Full text of Federal Reserve Notes : October 1978
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Federal Reserve Notes FEDERAL RESERVE BANK OF SAN FRANCISCO • OCTOBER 1978 Serving Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah & Washington NOV CONGRESS PASSES REGULATORY BILL NATIONWIDE EFT » SYSTEM COMPLETED Just prior to its October 15 adjourn ment, Congress passed the Financial Institutions Regulatory Act, which prohibits Federally-insured banks or The Federal Reserve System an nounced last month the completion of a nationwide network for making pay ments electronically. The system links up some 9,400 banks and 1,500 thrift institutions that are currently members of automated clearing house (ACH) associations, along with some 6,000 customer corporations. their affiliates from making loans equal to more than 10 percent of their capital accounts to bank officers and major stockholders. (Capital ac counts include equity capital and retained earnings.) The legislation, with its limitation on bank insiders' activities, now goes to the President for his signature. Another feature of the bill requires that any loan made by a bank to an insider of another bank can't be made on preferential terms, and must be reported by the borrower to his bank's board. It also requires each bank to report annually the total amount of loans made to its officers or those owning 10 percent of its stock. The legislation also bars interlocking directorates among banks, savings institutions and credit unions in the same market region. For large finan cial institutions, interlocking director ates are barred completely. The 35 ACH's now in operation—one private and the rest Federal Reserve facilities—consist of computers which clear and sort payments in structions recorded on magnetic tapes. The new system requires no new facilities, but instead makes in tensified use of existing Federal Re serve computers and wires. "Linkage of automated clearinghouse associations in all parts of the nation makes possible the electronic trans fer of payments to and from virtually any place in the United States," the Board of Governors said. "The availa bility of the new payments-system network will enhance and improve financial services to individuals and financial institutions, and encourage the use of the electronic movement of Federal bank regulators obtain ex funds as a more efficient and less panded cease-and-desist and sub poena powers under the bill. In addi tion, regulators will have less difficulty costly alternative to making payments by check." than before in removing bank officials who jeopardize their bank's safety. The Board said that any payment that can be made by check can also be Another provision requires any indi vidual who wants to acquire a bank or thrift institution to give 60 days' notice 1978 made electronically. Electronic pay ments already are made for payroll deposits and recurring bills such as mortgages, as well as U.S. Treasury deposits for social-security benefi ciaries and the like. The Board authorized Federal Re serve Banks last April to provide ser vices for a national network of ACH's. The pilot work for the system began in 1976 in conjunction with the National Automated Clearing House Associa tion (NACHA). That association was responsible for training local ACH's in the techniques of interregional electronic-payments transfers. The local associations gave technical as sistance to member financial institu tions. Under the new system, any financial institution that is a member of an automated clearinghouse associa tion can present payment instructions recorded on magnetic tape to the nearest ACH for transmission nation wide. Such a magnetic tape might bear instructions to make salary pay ments to a company's employees located in many parts of the country. The ACH that receives such a tape sends the instructions to other ACH's over the Fed's wire network. The ACH serving the final payment point sorts the instructions by computer and for wards them to designated commer cial banks or thrift institutions. These institutions then debit the accounts of customers who are making payments and credit the accounts of customers the authority for regulatory agencies to set deposit interest-rate ceilings for receiving payments. banks and thrift institutions. The legis "The system parallels the sorting and forwarding of payment instructions on The legislation spells out consumer lation also eliminates the differential checks," the Fed noted. "But instead rights and safeguards in electronic funds-transfer systems, such as computerized bank tellers. In an on savings accounts subject to auto matic transfer and authorizes now it does it electronically rather than by mail or courier, and offers the poten accounts for Federally insured institu tial for greatly improved services and amendment, it extends for two years tions in New York State, if cost efficiencies." if1 to the appropriate regulatory agency. SUMMARY OF KEY FED DEVELOPMENTS FED RAISES DISCOUNT RATE CREDIT ON NONCONVERTIBLE BONDS Federal Reserve Banks posted an increase in their dis count rate, from 8 to 8V2 percent, effective October 16. In approving the increase, the Board of Governors said, "The action was taken to bring the discount rate into closer alignment with increased short-term market interest rates, and in recognition of continued high inflation, the recent rapid rate of monetary expansion, and current international The Federal Reserve has amended its Regulation T (Credit by Brokers and Dealers), regarding the use of credit for financial conditions." tain credit on unlisted nonconvertible bonds sold on the buying nonconvertible corporate bonds in the over-thecounter (OTC) market. Before adoption of the amendment, credit could be extended by brokers or dealers only for bonds listed on a national securities exchange. The amendment provides that they may also extend and main OTC market. However, at the time credit is extended, the outstanding principal amount of an issue cannot be less than $25 million, and all payments of principal and interest FLOOD INSURANCE The Federal Insurance Administration (FIA) has liberalized its guidelines to expedite the closing of loans for real estate located in flood-hazardous areas covered by the National Flood Insurance Program. The guidelines, which became effective on February 17, 1978, stated that before loanclosing a lender should obtain either a copy of the Standard Flood Insurance Policy or a policy application indicating payment of the full premium. However, the FIAsubsequent ly ruled that other documents also are acceptable. A lender now can accept a copy of the mortgagor's check issued in payment of a flood-insurance policy, or alternatively, an agent's certification or letter that a mortgagor has pur chased the insurance. must be current. In addition, each issue must be registered with the Securities and Exchange Commission (SEC) and the issuer must provide current reports under SEC regula tions. Securities that meet these criteria will be designated "OTC margin bonds." For further information, contact the Reserve Bank's Consumer Affairs Unit (415) 544-2226. POLICY ON TAX TRANSACTIONS The Board of Governors has approved a policy statement on tax transactions between state member banks and their As a result, a state member bank that accepts any of these documents will be in compliance with Federal Reserve Regulation H (Membership of State Banking Institutions). However, the standard flood-insurance policy does not become effective for 15 days from the date of application, so that a state member bank legitimately may decide to delay a loan closing for 15 days. This would ensure that there is no interim period when a loan is not covered by flood insurance. For further information, contact the Re serve Bank's Law Department (415) 544-2254 or 5442256. parent holding companies. The statement was substantial ly unchanged from one that was issued for comment in June. According to this ruling, a bank holding company should serve as a source of strength for its subsidiary banks and should not exercise its control to their detriment. The Board criticized the accounting practice whereby assets and income are transferred from subsidiary banks to the parent company without offsetting benefits to subsi diaries. The Board also encouraged holding companies to develop written tax agreements with their bank subsidiaries specifying intercorporate tax-settlement policies. It did not prescribe any specific tax-accounting methods, but it added that whatever methods are employed should give bank subsidiaries equitable treatment. For further informa REVISED OTC LIST tion, call the Reserve Bank's Bank Holding Company Section (415) 544-2235. A revised list of over-the-counter (OTC) stocks that are subject to Federal Reserve margin requirements is now available. The new list includes 1,157 OTC stocks, includ ing 81 stocks listed for the first time. Margin regulations generally limit the amount of credit that can be used to buy or carry securities. Stocks on the OTC list are subject to the same margin requirements as stocks listed on national stock exchanges. The requirement currently is 50 percent, which means that at least 50 percent of a stock's purchase price must be paid in cash to obtain credit forthe remaining 50 percent. For further information, call the Reserve Bank's Consumer Affairs Unit (415) 544-2226. HOLIDAY NOTICE The Portland Branch of the San Francisco Reserve Bank will be closed on Friday, November 10, in observance of Veterans' Day. All other offices of the Bank will be open for business. All Bank offices will be closed on Thursday, November 23 for Thanksgiving Day. TOP COURT UPHOLDS AUTO LEASING RULE BOARD ISSUES ATS GUIDELINES In a recent public statement, the Fed The Supreme Court this month up held the Federal Reserve's authority to allow bank holding companies to conduct auto-lease financing. The high court refused to review a petition which was brought by the National Automobile Dealers eral Reserve Board of Governors announced guidelines for member banks to follow in advertisements or programs designed to promote the new automatic-transfer service. Banks are authorized to offer the ATS Association (NADA) against a ruling made last service beginning November 1. February by the U.S. Court of Appeals for the District of Columbia. The Fed said that ads or promotional materials should clearly indicate that The Federal Reserve Board of Gover the nors first permitted bank holding com panies to engage in auto-leasing ac tivities in April 1974, on the grounds that these activities are closely relat ed to banking and also benefit the public. The auto trade group then sought a court ruling on whether the regulation should apply to auto leas ing. The court referred the matter volves two separate accounts—a savings and a checking account. back to the Board of Governors, which in October 1976 again con cluded that auto leasing under certain conditions represents a permissible non-banking activity for holding com panies. The NADA again took the Fed to court, and this matter then went all TEETERS APPOINTED NEW FED GOVERNOR accounts. Nancy H. Teeters was sworn in late last month as the first woman Federal Reserve Governor. The ceremony took place in the White House and was conducted by Vice President Walter F. Mondale. Mrs. Teeters fills the unexpired term Fed Chairman service in Banks also should avoid referring to the ATS service as equivalent or similar to paying interest on checking N. H. Teeters of former automatic-transfer Arthur F. Because of this, such statements as "interest on checking," "interest checking account," "interest-paying checking plan," and "almost like interest on checking," are not permissible. These statements might convey the incorrect impres sion that depositors would receive interest on demand depositssomething that is prohibited by law. Burns, which runs until January 21, 1984. Before accepting the appoint Additionally, the Board said banks review. ment to the Fed, Mrs. Teeters was the The Fed's regulation permits personal-property leasing provided chief economist of the House Budget transfer service as "checking on sav ings" or "checkable savings." Such Committee. She was once a statements could result in the mistak the lease serves as the functional economist at the Board of Governors, equivalent of a credit. The lessor holding company cannot acquire an inventory of property for leasing, and it must dispose of the property or lease within two years of the expiration of the initial lease. The bank holding company also cannot provide such non-financial services as lending autos during servicing, or auto mainte and also served on the staffs of the the way to the Supreme Court for staff Council of Economic Advisers, the should not refer to the automatic- en belief that checks may be drawn on interest-bearing savings ac counts. This is a service presently limited by law to the six New England Office of Management and Budget, and the Congressional Research Service of the Library of Congress. states. The Fed also said that member From 1970 to 1973 she was a senior at the time the ATS service is author fellow at the Brookings Institution. Mrs. Teeters received degrees from Oberlin College and the University of ized that the bank reserves the right to require at least 30 days' notice for an automatic withdrawal of savings de nance and repair. ^ Michigan. ^ posits.'^ SIMPLIFIED REPORT FOR SMALL BANKS The proposal was made jointly by the Comptroller of the Currency, the Fed with foreign offices or Edge Act subsi The Federal bank-regulatory agen cies have proposed a simplified ver sion of the Reports of Condition and Income ("Call Reports") that would significantly reduce the reporting burden for over 90 percent of the nation's commercial banks. The re ports would apply to banks with only eral Reserve Board of Governors and diaries, would continue to use the standard Reports of Condition and banks. If the proposal is approved, the new forms would be used for reports as of December 31, 1978. with the standard forms. Banks with less than $100 million—probably over 13,000 of the nation's commercial assets of over $100 million, or those the Federal Deposit Insurance Cor poration. The agencies asked for comment by November 15, specifi cally with reference to the feasibility of the $100-million bank-asset ceiling proposed for the simplified reports. Call Reports are the basic financial reports that must be made semi annually or quarterly by all Federally insured banks. The proposed new forms would eliminate about 40 per cent of the reporting now required domestic offices and with assets of banks should inform their depositors Income. The reduction of the reporting burden would result from several factors. The simplified forms would eliminate num erous specific items from separate reporting—particularly details of loan and deposit activity. In addition, they would reduce the frequency of report ing from semiannually to annually, sometimes for entire sections, for the Report of Income, ifr VQIZ-VVS (9Lt')9U0Md 'OSlWj 'B|UJO)!|BO 'OOSIOUBJJ ues 'ZOll xog o d 'oosiouEJd ubs jo >(UBg gAjssaa iBjapaj 'jajuao uoi}Buuo)u| ipjBasay 9q) Aq s>jueq lepjawiuoo o) painqujsip si uoi)BO -i|qnd am ^sny u3jb» pue z)gg p|Buoy '9>iJng lubjikm Aq paonpcud si sbjon aAjasaa lejapej dl~IV3 'OOSDNVUd NVS 29/ ON ilWddd aivd dovisod s n 1IVIM SSVIO ISHId OZlt'6 VO 'oosioubjj ues "JS awosues OOt> oosioubjj ues J° >fueg eAjesey jejepej PRESIDENT SIGNS FOREIGN BANK ACT UNIFORM RATING SYSTEM ADOPTED and audits; asset administration; ac count administration; conflicts of in terest; President Carter has signed into law the measure regulating the activities of foreign banks in the United States. The International Banking Act of 1978 The Federal bank regulatory agen'cies have adopted a uniform intera extends over the banks. This new common yardstick is branches and agencies of foreign banks operating in this country, and over commercial-lending companies controlled by foreign banks that are engaged in banking activities. The act does not change the status of statechartered banking subsidiaries of for eign banks. expected to improve the evaluations Federal control The measure restricts the interstate branching privilege of foreign banks. In the future, any foreign-bank branch gency system for rating the trust de partments of the nation's commercial of trust-department activities con tained in reports to Congress and the public. The new trust-rating system has two main elements. First, Federal examin ers will rate trust departments in six critical areas: supervision and organi zation of the trust department; the department's operations, controls and earnings and volume trends. Each of the areas will be rated on a scale of 1 (the highest) to 5 (the lowest category). Secondly, examiners will assign a composite rating to each trust depart ment. This overall rating will be deter mined by adding the individual num erical ratings for each critical area. ' Under this system, a numerical score of 6 to 8 will amount to a composite rating of 1, meaning superior per formance in almost every respect. On the opposite end of the scale, a num erical score of 27 to 30 will result in a composite rating of 5, meaning criti cally-deficient performance in major respects. located outside of the bank's "home" state would be limited to accepting deposits related to international bank ing and finance. In the home state, each branch could do a full banking business. However, foreign banks that already have offices in more than one state would be able to continue branches and agencies also are sub ject to similar regulation iftheir parent bank has $1 billion or more in world wide assets. The branches holding reserves would gain access to Feder al Reserve System services. The regulatory agencies stated that the new rating system recognizes the consumer-oriented nature of trust- department activities. "The system emphasizes the trust department's proper role in carrying out its fiduciary responsibilities in the public interest," the joint statement read. "Examiners their present operations under a "grandfather" provision. (Under such a provision, institutions established The Act also allows foreign citizens to are encouraged by the new system to before a certain date can remain free serve on the boards of national banks. of later restrictions.) This opens the possibility of foreignbank subsidiaries applying for nation focus on any conditions that could adversely impact the interests of ac The act empowers the Federal Re serve to impose mandatory reserve requirements on Federal branches and agencies of foreign banks. State al charters. For further information on mend corrective action before any this legislation, contact the Reserve such conditions might give rise to loss Bank's Bank Relations Department either to account beneficiaries or to (415) 544-2352. fr the bank." 'fr count beneficiaries, and to recom