Full text of Federal Reserve Notes : July 1982

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Federal Reserve Notes
FEDERAL RESERVE BANK OF SAN FRANCISCO

•

July 1982

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

FED RETAINS
MONEY TARGETS

FED ANNOUNCES
PRICING CHANGES

Federal Reserve Board Chairman

The Federal Reserve Board of Gov

Paul Volcker reported to Congress

ernors has announced planned re
visions in priced services offered to
depository institutions. The
changes were announced on July
29 by E. Gerald Corrigan, president

this month that the Fed would make

no change in its money-growth tar

gets for 1982. He told the Senate
Banking Committee that the Federal
Reserve's objective "is to create

of the Federal Reserve Bank of Min

neapolis and chairman of the Sys
tem's pricing policy committee. The
changes will be phased in over a
number of months beginning in
August.

an environment conducive to sus

tained recovery in business activity
while maintaining the financial disci
pline needed to restore reasonable
price stability." The 1982 growth tar
get of 21/2-51/2 percent for the stan
dard M1 measure—currency plus
transaction (check-type) deposits
—thus would remain unchanged.

The Chairman acknowledged that
firm monetary restraint is at least
indirectly responsible for strains on
the economy, but he said those
strains "cannot be easily remedied
through accelerated money growth."
Volcker said any attempt to drive in
terest rates lower through speeding
up money growth would create more
inflation, and would make the cur

Among the changes announced are
technical revisions in the method for

pricing Federal Reserve services
and accelerations in the collection
of certain classes of checks. Also
Paul Volcker

would be acceptable this year. The
Committee also agreed that liquidity
demand shifts in current economic

circumstances might require sub
stantial flexibility and judgment in
assessing appropriate needs for
money in the months ahead.

best eased by the adoption of poli

In 1983 and beyond, Volcker said,
the Open Market Committee "re
mains committed to restraining
money growth in order to achieve
sustained noninflationary economic
expansion." Thus the monetary
ranges now in effect "can appropri
ately remain as preliminary targets

cies to control the Federal deficit.

for 1983."

He added that more prudent credit
practices on the part of private bor

Volcker said an evaluation of eco

rent recession "another wasted

painful episode instead of a transi
tion to a sustained improvement in
the economic environment."

Volcker argued that current pres
sures on financial markets will be

rowers and lenders also are neces

sary to regain financial health.

Volcker said that the Federal Open
Market Committee agreed that
growth in the money targets around
the top of their respective ranges

nomic forces suggests the onset of
an economic upturn in the second
half of 1982. He said monetary
growth along the Fed's current
guidelines should accommodate
the expansion in real GNP. The ini(Continued on page 4)

announced were plans for further
reduction of Federal Reserve float

and pricing of Automated Clearing
house (ACH) services. Plans for an
electronic check-collection program
that had been under discussion will
be discontinued.

Next week, the Board of Governors

intends to consider a proposal to
seek public comment on the issue of
noon presentment of city checks.
The Board decision in this, and per
haps in other matters, will have an
impact on the effective dates of cer
tain services and prices.
In announcing the pricing and ser
vice changes, Corrigan emphasized
that the Federal Reserve System's
continuing objective is to enhance
the efficiency of the payments
mechanism in a manner consistent

with the Fed's overall public
responsibilities.
(Continued on page 3)

ALLISON DISCUSSES DELAYED FUNDS AVAILABILITY
and so forth. In other cases, institutions apparently delay
Many depository institutions protect themselves against
funds on all checks or all out-of-town checks.
the risk of unpaid checks by delaying the availability of
funds. Theodore E. Allison, Staff Director for Federal
Reserve Bank Activities, Board of Governors of the Fed

eral Reserve System, discussed this subject in testimony
this spring before the Subcommittee on Consumer Af
fairs of the Senate Banking Committee. Portions of his
testimony follow.

Slightly more than one percent of all checks the Federal
Reserve collects—about one-half million checks per day
—are returned unpaid. We believe that return experience
is similar for the checks not collected through the Federal
Reserve.

Correspondent institutions and the Federal Reserve
grant credit for checks that they collect for depository
institutions using an availability schedule which reflects
the normal processing and transportation time involved.
For example, if a Federal Reserve office is normally able
to collect a check in one day, it gives one day availability.
Most commonly, the Federal Reserve provides credit
within two days. However, reflecting the uncertainty re
garding a check's being paid or returned, the credit
granted is provisional, and the institution receiving the
credit must be prepared to give it up immediately should
the check be returned unpaid. Likewise, depository insti
tutions' depositors must also be prepared to make restitu
tion of any funds credited to their account should a de
posited check be returned unpaid, even though a delay in
availability may have been imposed.
There are several alternatives to the use of checks that

can ensure against the problems and risks associated
with checks returned unpaid. Many payments—especial
ly those that recur regularly such as salary, dividends, and
social security—can be received through automated
clearing houses, and others can be handled as wire trans
fers. Both of these electronic means of payment are
secure against loss or theft, and entail immediate and
(usually) irrevocable credit to the receiver's account. Iwill
discuss these alternatives in more detail later.

Delayed Funds Availability
Delayed funds availability is one way that institutions may
protect themselves from the risks involved in the event a
check is returned unpaid by the paying institution to the
institution in which it was first deposited. Delayed funds
availability is practiced by all types of depository institu
tions but varies widely among individual institutions. A
study done by Federal banking agencies in 1978 found
that 38 percent of the commercial banks surveyed had
adopted some formal delayed funds availability policy,
often specifying widely different procedures and criteria.

Some institutions rarely or never delay availability. Fre
quently, institutions tailor the delay by considering their
own exposure to individual risk—how well known the
depositor is to the bank, the amount of the check, the
average time required for collection and return of unpaid
checks between this institution and the paying institution,

Whether the delay is imposed selectively or not, delayed
funds availability is often characterized as "unfair" to
depositors. Institutions, however, defend the practice as
a means of protecting themselves from losses associated
with returned checks. But there is no mechanism for in

forming an endorsing institution affirmatively that a check
has been paid. One way for an institution to avoid loss in
the event a check is returned unpaid is to delay the de
positor's use of the funds. The longer the delay the less
risk that the check might be returned and loss incurred
by the institution. Thus, in view of the check collection
system in this country, selective delayed availability poli
cies and practices have a legitimate business basis and
may contribute to the safety and soundness of depository
institutions.

It is frequently charged that delayed funds availability
practices are intended to generate increased revenues
for depository institutions at the expense of depositors. It
may well be that certain institutions are able to enhance
their revenue through the practice of imposing blanket
rather than selective delay policies. This would be true
since blanket delay programs are relatively easy to imple
ment and affect all or most checks deposited.
However, a selective delayed availability policy may en
tail considerable expense for the institution, since training
employees to identify the need for and length of delay is
costly, and selectively imposed delays are handled as
exceptions to routine procedures. Moreover, delayed
availability policies are just one of a number of terms and
conditions—including service levels, check fees, re
quired balances, hours of operation, location of branches,
and interest rates—which must be considered as a whole

in determining the costs and benefits of the account rela
tionship for the customer. Thus, a less selective policy,
such as imposing a delay on all out-of-area checks de
posited, which would seemingly be more profitable for the
institution, might be used in conjunction with lower fees or
lower minimum balance requirements than would other
wise be the case. In effect, a less costly, less selective
policy could be part of a product preferred by customers
who are more interested in low fees and low minimum

balances than a short delay in using their funds.
The Federal Reserve has made an effort to keep informed
of delayed availability practices and problems, both be
cause of its role in the monitoring of consumer complaints
about banking practices and because of its responsibility
for the effectiveness of the payments system. For ex
ample, we have a formal procedure for receiving, tabulat
ing, and investigating consumer complaints involving
banks. In the last five years the number of complaints
involving delays in getting the use of funds has consis
tently been only about one or two percent of the total
number of consumer complaints.
(Allison's comments will be concluded in the next issue of

Federal Reserve Notes.) iijfji

FED PLANS FOR
WIRE CHARGEBACK

DIDC APPROVES NEW SAVINGS ACCOUNT
The Federal Depository Institutions

Thrift institutions could pay the bill

The Federal Reserve System has
announced new procedures for pro
cessing inter-district return items
and cash-letter adjustments of
$50,000 and over. Originally the
System had planned to implement
this "wire chargeback" procedure in
all Reserve districts on July 19, but it
has now postponed implementation
because of requests from financial

Deregulation Committee has ap
proved a new savings account
designed to help banks and thrift

rate on this new account, while com

institutions for additional lead time

to prepare for the new procedures.

FED SETS HEARING ON
B OF A-SCHWAB MERGER

In the case of both inter-district re

The Federal Reserve Board of Gov

turn items and cash-letter adjust

ernors has ordered public hearings
starting September 13 on an appli
cation by BankAmerica Corporation
to acquire Charles Schwab Corpora
tion, a discount brokerage firm.

ments, the Fed would initiate a wire

credit/charge procedure through the
Federal Reserve Communications

System. This procedure is one of
several implemented by the Fed to
match credit availability with actual
collection experience.

Currently, the Fed accepts interdistrict return items for immediate

credit even though they often can
not be presented for payment to in
stitutions for one or two days. The
Fed will still offer immediate credit

on return items to customers, but

the wire-chargeback procedure will
enable the receiving Reserve office
to debit the endorsing institution's
account on a same-day basis.

The originating Reserve office will
initiate the wire chargeback only af
ter the physical item has been re
ceived. The Fed does not intend that

this wire chargeback would substi
tute for the payor bank's initiating a
normal advice of non-payment for
an item of $2,500 or more.

The wire chargeback or advice of
adjustment for inter-district cashletters deposited would be handled
in a similar fashion. A cash-letter

adjustment form will be sent on the
same day the account balance is
debited or credited, and telephone
notification of each adjustment will
be made the same day a transaction

institutions compete more effective
ly with money-market mutual funds.
The accounts would require a mini
mum daily balance of $20,000, and
would pay interest rates pegged to
the Treasury's three-month bill rate.

The Board ordered the hearings
after receiving a protest from the

Securities Industry Association
against the acquisition. It said that
the hearings before an administra
tive-law judge would provide the
central bank "with a full record of

any disputed material fact involved
in the proposal."
BankAmerica Corporation an
nounced its intention to acquire the
country's second-largest discount
brokerage firm in November 1981.
The acquisition would provide
BankAmerica with a broader range
of consumer-financial services.
BankAmerica contends that the

operation of a discount brokerage
operation does not contravene the
Glass-Steagall Act—the law sepa
rating securities and brokerage
functions from banking—because
discount brokers only execute or
ders rather than serve as dealers.

The merger would be contingent on
Federal Reserve approval. Owner
ship of brokerage firms is not on the
list of approved activities for bankholding companies.

a new implementation date for the
wire-chargeback procedure in early

The Justice Department and Securi
ties and Exchange Commission do
not object to the proposal. However,
the Securities Industry Association
argued that the transaction would
lead to a major restructuring of the

September 1982.1j^p

financial services industry. 1|S

is posted.
The Federal Reserve will announce

mercial banks would be limited to

paying one-quarter-percentage
point less. The term of the account
could range from 7 to 31 days.
Institutions can begin offering the
new accounts on September 1. De
positors will not be permitted to
write checks on the accounts, and

they will suffer some loss of interest
payments for early withdrawal.
The committee agreed to eliminate
the interest-rate ceiling on the new
account on May 1983. Also, the ceil
ing rate would be suspended when
ever the three-month bill rate

declines to 9 percent or less for four
consecutive weekly auctions.
To deal with banking-industry criti

cisms, DIDC agreed to begin devel
oping proposals for savings accounts
that would have lower minimum bal
ances and no limits on interest

rates. But Treasury Secretary
Regan argued against approval of
these accounts until Congress great
ly expands thrift-institution powers
to make commercial loans, invest in

real estate, and engage in other ac
tivities now reserved for banks.'

FED ANNOUNCES
PRICING CHANGES
(Continued from page 1)

The System's initial pricing strategy,
which was based on detailed cost

estimates, involved calculating indi
vidual product costs and then add
ing a private-sector adjustment fac
tor. The revised pricing technique
recognizes that the value of some
services might be different from
their costs, and takes into account

prevailing market practices.
The most important and widespread
use of this technique will be reflect
ed in prices for handling certain
types of cash-letter deposits—
checks deposited with the Federal
Reserve for clearance—where

major improvements have been
made in the availability of funds to

depositing institutions. 1j|jj

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MONEY TARGETS
(Continued from page 1)

tial phase of the recovery "is likely to
be more heavily concentrated in
consumer spending than in past
business cycles, as current pres
sures in financial markets and li

quidity strains may inhibit recovery
in investment activity," he added.
Volcker noted that high interest
rates will likely discourage residen
tial construction, while the high level
of corporate bond rates and the de
terioration in corporate balance
sheets from years of short-term bor

rowing may restrain capital spend
ing. He added that the improved
price performance this year has
helped reduce the inflation rate.
However, he said that recorded in

flation rates may be higher in the
second half, although prospects ap

pear excellent "for continuing the
downtrend in the underlying rate
of inflation."

Prior to Chairman Volcker's Con

gressional appearance, the Federal
Reserve reduced its discount rate—

the rate charged on depository insti
tutions' borrowing of reserves—
from 12 to 111/2 percent. This repre
sented the first reduction since late

1981 and the lowest borrowing rate
since late 1980. The Fed said that it
reduced the discount rate "in the

SUPREME COURT
BACKS FED RULING

CITICORP GAINS DATA
PROCESSING APPROVAL

The U.S. Supreme Court has backed
rulings by the Federal Reserve and

The Federal Reserve Board of Gov

a lower Federal court that Wilshire

Oil Company of Texas has violated
the Bank Holding Company Act by
continuing to own the Trust Com
pany of New Jersey. In declining to
review the Wilshire case, the Sup
reme Court strengthened the central
bank's hand in dealing with nonbanking companies which want to
own and operate a bank under an
expanded reading of the legal defi
nition of a bank.

The Bank Holding Company Act
says that a bank is a bank if it takes
demand deposits and makes com
mercial loans. Wilshire argued,
however, that Trust Company was
no longer a bank because it re
served the right to a 14-day delay on
checking withdrawals, and thus no
longer took demand deposits.

Fed lawyers argued that the Wil
shire position would "repeal the
Bank Holding Company Act itself,"
and would thwart Congress' inten
tion in passing the 19th Amendment
to continue the national policy of
separating banking from commerce.
The U.S. Circuit Court of Appeals
unanimously agreed with the Fed in

context of recent declines in short-

a decision last December. This was

term market rates and the relatively
restrained growth of money and

the decision that the Supreme Court
has just upheld. W,

credit in recent months." 1j|ji

ernors has cleared the application
of Citicorp of New York to engage in
a wide variety of data-processing
and transmission activities through
a subsidiary to be called Citishare
Corporation. The application had
been opposed by the Association of
Data Processing Service Organiza
tions and several companies that
engage in data-processing services.

The Fed ruling clears the way for
Citishare to offer a wide range of
electronic services—including elec
tronic funds transfer, home banking,

and the processing and transmitting
of banking, financial and economic
data. Citishare also intends to pro
vide packaged financial systems to
depository institutions, and to sell
excess capacity on data processing
and transmission equipment.

The Fed's ruling follows the recom
mendations of an administrative-law

judge who had been appointed by
the Board last year to hold hearings.
The judge concluded last March that
Citicorp's data activities were closely
related to banking, and thus should
be permissible for a bank-holding

company. 1j|j