Full text of Federal Reserve Notes : August 1979

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Federal Reserve Notes
FEDERAL RESERVE BANK OF SAN FRANCISCO

•

AUGUST 1979

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

CHINESE DELEGATION
VISITS S.F. FED

FED ISSUES PAPER

ON CREDIT SCORING
The

Federal

Reserve

Governors last month

Board

of

issued a

staff paper discussing methods
by which the anti-discrimination
rules of Regulation B can be
applied to credit-scoring systems.
The Board's original proposals,
issued in April, had been cri
ticized by consumer groups for
treating credit scoring systems
differently than judgmental
systems under Equal Credit

Opportunity (ECO) rules. When
issuing the staff paper, the Board
said that the purpose of its origi
nal request for comment "was to
make Regulation B a more effec
tive tool for eliminating dis
crimination in credit granting."
The Fed's staff paper noted that
all credit analysis, whether per

formed judgmentally by loan of
ficers or by credit-scoring
systems, is based on the principle
that past credit experience pre
dicts future credit performance.
"Judgmental systems rely upon

the experience of credit officers
to identify the characteristics of
past creditworthy customers that
are reliable indicators of credit

worthiness. A credit-scoring
system uses statistical methods
to evaluate and compare past
creditworthy and noncreditworthy applicants.
"In a scoring system, the numbers
are used to construct a combined

score for individual applications
to

determine

whether

credit

should be extended. As distinct

from most judgmental systems,
which involve a subjective

(Continued on page 4)

The Federal Reserve Bank of San
Francisco welcomed Finance

Minister Zhang Jingfu and 14
other officials from the People's
Republic of China, at a late July

meeting at the Reserve Bank. San
Francisco was the last stop on a

U.S. tour for this group, which was
composed mostly of Finance
Ministry officials, but also
included representatives of the

People's Bank of China, the
Ministry of Foreign Affairs, and
the State Planning Commission.
In

his

welcoming

remarks,

Zhang Jingfu, Finance Minister of

the People's Republic of China (left),
meeting with John J. Balles, Presi
dent of the Federal Reserve Bank of
San Francisco.

Senior Vice President Michael W.
Keran described for the visitors

Reserve Bank President John J.

the

Balles said, "Trade and financial

responsibilities in the areas of
bank supervision, banking opera
tions and monetary policymaking.
Assistant Vice President HangSheng Cheng added a description

relations

between

the

United

States and the People's Republic
of China have increased rapidly in
recent years. Many of us forget,
however, that these relations date
back to the very beginning of our

country." He noted that the first
act of the first U.S. Congress sup
ported the China trade by placing
a heavy duty on tea from Europe
and reducing duties on tea

of

Federal

the

Reserve's

Reserve

Bank's

basic

Pacific

Basin program, which encom
passes conferences, publica
tions, technical assistance, and
two-way visits between top-level
Fed officials and heads of the
central banks of Pacific Basin

imported directly from China.

countries.

Balles added, "Times have
changed considerably since the
sailing-ship era. Yet in this world
of jet aircraft and container-cargo
ships, new ties are being forged
between your country and ours. In
the 1970's, both countries are
participating more and more in
the rapidly growing trade and
finance of the diverse Pacific
Basin region. I trust that your visit
to this country will lead to even
greater progress along these

Several directors from the
Reserve Bank's five offices

lines."

attended the dinner held afteY the

meeting. They included Mrs.
Howard Ahmanson (Chairman of

the Board, Caroline Leonetti, Ltd.),
CM. Berry (President, SeattleFirst National Bank), Ole R. Mettler (President and Chairman of
the Board, Farmers and
Merchants

Bank

of

Central

California), and Robert A. Young
(Chairman of the Board and Presi
dent, Northwest National Bank).

(Continued on page 4)

WALLICH REPORTS
ON EUROCURRENCIES
Federal Reserve Governor Henry
Wallich rejected "the extreme
view that the Eurocurrency
market is an unrestrained source

of monetary and exchange-

market instability," in testimony
before a House Banking Subcom
mittee

last

month.

But

Wallich

added that the existence of this
market makes the execution of

monetary policy more difficult.
"There is a danger that, if
measures are not taken to moder

J. Paul Morley, Bank Relations and

Public Services Manager at the
Reserve Bank's Salt Lake City
Branch, opens a new bag of Anthony
dollar coins. Deseret News photo.

ANTHONY DOLLAR
CAMPAIGN CONTINUES
The commercial-banking system

placed 280 million Susan

B.

Anthony dollars in circulation
during July, the first month the
new coin was available. The U.S.

Bureau of the Mint plans to pro
duce

a

total

of

950

million

Anthony coins by the end of 1979,
to meet the demand for the new
dollar.

The Eurocurrency market is an
international banking market in
deposits and loans, which are
denominated in currencies other

than the currency of the country
where the bank is located — for

example, dollar deposits and
loans of banking offices in Lon
don. Eurodollars account

about

three-fourths

of

for

the

Eurocurrency market, with about
half of the remainder being
Euromarks.

Treasury and Federal Reserve officials

ate the growth of the Eurocur
rency market, the problem will
grow over time and the prospects
for controlling inflation will cor
respondingly worsen."

made

a

number

of

appearances promoting the new
coin during the summer period.

Wallich noted that the scale of the

Eurocurrency market can be
overestimated, with the gross
total of foreign-currency liabilities

Treasury Under Secretary Bette

of banks in

Anderson visited San Francisco

amounting to, $800 billion (end-

and Los Angeles this month, call
ing attention at each stop to the
cost advantages of the new coin.
She

noted

that the dollar coin

lasts ten times as long as a dollar
bill, so that the coin could save

taxpayers as much as $50 million
a year in production and handling
costs. Also, if the coin becomes

widely accepted, the Bureau of
Engraving and Printing could
postpone plans to build a new
$100-million facility to produce
dollar bills.

In

the Mountain States, Utah

Governor Scott

Matheson

received the first Anthony dollar
released in that state from Wen

dell J. Ashton, Chairman of the

(Continued on page 4)

industrial countries

1978 data). But this figure is in
flated by a large volume of inter
bank activity, that neither con
tributes to the liquidity of the nonbank public, nor is associated
with any extension of credit to
nonbanks.

Henry C. Wallich

Wallich argued, however, that the
importance of the market should
not

be

underestimated.

absolute

numbers

The

involved

large, and are growing

are

much

faster than the domestic mone

tary and credit aggregates of most
major nations. For example, from
the end of 1974 to the end of

1978, Eurocurrency liabilities to
nonbank institutions grew about
I8V2 percent annually, on the
average — several times as fast

as the standard U.S. monetary
aggregates.
Consequently, Wallich called for
careful monitoring of this rapidly
growing market. In addition, he
said, "Careful consideration
should be given to making mone
tary restraints operating on the
Eurocurrency market move more
parallel with restraints on
domestic markets."

He added that any approach
adopted should seek to preserve

When various interbank transac

the benefits that flow from

tions are eliminated, the new

existence of the Eurocurrency
market. "The market is extremely
competitive and efficient. It facili
tates movements of large volumes

monetary liabilities in the
Eurocurrency market amount to

roughly $150-175 billion, of

the

which about one-third is counted

of funds from savers to investors

in the monetary statistics of some
country. Thus, the so-called
"stateless" money in the Eurocur
rency market — that which is not
counted in national monetary

across

statistics —

is on the order of

$100-120 billion.

national

borders at

low

cost. In doing so, it helps to
finance temporary currentaccount

imbalances

and

improves the efficiency of invest
ment worldwide."

(Continued on page 3)

HIGH-SPEED CURRENCY MACHINES INSTALLED

WALLICH REPORTS

(Continued from page 2)
—*-—-I

As another guideline, Wallich said
that any approach adopted
should help contribute to keeping
the volume of international liquid
assets within bounds. "Little

would be achieved, and a great
burden would be placed on some
institutions, if part of the market
were restricted and another part
were left unrestrained to take up
the slack, or if Eurocurrency
banking activity could easily be
shifted

into

new

unrestricted

forms." In this regard, he
welcomed the growing tendency

for foreign central banks to adopt
the American approach toward
bank supervision — which
involves considering the safety
and

soundness of

U.S. banks

abroad when reviewing proposals
of banks to expand their interna
tional operations.
The Fed governor said that, with
due regard to these and other
considerations, the Federal
Reserve

has

examined

several

ways that the Eurocurrency
market might be brought under
greater control. One possible
technique would entail placing
reserve requirements on the
Eurocurrency liabilities of banks'
head offices, branches and affili
ates, no matter where located.
"Those countries

whose

banks

and banking affiliates have a sig
nificant presence in international
markets would be expected to act
in concert with respect to their
banks." This approach, if adopted,
would minimize the likelihood that

large reserve-free markets would
emerge through the efforts of
banks

whose

head

offices

are

located in non-participating

As it did previously with high
speed check-sorting equipment,
the Federal Reserve System is
now leading an effort to develop a
more efficient and cost-effective

method of verifying, counting and
sorting currency. The Federal
Reserve Bank of San Francisco
and nine other Reserve Banks

have installed or will be installing
in the near future a "Currency
Verification Counting and Sorting
System" with an optimum feed
rate of 1,200 notes a minute,
which will not only detect coun
terfeits but also determine the fit

ness of the currency processed.
The equipment will supplement
but not replace this District's
polybag/shrink-wrap program.
As an integral pari of the pro
cessing system, the equipment
can immediately destroy, on line,
those notes which
determined

as

have been

unfit.

Conse

quently, these sophisticated new

countries.

machines eliminate the need for

Representatives of the Federal

complex manual procedures now
required for currency verification

Reserve and other central banks

are now studying the reserverequirement and other possible
approaches. Wallich noted that
the technical difficulties are con

siderable. Thus, he concluded, no
action is likely on Eurocurrencymarket

controls

until

after

current study is completed.

and destruction.

Sometime in 1980, this Federal
Reserve District will have six of

the new machines in operation —
three in Los Angeles, two in San
Francisco, and one in Seattle.

the

Reserve Bank staff will be able to

^

handle food coupons as well as

currency with these machines.
The need for new equipment
became evident with a sharp
expansion in the Federal
Reserve's currency-handling
workload, which increased 25

percent over the past halfdecade, to 8.5 billion pieces in
1978. The Federal Reserve's task

was also complicated by the
sharp variation in quality of the

notes returned as unfit by com
mercial banks to the Fed.

For many years, Fed employees
have performed these tasks
manually, with the aid only of cer
tain types of mechanical coun
ters. In particular, destruction of
unfit notes has required con
siderable effort, and demanded
special protection procedures.
But the cost of this manual opera
tion increased sharply in recent
years, as wage rates climbed and
productivity stabilized. The rising
cost of processing, along with the
escalating workload, thus
encouraged the Federal Reserve
and the Treasury Department to
automate the processing function.
But now, the whole area of cur
rency verification and destruction
— a labor-intensive, security-con
scious area — will be replaced by
the switch to on-line verification
and destruction.
If

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CREDIT SCORING

CHINESE VISIT

ANTHONY DOLLAR

(Continued from page 1)

(Continued from page 1)

(Continued from page 2)

appraisal of all the material in an
applicant's file before credit is

Other guests included Suez Chen

Board

(Senior Vice President, Bank of

Lake City Branch of the Federal

extended, credit-scoring systems
only value those characteristics
that previous statistical analysis
indicates are predictive of credit

America), Norman C. Eckersley

Reserve Bank of San Francisco.

(Chairman of the Board and Chief
Executive Officer, Chartered

Evans

worthiness."

The Board's April proposal pre
sented alternative ways of apply
ing the anti-discrimination rules

of its ECO regulation (Regulation
B) to four credit-scoring prac

Bank of London), Richard J.
Glover (Co-Director, National
Council for U.S.-China Trade),
Carl E. Hartnack (Chairman of the
Board, Security Pacific National

Bank), Herbert E. Horowitz (Direc
tor of the U.S. Treasury Depart
ment's Office of East-West Eco

tices:

nomic Policy), John W. Kenney

• Assigning a score to the num
ber of jobs or sources of income

(Vice Chairman of the Board,

an applicant has, and to his or her
sources of income;

• Keeping out of the scoring
system the amount of the appli
cant's income from secondary
sources, such as part-time
employment, pension or alimony;

United California Bank), Carl E.
Reichardt (President, Wells Fargo
Bank), and Thomas R. Wilcox
(Chairman of the Board and Chief
Executive Officer, Crocker

National Bank).

if1

for adverse

action

on

a

credit

• Selecting reasons for adverse
action from an agency model
statement, where the credit-scor

ing system used differs from the
model statement.

The deadline for comments on the

proposal was August 20, but the
Board said that any comments

Directors of

the

Salt

In addition, Idaho Governor John
received

Idaho's

first

Anthony dollar from several of the
Reserve Bank's Salt Lake City
directors — Robert A. Erkins,
Mary S. Knox, and J.L. Terteling.
In the Northwest, the Portland
division of Safeway stores made
an

intensive effort to distribute

the Anthony dollar. Safeway
cashiers distributed an estimated

600,000 dollar coins to their
customers during the first two
weeks of July, frequently making
change with both the dollar coin
and

the

two-dollar

bill.

And

throughout the West, a number of
rapid-transit districts asked their
customers

to

use

dollar

coins

rather than bills in fare boxes, as a

• Giving only judgmental reasons
decision;

of

received

while

the

staff

was

analyzing responses would be
fully considered. The Board has
sent the staff study to all parties
who

had

commented

on

the

credit-scoring proposals. Other
interested parties may receive
copies of the staff paper by call
ing the Law Department, Federal
Reserve Bank of San Francisco,

(415)544-2256.

<f>

means of promoting speed and
efficiency of service.
To help publicize the coin, the
Federal Reserve is offering free
copies of a pamphlet called "The
Dollar of the Future." For copies,
write or call the Public Informa

tion Section, Federal Reserve
Bank of San Francisco, P. O. Box
7702, San Francisco 94120.

Phone (415) 544-2184.

^