Full text of Federal Reserve Notes : March 1979

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Federal Reserve Notes
FEDERAL RESERVE BANK OF SAN FRANCISCO

•

MARCH 1979

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

FED CLEARS FOREIGN
BANK PURCHASES
The

Federal

Reserve

AGENCIES CHANGE
CERTIFICATE RULES

Board

of

Governors this month approved
foreign-bank purchases of control
of three large U.S. banks. With this
action, the way was cleared for
Standard Chartered

Bank,

Federal regulatory agencies this
month changed the rules under
which financial

institutions can

issue 26-week money-market cer
tificates (MMC's). The changes

Ltd.

were made to reduce somewhat the

(London) to acquire Union
Bancorp, which is the holding

cost of MMC's, and to moderate the

company for Union Bank, the sixth
largest bank in California. The
other acquisitions include

in the current inflationary period.

Hongkong and Shanghai Banking
Corp.'s purchase of 51 percent of
Marine Midland Banks, Inc., and
London-based

National

Westminster Bank Ltd.'s purchase
of 75 percent of National Bank of

The agencies prohibited the com
pounding of interest on MMC's
issued on or after March 15 by in
sured commercial banks, savings
banks, savings-and-loan associ
ations and credit unions. In addi

tion, they eliminated the 1/4-point
institutions and commercial banks

The foreign-bank presence in the
U.S. market has increased substan

tially in recent years. Between 1972
and 1978, assets of domestic banks
purchased or chartered by foreign
institutions increased five-fold, to
about $20 billion. That $20-billion

figure will more than double now

that three major acquisitions have
been approved.
The Board's action followed

last

month's release of a policy state
ment regarding supervision of
foreign-bank holding companies in
this country. The Board said that
the principle of "national treat
ment" should be the guiding rule in
administering the relevant portions
of the Bank Holding Company Act
and the International Banking Act
of 1978. The Board's policy is
designed to further two major
goals: 1) the U.S. subsidiary bank
should be operated in a safe and
prudent manner; and 2) the parent(Continued on page 4)

2

INTEREST

flow of funds into thrift institutions

interest differential between thrift

North America.

Bank Passbook Savings
4

when the certificate ceiling rate is 9
percent or more. However, the full
differential remains in effect when

RATES

1 ,
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1977

1978

D

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, 1
F

M

1979

mortgage credit.
The regulatory agencies created
the money-market certificate last
June 1 to help maintain a flow of
funds into the mortgage market. At
that time, with market interest rates
rapidly rising, they feared a flow of

funds into market (non-bank or
thrift) instruments, and out of
deposit instruments, that are sub
ject to interest-rate ceilings.

the ceiling rate is 8 3/4 percent or

MMC's

less.

denominations of $10,000 with a 26week maturity. The maximum rate
of interest that may be paid on

The action was announced jointly
by the Federal Reserve Board of
Governors, the Federal Home Loan
Bank Board, the Federal Deposit In
surance Corporation and the Na
tional Credit Union Administration.

The agencies said that, in addition,
they were "actively reviewing the
terms on other types of deposits
with a view toward providing im
proved savings opportunities for
the small saver."

The agencies noted that their ac
tion would affect the savings flows
of thrift institutions, but argued that
it would permit those institutions to
remain competitive in attracting
funds for housing. The action
should help reduce cost pressures
on thrifts, and over the longer run
assure continued availability of

are

issued

in

minimum

MMC's is tied to the discount rate

(auction average) on six-month
Treasury bills.
At the end of January, $104 billion
in such certificates were outstand

ing, with more than half of the total
being held at S&L's and another
third at commercial banks. These
certificates then accounted for

almost 13 percent of all S&L
deposits and for almost 8 percent of
all small-denomination (less than

$100,000) bank time and savings
deposits.

The sharp rise in popularity of
MMC's has reflected the widening
of the

differential

between

the

Treasury bill rate — the rate to
(Continued on page 4)

SUMMARY OF KEY FED DEVELOPMENTS
RESERVE BANK EARNINGS RISE
Gross earnings of Federal Reserve Banks increased
22.7 percent last year to a total of $8,455 million, reflect

ing a sharp increase in security earnings. (System earn
ings are derived primarily from U.S. government
securities the Fed acquires through open-market

operations — one of the tools of monetary policy.) The
12 banking districts of the Federal Reserve System in
curred current expenses of $653 million (4.6 percent
above 1977), leaving net earnings of $7,803 million in
1978. Other costs included a $53-million assessment for

Board of Governors expenditures and a $633-million
net deduction in the profit and loss account (mostly due

to a $130-million net loss on the sale of U.S. govern
ment securities and a $506-million loss on foreign-ex
change operations). After those deductions, the re
maining earnings were allocated as follows — $7,006
million in payments to the U.S. Treasury, $63 million in
statutory dividends to member banks, and $47 million in
additions to Reserve Bank surpluses. Under a 1964
System policy decision, ail net earnings after statutory
dividends and additions to surplus are paid to the U.S.
Treasury as interest on Federal Reserve notes.

REGULATION S REVOKED

In its ongoing effort to clarify and simplify all Fed
regulations, the Board of Governors has revoked its
Regulation S, "Bank Service Arrangements." In effect

since 1963, the regulation governed the Board's power
to regulate and examine banking services performed
for State-chartered member banks by outsiders. A re
cent amendment to the Bank Service Corporation Act
renders the "S" regulation unnecessary. The Board
also adopted modifications that would simplify present
interpretations and make them conform with the
amended Act. The San Francisco Reserve Bank has

issued a new Circular 12 — Bank Service Arrange
ments — that contains a model form that State member

The Board also modified the scale used for calculating
the fee a guarantor may charge for guaranteeing a loan.
The guarantee fee now runs from a low of 10 percent of
the base interest rate for the guaranteed portion of a
loan of which 70 percent or less is guaranteed, to a high
of 40-50 percent of the base interest rate on a loan of
which 95 percent or more is guaranteed. The base in
terest rate, which is set by the guaranteeing agency,
henceforth is to be 6 percent or more — previously it
had been a flat 6 percent.
Regulation V grew out of a program begun in World
War II to facilitate production or other operations for
national defense. The Federal Reserve acts as fiscal

agent for the program. The Board has also invited
public comment — through April 30,1979 — on whether
the entire V-loan program should be restructured, or
even eliminated. (Contact 415-544-2230 for further in
formation.)
CONSUMER COMPLIANCE ENFORCEMENT
The Federal Reserve's consumer-compliance program,
initiated on an experimental basis in March 1977, has
been revised to include tougher civil-rights enforce
ment procedures. It has also been placed on a per
manent basis. The program covers the 11 consumerrelated laws which the Fed has authority to enforce. In
its revised compliance program, the Board of Gover
nors emphasized that it will "investigate thoroughly

each complaint of discrimination it receives regarding
a state member bank, as well as any indication of non
compliance revealed during an examination of a state
member bank." The Board also approved civil-rights
examination procedures utilizing extensive interview

ing, which "reflect the subjective approach necessary"
to identify alleged cases of discriminatory lending prac
tices. The Board rejected the idea of using "testers" —
individuals who pose as loan applicants to gain first
hand knowledge of disciminatory practices — to estab
lish civil-rights data.

banks can use in notifying the Fed of new bank service
arrangements.

REGULATION V SIMPLIFIED

The Board of Governors recently simplified its Regula
tion V, "Loan Guarantees for Defense Production," and
consolidated related administrative rules into the

regulation. The Board also revised both the interest-

rate and guarantee-fee structures applying to such
loans. It changed the maximum rate of interest that a fi
nancing institution may charge for a V-loan from a fixed
maximum rate (which has been 7 1/2 percent) to the rate

the institution currently charges its most creditworthy
business customers for loans of comparable maturity —

MONEY ORDER SALES
The Board of Governors has approved an amendment
to its Regulation Yto allow bank holding companies to
sell money orders, travelers checks and U.S. savings
bonds to the public at their nonbank offices. The Board
fixed a maximum face value of $1,000 on the amount of
money orders which could be sold at offices of holding
companies and their subsidiaries. The Board declined,
however, to grant blanket permission for such firms to
offer variable-denomination instruments and financial-

management courses. It will consider, on a case-bycase basis, specific proposals by bank holding com
panies to furnish consumer-oriented financial-manage
ment courses. In one such case, Citicorp of New York

loan bearing a higher interest rate is necessary for na

received Board approval to offer financial-management
courses at eight Utah offices of its subsidiary, Citicorp

tional-defense purposes.

Person-to-Person Financial Centers, iff

unless the governmental guarantor decides a particular

new programs and the improve
ment of operating schedules,

COLDWELL OUTLINES
TIGHT FED BUDGET

worked out in collaboration with
The

Federal

Reserve

Board

of

Governors has approved a budget
of $753 million for operating ex
penses of Federal Reserve Banks in
1979, according to Governor Philip
Coldwell in testimony before the
Senate Banking Committee last
month.

Coldwell

noted

that

this

budget provided for a 4.8-percent

increase in operating expenses,
compared with a 5.3-percent in
crease in 1978 and an average 7.5percent annual growth between
1974 and 1977.

Federal Reserve Banks anticipate
operating in 1979 with a staffing
level of 23,161 — a 2.1-percent
decline from the 1978 level. Over

the entire 1974-79 period, Reserve
Bank employment has been
reduced by 3,482, for an average
annual decline of 2.8 percent. Pro
ductivity gains, adjusted to reflect
the costs of substituting capital for
labor, have averaged 9.9 percent
annually over this period — a rate
several times greater than the pro
ductivity increase of the private
sector.

In Coldwell's words, "Such in
creases in productivity reflect the
System-wide commitment to opera
tional improvements and the inten
sified cost competition among the
Reserve Banks. While the dramatic

improvements of 1974-78 seem
likely to slow in coming years, there
are still some improvements which
we hope to realize in the period

the U.S. Treasury and the National
Automated Clearinghouse Associ
ation.

In the cash function, greater effi
ciencies are expected as more

highspeed currency equipment
becomes operational. This equip
ment counts currency, detects
counterfeit notes, sorts mixed
denominations, determines the fit

ness of notes, and destroys notes
deemed unfit for circulation, all at

the rate of about 50,000 notes per
hour. In Coldwell's words, "Utiliza
tion of these machines will provide
a better quality of currency to return
to circulation, provide a greater
degree of accuracy, and reduce the
level of manual involvement."

Coldwell observed varying patterns
of growth in spending for other
Reserve Bank functions. He pro
jected a 3.6-percent increase this
year in services to the U.S. Treasury
and government agencies, a 7.8percent increase for supervision
and regulation activities, and a 6.0percent increase for monetary-and
economic-policy activities.
In the area of services to the Treas

ury and government agencies, two
developmental projects are under
way relating to the marketing,
safekeeping and servicing of U.S.
government securities. One project
involves identifying future control
safeguards and other operational
factors which must be considered

P. COLDWELL

ing project is designed to achieve
more cost reductions through joint
planning, development and imple
mentation of transportable com
puter software.

The substantial increase budgeted
for the supervision-and-regulation
function reflects the added respon
sibilities imposed by Congress on
the Federal Reserve in this activity.
The workload had expanded sig
nificantly in earlier years because
of new responsibilities stemming
from consumer regulations, bank
holding-company supervision and
the processing of holding-company
applications. In 1979, the workload
will be intensified further because

of the passage of the International
Banking Act, the development and
expansion of data surveillance
systems, the added applications
processing required by the Com
munity Reinvestment Act, and the
implementation of various sections
of the

Financial

Institutions

Regulatory and Interest Rate Con
trol Act.

In this same area, the Federal
Reserve is now reviewing all its

ahead."

in

transferring government

regulations to determine the extent

Expenses for services to financial

securities among Reserve Banks by
automated means. These findings

to which they are meeting current

will be coordinated with those from

quires the redrafting of all regula
tions to incorporate changes in
policy, format and style.

institutions and the public, which
account for three-fourths of all ex

penses, are projected to rise only
4.8 percent in 1979, reflecting im
provements in both the paymentsmechanism function and the cash

function. During 1979, the produc
tion of payments services will be
affected by the promotion of the
automated-clearinghouse program,

which involves expanding auto
mated payments as an alternative to
paper checks. The Federal Reserve
expects to stimulate expanded ACH

volume through the planning of

other areas, such as funds trans
fers, in the final design specifica
tion for the Federal Reserve com

munications requirements in the
1980's.

The second project in this area in
volves the joint development and
installation of computer programs
by the San Francisco, Kansas City
and St. Louis Reserve Banks, to
automate the transferring of

securities and the accounting for
collateral. This pilot resource-shar-

policy goals. This review also re

In the area of monetary and eco
nomic policy, Coldwell described
several expanded programs for
1979. These encompass the evalua
tion of new market developments,
research on various aspects of
monetary control, and research on

regional and local economies,
along with reviews of many statisti
cal collection and reporting re

quirements, if

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FOREIGN BANKS
(Continued from page 1)

ing financial information on
foreign-bank holding companies,
and instituting quarterly reports on

bank holding company should be a
source of strength to the U.S. bank.

transactions between U.S. subsidi

The statement added, however, that

"It is the general policy of the
Board not to extend U.S. banking
supervisory standards extra-territorially to foreign-bank holding
companies."
The statement said that foreign
organizations that seek to acquire

ary banks and their foreign parents.
In addition, the Board proposes to
amend its Regulation Y, to ensure
that only those foreign companies
that are principally engaged in
banking abroad would qualify for
exemption from the nonbanking
prohibition of the Bank Holding

Company Act. «f

U.S. banks must obtain the Board's

prior approval. In each situation,
the Board will "seek to assure itself

of the foreign bank's ability to be a
source of financial strength and
support to the U.S. subsidiary
bank." Following the establishment
of a holding company, Board super
visory procedures will be aimed pri
marily at promoting the safety and
soundness of the subsidiary.
To this end, the Board announced
several implementing initiatives.
These include increasing examiner
surveillance of inter-company tran
sactions

and

common

customer

credits, requiring additional finan
cial information at the time of the

application, and soliciting the
views of foreign regulatory
authorities with regard to the
foreign banks subject to their juris
diction.

Other steps would include improv

CERTIFICATE RATES
(Continued from page 1)

FED STUDY MEASURES
CONSUMER AWARENESS
Consumer

awareness

of

interest

rates has increased significantly
since the enactment of the Truth in

Lending Act of 1968, according to
the Consumer Credit Survey re
cently released by the Federal
Reserve Board of Governors. The

survey was developed primarily by
Professor Thomas Durkin of Penn

sylvania State University, and the
field work was done by the Univer
sity of Michigan.
Among the survey respondents, 76
percent were familiar with the an
nual percentage rate noted in in

which they are tied — and deposit
ceiling rates. In the first month that

stalment contracts. Consumers

MMC's were offered, the spread be

also were well aware of the size of

tween the T-bill rate and the bank

payment required. On the other

passbook-savings rate was less
than 2 percentage points, but by
March 1979, it had widened to
about 4 1/2 percentage points.

hand, most interviewees said that
truth-in-lending statements were

not read carefully.

upon reinvestment after six months
of both principal and interest, if the
ads comply fully with previously
issued guidelines. Advertisements
also must state that Federal regula
tions prohibit compounding of in
terest. Further information may be
obtained from the Law Department,

Survey data showed a sharp in
crease in consumer-credit usage
over the 1970-77 period. The me
dian instalment debt owed by bor
rowers, especially in the middleand upper-income brackets,
roughly doubled over that period —
rising almost twice as fast as con
sumer prices. The percentage of
survey respondents using bank
credit cards more than doubled, to
35 percent of all households, while

Federal Reserve Bank of San Fran

non-bank credit-card

cisco, (415) 544-2254 or 544-2256.

perienced much smaller growth, if

Under the new rules, institutions

may advertise an annual effective
rate of interest for MMC's based

use ex