Full text of Federal Reserve Notes : April 1983

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Federal
Reserve
Notes
FEDERAL RESERVE BANK OF SAN FRANCISCO
•
April 1983
Serving Araska* Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah & Washington

S.F. FED OFFERS
TWO NEW SERVICES
On May 2, 1983, the Federal Re
serve Bank of San Francisco

announced the availability of two
new services for payor financial in

WESTERN FINANCE IN 1982

In 1982, the challenges posed by
high interest rates, accelerating de

vices were offered concurrent with

posit deregulation, and a slowdown
in the Western economy tested
Twelfth District depository institu
tions' ability to maintain asset qual
ity and earnings. Although District
banks posted earnings of nearly

implementation of noon present

$1.7 billion in 1982 almost all mea

ment of items.

sures of profitability suffered, espe
cially during the first half of the year.
Earnings rebounded in the second

stitutions: "Printed Selected Totals

by Account Numbers" and "Mag
netic Tape of MICR Line." The ser

Printed Selected Totals by Account
Numbers should aid payor institu
tions that wish to monitor selected

accounts or ranges of accounts for

cash management purposes. The
service provides a printout of: the
account number (or range), the dol
lar amount, the number of items for

half as interest rates fell and mar

gins widened, but not by enough to
post an increase over 1981 earnings.
Since late 1982, the rapid increase in
the pace of deposit deregulation
taken by the Depository Institutions

each selected account or range of

Non-machinable and package sort

ing those items with unreadable
characters or missing account num
ber fields, or (2) a tape that contains
only those items in which all five

ed items are not included in the

fields on the MICR line are read

account tables.

able. A sort of items that do not read

accounts, and a cash letter total.

The printout is available at present
ment, as is telephone notification.

A daily magnetic tape of the MICR
line of items processed on the
Bank's high speed check sorters is
available at presentment in either of
two forms: (1) a tape that contains
all items drawn on the payor institu
tion in the order processed, includ-

so doing, encouraged net savings in
flows into depository institutions. The
following report recounts the devel
opments in Western finance in 1982

that preceded the more positive out
look for the current year.
Recession Hurt Credit Demand

The recession that plagued the West
ern region's businesses and house
holds also curtailed their demands for

credit through most of 1982. With

weak loan growth and little change in
banks' securities holdings, total bank
credit growth was anemic. Only com
mercial and industrial lending con
tinued to show moderate strength,
but the display was due to poor busi
ness conditions and the unwilling

is optional on the latter tape.

ness to use alternative sources of

The prices for these services are

financing rather than to a resurgence
in economic activity.

listed in the box below. For further

information and detailed specifi
cations, please contact Financial

Commerical and industrial loans ac
counted for half of the $13 billion

Services in the Federal Reserve

(6 percent growth) in total loans.
Through much of the year, busi
nesses were under severe pressure
to meet their borrowing needs in the

Office serving your institution. fjL

New Services for Payor Financial Institutions
Service

Deregulation Committee has set the
tempo for heightened competition in
1983. In particular, the Money Market
Deposit Account has given banks and
thrifts a short-term, ceiling-free de
posit instrument to compete with
money market mutual funds and, in

Price

Printed Selected Totals

$300 per month for the first ten accounts

by Account Number

$ 12 for each account over ten

Fees include file maintenance and notification by
telephone

Magnetic Tape of

$ 25 per tape plus .10 per item (plus $500 per

MICR Line

month and .20 per item for optional sort of
"bad"reads)

short end of the market. Increased

borrowing from banks filled the
funding gaps arising from firms'
temporary working capital needs.
Western banks were a source of in
terim credit when funds in the com

merical paper or long-term bond
markets either dried up or became
(Continued on page 3)

FED REDUCES DEPOSIT REPORT REQUIREMENTS
The Federal Reserve Board's

amendments to Regulation D (Re
serves of Depository Institutions)
designed to reduce the deposit re
porting burden for small institutions
took effect April 28, 1983. The
Board action implements provisions

ments. Former quarterly reporters
that are fully exempt from reserve

requirements have been converted
into annual reporters, and former
weekly reporters that are fully exempt
are now quarterly reporters. The
number of items reported by the latter

of the Garn-St Germain Depository

two groups is also substantially

Institutions Act of 1982 intended to

reduced.

reduce the administrative burden of

and thrift institutions with $2.1
million or less in total reservable

tutions that file the new reduced quar

liabilities.

Fees for Federal Funds Checks:

Effective May 26, 1983, the follow

ing fees for processing Federal
Funds checks will be established:

• $5.00 for each Federal Funds
check processed
• $10.00 for each stop payment
or returned Federal Funds check

All nonexempt quarterly respondents
will begin reporting on the same
schedule as those fully exempt insti

such reports for commercial banks

REGULATIONS AND

OPERATIONS UPDATE

Depository institutions will continue
to bear the cost of printing and pro

ducing supplies of these checks.

terly report. At present, institutions

For further information, please con

Under the amendments, institutions

that report quarterly do so on a stag

(other than U.S. branches and agen
cies of foreign banks or Edge and
Agreement corporations) with $2.1

gered basis, one-third reporting each

tact the Accounting Department of
your local Federal Reserve Office.

month.

U.S. branches and agencies of for
eign banks, and Edge and Agree
ment corporations, will continue to file
a weekly Report of Transactions
Accounts, Other Deposits and Vault
Cash (FR 2900) and a Weekly Report
of Certain Eurocurrency Transactions
(FR 2950 and FR 2951) even if the
family of related institutions has

million or less in reservable liabilities

(called fully exempt institutions) must
file one of three kinds of reports

based on their total deposits. Avail
able data will be used to estimate de

posits at fully exempt institutions with
less than $2 million in total deposits.

Fully exempt institutions with total
deposits between $2 million and $15

less than $2.1 million in reservable

Regulation D—Reserves of De
pository Institutions: The Federal
Reserve Board has amended Regu
lation D to reduce the deposit

reporting burden for most small in
stitutions. For a detailed discussion,

please refer to the article on this
subject in these pages.

Regulation Q—Early Withdrawal
Penalties: In light of the severe

report (FR 291Oa) covering one day in

liabilities.

damage caused by the recent earth
quake in Coalinga, California, the

June each year. Fully exempt institu

A table illustrating the reporting pro

Federal Reserve Board has sus

tions with $15 million or more in total

gram follows. The Board's notice,

pended Regulation Q early with
drawal penalties for victims of the

million must file an annual two-item

deposits must file a condensed sixitem report (FR 291Oq) for the same

Docket Number R-0459, is available

from Corporate Services at (415)
974-2755. Sample forms for the new
reports and further information are

week each quarter.

With this system, the vast majority of
institutions previously deferred from
reserve and reporting requirements

available from Patrick Condon at

(415) 974-3126. Outside California,
our toll-free number (800) 227-4133,

remain free of reporting require

extension 3126, may be used. 1jp

Reporting Requirements of Depository Institutions
(Other than Edge and Agreement Corporations
and U.S. Branches and Agencies of Foreign Banks)
Total Deposits

Reservable Liabilities
More than

$2.1 Million or Less

Less than $2 million No reporting required unless data

Annually; FR 2910a

should obtain from the depositor a

signed statement describing fully
the disaster-related loss, and have

this statement approved and certi
fied by a bank officer.
The Board's action is retroactive to-

Quarterly; FR 2900

in effect until midnight, November 5,
1983. We understand that the FDIC
is taking similar action for nonmem-

and FR 2950

berbanks.

Weekly; FR 2900

tact our Law Department at (415)

million

$15 million or more

can pay a time deposit before ma
turity without penalty upon a show
ing that the depositor has suffered a
property or other financial loss in
Coalinga as a result of the May 2
earthquake. The member bank

(notapplicable)

then special filing of FR 2910a
but less than $15

A member bank, wherever located,

May 5, 1983 (the day Coalinga was
declared by the President to be a
major disaster area) and will remain

$2.1 Million

are not available from other sources,

$2 million or more,

natural disaster.

For further information, please con

Quarterly; FR 2910q

and FR 2950

974-2256 or 974-2254. ||j

WESTERN FINANCE IN 1982
(Continued from page 1)

boosted banks' business loan

Funding Costs Up
Competition from money market

growth throughout much of 1982,

funds and thrifts for both business

it reflected the fundamental weak

and consumer balances, as well as
the acceleration in deposit interest

prohibitively expensive. While this

ness of the economy and disrup
tions in the normal lines of long-term
financing.

By year-end, however, much of the
pressure on business loan demand
had subsided. Interest rates had fall

en significantly, and the financial mar
kets had begun to function in a more
normal manner. Borrowers began

taking advantage of the declines in
long-term interest rates to raise funds
in the equity and bond markets; si
multaneously, borrowers began to

pay down their short-term bank loans.
Faced much of the year with high
mortgage and consumer credit inter
est rates, as well as the specter of
rising unemployment, Western house
holds severely curtailed bank borrow
ing. Real estate loans did increase by
$3 billion (a four-percent increase)
but most of the strength came from
commerical real estate activity. Resi
dential mortgage growth fell well
below the rapid pace of recent years.
Both supply and demand considera
tions accounted for the weakness.

High rates had an obvious effect on
the demand for both housing and
mortgages. Moreover, many Western

rate ceiling deregulation, also kept
the cost of funds up. Almost the en
tire

1982 increase in domestic

deposits ($16 billion) came in instru
ments paying market returns, plac
ing continued upward pressure on
costs. In addition, a $3-billion

increase in non-deposit sources,

primarily Federal funds and repur
chase agreements, also provided
banks with ample funds to expand
asset growth during the year.
Western banks recorded a $2-billion
increase in NOW account balances,
but small-denomination time de

posits (under $100,000) provided
the bulk of new deposits. Of
course, the strength in small time
deposits reflected the enormous
popularity of market-return deposit
instruments and the wide variety of

newly authorized instruments that
became available in 1982. These
instruments attracted a continued
flow of below-market-return check

ing and savings balances. Large
time deposits ($100,000 and over),
which represent nearly one-third of
domestic deposits at District banks,

financial institutions—with sizeable

also continued to be a major source

portfolios of low-yielding long-term
fixed rate mortgages—also had

of funding, especially earlier in
the year.

taken actions to limit their exposure to
interest rate risk by limiting new ex
tensions of fixed-rate mortgages or

The surge in small denomination
time deposit growth in 1982 was

by selling rather than holding new

even more dramatic when one

mortgages.
Consumer loans for durables such

notes that Western banks reported
a $1-billion decline in holdings of

as automobiles, appliances and
furniture, exhibited continued weak

six-month money market certifi
cates ($28 billion as of December).

ness in 1982. In fact, consumer

Indeed, other factors such as the

loans—primarily installment credit

sharp decline in short-term interest
rates boosted growth in the 21/2-year
small-savers certificate (SSC).
SSC's jumped by over $3 billion to

—at Western banks, have stag
nated since 1979. While the decline

in consumer loans was very small in

1982, it signaled the inability and
unwillingness of many consumers
to increase their debt burden amid
continued concern over the course

of the economy.

the $9-billion level. All-Savers Cer

tificates began maturing in October,
and quickly declined in importance.
By year-end, they were surpassed
by ceiling-free IRA balances, which

had grown to $1.5 billion. The 7to 31-day money market account
authorized in September also was a
big hit with depositors, although, at
year-end many of these deposits
were transferred into the newly
authorized ceiling-free insured
money market deposit account
(MMDA). Authorization of the
MMDA's for offering in midDecember resulted in a dramatic

shift in the composition of banks'

consumer deposit base. Over $15
billion rapidly moved out of check
ing, NOW's, savings and other
types of short-term consumer in
struments into the new account. The

authorization of the Super-NOW
account in January is likely to rein
force this trend.

Earnings Slump

Aggregate earnings of Western
banks deteriorated in 1982, falling
about ten percent from 1981, as
many institutions suffered from nar
rowed interest margins, weak asset
growth and rising loan losses. Many
institutions also felt continued up

ward pressure on overhead ex
penses, especially personnel costs
and occupancy expenses. Most
banks' second half earnings also
suffered because of the necessity of
adding to their loan loss cushions.
Net interest income at Western

banks rose slightly in 1982 as earn

ings from the $13 billion increase in
loan volume more than offset

reduced earnings from narrowed
margins on the remainder of the
portfolio. Despite the overall reduc
tion in interest margins, caused
primarily by the soaring cost of con
sumer deposits, there were some

bright spots on the funding side.
Falling interest rates and weak loan
demand combined to help Western
banks record sizeable reductions in

expenses for off-shore borrowing as
well as for managed liabilities and
other purchased funds.
Unlike interest income, operating

earnings failed to keep pace with
operating expenses. Thus, the
small increase in net interest in-

(Continued on page 4)

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WESTERN FINANCE

est-rate sensitive. On the asset

(Continued from page 3)

side, mortgage lending activity con
tinued at a very slow pace as high
interest rates and flat or declining
housing prices provided little incen
tive for consumers to buy housing.
However, during the last half of
1982, mortgage interest rates

come easily was overshadowed by
continued sharp increases in over
head expenses and a tremendous
jump in banks' provision for loan
losses. The fifty percent increase
(nearly $.5 billion) in loan loss provi
sions at Western banks was the

most significant factor in lowering
District banks' aggregate earnings
in 1982. This erosion of asset quality
was a reflection of the troubled na

ture of many national and interna
tional credits held by large institu
tions, as well as problem loans
arising from the depressed local
markets facing some smaller banks.
And while earnings suffered, most
banks took significant steps to pro
vide an adequate cushion against
future losses arising from the weak
ened state of the economy.
Twelfth District Thrifts

The housing slump added to the
difficulties faced by Western sav
ings and loan associations in 1982.
Apart from the accelerated pace of
deposit-rate deregulation, the year
represented a continuation of trends

that have emerged over the last
several years.

ating losses continued to reduce net
worth at some institutions, the in

dustry's outlook was already bright
ening at year-end in the face of
lower interest rates and a modest

recovery in housing.

turned downward. This trend, if con

tinued, may provide the stimulus to
mortgage demand that the S&L in
dustry has been looking for.
Thrifts were more successful in re

taining funds in 1982 than in 1981.
Whereas in previous years money
flowed out of S&Ls into high-yield
money market fund accounts, in
1982 thrifts were authorized to offer

several new competitive deposit in
struments. Preliminary estimates
showed an $8 billion deposit inflow
for Twelfth District S&Ls in 1982,
about two-thirds of which was in

large certificates of deposit. Pass
book savings and NOW accounts
captured some transitory funds in
the latter part of the year, while total
market-return small-denomination

time deposits were up by about $2
billion even after the All-Savers run

off. Along with the new MMDA,
these instruments helped retain
consumer funds that might other
wise have been lost to money mar

Prospects for the Future

In the near future, the competition
among financial institutions for
corporate and consumer savings
should intensify. Institutions will
likely place additional emphasis on
the design of deposit instruments
and other services in order to create

a package that is not only attractive
to consumers but profitable to the
institutions themselves.

The competition for savings will
affect lending operations. Because
business loan demand will probably
remain weak, at least through the
early stages of the recovery, institu
tions will search for profitable lend

ing opportunities. Certainly, con
sumer installment and mortgage
lending could be poised for a recov
ery if the general level of interest
rates continues its gradual decline.
However, more interest-sensitive

consumer deposits also are likely to
affect the form as well as the cost of

ket funds.

mortgage and installment contracts

Many S&Ls still found themselves

as institutions take steps to promote
more adjustable rate loan products
and to implement more cost-effec

Like banks, S&Ls continued to wit

ness a change in the composition of
their portfolio of liabilities to one
both higher in cost and more inter

and yields on mortgage portfolios
remained low. However, while oper

facing continued operating losses in
1982 as the cost of funds crept up

tive service fee schedules. mfc