Full text of Federal Reserve Notes : May 1981

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Federal Reserve Notes
FEDERAL RESERVE BANK OF SAN FRANCISCO

•

May 1981

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

SAN FRANCISCO FED
CREATES NEW MCA ARM
The Federal Reserve Bank of San

Francisco has made some organi
zational changes aimed at improv
ing its relationships with depository
institutions under the Monetary
Control Act.

Effective June 1, a new Financial

Services Department will begin de
veloping and pricing the various
operating services offered by the

S.F. FED HOLDS REG Z SEMINARS
The Federal Reserve held two sem

inars in San Francisco in early May,
to provide creditors and regulators
with information on a major revision
of the Fed's Regulation Z, "Truth in
Lending".
Conducting the educational semi
nars were two staff members of the
Federal Reserve's Board of Gov

ernors—Lori Luck, a review exam

Reserve Bank to financial institu

iner, and Jesse Filkins, an attorney.
Representing the Federal Reserve

tions. Heading the new department

Bank of San Francisco as seminar

will be David J. Christerson, who

host was David Vandre, the Bank's

presently is director of the Monetary
Control Project Team for the San

manager of consumer affairs.

Francisco Federal Reserve District.

The present staff of the Bank's Busi
ness and Community Relations De
partment will become a part of the
Financial Services unit.

The new department will be respon
sible for price administration, ser
vice relations, and the planning and
development of additional Fed
services.

As part of the departmental restruc
turing, Maureen Shields was ap
pointed Financial Services officer.
Serving previously as manager of
price administration, she will be
responsible for the District's overall
product planning and price adminis
tration functions.

"This new organizational structure
will carry the San Francisco Fed to
step two in the MCA implementation
process," said Christerson. "It pro
vides us with an organization that will
be dedicated to working with our
priced services and our present and
prospective users of those services."

Nearly 400 persons attended the
seminar for creditor institutions,
while about 50 examiners and other

supervisory-agency staff attended
the separate seminar for regulators.
Agencies represented included the
Federal Home Loan Bank of San

Francisco, the Federal Deposit In
surance Corporation, the Office of
Comptroller of the Currency, the

project for approximately four
years. Though the new regulation
became effective April 1, creditors
have the option of continuing to
comply with the existing regulation
until March 31, 1982. This will allow
time for creditors to become familiar

with the new regulation and the new
model disclosure forms, and to

reprogram computers and retrain
personnel.
Meanwhile, the Federal Reserve

Board's staff is seeking comments
through July 10 on the revised Reg
ulation Z. This commentary will re
place the more than 1,500 individual
interpretations that the Board's staff
had written under the former regula
tion. Copies of the proposed com
mentary are available from the Cor
porate Services Department of the
Federal Reserve Bank of San Fran

cisco (415-544-2262).

National Credit Union Association,
and the San Francisco Fed.
The Federal Reserve has been

working on the Reg Z simplification
It is anticipated, adds Christerson,
that the Financial Services Depart
ment eventually will supplant the
Bank's MCA Project Team, which
was organized last year to launch
implementation of the Monetary
Control Act in the San Francisco Re
serve District.

The new department will coordinate

The Board's staff reviewed thou

sands of pages of comments from
creditors

and

other

interested

parties. The simplified rules for dis
closure of borrowing costs are de
signed to aid both consumers and
creditors. The revised regulation
approaches the disclosure of essen
tial credit information in a straight
forward manner, and reduces the

the activities of MCA field-service

number of technical disclosure bur

representatives at the Bank's of
fices in Los Angeles, Portland, Se

dens required of creditors for com
pliance. It should benefit consumers

attle and SaltLake City, fjjfii

(Continued on page 3)

Board,

MCA DIRECTOR EXAMINES SERVICES
The Federal Reserve System has
received a Congressional mandate
to implement the Depository Institu
tions Deregulation and Monetary

ducted with depository institutions
currently using our wire-transfer,

Control Act of 1980. To ascertain

imum of two compressed billing
cycles will be tested over a twoweek period.

how this mandate is being carried
out in the San Francisco District, we
conducted a two-part interview with
David J. Christerson, director of the

District's MCA Project Team. The
first part of the interview ran last
month, and the second part follows:
Wire transfers were the first Fed

services to be priced and made

available to all depository institu
tions. How are things working out in
this area?

net-settlement,

automated-clear

inghouse or check services. A min

and

the

National

Credit

Union Association. The Comptroller

of the Currency is a nonvoting mem
ber. The Committee has the author

ity to prescribe rules governing the
payment of interest and the estab
lishment of classes of deposits or
accounts, including limitations on
the maximum rates of interest that

How about access to Fed services

may be paid. The DIDC is required

by smaller institutions which have a

to 1) provide for the orderly phase-

very small or no clearing balance on

out and ultimate elimination of in

the Fed books?

terest-rate ceilings as rapidly as
economic conditions warrant, 2)
work toward providing depositors

Very few nonmember institutions
will have to post reserves at theSan
Francisco Fed to meet reserve re

quirements during the first year of
the phase-in. Therefore, almost all
small nonmember institutions wish

with a market rate of return with due

regard for the safety and soundness
of depository institutions, and 3) in
crease all interest-rate ceilings to
market rates as soon as feasible,

Open access to all depository insti
tutions for our priced wire-transfer
services commenced January 29,

ing direct access to Fed services will
need to open a clearing account, or
arrange for entries to be posted to

1981. Prior to that, the Fed devel

the account of another institution to

oped and fully tested the billing sys
tem and operational procedures

pay for Fed services. Small member

What major actions has the DIDC

banks, which meet their reserve re

taken?

with some mock runs, to ensure that

we had a workable system in place.
The wire-transfer service is now

fully operational, and we do not
foresee any major operating prob
lems. I might add that the volume of
transfers increased about 15 per
cent between February 1980 and
February 1981. While we have his
torically projected a 10-to-15percent annual growth rate in wire
transfer volume, our February 1981
increase in volume is an indication

of service acceptance by users in
our District.

How are things progressing for the
offering of the Fed's check services
on August 1?
Right now, we are modifying our
check-collection and clearing sys
tems to include billing data. Fees for
our check services will be based on

the number of items and types of
checks processed—i.e., city, re
gional (RCPC) or non-machineable.
Each depository institution will be
responsible for reporting volume on
incoming cash letters. We are also
developing our Phase II billing sys
tem around the Reserve System's
billing standards. When we convert
to the system on August 1, we will
begin to bill for all services on a
monthly basis. On July 2, 1981 a
district-wide billing test will be con

quirements with vault cash, will be
affected in the same way.
How is the Reserve Bank's new

MCA Advisory Group working out?

This panel represents the entire
spectrum of depository institutions,
from member commercial banks to

nonmember banks, mutual savings
banks, savings-and-loan associa
tions and credit unions. We have re

ceived a lot of valuable input from
the 12 persons serving on this pan
el. They have given us a chance to
talk with representatives of the var
ious financial industries affected by
the MCA, regarding Fed services,
monetary policy and regulatory is
sues. They have given us a good
understanding of how new develop
ments are affecting their respective
industries. Topics discussed during
our three meetings thus far have
ranged from discount-window ac
cess

to

money-market

mutual

but not increase ceilings above mar
ket rates during the six-month per
iod beginning March 31,1980.

—Ruled that ceiling rates on mon
ey-market certificates will continue
to be established by the results of
the weekly Treasury auction of sixmonth bills;

—Revised terms on ceiling rates for
small-saver certificates by estab
lishing minimum ceiling rates of
9.25 percent for banks and 9.50 per
cent for thrifts, but leaving unchang
ed the existing "cap" of 12 percent
for thrifts and 11% percent for
banks;

—Ruled that the penalty for with
drawal of funds from a time deposit
before its maturity will be an amount
equal to three months simple nom
inal interest when the original ma
turity is one year or less, and six
months simple nominal interest
when the original maturity is long
er—which means that (unlike the
earlier rule) the penalty could re
quire a reduction in the principal

funds.

sum of that account;

What is the Depository Institutions
Deregulation Committee (DIDC)?

—Ruled that the minimum required
penalty for early withdrawal of funds
from an IRA or a Keogh Plan ac
count within seven days of estab
lishment of the account may not ex

Established by the MCA, the DIDC
consists of five voting members—
the Secretary of the Treasury and
the Chairmen of the Federal Re

ceed interest earned to the time of

serve Board of Governors, the Fed

withdrawal;

eral Deposit Insurance Corporation,

—Ordered an 18-month phaseout
period for finders' fees paid by de-

the

Federal

Home

Loan

Bank

REG Z SEMINARS
(Continued from page 1)

by making disclosure forms shorter
and easier to understand.

In the past decade, surveys indi
cated that the Truth in Lending law
heightened consumers' awareness
and understanding of the cost and
terms of consumer-credit transac

tions. However, surveys also indi
cated that the regulation imposed

highly complex and technical re
quirements on creditors, produced
disclosures

that

sometimes

ob

scured important information for
consumers, and generated costly
and burdensome litigation over
technical interpretations of the reg
ulation. The simplified regulation is

aimed ateliminating these pitfalls.^
pository institutions to attract smalldenomination (under $100,000)
time-and-savings deposits.
—Established a 51/4-percent ceiling
rate of interest on NOW accounts, to

apply to all types of depository in
stitutions authorized to issue such

accounts;

—Set a ceiling rate of interest of 5Va
percent on the new category of
"14-90 time accounts" (accounts
under $100,000 with original matur
banks;

Steel work on the new 12-story headquarters building of the Federal Reserve Bank
of San Francisco was completed in mid-May. The $84-miilion structure is expected
to be ready for occupancy in the final quarter of 1982.

What major proposals is the DIDC
now considering?

SMALL INSTITUTIONS GET DEFERRAL

ities of 14-90 days) for Fed member

—To remove the 12-percent and
11%-percent caps on the maximum
interest rates that thrifts and banks

may offer, respectively, on smallsaver certificates, although continu
ing to tie the rate ceiling to the yield
on 21/2-year Treasury securities;
—To deregulate rate ceilings on a
set schedule, applied to deposits

with maturities of five years or more
on July 1, 1981; deposits with ma
turities of four to five years on July 1,
1982; deposits with maturities of
two to four years on July 1, 1983;
deposits with maturities of one to
two years on July 1, 1984; deposits
with maturities of six months to one

year on July 1, 1985; and eliminat
ing all remaining ceilings (as re

quired by law) on July 1,1986. "f|i

The Federal Reserve Board of Gov

ernors has deferred, from May to
November, the imposition of re
serve requirements for nonmember
depository institutions with less
than $2 million in total deposits. In
addition, the Board indicated that it

may seek authorization from Con
gress to exempt these smaller de
pository institutions on a permanent
basis.

Under the Monetary Control Act of
1980, all depository institutions of
fering transaction (check-type) ac
counts or nonpersonal time depos
its became subject to reserve re
quirements. Originally, in order to
lessen

the

reserve-maintenance

and reporting burden of small insti
tutions, the Board had deferred until

May 1981 the imposition of reserve
requirements for institutions with
less than $2 million in deposits. This
deferral now has been extended an
other six months.

However, previously deferred insti
tutions whose deposits grew to at

least $15 million by the end of 1980
must begin to report deposits for the
seven-day reserve computation pe
riod beginning May 21, and maintain
reserves during the seven-day pe
riod starting June 4.
Affected by the deferral are approx
imately 18,000 depository institu
tions nationwide, most of them cred
it unions. These institutions are es

timated to hold one-half of one per

cent of all deposits, ijfji

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FEDERAL RESERVE AMENDS REGS Q AND D
The Federal Reserve Board of Gov

ernors has amended its Regulations
D and Q, which set reserve require
ments and interest-rate ceilings, to
include deposits of less than

$100,000 by U.S. residents held in
foreign branches of U.S. banks.
The Board ruled that, effective May

14, funds held abroad by U.S. resi
dents will be exempt from U.S. rate
ceilings only if they are in accounts
of $100,000 or more. The ruling, in
effect, means that San Franciscobased

Bank of

California would

have to abandon its plan to pay U.S.
depositors fluctuating, double-digit
interest rates on its new Money Mar
ket Plus account. The plan required
a minimum opening deposit of
$10,000 held by Bank of California
in a special account at its London
branch.

The Board said the Money Market
Plus account must comply with Reg
ulation Q, which sets a ceiling of
5.25 percent on 14-day time depos
its or NOW accounts in domestic

bank branches, and Regulation D,
which imposes reserve require
ments on domestic bank deposits.

"The Board believes that the Money
Market Plus account serves no pur
poses other than as a device to
evade Regulations D and Q," said
the Board in a letter to BankCal offi
ciate. "The account does not facili

tate the conduct of the foreign
branch's or the customer's foreign
business, and the depositor has no

interest in maintaining funds in a for
eign branch other than as a device

LIMITS ON
INSURANCE SALES

Employees, officers, directors and

to obtain a rate of interest in excess

others associated with a state mem

of Regulation Q ceilings."

ber bank generally should not profit
personally from the sale of life in

Prior to the Board's action, bank

funds held in foreign branches and
payable only outside of the U.S.
were not subject to either of the
regulations.
In considering the matter, the Board

noted that the purpose of foreign
branches of U.S. banks is to con

duct an international business, "and
not to function as a substitute for

domestic banking facilities."
The Board added that such plans as
the Money Market Plus account pre
sent "potential adverse implications
for the flow of funds among deposi
tory institutions, and provide an un

fair competitive advantage to U.S.
banks with foreign offices relative to
depository institutions that do not
maintain foreign branches."
The Board noted that Congress in
tended that rate ceilings on deposits
of less than $100,000 should con
tinue until April 1, 1986, "unless
eliminated sooner by the Depository
Institutions Deregulation Commit
tee (DIDC)." But it added that the
DIDC may consider the possibility of
creating new deposit instruments,
to enhance the ability of U.S. depos
itory institutions to compete with
nondepository institutions in the
fast-growing area of money-market

funds. ^

surance in

connection with bank

loans, according to a new Federal
Reserve policy statement.

The policy permits crediting income
from insurance sales to an affiliate

of the bank that is operating under
the Bank Holding Company Act,
providing the state member bank re
ceives "reasonable compensation"
for its role in selling the insurance.
Under the new policy, state member
banks may allow their employees
and officers to participate in insur
ance income, under a bonus or in

centive plan not to exceed 5 percent
of the recipient's annual salary. The
policy statement calls for compli
ance within two years, except in
cases of clearly demonstrated
hardship.

The Federal Reserve adopted this
policy at the recommendation of the
Federal Financial Institutions Exam

ination Council, coordinating body

for Federal regulatory agencies. 1j|ji