Full text of Federal Reserve Notes : May 1976

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Federal Reserve Notes
FEDERAL RESERVE BANK OF SAN FRANCISCO
•
MAY 1976
Serving Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah & Washington
-••

%

FED AGREES TO GAO STUDY OF SUPERVISION

NUCLEAR ECONOMICS

The Federal Reserve Board of Gover

nors has agreed to a one-time study
by the General Accounting Office of
the Fed's bank supervisory responsi
bilities. In commenting on the study,

The Federal Reserve Bank of San

Francisco published this month a
comprehensive study of the econom
ic aspects of energy use and energy
technology, with the emphasis on
nuclear power in California.

Chairman Arthur Burns said, "We do

not consider this study to be an 'audit'
in any sense of that term, nor do we
understand it to be an inquiry that will
be repeated on a regular periodic
basis."

Burns added, "I have stated on sever
al

occasions that the Board would

welcome a meaningful inquiry by the
Congress into our performance of our
bank supervisory responsibilities, and
I believe that the guidelines we have

agreed to reasonably delineate the
scope of an inquiry that will serve this
purpose."

The study came about as a result of a
proposal made last January by the
Chairman of the House Banking
Committee. The other Federal regu

latory agencies, the Comptroller of
the Currency and the Federal Deposit
Insurance Corporation, are also in
volved in the project.

The study will include the procedures
used by Federal Reserve bank exam
iners in their periodic on-site exami
nations of state member banks, the

manner in which the findings and
conclusions of bank examiners are

reported, and the manner in which
financial data are collected from state

member banks for bank supervisory

purposes. Itwill also involve the meth
ods employed to identify and correct
problems at banks, the recruiting and
training of bank examiners, and the
methods the System uses to review
its own bank supervisory perform
ance.

FED HIGHLIGHTS

A. F. Burns

"California Energy: The Economic
Factors" consists of papers by econ
omists representing a broad spec
trum of views on this subject. The
study includes contributions from
economists representing the Bank of
America, California State University
at Long Beach. Carnegie-Mellon Uni
versity, Environmental Defense Fund,
Sierra Club, Sherman H. Clark Asso

The GAO study will cover a number of
areas of bank examinations, including
commercial, foreign operations, elec
tronic data processing and trusts. But
the study will not evaluate the overall
performance of the System's regula
tory functions, such as its policies and
procedures for implementing the
Bank Holding Act, the Bank Merger
Act, consumer protection statutes,
the securities laws, or laws or regula
tions relating to bank reserves, pay
ments of interest on deposits, or se
curities credit. Monetary policy
functions were specifically excluded
from the study. The agreement also
excluded System operations relating
to the payments mechanism, such as
check clearing, electronic funds
transfer, and currency and securities
handling.

ciates, Stanford University, and the
U.S. Energy Research and Develop

"The scope of the study," the Board

amount of reliance which should be

said, "relates to the examination of

placed on alternative sources of en
ergy, especially nuclear power and

state member banks, the detection in

those banks of existing or potential
unsafe or unsound conditions, or vio-

(continued on page 2)

ment Administration.

The Fed itself takes no position on the
question of an appropriate energy
policy for the state or nation. But with
this publication, it provides a forum for
a varied group of economists with
expertise in this area.

The study was produced against a
background of California's June vote
on a "Nuclear Power Plant Initiative,"

which would limit future nuclear pow

er plant construction and levels of
operations in the state. Because Cali
fornia tends to be a trend-setter in

many fields, the issue has important
nationwide implications.
The central theme of the study is the

coal. Most of the authors agree that
future growth in energy requirements
(continued on page 4)

BALLES SEES IMPROVED
BALANCE SHEETS
Bank examiners should be seeing
better balance sheets in 1976 as the

economy gains strength. President
John J. Balles told the Regional Con
ference of National Bank Examiners

in San Diego.
"If history is any guide, loan quality

generally should improve during this
recovery, just as it deteriorated during
the preceding recession," the Fed
president said. "The balance sheets

you examine this year will reflect the
actions of public and private policy
makers in bringing about the present
business recovery, but also their ear
lier actions in generating a still-

dangerous inflationary environment.
In addition, those records will reflect
bankers' cautious attitudes in rebuild

ing their balance sheets over the past
year."

Balles also noted the strength of the
current business recovery, which he
said should have a salutary effect on
commercial banking. In the recovery
period since last spring, credit has

MORE COMMENT TIME
ON POOLED FUNDS
The comment time on the Federal

costly, while the problems of banks
and other market participants have
eased considerably.

Reserve Board of Governors' pooledfunds proposal has been extended to
July 9. Earlier this year, the Board
invited public comments on a pro
posal to amend Regulation Q with
respect to interest-rate ceilings on
pooled funds.

"The improved business environment
thus should permit banks to work with
borrowers to prevent most loan de

The proposal would prohibit member
banks from paying interest on pooled

faults." he said. "With loan-loss re

funds of $100,000 or more at a rate

serves now built up to record levels,
banks generally are in much better
shape than they were a year ago to
handle such contingencies. Banks
may encounter difficulties from the
overhang of problem loans and from

early 1976 decline in large banks'
earnings, yet many of the worst prob
lem cases appear to be more
manageable in 1976 than they were in

above established Reg Q ceilings. No
interest rate ceiling is imposed on
deposits of $100,000 or more. The
Board expressed its concern that the
practice of pooling funds to circum
vent the present regulation could lead
to disruptive shifts of funds at financial
institutions. The Board proposal
spelled out new guidelines with re
spect to pooled funds, and similar
amendments were proposed by the
Federal Deposit Insurance Corpora

1974 and 1975." Ijf

tion and the Federal Home Loan Bank

become

more

available

and

less

the continued weakness of businessloan demand, as we can see from the

Balles noted two achievements of the

Board.

banking system that he said had been
underplayed in current discussions of
the banking scene.

GAO STUDY

(continued from page 1)

lations of law or regulations, and the
WELCOME TO DISTRICT

process by which the Federal Re

played an essential role in stabilizing
the economy at a critical time, at

On May 10, the Twelfth Federal Re

serve seeks to remedy such condi
tions or violations and to protect the
solvency and soundness of state

some cost to itself. At mid-1 974, bank

funds in many cases were the only

ber bank—Valley Bank and Trust
Company. Salt Lake City. Utah, with

funds available to some industries

total assets of almost $180 million and

(such as the utilities) and to small-and

total deposits of about $160 million.

"First, in 1974. the banking system
serve District welcomed a new mem

medium-sized firms, as money and

capital markets tightened drastically
in the face of double-digit inflation."
The resultant heavy loan demand
strained the liquidity of many banks,
but it helped to support the economy

Valley Bank and Trust Company,
formed nearly 30 years ago in an area
south of Salt Lake City, has now

grown to a total of 17 offices.

at the time it was most needed.
The bank is under the direction of

"The big achievement of 1975 was
the banking system's ability to regain
its own strength, even while contribut

ing to the growing health of the nation

Fred H. Stringham, President, who
has held that position for the past
three years. Robert R. Fitts is Chair
man of the Board.

al economy," he said. "Large com
mercial

banks

increased

their

The bank's other senior officers in

member banks."

Chairman

Burns stressed that the

Board and the GAO have agreed to
maintain the absolute confidentiality

and integrity of the examination proc
ess. "I should point out that the Board
has discussed the agreement at great
length," Burns said. "All of the Board
members were profoundly concerned
about violating our long tradition of
maintaining rigid confidentiality of
bank examination reports."
He said the agreement offers assur
ance that confidentiality will be main

tained during the entire examination
process by the GAO. In addition, the
House Banking Committee will not
require GAO to breach its obligations
of confidentiality under this agree

liquid-asset holdings 33 percent in
1975. while sharply reducing their

clude Senior Vice President John G.
Wells. Senior Vice President E. H.

reliance on volatile sources of funds.

Throndsen, Senior Vice President and

ment, or otherwise make available to

Meanwhile, banks improved their
profits in the face of increased loanloss provisions and shrinking loan
portfolios."

Secretary Robert D. Myrick, Senior

the committee any information con
cerning the identities of banks or

Vice President and Branch Adminis

trator Gaylen C. Larsen, and Senior

individuals covered

Vice President Gayle Taylor, if

study. ij|

by the GAO

OVERDRAFT SERVICE

DUE-COURSE RULE

ISSUE CLARIFIED

POSES PROBLEMS

The Federal Reserve Board of Gover

A Federal Trade Commission con

nors recently clarified its proposed
"overdraft" amendment to Regulation
Q, which governs interest on depos
its. The amendment would permit

sumer-protection regulation affect
ing the "holder-in-due-course" doc

Federal Reserve member banks to

transfer funds automatically from
savings accounts to demand depos
its whenever they couldn't make pay
ment on customers' checks because

of insufficient funds. The proposed
service would permit customers to
instruct their banks to add funds auto

matically
counts

to

when

demand-deposit
balances

fell

ac

below

specified levels.

The Board originally proposed a May
10 cutoff date for public comment on
the amendment. In reviewing the
to

the consumer credit industry and the
overall economy, according to Feder
al Reserve Chairman Arthur Burns.

"The Board is sympathetic to efforts
to promote consumer credit terms

date,

however,

the

Board found that some misunder

standing existed over the nature of
the overdraft service.

creditors," Burns wrote the FTC this

month. But he added, "Based upon
numerous comments received from

lenders and our staff analysis of this

credit business may be seriously dis
rupted if the rule goes into effect as
scheduled. Such disruption, if it oc
curs,

could

have

harmful

conse

quences for the economy."
The

holder-in-due-course

doctrine

refers to the centuries-old legal tradi
tion that requires consumers to honor
their financial obligations to a third
party regardless of any dispute with a
merchant over faulty merchandise.
The FTC ruling would upset this
precedent by making an indirect lend
er liable for claims pressed by a con-

Public com

June 14.

wishes to maintain a specified mini

obtain

the

transfer service.

Banks

would not be authorized to transfer a

depositor's funds from a savings ac
count unless the depositor voluntarily
had entered into an agreement previ
ously with the bank specifically au
thorizing this transfer practice."
The Board's proposal is intended to
provide an alternative to bank cus

tomers to avoid having their checks
returned

because

of

insufficient

funds. A depositor could simply in
struct his bank to transfer funds from

savings to checking when an over
draft occurs. The service could also

be used to replenish the customer's
checking account if the depositor

and appliances, but only if the lender
has a contract or other relationship
with the seller. This is known as an

indirect loan, where the bank or fi

nance company becomes the thirdparty lender. Direct loans between a
consumer and his bank or finance

company are not covered by the rule.
In Burns' view, "The most serious

problems concern the definition of a
'purchase money loan.' The Board
believes that the definition is overly
broad and will create uncertainty
about the applicability of the rule to
several important categories of con
sumer credit. The rule as drafted will

greatly

complicate

the

signature

loans that banks and other financial

ment now will be accepted through

"The overdraft service is completely
voluntary," the Board stated. "Bank
customers will not be required to

chases on such items as automobiles

that are fair to both borrowers and

rule, we believe that the consumer

According to the Fed's clarification,
the proposed overdraft service would
be a voluntary program available only
at the request of customers. The Fed
issued the clarification in response to
public concern that the service would
be mandatory.

comments

trine could have serious effects for

sumer who has suffered damages
because the purchased item failed or
was improperly serviced. The rule
affects banks and finance companies
that lend money for consumer pur

mum balance in his account.

Depositors would be able to transfer
funds in multiples of $100 or more.
The depositor would be required to
forfeit a minimum of at least 30 days

institutions commonly make to their
most creditworthy applicants. The
rule could also unduly complicate
overdraft checking account systems
which millions of customersare using
today," he added.
"The Board is concerned also about

the absence of any time limit on the
duration of the creditor's liability. This
may make creditors hesitate to offer
long-term loans to finance home im
provement projects or mobile home
purchases. In addition, a creditor's
liability for claims for personal injury
and property damage arising from the
goods or services purchased should
be eliminated, as it is in credit card

purchases
under the
Lending regulations."

Truth-in-

interest on the funds transferred. The

forfeiture provisions would aid in pre
serving the effectiveness of the stat
utory prohibition against the payment
of interest on demand deposits. The
proposed minimum forfeiture amount
would be 42 cents per $100 trans
ferred if the bank pays interest at the
rate of five percent on its savings
deposits. Member banks, however,
would be permitted to impose any
service charge for such transfer serv
ices as long as it equals or exceeds
the minimum and has been agreed
upon by the bank and its depositors.

Chairman Burns added that the Board

was anxious to promote consumer
credit terms that are fair and equitable
to both borrowers and creditors. He

said this goal would be served more
effectively by issuing simultaneously
the rules applying to sellers and a rule
applying to creditors that was pro

posed last year by the FTC. The FTC
at this point has only issued the rule
applying to sellers. In this way the
necessary clarifications and techni
cal refinements can be considered for

both rules, "iff

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EQUAL CREDIT AMENDMENTS ADOPTED

NUCLEAR ECONOMICS

(continued from page 1)

will be lower than the rates experi
enced in earlier decades, but that

some growth still will occur. A choice
among energy alternatives will there
fore have to be made. The study's
major themes include the direct costs
of providing energy to consumers
from alternative sources, the social

Several implementing amendments
to
Regulation
B—Equal Credit
Opportunity—have been adopted by
the Federal Reserve Board of Gover

letter of an action taken, a notation in

nors to carry out Congressional legis
lation prohibiting discrimination in the
granting of credit on grounds of sex or

the customer's file that such a letter

marital status.

and environmental costs associated

with these alternatives, the reliability
of various power sources, and the
potential for energy conservation as
an alternative to building more energy
capacity.
The full collection of papers should be
of interest to individuals involved in

the areas of energy, environment,
public policy and economics. In addi
tion, the Fed has published a pamph
let which provides a concise overview
of the entire study, with each of the
eight papers distilled in 300-word
summaries. This pamphlet will proba
bly be most useful for students and
the general public.

requirement that lenders retain cop
ies of customer's applications. If a
lender notifies a customer by form

One

amendment

relates to credit

extended under the student-loan pro

gram. It permits lenders to ask student
borrowers questions about their mari
tal status and the income of the appli
cant's spouse. The amendment also
allows creditors to obtain the signa
ture of the applicant's spouse to de
termine if the student qualifies for
assistance on the basis of need.

Another amendment requires cred
itors to retain copies of the notices of
action taken on applications for cred
it. This is in addition to the existing

was sent will satisfy the new require
ment.

A third amendment provides that in
business transactions of $100,000 or
more, a creditor need not explain the
reasons for denial of credit. In busi
ness

transactions

of

less

than

$100,000, creditors must explain the
reasons for denial if requested to do
so in writing.
The amendments just announced
relate to the original form of the Equal

Credit Opportunity legislation. The
Federal Reserve is now developing
further amendments to implement
changes in the law made by Con

gress this year. Ijflf

MORE TWOS ON THE WAY
Initial demand for the two-dollar bill

The Treasury plans to make a second
general release of two-dollar bills on
July 4 to commemorate the nation's

Single copies of these publications
are available at no charge from the

turned out to be much greater than
expected, as the public lined up at

Public Information Section, Federal

thousands of commercial banks on

bicentennial.

Reserve Bank of San Francisco, PO

April 13 to get its first glimpse of the
new bill. Before long, the vaults of
many commercial banks were deplet
ed, and cash officers had to reorder
from Reserve Banks to replenish
dwindling supplies.

Treasury plans to release $850 mil

Box

7702,

San

Francisco

94120.

Phone (415) 544-2184 or 544-2350.

Multiple copies of both publications
are available to academic and non-

pr6fi* institutions, "ijfp

For all

of

1976, the

lion in twos. It will then maintain a

production volume of $800 million
annually to assure widespread distri
bution of the bill.
w