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Federal Reserve Notes



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


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

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

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

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.




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
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.

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

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.

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.



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





of Governors

announced guidelines for member
banks to follow in advertisements or

programs designed to promote the



Banks are authorized to offer the ATS


(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


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


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



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



Banks also should avoid referring to
the ATS service as equivalent or
similar to paying interest on checking

N. H. Teeters

of former


Arthur F.





statements as "interest on checking,"
"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


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


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. ^



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


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

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and audits; asset administration; ac
count administration; conflicts of in

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


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



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
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

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