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S. HRG. 115–14
THE SEMIANNUAL MONETARY POLICY REPORT
TO THE CONGRESS
HEARING
BEFORE THE
COMMITTEE ON
BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE FEDERAL RESERVE’S SEMIANNUAL REPORT TO
CONGRESS ON MONETARY POLICY AND THE STATE OF THE ECONOMY
FEBRUARY 14, 2017
Printed for the use of the Committee on Banking, Housing, and Urban Affairs
(
Available at: http: //www.fdsys.gov /
U.S. GOVERNMENT PUBLISHING OFFICE
WASHINGTON
25–433 PDF
:
2017
For sale by the Superintendent of Documents, U.S. Government Publishing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800
Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001
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SHERYL
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama
SHERROD BROWN, Ohio
BOB CORKER, Tennessee
JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada
JON TESTER, Montana
TIM SCOTT, South Carolina
MARK R. WARNER, Virginia
BEN SASSE, Nebraska
ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas
HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota
JOE DONNELLY, Indiana
DAVID PERDUE, Georgia
BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina
CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana
CATHERINE CORTEZ MASTO, Nevada
GREGG RICHARD, Staff Director
MARK POWDEN, Democratic Staff Director
ELAD ROISMAN, Chief Counsel
TRAVIS HILL, Senior Counsel
JOE CARAPIET, Senior Counsel
JARED SAWYER, Senior Counsel
GRAHAM STEELE, Democratic Chief Counsel
LAURA SWANSON, Democratic Deputy Staff Director
DAWN RATLIFF, Chief Clerk
CAMERON RICKER, Hearing Clerk
SHELVIN SIMMONS, IT Director
JIM CROWELL, Editor
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C O N T E N T S
TUESDAY, FEBRUARY 14, 2017
Page
Opening statement of Chairman Crapo .................................................................
Opening statements, comments, or prepared statements of:
Senator Brown ..................................................................................................
1
2
WITNESS
Janet L. Yellen, Chair, Board of Governors of the Federal Reserve System ......
Prepared statement ..........................................................................................
Responses to written questions of:
Senator Toomey .........................................................................................
Senator Reed ..............................................................................................
Senator Sasse ............................................................................................
Senator Tester ...........................................................................................
Senator Rounds .........................................................................................
Senator Tillis .............................................................................................
Senator Perdue ..........................................................................................
ADDITIONAL MATERIAL SUPPLIED
FOR THE
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RECORD
The February 2017 semiannual Monetary Policy Report .....................................
Wall Street Journal article entitled, ‘‘U.S. Banks Report Record Profit in
Third Quarter,’’ dated November 29, 2016, submitted by Senator Warren ....
FDIC Quarterly Report, Third Quarter 2016 ........................................................
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THE SEMIANNUAL MONETARY POLICY
REPORT TO THE CONGRESS
TUESDAY, FEBRUARY 14, 2017
U.S. SENATE,
URBAN AFFAIRS,
Washington, DC.
The Committee met at 10:02 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee,
presiding.
COMMITTEE
ON
BANKING, HOUSING,
AND
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman CRAPO. The Committee will come to order.
Today we will receive testimony from Federal Reserve Chair
Janet Yellen regarding the Fed’s semiannual report to Congress on
monetary policy and the state of the economy.
It will come as no surprise to you, Chair Yellen, that improving
economic growth is a key priority for Congress this year.
Two thousand sixteen was the 11th consecutive year that the
U.S. economy failed to grow by more than 3 percent. One way to
improve economic growth is to study and address areas where regulations can be improved.
Since the financial crisis, regulators have imposed thousands of
pages of new regulations. We all need to better understand the
combined impact of these rules on lending, liquidity, costs for small
financial institutions, and broader economic growth.
It is time to reassess what is working and what is not. I am encouraged by President Trump’s Executive Order on Core Principles
for regulating the financial system.
Directing the Treasury Secretary, in consultation with the heads
of the other member agencies of Financial Stability Oversight
Council, including you, Chair Yellen, to report on how well existing
laws and regulations promote or inhibit economic growth will be a
helpful step as we move forward.
Financial regulation should strike the proper balance between
the need for a safe and sound financial system and the need to promote a vibrant, growing economy. I expect the Vice Chairman for
Supervision, once confirmed, will play an important role in striking
this balance.
We want our Nation’s banks to be well capitalized and well regulated, without being drowned by unnecessary compliance costs.
This is especially important for the community banks and credit
unions in America, which lack the personnel and infrastructure to
handle the overwhelming regulatory burden of the past few years,
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2
yet in many ways are treated the same as the world’s biggest
institutions.
At the last Humphrey-Hawkins hearing, Chair Yellen, you stated
that simplifying regulations for the community banks continues to
be a focus for the Fed, and I hope that remains the case. Our regulatory regime should be properly tailored and avoid a one-size-fitsall approach.
The Fed recently took an encouraging step in that direction when
it finalized changes to exempt certain banks from the qualitative
portion of CCAR, and I appreciate that.
Another area I would like to address is the $50 billion SIFI
threshold for regional banks. In prior hearings, we have discussed
whether $50 billion is the appropriate threshold, and I hope we can
work together to craft a more appropriate standard.
My goal is to work with Senators of this Committee and financial
regulators to better strike the balance between smart, thoughtful
regulation and promoting economic growth.
It has also been nearly a decade since Fannie Mae and Freddie
Mac were put into conservatorship. Housing finance reform remains the most significant piece of unfinished business following
the crisis, and it is important to build bipartisan support for a
pathway forward. For many years, the Fed expressed concerns
about Fannie and Freddie, and I encourage you, Chair Yellen, and
the Fed to work with this Committee to help find a solution.
With respect to monetary policy, it has now been nearly a decade
since the Fed began easing monetary policy in the fall of 2007 in
response to the emerging financial crisis.
Today the Fed still holds close to $4.5 trillion in assets on its balance sheet, which includes approximately 35 percent of the outstanding agency mortgage-backed security market. I look forward
to hearing from you on how the Fed plans to normalize monetary
policy and wind down its balance sheet.
The Banking Committee has a lot of work to do this Congress.
My goal is to work with Ranking Member Brown and other Members of the Committee to identify bipartisan approaches that we
can quickly get signed into law.
At the same time, we plan to start work on housing finance
reform, flood insurance, sanctions, and legislation to boost economic
growth in the country.
I look forward to working with you, Chair Yellen, the Federal Reserve, and other Members of the Committee to tackle some of these
critical issues that I have mentioned this morning, as well as a
number of others.
With that, Madam Chair, we look forward to your comments
today, but first I turn to Ranking Member Brown. Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator BROWN. Thank you, Mr. Chairman. I appreciate the
hearing today. And, Chair Yellen, thank you for—it is an honor always to have you here, and a pleasure, and your insight is always
helpful to all of us. Thank you for that.
Since your appearance, Madam Chair, last June, the economy
has improved enough, as we know, that the Fed raised the Federal
funds rate in December for only the second time since the financial
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3
crisis. Businesses continue to create jobs on a slow but steady pace,
some 70-plus months in a row, and there finally is some wage
growth.
Yet there are concerns. Too many Americans who want full-time
work still cannot find it. Many workers have left the labor force.
The gains have been not large enough and been uneven. Foreclosures and job losses hit African American and Latino communities particularly hard during the crisis. One study found that the
average wealth of white families has grown 3 times faster than the
rate for African American families and 1.2 times the growth rate
for Latino families over the last three decades. At these rates, it
will take hundreds of years for those families to match where white
families are today.
For affluent Americans, stock portfolios have recovered nicely
since the crisis, but for most of Ohio and for most of our States,
the story is very different. The State’s job growth last year was the
lowest since 2009. We actually went backwards 5 out of 12 months.
In many places, one in four homeowners is still underwater.
As you have heard me say and as Members of this Committee
have heard me say, in the Zip Code my wife and I live in in Cleveland, in the first half of 2007 there were more foreclosures than
any Zip Code in the United States of America. For Ohio manufacturers, the strong dollar continues to hurt exports, and there is uncertainty, much of it injected into the economy by this Administration already and by the majority party. Can Americans continue to
count on having health insurance? Will U.S. manufacturers and exporters have continued access to foreign markets? Will importers
have to pay a 20-percent sales tax? Will immigrants to this country
have access to jobs and to our universities? They do not even know
what to expect tomorrow let alone to do any kind of long-range
planning. All of that our country and our economy is dependent
upon.
Americans elected the new President based on his promises to
drain the swamp, to take on Wall Street, and begin to bring manufacturing jobs back to the industrial heartland. We are all concerned, though, when you look at some of the nominees confirmed,
with virtually every Republican virtually every time voting for
amazingly ethically challenged nominees, nominees that would
have stepped aside 8 years ago or 16 years ago with new Presidents, we are all concerned about that.
Instead of focusing on infrastructure and real job creation and
tax cuts for the middle class and education and workforce development, we have seen the new Administration target working Americans, furthering a billionaire’s special interest agenda, and
threaten Wall Street reform based on the false promises that banks
are not lending—false promises, some might call them lies.
I think everyone on this dais can agree there are parts of Wall
Street reform that could be improved and steps that can be taken
to help small banks and credit unions. That is an ongoing process
for both Congress and the regulators.
I applaud the Fed decision, Madam Chair, its recent decision to
remove banks below $250 billion in assets from part of its CCAR
process. But many of my Republican colleagues are dead set on
going beyond the reasonable, consensual, bipartisan adjustments
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and seeking to repeal reforms that are key to preventing the next
devastating financial crisis. Working Americans lost trillions of dollars in their retirement savings after large Wall Street firms made
risky bets with other people’s money either failed or were bailed
out during the crisis. That is why Congress put in place higher capital requirements for large banks, mechanisms to identify and regulate risky nonbank companies, and tools to make sure financial
firms can fail without bailouts funded by taxpayers.
Recent statements by top officials in the White House indicate
they are specifically targeting these important safeguards, even
though these parts of the law were supported by both parties back
less than a decade ago.
Now the Administration is putting Wall Street bankers in
charge. Steve Mnuchin—again, every single Republican voted for
him—was confirmed by the Senate last night. They are going after
the rules that their former employers do not like. They are trying
to take away the financial regulators’ freedom to make difficult decisions that will keep our financial system stable.
These priorities are wrong. American voters agree: 80 percent—
80 percent in one poll, that is Republicans and Democrats and
Independents—agree we need tough rules and stronger, not weaker, penalties for Wall Street.
I want to take a moment to recognize one person in particular
who has been one of the chief architects of the stronger rules that
have been put in place over the past several years to rein in Wall
Street misbehavior and excess. Last week, Governor Tarullo announced he is leaving the Board of Governors. I want to thank Governor Tarullo for his service to our Nation over the last 8 years.
He is one of a handful of dedicated public servants who have made
our financial system safer for a generation to come.
I also want to recognize Scott Alvarez, who is in his 36th year
at the Federal Reserve. He is seated right behind—if he would put
his hand up for a moment, Mr. Alvarez? He is in his 36th year at
the Fed. He has been General Counsel at the Fed I believe for over
a decade. Thank you for your service, Mr. Alvarez.
Madam Chair, I look forward to hearing more from you about the
current state of the economy, the importance—especially the importance of strong rules to guard against economic calamity—I know
you are not going to be there forever, although I wish you were—
and the importance of the strong rules that you have put in place
and you will continue to put in place over the next dozen months
or so, more than that, and what Congress can do to help the economy create jobs and make it easier for all Americans—and I underscore all Americans—to accumulate wealth, to buy a home, to pay
for college, and to have a decent, honorable, dignified retirement.
Madam Chair, it is a pleasure to see you.
Chairman CRAPO. Thank you, Senator Brown.
Again, Madam Chair, we appreciate you being here. We look forward to your opening statement at this point, and then we will
engage in some important discussion. You may proceed.
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STATEMENT OF JANET L. YELLEN, CHAIR, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Ms. YELLEN. Thank you. Chairman Crapo, Ranking Member
Brown, and other Members of the Committee, I am pleased to
present the Federal Reserve’s semiannual Monetary Policy Report
to the Congress. In my remarks today I will briefly discuss the current economic situation and outlook before turning to monetary
policy.
Since my appearance before this Committee last June, the economy has continued to make progress toward our dual-mandate objectives of maximum employment and price stability. In the labor
market, job gains averaged 190,000 per month over the second half
of 2016, and the number of jobs rose an additional 227,000 in January. Those gains bring the total increase in employment since its
trough in early 2010 to nearly 16 million. In addition, the unemployment rate, which stood at 4.8 percent in January, is more than
5 percentage points lower than where it stood at its peak in 2010
and is now in line with the median of the Federal Open Market
Committee participants’ estimates of its longer-run normal level. A
broader measure of labor underutilization, which includes those
marginally attached to the labor force and people who are working
part time but would like full-time jobs, has also continued to improve over the past year. In addition, the pace of wage growth has
picked up relative to its pace of a few years ago, a further indication that the job market is tightening. Importantly, improvements
in the labor market in recent years have been widespread, with
large declines in the unemployment rates for all major demographic groups, including African Americans and Hispanics. Even
so, it is discouraging that jobless rates for those minorities remain
significantly higher than the rate for the Nation overall.
Ongoing gains in the labor market have been accompanied by a
further moderate expansion in economic activity. U.S. real gross
domestic product is estimated to have risen 1.9 percent last year,
the same as in 2015. Consumer spending has continued to rise at
a healthy pace, supported by steady income gains, increases in the
value of households’ financial assets and homes, favorable levels of
consumer sentiment, and low interest rates. Last year’s sales of
automobiles and light trucks were the highest annual total on
record. In contrast, business investment was relatively soft for
much of last year, though it posted some larger gains toward the
end of the year in part reflecting an apparent end to the sharp decline in spending on drilling and mining structures; moreover, business sentiment has noticeably improved in the past few months. In
addition, weak foreign growth and the appreciation of the dollar
over the past 2 years have restrained manufacturing output. Meanwhile, housing construction has continued to trend up at only a
modest pace in recent quarters. And while the lean stock of homes
for sale and ongoing labor market gains should provide some support to housing construction going forward, the recent increases in
mortgage rates may impart some restraint.
Inflation moved up over the past year, mainly because of the diminishing effects of the earlier declines in energy prices and import
prices. Total consumer prices as measured by the personal consumption expenditure, or PCE, index rose 1.6 percent in the 12
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months ending in December, still below the Federal Open Market
Committee’s (FOMC) 2-percent objective but up 1 percentage point
from its pace in 2015. Core PCE inflation, which excludes the volatile energy and food prices, moved up to about 1 3⁄4 percent.
My colleagues on the FOMC and I expect the economy to continue to expand at a moderate pace, with the job market strengthening somewhat further and inflation gradually rising to 2 percent.
This judgment reflects our view that U.S. monetary policy remains
accommodative, and that the pace of global economic activity
should pick up over time, supported by accommodative monetary
policies abroad. Of course, our inflation outlook also depends importantly on our assessment that longer-run inflation expectations will
remain reasonably well anchored. It is reassuring that while market-based measures of inflation compensation remain low, they
have risen from the very low levels they reached during the latter
part of 2015 and first half of 2016. Meanwhile, most survey measures of longer-term inflation expectations have changed little, on
balance, in recent months.
As always, considerable uncertainty attends the economic outlook. Among the sources of uncertainty are possible changes in U.S.
fiscal and other policies, the future path of productivity growth,
and developments abroad.
Turning to monetary policy, the FOMC is committed to promoting maximum employment and price stability, as mandated by
the Congress. Against the backdrop of headwinds weighing on the
economy over the past year, including financial market stresses
that emanated from developments abroad, the Committee maintained an unchanged target range for the Federal funds rate for
most of the year in order to support improvement in the labor market and an increase in inflation toward 2 percent. At its December
meeting, the Committee raised the target range for the Federal
funds rate by 1⁄4 percentage point, to 1⁄2 to 3⁄4 percent. In doing so,
the Committee recognized the considerable progress the economy
had made toward the FOMC’s dual objectives. The Committee
judged that even after this increase in the Federal funds rate target, monetary policy remains accommodative, thereby supporting
some further strengthening in labor market conditions and a return to 2 percent inflation.
At its meeting that concluded early this month, the Committee
left the target range for the Federal funds rate unchanged but reiterated that it expects the evolution of the economy to warrant further gradual increases in the Federal funds rate to achieve and
maintain its employment and inflation objectives. As I noted on
previous occasions, waiting too long to remove accommodation
would be unwise, potentially requiring the FOMC to eventually
raise rates rapidly, which could risk disrupting financial markets
and pushing the economy into recession. Incoming data suggest
that labor market conditions continue to strengthen and inflation
is moving up to 2 percent, consistent with the Committee’s expectations. At our upcoming meetings, the Committee will evaluate
whether employment and inflation are continuing to evolve in line
with these expectations, in which case a further adjustment of the
Federal funds rate would likely be appropriate.
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The Committee’s view that gradual increases in the Federal
funds rate will likely be appropriate reflects the expectation that
the neutral Federal funds rate—that is, the interest rate that is
neither expansionary nor contractionary and that keeps the economy operating on an even keel—will rise somewhat over time. Current estimates of the neutral rate are well below pre-crisis levels—
a phenomenon that may reflect slow productivity growth, subdued
economic growth abroad, strong demand for safe longer-term assets, and other factors. The Committee anticipates that the depressing effect of these factors will diminish somewhat over time,
raising the neutral funds rate, albeit to levels that are still low by
historical standards.
That said, the economic outlook is uncertain, and monetary policy is not on a preset course. FOMC participants will adjust their
assessments of the appropriate path for the Federal funds rate in
response to changes to the economic outlook and associated risks
as informed by incoming data. Also, changes in fiscal policy or
other economic policies could potentially affect the economic outlook. Of course, it is too early to know what policy changes will be
put in place or how their economic effects will unfold. While it is
not my intention to opine on specific tax or spending proposals, I
would point to the importance of improving the pace of longer-run
economic growth and raising American living standards with policies aimed at improving productivity. I would also hope that fiscal
policy changes will be consistent with putting U.S. fiscal accounts
on a sustainable trajectory. In any event, it is important to remember that fiscal policy is only one of the many factors that can influence the economic outlook and the appropriate course of monetary
policy. Overall, the FOMC’s monetary policy decisions will be directed to the attainment of its congressionally mandated objectives
of maximum employment and price stability.
Finally, the Committee has continued its policy of reinvesting
proceeds from maturing Treasury securities and principal payments from agency debt and mortgage-backed securities. This policy, by keeping the Committee’s holdings of longer-term securities
at sizable levels, has helped maintain accommodative financial
conditions.
Thank you. I would be pleased to take your questions.
Chairman CRAPO. Thank you very much, Chair Yellen, and I
want to get into that last issue you talked about with regard to the
Fed’s balance sheet. But before that, I have got two or three quick
questions I just wanted to go through with you.
First, Dodd-Frank established a new position at the Federal Reserve, the Vice Chairman of Supervision. President Obama has
never yet designated anyone for this role, and instead Fed Governor Dan Tarullo has acted as the de facto Vice Chairman for Supervision in various ways, including by chairing the Federal
Reserve Board’s Committee on Supervision and Regulation, overseeing the Large Institution Supervision Coordinating Committee,
and representing the Fed at the Financial Stability Board and in
Basel, among other functions.
What role do you envision for the Fed Vice Chairman for Supervision having? And how do you envision working with this person
when we get one nominated? And is it your expectation that a
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Presidentially appointed Federal Vice Chairman for Supervision
will have the responsibilities that Governor Tarullo currently has,
including, among other things, chairing the Committee on Supervision and Regulation and negotiating on behalf of the Federal Reserve in Basel?
Ms. YELLEN. Chairman Crapo, I think, as you know, the entire
Board has responsibility for approving new rules, but the Vice
Chair would head our Supervision and Regulation Committee and
would coordinate our efforts in this area. He or she would also represent the Board on international negotiations of financial regulatory standards, including representing the Fed in Basel. And
beyond that, the new Vice Chair would fulfill any statutory obligations such as providing semiannual testimony to Congress on
supervision. I look forward to working with that individual.
Chairman CRAPO. Thank you very much.
Second, President Trump recently issued an Executive order directing the Treasury Secretary to work with the member agencies
of FSOC to review the extent to which existing laws and regulations promote certain core principles. First of all, do you agree that
it is important to promote the core principles mentioned in this Executive order? And do you plan to work with the Treasury Secretary and other members of FSOC to ensure that this review
occurs?
Ms. YELLEN. So I certainly do agree with the core principles.
They enunciate very important goals for our financial system and
for supervision and regulation of it. And I look forward to working
with the Treasury Secretary and other members of FSOC to engage
in this review.
Chairman CRAPO. Thank you very much.
My third question before we get to the balance sheet is: Fannie
Mae and Freddie Mac were put into conservatorship in 2008 and
continue to dominate the mortgage market. I am not alone in calling for housing reform and considering it the most significant piece
of unfinished business following the financial crisis.
Do you believe that finding a durable, comprehensive legislative
solution for the housing finance market is urgently needed? And
are you willing to work with us to help achieve that?
Ms. YELLEN. Yes, I think it is very important that Congress continue to deal with the GSEs and figure out what the Government’s
role in housing finance should look like going forward. The goal of
bringing private capital back into the mortgage market I think is
important, and I would hope that Congress would decide explicitly
on what the Government’s role is and, if there are guarantees, that
they would be recognized and priced appropriately. And we look
forward to continue working with you to help achieve these
objectives.
Chairman CRAPO. Well, thank you. And I just wanted to get your
comments on those few issues before I go into this final question
on the balance sheet. The Fed has said that it will not begin
shrinking its balance sheet until normalization of the level of Federal funds rates is well underway. Recently, some Reserve Bank
Presidents have suggested that it is time to consider beginning that
process. What are the benefits of starting to let the balance sheet
run off rather than relying solely on short-term rate hikes to
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tighten policy? And as short-term rates rise, is it problematic to
have the large balance sheet continuing to put downward pressure
on longer-term rates?
Ms. YELLEN. Well, Chairman Crapo, the Federal Reserve resorted to purchases of longer-term assets after the financial crisis
at a time when the economy was very depressed, unemployment
was very high, inflation running below our objectives, and extraordinary support was needed. But we would hope that that was a
very unusual intervention and one that we would not frequently be
relying on in the future.
The FOMC has enunciated that its longer-run goal is to shrink
our balance sheet to levels consistent with the efficient and effective implementation of monetary policy. And while our system
evolves and I cannot put a number on that, I would anticipate a
balance sheet that is substantially smaller than at the current
time.
In addition, we would like our balance sheet to again be primarily Treasury securities; whereas, as you pointed out, we have
substantial holdings of mortgage-backed securities.
Now, to adjust financial conditions in order to influence economic
developments in line with our dual-mandate objectives, the Committee would like, to the maximum extent possible, to rely on variations in our short-term overnight interest rate to accomplish that
objective. It is our traditional tool. It is the one that we have the
most confidence in, that markets best understand how we set it,
and we have the greatest confidence in our ability to calibrate it
relative to the needs of the economy. So we do not want to use fluctuations in our balance sheet policy as an active tool of monetary
policy management.
So what we would like to do is to find a time when we judge that
our need to provide substantial accommodation to the economy in
the coming years is minimal, when we have confidence that the
economy is on a solid course, and the Federal funds rate has
reached levels where we have some ability to address weakness by
cutting it. And once we have that confidence, we will begin to allow
maturing principal from our investments to gradually and in an orderly way we will stop reinvestments or diminish them, and allow
our balance sheet to shrink in an orderly and predictable way.
The Committee has decided that it will not sell mortgage-backed
securities, but as principal matures, we will begin to allow those
assets to run off our balance sheet. So we do expect to be discussing in greater detail. We gave general guidance that we want
to wait to start this process until the process of normalization is
well underway, and the Committee in the coming months will be
discussing issues pertaining to reinvestment strategy to try to provide some further guidance.
Chairman CRAPO. Thank you very much.
Senator Brown.
Senator BROWN. Thank you, Senator Crapo, Mr. Chairman.
Madam Chair, you testified last year that the banking system
was more safe, more resilient. Is that still true?
Ms. YELLEN. I believe so. Yes. I mean, there is much more capital in the banking system. The quantity of high-quality capital,
Tier 1 capital, has more than doubled since before the financial
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crisis. There is much more liquidity. I believe the financial system
is much more resilient than it was.
Senator BROWN. Thank you. Now that we know that—and I
think we already knew that—I appreciate your assertion and convincing arguments that you have made for some time. Some have
remarked that banks are not lending now. Is that true?
Ms. YELLEN. Well, a recent survey by the National Federation of
Independent Business, which is smaller businesses, indicated that
only 4 percent of respondents were unable to get all of the loans
that they needed, and the fraction of businesses ranking inadequate access to credit as their main problem stood at 2 percent,
which is an extremely low number.
Senator BROWN. So just because people——
Ms. YELLEN. Lending has expanded overall by the banking system and also to small businesses——
Senator BROWN. Thank you. Just because people in high places
say it is true does not make it so.
Are U.S. banks competing—others have said that U.S. banks
cannot compete. Are U.S. banks competing relative to their international counterparts?
Ms. YELLEN. U.S. banks are generally considered quite strong
relative to their counterparts. They built up capital quickly, partly
as a result of our insistence that they do so following the financial
crisis and, as I mentioned earlier, are very well capitalized. And
they are lending. Their price-to-book ratios are substantially higher
than the ratios of banks headquartered in other areas. And they
are gaining market share, and they remain quite profitable.
Senator BROWN. So banks are safer and more resilient. Banks
are lending. Banks are able to compete with international counterparts. Consumers—some have said consumers are worse off since
the crisis. Are consumers better protected today from abusive and
deceptive and fraudulent practices than they were?
Ms. YELLEN. Well, certainly we have focused very much on protecting consumers in our implementation of strengthening the
financial system. And, of course, consumers were very seriously
harmed by the financial crisis, but I think we have seen a significant recovery.
Senator BROWN. And the Fed is tailoring rules, as we have discussed personally and in this forum, the Fed is tailoring rules for
communities and—for community banks, regional banks, the largest banks based upon factors including size and riskiness, correct?
Ms. YELLEN. Yes.
Senator BROWN. It seems to me that steps taken after the crisis
with higher capital requirements, as you have said, with stress
tests, with orderly liquidation authority, with the Consumer Financial Protection Bureau have made our economy stronger, our financial system more stable, our banks better capitalized, and our
consumers better protected. I think that if the rules are removed,
as one executive said during the crisis, if the music is playing, you
have got to get up and dance. If the rules are removed, Wall Street
will almost assuredly be right back to their risky and reckless
behavior we experienced before you took this job, back before the
crisis.
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A couple of other lines of questions, if I could, Madam Chair, Mr.
Chairman. Recent Executive action directs the Secretary of Treasury to chair the Financial Stability Oversight Council, FSOC, to review the rules and other activities of each member agency of
FSOC, including the Fed, to determine if they are consistent with
the certain core principles of the executive branch. I know the Fed
and other agencies regularly review their work to make sure that
the rules continue to enhance financial stability and promote safety
and soundness and to protect consumers.
To the extent that you provide any information or conclusions to
Treasury or to FSOC about your agency’s rules as part of this process, could you provide those materials to the Banking Committee?
Ms. YELLEN. So I do not yet have any clarity about what the
process will involve, but we——
Senator BROWN. But when you do?
Ms. YELLEN. We always try to work with our oversight committees to provide materials that are relevant to your oversight of us.
Senator BROWN. Thank you.
Ms. YELLEN. And we will strive to be cooperative.
Senator BROWN. And we will count on that. Thank you.
I have doubts about the Executive order that requires Federal
agencies to eliminate two rules—in many cases, two consumer protections—for every new rule. I am particularly troubled by what
that means for financial regulators. It is a little like telling the
highway department to take down 2 feet of guardrails for every
foot it puts up.
Is it clear that—I have a series of questions, and I will put them
together, if you would answer. Is it clear that financial regulators,
including the Fed, are not covered by this rule? Does it make sense
to remove two safety and soundness rules for every new safety and
soundness protection? Does it make sense to remove two consumer
protections for every new consumer protection? Will it make our
system more stable and better protect consumers from bad actors?
Ms. YELLEN. So I believe that the independent agencies are not
covered explicitly by the rules, but let me just say that considering
regulatory burden and looking for ways in issuing rules and reviewing outstanding rules, constantly looking for ways to mitigate
burden I think is an important goal, and it is one that we have
strived and will strive to achieve. And it is a legitimate and important goal.
Senator BROWN. Understanding, of course, what some people call
‘‘rules and regulatory overreach,’’ others call ‘‘consumer protection
and environmental protection and work protections.’’
Chair Yellen—last question, Mr. Chairman—I want to follow up
on an issue we have talked about: diversity in the Federal Reserve
System. We see the least diverse President’s Cabinet than we have
seen at any time in the last three decades. The Presidents of two
of the most diverse Federal Reserve districts in the country, Richmond and Atlanta, have announced their retirement. Each bank
has begun its search for the replacement. What is the Board of
Governors doing to ensure that a diverse set of candidates is considered for these positions?
Ms. YELLEN. The Board consults with the search committees that
are charged with nominating individuals to serve as Presidents of
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the Reserve Banks, and we consistently emphasize that diversity
is an extremely important goal. We ensure that the search is inclusive, that robust efforts are made to identify diverse pools, and that
the boards are focused on this important goal as they go about
their searches.
Senator BROWN. And the last connected question, significant racial disparities in unemployment and wages persist everywhere—
not, of course, just Mississippi, Louisiana, Maryland, South Carolina, places in both of these districts. What is the Fed doing to
ensure that these challenges are understood by the Board of Directors in these districts? What can be done by the Fed or others to
address these issues?
Ms. YELLEN. Well, I think we are trying to address issues of high
minority unemployment by adopting policies that result in a robust
labor market and strong overall job conditions. Over the last year,
for example, the unemployment rate of African Americans I believe
has come down about a percentage point, moved substantially more
than that for white Americans. So a strong labor market does improve the situation of vulnerable minorities, although it is, as I
mentioned, disturbing that such large disparities continue to exist.
Senator BROWN. Thank you, Mr. Chairman.
Chairman CRAPO. Senator Shelby.
Senator SHELBY. Madam Chair, good to see you.
Ms. YELLEN. Thank you.
Senator SHELBY. I want to pick up on the theme that Chairman
Crapo got into a minute ago dealing with the Vice Chairman of the
Fed. We have been hoping that—we did at one time hope that
President Obama would nominate someone, but he did not. But
now, as I understand it, there are going to be three openings at the
Fed. Tarullo—it will come in April, whenever it is he has resigned.
Two other openings are there. And then your tenure, you are appointed to, what, next February? Is that correct?
Ms. YELLEN. That is correct.
Senator SHELBY. Do you intend to fulfill this last year of your appointment?
Ms. YELLEN. I do intend to complete my term as Chair.
Senator SHELBY. What will be the mechanics of how the Fed Vice
Chairman will work—the Chairman got into that some—with the
whole Board? You mentioned that he would come before the Committee to testify, he would represent people at the international—
dealing with regulatory relief, regulatory affairs and so forth. Have
you got anything else to add to that?
Ms. YELLEN. Well, importantly, he would chair our Board Committee on Supervision and Regulation, and that Committee takes
the lead on behalf of the full Board in working with the Division
of Supervision and Regulation to craft rulemakings that are then
brought to the full Board for a vote. The Vice Chair would head
that Committee and would have oversight in that role for our Division of Supervision and Regulation and would also represent us in
international supervision groups such as the Basel Committee.
Senator SHELBY. So if we have three new appointments to the
Fed Board of Governors, that will be three new people to deal with,
and you will have to deal with that as the Chairman. Is that right?
Ms. YELLEN. Of course. We have a diverse membership——
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Senator SHELBY. Sure.
Ms. YELLEN.——which changes over time, and the role of the
Chair is to work constructively with all the Governors to manage
the matters that Congress has charged us with.
Senator SHELBY. When you are getting into the area of monetary
policy, inflation, deflation, and so forth, price stability, what is the
biggest challenge as you are looking at all the data inside to see
where inflation is rearing its head and so forth? Is it wages and
salaries? Is that one of the big components? Energy is generally a
component there, and food is a component. But sometimes you do
not count that, you know. What is your biggest challenge in measuring, engaging, and configuring what inflation is doing or not
doing?
Ms. YELLEN. So we look at many measures of inflation. Our objective—we recognize that food and energy are very important
parts——
Senator SHELBY. Volatile, isn’t it?
Ms. YELLEN. Consumers spend a good share of their budgets on
food and energy. We do not want to ignore movements in food and
energy prices in measuring inflation. So in my testimony, I began
by saying that an overall comprehensive measure of price increases
that includes food and energy ran at 1.6 percent last year. There
are many different measures. We have focused explicitly in saying
that we have a 2-percent inflation goal on the measure we regard
as the best measure we have of consumer prices, which is the personal consumption expenditure price index. It is less well known
than the CPI, but we think it is actually a more comprehensive
measure.
Now, food and energy prices are very volatile, and in looking forward over a number of years and trying to estimate where inflation
is going, we often look at measures called ‘‘core measures’’ that remove food and energy prices.
Wage developments, it is unclear that they have much direct effect on inflation, but generally what we have found is that in a situation where labor and product markets are tight, inflation tends
to move up. And movements in wage growth gives us a sense of
just how tight labor markets are.
Senator SHELBY. In the area of regulations, the last time you
came before this Committee that you alluded to—I believe it was
back in June—I asked you what the Federal Reserve’s plans were
to tailor the CCAR process to provide much needed relief to smaller
regional banks. On January 30th, the Federal Reserve issued its
final CCAR rule, which tailored the process for institutions that
have less than $250 billion in total consolidated assets and less
than $75 billion of total nonbank assets.
What is the significance of what you did there? And how will
that help?
Ms. YELLEN. I think that change will reduce burdens substantially for——
Senator SHELBY. Regulation?
Ms. YELLEN. Yes, for a significant number of institutions. After
engaging in a 5-year review of CCAR and our stress-testing methodologies, we decided that the capital planning processes of those
smaller institutions could be adequately reviewed and commented
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on through our normal supervisory processes, and that it was appropriate to exempt them from the qualitative portion of that capital review. But we still are subjecting them to our stress tests and
requiring that they conduct stress tests themselves. That is an important component of our supervision.
Senator SHELBY. But as a regulator, you will continue to monitor
that, and if that needs to be tailored, you will do whatever it takes?
Ms. YELLEN. Yes, we believe very strongly in tailoring to make
sure that our regulations fit the risk profiles of particular institutions, and especially for smaller institutions, we are very well
aware of the burdens that they face and are looking for every way
we can find to mitigate those burdens.
Senator SHELBY. Thank you.
Chairman CRAPO. Senator Reed.
Senator REED. Well, thank you, Mr. Chairman, and thank you,
Madam Chair, for your leadership. Some of my colleagues in the
Congress have called on the Federal Reserve to use a formula, a
very strict formula in setting interest rates. Many times they refer
to the Taylor rule. Could you explain to us how this would affect
particularly working Americans? Would it be good or bad? And how
do we explain its ramifications to our constituents?
Ms. YELLEN. Well, right now the Taylor rule would call for a
short-term interest rate somewhere between 3 1⁄2 and 4 percent,
which is obviously a much higher value of the Federal funds rate
than the FOMC has deemed appropriate given the needs of the
economy. I believe we would have a much weaker economy if in the
last number of years we had followed the dictates of that rule. Unemployment would be substantially higher. The labor market
would be weaker. And instead of inflation which is running below
2 percent—and we want to see it move up to our 2-percent objective—I believe inflation would likely be lower than it is now.
Senator REED. So we would see fewer jobs, higher mortgage interest rates, a weaker economy if we were essentially just automatically following a formula?
Ms. YELLEN. That is right. I recently, a few weeks ago, gave a
speech at Stanford where I tried to explain why I thought it was
appropriate to address the recommendations of rules like that, to
take into account, for example, the fact that not only the FOMC
but most outside forecasters believe that the so-called neutral rate
of interest has been unusually low in the aftermath of the crisis.
And the Taylor rule would assume that it is at 2 percent. Current
estimates would put that estimate closer to zero.
Senator REED. All right. Thank you. There is another aspect I
have been working on for years, particularly incorporating some of
the language in the Dodd-Frank bill, ensuring that clearing platforms are used, but there is a risk because systemic failure would
be significant. Can you give us an update on what you are doing,
and your colleagues, to ensure that the central clearing platforms
are adequately protected from failure, i.e., the consumers are ultimately protected from failure?
Ms. YELLEN. Well, we strongly believe that well-regulated and
well-managed financial market infrastructures—and that would include central counterparties—play a positive financial stability
role. They can help stem the propagation of disturbances, and they
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reduce the volume of transactions among key financial institutions.
And we think they play a financial stability role, but they can also
be sources of risk to the financial system if they are not themselves
well managed. Title VIII of Dodd-Frank created a structure in
which the Federal Reserve, the CFTC, and the SEC have oversight
responsibilities to make sure that these key infrastructures of our
financial system are managing their own risks successfully, and we
are cooperating with the other regulators in our examinations to
make sure that appropriate risk management standards are in
place.
Senator REED. Thank you. A final question. Cybersecurity is the
issue on everyone’s mind, and you recently have an Advanced Notice of Proposed Rulemaking which would require boards of directors to have adequate expertise. I have been involved in legislation
that would apply not just to financial institutions but publicly held
companies because the cyber threat is not limited. It is ubiquitous.
Could you just briefly—very briefly—give us your sense of how
important it is to get this cybersecurity expertise on boards?
Ms. YELLEN. Well, I think cybersecurity is a major, major risk
that financial firms face. I think they are very well aware of the
risks, and my sense is that boards of directors generally appreciate
the seriousness of cyber threats, but sometimes they do not have
a comprehensive or enterprise-wide view of the institution’s capabilities in this area. And so it is very important for boards to have
appropriate expertise.
Senator REED. Thank you very much, Madam Chair.
Thank you, Mr. Chairman.
Chairman CRAPO. Senator Corker.
Senator CORKER. Thank you, Mr. Chairman. And, Madam Chairman, thank you for your service and being here today. I, too, want
to thank Mr. Tarullo. I did not always agree with every decision
he made, but we had vigorous debate, and I do think he was a committed public servant, and I want to thank him for his service,
along with Mr. Alvarez. We were in the foxhole many, many times
back in 2008, and, again, I thank you for your service.
Madam Chairman, I was interviewed earlier today, and, you
know, people have always sort of hinged their futures on what you
have to say and I guess are somewhat thankful now that it looks
like you have a little bit of a partner. We knew at one time there
probably were going to be no changes here—not being pejorative,
it is just the environment we lived in. And yet now we look at potential tax reform, we look at potential changes to the health care
policy, we look at things relative to infrastructure and all of that.
As you see those possibilities occurring, is that affecting how you
look at monetary policy decisions moving down the road? A stagnant situation before, again, just because of the environment, a
very changing possibility policy environment here, is that something that is affecting your deliberations?
Ms. YELLEN. So we recognize that there may be significant
economic policy changes and that those changes could affect the
outlook. We are very well aware of that. And we do not yet have
enough clarity on what changes will be put in place to really clearly factor those policy changes into the economic outlook.
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So we do not want to base current policy on speculation about
what may come down the line. We will wait to gain greater clarity
on policy changes and try to assess——
Senator CORKER. Well, those policy changes, once you develop
greater clarity on what you think is coming down the pike, could
affect monetary policy decisions.
Ms. YELLEN. Well, it is one of many factors that could affect
monetary policy decisions. So I think the answer is yes, they could.
Exactly how depends on the timing——
Senator CORKER. I got it.
Ms. YELLEN.——size, composition, and many factors——
Senator CORKER. And growth I guess would generate—growth
could generate additional inflationary pressures, and so paying attention to that, and when that happens, it can happen fairly quickly, can it not?
Ms. YELLEN. Well, we will certainly pay attention to it. I think
some policies may have supply side impacts and raise productivity
growth——
Senator CORKER. All right.
Ms. YELLEN.——and sustainable growth in the economy, too.
Senator CORKER. You mentioned something about sustainable
trajectory; you are hoping the Administration will develop policies
that cause a sustainable trajectory relative to fiscal issues. Is there
anything that you are seeing coming down the pike or being debated that has caused you to raise that issue? I agree with you, by
the way, but is there something you are looking at that caused you
to put a note in there, or is that just a standard line that would
be in a report like this?
Ms. YELLEN. Well, I think we have known for many, many years
that the U.S. fiscal trajectory is not sustainable, and the Congressional Budget Office’s most recent forecasts show deficits increasing over the next 10-year period under their baseline and the ratio
of debt to GDP as rising.
Senator CORKER. So nothing—it is just a standard, there is nothing that you are looking at coming out of the Administration or
Congress that is causing you to raise that alarm. It is more just
the standard concern that many of us have that we are really conducting ourselves in a totally inappropriate way as it relates to
deficits. Nothing that is being discussed policy-wise right now.
Ms. YELLEN. Well, I mean, some of the policies that are being
discussed might well raise deficits, and in that context, they may
also have impacts on economic growth——
Senator CORKER. Yeah.
Ms. YELLEN.——and the economy’s growth potential. So it is not
a simple matter to evaluate. But I do think it is worth pointing out
that fiscal sustainability has been a long-standing problem and
that the U.S. fiscal course, as our population ages and healthcare
costs increase, is already not sustainable.
Senator CORKER. I agree 100 percent. You gave a very fulsome
answer to the balance sheet question, and I understand how the
Fed’s fund rate is much more targetable and much more accurate.
I guess what I have not understood is just allowing the maturity—
in other words, allowing these securities, $4.5 trillion or so, just to
mature and rolling off, it is hard to understand how that would
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create vagaries, if you will, relative to monetary policy that would
be hard to predict. Could you share——
Ms. YELLEN. Yes, I am sorry, I did not mean to say that it would
create a problem.
Senator CORKER. Yeah.
Ms. YELLEN. We want to allow that process to occur in a gradual
and orderly way in order to——
Senator CORKER. But wouldn’t just allowing them to mature,
when they mature, they roll off, isn’t that orderly?
Ms. YELLEN. Yes. Yes, it is orderly, and that is why we intend
to do it that way.
Senator CORKER. But you have not started yet.
Ms. YELLEN. We have not——
Senator CORKER. You are reinvesting now. I am just curious
why—it just does not seem to me——
Ms. YELLEN. So I agree it is orderly, and that is our desire, to
have it be an orderly process, which is why we intend to allow
those assets to run off as principal matures. So we recognize, however, that allowing that process to occur results in some tightening
of financial conditions. And so before we turn that process on and
start it, we want to make sure that we have adequate ability
through our normal interest rate—overnight interest rate moves to
meet the needs of the economy, particularly if it were to weaken
some, which it would be a long process if it is running off, and we
want to make sure we have enough scope and the economy is
strong enough that that runoff would not create a problem for the
economy.
Senator CORKER. I just want to close with a statement. I know
when you were coming in and interviewing for this post and being
affirmed, you mentioned to me that when times called for it, you
would allow interest rates to rise. And you are known as being a
dove, but, in fact, you are—I know some people have criticized the
rate at which those rises have taken place, probably me included,
but I do want to thank you for allowing that to happen, hoping it
will continue as we return to more normal circumstances. Hopefully the balance sheet will roll off, and I hope you will continue
to criticize us if we allow deficit spending to continue more so than
it already is today. Thank you so much.
Ms. YELLEN. Thank you, Senator, and I think allowing that process to take place, that is something that will show that the economy is doing well and the increases have been a reflection of the
strength we have seen in the economy.
Senator SHELBY. [Presiding.] Senator Menendez.
Senator MENENDEZ. Thank you. Chairman Yellen, thank you for
your leadership at the Federal Reserve. Our economy, though not
perfect, has made tremendous strides since the financial crisis and
ensuing Great Recession, which wiped out nearly $13 trillion in
household wealth and cost 9 million Americans their jobs. And I
think these last 6 years have shown us how important and positive
Wall Street reform and consumer protection has been to our economy, to strong markets, and, most importantly, to American families and businesses.
Now, I want to ask you specifically, as you know, healthcare
accounts for nearly 20 percent of U.S. GDP, including not only the
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delivery of life-saving, life-enhancing health services, but also fueling innovations in patient care, in diagnostics, in preventative
health, and research and development of cures to diseases.
In response to the fiscal year 2017 budget resolution that Congress passed last month, the former Director of the Office of Management and Budget sent a letter to Congress saying that the resolution would add $9.5 trillion to the deficit. Recent studies have
shown that a major market disruption would have a detrimental
impact on the labor market, including a reduction in job growth by
nearly 2.6 million jobs in 2019.
My home State of New Jersey is estimated to be among the top
of the list when it comes to potential job losses as a result of a
spike in the number of uninsured. Furthermore, stripping nearly
30 million people of their health insurance would have a significant
impact on the productivity of the American workforce.
Are you concerned about how this major increase in debt coupled
with the downturn in the labor market and decreased productivity
would have on the larger economy?
Ms. YELLEN. Well, we would have to look at what the impact is
of shifts in health care on the economic outlook. Health care, as
you mentioned, does account for a very significant share of spending, and a loss of access to health insurance could have a significant impact on spending of households for other goods and services
and, beyond health care itself, have impacts on the economy.
In addition, access to health care has for some individuals likely
increased their mobility and diminished the phenomenon called
‘‘job lock,’’ where people are afraid to leave jobs because of losing
health insurance, and that could have implications for the labor
market as well that we would try to evaluate.
Senator MENENDEZ. So we should tread lightly before we make
major changes that create disruptions.
Let me ask you this: In the years leading up to the financial
crisis, many lenders and financial institutions exploited the uncoordinated enforcement of consumer protection laws and misled consumers into expensive and risky subprime mortgages even if they
qualified for prime rates. As part of the landmark Wall Street Reform and Consumer Protection Act, we were finally able to
empower a cop on the beat to protect hardworking Americans from
unfair, deceptive, and abusive financial practices, and from my
view it has been working.
As an independent agency whose sole job is to enforce consumer
protection laws, the CFPB has returned almost $12 billion in relief
to more than 29 million consumers. And, more importantly, the Bureau helps level the playing field for hardworking American families, ensuring that consumers are protected when they purchase a
home, open credit cards, take out student loans, and use prepaid
cards.
Do you believe that if an independent consumer-focused agency
like the CFPB has existed to police mortgage markets prior to the
financial crisis, much of the economic damage to working-class families would have been avoided? In addition to protecting individual
families, would better enforcement of consumer protections also
have enhanced national financial stability?
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Ms. YELLEN. Well, I do agree that consumer abuses in the mortgage and securitization areas played a key role in the crisis. The
Federal Reserve at that time had responsibility for enforcement of
these regulations, and in retrospect, I wish the Fed had acted more
aggressively and earlier to address those abuses. We have certainly
learned from the financial crisis that it is critical to monitor this
area and the potential for deceptive practices in consumer lending
to create a financial crisis or financial stability issues.
Senator MENENDEZ. So an entity like the Consumer Financial
Protection Bureau, which has, in essence, done that since the Great
Recession, has played a critical role in ensuring that. Certainly, I
agree that had the Fed been more active, along with all our other
regulators, about being the cop on the beat instead of being asleep
at the switch, it would have been great. But in the absence of that,
a bureau like the Consumer Financial Protection Bureau is actually playing a significant role in ensuring that consumers have a
level playing field. Is that not a fair statement?
Ms. YELLEN. Well, they have been focusing certainly on these
issues.
Senator MENENDEZ. Let me close by saying in the 104-year history of the Federal Reserve, it has had 134 different presidents of
regional banks. Not one—not one—of those 134 presidents has
been African American or Latino. That is pretty outrageous. And
it is my hope that now that there are some openings, that we begin
to change that reality. These are two communities that have an
enormous part of contributing to the Nation’s GDP, and for them
not to have any representation whatsoever in the process of these
banks is not acceptable, and I hope we can begin to change the
reality.
Ms. YELLEN. Increasing diversity is a critical priority, and I
share your hope.
Senator SHELBY. Senator Toomey.
Senator TOOMEY. Thank you, Mr. Chairman.
Madam Chair, thank you very much for joining us yet again. I
want to briefly ask you a question about the FOMC forecast for
growth at the December meeting. As we all know, we had an election in November in which a President and a Congress were elected, and a very, very central part of the message of both the President and the Congress included a commitment to tax reform, a
commitment to a very different regulatory approach, including a
much lighter regulatory touch and rollback of existing regulation,
and there was considerable discussion also about a fiscal stimulus
in the form of an infrastructure bill. But I do not think anyone disputes that the President campaigned on tax reform, campaigned on
lighter regulation, campaigned on this.
It seems that most of the world responded with the view that
that increases the likelihood—no certainty here, but increases the
likelihood that we would have stronger economic growth. Equity
markets responded powerfully and immediately. Bond markets sold
off, which is consistent with the view of stronger economic growth.
The IMF projected stronger economic growth. A poll of economists
by the Wall Street Journal showed a very strong consensus that
growth was likely to tick up. The World Bank suggested that tax
reform alone would add eight-tenths of a percent to American GDP
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in 2018. And yet at the December Fed meeting, the FOMC members had no change in their opinion at all, as far as I can gather,
about the prospect for economic growth. In fact, the upper bound,
the highest estimate, actually decreased.
So it just looks on the surface like the FOMC members either believe it is unlikely that any of those things will actually happen,
or they think that those things are not particularly pro-growth.
And, obviously, the rest of the world is of a different opinion.
Does the Fed have the view that the prospects for growth are not
at all changed by the prospect of tax reform and regulatory reform?
Ms. YELLEN. Well, we do not yet have clarity on what economic
policy changes will be put in place——
Senator TOOMEY. I understand there is no certainty. This is
about likelihoods.
Ms. YELLEN. Most of my colleagues decided that they would not
speculate on what economic policy changes would be put into effect
and what their consequences would be. A few of my colleagues
mentioned that in writing down those forecasts, they assumed that
there would be a mild fiscal stimulus. But most of my colleagues
have taken the view that we want greater clarity about the size,
timing, and composition of changes to fiscal and other policies
before trying to incorporate those into our forecasts.
Senator TOOMEY. OK. That is what I suspected. Let me move on
to CCAR. I sent you a letter last week outlining some of the big
concerns that I have about CCAR, and let me just touch on a few
of them briefly.
First of all, compliance is enormously expensive for the banks
who are subject to that. There is a recent GAO report that suggests
that the CCAR models employed by the Fed and testing procedures
are not transparent. Well, that is, I think, generally acknowledged.
The GAO report goes on to suggest that the Fed does not engage
in sufficient risk management of the systems of the models it uses.
The GAO report also concludes that the Fed has not assessed
whether CCAR is inadvertently procyclical despite the intent that
it be countercyclical.
I am concerned that CCAR might actually increase systematic
risk in one important respect by correlating the risks of bank
behavior and allocation of capital. And the CCAR’s implicit risk
weighting, which we have to infer because they are not explicit, is
very, very different from those of the banks and, for that matter,
Basel III.
Now, as you know, CCAR is not required by statute. DFAST is
required by statute, but CCAR is not. And you mentioned earlier
that there has been a huge increase in the capitalization of American banks post crisis, which is certainly the case. And the Fed
already has other ways of boosting capital requirements like the
countercyclical capital buffer and the G–SIB surcharge.
So my question is: Given all of that, isn’t CCAR at least somewhat duplicative? And since it is very, very costly and not mandated by statute, would you consider bringing it to an end at some
point in the foreseeable future?
Ms. YELLEN. Well, I think it is a key part of our regulatory process. It is a very detailed and institution-specific and forward-looking assessment of the risks in the firm’s balance sheet, and I think
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it has been a cornerstone of our efforts to improve supervision, especially of the largest banking institutions whose stability is really
critical to overall U.S. financial stability.
The GAO in their assessment found that the stress tests have
been useful and played a useful role. They did not recommend that
we end them. They made a number of specific recommendations
which we agree with and are working on, and we will, of course,
continue to review our practices as we recently changed CCAR to
exempt most of the institutions under $250 billion from the qualitative part of the CCAR review. But I do think that stress testing
has greatly strengthened our process of supervision.
Senator TOOMEY. I appreciate that. I would just point out that
in the absence of CCAR, that does not necessarily imply the end
of stress testing. DFAST is a mandate for stress testing that occurs
separately. Banks do their own stress testing. So I do think it is
duplicative.
Mr. Chairman, if I could just make one quick closing comment?
That is, as we all know, we have had a de facto Acting Vice Chair
of Supervision who never went through the nomination or the confirmation process but, nevertheless, exercised the powers of that
position. It is my hope that the President will soon be able to nominate individuals to complete the Board of Governors, including a
Vice Chair for Supervision who will go through the process, who
will be vetted and confirmed by the Committee. And until such
time, I hope the Fed will refrain from issuing major new regulations which I think really ought to benefit from the input of these
new people.
Thank you.
Chairman CRAPO. [Presiding.] Thank you. Before I go to Senator
Rounds, Senator Shelby had one quick question he wanted to ask.
Senator SHELBY. I will try to be quick. We have not talked about
this, Madam Chair, but the current account, our trade imbalance,
would you share with us—and, of course, you are sharing this with
the American people—the long-term danger of an imbalance in
trade that we have been running for years and years as opposed
to short-term and so forth? And where are we—you were an economics professor, but we were taught that is not a good thing in
the long run.
Ms. YELLEN. So we have a current account deficit that is——
Senator SHELBY. Tell the people what that is. Most people here
know, but you have a nationwide audience here this morning.
Ms. YELLEN. It is the difference between the amount that we
spend on goods and services that we import from abroad——
Senator SHELBY. Import versus export, is it not?
Ms. YELLEN. Correct, of goods and services. So we do have a current account deficit. It has increased in size, and ultimately it leads
to a buildup of our indebtedness to foreigners. And so it can be a
long-term concern if it is not on a sustainable course.
Senator SHELBY. What is it roughly now?
Ms. YELLEN. I believe it is——
Senator SHELBY. Roughly. You can furnish the exact figure for
the record if you do not have it.
Ms. YELLEN. I believe that in 2016 it amounted to about 2.6 percent of GDP.
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Senator SHELBY. And in dollars, what would that be, roughly?
Ms. YELLEN. At about close to $500 billion is the deficit, a little
bit below that.
Senator SHELBY. That is in 1 year, right?
Ms. YELLEN. Correct.
Senator SHELBY. What is our total indebtedness?
Ms. YELLEN. I do not have that figure at my——
Senator SHELBY. Would you furnish that for the record?
Ms. YELLEN. Yes. I mean, we have had deficits for some time, so
substantially——
Senator SHELBY. Would that be in the trillions?
Ms. YELLEN. Yes. I would be happy to furnish you with that figure.
Senator SHELBY. Would you call that a troubling thing long
term?
Ms. YELLEN. It depends on what the long-term trend is. It also
depends on what we earn on our foreign investments versus——
Senator SHELBY. Absolutely.
Ms. YELLEN.——what we pay, and historically we have earned
more on our assets that we hold abroad than we have paid to foreigners who hold our assets. But the trend there is important.
Senator SHELBY. When was the last time that we had a surplus—small, I am sure—in our current account, roughly?
Ms. YELLEN. I am not sure.
Senator SHELBY. Will you furnish that for the record?
Ms. YELLEN. Certainly.
Senator SHELBY. Has it been a number of years?
Ms. YELLEN. It has been.
Senator SHELBY. OK. Thank you, Mr. Chairman.
Chairman CRAPO. Thank you, Senator.
Senator Rounds.
Senator ROUNDS. Thank you, Mr. Chairman.
Madam Chairman, first of all, thanks for being here today. You
have a difficult position, and you have a very important position,
and I look forward to working with you in promoting sound economic policy in our country.
As I am sure you are probably aware, the Ag sector of our economy is suffering. The Wall Street Journal recently pointed out that
soon there will be fewer than 2 million farms in America for the
first time since the Louisiana Purchase. We are rapidly approaching a crisis in the Ag sector. Commodity prices have been sinking.
The Ag Department estimated that those who are still able to farm
will see their incomes drop by nearly 10 percent in 2017, and the
strength of the dollar is making it harder for American farmers to
compete abroad. Our Nation’s farmers are being left behind.
My question to you is: Recognizing that they need compromise to
capital and need access to literally being able to borrow money and
during a time in which we have made it a little bit more difficult
to borrow money, a lot of these folks are now seeing an end in
which they—because they work in an industry which is seasonal
and depends upon the weather, some years they make it, some
years they do not. Is there something that—could you just suggest
to us, number one, what you see in terms of economic headwinds
for our Ag economy and what we as policymakers should be
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focusing on if we want to help them make it through this next couple of years? Colorado right now is setting up an emergency hotline
for suicides for the farming and ranching communities. This is not
something that is going to go away quickly, and clearly it is gathering momentum.
Could you just talk to us in terms of what you see things that
we can do to perhaps take some of the burden off of these farming
families?
Ms. YELLEN. So I cannot give you recommendations for what
Congress should do to address the Ag issues. We are focusing on
the fact that there is pressure on commodity prices and particularly on food prices after a number of years in which conditions
were really very strong and land prices were pushed up. So in some
cases, we are seeing increases in delinquency rates on loans. And
certainly weak growth in the global economy coupled by a dollar
that began to appreciate substantially around mid-2014 has pressured farmers and is putting pressure on agriculture as you
indicated.
Senator ROUNDS. I think more specifically farming moves from
year to year. You can have a drought. You can have excessive moisture sometimes. And not every single year you are going to be consistently successful in your endeavor. Would it be fair to say,
though, that with regard to our financial institutions and their
ability to either loan or continue to carry debt, should there not be
some understanding within the policy at the Federal level that the
ability to survive not just a 12-month cycle but perhaps a 24-month
cycle or a 36-month cycle, it would seem that that would be an appropriate policy to at least continue to explore? Would you see some
value in that?
Ms. YELLEN. Honestly, this is something that really is up to Congress to consider and to look into. You know, it is not something
that the Federal Reserve has the ability to mandate.
Senator ROUNDS. But the financial institutions, which are the
source of that ability to borrow money—and during a year in which
you have a bad year for crops or perhaps commodity prices even
in a good year with yields may be down for a while, but in a cyclical manner, it seems rather illogical simply to base the ability to
borrow money from a financial institution on a 12-month cycle,
which seems to be what we do when we talk about balance sheets
and so forth from one year to the next, should an operating loan
be extended and so forth.
What I am asking, I guess, is: Wouldn’t it make some economic
sense to be able to allow this segment of the economy perhaps a
different cycle to be considered in without having their loans being
considered nonperforming assets in the auditing of those financial
institutions that really do want to continue on and carry credit forward for more than a 1-year period or a short-term period of time?
Ms. YELLEN. You know, it is something that we can look at, but,
you know, I think financial institutions are trying to engage in safe
and sound lending and want to be careful to protect themselves
from losses.
Senator ROUNDS. Thank you, Madam Chair.
Thank you, Mr. Chairman.
Chairman CRAPO. Thank you, Senator.
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Senator Cotton.
Senator COTTON. Thank you, Mr. Chair, and thank you, Madam
Chair, for appearing before us once again.
I would like to discuss with you today wage growth, or maybe I
should put it better, lack of wage growth. The Federal Reserve
tracks wage growth as a measure of economic progress and inflation. Over the past 8 years, wage growth has been largely stagnant, although fortunately we have seen a few positive trends in
the last few months.
But I also want to look back beyond just the last few years, starting in the 1970s, and I think we have a graphic that will display
this. Wages for workers with college degrees have increased while
wages for workers without college degrees have declined. For workers with less than a college degree, wages have declined by 17 percent, all in inflation-adjusted terms.
Could you comment on what is driving the recent wage growth
but also what is behind this phenomenon we see on the chart behind me?
Ms. YELLEN. Well, over long periods of time, the general average
nationwide trend in wage growth depends on productivity growth.
And in recent years, productivity growth has been relatively depressed in comparison, say, with the very long period from, say,
1949 to 2005, productivity growth was probably a percentage point
or so higher than it has been subsequently. For different groups in
the economy, as your chart focuses on, changes in wage growth depend on structural trends in the labor market and in the economy.
And what we have seen importantly because of technological
change that has raised the return to skill, raised the demand for
skilled workers, and raised the rewards to people who are able to
use technology, I think coupled with globalization that has made
it easier to offshore or outsource jobs that involve routine work that
can be done elsewhere or is subject to technological change. We
have seen different trends for much faster wage growth for higherskilled individuals and much slower wage growth for those who are
less skilled. The gap between the earnings of college-educated and
high school-educated or less individuals continues to grow, and this
has been a major source of the trends that you are describing in
your chart.
Senator COTTON. We have seen some improvement in recent
months. Do you care to venture an assessment of why we are seeing that?
Ms. YELLEN. So the labor market is pretty tight, and wage
growth has picked up somewhat. For example, average hourly
earnings were up 2 1⁄2 percent in the 12 months ending in January,
and that would compare with around 2 percent from 2011 to 2015.
Some other measures are rising somewhat faster. There is not a
dramatic increase in wage growth in recent years. There is some
evidence of a pickup, but not dramatic. In part, I think you are seeing a reflection of a healthy labor market, tight labor market conditions, but the fact that it remains so low is also related to weak
productivity growth in the U.S. economy.
Senator COTTON. And what has been contributing to a tighter
labor market?
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Ms. YELLEN. Well, you know, we are trying to do our job, and we
have put in place conditions intended to lower the unemployment
rate, improve labor market conditions. You have seen the unemployment rate come down. The pace of job growth really is strong
and exceeds what is probably sustainable in the longer run, and
the labor market has continued in a general sense to improve, although clearly the gains are not evenly distributed among different
segments of the population.
Senator COTTON. If the labor market were to continue to tighten
through both more economic growth but also, say, through a gradual reduction in the number of unskilled and low-skilled immigrants or guest workers that we are bringing into our country,
would we see continued wage growth in particular for those with
a high school degree or less?
Ms. YELLEN. So I am not certain. I expect the labor market to
continue to improve somewhat further. We have to be careful not
to allow conditions to become so tight that we push inflation above
our 2-percent objective, and we will be attentive to that. But I do
expect somewhat stronger labor conditions——
Senator COTTON. Is that a serious risk at the time when the
workforce participation rate is still at a relatively elevated level?
Ms. YELLEN. So the workforce participation rate has been
trending down.
Senator COTTON. But historically it is still high?
Ms. YELLEN. It is relatively high, but it is over time going to be
trending down. And immigration has been an important source of
labor force growth, so that would be reduced if immigration were
to diminish.
Senator COTTON. Thank you.
Chairman CRAPO. Senator Warren.
Senator WARREN. Thank you, Mr. Chairman. And it is good to
see you again, Chair Yellen.
So the 2008 financial crisis cost millions of people their jobs,
their homes, and their savings. And in response, Congress passed
the bipartisan Dodd-Frank Act which aimed to prevent big banks
from blowing up the economy again.
Now, President Trump has called Dodd-Frank Act a ‘‘disaster,’’
and he has vowed to ‘‘dismantle’’ it. He started down that road 2
weeks ago when he issued an Executive order on financial regulation, and he has put two men, Steve Mnuchin and Gary Cohn, who
have spent a combined 42 years at Goldman Sachs, in charge of
rewriting the rules to help big banks like Goldman.
Chair Yellen, I know you and the Fed spend an enormous
amount of time looking at actual data about the economy and financial markets, so I want to follow up on Senator Brown’s questions and get your take on some of the Administration’s main reasons for calling Dodd-Frank a ‘‘disaster.’’
When he unveiled his Executive order, President Trump said he
hoped to ‘‘cut a lot out of Dodd-Frank Act’’ because ‘‘friends of mine
that have nice businesses cannot borrow money.’’
Now, I am aware of the small business survey that you cited earlier, but I want to look at the bigger range of data. What do the
data show about business lending since Dodd-Frank was enacted in
2010?
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Ms. YELLEN. Well, C&I lending, at this point it has grown, and
it exceeds—after declining, it exceeds its 2008 peak on an inflationadjusted basis. The same is true for total loans held by commercial
banks. Since the end of 2010, total C&I loans outstanding have
grown over 75 percent.
Senator WARREN. Wow.
Ms. YELLEN. And in the most recent period for which we have
data, the recent 12-month period, C&I loans grew over 7 percent,
and small C&I loans, which are usually sort of small business related, grew almost 4 percent. So we have seen healthy growth in
actual lending in the economy. The survey that I mentioned to Senator Brown, I believe over half of small businesses indicated that
they absolutely did not need to lend and had no desire for credit
for a variety of reasons.
Senator WARREN. You mean did not need to borrow?
Ms. YELLEN. Did not need to borrow at all, including slow growth
in the economy.
Senator WARREN. Thank you very much. Very impressive. So the
data do not back the President up here.
Another claim, this from President Trump’s Economic Adviser,
Gary Cohn, is that banks have been ‘‘forced to hoard capital’’ and
have ‘‘been forced to literally build capital and build capital, instead of lending capital to their clients.’’
Now, Chair Yellen, when regulators impose a capital requirement on a bank, does that requirement prevent the bank from
lending out that capital? Or, in other words, is a capital requirement a reserve requirement? Can banks do whatever they want
with that capital, including lending it?
Ms. YELLEN. It is not a requirement that they take money and
stick it in a safe where it cannot be used. It is a requirement that
they finance the lending that they want to do with a certain
amount of capital and not only with debt. So the capital is used to
make loans.
Senator WARREN. Good. So the President’s Chief Economic Adviser is wrong about that pretty basic fact.
Let us look at another statement by Mr. Cohn. He said, ‘‘We
have the best, most highly capitalized banks in the world, and we
should use that to our competitive advantage.’’ But on the flip side,
we also have the most highly regulated, overburdened banks in the
world. That sounds an awful lot like a contradiction to me. Either
our banks have a competitive advantage because the world knows
that we carefully regulate our banks, or our banks have a competitive disadvantage because of those requirements.
So, Chair Yellen, which one is it? How have our banks done in
comparison to their foreign competitors since we put our new rules
in place?
Ms. YELLEN. So I do not have all the numbers at my fingertips,
but I believe that our banks are more profitable. As I mentioned,
they have higher market values relative to their book values, and
they are capturing market share, for example, from European
banks. So I guess I see well-capitalized banks that are regarded as
safe, sound, and strong as conferring a competitive advantage on
those banks in competing for business.
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Senator WARREN. Competitive advantage, taking away clients
from other banks. In fact, our banks have thrived since we passed
Dodd-Frank. Both big banks and community banks are making literally record profits.
Mr. Chairman, I would like to submit for the record the most recent quarterly report from the FDIC to show that banks of all sizes
are more profitable than ever, as well as this Wall Street Journal
article from November entitled ‘‘U.S. Banks Report Record Profit in
the Third Quarter.’’ May I do that?
Chairman CRAPO. Without objection.
Senator WARREN. Thank you, Mr. Chair.
Senator WARREN. Look, on any issue, but especially on something as important as the rules in place to stop another financial
crisis, we need to start with facts—real facts, not those alternative
facts that the Administration has become known for—and the facts
show that Donald Trump is wrong and his Chief Economic Adviser
is wrong about every major reason that they have given to tear up
Dodd-Frank. Commercial and consumer lending is robust, bank
profits are at record levels, and our banks are blowing away their
global competitors.
So why go after banking regulations? The President and the
team of Goldman Sachs bankers that he has put in charge of the
economy want to scrap the rules so they can go back to the good
old days when bankers could take huge risks and get huge bonuses
if they got lucky, knowing that they could get taxpayer bailouts if
their bets did not pay off.
We did this kind of regulation before, and it resulted in the worst
financial crisis since the Great Depression. We cannot afford to go
down this road again.
Thank you, Chair Yellen. Thank you, Mr. Chairman.
Chairman CRAPO. Senator Scott.
Senator SCOTT. Thank you, Mr. Chairman, and thank you, Chair
Yellen, for being here this morning.
I guess about a month ago you had a Teacher Town Hall meeting
with postsecondary economic educators, and you had a question
about Dodd-Frank as it relates to repealing it or changing it, and
part of your answer was, ‘‘Community banks feel the burden of regulation is very great,’’ and ‘‘I really feel strongly that we should be
looking for ways to mitigate the regulatory burden,’’ and we are
looking for ways, ‘‘particularly for smaller institutions’’ to mitigate
that burden. ‘‘There could be modifications to Dodd-Frank that
could succeed in reducing regulatory burden for smaller institutions,’’ to quote you.
I would love to hear your thoughts and your recommendations on
ways to mitigate that regulatory burden for small banks, specifically small banks in places like South Carolina and other States.
Ms. YELLEN. So, yes, let me reiterate what I said there. It is important to look for every way we can to mitigate the regulatory
burden. What we have suggested previously and I would reiterate
with respect to Dodd-Frank is that Congress might want to consider exempting community banks from the Volcker rule and some
of the incentive compensation provisions that apply to them, and
those would be examples.
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There is quite a bit we see being able to do ourselves, and we
have taken steps to extend the exam cycle for well-managed and
well-capitalized banks. We are reducing the duration of our onsite
loan reviews. We have heard from community bankers that when
big teams of examiners come in and stay in the bank premises for
a long time, it can be quite disruptive, and so we are doing much
more work offsite. We are trying to reduce our documentation requests and tailor them to areas that we think are high risk that
we want to examine.
We do a lot to—many of the regulations that we put out apply
to the largest banking organizations and not to community banks,
and so we try to make clear to community banks this new reg, this
just does not even apply to you, you do not have to worry about
that. We try and make clear what does apply to community banks
and what portions of our regulations do not apply to community
banks. We are trying to reduce the frequency of our consumer compliance exams for banks that are well managed and low risk.
So those are some of the things we are doing. We are attempting
through our EGPRA review with the other banking regulators to
identify provisions that can reduce burden. We have reduced—we
have put out provisions that reduce the amount of information that
we require on our call reports——
Senator SCOTT. Thank you,
Ms. YELLEN.——and many other things.
Senator SCOTT. Thank you very much. I look forward to seeing
some of that in writing so that we can——
Ms. YELLEN. Sure.
Senator SCOTT.——fuse it all together. Earlier you noted that
there was a 1-percent drop in the unemployment rate of African
Americans, which, of course, is a positive sign. I think that there
is certainly a correlation between educational achievement and unemployment rates. Whether you live in Cleveland, Ohio, or Detroit,
Michigan, black unemployment without a high school diploma is at
least twice as high as any other demographic with the same level
of education. What do you think drives the disparity? And what effects have your policies had on that specific demographic?
Ms. YELLEN. So African Americans generally have unemployment
rates and labor market experience that is more cyclical. In
downturns, they tend to be very badly affected, and in a strong upturn, their gains, they are basically regaining ground that they
lost, and so we can see stronger gains.
So, for example, just over the last year, whereas the white unemployment rate remained stable at 4.3 percent, the African American rate dropped from 8.8 to 7.7. But, again, as you pointed out,
that is a much higher rate, and the same is true at all education
levels. So unemployment rates at lower education levels are much
higher than those at higher education levels. For example, those
with at least college had an unemployment rate of 2.5 percent in
January; those with less than high school, 7.7 percent.
Senator SCOTT. Yes.
Ms. YELLEN. And, again, African Americans tend to have worse
experience.
Senator SCOTT. One of my concerns is, certainly, if you look at
the 15.8 percent for African Americans without a high school
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degree versus the 7.8 percent or the overall 8 percent for all demographics versus the unemployment rate of 2.4 percent or 4.4 percent for an African American versus white folks who have the
college level of education, my concern long term is that as we examine the labor force participation rate, we know it is down to 62.8
percent or so, so the real unemployment when you add all the numbers together, according to the U6, is around 9.2, 9.3 percent. Our
entire financial system is still wired around a defined benefits platform. So your lower labor force participation rates means that it is
incredible difficult for us to meet the obligations from Social Security to Medicare. So long term, if the growth in our economy from
a people perspective or African Americans and Hispanics who are
participating and having more kids in this Nation, the reality of it
is that if 30 percent, 20 percent unemployment is persistent, 16 to
20, it foreshadows a very difficult future for this Nation to meet
our obligations.
Ms. YELLEN. I agree with you, and I think it is appropriate for
Congress to focus on policies that might mitigate the trends that
we have discussed. Clearly, education and training, workforce development are part of that, but other things might be as well.
Senator SCOTT. Thank you.
Chairman CRAPO. Thank you.
Senator Heitkamp.
Senator HEITKAMP. Thank you, Mr. Chairman, and thank you,
Chair Yellen. It is great to see you again.
I want to associate myself with the remarks of Senator Scott, but
I also want at least some consideration for the underemployment
and unemployment of Native American citizens. I think where you
will look at those numbers, I will tell you they are even worse in
Indian country because of the isolation of the geography and additional education challenges. So I think we—I always want to point
out that we cannot leave our Native American citizens behind.
I also want to associate with the remarks on small community
banks, but I do not want to spend all of my time talking about it
because it gets eaten up pretty quickly. So mostly what I use my
time for is to say: What is on the horizon? What are the challenges
that we are going to have? We know that retirement security is a
huge future burden in this country, but I want to focus on automation and what automation will mean for employment, especially
employment in the categories that Senator Scott was talking about.
In a 2015 speech, the chief economist of the Bank of England referenced a startling statistic that 47 percent of all U.S. jobs are likely to be replaced by technology over the next 10 to 15 years, and
that would be more than 80 million all together.
Obviously, we see this from automation in trucks; we see this
from retail moving to online retail. So I am curious what steps the
Fed has taken to study the issue of automation and the impact on
the North Dakota economy and the U.S. economy moving forward.
And I know you always say better training but, obviously, a lot of
concern on how we implement that and how we move forward. So,
automation.
Ms. YELLEN. So we know that automation and technological
change more generally has had very important effects on our economy over many decades, and, you know, we are not seers of the
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future that know exactly where it is going, but certainly there are
dramatic accounts of changes that are on the horizon that could
have profound effects on the labor market and on productivity
growth.
Senator HEITKAMP. Do you think we are paying enough attention
to this issue? I mean, you know, obviously, during the campaign a
lot of talk about trade and the displacement that globalization has
played. A lot less talk about automation, which I think has been
a larger driver of displacement.
So how do we get the public’s attention to this? How do we get
the educators’ attention to this? And how do we change the labor
market and the skill sets that we need to change so that eventually
we end up with employment in our country?
Ms. YELLEN. So, generally, automation and technological change
more broadly has been a source of growth in incomes for America
generally, but it has created huge disadvantages for those with less
education and often for those in manufacturing in other areas that
have seen outsourcing or affected by both automation and
globalization. And I think we need to think about ways to address
the needs of those workers because they have seen chronic, longstanding downward pressure on their wages and income that are
making it very hard for them to cope.
Senator HEITKAMP. Yeah, I think one thing that gets lost in this
is when we talk about those workers, really talking about people
in their 40s and 50s, they are less concerned about their livelihood
than the opportunity that their children are going to have. And so
I think we need to be having a major discussion about what the
job of the future looks like, what the job market of the future looks
like.
I want to get in one more question, and this is about the lack
of prosecutions after 2008 and what we can do about it to hold people more accountable. New York Fed President Bill Dudley put forward an interesting idea by requiring firms to adopt a so-called
performance bond as a large portion of executive and senior management compensation. Under his proposal, any fines or penalties
incurred by the firm would be paid directly by performance bonds,
which would incentivize senior leaders to design and implement
systemic changes to improve the firm’s culture.
What is your view on the current incentive-based pay on Wall
Street? Do you think firms rely too much on equity-based compensation? And what are the risks with the Dudley model?
Ms. YELLEN. So I think that that was an important factor in the
financial crisis, in inappropriate incentive schemes, and we have
worked in our own supervision to insist that firms put in place
compensation schemes that do not lead to inappropriate risk taking. They may include longer periods of deferral or clawback or forfeiture provisions if an individual who takes risk on behalf of the
firm, if there are losses that are suffered. But I think it is important to strengthen incentive compensation practices.
Senator HEITKAMP. One of the concerns that I have—and, you
know, I am not a big believer always that enforcement is a strong
deterrent, especially if someone is addicted, but I do believe that
enforcement is a strong deterrent in white-collar crime, and I think
there is way too often the sense that if I did not know about it,
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I am not culpable. And so I think in order to really respond to people’s concerns about Wall Street and what is happening, we need
to have a better system of not only civil enforcement but criminal
enforcement. And so I will be looking at this in this Congress and
am very interested in feedback from the Fed and from other regulatory agencies, because I think without that ability to prosecute,
you know, a $1 million fine may shock a factory worker in Cleveland. It is not going to shock a Wall Street banker. And so we need
to do a better job holding people accountable.
Chairman CRAPO. Senator Tillis.
Senator TILLIS. Thank you, Mr. Chair. Welcome, Madam Chair.
I have a couple of questions. One relates back to a discussion
earlier by some of the Members about, I think, a discussion around
dispelling the myth that banks are not lending. I do not agree with
that. I think that there are—we are comparing probably not the
right data sets, so that people are absolutely valid in assuming
that based on the data they are using. There is a fair amount of
academic data that says increased capital requirements do have a
negative effect on loan underwriting. And I will not debate the academics, but I think there is a fair amount of information out there.
I think that what we see, particularly among households, household lending, and small business loans, it tends to have a downward trend.
You referenced, I think, a survey by the NFIB that said all but
4 percent of the people contacted were getting the loans they wanted. I am trying to square that with research that shows a substantial decrease in the amount of loans pre-crisis versus post crisis,
and I am not going to talk about household loans or mortgages. We
know why there is a lower number there, because they should not
have been underwritten pre-crisis. But with the business loans,
that is a different—I think that that is a different consideration,
and I think that I am seeing a number here that says that the average growth rate post—2011 and beyond, so after Dodd-Frank reforms, that we are at about a 4 percent per annum for large banks,
about 7 percent per annum for small banks. And that is somewhere
around maybe 60 percent of pre-crisis for, again, business loans.
So is it possible that the reason why 4 percent of the people
would say—only 4 percent would say they are not getting the loans
they wanted is because far fewer people are asking for loans, investing, and creating businesses?
Ms. YELLEN. I think that is true, and we have had a slowly growing economy, and many small businesses say their sales growth
does not justify significant expansion plans that would make it desirable to borrow. They are not looking to borrow.
Senator TILLIS. So it is——
Ms. YELLEN. I mean——
Senator TILLIS. To me, though, Madam Chair, isn’t it problematic
to have people leave this meeting thinking that all the small businesses that have business plans they think that they should move
forward with to create jobs and take risk, to make us think that
this is a phenomenon that only affects about 4 percent of all small
businesses, that everybody else is getting the loans? I think that
there is a pent-up demand out there, and please finish your
thought.
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Ms. YELLEN. Well, I was going to say that sometimes small business loans are underwritten by banks in a way that is similar to
credit card or home equity loans, and small businesses may borrow
against home equity lines of credit. So one thing that may be happening to some small businesses is that because there was a substantial reduction especially in some areas of the country in residential property values, their ability to finance business loans in
that way——
Senator TILLIS. So in your professional opinion, do you think that
the universe of potential small businesses that could be created are
businesses that exist that want to expand, that they have unfettered access to capital given the current environment?
Ms. YELLEN. Well, businesses that want to start up always need
equity capital, and that can be quite difficult.
Senator TILLIS. Do you think that when we are in an environment—now, I hear this at a community bank that I have exited
any investments in since I have come on to the Banking Committee, but I speak with them and they say that the personal relationships that they had in the past, where they could get a loan,
underwrite it, were pivotal to them being able to get a loan. Now
they feel like they have to go in—and, of course, if you have roughly the same amount of assets that you can secure the loan, then
you can get a loan. But there are a lot stricter requirements that
have a chilling effect on small business lending in the Nation. Do
you agree with that?
Ms. YELLEN. So, you know, certainly our objective is to encourage
banks to lend, safe and sound lending and not be caught up in bureaucratic obstacles.
Senator TILLIS. I think what we have here—and I do want to ask
another question, Mr. Chair. I will go as quickly as possible, and
I apologize to Senator Kennedy, but I do want to touch on a second
subject. But I think we are talking out of both sides of our mouth
in Washington. And I am not criticizing you for it, but when I take
a look at the movement of capital, on the one hand we say, of
course, banks can lend to anybody. On the other hand, on any
given day we could have five or six regulators in there saying you
better not lend based on outside of these very narrow parameters
because of what I consider to be overreaches in enforcement.
And so to me, letting a comment stand that banks are lending
to any commerce is not—and you did not say that. It was a supposition by a couple of the Members here on the Committee. I think
it is just absolutely defiant what I am seeing in the small business
community and the community banks, particularly the community
banks but big banks in North Carolina, which leads me to my last
question.
The pre-crisis—and, incidentally, I think there were very important reforms that had to be implemented with Dodd-Frank. I just
think what happened is you have a bill that is this big—that is this
big—that expands into a regulatory framework that was enabled
under Dodd-Frank that is that big. And, in particular, in North
Carolina we had a very thriving financial services ecosystem
pre-crisis. We had over 100 community banks. We have a couple
regional banks in North Carolina and a couple of relatively big
banks down in Charlotte where I live. Now we have seen a
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substantial decline in the community banks in North Carolina, and
I think that is a national trend. You know the numbers as well as
I do. And since Dodd-Frank regulations have been implemented,
we have had two de novo banks chartered. One is on an Indian reservation. The other one I think is primarily focused on serving the
Amish community. So we have completely destroyed the lower
foundations of the banking ecosystem, in my opinion, because it
has to be—because the inflection point was after Dodd-Frank was
implemented and CFPB and all the regulatory agencies started, I
think, extending their reach.
Do you believe that that is an area we need to be concerned
with? You did say, I think, in response to one of the questions that
the community banks probably do need some relief. You mentioned
the Volcker rule. But can you talk a little bit more about that.
Mr. Chair, I am sorry for going over my time.
Ms. YELLEN. So I think community banks—I agree with some of
the trends you just described. I think they have been under pressure. You had many years of a weak economy, very low interest
rates, and pressure on net margins and compliance costs. I agree
that it is very important for us to look for ways to relieve burden,
and I am committed, the Federal Reserve is committed to doing everything that we can to mitigate the burdens on these institutions.
They play a very important role, as you have indicated, in the economy and so many communities in supporting lending.
Chairman CRAPO. Senator Schatz.
Senator SCHATZ. Thank you, Mr. Chairman. Thank you, Chair
Yellen, for your public service, and also thank you for enduring
quite a long hearing and accommodating all of our questions.
Before we get going on my questions, I want to echo the sentiments of my colleagues in terms of what Dodd-Frank has done for
the economy and for the stability of our financial system. It has,
in fact, strengthened our economy, and undermining Dodd-Frank is
not, in my view, the correct course of action.
I wanted to ask you, Chair Yellen, about climate change. It is affecting our economy in a number of ways, such as prolonged
droughts that reduce agriculture yields, coastal flooding, increased
severity of storms, and the unpredictability of weather forecasts on
which many of our industries depend.
In 2016, NOAA reported 15 separate billion-dollar climate
events. Combined, these events cost the economy over $200 billion.
And lest we think this is an aberration, it is important to remember that the number and the cost of these events has doubled over
the last decade and has increased eightfold over the last 30 years.
And so climate change events are taking a toll on our economy, and
they are expected to become more and more intense going forward.
And so my question for you is: To what extent does the Fed take
into account the impacts of climate change in assessing our national economic outlook and future economic risks?
Ms. YELLEN. So in monetary policymaking, our focus is on trying
to achieve a strong labor market and price stability, and our
forecasts usually go out a few years, but not over the decades in
which climate change plays a role in changing——
Senator SCHATZ. Well, let me——
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Ms. YELLEN.——affecting the economic outlook, and sometimes a
hurricane or a drought can have—some of which may be related to
climate change, but also other factors may have a significant economic impact that we take into account that may result in a period
of weakness or movements in GDP that we see. But there is not
very much that we can do in incorporating that into our forecasts.
Senator SCHATZ. Well, I would like to disagree here, and I understand that there is going to be a reticence to enter into anything
that may be either political or unknowable or too long term for it
to be meaningful in terms of your analysis. But that is actually not
the case anymore when it comes to what is happening in terms of
climate change. You know, the billion-dollar event is a threshold
for financial markets, for insurance, for NOAA, for the National
Weather Service. And we are not talking about 15 years from now
there may be a higher frequency of severe weather events and they
may be more severe. We are talking about over the last 4 or 5
years we can actually measure this trajectory. So there is not a lot
of debate in the scientific community—and you are all data-driven
people—about what is happening. So actually in the private sector,
in financial markets, especially in insurance companies, they are
responding—the Department of Defense is responding to the reality
of climate change and not in terms of a 10-, 20-, 30-year time horizon, but in terms of planning for, you know, Q3, Q4 2018.
And so I would just offer to you that I think that analysis and
that desire to stay on that which is knowable and that which is not
in dispute is a good instinct. But we are now at a point where we
know what is happening to the climate, and it is having material
impacts on the economy now. Would you care to comment?
Ms. YELLEN. So, you know, various international fora I think are
looking into the economic aspects of climate change, for example,
that could affect financial stability, the exposures of financial organizations. And I think that is appropriate.
We recognize that risk events or severe weather or climate
changes could have effects on the financial system. Our general approach since the financial crisis has been to try to build resilience
among banking and financial organizations so they are well positioned to deal with risk events. And so, I mean, those are a couple
of reactions.
Senator SCHATZ. I appreciate what you are doing here, and I understand the difficulty of addressing something, but I would just
like for you to consider the following proposition, which is just
because we do not know the extent of the risk does not mean we
should book it at zero. It is not zero. It is now material. It is also
no longer 5, 10, 15 years from now. It is happening to us now. And
you may need another couple of quarters of unfortunate events to
be able to kind of assimilate that into your decisionmaking process.
But at some point the Fed is going to have to recognize that climate change is real, and it is not merely an ecological issue or political issue but an economic one. And I thank you for your indulgence on this issue you may not have expected to talk about this
morning. Thank you.
Ms. YELLEN. Thank you.
Chairman CRAPO. Thank you.
Senator Heller.
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Senator HELLER. Mr. Chairman, thank you, and thanks for holding this hearing. Dr. Yellen, thank you for being here. I appreciate
your time and coming through and following through on some of
these questions. And I have not been here for the whole hearing,
and I apologize for that also. So I will just ask the question: Did
you make a comment as to whether or not interest rates are going
to rise in March?
Ms. YELLEN. I indicated that in our upcoming meetings we will
try to evaluate whether or not the economy is progressing, namely,
labor market conditions and inflation, in line with our expectations.
And if we find that they are, it probably will be appropriate to
raise interest rates further.
We have indicated that we think a gradual path of rate increases
is likely to be appropriate if the economy continues on its current
course.
Senator HELLER. Is that the same answer for an interest rate increase for June? Same answer? Because I think those are the two
most important questions that are going to come out of this hearing
right now as to how you answer that particular question.
Ms. YELLEN. So my colleagues and I, in writing down our economic projections, we last did that in September, and, of course,
the economic outlook is uncertain, and it may change. But given
our expectations at that time, most of us concluded that a few interest rate increases would be appropriate this year. The median
was three at that time. And that means—we have eight meetings
a year, and it means that at some meetings we would, if things remain on course, increase our target for the Federal funds rate and
not act at others. And precisely when we would take an action,
whether it is March or May or June, I think—I know people are
focused on that. I cannot tell exactly——
Senator HELLER. They are. They are. Just so you know, they are.
Ms. YELLEN.——which meeting it would be. I would say that
every meeting is live and we——
Senator HELLER. And I would anticipate that the—or argue that
the markets are anticipating rate increases and individuals are
also. Would you agree with that?
Ms. YELLEN. I am sorry. That they are?
Senator HELLER. That they are anticipating rate increases this
year.
Ms. YELLEN. Well, it is our expectation that rate increases this
year will be appropriate.
Senator HELLER. OK. Let me tell you why I am asking the question. We have average sale prices of houses in southern Nevada
right now of around $280,000. So I will shift over to housing markets for a minute. So $280,000, and at the peak they were selling
for $315,000. So you can still see that some of these homes are still
underwater, and we are a long way away from a full recovery in
the housing markets in the State of Nevada. So as the housing
markets continue to struggle, how does this impact your thoughts
on future interest rate hikes?
Ms. YELLEN. So housing has been recovering nationally, but at
a very slow pace. And we recognize that higher interest rates can
have a restraining impact on the recovery in housing. House prices
have been moving up. So it is one of many factors that bear on our
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thinking about the appropriate path of interest rates. But remember that employment growth is strong; consumers are doing well.
That is an important support for housing, as well as the fact that
there is so much potential for an increase in homeownership.
So I expect housing to continue recovering, but overall we need
to take account of all the different forces that affect job growth and
inflation in the economy, and everything put together, we think
that some removal of accommodation is likely to be appropriate.
Senator HELLER. OK. How important is a fiscal stimulus to the
next interest rate hike?
Ms. YELLEN. So we do not know what fiscal plans Congress and
the Administration will decide on. We are not basing our judgments about current interest rates on speculation about that. The
economy has been making solid progress toward achieving our objectives. The unemployment rate is close to levels we regard as sustainable in the longer run. Inflation has moved up, and it is those
trends that are driving our policy decisions and not speculation
about fiscal policy.
Also, remember there are many factors that affect the economy.
Fiscal policy may matter, but it is only one of many things we need
to consider.
Senator HELLER. Let me ask you this question on a fiscal stimulus. What is better, a tax hike or spending cuts, in your opinion?
Ms. YELLEN. I think this is squarely in your domain to prioritize
and decide on.
Senator HELLER. All right. Let me ask you this question: Is it
better to cut corporate income taxes or personal income taxes?
Ms. YELLEN. Again, this is a decision that Congress needs to
make, and it is outside of our purview.
Senator HELLER. Do you support a border tax or do you not?
Ms. YELLEN. I am not going to tell you that either.
[Laughter.]
Senator HELLER. I am trying. I am trying here. Mr. Chairman,
thank you.
Chairman CRAPO. Thank you.
Senator Cortez Masto.
Senator CORTEZ MASTO. Thank you. Chair Yellen, nice to meet
you.
Ms. YELLEN. Nice to meet you.
Senator CORTEZ MASTO. I am the new Senator from Nevada, and
thank you for taking the time with us today.
Ms. YELLEN. Thank you.
Senator CORTEZ MASTO. So let me just ask you, because I am
new to the Committee, and keeping on with fiscal policy, some
would say that the resulting Budget Control Act of 2011 significantly depressed discretionary spending and in turn significantly
slowed the pace of the recovery of our economy. Would you agree
with that?
Ms. YELLEN. Well, I would say that the data suggests that the
support that fiscal policy provided during the period of recovery
overall, both Federal and State, was substantially lower than
would be typical—would have been typical historically in an expansionary period. During the downturn, there was quite a lot of support, but as the recovery proceeded until the last several years,
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fiscal policy overall was relatively tight in comparison with past
historical periods.
Senator CORTEZ MASTO. Thank you. There are a lot of benefits
to immigration in America. Our diversity is our strength, and the
range of perspectives and cultures we have in this country are essential for innovation, competitiveness, and global leadership.
Moreover—and I have said this time and again—immigration is
important for our economic growth. We have proof that it contributes to our GDP and our economy. And there is a report out there
from the National Academies of Sciences, Engineering, and Medicine that, in fact, revealed many important benefits of immigration,
including on economic growth, innovation, and entrepreneurship.
And those benefits came with little-to-no negative effects on the
overall wages or employment of native-born workers in the long
term. And the report also found that children of immigrants on
average go on to be the most positive fiscal contributors in the
population.
But despite this and immigration’s importance, we are hearing
information coming from the White House and particularly President Trump’s January 29th Executive order dramatically expanding the interior immigration enforcement and places an estimated
8 million undocumented immigrants at risk for deportation, including families and long-time residents.
The order has the effect of making every undocumented immigrant in the U.S. a priority for removal and directs the Department
of Homeland Security to hire what is essentially a deportation
force.
Chair Yellen, in your view as a noted labor economist, what impact would that have on our growth in competitiveness as a Nation
if we continue down the path of President Trump’s massively expanding immigration? And along with that, what would be the consequences for our labor market and the price of goods and services?
Ms. YELLEN. So I am not going to comment in detail on immigration policy. I think that is for Congress and the Administration to
decide. But I would say that labor force growth has been slowing
in the United States. It is one of several reasons, along with slow
productivity growth, for the fact that our economy has been growing at a slow pace, and immigration has been an important source
of labor force growth. So slowing the pace of immigration probably
would slow the growth rate of the economy.
Senator CORTEZ MASTO. Thank you. And we are hearing a lot
about proposals to impose a 20-percent tax on imports from Mexico
in order to pay for a border wall, and I am concerned about the potential for a trade war with our third largest trading partner. If the
Mexican economy were to go into a recession, how would that impact the average American? And, specifically, can you speak to any
impact on our domestic economy?
Ms. YELLEN. Well, our economies are closely tied. Both Mexico
and Canada are important trade partners of the United States, and
our economy is in many ways synchronous with the Mexican
economy. Our developments here have a significance spillover effect
to them, and there could be flows in the opposite direction as well.
Senator CORTEZ MASTO. Thank you. Thank you so much for joining us today. I appreciate it.
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Ms. YELLEN. Thank you.
Chairman CRAPO. Senator Kennedy.
Senator KENNEDY. Madam Chair, I am over here.
Ms. YELLEN. Yes, I am with you.
Senator KENNEDY. Why is the economy growing so slowly?
Ms. YELLEN. So the economy’s potential to grow is largely determined by the growth of the labor force and by productivity growth,
output per worker. And labor force growth has slowed. We have an
aging population, and labor force growth is relatively slow, and productivity growth in recent years has been depressingly slow. So I
guess over the last 6 years, business sector productivity has grown
at an average of only one-half a percent per year.
Senator KENNEDY. OK. So let me ask you—I do not mean to interrupt you, but I have just got 5 minutes. So it is labor. But we
are almost at full employment, aren’t we?
Ms. YELLEN. So the economy for a number of years has been
growing faster than resource growth and productivity growth would
have allowed, and the labor market has been tightening. Unemployment has been coming down, and labor market slack has been
diminishing, and that——
Senator KENNEDY. Right. That should help the economy.
Ms. YELLEN. Well, it has enabled us to grow at roughly 2 percent
a year, and the fact that labor market slack has diminished in the
face of 2 percent economic growth——
Senator KENNEDY. Well, we have grown at 1.9 percent. You consider that acceptable for the American economy, strongest economy
in the history of the world?
Ms. YELLEN. Well, when you say ‘‘acceptable,’’ I certainly wish it
were faster.
Senator KENNEDY. Yeah.
Ms. YELLEN. But it is—we have seen, as I said, a slowdown in
productivity growth.
Senator KENNEDY. Why is that?
Ms. YELLEN. I think nobody is certain exactly why that is. There
are a number of elements that may play a role. We have seen a
decline in dynamism in the U.S. economy, in new business formation. Some people think that the pace of underlying technological
change has——
Senator KENNEDY. Do you think it could be that people do not
have the money to invest, the capital?
Ms. YELLEN. Well, capital investment has also been quite slow.
Senator KENNEDY. Yeah. What blame, if any, does the Federal
Reserve System have to play in the fact that growth is so slow?
Ms. YELLEN. Well, our objectives that the Congress has assigned
us are price stability, which we interpret as 2 percent inflation, and
maximum employment. And we have put in place an accommodative monetary policy now over many years to get the economy operating at its potential. So with high unemployment, there was a lot
of slack in the labor market. The economy was falling short of
operating at the level of output that would be consistent with what
a full-employment economy would produce.
Senator KENNEDY. OK.
Ms. YELLEN. And we have tried to remedy that, and I think we
have now come close.
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Senator KENNEDY. All right.
Ms. YELLEN. So it is growth of labor supply and productivity that
are going to——
Senator KENNEDY. I get it. I do not mean to interrupt you, but
I do not have much time. Well, can we agree that 1.9 percent is
not acceptable to most Americans?
Ms. YELLEN. So I think it is a very disappointing level of performance.
Senator KENNEDY. Yeah, we can agree on that. OK.
Let me ask you this: I was not here in 2008. What did the community banks do wrong in 2008?
Ms. YELLEN. The——
Senator KENNEDY. By community banks, I mean $50 billion or
less. What did they do wrong?
Ms. YELLEN. Well, community banks were not the reason for the
financial crisis. It was larger institutions that took risks and risks
that developed outside of the banking system——
Senator KENNEDY. Right.
Ms. YELLEN.——that resulted in the financial crisis.
Senator KENNEDY. I think I heard you say nothing. They did
nothing wrong. I do not want to put words in your mouth. So how
come they are subject to Dodd-Frank, the same rules that apply to
the people who did do something wrong, either because of incompetence or greed?
Ms. YELLEN. It is not the case that the same rules apply to community banks that apply to larger institutions, and the most severe
requirements in Dodd-Frank apply to the very largest and most
systemic institutions. The Fed and other banking regulators have
tried to tailor our supervision of banks according to their risk profiles, and a large part of Dodd-Frank does not apply at all to community banks.
Senator KENNEDY. I am going to go over a little bit, Mr. Chairman. You are not saying that Dodd-Frank has not imposed new
regulations on community banks, are you?
Ms. YELLEN. I said it has imposed some, but I said large parts
of Dodd-Frank do not apply.
Senator KENNEDY. Right, but many parts do.
Ms. YELLEN. Some parts do.
Senator KENNEDY. OK. So the water is not 12 feet deep; it is only
10 feet deep. But you can still drown in 10 feet of water.
Ms. YELLEN. So we have done our best to tailor our regulations
so that they are appropriate to the risk profiles of banks. But the
regulatory burden on community banks is high. I would agree with
you.
Senator KENNEDY. But why? You just said they did not do anything wrong in 2008. I do not understand why.
Ms. YELLEN. So we think it is important for all firms to have
strong capital standards, including community banks, but the most
severe increases have been imposed on larger banking organizations with more complex activities.
Senator KENNEDY. Did the insufficient capital among the community banks cause the meltdown in 2008?
Ms. YELLEN. No, but a number failed. Many failed during the crisis because of the lending that they took on.
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Senator KENNEDY. I am going to ask one more question, Mr.
Chairman, with your indulgence. Does it bother you that nobody,
no individual person really responsible for 2008 went to jail?
Ms. YELLEN. I think those who were accountable should have
had appropriate punishments. It has been up to the Justice Department to—the regulators cannot impose criminal sanctions. That is
up to the Justice Department. And my understanding has been
that in many cases they felt they could not get criminal convictions.
Senator KENNEDY. Do you understand that—and this is an opinion. Let me put it this way: Can we agree that many Americans,
rightly or wrongly, this is how they feel: They are angry in part
because they feel there are too many undeserving—I want to emphasize ‘‘undeserving.’’ I do not want to paint with too broad a
brush. They feel there are too many undeserving people at the top
getting special treatment.
Ms. YELLEN. I think that is how Americans feel.
Senator KENNEDY. Do you think that is true?
Ms. YELLEN. I think that we have tried to put in place following
Dodd-Frank to greatly increase the safety and soundness and responsibility for risk management and sound compensation systems,
especially at the largest and most systemic institutions, and in that
sense are holding them accountable.
Senator KENNEDY. I have gone way over. Thank you, Madam
Chair.
Thank you for your indulgence, Mr. Chairman.
Chairman CRAPO. Thank you, Senator.
And, Madam Chair, I know you need to leave by 12:30. We have
two Senators left, so if you will allow us, we will let them have
their time, and we can move forward.
Ms. YELLEN. Yes, sure. Of course.
Chairman CRAPO. Senator Donnelly.
Senator DONNELLY. Madam Chair, thank you for your service.
We appreciate it.
Ms. YELLEN. Thank you.
Senator DONNELLY. Madam Chair, when we look at some of the
things that have caused damage over the years—you were here at
a time about a day or two after the Carrier layoffs occurred, if you
remember that. And those layoffs in my home State brought to
light a troubling pattern of corporate executives prioritizing immediate profits over the long-term health of companies. This shortterm mindset may be due to the relentless pressure of activist investors or poorly constructed executive compensation goals. But it
has resulted in executives spending trillions to placate shareholders with stock buybacks and dividends. It has also occurred at
the expense of workers and communities and long-term economic
value creation. And new research finds that companies focused on
the long term by reinvesting in the company far outperform their
short-term peers in economic and financial success.
I am wondering if you agree that short-termism, for want of a
better term, could hurt economic and financial value over the long
term.
Ms. YELLEN. So I do not know of any rigorous work on this, but
I certainly agree with you that focusing on long-term investments
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that have significant payoff for companies and for the economy is
important to the health of companies and the economy.
Senator DONNELLY. Do you agree that the management and
boards of public companies should be stewards of the whole company, including its workers and its long-term health? Do you think
that makes sense?
Ms. YELLEN. Most companies understand that their workforce is
a very important asset, and their success requires having a focus
on their human capital that is a firm asset.
Senator DONNELLY. At the same time that those workers were let
go, the CEO made over $10 million; the previous CEO before him,
when he left—and it was about 2 years before—on his last day received a payoff of over $150 million. And that is why the American
people are so angry and they think the system is so rigged that you
go we are going to fire—between Carrier and UTEC in Huntington,
we are going to fire 2,100 people who have already agreed to a twotiered wage—they already agreed to a two-tiered wage structure,
but we are going to pay $150 million to our CEO on his last day.
Does that not seem like a perversion of the American economic system to you?
Ms. YELLEN. I think it is something that makes people mad.
Senator DONNELLY. Yeah. What would you recommend in your
infinite wisdom to us here in Congress as some steps, if you have
any ideas, to change the short-term thinking that we see?
Ms. YELLEN. That is really outside the domain of our responsibilities, and I believe it is a set of policies that Members of Congress
and the Administration should be thinking about.
Senator DONNELLY. Well, I was thinking that with your experience and your abilities and talents, all good advice is welcome.
When a small town is devastated by job losses, as has happened
to so many towns across this country, where you look up and one
day you have a company making windshields for one of the Big
Three, and the next day that windshield company is in Mexico, it
impacts the future of it, of that town. And it is not just the jobs
that dry up but the economic development, the revenue base, the
secondary impact on other businesses, gas stations, restaurants,
grocery stores. How does a small town succeed when it feels like
so many of these economic currents have been against them for so
long? You have driven through some of these downtowns, I am
sure, over the years and seen the devastation that has occurred.
Ms. YELLEN. I mean, I think these are extremely difficult trends
for towns to cope with, and many towns in rural areas have been
very badly affected by these developments.
Senator DONNELLY. Here is what also happens, just so you know
when you make these decisions. You know, as these workers are
laid off, their children who are dreaming about going to college,
dreaming about the best schools, and dreaming about their chance
to make it, you know, Mom or Dad comes home and the funds just
are not there. The money just is not there to give them the shot
to do it. And I worry about the intergenerational impact of this
whole situation, too.
Have you seen this intergenerational impact and its impact on
success? And is there anything the Fed can do in terms of policies
to try to make it so our next generation of leaders have a shot?
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Ms. YELLEN. Well, I mean, our tools to deal with the issues that
you are describing are limited, and we generally feel that the best
contribution we can make is to use our tools to create overall
strong economic conditions, a labor market that is generating
enough jobs that there are opportunities there. But it does not always mean that the jobs are exactly what people want in the places
that they are. And I think Congress and the Administration need
to think about ways in which they can foster greater inclusion,
greater mobility, provide people with the tools that, if your father
lost his job, a good manufacturing job, that the child can get a
strong education and can get a job maybe in a sector of the economy that is growing more strongly that has strong job opportunities. And there certainly are things we can do to foster greater
equality across generations.
Senator DONNELLY. And I will finish with this, and I guess this
would be to the CEOs who are thinking about this, the shorttermism. One of my heroes in life—and you may have heard of
him—was Father Hesburgh, and the advice he gave me was: Do
not do what is always easy; just do what is right. Thank you,
Madam Chair.
Thank you, Mr. Chairman.
Chairman CRAPO. Thank you.
Senator Van Hollen.
Senator VAN HOLLEN. Thank you, Mr. Chairman, and thank you,
Madam Chair, for your service.
I am going to pick up on a little bit of what Mr. Donnelly was
raising, but from a slightly different angle, and that is the issue
of wage growth, because as you know, we have had for really a period of decades high productivity growth over time—not recently.
As you say, it is disturbingly low, but we have had high productivity rates, and, unfortunately, those increases in productivity
rates have not translated into large increases in real wages. And
so I am trying to look forward from where we are now to see what
the future holds for real wages. And as you indicate in your testimony, we have seen a tightening of the labor market, and we have
seen a slight uptick in real wages.
But as I listened to your testimony, it sounds like you may believe that there is not a lot of slack left in the labor market. And
if that is the case, what are your projections with respect to real
wage growth going forward?
Ms. YELLEN. So I think that somewhat faster wage growth than
we are seeing presently would be consistent with our inflation objective, and we are projecting—after all, monetary policy is still accommodative. Job growth remains strong. The labor market is still
strengthening, and even if we move to gradually diminish monetary policy accommodation, we expect some further strengthening
in the labor market. And I would expect that to push up wage
growth somewhat more than we have seen so far, but ultimately
real wage growth in the economy as a whole is limited by
productivity growth, determined by productivity growth, and that
is why I have lamented the fact that productivity growth has been
so slow, and even over the last decade is so much slower than it
was for much of U.S. post-war history and why I really urge
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Congress to focus on policies—they may be fiscal policies or other
policies—that would succeed in raising productivity growth.
Beyond that, of course, as you indicated, the gains from aggregate productivity growth have been very unevenly distributed
across the population, and we have had many decades of rising income inequality as a consequence, with those at the top of the income distribution seeing healthy increases in their incomes while
those at the median or below have seen stagnation, and so that reflects adverse structural trends.
But when you see that those with more education and skill are
doing substantially better than those with less education and that
the trends in the economy are adversely affecting those with less
education, to my mind that is telling us that investing in education
and training and workforce development, which can take many different forms depending on the population we are talking about, is
an investment with a payoff, and we know that it does have an important payoff.
Senator VAN HOLLEN. Well, thank you. I think you in part anticipated my question. I know you do not want to comment on specific
policies that are before the Congress, but in terms of fiscal policies,
actions the Congress can take that could increase productivity over
time, investments in the area of education, is that the area you
would most recommend?
Ms. YELLEN. So, generally, there are a number of areas that impact productivity growth, and this could look to different kinds of
policies. But policies that promote investment in people or human
capital, fiscal capital, both public infrastructure and private investment, are also important in promoting productivity. And then policies that foster innovation, the formation of new firms, research
and development, dynamism in the business climate, those things
can also foster faster productivity growth.
Senator VAN HOLLEN. Thank you. I think in addition to those
policies—and I support those kinds of investments. As you indicated, a number of those policies were in place over the last decades, and, nevertheless, you had a very uneven distribution of the
gains in productivity, and I think there are other things.
Ms. YELLEN. Yes, we have.
Senator VAN HOLLEN. Is there anything—Mr. Donnelly asked
you about incentives within sort of the corporate sector. Are there
things that are within the power of the Fed today that could influence those long-term versus short-term calculations that the Fed is
not currently employing fully?
Ms. YELLEN. Well, I think a strong economy and a sustainable
economic growth so that business firms can look out and can see
a favorable economic climate that they expect will be sustained
with low inflation is a business climate that does foster investment,
and that is the kind of backdrop for business decisionmaking that
we would hope to provide.
Senator VAN HOLLEN. All right. Thank you, Madam Chairman.
Mr. Chairman, I just hope that as the Committee looks toward
policy changes, we keep in mind the fact that over the last three
decades we have seen over most of that period rising productivity
rates, but the gains have been very unevenly distributed, which
gives rise to what I think is a bipartisan sense that is shared by
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so many of our constituents that, you know, folks who are doing
really well have the rules stacked in their favor against the average American. I think we need to look at all our policies that are
outside the purview of the Fed and change them.
Thank you.
Ms. YELLEN. Thank you.
Chairman CRAPO. Thank you, Senator. And thank you, Chair
Yellen. You have spent nearly 3 hours here with us. We appreciate
the work that you do and also your taking the time to spend this
time with us here today.
Senator BROWN. Thank you, Madam Chair.
Chairman CRAPO. Without anything further, this hearing is adjourned.
[Whereupon, at 12:38 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and additional material supplied for the record follow:]
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PREPARED STATEMENT OF JANET L. YELLEN
CHAIR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
FEBRUARY 14, 2017
Chairman Crapo, Ranking Member Brown, and other Members of the Committee,
I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report
to the Congress. In my remarks today I will briefly discuss the current economic
situation and outlook before turning to monetary policy.
Current Economic Situation and Outlook
Since my appearance before this Committee last June, the economy has continued
to make progress toward our dual-mandate objectives of maximum employment and
price stability. In the labor market, job gains averaged 190,000 per month over the
second half of 2016, and the number of jobs rose an additional 227,000 in January.
Those gains bring the total increase in employment since its trough in early 2010
to nearly 16 million. In addition, the unemployment rate, which stood at 4.8 percent
in January, is more than 5 percentage points lower than where it stood at its peak
in 2010 and is now in line with the median of the Federal Open Market Committee
(FOMC) participants’ estimates of its longer-run normal level. A broader measure
of labor underutilization, which includes those marginally attached to the labor
force and people who are working part time but would like a full-time job, has also
continued to improve over the past year. In addition, the pace of wage growth has
picked up relative to its pace of a few years ago, a further indication that the job
market is tightening. Importantly, improvements in the labor market in recent
years have been widespread, with large declines in the unemployment rates for all
major demographic groups, including African Americans and Hispanics. Even so, it
is discouraging that jobless rates for those minorities remain significantly higher
than the rate for the Nation overall.
Ongoing gains in the labor market have been accompanied by a further moderate
expansion in economic activity. U.S. real gross domestic product is estimated to
have risen 1.9 percent last year, the same as in 2015. Consumer spending has continued to rise at a healthy pace, supported by steady income gains, increases in the
value of households’ financial assets and homes, favorable levels of consumer sentiment, and low interest rates. Last year’s sales of automobiles and light trucks were
the highest annual total on record. In contrast, business investment was relatively
soft for much of last year, though it posted some larger gains toward the end of the
year in part reflecting an apparent end to the sharp declines in spending on drilling
and mining structures; moreover, business sentiment has noticeably improved in the
past few months. In addition, weak foreign growth and the appreciation of the dollar
over the past 2 years have restrained manufacturing output. Meanwhile, housing
construction has continued to trend up at only a modest pace in recent quarters.
And, while the lean stock of homes for sale and ongoing labor market gains should
provide some support to housing construction going forward, the recent increases in
mortgage rates may impart some restraint.
Inflation moved up over the past year, mainly because of the diminishing effects
of the earlier declines in energy prices and import prices. Total consumer prices as
measured by the personal consumption expenditures (PCE) index rose 1.6 percent
in the 12 months ending in December, still below the FOMC’s 2 percent objective
but up 1 percentage point from its pace in 2015. Core PCE inflation, which excludes
the volatile energy and food prices, moved up to about 1 3⁄4 percent.
My colleagues on the FOMC and I expect the economy to continue to expand at
a moderate pace, with the job market strengthening somewhat further and inflation
gradually rising to 2 percent. This judgment reflects our view that U.S. monetary
policy remains accommodative, and that the pace of global economic activity should
pick up over time, supported by accommodative monetary policies abroad. Of course,
our inflation outlook also depends importantly on our assessment that longer-run
inflation expectations will remain reasonably well anchored. It is reassuring that
while market-based measures of inflation compensation remain low, they have risen
from the very low levels they reached during the latter part of 2015 and first half
of 2016. Meanwhile, most survey measures of longer-term inflation expectations
have changed little, on balance, in recent months.
As always, considerable uncertainty attends the economic outlook. Among the
sources of uncertainty are possible changes in U.S. fiscal and other policies, the future path of productivity growth, and developments abroad.
Monetary Policy
Turning to monetary policy, the FOMC is committed to promoting maximum employment and price stability, as mandated by the Congress. Against the backdrop
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of headwinds weighing on the economy over the past year, including financial market stresses that emanated from developments abroad, the Committee maintained
an unchanged target range for the Federal funds rate for most of the year in order
to support improvement in the labor market and an increase in inflation toward 2
percent. At its December meeting, the Committee raised the target range for the
Federal funds rate by 1⁄4 percentage point, to 1⁄2 to 3⁄4 percent. In doing so, the Committee recognized the considerable progress the economy had made toward the
FOMC’s dual objectives. The Committee judged that even after this increase in the
Federal funds rate target, monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2
percent inflation.
At its meeting that concluded early this month, the Committee left the target
range for the Federal funds rate unchanged but reiterated that it expects the evolution of the economy to warrant further gradual increases in the Federal funds rate
to achieve and maintain its employment and inflation objectives. As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession. Incoming data
suggest that labor market conditions continue to strengthen and inflation is moving
up to 2 percent, consistent with the Committee’s expectations. At our upcoming
meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment
of the Federal funds rate would likely be appropriate.
The Committee’s view that gradual increases in the Federal funds rate will likely
be appropriate reflects the expectation that the neutral Federal funds rate—that is,
the interest rate that is neither expansionary nor contractionary and that keeps the
economy operating on an even keel—will rise somewhat over time. Current estimates of the neutral rate are well below pre-crisis levels—a phenomenon that may
reflect slow productivity growth, subdued economic growth abroad, strong demand
for safe longer-term assets, and other factors. The Committee anticipates that the
depressing effect of these factors will diminish somewhat over time, raising the neutral funds rate, albeit to levels that are still low by historical standards.
That said, the economic outlook is uncertain, and monetary policy is not on a preset course. FOMC participants will adjust their assessments of the appropriate path
for the Federal funds rate in response to changes to the economic outlook and associated risks as informed by incoming data. Also, changes in fiscal policy or other
economic policies could potentially affect the economic outlook. Of course, it is too
early to know what policy changes will be put in place or how their economic effects
will unfold. While it is not my intention to opine on specific tax or spending proposals, I would point to the importance of improving the pace of longer-run economic
growth and raising American living standards with policies aimed at improving productivity. I would also hope that fiscal policy changes will be consistent with putting
U.S. fiscal accounts on a sustainable trajectory. In any event, it is important to remember that fiscal policy is only one of the many factors that can influence the economic outlook and the appropriate course of monetary policy. Overall, the FOMC’s
monetary policy decisions will be directed to the attainment of its congressionally
mandated objectives of maximum employment and price stability.
Finally, the Committee has continued its policy of reinvesting proceeds from maturing Treasury securities and principal payments from agency debt and mortgagebacked securities. This policy, by keeping the Committee’s holdings of longer-term
securities at sizable levels, has helped maintain accommodative financial conditions.
Thank you. I would be pleased to take your questions.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM JANET L. YELLEN
Q.1. You indicated that you disagreed with a recent study that attempted to derive the relative risk weightings and capital charges
for assets under CCAR, when compared to the risk weightings imposed under capital methodologies. Please indicate whether the
Board has conducted its own independent analysis of the relative
risk weights implicit in the CCAR exercise and the potential impact thereof on bank lending activity. If so, please provide the analysis. If not, please undertake such analysis and provide it as
promptly as possible.
A.1. Although I agree with the spirit of the particular study you
mention, which is to improve understanding of the benefits and
costs of the Federal Reserve Board’s (Board) regulations, including
the stress testing rules, I disagree with the study’s conclusions and
methodology.1 The study attempts to derive an ‘‘average implicit
risk weight’’ from the losses projected in the Board’s supervisory
stress tests. This approach fundamentally mischaracterizes the nature and purpose of stress tests. Stress tests differ from capital regulations, where assets are allocated to relatively simple categories
and then assigned risk weights that are roughly proportional to the
average risk of these asset categories in order to establish a minimum capital standard at any given point in time. Instead, stress
tests serve a complementary purpose, which is to determine the
amount of a bank’s losses and revenues through severe recession,
like the one we experienced in 2007–2009. Unlike the capital rules,
which have as a chief aim making sure that banks have sufficient
capital in normal times, the stress tests address whether a bank
can remain a going concern and continue to make loans through a
severe recession.
Some examples highlight this point:
In a stress test, a bank’s revenues and losses have to be projected—income is an important source of loss-absorbing capacity.
However, many of the banks that are the focus of our supervisory
stress tests earn significant income from activities that are not connected to particular assets on their balance sheet, such as asset
management fees. An approach like the one taken in the study that
attempts to convert the dynamic firm-wide path of revenues and
expenses produced by the stress test into a single factor attached
only to the firm’s assets at a single point in time, likely will
misattribute the benefits from such income, producing potentially
inaccurate results.
An additional important feature of stress tests is their ability to
use extremely granular, loan-level data. This results in projections
1 https://www.theclearinghouse.org/∼/media/TCH/Documents/TCHWEEKLY/2017/
20170130lWPlImplicitlRisklWeightslinlCCAR.pdf.
(47)
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of losses that are quite sensitive to the risks of the underlying assets and thus will necessarily differ across banks depending on
portfolio characteristics. In contrast, the study attempts to infer a
single average ‘‘implicit risk weight’’ across banks for each asset
category. Further, the study does not control for any difference in
the riskiness of those portfolios across banks. Thus, the study
treats a bank with a portfolio of auto loans weighted toward
subprime borrowers as having the same risk profile as a bank with
a portfolio of auto loans weighted toward prime borrowers. This
has the potential to result in misleading results because loan loss
rates in the stress tests for a particular asset class, such as auto
loans, may differ substantially across banks, depending on how the
risk profile of the banks differ for that asset class.
Table 1 summarizes the projected loan loss rates across banks for
eight of the asset categories considered in the supervisory stress
test and Comprehensive Capital Analysis and Review (CCAR). The
results show how the assumption of a single average implicit risk
weight can be quite misleading. This is because the loss rates differ
across banks due to differences in the relative riskiness of their
portfolios for a given asset class.2 Thus, the appropriate way to calculate an ‘‘implicit risk weight’’ in CCAR would be to consider the
riskiness of a specific loan or subportfolio of loans at a specific
bank. As with point-in-time risk weights, an average risk weight
across all loans of a certain broad type—such as ‘‘auto loans’’—that
is bluntly applied to all banks will miss important differences in
how the individual loan portfolios would perform in an actual economic downturn. For these reasons, the results from the study
should not be interpreted as capturing ‘‘implicit risk weights’’ from
the CCAR, as the study suggested.3
We also note the Federal Reserve closely monitors bank lending
and credit availability as part of its bank supervision and research
functions, including the distribution of credit across segments of
the U.S. economy. For instance, the availability of credit to new
and small businesses is an area of the economy that we pay particular attention to. The Federal Reserve’s most direct measures of
the amount of credit provided to small businesses by banks are
commercial and industrial (C&I) and commercial real estate (CRE)
loans with balances under $1 million. If regulation is impeding the
flow of credit to small businesses, we would expect slower growth
in small business lending by banks that face greater regulation, for
example, banks with assets over $50 billion. Since 2011, however,
small C&I loans held at banks with assets over $50 billion have
grown more quickly than at the smaller banks. Small CRE loans
have declined somewhat in recent years at both large and small
banks. Although we continue to study these trends, these results
are not consistent with the view that either supervisory stress tests
or the Board’s more stringent capital rules for large institutions are
meaningful constraints on the provision of credit to small
2 These projected loss rates are determined by the relative amount of each risk portfolio within
an asset class at a given bank. A bank that does not have any portfolios in a particular asset
class will have a projected loan loss rate of zero for that class.
3 In addition to the conceptual arguments above, certain results from the study suggest that
something other than implicit risk weights are being captured. An example is that the ‘‘implicit
risk weight’’ for junior liens and HELOCs is estimated to be negative or zero, which is inconsistent with the actual CCAR loss rates (which are not zero) shown in Table 1.
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businesses. In addition, Federal Reserve staff continue to investigate the expanding role of nonbank providers of small business
credit, who we estimate account for more than half of all credit provided to small businesses, based on available data. These firms,
which include credit unions, finance companies, farm credit bureaus, and online platforms, could help to offset any reduction in
credit availability from banks.
More generally, however, quantifying the specific effects of capital regulation, and CCAR in particular, on credit provision is made
more difficult by a number of confounding factors, which could also
result in less credit provision by large banks. For instance, one of
the goals of incentivizing large banks to fund assets with additional
capital is to reduce the value of any remaining too-big-to-fail subsidy. With the reduction in that subsidy, the funding costs of large
banks should rise relative to community banks, thus making the
community banks more competitive in attracting new business. It
will take some time to gain a more concrete understanding of the
effects of new financial regulations, including capital regulation, on
bank lending and the availability of credit, but the Federal Reserve
is engaged and will continue to push ahead on this research
agenda.4
Finally, undercapitalized banks are unlikely to be able to provide
credit on a sustainable basis. Loans that are withdrawn at the first
signs of a downturn exacerbate recessions with a ‘‘credit crunch.’’
Indeed, research by Federal Reserve economists has shown that
banks with higher capital buffers (i.e., banks with capital ratios
well above regulatory minimums) lend more freely during
downturns, reducing both the severity of the downturn and the
likelihood of a crisis.5 The supervisory stress tests and CCAR help
to ensure that banks will be able to maintain such buffers above
the regulatory minimums even during a downturn. Related research by Federal Reserve economists focuses on different channels
through which bank capital levels affect the likelihood and severity
of a financial crisis.6
4 At present, most research on the new regulations focuses on specific pockets of the economy
or financial system. For example, Calem, Correa, and Lee (2016) find that the market share of
jumbo mortgage originations at banks participating in the 2011 CCAR exercise declined after
that exercise (Paul Calem, Ricardo Correa, and Seung Jung Lee (2016)), ‘‘Prudential Policies and
Their Impact on Credit in the United States,’’ International Finance Discussion Papers 1186
(Washington: Board of Governors of the Federal Reserve System, November, https://doi.org/
10.17016/IFDP.2016.1186). Morris-Levenson, Sarama, and Ungerer (2017) find that while recent bank regulation has contributed to a reduction in mortgage lending by large banks, counties most dependent on lending from the most heavily regulated banks have not experienced significantly slower mortgage origination or house price growth than less dependent counties (Joshua A. Morris-Levenson, Robert F. Sarama, and Christoph Underer (2017), ‘‘Does Tighter Bank
Regulation Affect Mortgage Originations?’’ paper, January, available at Social Science Research
Network, http://dx.doi.org/10.2139/ssrn.2941177). This suggests that the reduction in lending
by the largest banks has been largely filled by expanded origination activity from small banks
and nonbanks.
5 See, for example, Mark Carlson, Hui Shan, and Missaka Warusawitharana (2013), ‘‘Capital
Ratios and Bank Lending: A Matched Bank Approach,’’ Journal of Financial Intermediation, vol.
22 (October), pp. 663–87; Seung Jung Lee and Viktors Stebunovs (2016), ‘‘Bank Capital Pressures, Loan Substitutability, and Nonfinancial Employment,’’ Journal of Economics and Business, vol. 83 (January–February), pp. 44–69; and Ozge Akinci and Albert Queralto (2014),
‘‘Banks, Capital Flows and Financial Crises,’’ International Finance Discussion Papers 1121
(Washington: Board of Governors of the Federal Reserve System, October), https://
www.federalreserve.gov/econresdata/ifdp/2014/files/ifdp1121.pdf.
6 See Luca Guerrieri, Matteo Iacoviello, Francisco B. Covas, John C. Driscoll, Michael T. Kiley,
Mohammad Jahan-Parvar, Albert Queralto Olive, and Jae W. Sim (2015), ‘‘Macroeconomic Effects of Banking Sector Losses across Structural Models; Finance and Economics Discussion SeContinued
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Q.2. Last year, the Federal Reserve agreed to implement a series
of changes to its CCAR processes recommended in both an internal
IG report and a GAO study. Please provide a detailed update identifying what progress the Federal Reserve has made in addressing
each of these individual recommendations and, with respect to any
item not yet fully addressed, please describe the Federal Reserve’s
remediation plan to ensure its implementation and identify the resources dedicated to that remediation.
A.2. The Federal Reserve is making progress on addressing the recommendations made in U.S. Government Accountability Office Report GAO–17–18, Additional Actions Could Help Ensure the
Achievement of Stress Test Goals (GAO report). In a January 13,
2017, letter to Members of the House of Representative’s Committee on Oversight and Government Reform and the Senate’s
Committee on Homeland Security and Governmental Affairs, I provided an update on the Federal Reserve’s plans to address these
recommendations. Additional information on these plans is provided below:
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ries 2015–044 (Washington: Board of Governors of the Federal Reserve System, June), http://
dx.doi.org/10.17016/FEDS.2015.044; and Gazi I. Kara and S. Mehmet Ozsoy (2016), ‘‘Bank Regulation under Fire Sale Externalities,’’ Finance and Economics Discussion Series 2016–026
(Washington: Board of Governors of the Federal Reserve System, April), http://dx.doi.org/
10.17016/FEDS. 2016.026.
51
Inter-agency Coordination
The GAO report recommended that the Federal Reserve, Federal
Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) (collectively, the agencies) harmonize
their approach to granting extensions and exemptions from stress
test requirements.
Consistent with the plans outlined in the January 13 letter, Federal Reserve staff, in consultation with staff of the OCC and FDIC,
have established a process to meet at least annually, and more frequently as needed, to coordinate regarding requests for extensions
and exemptions from stress test rules. Federal Reserve staff met
with staff of the OCC and FDIC on January 26, 2017, to review all
the stress testing-related exemptions and extensions that the agencies granted to firms in 2016. The staff of the agencies have agreed
to continue this practice. Federal Reserve staff will continue to
work with the FDIC and OCC on a harmonized approach to granting extensions and exemptions from stress testing requirements.
Exclusion of Company-Run Tests from CCAR
The GAO report recommended that the Federal Reserve remove
company-run stress tests from the CCAR quantitative assessment.
As indicated in the January 13 letter, Federal Reserve staff continue to evaluate the benefits and costs of modifying its rules to
remove company-run stress test results from the factors that are
considered in the CCAR quantitative assessment. Before modifying
its rules, the Board would provide notice and invite public comments regarding any proposed changes.
Transparency of the Qualitative Assessment
The GAO’s report recommended that the Federal Reserve publicly disclose additional information about the CCAR qualitative assessments; the basis for the Federal Reserve’s decisions to object or
conditionally not object to a company’s capital plan on qualitative
grounds; and information on capital planning practices observed
during CCAR qualitative assessments, including practices the Federal Reserve considers stronger or leading practices. The GAO report also recommends that the Federal Reserve notify companies
about timeframes relating to Federal Reserve responses to company inquiries.
We continue to look for ways to further enhance the transparency of CCAR and respond to the GAO findings. For example,
the Federal Reserve expects to publish a summary of the current
range of capital planning practices after the completion of CCAR
2017.
In addition, consistent with the plans outlined in the January 13
letter, effective with the first quarter of 2017, all firms that are
subject to the Board’s capital plan rule, including FR–Y14 regulatory report filers, receive a confirmation email that acknowledges
receipt of their question and provides an expected timeline for a response. Additionally, firms now receive a direct response to questions related to CCAR in accordance with the communicated
timeline. Questions that the Federal Reserve receives regarding
CCAR which pertain to all firms subject to the Board’s capital plan
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rule are included in a general communication sent to all firms at
least quarterly, or more frequently, as needed.
Scenario Design Process
The GAO’s report recommends the Federal Reserve take several
actions to broaden the consideration of the types of scenarios to use
in the stress tests and to better understand the implications of scenario choices.
The Federal Reserve has procedures for generating and considering scenarios with severity that falls outside of post-war U.S. history, and that is reflected in the published scenarios. Federal Reserve staff continue to explore mechanisms in which the severely
adverse scenario in the stress tests would include deteriorations in
scenario variables that lie beyond those historically observed. Staff
also are developing additional analytical tools, including exploring
a stress testing model based on more aggregated, bank-level data,
to assess the capital levels that will likely be implied by scenarios
of differing severities. Finally, staff are developing a process to
analyze the severely adverse scenario for potential procyclicality.
Model Risk Management and Communication
The GAO’s report recommends the Federal Reserve take several
actions to improve its ability to manage model risk and ensure decisions based on supervisory stress test results are informed by an
understanding of model risk, such as by applying model development principles to the entire system of models that are used to estimate losses and revenue in the stress tests.
Consistent with the plans outlined in the January 13 letter, Federal Reserve staff have amended the principles used to develop
models to explicitly state that the principles apply to the overarching system of models, in addition to each of its component
models. In addition, Federal Reserve staff are developing separate
documentation that describes the system of models. Several
projects are currently underway to further test and document the
sensitivity and uncertainty of the system of models, including reviewing the relevant finance and statistics literature and exploring
various methods to test the sensitivity and measure uncertainty.
Finally, the Supervisory Stress Test Model Governance Committee
has issued a memo to the Board describing the state of model risk
and plans to issue this memo annually at the conclusion of each
year’s supervisory stress test. This memo describes the general outcomes of the model development and validation processes for the
models used in the supervisory stress test exercise, and provides a
more detailed discussion of the potential impact of modeling issues
on the uncertainty of post-stress capital ratio estimates.
RESPONSE TO WRITTEN QUESTION OF SENATOR REED FROM
JANET L. YELLEN
Q.1. You have said the United States is at or near full employment. You have also said that fiscal policy changes are not necessary to reach full employment under current economic conditions.
There are, however, many long-term unemployed individuals in my
home State of Rhode Island, and around the country, who would
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take issue with the statement that we are at full employment.
They would also argue that our unemployment system did not adequately adjust, as they continue to struggle in the wake of the
Great Recession. How would you recommend that I answer my constituents whose experience leads them to question whether we are
truly at full employment? What safeguards need to be put in place
now to protect against job loss in the next economic downturn?
A.1. The statement that the U.S. economy is at or near full employment pertains to the national economy. Within that overall national situation, there will be important variation by geographic
location, industry, and skill set. As you correctly observe, it remains the case that not every willing worker in every location can
currently find a job that she or he is qualified to fill. The policies
(including monetary policy) that affect aggregate demand at the national level will generally not be well suited to address these sorts
of more-localized and more-specialized situations, as real and as
painful as they are for those experiencing them.
To address the real and important aspects of unemployment that
remain today, a more-detailed set of interventions will probably be
more appropriate and effective. These interventions may be
designed at the Federal, State or local level, and may involve Government actions at that level, private actions, or partnerships involving both the public and private sectors. In one of my earliest
speeches as Chair of the Federal Reserve in October 2014, for example, I highlighted some potential ‘‘building blocks’’ for greater
economic opportunity; these included strengthening the educational
and other resources available for lower-income children, making
college more affordable, and building wealth and job creation
through strengthening Americans’ ability to start and grow
businesses.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
FROM JANET L. YELLEN
Q.1. I’d like you to elaborate on your statement to Senator Reed
during your Senate Banking testimony that ‘‘cybersecurity is a
major, major risk that financial firms face.’’
Q.1.a. How could a large scale cyberattack on our financial system
impact the U.S. economy and international economy?
A.1.a. The global financial system has a heightened level of exposure to cyber risk due to the high degree of information technology
intensive activities and the increasing interconnection between
firms across the financial services sector. In addition, the presence
of active, persistent, and sometimes sophisticated adversaries
means that malicious cyber attacks are often difficult to identify or
fully eradicate, may propagate rapidly through the system, and
have potentially systemic consequences.
Given the highly interconnected nature of the financial sector
and its dependencies on critical service providers, all participants
in the financial system face cyber threats. The potential scenarios
and resulting impact are diverse in nature and scale. In some
cases, attackers may seek to undermine public confidence and impact an institution’s and/or country’s reputation. In other cases, a
cyber attack on a financial institution or a group of financial
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institutions could impact liquidity, thereby causing insolvency
issues at the affected firms which could lead to systemic consequences.
Q.1.b. What is the most likely cyber-threat to our financial system?
A.1.b. In general, cyber threats against financial institutions are
becoming more frequent, sophisticated, and widespread. The rise in
frequency and sophistication of cyber attacks can be attributed to
numerous factors including nation-states that breach systems to
seek intelligence or intellectual property, hacktivists making political statements through systems disruptions, and criminals seeking
to breach systems for monetary gain. While Internet-based denialof-service attacks intended to disrupt or impede financial market
activities are among the most frequent attacks on U.S. financial institutions, potential attacks that alter or destroy financial institution data are more likely to threaten U.S. financial stability.
Q.1.c. When does the Federal Reserve expect to issue a proposed
rule relating to cybersecurity?
A.1.c. The Federal Reserve, Federal Deposit Insurance Corporation
and the Office of the Comptroller of the Currency issued an advance notice of proposed rulemaking (ANPR) on October 20, 2016,
inviting comment on a set of potential enhanced cybersecurity risk
management and resilience standards that would apply to large
and interconnected entities under their supervision. The agencies
received substantial feedback from industry on the ANPR through
the public comment period that ended on February 17, 2017. In
general, the feedback emphasized the burden on firms of trying to
comply with multiple cybersecurity frameworks and encouraged the
agencies to adhere to a common approach to cybersecurity developed in collaboration with industry that leverages the work done
by organizations such as the National Institute of Standards and
Technology. The Federal Reserve is considering options for better
integration with existing efforts and has not committed to a timeframe for any future notice of proposed rulemaking.
Q.2. I’d like to continue our discussion about deficits and the debt.
During your Senate Banking Testimony, you told Senator Corker
that ‘‘fiscal sustainability has been a longstanding problem, and
. . . the U.S. fiscal course, as our population ages and healthcare
costs increase, is already not sustainable.’’
Q.2.a. In correspondence with me last year, you told me that ‘‘fiscal
policymakers should soon put in place a credible plan for reducing
deficits to sustainable levels over time.’’ What level of deficits and
debt would the Federal Reserve consider sustainable over the long
run?
A.2.a. A sustainable level of Federal debt is when the ratio of debt
to nominal gross domestic product (GDP) remains essentially constant or is decreasing over the longer run. Sustainability can potentially be achieved at different levels of the debt-to-GDP ratio. For
example, the Congressional Budget Office (CBO) recently illustrated the fiscal policy changes necessary in two different scenarios
to put the Federal debt on a sustainable path over the next 30
years: one in which the debt-to-GDP ratio would remain constant
at its current level of about 75 percent and another where the
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debt-to-GDP ratio would be brought down to its 50-year average of
around 40 percent.
In regards to the deficit, a good rule-of-thumb is that the ‘‘primary’’ budget deficit—which is defined as Federal non-interest
spending minus tax revenues—needs to be around zero, on average,
for the debt-to-GDP ratio to remain constant over the longer run.
A declining debt-to-GDP ratio usually requires primary budget surpluses—that is, tax revenues must be greater than non-interest
spending—on average.
Q.2.b. What metrics would the Federal Reserve consult in order to
evaluate the impact of the U.S.’s debt and deficit levels? What levels must these metrics reach in order for the U.S. debt and deficit
to be sustainable?
A.2.b. The Federal Reserve uses monthly data produced by the Department of the Treasury to evaluate the current state of the budget deficit and the debt. We use the periodic Federal budget and
debt projections provided by the CBO to inform our view of the expected future paths of Federal deficits and debt. As I described earlier, a sustainable fiscal policy is one in which projected budget
deficits are at low enough levels such that the debt-to-GDP ratio
is projected to remain constant or to be decreasing.
Q.2.c. Assuming current policy and current demographic trends,
how will population aging impact the U.S. fiscal situation over the
next 10 years?
A.2.c. As described in the CBO’s most recent budget outlook, population aging contributes importantly to the projected growth in
Federal spending for retirement and healthcare programs over the
next 10 years. Growth in these Federal spending programs is expected to outpace growth in tax revenues, which is reflected in the
CBO’s projection of rising budget deficits over the next decade.
Q.2.d. Assuming current policy and current demographic trends,
how large does the Federal Reserve expect the shortfall to be between retiring workers and new entrants into the workforce, over
the next 10 years?
A.2.d. Most economic analysts expect that labor force growth will
be slower over the next 10 years than it has been, on average, over
the past several decades. This outlook reflects the well-known demographic trends of both a faster pace of workers retiring and a
slower pace of new entrants. I do not think that our views on how
these trends will evolve in the future—which are quite uncertain—
differ materially from the projections of others, such as the CBO.
Q.2.e. What policy changes could Congress consider to address the
impact of population aging on our fiscal situation?
A.2.e. In general, simple arithmetic indicates that the policy
changes will need to include restraining Federal spending or increasing tax revenues or some combination of both. All other things
being the same, policy changes that are more likely to help promote
economic growth would ease the fiscal challenges somewhat, although it is quite unlikely that our economy could grow its way out
of the long-run fiscal situation. Ultimately it is the responsibility
of the Congress and the Administration to decide on the
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appropriate policy changes to put the fiscal situation on a sustainable path in the long run.
Q.2.f. How would the Federal Reserve evaluate the economic impact of an unfunded $1 trillion infrastructure spending package,
especially in light of the Federal Reserve’s concerns about fiscal
sustainability?
A.2.f. Federal spending for public infrastructure can potentially increase productivity and the size of the economy, although the magnitude and timing of these potential gains would depend on the
composition of the infrastructure spending. Moreover, as the CBO
has reported, the overall gains to the economy and the effects on
the budget would depend importantly on whether the increased infrastructure was financed by borrowing or by changes in other Government spending or revenues.
Q.3. I’d like you to elaborate on your discussion with Senator Cotton during your Senate Banking testimony regarding depressed
wage growth in particular fields.
Q.3.a. You stated that the United States has seen ‘‘much faster
wage growth for higher skilled individuals and much slower wage
growth for those who are less skilled.’’ Are there any fields where
less skilled workers have seen more robust wage growth?
Q.3.b. What conditions must be present in the U.S. economy for
lower-skilled wages to increase?
Q.3.c. Typically, the barrier to entry for entering a high-skilled
profession is high. Do you know of any high-skilled professions that
lower-skilled workers have had an easier time transitioning into?
If so, what conditions allow for this to occur?
Q.3.d. What higher-skilled professions are currently facing a labor
shortage?
A.3.a.–d. The widening of the U.S. income distribution over the
past several decades has been evident in the wage outcomes for
people of different skill and educational levels. For example, on average over the past decade (according to data from the Current
Population Survey), wages of people with a high school education
but no college have just kept up with inflation, while wages of people with a college degree have exceeded inflation by about 1⁄2
percent per year. Similarly, wage gains for occupations typically
classified as high-skill (managers, professionals, and technicians)
have far outpaced wage gains for low-skill occupations (food preparation and serving, cleaning, and personal care services).
This pattern changed somewhat over the past year or so, as we
have seen relatively large gains for the lower-skill, lower-education
portion of the workforce. For example, median usual weekly earnings were almost identical for workers with college degrees, some
college, and high school graduates in 2016 (all between 2.2 and 2.4
percent, not adjusting for inflation). This pattern is also visible in
the wages for different industries; the leisure and hospitality sector, for example, is dominated by lower-paid workers who for the
past decade have had the lowest wage gains of any major industry
group, but wages in this sector rose well above average in 2016. A
portion of the explanation for the differing results last year is probably that a number of States increased their minimum wages in
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2016. But another portion of the explanation may be that the
strengthening labor market, with ongoing solid rates of job creation
and declining unemployment, has reached a point that it is benefiting these lower-skill workers more visibly. I am hopeful that continued gains in the labor market will further benefit workers
throughout the income distribution.
Despite this recent wage news, it remains the case that signs of
labor shortages appear most prevalent in higher-skilled occupations. Data point to shortages primarily in management, business
and financial services occupation, or in professional and related
services occupations. Other anecdotal evidence points to labor
shortages for some types of manufacturing and construction work,
and in health care.
As I noted, a strong labor market seems to be helping generate
higher wages throughout the income distribution. Effective Federal
Reserve policy can therefore contribute to further such progress,
but I would emphasize that the primary forces leading to different
economic outcomes for workers of different skill levels are beyond
the realm of monetary policy. Most especially, I see education as
a critical factor in enabling individuals to succeed in a labor market that increasingly rewards higher skills. And there are many
aspects to improved education, from the quality of our primary and
secondary schools, to the ability of high school graduates to afford
college without incurring excessive debt, to improved job training
opportunities for people of any age. Improved education, through
any of these channels, is surely an important part of a strategy to
help more Americans become qualified for these higher-skilled jobs.
Q.4. I’d like to discuss the U–6 real unemployment rate.
Q.4.a. What is the Federal Reserve’s estimation of the longer-run
normal level U–6 rate?
Q.4.b. Has the Federal Reserve’s estimation of this longer-run normal U–6 rate decreased since the 2008 financial crisis? If so, why?
A.4.a.–b. Federal Open Market Committee participants do not submit an estimate of the longer-run normal level of the U–6 measure
of labor underutilization. (This measure augments the official unemployment rate by also including the ‘‘marginally attached’’—individuals who would like to work, are available to work, and have
sought employment within the past 12 months but not in the past
4 weeks—and those who are working part-time, but say they would
like to be working full-time.) As with other such measures, the U–
6 rose substantially during the recession and has been coming
down since then. However, the U–6 measure still remains a little
above its pre-recession level, and the difference between the U–6
measure and the official unemployment rate has widened by about
1 percentage point since that time. Some economists think that the
higher level of U–6 could reflect structural changes in the economy,
for example, because employers in some growing service sectors
may have a relatively high propensity to use part-time labor. But
the somewhat elevated level of U–6 also may indicate some remaining labor market slack that is not captured by the official unemployment rate.
Q.5. I’d like to discuss the U.S. agricultural markets.
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Q.5.a. How would an interest-rate hike impact the agricultural sector, given current economic conditions? How will the Federal Reserve take this into account when evaluating current economic conditions?
Q.5.b. According to the United States Trade Representative, Nebraska goods exports totaled $7.9 billion in 2014. This number is
a 238 percent increase from export levels in 2004. A recent report
released by the Department of Agriculture titled, ‘‘USDA Agricultural Projections to 2026’’ predicts that over the next 10 years the
U.S. dollar will remain stronger than any year since 2006. According to the report, ‘‘A stronger U.S. dollar will increase the relative
price of U.S. exports, thereby constraining export growth.’’ Does the
Federal Reserve share this opinion about a stronger dollar and the
impact on export levels?
A.5.a.–b. The Federal Reserve considers all segments of the U.S.
economy during the regular course of monetary policy deliberations. Our monetary policy mandate, given to us in law by the Congress, is to pursue price stability and maximum sustainable employment. The concepts that constitute the so-called dual mandate
apply across the full economy. That is appropriate because our policy tools likewise have their effects across the full economy; they
cannot be targeted to specific sectors.
Turning to the agricultural sector, conditions there have softened
in recent years. Many factors influence profitability in the agricultural sector, but a prolonged downturn in the prices of agricultural
commodities has been the primary driver of the weakness in the
farm economy over the past few years; in turn, the prices of many
agricultural commodities are heavily influenced by global supply
and demand conditions, not just domestic conditions. The nominal
value of U.S. agricultural exports has declined modestly since 2014,
on the tide of lower commodity prices and a stronger dollar. A modest increase in interest rates will affect economic and financial
conditions in the agricultural sector through multiple different
channels. For one thing, a modest increase in interest rates will
often—as in the present circumstances—be accompanied by a
strengthening overall economy, and so, generally speaking, will be
accompanied by sustained domestic demand for the output of the
agriculture sector. A modest increase in interest rates may also result in a possible increase in borrowing costs. However, interest expenses account for a relatively small portion of production costs in
the U.S. farm sector and farm loan delinquencies remain historically low. As economic and financial conditions evolve, the Federal
Reserve will continue to carefully monitor developments in the
agricultural sector.
Q.6. I’d like you to elaborate on your statement regarding automation to Senator Heitkamp during your Senate Banking testimony
that ‘‘there are dramatic accounts of changes that are on the horizon that could have profound effects on the labor market.’’
a. What industries are most vulnerable to automation?
b. What industries will see the most growth because of automation?
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c. Does the Federal Reserve expect automation to permanently
increase unemployment for lower-skilled workers? Or will the
impacts of automation primarily be transitional, as new entrants into the workforce adapt to new technologies?
A.6.a.–c. The jobs that are most susceptible to automation appear
to be those that involve routine tasks, either physical or cognitive.
Many tasks in the manufacturing sector fall into this category, as
machines or robots are able to carry out physical tasks. This is also
the case for some services, where automation can substitute for
routine cognitive tasks; prominent examples include banking,
where ATMs have substituted for tellers, or sales workers who
have been displaced by internet shopping. Conversely, tasks that
require nonroutine skills appear least vulnerable to automation,
and they may expand as other jobs are automated. These nonroutine tasks cut across the skill distribution, and include laborers and
personal care providers along with higher-skilled workers such as
managers and software developers. Of course, as technology
changes, it may be that more types of occupations become susceptible to at least partial automation. As a result, demand and workers will shift to new occupations, some of which may not even exist
today.
Even though the likelihood of a job being automated cuts to some
extent across the skill distribution, on balance, changes in technology appear to have reduced demand for lower-skilled workers
and have contributed to the increased inequality of incomes that
have been in train for several decades. Moreover, as a recent report
from the Council of Economic Advisers 1 highlighted, reduced demand for lower-skilled workers also can help explain the ongoing
decline in labor force participation of men 25–54 years old, which
has been most concentrated among those with a high school degree
or less.
Knowing whether these trends will continue is of course difficult,
and there is debate among economists about the pace of automation and its likely effects. But as I said in the response to question
3, I see education as critically important for ensuring that new entrants to the labor force are prepared for a work environment dominated by new technologies.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
FROM JANET L. YELLEN
Debt/Deficit
Q.1. Chair Yellen, I want to start this morning by talking about
our Nation’s debt and deficit. Now, it’s my belief that our Nation’s
debt and deficit continues to be unsustainable. I think we refuse
to actually take a long hard look at our Federal budget to see what
simply doesn’t make sense anymore and at the same time we continue to hand out unpaid-for tax credits like candy.
Now just recently my friends on the other side of the isle have
proposed repealing the Affordable Care Act, which will reduce revenues by $350 billion over the next decade. On top of that, they
1 https://obamawhitehouse.archives.gov/sites/default/files/page/files/20160620lceal
primeagelmalellfp.pdf.
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have proposed a tax plan that would reduce Federal revenue more
than 2 trillion dollars.
Q.1.a. So I guess my first question is, what sort of effect will that
kind of new debt have on our economy?
A.1.a. The current level of Federal debt is equal to more than 75
percent of nominal gross domestic product (GDP), which is far
higher than the average debt-to-GDP ratio of about 40 percent over
the past 50 years. Moreover, the Congressional Budget Office
(CBO) projects that Federal budget deficits and Federal debt will
be increasing, relative to the size of the economy, over the next decade and in the longer run.1 Additional Federal borrowing would accelerate those unsustainable trends. The CBO appropriately
describes several reasons why high and rising Federal Government
debt could have serious negative consequences for the economy
over time. First, because Federal borrowing eventually reduces
total saving in the economy, the Nation’s capital stock would ultimately be smaller than it would be if debt was lower; as a result,
productivity and overall economic growth would be slower. Second,
fiscal policymakers would have less flexibility to use tax and spending policies to respond to unexpected negative shocks to the economy. Third, the likelihood of a fiscal crisis in the United States
would tend to increase. However, there is no way to predict with
any confidence whether and when such a crisis could occur; in particular, there is no identifiable level of Federal Government debt,
relative to the size of the economy, indicating that this would be
likely or imminent.
Q.1.b. Do you believe our debt and deficit levels are unsustainable
in the longer term?
A.1.b. I agree, as do most economists, with the assessment that the
Federal Government budget is on an unsustainable path, given current fiscal policies. As I noted earlier, the CBO projects that Federal budget deficits and Federal debt will be increasing, relative to
the size of the economy, over the next decade and in the longer
run, which is unsustainable. In the CBO’s projections, growth in
Federal spending—particularly for mandatory entitlement programs and interest payments on Federal debt—outpaces growth in
revenues in the coming years. The increases in entitlement programs, such as Social Security and programs providing health care,
are mainly attributable to the aging of the population and rising
healthcare costs per person. For fiscal sustainability to be achieved,
whatever level of spending is chosen, revenues must be sufficient
to sustain that spending in the long run.
Q.1.c. Does it inhibit our labor market?
A.1.c. As I mentioned earlier, increasing Federal borrowing reduces
total savings in the economy over time, ultimately leading to the
Nation’s capital stock being smaller than it would be if debt was
lower. As a result, productivity and overall economic growth would
be slower. As described by the CBO, lower productivity growth
1 Congressional Budget Office, ‘‘The Budget and Economic Outlook: 2017 to 2027,’’ January
2017, and ‘‘The 2016 Long-Term Budget Outlook,’’ July 2016.
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would slow the pace of gains in labor compensation, which would
tend to provide individuals less incentive to work.2
Q.1.d. During the course of several meetings with President
Trump’s nominees, folks kept telling me that they believe we can
grow the economy so much that it will offset $2 trillion in tax cuts.
Do you believe this is possible?
A.1.d. In general, I think most economists tend to agree that the
historical evidence suggests that most tax cuts do not usually pay
for themselves.3 Even though well-designed tax changes could increase household incentives to work and save, along with potentially enhancing business incentives to hire and invest, the positive
effects of these changes on overall economic growth appear to usually not be large enough to offset the direct budgetary effects of a
tax cut. Ultimately, the challenge for fiscal policymakers is that the
tax policies chosen must generate revenue sufficient to sustain the
level of Government spending that is also chosen.
Economy
Q.2. Chair Yellen, are there particular areas in the labor market
that give you concern? Are there specific sectors you see strong
growth in vs. others that are struggling?
A.2. The solid gains in payroll employment that we have seen over
the past several years have generally been fairly widespread across
different sectors of the labor market. However, manufacturing employment has been relatively flat more recently, reflecting in part
the effects of the higher foreign exchange value of the dollar, weak
foreign economic growth, and tepid domestic demand for capital
investment. Particularly as economic activity continues to strengthen, both domestically and abroad, the prospects for the U.S. manufacturing sector should improve. Indeed, the manufacturing
employment has picked up in recent months as factory output has
accelerated somewhat.
Community Banks
Q.3. Chair Yellen, I strongly believe that our community banks
serve the folks that keep State’s like mine running. And I think everyone up here knows that our community banks weren’t involved
in developing and selling exotic and risky financial products, and
they didn’t stray from the products that have served them and
their customers for generations. I think it’s time that we provide
our community banks with some regulatory relief. I don’t believe
they caused the financial crisis and they shouldn’t have to pay for
it either.
Over the last several years, I’ve seen dozens of mergers and
acquisitions of community banks across Montana and its very concerning to me. If community banks continue to consolidate, the real
losers will be folks living in rural America, States where a majority
of our institutions are community banks, and I’m not so sure anyone will fill the void once they are gone.
2 Congressional
Budget Office, ‘‘The 2016 Long-Term Budget Outlook,’’ July 2016.
example, see the Tax Foundation, ‘‘Do Tax Cuts Pay for Themselves?’’ at https://
taxfoundation.org/do-taxcuts-pay-themselves; and the Tax Policy Center, ‘‘Do Tax Cuts Pay for
Themselves?’’ at http://www.taxpolicycenter.org/briefing-book/do-tax-cuts-pay-themselves.
3 For
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Q.3.a. Can you give me a sense of what the Federal Reserve did
in 2016 to ensure that we are protecting consumers, but at the
same time differentiating regulations between community banks,
regional banks, and global banks?
A.3.a. In 2016, the Federal Reserve took a number of steps to reduce regulatory burden on community banks. For example, in response to bankers’ concerns about the burden imposed on small
banks when large numbers of examiners participate in onsite examinations, the Federal Reserve issued guidance to encourage examiners to review loan files offsite for examinations of banks with
less than $50 billion in total assets, if requested by the bank. Together with the other banking regulators, the Federal Reserve also
reduced the regulatory filing requirements for banks with less than
$1 billion in consolidated assets by eliminating about 40 percent of
the items in the required quarterly financial reporting form known
as the Call Report. In addition, the Federal Reserve enhanced its
examination planning process to use updated statistical models to
tier community banks by risk level. These enhancements allow examiners to better target their work and should result in less examination time being spent reviewing well-managed, lower-risk community banks. For regional banks with assets between $10 and $50
billion, the Federal Reserve continued to refine its expectations for
company-run annual stress tests required by the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Dodd-Frank Act).
This included providing banks with additional flexibility with respect to required assumptions that must be included in the stress
test and extending the length of time allowed to perform and report
on the results of the tests. These actions are examples of how the
Federal Reserve seeks to tailor its supervisory programs to reflect
the lower systemic risks presented by community and regional
banks.
The March 2017 Joint Report to Congress on the results from the
second Economic Growth and Regulatory Paperwork Reduction Act
(EGRPRA) review highlights many of the actions that the Federal
Reserve is undertaking to further reduce regulatory burden on
community banks, including simplifying regulatory capital requirements, addressing challenges in obtaining appraisals, and further
reducing items collected on the Call Report.
With respect to protecting consumers in their banking activities,
the Federal Reserve System conducts specialized examinations to
ensure compliance with consumer protection laws and regulations
in the institutions under its purview.4 During 2016, the Federal
Reserve Banks completed 209 consumer compliance examinations
and 206 examinations for the Community Reinvestment Act (CRA)
of State member banks. The Federal Reserve is mindful of the importance to balance efforts to tailor our supervisory approach in
4 For consumer financial protection, the Federal Reserve has examination and enforcement authority for Federal consumer financial laws and regulations for insured depository institutions
with $10 billion or less that are State member banks and not affiliates of covered institutions,
as well as for conducting CRA examinations for all State member banks regardless of size. The
Federal Reserve Board also has examination and enforcement authority for certain Federal consumer financial laws and regulations for insured depository institutions that are State member
banks with over $10 billion in assets, while the Consumer Financial Protection Bureau has examination and enforcement authority for many Federal consumer financial laws and regulations
for insured depository institutions with over $10 billion in assets and their affiliates (covered
institutions), as mandated by the Dodd-Frank Act.
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consumer compliance with our responsibility to ensure that banks
are transparent and fair in their dealings with consumers, regardless of the size or type of institution involved.
Toward this end, the Federal Reserve has adopted the following
procedures to conduct risk-focused consumer compliance supervision, implementing this program in January 2014. Examination
intensity is based on the individual bank’s risk profile and effectiveness of its compliance controls. In addition, more up-front work
is completed offsite. This has improved the efficiency and effectiveness of our examinations and reduced regulatory burden for many
community banks. In addition, we have lengthened time between
consumer compliance examinations for community banks with
lower-risk profiles. Banks with satisfactory consumer compliance
ratings are now examined every 48 to 60 months if they have assets under $350 million (up from every 24 months). And banks
with satisfactory ratings and assets between $350 million and $1
billion are examined every 36 months instead of every 24 months.
The Federal Reserve also works to support institutions in their
consumer compliance efforts through guidance and outreach to
clarify supervisory expectations. For example, the banking agencies
have revised the CRA Q&As twice in the past 5 years. The agencies are also working together to update interagency examination
procedures and other process improvements. With respect to fairlending examinations, the agencies issued revised Interagency Fair
Lending Examination Procedures that provide more detailed information regarding current fair-lending risk factors that can aid a
bank in its analysis of fair-lending risks and to prepare for fairlending exams. We have also increased our communications with
banks during the exam process and engaged in a variety of outreach activities, such as regular participation in conferences
sponsored by both industry and advocacy groups with the goal to
highlight fair lending risks so that institutions can take steps to
effectively manage compliance.
Q.3.b. Is the Federal Reserve concerned about the consolidation we
continue to see throughout the industry?
A.3.b. The Federal Reserve recognizes the vital role community
banks play in local economies and closely monitors consolidation
trends at community banks. While several factors have contributed
to the decline in the number of community banks, some have attributed a significant part of the decline to regulatory compliance
costs. Recognizing that regulatory compliance costs may be a contributing factor to consolidation, the Federal Reserve seeks to ensure that its regulations are balanced and provide safety and
soundness benefits that are relatively proportional to the resulting
compliance costs. In addition, the Federal Reserve tailors its prudential standards and examination procedures to banks based on
their risk profile, size and complexity. Doing so allows the Federal
Reserve to achieve its goal of promoting a strong banking system
and preventing or mitigating against the risk of bank failures while
minimizing regulatory compliance costs to community banks.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
FROM JANET L. YELLEN
Q.1. Small banks and community financial institutions are the cornerstones of cities and towns across the country, but they play an
especially important part in the economy of my State, South Dakota. While South Dakotans are proud of the role that smaller financial institutions have, the rules and regulations promulgated by
the Federal Government since the financial crisis are making it
harder for smaller institutions to compete.
The Economist recently pointed out that more rules and regulations were heaped on our financial institutions between 2010 and
2014 than the total number of all financial regulations that existed
in 1980. And a study by the Minneapolis Federal Reserve found
that adding two extra staffers to the compliance department of a
small bank would make the difference for one-third of all small
banks between operating at a profit and operating at a loss.
Recently I introduced legislation called the TAILOR Act to help
ease regulatory overreach for our Nation’s small banks and community financial institutions. Is our regulatory framework for small
banks and community financial institutions appropriate for the current macroeconomic environment? What further adjustments are
needed by Congress?
A.1. The Federal Reserve recognizes that the costs of regulation
can be a significant challenge for small banks. Accordingly, it seeks
to tailor prudential standards and supervisory guidance to community banks based on their risk, size, and complexity and to minimize unnecessary burdens whenever possible. Moreover, as discussed in the March 2017 Economic Growth and Regulatory Paperwork Reduction Act Joint Report to Congress, the Federal Reserve
has taken a number of actions independently and jointly with the
other regulatory agencies to address issues raised during the review that should reduce regulatory burden for community banks.
These include leveraging technology to conduct as much of the
examination work offsite as possible, significantly cutting the information collected from small banks on the Call Report, and improving examination planning efforts to better tailor examination work
so that well-run, low-risk banks receive significantly less supervisory scrutiny. In addition, the agencies are initiating efforts to
ease the conditions under which an appraisal is required to support
a commercial loan and to develop a simplified regulatory capital regime for community banks.
To help further ease regulatory burdens for small banks, Congress could consider exempting community banks from two sets of
Dodd-Frank Wall Street Reform and Consumer Protection Act requirements: the Volcker rule and the incentive compensation limits
in section 956. The risks addressed by these statutory provisions
are far more significant at larger institutions than they are at community banks. In the event that a community bank engages in
practices in either of these areas that raise heightened concerns,
we believe that the banking agencies would be able to address
them as part of the normal safety-and-soundness supervisory
process.
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Q.2. Congress has significant responsibilities with respect to cybersecurity, and I’m honored to chair the new Armed Services Subcommittee on Cybersecurity. With its advanced rulemaking notice
on cybersecurity in October, the Federal Reserve rightly recognized
that our financial infrastructure is a significant target for our Nation’s adversaries.
Q.2.a. Can you comment on the threats that our financial sector
faces and the vulnerabilities that exist in the system?
A.2.a. In general, cyber threats against financial institutions are
becoming more frequent, sophisticated, and widespread. The rise in
frequency and sophistication of cyber attacks can be attributed to
numerous factors including nation-states that breach systems to
seek intelligence or intellectual property, hacktivists making political statements through systems disruptions, or bad actors seeking
to breach systems for monetary gain.
Despite the increasing level of attack sophistication, it is more
apparent that a significant portion of successful breaches could
have been avoided by adhering to basic information security tenets, sound technology governance and network administration
practices.
Q.2.b. Do you have the regulatory authority you need to keep this
important part of our economy safe, or is additional action needed
on the part of Congress?
A.2.b. The Federal Reserve’s general safety and soundness authority is the primary source of its information technology requirements, including those for cybersecurity. In addition, the Federal
Reserve, Federal Deposit Insurance Corporation, and the Office of
the Comptroller of the Currency have authority under the Bank
Service Company Act to examine the services that third parties
provide to financial institutions that are supervised under each of
the agency’s regulatory authorities. At the present time, the Federal Reserve is not seeking additional regulatory authority in this
area.
Q.3. The Federal Reserve recently issued a final rule in regards to
its Comprehensive Capital Analysis and Review and stress testing
rules. In September, Federal Reserve Board Governor Daniel
Tarullo gave a speech on the next steps in stress testing.
Governor Tarullo’s speech covered numerous areas of stress testing, but one particular aspect stood out: the stress capital buffer.
Governor Tarullo noted that the Fed ‘‘will be considering adoption
of a ‘stress capital buffer . . . ’ ’’ From his remarks, it appears that
the stress capital buffer, which would include an additional riskbased capital requirement, would be substituted for the capital conservation buffer.
A.3. Could you give us your take on the stress capital buffer? And
is the Federal Reserve still considering its adoption?
At this time, the Federal Reserve Board (Board) does not have
plans to propose any significant rules. However, the Board continues to consider ways to more closely integrate CCAR and the
Board’s regulatory capital rules. Before making any changes to the
Board’s rules, we would provide notice of any proposed changes and
invite public comment on them.
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Q.4. President Trump’s recent Executive actions took a strong
stance on financial regulatory reform, and Congress has started to
revisit and in some cases rescind financial regulations proposed by
the previous Administration.
Given these developments, do you think that the Federal Financial Institutions Examination Council, including the Federal Reserve, should take up review of the Dodd-Frank Act and recommend to Congress what rules should be rolled back in light of
the President’s recent Executive orders?
A.4. The President issued an Executive order on February 3, 2017,
that articulates his Administration’s core principles of financial
regulation. The Executive order also instructs the Secretary of the
Treasury to consult with the heads of the member agencies of the
Financial Stability Oversight Council and report to the President
within 120 days on (i) the extent to which existing laws and regulations promote the core principles; and (ii) any laws or regulations
that inhibit Federal regulation of the U.S. financial system in a
manner consistent with the core principles.
I intend to participate in this Treasury-led review of U.S. financial law and regulation, which will include all the Federal agency
members of the Federal Financial Institutions Examination Council and likely will include review of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Q.5. I’m concerned that a number of factors abroad could be threatening our Nation’s economic recovery. The stalemate between
Greece and its international creditors over the past week has been
troublesome. And elsewhere around the world, major economies
like China are grappling with trouble in their own real estate markets as well as with ballooning debt.
Can you discuss the downside risks to the U.S. economy given
continued slowdown in China’s economy and Europe’s debt crisis?
Do you think China and Europe could become more of a problem
for the U.S. economy?
A.5. In our highly globalized economic and financial system, no
economy can be fully insulated from developments outside its borders. Over the past several years, a series of foreign shocks have
buffeted the U.S. economy—including the euro-area debt crisis, uncertainty about Chinese economic policy, and the sizable run-up in
the dollar and sharp decline in oil prices. These developments have
directly impacted the U.S. economy through their effects on trade
and inflation and indirectly through confidence and financial
channels.
At present, the effects of these past headwinds appear to be waning. Oil prices have stopped falling, thereby easing pressure on energy companies and oil-reliant economies, concerns about financial
stability in Europe and China have eased somewhat, and economies abroad have been recovering. These are hopeful signs for the
U.S. economy. However, several foreign risks remain a concern, including those that you raise about China and Europe.
Chinese economic growth has been on a general slowing trend
over the past few years as a result of demographic changes and the
moderation in growth typical of maturing economies. There are
concerns, however, that the rapid credit growth in China in recent
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years may have increased financial risks, and a materialization of
those risks could trigger a much sharper slowdown in the economy.
Specific concerns include mounting nonperforming corporate debts;
a growing reliance on short-term sources of funding in the financial
system; rapid growth in house prices; and the possibility that expectations of currency depreciation could cause an acceleration of
capital outflows. Should the Chinese economy decelerate abruptly
and severely, there would clearly be an impact on the global economy. China is an important market for the exports of other Asian
economies as well as for commodity exporters, and these economies
would be hit particularly hard. U.S. export growth also would be
restrained, both directly, as China has accounted for a significant
portion of U.S. export growth since 2007, and indirectly, as other
markets for U.S. exports are hindered.
While we are attuned to these risks, we do not view a Chinese
financial crisis and sharp slowdown in GDP growth as the most
likely scenario. Growth remains relatively solid. Chinese authorities have recently taken measures to curb the rapid rise in house
prices and slow the growth of lending. Market participants seem
more comfortable with the Chinese authorities’ current approach to
their currency. And the government has sufficient resources to provide important support to the financial sector in case of distress.
Regarding your concern about Greece, and Europe more generally, European economies have shown considerable improvement
over the past few years. The economic recovery appears to be gaining momentum and unemployment rates have been falling. Moreover, the European Central Bank has taken a number of actions to
help backstop sovereign debt, and the region has made substantial
progress toward banking union. Thus, other European countries
are better insulated from the situation in Greece than they were
in 2010 when the debt crisis broke out.
However, Greece still faces daunting financial and economic challenges, including its very high and growing level of public debt, the
resolution of which will require further difficult steps—including
additional Greek reforms and additional debt relief from Greece’s
creditors. Developments in Greece continue to have the potential
for disruptions that could spill over and affect the European economic outlook and global financial markets. It is encouraging that
Greek and European authorities have reached a preliminary agreement on a package of economic reforms that Greece must implement to receive another disbursement of official financing.
Europe faces other challenges as well, such as negotiating the
United Kingdom’s withdrawal from the European Union (EU), following through on the EU’s structural reform agenda, and
continuing to make progress on economic recovery and lowering unemployment. We will continue to monitor the European economy,
as we consider how foreign developments may affect the achievement of our domestic objectives of price stability and maximum
employment.
Q.6. The Federal Funds rate has been at an extremely low, nearly
zero level for quite some time since the financial crisis. On February 1, the Federal Open Market Committee (FOMC) decided to
keep the target range for the Federal funds rate at a half to three
quarters of 1 percent. The FOMC’s press release cited improving
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conditions in the economy including a strengthening labor market,
solid job gains and increasing inflation.
Where would the Fed like to see additional improvements in the
economy before raising the target rate?
A.6. At the Federal Reserve, we are squarely focused on achieving
our congressionally mandated goals of maximum employment and
price stability. These goals guide our decisions regarding the appropriate level of the Federal funds rate.
At our most recent meeting, on March 14–15, the Federal Open
Market Committee (FOMC) did raise the target range for the Federal funds rate by 1⁄4 percentage point, to 3⁄4 to 1 percent. That decision was based in part on incoming data indicating that the labor
market had continued to strengthen and that inflation had moved
closer to the FOMC’s 2 percent objective. In addition, our decision
in March reflected our expectation that, with gradual adjustments
in the stance of monetary policy, economic activity will expand at
a moderate pace, labor market conditions will strengthen somewhat further, and inflation will reach 2 percent on a sustained
basis.
The same factors that drove our decision in March will be key
for our future deliberations about the appropriate path for the Federal funds rate. In particular, if the U.S. economy continues to
evolve broadly as the FOMC anticipates—economic activity expanding at a moderate pace, labor market conditions strengthening
somewhat further, and inflation reaching 2 percent on a sustained
basis—additional increases in the Federal funds rate are likely this
year. Indeed, the median assessment of FOMC participants at our
March meeting was that an additional 1⁄2 percentage point cumulative increase in the Federal funds rate would likely be appropriate over the remainder of this year, which would bring the yearend target range for that rate to 1 1⁄4 to 1 1⁄2 percent.
Nonetheless, as my FOMC colleagues and I have said many
times, monetary policy cannot be and is not on a preset course. The
FOMC stands ready to adjust its assessment of the appropriate
path for the Federal funds rate if unanticipated developments materially change the economic outlook.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM JANET L. YELLEN
Q.1. Chair Yellen, in your testimony you stated that you expect inflation to ‘‘gradually [rise] to 2 percent;’’ ‘‘toward 2 percent;’’ ‘‘return
to 2 percent;’’ etc. Can you expound on whether 2 percent inflation
represents a target objective or is a ceiling?
A.1. The Federal Open Market Committee (FOMC) sets monetary
policy to achieve its statutory goals of maximum employment and
price stability set forth in the Federal Reserve Act. As indicated in
its Statement on Longer-Run Goals and Monetary Policy Strategy,
which the Committee first agreed to in January 2012 and reaffirms
each year, the FOMC judges that inflation at the rate of 2 percent,
as measured by the annual change in the price index for personal
consumption expenditures (PCE), is most consistent over the longer
run with the Federal Reserve’s statutory mandate for price stability. The Committee’s 2 percent inflation objective is not a ceiling.
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Indeed, the Committee indicates in the Statement of Longer Run
Goals that it would be concerned if inflation were running persistently above or below 2 percent, and that its inflation goal is symmetric. Communicating this symmetric inflation goal clearly to the
public is important because it helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and
moderate long-term interest rates and enhancing the Committee’s
ability to promote maximum employment in the face of significant
economic disturbances.
In communications with the public over the past year—the statement issued after FOMC meetings, the minutes of those meetings,
the Chair’s quarterly post-meeting press conferences, and the Monetary Policy Report and testimony—the Federal Reserve has indicated that it expected headline inflation to rise over time to the
Committee’s 2 percent objective. In the event, 12-month PCE price
inflation rose to nearly 2 percent in January, up from less than 1
percent last summer. That rise was largely driven by energy prices,
which have been increasing recently after earlier declines. Core inflation, which excludes volatile energy and food prices and tends to
be a better indicator of future inflation, has been little changed in
recent months at about 1 3⁄4 percent. The Committee expects core
inflation to move up and overall inflation to stabilize around 2 percent over the next couple of years, in line with its longer-run objective. The economic projections submitted by individual FOMC participants before the March 2017 FOMC meeting are consistent with
this view, with projections for headline and core inflation in 2019
ranging from 1.8 percent to 2.2 percent, with a median projection
of 2.0 percent.
Q.2. Chair Yellen, the Federal Financial Institutions Examination
Council is supposed to coordinate the work of different regulators,
but I am hearing that in practice this is not happening. Do you believe we need separate layers of examination at the holding-company level by the Fed and OCC? What added value is there for
having both the Fed and OCC examine a bank—is one incapable
of doing the job? Does the Fed not trust the OCC to conduct examinations or the OCC’s expertise? Do you believe that there is regulatory cooperation taking place as it should?
A.2. The Federal Reserve has statutory responsibility for supervising bank and savings and loan holding companies on both a
consolidated and parent-company-only basis. Holding company supervision complements the examination work completed by the
other banking agencies, including the Office of the Comptroller of
the Currency, but its focus is different than that of bank supervision. Specifically, holding company supervision aims to ensure
that the parent serves as a source of strength to its depository institutions and that nonbank activities conducted by the holding
company, many of which are supervised solely by the Federal Reserve and can be quite substantial for some complex holding companies, do not adversely affect the safety and soundness of insured
depositories. Lastly, holding company supervision assesses the
overall consolidated financial and managerial condition of the consolidated organization, including all subsidiary banks, nonbanks
and the parent company.
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In fulfilling its holding company supervision responsibilities, the
Federal Reserve cooperates and coordinates closely with the Federal and State supervisors of insured depositories and nonbank entities and relies substantially on the work and expertise of these
agencies in evaluating the condition of any banks or nonbanks they
directly supervise. The principle of coordinating with the other regulatory agencies is required by statute and is a well-established
tenet of the Federal Reserve’s supervisory process. For example,
section 604 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, now codified in the Bank Holding Company Act, requires that the Federal Reserve rely to the fullest extent possible
on the work of other regulators. The Federal Reserve reinforced
this requirement by issuing SR 12–17, Consolidated Supervision
Framework for Large Financial Institutions, and SR 16–4, Relying
on the Work of the Regulators of the Subsidiary Insured Depository
Institutions) of Bank Holding Companies and Savings and Loan
Holding Companies with Total Consolidated Assets of Less than
$50 Billion. Both of these supervisory directives require Federal
Reserve examiners to work with the primary regulators of insured
depositories to avoid duplication of effort and minimize regulatory
burden.
These directives and other Federal Reserve guidance also tailor
expectations for examiners depending on an organization’s size,
complexity, and degree of systemic risk. For smaller bank holding
companies, where consolidated assets are composed principally of
the assets of the subsidiary bank, nonbank activities are minimal,
and parent company leverage is low, the Federal Reserve limits its
work and relies substantially on the primary regulator’s examination of the insured depository to assess the condition of the holding
company. As holding companies become larger and more complex,
and nonbank activities become more important to the organization,
inspection work correspondingly expands. However, regardless of
the size, complexity and risk of the holding company, the Federal
Reserve endeavors to avoid duplication by relying on primary regulators whenever possible, meeting regularly with them to ensure
we are not duplicating efforts, and using their examination work
to reach a consolidated supervisory view.
Q.3. Chair Yellen, you have been asked in the past whether there
are liquidity problems in the bond market—can you tell me whether or not there is a present or imminent problem? I think it is important to get the diagnosis right, so I want to understand whether
you think there is a liquidity problem in the bond market, and that
if you are merely monitoring the situation, whether or not that indicates a cause for concern in terms of what lies ahead.
A.3. In corporate bond markets, estimated bid-ask spreads have declined and estimated price impacts are lower than in the early
2000s, indicating that, if anything, liquidity may have improved despite the reduction in dealer holdings of these securities.1 Demand
from buy-side market participants has been very high, which has
likely helped to support market liquidity. Partly as a result of this
high demand, corporate debt issuance has been quite robust, which
1 See Bruce Mizrach, ‘‘Analysis of Corporate Bond Liquidity,’’ Financial Industry Regulatory
Authority (FINRA), Office of the Chief Economist Research Note, December 2015.
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in turn can help to explain some of the decline in turnover as some
of these investors may be more likely to buy and then hold the securities for some time.
However, while acknowledging that some key measures do not
show a decline in liquidity, we must recognize that our ability to
measure market liquidity is imperfect. We have less data on dealer-to-customer trading in Treasury markets than in the interdealer
market, and, given the nature of the corporate bond market, estimates of liquidity are based on transactions rather than on direct
observations of quotes to buy or sell these bonds. We have heard
the concerns from market participants that they may not be able
to buy or sell large quantities of securities in a timely fashion. The
Federal Reserve is taking these concerns about market liquidity seriously. We are committed to analyzing liquidity conditions across
a wide array of financial markets as market liquidity is important
for the conduct of monetary policy, the health of the financial system and financial stability. Federal Reserve staff regularly assess
and monitor liquidity conditions on an ongoing basis for all of the
reasons cited.
Federal Reserve Board staff have also been involved in several
projects on market liquidity both internally and with other U.S.
Government agencies. Internally, staff have studied and are continuing to study whether there has been a decline in secondary
market liquidity in the fixed-income markets. Although we have
not found strong evidence of a significant deterioration in day-today liquidity, it is possible that changes in the structure of markets
have made liquidity less resilient. This is more difficult to analyze
because it involves the study of relatively infrequent events.
Among the factors we have looked at, algorithmic traders have become more prevalent in the Treasury market, and the share of
bond holdings held by open-end mutual funds, some of which provide significant liquidity transformation, has grown significantly in
the post-crisis period. Internal work has explored the importance of
these factors, and it has also focused on changes in the broker dealer business model and on the potential impact of regulatory
changes on market liquidity. We note that staff at the Federal Reserve Bank of New York have also done a number of studies on
market liquidity and have recently published some of this work
online.2
Federal Reserve staff have also played a key role in the interagency work on the events of October 15, 2014, when fixed-income
markets experienced a sudden and extreme increase in market
volatility.3 Staff also continue to engage actively with the U.S.
Treasury, the Commodity Futures Trading Commission, and the
Securities and Exchange Commission (SEC) on work examining
longer term changes in fixed-income market structure and their potential impact on market liquidity.
Q.4. Chair Yellen, can you let me know Governor Tarullo’s precise
responsibilities at the Fed, how you work with Governor Tarullo in
his execution of those responsibilities, and can you commit to me
2 http://libertystreeteconomics.newyorkfed.org/2016/02/continuing-the-conversation-on-liquidity.html#.Vs3HdXIUWmR.
3 http://www.federalreserve.gov/newsevents/press/other/20150713a.htm.
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that you will work with whomever President Trump nominates to
serve as the Vice Chair for Supervision at the Fed?
A.4. As you know, among the duties assigned by Congress to the
Federal Reserve Board (Board) is responsibility for promoting a
safe, sound, and stable financial system that supports the growth
and stability of the U.S. economy. The Board as a whole is charged
with this important duty and is held accountable by Congress and
the taxpayer for carrying out this responsibility continuously and
under all circumstances. In order to better be able to carry out its
responsibilities, the Board would welcome action by the President
and the Senate to appoint and confirm a Vice Chairman for Supervision as well as to fill the other vacancies on the Board.
To update you on our internal leadership, as you may know, Governor Jay Powell is now Chairman of the Federal Reserve Board’s
Committee on Supervision and Regulation. As a longtime member
of the committee and a Governor steeped with financial services experience, I believe Governor Powell will serve as an excellent chairman. As I have indicated in my testimony, upon confirmation, the
new Vice Chairman for Supervision will assume the chairmanship
of this committee.
Q.5. Chair Yellen, aside from the Joint Agency Frequently Asked
Questions document circulated with supervisory letter SR–16–19,
has the Federal Reserve conducted any research into the impact
that the Current Expected Credit Loss (CECL) standard will have
on capital reserves, credit availability, and the potential for a reduction in credit during times of economic stress? If so, please detail. If not, why not?
Q.5.a. While CECL is designed to help prevent the credit bubbles
such as the one that fueled events surrounding the 2008 financial
crisis, many have expressed concerns given the need for a financial
institution to account for losses on the life of a loan at the time of
origination and thus the capital reserves held against those lossesthat in times of economic stress, financial institutions may reduce
lending exacerbating the economic stress. What has the Federal
Reserve done to address this concern and has the Federal Reserve
discussed this with the other Federal financial regulators?
A.5.a. The Financial Accounting Standards Board (FASB) issued
the final Current Expected Credit Loss (CECL) standard on June
16, 2016, with the earliest mandatorily effective date of January 1,
2020, for calendar year-end SEC registrants. We followed the
FASB’s CECL standard during its development and will continue
to do so through implementation. One of the stated intents of the
CECL standard is to align the accounting with the economics of
lending by requiring banks and other lending institutions to record
the full amount of credit losses that are expected over the life of
a loan on a more timely basis. There was a general belief that the
existing accounting framework resulted in loan loss allowances that
were ‘‘too little, too late’’ and that the accounting framework should
be changed to address this weakness. This goal is accomplished in
part by requiring that the allowance reflects losses a firm expects
to experience over the remaining life of their loans instead of unduly delaying recognition until the point where losses have already
been incurred. The CECL standard also requires incorporation of
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a reasonable and supportable forecast of future conditions allowing
firms to incorporate on a more timely basis early indicators of deterioration in credit quality such as loosening underwriting
standards.
Since the FASB’s final issuance of the CECL standard, we have
established various groups to conduct research on the impact of the
CECL standard on loan loss provisioning, regulatory capital, and
the availability of credit through the economic cycle. We are in the
earlier phases of our research given that FASB issued the CECL
standard in June 2016. We are working closely with other U.S.
Federal financial institution regulators to monitor the implementation of the CECL standard and its micro-prudential and
macroprudential impacts. We meet on a regular basis to ensure
consistent resolution of key issues and timely communication to the
industry.
Q.5.b. The annual Comprehensive Capital Analysis and Review
(CCAR) and Dodd-Frank Stress Tests (DFAST) require a covered financial institution to project potential losses under each scenario
for eight quarters into the future. Starting in 2018, this eight quarter projection will begin to run until January 2020, the date at
which CECL would begin implementation. While CCAR does not
currently require calculations based upon future changes to the accounting rules, there is uncertainty about whether the Federal Reserve will require institutions to essentially run two sets of calculations for each scenario, one under the Allowance for Loan and
Lease Losses (ALLL) and one under CCAR. How does the Federal
Reserve plan to implement CECL into CCAR in 2018? Will covered
financial institutions need to prepare two sets of calculations based
on differing accounting standards for each scenario? Please describe in detail how the Federal Reserve intends to address this
matter.
A.5.b. On January 6, 2017, we provided instructions to firms to exclude the effect of the CECL standard in 2018 Dodd-Frank Act
Stress Tests/Comprehensive Capital Analysis Review (DFAST/
CCAR). In past CCAR submissions, bank holding companies were
instructed not to reflect the adoption of new accounting standards
in their projections unless a firm had already adopted the accounting standard for financial reporting purposes. For 2018 DFAST/
CCAR, consistent with previous guidance, we instructed firms to
exclude the effect of the CECL standard.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR PERDUE
FROM JANET L. YELLEN
Q.1. Madame Chair, currently among all the financial institutions
under the Federal Reserve’s supervision:
Q.1.a. How much are all the member institutions combined holdings in Total Risk-Based Capital?
A.1.a. The Federal Reserve is the consolidated supervisor of all
U.S. bank holding companies and savings and loan holding
companies (U.S. depository institution holding companies), as well
as the supervisor for State member banks. The Federal Reserve
Board’s (Board) capital rules, which include the requirement to
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hold a minimum amount of total (risk-based) capital, apply to all
State member banks and to certain bank holding companies and
savings and loan holding companies.1 The aggregate amount of
total capital held by U.S. depository institution holding companies
that are subject to the Board’s capital rules at the consolidated
level is approximately $2.007 trillion as of December 31, 2016.2 The
aggregate amount of total capital held by State member banks is
approximately $272.3 billion as of December 31, 2016.3
Q.1.b. How much of it is comprised of Common Equity Tier 1?
A.1.b. Approximately $1.554 trillion (77 percent of aggregate total
capital) held by U.S. depository institution holding companies described above is in the form of common equity tier 1 (CET1) capital.4 Approximately $247.4 billion (91 percent of the aggregate
total capital) held by State member banks is in the form of CET1
capital.
Q.1.c. Are there comparable figures that you can disclose from
2007?
A.1.c. U.S. bank holding companies reported an aggregate amount
of approximately $1.017 trillion in total capital as of December 31,
2007.5 The CET1 capital measure was not in effect as of year-end
2007. However, we estimate that, as of December 31, 2007, approximately $523.8 billion (52 percent of the total capital) held by
U.S. bank holding companies was in a form that would qualify as
CET1 capital under the current capital rules of the Board.6 State
member banks reported an aggregate amount of approximately
$148.3 billion in total capital as of December 31, 2007.7 Using the
same methodology as used for U.S. bank holding companies, we estimate that, as of December 31, 2007, approximately $114.6 billion
1 Total capital is defined in the Board’s capital rules under 12 CFR 217.20.
2 This figure reflects the aggregate value of the total capital as reported by U.S. holding companies subject to consolidated capital requirements, including bank holding companies, savings
and loan holding companies, and intermediate holding companies of foreign banking organizations, on Schedule HC–R of the Consolidated Financial Statements for Holding Companies report (FR Y–9C).
3 This figure reflects the aggregate value of the total capital as reported by State member
banks on Schedule RC–R of the Call Report (Consolidated Reports of Condition and Income for
a Bank with Domestic and Foreign Offices (FFIEC 031) and Consolidated Reports of Condition
and Income for a Bank with Domestic Offices Only (FFIEC 041)).
4 CET1 capital is defined in the Board’s capital rules under 12 CFR 217.20(b).
5 This figure reflects the aggregate value of the total capital as reported by U.S. bank holding
companies that were subject to consolidated capital requirements on Schedule HC–R of the Consolidated Financial Statements for Holding Companies report (FR Y–9C), as of December 31,
2007. The Board’s revised regulatory capital framework, adopted in 2013, amended the definition of total capital. Note that Title III of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) transferred to the Board the supervisory functions of the Office
of Thrift Supervision related to savings and loan holding companies beginning on July 21, 2011.
Thus, 2007 data do not reflect capital requirements for these firms. In addition, intermediate
holding companies of foreign banking organizations were formed pursuant to the Board’s Regulation YY, which implements the enhanced prudential standards mandated by the Dodd-Frank
Act. Thus, 2007 data similarly do not reflect capital requirements for these firms.
6 This methodology used to create this estimate is consistent with that used by the Federal
Reserve in 2012 to estimate the impact of changes to the regulatorily capital rule. That methodology was made publicly available on November 14, 2012, as part of remarks made to the Senate
Committee on Banking, Housing, and Urban Affairs by Michael Gibson, Director of the Division
of Banking Supervision and Regulation at the Board. Those remarks and the methodology used
by the Federal Reserve (see Attachment A) are available here: https://www.federalreserve.gov/
newsevents/testimony/gibson20121114a.htm.
7 This figure reflects the aggregate value of the total capital as reported by State member
banks on Schedule RC–R of the Call Report (Consolidated Reports of Condition and Income for
a Bank with Domestic and Foreign Offices (FFIEC 031) and Consolidated Reports of Condition
and Income for a Bank with Domestic Offices Only (FFIEC 041)). The Board’s revised regulatory
capital framework, issued in 2013, amended the definition of what qualifies as total capital.
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(77 percent of the total capital) held by State member banks was
in a form that would qualify as CET1 capital under the current
capital rules of the Board.
Q.2. Madame Chair, I am grateful for all the hard work that you
and your colleagues at the Federal Reserve have undertaken. However, I am concerned about the rising levels of global debt. Since
2007, governments alone have added over $25 trillion in debt, with
the advanced economics contributing to 75 percent of the increase.
The combined global household, corporate, and government debt
has exceeded $200 trillion.
a. At $200 trillion in global debt, global debt is leveraged at
nearly 3 times as much as the global economy. Do you have
concerns that the world is overleveraged?
b. Where do you see the systemic risks in the global economy?
i. Chinese corporate debt?
ii. Greek debt default?
iii. Capital flight from emerging markets as the Fed and
Bank of England raise rates?
iv. Japanese governmental debt?
A.2.a.–A.2.b. Rising debt levels are a concern to the extent that
borrowers could face difficulty servicing that debt if their incomes
decline or the interest rates that they pay increase. Debt servicing
can also potentially crowd out other spending, thereby placing a
drag on the economy.
Since the global financial crisis, debt has grown in many countries. Much of that growth reflects increases in sovereign debt that
were accumulated as governments supported their economies during the crisis, recession, and slow recovery. Such higher debt levels
are a source of concern, both because they may signal diminished
creditworthiness and because they may constrain governments in
responding to future economic shocks. However, in most cases, debt
remains on a sustainable path as evidenced by the very low level
of sovereign bond yields. In some countries, however, sovereign
debt and bond yields are at more worrisome levels, and more concerted efforts at debt reduction are needed.
In addition to sovereign debt, corporate debt levels have also increased in a number of countries, especially emerging market
economies. By many assessments, the risks associated with high leverage do not appear to be widespread across countries and sectors.
In addition, rising interest rates in advanced economies by themselves should not be problematic for emerging market borrowers if
they are associated with stronger global economic activity. However, a sudden reversal in sentiment that leads to a revaluation of
risk-return tradeoffs and a rapid reversal in capital flows can certainly have adverse consequences, especially for highly leveraged
emerging market firms. This is a risk that we continue to monitor,
although U.S. investors’ direct exposures to the emerging market
corporate sector remain fairly limited.
U.S. investors’ direct exposures to China’s corporate debt are also
low, but China is a significant part of the global economy, and its
corporate debt has risen rapidly in recent years. China’s corporate
debt is currently estimated to be about 170 percent of gross
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domestic product (GDP), which is high for an emerging market
economy. That poses a potential vulnerability for the Chinese economy, particularly to the extent that this debt has financed lowreturn investments. A mitigating factor is that policymakers have
substantial resources and tools to address the issue, especially
because the banks and most of the entities borrowing are
state-owned.
Greece still faces daunting financial and economic challenges, including its very high and growing level of public debt. European
authorities acknowledge that Greek public debt sustainability remains a serious concern, and that a resolution will require further
difficult steps—including additional Greek reforms and additional
debt relief from Greece’s creditors. It is encouraging that Greek
and European authorities have reached preliminary agreement on
a package of economic reforms that Greece must implement to receive another disbursement of official financing.
Japan’s government debt is equal to about 200 percent of GDP,
the highest among the G–7 economies. Ratings agencies have cited
that high debt level in downgrading the rating of Japanese government bonds over the past few years. The burden of that debt is
currently reduced by the extremely low interest rates that the government pays, with 10-year Japanese government bond yields
around zero. Domestic Japanese investors, including banks and insurance companies, are willing to hold most of this debt at those
low interest rates. Eventual rises in Japanese bond yields would increase the burden of that debt, but if the yield rises are driven by
improving economic growth and rising prices, tax revenues would
rise as well. Eventually, action will be needed to reduce the debt.
Q.3.a. Madame Chair, I want to focus on the issue of currency revaluations. With the election of President Trump and a likelihood
of tax reform and an infrastructure package, the market is already
building in higher inflation prospects into the value of the dollar.
Now, we have discussions of a border-adjustment tax that some
wish to implement.
Do you believe that the authors of the Border Adjustment Tax
are correct, that the imposition of a 20 percent tax on imports
would result in an immediate 20–25 percent appreciation of the
dollar or do you believe the effect of a border tax on the currency
market is harder to both calculate and anticipate?
A.3.a. There is now substantial literature on the potential effects
of the border adjustment tax. While there is a logic for why the dollar might fully adjust to offset the effects on U.S. trade and import
prices, it is unclear whether that would happen in practice. Based
on experience looking at foreign exchange markets and the many
factors that can affect them, there is considerable uncertainty
about how exchange rates would evolve following the imposition of
a border adjustment tax.
Q.3.b. What is the effect of an overnight 20 percent appreciation
of the dollar on the global economy, especially the emerging markets?
A.3.b. The economic effects of exchange rate movements will depend in part on the factors behind those movements. For example,
if dollar appreciation were caused by a stronger outlook for U.S.
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economic growth, then one might expect a relatively favorable
impact on the global economy. All else equal, however, dollar appreciation makes U.S. goods more expensive abroad and foreign
goods cheaper in the United States. Over time this should have
several effects. First, it should restrain U.S. exports and boost U.S.
imports, reducing U.S. aggregate demand and economic activity.
Second, it should put some downward pressure on import prices in
the United States and eventually may put some upward pressure
on prices of some consumer goods. The counterpart of dollar appreciation is the depreciation of foreign currencies. Currency depreciation would tend to boost the net exports of our trading partners,
but that positive effect on their economies could be offset by negative impacts from a tightening of financial conditions, especially in
emerging market economies, as capital inflows slow and some central banks are forced to tighten monetary policy to resist rising inflation. In addition, some emerging-market corporations that have
debt denominated in dollars could face difficulties.
Q.3.c. If the dollar appreciates as anticipated, would there be substantial risks to U.S. pension funds and other U.S. investors that
hold foreign assets?
A.3.c. U.S. investors hold nearly $8 trillion in foreign-currency denominated financial assets and nearly $4 trillion in foreign-currency denominated foreign direct investment. Thus a 20 percent
appreciation of the dollar, were it to occur, could generate significant wealth losses. These foreign-currency assets are held by a variety of U.S. investors, including households in the form of mutual
fund investments, as well as by pension funds, insurance companies, and other financial intermediaries. For pension funds specifically, foreign-currency assets are a relatively small portion of their
$19 trillion in total financial assets. However, for U.S. investors
more generally, a decline in wealth would be expected to have some
effect in reducing spending. Again, it is worth noting, there is much
uncertainty about these potential outcomes.
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ADDITIONAL MATERIAL SUPPLIED
FOR THE
RECORD
for use al l 0:00 a.m., EST
Froruaty 14, 2017
MoNETARY Poucv REPORT
February 14, 2017
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Board of Governors of the Federal Reserve System
79
lETIER OF TRANSMITIAL
BOARD OF GOVERNORS OF TfiE
fEDERAL RESERVE SYSlF.M
Washington. D.C.. February 14, 2017
Tue PResiOENTOI'Tfm SENA1'E
TnE SPr:AKF.ROF Ti lE HouSE OF REPRF.SENTATtves
The lloard of Governors is pleased to submit its Monetary Policy Report pursuant to
section 21) of tbe Federal Reserve Act.
~{~
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Janet L. Yellen. Chair
80
STATEMENT o N Lo NGER-RuN GoALS AND M o NETARY Poucv STRATEGY
Adoptc>d ei(ecuve January 24, 20 12; as amended eiiective January J I 2017
The Federal Open Market Committee (FOMC) is firmlycommitted to fulfilling its statutory
mandate from the Congress of promoting maximumemployment, stable prices. and moderate
long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public
as clearly as possible. Suchclarity facilitates weU-informed decisionmakiog by households and
businesses, reduces economic and financial uncert:tinty, increases the e!Tectiveness of monetary
policy, and enhances transparency and aceountability, which are essential in a democratic society.
Inflation, employment, and long-terminterest rates fluctuate over time in response to economic and
financial disturbances. Moreo~~r, monetary policy actions tend to influence economic activity and
prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its mediumterm outlook. and its assessments of the balance of risks. including risks to the financial system that
could impede the attainment of the Committee's goalo;.
l11e inflation rate over the longer run is primarilydetermined by monetary policy, and hence the
Committee has the ability to specify a longer-run goal for ioDation. The Committee reaffirm> its
judgment that inllation at the rate of 2 percent, as measured by the annual change in the price
index for personal consumption expenditures, is most consistent over the longer run with the
Federal Reserve's statutory mandate. llle Committee would he concemed if inflation were running
persistentlyabove or below this objective. Communicating this symmetric inflation goal clearly to the
public helps keep longer-terminflation expectations firmly anchored, thereby fostering price stability
and moderate long-term interest rates and enhancing the Committee's ability to promote maximum
employment in the face of significant economic disturbances. The maximum level of employment
is largely determined by nonmonetary factors that afiect the structure and dynamics of the labor
market. These factors maychange over time and may not he directly measurable. Consequently,
it would not be appropriate to specify a fixed goal for employment; rathe~ the Committee's policy
decisions must be informed by assessments of the ma.\imumlevel of employment, recognizing that
such assessments are necessarily uncertain and subject to revision. The Committee considers a
wide range of indicators in making these assessments. Information about Committee participants'
estimates of the longer-run normal rates of output growth and unemployment is published four
times per year in the FOMC's Summary of Economic Projection~ For example. in the most
recent projections, the median of FOMC participants' CJ;timates of the longer-rnn normal rate of
unemployment was 4.8 pen:ent.
In setting monetary policy. the Committee seeks to mitigate deviations of inflation from its
longer-run goal and deviations of employment from the Committee's assessments of its maximnm
level. These objectives are generaUy complementary. However. onder circum>tances in which the
Committee judges that tbe objectives are not comp~mentary, it foUows a balanced approach in
promoting them, taking into aceount the magnitude of the de,~ations and the potentially dilferent
time horizons over whichemployment and inflationare projected to return to lm ls judged
consistent with its mandate.
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111e Committee intends to reaflirmthese principles and to make adjustments as appropriate at its
annual organizational meeting each January.
81
CoNTENTS
Summary .................................................. 1
Part 1: Recent Economic and Financial Developments ....... . ........ 3
Domestic Developmems. . . .... . . . .... . . ...... . . .... . . . .... . . .... . . . . .... . . . . 3
Financial Developments ............. . ... .. . . . . . . ........... ... .. . ... . .... . . 19
International Developments ...................................... . . . ...... . . 24
Part 2: Monetary Policy ....................................... 29
Part 3: Summary of Economic Projections ................... . ..... 33
The Outlook for Economic Activity. . .. . . . . ...... . .. . ... . . .. . . . . ... .. . . .... . . . . 34
The Outlook for Inflation . . .. . . . . •.... •. •..• . •. . . .. . . . •.. . . . . . .... •. .... . •.• 36
Appropriate Monetary Policy ......... . ........ . ...... . . . .. . . . .... .. ....... . . 39
Uncertaintyand Risks... . .... . . . .... . . . . .. ... ... . .. . . .... . . . . . .. .. . . .. ..... 39
Abbreviations .............................................. 47
List of Boxes
The Recovery from the Great Recession and Remaining Challenges.
.. .. .. . 6
Homeownership by Race and E~tnidty . .. . .. .. .. . .. .. .. . .. .. .
.. . . 14
Developments Related to Financial Stability .. .. . ......... . ... . . ..... . .. . .... .. . . 22
Forecast Uncertainty. . . . . .. . . . . . . .. . . . . •... . •. . .. . . . . . .. . . . . . .. . . •. . .... •. . 45
Non: Unless staled odlMvise, the time series in the ligures e<teod lhroogh. fO< daily data, februa~· 9, 2017; for
monthly data, January 2017; and, ior quarterly data, 201 &:Q4. 1n bar charts, except as noted, the change ior a gii'Eil
period is measured to iB final quarte< from the final quar~ of !he pr«:c;ding penod.
for figures 14, 33, and 37, nolethatthe S&P 500 lnde< and the Dow Jones Bank todex are produe1s oi S&P Dow
Jones lndicesllC an<l'orits affiliates and ha"e been licensed for use by the Board. Copyright" 2017 S&f' Dow Jones
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Indices LLC. for more information on any of S&P Dow Jones lndioes llC's indices please 1isit """v.spdji.com. S&~ is
a regiSiered traden1.1rl< of Standard & Poofs financial Ser\icesllC, and Dow Jone9® is a registered tl3derrorl< of Dow
Jones Tr.~de<nark Holdings LLC. Neither S&P Dow jones lodices LLC, Dow Jones Tr.~demark Hol<fngs LLC, their affiliates
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errors, omissions, orinterruptions ol an}' index orthe data included thecein.
82
SUMMARY
a few years ago.
Consumer price inOatiou moved higher last
year but remained below the FOMC's longerrun objecth~ of 2 percent. The price index for
personal consumption expenditures {PCE)
increased 1.6 percent over the 12 months
ending in December, I percentage point more
than in2015, importantly reftecting that
energyp~ have turned back up and declines
in non-oil import prices have waned. The
PCE price index excluding food and energy
iten~ which provides a better indication than
the headline index of where overall inflation
wiU be in the future, rose 1.7 percent over
the 12 months ending in December, about
Y. percentage point more than its increase
in 2015. Meanwhile, survey-based measures
of longer-run inftation expectations ha'-e
remained generally stable, though some are at
relatively low levels; market-based measures
of inflationcompensation have moved up in
recent months but also are at low Je,~ls.
Real gross domestic product is estimated to
have increased at an annual rate of 2Y.. percent
in the second half of the year after rising
only I percent in the first half. Consumer
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spending has beenexpanding at a moderate
pace, supported by solid income gains and
tbe ongoing effects of increases in w~alth.
The housing market has continued its gradual
recovery, and fiSCal policy at aU levels of
government has provided a modest boost
to economic activity. Business investment
had been weak for mnch of2016 but posted
larger gains toward the end of the year.
Notwithstanding a transitory surge of exports
in the third quarter, the underlying pace of
exports has remained weak, a reflection of the
appreciation of the dollar in recent years and
the subdued pace or foreign economic groMh.
Domestic financial conditions have generaUy
been supportive of economic growth since
mid-2016 and remain so despite increases in
interest rates in recent months. Long-term
TreasUI)' yields and mortgage rates moved
up from their low le\<els earlier last year but
are still quite low by historical standards.
Broad measures of stock prices rose. and the
financial sector outperformed the broader
equity market. Spre.ads of yields of both
speculative-and investment-gradecorporate
bonds over yields of comparable-maturity
Treasury securities declined fromlevels that
were somewhat elevated relative to the past
several years. Even with an ongoing easing in
mortgage credit standards, mortgage credit is
still relatively difficult to aecess for borrowers
with low credit scores, undocumented income,
or high debt-to-income ratio~ Student and
auto loans are broadly available. including
to borrowers with non prime credit scores.
and the availability of credit card loans for
such borrowers appears to have expanded
somewhat over the past several quarters. In
foreign financial markets, meanwhile, equities,
bond yields, and the exchange value of the
U.S. doUar hal"e all risen, and risk spreads have
generallydeclined since June.
Financial vulnerabilities in the U.S. financial
system O\'eraU have continued to be moderate
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Labor market conditions continued to
strengthen over the second half of 2016.
Payroll employment has continued to post
solid gains. averaging 200.000 per month since
last June. a touch higher than the pace in the
ftJSt half of2016, though down modestly
from its 225,000-per-month pace in 2015. The
unemployment rate bas dedined slightly since
mid-2016; the 4.8 percent reading in January
of this year was in line with the median of
Federal Open Market Committee (Fm1C)
participants' estimates of its longer-run
normal level. The labor force participation
r.lte has edged higlter, on net, since midyear
despite a stn1ctural trend that is moving down
as a result of changing demographics of the
population. Inaddition. wage groll'lhsecms to
have picked upsomewhat relative to its pace of
83
VerDate Nov 24 2008
16:26 Aug 04, 2017
Sl!M'MRY
since mid-2016. U.S. banks are well capitalized
and have sizable liquidity l>uffers. Funding
markets functioned smoothly as money market
mutual fund reforms took effect in October.
The ratio of household del>tto income bas
changed lillie in recent quarters and is still
far below lhe peak level it reached about a
decade ago. Nonfinancial corporate business
leverage bas remained elevated l>y historical
standards even though outstanding riskier
corporate del>! declined slightly last year. In
addition, valuation pressures in some asset
classes increased, particularly late last year.
The Federal Reserve bas continued to take
steps to strengthen the financial system,
including finalizing a rule that imposes total
loss-absorbing capacity and long-term del>t
requirements on the largest internationally
active bank holding companies as well as
concluding an extensive review of its stress·
testiug and c.apital planning programs.
The Commillee has continued to emphasize
that, in determining the timing aud size of
future adjustments 10 the target range for
the federal funds rate, itwiU assess realized
and expected economic conditions relative
to its objectives of maximum employment
and 2 percent inllation. The Committe~ has
expected that economic conditions 11ill evolve
in a manner that will warrant only gradual
increases in the federal funds rate. and that the
federal funds rate 11~1l lik-ely remain, for some
time, below levels that are expected to prevail
in the longer run. Consistent with this outlook,
in the most recent Summary of Economic
Projections (SEP), which was compiled at
the time of the December meeting of the
FOMC, most participants projected that the
appropriate level of the federal funds rate
would be below its longer-nm leYel through
2018. (Tbe December SEP is included as Part 3
of this report.)
In Dectmber, the FOMC raised the target
for the federal funds rate to a range of
~ to '/. percent after maintaining it at Y. to
Y, percent for a year. The decision to increase
the federal funds rate refiected realized
and expected labor market conditions and
inflation. With the stance of monetary policy
remaining accommodative. tbe Committee has
anticipated some further strengthening in labor
market conditions and a return of infiation to
the Committee's 2 peroent objective.
With respect to its securities holdings, the
Committee has stated that it 11ill continue to
reinvest principal payments from its securities
portfolio, and that it expects to maintain this
policy until normalization of the level of
the federal funds rate is well under way. This
policy of keeping the Committee's holdings
of longer-termsecurities at sizal>le lmls
should help sustain accolfUilodative financial
conditions.
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2
84
3
PART 1
RECENT EcONOMIC AND fiNANCIAL DEVELOPMENTS
Labor market conditions continued to improve during the second half of last year and early this
)l!ar. Payroll employment has increased 200,000 per month, on average, since june, and the
unemployment rate has declined slightly further, reaching 4.8 percent in january\ in line with
the median of Federal Open Market Committee (FOMC) partidpants' estimates of its longer·run
normal/eve/. The labor force participation rate has edged higher, on net, which is a// the more
notable given a demographically induced downward trend.
The 12·month change in the price index for overall personal consumption expenditures (PCE)
was 1.6 percent in December- still below the Committee's 2 percent objective but up noticeably
from 2015, when the increase in top·line prices was held down by declines in energy prices. The
12-month change in the index excluding food and energy prices (the core PC£ price index) was
1.7 percent last year. Measures of longer·term inflation expectations have been generally stable,
though some survey-based measures remain/ower than a few years ago; market·based measures
of inflation compensation moved higher in recent months but also remain be/cf.v their levels from a
few years ago.
Real gross domestic product (COP) is estimated to have increased at an annual rate of 2¥< percent
over the second half of 2016 after increasing just I percell! in the first half. The economic
expansion continues to be supported by accommodative financial conditions-including the stiiJ.
/cf.v cost of borrowing for many households and businesses - and gains in household net wealth,
which has been boosted further by a rise in the stock market in recent months and by increases in
households' real income spurred by colltinuing job gains. However, net exports were a moderate
drag on CDP gr01vth in the second half, as imports picked up and the rise in the exchange value of
the dollar in recent years remained a drag on export demand.
Domestic Developments
The labor market has continued to
tighten gradually ...
Labor market conditions strengthened over the
second half of 2016 and early this year. Payroll
employment has continued to post sotid gains,
averaging 200,000 per month since last June
(figure 1). This rate of job gains is a bit higher
than that seen during tbe first half of 2016,
though it is a little slower than the 225,000
monthly pace in 2015. The unemployment rate
has declined slightly further. on net. since the
middle of last year. Afier dipping as tow as
4.6 percent in November, the unemployment
rate stood at4.8 percent in Janual)', in line
with the median of FOMC panicipants'
estimates of its longer-run normal level.
""''"""'"'"
-
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SHERYL
21417044.eps
The labor force participation rate, at
62.9 percent, is up slightlysince June 2016.
Changing demographics and other longer.run
structural changes in the labor market likely
85
4
PART 1: R(C!NT £CONO.YICAN0 FlNIINOAI. ()[VUOP.\IINTS
2. L3borforce p3rtkip.t1ion r.rte nOO
aq>lo)lDmt-to-popubtioo ratio
.....
-6$
r~~~
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-
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I
26»2®2011 :!613 2015 2017
have continued to put downward pressure
on the participation rate. A Hat or increasing
trajectory of the participation rate should
therefore be viewed as a cyclic.'ll improvement
relative to that downward trend. Reflecting
the slightly higher participation rate and the
small drop in the unemployment rate, the
employment-to-population ratio has moved
up about Y. percentage point since mid-2016
(figure 2). (For additional historical context
on the economic recovery. see the box "l'he
Reco~try from the Great Recession and
Remaining Challenges.")
... and is close to full employment
Other indicators are also consistent with
a healthy labor market. Layoffs as a share
of private employment. as measured in the
Job Opening, and Labor Turnover Survey
(JOLTS), remained at a low level through
~mbcr, and recent readings on initial
claims for unemployment insurance, a more
timely measure, point to a very low pace of
involuntary separations. The JOLfS quits
rate bas generallycontinued to trend up and
is now close to pre--crisis levels. indicating
that workers feel increasingly confident
about their employment opportunitie~ In
addition, tbe rate of job openings as a share
of private employment has remained near
record-high level~ Theshare of workers
who are employed part time but would like
to work fulltime-whic.~ is part of the U-6
measure of underutilization from the Bureau
of Labor Statistics {BLS)-is still somewbat
elevated, however. even though it has declined
further; as a result, the gap between U-6 and
the headline unemployment rate is somewl1at
111der than it was in the years before the Great
Recession (figure 3).
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21417045.eps
The jobless rate for African Amecic.ans also
continued to edge lower in the second half of
2016. while the rate for Hispanies remained
Oat as with the overall unemployment rate.
tbese rates are near levels seen leading into
the recession. Despite these gains, the a1<erage
unemployment rates for these groups of
Americans have remained high relative to the
aggregate. and those gaps ha1<e not narrowed
over tlte past decade (figure 4).
86
M0N£TARY POliCY R£~: F(Bit\JARY 1017
5
3. M=uts oflab<T undtrutiliz:1tim
-II
-
16
-
14
-
12
-10
-'
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1011
20ll
lOIS
1011
l~ioy:m;ILMt~II.UI tmeqlloytdua~eor~ ~b. U~manu~l ~'tdFblitecY.zqt.d •or'tm,ua
~ofOtltb:!t!Ofttpi'JS~w<d:m.Discoqcd 'I.'Otkc:sareadee'!.of~ly~dMii'mQoL~ :.etC'!l!'MIItyb)i-m&f'«wcck
bemsctbeybckvoe•)-'obst~tMillblefutlhct..U·Stet.tSlltUoxal ~plu.aD~ya:-..ICMIIOfllelabarfortt.as•~or(lle11bot
fOlOCpllliipus<Qma:glt.lyllladiN:olhebborfot'Qt.Ma:tgitdy~wukcn~tc~DfiC!lbc«f«t<.v.Wlta:sdwtl\'lilal:lkttrwock,llldbt.vtioohd
forajcba~p.tll~U-'mc:u:.aa~1ZX!Ilf!loyatpbalua;gillllly~wo.impbiCCillcmplo),.edpntG.c5of~rQI(:Qf;.l$&
~ o(tbt labor fott<
aD flllliin&ly 11tadd n®s. Tile Wdcd bar mdic:l:q;a pciqd o41rJSbca ;~:ocssm aslic!IDC4by6c N~ hw.l or
No1!:
rlllf
E«.oorr.i:R.tSa:Ch.
~ Dqlt."UU:Cl.o!"Ltb«,&.nnoft.aborSo.ati!l!ie&.
4. Unemplo)1llell! rnte by race and ethnioity
-II
-16
1011
lOll
lOIS
-
14
-
12
-
10
2011
VerDate Nov 24 2008
16:26 Aug 04, 2017
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SHERYL
21417046.eps
No!!: U~tlltt~w:alllla:lflYfni&St~of~b.botfortt.l'cncawbosefl!oit«yiti&u:i:ltduHispb::«l.ati!loaykof
anycaoc. Tht WdcdW ~ apcriodolb:mcss~u dtfaedbytbeNcio:.al Btru.:~ol"S:uJo:ni.:: RuccdL
5o.3a: IJ<!>o.""""oiUbor,B:.mooi'LoborS*'"-
87
6 PAAT I: R(QNT ECONO\UCANO fL'IANOAl OEVELOP~~NTS
TheRecoveryfromtheGreat Recession and Remaining Challenges
The Great Recession of 2008 and 2009, and
the ~nancial cris~ that precipitated i' rest.lted in
rrossh~ job looes and falling incomes for An1<'rican
households. The Great Recessionwas, along rmny
dimensions, the most se•'Ot'edowntum since the Great
Depressionalmost 80 )~ars earlie<. Economic output
declined ou~ight for 18 months, leaving real gross
domesli<: product (GDP)4V> petcenl belowi~ previous
peak. MOte than 8'/: mi!Jion jobs were Josl, on net.
and the une,..,loyment rate soared from 4Y, percent
in 2007 to a peak of I 0 pe<een in late 2009 (teld
frgure l). The labo< fO<Ce participation rate (l fPR), the
fraction of the pojlulation either e"l'IO)-ed or counted
as unempiO)'ed, f~ l steeply, from 66 percent in 2007 to
6l percent in 2014 (text figure 2~ Household inoomes
lurroled, with real income for the median family
declining more than8 pertentfrom2007 to 2012.
The hald!hips were p>rtlcularly acute for wt:ain
grout)$ of 1\mericans. As text fogure 4 shows,
unempiO)'ment rntes for blacks and Hispanics rose
oonsiderably more during the recession than did such
rates for the nation as a whole. (1 partiwlar note,
inflation-adjusted median household incomes for black
households declined more than 11 peroent from peak
10 ~ouglt, substantially more inpercenl:agetenns than
for while, Hispanic. Of Asian households (f.g<..e A).'
. .. but considerable progress has been made
In the eight years !lnce the crisis, the U.S. economy
has m>de considerable progress acroo a broad range
of measures; ~>is prog<ess has occurred while the
resilieoceof Ure fllancial system has been shored
up. More than IS rrillion jobs have been created, on
n<1, sioce the fall of 1009, and the unemplofment rate
has fallen by half. In addition, the LFPR has fl\0'>-ed
roughly sideways since 2014, whichshould be ,;.,,-Ed
as a cyclical improvennent gi>-en thederrographic
changes and other secular trends that have put
da.vmvard pres..,re on participation for thepa~
10)-ears. The robult job gains seen during theament
I. MNsurescfhou:seholdincon"t>defi,'ecfliomsur\'e)'$--
wdr" !he Cu11eo1 Pq>wtSonSu"<fsAnn"'l Soci•larod
EcOI\Ofric Sl!lpi«<Ol~ which irOo<ms !he C.OSus Bur.,o's
official suli-Siia-rroy not f!Jiy capu.~ earned income(such
JS from the s<lf-errplo)-.di and unearned inco,.,{OJdr »
uans(e.-s and f(iirfflll"'ntiocoo~. Th('S(' b-sues are lil:efy to be
m.Jdl m:>repr«~ouocOO b lht\arious stbgroq>J thanttl(!)'
Jre ff.lf the national mediu1.
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16:26 Aug 04, 2017
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A. M<diM bo\J$tboldincoore,bymeandelhoicity
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Lt:ino ~iry re.d !l.'t ~tt<rirs ttf ~~II)' n~t. Scot
m:!i\'1bk, (or ~ an- bclb Ugpmr md wbilt, ~ e.,. Cl!
~illbol.ll liou.
~ ~tofCoczl::r.t:e.&.~JGol~Ceca(Z(tl 6}.kO!It
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(WU:.p: ~ll'Uk-tlll. ~).-w~p·.~ti:·
lM®l6!&::».'p(b-t!6.hS.
expansion are all the...,.. noteworthygi,oen these
derrographic pressures.
The labor 1113rket at present is likely dose to being
at full employment. The UOO"l'loyment rate is near the
median d Federal ClpE» Marlcet Cormrittee tFOMC)
par1icipan~' assessmen~ ol i~ longe<-run normal \lllue.
In addition, real GOP n<M~ sunds I I pE<CEnt abo>~ i~
pre.recessJon peal(. and itis approaching, though still
a bit bei<M~, the Congressional Budg« Offroe's eslimate
ol potential output-#lat is, the maximum su!lainable
level of oconorric Output.>
lncorres fO< the median iarrily have mosdy
reco•oered from the Great Recession. Of note, real
median income is repo<ted to ha•·e risen5.1 percent
in 2015 (figure B).
The rf!C.OVf!f'( oompares favotablywith those of
other adva1lced economies. GDI' has increased faster
and uncf1'4lloyment has declined 010<e quicklyin the
lJnited St<lles than in olhet rrojor achonced OC<lllOrries
(figures Cand D~ And the Federal Resen'<!'s challenges
in gettinginflation bad< up to l:arget are similar to,
but not as se'l<re as, those faced by some o~rer 01ajor
monet~ry authorities in the past few years. Although
2. ~r.,...rol ~Office(20t7), The Budge<
.00 (conomicOutlcck: 2017., 20271WasliJ181Dll: CBO,
jaooo~l, p. 41, •ww.<bo~lsilO!Id<>lauh.foi.VI Il lh
conu,..·l01 7·lOI:Vr~1JIQ-o<.<iool;.pdf.
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SHERYL
21417047.eps
The Creal Recession severely affected the
U.S. economy ...
88
\IONfTARY POliCY REI'Ottl: HBit\JARY 1017
B. Indexed howtb<Jid income, by peK<ntile
-
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~WII'Wma:l,Qir>tia.')'·'pcl'l11.~1fldeo:f~'=:IL
7
has a'>erag«< onlyabout2 percent pe1 yeard..ing this
expansion, the slo\vest pace ol anypostwarreco..-ety
(flgure f). In pari, ~>at subduod pa<:e is due to slower
growth in the labor force in recent decades compared
with rruch ol U>e pos~var period.'
Another source of slow GOP gCOivlh has been
lackluster law productivity ~011'1h (fA>.xt figure 6).
Sinoe 2008, ooipul per hour in the business sector
hasrisen about I l"fC"lt pe1 year. far below the pace
that prevailed Wore the recession. Cyclical factors.
like weakbusiness ln,-estn>enl and flnns rebuilding
worldorces after culling musuallydeeply during
the crisis, likely explain some ol the sl01v rise in
prodllCiivily during this expansion. But slructur.~l factors
may also be at play, $UCh as declines in inRO\\ltion,
reduced business dynall'ism. Of decreased produa
market oompelition.• The productivity sl01vd01vn has
taken place in nl061advanced eoonorries, which
suggestS a rcle forSIJUctui31 faClors not specific to the
United States.
consumer price inilalio<l, as measured by the price
index for personal consumption expenditures. hasrun
below the FO~\C's 2 l"fC"lt objective through most ol
the e.pan~on, in recent months inOation has n10''t!d
closer to the Conmittee'slarget (text figure 7).
Nonetheless, challenges remain
4. SeeRobMJ.Cor<lon(lOI~), TheR.'<o>rrdfallol
M>ericln CrvMir: The U.S. StmdlrdcftNhg 5incet1e Civil
W.u il'>illCft<lr\ NJ.: Princeton ~rivenity Press); S"""' !.
While rruch p<ogress has been made, important
challenges remain for the U.S. ecooomy. GOP gro.vlh
C. 1\tali!JOSS Oolll<Sti< produ<t ill mtaaatioaal cont<xt
D. Unemployment rate in internatioaal context
~llllld..-.6ce.2009
......
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S<Ma: ();p:l~Uia;)Q ror Soo:4m~ co-~ t:~4 0:~
flOii}. "'O£CD Etoocolc Ottbli: No. 100 (Fd'lOCI 20W2)," OECO
O!)f!OJ1S1n&;tibfc.(arettJStdb:D:)'2011).
no. t mn&l t 7bt~ r~~1011).
PO 00000
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f2017A ~CD lk«!otr~tr: Ck.1ook. No.. 100 (Ea'.10e 201M:~· OEOl
E.~~ S~t.'t cd fto~ (~}. Cllp;lldx.doi.
SOI.Irtt ~
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9
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SHERYL
21417048.eps
""""
J. In p;>ni<IJI.lr, il>e C<lflgfesionoiBWger Offke .,.;,.,
thao ohe coouib<Jtioo oo p01!1lli>l COf> growlh from uend
1.00. lorctgro•lh is 2percenoagepoims k>wefloday INn
il was40 )@>~ago. Thisdwl!lopmentr<&:osa ~01\ite ol
pcpulation gtowlh and aS\\hch from arisi!Y6LFPR ~ .. falling
one, •"""& otlx< f•<1rl~. See Coreres6ionof8udget Off<e.
BudgE< >rrd EcoocmicOUdock. oable 2·3, p. 53, in..,. 2.
89
8
PAAT I: R(QNT ECONO\UCANO fL'IANOAl OEVElOP~~NTS
The Recovery from the Great Recession and Remaining Challenges rcCiltilt.re<fl
Meanwhne, despite the notable piclcup in 2015, real
incomes for the median family are still a bit lower than
they were pri<l< to the re:ession. Mor..,.-e<, thegaiM
have not been unifomiy distributed; families at the
10th percentile of the income distribotion earned about
4 percenlles< in 2015 than they did in 2007, while
families at the 90th percentile eomed about 4 percent
rrx><e than before the Great Recessioo (frgure 8).
Oawund )ohn Halo••nger (2014), 'labor M>riocot fluidity
aoo £conoo1c l'o<loomn<t,' NBERWorling P.oper Series
20419 fCani>ridg<, M>S<: N>oona18ur..u ol Econorric
Reseor<~ S<pc<ni>erl; ard l'llilippeAglliO<l, ~ick Bl«lm.
llichard Bluncl<ll. Rachel Crilfrth, "-.1 Peoe< tmi• (2005),
'Co"f>"i1i0<1 and ln.,..tion: Anlrn.,l«i-U Relatiol'6hip,•
QJ>nedylo<rmalo(f(O(l()rni<s, '""· Jl0~1)'),pp.701-28.
Economis~S aredrvi<k:"<< abo\lt !he causes oldie productivity
!lowdown and !heir coosequences f« the oudool<. f« an
q>tin'is,tic \1t"o\~ see £nk Sr)'njollsson al'ldAOOrewMeAfee-
(1014), Thes..:..d Mo1Chi1eJise:Wo.i, Prog,.,,md
l'msperity il a Tinod8rii/JJm T~(NewYO<I:IV.IV.
Norton & C""1'3nyt. f« a less<lJltirrillic Jl'f'l"'"''-,..
C..don, Roemd f>Jf ofAmerkan Crc...V., .,rli<r in !his note.
argue<I lflat diffko.lties aS600al«l " ilh roonomic
~retOOnt n'll)' ~ggerat.e IN slowdown: see. b
e>""lJJe, o";dM.8yrne,)ohnG. fomold,aooMo~lull B.
R<insdorf(2016), 'OoestheUnit<dStatesliaVI!al'loducovity
SJQ.d.,.n «a Me""'r"""'t Ptoblern!" ll<ockhgs Pipers on
EcOO<>!Ii<:Aaivjy,Sprire pp.I09-57. i"<Jps.:lhlww.btool<ings.
Similarly, the ECOOOn'lic circurnslai1C<!5 ol blaclcs
and Hispanics have improved since !he dep~hs ol the
recession, but they remainworse, on a\·erage, than
tha<e of whites rx Asians. Unemployment rates for
blaclcs and Hispanics continue to be well a~ !hose
ior their white and Asian oounlerparts(lexl i'igute 4),
~>ilile incomes f<>< these groups ha\'e sb)..d noticeably
lower (figure A).
lhese challeng<s lie S~tbsttntiall y be)'QI'Id the reach
of mooebty policy to addres<. Mooetny poli<y cannot.
for instance. gene<ale tE<:hnologrcal breaklluoughs or
addres< the r001 causes ol inequalil)'.
-
E. Real gross domtstic predict in historical tonte:<a
_.,
1~1- .II)
-ll
-»
Others''""
_,.
_.,
-tl
-10
eru'\\p..:on...V~lr.'Ollby"""""Pri ngl6bpea.pdf.
A~. mJre ()f)bnistic e~na ~on is thJ.lthe slowd<W~TI
inproduclivityrellocts a "coi'611UCcivepause• as fi~ adc:p1
""• p<Oductivi~4'nhancing t>dlnology and «ganiutional
practice; soe, for e<a"lJJe, Pao.IA. David 0 m• "The
ll)mmo and tlleComputtr.An Hi•orical Pffijl<'Ctivoon !he
1\b:iern ProductivityP.aradox,." Nr.Mc.atl kMI>f-r.ic Rft~
vot. so ''Aoy), 119.Jss-6t.
16:26 Aug 04, 2017
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Non: R.ell g!OU dotlu'.a: pc*f. lldtxtd iO balats C)\'lt IP:IU8b a
41!td.byibeNJb:)al!9encvf£0CI:l~ltt.w~ Tb!x<Ud~~
90
\IONfTARY POliCY ltfi'Ottl: HBit\JAR\' 1017
9
Labor compensation growth is
picking up . ..
The impro1~ng labor madet appean; to be
contributing to some111latlarger gains in labor
compensation. Major BLS measures of hourly
compensation posted larger increases last year.
Of these, tbe measures that include the costs
of benefits have posted smaller gains than
wage-only measures beeause of a slowdown
in the gro111h of employer health-care costs.
Acompensation measure computed by the
Federal Reserve Bank of Atlanta. which tracks
only the wages of worken; who were employed
attwo points in time spaced 12 momhsapart,
shows even more pickup than these BLS
measures (figure 5).
... amid persistently slow productivity
growth
As in the previous se\'eral yean;. gains in labor
compe11sation last year occurred against a
backdrop or pen;istently slow productivity
growth. Since 2008, 1abor productivity gains
have averaged around I percent per year,
well below the pace that prevailed fromthe
mid-1990s to 2007 and somewhat below
the 1974-95 average of I ~ percent per year
(figure 6). Since 20 I I, output per hour has
averaged only a little more than ~ percent per
)'l:ar. The relativelyslow pace of productivity
gro111h in recent years is in part a consequence
of the slower pace of capitalaccumulation;
diminishing gains in technological innov-ations
and down1111rd trends in business formation
also may have played a role.
5. Mea.<U~tSofclnng<inboU'IyoompmsatiOD
=~-~:
t
tnlplo)~c;h'Oit cld: _
Ul
A\'mtt~ftl!"'_ql
I I
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I
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I
2015
No:l: &-..sc~~ist.eliktt~.n~~
oldt f~MO\i:!&tvtnat. F«~~totti:J&x,clqtit
ovtr lhe 12 :'IIOIIb m!q b b!: lulaonlh oreacbqaa."!e; iot l'lt!l&t
t«utrtamiccJ.~isfooca ll~e&dc;; f«teAllwahd'•W•
~'l'!:adtt:t,~d&tat:t.:o--asa~{ll(cil*l'li!!&a~&!l!
mmde..~~20l6.
~ ~tor~.ato:.~UJ..&borS".slln"S;F~Rtsaw
BW«" Atla:a, W~tt<hla~ Tra.."ir:!:.
6. Cbangc in tm<;i..,·scctor ootput pa bo'"
Price inflation has picked up over the
past year ...
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SHERYL
21417050.eps
In recent years inflation has been pen;isteolly
low. in part beeause the drop in oil prices and
the rise in the exchange v<~lue of the dollar
since mid-2014 have Jed to sharp declines in
energy prices and relatively weak non-energy
import prices. The cft'ects or these earlier
dev-elopments bave been waning, howevet and
ov~mll inflation has been moving up toward
the FOMC's 2 percent target; the 12-month
91
PART 1: R(C£1ff(CONO,\UCAN0 fi~~OAI. OtvtLOPM£1ffS
10
7. Clunge intbe priceind<x rorpmooal COIIStllllptiOO
change inovernll PCE prices reached
1.6 peroent in Dec~mber. compared with
only0.6 percent ovcr2015. The PCE pric~
index excluding food and energy items. which
provides a better indic-ation than the headline
figure of where overall inflation will be in the
future, rose 1.7 percent over the 12 months
ending in December. somewhat greater than
the 1.4 peroeot increase in the prior year, as
prices for a wide range of core goods and
services accelerated. Nonetheless. the rate
of inJlation for both to!JI and core PCE
prices remains below the Committee's target
(figure ?).
c~n.es
1\QrE: Tbt6:a~!h:\q)0~~ 1 6:1tcqp~ftuno:t}$
"""'!«.>a: Dqor.ooll<l"""""""Bllnou<l!Jo=....,..•.
-
l lO
-
120
110
100
90
10
- 10
6ll
lO
- •o
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!
!
,
.2012
I!
I
t "
:Wil
"
!
201'
I
I
lOIS
I "
I
I
!
... as oil and other commodity prices
moved up moderately
The similar readings for headline and core
PCEinflation last year partly reflect an upturn
in crude oil in 2016 following thesharp decline
in the prior two years. Since July, oil prices
traded mostly in the S45 to SSOper barrel
range until the November OPEC agreement
regarding production cuts in 2017 (figure 8).
Inthe wake of that agreement, prices moved
up to about$55, roughly $15 per barrel higher
since late 2015. Retail gasoline prices also rose
after the November OPEC agreement, bntthat
increase has partially reverned in rec~ot weeks
I I
M16 2011
NoTJ:lbe~r:t~r~.:so(Qaz~Ut.t.date:lr.!tll:wP
tdmu..")'t,l011.
sr..uta:: N'l1o££X "" BIO<atq.
9. lion-oil imp«! prices :md U.S. dollar e>dlongerate
_,
-
ll
-
10
-
l
After falling during 2014 and 2015, non-oil
import prices stabilized in late2016. supported
by the rise in noofuel commodity prices as well
as byan uptick in foreign inflation (fig.ure 9).
In panicular, prices of metals have increased
in the past few months, boosted by production
cuts combined 11ith improved prospects for
demand both in the United States and abroad.
However. f.1ctors holding non-oil imporl prices
down include dollar apprecialion in the second
half of2016 and lower prices or agric.ullural
goods last fall, as U.S. harv~ts hit record-high
ie>·els for manycrops.
-l
2011
2012
2013
l(ll.t
lOIS
2016
10
2011
~lbtdata{ot !IO:I~ ~pri:u~~Ort«::be2016.
SCt-x-t: ~ofUb«,&.""tG: r/t...borS:)tm; ftdmi R~
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Bot.-t,Sut:it.jt:tJ JtdWt fLIO,•f~~ RAitS.."
92
MOI'<CTARY I'OliCV RER:>Rl: fE8RUARY l017 I I
Survey measures of longer-terminflation
expectations have been
generally stable . ..
Wage- and price-seuing decisions are likely
influenced by expectations for inflation.
Surveys of profe~ional foremten; outside
tbe Federal Reserve S}~tem indicate that
their longer-term inflationexpectations have
remained stable and wnsistent with the
FOMC's 2 percent objective for PCE inflation.
In wntrast, the median inflation expectation
over the next 5 to 10 yean; as reported by the
University of Michigan Surve)~ of Consumers
has generally trended downward over the past
few years, though it is littlechanged from a
year ago; this measure was at 2.5 percent in
early February (figure 10). It is unclear bow
best to interpret that downtrend; this measure
of inllationexpectations has been above actual
inflation for much of the past 20 years.
10. MC<Iian ioOatioo expecbtions
).lic:Qp=Cfl'(lf ~OD$
ror::nt5 1010)'nlfS
-3
I
I
1!
))OJ
1 tt
200:S
1 1 1;
ft
2007 2009 lOll
l
l
2013
ft!
I
-
1
-
I
1
I
201S 2017
throuah
NT.i:lbt ~~ CNtjtal! ~·~ dtxlt!ld
~. 'nc SPF dQ Co: im\:lo:l
~io::.t{(l:pesoa&J~~OD~i:udctqta:Urlfd~
fftlnazy; ibc F.-~ ciA~\'
mll)l)lQte.-.lOil:QL
S«.aa li-.:n~o(Mi;bip;!$;."\~olC~F~ R*"''e
Bd:olPhilak~S;rwyciProft$$iocdfoct\ues{SPF).
.....
It. S.to·IO·rou·forwaro inflation romprnsatioo
. . . and market-based measures of
inflation compensation have moved up
notably in recent months but also remain
relatively low
-B
TIPS-based inHationcompensation (5 to
10 yean; forward), after declining to very
low le\>els through the midd.leof2016, has
risen to nearly 2 percent and is about20 basis
points higher than it was at theend of 2015.
liowever. this level is stiU below the2\4 to
3 percent range that persisted for most of the
10 yean; prior to 2014 (figure II).
- u
Nm:t'tlt&!attt~l'ft':I:&Uoldattj61lda~!h:ouah
f~10.M11. TIPSis T~IIIO&:m·~~in.
~ te!ml Rtse;\'C &;I tJNew\'or\;Scdcys:f~~
Real GDP growth picked up in the
second half of 2016
12. Change in ,..li!JOS$OOmestie procl•ctll>d gnl!S
d.lmest:ic: income
Real GOP is reported to have increased at an
annual rate of 2Y. pen:ent in the second half of
2016 after increasing just I pen:ent in tbe first
half (figure 12). Much of the step.up reflects
the stabilization of inventocy investment,
which held down GDPg,rowthconsiderably in
the fi.n>t half of last year, as well as a pickup
in government pun:hases of goods and
sef\ices. Private domestic fi.oal purchasesthat is, final putt:hases by U.S. households
- l.o
-
15
-
IJ
-1.0
I ,,,,,,,,,,,,,,,,,,,,,,,,, , "'''''' ,, I
2001
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2011
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ll ll:os"''"""""""
~s ~~~
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_,
_,
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• O.O.~rc:.omelt~)'tllniltble (~lOI 6:Ul
$(oa ~IOI'Ctt~~!t~t!tt.,81t'SUOf£..'(I()Cica:'~'kl.
93
12 PART 1: R(C£1ff(C0NO.IUCAN0 fi~~OAI. O(V[lOf>M(IffS
13. O>aoge io r<al p<rlOilal consum~ <:q><o:!ilur<S
:md disposable pmooa1 incame
I
Pettaa!c0fli'!.'11ptioe!~
-
I Otipol;&blt~I U..-ome
Sew:£
6
- s
Dtpat:aeu!oiC~.Btm~~<-t&:-OIIOC!IicA!!d)ft
-
Gains in income and wealth have
14. i'rices of e:cistiog single-family houses
continued to support consumer
spending .. .
-
lO
-
IS
-
10
- s
It
I
I
200S
I
WI&
I
I
2010
I
I
2012
I
I
and businesses-trew more steadily than
GOP last year and posted a fairly snlid gain
in tbe second half. PCE gr0111h was bolstered
by rising incomes and weal~t. while private
fixed investment was weak despite the low
costs or borrowing ror many households and
businesses. Although the FOMC has increased
the rederal roods rate twice as this expansion
bas progressed--illtce in December 2015 and
again in December2016--in Y. percentage
point steps. overall financial conditions have
been sufficiently accommodative to support
somewhat-raster-than-trend growth in
real activity.
I
2014
-
10
-
IS
-
~0
I I
Ml6
Non: The dlt.l foe IDe S&f.{'.uo.sh•k Cdc:t =oar.:~::ouF No\obcr
2016. 1\t da I« tt ZillOIN ted Cud..o&k i:dtns ettd ihrou&l
Real consumer spending rose at an annual rate
of 2¥. percent in the second half of 2016, a
solid pace similar to tbe oneseen in the first
hair. Consumption has beensupported by
the ongoing improvement in the labor market
and the assnciated increases in real disposable
personal income (DPl}-~tat is. income after
taxes and adjusted for price changes Real
DPI increased 214 percent in 2016 follo11~ng
a gain of 3 percent in 2015, wbeo purchasing
power was boosted by falling energy prices
(figure 13).
~201 ~
sowo: C...Loc"""" Pri<ell>la: Zilow; w.~~"" us.
Nllimlllo:o!: P!i.'tl*. TbtS&PlC...shdlet:d.aistpro('.:rtoiS&:P
u.c .oo.w
~
D a.ftihlkS. tr« J).y.v
ll."e:Si~iti~ttt!htetl'.teo~Co:ttrupeJt.)
Dow Jcic:a
mes JnSm
I 5. Namirol hoUSt prices ao:! prlct-<<nt rolio
-100
- 110
- 110
-
llll
-
110
_ ,.,
- I~
-
130
120
-
100
liD
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Ill
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-
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)1)
IWl lm 1998 2001 »l4 lro1 1010 lOB 2016
Nm: lbc: da:& QUrl4 ~ I>t.x:Dbc: 10-16. 1k C«ri.ock: ~
.i:dt:K is~yldJ.:.ndbyFC'dm!Rt:sen~Bon~~zr.fu~
Consumer spending has also been supported
by rurther increases in household net worth.
Broad measures or U.S. equity prices rose
snlidly over the past yea~ and bouse prices
continued to move up (figure 14). {In
nominal terllli, national house prices are
approaching their peaks or the mid-2000s.
though relative to rents or income, bouse
price valuations are much lower thana decade
ago (figure 15).) Buoyed by these cumulative
increases in home and equity prices, aggregate
household net worth has risenappreciably
from its level during tbe recession, and the
ratio or household net worth to income
remains well above its historical average
(figure 16). The benefits of homeownership
have not been distributed evenly; see the box
"Homeownership by Race and Ethnicity."
n:aou tbc: tdOofiiOI:IIi:Jiho:atprimtoti:croor.::~~rtpo.e =xorre:~
c(p:iml.oy~ Ttc"-'a."' i:ldaed. :o 100inhma:y lOOO.
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Lobor-.
94
MOI'<CTARY I'OliCV RER:>Rl: fE8RUAR\' l017 13
.. . as does credit availability
-
16. Weoltl>lo·income ratio
Consumer credit has continued to expand
somewhat faster than income amid stable
delinquencies on consumer debt (figure 17).
Auto and student loans remain widely
available even to borrowers 11~th lower credit
scores, and outstanding balances on these
types of loans continued to expand at a robust
pace. Credit card balances continued to grow
and were 6 percent higher than one year earlier
in December. That said, creditcard standards
have remained tight for nonprime borrowers.
As a result, delinquencies oncreditcards are
still near low historical levels.
Consumer confidence is strong
....
-6.S
Residential investment spending appears to
have only edged higher in 2016 following a
larger gain in the previous year. Single-lamily
housingstarts registered a moderate inc.rease
in 2016, while multifamily housingstarts
flattened out on balance (figure 19). The pace
of construction activity in 2016 remained
sluggish despite solid gains in house prices and
ongoing improvements in demand for both
new and existing homes (figure 20). As a result.
tbe months' supply of inventories of homes for
sale dropped to low Je,~ls, and the aggregate
vacancy rate moved to its lowest levelsince
2005. Reportedly, tight supplies of skilled
labor and de\~loped lots hal'e been restraining
home constntction.
-
l.S
-
iO
IIJ! I!I! If l !l l l l l f l ! l l l ! ! l l
1996
2000
200A 100e 1t1a 2016
Nott 1bt i&t rxiOl ~ bl16:Ql. Tbt t«its is 1bt tltit of
~ld:tilr'011ito~pmw&C:oclt.
Soo1o: for ott~ F«5mmltstrw. &etc!. Str.irietl Rtkw l.l,
•ficmritl At.."'ttll!S ol ~ I?~ Stan"; lix ictocllt, {)qclnad of
('~~of~: ~
Household spending has also been supported
by favorableconsumersentiment. ln 2015
and through most of 2016. readings from the
overall index of consumer sentiment fromthe
Michigan survey were solid, likely reOecting
rising incomes and job gains. Sentiment has
improred further in the past couple of months
(figure IS). The share of households expecting
real income gains over the next year or two
is now c.Jose to its pre-recession level despite
ha~ing lagged improvements in the headline
sentiment measure earlier in the recorery.
Housing construction has been sluggish
despite rising home demand
..
-
-
1.000
""
600
400
lllO
+
0
lllO
.100
600
I
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t'X.-.
Nr."E: ~ m ~Clrd ~ ysd ~ )U'·ald
2016
cbqc$. wb1d& a:e c.alcuJcN l!o:;DQ} :.Ql..
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lDdexesof~umcrstfttimen.tand incomecxpWatKIIS
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rrd~ nt~s=IM:'l~C'tiiiOCilhlydt.oei:wiQt410
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~'H·mr:d mt1i II&J.\'fl9.
~lflli\'ttSi/fofM'a:·cbi8lC&:t\'f')'$olCOCS'CtWn.
95
14 PART 1: R!C~~TICONOMICANOfiNiiNCIAL OMLOPM£~'1>
Homeownership by Race and Ethnicity
Nationally reprolSefl~lil'e data from 1900 through
2015 indicate thatlheOI'erall homeownership rate
-sharply from 1940 10 19W (f~rel\). • Research
suggests that this surge in homeownership re{le(ted
a combination of faciO<$, including the postwar
economic boom and an easingolterm; for mortgage
credit (such 3$ reruced down poymtnt requiremet\IS
and longer terms 1o maturity) through go>'('{nn>enl·
backed lending programs run by the Federal Housing
Adnlnistration and theVeteransAdninistration.slhe
homeownership rate thenooged up sligl'lly lurtloer, on
net, boM'eEfll9Wand 2006. Howe>..; sincelheooset
ol ~>e housing crash and lhe financial crisis in 2007,
I. A 2014 SUM)' indical<dthatOI<r 90 pert"'tolyoong
the ~vne!Ship rate has declined as foreclosures
ll'flterS ~It'd d1.1t they iMended to purchase a home in
became elevated for several years and forst-time
che r,.uoe.S.. l'onnieMoetl014), flffl,~MleN.oon./
Hoosilg Sow')':"""" 1'o<."8"t RRmM v.~m and lhe Fil...:at homebuying dropped and remained subdued.'
Cazsu~illts They Set' {\Vashingu)lt f.tt~nie MaP, Map, wv.w.
these post<Jisis declines in homoownership have
hnniemJe.oom~..,.r<es'fil~....rchihoosing><ffl!'/pdfl
been similar for white, black. and Hispanic hoosdlolds
nmnayl014presentauon¢t
and somewhat smaller for Asian households! Thus,
l.S..T~Sinaiand Nict.obsS. ~(lOOS), 'Ownet·
the large gaps between the homert.vnership rates d
O<cup;ed Housi'@" o H<dgo ag>inst Root Rill<,' 11,.
white housEholds and those of black and Hisponic
Ql>netlyJoomalo/Erooomicr, YOI.120(2), pp. 76!-89:
,..,lsoD•vid Laibson(l99n, 'Colden £118s.nd H)p«b<!ic households ha1>e held steady, while the smaller gap
Oiscoundng • QlanetlyJoomllofEcon<;micr, YOf. 112 (24
between while and Asian households has narrowed
pp. «:1-73. 01 COOrs<\ as tn.fonanci.ll <risis ""dec...r,
slightly. Perhaps the most striking f<Giufe d the dal3 is
..,.,••,.,,.,.hi> carries risb ....u. For eocanvle. highly
the
per$i~ence of the bi:Kic-white homert.vnership gap,
le\'('fa_ged ho~TW\\'fl('f'S .Jre ~t risk of neg.ui\-e equi1yd house
which has measured aboui2S to 30 pera.'nl3ge poin~
pric~de(lint, which ~«ids 10 in~ mcbilit)'; see ~nardo
rena,., Joseph C)llu•ko. andlo"Ph r,.cytzoiO), 'Houong
throughout the po~ II 5 )'Oa"- Potmlial reasons lcx this
&osos and
Mobility.' Joo""l <I Urf»n loonomicr,
persistence will be discussed shortly.
YOI. 63 OoA)?, pp.l4-4l.
The likelihood of owning one's home riSES with age.
l. fol!().,ing "'nd>rdprlt!JCO, che
is
lhu~ lhc aging of the u.s. JlOIXIIation cwtributoo to
caiOJial<d htre as !he lraclionofhoUS<loolds !hot ""n cheir
llorrw.llws, ll'Mds ln household fofrnation i.nfiUMCe tteOOs in increasing homert.vnership before 2006 and would
che ~• .,hi> rate, and declining hoosehold fomution
tn "'""' )'e>O hash~ "W"'' dle hon"""'n«Ship
4. The do~ "edecenrial '"""' dato from 1900 thro.mo
rate. See Andrew l':lciorek tlO 16), 'The l~ and Shon of
2000 3S .-ell as Amorican COII'fOlOOityStney (ACS) data rrom
Hous<hold Fornation; Rerl I""• fconomks, YOI. 44 (I),
2006, 2009, lOll, •nd lOIS. For indi>id\oal-l"'fl cenws
pp.l-40.
andACScbu.,.. 51<'1.., Ruggles, Kotiec.n.dek Rooold
Goeken, Josiah Cro~<r, and Matthew SOOek 120 IS), lroegraod
Most househ<Jids in the United Slates own their
homes, and among !hose ~>ilo do nol, m:my conlinue
to aspire 10 own their homes.' The J)OtXIIarily of
homeownership may sltm from lheamtnilies and
financial benEI"llS that are associated with o:r.'nership.
for example, on lhe Onanc~l side, owning a ~
prorects households against YOlatilily in renl31 prices
and may help them b<Jild wealth as they repay their
m>r(g3ge.' HiSiorically, we have seen disparities in
homert.vnership across racial and ethnic g<oops, and
these disparities are an important dimtnsion of racial
inequalily in the Unitoo Slates.'
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d.~l V\Oinneapoli>linil'efSil)l<iMion<.'!Q\0). TheACS
h.lsto..n coolucl<d annually by cheU.S. c...... &or.,~~..,.
1000. Oa1a onhomeownMhip arenotaV<tilab&eoin~ l ~iO
C('0$11$ dJU,
5. S..Oanicl K. f<tt<r(2014~ 'Thelwer<i«h-Centuty
lner~se in US. Home Ow~rship: F~ and Hypodleses:
in Eugtne N. Wflite, Kennedt SnowdEn, and Price F'IS~
ods., H""'ilglfxl Mor'8.tgeMitkro i:> H,'s<oricil P~•
(Chieago ll<lil'efSity <:(Chicago Press).
6. S..Noil8ooltl!20I54 'The lnsand O.~ol"~'ll'a<
D<l>tduring dle Hoosing Boom and s..,· Joomlf <I MOt>«>ry
fOO<JM>icr, YOI. 76, pp. 284-93.
7. Ho!Mhofch .ue classified by r~eand ethnk~y
accoo&'@l> the r><eandethroi<ity of the tooos.hold head,
df.liood htr• as fiche< !he ""'"l' rt>SpOO<Ient 0< che !pOll!<>
ol t~ respoodent if older. The Hisp.1nic «hnicit)• and faCe
catepies.uenot mutually exclusi\'e, So""irdvid~l$ are,
fOf ~xa"lllf, both Hispanic and \\hite. The Asian category
ineluclosP.ocifoc ~landers. Homeo.,•••<l>i> rateSIO< Hlspan!.:
andAsi.in OOu~;ue notshGwn bebe 1980 beause,
prior to 1980, H~nic status \\dS notash>dabouldiroclfy
and theAsian population was Cf:Jrlt im!U.
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A. Hom...,enhip ntts, by "" and <lhnicil)'
96
MOI'<CTARY I'OliCV RER:>Rl: fE8RUAR\' l017 15
have caused lhe home<7.vnership rate lo contlnue rising
after 2006, all else being equal. fx.1rrining the dat>
"'lJOrately by age group reveals homeownmhip ~ends
that diffe< from ove<all averages, with suonger dedines
in homeown<rship obser\'ed for young and niddleaged households. For exa"l'le, among households
headed by a person 30 to 39 r•a~ old, homeowr>E<Ship
raleS fdl more than 10 pe<cent>ge points between 2006
and 2015 for all major races and E'lhnicities (fogure B).'
For bod> white and black households in this age range,
the homeownership rate pe.1ked in 1980, n>Xh earlier
than theo,-erallnational average; by20t5, it stood
well below i~ lt~'CI in 1960. 01'0<the past century. the
black-~>Me homeowne<ship gap hu actually widened
lor households in dtis age range.
In ligl'l of tbegajns in education, income, and
ac.:ess 1o credit and housing Ol'ef the long term for
rrinorities in the United Slates, the perliste<>ee of the
black-while gap is surprising. A considerable armunt
of academic research has sought to better understand
diifermces in homoownership rates across racial
and ethric g<oups' Many facto~ ha\'e been found
to influenc.e the likelihood of homeownership, and
some or these may hal'e had offsetting effects on the
black-white gap. forecample, from 1940 to 1960,
the rrigrationd many blade families from the Sooth to
nor1he<n un~l cilies(whereowning a home was le<s
likely 1egardle<s of rau) tended tooffset the positive
rJfeds on the homcowne<ship rate fromgains in
income And education.to
In more recen1decades, the relative rise in the
fraction of blade households headed by a single parent
may haveoffsec factors that orherwlsewould ha1'0
generated incre3ses in bomeownet~hip rates, including
the iWmluction and enforcement of anti-discrimination
131>>, such as the Equal Credit Opportmity ACt •nd
the Fair HousingACI. Research on the black-white
and Hispar>c-white gaps indiClles Uta! a large po<1ion
of these gaps in recent)-ears can be attributed to
socioecononic di~erences-such as age, income,
and farrily Slructure--across groups." That sajd, some
of the 0\'erall gap is nO! explainable on the basis ol
those variables and could reflecl O!her facta<s such
as location and housing prEferences; it also could
reOect continued discrirrination in hous.ing and credit
nwkets. 11 finally, recent research has also documented
larger differences in ctedil scores t>ooveen whites and
minorities than can be explained by income disparities;
3. for"""'"""'"" do" oo h"""""neohip taoesb)' age dtus,lhe tighter morlgage credit en•ironment lhal
sincet900,seelaurieGcodma~ Rolfl'fndall, .,'<l)unZhu
prevails today relative Loa dozen or more rears ago
(lOIS). HI'Od3hpzmiHcme<~~>nMh/p: IVh.lt Doe< II» f<~t<;r. could cause the homeownership gap to widen in the
Heidi ~Vaslli~ U.,.n tns>tu>e, Junol. w•w.ulbon.o'»'
nearterm.n
sitWdE/aullifiles110002S7 .OO.dship->nd.Jlom!ownershipwhot-does-tbel,.ure-holdl><f.
9. forare~;.woltbefit"'"''"·""'OooakiR. Hauri~
Clvi•q>he< E. Hab«t, and Stuan S. R....-.1\al (2007).
10. See William 1. Collinsand Roo.rtA.M.Irgo (1001),
•HomeowllEflllipGopsa~ l"".tncom..nd Mino<ity
·Race and Home0•1lEish4>: A Century-longVi..:
Households; Cir)S<ip('. ,..1.9 (l), pp. 5-52.
bplcrJri<xls 11> EconcmicHi<:<!l)', \01.38 Oonwryt pp. 68-91.
I f. See StiWIA. Cobr;,.i andStuan S. RostrAAol (2005),
' H..,..,..,.,.,.hip in dte 1900<and t990<:Aggreg.ore Tr<M<
B. Homeo\\11mhip rllte$, by rre and e(hnicity~ for
and Racial Caps; lc<;ma/ ol Vrb.Jn f<rmmics, \01. S7
hoosebolr!s h<id<d by""""" aged 30., 39
0."'3<)'), pp.IOI-l7;and[ricft>sseirre)Ot KienT. l..,nd
KiatYing S.ah (2012). 'A H-d~""" O.Corrposition ol
lhe ll'hi~t-Biack Homeowneohip Cop; R<giooal Sdettce >nd
Ul6arl koocmics, \01. 41 Oanua~), pp. S~2.
12. See KM\in Koli Chari"' and £rikHur• (2002), 'The
Transition to lion'~!' Owr.ership and !he Blad-White Weallfl
Qp;
Rev;,.vol Eco.""'ics and Swislks, vol. 34 tMa)l,
-60
pp.231-97.
1). See N<il8hull3 and Daniel Ringo(20161 'Credrt
' -AJlr./\ - 50
1:1~«~ ---.1'\. \
Av.nl3bilit)·a~ !he DEcline in ~~ lending lO Mnorittes
af"' tbe Housing 8oom,' FEOS Notes (1\\lshingiOO: B"'rd
oiGove<nor>oflhe r.derat R...,..s~ Sepl«li>« 29),
-~-70
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lbt d.D ~ (« 2006. 200'). 2012, d 1011 p~ wbou tdltid:y b
16t:!d&e.!ll Kifpll:lrorl..all:lo:aybtoC~ra.ooe
S<:w:t-Dcpa.~oCCoaunttN,.Brart-..oC~Ctt~Pa.
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fa< adrlilion.tl r...,n:h on h<igllt<fled credit S<ore th<e>hol<fs
in recent yws, seeSle\'en l>ul« and Andrew Paciorel:
(2016), 'The [ffe<tsof MorrgageCredttAvailability: £vidence
from MiniJmmCredit Score Lending Rules,• Finall(e aOO
Ecooomics Oiscr.o""" Series l016-o98 (Washington: Boord
o/Cov"""" of lhe r.deral Re«'f\<e System, O.Cent.rt
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97
16 PART 1: R(C£1ff(CONO,\UCAN0 fi~~OAI. OtvtLOPM£1ffS
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IO'NliUxn~d"C~XVMkl.
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for CW'I::& ~ ale$,
NtbOC:l!AJ*'iallceotlc&l'DI"S.
21. Mortgage DI<S and bousiog afford1bilily
l:lotainc~cdt'J:
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Business investment may be turning up
after a period of surprising weakness
Real outlays for business investment- that is,
private nonresidential fixed investment- were
generally weak in 2016 but posted larger gains
toward the end of the year (figure 22). Last
year's ~~~almess occurred despite moderate
increases in aggregate demand and generally
favorable financingconditions, and it was
11idespread across categories of equipment
investment. Investment in equipment and
intangibles n10,~d down Ol'er most of the year.
likely reftocting theeffects of thecombination
of low oil prices, weak export demand. and
a muted longer-run demand outlook among
businesses. Although such declines are unusual
outside of a recession, spending on these items
did tum up in the fourth quarter. Investment
in drilling and mining stmctures. which had
been falling sharply since the drop in oil prices
in 2014, fell further through most of2016 but
seems to be bottomingout. Outside of the
energy sector, investment in nonresidential
strucmres increased moderately in 2016.
Finally, afier having beensnbdued for much of
2016. a widespread set of business sentiment
indicators improved notably near theend of
last year.
I. The SLOOS is 01'3ilal:leoo Jbe Board's websiJe a1
hllps11w•w.federal=rve.g0\'lboanldocslsnloonsurvey.
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J-lomebuying and residential construction
have been supponed by low interest rates
and ongoing easing of credit standards
for mortgages. Banks indicated in the
October 2016 Senior LoanOfficer Opinion
Survey on Bank Lending Practices (SLOOS}
that they eased standards on se,·eral categories
of residential home purchase loans.' Evenso,
mortgage credit is still relatively difficult io
access for borrowers with low credit scores,
harder-to-document income, or high debtto-income ratios. Although mortgage rates
moved up from their all-time low levels O\tr
the socond half of last yta~ they remain quite
low by historical standards, and. consequently,
housingaffordability remains favorable
(figure 21\.
98
17
MOI'<CTARY I'OllCV RER:>Rl: fE8RUARY l017
Financing conditions for nonfinancial
firms have generally remained favorable
Nonfinaocial businesses have continued to
raise funds through bond issuance and bank
loans, albeit at a somewhat slower pace than
in the first half of 2016 (figure 23). The pace
of such borrowing was supported in part
bycontinued low interest rates: Corporate
bond yields for speculative-grade borrowers
ha\~ declined since last June. and those for
in,~stment-grade borrowers have increased
but a fair bit less than those on comparablematurityTreasury securities (figure 24).
Banks indicated in the October2016 and
January2017 SLOOS that tl1eyeased lending
terms on commercial and industrial loans in
thesecond half of the year, but that standards
on such loans remained unchanged relative
to earlier in 2016; bankscontinue.d to tighten
standards oncommercial real estate loans over
the second half of last year.
·-
l fl\;ipotcm.r.;d~lblttEpi:d
-ll
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I
2010
I
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201-'
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2016
23. S<l<ct«l<MipOO<ol$ of net d<bo fioa11ting for
ooafmmcialbu.\-inesses
Net exports held down second-half real
GDPgrowlh
The rise in thedollar since mid-2014 and
subdued foreign economic gro111h have
continued to weigh on U.S. exports (figure 25).
Nevertheless, exports increased at a moderate
pace in the second half of 2016. but 11ith much
of the iocrease a result of rising agricultural
exports. In particular. soybean exports surged
in the third quarter before falling back toward
a more normal level in the fourth quarter.
Consistent with the stronger exchange value
of the dollar. imports jumped in the second
half of the year after having been about Hat
in the first half, when investment demand lOr
imported equipment was very weak. Overall,
real net exports 11~re a moderate drag on
real GDP growth in the second half of2016.
Although the trade balance and current
aceount deficit narrowed slightly in the second
and third quarters of 2016, the trade balance
widened in the fourth quarter. as imports
significantly outpaced exports (figure 26).
I I
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24. Col)lOI'tc bood yields, by S«Uriti« rating
I
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99
18 PART 1: R(C£1ff(CONO,\UCAN0 fi~~OAI. OtvtLOPM£1ffS
25. Change in «•I impmsand expoi1S of goods
aOOsc[\·i;es
Federal fiscal policy was a roughly neutral
inAuence on GOP growth in 2016 .. .
·~
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2011
2013
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26. U.S inde :mdcurrmt:ICCOUDi b>l:mcts
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27. Clungt in Ral gowrnnxot ~prndituf($ on
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After being a drag on aggregate demand
during much of the expansion, discretionary
changes in federal fiscal policy have had a
more neutral influence over the past two
ye;~rs. During 2016, policy actions bad little
effect on taxes and transfers, and federal
purchases of goods and services are little
changed over this period (figure 27). The
federal budget deficit increased in fiscal year
2016 to 31 percent of GDP from 2.4 percent
in fiscal2015. Revenues rose only I percent
last year in nominal terms and fell as a share
of GOP because of soft personal income tax
revenues and a decline in corporate income
tax collections. Outlays rose 5 percent, edging
up as a share of GDP, owing to increases in
m.1ndatory spending and interest payments as
well as a shift in the timingof some payments
that ordinarily would have been made in fiscal
2017 (figure 28). Tite Congressional Budget
OJlke forecasts the deficit to be about the
same size (as a share of GOP) in fiscal201 7
and in the next couple of years before rising
thereafter. Consequently. the ratio of debt held
by the public to nominal GOP is projected to
remain near its current level of 77 pen:enl of
GDP for the om couple of years and then
b.ogin to rise (fig.ure 29).
... and real purchases at the state and
local level continue to increase, albeit at
a tepid pace
The fiscal conditions of most state and loc.aJ
governments have continued to improve,
though tbe pace of impro•~ment bas been
slower in recent quarters than it had been
pre1~0usly. The ongoing imprO\'ement
facilitated a step-up in the average pace of
employment gain in the sector to the strongest
rate since 2008. At thesame time, however,
real investment in structures by state and local
governments bas declined. on net. since the
first quarter of 2016 after trending up during
the prior two years (figure 30). All told. total
real state and local purchases rose anemically
in 2016. On the other side of the ledger,
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100
MOI'<CTARY I'OltCV RER:>Rl: fE8RUARY l017 19
revenue gr0111h was subdued overall, 11~th liHie
groll1h in tax collections at the state level but
moderate gains at the local level.
Financial Developments
The expected path for the federal funds
rate over the next several years steepened
Against the b.1ckdrQl> of continued
strengthening in the labor market and an
increase in inOation over the course of 2016,
the path of the federal funds rate implied by
market quotes on interest rate derivatires has
moved up, on net, since the middle of last year.
Following the U.S. elections in November,
the expected policy path iutbe United States
steepened significantly, apparently reflecting
inl'llstors' expectations of a more expansionary
fiscal policy. Mean111lile, market-based
measures of uncertainty about the policy rate
appro;<imately one to two years ahead also
increased, on balance, suggestiug that some of
the firming in market rates may reftect a rise in
term premiums.
Survey-based measures of the expected path
of policy also moved up in recent months.
In the Surveyof Primary Dealers that was
conducted by the Federal Resem Bank of
New York just prior to tlte January 2017
FOMC meeting. the median dealer expected
two rate hikes in2017and three rate hikes in
2018 as the most likely outcome.'
U.S. nominaiTreasury yields increased
considerably
I
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(ODP)&t&L."C"fc:tlbtf.r.:qoo..artme:dq cQl
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ttdmncnl.IIXOUW.n..Wa~¢:tdoi !m ql*rttr.
SooJ:G! For GD~. ~(If C«n~ 8utdl1 oi &coo:na:.
A:al)~ for fto.nl &ln. Ftd«aa l tterYt BoW. Sla!W:-.al Rtlme ZJ,
TC.·ialArt«lllts orlbrli:J:I!d$~.M
Arter droppingsignificantly during the first
half of 2016 and reaching near-historical lows
in the aftermath of the U.K. referendumon
exit from the European Union, or Brexit,
in June, yields on medium· and longer-term
nominal Treasury securities rebounded
strongly in the second half of last year.
with a substantial rise following the U.S.
2. The Ftdernl Rese~·e Bani: of New York's Su~-.yof
Primary D<a!ers is "'~ilable at bttps;/l..,.w.neW}orlcfed.
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101
20
PART 1: R(C£1ff(CONO,\UCAN0fi~~OAI. OtvtLOPM£1ffS
30. State and local <Ulploymcnt and struclli'<S in•-
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Llbor
S'.!!dlics:l«~'tl!!ttbll..~tof'Co!lcee:tt, B~cltco!omit
A:al)sis.
31. Yields oo oomim:l Treasury sec:witic:s
,....
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k'mlocfebc';&:y i $,Z001,CII!~Ibll.tt:~tsocf'dlna!y9,~.
Sa.w:~<llh<T-.y.
elections (figure 31). Markel participants have
attributed the increase inyields following !be
eleclions primarily 10 expeclalions of a more
expansionary fiscal policy. The boost in longerterm nominal yields in recent months reHects
roughly equal increases in real yields and
intla1ioncompensalion. Consistenl 11i1h !he
changes in Treasury yields. yields on 30-year
agency mongage-backed securities (MBS}-an
imponanl determinanl of mongage inleresl
rales- increased significaolly over Ihe second
half of Jbe year (figure 32). Howeve~ Treasury
and MBS yields remain quite low by hislorical
slandards.
Broad equity price indexes increased
notably ...
U.S.equity markets 11~re volalile around
lhe llrexil vole in Ihe United Kingdom
bu1operaled without disruptions. Broad
equity price indexes have increased notably
sine~ late June, with a sizable portion of the
gain occ.urringafter the U.S. elections in
November (figure 33). Reportedly, equity
prices have been supported in part by tbe
perception !hat corporate tax rates may be
reduced. Stock prices of banks. which tend to
benefit froma steepening in the yield curve.
outperformed tbe broader market. Moreover,
market participants pointed to expectations
of changes in the regulatory environment as
a factor con1ributing to the ontperformance
of bank stocks. By contrast, stock prices of
firms tbattend to benefit from lower interest
rates, such as ulilities, doc.lined moderately
on net The implied volatility of the S&P 500
index- the VJX- fell, ending the period close
to the bottom of its historical range. (For a
discussion of financial stability issues om
this same period, sre !he box '·Developments
Related to Financial Stability.")
... while risk spreads on corporate bonds
narrowed
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Bond spreads in tbe nonfinancial corporate
S<."Ctor declined significantlyacross the credit
spectrum, suggesling increased investor
confidence in the outlook for thecorporate
102
MOI'<CTARY I'OliCV RER:>Rl: fE8RUARY l017 21
32 Yield and '!"<>d oo agency mongagc·bailid
securities
,_
-.00
Treasury market functioning and liquidity
conditions in the mortgage-backed
securities market were generally stable
Indicators of Treasury market functioning
remained broadly stable over the second half
of2016 and early2017. A variety of liquidity
metrics-including bid-asked spreads and
bid sizes- have displayed minimal signs of
liquidity pressures overall, with a modest
reduction in liquidity following tbe U.S.
elections. ln addition. Tre<~sury auctions
generally continued to be well received by
investor.;. Liquidity conditions in the agency
MBS market were also generally stable.
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SMct: ~oflhtlm~wy.Btrelays.
The compliance deadline for money
market mutual fund reform passed in
mid-October wilh no market disruption
In the weeks leading up to the
October 14.2016. deadline for money
market mutual funds (also referred to as
money market funds, or MMFs) to comply
11ith a varietyof regulatory reforms, shifts in
i01~stments from prime to government MMFs
were substantial. However, the transition was
smooth and without any market disruptions.
Overnight Eurodollar deposit volumes
fell significantly and have remained low as
prime fnnds pulled back fromlending in this
market Meanwhile. the rise in total assets
of govemment funds appeared to contribute
to modestly higher levels of tal-e-up at the
overnight reverse repurchase agreement (ON
RRP) facility through late2016. <fttmight
money market rates were little affected,
although the spread between the three-month
LI.BOR (London interbank offered rate)
and the OIS(overnight index swap) rate has
remained elevated. likely reOecting MMFs'
reduced appetite for termlending.
-
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SHERYL
21417062.eps
sector since the middle of last year. Declines
in spreads were particularly large for firms
in the energy sector, likely reflecting improved
prospects for U.S. producers as theycontinue
to increase efficiency and benefit from
higher prices.
103
22
PART 1: R!C~~TICONOMICANOfiNiiNCIAL OMLOPM£~'1>
Developments Related to Financial Stability
Financial vulnerabilities in lhe U.S. frnan(lal
syslem 01'""11 have continued to be moderate ~nee
rrid-2016. U.S. banks are well capitalized and hm
sizable liquidily buffers. Nonfinan(lal OO<porate
busine<s leverage has remained Ele,~ted by historical
standards, and household borrowing has increased
rrodesdy, Jea,;ng lhe household deb!-to-inOO<ne ratio
about url(hangoo. On balance, the ratio of aggregate
noofanancialcredit to 81'065 domestic product (GOP)
has 100\00 up alitUe in recent year> to about ils la'<'l in
the mid-2000s but remains \Yell bEIC1oV its recent peak.
Valuation pressures in scme asset classes have been
rising, particularlylate last year.
Vulnerabilities stemming from le.mge in lhe
financial sector appear low: Regulatorycapilal has
rerminoo at historically high la'Ois for rmst large
domeslk banks, and all33 iinns participating in the
federal Reserves superviSO<y stress tests I<>' 2016
\\"ere able to maintain capital ratios abo\'e required
ninimums through the severely ad\me rec~on
se«~ario.' Moreo\'tt, rm~et·b.lscd measures of
leverage for domestic banks ha~-edecreased somewhat
since NO\'Cmber. Howe\'«, \'aluatioos of rmny of the
large<~ foreign banks remain depressed. Oespile the
settlement on December 23 be~'- Deutsche Sank
and lhe U.S. Department of Justice and some progrESS
toward addr~ng problerro in the lllllian banking
sedor, 'Se\rera:l large European financial institutions
have continuEd to be vtJin.,.ble to unexpected
developmenls. Available data .uggestthatlhe levtrage
of nonbank iinanciaJ institutions was relatively s1able in
lhe><Cond half d 2016.
On balance, vulnerabilities associated ~ith liquidity
and mah1rity llansfoonation are also somt.Y..tlat below
~r longer-run a'-erage. The rEliance t:l.large bartk
holding companies on short-term funding rerruins
subdued, and their holdings ol high-quality liqtld
assets are robust, owing in part to Ihe imp1f'OY!ntalion
of lhe liquidity Coverage Ratio. Money market mutual
fund {also referred to as money market fund, 01 MMF)
rel01ms d~gned to reduce lhe advantages associated
with being the first to exit a fund in times of financial
stresoloo to large declines in pnmeM\IF assets under
rrunagemen~ with rrtJSt oflhese funds n1grating lo
governmenl M\IFs. While the ...._.ting smaller size ol
prime funds and the new regulations should make !he
induslly mo<e stable, the longer-term effect ,.;11 depend
on lhe degree to whichsuch activity migrales to other
t)1l<'S of short·lerm in,~nl \-.hides that may be
subject to sirrilar fragilities.
I. TheiO t6 "4'6'i sory s•e«est merflodologpnd
resli;s are .waibble on the Board's website at hups'iM'WW.
lederalroo\._80"banlinforr.fsrress.....not6.,.,._;!<lf)'-
Asset valuation prCSS<rres have incre:Jsed, on
balance, since rrid-10t6, along with se\etal indicators
ol investors' risk appetite. Although )ields on Treasury
securities and term prffl'iums increased as m.uket
expectations abool future growth shifted higher inlhe
fall, they both rermin low. In addition. !he spread d
)ields on corporate bonds oset those on comparablematurity Treasury securities narrf1oved. Es6m3tes
ol risk ptemiums in equity markets also declinEd.
Outstanding riskier corporate dEI>t edgEd dOII'O over
the P'l~ year. but gross issuance of leveraged loans
was strong and the share of bond issuance rated Bor
below remained in the fourth qua net atthe high end
of its range over the past few years. Commercial real
estate (CR£) valuations, which ha\'e been an area of
growing concem 0\'ef the past year, rose further, with
p<operty prices continuing to climb and capitali ~lion
rates decreasing to hi~orically IC1oV les<els. While CRE
deb! renlains modc<trelativetolheos.,..ll si~eolthe
economy and lhe tighlening in bank lending stmdards
f01 CR£ loans in the second half of last )~" may rcilect
sotre reduction in the appetite lor CRE lending. the
~ght<.11ing of \Oiuatioo pressores may leave some
snlaller banks vulnerable to a sizable CR£ price
decline. Also, r~dentia l home prices continued to rise
brisklythrough Nm"'""". Although most measures of
residential \Oiuation have 100\00 up SOtlle\>ha' they
are still ooly modestly above the le,.ts thatii'OUid be
rxedided, gi\'OO rents and in\'es1menl costs. The resulls
d the federal Rt-se<Ve's 2017 stress tests. fO< slhich the
scenarios were released on February 3, will help gauge
thevulnerabilityofla~U.S. banks to all ollheseassci
\•aluationpressl.l'es.
Vul~bilities ~emming from pri\Ote nonfinancialsector borrowing remain moderate. The credil-to-GDP
ratio f<>' the oorporale ><Ctor is elevated after ses-eral
)'<'<l<S d rapid growth. Despite tl-ls higllle.-erage,
int!.1est·Cxpet'&'! ratios are l<»v by historical standards
even among hithE<-rislc finns, as are measures of
expected default based on ao:oonting and s~ock return
data, especially outside of !heal sect01. Tuming to
households, debt growth was modest through the
third quart!.1 of 2016, and the debl·to-inrome ratio
has changEd little Ol'ef the pa~ few years. Excep1 for
a recenl increase in early payment delinquencies
in subprime auto loans-a small segment of O\<rall
indEI>t~btoad indicalo<s of household soh"ncy
ha\<erermined \Yithin historical norms. On balance,
the private nonfinancial-sector credit~to-GDP ratio is far
below the levels""" late last decade and lies nearils
levEl in the mid·2000s (rrgureA).
Last fall, the Federal Resers'l! Soard finalizEd its
framewotic f01 setting theCounterC)'dical Capital8uifer
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stress·~l-lesults.Mm.
104
MOI'<CTARY I'OliCV RER:>Rl: fE8RUAR\' l017
23
minimumamount of unsecured long·tl'Jm debt thai
could be COO\'erted into equity in a possible resoltrtion
ol that firm. thereby recapit.llizing lhe frmwithout
putting 13Xpa)'er funds 31 risk and din"inishing ~>e threat
that i~ failure would pose to financial Slabilit)'.
In addition, the Soard complaed an extensive
r~iew d its statutory stress-test and <Anlx'ehensive
<O
CaplalAnalysis and Re-iew (CCAR) programs
and rrode some related modirocalions to!he rules
associated with those programs fe< the 2017 cyde.'
Among other changes, lhe Soard remG\'ed certlin large,
<0
nonc~lex fil'fffi from the qualitath-e asse-ssment oi
lhe CCAR.' Mor.,.,.·er, the Board, logether with lhe
other federal banlring agencies. issued an advance
notice of proposed rulernal<ing, inviong putlic
Ctlf!'lrenl "" a ~ ol potential enhanced C)bcrsocurity
~; lbtWoa~~·»-GDf'~~;!J)Jedtl)~~·tf')sS:O~
rislc·rro~land resilience m ndards thai would
ceq-.'".td)·W~~~I6'Q} T'..cJWe4W:t.blit.:eptliods
ol tmmro m."t'SSIOD u &rl:ll!il! b)• I# K~JJ 91::-Wl or Etoooaa: applyto depo<itO<)' inslitutioos and regulated holding
con'!)3nies with O\'E< SSO billion in asseiS and to
~ Ftdtnl ldtt\t &.d. Sto..~'ll ltttt. Z.J, .,.'0:1.'»1
CEttain financial market infrastructuce COf'll).)Aies.'
Nt:oc:~J. or lbt Umlt'd $tJttt'"'; bw ollitoo<O: Aaal;u,. mbO:al
"""'..Opcodo;t""""'il>1PA~IIoonlsWI<ol....,._
lhe standards would be tiered, "ith an addmonaJ
setof highE< standards for systems that p<ovide key
functionality to lhe financial secte<.
(CCyB) and later '"'ted to rminlain lhe CCyB at ze<o.'
In foming its view about the appropriate size oi the
The B<>ard and the federal Deposit Insurance
U.S. CCy8, the Soard intcn<k to monitor a wide range Corporation (FOIQ also h"c continued to adhdy
of financial and eo:>nomic indicato~ and oonsider
engage in the re501uUOfl·planning process with lhe
their in-plications lor financial S)'Siemwlnerabilities,
largest banks. As part ofthat process, the Board and
including but not limited to a$$EI valuation pressures,
the FDICannounced thatBanlr ol America, BNY
riskappetitC leverage in the financial and nonfinaocial MeiiOfl, JPMorgan Chase, and Slate Stre<l adequately
sectors, and rmturity and liquidity lr.lnslo<n\ltion in the remediated defiCiencies in their 2015 resolution plans.
financial secle<. The decision to mainlain the CCyB at
lhe twoagencies also announced thai Weils Fargo did
zero in part rellected an assessment that vulnerabilities not adequate!)' remedy all ol its deliciencies and will
associatecl with financial-sector le\'efage were al the
be subject to rMrictions on c«tain acti\·ities until the
lower end of lhar historical ranges.
def.ciencies are remedied.'
As part oi its eifort 10 impro'" the resilience ol
4. S..Ooni~K. TarulloU016), ·~ ... s.epsinthtE..tooon
frnancial instilutions and O\<erall financial stability, the oiStr"' Testing• !p<!<Ch de!ii'Ofed>t tht\'at.UniW<>ity
Soard has also tlkm several fut1her regulatO<)' ~epo.
School ol Man~t leaders Fo....., NewHa\'('1\ Com.,
Among those ~epsis thai the B<>ard finalized a rule that Scjl4fll'b« 26, htipit,..wwJ«k<alres"'•P""'""'"'"'
speedl.'laNIIo:Nl160926a.oon.
would impose totll loss-absorbing capacity and long.
s. s.. S..rd olw.....,ol lhe r.deral ReserveSymm
tE<m debt requirements on U.S. globll systen"ically
{lO In, ·rc-deral Restn• Boord Announces htuliz<d
importlnl bank holding companies (G.SIBs) and on
Stress Tesli11g Rules R@IT(Iving f\.~1~ firms from
the U.S. opE<aUOflS ol cerlain fe<eign G-SIBS' The final Qualr~ti-. A>pect o/CCAA Effooi" f0<1017: pr.,. r~-.
January JO, https:l"""'.federalr""'"·&O'Inewse\Ofl~tpreS61
rule \vould require eadl covered firm lo maintain a
...
""'•'"'
1
bcr'lj'101701llla.htm.
wv.w.fedtr.lllc-serve.gov·'nc<WS('Vfflts.l'prts6-bcrcf}
:Nl161215a.hun.
VerDate Nov 24 2008
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6. S..lloordoiC-ofthtr.tleoaiReserveSysoetl\
Olf"" olth<COI11'uolle< oltlleCurrecq andr.deral
~)<posit lnsttanC< C«p<>ration (2016), 'Agencies Is.<"'
Advanced Notic>ol Proposed Rulenuking O<l Enh>n<ed
C)bet Risk M>rogetneol Stul<brds; jointpr"' rele.,..,
0C100H 19, ~h-ww.ledoo!Jr<')('I\'(J.g<W/n("'o'S('\'flliSlpressl
bcref10161019a.i'«m.
7. S.. Boord ol c-..., ol lhe f«<eral Reserve Syoem
and Ft>dr!<alllqlositlr•tn""'Corpootion(2016i 'Agencies
Annou~OE!IefmiootioosonOctoOO' Resohltion Pla:n
Submi"i""' ol row S)'llenlcally I"''''ont Domestic 8anki ~
lf'6tiMions,• joor< press"'""'· Dec..OO IJ, htiJS:/1\\ww.
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21417064.eps
2. S..Soirdofw«no• ol tho r.der>l ReserveS)"""
(2016), "federal Resem Boord AllnooOC<'S It HasVoted
ooAifrmCoomerC)dicat Clpital8uff« {0::)8) a1 Current
ltl\<l ol 0 Pe<ce"-' pr"' r~..... Octobt< 24, hup,;.-.ww.
f..,.,alr'''"·~-~"'"""'~!prcswcf(>g/201 6102...hun.
l . S..8oirdofw«no•olthtf«<eral R""'~S)'•em
(1016). 1ederal R""'e 80>rdAdq>U fino IRut. to
SUt"flglhm lhtAbilil)•of C<wc101ll(fltAuthoritic-s to Resoh<ein
Orderly Way largest ~<and f«<ign Banks Op"'ting
in the United S..teS,' P'"' "''"'· Dec"""' 15, ht~:/1
105
24 PART 1: R(C£1ff(CONO.IUCAN0 fi~~OAI. OtvtLOPM£1ffS
H, Ratio of t01al oommacial bonk =lit to nominal gross
oomestic p-oduCI
.....
-
IS
-~-'I)
-
-6S
-
-
60
- ss
200&
!010
lOll
M~
1416
St.uct foiml le:scM Boa.-d. Sllo~i.:1.1 RelAx fU, "Me') a::4
Lilbli'Jes ol C~l Bd.$ c fM \ini:t4 S:Rr~ D~ of
Com:·u~ 8·.t."((;.. o(£."'000."18: /.:&b...._
35. Prormbili1yofoonk holding ccuupanics
J-
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-
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Lo-
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Aggregate credit provided bycollUllCrtial
banks continued to grow at a solid pace in the
second balf of2016 (figure 34). The expansion
in bank credit was driven by strong growth in
core loans coupled with an increase in banks'
holdings of securities. Measures of bank
profitability improved since the n~ddle of
last year but remained below their historical
a~·erages (figure 35).
Municipal bond markets continued to
function smoothly
l!tte!ttt!tto!tttl!!tltto!,u l udut!ttlfwlw!l
~
Bank credit continued to expand, and
bank profitability improved
l016
~ lbe6a:a. wlli ~ttlei:ICICII.Ita!p;:ti!.L.~ Ifl&t'.trlr~~
~"0"-ib lOI&QJ.
S<Qct Fok!ai ~~BoR. fona FR Y·9C.C«:$$I ~f~lll
$)lemataiorW Hcll.iq C~.
Credit conditions in municipal bond markets
have genemlly renmined stable since late June.
01~r that period. the MCDX- an index
of credit default swap spreads for a broad
portfolio of municipal bonds-d.ecreased
moderately, white yield spreads on 20-year
general obligation municipal bonds over
comparable-maturity Treasury securities
were little changed on balance. llte Puerto
Rico Oversight. Management, and Economic
Stability Act was passed into law in late June,
providing the commonwealth with a cl~arer
path toward debt restructuring. Although
Puerto Rico missed a small amount of debt
payments on general obligation bonds in
August, this default appeared to have bad no
significant eft'ect on the broader municipal
bond market.
International Developments
Foreign financial market conditions
improved despite global political
uncertainties
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21417065.eps
Financial market conditions in both the
advanced foreign economies (APEs) and
the emerging market economies (EMEs)
have generally improved since June. Ln
the AFEs, increasing distance from the
Brexit vote, beuer-than-expectedeconomic
data for Europe, and thecontinuation
of aecornmodative monetary policies by
advanced-economy central banks have
106
MOI'<CTARY I'OliCV RER:>Rl: fE8RUARY l017
contributed to improved risk sentiment.
Ad\'llnccd-economy bond yields rewrsed their
downward trend seen in the fitst balf of the
year and increased notably following the U.S.
elections, in part on expectations of a more
expansionary U.S. fiscal policy (figure 36).
25
36. tO-yw nominal bcncblll>lk yields insel«!cd
advaoccdecooomi<S
- l.O
-l.l
-10
Equity prices in the AFEs have generally risen
since June, with financial stocks outperforming
broader stock indexes as third-quarter
earnings largely beat expectations, several
major riskevents passed, and the steepening
of yield curves was expected to boost profits
going fOiward (figure 37). Despite some
widening of curo-arca corporate spreads in
the last months of 2016, corporatecredit
conditions in the advanced foreign economies
have remained accommodative, with the
continuation of corporate asset purchase
program; by several AFE central banks and
with low corporate spreads.
I
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f<Wt,;my9,llHT.
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l7. Equity iodc:<<S for S<lectcd forrign ccQllOillieS
M~~ip<'i.'Ofi.O::I~r:t
£.~"'"*_,._- •l.S
1
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'
In EMEs. equities have risen significantly and
sovereign yield spreads have narro\\~d since
June, supported in pan by higher commodity
prices Financial conditions did tighten briefly
following the U.S. elections, with increased
capital outflow~ and wider sovereign spreads.
on concerns that higher global interest rates.
as well as the possibility of more protectionist
trade policies, would weigh on EME growth
(figure 38). Howevtr. the favorable risk
sentiment seen in the summer and early fall
of2016 resumed by the end of the year for
most EMEs.
I
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Nm: lbt&a art 11'td:IY"~ ofdr.i~dall &:JC!n:..sd through
fftlr.al:)·9,lOIJ.
S«.ila: F« ~'l»d. lbttip ~. !ISCI £-\FE le&:x ~
~ ~.:m Dlwntlnt; for er.ging !Vlo f\'000!'11~ MSCt
£:w:ai:a: ~!a:h'.J to&x vit ~..otldCO ltt".:.tes Dt"ti!!'!l!.-.; for a,u-o.~
tel\ Dow Jo:ti £u:oSTOXX 8ck
BJooallq.(For~ .Jcas
r::«t"'
lndi.ub.-uall& e.foo..:i011. 1t.:lbe:nooe ooi#CCJC.tO~~)
38, Emaging ID>Ikrt mutuol fund Do•> and sprca<l;
After depreciating slightly in the first half
of last year, the dollar strengthened in
the second half
l<lO-
llle dollar has strengthened since June, with
the broad dollar index- a measure of tbe
trade-weighted value of the dollar against
foreign currencies- rising about 4 percent on
balance (figure 39). .Much of this strengthening
of the U.S. dollar reftects thecombined
influences of the large depreciation of the
Mexican peso, expectations of fisc.al and trade
policy changes after the U.S. elections, and
I S..di'.Jldn..,(nglux¥)
I Eq<o~ftm.! O•>t(ri;)!W.)
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SGtJ.ct: F«t«dt:!d~f.mdilows.,EPfRGict.l; forEMBI+.lJ.
M~£."ffeti:aM~~~Pt:$\'it8~
107
26
PART 1: R(C£1ff(CONO,\UCAN0 fi~~OAI. OtvtLOPM£1ffS
39. U.S. dollar mb3nge rateiodu"'
-
110
-
160
-
I SO
-
1'0
130
was moderate and inflation remained
120
subdued
Real gross domcoti< product gJo\'1h in ~tl<t!od
adv:IOOOd fot<ign <OOCIOOli<s
--..
-s
Ql
_._..._._...__..._Uf:
-
liO!l
liOI'
l Oll
In general, AFE economic growth
-
It
~0.
market expectations of tighter Federal Rese1ve
monetary policy. The Chinese renminbi also
weakened notably against the dollar, on net,
as capital outflows from China picked up:
Chinese authorities tightened capital controls
in tesponse.
I
11016
~ llltc!a:a*ll:tUnr~Kitpmi::..~dlttlubef".C.!e fot
20l6:Q{ ne en tOt llw- trz:o ~ ~"'!'p(n:l ~ ;ttlilni::3ty ~
tstimttt ror 2016..-QJ. Tbt c.u for J•pc a QeD oun1 lbro~
lOI6ql.
So..'iC£ Fotd!t1Jl!iud.~Ot"6oefot Nnoeal~; f01!._
r.et.c.~on'~«.C~othptn: t«ttC'Il:OIJ\'e. e:.."'SSII;t«Ccm.
b!A."SC&:!Ida;aD vit. Ht\!'t ~·
In Canada, oconomic growth picked up
sharply in the third quarte~ following a
contraction in the ptevious quarter, as oil
extraction rocovered from the disruptions
caused bywildfitesin May (figure40). Jn
contrast, oconomic growth inJapan in the
second and third quarters slowed after a
stron~ first quarter, returning to a more typical
moderate pace. Euro-area growth firmed in
the second half, and, in the United Kingdom,
ocooomic activity was resilient in the aftermath
of the Brexit refet:endum in June. Available
indicators suggest that growth in most AFEs
was moderate nearthe end of2016aod early
tltis year.
Headline inftation in most AFEs inct:eased
over the second half of 2016, in part driven
by higher oil prices. ln the United Kingdom,
the substantialsterling depreciation after
the Brexit referendum also exerted upward
pressure on consumer prices. Even so. core
inflation read in~ in AFEs remained generally
subdued, and headline inflation stayed helow
central bank targets in Canada, tbe euro area,
Japan, and the United Kingdom (6gut:e 41 ).
AFE central banks maintained highly
accommodative monetary policies
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In August. the Bank of Englandcut its policy
rate 25 basis points. announced additional
purchase-s of government and corporate
bonds, and introduced a term funding scheme.
In Septemher, the Bank of Japan committed
to expanding the monetary base until ioDation
exceeds 2 percent in a stable manner and
adopted a new policy framewort aimed at
controlling the yield curve by targetingshort-
108
MOI'<CTARY I'OliCV RER:>Rl: fE8RUARY l017
and long-term interest rates. In December,
the European Central Bank announced an
extension of the intended duration of its asset
purchases throug)t at least December 201 7.
albeit 11ith a slight reduction in those
purchases beginning in April201 7.
27
41. fnlbtioo in selected advnll«d foreigo e<XIOOmi<S
-l
-
Chinese economic activity remained robust
in the second half of 2016, as earlier policy
easing supported stable manufacturing growth
and a strong property market (figure 42).
Howeve~ the property market cooled
somewhat toward the end of the year foUowiug
the introduction of new macroprudential
measures aimed atcurbing rapidly rising house
prices. Elsewhere in emerging Asia, growth
held steady in the third quarter but stepped
down insome countries in the fourth, even
though exports and manufacturing improved.
And in India, a surprise mandatory exchange
of large-denomination bank notes- a move
aimed at bauling tax evasion and corruptionbas disrupted activity.
l
_,
In EMEs, Asian growth was solid ...
-
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Cwd.l;-lll\1lll;J\'G'A:oalytiel.
42. Re3l gross domestic prodllet growth in selected
emttgil1g nurkt:t tcanmnics
. . -but many Latin American economies
continued to struggle
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201!
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SHERYL
21417068.eps
In Mexico, after considerable weakness in the
first half of2016, growth surged in the third
quarter, supported in part by a recovery in
exports to tbe United States. However, activity
weak-ened again in the fourth quarter. as
consumer and business confidence dropped.
Furthermore, inftation in Mexico jumped over
thesecond half of the )~r. pressured in pan
by the peso's sizable depreciation, prompting
the Bank of Mexico to hike its policy rate
sharply. Brazil's recession deepened in tbe third
quarter, reflecting in part tight macroeconomic
policies, although the central bank began to
ease monetary policy as inflation dropped
in response to the weak ec<>nomy. Elsewhere
in the region, activity in the third quarter
was mixed; Chile's economY rebounded. but
Argentina's GDPcontracted and thecrisis in
Venezuela deepened.
109
29
PART 2
MONETARY
Poucv
In December, t~ Federal Open Market Committee (FOMC) raised the target for the federal funds
rate by V. percentage point to a range of~ to* percent The f OMC's decision reflected realized
and expected labor market conditions and inflation. Moreover, tiJe decision to raise t~ target range
wasconsistent with the Committee's expectation that, 11ith gradual adjustments in t~ stance of
monetary policy, economic activity would expand at a moderate pace, labor market conditions
would strengthen somewhat fun~r, and inflation would rise to the FOMC's2 percent objective
overt~ medium term. T~ Committee expects that economic conditions will evolve in a manner
that will warrant only gradual increases in t~ federal funds rate; the federal funds rate is likely
to remain, forsome time, below levels that are expected to prevail in the longer run. How!!ver,
the actual path of the federal funds rate will depend on the economic outlook as informed
b)' incoming data. ln addition, the Committee anticipates reinvestingprincipal payments of its
securities holdings until normalization of the level oft~ federal flmds rate is well under way.
The FOMC raised the federal funds rate
target range in December
About a year ago, in December 2015, the
FOMC raised the target range for the federal
funds rate after holding the range at near zero
since late2008 to support economic activity
and stem disinftationary pressures in the wake
of tbe Great Recession. At that time. the
Committee judged that it bad seen sufficient
im pro,~mrmt in the labor market and was
reasonablyconfident that inflation "'Ould move
back to its2 percent objective, which would
warrant an initial increase in the federal funds
rate. Through most of 2016, the Committee
maintained the target range of Y. to Yz percelll.
pending further evidence of continued
progress toward its objectives In December,
in riewof realized and expce.ted labor market
conditions and inftation, the FOMC raised
the target range for the federal funds rate
another Y. percentage poin~ to a range of
Y, to Y. percent (figure43).' The Committee
kept that same target range at its most recent
meeting, which concluded on February t.
3. See BoanlofGowrnorsof the Federal
R.serve System (:WI6), "Fedml R.s<rw l<sues
FOMCStatement," press release. Dooember 14,
hnp;J/wv.w.!<deralreseo·e.plnew5el·entslpressl
mooetaryl2016t2t4a.htm.
43. S<lect<d int<r<St 1111.s
"""'
""'
- s
-·_,
-
l
-
I
- o
It
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So.llG: ~.mo!olthc:TftU.'%'Yiftdcni R.ne\-c8d
110
PAATl: MON£TARYPOLICY
Monetary policy continues to support the
economic expansion
The size of the Federal Reserve's balance
sheet has remained stable
The Committee has continued to see the
federal funds rate as likely to remaill, for
some time, below the lerels that are expected
to prevail in the longer run. With gradual
adjustments in the stance of monetary policy.
the FOMC expects that economic activity
will expand at a m<xlerate pace, labor rmrket
conditions will strengthensomewhat further,
and inflation will rise to 2 percent over the
medium term.
To help maintain accomm<xlati~~ financial
conditions, tbe Committee bas continued
its existing policy of rolling over maturing
Treasury securities at auctionand reinvesting.
principal payments on all agency debt and
agency mortgage-backed securities in agency
mortgage-backed securities. The Federal
Reserve's total assets have held steady at
around S4.5 trillion, with holdings of U.S.
Treasury securities at S2.5 trillion and holdings
of agency debt and agency mortgage-backed
securities at approximately $1.8 trillion
(figure 44). The Committee has for some time
stated that it anticipates maintaining this
policy until normali7.ationof the level of the
federal funds rate i~ well under way.
Consistent with this outlook, in the most
recent Summary of Economic Projections
{included as Part 3of this report). which was
compiled at the time of the December 2016
meeting, most participants projected that
the appropriate level of the federal funds
rate would be below its longer-run level
through 2018.
Future changes in the federal funds rate
will depend on the economic outlook as
informed by incoming data
Although the Committee has expected that
economic conditions 11111 evolve in a manner
that will warrant only gradual increases in
the federal funds rate, the Commiuee has
continued to emphasize that the actual path of
monetary policy will depend on tbe evolution
of the economic outlook. In determining
the timing and size of future adjustments
to the target range for the federal funds
rate, the Commiuee will assess realized and
expected economic conditions relative to its
objectives of maximumemployment and
2 percent inftation. This assessment will take
into account a wide rnnge of information,
including measures of labor market
conditions, indicators of in Oat ion pressures
and inflation expectations, and readings on
financial and international del'elopments.l n
light of the current shortfall of inflation from
2 per:cent. the Conmuttee has indicated that
it will carefully monitor actual and expected
progress toward its inDationgoal .
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Interest income on tbe System Open Market
Aecount, or S0~1A, portfolio has continued
to support substantial remittances to the U.S.
Treasury. Preliminary results indicate that
the Reserve Banks provided for payments
of $92 billion of their estimated 2016 net
income to theTreasury. The Federal Reserve-s
remittances to the Treasury hill'e averaged
about $80 billiona year since 2008, wmpared
"~th about S25 billion a year om the decade
prior to 2008.'
The Federal Reserve's implementation of
monetary policy has continued smooth ly
As in December 2015, the Federal Reserve
successfully raised the elfective federal funds
rate in December 2016 using the interest
rate paid on reserve balances, together with
an Ol<ernight reverse repurchase agreement
4. Tow rtmiuanoes indude aont·time transferor
$19.3 billion in D«:ember 1015ro reduce theawegate
Rese"< Bank capital surplllS toStObillion. as requin'd
by the PixingAmerica-sSorfaceTransportatioo
Act. Set Boasd of Gc,-emorsof the Fcd<ml Rese" ·'
S)stem (2016), "Federal Resef\·e System Pablishes
Annual Pinancial Sratemen~~· press releast. March 18,
htt'(>S1J>.ww.federalrestrv<.g01'/ne.WS<\..tslpresrl
otherll0t603lia.bll)).
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30
111
MONETARY POliCY REII:JRT: fEBRUARY lOll 31
44. F«<tml Rescn~ assetS and liabilities
Asstll
OOu!Wil
~
.-.;"'&hvlft.~HC>Rr·~
2009
1010
2011
2012
1013
No1J; ~Q'C~md lir:pdllyrtoiliic."Wl!fiAO:FJA'Y.~,&:d5CihOil&ldtla:m(I:.VT.IOllctedi&;OCOIIIIbcnltqadt."YJ",;*JI$;qlpOrtkM&lkn
l,Qc, BewS~ md AI(); md«bcr;:redit !aa1- b.+Jdia&tbc P:irr.cy })Wa~F~~;ill.y,lbc A.c:~ComllCWII Pcpa }.Swcy Mckd. MlWal
k:xiU1J1idir.yfacility, t!lt Co~ . . F~P.aci~:y. d ~ fa'l'll A.actkk<d~IIC$ i,.ccQ f~~:ii:)· ~ 1$$Q" Q:lildq~
~i'!!at:lddisoo:r.sor~s«o.Jtitinhdd<r~ ~a::d~lillbitir.ies" io..i:desft'<--otrq:et:hueq:tt..11CJ'.t., W:U.S. ~Gefml~
l!ldOt U.S. 'l'!ul.~-y~lcttdr.I."Y fioaci:D&A~ 'l'htba~coddaulgllFdo&ryt,20t7.
F<den.l ~<tBOI!Il.S.:.ori:a!Rdmc HA. l, ~MnecR.t:tcrVt&lo:o."
(ON RRP) facility.s Spec.ifically, the Federal
Reserve raised the interest rate paid on
required and excess reserve balances to
~ percent and the ON RRP offering rate
to !h percent. In addition, the Board of
Governors approved an increase in the
discount rate (the primary credit rate) to
1.25 percent. The effective federal funds rate
rose into the new range amid orderly trading
conditions in money markets. Increases in
interest rates in other money markets were
similar to the rise in the federal funds rate
following tbe December meeting.
5. See Boord of Govtmoi> of lh<Fod<ral R<S<n<
Syst<m (20t4), "Fodml R<Serve Issues FOMC Statement
oo fl:>licy Nonnalil31ioo Principles and Plan~• pms
releao; Sept<mber 17, http<1/w"w.fodtralres<rve.govl
newsmnt5/p~<'monetaryl201409t icJI(I)I.
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The total take-up at the ON RRP facility
increased modestly in the second half of2016
as a result of higher demand bygovernment
money market mutual funds in the wake
of money fund reform that took effect in
mid-October.
Althou&IJ the implementation of monetary
poticy has been smooth, the Federal Reserve
has continued to test theoperational readiness
of other policy tools as pan of prudent
planning. Two operations of the Term Deposit
Facility were conducted in thesecond half of
2016; seven-day deposits were offered at both
operations with a Hoating rate of I basis point
o,·er the interest rate onexcess reserves. In
addition, the Open Market Deskcondncted
several small-value exercises solely for the
purpose of rmintainiog operational readiness.
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SaJla:
112
33
PART 3
SuMMARY oF EcoNOMIC PROJECTIONS
The following material appeared as an addendum to the minutes of the Docember 13-14, 2016,
meeling of the Federal Open Market Commiuee.
Most FOMC participants expected that, under
appropriate monetary policy. growth in real
gross domestic product (GDP) would pick
up a bit next year and run at or slightly above
their individual estimates of its longer-run
rate through 2019. Almost aU participants
projected that tbe unemployment rate would
run below their estimates of its longer-run
normalle11tl in 2017 and remain below that
6. One participant did not submit longer-run
projections for r<al OUlput &IC\\111, the un~piOjment
tate. or the f«<ctal funds 101<
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leveltbrougb2019. All participants projected
that in Hat ion, as measured by the four-quarter
pettentage change in the price index for
personal consumptionexpenditures (PCE).
would increase over the next two years, and
several expected inflation to slightly exceed
the Commiuce's2 percent objective in2018 or
2019. Table I and figure I pro\~de summary
statistics for the projections.
As showu in figure 2, almost all participants
expected that theevolution of economic
conditions would warrant only gradual
increases in the federal funds rate to achieve
and sustain maximum employment and
2 percent inflation. Many participants judged
that the appropriate level of the federal
funds rnte in 2019would he close to their
estimates of its longer-run nomml level.
However, the economic outlook is uncertain,
and participants noted that their economic
projections and assessments of appropriate
monetary policy may change in response to
incoming inlormation.
A majority of participants viewed the lew Iof
uncertainty associated 11ith their indi1idual
forecasts for economic growth, unemployment,
and inflationas broadlysimilar to the norms
of the pre\~ous 20 years, thoughsome
participants saw uncertainty associated with
their forecasts as higher than ao.erage. Most
participants also judged the risks around
their projectious fOr economic activity, the
unemploymelll rale, and inflation as broadly
balanced, while several participants saw tbe
risks to their forecasts of real GDP growth
as weighted to the upside and the risks to
their unemployment rate forecasts as tilted to
the downside.
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21417072.eps
In conjunction 11ith the Federal Open
Market Committee (fOMC) meeting held on
December 13-14.2016. meeting participants
submitted their projections of tbe most
likely ontc()mos for real output growth, the
unemployment rate, and inHation for each
year from2016to 2019 and over the longer
run.6 Each participant's projection was based
on information a1•ailable at the time of the
meeting. together with his or her assessment of
appropriate monetary policy, including a path
for the federal funds rate and its longer-run
value, and assumptions about other factors
likely to affect economic outcomes. The longerrun projections represent each participant's
assessment of the value to which each l'llriable
would he e~pected to converge, over time,
under appropriate monetary policyand in tbe
absence of further shocks to the economy.
"'Appropriate monetary policy·•is defined as
the future path of policy that eacb participant
deei!IS most likely to foster outcomes for
economic activity aud inflation tbat best
satisfy his or her individual interpretation of
the Federal Reserve's objectives of maximum
employment and stable prices.
113
34
PART l : SUMMARYOf ECONOMIC PROJECTIONS
Table 1. Economic projections of Federal RestJ''e lloaro m em~n and Federal Rese!Ve Bank pr<SideniS, under lhrir
indhidual asstSSmenls of projee1ed appropriale monelary policy, Decem~r 2016
"'"''"
~,, lllin ll!liS ll>l19 ~· ~~~ 1l0!1 12011121)191"::!"
"-in~GDP
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IJ 1.1-lO 19-10 ll).1fi 211 15-U
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) i'kNJtfwt~kiiiiJMl)Qr~li~~I(PtO~fiOIIIw.uttOW&kA.fotlhl'I'\MbkDllla!)Ul.
' l.oe-i!!to('Uf.IIOSJb«ttPCE8!rior.t.ttaotcol«~
The median of participants' projections for
the growth rale of re.al GOP. conditional on
their individual assumptions about appropriate
monetary policy, was I.9 percent in 2016,
2.1pertent in 2017, 2.0 percent in 2018, and
1.9 pcrtent in2019: the median of projections
for the longer·run normal rate of re.al GOP
growth was I.8 percent Most participants
projected that economic growth would pick
up a bit in 2017 from the current year's pace
and run at or slightly above their individual
esti111<1tes of its longer-run rate through 2019.
Compared 111th the September Summary of
Economic Projections (SEP), the medians
of the projections for real GOP growth were
slightly higher overthe period from201 7 to
2019, while the median assessment of the
longer-run growth rate was unchanged. Since
September, almost half of the participants
revised up their projections for real GDP
growth in 2018 or 2019, generally only slightly.
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Those increasing their projections for output
gro111h in tbose years cited expected changes
in fiscal. regulatory, or other policies as factors
contributing to their revisions. However,
many participants noted that the effects
on the economy of such policychanges, if
implemented, would likely be partially offset
by tighter financial condition~ including
higher longer-tenn interest rates and a
strengthening of the dollar.
The median of projections for the
unemployment rate in the fourth quarter of
2016 was 4.7 percent, slightly lower than in
September. Based on the median projections.
the anticipated path of the unemployment
rate for coming years also shifled down a
bit, with the median for the end of2019 at
4.5 percent, 0.3 percentage point below the
median assessment of the longer-run normal
rate of unemployment, 1111ich was unchanged
from September.
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The Outlook for Economic Activity
114
MONETARY POliCY REII:JRT: fEBRUARY lOll
35
Fig11re I. M<dians, cm!ral tendenaes, and ranges of eoonoouc projeotioos, 2016-19 and om the looger run
PttO!nl
Cllanteillrea!GDP
_
- Mediuof ~jltl)o)U
• cnuall>fldtacyor~
Tl~
"'"~
21111
2012
lOB
21114
llliS
2016
Ill
-.--
~
C5
-l
-
2017
2018
2019
I
Looger
rutl
Pt.etnl
_,
U~meotra~e
~ -lllll
2012
lOB
2014
lOIS
2016
2017
-·
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2018
2019
!!!!::! - s
- '
Looger
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Pccotnt
PC£inflauoo
-
~
lOll
2012
lOll
2014
lOIS
-
EB !!!!!
l
=
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-I
2016
2017
2018
2019
Looger
11111
P<rotot
Corei'CEinlldlioo
------
2011
2012
lOB
2014
lOIS
-
- ...
!!!!'!
2016
2018
2017
l
~
~
-I
2019
Looger
TWJ
Nom Defuritioos of l'tliaNes ud o1her exp:&nalicons min 1he DOleS to tal* I. Tht(fjta for tbe a.:tual l'lllX!S of the l'ariaNet
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arewual
115
36
PART 3: SUM\IAAV Of !CONOMIC I'ROj(CfJONS
Figure 2. FOMC panicipants' asse>sment; of appropriate monetary policy: Midpoint of target range or target
level for the federal fund• rate
ht=L
----------------------------------------~,----------- M
_,,
_
.......................................................................................................;..........................
·!·····
......-4.5
.
'
' ' ' I'
----------------------------------------~~----------~
. ..,' .... ...... ...
.
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----------------------------~--------~-._--~·--~~._----10
•
•
•
•
· · ·· ~
···:· ··········['···· ·······-lS
• •• 1
· ·· ··· ·· ··r·· ·· ·· ··········· ········ -O.S
I
------------------------------------~----------M
2016
2017
2013
2019
Long<J run
Non: Each shaded circle indicat« the value (rOilllded to Lb< """"' II per«ntlg< point) of an indi'idual Jl'Lnio:ipanf•
j odgmmt oflh< ~int of the appropriatt rarttt ran8' for Lh< fedttal funds rate or Lh<aP.I:fopriatt tlr&<J kvel for the federal
~~~;:::~~unds ~f.~ spe<ilitd <Okndar yw or O\OCr the loog<J run. One participant did not suboit loog<J·nm proje<tioos
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The Outlook for Inflation
In the December SEP, the median of
projections for headline PCE pri~ inflation
in 2016 was 1.5 percent, a bit higherthao in
September. 11le median of projoctions for
headline PCE price inOatioo was 1.9 percent
in 2017 and 2.0 peroent in 2018 and 2019,
unchanged from Septemher. Several
participants projecled tbal inOat ion will
slightlyex~ed the Commiuee's objective in
2018 or 2019. The medians of projections for
core PCE price inflation were the same as in
September, rising from 1.7 peroent in 2016 to
1.8 percent in 2017 and 2.0 percent in 2018
and 2019.
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21417075.eps
Figures 3.A and 3.B show tbe distribulions
of participants' projections for real GDP
growthand the unemployment rate from
2016 to 2019 and in the longer run . The
distributions of individual projections of real
GDP growth shifted slightly higher relative to
the distributionof the Seplember projoclions
for 2017 through 2019. The distributions
of projections for tbe unemployment rate
shifted modestly low~r for 2016 through2019,
while 1he distribution of projections for the
longer-run normal rale of unemployment
was unchanged.
116
MONETARY POliCYREII:JRT: fEBRUARY lOll 37
Figure J.A. Disrributioo of partici~ts' projtetioos for the d!ang< in r<a1 GOP. 2016-19 and over lhe la>ger Clln
-II
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---
r --- -J
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2019
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Norr: Oftlnitionsoh'triables and other t:tplao1tioos are in lhe tiNtS 10 1a~ 1.
117
38
PARI 3: SUMIMRY Of !CONOMICPROI!CTIONS
Figure lB. Dislribulioo ofportiaJl'Ults' projectioos for the uo<mplo)meot rale, 2016-19 aod over thelmger "'"
Nt*c~~llb
2016
- II
- 16
-14
- ll
- 10
- I
a~rpro~
•• St""'""".;..o...
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r
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118
MONITARYI'OUCYR£POIU: H8RUARY2017
Appropriate Monetary Policy
Figure 3.E prol'ides the distnootion of
participants' judgments regarding the
appropnate ta~t for the federal funds rate at
the end of each }Ur from 2016to 2019 and
Ol'er the longer run.' All participants S3W an
increase of 25 basis points in the federal funds
rate at the December meeting as appropriate.
The distributions for2017through 2019
shifted up modestly. The median projections
of the federal funds rate continued to show
gntdual increases. to 1.4 percent at the end
of2017, 2.1 percent at the end of2018. and
2.9 percent at the end of 2019; the median
of the longer-run projections of the federal
funds mte was 3.0 pem:nt. The medians of
the projections for the lel'el of the federal
funds rnte for201 7through 2019 were 1111
25 basis points higher than in the September
projections. A few participants re~ised up their
assessments of the longer-run federal funds
7. One potQapanJ's proj<CQODS ilf lbe r«l<nll
runds me. lUI GOP grt>IV!h,lhe unemplo)menr raJ<,
and rnftatioo ll'trt inbnn«l by lhe ,;ew lhar lhere are
mutliple possible mt<Jium·ttrm rtpm<S for the U.S.
toonomy, rhar lhese rePmesare persist.nr, and rharlhe
eoonomy shifts.,...,....., rePro<> in a way rhat cannor be
IOrecas~ Under dus ,;..·,lhe <eonomy cuntOdy 11 in 1
,..,;,.. dranoc(<nzod by e:xpansioo or tCIOOOIDIC actJ\11)'
•>lh lao pooct-=\11)' &roo1h and a low shon-rtm~IUI
iotms~ rare. bot IODJ<r·tmn Ollalm<S il< ''lnllies
«her lhan inll>tooo tallDOI bt as<fll!ly ptOJ«J«l
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rate 25 basis poiniS. resulting in an in<:rease in
the median of 13 basis poiniS.
In discussing their December forecasts. many
participants expressed a 11ew that increases in
the federal funds rate over the next few years
would tikely be gntdual in light of a short·
term neutral real interest rate that currently
was i<M'-a phenomenon that a number of
participants annbuted to the persiste~ of
low productivity grow1h. continued strength
or the dollar, a weak outlook for economic
gro111h abroad. strong demand for safe longerterm assets, or other factors- and that was
likely to rise only sl0111y as the effects of these
factors faded 0\'er time. Some participants
noted the continued proximity of short·
term nominal interest rates to the effective
10\1-er bound, e1-en Wlth an increase at this
meeting, as limiting the Committee's ability to
increase monetary accommodation to counter
possible adverse shocks to the ecouomy.
These participants judged that, as a result, the
Committee should take a cautious approach
to removing policy accommodation. Many
participants noted that there was currently
substantial u~nainty about the size.
co~ition. and t1ming of prospectio.-e fiscal
policy changes, but they also commented that
a more expansionary fiscal policy might raise
aggregate demand above sustainable leYels.
potentially necessitating somewhat tighter
monetary policy than currently anticipated.
Furthermore, several participants indicated
that recent inftation data and the continued
strengthening in labor mar:ket conditions
increased their confide~ that inOation
would 1110\'t t0\111rd the 2 percent objective,
making a slightly firmer path of monetary
policy appropriate.
Uncertainty and Risks
The left-hand column of figure 4 shows that,
for ta(h variable, a majority of participants
judged the lmls of un<:enainty associated
ll'ith their December p~ns for real GOP
grtmh. the unemployment rate. headline
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21417078.eps
Figures 3.C and 3.0 provide inform:uion on
the distribution of participants' ~iews about
the outlook for inftation. The distributions
of projections for headline and core PC~
price inflation shifted up slightly relative to
projections for the September meeting. Some
participants attributed the upward shift in
pro)CCled inllation this year and next to recent
data that sbo\1-ed somewhat higher inflation
than they had expected. A few S3W higher
inftnt1on in 2019 in conjun<:tion with somewhat
greater undershooting of the unemployment
rate below its longer-run normal level.
39
119
40
PARI 3: SUMIMRY Of !CONOMICPROI!CTIONS
Figurt lC. DiSlriburim oC participants projections for PCE inflation, 2016-19aodover the longer ruo
-,__ [l
Nullllleror penidpa~IS
2016
- ..
=~
r .
- II
-
s..o-~·-
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Non:: De6aitioos of variables and otbeaxpJaDabOnureiD the OOCeJ I.:t ~ 1.
120
MONETARY POliCY REII:JRT: fEBRUARY lOll 41
Figure 3.0. D~lributioo of par1icipan1S' projectims for core PCE inflatim, 2016-19
2016
•
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~kcpro~IIOM
- · ~ltrobuptojectto•
~r--------f-----~l _______ ,
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!
SHERYL
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-
121
42
PARI 3: SUMIMRY Of !CONOMICPROI!CTIONS
Figure 3.E. Distribution of partiaponiS' jud!l1lleniS oftbt midpoint of !he appropriate large~ 111oge for !he f<deral
fuods rate or the appropriaretargetlcvol for the federal funds rate. 2016-19and over !he IOllger run
- 2016
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Nom: De:m:titioosoCv-ariablesand olbert:q)J&~S~tioDS are in l.heootes to table 1.
122
MONETARY POliCY REII:JRT: fEBRUARY lOll 43
Fig~~re4. Uncertainty and risks in ecooaoic proj<COoos
-
Un001ainoyabooo GOP uo>lh
=
0
- IS
- 16
-1<
:n~
I
=
- :;S
I
~ r~ = :
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r,.-- - - I
- n· .
RiwloGDPuo•lh
-- ~- ~!:'::
-----1
!.J.--- ·1.1
2
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: '"" S¢p~tlllb«pojcdB
• 16
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Nort: For defioitiont of Ul'IOMaintyand risks intoooomk P'ojcctioon~ set lht boi "'Foreeastlhlctrtainly.'' Definitions l'lf
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variablesareiDtbeoOW$totable I.
123
44 PAATJ: SU><.w.RYOHCI:WO.IOCFI(()j(CIIOM
As can be seen in the right-band column of
figure 4. a majority of participants continued
to see the risks to real GOP g!OI\lb. the
uoempiOjment rate. lleadline ioftation. aod
core ioDation as broadlv balaoced: ~-e\-et
fCI\lr particip;lnts saw risks to economic
g!OI\1h and ioftatioo as \\lighted to the
dOI'oside or saw risks to the unemplo)ment
rate as weighted to the upside than in
September. Anumber of participants noted
that the prospect of expansionary fiscal
policy had increased the upside risks to
economic acti\1tyand ioftation. and a few
a~ the possibility of a reduction in
regulation as posing upside risks to their
forecasts of economic activity. Moreover.
8. Tabte2 pr<Widesestimates of lhefom•st
un<t~ainty IQr the cllao'' in real GDP, the
unempiO)mmt ra1~ and total consumer prioe inHatioo
om tbe period from 1996 throuV.20t5. At the end
of lhissummaJ)',tbebox "For«:ast Unoenainty"
di""sses !.be souroes and interp,..laJioo of uncertain~·
to the economic forecastt and explains dte approa<:b
""" to ._...,.the uncertainty and risl<s anendin: the
paniapocts'projeccioos.
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Table 2 Aw~t hiscoricll proje<tion error,..,.,
1\tm~poinb
\'a11itW
<lA•p:•W'"IlODP'
u• .,,~M«~tntr
Toui~M« ~-J
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lOll
lU
!1.7
IU
l ll
!ll
tl.4
I ll
.,,
"'
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10 ~
!II
))19
some participants judged that the recent
rise in nurl:et·based measures of mHat1on
compell$1tion suggested that d~l!Side risks
to inftation had dc<:lined.ll~~·lr, rn.:~ny
also pointed to various sources of dow11side
risk to economic actil-1ty. such as the linuted
potentia) for monetary policy to respond to
ad>e~ shocks when the federal funds rate is
near the effoctile 101\~r bound. d01111side risks
in Europe and China, a possible increase in
trnde barriers, and the possibility of a sharp
rise in financial market I'Oiatility in tbe e•·eot
that fiscal and other policy changes diverged
from marl:et expectations. In addition. some
participants pointed to f.1cto~sucb as global
disinHationary trends and downward pressure
on impon prices from further strengthening
of the dollar as sources of downside risk
to inHation.
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inflation. and core inflation to be broadly
similar to the average of the past 20 years.'
However, more participants than in September
saw uncertaintysurrounding re~l GOPgrowth,
tbe unemployment rate. or inflationas higher
than average. Manyparticipants mentioned an
increase in uncertainty associated with fi.scal,
trade, immigration, or regulatory policies as
a factor influencing their judgments about
tile degree of unc.:rtainty surrounding their
projections. Participants cited the difficulty of
predicting the size. composition, and timing of
tllese policy changes as we-ll as the magnitude
aod liming of their effects on the economy.
124
MOI'<CTARY I'OliCV RER:>Rl: fE8RUAR\' l017 45
Forecast Uncertainty
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4.7 pe<cent intheseoondyear. and0.9 to5.1 pe<cent
in the third and fourth years. The cooesponding
70 pe<cent confidence inten~ls for overall inflation
would be t.8 to 2.2 pe<cent in thecurrenl year, 1.0 to
3.0 in the second rear, and 0.9 to 3.1 pe<cent in the
third and fourth )<ears.
Because current conditions may differ from!hose
that p-evailed, on ~weage, 0\'t'f history, participants
pt'OVide ju~ as towhether the uncertainty
atladled 10 their projectioosoleach variable is gre>ter
than, smaller than, or broadly similar to typical lf\'els
oi forec.:tst uncertainty in the past, as shown in table 2.
ParticiP<l n~ also provide judgrn<.11~ as to whe-ther the
ri!lcs ID their proJections are •veighted to the up$ide,
are wcigflted to the &wmside, ot are broadly balanced.
That is, parUcipants judge whether each variable is
mO<e li~.ely to be above or below their projections
ol the most likelyoutco,..,. These judgments
about the uncerlainty and the ri•ks attending eacll
partidpanrs projections are distinct from the di•~rsity
of participan~· views about the most likely outcomes.
Forecast uncertainly is conoemed 1vith the risks
associated with a particular projection r.uher than "ith
divergences aero» a nurrber ol different projedioos.
As with realaaivity and inflation, the oudook
for the futile path ol the federal funds rate is subject
to considerable uncertainty. This uncertainty arises
pt'irmrilybecause each pa~icipanl's """'sment or
the appropriate stance of monetary policy depends
importantly on the evolution o/ real activil)' and
Inflation over ti,..,. If ecor>omic conditions evol•-e
inan unexpected manner then assessments of the
appropriate settingol the federal funds rate would
change from that poinl fonvard.
1
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The economic projections pro,;ded by the ,..,mbers
ol the Board ol Governors and the presideo~ ol
the federal Rese~·e Banl:s inform diSOJS$/ons ol
monelary policy among policyn13kers and can aid
public undffitlnding ollhe basis for policy action•
Considerable uncertainty attends these projedioos,
however. lhe economic and statistical models and
relationships used to help produce ecooon'ie iO<ecasts
are necessarilyimp.."ffect descriptions oi lhe real world,
and the future path of lhe eoonomycan be affected by
myriad urlo<ese<n de'eloprnenls and E!'tenK lhus,
in sating the Slanoe or monetary policy. partidpan~
consider not onlywhat app<ar> to be the most likely
ec:ooomic outcome as embodied in their projedions,
but aiS(IIhe ra~eof alternatiw• possibilities, the
likelihood of thEir occurring, and the potential c® to
the eoonomy should they occur.
Tallie 2summarizes the average historical accuracy
of a raoge of foreeaols, inducing those rePO<ted in
past Mcr.el<lry Policy Reporls and those prep.lred
by the Federa I Reseo;e Board's staff in advance o/
meetings ol the Federal Open Maiket Committee.
The projection error ranges shown in the table
illustrate the considerable uncertainty 3!SO<.iated
.,;th econcmic forecas~. For exa"'4'le, suppose a
participant projoru that real gross domestic product
(GOP) and toW consumer prices will rise steadily at
annual rates o/, respecth'ely, 3 pe<centand 2 pe<cenl
If the uncertainty attending !hose proJections is sin'ilar
to that experienced in the past and the risks around
the projections are broadly balanced, the nun>ber>
reported in table 2wouldimply a probability or about
70 perca>tthatactual GDf' would expand within a
ra~eof 2. t ID 3.9 percent in the wrrent )~ar, IJ to
125
47
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AFE
advanced foreign economy
BLS
Bureau of Labor Statistics
DPl
disposable personal income
EME
emerging mar~'llt economy
FOMC
Federal Open Market Committee; also, the Committee
GDP
gross domestic product
JOLTS
Job Opening5 and Labor Turnover Survey
UBOR
London interbank offered rote
MBS
mortgage-backed securities
Michigan survey
Uni>ersity of Michigan Surve~; of Consumers
MMF
money market mutual fund
01s
overnight index ~wap
ONRRP
overnight reverse repurchase agreement
OPEC
Organi7,ation of the Petroleum Exporting Countries
PCE
personal consumption expenditures
SEP
Summary of Economic Projections
SLOOS
Senior Loan Oflker Opinion Survey on Bank Lending Practices
SOMA
System Open Market Aoc<>unt
S&P
Standard & Poor's
TIPS
Treasury Inflation-Protected Securities
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ABBREVIATIONS
126
! 1.1!017
THE WALL STREET JOURNAL.
Home
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BUSINESS
U.S. Banks Report Record Profit in Third
Quarter
Institutions' profits soared and expenses moderated
iht U.S.SCD:mBOiltlilrfu ~fd~ faW10"6 :t'~d a 1 rl.ns&ntlll noo'!llfttfoeflt:I'QJ-*,ti1 F'DCs.cl.
PhO:O ASS~TED PRtss
By DONNA BORAK
Updated Nov. 29, 201610:49 a.m. ET
WASHIIiGTO!\-The nation's com merrill banks and ,.,;ng.< institutions reported al3~
rise in net inrome in tlte third quarter, hilling a record as institutions' profits soared
and expenses moderated.
lie! income at the 5.980 banks insured by the Federal Deposit Insurance Corp. rose SS.2
billion. to S45.6billion. in the tltird quarter. compared with a year earlier, acrordingto
data releasedTu~aybythe FDIC.
"The bankingindustl)' reported anolherpositi\'e quarter." said f'DIC Chairman Martin
Gruenberg. ... Revenue and net income were up from aye\lrago, Joan balances incrtas~
osset quality impro\'ed, and Ute number of unprofitable and 'problem banks' continued
to fall."
Theri~in net inconlCwasdue inpart to aSIObiJlion inC'rease innet interest income, up
9.2%from nyearearlier,and a81.2 billion gain in noninterest income. al.9~increase as
tradingrev~nue imprO\'ed at L1l'ge banks. One-timeacrountingand expense items ::tt
three institutions also had an impact on thegrowthofincome, the agency said.
hap..: ,.,....,.";; .rotn'~tck• -."'b;I'Jk!<-r:por1·t«'((tJ.f'OIIH&Ihild~:at:cr· l"~)l\.'-IS9
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VerDate Nov 24 2008
1'2
127
US.IIoobR-Rmrdl'!o"•rudo.-.·~'SJ
!ll.l12011
Stil~ Mr. Gruenbe!g cautioned banks cootinue to operate in a 'ciW!enging
envirorunent• Low interest rates for an extended period have led someinstituti0111 to
reach for yield, increasingtheirexposures to interest rate risk, liquidity risk, and credit
risk, he said.
"These challenges will only Intensify as interest rates norma111e,' said Mr. Gruenberg.
'Banks must manage risks prudently to ensure that growth is on al011g-run. sustainable
path.'
During the third quarter, ended Sept. 30, more than halfof banks reported year-aver•
year growth and less than 5'.11\ of banks said tlleywereunprclitab~. It was the lowest
pertentage of unprofitable banks since the third quarter of t997.
Communltybanks, Mlicll account for5,521 ol'the insured institutions, in particular
reported a positive quarter with tbeir net lncomerisingSS93 million, or 11.8%from the
2015 period. Community banks' net operating revenue totaled S23 billion. up &5'.11\ from
a year earlier. Loan growth was led by commercial real estate, residential mortgages and
commercial and industrial loans.
•eommunltybanks, Mlichaccount for4~ of the industry's small loans to bwinesses,
continued togrowtlleir small business loansata faster pace than the rest of the
industry." said Mr. Gruenberg.
Thenumberoffinandal institutions on theFDIC's 'problem list" shrank to 132 &om 147
the year before, tbe fewest nuni>trof institutions since the third quarter of2008. There
were two bank failures in the latest quarter.
The federal fund that protects consumers' US. bank deposits grewS2.8 biUion during
the third quarter toSB0.7billion.lts insurance fund reserve retio roseto LUI% of the
institutions' estimated insured deposits.
Write to Douna llorakat donnaborak@wsj.com
e.,.p~GoJr2017Cift ..... a...ecno..,ll'c./ID~t~
_......,..........
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na .,aw "",.,--.~-...,.Tocre~c:wn•~·,_~._•eus~neo•
128
QUARTERLY BANKING PROFILE Third Quarter 2016
INSURED INSTITUTION PERFORMANCE
Banking l.ndusltyNet Income IsS5.2 BiiUon Hightr Than a Yw EarU<r
CormnuttityBank Revenue and Loan Gr011'1 h Outpace lnduslty
Total Loan Balanc~ Rise 6.8 Percent During lhe Past Year
Net Income Registers
Strong Increase
lncreaso:l n<l interest income helped boost operoting revenues at FDIC.insured institutions
in tbe third quarter. Tbe indusltyreported net income o( S4S.6 billion for the quarter, an
increaseofSS.2 billion (12.9 percent) compared with the year before. More than 60 perc:ent of
all banks reporto:l year-over-year increa~ in quarterly earnings. Only 4.6 percentofbanks
~·ere unprofittblt for the quarter, down from S.2 peruntlhe previOui year. The ••~rage
return on assets (ROA) rose to IJOpercen~ from t.O> percent in third quarter20JS.
Net lnttr"t Maegill$
Dedintat a Majorityof
Banks
Net ope111ting revenue-the sum ofnet interest income and total noninl<rl/$1 incometObled $183.> billion, up $11.2 billion(6.5 percent). Net inl<r<$t income wasSlO biltion
(9.2 percent) higher. whilenonintert$t income rose by SL2 billion (1.9 percent). The increase
''"s attributable to growlb in inrerest-bearinga$$<!U (up 6.7 peruntover the pastl2 monlbs)
and impro\tment in the industry'uggregate net interest margin (NIM), wbitb rose !0
>.18 percent, from ).08 percent in tbird quarter 2015. Tbe NIM improwmentwas not broad·
based..~ majority oibanks- S>.S percent- reported bwer NIMs than tbe year earlier. In
addition, an accounting change at one large bank r~ulted in a sizable incteast ln lts lnrert$t income for the quarter that contributed to tbe size oflhe lmpro"ement in tbe industry's
quarttrly NIM. The rise in noninter~t income~.., driwn byaSI.I billion increase in
trading revenue and aSl.6 biiUon rise in smictng income.
txpense Gr~1h Is Modest
Total noninterestexpenses ~~re $1.1 biUion (I perunl) higher lban theJwr before. Expenses
for goodwill impairment '"re S6i8 million (97.8 rerunt) lower, wbile itemi:~td Uligation
expenses ~~re S248 million lcl$. Salary and emploJ~• benefit expenses were up S2A biUion
(5 percent). lhe avmge efficiency rotlo-noninlert$t expense as a percentage of net opel1ll·
ing te\-enue-improved to S7.5 percent in lhe third quarter, from 60.2 percent a J~ar earlier.
This~ the lo~t le\~1 for the ratio since second quarter 20t0.
Char1 1
Quarterly Net Income
Chart 2
_
Unprofitable Institutionsand Institutions With
I ncreasod Earnings
...
l!«&."iild"OOoii~ N!f
l.'-:flO(f!M1!1tt'lo:ml
10
...
I I t41 ) ) 4 111 4 1 P1 f l ) l 4 t I l 4 1 1 l
'2(11iJ
...~1'!100
Mill
!9U
lOU
:ol4
lOIS
lO"
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FDICQUARTERLY I
129
2016 • Volume 10 • ~umber ·I
Loss Prol'isions Absorb a
RisinsShar< of Rmnuts
Loan-lou provilions roseyearm·tryear fora ninth oonse.:uti,~quarteriO Sll.4 billion, a
$2.9billion (34 percenQ increase m~rthira quarter2015. Only 39 percent ofbanks reportoo
increases in their plll\;sions, while 30 percent repOrted reduced pro,ision expense>. For the
indu>lly, quarterly provi>iOns represented 6.2 ptrcent of the quarttr's net operating revenue,
up from 4.9percentthe previous year.
Charge-Offs Rise for •
fourth Construti\~ Qu•rttr
Net loan iosse!totaled SIO.I billion, up Sl.5 billion (16.9 ptrcenl) from a )WI earlier. Th~
is the fourth quarter in a row thalnetcharge-offs haw posted a )~ar·O\'t'r-yw increase.
Net cbarge-offs ofloons to commercial ana industrial {C&I) borrowers rose S946 million
{82.7 perrent~ whil<mdit card charge-<lffs were $658 million (ll4 percent) higher. Charge·
offs of rtsidential aoo commercial rea.lestate loans "~re 5371 million (39.1 percent) below
year·earlitrlevels. The average net charge-<>ffrate rose to 0.44 perren• from 0.40 percent the
year before.
hnproYcment in R~l Eslat<
Loans Ilelps RNucc Total
Cl'o ncurr<nt Loan Baltnces
Noncurrent l<lans aoo lease!-those90 days or more past-ducor in nonaccrual ttatusdecliocd forthe 25th time in the last26 quarters. falling by S2.S billion (1.8 percent) during
the thret montbsended Septtmber 30. During the quarter, noncurrent residential mort·
gage loon balances fell by $2.7 billion (3.8 per<ent~ while noncurrent home equity loons
declined b)• S386 million. and noncurrent nonfarm nonresidential real estate loons fell by
$367 milliOn ().7 perU'Ilt). These improwments e.lceeded the Sl billion increase in noncur·
rent credit cards. Noncurrent C&lloans increased fora seventh cooseculivcquarter, rising
b)•SlS4 miUiOJL This is tbesmal~stofthese,~nquarterly increases in noncurrent C&l
loans. Thea,~rage noncurrent loon rate fell from l.SO percent to 1.45 perren• the 10\\'tll 1<\~1
>iflC<)Wr-end 2007.
l,oan-tO<S R<Sm~s Po>t a
Small locrme
Sanks iocrea!ed their resen~s for loan aoo lease losses k>r a fourth consecuti\~ quarter. as loan loss pro,isionsexceeded net charge-oils. Loss reserm rose by S3i2 million
{OJ percent). At banks tbat itemize their rcsen·es, representing 90 percent of total industry
resen'l'l, the increase "~s driwn by higher reserws forcredit canllosset which rose by
Sl.7 billion (6.1 percent). In contrast with the pr~·ious se~~n quarttrs, itemized re.en·es iot
lo>se<on commercialloansdeclined, falling by sm million (2.1 percent). The increase in
industiy reserw~ combined witb the reduction in noncurrent loan balance.. cau!ed the
cowrage ratio of res«,ocs 10 noncurrent loons 10 rise from 89.2 per<ent to 91.1 percent during
thequarter.tbe higbcstlml ~n<eyear-end2007.
Chart)
Cbart4
Quarterly Net Operating Re<enue
QuarterlyLoan-l.ou Provisions
IQucw-.~l«en~:
IQwWl!~rot!"te-.,.
""""
10
10
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2 FDIC QUARTERLY
130
QUARTERLY BANKING PROFILE
Retilintd fArnings
Account for Most of
EquityGrowlh
Total equit)' capital incm!Eii by SI6J billion (0.9 percent) in third quarter 2016. Relaine<l
earnings contributed Sl S.l billion toequitygrowth in tbe third quarter, S4S8 million
(OJ pe<cent) more than a )-ear earlier. Bank$ declared $}0.5 billion in quarterly dividend~ a
S4.8 billion (18.5 percent) increase over thirJquarter 20tS. A $3.7 billion decline in accumu
latooothercomprcbeMive income limited the g~owth inequity. The awrageequity·to·asseu
ratio for the industry dcdinoo from 11.28 per<ent to 11.22 percent. At the end of lhequar·
ter, more than99 percent of all banks. representing 99.9 percentofindullry asset~ met or
excee<led tbe roqukements for the highest regulatory capital categoryasdefu!Eii for Prompt
Corrective Action purposes.
t oan Growlh
Total assm rose by $232.6 billion (1.4 per<ent) during the third quarter. Total loan and lease
balances increased by SIIZ billion (1.2 pe"ent), wbilt im~stment securities portk>liosrose
by $86.8 billion (2.S percent), and balances at F<detal Reserve banks grew by $41.5 billion
(lS percent). Assets in trading accounts dedined by S27 billion (4A pen:tnQ. Growth in
loaM was led by residential mortgage lOOM (up $28.6 billion, 1.5 percent), loans secured by
noniarm non,.siJential real estate properties (up $22.4 billion, 1.8 percent~ and creditcard
balances (up $15.7 billion, 2.1 percenQ. For lhe 12 months ended Septtrnber 30, tolalloan
and lease balances were up $590.8 billion (6.8 per.ent). The growth in securities "~satlrib·
utable to a S5SJ billion (2.9pe<cent) rise in mortgage·backoo !eCUrilie~ and a $37 billion
(8.5 pe<cent) incm.se in U.S. Treasury securitit'S. Unrealized gains on banks' al-ailab~fcc
"'"' securities fell by $5 billion (11.4 percenl~ whilt unreal11,ed gains on securities in held to·
maturit)' accounts decbned by $2.8 billion (11.7 percent).
RemainsSt,.dy
Depooits RiS< by
$271Billion
Dtposit gr01<1h "~•strong in the lhird quarter. Total deposits rose by S270.7 t>iUion
(2.2percent) in the third quarter. Deposits in dom<>tic offices increased by$259.6billion
(2.3 percent~ with balances in intmst·bearingacoountsrisingby Sl40 billion (IJ percenl~
01\d balan<e$ in noninterest·bearingacoounts up b)• Sll9.S billion (ol perce11t~ BalaOc;e$ in
consumer·oriented account! increa!Eii by$103.8 billion (2.6 percenQ, while all other domf!·
tic oflke deposits rose by Sl 56.8 billion (2.2 per.ent~ Deposits in foreignoHkes increa!Eii
by $11.2 billion (0.8 pere<nt~ Banks J'duced tbeirnondeposit liabilities by SS4J billion
(2.5 percent~ astradingaccountllabiliti<S fell by $44.4 billion (147 percent~
ChartS
Chart 6
Noncuncnt Loan RateandQua~erl)' Net Charge.OtfRate
""""
110
110
...
1!11
!;()
100
lOO
150
1!111
;o
20M Z!rJi
~ ~ ~10
Mll ZOU 2013 1014
~GIS
201-6
St.!«:!lttC
~~~ll*ll'fttbnlt~
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FDIC QUARTERLY 3
131
2016 •Volume I 0 • :-;umber 1
1\umW..ofFDIC.Insurtd
Institutions Is 5,980
The numberoiFDIC-insurtdcornmerclal bonkt and savings iruUtutions reportingquarterly
financial rt!ults li>llto 5,980 in thetbirJ quarter, from 6,058 in the S«<nd quartl'tof2016.
Therowere 71 ml'tg<rs ofinsurtd institutions. while two insur<d banks failed. No new charters were added during the quarl<'l'. Banks repor.ed 2,04M80 full-timeequivaltnt employ·
ets, an increase of4,990 from !bird quarter201~ The numberofinsurcJ irutitutionson the
FDIC's "Problem List" dedined from 147 to 132,astotalaS$tUof problem banks fell from
$29 billion toS14.9 billion.
Author.
Ross Waldrop
Senior Banking A na~st
Division of Insurance and Rese<~rch
(202) 898-39Sl
Char1 7
Char18
Twdl't-~lonlh Gro•1h Rate, Total Loansand~
..
.,
IS
·10
2006 b101 !In l009 !0::•10 !011 Nil !GU :VH !OIS 201,
S.:..«tiOIC-
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4 FDIC QUARTERLY
132
QUARTERLY BAN KI NG PROFILE
,.,... , ..
TABLE I·A. Seleoted lndk;ators, All FDIC·Insured ln•titutions•
...
fttllmmMMtt~
,.,
..
·~
>33
.,,
""'
·~
,,,.
·~..
=
...
,,.
""'
'"
....'"...,.,
,,.
....., ..."' .,,,.. ...
'" ...
...'" ..,,.... .,.,"' .,'" ...
Rttl.nontqOII_yN
>19
C«t(.UOf'l'fftOrimol%}
NW"Wffl't*«S-orhf h.W t1Ut ~IO:lt$11U00
N.c<h3r~·ofl~wtNnt~
AtMI9'~"1hratt D'!
92'
,.S!
(1.4!>
OQ
-
t!<
NtCII'IItr~!Nr9"N
~OC*ilnOIIQMttpl'fenQ
~
C~,lllbris
~-.llt'Aonl
Ptf(4QJ~~oh.r""orc""' •roel.l0b>ntf%1
$.110
301
·~
311
~,, . . .'**ffi)Oitr'q
~
tSI
'"
'"
"'
'"
2lf
IW
17M
1.~
~
""'
"'m
'"...
,"'
l.i1
......
1;1'>1
... w"" ... Mn....
.... . ,
••• .,.
"" .,.
.,, "" "' ·~ "' '" '"
s
"'• '"• "'.. """ """ ''""
• • • • •
tliO
3.90
Hlmbtfol ~.,.lbcn
Ul
At~omofPtotlttn.•,fll.•wntnhiiOMJ
~ofbdtdlllstJI~
Hl.mltror-.s~td mm...,,.,.
SJO)
$.3<1
ti>S
til
19.23
0
•[~....td:tnndlttoll. .bri'fiBA.II1.
0
••nr~~t!Mc3Q. rMIOt~~*btr••opruct -'*""IOfCM1hr.Jttt.ctbUMonchu~VinQS.p~ti'I'W30.
TABLE II·A Aggregate Condition and Income Ooto All FOIC·Inoured Institutions
,__-
,.,.
""""""'
""'
(Ma'ligtrn lnmi!O!W)
Hu'nberol .....c~ rtpO!tt'q
Totlieftllky..etlhA..,_~IJ'fiNI1)
)lcf<hQrlM
""'
tol!V"
..,
too8.' !<1
$1s,IOO.II$
4)11,101
un.m
1,199.663
tOU,.aG
toffOi hOtH».U
Tot.JI~•
U$7.12'0
l0¥15ttOJI'tdtrfrultttllt
I ~ FJ!nir~ fll(lf~
Nonl~n«Y.,..III
U$9,.1Q
1.3\1>.$11
>03,~
eoo.wecj.)ft..t•wloPMtfl'
HM~t•cvitltt
c.... _
l~lbll'dwdullh
,..,_
Olhtrlon&l.-e.
~51.231
Sl
..
""""
11'.1'0
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en.~
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....,,.,
1 .~2&
1,5'6,1'..6
1.,«m,&3!
Z.0J1
1,0!12,0i1
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UIOI,tc31
t.m~
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12 FDIC QUARTERLY
140
QUARTERLY BAN KI NG PROFILE
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21417015.eps
FDICQUARTERLY 13
141
QUARTERLY BA:-I KING PROFILE
COMMUNITY BANK PERFORMANCE
Community banks a.re identltlailxued oncriteriad~finM in the PDIC's Community Batt king Study. When comparing
communitybank perfonnanct across quart.,.~ prior-quarter dollar amoun!! are based on community banks designated
in the current quarter. adjusted for mergers. Incontrast, prior·quartl'1 f"rfonnance nllios are based on community banks
designatM during the previous quarter.
Quuttrly Net Income Increases 11.8 Percent to $5.6 Billion Fromthe Previous Ytar
)let Interest tncome Riscs SI.2 Billion From 2015, Ltd by Strong Loan Growth
"'ttlntercst Marpn of3.58 P<rcent OedineS FromThird Quarter2015
Loan-Loss Provisions RiseS ISS Million From2015to S718.2 Million
)loncumnt and :-let Charge-OffRateslnaease for Commercial and Industrial Loans
Close to 60 Percent of
Community Banks lncre.st
ThcirQuart<rlyNet Income
Quarterly net Income lor tbe 5,521 community banks totaled $5.6 billion in third quarter
2016, an increaseofS592.6 million (ll.Spercent) compared with the 2015 quarter. Higher
net operating rf\·enue (the sum of net interest income and total noninterest income) helped
lift quarterly net income. wbicb was partlroffset by higher loan-los$ pt~Wisions and noointmstexpet\se. Noncommunity banks increased their quarterly net income by $4.9 billion
(13.8 percent) from third quarter201S.Ied by a few latgt' noncommunity banks. Pretax
return on assets for community bankSI•¥sl.38 percent. up 4 basis points from second quartl'1 2016 and &basis poinl3 from a ytar earUer. The numberofFDIC-InsurM community
banksdeclinoo from 5.602 in thtsecond quarter to 5.521 (down 811 with two community
bank failures.
Ket Operating Re.-.nu•
lncrnses 8.5Perctnt From
Last Year
Improvement in net interest income (up S1.2 billioll. or 7.2 percent) and noninterest income
(ur SQI3.Smillion, or 13.1 ptrccnt) belpM lifi third-quarter netoper:ttingm·enue to
m billion, a $1.8 billion (8.5 percent) increase from the pr<!l'ious year. The benefitofhighl'1
interest incomt from non 1-t<>-4 family real estate loans (up S75LS miUion,or 10.1 pereenl)
drove tbe in<rease in net interest income from the 2015 quarter' Close to67 percent of
theyeaN)\'ef year increase in noninteresl incoffit'was led by net gains on loon sales (up
$410.1million. or 3M percent).
1Nolll•too4 ftmUy rt!le!ilt~a&l.:»tDtlndlkkt<oll1!n&;:bc)tl.uaddtw:lof'll'ltlll.&nltlaod, rmibG•IIy, and 110116.rm
Molllt~tbl.
Chil11
Cootributonto theYear-Om-Year Change in lncom•
FDICI.tWm!CoouuWI'f Buk:s
Sllihs
Poiilb'tF*Ck~c
Chart 2
tid lntert.st Matgin
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21417016.eps
FDIC QUARTERLY 15
142
2016 • Volume 10 • ~ umber ·I
N<t lntenst Maf'8in
Dedinos .llodesUy
From a Year Ago
The averagt net lntereu margin (lliM) Mdine.l from 3.62 per.:tnt in third quarttr 2015 to
3.58 perctnt,asasS<'t yields decrtaled (dO\\'n >l>asis poinU) aod fuodi.ngcosts increased (up
lbouis point). NIM at community banks was 46 basis point> higher than tbatoi noncommu
nity banks. The differenct narrowed from third quarter 20!S. as NIM for community banks
decUnedand NIM for noncommunity banks improved (up 13 basi! points).
1\'onint«est El:p<nS<
lnatasos for
Community Banks
01~r the past 12 month~ noninterest e>'J>ense grew by S909.Smillion (6.4 percent) 10
SIS.! billion. Close to 70 pl'm'nt ofcommunity banks increased their nonint11rest expenS<'
from theytar before. Tbe annual i.ncteale in nonintete!texp<nse was led b)' higher salary
and emplo)·ee benefit~ which <OS<' by $676 million (8.5 percent). Ful~time employees at
community banks were 12,SSS (3 percent) higher than third quarter 2015. Thea1·erage asS<'t
per emplo)~e totaled SS million tOr the third quarter, up from S4.8 miiJion a year earlier.
Nonintemt expense as a perc<nt of net operating re-.nue dedined 10 6$.8 percent- the
lowest le\~1 since third quarter 2007.
Loan and Least Bdancos
lncruse9.4 Percent From
Third Quarter 2015
Total assets of S2.2 trillion rose by S37.S biUion (1.8 percent) from second quarter 2016. as
loon and leaS<> balances grewbySll.l billion(2.1 perctnQ.CIOJe to71 perctntofcommu·
nitybanksgrewtbeirloanand leaS<'balancMirom thepte\•iousquarter. Thelargestquar·
terly increase ~'liS among nonfarm nonresidential loans (up S9.7 billion, or 2.3 percent~
t·to-4family residential mortgages (up $6.3billion, or 1.6 percent\ construction and dml·
opmeotloans (up SM billion, or 3.6 percent~ multifamily residential loans (up$3.-1 billion,
or 3.4 percent), and comme"ial and industrial loons (up S2.4 bHUon. or 1.2 pctcent). Loan
and leaS<' oolanct~ role by $127.6 billion (9.4 percent) o,~r the pte\'ious 12 months. exct«<·
ing6.S pen:eot growth at noncornmunit)' banks. Close to62 pe"entoftbeannual increase
in loon and lease balances was led by nonfarm nonresidential loans (up S40 t>illion, or
10.2 percent~ Ho-4 family residential JOOttgages (up S22.4 billion, or 6.2 percent\ and
multifamily residential loans (up $16.5 billion, or 19.1percent~ Unused loancornmitroenu
were S6.2 billion (2.3 percent) higher than in third quarter 2015, with commercial real
estate, mdudingconstru.:tionand development, riling by $11.9 biiUon (16.6 percent).
Chart)
Cbart4
Chan~ein Loan Balanmand Unused Commitments
Noncnrrent Loan Rates forfDI~In~11ed Communi!)' Banks
-
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21417017.eps
16 FDIC QUARTERLY
143
QUARTERLY BAN KI NG PROFILE
Small Loans to 8U>in~ses
lncmse Almost 3 Ptrctnt
From the Ym Before
In third quarttr2016, small loans to businesses ofS298.3 billion rost by $1.6 billion
(0.5 percent) from the p.wiousquarter while de<:lining by $1.7 billion (0.4 percent) for
noncommunity banh1 Tbe increase at COmmunity banks was led byagricuhural produv
lion loons (up $1.2 billion, or 4.3 percent). while commercial and industrial loans de<:lined
(down $4n.J miUion. orO.S ptrcent). The 12-month increase in small loans to busintssesat
community banks (up SSJ billion,or2.9 percenO "~'led b)' nonfarm nonresidential loons
(up S3.4 billion, or 2.4 percent) and commercial and industrial loans (up $3.2 billion. or
3.5 percent). Commun.it)' bG.nks held 43 ptrcent of small loans to businesses.
l\onrurrenl Kate
Slightly more than balf(S0.4 ptrcent)ofcommunity banks rl\luud their noncurrent
loan and lease balances from seoond quarter 2016, resulting in a decline of $87.6 million
(0.6 percent~ Tbe noncurrent rate "~s 0.99 percent, down 7basis points from the previ·
ousquart<rand SS basis points below the 1.$4 percent for noncommunity banks. All major
loan categories at oommunl.ty bGnks bad l01,·er noncurrent rates compared with the pm•i·
ousquarttr exe<>pt for oommettialand industrial loans (up 1oosis point~ Rlr the past fiVe
conseculivequart<n, the noncurrent rate for oommerdal and industrialloanl\\'aS IS basis
points above the third quarter 201S rate. Tbe largest quarterly impro,~ment in the noncurrent rate "~s amongconstriiCtion and development loans and l·t<H family residential mort·
gages, with both declining by 10 basis points.
Continues to lmpr<rl'e
Net Charge· Off Rate
R<mains Relatively Stable
From the Ym Befor<
For community bankt the net charge-off rate rose by 1basis point from the p.wlous year
toO.IS )lfrctn~ for noncommunity bank~ the r<te increased by 4bash points to O.S percent
The net charge·off rate for all major loan categories at community banks impro,·ed from
third quarttr 20IS,except for commeKial and industrial loans. which rose by 17 basis points
to0.4S percent.
Author.
Benjamin Tik'\ina
Senior Financial Analyst
Division oi Insurance and Research
(202) S9S..6S78
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FDIC QUARTERLY 17
144
2016 .Volum•IO .1\umbtr •I
-·... ....
TABLE I·B. Selected Indicators, FDJC.Insured Community Banks
Rtblnoni$1M(sfY.I
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SHERYL
21417023.eps
22 FOIC QUARTERLY
149
QUARTERLY BAN KI NG PROFILE
Insurance Fund Indicators
ll\$urtd Deposits Grow by2.1 Percent
DIFResen • Ratio Rises I Basis Point to 1.18 Percent
Sm ral Changes to Assessments Began in Third Quarter 2016
Total auets of the 5,980 FDIC-insured institutions increa!OO by 1.4 percent (S232.6 billion)
during tbe third quarler of20161 Total deposits iocreased by 22 pmc11t (S270.7 billion~
domestic ofllct deposits increased by 2.3 percent (S259.6 billion), and foreign offlcedepO$·
its increased by 0.8 perctnt ($11.2 billion). Domestic interest-bearing deposits increased
by 1.7 percent ($140.1 billion~ while noninterest-bearing deposits increa!OO by 4 percent
(Sli9.S billion). For the tweh·e months ending September 30.total domesti>: deposits grew
by 7.6 percent (SSIIJ billion), 1<ith interest-bearingdeposiu increasing by 81 percent
(S627.3 billion) and noninterest·bearingdeposits increasingby61 percent (SI84A billion).
Other borrowed money increased by 7.8 percen~ securiti<!s .old under agreements 10 repurchase declined bj· 12.5 percen~ and foreign office deposits declined by 0.2 perctnt 01~r the
.arne twelve-month period.l
Total estimated insured deposits increa!OO br 2.1 percent in the third quarter of2016. 1 For
institutions existing attbe start and the end oftbe most recent quarler, insured deposits
increased during the quarter at 3,588 inllitutions (60 percent~ decrea!OO at2,371insUtutions (40 percent~ and remained unchanged at30 institutions. Estimated in~ured deposits
increased by6.4 percent a.-er the 12 montb<ending September 30,2016.
The Deposit hssurance Fund (OJ F) increa!OO by S2.8 billion during the third quarter of
2016 to S80.7 billion (unaudited). Assessment income ofS2.6 billion and a negath~ provision for insurance losses ofSS66 million were the main dri1~rs of the fund bal3nce increase.
lnterl'Ston investmenu and other mil(t!Janoous income added another $174 million 10 the
fund. Third quarler operating expenses and unrealrad losses on available-for-sate securities
reduced the fund balan:e by SS89 million. Two insured institutions, "ith combined assets
ofS88 million, failed during the third quarter. The DJF's reserve ratio (the fund balance
as a percent of estimattJ insured deposits) wu 1.18 peramton S'l'tember 30, up from
1.17 percent at june 30. 2016. and 1.1:11 percent four quuten ago.
Effecth·e April!, 201 ~ tbe depo~t insuranceasseswent base changed to awragecoD!Oiidated total assets minusawrage taoglble equity.'Table I shows the distribution of the assessment base as ofSeptember 30.2016. by institution asset size category.
Cb•nge$ in Assessments
FDIC regulatiom provide that sevtfal changes to the assessment system ue to take effu<t
beginning thequarlerafter the Dlf reser1~ ratio first reaches or exceeds 1.15 percent. The
reserve ratio surpas!OO 1.15 percent and stood at 1.17 percent on june 30.2016. Therefore.
significant changes to deposit insurance assessments went into effect in the third quarter
of2016.
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f rUikW•UStr«lkbmandConAimcrPtotto;IIODA<t.
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FDICQUARTERLY 23
150
2016 • Volume 10 • ~umber ·I
Table I
Distribution of the Assessment Base for FDIC-Insuted ln~titutions•
by Asset Size
Data as of September 30, 2016
Percenl of
A$sessmet~t Base"
A.ue!Sile
Nlllllleroi iiiSiilltioos
TOiallns6!UiioiiS
($BiLl
less Than Sl Billion
5,245
$1,111.7
87.7
1,536.9
Sl -S10 Billion
621
10.4
$10 • SSO lllllion
74
1.2
1,482.5
SSO · $100 Billion
12
0.2
741.2
Over $100 BiniOil
28
0.5
9.448.7
To1al
5,980
100.0
14.322.0
Perceotol Base
7.8
10.7
10.4
5.2
66.0
100.0
I
• Exelucfest.nSt.Wed U.S. bt~neiles ol fioc'e.gl'l b.tr.tt
·~ A\'$rage eot~soida :ed IO!al assetsfllinusavorage t-angibSeequity, With adpstme-nts tor b3nto(s b31'1l:sand Ql1~ial banh.
Decrease in Overall ASS<$Snrtnt Rates
Ol'etall initial auessment rates ~li.ned from a range of5 lxlsis points 10 35 lxlsis points to a
range ofl basis points 10 30 basis poinu beginning in tbe tbird quarltr, puC$uant 1o regul:r
tions appi'OI'ed b)' the FDIC Boon! of Directors (Boord) in February :!011 and April2016. As
a mult oilhis change. FDIC estimates tbat regular assessments~llned by about one third.
New Pricing Method for F,stoblisheli Small Bnnks
The April2016flnal rule adopted brthe Board amends the way insuranceaueismentrnlts
are calculaitJ for established small banks."The rule updates tbedata and methodology that
the FDIC uses to determine risk-based assessm<nt ralts ior these institutions to better reflect
risks and 10 help ensure that banks Ural take on greater risks pay more for depo$it insurance
than their lts$-risky counterpart&
Tbt rule revises the llnandal rnUos method used todttermintaslessmentrates ior thele
banks so that it is basa:! on a stati>tical model that estimates tbe probabilityoffailureol'"
three years. The ruleeliminalt$ r~kcategories for established small banks and uses the
financ.ial ratios method for all sucb banks (subject to minimum or maximum aS!tssment
rates based on a bank's CAMELS composite ratin8).
Changesto asSts!mentsapprored in tbe April final rule are rerenue neutr•~ thali~ they
lea1~ aggregate aS!tssment rewnue collected from small banks approximate~· tbt same as it
would have been ablent the final rule.
Table 2 shows tbe scheduleofiniti:al and total assessm<nt rateSlhatapp~· beginning in tbe
third quarierof2016. The rate schedule incO<porates both the reduction in initial assessment
rates from a rangeofSbasls poinu to3Sbasis pointstoarangeof3basis poinu to30lxlsis
points and tbt new pricing method for estabU!he>l small banks. FDIC estimates that as~ess
ment rates tOr upproximately 93 p~?rcent of small banks have de< lined with tbe adoption of
the new rate schedule.
SGtoenlly.kolalbal bl'l'¢bslhlnSIVbilion1nUf<bduttu~b«nWcfall)·l:cNfed~atlwtit.'t)ttrs.
'Mrpd,"w•'W.fPO.f?VrfJs:)'f'Jt;:&Jf'NOIO·O$-lfJJffGO~. JIISlrdf
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21417025.eps
24 FDIC QUARTERLY
151
QUARTERLY BAN KI NG PROFILE
Tabid
Initial and Total Base Assessment Rates•
lin basts points per annum)
After the Reserve Rauo Reaches 115 Percent ••
h tatli$JledS•all llanu
CAMELS C001posite
lnrnal Base Assessment Rate
Un~ured Debt Adjustment"*
Brokered DepoSit Adjustment
Total Base Assessment Rate
1or2
3
3 to t6
·5 toO
N/A
1.5 to 16
6to 30
·StoO
N/A
3 to 30
4orS
16to30
·Sto 0
NIA
11 to30
large& Hithly
C011plex lostitotioiiS
I
3 to30
·StoO
Oto 10 1
1.5 to40
'Toul bas.o usmmeftt retn IB tM ub&&do not tnclude cit-e Dtposflory IMbtu·IJon Oebt A.dpruntnt(OIOAJ.
'• Tht tCU1YO rltio fOf tho immcdift(lfv pfiOf usc»monl period mu,t•lso be I~ then2 pcr,cn.L
.-..Tho IMISCWroddobt~j.lstmont Rn£101 cx'cod the lo;~r cl Sb.sia points« SO pcrunt ot 811 iDWroddtl)OJilory iNUU1JOn'; initi.l buo.uoumcnt
R1c; tlwt,. for cxarnplo. an insurod dopoJitory inttitutjof'l with an iBitAI ktcnsoumtnt moof 3 basis pointfwill hove • ma>umumun~rod dtbl
tdjus1tn""tof 1.5 ba:$is poinU and c.4nnot hovo ttotAI b.atoaStonmont rt!O lowortban l.5 buia points.
Lnrge Blllri Surcharges and Small Bank AS5f<SIIItnt Crtrlils
In Marth 2016, tbe FDIC Board approved atlnal rule to increase the DIFto the statutorily
required minimumoi!JS rertentof estimated insuredderosits.' C<lngres~ in the Dodd·
Frank Wall Str«t Reform and C<lnsumer Prol«tion Act {the Dodd-Frank Act). increased
the minimum DIF r""n-e ratio from I.IS percent to US percent anJ required tbatthe ratio
reacl! that level by September 30,2020. Further. the DodJ·Frank Act required tba~ in setting
aSS<'Ssments,tbe FDIC offset tbeeffectofthe increase in the minimum reser\'eratiofrom
1.15 to IJS percent on lr•nks with Jess than SIObillion m assets.
To satisfy these requirements. the final rule imposes on large banks a surcharge of 4.5 basis
points of their assessment base, after making certain adjustmeots.uTbe rule prescribes that
surcharges begin the quarter after the rtse!l'e ratio first reacbesorsurpasses 1.15 percent.
Therefore, large banks"'" subject to quarterlpurtharges in addition to lower regular
risk-baled assessments beginning in the third quarter of2016. The surcha'b"" amounted to
Sl.2 billion for tbequarttr.
The FDIC expecutbat surcharges will last eight quarter~ In any mnt,surcharges will
continue tbrougb the quarter in which the reset\~ ratio fint meet.s or exceeds t.3S percem,
but not past the fourth quarter of20!8.1ftbe resen< ratio has not reached !.35 rercent by
the end of101$, a shortfall assessment will be imp<>sed on large banks to close the gap.
Small hanks wiD recti1·ecredits to offset the p<>rlion oftbeirassessments that help to raise
the rtse!l'e ratio from LIS percent to 1.35 percenL Wben the reserve ratio isat or ahol"e
l.lS percent, the FDIC "'illautomaticaUyarply a small bank's credits to reduce iU rtgular
assessment up to tbe entire amount o( the al$eSSmenl
Author:
Ke~in Brown
Sen.ior Financial Analyst
Divisionofinsuranceand Research
{202)89&.6817
1
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1
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FDICQUARTERLY 25
152
2016 •Volume 10 • ~umber ·I
Table 1-C. InS-urance Fund Balances and Selected Indicators
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and Insured DeposiiS
(S.IIiltions)
I IJ
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Table 11-C Problem Institutions and Failed Institutions
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26 FDIC QUARTERLY
153
QUARTERLY BAN KING PROFILE
Table III·C. Estinated FDIC-Insured Deposits by Type of Institut ion
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It,'"'
16,.~8)1
......
u.nt
11.5f:6.<.6l
U$bcheloff«et1Jft811*t
TotJII~•fdltljf.IIUrionJ
11.460)11
1S.&&&J5&
OO!trfDICJuurtdlmeiMK.
.......
,.....,,
3,8U;JS
91U1b
,,.,..,
,....,
115.11&
..,...,.
...,...
'lb.J'S
3U36
Table IV-C. Distribut ion of Institutions and Assessment Base by Assessment Rate Range
ONI•bditl;-30.2016 (flollt~il&.f~
Hllmbtlof
Wit......
A.lllo~l lbttiii.,_PoiM$
UO·S<IO
,.,.
Stl·l5o0
3,101
.
..... -··
'-*'ollo\11
,
75\.1000
IOOt.,S.OO
"
1S.Ot10C:O
01
M.Ol.$06
lSot-3009
0
l$
3t.014S."
QI'UI«fun3S00
""
A~~~
,_,
Sl li
lt.WO
Ull
IllS!
..."'
..,
,...,.,
..
000
"'
'"
O,U
Sl
••
...
PloiC*ltol ~l
~
1130
1JIO
$.11
.,.,.
tll
000
...
001
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SHERYL
21417028.eps
FDICQUARTERLY l1
154
20J6 • Volume 10 • ~umber ·I
Notes to Users
This puNl."1tion wtnim fioandal data aod oth~r information f'or
depo<itOI)' inllituti""' lnsur<d by tht Ftdenl D<pOSi lns11tanct
CO<pOration (FDIC). Thest JlO(es areao integr~ part of this public•
tion and pl\)\'idt iofor.,.tion r<gan!ing the CIOmp<U11binyof.,ur,·e
dot• and reporu" diffmn<es o1<r time.
Tables 1-Athrough VIll-A.
The information pmented in Talmi·A tbro<Ogh VIll-A of lh<
FDIC Quarrtrly &nbng'P.ofilt is oggrtgated for all FDICinsured
Call rq>Ort f&n. both commer<UI bri3 and laving> lnstitatiom.
Somt tables are am)•d by groop< of FDIC-lnsured inst~Uiiom
basol 00 predootin31ll
t cooo:<ntratioo. while other tab!"
"SS"S"• institutions by ...a size and 8"'81"Phl: r<gion. Quartmy
and full-rear daa are provided foutlected iodlaton. indudi"
aggrtgate condition ;~od income data. pubmaoce r.t~ coodilion
ntios, aodstruct~ dtloges," wdlas pMt dut. OOll<WTtD1,3Dd
clwg<-otTioformatioo for loans outstanding and other'"""
m,..or....
than one ollke. and tht maximum number ofollk" """at 40 in
19$Sand reachts?; in ZOIO. Tht maldmum lml ofdqxi<i~ for
3.11)' Oil< oil'JC< is su; bilion in depooib in 19$5 and $5 biDion in
d<posks in 2010. Tbt """iningg<csnpbl: liml,.ions art abobasol
on 1!13Ximums for the number ofsblte> (fixed at J) aod big< metropolhanareas (f.xed ot l) in whi.:b tbt organization mainl>im o b
Bnn<h olti«~ ,,.. bar«! on the mool re«ot <bt> from !he anooal
JW>< 30 Summary ofDqmiu Sumrthat aruvailable • the timeol
pubt<otion.
finally, tht <kllnmn <stablisb" an a.s.<et·O::< l11tlll,al$0 adju~ed
"~"''"' ovmlmt, tor rump!<. from sz;o millioo in 1985 to $1 bil·
lion in lOIO,bclowwbkb ibtlimits on~ activ1iesand g«>
g"!'ltk ""P' ate wai\'\!d, ThU lioal step ac"-iedg<s tbt faa that
111011 of th<>Se •maU barl<s that art not excludod as spe<ialty banks
meet the "'!•it<meats lor banking oaMties aod gt081'pbic limks in
a.tl)'t\'('l1t
Summary of FDIC Research Definition of Community
Banking Organizations
Tables 1-B through VI-B.
Community boola ore deoigmted 3t thel"•l oftht boOOng
The ioformationpmeoted in Talmi·B through VI·Bu oggr<gat<d
lor all FDICinsured romm<tcUI OOnb and savings instltotiom
m~ tht criteria for coromunilybrulb th• .-.re dtwloped for
the FDIC'• Communi(¥ &nkiogSrrtdy, poblisbed in D<t.mber, 20 1 ~
bttp:J/fdl:.govlrcgulatioos/rt$0Ur<n/<bV!!!!Ortl<bi-full.p<lf.
Th~ determioatkm o( .,,,-'hid! insured iwtituti()(IS m considered com·
mWJily bonb it bar«! on five $1ep<.
Th~ Mt i1ep in defining a commun~)' bart i$ to agg.regJtt aD
chartor·l"•l d.i> report«! under tach holding comranr into
a• • bonki" O!poi.z.atioo. TbisoggrcgatiooappUes both to
b~n<Nbeet tneasures and the number ond locotion ofbaddng
off<"' Under the FDIC deftoition. ~the~ o't'niu.tioo is
de>ignated as • commuolty brulk. every dtlrter reporting under thai
otgani2:9tioo ts alsorons-ide·red 3 rommWlity bank "·ben "''odiing
with data 3l the cbartet level
The s«ond step~ to exclude aD)' bonking Otf<oixJlion wbore mort
thao SO pen:eot oft01al...as are held in <ertain sp«Uity blnking
chartm. indlldiog: m.Ut a;rd '!'"iolists. ""'''""" """''"'~ &a•b.
ir.dustrial Jean comJXlnies, trust OOI'f!Jif~ Nr.ktrs' bdttks, ,_od banks
belding 10 ptr«ot or more of
in foreign offices
organiz3tX>n.
(AD chort<n under d"ignated holding companies "e <on>idered
tool..,.,
On:• tht sp«Uityo~•oi.z.ation< are rrmovecl, tht third st"'' in'"""
incI~ o~aniutioll! that engage u1 bask bonki" octiviti<s os
meosur<d by the tolalloaos·to-OSS<U rotio (gre•ter than}} perwll)
and the ntio of rore d<posi~ to assets (gcutor than SO percenl). Core
d<posus m ddlned" DOO·brok<r<d d<posos in dome>ti< olf<<S.
Wy!lsof the underl}ing data sbo-. tha thest threshold.! establbh
mesniogfullevcls olbosk le~ aod d<pOSi g>tbtriog and still
allow for adegree ofdiwrs~)' in bow lndlvid~ banb <<>ll>iN<t their
communi1y banking charters.)
ExcbSe: Anyorganilarion with:
- No loans or oo cort dtposirs
- Foreign Asset•~ Ill% oftot~""''
- Morethao 5096
in certain sp«Uityblnks. includi~
· <reditardspecialills
• consunttr nonbank ball.k$1
• u>d<lll rial loon companl<s
of""''
• lnlStcotnpani~
• bo.Un'bonb
lncltJde: All remaining bonking org.ruzatioos with:
- Tot~ assets <indtxed oil< threshold'
- Totalassets~iodaedsiJlctbmbold.•ner<:
• Loan to assets> 3316
• Cor< dopom to ossets> 5096
• More than I offict but no more than tbt indexed maximlllD
numbt:r ofoAict>S.l
, 1\umbtr oflargo MSAs •ilh oRI<es S l
• l'lllDberolstat<>•ithoil'Kes ~l
• No si"8ie offi« •ilh dqxi<it> >indexed maximwn bn10cb
deposit size.•
~ocesll<<ts.
The fou llh step ioduder otganiutioos that operote wilhio a Umited
gt081'pb~ S<ept. This limntioo of""P' is uso:l "a proxy mOISart
lor a bank's relatlonshlp approodlto bonldog. Banb that operate
within a Umlted marktl area have mort taSt i.n mAl.l38~ relation·
ships at a P<f"'mllmL Uoder this st<p. four <ril<m art appli<d
to ..:b bonki~ orgoni.zation. They indude both • minunum and
moxiroum oumberoft01al~ollic<s,omaximum lewlof
d<pOSks lilraoyooe olf.-., ""' locaJioo-bar<d
ThtlimiUoo
th• DII!Ober ofand d<posits pero&ktar<gradoall)' adju!ted upward
ovtr tlm~ For
ior ~ offie<s, banb mllSI have mort
"'<ria.
'""'lf'l<,
1¢oiiJUIOQ'IIQnbaakbnJautflullrillbi'IJful••id!limik441nlrl:r$cll11CJII
mab«W~~Il'ltfdlll-»ut>~~4rpofu.bttaotbolb.
1 AUt1$i#thrtshoidtode:xcd totqOJI$250mVIiotllll!l$Stllol $1 bill
loti. 2010.
)~1ulmam-*r oloft1..-al~lotqll.lllol01t i9&Sstld7Sioltll0.
'~Ut!dlltlllibu.&depotil sbtlt1&stdl0tquai$J.UY:Iioolt119Maa! SSY!ion
l•~l>l
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28 FDIC QUARTERLY
155
Ql:ARTE RLY BANKI NG PROFILE
Tablesi·Cthrough IV·C.
ACCOUNTING CHANGES
A"!'<nit<"' oltablts (Tables l·C duoogft JV.C) prmits compa11·
til•qoartmrc!JC• ..Wtdtoth< D<po<itlnsumOC< Fund IDIF~ probltm iNtitutiom. faitdl..,ot«i imtk" io••· ,.;,..cd FOIC.lruw<d
deposils.u wtU 3$ :wmtntnl ratt lnfonnation. Otpos~ory lnshtu~
tiooJ thm "'not in!u!tdl>y tht FDIC throogft tht DIFart not lndudtd In th< FDIC Qu.11itly B~~r.!:~r.t Prcfilt. U.S. braod!t! ofinltiutlons
beodquo~•r«i io fore~o """"""and ooo-depolit tJwt compw!i<l
'"not indudol Wll<" ocht!Wist iotlkatoi Elfoonrt l1l3dt lo®in
firvncill rqxH'ts &;,rail a..-6\'t irutiiUii:lcls. H~·C'\'fr. W$0mt CUt$,
~IDI fupo.i~ "f<llU :ut notavalbblt li>r inltkution< thatlu><cbtd
or """"~ol thrlr dwtm.
Accotl'ltinQ lew Mtasure~~ent·Periocl Adjuoents Relaled to a
Business C.O.binMioo
DATA SOURCES
Tht !Uwxid information '!'~""ring io th~ pctNi.:aOOo is ®io<d
p1'111>'111y boll tht ffi!tral r.....~ lmttlulioos W..O.O.a
Cotto.:ftmECJC..S..iui.JidR.1'<'t1Jo/Ccrodrw•.Wisc"""
(C.I RtporulandtbtOlS 11lr{rfi.....,.J Rqora..tbmltttdby
• FD!Cilmu<d dqoooilorrinlliretioos. (TFR filtn btgan llhag
c.t Rtpocu decm.•"th thtqaarttt <odiog Mar.:h Jl.XIlll Th»
• - • l<omloa aod t<!rlmd !rom tht FDIC'• Raatdl
IalontutJoo S)'IICS (IUS) dottbaot.
COMPUTATION METHODOLOGY
l'utat ............,. "'JJmdto iilt~rq'<llU."""
MsobridWy &mtldllinol-lltSiill requmdto lilt"!'<·
raft r<p0rt1. Db froll ..oodiuy lostilutioG rtpOIU Itt iodoGtd
.. t11t Qumlf &ut.ilrfPrcfilc!Jitleo. ru'!IC2111..dtodoolf.,.
~ !'o~artl!lldtforO!I)'dooN<·~olsul>
sidurydot•M!>rionllly,,,...,.rJUS1m<martmac!ttotbtOTS
Thni F"""'"'IIIJ><w torrMit cb<r e<>nforaw>Ct •ilh tht
r~anrl ~ requiremeruoltbt FFIEC c.l Rrpom.
(ll'R rum bq;ao filiog c.n Rtpom d«tive with tht quarttr
mllngM&rcb Jl.lOil)
All condlioa and ptrfo""""' rotioo "J'Itf<lll ...;pttd "•"S"Lt.,tbt""" oftbt indn-l:!..r nummtomlut$ dJvidol bj· tht own
ofindlvi:lu>l dtnomirutomlu<s. All•"" at>lli>bd•ty ~" u<td
in akubi!Jl! ptriormanct r.lliol rtpmtlllavmg< amOIIllb lot thr
ptriod ~ning-<>i·p<riod ll!l<lWlt pillS tnd-of·ptriod amount plus
any illl<rim ptriocb. <Iiiidol bj· the totalwmbtr ofptriods). For
"poding-of·intmSI" m<rg<ll, th• .,..~of tbt "'JWrtd iollitutlon(s)
nrt inr.:lU<kd in a,'t.~si.nct the )"CCll·tc>-da1t hxomt includts
the resulu or all me lied inlliutloos. No odjustmert.! arelll3dt for
·purchase occounti< mtrgtrs.. GIO'I\tb rates reprmnt tbt rtrcrnt
oge ,ru.ng,ovu all·month ptriod io totals lor itl!tilutioos in tbe
baseptrlodtot<llals for iNtitulions intbtcurrent ptri>d. Forlbt
rQIImuti~Y bank subgroup. growth
tt6«t dtaoga 0\.,
tim< in tht number aod ldtruitles ofiostitutloos d<sig""td • com
m11111ry bonb, "~..u., dWlges io tht ""''and lllbiilts. and
incomt aod
ofgroup rntlllhtn. Ualm iodi.:ottd Olbttwist.
growth nits m not odjult..t br ltlt!g<D or other cb>nga in the
'""'P"'k"" or tbt "'"""'"'!)'bulk Olbpoor.
All dJta mooll«ttd anrl pltf<llltd based o• tbt location ol tor:h
"f<ld!Jl! UlSillutloo's....., oftl.'t. Rtpontd daJ may indnde II1CIJ
"'"will
''f"""'
and~loatol001>icltoltht rq>OIIinsiastitutioa'sbomut.a~
laaddil._- Ill)' tdr.>:au """'sutelioa «<haag<
thnrdwtm,~ioaiator·~oriatu ialrutt!'"'P
,_..,_ ""''""""""' _ . thtir borntolf~a b<lwwG """"'
.....,_.... CJll_toCOI!Illlt!dalbds,ot<n~~~~~t~till
barb may<....., ooariagrinstitttti>m.
In ScJl(•mbtr XIIS. tb• fin•n<lal A<C<>utlli'l! StRl!d.lrd! Board
(FASB) bu<td Accoumir~Stondords Up<blo (.ISU) No.XIIS·i6.
"Slmplifyblg tht A@urdulg li>r M..,uren~lll Ptriod Adjustmtnt••
UnJtr Aw>wlling Standards Codillonion Tq>l< 30S,Illuu""
Combinatio01 (formtdy PAS8Stattmtrlr No.I~ I(RI. "flluln"'
Cornbirutiolll"),lftbt iniial ""'""ti'l!lo" bwin"' combinmioa
is ln<ompl<1t h)'thttnd o[tht tt('Ortillg ptriod in wbi<h the <onJbi
Mllon <X<UN,. tbt kqul:ttr rtf«tl rro'risionaJ IIIOOWilS in its 61\.111·
dal statttn""' for tbt Itt.. ~r whi<b tho
k il>:omplttt.
DwioJ tht .......,,,.... ptri>d. the "'!uirtr II rtqulrtd to adjust tbt
proo'ruo..J amouots "'OSI'iztd" tht "'!ulsiloa <lot<, •'lib • ront·
~ adjUIIm<ot 10 pdwilL to ttil«t -lllform>tM>aobtaintd
al>oul rx., and
!bot -rd uoftht "<rJisrtiOCI dote
"""''"intl
""'"'"ta"'"
tb.ot.~"-n,woddbmali<.ttdtht......,.,.r11o[rbtamOUI1U
n<<>glllrtduoftb<ilk. AJ pmttlluodtrToplcM,an""JW'ttit
rcqoutd to rtiJOOF"11\<ly adlGfl tht p<OV!IIod ........ r<a>piztd
ottht~datttottil«ttht ""'"""-"" Tosiltfhlrtht
tht adjarultalj mdt 10ptOV\Iiollll- ASl:
""""""""lor
l01~16dlll'"""tht""""-"'"'""P"'Imt)'a<collllllortltt
odjooo.D<"" A<"""""'.tht ASl: -ads TOft' M"' uqo!rua
_.,o,....,-+-atstopmisiooal.-.utlulart
idallieddunoa tht - -ptnod Ia tbt "J''Ohhlll ptriod
11-.id ·--••aredrtmtuool. l:adsrtbt ASC,tbt
"'!W"'alooll•r«.,-iothtliaaa<illswrn•a:sfortht..,.,
~ptriodtbt&oat1111111p.tfaay.~froottht
adjulta>taljiOtht!""'·ioiaoal-•tfthta.""""!Jl!fortbt
bad b«o•OIDplrttd" oltbta<qulslloo dolt.
Ia grnml. tbt .,....,.meat ptriod Ia a bu.tn<t1 combtnatloo il
th• ptnod d<r tht •:qwstloo dolt d""'t whl.:h tbt "'~""" may
adJWI rro1'11loaal ..,...., rt('Odtd f« icltt1 d'ubl• """ a<quirol.
bah~• let mumol. anrl <or»ldtl1lioa '""'ltr!td lor tbt ""!WI« br
•ill.:h tbt ln~W """""'"for tbt bwinm comlin>uon illn.."Om
rltt• a th«od o1 th< ltJ'()dl'l! r<riod In •ilkh tht combllUiioo
"'"'"· Tq>k 80S p101ldu oddrllorul guld.tnce on the mwurem<m
ptriod. wbkh shaD not a,ttd on<
from tht a..quilnion dot•.
""' adjwtm<nu to provl&io!DI amoun~ duri" thil ptri>d.
For inltkuUool thot all puN!. bwlnts1 tlllkits,., dtfintd und<s U.S.
GMP, ASU lOIS 16 b tWMlw forf1S<>I )'elrt.aod Interim ptrlrxh
wkbin thooe f11<ol ran. btghwingafter Oe.<1nbtr I ~ lOiS. For
inllltuuoru that'" not p<d>ll bwin<» onritl" (L<. U>ill art priwl<
con>f''"lts~ the ASU b t!TC\1rvt for IU<ol
btguu>lt!G ofttr
On-.mbtr IS.l016. and lnt<rln> ptriods w.hln f"'-.1 l"" btgin·
ning afttr Ottembtr IS. 2017. Tht ASU'• am•nJmer11s to Topk IIOS
should h< appUed p""Jl«lll•lr, to ad)ullmtnu ro p.,.ll\o!DI
amounts thai O«urafttr tht etfr,111• ditto[ tbt ASU. Thw. irut~•·
tioOiwlthacaloo.l"y"rl\o.;d)'tMth.t or<pcl>iio; bwlnmt1111l><S
mU!Iarply tb• ASU toaoyadllbtawnu topi\WIIioct>l altiOWilf th3l
"'"" aliu lanlW)' l,l\)16, begin~ wllh thtw C.U Rtpons for
M.ot<h Ji,l0i6.llll~utlo• ..-h aaltr>lu r<v ils<1ll )<>rth31m
rlll'>lt COflli"AAIo ...,. opply tht ASU to aayad•ustmtllb to prorisiooll.-..•
lotawy i, Mi, brpoaiag W1ll> tlW
Cal Rtpons "'Dn-ttlbtr Jl,l017. udy ~·of ASl' WIS.
16 • pclllllltd ioCall Rtpon• tiNt liA-r Ml>«a sobllal<\t
Forlllilaiooal """""'""' ......_ sboulJ .... toASl'
l01~16......,.b'omrWl<a~r.L""...~")Ir!FASB.1'!:<'
Sci."!!D!!P!s<Stnl ll>6156JI610&.
bu._,......,....,
>•"
!'""
that"""'''"
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21417030.eps
FOIC QUARTERLY 19
156
20J6 • Volume 10 • ~umber ·I
Oebt l""""eCost•
loAprillOIS.theFASBi!su«<ASU No.WIS.O~ "Simpl!f)ingthe
Pr....,tst;,n of Debe I""'oct Colt.. This ASU r«juirtS debt l<>u·
:mte costs ~S()I.iltcd with 3 r«osnUed dtb: liabilil}'IO be presenttd
as adirtd dtduaion from lhe fattamooot of tht rdated ~ lilbU·
~y.!imilartod<btdi><ounts. 1ne ASU is limh«i toth< pmtntation
of dtbc JS$u.:u)ttcosts; tbert"rt, tht f't00£nitioo and mtaSUn.'ment g~~icbD<e for >Ucb '"'~is unJfected.IJ pr<$tn!, A«OIIn~
St.ndruds Codifi<:atl>o (ASC) Subtopk SlS. 30. lnter<st-lmput.>tioo
oflllltml, rtquir« dtbo
to bt reponed on the balance
med" m ""'<t (i.e., a dtftrr<d charg<). For Call Ro:pon P•'l"""'thecosiS of issuing debt .:urrtotlpre reponed. n<t of ".:umulat«l
amonization. in 'Other -.s:
For imtkutiom that ..-e puNk bU>in"' entili<s, as dttln«i under U.S.
GAAJ>, ASU 2015-03;, eliectivt for &cal 1...,., and interim periods
•ithin theo< llsal you>. begir~ M<1 O..:trnber IS. 2015. For
exsmplt, iiJStiutions "'ith acaltll!br )'roJ fis..-'3) )'t'.ar lbat 3rc rub!'='
bwinm entifu must apply the ASU ln their Call Reports~
Mar<h 31,1016. For imt~utions tim ar< no< puNk bwinm entili<s
(ie., that are prii'Ole companies), the ASU is ell'ecti,. for As..-.1
begiMing after De"mbtfl 5,2015, •nd interim periods •itbin llscal )Ufl ~aft" Dec<~ob<r IS.l016. Thus. imtilutions •itb
acalendar).ar lb.-a! l"" that are private companies must apply
the ASU in thrir De«mbtf 31, 2016, and suh!equem quarterly Call
Ro:pom. J:.dyodoptioooftheg~~i<laoce in ASU 201>03 is perm~ted.
""''"'""'II
l''"'
Enao<dinaty~•$
lo)amouy 2015. the FASB i>su!dASU lio.lOIHI, "Simp!!f)iog
ltl'ome St•ernent Preoent•ioo by Eliminating the Concept of
Extraordio:II)' lttms." Thi• ASU diminates from U.S. GAAP th<
coo«pC of extnordioory ~""'At P"""'- ASC Subtopi< 225·20.
lo:omeSllleromt- Extnordinaryand liDIIWOIIIems (formerly
Accoun~ Prir>:iples Boord Opinion No. 30. "Ro:poning the Result>
ofOperotioos"~ r<quim an <mit)' to "''"f'lely doss~, p~mot and
disd* o:tDOrdiruuy t\>eots mitr.msactiom. An e\'tnt or tf3.Jl$3C·
lion is presutn<dto b< an ordinary 3lld usua1 ..11v~yofthe reponing
emily unless el'idenct dearly "'~'!""~ its cla&il\;ation as an "''"'"'
dioary item. Ifan twnt or tr.ansaction cururlty roms the criteria for
extroordi.nat)·<bssifntion. an institution must ~regatt the ext.raor~
dioary ittm from the rmt!ts of itsordin:II)'operatioound ro:pon the
extraotdlnat)· itt.tn in is income Sbtement as -e.xtraordinaty ltem.1
-and other adjustments. ntt ofiocome taxa.•
.>\SU 2015-01 is tff«tivt for &cal yrus. 3lld interim periods within
tho« f..,.) l'""- beginning olter De<embtr I;, 201l. Thus. for
exampi~ iml~utio.. •ith. weodilr )'W fiscal year mull begin
to apply the ASU in thcirCall Rtpom for Mar<h 31,2016. Early
ad<>ptloo ofASU 2015-01 is pennitt«l pr<Wid«i that thtguicb"'e
is appiW from tht beginning of the &cal )'eat of ad<>ptlon For Call
Ro:pon PWJX""- an imtitution with • caltndar )W &cal y.... must
apply the ASU prooptdively,lhat it, ingeneral,toe~•m• or uamactk>ns(}XUrrins afterthe<b1fo( adopciorL Hown'(:c~an itJStituzioo
•·ith • f..,.) yearothor tbao aaltodaryw maydM to awlr ASU
Jl)IS.j)l p!C>!P"1ivelyor. alttrDJtively. ~may''"' to •pply the ASU
retrospe<1lvely to all prior caltodar quarten iodudtd in tht lnstitu·
lion'• )'W·to-date Call Rtpon incorot ltaleJt>tnt thal indudes the
begiMing ofthe AS<al rear of adoption.
Afttr an im1itull¢t! adopiJ ASU 2015·01,anyNtnl ortrJJlS:t."tion
that would ha\'t Mtt tht triteria for ~I30rdiJnry d4lSSltkation
btfor< the adoption ofth• ASU should bt repon«l in 'Oth<r nooiJ>
temt income: or "Other noninttmt txptnst," » ~roprlatt, unless
tht C'\'tnl or Cian$;Ktion would othtTVtist be reportable i.n tbe income
>12temtot )AI a mull ofthe r«eol accowuing dt""Se, l""·t<>date
Third Quarter 2016 'Extmrdinary gain>. n<t' on the QBP iJ>.-ludes
only Di!<Qillinu«l operation• t!Cpfns<. A«ordin~y. comparisons
to ptrlxls prior to September2016are ~meaningful. $n-et prior
periods indud«l all Exttaordinarygainund Di><ontinu«l opera·
tions expens•) For additional information. institutioos should r<ftr
to ASU lOI 5-01, •·bidt is available at ht!rJ/.-,.w.lasb.olifup/FASB/
Pm/SectionP3!l<&<id•lli6156316498.
AccOUilling by Priv>le Cotnjtlllies b lde<diable lrla111Jiltle Asset•
in a Business Coltbinarion
lnDetemb<r20B,the FASB i>suedASUNo. 201~-13, "Actoot•ing
for ldtnti&ble Intangible Alsets in a BwioosCombination.• wltich
il aco""""" of the Private CompanyCOUD<D (PCC). This ASU
pro~ an a«OWlting alterm.th-e that ptnoits a priv,.e company,
as defm«! in [).$. GMP (3lld di><u""' in a later $«<ion of these
Suprl.,.entallmtru<tioo•),to•irnpli&lheacwuntu'S for """'in
intangible assets.. TheacrountiDg alteroatn·e appllt$ "''ben a pri\'ltt
company is required to rt<OSDiuorotherwise comi<kr the fair v~a.e
of intangible assets 3S 3 multo(ctrtain transartiom. in.:hld~ wbtn
:Jp¢)"1 the ~KqWsition lll(thod to a bwioess combi.~»tioo WK:Itr
ASC Tq>i<SOS, Bwinm Comblll3lioot(f011Dtdy FASB Statttll<ol
No> 141 (rms.d 2007~ "BusinmCombinatloo!").
Under ASU roJ4-18, • privlie rompany that elects the """""ting
alte""'h• !ltoold no looser "'"'SJliu"!"rolely from goodwill:
• Customer·rdat«l irnngihle asseu unl"' lheym copable of b<ing
$0[d or licensed ind<pendently li<>m the otherassds ofa busin"'and
• Noncomp<t~ion agretroeol$.
H<M'trtr, l:«::.\l$t mortgast strvk'ins rights and tort ~it intangibks :J.Jt rtgardtd ~apabkofbe:ingsold orlke!)$ed ilxlq.:'t'ndend)'.
a prl\'31t rompa.n)' !hat tltd& this accoUJ'lling nhtmatlvt mu.n rc.'Cog·
nize th"' intangible meb separately from goodwill. ~wly measure
thm ll fair 1-alu~ 3lld •uboequently me"ure them in O<cordar>:e
with ASC Topic 350, lol""Sibks-Goodwllhod Other (formerly
FASB Stattment No. llZ. "Goodwill and Oth" Jma"Sibk A"eb").
A prh·.ait CCifliPJn}' tba1 drctslht> :k-<0\lnli~ alttntalivt in
ASU 2014-13 ~"'must adopt the privatt company goodwiii:I('('Ouol·
ing altemativede.cribed in ASU 2014·01, •Accounting for Goodwill •
Howt\'tf, a pri\''<llt .:ompany Urn t1eds lht goodwill a"oultiog
a.~emati>< in ASU lOJ4.j)l ;, not r<quir<d to adopt the"counting
alte!ll3liw '" ldelllift:Jble inl>llgiblt ""tt in ASU 2014·13.
Apri»t• comp:my'sdecision to adopt ASU WI~· IS must b< mad<
upon tht ""'"'""'of the fint bwinmcomblrutioo (or other
traota<1ion within th"copeofthe ASU) in &cal,..., beginning
Mer Decembtr 15.101;. Theefl'e<th• date of th< pri»tecompaoys
db:ilion to adopt the accounting olttr,.tiYe lor idellli&ble int~ible
assdS depeods on tbe timing ofthat ~nt trntsactioll
lflht 6rst.lrall$3dion occun in lht private comp:my's ~l$l fuel) ye.n
btgirunng M« Ot<.,nbtr 15.201 S.lht adoption will b< effo.'livt for
that &cal re•r's aMualfioan:ial reponing period and all interim and
aWlual periods ther..fter.lfthefit>t t......aion
as..-.~
rear beginning after Decetnber 15,11116. the adqition wil b< effec.
th't in the inlerim period tb-at iodudts tbtdate oftht! lrnltsa.."t.lon aDd
suimquent irtttrim and annual periods thereafter.
Early ~L--atioo oi lhc htl<uJSibtes a«o.u)rirrgaltwtalivt is penni!.·
ted tOr any31lllualor i~erim pe:riod forwhkb a pril'3lt: comp3.D)'''
fiwncial staterom" bave 001 y<t b<en mad< available for ""''"'~
Coltomer·relat!d intangible""" and ooncornp<t~ioo agJ«mentl that ai!t"' of th< beginning of the period of adoptl>nshoold
"'""'in
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30 FDIC QUARTERLY
157
QUARTERLY BAN KI NG PROFILE
continue to b< acCOWIIed for S<pantelr from goo<!wil. l•.su<h
exis11ng iota'1;ible ""'' .oo.Jd ool b< combined •ith goodwill
Abank Q1 savln!;$ ass«"iati<>D tba( metU the prh'lte companydefinitO>nin U.S.CMPis pemtitted. 001 ootr<quired.to:>dqlc ASU2014·
18li>r Call Rtport I"''J'OS<S and 1113)' choose totarlradopt the ASli,
pro1ided I also odopt> the pm·ate company goodwill a:counti'1;
oltemati-..lfa pri;'Jle institutioo "'"" U.S. CMP fwaocbl ""''
menu and adopl> ASU 201'1-IS. it sbouldappl)•the /.SU's int..plt
asset acwuntingaltematiw io its Call Rtport io a rnaru'ltr cornistt.Ol
with its rrpot1ingofi01~ibk assets inks finaocW $btellltJts.
For addilioRII informa.lion on Ihe pth'att compaJIY a«oumitls alttr·
..u,. lor identifiablt intangible"""· imtlutions •booid refer to
ASU lOH·IS. •t>:h is avaioble at htte//www.fusb.oJK!'•piFASB/
Pas<iS<ctionPageS;dd=l 176156)16198.
Private C..pany Acclllllring Akematives
lo M.y 201 t the FU..ncW Acrountl'1; Fowt<btion,tht indcpend<JC
pri>at< '"'or "'i"nitllioo
lor tht M<rsigbt ofthe FASB.
approved tbttstablisbtnt!ll <>i tht PCC t<> itnptO\•tthe pro..*t:Ssof!tf·
ting acoountiog standards lor prlv>lt OOIDJ"lni« The PCC is cb:uged
with working jointly with tbt FiiSB toddermioewbether sod in
"''hat dr.:umstaoca to provide alttrD3~\'t rK<Jgnilion. me-asurement.
disdll$ur• dilplay, elf«U-.dale,ondtmnsilioo gullao« for pri1'Jlt
companies. rtpo~ undtr U.S. GAAP. Alttroal.h-t guida.D't ror pri·
vatt compam may indll& moditi""tiom or e:xctptk>ns tootht.J'\'ise
appliotble ai>ting U.S. CAAP stoodatds.
The banking asencie> bm coodllded that. baJil"' saving< mociation thot is a pm'3le compaoy,., deSned in U.S. CMP (as di«USS<d
io a ht-.S<ttioooftbeS< s..pr!eme••~ Instructions). orermitted
to U$t priv:tlr comp3.Il')' ~'X'OO.!tli.ng nhen~alh-n issuai b)· the FASB
wben prep~ iLSCaD R<p<>rts.
as pro~ided in 12 U.S.C.
ISJin(•)asd""ril>ed in the followi'1; S<nten,•lftheagmdes
determin< that a partkular accounting principle •'lhin U.S. CMP.
indudi~ aprivate company accountiog altero3tive. is i.o.;onsiste:nl
•ith the statutorily sp<cif•d snpervUo<y OOj«t ives. the agencies moy
pr<o:ril>un aooruntingprinciple for r<gllhloly reporting pU!J>O"S
that Is no less stringent than U.&CMP.In>~J<b " il"'lion.an imtl·
tution woold not b< pnmattd to use that porti<ubrprivatecompany
accowting altemniveorother ac00Witi'1; prin<fle •itbin U.S.
CMP for Call Rtport PIIIJ>O'"- The agencies •'llllld provide 3j>pn>
priate notkt ifthey 'ft'ttt to disallow any accoull!lng alttrtJ:ativt uodtr
themtutol)'proc&
Accounling by l'liville CollpMie$ for Goo<Mill
Onfatml)' It\ 2014,thtFAS8ios~~tdASUNo. 2014·02.
"Acoouoti'1; lor Coodwill.• •itich is aCOll$<11$11$ ofthe PCC. This
ASU g<norally penn[s a pri~>te <OffiJ"lDY to elect to omortiz• good·
will on astmgbt·lin< bosb 0'" a p<tiod of teo l"'" (or less thao ten
l""" II mort appropmt<) and apply a ~mplitled impairmtll mOOd
to goodwill In addition, IIa prh'Jle company cboosa to adopt the
AS\fs goo<i'-iU accounting ~temativ<, the 1\SU rtquir<S the priv>t<
companr to rook< an a<counti'1; pol~1· elt\iion to tnt good-ill
for impairrneal jl tilhtr l.bt ertity ltvd or the- rtpOrting uhltltwl
Goodwill mU$1 b< ""ed for impainnelt •-hen a t~<riog """'
occw< that ind>:at,.tha th•lairvolue ol an tllity(or a r<p<>rting
wtit) may be below ils carr)ing amool1.1nconua., U.S. CMP does
DOl odtetwist J"rmll goodwill to be amortized, U.tead requiring
gocxlwUI to bt tc~ed brimpairmC'~ at tbr rq»rting unitln-tl annu~
aDyand J::,tn...·cm aruutal tfSI$ in certain cirtu.mstath."'tS. Tht ASl.i"s
good•iU accollflling altermth-e, IIdt<ted by a private ooropaoy, l!
eflt<til·< prosptctlvdy lor""' good•111 reoogni1.ed in aJmualr<riods
begiMing ofier De<<rnb<s I;, 2014, and in interim periods wilhin
"''"'••ibl•
'"'q>t
aoniiSI periods b<ginning•iier ll«emb<r IS. lOIS. Goodwill exist·
iog as of the beginni'1;ofthe period o(odq>eion;, to be mortiltd
prospecth-tly O\'tr 1en )-nr$ (orless lhan trn )Un if more-apprwfi.
at<~ The ASUs<at" th<11 earlpppijcntion o(the goodwUJ a=tntlns
altemaiw is permioed fo< any anrnw or interim period for wbi<h a
pri~>te COIDJ"lny's finonciol mtemeou have not )'<l been made 3\>U·
3blt ~r issU3JXe
AbaJil or "'vings association that m«ts the pril'3le compaoy dtl\nitioo io ASU 201!-0t as dOOJssed in thefollowi'1; S<Ctiooofthese
Supplemffital hmructions (<e. a private institution). is p<rmhted.
but not required. to odqlt this ASU for Call Report PUf!lO"' and
""Y <h..,.. to early odopt the ASU. If • priv31e institution"'"" U.S.
CMP fioaocial statemenu and adopts the ASU. ~ .boold 3fll'ly the
ASlfs goodwill acco11Jlti'1; olte""'tive in its Call Report io a monner
oonsisteot '1\'itb its rtpc>rting ofgoodwill io its 6naudal st-attmtnl$.
Thus, lor tiWllplt. a pri1>te imtilutlon with aalendar Y"' fi•
colye>rtbatcb....,toadopt ASU 2014 Ol muupplytheASlh
pro>isO>m inks Dmmb<s Jl. 201S. :ondsubs<qurot quanerlyCall
Reports unless e1rly appllcutionolthe ASU "'-" dected. This •..Wd
requln the privote instoution to ~'P"• in is Dt..-.mb<s 31, 201S.CaD
Report one )<at's amortization ofgoodwill tldsting" oljanu.uy I.
2015, and the amortization olany new goodwill ro:ogniud ln2015.
For addilional inl'onnOlion oo the pri~>te company a.:tountl'1;
altemali~< fOr good•·ill, institutions sbould rtferto ASU 2014·
02, •ti<h ;, m~oble at btqrJ(I.,.-.·.fasb.<>rg["PIFASBIP!ll!L
Se<tiooP@Jd• II76156JI6198.
Oefin«ions of Private C..pany anti Public Busine.. &tity
A«ording to ASU No. 2014·0~ •Accounli'1; li>r Goodwill," a pri•>te
company is a busimss <ntity that is nota publk busiD<SS truly. ASU
No. 2013·12, "Definition ofa Public811Si""'Entity,"wbi<h•"'
is•ued in ll«emberZOil, added this term to the MasterCloswy
in the A""""till! St>ndatds Codi&atioll This ASU """that'
buslnm tr'ltit)'. s:ocb as a bank or savings Msociation.that mttt:s an)'
one of fi,. criteri> "' forth in theASU b a J"lhlic business eruity for
r<p<>rting pOrpos<S under U.& GMP,lnduding lor Call Rtport pur·
P""'· An imtitutloo thai b a puNic busimss entity is 001 permlnol
to owlY tht private COIDJ"lD)' goodwill accounting alter..til'e dis·
CUS!ed !nth< pr«eding!Ortion whtn preparing bsCaD Rtport.
For additional inlOnnation oo the &finit.ion ofa public busL'Iffl
eruity,lmtHutO>ns.oo.Jd r<f<r to ASU ZOil-12., wbkh ls avaUable at
hnp:/,..'WWiasb.orgllsp/FASB/Page/SertionJ'm&dd=
~
Reporting ~in CO¥ern•ent-Golaranteed Mortgage lt>all$
Upon Ferecfostl'e
In Ausust 2014, the FASB iosuedA<coonti'1; Stmdortb l;pdate
(ASU) No. 2014-H. "Cias<ilication ofCertain C<wernmert·
Cuanmeed Mortg•ge Loar. UJ"ll For«losure.·to add"" dh•nit)'
in practke tor howgowrnmenc.guannr«d IDOf1Meko.m ate
r«<>.W upon lon<lo!ure. The ASU updatts gullan<t contained in
ASCSubq>ic 31~10, Receiw.bl"- Troubled Deb! Re.tructuringt b1·
Creditott (formerly FASB Stattmem No. I5, •Accounting by Deb!""
nJ>:i CrtdiO<s forTroublol Deb! Re.trudurin[!!." at amtoded),
becaust U.S. CAAP pr<Violllly did not prov!& sp«if~ guidar><< on
bow to 'ot<gorize or meosuttloredooed mortgogt looru that are government g"'nntttd. The ASU d:~rili<s the conditions und<rwbkh a
trtdi1or rntlSt dtrt'l.-ognizt agovtmmttt·gua.nuuffll mortg:.~ge loan
and r~nizt astparnu ·omn r«ti\oable• upon fortdasurt (d!alls,
whtn a tttditor r«th't'S physical J>OS$t$$ion of real tstate property
collateralizing a mortgag< loon in accordaott with tbt gui<hn<e in
ASCSubtopk 310--10).
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FDICQUARTERLY 31
158
20J6 • Volume 10 • ~umber ·I
UOO<r the ASU, imtkutiom.bould dtrec<JSlliu a mortgos<loon and
r«<rd a wpante othtr rt\'"tivable upoo (oredosurt o(the real estate
cdlattral ifthe (oU~ing coodhlons are met:
• The l<:on has ago-.•tmmenl guaranttt that 6 not StparaNe from 1lw
loan bttorr lor<dOIUI<
. At tht tbne o( tOr«:IOGurt, tht institutioo hu the Uttnt to con\'t')'
the proptrty to the guarantor ..d milia daim on lh< guattnt«
and it b" tilt abi!i1y to r•:<rm undtr tbot cl.>im.
• At lhetimtoflor"lo<ur<, 3J1)' amount oflhe daim tb>t isd<termillal on th< ~ ofthe 6ir VJ!11t ofth• rod osl>tt;, fixtd (that
r.al ....t. proptrty "" "'''" appraOal '" rllf!'O"S of tbt
dum .ndtbus tht irul~ution;, liOC "'PP"<' to chaoS" in lht fair
VJ!utoftheproptrty).
Thls guidanctisappliooblt to fuDy.nd portlallygo~tmmeru
gu.r.lll\«<1 mortgog< loom pro>ided the thr« conditio"' idemilkd
aboo."t ha\'t' btm mtt.ln w..-h situatbns. tq;tOn for«burt. the stpa·
rare olher ra:ti\'able shoukl bt- mcasurN bastJ on the :UilOulll ofthe
loon hoL>nC< (principal and ha<t..,.)<xr<"td to bt rtco~tr<d &om
b.'"'
Lheguanntor.
For inllitullom that artpul:lk
<rllfle$, as dtfilltd Wld<r
US. GAAP (., discusstd in ao earlier ..,.1ion of lh<>< Suppltmtntal
lnstru<tiom). ASU 2014-14 i1<ffta.ivt for &seal yun. aod interim
ptriods within thor< &al )...,..., btgiMing aft« Otctmbtr 15. 20Jt
For t·xamplc. h~~utions -.lth a caltndar )tar tlsc:al )~.ar that art
pubUc bu!i""' entbi<s """ apply theASU In thtbCalll\qx>ns
btginning Mardi 31. 101S. Howtl'er, imt~utiom that ar< oc< publk
businm totkies (Le.. that arc prh-..le C"ompanies) art not required
toapplylhtguidm:t in ASU 2014-14 Wllu annuol p<riods eodi~after Otctmbor IS, 201S.Wldinterim p<riods btginni~afttr
D"embtr IS. 2011. Thus. institutiollSwith a "ltndar yw fa r<>r
thot mprivotecompooits mvst apply the ASU in their o..;.,nbtr }I,
lOIS. andsub<oqutm quartedyCalll\qx>JU. Eod~r ad"l(ionoftht
guidaoct in ASU 2014-14 is p<nnitttd ~the institution h., olready
adopled lht aromdmtnts in ASU No. lOIHl-1, "R.d,ril\-.,.tlon of
Re$id<ntial Rod &tat< C<>llat...Uud Con•wn<r Mong>g< Loom
bull"'"
upon Forecburt.•
For additional information. institutions should r<fer to ASU
201+ H. •ilicb h available a ht1!1<1f•......,.fa>b.org/j•p!FASB/Pagel
S.ctioo!'!st&dd•l I 7615631~!18.
ReclassifJCalion ol Residential Real Eslate Colloteralized
eons.- Mortgage !DansUpon Forecloswe
lni3Jiuary liJI4.1ht FASB O.utdAccounliri!Staodards lipd.>te
(ASl;) No.l014·1>1. "R.d..,ifkatioll ofR.iw!tnrW Rnl F.siatt
CoU3leraliud Conswner Mortgoge Low upon Fo"dosiiJ'~· to
add.re$$ dh-e-rsity in pOOKe for "'·beo certain loon receiwbla shoWd
bt derecognizal and lht real ntatecollotml r«<~SDized. The ASU
updaltd guidm:«omaintd in AccOWiting Standards Codifka1ioo
Subtopic 310.40. R.ctiv:ibk.s-Troubltd Me R"'Ncturin[!l by
Cr<dbon (k>rmtrly FASB Sl>ttmeot No.IS. "Acc<lWlting b)' Dd>tor>
and Creditors for Trool:ltd O.b< fkacructwing>."" amended).
UOO<r prior >:OOWltiJ'I! gllilbo<e. all loon r«ei»bk.s "''"red.,.
sifi<d to oth<r real fStote owotd (OREO) "boo tbt imthmion."
crtd~or. obtained ph)'ical J'O'S'SSionof tbt prop<rt)'• ..gardl"' of
•iloher k>rmal foredoelltt
had tol:tn pi:~«. The.,..
ASU darilies when omd<or Js oonsidertd to ha" "'rived pbysk:ll
possesstoo (res.ultiDg from an in-subftatn rtpoomion or lOredo
sur<) of midential ml-ecollateralizing ocowumet mortgoge
JOQo. UOO<rthe new guidano~ physical po!S<S'i<>n k>r thes< "'ideotlal ...Jt<1>!t proptrll" kconsldtr<d to haveorour<d .nd aloan
r«<ivatlewould bt rt<l.>$$ifled coO REO only upon:
P'"'""""'
• Theimtitutionob<ainiog legal tide upoo completion of a fore·
dowse even ifthe borrow""" rtdtmption ~" th3l pro>id<tht
borrow<rwhba legal rigJu fora ptriodoftlmtafttfforedosiiJ'<to
I'O<bim tbt pr~l1y br payi~ ctnain amOOJ\1> spt<if1<d b)· law, or
• The oontplttioo of adetd in lifu of fora.iosurt or similar ltgal
agrtement uDder which the borrowerconveys aD internt in the
residenti>l real ntate proptrty to the institution to ..US~' tbt loan.
Loons stcured by rod est.>t< otbtr than comwner mortg~~g< loans col·
!.ttr.~lizal br residelllial rod est>te.bould comillue to bt reclas>ilkd
to OREO wben !ht institulioa bas r«tinod ph}'skal posStSSion ofa
bor!O\\'tr•s rt.d tstatt, regardlts.s ofwhether iormal fortdosurt proc«ding> takt pla«.
For irulhutio"' tbot m ptlhlic bu!i1"" ento~~ osdtfilltd Wider U.S.
geomllyaccepted a<<OOrllingprincipl.,,ASl} 2014-0-1 beff"1iv<for
!lscal yoaro. ond int<rim p<riods within thor< !lscal )'....., btginning
a!ler Otcember 15, l<l14. For txampk. inst ~ utioos 'A'il.h a calendar
)"t.ar ~ yt.arthat art public bus11)tS.S eoti1ies m~ aprlytht ASU
ill thrirCaU R<ports btginning Mardi 31.101;. H """"·i""~u
tions thot are nc< publ.i< bwinm tntiti" art not «qUired to opply
the guidan<e in ASU 2014·C)! Wllil annuol ptriods btgiMinga&er
December IS. 20H,.ndinterim periodswitbinannwlp«iodsbtginni~ oittr December 1$, 201;. Thut, instoutions ·~a calendar year
&cal)"1rtb>t moot publkbiUillmtntities must'f'l'lythtASU
in thtlr De<tmbor 31. 101;. and sui>l<q11t01 quantrly Call R<ports.
Eaditr odq>tlon of tht guidm:e in ASU 201 4-0·l is ptrmitted.
Em~;., CJQ eltct to opply the ASU on eaber a modit\td retrospe<m·e
transition~ or aproopt\iil't uamilion ba<ls. Appl)ing the.o\Su on
o proopt\1n~11Wilionbasis !hoold bt Jess oompl"' for innitufio"'
than appl)'ing lht ASU oo a modilkd ret""fl"li'• ttwiion basis.
Und<r tht prospoctiw transition method. an irulitmion mould apply
tht newguidancttoall instances •·here <"'""' pb)>>:al po!S<S'ioD
of rtslckntial rt:al t.sUte propttty rolbter.dizitlgtonsumer mortgagt
loons tb>t occur aft" the dote <>fadoplion of the ASU. Und<r tht
modilkd "'roop«<lv< tr.wiion mttbod. an lmtitmioo should apply
arumulativt-effect adjustmt'Jt to midtntial oonswntr mortg:agt
[.,..and OREO exist~ as ofth•btginoing oftht annuol p<riod
k>r •i>.\:h tht ASU b tft<cth<. As a result oladopli<t~ tht ASU on a
rnodilkd rd""Jl<''h• basis..,., redassifled from OREO to loons
d10uld bt m..,urtd ar tht ar~ing volue oftht"" "'~' ar the date
of odoption wlill< as•tt• mbssilltd &om loam to OREO !OOuld bt
me3$.Uitd at the lower of the Det amount ofthe Joan mriwbtt or the
OREO proptrty's &~ vn!u< 1.,. «><b to !dl at tbt lim• of adoption.
For odd~io•w iok>noation, institutiom should rel<r to ASU 2014-0-1.
"hkil i• 3\>Uabi< at lu!p! /t-w.f>lb.org{•p/FASBJl'.gt/St~ionPags
&cid• l 17615631&19$.
True-Up lial>iliy Under FDIC loss-Sharing A,--en~
An insurtddepusitor)' instltlllion tbot acquirtsa falltd illsurtd iM.ltution may ent<r into a lo..·Wri<t~ agr«m<nt •·itb the FDIC Wider
"hi..'h tbt FDIC'S...., to absorb aporllooofthe "'- on• sptdfitd
pooloi d~ fU«l institution•s as.sttsdurms asptriA~ Lime peri«~.
lbt acquiring lnstitutk>sl cypkally rt~."''rd:s an indtmnif~ion asset
rq>r,..nring its right to rt<tivt paymtmt from th< FDIC for"""'
during the sptdlled tim< ptriod oo asstu cover«! Wldtr thelossdwing agr,.m..t
Sin« 2009. mO<t losNiwing agmments bm indii<W • IJU,.ttp
provision that may rcquiu tht acquirins instilwion 10 rrimburst lhe
FDIC ifcwnularivt IMes io th< acquirtd Jo...wre ponk>lio are ltss
than theamOWit ofioo8" <bimtd by tht instaution througbow the
loos-.baring ptried. T)pkall)', • trot-up lbbiit)' roar muh btt>ust
th• '"""~'ptr\od on tho (06$-Wrt""'' (<.g.. •iSfd !=)is
*'
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32 FDIC QUARTERLY
159
QUARTERLYBAN KI NG PROfit£
l~er than 1he period during •ilidt 1he FDIC ag"" to "imoo"'
the JC<luising ln<litution for IOSS<Son the losHbare podiOJio(<s.
fll'e)'eanl.
Coosistenl•ith U.S. GMP aod bank gu;lan<e for "Offsettifl;,"
imiMions ar< penui\ted tooft>d assru and liabililito mognized
io tbe Report of Condition wbeo a "r¢t ofsetolf' exists. Under
ASCSublopk 210.20. Balaoct :lt«t-Oili<t1ing (~ll$oedy FASB
hl!erpr<totion No. 39, "Offstning of Am<lWl1S R&ted to C<rtaw
Contracts"). iogener.U. a ~t of ..tofftldst$ when a tq'OI1illg
lostl utioo and -her pany t:~<h owes the olher dctermill>bk
3J!tounts.lbe rtp:>rtiJ' itiS1itul.ion b-1he riJ!ttoitt off ~M> amouou
eodt p>rty""" and also Intends to"' ol{ and 1he riglu ofsttofi'is
enfor<nble 01 law. B<ausethecoodliont forlhe exlsttr>:eof ar¢t
ofoffset io ASC ~op< 110.20 M<mally woold not b< md •ilh
mped to an illdtmllif"'tioo-.nd atrue-up liabaity Wlder ''""'
wring .gr«m<Dt with the FDIC. this- and liability •bould Dot b<
n<tted fO<C:oll Rtpon
Therefore, imlitutioos showd r<pOrt
lh( indenudtlcati:)nassrt gross (Lt., wi1h0U1 r~rd to any trut·up
Uabiliy) in Other Ms<u. and any trut·up liabiily In Otbtt luMhl.._
Ia addition. an insti11llion should 00: contirtue to rtpo-rt assets
cowred by I""'.Jlaring agretmtms after the "'Pintion of the Jo...
marlrlg period e~•n ifthe ttrms of the los>·wring agr«menl require
rtimbu.rsemenh from tbt imtitution tolhe FDIC for certa.inarnouots
p"""""'
du~dl•rt<Q\•ryperiod.
lndetnnifico6oo As..u andAccllllllling Slaodards Updale
No. L012·06- In0ctobtr201l. tbe FASB issutd ActOWiling
Standard! Updatt (1.$1!) L'>o. l012.(;6, "Subsequent Accounting
forao lodemnil'atioo A>s<l R«"!Jnlztd at the Acqlllshion Date
"a Rault of aGo~tnta~tnt·A.,isted Acquisiioo o{' Fimoda!
lnsti utioo," to oddr"' the •ub«<!U<ot me3$UI<Ill<llt of•• iodemoili·
cation 3$Sd fKOglli.z..>d in an :t.."qui:ril.ion o( :1 financial ins:tilution that
in<ludes"' FDIC I=.baring 'Sr«menL Thi! ASU amends ASC
Topic 80S. Business Co.mbimtioru (formerlv FASB Suttmem No.l•l
(revlsed 1007), ·ausinessCO<Obimtlons·~ ~ili<h io:ludesguidonce
applicalJ!e to FDIC.3SSisted acquis~ioos of tilled imi~Ulio""
U1.1tr \h~ ~SU. wh~n a11 i1~lbtion n:peri~net$ a change in~~
casb o.., t"P"'ed to bt ooll«ted oo an FDIC ,..,.,baring lndem·
nii'..U.oa>set b<couS<ofa<haog<inthtaoh 6o•HJ<pectedtob<
coll<cttd on the"""' co\Or<d by tht los>·.barifll ljlr«roeol tht
lnstiMion.Jlould aro>u<l forthe<hllJ\!< In dlt mw11r<me<1 ofdle
iodemnilkOiion asset oo 1he13m< bo.sis as the change In dle amu
"''*"to lndtmnlintioa. Any amortl.uion ofchangts io the value
oftbe indtrnniJkation""" shoold be limited to the''''" ofthe
Ierro o( the indtmniJ>:alioo '@le<m<nt "'d the remaining life oflhe
indemnitled -~.
The ASU is et!Mh·e for ftSCal )'e3.rS. and inttri1nptrJ:xb "'ithill !host
fis<al yean.b<girutlngonorali<t Dr<emb<r 15,2011. For lnslitu·
tio,. with acalendu r•ar fucalym.lhe ASU t<l<e<tfft<t Januarr I,
201l. Early adoption oithe ASU ispennitted. The ASif• pn>~i<iOil!
.JlouJd b< aprlied proop«tiv<ly to any """ iockmllif•..OOo """
a<quised aJ\er lhedote ofadq>tiooood to iodemnilkOiion asse~
exilllngas ofthe <ht• ofadoption :uiliog from an FDIC·.,sisted
acquisiioo ofalioaoo.J iostitu!ioo.lnslitU!ioM with in<lemnift..-..
tiooasstts :uising from FDIC '""·Wring agreemeut> m expo.1ed
to adq>t ASU 2012-(16 for Call Rlport pUI]l<lkS in o:OO«J..ncr with
the efi<Ctl~t date of thl! oandard. Fot additloll>i lnfonnatioo, refor
to ASU 2012·06. "'Uabl• at bup:Joow.f.rsb.orgJ'•piFASB/Page/
Stdioi!P>gt&dd• II76156JI6l98.
Goodwilllntpairmenlle$\ing • In S<pttmb<r 2011, the fASB issutd
AcQ)Wl(ingSt>ndatds Updalt (ASU) No.lOII·OS. 'testing Goodwill
for lmpairm«ll.• toacSdm$ concerm about tbe CQSl aod compltx·
~yofthe ~good~'ill lmpainm"" tmlnASC Topic 350,
lntaogibles·GoodwiD and Otbtt (fO<merly FASB Stattmtlll 1'1<>.142.
"GoodWilond Other Inlaogibk AlS<ts). The ASU$ amendments to
ASC Tori< 350au efft<th< for annual and inlerim goodwill impair·
m<lll '""performed for f"'all""' b<glnnifll after Dr<emb<r IS.
2011 (le., foranoualorim<tim t..tsperformed0<1orafttt )anual)' I,
2012, for inst~utiorn •ith acaleodar )-.atliscal )'<2r). Eadyadoptioo
of the ASU ""permitted. Under ASU 201l·C6.an lnstitatioo bas
thtoption offim """'ing qualitative facto, to determine wh<thtt
~ b lle(t.SSal)' to pr.rfomt the IWO.JiqJ quanlilaJiw goodwdl intp~ir
melllltstde.crib<d inASCTopic350. Kalierconsldningall rde·
\'Jilt t\ttats and cit\"UUIUtances.an imtilutkm determines it is unlikely
(that is. a hkdihood of 50ptrtent orl"') that the fair valueoia
r<pOrtlrlg unit iJ lw thaolts carrying amount (il>:ill<lifll goodwil~
then thelostirutiondoet not netd to perform 1he two-stcp goodwill
impainment t"'- Ifthe imlitutioo inst<ad condudet thot the opposite
il true (thai is. II is likelyth31 the fait value of a r<po<tlog Wilt ill"'
th3ll it$ OllJ)iog amount).lhen his <tquisd toptrrorm 1he fim lltp
and, if D«""'ty. the so:ood lt<p oftbetwo·st<p goodwill imp:Ur·
mtlllt"L Uockr ASU2011~anlll$1~ution maycbOOOttOb)l"$'
thequalltati~< """melt for any r<portlng unit In any period and
proceed di"'llytoperfonoingtht 1\t<t sttpofthe "''0-stepgoodwll
impairment ttst.
Accot.nting for Loan Participaliom • Ameoded ASC Topk 860
(fO<merly FAS 1661 modified lbtcrherio that must b< mct In order
fora traoskr ofa portion ofa fUWJ'ial as.set. sLKh a$ a loan plrtnpalion. toquaJifyfouale :t«<Wlting-.,krto pJt\'louslypllblisbed
Q<tMkrly B•rrkir.g Profiie nold: hltp:/,.._.Hdis.sov/gl!p!201 hoar/
gbpnothto~.
Other·Than·T.,.porary ..painlent • ll'ltto tbe &It value ofan
ioveslmtol in an individual a'11iW>k·for.,.Je"' hdd·lo-m:rlurily
S«urity i$lm dun ils 00$1 ba.sb.,tht lmptitmtot is titbn- wopont)'
orolher·tlwHtmporary. Tht 3JDOWII oithetota!olher·than·ttmpor.al}' lmpai.rmtru !flat~ to<rtdit loss muss bt ~ind in eunif~Ss.
but the amoont o{tmal lmpalrroem tt!ated 10 other fa.ion mwt b<
r«<gJliled in other comprehensi-. income. ntl ofaprlicablt tam.
To cletnmiot •ildherdle illljl<irmento other·than·tempO<Ory."'
ln•itutioo mu~ apply dle awli<able a<ooWltifll guldaoc.-r<fer to
pr<Yiow!ypubli>bed QMMUrly Banting it•fot no!<" http<ll>"wS.
fdigo,·/<R>/101 lmar/gl!onothtml.
Accotrlling Slandards c.d~iclllion . r<fer to pmiously publlshed
Quanerly Banking Profllt ""'"' bnp.Joo..-;.fd~j[JW/qbp/20II!<p/
gbpnot.btml.
DEFINITIONS (in alphabetical order)
All ndttt assecs · total cash. balances dut from depos~Of)' iootJ.
tutk:ms. rTeroi:si!S, (JXrcf .SdS.. dirtct itsvtstmt(IU in rtJ.! f$blt,
i:Wt$lment it! UA."'osolidattd subS"icUari.."S. customtn' U3blliyon
""''"anc<$OUU13nding. -·hEld In t<>ding ae<ounu. ftdel'lll
funds sold,...:urilies purdta.ecJ w~h agr<tment• to ttsdL fair mar·
ket \>lutof derivatlm, prepaid cltpo<it ln•urance .,...meol>,and
olhtr3SS((s.
All other lial>~dies • baok'aliabaityoo '"''JlWlC"'Iim~ed·(ife P"'
femd st«k. aDO\\~f'Kt for esfjnl3tt.•d oft'.bmnct·sh~ crtdi bses.
talr m:uket valutofdtril·~i\w.and other lbbiliti«
Asse$$1111!111 base · eff<>-tiY< AprU I, 2011. thecltpo<it iosunnce
wtssmtni bastclw!gtdto ·a,~ragt oonsdidattd tocal a.uas minU!
awrage tangible equit)' witlun additional a<ljwtmenl to 1he ..,....
mont bose for b3Ji<tr'• baol<.and QIStndi:IJ ooih .. permitted under
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FDICQUARTERLY 33
160
2016, Volumt 10 • ~umber ·I
Dodd· Frank Pr""""'IY lhe "'"'m<nt b"' "' '.......ble dtposi•'
and consis1cd ofDIF dtpo<iU (dtpo<its in>urtd by tht FDIC D<po<it
lmunnce Fund) In bank&' dom.,tk offi"' wab ctrtalu adjnstmellt&
A~ rate schedule - lniti>l b3Sl,....ment rat" lOr sm.U
iostituliom art bGscd on a comb-ination o( tioanc'-t! ratios aod
CAMELS component~· lniial nt<S for brge iost.lltiomg<D<r>lly thoot with at lean $10 bDiion In US<ts-arubo b3Sld
on CA.>.tilS compontnl nlillgs andrtrtain &:m:-ial meu:um
comblotd imo I:W'O$COrta.tds--oot for mon 1argt 1ns~.itutiom and
MOiher for the remai~ very large Institutions lhat art "ructunlly
and optratior131lycompl"' or thM poot UJJiquc dl.tlltog<S and risks
in"" o{ f.lllurt (highly compi"' instnutiom). The FDIC may take
3dditioml inforlltlt.ioo intoac<'OWlt tomakealimi«iadjwtmeot to
a largt institutioo'u~""Or«ard mWts. whkb mused to detennine a
large institutloo's ~ial b3Sl "'"""ent rat<
\\'Me risk cattgOM lor smaD iostkutiom (<x<<J" ntw ~ilu·
tior»)~<<Rdlmioatcd ell'tctivt july 1,!016. iniful OJI<Sior smaD
hl$dtutions art subjn-c to minitrultiU and n'l3.Ximwns bastd on aJ1
in>UMioo's Ct~,I!EI.S composit< nniog (Risk ""gories for large
instlMioll$ "'"eliminated in 2011.)
Thecurrent ,....m<nt nt< .tcdule b«ame elleak·e july 1.2016.
Undtrthtcurmlf Kb«luJt, initial bast 3$S(SSmtnl r11ts raJJSt
(rom 3to 30 lnsls poinu. An iostilution's totall:we8i5e$$ment rnte
maydill'or f11>m as inkial1'31< due to lhret po<Sibl• o:ljustm<nl$:
(I) l!rll«<lrtd O.bt Adluruntnt An iostitutioo'• rne may deer.,.
by up tO 5bosis poinU for Wl!fCUicddtb<. The WUKurtd <J.bt
'Od)wwentcaM<It a<«d th< (..,.roflbosbpok!tsor 50 p<n:tnt
of"' ~~ution's inllal baS< '""'ment nrte (IBAR). Thus. lor
txMnple.an ~iiUilon with an lBAR ofl bosis points •~uld have o
moxiroum Wl!mtrtd dd>l adj\l.ltment oil.; boils poino lllld could
noC havu Iota! base 3S$t$SIDtnt rate lower than I.S baii$ poUts.
(1) Ott!OSilory lostiturk>n Debt Adju.sthltllt: For iostitutio~ that
bolclloog·t"m uns«urtd <kbt Issued by &OOthtr inrurtd dtposJ.
tory ~ution, a 50 boiis point <haJi< is applied to tht amount oi
such d<b( h<ld in excmofl pt~<ent of an institution's Tier I C3j>Oal
(J) Broketcd 0.00.1 Adjustru<nt Rates forlorst in>tltutlooslhat "'
not woB capit~ilcd or do oot b"• a<ompo<itt CAMELS nting of
I or l mil)' lnmo" (noc to exceed IObalb poino) iftheir blliertd
d<po<os "'<ted 10 p<r<tnt ofdomestic d<po<ir<
The ,...ssmeru nte KhcduiHftecth• July 1,1016, iubown in the
fdl ....ingt>ble:
hai S•t M.,..,Iltwf'
-
lrlitiaiS..e
Assessment Rata
Ull$0CUr~Oet.
M,uttmcnt
Brokef\ld0$po$11
AdJU$tmef'l1
Tot318aso
Asto$&rnot'l1 Rato
... SII.III8....
CAJ«lSC.polite
"ttil
'""""
c""""..
••• ..,._
t• l
)
••• 16
6tol0
10to30
·StoO
-5100
·StoO
.StoO
NIA
N/A
NIA
Oto 10
1.5to 16
3to30
ttto30
1.Sto40
lto30
• Al~•forthtt~t!MWtlll~H*ntatnnu.,. ToulbJHUtHlNt
fltMirllmli~Ot l'l'ltlll'rNM t.ttt-.llvwybfM._.tlltMIU. . foUl but
"'*
~trxetdoMI!ttdudtltlt~wyiMOWuon6tbt:.Jdiu:stll'IIMl
" ( 1Ncbvt.J\t1 1, l<n$.1.-QtlnSlltl.JIIOI\t .Vt al50tWjt«IO l~llfY
*""'*l~•n«dorlottMMihtr...,..,.r.Jilothm11SptR«Cto
115 pttcftll
Each institlltioo is as:signtd a risl<·bosed nrte for' qu.rt•rlr """'
mttll period near the end of tht quarter followi~ tbt a$$t$Smtnt
ptriod Payment I! geomlly due on the 30<b day of the last molllh
o( thtqu.rttr following tht """meIll p<riod Supervisory rating
changes art effecth~ for asses:smet• purposes as of the: mml..lntion
tnnsminaldat~
Assets se<urdi!ed and sold - ootal ouu1aodiog prin<ip<l bolaoct
o( US<ts securitilJ«! and sold with S<rvidng rtt2incd or lllhmeller·
provi<kd credit enbarK.emmts..
Capital Pllrdoase Plogram (CPI'l - as aorroun.:td in Oaobtt 2003
under the TARP,the T"""'Y ll<p<artmeot pui<base of oonrumubtlw ptrpttual prtferrcd •ockand rtlatcd ,.,mnts that lstrm<das
Toer 1capaalO>r r<guiatorycapaol JlWI'O"' is included in "Total
tqllil}' capital.• Sucb \'1-aNanU to purebase common stock or non·
rumulatl>< pr<ferrcd otod< il$ued by publidy·trad<d bank& art
rclle(ttd as weD in "Surplus.• Warrmts to purchMtcommonsto.:k or
ooncumulativt prtferrcd stock of nlll·pubiid)'·lrndcd l»nk •ock are
cb.uiJW in a bank's bai3JI<t shtd ""Oth" IW>iiit<"
Commoo equity tier 1capdal ratio - ratio ofcommon oquity t~r I
"l'ital to risk·weigbtcd """'Common equity tier I <>pitol in<ludes
common $lOCk i.nstJwnenls and rclattd. su.rpiU$, retained wnings.
~"('Ufflulattd 01hn compubtnsh~ iBcome (AOCI), aad limitd
amowtJ ofoommon tqujly1ler l minority inltml, minus applicaNt
rtgubtory adjustmcnts :ud dMw:tions. hems that rut fu!Jy tkductlod
lrorn rommonoquityt~r I apltal indudtgcodwill. otherin!3JlSilll<
ass<ts (txcluding mortgag• strvlcing asS<ts) and «rUin dtf<rrcd tax
m-ets:; hems th3t ate s-ub}ea to limits in comroonequ.i.ty tier J a.pibl
include mortgage mvklng asS<ts, digible d&rrtd tu auet.o, and e<r·
t1in sjgnifirni im·estmelis.
Cooslruetion and dmlopotert loans - indud" loons for .U
rropert)' t)pn un:ltr construdion, as wd) asloa(lS for lard acqu.isiti<>o and dMI~m.eot
C..e • ..,ilal - common equityapital pi"' nonrumulati" perpetual
pref<rrcd llod<plus minority inter"t in coosolidatcd subsidiar;.,
It$$ goodwill and «he inrhgiblt inlar~il:ft 3$$ds. Tht amoWll of
digible intangibles (including "rvl:lng rigi>U) induded locoree>pl·
tal is llmticd in ac<crdaoct witb SllJ"rvi>ofy upito! r<gulation<
Cost o! fur•ling earning assets - total interm expense poid oo
deposits and other borrOI\·td moDe')' 3$ 3 pth."t!Ugt or;a~~rase e:JIDingWtt<
Cttdil emancelleots - t«hniqU<S wbmbyacompanyattemr• to
rtduu tbe<rtdit risk of~s obligllliom. Crtdit rnhancemtr.'lt may be
provided by athird porty (external ertdD tnhaocement) or by the
originator (intenul crtdit ntban-:~melll~ aod mort than ODt-t)pt o(
ttlhaocemeot may btassodattd wltb ag_hWl tssuaoce.
Deposit lnsuCliiK:e f»nd (Difl- the Bar* (BIF) and Sa>lngs
Associarion (SA!F) lnslltall<e Funds""' merged in 2006bj· the
Fcdml Deposit '"""'"" Rtform Act to form the DlF.
Oeriva6ves nocionala11ollll - the ootlorul, or coruractual. amounts
of ckri\'ativ"
lhe lm! olimdvement in th< l)jl<S of
dtri\'atiVd Lrn.OSa..1ioN :and art not a quantification ofmarktl risk or
crtdit rbk. }\()(.ional amounts rtpre$tnt tb~ amounts wtd to c.akubte
contractual <osb fto•> to bt exdlangcd.
Deoivatives crtdit OCJ~italtnl aooourt - th< &it \Oiueoflhe derh>tivt
plus an adddioual amowt for pctonti:ll "-""credit "'JJIlUlf bas«! 011
lht ootionalatnO<llll, tht r<mainlng maturity and ~'P' ollheoomract
"!'"""'
Thtudlltl'9ft1ll'IN'II I O'!ibnupo~ntJol abrgu'l$btUbon·•
~~ battlafurmabnogt«U~t~ad!uta"*ltsi.
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Yl FDIC QUARTERLY
161
QUARTERLY BAN KI NG PROfiLE
Oeriv1tives transaction ljpeS:
Ftnurt$ and forward colltracts - concncts inwhkh lht buytr
agrees to pwdlase and the seDer agrees to ..U..r a'!""&!
lirturt dat~ a 'J><(if~tquant~yofan w!deriylng vari.lb!t or indtx
ala'!""llWprictOr)idd. Theseoontmtsexl• foravari<tyof
"""'bl" or in<lk"' (tnditioml ogri<Uitur.d or physi<al oommod·
•itt. 3S wtllas nu:rtn>."ie:J and in1emt r:Jtn). Futures contra.:ts are
staodardiltd aod are tradtd on organiltd txcha~ '1\·hidt $d.
Iimas on <OOOI<'!"rtY mclit apoou" foiWlrd rontrods do noc
ha\'t $1aoda.rdi:ud ttnm and art 1faded ewer tbt COiltlter.
Optio• C4nlfiC/$ • COOlrA"'s in wbi<b dtt buy<r a<quim lbt right
to buy from Of sdJ to anolh" party some 'J"<l!W amOWll ofan
w!dtrlyillg variabl< or illd<x at asb<td prke (su\kt prkt) dwi~
a ptriod or onalp<clf.ed fututtdate.ln retwo forrompt,.tlon
(such as aftt Of premium~ The seller Is ob~ated to purdw< or
sdJ the vuiabltor index at the dlscretionoftht bu)'<Ofthe
CODiract.
$WIIflS • oblig;ltioos l><lw«n two pam.. to exdt~ aS<ries of
cob a.,., at periodic inten•als (!<ttl<m<nt dates). for aspecified
ptriod. 1Dt tub flO"i\1 ofa swar art either tbctd. or determinrd
for ncb settltm,.t dale by mult~g the qu.nt<y (oodonal
priodp31) ofth• undtri)it'!l »ri.lble or index by sp<>.ified rtf<r·
etl<t rn.tt$ orprkt$. E.xctpr for currt.ncys""·.aps, the ooctonal principal is used to cakulale
payso<OS bulls not mbang<d
OerM!tives tllclerlying risk exposure- tbepotenti>le"'""ure<har·
acttrlled by dtel<Vd oll>lnks' eooceotnllon ill parti<Ubr undorl)ing
imtrumtrus., in gt:ntral Etposurt C3J\ mult from markt1 rhk. cmi!t
ri$k. and openlioo~ risk," wdlas, inter<~~ r.tl< ri$k.
0011estic deposits to total assets- total dom~tk off"ICe ckposil$ as
a ptr«lll of tot>I....U on aeonsolidat<d ball•
Earning assets - all1oans and other iuvt$lmtllU that ea.rn inte-mt or
divldendlncom<
Efficiency ralio . Nooiotete<t aptOS< I"' amorti2alion ofilllangible
assets 8$ arer..:e.nt of net intert$t iocome plm ooointerest iocome.
This ratio mcas.u.ru the rroportion of nd operating mrmu.ql.ha1
:ue aboorbed by Ol'<rhead '"~'<"'"· oo that • lo-o·<r value in<li<ates
greattfd!kitocy.
Estinated insured deposib - in gtntr.d, insured dq>osia arc toul
dom<Ok dq>os<s mlnus "timattd unlnsured deposill. B<g'mnl~
Mmh 31,2008. for imtitutions that 61tColl Reports, imurtd deposits'" toto! ""'!able dq>osit> minuse<tim;lted unimureddepooi~.
Bq;lnningSq'1embes 30.2009. u•ured depooil> indudedq>osbs in
accowis of SI00.000 to $2;0,00(1 that are cowred by a t<mpo"')'
irxre.ase in tbe FDIC~ $bndard ma~usn deporit insurance amQU.l)l,
(S~IDIA~ The Dodd·Fnnk \Vall Su.,r Rtform atd Coosumtr
Prot«tioo Act tnacted on)ulyll, 2010, toarl<ptrm>nent tbt stan·
dard maximumdtposh inswancumoont (SliDIA)of$150,000.
Also, tbt Dodd-Frank Act am,.<led the Feder.d Deposit llllUI1ntt
A\1. t<1lodude ooninlem:t·btari!l lrausactioo a«owlHUJ new
l«Dpor.uy dq>osit imllt.lB't acrowt at"Of)'. AD funds hdd in
noninl:erm-bearq tr.lllS3ttion 1KC()W)U wm hilly insur~ "itbout
limit, from O..:.mbtt 31,2010, th.oogb Do:trDber 31, lOll.
railed/misted institutions . anlO!litulion faib wb.. regulator<
tal<e roll!d ol the imtitution. placing tbe alStlund llol>iliti" Into o
bridgt bonk ron,.tv.ttonbip, rectwmltip, or :mothtr hnltby iwtl·
tutio11 This action m~rtqui~tht FDJCtoprovidt fundstorortr
1~. An institution Dde6ned as ~aMtrted• "''hen the institution
«mainsoptoand rwi\u ;wistance iD order to continue ope~iog.
'"b
Fair Value . theval..ti<>nof variow """ andli>bilitles on the baJ.
we sht<~-includi~ tndiog.,..~ and liabillti<o, avalla!J!t.for-ult
SKUritl"' loans hdd for salt, assets and llabiitiu accowtled fot
under the &ir volut optioo, and foredOS<d
"'''"-il\"'1'..,the use
of fair""""' Ouri~ periods o(matkd "'""the fair volues of aome
lioandal illstrumtw and nonlinaociol ....u moy dedi..,,
FHLB advances - .n borrow~1 by FDICinsured imtitutioos from
the Ftd"'l Home leon BankS)st<rn (FHtB) . ., reported brCaD
Rtport l1l•"· and byTFR flit" prlot to lta...:h 31,2012.
Goodwill 111d othe< irlangibleo - inta~i~• alStl! include sen•idng
risbts, purdt>sed credit curd ttlation.<hlp<. and othtt W.mif..ble
intangib!t '''"' Goodwillb dtea<t!S of the pur<bost pn.-eowr dte
lair tnarktt \'alut of lht nd a$$dS acquirtd.lcs:s substqutnt impair·
mtDI adj<tstm<DI< Other uu•ngible alStls art r<rordtd at falr \olu~
Jt.s subsequ<OS ~<rly amortizati<>n and impalrmttl adjustment•
l.oMs secured by real eSillte . illdudes bomt equityloaos.junlor
Utos S«urrd by I 1 fumi!y mldeotial proptrtiet, and aD otber low
secured by real ......
l.oMsto individuals • illducks out.u.nding crtdi cud bolances aod
other $t<Urtdaod UllK\."Ufed ~r l~m.
l.ong-t!rm mels (» yeonl- loans aod dobt ~«Uritle$ wilh remain·
illg maturities 0)' rtpridng itlrtrvab of0\'tr fh.·t ytars.
MaxiiiU• creel~ exposure - the nuximum rontm..iu:.tl credit
t:q>O$u.rt rtmtining u.Ddtr rcoourst arrt:ngtnttnu and other 5tlkr+
pro,;ded credl enhatXtmtnO provldtri by dte rtpOrti~ bonk to
S«uriti:za1ions..
MOitgage-backed SOCIIKieo • <trtlfKater of patfidpati<>n in pool!
of rtsideDiiAL111«1g'S"and«&ter.diud mortgogeoblig;ltions
Issued or gu:arantetd b)·goverrunttt·.sroosortd or privatttnltr·
pris<s. Also..,. "S<<wi iet." hdOI\'.
Net chargHfts • total loans and ltastl <hatged off (relllO\'td &om
balanct sbeot t.-':1"'' of uncollt<Ubllay).l"' amounu r<C<I\'ntd on
looos and ;,..., previou~y charged oli
Net n erest margin . thedift'ertoct b<lweeo inttmt and cl'l'lidtnds
01rotd on lolffiSt·~ alStls and int<rat paid todtpositor"nd
other cr«iitms. fXPress«< as aptrctntagtof awrage earning assets.
No adjustmeott art made for interest i.Jx:ome that is t-ax exempt.
Net loans to tO!> Iassets - loaos and lease finaocing n<eivabltS. II<\
of WlW1led iocomt, allo"n<e aod rtS<NtS. as a per<eol oftotal
assd.s on 2 comolid.ltcd b3$i$,
Net operating illC01Jie - iB."'C''Ie txcludltJS dJKrtlioMr)' lrnnsactiom sucb as g:iliu (or IC4$($) on the $!I.e oliavot$Untnt $«urillt$ aDd
txiraordinll)' item.s. locol'llf taxts$ubtracttd (rom q>frating iD:ome
ba\• been adju1ttd to tl<.:ludt the portion appllcabk to S«uriti<s
gains (orlossto).
Noncurrent.,.eu • the sum ofloa.,, J....., dobt SKUritie.t, and
otbtr assets that att 90 days or more past due. 011lo nona.:-crual Shtus.
Nonc111ent loans& leases - the swn of""""andkases90 da).or
mort past due, and"""" and le"" in
status.
Number of instillJiioos reportii'Q - lbe number ofimtitutioiiS dtot
actuaDy fled a fw.mcial rtporl
New reporters · imwed inoihltionsliillg ~erlyl\nancial rtpO<U
lOrtbe ftn~timt.
Other borrowed funds - fedenl hmds purdo"'d.•«umes .old •ith
ogrements to repu!<hast,dtmand notes isiUtd to the u.S. Treaswy.
FHLB
other bo.-ed money, mortgag< indobtedn""
"'"' "rual
ad'"""'
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162
2016, Volumt 10 • ~umber ·I
ob~os un<kr "!'itaiU<d )...,., and u.di~ liabilili<>.l•" revalu·
axionbm:onas$tU bcldintradblgac('OUnts.
Other real e11111e owned - primarily l'oro:k>s<d prop<ny. 0\"'1 and
indirect itt\'t:Stm~ in rtal estMt \'tllurt:s art txcludtd 1'ht a.mou.m
;, re6ro<d oa ofvaluatioo aii""'3J>."<~. For ln~kutiom 1!1.1 fit a
Thrift Fi••nciol Rtpcn (TFR), the valuation allowrux• •ubtrnct<d •i>o
incl.W.. :ollo•·anc" for other repo!Sm<dm<ts. Abo,l'or TFR lite"
the componeots ofother real estate O\\'oed ate reported gtoS$ of \'alU·
atioo all..-.o"" (I'FR lilen beg>n liliog Call Rq>o<ts effroivewith
lhequartermdingMnch 31. 2011)
l'ercenl ol institutions with earnings gains- the P"""' ofiostilu·
lbns that Uxrt'J$ed their net income (or decrnsed thtir loss~) com·
partd rotht samt ptriod a yearnditt.
"Problem· instiiOOons - leder.J r<glllatofi "'ign a<OmJ'O'ile rating
to each fiiDnciallnstitulioo, bo$td upon an cv:olu.tion offinancial
atldoper.1tional crite-ria The ratingls based on aKale of I to Sio
ascending ol"\kr ofwpervi5or)' con:ern. •probk;m • institutions art
thost instiiUiioos wkb lio.OOal. opentiooal, or ma~Dg<rillweak·
• ..,.. thai rhmttn their 0011tlou<d finallCid viability. Depending
upon the dtgrttof risk and supervisory conwo, they are"'"'
e~ra ...r· <1r ·s.• The owoberand l$$dtof"problem" imtituUons
ait bo$td on FDIC compos(< rati~ Priorro M"'h ll. 2(1(6. l'or
institutions wbo«pri'"")' foder.J regu!OlOr was the OTS. theOTS
cornposilt r.tling wu uud..
RecOO"se - an aJrangtJnt!l in whit.-h abank ~taint.. in form or in
substao:e, any u<dl risl: dire.11)'or in<lm<tl)':mociatod with an
''"' il !~.a sold (In ..-cordan<c •ilb goner.Jiya<«p<..S accounting
prin<ipks) rhat e:o:eeds a pro nlll shm of the book's dalm on the
""'-If a bonk bas no claim on,...,., it h" sold, then tbe reltlllion
of any credi1 risk b rexw"-
Re....,.. for losses - rh• allowan« for loon and '''"to.... on a
coosollcbt<dbosls.
Restrudllrtd loons and leases - loon and 1,.... financing rt<tiv·
ab!a wi1h ""'"restructured from theo~ cootr¥t Exclude!
~rurtured loans and"'""' that art not in compliolnce wah the
modilkd terms.
Retained earnings • net lllCOmt Ins <3>1! div\dtods on common and
pr<ftrrod >10<1< l'or rbe rt~ period.
Return on ....U - b:ui oet incom• (including gains or losS<S oo
S«Uthi<s and <X1I>ordiJWy ~ems) as a ptt«llt'S' ofa-.rage lOt~
(consolida!td)
The bos~ yardstick ofba~'l< profdalnlity.
Return on e"'ily - bank D<t Income Oncbuling gal"' or loss" oo
s«Urilies and extraordiwry ~ems) as a percentage ofa"t~ total
"'el'
tquilyapilaL
Risk-wei;.ted asstls . ""'' adju<led lor risk·bo$td "''iW dtlioi·
li:ms "'t.kh iocludt on-Wancc--.shm II$ ..,.dJ • oft:bdanct·sh«t
iltms mul!ipUod br rlsk-•·rifltiS thai range irom "'o 10 200 p<r<eru.
Aronvtrs.ion factor is used to asslgn alxdanct Ui.M tquival<DI.
amounl for sd«tedoff·bul•n<t-shtttaccowt•.
Sewr•ie$ ·ad!Ide!"curii<s held In uading accouru Banks',.....
rill<$ portiolio< coosist of $0.-urili" de!ign>tod as "bdd·to-m31uriry,"
•l>>:b '" "J'((ftod a1 amortiud cost (book \'3/ut), and S«urili<$ d.,.
igt>ated" "availab!t-for...Jt," rtportodar falr(market)valut.
Sewr•ie• gains (lo,...)- renJilod gains (1....,) oo bdd·to-
m31urity and avallablc.for..salt $t'Curltlts, btfort ad,i~mtnl1 for
inconlt raxa Thtifr F""',c;.r Rtporl (TFR) film al5o include g>ll•
(to....) on th< ..1" of ""U bcld lor ..I<. (TI'R 6ltrs began filing
Seller's intett$1 il iml~ution' sown seeuritizations - rbt repottiog
bank"s owntrsb' intt11$1 in lorans and odltr a.utts Wt b.a\'! btel'l
S«'Uritiwi. ex«pt an inttte$.t t.lut is a form of ~"'O.ltSeor odlcr
sdle"provided mdil enb311Cemtllt. S.Otr's illttt"t' differ irom
l.ht~ks issutd to ill\'tSton by tht se..:urkizatioD structure. Tht
prin:ipahmount ofa stUdslnteM isg<nmlly <quallo the total
prill<ipol amouol ofthe pool ofm<ts inclodtd in the se<uriti:r.tion
WU<\Uie Ins lh• prill<ipal amount of thost.,..u attributablero
inYe$10rs, i.t., in tbt formo(S«Uri1i« issutd to Uwntors.
Small8t1Sineosl.ending rmd. Th< Small Busintu l<odiog FW>d
(SBLF)w.lSeno<t«lintobwinStpternbtr lQIO., Jl'rloftheSmaU
Burin"' Jobs Act oflOIO to eocoorage k-nding1osmaU bosi"""'
by pro\idlng 01pWal1oqual16od oommunily illltiiUiions •·kb"""
ofkss than SIO billion. TheSBLF Prognm io adminlrtertd by the
U.S. Tr=uy O<p3rt.meot (httyJ/•""'""wy.gov/....,w«·ctlll<r/
sbp!O!!rams/Pagts/SmaD-BusultS$-I.trullng.fund.!!!>x).
Under rh< SBLF Program. the Treasury O.partmtnt putdustd
non<ullllUIUiW pel)'<tual prtierred oo.:k &oon qu~ifylog dcpos~ory
institutions and holding companies (nthtt than Sub.:bapter Sand
mutual inst~utions). When tbil stod< bos been issued b)· a dqx<~ory
~hutioo. ~ i> rtportod as "Pe!pdual preferred ~ocl< and rdatod
$urplus..• For rtgu1atory capital p~ this noncumulaU\'t
pttpttua1 p..ten<dsrockqualiOOasacompooentofTi<r I "!'ital.
Qualilj·ing SubchapW ScoljlO<ations and mutuol lostiluti""' issue
wt$«urtd subordia.tttd ckbtnturd 10 the T~UI)' Department
throogb the SBI.f. O.posllory lrulilutions ib.u IS!ued th"'
ckberuures uport them as "Subordinattd ootts aod dlbtnlu.res.•
For r<gulatory"i'ilal P•IJ'O!"· rht deberuur« art tlipbl< for
inclusion In an lrullMion's Tltr2 caplral lo :100>rdan.."t •'orb their
primaryfodtr.J reguloto?•"''~alstan&.rds. ToJl<'.oop.!t in the
SBI.f Pros ram. an imlilutioo with out~tand!og $tcurili<s l"ued
to th• T""ury Dcp.rtmoru ut~dtr the C.pial Pur<ha!e Progoam
(CPP) '"' r<quit<d to rtfiiW!(t or It)")' in full1ht CPPsecurillts
al the time of the SBLF fundiog. Any <lU!Jianding ,.,,.,., rhat an
imlilutioo issued. to the Treasury O.p;ortm.ellt under rheCPP rtmoio
out•anding atitr 1bt mllllllkingof the CPP A<><I< through th• SBLF
Progrnm uolm the imlilulion dloom to repor<h,.. them.
Sul>chaprer Secrporalion -a Subchapter Scoopor:uioo is trtat<d
as a p3SS·through tnli)'. similar 10 a partntrsb.,_ for it&raJ incocnt
tax PWJ'OS"' It Is g<nerally 001subjt.1 to any feder.J 1noom<laxtS at
theoooporattln•l This can ba-. theeff«t of red!rdng inslilllliolll'
rqx>rtai. laxtS and kntrt3.$iog thtir afttr·tax tarai~
Trust assets - ma&d vnluc, or othtr rt.asQ~Jal:ty availalie valutor
lidu<imaod rel:atod asseltiO inclodt marl<ttoble S<CiltiOO, and
other funncial and ph)>ical """'Common Jlhyskalasset• hdd In
6du.1aryaccounts l"'lud. rod mate, <quipmtru, colle<~iblo, and
bowthrld good< Sud! fidu.'hry ....a art not iocludtd in tho......,
ofthtAnmclalimtilution.
Unearned inc,..e &contra accOUI'IIS - ...,.med lnconl< ilr CaY
RIP""' lilmonl)'.
Ullllsed loan C<MIMitments - in<ludes mdit card1;.,., bomt <quil)'
lioo. rommitmt.nts to make l03J'I$ for cooS1Juctic>n.loans st~--urtd
byc»IMitrtitl retlesta.tt,aod wlt.l$tdComlaimtmtoorlgio!tt
or pur<haseloaJlS. (Exdudtdart oommilmenu after Jun• 2003 for
originated mong.tgtloans h<ld l'or ..Jt. wbidr art:I«<ulltod for.,
d.riYatk., on tht bol.tnce sb..r.)
Yield on earning assds • toto! lntt~. dividend, and let iocome
earned on loans aod im't'$tmtnts as a ptf'tDtJgtofaveragt
tamingasscts.
Call R<pomdft<ti><wdb thequarrertodlngMarch 31,2012)
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36 FDIC QUARTERLY
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