Full text of Federal Reserve Notes : August 1976

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Federal Reserve Notes
FEDERAL RESERVE BANK OF SAN FRANCISCO

•

AUGUST 1976

Serving Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah & Washington

of St
NEW FED ACTIONS

ON CONSUMER FRONT
' !K^M
The Federal Reserve Board of Gover
nors last month submitted to Con

gress a number of recommendations
for simplifying the wording of the Truth
in Lending Act. The proposed
changes grew out of the concern
expressed by Senate Banking Com

^^1
£_

f1-

mittee Chairman Proxmire, that the

Act's complex disclosure require
ments "may impose significant costs
and other burdens on competitors
despite their good-faith efforts to
comply with the law."
In submitting the Fed's recommenda
tions, Vice-Chairman Stephen S.

"

\

HfH
S.S. Gardner

P.C.Jackson

Several other possible areas of sim
plification, Gardner wrote, "involve
potential adverse impacts on con
sumers that should be weighed care
fully against the benefits of simplifica

Truth in Lending Act applicable to

as the amount of credit, finance

tion. . . ." One of these would limit

charge, annual percentage rate, and
repayment terms."

the penalty provisions to violations
that actually interfere with the con
sumer's ability to make meaningful
comparisons of credit terms. Other
areas which probably require further
study include Federal pre-emption of
State Truth in Lending laws, disclo

Act, similar recommendations may be
made for simplification applicable to

Gardner said "The Board believes

that adoption of its recommendations
for simplification would not deprive
consumers of essential information

needed to shop for credit or to under
stand their credit arrangement, such

In his correspondence, Gardner sug
gested:
"Elimination of itemization of certain

charges which ordinarily would have
to be disclosed if they were to be
excluded from the finance charge.
"Elimination of the requirement for
disclosure of the type of security
taken

in

connection

with

a

credit

transaction.

"Elimination of certain requirements
regarding clear identification of prop
erty taken in security for a closed-end
transaction, to make them inappli
cable to those items which are being
purchased as part of the credit trans
action.

sure

of

certain

terms

involved

closed-end credit.

He added that as more experience is

gained under the Fair Credit Billing

open-end credit extensions. An earli
er recommendation, limiting creditor
liability only to acts that significantly

injure or mislead consumers, also
offers some hope that the new law
can be simplified.

in

closed-end credit transactions, and

coverage of credit for agricultural pur
poses.
In another discussion of consumer-

credit legislation, Governor Philip C.
Jackson reported to the Senate Bank
ing Committee on steps taken to re
duce the complex regulatory frame
work in this field. Following up on
Governor Gardner's point, he noted
that the Federal Reserve has made

recommendations for statutory sim
plification of those aspects of the

Jackson argued that consumer stat
utes and regulations are complex
because "the credit system in Ameri

ca is complex beyond the ability of
any one person or organization to
completely understand. Ours has be
come such a credit-oriented society
that the purchase of practically any
kind of good or service may directly or
indirectly involve the use of credit."

He noted that any statute or imple
menting regulation tends to be as
(continued on page 3)

BALLES CITES CASE

FOR FED INDEPENDENCE

CAPITAL STRUCTURE
AMENDMENTS ISSUED

San Francisco Rotarians heard last

The Federal Reserve Board of Gover

4. The issuing bank must obtain the
approval of the appropriate regulatory
agency for any redemption of an
issue prior to maturity.

month the case for a strong and

nors last month issued new rules to

independent monetary authority, as
presented by President John J. Balles

provide banks with new flexibility in

5. Under

adding to their capital structure. The
new amendments affected Regula
tion D (reserve requirements) and

stances, regulators may make excep
tions to the rule that an obligation that
is exempt from reserve requirements
and interest-rate ceilings must have a

of the Federal Reserve Bank of San
Francisco.

"The central bank has a difficult job in
achieving the sometimes conflicting

goals of economic growth, high em
ployment, and a strong dollarathome
and abroad," Balles said. "That task
would be made even more difficult if

our nation followed the example of
others and placed the Fed under
direct Executive or Congressional
control."

Balles pointed out that the two indus
trial nations with the strongest central
banks—Germany and the United

Regulation Q (interest on deposits).
The Comptroller of the Currency and
the Federal Deposit Insurance Cor
poration issued similar rules for insti
tutions under their jurisdiction.
The most significant change in the
regulatory amendments adopted —
from those proposed last July 2—was
the introduction of a five-year mini
mum maturity requirement for any
note in a serial issue. Another new

provision allows Federal Bank regula
tors to waive certain repayment re
quirements in exigent circumstances.

certain

limited

circum

minimum denomination of $500.
The

Board also

issued criteria for

evaluating requests by state member
banks for approval of new subordinat
ed notes and debentures as an addi

tion to each issuing bank's capital
structure. "The application of these
criteria is intended to encourage the
accumulation by state member
banks of an adequate cushion of
equity capital, to protect against ex
cessive concentrations of debt re

States—are also the two with the

The principal amendments provide

payments in any one year, and to
promote safe and sound banking

strongest records of curbing inflation.

that:

practices," the Board stated. Iff

"In some other countries, in Latin
American and elsewhere, where the

1. An issue of subordinated debt to

monetary authority has always been
dominated by the Executive or the
Legislature, triple-digit inflation holds
sway, bringing economic and political
chaos in its wake."

The independence of a governmental
agency can never be absolute, Balles
continued. The Federal Reserve Sys
tem is subject not only to the provi
sions of the Federal Reserve Act, but

also to the Employment Act of 1946
and other statutes.

Balles noted that the Fed has certain

reporting responsibilities.

be used as an addition to the capital of
a state member bank will be free of

reserve requirements and interest
rate ceilings if the issue has an aver
age maturity of seven years or more.
2. No note in a serial issue may have
a maturity of less than five years.
3. In emergency circumstances, the
appropriate regulatory agency may
waive requirements that scheduled
repayments be made at least annual
ly and in amounts not less than in the
previous year.
the founders of the Federal Reserve

intended.

"Certainly

policymakers

"Chairman Burns, for example, trav
els up to Capitol Hill every quarter to
discuss the course of monetary poli

have stumbled on some occasions,

cy, and to provide growth projections
for the major monetary and credit
aggregates for the year ahead. This
approach is effective because it pro
vides ample scope for the exercise of
Congressional oversight, yet keeps
political pressures away from day-to
day involvement in the details of
monetary policy."

followed the suggestion of the Fed's

The Fed president argued that the
nation's system of monetary manage
ment has been working just the way

but it's hard to imagine that our prob
lems would have been solved if we'd

critics

and

turned

control

of

the

monetary authority over to the Exec
utive branch or to Congress.
"If the spending propensities of Fed
eral officials had been given freer rein
through easier access to the 'printing
press,' the inflationary tendency that
has weakened our economy over
much of the past decade probably
would have been aggravated even

more," he concluded, ijflji

FED CUTS SECURITIES

REPORTING PAPERLOAD
The Federal Reserve Board of Gover

nors has cut reporting requirements

for the regulation of securities credit,
through amendments to its Regula
tion G. The change cuts in half (to
about 350) the number of persons

subject to the regulation, which gov
erns securities credit by lenders other
than banks and broker-dealers. The

lenders still covered account for 98

percent of this type of credit.

The Fed's action is part of its continu
ing effort to reduce the reporting bur
den on the public, and to deregulate
lenders over whom regulatory control
is no longer essential. The major
amendments propose:
"Reduce the frequency of reporting
by Reg G lenders from a quarterly to
an annual basis.

"Decrease the number of persons
subject to the regulation. A lender
now is not subject to the regulation
unless credit extended or arranged is
$100,000 in any calendar quarter
(instead of $50,000), and unless the
amount of credit outstanding exceeds

$500,000 (instead of $100,000) at
any time during the calendar quarter.

(continued from page 1)
complex as the system it is designed
to regulate. "We feel that the best
solution to this problem for the future
is to limit legislative corrective action
to those particular fields where signifi
cant public abuse has developed."

SAN FRANCISCO
MEMBERSHIP FIRST

Pacific Securities Depository Trust
Company, the first limited-purpose
trust company in San Francisco, last
month became the first such institu
tion in the West to become a member

In a separate action, the Federal Re

of the Federal Reserve System.

serve Board of Governors asked for

comments on a revised Regulation B,
as a means of implementing the 1976
amendments to the Equal Credit Op
portunity Act. Written comments are
requested by September 1,1 976, and
the amendments become effective

March 23, 1977.

The original Equal Credit legislation
prohibited discrimination in credit
transactions on the basis of sex or

marital status. The 1 976 amendments

Just what is a securities depository?
The answer requires a brief recollec
tion of the famous back-office "paper
crunch" that was a feature of the "gogo" securities markets of the late
1960s and early 1970s. Willing buyers
and willing sellers flocked to the mar
ket in unprecedented numbers, only
to

run

head-on

into a

back-office

settlement mechanism woefully in
adequate to the challenge of twentymillion-share days.

extended its provisions to include
discrimination based on such other

To meet the crisis, securities firms

factors as race, color, religion, age,
national origin, receipt of income from
public assistance programs, and
good-faith exercise of rights under

developed securities depositories,
which are forerunners of today's
limited-purpose trust companies. At
these depositories, members handled

the Consumer Protection Act.

transactions with other members via

The Board's Regulation B and the
proposed revision both were written
upon the mandate of Congress to
implement new legislation. The
Board's regulation would continue to
be enforced by the twelve Federal
agencies designated in the Act, which
regulate all the various types of
consumer-credit activities, from bank
credit cards to air fares to home mort
gages.

In addition to broadening the classes
against which discrimination in credit
transactions is prohibited, Reg B's
principal provisions also would in
clude a change in the recordretention exemptions for specialpurpose credit programs, methods of
handling adverse actions, and assist
ance in formulating applications. (For
example, creditors who used a pro
posed model application form would
be assured of being in compliance.)
The proposed regulation also in
cludes a lengthy discussion of age
discrimination; for example, informa
tion on age would be restricted to the

book-entry adjustment, without the
costly and time-consuming physical
handling of securities. The counting,
validating, controlling, storing, and
transporting of certificates thus could
be greatly reduced or eliminated for
depository members.
Bankers entered the picture in
strength in the early 1970s, after the
Justice Department urged all finan
cial

institutions to

utilize securities

depositories as a means of combat
ing theft. The American Bankers As
sociation supported this position, ar
guing for the immediate development
of a national system of regional secu
rities depositories, as well as the ulti
mate elimination of all physical han
dling
of
securities.
Banking
authorities in California, New York

and Illinois conferred trust-company
status upon depositories in their re
spective jurisdictions.
Pacific Securities Depository Trust
Company, wholly-owned by the Pacif-

Pacific Stock Exchange
ic Stock Exchange, opened for busi
ness in December 1974. It is a highly
specialized bank which operates on a
limited-profit basis, drawing revenue
from customers' dues, and custody

and activity fees. It takes clients' se
curities into custody,thereby immobi
lizing them, and facilitates their trans
fer via the kind of book-entry

accounting used by the Federal Re
serve for government securities. The
Pacific Clearing Corporation, also
wholly-owned by the Exchange, han
dles settlement of Trust Company
securities transactions.

Henry W. Bineault, president of Pacif
ic Securities Depository Trust, hopes
to capitalize on the expertise of the
Federal Reserve Bank of San Fran

cisco. He believes that System mem
bership will help him expedite securi
ties transactions and provide better
service to his broker and bank cus

assessment of creditworthiness, and

information would be broadened to

could not be used arbitrarily to cut off
or diminish credit due to an appli-

take account of the 1976 amend

tomers. "The appearance of San
Francisco's first limited purpose
trust," says Bineault, "is designed to
provide both added strength and flexi
bility to the Western financial commu

ments, "iff

nity." 1§

cant's age. In addition, proposed rules
with respect to creditors' requests for

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FED SPEAKERS
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WELCOME TO THE DISTRICT
New Members

The Economy and
Economic Policy

Anaheim National Bank - Anaheim,

One subject that always comes up
when bankers and business people
get together is money. To help the
discussion along, the Federal Re
serve Bank of San Francisco main

tains a Speakers Bureau—comprised
of operations officers and
economists—who can make dollars

and sense out of central-banking op
erations.

Although the Fed touches the lives of
most Americans because of its role

as the nation's central bank, many
individuals still are not exactly sure of
what the System does. But last year,
for example, the Federal Reserve
Bank of San Francisco:

'Received and counted nearly 1 Vfe
billion coins valued at $221 million

'Handled 732 million pieces of cur
rency worth over $10 billion
'Transferred over $4'/2 trillion on its

computerized funds network

CA.

Pacific Securities Depository Trust
Company - San Francisco, CA.
Valley Bank & Trust Company - South
Salt Lake City, UT.
New State Nonmember Banks

Alaska Pacific Bank - Anchorage, AK.
Capital Bank of Commerce - Sacra
mento, CA.
Columbia Pacific Bank & Trust Com

pany - Portland, OR.
Delta Pacific Bank - Pittsburg, CA.
Diablo State Bank - Danville, CA.
Farmers State Bank - Farmersville,
CA.

Lincoln Mutual Savings Bank Spokane, WA.
Pioneer Bank - Salt Lake City, UT.
The Women's Bank - San Diego, CA.
All this, of course, was in addition to
the Bank's major responsibilities in
the areas of bank supervision and
monetary policy.

If your community group or service
club would like a presentation on
these activities, contact the Bank and

'Processed over a billion checks rep

Public Relations Department of your

resenting about $325 billion.

nearest Fed office. The numbers to

most $400 billion in Savings Bonds,
Savings Notes and other Treasury

call are: San Francisco, (415) 5442350; Los Angeles, (213) 683-8358;
Seattle, (206) 623-4373; Salt Lake
City, (801) 328-9240; Portland, (502)

Issues.

228-7558. %

'Issued, received and redeemed al

August 16, 1976
"Surely we Americans have done
something right over the past two
centuries to create our present $1.7trillion economy as well as the highest
standard of living ever recorded. One
of the things we've done right is to
learn from experience, and to main
tain the strength of those institutions
that contribute to a strong and grow
ing economy. We've learned how to
guard against the ravages of reces
sion, and we've recently begun to
make progress too against the rav
ages of inflation — but I would argue
that an independent central bank is
the centerpiece in the fight against
both of those evils. Our operating
techniques change over time; for ex
ample, Chairman Burns now makes a
formal report to Congress every quar
ter on the future direction of monetary
policy. That approach is effective
because it provides ample scope for
the exercise of Congressional over
sight, yet keeps day-to-day political
pressures away from the details of
Federal Reserve policy. I would say,
let's give our support to this and the
other institutions that keep America
strong, and our tricentennial report
will be even better."
John J. Balles