Full text of Roundup : May 1985
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DALLAS Federal Reserve Bank of Dallas May 1985 W h e re th e S tro n g D o lla r is G oing Dallas Board Chairman Says the Long-Term Outlook is Good The dollar’s relative value will decline before the end of the year, but the drop will have beneficial effects in the long run to the U.S. and to its future economic well-being, according to Robert D. Rogers, President and Chief Executive Officer of Texas Industries Inc. and the Dallas Fed’s chairman of the board. Rogers made his prediction on the dollar’s strength at a recent luncheon for business leaders in El Paso follow ing the Board’s April meeting in that city. The strong dollar is responsible for increased unemployment and a decrease in the gross national product, he said. While the record trade deficit has kept inflation low, the deficit means the gross national product grew 2 percent less than it should have, and unemployment is about 2 percent higher than it should be, he said. “ It is estimated that our trade deficit has exported about two million jobs to foreign countries,” Rogers noted. “ The political and economic extravagances of a high trade deficit are acceptable as long as there is satisfactory GNP growth and a satisfactory unemploy ment rate. But what would happen if GNP growth were to disappear? Would we still be pleased to export 2 percent or more of annual GNP growth outside our borders? And what would happen if unemployment rates were to rise to 10 percent or more, would we still be will ing to sustain 2 percent or more addi tional unemployment by exporting jobs?” Rogers said he felt it was unrealis tic, both politically and economically, to anticipate that the trade deficit can continue to grow. “ The single most im portant factor affecting the trade deficit is the relative strong value of the dollar. Were it to fall, the trade deficit would fall correspondingly.” “It is estimated that our trade deficit has ex ported about two million jobs to foreign countries.” “The single most important factor affecting the trade deficit is the relative strong value of the dollar.” The dollar’s strength, which has in creased 58 percent against other major currencies since 1980, won’t continue much longer because of the difficulties the United States will have in financing its budget and trade deficit, he believes. “ The current national budget and trade deficits total $300 billion and are rising,” he noted. “ These must and will be financed by savings, foreign and domestic.” He cautioned, however, that the demand for dollars (and dollar assets) is not inexhaustible. (Continued on page 4) INSIDE_________ ■ CAPITAL ADEQUACY ■ BANK FEES________ Robert D. Rogers ■ REG AA Capital Adequacy Guidelines Revised The Federal Reserve Board has an nounced revisions to its capital ade quacy guidelines for state member banks and bank holding companies to be effective May 15, 1985. The amended guidelines require a minimum ratio of primary capital to total assets of 5.5 percent and a minimum ratio of total capital to total assets of 6.0 percent for all state member banks and bank holding com panies. This requirement represents a decrease in the minimum primary capital ratio for community banking organizations (those with less than $1 billion in total assets) and an increase in the minimum primary capital ratio for regional and multinational banking institutions. The minimum total capital ratio remains unchanged for communi ty institutions and increases for larger banking institutions. (See table.) Primary capital includes common stock, perpetual preferred stock, capital surplus, undivided profits, con tingency and other capital reserves, in struments mandating conversion into common or perpetual preferred stock, allowance for loan and lease losses and the minority interest in the equity accounts of consolidated subsidiaries. The Board has decided to deduct goodwill in computing primary and total capital ratios of state member banks. With respect to bank holding companies, the Board will continue to take the level and character of intangi ble assets into account in assessing capital adequacy, but will avoid any automatic deduction of goodwill or other intangible assets from primary or total capital. The primary capital ratio for state member banks is computed as follows: Primary capital components Goodwill/Average total assets + Allowance for loan and lease losses (exclusive of allocated transfer risk reserves) Goodwill For bank holding companies, the primary capital ratio is: Primary capital components/ Total assets + Allowance for loan and lease losses (exclusive of allocated transfer risk reserves) The total capital ratio for state member banks is: Primary capital components + Secondary capital components* - Goodwill/Average total assets + Allowance for loan and lease losses (exclusive of allocated transfer risk reserves) Goodwill For bank holding companies, the total capital ratio is: Primary capital components + Secondary capital components/ Total assets + Allowance for loan and lease losses (exclusive of allocated transfer risk reserves) The new minimum ratios were established in the interest of achieving uniformity in the capital requirements of large and small banking organiza tions and maintaining consistency with other federal bank regulators. The amended guidelines, when considered in conjunction with the capital maintenance regulations of the Office of the Comptroller of the Currency and the Federal Deposit Insurance Cor poration, establish uniform minimum capital levels for all federally super vised banking organizations, including bank holding companies, regardless of size, type of charter, primary super visor or membership in the Federal Reserve System. In general, banking organizations are expected to operate above the minimum primary and total capital levels. The Board has decided, in accor dance with its July 1984 proposal, to continue using its “ zone” standards in assessing the adequacy of total c a p ita l. (See S eptem ber 1984 Roundup.) Subject to consideration of other factors, institutions with capital equal to at least 7 percent of total assets fall in Zone 1 and would be con sidered adequately capitalized. Institu tions in Zone 2, which includes organizations operating with total capital equal to 6 to 7 percent of total assets, would be considered marginal ly capitalized. Zone 3 states that bank ing organizations with total capital that is less than 6 percent of total assets may be considered under capitalized, in absence of clear ex tenuating circumstances. The Board made three changes in its existing capital guidelines for state member banks in order to define capital more consistently with the capital regulations of the OCC and FDIC. These changes, which do not ap ply to bank holding companies, require the automatic deduction of goodwill from primary and total capital; eliminate equity commitment notes from primary capital; and define the capital ratios in terms of average assets rather than period-end figures. * The components of secondary capital are: lim ited-life preferred stock (including related surplus); and bank subordinated notes and debentures and unsecured long term debt of the parent company and its nonbank subsidiaries. MINIMUM CAPITAL RATIOS Minimum Primary Capital: Multinational and Regional Community (under $1 billion in total assets) Minimum Total Capital: Multinational and Regional Community Current Guidelines (percent) Amended Guidelines 5.0 5.5 6.0 5.5 5.5 6.0 6.0 6.0 (percent) Fed Study Looks At Bank Fees The m a jo rity o f co nsu m e rs, regardless of income, considers the level of service charges and fees to be a relatively unimportant factor in the selection of their primary financial institutions. This is one of the observations in a study done by Federal Reserve Board staff on the impact of bank service charges and fees on customers. Com missioned last July by the Board’s Consumer Advisory Council, the report draws on existing data sources, in cluding three Federal Reservesponsored consumer surveys con ducted in 1984, 1983 and 1977, and on Functional Cost Analysis information prepared by Federal Reserve Banks. Consumers, regardless of their in come level, generally rank conve nience, availability of many services, and safety above low services charges or low minimum balance requirements when asked to cite the most important factors in their selection of a bank. The data shows that in 1983, 79 per cent of all families had checking ac counts. The comparable percentages for low-income families and lowincome minority families, who were of special concern to the Council in re questing the study, are 61 percent and 28 percent, respectively. Families who do not have a checking or savings account are more likely to be poor, nonwhite home renters who have lower levels of education than families with accounts. Data shows, however, that those without accounts are generally satisfied with use of cash or money orders to pay their bills, the report states. The study also looks at service charges and fees from the perspective of the commercial bank. It notes that while explicit pricing of consumer pro ducts and services is customary among businesses outside of banking, the recent evolution of commercial banking toward explicit pricing is often viewed by the public with skepticism and distrust. The study suggests that to a large extent this skepticism may reflect the fact that over the years customers were accustomed to receiv ing many banking services and pro ducts without explicit charge. In fact, in many cases consumers expected to receive premiums for giving their business to a particular bank. While commercial banks may have offered consumers products and ser vices without charge, they were never free, the study notes. Rather, con sumers paid for these services in other ways —prim arily in the form of foregone interest on funds deposited in regulated accounts paying below market (although often the maximum authorized by law) interest rates. The study suggests that some of the widespread consumer skepticism regarding the justification of increases in bank fees may be traced to poor communication between bankers and their customers. According to conclu sions drawn by the Fed staff from all available data, banks generally did not profit from service charge increases. A personal checking account analysis done as part of the study finds that, while minimum balance re quirements and service charges have generally risen at banks since 1979, ex penses incurred from providing these services also have risen. According to the report, service and handling fees increased by 42 percent at banks with less than $50 million in deposits, by 103 percent at banks with deposits be tween $50 million and $200 million, and by 123 percent at the largest banks be tween 1979 and 1983. However, the return to banks on the typical personal checking account in 1983 was found to be either essentially unchanged or somewhat smaller than in 1979, depending on the particular bank-deposit size category considered. This finding suggests, according to the report, that the increase in minimum balance requirements and service charge fee revenue over the 1979-1983 period was just sufficient to maintain a constant return on the average per sonal checking account. Reg AA Amended: New Rules for Loan Contracts Regulation AA, Unfair or Deceptive Acts or Practices, has been amended by the Federal Reserve Board of Gover nors to eliminate some provisions which have previously existed in loan contracts. (The rule does not apply to credit extended for the purchase of real property.) The new rules, which go into effect Jan. 1, 1986, will prohibit: —repossession of household goods other than those for which the credit has been extended —“confession of judgment” clauses (when a borrower agrees in advance to permit legal judgment against himself upon default) —credit contracts requiring borrowers to agree to waive or limit state protections that shelter their homes — “ pyramiding” of late charges (i.e.: penalizing those who are late on a single payment with extracted late charges after they have paid in full) — misrepresentation liability of a cosigner’s The new rules will apply to all banks and their subsidiaries with the excep tion of savings banks that are members of the Federal Home Loan Bank System. These rules have been amended to implement, as to banks, the Credit Practices Rule recently adopted by the Federal Trade Commission. The FTC’s rules do not apply to commercial banks. However, the Federal Trade Commission Act requires that the Board adopt, subject to certain ex ce p tio n s, s u b s ta n tia lly s im ila r regulations. The Board is not required to adopt a rule if it finds that such acts or prac tices of banks are not unfair or decep tive, or if adoption of similar regula tions would seriously conflict with essential monetary and payment systems policies of the Board. The Board has concluded that neither statutory exception is applicable. i Strong Dollar, continued “ The fundamentals of supply and de mand will return, the political realities will be felt, and the relative value of the dollar will fall before the end of the year,” he said. Rogers added a postscript to his speech, saying his remarks were prepared before the dollar took a sud den and abrupt plunge because of the problems with certain thrifts in Ohio. “ While the drop is not unanticipated or unwelcome, as these remarks will attest, the form of this drop is unnerv ing.” He said the significance of the drop is unavoidable and that faith in the dollar’s value at today’s relative price is fragile. Rogers answered questions from the El Paso media after his speech. J3 > cc/1 CDCD 03 O ? 3 qi V) O > o Q- o "H o CD ~ "O 0 O Z3 O ft) "O c cr 3 B =r ZT. 0 Q. ft) ~ O =J O =3 0 5O ^ Ui 3 ro rn3 ro o ro m H m o 0) ft) o a. Z 3 o O > > (Z) CD O ft) "2. < CD ft) C/) o 03 zr o o 3 0 c/)) 0 CT 0 0 c ~0 cn J3 0 O Q_ Q- 0 C Ie -Uf”^ r- H > O *