Full text of Federal Reserve Notes : October 1979

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Federal Reserve Notes
FEDERAL RESERVE BANK OF SAN FRANCISCO

•

OCTOBER 1979

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

FED ANNOUNCES
TIGHTENING MOVES

on controlling short-term fluctua

The Federal Reserve announced

the rate commercial banks pay to

tions in the Federal-funds rate —

a major shift in monetary policy on

borrow short-term

October 6. The System developed

each other, generally on an over
night basis.

three separate actions, designed
to promote better central-bank
control over the expansion of
money and credit, to curb
speculative excesses in financial
and commodity markets, and
thereby to help dampen inflation
ary forces.

First, the Board of Governors
unanimously approved Reserve

funds

from

In announcing these actions, the
Board stressed that appropriate

restraint of growth in the supply of
money and credit is an essential
part of any program to reduce
inflationary expectations. Such
restraint will help to avoid new
uncertainties about the outlook

Bank actions to increase the dis
count rate — the rate member

for prices and help to restore a
stable base for financial, foreignexchange and commodity trans

banks pay when borrowing from

actions.

their district Federal Reserve
Bank. The increase, from 11 per

cent to 12 percent, increases the
cost of banks' borrowed reserves.

Secondly, the Board established
an 8-percent marginal reserve
requirement on increases in four
"managed liabilities" — large time

deposits (CDs), Eurodollar bor
rowings, repurchase agreements
involving Treasury securities, and

E. A. Thomas

Under the provisions of the
Humphrey-Hawkins Act, the
Federal Reserve sets yearly

targets for the growth of the
monetary aggregates (the most
widely known being M,, which
consists of currency plus bank

demand deposits) and bank
credit (bank loans and invest
ments). The Board noted that the

Federal-funds borrowings from

aggregates and bank credit had

non-member

grown more rapidly in recent

institutions.

Banks

have relied increasingly on such
sources in recent months, to help
finance a rapid expansion in bank
credit.

Lastly, the Federal Open Market
Committee, comprised of all
seven members of the Board of
Governors and five of the twelve
Federal Reserve Bank Presidents,

unanimously approved a change
in the method used to implement

monetary policy. This change
involves placing greater
emphasis in day-to-day opera
tions on controlling the supply of
bank reserves, and less emphasis

months than was consistent with

established targets or with the
nation's basic economic objec
tives. The latest Fed actions are

designed to contain money and
credit growth in the months
immediately ahead, and thus pro
vide assurance that the System's
basic objectives can be achieved.
The new marginal reserve
requirement applies only to
increases in the four managed

FED NAMES THOMAS
TO EXAMINATION POST
The Federal Reserve Bank of San
Francisco made a number of

changes this month affecting its
bank-supervision and bank-rela
tions activities, centering around
the appointment of Eugene A.
Thomas

as

Vice

President

in

Charge of the Supervision,
Regulation and Credit Depart
ment. Thomas replaces Henry B.
Jamison, who is retiring next
month.

In other senior-level appoint
ments, the Bank promoted Harry
W. Green

to Vice

President in

Charge of the Bank Holding Com
pany and International Regulation
Section, and Merle E. Borchert to
Director of Bank Examinations.
Green adds international

examinations

to

his

present

by member banks, Edge corpora
tions (institutions chartered

responsibility for bank holding
companies, while Borchert re
places Thomas in the examina
tion post.

(Continued on page 2)

(Continued on page 3)

liabilities mentioned earlier if held

COLDWELL CRITICIZES
REMOTE DISBURSEMENT

TIGHTENING MOVES

Federal Reserve Governor Philip
Coldwell, speaking in New
Orleans last month, reminded

specially to engage in overseas

(Continued from page 1)
financial activities), or the U.S.
agencies and branches of foreign

bankers that the Federal Reserve

banks.

is firmly opposed to the practice

required to hold an additional 8percent reserve against the

of remote disbursement and does

These

institutions

are

bear the cost of

increase in the aggregate amount

"float" associated with it. Cold-

of such liabilities over the amount

well urged his audience to evalu
ate the opportunities and benefits
offered by an electronic-settle
ment system, and to consider how
such a program might fit into bank
cash-management schemes.

they held during the two-week
base period ended September 26.
This marginal reserve require

not

intend

to

Remote disbursement involves

writing a check on a distant bank
in order to lengthen check-collec
tion times. In contrast, a Fed-pro
posed electronic-settlement pro

gram is aimed at speeding and
improving the clearing of checks.
Electronic settlement is a concept

involving the capture of data
encoded on checks, with

the

System's communication network
being used to deliver the data and
to effect settlement.

Fed's interest in electronic settle

ment had been prompted by the
need to modernize check settle

ment, and also to reduce the risk

of float on large dollar items in the
event of weather-caused trans

portation delays or other prob
lems. It is in the best interest of all

parties to the collection process,
he said, to keep funds flowing in
the face of disruptions.
emphasized

that

electronic settlement offers clear

opportunities for bankers to
reduce their operating costs.
Electronic-based

P. Coldwell

only in regard to the implications
for electronic settlement, but also
in

relation

to

Federal

Reserve

efforts to improve other aspects of
the payments mechanism. But he
noted that many institutions had
cooperated fully with the Fed's
earlier request to reduce remote
disbursement and float. Since the

first of the year, float has declined
significantly, he said, "although
we are not yet where we would
like to be and intend to be."

Governor Coldwell said that the

Coldwell

ment

rather

than

paper-based systems may result
in lower service charges and
reduced depository bank bal
ances. Electronic settlement, he
added, creates favorable cash-

management opportunities in the
form of predictable funds
availability.

reviewing its policies for handling
checks of high dollar value, not

four categories of less than $100
million. The marginal reserve
applies to the aggregate level of
reserved managed liabilities so
that an increase in one compo
nent — for example, large CDs —
may be offset by a decrease in
another

without

an

overall

increase in reservable total.

The marginal reserve requirement
is directed toward the specific
sources

of

funds

that

have

financed the expansion of bank
credit in recent months. Member

banks in early October held more
aged liabilities. In the previous
three months alone, these
liabilities had increased by about

intend

that

"the

full

economic

impact of remote disbursement be
carried by the participants in the
practice. In that context, con
sideration of changes in our
policies regarding large-dollarvalue items would be consistent

with

our

remote

need

to

discourage

disbursement

while

reducing the level of Federal
Reserve float." In particular, he
suggested that the Federal
Reserve may require that largevalue

checks written

on

banks

outside the immediate city of the
receiving bank be settled
immediately by wire transfer.
Coldwell also commented on the

$17 billion — financing about half
of that period's total increase in
bank credit.

Under the new policy of focussing
bank reserves, the Federal
Reserve will attempt to hit target
growth rates for the quantity of
bank reserves. In achieving this
objective, the rate at which banks
on

can issue deposits (the main ele
ment in the money supply) also
will be largely determined. One
result of the change in emphasis
has been wider initial day-to-day
fluctuations in the now marketdetermined Federal-funds rate.

pricing of Federal Reserve ser

Although these fluctuations are

vices. He said that "while demand

expected to diminish somewhat
as the market gains more
experience with the new operat
ing procedure, implicit in the shift
is the willingness to accept
greater interest-rate variability in
order to get tighter control over

for Fed check processing may
change, our involvement in the
payments system will not. We will
regulatory role while providing a
public alternative to private
check-collection arrange ments."^

is

institutions

Reserve — and the Congress —

continue

Reserve

for

than $240 billion in such man

He warned his banker audience
Federal

waived

Coldwell warned that the Federal

that

the

is

with aggregate liabilities in the

to

exercise

an

active

money-supply growth.

^

EXAMINATION

MORTGAGE-BACKED
SECURITIES EXEMPT

(Continued from page 1)
Thomas joined the Bank in 1960

The

after receiving a B.A. at Penn
sylvania State University and an
M.A. in Economics at the Univer

President

and

Board

of

reserve requirements
interest-rate ceilings.

In the first case, the Board
exempted certain securities
backed by a pool of five-year

fices, and in 1974 became Assis
Vice

Reserve

mortgage-backed securities from
and

sity of North Carolina. Over the
years, he carried out a number of
assignments at various Bank of
tant

Federal

Governors, in two decisions this
month, voted to exempt certain

Chief

Examiner. In 1975, he was pro
Bank

rollover mortgages. (The interest

Examinations, and in 1978 to Vice
President in charge of that
activity.

rates on "rollover mortgages" can
be adjusted every five years to
reflect changes in banks' cost of

moted

to

Director

of

Green joined the Bank in 1975 as
Director of Bank Holding Com
pany Regulation. He previously

funds.) Under a proposal by the
National Bank of Detroit, the bank
is
H. W. Green

served a number of years in the
field

of

bank

examination

and

committed

to

refinance

the

mortgages at the end of each fiveyear period, provided the
mortgages are not in default.

bank holding-company supervi
Reserve

In its second decision, the Board

Bank of Kansas City. He received

reversed a 1976 ruling that
defined mortgage-backed
securities tied to a standby letter
of credit as deposits subject to
reserve and ceiling regulations.
The Bank of America had pro
posed to substitute its own letter
of credit for third-party insurance
on existing mortgage pools. The

sion

with

the

Federal

a B.B.A. degree from the Univer
sity of Oklahoma, as well as a
degree from the Stonier Graduate
School of Banking at Rutgers
University.

Borchert joined the Bank's
examination staff in

1972, and

after several promotions, in 1975
became Examining Officer in

letter

Charge of the Los Angeles Com
mercial

Examination

Unit.

He

attended Nebraska State College
in Kearney, Nebraska. In his new
position, he will have District-

wide responsibility for the Com
mercial Examination activity.

Reporting to Green will be Rodney
E. Reid, who was promoted this

M. E. Borchert

tional Regulation Section.

Examinations (San Francisco),
International Examinations (Los

assigned as Department Manager.

to

Assistant Vice

Presi

dent. Reid will be in charge of
three

units

—

International

credit

would

act

to

In both cases, the Board decided
that the proposed securities tech

In the Bank and Community Rela
tions Department, Marion Otsea
has been promoted to Bank and
Community Relations Officer and

month

of

guarantee payments of principal
and interest on the mortgages in
the pool up to 10 percent of their
initial principal balance.

Angeles) and Bank Holding Com

In this position, she will report to

pany Inspections.

Vice President Robert C. Dietz.

Also reporting to Green will be

nically were not deposits.

<#•

Consumer Affairs and Special
Examinations activities under the

supervision of Assistant Vice
President

W.

Gordon

Smith.

"Special Examinations" include
those whose primary objective is
to enforce regulatory compliance
rather than to assure the safety
and soundness of the institution

under

examination.

This

area

Robert A. Johnston, who trans

Other changes affect the
renamed Credit and Regulatory

ferred from Assistant Vice Presi

Compliance Section (formerly

includes consumer-compliance
examinations, as well as inspec

dent, Bank Relations, to Assistant
Vice President, Applications and

Credit and Consumer Affairs Sec

tions

tion) of the Supervision, Regula

Regulations G and U, which con

Analysis. Johnston will supervise
the Applications, Analysis and

tion and Credit Department.
Wayne L. Rickards will transfer to
this unit as Bank Regulations Of
ficer, and will manage the bank's

cern credit extended to finance

Structure functions in the Bank

Holding Company and Interna-

under Federal

securities transactions.

Reserve

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FED ISSUES RULES
ON REIMBURSEMENT

SAN FRANCISCO FED
HOSTS ECONOMISTS

to

The Federal Reserve Board of

Several dozen academic econo

Federal Reserve Regulation Z —
Truth in Lending — that allowed an

Governors has adopted new rules
for reimbursing financial institu
tions that supply their customers'
financial records requested or

mists discussed a variety of
theoretical and policy issues at the

FED REVOKES
REG Z EXCEPTION
A

controversial

amendment

exception to the "cooling off"
period for consumers who pledge
their homes as security in open-

end credit arrangements will be
revoked as of March 31, 1980.
Truth in Lending requires that
where a home is used as collateral

for a consumer loan, the lender

must give notice that the borrower
has a three-day "cooling off"
period in which to cancel the deal.

required by the Federal Govern
ment. Regulation S implementing

Fall Academic Conference hosted

this month by the Federal Reserve
Bank of San Francisco. The con

ference, for the third straight year,

the reimbursement rules became

provided a useful forum for the

effective on October 1.

exchange of views between

The Right to Financial Privacy Act
places restrictions on Federal
government access to the financial

Federal Reserve economists and

leading academics from Western
institutions.

records of individuals maintained

Featured on the program was a

by financial institutions. The Act

discussion of recent monetary-

In July 1978, the Board of Gover

also authorizes, with a number of

nors amended Regulation Z to
exempt one type of transaction
from this notice requirement —
namely, individual advances under
open-end credit arrangements

exceptions, reimbursement to

policy developments by three lead
ing academics and Reserve Bank

(such as credit-card transactions)
when the creditor and the seller

are not the same or related per
sons. The amendment required

that the right-of-recission notice
must be given for such an openend credit transaction only under
certain

conditions

—

when

the

credit plan was first opened, when
the credit line was

increased,

whenever terms of the

account

were changed, whenever a
security interest in a home was
added to an existing open-end
credit plan, and thereafter once

annually.

#

institutions for costs associated

President John

with providing such records.

academic participants were Milton

Regulation S provides for payment

Friedman, the Nobel laureate;
Edward Shaw, Professor

to financial

institutions for the

reasonably

necessary costs

directly incurred in assembling or
providing customer financial
records. Such costs include per
sonnel time (to be reimbursed at

the rate of $10/hour); paper

reproduction costs (15<E per page);
and actual transportation costs.

Only financial institutions, includ
ing credit-card issuers, are entitled
to such reimbursement. But banks
receive no reimbursement when

they provide records of corpora
tions and partnerships comprised
of more than five individuals.
#

J.

Balles. The

(Emeritus) at Stanford University;
and Sven Arndt, Professor at the

University of California (Santa
Cruz).
Six formal

papers on

monetary

topics were presented at the con
ference, by Arthur B. Laffer and
Robert I. Webb (University of
Southern California), Charles R.

Nelson (University of Washington),
John J. Makin (University of
Washington), Paul Evans (Stanford
University), John Rutledge (Claremont Men's College), and Levis A.
Kochin (University of Washington).