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THE FINANCIAL R E G U L A T O R Y E N V I R O N M E N T

R e m a r k s byMonroe Kimbrel
President
F ederal R e s e r v e B a n k of Atlanta

Before the
S e c o n d Biennial
S e m i n a r on Banking L a w

N o v e m b e r 6, 1978
Atlanta, Georgia

This opportunity to discuss with y o u s o m e of the changes occurring
within the financial regulatory e nviro n m e n t is timely.

T h e regulatory

e n v i r o n m e n t is an important part of the overall e c o n o m i c environment,
in w h ich the F e d e r a l R e s e r v e S y s t e m has a m a j o r role.

A t present, our

role is to fight the pervasive and pernicious inflation with which our
e c o n o m y has been afflicted in recent years.
T h e long standing nature of the p r o b l e m of inflation m a k e s our task
m o r e difficult.

A s m e a s u r e s are taken to c o m b a t inflation, c o n s u m e r s

and businesses act in w a y s w h i c h render these m e a s u r e s less effective.
E v e n with the package of actions last week, it is still too early to judge
w h e t h e r they will be effective.

W e arrived at our presait state of escalating

inflation over a period of years.

It will require time to reduce inflation to

an acceptable level.
C H A N G E S IN T H E B O A R D O F G O V E R N O R S
T h e F e d e r a l R e s e r v e "cast of characters' has changed considerably
during the current year, beginning in F e b r u a r y with the resignation of
f o r m e r G o v e r n o r D avid Lilly.

In M a r c h of this year, C h a i r m a n Miller

replaced f o r m e r C h a i r m a n Burns.

Mr.

Miller brings with h i m the s a m e

c o m m i t m e n t to fight inflation that Dr. B u r n s p o s s e s s e d but his style
presents quite a contrast.

Mr.

Miller brought with h i m experience as

h e a d of a m a j o r corporation for several years, while Dr. B u r n s w a s an
e c o n omist in g o v e r n m e n t and in academia.
of the S y s t e m are already evident.




C h a n g e s in administration

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This fall, N a n c y Teeters, the first w o m a n governor, took office.
G o v e r n o r Teeters is a f o r m e r staff econ o m i s t at the B o a r d of G o v e r n o r s
but m o s t recently w a s with the H o u s e B u d g e t C o m m i t t e e .
of fiscal policy should be valuable to the Board.

Effective N o v e m b e r 17,

G o v e r n o r Phillip Jackson has resigned f r o m the Board.
are interested to learn w h o will replace him.

H e r knowledge

Obviously, w e

W h o e v e r it is, you m a y be

sure that w e will continue the fight against inflation.
C O N S U M E R CREDIT REGULATION
A not inconsiderable cause of inflation is the increasing bu r d e n of
regulation which, ultimately, the c o n s u m e r m u s t bear.

Banking, probably

the m o s t regulated of industries, takes on a n e w regulatory burden today-the C o m m u n i t y R e i n v e s t m e n t Act, or C R A ,
n e w F e d e r a l R e s e r v e Regulation B B .

w hich is i m p l e m e n t e d by the

T h e C R A requires Fed e r a l bank

a n d thrift regulatory agencies to encourage regulated institutions to help
m e e t the credit needs of their communities, including low and m o d e r a t e
i n c o m e neighborhoods, consistent with safe and sound operations.

Within

90 days, each regulated lender is required to adopt a C R A statement,
w h i c h will delineate the "entire c o m m u n i t y " the lender serves, and will
specify the types of credit the lender is p r e p a r e d to extend to the c o m m u n i t y .
T h e C R A statement m u s t be available for public inspection in public areas
of lenders' offices, and lenders m u s t retain public c o m m e n t s for s u p e r ­
visory review for two years.




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Supervisory agencies are required to assess the record of institutions
in meeting the credit needs of their c o m m u n i t i e s w h e n considering appli­
cations for branches, m e r g e r s ,

charters, deposit insurance, holding company-

acquisitions and office relocations.

In addition to reviewing public c o m m e n t s ,

e x a m i n e r s will review records of loans accepted and rejected to assess the
lender's record.

It is rather obvious that C o n g r e s s expects regulatory-

agencies to deny applications for expansion f r o m those w h o fail to m e e t the
test i m p o s e d by the C R A .
T h e C R A is only the latest in a series of Federal c o n s u m e r credit
statutes, w h i c h b e g a n with the Truth in Lending A c t in 1968, a nd continued
with the Equal Credit Opportunity Act, the H o m e M o r t g a g e Disclosure Act,
the Truth in Leasing Act, and, m o r e recently, the Fair D ebt Collection
Practices Act.

T h e F e d e r a l R e s e r v e has rule-writing and supervisory

responsibilities with respect to several such statutes; w e and the other
b a n k regulatory agencies n o w conduct separate c o n s u m e r compliance
examinations in addition to our regular examination procedures.

Also,

in order to assist m e m b e r banks in avoiding the substantial civil penalties
w h i c h can result f r o m nonc o m p l i a n c e with c o n s u m e r statutes, w e have
conducted C o n s u m e r Affairs A d v i s o r y Services for well over 100 m e m b e r
banks in the Sixth District alone.




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T H E OMNIBUS BANKING BILL
In addition to the C R A ,

the 95th C o n g r e s s enacted legislation

w h i c h will affect significantly the w a y in wh i c h banks a n d other financial
institutions do business.

This, of course, includes the O m n i b u s Banking

Bill, a part of w h i c h is also k n o w n as the Financial Institutions Regulatory
Act.

T h e basic thrust of this legislation is to address those matters

generally referred to as "insider practices" a n d to set limits u p o n them.
During the past year, there have been a n u m b e r of p r o p o s e d versions of
the so-called "Safe Banking Act, " a n o m e n c l a t u r e w h i c h w a s offensive to
the banking c o m m u n i t y and w a s aband o n e d in favor of F I R A .

Until just

before adjournment, it w a s widely believed that no bill w o u l d be p assed
this year.

Nevertheless, a last-minute burst of legislative m a n e u v e r i n g

resulted in passage in both H o u s e s of C o n g r e s s during the early m o r n i n g
hours of Sunday, October 15.

T h e bill places limitations on abusive

insider practices, including insider loans a nd overdrafts, and loans f r o m
correspondent banks, and requires banks to file annual reports of insider
loans with supervisory agencies.

M a n a g e m e n t interlocks b etween c o m ­

peting financial institutions are prohibited, and supervisory agencies are
n o w able to forbid changes of control detrimental to banks.

Supervisory

agencies are given increased cease a nd desist p o w e r s to deal with abusive
practices.




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In addition to these provisions directed at abusive insider practices,
the bill contains several other provisions of importance.

It creates a

"Fe d e r a l Financial Institutions Examin a t i o n Council, " consisting of
officials of the three banking agencies, the F ed e r a l H o m e L o a n B a n k
Board, and the National Credit Union Administration; the Council will
establish u n i f o r m examination procedures and report forms, and c o n ­
duct e x a m i n e r schools.

T h e bill also authorizes N O W accounts for N e w

Y o r k State; authorizes F D I C insurance u p to $100, 000 for I R A a n d K e o u g h
accounts; extends Regulation Q interest rate control authority for two
m o r e years; eliminates the Q differential for N O W accounts and automatic
transfer accounts; and enacts E F T legislation limiting c u s t o m e r liability
for unauthorized electronic transfers to $50 if certain conditions are met,
a n d to $500 in any case.

T h e F e d e r a l R e s e r v e B o a r d is given rule-writing

authority in several sections of the bill, including those dealing with inter­
lock provisions, changes in control, and electronic funds transfer.
T H E I N T E R N A T I O N A L B A N K I N G A C T O F 1978
T h e International Ban k i n g A c t of 1978, pa s s e d in the 95th Congress,
should be of special interest to Georgia bankers.

T h e principal focus of

this legislation is to bring foreign banks operating in the U. S. into c o m ­
petitive equality with U. S. banks.




This is particularly true with respect

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to their operations across state lines, and with respect to reserve require­
ments, F D I C insurance, and, to an extent, F ederal supervision.

This A c t

also permits foreign banks to o w n E d g e A c t Corporations, while liberalizing
restrictions on E d g e Acts.

In addition, it requires the Administration to

report in one year as to whether the restrictions of the M c F a d d e n Act,
p a s s e d in 1927, should be retained.

This provision could eventually m e a n

liberalization of the M c F a d d e n Act's prohibition against interstate banking.
THE MEMBERSHIP PROBLEM
Legislation C o n g r e s s did not pass includes the p r o p o s e d bill w h i c h
w o u l d have a d d r e s s e d the F ed e r a l R e s e r v e System's long standing m e m b e r ­
ship problems.

T h e decline in S y s t e m m e m b e r s h i p has accelerated m a r k e d l y

in the last decade.

While m e m b e r banks held 83 percent of b ank deposits in

1965, by the end of 1977 this percentage h ad declined a full 10 percent to
73 percent.
T h e p r o b l e m of m e m b e r s h i p attrition has been m o r e severe in N e w
England, w h e r e N O W accounts have been permitted during the last f ew
years.

T h e reduction in earnings associated with N O W accounts has induced

banks to seek w a y s of lowering their costs, and as a result, they have
a s s e s s e d m o r e carefully the costs and benefits of m e m b e r s h i p .
This trend in N e w England, in ta n d e m w i t h the m o v e in C o n g r e s s to
extend N O W accounts nationwide, coupled with the erosion of the prohibition




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against p a y m e n t of interest on d e m a n d deposits, has e m p h a s i z e d the
n e e d for finding a solution to the m e m b e r s h i p problem.

Until recently,

the preferred solution included the p a y m e n t of interest by the F e deral
R e s e r v e on reserve accounts, together with other changes such as
explicit pricing of services.

Originally, the Fed e r a l R e s e r v e preferred

that these changes be e m b o d i e d in the N O W account bill.

However, N O W

account legislation appears to have been pretty m u c h placed on the back
burner b y Congress, despite the extension of N O W s to N e w York, and
w e have h ad to consider other avenues of a p p r o a c h to the problem.

Earlier

this year, after C h a i r m a n Miller took office, the idea w a s a dvanced that
the F e d e r al R e s e r v e could p a y interest on reserves without specific
legislative authorization--there is, in fact, no specific statutory prohibition
against such payment.

Nevertheless, the idea of paying interest on reserves

unilaterally w a s received quite negatively by k ey figures in Congress,

and

as a consequence, this line of thinking has been throttled considerably.
In July,

legislation w a s p r o p o s e d w h i c h w a s designed to address the

m e m b e r s h i p problem.

This bill w o u l d h ave i m p o s e d universal reserve

requirements on transactions accounts in all depository institutions in
excess of $5 million, and required the pricing of F ederal R e s e r v e services
for all institutions that use them.




This bill d r e w opposition f r o m a n u m b e r

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of quarters, a m a j o r contention being that universal reserves w o u l d
u n d e r m i n e the dual banking system.

Subsequently, C h a i r m a n R e u s s

of the H o u s e B a nking C o m m i t t e e p r o p o s e d a substitute bill w hich w o u l d
i m p o s e reserve requirements on all deposits over $100 million, with
reserves reduced below present levels; pricing w o u l d be left to the
discretion of the Federal Reserve, but wo u l d be expected.

In turn, w e

p r o p o s e d $50 million as the cutoff, a nd this w a s generally accepted by
the H o u s e and Senate Banking

Committees.

This w o u l d m e a n that

74 percent of bank deposits in the country w o u l d be subject to reserves,
virtually the s a m e as now.
T h e r e have been s o m e adv e r s e reactions to the R e u s s Bill and to
the p r o p o s e d modifications.

T h e A B A opposes m o r e favorable treatment

for sma l l banks than for m e d i u m - s i z e d and larger banks and feels that
reduction of reserve requirements, in the a bsence of m a n d a t o r y reserves
w o u l d be a preferable approach.

Interestingly, Senator P r o x m i r e ,

C h a i r m a n of the Senate Banking C o m m i t t e e , favors the Federal R e s e r v e
approach, and suggests that it is time for the F e d e r a l R e s e r v e S y s t e m to
r e s e m b l e m o r e closely a central bank rather than a " m e m b e r s - o n l y " club
In the next Congress, s o m e legislation e m b o d y i n g a solution to the
m e m b e r s h i p p r o b l e m should gain favor, m o s t probably resembling the
R e u s s Bill with s o m e of our prop o s e d modifications.

Hopefully the result

will be a n overall i m p r o v e m e n t in the structure of banking, together with




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a significant i m p r o v e m e n t in tools available to the F e d e r a l R e s e r v e
with w h i c h to fight inflation through m o r e effective m o n e t a r y policy.
THE AUTOMATIC

T R A N S F E R SERVICE

Effective N o v e m b e r 1, 1978, banks, u p o n a g r e e m e n t with their
depositors, m a y automatically transfer funds f r o m their savings accounts
to their checking accounts.

T h e automatic transfer service is designed

to p e r m i t the automatic coverage of checks d r a w n or to maintain a m i n i ­
m u m balance in a checking account.

It will provide depositors with an

alternative a r r a n g e m e n t to the present automatic overdraft loans a nd
should be beneficial to check clearing by reducing the n u m b e r of items
returned.

T h e A T S m e t with a legal challenge f r o m the United States

L e a g u e of Savings Associations, but at this time it appears that the
System's position in favor of the A T S has prevailed.

Congress appeared

to have recognized the legitimacy of the A T S b y eliminating the R e g u l a ­
tion Q differential with respect to it.
A

n u m b e r of banks are p r omoting this n e w service aggressively,

but it appears that m o s t are assessing substantial account charges or
requiring sizeable m i n i m u m balances and are not using the A T S as a
loss leader.

T h e A T S represents a fundamental change in the w a y banks

will be doing business in this country.




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PROJECT AUGEUS"
In M a r c h ,

1978, President Carter issued a directive that required

executive agencies to adopt procedures to simplify F e deral regulations.
A m o n g other things, it required that each regulation be written in "plain
English" a nd be understandable to those w h o m u s t c o m p l y with it.
While the directive did not apply to "independent Federal agencies"
such as the Federal R e s e r v e

System, the B o a r d of G o v e r n o r s felt this to

be a w o r t h y goal, a n d has approved a p r o g r a m for a z e ro-based review of
all our regulations.

It has been d u b b e d "Project A u g e u s " - - y o u m a y recall

f r o m G r e e k m y t h o l o g y that one of the labors of Hercules w a s to clean the
A u g e a n stables, which h a d been left untended for 30 years.

Hercules

cleaned the stables by redirecting the River Alpheus through the m - - I doubt
that the E nvi r o n m e n t a l Protection A g e n c y w o u l d allow that now.
Project A u g e u s is intended to pro d u c e a simplified set of regulations
by the end of 1979.

It will focus not only on simplification of language, but

also will entail a substantive r e view to determine whether the regulations
m e e t current policy goals, whether they continue to be in the public interest,
and w h e t h er legislation permitting n e c e s s a r y revisions should be r e c o m m e n d e d .
U n d e r Project Augeus, each Federal R e s e r v e B a n k has been assigned
one or m o r e regulations to review.

Atlanta has been assigned Regulation Z - -

Truth in Lending--admittedly c o m p l e x and not an e a s y regulation with
w h i c h to comply.

A n y suggestions or c o m m e n t s you care to submit w o u l d

be w e l c o m e .


http://fraser.stlouisfed.org/o n o u n c e d " a h G E E u s "
* Pr
Federal Reserve Bank of St. Louis

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During the past year, an increased d e gree of cooperation a m o n g
the b ank supervisory agencies has been accomplished.

T h e Interagency

Supervisory C o m m i t t e e has been f o r m e d and is m eeting monthly.
Specific achievements include a u n i f o r m interagency bank rating system,
w h i c h facilitates interagency c o m m u n i c a t i o n a n d reporting to C o n g r e s s
on the condition of the banking system; u n i f o r m interagency trust and
E D P rating systems; and an interagency a g r e e m e n t for joint supervision
of banks' E D P servicers.
f r a m e w o r k of the

A s the ISC's w o r k is continued within the

F ederal Financial Institutions Exa m i n a t i o n Council,

w e look for further achievements.
B A N K HOLDING C O M P A N Y SUPERVISION
Supervisory efforts in the bank holding c o m p a n y area h a v e intensi­
fied during the current year.

Recognizing the difficulty of separating the

affairs of a b ank holding c o m p a n y f r o m those of the banks it owns, a new,
m u c h m o r e c o m p r e h e n s i v e report of inspection for bank holding c o m p a n i e s
has been designed.

A t the s a m e time, a formal r e q uirement for frequency

of inspections has been established.

Beginning in 1978, all holding

c o m p a n i e s with $300 million or m o r e in consolidated assets will be
inspected yearly, except for a relatively f e w w h i c h are in satisfactory
financial condition and w hich do not have significant credit-extending




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n o n b a n k subsidiaries.

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M o s t smaller holding c o m p a n i e s w h i c h are in

satisfactory financial condition will be inspected every three years.
In addition to our traditional concerns such as capital, asset
quality, liquidity and leverage, the intensified holding c o m p a n y inspection
p r o g r a m is directed to a n u m b e r of specialized concerns.

T h e s e include

inappropriate tax accounting transactions such as upstre a m i n g of deferred
tax liabilities, and inappropriate m e t h o d s of assessing bank subsidiaries
for m a n a g e m e n t and service fees.

S uch fees should be reasonably re ­

lated to services rendered, and should not be m e r e l y the vehicle for p r o ­
viding funds for debt service.
C O M M E R C I A L B A N K SUPERVISION
Supervisory efforts with respect to c o m m e r c i a l banks have also
intensified.

T h e S y s t e m is placing increased e m p h a s i s on the u s e of

the additional authority provided u nder the Financial Institutions S u p e r ­
visory Act.

T h e s e supervisory tools will be u s e d to e m p h a s i z e the corrective

actions n e e d e d to return p r o b l e m banks to a satisfactory condition and to
i m p r e s s u p o n directors their important responsibility for directing the
affairs of the bank in a prudent m a n n e r .

Hopefully, the u se of these tools

will support an i m p r o v e m e n t in the financial health of the banking system.