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The Regional Economist October 2005
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President’s Message
“To be sure, CAFTA is not perfect. It is really a ‘freer trade’
rather than a ‘free trade’ agreement. Certain special interests
were successful in creating important protectionist exceptions
to the principle of free trade.”

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

Despite Flaws, CAFTA Is Step in Right Direction

AFTA, the trade agreement
that President Bush signed in
August, has faced some of the
same criticism as its predecessor,
NAFTA. But like the earlier agreement, CAFTA will benefit each of the
participating countries.
The Central American Free Trade
Agreement breaks down most trade
barriers between the United States
and five nations of Central America
(Costa Rica, El Salvador, Guatemala,
Honduras and Nicaragua) plus the
Caribbean country of the Dominican
Republic. Most products from this
region already were entering the
United States duty-free, but CAFTA
will make sure more U.S. products
and services get the same treatment
down south.
To be sure, CAFTA is not perfect.
It is really a “freer trade”rather than
a “free trade”agreement. Certain special interests were successful in creating important protectionist exceptions
to the principle of free trade.
But it’s important to remember that
similar problems, fears and shortcomings surrounded NAFTA when it was
passed more than 10 years ago. Yet
today, most U.S. economists agree
NAFTA has succeeded not only in
Mexico and Canada, but also in the
United States. Without question, the
economies of the NAFTA countries
have become more and more integrated. Some evidence:
• Total two-way trade between the
United States and our NAFTA partners grew a remarkable 111 percent
between 1993 and 2003, while total
two-way trade between the United

States and the rest of the world grew
by 79 percent.
• Because NAFTA reduced or
eliminated most barriers that limit
access to goods, U.S. exporters have
greater market access and a price
advantage over competitors such as
Japan, South Korea and China.
• NAFTA provisions in the auto
sector allow U.S. automakers to treat
the participating countries as a single
market, maximize efficiencies and
become competitive on a global scale.
• Mexico’s investment in the
United States increased 280 percent
from 1994 to 2002, while investment
in the United States by non-NAFTA
countries grew by 185 percent.
Critics blame NAFTA, CAFTA and
other trade agreements for large-scale
job losses. But most of the U.S. jobs
that are lost are low-wage, low-skill
jobs. These losses force workers to
train for higher-skill, higher-paying
jobs—the kinds we want. What trade
expansion does in the U.S. labor market, essentially, is to expand employment in higher-paying industries and
occupations and depress it in lowerpaying jobs. In fact, the net impact on
the number of U.S. jobs is negligible.
However, the individuals who are
helped are not the same as those who
are hurt. That fact provides the rationale for government trade-adjustment
assistance. Meanwhile, companies
can help to cushion the blow of
unemployment by providing ample
notification of plant closings and
assistance to departing employees.
The real issue with regional trade
pacts is that they can prevent U.S.
[3]

consumers from enjoying the benefits
of even cheaper goods that might be
available from countries not included
in the regional agreements. However,
it is probably true that in the absence
of greater progress on truly multilateral
trade agreements to expand trade for
all countries, progress on freer trade
through regional agreements is constructive, if only because it keeps the
public debates and the momentum
for freer trade alive.
In the end, we must remember
that trade restrictions can be very
costly. A study by economists Gary
Clyde Hufbauer and Kimberly Ann
Elliott showed that consumers were
paying an average of $139,000 for
each job protected in 1990 in the
apparel industry, an industry in which
the typical production worker made
less than $15,000. In the sugar industry, the consumer loss for each job
that was saved totaled $600,000!
Finally, CAFTA is about more than
trade. U.S. sales to that region totaled
a mere $15 billion a year before the
pact—about 2 percent of total exports
—and certainly won’t skyrocket anytime soon. But trade agreements also
promote democratic and economic
reform. A greater sense of economic
opportunity and progress creates
more stable political environments.
These benefits were emphasized in
the debate over NAFTA, and Mexican
experience over the past decade
seems to bear out the optimists.

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The Door Is Open,
but Banks Are Slow To Enter
Insurance and Investment Arenas
B y E l l e n H a r s h m a n , F r e d C. Ye a g e r a n d T i m o t h y J. Ye a g e r

ore than five years have passed since
Congress enacted the Gramm-Leach-Bliley Act, tearing
down regulatory barriers that separated commercial
banking, investment banking and insurance underwriting.
Many thought the new law would create a profusion of
“universal banks,” whose one-stop shop for financial
services would not only make money for them but save
money for consumers. Have these benefits come to pass?

The biggest potential benefit of the law is
that it allows financial institutions to exploit
fully the revenue efficiencies and cost savings that accrue from offering an array of
financial services. The concept is similar to a
grocery that also houses a pharmacy and a
video rental department. The grocery earns
additional revenue because the shopper
buying a gallon of milk finds it convenient to
fill a prescription and rent a movie. The grocery also sheds costs relative to three standalone stores because it can use the grocery’s
back-office functions, such as inventory,
accounting and marketing systems, to service the pharmacy and video department.
Shoppers benefit from added convenience
and lower costs.
Similarly, consumers conceivably can go
to their local bank to deposit funds, add the
teenage driver to the insurance plan and
invest savings in a mutual fund. In addition,
business customers may wish to borrow
money by taking out a bank loan or by selling corporate bonds. With the same banking
organization handling both activities, businesses save time and money by going
through the costly process of proving their

[5]

creditworthiness to only one firm instead of
two or more firms. Because of these advantages, supporters of the Gramm-Leach-Bliley
Act promised it would save consumers billions of dollars.1
Despite the hype over the act, many analysts argued that it would have only minor
effects on the financial industry because the
potential revenue gains and cost savings
from creating universal banks are small. To
the extent that these advantages exist, banking organizations had already found ways to
exploit them partly before March 2000—the
month that the act took effect—by conducting investment banking activities in so-called
Section 20 affiliates. (See article on Page 7.)
The legislation simply made it easier for
organizations to continue to engage in the
activities they had already undertaken.
More than five years have passed since
the adoption of the act, enough time to
examine the early impact that the legislation
has had on the banking industry. The evidence, thus far, suggests that the effects of
the law have been modest; consequently,
banking customers should not expect significant price reductions for their primary

The Regional Economist October 2005
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The Door Is Open,
but Banks Are Slow To Enter
Insurance and Investment Arenas
B y E l l e n H a r s h m a n , F r e d C. Ye a g e r a n d T i m o t h y J. Ye a g e r

[5]

The Regional Economist October 2005
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financial services. Two pieces of evidence
lead to this conclusion.2 First, most
financial holding companies (FHCs) continue to conduct traditional commercial
banking activities; very few firms are also
engaged heavily in insurance underwriting and investment banking. Second,
FHCs on average are no more profitable
or cost-efficient than they were before
passage of the legislation.

Five Years After Gramm-Leach-Bliley,
Financial Holding Companies Are Few in Number, Big in Size
Number

Share of banking assets

2500

100%

2000

90%

1500

80%

1000

70%

500

60%

Number of bank holding companies

Number of financial holding companies

TABLE 1

The FHC Metamorphosis

Before becoming an FHC,
the average BHC had
these ratios:

2004 Q4

2004 Q3

2004 Q2

2004 Q1

2003 Q4

2003 Q3

2003 Q2

2003 Q1

2002 Q4

2002 Q3

2002 Q2

2002 Q1

2001 Q4

2001 Q3

2001 Q2

2001 Q1

2000 Q4

2000 Q3

2000 Q2

2000 Q1

50%

FHC share of banking assets

Three years after
becoming an FHC, the
average FHC would have
these ratios:

Balance sheet ratios (percent of total assets)
Loanss
Securitiess
Deposits
Equity

62.30
25.80
79.40
9.21

58.90
27.80
80.40
9.59

Income ratios (percent of average assets)
Interest income
Interest expense
Net interest income
Noninterest income
Noninterest expense
Provision expense
Net income (ROA)
Return on equity

7.49
3.47
4.02
1.58
3.55
0.23
1.28
13.92

7.46
3.39
4.07
1.7
1.71
3.76
0.32
1.19
12.78

Performance ratios (percent)
o
Efficiency ratio

62.60

64.30

NOTE: Ratios in bold indicate statistically significant changes.

FHCs Move Slowly

One measure of the impact of the act
on the financial services industry is the
extent to which financial holding companies have taken advantage of their new
powers to conduct insurance and investment banking activities. The larger the
cost savings and revenue benefits, the
more quickly banks should respond to
the legislation.
To take advantage of the act, firms
must become financial holding companies. The chart above plots the number
[6]

of FHCs and BHCs—bank holding companies that have not elected to become
FHCs—between March 2000 and
December 2004.3 The number of FHCs
increased rapidly from 94 in March 2000
to 466 in December 2004; nevertheless,
FHCs have never accounted for more
than 23 percent of all banking organizations. As a percentage of assets, however,
FHCs account for a significant share of
total banking assets because most large
banking organizations elected to become
FHCs shortly after passage of GrammLeach-Bliley. As the line in the nearby
chart shows, in March 2000, FHCs
accounted for 65 percent of industry
assets; their share in December 2004
was 86 percent.
A firm’s designation as an FHC does
not necessarily mean that it is engaging
in insurance underwriting or investment
banking. Indeed, the process to become
an FHC is quite simple. To be eligible,
each depository institution controlled by
the banking organization must be wellcapitalized and well-managed as of the
date the company submits its declaration,
and it must have a satisfactory Community Reinvestment Act (CRA) rating from
its primary bank regulator. An election to
become an FHC is effective on the 31st
day after the date that the declaration
was received unless the Federal Reserve’s
Board of Governors notifies the company
prior to that time that the election is ineffective. The organization need not ever
conduct the newly permissible activities
authorized under Gramm-Leach-Bliley.
One indication of the weak response
of the banking industry to the law is that,
to date, financial holding companies are
involved only modestly in their new
universal banking powers to conduct
investment banking and insurance
underwriting. Moreover, the few that are
heavily engaged in these activities are the
large money-center banks that dominated
the banking industry even before passage
of the act. On average, FHCs hold less
than 1 percent of assets in investment
banking subsidiaries and just 0.24 percent of assets in insurance subsidiaries,
and these activities account for just 7 percent of revenue. In fact, investment
banking and insurance underwriting are
highly concentrated in just a few financial
holding companies. As of December
2004, of the 41 FHCs that held any
investment banking assets at all, three
organizations—Citigroup, Bank of
America and JPMorgan Chase—
accounted for 72 percent of the total.
Moreover, of the 22 FHCs with insurance
underwriting assets, just two firms—
MetLife and Citigroup—accounted for
96 percent of the total, and the concentration has since increased. In the first
quarter of 2005, Citigroup sold the bulk

of its life insurance business to Met Life.
It had already sold its property and casualty business in 2002. Citigroup’s rationale was that the capital could be invested
more profitably in other lines of business.
In sum, of the nearly 500 financial
holding companies, only a handful of
them have significant investment banking and insurance operations. Most
FHCs are not that different from more
traditional banking organizations. The
lack of activity provides circumstantial
evidence that the synergies between
these activities are relatively weak.

As Memories Fade, So Do
Restrictions on Banks’ Activities
To place the Gramm-Leach-Bliley Act in historical context, it is helpful to
examine the legislative events that separated banking from insurance and
investment banking. The National Banking Act of 1864, which established
the national bank charter, permitted banks to engage only in activities that
were “incidental” to the business of banking. Insurance activities were
excluded. Securities activities, however, were permissible as long as banks
conducted these activities through affiliates. Investment banking grew

FHC Performance Then and Now

A more direct approach to observing
the effects of Gramm-Leach-Bliley on
financial institutions is to measure
changes to a bank’s balance sheet and
profitability after it becomes an FHC.
Statistical techniques can isolate and
measure the average change in performance after banks become FHCs relative
to their performance before becoming
FHCs.4 We analyzed bank performance
between the years 1996 and 2003, assessing the marginal contribution from
becoming an FHC. The results are in
Table 1 on Page 6.
Three years after becoming an FHC,
the average banking organization shows
modest changes to its balance sheet. The
typical BHC holds $62.30 in loans for
every $100 in assets; that amount drops
to $58.90 three years after becoming an
FHC. The drop in loans is expected
because the organization presumably is
diversifying into insurance and investment banking assets. As a percent of
assets, securities holdings increase by two
percentage points, and deposits increase
by one percentage point. Equity—the
difference between assets and liabilities—
increases somewhat after a firm becomes
an FHC. The boldfaced font indicates
that all of these changes are statistically
significant—that is, the changes are not
simply the result of chance. Yet, given the
relatively wide dispersion of loan, securities, deposit and equity holdings among
banking organizations, none of these
changes is economically large.
In addition to the balance sheet
changes, the typical FHC shows a slight
decline in profitability. A banking organization that transitions from loan-making
to insurance underwriting and investment banking would expect to see its
interest income decline while its noninterest (fee) income increases. After all,
insurance and investment banking are
fee-driven services. Indeed, the typical
FHC experiences these changes. Interest
income as a percent of average assets
declines by three basis points, while the
ratio of noninterest income to average

quickly in the 1920s, fueled by the explosion in bond underwriting to finance
World War I and a booming economy and stock market.
The stock market crash of 1929 ushered in the Great Depression. Because
of the perception that banks’ involvement in securities activities facilitated
the Depression, Congress passed the Glass-Steagall Act of 1933, which prohibited banks from issuing, underwriting, selling or distributing any type of
securities with the exception of U.S. government and government agency
securities and certain municipal bonds.
By the 1970s, Depression-era conditions had faded from the minds of the
American public. In turn, the rationales for the compartmentalization of the
financial sector were questioned. A number of government-mandated studies called for banking deregulation and greater reliance on market forces.1
In addition, several studies argued that securities activities of commercial
banks were not significant factors leading to the banking crises during the
Great Depression.2 (See article on Page 8.)
Barriers between commercial banking and investment banking were lifted
gradually. Under Section 20 of the Glass-Steagall Act, banks were prohibited
from affiliating with other financial institutions that were “engaged principally
in the issue, floatation, underwriting, public sale or distribution of financial
assets.” Over the years, however, the term “engaged principally” became
subject to reinterpretation. Through a series of court rulings and Federal
Reserve Board interpretations, the type of securities and the proportion of
assets that bank affiliates could devote to these securities were broadened.
By 1996, bank affiliates were allowed to derive up to 25 percent of their revenue from underwriting corporate bond and equity issues. By late 1999, with
passage of the Gramm-Leach-Bliley Act imminent, the number of so-called
Section 20 banks stood at 45.
Given the gradual breakdown of Glass-Steagall and the merger-led growth
of bank holding companies in the mid-1990s, the largest banking organizations pressed for congressional action to repeal fully Glass-Steagall and other
barriers in the hopes of further exploiting revenue efficiencies and cost savings. Citigroup received a temporary exemption in September 1998 from the
Federal Reserve to buy Travelers Insurance, with the expectation that
Congress would act before the exemption expired.
On Nov. 12, 1999, laws separating commercial banking, investment banking and insurance activities for U.S. institutions were effectively removed with
the enactment of the Gramm-Leach-Bliley Act. Banking organizations have
since been allowed to form financial holding companies and to engage in
any activity that is financial in nature.
1

See, for example, Benston (1972).

See White (1986); Ang and Richardson (1994); Kroszner and Rajan (1994).

[7]

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Five Years After Gramm-Leach-Bliley,
Financial Holding Companies Are Few in Number, Big in Size
Number

Share of banking assets

2500

100%

2000

90%

1500

80%

1000

70%

500

60%

Number of bank holding companies

Number of financial holding companies

TABLE 1

The FHC Metamorphosis

Before becoming an FHC,
the average BHC had
these ratios:

2004 Q4

2004 Q3

2004 Q2

2004 Q1

2003 Q4

2003 Q3

2003 Q2

2003 Q1

2002 Q4

2002 Q3

2002 Q2

2002 Q1

2001 Q4

2001 Q3

2001 Q2

2001 Q1

2000 Q4

2000 Q3

2000 Q2

2000 Q1

50%

FHC share of banking assets

Three years after
becoming an FHC, the
average FHC would have
these ratios:

Balance sheet ratios (percent of total assets)
Loanss
Securitiess
Deposits
Equity

62.30
25.80
79.40
9.21

58.90
27.80
80.40
9.59

Income ratios (percent of average assets)
Interest income
Interest expense
Net interest income
Noninterest income
Noninterest expense
Provision expense
Net income (ROA)
Return on equity

7.49
3.47
4.02
1.58
3.55
0.23
1.28
13.92

7.46
3.39
4.07
1.7
1.71
3.76
0.32
1.19
12.78

Performance ratios (percent)
o
Efficiency ratio

62.60

64.30

NOTE: Ratios in bold indicate statistically significant changes.

FHCs Move Slowly

FHC Performance Then and Now

See, for example, Benston (1972).

See White (1986); Ang and Richardson (1994); Kroszner and Rajan (1994).

[7]

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Re-emergence of Universal Banking
Raises Specter of Earlier Banking Crisis
Will the re-emergence of universal banking authorized under the Gramm-LeachBliley Act harm investors and reintroduce instability into the U.S. financial system?
This question presumes that universal banks were harmful to the financial system
in the 1930s.
The Glass-Steagall Act of 1933 separated commercial banking from investment
banking because of the perception that organizations commingling these activities
harmed public investors and contributed to the banking crisis during the Great
Depression. Two related arguments were advanced by Sen. Carter Glass, D-Va.,
and others in the early 1930s to separate commercial and investment banking.
First, universal banking creates significant conflicts of interest within the firm—
conflicts that potentially harm investors. Suppose a bank has a loan outstanding
to a corporate customer, and the bank—but not the public—knows that the creditworthiness of the customer is deteriorating. The universal bank has an incentive
to repackage the loans into securities and misrepresent the quality of the securities
to the unsuspecting public. Alternatively, investment analysts of the universal bank
might provide overly optimistic assessments of a firm’s earnings potential if the bank
also has a lending relationship with the firm.
Second, the volatile investment banking business could contribute to banking
instability by draining the commercial bank’s capital or by harming the bank through
reputational risk. The investment bank might take even more risk, knowing that the
bank would bail it out if the business soured.
But recent research disputes these perceptions.
If universal banks exploit their information advantage to underwrite corporate
securities so that the corporation can pay off a high-risk bank loan, then securities
underwritten by universal banks should be riskier and have higher defaults than
securities issued by stand-alone investment banks. The evidence from the 1930s
suggests the opposite to be true.1
The evidence also refutes the notion that universal banks fostered banking instability.2 In fact, banks that had investment banking affiliates were less likely to fail in
the 1930s than banks without such affiliates. In addition, investment bank affiliates
did not drain equity from commercial banks.
Finally, commercial bank earnings and investment bank earnings were not highly
correlated, suggesting that universal banks may have had more stable earnings than
stand-alone banks.
That universal banks did not contribute negatively to the 1930s banking crisis is
not proof that they are a good idea today. The conflicts of interest and potential for
financial instability still remain. Indeed, JPMorgan Chase and Citigroup—banking
organizations that had exemptions to engage in limited investment banking before
passage of the Gramm-Leach-Bliley Act—recently paid fines over their alleged role
in fueling the Enron boom and bust.3 One of the charges was that they used creative bank financing to lend to Enron to court more investment banking business.
Another charge was that analysts at the banks were promoting Enron to investors
even when the analysts knew the firm was financially unsound.
Despite the potential for abuse from universal banking, today’s financial environment is much more tightly regulated than the pre-Depression financial environment.
The Securities Act of 1933 requires corporations to register their securities with the
Securities and Exchange Commission. Investors can be better informed, which helps
them to make better investment decisions. One study documents the reduction in
the variance of investor returns following implementation of the Securities Act.4
Bank regulation has also improved. The introduction of federal deposit insurance
came with mandated safety and soundness examinations. Examiners can limit
capital distributions from a troubled bank and force recapitalization if necessary. In
addition, affiliate transactions must be done at arm’s length. In other words, a commercial bank cannot give lending terms to its affiliates that are better than others
could get in a competitive market. These changes limit the ability of a troubled
investment banking affiliate to drain equity from the commercial bank.
Given that universal banks contributed little to the 1930s banking crisis and that
stronger regulations are in place to prevent abuse, the return of universal banking in
the United States is unlikely to contribute to financial instability.
1

See Kroszner and Rajan (1994) and Ang and Richardson (1994).
2 See White (1986).
3 See McLean and Elkind (2003).
4 See Simon (1989).

[8]

assets jumps by 13 basis points. However, the increase in noninterest income
is offset by an even larger increase in
noninterest (or overhead) expense.
Noninterest expense to average assets
surges by 21 basis points. In addition,
provision expense—the income set aside
to cover future credit losses—increases by
nine basis points. Overall profitability,
then, as measured by return on assets,
slips by nine basis points to 1.19 percent,
and return on equity drops by 114 basis
points due to the drop in net income
and the increase in equity. Only about
half of the income ratio changes are
statistically significant.
Do the FHCs gain cost advantages
relative to BHCs? The increase in noninterest expense noted above suggests
that the answer is “no,” and another
measure—the efficiency ratio—confirms
this result. The efficiency ratio is calculated
as overhead costs divided by operating
income. Intuitively, the efficiency ratio
shows how much overhead the organization spends to earn $1 in operating
income. Lower values signal better cost
efficiency. The average BHC between
1996 and 2003 had an efficiency ratio of
62.6 percent, suggesting that it took 63
cents in expenditures to yield a dollar in
operating income. Three years after
becoming an FHC, however, that ratio
increased to 64.3 percent. In other words,
FHCs were less cost-efficient than they
were as BHCs. To be sure, part of the
increase in costs may reflect one-time
expenditures to acquire and absorb
investment banking and insurance units
into the organization. In the short run,
however, FHCs did not gain a cost
advantage over BHCs.
Are the Section 20 Banks Different?

As the article on Page 7 notes, Section
20 of the Glass-Steagall Act allowed the
Federal Reserve to grant permission to
select banking organizations to conduct
limited investment banking activities
prior to passage of the Gramm-LeachBliley Act. Some organizations began
underwriting previously ineligible debt
and equity issues as early as 1986. It
could be the case that only those firms
with previous securities activities (through
Section 20 exemptions) were in a position
to take immediate advantage of the new
universal banking powers granted in the
Gramm-Leach-Bliley Act. If so, a separate
analysis of the so-called Section 20
FHCs—FHCs that had Section 20 affiliates before passage of the act—may
reveal synergies between investment
banking and commercial banking that
are absent in other FHCs.
Indeed, such an analysis shows that
three years after becoming Section 20

TABLE 2
Before becoming an FHC,
the average Section 20 BHC
had these ratios:

Three years after
becoming an FHC, the
average Section 20 FHC
would have these ratios:

Balance sheet ratios (percent of total assets)
Loanss
Securities
Depositss
Equity

60.30
18.10
64.00
7.75

52.10
22.30
65.50
8.43

Income ratios (percent of average assets)
Interest income
Interest expense
Net interest income
Noninterest income
Noninterest expense
Provision expense
Net income (ROA)
Return on equity

7.04
3.49
3.55
2.77
3.89
0.36
1.38
17.38

6.66
3.21
3.45
3.00
3.
4.06
0.49
1.24
14.91

Performance ratios (percent)
o
Efficiency ratio

61.80
0

63.
63.20

The Section 20 FHC Metamorphosis

NOTE: Ratios in bold indicate statistically significant changes.

FHCs, the organizations sharply reduce
their loan holdings by 8.2 percentage
points and they increase securities
holdings by 4.2 percentage points. In
addition, the ratio of equity to assets
increases by 68 basis points. All of these
changes, which can be seen in Table 2
above, are statistically significant.
Despite the balance sheet changes,
there is little evidence to support profit
or cost advantages for Section 20 FHCs.
Interest income decreases by 38 basis
points, although noninterest income
increases by just 23 basis points. Return
on assets is 14 basis points lower for
Section 20 FHCs than for Section 20
BHCs, and return on equity dips by
nearly 2.5 percentage points. Finally,
the efficiency ratio at Section 20 FHCs
is a statistically insignificant 140 basis
points higher than the ratio at Section
20 BHCs, suggesting that the Section 20
FHCs did not experience cost advantages
after becoming FHCs.
In sum, the effects of the GrammLeach-Bliley Act on Section 20 FHCs
are modest, but certainly larger than
the effects on other FHCs. Although
Section 20 FHCs do not appear to be
more profitable or cost effective than
other FHCs, the former do appear to
be repositioning themselves to exploit
presumed synergies between investment banking and commercial banking.
Some anecdotal evidence indicates
that these synergies are developing. A
recent New York Times article documented
the relative decline of two stand-alone
investment banks—Merrill Lynch and
Morgan Stanley—relative to the investment banks that are part of banking
organizations such as Citigroup
and JPMorgan Chase.5 An integrated
investment bank is able to provide its
customers with a broad range of services
that stand-alone investment banks cannot match.

Whether Gramm-Leach-Bliley will
affect the viability of the stand-alone
investment bank in the long run is not
clear. What is clear is that the act to date
has not caused a financial revolution;
rather, it has contributed to the deregulation of financial markets and institutions within the United States with
remarkably little impact.
Conclusion

One justification for the GrammLeach-Bliley Act of 1999 was to provide
new opportunities to financial institutions to exploit revenue opportunities
and cost savings by becoming universal
banks. We fail to find evidence, however, that FHCs were able to capture
significant and immediate benefits from
this legislation.
These results should not be construed
as evidence that the act was a step in the
wrong direction. Rather, the act is a further step in the evolutionary process of
financial deregulation that gives financial institutions more flexibility to adapt
to their global environment. Indeed, our
results are consistent with the view of
Philadelphia Fed President Anthony
Santomero, who wrote in 2001 that
financial modernization is not a single
event or law, but rather a relentless
process of eroding the constraints placed
on the financial marketplace during the
Great Depression. Perhaps the shortrun synergies between commercial
banking, investment banking and insurance are modest, but the long-term synergies may be much larger.
Ellen Harshman is the dean of the John Cook
School of Business at Saint Louis University.
Fred C.Yeager is professor of finance at Saint
Louis University. His son, Timothy J.Yeager, is
an economist and assistant vice president at the
Federal Reserve Bank of St. Louis.

[9]

ENDNOTES
1

See Anason (1999) and Zaretsky
(2000).

This article summarizes research by
Yeager et. al (2005). Refer to the full
paper for more details.

Although FHCs are technically also
BHCs, we treat these groups as mutually exclusive. The data include all
top-tier domestic banking organizations that file the Federal Reserve’s
FR Y-9C—the Consolidated Financial
Statements for Bank Holding Companies. By including only top-tier
organizations, we avoid double counting parent companies and their subsidiaries. Mandatory Y-9C reporters
include all domestic BHCs and FHCs
with total consolidated assets of at
least $150 million. Smaller organizations are omitted from this sample.

The statistical technique employed is
a fixed-effects panel regression.

See Thomas (2004). The animation
studio DreamWorks proved a specific
example of how JPMorgan Chase was
able to use its bank relationship with
the firm to win the investment banking business.

REFERENCES
Anason, Dean. “Clinton Enacts GlassSteagall Repeal,”American Banker,
Vol. 164, No. 219, Nov. 15, 1999, p. 2.
Ang, James S. and Richardson, Terry.
“The Underwriting Experience of
Commercial Bank Affiliates Prior to
the Glass-Steagall Act: A Re-examination of Evidence for Passage of the
Act,” Journal of Banking and Finance,
March 1994,Vol. 18, pp. 351-95.
Benston, George J. “Discussion of the
Hunt Commission Report,” Journal of
Money, Credit & Banking, November
1972,Vol. 4, No. 4. pp. 985-89.
Kroszner, Randall S. and Rajan,
Raghuram G. “Is the Glass-Steagall
Act Justified? A Study of the U.S.
Experience with Universal Banking
before 1933,”American Economic
Review, September 1994,Vol. 84,
No. 4, pp. 810-32.
McLean, Bethany and Elkind, Peter.
“Partners in Crime,”Fortune, October
2003,Vol. 148, Issue 9, pp. 78-100.
Santomero, Anthony. “The Causes and
Effects of Financial Modernization,”
speech to Pennsylvania Bankers
Association, meeting in Charleston,
S.C., May 7, 2001. See www.philadelphiafed.org/publicaffairs/speeches/
santomero9.html.
Simon, Carol. “The Effect of the 1933
Securities Act on Investor Information
and the Performance of New Issues,”
American Economic Review, June 1989,
Vol. 79, No. 3, pp. 295-318.
Thomas, Landon. “The Incredible Shrinking Investment Bank,” New York Times,
Oct. 17, 2004, section 3, p. 1.
White, Eugene. “Before the Glass-Steagall
Act: An Analysis of the Investment
Banking Activities of National Banks,”
Explorations in Economic History,
January 1986,Vol. 23, pp. 33-55.
Yeager, Timothy J.; Yeager, Fred C.; and
Harshman, Ellen. “The Financial
Services Modernization Act: Evolution or Revolution?” Working Paper
No. 2004-05, Federal Reserve Bank of
St. Louis, June 2005.
Zaretsky, Adam. “A New Universe in
Banking after Financial Modernization,” The Regional Economist, Federal
Reserve Bank of St. Louis, April 2000,
pp. 5-9.

The Regional Economist October 2005
■

www.stlouisfed.org

See Kroszner and Rajan (1994) and Ang and Richardson (1994).
2 See White (1986).
3 See McLean and Elkind (2003).
4 See Simon (1989).

[8]

TABLE 2
Before becoming an FHC,
the average Section 20 BHC
had these ratios:

Three years after
becoming an FHC, the
average Section 20 FHC
would have these ratios:

Balance sheet ratios (percent of total assets)
Loanss
Securities
Depositss
Equity

60.30
18.10
64.00
7.75

52.10
22.30
65.50
8.43

Income ratios (percent of average assets)
Interest income
Interest expense
Net interest income
Noninterest income
Noninterest expense
Provision expense
Net income (ROA)
Return on equity

7.04
3.49
3.55
2.77
3.89
0.36
1.38
17.38

6.66
3.21
3.45
3.00
3.
4.06
0.49
1.24
14.91

Performance ratios (percent)
o
Efficiency ratio

61.80
0

63.
63.20

The Section 20 FHC Metamorphosis

NOTE: Ratios in bold indicate statistically significant changes.

[9]

ENDNOTES
1

See Anason (1999) and Zaretsky
(2000).

This article summarizes research by
Yeager et. al (2005). Refer to the full
paper for more details.

The statistical technique employed is
a fixed-effects panel regression.

See Thomas (2004). The animation
studio DreamWorks proved a specific
example of how JPMorgan Chase was
able to use its bank relationship with
the firm to win the investment banking business.

The Regional Economist October 2005
■

www.stlouisfed.org

ad credit? No Credit?
Bankruptcy? No problem.

So go the large number of ads placed
by businesses that cater to the financially overextended. Such ads are an
example of the evolving view that
bankruptcy is seen as an acceptable
alternative to continued financial
hardship. As evidence of our growing
bankruptcy culture, personal bankruptcy filings in the United States
increased from 1.2 per 1,000 people
in 1980 to over 5.4 per 1,000 people
last year, an increase of nearly 350
percent.1 In terms of annual growth,
personal bankruptcy filings per 1,000
people have been growing at an
average rate of nearly 7 percent,

Lower-income individuals are
more likely to file for bankruptcy in
response to an insolvency event,
given their relatively limited access
to financial counseling and fewer and
less-diversified financial resources.
The typical bankruptcy filer is a blue
collar, high school graduate who is
the head of a household in the lower
middle income class with heavy use
of credit, according to consumer
economists’surveys.3
Several studies point to the decline
in the social stigma related to bankruptcy as being partly responsible
for the increase in filings. Also,

grown over the past 25 years in the
presence of relatively rapid income
growth. In addition, consumer debt
as a percentage of disposable personal
income has risen from 11.1 percent in
1980 to over 13.1 percent last year.
Bankruptcy levels rise during
times of economic growth as people
become more confident in the future
and are willing to take on a greater
debt burden and finance their
increasing obligations based on current income. However, as the supply
of credit inevitably begins to tighten

and

By Thomas A. Garrett
and Lesli S. Ott

Personal Bankruptcies Soar!
about 1.5 times greater than the
average rate of annual per capita
GDP growth.
These statistics, however, disguise
the fact that personal bankruptcy filings are not equal across the country.
For example, at the state level, Tennessee had the highest rate of personal
bankruptcy filings in the nation, with
over 10 filings per 1,000 persons last
year—nearly twice the U.S. rate—
whereas Massachusetts ranked last
with 2.8 filings per 1,000 people.
Explaining Bankruptcy

Researchers have found that the
primary cause of personal bankruptcy
is high levels of consumer debt often
coupled with an unexpected insolvency event, such as the loss of a
job, a major medical expense not
covered by insurance, divorce or
death of a spouse.2

the Bankruptcy Reform Act of 1978
is seen as an impetus for the record
levels of bankruptcy filings in the
1980s and early 1990s.4 This law
relaxed asset exemption levels and
made it easier for individuals to file
for bankruptcy.
The rise and spread of casino gambling since the early 1990s also has
been considered to be responsible,
in part, for the rise in bankruptcies.
However, the research on casino
gambling and personal bankruptcy
is mixed.5 The research that does find
a positive effect of casino gambling on
bankruptcy rates usually finds that
this effect is localized and very small
—much smaller than the effect from
the aforementioned factors.
Research suggests that bankruptcies may actually increase during periods of economic growth rather than
during economic downturns.6 For
example, personal bankruptcies have
[10]

and interest rates and loan repayments
begin to rise, the financial strain can
become quite large. When this strain
is coupled with an unexpected negative shock to income, an individual no
longer has the ability to maintain the
financial obligations undertaken in a
time of economic exuberance.
Thus, although lower-income individuals may be more likely to file for
bankruptcy in response to a negative
income shock, income growth over
time also creates the possibility that
individuals may become financially
overextended and, thus, see bankruptcy as a solution.

exempt assets and have them distributed
among his creditors as partial or full debt
repayment.7 Examples of exempt assets
include equity in a home (called a homestead exemption) and 401(k) funds. In a
relatively short time after liquidation, the
debtor is forgiven the outstanding balance of his unsecured debts (remaining
credit-card debt, for example). Under
Chapter 13, in lieu of an asset liquidation,
a debtor consents to a three- to five-year
payment plan whereby he pays down a
portion of his unsecured debts and is
then forgiven the remaining balance.
Under both plans, particular types of
debt—such as government-backed
student loans, child support and alimony
payments, and recent income taxes—
are ineligible for forgiveness and must be
repaid. The overall trend has consistently
been that over two-thirds of filers choose
Chapter 7.
The federal government has recently
implemented a policy aimed at reversing
the increasing trend in personal bankruptcy filings that has occurred since the
passage of the 1978 act. On April 20,
2005, President Bush signed the Bankruptcy Abuse Prevention and Consumer
Protection Act, which is the most sweeping bankruptcy reform legislation passed
in over 25 years. Previously, most major
pieces of bankruptcy legislation slightly
favored the consumer (debtor) over creditors. However, the 2005 act makes filing
for bankruptcy more difficult through
income-means testing, tougher guidelines for the homestead exemption,
increased lawyer liability and required
credit counseling.
Eighth District States
vs. the Nation

The table provides a comparison of
personal bankruptcy filings in Eighth
District states with average bankruptcy
filings in other states. Of the Eighth
District states, Tennessee had the greatest

Debtors filing for personal bankruptcy protection may do so under two
types of structured plans, Chapter 7
or Chapter 13. Under Chapter 7, a
debtor is required to liquidate all non-

Thomas A. Garrett is a research officer and economist, and Lesli S. Ott is a research associate,
both at the Federal Reserve Bank of St. Louis.

Personal Bankruptcies and Demographics Eighth District and U.S.
Bankruptcies
per 1,000 people
2004

Average annual
percent change
1980 to 2004

Per capita
income ($)
2004

Unemployment
rate (%)
2004

Arkansas

8.6

10.8

25,725

Illinois

6.3

6.1

34,351

6.2

Indiana

8.8

7.3

30,094

5.2

Kentucky

7.0

6.7

27,709

5.3

Mississippi

7.2

8.7

24,650

6.2

6.5

8.5

Missouri

Bankruptcy Law

number of filings per 1,000 people last
year (10.5) and Illinois had the lowest
(6.3). On average, Eighth District states
had a filing rate of 7.7 per 1,000 people
compared to an average filing rate of
5 per 1,000 people in other states. Thus,
on average, states located in the Eighth
District had roughly 2.7 more individuals
per 1,000 filing for personal bankruptcy.
Although Eighth District states have a
relatively higher rate of bankruptcy filing,
the annual average growth in bankruptcies in the District since 1980 has been
slightly lower than that of other U.S. states
—7.2 percent vs. 7.8 percent. Within the
District, Arkansas had the highest average
annual growth rate (10.8 percent) and Illinois had the lowest (6.1 percent). Although
Tennessee had the highest rate of bankruptcy of all District states (and the nation)
last year, the average annual growth in
bankruptcies in Tennessee was less than
that in most other Eighth District states.
The table also shows that Eighth
District states had an average per capita
income that was nearly $3,000 less than
other U.S. states’ last year and an unemployment rate that was 0.6 percentage
points higher than other U.S. states’. Comparing these data with the bankruptcy
data suggests both per capita income and
unemployment have a negative relationship with personal bankruptcy filings.8
Note, however, that while Tennessee had
a higher bankruptcy filing rate than other
states did, it had per capita income that
was higher than that of most other Eighth
District states. Although a definitive
causal relationship can be determined
only by more rigorous statistical methods,
the negative correlation is supportive of
the finding that, at a given point in time,
lower-income individuals may be more
likely to file for bankruptcy, given relatively less financial literacy and less
diversification of fewer financial assets.

Tennessee

10.5

7.1

5.7

30,608

5.7

30,005

5.4
5.7

Eighth District states

7.7

7.2

30,560

U.S. excluding Eighth District

5.0

7.8

33,317

5.1

U.S. total

5.3

7.6

32,937

5.5

NOTE: Bankruptcy data are from the Administrative Office of the U.S. Courts, and demographic
data are from the U.S. Census.

[11]

ENDNOTES
1

Bankruptcy data are from the
Administrative Office of the U.S.
Courts. See www.uscourts.gov/
adminoff.html.

See Gropp et al. (1997), Buckley and
Brinig (1998) and Nelson (1999).

See Shephard (1984).

See Domowitz and Eovaldi (1993).

See Nichols et al. (2000) and
Thalheimer and Ali (2004).

See Eckstein and Sinai (1986) and
Clark (1997).

See www.bankruptcydata.com and
www.bankruptcyinformation.com
for a comprehensive overview of
bankruptcy laws and procedures.

The correlation between per capita
income and bankruptcy filings is
–0.18, and the correlation between
filings and the unemployment rate
is –0.55.

REFERENCES
Buckley, F.H. and Brinig, Margaret F.
“The Bankruptcy Puzzle.” Journal of
Legal Studies, January 1998, Vol. 27,
pp. 187-207.
Clark, Kim. “Why So Many Americans
Are Going Bankrupt.” Fortune,
Aug. 4, 1997, pp. 24-6.
Domowitz, Ian and Eovaldi, Thomas L.
“The Impact of the Bankruptcy
Reform Act of 1978 on Consumer
Bankruptcy.” Journal of Law and
Economics, October 1993, Vol. 36,
pp. 803-35.
Eckstein, Otto and Sinai, Alan. “The
Mechanisms of the Business Cycle
in the Postwar Era.” The American
Business Cycle. Chicago: University
of Chicago Press, 1986, pp. 39-105.
Gropp, Reint; Scholz, John K.; and
White, Michelle J. “Personal Bankruptcy and Credit Supply and
Demand.” Quarterly Journal of
Economics, February 1997, Vol. 112,
pp. 217-51.
Nelson, Jon P. “Consumer Bankruptcy
and Chapter Choice: State Panel
Evidence.” Contemporary Economic
Policy, October 1999, Vol. 17, No. 4,
pp. 552-66.
Nichols, Mark W.; Sitt, B. Grant; and
Giacopassi, David. “Casino Gambling and Bankruptcy in New
United States Casino Jurisdictions.”
Journal of Socio-Economics, 2000,
Vol. 29, No. 3, pp. 247-61.
Shephard, Lawrence. “Accounting for
the Rise in Consumer Bankruptcy
Rates in the United States: A Preliminary Analysis of Aggregate Data
(1945–1981).” Journal of Consumer
Affairs, Winter 1984, Vol. 18,
pp. 213-30.
Thalheimer, Richard and Ali, Mukhtar
M. “The Relationship of Pari-Mutuel
Wagering and Casino Gaming to
Personal Bankruptcy.” Contemporary
Economic Policy, July 2004, Vol.22,
pp. 420-32.

The Regional Economist October 2005
■

www.stlouisfed.org

ad credit? No Credit?
Bankruptcy? No problem.

and

By Thomas A. Garrett
and Lesli S. Ott

The table provides a comparison of
personal bankruptcy filings in Eighth
District states with average bankruptcy
filings in other states. Of the Eighth
District states, Tennessee had the greatest

Debtors filing for personal bankruptcy protection may do so under two
types of structured plans, Chapter 7
or Chapter 13. Under Chapter 7, a
debtor is required to liquidate all non-

Thomas A. Garrett is a research officer and economist, and Lesli S. Ott is a research associate,
both at the Federal Reserve Bank of St. Louis.

Personal Bankruptcies and Demographics Eighth District and U.S.
Bankruptcies
per 1,000 people
2004

Average annual
percent change
1980 to 2004

Per capita
income ($)
2004

Unemployment
rate (%)
2004

Arkansas

8.6

10.8

25,725

Illinois

6.3

6.1

34,351

6.2

Indiana

8.8

7.3

30,094

5.2

Kentucky

7.0

6.7

27,709

5.3

Mississippi

7.2

8.7

24,650

6.2

6.5

8.5

Missouri

Bankruptcy Law

Tennessee

10.5

7.1

5.7

30,608

5.7

30,005

5.4
5.7

Eighth District states

7.7

7.2

30,560

U.S. excluding Eighth District

5.0

7.8

33,317

5.1

U.S. total

5.3

7.6

32,937

5.5

NOTE: Bankruptcy data are from the Administrative Office of the U.S. Courts, and demographic
data are from the U.S. Census.

[11]

ENDNOTES
1

Bankruptcy data are from the
Administrative Office of the U.S.
Courts. See www.uscourts.gov/
adminoff.html.

See Gropp et al. (1997), Buckley and
Brinig (1998) and Nelson (1999).

See Shephard (1984).

See Domowitz and Eovaldi (1993).

See Nichols et al. (2000) and
Thalheimer and Ali (2004).

See Eckstein and Sinai (1986) and
Clark (1997).

See www.bankruptcydata.com and
www.bankruptcyinformation.com
for a comprehensive overview of
bankruptcy laws and procedures.

The correlation between per capita
income and bankruptcy filings is
–0.18, and the correlation between
filings and the unemployment rate
is –0.55.

The Regional Economist October 2005
■

www.stlouisfed.org

The Economics of
Charitable Giving
What Gives?

this theory, donors view the gifts of others as imperfect substitutes of their own
contributions. That is, they would prefer
that gifts come from themselves rather
than from others. This, too, implies that
the crowding-out from government grants
will not be complete. The reason is that
voluntary contributions and involuntary
giving through taxes are not equivalent
in people’s minds; consequently, government taxation does not reduce private contributions by the same amount.

By Rubén Hernández-Murillo and Deborah Roisman
enerosity is a long-standing
American tradition, one that
continues to grow. The
Giving USA Foundation estimates
that Americans gave $248.5 billion to
charity last year, a threefold increase
in inflation-adjusted terms since
1964. To put the size of the donations in perspective, Americans gave
to charity last year an amount roughly
equal to the national incomes of
Norway or Indonesia.1 The most
important source of giving is, not
surprisingly, contributions from private individuals, which represent
more than 75 percent of the total.
The second most important source
of contributions is foundations, and
in third place, bequests.
What motivates people to give?
Who gives? What is the price of giving? Why do people volunteer time to
charitable activities? Economists have
found some answers to these questions, but they have just started to
model philanthropy as a market. As
they do so, they are trying to analyze
not only the strategic behavior of
donors, but also the strategic behavior
of charities. They are viewing charities
as firms that hire inputs to produce
goods and services. Competition
among charities for private donations
is also being examined, as are the
interactions between the supply and
demand for giving. Then there’s the
role of the government: It often provides charitable organizations with
grants that are financed by income
taxes. Do these grants displace donations from private individuals—the
“crowding out” hypothesis—and, if
so, to what extent?2
All of this is important for the
design of public policy and for
assessing how efficient charities are
at providing the services they offer,
such as alleviating poverty or funding
cancer research.

Motivations for Giving

Why do people give? Studies
overwhelmingly suggest that people
are not entirely altruistic when giving.
Individuals seem to derive more ben-

efits from the act of
giving itself than from
the benefits that their
gifts generate for
others. The
nature of these
benefits, however, is not very
clear. Donors may care
about the total amount
of goods or services that
charities produce, or
donors may enjoy the
simple act of giving.
Individuals may also
care about the public
recognition they receive
from giving.

Prestige

Yet another model comes from economists Amihai Glazer and Kai Konrad.
They say the data show that donors give,
at least partly, to signal wealth status and
not just because they obtain internal satisfaction. Economist William Harbaugh
further realized that when the names of
donors are publicly announced and the
gift amounts are given in categories (gifts
of $500 to $999 to qualify as “sponsor,”
$1,000 to $1,999 to qualify as “patron,”
etc.), most contributions are exactly the
minimum amount required for inclusion
in each category. Preference for prestige
implies that charities can increase contributions by reporting gift categories and
publicizing donations.

Perfect Altruism

Under the theory of “perfect altruism,”donors are concerned primarily
that charities receive some total
amount of money, regardless of the
sources. An individual donor is indifferent between giving a dollar to a
charity and the charity’s receiving the
dollar from someone else. For example, if a donor thinks that a particular
charity should receive a total of $1,000
from all sources to meet its needs, and
the donor estimates that other sources
will provide $900, he will donate the
remaining $100. If, instead, the donor
estimates that other sources will provide $1,000 or more in total, he will
not give anything to that charity.
One implication of the perfect
altruism model is that individual
donations can be completely “crowded
out” by government contributions.
Using the example above, if the government taxes the donor $10 and
hands it over to the charity, the donor
will simply reduce his contributions
to the charity by $10. For the charity,
the net effect of the government
donation is zero.
This theory, however, has several
implications that are not validated
by the empirical evidence on private
charities. Studies have found that
the crowding out is only partial at
most.3 Why? Because donors get
more satisfaction out of giving a
[12]

dollar directly to charity than they
do out of seeing a dollar of their
tax money go directly to that same
charity. They want to contribute on
their own.
The “perfect altruism” theory also
seems to fall apart when the number
of potential donors is large. Economist
James Andreoni and others established in the 1980s that the theory
would imply that individuals would
not try to anticipate what everyone
else is giving because the gift of any
one donor would be small relative to
the total. The contributions of most
donors, then, would fall toward zero,
except for the donations from the
very rich, who, because of the size of
their contributions, would maintain
some control over the total amount
raised. But the data don’t support
this scenario. They show, instead,
that people from all income levels
continue to give.
The Warm Glow

Andreoni and others have come
up with alternative theories for why
people give to charity. One is the
“warm glow” theory, by which donors
derive an internal satisfaction from
giving, although their contributions
may be entirely anonymous. Under

Who Gives?

Although several demographic characteristics have been found useful in predicting charitable giving, income is by far
the most important predictor of giving
behavior, according to economists Robert
McClelland and Arthur Brooks. Giving as
a function of income has a U-shaped pattern—people in the lowest and highest
income groups give larger proportions of
their incomes to charity than individuals
in middle-income groups. A plausible
explanation for this is that people in
lower-income groups tend to give more
to religious organizations, while people in
higher-income groups simply have more
disposable income. (Interestingly, very
rich people give almost nothing to religious charities.) McClelland and Brooks
find that this U-shaped pattern persists
even when accounting for additional variables associated with income. This relationship with income implies that the
philanthropy industry will continue to
thrive as the economy prospers.
Charitable giving also increases with
age and education; it varies, too, with
respect to sex (women give more) but
not with race.4

that the richest individuals, who face the
highest marginal tax rate, have the greatest incentive to donate because they face
the lowest marginal cost of giving. (For
them, charitable giving carries with it the
highest effective subsidy.) In other
words, for an individual facing a marginal
tax rate of 30 percent, the price of a dollar
given to charity is 70 cents; the remaining
30 cents are paid by the government in
taxes foregone, hence the subsidy. (Note
that someone who does not itemize
deductions effectively pays a price of one
dollar for each dollar of giving.)
Giving Time or Money

Individuals often volunteer time to
charitable activities. Andreoni explains
that if individuals were perfectly altruistic,
we should observe little volunteering.
Why? Volunteering time implies an
opportunity cost to individuals, as they
could work and be paid elsewhere and
instead give some of those wages to the
charity. Charities value volunteer services
at the market wages they would have to
pay to hire labor services. Presumably, the
opportunity cost of volunteers is higher
than this imputed wage because people
only volunteer to do work for which they
are overqualified. If individuals were perfectly altruistic and cared only about the
total value of their monetary contributions
plus imputed wages for their time, they
would prefer to work elsewhere for pay
and contribute money to the charity. This
implication is not validated by the evidence. People do volunteer their time to
charitable activities. Thus, Andreoni concludes, it is best to think of volunteering
as having some independent warm glow
component as well.
What Gives?

Although some people may be altruistic when giving, economics tells us that
the dominant motivation is the internal
satisfaction that individuals derive from
the act of giving itself. Individuals derive
utility from giving much in the same way
they obtain satisfaction from buying a
new car or eating at a restaurant; especially when the number of donors is
large, the social context of other people’s
giving is overshadowed by the satisfaction of one’s own giving when considering how much to give.
Rubén Hernández-Murillo is a senior economist,
and Deborah Roisman is a senior research associate, both at the Federal Reserve Bank of St. Louis.

The Price of Giving

The fact that charitable donations can
be deducted from taxable income implies
[13]

ENDNOTES
1

See www.worldbank.org/data/
databytopic/GNI.pdf.

For a more thorough review of the literature, see Andreoni (forthcoming).

For example, see Steinberg (1989).

See Yen (2002), Andreoni and Vesterlund (2001), and Rooney et al. (2005).

REFERENCES
Andreoni, James. “Privately Provided
Public Goods in a Large Economy:
The Limits of Altruism,” Journal of
Public Economics, February 1988,
Vol. 35, No. 1, pp. 57-73.
_______.“Giving with Impure Altruism:
Applications to Charity and Ricardian
Equivalence,” Journal of Political Economy, December 1989,Vol. 97, No. 6,
pp. 1, 447-58.
______.“Impure Altruism and Donations
to Public Goods: A Theory of Warm
Glow Giving,” Economic Journal, June
1990,Vol. 100, No. 401, pp. 464-77.
______.“Philanthropy,” in: Louis-Andre
Gerard-Varet, Serge-Christophe Kolm
and Jean Mercier Ythier, eds.,
Handbook of the Economics of Giving,
Altruism and Reciprocity, Part 1, NorthHolland: Elsevier, forthcoming.
______ and Vesterlund, Lise. “Which is
the Fair Sex? Gender Differences in
Altruism,” The Quarterly Journal of
Economics, February 2001,Vol. 116,
No. 1, pp. 293-312.
Glazer, Amihai and Konrad, Kai A. “A
Signaling Explanation for Charity,”
American Economic Review, September
1996,Vol. 86, No. 4, pp. 1,019-28.
“Giving USA 2005: The Annual Report
on Philanthropy for the Year 2004,”
The Center on Philanthropy at
Indiana University, 50th Edition.
See www.givingusa.org.
Harbaugh, William T. “The Prestige
Motive for Making Charitable
Transfers,”American Economic Review
Papers and Proceedings, May 1998,
Vol. 88, No. 2, pp. 277-82.
McClelland, Robert and Brooks, Arthur C.
“What is the Real Relationship
between Income and Charitable
Giving?” Public Finance Review,
September 2004,Vol. 32, No. 5,
pp. 483-97.
Rooney, Patrick M.; Mesch, Debra J.; Chin,
William; and Steinberg, Kathryn S.
“The Effects of Race, Gender, and
Survey Methodologies on Giving in
the U.S.,” Economics Letters, February
2005,Vol. 86, No. 2, pp. 173-80.
Steinberg, Richard. “The Theory of
Crowding Out: Donations, Local
Government Spending, and the ‘New
Federalism’,” in Richard Magat, ed.,
Philanthropic Giving: Studies in Varieties
and Goals. New York: Oxford University
Press, 1989, pp. 143-56.
Yen, Steven T. “An Econometric Analysis
of Household Donations in the
U.S.A.,” Applied Economic Letters,
October 2002,Vol. 9, No. 13, pp. 837-41.

The Regional Economist October 2005
■

www.stlouisfed.org

The Economics of
Charitable Giving
What Gives?

Motivations for Giving

Why do people give? Studies
overwhelmingly suggest that people
are not entirely altruistic when giving.
Individuals seem to derive more ben-

Prestige

Perfect Altruism

Who Gives?

The Price of Giving

The fact that charitable donations can
be deducted from taxable income implies
[13]

ENDNOTES
1

See www.worldbank.org/data/
databytopic/GNI.pdf.

For a more thorough review of the literature, see Andreoni (forthcoming).

For example, see Steinberg (1989).

See Yen (2002), Andreoni and Vesterlund (2001), and Rooney et al. (2005).

Community Profile

The Regional Economist October 2005
■

www.stlouisfed.org

Rice Industry Stands Tall in Stuttgart
n a town where some cars sport
“Have a Rice Day” bumper stickers
and grain silos dominate the skyline,
it’s not surprising to hear Bill Reed say
that rice “is why Stuttgart is here.”
Reed is a spokesman for Riceland
Foods Inc., which is not only the
biggest employer in town but also the
biggest rice miller in the world. It
employs 1,025 in Stuttgart. Two other
millers employ another 500 or so.
“It’d be hard to come to Stuttgart
and find a family that does not include
at least one person who works in the
rice industry,”says Reed.
W.E. Hope was the first farmer to
grow rice in Stuttgart, on a 9-foot by
27-foot plot of land in 1901. Hope
apparently had noticed the dense layer
of clay that rests beneath the prairie
topsoil. The hard clay was ideal for
holding water. Rice grows best in
flooded fields.
Arkansas harvests 41 percent of the
nation’s rice, almost twice as much as
No. 2 California (21 percent). Riceland
alone is responsible for almost onethird of the U.S. crop.
Local farmers founded the Riceland
cooperative in 1921 to get better prices.
Today, 9,000 farmers belong. Forty of
them sit on the board of directors.

I
By Glen Sparks

Every fall, as the air gets cool, the ducks head to Stuttgart. Flocks fly
near the giant grain silos just west of downtown.

Glen Sparks is an editor at the Federal
Reserve Bank of St. Louis.

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mack’s
prairie wings

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main street

pin
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Stuttgart

INDIANA

++++++++++++++++

ILLINOIS

Ducks Mean Big Business

riceland

community college
lennox industries

MISSOURI
KENTUCKY

TENNESSEE

++
++++
++++
++++
++++
++++
+++
++++
+++
+++

EIGHTH FEDERAL RESERVE DISTRICT
ARKANSAS

165

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[14]

The Arkansas Department of Parks and
Tourism hopes that Stuttgart’s fowl reputation can sprout some new wings. State officials want the city to promote itself also as a
bird-watching hub.
“It’d be kind of odd, though,” Bell says.
“People come in to kill ducks, but now we’d
be asking them to come and watch them.”

+++++++++++
+++
++++
+++
++++
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++++++++
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+

a business on the edge of town that is dedicated to serving waterfowl hunters. What
started as a small store downtown in 1944
has grown into retail and warehouse space
that’s almost as big as two football fields.
Mack’s does so much business that
Winchester Ammunition of East Alton, Ill.,
has named it the No. 1 steel shot dealer in
the world for seven straight years.
Fueling the boom was the addition of a
mail-order catalog business in 1993.
“We went from being a state-wide company to being a national company when we
began publishing the catalog,” says Deena
Fischer, a spokeswoman. This year, 1.8 million catalogs will be mailed out.
Stuttgart’s economy doesn’t depend solely
on the great outdoors. Lennox Industries,
for example, employs 910 in making commercial heating and air-conditioning units.
Lennox is big enough that suppliers are
opening up shop nearby. In late July,
Assembly Component Systems Inc. opened
a new plant in Stuttgart and hired 11 workers. The Kansas-based supplier makes
fasteners for Lennox air conditioners. Two
other suppliers also have opened up shop
near Lennox: Scott Manufacturing Inc. and
Industrial Crate and Supply Co.
Tim Walker, a Lennox executive, says he
hopes Lennox can attract more suppliers
to Stuttgart.
“Agricultural communities like this are
full of talented, skilled workers who fit in well
with heavy manufacturing jobs,” Walker
says. “Plus, when suppliers move close to
us, we save money on travel costs and it
frees up space for us. We don’t need to keep
as much inventory.”
Downtown Stuttgart is a mix of momand-pop shops. Brenda Dickson, a thirdgeneration florist, owns Fern and Feather.
Business goes up and down, she says.
“This is a farming community,” Dickson
says. “If the economy does well, our store
does well. Stuttgart is probably like just about
every other small Southern town. We were hurt
by Wal-Mart and other discount stores.”

++
++

tuttgart, a city of about 9,400, calls
itself the “duck and rice capital of
the world.” Hard clay underneath the
topsoil makes this area ideal for growing rice.
The place also seems ideal for migratory
birds escaping the cold in Canada. The city
lies on the Mississippi flyway, near the meandering Arkansas and White rivers. The Bayou
Meto and several lakes make the Stuttgart
region that much more inviting to waterfowl.
Ducks also like to gobble up any remains
from the summer harvest of rice.
As the ducks flock to Stuttgart, so do
hunters from across the country and world.
Among the “big names” who come to hunt
are Vice President Dick Cheney and Dallas
Cowboys owner Jerry Jones, say city officials.
“We really don’t need to advertise the
duck hunting here,” says Stephen Bell of the
Chamber of Commerce. “It’s pretty much on
reputation. There are times it seems like the
whole town is in camouflage.”
The duck hunting season adds $1 million
a day to the Stuttgart economy, says Bell.
That’s quite a chunk for a city whose budget
last year was just $10.7 million. That’s why
city leaders keep their fingers crossed that
there will be enough ducks for a full 60-day
season every year.
To kick off the season, Stuttgart throws a
big party during the week of Thanksgiving.
Crowds fill the downtown streets to celebrate
the Wings Over the Prairie Festival and the
World Championship Duck Calling Contest.
The city even holds a Queen Mallard Pageant.
The local chamber organizes the festival,
which last year cost about $370,000 and netted a $135,000 profit. “It’s better than a
bake sale,” Bell jokes.
Many hunters pursue their quarry at one
of the approximately 70 commercial and private duck clubs that lie within a 45-mile
radius of Stuttgart. Farmers and duck-club
owners use pneumatic tubes to flood acres of
fields and timberland to lure the ducks for
the hunters.
When the hunters are not sitting in duck
blinds, they gather at Mack’s Prairie Wings,

itself is packaged in bags ranging
The average Riceland farm is
from four ounces to 2,000 pounds.
about 750 to 1,000 acres, Reed says.
A few years ago, after the Bush
About one-third to one-half is
administration lifted certain trade
devoted to rice, with the rest going
restrictions, Riceland began shipping
to soybeans, one of the other crops
rice to Cuba. Iraq is emerging again
Riceland processes. The number of
as a major market. Mexico, Haiti,
rice farmers in the area is dwindling,
Reed says, but the typical farm is get- Saudi Arabia and Europe also buy
Riceland rice in bulk.
ting bigger as technology improves
“About 95 percent of the rice that
and the agricultural industry looks
is grown in the world stays in that
for ways to cut costs.
area,” Reed says. “China and India,
“Labor is part of the issue,” Reed
for instance, are big rice producers.
says. “There isn’t much available.
For us, though, the export market is
Therefore, farm equipment is getting
very important.”
bigger and faster to make up the
difference.’’
After farmers
thresh their rice with
combines, they deliver
the crop to Riceland,
which dries it, stores it,
transports it, processes
it, markets it and pays
the farmers.
Riceland sells about
$1 billion worth of
product every year
from Stuttgart, with
the rice and oil prodStuttgart lies in the richest rice-growing area in the United States.
ucts going out across
Riceland is the city’s largest employer and the biggest rice miller
the nation and to 75
in the world.
cities abroad. The rice

arkansas

MISSISSIPPI

Stuttgart, Ark.
BY THE NUMBERS
Population...............................Stuttgart 9,377 (2004)
Arkansas County 20,130 (2004)
Labor Force ......Arkansas County 11,584 (May 2005)
Unemployment
Rate ........................Arkansas County 6.3 (May 2005)
Per Capita
Personal Income ......Arkansas County $26,489 (2003)
Top Five Employers
Riceland Foods Inc.............................................1,025
Lennox Industries..................................................910
Producers Rice Mill Inc. ........................................425
Kinder-Harris Inc. ..................................................102
Rice Capital Inc. ......................................................97

unters enjoy Wildlife Farms
almost as much as the ducks do.
Waterfowl head to Wildlife Farms
every fall and hang out near the White
River or on one of the many Wildlife
lakes. Hunters pay $550 a day to bag
a duck or goose. That price includes
the guided hunt, a heated blind for
duck hunting, plus lodging and meals.
Wildlife Farms is one of about
70 private and commercial duck clubs
within an hour’s drive of Stuttgart.
The duck clubs help prop up the economy in a part of the country that is
struggling to gain new industry, says
Jeff Collins, director of the Center for
Business and Economic Research at
the University of Arkansas. Club owners usually lease land from farmers
during the fall and winter, Collins says.
“Duck hunting is a part of the
social network in this part of the
country,” Collins says. “Duck hunting
is booming. It’s natural to think that
duck clubs also are booming.”

Waiting lists can be long to join
some private duck clubs, Collins says.
He is 30th on a waiting list for a club
that has just 20 or so members.
Sally and Dan Barnett established
Wildlife Farms in 1992 just a few
miles east of Stuttgart. The couple
built a 12,000-square-foot lodge that
overlooks Clear Lake. Sally Barnett
runs the business day to day, while
her husband continues to work as a
stockbroker in Little Rock.
Wildlife Farms stays busy all year.
Guests fish for bass, catfish and crappie in the summer. Spring is a popular time for company retreats and
business meetings. Wildlife Farms
added a 3,000-square-foot conference
center in 2000 that can handle up to
120 people for day meetings and 66
people for overnight visits. The lodge
also is a popular place for weddings,
receptions and family gatherings.
Business booms in the fall and
winter. Hunters come from as far
[15]

After hunting on more than 1,750 acres,
visitors to Wildlife Farms can relax in a lodge
that features a wet bar, game room, computer
room and a hot tub overlooking Clear Lake.
Sally and Dan Barnett built this duck hunting
club in 1992.

away as the Philippines and Argentina
to Wildlife Farms in quest of deer,
turkey, pheasant, partridge, but most
of all, duck. By mid-September,
rooms at the lodge are full. They stay
that way until mid-February.

Community Profile

The Regional Economist October 2005
■

www.stlouisfed.org

I
By Glen Sparks

Every fall, as the air gets cool, the ducks head to Stuttgart. Flocks fly
near the giant grain silos just west of downtown.

Glen Sparks is an editor at the Federal
Reserve Bank of St. Louis.

mack’s
prairie wings

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+

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++

+
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main street

pin
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to
st

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u
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Stuttgart

INDIANA

++++++++++++++++

ILLINOIS

Ducks Mean Big Business

riceland

community college
lennox industries

MISSOURI
KENTUCKY

TENNESSEE

++
++++
++++
++++
++++
++++
+++
++++
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+++

EIGHTH FEDERAL RESERVE DISTRICT
ARKANSAS

165

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[14]

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arkansas

MISSISSIPPI

District Overviews

ST. LOUIS Zone

St. Louis

Louisville

Little Rock
Memphis

District’s Largest Urban Area Slowly
Regains Jobs Lost during Recession
By Elizabeth A. La Jeunesse and Christopher H. Wheeler

lthough the most recent U.S.
recession officially lasted from
March to November 2001,
employment in the St. Louis metropolitan area continued to fall through
much of 2002 and 2003. According to
the payroll survey conducted by the
Bureau of Labor Statistics, St. Louis’
total nonfarm employment declined
by more than 32,000 or nearly 2.5
percent between March 2001 and
December 2003. Following a period
of relative stability in the first half of
2004, St. Louis’ labor market subsequently expanded. During the latter
half of 2004, the metropolitan area
gained 9,000 jobs. Positive employment growth continued into this year;
between January and July, St. Louis
gained another 6,000 jobs.

professional and business services;
and trade, transportation and utilities.
Manufacturing, by far, has experienced the deepest job losses in the
metropolitan area over the past four
years. Collectively, St. Louis manufacturers eliminated more than 25,000
jobs or roughly 15 percent of their
payrolls between March 2001 and July
2005. Nationwide, manufacturing

added since January. Modest gains
have also been seen in trade, transportation and utilities, although much
of this is associated with stabilization
in the transportation sector combined
with gradually expanding employment in wholesale and retail trade.
More than 400 jobs have been added
in the trade, transportation and utilities sector since January.

Employment in the St. Louis Metropolitan Area
March 2001=100, seasonally adjusted
110

Education and Health Services

Leisure and Hospitality

105

Financial Services

100

Total Employment
95

Trade, Transportation and Utilities
90

Recession
June 05

March 05

Dec. 04

Sept. 04

June 04

March 04

Dec. 03

Sept. 03

June 03

March 03

Dec. 02

Sept. 02

June 02

March 02

Dec. 01

Sept. 01

June 01

Despite the net drop in total
employment since March 2001, two
sectors in St. Louis have registered
sizable employment gains over the
past four years: education and health
services, and leisure and hospitality.
Since March 2001, employment in the
education and health services sector
has increased by 8 percent or slightly
more than 15,000 jobs. This pattern
followed the national trend in which
education and health services
employment increased by more than
12 percent over the same period.
Between March 2001 and July 2005,
St. Louis’leisure and hospitality sector
experienced employment growth of
over 6 percent or nearly 8,500 jobs.
This increase owes primarily to
growth in the accommodation and
food service industry, as hotels,
motels, and eating and drinking
establishments added over 6,500 jobs.
Employment has also grown within St. Louis’relatively smaller financial
services industry, which includes
banks, security brokers and insurers,
as well as jobs in real estate. Since
March 2001, nearly 2,000 financial
services jobs have been added to the
metropolitan area’s payrolls.
Underlying much of St. Louis’net
job loss since March 2001 are losses in
three major sectors: manufacturing;

Manufacturing

Professional and Business Services
85

March 01

Gainers and Losers

SOURCE: Bureau of Labor Statistics

employment declined by more than
15.5 percent over the same period.
Although not as large, job losses in
the professional and business services
sector numbered approximately 6,000
over this period. Trade, transportation
and utilities lost an additional 6,500
jobs due primarily to declines in
transportation and utilities rather
than wholesale and retail trade.
Reversing Roles

During the first half of this year,
the primary job growers of the past
four years have begun to slow. Payrolls in both leisure and hospitality
and education and health services
have been relatively flat since the
beginning of the year.
Two of the major job losers since
March 2001, by contrast, have begun
to show some new life. Since January
2005, the professional and business
services sector has recovered, gaining
more than 4,000 jobs in the past 12
months, 3,000 of which have been
[16]

Recovering Slowly

Recent trends indicate that
employment in St. Louis appears to
have turned a corner. Although still
14,000 jobs short of its March 2001
peak level, St. Louis has nonetheless
shown steady job growth for much of
the past year. In the past six months,
most major sectors have either stabilized or begun to expand. All of
this points to a labor market that is
slowly, but gradually, strengthening.
Elizabeth A. La Jeunesse is a research associate, and Christopher H. Wheeler is a senior
economist, both at the Federal Reserve Bank
of St. Louis.

The Regional Economist October 2005
■

www.stlouisfed.org

LITTLE ROCK Zone

Fayetteville and Hot Springs Lead the Recovery in Employment
By Giang Ho and Anthony Pennington-Cross

employment. However, increases in
government employment of over
10 percent in both Fort Smith and
Texarkana helped to counterbalance
these declines. The employment outlook in Pine Bluff, which sits adjacent
to Little Rock-North Little Rock, is
equally bleak. Since March 2001, the
metropolitan area has lost 35 percent
and 15 percent of jobs in the informa-

Total Private Nonfarm Employment
March 2001=100, seasonally adjusted
115

Fayetteville-Springdale-Rogers
110

Hot Springs
105

Texarkana

100

Recession

Fort Smith

Pine Bluff
May 05

Jan. 04

March 05

Nov. 04

July 04

Sept. 04

May 04

Jan. 04

March 04

Nov. 03

July 03

Sept. 03

May 03

Jan. 03

March 03

Nov. 02

July 02

Sept. 02

May 02

Jan. 02

March 02

Nov. 01

July 01

Sept. 01

May 01

2005, Fayetteville added 13,675 workers, more than 1,000 workers per
month. Some of this gain came from
unemployed people getting jobs, but
most was due to emigration from other
parts of Arkansas or from other states.1
The unemployment rate in Fayetteville
stood at 3.4 percent in June, the lowest
in the state and well below the
national average of 5 percent.

March 01

mong the five metropolitan
statistical areas (MSAs) outside Little Rock-North Little
Rock, only Fayetteville-SpringdaleRogers experienced job increases (3.2
percent annual on average) both during and after the 2001 recession.
Employment in Hot Springs, a newly
classified metropolitan area, has also
recovered well from the recession,
growing at a solid annual rate
of 2.5 percent since March 2002.
However, the remaining MSAs
(Fort Smith, Pine Bluff and Texarkana)
have undergone a “jobless recovery,”
where labor market performance has
remained dismal despite an improving economy. These disparate
employment trends characterize
the changing economic landscape
in Arkansas.
The Fayetteville-SpringdaleRogers MSA is located in the Ozark
region—the extreme northwestern
upland portion of Arkansas—and
consists of three Arkansas counties,
Benton, Washington and Madison.
It lacks the Delta’s rich soil and the
industrial base of the state’s centrally
located capital, and only 50 years ago
was the poorest area of the state. The
economic wheel began turning and
picking up speed when several entrepreneurial and ambitious Arkansans
started building world-class companies in Ozark towns—Don Tyson’s
Tyson Foods Inc. in Springdale and
Sam Walton’s Wal-Mart Stores Inc. at
Bentonville, among others. By the
1990s, the MSA’s population was
growing rapidly (47.5 percent between
1990 and 2000), and jobs were being
created at an even faster rate.
Employment growth in the
Fayetteville MSA since the recession
has been uniformly strong in almost
all sectors. Except for a slight decline
in manufacturing, which was still mild
compared to Arkansas’decline as a
whole, job creation has been particularly strong in the natural resources,
mining and construction sector (36
percent from March 2001 to June
2005), education and health services
(24 percent), and the trade, transportation and utilities sector (21 percent). Between June 2004 and June

SOURCE: Bureau of Labor Statistics

On the other hand, in the remainder of the zone and especially in central Arkansas, the post-recession
employment recovery has been a
mixed picture, including declining
employment in Pine Bluff, stagnating
employment in Fort Smith, Pine
Bluff and Texarkana, and increasing
employment in Hot Springs.
Hot Springs, which consists of only
Garland County, has outperformed its
neighbors, thanks to especially solid
job increases in professional and business services (27 percent) and leisure
and hospitality (25 percent). It was
ranked No. 14 among the nation’s
MSAs that had the fastest job growth
based on change in nonfarm payroll
employment between June 2004 and
June 2005.
In contrast, Fort Smith was hit
especially hard in the financial activities sector, which has declined by
more than 15 percent since March
2001. Texarkana also experienced a
decline of over 7 percent in natural
resources, mining and construction
[17]

tion sector and the manufacturing
sector, respectively. In June 2005, its
unemployment rate of 7.3 percent was
the highest in the state. On a more
positive note, professional and business services grew over 27 percent.
Fayetteville still has some way to
go, but if the present trends continue
it may become the largest economic
force in the zone. For example,
Fayetteville’s share in total Arkansas
employment has increased from
11 percent to 17 percent in the
past 15 years, with improvement
in every sector.
Giang Ho is a research associate and Anthony
Pennington-Cross is a senior economist, both at
the Federal Reserve Bank of St. Louis.
1

Northwest Arkansas’ News Source, July 20, 2005.
See www.nwanews.com.

National Overview
Official Dates for Business Cycles
Don’t Capture All the Ups and Downs
By Howard J. Wall

hose who want a complete picture of business cycles should
look beyond the dates determined
by the National Bureau of Economic
Research for the starts and ends of
recessions and expansions. The
NBER’s Business Cycle Dating
Committee provides a good snapshot
of the broad aggregate economy, but
the committee’s methodology overlooks other related business cycles
that are also important.
Although the NBER determines
recession dates by evaluating a variety
of different measures of economic
activity, the dates are closely aligned
with movements of the broadest
measure, gross domestic product. As
is well-known, however, recent NBER
recessions have not been in synch
with periods of recession in the labor

before the NBER
recession began in
July 1990 and did not
leave recession until
well after the NBER
recession ended in March
1991. The most recent recession had the opposite pattern:
States in the middle of the country
tended to enter recession earlier than
the country as a whole and tended to
be the states that exited recession later
than the country as a whole.
The experiences of the seven states
wholly or partly in the Eighth Federal
Reserve District provide a good illustration of the diversity of state-level
experience during the period surrounding the most recent recession.
Except for Illinois, every District
state entered into labor-market reces-

Labor-Market Recessions

Arkansas
Illinois
Indiana
Kentucky
Mississippi
Missouri
Tennessee
United States

End of
expansion
period

End of final
recession
period

Number of
recession
periods

Total
months of
recession

March 2000
June 2000
March 2000
April 2000
August 1999
February 2000
March 2000

July 2003
June 2004
July 2003
July 2003
July 2004
July 2004
August 2003

1
1
2
1
3
1
1

40
49
36
39
51
53
41

May 2000

November 2003

market. The NBER said the latest
recession to hit the country started in
March 2001 and ended in November
2001. According to a forthcoming
study to be published by the St. Louis
Fed, the U.S. labor market entered
recession in May 2000—nearly a year
before the start of the NBER recession
—and exited recession in November
2003—a full two years after the end of
the NBER recession.1
A second interesting characteristic
of the business cycle that is missed by
the NBER, and by anyone who focuses solely on national-level data, is the
geographic pattern of state-level
recessions and expansions.2 The last
two recessions, in particular, each had
a strong geographic element. Many
coastal states went into recession well

sion earlier than the country did.
Mississippi’s recession began the
earliest, in August 1999, nine months
before the country’s labor-market
recession began and six months
before Missouri’s. At the other
extreme, Illinois’ labor-market recession began one month after the country’s did, while those of the remaining
states began one to three months
before the country’s.
District states can be separated
into two distinct groups in terms of
the dates by which they saw their
final months of labor-market recession. Recessions in Arkansas, Indiana,
Kentucky and Tennessee ended in
either July or August 2003, several
months before the end of the national
labor-market recession. On the other
[18]

hand, three District states did not see
their labor-market recessions end
until well after this date: Illinois did
not see the end of recession until June
2004, while Mississippi and Missouri
had to wait until July of the same year.
Although the national labor market experienced one uninterrupted
period of recession between May 2000
and November 2003, two District
states—Indiana and Mississippi—saw
brief periods of expansion during their
overall recession experience. Indiana’s labor market saw a “double dip”
in that it returned to expansion in
May 2002, only to dip back into recession just four months later. Mississippi actually saw a “triple dip,”exiting
recession in April 2002 and July 2003,
only to return to recession two and six
months later, respectively.
The final column of the table indicates the total number of months that
each state’s labor market was in recession during the period surrounding
the 2001 NBER recession. Illinois,
Mississippi and Missouri were in
recession for between seven and
11 months more than was the U.S.
labor market, which was in recession
for 42 months. In contrast, all of the
other four District states were in
recession for fewer months than the
country as a whole.
Howard J. Wall is an assistant vice president
and economist at the Federal Reserve Bank of
St. Louis.

Owyang, Michael T.; Piger, Jeremy; and Wall,
Howard J. “The 2001 Recession and the States
of the Eighth Federal Reserve District.” Federal
Reserve Bank of St. Louis Regional Economic
Development,Vol. 1, No. 1, 2005, forthcoming.

Owyang, Michael T.; Piger, Jeremy; and Wall,
Howard J. “Business Cycle Phases in U.S.
States.”Review of Economics and Statistics,
Vol. 87, No. 4, November 2005, forthcoming.

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 2005

U.S. Banks
by Asset Size

ALL

$100
million$300
million

Return on Average Assets*

1.35

1.26

1.19

1.37

1.27

1.42

1.35

Net Interest Margin*

3.60

4.32

4.24

4.28

3.83

4.05

3.41

Nonperforming Loan Ratio

0.78

0.70

0.76

0.65

0.71

0.62

0.66

0.83

Loan Loss Reserve Ratio

1.38

1.29

1.32

1.31

1.32

1.34

1.33

1.41

less than
$300
million

$300
million$1 billion

less
than
$1 billion

$1billion$15
billion

Return on Average Assets *

Net Interest Margin *

1.18
1.15
1.20
1.17
1.14
1.11

.25

.50

.75

4.20
4.22

Arkansas
3.74
3.74
3.49
3.43
3.87
3.70

Illinois
Indiana

1.17
1.12
1.19
1.23
1.22
1.11
1.23
1.27

3.87
3.86

Eighth District

0.97

0.47

1.25

Kentucky

4.14
4.03
3.94
3.84

Mississippi
Missouri
3.55

Tennessee

1.50 percent 1

1.5

Nonperforming Loan Ratio
0.80
0.89
0.98
0.86

0.72
0.45

.25

.75

2.5

Illinois
Indiana

1.42

Kentucky

0.95

Mississippi
Missouri
0.96

0.88

Tennessee

1.25

1.5

3.5

4.5

1.33
1.38
1.50
1.60
1.26
1.30
1.50
1.73
1.59
1.44
1.32
1.42
1.43
1.44

Arkansas

1.18

0.99

3.84

Loan Loss Reserve Ratio

0.62
0.62
0.72
0.81

Eighth District

1.14

More
less
than
than
$15 billion $15 billion

1.75

Second Quarter 2005
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

.25

.50

.75

1.18

1.25

Second Quarter 2004
For additional banking and regional data, visit our web site at:
www.research.stlouisfed.org/fred/data/regional.html.

1.50

1.75

The Regional Economist October 2005
■

www.stlouisfed.org

Regional Economic Indicators
Nonfarm Employment Growth*

year-over-year percent change

second quarter 2005
Total Nonagricultural
Natural Resources/Mining
Construction
Manufacturing
Trade/Transportation/Utilities
Information
Financial Activities
Professional & Business Services
Education & Health Services
Leisure & Hospitality
Other Services
Government

united
states

eighth
district

arkansas

illinois

indiana

kentucky

mississippi

missouri

tennessee

1.6%
6.2
4.2
–0.3
1.3
0.1
1.9
3.1
2.3
2.3
0.8
0.7

0.9%
2.2
1.4
–0.1
0.7
–2.6
0.9
2.1
1.8
1.9
0.4
0.2

1.1%
5.2
1.9
–0.8
0.7
–0.7
1.9
1.9
2.6
2.1
–0.4
1.7

0.6%
–2.1
–0.2
–0.8
0.3
–3.9
0.6
2.9
0.8
3.2
–0.5
–0.3

1.2%
–0.5
2.4
0.2
0.7
–1.3
1.3
2.2
2.9
1.9
2.0
0.3

1.0%
3.6
3.8
0.6
0.6
–3.1
–2.5
4.1
1.2
2.4
1.4
–0.1

1.0%
–0.4
1.6
–0.3
1.0
–0.5
1.5
3.0
3.0
0.7
–0.5
0.8

0.8%
11.7
1.2
0.7
0.9
–1.7
2.3
–0.4
2.0
0.3
1.0
0.6

0.8%
0.0
1.9
–0.1
1.1
–2.9
1.5
1.1
1.9
1.2
0.3
0.0

Unemployment Rates

District Real Gross State Product*
by Industry–2003

percent
II/2005

I/2005

5.1%
4.9
5.9
5.1
5.7
7.0
5.5
6.0

United States
Arkansas
Illinois
Indiana
Kentucky
Mississippi
Missouri
Tennessee

Financial Activities

II/2004

5.3%
5.4
5.7
5.6
5.2
7.0
5.8
5.9

Information
3.8%

5.6%
5.8
6.2
5.1
5.5
5.9
5.6
5.4

Trade/
Transportation/
Utilities

Professional &
Business Services
10.4%
10.4%
Education &
Health Services 7.5%

17.7%

20.3%
20.4%
18.4%

Leisure &
Hospitality 3.4%

10.8%

Other Services 2.3%
Government
Natural Resources
& Mining 1.5%

Manufacturing
Construction 4.1%

United States
$10,289 Billion
District Total
$1,301 Billion
Chained 2000 Dollars

second quarter

first quarter

Housing Permits

Real Personal Income †

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

year-over-year percent change

5.8
–2.7

–5

2005

3.3
3.4

Missouri
31.4

2004

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

4.0

1.9

Tennessee

35 percent

4.6

3.4

2005
†

3.9

3.0

Mississippi

12.1
11.3
11.1

4.2

2.6

Kentucky

16.0

0.1

–10

3.7

2.3

Indiana

–0.9

5.1

4.3

Illinois

1.5

2.0

4.5

3.3

Arkansas

9.1
10.3

0.6
–5.2

United States

12.5

2004

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

The Regional Economist October 2005

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Major Macroeconomic Indicators

Farm Sector Indicators

Full text of Regional Economist : A Quarterly Review of Business and Economic Conditions : October 2005

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