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FEDERAL RESERVE B A N K
OF ST. L O U IS
AUGUST 1977

Utilization of Federal Reserve Bank Services
by Member Banks: Implications for the
Costs and Benefits of M em bership ........

Estimates of the High-Employment Budget
and Changes in Potential O u tp u t.......... 16
Income and Expenses of Eighth District
Member B a n k s ..................................

Vol. 59, No. 8

Utilization of Federal Reserve Bank Services by
Member Banks: Implications for the Costs
and Benefits of Membership
R. ALTON GILBERT

1 HE proportion of commercial banks belonging to
the Federal Reserve System has been declining for
more than three decades. The percentage of banks in
the Federal Reserve System decreased from 49.1 per
cent of all commercial banks in 1945 to 39.3 percent
at the end of 1976 (see Chart I). The percentage of
total bank deposits held at Federal Reserve member
banks declined from 86.3 percent to 73.8 percent over
the same period.

C h a rt I

Membership Attrition

The reason banks mention most frequently for
withdrawing from Federal Reserve membership is the
cost of reserve requirements imposed on members
relative to reserve requirements of the various states
for nonmember banks.1 However, the utilization of
Federal Reserve Bank services by member banks
must also be considered in an analysis of the costs and
benefits of membership. The implications for the costs
and benefits of Federal Reserve membership are
analyzed on the basis of a survey of services used by
member banks that are served by the head office of
this Reserve Bank.

RESERVE REQUIREMENTS AS A
CAUSE OF MEMBERSHIP ATTRITION
In general, state reserve requirements for nonmem
bers are not lower than those for member banks.2
This observation is especially applicable to smaller
banks, since in about half of the states reserve re
quirements are flat percentages of various classes of
'P eter Rose, “ Exodus: W h y Banks are Leaving the F ed ,”
The Bankers Magazine (W in ter 1 9 7 6 ), pp. 43-49.
-R equired subscriptions to Federal Reserve Bank stock by
m em ber banks can be considered a type o f interest bearing
reserve requirement. M em ber banks must subscribe to stock
o f their Federal Reserve Banks in amounts proportional to
their capital and surplus. The annual yield on that stock is
six percent. That rate o f return was a significant inducement
to mem bership in the 1930s and 1940s when market interest
rates w ere very low , but given the market interest rates o f
recent years, the yield on Federal Reserve stock is now
probably a neutral factor in the costs and benefits o f m em
bership. Therefore, Federal Reserve Bank stock is not in
clu ded in the follow ing discussion o f the reserve burden of
m em ber banks or the costs o f membership.

Page 2

deposit liabilities, whereas reserve requirements for
member banks are graduated so that requirements are
lower for smaller banks. The significant difference
between the reserve requirements of member and
nonmember banks concerns the types of assets they
can use to meet their legal reserve requirements.
In most states nonmember banks can meet their
reserve requirements with vault cash, cash items in
the process of collection (C IP C ), and demand bal
ances due from other commercial banks. Member
banks can meet their reserve requirements only with

FEDERAL. RESERVE BANK OF ST. LOUIS

vault cash and collected reserve balances at the Fed
eral Reserve Banks.
The reserve burdens of most nonmember banks are
reduced substantially because they are permitted to
use CIPC to meet state requirements. Their CIPC
represent primarily the value of checks they have
deposited with correspondent banks for which the
correspondents have not yet received payment.3 On
the other hand, when member banks deposit checks
with Reserve Banks, they receive credit to their re
serve accounts according to a schedule which depends
upon the location of the banks on which the checks
are drawn. Member banks receive immediate credit
for some checks, but for others credit is delayed one
or two days. The deferred credit schedule approxi
mates the time required for the Federal Reserve
System to receive payment for outstanding checks.
To demonstrate the significance of CIPC for the
relative reserve burdens of member and nonmember
banks, the ratios of CIPC to reserve balances were
calculated for a group of 49 member banks that are
served by the St. Louis office of the Eighth Federal
Reserve District and which regularly clear both local
and out-of-region checks through this Reserve Bank.
The four largest correspondent banks in the area
were excluded from these calculations since their
CIPC are exceptionally large in relation to their re
serve balances. Average daily reserve balances of
those member banks would have been 82.6 percent
greater if they could have counted CIPC as part of
their reserves.4 Another indication of the significance
of CIPC is Knight’s estimate that, on average, only
56 percent of demand balances that banks hold at
correspondent banks are collected balances.®

Another significant difference between reserve re
quirements of states and those of the Federal Reserve
is that nonmember banks can meet state reserve
requirements with deposits at correspondents. As indi
cated below, correspondents offer respondent banks
higher implicit rates of return on demand balances in
the form of services than the implicit returns member
:i N onm em ber banks are officially allow ed to count their C IPC
as reserves in less than half o f the states. H ow ever, in the other
states nonm embers can count C IP C as reserves b y recording
all deposits o f checks w ith their correspondents as dem and
balances du e from correspondents, w hether the funds are
available for their use im mediately or w ith som e delay due to
the time required for collection.
4Average daily reserve balances and C IP C w ere calculated for
the period Septem ber 9, 1976, through January 12, 1977.
5R obert E. Knight, “ Com parative Burdens o f Federal Reserve
M em ber and N onm em ber Banks,” Monthly Review, Federal
Reserve Bank o f Kansas City (M a rch 1 9 7 7 ), pp. 24-25.

AUGUST 1977

banks receive on their reserve balances at Reserve
Banks. In addition, in about half of the states, non
member banks can meet various proportions of their
reserve requirements by holding interest earning gov
ernment securities, and the Federal Reserve enforces
its reserve requirements more rigorously than do most
states.0

REASONS FOR ANALYZING THE
UTILIZATION OF RESERVE RANK
SERVICES RY MEMRER RANKS
Empirical studies support the view that member
banks have greater reserve burdens than nonmembers
by showing that member banks have higher cash/asset
ratios than nonmember banks of the same size,
especially among smaller banks.7 However, these
studies do not show in general that the reserves of
member banks at Reserve Banks are larger than the
demand balances that nonmember banks hold at cor
respondents. The cash/asset ratios of member banks
are higher than those of nonmembers because many
member banks hold their required reserves at the
Federal Reserve and hold substantial demand bal
ances at correspondent banks.
Therefore, analysis of the cost of Federal Reserve
membership involves more than just comparison of
reserve requirements of the Federal Reserve with
those of the states. It also involves examination of
reasons why member banks hold large balances with
correspondents. One of the major reasons banks
hold demand balances at correspondent banks is to
compensate correspondents for their use of services.
Thus it is relevant to examine the services that mem(iIn 30 states there are no specified dollar penalties for reserve
deficiencies for nonm em ber banks.
"Cash assets o f banks are generally measured as their vault
cash, dem and balances due from correspondents, cash items
in the process o f collection, and reserve balances at Reserve
Banks. See Gary G . Gilbert and M anferd O . Peterson, “ R e
serve Requirements, Federal Reserve M em bership and Bank
P erfonnance,” F D IC W orking Paper No. 74-8, and “ The
Impact o f Changes in Federal Reserve M em bership on
Com m ercial Bank P erfonnance,” Journal of Finance (June
1 9 7 5 ), pp. 713-19; R obert E. Knight, “ Reserve Requirements,
Part 1: Com parative Reserve Requirements o f M em ber and
N onm em ber Banks,” Monthly Review , Federal Reserve Bank
o f Kansas City (A p ril 1 9 7 4 ), pp. 3-20; R obert J. Law rence
and D uane L ou gee, “ Determinants o f Correspondent Banking
Relationships,” Journal of Money, Credit and Banking (A u
gust 1 9 7 0 ), pp. 358-69; L u cille M ayne, The Effect of F e d

eral Reserve System M embership on the Profitability of
Illinois Banks, 1961-63 (C en ter for Research o f the C ollege
o f Business Administration, Pennsylvania State University,
1 9 6 7 ); W alter A. Varvel, “ T h e Cost o f M em bership in the
Federal Reserve System,” Federal Reserve Bank o f R ich
m ond, W orking Paper 77-1, M arch 1977.

Page 3

FEDERAL RESERVE BANK OF ST. LOUIS

AUGUST 1977

Table I

P E R C E N T O F IN S U R E D C O M M E R C I A L B A N K S
IN E A C H S IZ E G R O U P T H A T A R E M E M B E R S
O F THE F E D E R A L R E S E R V E S Y S T E M
A S O F D E C E M B ER 31, 1976
Asset Size
(in millions)
$

Percent

5 or less

18 . 7 %

5 -

9.9

25.5
38.0

10-

24.9

25 -

49.9

48.9

50-

99.9

58.5

100 - 299 .9

66.3

3 0 0 -4 9 9 .9

78.6

5 0 0 or more

86.7

S ou rce: Federal Deposit Insurance C orporation

ber banks obtain from Reserve Banks and services that
they receive from correspondents.
Another reason for examining the use of Reserve
Bank services by member banks concerns the size
distribution of member banks. In most states reserve
requirements for nonmember banks are either flat
percentages of various types of deposit liabilities or
less graduated than requirements of the Federal Re
serve. Also, the ratio of CIPC to total deposits tends
to be positively related to bank size. If relative re

serve requirements were the only basis on which
banks decided whether to be members of the Federal
Reserve, these two reasons would cause the largest
banks to have the greatest incentives to drop mem
bership. Yet this is not the case.
Table I indicates that the percentage of banks that
are Federal Reserve members increases with the size
of banks. Table II shows that the size distribution of
banks withdrawing from membership during 1971
through early 1977 corresponds closely to the size dis
tribution of all members at the end of last year, but
that no banks with total deposits over $1 billion with
drew from membership during that period. So there
must be additional factors which influence the deci
sions of banks concerning Federal Reserve member
ship. One such factor is the utilization of Reserve
Bank services by member banks.

NATURE AND UTILIZATION
OF FEDERAL RESERVE RANK SERVICES
Services that Reserve Banks provide to member
banks are discussed in approximately the order of
cost to the Federal Reserve System of providing them,
as indicated in Table III. Information on the utiliza
tion of services by member banks of differing size is
derived from a survey which includes 233 member

Table II

S IZ E D IS T R IB U T IO N S O F IN S U R E D B A N K S IN TH E U .S . T H A T W IT H D R E W F R O M F E D E R A L R E S E R V E M E M B E R S H IP ,
J A N U A R Y 1971 - M A R C H 1 9 7 7 , A N D ALL M E M B E R B A N K S , D E C E M B E R 31, 1 9 7 6
All Mem ber Banks

Banks that W ithdrew from Mem bership

Range of
Total Deposits
(millions of dollars)

Num ber

Percentage

Cumulative
Percentage

up to 5

5 .0 %

5.0 %

Percentage
6 .6 %

Cumulative
Percentage
6 .6 %

5 to 10

14.1

19.1

14.1

10 to 20

25.8

44.9

24.8

15.4

60.3

15.9

61.4
70.3

20 to 30

20.7
45.5

3 0 to 40

10.1

70.4

8.9

4 0 to 50

5.7

76.1

5.6

76.9

5 0 to 60

4.7

80.8

3.6

79.5

60 to 75

2.4

83.2

4.5

84.0

75 to 100

4.0

87.2

3.6

87.6

100 to 150

5.4

92.6

4.0

91.6

150 to 250

2.4

95.0

2.8

94.4

2 5 0 to 5 0 0

4.0

99.0

2.7

97.1

5 0 0 to 1,000

1.0

100.0

1.4

98.5

1,000 and over

0.0

100.0

1.5

100.0

Total

298

10 0 . 0 %

1 0 0 .0 %

•Measured as o f Decem ber ‘‘ , 1976, excep t in 8 cases in which recent data were not available. In those cases total deposits were measured
A
around the tim e banks withdrew from membership.

Page 4

FEDERAL RESERVE BANK OF ST. LOUIS

AUGUST 1977

Table III

CO STS

P R O V ID IN G

SE L E C T E D

S E R V IC E S T O

M EM BER

Total Federal Reserve System
Service
Check Collection

Cost of Providing
Services
$ 1 2 4 ,5 6 6 ,9 6 9

Coin and Currency Pickup and Delivery

Percent of Total
Cost of These Services
6 5 .6 %

BANKS

1976

Federal Reserve Bank of St. Louis1
Cost of Providing
Services

Percent of Total
Cost of These Services

$ 3 ,7 1 4 ,4 5 4

7 3 .1 %

5 0 ,2 2 0 ,6 4 4

26.4

946,11 1

W ire Transfers

5 ,6 7 2,666

3.0

124 ,69 5

2.5

Safekeeping of Securities

7 ,2 2 4 ,9 0 72

3.8

1 9 9 ,4 3 9 ’

3.9

Discounts and Credits
Total

2 ,3 03,49 0
$ 1 8 9 ,9 8 8 ,6 7 6

1.2
100 . 0 %

99,9 0 8
$ 5 ,0 8 4 ,6 0 7

18.6

2.0

100 . 0 %

1Cost data pertain only to head office operations.
2These figures include the cost o f p rov id in g some safekeeping services fo r nonm em ber banks.
S ou rce: Federal Reserve System Board o f Governors, Functional Expense Report, 1976 Annual R eport, Section I, p p . 41-69.

banks served by the head office of this Bank. Banks
are ranked by total assets and divided into groups of
20 each, except for group 12, which includes the 13
largest banks in the survey. Results, summarized for
each group, are presented in Table IV.

Check Collection
The service to member banks that is the most ex
pensive for Reserve Banks to provide to members is
collection of checks. The Federal Reserve System
provides the only national system of check collection,
through which 13.2 billion checks were cleared in
1976. This represents about 45 percent of all checks
written in the nation last year.
Member banks may deposit for credit to their re
serve accounts checks drawn on any other domestic
bank that remits at par.8 There is no direct charge to
member banks for this service. Since the early 1970s,
nonmember banks located in zones served by Regional
Check Processing Centers have been permitted to
deposit at Reserve Banks checks drawn upon other
banks in their regions. Deposits of such checks are
credited to the reserve accounts of member banks
that serve as correspondents. There is no charge to
nonmember banks for this service. Nonmember banks
collect out-of-region checks through their correspond
ents. All checks deposited with Reserve Banks must
be encoded with bank routing numbers and dollar
amounts. Banks depositing more than a certain mini
mum number of checks must sort checks by location
of the banks on which the checks are drawn.
8A non-par bank charges a fee w hen checks drawn upon
accounts o f its depositors are presented for collection b y any
means other than at the bank’s ow n teller w indow . Reserve
Banks w ill not accept checks drawn upon such banks for
deposit to a m em ber bank reserve account. As o f D ecem ber
31, 1975, there w ere only 73 non-par banks in the nation.

A survey of checks deposited with this Bank was
conducted in January of this year. Column (4 ) of
Table IV reports the percentages of banks within each
size group that deposited more than five checks dur
ing that month.9 A large majority of banks with total
assets under $100 million clear checks through
correspondents.
For each bank that deposited more than five checks
with the Reserve Bank, the number of checks depos
ited in January was multiplied by 12 to get an annual
rate, and averages within each size group are re
ported in column ( 5 ) .1 A few large banks deposited
0
most of the checks. For instance, the 12 largest banks
deposited 79 percent of all checks, and the five largest
deposited 74 percent. These figures actually under
state the share of checks directly deposited by the
largest banks since several of these large banks send
checks drawn on banks in other Federal Reserve dis
tricts directly to the other Federal Reserve Banks. The
survey does not include information on the number of
such checks.
Another function involved in check clearing is that
of banks paying their Reserve Bank for checks drawn
upon them (remitting for the Fed’s cash letters). The
percentages of banks in each group that remit by
having their reseive accounts debited are indicated in

9There w ere 15 m em ber banks that deposited from one to five
checks in January. T o in clude those banks in the percentages
in colum n ( 4 ) w ou ld exaggerate the num ber o f banks using
the Reserve Bank’s ch eck clearing facilities.
10T he volum e o f checks deposited w ith Reserve Banks in the
first quarter o f each year tends to b e about three percent
b elow the volum e for the previous fourth quarter. Therefore,
these figures proba b ly understate the annual rate at w hich
banks deposit checks. Since the Board o f Governors o f the
Federal Reserve System reports volum e o f checks data only
on a quarterly basis, there is no accurate means o f adjusting
on e m onth’s data for seasonal influences.

Page 5

FEDERAL RESERVE BANK OF ST. LOUIS

column (6 ). Those member banks not using this
method arrange for the reserve accounts of their cor
respondents to be debited, the same method of settle
ment that is used by nonmember banks.
This settlement function is analyzed as a separate
service since the method that member banks use for
settlement involves costs and benefits which are dif
ferent from the costs and benefits involved in the
method used for clearing checks. If member banks
choose to settle through their reserve accounts, they
incur transactions costs involved in meeting their
weekly required reserves. If they settle through cor
respondents, they must compensate correspondents
for record keeping and for the transactions costs
which they create for their correspondents.
In most size groups in Table IV, the number of
banks that have their reserve accounts debited for
checks drawn upon them is greater than the number
that deposit checks directly with the Reserve Bank.
This is probably because depositing checks directly
with the Reserve Bank involves more processing by
member banks (encoding and sorting) than corre
spondents require. Remitting for the Fed’s cash letters
through the reserve account involves only somewhat
more frequent adjustments to a member bank’s re
serve account than remitting through a correspond
ent’s account. However, most of the smaller member
banks use a correspondent’s account to settle for
checks drawn upon themselves. For instance, of the
100 smallest members in the survey, only 16 settle
through their reserve accounts, and of the next 100
largest, 38 settle through their reserve accounts.

AUGUST 1977

Information on the coin and currency service used
by member banks is presented in columns (7 ) - (10)
of Table IV. Column (7 ) indicates that most member
banks receive armored car service. Almost all of the
others receive Federal Reserve coin and currency
service through the mail ( see column 8 ). The remain
ing member banks receive money service from
correspondents.
When member banks receive money shipments or
deposit coin and currency at the Reserve Bank, they
can have the Reserve Bank debit or credit their re
serve accounts or those of their correspondent banks.
Such practices vary among member banks, as indi
cated in column (9 ). The method of debiting and
crediting for a bank’s money service, either through
its reserve account or a correspondent account, can be
considered a separate aspect of this service, as in the
discussion above about settlement for checks drawn
upon a member bank.
The degree to which member banks of various sizes
use the Federal Reserve’s coin and currency service
is quantified in column (10) in terms of fees that
member banks using this service would be charged as
nonmembers. The annual value of coin and currency
service to each member bank was calculated at fees
charged nonmember banks based upon utilization
of that service in September, October, and November
of last year. For banks in each size group that receive
money service from the Reserve Bank, the average
annual value of their money service is presented in
column (1 0 ).1
1

Wire Transfers
Coin and Currency Service
One of the important operational functions of Re
serve Banks is removing defective currency from cir
culation and issuing new currency. Reserve Banks
provide both member and nonmember banks with
coin and currency. Armored car service for pick up
and delivery of coin and currency is made available
daily at offices of member and nonmember banks
in metropolitan areas surrounding offices of Reserve
Banks and weekly in other areas. Banks not located
on armored car routes receive coin and currency from
Reserve Banks through the mail. This service is pro
vided to member banks without charge, whereas non
member banks are charged fees to cover costs. Re
serve Banks charge both members and nonmembers a
fee for wrapped coin to cover the cost of that
operation.
Page 6

A Reserve Bank service that is offered exclusively
to member banks at no charge is wire transfers —
transferring funds electronically from the reserve ac
count of one member bank to the reserve account of
any other member bank in the country.12 This system
is used heavily for conducting transactions in the
Federal funds market and for making payments for
large business customers. Many of the large member
banks use the wire transfer service through on-line
equipment, initiating and receiving notice of transac11There were not sufficient data to calculate the fees mem ber
banks receiving coin and currency service through the mail
w ou ld have been charged for such mail service as non
members. T he value o f the “ m ailed-m oney” service for m em
bers was calculated based upon what they w ou ld have paid
as a nonm em ber for the same value o f coin and currency
shipments provided through armored car service.
12There is a charge for transfers o f less than $1,000.

U T IL IZ A T IO N

FEDERAL

R ESER V E

BANK

S E R V IC E S

BY M E M B E R

(4 )

(1 0 )

G roup
Num ber
1
2
3
4
5
6
7
8
9
10
11
12

A ve rage A nn ual
Implicit Su b sid y
to Mem ber
Banks from
M o n e y Service
$

6 6 4 .4 2
838.1 1
8 3 0 .9 5
8 1 3 .5 6
1,046.53
2,23 0 .8 0
1,799.80
2 ,0 3 6 .8 0
2 ,0 8 7 .8 0
3 ,3 7 6 .0 0
5 ,3 9 2 .8 0
1 2 ,9 9 0 .7 7

6,312
8,268
10,351
12,998
16,395
19,995
23,766
27,536
3 4 ,0 3 7
4 6 ,7 5 5
107,641
1,743,592
(1 1 )

Percent of
Banks Initiating
W ire Transfers
Frequently3
15%
10
5
30
20
50
35
65
65
70
75
85

_
$

6,384
8,270
10,533
13,009
16,422
20,394
24,158
27,580
34,5 2 7
46,8 3 6
107,932
(1 2 )

O f Banks
Initiating W ire
Transfers
Frequently,
A verage Annual
Number
68
102
102
134
92
95
94
191
31 2
176
704
19,649

(7 )

5%
0
15
25
10
30
10
40
40
35
70
92

A ve rage A nnual
Num ber of
Checks Cleared
by Banks that
Clear Checks
Through the
Reserve Bank

Percent of
Banks Remitting
for the Fed’s
Cash Letters
Through Debits
to Their
Reserve Accounts

Percent of
Banks Receiving
Arm ored Car
Service

2 1 ,816
0
2 1 5 ,7 4 0
837,271
2 3 2 ,4 1 6
3 8 3 ,0 4 2
3 6 5 ,4 7 2
3 6 0 ,9 5 9
1,172,64 9
9 5 0 ,3 3 7
1,778,20 3
16 ,3 5 5 ,8 8 9

Percent of
Banks that
Clear Checks
Through the
Reserve
Bank2

15%
0
20
25
20
35
20
50
50
35
75
92

75%
45
55
65
75
75
85
90
95
100
100
100

(1 3 )
Percent of
Bank Holding
U.S. Government
Securities in Book
Entry at the
Reserve Bank
30%
70
50
40
55
70
55
80
75
75
70
100

(1 4 )
O f Banks H olding
Securities in Book
Entry, Average
Am ount4
(thousands of
dollars)
$

4 2 7 .0
985 .3
1,082.5
1,631.6
1,216.7
1,051.4
1,475.1
2,038.8
2,466.1
1,254.0
5,945.0
1 23,808.8

(1 6 )

(1 5 )

SURVEY1
(8 )

20%
50
40
30
20
25
15
10
5
—
—
—
(1 7 )

Percent of
O f Banks Holding
Banks that
Percent of Banks Definitive Securities
were Regular
Holding Definitive
at the Reserve
Borrowers at
Bank, Average
Securities at the
Discount
Am ount4
Reserve Bank
W indow
(thousands of
for Their
dollars)
1 9 7 5 -1 9 7 6 5
Investment Account
25%
35
35
30
45
50
35
70
65
80
65
69

49.4
40 3 .0
623.3
1,669.5
859.8
1,427.1
1,915.7
1,713.4
2,896.3
2,762.6
5,025.2
13,196.0

(9)

O f Banks Receiving
M o n e y Service
Through Armored
Percent of
Car or M ail,
Banks Receiving
Percent Having
M o n e y Service
Reserve Account
Through the
Debited and
M a il
Credited

5%
0
5
15
10
10
0
20
10
0
15
23

53%
58
74
58
47
60
60
75
65
70
70
92
(1 8 )
Annual Cost of
Services Used by
Mem ber Banks as
Percent of Their
Average Daily
Reserve Balances6
0 .5 9 4 %
0.294
0.449
0 .3 4 4 7
0.275
0.752
0.313
0.481
0.880
0.589
1.015
1.693

AUGUST

1977

Page

*The 233 banks in the survey are Eighth District banks in Illinois and M issouri that were m embers during the period Septem ber 1976 through January 1977.
2These banks deposited six o r m ore checks with the Reserve Bank durin g January 1977.
3These banks initiated six or m ore w ire transfers during the months o f N ovem ber and December 1976.
4These are p a r values o f securities held in safekeeping as o f Novem ber 30, 1976.
5These banks borrow ed in tw o different m onths or fo r 15 days or m ore in either 1975 o r 1976.
*T-iur ^an ^s *n ea ch size group the cost o f services utilized was summed and divided b y the sum o f their average daily reserve balances in the period Septem ber 9, 1976, through January 12, 1977.
T he cost o f clea rin g a check is estim ated at $0,015. This is above the unit cost reported in the Federal R eserve’s Functional Expense R ep o rt; this cost figure is used as an estimate o f unit costs
w ith the relevant capital costs added. The basis fo r assigning costs to the m oney service is the schedule o f fees fo r that service charged nonmem bers. F or banks initiating w ire transfers with
on-line equipm ent, the cost o f each w ire transfer initiated is estimated at $0.30, based upon d ata from the Functional Expense Report. F o r banks n ot on-line f o r w ire transfers, the cost o f
each w ire tra n sfer initiated is estim ated as $2, which is approxim ately the cost assigned to this service in the account analysis studies o f correspondent banks m ade by the Federal Reserve
Bank o f Kansas City.
7One bank was deleted from group 4 because its utilization o f Fed services was so much greater than that o f other banks o f sim ilar asset size that the percentage that cost o f services is o f
reserve balances w ith this bank included was unrepresentative fo r other banks o f that asset size.

ST. LOUIS

3,89 1 .6
7,179.8
9,59 2 .3
1 1,706.4
15 ,051 .6
17,723 .6
21,7 9 0 .2
25,991 .2
3 0 ,9 5 2 .0
40,961.1
69,1 0 6 .8
4 2 5 ,1 7 3 .8

(3)
Minimum

(6 )

1 9 7 6 -7 7

1
2
3
4
5
6
7
8
9
10
11
12

(2)
Maxim um

S IZ E ,

BANK

(1 )
A verage

G roup
Num ber

(5)

O F V A R IO U S

RESERVE

Total Assets of Banks in
Each G ro u p as of 6 / 3 0 / 7 6
(thousands of dollars)

BANKS

FEDERAL

Table IV

FEDERAL RESERVE BANK OF ST. LOUIS

tions through their own terminals. Other member
banks initiate wire transfers by telephone, giving em
ployees at Reserve Banks details of transactions. Non
member banks may use this funds transfer system
only indirectly through member banks. During 1976,
member banks initiated 21 million wire transfers with
a total dollar value of $35,617.8 billion.
Based upon a survey in November and December
of last year, many of the banks either initiated no wire
transfers or made minimal use of the service.1 Fre
3
quent users of the wire transfer service are defined as
those initiating more than five wire transfers during
the two month period; column (11) presents the per
centage of banks in each size group that initiated wire
transfers frequently.
The number of wire transfers originated by fre
quent users was multiplied by six to get annual rates;
averages of those annual rates for frequent users of the
service are presented in column (12). These calcula
tions indicate that banks in the largest size group
initiated most of the wire transfers. As additional
evidence, the four banks that initiated the most wire
transfers accounted for 86.8 percent of wire transfers
that were sent by all banks in the survey, including
those of the infrequent users.

Safekeeping of Securities
Reserve Banks hold securities in safekeeping for
member banks at no cost to members. Securities are
held in two forms:
( 1 ) C erta in F e d e ra l G o v e rn m e n t o b lig a tio n s are
h e ld at R e s e rv e Banks in b o o k -e n tr y fo rm . N o p h y sica l
d e b t ce rtifica tes are issu ed b y th e T rea su ry , b u t o w n e r
sh ip re co rd s are k e p t o n th e b o o k s o f th e R e serv e
Banks. C u stom ers o f m e m b e r b an ks m a y also h o ld
F e d e ra l d e b t o b lig a tio n s in this fo rm , w ith th e m e m b e r
b an ks a ctin g as their a gen ts fo r this service. O w n e rs h ip
o f th ese secu rities m a y b e c h a n g e d th rou gh w ire
transfers.
( 2 ) T h e o th e r fo rm in w h ic h secu rities are h e ld in
s a fe k e e p in g at R es e rv e Banks is th at o f d efin itiv e
secu rities ■
— a ctu a l p a p e r e v id e n c e o f d e b t o b lig a tio n s
( n o t lim ite d to F e d e ra l G o v e rn m e n t d e b t ) . R e serv e
Banks c o lle c t b o n d c o u p o n s fo r m e m b e r b an ks at n o
ch a rg e , a n d c o lle c t m a tu re d b o n d s at n o ch a rg e oth er
than sh ip p in g ch a rg es fo r c o lle c t io n o u ts id e F e d e ra l
R e s e rv e B ank cities. C o lle c t e d fu n d s are c r e d ite d to
th e rese rv e a cco u n ts o f m e m b e r banks.
13O f the 233 banks in the survey, 78 initiated no wire trans
fers during that period. All but three o f the banks not using
that service had total assets less than $35 million. T he banks
initiating from one to five wire transfers (5 7 in total) are
also relatively small; all but nine had total assets less than
$35 million.

Page 8

AUGUST 1977

Reserve Banks hold, for nonmembers, Federal Gov
ernment securities that are required as collateral for
U.S. Government deposits at those banks. Reserve
Banks also accept, from nonmembers, custody of se
curities that are pledged as collateral to deposits of
bankrupt estates. Other than in these two cases, non
members are not allowed to keep securities for their
own investment account or for the accounts of their
customers in safekeeping with Reserve Banks.
Columns (13) - (16) of Table IV present informa
tion on securities that member banks hold in safe
keeping with the Reserve Bank. Some member banks
do not use this service, preferring to hold securities
with their correspondents or in their own vaults. Use
of the safekeeping service of the Reserve Bank is
somewhat related to bank size, with a greater per
centage of the larger banks using this service. How
ever, more of the smaller banks use this service than
they do the Reserve Bank’s check clearing or wire
transfer services.

Borrowing through the Discount Window
Reserve Banks make loans to member banks for
various purposes and durations. In the most common
situation, a member bank borrows for only a few days
at a time, presumably to adjust its reserve position to
unanticipated deposit withdrawals or loan demands.
This type of lending is called adjustment credit. Cer
tain member banks with distinct seasonal patterns in
loan demand and deposit flows qualify for seasonal
borrowing privileges, under which they may borrow
fixed amounts from Reserve Banks for several con
secutive months. A third category of Federal Reserve
lending is emergency credit, involving loans for ex
tended periods of time to member banks experiencing
financial difficulties that make other sources of funds
unavailable to them at prevailing market interest
rates. Emergency credit is made available at a higher
discount rate than the rates for adjustment credit or
seasonal lending. In some circumstances emergency
credit can be made available to nonmember banks,
but at a higher interest rate than emergency credit for
member banks.
The discount rate was above the Federal funds rate
during most of 1975 and 1976. Therefore, banks that
borrowed at the discount window during those years
were generally borrowing to make short-term adjust
ments to their reserve positions rather than borrowing
to profit from a relatively low discount rate, as many
banks did in 1974. Banks that are “regular” borrowers
at the discount window are identified in this paper as

FEDERAL RESERVE BANK OF ST. LOUIS

those that borrowed in either two different months or
for a total of 15 days or more in either of the past two
years. These “regular” borrowers are assumed to be
relying upon the discount window as an important
source of short-term credit.
Only 21 banks are identified as “regular” borrowers
(see column (17), Table IV ).1 Note that 15 of them
4
had total assets of less than $35 million. Thus, al
though most member banks do not borrow when the
discount rate is above money market rates, the dis
count window is an important source of short-term
credit for several of the smaller member banks.

Aggregating the Benefits of Membership
The benefits of Federal Reserve membership are
measured by summing the costs to the Federal Re
serve of providing services to member banks and
dividing by their respective average reserve balances
at the Reserve Bank. This percentage is called an
implicit rate of return on reserve balances. Average
implicit returns are presented in column (18) of Table
IV. The numerator of this ratio is an estimate of the
cost to the Reserve Bank of providing check clearing,
money service, and wire transfers. This approach over
states the benefits of membership from these services
to the extent that member banks use more of these
services at zero explicit prices than they would as
nonmembers, paying for services by explicit fees or
correspondent balances.
Means of allocating the costs of services to indi
vidual member banks are discussed in Table IV. No
suitable basis was devised for allocating the costs of
safekeeping of securities and credit discount services
to individual member banks, but, as indicated in
Table III, the three services included in calculations
in column (18) — check clearing, coin and currency
service, and wire transfers — account for about 95 per
cent of the costs of services provided. Therefore,
allocating just the costs of these three services to
member banks provides suitable estimates of the
benefits of membership measured in terms of costs of
services used.
In all size groups the implicit rates of return on
reserve balances are quite low.1 The highest per
5
,4O nly 24 mem ber banks out o f 233 in the survey borrow ed
at any time during 1975-76. Therefore, most o f the banks
that borrow ed are identified as regular borrowers.
lr,These rates o f return w ou ld be even low er if the costs o f
services provided to members were strictly lim ited to those
offered exclusively to mem ber banks. A large share o f the
costs o f services provided to members in these calculations

AUGUST 1977

centages are for the largest group of banks in the sur
vey, averaging 1.69 percent. The calculated implicit
returns for the largest banks are understated since
they do not include the costs to the Federal Reserve
System of clearing checks that several of those banks
sent directly to other Reserve Banks. For the smaller
member banks (the 200 smallest in the survey), the
implicit returns average about one-half of one percent.

IMPLICATIONS FOR MEMBERSHIP
Data on implicit returns to the smaller member
banks relative to their reserve balances indicate why
smaller banks have incentives to withdraw from mem
bership. The survey has too few observations on the
utilization of Reserve Bank services by large banks to
offer an explanation for why most large banks have
remained in the Federal Reserve System.

Smaller Banks
Division of banks into categories of large and small
is somewhat arbitrary. For purposes of this discussion
small banks are identified as those with total assets less
than $50 million (or roughly those in groups 1-10 in
Table IV ).
Table IV indicates that most of these banks use few
Reserve Bank services. The implicit rate of return on
reserves averaged about one-half of one percent for
those banks. These results indicate that for most of the
smaller member banks, Federal Reserve services are
more expensive than the services of correspondent
banks, which are close substitutes for the services
offered by Reserve Banks.
Implicit returns on demand balances at correspond
ent banks, similar to the implicit returns on reserve
balances discussed above, can be derived from studies
of account analysis at correspondent banks. The cor
respondent banks that perform account analysis keep
records of services used by respondent banks and
assign dollar values to the utilization of services based
upon the costs to the correspondent banks of provid
ing those services. Correspondent banks multiply the
average collected demand balances of respondent
banks by implicit interest rates, called earnings allow
ances, to determine periodically whether respondent
banks have been holding large enough demand bal
ances to compensate for the services they use.
is the cost o f clearing checks drawn upon banks located
within the region served b y their ow n Regional Check
Processing Center. N onm em ber banks may also present such
checks to Reserve Banks for collection.

Page 9

FEDERAL RESERVE BANK OF ST. LOUIS

In a survey of 130 correspondent banks conducted
by Knight in July 1976, the earnings allowances on
collected demand balances, unadjusted for the re
quired reserves of correspondent banks against those
deposits, ranged from 3.34 to 6.19 percent with an
average of 4.5 percent.10 These percentages indicate
the implicit returns respondent banks may receive on
their collected demand balances at correspondents if
they fully utilize the services made available to them.
Thus, correspondent banks make available signifi
cantly more services per dollar of collected demand
balances than do Reserve Banks, assuming that Re
serve Banks are not substantially more efficient than
correspondent banks.1
7
This conclusion could be challenged on the basis
that the smaller member banks could increase their
implicit returns on reserve balances substantially if
they just made fuller use of Reserve Bank services.
This issue is investigated by calculating the implicit
returns on reserve balances for a group of banks

18For a description o f the m ethodology used in that study o f
account analysis, see R obert E. Knight, “ A ccou nt Analysis
in Correspondent Banking,” Monthly Review, Federal R e
serve Bank o f Kansas City (M a rch 1 9 7 6 ), pp . 11-20. The
earnings allowances reported in the survey o f July 1976
w ere for collected dem and balances o f respondent banks
net o f required reserves that correspondent banks must hold
against those deposits. In the discussion above, those earnings
allowances w ere converted to a basis o f collected balances
unadjusted for required reserves b y m ultiplying b y one
minus the marginal reserve requirement on dem and deposits
for correspondent banks, w hich is assumed to b e 16.5 per
cent, the marginal reserve requirement for m em ber banks
w ith dem and deposits greater than $400 m illion. This ad
justment is m ade to the earnings allowances b y correspond
ent banks to make them m ore com parable to the im plicit
returns on reserve balances o f m em ber banks calculated
above.
1C om p a rison s o f im plicit returns that m em ber banks receive
on their reserve balances to the earning allowances at cor
respondent banks understate to some extent the differences
in im plicit yields on reserve balances and collected dem and
balances at correspondent banks. This bias results from the
fact that correspondents are not charged fees fo r the R e
serve Bank services they use as part o f their service to
respondent banks, and therefore, do not have to include the
costs to the Reserve Banks in offering those services in their
im plicit charges to respondent banks in order to price their
services profitably. An objection m ight b e raised to this
conclusion on the basis that correspondent banks must set
their im plicit charges on services they offer to respondent
banks high enough to cover their costs o f Federal Reserve
m em bership in terms o f foregone eam ings on the large
reserve balances they must hold. If this objection is valid, it
w ould mean that com parison o f im plicit returns on reserve
balances to eam ings allowances at correspondent banks
w ou ld overstate the differences in yield on reserve balances
in terms o f services relative to the im plicit yields on dem and
balances at correspondents. H ow ever, this objection is not
valid since the eam ings allowances reported above equal the
eam ings allowances from the recent study o f accounts
analysis at correspondent banks m ultiplied b y one minus the
marginal reserve requirement on dem and deposits, thus
rem oving this second source o f potential bias.

Page 10

AUGUST 1977

with total assets less than $50 million which make
relatively full use of Reserve Bank services. Each of
the banks included in this analysis regularly clears
local and out-of-district checks directly through the
Reserve Bank. There are 34 such banks served by the
head office of this Bank. Their total assets as of June
1976 ranged from $8.8 to $49.9 million, with average
assets of $27.6 million.18 All of these banks receive
coin and currency service from the Reserve Bank, and
all but three of them initiated wire transfers.
The average implicit return to these banks on their
reserve balances is 1.32 percent. Thus, although mem
ber banks which utilize Reserve Bank services more
fully than average can increase their implicit returns
on reserve balances substantially, their implicit re
turns still will be low relative to the implicit interest
rates on collected demand balances at correspondents.
Significance of the Costs of Membership — Given
the relatively low implicit returns to member banks
on their reserve balances, a remaining question is the
size of the costs of Federal Reserve membership in
relation to bank profits and capital. If the costs of
membership are positive but insignificant, current
members would not have strong incentives to with
draw from membership. The costs of membership are
estimated for a group of member banks which make
minimal use of Reserve Bank services. The character
istics of those banks and the procedure for calculating
their costs of Federal Reserve membership are pre
sented in the Appendix. Membership costs of banks
making minimal use o f Reserve Bank services are
analyzed because measuring the costs to those banks
of obtaining services as nonmembers requires few
assumptions.
For the 54 banks included in the analysis, the costs
of Federal Reserve membership averaged 1.8 percent
of their equity capital in 1976. The cost of member
ship as a percent of 1976 profits before income taxes
and securities gains and losses averaged 11.2 percent
among 49 banks with positive profits last year. These
calculations indicate that for the smaller member
banks making little use of Reserve Bank services, there
is a substantial cost associated with Federal Reserve
membership.
W hy D o So Many of the Small M ember Banks
Make Minimal Use of Reserve Bank Services? — This
18T w o other banks had these characteristics but w ere excluded
from this analysis because their utilization o f services was
unusually great. Apparently those banks serve as ch eck p roc
essing centers for other banks in their holding com panies.

\
FEDERAL RESERVE BANK OF ST. LOUIS

analysis has not explained why most of the smaller
member banks make little use of Reserve Bank serv
ices. Explanations could be offered for each service
separately. For instance, one explanation for why most
of the small member banks clear checks through
correspondents is the Fed’s encoding and sorting re
quirements. However, a more general explanation,
which is supported by the evidence in the sections
above, is that most of the smaller member banks find
the transactions costs of managing their reserve ac
counts, while using Reserve Bank services, greater
than the benefits derived from using those services.
Use of Reserve Bank check clearing services in
volves frequent debits and credits to a member bank’s
reserve account. Having a reserve account debited
and credited for money shipments also creates some
problems for a member bank in managing its reserve
position. When a member bank orders a currency
shipment, its reserve account is debited, but the funds
transferred to the bank as vault cash are not counted
as part of reserve assets for two weeks. For the current
reserve settlement week, the funds withdrawn from
the bank’s reserve account must in general be re
placed with funds from another source in order to
meet reserve requirements. Use of other Reserve Bank
services — wire transfers, safekeeping of securities,
and borrowing through the discount window — in
volves similar adjustments to the reserve positions of
member banks.
Member banks know the average reserve balances
they are required to hold during each reseive settle
ment week at the beginning of the week, and most
member banks receive statements daily on the bal
ances in their reserve accounts. Even though the
Reserve Banks provide members with this information,
member banks incur transactions costs in managing
their reserve positions if they are using Reserve Bank
services which involve frequent debits and credits to
their reserve accounts. Banks using such services must
monitor their reserve positions closely, project debits
and credits to their reserve accounts, sell assets or
borrow funds to avoid reserve deficiencies when there
are unanticipated debits, and buy assets or lend funds
to avoid large excess reserves when they have unan
ticipated credits.
Large banks cope with such reserve management
problems by employing specialists in that function.
According to the explanation for the behavior of the
smaller member banks developed in this section, a
large proportion of them prefer not to incur the trans
actions costs that result from using Reserve Bank

AUGUST 1977

services directly. Instead they prefer to hold relatively
idle balances at the Reserve Bank to meet reserve
requirements, obtaining services through correspond
ents and using their demand balances at correspond
ents as their working balances. As explained above in
the discussion of account analysis at correspondent
banks, correspondents require respondent banks to
hold average demand balances in some proportion to
the costs of services they use. However, correspondent
banks require this balancing out less frequently than
once a week, thus allowing their respondent banks
more flexibility in the use of their demand balances
than Reserve Banks allow members in the use of
their reserve balances.
Data from the survey discussed above include several
observations which tend to support the hypothesis
that many of the smaller member banks avoid using
Reserve Bank services because of the reserve manage
ment problems that would result. Note in columns (6 )
and (9 ) of Table IV that in most size groups more
banks have their reserve accounts debited and cred
ited for money shipments than have their reserve
accounts debited for checks drawn upon them. A
member bank orders money shipments in advance and
therefore can plan its reserve management over a re
serve settlement week, taking such entries into consid
eration. In contrast, debits to a member bank’s reserve
account in remitting for the Fed’s cash letters come in
amounts and with timing that cannot be foreseen
accurately. Therefore, one explanation for why more
member banks order money shipments through their
reserve accounts than settle for checks drawn upon
them through their reserve accounts is that debits and
credits due to money shipments create smaller trans
actions costs in managing their reserve positions.
Another observation that supports this view is that
the smaller banks which do use services involving
frequent debits or credits to their reserve accounts
tend to use other such services. Use of one such serv
ice forces a bank to deal with the problem of manag
ing its reserve account subject to frequent debits or
credits. Thus, using other such Reserve Bank services
imposes a smaller marginal burden.
There are 58 banks among the 200 smallest in the
recent survey that either deposit checks directly with
the Reserve Bank or pay for checks drawn upon them
through their reserve accounts. Use of these services
involves the most frequent and unpredictable debits
and credits to reseive accounts. Of these banks, 52, or
89.7 percent, have their reserve accounts debited and
credited for money shipments; of the other 142 mem
Page 11

FEDERAL RESERVE BANK OF ST. LOUIS

ber banks among the 200 smallest in the survey, only
69, or 48.6 percent, have their reserve accounts deb
ited and credited for money shipments.
A similar difference in behavior exists among these
banks with respect to use of the wire transfer service.
Of the same 58 banks, 39, or 67.2 percent, initiated
more than five wire transfers during a two-month
period, whereas among the remaining 142 banks, only
33 banks, or 23.2 percent, initiated wire transfers that
frequently. Many of the member banks that did not
initiate wire transfers through the Reserve Bank prob
ably did so through correspondents.
The discussion above indicates a preference among
the smaller member banks for holding relatively idle
balances at Reserve Banks to meet their reserve re
quirements and holding more active demand balances
at correspondents which serve as their working bal
ances. Results in Table V, using observations for all
Eighth District member banks, reflect such a pattern
of behavior.
One measure of activity in reserve balances and
demand balances at correspondents is the standard
deviation of daily balances divided by the mean of
daily balances. For banks in each size group ex
cluding the 25 largest banks, their demand balances
at correspondents are, on average, more variable than
their reserve balances, indicating that the smaller
member banks tend to hold relatively idle balances
with the Reserve Bank and use their demand bal
ances at correspondents as their working balances.
Another measure of variability in daily balances
presented in Table V is the average number of days
that balances in an account did not change from the
previous day. To indicate the limits on these numbers,
the data used cover 126 days, and the minimum num
ber of days a bank’s reserve balance could remain
unchanged is 36, due to weekends and holidays. Many
of the smaller member banks leave their reserve bal
ances unchanged for several days in a row. The
number of days reserve balances remained unchanged
averaged 76.5 among the 60 smallest banks and
tended to decline as bank size increased. The number
of days demand balances at correspondents remained
unchanged were approximately the minimum for
banks in all size groups.
Member banks that use the services of correspond
ents, instead of the services provided by their Re
serve Banks, must hold substantial demand balances
at correspondents to compensate for the services they
use. Thus, many member banks bear double reserve
Page 12

AUGUST 1977

burdens, meeting the reserve requirements of the
Federal Reserve and holding demand balances at
correspondents that are large enough to exceed the
reserve balances that would be required of them as
nonmember banks.
In most states nonmember banks can meet their
reserve requirements with demand balances at corre
spondents and CIPC. The last column of Table V
indicates that in all size groups Eighth District mem
ber banks hold average daily demand balances at
correspondents plus CIPC that are larger than their
average daily reserve balances at the Reserve Bank.
The ratio of demand balances at correspondents plus
CIPC to reserve balances is especially high among the
smallest member banks and the largest member banks
in Table V, the large correspondent banks having
especially large CIPC.1
0
These observations do not necessarily imply that
most member banks would hold the same level of
demand balances at correspondents if they became
nonmembers. Several studies show that nonmember
banks hold larger demand balances at correspondents
than member banks of the same deposit size.20 The
observations in the last column of Table V do indicate
that most member banks hold assets that would count
as reserves if they were nonmember banks which are
larger than their current reserve balances at the Re
serve Bank.
W hy D o So Many of the Small Banks Retain Fed
eral Reserve Membership? — The analysis above in
dicates that there are substantial costs associated with
Federal Reserve membership, and yet, as indicated in
Table I, many of the banks in the smaller size groups
are members of the Federal Reserve. Access to the
Federal Reserve services discussed above does not
provide sufficient benefits to offset the opportunity
costs of required reserves. Therefore, the remaining
'''T h e numerator o f this ratio is dem and balances at corre
spondents plus C IP C for the follow in g reasons. O ne reason
concerns the differences am ong m em ber banks in the w ay
they record deposits at correspondents. Some banks record
the value o f deposits to accounts at correspondents as C IP C
until the funds are collected; others record deposits at cor
respondents as dem and balances when they make deposits,
whether the funds w ill be available for their use im m edi
ately or in a few days. Therefore, adding C IP C to dem and
balances at correspondents is necessary for getting co m
parable observations am ong banks. M em ber banks that clear
checks through their Reserve Banks are required to record
uncollected funds as CIPC . If these banks were nonm em
bers, those C IPC w ou ld count as reserve assets. Therefore,
these funds are in cluded in the numerator o f the ratio in
T able V, w hich shows the extent to w hich m em ber banks
hold double reserve assets.
- nSee references in footn ote 7.

F EDERAL.

Table V

MANAGEMENT

OF CASH

A SSETS

E IG H T H

D IS T R IC T M E M B E R

Smallest
in G roup
of Banks

$ 5 7 2 9 0 .2

$ 3 7 2 4 8 .4

Average
for Group
of Banks
$ 4 5 7 7 1 .7

0.4791

A verage Number
of D ays Due
From Balances
W ere the Same
as on the
Previous Day

Average
Ratio of Due
from Balances
Plus CIPC to
Reserve Balances

36.40

0 .6 3 7 4

40.40

3.22

39.20

2.55

3 3 1 5 6 .5

5 2 1 6.0

11 192.3

0 .3 4 5 4

39.15

0 .2 7 3 5

4 8 4 6 .5

290 4.0

3 7 4 3 .6

0 .2 0 6 9

40.55

0 .2 6 1 7

39.35

1.43

ST. LOUIS

Largest
in G rou p
of Banks

A verage Number
of D ays Reserve
Balances W ere
the Sam e as on
the Previous Day

A verage Daily Reserve Balances
(thousands of dollars)

Standard
Deviation of
Due from Balances
Divided by M ean
Balance: A verage
of These Ratios
for Each G roup
of Banks

BANK

G ro up s of 20
Banks Ranked
from Largest
to Smallest
(First G roup
has 5 Banks)

Standard
Deviation of
Reserve Balances
Divided by M ean
Balance: Average
of These Ratios
for Each G roup
of Banks

Demand Balances Due from Correspondent Banks

RESERVE

Reserve Balances at the Federal Reserve

BANKS1

1.50

287 3.8

2205.8

25 1 9 .6

0 .1 9 0 9

4 0 .6 0

0 .2 4 5 5

39.20

2 1 7 6 .7

1659.2

1 896.8

0 .1 4 4 0

43.5 0

0 .3 4 2 9

35.8 0

1.30

1630.1

1411.4

151 0.4

0 .1565

45.55

0 .2 8 2 6

37.70

1.55

1 3 9 9.9

1254.2

13 2 2 .7

0.2071

4 2.0 0

0 .3148

37.05

1.45

1 2 4 5.8

1096.5

115 1.7

0 .1 5 0 3

4 9 .3 0

0 .3 0 3 4

35.20

1.06

10 8 7 .0

971.1

1023.9

0 .2 0 3 3

45.0 5

0 .3438

38.75

1.31

9 6 9 .9

843.5

912 .9

0 .2274

46.8 0

0.3 3 2 3

34.10

1.50

53.0 0

0.3 6 4 8

37.85

1.35

84 0 .9

762.6

808.3

0 .1 4 5 4

76 2 .0

706.9

73 7 .7

0 .1 1 8 5

57.3 0

0 .3 2 0 2

36.75

1.69

0 .3 0 0 2

34.50

1.66

7 0 5 .0

633.8

662.1

0 .1 5 6 6

57.25

63 2 .5

585.5

604.8

0 .1 5 7 9

55.35

0 .3 1 6 0

36.45

1.97

33.4 0

1.57

5 8 4 .9

479.8

5 3 8 .7

0 .2 0 6 9

52.9 5

0 .2 7 8 6

478.1

408.2

452.2

0 .1 8 7 4

6 4.2 0

0.3 0 2 5

45.35

1.66
1.78

4 0 7 .7

344.2

37 6 .7

0 .1 9 8 8

6 4.9 0

0 .3 8 6 2

36.30

33 9 .9

289.9

31 1.8

0 .2 4 3 3

5 9.2 5

0.3301

36.05

2.11
2.45

289 .9

256.2

271.5

0 .2 1 3 2

60.15

0 .3 1 6 0

31.50

255 .3

212.2

231 .7

0.1 6 3 3

82.65

0 .3 7 0 4

32.20

2.24

198.8

136.5

170.0

0 .2 1 8 3

70.15

0 .2 9 0 7

33.75

134.8

7.4

91.7

0.301 8

76.55

0 .4 0 3 5

35.75

3.27

AUGUST

3.49

1977

Page

*The 425 banks included in these calculations are all Eighth District banks that were members o v e r the period Septem ber 9, 1976 through January 12, 1977. All observations apply to that period.

FEDERAL. RESERVE BANK OF ST. LOUIS

privilege of Federal Reserve membership which ap
pears to account for retention of membership by the
smaller banks is access to a lender of last resort
through their Reserve Bank’s discount window. That
privilege is a type of insurance policy on availability
to credit during periods of financial difficulty, whether
that difficulty occurs within the individual bank or in
the whole economy. The cost of membership to a bank
can be considered its premium paid for this form of
insurance. Since the Federal Reserve has a monopoly
on offering the service of lender of last resort, it can
charge high premiums for that service, as indicated by
the costs of membership calculated above.

Larger Banks
There remains the question of why most of the
larger banks remain in the Federal Reserve. One
possible explanation is that the large member banks
use enough Reserve Bank services to more than com
pensate them for the opportunity costs of the reserve
balances they hold. Table IV provides information on
this explanation. Dividing the cost to the Reserve
Bank of providing services to banks in the largest
group by their average reserve balances yields an
implicit rate of return of only 1.69 percent. For the
three largest banks in the survey, that implicit rate of
return is 1.83 percent. As noted above, these figures
are understated somewhat because the checks sent by
some of these banks directly to other Reserve Banks
are not accounted for. But even allowing for that fac
tor, the large member banks receive a low rate of
return on their reserve balances in terms of the costs
of the services they use. However, membership may
still be profitable for the large banks if access to
Federal Reserve services allows them to earn large
profits as correspondent banks.
These results do not support the view that the
larger banks retain their membership in the Fed
eral Reserve because of high implicit returns on their
reserve balances. There are too few large banks in
cluded in the survey of the utilization of services by
member banks to draw strong conclusions about the
generality of these results or the reasons why the
larger banks retain their membership in the Fed.
However, it is unlikely that many of the large member

Page 14

AUGUST 1977

banks receive very high implicit rates of return on
their reserves in the form of services, since for the
Federal Reserve System as a whole the cost of provid
ing services to member banks is approximately one
percent of total reserve balances held by members at
Reserve Banks. Therefore, the Federal Reserve is
effectively imposing a tax on the banking industry,
even with Federal Reserve membership being volun
tary. The tax takes the form of interest foregone by
member banks on their reserve balances less the costs
to Reserve Banks of providing services to member
banks. At an interest rate of five percent, that tax in
1976 was about $1 billion.2
1

CONCLUSIONS
An analysis of the costs and benefits of Federal Re
serve membership is incomplete without information
on the degree to which member banks use the services
provided by their Reserve Banks. Member banks with
total assets of less than about $50 million make rela
tively little use of Reserve Bank services, using the
services of correspondents instead. There is evidence
that the costs of this arrangement to many of the
smaller member banks are lower than the costs of
managing their reserve accounts if they made fuller
use of Reserve Bank services. Member banks making
minimal use of Reserve Bank services bear substantial
Federal Reserve membership costs, averaging 11.2
percent of profits and 1.8 percent of equity capital for
one group of banks.
Most of the major correspondent banks have re

mained members of the Federal Reserve. The large
banks are heavy users of Reserve Bank services, but
their implicit returns on reserve balances in the form
of services are substantially higher than the implicit
returns to the smaller member banks, but are still
rather low.
21M em ber bank reserves h eld at Reserve Banks averaged
$26.2 billion in 1976. Suppose the opportunity cost to
m em ber banks from holding those reserves is 5 percent, the
average yield on U.S. Governm ent Treasury bills last year.
T he total opportunity cost o f holding reserves w ou ld be
$1.3 billion. W ith the total costs to Reserve Banks o f offer
ing services to m em ber banks betw een $200 m illion and
$300 million, the total im plicit tax on banking was about
$1 billion.

AUGUST 1977

FEDERAL RESERVE BANK OF ST. LOUIS

APPENDIX
Calculation of the Costs of Federal Reserve Membership
T h e p u r p o s e o f th e fo llo w in g ca lcu la tion s is to estim a te
th e in c o m e that s e le cte d b an ks fo r e g o b y b e in g m em b ers
o f th e F e d e ra l R e s e rv e S ystem . M e m b e r b an ks in clu d e d
in this analysis h a v e th e fo llo w in g ch a ra cteristics:
(a )

th e y cle a r ch e ck s a n d rem it f o r th e F e d ’s cash
letters th ro u g h corre s p o n d e n ts,

(b )

th e y h o ld n o secu rities in s a fe k e e p in g , and

(c)

n o n e o f th em are regu la r b o rro w e rs th ro u g h the
d is co u n t w in d o w , as id e n tifie d a b ov e.

Banks w ith th ese ch a ra cteristics are ch o s e n sin ce b e c o m
in g a n o n m e m b e r w o u ld h a v e less e ffe c t o n th eir o p e r a
tions than o n o th e r b an ks in th e su rv ey a n d b e ca u s e
sp e cific d o lla r am ou nts c a n b e a ssign ed less a rbitrarily to
th e R e se rv e B ank services th ey u se than fo r oth er banks
th at m a k e u se o f a d d ition a l R e s e rv e B ank services. In
total, 5 4 banks m e e t th ese co n d itio n s ; th eir total assets
ra n ge fr o m $ 3 .4 m illion to $ 4 4 .5 m illion . O n ly s ev en o f
th ese 5 4 banks h a v e a n y d e m a n d d e p o s it liabilities d u e
to o th e r c o m m e rcia l banks, a v e ra g in g $ 3 3 th ou sa n d d u r
in g th e tw o w e e k s e n d in g Janu ary 12, 1 9 7 7 . T h e s e banks
d o n o t a p p e a r to b e fu n c tio n in g as co rre s p o n d e n ts to an y
sign ifican t d e g r e e ; th erefore, n o a d ju stm en t is n ecessa ry
fo r loss o f co rre s p o n d e n t b a n k in g profits d u e to th ese
banks b e c o m in g n o n m em b ers.
T h e first ste p in v o lv e s estim a tin g h o w m u ch a b a n k
c o u ld in crea se its e a rn in g assets if it b e c a m e a n o n m e m
b e r ( assu m in g its total assets rem ain u n c h a n g e d ) . S in ce
Illin ois has n o reserve req u irem en ts, m e m b e r b a n k s in
Illin ois are a ssu m ed to in crea se th eir ea rn in g assets b y
th e a m o u n t o f th eir a v e ra g e reserv e b a la n ce s at th e
R e s e rv e Bank. O f th e 5 4 b an ks in this analysis 3 5 are
lo ca te d in Illin ois.
T h e ca lcu la tio n s are m o r e c o m p le x fo r M issou ri banks.
R e se rv e re q u irem en ts fo r n o n m e m b e r banks in M issouri
are a p p ro x im a te ly e q u a l to th ose o f F e d e ra l R e serv e m e m
bers. N o n m e m b e r banks in M issou ri m a y h o ld their reserve
assets o n ly as va u lt ca sh , d e m a n d b a la n ces at c o r r e
s p o n d e n ts, o r ca sh item s in th e p r o ce ss o f co lle c tio n
( C I P C ) . B anks are a ssu m ed to h a v e th e sa m e a v era g e
le v e l o f va u lt ca sh a n d C IP C w h e th e r th ey are m e m b e r
o r n o n m e m b e r banks. T h e reserves n ecessa ry to satisfy a
b a n k ’s state re se rv e req u irem en ts are c a lcu la te d as its
a v e ra g e reserve b a la n c e at th e R e s e rv e B ank p lu s its
a v e ra g e d e m a n d b a la n c e at co rre s p o n d e n ts a n d C IP C
m u ltip lie d b y the b a n k ’s m a rg in a l reserve req u irem en ts

o n d e m a n d d ep osits. U n d e r F e d reserv e req u irem en ts,
d e m a n d b a la n ce s at c o rre s p o n d e n ts a n d C I P C are s u b
tra cte d in ca lcu la tin g d e m a n d d e p o s its s u b je ct to reserve
req u irem en ts, w h erea s th at d e d u c t io n is n o t m a d e fo r n o n
m e m b e r b an ks in M issouri. I f a b a n k ’s d e m a n d b a la n ce s at
co rre s p o n d e n ts are la rg er than w h a t w o u ld b e re q u ire d to
m e e t state reserv e req u irem en ts as a n o n m e m b e r bank,
th e b a n k is a ssu m ed to in crea se its ea rn in g assets b y th e
a m o u n t o f its cu rren t re s e iv e b a la n ce s at th e F e d if it
b e c o m e s a n o n m e m b e r. I f a b a n k ’s d e m a n d b a la n ce s at
c o rre s p o n d e n ts are sm aller than w h a t w o u ld b e re q u ire d
to m e e t state reserv e req u irem en ts, th e a m o u n t b y w h ic h
that b a n k c o u ld in crea se its ea rn in g assets is ca lcu la te d
b y a d d in g its a v e ra g e reserve b a la n c e at th e R e se rv e
B ank to its a v e ra g e d e m a n d b a la n ce at co rre s p o n d e n ts
a n d su b tra ctin g its re q u ire d re s e iv e b a la n ce at co r r e
sp on d en ts as a n o n m e m b e r b a n k . A v e ra g e d a ily reserve
b a la n ces, d e m a n d b a la n ces at corre s p o n d e n ts, a n d C I P C
are m ea su red o v e r th e p e r io d S e p te m b e r 9, 1 9 7 6 , th rou gh
January 12, 1 9 7 7 .
T h e in c o m e fo r e g o n e as a m e m b e r b a n k is ca lcu la te d
as fo llo w s :
(1 )

th e d olla r a m ou n ts b y w h ic h a b a n k c o u ld in crease
its ea rn in g assets as a n o n m e m b e r is m u ltip lie d b y
five p ercen t.

(2 )

th e fo llo w in g a m ou n ts are
c a lcu la te d in ( 1 ) a b o v e :

d ed u cted

fro m

that

(a )

th e a nn ual c o s t to th e b a n k o f o b ta in in g its
c o in a n d c u rre n c y s e rv ice as a n o n m e m b e r
bank;

(b )

th e n u m b e r o f w ire transfers th e b a n k m akes
at an a nn ual rate m u ltip lie d b y $ 2 , th e a p
p rox im a te co s t o f in itia tin g a w ire transfer as
a n o n m e m b e r ba n k ;

(c )

fo r b an ks h a v in g th eir reserv e a cco u n ts d e b
ited a n d cr e d ite d fo r m o n e y sh ip m en ts, the
n u m b e r o f su ch le d g e r entries in a yea r
ch a r g e d at ten cen ts p e r en try. T h is a m ou n t
is a p p ro x im a te ly th e im p licit c h a rg e b y c o r
re s p o n d e n t banks p e r le d g e r en try in their
a c c o u n t analysis.

A m o n g th e 5 4 banks, th e resu ltin g m ea su re o f in co m e
fo r e g o n e fo r e a ch b a n k a vera ges 1.8 p e r c e n t o f 1 9 7 6
e q u it y ca p ita l. F o r th e 4 9 b an ks w ith p o s itiv e profits in
19 7 6, in c o m e fo r e g o n e as a m e m b e r o f th e F e d e ra l
R e s e rv e a v e ra g e d 1 1 .2 p e r c e n t o f th eir 1 9 7 6 profits.

Page 15

Estimates of the High-Employment Budget
and Changes in Potential Output
KEITH M. CARLSON

0
NE of the more novel approaches to the problem
of assessing the impact of the Federal budget on
economic activity was the development of the concept
of the high-employment budget. The purpose of this
concept was to standardize the budget position on
some high-employment norm and thereby remove the
e f f e c t of variations in e c o n o m i c a c t i v it y o n t h e meas
ured budget surplus or deficit. Proponents of the highemployment budget argue that estimation of the
Federal budget at an assumed full-employment level
of activity provides a better measure of the impact of
the budget on the economy than the actual surplus or
deficit ( see Chart I ).
Central to the calculation of the high-employment
budget is the estimate of potential GNP — that rate
of production consistent with “full” utilization of
economic resources in “normal” times. In general, this
definition is very imprecise, and several estimates have
been developed by different analysts over the years.
Most recently — since 1973—-a controversy has
developed as to the estimated impact of energy de
velopments on the economy’s productive potential. If,
as has been argued, the run-up in energy prices has
affected potential output, estimates of the highemployment budget must be adjusted accordingly.
A measure of fiscal action that is not revised in accord
Page 16

ance with the revision of potential GNP will provide
misleading information as to the stance of fiscal policy.
With regard to the current status of estimates of
potential output, a consensus has not evolved. On the
one hand, the 1977 Annual Report of the Council of
Economic Advisers presented one set of revised esti
mates, based primarily on a reevaluation of recent
productivity trends and a redefinition of the “fullemployment unemployment rate.”1 On the other
hand, a series for potential output was recently dis
cussed in this Review which incorporated the effects
of energy developments since 1973.2
Two new estimates of the high-employment budget
are presented here and compared with previous esti
mates. Most of the differences between the new and
the old estimates occur after 1973. The differences
are of such magnitude that the implications for fiscal
policy are somewhat different with the increase in the
relative price of energy and its associated effects on
potential output.
1The Annual Report of the Council of Economic Advisers
(W ashin gton , D .C .: U.S. Governm ent Printing Office, 1 9 7 7),
pp. 45-57. For discussion o f this series, along w ith a presen
tation o f tw o other estimates o f potential output, see G eorge
L. Perry, “ Potential Output and Productivity,” Brookings
Papers in Economic Activity, 1 ( 1 9 7 7 ), pp. 11-60.
-R obert H. Rasche and John A. Tatom , “ Energy Resources
and Potential GNP, ” this Review (June 1 9 7 7 ), pp. 10-24.

AUGUST 1977

FEDERAL RESERVE BANK OF ST. LOUIS

DEVELOPMENT AND USE OF HIGHEMPLOYMENT BUDGET
Although the concept of high-employment budget
ing has been in existence since the 1940s, it did not
gain prominence in government policymaking until
the early 1960s.3 Since then, reliance on the concept
has waxed and waned with the tides of economic and
political developments. From 1966 to 1969, for
example, the concept received little attention in fiscal
policy discussions because with the economy operat
ing at a high level of employment, measured budget
surpluses and deficits approximated their high-employ
ment values. Since 1969 the concept has been kept
before the public but has not been assigned a key role
in the formulation of budget policy.4
One reason that the high-employment budget has
not been cast in a focal role in the fiscal policy
process is that it is a hypothetical budget. Since it is
an analytical tool designed by economists, its useful
ness hinges on an understanding of certain elements
of economic theory. Policymakers and the general
public are understandably suspicious of a hypothetical
figure based on theory that is not generally
understood.
Another reason the high-employment budget has
not become generally popular among policymakers
is that there is no official time series available from
the Federal government. Without the perspective
provided by a continuous time series, it is difficult to
interpret any particular estimate. Until such a series
is prepared and published by an official Government
agency, it is doubtful that the concept will receive
general acceptance either by policymakers or the
public.5
Several years ago, in an attempt to fill this void in
the Government’s data set, the Federal Reserve Bank
3For a discussion o f the developm ent o f the high-em ploym ent
budget concept, see Herbert Stein, The Fiscal Revolution in
America (C h ica g o : University o f C hicago Press, 1 969),
pp. 185-196, 220-240. For an update, see Alan S. Blinder
and Robert M. Solow, “ Analytical Foundations o f Fiscal
P olicy,” in The Economics of Public Finance ( W ashington,
D .C .: The Brookings Institution), pp. 3-115.
'T h e closest the high-em ploym ent budget cam e to being
a ccepted on an official basis was in the fiscal 1972 budget,
published in January 1971. H ere, for the first time, tables
w ere published in the bud get docum ent relating to the
“ full-em ploym ent budget margin,” and a rationale for fiscal
policy was discussed within this framework.
•
r,Still another reason that the con cept has not been generally
a ccepted is that economists themselves cannot agree (ty p i
ca lly ) on its usefulness and significance. See Blinder and
Solow.

C h a rt I

Fiscal M e a s u r e s
(+ ) S « r p lu s ; ( - ) D e fiu t
Quarterly Totals at A n n u a l Rates
Se ason ally Adjusted

.
..
B i l li o n s Of D o l la r s

...
B illlO M

. n „
0» D o l ' « r *

-100

-120
1969

1970

1971

1972

1973

1974

1975

1976

1977

Sources: U.S. Departm ent of Commerce and Federal Reserve Ban k of St. Louis
Latest data plotted: 2 n d q u a rte r estim ated

of St. Louis began publishing a series on the highemployment budget.6 This was done for purposes of
providing a series that could be used to provide
perspective whenever the concept was used. The
assumptions required to prepare these estimates are
somewhat arbitrary, but the measurement procedures
have remained consistent over time. The alternative
estimates which have been made by critics of this
series have not been followed up in the form of
regular updating and publication.7

RATIONALE FOR HIGH EMPLOMENT
RUDGET
Initially, the rationale for the high-employment
budget was developed within the framework of a
simple Keynesian model of national income determi
nation.8 This model is one that is still in general use
in the macroeconomic section of introductory eco
nomics textbooks. The essence of the theory is that the
level of economic activity is determined by the saving
and spending propensities of economic units. When
fiKeith M. Carlson, “ Estimates o f the H igh-Em ploym ent
Budget: 1947-1967,” this Review (June 1 9 6 7), pp. 6-14.
"See the references in Blinder and Solow.
8For discussion within the context o f this simple m odel, plus
additional refinements, see Blinder and Solow.

Page 17

FEDERAL. RESERVE BANK OF ST. LOUIS

viewed in conjunction with the saving- spending plans
of private economic units, the high-employment
budget provided a means of estimating what was re
quired by way of fiscal stimulus or restraint to achieve
full employment.
The usefulness of the high-employment budget does
not rest with the Keynesian model of national income
determination. Theoretical developments have oc
curred in recent years which have modified the inter
pretation of the high-employment budget but have
not negated its use as an analytical tool. In particular,
recognition of the interaction between monetary and
fiscal actions has led to some considerations that were
neglected in earlier discussions.

Identifying Active vs. Passive Elements in
Budget
Originally, the purpose of the high-employment
budget was to provide a measure of the impact of
fiscal action that was superior to the actual surplus or
deficit. Economists have been aware of the problems
of interpreting the Federal budget position for many
years. The reason for difficulty in interpretation is
that actual surpluses or deficits contain both active
and passive components.9 The active aspect of the
budget refers to the effect of discretionary actions,
that is, the effect of changing tax rates and expendi
ture programs. The passive component is the auto
matic response of expenditures and/or receipts to
variations in economic activity. With tax rates and
unemployment insurance programs as set by Con
gress, different levels of economic activity will yield
different amounts of receipts and expenditures.
The high-employment budget does, in principle,
provide a measure of the active part of the budget.
However, problems in the method of estimation re
main, as the active vs. passive classification is not that
clearcut or automatically identifiable. For example, on
a high-employment basis tax receipts tend to increase
from one period to the next because the economy is
growing. In addition, inflation causes receipts to rise
even without a change in statutory rates.1 Conse
0
!,F or further discussion using this term inology, see Keith
Carlson, “ T he Federal Budget: Perspectives and Prospects,”
this Review (O cto b e r 1 9 7 6 ), pp . 2-7.
10This point is discussed at som e length in Arthur M. Okun
and N ancy H. Teeters, “ T h e Full E m ploym ent Surplus
Revisited,” Brookings Papers on Economic Activity, 1
(1 9 7 0 ), pp. 90-96. See also N ancy Am m on Jianakoplos,
“ T he G row ing Link Between the Federal G overnm ent and
State and L ocal G overnm ent Financing,” this R eview ( M ay
1 9 7 7), pp. 13-20.

Page 18

AUGUST 1977

quently, the high-employment budget might suggest
active tightening in fiscal policy, when in fact the
increase in the surplus might simply be a reflection of
inflation, that is, prior stimulus.

Guiding Policy Decisions
Provision of a crude indicator of the direction of
fiscal actions is an important purpose of the highemployment budget. In addition, there is a purpose
implied by its connection with the underlying theo
retical framework — to actively use this budget con
cept in the process of achieving economic goals.11
One use of the high-employment budget for pur
poses of policy requires information on the values of
planned saving and investment. Critics have sug
gested that this type of information is very difficult to
develop.12 Many economic models have been de
veloped to explain the saving-investment process.13
However, with many different models available, and
with each assigning a different role to fiscal actions, a
particular high-employment budget number probably
means something different to each model builder.
Another interpretation of the high-employment
budget stresses the interaction between fiscal and
monetary policies.14 According to this monetarist in
terpretation, fiscal actions have short-run effects on
GNP, but over the longer run, unless accompanied by
a change in the rate of monetary expansion, these
fiscal effects will be negligible.15 In fact, the main
value of the high-employment budget is that it pro
11Initially this purpose was associated with short-run “ fine
tuning,” b u t m ore recently the emphasis seems to have
shifted to the long run and the use o f high-em ploym ent
budgeting as a means o f im posing fiscal discipline. This was
the view in the President’s fiscal 1972 bud get message.
for example, W arren L. Smith’s com m ent in Staff
Papers and Other Materials Reviewed by the President’s
Commission on Budget Concepts (W a sh in gton : U.S. Govern

'-S e e ,

ment Printing Office, O ctober 1 9 6 7 ), pp. 450-55.
1;iFor a discussion o f existing m odels o f the U.S. E con om y,
see Law rence R. Klein and E dw in Burmeister ( e d s .),
Econometric M odel Performance (P hiladelphia: University
o f Pennsylvania Press, 1 9 7 6).
]4For a theoretical discussion o f the interaction betw een
m onetary and fiscal policy, see Karl Brunner, “ Inflation,
M oney and the R ole o f Fiscal Arrangements: A n Analytic
Fram ework for the Inflation Problem ,” in Mario M onti
(e d it o r ), T he New Inflation and Monetary Policy (N e w
York: Macm illan, 1 9 7 6 ), pp. 25-89.
1'’Probably the best known work demonstrating this “ crow dingout effect” is Leonall C . Andersen and Jerry I. Jordan,
“ M onetary Fiscal A ctions: A Test o f their Relative Im
portance in E con om ic Stabilization,” this Review (N ovem b er
1 9 6 8 ), pp. 11-24. For a recent update o f this w ork showing
that fiscal policy n ow has an effect on GNP, see Benjamin
M. Friedman, “ Even the St. Louis M od el N ow Believes in
Fiscal Policy,” Journal of Money, Credit and Banking, IX
(M a y 1 9 7 7 ), pp. 365-367.

FEDERAL RESERVE BANK OF ST. LOUIS

vides information about the impact of fiscal actions on
interest rates. It is this credit market effect that is
crucial in determining the effect of fiscal actions on
economic activity in the long-run. This credit market
effect depends, in turn, on the strength of private
credit demands.16
The response of the monetary authority to interest
rate pressures is instrumental in the determination of
long-run growth and inflation. If the monetary author
ity does not respond to interest rate pressure, an
increase in the high-employment deficit in the pres
ence of strong private credit demands indicates that
the Federal government is bidding resources away
from the private sector. And shifts in the mix of out
put between public and private sectors can affect the
growth rate of potential output. If, on the other hand,
upward interest rate pressures are resisted by the
monetary authority, the money supply will increase,
and eventually inflation will result.

CONSIDERATIONS UNDERLYING
REVISED ESTIMATES
Once the procedures for estimating the highemployment budget were developed, the matter of
updating was somewhat mechanical, requiring as the
major input an estimate of potential GNP each quar
ter.17 The source for these estimates was the Council
of Economic Advisers, which during the period from
1967 through 1976 usually indicated their estimate of
the growth of potential GNP in their annual report.

Review of Procedure
The Federal sector of the national income accounts
provides the basis for preparing estimates of what
receipts and expenditures would be at high employ
ment. The estimation procedure involves the follow
ing steps for high-employment receipts:
(1) Defining a high-employment rate of production
and calculating a high-employment level of GNP in
nominal terms;

AUGUST 1977

For high-employment expenditures, the only adjust
ment that is made is for unemployment compensation.
Unemployment benefits are calculated for the speci
fied level of high-employment, and actual unemploy
ment benefits are adjusted for deviations from the
high-employment norm.

Revised Estimates and Changes in
Potential Output
One of the reasons the high-employment budget
came under attack in recent years was that it was
calculated on the assumption that full employment
was 96 percent of the labor force, that is, an unem
ployment rate of 4 percent. Changes in the composi
tion of the labor force in recent years suggest that a
4 percent unemployment rate is no longer realistic
as an estimate of the level of full employment.18 If
these labor force developments are ignored, the policy
interpretation of the high-employment measure could
have undesirable economic consequences. If, say, a
balance is sought in the budget on a high-employment
basis of 4 percent unemployment, when in fact the
“natural rate” of unemployment is 5 percent, budget
policy will probably err on the stimulative side.1
9
To make the estimates of the high-employment
budget more credible, two new series on potential
GNP were used in the process of preparing the re
vised estimates. One new potential GNP series was
prepared by the Council of Economic Advisers and is
discussed in their 1977 Annual Report. The other was
prepared by Robert Rasche and John Tatom and
published in the June issue of this Review. For both
series the estimates are supposedly consistent with a
variable “full-employment unemployment rate.” In
stead of being a constant 4 percent, the level of
unemployment which is deemed consistent with full
employment now varies between 4 percent in 1955
and 4.9 percent in 1976.

(2) Estimating the major income shares of GNP at
high employment, i.e. personal income, wages and
salaries, and corporate profits;

The Rasche-Tatom series also allows for the effects
of energy developments on productive potential. The
argument is that energy is an input in the productive
process, and a sharp unexpected increase in its relative
price changed the optimal production mix. The effect

(3) Applying high-employment tax rates to the de
rived income components, which serve as proxies for
actual tax bases.

18Peter K. Clark, “ A N ew Estimate o f Potential G N P,”
C ou ncil o f E con om ic Advisers, unpublished mem orandum ,
January 27, 1977. Also, see Perry.

16See Richard W . Lang, “ T h e 1975-76 Federal Deficits and
the Credit Market,” this Review (January 1 9 7 7 ), pp. 9-16.
17N ancy H. Teeters, “ Estimates o f the Full-Em ploym ent
Surplus, 1955-1964.” Review of Economics and Statistics,
vol. 47 (A ugu st 1 9 6 5 ), pp . 309-21.

19T he C ou ncil o f E con om ic Advisers defines the natural rate
(w h at they call full-em ploym ent rate) o f unem ploym ent as
“ the low est rate o f unem ploym ent attainable, under the
existing institutional structure, that w ill not result in accel
erated inflation.” 1977 Annual Report of Council of E co
nomic Advisers, p. 48.

Page 19

AUGUST 1977

FEDERAL RESERVE BANK OF ST. LOUIS

C h a rt |
|

Estim ates of Potential G N P *

Sou rce: C o u n c il of E co n om ic A d v ise rs
'M e a s u r e d in constant (1972) dollars.

was to reduce economic capacity below what it other
wise would have been from 1974 to present.
The two new potential GNP series are compared
with the old CEA estimates in Chart II. The differ
ences are quite small for 1947 through 1968, but then
the series begin to diverge. By 1976, the difference
between the old and the new CEA is $68 billion (1972
dollars) and $99 billion between the old CEA and the
Rasche-Tatom series.

Other Sources of Revision
Although the new potential GNP series are the
chief sources of the revision in the high-employment
budget, there were other minor changes as well. The
income share method is still used to derive proxies for
the tax bases. The high-employment shares were re
examined along with the high-employment tax rates
(ratio of collections to assumed bases). One of the
more important changes was a change in the defini
tion of the tax base proxy for personal taxes. Previ
ously, personal income was used as a proxy, but with
transfer payments growing in importance as a source
of personal income in recent years, the proxy was
changed to personal income minus Federal transfers
to persons. This change facilitates the procedure of
estimating high-employment personal taxes.
Page 20

All other tax base proxies remained unchanged,
except that they were recalculated for the new poten
tial GNP series and the high-employment shares were
reexamined. Wages and salaries are used as the base
for social security taxes, corporate profits after taxes
as the base for coiporate taxes, and personal income
as the base for indirect business taxes.
The effect of the revisions on high-employment re
ceipts is shown in Chart III. The changes from the old
series are quite small for 1947 to 1968, but after 1968
the differences become greater. By 1976, receipts are
$16 billion less for the new CEA series than for the
old, and the Rasche-Tatom estimate is $24 billion less
than the old CEA estimate. The contours remain the
same, however.
The revision also affected changes in high-employ
ment expenditures since the assumed full-employment unemployment rate was raised. Only the unem
ployment benefit component of spending is treated as
variant with the level of economic activity. Both of
the new series show the same expenditures at high
employment since they are both estimated on the
basis of the same full-employment unemployment
rate. The two sets of revised data are presented in
Table I.

AUGUST 1977

FEDERAL. RESERVE BANK OF ST. LOUIS

C h art III

Estimates of H igh Em ploym ent
(+ )S a rp lis ; (-)D ilic it
Q u arterly Totals at A n n ual Rates

'B a s e d on alternative estim ates o f Potential Output.
Latest d ata plotted: 4th quarter

INTERPRETATION OF REVISED
ESTIMATES
Examination of Chart III shows that both of the
revised estimates of the high-employment budget are
substantially less than those based on the old CEA
series. All three series can be said to depict the same
general pattern of movement throughout the 1952 to
1972 period. However, following 1972 the series show
diverging movements.
The new series show that fiscal policy was becoming
more stimulative from early 1970 through 1972. From
late 1972 to early 1974, all series showed tightening,
but the extent of tightening was greatest for the old
CEA series. In 1974, there is some confusion as to the
stance of fiscal policy depending on which series one
is examining. The old CEA series showed moderate
restriction, the new CEA series showed little change,
but the Rasche-Tatom showed moderate stimulus.
From late 1974 the pattern is similar, although the
extent to which the high-employment budget has
moved back toward surplus is least for the RascheTatom series.
In terms of the impact of fiscal actions, 1976 is
one of the more interesting years. The old CEA series
indicates that fiscal actions were relatively restrictive
in 1976, as indicated by a movement to balance late in
the year. The two revised estimates, on the other

hand, show that the budget imparted substantial
stimulus to economic activity in 1976 because these
measures of the high-employment budget were sub
stantially in deficit.
Some might argue that the status of fiscal action is
such that economic growth is being stifled by contin
uing large deficits in the high-employment budget, as
shown by the revised estimates. As long as monetary
growth is quite moderate, the effect of large highemployment deficits is to usurp funds from the pri
vate sector, and to the extent that such funds would
go to investment in plant and equipment, economic
growth is slowed.

SUMMARY AND CONCLUSIONS
The high-employment budget, if viewed in the
spirit in which it is constructed, can be a useful addi
tion to the policymakers tool kit. Something as com
plex as the impact of fiscal actions cannot be sum
marized with a single number. It’s chief purpose is to
transfer some o f the attention from the actual surplus
or deficit. However, the high-employment budget
serves its function best when used in conjunction with
the measured surplus or deficit.
The effect o f the recent revision of the series was to
increase the deficit in recent years, reflecting a down
Page 21

FEDERAL RESERVE BANK OF ST. LOUIS

AUGUST 1977

Table I

E S T IM A T E S

O F THE

H IG H

EMPLOYMENT

BUDGET*

Billions of Dollars

S e a s o n a lly A d ju s t e d a t A n n u a l R ate s
Based on O ld CEA
Potential G N P

Based on New CEA
Potential G N P

Based on Rasche-Tatom
Potential G N P

Receipts

Surplus/
Deficit

Receipts

Expenditures

Surplus/
Deficit

Receipts

Expenditures

Surplus/
Deficit

$ 2 3 1 .6

$2 3 4 .0

$ - 2.4

$ - 9.8

234 .9

242.4

III

237.4

1972

Expenditures

$ 2 2 5 .0

$ 2 3 4 .8

-1 7 .8

228 .4

243.1

-1 4 .7

237.1

0.3

230.2

23 7 .7

7.5

234 .0

23 7 .7

242 .0

259.0

-1 7 .0

234.5

25 9 .6

-2 5 .1

239 .0

259 .6

-2 0 .6

257.1

260 .9

3.8

249.6

261 .6

-1 2 .0

253 .9

261 .6

265 .5

261.5

4.0

257 .7

262.1

4.4

262.3

262.1

271 .9

263.9

8.0

263 .0

264 .6

1.6

268.2

26 4 .6

3.6

280.2

270 .7

9.5

271.2

271.5

0.3

275.8

271.5

4.3

294.2

279 .6

14.6

282.6

280.8

1.8

284.3

280.8

305 .6

292.1

13.5

293 .6

293.3

0.3

292.2

293.3

1.1

III

319.1

30 4 .6

14.5

30 5 .0

0.0

301 .9

30 5 .0

3.1

33 1 .0

314.8

16.2

316 .5

314.1

2.4

313 .4

314.1

0.7

341 .4

329 .4

12.0

328 .9

329.8

0.9

32 3 .4

329.8

6.4

1975

$ -1 1.5

243.1

III

1974

$ 2 3 4.8

225.3

1973

$2 2 3 .3

7.5

306.8

344.5

-3 7 .7

296.5

346 .2

-4 9 .7

290.2

346 .2

-5 6 .0

3.7

7.7
0.2

3.5

III

9.3

333.1

355.4

-2 2 .3

326 .3

35 5 .4

-2 9 .1

36 6 .6

-1 1 .6

342 .3

36 6 .7

-2 4 .4

33 5 .0

3 6 6 .7

-3 1 .7

363 .2

371 .9

8.7

349 .5

37 2 .5

-2 3 .0

34 1 .9

372 .5

-3 0 .6

37 3 .0

37 1 .6

1.4

358 .2

370.2

-1 2 .0

35 0 .0

370 .2

-2 0 .2

III

382 .2

383 .9

1.7

365 .4

38 5 .0

-1 9 .6

35 7 .0

38 5 .0

-2 8 .0

IV
1 97 7

353 .9

35 5 .0

1976

34 4 .6

39 3 .4

398 .3

4.9

376.1

3 9 4 .7

-1 8 .6

36 7 .0

3 9 4 .7

-2 7 .7

392 .2

39 8 .7

6.5

381 .9

3 9 8 .7

-1 6 .8

402.1

40 9 .5

7.4

391 .4

40 9 .5

-1 8 .1

~ D a ta 'for years p rior to 1972 are available on request from this Bank.

ward revision in the estimate of potential GNP.
The use of the high-employment budget series as an
indicator of fiscal action was little changed, but as a

Page 22

policy tool for puiposes of achieving full employment
with relative price stability, its implications are some
what different than before.

Income and Expenses of Eighth District
Member Banks: 1976
JEAN M. LOVATI

] V [ e m b e r banks of the Eighth District experi
enced a moderate increase in net income in 1976. Net
income of District member banks increased 9 percent
from 1975 to 1976, about the same rate as it did the
previous year. However, unlike 1975 in which operat
ing income and expenses posted slight gains, both
operating income and expenses registered increases
exceeding ten percent in 1976. Loans outstanding, the
major factor contributing to the higher income, posted
a solid increase, after rising slightly in 1975. Increases
in the amount of interest paid on deposits, the princi
pal factor in the rising expense, reflected a large inflow
of time and savings deposits.
On average, Eighth District member banks fared
better in 1976 than all member banks as a whole.
Although net operating income for banks in the nation
posted a stronger increase than comparable income at
District member banks, the combined effect of income
taxes paid and net securities gains favored the relative
position of District banks. Income taxes of all member
banks in the nation in 1976 were 33 percent higher
than in 1975. This compares with a one percent de
cline in income taxes paid by Eighth District banks
over the same period. Net securities gains, including
extraordinary items, significantly boosted earnings for
both groups. This additional source of eamings ad
vanced 220 percent for all member banks and 147
percent for District banks. The combination of these
two factors resulted in a greater net income gain for
the District than for the nation. Net income of all
member banks in the nation rose 6.7 percent in 1976,
compared to 9 percent for District banks.

Operating Income and Bank Assets
Operating income of Eighth District member banks
increased $179 million or 11 percent in 1976 to
$1,760 million (see Table I ). A year earlier operating
income increased less than one percent. Income from
loans, which rose more than $111 million, and that
from U.S. Treasury securities, which rose about
$40 million, primarily accounted for the change in
operating income. These increases, however, were

C h a rt I

Distribution of Assets
Eig h th D istrict M e m b e r B a n k s
End o f Y e a r D a ta

P e H **!

0
1972

1973

1974

1975

1976

• I n c l u d i n g F e d e r a l F u n d s s o ld a n d s e c u r it ie s p u r c h a s e d u n d e r r e s a le
a gre e m e n t.

partially offset by a decline in receipts from Federal
funds sold and securities purchased under resale
agreements.
Interest and fees on loans, which posted a 2.3 per
cent decline in 1975, increased 12 percent in 1976.
Increases in holdings contributed to the jump in this
source of income. The volume of loans outstanding
increased 13 percent in 1976 to $13 billion, after
registering a 1.3 percent increase a year earlier.1
1All comparisons o f assets, liabilities, and capital are m ade as o f
D ecem ber 31 o f each year. These data, as w ell as incom e and
expense items for 1976 are not strictly com parable to such
data for 1975 due to definitional changes in the Reports o f
Condition and Income.

Page 23

AUGUST 1977

FEDERAL RESERVE BANK OF ST. LOUIS

Table I

IN C O M E

AND

EXPENSES O F M EM BER

E IG H T H

FEDERAL

RESERVE

BANKS

THE

D IS T R IC T
Percent
C han ge

Thousands of Dollars
19761

19752

1 9 7 5 -7 6

Total O perating Income ............................................................................................

$ 1 ,7 6 0 ,1 7 3

$ 1 ,5 8 1 ,2 4 9

1 1 .3 %

Interest an d fees on loans .....................................................................................

1,064,018

9 5 2 ,6 7 5

11.7

80 ,4 9 0

9 6 ,3 1 8

— 16.4

Interest on securities .............................................................................................

4 0 1 ,1 0 8

3 4 4 ,1 5 6

16.5

U.S. Treasury securities .......................................................................................

162 ,33 5

1 1 9 ,0 9 6

36.3

Other U.S. Governm ent securities ........................................................................

8 5 ,0 3 9
147,641

7 9 ,4 4 3

7.0

O bligation s of States and political subdivisions ...................................................

1 3 8 ,7 0 6

6.4

O ther securities ................................................................................................

6,093

6,911

— 11.8

Income from Federal funds sold an d securities purchased under resale agreements

Trust department income .........................................................................................

3 5 ,7 8 9

3 0 ,9 3 6

15.7

Service charges on deposit accounts ........................................................................

36,721

3 1 ,9 1 7

15.1

Other operating income .........................................................................................

1 4 2 ,0 4 7

1 2 5 ,2 4 7

13.4

Total O perating Expenses ..........................................................................................

1 ,5 1 1 ,0 5 0

1 ,3 4 4 ,4 9 6

12.4

Interest on deposits ..............................................................................................

6 7 9 ,6 3 9

610,381

11.3

Other interest expenses .........................................................................................

6,933

6,4 4 3

Expense of Federal funds purchased and securities sold under repurchase agreements

103,841

111 ,6 0 5

Salaries and employee benefits .............................................................................

3 3 1 ,7 4 6

2 83 ,60 2

17.0

7.6
—

7.0

Provision for possible loan losses ...........................................................................

6 7 ,8 8 3

5 5 ,3 4 2

22.7

Other operating expenses .....................................................................................

3 2 1 ,0 0 8

2 7 7 ,1 2 3

15.8

Income Before Income Taxes and Securities G a in s (or Losses) .....................................

2 4 9 ,1 2 3

2 3 6 ,7 5 3

Less applicable income taxes .................................................................................

4 2 ,442

42,7 9 8

Income Before Securities G ain s (or Losses) ................................................................

206 ,68 1

1 9 3 ,9 5 5

Net securities ga in s (or losses) after taxes ............................................................

7,804

888

—
—

Extra charges or credits after taxes ........................................................................

5.2
—

.8
6.6

299

2,389

In c o m e .................................................................................................................................... ............

2 1 4 ,7 8 4

1 9 7 ,2 3 2

8 .9

Cash Dividends Paid ..................................................................................................

72,9 2 5

7 0 ,7 8 6

3.0

Num ber of B anks ......................................................................................................

428

427

Net

*Data are not strictly com parable to 1975 due to definitional changes in the R ep ort o f Incom e fo r 1976.
2Data have been adjusted to exclude one bank which exerienced unusual conditions.

Strong gains in holdings of real estate and automobile
loans made up the bulk of the change in outstanding
loans, increasing about 18 and 21 percent, respec
tively. The largest category of loans, commercial and
industrial, rose 10.5 percent to $4 billion. The rate of
return earned on loans averaged 8.7 percent in 1976.
Income from securities posted an increase of
17 percent in 1976. Whereas the 18 percent increase
in this source a year earlier was fairly evenly distrib
uted across security classes, interest on U.S. Treasury
securities comprised the bulk of the gain in securities
income in 1976. Interest earned on Treasury securities
increased 36 percent in 1976. Holdings of U.S. Treas
ury securities increased 12 percent with average yields
Page 24

on these securities rising from 6.7 percent to 6.9
percent.
Income derived from obligations of other U.S. Gov
ernment agencies and Government corporations
posted an increase of 7 percent. These securities, the
majority of which were held in one- to five-year ma
turities, earned an average yield of 7.5 percent. In
terest earned on obligations of states and political
subdivisions rose 6 percent. These securities, which
earned a 5 percent rate of return, were held primarily
in one- to ten-year maturities.
The above gains in income were partially offset by
a decline in income from Federal funds sold and
securities purchased under resale agreements. This

AUGUST 1977

FEDERAL RESERVE BANK OF ST. LOUIS

Chart II

Distribution of Liabilities, Reserves,
an d Capital Accounts
Eighth D istrict M t a b a r B o a k s

deposits represented half of all liabilities. Total de
mand deposits, on the other hand, increased 4 percent
in 1976 and represented 38 percent of total liabilities.
Provision for loan losses increased 23 percent in
1976 to $68 million, following a jump of 48 percent in
1975. Increases in the loan loss reserve account also
occurred as a result of recoveries from loans previ
ously written off, and additions from mergers. These
sources added $20 million to such reserves, bringing
the total to $88 million. Losses charged to the fund in
1976 amounted to $80 million, so that on balance,
reserves on loans increased $8 million or 6.6 percent.
Salaries and employee benefits increased 17 per
cent in 1976 to $332 million. The average amount paid
increased from $8,480 to $10,461 per employee and
the number of employees declined 5.2 percent, as
banks continued to automate banking transactions and
increase output per worker.
The rise in operating expenses was offset somewhat
by a 7 percent decline in interest paid on Federal
funds purchased and securities sold under repurchase
agreements. Outiays for Federal funds purchased,
which represented 6 percent of operating expenses,
declined $8 million in 1976, reflecting the lower aver
age rate of interest charged for these funds.

Net Income
source of income, which fell 16 percent in 1976, pri
marily reflected a decline in the Federal funds rate.
The rate averaged 5.1 percent last year, compared to
5.8 percent in 1975. However, this decline amounted
to only $16 million as total income from Federal
funds sold and securities purchased under resale
agreements represented only 4.6 percent of total
operating income.

Eighth District member bank income before income
taxes and securities gains or losses totalled $249 mil
lion in 1976, an increase of 5.2 percent over 1975.
Income taxes totaled $42 million, slightly less than the
amount paid a year earlier. Securities gains and other
credits, net of taxes, substantially helped earnings,
adding over $8 million to income. After such adjust
ment, net income of member banks increased 9 per
cent in 1976 to $215 million.

Operating Expenses and Bank Liabilities

The average return on equity capital in 1976 in
creased to 12.8 percent from 11.2 percent in 1975. The
rate of return on equity capital ranged from 9.6 per
cent for banks with assets of $300 million and over to
13.6 percent for banks with assets between $25 and
$50 million in assets.2

Operating expenses of Eighth District member
banks rose 12 percent in 1976 to $1,511 million, com
pared to little change the year before. Greater outlays
for interest paid on time and savings deposits, pro
vision for loan losses, and employee salaries made up
almost 80 percent of the rise in expenses.
Interest paid on time and savings deposits repre
sented the largest expense of District member banks,
amounting to $680 million in 1976. Outlays for such
deposit interest rose 11 percent in 1976, compared to
an increase of 4.3 percent a year earlier. Total time
and savings deposits on which the interest is paid
increased 11 percent in 1976 to $12.4 billion. These

Member banks paid dividends on common and pre
ferred stock of $73 million, a 3 percent increase over
-Averages for groups o f banks are unw eighted averages o f
operating ratios o f individual banks. Incom e and balance sheet
items used in constructing these ratios are averages o f the
figures from the Reports o f C ondition for M arch 31, June 30,
Septem ber 30, and D ecem ber 31, 1976 and the Report of
Incom e for 1976, the com ponents o f w hich include both
dom estic and foreign subsidiaries o f m em ber banks.

Page 25

AUGUST 1977

FEDERAL RESERVE BANK OF ST. LOUIS

Table II

S E L E C T E D O P E R A T I N G R A T IO S F O R T H E Y E A R 1 9 7 6 1
M E M B E R B A N K S — E IG H T H F E D E R A L R E S E R V E D IS T R IC T
G roup 1
Up to
$ 1 0 million

G rou p 2
$10 - $25
million

G roup 3
$ 2 5 - $5 0
million

G roup 4
G roup 5
G roup 6
$ 5 0 - $ 1 0 0 $ 1 0 0 - $ 3 0 0 $ 3 0 0 million
million
million
A n d O ver

All
Mem ber
Banks

12.00

12.71

13.57

12.57

12.64

9.62

12.75

17.42

20.81

24.78

25.34

32.53

41.95

23.1 6

7.03

Profitability
Percentage of Equity Capital
Net Income ...................................
Percentage of Net Income
Cash dividends paid .......... ......... -... ____
Sources and Disposition of Income
Percentage of Total Assets
Total operating income ....................

6.89

6.99

7.12

7.17

6.93

7.07

Salaries, w ages and fringe benefits ...

1.42

1.26

1.20

1.26

1.30

1.50

1.28

Interest on deposits ........................

2.84

3.23

3.37

3.35

2.76

2.17

3.16

Total operating expense ..............

5.78

5.89

5 .94

6.04

5.75

6.41

5.91

Net income ...................................

.98

.97

1.02

1.00

.96

.60

.98

Interest on U.S. Treasury securities ...

17.26

15.06

12.64

11.09

11.54

5.45

13.83

Interest on securities of U.S. G overn
ment agencies and corporations ... .....

1 2.98

8.69

7.63

6.11

4.85

2.30

8.40

Percentage of Total O perating Income

Interest on obligations of states and
political subdivisions ..................

5.61

8.97

10.31

10.63

9.49

6.05

8.95

Interest and fees on loans ...............

54.3 9

57.4 9

60.4 6

61.91

59.2 9

61.9 6

58.5 4

4.19

3.20

2.95

2.53

5.37

5.75

3.42

Income on Federal funds sold and
securities purchased to resell .... .... ......
Rate of Return on Securities and Loans
Return on Securities2' 3
Interest on U.S. Treasury securities ...

6.55

6.93

7.00

7.13

7.02

6.83

6.91

Interest on securities of U.S. Government
agencies and corporations ................

7.70

7.49

7.50

7.13

7.72

7.70

7.51

Interest on obligations of states and
political subdivisions ..................

4.99

5.03

5 .0 0

5.03

4.87

4.94

5 .00

8.62

8.71

8.80

8.82

8.61

8.70

8.73

Return on Loans (excluding unearned
income and Federal funds sold)
Interest ond fees on loons
Net losses (— ) or recoveries (~h )
on loans -------------- --------- -------------

—

.16

—

.27

—

.22

—

.21

—

.30

—

.74

—

.24

O ther Ratios
Total capital accounts to total assets4 ..

9.56

8.18

8.28

8.01

8.24

6.66

8.38

Time and savings to total deposits
(domestic offices) .........................

58.0 4

63.8 0

65.2 7

65.32

57.9 6

50 .9 6

62.7 /

Interest on time and savings deposits
to total time and savings deposits
(domestic offices)2 .......... -... ..........

5.35

5.54

5.70

5.55

5.53

5 .57

Num ber of Banks ...... -...............

151

123

423

1Each ratio is an unweighted average o f the ratios o f individual banks com puted from the Reports o f Condition fo r March 31, June 30, Septem
ber 30, and December 31, 1976 and the R eport o f Incom e fo r 1976, the com ponents o f which include both dom estic and foreign subsidiaries o f
member banks.
2Group averages exclude banks n ot rep orting these items.
3Excludes trad in g a ccou nt securities.
^Includes subordinated notes and debentures, but excludes valuation reserves and deferred tax reserves.

those paid in 1975. Fifty percent of the banks paid
dividends ranging from 12 to 30 percent of net
income, with the largest banks, in terms of assets,
Digitized forPage 26
FRASER

paying the largest proportion of net income in
cash dividends and the smallest banks the lowest
proportion.

FEDERAL RESERVE BANK OF ST. LOUIS

AUGUST 1977

Publications of This Bank Include:
Weekly

U. S. FINANCIAL DATA

Monthly

REVIEW
MONETARY TRENDS
NATIONAL ECONOMIC TRENDS

Quarterly

SELECTED ECONOMIC INDICATORS - CENTRAL
MISSISSIPPI VALLEY
FEDERAL BUDGET TRENDS
U. S. INTERNATIONAL TRANSACTIONS
AND CURRENCY REVIEW

Annually

ANNUAL U. S. ECONOMIC DATA
RATES OF CHANGE IN ECONOMIC DATA
FOR TEN INDUSTRIAL COUNTRIES
(QUARTERLY SUPPLEMENT)

Single copies of these publications are available to the public without charge.
For information write: Research Department, Federal Reserve Bank of St. Louis,
P. O. Box 442, St. Louis, Missouri 63166.

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