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The Regional Economist October 2004
■

www.stlouisfed.org

President’s Message
“Those who have misgivings about today’s free trade are
right in one regard. Our safety net for those who lose
their jobs needs to be widened.”

William Poole
PRESIDENT AND CEO,
FEDERAL RESERVE BANK OF ST. LOUIS

“Offshoring”of Jobs Opens Doors to Other Opportunities
udging from the talk shows, you
would think we’re all destined to
wear Nehru jackets or saris and to
bathe in the Ganges River if we want
to continue to collect a paycheck. Yes,
some U.S. jobs are moving to India.
No, the sun isn’t setting on the
American economy.
We’ve been through the pain of job
loss many times before as employers
seek to cut payroll. What makes this
instance of “offshoring”different is that
the jobs are in service industries and
not just in manufacturing.
But, as in the past, the United States
as a whole will not only survive this loss
of jobs but thrive. If Indians are willing
to write software programs, analyze
financial reports and transcribe doctors’
taped notes for as little as one-tenth of
U.S. wages, there will be plenty of savings to enjoy. American employers will
have more money not just to pass on to
their shareholders but to invest in their
businesses—and that includes their
remaining American employees.
Meanwhile in India, such jobs are bolstering the ranks of the middle class,
meaning more Indians will have more
money to buy more goods and services,
many of which will come from the
United States. In the end, we’re
enlarging our markets. As a bonus,
we’re tapping into a new knowledge
base, one that may give us ideas we
wouldn’t have thought of on our own.
Even if you disagree with this scenario, there’s little hope of stopping it.

J

It’s another inevitable result of technological change. The catalyst this time
was the laying of fiber optic cables to
other countries in the 1990s. The current glut has drastically lowered the
cost of phone calls and data transmission to India and other low-wage
countries. Any job that focuses on
usage of the phone or computer
could conceivably be done for less in
English-speaking India—even the
jobs of our economists!
Change created by new technology
can be a scary prospect, but only if you
don’t look at the whole picture. Pessimists should remember that these fiber
optic cables—and trade, in general—
are two-way streets, enabling foreign
automakers, drug makers, bankers and
the like to start operations in this country. When critics cry out for protection
for American jobs, the public also needs
to know that such measures almost
always end up costing us as a society
more than we save. For example, it’s
estimated that we spent more than
$100,000 for every job saved in the
apparel manufacturing industry—
jobs that seldom paid more than
$15,000 a year.
Those who have misgivings about
today’s free trade are right in one
regard. Our safety net for those who
lose their jobs needs to be widened.
One study shows that only one-third
of Americans who’ve been displaced
over the past two decades found new
jobs at the same or higher pay. One[3]

fourth saw their incomes fall by almost
one-third. We should consider suggestions such as strengthening programs
that supplement these people’s income
for a transitional period, providing relocation assistance and adding training.
While these measures are being
weighed, we can all help ourselves by
embracing lifelong learning. The need
to be prepared for different kinds of
work isn’t on the horizon; it’s here.
Our communities need to invest more
in education—academic or vocational
as long as the student learns how to
think logically and communicate clearly.
Everyone needs to understand the
importance of lifelong learning for his
or her economic future. There’s no
denying that the incomes of college
grads keep rising, while the wages of
those with low skills are stagnating.
The end result of this process will
be vigorous growth of employment at
home, and the jobs will be better than
ever. We will lose jobs abroad, but they
will tend to be lower skill and lower
paying jobs. The jobs here will require
higher skills, and they will be rewarded
with higher pay. Does anyone really
want to hold on to low-skill jobs rather
than trade them for high-skill jobs?
That would be the result of protectionist
policies and is surely not the route we
want to take.

The Regional Economist October 2004
■

www.stlouisfed.org

Observers comparing the U.S. economy with the economies of other
countries often note that Americans
seem to be much more willing to
become entrepreneurs. Indeed, a recent
survey found that more than 70 percent of adult
Americans would prefer being an entrepreneur
to working for someone else.1 In contrast, the
same survey showed that only 46 and 41 percent of
adults in Western Europe and Japan, respectively, preferred being an entrepreneur. One possible explanation for this
difference is that, because the United States is an immigrant nation, its
residents have inherited their dynamism from past generations. After all,
many of those who came here had the gumption to migrate halfway
around the world in search of a better life. Not only were the distances
long, but the travel was often dangerous. This cannot be the whole story,
however, because even in Canada—another nation of immigrants—only
58 percent of adults would prefer entrepreneurship over working for
someone else.

Entrepreneurs

RED
TAPE
B Y W I L L I A M P O O L E A N D H OWA R D J. WA L L

[5]

hat sets the United States apart?
When economists try to explain
differences in entrepreneurship across
countries or regions, they typically
examine the roles of a long list of economic and institutional factors. What
they tend to find is that, while these
factors are important, they don’t tell
the whole story.2 Even if all countries
had the same economic conditions
and policies, some would still be more
entrepreneurial than others, and the
United States would be among the
leaders. The best explanation for this
finding is that there are social factors
at work that are difficult or impossible
to quantify. These social factors can
be referred to collectively as entrepreneurial spirit.
In addition, the United States has
been relatively successful in creating a
policy environment that takes advantage of this intangible, yet vital, asset.
Entrepreneurial spirit and the policy
environment are interwoven, and
policy-makers should keep in mind
that the real key to entrepreneurial
success—entrepreneurial spirit—is
already in abundance and that we
should be careful not to waste it.

W

Nearly onehalf of
Europeans
who were
surveyed
said that one
should not
start a business if there is

any risk
at all that
it might fail.

The Gap in Entrepreneurial Spirit

Policy-makers in the European
Union have been grappling with their
perceived gap in entrepreneurial spirit.
What they have come to recognize
from comparing their countries with
the United States is that it is not
enough to have appropriate laws and
regulations. After all, in many respects,
compared with the United States,
some European countries have equivalent or superior institutional arrangements for allowing entrepreneurship.
Take, for example, the Scandinavian
countries, which, as judged by the
World Bank, have among the best
institutional arrangements to allow
entrepreneurship to thrive. Despite
the favorable institutional environment, about 30 percent of Scandinavians say that they would prefer to
be an entrepreneur over being an
employee of someone else. Recall
that in the United States, more than
70 percent of adults say that they
would prefer to be entrepreneurs.
A recent survey commissioned by
the European Union reveals how
Americans and Europeans differ
considerably in attitudes toward entrepreneurship.3 For example, a much
higher proportion of Europeans than
Americans say that the idea of starting
a business has never entered their
minds. Americans also have a greater
tolerance for the risk associated with
[6]

entrepreneurship, whereas many
Europeans appear to be extremely
averse to risk: Nearly one-half of
Europeans who were surveyed said
that one should not start a business if
there is any risk at all that it might fail.
Policy Environment

Discussion of the role of government
in the entrepreneurial process should
begin by recognizing the relative
abundance of entrepreneurial spirit in
the United States. To this end, it is
useful to draw a distinction between
passive and active policies toward
entrepreneurs. Passive policies are
those meant to facilitate entrepreneurship by establishing institutions, laws
and regulations to reduce the cost of
running a business. Active policies,
on the other hand, are things such as
targeted tax breaks, subsidies and so
forth that are meant to direct resources
into particular business activities by
creating specific incentives.
Given the entrepreneurial energy
in the United States, active policies are
of relatively limited importance. The
focus has been, and should continue
to be, on ensuring that the proper
passive policies are in place to allow
entrepreneurial spirit to thrive. Basic
institutions should be in place to facilitate business transactions, and interference into how businesses actually
operate should be minimal. In writing
regulations, policy-makers should
carefully weigh the costs and benefits
while keeping in mind that excessive
interference can quash or misdirect
our greatest advantage.
A particular benefit of the passive
approach is that entrepreneurs themselves pick the most promising areas
to pursue. In contrast, active policies
ordinarily involve efforts of government to pick the winners to subsidize.
Experience indicates that governments
have a poor track record in identifying
promising new technologies. Consequently, subsidies often prove wasteful
as they direct resources in directions
that turn out to be unpromising. At
the same time, taxes that are imposed
to support the subsidies create disincentives to entrepreneurs in general.
It is not possible to outline the
entire array of policies that affect
entrepreneurship, but a few examples
can illustrate the ways in which the
United States stands out in balancing
public policy requirements with the
needs and incentives of entrepreneurs
and other businesses. First, the
structures of our fundamental legal
institutions tend to differ from those
of other countries. Second, our com-

The Regional Economist October 2004
■

www.stlouisfed.org

petitive financial system provides
entrepreneurs with a ready source of
funds. Third, we do not overregulate
our labor markets, and fourth, we have
generally lower tax rates. However,
improvements in all these areas are
certainly possible, especially with
regard to labor market and tax policies.
Opening a Business

Generally speaking, policy-makers
in the United States have done a good
job of creating fundamental institutions. A good illustration of U.S.
success is a very basic institutional
arrangement: the act of establishing
a business as a legal entity. Perhaps
surprisingly, countries differ a great
deal in terms of what an entrepreneur
must do to establish a business as a
legal entity. This rather basic step may
seem trivial, but there are significant
advantages to making it simple. Once
a business is established as a legal
entity, it gains access to the legal and
financial system, thereby affording it
the ability to borrow and to enforce
contracts through legal means. If
establishing a business is too cumbersome or expensive, potential entrepreneurs might decide to forgo their
ventures altogether or they will have
only limited access to the legal system
and to credit markets.
The typical view in the United
States is that owning a business is an
inherent right and that the operation
of the business should be left to the
entrepreneur. The simplicity of the
process to establish a business reflects
this view: In the United States, it
typically takes four days and $210 to
establish a business as a legal entity.
The process amounts to registering
the name of the business, applying for
tax IDs, and setting up unemployment
and workers compensation insurance.
Many other countries seem to view
the ownership of a firm as a privilege
to be bestowed by bureaucrats. Additionally, some countries impose regulations that take basic business and
entrepreneurial decisions out of the
hands of entrepreneurs. This approach
often leads to government micromanagement of the actual workings of the
business, even before the business
exists. It is common, for example, that
before a company is even allowed to
exist as a legal entity, its owner must:
• meet requirements for the level of
capital available to the company,
• submit detailed descriptions of
corporate rules and organization,
• obtain government pre-approval of

financial and business plans, and
• belong to a trade association.
In the course of satisfying these
requirements, the entrepreneur often
pays exorbitant fees while waiting
weeks or months for various forms
and applications to make their way
through the system.
The World Bank has catalogued the
cross-country differences in the process
that an entrepreneur must satisfy to
establish a business. Table 1 provides
these differences for 19 rich countries
—including the United States—across
four categories: the number of procedures, the amount of time to satisfy
the procedures, the costs associated
with the procedures and the minimum
amount of capital that an entrepreneur
must have on hand at the time the
business is established.
To establish a business in Japan, for
example, a typical entrepreneur spends
more than $3,500 and 31 days to follow
11 different procedures. In Belgium, it
takes 56 days and more than $2,600.
Table 1

Establishing a Business around the World
Number of
procedures

Time
(days)

Cost
(US $)

Minimum
capital (% per
capita income)

Australia

2

2

402

Belgium

7

56

2,633

Canada

2

3

127

Denmark

4

4

0

52.3

10

53

663

32.1

9

45

1,341

103.8

Greece

16

45

8,115

145.3

Ireland

3

12

2,473

0

Italy

9

23

4,565

49.6

11

31

3,518

71.3

Netherlands

7

11

3,276

70.7

New Zealand

3

3

28

Norway

4

24

1,460

33.1

Portugal

11

95

1,360

43.4

Spain

11

115

2,366

19.6

Sweden

3

16

190

41.4

Switzerland

6

20

3,228

33.8

United Kingdom

6

18

264

0

United States

5

4

210

0

France
Germany

Japan

SOURCE: World Bank (2004)

[7]

0
75.1
0

0

Greece requires that an entrepreneur
satisfy 16 different procedures and pay
more than $8,000, including $1,200 for
something called “Certification by
lawyers’ welfare fund”and $3,700 to
simply notify tax authorities that business activities are about to commence.
Two of the countries listed in the table
—Germany and Greece—require that
entrepreneurs have an amount of capital on hand that exceeds their country’s
per capita income.
In many ways, the differences
between the United States and other
countries with regard to establishing
a business reflect more than simple
differences in institutional arrangements. They also reveal a great deal
about governments’ underlying attitudes towards entrepreneurship. Also,
given that this procedure is handled
primarily at the state level in the
United States, the ease of creating a
new business provides a good illustration of how our federal system works
to our advantage. States must compete

ventures. One that has been in place
many years is the venture capital industry, which hunts for promising new
firms to finance and help manage. A
more recent innovation, dating to the
late 1970s and early 1980s, is the junk
bond. This is a high-risk/high-yield
bond that allows firms with credit ratings below investment grade to have
access to investors willing to carry higher
levels of risk in exchange for higher
rates of return. New firms have been
able to raise substantial amounts of
capital by issuing junk bonds. Following a handful of scandals in the 1980s,
junk bonds have often been disparaged,
although, in reality, they fueled a great
deal of investment then and continue
to do so today.
Labor-Market Regulations

Another area that sets the United
States apart is the extent to which the
government regulates the relationship
between businesses and their employees. There is wide agreement about

According to the World Bank, among
developed countries, employers in the
United States have the most flexibility
in terms of both hiring and firing workers.
with one another to provide suitable
business environments or risk losing
out to other states.
Competitive Financial System

Establishing a business as a legal
entity allows entrepreneurs greater
access to credit markets, access that
is denied to informal firms in many
other countries. But if credit markets
are overregulated, even legally established entrepreneurs may have difficulty financing their ventures. Recent
research by Sandra Black and Philip
Strahan has argued that the wave of
banking deregulation that began in
the late 1970s has led to increased
rates of entrepreneurship in the United
States. In the 1970s, commercial banks
faced a variety of restrictions that varied from state to state. The banks often
faced restrictions on the interest rates
that they could charge to borrowers
and pay to depositors. In addition,
the banks could not operate across
state lines and could deal only in
classic financial intermediation activities—deposit-taking and lending.
Today, most of these restrictions have
been removed.
Other financial innovations have also
led to a variety of new entrepreneurial
[8]

the necessity of some regulation to protect workers from illegal discrimination
or employer fraud. There is less agreement, however, on the extent to which
workplace regulations—including minimum wage laws, mandatory severance
pay, right-to-work laws and legislated
fringe benefits—are necessary. Overregulation of hiring, firing and working
conditions can make the labor market
too rigid and make businesses reluctant
to start up and to hire workers.
One of the reasons that the United
States has been able to generate jobs so
successfully is that we do not regulate
labor markets nearly to the extent that
other countries do. Without question,
this looser regulation provides entrepreneurs in the United States with
much greater flexibility. According to
the World Bank, among developed
countries, employers in the United
States have the most flexibility in terms
of both hiring and firing workers. In
addition, U.S. firms face by far the least
regulation of the conditions of employment. Although hiring a worker in the
United States is still a costly proposition, particularly for a small business,
for the most part these costs do not
derive directly from regulation of the
relationship between businesses and
their employees.

The Regional Economist October 2004
■

www.stlouisfed.org

Table 2

World Tax Burdens
Total tax revenue as a
percentage of GDP
(2000)

Australia

31.5

Belgium

45.6

Canada

35.8

Denmark

48.8

France

45.3

Germany

37.9

Greece

37.8

Ireland

31.1

Italy

42.0

Japan

27.1

Netherlands

41.4

New Zealand

35.1

Norway

40.3

Portugal

34.5

Spain

35.2

Sweden

54.2

Switzerland

35.7

United Kingdom

37.4

United States

29.6

SOURCE: Organization for Economic Cooperation
and Development (2002).

Examples of labor-market rigidity in
Europe are abundant, and one can
imagine the effect that they must have
on the decisions of existing and potential entrepreneurs. In Belgium, for
instance, fixed-term employment contracts are prohibited. In France, the
maximum working week is 35 hours,
and the minimum paid vacation time
is five weeks. In Germany, the mandatory Saturday closing time for retailers
has only recently been extended from
4 p.m. to 8 p.m., and stores are still
prohibited from operating on Sundays.
Many other types of labor-market
rigidities are common: Several European governments produce a list of
allowable grounds for dismissal, others
require third-party approval prior to
layoffs and most mandate severance
pay equal to several months’salary.
Tax System

Another advantage for entrepreneurs in the United States is that businesses and individuals bear relatively
low tax burdens. As Table 2 shows,
among the rich countries listed, only
Japan imposes a lower tax burden.
Taxes, although necessary to finance
public services, place a burden on economic activity. High tax rates tend to

suppress economic activity of all types,
not just entrepreneurship. But for
entrepreneurs, high tax rates create an
additional incentive that distorts effort.
A high tax burden creates an incentive
for avoiding taxes, thereby leading
some businesses into the informal
sector, where their access to credit
markets and the legal system is limited.
Again, one of the reasons that the
United States has been able to maintain its relatively business-friendly tax
policies is its federal system. Many
governmental services are provided
at the state and local level. For this
reason, state and local governments
are forced to compete with one
another to provide effective services
while minimizing the tax burden.
Causes for Concern

Although there are many ways that
the policy environment in the United
States is in good shape relative to other
countries’ policy environments, there is
still a great deal of room for improvement. Many environmental and other
regulations in the United States place
too much of a burden on the activities
of entrepreneurs, without generating
correspondingly large benefits to society
as a whole; the tax codes for individuals and businesses are, in many ways,
needlessly complicated and introduce
countless distortions to day-to-day
decision-making; and there are rumblings that we should impose new
labor-market restrictions to make it
more costly for firms to move some
of their operations overseas.
In addition, many business people
say that they are reluctant to hire
new workers because the rising cost
of health care makes it increasingly
expensive to do so. Other businesses,
including many doctors, refuse to
engage in certain activities because,
without major tort reform, they find
it too risky or too expensive to pay
for the necessary insurance.
When addressing these and other
important policy issues, it is important
to keep in mind that the source of
much of U.S. economic dynamism is
the entrepreneurial spirit that has been
instilled in Americans over generations.
We should be careful that we do not
needlessly restrict or suppress this
spirit. It is a precious resource, not
to be wasted or squandered.
William Poole is president and chief executive officer
of the Federal Reserve Bank of St. Louis. Howard J.
Wall is an assistant vice president and economist
there. This paper is based on a speech by Poole titled
“Allowing Entrepreneurship,” given March 30, 2004.
It is available on the web at www.stlouisfed.org/
general/speeches/.

[9]

ENDNOTES
1

Blanchflower, Oswald and Stutzer
(2001).

2

Georgellis and Wall (2000 and 2004)
and Blanchflower (2000).

3

European Omnibus Survey Gallup
Europe (2004).

REFERENCES
Black, Sandra E. and Strahan, Philip E.
“Entrepreneurship and the Availability
of Bank Credit.” Journal of Finance,Vol.
57, No. 6, December 2002, pp. 2807-33.
Blanchflower, David. “Self-Employment
in OECD Countries.” Labour
Economics,Vol. 7, No. 5, September
2000, pp. 471-505.
Blanchflower, David; Oswald, Andrew;
and Stutzer, Alois. “Latent Entrepreneurship across Nations.” European
Economic Review,Vol. 45, Nos. 4-6,
May 2001, pp. 680-91.
EOS Gallup Europe, Flash Eurobarometer 146. Entrepreneurship. Brussels:
European Commission, 2004.
Georgellis,Yannis and Wall, Howard J.
“What Makes a Region Entrepreneurial? Evidence from Britain.”
Annals of Regional Science,Vol. 34,
No. 3, September 2000, pp. 385-403.
Georgellis,Yannis and Wall, Howard J.
“Entrepreneurship and the Policy
Environment.” Federal Reserve Bank
of St. Louis Working Paper 2002-019B,
March 2004.
Organization for Economic Cooperation
and Development, Revenue Statistics
1965-2001. Paris: OECD, 2002.
World Bank, Doing Business in 2004:
Understanding Regulation.
Washington: World Bank and Oxford
University Press, 2004.

Where is the banking industry in this country heading?
The U.S. banking industry is in a long-term state of decline. The supply of traditional
deposits is shrinking as households turn from checking accounts to cash-management
accounts and from savings accounts to mutual funds. Demand for loans is falling as
would-be borrowers turn from banks to commercial paper, bonds and stocks. Banks
are destined to become a smaller and less important part of the financial system.

The Two Faces of Banking
Traditional Loans and Deposits vs. Complex Brokerage and Derivative Services
By Klimentina Poposka, Mark D. Vaughan and Timothy J. Yeager

hich of the above statements is
true? Well, both. In two recent
articles, Franklin Allen, who is a
finance professor at the University
of Pennsylvania, and Anthony Santomero, who is the president of the
Federal Reserve Bank of Philadelphia,
argue that traditional deposit-taking
and loan-making have declined in the
United States, yet the industry is holding its own because of an increasing
focus on trading risk for households
and firms.1 For example, banks are
increasingly packaging and securitizing consumer loans, which shifts the
credit risk to investors. In addition,
more banks are helping business
customers reduce their exposure to
rising interest rates by brokering swap
agreements with other companies
that are exposed to falling interest
rates.
Allen and Santomero’s insights are
important because they look to
changes in the source of value rather
than changes in the structure of the
industry for clues about the banking
landscape of the future. An understanding of these changes will help
bank supervisors preserve the safety
and soundness of the banking system
while minimizing the regulatory tax
on individual banks. An awareness of
the changes will also help customers
understand better the new services
that banks are offering.

W

Identifying the Complex Banks

To get a sense for how far along the
U.S. banking system is in the shift from
traditional activities to complex risk
intermediation, we categorize each
U.S. bank both in 1993 and 2003 as one
that primarily engages in traditional

activities or as one that primarily
engages in complex risk management.
We then examine trends over the past
10 years. Nearly all banks exhibit some
degree of both characteristics. We classify banks based on their primary focus
both at year-end 1993 and year-end
2003 by extracting key information
from their financial reports. We focus
on four elements: asset size, geographic
diversity, fee income and derivative
activity.
It is well-known that just a few
organizations hold the majority of
assets in the U.S. banking industry.
At year-end 2003, Citigroup, JPMorgan
Chase and Bank of America each had
approximately $1 trillion in assets, collectively accounting for 35.7 percent
of the industry total.2 Because larger
banking organizations are more likely
to engage in more complex activities,
we begin our classification exercise by
assuming that banks with more than
$10 billion (inflation-adjusted, 2003
dollars) in assets are eligible to be
“complex”organizations. As the table
illustrates, 62 banking organizations
met the asset criterion in 1993. Ten
years later, 67 banks met the criterion,
and these banks held 79.4 percent of
industry assets.
Traditional banks commonly conduct business in a single geographic
area. Indeed, most U.S. banks operate
within a single county.3 In contrast, a
complex organization, especially one
that specializes as a service intermediary, typically comprises numerous subsidiaries, perhaps including multiple
banks and trust, mortgage and finance
companies. We expect a complex
organization to have operations in
several parts of the country. For our
classification purposes, we assume that
[10]

a complex bank operates in at least
three of the 12 Federal Reserve districts.
Banks that engage in significant
service and risk intermediation earn
relatively more fee income than banks
that engage primarily in loan-making.
Traditional banks earn most of their
income from interest rate spreads;
they earn relatively modest amounts
of fee income from ATM or insufficient funds charges. Complex
banks, in contrast, generate significant amounts of fee income from
trust services, mortgage originations
and servicing, fund management, brokerage fees, insurance commissions
and so on. We categorize complex
banks as those that generate fee
income exceeding 2 percent of assets.4
Derivatives activity is a strong signal
that a bank is selling complex risk
transfer services. Many banks engage
in this activity primarily as market
makers or matched traders for their
customers.5 The goal is to accommodate their customers by entering into
trades with the intention of quickly
entering into offsetting contracts with
other counterparties. The bank earns
fee income for this service, yet transfers
the risk to another party. Use of derivatives at U.S. banks exploded in the
1990s. Interest rate derivatives—especially swaps—are the most common.
In 1993, the notional amount of swaps
registered $2.8 trillion; by 2003, that
volume had grown to $42.4 trillion.
Despite the explosion in derivatives,
surprisingly few banks engage in this
activity. As of year-end 2003, only
523 of 6,699 (7.8 percent) banking
organizations had any derivatives outstanding. And the activity is highly
concentrated within those 523 banks.
The top five interest rate derivative

There seem to be two prevailing—and very different—views:
The U.S. banking industry is on the cusp of unprecedented growth and innovation. Demand for traditional services such as loans and deposits may be
waning, but demand for services that are more complex, such as brokerage
services and derivatives intermediation, is waxing. The future has never looked
brighter for the industry.

The Regional Economist October 2004
■

www.stlouisfed.org

ENDNOTES

users account for 93.7 percent of the
market. We assume that the ratio of
derivatives to assets at a complex bank
should exceed 10 percent.
Putting It All Together

Under our definition, a complex
bank holds more than $10 billion
in assets, operates within at least
three Federal Reserve districts,
generates fee income of at least
2 percent and holds derivatives equal
to at least 10 percent of assets. The row
labeled “Composite”in the table shows
the number of banks and percent of
assets that meet these criteria. In 1993,
a total of 21 banking organizations,
controlling 34.2 percent of industry
assets, would have been considered
complex under our definition. As of
2003, a total of 25 banks, controlling
61 percent of assets, qualify as complex.
In turn, the number of traditional banks
has declined by 1,831 and their share of
industry assets dropped nearly 27 percentage points between 1993 and 2003.

changes in the asset concentration of the
industry understates the changes necessary in supervision because that approach
implies a simple need to relocate the
existing examiner resources as the banks
relocate. In contrast, the approach by
Allen and Santomero focuses on the expertise that bank examiners must possess to
supervise adequately the complex banks
of the future. Put another way, the AllenSantomero framework implies less
emphasis on supervising asset quality and
more emphasis on supervising market risk
exposure and risk management systems.
Klimentina Poposka is an assistant researcher in
monetary and credit policy at the Institute of
Economics, St. Cyril and Methodious University
in Skopje, Macedonia. Mark D. Vaughan is an
economist and assistant vice president and Timothy
J.Yeager is an economist and senior manager,
both in the Banking Supervision and Regulation
Department of the Federal Reserve Bank of St. Louis.
Research assistance was provided by Andy Meyer
and Andy Foust, both of the St. Louis Fed.

1

See Allen and Santomero (1997 and
2001).

2

This figure includes assets from Bank
One and Fleet Boston, which merged
with JPMorgan Chase and Bank of
America, respectively.

3

See Hall and Yeager (2002).

4

In 2003, 5.7 percent of all banks had
fee income of 2 percent or higher.

5

See Puwalski (2003).

REFERENCES
Allen, Franklin and Santomero, Anthony
M. “The Theory of Financial
Intermediation.” Journal of Banking and
Finance, 1997,Vol. 21, pp. 1461-85.
Allen, Franklin and Santomero, Anthony
M. “What Do Financial Intermediaries
Do?” Journal of Banking and Finance,
2001,Vol. 25, pp. 271-94.
Hall, John and Yeager, Timothy J.
“Community Ties: Does ’Relationship
Lending’Protect Small Banks When
the Local Economy Stumbles?”
Federal Reserve Bank of St. Louis The
Regional Economist, April 2002, pp. 4-9.
Puwalski, Allen C. “Derivatives Risk in
Commercial Banking.” Federal
Deposit Insurance Corp., For Your
Information, March 26, 2003. See
www.fdic.gov/bank/analytical/fyi/
index.html.
Vaughan, Mark D. “Bullish on Banking:
Thriving in the Information Age.”
Federal Reserve Bank of St. Louis The
Regional Economist, January 1996, pp. 5-9.

The Future of Banking Seems Nontraditional
Conclusion

Clearly, the industry is evolving from
one that is engaged primarily in traditional activities to one that is engaged
in complex risk intermediation. That is
not to say that traditional banking will
disappear. Indeed, traditional banking
remains extremely viable, as illustrated
by the high earnings posted by banks of
all shapes and sizes over the past decade.
The U.S. banking industry seems likely
to include both traditional and complex
activities for some time to come.
Bank supervisors must continue to
adjust to the growing dominance of
complex banks. Focusing simply on

Date

Complex Banks

Traditional Banks

No. Banks % Assets

No. Banks % Assets

Asset Size

1993
2003

62
67

65.2
79.4

8,464
6,632

34.8
20.6

Geographic
Diversity

1993
2003

83
136

62.5
77.9

8,443
6,563

37.5
22.1

Fee Income

1993
2003

494
383

39.3
66.6

8,032
6,316

60.7
33.4

Derivatives

1993
2003

134
110

65.6
76.6

8,392
6,589

34.4
23.4

Composite

1993
2003

21
25

34.2
61.0

8,505
6,674

65.8
39.0

Change in Composite
(1993 to 2003)

+4

+26.8

–1,831

–26.8

[11]

Each U.S. bank is classified along four
categories as complex or traditional
in 1993 and again in 2003. A complex bank has to hold more than
$10 billion in assets, operate within
at least three Federal Reserve districts,
generate fee income of at least 2 percent of assets and hold derivatives
equal to at least 10 percent of assets.
The row labeled “Composite”shows
the number of banks and percent of
assets that meet these criteria. In
1993, a total of 21 banks, controlling
34.2 percent of industry assets, would
have been considered complex. As of
2003, a total of 25 banks, controlling
61 percent of assets, qualify as complex. Clearly, complex banks are
growing while traditional banks
are declining.

Point and Click,
or Mortar and Brick?
A Look at Internet Banking in the Eighth District
By Rubén Hernández-Murillo and Deborah Roisman

Overall, 48.5 percent of Eighth
District banks have a transactional
web site. This rate is slightly lower
than the 54 percent rate for the entire
U.S. banking industry.
We categorize banks into four size
groups based on their total assets
because previous studies on Internet
banking have shown that bank performance varies significantly across
bank sizes.2 Group 1 includes banks
with assets of $100 million or less.
Group 2 includes banks with assets
between $100 million and $350 million.
Group 3 includes banks with assets
between $350 million and $500 million.
Group 4 includes banks with assets
greater than $500 million. Nearly
90 percent of District banks in the sample have assets of $350 million or less—
48.6 percent of all banks are in Group 1
and 40.6 percent are in Group 2.
Demographics and Competition

nternet banking has been on the
rise since its inception in 1995.
Services today include delivery of
account statements, online credit card
and loan applications, transfer of
funds between accounts and online
bill payment. These services have the
potential to alter many aspects of the
banking industry—in particular, the
degree of market competitiveness
and financial performance—as banks
use the Internet as a tool to attract
and retain customers.
But there is very little information
so far on Internet banking to analyze
these issues. In 1999, banks and
other depository institutions in the
United States were first asked to report
their web site address, and not until
2003 were they also asked to report
whether their web site provided online
services. The adoption of Internet technologies, as indicated by the reports of
a web site address, has shown a steady
increase in this period. Economist Rick
Sullivan of the Federal Reserve Bank
of Kansas City indicates that 35 percent of depository institutions reported
a web site address in 1999, compared
with 70 percent in 2003.1

I

This article
looks at a sample
of commercial banks in the Eighth
Federal Reserve District and asks the
following questions:
• Is there a relationship between
the adoption of Internet technologies
and a bank’s size, location and
demographic characteristics of its
customer base?
• Is there a relationship between
the adoption of Internet technologies
and a bank’s competitive position, as
measured by its deposit market share?
• Finally, is there a relationship
between the adoption of Internet
banking and measures of credit risk
and profitability?
A Look at Eighth District Banks

The data used for this analysis are
from the Consolidated Reports of
Condition and Income (Call Reports)
for the first quarter of 2004. The data
consist of a sample of 808 commercial
banks located in the Eighth District.
Internet banks are defined here as
banks that offer banking services
through a transactional web site—a site
that allows online transactions, such as
fund transfers between accounts.
[12]

A bank’s decision to adopt Internet
technologies depends, at least in part,
on the characteristics of the market it
serves. Past research has shown that
demographic characteristics of a
bank’s potential customers, such as
income and education, as well as
whether the bank is located in a metropolitan area, are important factors
that a bank should consider when
deciding whether to offer Internet
banking.3 Competitive factors, such
as the bank’s deposit market share,
presumably influence the adoption
decision as well. We will show through
a tabular analysis whether this is the
case for Eighth District banks.
The adoption rates of Internet
banking indicate that larger banks as
a group have been more likely to
adopt Internet technologies, as seen
in Table 1. In the three largest groups,
68 percent of the District banks in
Group 2, 95 percent in Group 3 and
93.6 percent in Group 4 have adopted
Internet banking. In contrast, only
22.1 percent of banks in Group 1 have
adopted Internet banking.
Census data reveal that markets
of Internet banks have slightly higher
median income, on average, than
markets of non-Internet banks. A
market is defined here by the corresponding county or metropolitan
area in which a bank is located. On
average, median household income
(in constant 1999 dollars) in Internet
bank markets is larger than in nonInternet bank markets. Markets of
Internet banks also appear to have a
larger share of persons with higher
education (a bachelor’s degree or
higher) compared with markets of

The Regional Economist October 2004
■

www.stlouisfed.org

non-Internet banks. Markets of banks in
Group 3 are an exception in both cases.
The percent of Internet banks in an
urban area increases with bank size. The
share of Internet banks located in urban
areas is 34.1 percent for Group 2, 42.1
percent for Group 3 and 61.4 percent for
Group 4, compared with only 18.4 percent for Group 1. In addition, within each
group Internet banks are more likely to be
in urban areas, except for Group 3 banks.
What is the relationship between the
adoption of Internet banking and market
conditions such as average market share
and the degree of market competitiveness? We compute a bank’s market share
as the ratio of deposits held by the bank
to the market’s total deposits. We compute the market’s concentration index as
the sum of the squares of the market
shares multiplied by 10,000. A higher
concentration index indicates the market
is less competitive.4 We find that the average market share increases with bank
size, but there appears to be no consistent
pattern of differences in average market
shares between Internet and non-Internet
banks across size groups. Compared with
non-Internet banks, however, markets in
which Internet banks operate appear to
be more competitive, as suggested by the
lower concentration indexes for markets
of Internet banks across size groups,
except for markets of banks in Group 3.
Risk and Profitability

5

The profitability ratios are annualized
by multiplying by 4.

REFERENCES
Furst, Karen; Lang, William W.; and Nolle,
Daniel E. “Internet Banking: Developments and Prospects.” Center for
Information Policy Research, Harvard
University, Program on Information
Resources Policy, April 2002.
Sullivan, Richard. “Payment Services and
the Evolution of Internet Banking.”
Federal Reserve Bank of Kansas City
Payments System Research Briefing,
August 2004.
Sullivan, Richard. “How Has the
Adoption of Internet Banking Affected
Performance and Risk in Banks? A
Look at Internet Banking in the Tenth
Federal Reserve District.” Federal
Reserve Bank of Kansas City Financial
Industry Perspectives 2000, pp. 1-16.
Sullivan, Richard. “Performance and
Operation of Commercial Bank Web
Sites.” Federal Reserve Bank of
Kansas City Financial Industry
Perspectives 2001, pp. 23-33.

Rubén Hernández-Murillo is an economist and
Deborah Roisman is a research associate, both
at the Federal Reserve Bank of St. Louis.

105

Yes

223

No

2

Yes

38

No

3

Yes

44

68.0
95.0
93.6

Return on equity
(percent annualized)

No

22.1

Return on average assets
(percent annualized)

87

Nonperforming loan
ratio (percent)

Yes

Loan-to-asset ratio (percent)

306

Number of banks

No

Internet adoption (percent)

TABLE 2

Credit Risk and Profitability

Internet bank?

$500 million
or more

This concentration measure is known
as the Herfindahl Index. A higher
index indicates that the market is less
competitive because it is concentrated
among fewer firms. A market with
only one firm will exhibit a Herfindahl
Index of 10,000, the maximum possible. In general, a market with N firms
and equal market shares will exhibit a
Herfindahl Index of 10,000/N.

Average market
concentration index

Group 4

See Sullivan (2000).

4

Average deposits market
share (percent)

$350-$500
million

3

Average market percentage of
people with higher education

Group 3

See Sullivan (2000, 2001) and Furst,
Lang and Nolle (2002), among others.

Average market median
income (1999 dollars)

$100-$350
million

See Sullivan (2004).

2

Banks in urban
markets (percent)

Group 2

Less than
$100 million

1

TABLE 1

Number of banks

Group 1

ENDNOTES

Market Demographic Characteristics and Competition

Internet bank?

Size group by banks’ assets

Are measures of profitability and
financial performance for Internet banks
and non-Internet banks different?

Standard measures of profitability, such
as the return on average assets (net
income divided by the quarterly average
of total assets) and the return on equity
(net income divided by equity), indicate
that profitability in all four size groups
appears to be lower for Internet banks
compared with non-Internet banks in
the Eighth District, as seen in Table 2.5
Although not shown in the table, this
pattern is more common in rural markets for banks in Groups 1 and 2.
Profitability of Internet banks in urban
markets of banks in these two size
groups seems to be higher than for
non-Internet banks.
Standard measures of credit risk
include the loan-to-asset ratio (total loans
divided by total assets) and the nonperforming loan ratio (loans that are 90 days
past due plus nonaccrual loans divided by
total loans). The loan-to-asset ratio is
higher for Internet banks in Groups 1 and
2, but it is smaller for banks in Groups 3
and 4. In contrast, the nonperforming
loan ratio is higher for non-Internet banks
in Groups 1, 2 and 3, and it is smaller for
non-Internet banks in Group 4.
Thus, although Internet banks with
assets less than $350 million exhibit
higher loan-to-asset ratios, indicating
that they may be more exposed to bad
loans, the actual fraction of nonperforming loans is lower for all Internet banks
except those with assets greater than
$500 million.

13.4

31,016

12.2

25.9

5,606

No

306

57.53

1.18

1.08

9.57

18.4

31,847

12.4

28.6

5,031

Yes

87

64.31

1.17

0.96

9.09

21.9

30,534

12.3

44.0

5,601

No

105

60.30

1.22

1.27

10.97

34.1

31,462

13.5

36.1

5,597

Yes

223

64.45

0.91

1.08

10.81

50.0

36,677

18.1

37.7

3,513

No

2

75.52

1.69

1.73

17.73

42.1

34,202

16.9

46.2

5,605

Yes

38

68.20

0.63

1.05

11.23

33.3

33,626

16.2

60.3

7,333

No

3

71.63

0.71

1.54

17.62

61.4

33,936

19.4

43.3

5,338

Yes

44

67.84

1.07

1.17

11.82

NOTE: Data are from the Call Reports for the first quarter of 2004.

[13]

Community Profile

SAM’S★TOWN
HOME TO THE CORPORATE HEADQUARTERS OF THE WORLD’S LARGEST RETAILER,
BENTONVILLE, ARK., IS FINDING THAT WAL-MART IS A MAGNET FOR ATTRACTING SUPPLIERS
AND OTHER COMPANIES—AS WELL AS A FORCE FOR PROPELLING GROWTH FOR THE REGION.

BY LAURA J. HOPPER

entonville residents basking in the town’s rapid growth may want to
thank Sam Walton’s wife, Helen. When Sam, the legendary founder of
Wal-Mart, got out of the U.S. Army, he wanted to pursue his dreams of
retail fame and fortune in a big city. But Mrs. Walton, a native Midwesterner
like her husband, would have none of that.
“She insisted on staying in a small town to raise her family,” says Jay Allen,
Wal-Mart’s senior vice president for corporate affairs. “They liked living here in
the central part of the country and, as the company grew, it became a great
place to do business.”
In 1950, Sam Walton opened his Walton’s 5 & 10 store in downtown
Bentonville. (The store now serves as the Wal-Mart Visitors Center.) In 1962,
Sam founded the first official Wal-Mart store in nearby Rogers, Ark. By 1970,
Wal-Mart had grown to the point where it could have its own distribution center and home office. The Waltons, who by then were fixtures in the Bentonville
community, chose to keep the main offices there.
Many of today’s shoppers can fill in the rest of the Wal-Mart story. The discount retailer’s growth soared in the 1980s and rose to even greater heights in
the ‘90s. By 2002, Wal-Mart was at the top of the Fortune 500, and today it
holds the undisputed title of world’s largest retailer, with $256 billion in global
revenue in 2003. Wal-Mart employs more than 1.3 million people worldwide in
nearly 5,000 discount stores, supercenters and Sam’s Club wholesale stores.
With Wal-Mart at its epicenter, Bentonville is experiencing its own seismic
population explosion—from just over 11,000 residents in 1990 to almost
26,500 as of the most recent tally, in 2003. The ripple effect is widespread.
The surrounding Fayetteville-Springdale-Rogers Metropolitan Statistical Area
(MSA) is now the sixth-fastest-growing MSA in the United States. Benton
County, home to Bentonville, is one of the fastest-growing counties in the
nation. The county accounted for more than half of the state’s growth in the
2000 census, says Richard Davis, economic director of the Bentonville/Bella
Vista Chamber of Commerce.
“The majority of that growth has to be attributed to Wal-Mart, especially in
the time period since it secured itself as the nation’s largest retailer,” Davis says.
The engine fueling that growth isn’t just the thousands of employees who
work at Wal-Mart’s Bentonville offices or the shoppers who visit Wal-Mart’s
Bentonville Supercenter. It’s also the companies that make the products on
Wal-Mart’s shelves and clothing racks. As Wal-Mart’s growth has exploded
through the 1990s, an estimated 600-plus firms—ranging from Procter &
Gamble to Levi’s, from Wrangler to Gillette—have put out a shingle in northwestern Arkansas, even if it’s just a 10-to-20-person sales office.
“Wal-Mart epitomizes the ideal business model, and companies can get
more value selling their products to Wal-Mart than to any other retailer,” Davis
says. “They’re coming here from far and wide to pitch their products and get
shelf space at Wal-Mart.”
Getting that product positioning and maintaining a strong relationship with
Wal-Mart doesn’t require having office space in Bentonville, the retail giant
insists. “We have suppliers in northwest Arkansas with which we have a good
relationship. But we also have great relationships with suppliers in New York
and California,” says Allen, the Wal-Mart spokesman.
Those words aren’t enough to change the minds of the suppliers who contin-

B

The dime store that Sam Walton opened in 1950 in downtown Bentonville now serves as a sort of Wal-Mart museum.

To
o.
,M
in
pl
Jo

71

arkansas

Bentonville

Town Square
Wal-Mart Visitors Center

71B
Wal-Mart
Headquarters

72

102

12

279

To Eureka Springs, Ark.

d.
ton Blv
Wal

To Tulsa, Okla.

62

71B

540

112

71B

ILLINOIS
INDIANA

MISSOURI

To Springdale/
Fayetteville, Ark.

KENTUCKY

TENNESSEE

EIGHTH FEDERAL RESERVE DISTRICT
ARKANSAS
MISSISSIPPI

Bentonville
BY THE NUMBERS
Population...................................Bentonville: 26,457 (2003)

Benton County: 172,003 (2003)
Labor Force..................................Bentonville: 10,241 (2000)

Benton County: 74,545 (2000)
Unemployment Rate..............Bentonville: 2.5 percent (2003)

Benton County: 2.6 percent (2003)
Per Capita Income.....................Bentonville: $20,831 (2000)

Benton County: $19,377 (2000)
Top Five Employers

Wal-Mart................................................................... 12,000
Bentonville Public Schools.......................................... 1,238
Northwest Arkansas Community College...................... 538
Tyson Foods of Bentonville.............................................400
CEI Engineering...............................................................190

[14]

The Regional Economist October 2004
■

www.stlouisfed.org

ue to stream into Bentonville—many of whom are housed side-by-side in
what locals have dubbed “Vendorville,” the maze of office parks that
encircle Wal-Mart’s corporate hub like flowers growing toward the sun.
In one of those offices, supplier Gillette Co. has 20 employees devoted
to cultivating business with Wal-Mart. “Clearly, this close proximity allows
our team daily contact with executives at Wal-Mart and provides us the
opportunity to develop innovative joint initiatives to support both our
businesses,” says Paul Fox, Gillette’s director of global external relations.
The constant influx of vendors has spawned an additional layer of development—companies that have set up shop in Bentonville to supply the
suppliers. “We’ve seen a secondary level of entrepreneurial and business
development from these support companies, such as packaging and marketing firms,” Davis says.
Such continued growth in Bentonville has had a positive effect
throughout northwestern Arkansas, Davis says, helping the region gain
prominence not only in the state but nationally as well. For example, the
Northwest Arkansas Regional Airport, opened in 1998, now offers non-stop
flights to several major U.S. cities—some of which aren’t even offered at
Little Rock’s airport, Davis says. These flights have been added in large part
to serve Wal-Mart buyers who must travel from around the country, he adds.
Northwestern Arkansas’ hotels, in turn, are often at least 90 percent
filled during the week. Construction should be complete on five more
hotels by the fall of 2005, Davis says.

Many suppliers are housed in what locals have dubbed
“Vendorville,” the maze of office parks that encircle WalMart‘s corporate hub like flowers growing toward the sun.
Trends such as these—along with the stability of northwestern Arkansas
corporate fixtures such as poultry processor Tyson Foods and trucking firm
J.B. Hunt—have helped the region accomplish an admirable feat, Davis
says: The region skipped the recession. Bentonville’s 2003 unemployment
rate of 2.5 percent was just a bit above its 1.9 percent rate of 2002. Both
figures are little more than half of the nationwide average.
Davis adds: “I’ve been asked jokingly, ‘You’re from Benton County?
Isn’t that where the streets are paved with gold?’”
Such growth and prosperity is no joke to Bentonville Mayor Terry Coberly.
A Bentonville native, she attended high school with Sam Walton’s son, Jim,
and has witnessed the golden eras of the city’s past and present.
“I’ve had the luxury of seeing the best of Bentonville—growing up in a
small town and now seeing it flourish,” she says. “We’re trying really hard
to keep our small-town atmosphere while dealing with our growth at the
same time.”
Bentonville’s rapid rise in population presents challenges in two major
areas for Coberly: housing and infrastructure. The value of homes in
Bentonville has been rising about 6 percent a year, she says. And even
as the city expands its boundaries, it’s running short of room.
“We just can’t build houses fast enough,” Coberly says, noting that the
crunch of affordable housing in Bentonville has transformed neighboring Bella
Vista from a quiet retirement community into a booming sister community.
Getting to and from those homes can also be a challenge. Most of
Bentonville’s major arteries are state or federal highways; so, if improvements are needed, the city must often make its request and wait.
In 2003, Bentonville passed a 1 percent sales tax, of which at least
70 percent will go toward funding road construction, Coberly says. The
city has also made a deal with the state of Arkansas: If the state will
move up the schedule for construction improvements—such as widening
roads and highways—Bentonville will pony up half the cost. The state
has accepted the offer, Coberly says.
While juggling these major issues, Coberly and the Bentonville Chamber of Commerce are also working together on a seemingly less critical but
still important matter: creating more amenities—such as restaurants and
entertainment—for the region’s newfound residents and workers, who are
currently being invited to fill out a survey about their leisure-time preferences.
[15]

The Wal-Mart
Visitors Cent
er in
downtown Bent
onville attr
acts
tourists and
local reside
nts.

Roy‘s Office
Solutions is
one
of a growing
number of bu
siness
support comp
anies openin
g in
Bentonville.

Bentonville
still preser
ves a
small-town at
mosphere in
areas
such as its
town square.

***CUSTOME

R COPY***

One addition being discussed is a trolley system
that would transport Wal-Mart workers to and from
downtown Bentonville during lunch, allowing them
to eat out without losing their prized parking spaces
in the crowded corporate office lot. “But that won’t
work until we get more restaurants,” says Coberly,
who is hoping to lure more food establishments
away from the city’s outskirts and into downtown.
Survey results or no, Coberly is well-aware of one
other missing small-town staple that even Sam
Walton couldn’t enjoy. “We still don’t have a single
movie theater here in Bentonville,” she says. “It’s
past time we got one of those.”
Laura J. Hopper is a senior editor at the Federal
Reserve Bank of St. Louis.

National and District Data

Selected indicators of the national economy
and banking, agricultural and business conditions in the Eighth Federal Reserve District

Commercial Bank Performance Ratios
second quarter 2004

U.S. Banks
by Asset Size

ALL

$100
million$300
million

Return on Average Assets*

1.35

1.21

1.15

1.28

1.21

1.43

1.32

1.36

Net Interest Margin*

3.60

4.25

4.24

4.17

4.21

3.84

4.03

3.43

Nonperforming Loan Ratio

0.97

0.82

0.90

0.75

0.83

0.82

0.83

1.03

Loan Loss Reserve Ratio

1.63

1.35

1.39

1.42

1.40

1.60

1.50

1.69

less than
$300
million

$300
million$1 billion

less
than
$1 billion

$1billion$15
billion

Return on Average Assets *
1.14

Net Interest Margin *

.25

.50

1

1.25

4.22
4.31
3.74
3.74

Illinois
3.43
3.41

Indiana

1.01
1.12
0.88
0.88

.75

3.70

Kentucky

1.50

1.70

1.75

Mississippi

3.83
3.83

Missouri

3.83

Tennessee

3.84

percent

2

3

Nonperforming Loan Ratio
0.89

0.99

1.21
1.17

0.81
0.72
0.85
0.81

.5

.75

1

3.5

1.30
1.34

1.44
1.45
1.45
1.46
1.44
1.45

Mississippi
Missouri
1.18
1.23

Tennessee

1.25

2.25 percent

1.73

1.61

Kentucky

1.22
1.22

2

4.5

1.60
1.54

Indiana

1.99

1.75

4.00

1.38
1.38

Illinois

1.5

4.04

4

Arkansas

1.50

1.19

1.25

4.21

Loan Loss Reserve Ratio
Eighth District

1.42
0.95

3.99

Arkansas

1.35
1.11
1.17
1.27

0

3.86

Eighth District

1.33

1.17
1.22
1.11
1.15
0.47

more
less
than
than
$15 billion $15 billion

1

1.25

1.5

1.75

Second Quarter 2003

Second Quarter 2004
NOTE: Data include only that portion of the state within Eighth District boundaries.
SOURCE: FFIEC Reports of Condition and Income for all Insured U.S. Commercial Banks
*Annualized data

[16]

For additional banking and regional data, visit our web site at:
www.research.stlouisfed.org/fred/data/regional.html.

2

The Regional Economist October 2004
■

www.stlouisfed.org

Regional Economic Indicators
Nonfarm Employment Growth*

year-over-year percent change

second quarter 2004
eighth
district

united
states

Total Nonagricultural

1.0%
3.2
3.0
–1.2
0.8
–0.7
0.7
3.1
2.0
2.1
0.3
–0.2

Natural Resources/Mining
Construction
Manufacturing
Trade/Transportation/Utilities
Information
Financial Activities
Professional & Business Services
Educational & Health Services
Leisure & Hospitality
Other Services
Government

arkansas

0.4%
0.9
1.7
–0.4
0.1
–2.0
0.6
0.7
1.7
1.7
0.5
–0.6

0.7%
0.0
–0.8
–0.9
0.8
–0.5
1.6
0.5
2.7
1.7
0.2
0.7

illinois

indiana

–0.2%
2.1
–0.5
–1.2
–0.5
–3.3
0.6
–0.2
1.0
1.9
–0.2
–1.2

0.5%
1.9
5.3
–0.6
–0.5
–0.5
–0.8
2.3
1.4
0.1
0.2
0.3

kentucky

mississippi

0.4%
2.5
4.2
–0.5
0.5
–1.1
1.3
–0.2
0.9
3.2
2.2
–2.4

0.8%
–3.0
0.1
0.8
0.1
–2.4
1.3
3.7
2.2
0.0
–2.5
1.1

missouri

tennessee

1.1%
–0.7
2.7
1.4
0.1
–1.5
1.0
1.6
2.8
2.0
2.4
–0.7

0.8%
1.6
1.2
–0.2
1.3
–1.6
0.4
0.8
2.1
2.4
0.6
–0.2

*NOTE: Nonfarm payroll employment series have been converted from the 1987 Standard Classification (SIC) system basis to a 2002 North American Industry Classification (NAICS) basis.

Unemployment Rates

Total Bankruptcies

percent

year-over-year percent change†

II/2004

I/2004

5.6%
5.7
6.1
5.0
5.4
5.3
5.0
4.7

United States
Arkansas
Illinois
Indiana
Kentucky
Mississippi
Missouri
Tennessee

United States

II/2003

5.6%
5.4
6.2
5.2
5.4
5.1
4.9
5.0

–0.9

Arkansas

6.1%
6.2
6.6
5.1
6.3
6.8
5.8
5.8

– 1.2

Illinois

– 6.4

Indiana

0.7

Kentucky

2.0

Mississippi

– 7.8

Missouri

1.8

Tennessee

–19.7

– 24

– 20

– 16

–12

–8

–4

0

4

Comparing year ending June 30, 2004, with year ending June 30, 2003.

†

second quarter

first quarter

Housing Permits

Real Personal Income

year-over-year percent change
in year-to-date levels

year-over-year percent change

5.6
9.1

12.5

United States

12.4

Arkansas

0.6
0.0
1.5
0.5
16.0
12.1

–2.8

–5

0

5

31.4

10

2004

15

2.0

–0.3

– 22

– 18

– 14

Indiana

1.3

Kentucky

1.3

20

25

30

–10

–2

3.8
2.5
4.0

1.2

35 percent –1

2003

0

1

2

2004
‡

2

3.5

0.4

Tennessee

[17]

–6

3.2

1.9

Missouri

2.1

–10

5.1

1.0

Mississippi

11.1

5.7

3.5

0.5

Illinois

0.7

‡

3

4

5

6

2003

NOTE: Real personal income is personal income divided by the PCE chained price index.

Major Macroeconomic Indicators
Real GDP Growth

Consumer Price Inflation

percent

percent

10

4.0

8

3.5

all items

3.0

6

2.5

4

2.0

2

1.5

0

all items, less
food and energy

1.0

–2
1999

00

01

02

03

0.5
1999

04

NOTE: Each bar is a one-quarter growth rate (annualized); the green line is the
10-year growth rate.

Aug.

00

01

02

03

Civilian Unemployment Rate

Interest Rates

percent

percent
8
7
fed funds
target
6
5
4
three-month
t-bill
3
2
1
0
1999
00
01
02

6.5
6.0
5.5
5.0
4.5
4.0
3.5
1999

Aug.

00

01

02

03

04

NOTE: Percent change from a year earlier

04

NOTE: Beginning in January 2003, household data reflect revised population
controls used in the Current Population Survey.

10-year

t-bond

Aug.

04

03

NOTE: Except for the fed funds target, which is end-of-period, data are
monthly averages of daily data.

Farm Sector Indicators
U.S. Agricultural Trade

Farming Cash Receipts

billions of dollars

billions of dollars
115

40
35
30
25

livestock

crops

105

imports

20
15
10
5

110

exports

100
95

trade balance

0
1999

90
May

July

00

02

01

03

85
1999

04

NOTE: Data are aggregated over the past 12 months. Beginning with December
1999 data, series are based on the new NAICS product codes.

00

01

02

03

04

NOTE: Data are aggregated over the past 12 months.

U.S. Crop and Livestock Prices
index 1990-92=100
145
135

crops

125
115
105
95

livestock

85
75
1990

Aug.

91

92

93

94

95

96

97

[18]

98

99

00

01

02

03

04

The Regional Economist October 2004
■

www.stlouisfed.org

National and District Overview

Focusing on St. Louis Employment
Employment in the St. Louis Metropolitan Area

By Howard J. Wall

Recession-Sensitive Sectors

The two sectors hit hardest by the
recession were “manufacturing”and “professional and business services,”which is
linked closely to manufacturing. Between
March 2001 and August 2003, manufacturing employment in St. Louis fell by more
than 14 percent. This drop was less severe
than the 16 percent drop in manufacturing
employment at the national level.
The St. Louis experience was buoyed by
the fact that, compared with the country as
a whole, it has a larger share of jobs in motor
vehicles and motor vehicle parts, both of
which saw relatively modest job losses. In
addition, the large aerospace products and
parts subsector in St. Louis did not see the
heavy job losses that were reported elsewhere following the sharp drop in demand
for commercial aircraft. This is because
aerospace firms in St. Louis are more
focused on noncommercial products.
Manufacturing has been recovering
nationally and locally for nearly a year, in
the sense that employment has stabilized
at or near its long-run situation of zero
growth. In St. Louis, the manufacturing

March 2001=100, seasonally adjusted

SOURCE: Bureau of Labor Statistics

Education and Health
105

100

Total Employment

95

Professional and Business Services

90

recovery has been reflected in the
turnaround of the professional
and business services sector, which
has been expanding rapidly. This
sector has been the main source
of job growth over the past year
in St. Louis, accounting for about
43 percent of the increase in
employment between August
2003 and July 2004. By July 2004,
the level of employment in this
sector had nearly reached its prerecession level. Although employment in professional and business
services has also grown rapidly at
the national level, this sector has
been somewhat less important for
overall U.S. job growth, accounting for just less than one-third of
the increase over the period.
Recession-Resistant Sectors

An oft-neglected feature of the
recent recession and recovery is
that some sectors experienced job
growth throughout the recession
and recovery. In particular, education and health services saw job
gains through much of the period,
both nationally and in St. Louis.
In July 2004, St. Louis employment in this sector was 8 percent
higher than it had been in March
2001. At the same time, employ[19]

June 04

March 04

Dec. 03

Sept. 03

June 03

March 03

Dec. 02

Sept. 02

March 02

Dec. 01

Sept. 01

June 02

Manufacturing

85
June 01

T

110

March 01

he St. Louis labor market tends to
experience the same short-run ups
and downs as the United States as a
whole, except more so. The experience of
the past few years, which included a short,
manufacturing-based recession followed
by a long bumpy recovery, provides a good
illustration of the tendency for the national
situation to be magnified in St. Louis.
Total nonfarm payroll employment in
the St. Louis metropolitan area fell steadily
after March 2001—the official start of the
recession as determined by the National
Bureau of Economic Research. Employment in St. Louis bottomed out in August
2003 at 3.2 percent below its level at the
start of the recession. U.S. employment
also hit bottom in August 2003, but at only
2.1 percent below its March 2001 peak.
Employment in St. Louis and the country
as a whole has since risen steadily, though
job growth in St. Louis has been more
rapid. By July of this year, 82 percent of the
jobs lost in St. Louis had been recovered.
In contrast, the national economy had
replaced 57 percent of the jobs lost
between March 2001 and August 2003.

ment in education and health
services at the national level
grew steadily, adding more than
1.4 million jobs, an increase of
9 percent. For St. Louis, though,
job gains in this sector were mostly
in health services rather than in
education, whereas at the national
level, health and education both
saw steady employment growth.
Where Things Stand

The labor-market recovery has
become firmly entrenched in the
St. Louis area, and most of the
jobs lost during and following the
recession have been replaced. If
employment growth continues at
the rate experienced in the first
seven months of the year, St. Louis
will reach its March 2001 employment level by October of this year.
For St. Louis, the dark side of the
recession was that it experienced
relatively more job losses than
did the nation as a whole. The
bright side, however, is that, so
far, the recovery in St. Louis has
been stronger.
Howard J. Wall is an assistant vice president and economist at the Federal Reserve
Bank of St. Louis.