Full text of Federal Reserve Notes : June 1979

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Federal

Notes

FEDERAL RESERVE BANKLQJRSAN FRANCISCO

•

JUNE 1979

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

RESERVE BANK MAKES SENIOR APPOINTMENTS

AGENCIES CHANGE
SMALL SAVER RULES
Banks

and

thrift

institutions

announced new savings-account
rates, effective July 1, following
last month's adoption by the
major Federal regulatory agen
cies of measures designed to help
small savers obtain a higher
return on their deposits. The
measures, which affect all
Federally insured commercial
banks, savings-and-loan associ
ations and mutual savings banks,
include:

•An increase of 1A percent in the
maximum

Kenneth A. Grant

H. Peter Franzel

The Federal Reserve Bank of San

to Assistant Vice President two

Francisco made two senior-level

years later, in charge of the
bank's information systems. Next,
he was appointed Director of
Computer Systems in 1976, and

rate

of

interest

that

depository institutions may pay
on passbook savings accounts.
This raises the commercial-bank

appointments, effective July 1,
with Kenneth A. Grant being pro
moted to Senior Vice President,
Computer Services, and Vice
President H. Peter Franzel assum

ing added responsibilities for
Bank Operations at the Bank's
San

Francisco office.

ficers will

report to

Both

of

First Vice

President John B. Williams.

Grant, in his new position, will be
responsible for all automation
services for the bank's five offices

throughout the West. Franzel will
supervise the areas of payments
services, custody services, and
operations support at the San
Francisco office.

Vice President in 1978. At the age
of 33, he is the youngest Senior
Vice

President in

the Federal

Reserve System.
Grant graduated from the Univer
sity of California at Berkeley,
receiving a B.S. degree in com
puter sciences. He has been
actively involved for a number of
years with the Federal Reserve
System's efforts in the area of
electronic-funds transfer.

Franzel joined the bank at its Se
attle Branch in 1953, where he

ceiling to 51A percent, and the
thrift-institution ceiling to 51/2 per
cent. The increase represents the
first boost in the passbook rate
ceiling since 1973.

•Creation of a new savings cer
tificate with a maturity of four
years or more, with a rate ceiling
based on the yield for four-year
government securities as deter

mined each month by the U.S.
Treasury Department. The com
mercial-bank ceiling is 11A per
centage points below the yield on
four-year governments, and the
thrift-institution ceiling is 1 per
centage point below the Treasury
yield. Thus, the rate on the first

(July 2) offering was set at 7.60
percent for banks and at 7.85 per

Grant joined the Reserve Bank's

worked in several operating
departments. He was appointed

staff in 1968. He served for three

as Assistant Vice President at the

years in the bank's research
department. In 1971 he was

bank's Salt Lake City Branch in
1970, and was transferred to San

• Elimination of all requirements

appointed Manager of Research
Programming. He was promoted

Francisco in 1976 as Assistant

for

(Continued on page 4)

cent for thrift institutions. The rate

does not float during the term of
the deposit.
minimum

denominations

on

(Continued on page 4)

HOUSE COMMITTEE
ACTS ON MEMBERSHIP

FED RULES ON EDGE CORPORATIONS

The House Banking Committee
this month approved a bill
designed to curb the exodus of

Governors this month revised its

banks from the Federal Reserve

the International Banking Act of
1978. Among other provisions, the
new Reg K includes rules govern

System, and to facilitate monetary
policy under a more equitable set

The

Federal

Reserve

Board

of

Regulation K (International Bank
ing Operations) to conform with

bably will take up the legislation

ing 1) the ownership of Edge Cor
porations (international banking

later in this session.

and financial firms) and their U.S.

of ground rules. The Senate pro

The House bill, like its earlier ver
sions, would reduce the amount of
non-interest-bearing reserves
that member banks must keep
with

Federal Reserve

Banks. In

addition, it would require nonmember banks and some large
mutual savings banks to set aside
noninterest-bearing reserves as
well.

The bill sets an initial 11 -percent
reserve requirement on the total
amount of checking or similar
transactions

accounts

of

more

than $35 million at every commer
cial bank and thrift institution. The

proposed legislation allows the
Fed to adjust the requirement be
tween 4 percent and 1 2 percent.
The bill also sets an initial 3-per
cent reserve requirement on bank

short-term (non-personal) time

operations, 2) overseas activities
of Edge Corporations, Fed mem
ber banks and bank holding com

panies, and 3) lending limits and
capital requirements for Edge
Corporations.

The new Reg K enlarges the
opportunities for Edge Corpora
tions to operate in this country, by
permitting them to open branches
here with the Board's approval.
Previously, Edges could not open
domestic branches, although a
U.S. banking company could es
tablish separately incorporated
Edges in various locations. The
new authority thus makes it more
efficient and less costly for Edge
Corporations to operate in new
U.S. locations.

deposits of 180 days' maturity or
less, or longer-term time deposits.
The bill in effect would impose
reserve requirements on about
1,000 institutions — considerably
fewer than the 5,500 member
banks that now carry reserves
with the Fed. Of that 1,000, about

son by an Edge engaged in bank
ing may not exceed 10 percent of
the corporation's capital and
surplus. In addition, it ruled that
Edge deposits in the U.S. and
abroad are subject to reserve
requirements and interest-rate
ceilings, in the same way as mem
ber-bank deposits.

resources, decreased or unfair
competition, conflicts of interest
or unsound banking practices in
the United States." A foreign

prevent undue concentration of
a

volume

of transactions

including all the savings banks,
would be able to meet the require

financial

ments

percent of the institution's capital
and surplus in an Edge Corpora

with

vaults. The

the

cash

rest

would

in

their

have

to

institution

will

not

be

allowed to invest more than 10

post interest-free reserves with

tion.

Federal Reserve banks.

The Board's actions help meet the

Under the bill, the Fed would lose
about $1.2 billion in income from
the shift in reserve requirements,

requirements of the International
Banking Act of 1978, which repre

but it would recover a significant
portion of this amount by charging
for services that it now provides
free

to

members. The

services

700 would be Fed members and

would

depository institutions. The Fed
also would begin charging for
"float," the amount of money it

few mutual savings banKS. While
savings-and-loan associations

that credit extensions to one per

has

the rest would be mostly nonmember commercial bar' s and a

dential rules for Edge Corpora
tions that accept deposits in the
United States. Among other
stipulations, it ruled that risk
assets of an Edge engaged in
banking may not exceed 7 per
cent of capital and surplus, and

said that it "will impose condi
tions it regards as necessary to

action

About half of the institutions,

or on consumer time

The Board also established pru

another proposal that would have
given Edge Corporations the

deferred

versions, the

—

financed are directly identifiable
as export items.

Concerning foreign investment in
Edge Corporations, the Board

Board

accounts in excess of the stipu
lated exemptions.

drawal

orders, or when the items to be

on

The

deposits totaling more than $10
million, although the requirement
could be set anywhere between
zero and 8 percent. Unlike earlier
bill would not
impose reserve requirements on
savings deposits — other than
those subject to automatic trans
fer or negotiable order of with

authority to provide full banking
services to customers principally
engaged in international com
merce. But the revised Reg K
allows Edges to finance the pro
duction of goods and services for
export. This may be done when
the customer has obtained export

be made available to all

credits

banks

and credit unions would not be

have

exempt, none of them currently

cleared.

been

for

paid

its enactment in 1919. In amend

ing the Edge Act, Congress said
that Edge Corporations should
have sufficient powers to enable
them to compete with foreign
banks at home and abroad, and to

provide all segments of the U.S.

that

economy with the means to

not yet

finance international trade — in

checks

but

sented the first significant
amendment of the Edge Act since

*§•

particular, the export trade. <§

PARTEE LISTS BANKS' STRENGTHS, PROBLEMS
Commercial banks — "the depart
ment stores of finance" — tend to

reflect the condition of the overall

economy, Federal Reserve Gover
nor

J.

Charles

Partee

told

the

Senate Banking Committee last
month. He said that the banking
system generally is in good shape
to

deal

with

a

recession

if

it

should come, although problems

could arise for those relatively
few banks that have not yet
recovered from the earlier reces
sion of 1973-75.

on bank capital ratios. As evi
dence, he pointed to the decline
in the ratio of equity capital to
total assets, from 6.1 percent to
5.8 percent between the end of

forced

1976 and the end of 1978. Infla

System's Open Market Committee

tion

has

reflected

the

internal

growth of capital from retention of
earnings.
Partee

their regulators could do to limit
the damage to the banking system
and to the economy. "One thing

Further, Partee said, inflation
tends to put downward pressure

asked

what

banks

and

that we can do is to make sure

that banks employ prudent lend
ing standards and hold their commitments

within

reasonable

bounds... Second, banks must
keep their capital ratios suffi
ciently high to cushion losses and
maintain public confidence dur
ing adversity. .. Third, banks
should be encouraged to employ
the principles of diversification in
all major aspects of their opera
tions, both at home and abroad."

FED TO SURVEY CARIBBEAN DEPOSITS
The Federal Reserve Board of
Governors this month authorized

deposits are used as substitutes
for domestic deposits that are

a one-time deposit survey cover
ing 23 member banks that have

counted in the M, measure (cur
rency plus demand deposits).

Caribbean

branches with

more

than $400 million in deposits of
U.S. residents. The need for more

information became apparent
when, in the first quarter of 1979,
Caribbean

branches

accounted

for roughly four-fifths of the total
$5.3 billion increase in offshore
dollar-denominated deposits at
all foreign branches of U.S. banks.

Many U.S. depositors apparently
hold large sums in the Caribbean
branches, and thus are able to
escape domestic interest-rate

the

Federal

Reserve

(FOMC) to expedite disclosure of

has been undermining the health
of the banking system. "First,
may adversely affect the quality
of bank loan portfolios." Inflation
tends to generate ballooning
credit demands, even while
interest rates are rising. High
interest rates and rising indebted
ness, in turn, expose borrowers to
the risk of heavy debt-servicing
burdens, as happened with the
financing of real-estate invest
ment trusts several years ago.

lower-

its monetary-policy decisions.
The top tribunal told the lower

has outrun

in

this month to set aside a

court ruling which would have

the

credit

been

The U.S. Supreme Court voted

heavy financing needed to
accompany the sharp rise in dol
lar spending for goods and ser
vices, and this expansion in bank

He warned, however, that inflation

inflation creates conditions that

SUPREME COURT RULES
ON FOMC DISCLOSURE

The survey will request informa
tion on overnight and call
accounts, which include highly
liquid interest-bearing deposits
that

cannot

be

offered

domestically because of Regula
tion Q (interest rate) restrictions.
The survey will also seek data on
accounts that are available for

payment in immediately available
funds during the next business
day — accounts which are

court to reconsider the case,

weighing the Fed's argument that
postponing release of FOMC
directives until they have been
supplanted by the following
month's decisions is permitted
under an exemption to the
Freedom of Information Act.

In its brief, the Federal Reserve
argued that immediate release of
information would have a destab

ilizing "announcement effect" on
financial markets, because
market participants would move
quickly to adjust their holdings of
government securities in antic
ipation of the Fed's market tran
sactions.

The

Fed

also

contended

that

immediate disclosure would give
large institutional investors an
advantage over small investors,
because they could analyze the
information quickly and act more
rapidly than others. Further, with

immediate disclosure, the govern
ment's interests could be jeopar
dized by additional borrowing
costs of perhaps $300 million a
year, because sharp fluctuations
in interest rates on government
securities

could

cause

dealers

and purchasers to demand a
higher yield to compensate them
for the additional risk involved.

Ruling for the Supreme Court
majority, Justice Harry Blackmun
said, "We think that if the
domestic directives contain sen
sitive information

not otherwise

substitutes for domestic demand

available, and

if

deposits and security-repurchase
agreements. Another question will

release of these directives would

immediate

behavior of the monetary aggreg

analogous, on the domestic
scene, to individual automatictransfer accounts and corporate

significantly harm the govern
ment's monetary functions or
commercial interests, then a
slight delay in the publication of
the directives would be permit

ates, because many of the

automatic-repurchase facilities."*1

ted."

limitations

on

short-term

or

demand deposits. In the Fed's
view, these practices could have
a significant effect on the

concern

accounts

that

are

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FED SEEKING
CONSUMER ADVISORS

experience relating to consumer

SMALL SAVERS

matters. Nominations should

(Continued from page 1)

be

received no later than August 6,
The

Federal

Reserve

Board

of

Governors is seeking public
nominations for appointments to
its Consumer Advisory Council.
The Council meets four times a

year, generally for a day and a half

1979.

The present Council is composed
of 27 members with a wide range
of experience in the area of con
sumer credit. Westerners repre

each time, to advise the Board on
its responsibilities regarding con

sented

sumer-credit
regulation.

Dean of the U.C.L.A. School of Law

legislation

and

on

the

Council

include

Chairman William D. Warren,

(Los Angeles), Roland E. Brandel,
Partner,

Those wishing to submit nomina
tions should provide information
on the nominee's past and pre
sent positions, as well as informa
tion on his or her special
knowledge, interests or

(San

Morrison

and

Foerster

Francisco), Richard

H.

Holton, Professor of Business Ad

ministration at the University of

California (Berkeley), Percy W.
Loy, President of Kubla Khan

Food Company (Portland,
Oregon), and Richard A. Van
Winkle, President of Lockhart

Finance Company (Salt Lake
City).

SENIOR OFFICERS

(Continued from page 1)
Vice President (Branch Opera
tions Support). He was promoted
to Director of Branch Operations
in 1977, and to Vice President in
1978.

for

the

Council

should be submitted in writing to
Ms. Anne Geary, Assistant Direc
tor, Division of Consumer Affairs,
Board of Governors of the Federal

Franzel received his B.A. degree
from
the University of
Washington, and graduated with
honors

Nominations

from

the

Pacific

Coast

Banking School at the University
of Washington in Seattle.
(§•

Reserve System, Washington,

D.C. 20551.

if

consumer-type time deposits —
except that the $10,000 minimum
will continue to be required for the
six-month money-market certifi
cate.

•Adoption of a new early-with
drawal penalty, applicable to all
time-deposit contracts entered
into on or after July 1, and to
existing time deposits renewed or
extended

after that date. The

minimum penalty will be three
months'

loss

of

interest

for

deposits maturing in one year or
less, and six months' interest loss
for longer-maturity deposits.
In a related development, the
agencies ruled that depository
institutions may accept deposits
that have been pooled by deposi
tors

to

reach

a

minimum-

denomination requirement.
However, these institutions may
not solicit or promote such pooled
deposits in any way.
The agencies plan to consult
again on the question of rate ceil
ings later this year. At that time,
they will determine whether
further adjustments in ceilings
will be appropriate to meet the

needs of small savers.

ifr