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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
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
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
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
“ 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)

■ BANK FEES________
Robert D. Rogers


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
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
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

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 Primary Capital:
Multinational and Regional
Community (under $1
billion in total assets)
Minimum Total Capital:
Multinational and Regional










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
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
—“confession of judgment” clauses (when
a borrower agrees in advance to permit
legal judgment against himself upon
—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




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
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.


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.

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