Federal Reserve Bulletin, 1989-03

VOLUME 75 • NUMBER 3 • MARCH 1989 FEDERAL RESERVE BULLETIN • > v BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, WASHINGTON, D.C. PUBLICATIONS COMMITTEE Joseph R. Coyne, Chairman • Michael Bradfield • S. David Frost • Griffith L. Garwood • Donald L. Kohn • Michael J. Prell • Edwin M. Truman The FEDERAL RESERVE BULLETIN is issued monthly under the direction of the staff publications committee. This committee is responsible for opinions expressed except in official statements and signed articles. It is assisted by the Economic Editing Section headed by Mendelle T. Berenson, the Graphic Communications Section under the direction of Peter G. Thomas, and Publications Services supervised by Linda C. Kyles. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Table of Contents 107 MONETARY POLICY REPORT 1988 was another year of progress for the TO THE CONGRESS economy and that there are few impediments to continued expansion as the econ- Overall, 1988 was another year of progress omy enters 1989, before the House Comfor the U.S. economy, marked by further mittee on Banking, Finance and Urban substantial increases in output and employ- Affairs, January 24, 1989. [Chairman ment and by a significant improvement in Greenspan presented substantially identical the balance of trade. testimony before the Joint Economic Committee of the Congress on January 31, 120 TRENDS IN BANKING STRUCTURE 1989.] SINCE THE MID-1970S Over the period from 1977 to 1987, the 142 Chairman Greenspan addresses issues number of banking organizations declined raised by recent trends in corporate restrucconsiderably, while the share of banking turing activity and says that while the reassets controlled by the largest organiza- structurings of the 1980s probably are imtions increased sharply. At the same time, proving, on balance, the efficiency of the banks have expanded beyond their tradi- American economy, the worrisome, and tional geographic borders; differences be- possibly excessive, degree of leveraging tween commercial banks and nonbank fi- associated with this process could create a nancial institutions have diminished; and set of new problems for the financial systhe number of bank mergers and acquisi- tem, before the Senate Committee on Fitions has soared. nance, January 26, 1989. 134 INDUSTRIAL PRODUCTION 147 ANNOUNCEMENTS Industrial production increased an esti- Final guidelines issued on risk-based capital mated 0.3 percent in December. requirements. New members appointed to Thrift Institu- 136 STATEMENTS TO CONGRESS tions Advisory Council. Manuel H. Johnson, Vice Chairman, Board New members appointed to Consumer Adof Governors, discusses how the debt-servisory Council. vicing difficulties of some of the developing countries have affected the U.S. banking Preliminary figures available on operating system and says that the potential effects of income of Federal Reserve Banks. these difficulties on the banking system Proposal to amend Regulation Z to implehave been managed with some degree of ment the Home Equity Loan Consumer success, before the House Committee on Protection Act; extension of public com- Banking, Finance and Urban Affairs, Janument period on proposal to rescind a proviary 5, 1989. sion of Regulation Y; announcement that 139 Alan Greenspan, Chairman, Board of Gov- proposed amendment to Regulation CC ernors, reviews the current economic situ- would not be effective April 1, 1989, as ation and the outlook for 1989, and says that previously reported; request for public Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

comment on whether U.S. companies oper- A3 Domestic Financial Statistics ating in the government debt markets of A46 Domestic Nonfinancial Statistics certain foreign countries have the same competitive opportunities as domestic com- A55 International Statistics panies in those markets. A7i GUIDE TO TABULAR PRESENTATION, Revised List of Marginable OTC Stocks STATISTICAL RELEASES, AND SPECIAL now available. TABLES Revisions to table 1.24 in the FEDERAL RESERVE BULLETIN. A72 BOARD OF GOVERNORS AND STAFF Changes in Board staff. A74 FEDERAL OPEN MARKET COMMITTEE Admission of three state banks to member- AND STAFF; ADVISORY COUNCILS ship in the Federal Reserve System. A76 FEDERAL RESERVE BOARD 153 LEGAL DEVELOPMENTS PUBLICATIONS Various bank holding company, bank ser- A79 INDEX TO STATISTICAL TABLES vice corporation, and bank merger orders; and pending cases. A81 FEDERAL RESERVE BANKS, BRANCHES, AND OFFICES Ai FINANCIAL AND BUSINESS STATISTICS These tables reflect data available as of A82 MAP OF FEDERAL RESERVE SYSTEM January 27, 1989. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report to the Congress Report submitted to the Congress on February activity. Pressures on the reserve positions of 21, 1989, pursuant to the Full Employment and depository institutions were eased a bit further in Balanced Growth Act of 1978.1 early 1988, and interest rates edged down for a time, extending the declines that had begun in October 1987. Growth of M2 and M3 was fairly MONETARY POLICY AND THE ECONOMIC rapid during this period, nearly reaching the OUTLOOK FOR 1989 upper bounds of the annual target ranges established by the Federal Open Market Committee Overall, 1988 was another year of progress for (FOMC). the U.S. economy, marked by further substantial As it became clear in the spring that the increases in output and employment and by a economy still was strong, the focus of Federal significant improvement in the balance of trade. Reserve policy shifted. For much of the year, The dramatic stock-market break of October there was heightened concern about the potential 1987 did seem to affect real activity for a time, for increased inflation, largely reflecting rapid but the underlying strength of the economy soon growth of spending and a continued tightening of showed through, and, apart from losses of farm labor and product markets. A sharp upswing in output caused by the drought, growth proceeded real net exports of goods and services that had at a relatively strong pace throughout 1988. begun in 1987 continued into 1988; while this Moreover, the sizable employment gains in Jan- upturn was a welcome and necessary part of the uary of this year suggest that .the economy en- adjustment of the U.S. economy toward a better tered 1989 with considerable forward momen- balance in its external accounts, it also intensitum. fied the demands on U.S. producers at a time Inflation has remained in check into the sev- when the utilization of domestic labor and capital enth year of the expansion. Even so, develop- already was quite high. Accommodating the imments during 1988 were a little worrying, as, for provement in our external position while limiting a second year, increases in prices were some- the risk of heightened inflation required restraint what larger than they were in earlier years of the on the growth of domestic demand. expansion. Part of the pressure on prices in 1988 The shift by the Federal Reserve toward recame in the food area and reflected the influence straint was reflected in a tightening of reserve of the drought. However, with labor markets market conditions that began in late March and tightening, there also was a quickening in the rise continued, in several steps, into 1989. Short-term of wages and total hourly compensation, which market interest rates moved up during this peaffected prices more generally. riod, influenced both by the System's tightening Federal Reserve policy mirrored the changing and by the strength of the economy, and the economic circumstances of 1988. Early in the discount rate was raised in August, to its current year, as in late 1987, the Federal Reserve sought level of 6V2 percent. Growth of M2 moderated to limit repercussions from the plunge in stock after the spring and ended the year just below the prices and, in particular, to guard against the middle of the 1988 target range. The growth of possibility of a significant contraction in business M3 also ebbed over the last two quarters, as the needs of banks and thrift institutions to fund credit expansion slackened. 1. The charts for the report are available on request from At present, short-term interest rates are about Publications Services, Board of Governors of the Federal Reserve System, Washington, D.C. 20551. Vh percentage points higher than they were early Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

108 Federal Reserve Bulletin • March 1989 last spring. Long-term interest rates, by contrast, are subject to a substantial degree of uncertainty. have changed little, on net, over that same pe- Moreover, in 1989, the behavior of M2 and M3 riod; although these rates turned up in the spring also could be influenced by the resolution of of 1988, they leveled off over the summer and problems in the thrift industry, depending, in edged down in the fall, even as short-term rates part, on how pricing practices of these instituwere continuing to rise. This behavior of bond tions change, on the reactions of retail and yields seems to have reflected a lowering of wholesale depositors in these institutions, and on market expectations of long-run inflation. the extent of any restraints on the growth of assets of savings and loan associations. Monetary Policy for 1989 M2 and M3 are now around the lower ends of their 1989 ranges. This slow growth and the The commitment by the Federal Reserve to accompanying rise in velocity reflect the continucontain inflationary pressures is reflected in the ing effects of recent increases in market interest FOMC's decisions to lower the ranges for mon- rates. In light of the slow adjustment of deposit etary and credit expansion this year. The Com- rates, velocity could continue to increase, with mittee has set a range of 3 to 7 percent for M2 growth in these monetary aggregates in the lower growth during 1989 and a range of 3!/2 to IVi halves of their ranges. Given the uncertainties percent for M3, reaffirming the target ranges about the relation of movements in the aggreestablished tentatively in June 1988. These gates to prices and output, the Committee agreed ranges were reduced from those for 1988—a full that in implementing policy, they would need to percentage point for M2 and one-half percentage assess, in addition to the behavior of money, point for M3—signalling the Committee's deter- indicators of inflationary pressures and economic mination to resist any upward tendencies in growth, as well as developments in financial and inflation in the coming year and to promote foreign exchange markets. progress toward price stability over the long run. The Committee will continue to monitor the The monitoring range for the growth of domestic growth of domestic debt in 1989. The expansion nonfinancial debt for 1989 was set at 6V2 to 101/2 of the debt of nonfinancial sectors may slow a percent, which also is lower than that of last little from the 83/4 percent pace of 1988, although year. it is expected once again to exceed the pace of In recognition of the degree to which the growth in nominal income. The growth of debt relationship between the monetary aggregates could be importantly affected by corporate finanand economic performance has varied in this cial behavior. The expansion of private debt has decade, the Committee retained the spread of 4 been boosted in recent years by the substitution percentage points between the upper and lower of debt for equity in connection with leveraged ends of the growth ranges that it adopted in 1988. buyouts and other corporate restructurings, and Despite the deregulation of deposit interest rates, business borrowing is likely to be especially M2 velocity has remained very sensitive to sizable in the early part of this year, owing to the changes in market interest rates over periods as recent heavy volume of such activity. The fedlong as a year or more. Depository institutions eral government, once again, will be placing have been slow to adjust some of their offering heavy demands on credit markets, financing its rates, causing substantial changes over the short continuing deficit. and intermediate term in the relative attractiveness to savers of deposits versus market instru- 1. Ranges of growth ments. In these circumstances, it is difficult to for monetary and credit aggregates specify in advance a narrow range for the appro- Percent change, fourth quarter to fourth quarter priate growth of M2 and the other aggregates in Monetary the coming year; such growth will depend on the aggregate 1987 1988 1989 forces affecting the economy and prices and on M2 5Vi to 81/2 4 to 8 3 to 7 the response of depository institutions to any M3 5'/> to 8>/> 4 to 8 VA to Vh changes in market interest rates, both of which Debt 8 to 11 7 to 11 6'/> to \0lA Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report to the Congress 109 Economic Projections text of a prudent effort to restore price stability over time. It should be noted, however, that In general, the Committee members, including some members expect a rise in prices that is the nonvoting Reserve Bank presidents, antici- significantly below the central-tendency range; in pate that real gross national product will grow their view this far more desirable outcome could moderately in 1989, that prices will rise at a pace flow from the dollar's recent firmness, which will similar to, or perhaps slightly above, that of 1988, damp the pressures from rising import prices, and that the unemployment rate will remain near and from the recognition by business and labor its recent level—the lowest in a decade and a that restraint is needed to preserve gains in half. On balance, the FOMC members anticipate international competitiveness. a little less real growth and a somewhat higher A particular uncertainty in the inflation outrate of inflation than does the administration, but look for 1989 centers on the prospects for food the differences are not large. prices. FOMC members generally assume that a Members of the Committee believe that the return to more normal weather conditions this progress of the economy in 1989 will be deter- year, together with an increase in acres planted, mined in large measure by developments on will lead to a sharp rebound in crop production, the inflation front. Although special factors, in which case food prices might help to temper such as the drought, contributed to price in- overall inflation. However, because stocks of creases last year, there also have been troubling some key agricultural commodities have been indications—most notably in recent wage reduced to low levels, there also is risk that trends—that inflationary pressures have become another year of drought could generate strong more widespread and, potentially, more deeply upward pressures on prices. In the energy area, rooted. consumer prices could rise sharply early this Given the tightening actions taken by the Fed- year, responding to the runup in oil prices around eral Reserve over the past year and the policy of the end of 1988; nonetheless, world oil supplies continued restraint on aggregate demand ex- still look ample, and members of the Committee pressed in the monetary targets for 1989, the are assuming that energy prices will increase members of the Committee anticipate that, if only moderately over 1989 as a whole. there is any further acceleration of prices from With respect to real GNP, the central-tenthe 1988 pace, it will be quite limited. The dency forecast of the Committee members is for majority of the Committee members expect that a rise of about 2VI to 3 percent in 1989, about the the consumer price index will rise about 4V2 to 5 same as in 1988. However, this forecast incorpopercent this year. This would be a slightly larger rates a working assumption that increased farm increase than in 1988, and thus would represent output will add around two-thirds of a percentage something of a setback relative to the Commit- point to the growth of GNP, similar to the tee's disinflationary objective. However, in light amount that the drought pared from growth in of the tautness of markets and the current mo- 1988. Excluding this swing in farm output, the mentum of wages and prices, these members central-tendency forecast is for considerably viewed such a projection as realistic in the con- slower growth of real output than last year's 2. Economic projections for 1989 „„ Percent change, fourth quarter to fourth quarter eemm FOMC members and other FRB Presidents 11998888 AAccttuuaall Range Central tendency Nominal GNP 7.0 5lA to 8'/> 6'A to VA Real GNP 2.7 IVi to 3'/4 2'A to 3 Consumer price index 4.3 3'A to 5'A 4'A to 5 Average level in the fourth quarter, percent Unemployment rate 5.3 5 to 6 5</4 to 554 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

110 Federal Reserve Bulletin • March 1989 gain, excluding drought losses, of more than 3 Gramm-Rudman-Hollings targets will be adpercent. hered to in the fiscal 1990 budget process; but the Although the economy clearly has entered creation of an environment favorable for eco- 1989 on a strong note—even discounting the nomic growth with stable prices requires that transitory influence of unusually mild weather in fiscal policies be put in place to produce the many parts of the country—the members feel prescribed budget results in the out-years as that growth soon will move to a lower trajectory, well. owing both to the general influence of monetary restraint and to a number of sector-specific trends. In the business sector, the boom in THE PERFORMANCE OF THE ECONOMY capital outlays that was evident in the first half of IN 1988 1988 has since abated, and surveys of plans for 1989 point to moderate gains in overall plant and The U.S. economy completed a sixth year of equipment spending. Government purchases are expansion in 1988. Real gross national product expected to be held down by budgetary con- rose about 23/4 percent over the course of the straints; defense purchases, in particular, have year, the number of jobs increased more than 3!/2 been trending lower under the influence of cut- million, and the unemployment rate remained on backs in real spending authority. Recent in- a downward course, closing the year at 5.3 creases in mortgage rates likely portend some percent, its lowest level in 14 years. Progress slackening in the pace of homebuilding, and the also was made toward restoring external balance, growth of consumption expenditures also should as the merchandise trade deficit fell sharply. begin to taper off from the rapid pace of 1988, as The year began on a note of uncertainty. The a slowing of expansion elsewhere in the economy sharp break in the stock market in the fall of 1987 damps the growth of real disposable income. had raised concern that the economy might fal- With regard to the external sector, real net ter, and some signs of weakness did emerge exports of goods and services declined over the around the start of 1988. By early spring, howsecond half of 1988, but most members of the ever, it became clear that the expansion still had Committee expect some improvement in the considerable vigor, coming in particular from months ahead. However, substantial further rising exports and a boom in capital spending. progress in external adjustment will require a Households, meanwhile, adjusted fairly readily continuing commitment on the part of U.S. firms to the loss of stock market wealth, and consumer to capitalize on the enhanced competitiveness spending rose at a strong pace throughout the resulting from the depreciation of the dollar since year. Toward the end of the year, net exports and 1985. That commitment must take the form not capital spending softened, but there was enough only of continued cost control and price re- impetus from other sectors to keep real GNP on straint, but also of more intense efforts at mar- a firm upward course. keting abroad and investment in new capacity The rate of inflation, which had picked up in where constraints are visible. Failure on these 1987, remained somewhat higher in 1988 than in counts would almost certainly leave the U.S. earlier years. The step-up in inflation in 1987 had economy considerably less well off over the long resulted mainly from a rebound in the price of oil haul. and the pass-through of higher prices for imports. Government policy can do much to encourage This past year, by contrast, extra price pressures businesses to make the longer-range commit- reflected the impact of drought on the price of ments needed to bring about better balance in the food and, more generally, a widespread pickup in economy and to foster longer-run growth. A labor costs in the domestic economy. monetary policy directed steadfastly at move- The rise in real GNP last year would have ment toward price stability is one critical ingre- exceeded 3 percent but for a severe drought, one dient. But also crucial is action to bring about of the worst of this century, that caused huge further progress toward balance in the federal losses of farm output. These losses accounted for budget. The Committee has assumed that most of the slowdown in GNP growth that oc- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report to the Congress 111 curred after the first quarter of 1988. Fortunately, goods. The volume of agricultural exports for inventories of farm products had been sizable 1988 was up 9 percent from that for 1987, despite coming into 1988, and a drawdown of stocks declines in the second half of the year; the value helped to buffer households and others from the of these exports was boosted further by the disruption to output. Within the farm sector, the drought-induced rise in crop prices. drought strained the finances of some producers, The value of merchandise imports, other than but the financial condition of many others was oil, rose about 7 percent during 1988. The volume not seriously affected, and the sector as a whole of non-oil imports increased about 2 percent. remains stronger fundamentally than in the first This rise was concentrated mainly in the capital half of the 1980s, when the boom of the previous goods area; volume was down for other major decade was unwinding. categories of imports. The prices of imported In most of the nonfarm economy, the growth industrial supplies (excluding oil) rose signifiof activity was robust in 1988. Production in the cantly in 1988; smaller increases were recorded manufacturing sector increased 5 percent, nearly for consumer goods, automotive products, and matching the previous year's gain, and factory various machinery categories. However, price employment rose sharply. Employment also con- declines for oil and computers held the overall tinued to grow rapidly in retail and wholesale increase in import prices below that of 1987; on a trade and among the providers of business and fixed-weight basis, the rise in non-oil import health services. However, oil drilling, which had prices during 1988 was IVA percent. The value of turned up in 1987, when oil prices were rising, oil imports declined last year, as an increase in experienced renewed weakness in 1988, intensi- physical volume was more than offset by the fying economic stresses in some parts of the decline in price. country. For the first three quarters of 1988, the current account showed a cumulative deficit of $102 The External Sector billion, which was balanced by recorded net capital inflows of $88 billion and a statistical The U.S. external accounts showed considerable discrepancy of $14 billion. Foreign official assets improvement during 1988. On a balance of pay- in the United States increased $28 billion on net ments basis, the deficit on merchandise trade fell (this rise included about $30 billion, on net, of from an annual rate of $165 billion in the fourth official purchases of U.S. government securiquarter of 1987 to around $120 billion in the ties). Net inflows through banks were $21 billion. second quarter of 1988 and, on average, re- Excluding banking flows, assets held in the mained at that lower level in the second half of United States by private foreigners increased $68 the year. Over the four quarters of last year, the billion on net; purchases of U.S. government value of exports rose more than 20 percent; securities were sizable (in contrast to net sales in adjusted for inflation, the increase was around 15 1987), and direct investment by foreigners in the percent. Much of the strength in exports, which United States remained near record levels. Exwas concentrated in the first half of the year, cluding bank flows, the assets held abroad by appeared to be associated with an improvement private U.S. residents increased $26 billion. in the price competitiveness of U.S. products These recorded capital flows during the first resulting from an earlier depreciation of the dol- three quarters of 1988, plus the likely net inflows lar, as well as with efforts at cost control and in the fourth quarter, brought the recorded U.S. increases in productivity among domestic pro- net indebtedness to foreigners to almost $500 ducers. Demand for exports also was supported billion at the end of 1988. by surprisingly strong economic growth in other The foreign exchange value of the U.S. dollar, industrial countries. The growth in real export which had fallen sharply from early 1985 through volume was spread over most categories of the end of 1987, has shown wide fluctuations in trade; gains were particularly large for capital the subsequent period. Measured against the goods (especially computers and computer other G-10 currencies, the dollar currently is up parts), automotive products, and consumer somewhat, on net, from its end-of-1987 low. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

112 Federal Reserve Bulletin • March 1989 However, it has declined in real (price-adjusted) spawned by the crash soon gave way to renewed terms against the currencies of our major trading optimism among households. Thus, after the partners among the developing countries, espe- initial, one-time jump in the saving rate, real cially South Korea, Mexico, and Brazil. consumption expenditures grew at about the From mid-April to late August of last year, the same pace as the trend in after-tax income; the dollar rose sharply, on average, against the cur- rise over the year was about V/i percent. rencies of the other industrial countries, reflect- Consumer spending for big-ticket items was ing the influences of Federal Reserve monetary brisk in 1988. The unit sales of domestically tightening and monthly trade reports that bright- produced automobiles moved up a bit from the ened the market's assessment of the outlook for 1987 pace, and the sales of light trucks and vans, U.S. external adjustment. When measured which have more than doubled since the expanagainst a weighted average of the other G-10 sion began in 1983, reached another new high. currencies, the appreciation during that period Adjusted for inflation, total consumer spending was more than 15 percent. After holding steady for motor vehicles increased 6'/2 percent over the through September, the dollar then declined four quarters of the year. Among the household sharply in October and November; market per- durables, real outlays for furniture and appliceptions appeared to shift during that period ances, which had slowed in 1987, moved up IVi toward a view that monetary restraint in other percent during 1988, renewing the strength that countries had increased relative to that in the had been evident over the 1983-86 period. United States, and incoming trade data suggested Real residential investment fell slightly in the a stalling of the adjustment process. Since No- first half of 1988, but it turned up in the second vember, the dollar has again risen, partly in half and, by the fourth quarter, was a little above response to further tightening actions by the the level of a year earlier. Starts of multifamily Federal Reserve. housing units, which had slumped in 1987, fell Measured against the G-10 currencies, the further in the first quarter of 1988, but then dollar currently is about 7 percent above its flattened out over the remainder of the year; December 1987 level. If adjustment is made for vacancy rates for multifamily dwellings remain changes in relative prices, the resulting real ap- high in many areas and are likely to hold down preciation is somewhat greater, as inflation in the new construction of these units for some time. In United States has exceeded the weighted average the single-family sector, starts edged down of the inflation rates of the other major industrial through the first three quarters of 1988, but countries. rebounded toward year-end to the highest levels since the fall of 1987. By historical standards, The Household Sector these swings in single-family starts during 1988 were relatively mild; indeed, from a longer-term At the start of 1988, concern about the possible perspective, the past six years have been an effect of the stock market break on the real unusually stable period in the single-family mareconomy centered on the household sector. The ket, in sharp contrast to the boom-and-bust cydrop in share values had pared roughly half a cles of the 1970s and early 1980s. Total housing trillion dollars from household wealth, and the starts, of course, have fallen sharply since 1986 degree to which spending would be cut in re- because of the steep decline in construction of sponse to this loss of wealth was not clear. multifamily units. In the event, the loss of wealth may indeed have left an imprint on consumer demand. The The Business Sector personal saving rate did rise after the crash and, over the next year, averaged about a percentage Virtually all indicators of business activity exhibpoint higher than in the year preceding the crash. ited strength in 1988. Business sales, in nominal But, with exports and capital investment boom- terms, rose 9 percent over the year. Hiring was ing, the growth of jobs and real incomes re- brisk in most sectors, and operating rates rose mained strong in 1988, and the uncertainties further; in the industrial sector, capacity utiliza- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report to the Congress 113 tion at the end of 1988 was at its highest level an effort to pare inventories. For all of manufacsince 1979. Corporate profits remained healthy. turing and trade combined, the ratio of invento- A surge in business equipment spending that ries to sales varied little over the course of 1988 had begun in 1987 extended through the first half and was near the lower end of the range in which of 1988, when outlays grew, in real terms, at an it has been since the business expansion began. annual rate of about 20 percent. The surge was led by sizable investment in high-technology items—computers, communication equipment, The Government Sector and the like—but outlays for other types of equipment also were strong. After midyear, the Budgetary constraints have led to a slowing of rise in equipment spending slowed, and some government purchases, both at the federal level weakness became evident toward the end of the and among state and local governments. The year. However, most reports from the field sug- federal government's purchases of goods and gest that the underlying trend in equipment services—the part of federal spending that adds spending still is pointing firmly upward. directly to the gross national product—fell 4 Business spending for new construction de- percent in real terms from the fourth quarter of clined in 1988, reversing the moderate increase of 1987 to the fourth quarter of 1988. Roughly half the previous year. Commercial construction, the of the decline reflected a drought-induced reducbiggest item in the total, continued to be re- tion in the farm inventories owned or financed by strained in 1988 by the big overhang of vacancies the Commodity Credit Corporation (CCC), a that grew out of the building boom of the mid- reduction that is counted as a negative federal 1980s. Gas and oil drilling, following the lead of purchase. Excluding this inventory swing, fedoil prices, fell back a little from the pace of late eral purchases were down 2 percent over the 1987, but remained above the lows of 1986. year—the first decline since 1976. Over the eight Construction of buildings for industrial use was years that preceded 1988, real federal purchases, little changed over 1988; although capacity utili- other than those of the CCC, had risen at an zation is high in manufacturing, many producers average pace of nearly 5 percent, considerably also appear to be limiting their needs for addi- faster than the growth of real GNP. The downtional space by shifting toward technologies that turn in 1988 reflected cuts in the defense area; use more compact equipment, by economizing other non-CCC federal purchases rose somewhat on inventories, or by conserving on space in over the year. other ways. On a budget basis, total federal outlays, which Inventory investment, which had been sizable are almost three times as great as federal purin late 1987, moderated in 1988, and, with sales chases alone, continued to rise in fiscal year on an upward trajectory, stock overhangs were 1988, but at a somewhat slower rate than in most not a problem for most businesses. In manufac- previous years. There were further increases in turing, stocks grew more rapidly in 1988 than entitlements, greater demands on deposit insurthey had in recent years, but much of the accu- ance agencies, and increases in net interest paymulation was in industries in which orders and ments. Meanwhile, the growth of federal receipts shipments also were generally strong; the ratio of slowed in 1988 from the rapid pace of the previinventories to sales for all of manufacturing ous year. Receipts from social security taxes moved down during the year from the already rose more than 10 percent, in part because of a low levels of late 1987. In retail trade, concern rate increase in January of 1988. However, about a possible overhang of the stocks of non- growth in receipts from personal income taxes durables eased a bit during the year, as the ratio slowed, as increases in employment and nominal of stocks to sales in that sector edged gradually incomes were offset by final reductions in income lower from a February high. By contrast, auto tax rates legislated under the 1986 tax reforms. dealers' stocks rose sharply in the fourth quarter, The federal budget deficit in fiscal year 1988 was and auto manufacturers have enhanced sales $155 billion, slightly above the level of the preincentives and moved to a lower assembly rate in vious year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

114 Federal Reserve Bulletin • March 1989 The real purchases of goods and services by year—almost a percentage point more than in state and local governments rose 3 percent over 1987. The pickup was most pronounced among the four quarters of 1988, a little more than in white collar workers and in the ser- 1987 but less than the average rate of growth over vice-producing industries, where unemployment the preceding three years. Spending for construc- rates currently are the lowest. The cost of benetion, which had risen rapidly in the mid-1980s, fits provided to employees rose 63/4 percent over was little changed during 1988 as a whole, al- the year, nearly twice the increase of 1987; the though some pickup was evident in the fourth rise reflected both the hike in the payroll tax at quarter. Employment in the state and local sector the start of 1988 and a surge in the cost of health continued to rise during 1988, reflecting, in part, benefits. Total compensation per hour—wages the increased demands for teachers and other and salaries plus benefits—rose nearly 5 percent school workers associated with growth in the over the four quarters of 1988, after two years in number of elementary students. which the annual increases had been in the neighborhood of 314 percent. The Labor Markets Productivity gains slackened somewhat in 1988. The rise in output per hour in the nonfarm The rise in the number of jobs during 1988 was business sector over the four quarters of the year somewhat above that of 1987 and brought the was only 0.7 percent—about half a percentage total increase in payroll employment since late point below the average over this decade. This 1982 to about 181/2 million. Virtually all parts of slippage in productivity growth in 1988, comthe economy shared in last year's gain. The bined with the faster rate of increase in hourly number of jobs in manufacturing increased compensation, resulted in a 4 percent rise in unit 400,000; employment in construction was up labor costs in the nonfarm business sector over 300,000. Close to a million new jobs were created the four quarters of 1988—well above the averin retail and wholesale trade, and 1.3 million age rate of increase during the previous five were added in services. Except for a brief slow- years. down in the summer, the growth of jobs was strong throughout the year. Price Developments The continued rise in employment last year led to a tightening of labor markets and called atten- The broader measures of prices—including the tion to limits on the potential growth of the GNP price measures, the producer price index, supply of labor and of output. Growth of the and the consumer price index—all indicate that working-age population has slowed in the 1980s, inflation was in a range of 4 to 4!/2 percent in and the increase during 1988 was the smallest 1988. Except for the CPI, which had moved up annual rise in more than two decades. This into this range in 1987, these measures showed slowing of population growth in the 1980s has some acceleration last year, and all of them— led, in turn, to a more moderate rate of growth in including the CPI—rose more rapidly than they the labor force, even as the rate of labor force did in the first four years of the expansion. In participation, especially for adult women, has contrast to 1987, when the indexes were boosted continued to rise. A big boost to output during by a rebound in energy prices and rising prices the expansion has come from putting unem- for imports, the inflationary pressures this past ployed workers back on the job; now, however, year were augmented by larger increases in labor with the unemployment rate at less than 5Vi costs in the U.S. economy and the drought's percent, the labor force is more fully utilized than influence on agricultural prices. at any time in the last decade and a half. The drought's effects appeared quickly at the The tightening of labor markets in 1988 was retail level in the summer, as price increases associated with a pickup in the rise of wages and picked up for a wide variety of consumer foods. labor costs. The employment cost index for By late autumn, however, the impact of the wages and salaries in the private nonfarm sector drought on food prices began to dissipate, and increased a bit more than 4 percent over the inflation in the food sector returned to a more Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report to the Congress 115 moderate path. The increase in consumer food zation in a number of industries, as well as the prices over the year as a whole was 5lA percent— tightening of labor markets. about 2 percentage points above the average of the preceding five years. Prices in 1989 will be sensitive to weather developments over the MONETARY POLICY AND FINANCIAL spring and summer. In the past, major droughts DEVELOPMENTS DURING 1988 in the United States have been one-year events, often separated in time by several good growing During 1988, Federal Reserve policy continued seasons, and most agricultural observers have to be characterized by a flexible approach to been assuming that farm output will rebound in monetary targeting, with System actions re- 1989, thereby restraining the prices of farm sponding to emerging conditions in the economy crops. Currently, however, dry conditions still and in financial markets, as well as to growth of prevail in some important growing regions, and the monetary aggregates. This approach has been crop prices could rise abruptly if moisture sup- necessitated by the short-run variability in the plies are deficient in coming months. relation of these aggregates to economic perfor- Energy prices were little changed at the con- mance, owing primarily to their sizable response sumer level during 1988 after a sharp rise in to changing interest rates, in addition to spend- 1987—a pattern that resulted mainly from the ing. In the early months of last year, monetary continued gyrations in world oil markets. The policy was eased in light of incoming data sugprice of oil, which had risen sharply in 1987, gesting a weakening in the economic expansion moved lower for much of 1988, as the efforts of and the possibility of further financial market OPEC to restrain production unraveled. In late disruptions. Subsequent information, however, 1988, a new agreement by OPEC to limit produc- suggested a growing threat of inflationary prestion, coupled with higher-than-expected oil con- sures, as the economic expansion remained sumption and production shortfalls in non-OPEC strong and margins of available labor and produccountries, caused prices to rise sharply once tive capacity dwindled. To head off a potential again; however, despite these fluctuations, prices acceleration of inflation, the Federal Open Marhave not made any sustained departure from the ket Committee tightened reserve conditions in a range in which they generally have been since the series of steps beginning in the spring and exsummer of 1986. tending into 1989. The monetary aggregates were Price increases for goods and services other running close to the upper ends of their growth than food and energy were larger in 1988 than in ranges before the tightening actions, but subse- 1987. The pickup, while fairly moderate, was quently slowed, and they closed the year in the widespread and probably reflected in large part middle portions of their ranges. the past year's acceleration in hourly compensation and unit labor costs in the domestic econ- Implementation of Monetary Policy omy. By contrast, the pressures from rising import prices appeared to be a bit less pro- During the early months of last year, the Comnounced than in 1987. Even so, higher prices for mittee sought to counter any economic weakness imports probably were an influence in some that could result from the stock market break and areas; the retail prices of apparel, for example, to ensure the smooth functioning of domestic rose nearly 5 percent for the second year in a financial markets. Indicators of aggregate derow. The price increases for industrial commod- mand suggested that there was a risk of weakness ities slowed in 1988 after steep increases during in the economy that warranted some easing of 1987; by most measures, however, the year- monetary policy. In addition, special emphasis to-year rate of rise in these prices has remained was placed on monitoring domestic financial somewhat above that of inflation in general. The markets for signs of any new distress and on producer prices of intermediate inputs, excluding being alert to the need to alter the provision of food and energy, rose more than 7 percent during reserves quickly in response to any trouble. 1988, reflecting the high levels of capacity utili- Against this backdrop, reserve conditions were Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

116 Federal Reserve Bulletin • March 1989 eased slightly in early February, contributing to fluctuate narrowly, signalling the market's conreductions in short- and long-term interest rates. tinued confidence that inflationary pressures Throughout the spring, incoming economic would be contained. This confidence, together data suggested that the economy had overcome with the firming of policy, contributed to a the effects of lower equity prices on confidence strengthening of the foreign exchange value of and spending. This information indicated that the the dollar. economy was expanding at a rate that threatened progress toward long-run price stability. Bond Behavior of Money and Credit yields increased during this period, as indications of economic strength contradicted the earlier M2 expanded 5.3 percent last year, just below market forecasts of a general slowdown and the middle of its target range of 4 to 8 percent. raised concerns about an uptrend in inflation. Although demands for M2 were supported by Based on evidence of a greater potential for strong growth in income and spending, they were higher wage and price inflation and in the context reduced by increases in its opportunity cost— of rapid growth in M2 and M3, the Federal that is, the difference between market interest Reserve firmed reserve conditions further in a rates and the yields on M2-type instruments. series of steps beginning in March and culminat- Early in the year, opportunity costs had declined ing in early August with a hike of one-half in response to decreases in market interest rates percentage point in the discount rate. These relative to deposit rates in late 1987 and early moves brought about substantial increases in 1988, leading to strong growth in M2 and a short-term interest rates, but were accompanied decline in its velocity—the ratio of nominal GNP by only small increases in Treasury bond yields, to M2—during the first quarter. But as market as investors viewed Federal Reserve actions as interest rates moved upward after March and heading off a long-term acceleration of inflation. deposit rates lagged behind, the velocity re- The upturn in short-term interest rates, coupled versed, and it rose 1.7 percent for all of 1988. The with more optimistic expectations of future infla- response of offering rates was especially sluggish tion, helped boost the foreign exchange value of in the last part of 1988. One reason may have the dollar during this period. been regulatory pressure on thrift institutions In view of the policy restraint already in place, and the closing of many insolvent institutions, which was being reflected in slowing growth in which often had been overly aggressive in pricing the monetary aggregates, and some signs that deposits. The extent to which thrift institutions economic growth may have been moderating, the were offering higher rates than banks on small Committee postponed any further action over the time deposits was greatly reduced, and partly as late summer and early fall, awaiting further in- a consequence, growth of retail deposits was formation on the course of the economy. During much stronger at banks than at those institutions. October and November, the foreign exchange The growth of the components of M2 also value of the dollar declined, partly in response to responded to changes in deposit rates and market a rise in foreign interest rates relative to U.S. interest rates. Yields on liquid deposits—intermarket interest rates and to investor concern est-bearing checking deposits, savings deposits, over the lack of progress in reducing the U.S. and money market deposit accounts—changed federal budget deficit and the slowing improve- very little over the year. During the first half of ment in the U.S. trade deficit. 1988, liquid retail deposits expanded at a strong In late fall, incoming data suggested that pre- pace, largely reflecting increases in their relative vious monetary restraint had not been sufficient attractiveness stemming from declines in market to relieve the potential for higher inflation, and interest rates and, to a lesser extent, in rates on the Committee resumed tightening reserve con- small time deposits. Their growth slowed markditions in a series of moves beginning in Novem- edly over the last half of 1988, following the ber and extending into the new year. As a result reversal in the pattern of interest rate moveof these measures, short-term market interest ments. Growth in small-denomination time derates rose. In contrast, bond yields continued to posits was particularly robust throughout 1988. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report to the Congress 117 3. Growth of money and debt1 Percentage changes Debt of domestic Period Ml M2 M3 nonfinancial sectors Fourth quarter to fourth quarter 1979 7.7 8.2 10.4 12.3 1980 7.4 9.0 9.6 9.6 1981 5.2 (2.5)2 9.3 12.3 10.0 1982 8.7 9.1 9.9 9.0 1983 10.2 12.1 9.8 11.3 1984 5.3 7.7 10.5 14.2 1985 12.0 (13.0)3 8.9 7.7 13.2 1986 15.6 9.3 9.1 13.3 1987 6.4 4.2 5.7 9.8 1988 4.3 5.3 6.2 8.7 Quarterly growth rates (annual rates) 1988: 1 3.2 6.2 6.8 8.2 2 6.4 6.9 7.2 8.7 3 5.2 3.8 5.5 8.6 4 2.4 3.8 4.9 8.4 1. Ml, M2, and M3 incorporate effects of benchmark and seasonal 3. Ml figure in parentheses is the annualized growth rate from the adjustment revisions made in February 1989. second to the fourth quarter of 1985. 2. Ml figure in parentheses is adjusted for shifts to NOW accounts in 1981. Expansion in the early months of the year may years, the heavy use of Federal Home Loan have resulted, in part, from shifts in household Bank advances by thrift institutions—which are investment preferences away from stocks toward not included in M3—has had a moderating effect the safety of these savings instruments. Later, on M3 growth. rising yields on small time deposits relative to At 4.3 percent, Ml growth last year was down those on more liquid deposits led households to more than 2 percentage points from 1987. shift funds from liquid deposits to small-denom- Growth of interest-bearing checking accounts ination time deposit accounts. moderated, while demand deposits continued M3 grew 6.2 percent last year, placing it running off. As in recent years, the growth of Ml slightly above the midpoint of its target range of displayed great sensitivity to changes in market 4 to 8 percent. This increase from a 5.8 percent rates of interest. Households shifted savings balgrowth in 1987 reflected a modest pickup in the ances between NOW accounts and those M2 issuance of managed liabilities in M3 to fund components, such as small time deposits, whose credit expansion at banks and thrift institutions. yields responded to increases in market rates M3 followed a trajectory near the upper end of its much more quickly than those on NOW actarget range in the first half of 1988, but moder- counts. Because substitutions of this type are ated thereafter, in association with slowing credit internalized within M2, M2 has displayed less growth at depository institutions. For the year, sensitivity to interest rates than has Ml in this large time deposits and other managed liabilities decade. Demand deposits, the other highly interincluded in M3 but not in M2 grew rapidly, as est-sensitive component of Ml, again declined in inflows into M2-type deposits were insufficient 1988, partly reflecting increases in their opportufor banks and thrift institutions to finance their nity costs and declines in compensating baldesired pace of asset expansion. This was partic- ances. The amount of such balances that busiularly true in the second half of the year, when nesses must hold in these non-interest-bearing M2 growth moderated. To some extent, M3 accounts to compensate banks for services falls growth last year was bolstered compared with when interest rates rise. 1987 by a greater reliance by banks on managed The debt of domestic nonfinancial sectors exliabilities included in M3 than on nonmoney panded nearly 83A percent during 1988, down stock instruments, such as bank borrowings from from 9 percent in 1987, placing it near the midoverseas branches. In contrast, as in recent point of the Committee's monitoring range of 7 to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

118 Federal Reserve Bulletin • March 1989 11 percent. Although debt expansion was well which have an average life of roughly ten years, below the pace of the mid-1980s, it still exceeded and yields on ten-year Treasury notes did not nominal GNP growth. Federal debt grew margin- change appreciably over 1988, which also implies ally faster last year than in 1987. Expansion in that the mortgage markets continued functioning nonfederal debt moderated, as state and local well despite the problems of many savings and governments trimmed debt issuance and as loan associations. households expanded their mortgage debt at a In contrast to the thrift industry, preliminary less robust pace in response to higher mortgage data indicate that U.S. commercial bank profits rates. Growth of business debt picked up a bit were reasonably strong in 1988, even after abfrom the 1987 pace, with short-term debt growing stracting from the one-time jump in earnings in faster than long-term debt. Corporate borrowing the fourth quarter associated with the resumption was particularly strong, reflecting increased ex- of Brazilian debt payments. Moreover, most ternal financing needs for capital investments and large money-center banks with a significant for mergers, buyouts, and stock repurchases. amount of loans to developing countries have continued to build capital, which provides a Other Financial Developments cushion against default losses. Giving added impetus to efforts to raise equity was the agreement Although the economy continued to grow at a by bank supervisory authorities of major indusstrong pace last year and the financial markets trial countries to set more stringent, risk-based recovered from their skittishness following the standards of capital adequacy. These standards, stock market break of 1987, financial develop- to be fully phased in by 1992, place a greater ments in certain markets and sectors warranted emphasis on equity capital, take into account the the attention of policymakers. Of particular note off-balance-sheet activities of banks, and provide were the worsening condition of the thrift indus- a more uniform regulatory treatment of banks try, the need to achieve sounder capitalization of based in different countries. commercial banking organizations, and the rising As in 1987, banks lent considerable sums to indebtedness of businesses involved in restruc- finance mergers and leveraged buyouts. Alturing activity. though banks have reported that these loans have As the year wore on, the dimensions of the had a lower rate of loss than all other business problems facing the thrift industry became loans combined, and although LBO borrowers clearer. Although industry losses eased in the typically obtain some insurance against higher third quarter from their record levels in the first loan rates, concern remains about bank exposure half of 1988, this development appears largely to to losses in the event of an adverse turn in have reflected FSLIC-assistance transactions business conditions. For this reason, the Federal during the third quarter, rather than a significant Reserve is closely monitoring developments in underlying improvement in earnings. this area and has just revised its bank examina- Despite the turmoil in the thrift industry, there tion guidelines to ensure that member bank loans has been no noticeable disruption of mortgage used to finance buyouts and other highly leveractivity. In part, the development of a deep aged corporate restructurings meet prudent secondary mortgage market has separated the credit standards. origination of loans from the need to fund them. Leveraged buyouts and other mergers and For this reason, the base of mortgage credit has restructurings led to a record pace of net equity broadened in recent years, making the provision retirements by nonfinancial corporations in 1988. of mortgages far less dependent on the condition Despite the large volume of this activity in recent of any one type of financial institution or on the years, the overall corporate debt-to-equity ratio regional supply of loanable funds. During the is not out of line with observations since the early 1980s, the share of home mortgage credit held in 1970s, reflecting increased market valuation of securitized form has increased from about 10 equities since the early 1980s. Much of the recent percent to more than one-third. The spread be- financial restructuring has been a response to tween interest rates on fixed-rate mortgages, fundamental economic factors; it may impose a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report to the Congress 119 discipline on corporate management, which in equity is motivated by simple tax-saving considturn can stimulate efforts to improve productiv- erations, such as the full deduction for interest ity. Nevertheless, heavy commitments of cash payments and the double taxation of dividends. flow to service debt reduce a firm's ability to For these reasons, reforming the corporate tax cope with stresses or industry-specific shocks. system should be a component of public policy in To some extent, the substitution of debt for addressing this difficult issue. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

120 Trends in Banking Structure since the Mid-1970s Dean F. Amel, Division of Research and Statis- causes and significance of these developments. tics, and Michael J. Jacowski, Division of Bank- The first section of this article discusses the ing Supervision and Regulation, prepared this causes of the major structural changes that have article. Extensive technical support was provided occurred in banking over the past decade. The by Steven R. Schacht, with assistance from later sections analyze data describing these Kevin Wilson and Steve Bumbaugh. changes at the national, regional, state, and local levels. The structure of the American banking system has changed significantly since the mid-1970s. CAUSES OF RECENT CHANGES Over the period from 1977 to 1987, the number of IN BANKING STRUCTURE banking organizations has declined considerably, while the share of banking assets controlled by Recent changes in banking structure have been the largest banking organizations has increased made possible by two primary developments: (1) sharply. At the same time, banks have expanded recently enacted legislation has allowed banking beyond their traditional geographic borders; dif- organizations to expand geographically; (2) legferences between commercial banks and non- islative and regulatory changes have facilitated bank financial institutions have diminished; and mergers and acquisitions among banking organithe number of bank mergers and acquisitions has zations located in the same geographic area. soared. The factors responsible for these developments are still at work and will likely lead to Legislation Affecting continued rapid change in banking structure. Geographic Expansion by Banks Recent structural change in the banking industry is of interest for at least three reasons. First, Legislation relaxing constraints on the geochanges in costs attributable to changes in bank graphic expansion of banks and bank holding size may affect the operating efficiency of banks companies has come principally from the states.1 and, in turn, their profitability, and the prices, This legislation has substantially increased opquality, and convenience of the services they portunities for bank expansion both within states offer. Second, theory and empirical evidence and across state lines. The legislation itself has suggest that changes in banking structure and been spurred by a number of forces, including entry conditions may affect the degree of compe- technological changes making it easier to make tition for financial services. As in nonfinancial loans and gather deposits from distant customindustries, the degree of competition in banking ers, the attempts of regulators to arrange takealso influences profitability and the prices of overs of an increasing number of failing and services offered by firms. Finally, concern over troubled banks, efforts by state authorities and potential changes in the structure of the banking industry historically has stimulated debate over the consequences of increases in aggregate con- 1. The only recent federal legislation affecting the geocentration of economic resources in banking. graphic expansion of banks was the Depository Institutions Because of the extensive recent changes in Amendments of 1982 (the "Garn-St Germain Act"). This act permitted a limited amount of interstate banking by allowing banking structure and the important issues that acquisitions of large failing banks by out-of-state banking such changes raise, it is timely to examine the organizations. So far, it has been used rarely. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

121 local business and community groups seeking to or by multibank holding company acquisition or attract capital into a state, and the desires of the expansion. Since 1970, the number of states that banking industry itself. reduced branching restrictions has grown markedly, The states that have passed legislation allowing rising from 6 during the 1970s to 22 during the 1980s. increased intrastate and interstate geographic ex- As a result, 35 states currently allow unlimited pansion of banking organizations in the 1970s and statewide branching or statewide expansion through 1980s are listed in the box. As indicated, intrastate acquisition of existing banks. Eleven states allow expansion can occur either through bank branching only limited branching, but two of these have passed BROADENING THE ABILITY OF BANKS TO EXPAND GEOGRAPHICALLY Intrastate and interstate expansion State branching laws The following tabulation lists the states that changed laws to The listing below shows the current distribution of permit banks to expand geographically by various methods. It branching laws by state. As indicated, two of the vividly shows the increases in the past two decades in the states that now have only limited branching will power of banks to expand. allow statewide branching in the 1990s. Intrastate expansion Interstate Statewide Limited Unit Decade Bank Multibank banking branching branching banking holding branching companies Iowa Georgia Maine Alabama1 Arkansas2 Colorado Maine Michigan Alaska Iowa Illinois New Jersey New York Arizona Kentucky Montana New York California Louisiana Wyoming Ohio Connecticut Minnesota Virginia Delaware Missouri Florida1 New Mexico Alabama Arkansas All except Georgia1 Pennsylvania2 Connecticut Illinois five states.3 Hawaii Tennessee Florida Indiana Idaho Texas Georgia Kansas Indiana1 Wisconsin Indiana Kentucky Kansas1 Kansas Louisiana Massachusetts Nebraska Maine Michigan Oklahoma Maryland Minnesota Pennsylvania Massachusetts Mississippi Washington Michigan Nebraska West Virginia Mississippi1,2 Nebraska New Hampshire Nevada North Dakota New Hampshire Ohio New Jersey Oklahoma New York Oregon North Carolina Pennsylvania North Dakota1 Tennessee Texas Ohio Utah Oklahoma1 Washington Oregon West Virginia Rhode Island South Carolina South Dakota Utah Vermont Virginia Washington West Virginia 1. Statewide branching by merger. 3. The five are Hawaii, Iowa, Kansas, Montana, and North Dakota. 2. These states will permit statewide branching in the future: Arkansas in 1999; Mississippi in 1989; and Pennsylvania in 1990. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

122 Federal Reserve Bulletin • March 1989 legislation that will permit statewide branching in ences between commercial banks and nonbank the future. Only four states remain unit banking financial firms. states, allowing no branching. In applying antitrust laws to the banking indus- The easing of restrictions on the intrastate try, courts have traditionally defined banking expansion of multibank holding companies per- markets to include only banks from local geomits banking organizations to expand statewide graphic markets. This approach, which excluded by chartering separate banks under one holding nonbank financial firms from banking markets, company. Thus, expansion through multibank reflected concern over the limited number of holding companies can be accomplished even in institutions that provided financial services to states where branching is limited or prohibited. consumers and small businesses, and the fact The number of states that liberalized constraints that banks were the only institutions that offered on multibank holding company expansion grew such unique and widely used products as demand from 3 in the 1970s to 11 in this decade. Missis- deposits and commercial loans. Consequently, sippi is the only state that has not enacted a law antitrust laws generally deterred large instituallowing statewide operation of multibank hold- tions in the same local area from merging and ing companies. Since Mississippi allows state- held intact the basic structure of the banking wide branching, however, this restriction on industry. holding companies does not limit geographic Legislation allowing nonbank depository instiexpansion. tutions to compete more directly with banks has The passage of laws allowing interstate bank- altered the effect of antitrust laws. In 1980 and ing has had an even more dramatic effect on 1982, Congress expanded the investment powers banking structure than has the widespread liber- of thrift institutions and also permitted them to alization of intrastate banking laws. The McFad- offer transactions accounts that are functionally den Act (1927) and Section 3(d) (the "Douglas equivalent to demand deposits. These changes Amendment") of the Bank Holding Company allowed savings and loans and savings banks to Act of 1956 limit the expansion of national banks offer many of the products that traditionally had by making them subject to state limitations on been available only from banks. As these instigeographic expansion. Since the 1970s, all but tutions have taken advantage of the new powers, five states have passed laws permitting the acqui- the composition of their balance sheets has besition of state-chartered banks by out-of-state come more like that of banks, although substanbanking organizations. Given the application of tial differences remain. federal laws, these revised state laws also open Federal and state legislation also has reduced federally chartered banks to acquisition by out- the differences between banks and various nonof-state bank holding companies. With the ex- depository financial firms. At the federal level, ception of one passed in Maine in 1975, all state legislation phased out interest rate ceilings on laws governing interstate banking have been en- most bank accounts beginning in 1980 and peracted since 1982. Although a majority of state mitted interest-bearing transactions accounts laws still limit entry to banking organizations throughout the country. In 1982, banks were from nearby states, some states are beginning to allowed to issue insured money market deposit permit entry on a nationwide basis. accounts. These changes came in response to high inflation and interest rates in the late 1970s and the subsequent movement of funds out of the Legislative Changes Affecting banking system. They allowed banks to offer Local Market Structure deposit interest rates that were competitive with those of money market mutual funds, which were Changes in the structure of the banking industry then growing rapidly. At the state level, legislaat the local level have historically been limited by tion was passed that went beyond federal laws in antitrust laws. However, during the 1980s the expanding the range of activities open to banks implementation of these laws changed with the and other financial institutions. Some states, for example, granted banks broader securities powpassage of legislation that reduced the differ- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Trends in Banking Structure since the Mid-1970s 123 ers and others permitted banks to offer real estate increases in the perceived size of geographic or insurance services that even today are not markets, or the desire of managers to provide allowed by federal regulators. convenient service in all parts of their markets. The U.S. Department of Justice and federal Mergers and acquisitions also may reflect banks' banking agencies have responded to new banking attempts to obtain diversification benefits that legislation in part by modifying antitrust policies. stem from geographic expansion or to better As thrift institutions were granted expanded position themselves for increased competition powers, regulators began to include them, either from other financial institutions. Finally, by inwholly or partially, in local markets for banking creasing firm size, mergers and acquisitions may services. By including additional firms in a local serve the function of raising the compensation of market, the market share of each bank in that bank managers. Currently, however, no consenmarket is reduced, and thus fewer bank mergers sus exists among observers of the banking indusraise antitrust concerns. Moreover, the reduction try on the relative merits of these explanations. of differences between banks and nondepository Overall, during the 1980s, legislative and regfinancial intermediaries has prompted the Justice ulatory changes have caused banking organiza- Department to relax guidelines governing merg- tions to increase significantly their geographic ers among banking organizations. The guide- coverage and the range of products they offer. lines, which specify those acquisitions the Jus- The sections that follow discuss the structice Department likely would challenge as tural changes that accompanied these developanticompetitive because of their effect on con- ments. centration, now are more liberal for banking than they are for other industries. In the evolving competitive and regulatory environment, banking organizations have been AGGREGATE STRUCTURAL CHANGE eager to take advantage of the new opportunities to merge with, or acquire, other banks. The Aggregate banking structure can be measured number of bank mergers and acquisitions since either by the number of banking organizations or the mid-1970s has risen to a historically high by the relative size of these organizations as level.2 One reason for increased merger and reflected in the concentration of banking assets. acquisition activity may be the belief that larger size or a greater variety of products will lower Number of Banks and Banking costs or increase consumer satisfaction. Past Organizations empirical studies of bank costs have generally found little evidence linking size and efficiency, While deregulation has had a major effect on but they cannot measure possible increases in some elements of U.S. banking structure, it has consumer convenience. In addition, because de- had little effect on the number of insured comtailed cost data are available mainly for small mercial banks.3 Between 1976 and 1987, the banks and for only a few large banking organiza- number of banks declined 4 percent, from 14,399 tions, most cost studies have focused on small to 13,753 (table 1). The number of commercial banks. banks has declined at a faster pace in the past Banks also may merge and acquire for reasons two years, possibly foreshadowing a longer-term other than perceived cost savings. They may do trend; but, as recently as 1985, there were so in response to acquisitions by rival firms, slightly more banks than in 1976. 2. The number of bank mergers grew gradually from 135 in 3. The number of banking organizations is smaller than the 1976 to 188 in 1980. It then jumped 91 percent to 359 in 1981, number of commercial banks because banks that are part of marking the beginning of a period of accelerated consolida- the same holding company are consolidated to determine the tion. Bank mergers totaled 422 in 1982, 432 in 1983, and 553 number of discrete banking organizations. Banks owned by in 1984, before falling to 472 in 1985, the most recent year for the same holding company are counted separately in deterwhich data are available. mining the number of commercial banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

124 Federal Reserve Bulletin • March 1989 1. Changes in the number of insured commercial banks, 1977-87 Type of change 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Number of banks, beginning of period — 14,399 14,398 14,379 14,351 14,422 14,402 14,438 14,462 14,513 14,434 14,235 New banks organized 154 148 204 206 199 316 366 400 318 248 212 Banks that ceased operations (1) 0 (2) 0 0 (1) 0 0 (26) (32) (207) Consolidations and absorptions Banks converted into branches (156) (154) (217) (117) (196) (247) (300) (345) (309) (301) (528) Other (1) (14) (16) (16) (18) (34) (64) (37) (75) (14) n.a. Voluntary liquidations 0 0 0 (3) 0 0 (1) (2) (24) (132) n.a. Other changes 3 1 3 1 (5) 2 23 35 37 32 41 Number of banks, end of period 14,398 14,379 14,351 14,422 14,402 14,438 14,462 14,513 14,434 14,235 13,753 Net increase (decrease) (1) (19) (28) 71 (20) 36 24 51 (79) (199) (482) MEMO: Failures of FDIC-insured banks ... 6 7 10 10 10 42 48 79 120 138 184 n.a. not available The relative stability in the number of banks In contrast to the relatively stable number of resulted from a robust pace of formation of new commercial banks, the number of banking orgabanks that largely offset an otherwise strong nizations has declined more than 17 percent since movement within the banking industry toward 1976, or more than four times the rate of decline greater consolidation. From 1976 through 1987, for banks (table 2). As used here, the term nearly 2,800 banks were chartered—an average "banking organization" includes all bank holding of 252 per year. The number of new banks companies and independent banks, that is, banks formed each year trended upward until 1984, not affiliated with holding companies. when it peaked at 400. Most of the decline in the number of banking Exit by banks from the industry typically oc- organizations came about through acquisitions curred either because of failures or through by multibank holding companies. Such acquisimergers and subsequent conversions to tions enabled these companies to double the branches. More than four-fifths of the banks that number of banks under their control from 2,296 left the industry since 1976 were converted into in 1976 to 4,465 in 1987 and contributed to a branches of other banks. Bank failures, however, dramatic decrease of 59 percent in the number of soared during the mid-1980s to reach 184 in independent banks (table 2).6 These acquisitions 1987.4 Although many factors contributed to also significantly changed the distribution of asthese failures, most involved small banks whose sets among types of banking organizations. In loan portfolios were concentrated in weak sectors of the economy, such as agriculture or tion, but only purchases those assets whose value has not energy. Of the 654 banks that have failed since been impaired. Ownership of the lower-quality assets usually 1976, only 41 percent actually ceased operations. falls to the FDIC. Most failed banks were acquired by other insti- 6. The decrease in the number of independent banks also tutions as part of purchase-and-assumption reflects growth of one-bank holding companies that resulted from independent banks converting to a holding company transactions under the supervision of the Federal structure. Such conversions are frequently undertaken to Deposit Insurance Corporation.5 broaden the range of services that a banking organization can provide or to enlarge the geographic region that it may serve through its nonbank subsidiaries. Also, holding companies sometimes are used to provide leverage capacity beyond that 4. In 1988, the number of bank failures rose to 200. available to a bank or to reduce tax payments. Despite these 5. Under a purchase and assumption, the FDIC arranges factors, conversions of independent banks to one-bank holdthe sale of a failed institution as a means of protecting ing companies have no immediate effect on the total number depositors' funds. In such transactions the acquiring institu- or relative size of banking organizations and thus do not tion typically assumes all the liabilities of the failed institu- affect the structure of the banking industry. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Trends in Banking Structure since the Mid-1970s 125 2. Distribution of banking organizations, by type of organization1 1976 1987 TTyyppee ooff oorrggaanniizzaattiioonn Number Percent Assets2 Percent Av S e i r z a e ge Number Percent Assets2 Percent Av S e i r z a e ge z o a rg t o i a f o n n i s - to o t f a l ( d b o i l l o l l a i f o r n s) s a t s o o s t e f a t l s ( d m o i l o l l l a f i o rs n ) s z o a rg t o i a f o n n i s - to o t f a l ( d b o i l l o l l a i f o r n s) s a t s o o s t e f a t l s ( d m o i l l o l l a f i o rs n ) s Independent3 10,608 85.5 303.7 30.3 28.6 4,375 42.6 233.7 9.0 53.4 One-bank holding companies 1,495 12.1 341.5 34.0 228.4 4,919 47.9 537.0 20.7 109.2 Multibank holding companies 301 2.4 358.5 35.7 1,191.0 985 9.6 1,826.7 70.3 1,854.5 Total 12,404 100.0 1,003.7 100.0 80.9 10,279 100.0 2,597.3 100.0 252.7 MEMO: banks in multibank holding companies 2,296 .... 358.5 .... 156.1 4,465 .... 1,826.7 .... 409.1 1. In this table and those that follow, figures may not add to totals 2. Domestic banking assets, because of rounding. 3. Not affiliated with a holding company. 1976, insured domestic banking assets were dis- over this period by an increase in total banking tributed almost evenly among multibank holding assets, real growth in the economy, and the companies, one-bank holding companies, and inflationary conditions of the time, data for 1987 independent banks, with each group controlling are presented in terms of both nominal asset about one-third of all banking assets (table 2). By values and values deflated by the cumulative 1987, multibank holding companies had in- change in total domestic banking assets since creased their share of assets to 70 percent; one- 1976. The adjusted data are used to indicate bank holding companies held 21 percent of total changes in the relative sizes of banking organiassets; and banks not affiliated with holding zations. companies controlled only 9 percent. Comparing adjusted data for 1976 and 1987 The emergence since the 1970s of multibank reveals that banking organizations continue to holding companies as the dominant type of orga- exhibit significant diversity in size. Small organinization has greatly affected the size distribution zations remain numerically dominant; however, of firms in the industry. Table 3 contrasts size the number of such institutions and the share of distributions for 1976 and 1987 based on domes- assets they control has declined. The only size tic banking assets. Because the average size of category to show an increase in either the numbanking organizations was affected significantly ber of companies or their asset share is that with 3. Size distribution of banking organizations in nominal and adjusted assets1 1976 1987 Actual Adjusted2 AAsssseett ssiizzee ccaatteeggoorryy NNuummbbeerr AAsssseettss ((mmiilllliioonnss ooff ddoollllaarrss)) ooff Percent ((bbiilllliioonnss Percent Number Assets Number Assets oorrggaannii-- ooff of (billions of (billions zzaattiioonnss ddoollllaarrss)) organi- Percent of Percent organi- Percent of Percent zations dollars) zations dollars) Less than 50 10,542 85.0 167.7 16.7 6,389 62.2 152.0 5.9 8,902 86.6 133.7 13.3 51-100 943 7.6 64.0 6.4 2,071 20.1 143.9 5.5 719 7.0 48.5 4.8 101-1,000 767 6.2 207.7 20.7 1,557 15.1 358.9 13.8 511 5.0 142.5 14.2 1,001-5,000 130 1.0 265.2 26.4 173 1.7 401.9 15.5 108 1.1 242.3 24.1 5,001-25,000 18 .1 203.1 20.2 72 .7 822.1 31.7 37 .4 374.0 37.3 Greater than 25,000. 4 * 96.0 9.6 17 .2 718.5 27.7 2 * 62.7 6.2 Total 12,404 100.0 1,003.7 100.0 10,279 100.0 2,597.3 100.0 10,279 100.0 1,003.7 100.0 1. Based on domestic banking assets. 2. Assets were deflated by the change in total domestic banking assets between 1976 and 1987. •Less than 0.05. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

126 Federal Reserve Bulletin • March 1989 Distribution of domestic banking assets of insured belonging to the top 1 percent had grown to 62 commercial banking organizations, 1976 and 1987 percent. In comparison, the proportion of assets accounted for by organizations in the 90th 1976 1987 through the 98th percentiles—institutions with Size class Domestic Domestic assets between $166 million and $2 billion— percentile banking Percent of banking Percent of declined from 26 percent to 23 percent. The share assets assets total total (billions of (billions of controlled by the group of banking organizations dollars) dollars) below the 90th percentile, which comprises those 99 533.9 53.2 1.603.2 61.7 with domestic banking assets of less than $166 90-98.. 265.0 26.3 597.1 23.0 80-89 . 63.9 6.4 122.9 4.7 million as of year-end 1987, fell from 21 percent 70-79.. 39.2 3.9 76.4 2.9 to 15 percent. 60-69 . 28.6 2.9 55.8 2.2 50-59.. 22.0 2.2 42.7 1.6 Analyzing changes in the share of domestic 40-49 . 17.0 1.7 32.7 1.3 30-39.. 13.1 1.3 25.5 1.0 banking assets held by the 100 largest banking 20-29.. 9.9 1.0 19.1 .7 10-19.. 7.1 .7 14.0 .5 organizations helps to indicate more clearly 0-9.... 4.1 .4 7.9 .3 where the greatest amount of concentration Total 1,003.7 100.0 2.597.3 100.0 within the industry has occurred (table 5). The composition of the top 100 corresponds closely MEMO: 0-89... 204.8 20.5 397.0 15.3 to that of the top 1 percent of all banking organizations discussed above. The 100 largest orgaassets between $5 billion and $25 billion. To a nizations by and large are multibank holding large extent the increase in this size category companies, each of which has combined domesreflects the recent rise of large regional and tic banking assets exceeding $2 billion. "superregional" organizations, the vast majority The growth in assets controlled by the 100 of which are multibank holding companies.7 largest banking organizations varied significantly Many of these firms have pursued particularly depending on the size of the organization. As aggressive acquisition strategies that were made table 5 indicates, the overall share of total U.S. possible by the dismantling of barriers to in- banking assets held by the 100 largest institutions trastate and interstate banking. Such acquisitions grew from 50 percent to 62 percent between 1977 have reduced the number of small companies and and 1987. However, little of this increase was given rise to larger organizations. Many regional attributable to the largest institutions. The 10 and superregional institutions also have been largest organizations in that group actually sufable to sustain growth rates in excess of industry fered a decline in their percentage share as loan norms in large part because of their location in problems at several money center banks and the areas of the country—especially the Northeast exclusion of New York institutions from regional and Southeast—where the economy has grown compacts enacted by several states worked relatively rapidly. 5. Shares of domestic banking assets accounted for Aggregate Concentration by the largest banking organizations of Banking Assets Percent As the size of banking organizations increased, Rank bv asset size YYeeaarr MEMO: overall asset concentration within the industry TToopp 110000 1-10 11-25 26-50 51-100 rose significantly (table 4). In 1976, assets were heavily skewed toward the largest organizations: 1987 20.2 14.6 13.5 13.2 61.5 1986 20.0 13.5 12.7 12.9 59.1 the top 1 percent of the organizations controlled 1985 20.3 12.8 12.6 12.0 57.7 53 percent of total assets. By 1987, the share 1984 20.3 12.8 10.4 11.5 55.0 1983 21.0 12.8 9.4 11.1 54.3 1982 21.8 12.4 8.8 10.6 53.6 1981 21.1 12.0 8.5 10.1 51.7 1980 21.6 11.5 8.5 9.8 51.4 7. In this article, "superregional" denotes a banking orga- 1979 21.3 11.3 8.9 9.7 51.2 1978 21.1 11.3 8.7 9.7 50.8 nization with at least $10 billion in assets that has banking 1977 21.0 11.0 8.5 9.7 50.2 subsidiaries in more than one state. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Trends in Banking Structure since the Mid-1970s 127 against an increase in their relative holdings. The 6. Distribution of assets among selected financial share of assets held by the banking organizations institutions, 1976 and 1987 ranked 11 through 25 rose from 11 percent to 15 1976 1987 percent. However, the largest increases be- MMEEMMOO:: aannnnuuaall longed to banking organizations ranked 26 TTyyppee ooff ffiinnaanncciiaall Assets Assets ggrroowwtthh iinnssttiittuuttiioonn (billions Percent (billions Percent rraattee iinn through 100, whose share of assets grew from 18 of of total of of total ppeerrcceenntt,, percent to 27 percent. Included in this group of dollars) dollars) 11997766--8877 institutions are many of the previously men- All banking tioned regional and superregional organizations organizations ... 1,004.2 58.2 2,597.0 49.8 9.0 Savings and loans ... 385.1 22.3 1,261.6 24.2 11.4 that have grown rapidly in recent years. Mutual savings banks 134.8 7.8 263.0 5.0 6.3 Comparisons with earlier periods and with Credit unions 43.3 2.5 181.8 3.5 13.9 data from other economic sectors show that Finance companies.. 111.1 6.4 452.1 8.7 13.6 U.S. branches and concentration in the banking industry over the agencies of foreign banks ... 45.7 2.7 462.7 8.9 23.4 1976-87 period appears to have increased significantly. The percentage of total domestic banking Total 1,724.2 100.0 5,218.2 100.0 10.6 assets controlled by the top 1 percent of banking 1. Domestic banking assets. organizations between 1960 and 1975 changed less than 1 percent; from 1976 to 1987, however, less of which of these asset measures is used, the share increased 9 percent. By comparison, however, the overall trend toward sharply higher recent evidence from the manufacturing sector as aggregate concentration in commercial banking a whole shows virtually no change in the level of since the mid-1970s remains significant. aggregate concentration.8 At least two factors, however, may mitigate The use of domestic banking assets to measure the significance of increased aggregate concenfirm size may understate the degree of concen- tration. First, banks and other financial firms tration that exists within the industry. If all now often compete more directly, thereby reducassets, domestic and foreign, of U.S. chartered ing the ability of any one banking organization or banks are counted, the share of assets controlled group of organizations to dominate a market for by the top 1 percent of banking organizations is deposits, loans, or other financial services. Sec- 67 percent rather than 62 percent. The difference ond, since the mid-1970s, assets held by domesreflects the large foreign loan exposures of tic banking organizations have declined relative money center institutions. If off-balance-sheet to those of other financial institutions that have a assets and assets of nonbank subsidiaries of bank large percentage of their assets in loans. Table 6 holding companies were also added, the level of shows the relatively slow growth of aggregate concentration would increase even further, since bank assets over the 1976-87 period compared few small organizations engage in transactions with those of savings and loans, credit unions, that generate off-balance-sheet assets or have finance companies, and foreign banking organisignificant amounts of nonbank assets.9 Regard- zations. The rapid growth of assets at U.S. branches of foreign banks suggests that competition has increased between American banks 8. Aggregate concentration in the manufacturing sector and banks chartered in foreign countries. Only typically is expressed in terms of share of value added by the mutual savings banks have grown more slowly largest firms. Over the 1962-82 period, the share of value added by the 100 largest firms increased only 1 percent. The than domestic banks. As a result, the share of share of value added by the 200 largest firms rose just 3 financial institution assets held by domestic percent over the same period. 9. Data on off-balance-sheet assets are reported by multibank holding companies and one-bank holding companies with more than $150 million in total assets. The data do not foreign exchange contracts totaled about $3 trillion, of which encompass all of the types of off-balance-sheet activity in the 50 largest bank holding companies accounted for $2.8 which banks now engage; however, even available data give trillion. Similarly, nonbank subsidiary assets of the 50 largest some indication of the extent to which such assets are heavily bank holding companies amounted to $134 billion as of concentrated among the largest banking organizations. As of year-end 1987, compared with a total of $149 billion for all year-end 1987, for example, loan commitments, standby multibank holding companies and one-bank holding compaletters of credit, commercial letters of credit, swaps, and nies with more than $150 million in assets. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

128 Federal Reserve Bulletin • March 1989 banking organizations fell from 58 percent in One measure of the effect that laws permitting 1976 to 50 percent in 1987.10 The decline in part interstate banking have had on bank structure is reflects the shift of prime corporate customers the number of interstate mergers of banking from the bank loan market to other credit mar- organizations that has occurred during the 1980s. kets, such as commercial paper.11 Regardless of Before 1983 no merger of banking organizations the reasons for the decline, however, the dimin- in which both of the firms had deposits of more ished role of banking organizations within the than $1 billion had ever taken place across state financial services sector of the economy may lines. Since then, there have been 34 such merglessen the significance of higher levels of aggre- ers. Collectively, interstate mergers of banking gate concentration in banking. organizations with more than $1 billion in assets account for 47 percent of all mergers of that size that were consummated over the 1980-87 period. REGIONAL STRUCTURAL CHANGE The number of interstate mergers rose dramatically following the Supreme Court's 1985 deci- Changes in banking structure at the regional level sion affirming the constitutionality of regional have had important effects on the aggregate interstate compacts. structure of banking. Regional banking structure The extent of interstate banking can also be grew in importance with the lifting of state re- gauged from the volume of banking assets in a strictions on interstate banking. However, even state controlled by out-of-state organizations. In before states began to liberalize interstate bank- 20 states, at least 20 percent of banking assets are ing laws, banking organizations were able to owned by out-of-state institutions (table 7). In circumvent restrictions on geographic expansion Arizona, Connecticut, Idaho, Maine, South to a limited extent. A few companies were al- Carolina, and Washington, more than 45 percent lowed by the Bank Holding Company Act of 1956 of domestic banking assets are controlled by to continue operating in states in which they out-of-state firms.12 were already present. Some banking organiza- The adoption of laws permitting expansion tions also expanded nationwide by establishing across state borders began slowly. Indeed, even loan production offices and nonbank subsidiar- after Maine acted, interstate banking was not ies, such as consumer finance and mortgage addressed legislatively in other states until 1982. banking companies. In the past decade, an array Since then, the number of states that permit of technological advances, including electronic interstate banking has grown steadily and, at funds transfers, loan sales, and automated teller year-end 1987, stood at 45. machine transactions, has provided banking or- In general, states that passed legislation later ganizations with still other means of extending in the period adopted more liberal forms of their reach beyond state borders. However, none interstate banking legislation. Initially, several of these forms of circumventing restrictions on states, including South Dakota and Delaware, interstate banking broadened the ability of banks passed relatively restrictive laws that permitted to expand geographically to the extent that the out-of-state banks to acquire or establish only passage of interstate banking laws did. "limited purpose" banks that specialized in certain well-defined activities, such as credit card processing. Later, many states adopted laws 10. Comparing balance sheets across firm types is proble- permitting entry on a reciprocal basis to fullmatic because balance sheets of different types of financial service banks from out of state; that is, outinstitutions differ in many respects. For example, if size were measured by equity rather than by assets, or if off-balancesheet items were included in size calculations, the shares listed in table 6 would be substantially different. However, use of different measures would not change the conclusion 12. Although only 34 percent of domestic banking assets in that banks were smaller relative to other financial institutions Texas are held by out-of-state organizations, Texas ranks in 1987 than they were in 1976. first in the absolute level of assets controlled by outside firms. 11. Between 1976 and 1987, commercial paper outstanding This position results in part from acquisitions of failing banks increased from $52.0 billion to $373.6 billion, for a compound under the Garn-St Germain Act rather than solely from annual growth rate of 19.6 percent. acquisitions under state legislation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Trends in Banking Structure since the Mid-1970s 129 7. State banking assets owned by out-of-state organizations1 Assets held Assets held Total banking by out-of-state Total banking by out-of-state States2 assets (billions organizations Percent of States2 assets (billions organizations Percent of total total of dollars) (billions of of dollars) (billions of dollars) dollars) Texas 174.281.1 59.871.7 34.4 Iowa 29,985.6 2.778.2 9.3 Florida 112.148.0 39.202.8 35.0 Montana 7,003.6 2.679.5 38.3 Connecticut 36.829.5 25,607.2 69.5 Colorado 24,421.8 2.450.6 10.0 Washington 31.492.6 24,818.0 78.8 North Dakota.. 6,821.5 2,140.8 31.4 Pennsylvania ., 144,129.3 19.153.7 13.3 Michigan 79,091.0 2,128.8 2.7 Arizona 27,421.0 16.176.0 59.0 Oklahoma 26.349.5 1,439.1 5.5 Georgia 54.872.7 14.061.8 25.6 Nebraska 16.737.6 1.417.3 8.5 Indiana 50.178.2 13,677.7 27.3 Delaware 52.234.8 1,139.5 2.2 Tennessee 41,299.5 12.779.1 30.9 New Mexico... 9,815.5 867.2 8.8 Kentucky 34,806.9 12.560.0 36.1 Alaska 4,640.8 764.8 16.5 Maryland 46.349.4 12.013.1 25.9 Wyoming 4,151.0 463.4 11.2 New York 409.259.2 11,292.6 2.8 Minnesota 52.386.3 419.3 Illinois 157.133.1 9,743.1 6.2 Louisiana 34.955.7 284.3 South Carolina 19.065.3 9.086.6 47.7 Missouri 52.294.4 100.9 Oregon 19.408.0 8.339.4 43.0 West Virginia.. 15.505.9 78.5 New Jersey 79,916.7 7,748.0 9.7 California 249,765.3 76.8 District of Alabama 31.498.7 33.6 Columbia 15,658.3 6,797.9 43.4 North Carolina. 59,849.0 22.6 Ohio 94,682.2 6.230.7 6.6 Kansas 24.548.5 9.5 Wisconsin 40.355.7 6.207.7 15.4 Massachusetts . 94,612.4 5.1 Maine 7,189.6 6,198.9 86.2 Arkansas 17.961.8 0.0 0 N I R V d i e h a r v o g h a d i o n d e i a a I sland . 5 1 1 7 8 1 3 , . . . 2 6 2 2 1 3 5 6 3 0 9 0 . . . . 5 5 1 8 4 3 3 3 . . . . 9 6 5 2 0 1 6 8 9 4 0 6 . . . . 5 3 4 8 4 3 3 5 6 1 5 . . . . 7 6 2 1 M N V H e e a i r w s w m s a is H o i s i n i a p t m pi p shire 1 1 1 5 0 8 1 , , . . 0 1 7 8 7 0 2 6 6 6 6 4 . . . . 2 6 9 6 0 0 0 0 . . . .0 0 0 0 0 0 0 0 Utah 10.548.2 3,173.4 30.1 South Dakota.. 20,073.2 2,857.4 14.2 Total 2,657,866.5 362,267.6 13.6 1. Data shown are as of June 30, 1988; however, acquisitions 2. Ranked in descending order on the basis of assets held by outrecorded through November 1988 of full-service banks are included. of-state organizations. *Less than 0.1 percent. of-state banks were allowed to enter a state and the most popular form of interstate banking legoffer a complete range of banking services pro- islation. When specifically crafted to include only vided that a reciprocal arrangement was ex- contiguous states or states located in the same tended to that state's own banks. Such laws, region, reciprocal laws have resulted in so-called which have been passed by 33 states including regional compacts. those with the most banking assets, are currently The formation of regional compacts has had a 8. Geographic distribution of domestic banking assets, 1987 PPeerrcceenntt cchhaannggee iinn Share of assets held by the 10 largest RReeggiioonn11 NN bb uu aa mm nn bb kk ee iinn rr gg oo ff BBaannkkiinngg aasssseettss PPeerrcceenntt cchhaannggee iinn nnuummbbeerr ooff organizations (in percent) ((bbiilllliioonnss ooff ddoollllaarrss)) aasssseettss 11997766--8877 oorrggaanniizzaattiioonnss oorrggaanniizzaattiioonnss 11997766--8877 1976 1987 Northeast 198 155.3 306.5 -33.1 51.9 77.8 Middle-Atlantic 484 695.3 234.3 -34.3 58.5 58.1 Southeast 1,548 459.8 117.3 -28.5 18.3 43.5 Midwest 3,875 604.6 143.8 -26.4 24.5 29.4 Southwest 3,450 335.4 132.2 -1.8 24.0 35.9 West 652 349.2 171.4 52.3 75.1 70.4 1. The regions are delineated as follows: Midwest = Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Northeast = Connecticut, Maine, Massachusetts, New Hampshire, Missouri, Montana, North Dakota, Ohio, South Dakota, and Wiscon- Rhode Island, and Vermont; Middle-Atlantic = Delaware, New sin; Southwest = Arkansas, Arizona, Colorado, Kansas, Louisiana, Jersey, New York, and Pennsylvania; Southeast = Alabama, District Nebraska, New Mexico, Oklahoma, Texas, and Wyoming; West = of Columbia, Florida, Georgia, Maryland, Mississippi, North Caro- Alaska, California, Hawaii, Idaho, Nevada, Oregon, Utah, and Washlina, South Carolina, Tennessee, Virginia, and West Virginia; ington. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

130 Federal Reserve Bulletin • March 1989 significant effect on the structure of the banking tage of the opportunity to expand nationwide or industry. To highlight this fact, table 8 presents just continue their recent pattern of expansion data on regional structure for 1976 and 1987.13 into nearby states. However, legislation permit- The data show that over the 1976-87 period, ting nationwide banking creates at least the pomost regions recorded substantial consolidation tential for substantial increases in concentration in terms of both declining numbers of banking by allowing more money center and superregionorganizations and rising levels of concentration al banking organizations to merge. as measured by the share of domestic banking assets accounted for by the ten largest banking organizations. Of the regions, the Northeast and STRUCTURAL CHANGE Southeast registered large declines in the number AT THE STATE LEVEL of organizations and the greatest increases in concentration. These areas pioneered interstate Changes in banking laws governing intrastate banking and include those states that formed expansion also contributed importantly between especially long-lasting and distinct compacts. It 1976 and 1987 to consolidation of the banking is within these regions that many superregional industry. As with interstate banking legislation, institutions, whose interstate mergers and acqui- state branching laws since the mid-1970s have sitions have had such a significant effect on become increasingly liberal, as evidenced by the national levels of concentration, are located. growth in the number of states that permit state- In the Midwest and Middle-Atlantic regions, wide branching. Statewide branching now exists the number of organizations also declined precip- in 34 states and the District of Columbia in itously, but changes in concentration ratios have contrast to 1976 when just 21 states permitted it. been much smaller. These changes apparently More liberal branching laws have affected reflect bank failures and the acquisition of small banking structure in several respects. Table 9 banks by a few large, multibank organizations illustrates a clear relationship between levels of within individual states. The West is the only concentration in a state and the type of branching region where the number of banking organiza- laws in thkt state. Without exception, the states tions rose, and the level of concentration de- with the highest levels of concentration permit clined. The shrinkage of assets at large banking statewide branching. Those with more restrictive organizations and a continued robust rate of bank forms of branching have substantially lower formations in California appear to be behind statewide concentration ratios.15 these developments in the West. More liberal branching laws also contributed In recent years, reciprocal legislation has in- to a proliferation of bank branches. Over the creasingly been superseded by even more liberal 1976-87 period, the number of bank branches laws that allow unconditional entry by out-of- rose from 33,027 to 46,314, in large part reflecting state banks on a national basis. Thus far, twelve the acquisition and subsequent conversion of states have adopted or established "trigger" banks to branches by multibank holding compadates for such legislation.14 It is not yet clear nies and the establishment of new branches. As whether banking organizations will take advan- the number of acquisitions leading to branch conversions rose, levels of statewide concentration also generally increased. Between 1976 and 13. Regions are defined in the table to reflect as closely as 1987, nearly four-fifths of the states experienced possible reciprocal enabling legislation adopted by the states; some increase in concentration as measured by but because the manner in which states have defined regions is not uniform, definitions of regions are to some degree the share of domestic banking assets belonging to arbitrary. Assets belonging to multibank holding companies the five largest firms. are assigned to regions based on the location of branches and subsidiary banks rather than on the location of the parent organization. 14. Notwithstanding the trend toward more liberal inter- 15. Other factors besides branching laws affect banking state banking laws, several states have either retained or concentration at the state level. For example, the size of the introduced caps on the percentage of state banking assets that state in terms of area or population clearly influences the can be held by any one banking organization. ranking of states in table 9. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Trends in Banking Structure since the Mid-1970s 131 9. State concentration ratios1 Concentration ratios MEMO: Concentration ratios MEMO: State2 (five largest firms) sin C c h e a n 19 ge 7 63 T br y a p n e c h o f State2 (five largest firms) sin C c h e a nn 1 g 9 gee 7 63 , T br y a p n e c h o f 1976 1987 ing4 1976 1987 ing4 Rhode Island 94.1 94.4 .3 S Tennessee .. 43.6 59.8 16.2 L Nevada 96.5 91.0 (5.5) S Maryland ... 63.5 58.1 (5.4) s Arizona 94.6 89.2 (5.4) S New Jersey. 32.3 57.9 25.6 s Hawaii 90.7 89.0 (1.7) s New York .. 55.9 57.8 1.9 s Oregon 85.3 88.0 2.7 S Florida 35.8 57.3 21.5 s Idaho 88.6 87.2 (1.4) S Pennsylvania 38.8 56.0 17.2 L District of Columbia .. 89.9 85.1 4.8 S Ohio 36.6 55.8 19.2 S Maine 71.7 83.1 11.4 s Texas 35.0 55.3 20.3 L North Carolina 67.4 79.7 12.2 s Missouri 43.6 53.0 9.4 L South Dakota 50.9 77.7 26.8 s Wyoming 48.2 52.4 4.2 U Connecticut 62.4 77.2 14.8 s Montana... 56.2 51.4 (4.8) U Washington 75.5 77.2 1.7 s Mississippi. 35.9 50.4 14.5 s Alaska 85.0 75.4 (9.6) s Wisconsin . 34.0 46.8 12.8 L Utah 73.5 75.0 1.5 s Louisiana.. 26.9 45.7 18.8 L South Carolina 62.3 74.5 12.2 s Illinois 43.6 44.8 1.2 U Vermont 60.5 73.3 12.8 s Kentucky 30.3 40.7 10.4 L Massachusetts 66.1 73.3 7.2 s Delaware 92.0 39.0 (53.0) s Alabama 55.0 71.2 16.2 s North Dakota. 50.2 38.7 11.5 s Virginia 52.5 68.6 16.1 s Indiana 27.1 37.5 10.4 L New Hampshire 45.7 67.7 22.0 s Nebraska 30.3 33.2 2.9 s California 77.9 66.9 (11.0) s West Virginia. 16.7 32.0 15.3 s Michigan 48.0 64.6 16.6 s Oklahoma 31.6 28.3 (3.3) S Minnesota 59.9 63.5 3.6 L Iowa 22.1 27.7 5.6 L Georgia 49.6 63.4 13.8 s Arkansas 22.5 25.3 2.8 L Colorado 57.2 62.9 5.7 u Kansas 14.1 19.3 5.2 S New Mexico 60.7 61.9 1.2 L Average. 54.7 60.9 6.2 1. Based on domestic banking assets. 3. Decreases shown in parentheses. 2. Ranked in descending order based on data as of year-end 1987. 4. L = limited, S = statewide, U = unit banking. The largest increases in statewide concentra- little effect on other Delaware banking organization occurred in South Dakota (27 percentage tions. points), New Jersey (26), New Hampshire (22), Florida (22), and Texas (20). Besides changes in intrastate branching laws, several other factors CONCENTRATION contributed to the higher concentration in these IN LOCAL BANKING MARKETS states. The dramatic rise in the level of concentration in South Dakota has been due primarily to Although the structure of the banking industry at state legislation enabling a few large out-of-state the national, regional, and state levels lately has banks to set up credit card and insurance opera- received increased attention, most interest in tions. The special nature of these operations banking structure traditionally has focused on limits the importance of the change in state local markets for banking services. These marconcentration. Expansion of multibank holding kets have typically been defined to cover relacompanies along with liberalized branching laws tively small areas, in many cases no larger than contributed to higher levels of concentration in metropolitan areas or counties. Although recent New Jersey, New Hampshire, Florida, and technological developments allowing banking ser- Texas. Of the states with decreases in concen- vices to be provided by mail, telephone, and tration, Delaware recorded the largest change: automated teller machine have led many to argue entry into that state by several out-of-state hold- that local markets as traditionally defined are ing companies that formed limited-purpose banks overly restrictive, studies of the behavior of accounted for most of this decrease. As in South individuals and small businesses suggest that the Dakota, the establishment of these firms has had market for some basic banking services contin- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

132 Federal Reserve Bulletin • March 1989 ues to be geographically limited. For this reason, 10. Average three-firm concentration ratios for in antitrust cases, courts and regulators generally urban and rural U.S. banking markets, 1976-86 continue to use local banking markets to focus on Average three-firm concentration ratio changes in the level of concentration in banking. YYeeaarr Increases in local banking concentration, it is Urban markets Rural markets believed, might reduce competition among providers of banking services. When antitrust regu- 1976 68.45 90.06 1977 67.79 89.97 lators or the courts examine competition in a 1978 67.29 89.88 1979 66.78 89.75 local banking market because a proposed merger 1980 66.39 89.65 1981 66.04 89.45 appears to raise a serious competitive issue, a 1982 65.83 89.38 great deal of information on the distribution of 1983 65.92 89.41 1984 66.34 89.44 bank customers, commuting patterns, advertis- 1985 66.71 89.47 1986 67.51 89.47 ing patterns, and other dimensions of economic integration is taken into account so that the MEMORANDA1 Number of states with geographic extent of the market can be accu- increases in the rately determined. However, in empirical analy- 1976-86 22 15 ses using a national cross-section of banking 1976-81 6 6 1981-86 33 24 markets, such detailed definitions are not feasi- Number of states with decreases in the ble. As a result, these analyses usually measure 1976-86 28 33 urban banking markets by Metropolitan Statisti- 1976-81 44 41 cal Areas (MSAs) and rural banking markets by 1981-86 17 24 non-MSA counties. For local markets defined in 1. Alaska is not included, and the District of Columbia and New these ways, market concentration can then be Jersey have no rural banking markets. Also, one state had no change in the average concentration level of its rural markets over 1976-81. measured by the percentage of market deposits held by the three largest banks in the market. The rural markets, average market concentration deaverage market concentration ratios presented creased in most states over the period. Twentyhere follow this convention.16 two states had increases in average urban market Table 10 presents the national average of concentration while 28 had decreases. Average three-firm concentration ratios for the years 1976 concentration in rural markets rose in 15 states to 1986 for all urban and rural banking markets in and fell in 33. Breaking the decade into two the United States. Contrary to the results re- five-year periods, decreases in concentration ported for aggregate concentration, average local were much more prevalent over 1976-81 than market concentration has been quite stable. For over the decade as a whole, with only six states urban markets, the average three-firm concentra- having increases in average local market concention ratio fell from 68.5 in 1976 to 65.8 in 1982, tration for urban and rural banking markets. In before reversing trend and rising to 67.5 in 1986. contrast, over the 1981-86 period, about two- Rural markets followed a similar, but even more thirds of the states saw increases in average muted, trend, with the average concentration concentration in urban banking markets, while level falling from 90.1 in 1976 to 89.4 in 1982, states were split evenly between increases and before rising to 89.5 in 1986. For both urban and decreases in concentration in rural markets. The point in time at which the trend toward lower local concentration ceases coincides with 16. The three-firm concentration ratio is commonly used in the passage of federal legislation in 1980 and in analyses of local banking markets because the number of firms included in a concentration ratio should be proportion- 1982 that allowed increased competition between ate to the size of the area being examined. In the case of local banks and other financial institutions and led to markets, including more than three firms in a concentration the easing by antitrust authorities of restrictions ratio would result in high levels of concentration in almost all markets. on local bank mergers and acquisitions. On the Local market concentration is measured using deposits other hand, increased competition for banks rather than assets because asset data are available only at the from other financial institutions as a result of firm level, while deposit data can be disaggregated by local these legislative changes should alleviate antigeographic area. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Trends in Banking Structure since the Mid-1970s 133 trust concerns about the slight upward trend vary, with the Northeast and Southeast showing since 1982 in local market concentration. The the greatest increases. Four-fifths of the states change in trend in local concentration also coin- recorded increases in concentration over the past cides with widespread adoption of interstate decade, but the extent of the increase varied banking laws. These laws increase the possibility widely. Concentration in local banking markets of entry into local banking markets by banking decreased slightly over the 1976-82 period, with organizations operating elsewhere. The potential smaller increases occurring since then. for entry does not directly affect the structure of These structural changes can be traced in large local banking markets. However, it may increase part to relaxation of legal restrictions on the competition among firms already in the market geographic expansion of banking organizations and induce such firms to set lower prices to and on the products they can offer. The enactinhibit entry. Even discounting these sources of ment of interstate banking laws in 45 of the 50 increased competition, changes in local market states and increased concentration at the state concentration are much smaller than, and often level helped bring about increases in national and in the opposite direction of, those observed at the regional concentration. These increases occurred state, regional, and national levels. in part because interstate banking laws allowed the development of fast-growing superregional and regional bank holding companies. At the CONCLUSION state level, increases in concentration can be tied to more liberal branching laws adopted in the Since the mid-1970s, the U.S. banking system past decade. has become significantly more concentrated at While legislative and economic changes have the national, regional, and state levels, though led to increased concentration among banking not on the local level. Nationally, decreases in organizations, they have also allowed increased the number of banking organizations and dra- competition between banks and other financial matic increases in concentration have occurred institutions. Greater competition for banks from principally due to the growth of very large re- thrift institutions and other firms and the lack of gional and superregional bank holding compa- any substantial increase in concentration at the nies, often through merger or acquisition. local level should mitigate antitrust concerns Changes in regional and state concentration raised by structural changes. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

134 Industrial Production Released for publication January 18 as commercial equipment has declined and growth in other major components, except tran- Industrial production increased 0.3 percent in sit equipment, has slowed. At 140.2 percent December after having risen a revised 0.4 of the 1977 average, the total index in Decempercent in November. A sharp rise in motor ber was 4.7 percent higher than it was a year vehicles and continuing strength in construc- earlier. For the fourth quarter as a whole, protion supplies paced the December advance. Bus- duction advanced about 4 percent at an annual iness equipment rose slightly in December but rate after having risen 7 percent during the third has changed little, on balance, since September, quarter. Ratio scale, 1977=100 160 _ Total Index 140 Products 120 Materials 100 80 J I I 160 140 Materials Nondurable Durable s 120 s' 100 J L 80 J L J L 180 Business — Consumer Goods 160 — Intermediate Products supplies Nondurable 140 120 Construction supplies 100 I I I I L 80 140 Motor Vehicles and Parts Final Products Defense and 120 space 200 180 100 160 140 80 120 70 100 60 80 1982 1984 1986 1988 1982 1984 1986 1988 All series are seasonally adjusted. Latest figures: December. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

135 1977 = 100 Percentage change from preceding month Percentage cchhaannggee,, Group 1988 1988 DDeecc.. 11998877 ttoo DDeecc.. 11998888 Nov. Dec. Aug. Sept. Oct. Nov. Dec. Major market groups Total industrial production 139.8 140.2 .3 .1 .5 .4 .3 4.7 Products, total 148.3 148.8 .5 .1 .5 .1 .3 5.3 Final products 146.5 146.9 .5 .0 .5 .0 .3 5.1 Consumer goods 136.5 137.2 .6 -.1 1.4 -.2 .5 5.7 Durable 129.5 132.1 .3 .5 2.7 -.1 2.0 9.8 Nondurable 139.0 139.1 .7 -.3 1.0 -.2 .1 4.3 Business equipment.., 160.9 161.1 .5 .4 -.5 .6 .2 7.6 Defense and space 183.3 183.2 .0 -.2 -.3 -.4 -.1 -3.0 Intermediate products.. 154.4 155.2 .5 .4 .4 .6 .5 5.9 Construction supplies 140.9 141.7 -.2 .2 .7 1.1 .6 5.9 Materials 128.3 128.6 .1 .0 .7 .8 .2 3.9 Major industry groups Manufacturing 145.7 146.2 .3 .3 .6 .3 .3 5.2 Durable 145.0 145.5 .2 .4 .4 .4 .4 6.0 Nondurable 146.7 147.1 .3 .1 .9 .1 .3 4.2 Mining 104.4 104.4 -.5 .0 -.8 1.4 .0 -.2 Utilities 114.4 115.4 2.9 -4.0 .9 .3 .8 3.3 NOTE. Indexes are seasonally adjusted. In market groups, output of consumer durable cations equipment. Materials output also posted goods rose 2.0 percent in December, reflecting a small gain in December as nondurables, mainly the large gain in motor vehicles. Automobile paper and chemicals, advanced. However, duraassemblies increased to an annual rate of 7.9 ble materials were unchanged, and energy matemillion units from the rate of 7.6 million units in rials declined as crude oil extraction was re- November, and output of light trucks for con- duced. sumer use also advanced sharply. Production of In industry groups, manufacturing advanced other consumer goods was about unchanged. 0.3 percent in December as both durables and Within business equipment, production of transit nondurables increased. Within manufacturing, equipment, particularly motor vehicles for busi- the most notable gains were in transportation ness use and commercial aircraft, surged in De- equipment, lumber, paper, and petroleum prodcember. Commercial equipment declined, largely ucts. Mining output was unchanged in Decemreflecting weakness in computers and communi- ber, and production at utilities increased 0.8 percent. Total industrial production—Revisions Capacity utilization in total industry for De- Estimates as shown last month and current estimates cember 1988 was estimated at 84.2 percent, up 0.1 percentage point from November. In manu- Percentage change Index (1977=100) from previous facturing, capacity utilization for December was MMoonntthh months 84.4 percent, 0.1 percentage point higher than it Previous Current Previous Current was in November, and 1.8 percentage points higher than it was a year earlier. Detailed data for Sept 138.6 138.6 .1 .1 capacity utilization are shown separately in "Ca- Oct 139.3 139.3 .5 .5 Nov 139.9 139.8 .5 .4 pacity Utilization," Federal Reserve monthly Dec 140.2 .3 statistical release, G.3. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

136 Statements to Congress Statement by Manuel H. Johnson, Vice Chair- outside the United States. Of this total, $197 man, Board of Governors of the Federal Reserve billion, or 57 percent, represented exposure to System, before the Committee on Banking, Fi- borrowers in developed countries. On the other nance and Urban Affairs, U.S. House of Repre- hand, in 1982 U.S. bank exposure to the 15 sentatives, January 5, 1989. countries associated with the Baker initiative totaled $90 billion.1 Mexico, the largest borrower I am pleased to have the opportunity to appear among the developing countries, owed $25 bilbefore this committee to discuss how the debt- lion, which at the time represented an average of servicing difficulties of some of the developing 38 percent of combined gross capital funds.2 countries have affected the U.S. banking Exposure to Mexico by the nine money center system. banks totaled $14 billion and represented almost The subject that you have asked me to address 50 percent of their combined gross capital funds. today has received ongoing attention in recent In 1982 banks had little or no loan-loss reserves years by bank regulators. That attention has been against these loans. against the background of the basic framework As of June 1988, the exposure of U.S. banks to that has evolved. That framework involves the all foreign borrowers amounted to $280 billion. continuing cooperative efforts of the borrowing These borrowers are still primarily located in countries, the multilateral financial institutions, major developed countries where such borrowthe commercial banks, and the industrial coun- ings constitute $176 billion, or 63 percent of the tries. total. Exposure to the Baker-15 countries has The potential effect on the U.S. banking sys- declined to $76 billion, which represents 58 pertem of the debt problems of the developing cent of gross capital funds of all U.S. commercial countries has been managed with some degree of bank lenders. This amount compares with 136 success. First, bank exposure to developing percent of capital in June 1982. countries has declined since the emergence of the The impact of the debt problems of the develfirst signs of the debt problem in 1982. Second, oping countries has been felt most severely by the condition of U.S. banks is stronger now in the nine large banks. Their combined exposure to terms of capital and earnings that provide a base the Baker-15 countries as of June 1988 was $53 to deal with any problems. Third, supervision billion, representing approximately 100 percent over foreign lending by the regulatory authorities of their combined capital. But this exposure has been strengthened. Finally, regulation over relating to capital was half that of 1982 and the foreign lending has been amended to accommo- lowest it had been at any time since such data date emerging solutions while still being consis- were first collected in 1977. tent with standards of safety and soundness. I will address each of these topics separately. 1. The Baker-15 countries are Argentina, Bolivia, Brazil, BANK EXPOSURE Chile, Colombia, Ecuador, Ivory Coast, Mexico, Morocco, Nigeria, Peru, Philippines, Uruguay, Venezuela, and Yugoslavia. Loans to all foreign borrowers by U.S. banks 2. Gross capital funds include equity, subordinated debt, have declined significantly since the beginning of and loan-loss reserves. Exposure is cross-border claims on a foreign country that includes deposits with banks, securities, the debt crisis. As of June 1982, U.S. banks had loans, acceptances, and investments in unconsolidated sub- $344 billion outstanding to borrowers located sidiaries. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to Congress 137 The large banks have continued to support banks typically have reported smaller discounts additional lending to those heavily indebted in such transactions than did the regional banks. countries where efforts are being made toward This outcome is associated with the capacity of structural economic reform and where the coun- the former group of banks to employ a wider try is endeavoring to maintain normal creditor- range of debt-reduction techniques, including debtor relationships. As a consequence, the large sales, exchanges for other credits, and debtbanks have continued to shoulder a greater for-equity swaps. share of new lending to the heavily indebted U.S. banks' reductions in exposures to the countries. Baker-15 countries over the year ending June Many smaller and regional banks have, on the 1988 involved essentially a handful of countries. other hand, largely abandoned strategies that Reductions in banks' exposures to Mexico of would further involve them in continued interna- $3.7 billion accounted for slightly more than 40 tional lending in the developing countries. These percent of the total and were largely associated banks traditionally have been less involved in with negotiated debt retirements by privateinternational lending and have reduced their ex- sector borrowers in Mexico. Declines in U.S. posures to heavily indebted countries by various banks' exposures to Brazil and Chile were means, including loan swaps and sales. roughly proportionate to the decline in total New types of transactions involving bank exposure, while a smaller-than-proportionate deloans to developing countries have emerged and cline was reported for claims on Venezuela. are being used by all banks to adjust their port- Small increases were reported in the total of U.S. folios. These types include debt conversions in banks' exposures to Argentina and Colombia. which nonbank investors purchase loans to a particular debtor country and then exchange the loans for investments. They also include debt settlements in which individual borrowers from CONDITION OF THE BANKING SYSTEM developing countries reach an agreement with their external bank creditors to prepay their U.S. banks today are in a better position to debts on favorable terms. absorb the impact of any suspension of debt The volume of debt conversions and settle- servicing by borrowers, domestic or foreign. A ments has increased significantly since mid-1987. number of reasons justify this assessment. These transactions still account for only a small First, primary capital ratios of the large multiproportion of all bank claims on heavily indebted national banks, the major lenders to developing countries. Nonetheless, the availability of such countries' borrowers, have increased signifitechniques—and more generally the develop- cantly. In 1982, the average primary capitalment of the secondary market for loans to major to-asset ratio for multinational banks was 4.82 borrowing countries—has given U.S. banks, par- percent. Today it stands at 8.19 percent. ticularly those banks that are not otherwise ex- Second, earnings of the large multinational tensively involved in international banking, banks are at high levels. There was some slowing added flexibility in managing their international of the growth of earnings in the third quarter, but loan portfolios. nevertheless, bank earnings in 1988 were In part by taking advantage of these opportu- healthy. Diversified earnings help to act as a nities, total U.S. bank exposure to the 15 coun- cushion if a major borrower suspends debt sertries associated with the Baker initiative dropped vice. $8.6 billion over the year ending June 1988. A Finally, banks have increased their loan-loss disproportionate share of this reduction was ac- reserves against claims on developing countries. counted for by large regional banks, as distinct For the nine largest banks, these reserves now from the largest multinational banks. Nonethe- total almost $14 billion. These reserves represent less, the top nine banks did reduce their total approximately 26 percent of exposure to those exposure over the year by $2.6 billion, but their heavily indebted developing countries that have share of total bank exposure rose. The largest incurred external financial difficulties. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

138 Federal Reserve Bulletin • March 1989 SUPERVISION AND REGULATION OVER rowers for each country. The results are aggre- INTERNATIONAL LENDING gated into a country exposure lending survey, which is issued publicly. The latest report is Supervision over lending practices of banks is a attached as an appendix.3 Country exposure rematter of continuing attention by U.S. bank ports of individual banks are also reviewed to regulatory authorities. This has been especially determine any sizable new lending by a particular true in the past decade in the area of international bank or to an individual country. lending. Loans to private-sector foreign borrowers are evaluated in the same manner as domestic loans. Regulatory classification procedures are REGULATORY ACTIONS the same for all loans regardless of whether the loan is domestic or foreign. Regulators continu- Since mid-year 1987, the Federal Reserve Board ally review bank managements' policies and pro- has taken several actions to grant U.S. banking cedures on lending to ensure that the risk in the organizations additional flexibility in managing loan portfolios is being properly evaluated and their exposure through debt-for-equity swaps. that adequate reserves against future loan losses Before these amendments in August 1987 and are being provided. February 1988, the Board's Regulation K, which Lending to foreign borrowers involves an governs the international activities of U.S. bankadded risk that is commonly referred to as trans- ing organizations, allowed U.S. banking organifer risk. This risk involves the possibility that a zations to invest in up to 20 percent of the voting country's economic and financial policies may shares of any company, regardless of the nature not be compatible with producing an environ- of its activities. A number of U.S. banking orgament that provides sufficient foreign exchange nizations sought additional flexibility from the earnings to meet debt-servicing requirements. Board to invest, through a debt-for-equity swap, The bank regulatory agencies review and evalu- in a larger percentage of the shares of a foreign ate transfer risk uniformly. This is accomplished company engaged in nonfinancial activities. The through the Interagency Country Exposure Re- banking organizations felt that being able to view Committee (ICERC). ICERC meets three purchase a larger percentage of shares would times a year to make judgements on the degree of enhance their ability to bid on, supervise, and transfer risk inherent in lending to 80 countries. ultimately divest themselves of such invest- The resulting categorizations are applied uni- ments. In considering such amendments to its formly to all borrowers in a country whether regulations, the Board balanced its long-standing public or private although some differentiations safety and soundness concerns over the mixing are made at times for trade credits. of banking and commerce against a desire to The committee also recommends the level of allow banking organizations flexibility in managcharge-off or Allocated Transfer Risk Reserve ing their claims on developing countries. (ATRR) in those countries where debt service The effect of the two amendments to Regulahas been interrupted for a protracted period of tion K was to permit U.S. bank holding compatime. Banks have the option of writing off the nies to invest in up to 100 percent of the voting loans to the level established by the regulatory shares of a nonfinancial company that was being authorities or of establishing an ATRR for that privatized by the government of the eligible amount. The ATRR is not counted as capital. country and up to 40 percent of the equity This system of evaluating transfer risk was (including voting shares) of any company located established in 1979 and modified in 1983 in line in an eligible country, subject to certain condiwith the provisions of the International Lending tions that prevent the U.S. banking organization Supervision Act passed by the Congress. from having actual control of that company. Lending to foreign borrowers is monitored by the regulatory authorities through quarterly re- 3. The attachments to this statement are available on porting. Banks that lend to foreign borrowers are request from Publications Services, Board of Governors of required to report the aggregate claims on bor- the Federal Reserve System, Washington, D.C. 20551. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to Congress 139 These investments are not to be permanent in equity holdings by nonbanking organizations. nature; they must be divested within the lesser of Moreover, several of the developing countries 15 years or 2 years of the date on which the bank have at least temporarily placed restrictions on, holding company is permitted to repatriate in full or suspended, their debt-for-equity swap prothe investment in the foreign company. The grams because of concern about the effect of Board also expanded the general consent provi- such transactions on their money supply. sions for such investments. These are the limits within which an investment may be made without first seeking the Board's approval. They have CONCLUSION been expanded to the greater of $15 million or 1 percent of the equity of the investor. The international financial system should be able It would appear, based on the reactions of the to deal with the international debt problem. One U.S. banking organizations that had sought the major reason is that many developing countries more liberalized treatment, that the 1987 and acting in their own interest have adopted strong 1988 amendments were responsive to their con- adjustment programs and have continued to sercerns. It should be noted, however, that a signif- vice their debts. While significant progress has icant number of debt-for-equity investments are been made in managing the external debt probbeing made under the original portfolio invest- lems of developing countries, we are far from ment provisions of Regulation K. It should also being able to declare that these problems and be noted that most debt-for-equity transactions their consequences in the banking system are have involved the exchange of bank claims for behind us. • Statement by Alan Greenspan, Chairman, Board 1987. Especially encouraging in terms of the of Governors of the Federal Reserve System, prospects for sustained expansion is that these before the Committee on Banking, Finance and surprising gains have been achieved without a Urban Affairs, U.S. House of Representatives, flare-up of inflation. Prices have accelerated only January 24, 1989. slightly, with increases in most broad indexes holding in the range of 4 to 4Vi percent. I am pleased to appear before this committee to As we enter 1989, there are few signs of any discuss the current economic situation and the significant impediments to continued expansion. outlook for 1989. As you know, the Federal Business cycle history tells us some places to Reserve will submit its semiannual report on look for danger signals. One of them is excessive monetary policy to the Congress next month. accumulation of inventories; at present, over- That report will cover in detail the Federal Open hangs of stocks are rather isolated and manage- Market Committee's (FOMC's) policy targets for able. Another is overbuilding of capacity; while 1989, as well as our expectations for real growth there clearly are a good many empty office buildand inflation. Today, I would like to focus on ings around the country, industrial capacity is some of the broader considerations bearing on relatively fully utilized—indeed, tight in some our economic prospects. industries. Still another is out-of-control costs The overall record shows 1988 to have been and inadequate profit margins; again, there apanother year of progress for the U.S. economy. pear to be no widespread problems. Setting aside the effects on aggregate output of However, this is not to say that we have little last summer's drought, real GNP appears to have reason for concern. Resource utilization has risen more than 3 percent over the course of the risen to levels that at numerous times in the past year. That pace was considerably faster than was have been associated with a worsening of inflaexpected by many analysts at the start of the tion. If growth were to continue indefinitely at year, and it came on the heels of a strong the recent pace, the concomitant tightening of increase of 5 percent in gross national product in supply conditions for labor and materials would Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

140 Federal Reserve Bulletin • March 1989 risk a serious intensification of inflationary pres- unemployment now is well within the range of sures at some not-too-distant point in the future. AVi to 6!/2 percent that encompasses most esti- How fast the economy can now grow without mates of the "natural rate" of unemployment. a significant pickup in inflation is obviously a key The concept of a natural rate of unemployment, question. The answer depends, of course, on the that is, a rate consistent with stable inflation over amount of slack in labor markets and in industry the long run, is a useful notion for empirical and on prospects for the growth of labor and studies of the relationship between tightness in capital resources and of technological efficiency. the labor market and inflation. Unemployment Inflation in the longer term is essentially a mon- below the natural rate presumably would provide etary phenomenon. But excess pressures on pro- sustained impetus to inflation, while unemployductive resources have usually been the major ment above the natural rate would tend toward trigger engendering financial tensions that too disinflation. Any figure for the natural rate should often have been relieved through inflationary be viewed cautiously, given the uncertainties and monetary expansion. Unfortunately, such pres- the complexity of the economic relationships sures can be extremely hard to discern in a timely involved; indeed, the most recent estimates are way. Economic relationships are complex and perceptibly lower than many analysts thought difficult to pin down; the lags between changes in likely only a few years earlier. resource utilization and in prices can be long, and Nonetheless, increases in compensation—althe translation into credit and financial excess though volatile from quarter to quarter—picked inexact. Moreover, conventional measures of up roughly a percentage point last year, to the resource utilization may not be sufficiently sen- range of AVi to 5 percent. Pay gains in many sitive to the increasing openness of the U.S. occupations and regions of the country where economy in recent years and to other changes in labor demand has been especially strong have the economic structure. Nonetheless, a careful been somewhat greater. In the Northeast, for examination of the historical experience—in con- example, hourly compensation increased nearly junction with a knowledge of demographic trends 5VI percent over the year ending last September. and other long-run developments—provides am- Reports of labor shortages and wage pressures ple evidence of where the risks lie. are widespread in some regions, and there is The labor market is showing clear signs of some fear that the tenor of wage negotiations tightening. Gains in employment exceeded 2 mil- may shift in a direction inimical to cost restraint. lion last year, according to the Census survey of Measures of industrial supply conditions are households; these gains outstripped the growth more ambiguous, but on the whole also point to in the labor force, and the unemployment rate fell a tightening. Utilization rates for plant and equipto its lowest levels since the 1970s. However, the ment, as in the labor market, have moved up demographic composition of the work force has sharply over the past few years. Capacity utilichanged considerably since the 1970s. And work- zation in manufacturing, after having hovered ers now seem to be placing greater emphasis on around 80 percent from 1984 to mid-1987, has job preservation as opposed to bigger wage climbed to 841/2 percent. Some industries, includgains, while businesses strive to contain costs ing steel, paper, and chemicals, have been operand to enhance competitiveness. Accordingly, ating flat out, or close to it. the wage pressures associated with a 5LA percent The conventional measures, however, may jobless rate today are less than they would have well overstate the degree of price pressure. Cabeen 10 or 15 years earlier. It also is unlikely that pacity is a somewhat elusive concept. For exama few tenths of a percentage point up or down on ple, facilities can be moved in and out of use or the unemployment rate would change the infla- put on different operating schedules in response tion outlook dramatically. Nonetheless, the to fluctuations in demand and prices. Moreover, available evidence points to a high probability of measures of domestic capacity do not take acstepped-up wage pressures should unemploy- count of the availability of materials and supplies ment decline significantly further. from abroad—a factor of some importance in our In part, that assessment reflects the fact that increasingly open economy. Indeed, the informa- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to Congress 141 tion compiled monthly by the National Associa- Containing the pressures on labor and capital tion of Purchasing Management suggests that resources—while continuing to reduce our exterwhat may be called "deliverability" was dimin- nal imbalance—will require a slowing in domesishing only moderately at year-end, after marked tic demand. Such an outcome will be facilitated deterioration in 1987 and early 1988. Vendors to the extent that the federal budget deficit is were missing their schedules less often, while reduced. With the Gramm-Rudman-Hollings average lead times for orders of production ma- procedures providing some discipline on spendterials were no longer than they were a year ing decisions, the budget looks to be a mildly earlier. restraining influence on domestic demand this Our estimates of aggregate production capabil- year. But it is crucial that further steps be taken ities clearly are imprecise. Moreover, labor mar- in support of a long-term policy of reducing kets and industrial facilities may well be flexible budget deficits and the associated claims on the enough to allow us to operate for some time at nation's saving. higher levels of resource utilization without a Lower budget deficits will pay off" over the visible deterioration in inflation. But there is little longer run: they will free up domestic saving to doubt that margins of slack have been reduced. finance investment that embodies the most up- The risk of greater inflation could be appreciable to-date technology. Therein lies a major hope for if real GNP continued to increase at recent rates attaining the productivity gains so crucial to over the next several years. growth in potential GNP. In the 1980s, a large With most of the slack having been taken up, inflow of capital from abroad has made it possible our growth will tend to be limited by the rate at to finance both the federal budget deficit and a which our productive capacity expands. Most high level of gross private investment without estimates place the growth in productive capac- untenable pressures on credit markets. Howity—or long-term potential GNP—in the area of ever, a country cannot depend forever upon 21/2 to 3 percent per year. Growth of the labor foreign saving; at some point we will have to rely force has dropped markedly since the 1970s; more fully on our own resources. The paucity of given the trends in the working-age population, aggregate domestic saving in recent years has in participation rates, and in the average work- been exacerbated by a sharp fall in private savweek, such growth is likely to remain relatively ing, and we cannot count on a major reversal of slow in coming years. And while one can hope that trend. We have endeavored in the past few for some offset from better labor productivity decades to implement tax policies to augment performance, the improvements that we have household and business saving; by all accounts, seen to date in the economy-wide data have not they have met with only limited success. Accordbeen dramatic. Gains in nonfarm business pro- ingly, the surest way to overcome the shortage of ductivity have picked up somewhat in the 1980s, domestic saving is through sizable reductions in but—at only about VA percent per year—they budget deficits. fall far short of those recorded in the 1950s and Monetary policy also will bear importantly on 1960s. In part, the disappointing productivity our economic prospects, and I will be reporting performance reflects the low level of net invest- to the Congress next month on the Federal ment. Reserve's plans for monetary policy in 1989. Let To be sure, we have not had great success in me comment, however, on the notion I hear all forecasting intermediate shifts in productivity in too frequently that current rates of inflation are years past. It is possible that forces not now acceptable to the Federal Reserve. Fundamenvisible could impart a significant upward push to tally, our strategy continues to be centered on productivity. This could boost potential eco- moving toward, and ultimately reaching, stable nomic growth beyond 3 percent per year. How- prices, that is, price levels sufficiently stable so ever, a policy that assumes such outcomes risks that expectations of change do not become major significant inflationary imbalances. I think it is factors in key economic decisions. Current inflawiser to have "money in the bank before we tion rates, by that criterion, clearly are too high spend it," so to speak. and must be brought down. Progress toward that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

142 Federal Reserve Bulletin • March 1989 goal in 1988 was inhibited by the lagged effects of nesses. For that reason, it is our judgment—as I the sharp decline in the dollar over the 1985-87 indicated to the Congress last July—that the period and by the drought-induced flare-up in long-run costs of a return to higher inflation, and food prices. However, the dollar now is at levels the risks of this occurring under current circumwhere U.S. industry is quite competitive. Of stances, are sufficiently great that Federal Recourse, we recognize that achieving the joint serve policy at this juncture might well be adgoals of growth and price stability will require vised to err more on the side of restrictiveness persistence and patience. To the extent that labor than of stimulus. and management perceive our commitment, the Let me conclude by saying that I view our dynamics of the wage-price process will work in economic prospects in 1989 and beyond as favorour favor. able, but that such an outcome is by no means The pursuit of such a strategy on the part of the assured. I have spoken at length of the risk of Federal Reserve embodies an acute awareness of rising inflation when labor and product markets the great cost to our economy and society should are operating at or near full capacity. The deficits a more intense inflationary process become en- in the federal budget and in our external accounts trenched. The experience of the past two dec- also are serious problems that must be dealt with. ades vividly illustrates the problems that arise However, if we remain attentive to the course of when accelerating prices and wages have to be events and take prudent actions on a timely countered later by severely restrictive policies. basis, I am optimistic that we can make further There are unavoidable adverse implications for progress toward the objectives of full employproduction and employment, as well as for the ment and price stability. • financial health of many individuals and busi- Chairman Greenspan presented substantially identical testimony before the Joint Economic Committee, January 31, 1989. Statement by Alan Greenspan, Chairman, Board create a set of new problems for the financial of Governors of the Federal Reserve System, system. before the Committee on Finance, U.S. Senate, Corporate restructuring is not new to Ameri- January 26, 1989. can business. It has long been a feature of our enterprise system, a means by which firms adjust to ever-changing product and resource markets, I am pleased to be here today to address issues and to perceived opportunities for gains from raised by recent trends in corporate restructuring changes in management and management strateactivity. The spate of mergers, acquisitions, le- gies. veraged buyouts (LBOs), share repurchases, and Moreover, waves of corporate restructuring divestitures in recent years is a significant devel- activity are not new. We experienced a wave of opment. It has implications for shareholders, the mergers and acquisitions around the turn of this efficiency of our companies, employment and century and again in the 1920s. In the postwar investment, financial stability, and, of course, period, we witnessed a flurry of so-called contax revenues and our tax system. While the glomerate mergers and acquisitions in the late evidence suggests that the restructurings of the 1960s and early 1970s. 1980s probably are improving, on balance, the However, the 1980s have been characterized efficiency of the American economy, the wor- by features not present in the previous episodes. risome and possibly excessive degree of le- The recent period has been marked not only by veraging associated with this process could acquisitions and mergers but also by significant Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to Congress 143 increases in leveraged buyouts, divestitures, as- quences for trade-dependent industries; rapid set sales, and share repurchase programs. In technological progress, especially in automation many cases, recent activity reflects the breakup and telecommunications; rapid growth in the of the big conglomerate deals packaged in the service sector; and large movements in real in- 1960s and 1970s. Also, the recent period has been terest rates and relative prices. Clearly, such characterized by the retirement of substantial changes in the economic environment imply maamounts of equity (more than $500 billion since jor, perhaps unprecedented, shifts in the optimal 1983) mostly financed by borrowing in the credit mix of assets at firms—owing to corresponding markets. shifts in synergies—and new opportunities for The accompanying increase in debt has re- improving efficiency. Some activities need to be sulted in an appreciable rise in leverage ratios for shed or curtailed, and others added or beefed up. many of our large corporations. Aggregate book Moreover, the long period of slow productivity value debt-equity ratios, based on balance sheet growth in the 1970s may have partly exacerbated data for nonfinancial firms, have increased the buildup of a backlog of inefficient practices. sharply in the 1980s, moving outside their range When assets become misaligned or less than in recent decades, although measures based on optimally managed, there is clearly an increasing market values have risen more modestly. opportunity to create economic value by restruc- Along with this debt expansion, the ability of turing companies, restoring what markets perfirms in the aggregate to cover interest payments ceive as a more optimal mix of assets. But has deteriorated. The ratio of gross interest pay- restructuring requires corporate control. And ments to corporate cash flow before interest managers, unfortunately, often have been slow in provision is currently about 35 percent, close to reacting to changes in their external environthe 1982 peak when interest rates were much ment, some more so than others. Hence, it higher. Moreover, current interest coverage shouldn't be a surprise that, in recent years, rates are characteristic of past recession periods, unaffiliated corporate restructurers, some call when weak profits have been the culprit. Lately them corporate raiders, have significantly bid up profits have been fairly buoyant; the current the control premiums over the passive investdeterioration has been due to heavier interest ment value of companies that are perceived to burdens. have suboptimal asset allocations. If a company A measure of credit quality erosion is sug- has an optimal mix, there is no economic value to gested by an unusually large number of down- be gained from restructuring and, hence, no gradings of corporate bonds in recent years. The advantage in obtaining control of a company for average bond rating of a large sample of firms has such purposes. In that case, there is no incentive declined since the late 1970s from A+ to A-. to bid up the stock price above the passive investment value based on its existing, presumed optimal, mix of assets. But in an economy CAUSES OF RESTRUCTURING ACTIVITY knocked partially off kilter by real interest rate increases and gyrations in foreign exchange and To fashion an appropriate policy response, if commodity prices, there emerge significant opany, to this extraordinary phenomena, there are portunities for value-creating restructuring at some key questions that must be answered: What many companies. is behind the corporate restructuring movement? This presumably explains why tender offer Why is it occurring now, in the middle and late prices of common stock in potential restructur- 1980s, rather than in some earlier time? Why has ings have risen significantly during the past decit involved such a broad leveraging of corporate ade. Observed stock prices generally (though not balance sheets? And finally, has it been good or always) reflect values of shares as passive investbad for the American economy? ments. But there are, for any individual com- The 1980s has been a period of dramatic eco- pany, two or more prices for its shares, reflecting nomic changes: large swings in the exchange the degree of control over a company's mix of value of the dollar, with substantial conse- assets. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

144 Federal Reserve Bulletin • March 1989 Tender-offer premiums over passive invest- firms repurchase their own shares, using what is, ment values presumably are smaller than control in effect, a tax-favored method of paying cash premiums to the extent that those making tender dividends. In any event, the recent rise in reoffers believe that, restructured, the value of structuring activity is not easily tied to any shares is still higher than the tender. Nonethe- change in tax law. less, series on tender-offer premiums afford a Evidence about the economic consequences of reasonable proxy of the direction of control restructuring is beginning to take shape, but premiums. much remains conjectural. It is clear that the Such tender-offer premiums ranged from 13 markets believe that the recent restructurings are percent to 25 percent in the 1960s, but have potentially advantageous. Estimates range from moved to 45 percent and higher during the past $200 billion to $500 billion or more in paper gains decade, underscoring the evident increase in the to shareholders since 1982. Apparently, only a perceived profit to be gained from corporate small portion of that has come at the expense of control and restructuring. bondholders. These gains are reflections of the Interest in restructuring also has been spurred expectations of market participants that the reby the apparent increased willingness and ability structuring will, in fact, lead to a better mix of of corporate managers and owners to leverage assets within companies and greater efficiencies balance sheets. The gradual replacement of man- in their use. This, in turn, is expected to produce agers who grew up in the Depression and devel- marked increases in future productivity and, oped a strong aversion to bankruptcy risk prob- hence, in the value of American corporate busiably accounts for some of the increased ness. Many of the internal adjustments brought proclivity to issue debt now. about by changes in management or managerial Moreover, innovations in capital markets have policies are still being implemented, and it will made the increased propensity to leverage feasi- take time before they show up for good or ill in ble. It is now much easier than it used to be to measures of performance. mobilize tremendous sums of debt capital for So far, various pieces of evidence indicate that leveraged purchases of firms. Improvements in the trend toward more ownership by managers the loan-sale market among banks and the and tighter control by other owners and creditors greater presence of foreign banks in U.S. mar- has generally enhanced operational efficiency. In kets have greatly increased the ability of banks to the process, both jobs and capital spending in participate in merger and acquisition transac- many firms have contracted as unprofitable tions. The phenomenal development of the mar- projects are scrapped. But no clear trends in ket for low-grade corporate debt, so-called junk these variables are yet evident in restructured bonds, also has enhanced the availability of firms as a group. For the business sector, genercredit for a wide variety of corporate transac- ally, growth of both employment and investment tions. The increased liquidity of this market has has been strong. made it possible for investors to diversify away If what I have outlined earlier is a generally firm-specific risks by building portfolios of such accurate description of the causes of the surge in debt. restructurings of the past decade, one would The tax benefits of restructuring activities are, assume that a stabilization of interest rates, exof course, undeniable, but this is not a particu- change rates, and product prices would slow the larly new phenomenon. Our tax system has long emergence of newly misaligned companies and favored debt finance by taxing the earnings of opportunities for further restructuring. Such a corporate debt capital only at the investor level, development would presumably lower control while earnings on equity capital are taxed at both premiums and reduce the pace of merger, acquithe investor and corporate levels. There have sition, and LBO activity. been other sources of tax savings in mergers that This suggests that the most potent policies for do not depend on debt finance, involving such defusing the restructuring boom over the long items as the tax basis for depreciation and foreign haul are essentially the same macroeconomic tax credits. And taxable owners benefit when policies toward budget deficit reduction and price Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to Congress 145 stability that have been the principal policy con- flavoring. Once there was a fairly sharp distinccerns of recent years. tion between being unable to make interest payments on a bond, which frequently led to liquidation proceedings, and merely missing a FINANCIAL RISKS dividend. Now the distinction is much smaller. Outright defaults on original issue high-yield Whatever the trends in restructuring, we cannot bonds have been infrequent to date, but payment ignore the implications that the associated heavy difficulties have led to more frequent exchanges leveraging has for broad-based risk in the econ- of debt that reduce the immediate cash needs of omy. Other things equal, greater use of debt troubled firms. Investors know when they purmakes the corporate sector more vulnerable to chase such issues that the stream of payments an economic downturn or a rise in interest rates. received may well differ from the stream prom- The financial stability of lenders, in turn, may ised, and prices tend to move in response to also be affected. How much is another question. changes in both debt and equity markets. In The answer depends greatly on which firms are effect, the yields on debt capital rise toward that leveraging, which financial institutions are lend- of equity capital when scheduled repayments are ing, and how the financings are structured. less secure. Most of the restructured firms appear to be in mature, stable, noncyclical industries. Restructuring activity has been especially prevalent in POLICY IMPLICATIONS the trade, services, and, more recently, the food and tobacco industries. For such businesses, a In view of these considerations, and the very substantial increase in debt may raise the proba- limited evidence on the effects of restructuring at bility of insolvency by only a relatively small the present time, it would be unwise to arbitrarily amount. However, roughly two-fifths of merger restrict corporate restructuring. We must resist and aquisition activity, as well as LBOs, have the temptation to seek to allocate credit to speinvolved companies in cyclically sensitive indus- cific uses through the tax system or through the tries that are more likely to run into trouble in the regulation of financial institutions. Restrictions event of a severe economic downturn. on the deductibility of interest on certain types of Lenders to leveraged enterprises have been, in debt for tax purposes or on the granting of certain large part, those that can most easily absorb types of loans unavoidably involve an important losses without major systemic consequences. element of arbitrariness, one that will affect not They include mutual funds, pension funds, and only those types of lending intended but other insurance companies, which generally have di- types as well. Moreover, foreign acquirers could versified portfolios, have traditionally invested in be given an artificial edge to the extent that they securities involving some risk, such as equities, could avoid these restrictions. Also, the historiand are not themselves heavily leveraged. To the cal experience with various types of selective extent that such debt is held by individual insti- credit controls clearly indicates that, in time, tutions that are not well diversified, there is some borrowers and lenders find ways around them. concern. At the Federal Reserve, we are partic- All that does not mean that we should do ularly concerned about the increasing share of nothing. The degree of corporate leveraging is restructuring loans made by banks. Massive fail- especially disturbing in that it is being subsidized ures of these loans could have broader ramifica- by our tax structure. To the extent that the tions. double taxation of earnings from corporate Generally, we must recognize that the line equity capital has added to leveraging, debt levbetween equity and debt has become increas- els are higher than they need, or should, be. Our ingly fuzzy in recent years. Convertible debt has options for dealing with this distortion are, unalways had an intermediate character, but now fortunately, constrained severely by the federal there is almost a continuum of securities varying government's still serious budget deficit probin their relative proportions of debt and equity lems. One straightforward approach to this dis- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

146 Federal Reserve Bulletin • March 1989 tortion, of course, would be to substantially for assessing LBO-related loans, which are set reduce the corporation income tax. Alterna- forth in an attachment to my text.1 The Federal tively, partial integration of corporate and indi- Reserve is currently in the process of reviewing vidual income taxes could be achieved by allow- its procedures regarding the evaluation of bank ing corporations a deduction for dividends paid participation in highly leveraged financing transor by giving individuals credit for taxes paid at actions. The circumstances associated with the corporate level. But these changes taken highly leveraged deals require that creditors exalone would result in substantial revenue losses. ercise credit judgment with special care. Doing A rough estimate of IRS collections from taxing so entails assessing those risks that are firmdividends is in the range of $20 billion to $25 specific as well as those common to all highly billion. leveraged firms. • Dangers of risk to the banking system associated with high debt levels also warrant attention. The Federal Reserve, in its role as a supervisor 1. The attachments to this statement are available on of banks, has particular concerns in this regard. request from Publications Services, Board of Governors of In 1984, the Board issued supervisory guidelines the Federal Reserve System, Washington, D.C. 20551. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

147 Announcements FINAL GUIDELINES ISSUED ON core capital elements including common stock- RISK-BASED CAPITAL REQUIREMENTS holders' equity, retained earnings, and perpetual preferred stock—to weighted risk assets. The The Federal Reserve Board issued final guide- other half of required capital (Tier 2), can inlines on January 19, 1989, to implement risk- clude, among other supplementary capital elebased capital requirements for state member ments, limited-life preferred stock and subordibanks and bank holding companies. The guide- nated debt, and loan-loss reserves up to certain lines are based on the framework adopted July limits. 11, 1988, by the Basle Committee on Banking Initially, the risk-based capital guidelines do Regulations and Supervisory Practices, which not establish a minimum level of capital. Howincludes supervisory authorities from 12 major ever, by year-end 1990, banking organizations industrial countries. are expected to meet a minimum interim target The guidelines represent the culmination of a ratio of qualifying total capital to weighted risk review process on the subject of risk-based cap- assets of 7.25 percent, at least one-half of which ital initiated in 1986 by the Federal Reserve should be in the form of Tier 1 capital. Board, the Office of the Comptroller of the Highlights of the guidelines include the follow- Currency, and the Federal Deposit Insurance ing: Corporation. • Application of the two-tier requirement to The guidelines are designed to achieve the bank holding companies. Bank holding compafollowing important goals: nies may include cumulative perpetual preferred • Establishment of a uniform capital frame- stock, as well as noncumulative preferred stock, work, applicable to all federally supervised bank- in Tier 1 capital. However, cumulative and noning organizations. cumulative perpetual preferred stock cannot ex- • Encouragement of international banking or- ceed 25 percent of total Tier 1 capital. ganizations to strengthen their capital positions. • Bank holding companies are temporarily • Reduction of a source of competitive ine- allowed to count goodwill acquired before March quality arising from differences in supervisory 12, 1988, as capital in Tier 1, but they may not requirements among nations. include in capital goodwill acquired subsequent The guidelines establish a systematic analyti- to that date. After 1992, however, all goodwill is cal framework that makes regulatory capital re- to be deducted from bank holding companies' quirements more sensitive to differences in risk Tier 1 capital. Banks must deduct all goodwill profiles among banking organizations; takes off- from capital immediately. balance-sheet exposures explicitly into account • Loans secured by first mortgages on resiin assessing capital adequacy; and minimizes dential properties of one to four units, either disincentives to holding liquid, low-risk assets. owner-occupied or rented, are assigned a 50 The guidelines provide for phasing in risk- percent risk weight, rather than the 100 percent based capital standards through the end of 1992 risk weight initially proposed, provided the loans at which time the standards become fully effec- are of high quality and covered by an adequate tive. At that time, banking organizations will be margin of conservatively valued collateral. required to have capital equivalent to 8 percent The risk weights assigned to assets and credit of assets, weighted by risk. equivalent amounts of off-balance-sheet items Banking organizations must have a ratio of at are based primarily on credit risk. Other types of least 4 percent Tier 1 capital—which consists of exposure, such as interest rate, liquidity, and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

148 Federal Reserve Bulletin • March 1989 funding risks, as well as asset quality problems, The other members of the Council are the are not factored into the risk-based ratio. Such following: Robert S. Duncan, Chairman, Presirisks, however will be taken into account in dent, and Chief Executive Officer, Magnolia Feddetermining a final assessment of an organiza- eral Bank for Savings, Hattiesburg, Mississippi; tion's capital adequacy. Joe C. Morris, Chairman of the Board, Columbia Savings Association, Overland Park, Kansas; NEW MEMBERS APPOINTED TO Joseph W. Mosmiller, Chairman and Chief Ex- THRIFT INSTITUTIONS ADVISORY COUNCIL ecutive Officer, Loyola Federal Savings and Loan Association, Baltimore, Maryland; and The Federal Reserve Board announced on Janu- Louis H. Pepper, Chairman and Chief Executive ary 11, 1989, the names of six new members Officer, Washington Mutual Savings Bank, Seatappointed to its Thrift Institutions Advisory tle, Washington. Council (TIAC) to replace those members whose terms have expired and designated a new Presi- NEW MEMBERS APPOINTED dent and Vice President of the Council for 1989. TO CONSUMER ADVISORY COUNCIL The Council is an advisory group made up of 12 representatives from thrift institutions. The The Federal Reserve Board named on January panel was established by the Board in 1980 and 15, 1989, 13 new members to its Consumer includes representatives from savings and loans, Advisory Council to replace those members savings banks, and credit unions. The Council whose terms have expired and designated a new meets at least four times each year with the Chairman and Vice Chairman of the Council for Board of Governors to discuss developments 1989. relating to thrift institutions, the housing indus- The Consumer Advisory Council was estabtry, mortgage finance, and certain regulatory lished by the Congress in 1976, at the suggestion issues. of the Board, to advise the Board on the exercise Gerald M. Czarnecki, Chairman of the Board of its duties under the Consumer Protection Act and Chief Executive Officer of HONFED, Ho- and on other consumer-related matters. The 30nolulu, Hawaii, will serve as President of the member Council, with staggered three-year Council, and Donald B. Shackelford, Chairman terms of office, meets three times a year. of the Board of State Savings Bank, Columbus, Ms. Judith N. Brown, National Treasurer of Ohio, will serve as Vice President. the American Association of Retired Persons, The six new members, named for two-year was designated Chairman and Mr. William E. terms that began January 1, 1989, are the follow- Odom, Chairman of the Board of Ford Motor ing: Credit Company, was designated Vice Chair- Ms. Charlotte Chamberlain, Executive Vice man. President for Strategic Planning, Glendale Fed- The 13 new members are the following: eral Savings and Loan Association, Glendale, California; Adam A. Jahns, Chairman and Pres- George H. Braasch, Assistant General Counsel, ident, Cragin Federal Savings & Loan Associa- Sears, Roebuck, and Co., Chicago, Illinois. At Sears, tion, Chicago, Illinois; H.C. Klein, President and Mr. Braasch has responsibility for consumer credit General Manager, Little Rock Air Force Base and related financial services for the Sears Merchan- Federal Credit Union, Jacksonville, Arkansas; dise Group. He specializes in regulatory compliance Philip E. Lamb, Chairman and Chief Executive with federal and state consumer credit laws. Officer, Springfield Institute for Savings, Springfield, Massachusetts; Mrs. Marion O. Sandler, Cliff Cook, Vice President, Puget Sound National President-Chief Executive Officer, World Sav- Bank in Tacoma, Washington. Mr. Cook serves as the Compliance Officer for the Puget Sound Bancorp. ings & Loan Association, Oakland, California; and Charles B. Stuzin, Chairman, President, and R. B. (Joe) Dean, Administrator for Community and Chief Executive Officer, Citizens Federal Sav- Consumer Affairs for South Carolina National Bank in ings and Loan Association, Miami, Florida. Columbia, South Carolina. Mr. Dean is responsible for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Announcements 149 the bank's consumer regulatory compliance programs unions as providers of financial services to low-income and activities. consumers. William C. Dunkelberg, Dean of the School of Alan M. Silberstein, Senior Vice President of Chem- Business and Management at Temple University in ical Bank in New York City. Mr. Silberstein heads the Philadelphia, Pennsylvania. Before joining Temple's bank's consumer banking organization in the New staff last year, Mr. Dunkelberg was a Professor of York metropolitan area, with responsibility for 206 Economics and Management with Purdue University branches. and served as the associate director of the Credit Research Center at the university. David B. Ward, Senior Vice President of Beneficial Management Corporation in Peapack, New Jersey. He is responsible for governmental affairs at the state and James Fletcher, President and Director of South federal levels with the agencies that regulate Benefi- Shore Bank in Chicago and Vice President of Shorecial's consumer credit and insurance companies and bank Corporation, South Shore's bank holding comits credit card operations. pany. Mr. Fletcher serves as a director of the Neighborhood Institute, a not-for-profit, community-based, social and economic development organization. The other members of the Council are the following: James W. Head, Executive Director of the National Economic Development and Law Center in Berkeley, Naomi G. Albanese California. The Center is a nonprofit, public-interest Former Professor of Home Economics organization that provides technical and legal assis- University of North Carolina tance to community economic development corpora- Greensboro, North Carolina tions, community organizations, and local and state governments. Betty Tom Chu Chairman Barbara Kaufman, founder and codirector of Call Trust Savings Bank for Action in San Francisco, California. This all- Arcadia, California volunteer public service radio program handles offthe-air telephone calls on consumer problems from the Jerry D. Craft community. Executive Vice President First National Bank of Atlanta Michelle S. Meier, Counsel for Government Affairs Atlanta, Georgia for Consumers Union of the United States, Inc., in Washington, D.C. In this capacity, her work focuses Donald C. Day on consumer financial services, product safety, and President environmental issues. New England Securities Corporation Boston, Massachusetts Linda K. Page, Director of the Ohio Department of Commerce, Columbus, Ohio. The agency she directs Richard B. Doby serves as the state's chief regulatory and licensing Financial Services Consultant agency for financial institutions and financial transac- Denver, Colorado tions. Before serving as the Director of Ohio's Department of Commerce, Ms. Page was the state's Super- Richard H. Fink intendent of Banks. President Citizens for a Sound Economy Vincent P. Quayle, Director of the St. Ambrose Washington, D.C. Housing Aid Center in Baltimore, Maryland. The Center rehabilitates properties providing low-income Stephen Gardner housing to area residents. In addition, the Center's Assistant Attorney General staff assists families with the many facets of the State of Texas mortgage process. Dallas, Texas Clifford N. Rosenthal, Executive Director of the Elena Hanggi National Federation of Community Development Director Credit Unions located in New York City. The Feder- Institute for Social Justice ation works to expand the role of community credit Little Rock, Arkansas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

150 Federal Reserve Bulletin • March 1989 Robert A. Hess has acquired through open market operations. President and General Manager Income from the provision of financial services Wright Patman Congressional amounted to $658 million. Federal Credit Union Operating expenses of the 12 Reserve Banks Washington, D.C. and branches totaled $1,208 billion, including $127 million for earnings credits granted to de- Ramon W. Johnson Professor of Finance pository institutions under the Monetary Control College of Business and Act of 1980. Assessments by the Board of Gov- Graduate Business ernors for Board expenditures totaled $84 mil- University of Utah lion, and the cost of currency amounted to $164 Salt Lake City, Utah million. A.J. King Net deductions from income amounted to $489 Chairman million, primarily resulting from losses on assets Valley Bank of Kalispell denominated in foreign currencies. Statutory div- Kalispell, Montana idends to member banks were $126 million; additions to Reserve Bank surplus were $65 mil- Richard L.D. Morse lion; and payments to the Treasury amounted to Professor of Family Economics $17,356 billion. Kansas State University Manhattan, Kansas Under the policy established by the Board of Governors at the end of 1964, all net income after Sandra Phillips the statutory dividend to member banks and the Executive Director amount necessary to equate surplus to paid-in Pittsburgh Partnership for capital is transferred to the U.S. Treasury as Neighborhood Development interest on Federal Reserve notes. Pittsburgh, Pennsylvania Ralph E. Spurgin President and Chief Executive Officer Limited Credit Services, Inc. PROPOSED ACTIONS Columbus, Ohio The Federal Reserve Board issued for public Lawrence Winthrop President comment on January 12, 1989, a proposal to Consumer Credit Counseling Service amend its Regulation Z (Truth in Lending) to of Oregon, Inc. implement the Home Equity Loan Consumer Portland, Oregon Protection Act. Comment is requested by March 21, 1989. The Federal Reserve Board announced on January 23, 1989, that it has extended until April PRELIMINARY FIGURES ON OPERATING 28,1989, the public comment period regarding its INCOME OF FEDERAL RESERVE BANKS proposal to rescind a provision of Regulation Y (Bank Holding Companies and Change in Bank Preliminary figures indicate that operating in- Control) that permits a state bank in a holding come of the Federal Reserve Banks amounted to company to acquire the shares of nonbank com- $19,524 billion during 1988. Net income before panies engaged in activities that the bank may dividends, additions to surplus, and payments to conduct directly [53 Federal Register 48915 (Dethe Treasury totaled $17,548 billion. About $17.4 cember 5, 1988)]. The Board has also postponed billion was paid to the U.S. Treasury during the informal hearing regarding this matter from 1988. February 3, 1989, until April 7, 1989. Income from the Federal Reserve System is The Federal Reserve Board announced on derived primarily from interest accrued on U.S. January 30,1989, that should the Board adopt the government securities that the Federal Reserve amendment to its Regulation CC (Availability of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Announcements 151 Funds and Collection of Checks) (12 CFR Part Besides NMS-designated securities, the Board 229) restricting the delayed disbursement of tell- will continue to monitor the market activity of er's checks, such an amendment would not be other OTC stocks to determine which stocks effective April 1, 1989, as previously published in meet the requirements for inclusion and continthe Board's proposed rule [53 Federal Register ued inclusion on the list. 24093 (June 27, 1988)]. The Board is providing this public notice to allay the concerns of commenters that a final rule will be adopted with an insufficient lead time for implementation. REVISIONS TO TABLE 1.24 IN THE The Federal Reserve Board requested on Jan- FEDERAL RESERVE BULLETIN uary 31, 1989, public comment on whether U.S. companies operating in the government debt The nondeposit funds series that is published markets of certain foreign countries have the regularly in table 1.24 of the FEDERAL RESERVE same competitive opportunities as domestic BULLETIN has been revised in this issue. All of companies in those markets. Comment must be the revisions in the data that are not seasonally received by May 1, 1989. adjusted reflect new estimates of borrowings from lenders other than U.S. commercial banks (lines 3 and 6 in the new table, lines 3 and 4 in the old table). The other component that is not REVISED LIST PUBLISHED seasonally adjusted, net balances due to related ON OTC STOCKS SUBJECT foreign offices, has not been revised. In addition, TO MARGIN REGULATIONS more comprehensive seasonal adjustments have been calculated for the revised series. The Federal Reserve Board published on Janu- The series revisions reflect changes in the ary 27, 1989, a revised list of over-the-counter method of estimating borrowing from nonbanks. (OTC) stocks that are subject to its margin reg- The old series was calculated until November ulations, effective February 13, 1989. 1980 by subtracting interbank loans from total This revised List of Marginable OTC Stocks borrowing. Subsequently, because of changes in supersedes the list that was effective on Novem- data availability, the series was carried forward ber 14, 1988. The changes that have been made to by adding cumulative changes in several compothe list, which now includes 3,070 OTC stocks, nents of nonbank borrowing to the October 1980 are as follows: 76 stocks have been included for level of the series. the first time, 61 under National Market System The impetus to change this method of calcula- (NMS) designation; 53 stocks previously on the tion came from a study of the data that showed list have been removed for substantially failing to that the estimates were biased downward due to meet the requirements for continued listing; 64 inadequate representation of borrowings by forstocks have been removed for reasons such as eign-related institutions beginning November listing on a national securities exchange or in- 1980, and were biased upward in earlier years volvement in an acquisition. because of differences in the way lenders and The list includes all OTC securities designated borrowers report interbank transactions. The reby the Board pursuant to its established criteria vised series is calculated as a sum of compoas well as all stocks designated as NMS securi- nents: some components were used to estimate ties for which transaction reports are required to the old series, but others were developed to be made pursuant to an effective transaction improve the coverage of the new series. Data for reporting plan. Additional OTC securities may be all components of the new series are available designated as NMS securities in the interim beginning November 1980; earlier data were between the Board's quarterly publications and adjusted to be as comparable as possible with the will be immediately marginable. The next publi- new series. The revised nonbank borrowing secation of the Board's list is scheduled for May ries is currently nearly $30 billion higher than the 1989. old series mainly due to differences in calculating Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

152 Federal Reserve Bulletin • March 1989 (1) borrowing from nonbanks by foreign-related Vice President over Supervision and Regulation institutions and (2) federal funds borrowing. and Discount and Credit. He received a B.A. Revised data on the nonbank borrowing series from the University of Notre Dame and an M. A. are available from January 1973 through Decem- from the University of Illinois. ber 1988. Requests for these data may be ad- Mr. Alvarez joined the Board's staff in 1981 as dressed to the Banking and Money Market Sta- an Attorney and was promoted to Senior Counsel tistics Section, Division of Monetary Affairs, in 1986. He holds an A.B. from Princeton Uni- Board of Governors of the Federal Reserve Sys- versity and a J.D. from Georgetown University. tem, Washington, D.C., 20551. CHANGES IN BOARD STAFF SYSTEM MEMBERSHIP: ADMISSION OF STATE BANKS The Board of Governors has announced the appointment of Bruce J. Summers as Associate The following state banks were admitted to mem- Director in the Division of Federal Reserve Bank bership in the Federal Reserve System during the Operations, effective February 6, 1989. period January 1 to January 31, 1989. The Board of Governors also announced the appointment of Scott G. Alvarez as Assistant Illinois General Counsel in the Legal Division and has Bloomingdale Countryside Bank approved a title change for Ricki R. Tigert from of Stratford Assistant General Counsel to Associate General Vernon Hills Exchange Bank Counsel. of Lake County Mr. Summers had been at the Federal Reserve Michigan Bank of Richmond since 1974 and was the Senior Troy Midwest Guaranty Bank Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

153 Legal Developments FINAL RULE—AMENDMENT TO REGULATIONS Compuscan, Inc.: $.10 par common G, T, U AND X Convenient Food Mart, Inc.: $.10 par common Convergent Solutions, Inc.: Warrants (expire 05—15— The Board of Governors is amending 12 C.F.R. Parts 92) 207, 220, 221 and 224, its Securities Credit Transactions; List of Marginable OTC Stocks. The List of Develcon Electronics Ltd.: No par common Marginable OTC Stocks is comprised of stocks traded Digitext, Inc.: $.01 par common over-the-counter (OTC) that have been determined by DMI Furniture, Inc.: $.10 par common the Board of Governors of the Federal Reserve Sys- Dyansen Corporation: Class A, warrants (expire 12tem to be subject to the margin requirements under 30-88) certain Federal Reserve regulations. The List is published four times a year by the Board as a guide for Elexis Corporation: $.01 par common lenders subject to the regulations and the general Evergood Products Corp.: $.01 par common public. This document sets forth additions to or deletions from the previously published List which was First Commerce Bancshares, Inc. (Nebraska): $1.00 effective November 14, 1988, and will serve to give par common notice to the public about the changed status of certain First Federal Savings Bank (Tennessee): $1.00 par stocks. common Effective February 13, 1989, accordingly, pursuant to the authority of sections 7 and 23 of the Securities GardenAmerica Corporation: No par common Exchange Act of 1934, as amended (15 U.S.C. §§ 78g and 78w), and in accordance with 12 C.F.R. Hodgson Houses, Inc.: $.01 par common §§ 207.2(k) and 207.6(c) (Regulation G), 12 C.F.R. Hosposable Products, Inc.: Class A, warrants (expire §§ 220.2(s) and 220.17(c) (Regulation T), and 01-07-90) 12 C.F.R. §§ 221.2Q) and 221.7(c) (Regulation U), HPSC, Inc.: Warrants (expire 01-15-89) there is set forth below a listing of deletions from and additions to the Board's List of Marginable OTC Independent Bankshares, Inc. (Texas): $1.25 par com- Stocks: mon Deletions From List J.P.M. Industries, Inc.: Class A, no par common Stocks Removed For Failing Continued Listing Requirements Marine Petroleum Trust: $1.00 par units of beneficial interest Mars Stores, Inc.: $.50 par common Amerford International Corp.: $.05 par common Medmaster Systems, Inc.: $.01 par common Associated Hosts, Inc.: $.10 par common Meyers Parking System, Inc.: $.10 par common Michaels, J., Inc.: $1.00 par common Banks of Mid-America, Inc.: $2.50 par cumulative Microbiological Sciences, Inc.: $.10 par common convertible preferred Multi-Local Media Corporation: $.01 par common Bolt Technology Corporation: No par common Cabot Medical Corporation: Warrants (expire 01-16- Nahama & Weagant Energy Corp.: No par common 89) National Bancshares Corporation of Texas: $5.00 par common 10% subordinated debentures Central Realty Investors, Inc.: $1.00 par common Cermetek Microelectronics, Inc.: $.01 par common Citipostal Inc.: $.04 par common Old Republic International Corporation: Series F, Classic Corporation: $.01 par common $4.00 par convertible exchangeable preferred Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

154 Federal Reserve Bulletin • March 1989 Pyramid Oil Company: No par common Delta Woodside Industries, Inc.: $.01 par common Downey Designs International, Inc.: $.01 par common Real America Co.: $1.00 par common Redken Laboratories, Inc.: $.50 par common East Weymouth Savings Bank: $1.00 par common Repco Incorporated: $1.00 par common Entertainment Publications, Inc.: No par common Rockwood Holding Company: $1.00 par common Entre' Computer Centers, Inc.: $.01 par common Southwest Airlines Co.: Warrants (expire 06-25-90) Farmers Group, Inc.: $1.00 par common Suburban Bankshares, Inc.: Class A, $.10 par com- First Federal Savings & Loan Association of Kalamamon zoo: $.01 par common First NH Banks, Inc.: $1.00 par common T.R.V. Minerals Corporation: No par common Taylor, S. Companies, Inc.: $.001 par common Golden Valley Microwave Foods, Inc.: $.01 par com- Tinsley Laboratories, Inc.: $1.00 par common mon Transducer Systems, Inc.: No par common Gotaas-Larson Shipping Corp.: $1.00 par common Triangle Industries Inc.: Class A, $1.00 par common Graphic Packaging Corporation: $.01 par common $1.00 par cumulative convertible junior preferred GrofF Industries, Inc.: $.50 par common Trustcorp, Inc.: Series A, $2.90 par cumulative con- Guaranty National Corporation: $1.00 par common vertible preferred Tucker Holding Company, Inc.: $.10 par common Harvard Industries, Inc.: $.10 par common HHB Systems, Inc.: $.01 par common U. S. Shelter Corporation: $1.00 par common Hyponex Corporation: $.10 par common Waterford Glass Group, PLC.: American Depository Indian Head Banks, Inc. (New Hampshire): $5.00 par Receipts representing 10 ordinary shares common Intertan, Inc.: $1.00 par common XEBEC: No par common Kimmins Corporation: $.01 par common Stocks Removed For Listing On A National London House, Inc.: $.10 par common Securities Exchange Or Being Involved In An Longview Fibre Company: $7.50 par common Acquisition Magma Copper Company: Class B, $.01 par common Acuson Corporation: $.001 par common Metropolitan Consolidated Industries, Inc.: $.10 par Advanced Genetic Sciences, Inc.: $.01 par common common Air Cargo Equipment Corp.: $1.00 par common Minstar, Inc.: $.10 par common Alleco Inc.: $1.00 par common 9-l/2% convertible Morgan, Olmstead, Kennedy & Gardner Capital Corsubordinated debentures poration: $.01 par common Alliance Imaging Inc.: $.01 par common American Consulting Corp., Inc.: $.01 par common National City Corporation: $4.00 par common Nevada National Bancorporation: $.66-% par com- Bank Vermont Corporation: $1.00 par common mon Beazer PLC: American Depository Receipts Berkshire Hathaway Inc.: $5.00 par common Orion Research Inc.: $.10 par common Buehler International, Inc.: $.01 par common Regis Corporation: $.05 par common Cable TV Industries: No par common Resource Pension Shares 1: $.01 par shares of benefi- Canrad, Inc.: $.75 par common cial interest Centerre Bancorporation: $10.00 par common Resource Pension Shares 2: $.10 par shares of benefi- Citizens Financial Group, Inc.: $1.00 par common cial interest City Savings Bank of Meriden (Connecticut): $1.00 par Resource Pension Shares 3: $.10 par shares of beneficommon cial interest Convergent, Inc.: $.01 par common Restaurant Management Services, Inc.: $.10 par com- Cullum Companies, Inc.: $1.00 par common mon Cypress Semiconductor Corp.: $.01 par common Richmond Hill Savings Bank: $1.00 par common Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 155 Service Merchandise Company, Inc.: $.50 par com- Genex Corporation: $.60 par convertible preferred mon Genus, Inc.: No par common Shawmut National Corporation: $.01 par common GNW Financial Corporation: $.01 par common Sierra Capital Realty Trust IV: No par common Somerset Bancorp, Inc.: $2.50 par common Henley Group, Inc., The: $.05 par common Southernnet, Inc.: $.01 par common Hingham Institution for Savings: $1.00 par common Homeowners Group, Inc.: $.01 par common Thetford Corporation: $.25 par common Homestyle Buffet, Inc.: $.01 par common Horizon Gold Shares, Inc.: $.01 par common Unibancorp, Inc.: $5.00 par common Imagine Films Entertainment, Inc.: Warrants (expire Viking Freight, Inc.: No par common 07-30-93) VM Software, Inc.: $.01 par common IMCO Recycling Inc.: $.10 par common Vulcan Packaging Inc.: No par common Ironstone Group, Inc.: $.01 par common Wilton Enterprises, Inc.: $.10 par common Key Production Company, Inc.: $.25 par common Kimmins Environmental Service Corp.: 9% convert- Additions To The List ible subordinated debentures 3-D Systems, Inc.: No par common LEP Group, PLC.: American Depository Receipts Lindsay Manufacturing Company: $1.00 par common American Steel & Wire Corporation: $.20 par common Logic Devices, Inc.: No par common LYPHOMED, Inc.: 5-Vi% convertible subordinated Banc One Corporation: Series B, no par convertible debentures preferred BHA Group, Inc.: Class B, $.01 par common Mallon Resources Corporation: $.01 par common Bird Incorporated: $1.85 cumulative convertible pre- Management Technologies, Inc.: $.01 par common ferred Medical Devices, Inc.: $.10 par common Bliss & Laughlin Industries, Inc.: $.01 par common Metcalf & Eddy Companies, Inc.: $.01 par common Metro Bancshares, Inc.: $.01 par common California State Bank: No par common Midwest Grain Products, Inc.: No par common Carolina First Corporation: $1.00 par common Centennial Savings Bank: $1.00 par common New England Bancorp, Inc.: $.25 par common Community Bancorp, Inc.: $.01 par common Nu-West Industries, Inc.: $.01 par common $100 par Computer Components Corporation: $.01 par common convertible preferred Warrants (expire 06-18-91) Continental Savings of America (California): $1.11 par Office Depot, Inc.: $.01 par common common O.I. Corporation: $.10 par common Otisville Biopharm, Inc.: Warrants (expire 05-28-90) DEL Electronics Corp.: $.10 par common Ovex Fertility Corp.: $.01 par common Eastco Industrial Safety Corp.: $.01 par common P & F Industries, Inc.: $10.00 par convertible pre- E.R.C. Environmental & Energy Services Co., Inc.: ferred $.05 par common Pacific Agricultural Holdings, Inc.: No par common Pacific Bancorporation: $1.88 par common F.F.O. Financial Group, Inc.: $.10 par common Pentech International, Inc.: $.01 par common Fidelity Savings Association (Pennsylvania): $1.00 par Precision Standard, Inc.: $.0001 par common common Prima Energy Corporation: $.015 par common First Financial Caribbean Corporation: $1.00 par com- Prime Bancorp, Inc.: $1.00 par common mon Provident Life & Accident Insurance Company of FLS Holdings, Inc.: Series A, $.01 par convertible America: Class A, $1.00 par common preferred Quadra Logic Technologies, Inc.: No par common FMS Financial Corporation: $.10 par common Rainbow Technologies, Inc.: $.001 par common Garnet Resources Corporation: $.01 par common Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

156 Federal Reserve Bulletin • March 1989 RF & P Corporation: Non-voting, dividend obliga- result of consultations with supervisory authorities tions, $.50 par common from certain major industrial countries, on March 1, 1988, the Federal Reserve issued for public comment a Satellite Information Systems Company: No par com- revised risk-based capital framework that superseded mon the previous proposals. The revised proposal was Showbiz Pizza Time, Inc.: $.10 par common based upon a risk-based capital measure developed Softsel Computer Products, Inc.: $.01 par common jointly by supervisory authorities from the 12 countries that are represented on the Basle Committee on Timbeijack Corporation: $.01 par common Banking Regulations and Supervisory Practices. Tompkins, PLC.: American Depository Receipts The comment period for the Federal Reserve's Total Energold Corporation: No par common proposal ended on May 13, 1988. The Board received Tyco Toys, Inc.: Warrants (expire 06-07-93) comments that addressed various aspects of its proposal from over 180 respondents. Based upon the VMS Strategic Land Fund II: $.01 par common comments received, discussion with the other U.S. VSB Bancorp, Inc.: $.01 par common banking agencies, and further consultation with international supervisory authorities, the Board has made Wainwright Bank & Trust Company: $1.00 par com- some modifications to its March 1988 proposal. mon The Board is now issuing in final form its revised Wellington Leisure Products, Inc.: $.01 par common proposal as Risk-Based Capital Guidelines. The Board Williams, A. L., Corporation, The: 7.25% convertible is issuing two sets of guidelines: one is applicable to subordinated debentures state member banks, and the other is applicable to World-Wide Technology, Inc.: $.01 par common bank holding companies. The guidelines will be appended to the appropriate supervisory regulations for those organizations—for state member banks, the Board's Regulation H (12 C.F.R. Part 208) and for FINAL RULE—AMENDMENT TO REGULATIONS bank holding companies, Regulation Y (12 C.F.R. Part HAND Y 225). The Board's adoption of these guidelines achieves The Board of Governors is amending 12 C.F.R. Part important goals long sought by U.S. banking supervi- 208, its Regulation H, and 12 C.F.R. Part 225, its sors. First, it establishes a risk-based capital frame- Regulation Y, to reflect its revised proposal as Risk- work that is more sensitive than the current leverage Based Capital Guidelines. ratios to risk factors, including off-balance sheet ex- Since the early 1980s, the Board of Governors of the posures. Second, it encourages international banking Federal Reserve System has employed minimum su- organizations to strengthen their capital positions. pervisory leverage ratios of primary and total capital- Finally, it mitigates a source of competitive inequity to-total assets in assessing the capital adequacy of arising from different supervisory capital requirements state-chartered banks that are members of the Federal across countries. Reserve System and bank holding companies (collec- These guidelines represent a major step in the tively, "banking organizations"). process of coordinating with regulatory authorities of While these ratios of capital-to-total assets have other countries to establish appropriate capital stanserved as useful tools for assessing capital adequacy, dards for banking organizations, in accordance with the Board has determined that there is a need for a the International Lending Supervision Act of 1983. In measure that is more sensitive to the risk profiles of that regard, the Board notes that the regulatory auindividual banking organizations. In this regard, the thorities of the 12 major industrial countries intend to Board, together with the other U.S. Federal banking issue appropriate directives to those banking organiagencies, first proposed in early 1986, and again in zations falling under their supervision, in order to 1987 in conjunction with the Bank of England, the facilitate implementation of the risk-based capital adoption of a risk-based capital measure that took framework on an international basis. explicit account of broad differences in risks among a The framework for calculating risk-based capital banking organization's assets and off-balance sheet ratios will take effect on March 15, 1989. As further items. detailed below, the minimum supervisory ratios re- The Board deferred action on these earlier proposals flected in the framework's transitional provisions bein order to participate in the development of a more come effective on December 31,1990. The supervisory broadly based capital framework that would be appli- ratios in their final form become effective on Decemcable to international banking organizations. As a ber 31, 1992. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 157 Pursuant to the Board's authority under section 5(b) The risk-based capital guidelines include both a defiof the Bank Holding Company Act of 1956 (12 U.S.C. nition of capital and a framework for calculating 1844(b)), and section 910 of the International Lending weighted risk assets by assigning assets and off- Supervision Act of 1983 (12 U.S.C. 3909), the Board balance sheet items to broad risk categories. A bank's amends 12 C.F.R. Parts 208 and 225 as follows: risk-based capital ratio is calculated by dividing its qualifying capital (the numerator of the ratio) by its Part 208—Membership of State Banking weighted risk assets (the denominator).3 The definition Institutions in the Federal Reserve System of qualifying capital is outlined below in Section II, and the procedures for calculating weighted risk assets 1. The authority citation for Part 208 continues to read are discussed in Section III. Attachment I illustrates a as follows: sample calculation of weighted risk assets and the risk-based capital ratio. Authority: 12 U.S.C. 248, 321-338, 486, 1814, 3907, The risk-based capital guidelines also establish a 3909, and 15 U.S.C. 781(i). schedule for achieving a minimum supervisory stan- 2. The Board amends Section 208.13 of Part 208 to dard for the ratio of qualifying capital to weighted risk read as follows: assets and provide for transitional arrangements during a phase-in period to facilitate adoption and imple- Section 208.13—Capital Adequacy. mentation of the measure at the end of 1992. These interim standards and transitional arrangements are The standards and guidelines by which the capital set forth in Section IV. adequacy of state member banks will be evaluated by The risk-based guidelines apply to all state member the Board are set forth in Appendix A to Part 208 for banks on a consolidated basis. They are to be used in risk-based capital purposes, and in Appendix B to the the examination and supervisory process as well as in Board's Regulation Y, 12 C.F.R. Part 225, with rethe analysis of applications acted upon by the Federal spect to the ratios relating capital to total assets. Reserve. Thus, in considering an application filed by a state member bank, the Federal Reserve will take into 3. The Board adds an Appendix A to Part 208 to read account the bank's risk-based capital ratio, the reasonas set forth below. ableness of its capital plans, and the degree of progress it has demonstrated toward meeting the interim and APPENDIX A—CAPITAL ADEQUACY GUIDELINES final risk-based capital standards. FOR STATE MEMBER BANKS: RISK-BASED The risk-based capital ratio focuses principally on MEASURE broad categories of credit risk, although the framework for assigning assets and off-balance sheet items I. Overview to risk categories does incorporate elements of transfer risk, as well as limited instances of interest rate and The Board of Governors of the Federal Reserve Sys- market risk. The risk-based ratio does not, however, tem has adopted a risk-based capital measure to assist incorporate other factors that can affect a bank's in the assessment of the capital adequacy of state financial condition. These factors include overall inmember banks.1 The principal objectives of this mea- terest rate exposure; liquidity, funding and market sure are to: risks; the quality and level of earnings; investment or (i) make regulatory capital requirements more sen- loan portfolio concentrations; the quality of loans and sitive to differences in risk profiles among banks; investments; the effectiveness of loan and investment (ii) factor off-balance sheet exposures into the as- policies; and management's ability to monitor and sessment of capital adequacy; control financial and operating risks. (iii) minimize disincentives to holding liquid, low- In addition to evaluating capital ratios, an overall risk assets; and assessment of capital adequacy must take account of (iv) achieve greater consistency in the evaluation of the capital adequacy of major banks throughout the world.2 visory Practices (Basle Supervisors' Committee) and endorsed by the Group of Ten Central Bank Governors. The framework is described in a paper prepared by the BSC entitled "International Convergence of Capital Measurement," July 1988. 1. Supervisory ratios that relate capital to total assets for state 3. Banks will initially be expected to utilize period-end amounts in member banks are outlined in Appendix B to Part 225 of the Federal calculating their risk-based capital ratios. When necessary and appro- Reserve's Regulation Y, 12 C.F.R. Part 225. priate, ratios based on average balances may also be calculated on a 2. The risk-based capital measure is based upon a framework case-by-case basis. Moreover, to the extent banks have data on developed jointly by supervisory authorities from the countries rep- average balances that can be used to calculate risk-based ratios, the resented on the Basle Committee on Banking Regulations and Super- Federal Reserve will take such data into account. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

158 Federal Reserve Bulletin • March 1989 these other factors, including, in particular, the level the level or composition of the institution's capital and severity of problem and classified assets. For this base.4 reason, the final supervisory judgment on a bank's capital adequacy may differ significantly from conclu- A. The Components of Qualifying Capital. sions that might be drawn solely from the level of its risk-based capital ratio. 1. Core capital elements (Tier 1 capital). The Tier 1 The risk-based capital guidelines establish minimum component of a bank's qualifying capital must repreratios of capital to weighted risk assets. In light of the sent at least 50 percent of qualifying total capital and considerations just discussed, banks generally are may consist of the following items that are defined as expected to operate well above the minimum risk- core capital elements: based ratios. In particular, banks contemplating signif- (i) Common stockholders' equity. icant expansion proposals are expected to maintain (ii) Qualifying noncumulative perpetual preferred strong capital levels substantially above the minimum stock (including related surplus). ratios and should not allow significant diminution of (iii) Minority interest in the equity accounts of financial strength below these strong levels to fund consolidated subsidiaries. their expansion plans. Institutions with high or inordinate levels of risk are also expected to operate well Tier 1 capital is generally defined as the sum of the above minimum capital standards. In all cases, insti- core capital elements less goodwill.5 (See Section II tutions should hold capital commensurate with the (B) below for a more detailed discussion of the treatlevel and nature of the risks to which they are ex- ment of goodwill, including an explanation of certain posed. Banks that do not meet the minimum risk- limited grandfathering arrangements.) based standard, or that are otherwise considered to be a. Common stockholders' equity. Common stockinadequately capitalized, are expected to develop and holders' equity includes: common stock; related implement plans acceptable to the Federal Reserve for surplus; and retained earnings, including capital achieving adequate levels of capital within a reason- reserves and adjustments for the cumulative effect able period of time. of foreign currency translation, net of any trea- The Board will monitor the implementation and sury stock. effect of these guidelines in relation to domestic and b. Perpetual preferred stock. Perpetual preferred international developments in the banking industry. stock is defined as preferred stock that does not When necessary and appropriate, the Board will con- have a maturity date, that cannot be redeemed at sider the need to modify the guidelines in light of any the option of the holder of the instrument, and significant changes in the economy, financial markets, that has no other provisions that will require banking practices, or other relevant factors. future redemption of the issue. In general, preferred stock will qualify for inclusion in capital II. Definition of Qualifying Capital for the only if it can absorb losses while the issuer Risk-Based Capital Ratio operates as a going concern (a fundamental characteristic of equity capital) and only if the issuer A bank's qualifying total capital consists of two types has the ability and legal right to defer or eliminate of capital components: "core capital elements" (com- preferred dividends. prising Tier 1 capital) and "supplementary capital elements" (comprising Tier 2 capital). These capital The only form of perpetual preferred stock that state elements and the various limits, restrictions, and de- member banks may consider as an element of Tier 1 ductions to which they are subject, are discussed capital is noncumulative perpetual preferred. While below and are set forth in Attachment II. the guidelines allow for the inclusion of noncumulative To qualify as an element of Tier 1 or Tier 2 capital, perpetual preferred stock in Tier 1, it is desirable from a capital instrument may not contain or be covered by a supervisory standpoint that voting common stockany covenants, terms, or restrictions that are incon- holders' equity remain the dominant form of Tier 1 sistent with safe and sound banking practices. capital. Thus, state member banks should avoid over- Redemptions of permanent equity or other capital instruments before stated maturity could have a significant impact on a bank's overall capital structure. 4. Consultation would not ordinarily be necessary if an instrument were redeemed with the proceeds of, or replaced by, a like amount of Consequently, a bank considering such a step should a similar or higher quality capital instrument and the organization's consult with the Federal Reserve before redeeming capital position is considered fully adequate by the Federal Reserve. any equity or debt capital instrument (prior to matu- 5. During the transition period and subject to certain limitations set forth in Section IV below, Tier 1 capital may also include items rity) if such redemption could have a material effect on defined as supplementary capital elements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 159 reliance on preferred stock or non-voting equity ele- a. Allowance for loan and lease losses. Allowments within Tier 1.6 ances for loan and lease losses are reserves that Perpetual preferred stock in which the dividend is have been established through a charge against reset periodically based, in whole or in part, upon the earnings to absorb future losses on loans or lease bank's current credit standing (that is, auction rate financing receivables. Allowances for loan and perpetual preferred stock, including so-called Dutch lease losses exclude "allocated transfer risk auction, money market, and remarketable preferred) reserves,"9 and reserves created against identiwill not qualify for inclusion in Tier 1 capital.7 Such fied losses. instruments, however, qualify for inclusion in Tier 2 capital. During the transition period, the risk-based capital c. Minority interest in equity accounts of consol- guidelines provide for reducing the amount of this idated subsidiaries. This element is included in allowance that may be included in an institution's total Tier 1 because, as a general rule, it represents capital. Initially, it is unlimited. However, by year-end equity that is freely available to absorb losses in 1990, the amount of the allowance for loan and lease operating subsidiaries. While not subject to an losses that will qualify as capital will be limited to 1.5 explicit sublimit within Tier 1, banks are expected percent of an institution's weighted risk assets. By the to avoid using minority interest in the equity end of the transition period, the amount of the allowaccounts of consolidated subsidiaries as an ave- ance qualifying for inclusion in Tier 2 capital may not nue for introducing into their capital structures exceed 1.25 percent of weighted risk assets.10 elements that might not otherwise qualify as Tier b. Perpetual preferred stock. Perpetual preferred 1 capital or that would, in effect, result in an stock, as noted above, is defined as preferred excessive reliance on preferred stock within stock that has no maturity date, that cannot be Tier 1. redeemed at the option of the holder, and that has 2. Supplementary capital elements (Tier 2 capital). no other provisions that will require future re- The Tier 2 component of a bank's qualifying total demption of the issue. Such instruments are eligicapital may consist of the following items that are ble for inclusion in Tier 2 capital without limit.11 defined as supplementary capital elements: c. Hybrid capital instruments and mandatory (i) Allowance for loan and lease losses (subject to convertible debt securities. Hybrid capital instrulimitations discussed below). ments include instruments that are essentially (ii) Perpetual preferred stock and related surplus permanent in nature and that have certain char- (subject to conditions discussed below). acteristics of both equity and debt. Such instru- (iii) Hybrid capital instruments (as defined below) ments may be included in Tier 2 without limit. The and mandatory convertible debt securities. general criteria hybrid capital instruments must (iv) Term subordinated debt and intermediate-term meet in order to qualify for inclusion in Tier 2 preferred stock, including related surplus (subject to capital are listed below: limitations discussed below). The maximum amount of Tier 2 capital that may be to be included in capital, such reserves must be accepted by the bank's included in a bank's qualifying total capital is limited home supervisor. Although such undisclosed reserves are common in to 100 percent of Tier 1 capital (net of goodwill). some countries, under generally accepted accounting principles (GAAP) and long-standing supervisory practice, these types of re- The elements of supplementary capital are disserves are not recognized for state member banks. cussed in greater detail below.8 9. Allocated transfer risk reserves are reserves that have been established in accordance with Section 905(a) of the International Lending Supervision Act of 1983, 12 U.S.C. § 3904(a), against certain assets whose value U.S. supervisory authorities have found to be 6. The Federal Reserve's capital guidelines for bank holding com- significantly impaired by protracted transfer risk problems. panies limit the amount of perpetual preferred stock that may be 10. The amount of the allowance for loan and lease losses that may included in Tier 1 to 25 percent of Tier 1. (See 12 C.F.R. Part 225, be included in Tier 2 capital is based on a percentage of gross weighted Appendix A.) risk assets. A bank may deduct reserves for loan and lease losses in 7. Adjustable rate noncumulative perpetual preferred stock (that is, excess of the amount permitted to be included in Tier 2 capital, as well perpetual preferred stock in which the dividend rate is not affected by as allocated transfer risk reserves, from the sum of gross weighted risk the issuer's credit standing or financial condition but is adjusted assets and use the resulting net sum of weighted risk assets in periodically according to a formula based solely on general market computing the denominator of the risk-based capital ratio. interest rates) may be included in Tier 1. 11. Long-term preferred stock with an original maturity of 20 years 8. The Basle capital framework also provides for the inclusion of or more (including related surplus) will also qualify in this category as "undisclosed reserves" in Tier 2. As defined in the framework, an element of Tier 2. If the holder of such an instrument has a right to undisclosed reserves represent accumulated after-tax retained earn- require the issuer to redeem, repay, or repurchase the instrument ings that are not disclosed on the balance sheet of a bank. Apart from prior to the original stated maturity, maturity would be defined, for the fact that these reserves are not disclosed publicly, they are risk-based capital purposes, as the earliest possible date on which the essentially of the same quality and character as retained earnings, and, holder can put the instrument back to the issuing bank. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

160 Federal Reserve Bulletin • March 1989 (1) The instrument must be unsecured; fully possible date on which the holder can put the instrupaid-up; and subordinated to general creditors ment back to the issuing bank.) and must also be subordinated to claims of In the case of subordinated debt, the instrument depositors. must be unsecured and must clearly state on its face (2) The instrument must not be redeemable at that it is not a deposit and is not insured by a Federal the option of the holder prior to maturity, agency. To qualify as capital in banks, debt must be except with the prior approval of the Federal subordinated to general creditors and claims of depos- Reserve. (Consistent with the Board's criteria itors. Consistent with current regulatory requirefor perpetual debt and mandatory convertible ments, if a state member bank wishes to redeem securities, this requirement implies that holders subordinated debt before the stated maturity, it must of such instruments may not accelerate the receive prior approval of the Federal Reserve. payment of principal except in the event of e. Discount of supplementary capital instruments. bankruptcy, insolvency, or reorganization.) As a limited-life capital instrument approaches (3) The instrument must be available to partic- maturity it begins to take on characteristics of a ipate in losses while the issuer is operating as a short-term obligation. For this reason, the outgoing concern. (Term subordinated debt would standing amount of term subordinated debt and not meet this requirement.) To satisfy this re- any long- or intermediate-life, or term, preferred quirement, the instrument must convert to com- stock eligible for inclusion in Tier 2 is reduced, or mon or perpetual preferred stock in the event discounted, as these instruments approach matuthat the accumulated losses exceed the sum of rity: one-fifth of the original amount, less any the retained earnings and capital surplus ac- redemptions, is excluded each year during the counts of the issuer. instrument's last five years before maturity.12 (4) The instrument must provide the option for f. Revaluation reserves. Such reserves reflect the the issuer to defer interest payments if: (a) the formal balance sheet restatement or revaluation issuer does not report a profit in the preceding for capital purposes of asset carrying values to annual period (defined as combined profits for reflect current market values. In the United the most recent four quarters), and (b) the States, banks, for the most part, follow GAAP issuer eliminates cash dividends on common when preparing their financial statements, and and preferred stock. GAAP generally does not permit the use of market* value accounting. For this and other reasons, Mandatory convertible debt securities in the form of the Federal banking agencies generally have not equity contract notes that meet the criteria set forth in included unrealized asset values in capital ratio 12 C.F.R. Part 225, Appendix B, also qualify as un- calculations, although they have long taken such limited elements of Tier 2 capital. In accordance with values into account as a separate factor in assessthat appendix, equity commitment notes issued prior ing the overall financial strength of a bank. to May 15, 1985 also qualify for inclusion in Tier 2. Consistent with long-standing supervisory practice, d. Subordinated debt and intermediate-term pre- the excess of market values over book values for ferred stock. The aggregate amount of term sub- assets held by state member banks will generally not ordinated debt (excluding mandatory convertible be recognized in supplementary capital or in the debt) and intermediate-term preferred stock that calculation of the risk-based capital ratio. However, may be treated as supplementary capital is limited all banks are encouraged to disclose their equivalent of to 50 percent of Tier 1 capital (net of goodwill). premises (building) and equity revaluation reserves. Amounts in excess of these limits may be issued Such values will be taken into account as additional and, while not included in the ratio calculation, will be taken into account in the overall assessment of a bank's funding and financial condition. 12. For example, outstanding amounts of these instruments that count as supplementary capital include: 100 percent of the outstanding Subordinated debt and intermediate-term preferred amounts with remaining maturities of more than five years; 80 percent stock must have an original weighted average maturity of outstanding amounts with remaining maturities of four to five years; of at least five years to qualify as supplementary 60 percent of outstanding amounts with remaining maturities of three to four years; 40 percent of outstanding amounts with remaining capital. (If the holder has the option to require the maturities of two to three years; 20 percent of outstanding amounts issuer to redeem, repay, or repurchase the instrument with remaining maturities of one to two years; and 0 percent of outstanding amounts with remaining maturities of less than one year. prior to the original stated maturity, maturity would be Such instruments with a remaining maturity of less than one year are defined, for risk-based capital purposes, as the earliest excluded from Tier 2 capital. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 161 considerations in assessing overall capital strength and institution should reassess such values during its anfinancial condition. nual audit. Banks should use appropriate amortization methods and assign prudent amortization periods for B. Deductions from Capital and Other intangible assets. Examiners will review the carrying Adjustments. value of these assets, together with supporting documentation, as well as the appropriateness of including Certain assets are deducted from a bank's capital for particular intangible assets in a bank's capital calculathe purpose of calculating the risk-based capital tion. In making such evaluations, examiners will conratio.13 These assets include: sider a number of factors, including: (i) Goodwill—deducted from the sum of core capital (1) The reliability and predictability of any cash elements. flows associated with the asset and the degree (ii) Investments in banking and finance subsidiaries of certainty that can be achieved in periodically that are not consolidated for accounting or supervi- determining the asset's useful life and value; sory purposes and, on a case-by-case basis, invest- (2) The existence of an active and liquid market ments in other designated subsidiaries or associated for the asset; and companies at the discretion of the Federal Re- (3) The feasibility of selling the asset apart from serve—deducted from total capital components. the bank or from the bulk of its assets. (iii)Reciprocal holdings of capital instruments of banking organizations—deducted from total capital While all intangible assets will be monitored, intancomponents. gible assets (other than goodwill) in excess of 25 1. Goodwill and other intangible assets. percent of Tier 1 capital (which is defined net of a. Goodwill. Goodwill is an intangible asset that goodwill) will be subject to particularly close scrutiny, represents the excess of the purchase price over both through the examination process and by other the fair market value of identifiable assets ac- appropriate means. Whenever necessary—in particuquired less liabilities assumed in acquisitions ac- lar, when assessing applications to expand or to encounted for under the purchase method of ac- gage in other activities that could entail unusual or counting. State member banks generally have not higher-than-normal risks—the Board will, on a casebeen allowed to include goodwill in regulatory by-case basis, continue to consider the level of an capital under current supervisory policies. Con- individual bank's tangible capital ratios (after deductsistent with this policy, all goodwill in state mem- ing all intangible assets), together with the quality and ber banks will be deducted from Tier 1 capital.14 value of the bank's tangible and intangible assets, in b. Other intangible assets. The Federal Reserve is making an overall assessment of capital adequacy. not proposing, as a matter of general policy, to Consistent with long-standing Board policy, banks deduct automatically any other intangible assets experiencing substantial growth, whether internally or from the capital of state member banks. The by acquisition, are expected to maintain strong capital Federal Reserve, however, will continue to mon- positions substantially above minimum supervisory itor closely the level and quality of other intangi- levels, without significant reliance on intangible asble assets—including purchased mortgage servic- sets. ing rights, leaseholds, and core deposit value — 2. Investments in certain subsidiaries. The aggregate and take them into account in assessing the capital amount of investments in banking or finance adequacy and overall asset quality of banks. subsidiaries15 whose financial statements are not consolidated for accounting or bank regulatory reporting Generally, banks should review all intangible assets purposes will be deducted from a bank's total capital at least quarterly and, if necessary, make appropriate components.16 Generally, investments for this purpose reductions in their carrying values. In addition, in are defined as equity and debt capital investments and order to conform with prudent banking practice, an 13. Any assets deducted from capital in computing the numerator of 15. For this purpose, a banking and finance subsidiary generally is the ratio are not included in weighted risk assets in computing the defined as any company engaged in banking or finance in which the denominator of the ratio. parent institution holds directly or indirectly more than 50 percent of 14. An exception is made for those state member banks that have the outstanding voting stock, or which is otherwise controlled or acquired goodwill in connection with supervisory mergers with trou- capable of being controlled by the parent institution. bled or failed depository institutions and that were given explicit 16. An exception to this deduction would be made in the case of authority to include such goodwill in capital under the then-existing shares acquired in the regular course of securing or collecting a debt capital policy. Consistent with this approach, state member banks will previously contracted in good faith. The requirements for consolidabe allowed to include such goodwill in Tier 1 capital for risk-based tion are spelled out in the instructions to the commercial bank capital purposes. Consolidated Reports of Condition and Income (Call Report). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

162 Federal Reserve Bulletin • March 1989 any other instruments that are deemed to be capital in stand behind the losses of affiliated institutions, such the particular subsidiary. as joint ventures and associated companies, in order to Advances (that is, loans, extensions of credit, guar- protect the reputation of the organization as a whole. antees, commitments, or any other forms of credit In some cases, this has led to losses that have exexposure) to the subsidiary that are not deemed to be ceeded the investments in such organizations. capital will generally not be deducted from a bank's For this reason, the Federal Reserve will monitor capital. Rather, such advances generally will be in- the level and nature of such investments for individual cluded in the bank's consolidated assets and be as- banks and, on a case-by-case basis may, for risk-based signed to the 100 percent risk category, unless such capital purposes, deduct such investments from total obligations are backed by recognized collateral or capital components, apply an appropriate riskguarantees, in which case they will be assigned to the weighted capital charge against the bank's proportionrisk category appropriate to such collateral or guaran- ate share of the assets of its associated companies, tees. These advances may, however, also be deducted require a line-by-line consolidation of the entity (in the from the bank's capital if, in the judgment of the event that the bank's control over the entity makes it Federal Reserve, the risks stemming from such ad- the functional equivalent of a subsidiary), or otherwise vances are comparable to the risks associated with require the bank to operate with a risk-based capital capital investments or if the advances involve other ratio above the minimum. risk factors that warrant such an adjustment to capital In considering the appropriateness of such adjustfor supervisory purposes. These other factors could ments or actions, the Federal Reserve will generally include, for example, the absence of collateral sup- take into account whether: port. (1) The bank has significant influence over the Inasmuch as the assets of unconsolidated banking financial or managerial policies or operations of and finance subsidiaries are not fully reflected in a the subsidiary, joint venture, or associated bank's consolidated total assets, such assets may be company; viewed as the equivalent of off-balance sheet expo- (2) The bank is the largest investor in the sures since the operations of an unconsolidated sub- affiliated company ; or sidiary could expose the bank to considerable risk. For (3) Other circumstances prevail that appear to this reason, it is generally appropriate to view the closely tie the activities of the affiliated comcapital resources invested in these unconsolidated pany to the bank. entities as primarily supporting the risks inherent in 3. Reciprocal holdings of banking organizations' capthese off-balance sheet assets, and not generally avail- ital instruments. Reciprocal holdings of banking orgaable to support risks or absorb losses elsewhere in the nizations' capital instruments (that is, instruments that bank. qualify as Tier 1 or Tier 2 capital)18 will be deducted The Federal Reserve may, on a case-by-case basis, from a bank's total capital components for the purpose also deduct from a bank's capital, investments in of determining the numerator of the risk-based capital certain other subsidiaries in order to determine if the ratio. consolidated bank meets minimum supervisory capital Reciprocal holdings are cross-holdings resulting requirements without reliance on the resources in- from formal or informal arrangements in which two or vested in such subsidiaries. more banking organizations swap, exchange, or other- The Federal Reserve will not automatically deduct wise agree to hold each other's capital instruments. investments in other unconsolidated subsidiaries or Generally, deductions will be limited to intentional investments in joint ventures and associated cross-holdings. At present, the Board does not intend companies.17 Nonetheless, the resources invested in to require banks to deduct non-reciprocal holdings of these entities, like investments in unconsolidated such capital instruments.19'20 banking and finance subsidiaries, support assets not consolidated with the rest of the bank's activities and, therefore, may not be generally available to support additional leverage or absorb losses elsewhere in the 18. See 12 C.F.R. Part 225, Appendix A for instruments that qualify as Tier 1 and Tier 2 capital for bank holding companies. bank. Moreover, experience has shown that banks 19. Deductions of holdings of capital securities also would not be made in the case of interstate "stake out" investments that comply with the Board's Policy Statement on Nonvoting Equity Investments, 12 C.F.R. 225.143. In addition, holdings of capital instruments issued 17. The definition of such entities is contained in the instructions to by other banking organizations but taken in satisfaction of debts the commercial bank Call Report. Under regulatory reporting proce- previously contracted would be exempt from any deduction from dures, associated companies and joint ventures generally are defined capital. as companies in which the bank owns 20 to 50 percent of the voting 20. The Board intends to monitor non-reciprocal holdings of other stock. banking organizations' capital instruments and to provide information Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 163 III. Procedures for Computing Weighted Risk The terms "claims" and "securities" used in the Assets and Off-Balance Sheet Items context of the discussion of risk weights, unless otherwise specified, refer to loans or debt obligations of A. Procedures. the entity on whom the claim is held. Assets in the form of stock or equity holdings in commercial or Assets and credit equivalent amounts of off-balance financial firms are assigned to the 100 percent risk sheet items of state member banks are assigned to one category, unless some other treatment is explicitly of several broad risk categories, according to the permitted. obligor, or, if relevant, the guarantor or the nature of the collateral. The aggregate dollar value of the B. Collateral, Guarantees, and Other amount in each category is then multiplied by the risk Considerations. weight associated with that category. The resulting weighted values from each of the risk categories are 1. Collateral. The only forms of collateral that are added together, and this sum is the bank's total formally recognized by the risk-based capital frameweighted risk assets that comprise the denominator of work are: cash on deposit in the bank; securities the risk-based capital ratio. Attachment I provides a issued or guaranteed by the central governments of the sample calculation. OECD-based group of countries,22 U.S. Government Risk weights for all off-balance sheet items are agencies, or U.S. Government-sponsored agencies; determined by a two-step process. First, the "credit and securities issued by multilateral lending instituequivalent amount" of off-balance sheet items is de- tions or regional development banks. Claims fully termined, in most cases by multiplying the off-balance secured by such collateral are assigned to the 20 sheet item by a credit conversion factor. Second, the percent risk weight category. credit equivalent amount is treated like any balance The extent to which qualifying securities are recogsheet asset and generally is assigned to the appropriate nized as collateral is determined by their current risk category according to the obligor, or, if relevant, market value. If a claim is only partially secured, that the guarantor or the nature of the collateral. is, the market value of the pledged securities is less In general, if a particular item qualifies for place- than the face amount of a balance sheet asset or an ment in more than one risk category, it is assigned to off-balance sheet item, the portion that is covered by the category that has the lowest risk weight. A holding the market value of the qualifying collateral is assigned of a U.S. municipal revenue bond that is fully guaran- to the 20 percent risk category, and the portion of the teed by a U.S. bank, for example, would be assigned claim that is not covered by collateral in the form of the 20 percent risk weight appropriate to claims guar- cash or a qualifying security is assigned to the risk anteed by U.S. banks, rather than the 50 percent risk category appropriate to the obligor or, if relevant, the weight appropriate to U.S. municipal revenue bonds.21 guarantor. For example, to the extent that a claim on a private sector obligor is collateralized by the current market value of U.S. Government securities, it would on such holdings to the Basle Supervisors' Committee as called for be placed in the 20 percent risk category, and the under the Basle capital framework. balance would be assigned to the 100 percent risk 21. An investment in shares of a fund whose portfolio consists category. solely of various securities or money market instruments that, if held separately, would be assigned to different risk categories, is generally 2. Guarantees. Guarantees of the OECD and nonassigned to the risk category appropriate to the highest risk-weighted OECD central governments, U.S. Government agensecurity or instrument that the fund is permitted to hold in accordance with its stated investment objectives. However, in no case will indirect holdings through shares in such funds be assigned to the zero percent risk category. For example, if a fund is permitted to hold U.S. the fund's investments, holdings in the fund will be assigned to the 100 Treasuries and commercial paper, shares in that fund would generally percent risk category. During the examination process, the treatment be assigned the 100 percent risk weight appropriate to commercial of shares in such funds that are assigned to a lower risk weight will be paper, regardless of the actual composition of the fund's investments subject to examiner review to ensure that they have been assigned an at any particular time. Shares in a fund that may invest only in U.S. appropriate risk weight. Treasury securities would generally be assigned to the 20 percent risk 22. The OECD-based group of countries comprises all full members category. If, in order to maintain a necessary degree of short-term of the Organization for Economic Cooperation and Development liquidity, a fund is permitted to hold an insignificant amount of its (OECD), as well as countries that have concluded special lending assets in short-term, highly liquid securities of superior credit quality arrangements with the International Monetary Fund (IMF) associated that do not qualify for a preferential risk weight, such securities will with the Fund's General Arrangements to Borrow. The OECD ingenerally not be taken into account in determining the risk category cludes the following countries: Australia, Austria, Belgium, Canada, into which the bank's holding in the overall fund should be assigned. Denmark, the Federal Republic of Germany, Finland, France, Regardless of the composition of the fund's securities, if the fund Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, engages in any activities that appear speculative in nature (for New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turexample, use of futures, forwards, or option contracts for purposes key, the United Kingdom, and the United States. Saudi Arabia has other than to reduce interest rate risk) or has any other characteristics concluded special lending arrangements with the IMF associated with that are inconsistent with the preferential risk weighting assigned to the Fund's General Arrangements to Borrow. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

164 Federal Reserve Bulletin • March 1989 cies, U.S. Government-sponsored agencies, state and issued mortgage-backed securities that are assigned to local governments of the OECD-based group of coun- a lower risk weight category will be subject to examtries, multilateral lending institutions and regional de- iner review to ensure that they meet the appropriate velopment banks, U.S. depository institutions, and criteria. foreign banks are also recognized. If a claim is par- While the risk category to which mortgage-backed tially guaranteed, that is, coverage of the guarantee is securities is assigned will generally be based upon the less than the face amount of a balance sheet asset or an issuer or guarantor or, in the case of privately-issued off-balance sheet item, the portion that is not fully mortgage-backed securities, the assets underlying the covered by the guarantee is assigned to the risk security, any class of a mortgage-backed security that category appropriate to the obligor or, if relevant, to can absorb more than its pro rata share of loss without any collateral. The face amount of a claim covered by the whole issue being in default (for example, a sotwo types of guarantees that have different risk called subordinated class or residual interest), is asweights, such as a U.S. Government guarantee and a signed to the 100 percent risk category. Furthermore, state guarantee, is to be apportioned between the two all stripped mortgage-backed securities, including inrisk categories appropriate to the guarantors. terest-only strips (IOs), principal-only strips (POs), The existence of other forms of collateral or guar- and similar instruments are also assigned to the 100 antees that the risk-based capital framework does not percent risk weight category, regardless of the issuer formally recognize may be taken into consideration in or guarantor. evaluating the risks inherent in a bank's loan portfolio 4. Maturity. Maturity is generally not a factor in —which, in turn, would affect the overall supervisory assigning items to risk categories with the exception of assessment of the bank's capital adequacy. claims on non-OECD banks, commitments, and inter- 3. Mortgage-backed securities. Mortgage-backed se- est rate and foreign exchange rate contracts. curities, including pass-throughs and collateralized Except for commitments, short-term is defined as mortgage obligations (but not stripped mortgage- one year or less remaining maturity and long-term is backed securities), that are issued or guaranteed by a defined as over one year remaining maturity. In the U.S. Government agency or U.S. Government-spon- case of commitments, short-term is defined as one sored agency are assigned to the risk weight category year or less original maturity and long-term is defined appropriate to the issuer or guarantor. Generally, a as over one year original maturity.24 privately-issued mortgage-backed security meeting certain criteria set forth in the accompanying C. Risk Weights. footnote,23 is treated as essentially an indirect holding of the underlying assets, and assigned to the same risk Attachment III contains a listing of the risk categories, category as the underlying assets, but in no case to the a summary of the types of assets assigned to each zero percent risk category. Privately-issued mortgagecategory and the weight associated with each catebacked securities whose structures do not qualify gory, that is, 0 percent, 20 percent, 50 percent, and 100 them to be regarded as indirect holdings of the underpercent. A brief explanation of the components of lying assets are assigned to the 100 percent risk each category follows. category. During the examination process, privately- 1. Category 1: zero percent. This category includes cash (domestic and foreign) owned and held in all offices of the bank or in transit and gold bullion held in 23. A privately-issued mortgage-backed security may be treated as the bank's own vaults or in another bank's vaults on an indirect holding of the underlying assets provided that: (1) the underlying assets are held by an independent trustee and the trustee an allocated basis, to the extent it is offset by gold has a first priority, perfected security interest in the underlying assets bullion liabilities.25 The category also includes all on behalf of the holders of the security; (2) either the holder of the security has an undivided pro rata ownership interest in the underly- direct claims (including securities, loans, and leases) ing mortgage assets or the trust or single purpose entity (or conduit) on, and the portions of claims that are directly and that issues the security has no liabilities unrelated to the issued unconditionally guaranteed by, the central securities; (3) the security is structured such that the cash flow from the underlying assets in all cases fully meets the cash flow require- governments26 of the OECD countries and U.S. Govments of the security without undue reliance on any reinvestment income; and (4) there is no material reinvestment risk associated with any funds awaiting distribution to the holders of the security. In addition, if the underlying assets of a mortgage-backed security are 24. Through year-end 1992, remaining, rather than original, matucomposed of more than one type of asset, for example, U.S. Govern- rity may be used for determining the maturity of commitments. ment-sponsored agency securities and privately-issued pass-through 25. All other holdings of bullion are assigned to the 100 percent risk securities that qualify for the 50 percent risk category, the entire category. mortgage-backed security is generally assigned to the category appro- 26. A central government is defined to include departments and priate to the highest risk-weighted asset underlying the issue. Thus, in ministries, including the central bank, of the central government. The this example, the security would receive the 50 percent risk weight U.S. central bank includes the 12 Federal Reserve Banks, and the appropriate to the privately-issued pass-through securities. stock held in these banks as a condition of membership is assigned to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 165 ernment agencies,27 as well as all direct local currency portions of long-term claims that are guaranteed by, claims on, and the portions of local currency claims U.S. depository institutions and OECD banks.31 that are directly and unconditionally guaranteed by, This category also includes the portions of claims the central governments of non-OECD countries, to that are conditionally guaranteed by OECD central the extent that the bank has liabilities booked in that governments and U.S. Government agencies, as well currency. A claim is not considered to be uncondition- as the portions of local currency claims that are ally guaranteed by a central government if the validity conditionally guaranteed by non-OECD central govof the guarantee is dependent upon some affirmative ernments, to the extent that the bank has liabilities action by the holder or a third party. Generally, booked in that currency. In addition, this category securities guaranteed by the U.S. Government or its includes claims on, and the portions of claims that are agencies that are actively traded in financial markets, guaranteed by, U.S. Government-sponsored32 agensuch as GNMA securities, are considered to be uncon- cies and claims on, and the portions of claims guaranditionally guaranteed. teed by, the International Bank for Reconstruction and 2. Category 2:20 percent. This category includes cash Development (World Bank), the Interamerican Develitems in the process of collection, both foreign and opment Bank, the Asian Development Bank, the Afdomestic; short-term claims (including demand depos- rican Development Bank, the European Investment its) on, and the portions of short-term claims that are Bank, and other multilateral lending institutions or guaranteed28 by, U.S. depository institutions29 and regional development banks in which the U.S. Govforeign banks;30 and long-term claims on, and the ernment is a shareholder or contributing member. General obligation claims on, or portions of claims guaranteed by the full faith and credit of, states or the zero percent risk category. The definition of central government other political subdivisions of the U.S. or other coundoes not include state, provincial, or local governments; or commercial enterprises owned by the central government. In addition, it does tries of the OECD-based group are also assigned to not include local government entities or commercial enterprises this category.33 whose obligations are guaranteed by the central government, although This category also includes the portions of claims any claims on such entities guaranteed by central governments are placed in the same general risk category as other claims guaranteed by (including repurchase agreements) collateralized by central governments. OECD central governments are defined as cash on deposit in the bank; by securities issued or central governments of the OECD-based group of countries; non- OECD central governments are defined as central governments of guaranteed by OECD central governments, U.S. Govcountries that do not belong to the OECD-based group of countries. ernment agencies, or U.S. Government-sponsored 27. A U.S. Government agency is defined as an instrumentality of agencies; or by securities issued by multilateral lendthe U.S. Government whose obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the ing institutions or regional development banks in full faith and credit of the U.S. Government. Such agencies include which the U.S. Government is a shareholder or conthe Government National Mortgage Association (GNMA), the Vetertributing member. ans Administration (VA), the Federal Housing Administration (FHA), the Export-Import Bank (Exim Bank), the Overseas Private Investment Corporation (OPIC), the Commodity Credit Corporation (CCC), and the Small Business Administration (SBA). 28. Claims guaranteed by U.S. depository institutions and foreign banks include risk participations in both bankers acceptances and standby letters of credit, as well as participations in commitments, business; and has the power to accept demand deposits. Claims on, that are conveyed to other U.S. depository institutions or foreign and the portions of claims that are guaranteed by, a non-OECD central banks. bank are treated as claims on, or guaranteed by, a non-OECD bank, 29. U.S. depository institutions are defined to include branches except for local currency claims on, and the portions of local currency (foreign and domestic) of federally-insured banks and depository claims that are guaranteed by, a non-OECD central bank that are institutions chartered and headquartered in the 50 states of the United funded in local currency liabilities. The latter claims are assigned to States, the District of Columbia, Puerto Rico, and U.S. territories and either the zero percent risk category. possessions. The definition encompasses banks, mutual or stock 31. Long-term claims on, or guaranteed by, non-OECD banks and savings banks, savings or building and loan associations, cooperative all claims on bank holding companies are assigned to the 100 percent banks, credit unions, and international banking facilities of domestic risk category, as are holdings of bank-issued securities that qualify as banks. U.S.-chartered depository institutions owned by foreigners are capital of the issuing banks. also included in the definition. However, branches and agencies of 32. For this purpose, U.S. Government-sponsored agencies are foreign banks located in the U.S., as well as all bank holding defined as agencies originally established or chartered by the Federal companies, are excluded. government to serve public purposes specified by the U.S. Congress 30. Foreign banks are distinguished as either OECD banks or but whose obligations are not explicitly guaranteed by the full faith and non-OECD banks. OECD banks include banks and their branches credit of the U.S. Government. These agencies include the Federal (foreign and domestic) organized under the laws of countries (other Home Loan Mortgage Corporation (FHLMC), the Federal National than the U.S.) that belong to the OECD-based group of countries. Mortgage Association (FNMA), the Farm Credit System, the Federal Non-OECD banks include banks and their branches (foreign and Home Loan Bank System, and the Student Loan Marketing Associdomestic) organized under the laws of countries that do not belong to ation (SLMA). Claims on U.S. Government-sponsored agencies inthe OECD-based group of countries. For this purpose, a bank is clude capital stock in a Federal Home Loan Bank that is held as a defined as an institution that engages in the business of banking; is condition of membership in that Bank. recognized as a bank by the bank supervisory or monetary authorities 33. Claims on, or guaranteed by, states or other political subdiviof the country of its organization or principal banking operations; sions of countries that do not belong to the OECD-based group of receives deposits to a substantial extent in the regular course of countries are placed in the 100 percent risk category. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

166 Federal Reserve Bulletin • March 1989 3. Category 3:50 percent. This category includes loans 4. Category 4:100 percent. All assets not included in fully secured by first liens34 on 1-4 family residential the categories above are assigned to this category, properties,35 either owner-occupied or rented, pro- which comprises standard risk assets. The bulk of the vided that such loans have been made in accordance assets typically found in a loan portfolio would be with prudent underwriting standards, including a con- assigned to the 100 percent category. servative loan-to-value ratio;36 are performing in ac- This category includes long-term claims on, or guarcordance with their original terms; and are not 90 days anteed by, non-OECD banks, and all claims on nonor more past due or carried in nonaccrual status.37 OECD central governments that entail some degree of Also included in this category are privately-issued transfer risk.38 This category also includes all claims mortgage-backed securities provided that: on foreign and domestic private sector obligors not (1) the structure of the security meets the crite- included in the categories above (including loans to ria described in section III (B)(3) above; nondepository financial institutions and bank holding (2) if the security is backed by a pool of con- companies); claims on commercial firms owned by the ventional mortgages, each underlying mortgage public sector; customer liabilities to the bank on meets the criteria described above in this sec- acceptances outstanding involving standard risk tion for eligibility for the 50 percent risk weight claims;39 investments in fixed assets, premises, and category at the time the pool is originated; and other real estate owned; common and preferred stock (3) if the security is backed by privately-issued of corporations, including stock acquired for debts mortgage-backed securities, each underlying previously contracted; commercial and consumer security qualifies for the 50 percent risk cate- loans (except those assigned to lower risk categories gory. Privately-issued mortgage-backed securi- due to recognized guarantees or collateral and loans for residential property that qualify for a lower risk ties that do not meet these criteria or that do not weight); mortgage-backed securities that do not meet qualify for a lower risk weight are generally criteria for assignment to a lower risk weight (inassigned to the 100 percent risk weight catecluding any classes of mortgage-backed securities that gory. can absorb more than their pro rata share of loss without the whole issue being in default); and all Also assigned to this category are revenue (nonstripped mortgage-backed and similar securities. general obligation) bonds or similar obligations, including loans and leases, that are obligations of states Also included in this category are industrial develor other political subdivisions of the U.S. (for exam- opment bonds and similar obligations issued under the ple, municipal revenue bonds) or other countries of the auspices of states or political subdivisions of the OECD-based group, but for which the government OECD-based group of countries for the benefit of a entity is committed to repay the debt with revenues private party or enterprise where that party or enterfrom the specific projects financed, rather than from prise, not the government entity, is obligated to pay general tax funds. the principal and interest, and all obligations of states Credit equivalent amounts of interest rate and for- or political subdivisions of countries that do not belong eign exchange rate contracts involving standard risk to the OECD-based group. obligors (that is, obligors whose loans or debt securi- The following assets also are assigned a risk weight ties would be assigned to the 100 percent risk cate- of 100 percent if they have not been deducted from gory) are included in the 50 percent category, unless capital: investments in unconsolidated companies, they are backed by collateral or guarantees that allow joint ventures or associated companies; instruments them to be placed in a lower risk category. that qualify as capital issued by other banking organizations; and any intangibles, including grandfathered goodwill. 34. If a bank holds the first and junior lien(s) on a residential property and no other party holds an intervening lien, the transaction 38. Such assets include all non-local currency claims on, or guaris treated as a single loan secured by a first lien for the purpose of anteed by, non-OECD central governments and those portions of local determining the loan-to-value ratio. currency claims on, or guaranteed by, non-OECD central govern- 35. The types of properties that qualify as 1-4 family residences are ments that exceed the local currency liabilities held by the bank. listed in the instructions to the commercial bank Call Report. 39. Customer liabilities on acceptances outstanding involving non- 36. The loan-to-value ratio is based upon the most current appraised standard risk claims, such as claims on U.S. depository institutions, value of the property. All appraisals must be made in a manner are assigned to the risk category appropriate to the identity of the consistent with the Federal banking agencies' real estate appraisal obligor or, if relevant, the nature of the collateral or guarantees guidelines and with the bank's own appraisal guidelines. backing the claims. Portions of acceptances conveyed as risk partic- 37. Residential property loans that do not meet all the specified ipations to U.S. depository institutions or foreign banks are assigned criteria or that are made for the purpose of speculative property to the 20 percent risk category appropriate to short-term claims development are placed in the 100 percent risk category. guaranteed by U.S. depository institutions and foreign banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 167 D. Off-Balance Sheet Items. or collateral, or the risk category appropriate to the institution acquiring the participation. Any remainder The face amount of an off-balance sheet item is incor- is assigned to the risk category appropriate to the porated into the risk-based capital ratio by multiplying obligor, guarantor, or collateral. For example, the it by a credit conversion factor. The resultant credit portion of a direct credit substitute conveyed as a risk equivalent amount is assigned to the appropriate risk participation to a U.S. domestic depository institution category according to the obligor, or, if relevant, the or foreign bank is assigned to the risk category approguarantor or the nature of the collateral.40 Attachment priate to claims guaranteed by those institutions, that IV sets forth the conversion factors for various types is, the 20 percent risk category.43 This approach of off-balance sheet items. recognizes that such conveyances replace the originat- 1. Items with a 100 percent conversion factor. A 100 ing bank's exposure to the obligor with an exposure to percent conversion factor applies to direct credit sub- the institutions acquiring the risk participations.44 stitutes, which include guarantees, or equivalent in- In the case of direct credit substitutes that take the struments, backing financial claims, such as outstand- form of a syndication as defined in the instructions to ing securities, loans, and other financial liabilities, or the commercial bank Call Report, that is, where each that back off-balance sheet items that require capital bank is obligated only for its pro rata share of the risk under the risk-based capital framework. Direct credit and there is no recourse to the originating bank, each substitutes include, for example, financial standby bank will only include its pro rata share of the direct letters of credit, or other equivalent irrevocable under- credit substitute in its risk-based capital calculation. takings or surety arrangements, that guarantee repay- Financial standby letters of credit are distinguished ment of financial obligations such as: commercial from loan commitments (discussed below) in that paper, tax-exempt securities, commercial or individual standbys are irrevocable obligations of the bank to pay loans or debt obligations, or standby or commercial a third-party beneficiary when a customer (account letters of credit. Direct credit substitutes also include party) fails to repay an outstanding loan or debt the acquisition of risk participations in bankers accep- instrument (direct credit substitute). Performance tances and standby letters of credit, since both of these standby letters of credit (performance bonds) are transactions, in effect, constitute a guarantee by the irrevocable obligations of the bank to pay a third-party acquiring bank that the underlying account party (ob- beneficiary when a customer (account party) fails to ligor) will repay its obligation to the originating, or perform some other contractual non-financial obligaissuing, institution.41 (Standby letters of credit that are tion. performance-related are discussed below and have a The distinguishing characteristic of a standby letter credit conversion factor of 50 percent.) of credit for risk-based capital purposes is the combi- The full amount of a direct credit substitute is nation of irrevocability with the fact that funding is converted at 100 percent and the resulting credit triggered by some failure to repay or perform an equivalent amount is assigned to the risk category obligation. Thus, any commitment (by whatever appropriate to the obligor or, if relevant, the guarantor name) that involves an irrevocable obligation to make or the nature of the collateral. In the case of a direct a payment to the customer or to a third party in the credit substitute in which a risk participation42 has event the customer fails to repay an outstanding debt been conveyed, the full amount is still converted at 100 obligation or fails to perform a contractual obligation percent. However, the credit equivalent amount that is treated, for risk-based capital purposes, as respechas been conveyed is assigned to whichever risk tively, a financial guarantee standby letter of credit or category is lower: the risk category appropriate to the a performance standby. obligor, after giving effect to any relevant guarantees A loan commitment, on the other hand, involves an obligation (with or without a material adverse change or similar clause) of the bank to fund its customer in 40. The sufficiency of collateral and guarantees for off-balance sheet the normal course of business should the customer items is determined by the market value of the collateral or the amount of the guarantee in relation to the face amount of the item, except for seek to draw down the commitment. interest and foreign exchange rate contracts, for which this determination is made in relation to the credit equivalent amount. Collateral and guarantees are subject to the same provisions noted under Section III (B). 43. Risk participations with a remaining maturity of over one year 41. Credit equivalent amounts of acquisitions of risk participations that are conveyed to non-OECD banks are to be assigned to the 100 are assigned to the risk category appropriate to the account party percent risk category, unless a lower risk category is appropriate to obligor, or, if relevant, the nature of the collateral or guarantees. the obligor, guarantor, or collateral. 42. That is, a participation in which the originating bank remains 44. A risk participation in bankers acceptances conveyed to other liable to the beneficiary for the full amount of the direct credit institutions is also assigned to the risk category appropriate to the substitute if the party that has acquired the participation fails to pay institution acquiring the participation or, if relevant, the guarantor or when the instrument is drawn. nature of the collateral. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

168 Federal Reserve Bulletin • March 1989 Sale and repurchase agreements and asset sales with The unused portion of commitments with an original recourse (to the extent not included on the balance maturity exceeding one year,46 including underwriting sheet) and forward agreements also are converted at commitments, and commercial and consumer credit 100 percent. The risk-based capital definition of the commitments also are converted at 50 percent. Origisale of assets with recourse, including the sale of 1-4 nal maturity is defined as the length of time between family residential mortgages, is the same as the defi- the date the commitment is issued and the earliest date nition contained in the instructions to the commercial on which: bank Call Report. So-called "loan strips" (that is, (1) the bank can, at its option, unconditionally short-term advances sold under long-term commit- (without cause) cancel the commitment,47 and ments without direct recourse) are defined in the (2) the bank is scheduled to (and as a normal instructions to the commercial bank Call Report and practice actually does) review the facility to for risk-based capital purposes as assets sold with determine whether or not it should be extended. recourse. Forward agreements are legally binding contractual Such reviews must continue to be conducted at least obligations to purchase assets with certain drawdown annually for such a facility to qualify as a short-term at a specified future date. Such obligations include commitment. forward purchases, forward forward deposits placed,45 Commitments are defined as any legally binding and partly-paid shares and securities; they do not arrangements that obligate a bank to extend credit in include commitments to make residential mortgage the form of loans or leases; to purchase loans, securiloans or forward foreign exchange contracts. ties, or other assets; or to participate in loans and Securities lent by a bank are treated in one of two leases. They also include overdraft facilities, revolving ways, depending upon whether the lender is at risk of credit, home equity and mortgage lines of credit, and loss. If a bank, as agent for a customer, lends the similar transactions. customer's securities and does not indemnify the Normally, commitments involve a written contract customer against loss, then the transaction is excluded or agreement and a commitment fee, or some other from the risk-based capital calculation. If, alterna- form of consideration. Commitments are included in tively, a bank lends its own securities or, acting as weighted risk assets regardless of whether they conagent for a customer, lends the customer's securities tain "material adverse change" clauses or other proand indemnifies the customer against loss, the trans- visions that are intended to relieve the issuer of its action is converted at 100 percent and assigned to the funding obligation under certain conditions. In the risk weight category appropriate to the obligor, to any case of commitments structured as syndications, collateral delivered to the lending bank, or, if applica- where the bank is obligated solely for its pro rata ble, to the independent custodian acting on the lend- share, only the bank's proportional share of the syner's behalf. dicated commitment is taken into account in calculat- 2. Items with a 50 percent conversion factor. Trans- ing the risk-based capital ratio. action-related contingencies are converted at 50 per- Facilities that are unconditionally cancellable cent. Such contingencies include bid bonds, perfor- (without cause) at any time by the bank are not mance bonds, warranties, standby letters of credit deemed to be commitments, provided the bank makes related to particular transactions, and performance a separate credit decision before each drawing under standby letters of credit, as well as acquisitions of risk the facility. Commitments with an original maturity of participations in performance standby letters of credit. one year or less are deemed to involve low risk and, Performance standby letters of credit represent obli- therefore, are not assessed a capital charge. Such gations backing the performance of nonfinancial or short-term commitments are defined to include the commercial contracts or undertakings. To the extent unused portion of lines of credit on retail credit cards permitted by law or regulation, performance standby and related plans (as defined in the instructions to the commercial bank Call Report) if the bank has the letters of credit include arrangements backing, among other things, subcontractors' and suppliers' performance, labor and materials contracts, and construction bids. 46. Through year-end 1992, remaining maturity may be used for determining the maturity of off-balance sheet loan commitments; thereafter, original maturity must be used. 47. In the case of consumer home equity or mortgage lines of credit secured by liens on 1-4 family residential properties, the bank is deemed able to unconditionally cancel the commitment for the purpose of this criterion if, at its option, it can prohibit additional 45. Forward forward deposits accepted are treated as interest rate extensions of credit, reduce the credit line, and terminate the comcontracts. mitment to the full extent permitted by relevant Federal law. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 169 unconditional right to cancel the line of credit at any B. Basis swaps. time, in accordance with applicable law. C. Forward rate agreements. Once a commitment has been converted at 50 per- D. Interest rate options purchased (including caps, cent, any portion that has been conveyed to other U.S. collars, and floors purchased). depository institutions or OECD banks as participa- E. Any other instrument that gives rise to similar tions in which the originating bank retains the full credit risks (including when-issued securities and obligation to the borrower if the participating bank forward forward deposits accepted). fails to pay when the instrument is drawn, is assigned II. Exchange Rate Contracts to the 20 percent risk category. This treatment is A. Cross-currency interest rate swaps. analogous to that accorded to conveyances of risk B. Forward foreign exchange contracts. participations in standby letters of credit. The acqui- C. Currency options purchased. sition of a participation in a commitment by a bank is D. Any other instrument that gives rise to similar converted at 50 percent and assigned to the risk credit risks. category appropriate to the account party obligor or, if relevant, the nature of the collateral or guarantees. Exchange rate contracts with an original maturity of Revolving underwriting facilities (RUFs), note issu- fourteen calendar days or less and instruments traded ance facilities (NIFs), and other similar arrangements on exchanges that require daily payment of variation also are converted at 50 percent regardless of matu- margin are excluded from the risk-based ratio calcularity. These are facilities under which a borrower can tion. Over-the-counter options purchased, however, issue on a revolving basis short-term paper in its own are included and treated in the same way as the other name, but for which the underwriting banks have a interest rate and exchange rate contracts. legally binding commitment either to purchase any 2. Calculation of credit equivalent amounts. Credit notes the borrower is unable to sell by the roll-over equivalent amounts are calculated for each individual date or to advance funds to the borrower. contract of the types listed above. To calculate the 3. Items with a 20 percent conversion factor. Short- credit equivalent amount of its off-balance sheet interterm, self-liquidating trade-related contingencies est rate and exchange rate instruments, a bank sums which arise from the movement of goods are con- these amounts: verted at 20 percent. Such contingencies generally (1) the mark-to-market value49 (positive values include commercial letters of credit and other docu- only) of each contract (that is, the current mentary letters of credit collateralized by the underly- exposure); and ing shipments. (2) an estimate of the potential future credit 4. Items with a zero percent conversion factor. These exposure over the remaining life of each coninclude unused portions of commitments with an orig- tract. inal maturity of one year or less,48 or which are unconditionally cancellable at any time, provided a The potential future credit exposure on a contract, separate credit decision is made before each drawing including contracts with negative mark-to-market valunder the facility. ues, is estimated by multiplying the notional principal Unused portions of lines of credit on retail credit amount by one of the following credit conversion cards and related plans are deemed to be short-term factors, as appropriate: commitments if the bank has the unconditional right to cancel the line of credit at any time, in accordance with applicable law. Remaining Interest Rate Exchange Rate Maturity Contracts Contracts E. Interest Rate and Foreign Exchange Rate Contracts. One year or less 0 1.0% Over one year 0.5% 5.0% 1. Scope. Credit equivalent amounts are computed for each of the following off-balance sheet interest rate Examples of the calculation of credit equivalent and foreign exchange rate instruments: amounts for these instruments are contained in At- I. Interest Rate Contracts tachment V. A. Single currency interest rate swaps. 48. Through year-end 1992, remaining maturity may be used for 49. Mark-to-market values are measured in dollars, regardless of the determining term to maturity for off-balance sheet loan commitments; currency or currencies specified in the contract, and should reflect thereafter, original maturity must be used. changes in both interest rates and counterparty credit quality. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

170 Federal Reserve Bulletin • March 1989 Because exchange rate contracts involve an ex- above, the risk-based ratio does not take explicit change of principal upon maturity, and exchange rates account of the quality of individual asset portfolios or are generally more volatile than interest rates, higher the range of other types of risks to which banks may be conversion factors have been established for foreign exposed, such as interest rate, liquidity, market or exchange contracts than for interest rate contracts. operational risks. For this reason, banks are generally No potential future credit exposure is calculated for expected to operate with capital positions above the single currency interest rate swaps in which payments minimum ratios. This is particularly true for instituare made based upon two floating rate indices, so- tions that are undertaking significant expansion or that called floating/floating or basis swaps; the credit expo- are exposed to high or unusual levels of risk. sure on these contracts is evaluated solely on the basis Upon adoption of the risk-based framework, any of their mark-to-market values. bank that does not meet the interim or final supervi- 3. Risk weights. Once the credit equivalent amount for sory ratios, or whose capital is otherwise considered interest rate and exchange rate instruments has been inadequate, is expected to develop and implement a determined, that amount is assigned to the risk weight plan acceptable to the Federal Reserve for achieving category appropriate to the counterparty, or, if rele- an adequate level of capital consistent with the provivant, the nature of any collateral or guarantees.50 sions of these guidelines or with the special circum- However, the maximum weight that will be applied to stances affecting the individual institution. In addition, the credit equivalent amount of such instruments is 50 such banks should avoid any actions, including inpercent. creased risk-taking or unwarranted expansion, that 4. Avoidance of double counting. In certain cases, would lower or further erode their capital positions. credit exposures arising from the interest rate and exchange instruments covered by these guidelines A. Minimum Risk-Based Ratio After Transition may already be reflected, in part, on the balance sheet. Period. To avoid double counting such exposures in the assessment of capital adequacy and, perhaps, assigning As reflected in Attachment VI, by year-end 1992, all inappropriate risk weights, counterparty credit expo- state member banks should meet a minimum ratio of sures arising from the types of instruments covered by qualifying total capital to weighted risk assets of these guidelines may need to be excluded from balance 8 percent, of which at least 4.0 percentage points sheet assets in calculating banks' risk-based capital should be in the form of Tier 1 capital net of goodwill. ratios. (Section II above contains detailed definitions of cap- 5. Netting. Netting of swaps and similar contracts is ital and related terms used in this section.) The maxirecognized for purposes of calculating the risk-based mum amount of supplementary capital elements that capital ratio only when accomplished through netting qualifies as Tier 2 capital is limited to 100 percent of by novation.51 While the Federal Reserve encourages Tier 1 capital net of goodwill. In addition, the comany reasonable arrangements designed to reduce the bined maximum amount of subordinated debt and risks inherent in these transactions, other types of intermediate-term preferred stock that qualifies as Tier netting arrangements are not recognized for purposes 2 capital is limited to 50 percent of Tier 1 capital. The of calculating the risk-based ratio at this time. maximum amount of the allowance for loan and lease losses that qualifies as Tier 2 capital is limited to 1.25 IV. Minimum Supervisory Ratios and percent of gross weighted risk assets. Allowances for Standards loan and lease losses in excess of this limit may, of course, be maintained, but would not be included in a The interim and final supervisory standards set forth bank's total capital. The Federal Reserve will continue below specify minimum supervisory ratios based pri- to require banks to maintain reserves at levels fully marily on broad credit risk considerations. As noted sufficient to cover losses inherent in their loan portfolios. Qualifying total capital is calculated by adding Tier 1 50. For interest and exchange rate contracts, sufficiency of collat- capital and Tier 2 capital (limited to 100 percent of eral or guarantees is determined by the market value of the collateral Tier 1 capital) and then deducting from this sum or the amount of the guarantee in relation to the credit equivalent amount. Collateral and guarantees are subject to the same provisions certain investments in banking or finance subsidiaries noted under Section III (B). that are not consolidated for accounting or supervisory 51. Netting by novation, for this purpose, is a written bilateral purposes, reciprocal holdings of banking organization contract between two counterparties under which any obligation to each other to deliver a given currency on a given date is automatically capital securities, or other items at the direction of the amalgamated with all other obligations for the same currency and Federal Reserve. These deductions are discussed value date, legally substituting one single net amount for the previous gross obligations. above in Section 11(B). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 171 B. Transition Arrangements. 3. The Board amends the redesignated Appendix B to Part 225 by adding at the end of the title to Appendix The transition period for implementing the risk-based B ": Leverage Measure". capital standard ends on December 31, 1992.52 Ini- 4. The Board redesignates the current Appendix B as tially, the risk-based capital guidelines do not establish Appendix C. a minimum level of capital. However, by year-end 1990, banks are expected to meet a minimum interim target ratio for qualifying total capital to weighted risk APPENDIX A—CAPITAL ADEQUACY GUIDELINES assets of 7.25 percent, at least one-half of which FOR BANK HOLDING COMPANIES: RISK-BASED should be in the form of Tier 1 capital. For purposes of MEASURE meeting the 1990 interim target, the amount of loan loss reserves that may be included in capital is limited I. Overview to 1.5 percent of weighted risk assets and up to 10 percent of a bank's Tier 1 capital may consist of The Board of Governors of the Federal Reserve Syssupplementary capital elements. Thus, the 7.25 per- tem has adopted a risk-based capital measure to assist cent interim target ratio implies a minimum ratio of in the assessment of the capital adequacy of bank Tier 1 capital to weighted risk assets of 3.6 percent holding companies ("banking organizations").1 The (one-half of 7.25) and a minimum ratio of core capital principal objectives of this measure are to: elements to weighted risk assets ratio of 3.25 percent (i) make regulatory capital requirements more sen- (nine-tenths of the Tier 1 capital ratio). sitive to differences in risk profiles among banking organizations; Part 225—Bank Holding Companies and (ii) factor off-balance sheet exposures into the as- Change in Bank Control sessment of capital adequacy ; (iii) minimize disincentives to holding liquid, low- 1. The authority citation for Part 225 continues to read risk assets; and as follows: (iv) achieve greater consistency in the evaluation of the capital adequacy of major banking organizations Authority: 12 U.S.C. 1817(j)(13), 1818, 1843(c)(8), throughout the world.2 1844(b), 3106, 3108, 3907, 3909. The risk-based capital guidelines include both a 2. The Board amends the Appendices to Part 225 by definition of capital and a framework for calculating redesignating the current Appendix A as Appendix B weighted risk assets by assigning assets and offand adding a new Appendix A to read as set forth balance sheet items to broad risk categories. An instibelow. tution's risk-based capital ratio is calculated by dividing its qualifying capital (the numerator of the ratio) by its weighted risk assets (the denominator).3 The definition of qualifying capital is outlined below in Section II, and the procedures for calculating weighted risk 52. The Basle capital framework does not establish an initial assets are discussed in Section III. Attachment I minimum standard for the risk-based capital ratio before the end of illustrates a sample calculation of weighted risk assets 1990. However, for the purpose of calculating a risk-based capital and the risk-based capital ratio. ratio prior to year-end 1990, no sublimit is placed on the amount of the allowance for loan and lease losses includable in Tier 2. In addition, this framework permits, under temporary transition arrangements, a certain percentage of a bank's Tier 1 capital to be made up of supplementary capital elements. In particular, supplementary ele- 1. Supervisory ratios that relate capital to total assets for bank ments may constitute 25 percent of a bank's Tier 1 capital (before the holding companies are outlined in Appendix B of this Part. deduction of goodwill) up to the end of 1990; from year-end 1990 up to 2. The risk-based capital measure is based upon a framework the end of 1992, this allowable percentage of supplementary elements developed jointly by supervisory authorities from the countries repin Tier 1 declines to 10 percent of Tier 1 (before the deduction of resented on the Basle Committee on Banking Regulations and Supergoodwill). Beginning on December 31, 1992, supplementary elements visory Practices (Basle Supervisors' Committee) and endorsed by the may not be included in Tier 1. The amount of subordinated debt and Group of Ten Central Bank Governors. The framework is described in intermediate-term preferred stock temporarily included in Tier 1 a paper prepared by the BSC entitled "International Convergence of under these arrangements will not be subject to the sublimit on the Capital Measurement," July 1988. amount of such instruments includable in Tier 2 capital. Goodwill 3. Banking organizations will initially be expected to utilize periodmust be deducted from the sum of a bank's permanent core capital end amounts in calculating their risk-based capital ratios. When elements (that is, common equity, noncumulative perpetual preferred necessary and appropriate, ratios based on average balances may also stock, and minority interest in the equity of unconsolidated subsidiar- be calculated on a case-by-case basis. Moreover, to the extent ies) plus supplementary items that may temporarily qualify as Tier 1 banking organizations have data on average balances that can be used elements for the purpose of calculating Tier 1 (net of goodwill), Tier 2, to calculate risk-based ratios, the Federal Reserve will take such data and total capital. into account. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

172 Federal Reserve Bulletin • March 1989 The risk-based capital guidelines also establish a considerations just discussed, banking organizations schedule for achieving a minimum supervisory stan- generally are expected to operate well above the dard for the ratio of qualifying capital to weighted risk minimum risk-based ratios. In particular, banking orassets and provide for transitional arrangements dur- ganizations contemplating significant expansion proing a phase-in period to facilitate adoption and imple- posals are expected to maintain strong capital levels mentation of the measure at the end of 1992. These substantially above the minimum ratios and should not interim standards and transitional arrangements are allow significant diminution of financial strength below set forth in Section IV. these strong levels to fund their expansion plans. The risk-based guidelines apply on a consolidated Institutions with high or inordinate levels of risk are basis to bank holding companies with consolidated also expected to operate above minimum capital stanassets of $150 million or more. For bank holding dards. In all cases, institutions should hold capital companies with less than $150 million in consolidated commensurate with the level and nature of the risks to assets, the guidelines will be applied on a bank-only which they are exposed. Banking organizations that do basis unless: (a) the parent bank holding company is not meet the minimum risk-based standard, or that are engaged in nonbank activity involving significant otherwise considered to be inadequately capitalized, leverage;4 or (b) the parent company has a significant are expected to develop and implement plans acceptamount of outstanding debt that is held by the general able to the Federal Reserve for achieving adequate public. levels of capital within a reasonable period of time. The risk-based guidelines are to be used in the The Board will monitor the implementation and inspection and supervisory process as well as in the effect of these guidelines in relation to domestic and analysis of applications acted upon by the Federal international developments in the banking industry. Reserve. Thus, in considering an application filed by a When necessary and appropriate, the Board will conbank holding company, the Federal Reserve will take sider the need to modify the guidelines in light of any into account the organization's risk-based capital ra- significant changes in the economy, financial markets, tio, the reasonableness of its capital plans, and the banking practices, or other relevant factors. degree of progress it has demonstrated toward meeting the interim and final risk-based capital standards. II. Definition of Qualifying Capital for the The risk-based capital ratio focuses principally on Risk-Based Capital Ratio broad categories of credit risk, although the framework for assigning assets and off-balance sheet items An institution's qualifying total capital consists of two to risk categories does incorporate elements of trans- types of capital components: "core capital elements" fer risk, as well as limited instances of interest rate and (comprising Tier 1 capital) and "supplementary capital market risk. The risk-based ratio does not, however, elements" (comprising Tier 2 capital). These capital incorporate other factors that can affect an organiza- elements and the various limits, restrictions, and detion's financial condition. These factors include over- ductions to which they are subject, are discussed all interest rate exposure; liquidity, funding and mar- below and are set forth in Attachment II. ket risks; the quality and level of earnings; investment To qualify as an element of Tier 1 or Tier 2 capital, or loan portfolio concentrations; the quality of loans a capital instrument may not contain or be covered by and investments; the effectiveness of loan and invest- any covenants, terms, or restrictions that are inconment policies; and management's ability to monitor sistent with safe and sound banking practices. and control financial and operating risks. Redemptions of permanent equity or other capital In addition to evaluating capital ratios, an overall instruments before stated maturity could have a sigassessment of capital adequacy must take account of nificant impact on an organization's overall capital these other factors, including, in particular, the level structure. Consequently, an organization considering and severity of problem and classified assets. For this such a step should consult with the Federal Reserve reason, the final supervisory judgment on an organi- before redeeming any equity or debt capital instrument zation's capital adequacy may differ significantly from (prior to maturity) if such redemption could have a conclusions that might be drawn solely from the level material effect on the level or composition of the of the organization's risk-based capital ratio. organization's capital base.5 The risk-based capital guidelines establish minimum ratios of capital to weighted risk assets. In light of the 5. Consultation would not ordinarily be necessary if an instrument were redeemed with the proceeds of, or replaced by, a like amount of 4. A parent company that is engaged in significant off-balance sheet a similar or higher quality capital instrument and the organization's activities would generally be deemed to be engaged in activities that capital position is considered fully adequate by the Federal Reserve. involve significant leverage. In the case of limited-life Tier 2 instruments, consultation would Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 173 A. The Components of Qualifying Capital. qualify for inclusion in Tier 2 capital. For bank holding companies, both cumulative and 1. Core capital elements (Tier 1 capital). The Tier 1 noncumulative perpetual preferred stock qualify for component of an institution's qualifying capital must inclusion in Tier 1. However, the aggregate amount represent at least 50 percent of qualifying total capital of such stock (whether cumulative or noncumulative) and may consist of the following items that are defined that may be included in a holding company's Tier 1 as core capital elements: is limited to one-third of the sum of core capital (i) Common stockholders' equity. elements, excluding the perpetual preferred stock (ii) Qualifying perpetual preferred stock (including (that is, items (i) and (iii) above). Stated differently, the related surplus), subject to certain limitations de- aggregate amount may not exceed 25 percent of scribed below. the sum of all core capital elements, including perpet- (iii) Minority interest in the equity accounts of ual preferred stock (that is, items (i), (ii) and (iii) consolidated subsidiaries. above). Any perpetual preferred stock outstanding in excess of this limit may be included in Tier 2 capital Tier 1 capital is generally defined as the sum of the without any sublimits within that tier (see discussion core capital elements less goodwill.6 (See Section II below). (B)) below for a more detailed discussion of the The limits on preferred stock are consistent with the treatment of goodwill, including an explanation of Board's long-standing view that common equity certain limited grandfathering arrangements.) should remain the dominant form of a banking organia. Common stockholders' equity. Common stock- zation's capital structure. In addition to these limits, holders' equity includes: common stock; related the Board believes that, in general, banking organizasurplus; and retained earnings, including capital tions should avoid overreliance on other nonvoting reserves and adjustments for the cumulative effect equity instruments in their Tier 1 capital. of foreign currency translation, net of any trea- c. Minority interest in equity accounts of consolsury stock. idated subsidiaries. This element is included in b. Perpetual preferred stock. Perpetual preferred Tier 1 because, as a general rule, it represents stock is defined as preferred stock that does not equity that is freely available to absorb losses in have a maturity date, that cannot be redeemed at operating subsidiaries. While not subject to an the option of the holder of the instrument, and explicit sublimit within Tier 1, banking organizathat has no other provisions that will require tions are expected to avoid using minority interest future redemption of the issue. In general, pre- in the equity accounts of consolidated subsidiaries ferred stock will qualify for inclusion in capital as an avenue for introducing into their capital only if it can absorb losses while the issuer structures elements that might not otherwise qualoperates as a going concern (a fundamental char- ify as Tier 1 capital or that would, in effect, result acteristic of equity capital) and only if the issuer in an excessive reliance on preferred stock within has the ability and legal right to defer or eliminate Tier 1. preferred dividends. 2. Supplementary capital elements (Tier 2 capital). The Tier 2 component of an institution's qualifying Perpetual preferred stock in which the dividend is total capital may consist of the following items that are reset periodically based, in whole or in part, upon defined as supplementary capital elements: the banking organization's current credit standing (i) Allowance for loan and lease losses (subject to (that is, auction rate perpetual preferred stock, in- limitations discussed below). cluding so-called Dutch auction, money market, and (ii) Perpetual preferred stock and related surplus remarketable preferred) will not qualify for inclu- (subject to conditions discussed below). sion in Tier 1 capital.7 Such instruments, however, (iii) Hybrid capital instruments (as defined below), perpetual debt, and mandatory convertible debt securities. generally be obviated if the new security is of equal or greater maturity (iv) Term subordinated debt and intermediate-term than the one it replaces. preferred stock, including related surplus (subject to 6. During the transition period and subject to certain limitations set forth in Section IV below, Tier 1 capital may also include items limitations discussed below). defined as supplementary capital elements. 7. Adjustable rate perpetual preferred stock (that is, perpetual The maximum amount of Tier 2 capital that may be preferred stock in which the dividend rate is not affected by the issuer's credit standing or financial condition but is adjusted periodi- included in an organization's qualifying total capital is cally according to a formula based solely on general market interest limited to 100 percent of Tier 1 capital (net of goodrates) may be included in Tier 1 up to the limits specified for perpetual preferred stock. will). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

174 Federal Reserve Bulletin • March 1989 The elements of supplementary capital are dis- c. Hybrid capital instruments, perpetual debt, cussed in greater detail below.8 and mandatory convertible debt securities. Hya. Allowance for loan and lease losses. Allow- brid capital instruments include instruments that ances for loan and lease losses are reserves that are essentially permanent in nature and that have have been established through a charge against certain characteristics of both equity and debt. earnings to absorb future losses on loans or lease Such instruments may be included in Tier 2 withfinancing receivables. Allowances for loan and out limit. The general criteria hybrid capital inlease losses exclude "allocated transfer risk struments must meet in order to qualify for inclureserves,"9 and reserves created against identi- sion in Tier 2 capital are listed below: fied losses. (1) The instrument must be unsecured; fully During the transition period, the risk-based capital paid-up; and subordinated to general creditors. guidelines provide for reducing the amount of this If issued by a bank, it must also be subordinated allowance that may be included in an institution's total to claims of depositors. capital. Initially, it is unlimited. However, by year-end (2) The instrument must not be redeemable at 1990, the amount of the allowance for loan and lease the option of the holder prior to maturity, losses that will qualify as capital will be limited to 1.5 except with the prior approval of the Federal percent of an institution's weighted risk assets. By the Reserve. (Consistent with the Board's criteria end of the transition period, the amount of the allow- for perpetual debt and mandatory convertible ance qualifying for inclusion in Tier 2 capital may not securities, this requirement implies that holders exceed 1.25 percent of weighted risk assets.10 of such instruments may not accelerate the b. Perpetual preferred stock. Perpetual preferred payment of principal except in the event of stock, as noted above, is defined as preferred bankruptcy, insolvency, or reorganization.) stock that has no maturity date, that cannot be (3) The instrument must be available to particredeemed at the option of the holder, and that has ipate in losses while the issuer is operating as a no other provisions that will require future re- going concern. (Term subordinated debt would demption of the issue. Such instruments are eligi- not meet this requirement.) To satisfy this reble for inclusion in Tier 2 capital without limit.11 quirement, the instrument must convert to common or perpetual preferred stock in the event that the accumulated losses exceed the sum of the retained earnings and capital surplus ac- 8. The Basle capital framework also provides for the inclusion of counts of the issuer. "undisclosed reserves" in Tier 2. As defined in the framework, undisclosed reserves represent accumulated after-tax retained earn- (4) The instrument must provide the option for ings that are not disclosed on the balance sheet of a banking organithe issuer to defer interest payments if: (a) the zation. Apart from the fact that these reserves are not disclosed publicly, they are essentially of the same quality and character as issuer does not report a profit in the preceding retained earnings, and, to be included in capital, such reserves must be annual period (defined as combined profits for accepted by the banking organization's home supervisor. Although the most recent four quarters), and (b) the such undisclosed reserves are common in some countries, under generally accepted accounting principles (GAAP) and long-standing issuer eliminates cash dividends on common supervisory practice, these types of reserves are not recognized for and preferred stock. banking organizations in the United States. Foreign banking organizations seeking to make acquisitions or conduct business in the United States would generally be expected to disclose publicly at least the Perpetual debt and mandatory convertible debt secudegree of reliance on such reserves in meeting supervisory capital rities that meet the criteria set forth in 12 C.F.R. Part requirements. 9. Allocated transfer risk reserves are reserves that have been 225, Appendix B, also qualify as unlimited elements of established in accordance with Section 905(a) of the International Tier 2 capital for bank holding companies. Lending Supervision Act of 1983, 12 U.S.C. 3904(a), against certain assets whose value U.S. supervisory authorities have found to be d. Subordinated debt and intermediate-term presignificantly impaired by protracted transfer risk problems. ferred stock. The aggregate amount of term sub- 10. The amount of the allowance for loan and lease losses that may ordinated debt (excluding mandatory convertible be included in Tier 2 capital is based on a percentage of gross weighted risk assets. A banking organization may deduct reserves for loan and debt) and intermediate-term preferred stock that lease losses in excess of the amount permitted to be included in Tier may be treated as supplementary capital is limited 2 capital, as well as allocated transfer risk reserves, from the sum of to 50 percent of Tier 1 capital (net of goodwill). gross weighted risk assets and use the resulting net sum of weighted risk assets in computing the denominator of the risk-based capital Amounts in excess of these limits may be issued ratio. and, while not included in the ratio calculation, 11. Long-term preferred stock with an original maturity of 20 years or more (including related surplus) will also qualify in this category as an element of Tier 2. If the holder of such an instrument has a right to require the issuer to redeem, repay, or repurchase the instrument prior to the original stated maturity, maturity would be defined, for holder can put the instrument back to the issuing banking organizarisk-based capital purposes, as the earliest possible date on which the tion. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 175 will be taken into account in the overall assess- capital ratio calculations, although they have long ment of an organization's funding and financial taken such values into account as a separate condition. factor in assessing the overall financial strength of a banking organization. Subordinated debt and intermediate-term preferred stock must have an original weighted average maturity Consistent with long-standing supervisory practice, of at least five years to qualify as supplementary the excess of market values over book values for capital.12 (If the holder has the option to require the assets held by bank holding companies will generally issuer to redeem, repay, or repurchase the instrument not be recognized in supplementary capital or in the prior to the original stated maturity, maturity would be calculation of the risk-based capital ratio. However, defined, for risk-based capital purposes, as the earliest all banking organizations are encouraged to disclose possible date on which the holder can put the instru- their equivalent of premises (building) and equity ment back to the issuing banking organization.) revaluation reserves. Such values will be taken into In the case of subordinated debt, the instrument account as additional considerations in assessing overmust be unsecured and must clearly state on its face all capital strength and financial condition. that it is not a deposit and is not insured by a Federal agency. Bank holding company debt must be subordi- B. Deductions from Capital and Other nated in right of payment to all senior indebtedness of Adjustments. the company. e. Discount of supplementary capital instruments. Certain assets are deducted from an organization's As a limited-life capital instrument approaches capital for the purpose of calculating the risk-based maturity it begins to take on characteristics of a capital ratio.14 These assets include: short-term obligation. For this reason, the out- (i) Goodwill—deducted from the sum of core capital standing amount of term subordinated debt and elements. (See discussion below of limited grandfaany long- or intermediate-life, or term, preferred thering of bank holding company goodwill during stock eligible for inclusion in Tier 2 is reduced, or the transition period.) discounted, as these instruments approach matu- (ii) Investments in banking and finance subsidiaries rity: one-fifth of the original amount, less any that are not consolidated for accounting or superviredemptions, is excluded each year during the sory purposes, and investments in other designated instrument's last five years before maturity.13 subsidiaries or associated companies at the discref. Revaluation reserves. Such reserves reflect the tion of the Federal Reserve—deducted from total formal balance sheet restatement or revaluation capital components (as described in greater detail for capital purposes of asset carrying values to below). reflect current market values. In the United (iii) Reciprocal holdings of capital instruments of States, banking organizations, for the most part, banking organizations—deducted from total capital follow GAAP when preparing their financial state- components. ments, and GAAP generally does not permit the 1. Goodwill and other intangible assets. use of market-value accounting. For this and a. Goodwill. Goodwill is an intangible asset that other reasons, the Federal banking agencies gen- represents the excess of the purchase price over erally have not included unrealized asset values in the fair market value of identifiable assets acquired less liabilities assumed in acquisitions accounted for under the purchase method of ac- 12. Unsecured term debt issued by bank holding companies prior to counting. Any goodwill carried on the balance March 12, 1988, and qualifying as secondary capital at the time of issuance would continue to qualify as an element of supplementary sheet of a bank holding company after Decemcapital under the risk-based framework, subject to the 50 percent of ber 31, 1992, will be deducted from the sum of Tier 1 capital limitation. Bank holding company term debt issued on or core capital elements in determining Tier 1 capital after March 12, 1988, must be subordinated in order to qualify as capital. for ratio calculation purposes. Any goodwill in 13. For example, outstanding amounts of these instruments that existence before March 12, 1988, is "grandfacount as supplementary capital include: 100 percent of the outstanding thered" during the transition period and is not amounts with remaining maturities of more than five years; 80 percent of outstanding amounts with remaining maturities of four to five years; deducted from core capital elements until after 60 percent of outstanding amounts with remaining maturities of three December 31, 1992. However, bank holding to four years; 40 percent of outstanding amounts with remaining maturities of two to three years; 20 percent of outstanding amounts with remaining maturities of one to two years; and 0 percent of outstanding amounts with remaining maturities of less than one year. 14. Any assets deducted from capital in computing the numerator of Such instruments with a remaining maturity of less than one year are the ratio are not included in weighted risk assets in computing the excluded from Tier 2 capital. denominator of the ratio. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

176 Federal Reserve Bulletin • March 1989 company goodwill acquired as a result of a merger gible capital ratios (after deducting all intangible or acquisition that was consummated on or after assets), together with the quality and value of the March 12, 1988, is deducted immediately.15 organization's tangible and intangible assets, in makb. Other intangible assets. The Federal Reserve is ing an overall assessment of capital adequacy. not proposing, as a matter of general policy, to Consistent with long-standing Board policy, banking deduct automatically any other intangible assets organizations experiencing substantial growth, from the capital of bank holding companies. The whether internally or by acquisition, are expected to Federal Reserve, however, will continue to mon- maintain strong capital positions substantially above itor closely the level and quality of other intangi- minimum supervisory levels, without significant relible assets—including purchased mortgage servic- ance on intangible assets. ing rights, leaseholds, and core deposit value — 2. Investments in certain subsidiaries. and take them into account in assessing the capital a. Unconsolidated banking or finance subsidiaradequacy and overall asset quality of banking ies. The aggregate amount of investments in bankinstitutions. ing or finance subsidiaries16 whose financial statements are not consolidated for accounting or Generally, banking organizations should review all regulatory reporting purposes, regardless of intangible assets at least quarterly and, if necessary, whether the investment is made by the parent make appropriate reductions in their carrying values. bank holding company or its direct or indirect In addition, in order to conform with prudent banking subsidiaries, will be deducted from the consolipractice, an organization should reassess such values dated parent banking organization's total capital during its annual audit. Banking organizations should components.17 Generally, investments for this use appropriate amortization methods and assign pru- purpose are defined as equity and debt capital dent amortization periods for intangible assets. investments and any other instruments that are Examiners will review the carrying value of these deemed to be capital in the particular subsidiary. assets, together with supporting documentation, as well as the appropriateness of including particular Advances (that is, loans, extensions of credit, guaranintangible assets in a banking organization's capital tees, commitments, or any other forms of credit expocalculation. In making such evaluations, examiners sure) to the subsidiary that are not deemed to be will consider a number of factors, including: capital will generally not be deducted from an organi- (1) The reliability and predictability of any cash zation's capital. Rather, such advances generally will flows associated with the asset and the degree be included in the parent banking organization's conof certainty that can be achieved in periodically solidated assets and be assigned to the 100 percent risk determining the asset's useful life and value; category, unless such obligations are backed by rec- (2) The existence of an active and liquid market ognized collateral or guarantees, in which case they for the asset; and will be assigned to the risk category appropriate to (3) The feasibility of selling the asset apart from such collateral or guarantees. These advances may, the banking organization or from the bulk of its however, also be deducted from the consolidated assets. parent banking organization's capital if, in the judgment of the Federal Reserve, the risks stemming from While all intangible assets will be monitored, intan- such advances are comparable to the risks associated gible assets (other than goodwill) in excess of 25 with capital investments or if the advances involve percent of Tier 1 capital (which is defined net of other risk factors that warrant such an adjustment to goodwill) will be subject to particularly close scrutiny, capital for supervisory purposes. These other factors both through the inspection process and by other could include, for example, the absence of collateral appropriate means. support. Whenever necessary—in particular, when assessing Inasmuch as the assets of unconsolidated banking applications to expand or to engage in other activities and finance subsidiaries are not fully reflected in a that could entail unusual or higher-than-normal risks— the Board will, on a case-by-case basis, continue to consider the level of an individual organization's tan- 16. For this purpose, a banking and finance subsidiary generally is defined as any company engaged in banking or finance in which the parent institution holds directly or indirectly more than 50 percent of the outstanding voting stock, or which is otherwise controlled or 15. Goodwill acquired by a subsidiary bank in connection with a capable of being controlled by the parent institution. merger with a troubled or failed depository institution that regulatory 17. An exception to this deduction would be made in the case of authorities have specifically allowed the bank to include in its capital shares acquired in the regular course of securing or collecting a debt will generally not be deducted from the core capital elements of its previously contracted in good faith. The requirements for consolidaparent bank holding company. tion are spelled out in the instructions to the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C Report). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 177 banking organization's consolidated total assets, such These other factors could include, for example, the assets may be viewed as the equivalent of off-balance absence of collateral support.19 sheet exposures since the operations of an unconsoli- In general, when investments in a consolidated dated subsidiary could expose the parent organization subsidiary are deducted from a consolidated parent and its affiliates to considerable risk. For this reason, it banking organization's capital, the subsidiary's assets is generally appropriate to view the capital resources will also be excluded from the consolidated assets of invested in these unconsolidated entities as primarily the parent banking organization in order to assess the supporting the risks inherent in these off-balance sheet latter's capital adequacy.20 assets, and not generally available to support risks or The Federal Reserve may also deduct from a bankabsorb losses elsewhere in the organization. ing organization's capital, on a case-by-case basis, b. Other subsidiaries and investments. The de- investments in certain other subsidiaries in order to duction of investments, regardless of whether determine if the consolidated banking organization they are made by the parent bank holding com- meets minimum supervisory capital requirements pany or by its direct or indirect subsidiaries, from without reliance on the resources invested in such a consolidated banking organization's capital will subsidiaries. also be applied in the case of any subsidiaries, The Federal Reserve will not automatically deduct that, while consolidated for accounting purposes, investments in other unconsolidated subsidiaries or are not consolidated for certain specified supervi- investments in joint ventures and associated sory or regulatory purposes, such as to facilitate companies.21 Nonetheless, the resources invested in functional regulation. For this purpose, aggregate these entities, like investments in unconsolidated capital investments (that is, the sum of any equity banking and finance subsidiaries, support assets not or debt instruments that are deemed to be capital) consolidated with the rest of the banking organizain these subsidiaries will be deducted from the tion's activities and, therefore, may not be generally consolidated parent banking organization's total available to support additional leverage or absorb capital components.18 losses elsewhere in the banking organization. Moreover, experience has shown that banking organiza- Advances (that is, loans, extensions of credit, guar- tions stand behind the losses of affiliated institutions, antees, commitments, or any other forms of credit such as joint ventures and associated companies, in exposure) to such subsidiaries that are not deemed to order to protect the reputation of the organization as a be capital will generally not be deducted from capital. whole. In some cases, this has led to losses that have Rather, such advances will normally be included in the exceeded the investments in such organizations. parent banking organization's consolidated assets and For this reason, the Federal Reserve will monitor assigned to the 100 percent risk category, unless such the level and nature of such investments for individual obligations are backed by recognized collateral or banking organizations and may, on a case-by-case guarantees, in which case they will be assigned to the basis, deduct such investments from total capital comrisk category appropriate to such collateral or guaran- ponents, apply an appropriate risk-weighted capital tees. These advances may, however, be deducted charge against the organization's proportionate share from the consolidated parent banking organization's of the assets of its associated companies, require a capital if, in the judgment of the Federal Reserve, the line-by-line consolidation of the entity (in the event risks stemming from such advances are comparable to that the parent's control over the entity makes it the the risks associated with capital investments or if such functional equivalent of a subsidiary), or otherwise advances involve other risk factors that warrant such an adjustment to capital for supervisory purposes. 19. In assessing the overall capital adequacy of a banking organization, the Federal Reserve may also consider the organization's fully consolidated capital position. 20. If the subsidiary's assets are consolidated with the parent banking organization for financial reporting purposes, this adjustment 18. Investments in unconsolidated subsidiaries will be deducted will involve excluding the subsidiary's assets on a line-by-line basis from both Tier 1 and Tier 2 capital. As a general rule, one-half (50 from the consolidated parent organization's assets. The parent bankpercent) of the aggregate amount of capital investments will be ing organization's capital ratio will then be calculated on a consolideducted from the bank holding company's Tier 1 capital and one-half dated basis with the exception that the assets of the excluded (50 percent) from its Tier 2 capital. However, the Federal Reserve subsidiary will not be consolidated with the remainder of the parent may, on a case-by-case basis, deduct a proportionately greater banking organization. amount from Tier 1 if the risks associated with the subsidiary so 21. The definition of such entities is contained in the instructions to warrant. If the amount deductible from Tier 2 capital exceeds actual the Consolidated Financial Statements for Bank Holding Companies. Tier 2 capital, the excess would be deducted from Tier 1 capital. Bank Under regulatory reporting procedures, associated companies and holding companies' risk-based capital ratios, net of these deductions, joint ventures generally are defined as companies in which the banking must exceed the minimum standards set forth in Section IV. organization owns 20 to 50 percent of the voting stock. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

178 Federal Reserve Bulletin • March 1989 require the organization to operate with a risk-based tion's total weighted risk assets that comprise the capital ratio above the minimum. denominator of the risk-based capital ratio. Attach- In considering the appropriateness of such adjust- ment I provides a sample calculation. ments or actions, the Federal Reserve will generally Risk weights for all off-balance sheet items are take into account whether: determined by a two-step process. First, the "credit (1) The parent banking organization has signif- equivalent amount" of off-balance sheet items is deicant influence over the financial or managerial termined, in most cases, by multiplying the off-balance policies or operations of the subsidiary, joint sheet item by a credit conversion factor. Second, the venture, or associated company; credit equivalent amount is treated like any balance (2) The banking organization is the largest in- sheet asset and generally is assigned to the appropriate vestor in the affiliated company; or risk category according to the obligor, or, if relevant, (3) Other circumstances prevail that appear to the guarantor or the nature of the collateral. closely tie the activities of the affiliated com- In general, if a particular item qualifies for placepany to the parent banking organization. ment in more than one risk category, it is assigned to the category that has the lowest risk weight. A holding 3. Reciprocal holdings of banking organizations' cap- of a U.S. municipal revenue bond that is fully guaranital instruments. Reciprocal holdings of banking orga- teed by a U.S. bank, for example, would be assigned nizations' capital instruments (that is, instruments that the 20 percent risk weight appropriate to claims guarqualify as Tier 1 or Tier 2 capital) will be deducted anteed by U.S. banks, rather than the 50 percent risk from an organization's total capital components for the weight appropriate to U.S. municipal revenue bonds.24 purpose of determining the numerator of the risk- The terms "claims" and "securities" used in the based capital ratio. context of the discussion of risk weights, unless oth- Reciprocal holdings are cross-holdings resulting erwise specified, refer to loans or debt obligations of from formal or informal arrangements in which two or the entity on whom the claim is held. Assets in the more banking organizations swap, exchange, or other- form of stock or equity holdings in commercial or wise agree to hold each other's capital instruments. financial firms are assigned to the 100 percent risk Generally, deductions will be limited to intentional category, unless some other treatment is explicitly cross-holdings. At present, the Board does not intend permitted. to require banking organizations to deduct non-reciprocal holdings of such capital instruments.22'23 III. Procedures for Computing Weighted Risk Assets and Off-Balance Sheet Items A. Procedures. 24. An investment in shares of a fund whose portfolio consists solely of various securities or money market instruments that, if held separately, would be assigned to different risk categories, is generally Assets and credit equivalent amounts of off-balance assigned to the risk category appropriate to the highest risk-weighted security or instrument that the fund is permitted to hold in accordance sheet items of bank holding companies are assigned to with its stated investment objectives. However, in no case will one of several broad risk categories, according to the indirect holdings through shares in such funds be assigned to the zero obligor, or, if relevant, the guarantor or the nature of percent risk category. For example, if a fund is permitted to hold U.S. Treasuries and commercial paper, shares in that fund would generally the collateral. The aggregate dollar value of the be assigned the 100 percent risk weight appropriate to commercial amount in each category is then multiplied by the risk paper, regardless of the actual composition of the fund's investments at any particular time. Shares in a fund that may invest only in U.S. weight associated with that category. The resulting Treasury securities would generally be assigned to the 20 percent risk weighted values from each of the risk categories are category. If, in order to maintain a necessary degree of short-term added together, and this sum is the banking organiza- liquidity, a fund is permitted to hold an insignificant amount of its assets in short-term, highly liquid securities of superior credit quality that do not qualify for a preferential risk weight, such securities will generally not be taken into account in determining the risk category 22. Deductions of holdings of capital securities also would not be into which the banking organization's holding in the overall fund made in the case of interstate "stake out" investments that comply should be assigned. Regardless of the composition of the fund's with the Board's Policy Statement on Nonvoting Equity Investments, securities, if the fund engages in any activities that appear speculative 12 C.F.R. 225.143. In addition, holdings of capital instruments issued in nature (for example, use of futures, forwards, or option contracts by other banking organizations but taken in satisfaction of debts for purposes other than to reduce interest rate risk) or has any other previously contracted would be exempt from any deduction from characteristics that are inconsistent with the preferential risk weightcapital. ing assigned to the fund's investments, holdings in the fund will be assigned to the 100 percent risk category. During the examination 23. The Board intends to monitor non-reciprocal holdings of other process, the treatment of shares in such funds that are assigned to a banking organizations' capital instruments and to provide information lower risk weight will be subject to examiner review to ensure that on such holdings to the Basle Supervisors' Committee as called for they have been assigned an appropriate risk weight. under the Basle capital framework. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 179 B. Collateral, Guarantees, and Other weights, such as a U.S. Government guarantee and a Considerations. state guarantee, is to be apportioned between the two risk categories appropriate to the guarantors. 1. Collateral. The only forms of collateral that are The existence of other forms of collateral or guarformally recognized by the risk-based capital frame- antees that the risk-based capital framework does not work are: cash on deposit in a subsidiary lending formally recognize may be taken into consideration in institution; securities issued or guaranteed by the evaluating the risks inherent in an organization's loan central governments of the OECD-based group of portfolio—which, in turn, would affect the overall countries,25 U.S. Government agencies, or U.S. Gov- supervisory assessment of the organization's capital ernment-sponsored agencies; and securities issued by adequacy. multilateral lending institutions or regional develop- 3. Mortgage-backed securities. Mortgage-backed sement banks. Claims fully secured by such collateral curities, including pass-throughs and collateralized are assigned to the 20 percent risk category. mortgage obligations (but not stripped mortgage- The extent to which qualifying securities are recog- backed securities), that are issued or guaranteed by a nized as collateral is determined by their current U.S. Government agency or U.S. Government-sponmarket value. If a claim is only partially secured, that sored agency are assigned to the risk weight category is, the market value of the pledged securities is less appropriate to the issuer or guarantor. than the face amount of a balance sheet asset or an Generally, a privately-issued mortgage-backed seoff-balance sheet item, the portion that is covered by curity meeting certain criteria set forth in the accomthe market value of qualifying collateral is assigned to pany footnote26 is treated as essentially an indirect the 20 percent risk category, and the portion of the holding of the underlying assets, and is assigned to the claim that is not covered by collateral in the form of same risk category as the underlying assets, but in no cash or a qualifying security is assigned to the risk case to the zero percent risk category. Privately-issued category appropriate to the obligor or, if relevant, the mortgage-backed securities whose structures do not guarantor. For example, to the extent that a claim on qualify them to be regarded as indirect holdings of the a private sector obligor is collateralized by the current underlying assets are assigned to the 100 percent risk market value of U.S. Government securities, it would category. During the inspection process, privatelybe placed in the 20 percent risk category and the issued mortgage-backed securities that are assigned to balance would be assigned to the 100 percent risk a lower risk weight category will be subject to examcategory. iner review to ensure that they meet the appropriate 2. Guarantees. Guarantees of the OECD and non- criteria. OECD central governments, U.S. Government agen- While the risk category to which mortgage-backed cies, U.S. Government-sponsored agencies, state and securities is assigned will generally be based upon the local governments of the OECD-based group of coun- issuer or guarantor or, in the case of privately-issued tries, multilateral lending institutions and regional de- mortgage-backed securities, the assets underlying the velopment banks, U.S. depository institutions, and security, any class of a mortgage-backed security that foreign banks are also recognized. If a claim is par- can absorb more than its pro rata share of loss without tially guaranteed, that is, coverage of the guarantee is less than the face amount of a balance sheet asset or an off-balance sheet item, the portion that is not fully 26. A privately-issued mortgage-backed security may be treated as an indirect holding of the underlying assets provided that: (1) the covered by the guarantee is assigned to the risk underlying assets are held by an independent trustee and the trustee category appropriate to the obligor or, if relevant, to has a first priority, perfected security interest in the underlying assets any collateral. The face amount of a claim covered by on behalf of the holders of the security; (2) either the holder of the security has an undivided pro rata ownership interest in the underlytwo types of guarantees that have different risk ing mortgage assets or the trust or single purpose entity (or conduit) that issues the security has no liabilities unrelated to the issued securities; (3) the security is structured such that the cash flow from the underlying assets in all cases fully meets the cash flow require- 25. The OECD-based group of countries comprises all full members ments of the security without undue reliance on any reinvestment of the Organization for Economic Cooperation and Development income; and (4) there is no material reinvestment risk associated with (OECD), as well as countries that have concluded special lending any funds awaiting distribution to the holders of the security. In arrangements with the International Monetary Fund (IMF) associated addition, if the underlying assets of a mortgage-backed security are with the Fund's General Arrangements to Borrow. The OECD in- composed of more than one type of asset, for example, U.S. Governcludes the following countries: Australia, Austria, Belgium, Canada, ment-sponsored agency securities and privately-issued pass-through Denmark, the Federal Republic of Germany, Finland, France, securities that qualify for the 50 percent risk weight category, the Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, entire mortgage-backed security is generally assigned to the category New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Tur- appropriate to the highest risk-weighted asset underlying the issue, key, the United Kingdom, and the United States. Saudi Arabia has but in no case to the zero percent risk category. Thus, in this example, concluded special lending arrangements with the IMF associated with the security would receive the 50 percent risk weight appropriate to the privately-issued pass-through securities. the Fund's General Arrangements to Borrow. 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180 Federal Reserve Bulletin • March 1989 the whole issue being in default (for example, a so- ernment agencies,30 as well as all direct local currency called subordinated class or residual interest), is as- claims on, and the portions of local currency claims signed to the 100 percent risk category. Furthermore, that are directly and unconditionally guaranteed by, all stripped mortgage-backed securities, including in- the central governments of non-OECD countries, to terest-only strips (IOs), principal-only strips (POs), the extent that subsidiary depository institutions have and similar instruments, are also assigned to the 100 liabilities booked in that currency. A claim is not percent risk weight category, regardless of the issuer considered to be unconditionally guaranteed by a or guarantor. central government if the validity of the guarantee is 4. Maturity. Maturity is generally not a factor in dependent upon some affirmative action by the holder assigning items to risk categories with the exception of or a third party. Generally, securities guaranteed by claims on non-OECD banks, commitments, and inter- the U.S. Government or its agencies that are actively est rate and foreign exchange rate contracts. Except traded in financial markets, such as GNMA securities, for commitments, short-term is defined as one year or are considered to be unconditionally guaranteed. less remaining maturity and long-term is defined as 2. Category 2:20 percent. This category includes cash over one year remaining maturity. In the case of items in the process of collection, both foreign and commitments, short-term is defined as one year or less domestic; short-term claims (including demand deposoriginal maturity and long-term is defined as over one its) on, and the portions of short-term claims that are year original maturity.27 guaranteed by,31 U.S. depository institutions32 and foreign banks;33 and long-term claims on, and the portions of long-term claims that are guaranteed by, C. Risk Weights. U.S. depository institutions and OECD banks.34 Attachment III contains a listing of the risk categories, a summary of the types of assets assigned to each category and the risk weight associated with each 30. A U.S. Government agency is defined as an instrumentality of the U.S. Government whose obligations are fully and explicitly category, that is, 0 percent, 20 percent, 50 percent, guaranteed as to the timely payment of principal and interest by the and 100 percent. A brief explanation of the compo- full faith and credit of the U.S. Government. Such agencies include nents of each category follows. the Government National Mortgage Association (GNMA), the Veterans Administration (VA), the Federal Housing Administration (FHA), 1. Category 1: zero percent. This category includes the Export-Import Bank (Exim Bank), the Overseas Private Investcash (domestic and foreign) owned and held in all ment Corporation (OPIC), the Commodity Credit Corporation (CCC), offices of subsidiary depository institutions or in tran- and the Small Business Administration (SBA). 31. Claims guaranteed by U.S. depository institutions and foreign sit and gold bullion held in either a subsidiary deposbanks include risk participations in both bankers acceptances and itory institution's own vaults or in another's vaults on standby letters of credit, as well as participations in commitments, an allocated basis, to the extent it is offset by gold that are conveyed to U.S. depository institutions or foreign banks. 32. U.S. depository institutions are defined to include branches bullion liabilities.28 The category also includes all (foreign and domestic) of federally-insured banks and depository direct claims (including securities, loans, and leases) institutions chartered and headquartered in the 50 states of the United States, the District of Columbia, Puerto Rico, and U.S. territories and on, and the portions of claims that are directly and possessions. The definition encompasses banks, mutual or stock unconditionally guaranteed by, the central savings banks, savings or building and loan associations, cooperative governments29 of the OECD countries and U.S. Gov- banks, credit unions, and international banking facilities of domestic banks. U.S.-chartered depository institutions owned by foreigners are also included in the definition. However, branches and agencies of foreign banks located in the U.S., as well as all bank holding companies, are excluded. 33. Foreign banks are distinguished as either OECD banks or 27. Through year-end 1992, remaining, rather than original, matu- non-OECD banks. OECD banks include banks and their branches rity may be used for determining the maturity of commitments. (foreign and domestic) organized under the laws of countries (other 28. All other holdings of bullion are assigned to the 100 percent risk than the U.S.) that belong to the OECD-based group of countries. category. Non-OECD banks include banks and their branches (foreign and 29. A central government is defined to include departments and domestic) organized under the laws of countries that do not belong to ministries, including the central bank, of the central government. The the OECD-based group of countries. For this purpose, a bank is U.S. central bank includes the 12 Federal Reserve Banks, and stock defined as an institution that engages in the business of banking; is held in these banks as a condition of membership is assigned to the recognized as a bank by the bank supervisory or monetary authorities zero percent risk category. The definition of central government does of the country of its organization or principal banking operations; not include state, provincial, or local governments; or commercial receives deposits to a substantial extent in the regular course of enterprises owned by the central government. In addition, it does not business; and has the power to accept demand deposits. Claims on, include local government entities or commercial enterprises whose and the portions of claims that are guaranteed by, a non-OECD central bank are treated as claims on, or guaranteed by, a non-OECD bank, obligations are guaranteed by the central government, although any except for local currency claims on, and the portions of local currency claims on such entities guaranteed by central governments are placed claims that are guaranteed by, a non-OECD central bank that are in the same general risk category as other claims guaranteed by central funded in local currency liabilities. The latter claims are assigned to governments. OECD central governments are defined as central the zero percent risk category. governments of the OECD-based group of countries; non-OECD central governments are defined as central governments of countries 34. Long-term claims on, or guaranteed by, non-OECD banks and that do not belong to the OECD-based group of countries. all claims on bank holding companies are assigned to the 100 percent Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 181 This category also includes the portions of claims servative loan-to-value ratio;39 are performing in acthat are conditionally guaranteed by OECD central cordance with their original terms; and are not 90 days governments and U.S. Government agencies, as well or more past due or carried in nonaccrual status.40 as the portions of local currency claims that are Also included in this category are privately-issued conditionally guaranteed by non-OECD central gov- mortgage-backed securities provided that: ernments, to the extent that subsidiary depository (1) the structure of the security meets the criteinstitutions have liabilities booked in that currency. In ria described in Section III (B) (3) above; addition, this category also includes claims on, and the (2) if the security is backed by a pool of conportions of claims that are guaranteed by, U.S. Gov- ventional mortgages, each underlying mortgage ernment-sponsored agencies35 and claims on, and the meets the criteria described above in this secportions of claims guaranteed by, the International tion for eligibility for the 50 percent risk weight Bank for Reconstruction and Development (World category at the time the pool is originated; and Bank), the Interamerican Development Bank, the (3) if the security is backed by privately-issued Asian Development Bank, the African Development mortgage-backed securities, each underlying Bank, the European Investment Bank, and other mul- security qualifies for the 50 percent risk catetilateral lending institutions or regional development gory. Privately-issued mortgage-backed securibanks in which the U.S. Government is a shareholder ties that do not meet these criteria or that do not or contributing member. General obligation claims on, qualify for a lower risk weight are generally or portions of claims guaranteed by the full faith and assigned to the 100 percent risk weight catecredit of, states or other political subdivisions of the gory. U.S. or other countries of the OECD-based group are also assigned to this category.36 Also assigned to this category are revenue (non- This category also includes the portions of claims general obligation) bonds or similar obligations, in- (including repurchase agreements) collateralized by cluding loans and leases, that are obligations of states cash on deposit in the subsidiary lending institution; or other political subdivisions of the U.S. (for examby securities issued or guaranteed by OECD central ple, municipal revenue bonds) or other countries of the governments, U.S. Government agencies or U.S. OECD-based group, but for which the government Government-sponsored agencies; or by securities is- entity is committed to repay the debt with revenues sued by multilateral lending institutions or regional from the specific projects financed, rather than from development banks in which the U.S. Government is a general tax funds. shareholder or contributing member. Credit equivalent amounts of interest rate and for- 3. Category 3:50 percent. This category includes loans eign exchange rate contracts involving standard risk fully secured by first liens37 on 1-4 family residential obligors (that is, obligors whose loans or debt securiproperties,38 either owner-occupied or rented, pro- ties would be assigned to the 100 percent risk catevided that such loans have been made in accordance gory) are included in the 50 percent category, unless with prudent underwriting standards, including a con- they are backed by collateral or guarantees that allow them to be placed in a lower risk category. 4. Category 4:100 percent. All assets not included in the categories above are assigned to this category, risk category, as are holdings of bank-issued securities that qualify as which comprises standard risk assets. The bulk of the capital of the issuing banks. assets typically found in a loan portfolio would be 35. For this purpose, U.S. Government-sponsored agencies are defined as agencies originally established or chartered by the Federal assigned to the 100 percent category. government to serve public purposes specified by the U.S. Congress This category includes long-term claims on, and the but whose obligations are not explicitly guaranteed by the full faith and portions of long-term claims that are guaranteed by, credit of the U.S. Government. These agencies include the Federal Home Loan Mortgage Corporation (FHLMC), the Federal National non-OECD banks, and all claims on non-OECD cen- Mortgage Association (FNMA), the Farm Credit System, the Federal tral governments that entail some degree of transfer Home Loan Bank System, and the Student Loan Marketing Association (SLMA). Claims on U.S. Government-sponsored agencies include capital stock in a Federal Home Loan Bank that is held as a condition of membership in that Bank. 36. Claims on, or guaranteed by, states or other political subdivisions of countries that do not belong to the OECD-based group of 39. The loan-to-value ratio is based upon the most current appraised countries are placed in the 100 percent risk category. value of the property. All the appraisals must be made in a manner 37. If a banking organization holds the first and junior lien(s) on a consistent with the Federal banking agencies' real estate appraisal residential property and no other party holds an intervening lien, the guidelines and with the banking organization's own appraisal guidetransaction is treated as a single loan secured by a first lien for the lines. purpose of determining the loan-to-value ratio. 40. Residential property loans that do not meet all the specified 38. The types of properties that qualify as 1-4 family residences are criteria or that are made for the purpose of speculative property listed in the instructions to the FR Y-9C Report. development are placed in the 100 percent risk category. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

182 Federal Reserve Bulletin • March 1989 risk.41 This category also includes all claims on foreign category according to the obligor, or, if relevant, the and domestic private sector obligors not included in guarantor or the nature of the collateral.43 Attachment the categories above (including loans to nondepository IV sets forth the conversion factors for various types financial institutions and bank holding companies); of off-balance sheet items. claims on commercial firms owned by the public 1. Items with a 100 percent conversion factor. A 100 sector; customer liabilities to the bank on acceptances percent conversion factor applies to direct credit suboutstanding involving standard risk claims;42 invest- stitutes, which include guarantees, or equivalent inments in fixed assets, premises, and other real estate struments, backing financial claims, such as outstandowned; common and preferred stock of corporations, ing securities, loans, and other financial liabilities, or including stock acquired for debts previously con- that back off-balance sheet items that require capital tracted; commercial and consumer loans (except those under the risk-based capital framework. Direct credit assigned to lower risk categories due to recognized substitutes include, for example, financial standby guarantees or collateral and loans for residential prop- letters of credit, or other equivalent irrevocable undererty that qualify for a lower risk weight); mortgage- takings or surety arrangements, that guarantee repaybacked securities that do not meet criteria for assign- ment of financial obligations such as: commercial ment to a lower risk weight (including any classes of paper, tax-exempt securities, commercial or individual mortgage-backed securities that can absorb more than loans or debt obligations, or standby or commercial their pro rata share of loss without the whole issue letters of credit. Direct credit substitutes also include being in default); and all stripped mortgage-backed and the acquisition of risk participations in bankers accepsimilar securities. tances and standby letters of credit, since both of these Also included in this category are industrial devel- transactions, in effect, constitute a guarantee by the opment bonds and similar obligations issued under the acquiring banking organization that the underlying auspices of states or political subdivisions of the account party (obligor) will repay its obligation to the OECD-based group of countries for the benefit of a originating, or issuing, institution.44 (Standby letters of private party or enterprise where that party or enter- credit that are performance-related are discussed beprise, not the government entity, is obligated to pay low and have a credit conversion factor of 50 percent.) the principal and interest, and all obligations of states The full amount of a direct credit substitute is or political subdivisions of countries that do not belong converted at 100 percent and the resulting credit to the OECD-based group. equivalent amount is assigned to the risk category The following assets also are assigned a risk weight appropriate to the obligor or, if relevant, the guarantor of 100 percent if they have not been deducted from or the nature of the collateral. In the case of a direct capital: investments in unconsolidated companies, credit substitute in which a risk participation45 has joint ventures or associated companies; instruments been conveyed, the full amount is still converted at 100 that qualify as capital issued by other banking organi- percent. However, the credit equivalent amount that zations; and any intangibles, including grandfathered has been conveyed is assigned to whichever risk goodwill. category is lower: the risk category appropriate to the obligor, after giving effect to any relevant guarantees D. Off-Balance Sheet Items. or collateral, or the risk category appropriate to the institution acquiring the participation. Any remainder The face amount of an off-balance sheet item is incor- is assigned to the risk category appropriate to the porated into the risk-based capital ratio by multiplying obligor, guarantor, or collateral. For example, the it by a credit conversion factor. The resultant credit portion of a direct credit substitute conveyed as a risk equivalent amount is assigned to the appropriate risk participation to a U.S. domestic depository institution 43. The sufficiency of collateral and guarantees for off-balance sheet 41. Such assets include all non-local currency claims on, and the items is determined by the market value of the collateral or the amount portions of claims that are guaranteed by, non-OECD central govern- of the guarantee in relation to the face amount of the item, except for ments and those portions of local currency claims on, or guaranteed interest and foreign exchange rate contracts, for which this determiby, non-OECD central governments that exceed the local currency nation is made in relation to the credit equivalent amount. Collateral liabilities held by subsidiary depository institutions. and guarantees are subject to the same provisions noted under Section 42. Customer liabilities on acceptances outstanding involving non- III (B). standard risk claims, such as claims on U.S. depository institutions, 44. Credit equivalent amounts of acquisitions of risk participations are assigned to the risk category appropriate to the identity of the are assigned to the risk category appropriate to the account party obligor or, if relevant, the nature of the collateral or guarantees obligor, or, if relevant, the nature of the collateral or guarantees. backing the claims. Portions of acceptances conveyed as risk partic- 45. That is, a participation in which the originating banking organiipations to U.S. depository institutions or foreign banks are assigned zation remains liable to the beneficiary for the full amount of the direct to the 20 percent risk category appropriate to short-term claims credit substitute if the party that has acquired the participation fails to guaranteed by U.S. depository institutions and foreign banks. pay when the instrument is drawn. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 183 or foreign bank is assigned to the risk category appro- term advances sold under long-term commitments priate to claims guaranteed by those institutions, that without direct recourse) are treated for risk-based is, the 20 percent risk category.46 This approach capital purposes as assets sold with recourse and, recognizes that such conveyances replace the originat- accordingly, are also converted at 100 percent. ing banking organization's exposure to the obligor Forward agreements are legally binding contractual with an exposure to the institutions acquiring the risk obligations to purchase assets with certain drawdown participations.47 at a specified future date. Such obligations include In the case of direct credit substitutes that take the forward purchases, forward forward deposits placed,49 form of a syndication, that is, where each banking and partly-paid shares and securities; they do not organization is obligated only for its pro rata share of include commitments to make residential mortgage the risk and there is no recourse to the originating loans or forward foreign exchange contracts. banking organization, each banking organization will Securities lent by a banking organization are treated only include its pro rata share of the direct credit in one of two ways, depending upon whether the substitute in its risk-based capital calculation. lender is at risk of loss. If a banking organization, as Financial standby letters of credit are distinguished agent for a customer, lends the customer's securities from loan commitments (discussed below) in that and does not indemnify the customer against loss, then standby s are irrevocable obligations of the banking the transaction is excluded from the risk-based capital organization to pay a third-party beneficiary when a calculation. If, alternatively, a banking organization customer (account party) fails to repay an outstanding lends its own securities or, acting as agent for a loan or debt instrument (direct credit substitute). Per- customer, lends the customer's securities and indemformance standby letters of credit (performance nifies the customer against loss, the transaction is bonds) are irrevocable obligations of the banking or- converted at 100 percent and assigned to the risk ganization to pay a third-party beneficiary when a weight category appropriate to the obligor, to any customer (account party) fails to perform some other collateral delivered to the lending banking organizacontractual non-financial obligation. tion, or, if applicable, to the independent custodian The distinguishing characteristic of a standby letter acting on the lender's behalf. of credit for risk-based capital purposes is the combi- 2. Items with a 50 percent conversion factor. nation of irrevocability with the fact that funding is Transaction-related contingencies are converted at 50 triggered by some failure to repay or perform an percent. Such contingencies include bid bonds, perforobligation. Thus, any commitment (by whatever mance bonds, warranties, standby letters of credit name) that involves an irrevocable obligation to make related to particular transactions, and performance a payment to the customer or to a third party in the standby letters of credit, as well as acquisitions of risk event the customer fails to repay an outstanding debt participations in performance standby letters of credit. obligation or fails to perform a contractual obligation Performance standby letters of credit represent obliis treated, for risk-based capital purposes, as respec- gations backing the performance of nonfinancial or tively, a financial guarantee standby letter of credit or commercial contracts or undertakings. To the extent a performance standby. permitted by law or regulation, performance standby letters of credit include arrangements backing, among A loan commitment, on the other hand, involves an other things, subcontractors' and suppliers' perforobligation (with or without a material adverse change mance, labor and materials contracts, and construcor similar clause) of the banking organization to fund tion bids. its customer in the normal course of business should the customer seek to draw down the commitment. The unused portion of commitments with an original Sale and repurchase agreements and asset sales with maturity exceeding one year,50 including underwriting recourse (to the extent not included on the balance sheet) and forward agreements also are converted at 100 percent.48 So-called "loan strips" (that is, short- For risk-based capital purposes, however, such assets sold with recourse and reported as "true" sales by bank holding companies are converted at 100 percent and assigned to the risk category appropriate 46. Risk participations with a remaining maturity of over one year to the underlying obligor, or, if relevant the guarantor or nature of the that are conveyed to non-OECD banks are to be assigned to the 100 collateral, provided that the transactions meet the definition of assets percent risk category, unless a lower risk category is appropriate to sold with recourse, including the sale of 1-4 family residential the obligor, guarantor, or collateral. mortgages, that is contained in the instructions to the commercial 47. A risk participation in bankers acceptances conveyed to other bank Consolidated Reports of Condition and Income (Call Report). institutions is also assigned to the risk category appropriate to the 49. Forward forward deposits accepted are treated as interest rate institution acquiring the participation or, if relevant, the guarantor or contracts. nature of the collateral. 50. Through year-end 1992, remaining maturity may be used for 48. In regulatory reports and under GAAP, bank holding companies determining the maturity of off-balance sheet loan commitments; are permitted to treat some asset sales with recourse as "true" sales. thereafter, original maturity must be used. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

184 Federal Reserve Bulletin • March 1989 commitments, and commercial and consumer credit to cancel the line of credit at any time, in accordance commitments also are converted at 50 percent. with applicable law. Original maturity is defined as the length of time Once a commitment has been converted at 50 perbetween the date the commitment is issued and the cent, any portion that has been conveyed to U.S. earliest date on which: depository institutions or OECD banks as participa- (1) the banking organization can, at its option, tions in which the originating banking organization unconditionally (without cause) cancel the retains the full obligation to the borrower if the particcommitment;51 and ipating bank fails to pay when the instrument is drawn, (2) the banking organization is scheduled to is assigned to the 20 percent risk category. This (and as a normal practice actually does) review treatment is analogous to that accorded to conveythe facility to determine whether or not it ances of risk participations in standby letters of credit. should be extended. Such reviews must con- The acquisition of a participation in a commitment by tinue to be conducted at least annually for such a banking organization is converted at 50 percent and a facility to qualify as a short-term commit- assigned to the risk category appropriate to the acment. count party obligor or, if relevant, the nature of the collateral or guarantees. Commitments are defined as any legally binding ar- Revolving underwriting facilities (RUFs), note issurangements that obligate a banking organization to ance facilities (NIFs), and other similar arrangements extend credit in the form of loans or leases; to pur- also are converted at 50 percent regardless of matuchase loans, securities, or other assets; or to partici- rity. These are facilities under which a borrower can pate in loans and leases. They also include overdraft issue on a revolving basis short-term paper in its own facilities, revolving credit, home equity and mortgage name, but for which the underwriting organizations lines of credit, and similar transactions. Normally, have a legally binding commitment either to purchase commitments involve a written contract or agreement any notes the borrower is unable to sell by the rolland a commitment fee, or some other form of consid- over date or to advance funds to the borrower. eration. 3. Items with a 20 percent conversion factor. Short- Commitments are included in weighted risk assets term, self-liquidating trade-related contingencies regardless of whether they contain "material adverse which arise from the movement of goods are conchange" clauses or other provisions that are intended verted at 20 percent. Such contingencies generally to relieve the issuer of its funding obligation under include commercial letters of credit and other docucertain conditions. In the case of commitments struc- mentary letters of credit collateralized by the underlytured as syndications, where the banking organization ing shipments. is obligated solely for its pro rata share, only the 4. Items with a zero percent conversion factor. These banking organization's proportional share of the syn- include unused portions of commitments with an origdicated commitment is taken into account in calculat- inal maturity of one year or less,52 or which are ing the risk-based capital ratio. unconditionally cancellable at any time, provided a Facilities that are unconditionally cancellable separate credit decision is made before each drawing (without cause) at any time by the banking organiza- under the facility. Unused portions of lines of credit on tion are not deemed to be commitments, provided the retail credit cards and related plans are deemed to be banking organization makes a separate credit decision short-term commitments if the banking organization before each drawing under the facility. Commitments has the unconditional right to cancel the line of credit with an original maturity of one year or less are at any time, in accordance with applicable law. deemed to involve low risk and, therefore, are not assessed a capital charge. Such short-term commit- E. Interest Rate and Foreign Exchange Rate ments are defined to include the unused portion of Contracts. lines of credit on retail credit cards and related plans (as defined in the instructions to the FR Y-9C Report) 1. Scope. Credit equivalent amounts are computed for if the banking organization has the unconditional right each of the following off-balance sheet interest rate and foreign exchange rate instruments: 51. In the case of consumer home equity or mortgage lines of credit secured by liens on 1-4 family residential properties, the bank is deemed able to unconditionally cancel the commitment for the purpose of this criterion if, at its option, it can prohibit additional 52. Through year-end 1992, remaining maturity may be used for extensions of credit, reduce the credit line, and terminate the com- determining term to maturity for off-balance sheet loan commitments; mitment to the full extent permitted by relevant Federal law. thereafter, original maturity must be used. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 185 1. Interest Rate Contracts Examples of the calculation of credit equivalent amounts for these instruments are contained in At- A. Single currency interest rate swaps. tachment V. B. Basis swaps. Because exchange rate contracts involve an ex- C. Forward rate agreements. change of principal upon maturity, and exchange rates D. Interest rate options purchased (including caps, are generally more volatile than interest rates, highcollars, and floors purchased). er conversion factors have been established for for- E. Any other instrument that gives rise to similar eign exchange contracts than for interest rate concredit risks (including when-issued securities and for- tracts. ward forward deposits accepted). No potential future credit exposure is calculated for single currency interest rate swaps in which payments II. Exchange Rate Contracts are made based upon two floating rate indices, socalled floating/floating or basis swaps; the credit expo- A. Cross-currency interest rate swaps. sure on these contracts is evaluated solely on the basis B. Forward foreign exchange contracts. of their mark-to-market values. C. Currency options purchased. 3. Risk weights. Once the credit equivalent amount for D. Any other instrument that gives rise to similar interest rate and exchange rate instruments has been credit risks. determined, that amount is assigned to the risk weight category appropriate to the counterparty, or, if rele- Exchange rate contracts with an original maturity of vant, the nature of any collateral or guarantees.54 fourteen calendar days or less and instruments traded However, the maximum weight that will be applied to on exchanges that require daily payment of variation the credit equivalent amount of such instruments is 50 margin are excluded from the risk-based ratio calcula- percent. tion. Over-the-counter options purchased, however, 4. Avoidance of double counting. In certain cases, are included and treated in the same way as the other credit exposures arising from the interest rate and interest rate and exchange rate contracts. exchange instruments covered by these guidelines 2. Calculation of credit equivalent amounts. Credit may already be reflected, in part, on the balance sheet. equivalent amounts are calculated for each individual To avoid double counting such exposures in the ascontract of the types listed above. To calculate the sessment of capital adequacy and, perhaps, assigning credit equivalent amount of its off-balance sheet inter- inappropriate risk weights, counterparty credit expoest rate and exchange rate instruments, a banking sures arising from the types of instruments covered by organization sums these amounts: these guidelines may need to be excluded from balance (1) the mark-to-market value53 (positive values sheet assets in calculating banking organizations' riskonly) of each contract (that is, the current based capital ratios. exposure); and 5. Netting. Netting of swaps and similar contracts is (2) an estimate of the potential future credit expo- recognized for purposes of calculating the risk-based sure over the remaining life of each contract. capital ratio only when accomplished through netting by novation.55 While the Federal Reserve encourages The potential future credit exposure on a contract, any reasonable arrangements designed to reduce the including contracts with negative mark-to-market val- risks inherent in these transactions, other types of ues, is estimated by multiplying the notional principal netting arrangements are not recognized for purposes amount by one of the following credit conversion of calculating the risk-based ratio at this time. factors, as appropriate: Remaining Interest Rate Exchange Rate Maturity * Contracts Contracts 54. For interest and exchange rate contracts, sufficiency of collateral or guarantees is determined by the market value of the collateral One year or less .. 0 1.0% or the amount of the guarantee in relation to the credit equivalent Over one year 0.5% 5.0% amount. Collateral and guarantees are subject to the same provisions noted under Section III (B). 55. Netting by novation, for this purpose, is a written bilateral contract between two counterparties under which any obligation to each other to deliver a given currency on a given date is automatically 53. Mark-to-market values are measured in dollars, regardless of the amalgamated with all other obligations for the same currency and currency or currencies specified in the contract, and should reflect value date, legally substituting one single net amount for the previous changes in both interest rates and counterparty credit quality. gross obligations. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

186 Federal Reserve Bulletin • March 1989 IV. Minimum Supervisory Ratios and included in an organization's total capital. The Federal Standards Reserve will continue to require bank holding companies to maintain reserves at levels fully sufficient to The interim and final supervisory standards set forth cover losses inherent in their loan portfolios. below specify minimum supervisory ratios based pri- Qualifying total capital is calculated by adding Tier 1 marily on broad credit risk considerations. As noted capital and Tier 2 capital (limited to 100 percent of Tier above, the risk-based ratio does not take explicit 1 capital) and then deducting from this sum certain account of the quality of individual asset portfolios or investments in banking or finance subsidiaries that are the range of other types of risks to which banking not consolidated for accounting or supervisory purorganizations may be exposed, such as interest rate, poses, reciprocal holdings of banking organizations' liquidity, market or operational risks. For this reason, capital securities, or other items at the direction of the banking organizations are generally expected to oper- Federal Reserve. The conditions under which these ate with capital positions well above the minimum deductions are to be made and the procedures for ratios. This is particularly true for institutions that are making the deductions are discussed above in Secundertaking significant expansion or that are exposed tion II (B). to high or unusual levels of risk. Upon adoption of the risk-based framework, any B. Transition Arrangements. organization that does not meet the interim or final supervisory ratios, or whose capital is otherwise con- The transition period for implementing the risk-based sidered inadequate, is expected to develop and imple- capital standard ends on December 31, 1992.57 Iniment a plan acceptable to the Federal Reserve for tially, the risk-based capital guidelines do not establish achieving an adequate level of capital consistent with a minimum level of capital. However, by year-end the provisions of these guidelines or with the special 1990, banking organizations are expected to meet a circumstances affecting the individual organization. In minimum interim target ratio for qualifying total capiaddition, such organizations should avoid any actions, tal to weighted risk assets of 7.25 percent, at least including increased risk-taking or unwarranted expan- one-half of which should be in the form of Tier 1 sion, that would lower or further erode their capital capital. For purposes of meeting the 1990 interim positions. target, the amount of loan loss reserves that may be included in capital is limited to 1.5 percent of weighted A. Minimum Risk-Based Ratio After Transition risk assets and up to 10 percent of an organization's Period. As reflected in Attachment VI, by year-end 1992, all 57. The Basle capital framework does not establish an initial bank holding companies56 should meet a minimum minimum standard for the risk-based capital ratio before the end of ratio of qualifying total capital to weighted risk assets 1990. However, for the purpose of calculating a risk-based capital ratio prior to year-end 1990, no sublimit is placed on the amount of the of 8 percent, of which at least 4.0 percentage points allowance for loan and lease losses includable in Tier 2. In addition, should be in the form of Tier 1 capital. (Section II this framework permits, under temporary transition arrangements, a certain percentage of an organization's Tier 1 capital to be made up of above contains detailed definitions of capital and resupplementary capital elements. In particular, supplementary elelated terms used in this section.) The maximum ments may constitute 25 percent of an organization's Tier 1 capital amount of supplementary capital elements that quali- (before the deduction of goodwill) up to the end of 1990; from year-end 1990 up to the end of 1992, this allowable percentage of supplementary fies as Tier 2 capital is limited to 100 percent of Tier 1 elements in Tier 1 declines to 10 percent of Tier 1 (before the capital net of goodwill. In addition, the combined deduction of goodwill). Beginning on December 31, 1992, supplementary elements may not be included in Tier 1. The amount of subordimaximum amount of subordinated debt and intermenated debt and intermediate-term preferred stock temporarily indiate-term preferred stock that qualifies as Tier 2 cluded in Tier 1 under these arrangements will not be subject to the capital is limited to 50 percent of Tier 1 capital net of sublimit on the amount of such instruments includable in Tier 2 capital. While the transitional arrangements allow an organization to goodwill. The maximum amount of the allowance for include supplementary elements in Tier 1 on a temporary basis, the loan and lease losses that qualifies as Tier 2 capital is amount of perpetual preferred stock that may be included in a bank limited to 1.25 percent of gross weighted risk assets. holding company's Tier 1—both during and after the transition period —is, as described in Section II (A), based solely upon a specified Allowances for loan and lease losses in excess of this percentage of the organization's permanent core capital elements (that limit may, of course, be maintained, but would not be is, common equity, perpetual preferred stock, and minority interest in the equity of consolidated subsidiaries), not upon total Tier 1 elements that temporarily include Tier 2 items. Once the amount of supplementary items that may temporarily qualify as Tier 1 elements is deter- 56. As noted in Section I above, bank holding companies with less mined, goodwill must be deducted from the sum of this amount and than $150 million in consolidated assets would generally be exempt the amount of the organization's permanent core capital elements for the purpose of calculating Tier 1 (net of goodwill), Tier 2, and total from the calculation and analysis of risk-based ratios on a consolicapital. dated holding company basis, subject to certain terms and conditions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 187 Tier 1 capital may consist of supplementary capital is the 53rd largest of 95 commercial banks, controlling elements. Thus, the 7.25 percent interim target ratio .09 percent of the total deposits in commercial banks implies a minimum ratio of Tier 1 capital to weighted in the market.2 In the Sacramento market, Bank is the risk assets of 3.6 percent (one-half of 7.25) and a 29th largest of 34 commercial banks, controlling 0.25 minimum ratio of core capital elements to weighted percent of the total deposits in commercial banks in risk assets ratio of 3.25 percent (nine-tenths of the the market. Consummation of this proposal would not Tier 1 capital ratio). result in any adverse effects upon competition in any relevant market. Based upon the facts of record, including commit- ORDERS ISSUED UNDER BANK HOLDING ments made by several of C. N. Bancorp's sharehold- COMPANY ACT ers, the financial and managerial resources and future prospects of C. N. Bancorp, Williams-Augusta, and Orders Issued Under Section 3 of the Bank Bank are consistent with approval. Considerations Holding Company Act relating to convenience and needs of the communities to be served also are consistent with approval of the C. N. Bancorp, Ltd. application. Taipei, Taiwan Based on the foregoing and other facts of record, the Board has determined that consummation of the pro- Williams-Augusta Acquisition Corp. posal would be in the public interest and that the San Francisco, California applications should be, and hereby are, approved. The transactions shall not be consummated before Order Approving Formation of a Bank Holding the thirtieth day following the effective date of this Company Order, or later than three months following the effective date of this Order, unless such period is extended C. N. Bancorp, Ltd., Taipei, Taiwan ("C. N. for good cause by the Board or by the Federal Reserve Bancorp"), and its wholly owned subsidiary, Wil- Bank of San Francisco, pursuant to delegated authorliams-Augusta Acquisition Corp., San Francisco, Cal- ity. ifornia ("Williams-Augusta"), have applied for the By order of the Board of Governors, effective Board's approval under section 3(a)(1) of the Bank January 30, 1989. Holding Company Act (12 U.S.C. § 1842(a)(1)) ("BHC Act"), to become bank holding companies by Voting for this action: Chairman Greenspan and Governors acquiring 97 percent of the outstanding voting shares Johnson, Seger, Angell, Kelley, and LaWare. Absent and not of California National Bank, San Francisco, California voting: Governor Heller. ("Bank"). Notice of the applications, affording an opportunity JENNIFER J. JOHNSON Associate Secretary of the Board for interested persons to submit comments, has been given in accordance with section 3(b) of the BHC Act Credit International Bancshares, Ltd. (53 Federal Register 45,392 (1988)). The time for filing Washington, D.C. comments has expired, and the Board has considered the applications and all comments received in light of Order Approving the Formation of a Bank Holding the factors set forth in section 3(c) of the BHC Act. Company C. N. Bancorp and Williams-Augusta are nonoperating companies formed to acquire Bank. Bank is Credit International Bancshares, Ltd., Washington, among the smaller commercial banking organizations D.C. ("Bancshares"), has applied for the Board's in California, with total deposits of approximately approval under section 3(a)(1) of the Bank Holding $55.7 million, representing less than 1 percent of the Company Act (the "BHC Act") (12 U.S.C. total deposits in commercial banks in the state.1 Con- § 1842(a)(1)), to become a bank holding company by summation of the transaction would not result in an acquiring 100 percent of the voting shares of Credit increase in the concentration of banking resources in International Bank, National Association, Washing- California. ton, D.C. ("Credit International"). Bank operates in the San Francisco and Sacramento banking markets. In the San Francisco market, Bank 2. San Francisco and Sacramento market data are as of June 30, 1. State market data are as of December 31, 1986. 1987. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

188 Federal Reserve Bulletin • March 1989 Notice of the application, affording interested per- FirsTier Financial, Inc. sons an opportunity to submit comments, has been Omaha, Nebraska duly published (53 Federal Register 35,231 (1988)). The time for filing comments has expired, and the Order Approving Acquisition of a Bank Holding Board has considered the application and all com- Company ments received in light of the factors set forth in section 3(c) of the Act. FirsTier Financial, Inc., Omaha, Nebraska Bancshares is a nonoperating corporation formed to ("FirsTier"), a bank holding company within the acquire Credit International. Credit International is a meaning of the Bank Holding Company Act of 1956 de novo bank and will operate in the District of (12 U.S.C. § 1841 et seq.) (the "BHC Act"), has Columbia banking market.1 The principals of Banc- applied for the Board's approval under section 3(a)(3) shares are not affiliated with any other depository of the BHC Act (12 U.S.C. § 1842(a)(3)), to acquire institutions in this market. Credit International is a 100 percent of the voting shares of Norfolk Banshares, proposed de novo bank, and consummation of this Inc., Norfolk, Nebraska ("Norfolk"), and thereby proposal would not result in any adverse effects upon indirectly to acquire The DeLay First National Bank competition or increase in the concentration of bank- and Trust Company, Norfolk, Nebraska ("DeLay ing resources in any relevant area. Accordingly, the Bank"). Board concludes that competitive considerations un- Notice of the application, affording interested perder the BHC Act are consistent with approval. sons an opportunity to submit comments, has been The financial and managerial resources and future given in accordance with section 3 of the BHC Act. prospects of Bancshares and Credit International are (53 Federal Register 35,230 (1988)). The time for filing satisfactory. The Board thus concludes that consider- comments has expired, and the Board has considered ations relating to banking factors are consistent with the application and all comments received in light of approval. Considerations relating to the convenience the factors set forth in section 3(c) of the BHC Act and needs of the community to be served also are (12 U.S.C. § 1842(c)). consistent with approval. FirsTier operates two subsidiary banks, FirsTier Based on the foregoing and other facts of record, Bank, N.A., Omaha, Nebraska ("Omaha Bank") and and in reliance on commitments made and conditions FirsTier Bank, N.A., Lincoln, Nebraska ("Lincoln agreed to by certain investors in Bancshares, the Bank"). FirsTier is the largest banking organization in Board has determined that consummation of this Nebraska controlling deposits of $1.7 billion, repretransaction would be in the public interest and that the senting 11.7 percent of deposits in commercial banking application should be, and hereby is, approved. This organizations in the state.1 DeLay Bank is the eighth transaction shall not be consummated before the thir- largest banking organization in Nebraska, controlling tieth calendar day following the effective date of this deposits of $167.9 million, representing 1.2 percent of Order, or later than three months following the effec- total deposits in commercial banks in the state. Contive date of this Order, unless such period is extended summation of the proposal would not have any signiffor good cause by the Board or by the Federal Reserve icant adverse effect upon the concentration of banking Bank of Richmond, acting pursuant to delegated au- resources in Nebraska. thority. FirsTier and DeLay Bank do not compete directly in By order of the Board of Governors, effective any banking market. Accordingly, consummation of January 4, 1989. the proposal would not eliminate any substantial existing competition between FirsTier and DeLay Bank in any relevant banking market.2 Consummation also Voting for this action: Chairman Greenspan and Governors Johnson, Seger, Angell, Heller, Kelley, and LaWare. would not have any significant adverse effect on probable future competition in any market.3 JAMES MCAFEE Associate Secretary of the Board 1. Deposit data are as of December 31, 1987. 2. The relevant market for DeLay Bank is approximated by the 1. The District of Columbia banking market is defined as the following areas in Nebraska: Madison County (except the town of Washington, D.C., Ranally Metropolitan Area, which comprises the Newman Grove), Pierce County, Stanton County, Wayne County and District of Columbia; all of Fairfax and Prince William Counties; and the towns of Belden and Randolph in Cedar County. portions of Fauquier, Loudon, and Stafford Counties; the cities of 3. In this regard, the Board notes that there are other potential Alexandria, Arlington, Fairfax, Falls Church, Manassas, and Ma- entrants into the market presently served by DeLay Bank in addition nassas Park in Virginia; and substantially all of Montgomery, Prince to FirsTier. Moreover, the number of potential entrants will increase Georges, and Charles Counties, plus small portions of Anne Arundel, when Nebraska's regional reciprocal interstate banking statute be- Calvert, Carroll, Frederick, and Howard Counties in Maryland. comes effective on January 1, 1990. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 189 The financial and managerial resources and future tutions with the most effective programs to help meet prospects of FirsTier, Norfolk and their subsidiaries community credit needs share a number of elements. are consistent with approval of the application. These institutions maintain outreach programs which In considering the convenience and needs of the include procedures to permit effective communication communities to be served, the Board has taken into between the bank and various segments of the comaccount the records of FirsTier's banks and DeLay munity and formalized methods for incorporating find- Bank under the Community Reinvestment Act ings regarding community credit needs into the devel- (12 U.S.C. § 2901 et seq.) ("CRA"). The CRA opment and delivery of products and services. They requires the federal bank supervisory agencies to monitor institutional performance at senior manageencourage financial institutions to help meet the credit ment levels and periodically evaluate new opportunineeds of the local communities in which they are ties for innovative lending programs to meet specific chartered. To accomplish this end, the CRA requires community credit needs, including those of low-and the appropriate federal supervisory authority to moderate-income persons. An effective program also "assess the institution's record of meeting the credit includes the use of specifically designed marketing and needs of its entire community, including low- and advertising plans to stimulate public awareness of the moderate-income neighborhoods, consistent with the bank's services throughout the community, including safe and sound operation of such institution." 12 low- and moderate-income neighborhoods, as well as U.S.C. § 2903. The Board is required to "take such support of community development projects and prorecord into account in its evaluation" of applications grams. under section 3 of the BHC Act. The Board has considered the record of this appli- The Board has received comments regarding the cation, including the Protestants' comments and CRA performance of FirsTier's banks and DeLay FirsTier's response, in light of the requirements of the Bank from the Nebraskans for Fair Banking Coalition, CRA and the implementing regulations of the federal a coalition of community based organizations (collec- banking agencies. Based upon this record and for the tively, the "Protestants").4 The Protestants allege, reasons described below, the Board believes that inter alia, that FirsTier's two subsidiary banks and considerations relating to the convenience and needs DeLay Bank have failed to meet local credit needs of the communities to be served are consistent with with respect to low- and moderate-income neighbor- approval of the application. hoods, small business loans and agricultural loans.5 In In this case, the Board has given careful attention to an attempt to clarify and resolve the concerns raised the most recent CRA examination of FirsTier's subby the Protestants, the parties met privately on two sidiary banks, which was completed by the Comptroloccasions. These meetings, however, did not produce ler of the Currency in March, 1988. That examination a resolution of the differences between FirsTier and noted a less than satisfactory CRA performance by the Protestants.6 Omaha Bank. In response to the concerns raised in the In implementing the CRA, the Board and the other examination, FirsTier and Omaha Bank have adopted federal banking agencies have issued regulations spec- an extensive plan to enhance Omaha Bank's service to ifying the factors to be taken into account in determin- its communities, and have already taken significant ing whether an institution is meeting its responsibilities steps to implement these initiatives. under the CRA. See 12 C.F.R. 228.7. Moreover, the As part of this CRA plan, Omaha Bank intends to Board's experience over the years in examining bank conduct a market survey focusing on the credit needs performance under the CRA has indicated that insti- of low- and moderate-income and minority communities.7 Omaha Bank will use the results of the survey to conduct a direct mail advertising campaign in targeted areas. Omaha Bank will also increase its 4. The Board also received an untimely comment from the Omaha Black Forum, submitted on behalf of several community organiza- efforts to ascertain the credit needs of the communities tions, that also raised the issue of Omaha Bank's CRA performance. it serves by appointing a community liaison officer to 5. Protestants also allege that Omaha Bank has not met the credit initiate contacts with local groups. As part of its needs of Omaha's minority communities. 6. The Protestants also requested that the Board order a public outreach program FirsTier will also develop a program meeting or hearing to receive testimony on the issues presented by this discussing credit issues for presentation to neighborapplication. Although section 3(b) of the BHC Act does not require a public meeting or hearing in this instance, the Board may, in any case, order such proceedings. In the Board's view, the parties have had ample opportunity to present their arguments in writing and to 7. There are 33 census tracts in the Omaha area that have a minority respond to one another's submissions. Moreover, FirsTier has had population greater than 15 percent. According to 1980 census data, 28 private meetings with the Protestants to discuss these issues. In light of those tracts are also low- and moderate-income communities. Thus, of these facts, the Board has determined that a public meeting or FirsTier's initiatives in the low- and moderate-income neighborhoods hearing would serve no useful purpose in this case. Accordingly, the should also have a significant impact in Omaha's minority communi- Protestants' request for a public hearing is hereby denied. ties. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

190 Federal Reserve Bulletin • March 1989 hood organizations and will strengthen its advertising The record reflects that Lincoln Bank has placed to include special interest and community newspapers. considerable emphasis on CRA compliance and has FirsTier has also committed to enhance its procedures been actively involved in providing credit for commufor monitoring Omaha Bank's CRA performance nity development projects. There is also evidence to through the development of a computer-based system support Applicant's claim that its subsidiary banks as to track the distribution of credit applications and well as the DeLay Bank are committed to agricultural extensions of credit according to census tract. lending. Although agricultural lending in Nebraska, on Protestants have expressed concern regarding the whole, has experienced a decline in recent years, Omaha Bank's mortgage lending practices and in the proportion of the state's aggregate farm loans particular, the number of home purchase loans ex- made by each of these banks has increased over this tended by Omaha Bank in low- and moderate-income period.10 and minority neighborhoods. FirsTier responds by Accordingly, based upon the foregoing and other noting that the available loan data merely reflects facts of record, including FirsTier's commitments re- Omaha Bank's policy of referring prospective borrow- garding its CRA plan and the steps taken to implement ers to FirsTier's mortgage lending subsidiary, FirsTier that plan, the Board has determined that the applica- Mortgage. Applicant asserts that its lending record in tion should be, and hereby is, approved. The acquisi- Omaha is more accurately represented by including tion of Norfolk shall not be consummated before the the loans made by FirsTier Mortgage, and that the thirtieth calendar day following the effective date of mortgage subsidiary was a significant lender under this Order, or later than three months after the effecgovernment programs for low income individuals. In tive date of the Order, unless such period is extended any event, the mortgage lending subsidiary was sold for good cause by the Board or by the Federal Reserve by FirsTier in June 1988. As a result, Omaha Bank has Bank of Kansas City, acting pursuant to delegated reactivated its mortgage lending functions and now authority. offers a full range of government-assisted loans at each By order of the Board of Governors, effective branch. January 26, 1989. In addition, pursuant to discussions with Protestants, FirsTier has pledged to undertake a series of Voting for this action: Chairman Greenspan and Governors lending initiatives to augment Omaha Bank's existing Johnson, Seger, and Angell. Absent and not voting: Goverefforts directed at low- and moderate-income neigh- nors Heller, Kelley, and LaWare. borhoods. The lending initiatives undertaken by JENNIFER J. JOHNSON Omaha Bank will include, inter alia, the offering of Associate Secretary of the Board $1 million in loans for multi-family housing in conjunction with a program combining public and private Orders Issued Under Section 4 of the Bank sector funds; the availability of below-market rate Holding Company Act mortgage loans for individuals unable to qualify for government-sponsored or conventional financing; in- Barnett Banks, Inc. troduction of a secured credit card to provide open- Jacksonville, Florida end credit for persons with limited credit histories; a revolving loan fund for home improvement loans with Order Approving Applications to Underwrite and less restrictive terms than FHA sponsored credit; and, Deal in Certain Securities to a Limited Extent and to a revolving credit line for the acquisition and rehabil- Engage in Combined Investment Advisory and itation of single family homes in targeted areas.8 Securities Brokerage Activities The Board further notes that Lincoln Bank and DeLay Bank have each received satisfactory CRA assessments from the Comptroller of the Currency.9 credit needs of its community. The record also demonstrates, however, that despite declines in the loan-to-deposit ratios in the region 8. Protestants also express concern regarding Omaha Bank's record and state generally, the proportion of loans made in this region by of lending for home improvements in low- and moderate-income areas Delay Bank has been increasing. and its participation in programs that benefit small businesses. The 10. Protestants also allege that Omaha Bank has engaged in lending record reflects, however, that Omaha Bank has not excluded low- and violations and has not fulfilled certain reporting requirements. These moderate-income communities in making home improvement loans contentions were not documented by Protestants and the Board has and that its record compares favorably with other lenders in the not uncovered any violations or discrepancies in these areas. Omaha area. The record further shows that Omaha Bank's has The Board has also considered Protestant's concerns regarding the actively supported programs in its community designed to encourage lending practices of FirsTier Mortgage. The Board notes that these development of small business and low-to moderate-income areas. practices were voluntarily corrected by FirsTier in consultation with 9. Protestants allege that a recent decline in DeLay Bank's loan- the Department of Housing and Urban Development. The Board thus to-deposit ratio reflects that bank's decreased commitment to the finds that this matter does not warrant denial of the application. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 191 Barnett Banks, Inc., Jacksonville, Florida, a bank iary derives no more than 5 percent of its total gross holding company within the meaning of the Bank revenue from underwriting and dealing in the ap- Holding Company Act ("BHC Act"), has applied for proved securities over any two-year period.2 The the Board's approval under section 4(c)(8) of the BHC Board further found that, subject to the prudential Act (12 U.S.C. § 1843(c)(8)) and section 225.23 of the framework of limitations established in those cases to Board's Regulation Y (12 C.F.R. § 225.23), for its address the potential for conflicts of interests, unsound subsidiary, Barnett Capital Markets Group, Inc., Jack- banking practices or other adverse effects, the prosonville, Florida ("Capital Markets"), to engage posed underwriting and dealing activities were so de novo, on a limited basis, in underwriting and closely related to banking as to be a proper incident dealing in: thereto within the meaning of section 4(c)(8) of the (1) municipal revenue bonds, including certain BHC Act. Applicant has committed to conduct its industrial development bonds; ineligible underwriting and dealing activities subject to (2) 1-4 family mortgage-related securities; the 5 percent revenue test and the prudential limita- (3) commercial paper; and tions established by the Board in its Citicorp!Morgan! (4) consumer - receivable - related securities Bankers Trust and Chemical Orders.3 ("CRRs") (collectively "ineligible securities"). Consummation of the proposal would provide added convenience to Applicant's customers. In addition, In addition, Applicant proposes to engage in under- the Board expects that the de novo entry of Applicant writing and dealing in U.S. government and other into the market for these services would increase the bank-eligible securities pursuant to § 225.25(b)(16) and level of competition among providers of these serto provide investment advisory services pursuant vices. Accordingly, the Board has determined that the to § 225.25(b)(4) of Regulation Y (12 C.F.R. performance of the proposed activities by Applicant § 225.25(b)(16) and (b)(4)). can reasonably be expected to produce public benefits Applicant has also applied to provide investment which would outweigh adverse effects under the advice and combined investment advisory and broker- proper incident to banking standard of section 4(c)(8) age services ("full-service brokerage") to institutional of the BHC Act.4 and retail customers through Barnett Brokerage Ser- Based on the above, the Board has determined to vice, Inc., West Palm Beach, Florida ("Barnett Bro- approve the proposed underwriting activities subject kerage"). Barnett Brokerage is currently authorized to all of the terms and conditions established in the to provide securities brokerage services pursuant to Citicorp!Morgan/Bankers Trust and Chemical Orders, section 225.25(b)(15) of Regulation Y (12 C.F.R. except the market share limitation.5 § 225.25(b)(15)). Applicant, with consolidated assets of $24.9 billion, is the largest banking organization in Florida. It operates thirty-three subsidiary banks and engages directly 2. Citicorp, J.P. Morgan & Co. Incorporated and Bankers Trust New York Corporation, 73 FEDERAL RESERVE BULLETIN 473 (1987) and through subsidiaries in a broad range of permissi- ("Citicorp/Morgan!Bankers Trust''''), affd sub nom., Securities Indusble nonbanking activities.1 try Association v. Board of Governors of the Federal Reserve System, 839 F.2d 47 (2d Cir. 1988), cert, denied, 108 S. Ct. 2830 (1988) ("SIA Notice of the application, affording interested perv. Board"); and Chemical New York Corporation, The Chase Mansons an opportunity to submit comments on the pro- hattan Corporation, Bankers Trust New York Corporation, Citicorp, posal, has been published (53 Federal Register 51,163 Manufacturers Hanover Corporation and Security Pacific Corpora- (1988)). The time for filing comments has expired, and tion, 73 FEDERAL RESERVE BULLETIN 731 (1987) ("Chemical "). 3. In light of the decision in SIA v. Board, the Board has determined the Board has considered the applications and all not to require Applicant to comply with a market share limitation. comments received in light of the public interest 4. Capital Markets may also provide services that are necessary incidents to these approved activities. Any activity conducted as a factors set forth in section 4(c)(8) of the BHC Act. necessary incident to the ineligible securities activity must be treated as part of the ineligible securities activity unless Capital Markets has I. Underwriting and Dealing in Bank-Ineligible received specific approval under section 4(c)(8) of the BHC Act to conduct the activity independently. Until such approval is obtained, Securities any revenues from the incidental activity must be counted as ineligible revenue subject to the 5 percent gross revenue limit set forth in CiticorplMorgan/Bankers Trust. This 5 percent gross revenue limit The Board has previously determined that the conduct should be calculated in accordance with the method stated in J.P. of the proposed ineligible securities underwriting and Morgan & Co. Incorporated, et at., 75 FEDERAL RESERVE BULLETIN 192 (Order dated January 18, 1989). dealing activities is consistent with section 20 of the 5. The industrial development bonds approved in those applications Glass-Steagall Act, provided the underwriting subsid- and for Applicant in this case are only those tax-exempt bonds in which the governmental issuer, or the governmental unit on behalf of which the bonds are issued, is the owner for federal income tax purposes of the financed facility (such as airports, mass commuting 1. All data are as of September 30, 1988. facilities, and water pollution control facilities). Without further Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

192 Federal Reserve Bulletin • March 1989 II. Full-Service Brokerage Activities Board finds necessary to assure compliance with, and to prevent evasion of, the provisions of the BHC Act The Board has previously determined that the com- and the Board's regulations and orders issued therebined offering of investment advice and securities under. execution services to institutional and retail customers These transactions shall not be consummated later from the same bank holding company subsidiary is than three months after the effective date of this closely related and a proper incident to banking under Order, unless such period is extended for good cause section 4(c)(8) of the BHC Act, and does not violate by the Board or by the Federal Reserve Bank of the Glass-Steagall Act. National Westminister Bank Atlanta, pursuant to delegated authority. PLC, et al., 72 FEDERAL RESERVE BULLETIN 584 By order of the Board of Governors, effective (1986) ;6 Bank of New England Corporation, 1A FED- January 30, 1989. ERAL RESERVE BULLETIN 700 (1988) ("BNEC"). Barnett Brokerage proposes to conduct its brokerage and Voting for this action: Chairman Greenspan and Governors advisory activities within the same framework ap- Johnson, Seger, Angell, Kelley, and La Ware. Absent and not proved by the Board in BNEC.7 voting: Governor Heller. Barnett Brokerage will provide investment advice and full-service brokerage with respect to ineligible JENNIFER J. JOHNSON Associate Secretary of the Board securities which Capital Markets underwrites and deals in, with appropriate disclosure, to institutional J.P. Morgan & Co. Incorporated customers only. See Bankers Trust New York Com- New York, New York pany, 74 FEDERAL RESERVE BULLETIN 695 (1988).8 Based upon the foregoing and other considerations The Chase Manhattan Corporation reflected in the record, and in reliance on the commit- New York, New York ments offered by Applicant regarding the conduct of Barnett Brokerage's activities, the Board has deter- Bankers Trust New York Corporation mined that the public benefits associated with consum- New York, New York mation of this proposal can reasonably be expected to outweigh possible adverse effects, and that the balance of the public interests factors that the Board is re- Citicorp New York, New York quired to consider under section 4(c)(8) of the BHC Act is favorable. Security Pacific Corporation III. Conclusion Los Angeles, California Accordingly, Applicant's proposed activities are Order Conditionally Approving Applications to hereby approved. The Board's determination is sub- Engage, to a Limited Extent, in Underwriting and ject to all of the conditions set forth in the Board's Dealing in Certain Securities Regulation Y, including those in sections 225.4(d) and 225.23(b), and to the Board's authority to require Table of Contents modification or termination of the activities of a bank holding company or any of its subsidiaries as the I. Introduction and Description of Applications II. Glass-Steagall Act A. Compliance with Section 20 approval from the Board, Capital Markets may underwrite or deal in B. SIA's Contentions only these types of industrial development bonds. C. Calculation of the 5 Percent Revenue Limitation The Board's approval of the proposed underwriting and dealing III. Bank Holding Company Act activities extends only to Capital Markets. The activities may not be conducted by Applicant in any other subsidiary without prior Board A. Closely Related to Banking Analysis review. Pursuant to Regulation Y, no corporate reorganization of 1. In General Capital Markets, such as the establishment of subsidiaries of Capital 2. Close Functional and Operational Similarity Markets to conduct the activities, may be consummated without prior Board approval. —Origination and Structuring Function 6. Aff d sub nom. Security Industry Ass'n v. Board of Governors, —Risk Assessment Function 821 F.2d 810 (D.C. Cir. 1987), cert, den., 108 S. Ct. 697 (1988). 7. Barnett Brokerage will provide such services, in certain in- —Distribution Function stances, from offices located on the premises of affiliated banks. —Dealer Functions 8. Barnett Brokerage will also provide investment advice and 3. SI A Contention full-service brokerage with regard to bank-eligible securities to both institutional and retail customers with the appropriate disclosures. B. Proper Incident to Banking Analysis Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 193 1. Public Benefits (1) debt securities, including without limitation, —Increased Competition sovereign debt securities, corporate debt, debt —Greater Convenience and Increased Effi- securities convertible into equity securities, and ciency securities issued by a trust or other vehicle —Maintenance of Domestic and International secured by or representing interests in debt Competitiveness obligations; and 2. Adverse Effects (2) equity securities, including without limita- —Elements of Basic Prudential Framework tion, common stock, preferred stock, American Governing the Securities Underwriting and Depositary Receipts, and other direct and indi- Dealing Activities of Bank Holding Companies rect equity ownership interests in corporations —Potential for Added Risk and Other Adverse and other entities.1 Effects From the Proposed Expanded Activities —Adequacy of Basic Framework With Certain Section 16 of the Banking Act of 1933 (the "Glass- Modifications to Control the Potential for Risk Steagall Act") prohibits a member bank from underand Other Adverse Effects from the Proposed writing or dealing in these securities (hereinafter "in- Expanded Activities eligible securities"). 12 U.S.C. §§ 24 Seventh and —Capital Adequacy Considerations 335. As discussed below, however, insofar as the —Funding of Underwriting Subsidiaries by Glass-Steagall Act is concerned, an affiliate of a mem- Bank and Thrift Affiliates ber bank may underwrite and deal in ineligible securi- —Supervision of Affiliate Lending Undertaken ties so long as it is not engaged principally or substanin Connection With the Proposed Securities tially in that activity. 12 U.S.C. § 377. Underwriting Activities Applicants have previously received Board ap- —Additional Modification to Operating Limita- proval under section 4(c)(8) of the BHC Act for the tions above-mentioned subsidiaries (collectively the "un- —Ongoing Supervision of Underwriting Sub- derwriting subsidiaries") to underwrite and deal in sidiaries and Their Affiliates U.S. government and agency securities and state and —Separate Name and Logo municipal securities that state member banks are spe- —Absence of Potential for Undue Concentra- cifically authorized to underwrite and deal in under tion of Resources section 16 of the Glass-Steagall Act (hereinafter "eli- —Reservation of Authority to Modify Operat- gible securities"). The Board has also authorized these ing Limitations Based Upon Experience subsidiaries to underwrite and deal in commercial C. Shares of Investment Companies paper, 1-4 family mortgage-backed securities, munic- IV. Legislation Regarding Bank Holding Company ipal revenue bonds and consumer-receivable-related Securities Powers securities — securities that member banks may not V. Request for Hearing underwrite or deal in under section 16 of the Glass- VI. Conclusion and Summary of Conditions Steagall Act.2 In order to ensure that the subsidiaries /. Introduction and Description of 1. Applicants have not proposed to underwrite or deal in securities Applications. issued by open-end investment companies and, accordingly, may not do so without further application under section 4(c)(8) of the BHC Act. Applicants have proposed to underwrite and deal in securities J.P. Morgan & Co. Incorporated, The Chase Manhat- issued by closed-end investment companies. tan Corporation, Bankers Trust New York Corpora- The Chase Manhattan Corporation has applied to underwrite and deal in debt securities and preferred stock only. tion, and Citicorp, all of New York, New York, and 2. Citicorp, J.P. Morgan & Co. Incorporated and Bankers Trust Security Pacific Corporation, Los Angeles, California, New York Corporation, 73 FEDERAL RESERVE BULLETIN 473 (1987) ("CiticorplMorgan/Bankers Trust"), ajf d. sub nom., Securities Inbank holding companies within the meaning of the dustry Association v. Board of Governors of the Federal Reserve Bank Holding Company Act ("BHC Act" or "Act"), System, 839 F.2d 47 (2d Cir. 1988), cert, denied, 108 S. Ct. 2830 have each applied for the Board's approval under (1988); The Chase Manhattan Corporation, 73 FEDERAL RESERVE BULLETIN 607 (1987); Citicorp, 73 FEDERAL RESERVE BULLETIN 618 section 4(c)(8) of the BHC Act for their wholly owned (1987); Security Pacific Corporation, 73 FEDERAL RESERVE BULLETIN subsidiaries, J.P. Morgan Securities, Inc. ("JPMS"), 622 (1987); Chemical New York Corporation, The Chase Manhattan Corporation, Bankers Trust New York Corporation, Citicorp, Manu- Chase Manhattan Capital Markets, Inc. ("CMCM"), facturers Hanover Corporation, Security Pacific Corporation, 73 BT Securities Corporation ("BTSC"), Citicorp Secu- FEDERAL RESERVE BULLETIN 731 (1987); and J.P. Morgan & Co. rities Markets, Inc., and Security Pacific Securities, Incorporated, 73 FEDERAL RESERVE BULLETIN 875 (1987). Inc., respectively, to underwrite and deal in, on a JPMS, BTSC and CMCM also engage in securities brokerage and investment advisory activities for institutional customers. J.P. Morlimited basis, the following securities: gan & Co. Incorporated, 73 FEDERAL RESERVE BULLETIN 810 (1987); Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

194 Federal Reserve Bulletin • March 1989 would not be engaged principally or substantially in applications be rejected as contrary to law, premature, underwriting or dealing in these ineligible securities in and incomplete. The Committee also requested addiviolation of section 20 of the Glass-Steagall Act, the tional time within which to provide additional com- Board's approval is subject to the requirement that the ments and a hearing on the applications. gross revenues from these ineligible securities activi- The Board is of the view that an adequate opportuties may not exceed 5 percent of the subsidiary's total nity to comment on the proposals has been provided to gross revenues on average over any two year period. all interested parties and that further delay is not The subsidiaries are also subject to a framework of appropriate or consistent with the Board's rules.3 All structural and operating limitations established to but one of the applications were submitted to the avoid the potential for conflicts of interest, unsound Board on October 24 and 25, 1988, and were accepted banking practices, unfair competition, loss of public for processing on November 7 and 10, 1988. On confidence in affiliate banks and other adverse effects October 26, 1988, the SIA urged the Board to reject or from the conduct of the ineligible securities underwrit- not to accept the applications without the necessary ing and dealing activity. legislative safeguards.4 The Board announced a period Applicants propose to conduct the new debt and of public comment on the applications beginning on equity securities underwriting and dealing activities November 8, 1988, running through December 18, within the framework established in the Board's pre- 1988, with respect to the last of the proposals. The vious Orders. Accordingly, Applicants propose to SIA, the ICI and other interested persons submitted limit the gross revenues their underwriting subsidiaries timely comments through this date, and did not request an extension of the comment period or state that would receive from the proposed debt and equity insufficient opportunity to comment had been prosecurities activities and the previously approved ineligible vided. securities activities in the aggregate to no more than 5 percent of the total gross revenues of the underwriting The normal processing period for these applications subsidiary on average over any two year period. under the Board's rules has elapsed, and the Board has Notice of the applications for the proposed new completed its investigation and analysis required unactivities, affording interested persons an opportunity der these rules. The Board also notes that the issues to submit comments on the proposals, has been pub- relating to the expansion of the powers of banking lished (53 Federal Register 45,978 - 45,983, 46,503-4, organizations to underwrite and deal in securities have 47,763 (1988)). been extensively explored over the last several years The Board received comments in opposition to in connection with legislative proposals to repeal the approval of the applications from the Securities Indus- Glass-Steagall Act, in which the SIA has fully try Association ("SIA"), a trade association of the participated.5 As discussed below, the Board believes investment banking industry, and the Investment the record on these applications is fully sufficient to Company Institute ("ICI"), a trade association of the permit it to make the determinations required under mutual fund industry. The SIA contends that the the BHC Act, including the concerns raised by the proposed activities would result in a violation of Committee regarding the potential for conflicts of section 20 of the Glass-Steagall Act and do not meet interest, risk, unfair competition and other adverse effects from the proposals. For these reasons, the the "closely related" and "proper incident" to bank- Board has decided not to grant the Committee's reing standards of section 4(c)(8) of the BHC Act. The quest for an additional period of time to comment on ICI makes similar contentions to the extent that the the applications.6 applications request authority to underwrite and deal in investment company securities. The Board also The Board has carefully considered the submissions received a number of comments in favor of the pro- of the Applicants and the comments from the public posals. On January 4, 1989, several weeks after the close of 3. 12 C.F.R. 225.23(e)(2). the comment period on these applications, the Gov- 4. American Banker, Oct. 27, 1988, at 1. ernment Representatives Committee ("Committee") 5. Hearings on S.1886, S.I891 and S.1905 Before the Senate Comm. of the SIA submitted a comment reiterating many of on Banking, Housing and Urban Affairs, 100th Cong., 1st Sess. 407- 484 (1987)("Senate Banking Committee Hearings"), Reform of the the concerns raised by the SIA and urging that the Nation's Banking and Financial Systems, Hearings Before the Subcomm. on Financial Institutions Supervision, Regulation and Insurance of the House Comm. on Banking, Finance and Urban Affairs, 100th Cong., 1st Sess. 120, 198 (1988) ("House Banking Committee Bankers Trust New York Corporation, 74 FEDERAL RESERVE BULLE- Hearings"). TIN 695 (1988); and The Chase Manhattan Corporation, 74 FEDERAL 6. Although the SIA Committee's comments have been considered RESERVE BULLETIN 704 (1988). These approvals are limited to bro- by the Board, it is not clear from the record that the Committee has kerage activities and do not permit the affiliates to sell securities as standing in this matter as a representative of the securities industry. agent for an issuer in the private placement of securities. The Board expresses no opinion on this issue. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 195 for and against the proposals as well as the other facts under current banking laws, the Board believes it of record. Based upon this review, the Board has appropriate to review in one year whether Applicants concluded that, subject to the limitations set out in this may commence underwriting and dealing in these Order, the proposals are consistent with the applicable securities based on a determination by the Board that provisions of the Glass-Steagall Act and the standards they have established the managerial and operational the Board is required to apply to nonbanking proposals infrastructure and other policies and procedures necunder section 4(c)(8) of the BHC Act. essary to comply with the requirements of this Order. As the Board has recognized in the past, underwriting and dealing in securities is a natural extension of II. Glass-Steagall Act. activities currently conducted by banks, involving manageable risks and potential conflicts of interest A. Compliance with Section 20. when conducted in an organizational structure that insulates these activities from banking activities sup- Section 20 of the Glass-Steagall Act prohibits the ported by the federal safety net of deposit insurance affiliation of a member bank with a company that is and access to Federal Reserve lending. In the Board's "engaged principally" in underwriting or dealing in view, bank holding companies, with their existing securities.8 Because each Applicant is affiliated with a expertise in securities underwriting, dealing, broker- member bank, Board approval of these applications age and investment advisory activities and their broad would not be possible if, as a result, the underwriting financial skills, are particularly well equipped to pro- subsidiaries would be "engaged principally" in undervide the proposed new services.7 Moreover, the con- writing or dealing in securities within the meaning of duct of these activities within the prudential frame- section 20. work established in this Order may reasonably be In its earlier decisions authorizing the underwriting expected to yield significant public benefits in the form subsidiaries to underwrite and deal in a limited range of increased competition and convenience, lower costs of ineligible securities (i.e., municipal revenue bonds, and a strengthened and more competitive banking and commercial paper and certain asset-backed securifinancial system. ties), the Board concluded that no violation of section As discussed below, the Board places a very great 20 of the Glass-Steagall Act would result if the underemphasis in reaching its decision that the proposed writing and dealing activities in these securities were activities meet the standards of the BHC Act upon the conducted within the 5-10 percent revenue limitation establishment by Applicants of adequate policies and established in those Orders. In reaching this concluprocedures, accounting, audit and computer systems, sion, the Board found that and internal risk management controls. See pp. 209. (1) the prohibition in section 20 against being Accordingly, the Board has decided, as a condition of engaged principally in underwriting securities approval, to require that before the proposed activities does not include U.S. government and other may be commenced, Applicants must have in place at securities that a member bank is expressly the underwriting subsidiaries and their affiliates poli- authorized to underwrite and deal in under cies and procedures to ensure compliance with the section 16 of the Glass-Steagall Act; and operating conditions of this Order, including the nec- (2) a company that derives no more than 5 to 10 essary managerial and operational infrastructure. Be- percent of its total gross revenues from undercause of their current eligible debt securities under- writing and dealing in ineligible securities would writing and investment activities, banking not be "engaged principally" in underwriting or organizations should be able to satisfy this require- dealing in securities within the meaning of secment for immediate participation in the market for tion 20.9 These conclusions were upheld by the debt securities as an underwriter and dealer. In the case of equity securities, however, which banks may not underwrite or purchase for their own account 8. Section 20 (12 U.S.C. § 377) provides that ... no member bank shall be affiliated . . . with any . . . organization engaged principally in the issue, flotation, underwriting, public sale, or distribution at wholesale or retail or through syndicate participation of stocks, bonds, debentures, notes, or other securities. . . . 7. Citicorp/Morgan/Bankers Trust, 73 FEDERAL RESERVE BULLE- 9. Citicorp!Morgan!Bankers Trust, 73 FEDERAL RESERVE BULLE- TIN at 487-89; Senate Banking Committee Hearings, at 86, 87 and 89, TIN at 485; Bankers Trust New York Corporation, 73 FEDERAL (Statement of Alan Greenspan, Chairman, Board of Governors of the RESERVE BULLETIN 138 (1987). Federal Reserve System), reprinted in 74 FEDERAL RESERVE BULLE- The Board's decision regarding the Glass-Steagall Act was also TIN 91, 93 (1988). conditioned upon compliance by the underwriting subsidiaries with a See also House Banking Committee Hearings, at 227, 229 and 233, market share limitation. This condition, however, was overturned by (Statement of Alan Greenspan, Chairman, Board of Governors of the the court of appeals as not appropriate under the "engaged princi- Federal Reserve System), reprinted in 74 FEDERAL RESERVE BULLE- pally" standard in section 20 of the Glass-Steagall Act. Securities TIN 20, 21 (1988). Industry Ass'n v. Board of Governors, 839 F.2d at 67-68. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

196 Federal Reserve Bulletin • March 1989 United States Court of Appeals for the Second reasonable method, permitted by the Glass-Steagall Circuit.10 Although the proposals approved in Act, of ensuring that the ineligible securities activities these earlier decisions involved limited kinds of of the underwriting subsidiaries are not substantial ineligible securities, neither the Board's deci- within the meaning of section 20.12 In overturning the sions nor the court of appeals' opinions were market share limitation, the court of appeals implicitly restricted to those types of securities. Indeed, it ruled that the revenue test alone is a reasonable gauge is clear that the reasoning of these decisions in of substantial ineligible securities activity. Moreover, concluding that a bank affiliate does not violate the amount of capital needed to support a specific level section 20 if its ineligible securities underwrit- of underwriting and dealing activity can vary widely ing and dealing activity is not substantial rela- depending on the type of security involved. Thus, the tive to its total activity applies to any type of amount of capital an underwriting subsidiary needs to ineligible securities. support a particular securities activity is not always an accurate indicator of the scope or extent of the sub- Because the proposed debt and equity securities sidiary's involvement in that activity.13 Finally, the underwriting and dealing activities would be con- Board expects that any concerns with manipulation ducted by each underwriting subsidiary within the will be effectively addressed through the inspection overall 5 percent revenue limitation established in the process that the Board is establishing to supervise the Board's prior Orders and for the reasons stated in underwriting subsidiaries' compliance with the rethose Orders, the Board concludes that, upon consum- quirements of this Order. mation of these proposals, the underwriting subsidiaries would not be "engaged principally" in underwrit- C. Calculation of the 5 Percent Revenue ing or dealing in securities within the meaning of Limitation. section 20 of the Glass-Steagall Act. As the Board stated in the prior decisions, it will The Board notes that there has been some uncertainty consider whether this 5 percent limitation should be on the part of the underwriting subsidiaries over the increased to up to 10 percent after consideration of a appropriate method to calculate the 5 percent revenue year of experience of the underwriting subsidiaries in limitation established in the prior Orders, particularly the approved ineligible securities activities.11 during the first two years of operation. In its prior Orders, the Board stated that the 5 percent revenue B. SIA's Contentions. limitation would be calculated on average over any two year period.14 Compliance with this standard was The Securities Industry Association asserts that the to be determined quarterly on the basis of the FOCUS Board should reconsider its reliance on a revenue test and revenue reports required by the Orders to be filed in applying the "engaged principally" standard in by the underwriting subsidiaries with the Reserve section 20. The SIA notes that the market share test, Banks. which was established in the earlier Orders because of To determine compliance with this limitation during concern with the potential for manipulation of the the first two-year period in which the underwriting revenue test, was disapproved by the court of appeals. subsidiaries engage in ineligible securities underwrit- To address this potential, the SIA asserts that the ing and dealing activities, revenues from these ineligi- Board should interpret the "engaged principally" lim- ble securities activities for each quarter during this itation in section 20 on the basis of the capital the two-year period, when added to the revenues from affiliate devotes to ineligible activities as well as the ineligible securities activities for each previous quarter amount of revenues it obtains from such activities. The Board believes, however, that the interpretation urged by the SIA is not appropriate and that the 12. In view of the Second Circuit's decision in Securities Industry revenue limitation established in the prior Orders is a Ass'n v. Board of Governors, supra, the Board has determined not to condition its approval on compliance with a market share limitation. 13. For the same reason, the Board does not believe section 20 should be applied, as the SIA urges, to limit the amount of capital the 10. Securities Industry Ass'n i\ Board of Governors, 839 F.2d at 62, holding company may invest in the underwriting subsidiary to 5 67. See also Securities Industry Ass'n v. Board of Governors, 847 F.2d percent of the capital of its affiliate banks. Indeed, the court of appeals 890, 895 (1988), in which the U.S. Court of Appeals for the District of decision that the market share limitation was not appropriate was Columbia Circuit upheld the Board's determination that the under- based on the position that the determination whether the underwriting writing subsidiary's ineligible securities activities would not violate subsidiary is engaged principally in ineligible securities underwriting section 20 if conducted within the 5-10 percent revenue limitation activity must be made on a comparative basis relative to the subsidestablished in the Board's Orders. iary's own activities rather than relative to the activities or market 11. See CiticorplMorganlBankers Trust, 73 FEDERAL RESERVE share of others. BULLETIN at 485: First Chicago Corporation, 74 FEDERAL RESERVE 14. CiticorplMorganlBankers Trust, 73 FEDERAL RESERVE BULLE- BULLETIN 706, 707 (1988). TIN at 485. 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Legal Developments 197 during the period, may not exceed 5 percent of the meet the "closely related to banking" test if it is subsidiary's total gross revenues for that quarter and demonstrated that: all previous quarters during the two-year period.15 For (1) banks generally have in fact provided the each quarter after the first two years of operation, proposed activity; revenues from ineligible securities underwriting and (2) banks generally provide services that are dealing activities for that quarter, when added to the operationally or functionally so similar to the gross revenues from ineligible securities activities for proposed activity so as to equip them particuthe previous seven quarters, may not exceed 5 percent larly well to provide the proposed activity; or of total gross revenues of the subsidiary for that (3) banks generally provide services that are so quarter and the previous seven quarters.16 The Board integrally related to the proposed activity as to notes that the underwriting subsidiaries have or will require their provision in a specialized form.17 have in place the capability to monitor closely and on a timely basis revenues from eligible and ineligible These applications are before the Board in a finansecurities activity and thus to avoid inadvertent viola- cial environment in which the business of banking tions of the revenue limitation. itself is undergoing fundamental changes. Traditionally, banks served a unique role as financial interme- III. Bank Holding Company Act. diaries. Because of their cumulative knowledge about the financial condition of borrowers, banks were able Applicants maintain that the proposed activity is per- to make more informed credit decisions than most missible for a bank holding company under section other market participants. However, recent dramatic 4(c)(8) of the BHC Act. That section authorizes the developments in the facilities for storing, analyzing, Board to approve the acquisition and retention by a and transmitting data through increasingly improving bank holding company of shares of a company en- computer and telecommunications technology has engaged in activities that are "so closely related to abled potential investors to obtain needed financial banking . .. as to be a proper incident thereto." information with less reliance on intermediaries such 12 U.S.C. § 1843(c)(8). This standard requires that as banks. two separate tests be met for an activity to be permis- In short, the traditional core function of a bank of sible for a bank holding company. First, the Board financing the most creditworthy businesses has been must determine that the activity is, as a general matter, reduced, as these businesses, which formed the foun- "closely related to banking." Second, the Board must dation of the banks' commercial lending base, have find in a particular case that the performance of the looked increasingly to the capital markets to finance activity by the applicant bank holding company may their operations. reasonably be expected to produce public benefits that In response to this technological revolution, banks outweigh possible adverse effects. have sought to continue to service their traditional The Board has not previously determined that un- customer base, within the boundaries of current statderwriting and dealing in the proposed debt and equity utory restrictions, by providing certain types of investsecurities is permissible under section 4(c)(8) of the ment banking or functionally similar services, such as Bank Holding Company Act. providing loan guarantees and other similar offbalance sheet financial support, privately placing se- A. Closely Related to Banking Analysis. curities, securitizing loan assets, syndicating and selling bank loans, and engaging in interest rate and 1. In General. currency swaps. These activities are a natural extension of the fun- Based on guidelines established in the National Cou- damental business of commercial banking of financial rier decision, a particular activity may be found to intermediation, representing the same basic function conducted in a different manner. The movement of banks into securities underwriting and related activities is reflected in the active participation by foreign offices of U.S. banks and bank 15. Gross revenues for the period would be calculated under generally accepted accounting principles. 16. The SIA contends that the total amount of revenues that may be derived from ineligible securities activity should be set for each year 17. National Courier Association v. Board of Governors of the in advance, based on revenues during the previous two years. The Federal Reserve System, 516 F.2d 1229, 1237 (D.C. Cir. 1975). The method of measurement adopted by the Board is substantially similar National Courier guidelines are not the exclusive basis for a closely and, in any event, is a reasonable method to determine compliance related determination. Id. at 1237. The Board may consider any other with the engaged principally standard of section 20 of the Glass- basis that may demonstrate that the activity has a close relationship to Steagall Act. banking. 49 Federal Register 806 (1984). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

198 Federal Reserve Bulletin • March 1989 holding companies in securities markets overseas —as ten or dealt in; the basic skills and expertise needed to underwriters and dealers in debt and equity securities perform these functions are, however, the same or —where they are not under the regulatory constraints very similar to those that banks have developed in of the Glass-Steagall Act.18 U.S. banks maintain se- underwriting and dealing in eligible debt securities and curities affiliates in London, Tokyo and other interna- in conducting other functions that are an integral part tional financial centers and were among the leading of the traditional role of banks as financial intermediunderwriters of Eurosecurities in 1986 and 1987.19 In aries. recognition of these fundamental changes in the struc- Whether eligible or ineligible securities are being ture of the financial markets, the Board has urged underwritten, the underwriter performs the same basic Congress to repeal the Glass-Steagall Act limitations functions. First, the underwriter identifies the issuer's and authorize bank holding companies, subject to financing needs and advises the issuer concerning the appropriate safeguards, to engage in securities under- terms, amount and timing of the securities to be writing and dealing activities. issued. The underwriter then sets a price at which it believes the securities can be sold to investors at a 2. Close Functional and Operational Similarity. profit to the underwriter.20 This function involves both an analysis of factors affecting the price of securities of With respect to the applications now pending before the particular issuer as well as factors affecting the the Board, the Board finds that underwriting and general level of prices in the market and the demand dealing in debt and equity securities is closely related for that type of security. The underwriter distributes to banking for purposes of section 4(c)(8) because the securities to investors and also generally deals in banks provide services that are so operationally and the issuer's securities, that is, maintains a secondary functionally similar to the proposed activities that market in the issuer's securities by purchasing and banking organizations are particularly well equipped selling them for the underwriter's own account. to provide them. On the same basis, the Board con- In the Board's judgment, the functions involved in cluded, in Citicorp!Morgan!Bankers Trust, that under- underwriting debt and equity securities in general are writing and dealing in certain kinds of ineligible secu- very similar to those involved in the underwriting of rities (i.e., municipal revenue bonds, 1-4 family eligible debt securities as well as in other credit, mortgage-related and consumer-receivable-related se- advisory and financial intermediation services percurities and commercial paper) is closely related to formed by banks. banking. The record in that proceeding showed that banks underwrite and deal in a wide variety of eligible —Origination and Structuring Function. debt securities, as expressly permitted by section 16 of the Glass-Steagall Act, and provide other services that With respect to the underwriter's function of originatrequire the same skills, techniques and functions ing and structuring the new issue of securities, banks needed to underwrite and deal in the limited kinds of now perform these operations as a part of their ordiineligible securities proposed in those cases. nary banking activities and their eligible debt securi- The applications now before the Board seek to ties underwriting activities. Banks have developed expand the range of securities that may be underwrit- special expertise in advising businesses about structuring securities underwritings as a result of their conventional functions of commercial lending, providing corporate financial advice generally, and in placing 18. Pursuant to the Board's Regulation K, 12 C.F.R. 211.5(d)(13), a bank holding company subsidiary may underwrite and deal in any type debt and equity securities with investors in private of debt and equity securities outside the U.S., subject to limitations on transactions. the size of positions. 19. See Senate Banking Committee Hearings at 91, reprinted in 74 FEDERAL RESERVE BULLETIN at 94; House Banking Committee Hearings at 236-37, reprinted in 74 FEDERAL RESERVE BULLETIN at 22-23; United States Access to Japanese Financial Markets, Hearing Before the Senate Comm. on the Budget, 100th Cong., 1st Sess. 11, 30-31 (1987) (Statement of E. Gerald Corrigan, President, Federal 20. In a firm commmitment underwriting, the issuer sells the entire Reserve Bank of New York), reprinted in 73 FEDERAL RESERVE issue of securities to an underwriter or underwriting syndicate at a BULLETIN 569, 574 (1987). See also Investment Dealers Digest, Jan. pre-determined public offering price, net of underwriting discounts 11,1988, p. 38; Annual Financing Report, Euromoney, March 1988, at and commissions. The underwriter or underwriting syndicate then 34, 39. reoffers, either directly or through a selling group, the securities to the In the corporate debt market, for example, U.S. banks' foreign public at the public offering price. The underwriter or underwriting subsidiaries served lead roles in underwritings approaching $17 billion syndicate, thus, assumes the risk that the securities cannot be resold in 1986, or about 10 percent of the volume of such debt managed by at a price in excess of their net purchase price. In "best efforts" the 50 firms most active in the Eurosecurities market that year. House underwriting, instead of buying the new securities from the issuer and Banking Committee Hearings at 236-37, reprinted in 74 FEDERAL reselling them, the underwriter sells the securities as the agent of the RESERVE BULLETIN at 94. issuer in return for an agent's commission. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 199 —Risk Assessment Function. In underwriting equity securities, the underwriter must evaluate the price risk of the securities of a In the case of underwriting debt securities, the under- particular issuer by assessing the market's perception writer's pricing and risk assessment function requires of the firm's future prospects, which typically involves an analysis of the creditworthiness of the particular analysis of the firm's earnings, dividends, performance issuer. As part of the proposed debt securities under- and growth potential. Moreover, the underwriter must writing activity, the underwriting subsidiaries would take into account the fact that equity securities typibe required to evaluate the creditworthiness of corpo- cally exhibit greater price volatility than debt securirate as well as governmental issuers. Banking organi- ties. Nevertheless, the functions currently performed zations have the required expertise to carry out this by banks provide banking organizations with special function as a result of the traditional banking activities expertise to carry out these operations. In particular, of extending credit to corporate and governmental banks make just these kinds of assessments of the borrowers, managing their own assets and liabilities, market value of equity securities in connection with purchasing debt securities for their own account,21 and the private placement of issues of equity securities,24 performing investment advisory and trust activities. engaging through direct subsidiaries in underwriting Moreover, in regularly issuing letters of credit and equity securities overseas, buying and selling equity other credit enhancements for issues of debt securi- securities as a fiduciary on behalf of customers,25 and ties, banks engage in activities that require credit providing investment advice with regard to the purevaluation and analysis functions that are the same as, chase and sale of equity securities. Banks also rouor substantially similar to, those of an underwriter.22 tinely evaluate and monitor general price trends in the The Board also believes that banks have unique equity markets in connection with these conventional expertise in performing this credit analysis function activities. because of the role of banks in underwriting and dealing in money market instruments, establishing —Distribution Function. pools of assets for securitization and evaluating the underlying risks of the constituent elements in a pool, Banks currently establish distribution networks for the advising issuers and assisting them in the private securities being underwritten and contact potential placement of their debt securities, and generally aspurchasers of the securities when they underwrite sessing credit and interest rate risk. Indeed, banks are eligible securities. Banks also perform very similar among the largest firms that act as agent in the private operations when they arrange syndications of loans26 placement of corporate securities.23 and privately place debt and equity securities. These traditional banking functions also provide banking organizations with special expertise to per- —Dealer Functions. form the underwriter's function of assessing the market price risk in a securities issue. In general, the price Acting as dealer in debt and equity securities fundavolatility of debt securities is closely linked to fluctu- mentally involves judging anticipated movements in ations in interest rates. Because of their traditional the market price of the securities held in inventory. lending activities, investment advisory and trust ser- Banks perform these functions currently when acting vices, economic forecasting and liability management as dealers in eligible securities as well as in their roles, and investment functions, banks are particularly investment and advisory activities.27 As explained well-equipped to make these kinds of assessments. above, banking organizations are particularly well equipped to evaluate the credit and market risks associated with pricing securities being underwritten 21. Section 16 of the Glass-Steagall provides that member banks and, accordingly, have the special expertise to make may purchase for their own account "investment securities," which include marketable debt obligations of any person or corporation, as analogous judgments in conducting a dealer operation. defined by the Comptroller of the Currency. 12 U.S.C. §§ 24 and 335. 22. Applicants also propose to underwrite securities issued by foreign governments and securities representing interests in pools of debt obligations. The current eligible debt securities underwriting and lending activities of banks provide banking organizations with the 24. One bank, Morgan Guaranty Trust Company, privately placed expertise to analyze the credit-worthiness of such issuers. $1.2 billion of equity securities in 1987 and $347 million of equity 23. The Board previously recognized the substantial involvement of securities in the first half of 1988. IDD Information Services, Octocommercial banks in private placements. Federal Reserve Board Staff ber 21, 1988. Study, Commercial Bank Private Placement Activities (1977). See 25. The record indicates that banks managed as fiduciaries over also Comptroller of the Currency, Federal Deposit Insurance Corpo- $400 billion in equity securities in 1986. ration, Federal Reserve Board, Commercial Bank Private Placement 26. In 1987, banks arranged loan syndications of over $100 billion. Activities (1978). In 1987, seven commercial banks privately placed See, e.g., Annual Financing Report, supra at 20. $15.9 billion of debt securities. Investment Dealers Digest, March 21, 27. Fourteen of the 46 primary dealers in U.S. government securi- 1988, at 19. ties are banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

200 Federal Reserve Bulletin • March 1989 Finally, the Board notes that the entire securities B. Proper Incident to Banking Analysis. underwriting activity is one aspect of serving as a financial intermediary, because in essence underwrit- In order to approve an application to engage in a ers serve to channel funds of investors to businesses in nonbanking activity under section 4(c)(8) of the BHC need of capital. Thus, underwriting ineligible corpo- Act, the Board must also find that a proposed activity rate securities, as noted above, has a very close is a "proper incident" to banking by considering functional and operational similarity to the established whether the performance of the activity by the applirole of banks in lending funds of bank depositors to cant bank holding company may reasonably be exbusinesses for working capital and other purposes. pected to produce public benefits, such as greater convenience, increased competition, or gains in effi- 3. SIA Contention. ciency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair The SIA contends that underwriting and dealing in competition, conflicts of interest, or unsound banking equity securities and non-investment grade debt secu- practices. 12 U.S.C. § 1843(c)(8). Based upon the rities does not meet the closely related to banking facts of record and for the reasons and subject to the standard because banks are not permitted to purchase limitations set out below, the Board finds that undersuch securities for their own account, unlike commer- writing and dealing in debt and equity securities may cial paper and the other kinds of ineligible securities reasonably be expected to result in substantial public involved in the prior Orders. The Board believes that benefits that outweigh possible adverse effects. the SIA's view misconstrues the requirements of section 4(c)(8) of the BHC Act. In that section, Congress 1. Public Benefits. did not confine bank holding companies to activities that are permissible for banks. Rather, the Board was In CiticorplMorganlBankers Trust, the Board conauthorized to permit a bank holding company to cluded that Applicants' ineligible securities underwritconduct activities — including those that banks may ing and dealing activities could be expected to result in not conduct — if the activities are closely related to significant benefits to the public in the form of inbanking. Moreover, direct experience in the activity is creased competition in the municipal revenue bond, not a prerequisite for a favorable Board finding under commercial paper, mortgage-backed and consumerthe closely related to banking standard of the Act; receivable-related securities markets, greater conveexperience in services that are functionally or opera- nience to customers and gains in efficiency in the tionally similar to the proposed service may satisfy the provision of these services. The Board believes that statutory standard. As noted, Applicants' proposals the proposed expansion in the range of securities that fully satisfy this requirement.28 may be underwritten and dealt in by the underwriting subsidiaries to include debt and equity securities may also be expected to result in substantial public benefits in the form of increased competition, greater conve- 28. Although Applicants may not commence equity securities underwriting and dealing activities without a further determination by nience, gains in efficiency, and the maintenance of the the Board, the Board notes that, if the determination is made, an overall competitiveness of U.S. banking organizations underwriting subsidiary could be in a position to acquire, or could be domestically and internationally. contractually bound to acquire, voting shares of an issuer in connection with a firm commitment underwriting. Such an acquisition pursuant to a bona fide firm commitment underwriting is not, in the —Increased Competition. Board's view, the type of ownership or control prohibited by section 4(a) of the Act, provided the shares are disposed of as quickly as possible thereafter. See 12 C.F.R. 225.124(d); 12 U.S.C. The Board has previously recognized that the de novo § 1841(a)(5)(B). In such cases, the shares are acquired only for expansion by a bank holding company into nonbankpurposes of immediate resale or distribution and not for investment or to control the issuer. Accordingly, the Board will view such an acquisition of voting shares by an underwriting subsidiary in good faith pursuant to a firm commitment underwriting as permissible under The Board has previously indicated that ownership of more than the Act as an integral part of underwriting activity so long as those 25 percent of the equity of a company in the form of nonvoting shares are disposed within 30 days of their acquisition and during that securities could constitute control of the company. See letter dated time the shares are not voted. A dealer does not acquire shares from November 5, 1984, F.R.R.S. H4-305.1; letters dated May 21, 1986 the issuer for immediate distribution pursuant to an underwriting (Bank of New York Corporation) and November 25, 1986 (Sumitomo agreement and may hold the shares for an indefinite period. Accord- Bank, Ltd.). To address this potential, the Board requires that an ingly, an underwriting subsidiary may not acquire or retain voting underwriting subsidiary that acquires in a bona fide firm commitment shares of a company in an amount that, together with the voting shares underwriting more than 25 percent of the equity capital of a company, of the company held by any affiliate of the underwriting subsidiary, in the form of voting shares, nonvoting common or preferred shares or would exceed 5 percent of the outstanding shares of any class of subordinated debt or any combination thereof, would be required to voting shares of the company. See 12 U.S.C. § 1843c(6), permitting a dispose of that position as quickly as possible and no later than 30 days holding company to acquire up to 5 percent of the voting shares of a after acquisition and to comply with the Board's rulings regarding nonbank company. nonvoting equity investments in its dealing activities. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 201 ing activities may be expected to result in benefits to —Greater Convenience and Increased Efficiency. These proposals each represent a de novo entry into new markets rather than the acquisition of existing The Board also finds that these proposals should result firms, and thus in the normal course can be expected in public benefits in the form of greater convenience to to increase competition. customers and increased efficiency in the provision of In light of the moderately concentrated structure of the proposed services. Bank holding companies would the domestic corporate debt and equity securities be able to offer their commercial customers an addimarkets, the potential for increased competition from tional service and means of financing that may be more the bank holding company entry proposed in these economical for the borrower. cases is significant.30 In this regard, the Board notes Increased efficiency may be realized through possithat market concentration levels tend to be lower in ble economies of scale and scope from coordinated those securities markets in which banks have been provision of commercial and investment banking serpermitted to compete. vices within the framework of safeguards against un- The introduction of new competitors into these fair competition and other adverse effects established markets may be expected to reduce concentration in this Order. levels and, correspondingly, to lower customer and The entry of new firms would also increase the financing costs and increase the types and availability number of dealers in corporate securities, which of investment banking services. Smaller infrequent should enhance liquidity in the markets for these issuers such as small businesses, which currently have securities. This enhanced liquidity would increase relatively few choices among underwriters, would market efficiency and benefit investors, issuers and particularly benefit through increased access to the other market participants. securities markets and consequent reductions in borrowing costs. This access would be similar to that —Maintenance of Domestic and International currently available to municipalities whose general Competitiveness. obligation bonds are underwritten by local banks. The increased competition from bank holding com- Approval of the proposed activities would, in addition, pany entry may also foster innovation in these markets enable Applicants to further diversify their activities and lead to improved methods to meet customers' and generate new sources of revenue at a manageable financing needs. level of risk and thus may serve to strengthen the In this regard, the Board notes that a survey by the overall banking organization. Indeed, there is eco- Senate Committee on Banking, Housing, and Urban nomic evidence that, given Applicants' existing eligi- Affairs in connection with the proposed Proxmire ble securities dealing activities, the broadened range of Financial Modernization Act of 1988,31 indicated that securities available for acquisition within the con- 77 percent of the chief financial officers of the Fortune straints of the 5-10 percent revenue limitation will 500 corporations favor expanded securities powers for tend to lessen overall risk by providing the potential commercial banks as likely to result in public for diversification gains within the dealer function.33 benefits.32 The report also indicated that the entry by Moreover, the ability of banking organizations to commercial banks into the investment banking busi- deploy their capital over a wider range of activities will ness is supported by the National Association of allow them to compete more efficiently and better Manufacturers and by the National Association of serve their customers and the public. Home Builders because the added competition would As noted, the expansion of bank powers in this area result in improved service and lower costs. will provide banking organizations with the ability to State and local governments, including the National respond to the developments in computer and commu- Governors Association, the National Conference of nications technology that are altering so significantly State Legislators, National League of Cities, National the financial services industry both domestically and Association of Counties, U.S. Conference of Mayors, internationally. and the Government Finance Officers Association, These proposals will allow banks to act to maintain favor permitting banks to underwrite a broader range their role as financial intermediaries as well as to of securities. strengthen their basic competitiveness and share of credit markets. As bank customers increasingly turn to the capital markets for their financing needs, authorization for bank holding companies to underwrite and 30. S. Rep. No. 305, 100th Cong., 2d Sess. 14 (1988). See also H.R. Rep. No. 324, 100th Cong., 1st Sess. 19, 28 (1987). 31. S. 1886, 100th Cong., 2d Sess. (1988). 32. S. Rep. No. 305, at 14-15. 33. See H.R. Rep. No. 324, at 33. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

202 Federal Reserve Bulletin • March 1989 deal in corporate debt and equity securities will assist would also not be likely to result in potential adverse them in retaining their customer base and maintaining effects significant enough to outweigh the expected their service to their communities. public benefits and thus to warrant denial of the A potentially important benefit that may be ex- applications. pected from authorization for U.S. banking organizations to engage in the proposed activities would be the —Elements of Basic Prudential Framework improvement in their overall competitiveness as the Governing the Securities Underwriting and Dealing world's capital markets become increasingly inte- Activities of Bank Holding Companies. grated and as their foreign bank competitors solidify and expand their activities in these areas. In particular, it will enable them to compete more effectively To minimize the potential for securities underwriting with banks located in the European Economic Com- and dealing risk to be passed to federally insured bank munity, where it is proposed that effective in 1993 or thrift affiliates, the structural framework established banks in those countries would have a common bank- in the earlier Orders requires that the new activities be ing license available to them that would encourage conducted in a corporation over which the affiliated further the combination of commercial banking with banks or thrifts have no ownership, financial, managesecurities underwriting and dealing activities. ment or operational control. Thus, the new activities In sum, the Board believes that the expansion of would be conducted through a company that is conbank holding company securities powers within the trolled by the parent holding company and not by the prudential framework established in this Order would affiliated bank or thrift institution, that does not have permit banking organizations to strengthen their over- any officer, director, or employee in common with the all competitive position and to continue to serve an bank or thrift affiliate, and that has separate offices important role in the economy, both domestically and from any affiliate bank or thrift. The underwriting abroad. This will in turn enhance the stability and subsidiaries are required to maintain capitalization in soundness of the banking system in the United States. accordance with industry norms. This capitalization must be provided by the holding company from its 2. Adverse Effects. funds and not from the resources of its bank or thrift subsidiaries or, indeed, from the resources of the In Citicorp!Morgan!Bankers Trust, the Board consid- parent holding company needed to support these bank ered in detail the potential for adverse effects, such as or thrift subsidiaries. unsound banking practices, conflicts of interest, unfair The Orders also established operating limitations to competition, undue concentration of resources, and regulate transactions by an affiliate bank or thrift with, loss of public confidence in bank and thrift affiliates or for the benefit of, an underwriting subsidiary in where bank holding companies underwrite and deal in order to prevent the transfer of risk to federally certain types of ineligible securities. In those Orders, insured affiliates, conflicts of interest and other adthe Board established a structural framework and a verse effects. In general, these limitations: number of limitations to minimize the potential for —preclude the holding company and any affiliate from these adverse effects by separating the underwriting purchasing ineligible securities from the underwritsubsidiaries legally and operationally to the maximum ing subsidiary during the underwriting and for 60 extent feasible from their federally insured bank and days thereafter or while the underwriting subsidiary thrift affiliates and the support of the federal safety net. is making a market in the security; These limitations supplement existing provisions in —prevent a bank or thrift from lending to issuers to federal banking statutes regulating the relationships enhance the creditworthiness of securities underbetween banks and their affiliates as well as the written by the underwriting subsidiary, or to pay off various statutory protections Congress has provided the principal and interest on such securities; over the years to regulate the conduct of securities —prohibit a bank or thrift from knowingly lending to activities in general. customers secured by or for the purpose of purchas- The Board concluded that, within this framework ing securities underwritten by the underwriting suband subject to these limitations, consummation of the sidiary during the underwriting or in which it makes earlier proposals would not be likely to result in the a market; potential for significant conflicts of interest, risk or —require disclosure by the underwriting subsidiary to other adverse effects. As discussed below, the Board ensure that the public will not confuse the underbelieves that the conduct of the proposed debt and writing subsidiary with its federally insured affiliates equity securities activities within this basic frame- and will know that the instruments purchased from work, with certain modifications discussed below, the underwriting affiliate are not federally insured Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 203 deposits or guaranteed or otherwise backed by a the underwriting subsidiaries in coordination with the bank or thrift affiliate (unless such is the case); SEC and self-regulatory bodies operating under its —prohibit an affiliated bank and thrift from acting as supervision consistent with the proper implementation agent for, or engaging in marketing activities on of the Board's responsibilities under the BHC Act. behalf of, the underwriting subsidiary; Accordingly, inspections of the underwriting subsid- —limit self-dealing transactions between the under- iaries will focus on compliance with the requirements writing subsidiary and its bank and thrift affiliates of this Order and applicable federal banking laws and acting in a fiduciary capacity; and policies, particularly with respect to transactions of —prohibit the transfer of confidential customer infor- the underwriting subsidiaries involving their affiliates mation between the bank or thrift and underwriting or that affect such affiliates. subsidiary without customer consent.34 In addition to the structural separation and operating conditions required under the earlier decisions, the Bank loans to and purchases of assets from, or for Board considered that the risk to affiliate banks and the benefit of, the underwriting subsidiary are subject thrifts would be further minimized by the fact that the to sections 23A and 23B of the Federal Reserve Act, underwriting subsidiaries are required by law to rewhich generally limit the amount of these transactions main engaged fundamentally in activities that have to 10 percent of the bank's capital and require that been conducted safely and soundly in banking organithey be conducted on non-preferential terms and zations for many years. Under the engaged principally conditions.35 limitation, the underwriting subsidiaries would remain The structure established in the Orders fully utilizes predominantly underwriters and dealers in U.S. govthe concept of functional regulation, which the Board ernment and other eligible securities, and the previhas supported as an effective means to supervise the ously authorized ineligible securities underwriting acexpansion of bank powers. As a nonbank company, tivities would not be substantial in the context of their the underwriting subsidiary would be required to reg- overall operations. ister as a broker-dealer under the Securities Exchange The Board also considered the record of experience Act of 1934 and would operate within the legal and of Applicants in underwriting and dealing in U.S. regulatory framework Congress has established to government and other eligible securities as well as govern their activities. The underwriting subsidiaries their analogous credit intermediation and investment would be subject to the net capital rules established by advisory activities. the Securities and Exchange Commission and would be supervised and examined by that agency and self- —Potential for Added Risk and Other Adverse regulatory bodies operating under its purview. Effects From the Proposed Expanded Activities. As subsidiaries of bank holding companies, the underwriting subsidiaries would also be subject to the In these applications, Applicants seek approval for requirements of the BHC Act and to regulation and their underwriting subsidiaries to engage in nearly the inspection by the Board. As discussed below, the full range of investment banking activities, subject to Board intends to exercise this authority with respect to the revenue limitation required under the engaged principally standard in section 20 of the Glass-Steagall Act. 34. The specific terms of the operating limitations established by the Although the functions involved in underwriting and Board in Citicorp/Morgan!Bankers Trust, as well as the additional dealing in the proposed new securities are substanlimitations established in this Order, are set out in the Conclusion to this Order. tially the same as for eligible securities and the previ- The term "underwriting subsidiary" as used in these limitations ously approved ineligible securities, the proposed eqmeans one that is affiliated with the Applicant or the bank or thrift concerned. uity and debt securities have different characteristics 35. In general, section 23A prohibits a member bank from extending that present a greater potential for price risk, that is, credit to, or purchasing assets from, an affiliate in excess of 10 percent the risk that securities purchased by the underwriting of the bank's capital (an aggregate cap of 20 percent of capital is established for bank loans to all affiliates). Bank loans to an affiliate are subsidiary as principal in its underwriting or dealing also required to be collateralized in varying amounts depending on the capacity may not be resold at a profit. type of collateral provided. 12U.S.C.§371c. The proposed debt securities are also subject to a Section 23 B requires that covered transactions by a bank with an affiliate, or a person with whom the affiliate has certain business greater potential for credit risk than the previously relationships, must be on terms, including credit standards, that are approved ineligible debt securities, that is, the risk that substantially the same (or at least as favorable to the bank) as those prevailing at the time for comparable transactions with or involving the issuer will be unable to pay interest and principal non-affiliates. 12 U.S.C. § 371c-l. In addition to loans and purchases according to the terms of the debt offering. The of assets, section 23B treats as a covered transaction the sale of assets, Board's previous Orders limited the kinds of securities the payment of money, or the furnishing of services under contract, lease or otherwise by a bank to an affiliate. that could be underwritten or dealt in to investment Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

204 Federal Reserve Bulletin • March 1989 grade securities, i.e., those that are permissible for For example, each Applicant conducts substantial banks to invest in on the basis of the high credit rating government securities dealing and currency trading attached to the issue. operations, which exhibit a risk profile potentially Finally, as discussed below, authorization for the greater than that of their overall commercial banking underwriting subsidiaries to underwrite and deal in functions. Applicants have demonstrated the ability to equity and non-investment grade debt securities in- control this risk through techniques such as hedging, creases the potential for conflicts of interest, loss of thorough credit evaluation, and the adoption of posiimpartiality in the credit-granting process, and risk on tion limits and other sound risk management policies the part of affiliate banks and thrifts that participate in and procedures. a financing package for an issuer arranged by the The Board expects the underwriting subsidiaries to underwriting subsidiary. implement effective risk reduction techniques, including the adoption of position limits and other standard —Adequacy of Basic Framework With Certain underwriting operating policies and procedures for Modifications to Control the Potential for Risk and risk management. In this regard, the Board notes that Other Adverse Effects From the Proposed Expanded underwriters effectively address the greater price risk Activities. in the proposed debt and equity securities through higher underwriting spreads, syndications, hedging, While the Board recognizes the added potential for and careful preliminary analysis of the market acceptrisk, conflicts of interest and other adverse effects ability of a proposed issue. associated with the proposed broadening of powers, In addition, the operation of the SEC net capital the Board concludes, for the reasons set out in this and rules for broker-dealers will serve to limit the potential its earlier Orders, that this potential is effectively risk of the new activities to the underwriting subsidcontained within the basic framework established in iaries and their affiliates. Under these rules, the gains the prior Orders with certain modifications.36 The and losses in the portfolio of the affiliate are recogmodifications are designed specifically to take account nized immediately and losses that cause declines in of the potential for adverse effects from the broadened capital below required levels must be immediately underwriting and dealing powers and will increase the offset with additional capital, or the broker-dealer effectiveness of the structural and operational separa- must cease operations. Moreover, under the rules, the tion of the underwriting subsidiaries from Applicants' larger the position taken by an underwriting subsidiary federally insured subsidiaries.37 These modifications in potentially less liquid securities, such as less than strengthen two of the operating conditions in the investment grade securities, the more capital the unearlier Orders by preventing affiliate banks and thrifts derwriting subsidiary would be required to maintain. from funding the operations of the underwriting sub- In the event the security is not readily marketable, sidiary and the parent holding company from doing so substantially more capital is required. Thus, the net in a manner that will weaken its capital and financial capital rules operate as a restriction on the assumption position below levels needed for the support of its of excessive, potentially illiquid positions in the probank and thrift subsidiaries. posed securities by placing an immediate and ongoing In addition to the strengthened operating limita- higher capital charge on these positions38 as well as tions, the Board believes that the potential for adverse serving to cushion any losses that might be incurred by effects from the expanded powers is mitigated by the the subsidiary as a result of the underwriting or dealing extensive experience of each Applicant in the evalua- activities. tion and management of financial risk and conflicts of The Board also notes that market pressures require interest in the conduct of their corporate lending, underwriters to operate with substantial levels of fiduciary, investment and business advisory, securities excess net regulatory capital.39 The condition in the underwriting and dealing, and other banking activities. Board's earlier Orders that the underwriting subsidiaries maintain levels of capital on an ongoing basis commensurate with industry norms would thus require 36. The Board hereby adopts and incorporates by reference the the subsidiaries to maintain capital well above SEC reasoning and analysis regarding this finding contained in its prior Orders. 37. Many of the adverse effects that the SIA asserts these proposals would produce were expressly considered in the prior Orders and 38. Haberman, Capital Requirements of Commercial and Investwere found not likely to occur in light of the prudential limitations ment Banks: Contrasts in Regulation, Federal Reserve Bank of New imposed in the Orders and by federal law. The SIA did not challenge York Quarterly Review (Autumn 1987). these determinations in subsequent judicial review proceedings. In 39. For example, net capital among 16 diversified securities firms in protesting these applications, the SIA has failed to show how the 1986 averaged 7.3 times higher than minimum SEC requirements. expansion of the ineligible securities activities would increase the Firms with large amounts of underwriting and dealing activity tend to likelihood of these adverse effects. maintain more excess capital than retail brokerage firms. Id. at p. 6. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 205 minimum levels and at levels at least as high as In line with these principles, the Board will not securities firms of similar size and risk profile. This accept an impairment in an Applicant's financial condition will tend to further mitigate the potential for strength to provide capital or liquidity support for the risk as well as strengthen the operational and struc- proposed new activities. Accordingly, the Board will tural separation of the underwriting subsidiary from its require, as a condition of its approval of these appliaffiliates. cations, that each Applicant provide the Board with an Finally, the Board continues to believe that the acceptable plan to raise additional capital to fund revenue limitation required by the Glass-Steagall Act Applicant's equity and debt investment in the underwill operate to control risk by curtailing the amount of writing subsidiary or demonstrate that it is strongly ineligible activity that may be undertaken by the capitalized and will remain so after making the capital underwriting subsidiaries relative to their overall eli- adjustments authorized or required by this Order. An gible securities activities. Indeed, as noted, the broad- Applicant may not commence the new activities until ened range of securities in which the underwriting it has submitted a plan that the Board determines subsidiaries may deal, within the constraints of the satisfies this capital requirement and has raised the engaged principally test of the Glass-Steagall Act, additional capital required under the plan. provides the potential for diversification gains and In authorizing the formation of the underwriting overall risk reduction in their dealing operations. The subsidiaries, the Board required that each Applicant control provisions of the BHC Act, which, as ex- deduct from its consolidated primary capital its investplained above, limit the size of the position the under- ment in the underwriting subsidiary, and exclude from writing subsidiary may hold in the equity securities of its total consolidated assets the assets of the underan issuer, will also operate to limit the risk exposure of writing subsidiary.43 This requirement was designed to the underwriting subsidiaries in their dealing opera- ensure that the holding company maintains a strong tions. capital position to support its subsidiary banks and that the resources needed for that support would not —Capital Adequacy Considerations. be put at risk to fund the expanded securities activities. The Board continues to believe that this deduc- In its evaluation of proposals under section 4(c)(8) of tion is appropriate. In accordance with the new Riskthe Act, the Board considers the financial resources of Based Capital Guidelines, Applicants must deduct 50 the applicant and the company to be acquired and the percent of the amount of the investment in the undereffect of the proposal on those resources. 12 C.F.R. writing subsidiary from Tier 1 capital and 50 percent 225.24. The Board has previously stated that it expects from Tier 2 capital. banking organizations contemplating major expansion There is no limitation in the Board's prior Orders on proposals to maintain strong capital levels substan- the amount of funds that a holding company and its tially above the minimum levels specified in the nonbank affiliates may lend to the securities affiliate. Board's Capital Adequacy Guidelines.40 This policy is In view of the proposed expansion of the underwriting designed to ensure that the holding company's re- subsidiaries' activities in terms of risk exposure and sources and ability to serve as a source of strength to the investment that may be required to support these its subsidiary banks will not be prejudiced by the activities, the Board believes it is important to ensure proposal.41 To ensure compliance with this policy, the that the holding company will not impair its financial Board carefully analyzes the effect of expansion pro- resources through its funding of the underwriting posals on the preservation or achievement by a bank subsidiary. Under the Board's source of strength holding company of strong capital levels and has policy, a holding company "... should maintain the required that there be no significant diminution of financial flexibility and capital-raising capacity to obfinancial strength below those required levels for the tain additional resources for assisting its subsidiary purpose of effecting major expansion proposals.42 banks in a manner consistent with the provisions of this policy statement." F.R.R.S. H 4-878. Accordingly, in determining compliance with the 40. Capital Adequacy Guidelines, 50 Federal Register 16,057 (1985), Board's Capital Adequacy Guidelines, Applicants 71 FEDERAL RESERVE BULLETIN 445 (1985). should also deduct from their consolidated primary 41. CiticorplMorganlBankers Trust, 73 FEDERAL RESERVE BULLE- TIN at 501. capital any loans they extend directly or indirectly to 42. Thus, the Board has required that expansion proposals be the underwriting subsidiary that are not fully secured supported by the issuance of new equity capital or that declines in capital to effect expansion be promptly restored. See, e.g., Citicorp, 72 FEDERAL RESERVE BULLETIN 724 (1986); Security Pacific Corporation, 72 FEDERAL RESERVE BULLETIN 800 (1986); The Bank of New 43. This deduction would include any debt or equity investment by York Company, Inc., 74 FEDERAL RESERVE BULLETIN 257, 264-265 the holding company that is treated as capital in the underwriting (1988). subsidiary, including subordinated debt. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

206 Federal Reserve Bulletin • March 1989 by U.S. government or other marketable securities in to their subsidiary banks. 12 C.F.R. 225.4(a). Under the same manner and to the same extent as would be this rule, Applicants are expected to manage their applicable in the case of member bank loans or exten- investments in, and operation of, their subsidiaries, sions of credit to the underwriting subsidiary under including their underwriting subsidiaries, in such a section 23A(c) of the Federal Reserve Act.44 In the way as not to compromise or prejudice their ability to case of the Risk-Based Capital Guidelines, the deduc- continue to act as a source of strength to their subsidtions should be taken equally from Tier 1 and Tier 2 iary banks and thrifts, including to the extent necescapital as described above. sary, the sale or other disposition of these underwrit- To ensure compliance with these conditions and the ing subsidiaries to support Applicants' subsidiary continued financial responsibility of the holding com- thrifts and banks. pany, the Board further requires, as a condition of its approval of the new activities, that any funds supplied —Funding of Underwriting Subsidiaries by Bank and to the underwriting subsidiaries by the holding com- Thrift Affiliates. pany or its nonbank subsidiaries, whether in the form of capital, secured or unsecured loans, or other trans- In addition to the expanded capital requirements, the fer of assets, be subject to prior notice and approval by Board believes that the broadening in the scope of the Board.45 In reviewing such an application, the permissible securities activities for the underwriting Board will apply the capital policies described above. subsidiaries requires a prohibition on lending by a The Board may pre-approve requests for specific bank or thrift affiliate to the underwriting subsidiary as quantitative levels of funding by the holding company well as a prohibition on the purchase and sale of for the underwriting subsidiary in accordance with the financial assets between these institutions for their particular holding company's capitalization and re- own account, subject to a limited exception for clearsources and the requirements outlined in this Order. ing U.S. government and agency securities and the These strengthened capital and prior notice require- purchase and sale of U.S. Treasury securities. These ments will also tend to ensure that the underwriting transactions were permitted in the earlier Orders, subsidiaries maintain adequate levels of capital to subject to the lending and collateral requirements of support their operations on a stand-alone basis in sections 23A and 23B of the Federal Reserve Act, in accordance with industry norms — one of the impor- view of the limited range of securities activities authotant objectives the Board wishes to achieve through rized. the conditions established in this Order so as to The Board believes these prohibitions are necessary insulate affiliated banks and thrifts from the potential to limit the transfer of risk of the securities activities to risks of ineligible securities underwriting and dealing the federal safety net and would serve more effectively activities. The limitation on the ability of the under- to insulate federally insured banks and thrifts from the writing subsidiary to draw on demand and without underwriting subsidiaries. These limitations would limit upon the resources of the parent holding com- also promote corporate separateness by ensuring that pany should help to ensure that the market will eval- the activities and operations of the underwriting subuate the financial standing of the underwriting subsid- sidiaries are conducted on a stand alone basis and are iary based upon its own resources.46 not financed by affiliated federally insured depository Finally, the Board brings to Applicants' attention institutions. Under the provisions of sections 23A and their ongoing responsibility under the Board's regula- 23B, affiliated banks and thrifts would be able to lend tions to continue to act as a source of financial strength substantial amounts of their resources to or in support of the underwriting subsidiaries. Moreover, the Board's experience indicates that the restrictions of 44. 12 U.S.C. § 371c(c). For example, if 100 percent of the amount of an advance from the holding company is secured by U.S. govern- sections 23A and 23B are not completely effective to ment securities, no deduction from the holding company's capital is insulate the risk of the underwriting subsidiaries from required. If marketable equity securities are used to secure the the affiliated banks and thrifts and, given the complexadvance, the market value of these securities must be equal to 130 percent of the amount of the loan in order to avoid a deduction for ity of these provisions, are subject to avoidance by capital adequacy purposes. creative interpretation, particularly in times of stress. 45. The Board will review after one year's experience whether to The Board will, however, grant an exception to this modify this condition to eliminate the prior approval requirement in the case of extensions of credit secured by U.S. government and other lending prohibition to permit extensions of credit marketable securities that would not be subject to the capital deduc- necessary to clear U.S. government or agency securition for regulatory purposes under the rule discussed above. ties or securities on which the principal and interest 46. In light of these conditions with respect to the capital adequacy of Applicants, the Board does not believe it appropriate from a safety are fully guaranteed by the United States or its agenand soundness point of view to adopt the restrictions on Applicants' cies, provided that the extension of credit is fully investments in the underwriting subsidiaries proposed by the SIA. Nor, as noted, are such limitations required by the Glass-Steagall Act. secured by such securities, is on market terms, and is Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 207 to be repaid on the same calendar day.47 If the intra- the judgment that the up-front gain for the consoliday clearing cannot be completed because of a bona dated holding company organization may be worth the fide fail or operational problem incident to the clearing risk to the bank. The underwriting subsidiary also process, the bank or thrift may continue an intra-day could be motivated to sell an issuer's securities to the extension of credit overnight provided the overdraft is public in order to limit the risk to its affiliate bank that fully secured by such securities, is on market terms has extended credit to the issuer as part of such a and is repaid as early as possible on the next day. financing package. These concerns are increased For these same reasons relating to the funding of the where the bank provides short-term bridge financing, underwriting subsidiaries and their separation from which could entail greater than normal risks because affiliate banks and thrifts, the Board believes that these loans are typically subordinated to other debt, federally insured banks and thrifts should not for their may not be collateralized and depend on the successful own account purchase financial assets from or sell marketing of longer term securities or the sale of assets such assets to an affiliated underwriting subsidiary. for repayment. This limitation is not intended to limit the ability of the In the prior Orders, the Board did not prohibit bank underwriting subsidiary to act as agent for an affiliate lending in connection with financing arranged by the bank or thrift in the purchase or sale of assets. Such underwriting subsidiary or limit the ability of the agency transactions would, however, be subject to the underwriting subsidiary to market securities for the provisions of section 23B of the Federal Reserve Act purpose of repaying affiliate bank lending to the issuer requiring that they be on non-preferential terms and because of the narrow range of ineligible securities at conditions. In view of the breadth and liquidity of the issue in those cases. In view of the proposed expanmarket for U.S. Treasury securities, the prohibition on sion in the securities that may be underwritten or dealt the purchase and sale of financial assets will not apply in by the underwriting subsidiaries, the Board has to the outright purchase and sale for the underwriting considered whether to prohibit lending by a bank or subsidiary's own account of U.S. Treasury securities thrift undertaken in connection with financing transacat market terms. This exception would not be available tions underwritten or arranged by an underwriting in the case of repurchase or reverse repurchase agree- subsidiary because of the increased potential for conments between the bank and the underwriting subsid- flicts of interest and other adverse effects. On the iary involving these types of securities. present record and for the following reasons, the Board does not believe an absolute prohibition is required. —Supervision of Affiliate Bank or Thrift Lending Undertaken in Connection with the Proposed Section 23B of the Federal Reserve Act would cover Securities Underwriting Activities. bank lending under these circumstances and would require that the bank's participation in the transaction Approval for the underwriting subsidiary to under- be on terms and under circumstances, including credit write and deal in debt and equity securities would standards, that are substantially the same, or at least allow broader participation by the bank holding com- as favorable to the bank, as those prevailing at the time pany organization in leveraged buy-out ("LBO") and for comparable transactions with or involving nonother types of highly leveraged corporate transactions affiliated companies.48 A blanket prohibition would than is currently permitted. This broader participation also cover a number of types of acquisition financing poses an increased potential for conflicts of interest that are unobjectionable from a credit risk point of and risk to affiliate banks or thrifts that provide bridge view, and, moreover, would limit the competitiveness or other financing in connection with LBO and similar of banking organizations in this area and the anticitypes of leveraged financing transactions underwritten pated public benefits. or arranged by the underwriting subsidiary. Even without approval of the proposed expanded The Board is concerned that the fees that the underwriting activities, under the current regulatory underwriting subsidiary would ordinarily receive for framework, banks privately place as agents the secuits services in these transactions and the fees the rities typically used to finance LBO and similar highly affiliate bank typically receives in connection with leveraged transactions. Thus, the motivation for a related lending may motivate the bank to be less than objective in assessing the credit risk involved based on 48. Section 23B applies not only to bank loans to and asset purchases from an affiliate, but also to transactions between the bank 47. The term fully secured contemplates a perfected security and third parties in which the affiliate acts as agent or broker or interest in specific, identified securities with a market value that is receives a fee for its services or to bank transactions with a third party sufficient to provide a margin of protection in a volatile market or in in which the affiliate has an interest or is a participant. 12 U.S.C. the event the securities need to be liquidated quickly. § 371c-l(a)(2). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

208 Federal Reserve Bulletin • March 1989 bank to make a loan that may not be justified by sound extensions of credit, the ownership of securities, or credit standards in an attempt to gain the up-front otherwise. advisory or other fees for arranging the transaction is In connection with inspections of the underwriting present to a limited extent and is addressed by the subsidiaries, the Federal Reserve Banks will verify bank through internal controls as well as by the bank that these policies and procedures are in place at examination process. affiliate banks and thrifts and at the holding company The Board believes that sound risk management and will closely review loan documentation to ensure policies and procedures and the bank examination and that an independent and thorough credit evaluation supervisory process provide an effective mechanism has been undertaken with respect to the participation to control the potential for conflicts of interest and risk of an affiliate bank or thrift in a highly leveraged from lending or other participation by an affiliate bank corporate financing package arranged by the underor thrift in connection with an underwriting or similar writing subsidiary. As discussed below, the Board will financing transaction arranged by an underwriting sub- also maintain close supervision of the activities of the sidiary, while maintaining the potential for increased underwriting affiliate in conjunction with the appropricompetition and the other public benefits anticipated ate securities regulatory authorities, with the focus from the activity. Accordingly, the Board requires, as upon observance by the underwriting subsidiary and a condition of this Order, that bank holding companies its bank and nonbank affiliates of the structural and ensure that policies and procedures are adopted to operating limitations established in this Order. govern their participation, and that of their subsidiaries, in such transactions. —Additional Modifications to Operating Limitations. These policies must require establishment by bank and thrift affiliates of appropriate limits to control There are a number of conditions established in the concentrations of credit and overall exposure to indi- earlier Orders that the Board has modified to reflect vidual underwriting clients of the underwriting subsid- the proposed expansion in the range of securities iary as well as limits on aggregate exposure to all such available to the underwriting subsidiary. The limitaborrowers; approval for all such lending at the highest tion in the prior Orders against bank credit to issuers level of management; and maintenance of detailed and for the purpose of paying principal and interest on clearly identified credit and collateral documentation securities underwritten by the underwriting subsidiary so that examiners may determine that a thorough, is expanded to include credit extensions to issuers for objective and independent analysis of the credit has the payment of dividends on such securities. been undertaken. In addition, documentation must be The customer disclosure statement required by the maintained to show that the participation by a bank or Board's earlier Orders is expanded along the lines of thrift affiliate in the transaction has been undertaken the securities proposals considered in the last Conunder circumstances and on terms and conditions gress. Accordingly, the underwriting subsidiary (including pricing, minimum borrower cash flow-to- should also prominently disclose in writing to its debt service or collateral requirements, or repayment customers that securities sold, offered, or recomterms) that are not preferential and that fully reflect the mended by the underwriting subsidiary are not deposrisks associated with the loan, as required by section its, are not insured by the Federal Deposit Insurance 23B of the Federal Reserve Act. Moreover, adequate Corporation or the Federal Savings and Loan Insurinternal systems, controls and reporting procedures ance Corporation, are not guaranteed by an affiliated must be adopted to ensure that the amount and con- bank or insured thrift institution and are not otherwise dition of these loans are properly monitored on an an obligation of such a bank or an insured thrift ongoing basis and reported to senior management and institution (unless such is in fact the case). This the board of directors periodically and on a timely disclosure shall be made at the inception of the cusbasis. The procedures should also ensure that fees tomer relationship and in connection with each purincurred in connection with loans to customers of the chase or sale of securities. The Board believes this is underwriting subsidiaries are properly accounted for particularly important where the subsidiary may be in accordance with generally accepted accounting dealing with non-institutional customers. principles. In addition, the prohibition in the earlier Orders on In order to guard against concentration of the hold- extending credit during the course of an underwriting ing company's resources to any single enterprise, each to purchase a security underwritten by the underwrit- Applicant should also monitor and establish appropri- ing subsidiaries is extended to include a period of time ate limits on its overall exposure on a consolidated 30 days after the conclusion of the underwriting. The holding company basis to any single underwriting limitation on the transfer of confidential customer client of the underwriting subsidiary, in the form of information between a bank or thrift affiliate and the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 209 underwriting subsidiary is revised to make clear that pliance with the limitations and conditions established the transfer of information cannot be made without the in these Orders and federal banking law. The Board consent of the customer. will review the results of these inspections annually. The Board is also adopting two other provisions In addition, the Board has decided to condition derived from the legislation under consideration by the further its approval of these applications on a requirelast Congress in connection with expanded securities ment that, before the new activities may be compowers to prevent possible evasion of the operations menced, the Reserve Banks determine that the underlimitations and unfair competition. First, bank holding writing subsidiaries and their bank and nonbank companies may not enter into agreements to engage in affiliates have put in place the operational and manareciprocal transactions with other bank holding com- gerial infrastructure necessary to ensure compliance panies for the purpose of evading the operating limi- with the operating limitations of this Order, including tations established in this Order or other limitations computer, audit and accounting systems, internal risk under federal banking law on transactions between management controls and other policies and procebanks and their affiliates. dures consistent with sound practices. The underwrit- Second, a bank or thrift affiliate may not, directly or ing subsidiaries may not commence the new activities indirectly, extend or deny credit or services (including until notified by the Board that the required determiclearing services), or vary the terms or conditions nation has been made. thereof, with the intent to treat unaffiliated securities As noted, banks currently do not underwrite and firms less favorably than an affiliated underwriting deal in any type of equity securities in the United subsidiary unless the extension or denial is based on States and banks are generally forbidden from purobjective criteria and is consistent with sound business chasing equity securities for their own account. Alpractices. In addition, the bank or thrift may not though the Board is of the view that underwriting and extend or deny credit or services or vary the terms or dealing in these securities involves the same basic conditions thereof with the intent of creating a com- functions as underwriting debt securities, the Board petitive advantage for an affiliated underwriting sub- has decided to review in one year whether Applicants sidiary. may commence underwriting and dealing in equity Finally, the approval granted to Applicants in the securities based on a determination by the Board that instant Order to underwrite debt securities without they have established the necessary managerial and limitation necessarily supersedes the conditions con- operational infrastructure and other policies and protained in the earlier Orders requiring that ineligible cedures to comply with the requirements of this Order. debt securities underwritten or dealt in by the under- Because of their current eligible debt securities underwriting subsidiaries making these applications be rated writing and investment activities, the Board does not as investment quality. believe it necessary to delay for this period of time its decision with respect to Applicants' proposals to underwrite and deal in ineligible debt securities.49 This —Ongoing Supervision of Underwriting Subsidiaries aspect of the Board's Order may be implemented upon and Their Affiliates. satisfaction of the inspection, capital and other prerequisites of the Order. In reaching its conclusions regarding the potential for risk, conflicts of interest and other adverse effects from the proposed securities activities, the Board has —Separate Name and Logo. placed considerable reliance on the structural and operating limitations established in this and its previ- The SIA has suggested that the Board place restricous Orders and in federal banking and securities tions on the ability of the securities affiliate to use a statutes. The Board recognizes that the effectiveness name or logo similar to that of any banking affiliate, to of these measures to achieve their objective of mini- share premises, or to engage in joint advertising. mizing adverse effects and insulating affiliate banks These restrictions are intended to minimize the likeliand thrifts and the federal safety net from the risk of hood that the public would link the economic fortunes the new activities depends on careful adherence to of the underwriting subsidiary with those of a bank, these limitations by the underwriting subsidiaries and possibly causing a run on the bank. In the Board's their bank and nonbank affiliates. Accordingly, the Board has directed that the appro- 49. For this purpose, debt securities shall include those that are priate Reserve Banks undertake at least annual inspec- convertible into equity securities if, on the date the convertible tions of the underwriting subsidiaries to determine that securities are issued, the conversion price is greater than 115 percent effective procedures are in place at these subsidiaries of the market price of the equity security into which the debt security is convertible. Preferred stock is an equity security for purposes of and their bank and nonbank affiliates to ensure com- this Order. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

210 Federal Reserve Bulletin • March 1989 view, the operating limitations contained in this Order activities, establish additional limitations on the conadequately address the concerns raised by the SIA. duct of the activities to ensure that the subsidiaries' With these precautions in place, the Board believes activities are consistent with safety and soundness, the additional restrictions on the use of a company conflict of interest and other considerations relevant name or logo would lead to only small gains in the under the BHC Act. separation of the underwriting subsidiary from its federally insured affiliates, at the cost of losing the C. Shares of Investment Companies. advantage of the efficiency and convenience to customers that can be achieved through coordinated Applicants' proposals are broad enough to include marketing. In addition, the Board believes the require- underwriting and dealing in shares of closed-end inment of a separate name would be artificial, particu- vestment companies and unit investment trusts (but larly because securities laws would, in any event, not open-end investment companies, i.e., mutual require the affiliate to inform those using its services of funds). Underwriting or dealing activities involving its association with a bank. investment company securities under this Order must be conducted in accordance with the limitations con- —Absence of Potential for Undue Concentration of tained in the existing provisions of Regulation Y Resources. authorizing bank holding companies to provide advisory activities to investment companies. In particular, The Board believes that it is not appropriate to exer- Regulation Y provides that a bank holding company cise its discretion under section 4(c)(8), as suggested and its subsidiaries may not purchase for their own by the SIA, to impose the market share limitation on account, or engage directly or indirectly in the sale or the ineligible securities activities that the court of distribution of, the securities of any investment comappeals determined was not appropriate under the pany that the holding company advises or sponsors. Glass-Steagall Act. Like the activities previously ap- 12 C.F.R. 225.125(g)(1), (h). proved, the new activities would be expanded de novo and, thus, would not eliminate any existing competi- IV. Legislation Regarding Bank Holding tion. In addition, there is no compelling evidence in Company Securities Powers. the record that in the areas where banking institutions currently compete with securities firms, such as un- The Board notes that the 100th Congress had under derwriting Eurobonds and the private placement of active consideration legislation that would have estabsecurities, banking institutions have achieved a domi- lished a comprehensive framework for the conduct of nant position. securities underwriting activities by bank holding com- Finally, the limitations in section 4(a) of the BHC panies substantially the same as that established in this Act on the holding of voting shares by the underwrit- Order. While this legislation was passed by the U.S. ing subsidiary discussed below will prevent Applicants Senate and favorably reported by committees of the from obtaining control over other financial or non- U.S. House of Representatives,50 no legislation was financial businesses as a result of underwriting and enacted into law. In the absence of such legislation, dealing in the securities of these businesses. the Board is required, as provided in existing law, to act on these applications within mandated time periods —Reservation of Authority to Modify Operating and in accordance with the applications processing Limitations Based Upon Experience. schedule prescribed by Regulation Y. As noted above, the applications comply with existing law under the Because these proposals represent the first major framework established by the Board in this and its entry of banking organizations into the field of under- earlier Orders, a framework that has been upheld by writing and dealing in corporate debt and equity secu- the federal courts as consistent with the requirements rities, the Board believes it appropriate to proceed of the Glass-Steagall Act. cautiously and has established an extensive frame- The Board calls to Applicants' attention, however, work of prudential limitations to address conflicts of that subsequent Congressional action may override interest, unsound banking practices, and other adverse the Board's Order approving the activities described effects. After the underwriting subsidiaries have established a record of experience in the proposed activi- 50. S.1886, 100th Cong., 2d Sess., 134 Cong. Rec. S3437 (daily ed. ties, the Board may review the continued appropriate- March 30, 1988); H.R. 5094, 100th Cong., 2d Sess., 134 Cong. Rec. ness of particular limitations. H6453 (daily ed. August 4, 1988), 134 Cong. Rec. H8470 (Sept. 27, 1988). See also S. Rep. No. 305, 100th Cong., 2d Sess. (1988); H.R. Similarly, the Board may from time to time, based Rep. No. 822 (Part 1), 100 Cong., 2d Sess. (1988); H.R. Rep. No. 822 upon the supervisory process and experience with the (Part 2), 100th Cong., 2d Sess. (1988). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 211 herein without providing so-called grandfather rights ployed in underwriting and dealing in eligible debt to continue these activities. The Board retains juris- securities. In support of its position, the Committee diction over the applications to act to carry out the cites a September 1988 report by the General Accountrequirements of any legislation adopted by Congress ing Office with respect to the securities activities of that would affect Applicants' conduct of underwriting U.S. banks in London ("GAO Report").55 Nothing in and dealing activities under this Order and the Bank the SIA Committee's allegation or in the GAO Report Holding Company Act. disputes any fact material to the Board's decision. The GAO Report concluded that the London securities V. Request for Hearing. subsidiaries of certain U.S. banks suffered losses or were marginally profitable during 1986 and 1987, due As noted, several weeks after the close of the com- at least in part to management and internal control ment period for these applications, the Government problems relating to the specific banks involved. The Representatives Committee of the SIA submitted a GAO Report did not specifically address, however, the request that the Board conduct a public hearing with more generic issue the Board must consider under respect to the proposals. Under Regulation Y and the section 4(c)(8): whether the activities proposed for the Board's Rules of Procedure, the Board is only re- bank holding company have a close functional and quired to consider a comment or request for a hearing operational similarity to services that banks have if it is received before the latest date prescribed in the traditionally offered. Moreover, the Board has condipublished notice of the application.51 The Committee tioned its approval of the expanded underwriting and has offered no reason for its failure to follow the dealing activities on each Applicant having in place Board's rules and the requirements in the published adequate managerial and operational procedures to notices in these cases. Accordingly, the Board con- assure that the expanded activities will be conducted cludes that the Committee's request for a hearing is in compliance with the prudential requirements estabuntimely and should, therefore, be denied. In addition, lished in this and the Board's prior Orders. the Board has reviewed the issues raised by the SIA The SIA Committee also disputes Applicants' asser- Committee and concludes that no hearing with respect tion that the proposed expansion of securities activito these applications is required or appropriate. ties would not produce significant adverse effects, Section 4(c)(8) of the BHC Act requires that the such as potential conflicts of interest. Specifically, the Board provide "due notice and opportunity for hear- SIA Committee claims that the expansion of activities ing" before approving an application under that sec- will result in the tying of underwriting services by the tion. Under this standard, a formal, trial-type hearing underwriting subsidiaries with credit extended by the is required "only if there are disputed issues of mate- affiliate banks. In support of this claim, the SIA rial fact that cannot be resolved in some other Committee cites a SIA study of activities involving manner."52 A mere request or conclusory assertion certain types of eligible security underwritten directly that material facts are disputed is insufficient to justify by banks. The study purports to show a high correlaa formal hearing. In order to become entitled to a tion between the number of underwritings in which the hearing, the burden is on the protestant to make some bank served as a member of the managing underwriter minimal showing that material facts are in dispute and group and underwritings in which the bank supplied a that an inquiry in depth is appropriate.53 In the Board's credit facility to support the securities being view, the SIA Committee has failed to demonstrate underwritten.56 This study concerns the direct activithat any facts material to the Board's decision on these ties of banks, which are not subject to the safeguards applications is in dispute or that a hearing would be established in the Board's decisions under section appropriate.54 4(c)(8). In particular, the limitations in this Order The SIA Committee disputes Applicants' arguments prohibit the provision of credit, directly or indirectly, that the skills needed to conduct the proposed ineligi- by an Applicant or any of its subsidiaries to enhance ble securities activities are similar to the skills em- the creditworthiness or marketability of securities being underwritten by the underwriting subsidiary. 51. 12 C.F.R. 225.23(g); 262.3(e). The comments submitted by the SIA itself, which were received before the comment period on all of the applications closed, did not request a hearing. 55. United States General Accounting Office, International Fi- 52. 12 C.F.R. 225.23(g). nance: U.S. Commercial Banks' Securities Activities in London 53. Connecticut Bankers Ass'n v. Board of Governors, 627 F.2d (Sept. 1988). 245, 251 (D.C. Cir. 1980). 56. Legislative Proposals to Restructure Our Financial System: 54. The SIA Committee's request failed to state why in its view a Hearings on S.1886, S.1891, and S.1905 Before the Senate Comm. on written presentation would not suffice in lieu of a hearing, as required Banking, Housing, and Urban Affairs, 100th Cong., 1st Sess. 476-80 by the Board's Rules. 12 C.F.R. 262.3(e). (1987). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

212 Federal Reserve Bulletin • March 1989 The SIA Committee offers no other factual support As the GAO Report indicates, the losses experifor its assertion that approval of these proposals would enced in London underwriting operations, during a result in the tying of securities underwriting services. period of unique uncertainty and turmoil in the wake The Board notes that the explicit tying of services of major deregulation of these markets accounted for performed by the underwriting subsidiaries with those only a minor percentage of the capital of the banks and of an affiliate bank is expressly forbidden by the 1970 did not threaten their overall operations. Further, in Amendments to the Bank Holding Company Act.57 this case, the limitations in the Order will separate the The Committee also suggests that the Board should risk of loss of the proposed underwriting and dealing prohibit the provision by a bank of credit facilities in activities from affiliate banks and thrifts and from the anticipation of or in connection with securities activi- financial resources of the holding company that are ties undertaken by the underwriting subsidiary. The needed to maintain strong capitalization at its subsid- Board has carefully evaluated the potential for risk, iary banks and thrifts. The requirement that the holdconflicts of interest, and other adverse effects in such ing company may not make any debt or equity investtransactions and has concluded that the absolute pro- ment in the underwriting subsidiary without the hibition urged by the Committee is not warranted. For Board's prior approval and a demonstration that the the reasons earlier stated, the Board believes that the investment will not diminish the holding company's potential for adverse effects in such transactions can ability to maintain a strong capital position will ensure be effectively addressed through careful attention by that the underwriting subsidiary will not be funded the underwriting subsidiary and its affiliate banks and directly or indirectly by affiliate banks or thrifts. thrifts to the requirements of this Order, including the Under this condition, the funds invested in the underrequirement of section 23B of the Federal Reserve Act writing subsidiary must be above and beyond these that these transactions be conducted on non-preferen- needed by the holding company to support its subsidtial terms and under non-preferential circumstances, iary banks. The Board has also imposed explicit and the holding company and bank examination and requirements to ensure that both the parent holding supervisory process. companies and their underwriting subsidiaries main- The SIA Committee also challenges Applicants' tain amounts of capital that are commensurate with the argument that the expanded securities activities would risk involved with the expanded activities. not result in significant losses to Applicants, stating Finally, the Board notes that the London securities that the corporate debt and equity securities markets operations of U.S. banks are not subject to the reguare much more volatile than the markets for non- lated framework applicable to the domestic underwritcorporate fixed income securities and that U.S. banks ing subsidiaries pursuant to section 4(c)(8). These suffered losses in 1986 and 1987 as a result of their activities are conducted under a separate Congressionunderwriting operations in London. These conten- ally-established statutory framework and are subject tions, in the Board's judgment, do not present any to regular annual inspection and examination by the disputed issues of fact. The Board recognizes that Board and the Reserve Banks, as well as to supervicorporate securities generally exhibit greater price sion and regulation by local authorities. The Board volatility, but has concluded, as explained above, that currently has under consideration whether certain of the underwriting subsidiaries will be able to manage the prudential limitations established in this Order the greater potential for risk, especially in light of the should also be applied to the foreign securities affilexpanded operating limitations being required as a iates of U.S. banking organizations. condition of approval for the proposed activities. In The SIA Committee also disputes the claim that the addition, the losses experienced by some U.S. banks functions of the underwriting subsidiaries can be adein their London underwriting operations have been quately insulated from the affiliate bank under the attributed, at least in part, to specific managerial and limitations in the Board's earlier decisions. Again this internal control deficiencies. As noted above, before allegation raises no dispute of material fact, but rather they may commence any of the new activities, Appli- evidences a disagreement with the conclusion that the cants must have in place adequate internal controls, Board has reached on the basis of the facts of record. including exposure limits at affiliate banks and thrifts The Board has addressed these concerns by strengthand for the holding company on a consolidated basis, ening the basic framework established in the earlier computer and accounting systems, and experienced Orders to prohibit indirect extensions of credit to the staff.58 underwriting subsidiaries by affiliate banks and, as 57. 12 U.S.C. §§ 1971, 1972(1); 12 C.F.R. 225.4(d). 58. The foreign securities affiliates of U.S. banking organizations operations and have increased their capitalization in response to have instituted additional controls and procedures to govern these Board and local regulatory requirements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 213 noted, the diversion to these subsidiaries of the parent Board and the federal courts. As noted, the Board has companies' resources needed to support affiliate retained jurisdiction over the applications so that they banks. Within this framework, the Board has con- may be modified to the extent that Congress may cluded that the potential for adverse effects is not adopt legislation that would affect the scope of authorsignificant enough to warrant denial of the applications ity established under this Order pursuant to existing under the relevant statutory criteria. law. The SIA Committee's assertion that, after approval of these proposals, significant securities activities VI. Conclusion. would continue to be conducted directly by banks is not relevant to the standards the Board must apply in For the reasons and subject to the conditions set forth evaluating these applications and does not warrant a in this Order, the Board concludes that Applicants' hearing. Such activities are beyond the scope of the proposals for their respective underwriting subsidiarcurrent applications to engage in securities activities ies to underwrite and deal in debt and equity securities through nonbank subsidiaries of a holding company. are consistent with the applicable provisions of the The Board notes, moreover, that expansion of the Glass-Steagall Act and are so closely related to bankscope of permissible ineligible securities activities for ing as to be a proper incident thereto within the the underwriting subsidiaries, subject to the revenue meaning of section 4(c)(8) of the BHC Act; provided limit required under the Glass-Steagall Act, may op- that the underwriting subsidiaries may commence eqerate to encourage Applicants to transfer securities uity securities underwriting and dealing activities only operations from affiliate banks to the underwriting after a review by the Board in one year to determine subsidiary. whether Applicants may initiate these activities based The SIA Committee also advances other policy on a finding by the Board that they have established arguments that, in the Board's judgment, are not the managerial and operational infrastructure required sufficient to warrant denial of the applications or a by this Order. public hearing. As explained above, the Board be- The Board's approval of these proposals extends lieves the record now before the Board supports only to activities conducted within the conditions of approval of the applications, subject to the broad this Order and subject to the gross revenue limitation framework of operating conditions established herein. discussed above. Underwriting and dealing in the In this regard, the Board notes that a number of the approved securities in any manner other than as modifications to the operating limitations suggested by approved in this Order is not within the scope of the the SIA and the Committee have been adopted by the Board's approval and is not authorized for the under- Board in this Order. writing subsidiaries.59 As more fully set forth in the The Board also notes that the expanded securities activities will be conducted de novo. Thus, application of the closely related to banking and public benefits tests of section 4(c)(8) to these applications necessarily 59. In CiticorplMorganlBankers Trust, the Board noted that the involves inquiry into future conduct. Formal adjudica- underwriting subsidiaries could provide a service that is a necessary incident to the approved underwriting and dealing activities, subject to tory hearings are of limited efficacy in making such the revenue limitation for ineligible securities activities established to assessments. In this regard, the Board has reserved ensure compliance with section 20 of the Glass-Steagall Act. Applithe right to adjust the operating limitations or establish cants were also advised not to engage in any incidental, servicing or other functions without prior written notice to and review by Board additional limitations based upon the experience of the staff to ensure compliance with the Act and the Board's Orders. The underwriting subsidiary. The Board also has authority Board continues to believe such notice is necessary. under the BHC Act and the Financial Institutions Applicants have indicated that the underwriting subsidiaries would be expected to offer best efforts underwriting and private placements Supervisory Act of 1966 to ensure that the underwrit- involving the proposed ineligible debt and equity securities as a ing subsidiaries and their affiliates comply with the necessary incident to the approved debt and equity securities underwriting activities. In the Board's view, these activities may be requirements of this Order and applicable federal law. conducted as a necessary incident to the approved activities insofar as Finally, the Board does not believe that approval of the BHC Act is concerned. See National Courier Ass'n., 516 F.2d at the applications will interfere with the role of Con- 1240. With respect to the Glass-Steagall Act, however, any activity conducted as a necessary incident to an ineligible securities activity gress, which has been considering a comprehensive must be treated as part of the ineligible securities activity unless the revision of the laws governing the financial services underwriting subsidiary has received specific approval under section 4(c)(8) of the Act to conduct the activity independently. Until such industry. The Board's action does not effectively approval is obtained, any revenues from the incidental activity must repeal any restrictions in the Glass-Steagall Act, but be counted as ineligible revenue subject to the 5 percent revenue limit merely expands the type of ineligible securities activ- set forth in the Order. ities that may be conducted within the existing limita- Nothing in this Order enlarges or restricts the authority of U.S. banking organizations to engage in activities outside of the United tions of section 20 of that Act, as interpreted by the States under Regulation K (12 C.F.R. 211). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

214 Federal Reserve Bulletin • March 1989 Order, the Board's approval is subject to the following 4. The underwriting subsidiary shall maintain at all conditions: times capital adequate to support its activity and cover reasonably expected expenses and losses in accord- A. Capital Adequacy Conditions ance with industry norms. 1(a). In determining compliance with the Board's B. Credit Extensions to Customers of the Capital Adequacy Guidelines, each Applicant shall Underwriting Subsidiary61 deduct from its consolidated primary capital any investment it makes in the underwriting subsidiary that 5. No Applicant or subsidiary shall directly or indiis treated as capital in the underwriting subsidiary. In rectly extend credit, issue or enter into a stand-by accordance with the risk-based component of the letter of credit, asset purchase agreement, indemnity, Board's Capital Guidelines, Applicant shall deduct 50 guarantee, insurance or other facility that might be percent of the amount of any investment in the under- viewed as enhancing the creditworthiness or marketwriting subsidiary from Tier 1 capital and 50 percent ability of an ineligible securities issue underwritten or from Tier 2 capital. In calculating primary capital and distributed by the underwriting subsidiary. risk-based capital ratios, Applicant should also ex- 6. No Applicant or subsidiary (other than the underclude the underwriting subsidiary's assets from the writing subsidiary) shall knowingly extend credit to a holding company's consolidated assets. customer directly or indirectly secured by, or for the (b). Applicant shall also deduct from its regulatory purpose of purchasing, any ineligible security that an capital any credit it or a nonbank subsidiary extends affiliated underwriting subsidiary underwrites during directly or indirectly to the underwriting subsidiary the period of the underwriting or for 30 days thereafunless the extension of credit is fully secured by U.S. ter, or to purchase from the underwriting subsidiary Treasury securities or other marketable securities and any ineligible security in which the underwriting subis collateralized in the same manner and to the same sidiary makes a market. This limitation extends to all extent as would be required under section 23A(c) of customers of Applicant and its subsidiaries, including the Federal Reserve Act if the extension of credit were broker-dealers and unaffiliated banks, but does not made by a member bank.60 In the case of the risk- include lending to a broker-dealer for the purchase of based component of the Board's Capital Guidelines, securities where an affiliated bank is the clearing bank the deductions for unsecured or not fully-secured or for such broker-dealer. inadequately collateralized loans shall be taken 50 7. No Applicant or any of its subsidiaries may, directly percent from Tier 1 and 50 percent from Tier 2 as or indirectly, extend credit to issuers of ineligible described above. securities underwritten by an affiliated underwriting Notwithstanding these adjustments, Applicant subsidiary for the purpose of the payment of principal, should continue to maintain adequate capital on a fully interest or dividends on such securities. To assure consolidated basis. compliance with the foregoing, any credit lines ex- 2. No Applicant nor any of its nonbank subsidiaries tended to an issuer by any bank holding company or shall, directly or indirectly, provide any funds to, or any subsidiary shall provide for substantially different for the benefit of, an underwriting subsidiary, whether timing, terms, conditions and maturities from the in the form of capital, secured or unsecured extensions ineligible securities being underwritten. It would be of credit, or transfer of assets, without prior notice to clear, for example, that a credit has substantially and approval by the Board. different terms and timing if it is for a documented 3. Before commencing the new activities, each Appli- special purpose (other than the payment of principal, cant must submit to the Board acceptable plans to interest or dividends) or there is substantial participaraise additional capital as required by this Order or tion by other lenders. demonstrate that it is strongly capitalized and will 8. Each Applicant shall adopt appropriate procedures, remain so after making the capital adjustments autho- including maintenance of necessary documentary recrized or required by this Order. An Applicant may not ords, to assure that any extension of credit by it or any commence the proposed activities until it has received of its subsidiaries to issuers of ineligible securities a Board determination that the capital plan satisfies the underwritten or dealt in by an underwriting subsidiary requirements of this Order and has raised the addi- are on an arm's length basis for purposes other than tional capital required under the plan. payment of principal, interest, or dividends on the 61. Unless otherwise stated, these conditions shall apply to a 60. An extension of credit means any loan, guarantee, or other form subsidiary of a bank or thrift institution to the same extent as they of credit exposure, including those described in Condition 5. apply to the bank or thrift institution. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 215 issuer's ineligible securities being underwritten or and its bank and thrift affiliates and pointing out that an dealt in by the underwriting subsidiary. An extension affiliated bank or thrift could be a lender to an issuer of credit is considered to be on an arm's length basis if and referring the customer to the disclosure docuthe terms and conditions are substantially the same as ments for details. In addition, the statement shall state those prevailing at the time for comparable transac- that securities sold, offered, or recommended by the tions with issuers whose securities are not underwrit- underwriting subsidiary are not deposits, are not inten or dealt in by the underwriting subsidiary. sured by the Federal Deposit Insurance Corporation 9. In any transaction involving an underwriting sub- or the Federal Savings and Loan Insurance Corporasidiary, Applicants' thrift subsidiaries shall observe tion, are not guaranteed by an affiliated bank or thrift, the limitations of sections 23A and 23B of the Federal and are not otherwise an obligation or responsibility of Reserve Act as if the thrifts were banks. such a bank or thrift (unless such is the case). The 10. The requirements relating to credit extensions to underwriting subsidiary should also disclose any maissuers noted in paragraphs 5 - 9 above shall also apply terial lending relationship between the issuer and a to extensions of credit to parties that are major users bank or lending affiliate of the underwriting subsidiary of projects that are financed by industrial revenue as required under the securities laws and in every case bonds. whether the proceeds of the issue will be used to repay 11. Applicants shall cause their subsidiary banks and outstanding indebtedness to affiliates. thrifts to adopt policies and procedures, including appropriate limits on exposure, to govern their partic- E. Marketing Activities on Behalf of an ipation in financing transactions underwritten or ar- Underwriting Subsidiary ranged by an underwriting subsidiary as set forth in this Order. The Reserve Banks shall ensure that these 15. No underwriting subsidiary nor any affiliated bank policies and procedures are in place at Applicants' or thrift institution will engage in advertising or enter subsidiary banks and thrifts and Applicants shall as- into an agreement stating or suggesting that an affilsure that loan documentation is available for review by iated bank or thrift is responsible in any way for the Reserve Banks to ensure that an independent and underwriting subsidiary's obligations as required unthorough credit evaluation has been undertaken in der section 23B of the Federal Reserve Act. connection with bank or thrift participation in such 16. No bank or thrift affiliate of the underwriting financing packages and that such lending complies subsidiary will act as agent for, or engage in marketing with the requirements of this Order and section 23B of activities on behalf of, the underwriting subsidiary.63 the Federal Reserve Act. In this regard, prospectuses and sales literature relat- 12. Applicants should also establish appropriate poli- ing to securities being underwritten or dealt in by an cies, procedures, and limitations regarding exposure underwriting subsidiary may not be distributed by a of the holding company on a consolidated basis to any bank or thrift affiliate; nor should any such literature single customer whose securities are underwritten or be made available to the public at any offices of any dealt in by the underwriting subsidiary. such affiliate, unless specifically requested by a customer. C. Limitations to Maintain Separateness of an Underwriting Affiliate's Activity F. Investment Advice by Bank/Thrift Affiliates 13. There will be no officer, director, or employee 17. An affiliated bank or thrift institution may not interlocks between an underwriting subsidiary and any express an opinion on the value or the advisability of of the holding company's bank or thrift subsidiaries. the purchase or the sale of ineligible securities under- The underwriting subsidiary will have separate offices written or dealt in by an affiliated underwriting subsidfrom any affiliated bank or thrift.62 iary unless the bank or thrift notifies the customer that the underwriting subsidiary is underwriting, making a D. Disclosure by the Underwriting Subsidiary market, distributing or dealing in the security. 18. No Applicant nor any of its bank, thrift, or trust or 14. An underwriting subsidiary will provide each of its investment advisory subsidiaries shall purchase, as a customers with a special disclosure statement describ- trustee or in any other fiduciary capacity, for accounts ing the difference between the underwriting subsidiary over which they have investment discretion ineligible 62. An underwriting subidiary may have offices in the same building as a bank or thrift affiliate if the underwriting subsidiary's offices are 63. This condition does not prevent a bank or thrift from informing clearly distinguished from those of the bank or thrift affiliate. its customers of the available services of the underwriting subsidiary. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

216 Federal Reserve Bulletin • March 1989 securities (a) underwritten by the underwriting subsid- interest as described above, is on market terms, and is iary as lead underwriter or syndicate member during repaid as early as possible on the next business day. the period of any underwriting or selling syndicate, 22. No bank or thrift shall, directly or indirectly, for its and for a period of 60 days after the termination own account, purchase financial assets of an affiliated thereof, and (b) from the underwriting subsidiary if it underwriting subsidiary or a subsidiary thereof or sell makes a market in that security, unless, in either case, such assets to the underwriting subsidiary or subsidsuch purchase is specifically authorized under the iary thereof. This limitation shall not apply to the instrument creating the fiduciary relationship, by court purchase and sale of U.S. Treasury securities that are order, or by the law of the jurisdiction under which the not subject to repurchase or reverse repurchase agreetrust is administered. ments between the underwriting subsidiary and its bank or thrift affiliates.64 G. Extensions of Credit and Purchases and H. Limitations on Transfers of Information Sales of Assets 23. No bank or thrift shall disclose to an underwriting 19. No Applicant nor any of its subsidiaries, other than subsidiary, nor shall an underwriting subsidiary disthe underwriting subsidiary, shall purchase, as princi- close to an affiliated bank or thrift, any nonpublic pal, ineligible securities that are underwritten by the customer information (including an evaluation of the underwriting subsidiary during the period of the un- creditworthiness of an issuer or other customer of that derwriting and for 60 days after the close of the bank or thrift, or underwriting subsidiary) without the underwriting period, or shall purchase from the under- consent of that customer. writing subsidiary any ineligible security in which the underwriting subsidiary makes a market. I. Reports 20. An underwriting subsidiary may not underwrite or deal in any ineligible securities issued by its affiliates 24. Applicants shall submit quarterly to the approprior representing interests in, or secured by, obligations ate Federal Reserve Bank FOCUS reports filed with originated or sponsored by its affiliates (except for the NASD or other self-regulatory organizations, and grantor trusts or special purpose corporations created detailed information breaking down the underwriting to facilitate underwriting of securities backed by resi- subsidiaries' business with respect to eligible and dential mortgages originated by a non-affiliated ineligible securities, in order to permit monitoring of lender). the underwriting subsidiaries' compliance with the 21(a). Applicants shall assure that no bank or thrift provisions of this Order.65 subsidiary shall, directly or indirectly, extend credit in any manner to an affiliated underwriting subsidiary or J. Transfer of Activities and Formation of a subsidiary thereof; or issue a guarantee, acceptance, Subsidiaries of an Underwriting Subsidiary to or letter of credit, including an endorsement or Engage in Underwriting and Dealing standby letter of credit, for the benefit of the underwriting subsidiary or a subsidiary thereof. 25. The Board's approval of the proposed underwrit- (b). This prohibition shall not apply to an extension ing and dealing activities extends only to the subsidof credit by a bank or thrift to an underwriting subsid- iaries described above for which approval has been iary that is incidental to the provision of clearing sought in the instant applications. The activities may services by the bank or thrift to the underwriting not be conducted by Applicants in any other subsidsubsidiary with respect to securities of the United iary without prior Board review. Pursuant to Regula- States or its agencies, or securities on which the tion Y, no corporate reorganization of an underwriting principal and interest are fully guaranteed by the subsidiary, such as the establishment of subsidiaries of United States or its agencies, if the extension of credit the underwriting subsidiary to conduct the activities, is fully secured by such securities, is on market terms, may be consummated without prior Board approval. and is repaid on the same calendar day. If the intra-day clearing of such securities cannot be completed because of a bona fide fail or operational problem incidental to the clearing process that is beyond the 64. The limitation in the Board's CiticorplMorganlBankers Trust control of the bank or thrift and the underwriting Order regarding purchases and sales of assets between bank (or thrift subsidiary, the bank or thrift may continue the intra- affiliates) and an underwriting subsidiary is superseded by this providay extension of credit overnight provided the exten- sion and the provisions of section 23B of the Federal Reserve Act. 65. The Board will make available in the future a form on which this sion of credit is fully secured as to principal and information should be submitted. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 217 K. Limitations on Reciprocal Arrangements termination of the activities of a bank holding comand Discriminatory Treatment pany or any of its subsidiaries as the Board finds necessary to assure compliance with, and to prevent 26. No Applicant nor any of its subsidiaries may, evasion of, the provisions of the BHC Act and the directly or indirectly enter into any reciprocal arrange- Board's regulations and orders issued thereunder. ment. A reciprocal arrangement means any agree- By order of the Board of Governors, effective ment, understanding, or other arrangement under January 18, 1989. which one bank holding company (or subsidiary thereof) agrees to engage in a transaction with, or on Voting for this action: Chairman Greenspan and Governors behalf of, another bank holding company (or subsid- Johnson, Seger, Angell, Heller, Kelley, and LaWare. iary thereof), in exchange for the agreement of the second bank holding company (or any subsidiary WILLIAM W. WILES thereof) to engage in a transaction with, or on behalf Secretary of the Board of, the first bank holding company (or any subsidiary thereof) for the purpose of evading any requirement of The Honkong and Shanghai Banking this Order or any prohibition on transactions between, Corporation or for the benefit of, affiliates of banks established Hong Kong pursuant to federal banking law or regulation. 27. No bank or thrift affiliate of an underwriting Kellett, N.V. subsidiary shall, directly or indirectly: Curacao, (a) acting alone or with others, extend or deny credit Netherlands Antilles or services (including clearing services), or vary the terms or conditions thereof, if the effect of such action HSBC Holdings, B.V. would be to treat an unaffiliated securities firm less Amsterdam, The Netherlands favorably than its affiliated underwriting subsidiary, unless the bank or thrift demonstrates that the exten- Marine Midland Banks, Inc. sion or denial is based on objective criteria and is Buffalo, New York consistent with sound business practices; or (b) extend or deny credit or services or vary the Order Approving an Application to Engage in terms or conditions thereof with the intent of creating Trading in Foreign Exchange and Foreign Exchange a competitive advantage for an underwriting subsid- Related Products iary of an affiliated bank holding company. The Hongkong and Shanghai Banking Corporation, L. Requirement for Supervisory Review Before Hong Kong; Kellett, N.V., Curacao, Netherlands Commencement of Activities. Antilles; and HSBC Holding B.V., Amsterdam, The Netherlands, foreign banks and bank holding compa- 28. An Applicant may not commence the proposed nies under the Bank Holding Company Act (the "BHC debt and equity securities underwriting and dealing Act"), and Marine Midland Banks, Inc., Buffalo, New activities until the Board has determined that the York ("Marine Midland") (collectively "Appli- Applicant has established policies and procedures to cants"), have applied under section 4(c)(8) of the BHC ensure compliance with the requirements of this Or- Act (12 U.S.C. § 1843(c)(8)) and section 225.23 of the der, including computer, audit and accounting sys- Board's Regulation Y (12 C.F.R. § 225.23), for aptems, internal risk management controls and the nec- proval for their subsidiary primary dealer, Carroll essary operational and managerial infrastructure. In McEntee & McGinley, Inc., New York, New York this regard, the Board will review in one year whether ("CM&M" or "Company"),1 to engage in foreign Applicants may commence underwriting and dealing exchange spot, forward, options, futures, and options in equity securities based on a determination by the on futures transactions for its own account. Board that they have established the managerial and Notice of the application, affording interested peroperational infrastructure and other policies and pro- sons an opportunity to submit comments on the procedures necessary to comply with the requirements of posal, has been duly published (52 Federal Register this Order. The Board's approval determination is subject to all of the conditions set forth in the Board's Regulation Y, 1. CM&M is a wholly owned subsidiary of CM&M Group, Inc., including those in sections 225.4(d) and 225.23(b), and which is 49 percent owned by Marine Midland and 51 percent owned by Hongkong and Shanghai, and was established with Board apto the Board's authority to require modification or proval. 72 FEDERAL RESERVE BULLETIN 345 (1986). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

218 Federal Reserve Bulletin • March 1989 47,759 (1987)). The time for filing comments has ex- proposed activity; that banks generally provide serpired, and the Board has considered the application vices that are operationally or functionally so similar and all comments received in light of the public to the proposed activity as to equip them particularly interest factors set forth in section 4(c)(8) of the BHC well to provide the proposed activity; or that banks Act. generally provide services that are so integrally related Hongkong and Shanghai, a bank organized under to the proposed activity as to require their provision in the laws of Hong Kong, is the 33rd largest banking a specialized form.6 organization in the world with total consolidated as- In this case, the record shows that banks do conduct sets of approximately $107.4 billion.2 Hongkong and the proposed activities. Banks have traditionally en- Shanghai, directly and indirectly, engages in a broad gaged in foreign exchange trading, including, more range of financial and commercial services worldwide. recently, trading in the options and futures markets. Marine Midland is the 29th largest commercial banking Banks historically have been the dominant particiorganization in the United States with total consoli- pants in the spot (immediate delivery) and forward dated assets of $26.9 billion.3 (delayed delivery) foreign exchange markets. Their The Board has permitted bank holding companies activity extends, moreover, to buying and selling under section 4(c)(8) of the BHC Act to engage in commodity exchange-traded futures contracts to foreign exchange forward, futures, options, and op- hedge the risk associated with their foreign exchange tions on futures transactions for the account of others holdings and the rate fluctuation risk involved in spot, or for hedging purposes.4 The Board has also previ- forward, and option contracts with customers. Banks ously determined that trading in foreign exchange spot also have been significant participants in the currency contracts for a company's own account is a permissi- options markets. The Comptroller of the Currency has ble nonbanking activity. The Long-Term Credit Bank determined that national banks may trade financial of Japan, Ltd., 74 FEDERAL RESERVE BULLETIN 573 options for their own account if they may trade in the (1988).5 However, the Board has not previously ap- underlying instrument.7 The Comptroller has authoproved foreign exchange forward, options, and op- rized the trading of foreign exchange options through tions on futures transactions for a company's own an operations subsidiary of a national bank, finding the account for other than hedging purposes under section activity incidental to the purchase and sale of foreign 4(c)(8) of the BHC Act. exchange.8 Accordingly, the Board concludes that the In order to approve an application submitted pursu- proposed activities of trading in the foreign exchange ant to section 4(c)(8) of the BHC Act, the Board is spot, forward, options, futures, and options on futures required to determine that the proposed activity is "so markets is closely related to banking for purposes of closely related to banking as to be a proper incident section 4(c)(8) of the BHC Act. thereto." 12 U.S.C. § 1843(c)(8). In considering whether a proposed new activity would be a proper B. Balance of Public Benefits and Adverse incident to banking, the Board is required to determine Effects that the performance of the proposed activity can reasonably be expected to produce benefits to the In order to approve this application, the Board is public that outweigh possible adverse effects. Id. required to determine that the performance of the proposed activities by Applicants, "can reasonably be A. Closely Related to Banking Analysis expected to produce benefits to the public, such as greater convenience, increased competition, or gains Based on guidelines established in the National Cou- in efficiency, that outweigh possible adverse effects, rier case, a particular activity may be found to meet such as undue concentration of resources, decreased the "closely related to banking" test if it is demon- or unfair competition, conflicts of interests, or unstrated that banks generally have in fact provided the sound banking practices." 12 U.S.C. § 1843(c)(8). 2. Data are as of December 31, 1987. 3. Data are as of June 30, 1988. 6. Nat'l Courier Ass'n v. Board of Governors, 516 F.2d 1229, 1237 4. See, e.g., Southern Bancorporation, 69 FEDERAL RESERVE (D.C. Cir. 1975). The Board may also consider any other factor that BULLETIN 224 (1983); Citicorp!Citicorp Futures Corporation, 70 FED- demonstrates a reasonable or close connection or relationship of the ERAL RESERVE BULLETIN 591 (1984) (options and options on futures) activity to banking. 49 Federal Register 794, 806 (1984); Securities ("Citicorp"); 12 C.F.R. 225.25(b)(18) (futures commission mer- Industry Ass'n v. Board of Governors, 104 S. Ct. 3003, 3005-06 n.5 chants). (1984). 5. See also European-American Bancorp., 63 FEDERAL RESERVE 7. OCC Interpretive Letter No. 260 (June 27, 1983), reprinted in BULLETIN 595 (1977) and Standard and Chartered Group, Ltd., 38 Fed. Banking L. Rep. (CCH) I 85,424, at 77,549. Federal Register 27,552 (1973) (involving trading foreign exchange for 8. OCC Release 83-36 (May 14, 1983), reprinted in [Current] Fed. the companies' own accounts). Banking L. Rep. (CCH) % 99,554, at 86,799. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 219 Consummation of the proposal may reasonably be subsidiary in pit arbitrage activities on several comexpected to result in public benefits that outweigh modities exchanges. Pit arbitrage involves the actions possible adverse effects. In particular, consummation of floor traders on commodities exchanges in taking of the proposal will permit CM&M, which is a primary advantage of temporary price differentials between dealer in U.S. government securities, to gather infor- futures contracts.9 The Board determined that this mation about the impact of foreign exchange fluctua- type of speculative trading in commodities for a holdtions on the market for U.S. government securities, ing company's own account would involve significant thereby permitting CM&M to compete more effec- financial risks and would represent an unsound banktively with other primary dealers who are not re- ing practice. stricted in their foreign exchange activities. The pro- Applicants will not engage in pit arbitrage activities. posal will also transfer from an insured depository Floor traders who will execute CM&M's transactions institution to a non-bank subsidiary a portion of an will not have any discretion to engage in transactions activity subject to market uncertainties. other than those directed by CM&M's staff. As a primary dealer, CM&M has broad experience CM&M's staff will have limited trading authority trading and monitoring futures and options positions, based upon established position limits as determined and its affiliated bank, Marine Midland Bank, N.A., by senior management. Accordingly, the activity prohas extensive experience in foreign exchange transac- posed by Applicants should not involve the type and tions, including futures and options. The resulting degree of financial risks associated with pit arbitrage familiarity with the operations and controls associated activities previously disapproved by the Board. with these derivative products should serve to ensure The Board also denied an application to act as a prudent operations, since CM&M already has the specialist in options on French francs traded on the operational, accounting and control systems in place Philadelphia Stock Exchange.10 CM&M will not ento properly monitor positions resulting from trading gage in market-making or specialist activities, and, as these contracts. noted above, will trade in foreign currency only within In this regard, the board of directors of Marine specified and regularly monitored limits. Midland has adopted, and periodically reviews and CM&M does not propose to advise third parties revises, written policies, position limits, internal re- regarding foreign exchange matters, and will not exeview procedures and financial controls for each of its cute any foreign exchange transactions for customers. bank and non-bank affiliates engaged in these activi- Accordingly, the Board believes that CM&M's proties. Management reviews such activities on a regular posed operations do not involve significant conflict of basis and the internal audit department reviews con- interest issues. tract positions regularly to ensure conformity with Based upon the foregoing and other considerations established policies and position limits. reflected in the record, and subject to the commit- The proposed activities would similarly be moni- ments made by Applicants, the Board has determined tored in connection with the overall risk management that the public benefits associated with this proposal and monitoring of CM&M's primary business activi- can reasonably be expected to outweigh possible adties. Applicants have indicated that the proposed verse effects, and that the balance of the public interforeign exchange activities would bear a reasonable est factors that the Board is required to consider under relationship to the size of CM&M's government secu- section 4(c)(8) of the BHC Act is favorable. Accordrities portfolio, that revenues to be generated from ingly, the application is hereby approved. This deterthese activities are expected to represent only a small mination is further subject to all of the conditions set percentage of CM&M's gross revenues, and that the forth in the Board's Regulation Y, including those in trading of foreign exchange products will comprise sections 225.4(d) and 225.23(b), and to the Board's only a small portion of CM&M's total trading volume. authority to require modification or termination of the activities of the holding company or any of its subsid- Moreover, as a primary dealer, CM&M is subject to iaries as the Board finds necessary to assure compliregular review and reporting requirements under the ance with the provisions and purposes of the BHC Act Federal Reserve Bank of New York. Accordingly, the Board finds that these controls and limitations should minimize any potential financial risks involved in the proposed activity. The Board has previously reviewed two applications 9. Futures market spread positions are taken by floor traders at their own discretion in anticipation of favorable price movements that will that involved trading by a bank holding company in subsequently enable traders to close out positions at a profit. See foreign exchange. The issue of trading for a holding Citicorp/Citicorp Futures Corporation, 68 FEDERAL RESERVE BULLE- TIN 776, 111 (1982). company's own account in commodities generally was 10. Compagnie Financiere de SueilBanque Indosuez, 72 FEDERAL raised by an application to engage through an FCM RESERVE BULLETIN 141 (1986). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

220 Federal Reserve Bulletin • March 1989 and the Board's regulations and orders issued there- By order of the Board of Governors, effective under, or to prevent evasion thereof. January 24, 1989. This transaction shall not be consummated later than three months after the effective date of this Voting for this action: Chairman Greenspan and Governors Order, unless such period is extended for good cause Johnson, Seger, Heller, Kelley, and LaWare. Absent and not by the Board, or by the Federal Reserve Bank of New voting: Governor Angell. York, pursuant to delegated authority. WILLIAM W. WILES APPLICATIONS APPROVED UNDER BANK HOLDING COMPANY ACT By Federal Reserve Banks Recent applications have been approved by the Federal Reserve Banks as listed below. Copies are available upon request to the Reserve Banks. Section 3 Reserve Effective Applicant Bank(s) Bank date Abess Properties, Ltd., City National Bancshares, Inc., Atlanta January 3, 1989 Miami, Florida Miami, Florida Advance Banc Shares, Inc., Wayne County Bank and Trust St. Louis January 6, 1989 Fairfield, Illinois Company, Fairfield, Illinois American Community Bank American State B^nk of Minneapolis December 29, 1988 Group, Inc., Bloomington, Minnetonka, Minnesota Bloomington, Minnesota National City Bank of Ridgedale, Minnetonka, Minnesota Athens Bancorp, Inc., Athens State Bank, Chicago January 13, 1988 Athens, Illinois Athens, Illinois Bank of Maryland Corp., Bank of Maryland - Carroll Richmond January 24, 1989 Towson, Maryland County, Westminster, Maryland Barnett Banks, Inc., FMB Financial Holdings, Inc., Atlanta December 27, 1988 Jacksonville, Florida Fayetteville, Georgia Baxter County Bancshares, Inc., Peoples Bank Corporation, St. Louis January 12, 1989 Mountain Home, Arkansas Mountain Home, Arkansas Bluestem Financial Corp., National Bank of Fairbury, Chicago January 5, 1989 Fairbury, Illinois Fairbury, Illinois Bradley County Financial Corp., Bank of Cleveland, Atlanta December 29, 1988 Cleveland, Tennessee Cleveland, Tennessee B/W Bancshares, Inc., The First National Bank of Cleveland January 11, 1989 Lexington, Kentucky Georgetown, Georgetown, Kentucky Canaan National Bancorp, Inc., The Canaan National Bank, Boston January 11, 1989 Canaan, Connecticut Canaan, Connecticut Citizens National Bancshares, Citizens National Bank of St. Louis January 20, 1989 Inc., Springfield, Springfield, Missouri Springfield, Missouri Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 221 Section 3—Continued Reserve Effective Applicant Bank(s) Bank date Cleveland Bancshares, Inc., Peoples State Bank of Cleveland, Minneapolis December 27, 1988 Cleveland, Minnesota Cleveland, Minnesota Collins Bankcorp, Inc., Collins State Bank, Chicago January 12, 1989 Collins, Wisconsin Collins, Wisconsin Conway BanCorp, Inc., The State Bank of Conway Kansas City December 21, 1988 Conway Springs, Kansas Springs, Conway Springs, Kansas Cordova Bancshares, Inc., Cordova Bank & Trust Co., St. Louis December 29, 1988 Memphis, Tennessee Cordova, Tennessee Equimark Corporation, Treasure Valley Bancorp, Cleveland January 25, 1989 Pittsburgh, Pennsylvania Fruitland, Idaho Equimanagement, Inc., Pittsburgh, Pennsylvania Fairfield County Bancorp, Inc., Greenwich Trust Company, New York January 20, 1989 Stamford, Connecticut Greenwich, Connecticut Farmers & Merchants Farmers and Merchants Bank of Kansas City January 13, 1989 Bancshares, Inc., Piedmont, Crescent, Oklahoma Piedmont, Oklahoma FBT Bancshares, Inc., First Bank & Trust Company, Atlanta January 20, 1989 Fayetteville, Georgia Fayetteville, Georgia Finacorp, Inc., First National Bank of Naples, Atlanta January 17, 1989 Naples, Florida Naples, Florida First Banc Securities, Inc., First Bank, National Association, Richmond December 22, 1988 Morgantown, West Virginia Uniontown, Pennsylvania First Bankers Trustshares, Inc., First Midwest Bank/M.C., St. Louis January 6, 1989 Quincy, Illinois National Association, Quincy, Illinois First Cherokee Bancshares, Inc., First National Bank of Cherokee, Atlanta December 27, 1988 Woodstock, Georgia Woodstock, Georgia First Colonial Bankshares DuPage County Bank of Glendale Chicago December 29, 1988 Corporation, Heights, Chicago, Illinois Glendale Heights, Illinois First Commercial Bancshares, Sterling Bank, Atlanta January 11, 1989 Inc., Montgomery, Alabama Jasper, Alabama First National Bancorp, The Peoples Bank of Forsyth Atlanta December 30, 1988 Gainesville, Georgia County, Cumming, Georgia First Oak Brook Bancshares, Liberty Bancorp, Inc., Chicago January 12, 1989 Inc., Broadview, Illinois Oak Brook, Illinois Friendship Bancorp, The Friendship State Bank, Chicago January 19, 1989 Friendship, Indiana Friendship, Indiana FSB of Victor, Inc., Farmers Savings Bank, Chicago January 5, 1989 Victor, Iowa Victor, Iowa Golden Triangle Bancshares, Citizens Bank, St. Louis January 19, 1989 Inc., New Liberty, Kentucky Carrollton, Kentucky Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

222 Federal Reserve Bulletin • March 1989 Section 3—Continued Reserve Effective AApppplliiccaanntt BBaannkk((ss)) Bank date Greenville Financial Corporation, Greenville National Bank, Richmond January 12, 1989 Greenville, South Carolina Greenville, South Carolina Gwinnett Bancorp, Inc., Gwinnett National Bank, Atlanta January 18, 1989 Duluth, Georgia Duluth, Georgia Harrogate Corporation, Commercial Bank Group, Inc., Atlanta January 11, 1989 Harrogate, Tennessee Middlesboro, Kentucky Hub Financial Corporation, City Bank, Dallas December 30, 1988 Lubbock, Texas Lubbock, Texas Indecorp, Inc., DREXEL HOLDING Chicago December 23, 1988 Chicago, Illinois COMPANY, Oak Park, Illinois Kersey Bancorp, Inc., Platteville State Bank, Kansas City January 4, 1989 Kersey, Colorado Platteville, Colorado Lakeland Bancshares, Inc., Bank of Lyle, Minneapolis January 25, 1989 Lyle, Minnesota Lyle, Minnesota Lakeside Bank Holding McKenzie County National Minneapolis January 13, 1989 Company, Bank, New Town, North Dakota Watford City, North Dakota Markesan Bancshares, Inc., Markesan State Bank, Chicago January 25, 1989 Markesan, Wisconsin Markesan, Wisconsin Minnesota State Bancshares, Minnesota State Bancorporation, Minneapolis January 5, 1989 Inc., Inc., St. Paul, Minnesota St. Paul, Minnesota Moore Financial Group, Community Bank of Renton, San Francisco December 30, 1988 Incorporated, Renton, Washington Boise, Idaho Napa Valley Bancorp, Suisun Valley Bank, San Francisco January 23, 1989 Napa, California Fairfield, California NEB Corporation, Mount Calvary State Bank, Chicago January 12, 1989 Fond du Lac, Wisconsin Mount Calvary, Wisconsin O.A.K. Financial Corporation, Byron Center State Bank, Chicago January 19, 1989 Byron Center, Michigan Byron Center, Michigan Old National Bancorp, First Service Bancshares, Inc., St. Louis December 21, 1988 Evansville, Indiana Greenville, Kentucky Omega Financial Corporation, Mifflinburg Bancorp, Inc., Philadelphia January 9, 1989 State College, Pennsylvania Mifflinburg, Pennsylvania PTB Corporation, Pioneer Trust Bank, N.A., San Francisco December 22, 1988 Salem, Oregon Salem, Oregon Scott Bancshares, Inc., The Hight State Bank, Chicago January 24, 1989 Bethany, Illinois Dalton City, Illinois Security National Corporation, Security National Bank of Atlanta December 30, 1988 Maitland, Florida Brevard, Melbourne, Florida Sequoyah County Bankshares, National Bank of Sallisaw, Kansas City January 4, 1989 Inc., Sallisaw, Oklahoma Sallisaw, Oklahoma SouthTrust Corporation, SouthTrust Bank of Charleston, Atlanta January 20, 1989 Birmingham, Alabama N.A., Charleston, South Carolina Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 223 Section 3—Continued Reserve Effective Applicant Bank(s) Bank date SouthTrust Corporation, SouthTrust Bank of Sarasota Atlanta January 20, 1989 Birmingham, Alabama County, Sarasota, Florida State National Bancshares, Inc. State National Bank, Kansas City December 30, 1988 Heavener, Oklahoma Heavener, Oklahoma The Continental Bank & Trust The Tracy Collins Bank & Trust San Francisco December 23, 1988 Company, Company, Salt Lake City, Utah Salt Lake City, Utah Union Planters Corporation, United Southern Corporation, St. Louis January 13, 1989 Memphis, Tennessee Clarksdale, Mississippi United Missouri Bancshares, Monroe City Bank, Kansas City January 24, 1989 Inc., Monroe City, Missouri Kansas City, Missouri W-CV Bancorp., Inc., Westby-Coon Valley State Bank, Chicago January 6, 1989 Westby, Wisconsin Westby, Wisconsin Whiting Bankshares, Inc., The State Bank of Lancaster, Kansas City December 23, 1988 Whiting, Kansas Lancaster, Kansas Section 4 Nonbanking Reserve Effective Applicant Activity/Company Bank date BayBanks, Inc., The New York Switch Boston January 24, 1989 Boston, Massachusetts Corporation, Hackensack, New Jersey First Bancorp, Inc., Custer County Insurance Minneapolis January 6, 1989 Huron, South Dakota Agency, Custer, South Dakota First National Bancshares of Oxford Insurance Agency, Inc., Kansas City December 30, 1988 Winfield, Inc., Oxford, Kansas Winfield, Kansas Fleet/Norstar Financial Group, Cary Grant & Company, Inc., Boston January 11, 1989 Inc., Chicago, Illinois Providence, Rhode Island Moore Financial Group, The Tracy Collins Bank & Trust San Francisco December 30, 1988 Incorporated, Company, Boise, Idaho Salt Lake City, Utah NBD Bancorp, Inc., Serve Corps Mortgage Corp., Chicago December 23, 1988 Detroit, Michigan Downers Grove, Illinois Norwest Corporation, Charter Finance Company, Minneapolis January 12, 1989 Minneapolis, Minnesota Cape Girardeau, Missouri Mid South Finance Company of Illinois, McClure, Illinois Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

224 Federal Reserve Bulletin • March 1989 Section 4—Continued Nonbanking Reserve Effective Applicant Activity/Company Bank date The Hongkong and Shanghai Kidde Credit Corporation, New York January 6, 1989 Banking Corporation, Hagerstown, Maryland Hong Kong Kellett N.V., Curacao, Netherlands Antilles HSBC Holdings B.V., Amsterdam, Netherlands Marine Midland Banks, Inc., Buffalo, New York The Tokai Bank, Limited Master Lease Corporation, San Francisco December 29, 1988 Naka-ku, Nagoya, Japan Bala Cynwyd, Pennsylvania Sections 3 and 4 Nonbanking Reserve Effective Applicant Activity/Company Bank date Comerica Incorporated, Alliance Financial Corporation, Chicago January 24, 1989 Detroit, Michigan Dearborn, Michigan AFC Acquisition Corporation, Detroit, Michigan Comerica Incorporated, Alliance Data Services, Inc., Chicago January 24, 1989 Detroit, Michigan Dearborn, Michigan APPLICATIONS APPROVED UNDER BANK MERGER ACT By Federal Reserve Banks Recent applications have been approved by the Federal Reserve Banks as listed below. Copies are available upon request to the Reserve Banks. Reserve Effective Applicant Bank(s) Bank date First Bank of Johnston City, First Bank of Carbondale, St. Louis December 22, 1988 Johnston City, Illinois Carbondale, Illinois Texas Bank, Texas Bank of Denton, Dallas January 9, 1989 Weatherford, Texas Denton, Texas The First Western Bank Custer, Rushmore State Bank, Minneapolis January 20, 1989 Custer, South Dakota Rapid City, South Dakota Legal Developments continued on next page. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 225 PENDING CASES INVOLVING THE BOARD OF GOVERNORS This list of pending cases does not include suits against the Federal Reserve Banks in which the Board of Governors is not named a party. American Land Title Association v. Board of Gover- National Association of Casualty and Surety Agents, nors, No. 88-1872 (D.C. Cir., filed December 16, et al., v. Board of Governors, Nos. 87-1644, 87- 1988). 1801, 88-1001 88-1206, 88-1245, 88-1270 (D.C. MCorp v. Board of Governors, No. CA3-88-2693-F Cir., filed Nov. 4, Dec. 21, 1987, Jan. 4, March 18, (N.D. Tex., filed October 28, 1988). March 30, April 7, 1988). White v. Board of Governors, No. CU-S-88-623-RDF Teichgraeber v. Board of Governors, No. 87-2505-0 (D. Nev., filed July 29, 1988). (D. Kan., filed Oct. 16, 1987). VanDyke v. Board of Governors, No. 88-5280 (8th Northeast Bancorp v. Board of Governors, No. 87- Cir., filed July 13, 1988). 1365 (D.C. Cir., filed July 31, 1987). Whitney v. United States, etal., No. CA3-88-1596-H National Association of Casualty & Insurance Agents (N.D. Tex., filed July 7, 1988). v. Board of Governors, Nos. 87-1354, 87-1355 (D.C. Baugh v. Board of Governors, No. C88-3037 (N.D. Cir., filed July 29, 1987). Iowa, filed April 8, 1988). The Chase Manhattan Corporation v. Board of Gov- Bonilla v. Board of Governors, No. 88-1464 (7th Cir., ernors, No. 87-1333 (D.C. Cir., filed July 20, 1987). filed March 11, 1988). Lewis v. Board of Governors, Nos. 87-3455, 87-3545 Cohen v. Board of Governors, No. 88-1061 (D.N.J., (11th Cir., filed June 25, Aug. 3, 1987). filed March 7, 1988). CBC, Inc. v. Board of Governors, No. 86-1001 (10th Stoddard v. Board of Governors, No. 88-1148 (D.C. Cir., filed Jan. 2, 1986). Cir., filed February 25, 1988). Independent Insurance Agents of America, Inc. v. Board of Governors, No. 87-1686 (D.C. Cir., filed November 19, 1987). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A1 Financial and Business Statistics CONTENTS WEEKLY REPORTING COMMERCIAL BANKS Assets and liabilities Domestic Financial Statistics A19 All reporting banks A20 Banks in New York City A21 Branches and agencies of foreign banks A22 Gross demand deposits—individuals, MONEY STOCK AND BANK CREDIT partnerships, and corporations A3 Reserves, money stock, liquid assets, and debt measures FINANCIAL MARKETS A4 Reserves of depository institutions, Reserve A23 Commercial paper and bankers dollar Bank credit acceptances outstanding A5 Reserves and borrowings—Depository A23 Prime rate charged by banks on short-term institutions business loans A6 Selected borrowings in immediately available A24 Interest rates—money and capital markets funds—Large member banks A25 Stock market—Selected statistics A26 Selected financial institutions—Selected assets and liabilities POLICY INSTRUMENTS A7 Federal Reserve Bank interest rates FEDERAL FINANCE A8 Reserve requirements of depository institutions A9 Federal Reserve open market transactions A28 Federal fiscal and financing operations A29 U.S. budget receipts and outlays A30 Federal debt subject to statutory limitation A30 Gross public debt of U.S. Treasury—Types FEDERAL RESERVE BANKS and ownership A10 Condition and Federal Reserve note statements A31 U.S. government securities dealers— All Maturity distribution of loan and security Transactions holdings A32 U.S. government securities dealers—Positions and financing A33 Federal and federally sponsored credit agencies—Debt outstanding MONETARY AND CREDIT AGGREGATES A12 Aggregate reserves of depository institutions and monetary base SECURITIES MARKETS AND CORPORATE FINANCE A13 Money stock, liquid assets, and debt measures A15 Bank debits and deposit turnover A34 New security issues—State and local A16 Loans and securities—All commercial banks governments and corporations A35 Open-end investment companies—Net sales and asset position A3 5 Corporate profits and their distribution COMMERCIAL BANKING INSTITUTIONS A35 Total nonfarm business expenditures on new A17 Major nondeposit funds plant and equipment A18 Assets and liabilities, last-Wednesday-of-month A36 Domestic finance companies—Assets and series liabilities and business credit Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

2 Federal Reserve Bulletin • March 1989 REAL ESTATE A56 U.S. reserve assets A56 Foreign official assets held at Federal Reserve A37 Mortgage markets Banks A38 Mortgage debt outstanding A57 Foreign branches of U.S. banks—Balance sheet data A59 Selected U.S. liabilities to foreign official CONSUMER INSTALLMENT CREDIT institutions A39 Total outstanding and net change A40 Terms REPORTED BY BANKS IN THE UNITED STATES A59 Liabilities to and claims on foreigners FLOW OF FUNDS A60 Liabilities to foreigners A62 Banks' own claims on foreigners A41 Funds raised in U.S. credit markets A63 Banks' own and domestic customers' claims on A43 Direct and indirect sources of funds to credit foreigners markets A63 Banks' own claims on unaffiliated foreigners A44 Summary of credit market debt outstanding A64 Claims on foreign countries—Combined A45 Summary of credit market claims, by holder domestic offices and foreign branches Domestic Nonfinancial Statistics REPORTED BY NONBANKING BUSINESS ENTERPRISES IN THE UNITED STATES SELECTED MEASURES A65 Liabilities to unaffiliated foreigners A46 Nonfinancial business activity—Selected A66 Claims on unaffiliated foreigners measures A47 Labor force, employment, and unemployment A48 Output, capacity, and capacity utilization SECURITIES HOLDINGS AND TRANSACTIONS A49 Industrial production—Indexes and gross value A67 Foreign transactions in securities A51 Housing and construction A68 Marketable U.S. Treasury bonds and notes— A52 Consumer and producer prices Foreign transactions A53 Gross national product and income A54 Personal income and saving INTEREST AND EXCHANGE RATES International Statistics A69 Discount rates of foreign central banks A69 Foreign short-term interest rates A70 Foreign exchange rates SUMMARY STATISTICS A55 U.S. international transactions—Summary A56 U.S. foreign trade A71 Guide to Tabular Presentation, Statistical Releases, and Special Tables Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Money Stock and Bank Credit A3 1.10 RESERVES, MONEY STOCK, LIQUID ASSETS, AND DEBT MEASURES Annual rates of change, seasonally adjusted in percent1 MMoonneettaarryy aanndd ccrreeddiitt aaggggrreeggaatteess 1988 1988 Ql Q2 Q3 Q4 Aug. Sept. Oct.' Nov.' Dec. Reserves of depository institutions2 1 Total 3.5 5.8 4.3 -.7 -2.9 -1.9 -.8 2.0 -1.5 2 Required 2.9 7.2 4.0 -1.4 -1.9 -2.3 -2.6 .8 .0 3 Nonborrowed 1.5 -6.5 2.5 5.3 1.1 6.4 10.3 -9.5 22.0 4 Monetary base 8.3 7.6 6.6 4.8 2.5 5.5 5.7 3.3 5.9 Concepts of money, liquid assets, and debt4 i Ml 3.8 6.2r 5.2 1.3 .2' -.2' 1.8 .3 6.2 6 M2 6.8 7.7 3.6 3.0 2.3 .C 1.3 6.9 4.9 7 M3 7.1 7.6' 5.7 4.4 3.8 1.7 4.7 6.8 4.4 8 L 6.8' 9.0' 7.2 n.a. 5.4 1.8 5.1 9.1 n.a. 9 Debt 8.2 8.7 8.6 8.4 9.2' 8.9' 7.6 8.8 n.a. Nontrgnsaction components 10 In M2y 7.8 8.2 3.1 3.6 3.1 1.4 1.2 9.2 4.4 11 In M3 only6 8.r 7.4 13.7 9.5 9.3' 4.1 17.3 6.3 2.5 Time and savings deposits Commercial banks 12 Savings' 6.3 11.0 8.9r 2.9 7.0' -2.2' -2.3 18.6 -6.9 13 Small-denomination time 13.6r 11.8 10.2 19.9 12.7' 19.8' 23.6 16.9 19.5 14 Large-denomination time ' 3.3' 6.7 21.4' 14.1 20^ 18.2' 16.8 3.3 11.5 Thrift institutions 15 Savings -2.4 6.5' 5.8 -4.0 5.4 -2.1' -9.1 -3.1 -4.2 16 Small-denomination time 21.2' 14.0 4.5 7.5 6.2' 10.1 8.7 6.4 2.2 17 Large-denomination time 13.6r 9.T 4.6' 10.3 -.4' 24.5' 13.7 3.2 -4.3 Debt components4 18 Federal 8.0 8.2 7.2 7.9 10.3 12.3 5.4 6.8 n.a. 19 Nonfederal 8.2 8.9 9.0' 8.6 8.8' 7.8' 8.3 9.4 n.a. 20 Total loans and securities at commercial banks 5.3 11.0 7.3 4.4 7.2 -.7 7.1 6.0 .1 1. Unless otherwise noted, rates of change are calculated from average institutions and money market funds. Also excludes all balances held by U.S. amounts outstanding in preceding month or quarter. commercial banks, money market funds (general purpose and broker-dealer), 2. Figures incorporate adjustments for discontinuities associated with the foreign governments and commercial banks, and the U.S. government. implementation of the Monetary Control Act and other regulatory changes to M3: M2 plus large-denomination time deposits and term RP liabilities (in reserve requirements. To adjust for discontinuities due to changes in reserve amounts of $100,000 or more) issued by commercial banks and thrift institutions, requirements on reservable nondeposit liabilities, the sum of such required term Eurodollars held by U.S. residents at foreign branches of U.S. banks reserves is subtracted from the actual series. Similarly, in adjusting for discon- worldwide and at all banking offices in the United Kingdom and Canada, and tinuities in the monetary base, required clearing balances and adjustments to balances in both taxable and tax-exempt, institution-only money market mutual compensate for float also are subtracted from the actual series. funds. Excludes amounts held by depository institutions, the U.S. government, 3. The monetary base not adjusted for discontinuities consists of total money market funds, and foreign banks and official institutions. Also subtracted reserves plus required clearing balances and adjustments to compensate for float is the estimated amount of overnight RPs and Eurodollars held by institution-only at Federal Reserve Banks plus the currency component of the money stock less money market mutual funds. the amount of vault cash holdings of thrift institutions that is included in the L: M3 plus the nonbank public holdings of U.S. savings bonds, short-term currency component of the money stock plus, for institutions not having required Treasury securities, commercial paper and bankers acceptances, net of money reserve balances, the excess of current vault cash over the amount applied to market mutual fund holdings of these assets. satisfy current reserve requirements. After the introduction of contemporaneous Debt: Debt of domestic nonfinancial sectors consists of outstanding credit reserve requirements (CRR), currency and vault cash figures are measured over market debt of the U.S. government, state and local governments, and private the weekly computation period ending Monday. nonfinancial sectors. Private debt consists of corporate bonds, mortgages, con- Before CRR, all components of the monetary base other than excess reserves sumer credit (including bank loans), other bank loans, commercial paper, bankers are seasonally adjusted as a whole, rather than by component, and excess acceptances, and other debt instruments. The source of data on domestic reserves are added on a not seasonally adjusted basis. After CRR, the seasonally nonfinancial debt is the Federal Reserve Board's flow of funds accounts. Debt adjusted series consists of seasonally adjusted total reserves, which include data are based on monthly averages. Growth rates for debt reflect adjustments for excess reserves on a not seasonally adjusted basis, plus the seasonally adjusted discontinuities over time in the levels of debt presented in other tables. currency component of the money stock plus the remaining items seasonally 5. Sum of overnight RPs and Eurodollars, money market fund balances adjusted as a whole. (general purpose and broker-dealer), MMDAs, and savings and small time 4. Composition of the money stock measures and debt is as follows: deposits less the estimated amount of demand deposits and vault cash held by Ml: (1) currency outside the Treasury, Federal Reserve Banks, and the vaults thrift institutions to service their time and savings deposit liabilities. of depository institutions; (2) travelers checks of nonbank issuers; (3) demand 6. Sum of large time deposits, term RPs, and Eurodollars of U.S. residents, deposits at all commercial banks other than those due to depository institutions, money market fund balances (institution-only), less a consolidation adjustment the U.S. government, and foreign banks and official institutions less cash items in that represents the estimated amount of overnight RPs and Eurodollars held by the process of collection and Federal Reserve float; and (4) other checkable institution-only money market mutual funds. deposits (OCD) consisting of negotiable order of withdrawal (NOW) and auto- 7. Excludes MMDAs. matic transfer service (ATS) accounts at depository institutions, credit union 8. Small-denomination time deposits—including retail RPs—are those issued share draft accounts, and demand deposits at thrift institutions. in amounts of less than $100,000. All IRA and Keogh accounts at commercial M2: Ml plus overnight (and continuing contract) repurchase agreements (RPs) banks and thrifts are subtracted from small time deposits. issued by all commercial banks and overnight Eurodollars issued to U.S. residents 9. Large-denomination time deposits are those issued in amounts of $100,000 by foreign branches of U.S. banks worldwide, Money Market Deposit Accounts or more, excluding those booked at international banking facilities. (MMDAs), savings and small-denomination time deposits (time deposits—includ- 10. Large-denomination time deposits at commercial banks less those held by ing retail RPs—in amounts of less than $100,000), and balances in both taxable and money market mutual funds, depository institutions, and foreign banks and tax-exempt general purpose and broker-dealer money market mutual funds. officii institutions. Excludes individual retirement accounts (IRA) and Keogh balances at depository 11. Changes calculated from figures shown in table 1.23. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A4 Domestic Nonfinancial Statistics • March 1989 1.11 RESERVES OF DEPOSITORY INSTITUTIONS AND RESERVE BANK CREDIT Millions of dollars Monthly averages of daily figures Weekly averages of daily figures for week ending FFFaaaccctttooorrrsss 1988 1988 Oct. Nov. Dec. Nov. 16 Nov. 23 Nov. 30 Dec. 7 Dec. 14 Dec. 21 Dec. 28 SSSSSUUUUUPPPPPPPPPPLLLLLYYYYYIIIIINNNNNGGGGG RRRRREEEEESSSSSEEEEERRRRRVVVVVEEEEE FFFFFUUUUUNNNNNDDDDDSSSSS 11111 RRRRReeeeessssseeeeerrrrrvvvvveeeee BBBBBaaaaannnnnkkkkk cccccrrrrreeeeedddddiiiiittttt 255,178 258,858 263,823 259,508 258,005 259,428 261,879 262,357 263,885 264,494 22222 UUUUU.....SSSSS..... gggggooooovvvvveeeeerrrrrnnnnnmmmmmeeeeennnnnttttt ssssseeeeecccccuuuuurrrrriiiiitttttiiiiieeeeesssss''''' 225,724 229,131 234,567 228,920 229,119 231,005 234,192 233,266 234,972 234,552 33333 BBBBBooooouuuuuggggghhhhhttttt ooooouuuuutttttrrrrriiiiiggggghhhhhttttt 225,210 228,390 233,606 228,482 229,119 229,259 234,192 232,906 234,480 232,881 44444 HHHHHeeeeelllllddddd uuuuunnnnndddddeeeeerrrrr rrrrreeeeepppppuuuuurrrrrccccchhhhhaaaaassssseeeee aaaaagggggrrrrreeeeeeeeeemmmmmeeeeennnnntttttsssss 514 741 961 438 0 1,746 0 360 492 1,671 55555 FFFFFeeeeedddddeeeeerrrrraaaaalllll aaaaagggggeeeeennnnncccccyyyyy ooooobbbbbllllliiiiigggggaaaaatttttiiiiiooooonnnnnsssss 7,482 7,332 7,565 7,229 7,102 7,730 7,102 7,414 7,117 7,918 66666 BBBBBooooouuuuuggggghhhhhttttt ooooouuuuutttttrrrrriiiiiggggghhhhhttttt 7,160 7,106 7,041 7,102 7,102 7,102 7,102 7,066 7,018 7,010 77777 HHHHHeeeeelllllddddd uuuuunnnnndddddeeeeerrrrr rrrrreeeeepppppuuuuurrrrrccccchhhhhaaaaassssseeeee aaaaagggggrrrrreeeeeeeeeemmmmmeeeeennnnntttttsssss,,,,, 322 226 524 127 0 628 0 348 99 908 88888 AAAAAcccccccccceeeeeppppptttttaaaaannnnnccccceeeeesssss 0 0 0 0 0 0 0 0 0 0 99999 LLLLLoooooaaaaannnnnsssss 2,337 2,883 1,749 3,500 2,757 2,367 2,016 2,012 1,332 1,362 1111100000 FFFFFllllloooooaaaaattttt 1,219 1,186 1,436 1,169 1,401 495 114 1,342 1,760 1,771 1111111111 OOOOOttttthhhhheeeeerrrrr FFFFFeeeeedddddeeeeerrrrraaaaalllll RRRRReeeeessssseeeeerrrrrvvvvveeeee aaaaasssssssssseeeeetttttsssss 18,416 18,327 18,507 18,690 17,626 17,831 18,455 18,323 18,704 18,891 1111122222 GGGGGooooolllllddddd ssssstttttoooooccccckkkkk22222 11,064 11,061 11,061 11,061 11,060 11,060 11,062 11,062 11,061 11,060 1111133333 SSSSSpppppeeeeeccccciiiiiaaaaalllll dddddrrrrraaaaawwwwwiiiiinnnnnggggg rrrrriiiiiggggghhhhhtttttsssss ccccceeeeerrrrrtttttiiiiifffffiiiiicccccaaaaattttteeeee aaaaaccccccccccooooouuuuunnnnnttttt............... 5,018 5,018 5,018 5,018 5,018 5,018 5,018 5,018 5,018 5,018 1111144444 TTTTTrrrrreeeeeaaaaasssssuuuuurrrrryyyyy cccccuuuuurrrrrrrrrreeeeennnnncccccyyyyy ooooouuuuutttttssssstttttaaaaannnnndddddiiiiinnnnnggggg 18,667 18,718 18,769 18,714 18,724 18,734 18,745 18,759 18,773 18,787 AAAAABBBBBSSSSSOOOOORRRRRBBBBBIIIIINNNNNGGGGG RRRRREEEEESSSSSEEEEERRRRRVVVVVEEEEE FFFFFUUUUUNNNNNDDDDDSSSSS 1111155555 CCCCCuuuuurrrrrrrrrreeeeennnnncccccyyyyy iiiiinnnnn ccccciiiiirrrrrcccccuuuuulllllaaaaatttttiiiiiooooonnnnn 237,156 240,343 244,540 240,626 240,657 242,179 242,451 243,390 244,312 246,598 1111166666 TTTTTrrrrreeeeeaaaaasssssuuuuurrrrryyyyy cccccaaaaassssshhhhh hhhhhooooollllldddddiiiiinnnnngggggsssss22222 398 401 399 404 401 399 398 404 398 397 DDDDDeeeeepppppooooosssssiiiiitttttsssss,,,,, ooooottttthhhhheeeeerrrrr ttttthhhhhaaaaannnnn rrrrreeeeessssseeeeerrrrrvvvvveeeee bbbbbaaaaalllllaaaaannnnnccccceeeeesssss,,,,, wwwwwiiiiittttthhhhh FFFFFeeeeedddddeeeeerrrrraaaaalllll RRRRReeeeessssseeeeerrrrrvvvvveeeee BBBBBaaaaannnnnkkkkksssss 1111177777 TTTTTrrrrreeeeeaaaaasssssuuuuurrrrryyyyy 5,954 5,268 5,364 5,209 5,288 5,137 4,306 4,807 6.462 4,500 1111188888 FFFFFooooorrrrreeeeeiiiiigggggnnnnn 240 246 248 233 289 262 284 237 270 183 1111199999 SSSSSeeeeerrrrrvvvvviiiiiccccceeeee-----rrrrreeeeelllllaaaaattttteeeeeddddd bbbbbaaaaalllllaaaaannnnnccccceeeeesssss aaaaannnnnddddd aaaaadddddjjjjjuuuuussssstttttmmmmmeeeeennnnntttttsssss 1,848 1,746 2,014 1,887 1,897 1,932 2,147 2,073 1,789 1,849 2222200000 OOOOOttttthhhhheeeeerrrrr ;;;;; 352 380 369 305 328 552 317 310 371 412 2222211111 OOOOOttttthhhhheeeeerrrrr FFFFFeeeeedddddeeeeerrrrraaaaalllll RRRRReeeeessssseeeeerrrrrvvvvveeeee llllliiiiiaaaaabbbbbiiiiillllliiiiitttttiiiiieeeeesssss aaaaannnnnddddd cccccaaaaapppppiiiiitttttaaaaalllll 7,617 7,955 8,040 7,751 7,717 8,042 8,074 7,930 8,130 8,120 2222222222 RRRRReeeeessssseeeeerrrrrvvvvveeeee bbbbbaaaaalllllaaaaannnnnccccceeeeesssss wwwwwiiiiittttthhhhh FFFFFeeeeedddddeeeeerrrrraaaaalllll RRRRReeeeessssseeeeerrrrrvvvvveeeee BBBBBaaaaannnnnkkkkksssss33333 36,361 37,316 37,697 37,886 36,231 35,738 38,725 38,044 37,004 37,299 End-of-month figures Wednesday figures 1988 1988 Oct. Nov. Dec. Nov. 16 Nov. 23 Nov. 30 Dec. 7 Dec. 14 Dec. 21 Dec. 28 SSSSSUUUUUPPPPPPPPPPLLLLLYYYYYIIIIINNNNNGGGGG RRRRREEEEESSSSSEEEEERRRRRVVVVVEEEEE FFFFFUUUUUNNNNNDDDDDSSSSS 2222233333 RRRRReeeeessssseeeeerrrrrvvvvveeeee BBBBBaaaaannnnnkkkkk cccccrrrrreeeeedddddiiiiittttt 257,722 261,971 269,748 259,803 255,616 261,971 262,932 261,481 263,705 269,055 2222244444 UUUUU.....SSSSS..... gggggooooovvvvveeeeerrrrrnnnnnmmmmmeeeeennnnnttttt ssssseeeeecccccuuuuurrrrriiiiitttttiiiiieeeeesssss11111 225,638 232,702 238,422 229,178 228,077 232,702 233,451 231,552 235,293 237,268 2222255555 BBBBBooooouuuuuggggghhhhhttttt ooooouuuuutttttrrrrriiiiiggggghhhhhttttt 223,041 228,701 233,662 229,178 228,077 228,701 233,451 231,313 234,839 233,562 2222266666 HHHHHeeeeelllllddddd uuuuunnnnndddddeeeeerrrrr rrrrreeeeepppppuuuuurrrrrccccchhhhhaaaaassssseeeee aaaaagggggrrrrreeeeeeeeeemmmmmeeeeennnnntttttsssss 2,597 4,001 4,760 0 0 4,001 0 239 454 3,706 2222277777 FFFFFeeeeedddddeeeeerrrrraaaaalllll aaaaagggggeeeeennnnncccccyyyyy ooooobbbbbllllliiiiigggggaaaaatttttiiiiiooooonnnnnsssss 8,767 8,384 9,067 7,102 7,102 8,384 7,102 7,092 7,052 8,402 2222288888 BBBBBooooouuuuuggggghhhhhttttt ooooouuuuutttttrrrrriiiiiggggghhhhhttttt 7,116 7,102 6,966 7,102 7,102 7,102 7,102 7,018 7.017 6,967 2222299999 HHHHHeeeeelllllddddd uuuuunnnnndddddeeeeerrrrr rrrrreeeeepppppuuuuurrrrrccccchhhhhaaaaassssseeeee aaaaagggggrrrrreeeeeeeeeemmmmmeeeeennnnntttttsssss 1,651 1,282 2,101 0 0 1,282 0 74 35 1,435 3333300000 AAAAAcccccccccceeeeeppppptttttaaaaannnnnccccceeeeesssss 0 0 0 0 0 0 0 0 0 0 3333311111 LLLLLoooooaaaaannnnnsssss 2,275 2,328 2,170 3,406 1,570 2,328 1,819 2,197 961 1,603 3333322222 FFFFFllllloooooaaaaattttt 1,690 389 1,286 3,057 920 389 2,314 2,058 1,695 2,691 3333333333 OOOOOttttthhhhheeeeerrrrr FFFFFeeeeedddddeeeeerrrrraaaaalllll RRRRReeeeessssseeeeerrrrrvvvvveeeee aaaaasssssssssseeeeetttttsssss 19,352 18,168 18,803 17,060 17,947 18,168 18,246 18,582 18,704 19,091 3333344444 GGGGGooooolllllddddd ssssstttttoooooccccckkkkk22222 11,062 11,059 11,060 11,060 11,061 11,059 11,062 11,061 11,060 11,060 3333355555 SSSSSpppppeeeeeccccciiiiiaaaaalllll dddddrrrrraaaaawwwwwiiiiinnnnnggggg rrrrriiiiiggggghhhhhtttttsssss ccccceeeeerrrrrtttttiiiiifffffiiiiicccccaaaaattttteeeee aaaaaccccccccccooooouuuuunnnnnttttt............... 5,018 5,018 5,018 5,018 5,018 5,018 5,018 5,018 5.018 5,018 3333366666 TTTTTrrrrreeeeeaaaaasssssuuuuurrrrryyyyy cccccuuuuurrrrrrrrrreeeeennnnncccccyyyyy ooooouuuuutttttssssstttttaaaaannnnndddddiiiiinnnnnggggg 18,693 18,743 18,799 18,723 18,733 18,743 18,757 18,771 18,785 18,799 AAAAABBBBBSSSSSOOOOORRRRRBBBBBIIIIINNNNNGGGGG RRRRREEEEESSSSSEEEEERRRRRVVVVVEEEEE FFFFFUUUUUNNNNNDDDDDSSSSS 3333377777 CCCCCuuuuurrrrrrrrrreeeeennnnncccccyyyyy iiiiinnnnn ccccciiiiirrrrrcccccuuuuulllllaaaaatttttiiiiiooooonnnnn 237,094 242,472 247,649 240,480 241,883 242,472 243,041 243,951 245,411 247,745 3333388888 TTTTTrrrrreeeeeaaaaasssssuuuuurrrrryyyyy cccccaaaaassssshhhhh hhhhhooooollllldddddiiiiinnnnngggggsssss22222 397 402 395 401 399 402 405 398 398 390 DDDDDeeeeepppppooooosssssiiiiitttttsssss,,,,, ooooottttthhhhheeeeerrrrr ttttthhhhhaaaaannnnn rrrrreeeeessssseeeeerrrrrvvvvveeeee bbbbbaaaaalllllaaaaannnnnccccceeeeesssss,,,,, wwwwwiiiiittttthhhhh FFFFFeeeeedddddeeeeerrrrraaaaalllll RRRRReeeeessssseeeeerrrrrvvvvveeeee BBBBBaaaaannnnnkkkkksssss 3333399999 TTTTTrrrrreeeeeaaaaasssssuuuuurrrrryyyyy 6,151 5,198 8,656 5,384 4,631 5,198 4,185 4,638 10,156 5,822 4444400000 FFFFFooooorrrrreeeeeiiiiigggggnnnnn 301 251 347 182 287 251 251 233 201 216 4444411111 SSSSSeeeeerrrrrvvvvviiiiiccccceeeee-----rrrrreeeeelllllaaaaattttteeeeeddddd bbbbbaaaaalllllaaaaannnnnccccceeeeesssss aaaaannnnnddddd aaaaadddddjjjjjuuuuussssstttttmmmmmeeeeennnnntttttsssss 1,662 1,613 1,605 1,648 1,613 1,613 1,612 1,612 1,594 1,594 4444422222 OOOOOttttthhhhheeeeerrrrr 348 398 548 354 259 398 345 300 318 556 4444433333 OOOOOttttthhhhheeeeerrrrr FFFFFeeeeedddddeeeeerrrrraaaaalllll RRRRReeeeessssseeeeerrrrrvvvvveeeee llllliiiiiaaaaabbbbbiiiiillllliiiiitttttiiiiieeeeesssss aaaaannnnnddddd cccccaaaaapppppiiiiitttttaaaaalllll 8,463 8,058 7,683 7,467 7,542 8,058 7,681 7,695 7,674 8,070 4444444444 RRRRReeeeessssseeeeerrrrrvvvvveeeee bbbbbaaaaalllllaaaaannnnnccccceeeeesssss wwwwwiiiiittttthhhhh FFFFFeeeeedddddeeeeerrrrraaaaalllll RRRRReeeeessssseeeeerrrrrvvvvveeeee BBBBBaaaaannnnnkkkkksssss33333 38,079 38,399 37,742 38,688 33,813 38,399 40,249 37,504 32,816 39,539 1. Includes securities loaned—fully guaranteed by U.S. government securities stock. Revised data not included in this table are available from the Division of pledged with Federal Reserve Banks—and excludes any securities sold and Research and Statistics, Banking Section. scheduled to be bought back under matched sale-purchase transactions. 3. Excludes required clearing balances and adjustments to compensate for 2. Revised for periods between October 1986 and April 1987. At times during float. this interval, outstanding gold certificates were inadvertently in excess of the gold NOTE. For amounts of currency and coin held as reserves, see table 1.12. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Money Stock and Bank Credit A5 1.12 RESERVES AND BORROWINGS Depository Institutions1 Millions of dollars Monthly averages9 RReesseerrvvee ccllaassssiiffiiccaattiioonn 1985 1986 1987 1988 Dec. Dec. Dec. June July Aug. Sept. Oct. Nov. Dec. 1 Reserve balances with Reserve Banks2 27,620 37,360 37,673 37,907 37,992 36,911 37,213 36,421 36,997 37,830 7 Total vault cash3 22,953 24,079 26,155 25,717 26,479 26,895 26,726 27,1% 26,746 27,197 3 Vault4 20,522 22,199 24,449 24,084 24,763 25,054 24,940 25,494 25,410 25,906 4 Surplus5.... 2,431 1,879 1,706 1,632 1,715 1,841 1,786 1,702 1,335 1,291 5 Total reserves 48,142 59,560 62,123 61,991 62,756 61,965 62,153 61,915 62,407 63,736 6 Required reserves ^ 47,085 58,191 61,094 61,103 61,749 61,012 61,181 60,853 61,287 62,6% 7 Excess reserve balances at Reserve Banks 1,058 1,369 1,029 888 1,007 953 972 1,062 1,119 1,040 8 Total borrowings at Reserve Banks 1,318 827 777 3,083 3,440 3,241 2,839 2,299 2,861 1,716 9 Seasonal borrowings at Reserve Banks 56 38 93 311 376 423 421 332 186 130 10 Extended credit at Reserve Banks8 499 303 483 2,554 2,538 2,653 2,059 1,781 2,322 1,244 Biweekly averages of daily figures for weeks ending 1988 Aug. 24 Sept. 7 Sept. 21 Oct. 5 Oct. 19 Nov. 2 Nov. 16 Nov. 30 Dec. 14 Dec. 28 11 Reserve balances with Reserve Banks2 36,422 37,273 37,625 36,527 36,678 36,078 38,143 35,981 37,106 38,724 12 Total vault cash3 27,400 26,351 26,787 26,924 27,612 26,825 26,221 27,259 27,927 27,904 13 Vault4., 25,513 24,555 25,054 25,063 25,806 25,309 25,022 25,814 26,525 26,653 14 Surplus5... 1,887 1,797 1,733 1,861 1,806 1,516 1,200 1,446 1,403 1,251 15 Total reserves6 61,935 61,827 62,679 61,590 62,484 61,387 63,165 61,795 63,631 65,376 16 Required reserves i 60,954 60,705 61,8% 60,442 61,509 60,260 61,562 61,160 62,550 64,228 17 Excess reserve balances at Reserve Banks 981 1,123 783 1,148 975 1,128 1,603 635 1,081 1,148 18 Total borrowings at Reserve Banks 3,245 3,093 2,971 2,438 2,204 2,353 3,233 2,562 1,347 2,048 19 Seasonal borrowings at Reserve Banks 431 432 408 433 337 285 180 178 137 94 20 Extended credit at Reserve Banks 2,671 2,482 2,075 1,704 1,681 1,931 2,838 1,863 968 1,208 1. These data also appear in the Board's H.3 (502) release. For address, see in- with Federal Reserve Banks, which exclude required clearing balances and side front cover. adjustments to compensate for float, plus vault cash used to satisfy reserve 2. Excludes required clearing balances and adjustments to compensate for requirements. Such vault cash consists of all vault cash held during the lagged float. computation period by institutions having required reserve balances at Federal 3. Dates refer to the maintenance periods in which the vault cash can be used Reserve Banks plus the amount of vault cash equal to required reserves during the to satisfy reserve requirements. Under contemporaneous reserve requirements, maintenance period at institutions having no required reserve balances. maintenance periods end 30 days after the lagged computation periods in which 7. Reserve balances with Federal Reserve Banks plus vault cash used to satisfy the balances are held. reserve requirements less required reserves. 4. Equal to all vault cash held during the lagged computation period by institutions having required reserve balances at Federal Reserve Banks plus the 8. Extended credit consists of borrowing at the discount window under the amount of vault cash equal to required reserves during the maintenance period at terms and conditions established for the extended credit program to help institutions having no required reserve balances. depository institutions deal with sustained liquidity pressures. Because there is 5. Total vault cash at institutions having no required reserve balances less the not the same need to repay such borrowing promptly as there is with traditional amount of vault cash equal to their required reserves during the maintenance short-term adjustment credit, the money market impact of extended credit is period. similar to that of nonborrowed reserves. 6. Total reserves not adjusted for discontinuities consist of reserve balances 9. Data are prorated monthly averages of biweekly averages. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A6 Domestic Nonfinancial Statistics • March 1989 1.13 SELECTED BORROWINGS IN IMMEDIATELY AVAILABLE FUNDS Large Member Banks1 Averages of daily figures, in millions of dollars 1988 week ending Monday MMaattuurriittyy aanndd ssoouurrccee Mar. 28 Apr. 4 Apr. 11 Apr. 18 Apr. 25 May 2 May 9 May 16 May 23 Federal funds purchased, repurchase agreements, and other selected borrowing in immediately available funds From commercial banks in the United States 1 For one day or under continuing contract 66,924 75,487 75,392 72,737 67,632 64,874 66,700 63,447 63,088 2 For all other maturities 10,781 10,964 10,407 10,492 10,738 10,683 10,857 11,208 9,894 From other depository institutions, foreign banks and foreign official institutions, and U.S. government agencies 3 For one day or under continuing contract 36,308 35,383 39,168 36,509 31,334 28,596 32,399 33,207 34,265 4 For all other maturities 6,270 7,084 7,176 7,543 8,080 9,081 8,146 8,205 7,486 Repurchase agreements on U.S. government and federal agency securities in immediately available funds Brokers and nonbank dealers in securities 5 For one day or under continuing contract 13,570 13,685 13,367 13,659 13,648 13,705 15,256 16,394 16,467 6 For all other maturities 13,645 15,050 14,082 14,777 16,544 17,892 17,652 17,513 15,092 All other customers 7 For one day or under continuing contract 25,634 24,025 25,567 25,461 24,743 25,708 24,271 25,333 25,536 8 For all other maturities 10,562 11,956 9,572 10,279 9,705 9,324 9,238 9,444 9,348 MEMO: Federal funds loans and resale agreements in immediately available funds in maturities of one day or under continuing contract 9 To commercial banks in the United States 31,377 36,189 33,848 34,565 34,092 34,774 34,480 32,915 31,181 10 To all other specified customers 14,184 12,487 13,170 13,321 13,252 14,708 14,540 13,607 13,154 1. Banks with assets of $1 billion or more as of Dec. 31, 1977. 2. Brokers and nonbank dealers in securities; other depository institutions; These data also appear in the Board's H.5 (507) release. For address, see inside foreign banks and official institutions; and United States government agencies, front cover. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Policy Instruments A7 1.14 FEDERAL RESERVE BANK INTEREST RATES Percent per year Current and previous levels Extended credit2 AAddjjuussttmmeenntt ccrreeddiitt aanndd FFFeeedddeeerrraaalll RRReeessseeerrrvvveee SSeeaassoonnaall ccrreeddiitt11 First 30 days of borrowing After 30 days of borrowing3 BBBaaannnkkk 1/2 O 7 n / 89 Eff d e a c te ti ve Pre ra v t i e o us 1/2 O 7 n / 89 Eff d e a c te ti ve Pre r v at i e o us 1/2 O 7 n / 89 Ef d fe a c te ti ve Pre r v at i e o us Effective date 6Vl Vi Boston 8/9/88 6 6 8/9/88 6 9.65 1/26/89 9.70 1/12/89 New York 8/9/88 8/9/88 1/26/89 1/12/89 Philadelphia 8/9/88 8/9/88 1/26/89 1/12/89 Cleveland 8/9/88 8/9/88 1/26/89 1/12/89 Richmond 8/9/88 8/9/88 1/26/89 1/12/89 Atlanta 8/9/88 8/9/88 1/26/89 1/12/89 Chicago 8/10/88 8/10/88 1/26/89 1/12/89 St. Louis 8/9/88 8/9/88 1/26/89 1/12/89 Minneapolis 8/9/88 8/9/88 1/26/89 1/12/89 Kansas City 8/9/88 8/9/88 1/26/89 1/12/89 Dallas Vi 8/11/88 6Vl 8/11/88 1/26/89 1/12/89 San Francisco ... 6 8/9/88 6 8/9/88 6 9.65 1/26/89 9.70 1/12/89 Range of rates for adjustment credit in recent years4 Range (or F.R. Range (or F.R. Range (or F.R. level)— Bank level)— Bank level)— Bank Effective date All F.R. of Effective date All F.R. of Effective date All F.R. of Banks N.Y. Banks N.Y. Banks N.Y. In effect Dec. 31, 1977. 6 V l 66 Vi 1980—July 28 10-11 10 11998844——AApprr.. 9 8Vi-9 9 1978—Jan. 9 6-6 Vl m 29 10 10 13 m9- 9 9 Vi 20 6 i Sept. 26 11 11 Nov. 21 m 8 May 11 6W-7 i Nov. 17 12 12 26 8Vi 12 I-71 V* m Dec. 5 12-13 13 Dec. 24 8 8 July 3 IV* IVi Aug. 2 1 1 0 73/4 7 7 W % 1981—May 5 8 13 1 - 4 1 4 1 1 4 4 11998855——MMaayy 2 2 4 0 7VIVi-8i IVi Sept. 22 8 8 Vi Nov. 2 13-14 13 1-lVi 1 Oct. 16 8-s8vVii 8m 6 13 13 1986—Mar. 7 1 Nov. 20 1 8[/>-9W 9 Vi Dec. 4 12 12 Apr. 2 1 1 0 6V 7 i -7 6 Vi 3 9Vi 9Vi 1982—July 20 im- V 12 i llVi July 11 6 6 Vi 23 11 llVi AAuugg.. 21 5V Vi-6: 55 Vl 1979—July 20 10 Vl 10 Aug. 2 11-1 lVi 11 22 5 Aug. 17 10-10 lOV Vi i 3 W11V i 11 5Vl-6 20 IOV^J 10 16 lOVi 11998877——SSeepptt.. 4 6 Sept. 19 10V5-11 11 27 10-10V5 10 11 6 6 21 11 11 30 10 10 6-6V2 6V1 Oct. 8 II-12 12 Oct. 12 9W V10l 9 Vi 11998888——AAuugg.. 9 Vi Vi 10 12 12 13 9 99V i 11 6 6 Nov. 22 9-9 Vi 9 Vl Vi 1980—Feb. 15 12-13 13 26 m9~ 9 9 In effect January 27, 1989 6 6 19 13 13 Dec. 14 Vi May 29 12-13 13 15 8> /Vi-9i 8 30 12 12 17 8 8Vi June 13 11-12 11 16 11 11 1. Adjustment credit is available on a short-term basis to help depository somewhat above rates on market sources of funds ordinarily will be charged, but institutions meet temporary needs for funds that cannot be met through reason- in no case will the rate charged be less than the basic discount rate plus 50 basis able alternative sources. After May 19, 1986, the highest rate established for loans points. The flexible rate is reestablished on the first business day of each to depository institutions may be charged on adjustment credit loans of unusual two-week reserve maintenance period. At the discretion of the Federal Reserve size that result from a major operating problem at the borrower's facility. Bank, the time period for which the basic discount rate is applied may be Seasonal credit is available to help smaller depository institutions meet regular, shortened. seasonal needs for funds that cannot be met through special industry lenders and 4. For earlier data, see the following publications of the Board of Governors: that arise from a combination of expected patterns of movement in their deposits Banking and Monetary Statistics, 1914-1941, and 1941-1970', Annual Statistical and loans. A temporary simplified seasonal program was established on Mar. 8, Digest, 1970-1979. 1985, and the interest rate was a fixed rate Vl percent above the rate on adjustment In 1980 and 1981, the Federal Reserve applied a surcharge to short-term credit. The program was reestablished on Feb. 18, 1986 and again on Jan. 28, adjustment credit borrowings by institutions with deposits of $500 million or more 1987; the rate may be either the same as that for adjustment credit or a fixed rate that had borrowed in successive weeks or in more than four weeks in a calendar Vi percent higher. quarter. A 3 percent surcharge was in effect from Mar. 17, 1980 through May 7, 2. Extended credit is available to depository institutions, when similar assist- 1980. There was no surcharge until Nov. 17,1980, when a 2 percent surcharge was ance is not reasonably available from other sources, when exceptional circum- adopted; the surcharge was subsequently raised to 3 percent on Dec. 5, 1980, and stances or practices involve only a particular institution or when an institution is to 4 percent on May 5, 1981. The surcharge was reduced to 3 percent effective experiencing difficulties adjusting to changing market conditions over a longer Sept. 22, 1981, and to 2 percent effective Oct. 12, 1981. As of Oct. 1, 1981 the period of time. formula for applying the surcharge was changed from a calendar quarter to a 3. For extended-credit loans outstanding more than 30 days, a flexible rate moving 13-week period. The surcharge was eliminated on Nov. 17, 1981. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A8 Domestic Nonfinancial Statistics • March 1989 1.15 RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS1 Percent of deposits Depository institution requirements after implementation of the Monetary Control Act Type of deposit, and deposit interval2 Effective date Net transaction accounts • $0 million-$41.5 million 12/20/88 More than $41.5 million ... 12/20/88 Nonpersonal time deposits5 By original maturity Less than 1 Vi years 10/6/83 IVi years or more 10/6/83 Eurocurrency liabilities All types 11/13/80 1. Reserve requirements in effect on Dec. 31, 1988. Required reserves must NOW accounts and other transaction accounts, the exemption applies only to be held in the form of deposits with Federal Reserve Banks or vault cash. such accounts that would be subject to a 3 percent reserve requirement. Nonmembers may maintain reserve balances with a Federal Reserve Bank 3. Transaction accounts include all deposits on which the account holder is indirectly on a pass-through basis with certain approved institutions. For permitted to make withdrawals by negotiable or transferable instruments, previous reserve requirements, see earlier editions of the Annual Report and of payment orders of withdrawal, and telephone and preauthorized transfers in the FEDERAL RESERVE BULLETIN. Under provisions of the Monetary Control excess of three per month for the purpose of making payments to third persons Act, depository institutions include commercial banks, mutual savings banks, or others. However, MMDAs and similar accounts subject to the rules that savings and loan associations, credit unions, agencies and branches of foreign permit no more than six preauthorized, automatic, or other transfers per month, banks, and Edge corporations. of which no more than three can be checks, are not transaction accounts (such 2. The Garn-St Germain Depository Institutions Act of 1982 (Public Law accounts are savings deposits subject to time deposit reserve requirements). 97-320) requires that $2 million of reservable liabilities (transaction accounts, 4. The Monetary Control Act of 1980 requires that the amount of transaction nonpersonal time deposits, and Eurocurrency liabilities) of each depository accounts against which the 3 percent reserve requirement applies be modified institution be subject to a zero percent reserve requirement. The Board is to annually by 80 percent of the percentage increase in transaction accounts held adjust the amount of reservable liabilities subject to this zero percent reserve by all depository institutions, determined as of June 30 each year. Effective requirement each year for the succeeding calendar year by 80 percent of the Dec. 20, 1988 for institutions reporting quarterly and Dec. 27, 1988 for percentage increase in the total reservable liabilities of all depository institu- institutions reporting weekly, the amount was increased from $40.5 million to tions, measured on an annual basis as of June 30. No corresponding adjustment $41.5 million. is to be made in the event of a decrease. On Dec. 20, 1988, the exemption was 5. In general, nonpersonal time deposits are time deposits, including savings raised from $3.2 million to $3.4 million. In determining the reserve requirements deposits, that are not transaction accounts and in which a beneficial interest is of depository institutions, the exemption shall apply in the following order: (1) held by a depositor that is not a natural person. Also included are certain net NOW accounts (NOW accounts less allowable deductions); (2) net other transferable time deposits held by natural persons and certain obligations issued transaction accounts; and (3) nonpersonal time deposits or Eurocurrency to depository institution offices located outside the United States. For details, liabilities starting with those with the highest reserve ratio. With respect to see section 204.2 of Regulation D. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Policy Instruments A9 1.17 FEDERAL RESERVE OPEN MARKET TRANSACTIONS1 Millions of dollars 1988 TTyyppee ooff ttrraannssaaccttiioonn 11998855 11998866 11998877 May June July Aug. Sept. Oct. Nov. U.S. TREASURY SECURITIES Outright transactions (excluding matched transactions) Treasury bills 1 Gross purchases 22,213' 22,604' 18,983 0 0 515 0 1,280 337755 33,,559999 2 Gross sales 4,118 2,502 6,051' 0 0 0 0 0 0 0 3 Exchange 0 0 0 0 0 0 0 0 0 0 4 Redemptions 3,500 1,000 9,029 0 0 0 0 0 0 0 Others within 1 year 5 Gross purchases 1,349 190 3,659' 0 0 0 0 0 00 00 6 Gross sales 0 0 300 0 0 0 0 0 0 0 7 Maturity shift 19,762' 18,674' 21,504' 1,646 1,384 1,033 3,932 1,368 1,669 5,264 8 Exchange -17,718r -20,18c -20,388 -4,324 -1,826 -87 -4,2% -1,646 -916 -2,391 9 Redemptions 0 0 70 0 0 0 0 0 0 0 1 to 5 years 10 Gross purchases 2,185 893 10,231 0 0 0 0 0 00 00 11 Gross sales 0 0 452 0 0 0 0 0 0 0 12 Maturity shift -17,459 -17,058 -17,975 -1,102 -1,384 -997 -1,821 -1,368 -1,544 -3,088 13 Exchange 13,854r 16,985' 18,938 3,724 1,826 0 3,971 1,646 639 2,091 5 to 10 years 14 Gross purchases 459r 236 2,441 0 0 0 0 0 00 00 15 Gross sales 100 0 0 0 0 0 0 0 0 0 16 Maturity shift -1,620 -3,529 -387 0 -36 -2,111 0 -125 -2,145 17 Exchange 2,184 2,050 950 400 0 87 325 0 276 300 Over 10 years 18 Gross purchases 293 158 1,858 0 0 0 0 0 0 00 19 Gross sales 0 0 0 0 0 0 0 0 0 0 20 Maturity shift -446' 0 0 -157 0 0 0 0 0 -31 21 Exchange 1,679 1,150 500 200 0 0 0 0 0 0 All maturities 22 Gross purchases 26,500r 24,081' 37,170' 0 0 515 0 1,280 375 3,599 23 Gross sales 4,218 2,502 6,803' 0 0 0 0 0 0 0 24 Redemptions 3,500 1,000 9,099 0 0 0 0 0 0 0 Matched transactions 25 Gross sales 866,175 927,999' 950,923 115,287 73,708 81,979 124,875 113,886 98,804 9988,,661188 26 Gross purchases 865,%7' 927,247 950,935 115,115 72,966 83,464 123,220 113,384 97,897 100,680 Repurchase agreements2 77 Gross purchases 134,253 170,431 314,621' 15,871 10,520 22,978 0 35,800 44,,771155 1177,,886677 28 Gross sales 132,351 160,268 324,666 23,478 5,334 28,164 0 30,191 7,727 16,463 29 Net change in U.S. government securities 20,477 29,988' 11,234' -7,779 4,444 -3,186 -1,655 6,386 -3,544 7,064 FEDERAL AGENCY OBLIGATIONS Outright transactions 30 Gross purchases 0 0 0 0 0 0 0 0 00 00 31 Gross sales 0 0 0 0 0 0 0 0 0 0 32 Redemptions 162 398 276 11 0 67 10 0 75 14 Repurchase agreements2 33 Gross purchases 22,184'' 31,142 80,353 4,771 5,083 12,355 0 12,107 22,,222233 44,,776633 34 Gross sales 20,879' 30,521' 81,350' 7,566 2,843 14,594 0 8,225 4,454 5,132 35 Net change in federal agency obligations 1,143' 222 -1,274 -2,807 2,239 -2,306 -10 3,882 -2,306 -383 36 Total net change in System Open Market Account 21,621 30,212' 9,961 -10,585 6,683 -5,492 -1,665 10,268 -5,850 66,,668811 1. Sales, redemptions, and negative figures reduce holdings of the System Open 2. In July 1984 the Open Market Trading Desk discontinued accepting bankers Market Account; all other figures increase such holdings. Details may not add to acceptances in repurchase agreements, totals because of rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A10 Domestic Nonfinancial Statistics • March 1989 1.18 FEDERAL RESERVE BANKS Condition and Federal Reserve Note Statements1 Millions of dollars Wednesday End of month AAAccccccooouuunnnttt 1988 1988 Nov. 30 Dec. 7 Dec. 14 Dec. 21 Dec. 28 Oct. Nov. Dec. Consolidated condition statement ASSETS 1 Gold certificate account 11,059 11,062 11,061 11,060 11,060 11,062 11,059 11,060 2 Special drawing rights certificate account 5,018 5,018 5,018 5,018 5,018 5,018 5,018 5,018 i Coin 404 408 429 424 408 434 404 339955 Loans 4 To depository institutions 2,328 1,819 2,197 961 1,603 2,275 2,328 2,170 5 Other 0 0 0 0 0 0 0 0 6 Acceptances held under repurchase agreements 0 0 0 0 0 0 0 0 Federal agency obligations 7 Bought outright 7,102 7,102 7,018 7,017 6,967 7,116 7,102 6,966 8 Held under repurchase agreements 1,282 0 74 35 11,,443355 11,,665511 11,,228822 22,,110011 U.S. Treasury securities Bought outright 9 Bills 111,724 113,006 110,793 114,060 112,782 106,064 111,724 112,782 10 Notes 87,484 90,515 90,590 90,850 90,850 87,484 87,484 90,950 11 Bonds 29,493 29,930 29,930 29,929 29,930 29,493 29,493 29,930 12 Total bought outright 232,701 233,451 231,313 234,839 233,562 223,041 228,701 233,662 13 Held under repurchase agreements 4,001 0 239 454 3,706 2,597 4,001 4,760 14 Total U.S. Treasury securities 232,702 233,451 231,552 235,293 237,268 225,638 232,702 238,422 15 Total loans and securities 243,414 242,372 240,841 243,306 247,273 236,680 243,414 249,659 16 Items in process of collection 6,121 8,979 8,699 9,010 11,136 6,785 6,121 8,739 17 Bank premises 743 745 745 745 746 740 743 750 Other assets 18 Denominated in foreign currencies3 9,565 9,431 9,445 9,448 9,455 10,423 9,565 9,129 19 All other4 8,096 8,070 8,392 8,511 8,890 8,189 8,0% 8,924 20 Total assets 284,420 286,085 284,630 287,522 293,986 279,331 284,420 293,674 LIABILITIES 21 Federal Reserve notes 222244,,553355 222255,,009977 222266,,000077 222277,,444488 222299,,774444 221199,,223322 222244,,553355 222299,,664400 Deposits 2222 To depository institutions 40,012 41,861 39,116 34,410 41,133 39,741 40,012 39,347 23 U.S. Treasury—General account 5,198 4,185 4,638 10,156 5,822 6,151 5,198 8,656 24 Foreign—Official accounts 251 251 233 201 216 301 251 347 25 Other 398 345 300 318 556 354 398 548 26 Total deposits 45,859 46,642 44,287 45,085 47,727 46,547 45,859 48,898 27 Deferred credit items 6,020 6,665 6,641 7,315 8,445 5,089 6,020 7,453 28 Other liabilities and accrued dividends5 3,221 3,082 3,098 3,032 3,487 3,051 3,221 3,457 29 Total liabilities 279,635 281,486 280,033 282,880 289,403 273,919 279,635 289,448 CAPITAL ACCOUNTS 30 Capital paid in 2,106 2,107 2,110 2,111 2,113 2,108 2,106 2,113 31 Surplus 2,047 2,047 2,047 2,047 2,047 2,047 2,047 2,113 32 Other capital accounts 632 445 440 484 423 1,257 632 0 33 Total liabilities and capital accounts 284,420 286,085 284,630 287,522 293,986 279,331 284,420 293,674 34 MEMO: Marketable U.S. Treasury securities held in custody for foreign and international accounts 235,131 235,013 234,513 235,598 232,926 231,250 235,131 234,733 Federal Reserve note statement 35 Federal Reserve notes outstanding issued to bank 270,577 272,202 273,231 272,580 271,942 267,461 270,577 271,492 36 LESS: Held by bank 46,042 47,105 47,224 45,132 42,198 48,229 46,042 41,852 37 Federal Reserve notes, net 224,535 225,097 226,007 227,448 229,744 219,232 224,535 228,640 Collateral held against notes net: 38 Gold certificate account 11,059 11,062 11,061 11,060 11,060 11,062 11,059 11,060 39 Special drawing rights certificate account 5,018 5,018 5,018 5,018 5,018 5,018 5,018 5,018 40 Other eligible assets 0 0 0 0 0 0 0 0 41 U.S. Treasury and agency securities 208,458 209,017 209,928 211,370 213,666 203,152 208,458 213,562 42 Total collateral 224,535 225,097 226,007 227,448 229,744 219,232 224,535 229,640 1. Some of these data also appear in the Board's H.4.1 (503) release. For 4. Includes special investment account at the Federal Reserve Bank of address, see inside front cover. Chicago in Treasury bills maturing within 90 days. 2. Includes securities loaned—fully guaranteed by U.S. Treasury securities 5. Includes exchange-translation account reflecting the monthly revaluation pledged with Federal Reserve Banks—and excludes securities sold and sched- at market exchange rates of foreign-exchange commitments. uled to be bought back under matched sale-purchase transactions. 3. Valued monthly at market exchange rates. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks All 1.19 FEDERAL RESERVE BANKS Maturity Distribution of Loan and Security Holdings Millions of dollars Wednesday End of month TTTyyypppeee aaannnddd mmmaaatttuuurrriiitttyyy gggrrrooouuupppiiinnngggsss 1988 1988 Nov. 30 Dec. 7 Dec. 14 Dec. 21 Dec. 28 Oct. 31 Nov. 30 Dec. 30 1 Loans—Total 2,328 1,819 2,197 961 1,602 2,275 2,328 2,170 2 Within 15 days 2,289 1,753 2,132 945 1,592 2,189 2,289 2,152 3 16 days to 90 days 39 66 65 16 10 86 39 18 4 91 days to 1 year 0 0 0 0 0 0 0 0 5 Acceptances—Total 0 0 0 0 0 0 0 0 6 Within 15 days 0 0 0 0 0 0 0 0 7 16 days to 90 days 0 0 0 0 0 0 0 0 8 91 days to 1 year 0 0 0 0 0 0 0 0 9 U.S. Treasury securities—Total 232,702 233,451 231,552 235,293 237,268 223,041 232,702 238,422 10 Within 15 days1 12,583 11,362 7,978 13,156 12,562 5,789 12,583 9,935 11 16 days to 90 days 53,659 52,234 53,691 54,978 54,917 51,917 53,659 58,448 12 91 days to 1 year 74,475 75,051 75,079 72,356 74,986 70,477 74,475 75,236 13 Over 1 year to 5 years 53,501 55,326 55,326 55,326 55,326 54,499 53,501 55,326 14 Over 5 years to 10 years 12,007 12,569 12,569 12,568 12,568 13,851 12,007 12,568 15 Over 10 years 26,477 26,909 26,909 26,909 26,909 26,508 26,477 26,909 16 Federal agency obligations—Total 8,384 7,102 7,092 7,052 8,402 7,116 8,384 9,067 17 Within 15 days1 1,557 84 153 283 1,605 228 1,557 2,271 18 16 days to 90 days 675 885 831 661 697 782 675 697 19 91 days to 1 year 1,457 1,438 1,483 1,483 1,492 1,492 1,457 1,492 20 Over 1 year to 5 years 3,413 3,413 3,368 3,368 3,419 3,322 3,413 3,418 21 Over 5 years to 10 years 1,093 1,093 1,068 1,068 1,000 1,103 1,093 1,000 22 Over 10 years 189 189 189 189 189 189 189 189 1. Holdings under repurchase agreements are classified as maturing within 15 days in accordance with maximum maturity of the agreements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A12 Domestic Nonfinancial Statistics • March 1989 1.20 AGGREGATE RESERVES OF DEPOSITORY INSTITUTIONS AND MONETARY BASE1 Billions of dollars, averages of daily figures 1988 IItteemm D 19 e 8 c 5 . D 19 e 8 c 6 . D 19 e 8 c 7 . D 19 e 8 c 8 . May June July Aug. Sept. Oct. Nov/ Dec. Seasonally adjusted ADJUSTED FOR . CHANGES IN RESERVE REQUIREMENTS2 1 Total reserves3 47.26 57.46 58.72 60.98 60.37 60.64 61.24 61.09 61.00 60.96 61.06 60.98 2 Nonborrowed reserves 45.94 56.63 57.94 59.26 57.79 57.55 57.80 57.85 58.16 58.66 58.19 59.26 3 Nonborrowed reserves plus extended credit4 46.44 56.93 58.43 60.50 59.89 60.11 60.34 60.50 60.21 60.44 60.52 60.50 4 Required reserves 46.20 56.09 57.69 59.94 59.32 59.75 60.23 60.14 60.02 59.89 59.94 59.94 5 Monetary base 218.26 240.80 257.93 275.82 266.92 268.31 270.63 271.20 272.45 273.73 274.47 275.82 Not seasonally adjusted 6 Total reserves3 48.27 58.70 60.02 62.42 59.45 60.68 61.47 60.59 60.65 60.54 61.15 62.42 7 Nonborrowed reserves 46.95 57.87 59.25 60.71 56.88 57.60 58.03 57.35 57.82 58.24 58.29 60.71 8 Nonborrowed reserves plus extended credit4 47.45 58.18 59.73 61.95 58.98 60.15 60.57 60.00 59.87 60.02 60.62 61.95 9 Required reserves 47.21 57.33 58.99 61.38 58.41 59.79 60.46 59.64 59.68 59.48 60.04 61.38 10 Monetary base 221.49 244.55 262.05 279.89 265.73 269.44 272.41 271.73 271.57 272.44 275.48 279.89 NOT ADJUSTED FOR . CHANGES IN RESERVE REQUIREMENTS6 11 Total reserves3 48.14 59.56 62.12 63.74 60.68 61.99 62.76 61.97 62.15 61.92 62.41 63.74 12 Nonborrowed reserves 46.82 58.73 61.35 62.02 58.10 58.91 59.32 58.72 59.31 59.62 59.55 62.02 13 Nonborrowed reserves plus extended credit 47.32r 59.04 61.83' 63.26 60.21r 61.46r 61.85r 61.38' 61.37r 61.40^ 61.87 63.26 14 Required reserves 47.08 58.19 61.09 62.70 59.64 61.10 61.75 61.01 61.18 60.85 61.29 62.70 15 Monetary base 223.53 247.71 266.16 283.18 268.90 272.65 ' 275.59 275.03 274.87 275.78 278.65 283.18 1. Latest monthly and biweekly figures are available from the Board's H.3(502) the terms and conditions established for the extended credit program to help statistical release. Historical data and estimates of the impact on required reserves depository institutions deal with sustained liquidity pressures. Because there is of changes in reserve requirements are available from the Monetary and Reserves not the same need to repay such borrowing promptly as there is with traditional Projections Section. Division of Monetary Affairs. Board of Governors of the short-term adjustment credit, the money market impact of extended credit is Federal Reserve System, Washington, D.C. 20551. similar to that of nonborrowed reserves. 2. Figures incorporate adjustments for discontinuities associated with the 5. The monetary base not adjusted for discontinuities consists of total reserves implementation of the Monetary Control Act and other regulatory changes to plus required clearing balances and adjustments to compensate for float at Federal reserve requirements. To adjust for discontinuities due to changes in reserve Reserve Banks and the currency component of the money stock plus, for instirequirements on reservable nondeposit liabilities, the sum of such required tutions not having required reserve balances, the excess of current vault cash over reserves is subtracted from the actual series. Similarly, in adjusting for disconti- the amount applied to satisfy current reserve requirements. Currency and vault nuities in the monetary base, required clearing balances and adjustments to cash figures are measured over the weekly computation period ending Monday. compensate for float also are subtracted from the actual series. The seasonally adjusted monetary base consists of seasonally adjusted total 3. Total reserves not adjusted for discontinuities consist of reserve balances reserves, which include excess reserves on a not seasonally adjusted basis, plus with Federal Reserve Banks, which exclude required clearing balances and the seasonally adjusted currency component of the money stock and the remainadjustments to compensate for float, plus vault cash held during the lagged ing items seasonally adjusted as a whole. computation period by institutions having required reserve balances at Federal 6. Reflects actual reserve requirements, including those on nondeposit liabili- Reserve Banks plus the amount of vault cash equal to required reserves during the ties, with no adjustments to eliminate the effects of discontinuities associated with maintenance period at institutions having no required reserve balances. implementation of the Monetary Control Act or other regulatory changes to 4. Extended credit consists of borrowing at the discount window under reserve requirements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary and Credit Aggregates A13 1.21 MONEY STOCK, LIQUID ASSETS, AND DEBT MEASURES1 Billions of dollars, averages of daily figures 1988 IItteemm22 D 19 e 8 c 5 . D 19 e 8 c 6 . D 19 e 8 c 7 . D 19 e 8 c 8 . Sept. Oct. Nov. Dec. Seasonally adjusted 1 Ml 620.1 725.4 750.8 787.8 782.4' 783.5 783.7 787.8 2 M2 2,562.6 2.807.7 2,901.0 3,067.4 3,034.2 3,037.5 3,054.9' 3,067.4 3 M3 3,196.4 3.490.8 3,664.4 3,904.8 3,853.6 3,868.8r 3,890.6' 3,904.8 4 L 3,825.9 4,134.3 4,329.3 n.a. 4,589.1 4,608.7' 4.643.6 n.a. 5 Debt 6,719.9 7,576.8 8,282.2 n.a. 8,821.7r 8,877.7' 8.942.7 n.a. Ml components 6 Currency3 167.7 180.4 196.5 211.7 208.5 209.5 210.3 211.7 7 Travelers checks* 5.9 6.5 7.1 7.5 7.3 7.4 7.5 7.5 8 Demand deposits 267.2 303.3 288.0 288.1 288.4 288.6 286.9 288.1 9 Other checkable deposits 179.2 235.2 259.3 280.5 278.2 278.0' 279.1 280.5 Nontransactions components 10 In M2 1,942.5 2,082.3 2,150.2 2,279.6 2,251.8 2,254.0' 2,271.2' 2,279.6 11 In M3 only8 633.8 683.1 763.4 837.4 819.4 831.3' 835.6' 837.4 Savings deposits9 12 Commercial Banks 124.8 155.5 178.2 191.8 190.3 189.9 192.9 191.8 13 Thrift institutions 176.6 215.2 236.0 239.8 243.1 241.3 240.7' 239.8 Small-denomination time deposits10 14 Commercial Banks 383.3 364.6 384.6 442.4 420.y 429.2 435.3 442.4 15 Thrift institutions 496.2 488.6 528.5 584.8 576.4 580.6' 583.7 584.8 Money market mutual funds 16 General purpose and broker-dealer. 176.5 208.0 221.1 240.8 230.8 231.2 238.0 240.8 17 Institution-only 64.5 84.4 89.6 87.6 83.7 84.6 87.4 87.6 Large-denomination time deposits" 18 Commercial Banks12 284.9 288.9 323.5 361.7 352.3 357.3' 358.3' 361.7 19 Thrift institutions 151.6 150.3 161.2 173.2 171.3 173.3 173.8' 173.2 Debt components 20 Federal debt 1,585.3 1,805.8 1,956.1 n.a. 2,079.6 2,089.0 2,100.9 n.a. 21 Nonfederal debt 5,134.6 5,771.1 6,326.0 n.a. 6,742.1' 6,788.8' 6,841.9 n.a. Not seasonally adjusted 22 Ml 633.5 740.6 765.9 803.2 779.8 781.0' 787.1 803.2 23 M2 2,573.9 2,821.4 2,914.7 3,081.1 3,029.4 3,039.0 3,058.7' 3,081.1 24 M3 3,211.0 3,507.6 3,681.0 3,921.4 3,852.2 3,869.1' 3,898.6' 3,921.4 25 L 3,841.4 4,152.3 4,347.4 n.a. 4,584.8 4,610.2' 4,654.6 n.a. 26 Debt 6,710.2' 7,561.0 8,264.2 n.a. 8,788.4' 8,843.7' 8,900.6 n.a. It Ml C u c r o r m en p c o y n 3 e nts 170.2 183.0 199.4 214.8 207.9 209.0 211.3 214.8 28 Travelers checks 5.5 6.0 6.5 6.9 7.9 7.5 7.1 6.9 29 Demand deposits 276.9 314.4 298.5 298.5 287.1 288.5' 289.7 298.5 30 Other checkable deposits6 180.9 237.3 261.6 282.9 276.9 276.1 279.0 282.9 Nontransactions components 3311 M2 1,940.3 2,080.7 2,148.8 2,278.0 2,249.6 2,258.C 2,271.6' 2,278.0 32 M3 only8 637.1 686.2 766.3 840.3 822.9' 830.1' 839.9' 840.3 Money market deposit accounts 33 Commercial Banks 332.8 379.6 358.2 351.8 353.7 352.3 353.4' 351.8 34 Thrift institutions 180.8 192.9 167.0 150.2 156.9 154.5' 152.5' 150.2 Savings deposits9 35 Commercial Banks 123.7 154.2 176.7 190.1 189.8 190.1 192.1' 190.1 36 Thrift institutions 174.8 212.9 233.3 237.0 242.3 242.0 239.5' 237.0 Small-denomination time deposits10 37 Commercial Banks 384.0 365.3 385.2 443.0 422.8 430.0 436.5 443.0 38 Thrift institutions 497.5 489.7 529.3 585.5 575.6 582.0 584.6' 585.5 Money market mutual funds 39 General purpose and broker-dealer 176.5 208.0 221.1 240.8 230.8 231.2 238.0 240.8 40 Institution-only 64.5 84.4 89.6 87.6 83.7 84.6 87.4 87.6 Large-denomination time deposits11 41 Commercial Banks12 285.4 289.1 323.6 361.8 352.4' 356.6' 358.3' 361.8 42 Thrift institutions 151.9 150.7 161.8 173.8 171.7 174.4 174.7' 173.8 Debt components 43 Federal debt 1,583.7 1,803.9 1,954.1 n.a. 2,056.3' 2,069.2 2,090.3 n.a. 44 Nonfederal debt 5,126.4 5,757.2' 6,310.1 n.a. 6,732.1' 6,774.5' 6,810.3 n.a. For notes see following page. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A14 Domestic Nonfinancial Statistics • March 1989 NOTES TO TABLE 1.21 1. Latest monthly and weekly figures are available from the Board's H.6 (508) Debt: Debt of domestic nonfinancial sectors consists of outstanding credit release. Historical data are available from the Monetary and Reserves Projection market debt of the U.S. government, state and local governments, and private section, Division of Monetary Affairs, Board of Governors of the Federal Reserve nonfinancial sectors. Private debt consists of corporate bonds, mortgages, con- System, Washington, D.C. 20551. sumer credit (including bank loans), other bank loans, commercial paper, bankers 2. Composition of the money stock measures and debt is as follows: acceptances, and other debt instruments. The source of data on domestic Ml: (1) currency outside the Treasury, Federal Reserve Banks, and the vaults nonfinancial debt is the Federal Reserve Board's flow of funds accounts. Debt of depository institutions; (2) travelers checks of nonbank issuers; (3) demand data are based on monthly averages. deposits at all commercial banks other than those due to depository institutions, 3. Currency outside the U.S. Treasury, Federal Reserve Banks, and vaults of the U.S. government, and foreign banks and official institutions less cash items in depository institutions. the process of collection and Federal Reserve float; and (4) other checkable 4. Outstanding amount of U.S. dollar-denominated travelers checks of nondeposits (OCD) consisting of negotiable order of withdrawal (NOW) and auto- bank issuers. Travelers checks issued by depository institutions are included in matic transfer service (ATS) accounts at depositor institutions, credit union demand deposits. share draft accounts, and demand deposits at thrift institutions. 5. Demand deposits at commercial banks and foreign-related institutions other M2: Ml plus overnight (and continuing contract) repurchase agreements (RPs) than those due to depository institutions, the U.S. government, and foreign banks issued by all commercial banks and overnight Eurodollars issued to U.S. residents and official institutions less cash items in the process of collection and Federal by foreign branches of U.S. banks worldwide, MMDAs, savings and small- Reserve float. denomination time deposits (time deposits—including retail RPs—in amounts of 6. Consists of NOW and ATS balances at all depository institutions, credit less than $100,000), and balances in both taxable and tax-exempt general purpose union share draft balances, and demand deposits at thrift institutions. and broker-dealer money market mutual funds. Excludes individual retirement 7. Sum of overnight RPs and overnight Eurodollars, money market fund accounts (IRA) and Keogh balances at depository institutions and money market balances (general purpose and broker-dealer), MMDAs, and savings and small funds. Also excludes all balances held by U.S. commercial banks, money market time deposits. funds (general purpose and broker-dealer), foreign governments and commercial 8. Sum of large time deposits, term RPs, and term Eurodollars of U.S. banks, and the U.S. government. residents, money market fund balances (institution-only), less the estimated M3: M2 plus large-denomination time deposits and term RP liabilities (in amount of overnight RPs and Eurodollars held by institution-only money market amounts of $100,000 or more) issued by commercial banks and thrift institutions, funds. term Eurodollars held by U.S. residents at foreign branches of U.S. banks 9. Savings deposits exclude MMDAs. worldwide and at all banking offices in the United Kingdom and Canada, and 10. Small-denomination time deposits—including retail RPs—are those issued balances in both taxable and tax-exempt, institution-only money market mutual in amounts of less than $100,000. All individual retirement accounts (IRA) and funds. Excludes amounts held by depository institutions, the U.S. government, Keogh accounts at commercial banks and thrifts are subtracted from small time money market funds, and foreign banks and official institutions. Also subtracted deposits. is the estimated amount of overnight RPs and Eurodollars held by institution-only 11. Large-denomination time deposits are those issued in amounts of $100,000 money market mutual funds. or more, excluding those booked at international banking facilities. L: M3 plus the nonbank public holdings of U.S. savings bonds, short-term 12. Large-denomination time deposits at commercial banks less those held by Treasury securities, commercial paper and bankers acceptances, net of money money market mutual funds, depository institutions, and foreign banks and market mutual fund holdings of these assets. official institutions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary and Credit Aggregates A15 1.22 BANK DEBITS AND DEPOSIT TURNOVER1 Debits are shown in billions of dollars, turnover as ratio of debits to deposits. Monthly data are at annual rates. 1988 BBaannkk ggrroouupp,, oorr ttyyppee ooff ccuussttoommeerr May June July Aug. Sept. Oct. DEBITS TO Seasonally adjusted Demand deposits3 1 All insured banks 156,091.8r 188,346.1/ 217,116.2' 224,052.3 230,198.8 224,512.7 228,898.2 227,617.3 235,980.5 2 Major New York City banks 70,585.8 91,397.3 104,496.3 109,714.7 111,402.1 107,336.7 110,150.0 108,741.8 114,876.4 3 Other banks 85,506.0" 96,948.8 112,619.8' 114,337.6 118,796.6 117,176.0 118,748.2 118,875.5 121,104.1 4 ATS-NOW accounts4 1,823.5 2,182.5 2,402.7 2,664.9 2,786.0 2,570.4 2,963.6 2,871.2 2,820.2 5 Savings deposits 384.9 403.5 526.5 574.7 597.1 583.3 609.6 578.6 521.3 DEPOSIT TURNOVER Demand deposits3 6 All insured banks 500.3 556.5 612.1 630.9 649.8 622.7 645.8 651.0 659.7 7 Major New York City banks 2,196.9 2,498.2 2,670.6 2,881.3 2,911.0 2,789.6 2,939.3 3,102.4 3,086.1 8 Other banks 305.7 321.2 357.0 360.6 376.0 363.8 374.6 377.9 377.9 9 ATS-NOW accounts4 15.8 15.6 13.8 14.2 14.8 13.5 15.6 15.1 14.8 10 Savings deposits 3.2 3.0 3.1 3.1 3.2 2.9 3.2 3.1 2.8 DEBITS TO Not seasonally adjusted Demand deposits3 11 All insured banks 156,052.5r 188,506.7' 217,125.1' 222,685.5 241,133.2 217,350.7 237,459.0 224,089.2 227,485.2 12 Major New York City banks 70,559.2 91,500. V 104,518.8' 106,335.6 117,287.7 103,561.2 112,654.6 107,115.7 111,019.4 13 Other banks 85,493.2r 97,006.7r 112,606.2' 116,349.9 123,845.5 113,789.6 124,804.4 116,973.5 116,465.8 14 ATS-NOW accounts4 1,826.4 2,184.6 2,404.8 2,601.3 2,851.4 2,536.6 2,828.0 2,951.1 2,805.4 15 MMDA 1,223.9 1,609.4 1,954.2 2,341.0 2,557.1 2,399.0 2,530.0 2,409.4 2,325.8 16 Savings deposits 385.3 404.1 526.8 566.4 598.3 566.2 615.9 570.1 540.9 DEPOSIT TURNOVER Demand deposits3 17 All insured banks 499.9 556.7 612.3 638.6 679.5 599.9 681.6 642.9 39.8 18 Major New York City banks 2,196.3 2,499.1 2,674.9 2,895.6 3,121.4 2,660.7 3,170.3 3,046.4 3,059.1 19 Other banks 305.6 321.2 356.9 372.9 390.3 351.9 398.9 373.3 364.8 20 ATS-NOW accounts4 15.8 15.6 13.8 14.1 15.2 13.4 15.1 15.6 14.9 21 MMDA 4.0 4.5 5.3 6.6 7.2 6.7 7.2 6.9 6.7 22 Savings deposits5 3.2 3.0 3.1 3.1 3.2 3.0 3.3 3.1 2.9 1. Historical tables containing revised data for earlier periods may be obtained of states and political subdivisions. from the Monetary and Reserves Projections Section, Division of Monetary 4. Accounts authorized for negotiable orders of withdrawal (NOW) and ac- Affairs, Board of Governors of the Federal Reserve System, Washington, D.C. counts authorized for automatic transfer to demand deposits (ATS). ATS data are 20551. available beginning December 1978. These data also appear on the Board's G.6 (406) release. For address, see inside 5. Excludes ATS and NOW accounts, MMDA and special club accounts, such front cover. as Christmas and vacation clubs. 2. Annual averages of monthly figures. 6. Money market deposit accounts. 3. Represents accounts of individuals, partnerships, and corporations and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A16 Domestic Nonfinancial Statistics • March 1989 1.23 LOANS AND SECURITIES All Commercial Banks1 Billions of dollars; averages of Wednesday figures 1988 Category Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Seasonally adjusted 1 Total loans and securities2 2,244.8 2,264.1 2,281.3 2,304.7 2,328.5 2,348.4 2,360.8 2,374.9 2,373.6 2,387.5 2,398.1 2,398.4 2 U.S. government securities 336.4 336.4 340.2 343.8 346.5 350.5 348.0 350.5 352.5 355.1 356.8 360.9 3 Other securities 192.0 193.7 195.7 196.6 196.1 196.5 196.8 196.4 194.2 195.4 194.8 190.9 4 Total loans and leases2 1,716.5 1,734.0 1,745.4 1,764.3 1,786.0 1,801.5 1,815.9 1,827.9 1,826.8 1,836.9 1,846.5 1,846.6 5 Commercial and industrial ..... 565.2 569.3 568.6 578.1 586.3 592.4 598.3 599.4 597.1 600.9 599.2 600.0 6 Bankers acceptances held3... 4.3 4.3 4.7 4.6 4.4 4.4 4.4 4.6 4.5 4.2 4.2 3.9 7 Other commercial and industrial 560.9 564.9 564.0 573.5 582.0 588.1 593.9 594.7 592.7 596.7 595.0 596.1 8 U.S. addressees 552.2 556.3 555.8 565.5 575.1 581.3 587.4 588.4 586.4 590.6 589.5 589.6 9 Non-U.S. addressees 8.7 8.7 8.2 8.1 6.9 6.8 6.5 6.3 6.3 6.1 5.5 6.5 10 Real estate 593.7 599.2 604.9 611.3 618.6 625.0 631.4 638.7 644.7 652.0 659.2 663.2 11 Individual 329.8 333.0 337.0 340.4 342.8 344.4 345.3 347.0 349.1 349.6 350.8 353.6 12 Security 36.5 42.1 41.2 39.5 39.8 39.4 38.6 40.1 36.3 38.4 37.6 36.9 13 Nonbank financial institutions 31.4 31.8 31.2 30.4 30.9 30.6 31.0 30.8 29.9 29.8 29.8 29.8 14 Agricultural 29.6 29.5 29.3 29.4 29.6 29.6' 29.6 29.5 29.5' 29.7 30.3 30.8 15 State and political subdivisions 51.7r 5i.<y 50.1' 49.6' 49.4' 49.2' 48^ 48.3' 48.1' 48^ 48.2 46.7 16 Foreign banks 7.6 7.4 7.8 8.3 7.r 7.9 8.2 8.1' 7.3' 7.6 8.1 7.3 17 Foreign official institutions 5.4 5.1 5.1 5.1 5.1 5.0 5.0 5.2' 5.2 5.1 5.4 5.6 18 Lease financing receivables 25.1 25.3 25.4 25.7 26.0 26.5 27.2 27.3 27.7 28.1 28.1 28.1 19 All other loans 40.4' 40.4' 44.8' 46.5' 49.5' 51.4' 52.3' 53.6' si.r 46.8' 50.0 44.7 Not seasonally adjusted 20 Total loans and securities2 2,257.5 2,268.8 2,281.6 2,305.9 2,325.2 2,344.6 2,350.7 2,363.5 2,370.3 2,382.0 2,397.3 2,416.4 21 U.S. government securities 337.9 341.5 342.0 343.4 344.9 347.0 347.1 350.5 352.7 352.8 356.9 360.8 22 Other securities 194.6 194.4 195.3 196.2 196.1 196.0 195.5 196.3 194.3 194.3 194.1 191.5 23 Total loans and leases 1,724.9 1,732.9 1,744.2 1,766.3 1,784.2 1,801.6 1,808.1 1,816.7 1,823.3 1,834.9 1,846.2 1,864.1 24 Commercial and industrial ..... 564.9 568.5 573.8 582.1 588.8 594.0 595.4 594.2 593.7 596.4 598.1 604.5 25 Bankers acceptances held ... 4.1 4.3 4.7 4.5 4.4 4.5 4.4 44..66 44..55 44..11 44..22 44..00 26 Other commercial and industrial 560.7 564.2 569.1 577.6 584.4 589.5 591.0 589.6 589.1 592.3 593.9 600.5 2277 U.S. addressees 552.8 556.0 561.2 569.7 577.3 582.6 584.0 582.9 582.5 586.0 587.7 594.2 28 Non-U.S. addressees 8.0 8.2 7.9 7.9 7.1 6.9 7.0 6.7 6.6 6.2 6.2 6.3 29 Real estate 594.1 598.5 604.1 610.3 618.1 624.8 631.5 638.7 645.5 652.7 659.7 664.2 30 Individual 333.3 332.4 333.9 337.4 339.9 342.3 343.8 347.1 350.7 351.3 352.7 358.2 31 Security 37.3 40.5 40.6 41.2 40.4 40.8 38.2 3388..33 3355..33 3377..11 3377..66 3388..77 32 Nonbank financial institutions 31.6 30.8 30.3 30.3 30.7 30.6 30.8 30.7 30.2 29.9 30.2 30.9 33 Agricultural 28.9 28.5 28.3 28.6 29.3 29.9 30.3 30.4' 3300..55'' 3300..66'' 3300..55 3300..55 34 State and political subdivisions 53.5' 52.2' 51.0r so.o' 49.3' 48.9' 48.2' 47.7' 47.3' 48.1' 47.3 46.9 35 Foreign banks 7.8 7.6 7.7 7.9 7.7 7.8' 8.2 7.9 7.5' 7.7' 8.1 7.6 36 Foreign official institutions 5.4' 5.1 5.1 5.1 5.1 5.<K 5.0 5.2 5.2 5.1 5.4 5.6 37 Lease financing receivables 25.2 25.4 25.6 25.9 26.1 26.7 27.2 27.2 27.5 27.6 27.8 28.1 38 All other loans 42.9 43.3' 43^ 47.5' 48.9' 50^ 49.5' 49.3' 49.7' 48.3' 49.0 48.9 1. These data also appear in the Board's G.7 (407) release. For address, see 3. Includes nonfinancial commercial paper held. inside front cover. 4. United States includes the 50 states and the District of Columbia. 2. Excludes loans to commercial banks in the United States. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Commercial Banking Institutions A17 1.24 MAJOR NONDEPOSIT FUNDS OF COMMERCIAL BANKS' Monthly averages, billions of dollars 1988 Source Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Seasonally adjusted 2 1 N To et t a b l a n la o n n c d e e s p o d s u i e t f to u n r d el s a 2 ted foreign offices3 <. .. . . . 19 8 6 . . 7 4 19 2 5 . . 7 0 1 - 8 6 9 .5 .8 20 4 4 . . 5 1 20 6 9 . . 5 9 21 8 3 . . 8 3 21 1 5 4 . . 2 0 2 2 2 1 2 . . 8 4 21 8 0 . . 9 4 21 4 0 . . 3 5 21 9 7 . . 9 8 21 6 2 . . 7 7 3 Borrowings from other than commercial banks in United States4 187.7 192.3 196.3 199.7 203.4 204.4 201.2 200.6 201.5 206.2 207.8 206.1 4 Domestically chartered banks 159.6 164.4 166.7 167.6 170.8 170.6 166.8 166.1 165.6 168.0 168.5 167.1 5 Foreign-related banks 28.1 27.9 29.6 32.1 32.6 33.8 34.4 34.5 35.9 38.2 39.3 38.9 Not seasonally adjusted 6 Total nondeposit funds2 195.9 200.2 199.2 206.4 218.2 215.8 210.6 218.5 206.1 205.4 213.8 207.2 7 Net balances due to related foreign offices3... 9.1 3.1 -3.1 2.0 9.7 8.7 10.8 18.6 9.1 4.9 10.2 9.1 8 Domestically chartered banks -16.5 -20.2 -25.3 -22.2 -16.5 -16.3 -14.0 -7.3 -15.7 -20.6 -19.2 -20.7 9 Foreign-related banks 25.6 23.3 22.1 24.2 26.2 25.0 24.8 25.9 24.7 25.5 29.4 29.8 10 Borrowings from other than commercial banks in United States4 186.7 197.1 202.4 204.4 208.4 207.1 199.8 199.9 197.1 200.5 203.6 198.0 11 Domestically chartered banks 157.8 168.2 171.5 171.6 175.4 171.9 164.9 165.6 161.8 163.7 167.2 161.1 12 Federal funds and security RP borrowings 155.0 166.2 168.1 166.8 170.8 167.1 159.5 160.6 157.4 159.6 162.6 157.6 13 Other6 2.8 2.0 3.4 4.8 4.6 4.8 5.4 5.0 4.4 4.1 4.6 3.5 14 Foreign-related banks 28.9 28.8 30.8 32.8 33.0 35.2 34.9 34.2 35.3 36.8 36.3 36.9 MEMO Gross large time deposits 15 Seasonally adjusted 389.1 394.4 396.1 394.0 396.4 400.5 406.8 413.6 419.7 423.7 424.0 428.2 16 Not seasonally adjusted 390.1 394.7 398.2 393.9 397.1 399.8 404.0 412.9 419.7 423.0 424.1 428.3 U.S. Treasury demand balances at commercial banks8 17 Seasonally adjusted 18.6 22.6 24.9 21.8 24.7 22.0 20.2 15.8 24.5 30.7 22.2 26.8 18 Not seasonally adjusted 24.9 28.2 22.3 21.7 30.4 21.0 22.0 11.9 24.6 27.7 16.3 22.9 1. The nondeposit funds series that is published regularly in this table has been 4. Other borrowings are borrowings through any instrument, such as a promrevised starting with this issue. For details see the Announcements section, issory note or due bill, given for the purpose of borrowing money for the banking p. 151-152. business. This includes borrowings from Federal Reserve Banks and from foreign Commercial banks are those in the 50 states and the District of Columbia with banks, term federal funds, loan RPs, and sales of participations in pooled loans. national or state charters plus agencies and branches of foreign banks. New York 5. Based on daily average data reported weekly by approximately 120 large investment companies majority owned by foreign banks, and Edge Act corpora- banks and quarterly or annual data reported by other banks. tions owned by domestically chartered and foreign banks. 6. Figures are partly daily averages and partly averages of Wednesday data. These data also appear in the Board's G.10 (411) release. For address, see 7. Time deposits in denominations of $100,000 or more. Estimated averages of inside front cover. daily data. 2. Includes federal funds, RPs, and other borrowing from nonbanks and net 8. U.S. Treasury demand deposits and Treasury tax-and-loan notes at combalances due to related foreign offices. mercial banks. Averages of daily data. 3. Reflects net positions of U.S. chartered banks, Edge Act corporations, and U.S. branches and agencies of foreign banks with related foreign offices plus net positions with own IBFs. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A18 Domestic Nonfinancial Statistics • March 1989 1.25 ASSETS AND LIABILITIES OF COMMERCIAL BANKING INSTITUTIONS Last-Wednesday-of-Month Series1 Billions of dollars 1988 Account Feb. Apr. May July Aug. Sept. Oct. ALL COMMERCIAL BANKING INSTITUTIONS^ 1 Loans and securities 2,427.7 2,450.0 2.466.8 2.473.2 2,511.7 2,509.0 2.523.3 2.522.7 2,537.9 2,575.6' 2,586.5 2 Investment securities 514.9 517.7 519.7 521.6 518.6 521.6 525.4 525.9 523.6 529.6 529.8 3 U.S. government securities 325.0 325.7 328.8 330.7 328.0 331.6 334.6 336.5 334.4 340.4 343.9 4 Other 190.0 192.0 190.9 191.0 190.6 190.0 190.8 189.4 189.2 189.2 185.9 6 5 T T o ra ta d l i n l g o a a n c s c ount assets 1,8 2 9 1 0 . . 9 9 1,9 2 1 0 2 . . 3 0 1,92 1 7 9 . . 5 6 1.9 2 3 0 1 . . 3 3 1,9 2 7 2 1 . .0 1 1,9 2 6 3 3. . 5 9 1,9 2 7 2 5 . .1 8 1,9 2 7 1 5 . . 3 5 1,9 2 8 4 9 . . 9 4 2,02241..82 ' 2.03 1 7 9 . . 5 2 7 Interbank loans 161.4 159.5 158.0 152.3 163.7 158.7 154.7 151.2 158.5 167.7 163.9 8 Loans excluding interbank 1,729.5 1.752.4 1.769.5 1.779.1 1,807.3 1,804.8 1.820.4 1,824.3 1,830.9 l,853.5r 1.873.6 9 Commercial and industrial 568.9 576.2 583.4 587.8 598.2 592.4 592.8 593.8 593.8 600.0' 608.7 10 Real estate 599.2 607.3 612.5 619.7 627.5 633.1 641.8 647.8 654.1 661.6 666.6 11 Individual 332.7 334.8 339.1 340.0 343.2 344.1 349.2 351.5 351.9 354.1 360.5 12 All other 228.7 234.1 234.6 231.7 238.4 235.2 236.6 231.2 231.1 237.8 237.9 13 Total cash assets 207.4 211.2 214.3 200.3 221.4 217.0 221.8 215.9 208.5 235.4' 245.9 14 Reserves with Federal Reserve Banks 32.7 32.0 32.2 26.0 34.4 30.7 33.0 31.1 31.6 33.7 34.5 15 Cash in vault 25.1 24.8 25.4 25.4 26.5 25.9 26.5 26.2 26.3 28.7 30.3 16 Cash items in process of collection .. 66.9 74.1 76.4 71.5 77.2 75.7 79.9 76.4 72.6 89.5 92.1 17 Demand balances at U.S. depository institutions 30.4 32.0 30.3 29.2 31.6 31.3 31.5 29.4 29.2 32.1' 34.2 18 Other cash assets 52.3 48.2 49.9 48.3 51.8 53.5 50.9 52.8 48.8 51.4' 54.8 19 Other assets 180.9 193.1 190.9 186.6 194.3 188.4 187.5 191.8 201.2 201.3' 198.4 20 Total assets/total liabilities and capital... 2,816.0 2,854.3 2.871.9 2.860.2 2,927.5 2,914.4 2,932.6 2,930.3 2,947.6 3,012.2' 3,030.8 2 2 2 1 De T p r o a s n i s ts a ction deposits 1, 5 9 6 7 8 8 . . 6 4 2. 5 0 8 0 8 8 . . 5 5 2.0 5 1 95 1 . . 9 6 2,008.6 2,0 6 4 0 2 3 . . 5 3 2,0 5 5 9 0 8 . . 2 4 2,0 6 7 09 2 . . 5 9 2. 5 0 8 5 8 8 . . 3 8 2,0 5 6 86 7 . . 9 3 2, 6 12 2 0 7 . . 6 1 ' 2, 6 1 4 4 1 1 . . 3 6 23 Savings deposits 535.7 540.0 536.4 579.1 544.5 545.4 542.2 536.9 538.4 542.2 537.3 24 Time deposits 874.1 879.9 879.3 542.2 894.7 906.4 921.2 933.6 941.9 951.2 963.0 25 Borrowings 450.8 454.9 465.8 887.3 487.4 470.7 452.4 470.8 481.3 476.8' 470.7 26 Other liabilities 202.5 207.7 210.1 458.4 209.7 208.2 218.5 213.1 210.0 222.6 227.3 27 Residual (assets less liabilities) 184.4 183.2 184.4 207.4 187.8 185.3 188.7 187.6 189.0 192.2' 191.2 185.8 MEMO 28 U.S. government securities (including trading account) 342.1 341.2 343.4 346.3 344.7 349.2 351.4 352.7 354.3 359.9 357.9 29 Other securities (including trading account) 194.7 196.8 195.9 195.6 196.0 196.4 196.7 194.4 194.2 194.5 191.1 DOMESTICALLY CHARTERED COMMERCIAL BANKS3 30 Loans and securities 2.246.3 2,266.0 2,282.3 2,286.4 2,314.7 2.319.3 2,330.5 2,329.1 2,342.4 2,376.2 2,379.3 31 Investment securities 488.6 491.7 494.6 495.7 492.8 495.3 499.3 501.0 498.5 504.7 505.5 32 U.S. Treasury securities 313.6 314.5 317.7 318.6 316.3 319.3 322.8 325.0 323.1 329.2 332.9 33 Other 175.0 177.2 177.0 177.1 176.6 176.1 176.5 175.9 175.5 175.6 172.5 34 Trading account assets 21.9 20.3 19.6 20.3 22.1 23.9 22.8 21.3 24.9 24.8 19.2 35 Total loans 1,735.8 1,754.0 1,768.1 1,770.4 1.799.7 1,800.1 1,808.5 1,806.8 1,819.0 1,846.7 1,854.6 36 Interbank loans 132.0 131.2 128.5 124.9 133.1 130.7 125.2 121.8 127.8 136.3 130.7 37 Loans excluding interbank 1,603.8 1,622.9 1,639.6 1.645.6 1,666.6 1.669.4 1.683.3 1,685.0 1,691.2 1,710.4 1,723.9 38 Commercial and industrial 475.8 481.0 487.4 488.8 492.6 490.8 489.7 489.2 490.2 495.4 497.9 39 Real estate 584.5 592.1 597.0 603.6 611.4 617.5 625.4 631.5 636.5 642.7' 647.7 40 Individual 332.4 334.5 338.8 339.7 342.9 343.8 348.9 351.2 351.6 353.7' 360.2 41 All other 211.1 215.3 216.4 213.5 219.7 217.3 219.2 213.2 212.9 218.5' 218.1 42 Total cash assets 186.6 193.9 196.7 183.0 201.6 196.4 202.8 193.4 189.7 215.2 223.7 43 Reserves with Federal Reserve Banks 30.5 30.1 30.7 23.6 32.9 29.5 31.4 29.0 29.8 32.6 33.1 44 Cash in vault 25.1 24.7 25.4 25.4 26.5 25.9 26.5 26.2 26.3 28.7 30.3 45 Cash items in process of collection .. 66.4 73.5 75.8 71.0 76.5 75.1 79.2 75.7 71.9 88.7 91.2 46 Demand balances at U.S. depository institutions 28.8 30.4 28.7 27.5 29.8 29.4 29.8 27.3 27.2 30.2' 32.2 47 Other cash assets 35.8 35.2 36.0 35.6 35.8 36.5 36.0 35.3 34.4 35.1 37.0 48 Other assets 118.5 123.1 121.3 118.3 125.6 121.6 123.8 127.8 132.9 134.0 135.1 49 Total assets/liabilities and capital 2.551.4 2,583.0 2,600.3 2.587.7 2.641.8 2,637.4 2,657.2 2,650.3 2.665.0 2,725.4 2,738.1 5 5 1 0 De T p r o a s n it s s a ction deposits 1, 5 9 6 1 0 6 . . 7 1 1, 5 9 8 4 0 4 . . 0 5 1, 5 9 8 4 7 8 . . 2 1 1,944.7 1. 5 9 9 7 4 6 . . 5 9 1, 5 9 8 8 9 4 . . 6 4 2.0 6 0 0 6 0 . . 4 6 1, 5 9 7 9 9 1 . . 1 0 1. 5 9 7 9 7 9 . . 3 1 2, 6 0 1 5 7 1 . . 2 1 2,0 6 6 31 8 . . 5 9 52 Savings deposits 533.3 537.6 533.9 570.7 541.8 542.9 539.7 534.4 535.8 539.8 534.8 53 Time deposits 822.0 826.9 827.0 539.8 840.6 851.9 866.1 877.5 885.9 894.2 902.5 5 5 4 5 B O o th rr e o r w li i a n b g i s l ities 3 1 4 0 9 4 . . 9 4 3 1 5 0 0 8 . . 1 6 3 1 5 1 8 2 . . 4 7 3 8 5 3 1 4 . . 7 2 316191..40 3 1 5 1 8 2 . . 5 5 3 1 4 1 5 9 . . 7 6 3 1 5 1 8 6 . . 6 4 3 1 6 1 3 7 . . 2 0 3 1 6 2 2 3 . . 5 0 ' 3 1 6 2 0 1. .2 2 56 Residual (assets less liabilities) 181.1 179.9 181.1 108.8 184.5 182.0 185.4 184.3 185.6 188.8' 187.8 182.4 MEMO4 57 Real estate loans, revolving 31.7 32.1 33.0 33.7 34.8 35.3 36.3 37.3 37.9 39.1 39.7 58 Real estate loans, other 552.9 560.0 564.0 569.9 576.6 582.2 589.2 594.1 598.5 603.7 608.0 1. Back data are available from the Banking and Monetary Statistics section, the last Wednesday of the month based on a weekly reporting sample of Board of Governors of the Federal Reserve System, Washington, D.C., 20551. foreign-related institutions and quarter-end condition reports. These data also appear in the Board's weekly H.8 (510) release. 2. Commercial banking institutions include insured domestically chartered Data have been revised because of benchmarking to new Call reports beginning commercial banks, branches and agencies of foreign banks, Edge Act and January 1987. Agreement corporations, and New York State foreign investment corporations. Figures are partly estimated. They include all bank-premises subsidiaries and 3. Insured domestically chartered commercial banks include all member banks other significant majority-owned domestic subsidiaries. Loan and securities data and insured nonmember banks. for domestically chartered commercial banks are estimates for the last Wednes- 4. Memorandum items for real estate loans; revolving and other, are shown as day of the month based on a sample of weekly reporting banks and quarter-end separate breakdowns for the first time. condition report data. Data for other banking institutions are estimates made for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Weekly Reporting Commercial Banks A19 1.26 ASSETS AND LIABILITIES OF LARGE WEEKLY REPORTING COMMERCIAL BANKS1 Millions of dollars, Wednesday figures 1988 AAccccoouunntt Nov. 2 Nov. 9 Nov. 16 Nov. 23 Nov. 30 Dec. 7 Dec. 14 Dec. 21 Dec. 28 1 Cash and balances due from depository institutions 114,418'" 103,016' 117,541' 104,534' 118,357' 108,707 112,766 107,318 125,023 2 Total loans, leases, and securities, net 1,151,98c 1,140,001 1,150,913 1,142,918 1,157,817' 1,150,167 1,150,655 1,157,722 1,154,328 3 U.S. Treasury and government agency 132,734 132,345 134,711 134,944 135,902' 135,861 133,618 132,983 128,626 4 Trading account 19,278 18,688 21,049 19,971 19,818 19,009 16,908 16,529 14,371 5 Investment account 113,456 113,657 113,663 114,973 116,084' 116,852 116,710 116,454 114,255 6 Mortgage-backed securities2 44,825 44,858 44,873 45,459 46,226 46,470 46,486 46,399 46,514 All other maturing in 7 One year or less 19,623 19,739 20,339 20,625 21,124' 21,583 21,369 21,410 2200,,445588 8 Over one through five years 40,341 40,373 40,013 40,438 40,354' 40,373 40,251 39,804 39,527 9 Over five years 8,667 8,687 8,438 8,451 8,380 8,426 8,603 8,840 7,756 10 Other securities 72,812 72,811 72,859 72,970 73,307' 72,521 72,242 72,240 72,274 11 Trading account 1,336 1,336 1,446 1,643 1,681 1,622 1,549 1,683 1,713 17 Investment account 71,476 71,475 71,412 71,327 71,626' 70,899 70,692 70,557 70,560 13 States and political subdivisions, by maturity 45,794 45,711 45,560 45,479 45,487' 45,019 44,811 44,717 44,653 14 One year or less 5,262 5,263 5,138 5,087 5,106' 4,960 4,937 4,859 4,865 IS Over one year 40,532 40,448 40,422 40,391 40,381 40,059 39,874 39,858 39,788 16 Other bonds, corporate stocks, and securities 25,681 25,764 25,852 25,848 26,139 25,880 25,881 25,840 25,907 17 Other trading account assets 3,986 3,739 3,929 3,843 3,723 3,900 3,415 3,409 3,599 18 Federal funds sold3 78,740 68,841 71,955 66,424 76,096 72,375 73,388 75,908 74,386 19 To commercial banks 50,809' 42,385' 48,484' 42,436' 51,082' 45,665 47,158 49,231 49,135 70 To nonbank brokers and dealers in securities 18,313 16,832 14,537' 14,797 15,593 17,182 17,008 17,242 16,692 71 To others 9,617' 9,623' 8,934' 9,191' 9,42C 9,528 9,222 9,435 8,558 22 Other loans and leases, gross 903,788' 902,354 907,531 905,533 909,443 906,201 908,573 913,6% 915,687 23 Other loans, gross 880,563' 879,105 884,207 882,192 886,067 882,630 884,922 889,999 891,933 24 Commercial and industrial 300,302' 300,217' 300,15c 299,907' 301,254' 300,704 299,972 301,706 302,359 25 Bankers acceptances and commercial paper 1,871 1,805 1,860 1,876 1,904 1,816 1,828 1,782 1,807 76 All other 298,431' 298,412' 298,29c 298,030' 299,35C 298,888 298,145 299,924 300,552 77 U.S. addressees 296,174' 296,217' 296,03C 295,798' 297,093' 296,659 295,905 297,667 298,192 28 Non-U.S. addressees 2,258 2,194 2,259 2,232 2,256 2,229 2,240 2,257 2,360 29 Real estate loans 293,436 294,502 295,176 295,372' 296,04C 296,242 297,575 298,598 299,344 30 Revolving, home equity 21,067 21,146 21,262 21,350 21,443 21,520 21,606 21,696 21,789 31 All other 272,370 273,355 273,914 274,022' 274,597' 274,722 275,969 276,902 277,556 32 To individuals for personal expenditures 165,281 165,117 165,636 165,811' 165,673' 166,223 167,399 168,013 169,020 33 To depository and financial institutions 48,574 49,158 50,628 48,890 49,307 48,975 48,014 48,313 48,954 34 Commercial banks in the United States 22,776 23,120 24,115 23,059 22,714 23,016 22,138 21,968 22,245 35 Banks in foreign countries 3,746 4,318 4,528 4,432 4,632 4,059 3,922 4,020 3,641 36 Nonbank depository and other financial institutions — 22,051 21,720 21,985 21,398 21,961 21,900 21,954 22,325 23,068 37 For purchasing and carrying securities 14,238' 12,938' 13,982' 14,411 15,271 12,780 14,219 14,313 13,930 38 To finance agricultural production 5,558 5,512 5,495 5,489' 5,474' 5,455 5,460 5,485 5,487 39 To states and political subdivisions 29,104 28,849 28,804 28,954 28,871 28,669 28,684 28,694 28,598 40 To foreign governments and official institutions 2,131 2,077 2,132 2,098 2,026 2,164 2,035 2,089 1,954 41 All other 21,938 20,736 22,204 21,260 22,151 21,417 21,564 22,787 22,285 42 Lease financing receivables 23,225 23,249 23,323 23,341 23,376 23,571 23,651 23,697 23,754 43 LESS: Unearned income 4,844 4,879 4,871 4,874 4,847 4,853 4,864 4,872 4,888 44 Loan and lease reserve 35,236 35,210 35,201 35,923 35,806 35,838 35,717 35,642 35,356 45 Other loans and leases, net 863,708' 862,265 867,459 864,736 868,790 865,510 867,992 873,181 875,443 46 All other assets 132,412' 129,652' 130,504' 129.55C 131,067' 132,270 132,855 135,231 132,956 47 Total assets 1,398,810' 1,372,668 1,398,958 1,377,003' 1,407,241 1,391,144 1,396,276 1,400,271 1,412,308 48 Demand deposits 235,637' 217,665 241,854 225,530 240,653 230,811 238,689 233,931 247,245 49 Individuals, partnerships, and corporations 185,698' 175,655 190,422 180,647 191,636 182,950 191,684 186,204 195,432 50 States and political subdivisions 6,581 5,275 6,420 5,935 6,456 5,865 6,515 6,976 6,993 51 U.S. government 1,688 1,518 3,247 3,182 2,949 2,878 3,322 1,609 2,705 52 Depository institutions in the United States 23,179 19,587 25,398 19,594 22,067 21,951 20,689 22,518 24,194 53 Banks in foreign countries 5,786 6,637 6,754 7,042 7,239 7,013 6,840 6,453 6,662 54 Foreign governments and official institutions 741 663 888 918 832 878 920 1,054 985 55 Certified and officers' checks 11,963 8,330 8,722 8,213 9,474 9,277 8,719 9,117 10,274 56 Transaction balances other than demand deposits 74,006 73,605 73,698 72,917 73,637 75,258 74,519 75,080 75,412 57 Nontransaction balances 620,455' 623,481 623,274 622,587 622,745 625,000 626,327 625,170 623,960 58 Individuals, partnerships, and corporations 581,072' 583,887 583,645 582,787 583,097 585,622 586,652 586,441 585,180 59 States and political subdivisions 30,007 30,213 30,307 30,349 30,025 30,036 30,207 29,520 29,459 60 U.S. government 855 942 959 943 965 945 952 938 946 61 Depository institutions in the United States 7,668' 7,596 7,535 7,711' 7,829 7,596 7,799 7,567 7,698 62 Foreign governments, official institutions, and banks 853' 843 827 7%' 829' 801 717 704 677 63 Liabilities for borrowed money 286,393' 275,150 277,098 272,478 278,942' 272,591 269,508 280,079 278,127 64 Borrowings from Federal Reserve Banks 2,160 2,700 3,000 1,200 1,872 1,515 1,785 571 1,035 65 Treasury tax-and-loan notes 16,174 7,553 3,510 13,425 12,852' 4,614 5,991 25,227 21,048 66 All other liabilities for borrowed money 268,059' 264,897 270,588 257,853 264,218' 266,461 261,731 254,281 256,044 67 Other liabilities and subordinated notes and debentures 90,177' 90,090 90,595 89,968' 97,011' 92,693 91,978 90,903 93,583 68 Total liabilities 1,306,667' 1,279,992 1,306,520 1,283,479' 1,312,988 1,296,353 1,301,020 1,305,164 1,318,328 69 Residual (total assets minus total liabilities)6 92,142' 92,677 92,439 93,524 94,253 94,791 95,257 95,107 93,980 MEMO 70 Total loans and leases (gross) and investments adjusted7 ... 1,118,474' 1,114,585' 1,118,386' 1,118,22C 1,124,675' 1,122,177 1,121,940 1,127,038 1,123,192 71 Total loans and leases (gross) adjusted7 908,943' 905,689' 906,887' 906,462' 911,743' 909,895 912,665 918,406 918,693 77 Time deposits in amounts of $100,000 or more 193,997 194,552 194,051 194,751 194,464 195,830 195,955 195,915 196,032 73 U.S. Treasury securities maturing in one year or less 19,402 18,861 21,072 20,925 19,86C 19,997 20,195 20,001 18,560 74 Loans sold outright to affiliates—total8 1,401 1,380 1,303 1,342 1,308 1,380 1,330 1,370 1,380 75 Commercial and industrial 987 965 924 968 929 1,000 956 1,012 1,029 76 Other 414 414 379 374 380 380 374 358 350 77 Nontransaction savings deposits (including MMDAs) 253,371 255,025 254,856 253,029 253,021 253,063 253,440 252,044 250,403 1. Beginning Jan. 6, 1988, the "Large bank" reporting group was revised repurchase; for information on these liabilities at banks with assets of $1 billion or somewhat, eliminating some former reporters with less than $2 billion of assets more on Dec. 31, 1977, see table 1.13. and adding some new reporters with assets greater than $3 billion. 6. This is not a measure of equity capital for use in capital-adequacy analysis or 2. Includes U.S. government-issued or guaranteed certificates of participation for other analytic uses. in pools of residential mortgages. 7. Exclusive of loans and federal funds transactions with domestic commercial 3. Includes securities purchased under agreements to resell. banks. 4. Includes allocated transfer risk reserve. 8. Loans sold are those sold outright to a bank's own foreign branches, 5. Includes federal funds purchased and securities sold under agreements to nonconsolidated nonbank affiliates of the bank, the bank's holding company (if not a bank), and nonconsolidated nonbank subsidiaries of the holding company. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A20 Domestic Nonfinancial Statistics • March 1989 1.28 ASSETS AND LIABILITIES OF LARGE WEEKLY REPORTING COMMERCIAL BANKS IN NEW YORK CITY1 Millions of dollars, Wednesday figures 1988 Account Nov. 2 Nov. 9 Nov. 16 Nov. 23 Nov. 30 Dec. 7 Dec. 14 Dec. 21 Dec. 28 1 Cash balances due from depository institutions 27,028 22,061 24,007 20,026 27,884 24,348 24,272 22,154 26,940 2 Total loans, leases and securities, net2 219,266 214,932 217,719 213,718 221,963 216,483 217,293 218,999 221,039 Securities 3 U.S. Treasury and government agency 0 0 0 0 0 0 0 0 0 4 Trading account3 0 0 0 0 0 0 0 0 0 5 Investment account 15,256 15,180 15,113 15,381 15,623 15,559 15,558 15,702 15,689 6 Mortgage-backed securities4 6,125 6,126 6,183 6,465 6,660 6,552 6,717 6,770 6,782 All other maturing in 7 One year or less 2,432 2,429 2,320 2,323 2,217 2,326 2,176 2,225 2,225 8 Over one through five years 4,740 4,664 4,677 4,672 4,835 4,695 4,612 4,641 4,617 9 Over five years 1,958 1,961 1,934 1,921 1,911 1,986 2,053 2,066 2,066 10 Other securities3 0 0 0 0 0 0 0 0 0 11 Trading account 0 0 0 0 0 0 0 0 0 12 Investment account 17,350 17,435 17,403 17,512 17,718 17,694 17,539 17,514 17,468 13 States and political subdivisions, by maturity 12,562 12,557 12,4% 12,481 12,482 12,359 12,269 12,263 12,205 14 One year or less 1,155 1,156 1,098 1,090 1,092 979 960 978 %9 15 Over one year 11,407 11,401 11,399 11,391 11,390 11,380 11,308 11,284 11,236 16 Other bonds, corporate stocks, and securities 4,788 4,878 4,907 5,031 5,236 5,334 5,270 5,251 5,262 17 Other trading account assets 0 0 0 0 0 0 0 0 0 Loans and leases 18 Federal funds sold3 30,393 26,868 26,548 24,195 29,736 26,803 27,708 27,442 29,229 19 To commercial banks 14,210 10,798 13,642 10,424 14,717 10,946 12,719 12,527 14,683 20 To nonbank brokers and dealers in securities 9,818 9,462 7,151 7,578 8,394 9,563 8,944 8,771 8,970 21 To others 6,366 6,609 5,755 6,193 6,625 6,294 6,045 6,144 5,576 22 Other loans and leases, gross 171,189 170,445 173,614 171,595 173,781 171,331 171,370 173,228 173,521 23 Other loans, gross 165,662 164,906 168,008 165,990 168,182 165,647 165,687 167,551 167,825 24 Commercial and industrial 56,646 56,438 56,622 55,816 56,290 55,368 54,907 55,441 55,398 25 Bankers acceptances and commercial paper 493 422 462 440 483 416 400 363 389 26 All other 56,153 56,016 56,160 55,376 55,807 54,952 54,507 55,078 55,009 27 U.S. addressees 55,769 55,652 55,773 55,001 55,372 54,524 54,109 54,647 54,487 28 Non-U.S. addressees 383 363 387 375 436 427 398 430 522 29 Real estate loans 49,125 49,332 49,436 49,162 49,292 49,360 49,645 50,170 50,600 30 Revolving, home" equity 3,189 3,183 3,194 3,211 3,222 3,246 3,248 3,262 3,271 31 All other 45,936 46,149 46,242 45,951 46,069 46,114 46,397 46,908 47,328 32 To individuals for personal expenditures 20,457 20,453 20,578 20,679 20,709 20,740 20,897 20,779 20,923 33 To depository and financial institutions 20,316 21,168 22,568 21,123 21,789 22,169 21,179 21,480 21,851 34 Commercial banks in the United States 11,435 11,826 12,977 11,565 11,748 12,700 12,002 12,030 12,310 35 Banks in foreign countries 2,118 2,672 2,973 2,807 2,964 2,482 2,276 2,317 2,061 36 Nonbank depository and other financial institutions 6,762 6,671 6,618 6,752 7,077 6,987 6,901 7,133 7,479 37 For purchasing and carrying securities 5,496 4,765 5,075 5,976 6,294 4,761 6,216 6,129 5,874 38 To finance agricultural production 227 209 204 207 197 200 164 161 159 39 To states and political subdivisions 6,509 6,444 6,439 6,524 6,397 6,378 6,369 6,377 6,362 40 To foreign governments and official institutions 658 622 667 660 592 709 591 680 517 41 All other 6,228 5,474 6,420 5,842 6,622 5,%3 5,717 6,333 6,142 42 Lease financing receivables 5,527 5,539 5,606 5,605 5,600 5,684 5,683 5,677 5,6% 43 LESS: Unearned income 1,587 1,613 1,608 1,616 1,611 1,616 1,620 1,630 1,646 44 Loan and lease reserve 13,335 13,383 13,352 13,351 13,284 13,288 13,261 13,258 13,221 45 Other loans and leases, net6 156,267 155,449 158,654 156,628 158,886 156,427 156,488 158,341 158,654 46 All other assets 63,616 60,123 63,359 61,660 61,130 62,323 59,462 61,242 58,804 47 Total assets 309,910 297,117 305,085 295,404 310,977 303,154 301,027 302,395 306,783 Deposits 48 Demand deposits 56,273 50,729 58,595 52,540 57,536 55,393 58,192 55,789 59,274 49 Individuals, partnerships, and corporations 38,544 36,031 41,024 37,369 40,412 37,702 42,218 39,407 41,640 50 States and political subdivisions 652 535 760 568 661 625 627 633 593 51 U.S. government 215 269 588 562 5% 542 531 176 458 52 Depository institutions in the United States 5,695 4,557 6,452 4,438 5,542 6,050 5,015 5,931 5,848 53 Banks in foreign countries 4,626 5,466 5,548 5,722 5,922 5,798 5,679 5,168 5,481 54 Foreign governments and official institutions 567 522 745 758 666 730 761 913 831 55 Certified and officers' checks 5,975 3,349 3,477 3,123 3,736 3,946 3,361 3,562 4,423 56 Transaction balances other than demand deposits (ATS, NOW, Super NOW, telephone transfers) 8,688 8,634 8,646 8,574 8,608 8,735 8,718 8,909 9,110 57 Nontransaction balances 109,637 110,680 110,439 110,632 110,972 111,317 111,046 111,688 110,517 58 Individuals, partnerships, and corporations 99,412 100,420 100,171 100,190 100,625 101,202 101,024 101,664 100,417 59 States and political subdivisions 8,157 8,202 8,216 8,247 8,140 8,020 7,985 7,997 8,014 60 U.S. government 35 23 26 28 32 30 31 33 33 61 Depository institutions in the United States 1,747 1,751 1,741 1,887 1,894 1,788 1,742 1,737 1,797 62 Foreign governments, official institutions, and banks ... 285 284 284 280 282 278 265 257 257 63 Liabilities for borrowed money 74,428 66,848 68,566 65,773 68,091 66,294 61,958 65,583 65,301 64 Borrowings from Federal Reserve Banks 0 0 0 0 0 0 0 0 0 65 Treasury tax-and-loan notes 4,184 1,911 1,262 3,807 3,451 886 1,175 6,243 5,392 66 All other liabilities for borrowed money8 70,244 64,938 67,303 61,966 64,640 65,408 60,783 59,340 59,909 67 Other liabilities and subordinated notes and debentures ... 34,225 33,186 31,985 31,256 38,718 33,810 33,038 32,668 35,359 68 Total liabilities 283,252 270,078 278,230 268,774 283,926 275,549 272,953 274,636 279,562 69 Residual (total assets minus total liabilities)9 26,658 27,039 26,855 26,630 27,051 27,604 28,074 27,759 27,221 MEMO 70 Total loans and leases (gross) and investments adjusted2,10 208,543 207,305 206,060 206,6% 210,393 207,741 207,454 209,329 208,913 71 Total loans and leases (gross) adjusted10 175,937 174,690 173,543 173,802 177,052 174,488 174,357 176,113 175,756 72 Time deposits in amounts of $100,000 or more 40,9% 40,998 41,022 41,310 41,053 41,857 41,244 41,492 41,246 73 U.S. Treasury securities maturing in one year or less 3,998 3,654 4,816 4,163 3,299 3,528 3,354 2,934 2,984 1. These data also appear in the Board's H.4.2 (504) release. For address, see 6. Includes allocated transfer risk reserve. inside front cover. 7. Includes trading account securities. 2. Excludes trading account securities. 8. Includes federal funds purchased and securities sold under agreements to 3. Not available due to confidentiality. repurchase. 4. Includes U.S. government-issued or guaranteed certificates of participation 9. Not a measure of equity capital for use in capital adequacy analysis or for Digitized for FRin ApoSoEls Rof residential mortgages. other analytic uses. 5. Includes securities purchased under agreements to resell. 10. Exclusive of loans and federal funds transactions with domestic commerhttp://fraser.stlouisfed.org/ cial banks. Federal Reserve Bank of St. Louis

Weekly Reporting Commercial Banks A21 1.30 LARGE WEEKLY REPORTING U.S. BRANCHES AND AGENCIES OF FOREIGN BANKS' Assets and Liabilities Millions of dollars, Wednesday figures 1988 AAccccoouunntt Nov. 2 Nov. 9 Nov. 16 Nov. 23 Nov. 30 Dec. 7 Dec. 14 Dec. 21 Dec. 28 1 Cash and due from depository institutions ... 11,233 12,579 11,887 11,126 10,817 11,067 11,181 11,086 12,181 2 Total loans and securities 111,505 111,580 112,278 110,162 112,854 111,964 114,403 113,961 118,172 3 U.S. Treasury and government agency securities 7,885 7,751 7,834 7,546 7,651 7,575 7,794 7,980 77,,449922 4 Other securities 7,288 7,237 7,242 7,202 7,259 7,227 7,163 7,123 7,156 5 Federal funds sold 8,489 9,036 10,864 7,293 10,172 7,780 10,306 7,964 9,290 6 To commercial banks in the United States. 5,823 6,729 8,861 5,465 7,878 5,615 8,208 5,969 7,282 7 To others 2,666 2,307 2,003 1,828 2,294 2,165 2,098 1,995 2,008 8 Other loans, gross 87,843 87,556 86,338 88,121 87,772 89,382 89,140 90,894 94,234 9 Commercial and industrial 5566,,448822 5555,,888877 55,486 55,635 56,065 57,292 57,006 58,540 59,713 10 Bankers acceptances and commercial paper 1,555 1,604 1,689 1.736 1,554 1,618 1,485 1,532 1,420 11 All other 54,927 54,283 53,797 53,899 54,511 55,674 55,521 57,008 58,293 12 U.S. addressees 53,223 52,608 52,224 52,279 52,871 53,941 53,829 55,355 56,624 13 Non-U.S. addressees 1,704 1,675 1,573 1,620 1,640 1,733 1,692 1,653 1,669 14 To financial institutions 17,063 17,077 16,135 17,425 16,308 17,289 17,291 17,460 18,666 15 Commercial banks in the United States.. 12,648 12,773 11,902 13,038 12,018 12,929 12,931 12,927 14,098 16 Banks in foreign countries 1,350 1,174 1,157 1,221 1,220 1,298 1,194 1,307 1,269 17 Nonbank financial institutions 33,,006655 3,130 3,076 3,166 3,070 3,062 3,166 3,226 3,299 18 To foreign governments and official institutions 621 743 820 801 830 830 906 886644 885577 19 For purchasing and carrying securities 1,611 1,467 1,449 1,805 1,761 1,535 1,514 1,780 2,317 20 All other 12,066 12,382 12,448 12,455 12,808 12,436 12,423 12,250 12,681 21 Other assets (claims on nonrelated parties) .. 30,628 31,572 32,296 32,715 33,025 32,537 33,007 33,288 32,511 77 Net due from related institutions 17,526 16,796 14,936 18,101 15,233 17,869 14,524 15,202 13,002 23 Total assets 117700,,889933 117722,,552299 171,399 172,104 171,928 173,439 173,117 173,540 175,865 24 Deposits or credit balances due to other than directly related institutions 43,758 43,029 43,389 43,866r 44,179 44,843 44,601 45,246 46,626 25 Transaction accounts and credit balances3. 44,,554499 33,,664422 4,300 3,888 3,954 3,965 4,010 4,179 4,183 26 Individuals, partnerships, and corporations 2,655 2,350 2,882 2,497 2,451 2,323 2,520 2,581 2,453 27 Other 1,894 1,292 1,418 1,391 1,503 1,642 1,490 1,598 1,730 78 Nontransaction accounts 3399,,220099 3399,,338877 39,089 39,978r 40,225 40,878 40,591 41,067 42,443 29 Individuals, partnerships, and corporations 32,723 32,891 32,634 33,555r 33,713 34,417 34,340 35,061 36,436 30 Other 66,,448866 6,4% 6,455 6,423 6,512 6,461 6,251 6,006 6,007 31 Borrowings from other than directly related institutions 69,132 70,562 68,503 67,721r 68,197 69,676 68,404 70,772 66,140 32 Federal funds purchased 33,914 33,386 31,479 24,603 31,021 31,238 29,087 30,677 27,492 33 From commercial banks in the United States 17,088 17,674 16,307 12,087 16,454 15,670 15,553 14,778 14,188 34 From others 16,826 15,712 15,172 12,516 14,567 15,568 13,534 15,899 13,304 35 Other liabilities for borrowed money 35,218 37,176 37,024 43,118r 37,176 38,438 39.317 40,095 38,648 36 To commercial banks in the United States 23,628 25,763 25,668 28,072 25,744 26,714 27,267 26,577 25,716 37 To others 11,590 11,413 11,356 15,046r 11,432 11,724 12,050 13,518 12,932 38 Other liabilities to nonrelated parties 31,582 32,911 33,837 33,964 34,168 33,981 34,556 34,255 34,088 39 Net due to related institutions 26,420 26,028 25,668 26,552 25,383 24,937 25,556 23,266 29,011 40 Total liabilities 170,893 172,529 171,399 172,104 171,928 173,439 173,117 173,540 175,865 MEMO 41 Total loans (gross) and securities adjusted6 .. 93,034 92,078 91,515 91,659 92,958 93,420 93,264 95,065 96,792 42 Total loans (gross) adjusted 77,861 77,090 76,439 76,911 78,048 78,618 78,307 79,962 82,144 1. Effective Jan. 1, 1986, the reporting panel includes 65 U.S. branches and 3. Includes credit balances, demand deposits, and other checkable deposits. agencies of foreign banks that include those branches and agencies with assets of 4. Includes savings deposits, money market deposit accounts, and time $750 million or more on June 30, 1980, plus those branches and agencies that had deposits. reached the $750 million asset level on Dec. 31, 1984. These data also appear in the 5. Includes securities sold under agreements to repurchase. Board's H.4.2 (504) release. For address, see inside front cover. 6. Exclusive of loans to and federal funds sold to commercial banks in the 2. Includes securities purchased under agreements to resell. United States. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A22 Domestic Nonfinancial Statistics • March 1989 1.31 GROSS DEMAND DEPOSITS Individuals, Partnerships, and Corporations1 Billions of dollars, estimated daily-average balances, not seasonally adjusted Commercial banks TTyyppee ooff hhoollddeerr 1987 1988 11998833 11998844 11998855 11998866 DDeecc.. DDeecc.. DDeecc.. DDeecc.. June Sept. Dec. Mar. June Sept. 1 All holders—Individuals, partnerships, and corporations 293.5 302.7 321.0 363.6 340.2 339.0 343.5 328.6 346.5 337.8 2 Financial business 32.8 31.7 32.3 41.4 36.6 36.5 36.3 33.9 37.2 34.8 3 Nonfinancial business 161.1 166.3 178.5 202.0 187.2 188.2 191.9 184.1 194.3 190.3 4 Consumer 78.5 81.5 85.5 91.1 90.1 88.7 90.0 86.9 89.8 87.8 5 Foreign 3.3 3.6 3.5 3.3 3.2 3.2 3.4 3.5 3.4 3.2 6 Other 17.8 19.7 21.2 25.8 23.1 22.4 21.9 20.3 21.9 21.7 Weekly reporting banks 1987 1988 11998833 11998844 11998855 11998866 DDeecc.. DDeecc.. DDeecc.. DDeecc.. June Sept. Dec. Mar. June Sept. 7 All holders—Individuals, partnerships, and corporations 146.2 157.1 168.6 195.1 179.3 179.1 183.8 181.8 191.5 185.3 8 Financial business 24.2 25.3 25.9 32.5 29.3 29.3 28.6 27.0 30.0 27.2 9 Nonfinancial business 79.8 87.1 94.5 106.4 94.8 96.0 100.0 98.2 103.1 101.5 10 Consumer 29.7 30.5 33.2 37.5 37.5 37.2 39.1 41.7 42.3 41.8 11 Foreign 3.1 3.4 3.1 3.3 3.1 3.1 3.3 3.4 3.4 3.1 12 Other 9.3 10.9 12.0 15.4 14.6 13.5 12.7 11.4 12.8 11.7 1. Figures include cash items in process of collection. Estimates of gross 4. Historical data back to March 1985 have been revised to account for deposits are based on reports supplied by a sample of commercial banks. Types corrections of bank reporting errors. Historical data before March 1985 have not of depositors in each category are described in the June 1971 BULLETIN, p. 466. been revised, and may contain reporting errors. Data for all commercial banks for Figures may not add to totals because of rounding. March 1985 were revised as follows (in billions of dollars): all holders, - .3; 2. Beginning in March 1984, these data reflect a change in the panel of weekly financial business, -.8; nonfinancial business, -.4; consumer, .9; foreign, .1; reporting banks, and are not comparable to earlier data. Estimates in billions of other, -.1. Data for weekly reporting banks for March 1985 were revised as dollars for December 1983 based on the new weekly reporting panel are: financial follows (in billions of dollars): all holders, -.1; financial business, -.7; nonfinanbusiness, 24.4; nonfinancial business, 80.9; consumer, 30.1; foreign, 3.1; other cial business, -.5; consumer, 1.1; foreign, .1; other, -.2. 9.5. 5. Beginning March 1988, these data reflect a change in the panel of weekly 3. Beginning March 1985, financial business deposits and, by implication, total reporting banks, and are not comparable to earlier data. Estimates in billions of gross demand deposits have been redefined to exclude demand deposits due to dollars for December 1987 based on the new weekly reporting panel are: financial thrift institutions. Historical data have not been revised. The estimated volume of business, 29.4; nonfinancial business, 105.1; consumer, 41.1; foreign, 3.4; other, such deposits for December 1984 is $5.0 billion at all insured commercial banks 13.1. and $3.0 billion at weekly reporting banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Financial Markets A23 1.32 COMMERCIAL PAPER AND BANKERS DOLLAR ACCEPTANCES OUTSTANDING Millions of dollars, end of period 1988 1983 1984 1985 1986 1987 Dec. Dec. Dec. Dec. Dec. June July Aug. Sept. Oct. Nov. Commercial paper (seasonally adjusted unless noted otherwise) 1 All issuers 187,658 237,586 298,779 329,991 357,129 417,788 423,599 426,685 421,224 424,160' 440,670 Financial companies' Dealer-placed paper 2 Total 4444,,445555 5566,,448855 7788,,444433 110011,,007722 110011,,995588 114422,,332222 114488,,112255 114488,,222244 115511,,449911 114488,,994444 115544,,881111 3 Bank-related (not seasonally adjusted) 22,,444411 22,,003355 11,,660022 22,,226655 11,,442288 11,,444488 11,,334400 983 901 840 995 Directly placed paper 4 Total 9977,,004422 111100,,554433 113355,,332200 115511,,882200 117733,,993399 118844,,665588 118855,,006633 118877,,330055 117799,,669900 118833,,006644'' 119922,,222211 5 Bank-related (not seasonally adjusted) 35,566 42,105 44,778 40,860 43,173 45,294 44,975 47,818 43,887 42,204' 43,729 6 Nonfinancial companies 46,161 70,558 85,016 77,099 81,232 90,808 90,411 91,156 90,043 92,152 93,638 Bankers dollar acceptances (not seasonally adjusted)5 7 Total 78,309 78,364 68,413 64,974 70,565 64,359 63,240 64,036 63,452 62,253 65,961 Holder 8 Accepting banks 9,355 9,811 11,197 13,423 10,943 9,734 9,655 9,661 9,334 9,083 9,483 9 Own bills 8,125 8,621 9,471 11,707 9,464 8,861 8,702 88,,666644 8,400 8,026 8,768 10 Bills bought 11,,223300 1,191 11,,772266 11,,771166 11,,447799 873 953 888888 934 11,,005577 715 Federal Reserve Banks 11 Own account 418 0 0 0 0 0 0 0 0 0 0 12 Foreign correspondents 729 671 937 1,317 965 1,273 1,114 9,915 963 1,166 1,393 13 Others 67,807 67,881 56,279 50,234 58,658 53,351 52,471 53,493 53,154 52,004 55,086 Basis 14 Imports into United States 15,649 17,845 15,147 14,670 16,483 14,244 14,001 14,608 14,622 14,064 14,959 15 Exports from United States 16,880 16,305 13,204 12,960 15,227 14,606 14,676 14,345 13,946 14,067 14,578 16 All other 45,781 44,214 40,062 37,344 38,855 35,510 34,564 35,083 34,884 34,122 36,424 1. Institutions engaged primarily in activities such as, but not limited to, 4. Includes public utilities and firms engaged primarily in such activities as commercial savings, and mortgage banking; sales, personal, and mortgage fi- communications, construction, manufacturing, mining, wholesale and retail trade, nancing; factoring, finance leasing, and other business lending; insurance under- transportation, and services. writing; and other investment activities. 5. Beginning January 1988, the number of respondents in the bankers accep- 2. Includes all financial company paper sold by dealers in the open market. tance survey were reduced from 155 to 111 institutions—those with $100 million 3. As reported by financial companies that place their paper directly with or more in total acceptances. The new reporting group accounts for over 90 investors. percent of total acceptances activity. 1.33 PRIME RATE CHARGED BY BANKS on Short-Term Business Loans Percent per year Rate Period Av r e a r t a e ge PPeerriioodd Av r e a r te a ge 1986—Mar. 7 9.00 1986 8.33 1987 —Jan 7.50 1988 —Jan. Apr. 21 8.50 1987 8.21 Feb 7.50 Feb. July 11 8.00 1988 9.32 Mar 7.50 Mar. Aug. 26 7.50 Apr 7.75 Apr. 1986 —Jan. 9.50 May 8.14 May. 1987—Apr. 1 7.75 Feb. 9.50 June 8.25 June. May 1 8.00 Mar. 9.10 July 8.25 July . 15 8.25 Apr. 8.83 Aug 8.25 Aug. Sept. 4 8.75 May 8.50 Sept 8.70 Sept. Oct. 7 9.25 June 8.50 Oct 9.07 Oct.. 22 9.00 July 8.16 Nov 8.78 Nov. Nov. 5 8.75 Aug. 7.90 Dec 8.75 Dec. Sept. 7.50 1988—Feb. 2 8.50 Oct. 7.50 May 11 9.00 Nov. 7.50 July 14 9.50 Dec. 7.50 Aug. 11 10.00 Nov. 28 10.50 NOTE. These data also appear in the Board's H. 15 (519) and G. 13 (415) releases. For address, see inside front cover. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A24 Domestic Nonfinancial Statistics • March 1989 1.35 INTEREST RATES Money and Capital Markets Averages, percent per year; weekly, monthly and annual figures are averages of business day data unless otherwise noted. 1988 1988, week ending IInnssttrruummeenntt 11998866 11998877 11998888 Sept. Oct. Nov. Dec. Dec. 2 Dec. 9 Dec. 16 Dec. 23 Dec. 30 MONEY MARKET RATES 1 Federal funds1,2 6.80 6.66 7.57 8.19 8.30 8.35 8.76 8.44 8.59 8.51 8.87 8.86 2 Discount window borrowing ' ' 6.32 5.66 6.20 6.50 6.50 6.50 6.50 6.50 6.50 6.50 6.50 6.50 Commercial paper ' 3 1-month 6.61 6.74 7.58 8.09 8.12 8.38 9.31 8.82 9.27 9.32 9.39 9.30 4 3-month 6.49 6.82 7.66 8.17 8.24 8.66 9.11 9.12 9.10 9.14 9.13 9.07 5 6-month , 6.39 6.85 7.68 8.23 8.24 8.55 8.97 8.% 8.93 9.02 8.99 8.97 Finance paper, directly placed 1 6 1-month 6.57 6.61 7.44 7.% 8.05 8.29 9.00 8.53 8.97 9.08 9.06 9.00 7 3-month 6.38 6.54 7.38 7.95 8.06 8.20 8.50 8.26 8.41 8.53 8.62 8.55 8 6-month 6.31 6.37 7.14 7.71 7.80 7.94 8.24 8.07 8.18 8.22 8.34 8.29 Bankers acceptances ,6 9 3-month 6.38 6.75 7.56 8.06 8.15 8.55 8.96 8.94 8.93 9.02 8.98 8.90 10 6-month 6.28 6.78 7.60 8.15 8.13 8.46 8.83 8.80 8.77 8.89 8.87 8.83 Certificates of deposit, secondary market 11 1-month 6.61 6.75 7.59 8.12 8.15 8.43 9.37 8.99 9.34 9.42 9.40 9.36 12 3-month 6.51 6.87 7.73 8.23 8.36 8.78 9.25 9.22 9.24 9.32 9.29 9.20 13 6-month 6.50 7.01 7.91 8.50 8.48 8.81 9.28 9.24 9.24 9.32 9.31 9.26 14 Eurodollar deposits. 3-month 6.70 7.07 7.85 8.31 8.51 8.91 9.30 9.29 9.20 9.31 9.41 9.31 U.S. Treasury bills5 Secondary market9 15 3-month 5.97 5.78 6.67 7.23 7.34 7.76 8.07 7.94 7.96 8.09 8.11 8.16 16 6-month 6.02 6.03 6.91 7.43 7.50 7.86 8.22 8.09 8.19 8.27 8.20 8.28 17 1-year 6.07 6.33 7.13 7.60 7.54 7.87 8.32 8.10 8.23 8.42 8.32 8.38 Auction average 18 3-month 5.98 5.82 6.68 7.23 7.34 7.68 8.09 8.05 8.04 7.98 8.14 8.22 19 6-month 6.03 6.05 6.92 7.43 7.50 7.76 8.24 8.13 8.25 8.21 8.29 8.33 20 1-year 6.18 6.33 7.17 7.60 7.57 7.92 8.49 n.a. n.a. n.a. 8.49 n.a. CAPITAL MARKET RATES U.S. Treasury notes and bonds11 Constant maturities 21 1-year 6.45 6.77 7.65 8.09 8.11 8.48 8.99 8.75 8.89 9.10 9.00 9.07 22 2-year 6.86 7.42 8.10 8.46 8.35 8.67 9.09 8.% 8.99 9.16 9.09 9.18 23 3-year 7.06 7.68 8.26 8.57 8.43 8.72 9.11 8.98 9.01 9.17 9.12 9.20 24 5-year 7.30 7.94 8.47 8.69 8.51 8.79 9.09 9.00 8.99 9.16 9.10 9.18 25 7-year 7.54 8.23 8.71 8.87 8.69 8.89 9.13 9.08 9.04 9.19 9.12 9.22 26 10-year 7.67 8.39 8.85 8.98 8.80 8.% 9.11 9.11 9.03 9.16 9.08 9.17 27 20-year 7.84 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 28 30-year 7.78 8.59 8.96 9.06 8.89 9.02 9.01 9.11 9.00 9.02 8.97 9.00 Composite13 29 Over 10 years (long-term) 8.14 8.64 8.98 9.06 8.89 9.07 9.13 9.21 9.10 9.15 9.10 9.13 State and local notes and bonds Moody's series14 30 Aaa 6.95 7.14 7.36 7.39 7.25 7.35 7.35 7.41 7.34 7.36 7.34 7.30 31 Baa 7.76 8.17 7.83 7.84 7.72 7.78 7.76 7.81 7.75 7.77 7.77 7.70 32 Bond Buyer series 7.32 7.63 7.68 7.66 7.47 7.46 7.61 7.66 7.68 7.66 7.57 7.50 Corporate bonds Seasoned issues 33 All industries 9.71 9.91 n.a. 10.28 9.90 9.91 10.03 10.03 10.00 10.03 10.05 10.06 34 Aaa 9.02 9.38 n.a. 9.82 9.51 9.45 9.57 9.55 9.52 9.57 9.59 9.60 35 Aa 9.47 9.68 n.a. 10.06 9.71 9.72 9.81 9.82 9.79 9.81 9.81 9.84 36 A 9.95 9.99 n.a. 10.34 9.99 9.99 10.11 10.12 10.10 10.11 10.11 10.14 37 Baa 10.39 10.58 n.a. 10.90 10.41 10.48 10.65 10.61 10.61 10.65 10.68 10.67 38 A-rated, recently offered utility bonds 9.61 9.95 n.a. 10.26 10.11 10.12 10.08 10.20 10.15 10.02 10.15 9.98 MEMO: Dividend/price ratio18 39 Preferred stocks 8.76 8.37 n.a. 9.25 9.23 9.29 9.38 9.36 9.41 9.36 9.40 9.34 40 Common stocks 3.48 3.08 n.a. 3.69 3.61 3.70 3.68 3.70 3.63 3.70 3.68 3.70 1. Weekly, monthly and annual figures are averages of all calendar days, places. Thus, average issuing rates in bill auctions will be reported using two where the rate for a weekend or holiday is taken to be the rate prevailing on the rather than three decimal places. preceding business day. The daily rate is the average of the rates on a given day 11. Yields are based on closing bid prices quoted by at least five dealers. weighted by the volume of transactions at these rates. 12. Yields adjusted to constant maturities by the U.S. Treasury. That is, yields 2. Weekly figures are averages for statement week ending Wednesday. are read from a yield curve at fixed maturities. Based on only recently issued, 3. Rate for the Federal Reserve Bank of New York. actively traded securities. 4. Unweighted average of offering rates quoted by at least five dealers (in the 13. Averages (to maturity or call) for all outstanding bonds neither due nor case of commercial paper), or finance companies (in the case of finance paper). callable in less than 10 years, including one very low yielding "flower" bond. Before November 1979, maturities for data shown are 30-59 days, 90-119 days, 14. General obligations based on Thursday figures; Moody's Investors Service. and 120-179 days for commercial paper; and 30-59 days, 90-119 days, and 15. General obligations only, with 20 years to maturity, issued by 20 state and 150-179 days for finance paper. local governmental units of mixed quality. Based on figures for Thursday. 5. Yields are quoted on a bank-discount basis, rather than in an investment 16. Daily figures from Moody's Investors Service. Based on yields to maturity yield basis (which would give a higher figure). on selected long-term bonds. 6. Dealer closing offered rates for top-rated banks. Most representative rate 17. Compilation of the Federal Reserve. This series is an estimate of the yield (which may be, but need not be, the average of the rates quoted by the dealers). on recently-offered, A-rated utility bonds with a 30-year maturity and 5 years of 7. Unweighted average of offered rates quoted by at least five dealers early in call protection. Weekly data are based on Friday quotations. the day. 18. Standard and Poor's corporate series. Preferred stock ratio based on a 8. Calendar week average. For indication purposes only. sample of ten issues: four public utilities, four industrials, one financial, and one 9. Unweighted average of closing bid rates quoted by at least five dealers. transportation. Common stock ratios on the 500 stocks in the price index. 10. Rates are recorded in the week in which bills are issued. Beginning with the NOTE. These data also appear in the Board's H.15 (519) and G. 13 (415) releases. Treasury bill auction held on Apr. 18, 1983, bidders were required to state the For address, see inside front cover. percentage yield (on a bank discount basis) that they would accept to two decimal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Financial Markets A25 1.36 STOCK MARKET Selected Statistics 1988 IInnddiiccaattoorr 11998866 11998877 Apr. May June July Aug. Sept. Oct. Nov. Dec. Prices and trading (averages of daily figures) Common stock prices 1 New York Stock Exchange (Dec. 31, 1965 = 50) 136.00 161.70 149.91 148.46 144.99 152.72 152.12 149.25 151.47 156.36 152.67 155.35 2 Industrial 155.85 195.31 180.83 181.01 176.02 184.92 184.09 179.72 182.18 188.58 182.25 187.75 3 Transportation 119.87 140.39 134.01 133.40 127.63 136.02 136.49 132.52 136.27 141.83 137.51 144.06 4 Utility 71.36 74.29 72.22 69.35 68.66 72.25 71.49 70.67 71.83 74.19 79.28 74.81 5 Finance 147.19 146.48 127.41 121.66 120.35 129.04 129.99 130.77 133.15 136.09 130.05 128.83 6 Standard & Poor's Corporation (1941-43 = 10)1 236.34 286.83 n.a. 262.61 256.12 270.68 269.05 263.73 267.97 277.40 271.02 281.28 7 American Stock Exchange (Aug. 31, 1973 = 50? 264.38 316.61 294.90 300.43 296.30 306.13 307.48 297.76 297.86 302.83 292.25 298.59 Volume of trading (thousands of shares) 8 New York Stock Exchange 141,385 188,647 161,450 162,518 153,906 195,772 166,916 144,668 145,702 162,631 134,427 135,473 9 American Stock Exchange 11,846 13,832 9,955 10,706 8,931 11,348 9,938 9,307 8,198 9,051 8,497 11,227 Customer financing (end-of-period balances, in millions of dollars) 10 Margin credit at broker-dealers 36,840 31,990 32,740 33,270 33,070 32,300 31,770 31,930 32,770 33,410 33,640 32,740 Free credit balances at brokers4 11 Margin-account5 4,880 4,750 5,660 4,395 4,380 4,580 4,485 4,655 4,725 5,065 4,920 5,660 12 Cash-account 19,000 15,640 16,595 13,965 14,150 14,460 14,340 14,045 14,175 14.880 15,185 16,595 Margin requirements (percent of market value and effective date)6 Mar. 11, 1968 June 8, 1968 May 6, 1970 Dec. 6, 1971 Nov. 24, 1972 Jan. 3, 1974 13 Margin stocks 70 80 65 55 65 50 14 Convertible bonds 50 60 50 50 50 50 15 Short sales 70 80 65 55 65 50 1. Effective July 1976, includes a new financial group, banks and insurance "margin securities" (as defined in the regulations) when such credit is collateracompanies. With this change the index includes 400 industrial stocks (formerly lized by securities. Margin requirements on securities other than options are the 425), 20 transportation (formerly 15 rail), 40 public utility (formerly 60), and 40 difference between the market value (100 percent) and the maximum loan value of financial. collateral as prescribed by the Board. Regulation T was adopted effective Oct. 15, 2. Beginning July 5, 1983, the American Stock Exchange rebased its index 1934; Regulation U, effective May 1, 1936; Regulation G, effective Mar. 11, 1968; effectively cutting previous readings in half. and Regulation X, effective Nov. 1, 1971. 3. Beginning July 1983, under the revised Regulation T, margin credit at On Jan. 1, 1977, the Board of Governors for the first time established in broker-dealers includes credit extended against stocks, convertible bonds, stocks Regulation T the initial margin required for writing options on securities, setting acquired through exercise of subscription rights, corporate bonds, and govern- it at 30 percent of the current market-value of the stock underlying the option. On ment securities. Separate reporting of data for margin stocks, convertible bonds, Sept. 30, 1985, the Board changed the required initial margin, allowing it to be the and subscription issues was discontinued in April 1984. same as the option maintenance margin required by the appropriate exchange or 4. Free credit balances are in accounts with no unfulfilled commitments to the self-regulatory organization; such maintenance margin rules must be approved by brokers and are subject to withdrawal by customers on demand. the Securities and Exchange Commission. Effective Jan. 31, 1986, the SEC 5. New series beginning June 1984. approved new maintenance margin rules, permitting margins to be the price of the 6. These regulations, adopted by the Board of Governors pursuant to the option plus 15 percent of the market value of the stock underlying the option. Securities Exchange Act of 1934, limit the amount of credit to purchase and carry Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A26 Domestic Nonfinancial Statistics • March 1989 1.37 SELECTED FINANCIAL INSTITUTIONS Selected Assets and Liabilities Millions of dollars, end of period 1988 AAccccoouunntt 11998866 11998877 Jan. Feb. Mar. Apr. May Juner July' Aug/ Sept/ Oct. FSLIC-insured institutions 1 Assets 1,163,851 1,250,855 1,254,885 1,257,466 1,261,581 l,274,483r 1,285,339' 1,290,134 1,299,557 1,311,789 1,324,196 1,333,233 2 Mortgages 697,451 721,593 722,944 723,856 725,625 728,984 733,547' 736,898 774433,,113399 775511,,447755 775544,,665588 776611,,004433 3 Mortgage-backed securities 158,193 201,828 201,732 197,811 197,889 220022,,776677'' 220055,,005533'' 220077,,774444 220088,,553333 221100,,559988 221111,,222233 221122,,000011 4 Contra-assets to mortgage assets' 41,799 42,344 41,291 40,836 41,268 39,358' 39,764' 40,178 40,235 39,036 38,395 38,196 5 Commercial loans 23,683 23,163 23,538 23,340 24,004 24,243 24,201 24,762 24,962 25,096 24,893 25,265 6 Consumer loans 51,622 57,902 58,342 58,687 5588,,339900 5599,,112211 6600,,225500 6611,,115511 6611,,556688 6622,,441144 6611,,778899 6611,,331177 7 Contra-assets to nonmortgage loans 3,041 3,467 3,580 3,524 3,628 3,513 3,395 3,505 33,,337788 33,,114444 33,,005522 22,,992211 8 Cash and investment securities 164,844 169,717 169,953 174,106 176,386 177,955' 179,506' 177,536 178,442 175,995 183,080 184,727 9 Other 112,898 122,462 123,247 124,025 124,184 124,284' 125,939' 125,815 126,526 128,392 130,000 129,998 10 Liabilities and net worth . 1,163,851 1,250,855 1,254,885 1,257,466 1,261,581 1,274,483' 1,285,339' 1,290,134 1,299,557 1,311,789 1,324,196 1,333,233 11 Savings capital 890,664 932,616 939,080 946,790 958,471 962,304' 963,761 966,756 968,218 968,297 973,732 976,168 12 Borrowed money 196,929 249,917 246,088 239,452 237,563 244,990 250,697' 257,119 262,733 266,724 273,642 278,288 13 FHLBB 100,025 116,363 114,053 112,725 112,389 113,029 114,994 117,281 118,207 120,671 123,430 124,362 14 Other 96,904 133,554 132,035 126,727 125,174 131,961 135,703' 139,838 144,526 146,053 150,212 153,926 15 Other 23,975 21,941 23,873 25,818 22,555 24,618' 27,161' 24,562 27,105 28,898 25,991 27,547 16 Net worth 52,282 46,382 45,845 45,406 42,892 42,57C 43,720' 41,697 41,502 47,871 50,830 51,230 FSLIC-insured federal savings banks 17 Assets 210,562 284,272 284,303 295,951 307,756 311,434 323,028' 329,736 333,610 357,860 369,698 18 Mortgages 113,638 164,013 163,915 171,592 178,260 180,586 184,575' 188,454 190,897 201,999 207,200 19 Mortgage-backed securities 29,766 45,826 46,171 46,687 47,979 49,075 51,290 52,648 53,049 55,710 56,770 20 Contra-assets to mortgage assets' 9,100 8,909 9,175 9,460 9,346 9,735' 10,089 10,136 10,917 10,875 21 Commercial loans 6,504 6,496 6,971 7,378 7,531 7,639 7,904 7,919 8,570 8,910 22 Consumer loans 13,180 17,696 17,649 18,795 19,141 19,616 20,426 21,142 21,444 22,520 22,409 23 Contra-assets to nonmortgige loans ... 678 698 737 800 724 707 738 699 772 789 24 Finance leases plus interest 591 604 584 611 615 652 708 735 791 805 25 Cash and investment .. 35,347 34,645 35,718 38,224 38,273 39,889' 40,286 40,825 45,084 48,703 26 Other 19,034 24,070 24,430 25,517 26,424 25,822 26,758' 27,230 27,318 32,516 34,054 27 Liabilities and net worth 210,562 284,272 284,303 295,951 307,756 311,434 323,028' 329,736 333,610 357,860 369,698 28 Savings capital .. 157,872 203,196 204,329 214,169 224,169 226,544 232,656 236,759 239,591 256,224 262,926 29 Borrowed money 37,329 60,716 59,206 59,704 61,552 62,566 66,816 69,356 70,015 75,807 80,782 30 FHLBB 19,897 29,617 28,280 29,169 30,456 30,075 31,682 32,177 31,941 35,357 37,510 31 Other 17,432 31,099 30,926 30,535 31,096 32,491 35,134 37,179 38,074 40,450 43,272 32 Other 4,263 5,324 5,838 6,602 6,089 6,390 7,118' 6,639 7,061 8,061 7.680 33 Net worth 11,098 15,036 14,930 15,477 15,946 16,087 16,589' 16,886 16,847 17,665 18,217 Savings banks 34 Assets 236,866 259,643 258,628 259,224 262,100 262,269 264,507 249,927 252,875 253,453 255,510 257,127 Loans 35 Mortgage 118,323 138,494 137,858 139,108 140,835 139,691 143,235 138,148 139,844 141,316 143,626 145,398 36 Other 3355,,116677 3333,,887711 3355,,009955 3355,,775522 3366,,447766 3377,,447711 3355,,992277 3322,,339999 3322,,994411 3322,,779999 3322,,887799 3333,,223344 Securities 37 U.S. government 14,209 13,510 12,776 12,269 12,225 13,203 12,490 1111,,559977 1111,,556633 1111,,335533 1111,,118822 1100,,889966 38 Mortgage-backed securities 25,836 32,772 32,241 32,423 32,272 31,072 31,861 2299,,773355 3300,,006644 3300,,000066 2299,,119900 2299,,889933 39 State and local government 2,185 2,003 1,994 2,053 2,033 2,013 1,933 1,849 1,840 1,901 1,878 1,872 40 Corporate and other . 20,459 18,772 18,780 18,271 18,336 18,549 18,298 17,492 17,527 17,301 17,234 16,886 41 Cash 6,894 5,864 4,841 5,002 4,881 5,237 5,383 4,831 5,186 4,950 5,463 4,825 42 Other assets 13,793 14,357 15,043 14,346 15,042 15,033 15,380 13,876 13,910 13,827 14,058 14,123 43 Liabilities 236,866 259,643 258,628 259,224 262,100 262,269 264,507 249,927 252,875 253,453 255,510 257,127 44 Deposits 192,194 201,497 199,545 200,391 203,407 203,273 205,692 194,018 195,537 195,907 197,665 197,925 45 Regular4 186,345 196,037 194,322 195,336 198,273 197,801 200,098 188,571 189,993 190,716 192,228 192,663 46 Ordinary savings .. 37,717 41,959 41,047 41,234 41,867 41,741 42,403 40,179 40,124 39,738 39,618 39,375 47 Time 100,809 112,429 112,781 113,751 115,529 115,887 117,297 110,738 112,272 114,255 116,387 117,712 48 Other 5,849 5,460 5,223 5,055 5,134 5,472 5,594 5,447 5,544 5,191 5,427 5,262 49 Other liabilities 25,274 35,720 36,836 35,787 35,737 35,827 35,836 3344,,003388 3344,,668866 3344,,777766 3355,,000011 3355,,999977 50 General reserve accounts 18,105 20,633 20,514 20,894 21,024 21,109 21,179 19,875 20,069 20,018 20,151 20,324 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Financial Markets All 1.37—Continued 1988 AAccccoouunntt 11998866 11998877 Jan. Feb. Mar. Apr. May June' Julyr Aug/ Sept/ Oct. Credit unions5 51 Total assets/liabilities and capital 147,726 f f f 169,111 169,175 172,456 172,345 173,276 f f f 5 5 2 3 S F t e a d te e ral 9 52 5 , , 2 4 4 8 3 3 1 1 1 1 5 0 9 9 , , 3 7 1 9 4 7 1 5 0 9 9 , , 2 9 6 1 2 3 1 5 1 9 2 , , 8 5 5 9 5 5 1 5 1 9 2 , , 7 5 7 7 2 3 1 6 1 0 3 , , 2 0 0 6 8 8 1 1 1 54 Loans outstanding.. 86,137 n.a. n.a. n.a. 101,965 103,271 105,704 105,800 107,065 n.a. n.a. n a. 55 Federal 55,304 65,732 66,431 68,213 68,658 69,626 56 State 30,833 I | 1 36,233 36,840 37,491 37,142 37,439 1 1 1 57 Savings 134,327 156,045 155,105 157,764 158,186 159,314 5 5 8 9 F S e ta d t e e ral 8 4 7 6 , , 9 3 5 7 4 3 t1 • 1 t1 1 5 0 4 1 , , 1 8 9 4 8 7 1 5 0 4 1 , , 0 0 5 4 7 8 1 5 0 4 3 , , 6 1 3 2 5 9 1 5 0 4 3 , , 8 3 3 4 9 7 1 5 0 5 4 , , 0 2 5 5 8 6 t 1 t 1 • 1 Life insurance companies 60 Assets 937,551 1,044,459 1,042,350 1,052,645 1,065,549 1,075,541 1,094,827 1,105,546 1,113,547 1,121,337 1,131,17 9 Securities 61 Government 84,640 84,426 91,682 92,497 92,408 93,946 86,711 87,160 88,218 88,362 87,588 62 United States6.. 59,033 57,078 64,922 65,534 65,218 66,749 58,988 59,351 60,244 60,407 59,874 63 State and local . 11,659 10,681 11,749 11,859 12,033 11,976 11,016 11,114 11,102 11,190 11,054 64 Foreign" 13,948 16,667 15,011 15,104 15,157 15,221 16,707 16,695 16,872 16,765 16,660 65 Business 492,807 569,199 563,019 571,070 580,392 587,846 606,445 614,052 618,742 624,917 630,086 n. a. 66 Bonds 401,943 472,684 469,207 476,448 484,403 490,285 503,728 509,105 514,926 520,796 525,336 67 Stocks 90,864 96,515 93,812 94,622 95,989 97,561 102,717 104,947 103,816 104,121 104,750 68 Mortgages 193,842 203,545 212,637 213,182 214,815 215,383 219,012 220,870 221,990 233,438 225,627 69 Real estate 31,615 34,172 34,178 34,503 34,845 34,964 35,484 35,545 35,737 35,920 35,892 70 Policy loans 54,055 53,626 53,265 52,720 52,604 52,568 53,013 53,107 53,142 53,194 53,149 71 Other assets 80,592 89,586 87,569 88,673 90,499 90,834 94,162 94,812 95,718 95,505 98,837 1. Contra-assets are credit-balance accounts that must be subtracted from the NOTE. FSLIC-insured institutions: Estimates by the FHLBB for all institutions corresponding gross asset categories to yield net asset levels. Contra-assets to insured by the FSLIC and based on the FHLBB thrift Financial Report. mortgage loans, contracts, and pass-through securities include loans in process, FSLIC-insured federal savings banks: Estimates by the FHLBB for federal unearned discounts and deferred loan fees, valuation allowances for mortgages savings banks insured by the FSLIC and based on the FHLBB thrift Financial "held for sale," and specific reserves and other valuation allowances. Report. 2. Contra-assets are credit-balance accounts that must be subtracted from the Savings banks: Estimates by the National Council of Savings Institutions for all corresponding gross asset categories to yield net asset levels. Contra-assets to savings banks in the United States and for FDIC-insured savings banks that have nonmortgage loans include loans in process, unearned discounts and deferred loan converted to federal savings banks. fees, and specific reserves and valuation allowances. Credit unions: Estimates by the National Credit Union Administration for 3. Holding of stock in Federal Home Loan Bank and Finance leases plus federally chartered and federally insured state-chartered credit unions serving interest are included in "Other" (line 9). natural persons. 4. Excludes checking, club, and school accounts. Life insurance companies: Estimates of the American Council of Life Insurance 5. Data include all federally insured credit unions, both federal and state for all life insurance companies in the United States. Annual figures are annualchartered, serving natural persons. statement asset values, with bonds carried on an amortized basis and stocks at 6. Direct and guaranteed obligations. Excludes federal agency issues not year-end market value. Adjustments for interest due and accrued and for guaranteed, which are shown in the table under "Business" securities. differences between market and book values are not made on each item separately 7. Issues of foreign governments and their subdivisions and bonds of the but are included, in total, in "other assets." International Bank for Reconstruction and Development. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A28 Domestic Nonfinancial Statistics • March 1989 1.38 FEDERAL FISCAL AND FINANCING OPERATIONS Millions of dollars Calendar year Fiscal Fiscal Fiscal Type of account or operation year year year 1988 1986 1987 1988 July Aug. Sept. Oct. Nov. Dec. U.S. budget1 1 Receipts, total 769,091 854,143 908,953 60,690 69,479 97,803 63,646 64,408 93,795 2 On-budget 568,862 640,741 667,462 40,980 51,015 75,586 45,847 47,023 74,682 3 Off-budget 200,228 213,402 241,491 19,710 18,464 22,217 17,799 17,385 19,114 4 Outlays, total 990,258 1,003,830' 1,064,044' 83,634 92,561 87,588 90,655' 93.426 105,363 5 On-budget 806,760 809,998' 861,352' 66,818 74,756 70,071 73,514' 75.427 91,732 6 Off-budget 183,498 193,832 202,691 16,816 17,805 17,518 17,141 17,999 13,632 7 Surplus, or deficit (-), total -221,167 -149,687' -155,090' 9,134 -22,944 -23,082 -27,009' -29,018 -11,568 8 On-budget -237,898 -169,257' -193,890' -25,838 -23,741 5,515 -27,667' -28,403 -17,050 9 Off-budget 16,731 19,570 38,800 2,894 659 4,699 658 -614 5,482 Source of financing (total) 10 Borrowing from the public 236,187 162,062' 3,665 23,370 14,665 10,716 31,520 12,036 11 Operating cash (decrease, or increase 12 othei^!'.!'.'.'.!!'.!'.'.'.!'.'.'.'.'.'.'.!!'.!'.!'.'.! -14,324 -5,052 -7,963 15,696 10,954 -31,444 13,748 9,218 -12,268 -696 4,669' 991' 3,583 -11,242 6,564 2,545' -11,720 11,800 MEMO 13 Treasury operating balance (level, end of period) 31,384 36,436 44,398 23,908 12,954 44,398 30,650 21,432 33,700 14 Federal Reserve Banks 7,514 9,120 13,024 3,910 4,390 13,024 6,151 5,198 8,657 15 Tax and loan accounts 23,870 27,316 31,375 19,998 8,564 31,375 24,499 16,234 25,044 1. In accordance with the Balanced Budget and Emergency Deficit Control payable to the public; allocations of special drawing rights; deposit funds; Act of 1985, all former off-budget entries are now presented on-budget. The miscellaneous liability (including checks outstanding) and asset accounts; Federal Financing Bank (FFB) activities are now shown as separate accounts seigniorage; increment on gold; net gain/)oss for U.S. currency valuation under the agencies that use the FFB to finance their programs. The act has also adjustment; net gain/loss for IMF valuation adjustment; and profit on the sale of moved two social security trust funds (Federal old-age survivors insurance and gold. Federal disability insurance trust funds) off-budget. SOURCE. Monthly Treasury Statement of Receipts and Outlays of the U.S. 2. Includes SDRs; reserve position on the U.S. quota in the IMF; loans to Government and the Budget of the U.S. Government. international monetary fund; other cash and monetary assets; accrued interest Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Finance A29 1.39 U.S. BUDGET RECEIPTS AND OUTLAYS1 Millions of dollars Calendar year FFFiiissscccaaalll FFFiiissscccaaalll SSSooouuurrrccceee ooorrr tttyyypppeee yyyeeeaaarrr yyyeeeaaarrr 1987 1988 1988 111999888777 111999888888 HI H2 HI H2 Oct. Nov. Dec. RECEIPTS 1 All sources 854,143 908,954 447,282 421,712 476,115 449,821 63,646 64,408 93,795 2 Individual income taxes, net 392,557 401,181 205,157 192,575 207,659 200,299 31,287 29,822 39,673 3 Withheld 322,463 341,435 156,760 170,203 169,300 179,600 28,824 30,092 37,578 4 Presidential Election Campaign Fund 33 33 30 4 28 4 0 0 0 5 Nonwithheld 142,957 132,199 112,421 31,223 101,614 29,880 3,430 1,367 3,034 6 Refunds 72,896 72,487 64,052 8,853 63,283 9,187 %7 1,638 939 Corporation income taxes 7 Gross receipts 102,859 109,683 52,3% 52,821 5588,,000022 56,409 3,789 2,662 23,100 8 Refunds 18,933 15,487 10,881 7,119 8,706 7,384 1,995 1,219 940 9 Social insurance taxes and contributions, net 330033,,331188 334,335 163,519 143,755 181,058 157,603 23,848 25,075 24,698 10 Employment taxes and contributions 273,028 305,093 146,6% 130,388 164,412 144,983 22,400 22,051 2244,,110000 11 Self-employment taxes and contributions 13,987 17,691 12,020 1,889 14,839 3,032 0 326 0 12 Unemployment insurance 25,575 24,584 14,514 10,977 14,363 10,359 1,101 2,641 189 13 Other net receipts 4,715 4,659 2,310 2,390 2,284 2,262 347 382 410 14 Excise taxes 32,457 35,540 15,845 17,680 16,440 19,434 3,134 3,247 3,155 15 Customs deposits 15,085 16,198 7,129 7,993 7,851 8,535 1,381 1,403 1,391 16 Estate and gift taxes 7,493 7,594 3,818 3,610 3,863 4,054 662 753 673 17 Miscellaneous receipts 19,307 19,909 10,299 10,399 9,950 10,873 1,540 2,666 2,046 OUTLAYS 18 All types 1,004,586' 1,064,054' 503,267 532,839 513,210 553,227 90,655' 93,426 105,363 19 National defense 281,999 290,349 142,886 146,995 143,080 150,4% 25,938 24,702 28,934 20 International affairs 11,649 10,469 4,374 4,487 7,150 2,636 2,176 -2,055 805 21 General science, space, and technology 9,216 10,876 4,324 5,469 5,361 5,852 1,136 1,116 1,007 22 Energy 4,115 2,342 2,335 1,468 555 1,966 366 539 406 23 Natural resources and environment 13,363 14,538 6,175 7,590 6,776 8,330 1,451 1,465 1,480 24 Agriculture 26,606 17,210 11,824 14,640 7,872 7,725 3,025 3,243 1,712 25 Commerce and housing credit 6,156 19,064 4,893 3,852 5,951 20,274 477 2,764 7,217 26 Transportation 26,221 27,196 12,113 14,0% 12,700 14,922 2,504 2,570 2,249 27 Community and regional development 5,051 5,577 3,108 2,075 2,765 2,690 648 588 536 28 Education, training, employment, and social services 29,724 30,856 14,182 15,592 15,451 16,152 2,644 3,054 22,,884499 29 Health 39,968 44,482 20,318 20,750 22,643 23,360 3,994 3,%2 4,102 30 Social security and medicare 282,472 297,828 142,864 158,469 135,322 149,017 23,951 25,310 25,374 31 Income security 123,255 130,174 62,248 61,201 65,555 64,978 8,855 11,054 12,355 32 Veterans benefits and services 26,782 29,248 12,264 14,956 13,241 15,797 1,857 2,713 3,539 33 Administration of justice 7,548 9,205 3,626 4,291 4,761 4,778 865 803 765 34 General government 7,564 9,506 3,344 3,560 4,337 5,137 934 819 1,600 35 General-purpose fiscal assistance 0 0 337 1,175 448 0 0 0 0 36 Net interest6 138,570 151,711 70,110 71,933 76,098 78,317 13,014 13,622 12,972 37 Undistributed offsetting receipts -36,455 -36,576 -19,102 -17,684 -17,766 -18,771 -2,751 -2,844 -2,537 1. Functional details do not add to total outlays for calendar year data because 5. Deposits of earnings by Federal Reserve Banks and other miscellaneous revisions to monthly totals have not been distributed among functions. Fiscal year receipts. total for outlays does not correspond to calendar year data because revisions from 6. Net interest function includes interest received by trust funds. the Budget have not been fully distributed across months. 7. Consists of rents and royalties on the outer continental shelf and U.S. 2. Old-age, disability, and hospital insurance, and railroad retirement accounts. government contributions for employee retirement. 3. Old-age, disability, and hospital insurance. SOURCES. U.S. Department of the Treasury, Monthly Treasury Statement of 4. Federal employee retirement contributions and civil service retirement and Receipts and Outlays of the U.S. Government, and the U.S. Office of Managedisability fund. ment and Budget, Budget of the U.S. Government, Fiscal Year 1988. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A30 Domestic Financial Statistics • March 1989 1.40 FEDERAL DEBT SUBJECT TO STATUTORY LIMITATION Billions of dollars 1986 1987 1988 IItteemm Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 1 Federal debt outstanding 2,129.5 2,218.9 2,250.7 2,313.1 2,354.3 2,435.2 2,493.2 2,555.1 2,614.6 2 Public debt securities 2,125.3 2,214.8 2,246.7 2,309.3 2,350.3 2,431.7 2,487.6 2,547.7 2,602.3 3 Held by public 1,742.4 1,811.7 1,839.3 1,871.1 1,893.1 1,954.1 1,996.7 2,013.4 2,051.7 4 Held by agencies 382.9 403.1 407.5 438.1 457.2 477.6 490.8 534.2 550.4 5 Agency securities 4.2 4.0 4.0 3.8 4.0 3.5 5.6 7.4 12.4 6 Held by public 3.2 3.0 2.9 2.8 3.0 2.7 5.1 7.0 12.2 7 Held by agencies 1.1 1.1 1.1 1.0 1.0 .8 .6 .5 .2 8 Debt subject to statutory limit 2,111.0 2,200.5 2,232.4 2,295.0 2,336.0 2,417.4 2,472.6 2,532.2 2,586.9 9 Public debt securities 2,109.7 2,199.3 2,231.1 2,293.7 2,334.7 2,416.3 2,472.1 2,532.1 2,586.7 10 Other debt1 1.3 1.3 1.3 1.3 1.3 1.1 .5 .1 .1 11 MEMO: Statutory debt limit 2,111.0 2,300.0 2,300.0 2,320.0 2,800.0 2,800.0 2,800.0 2,800.0 2,800.0 1. Includes guaranteed debt of Treasury and other federal agencies, specified SOURCES. Treasury Bulletin and Monthly Statement of the Public Debt of the participation certificates, notes to international lending organizations, and District United States. of Columbia stadium bonds. 1.41 GROSS PUBLIC DEBT OF U.S. TREASURY Types and Ownership Billions of dollars, end of period 1987 1988 TTyyppee aanndd hhoollddeerr 11998844 11998855 11998866 11998877 Q4 Ql Q2 Q3 1,663.0 1,945.9 2,214.8 2,431.7 2,431.7 2,487.6 2,547.7 2,602.3 By type 1,660.6 1,943.4 2,212.0 2,428.9 2,428.9 2,484.9 2,545.0 2,599.9 1,247.4 1,437.7 1,619.0 1,724.7 1,724.7 1,758.7 1,769.9 1,802.9 4 Bills 374.4 399.9 426.7 389.5 389.5 392.6 382.3 398.5 705.1 812.5 927.5 1,037.9 1,037.9 1,059.9 1,072.7 1,089.6 167.9 211.1 249.8 282.5 282.5 291.3 299.9 299.9 413.2 505.7 593.1 704.2 704.2 726.2 775.1 797.0 44.4 87.5 110.5 139.3 139.3 142.9 146.9 147.6 9.1 7.5 4.7 4.0 4.0 6.1 5.7 6.3 9.1 7.5 4.7 4.0 4.0 6.1 5.7 6.3 11 Public .0 .0 .0 .0 .0 .0 .0 n.a. 73.1 78.1 90.6 99.2 99.2 102.3 104.5 106.2 286.2 332.2 386.9 461.3 461.3 474.4 517.5 536.5 2.3 2.5 2.8 2.8 2.8 2.6 2.7 2.5 By holder4 289.6 348.9 403.1 477.6 477.6 490.8 534.2 550.4 160.9 181.3 211.3 222.6 222.6 217.5 227.6 229.2 1,212.5 1,417.2 1,602.0 1,745.2 1,745.2 1,778.2 1,784.9 1,819.0 1 2 8 5 6 . . 9 0 r 1 2 9 5 8 . . 1 2 r 2 2 0 8 3 . . 0 5 ' 20 1 1 4 . .3 2 r 20 1 1 4 . . 2 3 r r 20u1..0yr 20 1 2 3. . 5r r 20 1 3 0 . . 0 8 64.5r 78.5r 105.6r 120.6 120.6 125.5 132.2 135.0 50.1 59.0 68.8 84.6 84.6 83.0 86.5 86.0 173.0 226.7r 262.8r 282.6 282.6 285.8 n.a. n.a. Individuals 74.5 79.8 92.3 101.1 101.1 104.0 106.2 107.8 69.3 75.0 70.5 72.3 72.3 69.8 71.7 72.0 192.9 212.5 251.6 287.3r 287.3 321.0" 333.8r 334.3 376.3r 462.4r 518.9' 581.2 581.2 573.2 n.a. n.a. 1. Includes (not shown separately): Securities issued to the Rural Electrifica- 5. Consists of investments of foreign and international accounts. Excludes tion Administration; depository bonds, retirement plan bonds, and individual non-interest-bearing notes issued to the International Monetary Fund. retirement bonds. 6. Includes savings and loan associations, nonprofit institutions, credit unions, 2. Nonmarketable dollar-denominated and foreign currency-denominated se- mutual savings banks, corporate pension trust funds, dealers and brokers, certain ries held by foreigners. U.S. Treasury deposit accounts, and federally-sponsored agencies. 3. Held almost entirely by U.S. Treasury agencies and trust funds. SOURCES. Data by type of security, U.S. Treasury Department, Monthly 4. Data for Federal Reserve Banks and U.S. Treasury agencies and trust funds Statement of the Public Debt of the United States; data by holder. Treasury are actual holdings; data for other groups are Treasury estimates. Bulletin. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Finance A31 1.42 U.S. GOVERNMENT SECURITIES DEALERS Transactions1 Par value; averages of daily figures, in millions of dollars 1988 1988 IItteemm 11998866 11998877 11998888 Oct. Nov. Dec. Nov. 23 Nov. 30 Dec. 7 Dec. 14 Dec. 21 Dec. 28 Immediate delivery2 1 U.S. Treasury securities 95,444 110,050 101,635 109,769 114,837 90,053 108,877 99,378 118,700 101,918 86,096 61,988 By maturity 2 Bills 34,247 37,924 29,393 29,616 32,559 28,590 30,341 30,850 30,816 29,287 32,412 2244,,559944 3 Other within 1 year 2,115 3,271 3,427 3,286 3,537 2,936 2,587 3,568 3,348 2,807 3,341 2,364 4 1-5 years 24,667 27,918 27,780 28,673 32,826 23,404 33,669 26,235 33,112 23,713 19,453 17,402 5 5-10 years 20,455 24,014 24,941 30,401 27,077 21,498 22,744 24,067 31,324 28,603 18,459 10,818 6 Over 10 years 13,961 16,923 16,093 17,793 18,838 13,625 19,535 14,658 20,100 17,507 12,431 6,810 By type of customer 7 U.S. government securities dealers 3,669 2,936 2,762 3,225 3,123 2,818 3,430 2,103 2,736 2,891 2,613 3,378 8 U.S. government securities brokers 49,558 61,539 59,849 65,612 67,171 51,839 62,572 57,329 71,067 61,061 48,605 32,530 9 All others3 42,217 45,575 39,023 40,933 44,543 35,395 42,875 39,945 44,897 37,966 34,878 26,080 10 Federal agency securities 16,747 18,084 15,900 17,651 17,535 14,779 15,758 13,977 15,820 19,310 12,559 11,910 11 Certificates of deposit 4,355 4,112 3,369 3,636 3,536 2,763 3,940 3,816 3,104 2,941 3,228 1,959 12 Bankers acceptances 3,272 2,965 2,316 2,177 2,563 1,906 2,056 2,497 2,160 2,071 1,846 1,438 13 Commercial paper 16,660 17,135 22,927 28,748 26,590 28,154 25,959 26,914 27,742 27,230 29,696 26,165 Futures contracts 14 Treasury bills 3,311 3,233 2,627 2,777 2,461 2,643 2,737 1,907 3,288 3,461 2,717 1,112 15 Treasury coupons 7,175 8,963 9,698 10,681 11,018 9,511 9,575 11,389 13,675 11,635 9,119 4,833 16 Federal agency securities 16 5 1 0 0 0 0 0 0 0 0 0 Forward transactions 17 U.S. Treasury securities 1,876 2,029 2,093 1,769 3,113 1,745 2,899 1,571 1,299 2,907 1,306 1,915 18 Federal agency securities 7,830 9,290 8,008 8,024 8,189 9,214 7,328 5,348 9,212 14,653 10,803 3,654 1. Transactions are market purchases and sales of securities as reported to the securities, nondealer departments of commercial banks, foreign banking agencies, Federal Reserve Bank of New York by the U.S. government securities dealers on and the Federal Reserve System. its published list of primary dealers. 4. Futures contracts are standardized agreements arranged on an organized Averages for transactions are based on the number of trading days in the period. exchange in which parties commit to purchase or sell securities for delivery at a The figures exclude allotments of, and exchanges for, new U.S. Treasury future date. securities, redemptions of called or matured securities, purchases or sales of 5. Forward transactions are agreements arranged in the over-the-counter securities under repurchase agreement, reverse repurchase (resale), or similar market in which securities are purchased (sold) for delivery after 5 business days contracts. from the date of the transaction for Treasury securities (Treasury bills, notes, and 2. Data for immediate transactions do not include forward transactions. bonds) or after 30 days for mortgage-backed agency issues. 3. Includes, among others, all other dealers and brokers in commodities and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A32 Domestic Nonfinancial Statistics • March 1989 1.43 U.S. GOVERNMENT SECURITIES DEALERS Positions and Financing1 Averages of daily figures, in millions of dollars 1988 1988 IItteemm 11998866 11998877 11998888 Oct. Nov. Dec. Nov. 30 Dec. 7 Dec. 14 Dec. 21 Dec. 28 Positions Net immediate2 1 U.S. Treasury securities 12,912 -6,216 -22,742 -25,794' -24,048 -32,841 -25,129' -28,723 -32,190 -32,858 -36,144 2 Bills 12,761 4,317 2,250 3,691' 329 -1,483 -1.2BST -862 -1,602 898 -3,257 3 Other within 1 year 3,705r 1,557 -2,233 -5,534 -3,587 -1,946 -2,731 -2,198 -2,076 -1,556 -1,752 4 1-5 years 9,146 649 -3,015 855 -1,334 -9,968 -5,154' -6,699 -9,180 -11,904 -12,010 5 5-10 years -9,505 -6,564 -9,662 -11,191 -7,697 -7,066 -4,196' -5,445 -6,200 -8,199 -7,812 6 Over 10 years -3,197 -6,174 -10,082 -13,615 -11,759 -12,377 -11,759' -13,518 -13,132 -12,097 -11,313 7 Federal agency securities 32,984 31,91 lr 28,231 30,169 32,172 27,290 28,918' 27,870 30,524 27,651 24,247 8 Certificates of deposit 10,485 8,188 7,301 8,262 8,445 8,776 8,124' 8,686 8,658 8,737 8,816 9 Bankers acceptances 5,526 3.66C 2,487 2,247 2,579 2,137 2,317 2,306 2,049 2,005 2,157 10 Commercial paper 88,,008899 77,,449966 66,,115522 66,,777700 55,,995577 99,,337711 55,,335522 66,,990099 77,,774411 1100,,883333 1111,,442266 Futures positions 11 Treasury bills -18,059 -3,373 -2,211 -4,388 -1,878 999 1,057' 710 985 1,740 806 12 Treasury coupons 3,473 5,988 6,224 6,532 5,875 6,604 6,657' 7,210 6,695 6,938 5,361 13 Federal agency securities -153 -95 0 0 0 0 0 0 0 0 0 Forward positions 14 U.S. Treasury securities -2,144 -1,211 338 -968' -770 -535 452 -949 -139 -1,003 -352 15 Federal agency securities -11,840 -18,817 -16,349 -17,557' -16,959 -12,854 -15,081 -14,146 -15,048 -12,110 -10,844 Financing3 Reverse repurchase agreements4 16 Overnight and continuing 98,913r 126,709'' 135,154 149,432' 143,423 133,638 161,256 151,461 151,229 144,363 140,953 1/ Term 110088,,660077'' 114488,,228888'' 117766,,115500 119933,,338811'' 220055,,663344 118866,,113300 118866,,881144 119966,,223344 220033,,660000 220099,,996677 220099,,117700 Repurchase agreements 18 Overnight and continuing 141,823'' 170,763' 171,261 189,498' 173,173 165,869 197,605 183,533 186,450 182,091 177,749 19 Term 102,397r 121,270' 136,179 145,288 165,035 134,524 137,132 145,008 145,132 151,035 150,729 1. Data for dealer positions and sources of financing are obtained from reports reverses to maturity, which are securities that were sold after having been submitted to the Federal Reserve Bank of New York by the U.S. Treasury obtained under reverse repurchase agreements that mature on the same day as the securities dealers on its published list of primary dealers. securities. Data for immediate positions do not include forward positions. Data for positions are averages of daily figures, in terms of par value, based on 3. Figures cover financing involving U.S. Treasury and federal agency securithe number of trading days in the period. Positions are net amounts and are shown ties, negotiable CDs, bankers acceptances, and commercial paper. on a commitment basis. Data for financing are in terms of actual amounts 4. Includes all reverse repurchase agreements, including those that have been borrowed or lent and are based on Wednesday figures. arranged to make delivery on short sales and those for which the securities 2. Immediate positions are net amounts (in terms of par values) of securities obtained have been used as collateral on borrowings, that is, matched agreements. owned by nonbank dealer firms and dealer departments of commercial banks on 5. Includes both repurchase agreements undertaken to finance positions and a commitment, that is, trade-date basis, including any such securities that have "matched book" repurchase agreements. been sold under agreements to repurchase (RPs). The maturities of some NOTE. Data on positions for the period May 1 to Sept. 30, 1986, are partially repurchase agreements are sufficiently long, however, to suggest that the securi- estimated. ties involved are not available for trading purposes. Immediate positions include Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Finance A33 1.44 FEDERAL AND FEDERALLY SPONSORED CREDIT AGENCIES Debt Outstanding Millions of dollars, end of period 1988 AAggeennccyy 11998844 11998855 11998866 11998877 July Aug. Sept. Oct. Nov. 1 Federal and federally sponsored agencies 271,220 293,905 307,361 341,386 356,009 360,004 363,894 364,491 n.a. 2 Federal agencies 35,145 36,390 36,958 37,981 36,465 35,694 35,448 35,070 n.a. 3 Defense Department' 142 71 33 13 11 11 11 8 8 4 Export-Import Bank2, 15,882 15,678 14,211 11,978 11,232 11,232 10,964' 10,964 10,964 5 Federal Housing Administration4 133 115 138 183 116 115 120 118 139 6 Government National Mortgage Association participation certificates 2,165 2,165 2,165 1,615 883300 0 00 00 00 7 Postal Service6 1,337 1,940 3,104 6,103 5,842 5,842 5,842 5,842 5,842 8 Tennessee Valley Authority 15,435 16,347 17,222 18,089 18,434 18,494 18,511 18,138 18,256 9 United States Railway Association6 51 74 85 0 0 0 0 0 0 10 Federally sponsored agencies7 237,012 257,515 270,553 303,405 319,544' 324,310' 328,446' 329,421' n.a. 11 Federal Home Loan Banks 65,085 74,447 88,752 115,725 119,409 121,266 126,011 127,113 130,630 12 Federal Home Loan Mortgage Corporation 10,270 11,926 13,589 17,645 17,844 19,652 18,368 17,384 n.a. N Federal National Mortgage Association 83,720 93,896 93,563 97,057 104,751 105,730 105,986 105,698 53,420 14 Farm Credit Banks8 72,192 68,851 62,478 55,275 54,538 53,582 53,764 53,923 105,337 15 Student Loan Marketing Association9 5,745 8,395 12,171 16,503 19,652R W.SSO' 20,117' 21,112 21,403 16 Financing Corporation n.a. n.a. n.a. 1,200 2,900 3,750 3,750 3,750 4,450 17 Farm Credit Financial Assistance Corporation" n.a. n.a. n.a. n.a. 450 450 450 450 690 MEMO 18 Federal Financing Bank debt12 145,217 153,373 157,510 152,417 149,937 149,809 146,151 145,529 143,321 Lending to federal and federally sponsored agencies 19 Export-Import Bank3 15,852 15,670 14,205 11,972 1111,,222266 1111,,222266 1100,,995588 1100,,995588 1100,,995588 70 Postal Service6 1,087 1,690 2,854 5,853 5,592 5,592 5,592 5,592 5,592 21 Student Loan Marketing Association 5,000 5,000 4,970 4,940 4,940 4,940 4,910 4,910 4,910 22 Tennessee Valley Authority 13,710 14,622 15,797 16,709 17,054 17,114 17,131 16,758 16,876 23 United States Railway Association6 51 74 85 0 0 0 0 0 0 Other Lending13 24 Farmers Home Administration 58,971 64,234 65,374 59,674 59,674 59,464 58,496 58,496 58,496 25 Rural Electrification Administration 20,693 20,654 21,680 21,191 19,206 19,225 19,205 19,222 19,220 26 29,853 31,429 32,545 32,078 32,245 32,248 29,859 29,593 27,269 1. Consists of mortgages assumed by the Defense Department between 1957 9. Before late 1981, the Association obtained financing through the Federal and 1963 under family housing and homeowners assistance programs. Financing Bank (FFB). Borrowing excludes that obtained from the FFB, which is 2. Includes participation certificates reclassified as debt beginning Oct. 1, 1976. shown on line 21. 3. Off-budget Aug. 17, 1974, through Sept. 30, 1976; on-budget thereafter. 10. The Financing Corporation, established in August 1987 to recapitalize the 4. Consists of debentures issued in payment of Federal Housing Administration Federal Savings and Loan Insurance Corporation, undertook its first borrowing in insurance claims. Once issued, these securities may be sold privately on the October 1987. securities market. 11. The Farm Credit Financial Assistance Corporation (established in January 5. Certificates of participation issued before fiscal 1969 by the Government 1988 to provide assistance to the Farm Credit System) undertook its first National Mortgage Association acting as trustee for the Farmers Home Admin- borrowing in July 1988. istration; Department of Health, Education, and Welfare; Department of Housing 12. The FFB, which began operations in 1974, is authorized to purchase or sell and Urban Development; Small Business Administration; and the Veterans obligations issued, sold, or guaranteed by other federal agencies. Since FFB Administration. incurs debt solely for the purpose of lending to other agencies, its debt is not 6. Off-budget. included in the main portion of the table in order to avoid double counting. 7. Includes outstanding noncontingent liabilities: notes, bonds, and deben- 13. Includes FFB purchases of agency assets and guaranteed loans; the latter tures. Some data are estimated. contain loans guaranteed by numerous agencies with the guarantees of any 8. Excludes borrowing by the Farm Credit Financial Assistance Corporation, particular agency being generally small. The Farmers Home Administration item shown in line 17. consists exclusively of agency assets, while the Rural Electrification Administration entry contains both agency assets and guaranteed loans. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A34 Domestic Nonfinancial Statistics • March 1989 1.45 NEW SECURITY ISSUES Tax-Exempt State and Local Governments Millions of dollars 1988 Type of issue or issuer, or use 1986 1987 May June July Aug. Sept. Oct. Nov/ Dec. 1 All issues, new and refunding1 214,189 147,011 102,407 7,846 13,912 9,746 6,966 9,669 10,455 8,551 10,711 Type of issue 2 General obligation 52,622 46,346 30,589 3,085 4,237 1,959 2,472 2,370 2,058 2,368 2,451 3 Revenue 161,567 100,664 71,818 4,761 9,675 7,788 4,494 7,299 8,387 6,183 8,260 Type of issuer 4 State 13,004 14,474 10,102 913 1,349 140 576 1,206 734 525 1,001 5 Special district and statutory authority 134,363 89,997 65,460 4,625 8,629 6,752 3,749 6,407 7,283 5,550 7,277 6 Municipalities, counties, and townships 78,754 42,541 26,845 2,308 3,934 2,854 2,641 2,056 2,438 2,476 2,433 7 Issues for new capital, total 156,050 83,492' 56,789 s.m' 8,935' 8,386' 5,317r 7,076r 6,965r 5,830 8,441 Use of proceeds 8 Education 16,658 12,307 9,524 1,316 1,320 1,699 694 1,351 512 827 2,308 9 Transportation 12,070 7,246 3,677 452 858 1,446 265 732 559 237 649 10 Utilities and conservation 26,852 14,594 7,912 580 635 225 613 694 1,238 1,055 513 11 Social welfare 63,181 11,353 11,106 694 2,060 1,222 1,242 2,358 2,478 1,991 2,020 12 Industrial aid 12,892 6,190 7,474 248 434 128 460 280 393 294 964 13 Other purposes 24,398 31,802 18,020 1,900 3,628 3,666 2,043 1,661 1,785 1,426 1,987 1. Par amounts of long-term issues based on date of sale. SOURCES. Securities Data/Bond Buyer Municipal Data Base beginning 1986. 2. Includes school districts beginning 1986. Public Securities Association for earlier data. 1.46 NEW SECURITY ISSUES U.S. Corporations Millions of dollars 1988 TTyyppee ooff iissssuuee oorr iissssuueerr,, oorr uussee 11998855 11998866 11998877 Apr. May June July Aug. Sept. Oct. Nov. 1 All issues1 239,015 423,726 392,156 21,227 23,413 30,043 18,037 19,305 23,933 21,532'' 22,233 2 Bonds3 203,500 355,293 325,648 18,515 19,382 25,748 12,899 15,970 20,928 18,745'' 18,833 Type of offering 3 Public, domestic 119,559 231,936 209,279 16,202 17,496 22,753 10,905 14,631 18,241r 17,250r 16,200 4 Private placement, domestic3 46,200 80,760 92,070 n.a. n.a. n.a. n.a. n.a. 5. Sold abroad 37,781 42,596 24,299 2,313 1,886 2,995 1,994 1,339 2,687r 1,512' 2,833 Industry group 6 Manufacturing 63,973 91,548 61,666 4,513 4,206 5,305 2,204 3,476 3,749 3,552' 2,534 7 Commercial and miscellaneous 17,066 40,124 49,327 771 1,446 2,281 1,531 2,227 1,035 765 2,875 8 Transportation 6,020 9,971 11,974 890 184 580 100 0 150 705 45 9 Public utility 13,649 31,426 23,004 1,170 1,929 1,707 540 298 856 1,346' 668 10 Communication 10,832 16,659 7,340 411 69 925 577 29 1,064 0 289 11 Real estate and financial 91,958 165,564 172,343 10,760 11,546 14,949 7,948 9,939 14,073 12,376' 12,422 12 Stocks3 35,515 68,433 66,508 2,712 4,031 4,295 5,138 3,335 3,005 2,787' 3,400 Type 13 Preferred 6,505 11,514 10,123 241 285 501 407 498 385 865 478 14 Common 29,010 50,316 43,225 2,471 3,746 3,794 4,731 2,837 2,620 1,922' 2,922 15 Private placement3 n.a. 6,603 13,157 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Industry group 16 Manufacturing 5,700 15,027 13,880 318 1,080 1,676 296 538 244 288 397 17 Commercial and miscellaneous 9,149 10,617 12,888 276 157 522 2,073 347 525 222 51 18 Transportation 1,544 2,427 2,439 150 15 51 0 72 5 25 20 19 Public utility 1,966 4,020 4,322 238 59 207 20 135 215 282 70 20 Communication 978 1,825 1,458 109 78 13 20 3 23 0 20 21 Real estate and financial 16,178 34,517 31,521 1,621 2,642 1,826 2,729 2,240 1,993 1,970' 2,842 1. Figures which represent gross proceeds of issues maturing in more than one 2. Monthly data include only public offerings. year, are principal amount or number of units multiplied by offering price. 3. Data are not available on a monthly basis. Before 1987, annual totals include Excludes secondary offerings, employee stock plans, investment companies other underwritten issues only. than closed-end, intracorporate transactions, equities sold abroad, and Yankee SOURCES. IDD Information Services, Inc., U.S. Securities and Exchange bonds. Stock data include ownership securities issued by limited partnerships. Commission and the Board of Governors of the Federal Reserve System. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Securities Market and Corporate Finance A35 1.47 OPEN-END INVESTMENT COMPANIES Net Sales and Asset Position Millions of dollars 1988 IItteemm 11998866 11998877 Apr. May June July Aug. Sept. Oct/ Nov. INVESTMENT COMPANIES1 1 Sales of own shares2 411,751 381,260 23,162 19,579 22,503 20,728 20,595 19,872 20,494 20,341 2 Redemptions of own shares3 239,394 314,252 25,000 21,412 23,168 20,561 22,836 21,330 19,362 20,618 3 Net sales 172,357 67,008 -1,828 -1,833 -665 167 -2,242 -1,458 1,132 -277 4 Assets4 424,156 453,842 473,321 468,735 481,120 477,076 465,822 474,662 481,571 470,660 5 Cash position5 30,716 38,006 45,307 45,003 43,229 44,015 45,229 46,706 45,976 43,822 6 Other 393,440 415,836 428,014 423,732 437,891 433,061 420,595 427,956 435,595 426,778 1. Data on sales and redemptions exclude money market mutual funds but 4. Market value at end of period, less current liabilities. include limited maturity municipal bond funds. Data on asset positions exclude 5. Also includes all U.S. government securities and other short-term debt both money market mutual funds and limited maturity municipal bond funds. securities. 2. Includes reinvestment of investment income dividends. Excludes reinvestment of capital gains distributions and share issue of conversions from one fund NOTE. Investment Company Institute data based on reports of members, which to another in the same group. comprise substantially all open-end investment companies registered with the 3. Excludes share redemption resulting from conversions from one fund to Securities and Exchange Commission. Data reflect newly formed companies after another in the same group. their initial offering of securities. 1.48 CORPORATE PROFITS AND THEIR DISTRIBUTION Billions of dollars; quarterly data are at seasonally adjusted annual rates. 1986 1987 1988 AAccccoouunntt 11998855rr 11998866'' 11998877 Q4 QL Q2 Q3 Q4 QL Q2 Q3 1 Corporate profits with inventory valuation and capital consumption adjustment 282.3 298.9 310.4 293.9 298.3 305.2 322.0 316.1 316.2 326.5 330.0 2 Profits before tax 224.3 236.4 276.7 252.1 261.8 273.7 289.4 281.9 286.2 305.9 313.9 3 Profits tax liability 96.4 106.6 133.8 114.3 126.3 132.6 140.0 136.2 136.9 143.2 144.8 4 Profits after tax 127.8 129.8 142.9 137.9 135.5 141.1 149.5 145.7 149.4 162.7 169.1 5 Dividends 83.3 88.2 95.5 89.8 91.7 94.0 97.0 99.3 101.3 103.1 105.7 6 Undistributed profits 44.6 41.6 47.4 48.1 43.8 47.0 52.4 46.4 48.1 59.6 63.4 7 Inventory valuation -1.7 8.3 -18.0 -8.1 -14.4 -20.0 -19.5 -18.2 -19.4 -27.4 -29.3 8 Capital consumption adjustment 59.7 54.2 51.7 49.8 50.8 51.5 52.1 52.4 49.4 48.0 45.4 SOURCE. Survey of Current Business (Department of Commerce). 1.50 TOTAL NONFARM BUSINESS EXPENDITURES on New Plant and Equipment • Billions of dollars; quarterly data are at seasonally adjusted annual rates. 1987 1988 1989 IInndduussttrryy 11998866 11998877 1199888811 Q2 Q3 Q4 Ql Q2 Q3' Q4' Ql 1 Total nonfarm business 379.47 389.67 430.95 380.66 394.54 406.82 412.02 426.94 436.01 445.73 466.76 Manufacturing 2 Durable goods industries 69.14 71.01 78.06 69.05 71.% 72.28 75.70 76.87 79.48 78.97 84.25 3 Nondurable goods industries 73.56 74.88 85.50 72.66 76.24 79.92 82.90 84.82 89.43 90.00 93.56 Nonmanufacturing 4 Mining 11.22 11.39 12.62 11.02 11.81 12.32 12.59 13.26 12.47 11.97 11.62 Transportation 5 Railroad 6.66 5.92 7.05 5.84 6.07 6.12 6.92 7.01 6.84 8.07 9.26 6 Air 6.26 6.53 7.61 6.02 6.15 6.94 6.43 6.66 8.06 6.84 10.07 7 Other 5.89 6.40 6.91 6.26 6.97 6.28 7.08 7.05 7.26 7.20 7.58 Public utilities 8 Electric 33.91 31.63 32.20 31.47 31.57 32.28 30.31 30.95 32.20 33.54 32.69 9 Gas and other 12.47 13.25 14.27 12.47 13.73 14.11 14.30 14.48 14.50 15.25 16.66 10 Commercial and other2 160.38 168.65 186.74 165.86 170.05 176.56 175.79 185.83 185.76 193.87 201.07 •Trade and services are no longer being reported separately. They are included 2. "Other" consists of construction; wholesale and retail trade; finance and in Commercial and other, line 10. insurance; personal and business services; and communication. 1. Anticipated by business. SOURCE. Survey of Current Business (Department of Commerce). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A36 Domestic Nonfinancial Statistics • March 1989 1.51 DOMESTIC FINANCE COMPANIES Assets and Liabilities1 Billions of dollars, end of period 1986 1987 AAccccoouunntt 11998833 11998844 11998855 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ASSETS Accounts receivable, gross 1 Consumer 83.3 89.9 111.9 123.4 135.3 134.7 131.1 134.7 141.6 141.1 2 Business 113.4 137.8 157.5 166.8 159.7 173.4 181.4 188.1 188.3 207.6 3 Real estate 20.5 23.8 28.0 29.8 31.0 32.6 34.7 36.5 38.0 39.5 4 Total 217.3 251.5 297.4 320.0 326.0 340.6 347.2 359.3 367.9 388.2 Less: 5 Reserves for unearned income 30.3 33.8 39.2 40.7 42.4 41.5 40.4 41.2 42.5 45.3 6 Reserves for losses 3.7 4.2 4.9 5.1 5.4 5.8 5.9 6.2 6.5 6.8 7 Accounts receivable, net 183.2 213.5 253.3 274.2 278.2 293.3 300.9 311.9 318.9 336.1 8 All other 34.4 35.7 45.3 49.5 60.0 58.6 59.0 57.7 64.5 58.2 9 Total assets 217.6 249.2 298.6 323.7 338.2 351.9 359.9 369.6 383.4 394.3 LIABILITIES 10 Bank loans 18.3 20.0 18.0 16.3 16.8 18.6 17.2 17.3 15.9 16.4 11 Commercial paper 60.5 73.1 99.2 108.4 112.8 117.8 119.1 120.4 124.2 128.4 Debt 12 Other short-term 11.1 12.9 12.7 15.8 16.4 17.5 21.8 24.8 26.9 28.0 13 Long-term 67.7 77.2 94.4 106.9 111.7 117.5 118.7 121.8 128.2 137.1 14 All other liabilities 31.2 34.5 41.5 40.9 45.0 44.1 46.5 49.1 48.6 52.8 15 Capital, surplus, and undivided profits 28.9 31.5 32.8 35.4 35.6 36.4 36.6 36.3 39.5 31.5 16 Total liabilities and capital 217.6 249.2 298.6 323.7 338.2 351.9 359.9 369.6 383.4 394.3 1. NOTE. Components may not add to totals because of rounding. 1.52 DOMESTIC FINANCE COMPANIES Business Credit Outstanding and Net Change1 Millions of dollars, seasonally adjusted 1988 TTyyppee June July Aug. Sept. Oct. Nov. 1 Total 156,297 171,966 205,869 222,133 223,706 223,958 230,474 231,807 234,059 Retail financing of installment sales 2 Automotive (commercial vehicles) 20,660 25,952 35,674 37,519 37,682 37,519 37,120 37,359 36,984 3 Business, industrial, and farm equipment 22,483 22,950 24,987 27,548 27,428 27,603 27,569 27,841 28,160 Wholesale financing 4 Automotive 23,988 23,419 31,059 28,731 28,449 27,721 32,732 32,523 32,523 5 Equipment 4,568 5,423 5,693 5,557 5,654 5,803 5,949 5,888 6,045 6 All other 6,809 7,079 8,408 8,481 8,458 8,531 8,738 8,867 9,025 Leasing 7 Automotive 16,275 19,783 21,943 24,076 24,400 24,370 23,861 24,186 24,623 8 Equipment 34,768 37,833 43,002 52,365 52,803 53,671 55,400 55,786 56,294 9 Loans on commercial accounts receivable and factored commercial accounts receivable 15,765 15,959 18,024 18,595 19,095 19,132 19,386 19,239 19,616 10 All other business credit 10,981 13,568 17,079 19,260 19,736 19,609 19,719 20,117 20,790 Net change (during period) 11 19,607 15,669 3,040 1,829 1,573 252 6,515 1,333 2,252 Retail financing of installment sales 12 Automotive (commercial vehicles) 5,067 5,292 1,220 300 163 -163 -399 239 -375 13 Business, industrial, and farm equipment -363 467 223 467 -120 175 -35 272 319 Wholesale financing 14 Automotive 5,423 -569 158 471 -282 -728 5,011 -208 0 15 Equipment -867 855 -101 320 97 149 146 -60 157 16 All other 1,069 270 257 67 -23 73 207 129 158 Leasing 17 Automotive 3,8% 3,508 -70 386 324 -30 -509 325 436 18 Equipment 2,685 3,065 1,038 239 438 867 1,729 386 508 19 Loans on commercial accounts receivable and factored commercial accounts receivable 2,161 194 -477 -105 500 37 255 -148 377 20 All other business credit 536 2,587 792 -318 476 -127 110 398 673 1. These data also appear in the Board's G.20 (422) release. For address, see inside front cover. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Real Estate A37 1.53 MORTGAGE MARKETS Millions of dollars; exceptions noted. 1988 IItteemm 11998866 11998877 11998888 June July Aug. Sept. Oct. Nov. Dec. Terms and yields in primary and secondary markets PRIMARY MARKETS Conventional mortgages on new homes Terms 1 Purchase price (thousands of dollars) 118.1 137.0 150.0 152.0 152.9 154.2 148.3 153.8 155.3 149.7 2 Amount of loan (thousands of dollars) 86.2 100.5 110.5 110.2 111.9 114.9 109.8 114.0 115.6 110.7 3 Loan/price ratio (percent) 75.2 75.2 75.6 73.8 75.2 76.7 75.4 75.8 76.1 75.7 4 Maturity (years) 26.6 27.8 28.0 27.5 28.4 28.5 27.6 28.4 28.4 28.3 5 Fees and charges (percent of loan amount)2 2.48 2.26 2.19 2.16 2.24 2.35 2.14 1.98 2.28 2.08 6 Contract rate (percent per year) 9.82 8.94 8.81 8.90 8.80 8.68 8.90 8.77 9.05 9.03 Yield (percent per year) 7 FHLBB series3 10.26' 9.31 9.18 9.26 9.17 9.06 9.26 9.10 9.43 9.37 8 HUD series4 10.07 10.17 n.a. 10.35 10.47 10.55 10.39 10.21 10.37 n.a. SECONDARY MARKETS Yield (percent per year) 9 FHA mortgages (HUD series)5 9.91 10.16 n.a. 10.65 10.66 10.74 10.58 10.23 10.63 n.a. 10 GNMA securities6 9.30 9.43' 9.83 9.88 9.91 10.09 9.93 9.77 9.85 10.07 Activity in secondary markets FEDERAL NATIONAL MORTGAGE ASSOCIATION Mortgage holdings (end of period) 11 Total 98,048 95,030 102,368 102,540 102,540 102,453 102,493 102,6% 12 FH A/V A-insured 29,683 21,660 19,765 19,677 19,586 19,526 19,464 19,467 13 Conventional 68,365 73,370 82,603 82,864 82,954 82,927 83,032 83,228 Mortgage transactions (during period) 14 Purchases 30,826 20,531 2,372 1,960 1,638 1,111 1,488 1,5% Mortgage commitments1 15 Contracted (during period) 32,987 25,415 2,179 1,108 1,041 1,439 1,740 1,289 16 Outstanding (end of period) 3,386 4,886 n.a. 5,365 4,277 3,135 3,257 3,165 2,740 n.a. FEDERAL HOME LOAN MORTGAGE CORPORATION Mortgage holdings (end of period)8 17 Total 13,517 12,802 15,576 15,133 15,142 15,442 15,669 n.a. 18 FHA/VA 746 686 627 619 611 606 601 n.a. 19 Conventional 12,771 12,116 14,949 14,514 14,531 14,836 15,068 n.a. Mortgage transactions (during period) 20 Purchases 103,474 76,845 4,117 3,879 3,858 4,192 4,037 n.a. 21 Sales 100,236 75,082 39,616 3,649 4,115 3,719 3,728 3,674 4,331 5,246 Mortgage commitments9 22 Contracted (during period) 110,855 71,467 n.a. 6,447 5,328 3,480 6,209 4,406 n.a. n.a. 1. Weighted averages based on sample surveys of mortgages originated by 6. Average net yields to investors on Government National Mortgage Associmajor institutional lender groups; compiled by the Federal Home Loan Bank ation guaranteed, mortgage-backed, fully modified pass-through securities, as- Board in cooperation with the Federal Deposit Insurance Corporation. suming prepayment in 12 years on pools of 30-year FHA/VA mortgages carrying 2. Includes all fees, commissions, discounts, and "points" paid (by the the prevailing ceiling rate. Monthly figures are averages of Friday figures from the borrower or the seller) to obtain a loan. Wall Street Journal. 3. Average effective interest rates on loans closed, assuming prepayment at the 7. Includes some multifamily and nonprofit hospital loan commitments in end of 10 years. addition to 1- to 4-family loan commitments accepted in FNMA's free market 4. Average contract rates on new commitments for conventional first mort- auction system, and through the FNMA-GNMA tandem plans. gages; from Department of Housing and Urban Development. 8. Includes participation as well as whole loans. 5. Average gross yields on 30-year, minimum-downpayment, Federal Housing 9. Includes conventional and government-underwritten loans. FHLMC's mort- Administration-insured first mortgages for immediate delivery in the private gage commitments and mortgage transactions include activity under mortgage/ secondary market. Based on transactions on first day of subsequent month. Large securities swap programs, while the corresponding data for FNMA exclude swap monthly movements in average yields may reflect market adjustments to changes activity. in maximum permissable contract rates. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A38 Domestic Nonfinancial Statistics • March 1989 1.54 MORTGAGE DEBT OUTSTANDING1 Millions of dollars, end of period 1987 1988 Type of holder, and type of property 11998855 11998866 11998877 Q3 Q4 Q1 Q2 Q3 1 AH holders 2,289,843 2,597,175 2,943,144 2,864,736 2,943,144 2,988,100 3,067,566R 3,151,956' 2 1- to 4-family 1,488,009 1,698,524 1,925,197 1,870,635 1,925,197 1,955,770 2,015,646'' 2,079,706' 3 Multifamily 214,470 247,831 273,830 268,911 273,830 277,622 282,51 LR 286,918' 4 Commercial 481,514 555,039 655,249 635,230 655,249 666,521 681,478' 697,919' 5 Farm 105,850 95,781 88,868 89,960 88,868 88,187 87,931' 87,413' 6 Selected financial institutions 1,390,394 1,507,289 1,700,820 1,648,328 1,700,820 1,723,737 1,773,444' 1,827,383' 7 Commercial banks 429,196 502,534 591,151 567,000 591,151 604,403 628,132 653,288' 8 1- to 4-family 213,434 235,814 275,761 263,762 275,761 280,439 291,767 304,029' 9 Multifamily 23,373 31,173 33,296 32,114 33,2% 33,640 34,672 35,936 10 Commercial 181,032 222,799 267,663 256,981 267,663 275,535 286,366 297,880 11 Farm 11,357 12,748 14,431 14,143 14,431 14,789 15,327 15,443' 12 Savings institutions3 760,499 777,312 856,945 838,737 856,945 863,110 881,924' 905,372' 13 1- to 4-family 554,301 558,412 598,886 583,432 598,886 603,532 622,863' 644,676' 14 Multifamily 89,739 97,059 106,359 104,609 106,359 107,687 109,108' 109,80C 15 Commercial 115,771 121,236 150,943 149,938 150,943 115511,,113366 114499,,220011'' 115500,,114444'' 16 Farm 688 605 17 Life insurance companies 171,797 193,842 212,375 204,263 212,375 214,815 220,870 225,245' 18 1- to 4-family 12,381 12,827 13,226 12,742 13,226 13,653 14,172 14,892' 19 Multifamily 19,894 20,952 22,524 21,968 22,524 22,723 23,021 23,100' 20 Commercial 127,670 149,111 166,722 159,464 166,722 168,774 174,086 178,012' 21 Farm .. 11,852 10,952 9,903 10,089 9,903 9,665 9,591 9,241' 22 Finance companies 28,902 33,601 40,349 38,328 40,349 41,409 42,518 43,478 23 Federal and related agencies 166,928 203,800 192,721 191,520 192,721 196,909 199,474 197,885' 24 Government National Mortgage Association.. 1,473 889 444 458 444 434 42 43 25 1- to 4-family 539 47 25 25 25 25 24 24 26 Multifamily , 934 842 419 433 419 409 18 19 27 Farmers Home Administration5 733 48,421 43,051 42,978 43,051 43,076 42,767 41,836 28 1- to 4-family 183 21,625 18,169 18,111 18,169 18,185 18,248 18,268 29 Multifamily 113 7,608 8,044 7,903 8,044 8,115 8,213 8,349 30 Commercial 159 8,446 6,603 6,592 6,603 6,640 6,288 5,300 31 Farm 278 10,742 10,235 10,372 10,235 10,136 10,018 9,919 32 Federal Housing and Veterans Administration 4,920 5,047 5,574 5,330 5,574 5,660 5,673 5,545 33 1- to 4-family 2,254 2,386 2,557 2,452 2,557 2,608 2,564 2,445 34 Multifamily 2,666 2,661 3,017 2,878 3,017 3,052 3,109 3,100 35 Federal National Mortgage Association 98,282 97,895 96,649 94,884 %,649 99,787 102,368 102,453 36 1- to 4-family 91,966 90,718 89,666 87,901 89,666 92,828 95,404 95,417 37 Multifamily 6,316 7,177 6,983 6,983 6,983 6,959 6,964 7,036 38 Federal Land Banks 47,498 39,984 34,131 34,930 34,131 33,566 33,048 32,566' 39 1- to 4-family 2,798 2,353 2,008 2,055 2,008 1,975 1,945 1,917' 40 Farm 44,700 37,631 32,123 32,875 32,123 31,591 31,103 30,649' 41 Federal Home Loan Mortgage Corporation .. 14,022 11,564 12,872 12,940 12,872 14,386 15,576 15,442 42 1- to 4-family 11,881 10,010 11,430 11,570 11,430 12,749 13,631 13,589 43 Multifamily 2,141 1,554 1,442 1,370 1,442 1,637 1,945 1,853 44 Mortgage pools or trusts6 439,058 565,428 718,297 692,944 718,297 736,344 754,045 782,093 45 Government National Mortgage Association.. 212,145 262,697 317,555 308,339 317,555 322,976 322,616 332,926 46 1- to 4-family 207,198 256,920 309,806 300,815 309,806 315,095 314,728 324,469 47 Multifamily 4,947 5,777 7,749 7,524 7,749 7,881 7,888 8,457 48 Federal Home Loan Mortgage Corporation .. 100,387 171,372 212,634 208,872 212,634 214,724 216,155 220,683 49 1- to 4-family 99,515 166,667 205,977 202,308 205,977 208,138 209,702 214,063 50 Multifamily 872 4,705 6,657 6,564 6,657 6,586 6,453 6,620 51 Federal National Mortgage Association 54,987 97,174 139,960 130,540 139,960 145,242 157,438 167,170 52 1- to 4-family 54,036 95,791 137,988 128,770 137,988 142,330 153,253 162,228 53 Multifamily 951 1,383 1,972 1,770 1,972 2,912 4,185 4,942 54 Farmers Home Administration 47,523 348 245 333 245 172 106 106 55 1- to 4-family 22,186 142 121 144 121 65 23 27 56 Multifamily 6,675 57 Commercial 8,190 132 63 124 63 58 41 38 58 Farm 10,472 74 61 65 61 49 42 41 59 Individuals and others7 293,463 320,658 331,306 331,944 331,306 331,110 340,603 344,595' 60 1- to 4-family 162,419 177,374 171,325 173,360 171,325 169,509 177,074 178,976' 61 Multifamily 55,849 66,940 75,368 74,795 75,368 76,021 76,935 77,706' 62 Commercial 48,692 53,315 63,255 62,131 63,255 64,378 65,4% 66,545' 63 Farm 26,503 23,029 21,358 21,658 21,358 21,202 21,098 21,368' 1. Based on data from various institutional and governmental sources, with 4. Assumed to be entirely 1- to 4-family loans. some quarters estimated in part by the Federal Reserve. Multifamily debt refers 5. FmHA-guaranteed securities sold to the Federal Financing Bank were to loans on structures of five or more units. reallocated from FmHA mortgage pools to FmHA mortgage holdings in 1986:4, 2. Includes loans held by nondeposit trust companies but not bank trust because of accounting changes by the Fanners Home Administration. departments. 6. Outstanding principal balances of mortgage pools backing securities insured 3. Includes savings banks and savings and loan associations. Beginning 1987:1, or guaranteed by the agency indicated. data reported by FSLIC-insured institutions include loans in process and other 7. Other holders include mortgage companies, real estate investment trusts, contra assets (credit balance accounts that must be subtracted from the corre- state and local credit agencies, state and local retirement funds, noninsured sponding gross asset categories to yield net asset levels). pension funds, credit unions, and other U.S. agencies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer Installment Credit A39 1.55 CONSUMER INSTALLMENT CREDIT1 Total Outstanding, and Net Change, seasonally adjusted Millions of dollars 1988 HHoollddeerr,, aanndd ttyyppee ooff ccrreeddiitt 11998866 11998877 Mar. Apr. May June July Aug. Sept. Oct/ Nov. Amounts outstanding (end of period) 1 Total 571,833 613,022 629,485 633,336 636,318 644,372 647,993 653,317 653,319 657,226 661,705 By major holder 2 Commercial banks 262,139 281,564 290,831 293,166 295,546 300,275 303,189 307,119 308,960 312,968 316,349 3 Finance companies 133,698 140,072 144,053 144,516 144,454 144,748 143,812 143,962 142,723 142,480 142,226 4 Credit unions 76,191 81,065 82,595 83,204 83,881 84,912 85,468 85,881 85,553 86,024 86,698 5 Retailers 39,660 42,782 43,271 43,295 43,162 43,450 43,634 43,712 43,956 44,250 44,644 6 Savings institutions 56,881 63,949 65,078 65,387 65,509 67,274 68,182 68,909 68,462 67,845 68,140 7 Gasoline companies 3,264 3,590 3,657 3,769 3,765 3,713 3,707 3,735 3,665 3,658 3,648 By major type of credit 8 Automobile 246,109 267,180 276,762 278,567 279,418 282,254 283,359 285,560 284,782 286,107 287,499 9 Commercial banks 100,907 108,438 113,593 114,868 115,951 117,322 118,650 120,380 121,450 122,995 124,276 10 Credit unions 38,413 43,474 44,795 45,293 45,831 46,565 47,043 47,444 47,436 47,870 48,420 11 Finance companies 92,350 98,026 100,669 100,564 99,708 99,900 98,896 98,711 96,939 96,400 95,825 12 Savings institutions 14,439 17,242 17,705 17,841 17,928 18,465 18,770 19,026 18,958 18,842 18,979 13 Revolving 136,381 159,307 165,643 167,356 169,154 172,809 174,927 177,568 178,675 181,277 184,340 14 Commercial banks 86,757 98,808 103,152 104,250 105,742 108,309 109,645 111,623 112,341 114,404 116,633 15 Retailers 34,320 36,959 37,408 37,414 37,259 37,526 37,671 37,708 37,914 38,169 38,481 16 Gasoline companies 3,264 3,590 3,657 3,769 3,765 3,713 3,707 3,735 3,665 3,658 3,648 17 Savings institutions 8,366 13,279 14,059 14,309 14,518 15,098 15,492 15,850 15,938 15,984 16,244 18 Credit unions 3,674 6,671 7,368 7,614 7,870 8,162 8,413 8,652 8,816 9,063 9,334 19 Mobile home 26,883 25,957 25,732 25,764 25,703 25,852 25,882 25,915 25,746 25,776 25,849 20 Commercial banks 8,926 9,101 8,993 9,047 8,966 8,933 8,913 8,893 8,833 9,048 9,098 21 Finance companies 8,822 7,771 7,640 7,575 7,578 7,513 7,436 7,387 7,341 7,243 7,224 22 Savings institutions 9,135 9,085 9.099 9,142 9,159 9,406 9,533 9,634 9,572 9,485 9,527 23 Other 162,460 160,578 161,348 161,649 162,043 163,456 163,825 164,274 164,116 164,066 164,016 24 Commercial banks 65,549 65,217 65,094 65,001 64,887 65,710 65,981 66,222 66,335 66,522 66,343 25 Finance companies 32,526 34,275 35,744 36,376 37,168 37,335 37,480 37,863 38,443 38,837 39,177 26 Credit unions 34,104 30,920 30,432 30,297 30,180 30,184 30,012 29,785 29,302 29,091 28,944 27 Retailers 5,340 5,823 5,863 5,880 5,903 5,923 5,964 6,004 6,041 6,081 6,163 28 Savings institutions 24,941 24,343 24,216 24,095 23,904 24,305 24,388 24,399 23,995 23,534 23,390 Net change (during period) 29 Total 54,078 41,189 5,191 3,851 2,982 8,054 3,621 5,324 2 3,907 4,479 By major holder 30 Commercial banks 20,495 19,425 3,487 2,335 2,380 4,729 2,914 3,930 1,841 4,008 3,381 31 Finance companies 22,670 6,374 1,107 463 -62 294 -936 150 -1,239 -243 -254 32 Credit unions 4,268 4,874 698 609 677 1,031 556 413 -328 471 674 33 Retailers3 466 3,122 191 24 -133 288 184 78 244 294 394 34 Savings institutions 7,223 7,068 -318 309 122 1,765 908 727 -447 -617 295 35 Gasoline companies -1,044 326 26 112 -4 -52 -6 28 -70 -7 -10 By major type of credit 36 Automobile 36,473 21,071 3,629 1,805 851 2,836 1,105 2,201 -778 1,325 1,392 37 Commercial banks 8,178 7,531 2,572 1,275 1,083 1,371 1,328 1,730 1,070 1,545 1,281 38 Credit unions 2,388 5,061 544 498 538 734 478 401 -8 434 550 39 Finance companies 22,823 5,676 546 -105 -856 192 -1,004 -185 -1,772 -539 -575 40 Savings institutions 3,084 2,803 -33 136 87 537 305 256 -68 -116 137 41 Revolving 14,368 22,926 2,181 1,713 1,798 3,655 2,118 2,641 1,107 2,602 3,063 42 Commercial banks 11,150 12,051 1,615 1,098 1,492 2,567 1,336 1,978 718 2,063 2,229 43 Retailers 47 2,639 177 6 -155 267 145 37 206 255 312 44 Gasoline companies -1,044 326 26 112 -4 -52 -6 28 -70 -7 -10 45 Savings institutions 2,078 4,913 114 250 209 580 394 358 88 46 260 46 Credit unions 2,137 2,997 251 246 256 292 251 239 164 247 271 47 Mobile home 49 -926 -125 32 -61 149 30 33 -169 30 73 48 Commercial banks -627 175 -42 54 -81 -33 -20 -20 -60 215 50 49 Finance companies -472 -1,051 -39 -65 3 -65 -77 -49 -46 -98 -19 50 Savings institutions 1,148 -50 -44 43 17 247 127 101 -62 -87 42 51 Other 3,188 -1,882 -494 301 394 1,413 369 449 -158 -50 -50 52 Commercial banks 1,794 -332 -656 -93 -114 823 271 241 113 187 -179 53 Finance companies 319 1,749 600 632 792 167 145 383 580 394 340 54 Credit unions -257 -3,184 -97 -135 -117 4 -172 -227 -483 -211 -147 55 Retailers 419 483 14 17 23 20 41 40 37 40 82 56 Savings institutions 913 -598 -354 -121 -191 401 83 11 -404 -461 -144 1. The Board's series cover most short-and intermediate-term credit extended These data also appear in the Board's G.19 (421) release. For address, see to individuals that is scheduled to be repaid (or has the option of repayment) in inside front cover. two or more installments. 2. More detail for finance companies is available in the G. 20 statistical release. 3. Excludes 30-day charge credit held by travel and entertainment companies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A40 Domestic Nonfinancial Statistics • March 1989 1.56 TERMS OF CONSUMER INSTALLMENT CREDIT1 Percent unless noted otherwise 1988 IItteemm 11998855 11998866 11998877 May June July Aug. Sept. Oct. Nov. INTEREST RATES Commercial banks2 1 48-month new car3 12.91 11.33 10.45 10.55 n.a. n.a. 10.93 n.a. n.a. 11.22 2 24-month personal ^ 15.94 14.83 14.23 14.40 n.a. n.a. 14.81 n.a. n.a. 15.06 3 120-month mobile home3 14.96 13.99 13.38 13.49 n.a. n.a. 13.62 n.a. n.a. 13.61 4 Credit card 18.70 18.26 17.92 17.78 n.a. n.a. 17.79 n.a. n.a. 17.77 Auto finance companies 5 New car 11.98 9.44 10.73 12.29 12.32 12.44 12.64 12.93 13.10 13.20 6 Used car 17.59 15.95 14.60 14.81 14.83 14.99 15.16 15.46 15.67 15.75 OTHER TERMS4 Maturity (months) New car 51.5 50.0 53.5 56.2 56.3 56.4 56.5 56.3 56.3 56.2 8 Used car 41.4 42.6 45.2 46.9 46.9 46.8 46.8 46.5 46.3 46.2 Loan-to-value ratio 9 New car 91 91 93 94 94 94 94 94 94 94 10 Used car 94 97 98 99 99 99 98 98 99 98 Amount financed (dollars) 11 New car 9,915 10,665 11,203 11,624 11,626 11,663 11,593 11,530 11,845 11,975 12 Used car 6,089 6,555 7,420 7,778 7,899 7,947 7,918 7,903 7,944 7,991 1. These data also appear in the Board's G.19 (421) release. For address, see 3. Before 1983 the maturity for new car loans was 36 months, and for mobile inside front cover. home loans was 84 months. 2. Data for midmonth of quarter only. 4. At auto finance companies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Flow of Funds A41 1.57 FUNDS RAISED IN U.S. CREDIT MARKETS Billions of dollars; quarterly data are at seasonally adjusted annual rates. 1987 1988 TTrraannssaaccttiioonn ccaatteeggoorryy,, sseeccttoorr 11998833 11998844 11998855 11998866 11998877 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Nonfinancial sectors 1 Total net borrowing by domestic nonfinancial sectors 546.8 750.8 846.3 830.6 680.6 552.0 751.7 652.1 766.8 731.8 704.0 760.4 By sector and instrument 7 U.S. government 186.6 198.8 223.6 215.0 143.8 161.6 145.2 101.8 166.7 222266..33 8877..66 119955..55 3 Treasury securities 186.7 199.0 223.7 214.7 142.3 157.7 147.1 102.7 161.8 226.8 79.8 174.6 4 Agency issues and mortgages -.1 -.2 -.1 .4 1.5 3.9 -1.9 -.9 5.0 -.5 7.7 20.9 5 Private domestic nonfinancial sectors 360.2 552.0 622.7 615.6 536.8 390.3 606.4 550.3 600.1 505.6 616.5 564.9 6 Debt capital instruments 257.6 319.3 452.3 460.7 446.1 473.3 466.7 428.1 416.1 363.3 452.2 457.1 7 Tax-exempt obligations 53.7 50.4 136.4 30.8 34.5 38.7 33.1 32.7 33.5 24.8 32.6 44.4 8 Corporate bonds 16.0 46.1 73.8 121.3 99.9 128.9 88.5 100.7 81.6 101.3 118.4 90.8 9 Mortgages 187.9 222.8 242.2 308.6 311.6 305.7 345.1 294.7 301.1 237.1 301.2 322.0 10 Home mortgages 120.4 136.7 156.8 210.9 221.7 224.2 243.5 212.1 206.9 177.9 228.0 210.1 11 Multifamily residential 14.1 25.2 29.8 33.5 24.3 27.4 30.9 23.1 15.9 21.4 14.0 33.5 1? Commercial 51.0 62.2 62.2 73.6 72.0 66.5 77.2 64.1 80.2 43.2 60.8 72.7 13 Farm 2.4 -1.2 -6.6 -9.5 -6.4 -12.4 -6.6 -4.7 -1.9 -5.4 -1.6 5.7 14 Other debt instruments 102.6 232.7 170.3 154.9 90.7 -83.0 139.7 122.2 184.0 142.3 164.2 107.8 15 Consumer credit 49.0 81.6 82.5 54.4 40.7 -.3 52.4 61.4 49.4 34.8 59.5 43.3 16 Bank loans n.e.c 23.2 67.1 38.6 69.3 8.8 -107.8 36.6 21.0 85.3 40.4 74.2 2.6 17 Open market paper -.8 21.7 14.6 -9.3 2.3 -.5 4.7 1.0 3.9 -3.8 4.0 11.1 18 Other 31.3 62.2 34.6 40.5 38.9 25.5 46.1 38.7 45.5 70.9 26.6 50.7 19 By borrowing sector 360.2 552.0 622.7 615.6 536.8 390.3 606.4 550.3 600.1 505.6 616.5 564.9 ?0 State and local governments 34.0 27.4 91.8 44.3 34.4 37.0 31.4 34.8 34.6 22.3 31.1 41.3 71 Households 186.1 231.5 283.6 286.1 261.5 197.3 302.7 281.2 264.9 220.0 288.0 250.9 77 Nonfinancial business 140.1 293.1 247.3 285.1 240.8 156.0 272.4 234.2 300.7 263.3 297.3 272.7 ?3 3.9 -.4 -14.5 -16.3 -11.2 -23.5 -12.7 -9.4 .8 -12.5 -3.6 1.3 74 Nonfarm noncorporate 81.9 123.2 129.3 127.6 115.8 108.4 125.7 105.4 123.8 91.0 87.1 120.3 25 Corporate 54.4 170.3 132.4 173.8 136.3 71.2 159.4 138.3 176.1 184.9 213.9 151.1 26 Foreign net borrowing in United States 17.3 8.4 1.2 9.6 4.3 -8.7 -.1 12.3 13.9 -1.0 4.9 9.7 77 Bonds 3.1 3.8 3.8 3.0 6.8 3.0 -4.1 6.7 21.6 16.8 -2.9 7.4 78 Bank loans n.e.c 3.6 -6.6 -2.8 -1.0 -3.6 -1.2 -3.5 -3.7 -6.1 .7 -3.5 .3 79 Open market paper 6.5 6.2 6.2 11.5 2.1 -4.2 . -6.4 21.6 -2.5 1.5 6.4 10.7 30 U.S. government loans 4.1 5.0 -5.9 -3.9 -1.0 -6.4 13.9 -12.3 .8 -19.9 4.9 -8.8 31 Total domestic plus foreign 564.1 759.2 847.5 840.2 685.0 543.3 751.6 664.3 780.7 730.9 709.0 770.1 Financial sectors 32 Total net borrowing by financial sectors ... 99.2 148.7 198.3 297.2 303.1 340.0 316.7 306.4 249.2 218.9 250.1 249.1 By instrument 33 U.S. government related 67.8 74.9 101.5 178.1 185.8 193.5 196.8 185.5 167.5 137.4 84.7 140.2 34 Sponsored credit agency securities 1.4 30.4 20.6 15.2 30.2 -4.4 21.5 32.0 71.6 56.8 9.4 42.8 35 Mortgage pool securities 66.4 44.4 79.9 163.3 156.4 200.7 175.4 153.5 95.9 80.5 75.3 97.4 36 Loans from U.S. government 1.1 -.4 -.7 -2.9 -.1 37 Private financial sectors 31.4 73.8 96.7 119.1 117.2 146.5 119.9 120.8 81.7 81.6 165.4 108.9 38 Corporate bonds 17.3 33.0 47.9 70.9 67.1 103.2 45.6 77.7 41.8 74.7 67.9 65.9 39 Mortgages * .4 .1 .1 .3 .4 .1 .2 .4 .2 * * 40 Bank loans n.e.c -.1 .7 2.6 4.0 -3.3 -9.5 .6 6.3 -10.7 -26.8 8.7 -4.9 4 4 2 1 L O o p a en n s m fr a o r m ke t F e p d a e p r e a r l Home Loan Banks - 2 7 1 . . 0 3 2 1 4 5 . . 1 7 3 1 2 4 . . 0 2 2 1 4 9 . . 2 8 2 24 8 . . 4 8 4 1 1 1 . . 5 0 5 1 4 9 . . 0 6 2 1 2 4 . . 2 3 44 5 . . 9 4 2 5 8 . . 4 0 7 1 8 0 . . 7 1 2 2 6 1 . . 6 3 By sector 43 Total 99.2 148.7 198.3 297.2 303.1 340.0 316.7 306.4 249.2 218.9 250.1 249.1 44 Sponsored credit agencies 1.4 30.4 21.7 14.9 29.5 -7.2 21.4 32.0 71.6 56.8 9.4 42.8 45 Mortgage pools 66.4 44.4 79.9 163.3 156.4 200.7 175.4 153.5 95.9 80.5 75.3 97.4 46 Private financial sectors 31.4 73.8 96.7 119.1 117.2 146.5 119.9 120.8 81.7 81.6 165.4 108.9 47 Commercial banks 5.0 7.3 -4.9 -3.6 7.1 6.4 20.0 -13.1 15.0 -22.4 6.2 -12.9 48 Bank affiliates 12.1 15.6 14.5 4.6 2.9 25.6 -2.7 11.3 -22.6 -5.0 7.6 5.2 49 Savings and loan associations -2.1 22.7 22.3 29.8 36.0 28.0 22.2 41.9 51.9 9.1 18.2 52.9 50 Finance companies 13.0 18.2 52.7 48.4 30.6 18.1 39.9 36.3 28.2 54.5 100.4 40.6 51 REITs -.2 .8 .5 1.0 1.5 1.7 -.5 1.7 3.2 2.4 1.8 1.9 52 CMO Issuers 3.6 9.3 11.5 39.0 39.1 66.8 41.0 42.7 6.0 43.1 31.2 21.3 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A42 Domestic Nonfinancial Statistics • March 1989 1.57—Continued 1987 1988 TTrraannssaaccttiioonn ccaatteeggoorryy,, sseeccttoorr 11998833 11998844 11998855 11998866 11998877 Qi Q2 Q3 Q4 Qi Q2 Q3 All sectors 53 Total net borrowing 663.4 907.9 1,045.7 1,137.4 988.0 883.3 1,068.3 970.7 1,029.9 949.8 959.1 1,019.2 54 U.S. government securities 254.4 273.8 324.2 393.5 330.4 358.0 342.2 287.3 334.2 363.6 172.3 335.7 55 State and local obligations 53.7 50.4 136.4 30.8 34.5 38.7 33.1 32.7 33.5 24.8 32.6 44.4 56 Corporate and foreign bonds 36.4 83.0 125.4 195.2 173.8 235.2 130.0 185.1 145.0 192.8 183.5 164.1 57 Mortgages 187.8 223.1 242.2 308.6 311.9 306.0 345.2 294.9 301.4 237.4 301.2 322.0 58 Consumer credit 49.0 81.6 82.5 54.4 40.7 -.3 52.4 61.4 49.4 34.8 59.5 43.3 59 Bank loans n.e.c 26.7 61.1 38.3 72.3 1.9 -118.5 33.8 23.6 68.5 14.2 79.4 -2.0 60 Open market paper 26.9 52.0 52.8 26.4 33.2 36.8 52.3 36.9 6.7 25.7 89.1 43.1 61 Other loans 28.4 82.9 44.0 56.1 61.6 27.3 79.4 48.7 91.2 56.4 41.7 68.6 62 MEMO: U.S. government, cash balance -7.1 6.3 14.4 * -7.9 -34.9 77.7 -19.6 -54.7 60.9 3.3 6.4 Totals net of changes in U.S. government cash balances 63 Net borrowing by domestic nonfinancial 553.9 744.5 831.9 830.6 688.5 586.9 674.0 671.7 821.5 670.9 700.8 775544..00 64 Net borrowing by U.S. government 193.7 192.5 209.3 215.0 151.7 196.6 67.6 121.4 221.4 165.4 84.3 189.1 External corporate equity funds raised in United States 65 Total net share issues 58.1 -36.0 20.1 93.9 13.3 170.1 13.9 -47.1 -83.6 -73.7 -141.0 -70.3 66 Mutual funds 27.2 29.3 84.4 161.8 72.3 205.4 79.1 13.8 -9.1 5.0 -8.1 6.0 67 All other 30.8 -65.3 -64.3 -68.0 -59.0 -35.3 -65.2 -60.9 -74.6 -78.7 -132.9 -76.3 68 Nonfinancial corporations 23.5 -74.5 -81.5 -80.7 -76.5 -57.0 -83.0 -78.0 -88.0 -95.0 -140.0 -92.0 69 Financial corporations 3.6 8.2 13.5 11.5 19.9 19.1 16.5 18.4 25.5 17.0 13.8 13.6 70 Foreign shares purchased in United States 3.7 .9 3.7 1.3 -2.4 2.7 1.2 -1.3 -12.0 -.7 -6.7 2.1 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Flow of Funds A43 1.58 DIRECT AND INDIRECT SOURCES OF FUNDS TO CREDIT MARKETS Billions of dollars, except as noted; quarterly data are at seasonally adjusted annual rates. 1987 1988 TTrraannssaaccttiioonn ccaatteeggoorryy,, oorr sseeccttoorr 11998833 11998844 11998855 11998866 11998877 Q1 Q2 Q3 Q4 Q1 Q2 Q3 t Total funds advanced in credit markets to domestic nonfinancial sectors 546.8 750.8 846.3 830.6 680.6 552.0 751.7 652.1 766.8 731.8 770044..00 776600..44 By public agencies and foreign ? Total net advances 117.8 157.6 193.1 304.2 256.3 227700..99 227799..33 221111..11 226644..00 228811..77 116622..55 119966..66 3 U.S. government securities 29.0 38.9 37.9 69.4 68.2 59.0 55.3 35.1 123.3 148.6 38.2 17.3 4 Residential mortgages 76.1 56.5 94.6 160.3 153.2 194.8 169.4 146.0 102.7 100.7 89.7 97.5 5 FHLB advances to savings and loans -7.0 15.7 14.2 19.8 24.4 11.0 19.6 22.2 44.9 5.4 10.1 26.6 6 Other loans and securities 19.7 46.6 46.3 54.6 10.5 6.1 35.1 7.8 -6.8 27.0 24.5 55.3 Total advanced, by sector 7 U.S. government 9.7 17.1 16.8 9.7 -11.5 -8.5 -12.3 -24.1 -.9 -8.9 --1100..11 11..55 8 Sponsored credit agencies 69.8 74.3 95.5 177.3 180.6 204.9 177.0 187.0 153.6 123.3 86.3 119.9 9 Monetary authorities 14.7 8.4 18.4 19.4 24.7 9.4 29.8 29.0 30.4 -5.5 4.1 17.1 10 Foreign 23.7 57.9 62.3 97.8 62.5 65.1 84.8 19.1 81.0 172.9 82.2 58.2 Agency and foreign borrowing not in line 1 11 Sponsored credit agencies and mortgage pools 67.8 74.9 101.5 178.1 185.8 119933..55 119966..88 118855..55 116677..55 113377..44 8844..77 114400..22 12 Foreign 17.3 8.4 1.2 9.6 4.3 -8.7 -.1 12.3 13.9 -1.0 4.9 9.7 Private domestic funds advanced 13 Total net advances 514.2 676.4 756.0 714.1 614.5 465.9 669.1 638.7 668844..22 558866..55 663311..22 771133..77 14 U.S. government securities 225.4 234.9 286.2 324.1 262.2 299.0 286.9 252.2 210.9 215.0 134.1 318.4 15 State and local obligations 53.7 50.4 136.4 30.8 34.5 38.7 33.1 32.7 33.5 24.8 32.6 44.4 16 Corporate and foreign bonds 14.5 35.1 40.8 84.1 86.5 100.4 58.8 83.7 102.9 115.7 8888..11 68.6 17 Residential mortgages 58.3 105.3 91.8 84.1 92.8 56.7 105.0 89.3 120.0 98.7 115522..44 146.1 18 Other mortgages and loans 155.1 266.3 214.9 210.8 162.9 -18.0 204.8 203.0 261.7 137.7 234.1 162.8 19 LESS: Federal Home Loan Bank advances -7.0 15.7 14.2 19.8 24.4 11.0 19.6 22.2 44.9 5.4 10.1 26.6 Private financial intermediation 70 Credit market funds advanced by private financial 394.7 581.0 569.8 746.3 564.9 521.5 549.7 639.7 548.5 674.9 661155..77 660066..44 21 Commercial banking 144.3 168.9 186.3 194.8 136.3 -56.2 198.0 150.9 252.6 56.0 213.3 132.3 77 Savings institutions 135.6 150.2 83.0 105.5 140.4 89.9 132.0 188.7 151.0 87.9 120.7 166.4 73 Insurance and pension funds 100.1 121.8 148.9 181.9 210.8 266.3 178.0 246.2 152.8 282.4 235.3 217.6 24 Other finance 14.7 140.1 151.6 264.3 77.3 221.6 41.7 54.0 -7.9 248.6 46.5 90.1 75 394.7 581.0 569.8 746.5 564.9 521.5 549.7 639.7 548.5 674.9 615.7 606.4 76 Private domestic deposits and RPs 210.4 321.9 210.6 264.7 146.2 -17.1 141.1 193.9 266.8 287.7 127.3 206.1 77 Credit market borrowing 31.4 73.8 96.7 119.1 117.2 146.5 119.9 120.8 81.7 81.6 165.4 108.9 78 Other sources 152.9 185.3 262.5 362.7 301.4 392.1 288.6 325.0 200.0 305.6 323.0 291.3 79 Foreign funds 14.6 8.8 19.7 12.9 43.7 14.9 35.1 99.5 25.2 -80.1 106.6 -39.2 30 Treasury balances -5.3 4.0 10.3 1.7 -5.8 -36.9 43.6 6.1 -36.1 53.3 -17.5 -1.9 31 Insurance and pension reserves 115.0 124.0 131.9 144.3 175.0 195.1 191.1 194.8 118.9 247.6 207.8 173.7 32 Other, net 28.7 48.5 100.7 203.8 88.6 219.0 18.9 24.6 91.9 84.8 26.1 158.6 Private domestic nonfinancial investors 33 Direct lending in credit markets 150.9 169.2 282.9 86.7 166.8 90.9 239.3 119.8 221177..33 --66..99 118800..99 221166..22 34 U.S. government securities 91.0 115.4 175.7 50.1 103.2 52.1 170.1 70.9 119.6 117.6 23.8 160.0 35 State and local obligations 38.8 26.5 39.6 -13.6 46.1 27.8 58.1 42.4 56.0 1.5 29.7 39.1 36 Corporate and foreign bonds -8.3 -.8 2.4 32.6 5.1 9.3 -58.6 28.3 41.5 -40.6 52.7 -25.9 37 Open market paper 12.4 4.0 45.6 -3.0 7.9 -1.9 64.2 -23.3 -7.5 -65.6 77.7 40.5 38 Other 17.0 24.2 19.6 20.7 4.6 3.6 5.6 1.6 7.7 -19.7 -3.0 2.5 39 Deposits and currency 227.8 325.4 220.9 285.0 162.4 -46.6 149.2 229.3 317.6 282.7 134.9 256.7 40 Currency 14.3 8.6 12.4 14.4 19.0 9.4 12.5 17.3 36.8 8.2 11.9 17.5 41 Checkable deposits 28.8 28.0 40.9 93.2 -2.4 -98.7 40.3 34.5 14.4 4.2 21.5 -.6 47 Small time and savings accounts 215.4 150.7 138.4 120.6 75.9 31.3 69.3 79.9 123.1 195.1 125.5 102.1 43 Money market fund shares -39.0 49.0 8.9 41.5 28.2 14.4 2.4 32.7 03.3 59.1 -34.8 13.0 44 Large time deposits -8.3 84.3 7.7 -11.5 27.6 13.7 4.8 .2 91.6 12.0 -7.6 92.0 45 Security RPs 13.5 10.0 14.6 20.8 16.9 22.1 24.3 46.6 -25.6 17.3 22.7 -.4 46 Deposits in foreign countries 3.1 -5.1 -2.1 5.9 -2.8 -38.9 -4.4 18.1 13.9 -13.3 -4.3 33.1 47 Total of credit market instruments, deposits, and 378.7 494.6 503.7 371.8 329.2 44.3 388.5 349.1 534.9 275.8 331155..88 447722..99 48 Public holdings as percent of total 20.9 20.8 22.8 36.2 37.4 49.9 37.2 31.8 33.8 38.5 22.9 25.5 49 Private financial intermediation (in percent) 76.8 85.9 75.4 104.5 91.9 112.0 82.2 100.2 80.2 115.1 97.6 85.0 50 38.2 66.7 82.0 110.7 106.2 80.0 119.9 118.7 106.2 92.8 188.9 19.0 MEMO: Corporate equities not included above 51 Total net issues 58.1 -36.0 20.1 9933..99 13.3 170.1 1133..99 --4477..11 --8833..66 --7733..77 --114411..00 --7700..33 57 Mutual fund shares 27.2 29.3 84.4 161.8 72.3 205.4 79.1 13.8 -9.1 5.0 -8.1 6.0 53 30.8 -65.3 -64.3 -68.0 -59.0 -35.3 -65.2 -60.9 -74.6 -78.7 -132.9 -76.3 54 Acquisitions by financial institutions 50.4 15.8 45.6 48.5 22.6 29.2 72.6 5.2 -16.5 -33.0 -10.1 -9.4 55 Other net purchases 7.7 -51.8 -25.5 45.4 -9.3 140.9 -58.7 -52.4 -67.1 -40.7 -131.0 -61.0 NOTES BY LINE NUMBER. 30. Demand deposits and note balances at commercial banks. 1. Line 1 of table 1.57. 31. Excludes net investment of these reserves in corporate equities. 2. Sum of lines 3-6 or 7-10. 32. Mainly retained earnings and net miscellaneous liabilities. 6. Includes farm and commercial mortgages. 33. Line 13 less line 20 plus line 27. 11. Credit market funds raised by federally sponsored credit agencies, and net 34-38. Lines 14-18 less amounts acquired by private finance plus amounts issues of federally related mortgage pool securities. borrowed by private finance. Line 38 includes mortgages. 13. Line 1 less line 2 plus line 11 and 12. Also line 20 less line 27 plus line 33. 40. Mainly an offset to line 9. Also sum of lines 28 and 47 less lines 40 and 46. 47. Lines 33 plus 39, or line 13 less line 28 plus 40 and 46. 18. Includes farm and commercial mortgages. 48. Line 2/line 1. 26. Line 39 less lines 40 and 46. 49. Line 20/line 13. 27. Excludes equity issues and investment company shares. Includes line 19. 50. Sum of lines 10 and 29. 29. Foreign deposits at commercial banks, bank borrowings from foreign 51. 53. Includes issues by financial institutions. branches, and liabilities of foreign banking agencies to foreign affiliates, less NOTE. Full statements for sectors and transaction types in flows and in amounts claims on foreign affiliates and deposits by banking in foreign banks. outstanding may be obtained from Flow of Funds Section, Division of Research and Statistics, Board of Governors of the Federal Reserve System, Washington, D.C. 20551. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A44 Domestic Nonfinancial Statistics • March 1989 1.59 SUMMARY OF CREDIT MARKET DEBT OUTSTANDING Billions of dollars; period-end levels. 1987 1988 TTrraannssaaccttiioonn ccaatteeggoorryy,, sseeccttoorr 11998866 QI Q2 Q3 Q4 QI Q2 Q3 Nonfinancial sectors 1 Total credit market debt owed by domestic nonfinancial sectors 5,204.3 5,953.7 6,797.0 7,618.1 7,725.8 7,917.4 8,074.1 8,301.3 8,444.3 8,629.8 8,817.3 By sector and instrument 2 U.S. government 1,177.9 1,376.8 1,600.4 1,815.4 1,843.9 1,875.3 1,897.0 1,959.2 2,001.8 2,020.4 2,063.8 3 Treasury securities 1,174.4 1,373.4 1,597.1 1,811.7 1,839.3 1,871.2 1,893.1 1,954.1 1,996.7 2,013.5 2,051.6 4 Agency issues and mortgages 3.6 3.4 3.3 3.6 4.6 4.2 3.9 5.2 5.0 7.0 12.2 5 Private domestic nonfinancial sectors 4,026.4 4,577.0 5,196.6 5,802.7 5,881.9 6,042.1 6,177.1 6,342.1 6,442.6 6,609.4 6,753.5 6 Debt capital instruments 2,717.8 3,040.0 3,488.4 3,946.4 4,065.6 4,189.4 4,296.9 4,404.5 4,479.3 4,596.7 4,715.0 7 Tax-exempt obligations 471.7 522.1 658.4 689.2 696.9 705.2 715.5 723.7 728.0 735.8 749.4 8 Corporate bonds 423.0 469.2 542.9 664.2 696.4 718.5 743.7 764.1 789.4 819.1 841.7 9 Mortgages 1,823.1 2,048.8 2,287.1 2,593.0 2,672.2 2,765.7 2,837.7 2,916.6 2,961.8 3,041.9 3,123.8 10 Home mortgages 1,200.2 1,336.2 1,490.2 1,699.6 1,730.4 1,800.7 1,853.8 1,908.7 1,939.7 2,000.4 2,056.6 11 Multifamily residential 158.8 183.6 213.0 246.3 254.2 259.9 264.9 269.9 273.8 278.1 285.6 12 Commercial 350.4 416.5 478.1 551.4 594.8 613.8 629.0 649.2 660.2 675.5 692.5 13 Farm 113.7 112.4 105.9 95.8 92.8 91.3 90.0 88.9 88.2 87.9 89.2 14 Other debt instruments 1,308.6 1,536.9 1,708.2 1,856.3 1,816.4 1,852.7 1,880.2 1,937.6 1,963.3 2,012.6 2,038.5 15 Consumer credit 437.7 519.3 601.8 656.2 643.3 658.7 680.9 696.9 692.2 709.6 727.8 16 Bank loans n.e.c 490.2 552.9 592.6 658.6 627.7 636.3 637.5 656.7 669.4 689.9 688.7 17 Open market paper 36.8 58.5 72.2 62.9 63.6 67.9 68.1 73.8 73.5 77.8 80.3 18 Other 344.0 406.2 441.6 478.6 481.7 489.9 493.7 510.1 528.1 535.3 541.6 19 By borrowing sector 4,026.4 4,577.0 5,196.6 5,802.7 5,881.9 6,042.1 6,177.1 6,342.1 6,442.6 6,609.4 6,753.5 20 State and local governments 357.7 385.1 476.9 520.2 527.5 535.3 546.2 554.7 558.3 565.7 578.5 21 Households 1,811.6 2,038.2 2,314.5 2,594.2 2,605.4 2,691.2 2,762.8 2,836.6 2,866.2 2,945.7 3,016.4 22 Nonfinancial business 1,857.1 2,153.7 2,405.2 2,688.3 2,749.0 2,815.7 2,868.1 2,950.9 3,018.1 3,097.9 3,158.5 23 Farm 188.4 187.9 173.4 156.6 149.9 150.2 148.5 144.9 141.5 144.0 145.0 24 Nonfarm noncorporate 645.8 769.0 898.3 1,025.9 1,053.8 1,084.3 1,106.7 1,141.7 1,165.2 1,186.0 1,211.9 25 Corporate 1,022.9 1,196.8 1,333.5 1,505.8 1,545.3 1,581.2 1,612.9 1,664.3 1,711.5 1,767.8 1,801.6 26 Foreign credit market debt held in United States 227.3 235.1 236.7 238.2 236.7 236.8 238.9 244.3 245.1 246.3 247.8 27 Bonds 64.2 68.0 71.8 74.8 75.1 74.6 75.9 81.6 85.4 85.2 86.7 28 Bank loans n.e.c 37.4 30.8 27.9 26.9 26.0 25.4 24.2 23.3 22.8 22.4 22.0 29 Open market paper 21.5 27.7 33.9 37.4 37.3 35.6 40.6 41.2 42.5 44.0 46.3 30 U.S. government loans 104.1 108.6 103.0 99.1 98.3 101.2 98.2 98.1 94.4 94.7 92.8 31 Total domestic plus foreign 5,431.6 6,188.8 7,033.7 7,856.3 7,962.5 8,154.2 8,313.1 8,545.6 8,689.4 8,876.1 9,065.1 Financial sectors 32 Total credit market debt owed by financial sectors 857.9 1,006.2 1,206.2 1,510.8 1,621.8 1,710.0 1,783.8 1,862.6 1,903.8 1,972.6 2,035.7 By instrument 33 U.S. government related 456.7 531.2 632.7 810.3 887.1 937.1 981.6 1,026.5 1,054.8 1,076.9 1,113.7 34 Sponsored credit agency securities 206.8 237.2 257.8 273.0 268.4 275.8 283.7 303.2 313.5 317.9 328.5 35 Mortgage pool securities 244.9 289.0 368.9 531.6 613.7 656.4 692.9 718.3 736.3 754.0 780.2 36 Loans from U.S. government 5.0 5.0 6.1 5.7 5.0 5.0 5.0 5.0 5.0 5.0 5.0 37 Private financial sectors 401.2 475.0 573.4 700.5 734.8 772.9 802.1 836.1 849.0 895.7 922.0 38 Corporate bonds 115.8 148.9 197.5 268.4 293.4 304.6 324.2 335.5 353.2 370.0 386.8 39 Mortgages 2.1 2.5 2.7 2.7 2.8 2.9 2.9 3.0 3.1 3.1 3.1 40 Bank loans n.e.c 28.9 29.5 32.1 36.1 36.5 40.1 42.2 40.8 31.7 34.3 33.9 41 Open market paper 195.5 219.5 252.4 284.6 295.2 311.1 312.7 323.8 331.5 353.4 356.8 42 Loans from Federal Home Loan Banks. .. 59.0 74.6 88.8 108.6 106.8 114.3 120.1 133.1 129.5 134.8 141.6 43 Total, by sector 857.9 1,006.2 1,206.2 1,510.8 1,621.8 1,710.0 1,783.8 1,862.6 1,903.8 1,972.6 2,035.7 44 Sponsored credit agencies 211.8 242.2 263.9 278.7 273.4 280.7 288.7 308.2 318.5 322.9 333.5 45 Mortgage pools 244.9 289.0 368.9 531.6 613.7 656.4 692.9 718.3 736.3 754.0 780.2 46 Private financial sectors 401.2 475.0 573.4 700.5 734.8 772.9 802.1 836.1 849.0 895.7 922.0 47 Commercial banks 76.8 84.1 79.2 75.6 76.1 80.7 78.6 82.7 76.4 77.2 75.4 48 Bank affiliates 71.0 86.6 101.2 101.3 109.0 108.7 109.5 104.2 104.4 106.5 105.8 49 Savings and loan associations 73.9 93.2 115.5 145.1 146.6 157.0 165.4 181.1 177.4 187.3 198.0 50 Finance companies 171.7 193.2 246.9 308.1 315.4 328.8 339.9 357.0 368.3 393.8 406.3 51 REITs 3.5 4.3 5.6 6.5 7.0 6.8 7.3 8.1 8.7 9.1 9.6 52 CMO Issuers 4.2 13.5 25.0 64.0 80.7 90.9 101.6 103.1 113.9 121.7 127.0 All sectors 53 Total credit market debt 6,289.5 7,195.0 8,239.8 9,367.2 9,584.3 9,864.2 10,096.9 10,408.1 10,593.3 10,848.6 11,100.8 54 U.S. government securities 1,629.4 1,902.8 2,227.0 2,620.0 2,726.0 2,807.4 2,873.7 2,980.7 3,051.6 3,092.3 3,172.5 55 State and local obligations 471.7 522.1 658.4 689.2 696.9 705.2 715.5 723.7 728.0 735.8 749.4 56 Corporate and foreign bonds 603.0 686.0 812.1 1,007.4 1,064.9 1,097.7 1,143.9 1,181.2 1,228.1 1,274.2 1,315.2 57 Mortgages 1,825.4 2,051.4 2,289.8 2,595.8 2,675.1 2,768.6 2,840.6 2,919.7 2,964.9 3,045.0 3,127.0 58 Consumer credit 437.7 519.3 601.8 656.2 643.3 658.7 680.9 696.9 692.2 709.6 727.8 59 Bank loans n.e.c 556.5 613.2 652.6 721.6 690.3 701.7 703.8 720.8 723.9 746.6 744.6 60 Open market paper 253.8 305.7 358.5 384.9 396.1 414.6 421.4 438.8 447.5 475.3 483.4 61 Other loans 512.1 594.4 639.5 692.0 691.8 710.4 717.0 746.3 757.0 769.8 780.9 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Flow of Funds A45 1.60 SUMMARY OF CREDIT MARKET CLAIMS, BY HOLDER Billions of dollars, except as noted; period-end levels. 1987 1988 TTrraannssaaccttiioonn ccaatteeggoorryy,, oorr sseeccttoorr 11998833 11998844 11998855 11998866 Ql Q2 Q3 Q4 Ql Q2 Q3 1 Total funds advanced in credit markets to domestic nonfinancial sectors 5,204.3 5,953.7 6,797.0 7,618.1 7,725.8 7,917.4 8,074.1 8,301.3 8,444.3 8,629.8 8,817.3 By public agencies and foreign 2 Total held 1,101.7 1,259.2 1,459.4 1,759.3 1,847.6 1,918.0 1,967.0 2,037.8 2,098.6 2,144.4 22,,119922..88 3 U.S. government securities 339.0 377.9 421.8 491.2 502.3 519.5 525.6 559.4 592.7 606.1 607.1 4 Residential mortgages 367.0 423.5 518.2 678.5 758.9 800.0 834.6 862.0 884.8 906.1 932.2 5 FHLB advances to savings and loans 59.0 74.6 88.8 108.6 106.8 114.3 120.1 133.1 129.5 134.8 141.6 6 Other loans and securities 336.8 383.1 430.6 481.0 479.6 484.3 486.8 483.4 491.5 497.4 511.9 7 Total held, by type of lender 1,101.7 1,259.2 1,459.4 1,759.3 1,847.6 1,918.0 1,967.0 2,037.8 2,098.6 2,144.4 2,192.8 8 U.S. government 212.8 229.7 247.6 254.3 249.2 242.9 237.1 235.4 233.7 232.0 232.6 9 Sponsored credit agencies and mortgage pools ... 482.0 556.3 657.8 833.9 912.0 957.9 1,003.7 1,044.1 1,068.2 1,091.6 1,124.2 10 Monetary authority 159.2 167.6 186.0 205.5 204.1 214.9 219.6 230.1 224.9 229.7 230.8 11 Foreign 247.7 305.6 367.9 465.7 482.3 502.3 506.7 528.2 571.8 591.1 605.3 Agency and foreign debt not in line 1 12 Sponsored credit agencies and mortgage pools ... 456.7 531.2 632.7 810.3 887.1 937.1 981.6 1,026.5 1,054.8 1,076.9 1,113.7 13 Foreign 227.3 235.1 236.7 238.2 236.7 236.8 238.9 244.3 245.1 246.3 247.8 Private domestic holdings 14 Total private holdings 4,786.6 5,460.8 6,207.0 6,907.3 7,002.0 7,173.2 7,327.7 7,534.2 7,645.7 7,808.6 7,985.9 15 U.S. government securities 1,290.4 1,524.9 1,805.2 2,128.7 2,223.7 2,287.9 2,348.1 2,421.3 2,458.9 2,486.3 2,565.3 16 State and local obligations 471.7 522.1 658.4 689.2 696.9 705.2 715.5 723.7 728.0 735.8 749.4 17 Corporate and foreign bonds 441.7 476.8 517.6 601.7 626.0 642.4 663.4 688.1 716.3 740.1 757.3 18 Residential mortgages 992.2 1,096.5 1,185.1 1,267.4 1,225.8 1,260.6 1,284.2 1,316.7 1,328.7 1,372.4 1,410.0 19 Other mortgages and loans 1,649.6 1,915.2 2,129.5 2,328.9 2,336.4 2,391.5 2,436.6 2,517.4 2,543.3 2,608.9 2,645.5 20 LESS: Federal Home Loan Bank advances 59.0 74.6 88.8 108.6 106.8 114.3 120.1 133.1 129.5 134.8 141.6 Private financial intermediation 21 Credit market claims held by private financial institutions 4,111.2 4,691.0 5,264.4 6,009.5 6,126.1 6,277.5 6,433.5 6,585.2 6,723.0 6,892.6 7,042.6 22 Commercial banking 1,622.1 1,791.1 1,978.5 2,173.2 2,155.9 2,207.9 2,248.7 2,309.6 2,322.1 2,377.5 2,414.3 23 Savings institutions 944.0 1,092.8 1,178.4 1,283.0 1,308.4 1,355.4 1,396.5 1,434.2 1,440.3 1,486.8 1,523.4 24 Insurance and pension funds 1,093.5 1,215.3 1,364.2 1,546.0 1,608.7 1,652.6 1,715.3 1,756.9 1,823.0 1,880.9 1,937.2 25 Other finance 451.6 591.7 743.4 1,007.3 1,053.1 1,061.5 1,073.0 1,084.6 1,137.6 1,147.5 1,167.7 26 Sources of funds 4,111.2 4,691.0 5,264.4 6,009.5 6,126.1 6,277.5 6,433.5 6,585.2 6,723.0 6,892.6 7,042.6 27 Private domestic deposits and RPs 2,389.8 2,711.5 2,922.1 3,182.6 3,165.0 3,198.6 3,234.4 3,328.8 3,385.7 3,417.0 3,455.1 28 Credit market debt 401.2 475.0 573.4 700.5 734.8 772.9 802.1 836.1 849.0 895.7 922.0 29 Other sources 1,320.2 1,504.5 1,768.9 2,126.4 2,226.3 2,305.9 2,397.0 2,420.4 2,488.4 2,579.9 2,665.6 30 Foreign funds -23.0 -14.1 5.6 18.6 26.7 26.1 52.7 62.2 45.9 62.3 54.8 31 Treasury balances 11.5 15.5 25.8 27.5 8.6 30.9 33.0 21.6 23.5 32.6 31.5 32 Insurance and pension reserves 1,036.1 1,160.8 1,289.5 1,427.9 1,461.8 1,507.5 1,552.8 1,592.2 1,656.3 1,706.7 1,751.9 33 Other, net 295.6 342.2 448.0 652.5 729.2 741.4 758.5 744.3 762.8 778.3 827.4 „ Private domestic nonfinancial investors 34 Credit market claims 1,076.6 1,244.8 1,516.0 1,598.3 1,610.7 1,668.7 1,696.3 1,785.0 1,771.6 1,811.6 1,865.3 35 U.S. government securities 548.6 663.6 830.7 881.2 912.0 950.4 969.4 1,014.7 1,025.7 1,027.0 1,071.4 36 Tax-exempt obligations 170.0 196.3 235.9 222.3 226.2 243.1 255.9 268.4 265.6 275.3 287.3 37 Corporate and foreign bonds 45.4 44.5 47.6 80.1 88.8 71.4 80.6 85.3 82.7 93.0 88.4 38 Open market paper 68.4 72.4 118.0 115.0 115.5 132.6 118.7 143.5 127.8 148.5 149.6 39 Other 244.3 268.0 283.8 299.7 268.1 271.2 271.9 273.2 269.9 267.9 268.5 40 Deposits and currency 2,566.4 2,891.7 3,112.5 3,393.4 3,364.7 3,405.6 3,444.5 3,555.7 3,607.4 3,646.4 3,690.7 41 Currency 150.9 159.6 171.9 186.3 185.3 191.3 192.4 205.4 204.0 209.9 210.7 42 Checkable deposits 350.9 378.8 419.7 512.9 468.5 488.0 487.2 510.5 491.1 506.8 497.3 43 Small time and savings accounts 1,542.9 1,693.5 1,831.9 1,948.3 1,965.2 1,977.7 1,990.8 2,024.2 2,079.4 2,107.9 2,126.8 44 Money market fund shares 169.5 218.5 227.3 268.9 281.3 279.5 286.4 297.1 322.1 310.4 311.1 45 Large time deposits 247.7 332.1 339.8 328.4 323.4 322.5 326.3 356.0 351.0 346.1 372.4 46 Security RPs 78.8 88.7 103.3 124.1 126.6 130.9 143.6 141.0 142.1 145.9 147.4 47 Deposits in foreign countries 25.7 20.6 18.5 24.5 14.4 15.7 17.8 21.6 17.8 19.4 25.0 48 Total of credit market instruments, deposits, and currency 3,643.0 4,136.5 4,628.5 4,991.7 4,975.4 5,074.2 5,140.8 5,340.8 5,379.0 5,458.0 5,556.1 49 Public holdings as percent of total 20.3 20.3 20.7 22.4 23.2 23.5 23.7 23.8 24.2 24.2 24.2 50 Private financial intermediation (in percent) 85.9 85.9 84.8 87.0 87.5 87.5 87.8 87.4 87.9 88.3 88.2 51 Total foreign funds 224.7 291.5 373.5 484.2 509.0 528.4 559.4 590.5 617.6 653.4 660.0 MEMO: Corporate equities not included above 52 Total market value 2,134.0 2,158.2 2,824.5 3,362.0 3,990.2 4,110.0 4,300.8 3,313.4 3,494.8 3,612.6 3,577.5 53 Mutual fund shares 112.1 136.7 240.2 413.5 485.2 520.7 525.1 460.1 479.2 486.8 483.9 54 Other equities 2,021.9 2,021.5 2,584.3 2,948.5 3,505.0 3,589.3 3,775.7 2,853.2 3,015.7 3,125.9 3,093.6 55 Holdings by financial institutions 612.0 615.6 800.0 972.2 1,175.7 1,238.9 1,312.5 1,021.7 1,087.1 1,133.8 1,133.0 56 Other holdings 1,522.0 1,542.6 2,024.5 2,389.8 2,814.5 2,871.1 2,988.4 2,291.7 2,407.7 2,478.9 2,444.4 NOTES BY LINE NUMBER. 32. Excludes net investment of these reserves in corporate equities. 1. Line 1 of table 1.59. 33. Mainly retained earnings and net miscellaneous liabilities. 2. Sum of lines 3-6 or 7-10. 34. Line 14 less line 21 plus line 28. 6. Includes farm and commercial mortgages. 35-39. Lines 15-19 less amounts acquired by private finance plus amounts 12. Credit market debt of federally sponsored agencies, and net issues of borrowed by private finance. Line 39 includes mortgages. federally related mortgage pool securities. 41. Mainly an offset to line 10. 14. Line 1 less line 2 plus line 12 and 13. Also line 21 less line 28 plus line 34. 48. Lines 34 plus 40, or line 14 less line 29 plus 41 and 47. Also sum of lines 29 and 48 less lines 41 and 47. 49. Line 2/line 1 and 13. 19. Includes farm and commercial mortgages. 50. Line 21/line 14. 27. Line 40 less lines 41 and 47. 51. Sum of lines 11 and 30. 28. Excludes equity issues and investment company shares. Includes line 20. 52-54. Includes issues by financial institutions. 30. Foreign deposits at commercial banks plus bank borrowings from foreign NOTE. Full statements for sectors and transaction types in flows and in amounts affiliates, less claims on foreign affiliates and deposits by banking in foreign banks. outstanding may be obtained from Flow of Funds Section, Stop 95, Division of 31. Demand deposits and note balances at commercial banks. Research and Statistics, Board of Governors of the Federal Reserve System, Washington, D.C. 20551. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A46 Domestic Nonfinancial Statistics • March 1989 2.10 NONFINANCIAL BUSINESS ACTIVITY Selected Measures1 1977 = 100; monthly and quarterly data are seasonally adjusted. Exceptions noted. 1988 MMeeaassuurree 11998866 11998877 11998888 Apr. May June July Aug. Sept. Oct/ Nov/ Dec. 1 Industrial production 125.1 129.8 137.2 135.4 136.1 136.5 138.0 138.5 138.6R 139.3 139.8 140.2 Market groupings 2 Products, total 133.3 138.3 145.9 144.1 145.0 145.3 146.5 147.3 147.4r 148.1 148.3 148.8 3 Final, total 132.5 136.8 144.3 142.5 143.5 144.0 145.0 145.8 145.8r 146.5 146.5 146.9 4 Consumer goods 124.0 127.7 133.9 131.9 132.7 133.0 134.2 135.0 134.8r 136.7 136.5 137.2 i Equipment 143.6 148.8 158.2 156.5 157.7 158.5 159.4 160.1 160.4r 159.5 159.8 159.8 6 Intermediate 136.2 143.5 151.5 149.6 1504 150.0 151.6 152.3 152.Y 153.5 154.4 155.2 7 Materials 113.8 118.2 125.3 123.6 123.9 124.5 126.4 126.5 J26.5r 127.4 128.3 128.6 Industry groupings 8 Manufacturing 129.1 134.6 142.8 140.8 141.8 142.1 143.6 144.0 144.4' 145.3 145.7 146.2 Capacity utilization (percent)2 9 Manufacturing 79.7 81.1 n.a. 82.9 83.3 83.3 84.0 84.0 84.0 84.3 84.3 84.4 10 Industrial materials industries 78.6 80.5 n.a. 82.9 83.0 83.2 84.4 84.3 84.1 84.5 85.0 85.0 11 Construction contracts (1982 = 100)3 158.0 161.0 155.0 144.0 157.0 165.0 156.0 155.0 151.0 153.0 157.0 169.0 12 Nonagricultural employment, total4 120.7 124.1 128.6 127.7 127.9 128.6 128.9 129.1 129.4 129.7 130.2 130.5 13 Goods-producing, total 100.9 101.8 105.0 104.5 104.6 105.1 105.4 105.3 105.4 105.8 106.2 106.4 14 Manufacturing, total 96.3 96.8 99.2 98.8 99.0 99.3 99.5 99.4 99.3 99.8 100.2 100.3 15 Manufacturing, production-worker 91.2 92.1 94.3 93.9 94.1 94.4 94.6 94.4 94.3 94.9 95.2 95.4 16 Service-producing 129.0 133.4 138.5 137.4 137.7 138.4 138.7 139.0 139.5 139.8 140.3 140.7 17 Personal income, total 219.7 235.1 252.8 248.8 250.2 251.6 253.3 254.5 256.0 259.9 259.4 261.7 18 Wages and salary disbursements 210.7 226.2 245.2 240.9 242.3 244.2 246.7 247.4 249.0 252.3 253.1 254.6 19 Manufacturing 177.4 183.8 196.0 192.8 193.8 195.4 196.6 196.8 198.1 202.3 201.2 201.7 20 Disposable personal income 218.9 232.7 251.8 243.3 249.5 251.2 253.1 254.2 255.6 259.7 259.0 261.4 21 Retail sales6 199.5 209.3 222.8 219.4 221.2 222.5 223.7 224.4 223.7 227.4 229.5 229.9 Prices7 22 Consumer (1982-84 = 100) 109.6 113.6 118.3 117.1 117.5 118.0 118.5 119.0 119.8 120.2 120.3 120.5 23 Producer finished goods (1982 = 100) ... 103.2 105.4 108.0 107.0 107.5 107.9 108.5 108.8 108.6 109.3 109.7 110.0 1. A major revision of the industrial production index and the capacity 5. Based on data in Survey of Current Business (U.S. Department of Comutilization rates was released in July 1985. See "A Revision of the Index of merce). Industrial Production" and accompanying tables that contain revised indexes 6. Based on Bureau of Census data published in Survey of Current Business. (1977=100) through December 1984 in the FEDERAL RESERVE BULLETIN, vol. 71 7. Data without seasonal adjustment, as published in Monthly Labor Review. (July 1985), pp. 487-501. The revised indexes for January through June 1985 were Seasonally adjusted data for changes in the price indexes may be obtained from shown in the September BULLETIN. the Bureau of Labor Statistics, U.S. Department of Labor. 2. Ratios of indexes of production to indexes of capacity. Based on data from Federal Reserve, McGraw-Hill Economics Department, Department of Com- NOTE. Basic data (not index numbers) for series mentioned in notes 4, 5,and 6, merce, and other sources. and indexes for series mentioned in notes 3 and 7 may also be found in the Survey 3. Index of dollar value of total construction contracts, including residential, of Current Business. nonresidential and heavy engineering, from McGraw-Hill Information Systems Figures for industrial production for the last two months are preliminary and Company, F. W. Dodge Division. estimated, respectively. 4. Based on data in Employment and Earnings (U.S. Department of Labor). Series covers employees only, excluding personnel in the Armed Forces. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Selected Measures A47 2.11 LABOR FORCE, EMPLOYMENT, AND UNEMPLOYMENT Thousands of persons; monthly data are seasonally adjusted. Exceptions noted. 1988 CCaatteeggoorryy 11998866 11998877 11998888 May June July Aug. Sept. Oct.' Nov.' Dec. HOUSEHOLD SURVEY DATA 1 Noninstitutional population1 182,822 185,010 186,837 186,600 186,755 186,911 187,033 187,178 187,333 187,471 187,618 2 Labor force (including Armed Forces)1 120,078 122,122 123,893 123,429' 123,717' 123,840' 124,203' 124,200' 124,310 124,737 124,779 3 Civilian labor force 111177,,883344 111199,,886655 112211,,666699 112211,,220033'' 112211,,552244'' 112211,,665588'' 112222,,000000'' 112211,,998844'' 122,091 122,510 122,563 Employment 4 Nonagricultural industries 106,434 109,232 111,800 111,293' 111,880' 111,974' 112,061' 112,194' 112,335 112,709 112,816 5 Agriculture 33,,116633 33,,220088 33,,116699 33,,111100'' 33,,112211'' 3,060' 33,,114422'' 3,176' 3,238 3,238 3,193 Unemployment 6 Number 8,237 7,425 6,701 E.SOC 6,523' 6,624' 6,797' 6,614' 6,518 6,563 6,554 7 Rate (percent of civilian labor force) 7.0 6.2 5.5 5.6 5.4' 5.4 5.6 5.4 5.3 5.4 5.3 8 Not in labor force 62,744 62,888 62,944 63,171' 63,038' 63,071' 62,830' 62,978' 63,023 62,734 62,839 ESTABLISHMENT SURVEY DATA 9 Nonagricultural payroll employment3 99,525 102,310 106,039 105,489 106,057 106,271 106,425 106,737 106,973 107,377 107,656 10 Manufacturing 18,965 19,065 19,536 19,490 19,544 19,593 19,560 19,549 19,648 19,718 19,752 11 Mining 777 721 733 739 740 740 739 734 729 721 723 12 Contract construction 4,816 4,998 5,294 5,237 5,308 5,330 5,340 5,365 5,366 5,405 5,418 13 Transportation and public utilities 5,255 5,385 5,584 5,556 5,582 5,598 5,605 5,618 5,631 5,648 5,650 14 Trade 23,683 24,381 25,362 25,245 25,353 25,435 25,471 25,510 25,573 25,663 25,742 15 Finance 6,283 6,549 6,679 6,656 6,679 6,684 6,689 6,692 6,708 6,724 6,733 16 Service 23,053 24,196 25,464 25,216 25,472 25,561 25,662 25,737 25,826 25,938 26,064 17 Government 16,693 17,015 17,387 17,350 17,379 17,330 17,359 17,532 17,492 17,560 17,574 1. Persons 16 years of age and over. Monthly figures, which are based on 3. Data include all full- and part-time employees who worked during, or sample data, relate to the calendar week that contains the 12th day; annual data received pay for, the pay period that includes the 12th day of the month, and are averages of monthly figures. By definition, seasonality does not exist in exclude proprietors, self-employed persons, domestic servants, unpaid family population figures. Based on data from Employment and Earnings (U.S. Depart- workers, and members of the Armed Forces. Data are adjusted to the March 1984 ment of Labor). benchmark and only seasonally adjusted data are available at this time. Based on 2. Includes self-employed, unpaid family, and domestic service workers. data from Employment and Earnings (U.S. Department of Labor). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A48 Domestic Nonfinancial Statistics • March 1989 2.12 OUTPUT, CAPACITY, AND CAPACITY UTILIZATION1 Seasonally adjusted 19 88 1988 1988 SSeerriieess Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Output (1977 = 100) Capacity (percent of 1977 output) Utilization rate (percent) 1 Total industry 134.5 136.0 138.2 139.8 163.1 164.2 165.2 166.2 82.4 82.8 83.8 84.1 2 Mining 102.5 103.3 104.8 103.9 127.7 127.0 126.2 125.5 80.3 81.5 82.3 82.8 3 Utilities 114.7 111.7 114.9 114.6 139.8 140.1 140.4 140.7 82.0 79.9 81.9 81.4 4 Manufacturing 139.6 141.6 143.7 145.7 168.9 170.2 171.5 172.7 82.7 83.2 84.0 84.4 5 Primary processing 123.0 123.9 125.7 127.9 141.6 142.7 143.9 145.1 86.9 86.8 87.5r 88.2 6 Advanced processing... 149.7 152.3 154.5 156.4 185.6 186.7 188.1 189.4 80.7 81.5 82.4 82.6 7 Materials 122.5 124.0 126.6 128.1 148.5 149.3 150.1 150.9 82.5 83.0 84.3 84.9 8 Durable goods 131.5 134.2 136.9 139.3 165.7 166.8 167.9 169.0 79.4 80.4 81.6 82.4 9 Metal materials 86.2 88.1 92.4 94.8 108.8 109.1 109.4 109.7 79.2 80.8 84.8 86.4 10 Nondurable goods 129.4 130.5 132.4 135.5 146.8 148.3 149.8 151.4 88.1 87.9 88.7 89.5 11 Textile, paper, and chemical ... 131.6 132.6 135.1 138.3 146.7 148.5 150.2 152.0 89.7 89.2 90.C 91.0 V 145.7 145.9 147.6 149.2 98.7 97.8 98.8 13 133.5 135.7 153.5 155.4 87.0 87.3 88.6' 14 Energy materials 100.9 100.4 103.5 102.0 119.7 119.4 119.1 118.8 84.3 84.2 86.0 85.8 Previous cycle2 Latest cycle3 1987 1988 High Low High Low Dec. Apr. May June July Aug. Sept. Oct/ Nov/ Dec. Capacity utilization rate (percent) 15 Total industry 88.6 72.1 86.9 69.5 82.4 82.7 82.9 83.0 83.7 83.8 83.7 84.0 84.1 84.2 16 Mining 92.8 87.8 95.2 76.9 81.5 82.3 80.8 81.2 82.5 82.2 82.2 81.6 82.2 83.3 17 Utilities 95.6 82.9 88.5 78.0 80.0 79.3 79.7 80.8 81.5 83.9 80.3 80.8 81.3 81.9 18 Manufacturing 87.7 69.9 86.5 68.0 82.6 82.9 83.3 83.3 84.0 84.0 84.0 84.3 84.3 84.4 19 Primary processing 91.9 68.3 89.1 65.0 87.6 86.9 87.0 86.6 87.8 87.4 87.2 87.9 88.1 88.4 20 Advanced processing.. 86.0 71.1 85.1 69.5 80.3 81.2 81.7 81.7 82.2 82.4 82.4 82.6 82.6 82.6 21 Materials 92.0 70.5 89.1 68.5 83.6 82.9 83.0 83.2 84.4 84.3 84.1 84.5 85.0 85.0 22 Durable goods 91.8 64.4 89.8 60.9 80.0 79.7 80.8 80.7 81.7 81.4 81.9 82.3 82.6 82.4 23 Metal materials 99.2 67.1 93.6 45.7 86.3 79.3 82.1 80.8 84.9 83.4 86.0 87.4 86.1 85.7 24 Nondurable goods 91.1 66.7 88.1 70.7 90.8 88.7 87.7 87.4 88.9 88.8 88.2 89.2 89.3 90.0 25 Textile, paper, and chemical 92.8 64.8 89.4 68.8 93.1 90.1 88.8 88.9 90.4 90.3 89.4r 90.7 90.7 91.5 ">6 98.4 70.6 97.3 79.9 101.6 98.1 98.1 97.1 100.0 98.4 97.9 97.8 96.8 77 92.5 64.4 87.9 63.5 90.9 88.0 86.9 87.0 88.8 89.0 88.0r 90.1 90.8 28 Energy materials 94.6 86.9 94.0 82.3 84.8 84.5 83.3 84.4 86.2 86.6 85.3r 85.0 86.3 86.1 1. These data also appear in the Board's G.3 (402) release. For address, see 2. Monthly high 1973; monthly low 1975. inside front cover. 3. Monthly highs 1978 through 1980; monthly lows 1982. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Selected Measures A49 2.13 INDUSTRIAL PRODUCTION Indexes and Gross Value' Monthly data are seasonally adjusted 1977 1987 1988 1987 GGrroouuppss por- avg. tion Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept.r Oct. Nov." Dec.' Index (1977 = 100) MAJOR MARKET 1 Total index 100.00 129.8 133.9 134.4 134.4 134.7 135.4 136.1 136.5 138.0 138.5 138.6 139.3 139.8 140.2 7 57.72 138.3 141.3 142.7 143.4 143.6 144.1 145.0 145.3 146.5 147.3 147.4 148.1 148.3 148.8 3 44.77 136.8 139.8 141.1 141.6 141.8 142.5 143.5 144.0 145.0 145.8 145.8 146.5 146.5 146.9 4 Consumer goods 25.52 127.7 129.8 131.2 131.3 131.2 131.9 132.7 133.0 134.2 135.0 134.8 136.7 136.5 137.2 5 Equipment 19.25 148.8 153.1 154.3 155.3 155.9 156.5 157.7 158.5 159.4 160.1 160.4 159.5 159.8 159.8 6 Intermediate products 12.94 143.4 146.5 148.1 149.4 149.9 149.6 150.4 150.0 151.6 152.3 152.9 153.5 154.4 155.2 7 Materials 42.28 118.2 123.7 123.0 122.1 122.5 123.6 123.9 124.5 126.4 126.5 126.5 127.4 128.3 128.6 Consumer goods 8 Durable consumer goods 6.89 120.2 120.3 121.7 120.6 120.4 123.3 125.6 125.3 125.3 125.7 126.3 129.7 129.5 132.1 9 Automotive products 2.98 118.5 115.4 118.7 117.6 120.6 121.9 127.1 127.1 124.4 124.2 126.4 129.8 130.3 135.0 10 Autos and trucks 1.79 115.1 110.2 112.8 111.8 116.4 118.0 126.9 125.3 120.8 123.1 124.8 128.3 129.5 138.0 It Autos, consumer 1.16 90.7 83.7 77.5 79.5 86.3 91.0 98.9 99.0 93.8 93.0 97.7 101.3 101.0 105.1 1? Trucks, consumer .63 160.5 159.5 178.3 171.6 172.2 168.2 178.9 174.1 170.8 179.0 175.3 178.4 182.4 13 Auto parts and allied goods 1.19 123.5 123.3 127.7 126.4 126.9 127.8 127.4 129.7 129.9 125.9 128.8 131.9 131.5 113300..66 14 3.91 121.6 123.9 124.0 122.8 120.2 124.3 124.4 123.9 125.9 126.8 126.2 129.6 128.9 129.8 IS Appliances, A/C and TV 1.24 141.5 142.7 142.2 140.6 132.8 143.2 142.2 138.0 143.3 146.5 144.9 154.4 150.4 151.0 16 Appliances and TV 1.19 142.1 142.6 140.9 141.4 132.7 142.2 143.0 137.1 143.8 146.1 143.7 151.9 148.9 17 Carpeting and furniture .% 130.7 133.9 134.2 132.3 133.1 133.1 135.8 135.9 136.6 137.2 137.1 138.8 139.9 18 Miscellaneous home goods 1.71 102.0 104.8 105.2 104.7 103.9 105.7 105.2 107.0 107.4 106.8 106.6 106.6 107.2 19 Nondurable consumer goods 18.63 130.5 133.3 134.7 135.3 135.1 135.1 135.4 135.8 137.5 138.5 138.0 139.3 139.0 139.1 ?0 Consumer staples 15.29 137.3 140.7 142.3 142.9 142.5 142.5 143.1 143.5 145.3 146.6 145.8 147.4 147.1 147.3 ?l Consumer foods and tobacco 7.80 136.2 139.2 140.3 140.8 139.4 138.3 139.2 139.3 141.1 141.3 141.1 143.1 143.3 77 Nonfood staples 7.49 138.5 142.2 144.3 145.0 145.7 146.8 147.0 147.9 149.6 152.1 150.7 151.9 151.0 1155LL66 71 Consumer chemical products 2.75 162.9 167.7 170.7 171.7 172.7 175.6 177.9 179.5 181.8 183.8 185.0 186.6 185.8 74 Consumer paper products 1.88 151.8 157.0 157.1 157.5 159.1 161.4 162.4 162.8 164.0 165.3 166.3 166.9 165.7 75 Consumer energy 2.86 106.3 108.0 110.6 111.3 111.0 109.6 107.3 107.7 109.3 113.0 107.6 108.9 108.1 76 Consumer fuel 1.44 93.1 95.4 95.4 97.0 97.9 98.9 94.3 93.0 94.6 95.5 92.7 95.3 93.2 27 Residential utilities 1.42 119.8 120.7 126.0 125.8 124.5 120.5 120.6 122.6 124.4 130.9 122.8 122.7 Equipment 78 Business and defense equipment 18.01 153.6 157.8 159.2 160.3 160.8 161.4 162.7 163.5 164.6 165.2 165.6 164.8 165.4 165.6 79 Business equipment 14.34 144.5 149.8 151.2 152.4 153.3 154.6 156.9 158.1 159.3 160.2 160.8 159.9 160.9 161.1 30 Construction, mining, and farm 2.08 62.2 67.4 67.1 67.6 68.3 70.8 71.8 72.4 73.6 73.1 74.3 74.2 74.3 75.3 31 Manufacturing 3.27 117.9 122.2 125.4 124.9 127.0 127.7 128.3 130.3 132.4 134.0 135.8 136.1 137.0 137.6 37 1.27 82.6 84.2 86.2 88.3 87.8 87.0 87.4 88.3 89.8 90.9 92.2 91.8 92.7 92.6 33 Commercial 5.22 226.5 235.5 238.0 240.3 239.9 241.5 245.7 247.1 248.2 249.8 248.7 244.7 245.6 244.1 34 2.49 108.4 109.1 106.5 108.2 111.1 112.3 115.3 115.7 115.9 115.2 116.8 120.2 121.9 125.1 35 Defense and space equipment 3.67 188.9 188.9 190.6 191.0 189.9 187.9 185.5 184.6 184.9 184.9 184.5 184.0 183.3 183.2 Intermediate products 36 Construction supplies 5.95 131.5 133.8 136.8 137.7 137.3 137.6 138.8 137.6 138.4 138.1 113388..44 113399..33 114400..99 114411..77 37 Business supplies 6.99 153.5 157.4 157.8 159.4 160.7 159.9 160.3 160.6 162.8 164.4 165.2 165.6 165.9 38 General business supplies 5.67 158.6 163.3 163.1 165.0 166.6 165.7 165.5 165.9 168.6 170.6 171.8 171.8 172.2 39 Commercial energy products 1.31 131.1 131.8 135.0 135.3 135.3 134.6 137.8 137.5 137.6 137.7 136.7 138.7 138.8 4 4 t 0 Du D ra u b ra le b l g e o c o o d n s s m um at e e r r i p al a s r ts 2 4 0 . . 9 5 2 0 1 1 0 2 0 5 . . 9 0 1 1 0 3 4 2 . . 6 0 1 1 0 3 4 1 . . 7 8 1 1 0 3 4 1 . . 4 4 1 1 0 3 3 1 . . 5 3 1 1 0 3 6 2 . . 2 7 1 1 1 3 0 4 . . 0 8 1 1 1 3 0 4 . . 3 9 1 1 1 3 0 6 . . 1 8 1 1 0 3 9 6 . . 8 6 1 13 1 7 1 . . 8 0 1 11 3 1 8 . . 4 7 1 11 1 33 3 99 . .. 5 77 1 11 1 33 4 99 . .. 1 77 4? 5.94 159.0 165.3 167.4 167.6 167.3 168.9 170.8 171.6 174.1 173.5 174.0 174.7 175.0 174.5 43 Durable materials n.e.c 9.64 116.4 125.5 123.7 123.0 123.4 124.0 125.3 124.8 127.5 127.6 129.2 130.5 131.2 131.2 44 Basic metal materials 4.64 86.7 100.0 92.9 91.4 90.5 91.6 94.8 93.7 98.4 97.3 100.3 101.1 100.4 100.1 45 Nondurable goods materials 10.09 125.8 132.5 129.9 128.1 130.1 131.1 130.1 130.1 132.8 133.1 132.6 134.6 135.1 136.6 4466 Textile, paper, and chemical 7.53 127.6 135.6 132.7 129.9 132.4 133.3 131.9 132.1 135.3 135.7 134.9 113377..33 113377..99 113399..66 47 Textile materials 1.52 111.7 113.6 112.6 110.2 112.7 111.9 107.5 107.5 108.5 110.1 109.2 109.5 108.5 48 Pulp and paper materials 1.55 141.0 149.0 148.0 144.4 144.8 145.8 146.4 145.4 150.3 148.3 148.1 148.5 147.4 49 Chemical materials 4.46 128.4 138.4 134.2 131.5 134.8 136.2 135.1 135.8 139.2 140.0 139.0 142.9 144.6 50 Miscellaneous nondurable materials ... 2.57 120.4 123.3 121.8 123.0 123.2 124.6 125.1 124.2 125.6 125.6 125.9 126.7 51 Energy materials 11.69 99.8 101.7 101.4 100.6 100.6 101.0 99.5 101.3 102.7 103.2 101.5 101.1 102.6 102.2 57 Primary energy 7.57 105.0 107.7 107.3 104.8 105.0 106.7 104.0 105.6 106.8 106.2 106.8 105.8 108.9 53 Converted fuel materials 4.12 90.3 90.7 90.6 93.0 92.6 90.5 91.2 93.5 95.3 97.7 91.8 92.6 91.0 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A50 Domestic Nonfinancial Statistics • March 1989 2.13 INDUSTRIAL PRODUCTION Indexes and Gross Value1—Continued 1977 1987 1988 Groups c S o I d C e pr t o io p n o r- a 1 v 98 g 7 . Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept.' Oct. Nov.'' Dec Index (1977 = 100) MAJOR INDUSTRY 1 Mining and utilities 15.79 104.3 107.3 107.8 106.8 106.7 107.1 106.0 106.8 108.1 109.0 107.2 107.1 108.2 108.5 2 Mining 9.83 100.7 104.6 103.3 101.5 102.7 104.7 102.6 103.0 104.3 103.8 103.7 102.9 104.4 104.4 3 Utilities 5.96 110.3 111.7 115.2 115.6 113.3 111.0 111.6 113.2 114.4 117.8 113.0 114.0 114.4 115.4 4 Manufacturing 84.21 134.6 138.9 139.4 139.5 140.0 140.8 141.8 142.1 143.6 144.0 144.4 145.3 145.7 146.2 5 Nondurable 35.11 136.7 141.3 141.4 141.1 141.7 142.3 142.1 142.6 144.6 145.1 145.3 146.6 146.7 147.1 6 Durable 49.10 133.1 137.3 137.9 138.4 138.8 139.7 141.5 141.7 142.9 143.2 143.8 144.4 145.0 145.5 Mining 7 Metal 10 .50 77.5 96.5 91.5 83.9 84.9 86.9 86.0 82.2 94.0 96.6 99.1 100.4 8 Coal 11.12 1.60 131.8 140.6 140.2 133.7 129.1 136.0 127.8 126.9 141.5 137.2 142.2 138.5 149.7 151.8 9 Oil and gas extraction 13 7.07 92.7 94.1 93.1 92.4 94.8 95.5 94.6 95.8 93.3 93.2 92.0 91.3 90.8 10 Stone and earth minerals 14 .66 128.2 135.6 132.1 134.3 136.9 141.2 140.1 137.4 140.2 141.3 139.7 142.9 142.2 Nondurable manufactures 11 Foods 7.% 137.7 140.1 141.2 141.9 141.1 140.3 141.0 141.3 143.3 143.3 143.2 145.2 145.5 12 Tobacco products .62 103.4 110.5 105.8 107.0 107.2 107.2 107.2 104.5 100.6 105.1 105.0 103.7 13 Textile mill products 2.29 115.8 118.2 116.2 115.3 117.0 117.3 114.6 114.3 117.1 116.4 116.2 117.0 116.5 14 Apparel products 2.79 107.4 107.8 108.7 108.5 108.7 109.2 108.6 109.3 109.4 108.9 109.9 109.5 15 Paper and products 3.15 144.4 150.6 149.9 148.0 149.1 149.2 149.5 148.6 152.3 151.0 150.9 151.7 150.7 16 Printing and publishing 4.54 172.0 176.9 177.5 178.7 180.4 181.8 180.7 182.3 184.9 186.7 188.0 187.8 186.7 186.7 17 Chemicals and products 8.05 140.1 147.9 147.9 145.4 146.4 148.9 149.1 150.5 153.4 154.8 155.3 157.0 158.1 18 Petroleum products 2.40 93.5 96.1 96.3 95.9 98.4 98.5 95.2 94.1 95.0 96.0 93.7 96.3 94.7 ' 97.7 19 Rubber and plastic products 2.80 163.6 170.6 170.5 172.3 172.2 172.3 173.4 174.4 175.4 175.3 175.3 177.3 178.9 20 Leather and products .53 60.0 57.5 58.3 59.7 59.5 58.0 57.1 58.9 59.1 59.4 59.9 61.0 60.2 Durable manufactures 21 Lumber and products 24 2.30 130.3 133.6 136.3 139.0 137.8 138.0 139.8 136.4 136.6 133.8 133.5 137.2 138.6 22 Furniture and fixtures 25 1.27 152.8 159.4 158.0 158.3 159.4 159.2 160.5 161.2 162.9 164.9 164.9 164.5 165.0 23 Clay, glass, and stone products. 32 2.72 119.1 120.1 120.4 121.6 122.5 121.4 121.5 123.4 122.2 122.6 122.6 122.5 124.6 24 Primary metals 33 5.33 81.5 90.6 86.5 86.4 85.1 85.3 89.2 87.5 91.5 90.8 93.1 94.3 92.4 92.1 25 Iron and steel 331.2 3.49 70.8 81.9 77.8 77.4 74.2 74.5 78.6 74.2 80.2 78.9 81.4 83.1 79.7 26 Fabricated metal products 34 6.46 111.0 115.8 117.1 117.6 118.8 118.8 119.8 120.4 121.7 122.1 122.5 122.6 124.2 124. 27 Nonelectrical machinery 35 9.54 152.7 161.0 162.9 163.6 164.6 167.2 170.3 171.2 173.1 174.1 174.8 173.2 174.6 174. 28 Electrical machinery 36 7.15 172.3 175.9 177.4 177.8 176.6 178.7 179.1 179.5 181.5 182.2 181.8 182.9 182.3 181. 29 Transportation equipment 37 9.13 129.2 128.1 128.6 128.4 130.0 130.4 133.1 132.8 131.9 131.8 132.7 134.8 135.6 138. 30 Motor vehicles and parts 371 5.25 111.8 110.2 109.7 109.3 113.0 114.8 119.6 119.1 116.6 117.5 118.5 121.7 123.0 12 31 Aerospace and miscellaneous transportation equipment 372-6.9 3.87 152.8 152.4 154.2 154.5 153.0 151.5 151.5 151.4 152.7 151.3 151.9 152.6 152.7 15 32 Instruments 38 2.66 143.9 145.5 148.2 149.2 149.7 150.5 151.3 153.0 156.4 156.8 157.8 159.9 159.8 160 33 Miscellaneous manufactures.... 39 1.46 102.6 105.6 105.0 104.4 105.1 105.9 106.0 107.6 107.8 108.3 108.5 107.7 109.0 Utilities 34 Electric 4.17 126.6 125.6 130.3 130.7 129.0 127.6 129.7 138.8 132.2 133.0 133.4 Gross value (billions of 1982 dollars, annual rates) MAJOR MARKET 35 Products, total. 517.5 1,735.8 1,778.8 ,790.6 1,797.5 1,807.5 1,812.2 1,820.1 1,813.9 1,822.3 1,828.6 1,828.9 1.853.3 1,852.6 1,867.0 36 Final 405.7 1,333.8 1,359.4 ,375.5 1,381.1 1,385.9 1,393.9 1,397.1 1,394.3 1,398.9 1,404.2 1,404.3 1.424.4 1,422.4 1,433.7 37 Consumer goods. 272.7 866.0 881.2 893.6 893.7 893.2 899.1 898.9 893.6 895.6 900.4 897.2 916.3 914.4 926.6 38 Equipment 133.0 467.8 478.2 481.9 487.3 492.7 494.7 498.3 500.7 503.2 503.8 507.1 508.1 508.0 507.2 39 Intermediate 111.9 402.0 419.4 415.1 416.5 421.6 418.4 423.0 419.6 423.4 424.3 424.5 428.9 430.2 433.3 1. These data also appear in the Board's G.12.3 (414) release. For address, see Industrial Production" and accompanying tables that contain revised indexes inside front cover. (1977=100) through December 1984 in the FEDERAL RESERVE BULLETIN, vol. 71 A major revision of the industrial production index and the capacity (July 1985), pp. 487-501. The revised indexes for January through June 1985 were utilization rates was released in July 1985. See "A Revision of the Index of shown in the September BULLETIN. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Selected Measures A51 2.14 HOUSING AND CONSTRUCTION Monthly figures are at seasonally adjusted annual rates except as noted. 1988 IItteemm 11998855 11998866 11998877 Feb. Mar. Apr. May June July Aug. Sept/ Oct/ Nov. Private residential real estate activity (thousands of units) NEW UNITS 1 Permits authorized 1,733 1,750 1,535 1,429 1,476 1,449 1,436 1,493 1,420 1,464 1,394 1,516 1,516 2 1-family 957 1,071 1,024 1,003 1,030 960 982 1,002 984 1,022 974 1,027 1,046 3 2-or-more-family 777 679 511 426 446 489 454 491 436 442 420 489 470 4 Started 1,742 1,805 1,621 1,519 1,529 1,584 1,393 1,465 1,477 1,461 1,467 1,533 1,558 5 1-family 1,072 1,179 1,146 1,102 1,172 1,093 1,004 1,092 1,068 1,078 1,045 1,136 1,135 6 2-or-more-family 669 626 474 417 357 491 389 373 409 383 422 397 423 7 Under construction, end of period1 . 1,063 1,074 987 983 999 999 984 982 974 965 955 955 960 8 1-family 539 583 591 596 617 622 610 609 606 603 5% 599 605 9 2-or-more-family 524 490 397 387 382 377 374 373 368 362 359 356 355 10 Completed 1,703 1,756 1,669 1,452 1,598 1,665 1,450 1,518 1,529 1,538 1,533 1,507 1,422 11 1-family 1,072 1,120 1,123 1,043 1,094 1,059 1,090 1,106 1,077 1,072 1,089 1,082 1,024 12 2-or-more-family 631 637 546 409 504 606 360 412 452 466 444 425 398 13 Mobile homes shipped 284 244 233 208 212 213 216 230 206 223 228 214 231 Merchant builder activity in 1-family units 14 Number sold 688 748 672 648 664 681 681 718 703 714' 698 729 671 15 Number for sale, end of period1 346 357 365 359 372 367 370 367 365 363 362 355 365 Price (thousands of dollars)2 Median 16 Units sold 84.3 92.2 104.7 110.9 108.9 111.0 110.0 111.5 118.0 110.0 116.0 115.0 110.2 17 Units sold 101.0 112.2 127.9 137.6 133.2 135.6 133.5 136.5 141.3 140.6r 141.5 140.0 138.9 EXISTING UNITS (1-family) 18 Number sold 3,217 3,566 3,530 3,250 3,330 3,520 3,590 3,820 3,630 3,710 3,670 3,670 3,670 Price of units sold (thousands of dollars) 19 Median 75.4 80.3 85.6 88.1 87.9 87.3 88.8 90.2 90.7 91.4 88.2 88.1 88.0 20 Average 90.6 98.3 106.2 110.4 110.7 108.7 111.9 115.4 114.8 115.1 112.3 110.9 111.8 Value of new construction3 (millions of dollars) CONSTRUCTION 21 Total put in place 355,735 386,093 398,848 392,456 403,555 396,238 398,473 395,714 404,164' 403,172' 406,906 407,795 411,085 22 Private 291,665 314,651 323,819 317,754 324,257 318,515 320,194 317,708 324,658' 326,763' 327,164 329,908 330,127 23 Residential 158,475 187,147 194,772 192,097 195,554 192,026 190,374 188,071 194,215' 195,393' 196,945 199,034 200,3% 24 Nonresidential, total 133,190 127,504 129,047 125,657 128,703 126,489 129,820 129,637 130,443' 131,37<y 130,219 130,874 129,731 Buildings 25 Industrial 15,769 13,747 13,707 13,489 14,546 13,849 13,907 13,676 13,928' 14,006' 13,546' 15,358' 15,617 26 Commercial 59,629 56,762 55,448 53,571 54,843 56,169 57,447 56,585 56,687' 56,404' 55,815' 54,376' 53,129 27 Other 12,619 13,216 15,464 17,101 17,301 16,382 16,847 16,757 16,166' 16,613' 16,600 17,143 17,015 28 Public utilities and other 45,173 43,779 44,428 41,496 42,013 40,089 41,619 42,619 43,662' 44,347' 45,258' 43,997' 43,970 29 Public 64,070 71,437 75,028 74,702 79,298 77,723 78,278 78,007 79,506' 76,409' 79,742 77,887 80,958 30 Military 3,235 3,868 4,327 3,280 4,216 3,872 3,547 4,844 4,350' 3,984' 4,897 3,650 3,946 31 Highway 21,540 22,681 22,758 25,348 26,963 26,912 25,254 24,822 27,673' 23,491' 23,841 25,900 26,617 32 Conservation and development... 4,777 4,646 5,162 4,535 4,899 4,226 4,460 4,596 4,861' 4,793' 5,045 3,905 3,999 33 Other 34,518 40,242 42,781 41,539 43,220 42,713 45,017 43,745 42,622' 44,141' 45,959 44,432 46,3% 1. Not at annual rates. NOTE. Census Bureau estimates for all series except (1) mobile homes, which 2. Not seasonally adjusted. are private, domestic shipments as reported by the Manufactured Housing 3. Value of new construction data in recent periods may not be strictly Institute and seasonally adjusted by the Census Bureau, and (2) sales and prices comparable with data in previous periods because of changes by the Bureau of the of existing units, which are published by the National Association of Realtors. All Census in its estimating techniques. For a description of these changes see back and current figures are available from the originating agency. Permit Construction Reports (C-30-76-5), issued by the Bureau in July 1976. authorizations are those reported to the Census Bureau from 16,000 jurisdictions beginning with 1978. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A52 Domestic Nonfinancial Statistics • March 1989 2.15 CONSUMER AND PRODUCER PRICES Percentage changes based on seasonally adjusted data, except as noted Change from 12 Change from 3 months earlier months earlier (at annual rate) Change from 1 month earlier IIInnndddeeexxx IIIttteeemmm llleeevvveeelll 1988 1988 DDDeeeccc... 11998877 11998888 111999888888111 DDeecc.. DDeecc.. Mar. June Sept. Dec. Aug. Sept. Oct. Nov. Dec. CONSUMER PRICES2 (1982-84=100) 1 AH items 4.4 4.4 4.2 4.5 4.8 4.1 .4 .3 .4 .3 .3 120.5 2 Food 3.5 5.2 1.4 7.1 9.9 2.3 .6 .8 .2 .1 .3 120.7 3 Energy items 8.2 .5 -4.9 4.2 2.7 .4 .9 -.6 .1 .2 -.2 88.7 4 All items less food and energy 4.2 4.7 5.4 4.3 4.0 4.6 .2 .4 .5 .3 .3 126.0 5 Commodities 3.5 4.0 4.7 3.9 3.1 4.2 -.3 .8 .7 .1 .3 118.0 6 Services 4.5 5.0 5.9 4.5 4.1 5.4 .5 .1 .5 .5 .4 130.6 PRODUCER PRICES (1982=100) 7 Finished goods 2.2 4.0 2.7 3.8 6.5 2.6 .5' .0 .3 .4 110.0 8 Consumer foods -.2 5.7 6.0 8.2 10.0 -.7 .5 1.2 -.1 .0 -.1 115.1 9 Consumer energy 11.2 -3.4 -18.5 .7 -.7 6.9 .<R -2.R .3 1.2 .2 59.3 10 Other consumer goods 2.7 4.8 5.7 2.4 6.6 4.1 .3 .4 .0 .3 .7 121.2 11 Capital equipment 1.3 3.5 3.2 2.5 6.5 1.4 .4 .8 -.3 .3 .3 116.3 12 Intermediate materials3 5.4 5.4 4.3 7.8 4.9 4.9 .4 .4 .1 .6 .6 109.3 13 Excluding energy 5.2 7.2 8.2 6.9 7.2 6.7 .4 .6 .5 .7 .4 118.6 Crude materials 14 Foods 1.8 14.2 17.7 31.0 23.0 -10.2 2.4' 1.4R 1.4 -6.0 2.1 109.5 13 Energy 10.7 -9.4 -24.1 7.8 -26.1 11.6 -1.8R -1.8' -2.2 -1.4 6.5 66.7 16 Other 22.6 6.0 15.9 -6.5 8.5 7.7 .9" -.7' .2 .7 1.0 134.9 1. Not seasonally adjusted. 3. Excludes intermediate materials for food manufacturing and manufactured 2. Figures for consumer prices are those for all urban consumers and reflect a animal feeds. rental equivalence measure of homeownership after 1982. SOURCE. Bureau of Labor Statistics. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Selected Measures A53 2.16 GROSS NATIONAL PRODUCT AND INCOME Billions of current dollars except as noted; quarterly data are at seasonally adjusted annual rates. 1987 1988 AAccccoouunntt 11998866 11998877 11998888 Q4 Ql Q2 Q3 Q4 GROSS NATIONAL PRODUCT 1 Total 4,240.3 4,526.7 4,861.8 4,662.8 4,724.5 4,823.8 4,909.0 4,989.9 By source 2 Personal consumption expenditures 2,807.5 3,012.1 3,226.0 3,076.3 3,128.1 3,194.6 3,261.2 3,320.1 3 Durable goods 406.5 421.9 449.9 422.0 437.8 449.8 452.9 459.3 4 Nondurable goods 943.6 997.9 1,047.2 1,012.4 1,016.2 1,036.6 1,060.8 1,075.2 5 Services 1,457.3 1,592.3 1,728.9 1,641.9 1,674.1 1,708.2 1,747.5 1,785.6 6 Gross private domestic investment 665.9 712.9 765.5 764.9 763.4 758.1 772.5 767.9 7 Fixed investment 650.4 673.7 717.4 692.9 698.1 714.4 722.8 734.3 8 Nonresidential 433.9 446.8 487.7 464.1 471.5 487.8 493.7 497.8 9 Structures 138.5 139.5 142.3 147.7 140.1 142.3 143.8 142.8 10 Producers' durable equipment 295.4 307.3 345.5 316.3 331.3 345.5 349.9 355.1 11 Residential structures 216.6 226.9 229.7 228.8 226.6 226.5 229.1 236.4 12 Change in business inventories 15.5 39.2 48.1 72.0 65.3 43.7 49.7 33.7 13 Nonfarm 17.4 40.7 41.8 72.8 49.4 33.1 41.9 42.7 14 Net exports of goods and services -104.4 -123.0 -93.2 -125.7 -112.1 -90.4 -80.0 -90.3 15 Exports 378.4 428.0 518.7 459.7 487.8 507.1 536.1 543.8 16 Imports 482.8 551.1 611.9 585.4 599.9 597.5 616.0 634.1 17 Government purchases of goods and services 871.2 924.7 963.6 947.3 945.2 961.6 955.3 992.2 18 Federal 366.2 382.0 380.2 391.4 377.7 382.2 367.7 393.2 19 State and local 505.0 542.8 583.4 555.9 567.5 579.4 587.6 599.0 By major type of product 20 Final sales, total 4,224.7 4,487.5 4,813.7 4,590.7 4,659.2 4,780.1 4,859.3 4,956.3 21 Goods 1,697.9 1,792.5 1,938.5 1,849.3 1,879.5 1,928.0 1,960.1 1,986.3 22 Durable 725.3 776.3 858.1 808.7 819.3 849.5 881.6 882.0 23 Nondurable 972.6 1,016.3 1,080.3 1,040.7 1,060.1 1,078.5 1,078.5 1,104.2 24 Services 2,118.3 2,295.7 2,476.8 2,363.9 2,405.2 2,451.5 2,501.6 2,548.8 25 Structures 424.0 438.4 446.6 449.5 439.9 444.3 447.3 454.8 26 Change in business inventories 15.5 39.2 48.1 72.0 65.3 43.7 49.7 33.7 27 Durable goods 4.3 26.6 31.2 50.5 26.6 17.8 45.1 35.1 28 Nondurable goods 11.3 12.6 16.9 21.6 38.6 25.9 4.6 -1.5 MEMO 29 Total GNP in 1982 dollars 3,721.7 3,847.0 3,995.0 3,923.0 3,956.1 3,985.2 4,009.4 4,029.2 NATIONAL INCOME 30 Total 3,437.1 3,678.7 3,964.3 3,802.0 3,850.8 3,928.8 4,000.7 n.a. 31 Compensation of employees 2,507.1 2,683.4 2,904.9 2,769.9 2,816.4 2,874.0 2,933.2 2,996.3 32 Wages and salaries 2,094.0 2,248.4 2,437.1 2,324.8 2,358.7 2,410.0 2,462.0 2,517.9 33 Government and government enterprises 393.7 420.1 446.1 429.2 437.1 442.9 449.1 455.4 34 Other 1,700.3 1,828.3 1,991.0 1,895.6 1,921.6 1,967.1 2,012.9 2,062.5 35 Supplement to wages and salaries 413.1 435.0 467.8 445.1 457.7 464.0 471.1 478.4 36 Employer contributions for social insurance 217.0 227.1 249.5 232.7 243.1 247.5 251.7 255.9 37 Other labor income 196.1 207.9 218.3 212.4 214.6 216.5 219.5 222.5 38 Proprietors' income1 286.7 312.9 324.7 326.0 323.9 328.8 321.6 324.6 39 Business and professional 250.3 270.0 288.3 279.0 279.2 285.3 290.7 298.2 40 Farm1 36.4 43.0 36.4 47.0 44.7 43.4 30.9 26.4 41 Rental income of persons2 12.4 18.4 19.6 20.5 20.5 19.1 19.7 19.1 42 Corporate profits1 298.9 310.4 323.6 316.1 316.2 326.5 330.0 n.a. 43 Profits before tax 236.4 276.7 302.0 281.9 286.2 305.9 313.9 n.a. 44 Inventory valuation adjustment 8.3 -18.0 -24.2 -18.2 -19.4 -27.4 -29.3 -20.7 45 Capital consumption adjustment 54.2 51.7 45.8 52.4 49.4 48.0 45.4 40.3 46 Net interest 331.9 353.6 391.5 369.5 373.9 380.6 396.2 415.1 1. With inventory valuation and capital consumption adjustments. 3. For after-tax profits, dividends, and the like, see table 1.48. 2. With capital consumption adjustment. SOURCE. Survey of Current Business (Department of Commerce). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A54 Domestic Nonfinancial Statistics • March 1989 2.17 PERSONAL INCOME AND SAVING Billions of current dollars; quarterly data are at seasonally adjusted annual rates. Exceptions noted. 1987 1988 AAccccoouunntt 11998866 11998877 1988 Q4 Q1 Q2 Q3 Q4 PERSONAL INCOME AND SAVING 1 Total personal income 3,531.1 3,780.0 4,063.2 3,906.8 3,951.4 4,022.4 4,094.0 4,185.1 2 Wage and salary disbursements 2,094.0 2,248.4 2,437.1 2,325.1 2,358.7 2,410.0 2,462.0 2,517.9 3 Commodity-producing industries 625.5 649.8 695.6 665.5 676.0 689.1 701.3 716.1 4 Manufacturing 473.1 490.3 522.7 501.3 509.6 517.4 525.9 538.0 5 Distributive industries 498.9 531.7 578.9 547.3 558.2 572.1 585.8 599.5 6 Service industries 575.9 646.8 716.5 682.8 687.4 705.9 725.8 746.9 7 Government and government enterprises 393.7 420.1 446.1 429.5 437.1 442.9 449.1 455.4 8 Other labor income 196.1 207.9 218.3 212.4 214.6 216.5 219.5 222.5 9 Proprietors' income 286.7 312.9 324.7 326.0 323.9 328.8 321.6 324.6 10 Business and professional 250.3 270.0 288.3 279.0 279.2 285.3 290.7 298.2 11 Farm1 36.4 43.0 36.4 47.0 44.7 43.4 30.9 26.4 12 Rental income of persons2 12.4 18.4 19.6 20.5 20.5 19.1 19.7 19.1 13 Dividends 82.8 88.6 96.3 91.9 93.5 95.0 97.3 99.4 14 Personal interest income 499.1 527.0 576.3 550.0 554.2 563.7 581.9 605.5 15 Transfer payments 521.1 548.8 586.0 556.8 576.3 582.8 588.6 596.3 16 Old-age survivors, disability, and health insurance benefits ... 269.3 282.9 301.9 286.5 298.1 300.4 303.1 305.9 17 LESS: Personal contributions for social insurance 161.1 172.0 195.1 175.9 190.2 193.5 196.7 200.1 18 EQUALS: Personal income 3,531.1 3,780.0 4,063.2 3,906.8 3,951.4 4,022.4 4,094.0 4,185.1 19 LESS: Personal tax and nontax payments 511.4 570.3 590.3 591.0 575.8 601.0 586.5 598.0 20 EQUALS: Disposable personal income 3,019.6 3,209.7 3,472.9 3,315.8 3,375.6 3,421.5 3,507.5 3,587.1 21 LESS: Personal outlays 2,898.0 3,105.5 3,325.9 3,171.8 3,225.7 3,293.6 3,361.8 3,422.5 22 EQUALS: Personal saving 121.7 104.2 147.0 144.0 149.9 127.8 145.7 164.6 MEMO Per capita (1982 dollars) 23 Gross national product 15,401.2 15,772.9 16,226.6 16,031.9 16,127.6 1166,,221133..22 1166,,226655..33 1166,,330055..99 24 Personal consumption expenditures 10,160.1 10,336.2 10,524.4 10,346.1 10,435.4 10,492.3 10,563.1 10,610.7 25 Disposable personal income 10,929.0 11,012.0 11,331.0 11,145.0 11,260.0 11,237.0 11,362.0 11,463.0 26 Saving rate (percent) 4.0 3.2 4.2 4.3 4.4 3.7 4.2 4.6 GROSS SAVING 27 Gross saving 537.2 560.4 643.0 603.4 627.0 634.1 665.4 n.a. 28 Gross private saving 681.6 665.3 730.9 714.1 726.3 711.2 732.9 n.a. 29 Personal saving 121.7 104.2 147.0 144.0 149.9 127.8 145.7 164.6 30 Undistributed corporate profits1 104.1 81.1 77.9 80.5 78.1 8800..11 79.5 n.a. 31 Corporate inventory valuation adjustment 8.3 -18.0 -24.2 -18.2 -19.4 --2277..44 -29.3 -20.7 Capital consumption allowances 32 Corporate 282.4 297.5 331155..66 330033..77 330099..88 331133..33 331166..88 332222..33 33 Noncorporate 173.5 182.5 190.4 185.8 188.5 189.9 190.9 192.4 34 Government surplus, or deficit (-), national income and product accounts -144.4 -104.9 -87.9 -110.7 -99.2 --7777..11 --6677..55 n.a. 35 Federal -205.6 -157.8 -141.9 -160.4 -155.1 -133.3 -123.5 n.a. 36 State and local 61.2 52.9 53.9 49.7 55.8 56.2 56.0 n.a. 37 Gross investment 523.6 552.3 631.0 597.0 612.0 629.0 651.4 631.4 665.9 712.9 765.5 764.9 763.4 758.1 772.5 767.9 39 Net foreign -142.4 -160.6 -134.5 -167.8 -151.3 -129-1 -121.1 -136.5 40 Statistical discrepancy -13.6 -8.1 -12.0 -6.4 -15.0 -5.1 -14.0 -14.0 1. With inventory valuation and capital consumption adjustments. SOURCE. Survey of Current Business (Department of Commerce). 2. With capital consumption adjustment. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Summary Statistics A55 3.10 U.S. INTERNATIONAL TRANSACTIONS Summary Millions of dollars; quarterly data are seasonally adjusted except as noted.1 1987 1988 Item credits or debits 11998855 11998866 11998877 Q3 Q4 Q1 Q2 Q3" 1 Balance on current account -115,102 -138,827 -153,964 -41,967 -33,523 -36,938 -33,739 -30,894 2 Not seasonally adjusted -47,330 -31,803 -32,179 -34,606 -37,029 3 Merchandise trade balance -122,148 -144,547 -160,280 -39,665 -41,192 -35,184 -30,151 -28,533 4 Merchandise exports 215,935 223,969 249,570 64,902 68,013 75,300 79,606 82,306 5 Merchandise imports -338,083 -368,516 -409,850 -104,567 -109,205 -110,484 -109,757 -110,839 6 Military transactions, net -3,431 -4,372 -2,369 -851 -1,261 -1,033 -914 -934 7 Investment income, net 25,936 23,143 20,374 1,067 12,539 1,159 -1,940 -337 8 Other service transactions, net -449 2,257 1,755 87 479 1,241 2,017 2,028 9 Remittances, pensions, and other transfers -3,786 -3,571 -3,434 -855 -828 -882 -793 -806 10 U.S. government grants (excluding military) -11,223 -11,738 -10,011 -2,125 -3,545 -2,239 -1,958 -2,312 11 Change in U.S. government assets, other than official reserve assets, net (increase, -) -2,829 -2,000 1,162 252 1,012 -814 -801 1,931 12 Change in U.S. official reserve assets (increase, -) -3,858 312 9,149 32 3,741 1,503 39 -7,380 13 Gold 0 0 0 0 0 0 0 0 14 Special drawing rights (SDRs) -897 -246 -509 -210 -205 155 180 -35 15 Reserve position in International Monetary Fund 908 1,500 2,070 407 722 446 69 202 16 Foreign currencies -3,869 -942 7,588 -165 3,225 901 -210 -7,547 17 Change in U.S. private assets abroad (increase, -) -25,949 -96,303 -86,298 -25,576 -43,645 5,903 -18,210 -34,181 18 Bank-reported claims -1,323 -59,975 -40,531 -16,519 -23,460 17,108 -13,274 -27,023 19 Nonbank-reported claims 923 -4,220 3,145 -215 1,248 -315 -7,061 20 U.S. purchase of foreign securities, net -7,481 -4,297 -4,456 -972 -1,757 -4,467 1,529 -1,521 21 U.S. direct investments abroad, net -18,068 -27,811 -44,456 -7,870 -19,676 -6,423 596 -5,637 22 Change in foreign official assets in United States (increase, +) -1,196 35,507 44,968 611 20,047 24,670 5,946 -2,902 23 U.S. Treasury securities -838 34,364 43,361 842 19,243 27,701 5,863 -3,706 24 Other U.S. government obligations -301 -1,214 1,570 714 662 -121 202 572 25 Other U.S. government liabilities4 767 2,054 -2,824 -287 108 -123 -570 -354 26 Other U.S. liabilities reported by U.S. banks3 645 1,187 3,901 -34 -223 -1,954 868 1,094 27 Other foreign official assets -1,469 -884 -1,040 -624 257 -833 -417 -508 28 Change in foreign private assets in United States (increase, +) < 131,096 185,746 166,521 71,047 36,025 1,395 59,549 50,928 29 U.S. bank-reported liabilities'' 41,045 79,783 87,778 46,153 29,764 -17,233 31,121 30,434 30 U.S. nonbank-reported liabilities -366 -2,906 2,150 -116 -1,000 2,015 113 31 Foreign private purchases of U.S. Treasury securities, net 20,433 3,809 -7,596 -2,835 496 6,887 5,457 4,322 32 Foreign purchases of other U.S. securities, net 50,962 70,969 42,213 12,819 -4,977 2,379 9,797 8,043 33 Foreign direct investments in United States, net 19,022 34,091 41,976 15,026 11,742 7,347 13,061 8,129 34 Allocation of SDRs 0 0 0 0 0 0 0 0 35 Discrepancy 17,839 15,566 18,461 -4,399 16,342 4,282 -12,784 22,498 36 Owing to seasonal adjustments -4,658 3,138 3,747 -3,585 -5,205 37 Statistical discrepancy in recorded data before seasonal adjustment 17,839 15,566 18,461 259 13,204 535 -9,199 27,703 MEMO Changes in official assets 38 U.S. official reserve assets (increase, -) -3,858 312 9,149 32 3,741 1,503 39 -7,380 39 Foreign official assets in United States (increase, +) excluding line 25 -1,963 33,453 47,792 898 19,939 24,793 6,516 -2,548 40 Change in Organization of Petroleum Exporting Countries official assets in United States (part of line 22 above) -6,709 -9,327 -9,956 -1,723 -2,750 -1,375 -1,783 -423 41 Transfers under military grant programs (excluded from lines 4, 6, and 10 above) 46 101 58 13 12 45 4 5 1. Seasonal factors are not calculated for lines 6, 10, 12-16, 18-20, 22-34, and 4. Primarily associated with military sales contracts and other transactions 38-41. arranged with or through foreign official agencies. 2. Data are on an international accounts (IA) basis. Differs from the Census 5. Consists of investments in U.S. corporate stocks and in debt securities of basis data, shown in table 3.11, for reasons of coverage and timing. Military private corporations and state and local governments. exports are excluded from merchandise data and are included in line 6. NOTE. Data are from Bureau of Economic Analysis, Survey of Current 3. Reporting banks include all kinds of depository institutions besides commer- Business (Department of Commerce). cial banks, as well as some brokers and dealers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A56 International Statistics • March 1989 3.11 U.S. FOREIGN TRADE1 Millions of dollars; monthly data are seasonally adjusted. 1988r IItteemm 11998855 11998866 11998877 May June July Aug. Sept. Oct. Nov. 1 EXPORTS of domestic and foreign merchandise excluding grant-aid shipments, f.a.s. value 218,815 227,159 254,122 27,478 26,283 26,516 27,493 27,989 27,816 27,178 GENERAL IMPORTS including merchandise for immediate consumption plus entries into bonded warehouses 2 C.I.F. value 352,463 382,295 424,442 37,240 39,499 35,989 39,763 38,662 38,078 39,688 3 Customs value 345,276 365,438 406,241 35,732 37,948 34,533 38,140 37,178 36,600 38,134 Trade balance 4 C.I.F. value -133,648 -155,137 -170,320 -9,762 -13,216 -9,473 -12,270 -10,673 -10,262 -12,510 5 Customs value -132,129 -138,279 -152,119 -8,253 -11,665 -8,017 -10,647 -9,189 -8,784 -10,956 1. The Census basis data differ from merchandise trade data shown in table tions; military payments are excluded and shown separately as indicated above. 3.10, U.S. International Transactions Summary, for reasons of coverage and As of Jan. 1,1987 census data are released 45 days after the end of the month; the timing. On the export side, the largest adjustment is the exclusion of military sales previous month is revised to reflect late documents. Total exports and the trade (which are combined with other military transactions and reported separately in balance reflect adjustments for undocumented exports to Canada. the "service account" in table 3.10, line 6). On the import side, additions are made SOURCE. FT900 "Summary of U.S. Export and Import Merchandise Trade" for gold, ship purchases, imports of electricity from Canada, and other transac- (Department of Commerce, Bureau of the Census). 3.12 U.S. RESERVE ASSETS Millions of dollars, end of period 1988 TTyyppee 11998855 11998866 11998877 June July Aug. Sept. Oct. Nov. Dec." 1 Total 43,186 48,511 45,798 41,028 43,876 47,778 47,788 50,204 48,944 47,802 2 Gold stock, including Exchange Stabilization Fund 11,090 11,064 11,078 11,063 11,063 11,061 11,062 11,062 11,059 11,057 3 Special drawing rights2,3 7,293 8,395 10,283 9,180 8,984 9,058 9,074 9,464 9,785 9,637 4 Reserve position in International Monetary Fund2 11,947 11,730 11,349 9,992 9,773 9,642 9,637 10,075 10,103 9,745 5 Foreign currencies4 12,856 17,322 13,088 10,793 14,056 18,017 18,015 19,603 17,997 17,363 1. Gold held under earmark at Federal Reserve Banks for foreign and interna- 3. Includes allocations by the International Monetary Fund of SDRs as follows: tional accounts is not included in the gold stock of the United States; see table $867 million on Jan. 1, 1970; $717 million on Jan. 1, 1971; $710 million on Jan. 1, 3.13. Gold stock is valued at $42.22 per fine troy ounce. 1972; $1,139 million on Jan. 1, 1979; $1,152 million on Jan. 1, 1980; and $1,093 2. Beginning July 1974, the IMF adopted a technique for valuing the SDR based million on Jan. 1, 1981; plus transactions in SDRs. on a weighted average of exchange rates for the currencies of member countries. 4. Valued at current market exchange rates. From July 1974 through December 1980, 16 currencies were used; from January 1981, 5 currencies have been used. The U.S. SDR holdiings and reserve position in the IMF also are valued on this basis beginning July 1974. 3.13 FOREIGN OFFICIAL ASSETS HELD AT FEDERAL RESERVE BANKS1 Millions of dollars, end of period 1988 AAsssseettss 11998855 11998866 11998877 p June July Aug. Sept. Oct. Nov. Dec. 1 Deposits 480 287 244 381 269 230 338 301 251 347 Assets held in custody 2 U.S. Treasury securities 121,004 155,835 195,126 223,127 223,296 221,715 221,119 226,533 229,926 232,547 3 Earmarked gold3 14,245 14,048 13,919 13,662 13,666 13,658 13,653 13,637 13,640 13,636 1. Excludes deposits and U.S. Treasury securities held for international and 3. Earmarked gold and the gold stock are valued at $42.22 per fine troy ounce, regional organizations. Earmarked gold is gold held for foreign and international accounts and is not 2. Marketable U.S. Treasury bills, notes, and bonds; and nonmarketable U.S. included in the gold stock of the United States. Treasury securities payable in dollars and in foreign currencies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Summary Statistics A57 3.14 FOREIGN BRANCHES OF U.S. BANKS Balance Sheet Data1 Millions of dollars, end of period 1988 AAsssseett aaccccoouunntt 11998855 11998866 11998877 May June July Aug. Sept. Oct. Nov/ All foreign countries 1 Total, all currencies 458,012 456,628 518,618 492,844 487,677 488,283 487,895 490,582 493,728 512,364 2 Claims on United States 119,706 114,563 138,034 141,790 140,932 147,662 157,021 155,386 155,417" 169,444 3 Parent bank 87,201 83,492 105,845 104,299 104,405 109,929 117,525 115,286 115,954 129,096 4 Other banks in United States 13,057 13,685 16,416 14,625 14,424 15,954 16,176 16,121 14,729" 16,061 5 Nonbanks 19,448 17,386 15,773 22,866 22,103 21,779 23.320 23,979 24,734 24,287 6 Claims on foreigners 315,676 312,955 342,520 315,302 311,308 305,556 295,270 298,466 300,969" 304,911 7 Other branches of parent bank 91,399 96,281 122,155 102,931 106,722 103,646 98,299 102,355 100,609 105,121 8 Banks 102,960 105,237 108,859 103,427 100,669 99,660 98,982 98,563 102,072r 100,624 9 Public borrowers 23,478 23,706 21,832 20,991 20,438 19,276 18,709 18,444 18,205 18,170 10 Nonbank foreigners 97,839 87,731 89,674 87,953 83,479 82,974 79,280 79,104 80,083 80,996 11 Other assets 22,630 29,110 38,064 35,752 35,437 35,065 35,604 36,730 37,342 38,009 12 Total payable in U.S. dollars 336,520 317,487 350,107 334,112 334,990 336,233 342,906 340,901 337,346 351,657 13 Claims on United States 116,638 110,620 132,023 136,078 135,348 141,415 151,581 149,764 149,698" 162,974 14 Parent bank 85,971 82,082 103,251 101,578 101,422 106,792 114,943 112,621 113,569 125,954 15 Other banks in United States 12,454 12,830 14,657 13,600 13,661 14,434 14,901 14,687 13,250" 14,757 16 Nonbanks 18,213 15,708 14,115 20,900 20,265 20,189 21,737 22,456 22,879 22,263 17 Claims on foreigners 210,129 195,063 202,428 182,980 183,568 179,076 174,433 174,271 171,581' 171,878 18 Other branches of parent bank 72,727 72,197 88,284 76,136 79,774 78,071 73,792 76,506 73.508 75,866 19 Banks 71,868 66,421 63,707 57,102 55,234 54,189 54,839 52,503 54,657" 53,499 20 Public borrowers 17,260 16,708 14,730 14,342 13,851 13,247 12,933 12,770 12,616 12,234 21 Nonbank foreigners 48,274 39,737 35,707 35,400 34,709 33,569 32,869 32,492 30,800 30,279 22 Other assets 9,753 11,804 15,656 15,054 16,074 15,742 16,892 16,866 16,067 16,805 United Kingdom 23 Total, all currencies 148,599 140,917 158,695 156,184 151,835 151,017 149,646 147,329 155,580 159,556 24 Claims on United States 33,157 24,599 32,518 32,832 33,852 35,708 36,307 32,048 36,210 39,222 25 Parent bank 26,970 19,085 27,350 27,506 28,535 30,615 30,767 26,661 30,569 33,138 26 Other banks in United States 1,106 1,612 1,259 1,360 1,322 1,064 1,197 1,238 994 1,343 27 Nonbanks 5,081 3,902 3,909 3,966 3,995 4,029 4,343 4.149 4,647 4,741 28 Claims on foreigners 110,217 109,508 115,700 114,452 107,856 105,594 103,527 105,824 109,793 110,356 29 Other branches of parent bank 31,576 33,422 39,903 33,849 32,446 30,228 29,656 31,758 33,103 33,243 30 Banks 39,250 39,468 36,735 39,883 37,108 37,805 38,259 38,848 40,236 40.875 31 Public borrowers 5,644 4,990 4,752 4,987 4,742 4,665 4,543 4,250 4,190 4,276 32 Nonbank foreigners 33,747 31,628 34,310 35,733 33.560 32,896 31,069 30,968 32,264 31,962 33 Other assets 5,225 6,810 10,477 8,900 10,127 9,715 9,812 9,457 9,577 9,978 34 Total payable in U.S. dollars 108,626 95,028 100,574 97,188 95,326 94,492 96,767 93,790 99,868 101,341 35 Claims on United States 32,092 23,193 30,439 30,736 31,855 33,795 34,535 30,116 34,134 36,881 36 Parent bank 26,568 18,526 26,304 26,608 27,672 29,706 29,837 25,692 29,667 32,115 37 Other banks in United States 1,005 1,475 1,044 1,068 1,069 870 1,039 910 606 849 38 Nonbanks 4,519 3,192 3,091 3,060 3,114 3,219 3,659 3,514 3,861 3,917 39 Claims on foreigners 73,475 68,138 64,560 62,018 57,969 55,832 57,037 58,474 61,034 59,405 40 Other branches of parent bank 26,011 26,361 28,635 25,448 23,843 22,549 22,465 24,472 25,703 25,574 41 Banks 26,139 23,251 19,188 19,555 17,477 18,025 19,165 19,066 20,488 19,452 42 Public borrowers 3,999 3,677 3,313 3,252 3,188 3,133 3,105 3,022 2,984 2,898 43 Nonbank foreigners 17,326 14,849 13,424 13,763 13,461 12,125 12,302 11,914 11,859 11,481 44 Other assets 3,059 3,697 5,575 4,434 5,502 4,865 5,195 5,200 4,700 5,055 Bahamas and Caymans 45 Total, all currencies 142,055 142,592 160,321 156,353 159,718 160,516 165,771 164,313 155,265 164,945 46 Claims on United States 74,864 78,048 85,318 90,896 88,116 92,308 99,090 99,541 94,437' 104,197 47 Parent bank 50,553 54,575 60,048 60,419 58,579 61,397 67,034 66,607 62.709 71,916 48 Other banks in United States 11,204 11,156 14,277 12,489 12,236 13,863 13,907 13,878 12,489" 13,760 49 Nonbanks 13,107 12,317 10,993 17,988 17,301 17,048 18,149 19,056 19,239 18,521 50 Claims on foreigners 63,882 60,005 70,162 59,374 65,855 62,508 60,822 57,887 54,494" 54,086 51 Other branches of parent bank 19,042 17,296 21,277 18,463 24,745 22,797 20,789 20,320 17,331 17,016 52 Banks 28,192 27,476 33,751 27,019 27,650 26,120 26,866 24,545 25,327" 25,322 53 Public borrowers 6,458 7,051 7,428 6,955 6,835 6,457 6,185 6,219 6,045 5,862 54 Nonbank foreigners 10,190 8,182 7,706 6,937 6,625 7,134 6,982 6,803 5,791 5,886 55 Other assets 3,309 4,539 4,841 6,083 5,747 5,700 5,859 6,885 6,334 6,662 56 Total payable in U.S. dollars 136,794 136,813 151,434 148,545 152,219 152,685 157,975 156,409 147,481 157,150 1. Beginning with June 1984 data, reported claims held by foreign branches from $50 million to $150 million equivalent in total assets, the threshold now have been reduced by an increase in the reporting threshold for "shell" branches applicable to all reporting branches. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A58 International Statistics • March 1989 3.14—Continued 1988 Liability account 1985 1986 1987 May June July Aug. Sept. All foreign countries 57 Total, all currencies 458,012 456,628 518,618 492,844 487,677 488,283 487,895 490,582 493,728 512,364 58 Negotiable CDs 34,607 31,629 30,929 32,175 29,485 30,159 31,203 28,953 27,969 30,734 59 To United States 156,281 152,465 161,390 162,027 156,294 159,009 164,401 165,492 161,783 172,679 60 Parent bank 84,657 83,394 87,606 86,901 87,260 84,196 88,819 94,953 95,427 104,660 61 Other banks in United States 16,894 15,646 20,559 15,423 14,680 15,310 16,356 14,272 14,029 13,417 62 Nonbanks 54,730 53,425 53,225 59,703 54,354 59,503 59,226 56,267 52,327 54,602 63 To foreigners 245,939 253,775 304,803 277,082 280,939 277,776 270,678 274,822 281,143 285,427 64 Other branches of parent bank 89,529 95,146 124,601 104,667 110,429 107,084 100,538 106,284 106,010 110,867 65 Banks 76,814 77,809 87,274 82,421 82,380 83,086 80,606 80,382 81,946 82,045 66 Official institutions 19,520 17,835 19,564 17,699 17,159 16,628 17,232 16,911 18,786 17,743 67 Nonbank foreigners 60,076 62,985 73,364 72,295 70,971 70,978 72,302 71,245 74,401 74,772 68 Other liabilities 21,185 18,759 21,496 21,560 20,959 21,339 21,613 21,315 22,833 23,524 69 Total payable in U.S. dollars 353,712 336,406 361,438 341,729 341,411 341,539 346,185 348,248 343,233 359,429 70 Negotiable CDs 31,063 28,466 26,768 27,233 25,015 24,870 26,128 24,353 23,218 26,130 71 To United States 150,905 144,483 148,442 149,645 144,464 147,551 152,745 154,647 150,497 159,322 72 Parent bank 81,631 79,305 81,783 80,331 80,752 77,503 81,710 88,413 88,447 96,334 73 Other banks in United States 16,264 14,609 19,155 14,073 13,256 14,011 15,153 13,153 12,868 12,080 74 Nonbanks 53,010 50,569 47,504 55,241 50,456 56,037 55,882 53,081 49,182 50,908 75 To foreigners 163,583 156,806 177,711 155,450 162,056 158,901 156,358 158,325 158,514 162,485 76 Other branches of parent bank 71,078 71,181 90,469 76,920 83,493 81,144 75,014 79,450 78,423 81,367 77 Banks 37,365 33,850 35,065 28,635 28,909 28,495 30,041 29,341 28,831 30,542 78 Official institutions 14,359 12,371 12,409 10,028 9,571 9,354 9,938 9,207 10,624 9,121 79 Nonbank foreigners 40,781 39,404 39,768 39,867 40,083 39,908 41,365 40,327 40,636 41,455 80 Other liabilities 8,161 6,651 8,517 9,401 9,876 10,217 10,954 10,923 11,004 11,492 United Kingdom 81 Total, all currencies 148,599 140,917 158,695 156,184 151,835 151,017 149,646 147,329 155,580 159,556 82 Negotiable CDs 31,260 27,781 26,988 27,659 25,390 25,750 26,998 24,311 23,345 26,013 83 To United States 29,422 24,657 23,470 27,145 25,120 26,859 25,013 25,657 31,575 32,420 84 Parent bank 19,330 14,469 13,223 15,518 15,996 16,844 15,100 17,115 22,800 23,309 85 Other banks in United States 2,974 2,649 1,740 2,408 1,791 2,051 1,878 2,021 2,192 1,768 86 Nonbanks 7,118 7,539 8,507 9,219 7,333 7,964 8,035 6,521 6,583 7,343 87 To foreigners 78,525 79,498 98,689 91,995 91,691 88,489 87,504 87,212 89,934 90,404 88 Other branches of parent bank 23,389 25,036 33,078 28,743 28,967 26,948 25,570 26,837 25,743 26,268 89 Banks 28,581 30,877 34,290 31,995 33,125 32,763 31,829 31,701 32,385 33,029 90 Official institutions 9,676 6,836 11,015 9,672 8,893 9,034 9,982 8,570 10,656 9,542 91 Nonbank foreigners 16,879 16,749 20,306 21,585 20,706 19,744 20,123 20,104 21,150 21,565 92 Other liabilities 9,392 8,981 9,548 9,385 9,634 9,919 10,131 10,149 10,726 10,719 93 Total payable in U.S. dollars . .. 112,697 99,707 102,550 99,378 97,555 96,908 97,926 96,970 101,689 102,933 94 Negotiable CDs 29,337 26,169 24,926 24,994 22,960 22,846 24,229 22,043 20,864 23,543 95 To United States 27,756 22,075 17,752 22,405 20,889 23,105 20,993 22,177 28,063 27,123 96 Parent bank 18,956 14,021 12,026 14,134 14,712 15,729 13,745 16,031 21,665 21,086 97 Other banks in United States 2,826 2,325 1,512 2,184 1,512 1,817 1,655 1,819 1,978 1,366 98 Nonbanks 5,974 5,729 4,214 6,087 4,665 5,559 5,593 4,327 4,420 4,671 99 To foreigners 51,980 48,138 55,919 47,969 48,777 46,083 47,227 47,149 47,278 46,843 100 Other branches of parent bank 18,493 17,951 22,334 18,902 20,303 18,539 17,550 18,696 17,384 17,443 101 Banks 14,344 15,203 15,580 12,860 12,957 12,240 13,501 13,417 13,436 14,029 102 Official institutions 7.661 4,934 7,530 5,470 4,700 5,036 5,781 4,519 6,186 4,713 103 Nonbank foreigners 11,482 10,050 10,475 10,737 10,817 10,268 10,395 10,517 10,272 10,658 104 Other liabilities 3,624 3,325 3,953 4,010 4,929 4,874 5,477 5,601 5,484 5,424 Bahamas and Caymans 105 Total, all currencies 142,055 142,592 160,321 156,353 159,718 160,516 165,771 164,313 155,265 164,945 106 Negotiable CDs 610 847 885 1,096 941 940 731 924 1,092 1,361 107 To United States 104,556 106,081 113,950 112,605 109,424 112,540 117,765 116,687 107,115 115,194 108 Parent bank 45,554 49,481 53,239 51,745 52,221 49,896 54,174 56,818 51,522 58,236 109 Other banks in United States . 12,778 11,715 17,224 11,659 11,451 12,069 13,412 11,106 10,824 10,673 110 Nonbanks 46,224 44,885 43,487 49,201 45,752 50,575 50,179 48,763 44,769 46,285 111 To foreigners 35,053 34,400 43,815 40,369 47,361 44,993 45,062 44,478 44,636 45,781 112 Other branches of parent bank 14,075 12,631 19,185 18,909 24,755 22,288 21,221 22,872 23,283 23,065 113 Banks 10,669 8,617 10,769 9,080 9,779 10,155 9,607 8,405 8,154 9,444 114 Official institutions 1,776 2,719 1,504 1,053 1,850 1,015 1,099 1,067 972 1,060 115 Nonbank foreigners 8,533 10,433 12,357 11,327 10,977 11,535 13,135 12,134 12,227 12,212 116 Other liabilities 1,836 1,264 1,671 2,283 1,992 2,043 2,213 2,224 2,422 2,609 117 Total payable in U.S. dollars .... 138,322 138,774 152,927 148,923 151,684 152,235 157,512 156,215 147,718 156,697 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Summary Statistics A59 3.15 SELECTED U.S. LIABILITIES TO FOREIGN OFFICIAL INSTITUTIONS Millions of dollars, end of period 1988 IItteemm 11998866 11998877 May June July Aug. Sept. Oct. Nov/ 1 Total1 211,834 259,556r 294,729 290,842 290,944' 290,263 288,601' 294,494 300,136 By type 2 Liabilities reported by banks in the United States 27,920 31,838 31,460 30,761 32,070' 32,813 32,224 34,101 34,290 3 U.S. Treasury bills and certificates3 75,650 88,829 96,604 95,299 96,715' 96,698 96,812 100,804 103,833 U.S. Treasury bonds and notes 4 Marketable 91,368 122,432 150,991 149,333 146,971 145,521 144,040' 144,597 146,800 5 Nonmarketable 1,300 300 499 502 506 509 513 516 520 6 U.S. securities other than U.S. Treasury securities 15,596 16,157'' 15,175 14,947 14,682 14,722 15,012 14,476 14,693 By area 7 Western Europe1 88,629 124,620 131,406 126,772 125,195' 123,428 121,206' 124,711 127,875 8 Canada 2,004 4,961 9,372 10,773 10,725 9,981 10,054 11,014 10,066 9 Latin America and Caribbean 8,417 8,328 9,145 9,407 9,888' 11,336 10,136 9,840 10,501 10 105,868 116,098 135,120 134,285 135,657' 136,165 137,513 139,420 142,763 11 1,503 1,402 1,418 1,266 1,179 1,1% 1,130 1,094 993 12 Other countries6 5,412 4,147 7,773 7,837 7,793 7,646 8,049 7,901 7,418 1. Includes the Bank for International Settlements. bonds and notes payable in foreign currencies. 2. Principally demand deposits, time deposits, bankers acceptances, commer- 5. Debt securities of U.S. government corporations and federally sponsored cial paper, negotiable time certificates of deposit, and borrowings under repur- agencies, and U.S. corporate stocks and bonds. chase agreements. 6. Includes countries in Oceania and Eastern Europe. NOTE. Based on Treasury Department data and on data reported to the 3. Includes nonmarketable certificates of indebtedness (including those payable Treasury Department by banks (including Federal Reserve Banks) and securities in foreign currencies through 1974) and Treasury bills issued to official institutions dealers in the United States. of foreign countries. 4. Excludes notes issued to foreign official nonreserve agencies. Includes 3.16 LIABILITIES TO AND CLAIMS ON FOREIGNERS Reported by Banks in the United States Payable in Foreign Currencies1 Millions of dollars, end of period 1987 1988' IItteemm 11998844 11998855 11998866 Dec.' Mar. June Sept. 1 Banks' own liabilities 8,586 15,368 29,702 55,438 55,818 55,110 61,216 2 Banks' own claims 11,984 16,294 26,180 51,271 52,221 51,183 60,849 3 Deposits 4,998 8,437 14,129 18,861 18,407 17,785 22,073 4 Other claims 6,986 7,857 12,052 32,410 33,814 33,398 38,776 5 Claims of banks' domestic customers2 569 580 2,507 551 810 1,004 392 1. Data on claims exclude foreign currencies held by U.S. monetary author- States that represent claims on foreigners held by reporting banks for the accounts ities. of the domestic customers. 2. Assets owned by customers of the reporting bank located in the United Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A60 International Statistics • March 1989 3.17 LIABILITIES TO FOREIGNERS Reported by Banks in the United States1 Payable in U.S. dollars Millions of dollars, end of period Holder and type of liability 1985 1987 May' Julyr Aug. Sept/ 1 All foreigners 435,726 540,996 618,874' 629,198 637,694' 654,809 658,039' 657,404 651,247 2 Banks' own liabilities 341,070 406,485 470,070' 465,821 476,484' 490,856 493,988' 491,108 482,064 3 Demand deposits 21,107 23,789 22,383 22,135 22,991' 21,983 20,314 21,375 21,834 4 Time deposits 117,278 130,891 148,374' 138,129 141,145' 142,551 145,123' 148,747 141,922 5 Other. 29,305 42,705 51,677' 48,723 47,418' 50,747 52,630' 53,840 56,692 6 Own foreign offices4 173,381 209,100 247,635' 256,835 264,931' 275,575 275,920' 267,145 261,615 7 Banks' custody liabilities5 94,656 134,511 148,804' 163,377 161,209' 163,953 164,050' 166,2% 169,183 8 U.S. Treasury bills and certificates6 69,133 90,398 101,743 108,803 108,614 109,555 109,106 109,768 112,257 9 _ Other negotiable and readily transferable instruments 17,964 15,417 16,776' 16,595 16,626 16,231 15,971' 15,555 16,3% 10 Other 7,558 28,696 30,285' 37,978 35,%9' 38,167 38,973' 40,973 40,530 11 Nonmonetary international and regional organizations 5,821 5,807 4,464 6,889 7,879 7,061 4,749 7,764 5,879 12 Banks' own liabilities 2,621 3,958 2,702 4,898 5,142 4,882 2,925 5,104 4,067 13 Demand deposits 85 199 124 84 84 92 85 104 143 14 Time deposits 2,067 2,065 1,538 1,981 1,873 1,857 966 1,688 1,101 15 Other3 469 1,693 1,040 2,833 3,185 2,933 1,874 3,311 2,823 1 1 6 7 Ba U nk .S s . ' c T u r s e t a o s d u y r y l i b a i b l i ls li t a ie n s d 5 certificates6 3 1 , , 2 7 0 3 0 6 1,8 2 4 5 9 9 1, 2 76 6 1 5 1,9 1 9 3 1 2 2,7 7 3 4 7 5 2,1 2 7 8 9 6 1,8 4 2 3 4 2,6 7 6 5 0 5 1,8 6 12 2 18 Other negotiable and readily transferable instruments 1,464 1,590 1,497 1,852 1,989 1,861 1,769 1,899 1,750 19 Other 0 0 0 7 3 32 12 5 0 20 Official institutions9 79,985 103,569 120,667 128,065 126,060 128,786 129,511 129,036 134,905 21 Banks' own liabilities 20,835 25,427 28,703 28,451 27,882 28,486 29,079 28,725 30,348 22 Demand deposits 2,077 2,267 1,757 1,882 1,834 1,6% 1,405 1,756 1,780 23 Time deposits 10,949 10,497 12,843 12,861 11,865' 11,520 12,289 11,573 11,209 24 Other3 7,809 12,663 14,103 13,707 14,183' 15,270 15,385 15,396 17,359 25 Banks' custody liabilities5 59,150 78,142 91,965 99,613 98,178 100,300 100,432 100,311 104,557 26 U.S. Treasury bills and certificates6 53,252 75,650 88,829 %,604 95,299 96,715 %,698 %,812 100,804 27 Other negotiable and readily transferable instruments 5,824 2,347 2,990 2,775 2,672 3,368 3,450 3,221 3,612 28 Other 75 145 146 234 207 217 284 279 141 29 Banks10 275,589 351,745 414,280' 413,695 423,854' 436,443 439,532' 436,310 425,233 30 Banks' own liabilities 252,723 310,166 371,665' 365,664 375,461' 387,578 390,416' 385,217 374,630 31 Unaffiliated foreign banks 79,341 101,066 124,030 108,829 110,529' 112,003 114,495 118,072 113,015 32 Demand deposits 10,271 10,303 10,898 10,210 10,899' 10,217 9,258 9,349 10,233 33 Time deposits 49,510 64,232 79,717' 69,455 72,187' 73,000 73,826' 77,713 71,085 34 Other3 19,561 26,531 33,415' 29,165 27,444' 28,787 31,412' 31,010 31,6% 35 Own foreign offices4 173,381 209,100 247,635' 256,835 264,931' 275,575 275,920' 267,145 261,615 36 Banks' custody liabilities5 22,866 41,579 42,615' 48,031 48,394' 48,865 49,116 51,093 50,603 37 U.S. Treasury bills and certificates6 9,832 9,984 9,134 8,872 9,212 9,324 9,299 8,969 7,976 38 Other negotiable and readily transferable instruments 6,040 5,165 5,392 4,341 4,725 4,625 4,090 4.230 5,265 39 Other 6,994 26,431 28,089' 34,819 34,457' 34,916 35,727 37,893 37,362 40 Other foreigners 74,331 79,875 79,463' 80,549 79,900' 82,520 84,247' 84,294 85,230 41 Banks' own liabilities 64,892 66,934 67,000 66,808 67,999 69,910 71,568 72,061 73,018 42 Demand deposits 8,673 11,019 9,604 9,959 10,173 9,979 9,566 10,166 9,677 43 Time deposits 54,752 54,097 54,277 53,832 55,220' 56,174 58,042' 57,772 58,527 44 Other3 1,467 1,818 3,119 3,017 2,606' 3,757 3,960' 4,123 4,814 45 Banks' custody liabilities5 9,439 12,941 12,463' 13,742 11,901' 12,610 12,678' 12,233 12,212 46 U.S. Treasury bills and certificates6 4,314 4,506 3,515 3,1% 3,358 3,231 3,066 3.231 3,415 47 Other negotiable and readily transferable instruments 4,636 6,315 6,898' 7,628 7,241 6,378 6,663' 6,205 5,770 48 Other 489 2,120 2,050' 2,918 1,303' 3,002 2,950' 2,797 3,027 49 MEMO: Negotiable time certificates of deposit in custody for foreigners 9,845 7,4% 7,711 6,975 6,792 6,122 1. Reporting banks include all kinds of depository institutions besides commer- 5. Financial claims on residents of the United States, other than long-term cial banks, as well as some brokers and dealers. securities, held by or through reporting banks. 2. Excludes negotiable time certificates of deposit, which are included in 6. Includes nonmarketable certificates of indebtedness and Treasury bills "Other negotiable and readily transferable instruments." issued to official institutions of foreign countries. 3. Includes borrowing under repurchase agreements. 7. Principally bankers acceptances, commercial paper, and negotiable time 4. U.S. banks: includes amounts due to own foreign branches and foreign certificates of deposit. subsidiaries consolidated in "Consolidated Report of Condition" filed with bank 8. Principally the International Bank for Reconstruction and Development, and regulatory agencies. Agencies, branches, and majority-owned subsidiaries of the Inter-American and Asian Development Banks. Data exclude "holdings of foreign banks: principally amounts due to head office or parent foreign bank, and dollars" of the International Monetary Fund. foreign branches, agencies, or wholly owned subsidiaries of head office or parent 9. Foreign central banks, foreign central governments, and the Bank for foreign bank. International Settlements. 10. Excludes central banks, which are included in "Official institutions." Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Nonbank-Reported Data A61 3.17—Continued 1988 AArreeaa aanndd ccoouunnttrryy 11998855 11998866 11998877 May June July Aug. Sept. Oct. Nov.p 1 Total 435,726 540,996 618,874' 629,198' 637,694' 654,809' 658,039' 657,404' 651,247 677,944 2 Foreign countries 429,905 535,189 614,411' 622,310' 629,815' 647,749' 653,289" 649,640' 645,368 673,247 3 Europe 164,114 180,556 234,641 227,898' 227,661' 231,218' 232,797' 224,663' 226,813 234,004 4 Austria 693 1,181 920 1,090 941 1,425' 1,245 1,072 1,271 1,612 5 Belgium-Luxembourg 5,243 6,729 9,347 9,893 10,363 9,531' 10,051 9,937' 10,247 11,103 6 Denmark 513 482 760 1,164 1,364 1,474 2,078 1,402 2,358 3,089 7 Finland 496 580 377 426' 426 549 417 447 339 339 8 France 15,541 22,862 29,835 28,250' 26,980' 26,005' 24,237 24,295 23,285 24,564 9 Germany 4,835 5,762 7,022 6,492' 5,IKK 5,211 6,226 5,085 5,898 7,975 10 Greece 666 700 689 675 653 620 694 633 677 683 11 Italy 9,667 10,875 12,073 9,285 10,705' 9,921' 9,766 8,550 12,512 13,337 12 Netherlands 4,212 5,600 5,014 5,756' 5,351 5,007' 5,647 6,167' 6,377 5,939 13 Norway 948 735 1,362 1,240 1,078 1,322' 900 1,060 1,143 1,342 14 Portugal 652 699 801 910 897 859 848 858 915 738 15 Spain 2,114 2,407 2,621 2,844' 4,173' 5,011 5,570 6,248 6,838 5,976 16 Sweden 1,422 884 1,379 2,280 1,522 1,926 2,011 2,1% 1,579 1,829 17 Switzerland 29,020 30,534 33,766 31,293 31,197r 30,416' 29,043' 31,330' 31,157 32,711 18 Turkey 429 454 703 628 570 537 709 706 878 793 19 United Kingdom 76,728 85,334 116,852 115,455' 115,531' 121,895 122,620 113,287 109,9% 111,718 20 Yugoslavia 673 630 710 586 690 614 629 579 655 569 21 Other Western Europe 9,635 3,326 9,798 9,038 9,259' 8,215' 9,463' 10,207' 9,921 8,895 22 U.S.S.R 105 80 32 136 239 80' 99 45 100 74 23 Other Eastern Europe 523 702 582 456 611 598' 544 558' 670 717 24 Canada 17,427 26,345 30,095 27,894' 30,037' 29,944 28,128 28,247 26,697 26,177 25 Latin America and Caribbean 167,856 210,318 220,372' 229,928' 232,041' 242,719' 246,723' 246,743' 240,073 257,283 26 Argentina 6,032 4,757 5,006 5,219 5,876 5,975 6,775 7,106 7,065 7,307 27 Bahamas 57,657 73,619 74,767' 74,011' 74,282' 76,002' 78,889' 77,921 76,805 83,598 28 Bermuda 2,765 2,922 2,344 2,927 2,077 2,413 2,394 2,389 2,577 2,836 29 Brazil 5,373 4,325 4,005 4,122 4,205 4,489 4,524' 4,475 4,726 5,135 30 British West Indies 42,674 72,263 81,494' 91,678' 94,347' 101,332' 99,907' 101,711' 95,828 104,954 31 Chile 2,049 2,054 2,210 2,184 2,378 2,323 2,463 2,467 2,727 2,653 32 Colombia 3,104 4,285 4,204 4,395 4,502 4,441 4,403 4,171 4,136 4,221 33 Cuba 11 7 12 9 10 9 8 9 12 9 34 Ecuador 1,239 1,236 1,082 1,206 1,212 1,216 1,224 1,244 1,265 1,360 35 Guatemala 1,071 1,123 1,082 1,191 1,209 1,183 1,182 1,177 1,150 1,178 36 Jamaica 122 136 160 152 156 154 149 166 177 164 37 Mexico 14,060 13,745 14,480 15,866 15,801 16,334 17,260 15,842' 15,635 15,389 38 Netherlands Antilles 4,875 4,970 4,975 5,348 5,338 4,798 5,011 5,252 5,354 5,907 39 Panama 7,514 6,886 7,414 4,005 4,171 4,251 4,262 4,128 4,114 4,046 40 Peru 1,167 1,163 1,275 1,423 1,438 1,514 1,539' 1,584 1,605 1,650 41 Uruguay 1,552 1,537 1,582 1,717 1,882 1,828 1,898' 1,884 1,788 1,885 42 Venezuela 11,922 10,171 9,048 9,255 8,950 9,116 9,330 9,752 9,547 9,301 43 Other 4,668 5,119 5,234 5,219 5,207' 5,343 5,504 5,462' 5,560 5,690 44 72,280 108,831 121,288' 125,676' 128,0%' 133,933' 135,851' 139,845' 142,030 145,858 China 45 Mainland 1,607 1,476 1,162 1,921 1,725 1,564 1,757 1,608' 1,479 1,401 46 Taiwan 7,786 18,902 21,503 23,874 23,072 24,023 23,422 22,334 23,377 24,791 47 Hong Kong 8,067 9,393 10,180 10,219' 9,321' 9,951 10,417 10,875 11,532 12,386 48 India 712 674 582 619 942 858 845 1,013 793 765 49 Indonesia 1,466 1,547 1,404 1,03C 1,075 1,036 1,254' 1,121' 1,286 991 50 Israel 1,601 1,892 1,292 1,190 1,334 1,244 1,194 1,130 2,323 1,063 51 Japan 23,077 47,410 54,322' 58,077' 60,846' 63,460' 64,559' 70,188 70,594 73,103 52 Korea 1,665 1,141 1,637 1,476 1,572 1,459 1,720 2,091 2,440 2,813 53 Philippines 1,140 1,866 1,085 975 954 1,085 1,001 971 1,140 1,150 54 Thailand 1,358 1,119 1,345 1,448 1,099 1,650 1,422 1,369' 1,363 1,205 55 Middle-East oil-exporting countries 14,523 12,352 13,988 12,413 12,089 14,298 12,787 14,091 13,200 12,838 56 Other 9,276 11,058 12,788 12,434 14,066 13,306' 15,472 13,053 12,503 13,352 57 Africa 4,883 4,021 3,945 4,055 4,023 3,837 3,846 3,659 3,702 3,530 58 Egypt 1,363 706 1,151 1,1% 1,187 1,039 %9 813 850 757 59 Morocco 163 92 194 65 73 80 70 111 66 64 60 South Africa 388 270 202 267 245 200 204 247 245 267 61 Zaire 163 74 67 63 60 63 67 71 71 72 62 Oil-exporting countries4 1,494 1,519 1,014 1,090 1,108' 1,052 1,039 1,015 993 952 63 Other 1,312 1,360 1,316 1,373 1,351' 1,403 1,498 1,402 1,477 1,418 64 Other countries 3,347 5,118 4,070 6,859 6,957 6,098 5,945 6,484 6,054 6,3% 65 Australia 2,779 4,1% 3,327 5,943 6,017 5,329 5,170 5,639' 5,199 5,426 66 All other 568 922 744 916 939 769 775 845 854 970 67 Nonmonetary international and regional organizations 5,821 5,807 4,464 6,889 7,879 7,061' 4,749 7,764 5,879 4,698 68 International 4,806 4,620 2,830 4,955 5,925 5,130' 2,979 5,721 3,912 3,211 69 Latin American regional 894 1,033 1,272 1,727 1,769 1,651 1,614 1,762 1,662 1,276 70 Other regional 121 154 362 207 185 279 156 281 306 211 1. Includes the Bank for International Settlements and Eastern European 4. Comprises Algeria, Gabon, Libya, and Nigeria. countries that are not listed in line 23. 5. Excludes "holdings of dollars" of the International Monetary Fund. 2. Comprises Bulgaria, Czechoslovakia, the German Democratic Republic, 6. Asian, African, Middle Eastern, and European regional organizations, Hungary, Poland, and Romania. except the Bank for International Settlements, which is included in "Other 3. Comprises Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and Western Europe." United Arab Emirates (Trucial States). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A62 International Statistics • March 1989 3.18 BANKS' OWN CLAIMS ON FOREIGNERS Reported by Banks in the United States1 Payable in U.S. Dollars Millions of dollars, end of period 1988 AArreeaa aanndd ccoouunnttrryy 11998855 11998866 11998877 May June July Aug. Sept. Oct. Nov.p 1 Total 401,608 444,745 459,877' 451,885' 458,967' 470,241' 469,243' 477,149' 465,768 485,283 2 Foreign countries 400,577 441,724 456,472' 450,496' 456,372' 467,427' 466,799' 471,566' 462,785 481,030 3 Europe 106,413 107,823 102,348'' 100,486' 100,909' 9999,,775511'' 99,284' 110022,,440099'' 105,922 108,175 4 Austria 598 728 793 865 806 888888 743 880088 812 721 5 Belgium-Luxembourg 5,772 7,498 9,397 8,724 7,863 8,530 8,419 8,786' 8,907 8,951 6 Denmark 706 688 717 630 640 742' 608 582 631 595 7 Finland 823 987 1,010 1,103 954 1,325 1,231 1,195 912 1,161 8 France 9,124 11,356 13,548r 12,147 12,186' 11,861 11,965' 12,164 12,338 12,478 9 Germany 1,267 1,816 2,039 1,727' 2,862' 2,169' 2,000' 1,728' 2,303 2,300 10 Greece 991 648 462' 557' 589' 562' 523' 506' 494 601 11 Italy 8,848 9,043 7,460 6,606 7,072 6,607 6,626 6,118' 6,039 7,092 12 Netherlands 1,258 3,296 2,619' 2,766 2,656 3,017 2,933' 3,202 2,671 2,763 13 Norway 706 672 934 886 589 484 534 510 534 478 14 Portugal 1,058 739 477 400 358 333 321 333 266 253 13 Spain 1,908 1,492 1,853' 1,906' 1,862' 1,973' 2,011' 1,969 1,806 2,054 16 Sweden 2,219 1,964 2,254' 2,480 2,087 1,958 2,256 1,983' 1,852 2,086 17 Switzerland 3,171 3,352 2,718' 3,098' 3,291' 2,491' 2,569' 2,559' 2,918 2,983 18 Turkey 1,200 1,543 1,680 1,543 1,495 1,432 1,397 1,3% 1,343 1,390 19 United Kingdom 62,566 58,335 50,823' 51,674' 52,033' 51,918' 51,789' 54,669' 57,933 57,880 20 Yugoslavia 1,964 1,835 1,700 1,586 1,624 1,559 1,537 1,476' 1,472 1,450 21 Other Western Europe2 998 539 619 598 647 671 524 889' 1,155 926 22 U.S.S.R 130 345 389 339 506 431 466 473' 724 11,,220077 23 Other Eastern Europe 1,107 948 852 851 787 800 831' 1,065' 812 880066 24 Canada 16,482 21,006 25,368' 23,794' 24,634' 23,937' 24,137' 23,804' 22,491 23,274 25 Latin America and Caribbean 202,674 208,825 214,789' 204,693' 202,663' 205,268' 206,798' 212,897' 201,032 211,113 26 Argentina 11,462 12,091 11,996 12,296' 12,365 12,342' 12,238 12,235 12,077 12,025 27 Bahamas 58,258 59,342 64,587' 59,258' 55,554' 60,35C 63,305' 64,253' 59,310 67,525 28 Bermuda 499 418 471 369 818 460 43C 688 597' 563 29 Brazil 25,283 25,716 25,897 26,119 26,230 26,023' 25,909 25,61C 25,452 26,353 30 British West Indies 38,881 46,284 50,042' 49,618' 51,763' 50,483' 49,641' 55,262' 48,884 50,628 31 Chile 6,603 6,558 6,308 6,018 5,881 5,771' 5,677 5,656 5,459 5,332 32 Colombia 3,249 2,821 2,740 3,082 3,095 3,127 3,029 3,023 3,016 2,963 33 Cuba 0 0 1 0 0 0 0 0 0 0 34 Ecuador 2,390 2,439 2,286 2,197 2,142 2,143' 2,156 2,185 2,168 2,162 35 Guatemala4 194 140 144 149 144 157 148 150 175 160 36 Jamaica4 224 198 188 177 187 214 184 185 201 205 37 Mexico 31,799 30,698 29,532 26,649' 26,177 26,022' 25,885 25,971' 25,645 25,146 38 Netherlands Antilles 1,340 1,041 980 1,434 1,238 1,055 1,269 1,079 1,491 1,414 39 Panama 6,645 5,436 4,744 2,567' 2,492 2,400 2,370' 2,238' 2,214 2,363 40 Peru 1,947 1,661 1,329 1,297 1,149 1,137' 1,192 1,080 1,065 1,012 41 Uruguay 960 940 963' 880 885 878 889' 891 850 883 42 Venezuela 10,871 11,108 10,843' 10,863' 10,912 11,021' 10,862' 10,754' 10,803 10,746 43 Other Latin America and Caribbean 2,067 1,936 1,738 1,719 1,631 1,684' 1,612' 1,636 1,626 1,632 44 66,212 96,126 106,096' 111144,,002222'' 112200,,220022'' 113300,,557733'' 112288,,778877'' 112244,,883355'' 112244,,997744 113300,,221133 China 45 Mainland 639 787 968 942' 1,065 1,033 1,017 888' 844 775 46 Taiwan 1,535 2,681 4,592' 3,805 3,957 3,562 3,241 3,121' 2,940 3,829 47 Hong Kong 6,797 8,307 8,218' 8,356 9,632 8,342 7,451 8,389' 9,495 10,826 48 India 450 321 510 507 499 508 548 540 634 568 49 Indonesia 698 723 580 706' 772' 765' 786' 778' 808 767 50 Israel 1,991 1,634 1,363 1,259 1,213 1,206 1,174 1,180 1,170 1,231 51 Japan 31,249 59,674 68,658' 78,688' 82,35C 93.14C 92,84C 87,246' 87,629 89,716 52 Korea 9,226 7,182 5,148' 4,884' 5,003' 4,889' 4,909' 5,137' 5,112 5,142 53 Philippines 2,224 2,217 2,071 2,012 2,055 2,029 2,030 2,009 1,912 1,900 54 Thailand 845 578 496 596 641 668 683 759 766 778 55 Middle East oil-exporting countries 4,298 4,122 4,858 3,542' 4,574' 6,400 6,216' 6,401' 5,407 6,664 56 Other Asia 6,260 7,901 8,635' 8,725 8,441 8,031 7,891 8,389' 8,257 8,018 57 Africa 5,407 4,650 4,742 5,092 5,423 5,493 5,462 5,454' 5,628 5,629 58 Egypt 721 567 521 503 605 539 530 535 540 532 59 Morocco 575 598 542 483 484 481 478 478 474 488 60 South Africa 1,942 1,550 1,507 1,496 1,693 1,726 1,711 1,693' 1,707 1,698 61 Zaire 20 28 15 42 41 38 36 16 17 18 62 Oil-exporting countries 630 694 1,003 1,244 1,275 1,340 1,359 1,388 1,484 1,491 63 Other 1,520 1,213 1,153 1,324 1,325 1,369 1,348 1,343 1,406 1,402 64 Other countries 3,390 3,294 3,129' 2,409' 2,541' 2,404' 2,331' 2,167 2,738 2,625 65 Australia 2,413 1,949 2,10C 1,413 1,678 1,554 1,499 1,392 1,879 1,566 66 All other 978 1,345 1,029' 996' 863' 85C 832' 775 859 1,059 67 Nonmonetary international and regional organizations 1,030 3,021 3,404 1,389' 2,595' 2,814' 2,445' 5,583' 2,983 4,253 1. Reporting banks include all kinds of depository institutions besides commer- 4. Included in "Other Latin America and Caribbean" through March 1978. cial banks, as well as some brokers and dealers. 5. Comprises Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and 2. Includes the Bank for International Settlements. Beginning April 1978, also United Arab Emirates (Trucial States). includes Eastern European countries not listed in line 23. 6. Comprises Algeria, Gabon, Libya, and Nigeria. 3. Beginning April 1978 comprises Bulgaria, Czechoslovakia, the German 7. Excludes the Bank for International Settlements, which is included in Democratic Republic, Hungary, Poland, and Romania. "Other Western Europe." Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Nonbank-Reported Data A63 3.19 BANKS' OWN AND DOMESTIC CUSTOMERS' CLAIMS ON FOREIGNERS Reported by Banks in the United States1 Payable in U.S. Dollars Millions of dollars, end of period 1988' TTyyppee ooff ccllaaiimm 11998855 11998866 11998877'' May June July Aug. Sept. Oct. Nov.p 1 Total 444444433333330000000,,,,,,,444444488888889999999 444444477777778888888,,,,,,,666666655555550000000 444444499999997777777,,,,,,,666666633333335555555 444444499999994444444,,,,,,,222222288888880000000 555555511111112222222,,,,,,,999999955555550000000 22 BBaannkkss'' oowwnn ccllaaiimmss oonn ffoorreeiiggnneerrss 444444400000001111111,,,,,,,666666600000008888888 444444444444444444444,,,,,,,777777744444445555555 444444455555559999999,,,,,,,888888877777777777777 451,885 444444455555558888888,,,,,,,999999966666667777777 470,241 469,243 444444477777777777777,,,,,,,111111144444449999999 465,768 485,283 33 FFoorreeiiggnn ppuubblliicc bboorrrroowweerrss 66666660000000,,,,,,,555555500000007777777 66666664444444,,,,,,,000000099999995555555 66666664444444,,,,,,,666666600000005555555 61,526 66666662222222,,,,,,,777777755555558888888 62,825 61,696 66666663333333,,,,,,,777777733333336666666 60,232 63,931 44 OOwwnn ffoorreeiiggnn ooffffiicceess""'' 111111177777774444444,,,,,,,222222266666661111111 222222211111111111111,,,,,,,555555533333333333333 222222222222224444444,,,,,,,777777722222227777777 226,308 222222222222229999999,,,,,,,999999977777772222222 239,112 237,012 222222244444445555555,,,,,,,333333399999997777777 237,410 255,015 55 UUnnaaffffiilliiaatteedd ffoorreeiiggnn bbaannkkss 111111111111116666666,,,,,,,666666655555554444444 111111122222222222222,,,,,,,999999944444446666666 111111122222227777777,,,,,,,666666600000009999999 122,587 111111122222223333333,,,,,,,444444499999998888888 127,298 128,447 111111122222224444444,,,,,,,888888855555552222222 122,077 123,470 66 DDeeppoossiittss 44444448888888,,,,,,,333333377777772222222 55555557777777,,,,,,,444444488888884444444 66666660000000,,,,,,,666666688888887777777 57,898 55555559999999,,,,,,,000000044444443333333 60,184 60,558 66666661111111,,,,,,,555555522222221111111 54,122 55,984 77 OOtthheerr 66666668888888,,,,,,,222222288888882222222 66666665555555,,,,,,,444444466666662222222 66666666666666,,,,,,,999999922222222222222 64,690 66666664444444,,,,,,,444444455555555555555 67,114 67,889 66666663333333,,,,,,,333333333333330000000 67,955 67,486 88 AAllll ootthheerr ffoorreeiiggnneerrss 55555550000000,,,,,,,111111188888885555555 44444446666666,,,,,,,111111177777771111111 44444442222222,,,,,,,999999933333336666666 41,464 44444442222222,,,,,,,777777733333338888888 41,006 42,089 44444443333333,,,,,,,111111166666664444444 46,050 42,866 99 CCllaaiimmss ooff bbaannkkss'' ddoommeessttiicc ccuussttoommeerrss33...... 22222228888888,,,,,,,888888888888881111111 33333333333333,,,,,,,999999900000005555555 33333337777777,,,,,,,777777755555558888888 33333335555555,,,,,,,333333311111114444444 33333335555555,,,,,,,888888800000001111111 3333333,,,,,,,333333333333335555555 4444444,,,,,,,444444411111113333333 3333333,,,,,,,666666699999992222222 4444444,,,,,,,888888844444443333333 5555555,,,,,,,333333399999991111111 11 Negotiable and readily transferable 11111119999999,,,,,,,333333333333332222222 22222224444444,,,,,,,000000044444444444444 22222226666666,,,,,,,666666699999996666666 22222224444444,,,,,,,000000000000002222222 22222220000000,,,,,,,999999911111116666666 12 Outstanding collections and other 6666666,,,,,,,222222211111114444444 5555555,,,,,,,444444444444448888888 7777777,,,,,,,333333377777770000000 6666666,,,,,,,444444466666668888888 9999999,,,,,,,444444499999994444444 13 MEMO: Customer liability on 22222228888888,,,,,,,444444488888887777777 22222225555555,,,,,,,777777700000006666666 22222223333333,,,,,,,111111100000007777777 11111119999999,,,,,,,666666611111118888888 11111118888888,,,,,,,777777733333330000000 Dollar deposits in banks abroad, reported by nonbanking business enterprises in the United States 38,102 43,984' 40,087 44,316 42,763 46,837 49,732 42,669 41,525 n.a. 1. Data for banks' own claims are given on a monthly basis, but the data for and foreign branches, agencies, or wholly owned subsidiaries of head office or claims of banks' own domestic customers are available on a quarterly basis only. parent foreign bank. Reporting banks include all kinds of depository institutions besides commercial 3. Assets owned by customers of the reporting bank located in the United banks, as well as some brokers and dealers. States that represent claims on foreigners held by reporting banks for the account of their domestic customers. 2. U.S. banks: includes amounts due from own foreign branches and foreign 4. Principally negotiable time certificates of deposit and bankers acceptances. subsidiaries consolidated in "Consolidated Report of Condition" filed with bank 5. Includes demand and time deposits and negotiable and nonnegotiable regulatory agencies. Agencies, branches, and majority-owned subsidiaries of certificates of deposit denominated in U.S. dollars issued by banks abroad. For foreign banks: principally amounts due from head office or parent foreign bank, description of changes in data reported by nonbanks, see July 1979 BULLETIN, p. 550. 3.20 BANKS' OWN CLAIMS ON UNAFFILIATED FOREIGNERS Reported by Banks in the United States1 Payable in U.S. Dollars Millions of dollars, end of period 1987 1988 MMaattuurriittyy;; bbyy bboorrrroowweerr aanndd aarreeaa 11998844 11998855 11998866 Dec.' Mar.' June' Sept. 1 Total 243,952 227,903 232,295 235,130 219,323 227,589 228,788 By borrower 2 Maturity of 1 year or less2 167,858 160,824 160,555 163,997 152,658 162,912 166,345 3 Foreign public borrowers 23,912 26,302 24,842 25,889 24,488 25,608 27,644 4 All other foreigners 143,947 134,522 135,714 138,108 128,171 137,304 138,701 5 Maturity over 1 year 76,094 67,078 71,740 71,133 66,664 64,677 62,443 6 Foreign public borrowers 38,695 34,512 39,103 38,625 35,879 35,613 35,014 7 All other foreigners 37,399 32,567 32,637 32,507 30,785 29,064 27,429 By area Maturity of 1 year or less2 8 Europe 58,498 56,585 61,784 59,027 51,552 55,242 53,958 9 Canada 6,028 6,401 5,895 5,680 4,978 6,426 5,913 10 Latin America and Caribbean 62,791 63,328 56,271 56,535 55,544 56,333 55,642 11 Asia 33,504 27,966 29,457 35,919 35,579 38,893 41,831 12 Africa 4,442 3,753 2,882 2,833 2,5% 2,914 3,112 13 All other3 2,593 2,791 4,267 4,003 2,410 3,103 55,,888888 Maturity of over 1 year 14 Europe 9,605 7,634 6,737 6,6% 5,914 5,420 5,320 15 Canada 1,882 1,805 1,925 2,661 2,213 2,337 2,070 16 Latin America and Caribbean 56,144 50,674 56,719 53,817 51,541 49,775 48,294 17 5,323 4,502 4,043 3,830 3,680 3,711 3,954 18 Africa 2,033 1,538 1,539 1,747 2,201 2,429 2,265 19 All other3 1,107 926 777 2,381 1,114 1,006 541 1. Reporting banks include all kinds of depository institutions besides commer- 2. Remaining time to maturity, rial banks, as well as some brokers and dealers. 3. Includes nonmonetary international and regional organizations. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A64 International Statistics • March 1989 3.21 CLAIMS ON FOREIGN COUNTRIES Held by U.S. Offices and Foreign Branches of U.S.-Chartered Banks1-2 Billions of dollars, end of period 1986 1987 1988 AArreeaa oorr ccoouunnttrryy 11998844 11998855 Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. 1 Total 405.7 385.4 381.6 385.1 395.4' 384.6 387.7 381.4' 373.1' 352.6' ss^ 2 G-10 countries and Switzerland 148.1 146.0 154.8 156.6 162.7 158.1 155.2 160.0' 156.7' 150.5 150.3 3 Belgium-Luxembourg 8.7 9.2 8.3 8.3 9.1 8.3 8.2 10.1 9.3 9.2 9.5 4 France 14.1 12.1 14.5 13.7 13.3 12.5 13.7 13.8 11.5 10.8 10.0 5 Germany 9.0 10.5 12.4 11.6 12.7 11.2 10.5 12.6 11.8 10.6 8.9 6 Italy 10.1 9.6 7.8 9.0 8.7' 7.5 6.6 7.3 7.4 6.1 5.9 7 Netherlands 3.9 3.7 3.9 4.6 4.4 7.3 4.8 4.C 3.3 3.3 3.0 8 Sweden 3.2 2.7 2.7 2.4 3.0 2.4 2.6 2.1 2.1 1.9 2.0 9 Switzerland 3.9 4.4 4.7 5.8 5.8 5.7 5.4 5.6 5.1 5.6 5.2 10 United Kingdom 60.3 63.0 68.8 71.0 73.7 72.0' 72.1 69.1 71.4' 69.8 68.9 11 Canada 7.9 6.8 5.9 5.3 5.3 4.7 4.7 5.6' 4.9' 5.4 5.2 12 Japan 27.1 23.9 25.8 24.9 26.9 26.3' 26.5' 29.8 29^ nv 31.7 13 Other developed countries 33.6 29.9 28.9 25.7 25.7 25.2 25.9 26.2' 26.2 23.7 22.7 14 Austria 1.6 1.5 1.7 1.7 1.9 1.8 1.9 1.9 1.6 1.6 1.6 15 Denmark 2.2 2.3 2.2 1.7 1.7 1.5 1.6 1.7 1.4 1.0 1.1 16 Finland 1.9 1.6 1.6 1.4 1.4 1.4 1.4 1.3 1.0 1.2 1.3 17 Greece 2.9 2.6 2.3 2.3 2.1 2.0 1.9 2.0 2.3 2.2 2.1 18 Norway 3.0 2.9 2.7 2.4 2.2 2.1 2.0 2.3 2.0 2.0 2.0 19 Portugal 1.4 1.2 1.0 .8 .8 .8 .5 .4 .4 .4 20 Spain 6.5 5.8 6.7 5.8 6.3 6.1 7.4 8.0 9.0 7.2 6.3 21 Turkey 1.9 1.8 1.9 1.8 1.7 1.7 1.5 1.6 1.6 1.5 1.3 22 Other Western Europe 1.7 2.0 1.6 1.4 1.4 1.5 1.6 1.6 1.9 1.6 1.9 23 South Africa 4.5 3.2 3.0 3.0 3.0 3.0 2.9 2.9 2.8 2.8 2.7 24 Australia 6.0 5.0 4.2 3.5 3.2 3.1 2.9 2.4' 2.1 2.2 1.8 25 OPEC countries3 24.9 21.3 19.7 19.3 20.0 18.8 19.0 17.1 17.2' 16.4 17.6 26 Ecuador 2.2 2.1 2.2 2.2 2.1 2.1 2.1 1.9 1.9 1.8 1.8 27 Venezuela 9.3 8.9 8.7 8.6 8.5 8.4 8.3 8.1 8.1 8.0 7.9 28 Indonesia 3.3 3.0 2.8 2.5 2.4 2.2 2.0 1.9 1.9 l^ 1.9 29 Middle East countries 7.9 5.3 4.4 4.3 5.4 4.4 5.0 3.6 3.6 3.1 4.3 30 African countries 2.3 2.0 1.7 1.7 1.6 1.7 1.7 1.7 1.7 1.7 1.7 31 Non-OPEC developing countries 111.8 104.2 99.1 99.1 100.7' 100.4' 97.7 97.7 94.0 91.3 87.0 Latin America 32 Argentina 8.7 8.8 9.2 9.5 9.5 9.5 9.3 9.4 9.5 9.4 9.2 33 Brazil 26.3 25.4 25.2 25.2 26.2' 25.1 25.1 24.7 23.9 23.7 22.4 34 Chile 7.0 6.9 7.1 7.1 7.3' 7.2 7.0 6.9 6.6 6.4 6.2 35 Colombia 2.9 2.6 1.9 2.1 2.0 1.9 1.9 2.0 1.9 2.1 2.1 36 Mexico 25.7 23.9 23.9 23.8 24.1' 25.3 24.8 23.7 22.5 21.1 20.6 37 Peru 2.2 1.8 1.5 1.4 1.4 1.3 1.2 1.1 1.1 .9 .8 38 Other Latin America 3.9 3.4 3.3 3.1 3.0 2.9 2.8 2.7 2.8 2.6 2.5 Asia China 39 Mainland .7 .5 .6 .4 .9 .6 .3 .3 .4 .3 .3 40 Taiwan 5.1 4.5 4.3 4.9 5.5 6.6 6.0 8.2 6.1 4.9 3.1 41 India .9 1.2 1.3 1.2 1.8' 1.7 1.9 1.9 2.1 2.3 2.0 42 Israel 1.8 1.6 1.4 1.5 1.4 1.3 1.3 1.0 1.0 1.0 1.0 43 Korea (South) 10.6 9.2 7.1 6.6 6.2 5.6 4.9' 5.V 5.7' 5.9 6.0 44 Malaysia 2.7 2.4 2.1 2.1 1.9 1.7 1.6 1.5 1.5 1.5 1.6 45 Philippines 6.0 5.7 5.4 5.4 5.4 5.4 5.4 5.1 5.1 4.9 4.5 46 Thailand 1.8 1.4 1.0 .9 .9 .8 .7 .7 1.0 1.1 1.2 47 Other Asia 1.1 1.0 .6 .7 .6 .7 .7 .7 .7 .8 .8 Africa 48 Egypt 1.2 1.0 .7 .7 .6 .6 .6 .5 .5 .6 .5 49 Morocco .8 .9 .9 .9 .9 .9 .8 .9 .9 ..99 .8 50 Zaire .1 .1 .1 .1 .1 .1 .1 .0 .1 ..11 .0 51 Other Africa4 2.1 1.9 1.6 1.6 1.4 1.3 1.3 1.3 1.0 1.2 1.2 52 Eastern Europe 4.4 4.1 3.3 3.2 3.0 3.3 3.3 3.0 2.9 3.1 3.1 53 U.S.S.R .1 .1 .1 .1 .1 .3 .5 .4 .3 .4 .4 54 Yugoslavia 2.3 2.2 1.9 1.7 1.6 1.7 1.7 1.6 1.7 1.7 1.7 55 Other 2.0 1.8 1.4 1.4 1.3 1.3 1.2 1.0 .9 1.0 1.1 56 Offshore banking centers 65.6 62.9 58.3 61.3 63.r 60.7' 64.3 54.3' 54.6' 45.3' 48.8' 57 Bahamas 21.5 21.2 19.6 22.0 23^ 19.9 25.5 17.1 18.3 11.0' 15.8' 58 Bermuda .9 .7 .4 .7 .8 .6 .6 .6 .8 1.0 .9 59 Cayman Islands and other British West Indies 11.8 11.6 11.3 12.4 12.2' 14. </ 12.8 13.3' 12.2' 10.6' 10.6 60 Netherlands Antilles 3.4 2.2 1.8 1.8 1.7 1.3 1.2 1.2 1.3 1.2 1.2 61 Panama 6.7 6.0 5.1 4.0 4.3' 3.9 3.7 3.7 3.2 33..00 2.7 62 Lebanon .1 .1 .1 .1 .1 .1 .1 .1 .1 ..11 63 Hong Kong 11.4 11.4 10.3 11.1 11.4 12.5 12.3 11.3' 11.3 11.7 10.6 64 Singapore 9.8 9.8 9.7 9.2 8.6 8.3 8.1 7.0 7.4 6.8 7.0 65 Others6 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 66 Miscellaneous and unallocated7 17.3 16.9 17.3 19.8 20.1 18.1 22.3 23.2 21.5 22.2 27.(y 1. The banking offices covered by these data are the U.S. offices and foreign from $50 million to $150 million equivalent in total assets, the threshold now branches of U.S.-owned banks and of U.S. subsidiaries of foreign-owned banks. applicable to all reporting branches. Offices not covered include (1) U.S. agencies and branches of foreign banks, and 3. This group comprises the Organization of Petroleum Exporting Countries (2) foreign subsidiaries of U.S. banks. To minimize duplication, the data are shown individually, other members of OPEC (Algeria, Gabon, Iran, Iraq, Kuwait, adjusted to exclude the claims on foreign branches held by a U.S. office or another Libya, Nigeria, Qatar, Saudi Arabia, and United Arab Emirates), and Bahrain and foreign branch of the same banking institution. The data in this table combine Oman (not formally members of OPEC). foreign branch claims in table 3.14 (the sum of lines 7 through 10) with the claims 4. Excludes Liberia. of U.S. offices in table 3.18 (excluding those held by agencies and branches of 5. Includes Canal Zone beginning December 1979. foreign banks and those constituting claims on own foreign branches). 6. Foreign branch claims only. 2. Beginning with June 1984 data, reported claims held by foreign branches 7. Includes New Zealand, Liberia, and international and regional organizahave been reduced by an increase in the reporting threshold for "shell" branches tions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Nonbank-Reported Data A65 3.22 LIABILITIES TO UNAFFILIATED FOREIGNERS Reported by Nonbanking Business Enterprises in the United States1 Millions of dollars, end of period 1987 1988 TTyyppee,, aanndd aarreeaa oorr ccoouunnttrryy 11998844 11998855 11998866 Sept. Dec. Mar.' June' Sept." 1 Total 29,357 27,825 25,587' 28,571r 27,852' 28,877 29,387 30,902 2 Payable in dollars 26,389 24,296 21,749' 24,006' 22,468' 23,293 24,136 25,727 3 Payable in foreign currencies 2,968 3,529 3,838' 4,565' 5,384' 5,584 5,251 5,175 By type 4 Financial liabilities 14,509 13,600 12,133' 12,936' 11,828' 13,134 13,112 13,456 5 Payable in dollars 12,553 11,257 9,609' 9,945' 8,303' 9,459 9,607 10,082 6 Payable in foreign currencies 1,955 2,343 2,524' 2,991' 3,525' 3,675 3,505 3,374 7 Commercial liabilities 14,849 14,225 13,454' 15,635 16,025' 15,743 16,275 17,446 8 Trade payables 7,005 6,685 6,450' 7,548 7,425' 6,560 6,867 6,615 9 Advance receipts and other liabilities 7,843 7,540 7,004 8,086 8,600' 9,183 9,409 10,832 10 Payable in dollars 13,836 13,039 12,14c 14,061 14,165' 13,834 14,529 15,645 11 Payable in foreign currencies 1,013 1,186 1,314 1,574 1,859 1,909 1,746 1,801 By area or country Financial liabilities 12 Europe 6,728 7,700 7,917' 9,162' 8,065' 8,983 8,758 9,442 13 Belgium-Luxembourg 471 349 270 230 202 241 269 326 14 France 995 857 661 615 364 365 332 329 15 Germany 489 376 368 505 583 586 626 709 16 Netherlands 590 861 542' 505' 884' 883 880 893 17 Switzerland 569 610 646 685 493 652 707 697 18 United Kingdom 3,297 4,305 5,140 6,357 5,346r 6,074 5,772 6,318 19 Canada 863 839 399 397 400 467 461 439 20 Latin America and Caribbean 5,086 3,184 1,944' 998' 829' 1,178 1,175 894 21 Bahamas 1,926 1,123 614 280 278 249 211 233 22 Bermuda 13 4 4 0 0 0 0 0 23 Brazil 35 29 32 22 25 23 20 35 24 British West Indies 2,103 1,843 1,146' 618' 459' 807 878 581 25 Mexico 367 15 22 17 13 15 26 2 26 Venezuela 137 3 0 3 0 2 0 0 27 Asia 1,777 1,815 1,805 2,300 2,429 2,426 2,641 2,672 28 Japan 1,209 1,198 1,398 1,830 2,042 1,987 2,066 2,076 29 Middle East oil-exporting countries 155 82 8 7 8 11 11 11 30 Africa 14 12 1 2 4 5 2 3 31 Oil-exporting countries3 0 0 1 0 1 3 1 1 32 All other4 41 50 67 76 100 75 74 7 Commercial liabilities 33 Europe 4,001 4,074 4,446' 4,951 5,635' 5,738 5,836 6,744 34 Belgium-Luxembourg 48 62 101 59 134' 156 150 204 35 France 438 453 352 437 451 441 433 470 36 Germany 622 607 715' 674 916 818 798 1,204 37 Netherlands 245 364 424 336 428' 463 535 653 38 Switzerland 257 379 385' 556 559 527 482 394 39 United Kingdom 1,095 976 1,341 1,473 1,668 1,798 1,848 2,187 40 Canada 1,975 1,449 1,405 1,399 1,301 1,392 1,168 1,139 41 Latin America and Caribbean 1,871 1,088 924 1,082 865 938 996 1,016 42 Bahamas 7 12 32 22 19 15 58 20 43 Bermuda 114 77 156 252 168 325 272 222 44 Brazil 124 58 61 40 46 59 53 58 45 British West Indies 32 44 49 47 19 14 28 30 46 Mexico 586 430 217 231 189 164 233 193 47 Venezuela 636 212 216 176 162 85 111 207 48 Asia 5,285 6,046 5,080' 6,511 6,573 5,888 6,262 6,671 49 Japan 1,256 1,799 2,042' 2,422 2,580 2,510 2,659 2,789 50 Middle East oil-exporting countries2,3 2,372 2,829 1,679 2,104 1,964 1,062 1,318 1,313 51 Africa 588 587 619 572 574 575 624 463 52 Oil-exporting countries3 233 238 197 151 135 139 115 106 53 All other4 1,128 982 980 1,119 1,078 1,211 1,390 1,415 1. For a description of the changes in the International Statistics tables, see 3. Comprises Algeria, Gabon, Libya, and Nigeria. July 1979 BULLETIN, p. 550. 4. Includes nonmonetary international and regional organizations. 2. Comprises Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and 5. Revisions include a reclassification of transactions, which also affects the United Arab Emirates (Trucial States). totals for Asia and the grand totals. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A66 International Statistics • March 1989 3.23 CLAIMS ON UNAFFILIATED FOREIGNERS Reported by Nonbanking Business Enterprises in the United States1 Millions of dollars, end of period 1987 1988 TTyyppee,, aanndd aarreeaa oorr ccoouunnttrryy 11998844 11998855 11998866 Sept. Dec.' Mar.' June' Sept." 1 Total 29,901 28,876 36,265' 33,265' 31,967 31,445 38,716 37,969 2 Payable in dollars 27,304 26,574 33,867' 30,705' 29,114 29,368 36,637 35,387 3 Payable in foreign currencies 2,597 2,302 2,399 2,561 2,854 2,077 2,078 2,582 By type 4 Financial claims 19,254 18,891 26,273 22,847' 21,338 20,612 27,102 26,969 5 Deposits 14,621 15,526 19,916 17,274' 15,214 13,257 20,037 19,866 6 Payable in dollars 14,202 14,911 19,331 16,366' 13,997 12,604 19,195 18,666 7 Payable in foreign currencies 420 615 585 908 1,217 654 842 1,200 8 Other financial claims 4,633 3,364 6,357 5,572 6,124 7,355 7,064 7,104 9 Payable in dollars 3,190 2,330 5,005 4,448' 5,020 6,301 6,238 6,276 10 Payable in foreign currencies 1,442 1,035 1,352 1,124 1,104 1,054 826 828 11 Commercial claims 10,646 9,986 9,992' 10, AW 10,630 10,832 11,614 10,999 12 Trade receivables 9,177 8,696 8,783 9,420' 9,565 9,719 10,558 10,016 13 Advance payments and other claims 1,470 1,290 1,209' 999' 1,065 1,113 1,056 984 14 Payable in dollars 9,912 9,333 9,530' 9,891' 10,097 10,464 11,204 10,445 b Payable in foreign currencies 735 652 462 528 533 369 410 554 By area or country Financial claims 16 Europe 5,762 6,929 10,744 10,785 10,182 10,314 12,577 11,292 17 Belgium-Luxembourg 15 10 41 26 7 15 16 49 18 France 126 184 138 171 360 335 185 212 19 Germany 224 223 116 103 122 112 181 130 20 Netherlands 66 161 151 157 351 336 337 364 21 Switzerland 66 74 185 44 84 57 82 94 22 United Kingdom 4,864 6,007 9,855 10,074 9,008 9,210 11,407 9,820 23 Canada 3,988 3,260 4,808 3,295' 3,293 2,777 3,074 3,768 24 Latin America and Caribbean 8,216 7,846 9,291 7,568' 6,817 6,572 10,898 11,178 25 Bahamas 3,306 2,698 2,628 3,299 1,804 2,349 4,145 4,015 26 Bermuda 6 6 6 2 7 43 126 212 2/ Brazil 100 78 86 113 63 86 46 65 28 British West Indies 4,043 4,571 6,078 3,705' 4,427 3,561 6,077 6,417 29 Mexico 215 180 174 174 172 154 147 133 30 Venezuela 125 48 21 18 19 35 28 27 31 Asia 961 731 1,317 1,105 908 874 446 610 32 Japan 353 475 999 737 628 708 211 425 33 Middle East oil-exporting countries2 13 4 7 10 10 7 6 6 34 Africa 210 103 85 71 65 53 60 96 35 Oil-exporting countries3 85 29 28 14 7 7 10 9 36 All other4 117 21 28 24 72 23 47 26 Commercial claims 37 Europe 3,801 3,533 3,725' 4,166' 4,190 4,201 4,901 4,257 38 Belgium-Luxembourg 165 175 133 169 179 192 159 170 39 France 440 426 431' 462' 652 554 686 535 40 Germany 374 346 444 551' 562 637 770 601 41 Netherlands 335 284 164 190 135 151 173 146 42 Switzerland 271 284 217 206 185 172 262 182 43 United Kingdom 1,063 898 999 1,228 1,086 1,084 1,300 1,184 44 Canada 1,021 1,023 934 1,051 931 1,155 946 901 45 Latin America and Caribbean 2,052 1,753 1,857 1,732' 1,947 1,973 2,090 2,115 46 Bahamas 8 13 28 12 19 14 13 12 47 Bermuda 115 93 193 143 170 171 174 161 48 Brazil 214 206 234 231 227 214 234 236 49 British West Indies 7 6 39 20 26 24 25 22 50 Mexico 583 510 412 369 368 374 399 460 51 Venezuela 206 157 237 192 298 314 343 290 52 Asia 3,073 2,982 2,755 2,800 2,919 2,857 3,002 3,014 53 Japan 1,191 1,016 881 1,027 1,160 1,109 1,169 992 54 Middle East oil-exporting countries 668 638 563 434 450 408 445 406 55 Africa 470 437 500 407 401 419 422 419 56 Oil-exporting countries3 134 130 139 124 144 126 136 136 57 All other4 229 257 222 262 241 227 253 294 1. For a description of the changes in the International Statistics tables, see 3. Comprises Algeria, Gabon, Libya, and Nigeria. July 1979 BULLETIN, p. 550. 4. Includes nonmonetary international and regional organizations. 2. Comprises Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates (Trucial States). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Securities Holdings and Transactions A67 3.24 FOREIGN TRANSACTIONS IN SECURITIES Millions of dollars 1988 1988 Transactions, and area or country 1986 1987 J N an o . v . - May June July Aug. Sept. Oct. Nov/ U.S. corporate securities STOCKS 1 Foreign purchases 148,114 249,122' 169,736 13,654 20,007 19,207 17,275 11,971 13,232 11,973 2 Foreign sales 129,395 232,849 170,550 14,723 19,678 18,383 16,704 12,552 14,852 11,861 3 Net purchases, or sales (—) 18,719 16,272r -814 -1,069 329 824 572 -581 -1,620 112 4 Foreign countries 18,927 16,321r -683 -976 287 793 548 -554 -1,507 89 5 Europe 9,559 1,932' -2,652 -1,151 33 227 287 -616 -128 -901 6 France 459 905 -217 -153 121 -34 -21 -37 89 -49 7 Germany 341 -7 C 282 -66 -36 -3 9 -14 107 -20 8 Netherlands 936 892 -534 -43 -56 20 -5 -56 17 -30 9 Switzerland 1,560 -1,123 — 1,969 -247 -204 -90 -37 -506 -217 -268 10 United Kingdom 4,826 631' -611 -711 146 253 234 245 -41 -579 11 Canada 816 1,048 813 102 -172 58 162 44 -116 576 12 Latin America and Caribbean 3,031 1,318' 1,271 -82 -116 58 159 310 374 98 13 Middle East1 976 -1,360 -2,334 62 -549 -159 91 -188 -846 151 14 Other Asia 3,876 12,8% 1,929 106 1,039 518 -228 -127 -693 138 15 Japan 3,305 11,365 2,330 85 1,187 475 -282 24 -626 133 16 Africa 297 123 189 23 3 78 41 5 5 21 17 Other countries 373 365 102 -35 51 13 36 19 -102 6 18 Nonmonetary international and regional organizations -208 -48 -130 -92 42 31 23 --2288 -112 2233 BONDS2 19 Foreign purchases 123,169 105,856 77,942 7,810 8,341 8,277 5,966 7,450 7,552 7,653 20 Foreign sales 72,520 78,312 53,257 3.70C 4,590 5,064 4,144 5,048' 4,656 4,794 21 Net purchases, or sales (—) 50,648 27,544 24,686 4,11c 3,751 3,213 1,822 2,401' 2,8% 2,859 22 Foreign countries 49,801 26,804 25,236 4,08C 3,569 3,190 1,837 2,337' 3,020 2,828 23 Europe 39,313 21,989 15,343 2,074' 2,203 1,744 1,482 1,611' 2,341 1,250 24 France 389 194 272 -18 15 -7 5 90 45 13 25 Germany -251 33 1,269 11 226 8 166 160 34 -122 26 Netherlands 387 269 1,502 180 55 17 41 415 545 176 27 Switzerland 4,529 1,587 240 152 -71 -139 84 97 175 -13 28 United Kingdom 33,900 19,770 11,180 1,705' 1,738 1,685 1,188 793' 1,339 1,146 29 Canada 548 1,2% 533 98 216 130 27 -155 20 5 30 Latin America and Caribbean 1,552 2,857 1,683 141 174 254 193 45 198 51 31 Middle East' -3,113 -1,314 -333 -4 -124 -101 -87 -14 -45 143 32 Other Asia 11,346 2,021 8,078 1,755 1,091 1,152 254 916 502 1,353 33 Japan 9,611 1,622 6,958 1,641 1,049 1,035 178 575 399 1,210 34 Africa 16 16 -8 -2 4 0 1 1 4 -1 35 Other countries 139 -61 -60 17 5 10 -33 -67' -1 26 36 Nonmonetary international and regional organizations 847 740 -550 31 182 23 -14 64 -124 31 Foreign securities 37 Stocks, net purchases, or sales (-) -1,853 1,081' -638 852' -16C -126 -257 -57 -125 -185 38 Foreign purchases 49,149 95,458' 67,308 5,%9' 6,413' 7,052 5,904 5,054 6,071 7,625 39 Foreign sales 51,002 94,377' 67,945 5,117' 6,573' 7,178 6,161 5,111 6,1% 7,810 40 Bonds, net purchases, or sales (-) -3,685 -7,946' -8,427 829' -699' -659 -363 -509 -3,389 435 41 Foreign purchases 166,992 199,089' 195,950 15,127' 17,033' 19,224 17,038 25,271 20,525 20,875 42 Foreign sales 170,677 207,035' 204,378 14.29C 17,732' 19,882 17,401 25,780 23,914 20,440 43 Net purchases, or sales (—), of stocks and bonds -5,538 -6,865' -9,065 1,681' -858' -785 -620 -566 -3,514 250 44 Foreign countries -6,493 -6,757' -9,447 1,465' -77C -759 -650 -547 -3,564 214 45 Europe -18,026 -12,101' -8,769 637' -1,185 -488 -897 -446 -2,881 -478 46 Canada -876 -4,072' -3,142 -162 -19C -319 216 -730 -273 392 47 Latin America and Caribbean 3,476 828 1,508 322 301 -48 -34 290 -120 57 48 Asia 10,858 9,299' 1,082 678' 552' 237 -114 189 130 172 49 Africa 52 89 -20 -1 1 11 37 28 -189 18 50 Other countries -1,977 -800' -106 -9' -248' -153 143 121 -230 52 51 Nonmonetary international and regional organizations 955 -108' 382 216 -89 -26 30 -19 49 36 1. Comprises oil-exporting countries as follows: Bahrain, Iran, Iraq, Ku- securities sold abroad by U.S. corporations organized to finance direct investwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates (Trucial States). ments abroad. 2. Includes state and local government securities, and securities of U.S. government agencies and corporations. Also includes issues of new debt Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A68 International Statistics • March 1989 3.25 MARKETABLE U.S. TREASURY BONDS AND NOTES Foreign Transactions Millions of dollars 1988 1988 Country or area 1986 1987 J N a o n v .- . May June July Aug. Sept. Oct. Nov.p Transactions, net purchases or sales (-) during period1 1 Estimated total2 19,388 25,587 48,413 11,062 -2,161'' 905 -383 -l,937r 2,196 8,596 2 Foreign countries2 20,491 30,889 45,715 9,972 -3.336' 2,156 -149 -2,259 -241 8,261 3 Europe2 16,326 23,716 13,970 3,108 -3,226 -1,460 -836 -1,233 -175 1,733 4 Belgium-Luxembourg -245 653 1,013 159 -68 122 -209 -333 -3 133 Germany 7,670 13,330 -4,942 79 -4,241 -4,240 -2,020 -720 277 -1,015 6 Netherlands 1,283 -913 -242 -22 -796 312 -346 -58 41 135 7 Sweden 132 210 -441 104 -232 -187 175 -121 -162 355 8 Switzerland2 329 1,917 -1,056 -309 654 -51 344 -1,355 87 -411 9 United Kingdom 4,546 3,975 9,898 1,523 47 837 416 2,023 -1,019 1,945 10 Other Western Europe 2,613 4,563 9,736 1,560 1,420 1,755 803 -663 615 591 11 Eastern Europe 0 -19 5 14 -10 -9 0 -7 -10 -2 12 Canada 881 4,526 2,974 1,415 669 -314 -315 -167 633 -368 13 Latin America and Caribbean 926 -2,192 800 360 -580 0 -312 269 -574 582 14 Venezuela -96 150 -109 1 2 -2 -128 -17 1 0 1 Other Latin America and Caribbean 1,130 -1,142 973 -17 63 57 -292 285 -331 506 16 Netherlands Antilles -108 -1,200 -63 376 -645 -55 108 1 -244 77 17 1,345 4,488 26,547 4,476 —381r 3,246 919 -1,351 -104 6,870 18 Japan -22 868 21,913 2,820 —52 3,006 1,540 -2,841 223 4,224 19 -54 -56 -6 -13 — 1 -10 5 31 0 -8 20 All other 1,067 407 1,429 626 183 694 391 193 -21 -548 21 Nonmonetary international and regional organizations -1,104 -5,300 2,700 1,090 1,174 -l,251r -234 323r 2,438 335 2.2 International -1,430 -4,387 3,160 1,155 1,546 -1,137 -282 294r 2,365 489 23 Latin American regional 157 3 -41 7 -38 -14 -8 0 0 10 Memo 24 Foreign countries 20,491 30,889 45,715 9,972 -3,336r 2,156 - 149r -2,259 -241 8,261 25 Official institutions 14,214 31,064 24,369 5,062 -1,658 -2,362 -1,450 -l,481r 557 2,204 26 Other foreign 6,283 -181 21,345 4,910 -1,678 4,518 1,301 -779r -798 6,058 Oil-exporting countries 27 Middle East3 -1,529 -3,142 833 -612 -201 295 449 -182 -1,023 22,,112211 28 Africa4 5 16 1 0 0 0 0 0 0 0 1. Estimated official and private transactions in marketable U.S. Treasury 3. Comprises Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and securities with an original maturity of more than 1 year. Data are based on United Arab Emirates (Trucial States). monthly transactions reports. Excludes nonmarketable U.S. Treasury bonds and 4. Comprises Algeria, Gabon, Libya, and Nigeria, notes held by official institutions of foreign countries. 2. Includes U.S. Treasury notes publicly issued to private foreign residents denominated in foreign currencies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Interest and Exchange Rates A69 3.26 DISCOUNT RATES OF FOREIGN CENTRAL BANKS Percent per year Rate on Jan. 31, 1989 Rate on Jan. 31, 1989 Rate on Jan. 31, 1989 Country Country Country Percent e M ffe o c n t t i h v e e M ffe o c n t t i h v e Percent ef M fe o c n t t i h v e Austria.. 4.5 Jan. 1989 France1 8.25 Jan. 1989 Norway 8.0 June 1983 Belgium . 8.25 Jan. 1989 Germany, Fed. Rep. of 4.0 Jan. 1989 Switzerland .... 4.0 Jan. 1989 Brazil ... 49.0 Mar. 1981 Italy 12.5 Aug. 1988 United Kingdom2 Canada.. 11.43 Jan. 1989 Japan 2.5 Feb. 1987 Venezuela Oct. 1985 Denmark 7.0 Oct. 1983 Netherlands 5.0 Jan. 1989 1. As of the end of February 1981, the rate is that at which the Bank of France or makes advances against eligible commercial paper and/or government comdiscounts Treasury bills for 7 to 10 days. mercial banks or brokers. For countries with more than one rate applicable to 2. Minimum lending rate suspended as of Aug. 20, 1981. such discounts or advances, the rate shown is the one at which it is understood the NOTE. Rates shown are mainly those at which the central bank either discounts central bank transacts the largest proportion of its credit operations. 3.27 FOREIGN SHORT-TERM INTEREST RATES Percent per year, averages of daily figures 1988 1989 CCoouunnttrryy,, oorr ttyyppee 11998866 11998877 11998888 July Aug. Sept. Oct. Nov. Dec. Jan: 1 Eurodollars 6.70 7.07 7.86 8.09 8.47 8.31 8.51 8.91 9.30 9.28 2 United Kingdom 10.87 9.65 10.28 10.45 11.29 12.09 11.94 12.23 13.07 13.06 3 Canada 9.18 8.38 9.63 9.42 9.92 10.48 10.48 10.86 11.15 11.34 4 Germany 4.58 3.97 4.28 4.88 5.28 4.93 5.03 4.91 5.32 5.63 5 Switzerland 4.19 3.67 2.94 3.67 3.57 3.34 3.62 4.10 4.77 5.31 6 Netherlands 5.56 5.24 4.72 4.85 4.50 5.51 5.35 5.30 5.60 5.99 7 France 7.68 8.14 7.80 7.32 7.58 7.86 7.87 8.03 8.36 8.55 8 Italy 12.60 11.15 11.04 11.02 11.02 11.27 11.30 11.48 11.96 11.84 9 Belgium 8.04 7.01 6.69 6.84 7.25 7.39 7.24 7.18 7.38 7.59 10 Japan 4.96 3.87 3.96 3.84 3.98 4.15 4.26 4.22 4.16 4.24 NOTE. Rates are for 3-month interbank loans except for Canada, finance company paper; Belgium, 3-month Treasury bills; and Japan, Gensaki rate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A70 International Statistics • March 1989 3.28 FOREIGN EXCHANGE RATES1 Currency units per dollar 1988 1989 Country/currency 11998866 11998877 11998888 Aug. Sept. Oct. Nov. Dec. Jan. 1 Australia/dollar2 67.093 70.136 78.408 80.57 79.15 80.% 85.07 85.73 87.05 2 Austria/schilling 15.260 12.649 12.357 13.281 13.135 12.777 12.307 12.359 12.904 3 Belgium/franc 44.662 37.357 36.783 39.562 39.149 38.077 36.670 36.815 38.441 4 Canada/dollar 1.38% 1.3259 1.2306 1.2237 1.2267 1.2055 1.2186 1.1962 1.1913 5 China, P.R./yuan 3.4615 3.7314 3.7314 3.7314 3.7314 3.7314 3.7314 3.7314 3.7314 6 Denmark/krone 8.0954 6.8477 6.7411 7.2280 7.1764 7.0055 6.7547 6.7891 7.1143 7 Finland/markka 5.0721 4.4036 4.1933 4.4720 4.4282 4.3041 4.1522 4.1408 4.2553 8 France/franc 6.9256 6.0121 5.9594 6.3919 6.3515 6.1975 5.9746 5.9994 6.2538 9 Germany/deutsche mark 2.1704 1.7981 1.7569 1.8880 1.8668 1.8165 1.7491 1.7563 1.8356 10 Greece/drachma 139.93 135.47 142.00 151.62 151.47 148.71 145.22 146.10 152.25 11 Hong Kong/dollar 7.8037 7.7985 7.8071 7.8050 7.8106 7.8133 7.8095 7.8062 7.8047 12 India/rupee 12.597 12.943 13.899 14.217 14.490 14.720 14.966 15.019 15.092 13 Ireland/punt 134.14 148.79 152.49 142.17 143.60 147.30 152.70 152.29 145.82 14 ItalyAira 1491.16 1297.03 1302.39 1397.93 1393.15 1353.36 1300.22 1295.61 1345.12 15 Japan/yen 168.35 144.60 128.17 133.77 134.32 128.68 123.20 123.61 127.36 16 Malay sia/ringgit 2.5830 2.5185 2.6189 2.6520 2.6643 2.6785 2.6779 2.6935 2.7221 17 Netherlands/guilder 2.4484 2.0263 1.9778 2.1319 2.1063 2.0486 1.9729 1.9824 2.0723 18 New Zealand/dollar ... 52.456 59.327 65.558 64.815 61.480 62.113 64.067 63.621 62.412 19 Norway/krone 7.3984 6.7408 6.5242 6.9016 6.9150 6.7400 6.57% 6.5234 6.6808 20 Portugal/escudo 149.80 141.20 144.26 153.72 154.18 150.13 145.57 145.56 150.74 21 Singapore/dollar 2.1782 2.1059 2.0132 2.0417 2.0409 2.0202 1.9616 1.9442 1.9404 22 South Africa/rand 2.2918 2.0385 2.1900 2.4531 2.4575 2.4662 2.3943 2.3487 2.3847 23 South Korea/won 884.61 825.93 734.51 725.74 723.00 712.72 6%.08 687.89 685.28 24 Spain/peseta 140.04 123.54 116.52 124.122 124.36 120.02 115.17 113.73 114.78 25 Sri Lanka/rupee 27.933 29.471 31.847 32.807 32.953 32.989 32.989 33.016 33.132 26 Sweden/krona 7.1272 6.3468 6.1369 6.4878 6.4448 6.2694 6.0%8 6.0888 6.2725 27 Switzerland/franc 1.7979 1.4918 1.4642 1.5837 1.5763 1.5372 1.4675 1.4799 1.5619 28 Taiwan/dollar 37.837 31.756 28.636 28.693 28.914 28.880 28.170 28.199 27.821 29 Thailand/baht ± 26.314 25.774 25.312 25.560 25.548 25.365 25.146 25.146 25.322 30 United Kingdom/pound 146.77 163.98 178.13 169.65 168.40 173.87 180.85 182.58 177.37 MEMO , 31 United States/dollar3 ... 112.22 %.94 92.72 98.29 97.91 95.10 91.91 91.88 95.12 1. Averages of certified noon buying rates in New York for cable transfers. currencies of 10 industrial countries. The weight for each of the 10 countries is the Data in this table also appear in the Board's G.5 (405) release. For address, see 1972-76 average world trade of that country divided by the average world trade of inside front cover. all 10 countries combined. Series revised as of August 1978 (see FEDERAL 2. Value in U.S. cents. RESERVE BULLETIN, vol. 64, August 1978, p. 700). 3. Index of weighted-average exchange value of U.S. dollar against the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A71 Guide to Tabular Presentation, Statistical Releases, and Special Tables GUIDE TO TABULAR PRESENTAION Symbols and Abbreviations c Corrected 0 Calculated to be zero e Estimated n.a. Not available p Preliminary n.e.c. Not elsewhere classified r Revised (Notation appears on column heading when IPCs Individuals, partnerships, and corporations about half of the figures in that column are changed.) REITs Real estate investment trusts * Amounts insignificant in terms of the last decimal place RPs Repurchase agreements shown in the table (for example, less than 500,000 SMSAs Standard metropolitan statistical areas when the smallest unit given is millions) Cell not applicable General Information Minus signs are used to indicate (1) a decrease, (2) a negative obligations of the Treasury. "State and local government" figure, or (3) an outflow. also includes municipalities, special districts, and other po- "U.S. government securities" may include guaranteed litical subdivisions. issues of U.S. government agencies (the flow of funds figures In some of the tables, details do not add to totals because also include not fully guaranteed issues) as well as direct of rounding. STATISTICAL RELEASES List Published Semiannually, with Latest Bulletin Reference Issue Page Anticipated schedule of release dates for periodic releases December 1988 A77 SPECIAL TABLES Published Irregularly, with Latest Bulletin Reference Assets and liabilities of commercial banks, March 31, 1987 October 1987 A70 Assets and liabilities of commercial banks, June 30, 1987 February 1988 A70 Assets and liabilities of commercial banks, September 30, 1987 April 1988 A70 Assets and liabilities of commercial banks, December 31, 1987 June 1988 A70 Assets and liabilities of U.S. branches and agencies of foreign banks, September 30, 1987 February 1988 A76 Assets and liabilities of U.S. branches and agencies of foreign banks, December 31, 1987 June 1988 A76 Assets and liabilities of U.S. branches and agencies of foreign banks, March 31, 1988 September 1988 A82 Assets and liabilities of U.S. branches and agencies of foreign banks, June 30, 1988 January 1989 A78 Terms of lending at commercial banks, November 1987 September 1988 A76 Terms of lending at commercial banks, February 1988 May 1988 A70 Terms of lending at commercial banks, May 1988 September 1988 A70 Terms of lending at commercial banks, August 1988 January 1989 All Pro forma balance sheet and income statements for priced service operations, June 30, 1987 November 1987 A74 Pro forma balance sheet and income statements for priced service operations, September 30, 1987 February 1988 A80 Pro forma balance sheet and income statements for priced service operations, March 31, 1988 August 1988 A70 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A72 Federal Reserve Board of Governors ALAN GREENSPAN, Chairman MARTHA R. SEGER MANUEL H. JOHNSON, Vice Chairman WAYNE D. ANGELL OFFICE OF BOARD MEMBERS DIVISION OF INTERNATIONAL FINANCE JOSEPH R. COYNE, Assistant to the Board EDWIN M. TRUMAN, Staff Director DONALD J. WINN, Assistant to the Board LARRY J. PROMISEL, Senior Associate Director BOB STAHLY MOORE ,Special Assistant to the Board CHARLES J. SLEGMAN, Senior Associate Director DAVID H. HOWARD, Deputy Associate Director ROBERT F. GEMMILL, Staff Adviser LEGAL DIVISION DONALD B. ADAMS, Assistant Director PETER HOOPER III, Assistant Director MICHAEL BRADFIELD, General Counsel KAREN H. JOHNSON, Assistant Director J. VIRGIL MATTINGLY, JR., Deputy General Counsel RALPH W. SMITH, JR., Assistant Director RICHARD M. ASHTON, Associate General Counsel OLIVER IRELAND, Associate General Counsel RICKI R. TLGERT, Associate General Counsel DIVISION OF RESEARCH AND STATISTICS SCOTT G. ALVAREZ, Assistant General Counsel MARYELLEN A. BROWN, Assistant to the General Counsel MICHAEL J. PRELL, Director EDWARD C. ETTIN, Deputy Director THOMAS D. SIMPSON, Associate Director OFFICE OF THE SECRETARY LAWRENCE SLIFMAN, Associate Director MARTHA BETHEA, Deputy Associate Director PETER A. TINSLEY, Deputy Associate Director WILLIAM W. WILES, Secretary JENNIFER J. JOHNSON, Associate Secretary MYRON L. KWAST, Assistant Director BARBARA R. LOWREY, Associate Secretary SUSAN J. LEPPER, Assistant Director MARTHA S. SCANLON, Assistant Director DAVID J. STOCKTON, Assistant Director DIVISION OF CONSUMER JOYCE K. ZLCKLER, Assistant Director LEVON H. GARABEDIAN, Assistant Director AND COMMUNITY AFFAIRS (Administration) GRIFFITH L. GARWOOD, Director GLENN E. LONEY, Assistant Director DIVISION OF MONETARY AFFAIRS ELLEN MALAND, Assistant Director DOLORES S. SMITH, Assistant Director DONALD L. KOHN, Director DAVID E. LINDSEY, Deputy Director DIVISION OF BANKING BRIAN F. MADIGAN, Assistant Director RICHARD D. PORTER, Assistant Director SUPERVISION AND REGULATION NORMAND R.V. BERNARD, Special Assistant to the Board WILLIAM TAYLOR, Staff Director DON E. KLINE, Associate Director OFFICE OF THE INSPECTOR GENERAL FREDERICK M. STRUBLE, Associate Director WILLIAM A. RYBACK, Deputy Associate Director BRENT L. BOWEN, Inspector General STEPHEN C. SCHEMERING, Deputy Associate Director RICHARD SPILLENKOTHEN, Deputy Associate Director HERBERT A. BIERN, Assistant Director JOE M. CLEAVER, Assistant Director ROGER T. COLE, Assistant Director JAMES I. GARNER, Assistant Director JAMES D. GOETZINGER, Assistant Director MICHAEL G. MARTINSON, Assistant Director ROBERT S. PLOTKIN, Assistant Director SIDNEY M. SUSSAN, Assistant Director LAURA M. HOMER, Securities Credit Officer Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A73 and Official Staff H. ROBERT HELLER JOHN P. LA WARE EDWARD W. KELLEY, JR. OFFICE OF OFFICE OF STAFF DIRECTOR FOR STAFF DIRECTOR FOR MANAGEMENT FEDERAL RESERVE BANK ACTIVITIES S. DAVID FROST, Staff Director THEODORE E. ALLISON, Staff Director EDWARD T. MULRENIN, Assistant Staff Director PORTIA W. THOMPSON, Equal Employment Opportunity Programs Officer DIVISION OF FEDERAL RESERVE BANK OPERATIONS DIVISION OF HUMAN RESOURCES CLYDE H. FARNSWORTH, JR., Director MANAGEMENT DAVID L. ROBINSON, Associate Director C. WILLIAM SCHLEICHER, JR., Associate Director DAVID L. SHANNON, Director BRUCE J. SUMMERS, Associate Director JOHN R. WEIS, Associate Director CHARLES W. BENNETT, Assistant Director ANTHONY V. DIGIOIA, Assistant Director JACK DENNIS, JR., Assistant Director JOSEPH H. HAYES, JR., Assistant Director EARL G. HAMILTON, Assistant Director FRED HOROWITZ, Assistant Director JOHN H. PARRISH, Assistant Director LOUISE L. ROSEMAN, Assistant Director FLORENCE M. YOUNG, Adviser OFFICE OF THE CONTROLLER GEORGE E. LIVINGSTON, Controller STEPHEN J. CLARK, Assistant Controller (Programs and Budgets) DARRELL R. PAULEY, Assistant Controller (Finance) DIVISION OF SUPPORT SERVICES ROBERT E. FRAZIER, Director GEORGE M. LOPEZ, Assistant Director DAVID L. WILLIAMS, Assistant Director OFFICE OF THE EXECUTIVE DIRECTOR FOR INFORMATION RESOURCES MANAGEMENT ALLEN E. BEUTEL, Executive Director STEPHEN R. MALPHRUS, Deputy Executive Director DIVISION OF HARDWARE AND SOFTWARE SYSTEMS BRUCE M. BEARDSLEY, Director THOMAS C. JUDD, Assistant Director ELIZABETH B. RLGGS, Assistant Director ROBERT J. ZEMEL, Assistant Director DIVISION OF APPLICATIONS DEVELOPMENT AND STATISTICAL SERVICES WILLIAM R. JONES, Director DAY W. RADEBAUGH, Assistant Director RICHARD C. STEVENS, Assistant Director Digitized for FPRATARSIECIRA A. WELCH, Assistant Director http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A74 Federal Reserve Bulletin • March 1989 Federal Open Market Committee FEDERAL OPEN MARKET COMMITTEE MEMBERS ALAN GREENSPAN, Chairman E. GERALD CORRIGAN, Vice Chairman WAYNE D. ANGELL MANUEL H. JOHNSON JOHN P. LAWARE ROGER GUFFEY SILAS KEEHN THOMAS C. MELZER H. ROBERT HELLER EDWARD W. KELLEY, JR. MARTHA R. SEGER RICHARD F. SYRON ALTERNATE MEMBERS EDWARD G. BOEHNE W. LEE HOSKINS JAMES H. OLTMAN ROBERT H. BOYKIN GARY H. STERN STAFF DONALD L. KOHN, Secretary and Economist JOHN M. DAVIS, Associate Economist NORMAND R.V. BERNARD, Assistant Secretary RICHARD G. DAVIS, Associate Economist MICHAEL BRADFIELD, General Counsel DAVID E. LINDSEY, Associate Economist ERNEST T. PATRIKIS, Deputy General Counsel CHARLES J. SLEGMAN, Associate Economist MICHAEL J. PRELL, Economist THOMAS D. SIMPSON, Associate Economist EDWIN M. TRUMAN, Economist LAWRENCE SUFMAN, Associate Economist JOHN H. BEEBE, Associate Economist SHEILA L. TSCHINKEL, Associate Economist J. ALFRED BROADDUS, JR., Associate Economist PETER D. STERNLIGHT, Manager for Domestic Operations, System Open Market Account SAM Y. CROSS, Manager for Foreign Operations, System Open Market Account FEDERAL ADVISORY COUNCIL DONALD N. BRANDIN, President SAMUEL A. MCCULLOUGH, Vice President J. TERRENCE MURRAY, First District B. KENNETH WEST, Seventh District WILLARD C. BUTCHER, Second District DONALD N. BRANDIN, Eighth District SAMUEL A. MCCULLOUGH, Third District LLOYD P. JOHNSON, Ninth District THOMAS H. O'BRIEN, Fourth District JORDAN L. HAINES, Tenth District FREDERICK DEANE, JR., Fifth District JAMES E. BURT III, Eleventh District KENNETH L. ROBERTS, Sixth District PAUL HAZEN, Twelfth District HERBERT V. PROCHNOW, Secretary WILLIAM J. KORSVIK, Associate Secretary Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A75 and Advisory Councils CONSUMER ADVISORY COUNCIL JUDITH N. BROWN, Edina, Minnesota, Chairman WILLIAM E. ODOM, Dearborn, Michigan, Vice Chairman NAOMI G. ALBANESE, Greensboro, North Carolina ROBERT A. HESS, Washington, D.C. GEORGE H. BRAASCH, Chicago, Illinois RAMON E. JOHNSON, Salt Lake City, Utah BETTY TOM CHU, Arcadia, California BARBARA KAUFMAN, San Francisco, California CLIFF E. COOK, Tacoma, Washington A. J. (JACK) KING, Kalispell, Montana JERRY D. CRAFT, Atlanta, Georgia MICHELLE S. MEIER, Washington, D.C. DONALD C. DAY, Boston, Massachusetts RICHARD L. D. MORSE, Manhattan, Kansas R.B.(JOE) DEAN, JR., Columbia, South Carolina LINDA K. PAGE, Columbus, Ohio RICHARD B. DOBY, Denver, Colorado SANDRA PHILLIPS, Pittsburgh, Pennsylvania WILLIAM C. DUNKELBERG, Philadelphia, Pennsylvania VINCENT P. QUAYLE, Baltimore, Maryland RICHARD H. FINK, Washington, D.C. CLIFFORD N. ROSENTHAL, New York, New York JAMES FLETCHER, Chicago, Illinois ALAN M. SPURGIN, New York, New York STEPHEN GARDNER, Dallas, Texas RALPH E. SPURGIN, Columbus, Ohio ELENA G. HANGGI, Little Rock, Arkansas DAVID P. WARD, Peapack, New Jersey JAMES HEAD, Berkeley, California LAWRENCE WINTHROP, Portland, Oregon THRIFT INSTITUTIONS ADVISORY COUNCIL GERALD M. CZARNECKI, Honolulu, Hawaii, President DONALD B. SHACKELFORD, Columbus, Ohio, Vice President CHARLOTTE CHAMBERLAIN, Glendale, California JOE C. MORRIS, Overland Park, Kansas ROBERT S. DUNCAN, Hattiesburg, Mississippi JOSEPH W. MOSMILLER, Baltimore, Maryland ADAM A. JAHNS, Chicago, Illinois LOUIS H. PEPPER, Seattle, Washington H. C. KLEIN, Jacksonville, Arkansas MARION O. SANDLER, Oakland, California PHILIP E. LAMB, Springfield, Massachsetts CHARLES B. STUZIN, Miami, Florida Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A76 Federal Reserve Board Publications For ordering assistance, write PUBLICATIONS SER- FEDERAL RESERVE REGULATORY SERVICE. Looseleaf; up- VICES, MS-138, Board of Governors of the Federal Reserve dated at least monthly. (Requests must be prepaid.) System, Washington, D.C. 20551 or telephone (202) 452- Consumer and Community Affairs Handbook. $75.00 per 3244. When a charge is indicated, payment should accom- year. pany request and be made payable to the Board of Governors Monetary Policy and Reserve Requirements Handbook. of the Federal Reserve System. Payment from foreign resi- $75.00 per year. dents should be drawn on a U.S. bank. Securities Credit Transactions Handbook. $75.00 per year. The Payment System Handbook. $75.00 per year. THE FEDERAL RESERVE SYSTEM—PURPOSES AND FUNC- Federal Reserve Regulatory Service. 3 vols. (Contains all TIONS. 1984. 120 pp. three Handbooks plus substantial additional material.) ANNUAL REPORT. $200.00 per year. ANNUAL REPORT: BUDGET REVIEW, 1986-87. Rates for subscribers outside the United States are as FEDERAL RESERVE BULLETIN. Monthly. $20.00 per year or follows and include additional air mail costs: $2.00 each in the United States, its possessions, Canada, Federal Reserve Regulatory Service, $250.00 per year. and Mexico; 10 or more of same issue to one address, Each Handbook, $90.00 per year. $18.00 per year or $1.75 each. Elsewhere, $24.00 per THE U.S. ECONOMY IN AN INTERDEPENDENT WORLD: A year or $2.50 each. MULTICOUNTRY MODEL, May 1984. 590 pp. $14.50 BANKING AND MONETARY STATISTICS. 1914-1941. (Reprint each. of Part I only) 1976. 682 pp. $5.00. PROCESSING AN APPLICATION THROUGH THE FEDERAL RE- ANNUAL STATISTICAL DIGEST SERVE SYSTEM. August 1985. 30 pp. 1974-78. 1980. 305 pp. $10.00 per copy. INDUSTRIAL PRODUCTION—1986 EDITION. December 1986. 1981. 1982. 239 pp. $ 6.50 per copy. 440 pp. $9.00 each. 1982. 1983. 266 pp. $ 7.50 per copy. FINANCIAL FUTURES AND OPTIONS IN THE U.S. ECONOMY. 1983. 1984. 264 pp. $11.50 per copy. December 1986. 264 pp. $10.00 each. 1984. 1985. 254 pp. $12.50 per copy. 1985. 1986. 231 pp. $15.00 per copy. 1986. 1987. 288 pp. $15.00 per copy. 1987. 1988. 272 pp. $15.00 per copy. CONSUMER EDUCATION PAMPHLETS HISTORICAL CHART BOOK. Issued annually in Sept. $1.25 Short pamphlets suitable for classroom use. Multiple copies each in the United States, its possessions, Canada, and are available without charge. Mexico; 10 or more to one address, $1.00 each. Elsewhere, $1.50 each. Consumer Handbook on Adjustable Rate Mortgages SELECTED INTEREST AND EXCHANGE RATES—WEEKLY SE- Consumer Handbook to Credit Protection Laws RIES OF CHARTS. Weekly. $24.00 per year or $.60 each in Fair Credit Billing the United States, its possessions, Canada, and Mexico; Federal Reserve Glossary 10 or more of same issue to one address, $22.50 per year A Guide to Business Credit and the Equal Credit Opportunity or $.55 each. Elsewhere, $30.00 per year or $.70 each. Act THE FEDERAL RESERVE ACT, and other statutory provisions A Guide to Federal Reserve Regulations affecting the Federal Reserve System, as amended How to File A Consumer Credit Complaint through April 20, 1983, with Supplements covering If You Use A Credit Card amendments through August 1987. 576 pp. $7.00. REGULATIONS OF THE BOARD OF GOVERNORS OF THE Series on the Structure of the Federal Reserve System FEDERAL RESERVE SYSTEM. The Board of Governors of the Federal Reserve System ANNUAL PERCENTAGE RATE TABLES (Truth in Lending— The Federal Open Market Committee Regulation Z) Vol. I (Regular Transactions). 1969. 100 Federal Reserve Bank Board of Directors pp. Vol. II (Irregular Transactions). 1969. 116 pp. Each Federal Reserve Banks volume $2.25; 10 or more of same volume to one Organization and Advisory Committees address, $2.00 each. INTRODUCTION TO FLOW OF FUNDS. 1980.68 pp. $1.50 each; A Consumer's Guide to Mortgage Lock-Ins 10 or more to one address, $1.25 each. A Consumer's Guide to Mortgage Closings PUBLIC POLICY AND CAPITAL FORMATION. 1981. 326 pp. A Consumer's Guide to Mortgage Refinancing $13.50 each. Making Deposits: When Will Your Money Be Available? Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

All PAMPHLETS FOR FINANCIAL INSTITUTIONS VESTIGATION, by Bonnie E. Loopesko. November Short pamphlets on regulatory compliance, primarily suit- 1983. Out of print. able for banks, bank holding companies and creditors. 134. SMALL EMPIRICAL MODELS OF EXCHANGE MARKET INTERVENTION: A REVIEW OF THE LITERATURE, by Limit of 50 copies Ralph W. Tryon. October 1983. 14 pp. Out of print. 135. SMALL EMPIRICAL MODELS OF EXCHANGE MARKET The Board of Directors' Opportunities in Community Rein- INTERVENTION: APPLICATIONS TO CANADA, GERvestment MANY, AND JAPAN, by Deborah J. Danker, Richard A. The Board of Directors' Role in Consumer Law Compliance Haas, Dale W. Henderson, Steven A. Symansky, and Combined Construction/Permanent Loan Disclosure and Ralph W. Tryon. April 1985. 27 pp. Out of print. Regulation Z 136. THE EFFECTS OF FISCAL POLICY ON THE U.S. ECON- Community Development Corporations and the Federal Re- OMY, by Darrell Cohen and Peter B. Clark. January serve 1984. 16 pp. Out of print. Construction Loan Disclosures and Regulation Z 137. THE IMPLICATIONS FOR BANK MERGER POLICY OF Finance Charges Under Regulation Z FINANCIAL DEREGULATION, INTERSTATE BANKING, How to Determine the Credit Needs of Your Community AND FINANCIAL SUPERMARKETS, by Stephen A. Regulation Z: The Right of Rescission Rhoades. February 1984. Out of print. The Right to Financial Privacy Act 138. ANTITRUST LAWS, JUSTICE DEPARTMENT GUIDE- Signature Rules in Community Property States: Regulation B LINES, AND THE LIMITS OF CONCENTRATION IN LOCAL Signature Rules: Regulation B BANKING MARKETS, by James Burke. June 1984.14 pp. Timing Requirements for Adverse Action Notices: Regula- Out of print. tion B 139. SOME IMPLICATIONS OF FINANCIAL INNOVATIONS IN What An Adverse Action Notice Must Contain: Regulation B THE UNITED STATES, by Thomas D. Simpson and Understanding Prepaid Finance Charges: Regulation Z Patrick M. Parkinson. August 1984. 20 pp. 140. GEOGRAPHIC MARKET DELINEATION: A REVIEW OF THE LITERATURE, by John D. Wolken. November 1984. 38 pp. Out of print. STAFF STUDIES: Summaries Only Printed in the 141. A COMPARISON OF DIRECT DEPOSIT AND CHECK PAY- Bulletin MENT COSTS, by William Dudley. November 1984. 15 pp. Out of print. Studies and papers on economic and financial subjects that are of general interest. Requests to obtain single copies of 142. MERGERS AND ACQUISITIONS BY COMMERCIAL BANKS, 1960-83, by Stephen A. Rhoades. December the full text or to be added to the mailing list for the series 1984. 30 pp. Out of print. may be sent to Publications Services. 143. COMPLIANCE COSTS AND CONSUMER BENEFITS OF Staff Studies 115-125 are out of print. THE ELECTRONIC FUND TRANSFER ACT: RECENT SUR- VEY EVIDENCE, by Frederick J. Schroeder. April 1985. 114. MULTIBANK HOLDING COMPANIES: RECENT EVI- 23 pp. Out of print. DENCE ON COMPETITION AND PERFORMANCE IN 144. SCALE ECONOMIES IN COMPLIANCE COSTS FOR CON- BANKING MARKETS, by Timothy J. Curry and John T. SUMER CREDIT REGULATIONS: THE TRUTH IN LEND- Rose. Jan. 1982. 9 pp. ING AND EQUAL CREDIT OPPORTUNITY LAWS, by 126. DEFINITION AND MEASUREMENT OF EXCHANGE MAR- Gregory E. Elliehausen and Robert D. Kurtz. May KET INTERVENTION, by Donald B. Adams and Dale W. 1985. 10 pp. Henderson. August 1983. 5 pp. Out of print. 145. SERVICE CHARGES AS A SOURCE OF BANK INCOME 127. U.S. EXPERIENCE WITH EXCHANGE MARKET INTER- AND THEIR IMPACT ON CONSUMERS, by Glenn B. VENTION: JANUARY-MARCH 1975, by Margaret L. Canner and Robert D. Kurtz. August 1985. 31 pp. Out of Greene. August 1984. 16 pp. Out of print. print. 128. U.S. EXPERIENCE WITH EXCHANGE MARKET INTER- 146. THE ROLE OF THE PRIME RATE IN THE PRICING OF VENTION: SEPTEMBER 1977-DECEMBER 1979, by Mar- BUSINESS LOANS BY COMMERCIAL BANKS, 1977-84, garet L. Greene. October 1984. 40 pp. Out of print. by Thomas F. Brady. November 1985. 25 pp. 129. U.S. EXPERIENCE WITH EXCHANGE MARKET INTER- 147. REVISIONS IN THE MONETARY SERVICES (DIVISIA) VENTION: OCTOBER 1980-OCTOBER 1981, by Margaret INDEXES OF THE MONETARY AGGREGATES, by Helen L. Greene. August 1984. 36 pp. T. Farr and Deborah Johnson. December 1985. 42 pp. 130. EFFECTS OF EXCHANGE RATE VARIABILITY ON INTER- 148. THE MACROECONOMIC AND SECTORAL EFFECTS OF NATIONAL TRADE AND OTHER ECONOMIC VARIABLES: THE ECONOMIC RECOVERY TAX ACT: SOME SIMULA- A REVIEW OF THE LITERATURE, by Victoria S. Farrell TION RESULTS, by Flint Brayton and Peter B. Clark. with Dean A. DeRosa and T. Ashby McCown. January December 1985. 17 pp. 1984. Out of print. 149. THE OPERATING PERFORMANCE OF ACQUIRED FIRMS 131. CALCULATIONS OF PROFITABILITY FOR U.S. DOLLAR- IN BANKING BEFORE AND AFTER ACQUISITION, by DEUTSCHE MARK INTERVENTION, by Laurence R. Ja- Stephen A. Rhoades. April 1986. 32 pp. cobson. October 1983. 8 pp. 150. STATISTICAL COST ACCOUNTING MODELS IN BANK- 132. TIME-SERIES STUDIES OF THE RELATIONSHIP BE- ING: A REEXAMINATION AND AN APPLICATION, by TWEEN EXCHANGE RATES AND INTERVENTION: A RE- John T. Rose and John D. Wolken. May 1986. 13 pp. VIEW OF THE TECHNIQUES AND LITERATURE, by Ken- 151. RESPONSES TO DEREGULATION: RETAIL DEPOSIT neth Rogoff. October 1983. 15 pp. PRICING FROM 1983 THROUGH 1985, by Patrick I. Ma- 133. RELATIONSHIPS AMONG EXCHANGE RATES, INTER- honey, Alice P. White, Paul F. O'Brien, and Mary M. VENTION, AND INTEREST RATES: AN EMPIRICAL IN- McLaughlin. January 1987. 30 pp. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A78 152. DETERMINANTS OF CORPORATE MERGER ACTIVITY: A Survey of Consumer Finances, 1983. 9/84. REVIEW OF THE LITERATURE, by Mark J. Warshawsky. Bank Lending to Developing Countries. 10/84. April 1987. 18 pp. Survey of Consumer Finances, 1983: A Second Report. 153. STOCK MARKET VOLATILITY, by Carolyn D. Davis and 12/84. Alice P. White. September 1987. 14 pp. Union Settlements and Aggregate Wage Behavior in the 154. THE EFFECTS ON CONSUMERS AND CREDITORS OF 1980s. 12/84. PROPOSED CEILINGS ON CREDIT CARD INTEREST The Thrift Industry in Transition. 3/85. RATES, by Glenn B. Canner and James T. Fergus. A Revision of the Index of Industrial Production. 7/85. October 1987. 26 pp. Financial Innovation and Deregulation in Foreign Industrial 155. THE FUNDING OF PRIVATE PENSION PLANS, by Mark J. Countries. 10/85. Warshawsky. November 1987. 25 pp. Recent Developments in the Bankers Acceptance Market. 1/86. 156. INTERNATIONAL TRENDS FOR U.S. BANKS AND BANK- The Use of Cash and Transaction Accounts by American ING MARKETS, by James V. Houpt. May 1988. 47 pp. Families. 2/86. Financial Characteristics of High-Income Families. 3/86. Prices, Profit Margins, and Exchange Rates. 6/86. REPRINTS OF BULLETIN ARTICLES Agricultural Banks under Stress. 7/86. Foreign Lending by Banks: A Guide to International and Most of the articles reprinted do not exceed 12 pages. U.S. Statistics. 10/86. Recent Developments in Corporate Finance. 11/86. Limit of 10 copies Measuring the Foreign-Exchange Value of the Dollar. 6/87. Foreign Experience with Targets for Money Growth. 10/83. Changes in Consumer Installment Debt: Evidence from the Intervention in Foreign Exchange Markets: A Summary of 1983 and 1986 Surveys of Consumer Finances. 10/87. Ten Staff Studies. 11/83. U.S. International Transactions in 1987. 5/88. A Financial Perspective on Agriculture. 1/84. Home Equity Lines of Credit. 6/88. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A79 Index to Statistical Tables References are to pages A3-A71 although the prefix "A" is omitted in this index ACCEPTANCES, bankers (See Bankers acceptances) Demand deposits—Continued Agricultural loans, commercial banks, 19, 20 Ownership by individuals, partnerships, and Assets and liabilities (See also Foreigners) corporations, 22 Banks, by classes, 18-20 Turnover, 15 Domestic finance companies, 36 Depository institutions Federal Reserve Banks, 10 Reserve requirements, 8 Financial institutions, 26 Reserves and related items, 3, 4, 5, 12 Foreign banks, U.S. branches and agencies, 21 Deposits (See also specific types) Automobiles Banks, by classes, 3, 18-20, 21 Consumer installment credit, 39, 40 Federal Reserve Banks, 4, 10 Production, 49, 50 Turnover, 15 Discount rates at Reserve Banks and at foreign central banks and foreign countries (See Interest rates) Discounts and advances by Reserve Banks (See Loans) BANKERS acceptances, 9, 23, 24 Dividends, corporate, 35 Bankers balances, 18-20. (See also Foreigners) Bonds CSee also U.S. government securities) New issues, 34 EMPLOYMENT, 47 Rates, 24 Eurodollars, 24 Branch banks, 21, 57 Business activity, nonfinancial, 46 FARM mortgage loans, 38 Business expenditures on new plant and equipment, 35 Federal agency obligations, 4, 9, 10, 11, 31, 32 Business loans (See Commercial and industrial loans) Federal credit agencies, 33 Federal finance Debt subject to statutory limitation, and types and own- CAPACITY utilization, 48 ership of gross debt, 30 Capital accounts Receipts and outlays, 28, 29 Banks, by classes, 18 Treasury financing of surplus, or deficit, 28 Federal Reserve Banks, 10 Treasury operating balance, 28 Central banks, discount rates, 69 Federal Financing Bank, 28, 33 Certificates of deposit, 24 Federal funds, 6, 17, 19, 20, 21, 24, 28 Commercial and industrial loans Federal Home Loan Banks, 33 Commercial banks, 16, 19 Federal Home Loan Mortgage Corporation, 33, 37, 38 Weekly reporting banks, 19-21 Federal Housing Administration, 33, 37, 38 Commercial banks Federal Land Banks, 38 Assets and liabilities, 18-20 Federal National Mortgage Association, 33, 37, 38 Commercial and industrial loans, 16, 18, 19, 20, 21 Federal Reserve Banks Consumer loans held, by type, and terms, 39, 40 Condition statement, 10 Loans sold outright, 19 Discount rates (See Interest rates) Nondeposit funds, 17 U.S. government securities held, 4, 10, 11, 30 Real estate mortgages held, by holder and property, 38 Federal Reserve credit, 4, 5, 10, 11 Time and savings deposits, 3 Federal Reserve notes, 10 Commercial paper, 23, 24, 36 Federal Savings and Loan Insurance Corporation insured Condition statements (See Assets and liabilities) institutions, 26 Construction, 46, 51 Federally sponsored credit agencies, 33 Consumer installment credit, 39, 40 Finance companies Consumer prices, 46, 48 Assets and liabilities, 36 Consumption expenditures, 53, 54 Business credit, 36 Corporations Loans, 39, 40 Nonfinancial, assets and liabilities, 35 Paper, 23, 24 Profits and their distribution, 35 Financial institutions Security issues, 34, 67 Loans to, 19, 20, 21 Cost of living (See Consumer prices) Selected assets and liabilities, 26 Credit unions, 26, 39. (See also Thrift institutions) Float, 4 Currency and coin, 18 Flow of funds, 41, 43, 44, 45 Currency in circulation, 4, 13 Foreign banks, assets and liabilities of U.S. branches and Customer credit, stock market, 25 agencies, 21 Foreign currency operations, 10 Foreign deposits in U.S. banks, 4, 10, 19, 20 Foreign exchange rates, 70 DEBITS to deposit accounts, 15 Foreign trade, 56 Debt (See specific types of debt or securities) Foreigners Demand deposits Claims on, 57, 59, 62, 63, 64, 66 Banks, by classes, 18-21 Liabilities to, 20, 56, 57, 59, 60, 65, 67, 68 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A80 GOLD Real estate loans—Continued Certificate account, 10 Financial institutions, 26 Stock, 4, 56 Terms, yields, and activity, 37 Government National Mortgage Association, 33, 37, 38 Type of holder and property mortgaged, 38 Gross national product, 53 Repurchase agreements, 6, 17, 19, 20, 21 Reserve requirements, 8 HOUSING, new and existing units, 51 Reserves Commercial banks, 18 INCOME, personal and national, 46, 53, 54 Depository institutions, 3, 4, 5, 12 Industrial production, 46, 49 Federal Reserve Banks, 10 Installment loans, 39, 40 U.S. reserve assets, 56 Insurance companies, 26, 30, 38 Residential mortgage loans, 37 Interest rates Retail credit and retail sales, 39, 40, 46 Bonds, 24 Consumer installment credit, 40 SAVING Federal Reserve Banks, 7 Flow of funds, 41, 43, 44, 45 Foreign central banks and foreign countries, 69 National income accounts, 53 Money and capital markets, 24 Savings and loan associations, 26, 38, 39, 41. (See also Mortgages, 37 Thrift institutions) Prime rate, 23 Savings banks, 26, 38, 39 International capital transactions of United States, 55-69 Savings deposits (See Time and savings deposits) International organizations, 59, 60, 62, 65, 66 Securities (See also specific types) Inventories, 53 Federal and federally sponsored credit agencies, 33 Investment companies, issues and assets, 35 Foreign transactions, 67 Investments (See also specific types) New issues, 34 Banks, by classes, 18, 19, 20, 21, 26 Prices, 25 Commercial banks, 3, 16, 18-20, 38 Special drawing rights, 4, 10, 55, 56 Federal Reserve Banks, 10, 11 State and local governments Financial institutions, 26, 38 Deposits, 19, 20 Holdings of U.S. government securities, 30 LABOR force, 47 New security issues, 34 Life insurance companies (See Insurance companies) Ownership of securities issued by, 19, 20, 26 Loans (See also specific types) Rates on securities, 24 Banks, by classes, 18—20 Stock market, selected statistics, 25 Commercial banks, 3, 16, 18-20 Stocks (See also Securities) Federal Reserve Banks, 4, 5, 7, 10, 11 New issues, 34 Financial institutions, 26, 38 Prices, 25 Insured or guaranteed by United States, 37, 38 Student Loan Marketing Association, 33 MANUFACTURING Capacity utilization, 48 TAX receipts, federal, 29 Production, 48, 50 Thrift institutions, 3. (See also Credit unions and Savings Margin requirements, 25 and loan associations) Member banks (See also Depository institutions) Time and savings deposits, 3, 13, 17, 18, 19, 20, 21 Federal funds and repurchase agreements, 6 Trade, foreign, 56 Reserve requirements, 8 Treasury cash, Treasury currency, 4 Mining production, 50 Treasury deposits, 4, 10, 28 Mobile homes shipped, 51 Treasury operating balance, 28 Monetary and credit aggregates, 3, 12 UNEMPLOYMENT, 47 Money and capital market rates, 24 U.S. government balances Money stock measures and components, 3, 13 Mortgages (See Real estate loans) Commercial bank holdings, 18, 19, 20 Mutual funds, 35 Treasury deposits at Reserve Banks, 4, 10, 28 U.S. government securities Mutual savings banks (See Thrift institutions) Bank holdings, 18-20, 21, 30 Dealer transactions, positions, and financing, 32 NATIONAL defense outlays, 29 Federal Reserve Bank holdings, 4, 10, 11, 30 National income, 53 Foreign and international holdings and transactions, 10, 30, 68 OPEN market transactions, 9 Open market transactions, 9 Outstanding, by type and holder, 26, 30 PERSONAL income, 54 Rates, 24 Prices U.S. international transactions, 55-69 Consumer and producer, 46, 52 Utilities, production, 50 Stock market, 25 Prime rate, 23 Producer prices, 46, 52 VETERANS Administration, 37, 38 Production, 46, 49 Profits, corporate, 35 WEEKLY reporting banks, 19-21 Wholesale (producer) prices, 46, 52 REAL estate loans Banks, by classes, 16, 19, 20, 38 YIELDS (See Interest rates) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A81 Federal Reserve Banks, Branches, and Offices FEDERAL RESERVE BANK Chairman President Vice President branch, or facility Zip Deputy Chairman First Vice President in charge of branch BOSTON* 02106 George N. Hatsopoulos Richard F. Syron Richard N. Cooper Robert W. Eisenmenger NEW YORK* 10045 Cyrus R. Vance E. Gerald Corrigan Ellen V. Futter James H. Oltman Buffalo 14240 Mary Ann Lambertsen John T. Keane PHILADELPHIA 19105 Peter A. Benoliel Edward G. Boehne Gunnar E. Sarsten William H. Stone, Jr. CLEVELAND* 44101 Charles W. Parry W. Lee Hoskins John R. Miller William H. Hendricks Cincinnati 45201 Owen B. Butler Charles A. Cerino1 Pittsburgh 15230 James E. Haas Harold J. Swart1 RICHMOND* 23219 Hanne Merriman Robert P. Black Leroy T. Canoles, Jr. Jimmie R. Monhollon Baltimore 21203 Thomas R. Shelton Robert D. McTeer, Jr.1 Charlotte 28230 William E. Masters Albert D. Tinkelenberg1 Culpeper Communications John G. Stoides1 and Records Center 22701 ATLANTA 30303 Bradley Currey, Jr. Robert P. Forrestal Larry L. Prince Jack Guynn Delmar Harrison1 Birmingham 35283 Nelda P. Stephenson Fred R. Herr1 Jacksonville 32231 Winnie F. Taylor James D. Hawkins1 Miami 33152 Jose L. Saumat James Curry III Nashville 37203 Patsy R. Williams Donald E. Nelson New Orleans 70161 James A. Hefner Robert J. Musso CHICAGO* 60690 Robert J. Day Silas Keehn Marcus Alexis Daniel M. Doyle Detroit 48231 Richard T. Lindgren Roby L. Sloan1 ST. LOUIS 63166 Robert L. Virgil, Jr. Thomas C. Melzer H. Edwin Trusheim James R. Bowen Little Rock 72203 L. Dickson Flake John F. Breen Louisville 40232 Thomas A. Alvey Howard Wells Memphis 38101 Seymour B. Johnson Paul I. Black, Jr. MINNEAPOLIS 55480 Michael W. Wright Gary H. Stern John A. Rollwagen Thomas E. Gainor Helena 59601 Warren H. Ross Robert F. McNellis KANSAS CITY 64198 Fred W. Lyons, Jr. Roger Guffey To be announced Henry R. Czerwinski Denver 80217 James C. Wilson Kent M. Scott Oklahoma City 73125 Patience S. Latting David J. France Omaha 68102 Kenneth L. Morrison Harold L. Shewmaker DALLAS 75222 Bobby R. Inman Robert H. Boy kin Hugh G. Robinson William H.Wallace Tony J. Salvaggio1 El Paso 79999 Diana S. Natalicio Sammie C. Clay Houston 77252 Andrew L. Jefferson, Jr. Robert Smith, III1 San Antonio 78295 Lawrence E. Jenkins Thomas H. Robertson SAN FRANCISCO 94120 Robert F. Erburu Robert T. Parry Carolyn S. Chambers Carl E. Powell John F. Hoover1 Los Angeles 90051 Yvonne B. Burke Thomas C. Warren2 Portland 97208 Paul E. Bragdon Angelo S. Carella1 Salt Lake City 84125 Don M. Wheeler E. Ronald Liggett1 Seattle 98124 Carol A. Nygren Gerald R. Kelly1 * Additional offices of these Banks are located at Lewiston, Maine 04240; Windsor Locks, Connecticut 06096; Cranford, New Jersey 07016; Jericho, New York 11753; Utica at Oriskany, New York 13424; Columbus, Ohio 43216; Columbia, South Carolina 29210; Charleston, West Virginia 25311; Des Moines, Iowa 50306; Indianapolis, Indiana 46204; and Milwaukee, Wisconsin 53202. Digitized for FR1.A SSeEniRor Vice President. http://fraser.stlo2.u Eisxfeecdu.toivrge /V ice President. Federal Reserve Bank of St. Louis

A82 The Federal Reserve System Boundaries of Federal Reserve Districts and Their Branch Territories LEGEND —Boundaries of Federal Reserve Districts ® Federal Reserve Bank Cities Boundaries of Federal Reserve Branch • Federal Reserve Branch Cities Territories Federal Reserve Bank Facility Q Board of Governors of the Federal Reserve System Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Publications of Interest FEDERAL RESERVE CONSUMER CREDIT Three booklets on the mortgage process are also PUBLICATIONS available: A Consumer's Guide to Mortgage Refinancing, A Consumer's Guide to Mortgage Lock-Ins, and The Federal Reserve Board publishes a series of A Consumer's Guide to Mortgage Closings. These pamphlets covering individual credit laws and topics, booklets were prepared in conjunction with the Fedas pictured below. The series includes such subjects as eral Home Loan Bank Board and in consultation with how the Equal Credit Opportunity Act protects wom- other federal agencies and trade and consumer en against discrimination in their credit dealings, how groups. to use a credit card, and how to resolve a billing error. Copies of consumer publications are available free The Board also publishes the Consumer Handbook of charge from Publications Services, Mail Stop 138, to Credit Protection Laws, a complete guide to con- Board of Governors of the Federal Reserve System, sumer credit protections. This 44-page booklet ex- Washington, D.C. 20551. Multiple copies for classplains how to use the credit laws to shop for credit, room use are also available free of charge. apply for it, keep up credit ratings, and complain about an unfair credit. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Publications of Interest NEW HANDBOOK AVAILABLE FROM THE containing all Board regulations and related statutes, REGULATORY SERVICE interpretations, policy statements, rulings, and staff opinions. For those with a more specialized interest in The Federal Reserve Board has announced publica- the Board's regulations, parts of this service are pubtion of The Payment System Handbook. The new lished separately as handbooks pertaining to monetary handbook, which is part of the Federal Reserve Reg- policy, securities credit, consumer affairs, and, availulatory Service, deals with expedited funds availabil- able for the first time in September 1988, The Payment ity, check collection, wire transfers, and risk-reduc- System Handbook. tion policy. It includes Regulation CC (Availability of For domestic subscribers, the annual rate for The Funds and Collection of Checks), Regulation J (Col- Payment System Handbook is $75. For subscribers lection of Checks and Other Items and Wire Transfers outside the United States, the price, including addiof Funds by Federal Reserve Banks), the Expedited tional air mail costs, is $90. For the Federal Reserve Funds Availability Act and related statutes, official Regulatory Service, not including handbooks, the an- Board commentary on Regulation CC, and policy nual rate is $200 for domestic subscribers and $250 for statements on risk reduction in the payment system. In subscribers outside the United States. All subscription addition, it contains detailed subject and citation in- requests must be accompanied by a check payable to dexes. It is published in loose-leaf binder form and is "Board of Governors of the Federal Reserve updated monthly. System." Orders should be addressed to Publications To promote public understanding of its regulatory Services, Mail Stop 138, Board of Governors of the functions, the Board publishes the Federal Reserve Federal Reserve System, Washington, D.C. 20551. Regulatory Service, a three-volume loose-leaf service Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis