americans increased modestly in most markets from 2001
to 2002 and again from 2002 to 2003.41 In addition, the
denial disparity ratios42 decreased from 2001 to 2002 in
most of the MSAs. HMDA data in 2002 also indicate that
lending by the Regions Prime Lenders to Hispanics was
generally comparable to lending by the aggregate lenders
in most markets reviewed and exceeded that of the aggre
gate lenders in the Orlando MSA, the market with the
highest percentage of Hispanic individuals.43

37. Based on an analysis of home purchase lending data for
Regions, a commenter also alleged that Regions Bank relies heavily
on its “subprime affiliates” to lend to African-American and LMI
borrowers in Mississippi. HMDA data for Mississippi MSAs in 2002
indicate that Regions Bank, including RMI, received only five appli
cations from African Americans and only 26 applications from
LMI individuals. Neither Regions Bank nor RMI has a branch in
Mississippi.
38. The Board’s review of the HMDA data for the Regions Prime
Lenders included the Mobile and Little Rock/North Little Rock
MSAs, as well as the MSAs cited by the commenter.
39. The lending data o f the aggregate of lenders represent the
cumulative lending for all financial institutions that have reported
HMDA data in a given market.
40. During 2002, the Regions Prime Lenders engaged in significant
overall volume o f mortgage lending in the Atlanta MSA, receiving
more than 4,200 loan applications and making more than 3,300 loans.
41. In the Atlanta MSA, the percentage of loans extended by the
Regions Prime Lenders to African Americans increased from 2001 to
2002 but decreased from 2002 to 2003.
42. The denial disparity ratio equals the denial rate of a particular
racial category (e.g., African Americans) divided by the denial rate for
whites.
43. The HMDA data for the Orlando MSA indicate that the
Regions Prime Lenders originated a larger number and higher percent
age o f their HMDA-reportable loans to Hispanics than EquiFirst in
2001 and 2002.

395

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 informa
tion about covered loans.44 Moreover, HMDA data indi
cating that one affiliate is lending to minorities or LMI
individuals to a greater extent than another affiliate do not,
without more information, indicate that either affiliate has
engaged in discriminatory lending on a prohibited basis.
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 on-site
evaluations of compliance with fair lending laws by the
subsidiary depository institutions of Regions and Union
Planters and their lending subsidiaries, including EquiFirst.
Examiners found no substantive violations of fair lending
laws or regulations or other illegal credit practices at any
of the depository institution subsidiaries of either organiza
tion or their lending subsidiaries.
In Regions Bank’s 2001 consumer compliance examina
tion, examiners found the bank’s marketing efforts overall
were broad-based and designed to cover all of the bank’s
markets. As part of this examination, examiners reviewed
the bank’s lending in minority tracts of the Atlanta
M SA.45 Examiners found no evidence that Regions
Bank was deliberately excluding any geographic areas
from its HMDA-reportable lending efforts in the Atlanta
market and also found that no areas in the Atlanta MSA
were excluded from the bank’s broad-based marketing
efforts.
The record also indicates that Regions has taken several
steps to ensure that the lending operations of Regions Bank
and its subsidiaries, including EquiFirst, comply with fair
lending laws. Regions Bank and its mortgage division have
established compliance departments to help ensure compli
ance with federal and state banking laws and regulations,
particularly those related to fair lending and consumer
protection. These compliance departments are responsible
for implementing fair lending and consumer protection
compliance programs and procedures, which include pro
viding annual fair lending training to all bank employees
involved in lending transactions, performing a second
review of all loan applications before they are denied, and

44. 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.
45. Minority census tract means a census tract with a minority
population of 80 percent or more.

396

Federal Reserve Bulletin □ Summer 2004

conducting regular compliance audits and fair lending
reviews of loan documentation by product and business
line.
Based on a review of the loans it sold to the Fed
eral National Mortgage Association ( “ Fannie M ae” ) dur
ing 2002, RMI concluded that measures were needed to
increase its originations to minority borrowers. To help
achieve this goal, RMI initiated an emerging markets pro
gram featuring a Community Lending Alliance ( “ CLA” )
involving Fannie Mae to increase RM I’s lending in under
served markets. RMI has pledged to use its best efforts to
originate $ 1 billion in mortgage loans in underserved mar
kets between August 8, 2003, and September 2, 2005,
through the CLA. Regions represents that according to
Fannie Mae, RMI has already closed $725 million in loans
under the CLA, almost 20 percent of which were to minor
ity loan applicants, including African Americans.
Regions also represents that EquiFirst, which originates
all its loans through mortgage brokers, uses computer
software to help ensure compliance with applicable federal
and state fair lending laws and regulations. According to
Regions, this automated compliance program generates all
required disclosures for mortgage loan originations and
closings. Regions reports that EquiFirst recently enhanced
the software to include stand-alone programs for com
parative analyses and “ predatory” lending testing to
supplement the reviews of EquiFirst’s originations already
performed by Regions Bank. In addition, EquiFirst staff
conducts compliance testing, self-assessments, and audits
of a sample of mortgage loan originations each month, and
also conducts a second review of all denied mortgage loan
applications.
Compliance with fair lending and consumer protec
tion laws at UPB-NA and its consumer-loan affiliates is
managed and monitored by each lending department or
division separately, with oversight and assistance from
the bank’s Corporate Compliance division. Generally,
UPB-NA’s compliance programs and procedures provide
for automated testing of loan portfolios for compliance
with fair lending laws and regulations and include ongoing
automated monitoring of rates of application denials and
loan distributions for HMDA-reportable loans to minorities
in each market, auditing major bank departments for com
pliance with all other consumer protection laws every 12 to
18 months, and quarterly automated training in fair lending
and consumer protection for all staff involved in the bank’s
lending process.
Regions stated that, although it has not decided which
organization’s fair lending policies and programs will
be implemented at New Regions, it expects that the
New Regions’ compliance program would draw from the
best practices of the existing compliance programs at both
organizations. Regions also indicated that the compliance
program for Regions Bank, including RMI, after consum
mation of the proposal, would include UPB-NA’s method
ology for reviewing HMDA data, which uses denial dis
parity ratios and penetration rates for loans to minorities
to analyze lending performance in the bank’s assessment
areas.

The Board also has considered the HMDA data in light
of other information, including the CRA performance
records of Regions’ and Union Planters’ subsidiary banks
that are detailed above. These established efforts dem on
strate that, on balance, the records of performance of
Regions and Union Planters in meeting the convenience
and needs of their communities are consistent with
approval of this proposal. The record in this case also
reflects an opportunity for the Regions Prime Lenders to
improve the percentage of their overall applications for
HMDA-reportable loans from, and the percentage of over
all HMDA-reportable originations to, African-American
borrowers, particularly in the Atlanta MSA. As noted
above, RM I’s internal review has identified the need to
originate more loans to minority borrowers and it appears
to have taken affirmative steps to improve this aspect of its
lending operations through its emerging markets initiative
that features the CLA with Fannie Mae. The Board also
notes that Regions Bank, including RMI, should be better
equipped on consummation of the proposal to identify the
MSAs where it is underperforming in terms of originating
mortgage loans to African Americans after the methodol
ogy of its internal analysis of HMDA-reportable lending
has been updated. The Board expects that Regions Bank,
including RMI, will continue to take steps to improve
its mortgage lending performance to African-American
borrowers, particularly in the Atlanta MSA. The Federal
Reserve System will monitor and evaluate the performance
of Regions Bank as part of the supervisory process, includ
ing assessments of this performance in subsequent con
sumer compliance examinations.
E. Branch Closings
A commenter expressed concern that this proposal would
result in possible branch closings and requested that
Regions identify which branches it would close. The Board
has carefully considered these comments in light of all the
facts of record. Regions represented that the number of
branch closings, relocations, or consolidations related to
the proposed acquisition would be small because there is
little geographic overlap with Union Planters. Regions also
represented that no decision has been made about the
number or locations of branches to be closed, relocated, or
consolidated, or about which organization’s branch closing
policy would be in effect at New Regions on consumma
tion of the proposal.
The Board has considered carefully Regions’ and
UPB-NA’s branch closing policies and Regions’ record
of opening and closing branches. Under their policies,
Regions and UPB-NA must review a number of factors
before identifying a branch for closure, consolidation, or
relocation, including deposit levels, the potential impact
on the community, and other relevant factors. Examiners
reviewed Regions’ branch closing policy as part of the
most recent CRA evaluation of Regions Bank and found it
to be in compliance with federal law.
The Board also has considered that federal banking law
provides a specific mechanism for addressing branch clos

Legal Developments

ings.46 Federal law requires an insured depository institu
tion to provide notice to the public and to the appropriate
federal supervisory agency before closing a branch. In
addition, the Board notes that the Reserve Bank and the
OCC will continue to review the branch closing record of
Regions Bank and UPB-NA, respectively, in the course of
conducting CRA performance evaluations.
F. C onclusion on Convenience 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 Regions,
comments 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 fac
tor, including the CRA performance records of the relevant
depository institutions, are consistent with approval.
Nonbanking Activities
New Regions also has filed notice under sections 4(c)(8)
and 4(j) of the BHC Act to acquire Regions FSB and
thereby engage in the activity of operating a savings asso
ciation. Through Regions FSB, New Regions would accept
a small amount of deposits and provide trust and asset
management services. The Board has determined by regu
lation that the activity of owning, controlling, or operating
a savings association is permissible for a bank holding
company, provided that the savings association directly
and indirectly engages only in activities that are permis
sible for a bank holding company to conduct under sec
tion 4(c)(8) of the BHC Act.47
In order to approve New Regions’ notice to acquire
Regions FSB, the Board is required by section 4(j)(2)(A)
of the BHC Act to determine that the acquisition “can
reasonably be expected to produce benefits to the public . . .
that outweigh possible adverse effects, such as undue con
centration of resources, decreased or unfair competition,
conflicts of interests, or unsound banking practices.” 48
As part of its evaluation of these factors, the Board
considers the financial condition and managerial resources
of the notificant, its subsidiaries, and the companies to be
acquired, and the effect of the proposed transaction on
those resources. For the reasons discussed above and based
on all the facts of record, the Board has concluded that
financial and managerial considerations are consistent with
approval of the notice. The Board reviewed the competi
46. Section 42 o f 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.
47. 12 CFR 225.28(b)(4).
48. 12 U.S.C. § 1843(j)(2)(A).

397

tive effects of the proposal in the Birmingham banking
market. Regions FSB maintains its only office in Birming
ham, and Union Planters does not compete in this banking
market. Based on all the facts of record, the Board con
cludes that it is unlikely that significantly adverse competi
tive effects would result from the acquisition of Regions
FSB.
The Board also has reviewed carefully the public bene
fits of the acquisition of Regions FSB. The record indicates
that consummation of the proposed thrift acquisition, when
considered in the broader context of Regions’ acquisition
of Union Planters, would result in benefits to the customers
and communities that the institutions serve. On consumma
tion, the proposal would allow Regions to provide custom
ers of Regions FSB, along with the customers of Regions
Bank, UPB-NA, Lakeway Bank, and Regions’ other direct
and indirect subsidiaries, with access to a broader array of
commercial banking products and services. Moreover,
Regions’ customers would have access to an expanded
network of branch offices and ATMs.
The Board concludes that the conduct of the proposed
nonbanking activities within the framework of Regu
lation Y and Board precedent is not likely to result in
adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interests, or
unsound banking practices, that would outweigh the public
benefits of the proposal, such as increased customer con
venience and gains in efficiency. Accordingly, based on
all the facts of record, the Board has determined that
the balance of public interest factors that the Board must
consider under section 4(j)(2)(A) of the BHC Act is consis
tent with approval of New Region’s notice.
As noted above, New Regions also has proposed to
acquire Union Planters Hong Kong, Inc. The Board has
concluded that all the factors required to be considered
under the Federal Reserve Act and Regulation K are con
sistent with approval.
Financial Holding Company Election
New Regions filed with the Board an election to become a
financial holding company pursuant to sections 4(k) and (/)
of the BHC Act and section 225.82 of Regulation Y.
New Regions has certified that the subsidiary depository
institutions controlled by Regions and Union Planters are
well capitalized and well managed and will remain so on
consummation of the proposal. New Regions has provided
all the information required for financial holding company
election under Regulation Y.
As noted above, the Board has reviewed the examination
ratings received by the subsidiary depository institutions
controlled by Regions and Union Planters under the CRA
and other relevant examinations and information. Based
on all the facts of record, the Board has determined that
New Regions’ election to become a financial holding
company will become effective on consummation of the
proposal, if on that date Regions Bank, Regions FSB,
UPB-NA, and Lakeway Bank remain well capitalized and
well managed and all institutions subject to the CRA are

398

Federal Reserve Bulletin □ Summer 2004

rated at least “ satisfactory” at their most recent perfor
mance evaluations.49
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.50 In reaching
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 New Regions with the conditions in this order and with
all the commitments made to the Board in connection with
this proposal and the receipt of all other regulatory approv
als. 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) of Regulation Y (12 CFR 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 purposes of these actions, 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 bank acquisitions 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
49. This determination includes the financial holding company
elections by UPHC and Franklin Financial, which also will become
effective on consummation of the proposal.
50. Two commenters requested that the Board hold a public hear
ing on the proposal. Section 3 of the BHC Act does not require the
Board to hold a public hearing on an application unless the appropri
ate supervisory 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 supervisory
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 CFR 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 o f material facts that
cannot be resolved in some other manner. 12 CFR 225.25(a)(2). The
Board has considered carefully the commenters’ requests in light
of all the facts of record. In the Board’s view, the public has had
ample opportunity to submit comments on the proposal, and in fact,
the commenters have submitted written comments that the Board
has considered carefully in acting on the proposal. The commenters’
requests fail to identify disputed issues of fact that are material to the
Board’s decisions that would be clarified by a public hearing or
meeting. Moreover, the commenters’ requests fail to demonstrate why
their written comments do not present their views adequately or why a
meeting or hearing otherwise would be necessary or appropriate. For
these reasons, and based on all the facts of record, the Board has
determined that a public hearing or meeting is not required or war
ranted in this case. Accordingly, the requests for a public hearing or
meeting on the proposal are denied.

three months after the effective date of this order, unless
such period is extended for good cause by the Board or by
the Federal Reserve Bank of Atlanta acting pursuant to
delegated authority.
By order of the Board of Governors, effective June 16,
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 e V. F r ie r s o n

Deputy Secretary o f the Board

A ppendix A
Banking Markets in which Regions and Union Planters
Compete Directly
Alabam a Banking M arkets
Decatur
Morgan County, and the portion of the City of Decatur in
Limestone County.
Florence

Colbert and Lauderdale Counties.
Huntsville
Madison County, and Limestone County, excluding the
Town of Ardmore and the portion of the City of Decatur in
Limestone County.
Mobile
Mobile County, and the towns of Bay Minette, Daphne,
Fairhope, Loxley, Robertsdale, and Spanish Fort.
Arkansas Banking Markets
Blytheville
Mississippi County, and the towns of Virginia, Holland,
Cooter, and Pemiscot.
Corning
Clay County.
Jonesboro
Craighead and Poinsett Counties.
Newport
Jackson County.
Paragould
Greene County.

Legal Developments

399

Florida Banking M arket

Nashville

West Palm Beach

Cheatham, Davidson, Robertson, Rutherford, Sumner,
Williamson, and Wilson Counties.

The portion of Palm Beach County east of Loxahatchee,
and the towns of Indiantown and Hobe Sound.

Texas Banking M arket

Louisiana Banking M arkets

Houston
Houston Ranally M etropolitan Area.

Baton Rouge
Ascension, East Baton Rouge, Iberville, Livingston, and
West Baton Rouge Parishes; the northern half of Assump
tion Parish; and the Town of Union in St. James Parish.

A ppendix B

Houma-Thibodaux

Unconcentrated Banking Market

Lafourche and Terrebonne Parishes.

Clarksville, Tennessee/Kentucky

New Orleans

Regions operates the 14th largest depository institution in
the market, controlling deposits of $13.5 million, represent
ing less than 1 percent of market deposits. Union Planters
operates the 13th largest depository institution in the
market, controlling deposits of $38.9 million, represent
ing approximately 2.1 percent of market deposits. After
the proposed merger, New Regions would operate the
12th largest depository institution in the market, control
ling deposits of $52.4 million, representing approximately
2.8 percent of market deposits. Thirteen depository institu
tions would remain in the banking market. The HHI would
increase by 3 points to 977.

Jefferson,
Orleans,
Plaquemines,
St.
Bernard,
St. Charles, St. John the Baptist, and St. Tammany Par
ishes; and St.James Parish, excluding the Town of Union.

Tennessee Banking M arkets
Chattanooga
Hamilton and Marion Counties, excluding the portion of
the Town of Monteagle in Marion County; and Catoosa,
Dade, and Walker Counties in Georgia.

Market Data

Moderately Concentrated Banking Markets
Clarksville
Montgomery and Stewart Counties; and Christian County
in Kentucky.
Cookeville
Jackson, Overton, and Putnam Counties.
Fayetteville
Lincoln County, excluding the portion of the Town of
Petersburg in this county.
Knoxville
Anderson, Knox, Loudon, Roane, and Union Counties; the
portion of Blount County northwest of Chilhowee M oun
tain; and the towns of Blaine, Buffalo Springs, Chestnut
Hill, Danridge, Dumplin, Friends Station, Harriman,
Hodges, Kodak, Joppa, Lea Springs, New Market, Oliver
Springs, Powder Springs, Seymour, and Strawberry Plains.
Memphis
Fayette, Shelby, and Tipton Counties; Crittenden County in
Arkansas; and De Soto and Tate Counties in Mississippi.

Chattanooga, Tennessee/Georgia
Regions operates the 16th largest depository institution in
the market, controlling deposits of $77.6 million, represent
ing approximately 1.4 percent of market deposits. Union
Planters operates the 17th largest depository institution in
the market, controlling deposits of $71.7 million, represent
ing approximately 1.3 percent of market deposits. After the
proposed merger, New Regions would operate the seventh
largest depository institution in the market, controlling
deposits of $149.3 million, representing approximately
2.6 percent of market deposits. Twenty-four depository
institutions would remain in the banking market. The HHI
would increase by 4 points to 1343.
Cookeville, Tennessee
Regions operates the 13th largest depository institution in
the market, controlling deposits of $31.1 million, represent
ing approximately 2.3 percent of market deposits. Union
Planters operates the fifth largest depository institution in
the market, controlling deposits of $135.5 million, repre
senting approximately 9.9 percent of market deposits. After
the proposed merger, New Regions would operate the
fourth largest depository institution in the market, control
ling deposits of $166.6 million, representing approximately

400

Federal Reserve Bulletin □ Summer 2004

12.2 percent of market deposits. Thirteen depository insti
tutions would remain in the banking market. The HHI
would increase by 45 points to 1110.

24 percent o f market deposits. Thirteen depository institu
tions would remain in the banking market. The HHI would
increase by 105 points to 1339.

Decatur, Alabama

Jonesboro, Arkansas

Regions operates the largest depository institution in the
market, controlling deposits of $203.8 million, represent
ing approximately 14.9 percent of market deposits. Union
Planters operates the seventh largest depository institution
in the market, controlling deposits of $112.8 million, repre
senting approximately 8.3 percent of market deposits. After
the proposed merger, New Regions would remain the larg
est depository institution in the market, controlling depos
its of approximately $316.7 million, representing approxi
mately 23.2 percent of market deposits. Thirteen depository
institutions would remain in the banking market. The HHI
would increase by 246 points to 1425.

Regions operates the fourth largest depository institution in
the market, controlling deposits of $160.3 million, repre
senting approximately 9 percent of market deposits. Union
Planters operates the second largest depository institution
in the market, controlling deposits of $199.4 million, rep
resenting approximately 11.2 percent of market deposits.
After the proposed merger, New Regions would operate
the second largest depository institution in the market,
controlling deposits of approximately $359.6 million, rep
resenting approximately 20.2 percent of market deposits.
Fifteen depository institutions would remain in the banking
market. The HHI would increase by 202 points to 1713.

Florence, Alabama

Knoxville, Tennessee

Regions operates the eighth largest depository institution
in the market, controlling deposits of $116.5 million, repre
senting approximately 6.2 percent of market deposits.
Union Planters operates the 12th largest depository institu
tion in the market, controlling deposits of $29.7 million,
representing approximately 1.6 percent of market deposits.
After the proposed merger, New Regions would operate
the sixth largest depository institution in the market, con
trolling deposits of $146.2 million, representing approxi
mately 7.8 percent of market deposits. Thirteen depository
institutions would remain in the banking market. The HHI
would increase by 19 points to 1257.

Regions operates the 22nd largest depository institution in
the market, controlling deposits of $32.2 million, represent
ing less than 1 percent of market deposits. Union Planters
operates the seventh largest depository institution in the
market, controlling deposits of $462.8 million, represent
ing approximately 5.2 percent of market deposits. A fter the
proposed merger, New Regions would operate the seventh
largest depository institution in the market, controlling
deposits of $495 million, representing approximately
5.5 percent of market deposits. Thirty-one depository insti
tutions would remain in the banking market. The HHI
would increase by 4 points to 1118.

Houma-Thibodaux, Louisiana

Nashville, Tennessee

Regions operates the fifth largest depository institution
in the market, controlling deposits of $157.1 million, rep
resenting approximately 6.9 percent of market deposits.
Union Planters operates the 11th largest depository institu
tion in the market, controlling deposits of $52.6 million,
representing approximately 2.3 percent of market deposits.
After the proposed merger, New Regions would operate
the fourth largest depository institution in the market,
controlling deposits of approximately $209.6 million, rep
resenting approximately 9.1 percent of market deposits.
Thirteen depository institutions would remain in the bank
ing market. The HHI would increase by 31 points to 1757.

Regions operates the 11th largest depository institution in
the market, controlling deposits of $463.6 million, repre
senting approximately 2.4 percent of market deposits.
Union Planters operates the fourth largest depository insti
tution in the market, controlling deposits of $1.1 billion,
representing approximately 5.5 percent of market deposits.
After the proposed merger, New Regions would operate
the fourth largest depository institution in the market,
controlling deposits of approximately $1.5 billion, rep
resenting approximately 7.9 percent of market deposits.
Thirty-five depository institutions would remain in the
banking market. The HHI would increase by 26 points to
1105.

Huntsville, Alabama
Regions operates the largest depository institution in the
market, controlling deposits of $913.8 million, represent
ing approximately 21.6 percent of market deposits. Union
Planters operates the ninth largest depository institution in
the market, controlling deposits of $103.2 million, repre
senting approximately 2.4 percent of market deposits. After
the proposed merger, New Regions would remain the larg
est depository institution in the market, controlling depos
its of approximately $1 billion, representing approximately

New Orleans, Louisiana
Regions operates the fourth largest depository institution in
the market, controlling deposits of $1.3 billion, represent
ing approximately 7.4 percent of market deposits. Union
Planters operates the 26th largest depository institution in
the market, controlling deposits of $60.5 million, represent
ing less than 1 percent of market deposits. After the pro
posed merger, New Regions would remain the fourth larg
est depository institution in the market, controlling deposits

Legal Developments

of approximately $1.4 billion, representing approximately
7.8 percent of market deposits. Thirty-eight depository
institutions would remain in banking market. The HHI
would increase by 5 points to 1628.
West Palm Beach, Florida
Regions operates the 53rd largest depository institution in
the market, controlling deposits of $1.3 million, represent
ing less than 1 percent of market deposits. Union Planters
operates the 14th largest depository institution in the
market, controlling deposits of $274.5 million, represent
ing approximately 1.3 percent of market deposits. After
the proposed merger, New Regions would operate the
14th largest depository institution in the market, control
ling deposits of approximately $275.8 million, representing
approximately 1.3 percent of market deposits. Fifth-five
depository institutions would remain in the banking mar
ket. The HHI would not increase, remaining at 1325.
Highly Concentrated Banking Markets

401

the proposed merger, New Regions would operate the
third largest depository institution in the market, control
ling deposits of approximately $41 million, representing
approximately 19 percent of market deposits. Six deposi
tory institutions would remain in the banking market. The
HHI would increase by 180 points to 2343.
Fayetteville, Tennessee
Regions operates the second largest depository institution
in the market, controlling deposits of $77.1 million, repre
senting approximately 20.3 percent of market deposits.
Union Planters operates the seventh largest depository
institution in the market, controlling deposits of $18.6 mil
lion, representing approximately 4.9 percent of market
deposits. After the proposed merger, New Regions would
remain the second largest depository institution in the
market, controlling deposits of approximately $95.6 mil
lion, representing approximately 25.2 percent of market
deposits. Six depository institutions would remain in the
banking market. The HHI would increase by 199 points to
1998.

Baton Rouge, Louisiana
Regions operates the sixth largest depository institution
in the market, controlling deposits of $288.6 million, rep
resenting approximately 3.5 percent of market deposits.
Union Planters operates the fourth largest depository insti
tution in the market, controlling deposits of $638.5 million,
representing approximately 7.7 percent of market deposits.
After the proposed merger, New Regions would operate
the third largest depository institution in the market, con
trolling deposits of $927.1 million, representing approxi
mately 11.1 percent of market deposits. Thirty-two deposi
tory institutions would remain in the banking market. The
HHI would increase by 53 points to 1832.

Houston, Texas
Regions operates the 33rd largest depository institution
in the market, controlling deposits of $196.7 million, rep
resenting less than 1 percent of market deposits. Union
Planters operates the 20th largest depository institution
in the market, controlling deposits of $494.2 million, rep
resenting less than 1 percent of market deposits. After
the proposed merger, New Regions would operate the
13th largest depository institution in the market, control
ling deposits of $690.9 million, representing less than
1 percent of market deposits. Eighty-three depository insti
tutions would remain in the banking market. The HHI
would not increase, remaining at 2641.

Blytheville, Arkansas
Regions operates the fifth largest depository institution in
the market, controlling deposits of $31.5 million, represent
ing approximately 6.8 percent of market deposits. Union
Planters operates the seventh largest depository institution
in the market, controlling deposits of $23.6 million, repre
senting approximately 5.1 percent of market deposits. After
the proposed merger, New Regions would operate the
third largest depository institution in the market, control
ling deposits of $55.1 million, representing approximately
11.8 percent of market deposits. Six depository institutions
would remain in the banking market. The HHI would
increase by 69 points to 2505.

Memphis, Tennessee/Arkansas/Mississippi
Regions operates the 11th largest depository institution
in the market, controlling deposits of $324.1 million, repre
senting approximately 1.3 percent of market deposits.
Union Planters operates the third largest depository institu
tion in the market, controlling deposits of $3.7 billion,
representing approximately 15.5 percent of market depos
its. After the proposed merger, New Regions would oper
ate the second largest depository institution in the market,
controlling deposits of approximately $4.1 billion, repre
senting approximately 16.8 percent of market deposits.
Fifty-one depository institutions would remain in the bank
ing market. The HHI would increase by 41 points to 2250.

Corning, Arkansas
Regions operates the fourth largest depository institution in
the market, controlling deposits of $21.4 million, represent
ing approximately 10 percent of market deposits. Union
Planters operates the fifth largest depository institution in
the market, controlling deposits of $19.5 million, represent
ing approximately 9.1 percent of market deposits. After

Mobile, Alabama
Regions operates the largest depository institution in the
market, controlling deposits of $2.2 billion, represent
ing approximately 37.3 percent of market deposits. Union
Planters operates the eighth largest depository institution
in the market, controlling deposits of $120.1 million, rep

402

Federal Reserve Bulletin □ Summer 2004

resenting approximately 2.1 percent of market deposits.
After the proposed merger, New Regions would remain
the largest depository institution in the market, control
ling deposits of approximately $2.3 billion, representing
approximately 39.4 percent of market deposits. Seventeen
depository institutions would remain in the banking mar
ket. The HHI would increase by 155 points to 2310.
Newport, Arkansas
Regions operates the fourth largest depository institution in
the market, controlling deposits of $4.5 million, represent
ing approximately 2.5 percent of market deposits. Union
Planters operates the third largest depository institution in
the market, controlling deposits of $37.4 million, represent
ing approximately 20.9 percent of market deposits. After
the proposed merger, New Regions would operate the
second largest depository institution in the market, con
trolling deposits of approximately $42 million, represent
ing approximately 23.4 percent of market deposits. Three
depository institutions would remain in the banking mar
ket. The HHI would increase by 106 points to 3964.
Paragould, Arkansas
Regions operates the eighth largest depository institution in
the market, controlling deposits of $17.4 million, represent
ing approximately 3.1 percent of market deposits. Union
Planters operates the fourth largest depository institution in
the market, controlling deposits of $61.2 million, represent
ing approximately 10.8 percent of market deposits. After
the proposed merger, New Regions would operate the
second largest depository institution in the market, control
ling deposits of approximately $78.5 million, representing
approximately 13.9 percent of market deposits. Eight
depository institutions would remain in the banking mar
ket. The HHI would increase by 66 points to 2525.

O r d e r s I s s u e d U n d e r In t e r n a t io n a l
Ba n k in g A c t
Hypothekenbank in Essen A G
Essen, Germany
Order Approving Establishment of a Representative Office
Hypothekenbank in Essen AG ( “ Bank” ), Essen, Germany,
a foreign bank within the meaning of the International
Banking Act ( “ IBA” ), has applied under section 10(a) of
the IBA (12 U.S.C. § 3 107(a)) to establish a representative
office in New York, New York. The Foreign Bank Supervi
sion Enhancement Act of 1991, which amended the IBA,
provides that a foreign bank must obtain the approval of
the Board to establish a representative office in the United
States.
Notice of the application, affording interested persons an
opportunity to submit comments, has been published in a
newspaper of general circulation in New York, New York
(The New York Times, January 30, 2004). The time for

filing comments has expired, and all comments have been
considered.
Bank, with total consolidated assets of approximately
$92 billion,1 is the fifth largest mortgage bank in Germany
and is primarily engaged in real estate mortgage lending
and public sector lending. Bank operates representative
offices in Belgium, France, and the United Kingdom.
Bank is owned by Com merzbank, AG, Frankfurt,
Germany, and Helvetic Grundbesitz Verwaltung GmbH.
Commerzbank, with consolidated total assets of approxi
mately $493 billion, is the fourth largest banking organi
zation in Germany.2 Commerzbank engages in banking
operations in the United States through branches in
New York, New York; Chicago, Illinois; and Los Angeles,
California; and an agency in Atlanta, Georgia. Commerz
bank also engages in nonbanking activities in the United
States through a number of subsidiaries.
The proposed representative office would initially act
as a liaison with existing and potential customers o f Bank.
The office would also conduct research and may solicit
commercial mortgage loans in the United States.
In acting on an application to establish a representative
office, the IBA and Regulation K provide that the Board
shall take into account whether the foreign bank engages
directly in the business of banking outside o f the United
States and has furnished to the Board the information it
needs to assess the application adequately. The Board also
shall take into account whether the foreign bank and any
foreign bank parent is subject to comprehensive super
vision or regulation on a consolidated basis by its
home country supervisor (12 U.S.C. § 3 107(a)(2); 12 CFR
211.24(d)(2)).3 In addition, the Board may take into
account additional standards set forth in the IBA and
Regulation K (12 U.S.C. §3105(d)(3)-(4); 12 CFR
211.24(c)(2)).
As noted above, Bank and Commerzbank engage
directly in the business of banking outside the United
States. Bank also has provided the Board with information
necessary to assess the application through submissions
that address the relevant issues. With respect to supervision
by home country authorities, the Board previously has
1. Unless otherwise indicated, data are as of December 31, 2003.
2. Data are as of March 31, 2004.
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.

Legal Developments

determined, in connection with applications involving other
German banks, including Commerzbank, that those banks
were subject to home country supervision on a consoli
dated basis.4 Bank is supervised by the German Federal
Financial Supervisory Agency on substantially the same
terms and conditions as the other banks. Based on all the
facts of record, it has been determined that Bank is and
Commerzbank continues to be subject to comprehensive
supervision and regulation on a consolidated basis by their
home country supervisor.
The additional standards set forth in section 7 of the
IBA and Regulation K (see 12 U.S.C. § 3 105(d)(3)-(4);
12 CFR 211.24(c)(2)) have also been taken into account.
The German Federal Financial Supervisory Agency has no
objection to the establishment of the proposed representa
tive office.
W ith respect to the financial and managerial resources of
Bank, taking into consideration Bank’s record of opera
tions in its home country, its overall financial resources,
and its standing with its home country supervisor, financial
and managerial factors are consistent with approval of the
proposed representative office. Bank appears to have the
experience and capacity to support the proposed represen
tative office and has established controls and procedures
for the proposed representative office to ensure compliance
with U.S. law.
Germany is a member of the Financial Action Task
Force and subscribes to its recommendations regarding
measures to combat money laundering. In accordance with
these recommendations, Germany has enacted laws and
created legislative and regulatory standards to deter money
laundering. Money laundering is a criminal offense in
Germany and credit institutions are required to establish
internal policies and procedures for its detection and
prevention.
With respect to access to information on Bank’s opera
tions, the restrictions on disclosure in relevant jurisdictions
in which Bank operates have been reviewed and relevant
government authorities have been communicated with
regarding access to information. Bank and its parents have
committed to make available to the Board such informa
tion on the operations of Bank and any of their affiliates
that the Board deems necessary to determine and enforce
compliance with the IBA, the Bank Holding Company Act
of 1956, as amended, and other applicable federal law. To
the extent that the provision of such information to the
Board may be prohibited by law or otherwise, Bank and its
parents 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 informa
tion. In addition, subject to certain conditions, the German
Federal Financial Supervisory Agency may share informa
tion 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
4. S ee, e.g., H S H N o r d b a n k A G , 89 F e d e r a l R e s e r v e B u lle tin 344
(2003); E u ro h y p o A G , 88 F e d e r a l R e s e r v e B u lle tin 504 (2002);
C o m m e r zb a n k A G , 85 F e d e r a l R e s e r v e B u lle tin 336 (1999).

403

has been determined that Bank has provided adequate
assurances o f access to any necessary information that the
Board may request.
On the basis of all the facts of record, and subject to the
commitments made by Bank and its parents, and the terms
and conditions set forth in this order, Bank’s application
to establish the representative office is hereby approved.5
Should any restrictions on access to information on the
operations or activities of Bank or any of its affiliates
subsequently interfere with the Board’s ability to obtain
information to determine and enforce compliance by Bank
or its affiliates with applicable federal statutes, the Board
may require or recommend termination of any of Bank’s
direct and indirect activities in the United States. Approval
of this application also is specifically conditioned on com
pliance by Bank and its parent companies with the commit
ments made in connection with this application and with
the conditions in this order.6 The commitments and condi
tions referred to above are conditions imposed in writing
by the Board in connection with its decision and may be
enforced in proceedings against Bank and its affiliates
under 12 U.S.C. § 1818.
By order, approved pursuant to authority delegated by
the Board, effective June 18, 2004.
R o b e r t d e V. F r ie r s o n

Deputy Secretary o f the Board

F in a l E n f o r c e m e n t D e c i s i o n s I s s u e d
BOARD OF GOVERNORS

b y the

In the M atter o f a N otice to P rohibit Further P articipa
tion A gainst
Garfield C. Brown, Jr.,
Form er Employee,
Mellon Bank, N.A.
Pittsburgh, Pennsylvania
D ocket No. O CC-A A -EC-03-11
Final D ecision
This is an administrative proceeding pursuant to the Fed
eral Deposit Insurance Act ( “ the FDI A ct” ) in which the
Office o f the Comptroller o f the Currency o f the United
States of America ( “ O CC” ) seeks to prohibit the Respon
5. Approved by the Director o f the Division o f Banking Supervi
sion and Regulation, with the concurrence of the Associate General
Counsel, pursuant to authority delegated by the Board and the General
Counsel.
6. The Board’s authority to approve the establishment o f the pro
posed representative office parallels the continuing authority of the
State of New York to license offices o f a foreign bank. The Board’s
approval of this application does not supplant the authority of the
State of New York or its agent, the New York State Banking Depart
ment ( “Department” ), to license the proposed office of Bank in
accordance with any terms or conditions that the Department may
impose.

404

Federal Reserve Bulletin □ Summer 2004

dent, Garfield C. Brown, Jr. ( “ Respondent” ), from further
participation in the affairs of any financial institution
because of his conduct as an employee of Mellon Bank,
N.A., Pittsburgh, Pennsylvania (the “ Bank” ), a national
bank. Under the FDI Act, the OCC may initiate a prohibi
tion proceeding against a former employee of a national
bank, but the Board must make the final determination
whether to issue an order of prohibition.
Upon review of the administrative record, the Board
issues this Final Decision adopting the Recommended
Decision of Administrative Law Judge Ann Z. Cook (the
“A LJ” ), and orders the issuance of the attached Order of
Prohibition.
I. Statem ent of the C ase
A. Statutory and Regulatory Framework
Under the FDI Act and the Board’s regulations, the ALJ is
responsible for conducting proceedings on a notice of
charges. 12 U.S.C. § 1818(e)(4). The ALJ issues a recom
mended decision that is referred to the deciding agency
together with any exceptions to those recommendations
filed by the parties. The Board makes the final findings of
fact, conclusions of law, and determination whether to
issue an order of prohibition in the case of prohibition
orders sought by the OCC. Id.; 12 CFR 263.40.
The FDI Act sets forth the substantive basis upon which
a federal banking agency may issue against a bank official
or employee an order of prohibition from further partici
pation in banking. To issue such an order, the Board must
make each of three findings: (1) that the respondent
engaged in identified misconduct, including a violation of
law or regulation, an unsafe or unsound practice or a
breach of fiduciary duty; (2) that the conduct had a speci
fied effect, including financial loss to the institution or gain
to the respondent; and (3) that the respondent’s conduct
involved either personal dishonesty or a willful or continu
ing disregard for the safety or soundness of the institution.
12 U.S.C. § 1818(e)(l)(A )-(C).
An enforcement proceeding is initiated by filing and
serving on the respondent a notice of intent to prohibit.
Under the O CC’s and the Board’s regulations, the respon
dent must file an answer within 20 days of service of the
notice. 12 CFR 19.19(a) and 263.19(a). Failure to file
an answer constitutes a waiver of the respondent’s right to
contest the allegations in the notice, and a final order may
be entered unless good cause is shown for failure to file a
timely answer. 12 CFR 19.19(c)(1) and 263.19(c)(1).
B. Procedural H istory
On June 3, 2003, the OCC issued a Notice initiating an
enforcement action that sought, inter alia, an order of
prohibition against Respondent for his participation in pro
cessing three cash advances for an acquaintance, totaling
$15,000, knowing that his acquaintance presented false
identification to obtain the cash advances. The Notice
further alleges that Respondent recorded inaccurate identi

fication information on the cash advance slips completed
for these transactions, and that the Respondent received
$500 from his acquaintance for his participation in these
cash advances.1 The Notice directed Respondent to file an
answer within 20 days, and warned that failure to do so
would constitute a waiver of her right to appear and contest
the allegations. The record shows that the Respondent
received service of the Notice. Nonetheless, Respondent
failed to file an answer within the 20-day period.
On or about July 24, 2003, Enforcement Counsel filed a
Motion for Entry of an Order of Default. The motion was
served on Respondent in accordance with the O CC’s rules,
but he did not respond to it. Finally, on or about July 29,
2003, Respondent received service of an Order to Show
Cause directing him to submit an answer by August 13,
2003, and to demonstrate good cause for not having done
so previously. That Order, too, was ignored. Respondent
has never filed an answer to the Notice.
II. D iscussion
The O CC’s Rules of Practice and Procedure set forth the
requirements of an answer and the consequences of a
failure to file an answer to a Notice. Under the Rules,
failure to file a timely answer “ constitutes a waiver of
[a respondent’s] right to appear and contest the allegations
in the Notice.” 12 CFR 19.19(c). If the ALJ finds that
no good cause has been shown for the failure to file, the
judge “ shall file . . . a recommended decision containing
the findings and the relief sought in the notice.” Id. An
order based on a failure to file a timely answer is deemed to
be issued by consent. Id.
In this case, Respondent failed to file an answer despite
notice to him of the consequences of such failure, and also
failed to respond to the A L J’s Order to Show Cause.
Respondent’s failure to file an answer constitutes a default.
Respondent’s default requires the Board to consider
the allegations in the Notice as uncontested. The Notice
alleges, and the Board finds, that on or about July 30, 1998,
Respondent processed for his acquaintance two cash
advances against a credit card, each in the amount of
$3,500, knowing that the driver’s license presented by his
acquaintance matched neither the name of the acquain
tance, nor the name of the cardholder against which the
cash advance was taken. Additionally, on or about
August 5, 1998, Respondent processed for the same
acquaintance another cash advance in the amount of $8,000
against a different credit card, after the acquaintance pre
sented the same driver’s license that was used for identifi
cation in the July 30, 1998 transactions. The Notice alleges
and the Board finds that on both occasions, Respondent
recorded inaccurate identification information on Bank
records, at the request of his acquaintance, and that
Respondent received $500 from his acquaintance for his
participation in these cash advance transactions. The Bank
1.
The Notice also sought an order requiring Respondent to make
restitution to the Bank under 12 U.S.C. 1818(b)(6). The OCC has
authority to issue a final decision with respect to this requested relief.

Legal Developments

reimbursed the cardholders who were wrongfully charged,
and thereby suffered a loss of $15,000.
This conduct by Respondent meets all the criteria for
entry of an order of prohibition under 12 U.S.C. § 1818(e).
It is a breach of fiduciary duty and an unsafe or unsound
practice for a bank employee to give bank funds to a
person the bank employee knows is not entitled to receive
such funds, to accept identification documents that the
bank employee knows does not belong to a customer
requesting a bank transaction, and to record inaccurate
information on bank records. Respondent’s action caused
gain to himself, as well as loss to the Bank. Finally, such
actions, along with Respondent’s acceptance of $500 for
his involvement in this fraudulent scheme, also exhibit
personal dishonesty. Accordingly, the requirements for an
order of prohibition have been met and the Board hereby
issues such an order.
Conclusion
For these reasons, the Board orders the issuance of the
attached Order of Prohibition.
By order of the Board of Governors, this 21st day of
November 2003.
Board of Governors of the
Federal Reserve System
J e n n if e r J. J o h n s o n

405

insured depository institution, any insured depository
institution holding company or any U.S. branch or
agency of a foreign banking organization;
(b) from soliciting, procuring, transferring, attempt
ing to transfer, voting or attempting to vote any
proxy, consent or authorization with respect to any
voting rights in any institution described in sub
section 8(e)(7)(A) of the FDI Act (12 U.S.C.
§ 1818(e)(7)(A));
(c) from violating any voting agreement previously
approved by any Federal banking agency; or
(d) from voting for a director, or from serving or
acting as an institution-affiliated party as defined in
section 3(u) of the FDI Act (12 U.S.C. §1813(u)),
such as an officer, director, or employee in any institu
tion described in section 8(e)(7)(A) of the FDI Act
(12 U.S.C. § 1818(e)(7)(A)).
2. Any violation of this order shall separately subject
Brown to appropriate civil or criminal penalties or both
under section 8 of the FDI Act (12 U.S.C. § 1818).
3. This order, and each and every provision hereof, is
and shall remain fully effective and enforceable until
expressly stayed, modified, terminated or suspended in
writing by the Board.
This order shall become effective at the expiration of
thirty days after service is made.
By order of the Board of Governors, this 21st day of
November 2003.

Secretary o f the Board

Board of Governors of the
Federal Reserve System

Order of Prohibition

J e n n if e r J. J o h n s o n

Secretary o f the Board
Whereas, pursuant to section 8(e) of the Federal Deposit
Insurance Act, as amended, (the “FDI A ct” ) (12 U.S.C.
§ 1818(e)), the Board of Governors of the Federal Reserve
System ( “ the Board” ) is of the opinion, for the reasons set
forth in the accompanying Final Decision, that a final
Order of Prohibition should issue against GARFIELD C.
BROWN, Jr. ( “ Brow n” ), a former employee and
institution-affiliated party, as defined in Section 3(u) of the
FDI Act (12 U.S.C. § 1813(u)), of Mellon Bank, N.A.,
Pittsburgh, Pennsylvania.

In the M atter o f a N otice to P rohibit Further P articipa
tion A gainst
M arian L. Butler,
Former Employee,
CoreStates Financial (now F irst Union)
Philadelphia, Pennsylvania
D ocket No. O CC -A A -E C -02-07

NOW, THEREFORE, IT IS HEREBY ORDERED, pursu
ant to section 8(e) of the FDI Act, 12 U.S.C. § 1818(e),
that:
1. In the absence of prior written approval by the Board,
and by any other Federal financial institution regulatory
agency where necessary pursuant to section 8(e)(7)(B)
of the Act (12 U.S.C. § 1818(e)(7)(B)), Brown is hereby
prohibited:
(a) from participating in any manner in the conduct
of the affairs of any institution or agency specified
in section 8(e)(7)(A) of the FDI A ct (12 U.S.C.
§ 1818(e)(7)(A)), including, but not limited to, any

Final D ecision
This is an administrative proceeding pursuant to the Fed
eral Deposit Insurance Act ( “FDI A ct” ) in which the
Office of the Comptroller of the Currency of the United
States of America ( “ O C C ” ) seeks to prohibit the Respon
dent, Marian L. Butler ( “ Respondent” ), from further par
ticipation in the affairs of any financial institution because
o f her conduct as an employee of CoreStates Financial
(now First Union) (the “ Bank” ), a national banking asso
ciation. Under the FDI Act, the OCC may initiate a prohi
bition proceeding against a former employee of a national

406

Federal Reserve Bulletin □ Summer 2004

bank, but the Board must make the final determination
whether to issue an order of prohibition.
Upon review of the administrative record, the Board
issues this Final Decision adopting the Recommended
Decision of Administrative Law Judge Ann Z. Cook (the
“ALJ” ), and orders the issuance of the attached Order of
Prohibition.

I. Statem ent o f the Case
A. Statutory and Regulatory Framework
Under the FDI Act and the Board’s regulations, the ALJ
is responsible for conducting proceedings on a notice of
charges. 12 U.S.C. § 1818(e)(4). The ALJ issues a recom
mended decision that is referred to the deciding agency
together with any exceptions to those recommendations
filed by the parties. The Board makes the final findings of
fact, conclusions of law, and determination whether to
issue an order of prohibition in the case of prohibition
orders sought by the OCC. Id.; 12 CFR §263.40.
The FDI Act sets forth the substantive basis upon which
a federal banking agency may issue against a bank official
or employee an order of prohibition from further partici
pation in banking. To issue such an order, the Board must
make each of three findings: (1) that the respondent
engaged in identified misconduct, including a violation of
law or regulation, an unsafe or unsound practice or a
breach of fiduciary duty; (2) that the conduct had a speci
fied effect, including financial loss to the institution or gain
to the respondent; and (3) that the respondent’s conduct
involved either personal dishonesty or a willful or continu
ing disregard for the safety or soundness of the institution.
12 U.S.C. § 1818(e)(l)(A M C ).
An enforcement proceeding is initiated by filing and
serving on the respondent a notice of intent to prohibit.
Under the O CC’s and the Board’s regulations, the respon
dent must file an answer within 20 days of service of the
notice. 12 CFR 19.19(a) and 263.19(a). Failure to file an
answer constitutes a waiver of the respondent’s right to
contest the allegations in the notice, and a final order may
be entered unless good cause is shown for failure to file a
timely answer. 12 CFR 19.19(c)(1) and 263.19(c)(1).
B. Procedural H istory
On August 6, 2002, the OCC issued a Notice initiating an
enforcement action that sought an order of prohibition due
to Respondent’s actions in stealing between $10,000 and
$15,000 from the Bank while working in the cash process
ing unit. The Notice directed Respondent to file an answer
within 20 days, and warned that failure to do so would
constitute a waiver of her right to appear and contest the
allegations. The record shows that the OCC made numer
ous efforts to serve the Notice on Respondent. The initial
copy of the Notice was mailed certified mail, return receipt
requested, on August 7, 2002, but the receipt was never
returned. A second copy of the Notice was served on

Respondent by overnight delivery on September 11, 2002.
The courier service returned the package as “refused” by
the addressee. A process server was dispatched to Respon
dent’s address on September 21, 2002, but was told that
there was no one by Respondent’s name at that address. On
October 1, 2002, Enforcement Counsel sent two more
copies to Respondent’s home address, one by certified
mail, return receipt requested, and one by courier, this time
not indicating that the package was from the OCC.
Although no return receipt was returned for the copy sent
by certified mail, an individual with Respondent’s last
name signed for the couriered copy on October 4, 2002.1
Nonetheless, Respondent failed to file an answer within the
20-day period specified in that copy of the Notice. On
November 27, 2002, the ALJ issued an Order to Show
Cause directing Respondent to submit an answer by
December 16, 2002, and demonstrate good cause for not
having done so previously. The record reflects that the
Order was delivered by courier to Respondent’s address
and signed for on December 2, 2002. Respondent did not
respond to the Order to Show Cause and has never filed an
answer to the Notice.

II. D iscussion
The O CC’s Rules of Practice and Procedure set forth the
requirements of an answer and the consequences of a
failure to file an answer to a Notice. Under the Rules,
failure to file a timely answer “ constitutes a waiver of [a
respondent’s] right to appear and contest the allegations in
the Notice.” 12 CFR 19.19(c). If the ALJ finds that no
good cause has been shown for the failure to file, the judge
“ shall file . . . a recommended decision containing the
findings and the relief sought in the notice.” Id. An order
based on a failure to file a timely answer is deemed to be
issued by consent. Id.
The record establishes that the OCC used methods “ rea
sonably calculated to give actual notice” in its efforts to
notify Respondent of the pendency of this case. 12 CFR
19.11(c)(2)(v). Nonetheless, Respondent failed to file an
answer despite notice to her of the consequences of such
failure, and also failed to respond to the A LJ’s Order to
show cause. Respondent’s failure to file an answer consti
tutes a default.
Respondent’s default requires the Board to consider the
allegations in the Notice as uncontested. The Notice al
leges, and the Board finds, that Respondent stole between
$10,000 and $15,000 in cash from the Bank while working
as a temporary employee in the cash processing unit.2 This
conduct meets all the criteria for entry of an order of
prohibition under 12 U.S.C. § 1818(e). It is a violation of
1. The person who signed for the package did not provide a first
name.
2. Respondent was an employee of Manpower Temps, and was
contracted from Manpower Temps to work at the Bank. The Board
finds that this qualifies her as an institution-affiliated party within the
meaning of 12 U.S.C § 1818(u)( 1), in that she was an “employee . . .
of, or agent for, an insured depository institution.”

Legal Developments

law and an unsafe or unsound practice for a bank employee
to steal bank funds. Respondent’s actions caused gain to
herself as well as loss to the Bank. Finally, Respondent’s
actions involved personal dishonesty in taking property not
her own. The requirements for an order of prohibition
having been met, the Board has determined that such an
order will issue.
Conclusion
For these reasons, the Board orders the issuance of the
attached Order of Prohibition.
By order of the Board of Governors, this 13th day of
February, 2003.
Board of Governors of the
Federal Reserve System
J e n n if e r J. J o h n s o n

Secretary of the Board

In the M atter o f a N otice to Prohibit F urther Participa
tion A gainst
Stephanie Edmond,
Former Custom er Service Representative and Teller
First Tennessee Bank, NA,
Memphis, Tennessee
and
Former Teller
Bank o f America, NA,
Charlotte, North Carolina

407

I. Statem ent o f the Case
A. Statutory and Regulatory Framework
Under the FDI Act and the Board’s regulations, the ALJ
is responsible for conducting proceedings on a notice of
charges. 12 U.S.C. § 1818(e)(4). The ALJ issues a recom
mended decision that is referred to the deciding agency
together with any exceptions to those recommendations
filed by the parties. The Board makes the final findings of
fact, conclusions of law, and determination whether to
issue an order of prohibition in the case of prohibition
orders sought by the OCC. Id.; 12 CFR 263.40.
The FDI Act sets forth the substantive basis upon which
a federal banking agency may issue against a bank official
or employee an order o f prohibition from further participa
tion in banking. In order to issue such an order, the Board
must make each of three findings: (1) that the respondent
engaged in identified misconduct, including a violation of
law or regulation, an unsafe or unsound practice, or a
breach of fiduciary duty; (2) that the conduct had a speci
fied effect, including financial loss to the institution or gain
to the respondent; and (3) that the respondent’s conduct
involved either personal dishonesty or a willful or continu
ing disregard for the safety or soundness of the institution.
12 U.S.C. § 1818(e)(l)(A )-(C).
An enforcement proceeding is initiated by the filing of a
notice of charges which is served on the respondent. Under
the O CC’s and the B oard’s regulations, the respondent
must file an answer within 20 days of service of the notice.
12 CFR 19.19(a) and 263.19(a). Failure to file an answer
constitutes a waiver of the respondent’s right to contest the
allegations in the notice, and a final order may be entered
unless good cause is shown for failure to file a timely
answer. 12 CFR 19.19(c)(1) and 263.19(c)(1).

D ocket No. O C C -A A -EC -03-24
B. Procedural H istory
Final D ecision
This is an administrative proceeding pursuant to the Fed
eral Deposit Insurance Act ( “ FDI A ct” ) in which the
Office of the Comptroller of the Currency of the United
States of America ( “ O CC” ) seeks to prohibit the Respon
dent, Stephanie Edmond (“ Respondent” ), from further
participation in the affairs of any financial institution based
on her conduct while she was employed at First Tennessee
Bank, NA, Memphis, Tennessee ( “First Tennessee” ), as
well as Bank of America, NA, Charlotte, North Carolina
( “BoA” ), both national banking associations. Under the
FDI Act, the OCC may initiate a prohibition proceeding
against a former employee of a national bank, but the
Board must make the final determination whether to issue
an order of prohibition.
Upon review of the administrative record, the Board
issues this Final Decision adopting the Recommended De
cision ( “ Recommended Decision” ) of Administrative Law
Judge Arthur L. Shipe (the “A LJ” ), and orders the issu
ance of the attached Order of Prohibition.

On September 24, 2003, the OCC issued a Notice initiating
an enforcement action that sought an order of prohibition
against Respondent based on her actions while employed
at two different banks. The Notice directed Respondent to
file an answer within 20 days, and warned that failure to do
so would constitute a waiver of her right to appear and
contest the allegations. The OCC sent the Notice by over
night delivery to the two last known addresses for Respon
dent. On September 25, 2003, a “ Ms. Edm ond” signed for
receipt of the Notice at one o f these addresses. However,
Respondent failed to file an answer within the 20-day
period specified in the Notice.
On November 4, 2003, Enforcement Counsel for the
OCC moved for entry of an order of default based on
Respondent’s failure to appear and file an answer. On
November 24, 2003, the ALJ issued an Order to Show
Cause, noting that Respondent had not replied to the
OCC’s motion, and directing Respondent to appear and
demonstrate why the ALJ should not grant the default
motion.

408

Federal Reserve Bulletin □ Summer 2004

From approximately December 16, 2003, through the
beginning of February 2004, a private process server hired
by the OCC made nine attempts to personally serve
Respondent with the Order to Show Cause at the address
where the Notice had been sent and received. However,
residents at this address refused to acknowledge the pro
cess server when he attempted service. The OCC con
firmed in a January 2004 telephone conversation with
Respondent’s m other that Respondent resided at this
address. The record reflects that the process server ulti
mately posted the Order at this address on February 11,
2004. Respondent did not respond to the Order to Show
Cause and has never filed an answer to the Notice.
II. D iscussion
The O CC’s Rules of Practice and Procedure set forth the
requirements of an answer and the consequences of a
failure to file an answer to a Notice. Under the rules, failure
to file a timely answer “ constitutes a waiver of [a respon
dent’s] right to appear and contest the allegations in the
notice.” 12 CFR 19.19(c). If the ALJ finds that no good
cause has been shown for the failure to file, the judge
“ shall file . . . a recommended decision containing the
findings and the relief sought in the notice.” Id. An order
based on a failure to timely answer is deemed to be issued
by consent. Id.
The record establishes that at a minimum, the OCC used
methods "reasonably calculated to give actual notice” in
its efforts to notify Respondent of the pendency of this
case. 12 CFR 19.11(c)(2)(v). The OCC identified two last
known addresses for the Respondent. On September 25,
2003, a “Ms. Edmond” signed for receipt of the overnight
delivery of the Notice at one of these addresses. By
telephone conversation following receipt of the Notice,
Respondent’s mother, Mary Edmond, confirmed that the
address to which the Notice had been sent was her address,
and that her daughter, the Respondent, resided with her
at that address. Finally, on February 11, 2004, a process
server delivered the Order to Show Cause to this same
address. Nonetheless, Respondent failed to file an answer
despite notice to her of the consequences of such failure,
and also failed to respond to the ALJ’s Order to Show
Cause. Respondent’s failure to file an answer constitutes a
default.
Respondent’s default requires the Board to consider the
allegations in the Notice as uncontested. The Notice
alleges, and the Board finds, that while employed at First
Tennessee, Respondent fraudulently benefited from a First
Tennessee installment loan by, among other things, provid
ing false information on loan documents and forging the
name and signature of a cosigner. Respondent’s fraudulent
loan subsequently went into default. Also while employed
at First Tennessee, Respondent took out a loan in the name
o f a First Tennessee customer, without the customer’s
knowledge or consent, and by forging the customer’s sig
nature on the loan application. Respondent used the pro
ceeds of this loan for her own benefit. Furthermore, while
employed at BoA, Respondent executed a cash-out ticket

without posting a corresponding ticket. This conduct meets
the criteria for entry of an order of prohibition under
12 U.S.C. § 1818(e). It is a violation of law, a breach of
fiduciary duty, and an unsafe or unsound practice for a
bank employee to fraudulently obtain and benefit from
loans issued by a bank at which she is employed. M ore
over, it is an unsafe or unsound practice for a bank
employee to fail to maintain proper record-keeping of the
transactions she executes. Respondent’s actions caused
gain to herself, as well as a total loss of $22,346 to these
two banks. Finally, Respondent’s acts involved both per
sonal dishonesty and a willful disregard for the safety or
soundness of the banks at which she was employed.
In sum, all the elements necessary for the issuance of a
prohibition order are presented in this case.
Conclusion
For these reasons, the Board orders the issuance of the
attached Order of Prohibition.
By order of the Board of Governors, this 17th day of
June 2004.
Board of Governors of the
Federal Reserve System
J e n n if e r J. J o h n s o n

Secretary o f the Board

Order of Prohibition
Whereas, pursuant to section 8(e) of the Federal Deposit
Insurance Act, as amended, (the “FDI A ct” ) (12 U.S.C.
§ 1818(e)), the Board of Governors of the Federal Reserve
System (“ the Board” ) is of the opinion, for the reasons set
forth in the accompanying Final Decision, that a final
Order of Prohibition should issue against STEPHANIE
EDM OND ( “Edm ond” ), a former em ployee and
institution-affiliated party, as defined in Section 3(u) of the
FDI Act (12 U.S.C §1813(u)), o f First Tennessee Bank,
NA, Memphis, Tennessee, and Bank of America, NA,
Charlotte, North Carolina.
NOW, THEREFORE, IT IS HEREBY ORDERED, pursu
ant to section 8(e) of the FDI Act, 12 U.S.C. § 1818(e),
that:
1. In the absence of prior written approval by the Board,
and by any other Federal financial institution regulatory
agency where necessary pursuant to section 8(e)(7)(B)
of the Act (12 U.S.C. § 1818(e)(7)(B)), Edmond is
hereby prohibited:
(a) from participating in any manner in the conduct
of the affairs of any institution or agency specified
in section 8(e)(7)(A) of the FDI Act (12 U.S.C.
§ 1818(e)(7)(A)), including, but not limited to, any

Legal Developments

insured depository institution, any insured depository
institution holding company or any U.S. branch or
agency of a foreign banking organization;
(b) from soliciting, procuring, transferring, attempt
ing to transfer, voting or attempting to vote any
proxy, consent or authorization with respect to any
voting rights in any institution described in sub
section 8(e)(7)(A) of the FDI Act (12 U.S.C.
§ 1818(e)(7)(A));
(c) from violating any voting agreement previously
approved by any Federal banking agency; or
(d) from voting for a director, or from serving or
acting as an institution-affiliated party as defined in
section 3(u) of the FDI Act (12 U.S.C. §1813(u)),
such as an officer, director, or employee in any institu
tion described in section 8(e)(7)(A) of the FDI Act
(12 U.S.C. § 1818(e)(7)(A)).
2. Any violation of this Order shall separately subject
Edmond to appropriate civil or criminal penalties or
both under section 8 of the FDI Act (12 U.S.C. § 1818).
3. This Order, and each and every provision hereof, is
and shall remain fully effective and enforceable until
expressly stayed, modified, terminated or suspended in
writing by the Board.
This order shall become effective at the expiration of
thirty days after service is made.
By order of the Board of Governors, this 17th day of
June 2004.
Board of Governors of the
Federal Reserve System
J e n n i f e r J. J o h n s o n
Secretary o f the Board

In the M atter o f a N otice to Prohibit F urther Participa
tion A gainst
Cynthia Rowe,
Form er Employee,
Key Bank, N.A.,
Cleveland, Ohio

409

of a national bank, but the Board must make the final
determination whether to issue an order of prohibition.
Upon review of the administrative record, the Board
issues this Final Decision adopting the Recommended
Decision of Administrative Law Judge Ann Z. Cook (the
“A L J” ), and orders the issuance of the attached Order of
Prohibition.

I. Statem ent o f the Case
A. Statutory and Regulatory Framework
Under the FDI Act and the Board’s regulations, the ALJ
is responsible for conducting proceedings on a notice of
charges. 12 U.S.C. § 1818(e)(4). The ALJ issues a recom
mended decision that is referred to the deciding agency
together with any exceptions to those recommendations
filed by the parties. The Board makes the final findings of
fact, conclusions of law, and determination whether to
issue an order of prohibition in the case of prohibition
orders sought by the OCC. Id:, 12 CFR 263.40.
The FDI Act sets forth the substantive basis upon which
a federal banking agency may issue against a bank official
or employee an order of prohibition from further partici
pation in banking. To issue such an order, the Board must
make each of three findings: (1) that the respondent
engaged in identified misconduct, including a violation of
law or regulation, an unsafe or unsound practice or a
breach of fiduciary duty; (2) that the conduct had a speci
fied effect, including financial loss to the institution or gain
to the respondent; and (3) that the respondent’s conduct
involved either personal dishonesty or a willful or continu
ing disregard for the safety or soundness o f the institution.
12 U.S.C.§ 1818(e)(l)(A M C ).
An enforcement proceeding is initiated by filing and
serving on the respondent a notice of intent to prohibit.
Under the O CC’s and the Board’s regulations, the respon
dent must file an answer within 20 days of service of the
notice. 12 CFR 19.19(a) and 263.19(a). Failure to file an
answer constitutes a waiver of the respondent’s right to
contest the allegations in the notice, and a final order may
be entered unless good cause is shown for failure to file a
timely answer. 12 CFR 19.19(c)(1) and 263.19(c)(1).
B. Procedural H istory

D ocket No. O CC -A A -EC -02-13
Final D ecision
This is an administrative proceeding pursuant to the Fed
eral Deposit Insurance Act ( “ FDI Act” ) in which the
Office of the Comptroller of the Currency of the United
States of America ( “O CC” ) seeks to prohibit the Respon
dent, Cynthia Rowe (“ Respondent” ), from further partici
pation in the affairs of any financial institution because of
her conduct as an employee of Key Bank, N.A., Cleveland,
Ohio (the “ Bank” ). Under the FDI Act, the OCC may
initiate a prohibition proceeding against a former employee

On October 3, 2002, the OCC issued a Notice initiating an
enforcement action that sought, inter alia, an order of
prohibition due to Respondent’s actions in stealing over
$40,000 from the Bank over a three-year period.1 The
Notice directed Respondent to file an answer within
20 days, and warned that failure to do so would constitute a
waiver of her right to appear and contest the allegations.

1.
The Notice also sought an order requiring Respondent to make
restitution to the Bank under 12 U.S.C. § 1818(b)(6)(A). The OCC
has statutory authority to issue a final decision with respect to this
requested relief.

410

Federal Reserve Bulletin □ Summer 2004

The record shows that the Respondent acknowledged
receipt of the Notice. Nonetheless, Respondent failed to
file an answer within the 20-day period. A second copy of
the Notice was served on October 25, 2002, and received
by Respondent on October 30, 2002. The ALJ served an
Order Setting Telephone Conference on November 13,
2002, which was received at Respondent’s residence on
November 14, 2002. Respondent did not, however, partici
pate in the telephone conference call established by the
Order. On November 21, 2002, Respondent was served
with Enforcement Counsel’s Motion for Entry of an Order
of Default, but did not respond to it. On November 25,
2002, Respondent received service of an Order to Show
Cause directing her to submit an answer by December 10,
2002, and demonstrate good cause for not having done so
previously. That Order, too, was ignored. Respondent has
never filed an answer to the Notice.

II. Discussion
The O CC’s Rules of Practice and Procedure set forth the
requirements of an answer and the consequences of a
failure to file an answer to a Notice. Under the Rules,
failure to file a timely answer “ constitutes a waiver of
[a respondent’s] right to appear and contest the allegations
in the Notice.” 12 CFR 19.19(c). If the ALJ finds that no
good cause has been shown for the failure to file, the judge
“ shall file . . . a recommended decision containing the
findings and the relief sought in the notice.” Id. An order
based on a failure to file a timely answer is deemed to be
issued by consent. Id.
In this case, Respondent failed to file an answer despite
notice to her of the consequences of such failure, and also
failed to respond to the A LJ’s Order to show cause.
Respondent’s failure to file an answer constitutes a default.
Respondent’s default requires the Board to consider
the allegations in the Notice as uncontested. The Notice
alleges, and the Board finds, that Respondent repeatedly
stole cash from the Bank’s teller drawers over a threeyear period. She also made fraudulent entries in the
Bank’s books and records to reverse overdrafts to her
account at the Bank. Together, these thefts totaled over
$40,000.
This conduct meets all the criteria for entry of an order
of prohibition under 12 U.S.C. § 1818(e). It is a violation of
law and an unsafe or unsound practice for a bank employee
to steal bank funds and to falsify bank records. Respon
dent’s actions caused gain to herself as well as loss to the
Bank. Finally, Respondent’s actions involved personal dis
honesty in taking property not her own. The requirements
for an order of prohibition having been met, the Board has
determined that such an order will issue.

By order of the Board of Governors, this 13th day of
February, 2003.
Board of Governors of the
Federal Reserve System
J e n n if e r J. J o h n s o n

Secretary o f the Board

Order of Prohibition
Whereas, pursuant to section 8(e) of the Federal Deposit
Insurance Act, as amended, (the “A ct” ) (12 U.S.C.
§ 1818(e)), the Board of Governors of the Federal Reserve
System ( “ the Board” ) is of the opinion, for the reasons set
forth in the accompanying Final Decision, that a final
Order of Prohibition should issue against CYNTHIA
ROWE ( “ Row e” ), a former employee and institutionaffiliated party, as defined in Section 3(u) of the Act
(12 U.S.C § 1813(u)), of Key Bank, N.A., Cleveland,
Ohio.
NOW, THEREFORE, IT IS HEREBY ORDERED, pur
suant to section 8(e) of the Act, 12 U.S.C. § 1818(e),
that:
1. In the absence of prior written approval by the Board,
and by any other Federal financial institution regulatory
agency where necessary pursuant to section 8(e)(7)(B)
of the Act (12 U.S.C. § 1818(e)(7)(B)), Rowe is hereby
prohibited:
(a) from participating in the conduct of the affairs
of any bank holding company, any insured deposi
tory institution or any other institution specified
in subsection 8(e)(7)(A) of the Act (12 U.S.C.
§ 1818(e)(7)(A));
(b) from soliciting, procuring, transferring, attempt
ing to transfer, voting or attempting to vote any proxy,
consent, or authorization with respect to any voting
rights in any institution described in subsec
tion 8(e)(7)(A) of the Act (12 U.S.C. § 1818(e)(7)(A));
(c) from violating any voting agreement previously
approved by any Federal banking agency; or
(d) from voting for a director, or from serving or
acting as an institution-affiliated party as defined in
section 3(u) of the Act (12 U.S.C. § 1813(u)), such as
an officer, director, or employee.
2. This Order, and each provision hereof, is and shall
remain fully effective and enforceable until expressly
stayed, modified, terminated or suspended in writing by
the Board.

Conclusion

For these reasons, the Board orders the issuance of the
attached Order of Prohibition.

This order shall become effective at the expiration of thirty
days after service is made.

Legal Developments

By order of the Board of Governors, this 13th day of
February, 2003.
Board of Governors of the
Federal Reserve System
J e n n if e r J. J o h n s o n

Secretary o f the Board

In the M atter o f a N otice to Prohibit F urther P articipa
tion A gainst
Gene Ulrich,
Former Senior Vice President and
Senior Loan Officer,
and
Susan D iehl McCarthy,
Form er Vice President and Loan Officer
Six Rivers N ational Bank,
Eureka, California

Docket No. AA-EC-00-40
Final D ecision
This is an administrative proceeding brought pursuant to
the Federal Deposit Insurance Act (FDI Act) in which the
Office of the Comptroller of the Currency ( “ O CC” ) seeks
to prohibit the Respondents Gene Ulrich ( “ U lrich” ) and
Susan Diehl McCarthy (“ Diehl M cCarthy” ) from further
participation in the affairs of any financial institution
because of their respective conduct as officers at the Six
Rivers National Bank, Eureka, California (the Bank).
Respondent Ulrich served as Senior Vice President and
Senior Loan Officer at the Bank, and Respondent Diehl
McCarthy held the positions of Vice President and Loan
Officer. As required by statute, the OCC has referred the
action to the Board of Governors of the Federal Reserve
System (the “ Board” ) for final action.
Upon review of the administrative record, the Board
issues this Final Decision adopting the Recommended
Decision (“ Recommended D ecision” ) of Administrative
Law Judge Ann Z. Cook (the “A LJ” ) except as specifically
supplemented or modified herein. The Board therefore
orders that the attached Orders of Prohibition issued against
Respondents prohibiting them from future participation in
the affairs of any federally-supervised financial institution,
without the approval of the appropriate supervisory agency.

I. Statement of the Case
A. Statutory Fram ework
1. Standards fo r Prohibition—Under the FDI Act and the
Board’s regulations, the ALJ is responsible for conducting
an administrative hearing on a notice of intent to prohibit
participation. 12 U.S.C. § 1818(e)(4). Following the hear
ing, the ALJ issues a recommended decision that is referred

4 11

to the deciding agency together with any exceptions to
those recommendations filed by the parties. The Board
makes the final findings of fact, conclusions of law and
determination whether to issue an order of prohibition in
the case of a prohibition order sought by the OCC. Id.;
12 CFR 263.40.
The FDI Act sets forth the substantive basis upon which
a federal banking agency may issue against a bank official
an order of prohibition from further participation in bank
ing. In order to issue such an order pursuant to sec
tion 1818(e)(1), the Board must make each of three find
ings: (1) that the respondent engaged in identified
misconduct, including a violation of law or regulation, an
unsafe or unsound practice, or a breach of fiduciary duty;
(2) that the conduct had a specified effect, including finan
cial loss to the institution or gain to the respondent; and
(3) that the respondents conduct involved culpability of a
certain degree— either personal dishonesty or a willful or
continuing disregard for the safety or soundness of the
institution. 12 U.S.C. § 1818(e)(l)(A )-(C).
2. Statutory and Regulatory Lending Restrictions—Sec
tion 84 of the National Bank Act (12 U.S.C. §84) imposes
limits on the degree to which national banks may concen
trate credit to particular borrowers. In general, the total
loans and other extensions of credit to a single borrower
may not exceed 15 percent of a national bank’s unimpaired
capital and surplus. Under the O CC’s regulations, loans to
one borrower will be attributed to a second borrower when
the proceeds of the loan are used for the “ direct benefit”
of the second person. 12 CFR 32.5(a)(1). Proceeds are
deemed to be for the “ direct benefit” of another person
when the proceeds are “ transferred to [the other] person,”
except in the case of a “bona fide arm ’s length transaction
where the proceeds are used to acquire property, goods, or
services.” 12 CFR 32.5(b).
B. Procedural H istory
On October 12, 2000, the OCC issued a combined Notice
of Intention to Prohibit Further Participation, a Notice of
Charges for Restitution and a Notice of Assessment of
Civil Money Penalty (together, the “ Notices” ) against
Ulrich and Diehl McCarthy. The Notices alleged that
Ulrich and Diehl McCarthy violated law and regulation,
recklessly engaged in unsafe or unsound practices and
breached their fiduciary duties in connection with five
loans they approved in December 1996. The Notices fur
ther alleged that Ulrich and Diehl M cCarthy’s misconduct
resulted in a substantial monetary loss to the Bank and
demonstrated personal dishonesty and a willful or continu
ing disregard for the safety or soundness of the Bank.
Following 18 days of hearings and post-hearing briefing,
the ALJ issued a Recommended Decision in this matter, to
which Respondents filed lengthy exceptions. The OCC did
not file any exceptions. In her Recommended Decision, the
ALJ concluded that the facts in this case warranted the
imposition of an order of prohibition, restitution and sec
ond tier civil monetary penalties.

412

Federal Reserve Bulletin □ Summer 2004

The case was then referred to the Board for review of
the recommendation for prohibition, and to the OCC for
review of the recommendations for restitution and civil
monetary penalties. On September 2, 2003, the Comptrol
ler issued a Decision and Order upholding the recom
mended restitution and imposing civil monetary penalties
of $35,000 and $20,000, respectively, on Respondents
Ulrich and Diehl McCarthy.

II. D iscussion
The Board has reviewed the record in this matter to assure
that substantial evidence in the record supports the factual
and legal conclusions of the ALJ and warrants the imposi
tion of a prohibition order against Respondents. The Board
finds that the allegations contained in the O CC’s Notices
and proved at the hearing meet the statutory criteria for the
issuance of an order of prohibition and adopts the Recom
mended Decision of the ALJ except as specifically modi
fied or supplemented herein.
A. Facts
1. Ulrich and Diehl M cCarthy’s Positions at the Bank—
Respondents Ulrich and Diehl McCarthy started working
at the Bank around 1993 and 1994, respectively. (ALJ’s
Findings of Fact at I f 2, 7) (hereinafter “ FF at %__” ). Prior
to coming to the Bank, each Respondent had obtained a
significant amount of experience working in the banking
industry, including holding positions of considerable
responsibility. (FF a t f ^ - S , 8).
In December 1996, and at all other times relevant for the
purposes of this Final Decision, Respondent Ulrich served
as Senior Vice President and Senior Loan Officer at the
Bank, and Respondent Diehl McCarthy held the positions
of Vice President, Government Guaranteed Loan Manager,
and Loan Officer at the Bank. (FF at f f l , 6). As a senior
officer of the Bank, Ulrich was responsible for ensuring
that loans issued by the Bank complied with the Bank’s
policy, as well as recommending or making revisions to
the policy. (FF at 167). As an officer of the Bank, Diehl
McCarthy also was responsible for ensuring that loans
extended by the Bank complied with the Bank’s policy.
(F F a tf 6 8 ) .
2. NCH and Straightline’s Lending From the Bank—
Northcoast Hardwoods, Inc. ( “ N CH” ) and Straightline
Investments, Inc. (“ Straightline” ) were two local compa
nies to which the Bank extended loans before and during
1996. (FF at f l l ) . NCH and Straightline were owned and
operated by the same individual, Matthew Galt ( “ G alt” ).
(FF at I f 9, 10). The two companies operated for all
practical purposes as two units of the same business. NCH
served as the operating and sales unit, while Straightline
functioned as the holding company that owned the real
property and equipment. (FF at c][ 10). For these reasons,
NCH and Straightline were considered a single borrower
for lending limit purposes. (FF at f 10).

As of early December 1996, the Bank had approved and
issued loans to NCH and Straightline totaling at least
$928,159. (FF at f 62). The Bank’s legal lending limit, in
effect during December 1-30, 1996, was $985,322. (FF at
H63). See 12 U.S.C. §84, 12 CFR Part 32.
3. Respondents’ Knowledge o f N CH ’s History of Loans
from the Bank and o f N C H ’s Financial Condition—As of
early December 1996, Respondents understood that NCH/
Straightline had almost reached the maximum lending
limit for a single borrower. (FF at I f 17, 29). In addition,
Respondents knew that up to and around early December
1996, NCH consistently asked the Bank for additional
loans, but simultaneously failed to meet its existing obliga
tions to the Bank. Between February and December 1996,
NCH requested and Respondents approved four loans to
the company. In July and December 1996, NCH requested
and Respondents approved extensions to NCH on existing
loans for which payments were either “ slow” or “past
due” and in October 1996, NCH requested and Respon
dents approved a restructuring of N CH ’s existing debt.
(FF at f 11-12).
Finally, Respondents were familiar with the financial
crisis NCH confronted by early December 1996. Respon
dents received letters in early December 1996 from
Matthew Galt stating that N CH ’s net worth was negative
$600,000, that the company had no money to pay for the
supply and production costs of its outstanding customer
orders, and that the company laid off almost 25 percent
of its employees in November 1996. (FF at f 13; OCC
Exh. 51).
4. NCH Searches For Help: Application fo r a Guaranteed
Loan Through USDA—Due to the financial difficulties
NCH experienced in 1996, the company, with the help
of both Respondents, sought additional means to obtain
funds needed to maintain its operations. (FF at f f 18-31).
Respondents worked with Galt to apply for a United States
Department of Agriculture loan guarantee. (FF at f f 2 1 31). Loans guaranteed by a Federal agency do not count in
the calculation of loans to a particular borrower, so the
Bank could have made such a loan to NCH if the guarantee
could be obtained. 12 CFR 32.2(c)(4). As Respondents
assisted Galt in the application process, they were well
aware of N CH ’s troubled credit and of the extreme difficul
ties NCH would encounter in attempting to raise capital
for the company without first receiving a conditional com
mitment from the USDA for the guaranteed loan. (FF at
I f 23, 26).
By letter dated December 9, 1996, the USDA declared it
was unwilling to issue a conditional commitment to NCH
for a guaranteed loan because o f N CH’s unproven products
and markets, as well as the company’s negative net worth
of $600,000. (FF at f 27). The letter stated if NCH was able
to raise the com pany’s tangible balance sheet equity to
10 percent, the USDA would consider issuing a conditional
commitment subject to NCH being able to increase the
com pany’s tangible balance sheet equity to 20 percent.
(FF at 1 27). However, the letter concluded by reiterating

Legal Developments

concerns about N CH ’s financial stability and warning that
the USD A made no guaranty to approve a conditional
commitment or guaranteed loan even if NCH increased the
company’s tangible balance sheet equity. (FF at 127).
After receiving the December 9th letter from the USD A,
Respondents met with Galt to discuss how NCH could
raise 10 percent equity, which equated to $970,000. (FF at
1128, 31). The three of them spoke about the possibility of
third parties injecting capital into NCH, including the
possibility that the Bank could issue loans to third parties
who would inject the proceeds into NCH. (FF at 130). At
that meeting, Ulrich told Galt that the Bank could not make
any further loans to NCH. (FF at 129).
5. The Five December 1996 Loans From The Bank—
Within days of the conversation about obtaining funds to
inject into NCH, Respondents approved five loans, totaling
$900,000, to friends and business associates of Galt (here
inafter, collectively, “the December 1996 loans” ). (FF at
1132, 34). On December 16, 1996, Respondents approved
a $200,000 loan to Timothy and Paula Crowley and a
$200,000 loan to Frank and Virginia Nemetz; on Decem
ber 18, 1996, Respondents approved a $200,000 loan to
Gary Johnston; and on December 30, 1996, Respondents
approved a $200,000 loan to Mitchell and Maggie Tonini
and a $100,000 loan to Valerie Weyna. Within a day or two
of disbursement, the proceeds of each of the December
1996 loans were transferred to NCH. (FF at H 3 8 , 42, 49,
53-56, 60).1 The aggregate amount of these loans,
$900,000, equaled substantially all of the additional equity
needed by NCH to enable USDA to consider a conditional
commitment.
Respondents drafted and signed credit memoranda to
accompany the Crowley, Nemetz and Johnston loans.
These credit memoranda stated that each loan would ini
tially “ be booked by NCH as a loan,” and would "convert
to equity” upon approval of the USDA, or, in any event,
“ even if the [USDA] loan is not approved.” (FF at (H(H36,
40, 47; OCC Ex. 56, 58, 60). Other documents created
and/or reviewed by Respondents in connection with all five
transactions also indicated that all five loans would be
re-loaned to NCH. (FF at 152; OCC Ex. 57, 76).
The loan approval process for the December 1996 loans
did not start until after the meeting Respondents had with
Galt on December 10, 1996. (FF at 1*1128-32). Respondents
allowed Galt to both contact and obtain information from
the five borrowers in connection with the loans, and with
one exception, Respondents communicated with the bor
rowers only through Galt. (FF at 1 79).2 The loans violated
the Bank’s lending policy, which entirely prohibited loans
for “ speculative investments in securities,” and also
prohibited “ capital loans for a start-up business” in the
absence of a government loan guarantee. (FF at 1169-70;
1. The disbursements to NCH were made despite Respondents’
representations to the Bank’s loan committee that $500,000 of the
proceeds would be held in a “bank controlled account.” (OCC
Ex. 57). The account was never established. (Trans. 2635 (Ulrich)).
2. Diehl McCarthy spoke briefly with borrower Weyna at the time
the loan documents were signed. (FF at 1 80).

413

OCC Exh. 140). Bank policy also provided that personal
loans exceeding $20,000 required adequate collateral.
(OCC Exh. 140 at 269). Respondents wrote up the Decem
ber 1996 loans not as personal loans but as commercial
“ term capital loans,” a category intended to provide work
ing capital through a direct loan to an established company.
(OCC Exh. 56, 58, 60, 63, 67; OCC Exh. 140 at 23-25;
Trans. 94 (Tornborg)). Under the Bank’s loan policy, even
this type of loans could be issued on an unsecured basis
only “ extremely rarely, depending on debt coverage.” Id.
Yet all five of the December 1996 loans were unsecured;
in none was any exception to the loan policy identified in
the credit memoranda generated by Respondents. OCC
Exhs. 56, 58, 60, 63, 67.
The loans were structured two-year, interest-only loans,
with a balloon payment of all principal due at the end of
the two-year term. OCC Exhs. 144-148. Despite the sub
stantial amount and the short term of the loans, however,
Respondents never spoke to any of the borrowers or made
any efforts to identify a source of funds for repayment of
the loans. In the minimal efforts they made to assess the
financial condition of the borrowers, Respondents failed
to obtain information necessary to make realistic credit
assessments, included information that was outdated and/or
not indicative of the borrowers’ ability to repay the loans in
accordance with their terms, and excluded critical factors
such as the borrowers’ living expenses. (See, e.g., Trans.
3112-13, 3158 (Diehl McCarthy); Trans. 3370-71, 337374, 3377-78, 3384-85, 3388-90, 3392-93 (Matt Johnson);
OCC Exhs. 215, 199). This was particularly critical in the
case of several borrowers, who had limited cash flow and
whose net worths were tied up in personal businesses or
real estate. (OCC Exh. 63, 67). Assuming, as Respondents
claim to have done, that the loan proceeds would be used
to acquire stock in NCH, it is difficult to understand how
that investment, in a closely-held private company, could
serve as a source of repayment of the principal of these
loans; in any event, there is no evidence that this question
was ever considered by the Respondents.3
As Respondents acknowledge, the December 1996
Loans caused the Bank to violate its lending limits. Under
the O CC’s rules, loans to one borrower are attributed to
another if the proceeds of the loan are transferred to the
other, unless the transfer involved a “ bona fide arm ’s
length transaction where the proceeds are used to acquire
property, goods, or services.” 12 CFR 32.5(b). Here, there
was no such arm ’s length transaction, and the loans were
properly combined with those to NCH, causing the lending
limits violation.

6. Loss to the Bank—Ultimately, none of the borrowers
ever received any value in return for the $900,000 they
3.
Diehl McCarthy suggested that her obligation to identify a
source of repayment was satisfied by suggesting to borrower Weyna
that if the investment did not work out as hoped, the loan could be
restructured when principal payment became due. (Trans. 3123-24
(Diehl McCarthy)). This is obviously insufficient as a means of
identifying a source of repayment, even a restructured loan eventually
involves the repayment of principal.

414

Federal Reserve Bulletin □ Summer 2004

collectively gave to NCH, the USDA never issued a loan
guarantee to NCH, NCH filed for bankruptcy, and the Bank
was unable to collect on four of the five December loans.
(FF at f (K61, 92, 94, 95). The Bank’s board of directors
bought two of the loans, and settlement and restitution paid
by some of the borrowers and several members of the
Bank’s loan committee provided some additional recovery.
However, the Bank currently maintains a loss of $232,000.
(FF at n 95-99).
B. Legal Conclusions
1. Prohibition—The sole purpose of this Final Decision
and Order is to review the A LJ’s recommendation for an
order of prohibition against Respondents, as the A LJ’s
recommendation for an order of restitution and civil mone
tary penalties is reviewed by the OCC. To adopt the A LJ’s
conclusion regarding the prohibition, the Board must find
that three elements have been met: (1) misconduct, includ
ing violation of law or regulation or participation in an
unsafe or unsound practice, (2) a specified effect, includ
ing financial loss to the institution, and (3) culpability.
12 U.S.C. § 1818(e)(l)(A )-(C ). Because the evidence in the
record supports that all three elements have been met, the
Board adopts the A L J’s recommendation for an order of
prohibition against Respondents.
(a) Misconduct and Specified Effect—Respondents con
cede that they participated in a lending limits violation
and that the Bank suffered a loss of $232,000 as a result.
(Respondents’ Exceptions at pp. 25, 34). These admis
sions, along with the record evidence that supports them,
establish the first and second elements needed for an
order of prohibition.
The ALJ also found, and the evidence supports, that
Respondents engaged or participated in unsafe or
unsound practices even apart from their participation in
the lending limits violation.4 As detailed above, in a
number of critical respects, the December 1996 loans
and the process by which they were approved contra
vened Bank policies designed to assure safety and
soundness. If considered as loans to purchase stock in
NCH, as Respondents contend, the loans violated the
Bank’s loan policies prohibiting loans for speculative
investments in securities. If considered as capital loans,
the loans violated the policy against capital loans to
start-up businesses in the absence of an agency guaran
tee. If considered as personal loans to the borrowers, the
loans violated the policy requiring collateral for such
loans above $20,000. Even accepting the loan category
in which Respondents placed these loans in their credit
memoranda— commercial “ term loans for capital,” a
category clearly not intended for loans of this type—
such loans too required collateral and could be issued on
an unsecured basis only “ extremely rarely, depending on

4.
Respondents’ procedural argument that any evidence relating to
unsafe and unsound practices should not have been admitted is dis
cussed below.

debt cover.” (OCC Exh. 140 at 24).5 Nonetheless, all of
the December 1996 loans were approved on an unse
cured basis, and the credit memoranda failed even to
note, much less explain, the departure from the lending
policy. The Bank’s loan policy was established to limit
the bank’s exposure to risk; such violations of the loan
policy clearly constituted unsafe or unsound practices.
As discussed earlier, the process by which the loans
were granted also constituted an unsafe or unsound
practice. Respondents rushed to approve the loans on the
basis of incomplete or outdated information in violation
of the loan policy, and left it to Galt, whom they knew to
be desperately in need of funds, to communicate with
the borrowers. They thereby opened themselves, and the
Bank, up to be “ victimized” by G alt’s scheme to the
extent they did not actively endorse it.6 Respondents
also failed to identify a source of repayment for the
loans despite the obvious risk that such action entailed
in the case of these large balloon loans made to borrow
ers whose cash flow did not appear sufficient to repay
principal.
(b) Culpability—The only element in dispute in the case
at hand is whether the record supports the A LJ’s finding
that Respondents’ misconduct involved the requisite
culpability. In a case involving a prohibition order under
the FDI Act, culpability is established by showing that
a respondent’s misconduct involved either personal
dishonesty or a willful or continuing disregard for
the safety or soundness of the institution. 12 U.S.C.
§ 1818(e)( 1)(C)(i)—(ii). W hatever the precise basis of
culpability, the agency must prove that the respondent’s
misconduct exhibited a “ degree of culpability beyond
mere negligence.” Kim v. Office o f Thrift Supervision,
40 F.3d 1050, 1054 (9th Cir. 1994).
Acts of personal dishonesty have been described as
those “ involving fraud or lack of integrity.” Van Dyke v.
Board o f Governors o f the Federal Reserve System,
876 F.2d 1377, 1379 (8th Cir. 1989). Continuing disre
gard is considered to be conduct which has been “ volun
tarily engaged in over a period of time with heedless
indifference to the prospective consequences.” Grubb v.
FDIC, 34 F.3d 956, 962 (10th Cir. 1994). W illful dis
regard has been defined as “ deliberate conduct which
exposed the bank to abnormal risk of loss or harm
contrary to prudent banking practices.” Grubb, 34 F.3d
at 961-62; Van Dyke, 876 F.2d at 1380. For example, in
Cavallari v. Office of the Comptroller o f the Currency,
57 F.3d 137, 145 (2d Cir. 1995), the court upheld a pro

5. According to the loan policy, term loans for capital were to be
“used for established companies,” with an emphasis on those with a
“good [credit] history” with the Bank— a category of company that
clearly excluded NCH. (OCC Exh. 140 at 24).
6. The risk associated with this practice is evidenced by the fact
that Respondents claim to have been unaware that the borrowers had
no intention of investing the proceeds of the loans in NCH, and
expected Galt to repay the loans for them. Had they discussed the
loans with the borrowers, they presumably would have learned of
Galt’s scheme before approving the loans.

Legal Developments

hibition order where the Board found that the respon
dent’s misconduct evidenced an “ utter lack of attention
to an institution’s safety and soundness” or a “ willing
ness to turn a blind eye to [the bank’s] interests in the
face of a known risk.”
While all three types of culpability can be present in a
given case, only one type is needed to support an order
of prohibition. Here, the Board finds that Respondents’
misconduct involved at least willful disregard for the
safety and soundness of the Bank, and therefore does not
reach the other bases of culpability.
Substantial evidence in the record supports a finding
that Respondents’ actions went beyond negligence and
amounted to “ willful disregard” of the Bank’s safety
and soundness. As noted above, Respondents approved
$900,000 in loans in a matter of days, on the basis of
information provided solely by a source with an obvious
conflict of interest. Respondents knew that the proceeds
of the loans would be transferred to NCH. As experi
enced bankers, they should have known that the loans
were therefore attributable to NCH for lending limits
purposes and would cause the Bank to violate its lending
limits.
Prior to approving the loans, Respondents failed to
determine whether the borrowers would be able to repay
the loans based on their personal cash flow, and appar
ently considered the possibility that the Bank would
renegotiate the loans at the conclusion of their two-year
term to be sufficient for purposes of assuring repayment.
Moreover, regardless of whether the five December
loans are classified as commercial “term working capital
loans,” or as Respondents are more appropriately calling
them now, “ loans to individuals” (see Respondents’
Exceptions at p. 27), Respondents ignored the risk they
posed to the Bank by approving them on an unsecured
basis. Several provisions of the Bank’s loan policy estab
lished that the loans were of a type that posed an
unacceptable risk to the Bank. To the extent Bank policy
permitted loans of this type to be made at all, the policy
required that they be adequately collateralized. Ade
quate collateral obviously would have assisted the Bank
in avoiding the losses it suffered in connection with the
loans. By approving these loans on an unsecured basis,
Respondents not only violated Bank policy, but they
“turn[ed] a blind eye to [the bank’s] interests in the face
of a known risk.” Cavallari, 57 F.3d at 145.
These and other actions on the part of Respondents
reveal their “ utter lack of attention” to the safety and
soundness of the Bank in connection with the December
1996 loans. Cavallari, 57 F.3d at 145. For example, the
record reveals that Respondents were expressly asked
by another bank officer whether two of these loans
would be combinable with the NCH loans for lending
limit purposes. W ithout any inquiry or research, Respon
dent Ulrich simply asserted they were not combinable,
and Diehl McCarthy followed suit. (Trans. 2688-89
(Ulrich); Trans. 3160-61 (Diehl McCarthy)). This com
plete lack of concern about compliance with regulations
designed to safeguard the Bank is further evidence of

415

Respondents’ “ utter lack of attention” for the safety and
soundness o f the Bank.
The Board rejects Respondents’ argument that they
lacked the requisite culpability because they believed
that the borrowers would use the loan proceeds to pur
chase stock and, as such, that they would not be combin
able with N CH ’s loans for lending limits purposes. First,
regardless of whether Respondents truly believed that
the loans would eventually be converted to stock, they
cannot claim that the loans would be used to purchase
NCH stock upon disbursement.7 Their own contempora
neous credit memoranda explicitly state that each of the
five December loans would be “ booked by NCH as a
loan” from the borrower and only later “ converted to
equity” upon approval of the USDA loan guarantee “ or
even if the loan is not approved.” (OCC Exhs. 56, 58,
60). Given the Respondents’ knowledge of the highly
uncertain nature and timing of the USDA approval, it
is evident that Respondents had no expectation when
they approved the loans that conversion to equity was
imminent.
Moreover, even if the December 1996 loans had been
for the purpose of funding the borrowers’ purchase of
shares in NCH immediately, the loans still would have
been considered a “direct benefit” to NCH and therefore
would still have resulted in violations of the Bank’s
lending limit. See 12 CFR 32.5(a)(1), (b); OCC Interpre
tive Letter, January 29, 1987 (1987 WL 149851) (OCC
“considers an equity investment in a corporation to be a
direct benefit because the company thereby receives
additional working capital. Thus, when a borrower uses
a loan to purchase newly-issued stock in a corporation,
the latter has received the benefits of the proceeds and
the investor’s loan must be combined with any loans to
the corporation.” ).8
Respondents’ violations were not technical or minor
violations. They were, instead, violations of law, policy,
and prudent banking practices that are designed to pro
tect the Bank from the very harm it suffered here. For
these reasons, the Board finds that Respondents’ miscon
duct demonstrated willful disregard and an order of
prohibition against them is justified.
2. Procedural Issues Challenged By Respondents—The
Board also finds that none of the four procedural issues
raised by Respondents is sufficient to deny an order of
prohibition in this case. In general, the Board defers to
evidentiary and trial management rulings by an ALJ “ in
7. In any event, Respondents’ contemporaneous statements make
clear that they did understand that the borrowers would transfer the
loan proceeds to NCH. For example, in a December 13, 1996 letter
to the USDA, Diehl McCarthy stated that Crowley, Nemetz, and
Johnston would each contribute to NCH the precise amount which
they subsequently borrowed from the Bank, and that each would
“lend these funds to [NCH]” and that “NCH’s pro forma balance
sheet will indicate that the funds are converted to stock.” (OCC
Exh. 55).
8. Thus, the “bona fide sale” exception to the direct benefit rule,
12 CFR 32.5(b), is inapplicable even under Respondents’ view of the
case.

416

Federal Reserve Bulletin □ Summer 2004

absence of an abuse of discretion or manifest unfairness.”
In the Matter of Augustus I. Cavallari, 80 Federal Reserve
Bulletin, 1046, 1049 (1994). No such abuse or unfairness if
evident here and the A LJ’s rulings are therefore sustained.
First, Respondents argue that the ALJ improperly used
official notice to absolve the OCC of its burden to establish
jurisdiction in this case. Specifically, Respondents chal
lenge the A LJ’s post-hearing acceptance and subsequent
official notice of information from the FD IC ’s official
website to the effect that at all relevant times, the Bank
was an “ insured depository institution,” a prerequisite to
Respondents’ status as “institution-affiliated parties” as
defined by 12 U.S.C. § 1813(u).
The ALJ’s action was both appropriate and timely. The
OCC’s regulations permit the ALJ to take official notice of
“any material fact which may be judicially noticed by a
United States district court and any material information in
the official public records of any Federal or state govern
ment agency.” 12 CFR 19.36(b)(1). Similar information
to that accepted here has been subject of judicial notice in
civil cases in the federal courts. See, e.g., In re Wellbutrin
SR/Zyban Antitrust Litigation, 2003 WL 22099725 (E.D.
Pa. 2003); Morris v. Valesco, 2003 WL 21397742 (N.D. 111.
2003); Ligon v. Doherty, 208 F. Supp. 2d 384 (E.D.N.Y.
2002). Moreover, Respondents have not suggested that the
information on the FDIC web site regarding the Bank’s
insured status was in any way flawed or incorrect.9
Nor was it improper for the ALJ to have accepted this
material after the hearing. Respondents were on notice of
Enforcement Counsel’s request to take judicial notice and
had a full opportunity to object. In addition, as the ALJ
explained in her August 6, 2002 Order, Federal Rules of
Evidence 201(d) and (f), applicable by analogy, permit
judicial notice to be taken “ at any stage of the proceeding”
and mandate that official notice be taken if a party requests
it and supplies the necessary information. Here, the OCC
requested that the ALJ take official notice regarding the
insured status of the Bank and supplied the necessary
information as described in 12 CFR 19.36(b). Accord
ingly, the ALJ properly took official notice of the O CC’s
post-hearing submission.
Second, Respondents contend that they were denied
their right to counsel because the “sequestration” order
entered by the ALJ in this case prohibited them “ from
speaking to their counsel regarding the case while they
were on the stand . . . including overnight breaks.”
(Respondents’ Exceptions at p. 14). Respondents claim
that the sequestration order violates their right to counsel
under the Administrative Procedure Act, 5 U.S.C. § 555(b),
the O CC’s procedural rules at 12 CFR 19.183(b), and
the Sixth Amendment to the Constitution. (Respondents’
Exceptions at pp. 14-17).
None of these sources provides a basis to hold that the
A LJ’s order, which prohibited only discussion of a wit9.
Respondents claim that they contested the Bank’s insured status
in their Answers. In fact, their answers claimed only that they lacked
sufficient information to respond to the allegation that the Bank was
an insured depository institution, and on that basis the allegation was
denied.

ness’s testimony while he or she was under oath (Trans.
2594, 2806), was improper. While the Administrative
Procedure Act allows parties to be “ accompanied, repre
sented, and advised by counsel,” it does not state or
suggest that parties are entitled to discuss their on-going
testimony with counsel while on breaks at an adminis
trative hearing. The regulation cited by Respondents,
12 CFR 19.183, applies to investigative testimony, not
testimony given at an administrative hearing. Finally, the
protections provided by the Sixth Amendment to the
United States Constitution do not apply to administrative
hearings because such protections “ are explicitly con
fined to ‘criminal prosecutions.’ ” Austin v. United States,
509 U.S. 603, 608 (1993); see also United States v. Ward,
448 U.S. 242, 248 (1980).10
Third, Respondents assert that the ALJ prevented them
from recalling certain OCC witnesses for further testimony
after their cross-examination of those witnesses, and as
such, that they were denied their right to cross-examine
and confront witnesses. (Respondents’ Exceptions p. 1719). The ALJ stated that she would consider permitting
additional testimony from a witness who already had testi
fied if Respondents submitted information as to the topics
to be covered and how the testimony would provide rele
vant and non-repetitive information. This requirement was
certainly within the A LJ’s discretion to control the flow of
witnesses at the hearing. Respondents failed to provide
such information within the time permitted by the ALJ. As
such, Respondents’ argument is now moot.
Fourth, Respondents argue that the OCC never alleged
unsafe and unsound banking practices or breach of fidu
ciary duties in its original Notice of Intent, and thus that
the ALJ should have dismissed all testimony and evidence
related to such claims.
The O CC’s rules permit the ALJ conform the notice to
the evidence where issues not raised in the notice are tried
at the hearing by express or implied consent of the parties,
or where the objecting party fails to show that admission
of such evidence would unfairly prejudice the party’s
defense. 12 CFR 19.20(b). Here, Respondents were aware
at least through the evidence introduced at the hearing that
the allegations against them went beyond lending limit
violations and involved the structure and approval of the
loans, as well as the creditworthiness of the borrowers, and
they failed to object to the introduction of such evidence at
the hearings. For example, neither Respondent objected
to the introduction of OCC Exhibit 140, the Bank’s exten
sive loan policy manual. (Trans. 107). Furthermore, both
Respondents testified at the hearing regarding the issues of
the borrowers’ creditworthiness and of compliance with
loan policies and procedures. (See, e.g., Trans. 2776-78
(Ulrich); Trans. 3086, 3089-90, 3104-06, 3108-13, 31 7 6 77, 3262, 3264-75, 3279-80 (Diehl M cCarthy)).11
10. Even under the Sixth Amendment, a criminal defendant “has
no constitutional right to consult with his lawyer while he is testify
ing.” Perry v. Leeke, 488 U.S. 272, 281 (1989).
11. Respondents also insist that the ALJ improperly excluded
testimony from their witness, John Moulton, regarding the credit
worthiness of the borrowers. (Respondents’ Exceptions at p. 24). The

Legal Developments

Conclusion
For these reasons, the Board orders the issuance of the
attached Orders of Prohibition.12
By order of the Board of Governors, this 15th day of
October 2003.
Board of Governors of the
Federal Reserve System
R o b e r t d e V. F r ie r s o n

417

tion 3(u) of the FDI Act, such as an officer, director,
or employee in any institution described in sec
tion 8(e)(7)(A) o f the FDI Act (12 U.S.C.
§ 1818(e)(7)(A)).
2. Any violation of this Order shall separately subject
Ulrich to appropriate civil or criminal penalties or both
under section 8 of the FDI Act (12 U.S.C. § 1818).
3. This Order, and each and every provision hereof, is
and shall remain fully effective and enforceable until
expressly stayed, modified, terminated or suspended in
writing by the Board.

Deputy Secretary o f the Board

Order of Prohibition

This order shall become effective at the expiration of
thirty days after service is made.
By order of the Board of Governors, this 15th day of
October 2003.

Whereas, pursuant to section 8(e) of the Federal Deposit
Insurance Act, as amended, (the “ FDI A ct” ) (12 U.S.C.
§ 1818(e)), the Board of Governors of the Federal Reserve
System ( “ the Board” ) is of the opinion, for the reasons set
forth in the accompanying Final Decision, that a final
Order of Prohibition should issue against GENE ULRICH
(“ U lrich” );
NOW, THEREFORE, IT IS HEREBY ORDERED, pursu
ant to section 8(e) of the Federal Deposit Insurance Act, as
amended, (12 U.S.C. § 1818(e)), that:
1. Ulrich, without the prior written approval of the
Board of Governors and, where necessary pursuant
to section 8(e)(7)(B) of the FDI Act (12 U.S.C.
§ 1818(e)(7)(B), another federal financial institution
regulatory agency, is hereby and henceforth prohibited:
(a) from participating in any manner in the conduct
of the affairs of any institution or agency specified
in section 8(e)(7)(A) of the FDI Act (12 U.S.C.
§ 1818(e)(7)(A)), including, but not limited to, any
insured depository institution, any insured depository
institution holding company or any U.S. branch or
agency of a foreign banking organization;
(b) from soliciting, procuring, transferring, attempt
ing to transfer, voting or attempting to vote any
proxy, consent or authorization with respect to any
voting rights in any institution described in sub
section 8(e)(7)(A) of the FDI Act (12 U.S.C.
§ 1818(e)(7)(A));
(c) from violating any voting agreement previously
approved by any federal banking agency; or
(d) from voting for a director, or serving or acting
as an institution-affiliated party as defined in sec

Board concludes that the ALJ properly excluded such evidence.
Respondents did not indicate in their pre-hearing filings that
Mr. Moulton would testify about the borrowers’ creditworthiness,
even after the issue was raised by the OCC’s witness designations.
(Trans. 3664-3670).
12.
Respondents have requested oral argument but have not estab
lished good cause for such a request or identified reasons why argu
ments cannot be presented adequately in writing. Accordingly, their
request is denied. 12 CFR 263.40(b).

Board of Governors of the
Federal Reserve System
R o b e r t d e V. F r i e r s o n

Deputy Secretary o f the Board

Order of Prohibition
Whereas, pursuant to section 8(e) of the Federal Deposit
Insurance Act, as amended, (the “ FDI A ct” ) (12 U.S.C.
§ 1818(e)), the Board of Governors of the Federal Reserve
System ( “ the B oard” ) is of the opinion, for the reasons set
forth in the accompanying Final Decision, that a final
Order of Prohibition should issue against SUSAN DIEHL
MCCARTHY ( “ Diehl M cCarthy” );
NOW, THEREFORE, IT IS HEREBY ORDERED, pursu
ant to section 8(e) of the Federal Deposit Insurance Act, as
amended, (12 U.S.C. § 1818(e)), that:
1. Diehl McCarthy, without the prior written approval
of the Board of Governors and, where necessary pur
suant to section 8(e)(7)(B) of the FDI Act (12 U.S.C.
§ 1818(e)(7)(B), another federal financial institution
regulatory agency, is hereby and henceforth prohibited:
(a) from participating in any manner in the conduct
of the affairs of any institution or agency specified
in section 8(e)(7)(A) of the FDI Act (12 U.S.C.
§ 1818(e)(7)(A)), including, but not limited to, any
insured depository institution, any insured depository
institution holding company or any U.S. branch or
agency of a foreign banking organization;
(b) from soliciting, procuring, transferring, attempt
ing to transfer, voting or attempting to vote any
proxy, consent or authorization with respect to any
voting rights in any institution described in sub
section 8(e)(7)(A) of the FDI Act (12 U.S.C.
§ 1818(e)(7)(A));
(c) from violating any voting agreement previously
approved by any federal banking agency; or

418

Federal Reserve Bulletin □ Summer 2004

(d) from voting for a director, or serving or acting
as an institution-affiliated party as defined in sec
tion 3(u) of the FDI Act, such as an officer, director,
or em ployee in any institution described in sec
tion 8(e)(7)(A) of the FDI Act (12 U.S.C.
§ 1818(e)(7)(A)).
2. Any violation of this Order shall separately subject
Diehl McCarthy to appropriate civil or criminal penal
ties or both under section 8 of the FDI Act (12 U.S.C.
§1818).
3. This Order, and each and every provision hereof, is
and shall remain fully effective and enforceable until
expressly stayed, modified, terminated or suspended in
writing by the Board.

This order shall become effective at the expiration of
thirty days after service is made.
By order of the Board of Governors, this 15th day of
October 2003.
Board of Governors of the
Federal Reserve System
R o b e r t d e V. F r ie r s o n

Deputy Secretary of the Board

420

Federal Reserve Bulletin □ Summer 2004

Federal Reserve Board of Governors
and Official Staff
A

lan

oger

C hairm an
W. F e r g u s o n , J r ., Vice Chairm an

G r eenspan,

O f f ic e
M

of board

em bers

A . S m i t h , D irecto r

ic h e l l e

A ssistan t to the B oard and
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 , S pecial A ssistant to the B oard
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

W i n t h r o p P. H

am bley,

E dw 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
K a r e n H . J o h n s o n , D irector
D

a v id

H . H o w a r d , D epu ty D irecto r

T h o m a s A . C o n n o r s , A sso cia te D irecto r
W

il l i a m

ale

L . H e l k i e , Sen ior A d v iser

W . H e n d e r s o n , Senior A d v iser

R i c h a r d T. F r e e m a n , D epu ty A ssociate D irector
S t e v e n B . K a m i n , D epu ty A ssociate D irector
J o n W . F a u s t , A ssistan t D irecto r

Leg al

d iv is io n

J o s e p h E . G a g n o n , A ssistan t D irector

G en eral Counsel
R i c h a r d M . A s h t o n , A sso cia te G eneral Counsel
S t e p h a n i e M a r t i n , A sso cia te 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 i s b a c k , 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 ssistan t G en eral Counsel
Scott G . A

O f f ic e

lvarez,

o f th e

Se c r e ta r y

J e n n i f e r J. J o h n s o n , S ecretary
Robert

d e V.

F r i e r s o n , D epu ty Secretary

M . S h a n k s , A ssista n t Secretary

argaret

iv is io n o f

il l e n e

A . J o h n s o n , A d v iser

ic h a e l

P. L e a h y , A ssistan t D irector

D . N a t h a n S h e e t s , A ssistan t D irecto r
R a l p h W . T r y o n , A ssistan t D ire cto r

D IV IS IO N O F R E S E A R C H A N D ST A T IS T IC S
D

a v id

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 ire cto r

S t e p h e n D . O l i n e r , A ssociate D ire cto r
P a t r ic k M . P a r k i n s o n , A ssociate D ire cto r
L a w r e n c e S l i f m a n , A ssociate D irecto r

and

Ba n

k in g

S u p e r v is io n

R e g u l a t io n

R i c h a r d S p i l l e n k o t h e n , D irector

C h a r l e s S . S t r u c k m e y e r , A s s o c ia te D ir e c to r
D a v id L . R e i f s c h n e i d e r , D epu ty A sso cia te D irector
W i l l i a m L . W a s c h e r III, D epu ty A sso cia te D irector

S t e p h e n M . H o f f m a n , J r ., D epu ty D irector

A l ic e P a t r ic i a W

H e r b e r t A . B i e r n , Senior A ssociate D irector

J o y c e K . Z ic k l e r , D epu ty A sso cia te D irector

h it e ,

D epu ty A sso cia te D irector

R o g e r T. C o l e , S enior A ssociate D irector

D o u g l a s E l m e n d o r f , A ssistan t D irecto r

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 sso cia te D irector
B e t s y C r o s s , A sso cia te 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 sso cia te D irector
J a c k P. J e n n i n g s , A sso cia te D irector
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 sso cia te D irecto r
H o w a r d A . A m e r , D epu ty A ssociate 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 sso cia te D irector
J a m e s A . E m b e r s i t , D epu ty A ssociate D irector
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
Jo n D . G r e e n l e e , A ssista n t D irecto r
W a l t H . M i l e s , A ssistan t D irector
W i l l i a m C . S c h n e i d e r , J r ., A ssistan t D irector
W i l l i a m F. T r e a c y , A ssistan t D irecto r

ic h a e l

G. M

a r t in s o n ,

ic h a e l

G i b s o n , A ssistan t D irector

D i a n a H a n c o c k , A ssistan t D irecto r
J. N

e l l ie

L i a n g , A ssistan t D irecto r

S . W a y n e P a s s m o r e , A ssistan t D irecto r
Ja n i c e S h a c k - M
D

a n ie l

ary

arquez,

A ssista n t D irector

S i c h e l , A ssistant D irector

M . W e s t , A ssistan t D irecto r

G l e n n B . C a n n e r , Senior A d v iser
D

a v id

S . J o n e s , Senior A d v iser

T h o m a s D . S i m p s o n , Senior A d v iser

iv is io n o f

onetary

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 ssociate D irector
W il l ia m C . W

h it e s e l l ,

D epu ty A ssociate D irector

C h e r y l L . E d w a r d s , A ssistan t D irector
W i l l i a m B . E n g l i s h , A ssistan t D irecto r
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 , S pecial A ssistan t to the B oard

421

M
B

W. O l s o n
S. B e r n a n k e

ark
en

Kohn

D iv is io n o f R e s e r v e b a n k O p e r a t io n s
P a y m e n t S y st e m s

D IV IS IO N O F C O N S U M E R
and

onald

C o m m u n it y A ffa ir s

and

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 irector

G l e n n E. L o n e y , D epu ty D irector

P a u l W . B e t t g e , A ssociate D irector

A d r i e n n e D. H u r t , A sso ciate D irector

Je f fr e y C . M

A ssociate D irector
J a m e s A . M i c h a e l s , A ssista n 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 u l t y ,

O f f ic e o f
S t a f f D ir e c t o r
S t e p h e n R. M

for

Ma n a g e m e n t

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 ox, S en ior A d v iser
alph rus,

arquardt,

A sso cia te D irector

J o 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 irector
D

orothy

ar sh a

L a C h a p e l l e , A ssistan t D irector

W . R e i d h i l l , A ssistan t D irector

J e f f J. S t e h m , A ssistan t D irecto r
J a c k K . W a l t o n II, A ssistan t D irector

O f f ic e

o f t h e In s p e c t o r

General

B a r r y R . S n y d e r , In spector G eneral

M a n a g e m e n t D iv is io n

D o n a l d L . R o b i n s o n , D epu ty In spector G eneral

H. F ay P e t e r s , D irecto r
S t e p h e n J. C l a r k , A ssociate D irector
D a r r e l l R. P a u l e y , A sso ciate D irector
C h r i s t i n e M. F i e l d s , A ssistan t 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 ssistan t D irector

D iv is io n

o f in f o r m a t io n

a r ia n n e

M . E m e r s o n , D irector

aureen

Te c h n o l o g y

T. H a n n a n , D ep u 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 s s i s t a n t D i r e c t o r
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
S u s a n F. M

arycz,

A ssista n t D irector

S h a r o n L. M o w r y , A ssista n t D irecto r
R a y m o n d R o m e r o , A ssista n t D irector

422

Federal Reserve Bulletin □ Summer 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 l a n G r e e n s p a n , Chairman
B e n S. B

T im o t h y F. G e i t h n e r , Vice Chairm an

T h o m a s M . H o e n ig

S u s a n S c h m i d t B ie s

D o n a l d L. K o h n

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 , Jr.

C ath y E. M

ernanke

in e h a n

ark

W . O lso n

il l ia m

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

G ary H. S tern

cT ee r ,

Jr .

ic h a e l

H. M

A n t h o n y M . S antom ero

o sk ow

Staff
V i n c e n t R . R e i n h a r t , Secretary an d 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 e r n a r d , D epu ty Secretary

ic h e l l e

A . S m i t h , A ssistan t Secretary

K a r e n H . J o h n s o n , E conom ist
a v id

H . H o w a r d , A ssociate E conom ist
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

T h o m a s C . B a x t e r , J r ., D epu ty G eneral Counsel
D

a v id

B r i a n F. M

L a w r e n c e S l i f m a n , A ssociate E conom ist

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 E conom ist

ark

S . S n i d e r m a n , A ssociate E conom ist

a v id

W. W

il c o x ,

A ssociate Econom ist

J e f f r e y C . F u h r e r , A ssociate Econom ist

D i n o K o s , M anager, System Open M arket A ccount

Fe d e r a l A d v is o r y C o u n c il

V a c a n t , P residen t
D

a v id

W . K e m p e r , Vice P resident

S eventh D is tric t
E ig h th D is tric t
J e r r y A . G r u n d h o f e r , N in th D is tric t
B y r o n G . T h o m p s o n , T e nth D is tric t
G a y l e M . E a r l s , E le ve n th D is tric t
V a c a n t , T w e lfth D is tric t

F irs t D is tric t
Second D is tric t
R u f u s A . F u l t o n , J r ., T h ird D is tric t
M a r t i n G . M c G u i n n , F o u rth D is tric t
F r e d L . G r e e n III, F ifth D is tric t
C . D o w d R i t t e r , S ix th D is tric t

D e n n i s J. K u e s t e r ,

V a ca n t,

D a v id W . K e m p e r,

T h o m a s A . R e n y i,

Ja m e s A

nnable,

S ecretary

423

C o n s u m e r A d v is o r y C o u n c il

A g n e s B u n d y S c a n l a n , B o s t o n , M a s s a c h u s e t t s , Chairm an
M

D e n n is L . A

l g ie r e ,

ark

P i n s k y , P h ila d e lp h ia , P e n n s y lv a n ia , Vice Chairm an

W e s te r ly , R h o d e I sla n d

R u h i M a k e r , Rochester, N ew York

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

P a t r ic i a M cC oy, Cambridge, M assachusetts

K yle, South Dakota

K e n n e t h P. B o r d e l o n , B a to n R o u g e , L o u is ia n a

E l sie M

S u s a n B r e d e h o f t , C h e r r y H ill, N ew J e r se y

B r u c e B . M o r g a n , Roeland Park, Kansas

eek s,

S. R e y e s , Tampa, Florida

S h e i l a C a n a v a n , M o a b , U ta h

R o b i n C o f f e y , C h ic a g o , I llin o is

B e n s o n R o b e r t s , W ashington, District o f Columbia

A n n e D i e d r i c k , N ew Y o rk , N ew Y o rk

B e n j a m i n R o b i n s o n III, Charlotte, North Carolina

ix o n ,

W a s h in g to n , D is t r ic t o f C o lu m b ia

ebra

ary

J a n e S e e b a c h , Calabasas, California

H a t t i e B . D o r s e y , A tla n ta , G e o r g ia

P a u l J. S p r i n g m a n , Atlanta, Georgia

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

F o r r e s t F. S t a n l e y , Cleveland, Ohio

J a m e s G a r n e r , B a ltim o r e , M a r y la n d

L o r i R. S w a n s o n , S t. Paul, M innesota

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

D i a n e T h o m p s o n , East St. Louis, Illinois

L a r r y H a w k in s , H o u s to n , T e x a s

H u b e r t V a n T o l , Sparta, W isconsin

W . J a m e s K i n g , C in c in n a t i, O h io

C l i n t W a l k e r , W ilm ington, Delaware

Th r i f t In s t i t u t i o n s A d v i s o r y C o u n c i l

W i l l i a m J. S m a l l , Defiance, Ohio, P resident
D. T a d L o w r e y , Brea, California, Vice P residen t

E l d o n R . A r n o l d , Peoria, Illinois
H. B

rent

eesley ,

S t. G eorge, Utah

J. B r o w n , S r ., F t. Pierce, Florida
R i c h a r d J. D r i s c o l l , Arlington, Texas
D o u g l a s K. F r e e m a n , Alpharetta, Georgia

ic h a e l

C u r t i s L . H a g e , Sioux Falls, South Dakota
D a v id H . H a n c o c k , Grandview, M issouri
O l a n O . J o n e s , J r ., Kingsport, Tennessee
G e o r g e W. N i s e , Philadelphia, Pennsylvania
R o y M. W

h it e h e a d ,

Seattle Washington

424

Federal Reserve Bulletin □ Summer 2004

Federal Reserve Board Publications
F o r orderin g a ssistan ce, w rite PUBLICATIONS FULFILL
MENT, M S-127, Board o f Governors o f the Federal Reserve
System , W ashington, DC 20551, or telephone (202) 452-3245,
or FAX (202) 728-5886. You m ay also use the pu blications
o rd e r fo rm a va ila b le on the B o a r d ’s W orld Wide Web site
(w w w .federalreserve.gov). When a charge is indicated, paym en t
sh ou ld accom pan y request a n d be m ade p a ya b le to the B oard o f
G overnors o f the F ederal R eserve System o r m ay be ordered via
M asterC ard, VISA, o r A m erican Express. P aym ent from foreign
residents should be draw n on a U.S. bank.

BOOKS AND MISCELLANEOUS PUBLICATIONS
T h e F e d e r a l R e se r v e

S y s t e m — P u r po ses

and

F u n c t io n s .

1994. 157 pp.
A n n u a l R eport, 2003.
A n n u a l R e p o r t : B u d g e t R e v i e w , 2004.
F e d e r a l R e s e r v e B u l l e t i n . Quarterly. $10.00 per year or $2.50

each in the U nited States, its possessions, Canada, and
M exico. Elsewhere, $15.00 per year or $3.50 each.
S t a t is t ic a l S u p p l e m e n t

to th e

F e d e r a l R eser ve B u l l e t in .

Monthly. $2 5 .0 0 per year or $2.50 each in the United States,
its possessions, Canada, and M exico. Elsewhere, $35.00 per
year or $3.50 each.
A n n u a l S t a t i s t i c a l D i g e s t : period covered, release date, num
ber o f pages, and price.
1981
October 1982
239 pp.
$ 6.50
1982
D ecem ber 1983
266 pp.
$ 7.50
October 1984
264 pp.
$11.50
1983
1984
October 1985
254 pp.
$12.50
O ctober 1986
231 pp.
$15.00
1985
1986
N ovem ber 1987
288 pp.
$15.00
1987
October 1988
272 pp.
$15.00
1988
N ovem ber 1989
256 pp.
$25.00
712 pp.
$25.00
March 1991
1 9 8 0 -8 9
$25.00
1990
N ovem ber 1991
185 pp.
1991
N ovem ber 1992
215 pp.
$25.00
D ecem ber 1993
$25.00
1992
215 pp.
D ecem ber 1994
281 pp.
$25.00
1993
1994
D ecem ber 1995
190 pp.
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Novem ber 1996
404 pp.
$25.00
199 0 -9 5
352 pp.
$25.00
1 9 9 6 -2 0 0 0
March 2002
R e g u l a t io n s

of th e

B oard

G overnors

of the

F ederal

R ese r v e S y s t e m .
A

P e r c e n t a g e R a t e T a b l e s (Truth in Lending—
Regulation Z) Vol. I (Regular Transactions). 1969. 100 pp.
Vol. II (Irregular Transactions). 1969. 116 pp. Each volum e
$5.00.

nnual

G u id e

the

Flow

Funds

A c c o u n t s . January 2000.

1,186 pp. $20.00 each.
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 i c e . Loose-leaf; updated

monthly. (Requests must be prepaid.)
Consum er and Com munity Affairs Handbook. $75.00 per year.
Monetary P olicy and Reserve Requirements Handbook. $75.00
per year.

Securities Credit Transactions Handbook. $75.00 per year.
The Payment System Handbook. $75.00 per year.
Federal R eserve Regulatory Service. Four vols. (Contains all
four Handbooks plus substantial additional material.) $200.00
per year.
R ates f o r su bscribers outside the U nited States are as fo llo w s
a n d include addition al a ir m ail costs:
Federal Reserve Regulatory Service, $250.00 per year.
Each Handbook, $90.00 per year.
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 f o r P e r s o n a l
C o m p u t e r s . CD-ROM ; updated monthly.

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Subscribers outside the U nited States should a d d $50 to co ver
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EDUCATION PAMPHLETS
Short pam ph lets su itable f o r classroom use. M ultiple co p ies are
available w ithout charge.
Consum er Handbook on Adjustable Rate M ortgages (also avail
able in Spanish)
Consumer H andbook to Credit Protection Laws
A Guide to Business Credit for W om en, M inorities, and Sm all
B usinesses
Series on the Structure o f the F ederal R eserve System
The Board o f Governors o f the Federal Reserve System
The Federal Open Market Com m ittee
Federal R eserve Bank Board o f Directors
Federal Reserve Banks
A Consum er’s Guide to M ortgage Lock-Ins
A Consum er’s Guide to M ortgage Settlem ent Costs
A Consum er’s Guide to M ortgage Refinancings
H om e M ortgages: Understanding the Process and Your Right
to Fair Lending
H ow to File a Consum er Com plaint about a Bank (also available
in Spanish)
In Plain English: Making Sense o f the Federal Reserve
M aking Sense o f Savings
What You Should Know About H om e Equity Lines o f Credit
(also available in Spanish)
K eys to V ehicle Leasing (also available in Spanish)
Looking for the B est M ortgage (also available in Spanish)
Privacy C hoices for Your Personal Financial Information
W hen Is Your C heck N ot a Check? (also available in Spanish)
Putting Your H om e on the Loan Line Is Risky B usiness (also
available in Spanish)

425

STAFF STUDIES: O nly Sum m aries P rin ted in the
B u l l e t in
Studies an d p a p ers on econom ic a n d finan cial su bjects th at are o f
gen eral interest. S ta ff Studies 1 -1 5 8 , 161, 163, 165, 166, 168, and
169 are out o f print, bu t p h o to co p ies o f them are available. S taff
Studies 1 6 5 -1 7 6 are ava ila ble online a t w w w .federalreserve.gov/
pubs/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 sen t to
Publications.
159. N e w D a t a

o n t h e P e r fo r m a n c e of 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 , b y N e l l i e Liang and
Donald Savage. F e b r u a r y 1990. 12 pp.
160. B a n k in g 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 e r
v i c e s b y 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
a r ie s o f

Gregory E. Elliehausen and John D. W olken. September
1990. 35 pp.
1 6 2 . 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 fr o m M o r t
g a g e L o a n R a t e s i n T w e n t y C it i e s , by Stephen A.
Rhoades. February 1 9 9 2 . 11 pp.
1 6 4 . T h e 1 9 8 9 - 9 2 C r e d it C r u n c h fo r R e a l E s t a t e , b y
J a m e s T. F e r g u s a n d J o h n L . G o o d m a n , Jr. J u ly 1 9 9 3 .

20 pp.
167. A S u m m a r y
in g ,

1 9 8 0 -9 3 ,

Perform ance”

erger

and

P e r f o r m a n c e S t u d ie s

and

by Stephen A . Rhoades. July 1 9 9 4 . 3 7 pp.

B ank

A s s e ss m e n t o f t h e “ O p e r a t in g
“ E v e n t S t u d y ” M e t h o d o l o g ie s ,

170. T h e C o s t
l a t io n s :
in

Im p l e m e n t i n g C o n s u m e r F i n a n c i a l R e g u
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
A c t , by Gregory Elliehausen and Barbara R .

S a v in g s

Lowrey. D ecem ber 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 p p .
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
D i s c i p l i n e , b y S tu d y G r o u p o n S u b o r d in a te d N o t e s
a n d D e b e n t u r e s , F e d e r a l R e s e r v e S y s t e m . D e c e m b e r 1999.
ket

69 p p .
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 D isclosure, Federal R eserve 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 , 1 9 80-98, b y Stephen Rhoades. A ugust 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 :
In d u s t r y In t e r v ie w s a n d A n a l y s i s , F e d e r a l R e s e r v e
S ta ff, fo r th e P a y m e n t s S y s t e m D e v e l o p m e n t C o m m it t e e ,
F e d e r a l R e s e r v e S y s t e m . D e c e m b e r 2002. 27 p p .
176. B a n k M e r g e r A c t i v i t y i n t h e U n i t e d S t a t e s , 1 9 9 4 -

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

426

Federal Reserve Bulletin □ Summer 2004

n t ic ip a t e d

Sc h

edule o f release d a te s for

e r io d ic r e l e a s e s o f t h e b o a r d

overnors of

THE FEDERAL RESERVE SYSTEM
F o r orderin g assistance, w rite PUBLICATIONS FU LFILL
MENT, M S -127, Board o f Governors o f the Federal Reserve
System , Washington, DC 20551, or telephone (202) 452-3245,
or FAX (202) 728-5886. You m ay also use the pu blications
o rd er fo rm a va ila b le on the B o a rd ’s W orld Wide Web site

R elease number and title

Annual
m ail
rate

Annual
fax
rate

(w w w .federalreserve.gov). When a charge is indicated, p aym en t
should accom pan y request and be m ade p a ya b le to the B oard o f
G overnors o f the F ederal R eserve System o r m ay be ordered via
M asterC ard, VISA, o r A m erican Express. P aym en t from foreign
residents should be draw n on a U.S. bank.

Approximate
release
d a y s1

Period or date to
which data refer

Corresponding
Bulletin or
S tatistical
Supplem ent
table num bers2

W e ek ly R e le a s e s
H.2.

Actions o f the Board:
Applications and Reports
R eceived

$55.00

n.a.

Friday

W eek ending
previous
Saturday

H.3.

Aggregate Reserves o f
Depository Institutions and
the Monetary B a s e 3

$20.00

n.a.

Thursday

W eek ending
previous
W ednesday

1.20

$20.00

n.a.

Thursday

W eek ending
previous
W ednesday

1.11, 1.18

H.4.1. Factors A ffecting Reserve Balances
o f D epository Institutions and
Condition Statement o f
Federal Reserve B an k s3
H.6.

M oney Stock M easures3

$35.00

n.a.

Thursday

W eek ending
M onday o f
previous week

1.21

H.8.

A ssets and Liabilities o f
Commercial Banks in the
United States3

$30.00

n.a.

Friday

W eek ending
previous
W ednesday

1 .26A -F

H.10.

Foreign Exchange R ates3

$20.00

M onday

W eek ending
previous
Friday

3.28

H.15.

S elected Interest R ates3

$20.00

M onday

W eek ending
previous
Friday

1.35

M o n th ly R e le a s e s
G.5.

Foreign Exchange R ates3

$ 5.00

First o f month

Previous month

3.28

G.17.

Industrial Production and
Capacity U tilization 3

$15.00

n.a.

Midmonth

Previous month

2.12, 2.13

G.19.

Consumer Credit3

$ 5.00

Fifth working day
o f month

Second month
previous

1.55, 1.56

G .20.

Finance C om panies3

$ 5.00

n.a.

End o f month

Second month
previous

1.51, 1.52

427

R elease number and title

Annual
mail
rate

Annual
fax
rate

Approximate
release
days'

Period or date to
which data refer

Corresponding
Bulletin or
S tatistical
Supplem ent
table num bers2

Q u a r te r ly R e le a s e s
E.2.

Survey o f Terms o f Business
L ending3

$ 5.00

n.a.

M idmonth o f
March, June,
September, and
Decem ber

February, May,
August, and
Novem ber

E. 11.

Geographical Distribution o f
A ssets and Liabilities o f
Major Foreign Branches o f
U.S. Banks

$ 5.00

n.a.

15th o f March,
June,
September, and
D ecem ber

Previous quarter

E.16.

Country Exposure Lending
S u rvey3

$ 5.00

n.a.

January, April,
July, and
October

Previous quarter

Z. 1.

F low o f Funds A ccounts
o f the United States:
F low s and O utstandings3

$25.00

n.a.

Second w eek o f
March, June,
September, and
D ecem ber

Previous quarter

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 circumstances may, from time to time,
result in a release date being later than anticipated.
2. Beginning with the Winter 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 S u pplem 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 Board’s web site,
www.federalreserve.gov/releases.
n.a. Not available.

428

Federal Reserve Bulletin □ Summer 2004

Maps of the Federal Reserve System

York

\D E L P H IA

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.

429

3-C

2 -B

■

Buffalo

B oston

W "j

m
ew

4 _ D pttb

IW
T

Yo r k

Cleveland

P h il a d e l p h ia

B iirningham -J*

Mf &

J fip i

•if
|B § § |§ § g ||

New Orleans

AT]LANTA

D flP

—

S t . L o u is

in n e a p o l is

1 2 -L

ALASKA

Vi
K a n s a s C it y

HAWAII

D allas

■ ^ J V J Q R e m p h is

C h ic a g o

R ic h m o n d

8-H

7-G

S a n F r a n c is c o

430

Federal Reserve Bulletin □ Summer 2004

Federal Reserve Banks, Branches, and Offices
FEDERAL RESERVE BANK
branch, ox facility
Zip

Chairman
Deputy Chairman

President
First Vice President

BOSTON* ...................

02106

Samuel O. Thier
Blenda J. Wilson

Cathy E. Minehan
Paul M. Connolly

NEW Y O R K *..............

10045
14240

John E. Sexton
Jerry I. Speyer
Katherine E. Keough

Timothy F. Geithner
Christine M. Cumming

Buffalo ....................

Barbara L. Walter1

PHILADELPHIA

19105

Ronald J. Naples
Doris M. Damm

Anthony M. Santomero
William H. Stone, Jr.

CLEVELAND*

44101

Robert W. Mahoney
Charles E. Bunch
Dennis C. Cuneo
Roy W. Haley

Sandra Pianalto
Robert Christy Moore

Wesley S. Williams, Jr.
Thomas J. Mackell, Jr.
Owen E. Herrnstadt
Michael A. Almond

J. Alfred Broaddus, Jr.
Walter A. Varvel

David M. Ratcliffe
V. Larkin Martin
Catherine Crenshaw
Julie Hilton
Rosa Sugranes
Rodney Lawler
Dave Dennis

Jack Guynn
Patrick K. Barron

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

Michael H. Moskow
Gordon R. G. Werkema

Walter L. Metcalfe, Jr.
Gayle P. W. Jackson
Scott T. Ford
Cornelius A. Martin
Meredith B. Allen

William Poole
W. LeGrande Rives

Linda Hall Whitman
Frank L. Sims
Dean Folkvord

Gary H. Stern
James M. Lyon

Richard H. Bard
Robert A. Funk
Thomas Williams
Tyree O. Minner
A.F. Raimondo

Thomas M. Hoenig
Richard K. Rasdall

Ray L. Hunt
Patricia M. Patterson
Ron C. Helm
Lupe Fraga
Ron R. Harris

Robert D. McTeer, Jr.
Helen E. Holcomb

George M. Scalise
Sheila D. Harris
William D. Jones
Karla S. Chambers
H. Roger Boyer
Mic R. Dinsmore

Janet L. Yellen
John F. Moore

Cincinnati ............... .........45201
Pittsburgh ...............
15230
RICHMOND* ............

23219

Baltim ore................. ......... 21203
Charlotte...................
28230
ATLANTA ...................

30303

Birmingham ............
Jacksonville ............
Miami ......................
Nashville .................
New Orleans ..........

......... 35242
......... 32231
......... 33152
......... 37203
.........70161

CHICAGO* .................

60690

Detroit ...................... .........48231
ST. LOUIS ...................

63166

Little Rock .............. ......... 72203
L o u isv ille................. ......... 40232
Memphis ................. ......... 38101
MINNEAPOLIS

55480

Helena ...................... ......... 59601
KANSAS CITY

64198

D en ver...................... .......... 80217
Oklahoma City .................73125
O m aha......................
68102
D A L L A S ......................

75201

El Paso .................... .......... 79999
Houston ............................. 77252
San Antonio ............
78295
SAN FRANCISCO

94120

Los Angeles ...................... 90051
Portland ............................. 97208
Salt Lake City ........ .......... 84125
98124
Seattle ......................

Vice President
in charge of branch

Barbara B. Henshaw
Robert B. Schaub

William J. Tignanelli1
Jeffrey S. K ane1
James M. M cK ee1
Lee C. Jones
Christopher L. Oakley
James T. Curry III
Melvyn K. Purcell1
Robert J. M usso1

Glenn Hansen1

Robert A. Hopkins
Thomas A. Boone
Martha Perine Beard

Samuel H. Gane

Pamela L. Weinstein
Dwayne E. Boggs
Steven D. Evans

Robert W. Gilmer3
Robert Smith III1
James L. S tu ll1

Mark L. Mullinix2
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

431

Publications of Interest
S t a t is t ic a l S u p p l e m e n t t o
FEDERAL RESERVE BULLETIN

the

The Statistical Supplem ent to the F ederal R eserve
Bulletin is a continuation of the Financial and Business
Statistics section that appeared in each month’s issue of
the Federal Reserve Bulletin.
Published monthly, the new Statistical Supplement is
designed as a compact source of economic and financial
data. All tables that appeared in the Federal Reserve
Bulletin, including the annual and quarterly special
tables, now appear in the S tatistical Supplement. All
statistical series are published with the same frequency

that they had in the Bulletin, and the numbering system
for the tables remains the same.
Separate subscriptions for the quarterly Federal
R eserve Bulletin and the monthly S tatistical Sup
plem ent are available. For subscription information
about these publications, contact Publications Ful
fillment at (202) 452-3245, or send an e-mail to
publications-bog@frbog.frb.gov.
The statistical tables included in the Statistical
Supplement are listed below.

FINANCIAL AND BUSINESS STATISTICS
D o m e s t ic F in a n c ia l S ta tistic s

Money Stock and Bank Credit
Reserves and money stock measures
Reserves o f depository institutions and Reserve Bank credit
Reserves and borrowings— Depository institutions

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

Policy Instruments
Federal Reserve Bank interest rates
Reserve requirements o f depository institutions
Federal Reserve open market transactions

d o m e s t i c N o n f i n a n c ia l S t a t i s t i c s

Federal Reserve Banks
Condition and Federal Reserve note statements
Maturity distribution o f loans and securities

Selected Measures
Output, capacity, and capacity utilization
Industrial production— Indexes and gross value

Monetary and Credit Aggregates
Aggregate reserves o f depository institutions and monetary base
Money stock measures

I n t e r n a t io n a l S t a t ist ic s

Commercial Banking Institutions—Assets and Liabilities
All commercial banks in the United States
Domestically chartered commercial banks
Large domestically chartered commercial banks
Small domestically chartered commercial banks
Foreign-related institutions
Financial Markets
Commercial paper outstanding
Prime rate charged by banks on short-term business loans
Interest rates— Money and capital markets
Stock market— Selected statistics
Federal Finance
Federal debt subject to statutory limitation
Gross public debt o f U.S. Treasury— Types and ownership
U.S. government securities dealers— Transactions
U.S. government securities dealers— Positions and financing
Federal and federally sponsored credit agencies— Debt outstanding
Securities Markets and Corporate Finance
New security issues— Tax-exempt state and local governments and
U.S. corporations
Open-end investment companies— Net sales and assets
Domestic finance companies— Assets and liabilities
Domestic finance companies— Owned and managed receivables
Real Estate
Mortgage markets— New homes
Mortgage debt outstanding

Summary Statistics
U.S. international transactions
U.S. reserve assets
Foreign official assets held at Federal Reserve Banks
Selected U.S. liabilities to foreign official institutions
Reported by Banks in the United States
Liabilities to, and claims on, foreigners
Liabilities to foreigners
Banks’ own claims on foreigners
Banks’ own and domestic customers’ claims on foreigners
Reported by Nonbanking Business Enterprises in the United States
Liabilities to unaffiliated foreigners
Claims on unaffiliated foreigners
Securities Holdings and Transactions
Foreign transactions in securities
Marketable U.S. Treasury bonds and notes— Foreign transactions
Interest and Exchange Rates
Foreign exchange rates
SPECIAL T a b le s —Data Published Irregularly

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

432

Federal Reserve Bulletin □ Summer 2004

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 Se 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 M onetary P olicy 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, which deal with exten
sions of credit for the purchase of securities, and related
statutes, Board interpretations, rulings, and staff opin
ions. 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.

The Paym ent 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 airmail 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 Fulfillment, Mail Stop 127,
Board of Governors of the Federal Reserve System,
Washington, DC 20551.

G U ID E TO THE FLO W OF FUNDS ACCOUNTS

A new edition of Guide to the Flow o f 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),

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 Fulfillment, Mail Stop
127, Board of Governors of the Federal Reserve Sys
tem, Washington, DC 20551.

433

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.

Reference
N um ber

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:

S ta tistical release

F requency 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 Credit

Monthly/fifth business day

Z. 1

Flow of Funds

Quarterly

Full text of Federal Reserve Bulletin : Summer 2004

FRASER