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Federal Reserve Bank of Dallas

October 1983

Brokerage Services Approved by Board
Discount securities brokerage ser­
vices and securities credit lending
were added to the list of nonbanking
activities in which a bank holding com­
pany may engage effective September
9. The Federal Reserve Board of Gover­
nors recently adopted a final amend­
ment to its Regulation Y—which con­
cerns bank holding company forma­
tions, acquisitions of additional banks,
and approved nonbanking a c­
tivities—to specify these services as
generally permissible activities.
The Board stated that brokerage ac­
tivities are to be restricted to buying

and selling securities as an agent for
the accounts of customers. Securities
underwriting and the provision of in­
vestment advice are not included. In
addition, margin lending on securities
is to be conducted by a nonbank sub­
sidiary of the holding company. In­
cidental activities to the newly approv­
ed services—such as custodial ser­
vices, furnishing individual retirement
accounts, and cash management ser­
vices—also were approved by the
The amendment to Regulation Y
codifies a previous position taken by

the Board of Governors in approving,
on January 7, 1983, the acquisition by
BankAmerica Corporation of Charles
Schwab Corporation. In that action,
the Board found Schwab’s activities
(retail discount securities brokerage,
securities credit lending, and certain
incidental activities) to be closely
related to banking for purposes of the
Bank Holding Company Act. This act
controls the expansion of bank holding
companies and generally limits certain
types of nonbanking activities. The
Board also found that banks already
were providing securities brokerage
services to a certain extent and that
Schwab’s margin lending activities
were similar to margin lending ac­
tivities already offered by banks.
Subsequent to the Board’s approval
of the BankAmerica/Schwab applica­
tion, the Securities Industry Associa­
tion requested a judicial review of the
order. The U.S. Second Circuit Court of
Appeals upheld the Board’s order and
found that the proposed activities were
not prohibited by provisions of the
Glass-Steagall Act. This act, also re­
ferred to as the Banking Act of 1933,
generally separated commercial from
investment banking.

• ACH Deposits
• Loans to Insiders
• Credit Card Study

Nighttime Deadline Opened to All ACH Items
Automated clearinghouse (ACH)
operations have been modified by the
Board of Governors to permit all types
of ACH items to be deposited at a
nighttime deposit deadline. The new
service, available October 6, 1983, will
be subject to the interim fee schedule
accompanying this article.
Originators of ACH payments will
receive additional processing time as
well as improved funds availability for
their deposits under the new arrange­
ments. In addition, the night cycle can
be used to accomodate payments that
normally would be processed during
the day, but have been delayed due to
operational problems.
Use of the nighttim e deposit
d e a d lin e p re v io u s ly had been
restricted to cash concentration debits
only. These debits are used by

Interim Fee Schedule
Per Item Surcharge
to Originators

D eb its*............................................


Next-day settlement
credits ............................................


Two-day settlement
credits ............................................


* This surcharge will not be assessed
for debits, other than cash concentration
debits, originated by financial institu­
tions located in the Cleveland and Rich­
mond Federal Reserve Districts.

Interest Rate Recording
To Change October 3
The Dallas Fed’s 24-hour telephone
recorded message service—which cur­
rently announces interest rate ceilings
for 91-day, 26-week, and 11/2-year
“small saver” certificates of d e p o sitwill change effective October 3 to coin­
cide with the scheduled deregulation
of interest rates. After that date, the
message will continue to announce the
current week’s three-month and six-

month Treasury bill rates, the 1Vz- and
21/2-year yield curve rates, and the
Federal Reserve discount rate. The
11/2- and 21/2-year yield curve rates are
given for informational purposes only.
Numbers used to access the re­
cording are: (214) 651-6177, Dallas;
(214) 263-1093, Dallas/Ft. Worth metro;
(800) 442-7390, Texas WATS; and (800)
527-9208, Eleventh District WATS.

businesses to transfer balances held
at various financial institutions to one
central institution to accumulate funds
for investment or other purposes.
The current ACH fees were im­
plemented on December 29, 1982, and
were set to recover 40 percent of the
total costs of providing commercial
ACH services. A new ACH fee schedule
based on a 60 percent recovery rate, as
required by the Board’s announced
phase-out of ACH incentive pricing,
currently is being developed. Since im­
mediate expansion of the night cycle is
desired by users of the ACH service,
the interim fee schedule in effect is
based on the current 40 percent
recovery rate. These interim fees will
be in effect until new ACH fees, based
on the 60 percent recovery rate, are

Subsidy Change
On September 29, the subsidy
cap on Eleventh District institu­
tions’ cash transportation fees
increased from $175 to $400 in
the second phase of a program to
adjust the subsidized portion of
the Dallas Fed’s cash transporta­
tion fee toward full cost recovery
this year. The Fed will absorb
costs in excess of these caps for
the remainder of 1983.

Revisions Adjust Insider Loan Limits
On October 11, the Federal Reserve
Board will implement revisions to
Regulation 0, eliminating specific
dollar limitations on loans by a state
member bank to executive officers for
home mortgages, education of of­
ficers’ children and other purposes.
Regulation O deals with credit to cer­
tain bank insiders such as executive
officers, principal shareholders and
their related interests.
The amendments to Regulation O
also specify that a state member bank
may lend to an executive officer, for

purposes other than home mortgages
or education, up to $25,000 or 2.5 per­
cent of its capital and unimpaired
surplus, whichever is greater, with an
overall limit of $100,000. Prior approval
of a state member bank’s board of
directors is required for insider loans
that, in addition to other such loans,
exceed $25,000 or five percent of the
bank’s capital and surplus. The total
loans to an insider may not exceed the
limit of credit that may be extended to
any one borrower—15 percent of the
bank’s capital and surplus for loans

not fully collateralized and an addi­
tional 10 percent of the bank’s capital
and surplus for loans that are fully col­
lateralized. Finally, prior approval from
the bank’s board of directors is re­
quired for all insider loans totaling in
excess of $500,000.
The revisions to Regulation O com­
ply with amendments to the Federal
Reserve Act by the Garn-St Germain
Depository Institutions Act of 1982.
Other federal bank regulatory agencies
are in the process of revising their

Board Study
Exam ines
Im pact of
Credit C ard s
recently released study by
the Federal Reserve Board of
Governors concerning credit card
use in the United States indicates
that approximately 70 percent of

households have at

least one credit card. According
to the study, almost 600 million
credit card accounts existed in
the United States in December
1982 and outstanding balances
on credit card accounts totaled
more than $75 billion.
The credit card study—which
was required of the Board by the
Cash Discount Act of 1981—ex­
amines the impact of credit cards
on the costs that merchants and
creditors incur, on the volume of
retail sales, and on the pricing of
goods sold by retailers. High­
lights of the study follow.

Credit card transactions cost more than
cash or check transactions for most
retailers. Credit cards typically add about
two to three percent of the purchase
amount to a retailer's costs. For most
retailers, the cost of check transactions
appears to be less than the cost of credit
card transactions, and either about the same or more than for cash.
According to a survey conducted during the study, large retailers
are more likely than small retailers to rate both checks and credit
card transactions as more costly than cash.
The higher cost is not offset by higher
retail sales volume. There is little
evidence that credit cards promote im­
pulse purchases. A survey of households
found that many unplanned purchases
are conducted with cash andthat many of
the unplanned purchases made by credit
card would have occurred even without access to the credit card.
The higher cost is reflected in the level of
prices, so to some extent cash buyers
subsidize credit card users by paying
identical prices.
However, the need to cover creditrelated costs likely would boost the price
of an item by less than one percentgiven that only 15 percent of sales are transacted by third-party
credit cards according to the study.
Recognizing that this single price
scheme results in a subsidy for credit
card purchases, the study identified two
ways to minimize that subsidy. The study
first recommended the removal of artifi­
cial limits imposed by governmental units
on finance charges and other user fees
that are designed to recover credit card costs directly from users.
Second, the study recommended the creation of a two-tier price
structure by setting a credit card price (higher than the previous
single price) and then discounting the cash price to a level below
the single price.
The Board’s study found that 25 percent of gasoline dealers
already are offering cash discounts, but only six percent of other
types of retailers are participating in a two-tier structure. However,
40 percent of retailers surveyed thought cash discounts were a
good idea.

Improved Currency Quality Sensor Developed
An improved quality sensor is being
installed in all Federal Reserve high­
speed currency verification equipment
currently used for the examination of
currency and the destruction of unfit
currency. The new sensor is a better
detector of soiled notes and notes
unacceptable for recirculation. This
device will cause notes with certain
defects and those with transparent
tape to be destroyed and will provide
financial institutions with a more con­
sistent quality of currency. This is of
particular importance for the operation
of automated teller machines which
often require a high quality of currency
to work efficiently.
High-speed machines
High-speed machines have been
used at the Dallas Fed since 1978.
These machines count, sort and strap

currency. They also detect counterfeit
notes and mixed denominations. Final­
ly, the machines check a note’s fitness
for recirculation and destroy the note if
it is “ unfit.” The introduction of high­
speed verification equipment through­
out the Federal Reserve System in the
1970s has helped process the millions
of dollars that pass through each Fed
office every day.
Initial testing
Initial testing of the high-speed
machines for the entire Federal
Reserve System was conducted at the
Dallas Fed in 1975. A pilot program
was initiated to demonstrate that cir­
culated currency could be processed
accurately at a high rate of speed. Prior
to installation of the high-speed equip­
ment, manually operated Federal Bill
Counters were used. These machines

were operated by one person who had
to determine by sight and touch a bill’s
fitn e s s and whether it was a
counterfeit. A good operator could pro­
cess around 40,000 notes per day on
these machines. Today, it is possible
for a team of three people to process
up to 72,000 notes per hour on the high­
speed equipment.
In an effort to improve the efficiency
of the examination of used currency,
the Reserve Banks have installed 111
high-speed machines at 35 locations
throughout the country. The purchase
and installation of the new quality sen­
sors culminates a two-year research
and development effort by the Federal
Reserve System to develop an im­
proved currency quality sensor. In­
stallation of the sensor will begin in
October and will be completed by
March 1984.

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