Full text of Federal Reserve Notes : October 1977

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Federal Reserve Notes
FEDERAL RESERVE BANK OF SAN FRANCISCO

•

OCTOBER 1977

Serving Alaska, Arizona, California, Hawaii, ldaKov^evaite>,.OregonicUtah & Washington
wrr
WESTERN BANKS LAG
U.S. EARNINGS PACE

COMPUTER LINKS

Western banks participating in the annu
al functional-cost analysis program

A new service now available to member "

achieved somewhat smaller net earn

computers directly to the nationwide

ings than their national counterparts in
1976, reflecting a relatively higher level
of expenses in this District. However,
their performance roughly matched the
national average in terms of net return
on loans and investments. The survey
results might not be completely repre
sentative—only 24 of the 144 member

BANKS TO FED WIRE

3

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r
SL.P i\ i

banks will enable them to connect their
network known as Fed Wire. "The new

computer-interface facility is faster,
more accurate, and more secure than

the linkup that was previously used,"
said Senior Vice President Richard T.

Griffith, who is in charge of the Comput
er Services Group at the Federal Re
serve Bank of San Francisco.

banks in the San Francisco Reserve Dis
were similar in each of the three size

The Fed Wire is operated by the Federal
Reserve System to transfer an average

categories in the survey (see table).

of $120 billion in funds each business

trict participated —but comparisons

day. With the new system, a commercial
bank can transmit on-line transactions

Participating banks are grouped each
year in one of three deposit-size cate

to its own computer, which in turn relays

gories—up to $50 million, $50-200 mil

them to the Federal Reserve Bank. A

lion, and over $200 million. Participants
furnish Federal Reserve analysts with
deposit-structure and other characteris
tics, and this permits grouping of insti

data-entry operator enters information
on a terminal keyboard and it is dis
played on a CRT (cathode ray tube)
screen. After verification by the bank's
computer, data are transmitted to the
San Francisco Fed's computer for relay
through the nationwide Fed Wire. The

tutions

of

like size to facilitate

comparisons.

The results of each survey, published in
an annual Average Banks report, in
clude cost ratios which help participants
to compare their own results with those

Fed Wire allows commercial banks to

COMPUTER TO COMPUTER TIE-IN—Com

puters talking to computers? That's what's
happening here. As Aric Clark, project lead
er of Wells Fargo Bank's Financial Institution
System looks on, Data Control Clerk Grace
Turner activates the new computer-to-com

puter interface system. Data are loaded into
the Wells Fargo computer through the termi
nal above, and are then transferred to the
San Francisco Fed computer. The system
enables Wells Fargo to transfer funds

throughout the nation via the Fed Wire much
more quickly and efficiently.

ing the new service. They include
Crocker National Bank, Bank of Amer

ica, Security Pacific National Bank,
Union Bank, Valley National Bank of Ari

transmit messages across the country in

zona, First National Bank of Arizona,

seconds.

and Seattle First National Bank.

of other District member banks as well

A direct link to the Fed Wire enables

as member banks nationwide. These ra

commercial banks to implement in
creasingly sophisticated cash-manage
ment systems for themselves and their

"Since the implementation of this new
interface, we have experienced no ap
plication program problems," said Aric
Clark, Project Leader of Wells Fargo
Bank's Financial Institution System.

tios provide an important management
tool for banks to use in making policy
decisions and in implementing cost

In 1976, Western banks' net earnings as

a percentage of available funds—that
is, as a percentage of total liabilities mi
nus bank premises and fixed and other
assets—reached 1.75 percent for small
banks, 1.62 percent for medium-sized
banks, and 1.32 percent for large
banks.

customers. In most cases, banks estab
lish similar links to other funds-transfer

controls.

In each case, the ratio was
(continued on page 2)

services (including the commercially op
erated Bankwire) and their own internal
systems, permitting further efficiencies
in cash management.

"We have been working on this system
for quite a long time," said Ben
Conophy, Assistant Vice President at

The first link in the system was made

that we put into getting it started."

Crocker National. "So far we feel the

results are well worth the time and effort

with Wells Fargo Bank, and a number of
other banks are now developing com

puter links to the Fed Wire or are explor-

From the Federal Reserve's point of
view, the new system allows greater se(continued on page 3)

WESTERN BANKS LAG U.S. EARNINGS PACE

FED NOTES
CURRENCY SHIFTS

(continued from page 1)
somewhat smaller for Western banks

than for their national counterparts, the
difference ranging between 17 basis
points for small banks to 31 basis points
for medium-sized banks. (One hundred
basis points equal one percentage
point.)
The earnings difference could be ex
plained in terms of the much larger ex
pense ratios in the Western banking
community, which averaged about a full
percentage point higher than elsewhere.
Total expenses amounted to 7.44
percent of available funds at small
Western banks, and the comparable ra
tios for medium-sized and large banks
were 7.34 percent and 6.91 percent,
respectively.
The higher expense ratios in the West

are somewhat puzzling, especially since
cost-of-money ratios were roughly com
parable with the national figures. The
higher expense ratios may be explained,
however, by certain diseconomies of
scale encountered by the large branchbanking systems found throughout the
West. The number of branches per bank
were at least two to three times the na

averages in each size category in 1976.
The regional ratios were 7.43 percent
for small banks, 7.66 percent for medi
um-sized banks, and 7.06 percent for
large banks. These yields were calculat
ed as the return on assets minus depart
mental expenses. FCA uses a fullabsorption costing method, which
means that all expenses (including over
head) are allocated by function.
Western banks uniformly obtained much
higher yields on real-estate loans, but
fell behind their national counterparts in
other loan categories, mainly in
instalment lending. Yields on business
loans and on securities portfolios were
roughly similar, regionally and nationally.
Member banks participating in the func
tional-cost program provide detailed
cost data each year to their District Re
serve Banks. After the data are checked

in circulation. But analysts speculate
that much of it—billions in fact—is being
held by individuals in private hoards con

sisting increasingly of hundred-dollar
bills. Altogether, there is about $ 1,000 in
circulation for every family in America—
considerably more than might be ex
pected in view of the widespread use of
checks and credit cards for most large
purchases.

Over the past three fiscal years (197577) the Federal Reserve Bank of San
Francisco paid out $32.8 billion in cur
rency for use by the 33 million people in
the nine westernmost states. During this
same period, about $31.9 billion was re
turned from the commercial banking
system. Consequently, $914 million was
added to the total supply of currency in

and processed, each participating bank
receives a detailed report containing
historical and current-year comparisons
with a group of banks of similar size and
characteristics. FCA participation thus

this District—but the increase in hun

enables each bank to evaluate the actu

son

al prices of its services.

Bank, only about a third of the nation's
currency is being actively used. "Most
families do not hold anywhere near the
$1,000 per family in circulation, so a mi
nority of individuals must have very large

tional average in each size category in
this District, and Western banks' ex

The functional-cost program is a free

pense ratios were higher in each
category.

service available to all Federal Reserve

Western banks' net portfolio yields, cal
culated as a percentage of invested
funds, roughly matched the national

No one knows the exact whereabouts of

the $85 billion in coin and currency now

member banks. For further information,

contact the Functional Cost Analyst in
San Francisco—(415) 544-2351—or

dred-dollar bills amounted to $1.4
billion.

According to a study by Paul S. Ander
of

the

Boston

Federal

Reserve

holdings, perhaps of $5,000, $ 10,000 or

call the Bank and Public Services De

even more," he says. "Only a minute per
centage of the currency outstanding is

partment at the nearest Fed office, ijfr

lost or destroyed.'"^

FUNCTIONAL COST COMPARISONS—1976

Under $50 Million
U.S.

West

$50 to $200 Million
U.S.

West

Over $200 Million
U.S.

West

As Percent of Available Funds

Net earnings
Total expenses
Cost of money

1.916

1.748

1.930

1.622

1.589

1.322

6.475

7.435

6.124

7.336

6.162

6.907

4.921

4.927

4.804

5.272

4.592

4.712

As Percent of Invested Funds

Net portfolio yield

7.528

7.432

7.501

7.658

7.111

7.058

Securities

7.770

7.360

7.751

7.410

7.608

7.346

Business loans

6.912

6.728

6.922

7.660

6.388

6.221

Real-estate loans

7.576

8.716

7.562

8.859

7.437

8.407

Instalment loans

7.843

6.922

7.728

6.000

6.906

5.659

Credit cards

3.384

2.602

5.986

7.329

7.580

9.449

Note: Number of participants included 443 U.S. banks and 9 Western banks under $50 million; 317 U.S. banks and 6 Western

banks between $50 million and $200 million; and 109 U.S. banks and 9 Western banks over $200 million in deposits.

*

»5» J

FOCUS ON CENTRAL BANKING—Discuss

ing the Short Course on Central Banking are
(from left) Bob Easter, Mid-Cal National
Bank; Senior Vice President Wes DeVries;
Connie Woodcox, The Bank of California;

Vice President Robert Dietz; and Larry Blair,
Crocker National Bank.

FED HOSTS COURSE
ON CENTRAL BANKING
Officers of Pioneer National Bank include (from left) President and Chief Executive Officer M.C.

Fourteen Northern California banks par

Deitrick; Assistant Vice President Doris Poole; Cashier Tom Oliva; and Vice President Bill

ticipated last month in the first annual

Wickham. Photo Courtesy of Yakima Valley Sun.

Short Course in Central Banking spon
sored by the San Francisco Branch of

Welcome to the District
PIONEER NATIONAL BANK
"We felt Pioneer National Bank was the

best possible name to sum up our oper
ation," says President M.C. Deitrick.
"The name distinguished us from other
local institutions, while at the same time

it captured our image of a bank that
blends individualism with newness."

Strausz, and Deitrick. The group con
cluded that the area's strong economic
growth justified the launching of another
financial institution, and began raising
the capital for an initial stock offering of
$11/2 million.

"Almost 18 months elapsed from the
time a go-ahead decision was made un
til our grand opening," Deitrick recalls.
"But the arduous process was well worth

the Federal Reserve Bank of San
Francisco.

This seminar was developed to provide
management trainees and junior officers
at commercial banks with an overview of

Federal Reserve
operations.

policies

and

During the two-day meeting, officers,
economists and operations specialists

Pioneer National Bank is the first bank to

it. Pioneer is a financial institution owned

of the San Francisco Fed covered such

open in Yakima since 1958, and the first
new national bank in that Washington
community in over 40 years. Since open
ing in July, this latest member of the
Federal Reserve System has been offer
ing residents a full line of services—
commercial and consumer loans,
checking accounts, savings accounts,

by shareholders who live here in the
Yakima Valley. Our primary concern is
for the people we serve—our neighbors

topics as monetary policy, the discount
window, consumer affairs, equal credit
opportunity, supervisory activities,
check and cash operations, electronic
funds transfer, fiscal operations and re
serve accounting. Senior Vice President
Kent Sims, in closing the sessions, dis
cussed future trends in System policy
and commercial banking.

certificates of deposit, and easy acces
sibility and convenient banking hours.

and fellow business associates."^

COMPUTER LINKS
(continued from page 1)

When it comes to banking, however,

curity on the Fed Wire network, provides
the potential for back-up link-ups to oth
er Fed sites in cases of emergency, and
permits increased control over message

Deitrick is no newcomer. For the last 15

flow.

years he was associated with the Ameri
can Bankers Association, serving as Di
rector of its Bank Management
Department and then comptroller. Pre
viously, he helped organize the Mid-Co

Keith Davis, Assistant Vice President

Assessing the first Short Course, Senior
Vice President Wesley G. DeVries, who
is in charge of the San Francisco
Branch, said that critiques by partici
pants indicated that the program filled a

(Support Services) of the San Francisco
Fed's Computer Services Group, said

the central bank and commercial bank

that costs should be further reduced in

ers.

need for closer communication between

DeVries

added

that

the

Short

the future as a result of new communica

Course was an excellent opportunity for

subsequently merged with Peoples Na

tions services available from common

staff members from the San Francisco

tional Bank of Washington.

carriers. Davis added, "We are now
transferring tens of billions of dollars per

lumbia

Bank

in

Pasco,

which

Branch

to

meet

commercial

bankers

Planning for Pioneer National began
about two years ago, under the leader
ship of a group including current direc
tors Dr. Donald Ballew, Robert Lynch,

day over this network. Anything that in
creases security or control—such as
the computer-interface system—is a
real plus for the entire communications

face to face. "From the standpoint of
commercial banks, the Short Course is
also a means of supplementing their
own development programs for officers
and trainees who will be assuming key

Robert Lewis, Dr. Patrick Lynch, Robert

network."^

management positions in the future." flfr

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BALLES URGES
INFLATION CURBS

ment. The actions of both groups lower

cal standards, but are also above the

aggregate demand and thereby tend to
raise the jobless rate."

upper bounds of the current targets
which the Fed has set for long-term
monetary growth."

The best hope for prolonging the recov

ery and lowering the unemployment rate
is to reduce the underlying rate of infla
tion, John J. Balles told the Georgetown
University Bankers Forum in Washing
ton, DC. last month.

The San Francisco Fed President said

this policy prescription flows from the
important research finding that the goals
of reduced unemployment and lower in
flation are mutually reinforcing, not
conflicting. Under some circumstances,
inflation may tend to increase rather
than to decrease joblessness, accord
ing to a study by the Bank's research
staff. The recent experience of Great
Britain, Canada and Italy suggests the
same results.

According to Balles, the perverse im
pact of rising prices on unemployment
can be explained by the reactions of
both consumers and producers, who
associate inflation with increased uncer

Balles noted that many economists be
lieve that an unexpected increase in the
inflation rate will lead to a short-run re

duction in unemployment—reflecting a
positive supply response, with business
men hiring more workers to increase
output because of the better prices they
receive for their products. But he argued
that this positive response will soon be
undone by negative reactions on the de
mand

side,

as

households

and

businesses reduce spending because of
increased uncertainty about the effects
of inflation.

"What does this research finding imply
for monetary policy?" he asked. "Quite
simply, that we should pursue a gradual
reduction in the growth rates of the mon
etary aggregates, to a level consistent
with long-run price stability. This would
follow the course initiated two years
ago, when the Fed began the practice of
making quarterly reports to Congress
regarding our monetary-growth targets."

tainty about the future.
The Fed official said that there was no

"Households, more uncertain about the
future value of their real incomes, tend
to cut back on their spending plans.
Businesses, more uncertain about the
rate of return on new capital, tend to
reduce investment in plant and equip

need for a more expansive monetary
policy despite recent signs of a slower

rate of growth in the economy. "For one
reason, monetary policy has already
been very expansive in 1977. Moneygrowth rates are not only high by histori

He added that easing actions would not
be called for even if there were stronger
evidence of business sluggishness. Cit
ing the case of the late-1976 "pause," he
argued that if the Fed had responded to
that episode with a more expansive poli
cy, the effects would have been felt in
the first half of this year, when the econ
omy was booming and inflation
reaccelerating.
Balles noted that the "pause" was really

a mini-inventory cycle. "I don't believe
that monetary policy should try to offset
quarterly variations in economic growth
caused by such mini-inventory cycles.
Instead, I believe that it must aim at es

tablishing a stable environment conduc
ive to sustained economic expansion
over the long haul."
The Fed official said that the achieve

ment of fiscal restraint is the greatest
policy challenge in the years ahead. He
explained, "When fiscal policy results in
chronic, massive budget deficits, the
Fed comes under tremendous pressure
to provide more reserves to the banking
system to help finance such deficits.
This reserve expansion increases the
rate of monetary growth and ultimately

leads to more inflation." iflji