Full text of Federal Reserve Notes : June 1978

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Federal Reserve Notes
FEDERAL RESERVE BANK OF SAN FRANCISCO

•

June 1978

Serving Alaska, Arizona, California, Hi^alirldaho, Nevada, Oregon, Utah &Washington
0 i u

FED REVIEWING

FED PROPOSES
REG Z CHANGES

ALL REGULATIONS

The Federal Reserve Board of Gover

The Federal Reserve Board of Gover

nors has proposed a revision of Regula
tion Z (Truth in Lending) to simplify the
calculation of annual percentage rates
for graduated-payment mortgages.
(With a graduated mortgage, payments
increase annually during the first five or
ten years of a mortgage.) Under this
amendment, irregular payment amounts
and irregular payment periods would be
considered "regular" for the purpose of
calculating the annual percentage rate.
The amendment would apply to all mort
gages with monthly payments, a maturi
ty of 15 years or more, and a minor
variation in a payment period.

nors has undertaken a major review of
its regulations and related interpreta
tions, with a view to streamlining and
modernizing necessary regulations, and
eliminating those not required by law.

•

Chairman G. William Miller told the Sen

ate Banking Committee that "we are go
ing in for zero-based regulating." He said
that the Fed aims to alleviate the burden

of regulatory paperwork on the nation's
banks.

The Board also amended Reg Z, effec
tive immediately, to require certain lend

Governor Philip C. Jackson heads a
task force which is carrying out the re
view. The group will attempt to redraft
the Board's 26 regulations to improve
their format, their public benefits, and
their relevancy to current policy goals.

ers to retain all records of credit

The full Board then will make recom

transactions in their possession for
more than two years. It applies to all

mendations to Congress for any statu
tory changes needed for modernizing
the System's regulations.

creditors and lessors under the supervi
sion of the Federal Reserve, the Comp
troller of the Currency, the Federal
Deposit Insurance Corporation, the Fed
eral Home Loan Bank Board and the Na

tional Credit Union Administration.

This is the first review of its kind in Fed

eral Reserve history. While some regula
tions are relatively recent, many others
are much-amended versions of rulings
first issued several decades ago.

These agencies have proposed a uni
form statement that calls for reimburse
ment to consumers for certain violations

of Reg Z. This reimbursement could ex
tend to violations that occurred more

than two years before discovery. The
amendment requires creditors and les
sors to retain credit transaction records
until final action has been taken on the

The review will take place in two stages.
The first stage will encompass regula
tions affecting commercial banks, bank
holding companies and other institutions
outside the Federal Reserve. The sec

ond stage will cover all other Fed regula
tions, interpretations, policy letters and
operating circulars.

uniform statement and one examination

has been completed under those guide
lines. Comment on the rule is being ac
cepted until July 14, 1978. For further
information on this amendment or other

Reg Z matters, contact the San Francis
co Reserve Bank's Consumer Affairs

Unit (415) 544-2226.fr

The review will cover the legal require
ments as well as the costs and benefits

of each regulation. In addition, it will de
termine whether statutes underlying the
regulations need revision, and whether
nonregulatory alternatives are available
for resolving the issues covered by

P. C. Jackson

those regulations. The task force would
attempt to ensure that any improve
ments made now would be preserved

as future regulatory changes are made.
In a separate but related move, the
Board early this month approved ac
tions to reduce the reporting burden on
commercial banks. The Fed stopped
collecting annual data, previously re
quired of all banks, on outstanding loans
to customers other than dealers for the

purpose of buying or carrying securities.
The Fed also halted the monthly collec
tion of data on such loans for a sample
of 72 large banks.
In addition, the Fed reduced statistical

reporting for some 240 member banks
who report interest rates charged on
various types of consumer loans. These
reports were put on a quarterly rather
than a monthly basis, and some smaller
banks were dropped from the reporting
panel. The Board said that the revision
will call for only about one-third as much

reporting as previously, iff

SUMMARY OF KEY FED DEVELOPMENTS

POLICY ON TAX TRANSACTIONS

GENERAL INSURANCE

The Board of Governors has issued a proposed policy state

The Board of Governors is considering whether bank holding
company subsidiaries should be authorized to act as general
agents in towns with less than 5,000 people, in accordance
with its Regulation Y. Recent court decisions have raised the
question whether insurance agency activities could be consid
ered closely related to banking, and thus permissible for hold
ing company subsidiaries to undertake. For further information,
call the Reserve Bank's Bank Holding Company Section at
(415) 544-2235.

ment on tax transactions between state member banks and

their parent holding companies. In the Board's view, a bank
holding company should serve as a source of strength for its
subsidiary banks and should not exercise its control to their
detriment. The Fed criticized the accounting practice whereby
assets and income are transferred from subsidiary banks to

the parent company without offsetting benefits to subsidiaries.
The Board also encouraged holding companies to develop
written tax agreements with their bank subsidiaries that specify
intercorporate tax-settlement policies. For further information,
call the Bank Holding Company Section at the Federal Reserve

SHIPMENT OF SECURITIES

Bank of San Francisco (415) 544-2235.

transit after being forwarded by depositing banks to the San
Francisco Reserve Bank through ordinary mail. Use of ordinary
mail greatly increases the risk of loss or theft. Financial institu

REGULATIONS Q & D
The San Francisco Reserve Bank has distributed material on

revisions in Regulation Q (Interest on Deposits) and D (Re
serves of Member Banks) to all member banks and branches
in the District. The information covers automatic transfer ser

vices for individual customers from savings to checking ac
counts (effective November 1) and member-bank participation
in the new Treasury Tax and Loan Investment program (effec
tive July 6). Additional information on the former program can
be obtained by calling the Reserve Bank's Law Department at
(415) 544-2254 and information on the latter program can be
obtained by calling the Fiscal Department at (415) 544-2453.
IRA & KEOGH ACCOUNTS
The Board of Governors has announced that member banks

can pay up to 8-percent interest on all Individual Retirement
Accounts (IRA) and Keogh Accounts with 3-year maturities.
(These retirement accounts are open to individuals who are
ineligible for corporate pension funds.) Last month the Board
raised the ceiling rate for these accounts from 7% to 8 percent,
but made the new rate applicable only to funds deposited on or
after June 1. However, because of bank complaints about the
problems caused by this "split" rate, the Board amended its

ruling to allow the higher rate for both new and outstanding
deposits.

SECURITIES CREDIT TRANSACTIONS
The Board of Governors has approved amendments to the
Fed's Regulations G, T and U, covering requirements for the
inclusion of stocks on the Board's list of Over the Counter

stocks. Copies of the amendments have been mailed to all
member and nonmember banks in the District. For further infor

mation, contact the Consumer Affairs Unit at (415) 544-2226.

12TH DISTRICT HOLIDA YS
All of the Reserve Bank's offices will be closed on Tuesday,
July 4, in commemoration of Independence Day. The Salt Lake
City office also will be closed on Monday, July 24, in obser
vance of Pioneer Day.

A number of bearer securities and coupons have been lost in

tions can avoid unnecessary risk by shipping valuables — par
ticularly those securities in bearer form — by registered mail or
armored car. Also, as noted in the April 1978 FED Notes,
banks can speed up the processing of registered and certified
mail and expedite the posting of credit to their accounts by
coding their mail. Questions about the mail coding program
can be addressed to the mail section of your nearest Fed
office.

SUBORDINATED CAPITAL LOANS
The Board of Governors has proposed an amendment to its
Regulation T (Margin Requirements) that would permit any
broker or dealer subject to the regulation to make a subordin
ated capital loan to another broker or dealer. At present, only
members of national securities exchanges may make such
loans. For further information, contact the Bank's Consumer
Affairs Unit (415) 544-2226.
BANKERS ACCEPTANCES
The Board has adopted an interpretation that increases the

number of bankers acceptances eligible for discount by Feder
al Reserve Banks. (A bankers acceptance is a time draft, pri

marily used to finance the shipment or storage of goods.) The
interpretation, which is effective immediately, makes bankers
acceptances secured by field-warehouse receipts covering
readily marketable staples acceptable as collateral for Federal
Reserve loans to member banks. For further information, con
tact the Credit Unit at the San Francisco office (415) 544-2230.

CHECK ALERT
Some checks sent to the Reserve Bank for processing have
been printed on red paper that produces illegible copies when
microfilmed. Federal regulations require banks to maintain the
original or a copy of most types of checks written for more than
$100. If a bank allows its depositors to use checks which can
not be microfilmed effectively, it must make sure to maintain

sufficient documentation to comply with the regulation. For fur
ther information, contact the check department at your nearest
Fed office.

FED BACKS

NEW DATA-PROCESSING
EXAMINATION POLICY

DOLLAR COIN
A new dollar coin could save taxpayers

Federal regulatory agencies last month
established a joint policy for the exami
nation of data-processing centers. The
new program was designed to eliminate
separate examination of data proces
sors by more than one Federal bank or
thrift-institution regulator, as a means of

millions of dollars, increase bank effi

ciency and offer numerous advantages
to retailers, Federal Reserve Governor

Philip Coldwell told a House subcommit

tee in testimony backing the proposed
coin. "A circulating dollar coin would re
sult in significant cost savings to the
Federal Reserve, potentially exceeding
$30 million each year," Coldwell said.
"And because Federal Reserve earnings

improving the utilization of the regula
tors' examination staffs.

The policy statement was adopted by
the Federal Reserve Board of Gover

in excess of costs are almost all re

nors, the Comptroller of the Currency,

turned to the Treasury, these Federal
Reserve savings would be passed on to
the government."
Coldwell noted that the Federal Reserve

spent $48 million in the last fiscal year
for the printing of new currency. (This
cost represented about 7 percent of the
total operating costs of the System.)

and the Federal Home Loan Bank
P. Coldwell

do not stick together or fold, and they
should facilitate change-making. The

one-dollar notes.

But he argued that only about $5 million
would be needed annually to maintain
the same size pool of dollar coins. Al
though coins cost more to produce than
currency, they also last much longer —

policy statement in the near future.

new coin also should work well in cash

The policy statement specifies:

ier machines that automatically dis

—Data centers that are operated by a
bank or thrift institution supervised by
one of the Federal regulators will be ex
amined by that regulator.
—Other data processing centers serv

pense the coin portion of a customer's
change.

About $28 million of the $48-million total

was needed to print nearly two billion

Board. The Federal Deposit Insurance
Corporation is expected to act on the

"We believe it is vitally important that
these potential advantages be investi
gated and fully communicated to the re
tailing community if the proposed new

ing Federally insured banks or thrift insti

coin is to succeed," Coldwell concluded.

examination team including representa
tives of several agencies, or by one of

tutions will be examined by a joint

15 years or more on the average, com
pared to 11/2 years for the average piece
of currency. Thus he concluded, "If coins
only replaced half the dollar notes, the

"If the legislation is enacted, we would
strongly urge the Treasury Department
to undertake such a program, and will
offer the cooperation and assistance of

on behalf of the others will be rotated

the Federal Reserve System in carrying

every two years.

savings in production costs would still

LEASING PAMPHLET

amount to $11 million annually."
The Fed official also said that that the

Federal Reserve would realize savings
in lower handling costs for the coin,
compared to the costs of handling
notes. Currency is difficult to sort and

verify, and the process for destroying
unfit currency is particularly cumber
some and costly.

However, he cautioned that the project
ed savings would be contingent upon
the new dollar coin circulating and re
placing dollar notes. He called for a ma
jor effort to promote the circulation of

the new coin — including a marketing
program, a coordinated retail-industry
utilization effort, and a financial-industry

out the effort." fr

the regulators on behalf of the others.

—Agencies examining data processors

—If, however, the examining agency re
gards the data processor's overall con

NOW AVAILABLE

dition as less than satisfactory, the
processor will be examined jointly until
its condition improves to the satisfactory

Truth in Leasing, the latest in a series
of consumer-education pamphlets that
explains the Consumer Leasing Act, is
now available free of charge from Fed

will receive the examiner's conclusions

eral Reserve Banks. The Consumer

and recommendations. The examiner's

Leasing Act is designed to help consum

reports dealing with matters of a propri
etary or competitive nature will be dis

ers compare the cost of one lease with

another, or with the cost of buying for
cash or on credit. The pamphlet covers
such matters as the type of leases cov
ered by the law, costs of leases, terms
of leases, aspects of open-end leases
and balloon payments, limits on balloon
payments, and ways of shopping for a
lease. Copies of the pamphlet are avail

able, singly or in bulk, from the Supply

program to encourage utilization.

Department of the San Francisco Re
serve Bank. For further information,

Coldwell noted that the new coin offers

contact the Bank's Consumer Affairs

important advantages to retailers. Coins

Unit at (415) 544-2226.fr

level.

—All insured banks or thrift institutions

served by an examined data processor

tributed only to the Federal regulators.
ECONOMIC REVIEW
Copies are now available of the

Spring 1978 Economic Review,
which contains four articles on the

topic of "Information and Market Ef

ficiency." For copies, write the Pub
lic Information Section, Federal
Reserve Bank of San Francisco,
P.O. Box 7702, San Francisco, CA
94120, or call (415) 544-2184.

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NEW MAILING

SYSTEM INSTALLED
The Federal Reserve Bank of San Fran

COURT SUPPORTS
BANK AUTO LEASING
The Supreme Court this month let stand
a lower court ruling permitting national

cisco will begin a new program on July 1
to improve the distribution of regula
tions, operating circulars and other ma

banks to continue in the auto-leasing

terials to financial institutions in this

of Appeals in San Francisco, found that
auto leasing is a financial activity related
to the business of banking, and thus is

District. The program was designed to
standardize the means of disseminating

this type of material, and thus reduce the
flow of paper throughout the District.
In the past, regulations or circulars
sometimes were sent to head offices

only, and sometimes to all branches. But
a new procedure became necessary
after a number of banks pointed out that
branch distribution hindered head-office

internal control procedures. For that
matter, most regulations and circulars
do not apply to branch offices.

As of July 1, all regulations and circulars
will be sent only to head offices of mem

business. The original ruling, handed
down last November by the U.S. Court

consistent with the National Bank Act.

Suit had been brought by a group of in
dependent auto leasers against two
Western banks several years ago.

Those firms had argued that auto leas

ing is a business activity having "definite
commercial, rather than financial, over
tones," and thus was outside the proper

realm of banking. They said that the two
banks in the case had utilized their supe
rior financial resources to dominate the

smaller competition.

But the appeals court maintained that a
bank's role in an auto-leasing agree

ber banks, nonmember banks, and oth

ment is principally one of financing. In

er financial institutions. Each bank will

most cases, the customer decides with

receive a single copy of each regulation

the auto dealer which vehicles the cus

at its head-office address. Multiple

tomer would like to lease, and the bank

copies will be made available for internal

then purchases them. In the court's
view, the bank only provides money
against the prospect of receiving pay

distribution to those banks which have

made the necessary arrangements with
the Fed. Any bank that wants to receive
multiple copies should contact the Cor
porate Services Department, Federal

BANK-AIDED PLACEMENTS

SEEN AS NO PROBLEM
A study by the Federal Reserve and oth
er regulatory agencies has found no evi
dence that potential conflicts of interest
in bank-assisted private placements
harm any parties to those transactions.
According to the document, interlocking
directorates between commercial-bank

advisers and other parties in privateplacement transactions are not likely to
result in significant harm.

The new study found that growth contin
ued to occur last year in the volume of
private placements — directly placed
securities exempted from the registra
tion requirements of the Securities and
Exchange Commission. All of the in
crease over 1976 was in placements as

sisted by advisers, which rose from $18
billion to $22 billion. However, the com
mercial-bank share of all private place
ments declined from 7.3 percent to 6.7
percent over the year.

The report noted that 34 banks offer pri
vate-placement adviser services. All the
institutions offering the service were
among the nation's 100 largest banks,
and 24 were among the 40 largest.

ments in the form of rent.

The study had been requested last De
cember by House Banking Committee
serve Board of Governors, the Comp

7702, Rincon Annex, San Francisco

Bank activity in the auto-leasing field has
grown sharply in recent years, from very
low levels at the beginning of the dec

94120, (415) 544-2556.%

ade—especially in the West.*f>

Deposit Insurance Corporation.%

Reserve Bank of San Francisco, PO Box

Chairman Reuss from the Federal Re

troller of the Currency, and the Federal