Federal Reserve Bulletin, 1998-08

VOLUME 84 • NUMBER 8 • AUGUST 1998 FEDERAL RESERVE BULLETIN BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, WASHINGTON, D.C. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Table of Contents 585 MONETARY POLICY REPORT TO THE about the use of loan risk ratings from consulta- CONGRESS tions conducted with a sample of the survey respondents during the process of planning the The U.S. economy posted significant further revisions to the survey. gains in the first half of 1998. The unemployment rate dropped to its lowest level in nearly 616 INDUSTRIAL PRODUCTION AND CAPACITY thirty years, and inflation remained subdued. UTILIZATION FOR JUNE 1998 Real output rose appreciably, on balance, although much of the advance apparently Industrial production declined 0.6 percent in occurred early in the year. The turmoil that June, to 128.1 percent of its 1992 average, after erupted in some Asian countries last year has a revised gain of 0.3 percent in May. Capacity created considerable uncertainty and risk for the utilization dropped 0.8 percentage point in June, U.S. economy. Even so, the members of the to 81.6 percent. Board of Governors and the Federal Reserve Bank Presidents expect the economy to expand 619 STATEMENTS TO THE CONGRESS moderately, on average, over the next year and a Laurence H. Meyer, Member, Board of Goverhalf. With labor markets remaining tight and nors, discusses antitrust issues related to mergsome of the special factors that helped restrain ers and acquisitions between U.S. banks and inflation in the first half of 1998 unlikely to be between banking organizations and other finanrepeated, inflation is anticipated to run somecial services firms and says that the Board what higher in the second half of 1998 and in devotes considerable resources to the case-by- 1999. case evaluation of merger proposals. Further, the Federal Reserve's (along with the Department 604 RECENT CHANGES TO THE FEDERAL of Justice's) administration of the antitrust laws RESERVE'S SURVEY OF TERMS OF in banking has helped to maintain competitive BUSINESS LENDING banking markets in the midst of the most signifi- The Federal Reserve's quarterly Survey of cant consolidation of the banking industry in Terms of Business Lending, which has been U.S. history, before the House Committee on the conducted for more than twenty years, collects Judiciary, June 3, 1998. information on interest rates and other character- 627 Edward M. Gramlich, Member, Board of Goveristics of commercial bank business loans. The nors, speaking as past chair of the 1994-96 survey has been changed from time to time to Quadrennial Advisory Council on Social Securecognize innovations in bank lending practices rity, testifies on social security reform and says and to improve the measurement of the desired that the approach he advocates preserves the information. The most recent changes took important social protections of social security effect with the May 1997 survey. The major and achieves long-term financial balance improvement was the addition of an item meathrough benefit cuts that would be felt mainly by suring loan risk. In addition, the reporting panel, high wage workers, with no reliance at all on the which had been limited to domestically charstock market to finance social security benefits tered commercial banks was expanded to and no worsening of the finances of the Health include a sample of U.S. branches and agencies Insurance Trust Fund, before the Subcommittee of foreign banks, which now account for a sigon Social Security of the House Committee on nificant proportion of business lending to U.S. Ways and Means, June 3, 1998. firms. This article discusses the most recent changes made to the survey and presents some 628 Roger W. Ferguson, Jr., Member, Board of Govinformation now available from the new items ernors, discusses the Federal Reserve's perspecbeing reported. It also summarizes information tive on the implications of developments in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

electronic commerce generally and electronic the banking industry and says that the Federal payments specifically and says that the Federal Reserve's efforts to attack the money laundering Reserve anticipates minimal impact in the near problem continue to be one of its highest bank term from emerging electronic payments and supervisory priorities and that it will continue from electronic commerce more broadly on its cooperative efforts with other bank supervisors core central banking responsibilities, including and the law enforcement community to develop its ability to implement monetary policy, its and implement effective anti-money-laundering supervisory responsibilities, and its operational programs, before the House Committee on role in the clearing and settlement of payments, Banking and Financial Services, June 11, 1998. before the Subcommittee on Finance and Haz- 643 Chairman Greenspan discusses the current ardous Materials of the House Committee on merger wave that is affecting a wide range of Commerce, June 4, 1998. industries in the American economy—the fifth 632 Alan Greenspan, Chairman, Board of Gover- such wave in this country during the past nors, presents an update on economic conditions century—and says that the regulatory climate in in the United States and says that the U.S. econ- antitrust has moved in a more market-oriented omy has remained strong this year despite evi- direction. Further, in reacting to the current dence of substantial drag from Asia, and at the merger wave, we need to appropriately account same time, inflation has remained low. This set for the complexity and dynamism of modern of circumstances is not what historical relation- free markets and to enhance conditions in our ships would have led us to expect at this point in market system that will foster the competition the business expansion, and the Federal Reserve and innovation so vital to a prosperous econremains watchful for signs of potential inflation- omy, before the Senate Committee on the Judiary imbalances even as the economy continues ciary, June 16, 1998. to perform more impressively than it has in a 647 Chairman Greenspan presents the views of the very long time, before the Joint Economic Com- Federal Reserve on the need to enact legislation mittee, June 10, 1998. to modernize the U.S. financial system and 636 The Board of Governors, in a written statement, expresses the Board's strong support for submits its views on issues relating to the poten- H.R. 10, the Financial Services Act of 1998, tial application of the Commodity Exchange Act which achieves this objective by removing out- (CEA) to over-the-counter (OTC) derivatives dated restrictions that currently limit the ability transactions and says that it believes that the of U.S. financial service providers, including application of the CEA to institutional transac- banks, insurance companies, and securities tions in OTC derivatives would be inappropriate firms, to affiliate with each other and enter each and unnecessary to achieve public policy objec- other's markets. Further, H.R. 10 uses the holdtives with respect to such transactions. More- ing company structure, and not the universal over, the application of the CEA to such trans- bank, as the appropriate structure to allow the actions would call into question the legal new securities and insurance affiliations, which enforceability of at least some, and perhaps is critical because it provides better protection many, of those transactions. In those circum- for our banking and financial system without stances, the potential losses to counterparties damaging the national or state bank charters or could be so large as to pose a threat to the limiting in any way the benefits of financial financial condition of the counterparties and pro- modernization, before the Senate Committee on vide a significant shock to the financial system Banking, Housing, and Urban Affairs, June 17, as a whole, before the Subcommittee on Risk 1998. Management and Specialty Crops of the House Committee on Agriculture, June 10, 1998. 659 Ernest T. Patrikis, First Vice President, Federal Reserve Bank of New York, discusses the impli- 639 Herbert A. Biern, Associate Director, Division cations of the Year 2000 (Y2K) computer probof Banking Supervision and Regulation, Board lem for international banking and finance, in his of Governors, discusses the Federal Reserve's capacity as chairman of the Joint Year 2000 role in the government's anti-money-laundering Council, and says that the international financial efforts and interagency efforts to develop and community has much work to do to prepare issue effective "Know Your Customer" rules for itself for the challenges posed by the Y2K prob- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

lem. Further, one of the Federal Reserve's major 673 LEGAL DEVELOPMENTS concerns will be the possible impact of the Y2K Various bank holding company, bank service problem on the functioning of the international corporation, and bank merger orders; and pendfinancial system as a whole, although only firms ing cases. themselves have the ability to address the Y2K problems that exist within their own organizations, before the House Committee on Banking 701 MEMBERSHIP OE THE BOARD OF and Financial Services, June 23, 1998. GOVERNORS OF THE FEDERAL RESERVE SYSTEM, 1913-98 668 ANNOUNCEMENTS List of appointive and ex officio members. Adoption of a revised Policy Statement on Privately Operated Multilateral Settlement Al FINANCIAL AND BUSINESS STATISTICS Systems. These tables reflect data available as of Proposal to restrict the last fifteen minutes of the June 26, 1998 operating day for Fedwire funds transfers to funds transfers sent and received by depository A3 GUIDE TO TABULAR PRESENTATION institutions for their own account; request for comments on an interpretation and two A4 Domestic Financial Statistics proposed rules exempting certain transactions A42 Domestic Nonfinancial Statistics between an insured depository institution and A50 International Statistics its affiliates under section 23A of the Federal Reserve Act. A63 GUIDE TO STATISTICAL RELEASES AND Issuance of guidance for bank examiners SPECIAL TABLES in evaluating banking organizations' risk management. A76 INDEX TO STATISTICAL TABLES Scheduling of a public meeting on the proposed acquisition of BankAmerica Corporation by A78 BOARD OF GOVERNORS AND STAFF NationsBank Corporation. Scheduling of a public meeting on the proposed A80 FEDERAL OPEN MARKET COMMITTEE AND acquisition of Citicorp by Travelers Corp. STAFF; ADVISORY COUNCILS Sponsorship by the Federal Reserve of a statisti- A82 FEDERAL RESERVE BOARD PUBLICATIONS cal study of consumer finances. Publication of Directory: Community Develop- A84 MAPS OF THE FEDERAL RESERVE SYSTEM ment Investments. Publication of the June 1998 update to the Bank A86 FEDERAL RESERVE BANKS, BRANCHES, Holding Company Supervision Manual. AND OFFICES PUBLICATIONS COMMITTEE Lynn S. Fox, Chairman • S. David Frost • Donald L. Kohn • J. Virgil Mattingty, Jr. • Michael J. Prell • Dolores S. Smith • Richard Spillenkothen • 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 S. Ellen Dykes, the Multimedia Technologies Center under the direction of Christine S. Griffith, and Publications Services supervised by Linda C. Kyles. 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 July 21, 1998, import prices. Shifts in preferences toward dollarpursuant to the Full Employment and Balanced denominated assets in combination with downward Growth Act of 1978 revisions to forecasts of inflation and demand have helped to reduce our interest rates; the lower interest rates have boosted household and business spending, MO\LI\\KY l-'oiICY \xn inr offsetting a portion of the damping of demand from /:.( v.i.Yr/.u/< Or-1 LOOK the foreign sector. The Asian crisis is likely to continue to restrain The U.S. economy posted significant further gains in U.S. economic activity in coming quarters. The size the first half of 1998. The unemployment rate of the effect will depend in large part on how quickly dropped to its lowest level in nearly thirty years, and the authorities in the Asian nations can put their inflation remained subdued. Real output rose appretroubled financial systems on a sounder footing and ciably, on balance, although much of the advance carry out other essential economic reforms. Deterioapparently occurred early in the year. Household rating conditions in many countries during the past spending and business fixed investment, supported by few months created added pressures for reform, and the ongoing rise in equity prices and the continued they underscored the depth and scope of the problems low level of long-term interest rates, appear to have that must be addressed. maintained considerable momentum this year. The Despite the pronounced weakening of our trade sizable advance in capital spending and the resulting balance, the already tight U.S. labor market has come additions to the capital stock should help bolster under further strain this year owing to robust growth labor productivity—the key to rising living standards. of domestic demand. As a result, the outlook for Yet the news this year has not been uniformly inflation has taken on a greater degree of risk. Congood. The turmoil that erupted in some Asian counsumer prices actually rose a bit less rapidly in the first tries last year has generated major concerns about the half of 1998 than they did in 1997, but transitory outlook for those economies and the repercussions factors—the drop in oil prices, the runup in the dollar, for other nations, including the United States. Several and weak economic activity in Asia—exerted consid- Asian countries have had sharp contractions in ecoerable downward pressure on domestic prices. These nomic activity, and others have experienced distinctly factors will not persist indefinitely. Meanwhile, the subpar growth. Heightened uneasiness among interpool of individuals interested in working but who are national investors has induced portfolio shifts away not already employed has continued to shrink. The from Asia and, to some extent, from other emerging extraordinary tightness in labor markets has genermarket economies. ated a rising trend of increases in wages and related These difficulties have created considerable uncercosts, although faster productivity growth has tainty and risk for the U.S. economy, but they have damped the effect on business costs so far. also helped to contain potential inflationary pressures In conducting monetary policy in the first half of in the near term by reducing import prices and 1998, the Federal Open Market Committee (FOMC) restraining aggregate demand. In particular, the subclosely scrutinized incoming information for signs stantial rise in the foreign exchange value of the that the strength of the economy and the taut labor dollar has boosted our real imports and—together market were likely to boost inflation and threaten the with the slower growth in Asia—depressed our real durability of the expansion. However, despite slightly exports. At the same time, the runup in the dollar and larger increases in the consumer price index (CPI) in slack economic conditions in Asia have helped some months, inflation remained moderate on the produce a sharp drop in the dollar prices of oil and whole. Moreover, the FOMC expected that aggregate other commodities and have pushed down other demand would slow appreciably because of a rising trade deficit and a considerable slackening in domes- NOTE. The charts for the report are available on request from tic spending. Although the Committee was acutely Publications Services, Mail Stop 127, Board of Governors of the aware of the uncertainties in the economic outlook, it Federal Reserve System, Washington, DC 20551. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

586 Federal Reserve Bulletin I August 1998 believed that the deceleration in demand—and the outlook. On the price side, the FOMC noted that, associated modest easing of pressures on resources— although the incoming data were quite favorable, could well be sufficient to limit any deterioration in transitory factors were possibly masking underlying underlying price performance. On balance, the tendencies toward higher inflation. Moreover, the FOMC chose to keep the intended federal funds rate available data on household and business spendat 5'/2 percent. ing confirmed the impressive strength of domestic demand and highlighted the possibility that developments in the external sector might not provide suffi- ./'<'/.''. T. / // n I j1, 1,11 ,-\ /, / ,'7, ( 7 V. lili cient offset in coming quarters to avoid a buildup of inflation pressures. At the same time, the FOMC Output grew rapidly in the first quarter, with real noted the substantial uncertainty surrounding the gross domestic product (GDP) estimated to have prospects for the Asian economies. Balancing these risen 5'/2 percent at an annual rate. Business fixed considerations, the FOMC kept its policy stance investment soared after a weak fourth quarter, and unchanged but noted that recent information had consumption and housing expenditures expanded at a altered the inflation risks enough to make tightening strong clip. In addition, contrary to the expectations more likely than easing in the period ahead. of many forecasters, inventory investment rose sub- The second quarter brought both a marked further stantially from its already hefty fourth-quarter pace, deterioration in the outlook for Asia and some indiwith the rise contributing more than 1 Vi percentage cations that the U.S. economy might be cooling. In points to overall GDP growth. At the same time, the Asia, evidence of steep output declines in several cumulative effect of the appreciation of the dollar and countries was combined with mounting concern that the faster growth of demand here than abroad resulted economic and financial problems in Japan were not in a sharp drop in real net exports, with both rapid likely to be resolved as quickly as many observers import growth and the first quarterly drop in exports had hoped or expected. One result was a further rise in four years. Employment continued to advance in the exchange value of the dollar and a decline in briskly, and the unemployment rate held steady at long-term U.S. interest rates. Increasing investor con- 43/4 percent. Hourly compensation accelerated some- cern about emerging market economies raised risk what when measured on a year-over-year basis, but spreads on external debts in Asia, Russia, and Latin impressive productivity growth once again helped to America. restrain the increase in unit labor costs. The CPI rose The higher value of the dollar and the depressed only lA percent at an annual rate over the first three income in many Asian countries continued to take months of the year, as a sharp drop in energy prices their toll on U.S. exports and to boost imports in the offset price increases elsewhere. second quarter. In addition, a marked slackening Falling long-term interest rates and rising equity in the pace of inventory accumulation, which was prices over the previous year provided substantial amplified by the effects of a strike in the motor impetus to household and business spending in the vehicle industry, was reflected in a sharp slowing first quarter. Interest rates dropped sharply further in in domestic demand. Nonetheless, the utilization of early January, and although they moved up a little labor resources remained very high: In the second over the remainder of the quarter, nominal yields on quarter, the unemployment rate averaged a bit less long-term Treasury securities were among the lowest than 4'/2 percent, its lowest quarterly reading in in decades. Interest rates continued to benefit from nearly thirty years. The twelve-month change in averthe improvement in the federal budget and the pros- age hourly earnings indicated that wages were rising pect of reduced federal borrowing in the future; rates somewhat more rapidly than they had a year earlier. were also restrained to a significant extent by the And the CPI rose faster in the second quarter than in effects of the Asian crisis. Equity prices increased the first, mainly reflecting a smaller drop in energy sharply in the first quarter, extending their remark- prices. able gains of the previous three years in spite of Financial conditions in the second quarter and into disappointing news on corporate profits. Households July remained supportive of domestic spending. and firms borrowed at a vigorous pace in the first Yields on private securities declined, although less quarter, and growth in the debt of domestic nonfinan- than Treasury yields, as quality spreads widened a cial sectors picked up from the fourth quarter of bit. Equity prices rose further in early April before 1997, as did the growth of the monetary aggregates. falling back over the next two months in response At their March meeting, the members of the FOMC to renewed earnings disappointments. Prices then confronted unusual crosscurrents in the economic rebounded substantially, with most major indexes Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report to the Congress 587 hitting record highs in July. The growth of money the central tendency of their forecasts for real GDP and credit slowed a little on balance from the first- growth spans a range of 3 percent to 3 lA percent. For quarter pace but remained buoyant. Banks and other 1999, these forecasts center on a range of 2 percent to lenders continued to compete vigorously, extending 2'/2 percent The civilian unemployment rate, which credit on generally favorable terms as they responded averaged a bit less than 4'/2 percent in the second in part to the sustained healthy financial condition of quarter of 1998, is expected to stay near this level most businesses and households. through the end of this year and to edge higher in The FOMC left the intended federal funds rate 1999. With labor markets remaining tight and some unchanged at its May and June-July meetings. At the of the special factors that helped restrain inflation in May meeting, the FOMC reiterated its earlier con- the first half of 1998 unlikely to be repeated, inflation cern that the robust expansion of domestic final is anticipated to run somewhat higher in the second demand, supported by very positive financial con- half of 1998 and in 1999. ditions, had raised labor market pressures to a point The economy is entering the second half of 1998 that might precipitate an upturn in inflation over time. with considerable strength in household spending and Yet the FOMC believed that the growth of economic business fixed investment. Consumers are enjoying activity would slow. It also judged that the risk of expanding job opportunities, rising real incomes, and significant further deterioration in Asia, which could high levels of wealth, all of which are providing them disrupt global financial markets and impair economic with the confidence and wherewithal to spend. These activity in the United States, was rising somewhat. factors, in conjunction with low mortgage interest rates, are also bolstering housing demand. Business fixed investment appears robust as well: Financial Economic Projections for 199H and 1999 conditions remain conducive to capital spending, and firms no doubt are continuing to seek out opportuni- The members of the Board of Governors and the ties for productivity gains in an environment of rapid Federal Reserve Bank Presidents, all of whom par- technological change, falling prices for high-tech ticipate in the deliberations of the FOMC, expect equipment, and tight labor markets. economic activity to expand moderately, on average, Nonetheless, a number of factors are expected to over the next year and a half. For 1998 as a whole, exert some restraint on the expansion of activity in the quarters ahead. The demand for U.S. exports will continue to be depressed for a while by weak activity abroad, on average, and by the strong dollar, which 1. economic pi"u|ccii m^ lor IWN will also likely continue to boost imports. The effects Percent of these external sector developments on employ- Federal Reserve governors and Reserve Bank presidents ment and income growth have yet to materialize Indicator Administration fully. In addition, although financial conditions are Central Range tendency generally expected to be supportive, real outlays on 1998 housing and business equipment have reached such high levels that gains from here are expected to be Change, fourth quarter to fourth quarter' more moderate. Nominal GDP 4'/i-5 416-5 4.2 Real GDP 2VJ-3'/* 3-3'A 2.4 With the plunge in energy prices in early 1998 Consumer price index2 .. 114-2'/* WA-2 1.6 unlikely to be repeated, most FOMC participants Average level expect the CPI for all urban consumers to rise more in the fourth quarter Civilian unemployment rapidly in the second half of 1998 than it did in rate the first half, resulting in an increase in the CPI of 1999 VA percent to 2 percent for 1998 as a whole. The pickup in the second half should be limited, however, Change, fourth quarter to fourth quarter' by further decreases in non-oil import prices, ample Nominal GDP 4-5'« 4'/4-5 4.1 Real GDP 2-3 2-2'/2 2.0 domestic manufacturing capacity, and low expected Consumer price index2 .. P/4-3 2-2 'A 2.1 inflation. Looking ahead to next year, the central Average level tendency is for an increase in the CPI of 2 percent to in the fourth quarter Civilian unemployment 2'/2 percent. Absent a further rise in the dollar, the fall rate 4'/4-4% 41/2-4% 5.0 in non-oil import prices should have run its course. 1. Change from average for fourth quarter of previous year to average for Moreover, even with the expected edging higher of fourth quarter of year indicated. 2. All urban consumers. the unemployment rate next year, the labor market Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

588 Federal Reserve Bulletin • August 1998 will remain tight, suggesting potential ongoing pres- more. M2 velocity showed little trend but varied sures on available resources that would tend to raise positively from year to year with changes in a tradiinflation a bit. The FOMC will remain alert to the tional measure of M2 opportunity cost, defined as the possibility of underlying imbalances in the economy interest forgone by holding M2 assets rather than that could generate a persisting pickup in inflation, short-term market instruments such as Treasury bills. which would threaten the economic expansion. M3 velocity moved down a bit over time, as deposi- As noted in past monetary policy reports, the tory credit and the associated elements in M3 tended Bureau of Labor Statistics is in the process of imple- to grow a shade faster than GDP. In the early 1990s, menting a series of technical adjustments to make the these patterns of M2 and M3 behavior were dis- CPI a more accurate measure of price change. These rupted, and the velocities of both aggregates climbed adjustments and the regular updating of the market well above the levels that were predicted by past basket are estimated to have trimmed CPI inflation relationships. However, since 1994 the velocities of somewhat over 1995-98, and a significant further M2 and M3 have again moved roughly in accord with adjustment is scheduled for 1999. All told, the pub- their pre-1990 experience, although their levels lished figures for CPI inflation in 1999 are expected remain elevated. to be more than V2 percentage point lower than they The recent return to historical patterns does not would have been had the Bureau retained the meth- imply that velocity will be fully predictable or even ods and formulas in place in 1994. In any event, that all movements in velocity can be completely the FOMC will continue to monitor a variety of price explained in retrospect. Some shifts in velocity arise measures besides the CPI as it attempts to gauge from household and business decisions to adjust their progress toward the long-run goal of price stability. portfolios for reasons that are not captured by simple Federal Reserve officials project somewhat faster measures of opportunity cost. Some shifts in velocity growth in real GDP and slightly higher inflation arise from decisions of depository institutions to in 1998 than does the Administration. The Adminis- create more or less credit or to fund credit creation tration's projections for the growth in real GDP and in different ways. All these decisions are shaped by inflation in 1999 are around the lower end of the the rapid pace of innovation in financial institutions FOMC participants' central tendencies. and instruments. Between 1994 and early 1997, M2 velocity drifted somewhat higher, probably owing to some reallocation of household savings into bond and Money ami Debt Ranges for I99H and 1999 equity markets. But M2 velocity has declined over the past year despite little change in its traditionally At its most recent meeting, the FOMC reaffirmed the defined opportunity cost. One explanation may be ranges for 1998 growth of money and debt that it had that the flatter yield curve has reduced the return on established in February: 1 percent to 5 percent for longer-term investments relative to the bank deposits M2, 2 percent to 6 percent for M3, and 3 percent to and money market mutual funds in M2. Another part 7 percent for the debt of the domestic nonfinancial of the story may be the booming stock market, which sectors. The FOMC set these same ranges for 1999 has reduced the share of households' financial assets on a provisional basis. represented by monetary assets and may have encour- Once again, the FOMC chose the growth ranges aged households to rebalance their portfolios by for the monetary aggregates as benchmarks for increasing their M2 holdings. M3 velocity has growth under conditions of price stability and historidropped more sharply over the past year, with strong cal velocity behavior. For several decades before growth in large time deposits and in institutional 1990, the velocities of M2 and M3 (defined as the money funds that are increasingly used by businesses ratios of nominal GDP to the aggregates) behaved for cash management. in a fairly consistent way over periods of a year or If the velocities of M2 and M3 follow their average historical patterns over the remainder of 1998 and the 2. RaiiL'cs lor growth ul" monetary and ilobt ugarvsates growth of nominal GDP matches the expectations of Percent Federal Reserve policymakers, these aggregates will finish this year above the upper ends of their respec- Provisional for Aggregate 1997 1998 1999 tive ranges. Part of this relatively rapid money growth M2 1-5 1-5 1-5 reflects nominal GDP growth in excess of that consis- M3 2-6 2-6 2-6 tent with price stability and sustainable growth of real Debt 3-7 3-7 3-7 output; the rest represents a decline in velocity. NOTE. Change from average for founh quarter of preceding year lo average Absent unusual changes in velocity in 1999, policyfor fourth quarter of year indicated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report to the Congress 589 makers' expectations of nominal GDP growth imply The that M2 and M3 will be in the upper ends of their price-stability growth ranges next year. The debt of Spending the domestic nonflnancial sectors is expected to remain near the middle of its range this year and in The factors that fueled the sizable increase in house- 1999. hold expenditures in 1997 continued to spur spending In light of the apparent return of velocity changes in the first half of 1998: Growth in employment and to their pre-1990 behavior, some FOMC members real disposable income remained very strong, and have been giving the aggregates greater weight in households in the aggregate enjoyed significant furassessing overall financial conditions and the thrust ther gains in net worth. Reflecting these developof monetary policy. However, velocity remains some- ments, sentiment indexes suggest that consumers conwhat unpredictable, and all FOMC members monitor tinued to feel extraordinarily upbeat about the current a wide variety of other financial and economic indica- and prospective condition of the economy and their tors to inform their policy deliberations. The FOMC own financial situations. decided that the money and debt ranges are best used In total, real consumer outlays rose at an annual to emphasize its commitment to achieving price sta- rate of 6 percent in the first quarter, and the available bility, so it again set the ranges as benchmarks for data point to another large increase in the second growth under price stability and historical velocity quarter. Increases in spending were broad-based, but behavior. outlays for durable goods were especially strong. Declining prices and ongoing product innovation continued to stimulate demand for personal computers and other home electronic equipment. In addition, ONOMIC A.\l) ])[-\'hl.<>lJMI-:\TS purchases of motor vehicles were sustained by a com- /.v bination of solid fundamentals and attractive pricing. Indeed, since 1994, sales of light vehicles have been The U.S. economy continued to perform well in the running at a brisk pace of 15 million units (annual first half of the year. The economic difficulties in rate), and in the second quarter, a round of very Asia and the strong dollar reduced the demand for attractive manufacturers' incentives helped lift sales our exports and intensified the pressures on domestic to a pace of 16 million units. producers from foreign competition. But these effects Spending on services also remained robust in the were outweighed by robust domestic final demand, first half of the year, with short-run variations reflectowing in part to supportive financial conditions, ing in part the effects of weather on household energy including a higher stock market, ample availability of use; outlays on personal business services, including credit, and long-term interest rates that in nominal those related to financial transactions, and on recreterms were among the lowest in many years. Sharp ation services continued to exhibit remarkable swings in inventory investment were mirrored in strength. In addition, real outlays for nondurable considerable unevenness in the growth of real GDP, goods, which rose only moderately last year, grew which appears to have slowed markedly in the second about 6V2 percent at an annual rate in the first quarter, quarter after having soared to nearly 5 V2 percent at an and they appear to have posted another sizable annual rate in the first quarter. Nonetheless, over the increase in the second quarter. first half as a whole, the rise in real output was large Real disposable income—that is, after-tax income enough to support sizable gains in employment and adjusted for inflation—remained on a strong uptrend to push the unemployment rate down to the range of in early 1998: It rose about 4 percent at an annual rate 4'/4 percent to 4'/2 percent, the lowest in decades. between the fourth quarter of 1997 and May 1998. The further tightening of labor markets in recent This increase in part reflected a sharp rise in aggrequarters has been reflected in a more discernible gate wages and salaries, which were boosted by uptilt to the trend in hourly compensation. But price sizable gains in both employment and real wage inflation remained subdued in the first half of the rates; dividends and nonfarm proprietors' incomes year, held down in part by a sharp decline in energy also rose appreciably. However, growth in after-tax prices and lower prices for non-oil imports. Intense income (as measured in the national income and competition in product markets, ample plant capacity, product accounts) was restrained by large increases ongoing productivity gains, and damped inflation in personal income tax payments—likely owing in expectations also helped to restrain inflation pres- part to taxes paid on realized capital gains; capital sures in the face of tight labor markets. gains—whether realized or not—are not included Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

590 Federal Reserve Bulletin Tl August 1998 in measured income. Reflecting the movements in the apartment vacancy rate appears to be edging spending and measured income, the personal saving down. rate fell from an already low level of about 4 percent in 1997 to 3'/2 percent during the first five months of 1998. [ li HIM lii>kl Tpin.mi.v Household net worth rose sharply in the first quarter, RcMiL'iilial InwMincnt pushing the wealth-to-income ratio to another record high. Although the flow of new personal saving was Housing activity continued to strengthen in the first quite small, the revaluation of existing assets added half of 1998, especially in the single-family sector, considerably to wealth, with much of these capital where starts rose noticeably and sales of both new gains accumulated on equities held either directly or and existing homes soared. Indeed, the average level indirectly through mutual funds and retirement of single-family starts over the first five months of the accounts. Of course, these gains have been distribyear—1 VA million units at an annual rate—was 9 per- uted quite unevenly: The 1995 Survey of Consumer cent above the pace for 1997 as a whole. Moreover, Finances reported that 41 percent of U.S. families surveys by the National Association of Homebuilders own equities in some form, but that families with suggested that housing demand remained vigorous higher wealth own a much larger share of total at midyear, and the Mortgage Bankers Association equities. reported that loan applications for home purchases In the first quarter of this year, the runup in wealth, have been around all-time highs of late. together with low interest rates and high levels of The strong demand for homes has contributed to confidence about future economic conditions, supsome firming of house prices, which are now rising in ported robust household spending and borrowing. the neighborhood of 3 percent to 5 percent per year, The expansion of household debt, at an annual rate according to measures that control for shifts in the of 73/4 percent, was above last year's pace and once regional composition of sales and attempt to mini- again outstripped growth in disposable income. The mize the effects of changes in the mix of the struc- consumer credit component of household debt grew tural features of houses sold. In nominal terms, these 4'/2 percent at an annual rate in the first quarter, a increases are well within the range of recent years; pace roughly double that for the fourth quarter of last however, in real terms, they are among the largest year but near the 1997 average. Preliminary data for since the mid-1980s—a development that should April and May point to a somewhat smaller advance reinforce the investment motive for homeownership. in the second quarter. Of course, rising house prices may make purchasing Mortgage debt increased 8!/i percent at an annual homes more difficult for some families. But, with rate in the first quarter, the same as its fourth-quarter income growth strong and mortgage rates around advance and a little above its 1997 growth rate. 7 percent (thirty-year conventional fixed-rate loans), Fixed-rate mortgage interest rates were 15 basis homeownership is as affordable as it has been at any points lower in the first quarter than three months time in the past thirty years. Moreover, innovative earlier and 75 basis points lower than a year earlier, programs that relax the standards for mortgage quali- which encouraged both new home purchases and fication are helping low-income families to finance a surge of refinancing of existing mortgages. Within home purchases. Also, stock market gains have prob- total gross mortgage borrowing, the flattening of the ably boosted demand among higher-income groups, yield curve made adjustable-rate mortgages less especially in the trade-up and second-home segments attractive relative to fixed-rate mortgages, and their of the market. share of originations reached the lowest point in After having surged in the fourth quarter of 1997, recent years. Net borrowing can be boosted by refimultifamily starts settled back to about 325,000 units nancings if households "cash out" some housing (annual rate) over the first five months of 1998, a equity, but the magnitude of this effect is unclear. In pace only slightly below that recorded over 1997 as any event, continued expansion of bank real estate a whole. Support for multifamily construction con- lending and a high level of mortgage applications for tinued to come from the overall strength of the econ- home purchases suggest a further solid gain in mortomy, which undoubtedly has stimulated more indi- gage debt in the second quarter. Home equity credit viduals to form households, as well as from low at banks increased only 2 percent at an annual rate interest rates and an ample supply of financing. In from the fourth quarter of 1997 through June 1998 addition, real rents picked up over the past year, and after having posted a 15'/2 percent gain last year; Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report to the Congress 591 this slowdown may reflect a diminished substitution rapid investment in the manufacturing sector in recent of mortgage debt for consumer debt or simply the years has resulted in large additions to productive increase in mortgage refinancings, which allowed capacity, which have helped keep factory operating households to pay down more expensive home equity rates from rising much above average historical levdebt or to convert housing equity into cash in a more els in the face of appreciable increases in output. advantageous manner. Real outlays for producers' durable equipment, Despite the further buildup of household indebted- which have been rising more than 10 percent per ness, financial stress among households appears to year, on average, since the early 1990s, moved have stabilized after several years of deterioration. In sharply higher in the first half of 1998. All major the aggregate, estimated required payments of loan categories of equipment spending recorded sizable principal and interest have held about steady relative gains in the first quarter; but, as has been true to disposable personal income—albeit at a high throughout the expansion, outlays for computers rose level—since 1996. Over this period, the effect on especially rapidly. Real computer outlays received debt burdens of faster growth of debt than income has particular impetus in early 1998 from extensive pricebeen roughly offset by declining interest rates and the cutting. Purchases of communications equipment associated refinancing of higher interest-rate debt, as have also soared in recent quarters; the rise reflects well as by a shift toward mortgage debt (which has a intense pressures to add capacity to accommodate the longer repayment period). Various measures of delin- growth of networking; the rapid pace of technological advance, especially in wireless communications; quency rates on consumer loans leveled off or and regulatory changes. As for the second quarter, declined in 1997, and delinquency rates on mortdata on shipments, coupled with another steep decline gages have been at very low levels for several years. in computer prices, point to a further substantial Personal bankruptcy filings reached a new record increase in real computer outlays. Spending on motor high in the first quarter of 1998, but this represented vehicles apparently continued to advance as well only 6 percent more filings than four quarters earlier, while demand for other types of capital equipment which is the smallest such change in three years. appears to have remained brisk. These developments have apparently suggested to banks that they have sufficiently tightened terms In total, real outlays on nonresidential construction and standards on consumer loans. In the Federal flattened out in 1997 after four years of gains, and Reserve's May Senior Loan Officer Opinion Survey they remained sluggish in early 1998. Construction on Bank Lending Practices, relatively few banks, on of office buildings remained robust in the first half of net, reported tightening standards on credit card or this year, after having risen at double-digit rates in other consumer loans. Little change was reported in 1996 and 1997, and outlays for institutional buildings the terms of consumer loans. continued to trend up. However, expenditures for other types of structures were lackluster. Nonetheless, the economic fundamentals for the sector as a whole remain quite favorable: Vacancy rates for I Iw liiisuii'ss Sccloi' office and retail space have continued to fall; real estate prices, though still well below the levels of the i i\k'd In\L'sinvm mid-1980s in real terms, have risen appreciably in Real business fixed investment appears to have recent quarters; and funding for new projects remains abundant. posted another hefty gain over the first half of 1998 as spending continued to be boosted by positive sales expectations in many industries; favorable financial conditions; and a perceived opportunity, if not a ln\ ciiii a \ ln\ L'Mmu'H necessity, for firms to install new technology in order to remain competitive. The exceptional growth of The pace of stockholding by nonfarm businesses investment, since the early 1990s has been facilitated picked up markedly in 1997 and is estimated to have in part by the increase in national saving associated approached $100 billion (annual rate) in the first with the elimination of the federal budget deficit. quarter of 1998—equal to an annual rate increase of It has resulted in considerable modernization and 8'/2 percent in the level of inventories and accounting expansion of the nation's capital stock, which have for more than 1 Vi percentage points of that quarter's been important in the improved performance of labor growth in real GDP. The first-quarter accumulation productivity over the past few years and which should was heavy almost across the board. Among other continue to lift productivity in the future. Moreover, things, it included a large increase in stocks of petro- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

592 Federal Reserve Bulletin • August 1998 leum as the unusually warm weather reduced demand of the fourth quarter of 1997, with debt expanding at for refined products and low prices provided an an annual rate of 9 percent in the first quarter of 1998. incentive for refiners and distributors to accumulate Outstanding amounts of both bonds and commercial stocks. However, overall sales were also very strong, paper rose especially sharply. The decline in longand with only a few exceptions—notably, semicon- term interest rates around year-end encouraged ductors, chemicals, and textiles—stocks did not seem companies to lock in those yields, and gross bond out of line with sales. In any event, fragmentary data issuance reached a record high in the first quarter for the second quarter point to a considerable slowing of 1998. Borrowing by nonfinancial businesses in inventory investment that is especially evident in increased at a slightly slower but still rapid clip in the the motor vehicle sector, where stocks were depleted second quarter, with little change in outstanding comby the combination of strong sales and General mercial paper but very strong net bond issuance and Motors production shortfalls. In addition, petroleum some rebound in bank loans. stocks appear to have grown less rapidly than they Despite persistent high borrowing, external funddid in Ihe first quarter, and stockbuilding elsewhere ing for businesses remained readily available on slowed sharply in April and May. favorable terms. The spreads between yields on investment-grade bonds and yields on Treasury bonds widened a little from low levels, with investors favoring Treasury securities over corporate securities as a haven from Asian turmoil and, perhaps, with disap- Businesses have financed a good part of their invest- pointing profits leading to some minor reassessment ment this year through continued strong cash flow, of the underlying risk of private obligations. The but they have also increased their reliance on finan- spreads on high-yield bonds also increased, in part cial markets. Economic profits (book profits after because of heavy issuance of these bonds this spring, inventory valuation and capital consumption adjust- but they remain narrow by historical standards. In the ments) have run at 12 percent of national income Federal Reserve's May survey on bank lending pracover the past year, well above the 1980s peak of tices, banks reported negligible change in business roughly 9 percent. However, the strength in profits loan standards; moreover, yield spreads on bank loans has resulted partly from the low level of net interest remained low for both large and small firms. Surveys payments, leaving total capital income at roughly the by the National Federation of Independent Business same share of national income as at the 1980s peak. suggest that small firms have been facing little diffi- Overall, a major portion of the increase in profits culty in obtaining credit. between the 1980s and the 1990s represents a realign- The ready availability of credit has stemmed ment of returns from debt-holders to equity-holders. importantly from the healthy financial condition of Although their level remains high, the growth of many businesses, which have enjoyed an extended profits has slowed: Economic profits rose 4% percent period of economic expansion and robust profits. at an annual rate in the first quarter, compared with The aggregate debt-service burden for nonfinancial 9'/2 percent between the fourth quarter of 1996 corporations, measured as the ratio of net interest and the fourth quarter of 1997. This slowdown may payments to cash flow, dropped substantially between have resulted from various causes, including rising 1990 and 1996 and remains modest, despite edging employee compensation and the Asian financial up in the first quarter of this year. In addition, most crisis. Quantifying the effect of the Asian turmoil is measures of financial distress have shown favorable difficult: Although only a small share of the profits of readings. The delinquency rate on commercial and U.S. companies is earned in the directly affected industrial bank loans has stayed very low since 1995, Asian countries, the crisis has reduced the prices of preserving the dramatic decline that occurred in the U.S. imports and thereby put downward pressure on first half of the decade. After moving up a little in domestic prices. 1996 and 1997, business failures decreased in the Nonfinancial businesses realized annualized eco- first five months of 1998; the liabilities of failed nomic profit growth of only 1 VA percent in the first businesses as a share of total liabilities was less than quarter. Because capital expenditures (including one-quarter the value reached in the early 1990s. At inventory investment) grew much faster, the financ- the same time, Moody's upgraded significantly more ing gap—the excess of capital expenditures over debt than it downgraded, and the rate of junk bond retained earnings—widened. As a result, these busi- defaults stayed close to its low 1997 level. nesses used less of their cash flow to retire outstand- Net equity issuance was less negative in the first ing equity and continued to borrow at the rapid pace quarter of this year than in the fourth quarter of last Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report to the Congress 593 year, but nonfinancial corporations still retired, on increase for nominal GDP over the past year. Indinet, about $100 billion of equity at an annual rate. vidual income tax receipts, which have been rising at The wave of merger announcements this spring will double-digit rates since the mid-1990s, continued to likely generate strong share retirements over the do so over the past year as the surge in capital gains remainder of the year. Gross equity issuance in the realizations likely persisted and sizable gains in real first half of 1998 was close to its pace of the past income raised the average tax rates on many houseseveral years, although investors seemed somewhat holds (the individual income tax structure being cautious about initial public offerings. indexed for inflation but not for growth in real incomes). In contrast to the ongoing strength in individual taxes, corporate tax payments increased only ///<' (jovcnwieiii Sait>r moderately over the past year, echoing the deceleration in corporate profits. Federal Federal expenditures in the twelve months ending in May 1998 were only 1 Vi percent higher in nominal The incoming news on the federal budget continues terms than during the twelve months ending in May to be very positive. Over the twelve months ending in 1997, with restraint evident in most categories. Out- May 1998, the unified budget registered a surplus of lays for defense were about unchanged, as were those $60 billion, compared with a deficit of $65 billion for income security programs. In the latter category, during the twelve months ending in May 1997. Soar- outlays for low-income support fell as economic ing receipts continued to be the main force driving activity remained robust, welfare reform capped outthe improvement in the budget, but subdued growth lays for family assistance, and enrollment rates in in outlays also played a key role. If the latest projec- other programs dropped. In the health area, spending tions from the Office of Management and Budget on Medicaid picked up somewhat after a period of (OMB) and the Congressional Budget Office (CBO) extraordinarily smalJ increases, whereas growth in are realized, the unified budget for fiscal year 1998 as spending for Medicare slowed, in part because of the a whole will show a surplus of roughly $40 billion to programmatic changes that were legislated in 1997. $65 billion. And, with interest rates little changed and the stock With the federal budget having shifted into sur- of outstanding federal debt no longer rising, net interplus, the federal government is now augmenting, est payments stabilized. rather than drawing on, the pool of national saving. In Real federal outlays for consumption and gross fact, the improvement in the government's budget investment, the part of federal spending that is position over the past several years has been large counted in GDP, fell about 2 percent between the first enough to generate a considerable rise in gross quarters of 1997 and 1998. The decrease was condomestic saving despite a decline in the private sav- centrated in real defense spending, which fell about ing rate; all told, gross saving by households, busi- 23/4 percent, roughly the same as over the precednesses, and governments increased from about ing four quarters; real nondefense spending was 14!/2 percent of gross national product in the early unchanged, on balance. In the first quarter, real fed- 1990s, when federal saving was at a cyclical low, to eral outlays fell at a 10 percent annual rate; the drop more than 17 percent of GNP in recent quarters. This reflected a plunge in defense spending, which appears increase in domestic saving, along with increased to have been reversed in the second quarter. borrowing from abroad, has financed the surge in With debt held by the public close to $4 trillion, domestic investment in this expansion. Moreover, the government will continue to undertake substantial this year's budgetary surplus will continue to pay gross borrowing to redeem maturing securities. The benefits in future years because it allows the govern- government will also continue to adjust its issuance ment to reduce its outstanding debt, which implies of short-term debt to accommodate seasonal swings smaller future interest payments and, all else equal, in receipts and spending. The surplus during the first makes it easier to keep the budget in surplus. If, in half of calendar year 1998—boosted by the huge fact, the budget outcome over the next several years inflow of individual income tax receipts—enabled is as favorable as the OMB and the CBO now antici- the Treasury to reduce its outstanding debt $57 bilpate under current policies, the reduction in the out- lion while augmenting its cash balance $40 billion. standing debt could be substantial. The reduction in debt included net paydowns of Federal receipts in the twelve months ending in coupon securities and bills. May 1998 were 10 percent higher than in the same Looking ahead to projected surpluses for coming period a year earlier—roughly twice the percentage years, the Treasury announced that it will no longer Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

594 Federal Reserve Bulletin • August 1998 issue three-year notes and will auction five-year notes State and local governments responded to the low quarterly rather than monthly. Over the past several interest rates during the first half of the year by years, the Treasury has accommodated the surprising borrowing at a rapid rate, both to refinance outstandimprovement in federal finances by substantially ing debt and to fund new capital projects. Because reducing both bill and coupon issuance. The Treasury debt retirements eased in the first quarter relative to hopes that concentrating future coupon offerings in the fourth quarter of 1997, net issuance increased larger, less-frequent auctions will maintain the liquid- substantially. Meanwhile, credit quality of state and ity of these securities while still allowing for suffi- local debt continued to improve, with much more cient issuance of bills to maintain their liquidity as debt upgraded than downgraded in the first half of the well. These changes are also intended to prevent year. further upcreep in the average maturity of the outstanding debt held by private investors, now standing at sixty-five months. The Treasury continues to work on encouraging the market for inflation-indexed secu- External Scclnr rities, issuing a thirty-year indexed bond in April to complement the existing five-year and ten-year Trade and lite Current Account indexed notes. The nominal trade deficit on goods and services Stale and Local widened to $140 billion at an annual rate in the first quarter from $114 billion in the fourth quarter of last The fiscal position of state and local governments in year. The current account deficit for the first quarter the aggregate has also remained quite favorable. reached $189 billion (annual rate), 2lA percent of Strong growth of household income and consumer GDP, compared with $155 billion for the year 1997. spending has continued to lift revenues, despite A larger deficit on net investment income as well as numerous small tax cuts, and governments have con- the widening of the deficit on trade in goods and tinued to hold the line on expenditures. As a result, services contributed to the deterioration in the first the consolidated current account of the sector, as quarter of the current account balance. In April and measured by the surplus (net of social insurance May, the trade deficit increased further. funds) of receipts over current expenditures in the The quantity of imports of goods and services national income and product accounts, held steady in again grew vigorously in the first quarter. The annual the first quarter at around $35 billion (annual rate), rate of expansion at 17 percent exceeded that for roughly where it has been since 1995. State govern- 1997 and reflected the continued strength of U.S. ments, which have reaped the main benefits of rising economic activity and the effects of past dollar appreincome taxes, have fared especially well: Indeed, all ciation. Imports of consumer goods, automotive prodof the forty-seven states whose fiscal years ended by ucts, and machinery were particularly robust. Prelimi- June 30 appear to have achieved balance or to have nary data for April and May suggest that real import run surpluses in their general funds budgets in fiscal growth remained strong. Non-oil import prices fell year 1998. sharply through the second quarter, reflecting the rise Real expenditures for consumption and gross in the exchange value of the dollar over the past year. investment by states and localities have been rising The quantity of exports of goods and services about 2 percent per year, on average, since the early declined at an annual rate of 1 percent in the first 1990s, and the increase in spending for the first half quarter, the first such absolute drop since the first of 1998 appears to have been a bit below that trend. quarter of 1994. The weakness of economic activity These governments added jobs over the first half of in a number of our trading partners, with absolute the year at about the same rate as they did over 1997 declines in several economies in Asia, and the as a whole. However, real construction outlays, which strength of the dollar, which also partly resulted from have been drifting down since early 1997, posted a the Asian financial crises, largely account for the sizable decline in the first quarter, and monthly data abrupt halt in the growth of real exports after a suggest that spending dropped further in the spring. 10 percent rise last year. Declines were recorded for The weakness in construction spending over the past machinery, industrial supplies, and agricultural prodyear has cut across the major categories of construc- ucts. Exports to the emerging market economies in tion and is puzzling in light of the sector's ongoing Asia, particularly Korea, as well as exports to Japan infrastructure needs and the good financial shape of were down sharply while exports to western Europe most governments. and Canada rose moderately. Preliminary data for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report to the Congress 595 April and May suggest that real exports declined finance, insurance, and real estate category. Construcfurther. tion payrolls were bounced around by unusual winter weather but, on average, rose a brisk 21,000 per month—about the same as in 1997. I he Capital Account In contrast to the robust gains elsewhere, manufacturing firms curbed their hiring in the first half of Foreign direct investment in the United States and 1998 in the face of slower growth in factory output. U.S. direct investment abroad continued at near After having risen a torrid 6VA percent in 1997, record levels in the first quarter of 1998, spurred by factory output increased at an annual rate of about strong merger and acquisition activity across national 2!/2 percent between the fourth quarter of last year borders. and May 1998; the deceleration reflected the effects In the first quarter, the booming U.S. stock market of the Asian crisis as well as a downshift in motor continued to attract large foreign interest. Net pur- vehicle assemblies and the completion of the chases by private foreigners were $29 billion, follow- 1996-97 ramp-up in aircraft production. In June, ing record net purchases of $66 billion in the year factory output is estimated to have fallen V2 percent; 1997. Foreign net purchases of U.S. corporate bonds the GM strike accounted for the decline. remained substantial, and net purchases of U.S. gov- The labor force participation rate—which meaernment agency bonds reached a record $21 billion. sures the percentage of the working-age population In contrast, net sales of U.S. Treasury securities by that is either employed or looking for work—trended private foreigners, particularly large net sales booked up mildly over the past couple of years and stood at at a Caribbean financial center, were recorded in the 67.1 percent, on average, in the first half of 1998, first quarter. U.S. net purchases of foreign stocks and slightly above the previous cyclical highs achieved in bonds were modest. late 1989 and early 1990. Participation among adult Foreign official assets in the United States women has picked up noticeably in recent years, after increased $10 billion in the first quarter. However, the having risen only slowly in the first half of the 1990s, net increase in the second quarter was limited by and participation among adult men, which had been large dollar sales by Japan. on a gradual downtrend through mid-decade, appears to have leveled out. In contrast, participation rates for teenagers, for whom school enrollment rates have Tin1 labor Market risen, have continued to sag after having dropped sharply in the early 1990s. Strong labor demand hinpli)\ and I ;ibur Supply clearly contributed importantly to the rise in overall participation over the past several years, but the Labor demand remained robust during the first half of expansion of the earned income tax credit and 1998. Growth in payroll employment averaged changes in the welfare system probably provided 243,000 per month, only a little less than in 1997 and added stimulus. well above the rate consistent with the growth in the working-age population. The unemployment rate held steady in the first quarter at 4% percent but dropped I .iibur CosK and Productivity to the range of 4'/4 percent to AVi percent in the second quarter. Firms no doubt are continuing to rely heavily on The services industry, which accounts for about targeted pay increases and incentives like stock 30 percent of nonfarm employment, continued to be options and bonuses to attract and retain workers. But the mainstay of employment growth over the first the tightness of the labor market also appears to be half of 1998, posting increases of 115,000 per month, exerting some upward pressure on traditional meaon average. Within services, hiring remained brisk at sures of hourly compensation, which have exhibited computer and data-processing firms and at firms pro- a somewhat more pronounced uptrend of late. Indeed, viding engineering and managerial services, but pay- the twelve-month change in the employment cost rolls at temporary help agencies rose much less rap- index (ECI) for private industry workers picked up idly than they had over the preceding few years— to V/7 percent in March, compared with 3 percent apparently in part reflecting difficulties in finding for the twelve months ending in March 1997 and workers, especially for highly skilled and technical 2% percent for the twelve months ending in March positions. Sizable increases were also posted at 1996. Hourly compensation accelerated especially wholesale and retail trade establishments and in the rapidly for employees of finance, insurance, and real Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

596 Federal Reserve Bulletin • August 1998 estate firms, some of whom received sizable bonuses 1 percent per year, on average, over the first half and commissions. However, the acceleration was of the decade. At least in part, the recent strong fairly widespread across industries and occupations productivity growth has likely been a cyclical and, given the relatively small rise in consumer prices response to the marked acceleration of output. But it over the past year, implies a solid increase in real pay is also possible that the high levels of business investfor many workers. ment over the past several years—and the associated The acceleration in hourly compensation costs over rise in the amount of capital per worker—are translatthe past year resulted mainly from faster growth ing into a stronger underlying productivity trend. In of wages and salaries, which rose 4 percent over addition, productivity apparently is being buoyed by the twelve months ending in March; this increase the assimilation of new technologies into the workwas about V2 percentage point larger than the one place. In any event, the faster productivity growth of recorded over the preceding twelve months. Separate late is helping to offset the effects of higher hourly data on average hourly earnings of production or compensation on unit labor costs and prices, thereby nonsupervisory workers also show an ongoing allowing wages to rise in real terms. acceleration of wages: The twelve-month change in this series was 4.1 percent in June, Vz percentage point above the reading for the preceding twelve Prices months. Benefits costs have generally remained subdued, Price inflation remained quiescent in the first half of with the increase over the year ending in March this year. After having increased 1% percent in 1997, amounting to only about 2!/t percent. According to the consumer price index slowed to a crawl in early the ECI, employer payments for health insurance 1998 as energy prices plummeted, and it recorded a have picked up moderately in recent quarters after rise of only about Wi percent at an annual rate over having been essentially flat over the previous couple the first six months of the year. The increase in the of years, and indications are that further increases CPI excluding food and energy—the so-called "core may be in the offing. Insurers whose profit margins CPI"—picked up to 2'/2 percent (annual rate) over had been squeezed in recent years by pricing strate- the first half of the year. However, this pickup follows gies designed to gain market share reportedly are some unusually small increases in the second half of raising premiums, and many managed care plans are 1997, and the twelve-month change has held fairly adding innovations that, while offering greater flex- steady at about 2'/i percent since late last summer. ibility and protections to consumers, may boost costs. The chain-type price index for personal consumption Additional upward pressure on premiums apparently expenditures on items other than food and energy has come from higher spending on prescription drugs. rose only 1 Vi percent over the year ending in the first Among other major components of benefits, rising quarter of 1998—the most recent information availequity prices have reduced the need for firms to able; this measure typically rises less rapidly than pay into defined benefit plans, and costs for state does the core CPI, in part because it is less affected unemployment insurance and workers' compensation by so-called "substitution bias." have fallen sharply. The relatively favorable price performance in the Labor productivity in the nonfarm business sector first half of 1998 reflected a number of factors that, posted another sizable advance in the first quarter of taken together, continued to exert enough restraint to 1998, bringing the increase over the year ending in offset the upward pressures from strong aggregate the first quarter to an impressive 2 percent.' Taking a demand and high levels of labor utilization. One was slightly longer perspective, productivity has risen a bit more than 1V2 percent per year, on average, over 3. Alternative measures of price change the past three years, after having risen less than Percent 1996:Q1 1997:Q1 Price measure to to 1. According to the published data, productivity rose 1.1 percent at I997:Q1 1998:Q1 an annual rate in the first quarter. However, these data are distorted by inconsistencies in the measurement of hours associated with varying Fixed-weight lengths of pay periods across months. Although the Bureau of Labor Consumer price index 2.9 1.5 Statistics has already revised the monthly hours and earnings data to Excluding food and energy 2.5 23 account for these inconsistencies, it will not update the productivity Chain-type statistics until August. All else being equal, adjusting the productivity Personal consumption expenditures ... 2.6 1.0 data to reflect the Bureau's revisions to hours would substantially Excluding food and energy 2.3 1.4 Gross domestic product 2.2 1.4 raise productivity growth in the first quarter, but it would have little effect on the change over the four quarters ending in the first quarter. NOTE. Changes are based on quarterly averages. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report to the Congress 597 the drop in oil prices. In addition, non-oil import ter of 1997, the spot price of West Texas intermediate prices continued to fall, thus further lowering input dropped to a monthly average of $15 per barrel in costs for many domestic industries and limiting the March, where it more or less remained through the ability of firms facing foreign competition to raise spring. Crude prices dropped sharply in June followprices for fear of losing sales to producers abroad. ing reports of high levels of inventories and revised Prices of manufactured goods were also held in check estimates of oil consumption in Asia but have since by the sizable increase in domestic industrial capacity firmed in response to an agreement by major oil in recent years and by developments in Asia, which, producers to restrict supply in the months ahead; they among other things, led to a considerable softening now stand at $14'/2 per barrel. Reflecting the decline of commodity prices. Moreover, the various surveys in crude prices, retail energy prices fell at an annual of consumers and forecasters suggest that inflation rate of 12 percent over the first half of the year, led by expectations stayed low—even declined in some a steep drop in gasoline prices. measures. For example, according to the Michigan Developments in the agricultural sector also helped survey, median one-year inflation expectations to restrain overall inflation in the first half of this dropped a bit further this year, after having held fairly year. Excluding the prices of fruits and vegetables— steady over 1996 and 1997, and inflation expecta- which tend to be bounced around by short-term tions for the next five to ten years edged down from swings in the weather—food prices have been rising about 3 percent, on average, in 1996 and 1997 to a scant 0.1 percent per month, on average, since late 23A percent in the second quarter of 1998. 1997. Although farmers in some regions of the coun- The CPI for goods other than food and energy rose try are experiencing more prolonged weather probat an annual rate of 1 percent over the first six months lems, conditions in the major crop-producing areas of 1998, only a bit above the meager Vi percent of the Midwest still look relatively favorable, and it rise over 1997 as a whole. In the main, the step-up appears that aggregate farm production will be suffireflected a turnaround in prices of used cars and cient to maintain ample supplies over the coming trucks, and prices of tobacco products and prescrip- year, especially in the context of sluggish export tion drugs also rose considerably faster than they demand. had in 1997. More generally, prices continued to be restrained by the effect of the strong dollar on prices of import-sensitive goods. For example, prices of Credit iiiid ilw MciH'tary A^^rc^iiles new vehicles fell slightly over the first half of the year, while prices of other import-sensitive goods— Credit and Depositor* Intermediation such as apparel and audio-video equipment—were flat or down. In the producer price index, prices of The total debt of U.S. households, governments, and capital equipment were little changed, on balance, nonfinancial businesses increased at an annual rate of over the first half of 1998; they, too, were damped by 53/4 percent from the fourth quarter of 1997 through the competitive effects of falling import prices. May of this year. Domestic nonfinancial debt now The CPI for non-energy services increased 3 per- stands a little above the midpoint of the 3 percent to cent over the first six months of 1998, about the same 7 percent range established by the FOMC for 1998. as last year's pace. After having fallen somewhat last Debt growth has picked up since 1997, as an year, airfares picked up in the first half of the year, acceleration of private credit associated with strong and owner's equivalent rent seems to be rising a domestic demand and readily available supply has bit faster than it did in 1997. In addition, increases more than offset reduced federal borrowing. Indeed, in prices of medical services, which had slowed federal debt declined 1 lA percent at an annual rate to about 3 percent per year in 1996-97, have been between the fourth quarter of 1997 and May 1998, running somewhat higher so far this year. Price whereas nonfederal debt increased 8 lA percent changes for most other major categories of services annualized over the same period. The growth of were similar to or smaller than those recorded in nonfederal debt has slowed only slightly over the past 1997. several months. Energy prices fell sharply in early 1998, as the Credit on the books of depository institutions rose price of crude oil came under severe downward pres- at roughly the same pace as total credit in the first sure from weak demand in Asia, a decision by key half of the year. Commercial bank credit advanced OPEC producers to increase output, and a relatively rapidly in the first quarter and at a more subdued rate warm winter in the Northern Hemisphere. After hav- in the second. This slowdown was especially acute ing averaged about $20 per barrel in the fourth quar- in securities holdings, which had surged in both the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

598 Federal Reserve Bulletin • August 1998 fourth quarter of 1997 and the first quarter of this assessments should take account of the possibility of year. Responses to the Federal Reserve's May survey less positive economic circumstances in the future. on bank lending practices suggest that the earlier The trend toward consolidation in the banking runup in securities reflected the efforts of banks to industry continued in the first half of the year. Some boost returns on equity by increasing leverage; much of the announced mergers involve combinations of of the rise in securities holdings was concentrated at banks and nonbank financial institutions, such as banks that were constrained by recent mergers from thrifts and insurance companies. Many of the mergers using their profits to repurchase shares. Loan growth were designed to capitalize on the economies of scale also slowed in the second quarter, although the vari- and diversification of risk in nationwide banking; ous loan categories behaved quite differently: Real other mergers were undertaken to expand the range estate lending expanded most slowly in May and of services offered to customers. Although some June, whereas business lending rebounded in those observers are concerned that consolidation might months after having stalled out in March and April. raise banks' market power, greater national con- Outstanding loans at branches and agencies of for- centration in banking over the past several years has eign banks declined in the second quarter, and survey not increased banking concentration in most local responses identified an actual or expected weakening markets. in the capital position of the parent banks as the primary impetus for a tightening of loan terms and standards. The The Report of Condition and Income (the Call Report) showed that banks' return on equity was The broad monetary aggregates grew more rapidly in about unchanged in the first quarter, staying in the first half of 1998 than they did in 1997, although the elevated range it has occupied since 1993. Call the pace of their expansion has slowed noticeably in Report data also indicated that delinquency and recent months. M2 grew 11A percent at an annual rate charge-off rates on commercial and industrial loans between the fourth quarter of last year and June of and on real estate loans remain quite low, while this year, placing it well above the top of its 1 percent delinquency and charge-off rates on consumer loans to 5 percent growth range. When the FOMC estabhave leveled off after their previous rise. Indeed, lished this range in February, it noted that annual bank profits have benefited importantly in recent ranges represented benchmarks for money growth years from a low level of provisioning for loan losses. under conditions of stable prices and velocity behav- Nevertheless, bank supervisors have been concerned ior in accordance with its pre-1990 historical expethat intense competition and favorable economic con- rience. In fact, nominal spending and income have ditions might be leading banks to ease standards grown more rapidly than is consistent with price excessively. They reminded depositories that credit stability and sustainable real growth, and the velocity •I. (irnwili HI >trul Percent Domestic Period Ml M2 M3 nonflnancial debl Annual' 1988 43 S.7 6.3 9.1 1989 .5 5.2 4.0 7.5 1990 4.2 4.1 1.8 6.7 1991 7.9 3.1 1.2 4.5 1992 . .. . . 14.4 1.8 .6 4.5 1993 10.6 1.3 I.I 4.9 1994 2.5 .6 1.7 4.9 1995 -1.6 3.9 6.1 5.4 1996 -4.5 4.6 6.8 5.3 1997 -1.2 5.7 8.8 5.0 Quarterly (annual rale) - 1998:1 .' 3.0 8.0 11.0 6.2 2 .3 7.3 9.6 n.a. Year-to-dale' 1998 .9 7.3 9.8 5.8 1. From average for fourth quarter of preceding year to average for fourth 3. From average for fourth quarter of 1997 lo average for June (May in the quarter of year indicated. case of domestic nonfinancial debt). 2. From average for preceding quarter to average for quarter indicated. n.a. Not available. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report to the Congress 599 of M2 (defined as the ratio of nominal GDP to M2) growth has slowed. Holdings of institutional money has fallen relative to the behavior predicted by the market mutual funds climbed more than 20 percent pre-1990 experience. in each of the past three years, and that strength has For several decades before 1990, M2 velocity mounted in 1998 as businesses' interest in outsourcshowed little overall trend but varied positively from ing their cash management evidently has intensified. year-to-year with changes in M2 opportunity cost, Because in-house management often involves shortwhich is generally defined as the interest forgone term assets that are not included in M3, the shift to by holding M2 assets rather than short-term market mutual funds boosts M3 growth. instruments such as Treasury bills. The relationship Ml rose 1 percent at an annual rate between the was disturbed in the early 1990s by a sharp increase fourth quarter of 1997 and June of this year. Currency in velocity; however, since mid-1994, M2 velocity expanded 6'/2 percent annualized over that period, a and opportunity cost have again been moving roughly bit below its increase last year. Foreign demand for together, though not in lockstep. Indeed, velocity has U.S. currency apparently weakened substantially in declined recently despite almost no change in the the first five months of the year, with an especially standard measure of opportunity cost. The dip in large decline in shipments to Russia. Deposits in Ml velocity may be partly attributable to the flatter yield declined in the first half of the year owing to the curve, which has reduced the return on longer-term continued introduction of "sweep" programs. Ml investments relative to M2 assets—bank deposits and growth has been depressed for several years by the money market mutual funds. Money demand may spread of these programs, which sweep balances out also be bolstered by the efforts of households to of transactions accounts, which are subject to reserve rebalance their portfolios in the face of a booming requirements, and into savings accounts, which are stock market. By the end of 1997, households' mone- not. Depositors are unaffected by this arrangement tary assets had ebbed to the smallest share of their because the funds are swept back when needed; banks total financial assets in many years, and households benefit because they can reduce their holdings of may want to reduce the concentration of their assets reserves, which earn no interest. New sweeps of in relatively risky equities and increase their holdings other checkable deposits have slowed sharply, but of less volatile M2 assets. However, in spite of both sweeps of demand deposits into savings deposits—an the flatter yield curve and the rebalancing motive, activity that has become popular more recently— flows into both bond mutual funds and stock mutual continue to spread. Because many banks have already funds have been quite heavy this year. reduced their required reserves to minimal levels, the total flow of new sweep programs is tapering off, M2 increased IV* percent at an annual rate in the although it remains considerable. second quarter, compared with 8 percent in the first quarter. A buildup in household liquid accounts in The drop in transactions accounts in the first half preparation for individual income tax payments sub- of the year caused required reserves to fall 33/4 perstantially boosted money growth in April; the clear- cent at an annual rate, a much slower decline than ing of these payments depressed May growth by in 1997. The monetary base grew 5'/2 percent over a roughly equal amount. At an annual rate, M2 the same period, as the runoff in required reserves increased about 6 percent on average over April and was more than offset by the increased demand for May and about 5 percent in June, suggesting a larger currency. deceleration than is shown by the quarterly average The substantial decline in required reserves over figures. the past several years has raised concern that the M3 grew 93/4 percent at an annual rate between the federal funds rate might become more volatile. fourth quarter of last year and June, placing it far Required reserves are fairly predictable and must be above the top of its 2 percent to 6 percent growth maintained on only a two-week average basis. As a range. As with M2, the FOMC chose the growth result, the Federal Reserve has generally been able range for M3 as a benchmark for growth under condi- to supply a quantity of reserves that is close to the tions of price stability and historical velocity behav- quantity demanded at the federal funds rate intended ior. The components of M3 not included in M2 by the FOMC, and banks have accommodated many increased YlVi percent at an annual rate over the first unanticipated imbalances in reserve supply by varyhalf of the year, following an even faster runup in ing the quantity demanded across days. Banks also 1997. Rapid expansion of large time deposits in the hold reserve balances to avoid overdrafts after makfirst quarter was driven importantly by strong credit ing payments to other banks. But this precautionary growth at depository institutions. More recently, demand is more variable and difficult to predict than gains in this category have diminished as bank credit requirement-related demand, and it cannot be substi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

600 Federal Reserve Bulletin D August 1998 tuted across days. As required reserves drop, more Several factors have contributed to the decline in banks will hold deposits at the Federal Reserve only intermediate- and long-term interest rates over the to meet these day-to-day demands, reducing the past year. For one, developments in the U.S. economy potential for rate-smoothing behavior. and overseas reduced expected inflation and, perhaps, So tar, however, the federal funds rate has not uncertainty about future inflation. Between the secbecome noticeably more volatile on a maintenance- ond quarter of 1997 and the second quarter of 1998, period average basis. This outcome has occurred the median long-term inflation expectation in the partly because the Federal Reserve has responded to Michigan Survey Research Center survey of housethe changing nature of reserve demand by conducting holds dropped lA percentage point, and the average open market operations on more days than had been expectation in the Philadelphia Federal Reserve's customary and by arranging more operations with Survey of Professional Forecasters fell almost V2 perovernight maturity, thereby bringing the daily reserve centage point. Over the same period, the variance of supply more closely in line with demand. At the same long-term inflation expectations in the Michigan surtime, banks have borrowed more reserves at the vey was halved. This greater consensus of expectadiscount window and have improved the manage- tions suggests that people may now place less weight ment of their accounts at Reserve Banks. Between on the possibility of a sharp acceleration in prices; a 1995 and 1997, banks also significantly increased reduction in perceived inflation risk would tend to their required clearing balances, which they pre- reduce term premiums and thereby cut long-term commit to hold and which earn credits that can be interest rates. A damping of expected growth in real applied to Federal Reserve priced services. Like demand here and abroad, triggered importantly by required reserve balances, required clearing balances the Asian financial crisis, also has probably pulled are predictable by the Federal Reserve and can be rates lower, as has an apparent shift in desired portsubstituted across days within the two-week maintefolios away from Asia and, to some extent, from nance period. Going forward, the Federal Reserve's other emerging market economies. Lastly, diminrecent decision to use lagged reserve accounting ished borrowing by the federal government has rerather than contemporaneous reserve accounting strained interest rates by reducing the competition for will increase somewhat the predictability of reserve private domestic saving and for borrowed funds from demand by both banks and the Federal Reserve. Still, abroad. further declines in required reserves might increase Assessing the relative importance of some of these funds-rate volatility. Moreover, one-third of the banks factors might be aided, in principle, by comparing responding to the Federal Reserve's recent Senior yields on nominal and inflation-indexed Treasury Financial Officer Survey report that reserve managenotes. Between the second quarters of 1997 and ment is more difficult today than in the past. One way 1998, the nominal ten-year yield fell more than 1 perto diminish these problems would be to pay interest centage point, whereas the inflation-indexed ten-year on reserve balances, which would reduce banks' yield increased a bit. Unfortunately, the relatively incentives to minimize those balances. recent introduction of inflation-indexed securities and the thinness of trading makes interpreting their yield levels and movements difficult. In particular, light trading may lead investors to view these new securities as providing less liquidity than traditional Trea- Interest R:iu- sury notes, and investors may value liquidity especially highly now in the face of uncertainty about Yields on intermediate- and long-term Treasury secu- developments in Asia. rities moved in a fairly narrow band during the first The yield curve for Treasury securities has recently half of 1998, centered a little below the levels that been flatter than at any point since the beginning of prevailed in the latter part of 1997. The thirty-year the decade. For example, the difference between the bond yield touched its lowest value since the bond ten-year-note yield and the three-month-bill yield was introduced to the regular auction calendar in was smaller in the first half of 1998 than in any other 1977; it was also lower than any sustained yield on half-year period since early 1990. In that earlier epithe twenty-year bond (the longest maturity Treasury sode, the yield curve had been flattened by a sharp security before the issuance of the thirty-year bond) runup in short-term interest rates as the Federal since 1968. Meanwhile, the average yield on five- Reserve tried to check an upcreep in inflation. In the year notes in the first half of the year was the lowest current episode, short rates have held fairly steady, since early 1994. while long-term rates have declined significantly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report to the Congress 601 Some of the current flatness of the term structure seriously affected by the crises. In early April, the probably stems from the apparent reduction in term agreement between Korean banks and their external premiums noted above. But the flat yield curve may bank creditors to stretch out short-term obligations also reflect the expectation that short-term real inter- was implemented, ending an interval of rollovers by est rales, which have been boosted by the decline in creditors that was endorsed by the authorities in inflation over the past year, will drop in the future. countries that had pledged to support the Korean Supporting that notion, the yield curve for inflation- program. Indonesia reached a second revised agreeindexed debt has become inverted this year, as the ment with the International Monetary Fund (IMF) in return on the five-year indexed note has risen above April on a reform program, which was subsequently the return on the ten-year indexed note, which derailed by political strife and the resignation of the exceeds the return on the new thirty-year indexed president in late May; the change in political regime bond. was followed by calm, and a new agreement was reached with the IMF management in late June and approved by the IMF Executive Board on July 15. Hqintv Prices After having risen sharply during the final months of 1997 through mid-January of 1998, the exchange Equity markets have remained ebullient this year. value of the dollar in terms of the currencies of The S&P 500 composite index rose sharply in the Korea, Indonesia, Thailand, and other ASEAN counfirst several months of 1998; it then fell back a little tries partly retraced those gains during February, before moving up to a new record in July. The March, and April. Since then, however, market pres- NASDAQ composite, NYSE composite, and Dow sures have again led to further sharp increases in the Jones Industrial Average followed roughly similar exchange value of the dollar in terms of the Indonepatterns, and these indexes now stand about 17 to sian rupiah while the dollar has changed little against 28 percent above their year-end marks. Small capimost of the other Asian emerging-market currencies. talization stocks have not fared so well this year, with Since the end of December, the dollar has declined, the Russell 2000 index up about a third as much on on balance, 24 percent against the Korean won and net. nearly 14 percent against the Thai baht and has risen The increase in equity prices combined with the moderately in terms of the Taiwan dollar and recent slowdown in earnings growth has kept many increased about 130 percent in terms of the Indovaluation measures well above their historical ranges. nesian rupiah. The ratio of prices in the S&P 500 to consensus During the first weeks of the year, the dollar depreestimates of earnings over the coming twelve months ciated in terms of the Japanese yen as improved reached a new high in April and has retreated only prospects elsewhere in Asia and market uncertainty slightly from that point. At the same time, the real regarding potential intervention by the Japanese long-term bond yield—measured either by the tenmonetary authorities lent support to the yen. Indicayear indexed yield or by the difference between tions that significant measures for economic stimulus the ten-year nominal Treasury yield and inflation might be announced also put upward pressure on the expectations in the Philadelphia Federal Reserve's yen. In February, the dollar resumed its appreciation survey—is little changed since year-end. As a result, with respect to the yen. The rise in the dollar was the forward-earnings yield on stocks exceeds the real only temporarily interrupted by sizable intervention yield on bonds by one of the smallest amounts purchases of dollars by Japanese authorities in April. in many years. Apparently, investors share analysts' Upward pressure on the dollar relative to the yen expectations of robust long-term earnings growth, or intensified in late May and June. Renewed signs of they are content with a much smaller equity premium cyclical weakness in the Japanese economy and lack than the historical average. of market confidence in the announced programs for addressing the chronic problems within the financial International Developments sector contributed to pessimism toward the yen. Persistent weakness in the Japanese economy and the Events in Asia, including in Japan, have continued to yen, in turn, heightened concerns about prospects dominate developments in global asset markets so far elsewhere in Asia; the lower yen adversely affected in 1998. During the first months of the year, many the competitiveness of goods produced in the Asian financial markets in Asia appeared to stabilize, and emerging-market economies and raised questions progress in implementing economic and financial about the sustainability of current exchange rate polireform programs was made in most of the countries cies in China and Hong Kong. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

602 Federal Reserve Bulletin • August 1998 On June 17, the monetary authorities in the United nal demand as a consequence of the crises. Data for States and Japan cooperated in foreign exchange recent months suggest that additional slowing has intervention purchases of yen for dollars. This inter- occurred and that the risk of further spread and deepvention operation was the first by U.S. authorities ening of cyclical weakness throughout the region since August 1995. In announcing the market inter- cannot be ruled out. Depreciation of their respective vention, Treasury Secretary Rubin cited Japanese currencies has led to acceleration of domestic prices government plans to restore the health of their in several of these economies, particularly in Indofinancial system and to strengthen Japanese domestic nesia and Thailand. demand. He pointed to the stake of Asia and the Real GDP in Japan also fell sharply in the first international community as a whole in Japan's suc- quarter, and output indicators suggest a further cess. The yen rose somewhat following the exchange decline in the second quarter. Consumer price inflamarket intervention and has since partially given tion remains very low. Japanese authorities have back that gain. In the wake of the recent election, announced a series of fiscal measures that are which cost the Liberal Democratic Party numerous expected to boost domestic demand during the seats in the upper house of the Diet and precipitated second half of this year. In addition, officials have the resignation of Prime Minister Hashimoto, the yen announced a package of steps directed at restoring changed little. On balance, the dollar has appreciated the soundness of the financial sector, including about 7 percent in terms of the yen since the end of (1) introduction of a bridge bank mechanism to facili- December. tate the resolution of failed banks while permitting Equity prices in the Asian emerging-market econo- some of their borrowers to continue to receive credit, mies have been volatile so far this year as well. These (2) measures to improve the disposal of bad bank prices recovered somewhat in the first weeks of loans, (3) enhanced transparency and disclosure by the year in response to the market perception that the banks, and (4) strengthened bank supervision. These crisis was easing; after having fluctuated narrowly, actions are intended to restore confidence in Japanese they began moving back down in March and April, financial institutions and in the prospects for the reaching new lows in June in Korea, Thailand, and economy more broadly. Hong Kong. On balance, these equity prices have In the other major industrial countries, economic moved down about 25 percent (Singapore and Malay- developments so far this year have generally been sia) to up about 20 percent (Indonesia) since the end favorable. The exchange value of the dollar in terms of last year. Equity prices in Japan also rose early in of the German mark has fluctuated narrowly and, on the year on improved optimism but then gave back balance, is little changed since the end of December. those gains over time with the release of indicators Market perceptions that progress toward the start of suggesting additional weakness in the Japanese econ- the final stage of European Monetary Union (EMU) omy. Since the middle of June, Japanese equity prices is going smoothly and signs of momentum in the U.S. have rebounded on the perception that significant and German economies resulted in little pressure in fiscal stimulus is now more likely. On balance, Japa- either direction on the exchange rate. The dollar also nese equity prices are up about 9 percent from their fluctuated narrowly against the U.K. pound with little level at the end of last year. Japanese long-term net change so far this year. Moves to tighten moneinterest rates continued through May on their down- tary conditions in the United Kingdom lent support to ward trend that began in mid-1997, declining an the pound, countering some tendency for weak exteradditional 50 basis points during the first five months. nal demand to depress the currency. The Canadian Since then, long-term interest rates have retraced dollar rebounded following a tightening of monetary more than half of that decline, in part in response to conditions by the Bank of Canada on January 30. the announcement of the plan for financial restruc- Since early March, however, it has tended to move turing and in part in response to the outcome of down as market participants have come to believe the recent election, which heightened expectations that further upward shifts of official interest rates are of additional fiscal stimulus. unlikely and as weakness in global commodity mar- The Asian financial crises have resulted in a sharp kets, partly the result of reduced economic activity in drop in the pace of economic activity in the region. Asia, have weighed on the currency. The exchange Output declined precipitously in the first quarter in value of the U.S. dollar in terms of the Canadian those countries most affected, such as Korea, Indo- dollar reached new highs in July and, on balance so nesia, and Malaysia, and slowed in other Asian far this year, has risen about 4 percent. economies, such as China and Taiwan, that have Long-term interest rates have declined, and equity suffered a loss of competitiveness and reduced exter- prices have generally risen strongly in European and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Report to the Congress 603 Canadian markets this year. Despite signs of strength- global oil prices have contributed to downward presening activity in Germany and other continental sure on the exchange value of the Mexican peso. The European countries and continued healthy expansion peso declined sharply in terms of the dollar at the in the United Kingdom and Canada, long-term rates start of the year but then stabilized in February have moved down since December; long rates are through May as Asian markets partially recovered. It about 60 basis points lower in Germany and less than depreciated further in May and June, resulting in a half that amount lower in Canada. Shifts of interna- net decline of about 9 percent in terms of the dollar tional portfolios away from Asian assets and toward so far this year. The Brazilian exchange rate regime those perceived to be safer have probably contributed of a controlled crawl and the Argentine regime of to rate declines in Continental Europe and in the pegging the peso to the dollar remain in place, and United States. Stock prices have also continued Brazilian short-term interest rates have been lowered to rise in Europe and Canada. Since December, the from the very high levels to which they were raised gains have ranged from about 40 percent in Germany when the Asian crisis intensified in late 1997. Equity and France to about 10 percent in Canada. prices in these three Latin American countries have The pace of real economic activity improved some- been volatile, rising early in the year and giving back what in the first quarter in Germany and on average those gains since April. On balance this year, equity in the eleven countries slated to proceed with cur- prices have declined about 10 percent in Mexico and rency union on January 1, 1999.2 Production and Argentina and have risen about 8 percent in Brazil. employment data for more recent months suggest Real output growth remains strong in Mexico and continued expansion. Business confidence has firmed Argentina, but the rate has slowed somewhat from as progress toward EMU has continued. Domestic last year's vigorous pace. In Brazil, economic activdemand is becoming more buoyant in several of these ity has weakened more sharply, in part in response to countries, offsetting weakening of external demand the tightening of monetary conditions that followed arising from events in Asia. On average, inflation the outbreak of the Asian crisis. remains subdued within the euro area. In the United Lower global oil prices have combined with a Kingdom and Canada, real output continues to poorly functioning domestic tax system to trigger a expand at a relatively rapid rate. U.K. inflation threat- financial crisis in Russia. Russian officials have ens to exceed the government's target of 2'/2 percent, reached agreement with IMF management on a and the Bank of England raised its official lending revised program that includes proposed increased rate 25 basis points in June in order to lessen price funds from the IMF and other sources. To help pressures. Consumer price inflation in Canada finance this program, the General Arrangements to remains very low. Borrow are being activated in light of the inadequacy Events in Asia have spilled over to affect devel- of IMF resources to meet actual or expected requests opments in Latin American countries. Declines in for financing and a need to forestall impairment of the international monetary system. The General Arrangements to Borrow provide the IMF with supplementary lines of credit from the G-10 2. Those countries are Austria, Belgium, Finland, France, Ireland, countries. • Italy, Germany, Luxembourg, the Netherlands, Portugal, and Spain. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

604 Recent Changes to the Federal Reserve's Survey of Terms of Business Lending Thomas F. Brady, William B. English, and William R. This article discusses the most recent changes Nelson, of the Board's Division of Monetary Affairs, made to the survey and presents some informaprepared this article. Thomas C. Allard assisted tion now available from the new items being in the preparation of the data. Lisa X. Chen and reported. It also summarizes information about the Adrian R. Sosa provided research assistance. use of loan risk ratings from consultations with a sample of the survey respondents. These consulta- The Federal Reserve's quarterly Survey of Terms of tions were conducted in the process of planning Business Lending, which has been conducted for the revisions to the survey and provided much usemore than twenty years, collects information on inter- ful information, particularly with respect to risk est rates and other characteristics of commercial baak ratings. loans to businesses. The survey has been changed from time to time to recognize innovations in bank lending practices and to improve the measurement of the desired information. The most recent changes ri.\ck<;iu>t:\D oi- nil-. Si AV/_) took effect with the May 1997 survey.1 The major improvement was the addition of an item measuring Since its inception in 1977, the Survey of Terms loan risk. The addition of this item was possible of Business Lending (STBL) has provided unique because a large and increasing percentage of banks information concerning the terms (both price and have adopted the practice of assigning internal risk nonprice) of commercial and industrial loans ratings to their "pass" loans—that is, loans other made to U.S. nonfinancial businesses by commerthan those to troubled borrowers. (Loans to troubled cial banks. The STBL replaced the Quarterly Interborrowers are generally part of workout arrange- est Rate Survey and portions of the Survey of ments.) Further changes were made to the survey to Selected Interest Rates. It was designed to proimprove the measurement of other important loan vide more accurate and detailed information than characteristics. In addition, the reporting panel, which these surveys on business loans, especially conhad been limited to domestically chartered com- cerning maturity and nonprice terms. (See the box, mercial banks, was expanded to include a sample of "A History of Federal Reserve Surveys of Business U.S. branches and agencies of foreign banks. These Lending Terms.") branches and agencies now account for a significant The STBL collects detailed data on individual proportion of business lending to U.S. firms.2 loans from a stratified random sample of about 300 institutions. The survey respondents provide information on the stated rate of interest on each loan 1. Details on the proposed changes to the survey were published extended during the survey week and the frequency for public comment in Board of Governors of the Federal Reserve with which interest is compounded or paid, thereby System, "Agency Information Collection Activities: Proposed Collecallowing calculation of the effective interest rate. The tion; Comment Request," Federal Register, vol. 61 (July 23, 1996), pp. 38202-203. Announcement of the final Board action was pub- respondents also report other important loan characlished in Board of Governors of the Federal Reserve System, "Agency teristics, including loan size, loan maturity, the fre- Information Collection Activities: Submission to OMB Under Delequency of repayments, collateralization status, and gated Authority," Federal Register, vol. 61 (October 24, 1996), pp. 55151-152. the size of the commitment (if any) under which the Changes like those made to the business survey were made at the loan was extended. same time to a survey of farm loans (Survey of Terms of Bank Data are collected for the first full business week Lending to Fanners). 2. As a result of the inclusion of the branches and agencies of of the middle month of each quarter (February, May, foreign banks, the name of the survey was changed from the Survey August, and November). These sample data are used of Terms of Bank Lending to Business to the Survey of Terms of to construct estimates of the terms of business loans Business Lending. In this article we refer to both the old and new versions of the survey as the STBL. extended during the reporting week at all domesti- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

605 cally chartered commercial banks and U.S. branches RECENT CHANGES TO THE SURVEY and agencies of foreign banks.3 The most recent changes to the survey involved the addition of items on loan risk, the introduction of other new items, the revision or deletion of some items, and an expansion of the coverage of the survey. 3. These estimates are published in the Federal Reserve Bulletin and in the Federal Reserve's E.2 Statistical Release, "Survey of Terms of Business Lending," which is available on the Board's web survey, conducted in May, are published in this issue of the Bulletin on site (www.bog.frb.fed.us/releajses/E2). The results of the most recent pages A67-A71. A History of Federal Reserve Surveys of Business Lending Terms The Federal Reserve has collected and published informa- with maturities of more than one year), loans made under tion on business loan rates at commercial banks since 1919. revolving credit arrangements, and other loans with maturi- Between 1919 and 1939 the Federal Reserve collected ties of less than one year. These rates were published by monthly data on the average prevailing rate charged on size category and region as well as for the entire nation. prime (high-quality) commercial loans as part of its survey Starting in January 1972 the Federal Reserve began a of rates on loans to customers. By 1930 the survey included monthly survey of interest rates on a variety of bank loans about 200 large banks in thirty-six "principal" cities, for the Committee on Interest and Dividends (the CID although the panel had been smaller in earlier years. Calcu- survey). The committee, which was chaired by Federal lations of the published estimates of regional and national Reserve Chairman Arthur Burns, was established by Execuaverage rates were based on the volume of lending at the tive Order in October 1971 to formulate and execute a surveyed banks and at other large banks. program for voluntary restraint on interest rates and One problem with this survey was that rather than provid- dividends. The CID survey, which was conducted in ing information on the average rate actually paid by all addition to the QIRS, collected monthly data on selected business borrowers, it covered only the rate paid by prime loan interest rates from a panel of about 350 banks of all borrowers, which tended to be relatively large. In 1939 the sizes. One portion of this survey gathered data on the "most Federal Reserve introduced a new survey (the Quarterly common" rate on small, short-term, noninstallment busi- Interest Rate Survey, or QIRS) and discontinued the previ- ness loans. Another portion of the survey collected data ous survey. The new survey collected information from a on the prime rates applicable to small and large business panel of about ninety large banks in nineteen cities on the loans. Averages of these rates, calculated on an unweighted distribution of actual loan rates charged on all new commer- basis, were published in a Federal Reserve statistical cial and industrial loans with maturities of between thirty release. days and one year during the first half of the final month of In 1977 the Federal Reserve replaced the QIRS and the each quarter. This information was used to calculate the business loan portion of the CID survey with the Survey of weighted-average rate on new business loans at large banks Terms of Bank Lending to Business (STBL). The new by region and for the nation as a whole. Starting in 1948, survey was similar to the QIRS, but the panel of responthe QIRS collected data on the terms of individual loans dents was expanded considerably and included banks of all with maturities of less than one year, and weighted-average sizes. The respondents reported the terms on loans extended rates on such loans were calculated and reported by loan in the first full business week of the middle month of each size. quarter. The responses were used to estimate the average The QIRS was substantially revised in 1967. The panel rate and terms on all business loans and on loans of various size was increased to 126 large banks in thirty-five cities. At sizes and maturities that were extended by all U.S. commerthe same time, the timing of the survey was shifted to the cial banks during the survey week. middle month of each quarter. The Federal Reserve contin- Three significant changes to the STBL preceded the ued to publish weighted-average loan rates for loans with current revision. First, in 1982 the reporting of loan matumaturities of less than one year and provided average rates rity was changed from months to days to allow overnight for more regions and for larger size categories than had loans, which were becoming much more common at that been the case before the revisions. time, to be detected. Second, starting in 1986 the respon- Starting in 1971 and continuing until the survey was dents were asked to report the base rate used in the setting discontinued in 1977, separate weighted-average loan rates of loan interest rates because banks were increasingly using were published for three types of loan:1 term loans (those market rates rather than the prime rate to price business loans. Finally, in 1989 construction and land development 1. Data allowing these three rales to be calculated had been collected loans secured by real estate, which had been included as a since 1967. Historical data for the new series were published for 1967-71. separate category on the STBL until that time, were dropped See Mary F. Weaver and Edward R. Fry, "Bank Rates on Business Loansfrom the survey. Revised Series," Federal Reserve Bulletin, vol. 57 (June 1971), pp. 468-77. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

606 Federal Reserve Bulletin • August 1998 Adilinx Information on Loan Risk be useful, however, three conditions had to be met: First, the proportion of banks assigning risk ratings The ability to distinguish among possible reasons for to new loans reported on the STBL had to be suffia movement in loan interest rates could contribute to ciently large; second, banks had to use more than one improved monetary policy. If, for example, banks rating for acceptable new loans; and, third, the definiraise or lower loan interest rates for borrowers of tions of the ratings had to be independent of the state unchanged quality, this change could have implica- of the economy. tions for spending and aggregate demand that would To determine whether these criteria could be met, be important in setting monetary policy. Alterna- Reserve Bank staff members consulted with 114 tively, a change in the average loan rate resulting STBL respondents. Of these, about 85 percent from a shift in the composition of bank loans could reported assigning risk ratings to new business loans suggest that banks have modified their lending stan- or business borrowers (table I).4 All of the large dards, again with possible implications for monetary banks (those with outstanding commercial and induspolicy. For example, a lowering of standards could trial loans of more than $1 billion) assigned internal induce a rise in the average loan rate, as a larger risk ratings, and virtually all of the medium-sized number of risky borrowers received loans at rela- banks (commercial and industrial loans between tively high interest rates. $100 million and $1 billion) did so. Even among the In the past, however, using the survey data to small banks (commercial and industrial loans of less monitor developments in business loan pricing was than $100 million), about two-thirds reported having hampered by a lack of information on loan risk. For a risk rating system. More detailed interviews with example, when spreads of loan rates over base rates personnel from eight STBL respondents indicated rose sharply in the early 1990s, the increase may that definitions of risk-rating categories did not generhave arisen from tighter loan pricing by banks as ally change in the face of changing economic condia result of their desire to limit credit extensions, a tions, at least at those institutions. worsening of the average quality of new borrowers, At most banks, ratings varied enough across loans or both. to make the information provided on loan risk valu- In recent years, an increasing share of banks have able. Most commonly, banks used between three and assigned internal risk ratings to their business loans. This development provided the Federal Reserve with an opportunity to collect information on banks' 4. A bank thai had only a single rating for acceptable new loans assessment of loan riskiness. For this information to was not counted as having a rating system. I. [iilomialiim i in IIDIIICSIK' banks' inkTlial rut I nir s\ steins tor business loans. h\ size ol hank, November Item All Large Medium Small Percentage rating either loans or borrowers 85.1 100.0 94.1 68.8 Average percentage of new loans rated at banks that rated loans By number , 95.2 97.4 93.9 94.5 By dollar volume 96.6 98.0 95.9 95.8 Average number of internal rating categories 7.79 8.66 7.56 7.18 For classified loans' 3.70 3.63 4.00 3.48 For pass loans' 4.00 4.77 3.77 3.43 Average number of rating categories, with each having 10 percent or more of the dollar volume of new loans 2.49 3.04 2.22 2.24 Percentage of banks with 75 percent or more of the dollar volume of new loans in one rating category 37.7 12.0 47.8 51.7 Average share of new loan volume in the rating category with the largest share 64.8 53.6 68.4 71.6 Average rating category assigned to a borrower with an unsecured bond rating of BBB2 3.29 3.66 2.96 3.20 MEMO Number of respondents 114 32 34 48 NOTE. The data were compiled from consultations with 114 respondents to ber 30. 1995: For large banks, more than $1 billion; medium-sized banks, the STBL. These consultations were conducted lo collect information to be used between $100 million and $1 billion; and small banks, less than $100 million. in deciding on the revisions to the survey. The size of bank is based on the 1. For definition, see text. volume of commercial and industrial loans on the bank's books as of Septem- 2. On an ascending scale in which I is the rating with the lowest risk. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Recent Changes to the Federal Reserve's Survey of Terms of Business Lending 607 five ratings for new pass loans, with larger banks With these considerations in mind, the Federal having more pass ratings on average. Although in Reserve decided on the second method: The survey practice most banks assigned the bulk of their loans asks respondents to translate their internal ratings to a smaller number of rating categories, they gener- into one of five rating categories provided in the ally placed at least 10 percent of new loans in each survey instructions, including four pass categories: of two or three rating categories. Many banks also "minimal risk," "low risk," "moderate risk," and assigned smaller, but still significant, proportions "acceptable risk." The moderate-risk category is of new loans to another one or two rating categories. defined to cover the average loan under average Small banks tended to assign their loans to fewer economic conditions at the typical bank. The fifth rating categories. Indeed, more than half of the small rating is a "classified" category for risky loans— banks indicated that they assigned the same rating to likely part of workout arrangements for troubled 75 percent or more of their new loans, while only borrowers—that the respondents judge belong in the 12 percent of the large banks did so. examination categories "special mention," "substan- The substantial differences among the rating sys- dard," "doubtful," or "loss."5 The survey also allows tems of different banks posed a major obstacle to the for unrated loans because some of the banks concollection on the STBL of useful information on loan sulted indicated that they did not usually rate some risk. Some of the banks included in the consultations types of business loans, most often those to small used only one pass rating, while others had as many businesses. as eleven. Even banks that used the same number of ratings were likely to have differing definitions of the individual categories. In addition, banks labeled the < Hlit'r .Wu' i>r Rt:vi\t'<l hems categories in different ways, some with numbers, others with letters, and a few with a mix of numbers A second important change to the survey was and letters. Although most banks had adopted the designed to allow an assessment of the sensitivity of convention that a rating of 1 represented the lowest loan rates to changes in market rates and to improve risk, a small number of banks used that number for the Federal Reserve's ability to match loan rates to their highest risk category. market rates of an appropriate maturity when calcu- Given these differences, it was necessary to map lating spreads. To accomplish these aims, banks are the risk ratings of each respondent into a single asked to report the first date on which rates on system. Two approaches for this mapping procedure variable-rate loans are scheduled to adjust. (Frewere considered. Under the first, the Federal Reserve quently, loans are priced so that the interest rate would collect and maintain a concordance for each adjusts at specified intervals over the life of the loan, respondent, showing how that respondent's risk rat- typically with respect to market rates such as those on ings mapped into a common rating system. Alterna- large time or Eurodollar deposits.) tively, the respondents would do the mapping them- The revised survey also asks banks to provide selves before submitting their data. more information about the options available to The first method appeared to be impractical, terminate a loan. Previously, the survey addressed whereas the second offered some advantages. Under this concept by asking respondents to classify a loan the first method, Federal Reserve staff members as a "demand loan" if the bank had the right to call it would have had to gather and maintain a considerable (that is, demand immediate repayment) or renegotiate amount of information on each respondent's rating its terms at any time. Loans were also classified as system to make the translations. In addition, banks demand loans if the borrower had the option to that had recently merged might have more than one prepay it without cost (that is, without a prepayment rating system, and so for these respondents the rating penalty or "breakage fee"). Banks were instructed to system applied to each loan would have to be iden- identify demand loans by leaving the reported matutified. In contrast, under the second method, banks rity date blank. This reporting method resulted in the would likely find it easier to construct concordances loss of maturity information for demand loans and themselves rather than provide descriptions of their provided no information on whether the option to risk ratings in sufficient detail to allow the Federal terminate the loan belonged to the borrower, the Reserve staff to construct them. Similarly, although bank, or both. In contrast, the revised survey asks changes in a bank's rating system over time would require an adjustment to the concordance, the bank would not need to provide information about such 5. The appendix contains the definitions of the risk-rating catechanges to the Federal Reserve. gories as presented in the survey instructions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

608 Federal Reserve Bulletin • August 1998 banks to report the date of maturity for every loan 1. Shaiv of l.'.S. business loans held by U.S. brandies and having a stated maturity and to report separately agencies of foreign banks. 1977-May IWK whether the loan can be called and whether it has a prepayment penalty. Items Dropped from the Survey Two items were dropped from the survey as of May 1997. One asked banks to report the size of the larger loan syndication or participation, if any, of which a — 10 reported loan was a part. This information applied to only a small share of loans, and many banks had noted that it was difficult to provide. The other item asked banks whether the commitment under which a 1 I I I I I I I I I I I 1 I I I I I I I I 11 loan was extended was formal or informal. This item 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 was dropped because some banks found it difficult to NOTE The data are monthly. report and because the increased use of informal credit lines by high-quality firms blurred the distinc- effect on the rates, maturities, and other loan tion between the two types of commitments. terms available in the market. The nationality of the parent bank was considered important because evidence from the Report of Assets and Liabilities Expansion of the Survey Panel of U.S. Branches and Agencies of Foreign Banks (FFIEC 002) indicates that the behavior of the bal- Until the most recent revision, the STBL panel con- ance sheet items of U.S branches and agencies of sisted entirely of domestic banks.6 However, since Japanese banks can differ significantly from that of the inception of the STBL, the share of the volume non-Japanese (primarily European) institutions. of all U.S. domestic business loans held by U.S. The classification of the panel by size and nationalbranches and agencies of foreign banks has increased ity resulted in five groups. The first group comprised from about 7 percent to about 25 percent (chart 1). As the fifteen largest foreign branches and agencies a result, the exclusion of these institutions from the (regardless of nationality), as measured by the vol- STBL panel resulted in a progressively less repre- ume of commercial and industrial loans outstanding. sentative measure of business loan conditions in All of these institutions were selected for inclusion in the United States because lending terms at foreign the panel. The remaining universe of institutions was branches and agencies may be influenced by foreign then split into two size classes, large and small, and developments that do not directly affect domestic the two size classes were split into Japanese and institutions. To remedy this shortcoming, the survey non-Japanese subclasses; the remaining panel instituwas expanded to include a sample of up to fifty U.S. tions were then selected randomly from these four branches and agencies of foreign banks. Collection of groups. The number of panel members selected from information from these institutions allows the estima- each of the four groups was chosen to provide the tion and publication (in the Federal Reserve Bulletin best possible estimates of loan terms at all foreign and in the E.2 statistical release) of separate estimates institutions.7 of terms on loans extended in the United States by foreign branches and agencies. PRELIMINARY RESULTS I-ROM THE REVISED Two criteria were used in the selection of the panel SURVEY institutions from the universe of more than 450 U.S. branches and agencies of foreign banks: the insti- Although the new items should have their main paytution's size and the nationality of its parent bank. off in helping to explain changes in loan pricing over Because larger institutions make more and larger loans than smaller institutions, they have a larger 7. About thirty of the fifty institutions originally selected for the foreign panel participated in the May 1998 survey. Some of the others 6. Currently, ihe domestic panel consists of a stratified random have been unable to participate thus far but have indicated that they sample of up to 348 U.S. commercial banks intended to represent the will be able to report on future surveys. When selected institutions are entire domestic banking universe. unable to participate, new panel members are substituted. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Recent Changes to the Federal Reserve's Survey of Terms of Business Lending 609 time, the results from the initial surveys incorporat- 98 !/2 percent—of the loans they reported. A second ing the revisions have also provided interesting infor- divergence between the consultations and the STBL mation on risk ratings and pricing patterns for loans results was that small loans appeared to be almost as and their relationship to capital market spreads. likely to receive a rating as large loans. This difference may reflect increased efforts to apply ratings, or Reporting of Loan Risk Ratings it may arise from improvements in technology since the consultations took place that allow ratings to be In the May 1998 survey, nearly 85 percent of the assigned to these loans at lower cost. domestic respondents and more than 95 percent of Consistent with the results of the consultations was the foreign branches and agencies reported risk rat- the finding that a respondent's loans tended to be ings for some or all of their loans (table 2). Among concentrated in relatively few of the STBL rating the domestic banks, medium-sized banks were most categories, especially at the smaller domestic banks. likely to provide ratings, but the differences by size The number of rating categories receiving more than of bank were small compared with those found in the 10 percent of new loans averaged 2.5 for the large consultations. The explanation for this divergence domestic banks but just 1.5 for the small banks. may be that some small banks without internal risk Similarly, while one-fifth of the large banks gave the ratings used the definitions provided in the STBL same rating to 75 percent or more of new loans (by instructions to rate the small number of loans they dollar volume), about half of the medium-sized banks made in the survey week. Moreover, some large and two-thirds of the small banks did so. As might be banks that do have internal risk ratings may not be expected, given that the parent institutions of the able to provide ratings on the survey because auto- foreign branches and agencies are generally fairly mated systems are not yet in place for this survey or large, the distributions of their ratings were similar have not been updated to incorporate the changes to those of the larger domestic banks. On average, to the survey. Because of the large number of loans the foreign branches and agencies had 2.2 catereported by the larger respondents, providing risk gories, each with at least 10 percent of new extenratings manually may be prohibitively expensive. sions; only 31 percent of them assigned 75 percent or Those banks that reported risk ratings in the more of the dollar volume of new loans to a single May survey provided them for nearly all— risk class. STBL FL'SQIIS lor risk ratings, by type i>l instiiution. May 199S Domestic Item All Foreign All Large Medium Small Percenlage of respondents providing ratings' Sample 84.2 82.7 84.5 88.9 77.7 96.6 Population 76.0 75.6 82.9 88.7 74.9 96.6 Average percentage of new loans with a rating at institutions providing ratings By number 98.4 98.4 92.9 96.8 98.6 99.9 By dollar volume 98.3 98.3 92.0 97.8 98.4 100.0 Average percentage of loans with a rating, by size of loan (thousands of dollars) 1-99 93.8 93.7 86.6 97.1 96.9 99.7 100-999 94.6 93.5 91.8 97.5 94.8 99.6 1,000-9,999 97.6 95.0 94.6 95.8 100.0 99.8 10.000andmore 97.0 91.5 91.5 1O0.0 100.0 Average number of rating categories, with each having 10 percent or more of the dollar volume of new loans 1.61 1.59 2.49 1.81 1.53 2.19 Percentage of institutions with 75 percent or more of the dollar volume of new loans in one rating category . 64.7 66.1 20.0 50.1 69.4 30.8 Average share of new loan volume in the rating category with the largest share 79.5 80.1 56.3 75.8 81.4 63.5 MEMO Number of respondents2 283 254 70 72 112 29 NOTE. The size categories for domestic banks are based on the volume of 1. The sample figures show unweighted results for the survey respondents. commercial and industrial loans on the bank's books as of December 31, 1997; Other figures are estimates for the population of all domestically chartered see the general note to table 1 for categories. commercial banks and U.S. branches and agencies of foreign banks. 2. In addition, 24 respondents, mostly small domestic banks, had no new business loans in the survey week. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

610 Federal Reserve Bulletin • August 1998 2. Distribution ol loan originations and average interest The larger number of categories actively employed rates, by risk ratina. May I99S STB], by the larger domestic banks and the U.S. branches and agencies of foreign banks could be the result of more detailed internal risk-rating systems at these Volume of originations institutions, which could yield a wider range of rat- — 50 ings in the common system. Alternatively, the larger domestic and foreign institutions may make loans - 40 with a greater range of risk than the smaller domestic banks do. — 30 — 20 Loan Pricing and Risk Ratings — 10 The largest percentage of loan originations—more than 40 percent by volume—were classified as having moderate risk (the middle-risk category). Rela- Average interest rate tively small percentages—less than 10 percent—of loans were reported in the minimal-risk and classified categories (chart 2). About 25 percent of the loans were classified as having low risk, and less than 20 percent were in the acceptable-risk category. As expected, effective loan rates generally increase on average with risk, although the rate on classified loans (the highest-risk category) is relatively low, perhaps because of the low rates on some workout loans (chart 3). To separate the effect of risk ratings Minimal Low Moderate Acceptable Classified on loan rates from the effects of other loan character- NOTE. See Ihe appendix for definitions of the risk ratings. istics, we used multiple regression analysis. Regres- Averagc interest rale, by type of institution and risk ratine. May 1WH STBL Large domestic banks Medium-sized domestic banks — 10 U.S. branches and agencies Of foreign banks Minimal Low Moderate Acceptable Classified Minimal Low Moderate Acceptable Classified NOTE. See the general note to table 1 for size definitions and Ihe appendix for Digitizedd effoinri tFioRnsA oSf E[hRe risk ratings. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Recent Changes to the Federal Reserve's Survey of Terms of Business Lending 611 sion results that control for the loan characteristics risk category is defined to include loans to firms with measured by the survey show that the estimated BBB-rated debt. Rates on loans in this category are difference in rates between loans in the minimal-risk estimated to be 15 basis points higher than those on category and those in the acceptable-risk category is loans in the minimal-risk category. This spread is about 75 basis points—about 50 basis points less than somewhat smaller than that between the yields on the difference between the average rates on loans in AA-rated and BBB-rated bonds, but it is similar to these categories shown in chart 2 (table 3). the spread between the rates on medium-grade and The risk premiums indicated by the regression prime, one-month commercial paper. At the lowerresults are roughly in line with yield spreads on rated quality end, the estimated premium on loans in the securities, at least for higher-quality loans. The low- highest-risk category (classified) relative to loans in 1. Coefficients from m regression equation1, lor ihe eitixtive loan rate, hy type of iiistiiutum, .May ]lWK Domestic Independent variable All Foreign Large Medium Small Constant 7.83 7.46 8.59 9.63 6.69 Risk raring., Minimal .. -.64 -.85 -.38 -1.31 -.33 Low -.49 -.51 -.53 -.16' -.26 Moderate .. .12 .17 .09 .2i .09 Acceptable .14 .15 .21 .38 .34 Classified . .57 .66 .44 1.04 .42 Missing -.. .31 .38 .17 -.16' -.25' Repricing interval... Zero .20 ,27 -.06' .04' .08' Daily .09 .13 .24 -.24' -.13 2-30 days .20 .26 -.02' -.11' -.01' 31-365d»ys -.11 -.22 .00' .10' -.01' More than 365 days . .15 .15 .17 .21' -.00' Missing -.54 -.59 -.33 .08' Maturity Overnight -.52 -.51 .31' -.67' -.10' 2-30 days -.09 -.11 -.09' .52' .17 31-365days .13 .12 -.03' .30' .34 More than 365 days . .08 .07 -.17 .05' -.13 None .40 .42 -.03' -.19' -.27 Size of loan1 Small .94 .87 .80 .06' Medium ... .15 .2! .23' .05' -i03' Large -.30 -.32 -.40 -.85' .09 Jumbo -.73 -.84 -.71' -.12 Base rate Prime .98 .92 .82 .21' 2.30 Federal funds.. -.89 -.90 -.51 .76' -.77 Other domestic -.18 -.11 .36 -.46' -.74 Foreign -.44 -.38 -.93 -.38' -.39 Other .53 .47 .26 -.13' -.40 Termination options Callable -.09 -.13 .08 .07' .04' Prepayment penalty . .02' .09 -.55 -.13' .13 Other terms Under commitment . -.06 -.04' -.21 .02' .11' Secured .04 .02' -.11 -.62 .40 Tvpe of institution* Small .59 Medium .01' Large -.28 Foreign -.31 .45 .41 .20 .17 .69 Number of observations . 44,529 33.889 6.775 1,155 2.710 MEMO Number of respondents4 283 70 72 112 29 NOTE. The regressions are unweighled.The coefficients on each sel of dummy 2. The loan st^e dummy variables are defined as follows: Small loans are variables thai are exhaustive (risk rating, repricing interval, maturity, size of those less than or equal to $100,000; medium-sized, larger than $100,000 but loan, base rate, and type of institulion) are restricted to sum to zero. less than or equal to $1 million; large, larger than $1 million but less than or 1. This coefficient is not statistically significant at the 5 percent level. Unless equal to SI0 million; and jumbo, larger than $10 million. otherwise noted, the remaining coefficients are significant at that level. 3. For the definitions of size of bank, see the general note to table I. Digitized for FRASER 4. See note 2 to table 2. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

612 Federal Reserve Bulletin • August 1998 the lowest-risk category (minimal risk) is 121 basis 4, Distribution of loan originations ;md average interest rale, points. This result is well below the difference in by repricing interval. May IW8 STBL yield between AA-rated bonds and junk bonds at the Perccnl time of the May survey. This difference may reflect Volume of originations the better protections that bank loans can offer in the event of difficulties, as well as the inclusion of relatively low-interest-rate workout loans in the classified category. The regression coefficients on the dummy variables for risk ratings indicate that small banks charge the largest rate premiums for increased loan risk while medium-sized banks charge the smallest. Rates on loans rated as having minimal risk and acceptable risk differ by 100 basis points at large domestic banks, 59 basis points at medium-sized banks, and 169 basis points at small banks; at the foreign institu- Average interest rate tions, this spread is 67 basis points. The coefficients on risk ratings generally rise in step with risk for both — 8 the domestic and foreign institutions. Loan Pricing and Re/vicing Intervals An examination of the distribution by repricing interval of the volume of loan originations in the May survey reveals that loans with a repricing interval of zero (primarily prime-rate-based loans, which by More than industry practice are subject to repricing at any time) Zero Daily 365 days accounted for about 15 percent of the dollar volume NOTIL. Loans with a zero repricing interval can reprice at any time and of new loans (chart 4).8 Because these loans tend to largely have prime-based rates. be relatively small, however, they accounted for more than 40 percent of the number of loans originated. Conversely, loans that reprice daily, which tend to sion results show, however, that once the effects of be large, accounted for nearly half the dollar vol- other loan terms are taken into account, changes in ume but only about 15 percent of the number of the repricing interval did not have a consistent effect new loans. Loans with repricing intervals longer than on loan interest rates despite the slight upward tilt to a year accounted for only a small proportion of the yield curve during the survey week (table 3, first originations.9 column). In part, this apparent lack of influence may The average rate on zero-interval loans, which, as reflect imprecise measurement of risk. As noted, the already noted, are typically prime based, is higher ratings reported on the survey do appear to provide than the average rate on loans that reprice every day information on banks' assessment of loan risk. How- (chart 4, bottom panel). Aside from prime-based ever, with only five risk-rating categories, many loans, loan rates in the May survey rose on average banks may find it difficult to map their internal ratwith the length of the repricing interval. The regres- ings into those used for the survey. As a result of these difficulties, some portion of loan risk is likely not accounted for by the risk rating and may be correlated with loan terms. For example, if banks are 8. The repricing interval is the time between the date the loan is more willing to make fixed-rate loans with long matumade and the next date on which the loan interest rate can change. 9. The distributions reported here are for originations and so are rities to low-risk borrowers or to those with highnot representative of the outstanding amounts of business loans on quality collateral, then the regression results for the banks' books. Loans with shorter maturities will make up a larger repricing interval variables may be capturing both the share of originations than of outstandings. Repricing intervals and maturities tend to move together (indeed, for fixed-rate loans they are slope of the yield curve and also the lower average the same), and so the distribution of originations by repricing interval risk of those receiving loans with long repricing is more heavily weighted toward shorter-interval loans than would be intervals. the distribution of outstandings. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Recent Changes to the Federal Reserve's Survey of Terms of Business Lending 613 Termination Options 4 Average loan terms .il dnmostic ami foreign institutions, by dollar volume ol loan extensions. May I'J9S During the May survey week about 10 percent of Term All Domestic Foreign loan originations, by volume, were callable and about 30 percent were subject to a prepayment penalty. Size (thousands of dollars) 805 453 5,817 Average maturity (days) 269 419 115 Larger loans were more likely to have a prepayment Average reprieing interval (days) 47 69 22 penalty, however; by number, more than 90 percent Percentage secured by collateral 36.6 37.1 36.1 Termination options (percent) of the loan originations did not have a penalty.10 Callable 11.7 13.8 9.4 Prepayment penally 31.0 9,9 53.9 The regression results suggest little relationship Made under commitment (percent) .... 73.5 73.3 73.6 between loan interest rates and termination options. Average risk rating' 2.97 2.96 2.98 Effective rate (percent) 6.80 7.23 6.34 The coefficients on the dummy variables designating MEMO: loans that can be called and those with prepayment Gross extensions (billions of dollars) .. 134.7 70.7 63.9 Number of respondents2 283 254 29 penalties are generally small and of differing signs across the subsamples. Negative coefficients would NOTE. The figures shown are estimates for all domestically chartered commercial banks and U.S. branches and agencies of foreign banks. indicate that lenders were accepting lower loan inter- 1. Risk ratings range from 1 (least risk) to 5 (highest risk). See the appendix est rates in order to obtain the option to call a loan for definitions of the rating categories. 2. See note 2 to table 2. or to restrict the option to repay the loan. However, banks may be more likely to impose these conditions when the borrower has undesirable characteristics that are not fully captured by the risk ratings, result- age risk rating for loans at the foreign-related instituing in positive or zero coefficients. tions was about the same as that at domestic banks. Nonetheless, the average loan interest rate was about 90 basis points lower at the branches and agencies. Lending Terms at the U.S. Branches and As shown by the coefficient on the dummy variable Agencies of Foreign Banks for foreign institutions (table 3, first column), however, rates at these lenders are similar to those at large The addition of the foreign branches and agencies domestic banks once the effects of other loan charachad a substantial effect on the estimated average teristics are taken into account. terms on new business loans (table 4). The foreignrelated institutions accounted for nearly half of the gross commercial and industrial loan extensions in CONCLUSION the survey week—about twice the share of such loans on their books (chart 1). This high proportion The addition to the STBL of an item on loan risk reflected the larger average size and shorter average rating provides a unique source of information on the maturity of the loans made by these institutions. The riskiness of new business loans. This information average loan at foreign branches and agencies was should improve the interpretation of trends in loan more than $5.8 million—roughly twelve times the pricing and so contribute to the formulation of moneaverage loan size at domestic banks. The average tary policy. The information also improves the Fedmaturity of new loans at the branches and agencies eral Reserve's knowledge of banks' use of risk was 115 days, less than one-third of the average ratings. The addition of U.S. branches and agencies maturity at domestic banks. The loans at branches of foreign banks to the survey panel makes the data and agencies were about as likely to be made under on loan pricing more comprehensive, and therefore commitment, to be secured with collateral, or to be the data should provide better information on callable but far more likely to have a prepayment loan interest rates and other terms available in the penalty than loans at domestic institutions. The aver- market. AL'I'LNDIX: INSTRUCTIONS FOR THE 10. Largely because of the infrequency of prepayment penalties. REPORTING OF THE NEW ITEMS ON THE. 90 percent of the volume of loans reported by domestic banks on the SUR\EY OF TERMS OF BUSINESS LENDING May 1997 survey should properly have been classified as demand loans under the instructions before the revisions. Only 23 percent of the loans on the February 1997 survey, the last before the survey The following excerpts from the STBL instructions changes, were reported as demand loans, suggesting that in the past are for the items that became part of the survey in many banks were incorrectly reporting maturities for loans that should have been classified as demand loans. May 1997. The new items are the following: the next Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

614 Federal Reserve Bulletin • August 1998 date on which the loan rate may be recalculated, the Do not enter your institution's own internal risk termination options, and the risk rating." rating. If your institution rates loans, but a particular loan is unrated, or not yet rated, enter "0" for that loan. \c.\f Dah' mi \\ liich the loan Rate \Liy AY If your institution does not assign internal risk Rcculculu.icd ratings to business loans, either (a) leave this column blank or (b) use the categories presented below to Enter the first date on which the rate on the loan will make the assignment. be recalculated to reflect changes in the base rate, if The definitions provided here take account of both any. the characteristics of the borrower and the protections For a loan rate that can be recalculated at any time provided in the loan contract. Note that the defini- (as with many prime-based loans), enter the date tions are intended to characterize ranges of risk; made. hence the definition of your institutions's internal If the interest rate on the loan is fixed for a period rating for a loan probably will not exactly match any less than the maturity of the loan (for example, a loan of the provided definitions. Enter the numerical desthat matures in 90 days but has a rate that is recalcu- ignation that corresponds most closely to the internal lated every 30 days relative to the 30-day LIBOR), rating of your institution. enter the date on which the interest rate can first be The risk rating categories provided here are not recalculated. intended to establish a supervisory standard for the If the interest rate is fixed for the life of the loan, maintenance or reporting of internal risk rating enter the loan's date of maturity. systems. If the interest rate is fixed and the loan has no stated date of maturity, enter "0." Minimal Risk (Filler Ivnnniottoii ()pu<>n.\ Loans in this category have virtually no chance of resulting in a loss. They would have a level of risk a. Check "yes" under "Callable" when, accord- similar to a loan with the following characteristics: ing to the terms of the agreement, the lender can call or renegotiate the terms of the loan before maturity. • The customer has been with your institution for Otherwise, check "no" under "Callable." many years and has an excellent credit history. Check "no" if the lender's ability to call or renego- • The customer's cash flow is steady and well in tiate the loan is contingent on a change in the status excess of required debt repayments plus other fixed of the borrower (for example, an increase in the charges. borrower's debt-equity ratio). • The customer has an AA or higher public debt b. Check "yes" under "Prepayment penalty" rating. when the borrower must pay a penalty or fee (some- • The customer has excellent access to alternative times called a "breakage fee") in order to repay or sources of finance at favorable terms. reprice the loan before its scheduled maturity or the • The management is of uniformly high quality next scheduled date on which the rate is recalculated and has unquestioned character. (if any). If there is no such fee or penalty, check "no" • The collateral, if required, is cash or cash equivaunder "Prepayment penalty." lent and is equal to or exceeds the value of the loan. • The guarantor, if required, would achieve approximately this rating if borrowing from your institution. If your institution assigns internal risk ratings to business loans, enter the numerical designation from I .<<\v Risk (LnkT "J") the list provided below that most closely matches the definition of the internal rating assigned to this loan. Loans in this category are very unlikely to result in a loss. They would have a level of risk similar to a loan with the following characteristics: 11. The report form and a complete sel of instructions are available on request from the Financial Reports Section, of the Board's Division of Research and Statistics, at 202-452-3829. • The customer has an excellent credit history. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Recent Changes to the Federal Reserve's Survey of Terms of Business Lending 615 • The customer's cash flow is steady and comfort- make likely the recovery of the value of the loan in ably exceeds required debt repayments plus other the event of default. fixed charges. • The guarantor, if required, would achieve • The customer has a BBB or higher public debt approximately this rating if borrowing from your rating. institution. • The customer has good access to alternative sources of finance at favorable terms. • The management is of high quality and has Acceptable Risk fbuler "4") unquestioned character. • The collateral, if required, is sufficiently liquid Loans in this category have a limited chance of and has a large enough margin to make very likely resulting in a loss. They would have a level of risk the recovery of the full amount of the loan in the similar to a loan with the following characteristics: event of default. • The guarantor, if required, would achieve • The customer has only a fair credit rating but no approximately this rating if borrowing from your recent credit problems. institution. • The customer's cash flow is currently adequate to meet required debt repayments, but it may not be sufficient in the event of significant adverse Moderate Kisk (tinier "}") developments. • The customer does not have access to the capital Loans in this category have little chance of resulting markets. in a loss. This category should include the average • The customer has some limited access to alternaloan, under average economic conditions, at the tive sources of finance possibly at unfavorable terms. typical lender. Loans in this category would have • Some management weakness exists. a level of risk similar to a loan with the following • Collateral, which would generally be required, is characteristics: sufficient to make likely the recovery of the value of the loan in the event of default, but liquidating the • The customer has a good credit history'. collateral may be difficult or expensive. • The customer's cash flow may be subject to • The guarantor, if required, would achieve this cyclical conditions but is adequate to meet required rating or lower if borrowing from your institution. debt repayments plus other fixed charges even after a limited period of losses or in the event of a somewhat lower trend in earnings. Special Mention 01 Classified Asset ft'nier "5") • The customer has limited access to the capital markets. Loans in this category would generally fall into the • The customer has some access to alternative examination categories "special mention," "substansources of finance at reasonable terms. dard," "doubtful," or "loss." They would primarily • The firm has good management in important be workout loans, as it is highly unlikely that new positions. loans would fall into this category. • • Collateral, which would usually be required, is sufficiently liquid and has a large enough margin to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

616 Industrial Production and Capacity Utilization for June 1998 Released for publication July 16 groups weakened or remained about unchanged. At 128.1 percent of its 1992 average, industrial produc- Industrial production declined 0.6 percent in June tion in June was 3.7 percent higher than it was in after a revised gain of 0.3 percent in May. Ongoing June 1997; excluding the output of motor vehicles strikes, which have curtailed the output of motor and parts, the twelve-month increase was 4.1 percent. vehicles and parts, accounted for the decrease in Capacity utilization dropped 0.8 percentage point in industrial production. Excluding motor vehicles, the June, to 81.6 percent. output of business equipment posted a strong gain For the second quarter, industrial output rose in June; the output of most other major market 2.5 percent at an annual rate after a gain of 1.2 per- Industrial production indexes Ratio scale, 1992= 100 Ratio scale, 1992= 100 _ Consumer goods A/^ _ 130 _ Intermediate products 130 120 120 Durable / Construction supplies 110 110 Nondurable 100 Business supplies — 100 - v 90 90 1 1 J L _ Equipment 150 Materials 150 Business 130 130 Durable goods 110 110 Nondurable goods - 90 and energy 90 Defense and space N. 1 1 1 1 1 1 1 J I 1990 1992 1994 1996 1998 1990 1992 1994 1996 1998 Capacity utilization Percent of capacity Percent of capacity - 85 - 85 - 80 - 80 - 75 - 75 1984 1986 1988 1990 1992 1994 1996 1998 1984 1986 1988 1990 1992 1994 1996 1998 All series are seasonally adjusted. Latest series, June. Capacity is an index of potential industrial production. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

617 Industrial production and capacity utilization, June 1998 Industrial production, index, 1992=100 Percentage change Category 1998 1998' June 1997 to Mar.' Apr.' May' Junep Mar.' Apr.' May' June June 1998 Total 128.0 128.5 128.9 128.1 .5 .4 .3 -.6 3.7 Previous estimate 127.8 128.2 128.8 .4 .3 .5 Major market groups Products, total2 121.3 121.9 122.1 121.4 .6 .5 .2 -.6 3.2 Consumer goods 116.0 116.7 116.9 115.5 .8 .6 .2 -1.2 1.8 Business equipment 148.7 150.2 150.5 150.6 1.3 1.0 .3 .0 7.4 Construction supplies 124.2 124.0 125.3 125.0 -1.6 -.2 1.1 -.3 2.3 Materials 138.7 139.2 139.7 138.8 .4 .4 .3 -.6 4.4 Major industry groups Manufacturing 130.8 131.6 131.7 130.9 .2 .6 .0 -.6 3.8 Durable 148.6 149.6 150.3 148.8 .5 .7 .5 -1.0 5.4 Nondurable 112.6 113.3 112.7 112.6 -.3 .6 -.5 -.1 1.9 Mining 108.0 107.0 108.0 105.8 -.7 -.9 .9 -2.0 .1 Utilities 114.3 113.5 116.2 116.7 5.7 -.7 2.4 5.3 Capacity utilization, percent MEMO Capacity, percentage 1997 1998 change, Average, Low, High, June 1997 1967-97 1982 1988-89 to June Mar.' Apr.' May' June June 1998 Total 82.1 71.1 85.4 82.3 82.4 82.4 82.4 81.6 4.6 Previous estimate 82.2 82.1 82.2 Manufacturing 81.1 69.0 85.7 81.3 81.2 81.4 81.1 80.3 5.2 Advanced processing 80.5 70.4 84.2 79.4 79.5 79.7 79.5 78.5 6.0 Primary processing .. 82.4 66.2 88.9 85.8 85.1 85.3 84.7 84.3 3.3 Mining 87.5 80.3 88.0 89.6 91.2 90.3 91.0 89.1 .7 Utilities 87.3 75.9 92.6 87.7 89.6 88.9 91.0 91.3 1.1 NOTE. Data seasonally adjusted or calculated from seasonally adjusted 2. Contains components in addition to those shown, monthly data. r Revised, 1. Change from preceding month. p Preliminary. cent in the first quarter. The improvement in the The production of business equipment was unsecond quarter was largely attributable to a rebound changed; it was restrained by the drop in assemblies in utility output as temperatures throughout the coun- of business vehicles that led to a 5.2 percent decline try returned to more normal levels. However, manu- in the output of transit equipment. Excluding motor facturing production decelerated from a 2.3 percent vehicles, the production of business equipment rate of increase in the first quarter to a 1.7 percent advanced sharply in June. Led by a sharp increase in rate in the second quarter; manufacturing output the production of construction machinery, the output excluding motor vehicles also slowed. of industrial equipment rebounded 2.2 percent after falling in May. The production of other equipment— notably farm machinery and equipment and office MARKET GROUPS furniture and fixtures—also bounced back and more The output of consumer goods declined 1.2 percent than reversed the decline in May. The output of in June, with the decline in motor vehicles account- information processing equipment advanced further, ing for much of the loss. The production of other mainly on the strength of gains in the production consumer durables also fell noticeably and reversed of computing and office equipment and telephone apparatus. most of the 1.8 percent increase in May. The output of consumer nondurable goods was unchanged in The output of construction supplies edged down June. The production of non-energy products has 0.3 percent after having increased 1.1 percent in May remained sluggish for several months; energy prod- and remained close to the high level seen in the first ucts, a category that was quite volatile earlier in the quarter. The production of materials declined 0.6 peryear, was also little changed last month. cent, with weakness both in the durable goods Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

618 Federal Reserve Bulletin • August 1998 materials used to make motor vehicles and in energy The factory operating rate decreased 0.8 percentmaterials. The production of nondurable goods mate- age point, to 80.3 percent. The rate for advancedrials was flat, as activity in paper materials declined processing industries fell 1.0 percentage point, to further and the output of textiles and chemicals con- 78.5 percent; the operating rate for motor vehicles tinued to be sluggish. and parts fell 8.4 percentage points, a decrease mostly reflecting effects of strikes. The rate for primaryprocessing industries declined 0.4 percentage point, INDUSTRY GROUPS to 84.3 percent, and has fallen 2 percentage points since the end of last year. The operating rate at mines Manufacturing output declined 0.6 percent, largely dropped 1.9 percentage points, to 89.1 percent, while because of the 11 percent drop in production in the the rate at utilities increased 0.3 percentage point, to motor vehicle and parts industry. Although the strike 91.3 percent. in the motor vehicle and parts industry contributed significantly to the 1.0 percent drop in production in This release contains revised estimates of capacity durable manufacturing, weakness was evident in for selected industries for the period March through other industries as well. Output rose in only three December 1998. The revision lowered the estimated industry groups within durables: stone, clay, and glass growth of aggregate capacity 0.5 percentage point products; industrial machinery and computing equip- between December 1997 and December 1998. In ment; and electrical machinery. The output of non- addition, the industrial production indexes were durables was little changed, as gains in chemicals and revised to reflect the semiannual revision to seasonal products and in petroleum products were offset factors for motor vehicle assemblies and for series by declines in all other industries. Mining activity that use production-worker hours as their monthly decreased 2 percent, and output at utilities rose indicator. Seasonal factors were not changed for the 0.4 percent. period before March 1998. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

619 Statements to the Congress Statement by Laurence H. Meyer, Member, Board of establishes nationwide and individual state deposit Governors of the Federal Reserve System, before the limits for interstate bank acquisitions and consoli- Committee on the Judiciary, U.S. House of Represen- dated home country supervision standards for foreign tatives, June 3,1998 banks. In my testimony before the Committee on Banking and Financial Services on April 29, I dis- I am pleased to appear before this committee on cussed each of these topics in some detail.1 Lastly, behalf of the Federal Reserve Board to discuss anti- if a bank holding company proposes to acquire a trust issues related to mergers and acquisitions fiim that is engaging in an activity not previously between U.S. banks and between banking organiza- approved for bank holding companies, the Board tions and other financial services firms. Under U.S. must determine whether such activities are so closely law, when considering the competitive effects of a related to banking or to managing or controlling proposed bank merger or acquisition, the Board is banks as to be a "proper incident" to banking. required to apply the competitive standards contained in the Sherman and Clayton antitrust acts. Under these standards, the Board may not approve a pro- TIIENDS IN MERGERS AND BANKING posal that would result in a monopoly or that may STRUCTURE substantially lessen competition or tend to create a monopoly in a particular market. In the case of pro- It is useful to begin a discussion of the Board's posals that involve the acquisition of a nonbanking antitrust policy toward bank mergers with a brief company by a bank holding company, the Board description of recent trends in merger activity and must consider whether the acquisition can reasonably overall U.S. banking structure. The statistical tables be expected to produce benefits to the public, such as at the end of my statement provide some detail that greater convenience, increased competition, or gains may be of interest to the committee. in efficiency, that outweigh possible adverse effects. My statement today will discuss how the Federal Reserve implements these requirements. I will also BANK MERGERS try to provide some broad perspective on the ongoing consolidation of the U.S. banking system and the There have been more than 7,000 bank mergers since potential effects of bank mergers. 1980. The pace accelerated from 190 mergers with It is important to understand that the Bank Holding $10.2 billion in acquired assets in 1980 to 649 with Company Act does not give the Board unfettered $123.3 billion in acquired assets in 1987. In the discretion in acting on merger and acquisition propos- 1990s, the pace of both the number and dollar volals and that competition is not the only criterion that ume of bank mergers has remained high. So far this the Board must consider when assessing such a pro- year, the rapid rate of merger activity has continued. posal. Other factors that the Bank Holding Company For example, if only the five largest mergers or Act requires that the Board consider include the acquisitions approved or announced since December financial and managerial resources and future pros- are completed, a total of more than $500 billion in pects of the companies and banks involved in the banking assets will have been acquired. proposal and the effects of the proposal on the con- The incidence of "megamergers," or mergers venience and needs of the community to be served, among very large banking organizations, is a truly including the performance record of the depository remarkable aspect of current bank merger activity. institutions involved under the Community Reinvest- But it is useful to recall that very large mergers began ment Act. The Bank Holding Company Act also to occur with growing frequency after 1980. In 1980, there were no mergers or acquisitions of commercial NOTE. The attachments to this statement are available from Publi- banking organizations in which both parties had cations Services. Mail Stop 127, Board of Governors of the Federal Reserve System, Washington, DC 20551, and on the Board's site on the World Wide Web (http://www.bog.frb.fed.us). 1. See Federal Reserve Bulletin, vol. 84 (June 1998), pp. 438-51. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

620 Federal Reserve Bulletin • August 1998 $1.0 billion in total assets. The years 1987 through tions went from just more than one-half in 1980, to 1997 brought growing numbers of such acquisitions nearly three-quarters in 1997. The increase in nationand, reflecting changes in state and federal laws, wide concentration reflects, to a large degree, a an increasing number of these involved interstate response by the larger banking organizations to the acquisitions by bank holding companies. The larg- removal of state and federal restrictions on geoest mergers in U.S. banking history took place graphic expansion both within and across states. The or were approved during the 1990s—including industry is moving from many separate state banking Chase-Chemical, Wells Fargo-First Interstate, structures toward a nationwide banking structure that NationsBank-Barnett, and First Union-CoreStates. would have existed already had legal restrictions not And while these mergers set size precedents, the stood in the way. The increased opportunities for recently proposed mergers of Citicorp and Travelers, interstate banking are allowing many banking organiand NationsBank and BankAmerica, if consummated, zations to reach for the twin goals of geographic risk would set a new standard for sheer size in U.S. diversification and new sources of "core" deposits. banking organizations. As I will discuss shortly, it may well be that the retail banking industry is moving toward a structure more like that of some other local market industries National Banking Structure such as clothing and department store retailing. As in retail banking, clothing and department store custom- The high level of merger activity since 1980, along ers tend to rely on stores located near their home or with a large number of bank failures, is reflected in a workplace. These stores may be entirely local or may steady decline in the number of U.S. banking organi- be part of regional or national organizations. Thus, it zations from 1980 through 1997. In 1980, there were should perhaps not be surprising that banks, now more than 12,000 banking organizations, denned as freed of barriers to geographic expansion, are taking bank holding companies plus independent banks; advantage of the opportunity to operate in local marbanks (independent banks plus banks owned by hold- kets throughout the country as have firms in other ing companies) in total numbered nearly 14,500. By retail industries. 1997, the number of organizations had fallen to about But it would be a mistake to think that adjustment 7,100 and the number of banks to just more than to a new statutory environment—and the increased 9,000. The number of organizations had declined opportunities for geographic diversification—were more than 40 percent and the number of banks by the only reasons for the current volume of bank more than one-third. merger activity. Each merger is somewhat unique and The trends I have just described must be placed in likely reflects more than one motivation. For examperspective because taken by themselves they hide ple, a recent study of scale economies in banking some of the key dynamics of the banking industry. suggests that efficiencies associated with larger size There are some other important characteristics of may be achieved up to a bank size of about $10 bil- U.S. banking. While there were about \ ,450 commer- lion to $25 billion in assets. In addition, some lines of cial bank failures and more than 7,000 bank acquisi- business, such as securities underwriting and market tions between 1980 and 1997, some 3,600 new banks making, require quite large levels of activity to be were formed. Similarly, while more than 18,000 bank viable. branches were closed, the same period saw the open- Increased competitive pressures caused by rapid ing of nearly 35,000 new branches. Perhaps even technological change and the resulting blurring of more important, the total number of banking offices distinctions between banks and other types of finanincreased sharply from about 53,000 in 1980 to cial firms, lower barriers to entry due to deregulation, more than 71,000 in 1997, a 35 percent rise, and the and increased globalization also contribute to merger population per banking office declined. This includes activity. Global competition appears to be especially former thrift offices that were acquired by banking important for banks that specialize in corporate cusorganizations. Fewer banking organizations clearly tomers and wholesale services, especially among the has not meant fewer banking offices serving the very largest institutions. Today, for example, almost public. 40 percent of the U.S. domestic commercial and These trends have been accompanied by a substan- industrial bank loan market is accounted for by tial increase in the share of total banking assets foreign-owned banks. controlled by the largest banking organizations. For More generally, greater competition has forced example, the proportion of domestic banking assets inefficient banks to become more efficient, accept accounted for by the 100 largest banking organiza- lower profits, close up shop, or—in order to exit a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 621 market in which they cannot survive—merge with through 1997, in both urban and rural markets, so that another bank. Other possible motives for mergers the average percentage of bank deposits accounted include the simple desire to achieve market power or for by the three largest firms has remained steady or the desire by management to build empires and actually declined slightly, even as nationwide concenenhance compensation. Some mergers probably occur tration has increased substantially. Essentially similar as an effort to prevent the acquiring bank itself from trends are apparent when local market bank concenbeing acquired, or, alternatively, to enhance a bank's tration is measured by the Herfindahl-Hirschman attractiveness to other buyers. Index (HHI), defined as the sum of the squares of the Many of these factors are also motivating mergers market shares. Because of the importance of local between bank and nonbank financial firms. However, banking markets, I would like to provide somewhat in these cases, a key causal factor is the ongoing more detail on the implications of bank mergers for blurring of distinctions between what were, not very local market concentration. long ago, quite different financial services. Today, as Metropolitan Statistical Areas (MSAs) and nonthe Board has testified on many occasions, and MSA counties are often used as proxies for urban and despite the fact that banks continue to offer a unique rural banking markets. The average three-firm debundle of services for retail customers, it is increas- posit concentration ratio for urban markets decreased ingly difficult to differentiate between many products 3 percentage points between 1980 and 1997. Average and services offered by commercial banks, invest- concentration in rural counties declined 1.7 percentment banks, and insurance companies. Thus, we age points. Similarly, the average bank-deposit-based should not find it surprising that firms in each of HHI for both urban and rural markets fell between these industries should seek partners in the others. 1980 and 1997. When thrift deposits are given a 50 percent weight in these calculations, average HHIs are sharply lower than the bank-only HHIs in a given Local Market Banking Structure year, but the HHIs trend slightly upward since 1984. Given the Board's statutory responsibility to apply On balance, the three-firm concentration ratios and the antitrust laws so as to ensure competitive banking the HHI data indicate that, despite the fact that there markets, it is critical to understand that nationwide were more than 7,000 bank mergers between 1980 concentration statistics are generally not the appro- and 1997, local banking market concentration has priate metric for assessing the competitive effects remained about the same. of mergers. Moreover, the extent to which mergers Why haven't all of these mergers increased avercan increase national concentration is limited by the age local market concentration? There are a number provisions in the Riegle-Neal Act of 1994, which of reasons. First, many mergers are between firms amended the Bank Holding Company Act and estab- operating primarily in different local banking marlished national (10 percent) and state-by-state kets. While these mergers may increase national or (30 percent) deposit concentration limits for inter- state concentration, they do not tend to increase constate bank acquisitions. States may establish a higher centration in local banking markets and thus do not or lower limit, and initial entry into a state by acqui- reduce competition. sition is not subject to the Riegle—Neal statewide Second, as I have already pointed out, there is new 30 percent limit. entry into banking markets. In most markets, new Beyond this, the Board has a statutory responsibil- banks can be formed fairly easily, and some key ity to apply the antitrust laws so as to ensure competi- regulatory barriers, such as restrictions on interstate tive local banking markets. Evidence indicates that in banking, have been all but eliminated. the vast majority of cases the relevant concern for Third, the evidence overwhelmingly shows that competition analysis is competition in local banking banks from outside a market usually do not increase markets. This is based partly on survey findings that their market share after entering a new market by indicate that households and small businesses obtain acquisition. Studies indicate that when a local bank is most of their financial services in a very local area. In acquired by a large out-of-market bank, there is noraddition, it is based on empirical research that shows mally some loss of market share. The new owners are deposit rates tend to be lower and some loan rates, not able to retain all of the customers of the acquired particularly those on loans to small businesses, are bank. Anecdotal evidence suggests that some other higher in local markets with relatively high levels of banks in the market mount aggressive campaigns to concentration. lure away customers of the bank being acquired. While concentration has increased in some local Fourth, it is important to emphasize that small markets, it has decreased in others, from 1980 banks have been, and continue to be, able to retain Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

622 Federal Reserve Bulletin • August 1998 their market share and profitability in competition devotes considerable care and substantial resources with larger banks. Our staff has done repeated studies to analyzing individual merger applications. of small banks; all of these studies indicate that small banks continue to perform as well as, or better than, FEDERAL RESERVE'S APPLICATION OF their large counterparts, even in the banking markets ANTITRUST STANDARDS dominated by the major banks. This may be due, in part, to more personalized service. But whatever the The Federal Reserve Board is required by the Bank reason, based on this experience, we expect that there Holding Company Act (1956) and the Bank Merger will continue to be a large number of banks remain- Act (1960) to review specific statutory factors arising ing in the future. from a transaction when (1) a holding company Despite a continued high level of merger activity, acquires a bank or a nonbank firm or merges with studies based on historical experience suggest that in another holding company, or (2) the bank resulting about a decade there may still be about 3,000 to from a merger of two banks is a state-chartered 4,000 banking organizations, down from about 7,000 member bank. The Board must evaluate, among other today. Although the top ten or so banking organizathings, the likely effects of such mergers on competitions will almost certainly account for a larger share tion. This section of my statement discusses in some of banking assets than they do today, the basic size detail the methodology the Board uses in assessing distribution of the industry will probably remain the competitive effects of a proposed merger. about the same. That is, there will be a few very large organizations and an increasing number of smaller organizations as we move down the size scale. It Competitive Criteria seems reasonable to expect that a large number of small, locally oriented banking organizations will In considering the competitive effects of a proposed remain. Moreover, size does not appear to be an bank acquisition, the Board is required to apply the important determining factor even for international same competitive standards contained in the Sherman competition. Only very recently have U.S. banks and Clayton antitrust acts. The Bank Holding Combegun to appear, once again, among the world's pany (BHC) Act and the Bank Merger Act do contain twenty largest in terms of assets. Yet those U.S. banks a special provision, used primarily in troubled-bank that compete in world markets are consistently among cases, that permits the Board to balance public benethe most profitable and best capitalized in the world, fits from proposed mergers against potential adverse as well as being ranked as the most innovative. competitive effects. The law also requires that the Finally, administration of the antitrust laws has Board consider the potential effects on competition in almost surely played a role in restricting local market the relevant market when bank holding companies concentration. At a minimum, banking organizations acquire nonbank firms, as will be discussed later. have been deterred from proposing seriously anti- The Board's analysis of competition begins with competitive mergers. And in some cases, to obtain defining the geographic areas that are likely to be merger approval, applicants have divested banking affected by a merger. Under procedures established offices with their assets and deposits in certain local by the Board, these areas are defined by staff at the markets where the merger would have otherwise local Reserve Bank in whose District the merger resulted in excessive concentration. would occur, with oversight by staff in Washington. Overall, then, the picture that emerges is that of In mergers where one or both parties are in two a dynamic U.S. banking structure adjusting to the Federal Reserve Districts, the Reserve Banks cooperremoval of long-standing legal restrictions on geo- ate, as necessary. To ensure that market definition graphic expansion, technological change, and greatly criteria remain current, and in an effort to better increased domestic and international competition. understand the dynamics of the banking industry, the Even as the number of banking organizations has Board has recently sponsored several surveys, includdeclined, the number of banking offices has contin- ing national Surveys of Small Business Finances, a ued to increase in response to the demands of con- triennial national Survey of Consumer Finances, and sumers, and measures of local banking concentration telephone surveys in specific merger cases, to assist it have remained quite stable. In such an environment, in defining geographic markets in banking. These it is potentially very misleading to make broad gener- surveys are particularly useful because electronic alizations without looking more deeply into what lies technology and banks with widespread branch netbelow the surface. In part for the same reasons that works are becoming more prevalent. The surveys and make generalizations difficult, the Federal Reserve other evidence continue to suggest that small busi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 623 nesses and households most often obtain their bank- Thrift institution deposits are now typically acing services in their local area. This implies using a corded 50 percent weight in calculating statistical local geographic market definition for analyzing com- measures of the impact of a merger on market strucpetition. Local markets would, of course, be less ture for the Board's analysis of competition. In some important for the financial services obtained by large instances, however, a higher percentage may be businesses. included if thrift institutions in the relevant market With this basic local market orientation of house- look very much like banks, as indicated by the subholds and small businesses in mind, the staff con- stantial exercise of their transactions account, comstructs a local market index of concentration, the mercial lending, and consumer lending powers. HHI, which is widely accepted as a useful measure of While the merger guidelines provide a significant market concentration, in order to conduct a prelimi- allowance for nonbank competition, competition nary screen of a proposed merger. The HHI is calcu- from other depository and nonbank financial institulated based on local bank and thrift deposits. The tions may be given some additional consideration if merger would generally not be regarded as anticom- such entities clearly provide substitutes for the basic petitive if the resulting market share, the HHI, and banking services used by most households and small the change in that index do not exceed the criteria in businesses. In this context, credit unions and finance the Justice Department's merger guidelines for bank- companies may be particularly important. ing. However, while the HHI is an important indica- The competitive significance of the target firm can tor of competition, it is not a comprehensive one. In be a factor in some cases. For example, if the bank addition to statistics on market share and bank con- being acquired is not a reasonably active competitor centration, economic theory and evidence suggest in a market, the loss of competition would not be that other factors, such as potential competition, the considered to be as severe as would otherwise be the strength of the target firm, and the market environ- case. ment, may have important influences on bank behav- Adverse structural effects may be offset somewhat ior. These other factors have become increasingly if the firm to be acquired is located in a declining important as a result of many recent procompetitive market. This factor would apply where a weak or changes in the financial sector. Thus, if the resulting declining market is clearly a fundamental and longmarket share and the level and change in the HHI are term trend, and there are indications that exit by within Justice Department guidelines, there is a pre- merger would be appropriate because exit by closing sumption that the merger is acceptable, but if they are offices is not desirable, and shrinkage would lead to not, a more thorough economic analysis is required. diseconomies of scale. This factor is most likely to be To conduct such an analysis of competition, the relevant in rural markets. Board uses information from its own major national Competitive issues may be reduced in importance surveys noted above, from telephone surveys of if the bank to be acquired has failed or is about to fail. households and small businesses in the market being In such a case, it may be desirable to allow some studied, from on-site investigations by staff, and from adverse competitive effects if this means that banking various standard databases with information on mar- services will continue to be made available to local ket income, population, deposits, and other variables. customers rather than be severely restricted or per- These data, along with results of general empirical haps eliminated. research by Federal Reserve System staff, academics, A very high level of the HHI could raise questions and others, are used to assess the importance of about the competitive effects of a merger even if the various factors that may affect competition. To pro- change in the HHI is less than the Justice Department vide the committee with an indication of the range of criteria. This factor would be given additional weight other factors the Board may consider in evaluating if there has been a clear trend toward increasing competition in local markets, I shall outline these concentration in the market. The possibility of effifactors. ciency gains, especially via scale economies, is con- Potential competition, or the possibility that other sidered when appropriate, although this has generally firms may enter the market, may be regarded as a not been a significant factor. significant procompetitive factor. It is most relevant Finally, other factors unique to a market or firm in markets that are attractive for entry and where would be considered if they are relevant to the analybarriers to entry, legal or otherwise, are low. Thus, sis of competition. These factors might include evifor example, potential competition is of relatively dence on the nature and degree of competition in a little importance in markets where entry is unlikely market, information on pricing behavior, and the for economic reasons. quality of services provided. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

624 Federal Reserve Bulletin • August 1998 Some merger applications are approved only after completed by Board staff early last year. This review the applicant proposes the divestiture of offices in essentially confirmed the continued appropriateness local markets and when the merger cannot be justi- of our existing methodology. I would like to highlight fied using any of the criteria I have just discussed. We five aspects of that review that might be of particular believe that such divestitures have provided a useful interest to the committee. vehicle for eliminating the potentially anticompeti- Since at least the mid-1960s, the cluster of prodtive effects of a merger in specific local markets ucts and services that constitutes commercial banking while allowing the bulk of the merger to proceed. has been used, and reaffirmed by the courts, as the relevant product line for bank merger analysis. The cluster is meant to encompass the set of products and Remedies: Divestitures and Denials services that is purchased primarily from banks, a set that technological and other market developments The Board makes a concerted effort to provide the have clearly changed over time. However, extensive industry and other market participants with clear review of available data, including our practical expecompetition standards in order to make the regulatory rience in analyzing cases, indicated that there still process as efficient as possible. This is accomplished exists a core of such activities for both households especially through published Board Orders on indiand small businesses. Such activities certainly include vidual merger decisions. Furthermore, staff at the federally insured deposits and, for small businesses, Reserve Banks and the Board often provide guidance likely encompass certain credit products and services to banks and bank holding companies that are considas well. Thus, the cluster continues to be the product ering a merger even before the filing of a formal line used by the Board for bank merger analysis. application as well as after an application is filed. In The staff's review also indicated very strong supthis way, applicants learn very early in the process port for the continued use of local geographic marwhether their application is likely to raise antitrust kets for the cluster of bank services as the primary concerns. In fact, because this information regarding concern of competition analysis. Survey data indithe principles applied by the Board in its competitive cate, for example, that 98 percent of households and analysis is so readily available, applicants are able to 92 percent of small businesses use a local depository structure proposals so that few merger applications institution. In addition, it is estimated that almost are denied on competitive grounds. 90 percent of services consumed at depositories by Some potential applicants choose not to file an households and 95 percent of services consumed by application after having been advised of the Board's small business are provided by local depositories. On policy and standards. Other potential applicants, who a closely related issue, our staff considered whether it recognize that their application raises serious conmight be appropriate to use somewhat different comcerns about competition, choose to make divestitures petition standards in urban and rural markets. This of offices to remedy the competition problem. As I question was motivated by the fact that, because rural indicated above, divestitures have proven to be an markets tend to be more concentrated than urban effective way for applicants to resolve a competition markets, it is frequently more difficult for banks in a problem without jeopardizing the entire deal. Indeed, given rural market to merge with each other than it is the Board has approved forty-eight merger applicafor banks in an urban market. However, no objective tions involving divestitures during the 1990s. basis was discovered for treating urban and rural Board denials of applications on competitive markets fundamentally differently in the analysis of grounds are rare. Nevertheless, despite the Board's potential competitive effects of a merger. Thus, all efforts to inform the industry of its antitrust policy proposals continue to be evaluated on a case-by-case and standards, the Board has denied four applications basis using common standards. because of adverse competitive effects during the Our staff also reviewed whether continued use of 1990s. the Department of Justice's merger guidelines was appropriate or whether, in light of institutional and Reviews of Policies and Procedures technological changes, a more liberal initial screen should be applied. While the market for banking Given the rapid pace of change in the U.S. banking services certainly has become more competitive since and financial system, the Board and its staff review the existing guidelines were established in 1984, the policies and procedures for assessing competition on current guidelines continue to provide a useful initial a nearly continuous basis. Periodically, more formal screen for deciding whether a proposed merger is reviews are conducted, the most recent of which was likely to have anticompetitive effects. In particular, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 625 the more generous allowance in the guidelines for A significant amount of information is also shared the effects of nonbank competition were deemed on an ad hoc basis. Direct staff-to-staff communicato remain sufficient for the vast majority of cases. tions, including conversations and meetings, play an Exceptions can be dealt with on an individual basis. important role in the resolution of difficult competi- Moreover, there is considerable virtue in having both tive issues. Communications between the staffs of the the Federal Reserve and the Department of Justice DOJ and the Federal Reserve can be frequent and use the same initial screen. In the end, there appears may occur without limit at any stage of the applito be no substitute for a careful case-by-case analysis, cation process, including pre-application and postof the type that I discussed above, of proposals that approval. In the past, a range of issues has been violate the Board's and the Department of Justice's discussed and resolved informally, including both initial guidelines. geographic and product market definitions and dives- Lastly, in light of a substantial body of evidence titure requirements. Such informal interactions occur accumulated over the 1980s, economies of scale are routinely in both banking and nonbanking cases and considered as a potential mitigating factor in our are probably the single most important means by analysis of merger proposals. Many studies using which the Federal Reserve and the DOJ coordinate data from the 1970s and 1980s indicated only small their competitive analyses. economies of scale in banking, economies that were The DOJ places substantial weight on the potential exhausted at about $100 million in total assets. How- effect of a merger on lending to small businesses. The ever, recent research using data from the 1990s Board also considers small business lending but in suggests that significant scale economies may exist the context of the more general analysis of the cluster for much larger firms, perhaps for banks as large as of banking services. Because of these differences in $10 billion to $25 billion in assets. If these results emphasis, the Board and DOJ may, in occasional hold up to additional scrutiny, we will clearly need to cases, reach different conclusions regarding the comevaluate once again the weight given to economies of petitive effects of a merger. scale in competition analysis. Recent Cases Coordination with Department of Justice As I noted earlier, the Board has always believed that The Federal Reserve and the Department of Justice it is important to make its antitrust policy clear to the (DOJ) coordinate their antitrust analysis of banking industry and other members of the public. One way it consolidations through a combination of formal and attempts to accomplish this is by providing a detailed informal procedures. These procedures have two analysis of competitive issues in its public Order on objectives. First, they ensure that the two agencies each case. In a number of recent large and complex share information that is relevant to the competition cases, the Board has reinforced its policy and methanalysis of all bank merger proposals that raise a odology for analyzing competition and reminded serious competitive issue. Second, they ensure that applicants of the need for noticeable and possibly the analysis of each agency is known to the other. increasing, "mitigators" in cases that exceed the A number of procedures have been developed at DOJ screening guidelines. This was done because various stages of the application process. Largely, during the past couple of years an increasing number they entail the exchange or sharing of documents. of applicants came very close to the Board's limits, in The DOJ, for example, is provided a copy of all bank terms of structural effects and strength of mitigating applications made to the Federal Reserve. The geofactors, for approving bank mergers. It appeared as graphic markets used to conduct the competitive though some applicants had concluded that the Board analysis are provided by the Federal Reserve to the had relaxed its competition standards. That conclu- DOJ. Also, the DOJ regularly (about every two sion is incorrect. weeks) sends the Federal Reserve and other banking For example, in one recent Order the Board noted, agencies a document listing those mergers that the DOJ believes are not likely to have significantly adverse competitive effects. Finally, in cases involv- As the Board has indicated in previous cases, in a market in which the competitive effects of a proposal as measured ing DOJ-required divestitures, the DOJ typically by market indexes and market share exceed the DOJ sends the Federal Reserve a copy of the "letter of Guidelines, the Board will consider whether other factors agreement" that identifies the terms of the required tend to mitigate the effects of the proposal. The number divestitures. and strength of factors necessary to mitigate the competi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

626 Federal Reserve Bulletin • August 1998 tive effects of a proposal depend on the level of market concentration of resources, decreased or unfair comconcentration and size of the increase in market petition, conflicts of interest, or unsound banking concentration.2 practices." The Board has determined that nonbanking activi- The Board has recently also considered cases in ties are closely related to banking if they meet any which Department of Justice guidelines were one of three criteria: (1) Banks generally have in fact exceeded in a large number of local markets. In those provided the proposed services; (2) banks generally cases as well, the Board indicated that mitigating provide services that are operationally or functionally factors should exist in each local market being so similar to the proposed services as to equip them affected. There, the Board stated, particularly well to provide the proposed services; or, (3) banks generally provide services that are so inte- In these cases, the Board believes that it is important to give increased attention to the size of the change in market grally related to the proposed services as to require concentration as measured by the HHI in highly concen- their provision in a specialized form. trated markets, the resulting market share of the acquiror The competitive effects of a proposal must be and the pro forma HHIs in these markets, the strength and reviewed as part of the "net public benefits" test that nature of competitors that remain in the market, and the governs nonbanking acquisitions. Unlike the case in strength of additional positive and negative factors that may affect competition for financial services in each banking acquisitions, however, in every nonbanking market.3 acquisition, the Board must also weigh other possible effects—such as undue concentration of resources In summary, at a time when the banking industry is and the existence of unfair competition—against pubundergoing an unprecedented merger movement that lic benefits and find that public benefits are predomiis likely to continue for a considerable period, it is nant in order to approve the proposal. particularly important to have a public policy that Generally, the Board's competitive analysis of nonwill maintain a competitive banking marketplace and banking acquisitions is very similar to that used in that is well understood by all market participants. banking mergers. In particular, the economic analysis The Board seeks to accomplish these public policy begins with determining the product market in quesobjectives in an efficient and effective manner by tion and then the relevant geographic area for assessmaintaining a relevant and up-to-date policy, cooper- ing competition. The relevant market area may be ating closely with the Department of Justice, keeping local, regional, national, or international, depending the industry and other members of the public well on the product under review and the exact nature of informed, and providing information and guidance the marketplace. Then, proposed changes in market through staff at the Board and Reserve Banks. structure are examined along with other factors, such as potential competition, to determine the extent to which competition may be reduced. Over the years, Nonbank Acquisitions nonbanking acquisitions generally have raised fewer competitive concerns than banking mergers. This is The ability of bank holding companies to engage in a because nonbanking activities have generally been wide range of nonbanking activities was made pos- conducted in markets where industry concentration sible by the 1970 amendments to the Bank Holding was low or moderate and where numerous competi- Company Act. Permissible nonbanking activities are tors existed (for example, consumer finance and those that satisfy a two-part test delineated in sec- mortgage banking). tion 4(c)(8) of the Bank Holding Company Act. This test first requires the Board to find that a nonbanking activity is "closely related to banking." Second, the CONCLUSION Board must determine that the performance of the activity "can reasonably be expected to produce The Federal Reserve is required by law to assess the benefits to the public, such as greater convenience, competitive implications of proposed bank mergers increased competition, or gains in efficiency, that and acquisitions. In order to fulfill its statutory outweigh possible adverse effects, such as undue responsibilities, the Federal Reserve devotes considerable resources to the case-by-case evaluation of merger proposals. The Board normally focuses its 2. "First Union Corporation." Federal Reserve Bulletin, vol. 84 analysis on a proposed merger's potential impact on (June 1998), p. 494. competitive conditions in local markets for banking 3. "NationsBank Corporation," Federal Reserve Bulletin, vol. 84 services. In some cases, particularly those involving (February 1998), pp. 134-35. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 627 the acquisition of nonbank firms, broader geographic tive banking markets in the midst of the most signifiareas are used. The Federal Reserve's (along with the cant consolidation of the banking industry in U.S. Department of Justice's) administration of the anti- history. It is the Board's intention and expectation trust laws in banking has helped to maintain competi- that this will continue to be the case in the future. Statement by Edward M. Gramlich, Member, Board would be no reliance at all on the stock market to of Governors of the Federal Reserve System, before finance social security benefits and no worsening of the Subcommittee on Social Security of the Commit- the finances of the Health Insurance Trust Fund. tee on Ways and Means, U.S. House of Representa- The IA plan includes some technical changes such tives, June 3,1998 as including all state and local new hires in social security and applying consistent income tax treat- I am pleased to appear before the committee to testify ment to social security benefits. These changes go on social security reform. I speak for myself, as past some way to eliminating social security's actuarial chair of the 1994-96 Quadrennial Advisory Council deficit. on Social Security, and not in my current status as a Then, beginning in the twenty-first century, two member of the Federal Reserve Board. other measures would take effect. There would be a Let me first engage in some retrospection. At the slight increase in the normal retirement age for all time I and other members of the Advisory Council workers, in line with the expected growth in overall spoke before your committee last year, our report was life expectancy (also proposed by the CED, Senator just out and there was much publicity about the fact Moynihan, and the NCRP). There would also be a that we couldn't agree on a single plan but had three slight change in the benefit formula to reduce the separate approaches. Since that time, it strikes me growth of social security benefits for high wage that there has been a coalescence around the middle- workers (also proposed by the CED and NCRP). ground approach I advocated. After our report, both Both of these changes would be phased in very the Committee for Economic Development (CED) gradually to avoid actual benefit cuts for present and Senator Moynihan came out with plans that retirees and "notches" in the benefit schedule adopted some of the features of my plan. Two weeks (instances when younger workers with the same earnago the National Commission on Retirement Policy ings records get lower real benefits than older work- (NCRP) came out with a similar plan, again adopting ers). The result of all these changes would be a some features of my plan. In political terms the modest reduction in the overall real growth of social center seems to be holding—since our report, there security benefits. When combined with the rising has been increased interest in sensible middle-ground number of retirees, the share of the nation's output approaches, and I would encourage this committee to devoted to social security spending would be work in that direction. approximately the same as at present, eliminating this In trying to reform social security, the middle- part of the impending explosion in future entitlement ground approach has two goals. The first is to make spending. affordable the important social protections of this These benefit cuts alone would mean that high program that have greatly reduced aged poverty and wage workers would not experience rising real benethe human costs of work disabilities. The second is to fits as their real wages grow, so I would supplement add new national saving for retirement both to help these changes with another measure to raise overall individuals maintain their own standard of living in retirement (and national) saving. Workers would retirement and to build up the nation's capital stock be required to contribute an extra 1.6 percent of in advance of the baby boom retirement crunch. their pay to newly created individual accounts. These My compromise plan, called the Individual accounts would be owned by workers but centrally Accounts (IA) Plan, achieves both goals. It preserves managed. Workers would be able to allocate their the important social protections of social security and funds among five to ten broad mutual or index funds still achieves long-term financial balance in the sys- covering stocks and bonds. Central management of tem by what might be called kind and gentle benefit the funds would cut down the risk that funds would cuts. Most of the cuts would be felt by high wage be invested unwisely, would cut administrative costs, workers, with disabled and low wage workers being and would mean that Wall Street firms would not find largely protected from cuts. Unlike the other two these individual accounts a financial bonanza. The plans proposed in the Advisory Council report, there funds would be converted to real annuities on retire- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

628 Federal Reserve Bulletin • August 1998 ment, to protect against inflation and the chance that uled level of benefits would be paid to all wage retirees would overspend in their early retirement classes of workers, of all ages. The difference years. between the outcome and present law is that under Some observers have objected to mandating new this plan these benefits would be affordable, as they retirement contributions now, when there is a wel- are not under present law. The changes would elimicome prospect of federal budget surpluses. The nate social security's long-run financial deficit while NCRP, for example, uses both the surpluses and the still holding together the important retirement safety Health Insurance Fund to help finance individual net provided by social security. They would reduce accounts. I see some problems with that approach, the growth of entitlement spending. They would sigthough it does lessen the political difficulty of man- nificantly raise the return on invested contributions dating additional pension coverage. Another option for younger workers. And the changes would move might be to rely on the already extensive private beyond the present pay-as-you-go financing scheme pension system to fill gaps in the existing pension by providing new saving to build up the nation's coverage of workers. Tax qualification rules might be capital stock in advance of the baby boom retirement changed to include a provision that requires the full crunch. participation of all corporate employees in order to As the Congress debates social security reform, qualify for favorable tax treatment. I hope it will keep these goals in mind and con- The social security and pension changes together sider these types of changes in this very important would mean that approximately the presently sched- program. Statement by Roger W. Ferguson, Jr., Member, Board ability to send an electronic message from a personal of Governors of the Federal Reserve System, before computer that instructs a bank to pay a bill from the Subcommittee on Finance and Hazardous Mate- the consumer's checking account using traditional rials of the Committee on Commerce, U.S. House of payment systems is one example. A protocol for Representatives, June 4, 1998 sending encrypted messages containing credit card instructions—the most common means of payment It is a pleasure to be here today to discuss the Federal on the Internet today—is another. Many of these Reserve's perspective on the implications of develop- services can also be viewed as similar, in concept, to ments in electronic commerce generally and elec- communications and payment arrangements that have tronic payments specifically. In my testimony, I will been available to banks and large corporations for focus on addressing the questions posed in Chairman many years. Increasingly, this technology is becom- Bliley's letter of April 9 to Chairman Greenspan. ing cost effective at the consumer level, as personal In the past several years, an unprecedented variety computer prices have fallen and widespread access to of new electronic banking and payment services have the Internet has opened the way for low-cost elecbeen developed. The Federal Reserve has been tronic data communications between individuals and following these developments closely, meeting a their financial institutions. number of times with industry participants to learn Emerging payment products that have been the more about the products and technologies that may subject of considerable publicity in recent years be offered to banking customers. Of course, many of include stored-value cards and "electronic cash" for these new products and technologies are still in the use on the Internet. These new forms of payment very early phases of development and implementa- have been referred to collectively as "electronic tion, and they are likely to change considerably over money" in a number of different studies, including the coming years as the market evolves. those conducted over the past few years by the Group of Ten countries.1 Although electronic money products have some novel features, they are generally NEW BANKING AND PAYMENT PRODUCTS AND based on the prepaid payment concept familiar from SERVICES travelers checks and money orders. With many of It is important to recognize that many of what are 1. See, for example, Group of Ten, Electronic Money: Consumer described as new forms of money or payment simply protection, law enforcement, supervisory and cross border issues (Bank for International Settlements, 1997); Committee on Payment involve delivering or gaining access to existing retail and Settlement Systems and the Group of Computer Experts, Security banking products and services in new ways. The of Electronic Money (Bank for International Settlements, 1996). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 629 these products, a prepaid balance of funds available New forms of money, such as those held as storedto the consumer (a liability of the issuing institution) value card balances, are expected to make up a very is recorded on a magnetic strip, smart card chip, or small portion of the money supply and are unlikely to the consumer's personal computer. A wide range influence aggregate payment flows materially, parof potential operational forms, product features, ticularly in the near-to-medium term. The Federal financial and legal structures, and intended usage and Reserve has been monitoring these flows in the larger markets have been proposed for these products, stored-value card pilots involving banks. We might however. also need to consider establishing other monitoring Certain types of stored-value cards are marketed as channels if amounts issued by nondepository institualternatives to cash in making small-value payments, tions were to become significant in the future. such as at parking meters, public transport, and fast Moreover, it is unlikely, as some have suggested, food restaurants. Other new payment technologies that alternative currencies will emerge in the United have been developed specifically for making "micro- States along with the introduction of new forms of payments," or very small-value purchases of articles, electronic money. The U.S. dollar is supported by a games, or other electronic information, over the Inter- well-established operational, legal, and economic net. Federal and state governments are testing differ- foundation in this country, and it is very likely that ent types of stored-value cards for making electronic electronic payments made between U.S. residents and payments to food stamp recipients, for example, and businesses will continue to be denominated in U.S. for other purposes. dollars. It is already becoming clear that many consumers Similarly, because the usage of electronic money is and businesses, particularly those that are technologi- likely to grow relatively slowly, its introduction is cally sophisticated, find the new electronic delivery unlikely to affect materially the seigniorage revenues methods an attractive option for gaining access received by the Treasury Department in the near to familiar banking and payment services. Growing term. "Seigniorage" is a term often used to describe numbers of financial institutions are offering services the direct and indirect revenue the Treasury receives over the Internet, and transactions initiated over the on U.S. currency and coin. The most significant Internet are widely reported to be on the increase. At portion of this revenue is received indirectly via the same time, most would agree that the growth of the Federal Reserve's annual earnings. The Federal wholly new payment technologies, such as electronic Reserve is required to hold collateral, typically govmoney, has been slower than many observers antici- ernment securities, in an amount at least adequate pated several years ago. This should not be surpris- to cover its outstanding currency obligations. In 1997, ing. It is important to keep in mind that these new the Federal Reserve transferred approximately payment products are designed to substitute for exist- $21 billion in earnings to the Treasury, largely attribing payment methods, such as cash, checks, and debit utable to interest on these government securities holdand credit cards, and so must offer consumers and ings. If the usage of electronic money were to reduce businesses materially improved features in terms of the outstanding amounts of currency, and the Federal cost and convenience in order to gain their accep- Reserve's holdings of securities were correspondtance. In addition, for some of these products, new ingly reduced, the Federal Reserve's annual earnings technical infrastructure must be put in place. While remitted to the Treasury would fall. The other, much these technologies are thus likely to spread only smaller, source of seigniorage revenue—the issuance gradually, for the nation's central bank, issues of of coins—could be similarly affected. Of course, it importance include the potential implications for should be recognized that the increasing use of elecmonetary policy, for the banking and payment sys- tronic retail payment methods more generally might tem, and for consumers. be expected to have an effect on the use of bank notes and coin over time. IMPLICATIONS FOR MONETARY POLICY AND SEIGNIORAGE IMPLICATIONS FOR PAYMENT SYSTEMS AND As with financial innovations in the past, the Federal THE FEDERAL RESERVE Reserve expects to be able to adjust to future changing circumstances. We do not anticipate that the We also do not expect the development of electronic emergence of electronic money will impair our abil- money and electronic commerce more broadly to ity to pursue legislated objectives for the perfor- necessitate significant changes in the nation's paymance of the economy. ments and settlement systems. Many transactions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

630 Federal Reserve Bulletin • August 1998 initiated on the Internet, for example, are likely to payment methods.2 These efforts may include helpflow through existing interbank clearing and settle- ing to reduce regulatory or legal barriers, encourment channels. In fact, credit card payments over the aging the development of open technical standards, Internet, as well as certain types of stored-value card promoting consumer education, and providing effitransactions, are now routinely cleared and settled cient interbank settlement services, as I noted earlier. through the existing facilities operated by the credit To a large extent, the impetus for the development card associations. Likewise, most Internet bill- of new payment systems will originate in the private payment systems plan to utilize the existing auto- sector, where consumer and business needs can most mated clearing house (ACH) system for clearing and readily be addressed. Consistent with this view, settlement of individual payments. As you may know, the Federal Reserve has no plans to issue electronic the ACH is an electronic payment system that sup- money at this time. Direct competition in this area ports direct deposit of payroll and numerous other between the government and the private sector could types of routine payments. The Federal Reserve well stifle the current environment of experimenclears and settles the majority of these transactions. tation and innovation. Moreover, the public benefits In addition, the Federal Reserve Banks provide and acceptance of these types of payment instruinterbank settlement services for a number of retail ments, as well as the evolution of their underlying payment clearinghouses, including private check and technologies, are highly uncertain. ACH clearinghouses, as well as several bank card clearing arrangements. We are currently upgrading these services to make them more efficient and IMPLICATIONS FOR CONSUMERS secure. These settlement services could become useful for a range of emerging electronic payment meth- I would like to turn to recent developments in the ods in the future. area of consumer protection issues as they relate to In the longer term, it is possible that new clearing new electronic payment and banking technologies. and settlement methods will need to be developed. Competitive market forces should create incentives Development of new interbank systems typically for financial institutions and other suppliers of new requires substantial initial investments, planning, and electronic payment products to provide protections organization among a large group of financial insti- to consumers in order to promote confidence and tutions. The financial industry has considerable expe- encourage usage and acceptance of their products. rience in this regard, having developed clearing and Moreover, the existing legal framework provides consettlement systems for credit card, ATM, and ACH siderable incentives to disclose the terms of these transactions. The private-sector New York Clearing products and to avoid unconscionable or unfair terms. House Association also operates the Clearing House Although we cannot predict whether these incentives Interbank Payments System (CHIPS). CHIPS, like will address all potential problems, industry efforts in the Federal Reserve's Fedwire system, is used prima- this area are likely to be more effective than premarily for large-value funds transfers. In fact, CHIPS is ture and potentially costly new regulations at this now the largest U.S. dollar payment system in terms time. This is consistent with the approach advocated of dollar volume, handling $1.4 trillion in payments in the recently released report of an interagency task per day. force, on which my colleague, Governor Kelley, The Federal Reserve believes that private-sector was a member, which recommended limiting governinnovation and competition that has the potential ment action to monitoring of industry developments to shift retail payment users to potentially more effi- and providing consumer financial education where cient and secure electronic alternatives is beneficial, appropriate.3 In any case, we believe that the desirregardless of the impact on Federal Reserve payment ability of any potential new statutory consumer proservices. The use of electronic payment services pro- tections should be based on a demonstrated need to vided by the private sector is likely to continue to address specific problems or abuses, rather than on an lead to relatively slower growth, or even a decline, in attempt to promote the future growth of any particuretail payment services in which the Federal Reserve lar form of payment or other service. System is involved operationally, notably check clearing. As discussed in the recent report by the System's Committee on the Federal Reserve in the 2. Board of Governors of the Federal Reserve System, Committee Payments Mechanism, we are exploring how the on the Federal Reserve in the Payments Mechanism, The Federal Reserve in the Payments Mechanism (Board of Governors, 1998). Federal Reserve can play a more active role in 3. Consumer Electronic Payments Task Force, Report of the Conencouraging innovation in and usage of electronic sumer Electronic Payments Task Force, April 1998. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 631 It is evident, however, that certain existing regula- tion of this industry, it seems unlikely that one set of tions need to be updated to avoid unintended barriers disclosures or other consumer protection requireto the provision of new electronic products and ser- ments would be appropriate for all such products. vices to consumers. Federal Reserve Regulation E The Federal Deposit Insurance Corporation has provides a prime example in this regard. One require- determined that most types of stored-value cards, ment of Regulation E is that authorizations for recur- even if issued by federally insured depository instituring electronic payments must be signed by the con- tions, do not meet the definition of a deposit under sumer. To eliminate the delay and expense of paper- the Federal Deposit Insurance Act, for purposes of based authorization, the Federal Reserve amended inclusion within federal deposit insurance coverage.5 Regulation E in 1996 to allow preauthorized transfers From the point of view of the government, this in an electronic system to be authenticated by an determination would have the effect of limiting the electronic method that provides the same assurance extension of the federal safety net to these new prodas a signature in a paper-based system. Similarly, in ucts. The FDIC expects banks to disclose to consum- March 1998, the Board adopted an interim rule that ers whether or not their cards are federally insured, amended Regulation E to allow financial institutions however. to provide disclosures and other information required by the regulation electronically, rather than in paper form, if the consumer agrees. PRIVACY AND SECURITY IN ELECTRONIC BANKING The Federal Reserve and the Congress have also been weighing the more difficult issue of how the One of the most sensitive issues raised during discus- Electronic Fund Transfer Act (EFTA), and its implesions of electronic money and banking is the privacy menting Regulation E, should apply to stored-value of consumers' financial information. The issue of products, if at all. The EFTA includes elements of privacy in a world of ever-growing access to informaboth disclosures and substantive requirements regardtion through computer and telecommunications teching product terms and conditions, such as liability for nology is by no means limited to financial informaunauthorized transactions. In April 1996, the Board tion, but it is increasingly cited as a concern with issued proposed amendments to Regulation E that respect to the security of retail transactions. Although would apply selected provisions of the regulation, we have no recommendations to make at this time, I such as disclosures, to certain types of electronic would like to make a few observations that may be stored-value cards. In September 1996, the Congress helpful for discussions on this important issue. imposed a nine-month moratorium on the issuance of final regulations affecting stored-value products and Last year, in response to a congressional directive, directed the Federal Reserve to conduct a study of the Board conducted a study concerning the availabilthese products. ity to the public of sensitive information about consumers. This study was narrowly focused on the The Board's resulting March 1997 report to the potential for financial fraud that could flow from the Congress evaluated whether the EFTA could be use of sensitive information and the associated risks applied to stored-value products without adversely to depository institutions. The report concluded that impacting their cost, development, and operation.4 the losses attributable to "identity theft" did not, at At the request of the Congress, the Board also conthat time, pose a significant risk to the banking indussidered whether alternatives to regulation—such as try.6 Given the pace of technological change and allowing competitive market forces to shape the the relatively widespread access to personal informadevelopment and operation of the products—could tion, however, this risk appears to be a growing more efficiently achieve the objectives of the EFTA. concern for consumers and financial institutions. The report did not recommend any specific course of More broadly, the report highlighted the importance action but did consider at length the benefits and risks of balancing individuals' important privacy interests of regulatory action in a rapidly changing environwith the legitimate needs for information by law ment. For example, the disclosure model is often seen enforcement agencies, businesses, and others in both as the least intrusive form of government interthe public and private sectors. vention. However, given the variety of existing and planned stored-value products and the rapid evolu- 5. Federal Deposit Insurance Corporation, "General Counsel's Opinion No. 8; Stored Value Cards," 61 FR 40490, August 2, 1996. 4. Board of Governors of the Federal Reserve System, Report to 6. Board of Governors of the Federal Reserve System, Report to Congress on the Application of the Electronic Fund Transfer Act to Congress Concerning the Availability of Consumer Identifying Infor- Electronic Stored-Value Products (Board of Governors, 1997). mation and Financial Fraud (Board of Governors, 1997). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

632 Federal Reserve Bulletin • August 1998 This study highlighted the fact that many consider on financial services offered in this country and the issues of privacy and security to be closely abroad in the coming years is very difficult to predict. related. Although some surveys indicate that security However, it is possible that significant changes could concerns are still a barrier to the growth of electronic occur in the way that products and services are marcommerce, there has been a considerable amount keted and delivered. In general, these developments of promising private-sector activity with respect to should be positive for users of financial services, addressing the security and reliability of payment offering them greater flexibility and the potential to transactions transmitted over the Internet. Several obtain financial services at the lowest cost, regardless technologies are already available for protecting of location or provider. transaction information against unauthorized disclo- A significant expansion of the solicitation and prosure while in transit. Some new payment methods vision of financial services across jurisdictional have specifically incorporated technologies to safe- boundaries could raise cross-border legal and regulaguard the privacy of consumers' transaction informa- tory issues. Of course, such activities also occur with tion. Of course, consumers and businesses will need current technology, including via telephones and to select the technologies and payment arrangements paper-based communications. The resulting jurisdicthat are most appropriate, given their preferences and tional and enforcement issues relating to legal uncerthe risks in different types of transactions. tainties, compliance with different national laws and Security is likely to remain a primary concern of regulations, or abusive practices by offshore entities, financial institutions, which most often bear the losses have arisen in the past in many different contexts. associated with fraudulent transactions. The Federal Although new technologies could spur greater activ- Reserve and the other federal banking agencies have ity in this regard, it would appear premature at this been actively reviewing and upgrading our supervi- time to predict that wholesale changes in legal or sory policies and procedures in the area of electronic regulatory approaches will be needed. banking and information security to help ensure that risks to banks in providing services that support electronic commerce are appropriately managed. The Federal Reserve recently participated in an interna- CONCLUSIONS tional effort under the Basle Supervisors Committee to provide preliminary supervisory guidance on risk In summary, the Federal Reserve anticipates minimal management for electronic banking activities, result- impact in the near term from emerging electronic ing in a study published earlier this year. Going payments, and from electronic commerce more forward, information security risk management will broadly, on our core central banking responsibilities, continue to increase in importance as banks' reliance including our ability to implement monetary policy, on information technology grows and greater atten- our supervisory responsibilities, and our operational tion is focused on the need to safeguard customer role in the clearing and settlement of payments. information. Nevertheless, technological change and the growth of electronic commerce could raise complex policy issues that may require careful monitoring and study GLOBAL IMPLICATIONS FOR BANKING over the coming years by the Federal Reserve, the Congress, and the private sector. We look forward to Finally, it is important to note that the potential working with you to assess the implications of these impact of increasingly linked global communications important developments. Statement by Alan Greenspan, Chairman, Board of affect the performance of the American economy. In Governors of the Federal Reserve System, before the my previous appearance before this committee last Joint Economic Committee, U.S. Congress, June 10, October, my remarks focused mainly on the turbu- 1998 lence that was then evident in world financial markets and, in particular, on the problems that had emerged I am pleased to have the opportunity to present an in a number of Asian economies. The tentative update on economic conditions in the United States. assessment offered then was that the economies of Such an assessment cannot be made in isolation Asia were in for some trying times but that the but rather depends critically on what is happening in situation did not seem likely to threaten the expanthe rest of the world and how those developments sion of this country's economy. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 633 That assessment, I believe, still is essentially cor- worked suggest that growth of the economy has rect, although uncertainties about the degree of likely slowed this quarter from the first quarter's restraint that will be coming from abroad remain torrid pace, the degree of slowdown remains in quessubstantial. Earlier this year, the situations in most of tion. Evidence to date of a moderation in underlying the Asian countries seemed to be stabilizing in some domestic spending still is sparse. respects, but, as the events of the past few weeks The strength of domestic spending has been fueled, have demonstrated, the restoration of normally func- in part, by conditions in financial markets. Although tioning economies will not necessarily go smoothly. real short-term interest rates have been rising, equity In some cases, the adjustments that are needed to prices have moved still higher, credit has been readily improve external balances and to correct existing available at slender margins over Treasury interest misallocations of resources have been accompanied rates, and nominal long-term interest rates have by sharp increases in inflation, rising unemployment, remained near the lowest levels of recent decades. abrupt cutbacks in living standards, and increases in Rapid growth of money this year is a further indiuncertainty and insecurity. The heightened social and cation that financial conditions are accommodating political pressures that can develop in such circum- strong domestic spending, although we still are stances not only introduce added complications into uncertain how reliable that relationship will prove to economic policymaking but also make it even more be over time. difficult to foresee how the processes of adjustment In short, our economy is still enjoying a virtuous will play out across the afflicted economies. cycle, in which, in the context of subdued inflation That the American economy would be affected to and generally supportive credit conditions, rising some degree by spillover from the problems in Asia equity values are providing impetus for spending was never in doubt, even though the timing and and, in turn, the expansion of output, employment, magnitude of the impact have been difficult to predict and productivity-enhancing capital investment. The with much confidence. Many months ago, businesses hopes for accelerated productivity growth have been in this country began anticipating a worsening of our bolstering expectations of future corporate earnings trade balance with the Asian countries, and incoming and thereby fueling still further increases in equity economic data have since confirmed those expecta- values. tions. Meanwhile, other influences on trade—such as The essential precondition for the emergence, and the strength of demand growth in the United States persistence, of this virtuous cycle is arguably the and a dollar that has been strong against a wide array decline in the rate of inflation to near price stability. of currencies—have persisted. In total, U.S. exports Continued low product price inflation and expectaof goods and services turned down in real terms in tions that it will persist have brought increasing stathe first quarter of 1998, the first such decline in four bility to financial markets and fostered perceptions years, and real imports of goods and services contin- that the degree of risk in the financial outlook has ued to rise very rapidly. The combined effect of these been moving ever lower. These perceptions, in turn, changes exerted a drag of 2Vi percentage points on have reduced the extra compensation that investors the annual growth rate of real gross domestic product require for making loans to, or taking ownership last quarter. Weaknesses in Asia appear to account positions in, private firms. for approximately one-half of that deterioration. Not To a considerable extent, investors seem to be only have export volumes been affected, but produc- expecting that low inflation and stronger productivity ers in both industry and agriculture also are having growth will allow the extraordinary growth of profits to adjust to the lower product prices that have come to be extended into the distant future. Indeed, expecwith slower economic growth abroad and the increase tations of per share earnings growth over the longer in the competitiveness of foreign producers induced term have been undergoing continuous upward revilargely by depreciations of their currencies. sion by security analysts since 1994. These rising But even with substantial drag from the external expectations have, in turn, driven stock prices sharply sector, the U.S. economy has continued to expand at a higher and credit spreads lower, perhaps to levels that robust pace. In the first quarter, real GDP grew even will be difficult to sustain unless economic conditions faster than it had in 1997. Employment has continued remain exceptionally favorable—more so than might to increase rapidly this year, and the unemployment be anticipated from historical relationships. In any rate has fallen further, reaching its lowest level since event, primarily because of the rise in stock prices, 1970. Incomes have continued to climb, and gains about $12 trillion has been added to the value of in household and business expenditures have been household assets since the end of 1994. Probably exceptionally strong. Although the data on hours only a few percent of these largely unrealized Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

634 Federal Reserve Bulletin • August 1998 capital gains have been transformed into the pur- business expansions—eventually bringing those chase of goods and services in consumer markets. expansions to an end—do not appear to have gained a But that increment to spending, combined with the significant toehold in the current expansion. sharp increase in equipment investment, which has There are many reasons why the wage-price interstemmed from the low cost of both equity and debt actions have been so well contained in this expanrelative to expected profits on capital, has propelled sion. For one thing, increases in hourly compensation the economy forward. The current economic perfor- have been slower to pick up than in most other recent mance, with its combination of strong growth and expansions, although, to be sure, wages have started low inflation, is as impressive as any I have wit- to accelerate in the past couple of years as the labor nessed in my near half century of daily observation of market has become tighter and tighter. the American economy. In the first few years of the expansion, the subdued The consequences for the American worker have rate of rise in hourly compensation seemed to be, in been dramatic and, for the most part, highly favor- part, a reflection of greater concerns among workers able. A great many chronically underemployed about job security. We now seem to have moved people have been given the opportunity to work, and beyond that period of especially acute concern, many others have been able to upgrade their skills as though the flux of technology may still leave many a result of work experience, extensive increases in workers with fears of job skill obsolescence and a on-the-job training, or increased enrollment in techni- willingness to trade wage gains for job security. This cal programs. Welfare recipients appear to have been may explain why, despite the recent acceleration of absorbed into the work force in significant numbers. wages, the resulting level of compensation has fallen Government finances have improved as well. The short of what the experience of previous expansions taxes paid on huge realized capital gains and other would have led us to anticipate given the current incomes related to the stock market, coupled with degree of labor market tightness. In the past couple of taxes on markedly higher corporate profits, have years, of course, workers have not had to press espejoined with restraint on spending to produce a unified cially hard for nominal pay gains to realize sizable federal budget surplus for the first time in nearly increases in their real wages. In contrast to the pattern three decades. April's budget surplus of $125 billion that developed in several previous business expanwas the largest monthly surplus on record. Wide- sions, when workers required substantial increases spread improvement also has been evident in the in pay just to cover increases in the cost of living, financial positions of state and local governments. consumer prices have been generally well behaved The fact that economic performance strengthened in the current expansion. Changes this past year in as inflation subsided should not have been surprising, prices of both goods and services have been among given that risk premiums and economic disincentives the smallest of recent decades. to invest in productive capital diminish as product In addition, the rate of rise in the cost of benefits prices become more stable. But the extent to which that employers provide to workers has been remarkstrong growth and high resource utilization have been ably subdued over the past few years, although a joined with low inflation over an extended period is gradual upward tilt has become evident of late. A nevertheless extraordinary. Indeed, the broadest mea- variety of factors—including the strength of the sures of price change indicate that the inflation rate economy and rising equity values, which have removed down further in the first quarter of this year, duced the need for payments into unemployment even as the economy strengthened. Although declin- trust funds and pension plans, and the restructuring of ing oil prices contributed to this result, pricing lever- the health care sector—have been working to keep age in the goods-producing sector more generally benefit costs in check in this expansion. But, in the was held in check by rising industrial capacity; medical area at least, the most recent developments reduced demand in Asia, which, among other things, suggest that the favorable trend may have run its has led to a softening of commodity prices; and a course. The slowing of price increases for medical strong dollar, which has contributed to bargain prices services seems to have come to a halt, at least for a on many imports. Some elements in this mix clearly time, and, with the cost-saving shift to managed care were transitory, and the very recent price data suggest having been largely completed, the potential for busithat consumer price inflation has moved up in the nesses to achieve further savings in that regard second quarter. But, even so, the rate of rise remains appears to be rather limited at this point. There have quite moderate overall. At this point, at least, the been a few striking instances this past year of adverse wage-price interactions that played so cen- employers boosting outlays for health benefits by tral a role in pushing inflation higher in many past substantial amounts. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 635 A couple of years ago—almost at the same time per hour. The gap between employment growth and that increases in total hourly compensation began population growth, amounting to about 1.2 million trending up in nominal terms—evidence of a long- a year on average, has been made up, in part, by a awaited pickup in the growth of labor productivity decline in the number of individuals who are counted began to show through more strongly in the data; as unemployed—those persons who are actively and this accelerated increase in output per hour has seeking work—of approximately 700,000 a year, on enabled firms to meet workers' real wage demands average, since the end of 1995. The remainder of the while holding the line on price increases. Gains in gap has reflected a rise in labor force participation productivity usually vary with the strength of the that can be traced to a decline of more than 500,000 economy, and the favorable results that we have a year in the number of individuals (age 16 to 64) observed during the past two years or so, when the wanting a job but not actively seeking one. Presumeconomy has been growing more rapidly, surely over- ably, many of the persons who once were in this state the degree of pickup that can be sustained. But group have more recently become active and successevidence continues to mount that the trend has picked ful job seekers as the economy has strengthened, up, even if the extent of that improvement is as yet thereby preventing a still sharper drop in the official unclear. Signs of a major technological transforma- unemployment rate. In May, the number of persons tion of the economy are all around us, and the bene- aged 16 to 64 who wanted to work but who did not fits are evident not only in high tech industries but have jobs was 9.7 million on a seasonally adjusted also in production processes that have long been part basis, slightly more than 5 Vi percent of the working of our industrial economy. age population. This percentage is a record low for Notwithstanding a reasonably optimistic interpreta- the series, which first became available in 1970. tion of the recent productivity numbers, it would not The gap between the growth in employment and be prudent to assume that rising productivity, by that of the working age population will inevitably itself, can ensure a noninflationary future. Certainly close. What is crucial to sustaining this unprecwage increases, per se, are not inflationary. To be edented period of prosperity is whether that closing avoided are those that exceed productivity growth, occurs in a disruptive or gradual, balanced manner. thereby creating pressure for inflationary price The effects of the crisis in Asia will almost certainly increases that can eventually undermine economic damp net exports further, potentially moderating the growth and employment. Because the level of pro- growth of domestic production and hence employductivity is tied to an important degree to the physical ment. The strength of domestic spending that has stock of capital, which turns over only gradually, been bolstering output growth and the demand for increases in the trend growth of productivity prob- labor also could ebb if recent indications of a narrowably also occur rather gradually. By contrast, the ing in domestic profit margins were to prove to be the potential for abrupt acceleration of nominal hourly forerunner of a reassessment of the expected rates of compensation is surely greater. Still, a strong signal return on plant and equipment. Reduced prospects for of inflation pressures building because of compensa- the return to capital would not only affect investment tion increases markedly in excess of productivity directly but could also affect consumption as stock gains has not yet clearly emerged in this expansion. prices adjusted to a less optimistic view of earnings Among nonfinancial corporations, our most reliable prospects. Finally, the clearly unsustainable rise of source of consolidated costs, trends in costs seem to inventories that has been evident in recent quarters have accelerated from their lows, but the rates of will be slowing at some point, perhaps abruptly. An increase in both unit labor costs and total unit costs easing of the demand for labor would be an expected are still quite low. consequence of a slowdown in either final sales or Nonetheless, as I have noted in previous appear- inventory accumulation. Of course, the demand for ances before the Congress, I remain concerned that labor that is consistent with a particular rate of output economic growth will run into constraints as the growth also could be lowered if productivity were to reservoir of unemployed people available to work is continue to accelerate. And, on the supply side of the drawn down. The annual increase in the working age labor market, faster growth of the labor force could population (from 16 to 64 years of age), including emerge as the result of delayed retirements or immigrants, has been approximately 1 percent a year increased immigration. in recent years. Yet employment, measured by the If developments such as these do not bring labor count of persons who are working rather than by the demand into line with its sustainable supply, tighter count of jobs, has been rising 2 percent a year since economic policy may be necessary to help guard 1995 despite the acceleration in the growth of output against a buildup of pressures that could derail the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

636 Federal Reserve Bulletin • August 1998 current prosperity. Fortunately, fiscal policy has been to prove transitory or the start of a more worrisome moving toward restraint to some degree, although pattern that may well require a response. recent budgetary discussions do not appear to be In summary, our economy has remained strong this focused on extending that tendency. Monetary policy year despite evidence of substantial drag from Asia, might need to tighten if demand were to continue to and, at the same time, inflation has remained low. As exhibit few signs of abating noticeably, thereby I have indicated, this set of circumstances is not what threatening to place still further strains on our labor historical relationships would have led us to expect at markets. We at the Federal Reserve, recognizing the this point in the business expansion, and while it is powerful forces of productivity growth and global possible that we have, in a sense, moved "beyond restraint on inflation, have not perceived to date the history," we also have to be alert to the possibility need to tighten policy in response to strong demand that less favorable historical relationships will evenbeyond what has occurred through falling inflation's tually reassert themselves. That is why we are upward pressure on the real federal funds rate and the remaining watchful for signs of potential inflationary modest increase in the nominal rate that we initiated imbalances, even as the economy continues to perin March of 1997. But we are monitoring the evolv- form more impressively than it has in a very long ing forces very closely to determine whether the time. recent acceleration of costs, albeit moderate, is likely Statement submitted by the Board of Governors of derivatives. In particular, the underlying premise of the Federal Reserve System, to the Subcommittee on the release is that such transactions are subject to Risk Management and Specialty Crops of the Com- the CEA unless clearly and explicitly excluded or mittee on Agriculture, U.S. House of Representatives, exempted. This marks an important departure from June 10, 1998 precedent. Neither the Congress nor the CFTC has to date made a determination that OTC derivatives are The Board appreciates the opportunity to submit its subject to the CEA. Indeed, in early 1993, when the views on issues relating to the potential application commission used the FTPA authority to exempt many of the Commodity Exchange Act (CEA) to over-the- OTC transactions from most provisions of the CEA, counter (OTC) derivatives transactions. The Board it stated explicitly that its action should not be conhas been participating actively in discussions of these strued as reflecting any determination that the instruissues for the past ten years. As the subcommittee is ments covered by the exemption were subject to the aware, the markets for OTC derivatives have grown act. enormously during this period and are now large and The reason the Board has been keenly interested in globally significant. For this reason, the legal and these issues is because of the potential consequences regulatory framework for these markets is unques- if significant volumes of OTC derivatives were detertionably important. The Board is deeply concerned mined to be illegal and unenforceable under the CEA. about any legal or regulatory development that calls In those circumstances, the potential losses to couninto question the enforceability of a significant vol- terparties, including those large U.S. banks that are ume of such transactions. leading derivatives dealers, could be so large as to A particular concern for many years has been the pose a threat to the financial condition of the counterpotential application of the CEA to OTC derivatives. parties themselves and to provide a significant shock Because the CEA generally requires instruments cov- to the financial system as a whole. The Board is also ered by the act to be traded on an exchange, if OTC dismayed by the prospect that legal uncertainties or derivatives were covered, they might be illegal and unnecessary regulatory burdens could undermine the unenforceable. The Futures Trading Practices Act position of U.S. institutions in what are intensely (FTPA) of 1992 tried to address this concern by competitive global markets. We see no social benefits authorizing the Commodity Futures Trading Com- and clear social costs from pushing OTC derivatives mission (CFTC) to exempt OTC derivatives from activity offshore. most provisions of the CEA, to the extent that the act Some may characterize the issues under considermight apply. Nonetheless, concerns have persisted ation as nothing more than regulatory turf fights. We that the CEA could jeopardize the enforceability of believe this misses the point. The issues under concertain OTC derivatives transactions. sideration really are not so much issues of which These concerns have been heightened by the government agency should regulate these transac- CFTC's recent concept release on regulation of OTC tions as they are issues of whether government regu- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 637 lation is necessary and, if so, what types of regula- protect themselves from losses from fraud and countions are appropriate. Moreover, as we have indicated, terparty insolvencies. They have insisted that dealers considerably more is at stake—the safety and sound- have financial strength sufficient to warrant a credit ness of banks, the competitiveness of U.S. markets rating of A or higher. Consequently, dealers are estaband institutions, and possibly even the stability of the lished institutions with substantial assets and signififinancial system—than would be the case if the issues cant investments in their reputations. When such were limited solely or even primarily to regulatory dealers have engaged in deceptive practices, instituturf. tions that have been victimized have been able to obtain redress by going to court or directly negotiating a settlement with the dealer. The threat of POTENTIAL APPLICATION OF THE CEA TO legal damage awards provides dealers with incen- OTC DERIVATIVES tives to avoid misconduct. A far more powerful Governor Phillips presented the Board's views on the incentive, however, is the fear of loss of the dealer's potential application of the CEA to OTC derivatives good reputation, without which it cannot compete in testimony to this subcommittee in April 1997. effectively, regardless of its financial strength or Since then the Board's views have not changed. financial engineering capabilities. Institutional coun- Indeed, subsequent developments have reinforced our terparties to privately negotiated transactions also earlier position. have demonstrated their ability to manage credit The Board believes that application of the CEA risks quite effectively through careful evaluation of to institutional transactions in OTC derivatives is counterparties, the setting of internal credit limits, unnecessary to achieve public policy objectives with and the judicious use of netting agreements and respect to these transactions. The public policy objec- collateral. tives of the CEA are to ensure the integrity of com- Although an October 1997 report by the General modity markets, especially to deter market manipu- Accounting Office (GAO) suggested that there have lation, and to protect market participants from losses been substantial losses to end-users of OTC derivaresulting from fraud or the insolvency of contract tives, a careful inspection of the report's data reveals counterparties. In the case of institutional OTC that the vast majority of those losses were in investderivatives transactions, private market discipline ments in mortgage-backed securities and structured appears to achieve these objectives quite effectively notes, for which federal sales practices regulations and efficiently. either were in place or have since been implemented. Counterparties to privately negotiated transactions Indeed, we feel the most revealing data in the GAO's have limited their activity to contracts that are very report were the results of its survey of end-users. difficult to manipulate. The vast majority of privately When asked if they were satisfied with derivatives negotiated contracts are settled in cash rather than dealers' sales practices, 85 percent of users of plain through delivery. Cash settlement typically is based vanilla derivatives and 79 percent of users of more on a rate or price in a highly liquid market with a complex derivatives indicated satisfaction. The great very large or virtually unlimited deliverable supply, majority of the remainder responded neutrally rather for example, LIBOR or the spot dollar yen exchange than indicating that they were dissatisfied. In the rate. Furthermore, the costs of default or of failing to Board's view, these results call into question the need deliver typically are limited to actual damages. Thus, for additional government regulation of sales pracattempts to corner a market, even if successful, could tices of OTC derivatives dealers. not induce sellers in privately negotiated transactions In the future, counterparties to OTC derivatives to pay significantly higher prices to offset their con- transactions may seek to establish new facilities for tracts or to purchase the underlying assets. Most centralized clearing of such transactions. Such faciliimportant, prices established in privately negotiated ties potentially could make management of countertransactions are not used directly or indiscriminately party credit risks and liquidity risks even more effecas the basis for pricing other transactions, so any tive. At the same time, however, clearing facilities price distortions would not affect other buyers or often concentrate and mutualize risk. The Board sellers of the underlying asset. In these respects, believes that if counterparties were to choose to privately negotiated contracts have different charac- develop such facilities, some type of government teristics than exchange-traded contracts generally and oversight generally may be appropriate to suppleagricultural futures in particular. ment the private self-regulation that the counterpar- Institutional counterparties to privately negotiated ties would provide. However, it is not obvious that contracts also have demonstrated their ability to regulation of such clearing facilities under the CEA Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

638 Federal Reserve Bulletin • August 1998 would be the best approach. For example, the Board While the legal uncertainty associated with the sees no reason why a clearing agency regulated potential application of the CEA for OTC derivatives by the Securities and Exchange Commission should is the Board's most serious concern, it is also troubled not be allowed to clear OTC derivatives transactions, by the potential implications of a provision of the especially if it already clears the instruments under- CEA that provides the CFTC with exclusive jurisdiclying the derivatives. More generally, the Board tion over instruments subject to the act. Recently, the believes that in many circumstances, regulation of CFTC has claimed that this provision may impose OTC clearing might best be conducted by the Secu- restrictions on the SEC's ability to impose regularites and Exchange Commission (SEC), or by one of tions, including capital regulations on the activities the federal banking agencies, rather than by the of a new class of broker-dealers, on instruments or CFTC. Furthermore, if a clearing facility is located transactions that the CFTC asserts are subject to the abroad and regulated effectively by a home country CEA. Banking regulators apply capital requirements regulator, U.S. regulators should rely primarily on the to a wide variety of instruments that either are home country regulator to address U.S. public policy unquestionably subject to the CEA (futures traded on concerns, rather than attempting to force the clearing U.S. commodity exchanges) or that the CFTC has facility to conform to the rules of multiple jurisdic- asserted are subject to the act (many OTC derivations, which may well conflict. tives). The Board cannot believe that the Congress In general, even in those cases in which regulation intended the exclusivity provision of the CEA to of OTC derivatives may be necessary, the Board sees preclude other federal regulators from imposing serious problems with applying the CEA to such safety and soundness regulations on activities of institransactions. By far the most significant problem is tutions over which they have authority, even if those the uncertainty created by the act's exchange trading activities involve transactions subject to the CEA. requirement. To be sure, there are some specific exclusions of OTC transactions from the act, and CFTC policy statements and exemptions have been NEED FOR LEGISLATION intended to create legal certainty for other OTC transactions. Experience has repeatedly demonstrated, The Board believes that the issues relating to governhowever, that these exclusions and exemptions have ment regulation of OTC derivatives, including the not provided legal certainty for OTC derivatives. In potential application of the CEA to those transacevery case, the exclusions and exemptions include tions, deserve further study and ultimately should be terms or conditions that are ambiguous or that, even revisited by the Congress. In the interim, however, if seemingly unambiguous, have been made the sport the Congress should do as much as possible to of litigators. The CFTC's recent issuance of a con- remove the legal clouds hanging over the OTC cept release on regulation of OTC derivatives has derivatives markets. made matters worse by presuming that such trans- Accordingly, the Board supports the proposal for actions are covered unless specifically excluded or immediate but temporary legislation that was recently exempted and by underscoring that, whatever the transmitted to Speaker Gingrich by Chairman terms of various existing policy statements and Greenspan, Secretary Rubin, and Chairman Levitt. exemptions, these can be altered or reinterpreted by The proposal calls for the President's Working Group the commission. on Financial Markets to study the markets for OTC As things stand, some interpret the language of the derivatives and for hybrid debt instruments (whose existing exclusions and exemptions in ways that, if potential regulation under the CEA raises broadly accepted by the courts, could call into question the similar issues and concerns), to make recommendaenforceability of at least some, and perhaps a signifi- tions for changes to statutes and regulations, and to cant share of, outstanding OTC transactions. In the submit a report to the Congress containing its results Board's view, the potential that such interpretations and recommendations within one year. Such a study might be accepted places the financial system at by the Working Group undoubtedly would produce a risk and therefore is an unacceptable state of affairs. thorough airing of the issues that would be quite The Board continues to believe that the only way to useful to the Congress in deciding how best to resolve achieve legal certainty is through a broad statutory the existing legal and regulatory uncertainties. exclusion of institutional OTC derivatives transac- The proposal would enhance legal certainty in two tions, perhaps using the definitions of a "swap agree- ways. First, it includes a standstill provision that ment" and an "eligible swap participant" that the would temporarily eliminate the risk that changes in CFTC currently uses in its exemption. CFTC regulations, policies, or interpretations could Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 639 raise new questions about the enforceability of any these securities-indexed transactions, thereby reduc- OTC derivatives transaction (or hybrid debt instru- ing legal uncertainty. ment) that was exempt from the CEA under the CFTC's existing exemptions as of January 1, 1998. This standstill provision would also temporarily SUMMARY preclude the CFTC from unilaterally imposing a new, comprehensive regulatory regime for the OTC In summary, the Board believes that application of derivatives markets without the explicit consent of the CEA to institutional transactions in OTC derivathe Congress and before the Congress has had a tives would be inappropriate. It is unnecessary to chance to consider carefully the potential ramifica- achieve public policy objectives with respect to such tions. Second, the proposal would remove the legal transactions. Moreover, if the CEA is applied to such cloud over certain securities-indexed transactions transactions, as assumed by the CFTC in its recent (including equity swaps and equity-indexed hybrid concept release, it would call into question the legal debt instruments). These securities-indexed trans- enforceability of at least some, and perhaps many, of actions are subject to additional legal uncertainty those transactions. This threat undermines the combecause of a provision that prohibits the CFTC from petitiveness of U.S. firms and markets and could exempting such transactions from the CEA to the place the stability of the financial system at risk. For extent that they might be considered to be covered. these reasons, the Board supports the proposal for The proposal would, in effect, extend the CFTC's immediate but temporary legislation that was recently existing exemption for OTC derivatives to cover transmitted to the Congress. Statement by Herbert A. Biern, Associate Director, steps to ensure that banking organizations do not Division of Banking Supervision and Regulation, knowingly engage in money laundering. For this Board of Governors of the Federal Reserve System, reason, and to support our law enforcement agencies before the Committee on Banking and Financial Ser- in their efforts to combat money laundering, the vices, U.S. House of Representatives, June 11, 1998 Federal Reserve's efforts to attack the money laundering problem continue to be one of our highest I am pleased to appear before the Committee on bank supervisory priorities. As I will describe in Banking and Financial Services to discuss the Fed- more detail, the Federal Reserve has played, and will eral Reserve's role in the government's anti-money- continue to play, a prominent role in the federal laundering efforts and our interagency efforts to government's program to reduce and we hope elimidevelop and issue effective "Know Your Customer" nate money laundering activities through U.S. finanrules for the banking industry. As you requested, cial institutions. I will also describe in general terms the Federal Reserve's participation in Operation Casablanca and the issuance of enforcement orders against the for- FEDERAL RESERVE ROLE eign banking organizations with U.S. offices identified in the operation. Finally, I will provide some Banking organizations and their employees are the comments on proposed anti-money-laundering legis- first and strongest line of defense against financial lation that you and the members of the committee are crimes and, in particular, money laundering. It is for considering. this reason that the Federal Reserve emphasizes the First, I want to emphasize that the Federal Reserve importance of financial institutions putting in place places a high priority on participating in the govern- controls to protect themselves and their customers ment's programs designed to attack the laundering from illicit activities. A banking organization's best of proceeds of illegal activities through our nation's protection against criminal activities is its own polifinancial institutions. As a result, over the past sev- cies and procedures designed to identify and undereral years Federal Reserve staff has engaged exten- stand with whom it is conducting business and sively in anti-money-laundering endeavors on its having the capability to identify and then reject own and in coordination with U.S. and international potentially illegal or damaging transactions. For this bank supervisory agencies and law enforcement reason, the Federal Reserve and the other regulators authorities. have implemented various directives for banking As bank supervisors, the Federal Reserve believes organizations to establish internal controls and procethat it is necessary to take reasonable and prudent dures designed to detect unusual or suspicious trans- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

640 Federal Reserve Bulletin • August 1998 actions that, if unchecked, could lead to criminal tion, we immediately notify our law enforcement misconduct, including money laundering. colleagues. To understand and properly evaluate the effective- Having said this, however, in recent years the ness of a banking organization's controls and pro- Federal Reserve has determined that in some cedures, Federal Reserve staff has developed com- instances it is necessary to go beyond the scope of an prehensive examination procedures and manuals. In ordinary bank examination to determine if violations November 1997, the Federal Reserve issued its newly of law have occurred. For this reason, in 1993 the revised risk-focused Bank Secrecy Act examination Special Investigations Section was created in the procedures. These enhanced examination procedures Board's bank supervision division. This unit's funcspecifically address anti-money-laundering compli- tion, in part, continues to be that of reviewing inforance. For example, the examination procedures direct mation developed during the course of an examexaminers to review written policies of an institution ination and conducting a specialized inquiry to to assess whether senior management has included determine what, if any, laws have been violated anti-money-laundering procedures in all of the insti- through activity conducted at a banking organization. tution's operational areas, including retail operations, Section staff notifies the appropriate law enforcecredit, private banking, and trust. Examiners are also ment agency when apparent criminal violations are directed to review existing Know Your Customer detected and provides support and technical assispolicies as a preventive measure and as a means tance whenever requested. Recent undertakings of to detect and report suspicious money-laundering- this section include uncovering information that led related activities. In addition, specific examination to the conviction for criminal activity related to procedures direct the examiner to determine the effec- money laundering and fraud of the Bangkok Metrotiveness of systems used by the institution to identify politan Bank, a foreign banking organization that unusual or suspicious activities with regard to cash subsequently was ordered by the Federal Reserve to transactions, exemptions, the sale of monetary instru- cease all operations in the United States, and coordiments, and funds transfers. Examiners are also nating the Federal Reserve's recent involvement in directed to review audit testing procedures to deter- Operation Casablanca. mine if audits are being used to detect, deter, and report money laundering activities. Training programs for relevant bank staff in the areas of Bank COORDINATED ANTI-MONEY-LAUNDERING Secrecy Act compliance and anti-money-laundering EFFORTS controls are also evaluated. Federal Reserve examiners are provided with com- In addition to the Federal Reserve's efforts to develop prehensive training to assist them in identifying appropriate anti-money-laundering-related policies appropriate bank policies and procedures. We also and procedures for the domestic and foreign financial provide training to our examiners on the latest trends institutions that we supervise and our examination for in money laundering, as well as techniques for iden- compliance with those policies and procedures, staff tifying suspicious or unusual transactions. Examin- of the Federal Reserve has taken an active role among ers evaluate the viability of a bank's anti-money- federal bank supervisors in the law enforcement comlaundering policies and procedures designed to munity's battle to deter money laundering by providenable the bank to, among other things, detect and ing expertise for law enforcement initiatives and report unusual or suspicious transactions. However, training to various government agencies. even with appropriate training, it is still difficult The Federal Reserve routinely coordinates with for even the most experienced examiners to detect federal law enforcement agencies with regard to sophisticated money laundering schemes during the potential criminal matters, including anti-moneycourse of an examination. In this regard, I must laundering activities. The scope of this coordination emphasize that we do not expect our examiners to act ranges from our significant work on the development as criminal investigators. As a federal bank super- and implementation of the new interagency Suspivisory agency, we view the Federal Reserve's role as cious Activity Reporting system to the referral of auxiliary to the legitimate law enforcement duties of illicit activities on a case-by-case basis to law criminal justice agencies. Our examiners do not, nor enforcement agencies resulting from examinations of should they, possess the necessary tools required banking organizations. to fully investigate and prosecute criminal conduct. Training provided by Federal Reserve staff to law If money laundering transactions are identified or enforcement agencies continues to include programs strongly suspected during the course of an examina- at the U.S. Department of the Treasury's Federal Law Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 641 Enforcement Training Center and at the FBI Acad- being conducted to assist criminals in the movement emy, as well as training for the U.S. Secret Service of illegally derived funds, it is fundamental for safe and the U.S. Customs Service. Additionally, Federal and sound operations that financial institutions take Reserve staff has provided training in anti-money- reasonable measures to identify adequately who they laundering procedures to foreign law enforcement conduct business with, understand the legitimate officials and central bank supervisory personnel in transactions to be conducted by those customers, and, such countries as Russia, Poland, Hungary, the Czech consequently, identify those transactions conducted Republic, and a number of the emerging Baltic states, by their customers that are unusual or suspicious in as well as Brazil, Ecuador, Argentina, China, and nature. several other countries in the Middle East and Far In February 1996, Governor Kelley directed Fed- East. eral Reserve staff to begin the development of a The Federal Reserve's foreign initiatives also Know Your Customer regulation. The first step in this include our staff's active participation in the Finan- process was an extensive Federal Reserve effort in cial Action Task Force (FATF), which was estab- 1996 and 1997 to gain a comprehensive understandlished by the Group of Seven (G-7) countries. Board ing of the current Know Your Customer policies and staff has contributed significantly to the FATF's mis- procedures of banking organizations operating in the sion of educating countries around the world in anti- United States and abroad, including the private bankmoney-laundering and fraud prevention efforts. The ing activities of large domestic and foreign banking Federal Reserve also participated in the development organizations. Among the actions taken by Federal of guidance related to serious financial crimes, Reserve staff during this period were the examinaincluding money laundering, that was adopted at tions of several private banking operations in order to the recently concluded G-7 ministerial meeting at determine, among other things, how they have imple- Birmingham, England. mented their own Know Your Customer policies and In addition, the Federal Reserve is a founding procedures. As a result of the yearlong private bankmember and an active participant in the well-regarded ing review, the Federal Reserve developed and issued interagency Bank Fraud Working Group, which a "sound practices" paper on private banking in July consists of representatives of thirteen federal law 1997. Information gathered from the private banking enforcement and bank and securities supervisory examinations provided staff with some basic informaagencies. Among other things, this group, which has tion that was necessary before draft regulations covbeen meeting on a monthly basis since the mid- ering banking organizations' relationships with their 1980s, has coordinated the dissemination of relevant customers could be prepared. and timely information concerning criminal miscon- In the late summer of 1997, the staff of the Federal duct involving various banking organizations and Reserve prepared a preliminary draft regulation, and their officials. then began discussions with the other federal bank regulators in an effort to design a coordinated regulation that would address the Know Your Customer KNOW YOUR CUSTOMER activities of all federally supervised banks, thrift institutions, and credit unions. Representatives of the five The Federal Reserve believes that the most prudent federal bank supervisory agencies, along with a repreand effective means by which banking organizations sentative from Treasury's Financial Crimes Enforcecan protect themselves from allowing criminal trans- ment Network (FinCEN), have been meeting over the actions to be conducted at, or through, their institu- past year. It is hoped that we are nearing the end tions are for the institutions to adopt what has become of what has been a complex process. Barring any known as Know Your Customer policies and pro- unforseen complications, we expect that the regulacedures. Illicit activities, such as money laundering, tors should be able to issue coordinated notices of fraud, and other transactions designed to assist crimi- proposed rulemaking for Know Your Customer regunals in their illegal ventures, pose a serious threat to lations that would be applicable to bank as well as the integrity and reputation of financial institutions. nonbank financial institutions within the next few When transactions at financial institutions involving months. illicit funds, such as money laundering activities, are The objective of the Know Your Customer regularevealed, such transactions invariably damage the tion will be quite simple. The regulation is designed reputation of the institution involved. While it is to protect the reputation of the bank, facilitate the practically impossible to identify every transaction at bank's compliance with all applicable statutes and a financial institution that is potentially illegal or is regulations and with safe and sound banking prac- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

642 Federal Reserve Bulletin • August 1998 tices, and protect the bank from becoming a vehicle these parameters, I would like to describe briefly the for, or a victim of, illegal activities perpetrated by Federal Reserve's involvement in the operation. its customers. One of the benefits of developing The Federal Reserve was first made aware of and implementing a Know Your Customer program Operation Casablanca in late 1995 when staff memis that having an effective program should enhance bers were approached by Special Agents of the U.S. the relationship between the bank and its legitimate Customs Service, the lead agency for Operation customers. Casablanca. The agents requested technical assis- As the regulators' staff now envisions the require- tance with regard to certain banking aspects of an ments of the regulation, banking organizations would undercover money laundering sting operation. From be required to develop a Know Your Customer that time on, Federal Reserve staff members have program that would allow them to identify their cus- provided, and continue to provide, assistance to the tomers at the inception of the customer relationship, U.S. Customs Service and the Department of Justice and understand the source of funds and the normal as they complete the investigation and as they now and expected transactions of their customers. The prepare for the various prosecutions resulting from program should also be designed to allow banking the recently announced indictments. Some of the organizations to monitor the transactions of their assistance that we provided included verification as customers to ensure that they are consistent with to the existence of banking organizations and the their expected transactions and identify and report, geographic location of their operations, explanations as necessary, those transactions that are unusual or of procedures for the movement of currency between suspicious. banking organizations and within the Federal Reserve The requirements of the Know Your Customer System, training on check clearing and funds transfer program are expected to be set out in general terms, procedures, describing the various procedures banks reflecting the view that a Know Your Customer pro- follow in complying with regulatory reporting gram that is appropriate for one institution may not requirements such as the filing of Suspicious Activity be appropriate for another. Under the proposed regu- Reports and Currency Transaction Reports, and prolation, we would expect each banking organization viding assistance in the post arrest interviews of the to design a program that is appropriate to that orga- bankers who were arrested in the United States. nization, given its size and complexity, the nature On May 18—when the Departments of Justice and and extent of its activities, its customer base, and the Treasury jointly announced the indictments of sevlevels of risk associated with its various customers eral banks and bankers resulting from Operation and their transactions. The Federal Reserve has long Casablanca—the Board issued enforcement actions, advocated this approach as opposed to a detailed in this case temporary cease and desist orders, against regulation that imposes the same list of requirements four Mexican banks and one Spanish bank with a on every organization regardless of its specific cir- Mexican bank subsidiary. Two days later, when sevcumstances and the scope of its business activities. eral Venezuelan bankers and alleged money launderers were arrested, the Board took a similar enforcement action against a Venezuelan bank with U.S. OPERATION CASABLANCA operations. In total, the Board issued six temporary cease and desist orders resulting from Operation As the members of the committee are aware, Opera- Casablanca. tion Casablanca was recently made public with the Specifically, the Board ordered each of the finanannouncement of criminal indictments that included cial institutions to provide a detailed description of charges of money laundering being brought against the anti-money-laundering policies and procedures numerous bankers, as well as three Mexican banks— that it had in place, as well as a detailed description two of which operate offices in the United States. As of its understandings regarding the deficiencies in I am sure the committee will understand, I cannot such policies and procedures that could have given provide specific operational information about Opera- rise to the apparent illegal actions taken by its emtion Casablanca because the law enforcement agen- ployees. Additionally, the Board ordered each institucies responsible for the operation are still working on tion to submit an acceptable plan detailing the steps various aspects of the case. Similarly, confidentiality that have been and will be implemented to ensure that requirements preclude me from discussing supervi- conduct, such as that which has already occurred, is sory information about the banking organizations that not occurring and will not occur in the future. In allegedly may have been involved in improper activi- conjunction with the responses expected from the ties identified during Operation Casablanca. Within six banking organizations, the Federal Reserve has Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 643 begun in-depth targeted reviews of their anti-money- With respect to the Money Laundering and Finanlaundering policies and procedures, and staff contin- cial Crimes Strategy Act of 1998, we believe that ues to monitor each of the implicated banks with U.S. coordination already exists among and between the operations. various governmental bodies that participate in antimoney-laundering efforts. If the Congress were to determine that the development of a national strategy PROPOSED LEGISLATION in this area is appropriate, then we would welcome Finally, you have asked us to comment on legislation the opportunity to participate in such an initiative. you proposed, entitled the "Money Laundering Deterrence Act of 1998,"' as well as legislation proposed by Congresswoman Velazquez, entitled the CONCLUSION "Money Laundering and Financial Crimes Strategy Act of 1998." While the Board has not had an oppor- Over the past several years, the Federal Reserve has tunity to review either proposal, as a general proposi- undertaken extensive efforts to develop programs, tion the Federal Reserve has always supported con- procedures, and systems to better detect and deter structive efforts to better and more efficiently attack illegal money laundering activities at individual money laundering activities. From the staff's review banking organizations as well as address systemic of the proposals, it appears that the legislation, among issues related to financial institutions' compliance other things, would increase the tools available to law with applicable anti-money-laundering laws and enforcement authorities to combat money launder- regulations, including the Bank Secrecy Act. The ing on the one hand and establish a coordinated Federal Reserve has also provided training and techgovernment-wide effort against money laundering on nical assistance to law enforcement agencies particithe other. pating in the government's anti-money-laundering With specific regard to the "Money Laundering efforts and to international banking and law enforce- Deterrence Act of 1998," the staff is particularly ment authorities. pleased with the clarification of some issues related These actions underscore the Federal Reserve's to the disclosure of Suspicious Activity Reports. The significant commitment to the bank regulatory comfiling of Suspicious Activity Reports by banking munity's anti-money-laundering mission. The Fedorganizations is a vital tool for the government's eral Reserve has a vital interest in protecting the anti-money-laundering efforts, and your legislative banking system from criminal elements. Conseproposal enhances the organizations' ability to com- quently, we will continue our cooperative efforts with municate with law enforcement and bank supervisors other bank supervisors and the law enforcement comin a timely and effective manner without the threat munity to develop and implement effective antiof inappropriate legal challenges. We also appreciate money-laundering programs addressing the everthe importance that the proposed legislation places changing strategies of criminals who attempt to on Know Your Customer regulations as an integral launder their illicit funds through banking organizacomponent of an effective government anti-money- tions here and abroad. laundering program. Statement by Alan Greenspan, Chairman, Board of tion as the perceived most effective way to contain Governors of the Federal Reserve System, before the the undue concentration of power. Such power Committee on the Judiciary, U.S. Senate, June 16, is presumed to thwart individual initiative and to 1998 prevent the efficient allocation of resources, which would interfere with the creation of wealth and its It is my pleasure to appear today to discuss the wide distribution. The acceleration of megamergers current merger wave that is affecting a wide range of in recent months across a broad range of industries industries in the American economy. This nation has has once again stirred these latent concerns. always viewed concentrations of power, whether in Waves of mergers are, of course, not new. The government or the private sector, as a threat to indi- current one is the fifth in this country during the past vidual political freedoms and the equality of opportu- century. Previous waves occurred at the turn of the nity. In the public sector we seek democratic institu- century, in the late 1920s, the late 1960s, and, most tions and a rule of law to tether excessive political recently, in the early 1980s. The first two almost power. In the private sector we encourage competi- certainly did produce significant increases in eco- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

644 Federal Reserve Bulletin • August 1998 nomic concentration in manufacturing as industrial- in above-normal profitability, another group argues ization accelerated with the shift of resources out of that high concentration levels and high profits are agriculture into many new budding industries. The both the consequence of greater efficiency. Studies of more recent merger waves, however, do not appear to the relationship between concentration and prices have materially altered industry structure, perhaps tend to support the market power interpretation, but owing, in large part, to the increased adaptability of the magnitudes of the positive, statistically significant our more mature and competitive industrialized econ- coefficients relating prices to concentration measures omy. Other countries have also experienced merger tend to be fairly small. waves in recent decades with no perceptible increase Some empirical studies also suggest that high conin concentration overall. centration and presumed lack of competitive pressure The effects of the present merger wave on concen- may also be associated with the failure of firms to tration have yet to be determined, but there is little produce efficiently. reason to expect their influence will differ substan- More generally, it is concern over the lack of the tially from the merger wave of the early 1980s, which leveling force of competition in highly concentrated produced at most a slight increase in manufacturing markets that has fostered the fear of bigness. But concentration. unless a relationship between bigness and market To be sure, recent bank mergers have led to a concentration can be more firmly rooted in anticomsubstantial rise in national concentration measures. petitive behavior, bigness, per se, does not appear to Nonetheless, they have had little or no evident impact be an issue for national economic policy. Rather, it on average concentration measured at the more rele- appears that bigness should be primarily the concern vant local market level. This stability of local market of shareholders, whose returns could be muted by concentration owes, in part, to the dynamic nature large company inefficiencies, and their customers, of American banking, with substantial entry of who may face bureaucratic inflexibility. new firms as well as exit of others. In any event, on There is an evident general consensus in this counbalance, while the average number of competitors try that competition, in the abstract, is good for the within local banking markets has not materially consumer, for economic growth, and standards of changed in recent years, they tend to be the same living. This notion is buttressed by studies that sugcompetitors in an increasing number of markets. gest the more open to competitive forces, the greater Beyond banking, useful studies on the effects of the growth of an economy. Much more immediately mergers on concentration in other nonmanufacturing and directly, the areas of greatest growth in output segments of our economy are regrettably few. and productivity in this country—Silicon Valley and Evidence concerning the effects of mergers on its counterparts around the country—are extremely economic efficiency is mixed. While some studies competitive judging from the turnover of business find no evidence of profit and efficiency improve- and the evidence of a high degree of what Joseph ments following mergers, others indicate that, on Schumpeter many decades ago called creative deaverage, mergers have led to significant productivity struction. Many new products emerge with great fangains. In the banking industry, the data suggest that fare and soaring stock prices only to flare out when while some mergers have engendered improved confronted with a still newer competitive innovation. operations, others have not. Thus, there are no clear- There are, nonetheless, differences at the margin cut findings that suggest bank mergers uniformly lead (some would go further) of what constitutes approprito efficiency gains. However, the evidence suggests ate competitive behavior and what the role of governthat there are considerable differences in the cost ment in this country should be in enforcing it. At efficiencies of banks within all bank size classes, root, what differences exist stem from varying views implying that there is substantial potential for many of precisely how our economy functions and which banks to improve the efficiency of their operations, activities are wealth producing and which are not. perhaps through mergers. The notion of what we mean by competition is not Numerous empirical studies, nonetheless, have altogether without dispute. Most would agree that found a statistically significant positive relationship producers try to emphasize their new products or the between market concentration and profits, which, comparative advantages of existing products. When upon closer examination, appears to derive from a they sense that improved quality will enhance sales link between market share and profits. Economists more than costs, they will direct resources to quality have differed in their interpretations of this finding. improvement and try to differentiate their product, While one group argues that high levels of concentra- often through brand name advertising. All seek, or at tion allow firms to exercise market power, resulting least hope, to achieve market dominance. When they Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 645 cannot differentiate their product from others because unequivocal benefit to consumers is the outcome of they choose to produce, for example, electrolytic an auction market with very tight bid-ask spreads. copper or any other so-called commodity, they will Such markets represent a very small share of bilateral endeavor to improve their market share and spread transactions. overhead through innovative improvements in ser- In one sense, markets generally are always in some vice. Other producers may turn to mergers and acqui- state of imperfection in that businesses never fully sitions to increase market share. Acquirers may exploit, perhaps can never fully exploit, all opportuniseek to enhance efficiency, but they may also seek to ties for profitable, productive, investment. Consumincrease their market power, and hence their profits, ers do not always seek out the lowest prices or the through practices that are often considered less than best quality, owing to the costs of searching across sportsmanlike, to use an analogy to another promi- sellers. Rationally acting individuals may choose not nent arena of competition. When producers cannot to exert the additional effort that they perceive will achieve a profitable market niche, some, but fortu- only marginally enhance their state of well-being. nately few, will seek political protection from mar- Then, of course, people do not always act rationally. kets through subsidies, tariffs, quotas, or outright In addition, market effectiveness is clearly a funcgovernment franchised monopolies. tion of the degree of market participants' state of Through skill, perseverance, luck, or political con- knowledge. The critical signals that make markets nections, competitors have always pressed for market function—product and asset prices, interest rates, dominance. It is free, open markets that act to thwart bid-ask spreads, and so on—depend on market parachievement of such dominance and in the process ticipants' perceptions of the state of demand and direct the competitive drive, which seeks economic supply and future prospects, to the extent they are survival, toward the improvement of products, greater discernable. There is inevitably considerable asymproductivity, and the amassing and distribution of metry of information among producers and consumwealth. Adam Smith's invisible hand does apparently ers, and buyers and sellers. Moreover, any voluntary work. transaction comprises not only a good or a service but To be sure, markets do not always work fully to the a representation, explicit or otherwise, of the nature standards of our abstract notions of perfection, which of the product being transferred. Misrepresentation to induce an exchange is theft, in that the transaction in turn rest on particular notions of the way human was not voluntary. Laws against fraud are demonstrabeings do, or should, behave in the marketplace. bly a necessary fixture of any free market economy. There appears to be general agreement among economists that the test of success of economic activity is But what information is a seller obligated to conwhether, by directing an economy's scarce resources vey to a buyer in an exchange? Misrepresenting a to their most productive purposes, it makes consum- lead brick for a gold one is unambiguous. But are ers as well off as is possible. Moreover, it is generally producers required to divulge information about agreed that the chances of achieving these goals are potential new products that would make obsolete an greatest if prices are determined in competitive mar- offered product and depreciate its value? More generkets and reflect, to the fullest extent that is feasible, ally, how far does protection of intellectual property the costs in real resources of producing goods and rights go in protecting what is, or what is not, divulservices. While relatively straightforward to state in gable to a counterparty to a transaction? Clearly, this theory, how such a standard should be applied in dilemma is only one of many such conundrums practice is often subject to dispute. resulting from the awesome complexity of the opera- The focus of much debate in recent years is just tions of free markets. In this case, too heavy a hand what constitutes a "market failure," or the tendency of government regulation will surely stifle innovation and wealth creation. Too little will infringe the legal for market prices not to reflect appropriately all releproperty rights of counterparties. vant production costs. In addition, what constitutes the interest of consumers in the abstract is, of course, Still more difficult is the relevance of the effects on by no means self-evident in a large number of cases. third parties from the actions of two individuals act- As a result of certain transactions, some consumers ing voluntarily, with or without conspiratorial intent, will benefit; others will not. Moreover, conditions can in their mutual interest through exchange. In the most differ with respect to whether it is the short- or general sense, all bilateral transactions, to a greater long-term interest of consumers that is at stake. or lesser extent, affect the markets with which third Any notion of market failure, of course, presup- parties deal for good or ill. Some actions open new poses a concept of market perfection. In that sense, markets for unrelated third parties. Other actions perhaps the only market that achieves this standard of increase competitive pressure. Indeed, that is an Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

646 Federal Reserve Bulletin • August 1998 inevitable consequence of the division of labor in a assuaged by heightened competition. Antitrust initiasociety. But it is almost impossible in the vast major- tives were not seen as a generally successful remedy. ity of cases to judge with any confidence that one act More recently, limited avenues for antitrust policy creates wealth or another destroys it. Nonetheless, are perceived by policymakers to enhance market while certain aggressive, competitive behaviors may, efficiencies. as the evidence suggests, enhance wealth creation, That markets, on occasion, can be shown to be our society has, in addition to taking actions against behaving in a manner presumed inferior to some presumed failings in the marketplace, chosen to set presubscribed optimum is not a difficult task. For noneconomic limits to competitive behavior. In example, suboptimal product or operational standards effect, we have established a set of Marquis of are seen by some to persist because, once in place, Queensberry rules for the marketplace, that is, non- they are difficult to dislodge. Often cited is the wordeconomic criteria for the types of behavior that are processor keyboard whose key placement still reflects judged tolerable in business relationships. We may in the manual typewriter's need to prevent its keys from the process, of course, be losing some wealth cre- sticking rather than convenience to the typist. A more ation, but the value of market civility, at various recent example pointed to by some is the universal times in our history, appears to have tempered our adoption of VHS-based VCR technology. The more drive for maximum efficiency. Nonetheless, that mar- general proposition is that the success of competing kets, however faulted, are a productive means to technologies depends more on the relative size of coordinate human behavior for most remains beyond their initial adoptions than on the inherent superiority doubt. of one over the other (what economists term "path Markets enforce a degree of trust among partici- dependence"). I should point out, however, that these pants that may not be so prevalent in other aspects of examples, and the more general proposition, are not life. People cannot be untruthful without cost in a without challenges. market context where credibility has distinct com- To demonstrate that a particular antitrust remedy mercial value. A reputation for an inferior product will improve the functioning of a market is also often might not be damaging in a centrally planned econ- fraught with difficulties. For implicit in any remedy is omy but has heavy consequences in markets where a forecast of how markets, products, and companies choice is available. But above all, by constructing will develop. institutions that enable the value preferences of con- Forecasting how technology, in particular, will sumers to be reflected in prices and other market evolve has been especially daunting. The problem is signals, a society can produce far greater wealth than that the various synergies of existing technologies any of the nonmarket alternatives. that account for much of our innovation have been One of those essential institutions is a rule of law exceptionally difficult to discern in advance. For that protects property rights, both real and intellec- example, according to Charles Townes, a Nobel Prize tual, against force or fraud, enforces contracts, and winner for his work on the laser, the attorneys for adjudicates the bankrupt. More controversial are the Bell Labs initially refused, in the 1960s, to patent the laws that endeavor to improve the workings of the laser because they believed it had no applications in marketplace, the Sherman and Clayton acts being the the field of telecommunications. Only in the 1980s, most prominent. after extensive improvements in fiber optics technol- While no one, I presume, is against improving ogy, did the laser's importance for telecommunicamarkets, the issue is clearly what constitutes improve- tions become apparent. ment and by what means, if any, it can be achieved. Moreover, almost by definition, antitrust remedies How this issue has been addressed since the passage are applied mainly to firms dominant in their indusof the Sherman Antitrust Act of 1890 has ebbed and tries. Yet the evidence of sustained dominance where flowed with evolving theories and empirical evidence markets are generally open are few. There has been a about how markets function and the degree of accep- tendency for one firm to dominate in the early develtance in our society of free markets to determine the opment of many of our industries where economies distributions of income and wealth. of scale enabled significant reductions in unit costs In the 1970s and 1980s, there was a significant and hence prices. U.S. Steel, General Motors, and shift in emphasis from a relatively deterministic anti- IBM are only the more prominent cases of market trust enforcement policy to one based on the belief share erosion after early virtual dominance of their (under the aegis of the so-called Chicago School) that industries was achieved. One wonders how long the those market imperfections that are not the result of Standard Oil Trust's near monopoly of refining would government subsidies, quotas, or franchises would be have prevailed, even without the landmark antitrust Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 647 breakup in 1911, as upstart competitors Royal Dutch "we can think of no more effective exclusion [of Shell, British Petroleum, Gulf, and the Texas Com- competitors] than progressively to embrace each new pany (Texaco) undercut Standard. opportunity as it opened, and to face every newcomer I am not saying that dominant positions in indus- with new capacity already geared into a great organitries cannot be maintained for extended periods, but I zation, having the advantage of experience, trade suspect in free competitive markets that it is possible connections and the elite of personnel." only if dominance is maintained through cost effi- If competitors are excluded because of a compaciencies and low prices that competitors have diffi- ny's excellence in addressing consumer needs, should culty matching. By the measure of what benefits such activity be constrained by law? Such a standard, consumers, such enterprises should not be discour- if generally applied to business initiatives, would aged. Natural monopolies are an exception, but tech- have chilled the type of competitive aggressiveness nology is increasingly reducing the areas of our econ- that brings efficiencies and innovation to the marketomy where such monopolies can prevail. Banking place. Fortunately, that principle was subsequently and other regulated industries are of course a further abandoned by the Supreme Court. More important, exception. antitrust actions of recent years have sought to The possibility of economies of scale leading to enhance efficiencies and innovations. I leave it to very large firms relative to any one nation's economy others to judge their degree of success. But the reguillustrates and emphasizes the importance of interna- latory climate in antitrust, indeed throughout governtional free trade policies in maintaining domestic ment, has moved in a more market-oriented direction. competition. In some industries, free trade may be I believe that is good for consumers and the nation. essentially the only way to maintain truly competitive In conclusion, the United States is currently experimarkets to the benefit of consumers in all of the encing its fifth major corporate consolidation of this nations involved. Nevertheless, it is also interesting century. When trying to understand and deciding how to note that some, such as Professor Michael Porter at to react to this development, I would hope that we Harvard, have found that the most successful export- appropriately account for the complexity and dynaers have evolved out of domestically competitive mism of modern free markets. Foremost on the industries. agenda of policymakers, in my judgment, should be In any event, we have come a long way in attitudes to enhance conditions in our market system that will about market power and antitrust enforcement from foster the competition and innovation so vital to a the days, more than a half century ago, when a prosperous economy. Federal Appeals Court opined in the Alcoa case, that Statement by Alan Greenspan, Chairman, Board of tal changes driven by a revolution in technology, by Governors of the Federal Reserve System, before the dramatic innovations in the capital markets, and by Committee on Banking, Housing, and Urban Affairs, the globalization of the financial markets and the U.S. Senate, June 17, 1998 financial services industry. The Federal Reserve believes that it is essential It is a pleasure to appear before this committee to that the nation act promptly to modernize the rules present the views of the Federal Reserve on the need that govern our financial institutions in order to to enact legislation to modernize the U.S. financial ensure their continued competitiveness and to foster system and to express the Board's strong support for their ability to innovate, to operate efficiently, and to H.R. 10, which achieves this objective. provide the best and broadest possible services to consumers as well as to maintain this nation's role as the preeminent world financial center. We believe THE NEED FOR FINANCIAL REFORM that it is important for the Congress to set the rules U.S. financial institutions are today among the most for this industry, which is so important to our nation's innovative and efficient providers of financial ser- health and prosperity. Only the Congress has the vices in the world. They compete, however, in a ability to fashion rules that are comprehensive and marketplace that is undergoing major and fundamen- equitable to all participants and that guard the public interest. NOTE. The attachments to this statement are available from Publi- That is why the Federal Reserve strongly supports cations Services, Mail Stop 127, Board of Governors of the Federal H.R. 10 and urges the Senate to consider and pass Reserve System, Washington, DC 20551, and on the Board's site on the World Wide Web (http://www.bog.frb.fed.us). this legislation as soon as feasible. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

648 Federal Reserve Bulletin • August 1998 The market will continue to force change whether modernization, and it is fundamentally a sound bill. or not the Congress acts. The strength and viability of No legislation that endeavors to address financial our financial institutions, the effectiveness of our modernization will be considered ideal by all, but regulatory structure, and the role and status of our time will allow its rough spots to be worked out. financial services industry in the international system What is most important is that for the first time are in play as a result of the aforementioned market there is an extraordinary amount of agreement on forces as well as regulatory actions. Without congres- nearly all of the key principles in the bill. There is no sional action, changes will occur through exploitation disagreement—and there has been no disagreement of loopholes and marginal interpretations of the law for many years—that the Glass-Steagall Act must be that courts feel obliged to sanction. This type of repealed. There is now finally no disagreement that response to market forces leads to inefficiencies, insurance companies and banks should be permitted expansion of the federal safety net, potentially to affiliate, and virtual unanimity that banks should increased risk exposure to the federal deposit insur- be permitted to sell insurance. There is no disagreeance funds, and a system that will undermine the ment that financial holding companies should be percompetitiveness and innovative edge of major seg- mitted to engage in a broad range of other activities ments of the financial services industry. Delay in that are financial in nature, including merchant bankacting on financial modernization legislation would ing. And there is no disagreement that new affiliaonly limit the Congress's options as these develop- tions must be permitted on a level playing field and ments proliferate and complicate, increase the diffi- in a manner that permits a realistic two-way street culty of enacting protections included in H.R. 10 to between banking organizations that seek to affiliate protect safety and soundness and the public interest, with insurance and securities firms, and between and deny to consumers the benefits that immediate insurance and securities firms that seek to acquire changes in our outdated banking laws will surely banks. Moreover, there is no disagreement that finanbring. cial modernization must not place insurance and Of course, financial modernization involves com- securities firms that choose to remain independent at plicated and sometimes divisive issues because it a disadvantage in competing against those firms that requires easing rules and opening options for some choose to affiliate with banks. while increasing competition for others, redrawing In addition, there is strong agreement that new lines that create new limits, and applying some affiliations must be permitted within a framework pre-existing regulatory structures to new institutions. that maintains the safety and soundness of our finan- However, these issues are not new to the Senate. cial system in general and the banking system The Senate Banking Committee has on three pre- in particular without imposing unnecessary regulavious occasions led the way in developing financial tory burden or intrusion. That means strong funcmodernization legislation, and the full Senate has tional regulation and reasonable, but not banklike, twice followed this committee's recommendation in umbrella oversight of financial holding companies. adopting such legislation. (A summary of these finan- A consensus has also developed that banking and cial modernization proposals is provided at attach- commerce should not be mixed at this time beyond ment I.) In 1991, the committee passed S. 543, which the limited level needed to allow a realistic two-way repealed the Glass-Steagall Act and allowed banks street for financial firms that are predominantly secuto affiliate with securities firms using the holding rities and insurance companies to acquire banks. company structure to ensure safety and soundness, a There is also agreement that the new law must prolevel competitive playing field, and protection of vide regulators with adequate means to protect the the taxpayer. H.R. 10 uses that same holding com- consumer and ensure that consumers are carefully pany framework from S. 543 but expands the range informed about the differences between products that of permissible financial affiliations to include insur- are backed by federal deposit insurance and those ance underwriting and merchant banking. Senate that are not. action at this time to enact H.R. 10 would be a These are the fundamental principles embodied in historic achievement that would establish a sound H.R. 10, save one. There are some details surroundand much-needed framework for launching our ing these aforementioned principles that are still financial services industry into the twenty-first under discussion. These surrounding details are century. important, but not so important that they should be There has been much—perhaps too much— allowed to defeat the consensus that has developed arguing over details contained in H.R. 10. H.R. 10 is around these principles themselves. It would be a a comprehensive approach to the issues of financial disservice to the public and the nation if, in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 649 fruitless search for a bill that pleases everyone, the dictably created a moral hazard: The banks determine benefits of this vital legislation are lost or delayed. the level of risk-taking and receive the gains there- There is, however, as I indicated, one fundamental from but do not bear the full cost of that risk; the principle embodied in H.R. 10 upon which there is remainder is borne by the government. Because the disagreement between the Federal Reserve and the sovereign credit of the United States ultimately guarcurrent Treasury Department, although there is agree- antees the stability of the banking system and the ment among the Federal Reserve and many in the claims of insured depositors, bank creditors do not affected industries as well as earlier Treasury Depart- apply the same self-interest monitoring of banks ments. That is the considered decision of the House to protect their own position as they would withto use the holding company structure, and not the out discount window access and deposit insurance. universal bank, as the appropriate structure to allow Instead, this moral hazard requires that the guarantor, the new securities and insurance affiliations. That the U.S. government, supervise and regulate entities decision, which is fundamental to the way in which with access to the safety net to protect its own, that is the financial services industry will develop, is critical the taxpayers', interest—the cost of making good on because it provides better protection for our banking the guarantee. and financial system without damaging the national Put another way, the safety net requires that the or state bank charters or limiting in any way the government replace with law, regulation, and superbenefits of financial modernization. Importantly, that vision much of the disciplinary role that the market decision also prevents the spread of the safety net and plays for other businesses. Our experience in the the accompanying moral hazard to the securities and 1980s with insured thrift institutions illustrates the insurance industries and ensures a level playing field necessity of avoiding expanding risks to the deposit within the financial services industry and thus full, insurance funds and lax supervisory policies and open, and fair competition as we enter the next cen- rules. But this necessity has an obvious downside: tury. The other route toward universal banking for These same rules limit innovative responses and the national banks will, in our view, lead to greater risk ability to take the risks so necessary for economic for the deposit insurance funds and the taxpayer. It growth. The last thing we should want, therefore, will also inevitably lead to a weakening of the com- is to widen or spread this unintended but neverpetitive strength of our financial services industry as theless corrosive dimension of the safety net to independent securities, insurance, and other financial other financial and business entities and markets. services providers operate at a disadvantage to those It is clear that to do so would not only spread a owned by banks. It is for these reasons that the subsidy to new forms of risk-taking but ultimately Federal Reserve, the Securities and Exchange Com- require the expansion of banklike supervision as mission (SEC), many state functional regulators, and well. many in the affected industries support the holding In our judgment, the holding company approach company framework and have opposed the universal upon which H.R. 10 is premised avoids this pitfall; bank approach. the universal bank approach does not. In virtually every other industry, the Congress While financial modernization represents a much would not be asked to address issues such as these, needed reform, we should not forget that this modernwhich are associated with technological and market ization will, by itself, introduce dramatic changes in developments; the market would force the necessary our financial services industry. We feel confident that institutional adjustments. Why is it so different for the risks of this type of reform are manageable within the financial system? I believe the difference reflects the holding company framework set out in H.R. 10. the painful experience that has taught us that devel- We believe that the magnitude of the reform to our opments in our financial system—especially, but not financial system represented by allowing new and solely, in our banking system—can have profound broad affiliations counsels that this is not the time to effects on the stability of our whole economy, rather experiment with these broad new affiliations through than the limited impact we perceive from difficulties operating subsidiaries, an approach that has failed the in individual nonfinancial industries. taxpayer in other contexts and has other serious con- Moreover, as a society we have made the choice to sequences. Instead, we believe the Congress is best create a safety net for depository institutions, not advised to retain the existing holding company struconly to protect the public's deposits but also to mini- ture, which achieves the full benefits sought by finanmize the impact of adverse developments in financial cial modernization and has a proven track record of markets on our economy. Although we have clearly protecting safety and soundness, insulating the fedbeen successful in doing so, the safety net has pre- eral safety net, and providing competitive equality Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

650 Federal Reserve Bulletin • August 1998 among companies that choose to affiliate with banks this change and to ensure that these new affiliations and those that choose to remain independent. occur in a manner that is consistent with the safety There are two final points I want to make because and soundness of the banking and financial system they appear to drive Treasury's opposition to and the protection of investors and other consumers H.R. 10. First, as I will discuss in more detail later, of financial services. H.R. 10 requires that these new H.R. 10 would not diminish—but would in fact affiliations occur within a holding company structure, enhance—the national bank charter. which the Federal Reserve believes is sound policy Second, H.R. 10 would not diminish the ability of because it best protects the federal deposit insurance the executive branch to continue to play its meaning- funds by limiting the additional risks permitted to ful role in the development of banking or economic insured depository institutions. Arguably of even policy. Currently, the executive branch influences greater importance, the holding company structure such policy primarily through its supervision of limits the spread of the federal safety net and its national banks and federal savings associations. related subsidy and moral hazard to entities or activi- H.R. 10 would not alter the executive branch's ties beyond the insured depository institutions it was supervisory authority for national banks or federal intended originally to support. H.R. 10 builds on the savings associations, nor would it result in any reduc- protection afforded by the holding company structure tion in the predominant and growing share of this by relying on strong functional regulation of the nation's banking assets controlled by national banks securities, insurance, and banking components of the and federal savings associations. holding company. It also provides flexibility to autho- Furthermore, the Congress for sound public policy rize restrictions on transactions between depository reasons has purposefully apportioned responsibility institutions and their newly authorized affiliates when for this nation's financial institutions among the necessary to protect the safety and soundness of elected executive branch and independent regulatory affiliated depository institutions and the federal agencies. H.R. 10 retains this balance, and the Fed- deposit insurance funds. H.R. 10 grants access to eral Reserve does not believe it would be appropriate these new affiliations only to those organizations that to alter this balance in favor of increased executive have and maintain well-capitalized and well-managed control of financial institution policy. Such action subsidiary depository institutions. would be contrary to the deliberate steps that the H.R. 10 also includes provisions designed to ensure Congress has taken to ensure independence in the that these new affiliations occur in a manner that is regulation of this nation's financial institutions, both consistent with the protection of consumers. For banking and nonbanking. example, the bill requires that the federal banking agencies issue consumer protection regulations governing the retail sale of securities and insurance prod- THE FINANCIAL SERVICES ACT OF 1998 ucts by depository institutions. And H.R. 10 empha- (H.R. 10) sizes the obligation of depository institutions to help meet the credit needs of their entire community by Although H.R. 10 is almost 300 pages in length, its limiting the new affiliations to only depository instituobjective is simple and can be stated concisely— tions that have at least a satisfactory performance H.R. 10 removes outdated restrictions that currently record under the Community Reinvestment Act. limit the ability of U.S. financial service providers, including banks, insurance companies, and securities firms, to affiliate with each other and enter each Umbrella Supervision and Functionally other's markets.1 This objective—permitting the Regulated Entities affiliation of financial service providers and thereby allowing open and free competition in the financial H.R. 10 for the first time would permit broad affiliaservices industry—is supported by the banking, insur- tions among financial service providers that are curance, and securities industries as well as the three rently supervised by different agencies. As a result, federal banking agencies, the Treasury Department, H.R. 10 builds on the principle of functional regulaand the Securities and Exchange Commission. tion and includes important provisions that encourage For the most part, the remaining provisions of and facilitate cooperation among the functional regu- H.R. 10 are designed to implement and complement lators. It also reduces overlap between the various regulators and clearly allocates responsibility and accountability for supervising the different parts of 1. For the committee's assistance, attachment 2 to this testimony provides an executive summary of H.R. 10. new financial holding companies. At the same time, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 651 H.R. 10 retains a meaningful, albeit streamlined, specified circumstances—any subsidiary that poses a level of umbrella oversight of the entire organization material risk to the insured bank, and to enforce to ensure that some agency has a complete view of, compliance by the organization with the federal bankand accountability for, new financial holding compa- ing laws. This ensures that, while the functional nies and can serve a facilitating role in relationships regulators are supervising various parts of the organiamong functional regulators. zation, someone is overseeing the organization as a The Federal Reserve believes that H.R. 10 has whole as well as subsidiaries that are not subject to constructed a good balance that provides the various other functional regulation. regulators, including the umbrella supervisor, with the tools needed to supervise financial holding companies adequately. In addition, H.R. 10 is helpful in Enhanced Functional Regulation enhancing the ability of the relevant state and federal of Financial Products supervisory agencies to share information on a confidential basis. Consistent with the bill's emphasis on functional The focus of H.R. 10 on functional regulation is regulation, H.R. 10 also would repeal the blanket perhaps best illustrated through an example. Under exemptions provided banks from the definitions of H.R. 10, responsibility would be allocated for super- "broker" and "dealer" in the Securities Exchange vising a new financial holding company composed Act of 1934, requiring banks to register with the SEC of an insurance company, a securities firm, several if their securities activities fall outside specified catefinancial companies such as a mortgage lender and a gories of transactions. These categories are broad and financial data processing company, and an insured would permit banks to continue engaging in securibank. H.R. 10 contemplates that responsibility for ties activities in connection with their traditional trust, supervising and regulating the insurance company, custody, safekeeping, and derivatives operations and securities firm, and insured bank would, as under in a limited amount of retail securities transactions current law, rest respectively with the relevant without registering as a broker or dealer. state insurance authorities, with the Securities The bill also establishes procedures for determinand Exchange Commission and the securities self- ing which functional regulator would have primary regulating organizations, and with the appropriate responsibility for supervising the provision of new or state and federal bank supervisory agencies. Each of hybrid financial products that may be developed in these agencies would retain the full authority that it the future. In the securities area, for example, H.R. 10 currently has to examine firms under its jurisdiction would authorize banks, to the extent consistent with and to interpret and enforce the law applicable to the applicable banking law, to offer and sell new or type of company that the agency is charged with hybrid products that are developed in the future supervising. unless the SEC determines, after a formal rulemak- The Federal Reserve, as umbrella supervisor, ing process and after consultation with the federal would be required to the fullest extent possible to rely banking agencies, that the new or hybrid product is on regulatory reports required and examinations con- a security for purposes of the securities laws. If ducted by, using our example, the state insurance the SEC makes such a determination, the bill would commissioner, the SEC (and appropriate securities require that the product be sold by an SEC-registered self-regulatory agencies), and the appropriate state or entity, such as a subsidiary of the bank, subject to federal banking agency, [n a problem bank situation, functional regulation as a security product. the Federal Reserve also would be prohibited from The bill establishes a similar, although more comrequiring that the insurance company or securities plex, procedure for determining whether future prodfirm provide financial resources to the bank if the ucts that are classified as insurance by a state may be functional regulator determines that such action underwritten by a bank within the framework of bank would have a materially adverse effect on the finan- regulation or only by a functionally regulated insurcial condition of the insurance company or securities ance underwriting affiliate. This process seeks to firm. Instead, the Federal Reserve could order divesti- ensure that banks will continue to have the ability to ture of the bank or affiliate in order to recapitalize the provide any product banks are providing today. In bank. addition, it ensures that banks may, as principal, At the same time, H.R. 10 preserves the important provide any new form of a traditional banking prodauthority of the umbrella supervisor to apply consoli- uct that may in the future be characterized as insurdated capital standards to the financial holding com- ance by state law unless the product is treated as pany, to examine the holding company and—under insurance for purposes of the federal Internal Reve- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

652 Federal Reserve Bulletin • August 1998 nue Code. There is also a procedure to resolve dis- this area, particularly as to whether H.R. 10 would putes between insurance and banking regulators over scale back the Supreme Court's decision in the future products with final decisions by the courts Barnett case concerning the ability of states to regu- "without unequal deference" to either the relevant late the sale by national banks of insurance as agent. federal or state regulators and after having reviewed It is my understanding that H.R. 10, in fact, seeks to the history of the regulation of the product. codify the Barnett decision by incorporating the Although any attempt to devise rules for the classi- phraseology used by the Supreme Court and a spefication and regulation of future products is bound to cific citation to the Supreme Court's opinion in encounter difficulties and improvements could be Barnett into a new federal statute that would preempt made in some marginal provisions, the substantive any state law that "prevents or significantly interprovisions of H.R. 10 governing the division of regu- feres" with the ability of any national bank or other latory responsibility for future products are carefully depository institution to engage in insurance sales balanced in our judgment. activities authorized by federal law. H.R. 10 does provide that a state law will not be preempted under the Barnett standard if the law is no Competitive Flexibility more restrictive than an existing Illinois statute that governs insurance sales by banks. This statute, among Importantly, H.R. 10 provides banking organiza- other things, requires the licensing of agents and the tions—both large and small—substantial flexibility disclosure that insurance products sold by the bank in determining how to respond to the market forces are not guaranteed or insured by the Federal Deposit so rapidly changing the industry. Many large banking Insurance Corporation (FDIC). This provision also organizations that meet applicable criteria may elect prohibits the tying of insurance products to credit to affiliate with full-service insurance and securities products, the payment of commissions to unlicensed underwriting firms and thereby become comprehen- persons, and the unauthorized disclosure of customer sive providers or "manufacturers" of financial prod- information. The statute's requirements are not oneructs. Similarly, small banking organizations would ous, and the Comptroller of the Currency has recogremain free to engage in currently authorized activi- nized that the statute's requirements do not on their ties or to expand into newly authorized principal face conflict with the Barnett decision. activities at the pace most consistent with the organi- In short, the controversy in this area appears to zation's competitive strategy. Small banking organi- stem largely from confusion concerning the bill's zations also would be free to focus their efforts in an intent, which can be addressed through clarifying area in which they have a demonstrable competitive amendments designed to make plain that the bill does advantage—the sale of any type of financial product not scale back, and is fully consistent with, the as agent. Barnett decision. One of the areas of great interest to banks—and one likely to increase consumer options and benefits greatly—is insurance sales. Importantly, H.R. 10 ENHANCEMENTS TO THE would expand the insurance sales opportunities for NATIONAL BANK CHARTER banks by authorizing subsidiaries of national banks to sell virtually any type of insurance product, whether There has been some concern that H.R. 10 may underwritten by an affiliate or a third party, from any damage the national bank charter. The Federal location on a nationwide basis. National banks also Reserve believes that it is important that the national would retain their current ability to sell insurance as bank charter not be impaired or diminished in view of agent in any place with a population of 5,000 or less. its significance to the nation's financial system. On One detail in this area that we do not support is the the other hand, we do not believe the national bank provision in H.R. 10 that requires a national bank, for charter should be fundamentally transformed and the next five years, to expand its insurance activities enlarged into a universal bank charter by allowing in additional states only by buying an existing insur- national banks directly or indirectly to engage in ance agency. underwriting life and property and casualty insur- H.R. 10 would also provide depository institutions ance, underwriting and dealing in securities, merimportant protections against state laws that might chant banking and direct equity investing, or real conflict with the ability of these institutions to sell estate investment and development. For the reasons financial products as authorized by federal law. Some laid out in this testimony, we believe such an expanconfusion and controversy, however, have arisen in sion of the national bank charter would be a mistake Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 653 for bank safety and soundness, the deposit insurance over national banks in the securities area. H.R. 10 funds and safety net, the financial services industry prohibits state banks from engaging in underwriting (consumers and businesses alike), and the taxpayer. or dealing in securities, either directly or through In the Federal Reserve's view, the concern about an operating subsidiary, to the same extent that a H.R. 10's effect on the national bank charter appears national bank is prohibited from underwriting and based on a misunderstanding of the bill. Our review dealing in securities. of H.R. 10 indicates that it preserves the existing H.R. 10 would clarify that national banks should benefits of the national bank charter and includes not in the future underwrite life or property and significant provisions that actually enhance the pow- casualty insurance beyond that currently permissible ers of national banks. First, H.R. 10 does not reduce for national banks. State banks are already prohibited the current powers of national banks to conduct bank- by the Federal Deposit Insurance Corporation ing activities or indeed limit the present activities Improvement Act of 1991 from commencing insurconducted by national banks. In fact, H.R. 10 con- ance underwriting activities or making equity investtains several provisions that specifically preserve ments. Thus, under H.R. 10, the only financial activthese powers. Moreover, there is nothing in H.R. 10 ity of which we are aware that state banks in some that limits the authority of the Office of the Comptrol- states could conduct, either directly or in an operating ler of the Currency (OCC) to authorize new powers subsidiary, that national banks cannot is real estate for national banks as within the business of banking investment and development. Treasury's recent bill, or incidental to a banking business under the National however, would wisely, in our view, also have pro- Bank Act other than those activities prohibited for hibited that activity to national banks and their national banks and future, as yet unauthorized, insur- subsidiaries. ance underwriting activities. As I explained earlier, H.R. 10 also includes pro- As I mentioned earlier, H.R. 10 contains, as has visions that guarantee national banks the right to every prior version of financial modernization legis- affiliate—through holding companies—with securilation for the past fifteen years including the recent ties firms, insurance companies, and other financial Treasury proposal, provisions that encourage all services providers, and to sell and market the prodbanks to conduct securities activities through an ucts of those affiliates notwithstanding any state law. affiliate or, where authorized, a subsidiary of the In addition, H.R. 10 preserves the rule of law estabbank, rather than in the bank. These provisions, how- lished in Barnett. ever, include significant exceptions that allow banks Together, these provisions allow national banks to to continue to conduct in the bank securities activities remain strong and vibrant competitors. H.R. 10 also that are part of or incidental to traditional banking does nothing to encourage national banks to convert services or that are conducted in limited numbers. to state charters. Nor does H.R. 10 tarnish in any way And, as in the Treasury's recent modernization pro- the appeal that many see in the national bank charter, posal, the provisions of H.R. 10 apply equally to all particularly as a vehicle for conducting interstate national and state banks. branching. Indeed, nearly 90 percent of all interstate Second, H.R. 10 improves the national bank char- branches are operated by national banks, which operter. H.R. 10 empowers national banks to conduct any ate under one set of rules and with one regulator at all financial activity as agent through an operating sub- their locations—the OCC. sidiary. Under this provision, national banks may, The heart of the concern about H.R. 10's applicathrough a subsidiary, sell any type of insurance at any bility to national banks does not appear to be that it location (including in cities with a population over fails to enhance the national bank charter but that it 5,000). This provision also allows a subsidiary of a fails to enhance the national bank charter enough for national bank to sell any financial product as agent, some. However, the record does not demonstrate that and to engage in any financial agency activity that the national bank charter is in decline. In fact, the is permitted for a financial holding company. Such opposite is true. In the postwar years, national banks activity, as best we can judge, because it is rarely have controlled more than 50 percent of total bank asset intensive and hence requires minimal equity, assets. In fact, the share of assets controlled by transfers little subsidy to the bank subsidiary. national banks rose sharply last year and early in H.R. 10 also authorizes national banks for the first 1998, reflecting the increased attractiveness of the time to underwrite any type of municipal security, national charter as interstate branching has been including municipal revenue bonds, directly or authorized, and assets held by national banks are at through a subsidiary. At the same time, H.R. 10 the highest level this decade and near the postwar removes the current advantage that state banks have high relative to state banks. Attachment 3 provides Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

654 Federal Reserve Bulletin • August 1998 additional data on the relative strength of the national from the stability brought to the banking system by bank charter. the safety net—are willing therefore to provide funds In any event, the issue that is facing the Congress to banks at much lower rates than are available is not whether we need to provide an edge to a to competing institutions. Moreover, the insured particular type of bank charter. The record is replete creditors—and many of the uninsured ones as with evidence that what is really needed is reform of well—do not feel the necessity to monitor their credit the laws that prevent the affiliation of banks of all exposure because of the government guarantee and types with securities firms, insurance companies, and the other implications of the safety net. As a result, other financial services providers, and thereby allow the government is required to monitor the riskthe financial services industry to adjust to a rapidly taking—to put itself in the shoes of the creditors—in changing market. That is the deficiency that H.R. 10 order to protect the taxpayers and maintain financial is designed to address and does address very well. If market stability. the future finds, contrary to the past and present, that The existence of this subsidy is clear in debt further adjustments are needed to the national bank ratings—which are virtually always higher at banks charter to allow it to remain competitive and viable, than at their parent holding company. It is clear in the those concerns can, and should, be addressed more higher capital ratios required of nonbanking financial clearly once an actual deficiency is shown. firms, even those that receive the same debt rating as banks. It is clear in the tendency for banking organizations, when geographic restrictions were eased, OPERATING SUBSIDIARIES to shift back to the bank and its subsidiaries those vs. HOLDING COMPANIES activities that, while authorized for banks, had been conducted in holding companies. Bank holding com- One area in which some have argued that H.R. 10 panies, the owners of most banks, have no doubt also does not go far enough is in authorizing national gained by the higher debt ratings and lower cost of banks to own so-called operating subsidiaries, which capital that comes from having as their major asset an are subsidiaries of the bank that engage in activities entity—the bank—with access to the safety net. But that national banks are forbidden by federal law to holding companies also own nonsubsidized entities conduct directly. This is not a detail or a technical that have no direct access to the safety net. Accordissue, but one that we believe is critical to determin- ingly, both bank holding companies and their noning the shape, soundness, and competitive fairness of bank subsidiaries have a higher cost of capital than our financial system as it develops into the twenty- banks that cannot be credibly explained by the holdfirst century and will have profound ramifications for ing companies' responsibilities to their insured our federal safety net. depository institutions. Moreover, any benefit that There are two reasons why the Board believes that holding companies might currently be experiencing it is not wise or necessary to expand the ability of from ownership of an insured bank can be expected banks to engage in new principal activities through to decline as the holding company's ability to expand operating subsidiaries that are prohibited to the bank. its affiliations causes the insured bank to become a These are (1) extension of the safety net subsidy smaller part of the total organization. to activities beyond what the Congress originally Virtually all nonbank subsidiaries of bank holding intended and resultant harm to the vibrancy of com- companies, with the exception of section 20 securipetition in our financial services industry and (2) the ties affiliates, were historically put in the holding safety and soundness implications for banks and risk company, not because the holding company could exposure of the deposit insurance funds. conduct broader activities than the bank, but for other reasons, such as geographic restrictions on the bank. As these restrictions have been eased over the past Extension of the Safety Net decade, the share of consolidated assets of bank holding companies associated with nonbank In my introductory remarks, I noted that a major activities—other than section 20s, whose purpose is reason the Congress is called upon to involve itself in to conduct a business that is not permissible for the a legislative response to technical innovation in finan- bank itself—has declined about 50 percent. Bank cial markets is the safety net. Institutions covered by holding companies tell us that the primary reason for it receive a subsidy because insured depositors cor- shifting back to banks those operations that can be rectly perceive their risk exposure as virtually zero. shifted is to obtain cheaper funding and avoid These depositors—and other creditors who benefit limitations on funding transactions contained in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 655 sections 23A and B of the Federal Reserve Act. Reserve believes that we must avoid inadvertently Activities that have stayed in holding company sub- extending the safety net and its associated subsidy sidiaries, we are told, remain there for tax reasons, without a thorough understanding of the implications inertia, and established names separate from the bank. of such an extension on the competitive balance and In time, inertia will fade. systemic risks of our financial system. It is critical that the subsidy implicit in the federal The safety net subsidy is difficult to measure, and safety net be limited to those activities that a bank several observers have doubted its existence net of can conduct directly. The Federal Reserve is con- regulatory costs. Subsidy values—net or gross—vary cerned that operating subsidiaries would be a funnel from bank to bank; riskier banks clearly get a larger for transferring the sovereign credit subsidy directly subsidy from the safety net than safer banks. In from the bank to finance any new principal activities addition, the value of the subsidy varies over time. In authorized by either the Congress or by OCC regu- good times, such as now, markets demand a low risk latory action—imparting a competitive advantage to premium, and it is difficult to discern the safety net such entities. We approve of new principal activi- subsidy. But when markets turn weak, financial asset ties, but we believe they should be financed com- holders demand to be compensated by higher yields petitively in the marketplace. Moreover, we do not for holding claims on riskier entities. It is at this time believe that it is possible to bring to bear the separa- that subsidy values are the most noticeable, as tion of an operating subsidiary from its parent bank spreads open up between bank and nonbank claims. that one can introduce between a bank and its sister What was it worth in the late 1980s and early 1990s affiliates. for a bank with a troubled loan portfolio to have Rules can be devised to limit the aggregate equity deposit liabilities guaranteed by the FDIC, to be investment made by banks in their subsidiaries. But assured that it could turn illiquid to liquid assets at one cannot eliminate the fact that the equity invested once through the Federal Reserve discount window, in subsidiaries is funded by the sum of insured depos- and to tell its customers that payment transfers would its and other bank borrowings that directly benefit be settled on a riskless Federal Reserve Bank? For from the subsidy of the safety net. Thus, inevitably, many, it was worth not basis points but percentage a bank subsidiary must have lower costs of capital points. For some, it meant the difference between than an independent entity and even a subsidiary survival and failure. of the bank's parent. Indeed, one would expect that a The Federal Reserve has no doubt that the costs of rational banking organization would, as much as pos- regulation are large, too large in our judgment, and sible, shift its nonbank activity from the bank holding we wish to reduce the degree of regulatory burden. company structure to the bank subsidiary structure. But no bank has turned in its charter in order to Such a shift from affiliates to bank subsidiaries would operate without the cost of banking regulation, which increase the subsidy and the competitive advantage would require that it operate also without deposit of the entire banking organization relative to its non- insurance or access to the discount window or paybank competitors. ments system. To do so would require both higher I am aware that these are often viewed as only deposit and other funding costs and higher capital. It highly technical issues, and hence ones that are in the is also instructive that there are no private deposit end of lesser significance. I do not think so. The issue insurers competing with the FDIC. For the same of the use of the sovereign credit is central to how our product offered by the FDIC, private insurers would financial system will allocate credit, and hence real have to charge premiums far higher than those of resources, the kinds of risk it takes, and the degree of government insurance and still not be able to match supervision it requires. If the use of the sovereign the certainty of unlimited payments in the event of credit is to be extended, that decision ought to be default, the hallmark of a government insurer backed made by the Congress in full recognition of the by the sovereign credit of the United States. consequences of the subsidy on the financial system. The Federal Reserve has a similar status with But it should not, in the name of some technical respect to the availability of the discount window and change, or in search of some minor efficiency, inad- riskless final settlement during a period of national vertently expand significantly the use of the sover- economic stress. Providing such services is out of the eign credit. reach of all private institutions. The markets place This issue would not be so important were we not substantial values on these safety net subsidies, in the process of addressing what must surely be a clearly in excess of the cost of regulation. To repeat, watershed in the revamping of our financial structure. were it otherwise, some banks would be dropping But we are at such a watershed, and the Federal their charters. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

656 Federal Reserve Bulletin • August 1998 Safety and Soundness purposes, but it is not the way the market will view the organization. Even if there were no subsidy issue, engaging in In addition to being inconsistent with sound principal activities in an operating subsidiary exposes accounting standards (GAAP), the proposed deducthe bank—and hence the safety net—to greater risks. tion treatment also runs counter to the way that banks I am not arguing that the new financial activities that manage their subsidiaries, the way regulators have financial modernization would permit to banking or- supervised subsidiaries, and the way financial marganizations are unusually risky. But they do present kets are likely to perceive the bank as a whole. additional risk as principal and any losses associated Historically, both bank management and supervisors with these activities would have to be absorbed. If have considered subsidiaries of the bank to be an such losses were suffered by a bank holding company integral part of the bank (in fact they have been subsidiary, the loss would be consolidated into the treated as departments of the bank) whose operations, holding company parent—an entity without direct if material, could have a significant impact on the access to the safety net. In contrast, if the loss bank's risk profile. Bank managers have invariably occurred at a subsidiary of a bank, the loss would fall sought to support their subsidiaries in the past, and directly on the bank parent, increasing the risk expo- supervisors have carefully examined the operations sure of the deposit insurance funds and the safety net. of material subsidiaries in view of the difficulty in This difference is neither small nor technical. It lies at insulating the parent bank from problems in its the heart of the matter. subsidiaries. The Treasury, as you know, has proposed and Even if statutory barriers are erected that attempt supported new principal activities in the operating to limit the impact of subsidiary losses on the parent subsidiary. It argues that potential losses in the oper- bank, substantial losses in a subsidiary will likely ating subsidiary could be capped in such a way as to erode the market's confidence in the management eliminate the exposure of the safety net. Under the and health of the bank. This would be a critical Treasury plan, investment by a bank in its operating development in the case of a bank whose stability— sub must be deducted from the regulatory capital of and whose level of risk to the federal deposit insurthe bank, after which the bank's regulatory capital ance funds—depends in large measure on its reputaposition must still be deemed "well capitalized." tion and standing in the financial markets. A law may Moreover, the bank would be prohibited from mak- endeavor to mandate accounting and regulatory treating good any of the debts of the failed subsidiary. ment, but it is not so easy to alter perceptions of I should note that it is necessary that all of these counterparties or the reality of financial markets. prohibitions be statutory, since generally accepted It is worth noting that a dividend payment by a accounting principles—GAAP—require that the sub- bank to its holding company results in a real decline sidiaries' operations be consolidated with its parent in bank capital. This is a genuine constraint on the and that courts determine if a parent is responsible for subsidy transfer from banks to their holding company the claims on its failed subsidiaries. I should further affiliates and helps explain the reality that bank divinote that what may be viewed as a regulatory matter dends historically have not chronically exceeded the as excess capital—the maximum amount that is to be dividends paid out by holding company parents plus invested in the subsidiary under this proposal—may debt service. The use of bank dividends to fund or may not be excess in an economic or real sense. holding company expansion would, of course, incor- Regulatory accounting principles—RAP—are not porate a modest safety net subsidy because bank often designed to reflect economic realities, as we earnings are higher than they otherwise would be saw last in the savings and loan crisis of the 1980s. because of the safety net. But the capital constraint— Moreover, as I understand it, the RAP capital deduc- plus the supervisor's natural tendency to guard tion for purposes of computing the level of a bank's against significant capital reductions—has limited investment in its operating subsidiaries would not be such transfers. It is unlikely that a capital adjustment mirrored by a capital deduction for other regulatory for regulatory purposes that is in conflict with GAAP purposes—like loans-to-one-borrower or dividend would be as effective a constraint on the investments limit purposes. that a bank may make in its subsidiary. And I can assure you it will not be deducted for the Moreover, losses in, for example, securities deal- GAAP bank statements that uninsured creditors and ing or fire and casualty insurance underwriting conlarge loan customers will insist on reviewing before ducted in an operating subsidiary could occur so they conduct business with the bank. Thus, a capital rapidly that they could overwhelm the bank parent deduction may matter for the regulators for some before actions could be taken by the regulator. Put Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 657 differently, losses in an operating subsidiary can This same principle—allowing competitive easily far exceed a bank's original equity investment equity—argues against authorizing operating subsidilong before the supervisor has any such knowledge. aries to conduct broad activities within the United The resulting bank safety and soundness concerns are States. As discussed above, the universal bank only deepened by the extent to which past retained approach would allow banks and their subsidiaries a earnings of the operating subsidiary would have competitive advantage over U.S. securities and insurstrengthened the capital of the parent bank—an osten- ance firms that remain independent of banks— sible reason for operating subsidiaries. Such a buildup thereby inevitably impairing their competitive in capital could be used to support other bank activi- strength. Thus, given the structure of the financial ties and then eliminated by subsequent losses in the services industry inside the United States, the prinoperating subsidiary, leaving the bank in an under- ciple of competitive equity that gave rise to the Edge capitalized position. corporation as a vehicle for conducting a banking The argument that operating subsidiaries are desir- business outside the United States argues against a able because of the organizational flexibility they similar vehicle within the United States. provide to bank management seems less than compel- Others have concluded that the Federal Reserve's ling. Having two options is better than one. But there objection to operating subsidiaries is solely is no real choice here. From the purview of banking jurisdictional—solely turf. If by such comments, organization profitability, the operating subsidiary these critics believe that our concern is simply to is far superior to a holding company affiliate because maintain our status or prerogatives, they are misof the funding advantage gained from access to the taken. This has certainly not been our approach to safety net. Hence, if profitability is the gauge, there is bank powers. The Board was an early and strong no increase in managerial flexibility. Rational man- supporter of interstate banking, knowing that it would agement will always select the operating subsidiary. induce shifts from state to national bank charters, Some observers have argued that operating subsid- reducing the Federal Reserve's supervisory role. Interiaries should be allowed to conduct broad activities state banking was right for the economy, and we as principal in the United States because Edge cor- supported it. Operating subsidiaries are not, and that porations, which are congressionally authorized cor- is why we oppose them. porations chartered to conduct a banking business outside the United States and are largely owned by banks, have conducted a broader range of activities H.R. 10 AND THE as principal outside the United States without damage COMMUNITY REINVESTMENT ACT to banks. As an initial matter, it is important to realize that there are only a handful of banks that engage It has also been argued that H.R. 10 damages the to any significant extent through Edge corporations Community Reinvestment Act (CRA). The Board in activities not permissible to their parent bank, and believes that this argument is incorrect. In fact, enactthese banks engage primarily in various securities ment of H.R. 10 would strengthen the CRA in very activities. Importantly, the Congress authorized the material ways. Edge corporation as a means to allow our banks to be The Board believes that the CRA has played an competitive abroad. In order to do so, Edge corpo- important role in encouraging banks to identify lendrations had to be able to conduct outside the United ing markets that may be underserved and to develop States activities that are somewhat broader than those credit products and services in response to identified permitted domestically, provided the activities are needs of their communities. H.R. 10 provides a comusual in connection with the conduct of banking in pelling incentive for financial holding companies to the country in which the Edge corporation operated. continue these efforts by requiring as a prerequisite to The Edge corporation, therefore, conducts broader the expanded powers and affiliations authorized by activities not because the Congress believed that it the bill that all of the subsidiary depository instituwas, as a general matter, prudent to permit subsidi- tions have at least a "satisfactory" CRA rating. aries of banks to conduct broad powers. Instead, Moreover, H.R. 10 adds teeth to the CRA. Cur- Edge corporations may conduct broader activities rently, the CRA is enforced through the application because they must be allowed to be as competitive as process. But there is no current requirement that a possible in the arena in which they compete—which depository institution divest a bank once a merger is is in foreign markets where the rules governing the approved if the bank fails to maintain adequate CRA activities of banks and other financial service provid- performance levels after the merger. H.R. 10, howers differ from the rules in the United States. ever, requires that satisfactory CRA ratings be main- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

658 Federal Reserve Bulletin • August 1998 tained as a condition for continued affiliation with absorbed the significant changes called for by financompanies authorized under the bill. Thus, a financial cial modernization. holding company has a strong incentive to ensure that Recent events have, if anything, strengthened our its depository institution subsidiaries continue to meet view on the desirability for caution in this area. The their CRA obligations. H.R. 10 also would expand Asia crisis has highlighted some of the risks that can the CRA to wholesale financial institutions, a new arise if relationships between banks and commercial form of depository institution authorized by the bill. firms are too close. It is not so much that U.S. entities There exists some confusion, however, as to would face structures like those in Indonesia, Thaiwhether the CRA would be further benefited if banks land, or Korea. Rather it is the experience that interwere permitted to engage, either directly or through a actions of complex structures can make it extremely subsidiary, in securities and insurance activities as difficult to monitor, analyze, and manage financial principal. The CRA by its terms requires that the exposures. In short, the Board would prefer more federal banking agencies assess the record of deposi- experience with financial change as a prelude to tory institutions in meeting the credit needs of their considering further and more profound structural entire community, including low- and moderate- changes. We thus support the H.R. 10 provisions on income communities. While the CRA relates to the commerce and banking. lending activities of depository institutions, it does H.R. 10, as passed by the House, prohibits the not apply to securities or insurance underwriting affiliation of banking and commerce, with three activities—whether conducted by a bank, a subsidi- exceptions. Companies, such as securities and insurary of a bank, or an affiliate of a bank. Accordingly, ance firms, that engage predominantly in financial authorizing a bank to directly or indirectly conduct activities and that acquire an insured depository instithe securities and insurance underwriting activities tution may continue to own commercial firms but authorized by H.R. 10 for financial holding compa- must divest them within ten years (with the possibilnies would not increase a bank's obligations under ity of a further five-year extension). Financial holdthe CRA, although it would expose the bank and its ing companies that own only uninsured wholesale CRA-related lending activities to the earnings fluc- financial institutions also are permitted to retain limtuations and possible losses associated with such ited grandfathered investments made as of the date of principal activities. enactment of the bill but are not required to divest Under H.R. 10, banks would remain free to them at the end of a specified period. develop and offer the type of innovative or targeted Unitary thrift holding companies—holding comlending products, either directly or through a subsidi- panies with only one thrift subsidiary—now may ary, that are designed to meet the identified credit be affiliated with commercial entities. Only a few needs of their communities and that are relevant to are, but H.R. 10 would grandfather the ability of all the bank's CRA assessment. Moreover, if a banking unitary thrift holding companies to establish commerorganization elected to engage in CRA-related activi- cial affiliations. For securities firms and insurance ties through a holding company subsidiary, the orga- companies that acquire banks, however, H.R. 10 nization would remain free under the CRA regula- would not permit new commercial affiliations. tions issued by all of the federal banking agencies to In light of the dangers of mixing banking and have the activities of the holding company subsidiary commerce, the Board supports elimination of the count toward the CRA performance of an affiliated unitary thrift loophole, which currently allows any bank. type of commercial firm to control a federally insured depository institution. Failure to close this loophole now would allow the conflicts inherent in banking COMMERCE AND BANKING and commerce combinations to further develop in our economy and complicate efforts to create a Last year, the Board, in testimony before the House fair and level playing field for all financial service Banking and Commerce Committees, recommended providers. caution about authorizing banking and commerce Accordingly, the Federal Reserve strongly supports affiliations. We noted that technology was already in the provisions of H.R. 10 that would prohibit new the process of eroding any bright line between com- unitary thrift holding companies from having nonmerce and banking. Nonetheless, we concluded that financial affiliations on a prospective basis. However, the free and open legal association of banking and H.R. 10 would also permit existing unitary thrift commerce would be a profound and surely irrevers- holding companies to retain their current commercial ible structural change that should best wait while we affiliations, to expand those commercial affiliations, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 659 and to sell those rights to do so. Equity and fairness Congress can establish the ground rules designed do not justify providing these grandfathered organi- to ensure the maximum net public benefits and a zations such unique economic benefits. The Board, fair and level playing field for all participants and therefore, strongly supports an amendment to to ensure the continued primacy of U.S. financial H.R. 10 that would at least prohibit or significantly markets. restrict the ability of grandfathered unitary thrift hold- The Senate has a historic opportunity to modernize ing companies to transfer their legislatively created our financial system by passing a bill that creates an grandfather rights to another commercial organiza- unusually desirable framework. The Federal Reserve tion through mergers or acquisitions. urges the committee to establish a wider scope for the delivery of financial services through the holding company vehicle. This is the best way to minimize CONCLUSION the spread of the safety net subsidy and its resulting competitive inequities, to minimize risks for deposi- The markets are demanding that we change outdated tory entities and their insurance funds, and to facilistatutory limitations that stand in the way of more tate a safe and sound banking and financial system efficiently and effectively delivering financial ser- that is able to serve the American public and maintain vices to the public. Many of these changes will occur the leadership role of the American financial system even if the Congress does not act, but only the in the global economy. Statement by Ernest T. Patrikis, First Vice President, cations.1 I will not attempt to cover those topics again Federal Reserve Bank of New York, before the Com- here. Instead, this morning I will begin with some mittee on Banking and Financial Services, U.S. House background on the possible implications of the Y2K of Representatives, June 23, 1998 problem for international banking and finance. Second, I will describe how various supervisory initia- I am pleased to appear before the committee today to tives led to the formation of the Joint Year 2000 discuss the implications of the Year 2000 (Y2K) Council a little more than two months ago. Third, I computer problem for international banking and will discuss the actions being taken by the Joint finance. I am appearing in my capacity as chairman Year 2000 Council, particularly in the areas of raising of the Joint Year 2000 Council, which is sponsored awareness, improving preparedness, and contingency jointly by the Basle Committee on Banking Supervi- planning. sion, the Group of Ten (G-10) central bank governors' Committee on Payment and Settlement Systems, the International Association of Insurance BACKGROUND ON THE INTERNATIONAL Supervisors, and the International Organization of IMPLICATIONS OF THE Y2K PROBLEM Securities Commissions (collectively referred to as the Sponsoring Organizations). The Y2K bug potentially affects all organizations that The international financial community has much are dependent on computer software applications or work to do to prepare itself for the challenges posed on embedded computer chips. In other words, nearly by the Year 2000 problem. While much good work is all financial organizations worldwide are potentially being done and progress in many areas is evident, at risk. Even those whose own operations remain more needs doing. The Sponsoring Organizations strictly paper-based are likely to be dependent on believe that mutual cooperation and information sharpower, water, and telecommunications utilities that ing can play a key role in helping individual market must themselves address possible Y2K problems. participants carry out these preparations and limit the Also, many nonfinancial customers have dependenscope of Y2K-related disruptions. Our major concies on technology. cern, of course, will be the possible impact of the All countries of the world, therefore, need to Y2K problem on the functioning of the international address the Y2K problem and its potential effects on financial system as a whole. Federal Reserve Governor Edward W. Kelley, Jr., has recently elaborated on the activities of the Fed- 1. See Statement by Edward W. Kelley, Jr., Member, Board of Governors of the Federal Reserve System, before the Committee on eral Reserve System in connection with the Y2K Commerce, Science and Transportation, U.S. Senate, April 28, 1998, problem as well as on possible macroeconomic impli- Federal Reserve Bulletin, vol. 84 (June 1998), pp. 433-38. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

660 Federal Reserve Bulletin • August 1998 their domestic financial markets. In some cases, it is National Book-Entry System in the United States, or said that computer systems in particular countries are at one of the two major international securities not much affected because their national calendars depositories, Euroclear or Cedel. Additional clearing are not based on the conventional Gregorian calendar firms, such as the National Securities Clearing Corused in the United States and many other countries. poration and the Government Securities Clearing T do not derive much comfort from these statements Corporation in the United States, may also occupy because in most cases operating systems and the central roles in the trade clearance and settlement software applications running on them count inter- process. nally with a conventional date system that may not be Payments and foreign exchange transactions on Y2K-compliant. These systems typically also need behalf of the mutual fund would involve the use of to connect and interact with other systems that use correspondent banks, both for the U.S. dollar and for conventional dates, and so these interfaces must other relevant currencies. These transactions would be tested for Y2K-compliance. More broadly, mere typically settle over the books of domestic wholesale assertions that computer applications are unaffected payment systems, such as the Clearing House Intercannot be seen as a substitute for the rigorous bank Payments System (CHIPS) or Fedwire in the assessment, remediation, and testing efforts that United States, and the new TARGET system for the should be undertaken by financial market participants euro. Correspondent banks are also heavily depenworldwide. dent on the use of cross-border payments messaging The increasing extent of cross-border, financial- through the network maintained by the Society for market activity has been much remarked on in recent Worldwide Interbank Financial Telecommunications years. Perhaps less well known is the fact that this (S.W.I.F.T.) to advise and confirm payments. To proactivity is dependent on a large, geographically vide some sense of the magnitudes involved here, diverse, and highly computer-intensive global infra- consider that the Fedwire and CHIPS systems prostructure for each of the key phases of this activity— cess a combined $3 trillion in funds transfers on an from trade execution through to payment and average day (split roughly evenly between the two settlement. systems). While S.W.I.F.T. itself does not transfer As an example, consider the daily financial market funds, its messaging network carries more than 3 milactivities of a hypothetical U.S.-based mutual fund lion messages per day relating to financial transacholding stocks and bonds in a number of foreign tions worldwide. jurisdictions. Such a mutual fund would likely exe- The many interconnections of the global financial cute trades via relationships with a set of securities market infrastructure imply that financial market pardealers, who themselves might make use of other ticipants in the United States could be affected by securities brokers and dealers, including some out- Y2K-related disruptions in other financial markets. In side the United States. The operational integrity of assessing the scope of any such potential problems, the major securities dealers in each national securities we should be realistic in accepting that some disrupmarket is critical to the smooth functioning of those tions are inevitable, while also recognizing that not markets. In addition, securities trading in most coun- all countries confront Y2K problems of similar magtries is reliant on the proper functioning of the respec- nitudes. The problem simply affects too many organitive exchanges, brokerage networks, or electronic zations and too many systems to expect that 100 pertrading systems and the national telecommunications cent readiness will be achieved throughout the world. infrastructure on which these all depend. Financial Nor are the best efforts of supervisors and regulators markets today are also highly dependent on the avail- capable of completely eradicating the risk of disrupability of real-time price and trade quotations pro- tion. Ultimately, the work of fixing the Y2K problem vided by financial information services. rests with firms themselves, and even some of the For recordkeeping, administration, and trade settle- most determined and well-funded Year 2000 efforts ment purposes, our hypothetical mutual fund would may miss something. also likely maintain a relationship with one or more global custodians (banks or brokerage firms), who themselves would typically maintain relationships GLOBAL YEAR 2000 ROUND TABLE with a network of subcustodians located in various domestic markets around the world. Actual settle- Recognizing the global nature of the issues surroundment of securities transactions typically occurs over ing the Y2K problem, each of the Sponsoring Organithe books of a domestic securities depository, such zations undertook initiatives in 1997 to raise awareas the Depository Trust Company or the Fedwire ness, enhance disclosure, and prompt appropriate Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 661 action within the financial industry. Their decision readiness of financial markets worldwide. For examlast fall to organize a Global Year 2000 Round Table ple, current Global 2000 projects include the developwas motivated by a growing sense of the seriousness ment of recommendations for financial infrastructure of the Y2K challenges posed in many countries and testing and guidelines for addressing Y2K compliof the potentially severe consequences for financial ance issues related to vendors and service providers. markets that fail to meet these challenges. The Global The Global 2000 Coordinating Group, which includes Year 2000 Round Table was held at the Bank for representatives from more than seventy-five finan- International Settlements on April 8, 1998. It was cial institutions in eighteen countries, represents an attended by more than 200 senior executives from extremely valuable private-sector attempt at cooperafifty-two countries, representing a variety of private tion on this important issue. At the same time, howand public organizations in the financial, information ever, the international financial supervisory commutechnology, telecommunications, and business com- nity recognized that it would be useful to establish a munities around the world.2 public sector group, called the Joint Year 2000 Coun- The discussions at the Round Table confirmed that cil, that would work with the private sector and also the Y2K issue must be a top priority for directors and maintain a high level of attention on the Y2K probsenior management and that the public and private lem among financial market supervisors and regulasectors should increase efforts to share information. tors worldwide. The importance of thorough testing, both internally and with counterparties, was emphasized as the most effective way to ensure that Y2K problems are mini- JOINT YEAR 2000 COUNCIL mized. Round Table participants identified the need to continue the widening and strengthening of exter- The formation of the Joint Year 2000 Council was nal testing programs in many countries. announced at the end of the Global Year 2000 Round The communique issued by the four Sponsoring Table on April 8, 1998. The Joint Year 2000 Council Organizations at the close of the Round Table recom- consists of senior members of the four Sponsoring mended that market participants from regions that Organizations. Every continent is represented by at have not yet vigorously tackled the problem should least one member on the council. The Secretariat of consider the need to invest significant resources in the Council is provided by the Bank for International the short time that remains. The Sponsoring Organi- Settlements. I am honored to serve as the chairman of zations further recommended that external testing the Joint Year 2000 Council. programs be developed and expanded and that all The mission of the Joint Year 2000 Council has financial market supervisors worldwide should imple- four parts: first, to ensure a high level of attention on ment programs that enable them to assess the Y2K the Y2K computer challenge within the global finanreadiness of the firms and market infrastructures that cial supervisory community; second, to share inforthey supervise. The Sponsoring Organizations urged mation on regulatory and supervisory strategies and telecommunications and electricity providers to share approaches; third, to discuss possible contingency information on the state of their own preparations and measures; and fourth, to serve as a point of contact encouraged market participants and supervisors and with national and international private-sector initiaregulators to consider the need to develop appropriate tives. After their meetings on May 8-9, 1998, the contingency procedures. Group of Seven finance ministers called on the Joint At the Round Table, a new private-sector initiative Year 2000 Council and its Sponsoring Organizations known as the Global 2000 Coordinating Group was to monitor the Y2K-related work in the financial announced. The aims of the Global 2000 effort are industry worldwide and to take all possible steps to to identify and support coordinated initiatives by the encourage readiness. global financial community to improve the Y2K The council has met twice since being formed in early April and plans to meet frequently, almost monthly, between now and January 2000. At our 2. A videotape containing highlights of the Global Year 2000 Round Table is available free of charge from the Bank for Interna- first meeting, we organized our work projects and tional Settlements. Please contact the Joint Year 2000 Council Secre- approved our mission statement. At our second meettariat at the Bank for International Settlements, Centralbahnplatz 2, ing, we met for the first time with an External Con- CH-4002 Basle, Switzerland (telephone: 41 61 2808432, fax: 41 61 sultative Committee consisting of international 280 9100, email: jy2kcouncil.bis.org). The Federal Financial Institutions Examinations Council (FFIEC) public-sector and private-sector organizations. Meethas also placed the entirety of this video tape on its web site, where ing with this External Consultative Committee is it is available for downloading in whole or in part. Please see intended to enhance the degree of information sharhttp://www.bog.frb.fed.us/y2k/video_index.htm#19980408. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

662 Federal Reserve Bulletin • August 1998 ing and the raising of awareness on different aspects of information sharing with others. For example, at of the Year 2000 problem by both public and private the Federal Reserve Bank of New York, we have sectors within the global financial markets. been holding quarterly Y2K forums with a diverse set The External Consultative Committee includes rep- of financial organizations in the area. Participants resentatives from international payment and settle- have requested that we continue to hold these ment mechanisms (such as S.W.I.F.T., Euroclear, meetings—in fact, to hold them even more Cedel, and VISA), from international financial mar- frequently—because they believe that the contacts ket associations (such as the International Swaps and and the exchange of views are broadly beneficial. We Derivatives Association, the International Institute of hope to use the Joint Year 2000 Council to achieve Finance, and the Global 2000 Coordinating Group), similar goals. from multilateral organizations (such as the Inter- Each of the members of the Joint Year 2000 Counnational Monetary Fund, the Organization for Eco- cil has committed to help play a leading role in nomic Cooperation and Development, and the World promoting awareness of Y2K initiatives within their Bank), from the financial rating agencies (such as region. Each of us will help in coordinating regional Moody's and Standard & Poor's), and from a number Y2K forums or conferences and will publicly proof other international organizations (such as the mote the goals of the Joint Year 2000 Council in International Telecommunications Union, Reuters, speeches and on conference programs. the International Federation of Accountants, and the The Joint Year 2000 Council will also maintain International Chamber of Commerce). This diversity extensive World Wide Web pages that can be of perspectives led to an extremely valuable discus- accessed freely over the Internet.3 These pages are sion with the Joint Year 2000 Council and stimulated being maintained through the support the council has work on several projects to be taken forward with received from the Bank for International Settlements, input from both the public and private sectors, for in particular from the General Manager, Andrew example, the initiatives on Y2K testing and self- Crockett. These web pages will maintain current assessment that I will describe shortly. Further ses- information on the activities of the Joint Year 2000 sions with the External Consultative Committee are Council. planned on a quarterly basis. The most extensive aspect of the council's web site It is important at the outset for me to be clear that will be a series of country pages, one for each counthe Joint Year 2000 Council is not intended to try in the world. For each country, the page will become a global Y2K regulatory authority, with contain contact information for government entities sweeping powers to coordinate international action or (including national coordinators), financial industry to take responsibility for ensuring Y2K readiness in supervisors and regulators (including central banks, every financial market worldwide. Through our abil- banking supervisors, insurance supervisors, and secuity to serve as a clearinghouse for Y2K information, rities regulators), financial industry associations, payhowever, I believe that the Joint Year 2000 Council ment, settlement, and trading systems, chambers will play a positive role in three areas: (1) raising of commerce, and major utility associations or superawareness, (2) improving preparedness, and (3) con- visors. For each of these organizations, a name, tingency planning. In the next portion of my remarks, address, phone number, fax number, electronic mail, I would like to address each of these roles in turn. and web site address will be provided. Other relevant information on an organization's Y2K preparations may also be included, for example, whether it has a EFFORTS TO PROMOTE AWARENESS dedicated Y2K contact or has taken specific action with respect to the Y2K problem. The Joint Year 2000 Council is undertaking a series The motivation for developing these country pages of initiatives that may be described under the heading is to increase awareness of the work that is being of promoting awareness. By this term, I do not mean done to address the Y2K problem and to enable to include only those initiatives aimed at raising market participants to easily find out more informageneral awareness, although that too is still needed tion about the state of preparations worldwide. Estabin some cases. I mean to include efforts to promote lishing these national contacts will also help to better awareness of the many efforts currently under develop the informal networks and arrangements way to tackle the Y2K problem. 1 have found that, while many organizations are working hard on vari- 3. The web pages of the Joint Year 2000 Council can be reached at the web site of the Bank for International Settlements (www.bis.org). ous aspects of the Y2K challenge, in many cases These pages will also be registered under the name jy2kcouncil.org in these efforts would be enhanced by a greater degree the near future. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 663 that may be needed in addressing other Y2K-related the council members felt strongly that involvement in issues, for example, in formulating contingency mea- some fashion by the national government could be sures. Finally, of course, the presence of the country beneficial. pages may exert pressure on those countries in which Accordingly, the Joint Year 2000 Council plans to more vigorous action is needed. A blank or uninfor- issue a statement in the near future providing general mative country listing would probably not be seen as support for the concept of a national-level coordinata good sign by some financial market participants. ing body for the Y2K problem. In the United States, In addition, the web pages of the Joint Year 2000 of course, the White House has established the Presi- Council will also provide summaries of the efforts dent's Council on Year 2000 Conversion, headed being undertaken by its Sponsoring Organizations as by John Koskinen. This effort, as well as those of this well as links to the relevant web sites. For example, committee under the leadership of Chairman Leach, reports on Y2K surveys of supervisors and regulators and of the other congressional committees that have being undertaken by the Basle Committee on Bank- addressed the Y2K problem, has shown that national ing Supervision and by the International Organi- government bodies have a very important and useful zation of Securities Commissions are planned to be role to play in encouraging progress in addressing the made available on the Joint Year 2000 Council web Y2K problem. site. Public papers produced by the Joint Year 2000 Turning now to the question of how financial Council will also be available on the web site. A supervisors can implement effective Y2K programs, listing of international conferences and seminars the Joint Year 2000 Council intends to promote the related to Y2K will be posted on the web site, sharing of strategies and approaches. For example, together with links to other Y2K web sites and the Basle Committee on Banking Supervision has documents. prepared a paper containing "Supervisory Guidance At this stage, each member of the Joint Year 2000 on Independent Assessment of Bank Year 2000 Council is in the process of finalizing the country Preparations." This document is aimed at moving page for its respective country. Last week, I wrote supervisors worldwide from a level of general awareto every contact provided by the four Sponsoring ness to a specific, concrete program of action for Organizations (almost 600 contacts in more than overseeing Y2K preparations, both on an individual 170 countries), asking for assistance in coordinating bank basis and on a system-wide basis. the development of their country page. This also The Joint Year 2000 Council intends to adapt this provided a further opportunity to raise the awareness paper for use by financial market regulators and of the Year 2000 problem at the most senior levels supervisors more broadly and to issue it as rapidly as of financial market authorities and supervisors in possible with the endorsement of all four Sponsoring countries around the world. Through the effort to Organizations. The goal will be to provide guidance develop this web site and other similar efforts by in developing specific Year 2000 action plans for all the Joint Year 2000 Council, I believe we can suc- types of financial market authorities. Supervisors in ceed at keeping the awareness of the issue at a very countries that have gotten a head start on the issue high level within the global financial supervisory can thereby provide the benefit of their experience to community. those who are starting later. Those supervisors getting a late start have a need for tools of this type. The Joint Year 2000 Council will also be working EFFORTS TO IMPROVE PREPAREDNESS with the members of our External Consultative Committee, particularly the Global 2000 Coordinating Of course, awareness of the Year 2000 problem is Group, to build on this effort and develop a Y2K only the first step in addressing it. Global efforts to self-assessment tool that could be used broadly by the prepare for Year 2000 vary widely, and many coun- financial industry in countries around the world. We tries believe that more coordinated national action also intend to develop additional papers on a variety will be necessary to tackle the problem as effectively of Y2K topics that might be of interest to the global as possible. At our second meeting of the Joint financial supervisory community. Year 2000 Council, a strong consensus emerged that At this point, I am sure that members of the coma national government body in each country could mittee have questions regarding the state of Y2K play a helpful role in coordinating preparations for preparations in various parts of the world. I think that Y2K. While the council did not have a strong view it is fair to say that most believe a spectrum exists, on what particular form or what specific authority with the United States at one end of the spectrum, such a body would require in each specific country, and emerging market and undeveloped countries at Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

664 Federal Reserve Bulletin • August 1998 the other end. There are likely exceptions of course; and indicated that a further global survey and report some developed countries are probably less far along on this topic is due to be completed soon. This is the than they should be. Some emerging market coun- type of information sharing that helps all parties tries, on the other hand, appear to be quite advanced understand the scope of the problem as well as the in their preparations. efforts that others are undertaking. We intend to Overall, however, there is still not nearly enough encourage further information sharing between the concrete, comparable information on the preparations financial sector and core infrastructure providers at of individual institutions to be able to make any future meetings of the Joint Year 2000 Council and confident statements about the state of global prepara- the External Consultative Committee. I would also tions in any detail. Over the time remaining until strongly encourage such mutual cooperation on Y2K January 2000, we hope to use the Joint Year 2000 preparations within each national jurisdiction. Council as a means of gathering a better picture of Another issue that some participants in our Joint the state of global preparations and to help direct Year 2000 Council are concerned about in regard to resources and attention to those regions that appear to preparations in their countries relates to the availabilbe faltering in their efforts. We will use the informa- ity of human resources. In some regions, the supply tion provided for our web site and the discussions of available information technology professionals with members of our External Consultative Commit- may be hard pressed to meet the challenges posed tee as our primary resources in seeking to identify by Y2K. For each organization facing resource con- "hot spots" where more urgent efforts are needed. straints, this situation clearly indicates the need to If we identify regions in which more needs to be develop action plans for Y2K that set clear priorities done, our first step will be to work through the among systems and projects. relevant national financial supervisors and regulators More broadly, we must also recognize that the lack to increase the urgency of efforts in their jurisdiction. of available programming resources will be a signifi- We may also involve multilateral institutions, such as cant overall constraint on the scale of Y2K remediathe World Bank, to help increase national attention tion efforts globally. As a result, the cost of hiring on the issue. I do not believe that calling public computer professionals capable of addressing the attention to problems in specific countries would be a problem will continue to rise. Wealthy countries are constructive step for us to take at this stage, as we are undoubtedly in a better position to bear these increasstill trying to build cooperation and our current infor- ing costs than are poor countries. mation is incomplete. In this context, I would also A number of participants from our External Conpoint out that the market itself will begin to bring sultative Committee cited the recent grant of £10 milstrong pressures to bear on specific firms and markets lion sterling by the British government to the World that exhibit signs of being ill-prepared during the Bank as a positive development. Among other course of 1999. projects, the World Bank intends to use this grant to In conjunction with preparations for Y2K, the fund a variety of educational and awareness-raising recent discussion of the Joint Year 2000 Council with events related to Y2K over the next several months. the External Consultative Committee raised several Given the potential consequences of a failure to important issues. First, in every national market there prepare for Y2K, the World Bank indicated to the is the question of the dependence of the banking and Joint Year 2000 Council that it intends to take on financial sectors on core infrastructure such as tele- an aggressive role in promoting and assisting Y2K communications, power, water, sewer, and transporta- efforts in countries around the world. The Joint tion. In all cases, it seems that it is not an everyday Year 2000 Council intends to work closely with the occurrence for representatives of these differing sec- World Bank to enhance our mutual efforts on the tors to get together with financial sector represen- Y2K problem. tatives and discuss their mutual concerns. Yet, this The subject of appropriate Y2K disclosure was must be made a priority if financial firms and their also discussed by members of the External Consultacounterparties are to achieve comfort that their own tive Committee. Many of those present agreed that efforts to prepare for Year 2000 will not be compro- greater disclosures would be helpful. However, there mised by the failures of systems beyond their control. was skepticism that a standardized disclosure format A representative of the International Telecommuni- would be effective in eliciting meaningful informacations Union is a member of our External Consulta- tion for a wide class of financial firms, given the tive Committee. At our meeting earlier this month, he complexity and variety of Y2K issues facing these provided useful factual information on the prepara- firms worldwide. It was also noted that disclosure tions being undertaken by telecommunications firms which relies primarily on a firm's own subjective Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 665 assessments of its Y2K problems inevitably will Year 2000 Council intends to expand the coverage of suffer from an optimistic bias. this framework to exchanges and trading systems, as In addition, most Y2K efforts will not reach the well as to major financial information services proserious testing phase until 1999. The purpose of the viders, and hopes to expand the number of countries testing will be to uncover areas in which additional and systems that are included. We will also collate work is required, so that the first round of tests can be and present the information graphically to help highexpected to encounter problems. In this environment, light anomalies in testing schedules and to facilitate it may be difficult for firms themselves to assess the the efforts of systems to coordinate test scheduling true state of their Y2K preparations. Also, firms that when feasible. believe that they are going to be ready will be Primarily, I see this as an exercise in peer pressure. directed by legal counsel not to make too strong a If we list every country in the world on our web site statement to avoid liability claims in case of unfore- and the public can see that some countries have seen problems. On the other hand, firms that do not scheduled mandatory external tests of their major believe they can get ready in time will seek to avoid trading and settlement systems, while other counstating this clearly to protect their activities during tries do not provide any information, that second 1999. For all of these reasons, I am doubtful that country may come under greater pressure to orgaspecific, reliable information on the state of Y2K nize an external testing program. This is our stated preparations by individual firms worldwide will goal. We will simply have blanks for those counbecome publicly available. tries that do not respond to our requests for Finally, in the area of improving preparedness, information. I have saved the most important topic for last— Of course, if the Joint Year 2000 Council is going namely, testing. Testing programs, particularly exter- to encourage testing to such an extent, then it is only nal testing programs, are universally regarded as the appropriate that we also help provide some tools for most critical element of serious Y2K preparations in those countries trying to get a serious testing effort the financial sector. The Joint Year 2000 Council under way in a short amount of time. This is another encourages all firms and institutions active in the of our high priority projects. We will be working with financial markets to engage in internal and external members of the External Consultative Committee— testing of their important applications and interfaces. including representatives of the Global 2000 Coordi- To this end, many major payment and settlement nating Group, S.W.I.F.T., and the World Bank—to systems around the world have developed extensive rapidly develop a series of documents that help countesting programs and procedures for their partici- tries set up testing programs and overcome common pants. In the United States, for example, Fedwire, obstacles. We intend to issue these documents CHIPS, and S.W.I.F.T. have coordinated shared test- broadly by the end of the summer, and some parts ing days for the purpose of testing the major inter- well before that. national wholesale payments infrastructure for the In closing this section of my statement, I do not U.S. dollar. The Securities Industry Association think it is possible to overemphasize the importance (SIA) has been at the forefront of an ambitious pro- of testing to help improve readiness. To illustrate this gram to develop a coordinated industrywide test of point, I would like to draw on our experiences with all aspects of the trading and settlement infrastruc- Fedwire, the Federal Reserve's wholesale interbank ture for the U.S. stock market. The FFIEC's efforts payments system. Much of the current Fedwire have also been extremely beneficial in stressing the software application was written in the past five importance of testing within the banking sector years, with the Y2K problem in mind. Nevertheless, generally. some of the older software code that was carried over Yet, external testing programs globally need to be into the new application was not Y2K-compliant. dramatically extended and expanded. To that end, the Without the rigorous internal Y2K testing program G-10 Committee on Payment and Settlement Sys- that the Federal Reserve adopted, our Y2K remediatems last year started to collect information on the tion efforts might, therefore, have been incomplete. state of preparedness and testing of payment and I think of this experience whenever I hear it said settlement systems worldwide. To date, more than that some countries are immune to Y2K because 150 systems in forty-seven countries have responded they have only recently introduced information to the framework and posted such plans.4 The Joint technology and that recent software programs are less affected by Y2K. I ask whether those programs have truly been thoroughly tested for Y2K 4. The relevant information can now be found on the pages of the Joint Year 2000 Council. compliance. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

666 Federal Reserve Bulletin • August 1998 CONTINGENCY PLANNING EFFORTS 2000 (the first business day of the new year in the United States). For example, market participants may The third major role of the Joint Year 2000 Council seek to minimize the number of transactions that will relate to contingency planning. In this context, I would be scheduled for settlement on January 3 or should note that contingency planning is something January 4 or that would require open positions to be that most financial market authorities, particularly maintained over the century date change weekend. central banks, undertake regularly with regard to a Contingency planning involves a series of elewide variety of potential market disruptions. Most ments, many of which must be put in place well private-sector financial firms, as well, have well before January 2000. For example, we must consider developed contingency and business continuity plans many possible sources of disruption and determine in place for their operations. what approaches could be available to limit the Nevertheless, it is clear that contingency planning impact of each possible disruption. The sooner such for Y2K problems has a number of unique character- thinking occurs, the more opportunity we have to istics. First, of course, is the fact that one cannot rely plan around the possible disruptions. In this context, on a backup computer site for Y2K contingency if members of our External Consultative Committee that site also uses the same software that is the cause noted that one of the key obstacles to effective continof the Y2K problem at the main site. In some cases, it gency planning is the inability to list and consider all is impractical to build a duplicate software system possible disruption scenarios. Several of these particifrom scratch simply to provide for Y2K contingency. pants noted that their firms were engaging consult- In these cases, as a senior banker explained at one of ants or other procedures to expand the number of our New York Y2K forums, contingency planning scenarios for inclusion in their Y2K contingency amounts to, "Testing, testing, and more testing." planning. Contingency planning can also be separated into In New York, we will be using our Y2K forum components that are firm-specific and those that are next month to discuss contingency planning with a marketwide. Each individual firm will need to diverse set of market participants. These local market develop its own contingency plans designed to main- participants will provide helpful insights for the Joint tain the integrity of its operations during the Year 2000 Council. Clearly, more work is needed on changeover to the Year 2000. The FFIEC has recently contingency planning for Y2K, especially at the interissued guidance to banks in the United States regard- national level. Once we get beyond the early fall of ing the core elements of their own contingency plan- this year, I believe that these efforts will begin to ning.5 The Joint Year 2000 Council will also be receive much greater focus and attention and— developing a paper on contingency planning for the together with testing—will dominate our discussions benefit of the global financial supervisory commu- of Y2K during 1999. nity. This paper will seek to address firm-level contingency as well as issues of marketwide contingency. Marketwide contingency refers to the planning by CLOSING REMARKS participants and supervisors done to ensure that individual disruptions can be managed in ways that will In closing, I would like to thank the committee for prevent them from causing disruptions to critical the opportunity to appear and submit a statement on market infrastructures. For instance, we at the Fed- this important issue. I hope that the efforts of the eral Reserve have gone to great lengths to ensure that Joint Year 2000 Council will help to make a differbarriers are in place to prevent Y2K problems with a ence in improving the state of Y2K preparations in Fedwire participant from causing problems on the the international financial community. Realistically, Fedwire system itself. We are also now actively however, I believe that it is important to understand researching additional steps that the Federal Reserve the limits of what financial market supervisors can could take to better prepare the financial markets as a accomplish, either individually or collectively. Only whole to function in spite of disruptions at individual firms themselves have the ability to address the firms. Year 2000 problems that exist within their own orga- It is also important to realize that contingency nizations. Only firms working together can ensure planning for Y2K is not solely an operational issue. that local markets will function normally. Supervisors Financial firms may seek to adopt a defensive posture and regulators cannot guarantee that disruptions will in the marketplace well ahead of Monday, January 3, not occur. Given the sheer number of organizations that are 5. See www.ffiec.gov/y2k/contplan.htm. potentially at risk, it is inevitable that Y2K-related Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statements to the Congress 667 disruptions will occur. Today it would be impossible persuade others of the need to take appropriate to predict the precise nature of these disruptions. actions promptly. It would be unfortunate if general However, we do know that financial markets have perceptions of the Y2K problem are driven primarily in the past survived many other serious disruptions, by unofficial commentators whose rhetoric is seen to including blackouts, snow storms, ice storms, and exceed the facts on which it is based, and therefore floods. We will also have a very interesting case at easily dismissed. the end of this year with the changeover to monetary As a central banker and bank supervisor, my major union in Europe. We will all be watching carefully concern must be with the system as a whole. At this to see whether the extent of operational problems point, I believe that we are doing everything possible related to this event is greater or less than expected. to limit the possibility that Y2K disruptions will have I would also like to say at this point that my systemic consequences in our markets. However, we discussions with other members of the Joint must all continue to work hard—both individually Year 2000 Council and with members of the External and cooperatively—in the time that remains to ensure Consultative Committee have convinced me that suc- that this threat does not become more concrete. cessful efforts to address the Y2K problem will be In that spirit, I would like to end my remarks by dependent on the credibility of those calling for commending the committee for organizing these action. Those of us—such as members of this com- hearings on the implications of the Year 2000 mittee as well as others in the Congress—who are computer problem for international banking and seriously engaged and concerned need to be able to finance. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

668 Announcements ADOPTION OF A REVISED POLICY STATEMENT dollar systems. Further, the revised policy statement ON PRIVATELY OPERATED MULTILATERAL is not intended to alter approvals by the Board for SETTLEMENT SYSTEMS specific clearinghouses to use the Federal Reserve Banks' Fedwire-based net settlement service. The Federal Reserve Board on June 19, 1998, announced that it had adopted a revised Policy Statement on Privately Operated Multilateral Settlement Systems. The statement updates and integrates the PROPOSED ACTIONS Board's risk management policies for privately operated large-dollar multilateral netting systems and The Federal Reserve Board on June 5, 1998, private small-dollar clearing and settlement systems requested comment on whether the last fifteen mininto a single, comprehensive policy statement. The utes of the Fedwire funds transfer operating day revised policy statement becomes effective January 4, (from 6:15 p.m. to 6:30 p.m. eastern time) should be 1999. restricted to funds transfers sent and received by The policy statement will apply to privately oper- depository institutions for their own account. This ated multilateral settlement systems that are expected would facilitate the end-of-day management of their to settle transactions with an aggregate gross value of balances held at the Federal Reserve. Comments were $5 billion or more on any day during a rolling, requested by August 12, 1998. twelve-month period. The policy statement will apply The Federal Reserve Board on June 11, 1998, to systems or arrangements for the settlement of requested public comment on an interpretation and checks, automated clearinghouse (ACH) transfers, two proposed rules exempting certain transactions credit, debit, and other card transactions, large-value between an insured depository institution and its interbank transfers, or foreign exchange contracts affiliates under section 23A of the Federal Reserve involving the U.S. dollar. However, only a few of Act. Comments were requested by July 21, 1998. these systems currently settle transactions with a gross daily aggregate value in excess of $5 billion and thus will be subject to the requirements of the policy at this time. ISSUANCE OF GUIDANCE FOR BANK The systems that are covered by the policy state- EXAMINERS IN EVALUATING BANKING ment will be required to address the credit, liquidity, ORGANIZATIONS' RISK MANAGEMENT operational, and legal risks associated with their settlement activities using an analytical and flexible The Federal Reserve on June 30, 1998, issued addiapproach to risks and risk management. In addition, tional guidance to assist bank examiners in their a few of these systems may be required to meet evaluations of the quality of banking organizations' the Lamfalussy Minimum Standards based on the credit risk management processes. Board's determination, for example, that such sys- The guidance is the result of an intensive study tems settle a high proportion of large-value interbank conducted by Federal Reserve supervision staff to or other financial market transactions, generate very assess the current state of bank lending terms and large liquidity exposures that have potentially sys- standards for domestic commercial and industrial temic consequences, or generate systemic credit loans. The study compared loans made in late 1995 exposures relative to participants' financial capacity. with loans made in late 1997 and involved several In general, such systems are already subject to the hundred loans across the country. Board's policy on privately operated large-dollar The study identified noteworthy and measurable multilateral netting systems, which is being inte- easing in bank lending terms and, to some extent, grated into the revised policy statement. bank lending standards. However, the overall quality The revised policy statement is not intended to of loans did not deteriorate significantly over the alter the Board's policy with respect to these large- two-year period. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

669 The guidance to examiners indicates that this is a NOTICE OF PUBLIC MEETING ON THE critical time for banks to maintain their lending disci- PROPOSED ACQUISITION OF CITICORP BY pline, and it highlights particular areas of concern, TRAVELERS CORP. including the need for formal, forward-looking analysis in the loan-approval process. The Federal Reserve Board on June 4, 1998, announced a public meeting for Thursday, June 25, 1998, in New York, New York, on the proposal by PUBLIC MEETING SCHEDULED ON THE Travelers Group Inc. to acquire Citicorp, both located PROPOSED ACQUISITION OE BANKAMERICA in New York, New York. This transaction involves a CORPORATION BY NATIONSBANK proposal to combine the second largest bank holding CORPORATION company in the United States with one of the largest The Federal Reserve Board on June 19, 1998, financial conglomerates in the United States. The announced a public meeting for Thursday, July 9, Board received a number of requests to hold a public in San Francisco on the proposal by NationsBank meeting in this case. The meeting was held at the Corporation, Charlotte, North Carolina, to acquire Federal Reserve Bank of New York, 33 Liberty BankAmerica Corporation, San Francisco, California. Street, New York, New York, and began at 9:00 a.m. The purpose of the meeting was to collect informa- EDT. tion relating to factors the Board is required to con- The purpose of the meeting was to collect informasider under the Bank Holding Company Act. These tion relating to factors the Board is required to confactors are the effects of the proposal on the financial sider under the Bank Holding Company Act. These and managerial resources and future prospects of the factors are the effects of the proposal on the financial companies and banks involved in the proposal, com- and managerial resources and future prospects of the petition in the relevant markets, and the convenience companies and banks involved in the proposal, comand needs of the communities to be served. Conve- petition in the relevant markets, and the convenience nience and needs considerations include consider- and needs of the communities to be served. Conveation of the records of performance of NationsBank nience and needs considerations include considerand BankAmerica under the Community Reinvest- ation of the records of performance of Travelers ment Act. Group and Citicorp under the Community Reinvest- The meeting was held at the Federal Reserve Bank ment Act. of San Francisco, 101 Market Street, San Francisco, The transaction also involves the proposed acquisi- California, at 9:00 a.m. PDT. tion or retention of a number of nonbanking com- Persons who wished to testify at the meeting were panies engaged in activities permissible for bank required to submit a written request by 5:00 p.m. holding companies as well as a proposal to divest or PDT, Monday, June 29, containing a brief statement otherwise conform a number of other activities that of the nature of the expected testimony and the are not permissible for bank holding companies estimated time required for the presentation (together under current law. With respect to the proposal to with their address, telephone number, and facsimile conduct permissible nonbanking activities, the Board number if available), to Joy Hoffman-Molloy, Com- also must determine whether conducting the promunity Affairs Officer, Federal Reserve Bank of posed nonbanking activities can reasonably be San Francisco, Division of Banking Supervision and expected to produce benefits to the public that out- Regulation, Mail Stop 620, 101 Market Street, weigh possible adverse effects, such as undue con- San Francisco, California 94105 (facsimile: 415-393- centration of resources, decreased or unfair com- 1920). Persons interested only in attending the meet- petition, conflicts of interest, or unsound banking ing did not need to submit a written request to attend. practices. On the basis of the requests to testify, the presiding Persons who wished to testify at the meeting were officer of the public meeting established a schedule of required to submit a written request no later than appearances and prescribed all necessary procedures 5:00 p.m. EDT, June 12, 1998, containing a brief to ensure that the meeting proceeded in a fair and statement of the nature of the expected testimony orderly manner. An agenda for the meeting, including and the estimated time required for the presentation the scheduled time for each person's testimony, was (together with their address, telephone number, and provided to participants at a later date. facsimile number if available) to Elizabeth Rodriguez The Federal Reserve Board also announced that it Jackson, Community Affairs Officer, Federal Reserve would extend the period for public comment on the Bank of New York, 33 Liberty Street, New York, proposal through July 9, 1998. New York 10045 (facsimile: 212-720-7841). 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670 Federal Reserve Bulletin • August 1998 interested only in attending the meeting did not have ers, community development groups, and others to submit a written request to attend. interested in community development finance. On the basis of the requests to testify, the presiding The 1998 directory consists of 159 profiles of officer of the public meeting established a schedule of community development investments made through appearances and prescribed all necessary procedures late 1997 by bank holding companies and stateto ensure that the meeting proceeded in a fair and chartered banks supervised by the Federal Reserve orderly manner. An agenda for the meeting, which System. The profiles highlight the activities of comincluded the scheduled time for each person's testi- munity development corporations (CDCs), limited mony, was provided to participants. The Federal liability companies, and limited partnerships in Reserve Board also announced that it would extend which institutions have invested. Each profile the period for public comment on the proposal includes information on the amount of initial capital through June 25, 1998. invested by an institution, a description of the com- The Federal Reserve Board on June 18, 1998, munity development projects or activities undertaken announced the scheduling of an additional day, or planned, and contact persons who can provide June 26, and a time change, to 8:00 a.m. EDT, for the additional information on the organization and operapublic meeting in New York City on the proposal by tions of the CDC or other community development Travelers Group Inc. to acquire Citicorp. investment activity. Additional information about the public meeting Under certain circumstances, regulations governwas contained in the Notice of Public Meeting issued ing community development investments allow bank by the Board on June 4, 1998. holding companies and state member banks to make equity investments in CDCs or in limited liability companies and limited partnerships devoted to community development, without prior regulatory STUDY OF CONSUMER FINANCES approval. However, institutions supervised by the UNDER WAY Federal Reserve are encouraged to consult with both the Community Affairs staff and Applications staff at The Federal Reserve Board is currently sponsoring a their local Federal Reserve Bank before initiating statistical study of household finances that will pro- investment activity. vide policymakers with information on the economic The directory of community development investcondition of a broad array of American families. ments is periodically updated and published and The study, which is undertaken every three years is available to bankers and the public. It can also as part of the Survey of Consumer Finances, is being be downloaded from the Board's web site conducted for the Board by the National Opinion (www.bog.frb.fed.us/DCCA/Directory). Research Center (NORC) at the University of Chi- Printed copies of the directory may be obtained by cago through December of this year. financial institutions and others by contacting the Participants in the study are chosen at random Community Affairs office of their local Federal using a scientific sampling procedure in 100 areas Reserve Bank. For further information, contact the across the United States. A representative of NORC Division of Consumer and Community Affairs, Board contacts each potential participant personally to of Governors of the Federal Reserve System, Washexplain the project and request time for an interview. ington DC 20551, or at (202) 452-3378. Names and addresses of each participant are confidential. Participation in the study is completely voluntary, and summary results will be published by the Board in the Federal Reserve Bulletin after all data PUBLICATION OF THE JUNE 1998 have been assessed and analyzed. UPDATE TO THE BANK HOLDING COMPANY SUPERVISION MANUAL The June 1998 update to the Bank Holding Company PUBLICATION OF DIRECTORY: COMMUNITY Supervision Manual, Supplement No. 14, has been DEVELOPMENT INVESTMENTS published and is now available. The Manual comprises the Federal Reserve System's bank holding The Federal Reserve Board on June 18, 1998, company inspection procedures and supervisory announced the publication of its Directory: Commu- guidance. The supervisory information includes the nity Development Investments, a resource for bank- following. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Announcements 671 Control and Ownership the Board's decision to rescind the extension of bank antitying rules to bank holding companies and their Certain revisions were made to a general control and nonbank subsidiaries. ownership section for bank holding company formations. This section includes information pertaining to Risk-Focused Supervision the Small Bank Holding Company Policy Statement included in Regulation Y (Bank Holding Companies Revisions were made to the Board bank holding and Change in Bank Control), effective on April 21, company inspection policies pertaining to the risk- 1997. focused supervision of small shell bank holding companies. Nonbanking Activities The Manual's new or revised sections include Changes involving the 1997 laundry list of nonbank- inspection guidance, inspection objectives and proceing activities for Regulation Y were made to several dures, and, in some cases, inspection checklists. The sections. These new or revised sections include such Manual and updates, including pricing information, activities as providing financial and investment are available from Publications Services, Mail Stop advice, management consulting, securities brokerage, 127, Board of Governors of the Federal Reserve acting as futures commission merchants, and the System, Washington, DC 20551 (or facsimile: 202arranging of real estate equity financing. 728-5886). The Manual is also available on the Board's web site (www.bog.frb.fed.us) under Supervision Manuals. • Antitying Rules These rules pertain to the Board's changes to the antitying provisions of Regulation Y. They include Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

673 Legal Developments FINAL RULE—AMENDMENT TO REGULATION Y ORDERS ISSUED UNDER BANK HOLDING COMPANY ACT The Board of Governors is amending 12C.F.R. Part 225, its Regulation Y (Leverage Capital Standards: Tier 1 Orders Issued Under Section 3 of the Bank Holding Leverage Ratio). The Board is amending its Tier 1 leverage Company Act capital standard for bank holding companies. The effect of this final rule is to simplify the Board's leverage capital Eagle Bancorp, Inc. standard for bank holding companies and to incorporate Bethesda, Maryland the market risk capital rule into the leverage standard. Effective June 30, 1998, Part 225 is amended as follows: Order Approving Formation of a Bank Holding Company, Membership in the Federal Reserve System, Part 225—Bank Holding Companies and Change in and the Establishment of Branches Bank Control (Regulation Y) Eagle Bancorp, Inc. ("Eagle") has requested the Board's approval under section 3(a)(l) of the Bank Holding Com- 1. The authority citation for Part 225 is revised to read as pany Act ("BHC Act") (12 U.S.C. § 1842(a)(l)) to befollows: come a bank holding company by acquiring all the voting shares of EagleBank, Bethesda, Maryland ("Bank"), a Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 18311, de novo bank chartered under the laws of Maryland. Bank 1831p-l, 1843(c)(8), 1844(b), 1972(1), 3106, also has applied pursuant to section 9 of the Federal 3108, 3310, 3331-3351, 3907, and 3909. Reserve Act (12 U.S.C. § 321) to become a member of the Federal Reserve System and to establish branches at 8677 2. In Appendix D to Part 225, section Il.a. is revised to Georgia Avenue, Silver Spring, Maryland, and 110 North read as follows: Washington Street, Rockville, Maryland. Notice of the applications, affording interested persons an opportunity to submit comments, has been published APPENDIX D TO PART 225—CAPITAL ADEQUACY (59 Federal Register 35,122 (1994)) and given in accor- GUIDELINES FOR BANK HOLDING COMPANIES: dance with applicable law. The time for filing comments TIER I LEVERAGE MEASURE has expired, and the Board has considered the applications and all comments received in light of the factors set forth in section 3 of the BHC Act and the Federal Reserve Act. The Board has established a minimum ratio of Tier 1 Eagle is a newly formed nonoperating corporation that capital to total assets of 3.0 percent for strong bank would acquire Bank. The addition of a new bank in the holding companies (rated composite "1" under the relevant banking market would increase the number of BOPEC rating system of bank holding companies), and alternative sources of banking products and services availfor bank holding companies that have implemented the able to customers in the market and increase competition. Board's risk-based capital measure for market risk as set The Board previously has stated that the promotion of forth in Appendices A and E of this part. For all other competition through de novo entry is a positive considerbank holding companies, the minimum ratio of Tier 1 ation in an application under section 3 of the BHC Act.1 capital to total assets is 4.0 percent. Banking organiza- Accordingly, the Board concludes that consummation of tions with supervisory, financial, operational, or mana- the proposal would not have a significantly adverse effect gerial weaknesses, as well as organizations that are on competition or on the concentration of banking reanticipating or experiencing significant growth, are ex- sources in any relevant banking market, and that competipected to maintain capital ratios well above the mini- tive considerations are consistent with approval. mum levels. Moreover, higher capital ratios may be The Board has reviewed examination reports and other required for any bank holding company if warranted by supervisory information, including information regarding its particular circumstances or risk profile. In all cases, institutions with which Eagle's principals previously were bank holding companies should hold capital commensurate with the level and nature of the risks, including the volume and severity of problem loans, to which they are 1. See Wilson Bank Holding Company, 82 Federal Reserve Bulletin exposed. 568 (1996). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

674 Federal Reserve Bulletin El August 1998 affiliated. In light of all the facts of record, the Board Federal Register 16,538 and 17,873 (1998)). The time for concludes that the financial and managerial resources and filing comments has expired, and the Board has considered future prospects of Eagle and Bank, the convenience and the proposal and all comments received in light of the needs of the communities to be served, and other supervi- factors set forth in section 3 of the BHC Act. sory factors that the Board is required to consider under Fuji, with total consolidated assets of approximately section 3 of the BHC Act, are consistent with approval of $453 billion, is the third largest banking organization in the proposal. Japan.1 In the United States, Fuji owns The Fuji Bank and In addition, Bank has applied under section 9 of the Trust Company, New York, New York. Fuji also operates a Federal Reserve Act to become a member of the Federal branch office in New York, New York; and Chicago, Illi- Reserve System and to establish branches. The Board has nois; an agency office in Los Angeles and San Francisco, considered the factors it is required to consider when California; Atlanta, Georgia; and Houston, Texas; and a reviewing applications pursuant to section 9 of the Federal representative office in New York, New York; Miami, Reserve Act and finds those factors to be consistent with Florida; and Washington, D.C. In addition, Fuji engages approval. through its nonbanking subsidiaries in a number of activi- Based on the foregoing and all the facts of record, the ties in the United States that are permissible under sec- Board has determined that these applications should be, tion 4(c)(8) of the BHC Act. and hereby are, approved. The Board's approval is ex- Yasuda, with total consolidated assets of approximately pressly conditioned on compliance with all the commit- $69 billion, is the 16th largest banking organization in ments made by Eagle in connection with the applications. Japan. In the United States, Yasuda operates Yasuda Bank, For purposes of this action, the commitments and condi- which has assets of approximately $201 million, and a tions relied on by the Board in reaching this decision are branch office in New York, New York, which has assets of deemed to be conditions imposed in writing by the Board approximately $1.7 billion.2 in connection with its findings and decision, and as such, may be enforced in proceedings under applicable law. Competitive Considerations This transaction shall not be consummated before the fifteenth calendar day following the effective date of this The BHC Act provides that the Board may not approve a order, or later than three months following the effective proposal submitted under section 3 of the BHC Act if the date of this order, and Bank shall be open for business proposal would result in a monopoly or if the effect of the within six months following the effective date of this order, proposal may be substantially to lessen competition in any unless such periods are extended for good cause by the relevant banking market, unless the Board finds that the Board or by the Federal Reserve Bank of Richmond, acting anticompetitive effects of the transaction are clearly outpursuant to delegated authority. weighed in the public interest by the probable effect of the By order of the Board of Governors, effective June 1, transaction in meeting the convenience and needs of the 1998. community to be served.3 Fuji and Yasuda compete directly in the Metropolitan Voting for this action: Chairman Greenspan, Vice Chair Rivlin, and New York-New Jersey banking market.4 Fuji controls de- Governors Meyer, Ferguson, and Gramlich. Absent and not voting: posits of approximately $160 million, representing less Governors Kelley and Phillips. than 1 percent of the total deposits in depository institutions in the market.5 Yasuda controls deposits of approxi- ROBERT DEV. FRIERSON Associate Secretary of the Board 1. Asset data are as of March 31, 1997, and are based on exchange The Fuji Bank, Limited rates then applicable. Ranking data are as of December 31, 1996. 2. U.S. asset data are as of March 31, 1998. Tokyo, Japan 3. 12 U.S.C. § 1842(c)(l)(B). 4. The Metropolitan New York-New Jersey banking market in- Order Approving Retention of an Interest in a Bank cludes New York City; Nassau, Orange, Putnam, Rockland, Suffolk, Holding Company Sullivan, and Westchester Counties in New York; Bergen, Essex, Hudson, Hunterdon, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, Sussex, Union, Warren, and a portion of Mercer Counties in The Fuji Bank, Limited ("Fuji"), a registered bank holding New Jersey; Pike County in Pennsylvania; and portions of Fairfield company, has requested the Board's approval under sec- and Litchfield Counties in Connecticut. tion 3 of the Bank Holding Company Act ("BHC Act") 5. In this context, depository institutions include commercial banks, savings banks, and savings institutions. Market share data are as of (12 U.S.C. § 1842) to retain 16.8 percent of the voting June 30, 1996, and are based on calculations in which the deposits of shares of The Yasuda Trust and Banking Co., Ltd., Tokyo, thrift institutions are included at 50 percent. The Board previously has Japan ("Yasuda"), and thereby to retain an interest in the indicated that thrift institutions have become, or have the potential to wholly owned U.S. bank subsidiary of Yasuda, Yasuda become, significant competitors of commercial banks. See WM Bancorp, 76 Federal Reserve Bulletin 788 (1990); National City Corpora- Bank and Trust Company (U.S.A.), New York, New York tion, 70 Federal Reserve Bulletin 743 (1984). Thus, the Board has ("Yasuda Bank"). regularly included thrift deposits in the calculation of market share on Notice of the proposal, affording interested persons an a 50-percent weighted basis. See, e.g., First Hawaiian, Inc., 77 Fedopportunity to submit comments, has been published (63 eral Reserve Bulletin 52 (1991). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 675 mately $42 million, representing less than 1 percent of the operations and activities and those of its affiliates that the total deposits in depository institutions in the market. If Board deems appropriate to determine and enforce compli- Fuji and Yasuda are considered as a combined entity, the ance with the BHC Act and the International Banking Act Herfindahl-Hirschman Index ("HHI") for the banking ("IBA") (12 U.S.C. § 3101 et seq.). The Board has market would remain unchanged at 796. The banking reviewed restrictions on disclosure in jurisdictions where market would remain unconcentrated and numerous com- Fuji has material operations and has communicated with petitors would remain in the market.6 Thus, any potential relevant authorities concerning access to information. Fuji elimination of competition between the two entities is not has committed that, to the extent not prohibited by applicaexpected substantially to lessen competition in the Metro- ble law, it will make available to the Board such informapolitan New York-New Jersey banking market or in any tion on the operations of Fuji and any of its affiliates that other relevant banking market. the Board deems necessary to determine and enforce compliance with the BHC Act, the IBA, and other applicable Financial, Managerial, and Other Supervisory federal law. Fuji also has committed to cooperate with the Considerations Board to obtain any waivers or exemptions that may be necessary to enable Fuji to make any such information Under section 3 of the BHC Act, the Board may not available to the Board. In light of these commitments and approve an application involving a foreign bank unless the other facts of record, the Board has concluded that Fuji has bank is "subject to comprehensive supervision or regula- provided adequate assurances of access to any appropriate tion on a consolidated basis by the appropriate authorities information that the Board may request. For these reasons, in the bank's home country."7 The Board previously has and based on all the facts of record, the Board has condetermined in applications under the BHC Act that certain cluded that the supervisory factors it is required to consider Japanese banks were subject to comprehensive supervision under section 3(c) of the BHC Act are consistent with on a consolidated basis by their home country authorities.8 approval. The Board has determined that Fuji is supervised on sub- The Board also has carefully considered the financial stantially the same terms and conditions as those other and managerial resources and future prospects of Fuji, Japanese banks. In addition, Japanese banking authorities Yasuda, and their respective subsidiaries, and the effect the recently have taken steps intended to enhance the supervi- proposal would have on these factors in light of all the sion of Japanese banks, including Fuji. These measures are facts of record. Fuji has submitted information indicating part of an ongoing effort to strengthen the Japanese bank that the proposal, which is incidental to a corporate restrucsupervisory framework. Based on all the facts of record, turing in Japan, would not affect the existing U.S. operathe Board has concluded that Fuji is subject to comprehen- tions of Fuji, and would require no funding or other supsive supervision and regulation on a consolidated basis by port from the U.S. operations of Fuji. In addition, the Board its home country supervisor. has reviewed supervisory information from the home coun- The BHC Act also requires the Board to determine that try authorities responsible for supervising Fuji and Yasuda the foreign bank has provided adequate assurances that it concerning the proposal and the condition of the parties, will make available to the Board such information on its confidential financial information from Fuji and Yasuda Bank, and reports of examination from the appropriate federal and state supervisors of the affected organizations 6. Under the revised Department of Justice Merger Guidelines, 49 assessing the financial and managerial resources of the Federal Register 26,823 (1984), a market in which the post-merger organizations. Based on all the facts of record, the Board HHI is less than 1000 is considered to be unconcentrated. The Department of Justice has informed the Board that a bank merger or has concluded that the financial and managerial resources acquisition generally will not be challenged (in the absence of other and future prospects of the organizations are consistent factors indicating anticompetitive effects) unless the post-merger HHI with approval. Factors related to the convenience and needs is at least 1800 and the merger increases the HHI by more than of the community to be served that the Board is required to 200 points. The Department of Justice has stated that the higher than normal threshold for an increase in HHI when screening bank mergers consider also are consistent with approval, as are the other and acquisitions for anticompetitive effects implicitly recognizes the supervisory factors that the Board must consider under competitive effects of limited-purpose and other nondepository finan- section 3 of the BHC Act. cial entities. 7. 12 U.S.C. § 1842(c)(3)(B). As provided in Regulation Y, the Board determines whether a foreign bank is subject to consolidated Conclusion home country supervision under the standards set forth in Regulation K. See 12 C.F.R. 225.13(a)(4). Regulation K provides that a foreign bank may be considered subject to consolidated supervision if Based on the foregoing and all the facts of record, the the Board determines that the bank is supervised or regulated in such a manner that its home country supervisor receives sufficient informa- Board has determined that the application should be, and tion on the worldwide operations of the foreign bank, including the hereby is, approved. The Board's approval is expressly relationship of the bank and it affiliates, to assess the foreign bank's conditioned on compliance with all the commitments made overall financial condition and compliance with law and regulation. by Fuji in connection with the application. The commitments and conditions relied on by the Board in reaching 8. See The Mitsubishi Bank, Limited, 82 Federal Resen-e Bulletin this decision are deemed to be conditions imposed in 436 (1996). See also The Bank of Tokyo, Ltd., 81 Federal Resen'e Bulletin 279 (1995). writing by the Board in connection with its finding and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

676 Federal Reserve Bulletin • August 1998 decision, and, as such, may be enforced in proceedings in section 3(d) are met in this case.3 In view of all the facts under applicable law. of record, the Board is permitted to approve the proposal By order of the Board of Governors, effective June 8, under section 3(d) of the BHC Act. 1998. Competitive Considerations Voting for this action: Chairman Greenspan and Governors Kelley, Meyer, Ferguson, and Gramlich. Absent and not voting: Vice Chair The BHC Act prohibits the Board from approving an Rivlin and Governor Phillips. application if the proposal would result in a monopoly or if the proposal would substantially lessen competition in any ROBERT DEV. FRIERSON relevant market, unless the Board finds that the anticom- Associate Secretary of the Board petitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of Norwest Corporation the transaction in meeting the convenience and needs of Minneapolis, Minnesota the community to be served.4 Norwest and Mountain compete in the Montrose County and the Eagle County banking Order Approving Acquisition of a Bank Holding markets, both in Colorado.5 Company In the Montrose County banking market, Norwest would remain the largest depository institution in the market, Norwest Corporation ("Norwest"), a bank holding comcontrolling $173.4 million in deposits, representing pany within the meaning of the Bank Holding Company 38.5 percent of deposits in depository institutions in the Act ("BHC Act"), has requested the Board's approval market ("market deposits") after consummation of the under section 3 of the BHC Act to acquire Mountain proposal.6 Concentration in the banking market as mea- Bancshares, Inc., Newport, Minnesota ("Mountain"), and sured by the Herfindahl-Hirschman Index ("HHI") under thereby acquire Mountain Bank, Eagle, Colorado. the Department of Justice Merger Guidelines ("DOJ Notice of the proposal, affording interested persons an Guidelines") would increase by 82 points to 2134.7 Twelve opportunity to submit comments, has been published (63 Federal Register 18,021 (1998)). The time for filing comments has expired, and the Board has considered the 3. See 12 U.S.C. §§ 1842(d)(l)(A) and (B) and 1842(d)(2)(A) and proposal and all comments received in light of the factors (B). Norwest is adequately capitalized and adequately managed, as set forth in section 3 of the BHC Act. defined by applicable law, and Mountain Bank has been in existence Norwest operates banks in Arizona, Colorado, Illinois, and operated for the minimum period of time necessary to satisfy age Indiana, Iowa, Minnesota, Montana, Nebraska, Nevada, requirements established by applicable state law. See Colo. Rev. Stat. Ann. § U-6.4-103(2)(1997) (five years). On consummation of the New Mexico, North Dakota, Ohio, South Dakota, Wisconproposal. Norwest would control less than 10 percent of the total sin, and Wyoming. Norwest is the largest commercial amount of deposits of insured depository institutions in the United banking organization in Colorado, controlling approxi- States. Norwest would control less than 25 percent of the total amount mately $7.1 billion in deposits, representing approximately of federally insured deposits in Colorado, as calculated under applica- 22.1 percent of total deposits in commercial banking orga- ble Colorado law. See Colo. Rev. Stat. Ann 1 l-6.4-103(4)(l997). All other requirements of section 3(d) of the BHC Act also would be met nizations in Colorado ("state deposits").1 Mountain is the on consummation of the proposal. 66th largest commercial banking organization in Colorado, 4. 12 U.S.C. § 1842(c)(l)(B). controlling approximately $70 million in deposits, repre- 5. The Montrose County banking market is defined as Montrose, senting less than 1 percent of state deposits. On consumma- Ouray, and San Miguel Counties in Colorado. The Eagle County tion of the proposal, Norwest would remain the largest banking market is defined as Eagle County, Colorado, excluding the towns of El Jebel, Basalt, and Emma. commercial banking organization in Colorado. 6. In this context, depository institutions include commercial banks, savings banks, and savings associations. Market share data used to Interstate Analysis analyze the competitive effects of the proposal are as of June 30, 1997. These data are based on calculations in which the deposits of thrift institutions are included at 50 percent. The Board previously has Section 3(d) of the BHC Act allows the Board to approve indicated that thrift institutions have become, or have the potential to an application by a bank holding company to acquire become, significant competitors of commercial banks. See Midwest control of a bank in a state other than the home state of Financial Group, 75 Federal Reserve Bulletin 386 (1989); National City Corporation, 70 Federal Reserve Bulletin 743 (1984). Thus, the such bank holding company, if certain conditions are met. Board has regularly included thrift deposits in the calculation of For purposes of the BHC Act, the home state of Norwest is market share on a 50-percent weighted basis. See, e.g., First Hawai- Minnesota, and Mountain controls a bank in Colorado.2 All ian, Inc., 77 Federal Reserve Bulletin 52 (1991). of the conditions for an interstate acquisition enumerated 7. Under the revised Department of Justice Merger Guidelines, 49 Federal Register 26,823 (June 29, 1984), a market in which the post-merger HHI exceeds 1800 is considered highly concentrated. The 1. State deposit data are as of June 30, 1997. Department of Justice has informed the Board that a bank merger or 2. A bank holding company's home state is that state in which the acquisition generally will not be challenged (in the absence of other operations of the bank holding company's banking subsidiaries are factors indicating anticompetitive effects) unless the post-merger HHI principally conducted on July 1, 1966, or the date on which the is at least 1800 and the merger increases the HHI by more than company became a bank holding company, whichever is later. 200 points. The Department of Justice has stated that the higher than 12U.S.C. § 1841(o)(4)(C). normal HHI thresholds for screening bank mergers and acquisitions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 677 competitors, including Norwest, would remain in the Mon- Conclusion trose County banking market after consummation of this proposal. The second largest competitor would control Based on the foregoing, and in light of all the facts of 19.7 percent of market deposits, and five other competitors, record, the Board has determined that the application not including Norwest, each would control more than 5 should be, and hereby is, approved. The Board's approval percent of market deposits after consummation of the pro- is specifically conditioned on compliance by Norwest with posal. all the commitments made in connection with the applica- In the Eagle County banking market, Norwest would tion. For the purposes of this action, the commitments and become the third largest depository institution after con- conditions relied on by the Board in reaching its decision summation of the proposal, controlling $71 million in are deemed to be conditions imposed in writing by the deposits, representing approximately 15.1 percent of mar- Board in connection with its findings and decision and, as ket deposits. The HHI would increase by 35 points to 4014. such, may be enforced in proceedings under applicable Five competitors, including Norwest, would remain in the law. market. Two competitors would control a larger percentage This transaction shall not be consummated before the of market deposits than Norwest, including the largest fifteenth calendar day following the effective date of this competitor in the market which controls 58.7 percent of order, or later than three months after the effective date of market deposits. this order, unless such period is extended for good cause by Consummation of the proposal in both banking markets the Board or by the Federal Reserve Bank of Minneapolis, would be consistent with the DOJ Guidelines and Board acting pursuant to delegated authority. precedent. In addition, the Department of Justice reviewed By order of the Board of Governors, effective June 1, the proposal and advised the Board that consummation of 1998. the proposal would not likely have a significantly adverse effect on competition in any relevant banking market. Voting for this action: Chairman Greenspan. Vice Chair Rivlin, and Based on all the facts of record, including the small in- Governors Meyer. Ferguson, and Gramlich. Absent and not voting: Governors Kelley and Phillips. creases in market concentration as measured by the HHI, the number of competitors remaining, and the market shares controlled by the remaining competitors, the Board ROBERT DEV. FRIERSON concludes that consummation of the proposal is not likely Associate Secretary of the Board to result in any significantly adverse effects on competition or on the concentration of banking resources in any rele- Orders Issued Under Section 4 of the Bank Holding vant banking market. Company Act Other Considerations Fifth Third Bancorp Cincinnati, Ohio The BHC Act requires the Board, in acting on an application, to consider the financial and managerial resources and Order Approving Notice to Engage in Nonbanking future prospects of the companies and banks involved, the Activities convenience and needs of the communities to be served, and certain supervisory factors. The Board has reviewed Fifth Third Bancorp ("Bancorp"), a bank holding comthese factors in light of the record, including supervisory pany within the meaning of the Bank Holding Company reports of examination assessing the financial and manage- Act ("BHC Act"), has requested the Board's approval rial resources of the organizations. Based on all the facts of under section 4(c)(8) of the BHC Act (12 U.S.C. record, the Board concludes that the financial and manage- § 1843(c)(8)) and section 225.24 of the Board's Regularial resources and the future prospects of Norwest, Moun- tion Y (12 C.F.R. 225.24) to acquire all of the voting shares tain, and their respective subsidiary banks are consistent of The Ohio Company ("Company"), and thereby indiwith approval, as are the other supervisory factors the rectly acquire Cardinal Management Corp., both in Colum- Board must consider under section 3 of the BHC Act. In bus, Ohio. Bancorp would thereby engage in the following addition, considerations related to the convenience and nonbanking activities: needs of the communities to be served, including the (1) Performing functions or activities that may be perrecords of performance of the institutions under the Com- formed by a trust company, pursuant to section munity Reinvestment Act, are consistent with approval of 225.28(b)(5) of Regulation Y (12 C.F.R. the proposal. 225.28(b)(5)); (2) Providing financial and investment advisory services, pursuant to section 225.28(b)(6) of Regulation Y (12 C.F.R. 225.28(b)(6)); (3) Providing securities brokerage, riskless principal, and private placement services, pursuant to section 225.28(b)(7)(i)-(iii) of Regulation Y (12 C.F.R. for anticompetitive effects implicitly recognize the competitive effect of limited-purpose lenders and other non-depository financial entities. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

678 Federal Reserve Bulletin • August 1998 (4) Underwriting and dealing in government obliga- the meaning of section 4(c)(8) of the BHC Act.3 The Board tions and money market instruments in which state also has determined that underwriting and dealing in bankmember banks may underwrite and deal under 12 ineligible securities is consistent with section 20 of the U.S.C. §§ 335 and 24(7) ("bank-eligible securi- Glass-Steagall Act (12 U.S.C. § 377), provided that the ties"), pursuant to section 225.28(b)(8)(i) of Regu- company engaged in the activity derives no more than lation Y (12 C.F.R. 225.28(b)(8)(i)); 25 percent of its gross revenues from underwriting and (5) Providing employee benefit consulting services, dealing in bank-ineligible securities.4 pursuant to section 225.28(b)(9)(ii) of Regulation Bancorp has committed that Company will conduct its Y (12 C.F.R. 225.28(b)(9)(ii)); and underwriting and dealing activities using the methods and (6) Underwriting and dealing in. to a limited extent, all procedures and subject to the prudential limitations estabtypes of debt and equity securities other than inter- lished by the Board in the Section 20 Orders. Bancorp also ests in open-end investment companies ("bank- has committed that Company will conduct its bankineligible securities"). ineligible securities underwriting and dealing activities subject to the Board's revenue limitation. As a condition of Notice of the proposal, aifording interested persons an this order, Bancorp is required to conduct its bankopportunity to submit comments, has been published (63 ineligible securities activities subject to the revenue limita- Federal Register 17,181 (1998)). The time for filing com- tion and Operating Standards established for section 20 ments has expired, and the Board has considered the notice subsidiaries ("Operating Standards").5 and all comments received in light of the factors set forth in section 4(c)(8) of the BHC Act. Other Activities Approved by Regulation or Order Bancorp, with total consolidated assets of approximately $21.4 billion, is the 39th largest banking organization in The Board previously has determined that trust company the United States.1 Bancorp operates subsidiary banks in activities; financial and investment advisory activities; sefour states, and engages through other subsidiaries in a curities brokerage, riskless principal, and private placebroad range of permissible nonbanking activities. Com- ment activities; bank-eligible securities underwriting and pany is, and after consummation of the proposal will dealing activities; and employee benefits consulting sercontinue to be, registered as a broker-dealer with the Secu- vices are closely related to banking within the meaning of rities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.), and a member of the National Association of Securities Deal- 3. See J.P. Morgan & Co. Inc., et. al, 75 Federal Reserve Bulletin ers, Inc. ("NASD"). Accordingly, Company is, and will 192 (1989), aff'd sub nom. Securities Industry Ass'n v. Board of continue to be, subject to the record-keeping and reporting Governors of the Federal Resen'e System. 900 F.2d 360 (D.C. Cir. obligations, fiduciary standards, and other requirements of 1990); Citicorp, 73 Federal Reserve Bulletin 473 (1987), aff'd sub the Securities Exchange Act of 1934, the SEC, and NASD. nom. Securities Industry Ass 'n v. Board of Governors of the Federal Cardinal Management Corp. ("Cardinal Management") is Reserve System, 839 F.2d 47 (2d Cir.), cert, denied, 486 U.S. 1059 (1988), as modified by Review of Restrictions on Director, Officer and registered with the SEC as an investment adviser under Employee Interlocks, Cross-Marketing Activities, and the Purchase the Investment Advisers Act of 1940 (15 U.S.C. § 80b-1 and Sale of Financial Assets Between a Section 20 Subsidiary and an et seq.) ("Advisers Act") and is, and will continue to be, Affiliated Bank or Thrift, 61 Federal Register 57,679 (1996), Amendsubject to the recordkeeping and reporting obligations, ments to Restrictions in the Board's Section 20 Orders. 62 Federal fiduciary standards, and other requirements of the Advisers Register 45,295 (1997); and Clarification to the Board's Section 20 Act and the SEC.2 Orders, 63 Federal Register 14,803 (1998) (collectively, "Section 20 Orders"). 4. Compliance with the revenue limitation shall be calculated in accordance with the method stated in the Section 20 Orders, as Underwriting and Dealing in Bank-Ineligible Securities modified by the Order Approving Modifications to the Section 20 Orders, 75 Federal Reserve Bulletin 751 (1989); 10 Percent Revenue The Board has determined that—subject to the framework Limit on Bank-Ineligible Activities of Subsidiaries of Bank Holding of prudential limitations established in previous decisions Companies Engaged in Underwriting and Dealing in Securities, 61 to address the potential for conflicts of interests, unsound Federal Register 48,953 (1996); and Revenue Limit on Bank-Ineligible Activities of Subsidiaries of Bank Holding Companies Engaged in banking practices, or other adverse effects — underwriting Underwriting and Dealing in Securities, 61 Federal Register 68,750 and dealing in bank-ineligible securities is so closely re- (1996) (collectively. "Modification Orders"). In light of the fact that lated to banking as to be a proper incident thereto within Bancorp proposes to acquire a going concern, the Board believes that allowing Company to calculate compliance with the revenue limitation on an annualized basis during the first year after consummation of the acquisition and thereafter on a rolling quarterly average basis would be consistent with the Section 20 Orders. See Dauphin Deposit Corporation, 11 Federal Reserve Bulletin 672 (1991). 1. Asset and ranking data are as of December 31, 1997. 2. Company currently owns certain subsidiaries other than Cardinal 5. 12 C.F.R. 225.200. Company may provide services that are Management. Bancorp has committed that Company will divest its necessary incidents to the proposed underwriting and dealing activiownership of such subsidiaries prior to consummation of the proposal ties. Unless Company receives specific approval under section 4(c)(8) or that Bancorp will otherwise conform its ownership and the activi- of the BHC Act to conduct the activities independently, any revenues ties of such subsidiaries to the requirements of the BHC Act immedi- from the incidental activities must be treated as ineligible revenues ately on consummation. subject to the Board's revenue limitation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 679 section 4(c)(8) of the BHC Act.6 Bancorp has committed tion. In those markets where the product offerings of Banthat it will conduct these activities in accordance with the corp's nonbanking subsidiaries and Company overlap, such limitations set forth in Regulation Y and the Board's orders as securities brokerage and investment advisory activities, and interpretations relating to each of the activities.7 there are numerous existing and potential competitors. Consummation of the proposal, therefore, would have a Other Considerations de minimis effect on competition in the market for these services, and the Board has concluded that the proposal In order to approve this notice, the Board also must deter- would not have any significantly adverse competitive efmine that the proposed activities "can reasonably be ex- fects in any relevant market. pected to produce benefits to the public, such as greater In order to approve the proposal, the Board also must convenience, increased competition, or gains in efficiency, find that the performance of the proposed activities by that outweigh possible adverse effects, such as undue con- Bancorp can reasonably be expected to produce benefits centration of resources, decreased or unfair competition, that would outweigh possible adverse effects under the conflicts of interests, or unsound banking practices."8 As proper incident to banking standard of section 4(c)(8) of part of its review of these factors, the Board considers the the BHC Act. Under the framework established in this and financial and managerial resources of the notificant and its prior decisions, consummation of the proposal is not likely subsidiaries and the effect the transaction would have on to result in any significantly adverse effects, such as undue such resources.9 concentration of resources, decreased or unfair competi- In considering the financial resources of the notificant, tion, conflicts of interests, or unsound banking practices. the Board has reviewed the capitalization of Bancorp and The Board expects that consummation of the proposal Company in accordance with the standards set forth in the would provide added convenience to the customers of Section 20 Orders and finds the capitalization of each to be Bancorp and Company. Bancorp has indicated that conconsistent with approval. This determination is based on all summation of the proposal would expand the range of the facts of record, including Bancorp's projections of the products and services available to its customers and those volume of Company's underwriting and dealing activities of Company and has stated that the acquisition would in bank-ineligible securities. permit Bancorp to further diversify its nonbanking opera- The Board also has reviewed the managerial resources tions, thereby making it less vulnerable to economic fluctuof each of the entities involved in the proposal in light of ations in individual business lines. examination reports and other supervisory information. In Based on all the facts of record, the Board has deterconnection with the proposal, the Federal Reserve Bank of mined that performance of the proposed activities by Ban- Cleveland ("Reserve Bank") has reviewed the policies and corp can reasonably be expected to produce public benefits procedures of Company to ensure compliance with this that outweigh any adverse effects of the proposal. Accordorder and the Section 20 Orders, including Company's ingly, the Board has determined that the performance of the operational and managerial infrastructure, computer, audit, proposed activities by Bancorp is a proper incident to and accounting systems, and internal risk management banking for purposes of section 4(c)(8) of the BHC Act. procedures and controls. On the basis of the Reserve Bank's review and all other facts of record, including the Conclusion commitments provided in this case and the proposed managerial and risk management systems of Company, the On the basis of all the facts of record, the Board has Board has concluded that financial and managerial consid- determined that the notice should be, and hereby is, aperations are consistent with approval of the notice. proved, subject to all the terms and conditions described in The Board also has carefully considered the competitive this order. The Board's approval of the proposal extends effects of the proposal. To the extent that Bancorp and only to activities conducted within the limitations of this Company offer different types of products and services, the order, including the Board's reservation of authority to proposed acquisition would result in no loss of competi- establish additional limitations to ensure that Company's activities are consistent with safety and soundness, avoidance of conflicts of interests, and other relevant consider- 6. See 12 C.F.R. 225.28(b)(5), (6), (7)(i)-(iii), (8)(i), and (9)(ii). ations under the BHC Act. Underwriting and dealing in 7. Cardinal Management currently serves as adviser, administrator any manner other than as approved in this order is not and distributor of the Cardinal Funds, a family of open-end investment companies ("mutual funds"). Bancorp has committed that Car- within the scope of the Board's approval and is not authodinal Management will cease its mutual fund distribution activities rized for Company. prior to consummation. In addition, Bancorp has stated that the The Board's determination is subject to all the terms and Cardinal Funds will be merged with and into Bancorp's existing conditions set forth in Regulation Y, including those in family of proprietary mutual funds shortly after consummation of the sections 225.7 and 225.25(c) (12 C.F.R. 225.7 and proposal and that, after such merger, Cardinal Management will not provide administrative services to mutual funds. In light of the pro- 225.25(c)), and to the Board's authority to require modifiposed merger, Bancorp has not requested authority for Company to cation or termination of the activities of a bank holding provide administrative services to mutual funds under section 4(c)(8) company or any of its subsidiaries as the Board finds of the BHC Act. necessary to ensure compliance with, or to prevent evasion 8. 12U.S.C. § 1843(c)(8). of, the provisions and purposes of the BHC Act and the 9. See 12C.F.R. 225.26(b). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

680 Federal Reserve Bulletin • August 1998 Board's regulations and orders issued thereunder. The (6) Providing agency transactional services for cus- Board's decision is specifically conditioned on compliance tomer investments, pursuant to section with all the commitments made in connection with the 225.28(b)(7) of Regulation Y (12 C.F.R. notice, including the commitments and conditions dis- 225.28(b)(7)); cussed in this order and the Board regulations and orders (7) Underwriting and dealing in government obliganoted above. The commitments and conditions are deemed tions and money market instruments ("bankto be conditions imposed in writing by the Board in con- eligible securities"), pursuant to section nection with its findings and decision, and, as such, may be 225.28(b)(8)(i) of Regulation Y (12 C.F.R. enforced in proceedings under applicable law. 225.28(b)(8)(i)); The proposal shall not be consummated later than three (8) Investing and trading activities, pursuant to secmonths after the effective date of this order, unless such tion 225.28(b)(8)(ii) of Regulation Y (12 C.F.R. period is extended for good cause by the Board or the 225.28(b)(8))(ii)); Reserve Bank, acting pursuant to delegated authority. (9) Providing cash management services; By order of the Board of Governors, effective June 1, (10) Providing certain administrative services for open- 1998. end investment companies ("mutual funds"); and (11) Acting as general partner for certain private in- Voting for this action: Chairman Greenspan, Vice Chair Rivlin, and vestment limited partnerships that invest in assets Governors Meyer, Ferguson, and Gramlich. Absent and not voting: in which a bank holding company is permitted to Governors Kelley and Phillips. invest. ROBERT DEV. FRIERSON Notice of the proposal, affording interested persons an Associate Secretary of the Board opportunity to submit comments, has been published (63 Federal Register 17,874 (1998)). The time for filing com- Societe Generate ments has expired, and the Board has considered the notice Paris, France and all comments received in light of the factors set forth in section 4(c)(8) of the BHC Act. Order Approving Notice to Engage in Nonbanking SoGen, with total consolidated assets of approximately Activities $413 billion, is the third largest banking organization in France and the 15th largest banking organization in the Societe Generale ("SoGen"), a foreign bank subject to the world.2 In the United States, SoGen operates branches in provisions of the Bank Holding Company Act ("BHC New York, New York, Chicago, Illinois, and Los Angeles, Act"),1 has requested the Board's approval under section California; an agency in Dallas, Texas; and representative 4(c)(8) of the BHC Act (12 U.S.C. § 1843(c)(8)) and offices in San Francisco, California, Atlanta, Georgia, and section 225.24(a) of the Board's Regulation Y (12 C.F.R. Houston, Texas. SoGen also engages through subsidiaries 225.24(a)) to acquire Cowen & Co. and Cowen Incorpoin a broad range of nonbanking activities in the United rated, both of New York, New York (together "Cowen"), States. Cowen, with total consolidated assets of $3.7 biland thereby engage in the following nonbanking activities: lion, engages in a broad range of securities underwriting (1) Underwriting and dealing in, to a limited extent, and dealing, brokerage, investment advisory, and other all types of debt and equity securities that a state activities.3 member bank may not underwrite and deal in SoGen plans to transfer the business of Cowen to ("bank-ineligible securities"), except ownership Societe Generale Securities Corporation, New York, New interests in open-end investment companies; York ("SGSC"), a subsidiary of SoGen that engages in a (2) Making loans or other extensions of credit, pursuwide range of securities-related activities, including securiant to section 225.28(b)(l) of Regulation Y ties underwriting and dealing.4 After consummation of the (12 C.F.R. 225.28(b)(l)); proposal, SGSC will change its name to SG Cowen Securi- (3) Activities related to extending credit, pursuant to ties Corporation, New York, New York ("SG Cowen"). section 225.28(b)(2) of Regulation Y (12 C.F.R. 225.28(b)(2)); (4) Providing fiduciary services, pursuant to section 225.28(b)(5) of Regulation Y (12 C.F.R. 225.28(b)(5)); 2. Asset and foreign ranking data are as of December 31, 1997, and are based on foreign exchange conversion rates as of that date. World (5) Providing financial and investment advisory serranking data are as of December 31,1996. vices, pursuant to section 225.28(b)(6) of Regula- 3. Cowen currently engages in certain insurance and real estate tion Y (12 C.F.R. 225.28(b)(6)); activities and controls certain limited partnerships that have investments that are not permissible for bank holding companies. SoGen has committed to conform the activities, investments, and relationships of Cowen to those permissible for bank holding companies within two 1. As a foreign bank operating branches and an agency in the United years of acquiring Cowen. States. SoGen is subject to certain provisions of the BHC Act by 4. SoGen controls SGSC pursuant to the "grandfather" provisions operation of section 8(a) of the International Banking Act of 1978 of section 8(c) of the IBA (12 U.S.C. § 3106(c)). On consummation of (12 U.S.C. § 3IO6(a)M"IBA"). the proposal. SoGen's grandfather rights relating to SGSC would end. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 681 SG Cowen would continue to engage in most of the current lished by the Board in the Section 20 Orders and other activities of SGSC and the permissible activities of Cowen. previous cases. SoGen also has committed that Company SGSC is currently and, after consummation of the pro- will conduct its bank-ineligible securities underwriting and posal, SG Cowen will continue to be registered with the dealing activities subject to the Board's revenue restriction. Securities and Exchange Commission ("SEC") as a As a condition of this order, SoGen is required to conduct broker-dealer under the Securities Exchange Act of 1934 its bank-ineligible securities activities subject to the reve- (15 U.S.C. § 78a et seq.) ("1934 Act") and a member of nue restrictions and Operating Standards established for the National Association of Securities Dealers, Inc. section 20 subsidiaries ("Operating Standards").7 ("NASD"). Accordingly, SGSC is and SG Cowen will be subject to the recordkeeping and reporting obligations, Mutual Fund Activities fiduciary standards, and other requirements of the 1934 Act, the SEC, and the NASD. The Board previously has determined that providing administrative services to mutual funds is closely related to Underwriting and Dealing in Bank-Ineligible Securities banking within the meaning of section 4(c)(8) of the BHC Act.8 SoGen proposes to provide investment advisory, bro- The Board previously has determined that — subject to the kerage, and administrative services through SG Cowen that framework of prudential limitations established in previous previously have been approved by the Board, and SoGen decisions to address the potential for conflicts of interests, has committed that the proposed activities will be conunsound banking practices, or other adverse effects — the ducted in compliance with Regulation Y and subject to the proposed underwriting and dealing activities involving prudential and other limitations established by the Board.9 bank-ineligible securities are so closely related to banking Cowen provides administrative, advisory, brokerage, and as to be proper incidents thereto within the meaning of other services to mutual funds. SoGen proposes that SG section 4(c)(8) of the BHC Act.5 The Board also has Cowen would continue to provide these services to the determined that underwriting and dealing in bank-ineligible funds.10 However, SoGen has committed that distribution securities is consistent with section 20 of the Glass- activities of mutual funds would be the responsibility of an Steagall Act (12 U.S.C. § 377), provided that the company independent distributor, which would enter into contractual engaged in the activity derives no more than 25 percent of agreements with the mutual funds to serve as "principal its gross revenues from underwriting and dealing in bank- underwriter."" The independent distributor also would be ineligible securities.6 responsible for supervising sales as the principal under- SoGen has committed that SG Cowen will conduct its writer for purposes of the federal securities laws.12 underwriting and dealing activities using the methods and procedures and subject to the prudential limitations estab- 7. 12 C.F.R. 225.200. SG Cowen may provide services that are necessary incidents to the proposed underwriting and dealing activities. Unless SG Cowen receives specific approval under section 5. See Canadian Imperial Bank of Commerce, et al., 76 Federal 4(c)(8) of the BHC Act to conduct the activities independently, any Reserve Bulletin 158 (1990); J.P. Morgan & Co. Incorporated, et al, revenues from the incidental activities must be treated as ineligible 75 Federal Reserve Bulletin 192 (1989). aff'd sub nom. Securities revenues subject to the Board's revenue limitation. Industries Ass'n v. Board of Governors of the Federal Reserve System, 8. See, e.g., Bankers Trust New York Corporation, 83 Federal 900 F.2d 360 (D.C. Cir. 1990); Citicorp, et al., 73 Federal Reserve Reserve Bulletin 780 (1997) ("BTNT'); Commenbank AG, 83 Fed- Bulletin 473 (1987), aff'd sub nom. Securities Industry Ass 'n v. Board eral Reserve Bulletin 679 (1997). of Governors of the Federal Reserve System, 839 F.2d 47 (2d Cir.), 9. See, e.g., BTNY. The administrative services that SoGen would cert, denied, 486 U.S. 1059 (1988); as modified by Review of Restric- provide to mutual funds through SG Cowen and other SoGen subsidtions on Director, Officer and Employee Interlocks, Cross-Marketing iaries include computing the fund's financial data, maintaining and Activities, and the Purchase and Sale of Financial Assets Between a preserving the records of the fund, providing office facilities and Section 20 Subsidiary and an Affiliated Bank or Thrift, 61 Federal clerical support for the fund, and preparing and filing tax returns for Register 57,679 (1996); Amendments to Restrictions in the Board's the funds. The services are listed in the Appendix. Section 20 Orders, 62 Federal Register 45,295 (1997); and Clarifica- 10. The Board previously has determined that the Glass-Steagall tion to the Board's Section 20 Orders, 63 Federal Register 14,803 Act does not prohibit a bank holding company from providing advi- (1998) (collectively, "Section 20 Orders"). sory and administrative services to a mutual fund. See 12 C.F.R. 6. Compliance with the revenue limitation shall be calculated in 225.125. Although SoGen does not own a member bank, SoGen is accordance with the method stated in the Section 20 Orders, as subject to the limitations applicable to domestic banking organizations modified by the Order Approving Modifications to the Section 20 under the principle of national treatment. See, e.g., Canadian Imperial Orders, 75 Federal Reserve Bulletin 751 (1989), and 10 Percent Bank of Commerce, et al., 76 Federal Reserve Bulletin 158 (1990). Revenue Limit on Bank-Ineligible Activities of Subsidiaries of Bank 11. As defined under the Investment Company Act of 1940 ("1940 Holding Companies Engaged in Underwriting and Dealing in Securi- Act"), a principal underwriter is any underwriter who, as principal, ties, 61 Federal Register 48,953 (1996) (collectively, "Modification purchases from a mutual fund any security for distribution, or who as Orders"). SoGen has requested that SG Cowen be permitted to agent for such fund sells or has the right to sell the fund's securities to calculate compliance with the revenue limitation on an annualized a dealer and/or to the public. 15 U.S.C. § 80a-2(a)(29). basis during the first year after consummation of the proposed acquisi- 12. An independent distributor would enter into any sales agreetion. The Board believes that allowing SG Cowen to calculate compli- ments with brokers or other financial intermediaries to sell shares of ance with the revenue limitation on an annualized basis during the first mutual funds. The independent distributor also would have legal year of its operations and thereafter on a rolling quarterly average responsibility under the rules of the NASD for the form and use of al) basis is consistent with the Section 20 Orders. See Dauphin Deposit advertising and sales literature and also would be responsible for filing Corporation, 11 Federal Reserve Bulletin 672 (1991). these materials with the NASD or the SEC. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

682 Federal Reserve Bulletin • August 1998 SoGen also proposes to have certain director and officer director and officer interlocks would not compromise the interlocks with the funds. In particular, SoGen proposes independence of the boards of the funds or permit SoGen that up to 25 percent of the directors of a mutual fund to control the funds. would be employees, officers, or directors of SoGen or one of its subsidiaries, including SG Cowen. SoGen proposes Other Activities Approved by Regulation or Order that one of these directors may serve as chairman of the board of the fund. In addition, SoGen seeks to have up to The Board previously has determined that making loans or three directors, officers, or employees of SoGen or its other extensions of credit and engaging in activities related subsidiaries, including SG Cowen, serve as senior officers to extending credit, providing fiduciary services, providing of the fund and have other SoGen personnel serve as financial and investment advisory services, providing junior-level officers of the fund.13 agency transactional services for customer investments, The Board previously has authorized a bank holding underwriting and dealing in bank-eligible securities, engagcompany and its nonbank subsidiaries to have limited ing in investing and trading activities, providing cash mandirector and officer interlocks with mutual funds that the agement services, and acting as general partner to private bank holding company advises and administers.14 In each investment limited partnerships that make investments that of these cases, the Board found that the funds would be a bank holding company may make are all closely related controlled by their independent directors.15 The Board to banking within the meaning of section 4(c)(8) of the noted that the independent directors would be responsible BHC Act.17 SoGen has committed that it will conduct for the selection and review of the investment adviser, the these activities in accordance with the limitations set forth underwriter, and the other major service contractors of the in Regulation Y and the Board's orders and interpretations fund.16 relating to each of the activities. In this case, SoGen's personnel would not comprise more than 25 percent of any fund's board of directors. Other Considerations Accordingly, all of the funds to which SoGen provides advisory and administrative services would have boards of In order to approve the proposal, the Board also must directors in which 75 percent of the directors are unaffili- determine that the proposed activities are a proper incident ated with SoGen, and the funds would be controlled by to banking, that is, that the proposed transaction "can those independent directors. In addition, any director of a reasonably be expected to produce benefits to the public fund who also serves as a director, officer, or employee of .. . that outweigh possible adverse effects, such as undue SoGen would be an "interested person" under the 1940 concentration of resources, decreased or unfair competi- Act and, therefore, would be required to abstain from tion, conflicts of interests, or unsound banking practices."18 voting on investment advisory and other major contracts of As part of its evaluation of these factors, the Board considthe fund. ers the financial and managerial resources of the notificant, The director and officer interlocks proposed by SoGen its subsidiaries, and any company to be acquired, and the would not appear to aifect the independence of the other effect the transaction would have on such resources.19 directors on the boards of directors for the funds. The SoGen's capital ratios satisfy applicable risk-based stanindependent members of the boards of directors would dards under the Basle Accord and are considered equivacontinue to have authority to review brokerage, advisory, lent to the capital levels that would be required of a United administrative and other major contracts and would retain States banking organization. The Board also has reviewed authority to change the distributor of fund shares. Based on the capitalization of SGSC and Cowen in accordance with the foregoing, the Board concludes that control of the the standards set forth in the Section 20 Orders and finds mutual funds would rest with the independent members of the capitalization of each to be consistent with approval. the boards of directors of the funds and that the proposed This determination is based on all the facts of record, including projections of the volume of SG Cowen's underwriting and dealing activities in bank-ineligible securities. 13. Senior officers include the president, secretary, treasurer, and The Board also has reviewed other aspects of the financial vice presidents with policy-making functions. Junior officers include condition and resources of SoGen, Cowen, and their reassistant secretaries, assistant treasurers, or assistant vice-presidents of spective subsidiaries, including the effect of the proposal the funds. Junior officers are fund employees who have no authority or on the financial condition and resources of these entities. responsibility to make policy. 14. See, e.g.. BTNY; Lloyds TSB Group pic, 84 Federal Reserve The Board also has reviewed the managerial resources Bulletin 116 (1998); BankAmerka Corporation, 83 Federal Reserve of each of the entities involved in this proposal in light of Bulletin 913 (1997); The Governor and Company of the Bank of Ireland, 82 Federal Reserve Bulletin 1129 (1996). 15. Under the 1940 Act, at least 40 percent of the board of directors of a mutual fund must be individuals who are not affiliated with the 17. See 12 C.F.R. 225.28(b)(l), (2), (5), (6), (7), (8)(i), (8)(ii); mutual fund, investment adviser, or any other major contractor to the Sovran Financial Corporation, 73 Federal Reserve Bulletin 225 fund. (19&7); Dresdner Bank AG, 84 Federal Reserve Bulletin 361 (1998). 16. The 1940 Act and related regulatory provisions require that 18. See 12U.S.C. § 1843(c)(8). independent directors annually review and approve the mutual fund's 19. See 12 C.F.R. 225.26(b); see also The Fuji Bank, Limited, 75 investment advisory contract and any plan of distribution or related Federal Reserve Bulletin 94 (1989); Bayerische Vereinsbank AG, 73 agreement. Federal Reserve Bulletin 155 (1987). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 683 examination reports and other supervisory information. In 225.7 and 225.25(c)), and to require such modification or connection with the proposal, the Federal Reserve Bank of termination of the activities of a bank holding company or New York has reviewed the policies and procedures of any of its subsidiaries as the Board finds necessary to SoGen, SGSC, and Cowen to ensure compliance with this ensure compliance with, and to prevent evasion of, the order and the Section 20 Orders, including computer, audit, provisions of the BHC Act and the Board's regulations and and accounting systems, internal risk management con- orders issued thereunder. The Board's decision is specifitrols, and the necessary operational and managerial infra- cally conditioned on compliance with all the commitments structure. On the basis of this review and the Board's made in connection with the notice and related corresponsupervisory experience with SoGen and SGSC, the com- dence, the conditions established in this order, and the mitments provided in this case, and the proposed manage- Board's regulations and other orders noted above. The rial and risk management systems of SG Cowen, the Board commitments and conditions relied on by the Board in has determined that financial and managerial consider- reaching this decision are deemed to be conditions imations are consistent with approval. posed in writing by the Board in connection with its The Board also has carefully considered the competitive findings and decision and, as such, may be enforced in effects of the proposal. SoGen represents that SGSC and proceedings under applicable law. Cowen offer largely complementary services with few The proposal shall not be consummated later than three overlaps. To the extent that SGSC and Cowen offer differ- months after the effective date of this order, unless such ent types of products and services, the proposed acquisition period is extended for good cause by the Board or by the would result in no loss of competition. In those markets Federal Reserve Bank of New York, acting pursuant to where the product offerings of SGSC and SoGen's other delegated authority. subsidiaries and Cowen do overlap, there are numerous By order of the Board of Governors, effective June 22, existing and potential competitors. As a result, consumma- 1998. tion of the proposal would have a de minimis effect on competition for these services, and the Board has con- Voting for this action: Chairman Greenspan, Vice Chair Rivlin, and cluded that the proposal would not result in a significantly Governors Phillips, Meyer, and Gramlich. Absent and not voting: Governors Kelley and Ferguson. adverse effect on competition in any relevant market. Under the framework established in this and prior deci- ROBERT DEV. FRIERSON sions, consummation of the proposal is not likely to result in any significantly adverse effects, such as undue concen- Associate Secretary of the Board tration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices that out- Appendix weigh the public benefits of the proposal. The Board expects that the proposal would enable SoGen to compete List of Administrative Services more effectively, particularly in underwriting activities, by 1. Maintaining and preserving the records of mutual increasing efficiencies and enabling SoGen to offer a funds, including financial and corporate records. broader range of products and services to its customers. 2. Computing net asset value, dividends, performance Accordingly, based on all the facts of record, the Board data, and financial information regarding mutual funds. has determined that the balance of public benefits that it 3. Furnishing statistical and research data to mutual must consider under the proper incident to banking stan- funds. dard of section 4(c)(8) of the BHC Act is favorable and 4. Preparing and filing with the SEC and state securities consistent with approval of the proposal. regulators registration statements, notices, reports, and other materials required to be filed under applicable Conclusion laws. 5. Preparing reports and other informational materials Based on the foregoing and all other facts of record, the regarding mutual funds, including prospectuses, prox- Board has determined that the notice should be, and hereby ies, and other shareholder communications. is, approved. This determination is subject to all the terms 6. Providing legal and other regulatory advice to mutual and conditions discussed in this order, including the funds. Board's reservation of authority to establish additional 7. Providing office facilities and clerical support for mulimitations to ensure that SoGen's activities are consistent tual funds. with safety and soundness, conflicts of interests, and other 8. Developing and implementing procedures for monitorrelevant considerations under the BHC Act. Underwriting ing compliance with regulatory requirements and comand dealing in any manner other than as approved in this pliance with mutual funds' investment objectives, polorder and the Section 20 Orders, as modified by the Modi- icies, and restrictions as established by the boards of fication Orders, is not within the scope of the Board's directors of the funds. approval and is not authorized for SG Cowen. 9. Providing routine accounting services to mutual funds The Board's determination also is subject to all the terms and liaison with outside auditors. and conditions set forth in Regulation Y, including those in 10. Preparing and filing tax returns, and monitoring tax sections 225.7 and 225.25(c) of Regulation Y (12 C.F.R. compliance. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

684 Federal Reserve Bulletin • August 1998 11. Reviewing and arranging for payment of expenses for newly formed entity (New UBS) that currently is jointly mutual funds. owned by UBS and Swiss Bank.1 New UBS would be the 12. Providing communication and coordination services survivor of these mergers and, after consummation of the with regard to mutual funds' investment advisers, transaction, would operate the current businesses of UBS transfer agent, custodian, distributor, and other service and Swiss Bank. organizations that render distribution, recordkeeping, In connection with these transactions, UBS and New or shareholder communication services. UBS (collectively, "Notificants") have sought the Board's 13. Reviewing and providing advice to the distributor, approval under section 4(c)(8) of the BHC Act to acquire mutual funds, and investment advisors regarding sales the existing nonbanking subsidiaries of Swiss Bank, inliterature and marketing plans for the mutual funds. cluding SBC Warburg Dillon Read Inc., New York, New 14. Providing information to the distributor's personnel York ("SBC Warburg"). New UBS also has sought the concerning performance and administration of mutual Board's approval under section 4(c)(8) of the BHC Act to funds. acquire the existing nonbanking subsidiaries of UBS, in- 15. Providing marketing support with respect to sales of cluding UBS Securities LLC, New York, New York ("UBS mutual funds through financial intermediaries. Securities"). After consummation of the proposed transac- 16. Participating in seminars, meetings, and conferences tion, New UBS proposes to conduct the following nondesigned to present information concerning mutual banking activities nationwide: funds. (1) Extending credit and servicing loans, in accor- 17. Assisting in the development of additional mutual dance with section 225.28(b)(l) of Regulation Y funds. (12 C.F.R. 225.28(b)(l)); 18. Providing reports to the board of directors of mutual (2) Engaging in activities related to making, acquirfunds. ing, brokering or servicing loans or other exten- 19. Providing telephone shareholder services through a sions of credit, including acquiring debt that is in toll-free number. default at the time of acquisition, in accordance with section 225.28(b)(2) of Regulation Y UBSAG (12 C.F.R. 225.28(b)(2)); Zurich and Basel, Switzerland (3) Leasing personal or real property or acting as agent, broker, or adviser in leasing such property, Union Bank of Switzerland in accordance with section 225.28(b)(3) of Regu- Zurich, Switzerland lation Y (12 C.F.R. 225.28(b)(3)); (4) Performing trust company functions, in accor- Order Approving Acquisition of Nonbanking Companies dance with section 225.28(b)(5) of Regulation Y and Establishment of U.S. Branches, Agencies, and (12 C.F.R. 225.28(b)(5)); Representative Offices (5) Providing financial and investment advisory services, in accordance with section 225.28(b)(6) of Union Bank of Switzerland ("UBS") and UBS AG ("New Regulation Y (12 C.F.R. 225,28(b)(6)); UBS"), foreign banking organizations subject to the provi- (6) Providing securities brokerage, riskless principal, sions of the Bank Holding Company Act ("BHC Act"), private placement, futures commission merchant, have requested the Board's approval under section 4(c)(8) and other agency transactional services, in accorof the BHC Act (12 U.S.C. § 1843(c)(8)) and section dance with section 225.28(b)(7) of Regulation Y 225.24 of the Board's Regulation Y (12 C.F.R. 225.24), (12 C.F.R. 225.28(b)(7)); and New UBS has applied under sections 5(a), 7(d), and (7) Underwriting and dealing in government obliga- 10(a) of the International Banking Act (12 U.S.C. tions and money market instruments that state §§ 31O3(a), 31O5(d) and 3107(a)) ("IBA") and section member banks may underwrite or deal in under 12 211.24 of the Board's Regulation K (12 C.F.R. 211.24), in U.S.C. §§ 335 and 24(7) ("bank-eligible securiconnection with the proposed merger of UBS and Swiss ties"), engaging in investment and trading activi- Bank Corporation, Basel, Switzerland ("Swiss Bank"). ties, and buying and selling bullion, and related The proposal involves the merger of two large foreign activities, in accordance with section 225.28(b)(8) banks that are predominantly engaged in banking activities of Regulation Y (12 C.F.R. 225.28(b)(8)); outside the United States and, particularly, in Switzerland. The banking and nonbanking operations of UBS and Swiss Bank in the United States represent a relatively small proportion of their overall banking and nonbanking assets. 1. Under the terms of the merger agreement, Swiss Bank will merge The Swiss Federal Banking Commission ("Swiss Banking with and into New UBS and, shortly thereafter, UBS will merge with Commission") and the Swiss Federal Competition Com- and into New UBS. UBS has indicated that the merger of UBS into mission, which are the primary supervisors of UBS and New UBS is expected to occur one business day after the merger of Swiss Bank, have approved the proposed merger of the Swiss Bank into New UBS. After consummation, current shareholders of UBS would own approximately 60 percent of the shares of New banks. The combination of UBS and Swiss Bank would be UBS, and current shareholders of Swiss Bank would own approxiaccomplished through the merger of both banks into a mately 40 percent of the shares of New UBS. 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Legal Developments 685 (8) Engaging in community development activities, in UBS would become the second largest banking organizaaccordance with section 225.28(b)(12) of Regula- tion in the world. UBS and Swiss Bank are qualifying tion Y (12 C.F.R. 225.28(b)(12)); foreign banking organizations under section 211.23(b) of (9) Serving as general partner of certain private in- the Board's Regulation K (12 C.F.R. 211.23(b)), and New vestment limited partnerships that invest in assets UBS would become a qualifying foreign banking organizain which a bank holding company is permitted to tion on consummation of the proposal. invest; and (10) Underwriting and dealing in, to a limited extent, Nonbanking Activities all types of securities that a member bank may not underwrite or deal in ("bank-ineligible securi- The Board previously has determined that credit and creditties"), except for ownership interests in open-end related activities; leasing activities; trust company activiinvestment companies.2 ties; financial and investment advisory activities; securities brokerage, riskless principal, private placement, futures Swiss Bank currently operates two state-licensed commission merchant, and other agency transactional acbranches in New York, New York; a state-licensed branch tivities; bank-eligible securities underwriting and dealing, in Chicago, Illinois, and Stamford, Connecticut; a federal investment and trading, and buying and selling bullion and branch in San Francisco, California; a state-licensed related activities; and community development activities agency in Miami, Florida; and a representative office in are closely related to banking within the meaning of sec- Los Angeles, California, and Houston, Texas.3 UBS cur- tion 4(c)(8) of the BHC Act.6 In addition, the Board rently operates a federal branch in Los Angeles. California; previously has determined by order that private investment a state-licensed branch and a limited state-licensed branch limited partnership activities are permissible for bank holdin New York, New York; a state-licensed agency in Hous- ing companies.7 Notificants have committed that they will ton, Texas; and a representative office in San Francisco, conduct each of these activities in accordance with the California, and New York, New York. limitations set forth in Regulation Y and the Board's orders Notice of the proposal under section 4 of the BHC Act, and interpretations relating to each of the activities.8 affording interested persons an opportunity to submit comments, has been published in the Federal Register (63 Federal Register 6939, 9234 (1998)). In addition, notice of the application under the IBA, affording interested persons 6. See 12 C.F.R. 225.28(b)(l), (2), (3), (5), (6), (7), (8), and (12). an opportunity to submit comments, has been published in The Board received comments from Inner City Press/Community on a newspaper of general circulation in each community in the Move ("ICP") contending that UBS Community Development which New UBS proposes to establish a branch, agency, or Corporation ("UBS-CDC"), a nonbanking subsidiary of UBS authorepresentative office.4 The time for filing comments has rized to engage in community development activities under Regulation Y. has not engaged in any community development activities and expired, and the Board has considered the application and that Notificants must disclose their future plans for the subsidiary. ICP notices and all comments received in light of the factors set also alleges that UBS has not complied with the representations that it forth in the BHC Act and the IBA. made to the Federal Reserve System in connection with the establish- UBS, with approximately $401 billion in consolidated ment of UBS-CDC. Notificants have stated that UBS-CDC has made investments consistent with its authority and have requested approval assets, is the 17th largest banking organization in the to engage in community development activities in the future through world.5 Swiss Bank, with approximately $305 billion in UBS-CDC. The Board notes that the Community Reinvestment Act consolidated assets, is the 27th largest banking organiza- by its terms does not apply to the section 4 notice and IBA application tion in the world. On consummation of the proposal. New filed by Notificants. Furthermore, based on all the facts of record, including a review by the Federal Reserve Bank of New York of UBS's notice to establish UBS-CDC, the Board concludes that no 2. UBS, through UBS Securities, also currently engages in a variety misrepresentations were made in connection with that notice. of nonbanking activities in the United States under grandfather rights 7. See Dresdner Bank AC, 84 Federal Reserve Bulletin 361 (1998); claimed under section 8(c) of the IBA (12 U.S.C. § 3106(c)). Meridian Bancorp, Inc.. 80 Federal Resen-e Bulletin 736 (1994). 3. In addition, Swiss Bank has a subsidiary bank in Switzerland, Notificants also have requested approval to continue to trade in Banca della Svizzera Italiana ("BSI"), that operates a limited state- derivative products to the extent permissible for Swiss Bank under licensed branch in New York. New York. New UBS has represented Swiss Bank Corporation, 81 Federal Reserve Bulletin 185 (1995). that BSI will operate in the same corporate form after the merger. Notificants have committed to engage in such activities in accordance Accordingly, the Board views New UBS's application as fulfilling the with the commitments and limitations discussed in that order. notice requirement under section 211.24(a)(4)(i) of Regulation K 8. As a result of prior acquisitions, Swiss Bank currently controls (12 C.F.R. 211.24(a)(4)(i)). several limited partnerships that invest in debt and equity securities 4. Notices were published in the following communities: Chicago, beyond the levels permissible for bank holding companies under Illinois (The Chicago Sun-Times, March 23, 1998); Houston, Texas section 4 of the BHC Act. Swiss Bank previously has committed to (The Houston Chronicle, March 23, 1998); Los Angeles, California conform these relationships to the requirements of section 4 of the (The Los Angeles Times, March 23, 1998); Miami, Florida (The Miami BHC Act within certain time limits. See Swiss Bank Corporation, 83 Herald, March 23, 1998); New York, New York (The New York Post, Federal Reserve Bulletin 786 (1997) ("Swiss Bank 1997"), and Let- March 23. 1998); San Francisco, California (The San Francisco ters, dated March 28. 1995, and March 30, 1995, from John S. Chronicle, March 23, 1998); and Stamford, Connecticut (The Advo- Cassidy, Assistant Vice President, Federal Reserve Bank of New cate, March 23, 1998). York, to Mario Cueni. Notificants have committed to conform these 5. Asset data are as of December 31. 1997, and ranking data are as relationships to the requirements of section 4 within the time periods of December 31, 1996. previously committed to by Swiss Bank. 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686 Federal Reserve Bulletin • August 1998 Bank-Ineligible Securities Activities mation of the transaction, UBS Securities will conduct its bank-ineligible securities underwriting and dealing activi- Swiss Bank currently is engaged in underwriting and deal- ties subject to the 25-percent revenue limitation and the ing in bank-ineligible securities, to a limited extent, prudential limitations previously established by the Board, through SBC Warburg.9 UBS also currently is engaged in and this order is conditioned on compliance by Notificants underwriting and dealing in bank-ineligible securities with the revenue restriction and Operating Standards estabthrough UBS Securities in reliance on grandfather rights lished for section 20 subsidiaries.13 established by section 8(c) of the 1BA.10 After consummation of the proposal, SBC Warburg would be merged into Comments on the Proposal UBS Securities. Accordingly, New UBS has requested approval under section 4(c)(8) of the BHC Act for UBS The Board received timely comments on the proposal from Securities to engage in underwriting and dealing in bank- a member of the United States Senate, ICP, and two indiineligible securities, to a limited extent, after its merger viduals. Commenters contend that UBS and Swiss Bank with SBC Warburg. have failed to take adequate steps to locate and preserve UBS Securities is, and will continue to be, a broker- documents and other information relating to accounts and dealer registered with the Securities and Exchange Com- assets that may belong to victims of the Holocaust or their mission ("SEC"), a futures commission merchant regis- heirs and to other accounts that have been dormant since tered with the Commodity Futures Trading Commission the end of World War II. The commenters also contend that ("CFTC"), and a member of the National Association of UBS and Swiss Bank have acted improperly, fraudulently, Securities Dealers, Inc. ("NASD"). Accordingly, UBS or without sufficient alacrity in handling claims to accounts Securities would remain subject to the recordkeeping and that may be owned by victims of the Holocaust or their reporting obligations, fiduciary standards, and other re- heirs.14 In addition, the commenters contend that UBS and quirements of the Securities Exchange Act of 1934 Swiss Bank have failed to cooperate with domestic and (15 U.S.C. § 78a el seq.), the Commodity Exchange Act foreign governmental authorities, international organiza- (7 U.S.C. § 2 et seq.), the SEC, the CFTC, and the NASD. tions, and private individuals that are seeking to obtain The Board has determined that, subject to the framework documentary and other information concerning accounts of prudential limitations established in previous decisions that may belong to victims of the Holocaust or their heirs to address the potential for conflicts of interests, unsound and resolve claims to such accounts.15 banking practices, or other adverse effects, underwriting The Board also received comments from the New York and dealing in bank-ineligible securities is so closely re- State Banking Department ("NYSBD") detailing concerns lated to banking as to be a proper incident thereto within that the NYSBD initially had regarding the manner in the meaning of section 4(c)(8) of the BHC Act." The which UBS and Swiss Bank have handled accounts of Board also has determined that underwriting and dealing in victims of the Holocaust or their heirs and the steps taken bank-ineligible securities is consistent with section 20 of by the banks to address these concerns. The NYSBD has the Glass-Steagall Act (12 U.S.C. § 377), provided that indicated that in December 1997, Swiss Bank and its New the company engaged in the activities derives no more than York branch entered into a consent order with the NYSBD 25 percent of its gross revenues from underwriting and dealing in bank-ineligible securities over a two-year period.12 Notificants have committed that, following consum- Securities, 61 Federal Register 48,953 (1996); and Revenue Limit on Bank-Ineligible Activities of Subsidiaries of Bank Holding Companies Engaged in Underwriting and Dealing in Securities, 61 Federal Register 68,750 (1996) (collectively. "Modification Orders"). 9. See Swiss Bank 1997. 13. 12 C.F.R 225.200. UBS Securities may provide services that are 10. See 12 U.S.C. § 3106(c). necessary incidents to the proposed underwriting and dealing activi- 11. See J.P. Morgan & Co. Inc., et. at, 75 Federal Reserve Bulletin ties. Unless UBS Securities receives specific approval under sec- 192 (1989), aff'd sub nom. Securities Industry Ass'n v. Board of tion 4(c)(8) of the BHC Act to conduct the activities independently, Governors of the Federal Reserve System, 900 F.2d 360 (D.C. Cir. any revenues from the incidental activities must be treated as ineligi- 1990); Citicorp, 73 Federal Reserve Bulletin 473 (1987), aff'd sub ble revenues subject to the Board's revenue limitation. nom. Securities Industry Ass 'n v. Board of Governors of the Federal 14. One commenter also contends that UBS and Swiss Bank served Reserve System. 839 F.2d 47 (2d Cir.), cert, denied, 486 U.S. 1059 as depositories for gold and other funds seized by the Nazi govern- (1988), as modified by Review of Restrictions on Director, Officer and ment from individuals and nations during World War II and otherwise Employee Interlocks, Cross-Marketing Activities, and the Purchase collaborated with the Nazis. This commenter contends that the banks and Sale of Financial Assets Between a Section 20 Subsidiary and an have sought to conceal their actions in this regard and to prevent the Affiliated Bank or Thrift, 61 Federal Register 57.679 (1996), Amend- return of stolen assets. ments to Restrictions in the Board's Section 20 Orders, 62 Federal 15. One commenter also noted that several states and municipalities Register 45,295 (1997V, and Clarification to the Board's Section 20 have threatened to terminate their relationships with Swiss banks if Orders, 63 Federal Register 14,803 (1998) (collectively, "Section 20 the banks do not take additional steps to resolve claims by victims of Orders'"). the Holocaust and their heirs and that UBS and Swiss Bank are parties 12. See Section 20 Orders. Compliance with the revenue limitation to several pending lawsuits concerning the disposition of assets that shall be calculated in accordance with the method stated in the Sec- may belong to victims of the Holocaust or their heirs. The Board notes tion 20 Orders, as modified by the Order Approving Modifications to that these lawsuits remain pending and that Swiss banks, including the Section 20 Orders, 75 Federal Reserve Bulletin 751 (1989), and UBS and Swiss Bank, recently have entered into negotiations with the 10 Percent Revenue Limit on Bank-Ineligible Activities of Subsidiaries plaintiffs and other parties to seek a negotiated and comprehensive of Bank Holding Companies Engaged in Underwriting and Dealing in settlement of the pending actions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 687 that required Swiss Bank's New York branch to initiate a UBS for the retention of documents related to dormant number of steps designed to improve the branch's ability to accounts.19 The Volcker Commission also has stated that track and retrieve information concerning pre-1945 ac- both UBS and Swiss Bank cooperated with these investigacounts and respond to inquiries from the NYSBD regard- tions. Furthermore, the Volcker Commission has indicated ing such accounts. In April 1998, UBS and its New York that the investigations concluded that Swiss Bank and UBS branch entered into a similar consent order with the had adequate internal procedures to safeguard documents NYSBD.16 The NYSBD has stated that Swiss Bank and related to dormant accounts under Swiss law.20 UBS are in compliance with the terms of the consent The second phase of the audit process, which currently is orders, and that the NYSBD believes that the management ongoing, involves the on-site investigations of Swiss banks of Swiss Bank and UBS are committed to cooperating with by the Volcker Commission auditors to locate and identify the Department and ensuring the bank's continued compli- all dormant accounts held by the banks. The Volcker ance with the consent order. The NYSBD also has stated Commission has stated that the auditors have been on-site that both banks have established extensive search and audit at UBS and Swiss Bank since September 1997 preparing processes to identify and organize data relating to accounts for and conducting the second phase of the audit and that from the wartime period and to investigate claims to such the major elements of this phase are expected to be comaccounts. Based on its review of these and other actions pleted by the end of 1998. In addition, the Volcker Comtaken by UBS and Swiss Bank, the NYSBD has approved mission has reported that both banks are cooperating with the proposed establishment by New UBS of the branches the auditors and have devoted substantial personnel and and representative office of UBS and Swiss Bank in New physical resources to assist the audit firms in locating, York. cataloging, and establishing databases of the documentary The Board also sought the views of the Independent records relating to dormant accounts.21 Committee of Eminent Persons ("Volcker Commission"), The Volcker Commission and the SBA also have jointly an independent committee established to oversee a compre- established an independent Claims Resolution Tribunal to hensive, investigative audit of Swiss banks, including UBS resolve all claims to dormant accounts opened by nonand Swiss Bank.17 The Volcker Commission audit process Swiss customers and identified on lists of dormant acis designed to identify all dormant accounts or other finan- counts published by the SBA in July and October 1997.22 cial assets held by Swiss banks during the 1933-1945 The Claims Resolution Tribunal reviews claims to pubperiod that may belong to victims of Nazi persecution or their heirs ("dormant accounts").18 The Board notes that Swiss law requires that all Swiss banks cooperate fully 19. The pilot audit of Swiss Bank involved a preliminary investigawith the audit being conducted by the Volcker Commistion into dormant accounts held by the bank as well as an investigation sion, which is being conducted in two phases by four large into the bank's procedures for retaining documents that may relate to international audit firms retained by the Commission. dormant accounts. The document retention investigation at UBS examined the bank's document retention policies and procedures, The Volcker Commission has stated that during the first archive and storage procedures, document destruction procedures, and phase of the audit the Commission's auditors conducted a dormant account recordkeeping practices. pilot audit of Swiss Bank and a review of the programs at 20. Swiss law prohibits Swiss banks from destroying any documents that relate to accounts in existence prior to the end of World War II, including dormant accounts that may belong to victims of the Holocaust or their heirs. Certain commenters contend that in January 16. The consent order requires that UBS and its New York branch 1997, a UBS employee improperly destroyed documents that were cooperate with the NYSBD and its Holocaust Claims Processing protected by Swiss law. These allegations have been investigated by Office ("HCPO") and hire an independent accounting or consulting Swiss authorities, who determined that no legal action against UBS or firm to investigate, inventory, catalog, and review all documents held the employee was warranted. UBS has stated that its management did by Swiss Bank relating to assets transferred by Swiss Bank to New not order or authorize the destruction of documents by the employee York prior to and during World War II. The HCPO is a branch of the and has taken steps to prevent the destruction of protected documents. NYSBD established to assist Holocaust survivors and their heirs Furthermore, as noted above, the Volcker Commission's auditors recover assets held by Swiss banks. concluded that UBS has adequate policies and procedures in place to 17. One commenter contends, without providing any supporting preserve documents related to dormant accounts and protected by evidence, that UBS illegally confiscated large quantities of gold and Swiss law. other financial assets from a number of individuals represented by the 21. The Swiss federal government also has established the Swiss commenter in violation of state, federal, and Swiss law. Commenter Historical Commission — Second World War ("Bergier Commishas filed a lawsuit in U.S. district court to recover the assets that sion"), an independent commission charged with investigating the allegedly were confiscated by UBS. The Board notes that there has extent and fate of all assets that entered Switzerland as a result of the been no final adjudication of this lawsuit or finding of wrongdoing on Nazi regime, including assets owned by or seized from victims of the the part of UBS. The courts, moreover, have adequate authority to Holocaust. The Bergier Commission has the authority to review all provide commenter with redress if commenter's allegations can be records in the possession of the Swiss government and companies supported. relevant to its investigation. The Bergier Commission recently pre- 18. The Volcker Commission was established in May 1996, under a sented a detailed interim report to the Swiss government concerning memorandum of understanding between the Swiss Bankers Associa- gold transactions between Swiss entities, including the Swiss National tion ("SBA") and the World Jewish Congress. The Commission Bank and Swiss commercial banks, and the German Reichsbank consists of seven persons, three of whom were selected by the World during World War II. Jewish Restitution Organization and three of whom were selected by 22. The published lists contained more than 5,000 names connected the SBA. The members jointly selected Paul A. Volcker to serve as with dormant accounts identified by the Volcker Commission auditors chairman of the committee. or independently by Swiss banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

688 Federal Reserve Bulletin • August 1998 lished dormant accounts free of charge and uses relaxed the matters raised by commenters relate to the factors that standards of proof that take into consideration the difficul- the Board is authorized to consider, the Board concludes, ties Holocaust victims or their heirs may have in presenting based on all the facts of record and for the reasons disevidence of legal or beneficial ownership to an account.23 cussed above and in this order, including the cooperation of The Swiss Banking Commission has informed the Board UBS and Swiss Bank with the appropriate investigating that UBS and Swiss Bank have cooperated with the Swiss and supervisory authorities, that such matters do not war- Banking Commission, the SBA, and the Volcker Commis- rant denial of the proposal. sion during the claims resolution process, and that the Swiss Banking Commission is fully satisfied with the ef- Evaluation under the IBA forts of the two banks in connection with the Claims Resolution Tribunal.24 In order to approve an application by a foreign bank to The Board also sought the views of the United States establish a branch, agency, or representative office in the Department of State on the matters raised by the comment- United States, the IBA and Regulation K require the Board ers. Although the State Department stated that it took no to determine that the foreign bank engages directly in the position on the merits of the proposal, the Department business of banking outside the United States and has noted that it has supported the several initiatives taken by furnished to the Board the information it needs to assess the Swiss government and Swiss banks to address the the application adequately. The Board also generally must issues related to dormant accounts that may belong to determine that the foreign bank is subject to comprehen- Holocaust victims or their heirs and has expressed confi- sive supervision or regulation on a consolidated basis by its dence that these initiatives and the commitments under- home country supervisor (12 U.S.C. § 3105(d)(2),(6); taken so far will be fully carried out. The State Department 12 C.F.R. 211.24(c)(l)).27 The Board also may take into further noted that sanctions against Swiss banks are not account additional standards set forth in the IBA (12 U.S.C. justified and would only retard ongoing progress on these § 3105(d)(3), (4)) and Regulation K (12 C.F.R. 211.24(c)(2)). issues. The Board has carefully reviewed the comments submit- On consummation of the merger, New UBS would ented by the commenters in light of all the facts of record, gage directly in the business of banking outside the United including the information received from the Volcker Com- States through its banking operations in Switzerland and mission, the State Department, UBS and Swiss Bank, and elsewhere. UBS, Swiss Bank, and New UBS have proconfidential supervisory information received from the vided the Board with the information necessary to assess NYSBD and the Swiss Banking Commission.25 Although the application through submissions that address the relethe matters raised by commenters involve subjects of pub- vant issues. lic concern, the Board believes that many of these matters The Board also has carefully considered, in light of all involve disputes that are not within the Board's limited the facts of record and the comments received on the jurisdiction to adjudicate or do not relate to the factors that proposal, whether the foreign banks involved in the prothe Board may consider in reviewing an application or posal are subject to comprehensive supervision or regulanotice under the BHC Act or the IBA.26 To the extent that tion on a consolidated basis.28 Regulation K provides that a foreign bank will be considered to be subject to comprehensive supervision or regulation on a consolidated basis if the Board determines that the bank is supervised and 23. The Tribunal consists of 16 arbitrators from several countries regulated in such a manner that its home country superviand is overseen by a Board of Trustees consisting of Mr. Volcker (Chairman), a member of the Swiss Parliament and a representative of sor receives sufficient information on the worldwide operathe World Jewish Congress. The Volcker Commission has stated that tions of the foreign bank, including its relationship to any the Tribunal is currently processing 6,000 of the 8,736 claims submit- affiliate, to assess the bank's overall financial condition and ted. 24. One commenter raised questions concerning UBS and Swiss Bank's handling of three accounts that are included on the dormant account lists published by the SBA in 1997. The Board has considered these comments in light of confidential supervisory information received from the Swiss Banking Commission concerning the opening, handling, and closing of these accounts and actions taken by the banks administered and enforced by the Board. See Nonvest Corporation, 82 to resolve claims to the accounts as well as information provided by Federal Reserve Bulletin 580 (1996); see also Western Bancshares v. the NYSBD. Board of Governors, 480 F.2d 749 (10th Cir. 1973). 25. The NYSBD submitted confidential information to the Board 27. In acting on an application to establish a representative office, concerning the Department's investigation into the activities of Swiss the IBA and Regulation K provide that the Board shall take into banks in New York State prior to and during World War II and the account whether the foreign bank is subject to comprehensive supervi- Department's supervisory experience with Swiss banks during the sion or regulation but a determination on this factor is not required. conduct of this investigation. See 12 U.S.C. § 3107(a)(2); 12 C.F.R. 211.24(d)(2). 26. The factors that the Board may consider in reviewing an 28. Certain commenters questioned whether UBS and Swiss Bank application under section 4 of the BHC Act and the IBA are limited by are subject to comprehensive consolidated supervision and regulation those acts. Moreover, the Board previously has noted and the courts in light of the ongoing investigations into the banks' handling of have held that the Board's limited jurisdiction to review applications accounts owned by victims of the Holocaust and claims to such under the BHC Act and the IBA does not authorize the Board to accounts, and losses recently incurred by the equity derivatives busiadjudicate disputes involving an applicant that do not arise under laws ness of UBS. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 689 its compliance with law and regulation (12 C.F.R. Banking Commission may share information on the operations of New UBS with other supervisors, including the The primary supervisor of New UBS will be the Swiss Board. In light of these commitments and other facts of Banking Commission. The Board previously has deter- record, and subject to the condition described below, the mined, in connection with applications under the IBA Board has concluded that New UBS has provided adequate submitted by Swiss Bank and UBS, that both banks were assurances of access to any necessary information the subject to home country supervision on a consolidated Board may request.31 basis.30 The Board has determined that New UBS will be supervised by the Swiss Banking Commission on substan- Establishment of Interstate Branches. Section 5(a) of the tially the same terms and conditions as Swiss Bank and IBA establishes additional criteria that must be met for the UBS. Based on all the facts of record, the Board has Board to approve the establishment of branches outside a concluded that New UBS would be subject to comprehen- foreign bank's home state. On consummation, New UBS sive supervision and regulation on a consolidated basis by will designate Connecticut as its home state.32 New UBS its home country supervisor. proposes to establish the following branches outside Con- The Board also has taken into account the additional necticut: Swiss Bank's two state-licensed branches in New standards set forth in the IBA (12 U.S.C. § 3105(d)(3), (4)) York, New York, and its state-licensed branch in Chicago, and Regulation K (12 C.F.R. 211.24(c)(2)). The Swiss Illinois; and UBS's federal branch in Los Angeles, Califor- Banking Commission has consented to the establishment nia, and its state-licensed branch in New York, New York. by New UBS of the branches, agencies, and representative Under section 5(a) of the IBA (12 U.S.C. § 31O3(a)), as offices in the United States referenced in this order. In amended by section 104 of the Riegle-Neal Interstate addition, the record indicates that New UBS has estab- Banking and Branching Efficiency Act of 1994 ("Rieglelished controls and procedures in each of the proposed U.S. Neal Act"), a foreign bank, with the approval of the Board offices to ensure compliance with applicable U.S. law, as and the Office of the Comptroller of the Currency ("OCC") well as controls and procedures for its worldwide opera- or the appropriate state banking supervisor, may establish tions generally. and operate a branch in any state outside its home state to With regard to access to information, the Board has the extent that a bank with the same home state as the reviewed the restrictions on disclosure in relevant jurisdic- foreign bank could do so under section 44 of the Federal tions in which New UBS would operate and has communi- Deposit Insurance Act ("FDI Act"). Section 44 of the FDI cated with relevant government authorities about access to Act permits approval of a merger transaction under the information. New UBS has committed to make available to Bank Merger Act between banks with different home the Board such information on the operations of New UBS states, provided that neither of the states has elected to and any affiliate of New UBS that the Board deems neces- prohibit interstate merger transactions. Connecticut and sary to determine and enforce compliance with the IBA, California law satisfy this requirement.33 All other applicathe BHC Act, and other applicable federal law. To the ble conditions of section 44 of the FDI Act also have been extent that the provision of such information may be pro- met by the proposal.34 hibited or impeded by law or otherwise, New UBS has The Board has determined that all of the other criteria committed to cooperate with the Board to obtain any referred to in section 5(a)(3) of the IBA,35 including the necessary consents or waivers that might be required from third parties in connection with disclosure of certain information. In addition, subject to certain conditions, the Swiss 31. One commenter questioned whether New UBS has provided other appropriate commitments to the Board. New UBS has made the commitments required in connection with its application. 29. In assessing this standard, the Board considers, among other 32. Because Connecticut will be the home state of New UBS, New factors, the extent to which the home country supervisors: UBS does not need approval under section 5(a) of the IBA to establish (i) Ensure that the bank has adequate procedures for monitor- Swiss Bank's state-licensed branch in Stamford, Connecticut. ing and controlling its activities worldwide; 33. See Conn. Gen. Stat. Ann. § 36a-411 (West 1996); Cal. Fin. (ii) Obtain information on the condition of the bank and its Code § 3754(c) (West 1998). Currently, Swiss Bank's home state is subsidiaries and offices through regular examination re- Connecticut, and UBS's home state is California. ports, audit reports, or otherwise; 34. Section 5(a) of the IBA requires that certain conditions of (iii) Obtain information on the dealings with and relationship section 44 of the FDI Act be met in order for the Board to approve an between the bank and its affiliates, both foreign and interstate banking transaction under section 5(a)(l) of the IBA. See domestic; 12 U.S.C. § 31O3(a)(3)(C) (referring to sections 44(b)(l), 44(b)(3), (iv) Receive from the bank financial reports that are consoli- and 44(b)(4) of the FDI Act (12 U.S.C. §§ 1831u(b)(l), (b)(3), and dated on a worldwide basis, or comparable information (b)(4)). The Board has determined that New UBS is in compliance that permits analysis of the bank's financial condition on with state filing requirements. Community reinvestment considera worldwide consolidated basis; and ations also are consistent with approval. As discussed more fully (v) Evaluate prudential standards, such as capital adequacy elsewhere in this order, each of Swiss Bank and UBS was adequately and risk asset exposure, on a worldwide basis. capitalized as of the date the application was filed, and, on consumma- These are indicia of comprehensive consolidated supervision; no tion of this proposal, New UBS would continue to be adequately single factor is essential and other elements may inform the Board's capitalized and adequately managed. determination. 35. The Riegle-Neal Act provides that a bank resulting from an 30. See Swiss Bank Corp., 83 Federal Reserve Bulletin 214 (1997); interstate merger may, with Board approval, retain and operate, as a Union Bank of Switzerland, 82 Federal Reserve Bulletin 370 (1996). branch, any office that any bank involved in the merger transaction Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

690 Federal Reserve Bulletin • August 1998 criteria in section 7(d) of the IBA, have been met. In dential examination and other supervisory information. particular, the Board has determined, after consultation The supervisory information considered by the Board inwith the Secretary of the Treasury, that the financial re- cludes information provided by the Swiss Banking Comsources of New UBS are equivalent to those required for a mission and the Bank of England assessing the internal domestic bank to receive approval for interstate branching controls and risk-management policies and procedures that under section 44 of the FDI Act. In view of all the facts of would govern the equity derivatives business of New UBS record, the Board is permitted to approve the establishment in London. After consummation of the proposal New UBS of interstate branches by New UBS under section 5(a) of will use the existing risk management policies, procedures the IBA. and systems of Swiss Bank in connection with the operation of the bank's worldwide equity derivatives business, Establishment of Agencies and Limited Branches. Under and the Board has considered the comments on the prosection 5(a)(7) of the IBA (12 U.S.C. § 3103(a)(7)), as posal in light of the Board's supervisory experience with amended by section 104 of the Riegle-Neal Act, a foreign the risk management systems of Swiss Bank. bank, with the approval of the Board, may establish an Switzerland is a signatory to the Basle risk-based capital agency or limited branch outside its home state, provided standards, and Swiss risk-based capital standards meet the establishment and operation of the agency or limited those established by the Basle Capital Accord. On consumbranch is expressly permitted by the state in which the mation of the merger, the capital of New UBS would be in agency or limited branch is to be established. Outside its excess of the minimum levels that would be required by home state, New UBS proposes to establish a limited the Basle Capital Accord and is considered equivalent to federal branch in San Francisco, California; a limited state- the capital that would be required of a U.S. banking organilicensed branch in New York, New York; and a state- zation. New UBS, furthermore, appears to have the experilicensed agency in Miami, Florida, and Houston, Texas. ence and capacity to support its proposed branches, agen- Based on a review of the relevant law of each of these cies, and representative offices in the United States. states, the Board has determined that New UBS may estab- The Board also has reviewed the capitalization of New lish the agencies and limited branches discussed above, UBS, UBS, SBC Warburg, and UBS Securities in light of subject to the condition that New UBS also receive the the standards set forth in the Section 20 Orders. The Board approval of the OCC for the limited federal branch and of finds the capitalization of each to be consistent with apthe relevant state supervisors for the two state-licensed proval of the proposal and the Section 20 Orders. The agencies and the limited state-licensed branch. Board's determination is based on all the facts of record, including New UBS's projections of the volume of bank- Financial, Managerial, and Other Considerations ineligible securities underwriting and dealing activities to be conducted by UBS Securities. In order to approve the proposal, the Board also must The Board also has carefully reviewed the managerial determine that the proposed nonbanking activities are a resources of the organizations involved in light of examinaproper incident to banking, that is, that the proposed trans- tion reports and the Board's supervisory experience with action "can reasonably be expected to produce benefits to UBS, Swiss Bank, and SBC Warburg.39 The Board has the public . . . that outweigh possible adverse effects, such considered that Swiss Bank has established policies and as undue concentration of resources, decreased or unfair procedures to ensure compliance with this order and the competition, conflicts of interests, or unsound banking Section 20 Orders, including computer, audit, and accountpractices."36 As part of its evaluation of these factors, and the standard set forth in section 211.24(c) of Regulation K, the Board considers the financial condition and managerial (2) UBS has suffered large losses in its equity derivatives business resources of the notificant and its subsidiaries and the effect that have not been fully disclosed by the bank; the transaction would have on such resources.37 The Board (3) UBS does not have adequate internal controls to properly manage its global equity derivatives business; and has carefully considered the financial and managerial re- (4) The financial resources of New UBS will be adversely afsources of the organizations involved in light of all the fected by the boycott of Swiss banks by clients, states, and facts of record, including comments received on the pro- municipalities and pending litigation related to the banks' posal,38 the responses of UBS and Swiss Bank, and confi- handling of accounts of Holocaust victims. 39. One commenter contended that Swiss Bank has improperly denied his daughter access to funds held in an account at branch of the bank in Zurich, Switzerland, and that Swiss Bank has provided false was operating as a main office or branch immediately before the information to commenter and the Board concerning the current status merger transaction. See 12 U.S.C. § I831u(d)(l). Therefore, New and monetary holdings of the account. The Board has forwarded these UBS may retain and operate the state-licensed branches outside of comments to the Swiss Banking Commission, which is the primary Connecticut currently being operated by Swiss Bank and UBS, pro- supervisor of Swiss Bank's activities in Switzerland. The Board notes vided the criteria in section 5(a)(3) of the IBA have been met. that the Swiss Banking Commission has adequate supervisory author- 36. 12 U.S.C. § 1843(c)(8). ity to investigate commenter's claims and provide redress if the 37. See 12 C.F.R. 225.26; see also The Fuji Bank, Limited, 75 Commission determines that such action is necessary or appropriate. Federal Reserve Bulletin 94 (1989); Bayerische Vereinsbank, 73 Fed- The Board also has considered commenter's contentions in light of all eral Reserve Bulletin 155 (1987). the facts of record, including confidential examination and other 38. These comments include contentions that: supervisory information assessing the managerial resources of Swiss (1) Merger-related costs will reduce the profits of New UBS; Bank. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 691 ing systems, internal risk management controls, and the bined organization to make additional banking and nonnecessary operational and managerial infrastructure. New banking investments in the United States and overseas. UBS has stated that these policies and procedures will be Based on all the facts of record, the Board has determined used by UBS Securities following its merger with SBC that performance of the proposed activities by Notificants Warburg to ensure compliance with this order and the can reasonably be expected to produce public benefits that Section 20 Orders. On the basis of these and all the facts of outweigh any adverse effects of the proposal. Accordingly, record, including the commitments provided in this case, the Board has determined that performance of the proposed the proposed managerial structure and risk management activities by UBS and New UBS is a proper incident to systems of New UBS and UBS Securities, and information banking for purposes of section 4(c)(8) of the BHC Act. received from the NYSBD, the Volcker Commission, and the Swiss Banking Commission, the Board has concluded Grandfathered Nonbanking Activities that financial and managerial considerations are consistent with approval of the notice. UBS currently engages through UBS Securities in mer- The Board also has carefully considered the competitive chant banking activities in the United States that are not effects of the proposed transaction under section 4 of the permissible under section 4 of the BHC Act.40 UBS claims BHC Act. To the extent that UBS and Swiss Bank offer authority to engage in these activities under section 8(c) of different types of nonbanking products, the proposed acqui- the IBA, which permits an eligible foreign bank to consition would result in no loss of competition. In those tinue to engage in nonbanking activities in the United markets in which the nonbanking product offerings of UBS States that the foreign bank conducted directly or through and Swiss Bank overlap, such as securities brokerage, an affiliate on July 26, 1978, or that were covered by an underwriting and dealing in bank-ineligible securities, and application filed by the foreign bank or an affiliate on or investment advisory activities, there are numerous existing before July 26, 1978. New UBS has requested that it be and potential competitors. Consummation of the proposal, permitted to continue to engage in merchant banking activtherefore, would have a de minimis effect on competition in ities in the United States after consummation of the prothe market for these services. Based on all the facts of posal in reliance on the grandfather rights provided in record, the Board has concluded that the proposal would section 8(c) of the IBA.41 not result in any significantly adverse competitive effects in The Board believes that the grandfather rights provided any relevant market. by section 8(c) of the IBA should be construed narrowly to As noted above, Notificants have committed that, follow- ensure a fair competitive playing field to the extent consising the proposed acquisition, UBS Securities will conduct tent with statutory requirements. After careful review of its bank-ineligible securities underwriting and dealing ac- the IBA in light of the facts of this case, the Board tivities in accordance with the prudential framework estab- concludes that New UBS does not qualify for grandfather lished by the Board's Section 20 Orders. Under the frame- rights under section 8(c) of the IBA and that any grandfawork and conditions established in this order and the ther rights that UBS currently may have under section 8(c) Section 20 Orders, and based on all the facts of record, the terminate on consummation of the proposal.42 In connec- Board concludes that the underwriting and dealing activi- tion with the proposal UBS will merge with and into New ties in bank-ineligible securities proposed by Notificants UBS. Accordingly, after consummation, a new top-tier are not likely to result in significantly adverse effects that corporate entity would exist, New UBS. Because New would outweigh the public benefits. Similarly, the Board concludes that the conduct of the other proposed nonbanking activities by Notificants under the framework and con- 40. 12 U.S.C. § 3106(c)(l). UBS filed an application with the SEC ditions established in this order, prior orders and Regula- to register UBS Securities as a broker-dealer prior to July 26, 1978. tion Y is not likely to result in any significantly adverse 41. ICP contends that UBS does not currently have grandfather rights under section 8(c) of the IBA to engage in merchant banking effects that would outweigh the public benefits of the activities in the United States, and that any grandfather rights that proposal. UBS may have under section 8(c) of the IBA would terminate on The Board expects that the proposed acquisition would consummation of the proposal because Swiss Bank would be the true provide added convenience to customers of both UBS and survivor of the proposed transaction. Alternatively, ICP requests that the Board hold a hearing and exercise its authority under section 8(c) Swiss Bank. Notificants have indicated that the transaction to terminate the grandfather rights of UBS. would allow the combined organization to expand the 42. To sustain the argument that New UBS may make merchant range of products and services available to customers of banking investments, New UBS must meet two requirements: that UBS and Swiss Bank. Notificants also have stated that the UBS has grandfather rights to make merchant banking investments and that any such grandfather rights of UBS transfer to New UBS. proposed transaction would allow the combined organiza- New UBS argues that UBS has grandfather rights to make merchant tion to achieve economies of scale and operational efficien- banking investments because UBS had applied to engage in securities cies through the combination of the distribution structure, brokerage, underwriting, and dealing activities in the United States on product development efforts, and back office and techno- the grandfather date and that these activities have evolved in the marketplace since that time to include making merchant banking logical infrastructure of UBS and Swiss Bank. In addition, investments. Consistent with principles of statutory construction, the Notificants have stated that the transaction is expected to Board has narrowly interpreted grandfather rights and, in any event, produce cost savings, allow the combined organization to for the reasons discussed in this order, has determined that New UBS more profitably allocate its equity, and permit the com- is not entitled to any grandfather rights. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

692 Federal Reserve Bulletin • August 1998 UBS is a newly formed entity, New UBS does not meet the that New UBS does not qualify for grandfather rights to criteria for grandfather rights under section 8(c) of the engage in nonbanking activities in the United States under IBA.43 section 8(c) of the IBA. Section 8 of the IBA grants a Notificants contend, however, that any grandfather rights two-year period in which to conform nonbanking activities that UBS currently may have under section 8(c) of the IBA conducted under that section.48 Accordingly, New UBS should transfer to New UBS on consummation of the must conform all investments made in reliance on secproposal. The Board previously has permitted one corpo- tion 8(c) of the IBA to the requirements of the BHC Act rate entity to receive the section 8(c) grandfather rights of within two years of the date of this order. another entity in the case of an internal corporate reorganization of a foreign bank with grandfather rights.44 In this Conclusion case, New UBS results from the merger of two large and nearly equal-sized foreign banking organizations and New On the basis of all the facts of record, the Board has UBS would operate under the existing banking charter of determined that the notice and application should be, and Swiss Bank, rather than UBS.45 After consummation of the hereby are, approved, subject to all the terms and condiproposal, a new organization (New UBS) will exist that tions in this order and the Section 20 Orders, as modified controls all of the existing banking and nonbanking assets by the Modification Orders.49 currently owned by UBS and Swiss Bank and that, as a The Board's approval of the nonbanking aspects of the result, will be significantly larger than UBS in terms of proposal extends only to activities conducted within the assets, capital, market capitalization, and number of bank- limitations of those orders and this order, including the ing and nonbanking offices in the United States and over- Board's reservation of authority to establish additional seas. Unlike the previous case, the shareholders of New limitations to ensure that Notificants' activities are consis- UBS will include a substantial number of shareholders tent with safety and soundness, avoidance of conflicts of who did not own shares of UBS prior to the transaction, interests, and other relevant considerations under the BHC and current directors of Swiss Bank will represent Act. Underwriting and dealing in any manner other than as 50 percent of the board of directors of New UBS.46 New approved in this order and the Section 20 Orders (as UBS, moreover, is an entity that currently is jointly owned modified by the Modification Orders) is not within the by UBS and Swiss Bank and is not, as in the previous case, scope of the Board's approval and is not authorized for a company beneficially owned solely by the shareholders UBS Securities. The Board's determination is subject to all of the grandfathered foreign company.47 the terms and conditions set forth in Regulation Y, includ- Based on these and all the facts of record, and viewing ing those in sections 225.7 and 225.25(c) of Regulation Y the proposed transaction as a whole, the Board concludes (12 C.F.R. 225.7 and 225.25(c)), and to the Board's authority to require such modification or termination of the activities of a bank holding company or any of its subsid- 43. To be eligible for grandfather rights under section 8(c) of the iaries as the Board finds necessary to ensure compliance IBA, a foreign bank or other company must either (i) have operated a with, and to prevent evasion of, the provisions of the BHC branch or agency in a state or controlled a commercial lending company organized under state law on the date of enactment of the Act and the Board's regulations and orders issued thereun- IBA, or (ii) have established a branch in a state after the date of der. enactment of the IBA under an application that was filed on or before In addition, should any restrictions on access to informa- July 26, 1978. See 12 U.S.C. 3106(c)(l). New UBS did not operate a tion on the operations or activities of New UBS or any of branch or agency in a state or control a commercial lending company organized under state law on the date of enactment of the IBA, nor did its affiliates subsequently interfere with the Board's ability New UBS have an application to establish a branch pending before a state on July 26, 1978. 44. See Letter from J. Virgil Mattingly, General Counsel of the 48. See 12 U.S.C. § 3106(c)(2). Board, to Allen I. Isaacson, Esq., dated March 8, 1989. 49. Certain commenters contend that the Board should delay action 45. The Board also notes that New UBS has selected the current on the proposal until other authorities, organizations or independent home state of Swiss Bank, rather than UBS. as its home state for commissions, including the Volcker Commission, complete their inpurposes of Federal banking laws. vestigations into matters related to the retention and disposition by 46. In this case, 40 percent of the shares of New UBS would be Swiss banks of assets owned by Holocaust victims, or should conduct owned by existing shareholders of Swiss Bank. its own investigation into these matters. One commenter also contends 47. Notificants contend that the proposed transaction is similar to a that the Board should conduct an investigation into the global derivatransaction reviewed and permitted by the Board under section 4(f) of tives activities of UBS. The Board is required under applicable law the BHC Act. See Letter from William W. Wiles, Secretary of the and its regulations to act on applications submitted under the BHC Act Board, to Harvey N. Bock, Esq., dated May 28, 1997 (involving and the IBA within specified time periods. As discussed above, the merger of Dean, Witter, Discover & Co. ("Dean Witter") and Morgan Board has carefully reviewed the record in this case, including infor- Stanley Group, Inc.). The statutory grandfather rights are not the same mation received from the Volcker Commission, the State Department under section 8(c) of the IBA as under section 4(f) of the BHC Act, and the NYSBD and confidential examination and other supervisory and the form and substance of the two transactions are different. In information assessing the financial and managerial resources of the this transaction, for example. UBS will merge with and into New organizations involved, in light of the Board's limited jurisdiction UBS, the corporate existence of UBS will cease after consummation under the BHC Act and the IBA. Based on all the facts of record, the of the proposal, and New UBS will operate under the banking charter Board concludes that the record is sufficient to act on this proposal of a nongrandfathered company (Swiss Bank), while in the Dean under the factors the Board is required to consider under the relevant Witter transaction, the company with grandfather rights (Dean Witter) statutes and that delay of this proposal or an independent investigation was at all times the ultimate parent and surviving company. by the Board is not warranted. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 693 to determine and enforce compliance by New UBS or its its findings and decision, and, as such, may be enforced in affiliates with applicable federal statutes, the Board may proceedings under applicable law. require termination of any of the direct or indirect activities The proposal shall not be consummated later than three of New UBS in the United States or, in the case of an office months after the effective date of this order, unless such licensed by the OCC, recommend termination of such period is extended for good cause by the Board or by the office. Federal Reserve Bank of New York, acting pursuant to The Board's decision is specifically conditioned on com- delegated authority. pliance with all the commitments made in connection with By order of the Board of Governors, effective June 8, this notice and application, including the commitments 1998. discussed in this order, and the conditions set forth in this order and the above-noted Board regulations and orders.™ Voting for this action: Chairman Greenspan and Governors Kelley, These commitments and conditions are deemed to be con- Meyer, Ferguson, and Gramlich. Absent and not voting: Vice Chair Rivlin and Governor Phillips. ditions imposed in writing by the Board in connection with ROBERT DEV. FRIERSON Associate Secretary of the Board 50. The Board's authority to approve the establishment of the proposed offices parallels the continuing authority of the OCC to UBS or the authority of the various states and their agents, the license federal offices, or of the various states to license state offices, relevant state supervisors, to license the various state offices, in of a foreign bank. The Board's approval of this application does not accordance with any terms or conditions that the OCC or the relevant supplant the authority of the OCC to license the federal offices of New state supervisors, as the case may be. may impose. APPLICATIONS APPROVED UNDER BANK HOLDING COMPANY ACT By the Secretary of the Board Recent applications have been approved by the Secretary of the Board as listed below. Copies are available upon request to the Freedom of Information Office, Office of the Secretary, Board of Governors of the Federal Reserve System, Washington, D.C. 20551. Section 3 Applicant(s) Bank(s) Effective Date BankFirst Corporation, First Franklin Bancshares, Inc., June 3, 1998 Knoxville, Tennessee Athens, Tennessee First National Bank and Trust Company, Athens, Tennessee Compass Bancshares, Inc.. Compass Banks of Texas, Inc., June 25, 1998 Birmingham, Alabama Birmingham, Alabama Compass Bancorporation of Texas, Inc., Wilmington, Delaware Hill Country Bank, Austin, Texas First American Corporation, Peoples Bank, June 5, 1998 Nashville, Tennessee Dickson, Tennessee Norwest Corporation, MidAmerica Bancshares, Inc., June 2, 1998 Minneapolis, Minnesota Newport, Minnesota Minnesota Bancshares, Inc., Newport, Minnesota Wisconsin Bancshares, Inc., Newport, Minnesota Charter Bancorporation, Inc., Scottsdale, Arizona The Bank of New Mexico Holding Company, Albuquerque, New Mexico Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

694 Federal Reserve Bulletin • August 1998 Section 4 Applicant(s) Bank(s) Effective Date Norwesl Corporation, Emjay Corporation, June 3, 1998 Minneapolis, Minnesota Milwaukee, Wisconsin Norwest Corporation, Fidelity Funding, Inc., June 30, 1998 Minneapolis, Minnesota Dallas, Texas Norwest Financial Services, Inc, Des Moines, Iowa Norwest Financial, Inc., Des Moines, Iowa State Street Corporation, Askari, Inc., June 23, 1998 Boston, Massachusetts New York, New York SSB Investments, Inc., Boston, Massachusetts Sections 3 and 4 Applicant(s) Bank(s) Effective Date Mercantile Bancorporation Inc., Firstbank of Illinois Company, June 2, 1998 St. Louis, Missouri Springfield, Illinois Ameribanc, Inc., St. Louis, Missouri 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 Applicant(s) Bank(s) Reserve Bank Effective Date 1st Brookfield, Inc. Employee Stock 1st Brookfield, Inc., Chicago May 29, 1998 Ownership Plan, Brookfield, Illinois Brookfield, Illinois The First National Bank of Brookfield, Brookfield, Illinois Avon State Bank Employee Stock Avon Bancshares, Inc., Minneapolis May 28, 1998 Ownership Plan and Trust, Avon, Minnesota Avon, Minnesota BB&T Corporation, BB&T Bankcard Corporation, Richmond May 22, 1998 Winston-Salem, North Carolina Columbus, Georgia Cambridge Financial Group, Inc., Cambridge Savings Bank, Boston June 19, 1998 Cambridge, Massachusetts Cambridge, Massachusetts Central Bancompany, Inc., Higginsville Bancshares, Inc., St. Louis June 17, 1998 Jefferson City, Missouri Higginsville, Missouri First State Bank of Higginsville/Odessa, Higginsville, Missouri Central Trust Company, VH Bancorporation, Kansas City June 1, 1998 Lander, Wyoming Edina, Minnesota CNB Holdings, Inc., Chattahoochee National Bank, Atlanta May 29, 1998 Atlanta, Georgia Alpharetta, Georgia ComBanc, Inc., The Commercial Bank, Cleveland June 12, 1998 Delphos, Ohio Delphos, Ohio Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 695 Section 3—Continued Applicant(s) Bank(s) Reserve Bank Effective Date Commerce Bancorp, Inc., Commerce Bank/Delaware, National Philadelphia June 22, 1998 Cherry Hill, New Jersey Association, Wilmington, Delaware Community Bankshares, Inc., Florence National Bank, Richmond May 28, 1998 Orangeburg, South Carolina Florence, South Carolina Community First Bankshares, Inc., Western Bancshares of Las Cruces, Inc., Minneapolis June 10, 1998 Fargo, North Dakota Carlsbad, New Mexico Dauphin Bancorp, Inc., First National Bank of Liverpool, Philadelphia June 16, 1998 Harrisburg, Pennsylvania Liverpool, Pennsylvania Diamond Bancorp, Inc., Cardinal Bancorp II, Inc., St. Louis June 17, 1998 Washington, Missouri St. Louis, Missouri United Bank of Union, Union, Missouri Exchange Bancshares, Inc., Towne Bank, Cleveland June 18, 1998 Luckey, Ohio Perrysburg, Ohio The Exchange Bank, Luckey, Ohio Farmers Bancshares, Inc., Beverly Bankshares, Inc., Kansas City June 11, 1998 Lincoln, Kansas Beverly, Kansas Beverly State Bank, Beverly, Kansas First Commerce Bancshares, Inc., Western Nebraska National Bank, Kansas City June 3, 1998 Lincoln, Nebraska Valentine, Nebraska First National Bank at St. James First National Agency at St. James, Inc., Minneapolis June 16, 1998 ESOP, St. James, Minnesota St. James, Minnesota First TeleBanc Corporation, Boca Raton First National Bank, Atlanta June 15, 1998 Sanford, Florida Boca Raton, Florida Florida Banks, Inc., First National Bank of Tampa, Atlanta June 17, 1998 Jacksonville, Florida Tampa, Florida Frandset Financial Corporation, Taylor Bancshares, Inc., Minneapolis June 24, 1998 Forest Lake, Minnesota North Mankato, Minnesota Gold Bane Corporation, Farmers State Bancshares of Sabetha, Kansas City June 18, 1998 Leawood, Kansas Inc., Sabetha, Kansas Guaranty Capital Corporation, Hollandale Capital Corporation, St. Louis May 22, 1998 Belzoni, Mississippi Hollandale, Mississippi Bank of Hollandale, Hollandale, Mississippi Heritage Financial Corporation, North Pacific Bancorporation, San Francisco May 28, 1998 Olympia, Washington Tacoma, Washington North Pacific Bank, Tacoma, Washington Hometown Bancshares, Inc., Union Bank of Tyler County, Cleveland June 1, 1998 Middlebourne, West Virginia Middlebourne, West Virginia InterWest Bancorp, Inc., Pacific Northwest Bank, San Francisco May 20, 1998 Oak Harbor, Washington Seattle, Washington The K&Z Company, LLC, The Upstate National Bank, New York June 15, 1998 Brooklyn, New York Lisbon, New York Merchants Holding Company, BRAD, Inc., Minneapolis June 17, 1998 Winona, Minnesota Black River Falls, Wisconsin Black River Country Bank, Black River Falls, Wisconsin Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

696 Federal Reserve Bulletin • August 1998 Section 3—Continued Applicant(s) Bank(s) Reserve Bank Effective Date M.I.F. Limited, Chisholm Bancshares, Inc., Minneapolis June 24, 1998 Chisholm, Minnesota Chisholm, Minnesota NW Bancorp Inc., Billage Bank and Trust, Chicago May 29, 1998 Prospect Heights, Illinois North Barrington, Illinois Ploetz Investments Limited Bank of Prairie du Sac, Chicago June 12, 1998 Partnership, Prairie du Sac, Wisconsin Prairie du Sac, Wisconsin Portage Bancshares, Inc., Portage Community Bank, Cleveland May 28, 1998 Ravenna, Ohio Ravenna, Ohio Premier Financial Bancorp, Inc.. The Bank of Philippi, Inc., Cleveland June 9, 1998 Georgetown, Kentucky Philippi, West Virginia Premier Financial Bancorp, Inc.. Boone County Bank, Inc., Cleveland June 10, 1998 Georgetown, Kentucky Madison, West Virginia PSB Bancorp, Inc., Pennsylvania Savings Bank, Philadelphia June 15, 1998 Philadelphia, Pennsylvania Philadelphia, Pennsylvania Regions Financial Corporation, Etowah Bank, Atlanta June 11, 1998 Birmingham, Alabama Canton, Georgia Regions Financial Corporation, First Community Banking Services, Atlanta June 11, 1998 Birmingham, Alabama Peachtree City, Georgia First Community Bank, Peachtree City, Georgia Regions Financial Corporation, Jacobs Bank, Atlanta June 11, 1998 Birmingham, Alabama Scottsboro, Alabama Regions Financial Corporation, Villages Bankshares, Inc., Atlanta June 11, 1998 Birmingham, Alabama Tampa, Florida The Village Bank of Florida, Tampa, Florida Rigler Investment Co., Figge Bancshares, Inc., Chicago June 10, 1998 New Hampson, Iowa Ossian, Iowa RVB Bancshares, Inc., River Valley Bank, St. Louis June 25, 1998 Russellville, Arkansas Russellville, Arkansas Salisbury Bancorp, Inc., Salisbury Bank and Trust Company, Boston June 18, 1998 Lakeville, Connecticut Lakeville, Connecticut Spring Hill Holdings Corporation, Spring Hill State Bank, Dallas June 24, 1998 Longview, Texas Longview, Texas Spring Hill (Delaware), Inc., Wilmington, Delaware Star Bane Corporation, Trans Financial, Inc., Cleveland May 29, 1998 Cincinnati, Ohio Bowling Green, Kentucky Trans Financial Bank, National Association, Bowling Green, Kentucky Trans Financial Bank Tennessee, National Association, Nashville, Tennessee Town Bankshares, Ltd., Delafield State Bank, Chicago June 19, 1998 Delafield, Wisconsin Delafield, Wisconsin Triangle Bancorp, Inc., United Federal Savings Bank, Richmond June 24, 1998 Raleigh, North Carolina Rocky Mount, North Carolina UB&T Financial Services United Bank & Trust Company, Atlanta May 22, 1998 Corporation, Rockmart, Georgia Rockmart, Georgia Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 697 Section 3—Continued Applicant(s) Bank(s) Reserve Bank Effective Date Union Bankshares Corporation, Rappahannock Bankshares, Inc., Richmond June 11, 1998 Bowling Green, Virginia Washington, Virginia The Rappahannock National Bank of Washington, Washington, Virginia Union Planters Corporation, Alvin Bancshares, Inc., St. Louis June 10, 1998 Memphis, Tennessee Alvin, Texas Union Planters Holding Corporation, Alvin Bancshares Delaware, Inc., Memphis, Tennessee Alvin, Texas Alvin State Bank, Alvin, Texas United Security Bancorporation, Grant National Bank, San Francisco June 24, 1998 Spokane, Washington Ephrata, Washington WTSB Bancorp, Inc., West Texas State Bank, Dallas June 15, 1998 Snyder, Texas Snyder, Texas WTSB Delaware Bancorp, Inc., Dover, Delaware Section 4 Applicant(s) Nonbanking Activity/Company Reserve Bank Effective Date The Bank of Nova Scotia, American Securities Transfer & Trust New York May 29, 1998 Toronto, Ontario, Canada Incorporated, The Bank of Nova Scotia New York Denver, Colorado Trust Company, New York, New York BB&T Corporation, Dealers Credit, Incorporated, Richmond May 28, 1998 Winston-Salem, North Carolina Menomonee Falls, Wisconsin CITBA Financial Corporation, Independent Bankers Life Insurance Chicago June 12, 1998 Mooresville, Indiana Company of Indiana, Phoenix, Arizona CBOT Financial Corporation, CBOT Mortgage, Dallas June 22, 1998 New Waverly, Texas Conroe, Texas CBOT Financial Corporation of Delaware, Wilmington, Delaware FirstMerit Corporation, Security First Corp., Cleveland June 17, 1998 Akron, Ohio Mayfield Heights, Ohio Great Southern Bancorp, Inc., Great Southern Bank, FSB, St. Louis June 15, 1998 Springfield, Missouri Springfield, Missouri Great Southern Capital Management, Inc., Springfield, Missouri Investors Financial Services Corp., AMT Capital Services, Inc., Boston May 29, 1998 Boston, Massachusetts New York, New York AMT Capital Advisors, Inc., New York, New York Orchard Valley Financial MegaBank Financial Corporation, Kansas City June 18, 1998 Corporation, Englewood, Colorado Englewood, Colorado MegaBank, Englewood, Colorado Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

698 Federal Reserve Bulletin • August 1998 Section 4—Continued Applicant(s) Nonbanking Activity/Company Reserve Bank Effective Date Palm Desert Investments, To engage de novo, directly, in an San Francisco June 9, 1998 Palm Desert, California incidental data processing activity Republic Bancshares, Inc., Bankers Savings Bank, FSB, Atlanta June 4, 1998 St. Petersburg, Florida Coral Gables, Florida Republic Bancshares, Inc., Republic Bank, F.S.B., Atlanta June 15, 1998 St. Petersburg, Florida St. Petersburg, Florida United Community Bancshares, Inc., United Trust Company, National Minneapolis June 24, 1998 Eagan, Minnesota Association, Eagan, Minnesota Sections 3 and 4 Applicant(s) Nonbanking Activity/Company Reserve Bank Effective Date FMB Bankshares, Inc., Canton Bancshares, Inc., Minneapolis June 3, 1998 Madison, South Dakota Canton, South Dakota First American Bank, Canton, South Dakota Fairview Insurance Agency, Canton, South Dakota APPLICATIONS APPROVED UNDER BANK MERGER ACT By the Secretary of the Board Recent applications have been approved by the Secretary of the Board as listed below. Copies are available upon request to the Freedom of Information Office, Office of the Secretary, Board of Governors of the Federal Reserve System, Washington, D.C. 20551. Applicant(s) Bank(s) Effective Date Bank of Cushing and Trust Company, BancFirst, June 29, 1998 Cushing, Oklahoma Oklahoma City, Oklahoma Compass Bank, Compass Bancorporation of Texas, Inc., June 25, 1998 Houston, Texas Wilmington, Delaware Hill Country Bank, Houston, Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legal Developments 699 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. Applicant(s) Bank(s) Reserve Bank Effective Date Alpha Community Bank, Citizens National Bank of Toluca, Chicago May 28, 1998 Washburn, Illinois Toluca, Illinois Minonk State Bank, Minonk, Illinois The Bank of Belton, Carolina First Bank, Richmond May 29, 1998 Belton, South Carolina Greenville, South Carolina Colonial Bank, Commercial National Bank, Atlanta June 10, 1998 Montgomery, Alabama Daytona Beach, Florida The First Security Bank, The First Security Bank, Kansas City May 27, 1998 Fort Lupton, Colorado Craig, Colorado Peninsula Trust Bank, First Virginia Bank-Commonwealth, Richmond June 11, 1998 Gloucester, Virginia Grafton, Virginia Huron Community Bank, First of America Bank, Chicago June 22, 1998 East Tawas, Michigan Kalamazoo, Michigan RCB Bank, Bank of Inola, Kansas City June 2, 1998 Claremore. Oklahoma Broken Arrow, Oklahoma Republic Security Bank, UniFirst Federal Savings Bank, Atlanta May 21. 1998 West Palm Beach, Florida Hollywood, Florida Triane Bank, United Federal Savings Bank, Richmond June 24, 1998 Raleigh, North Carolina Rocky Mount, North Carolina Wesbanco Bank Wheeling, Wesbanco Bank Barnesville, Cleveland June 3, 1998 Wheeling, West Virginia Barnesville, Ohio Western Bank of Cody, First National Bank, Kansas City May 26, 1998 Cody, Wyoming Worland, Wyoming WestStar Bank, Glenwood Independent Bank, Kansas City June 10, 1998 Vail, Colorado Glenwood Springs, Colorado PENDING CASES INVOLVING THE BOARD OF GOVERNORS This list of pending cases does not include suits against the the United States Court of Appeals for the District of Federal Reserve Banks in which the Board of Governors is not Columbia Circuit of a petition for review of a Board order named a party. dated May 14, 1997, approving the application of Bane One Corporation, Inc., Columbus, Ohio, to merge with First Board of Governors v. Carrasco, No. 98 Civ. 3474 (LAK) USA, Inc., Dallas, Texas. On June 22, 1998, the Supreme (S.D.N.Y., filed May 15, 1998). Action to freeze assets of Court denied certiorari. individual pending administrative adjudication of civil Logan v. Greenspan, No. l:98CV00049 (D.D.C., filed Janumoney penalty assessment by the Board. On May 26, 1998, ary 9, 1998). Employment discrimination complaint. the court issued a preliminary injunction restraining the transfer or disposition of the individual's assets and appoint- Goldman v. Department of the Treasury, No. 1-97-CV-3798 ing the Federal Reserve Bank of New York as receiver for (N.D. Ga., filed December 23, 1997). Declaratory judgment those assets. action challenging Federal Reserve notes as lawful money. Research Triangle Institute v. Board of Governors, No. 97- On March 2, 1998, the Board filed a motion to dismiss the 1719 (U.S. Supreme Court, filed April 28, 1998). Petition action. for writ of certiorari to review dismissal by the United Kerr v. Department of the Treasury, No. CV-S-97-01877- States Court of Appeals for the Fourth Circuit of a contract DWH (S.D. Nev., filed December 22, 1997). Challenge to claim against the Board. income taxation and Federal Reserve notes. Inner City Press/Community on the Move v. Board of Gover- Allen v. Indiana Western Mortgage Corp., No. 97-7744 RJK nors, No. 97-1514 (U.S. Supreme Court, filed March 12, (CD. CaL, filed November 12, 1997). Customer dispute 1998). Petition for writ of certiorari to review dismissal by with a bank. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

700 Federal Reserve Bulletin • August 1998 Patrick v. United States, No. 97-75564 (E.D. Mich., filed pensatory and punitive damages for alleged violations of November 7, 1997). Action for damages arising out of tax civil rights by federal savings bank. On May 12, 1998, the dispute. court of appeals affirmed the district court's dismissal. Leuthe v. Office of Financial Institution Adjudication, No. The New Mexico Alliance v. Board of Governors, No. 98- 97-1826 (3d Cir., filed October 22, 1997). Appeal of district 1049 (D.C. Cir, transferred as of January 21, 1998). Peticourt dismissal of action against the Board and other Fedtion for review of a Board order dated December 16, 1996, eral banking agencies challenging the constitutionality of approving the acquisition by NationsBank Corporation and the Office of Financial Institution Adjudication. On June 8, NB Holdings Corporation, both of Charlotte, North Caro- 1998, the court of appeals affirmed the district court's lina, of Boatmen's Bancshares, Inc., St. Louis, Missouri. On dismissal of the action. January 21, 1998, the United States Court of Appeals for Patrick v. United States, No. 97-75017 (E.D. Mich., filed the Tenth Circuit ordered the petition transferred to the September 30, 1997). Action for damages arising out of tax United States Court of Appeals for the District of Columbia dispute. Circuit. On May 27, 1998, the court of appeals granted the Artis v. Greenspan, No. 97-5235 (D.C. Cir, filed Septem- Board's motion to dismiss the petition. ber 19, 1997). Appeal of district court order dismissing employment discrimination class action. American Bankers Insurance Group, Inc. v. Board of Gover- Towe v. Board of Governors, No. 97-71143 (9th Cir., filed nors, No. 96-CV-2383-EGS (D.D.C., filed October 16, September 15, 1997). Petition for review of a Board order 1996). Action seeking declaratory and injunctive relief indated August 18, 1997, prohibiting Edward Towe and validating a new regulation issued by the Board under the Thomas E. Towe from further participation in the banking Truth in Lending Act relating to treatment of fees for debt industry. cancellation agreements. On October 18, 1996, the district In re: Subpoena Duces Tecum Served on the Office of the court denied plaintiffs' motion for a temporary restraining Comptroller of the Currency, No. 97-5229 (D.C. Cir, filed order. On April 13, 1998, the district court granted the September 12, 1997). Appeal of district court order denying Board's motion for summary judgment. motion to compel production of pre-decisional supervisory Board of Governors v. Pharaon, No. 98-6101 (2d Cir, filed documents and testimony sought in connection with an May 4, 1998). Appeal of partial denial of Board's motion action by Bank of New England Corporation's trustee in bankruptcy against the Federal Deposit Insurance Corpora- for summary judgment in action to freeze assets of individtion. On June 26, 1998, the court of appeals reversed and ual pending administrative adjudication of civil money penremanded the case to the district court. alty assessment by the Board. On May 22, 1998, the appellee filed a cross-appeal from the partial final judgment. Clarkson v. Greenspan, No. 97-CV-2035 (D.D.C., filed September 5, 1997). Freedom of Information Act case. On January 20, 1998, the Board filed a motion to dismiss the action. FINAL ENFORCEMENT ORDERS ISSUED BY THE Bettersworth v. Board of Governors, No. 97-CA-624 (W.D. BOARD OF GOVERNORS Tex., filed August 21, 1997). Privacy Act case. Wilkins v. Warren, No. 98-1320 (4th Cir. 1998). Appeal of Faisal Saud Al-Fulaij District Court dismissal of action involving customer dispute with a bank. A Former Institution-Affiliated Party of Greeff v. Board of Governors, No. 97-1976 (4th Cir., filed Credit and Commerce American Holdings, N.V. June 17, 1997). Petition for review of a Board order dated Netherland Antilles May 19, 1997, approving the application by Allied Irish Banks, pic, Dublin, Ireland, and First Maryland Bancorp, The Federal Reserve Board announced on June 23, 1998, Baltimore, Maryland, to acquire Dauphin Deposit Corpora- the issuance of an Order of Prohibition against Faisal Saud tion, Harrisburg, Pennsylvania, and thereby acquire Dau- Al-Fulaij, a former institution-affiliated party of Credit and phin's banking and nonbanking subsidiaries. commerce American Holdings, N.V., formerly the parent Maunsell v. Greenspan, No. 97-6131 (2d Cir, filed May 22, bank holding company over the First American banking 1997). Appeal of district court dismissal of action for com- organization. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

701 Membership of the Board of Governors of the Federal Reserve System, 1913-98 APPOINTIVE MEMBERS' Federal Reserve Date of initial Other dates and information relating Name District oath of office to membership - Charles S. Hamlin Boston Aug. 10, 1914 Reappointed in 1916 and 1926. Served until Feb. 3, 1936.3 Paul M. Warburg New York Aug. 10, 1914 Term expired Aug. 9, 1918. Frederic A. Delano Chicago Aug. 10, 1914 Resigned July 21, 1918. W.P.G. Harding Atlanta Aug. 10, 1914 Term expired Aug. 9, 1922. Adolph C. Miller San Francisco Aug. 10, 1914 Reappointed in 1924. Reappointed in 1934 from the Richmond District. Served until Feb. 3, 1936.3 Albert Strauss New York Oct. 26, 1918 Resigned Mar. 15, 1920. Henry A. Moehlenpah Chicago Nov. 10, 1919 Term expired Aug. 9, 1920. Edmund Platt New York June 8, 1920 Reappointed in 1928. Resigned Sept. 14, 1930. David C. Wills Cleveland Sept. 29, 1920 Term expired Mar. 4, 1921. John R. Mitchell Minneapolis May 12, 1921 Resigned May 12, 1923. Milo D. Campbell Chicago Mar. 14, 1923 Died Mar. 22, 1923. Daniel R. Crissinger Cleveland May 1, 1923 Resigned Sept. 15, 1927. George R. James St. Louis May 14, 1923 Reappointed in 1931. Served until Feb. 3, 1936.4 Edward H. Cunningham Chicago May 14, 1923 Died Nov. 28, 1930. Roy A. Young Minneapolis Oct. 4, 1927 Resigned Aug. 31, 1930. Eugene Meyer New York Sept. 16, 1930 Resigned May 10, 1933. Wayland W. Magee Kansas City May 18, 1931 Term expired Jan. 24, 1933. Eugene R. Black Atlanta May 19, 1933 Resigned Aug. 15, 1934. M.S. Szymczak Chicago June 14, 1933 Reappointed in 1936 and 1948. Resigned May 31, 1961. J.J.Thomas Kansas City June 14, 1933 Served until Feb. 10, 1936.1 Marriner S. Eccles San Francisco Nov. 15, 1934 Reappointed in 1936, 1940. and 1944. Resigned July 14, 1951. Joseph A. Broderick New York Feb. 3. 1936 Resigned Sept. 30, 1937. John K. McKee Cleveland Feb. 3. 1936 Served until Apr. 4, 1946.' Ronald Ransom Atlanta Feb. 3, 1936 Reappointed in 1942. Died Dec. 2, 1947. Ralph W. Morrison Dallas Feb. 10, 1936 Resigned July 9, 1936. Chester C. Davis Richmond June 25, 1936 Reappointed in 1940. Resigned Apr. 15, 1941. Ernest G. Draper New York Mar. 30, 1938 Served until Sept. 1, 1950.' Rudolph M. Evans Richmond Mar. 14, 1942 Served until Aug. 13, 1954.1 James K. Vardaman, Jr. St. Louis Apr. 4, 1946 Resigned Nov. 30, 1958. Lawrence Clayton Boston Feb. 14, 1947 Died Dec. 4, 1949. Thomas B. McCabe Philadelphia Apr. 15, 1948 Resigned Mar. 31, 1951. Edward L. Norton Atlanta Sept. 1, 1950 Resigned Jan. 31, 1952. Oliver S. Powell Minneapolis Sept. 1, 1950 Resigned June 30, 1952. Wm. McC. Martin, Jr New York April 2, 1951 Reappointed in 1956. Term expired Jan. 31, 1970. A.L. Mills, Jr San Francisco Feb. 18, 1952 Reappointed in 1958. Resigned Feb. 28, 1965. J.L.Robertson Kansas City Feb. 18, 1952 Reappointed in 1964. Resigned Apr. 30, 1973. C. Canby Balderston Philadelphia Aug. 12, 1954 Served through Feb. 28, 1966. Paul E. Miller Minneapolis Aug. 13, 1954 Died Oct. 21, 1954. Chas. N. Shepardson Dallas Mar. 17, 1955 Retired Apr. 30, 1967. G.H. King, Jr Atlanta Mar. 25, 1959 Reappointed in 1960. Resigned Sept. 18, 1963. George W. Mitchell Chicago Aug. 31, 1961 Reappointed in 1962. Served until Feb. 13, 1976.1 J. Dewey Daane Richmond Nov. 29, 1963 Served until Mar. 8, I974.3 Sherman J. Maisel San Francisco Apr. 30, 1965 Served through May 31, 1972. Andrew F. Brimmer Philadelphia Mar. 9, 1966 Resigned Aug. 31, 1974. William W. Sherrill Dallas May 1, 1967 Reappointed in 1968. Resigned Nov. 15, 1971. Arthur F. Burns New York Jan. 31, 1970 Term began Feb. I, 1970. Resigned Mar. 31, 1978. John E. Sheehan St. Louis Jan. 4, 1972 Resigned June 1, 1975. Jeffrey M. Bucher San Francisco June 5, 1972 Resigned Jan. 2. 1976. Robert C. Holland Kansas City June 11, 1973 Resigned May 15, 1976. Henry C. Wallich Boston Mar. 8, 1974 Resigned Dec. 15, 1986. Philip E. Coldwell Dallas Oct. 29, 1974 Served through Feb. 29, 1980. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

702 Federal Reserve Bulletin • August 1998 Federal Reserve Date of initial Other dates and information relating Name District oath of office to membership2 Philip C. Jackson, Jr Atlanta July 14, 1975 ResignedNov. 17, 1978. J. Charles Partee Richmond Jan. 5, 1976 Served until Feb. 7, 1986.3 Stephen S. Gardner Philadelphia Feb. 13, 1976 Died Nov. 19, 1978. David M. Lilly Minneapolis June 1, 1976 Resigned Feb. 24, 1978. G. William Miller San Francisco Mar. 8, 1978 Resigned Aug. 6, 1979. Nancy H. Teeters Chicago Sept. 18, 1978 Served through June 27, 1984. Emmett J. Rice New York June 20, 1979 Resigned Dec. 31, 1986. Frederick H. Schultz Atlanta July 27, 1979 Served through Feb. 11, 1982. Paul A. Volcker Philadelphia Aug. 6, 1979 Resigned August 11, 1987. Lyle E. Gramley Kansas City May 28, 1980 Resigned Sept. 1, 1985. Preston Martin San Francisco Mar. 31, 1982 Resigned April 30, 1986. Martha R. Seger Chicago July 2, 1984 Resigned March 11, 1991. Served through Feb. 9, 1994. Wayne D. Angell Kansas City Feb. 7, 1986 Resigned August 3, 1990. Manuel H. Johnson Richmond Feb. 7, 1986 Resigned July 31, 1989. H. Robert Heller San Francisco Aug. 19, 1986 Reappointed in 1990. Edward W. Kelley, Jr Dallas May 26, 1987 Reappointed in 1992. Alan Greenspan New York Aug. 11, 1987 Resigned April 30, 1995. John P. LaWare Boston Aug. 15, 1988 Resigned Feb. 14, 1994. David W. Mullins, Jr. St. Louis May 21, 1990 Resigned Feb. 5, 1997. Lawrence B. Lindsey Richmond Nov. 26, 1991 Served through June 30, 1998. Susan M. Phillips Chicago Dec. 2, 1991 Term expired Jan. 31, 1996. Alan S. Blinder Philadelphia June 27, 1994 Resigned Feb. 17, 1997. Janet L. Yellen San Francisco Aug. 12,1994 Laurence H. Meyer St. Louis June 24, 1996 Alice M. Rivlin Philadelphia June 25, 1996 Roger W. Ferguson, Jr. Boston Nov. 5, 1997 Edward M. Gramlich Richmond Nov. 5, 1997 Chairmen4 Vice Chairmen4 Charles S. Hamlin Aug. 10, 1914-Aug. 9, 1916 Frederic A. Delano Aug. 10, 1914-Aug. 9, 1916 W.P.G. Harding Aug. 10, 1916-Aug. 9, 1922 Paul M. Warburg Aug. 10, 1916-Aug. 9, 1918 Daniel R. Crissinger May 1, 1923-Sept. 15, 1927 Albert Strauss Oct. 26, 1918-Mar. 15, 1920 Roy A. Young Oct.4, 1927-Aug. 31, 1930 Edmund Platt July 23, 1920-Sept. 14, 1930 Eugene Meyer Sept. 16, 1930-May 10, 1933 J.J. Thomas Aug. 21, 1934-Feb. 10, 1936 Eugene R. Black May 19, 1933-Aug. 15, 1934 Ronald Ransom Aug. 6, 1936-Dec. 2, 1947 Marriner S. Eccles Nov. 15, 1934-Jan. 31, 19485 C. Canby Balderston Mar. 11, 1955-Feb. 28, 1966 Thomas B. McCabe Apr. 15, 1948-Mar. 31, 1951 J.L. Robertson Mar. 1, 1966-Apr. 30, 1973 Wm. McC. Martin, Jr Apr.2, 1951-Jan. 31, 1970 George W. Mitchell May 1, 1973-Feb. 13, 1976 Arthur F. Burns Feb. 1, 1970-Jan. 31, 1978 Stephens. Gardner Feb. 13, 1976-Nov. 19, 1978 G. William Miller Mar.8, 1978-Aug. 6, 1979 Frederick H. Schultz July 27, 1979-Feb. 11, 1982 Paul A. Volcker Aug.6, 1979-Aug. 11, 1987 Preston Martin Mar. 31, 1982-Apr. 30, 1986 Alan Greenspan Aug. 11. 1987-6 Manuel H. Johnson Aug. 4, 1986-Aug. 3, 1990 David W. Mullins, Jr. July 24, 1991-Feb. 14, 1994 Alan S. Blinder June 27, 1994-Jan. 31, 1996 Alice M. Rivlin June 25, 1996- EX-OFFICIO MEMBERS ' Secretaries of the Treasury Comptrollers of the Currency W.G. McAdoo '...Dec. 23, 1913-Dec. 15, 1918 John Skelton Williams Feb. 2, 1914-Mar. 2, 1921 Carter Glass Dec. 16, 1918-Feb. 1, 1920 Daniel R. Crissinger Mar. 17, 1921-Apr. 30, 1923 David F. Houston Feb. 2, 1920-Mar. 3, 1921 Henry M. Dawes May 1, 1923-Dec. 17, 1924 Andrew W. Mellon Mar. 4, 1921-Feb. 12, 1932 Joseph W. Mclntosh Dec. 20, 1924-Nov. 20, 1928 OgdenL. Mills Feb. 12, 1932-Mar. 4, 1933 J.W. Pole Nov. 21, 1928-Sept. 20, 1932 William H. Woodin Mar. 4, 1933-Dec. 31, 1933 J.F.T. O'Connor May 11, 1933-Feb. 1, 1936 Henry Morgenthau Jr Jan. 1, 1934-Feb. 1, 1936 1. Under the provisions of the original Federal Reserve Act, the Federal ive members in office on the date of that act should continue to serve until Feb. 1, Reserve Board was composed of seven members, including five appointive 1936. or until their successors were appointed and had qualified; and that members, the Secretary of the Treasury, who was ex-officio chairman of the thereafter the terms of members should be fourteen years and that the Board, and the Comptroller of the Currency. The original term of office was ten designation of Chairman and Vice Chairman of the Board should be for a term of years, and the five original appointive members had terms of two, four, six, four years. eight, and ten years respectively. In 1922 the number of appointive members was 2. Date after words "Resigned" and "Retired" denotes final day of service. increased to six, and in 1933 the term of office was increased to twelve years. 3. Successor took office on this dale. The Banking Act of 1935. approved Aug. 23, 1935, changed the name of the 4. Chairman and Vice Chairman were designated Governor and Vice Federal Reserve Board to the Board of Governors of the Federal Reserve System Governor before Aug. 23, 1935. and provided that the Board should be composed of seven appointive members; 5. Served as Chairman Pro Tempore from February 3, 1948, to April 15, that the Secretary of the Treasury and the Comptroller of the Currency should 1948. continue to serve as members until Feb. 1. 1936; that the appoint- 6. Served as Chairman Pro Tempore from March 3, 1996, to June 20. 1996. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Al Financial and Business Statistics A3 GUIDE TO TABULAR PRESENTATION Federal Finance—Continued A27 Gross public debt of U.S. Treasury— DOMESTIC FINANCIAL STATISTICS Types and ownership A28 U.S. government securities Money Stock and Bank Credit dealers—Transactions A4 Reserves, money stock, liquid assets, and debt A29 U.S. government securities dealers— measures Positions and financing A5 Reserves of depository institutions and Reserve Bank A30 Federal and federally sponsored credit credit agencies—Debt outstanding A6 Reserves and borrowings—Depository institutions Securities Markets and Corporate Finance Policy Instruments A31 New security issues—Tax-exempt state and local governments and corporations A7 Federal Reserve Bank interest rates A32 Open-end investment companies—Net sales A8 Reserve requirements of depository institutions and assets A9 Federal Reserve open market transactions A32 Corporate profits and their distribution A32 Domestic finance companies—Assets and Federal Reserve Banks liabilities A33 Domestic finance companies—Owned and managed A10 Condition and Federal Reserve note statements receivables Al 1 Maturity distribution of loan and security holding Real Estate Monetary and Credit Aggregates A34 Mortgage markets—New homes A12 Aggregate reserves of depository institutions A35 Mortgage debt outstanding and monetary base A13 Money stock, liquid assets, and debt measures Consumer Credit A36 Total outstanding Commercial Banking Institutions— A36 Terms Assets and Liabilities A15 All commercial banks in the United States Flow of Funds A16 Domestically chartered commercial banks A17 Large domestically chartered commercial banks A37 Funds raised in U.S. credit markets A19 Small domestically chartered commercial banks A39 Summary of financial transactions A20 Foreign-related institutions A40 Summary of credit market debt outstanding A41 Summary of financial assets and liabilities Financial Markets A22 Commercial paper and bankers dollar DOMESTIC NONF1NANC1AL STATISTICS acceptances outstanding A22 Prime rate charged by banks on short-term Selected Measures business loans A42 Nonfinancial business activity A23 Interest rates—Money and capital markets A42 Labor force, employment, and unemployment A24 Stock market—Selected statistics A43 Output, capacity, and capacity utilization A44 Industrial production—Indexes and gross value Federal Finance A46 Housing and construction A25 Federal fiscal and financing operations A47 Consumer and producer prices A26 U.S. budget receipts and outlays A48 Gross domestic product and income A27 Federal debt subject to statutory limitation A49 Personal income and saving Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A2 Federal Reserve Bulletin • August 1998 INTERNATIONAL STATISTICS Securities Holdings and Transactions A60 Foreign transactions in securities Summary Statistics A61 Marketable U.S. Treasury bonds and A50 U.S. international transactions notes—Foreign transactions A51 U.S. foreign trade A51 U.S. reserve assets Interest and Exchange Rates A51 Foreign official assets held at Federal Reserve A61 Discount rates of foreign central banks Banks A61 Foreign short-term interest rates A52 Selected U.S. liabilities to foreign official A62 Foreign exchange rates institutions A63 GUIDE TO STATISTICAL RELEASES AND Reported by Banks in the United States SPECIAL TABLES A52 Liabilities to, and claims on, foreigners A53 Liabilities to foreigners SPECIAL TABLES A55 Banks' own claims on foreigners A56 Banks' own and domestic customers' claims on A64 Assets and liabilities of commercial banks, foreigners March 31, 1998 A56 Banks' own claims on unaffiliated foreigners A67 Terms of lending at commercial banks, May 1998 A57 Claims on foreign countries—Combined A72 Assets and liabilities of U.S. branches and agencies domestic offices and foreign branches of foreign banks, March 31, 1998 A76 INDEX TO STATISTICAL TABLES Reported by Nonbanking Business Enterprises in the United States A58 Liabilities to unaffiliated foreigners A59 Claims on unaffiliated foreigners Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A3 Guide to Tabular Presentation SYMBOLS AND ABBREVIATIONS c Corrected G-10 Group of Ten e Estimated GNMA Government National Mortgage Association n.a. Not available GDP Gross domestic product P Preliminary HUD Department of Housing and Urban r Revised (Notation appears on column heading Development when about half of the figures in that column IMF International Monetary Fund are changed.) IO Interest only * Amounts insignificant in terms of the last decimal IPCs Individuals, partnerships, and corporations place shown in the table (for example, less than IRA Individual retirement account 500,000 when the smallest unit given is millions) MMDA Money market deposit account 0 Calculated to be zero MSA Metropolitan statistical area Cell not applicable NOW Negotiable order of withdrawal ATS Automatic transfer service OCD Other checkable deposit BIF Bank insurance fund OPEC Organization of Petroleum Exporting Countries CD Certificate of deposit OTS Office of Thrift Supervision CMO Collateralized mortgage obligation PO Principal only FFB Federal Financing Bank REIT Real estate investment trust FHA Federal Housing Administration REMIC Real estate mortgage investment conduit FHLBB Federal Home Loan Bank Board RP Repurchase agreement FHLMC Federal Home Loan Mortgage Corporation RTC Resolution Trust Corporation FmHA Farmers Home Administration SCO Securitized credit obligation FNMA Federal National Mortgage Association SDR Special drawing right FSLIC Federal Savings and Loan Insurance Corporation SIC Standard Industrial Classification G-7 Group of Seven VA Department of Veterans Affairs GENERAL INFORMATION In many of the tables, components do not sum to totals because of include not fully guaranteed issues) as well as direct obligarounding. tions of the Treasury. Minus signs are used to indicate (1) a decrease, (2) a negative "State and local government" also includes municipalities, figure, or (3) an outflow. special districts, and other political subdivisions. "U.S. government securities" may include guaranteed issues of U.S. government agencies (the flow of funds figures also Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A4 Domestic Financial Statistics • August 1998 1.10 RESERVES, MONEY STOCK, LIQUID ASSETS, AND DEBT MEASURES Percent annual rate of change, seasonally adjusted1 1998' Monetary or credit aggregate Q2 Q3 Q4' Ql' Jan. Feb. Mar. Apr May Reserves of depository institutions2 1 Total -15.2 -3.0 -2 7 -1.9 -4.3 -20.1 8.5 -2.3 -9.5 2 Required -15.9 -3.7 -5.6 -1.8 -7.1 -14.0 14.5 -3.1 -4.5 3 Nonborrowed -16.9 -4.7 -.7 -1.4 -16.3 9.0 -3.1 -11.6 4 Monetary base' 3.8 6.2 6.9 6.7 3.5 4.1 3.4 4.7 Concepts of money, liquid assets, and debt* 5 Ml -4.5 .3 .9 -2.6 3.1 5.1 -.3 -3.0 6 M2 4.4 5.6' 7.1 7.6 9.6 8.3 9.5 2.8 7 M3 7.7 8.2' 10.0 11.2 10.6 9.4 14.8 10.8 6.3 8 L 8.4 7.2' 9.2 12.3 12.5 12.0 12.2 3.0 9 Debt 5.0 4.5' 5.8 6.2 5.9 6.7 6.5 4.9 Nontransaction components 10 In M25 7.9 7.6r 9.4 9.9 11.3 11.9 9.4 12.9 4.8 11 In M3 only6 18.9 16.8' 19.3 21.1 19.9 8.7 34.5 14.5 16.9 Time and savings deposits Commercial banks 12 Savings, including MMDAs 11.0 9.6 16.3 13.6 14.6 13.2 12.1 25.9 .2 13 Small time7 5.6 8.1' 4.5 1.5 .8 .4 -.2 .6 -4.0 14 Large time89 24.1 17.2 9.9 19.8 6.2 36.5 45.9 -6.9 7.4 Thrift institutions 15 Savings, including MMDAs 6.0 1.0 1.4 7.6 6.4 13.6 11.6 10.6 16.3 16 Small time7 -3.0r -5.2 -3.1 -.4 4.9 -2.8 -5.6 -10.8 -6.0 17 Large time8 4.3 10.0' 5.4 14.4 29.5 4.1 -8.2 13.8 -17.7 Money market mutual funds 18 Retail 13.5 16.3 16.0 19.6 23.3 28.7 21.6 ISO 19.8 19 Institution-only 18.0 19.7 22.0 18.9 14.7 12.3 22.5 51.7 38.7 Repurchase agreements and Eurodollars 20 Repurchase agreements10 6.8 13.4 38.3 32.8 54.2 -26.9 88.5 -2.8 6.5 21 Eurodollars" 32.7' 18.6 24.2 16.9 19.0 -32.5 -36.8 22.4 28.8 Debt components 22 Federal .9' .0' .4 .0 -.5 -1.2 1.4 -2.7 n.a. 23 Nonfederal 6.4' 6.1' 7.6 8.3 8.0 9.4 8.1 7.4 n.a. 1. Unless otherwise noted, rates of change are calculated from average amounts outstand- amounts held by depository institutions, the U.S. government, money market funds, and ing during preceding month or quarter. foreign banks and official institutions. Seasonally adjusted M3 is calculated by summing large 2. Figures incorporate adjustments for discontinuities, or "breaks." associated with time deposits, institutional money fund balances, RP liabilities, and Eurodollars, each regulatory changes in reserve requirements, (See also table 1.20.) seasonally adjusted separately, and adding this result to seasonally adjusted M2. 3. The seasonally adjusted, break-adjusted monetary base consists of (1) seasonally L: M3 plus the nonbank public holdings of U.S. savings bonds, short-term Treasury adjusted, break-adjusted total reserves (line 1), plus (2) the seasonally adjusted currency securities, commercial paper, and bankers acceptances, net of money market fund holdings of component of the money stock, plus (3) (for all quarterly reporters on the "Report of these assets. Seasonally adjusted L is computed by summing U.S. savings bonds, short-term Transaction Accounts, Other Deposits and Vault Cash" and for all weekly reporters whose Treasury securities, commercial paper, and bankers acceptances, each seasonally adjusted vault cash exceeds their required reserves) the seasonally adjusted, break-adjusted difference separately, and then adding this result to M3. between current vault cash and the amount applied to satisfy current reserve requirements. Debt: The debt aggregate is the outstanding credit market debt of the domestic nonfinancial 4. Composition of the money stock measures and debt is as follows: sectors—the federal sector (U.S. government, not including government-sponsored enter- Ml: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of prises or federally related mortgage pools) and the nonfederal sectors (state and local depository institutions, (2) travelers checks of nonbank issuers, (3) demand deposits at all governments, households and nonprofit organizations, nonfinancial corporate and nonfarm commercial banks other than those owed to depository institutions, the U.S. government, and noncorporate businesses, and farms). Nonfederal debt consists of mortgages, tax-exempt and foreign banks and official institutions, less cash items in the process of collection and Federal corporate bonds, consumer credit, bank loans, commercial paper, and other loans. The data, Reserve float, and (4) other checkable deposits (OCDs), consisting of negotiable order of which are derived from the Federal Reserve Board's flow of funds accounts, are breakwithdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, adjusted (that is, discontinuities in the data have been smoothed into the series) and credit union share draft accounts, and demand deposits at thrift institutions. Seasonally month-averaged (that is, the data have been derived by averaging adjacent month-end levels). adjusted Ml is computed by summing currency, travelers checks, demand deposits, and 5. Sum of (1) savings deposits (including MMDAs), (2) small time deposits, and (3) retail OCDs, each seasonally adjusted separately. money fund balances, each seasonally adjusted separately. M2: Ml plus (1) savings (including MMDAs), (2) small-denomination time deposits (time 6. Sum of (1) large time deposits, (2) institutional money fund balances, (3) RP liabilities deposits—including retail RPs—in amounts of less than $100,000), and (3) balances in retail (overnight and term) issued by depository institutions, and (4) Eurodollars (overnight and money market mutual funds (money funds with minimum initial investments of less than term) of U.S. addressees, each seasonally adjusted separately. $50,000). Excludes individual retirement accounts (IRAs) and Keogh balances at depository 7. Small time deposits—including retail RPs—are those issued in amounts of less than institutions and money market funds. Seasonally adjusted M2 is calculated by summing $100,000. All IRA and Keogh account balances at commercial banks and thrift institutions savings deposits, small-denomination time deposits, and retail money fund balances, each are subtracted from small time deposits. seasonally adjusted separately, and adding this result to seasonally adjusted Ml. 8. Large time deposits are those issued in amounts of $100,000 or more, excluding those M3: M2 plus (1) large-denomination time deposits (in amounts of $100,000 or more). (2) booked at international banking facilities. balances in institutional money funds (money funds with minimum initial investments of 9. Large time deposits at commercial banks less those held by money market funds, $50,000 or more), (3) RP liabilities (overnight and term) issued by all depository institutions, depository institutions, the U.S. government, and foreign banks and official institutions. and (4) Eurodollars (overnight and term) held by U.S. residents at foreign branches of U.S. 10. Includes both overnight and term. banks worldwide and at all banking offices in the United Kingdom and Canada. Excludes Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Money Stock and Bank Credit A5 1.11 RESERVES OF DEPOSITORY INSTITUTIONS AND RESERVE BANK CREDIT1 Millions of dollars Average of daily figures Average of daily figures for week ending on date indicated 1998 Apr. May Apr. 15 Apr 22 Apr. 29 May 6 May 13 May 20 May 27 SUPPLYING RESERVE FUNDS 1 Reserve Bank credit outstanding 467,483 474,688' 471,940 471,693 476.123 481,388' 473,751 469,098 473,983 471,968 U.S. government securities2 2 Bought outright—System account 431.767 437,525 438,825 436,436 440,602 439,580 437,654 434.600 441,514 440,583 3 Held under repurchase agreements 2.313 3.566 442 1,899 2,338 7,459 2,247 0 421 0 Federal agency obligations 4 Bought outright 641 551 586 565 559 551 551 551 551 5 Held under repurchase agreements 1.245 667 66 787 687 536 279 0 150 0 6 Acceptances 0 0 0 0 0 0 0 0 0 0 Loans to depository institutions 7 Adjustment credit 6 44 58 14 14 15 24 153 6 75 8 Seasonal credit 22 40 95 31 43 53 69 73 97 117 9 Extended credit 0 0 0 0 0 0 0 0 0 0 10 Floal 464 446' 606 316 308 392' 520 1.069 746 296 11 Other Federal Reserve assets 31,026 31.817 31,297 31,623 31,566 32,795 32.407 32,653 30,499 30,346 12 Gold stock 11,049 11,049 11,048 11,048 11,049 11,049 11,048 11,048 11,048 11,049 13 Special drawing rights certificate account 9,200 9,200 9.200 9,200 9,200 9,200 9.200 9,200 9,200 9,200 14 Treasury currency outstanding 25,761 25,823 25.816 25,830 25,844 25.858 25,872 25,886 25.900 ABSORBING RESERVE FUNDS 15 Currency in circulation 473,771 476,390 479,109 477.195 476,953 475,910 477,103 478.436 478.490 480,928 16 Treasury cash holdings 254 273 247 276 277 277 271 248 247 237 Deposits, other than reserve balances, with Federal Reserve Banks 17 Treasury 5,455 9,708 5,474 6.218 7,894 17,944 8.442 6.055 5,428 5,179 18 Foreign 174 177 165 183 185 173 160 166 167 172 19 Service-related balances and adjustments 6.993 6,800 6,721 6,633 6,859 6,801' 6.751 6,644 6.782 6.738 20 Other 369 375 364 383 349 366 384 377 368 359 21 Other Federal Reserve liabilities and capital . . 16,176 16,177 16,617 16.223 16,328 16,304 16,769 16,691 16,463 16,505 22 Reserve balances with Federal Reserve Banks4 10.303 10.859' 9,374 10.645 13,356 9.706' 9,977 6.600 12,172 7.999 End-of-month figures Wednesday figures Apr. May Apr. 15 Apr. 22 Apr. 29 May 6 May 13 May 20 May 27 SUPPLYING RESERVE FUNDS 1 Reserve Bank credit outstanding 475.593 487,623 470,786 471.338 478,366 474,437 U.S. government securities3 2 Bought outright—System account3 433,182 441,322 440.980 440 277 441,824 442,406 437.682 437,644 442.820 442,643 3 Held under repurchase agreements . . 6.846 15,731 2.997 3.095 10.225 26,047 0 0 2,945 0 Federal agency obligations 4 Bought outright 625 551 551 565 565 551 551 551 551 5 Held under repurchase agreements 1,450 1.955 230 1.958 2,617 0 0 1,050 0 6 Acceptances 0 0 0 0 0 0 0 0 0 0 Loans to depository institutions 7 Adjustment credit 25 4 2 96 4 1 10 25 1 8 Seasonal credit 27 61 132 37 47 56 68 79 110 124 9 Extended credit 0 0 0 0 0 0 0 0 0 0 10 Floal 1.502 -478' 254 -296 -344 645' 228 240 554 629 11 Other Federal Reserve assets 31.959 33.874 30,709 31.358 32,594 35.278 32,258 32.814 30,312 30,490 12 Gold stock I 1.049 11,048 11,049 11.048 1I.O49 11.048 11,048 I 1.048 11,048 11,049 13 Special drawing rights certificate account . 9.200 9,200 9,200 9.200 9,200 9.200 9,200 9,200 9,200 9,200 14 Treasury currency outstanding 25.788 25,858 25,914 25,816 25,830 25.844 25,858 25,872 25.886 25,900 ABSORBING RESERVE FUNDS 15 Currency in circulation 475,091 476.806 480,845 478,416 477.306 477.038 478,834 479,285 479.942 482.307 16 Treasury cash holdings 265 275 226 277 278 275 248 248 238 226 Deposits, other than reserve balances,with Federal Reserve Banks 17 Treasury 5,490 28,014 5,693 9,457 12,950 41,801 4,107 5.127 4,697 5,013 Foreign 167 162 156 163 162 199 154 155 174 179 Service-related balances and adjustments 6.845 6,751 6,674 6,633 6,859 6,801 6,751 6.644 6,782 6,738 i2.\l 1 OtV O hJUeI t Cr h l e F r ederal Reserve liabilities and capital . 15, 3 7 5 0 4 8 16, 3 8 6 9 0 4 16. 3 7 0 4 9 3 16, 3 1 4 0 4 7 16, 3 15 5 6 0 16,1 34 3 3 5 16, 3 4 7 5 5 0 16,1 37 6 3 8 16,2 3 5 7 1 1 16. 3 2 1 9 1 4 22 Reserve balances with Federal Reserve Banks4 17,709 9,885' 11,372 11,662 19,641 10,293' 9.974 9,457 16,044 9,517 1. Amounts of cash held as reserves are shown in table 1.12, line 2. 3. Includes compensation that adjusts for the effects of inflation on the principal of 2. Includes securities loaned—fully guaranteed by U.S. government securities pledged inflation-indexed securities. with Federal Reserve Banks—and excludes securities sold and scheduled to be bought back 4. Excludes required clearing balances and adjustments to compensate for float. under matched sale-purchase tram;actions- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A6 Domestic Financial Statistics • August 1998 1.12 RESERVES AND BORROWINGS Depository Institutions' Millions of dollars Prorated monthly averages of biweekly averages Reserve classification 1995 1996 1997 1997 1998 Dec. Dec. Dec. Nov. Dec. Jan. Feb Mar. Apr.' May 1 Reserve balances with Reserve Banks 20,440 13,395 10.673 10.559 10,673 9.733 9.394 10.140 11,053 9.646 2 Total vault cash' 42,281 44,525 44 707 42,851 44,707 47,336 43,167 41,598 41,216 41,485 3 Applied vault cash4 37,460 37,848 37.206 35,892 37,206 37,762 35,580 35,370 35,423 35,163 4 Surplus vault cash5 4,821 6,678 7 500 6.959 7,500 9,574 7.587 6,228 5,793 6,322 5 Total reserves6 57,900 51,243 47,880 46,451 47,880 47.495 44.974 45,509 46,476 44,809 6 Required reserves 56,622 49,819 46,196 44,834 46.196 45,714 43,450 44,193 45.131 43,659 7 Excess reserve balances at Reserve Banks7 . . . 1,278 1.424 1,683 1,617 1.683 1.780 1.524 1,317' 1.345 1.150 8 Total borrowings at Reserve Banks 257 155 324 153 324 210 58 41 72 153 9 Seasonal borrowings 40 68 79 115 79 18 12 22 41 94 10 Extended credit I) 0 0 0 0 0 0 0 0 0 Bweekly averages of daily figures for two week periods ending on dates indicated 1998 Jan. 28 Feb. 11 Feb 25 Mar. 11 Mar. 25 Apr. 8 Apr. 22' May 6' May 20 June 3 1 Reserve balances with Reserve Banks" 8,176 8,750 9.726 10,210 9,878 10.623 11.991 9,841 9.365 9.89S 2 Total vault cash1 49,444 45.165 41.804 42.202 41,199 41.420 40.815 41,715 41,548 41.280 3 Applied vault cash4 . . 37,827 36,462 34.892 35,555 35,154 35.535' 35,185 35,727 35,066 34.980 4 Surplus vault cash5 11,617 8,703 (\9I2 6,647 6,046 5,885' 5.629 5.988 6,482 6,299 5 Total reserves6 46,1X13 45,212 44 618 45,765 45,031 46,158' 47,176 45,568 44,430 44,878 6 Required reserves 44,213 43,648 43.132 44,209 43,893 44,865 45.736 44,339 43,409 43,608 7 Excess reserve balances at Reserve Banks 1,790 1,563 1,485 1,556 1,138 1,293' 1.441 1,230 1,022 1,270 8 Total borrowings at Reserve Banks* 242 67 59 19 34 101 51 81 165 178 9 Seasonal borrowings 16 o 13 17 23 30 37 61 85 123 10 Extended credit4 0 0 0 0 0 0 0 0 0 0 1. Data in this table also appear in the Board's H.3 (502) weekly statistical release. For 5. Total vault cash (line 2) less applied vault cash (line 3). ordering address, see inside front cover. Data are not break-adjusted or seasonally adjusted. 6. Reserve balances with Federal Reserve Banks (line 1) plus applied vault cash 2. Excludes required clearing balances and adjustments to compensate for Moat and (line 3). includes other off-balance-sheet k'as-of" adjustments, 7. Total reserves (line 5) less required reserves f line 6h 3. Total "lagged" vault cash held by depository institutions subject to reserve 8. Also includes adjustment credit. requirements Dates refer to the maintenance periods during which the vault cash may be used 9. Consists of borrowing ai the discount window under the terms and condition-, establo satisfy reserve requirements. The maintenance period for weekly reporters ends sixteen lished for the extended credit program to help depository institutions deal with sustained days after the lagged computation period during which ihe vault cash is held. Before Nov. 25. liquidity pressures. Because there is not the same need to repay such borrowing promptly as 1992, the maintenance period ended thirty days after the lagged computation period. with traditional short-term adjustment credit, the money market effect of extended credit is 4. All vault cash held during the lagged computation period by "bound" institutions (that similar to that of nonborrowed reserves. is, those whose required reserves exceed their vault cash) plus the amount of vault cash applied during the maintenance period by "nonbound" institutions (that is. [hose whose vault cash exceeds their required reserves) to satisfy current reserve requirements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Policy Instruments A 7 1.14 FEDERAL RESERVE BANK INTEREST RATES Percent per year Current and previous levels Adjustment credit Seasonal credit Extended credit'1 Federal Reserve Bank On On Previous rate On 7/17/9K 7/17/98 7/17/98 Boston 2/1/% New York 1/31/% Philadelphia . 1/31/96 Cleveland. . . 1/31/96 Richmond. . . 2/1/96 Atlanta . . . 1/31/% Chicago 2/1/96 St. Louis 2/5/96 Minneapolis . . 1/31/96 Kansas City . . 2/1/96 Dallas 1/31/% San Francisco 1/31/96 5.25 Range of rates for adjustment credit in recent years Range (or F.R. Bank Range (or F.R. Bank Ranne(or F.R. Bank Effective date level)—AM of Effective dale level)—All of Effective date level")—All of F.R Banks NY. F.R. Banks N.Y. F.R Banks NY In effect Dec. 31. 1977 6 6 1981—Nov. 2 13-14 13 1988—Aug. 9 6-6.5 6.5 6 13 13 ] ] 6.5 6.5 1978—Jan. 9 6-6 5 6.5 Dec. 4 12 12 20 6.5 6.5 1989—Feb. 24 6.5-7 7 Mav II 6.5-7 7 1982—Julv 20 11.5-12 11.5 27 7 7 i: 7 7 23 11.5 11.5 Julv 1 7-7.25 7.25 Aug. 2 11-11.5 11 1990—Dec. 19 6.5 6.5 Ml 7.25 7.25 3 II 1 ] Aug. 21 7.75 7.75 16 10.5 10.5 1991—Feb. 1 6-6.5 6 Sept. 22 8 8 27 10-10 5 10 4 6 6 Oct. 16 8-8.5 8.5 30 11) 10 Apr. 30 5.5-6 5.5 20 8.5 8.5 Oct. 12 9.5-11) 9.5 May 2 5.5 5.5 Nov. 1 S.5-9.5 9.5 13 9.5 9.5 Sept. 13 5-5 5 5 3 9.5 9.5 Nov 22 9-9 5 9 17 5 5 26 9 9 Nov. 6 4.5-5 4.5 1979—July 20 10 10 Dec. 14 8.5-9 9 7 4.5 45 Aug. 17 10-10.5 10.5 15 8.5-9 S.5 Dec. 20 3.5^1.5 3.5 20 10.5 10.5 17 8.5 8.5 24 3.5 3.5 Sept. 19 10.5-11 II 21 11 11 1984—Apr 9 8.5-9 9 1992—Julv 2 3-3.5 3 Oct. S 11-12 12 13 . ... 9 9 7 3 3 10 12 12 Nov. 21 8.5-9 8.5 26 8.5 8.5 1994—May 17 3-3.5 3.5 19S0—Feb. 15 12-13 13 Dec. 24 8 8 18 3.5 3.5 19 13 13 Aug. 16 3.5^1 4 May 29 12-13 13 1985—May 20 7.5-8 7.5 18 4 4 30 12 i: 24 7.5 7.5 Nov. 15 4-4 75 4 75 June 13 11-12 11 17 4.75 4.75 16 II II 1986—Mar 7 ... 7-7 5 7 Julv 28 10-11 10 10 7 7 1995—Feb. 1 4.75-5.25 5.25 29 10 10 Apr. 21 6.5-7 6.5 9 5.25 5.25 Sept. 26 II II 23 65 6.5 Nov. 17 12 12 July 11 6 6 1996—Jan. 31 5.1)0-5.25 5.00 Dec. 5 12-13 13 Aug. 21 5.5-6 5.5 Feb. 5 5.00 5.00 8 13 13 22 5.5 5.5 IS>81 — Mav 5 13-14 14 In effect July 17. 1998 5.00 5.00 8 14 14 19X7—Sept. 4 5.5-6 6 11 6 6 !. Available on a short-term basis to help depository institutions mccl temporary needs for of the Federal Reserve Bank, this lime period may be shortened. Beyond this initial period, a funds that cannot be met through reasonable alternative sources. The highest rate established flexible rate somewhat above rales charged on market sources of funds is charged. The rate lor loans to depository institutions may be charged on adjustment credit loans of unusual size ordinarily is reestablished on the first business day of each two-week reserve maintenance that result from a major operating problem at the borrower's facility period, hut it is never less rhan the discount rate applicable to adjustment credit plii* 50 basis 2. Available to help relatively small depository institutions meet regular seasonal needs for points. funds that arise from a clear pattern of intrayearly movements in their deposits and loans and 4. For earlier data, see the following publications of the Board of Governors: Bunking and that cannot be met through special industry lenders. The discount rate on seasonal credit takes Monetary Statistics, 1914-1941, and 1941-1970; and the Annual Statistical Digest, 1970into account rates charged by market sources of funds and ordinarily is reestablished on the 1979. first business day of each two-week reserve maintenance period; however, it is never less than In 1980 and 1981, the Federal Reserve applied a surcharge to short-icrm adjustment-credit the discount rate applicable to adjustment credit. borrowings by institutions with deposits of $500 million or more lhat had horrowed in 3. May be made available to depository institutions when similar assistance is not successive weeks or in more than four weeks in a calendar quarter. A 3 percent surcharge »as reasonably available from other sources, including special industry lenders Such credit may in effect from Mar. 17, 1980. through May 7. 1980. A surcharge of 1 percent was reimposed be provided when exceptional circumstances (including sustained deposit drains, impaired on Nov. 17, 1980; the surcharge was subsequently raised to 3 percent on Dec. 5, 1980, and to access to money market funds, or sudden deterioration in loan repayment performance) or 4 percent on May 5, 1981. The surcharge was reduced to 3 percent effective Sept. 22, 1981, practices involve only a particular institution, or to meet the needs of institutions experiencing and to 2 percent effective Oct. 12. 1981. As of Oct. I, 1981, the formula for applying the difficulties adjusting to changing market conditions over a longer period (particularly at times surcharge was changed from a calendar quarter lo a moving thirteen-week period The of deposit disinlermediation). The discount rate applicable to adjustment credit ordinarily is surcharge was eliminated on Nov 17, 19K1. charged on extended-credit loans outstanding less than thirl) days: however, at the discretion Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A8 Domestic Financial Statistics • August 1998 1.15 RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS' Type of deposit Net transaction accounts 1 $0 million-$47.8 million3 1/1/98 2 More than $47.8 million4 1/1/98 3 Nonpersonal lime deposits . . . . . 12/27/90 4 Eurocurrency liabilities6 12/27/90 1. Required reserves must be held in the form of deposits with Federal Reserve Banks succeeding calendar year by 80 percent of the percentage increase in the total reservable or vault cash. Nonmember institutions may maintain reserve balances with a Federal liabilities of all depository institutions, measured on an annual basis as of June 30. No Reserve Bank indirectly, on a pass-through basis, with certain approved institutions. For corresponding adjustment is made in the event of a decrease. The exemption applies only to previous reserve requirements, see earlier editions of the Annual Report or the Federal accounts that would be subject to a 3 percent reserve requirement. Effective with the reserve Reserve Bulletin. Under the Monetary Control Act of 1980, depository institutions maintenance period beginning January 1, 1998, for depository institutions that report weekly, include commercial banks, mutual savings banks, savings and loan associations, credit and with the period beginning January 15. 1998, for institutions that report quarterly, the unions, agencies and branches of foreign banks, and Edge Act corporations. exemption was raised from $4.4 million to $4.7 million. 2. Transaction accounts include all deposits against which the account holder is permitted 4. The reserve requirement was reduced from 12 percent to 10 percent on to make withdrawals by negotiable or transferable instruments, payment orders of with- Apr. 2, 1992, for institutions that report weekly, and on Apr. 16, 1992, for institutions that drawal, or telephone or preauthorized transfers for the purpose of making payments to third report quarterly. persons or others. However, accounts subject to the rules that permil no more lhan six 5. For institutions that report weekly, the reserve requirement on nonpersonal time deposits preaulhorized, automatic, or other transfers per month (of which no more than three may be with an original maturity of less than 1 l/i years was reduced from 3 percent to 1 l/2 percent for by check, draft, debit card, or similar order payable directly to third parties) are savings the maintenance period that began Dec. 13, 1990, and to zero for the maintenance period that deposits, not transaction accounts. began Dec. 27, 1990. For institutions that report quarterly, the reserve requirement on 3. The Monetary Control Act of 1980 requires that the amount of transaction accounts nonpersonal time deposits with an original maturity of less than 1 x/i years was reduced from 3 against which the 3 percent reserve requirement applies be modified annually by 80 percent of percent to zero on Jai\. 17, 1991 the percentage change in transaction accounts held by all depository institutions, determined The reserve requirement on nonpersonal time deposits with an original maturity of 1 '/5 as of June 30 of each year. Effective with the reserve maintenance period beginning January 1, years or more has been zero since Oct. 6, 1983. 1998. for depository institutions that report weekly, and with the period beginning January 15. 6. The reserve requirement on Eurocurrency liabilities was reduced from 3 percent to zero 1998. for institutions that report quarterly, the amount was decreased from $49.3 million to in the same manner and on the same date;, as the reserve requirement on nonpersonal time $47.8 million. deposits with an original maturity of less than I '/2 years (see note 5). Under the Garn-St Germain Depository Institutions Act of 1982, the Board adjusts the amount of reservable liabilities subject to a zero percent reserve requirement each year for the 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 1998 Type of transaction and maturity Apr. U.S. TREASURY SECURITIES2 Outright transactions (excluding matched transactions) Treasury bills 1 Gross purchases 10,932 9,901 9,147 0 0 4,545 0 0 0 3,550 2 Gross sales 0 0 0 0 0 0 0 0 0 0 3 Exchanges 405,296 426,928 419,347 39,313 33,485 26,905 41.731 29,290 28,180 36,097 4 For new bills 405,296 426,928 418,997 39,313 33,485 26,905 41,731 29,290 28,180 36,097 5 Redemptions 900 0 0 0 0 0 2.000 0 0 0 Others within one year 6 Gross purchases 390 524 5,748 0 1.462 1,947 0 0 0 1.369 7 Gross sales 0 0 0 0 0 0 0 0 0 0 8 Maturity shifts 43,574 30,512 43,473 3,193 5.231 1.748 3,447 6.098 1,964 4,369 9 Exchanges -35,407 -41,394 -27,499 -1.267 -4,126 -2,329 -400 -6,128 -5,736 -2.601 10 Redemptions 1,776 2,015 1,996 416 0 0 478 0 0 286 One to five years 11 Gross purchases 5,366 3,898 20.299 0 3,323 4,471 0 0 3,763 2,993 12 Gross sales 0 0 0 0 0 0 0 0 0 0 13 Matunty shifts -34,646 -25,022 -39,744 -3,193 -4,883 -1,748 -3 447 -3,213 -1,964 -4,369 14 Exchanges 26,387 31,459 20,274 1,267 1,651 2,329 0 3,383 5,736 2,201 Five to ten years 15 Gross purchases 1,432 1,116 3,101 770 485 613 0 0 283 495 16 Gross sales 0 0 0 0 0 0 0 0 0 0 17 Maturity shifts -3,093 -5,469 -1,954 0 31 0 0 -2.884 0 0 18 Exchanges 7,220 6,666 5.215 0 1,295 0 400 1,420 0 0 More than ten years 19 Gross purchases 2.529 1,655 5,827 648 954 1,214 0 0 743 0 20 Gross sales 0 0 0 0 0 0 0 0 0 0 21 Maturity shifts -2.253 -20 -1,775 0 -379 0 0 0 0 0 22 Exchanges 1,800 3,270 2,360 0 1.180 0 0 1.325 0 400 All maturities 23 Gross purchases 20,649 17,094 44,122 1,418 6,224 12,790 0 0 4,789 8,407 24 Gross sales 0 0 0 0 0 0 0 0 0 0 25 Redemptions 2,676 2,015 1,996 416 0 0 2,478 0 0 286 Matched transactions 26 Gross purchases 2.197,736 3.092,399 3,586,584 316.425 272,474 353,726 332,581 326,812 364,307 372.587 27 Gross sales 2,202.030 3,094,769 3,588,905 318,485 269.586 355,668 332,795 326.245 364.537 372,572 Repurchase agreements 28 Gross purchases 331.694 457,568 810.485 75,323 73,618 97,932 45,544 33.428 40,211 59.548 29 Gross sales 328,497 450,359 809,268 78,157 73,064 87,160 65,932 30,583 37,010 50,663 30 Net change in U.S. Treasury securities 41,022 -3,893 9,666 -23.079 3,412 7,760 17,021 FEDERAL AGENCY OBLIGATIONS Outright transactions 31 Gross purchases 0 0 0 0 0 0 0 32 Gross sales 0 0 0 0 0 0 0 33 Redemptions 1.003 409 1,540 215 26 50 74 Repurchase agreements 34 Gross purchases 36,851 75,354 160.409 15,639 23,054 20,056 12,488 9,615 17,685 13,547 35 Gross sales 36,776 74,842 159,369 15,157 20,976 21.186 13,872 8,776 18,342 13.042 36 Net change in federal agency obligations -928 103 -500 267 -1,130 -1,384 829 -707 431 37 Total net change in System Open Market Account. 15,948 20,021 40.522 -3,626 11,718 20.490 -24,463 4,241 7,053 17,452 1. Sales, redemptions, and negative figures reduce holdings of the System Open Market 2. Transactions exclude changes in compensation for the effects of inflation on the principal Account; all other figures increase such holdings. of inflation-indexed securities Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A10 Domestic Financial Statistics • August 1998 1.18 FEDERAL RESERVE BANKS Condition and Federal Reserve Note Statements' Millions of dollars Wednesday End of month Account 1998 1998 Apr. 29 May 6 May 13 May 20 May 27 Mar. 31 Apr. 30 May 31 Consolidated condition statement ASSETS 1 Gold certificate account 11,048 11,048 11.048 11,048 11,049 11,049 11,048 11,049 1 Special drawing rights certificate account 9,200 9.200 9,200 9,200 9.200 9,200 9,200 9,200 3 Coin 457 457 449 434 404 527 463 407 Loans 4 To depository institutions 60 69 89 135 125 29 86 136 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 551 551 551 551 551 625 551 551 8 Held under repurchase agreements 1.808 0 0 1.050 0 1,450 1,955 230 468,453 437,682 437,644 445,765 442,643 440,028 457,053 443,977 442.406 437.682 437,644 442,820 442,643 433.182 441,322 440,980 11 Bills 199,906 195,181 195,143 200,318 200,140 195.258 198,823 198,476 12 Notes 180,586 180.587 180,588 180,589 180.590 176.436 180,586 180,590 13 Bonds 61,913 61.913 61,914 61,914 61,914 61.488 61,913 61,914 14 Held under repurchase agreements 26,047 0 0 2,945 0 6.846 15,731 2,997 15 Total loans and securities 470,871 438,301 438,284 447,500 443319 442,131 459,645 444,893 16 Hems in process of collection 7.743 8,543 6,749 7,187 10,106 9,691 4,997 5,165 1.284 1,285 1,287 1,288 1,287 1,279 1,284 1,287 Other assets 18 Denominated in foreign currencies 16.744 17,139 17,147 17,156 17,164 16,711 17,132 16.995 19 All other4 17 243 13 904 14 231 11 769 11 979 13,930 15,417 12 356 534.591 499,877 498,395 505,582 504,508 504,519 519,187 501352 LIABILITIES 21 Federal Reserve notes 451.926 453,681 454,110 454,728 457,038 450,095 451,687 455,565 22 Total deposits 59.716 22,365 21,776 27,968 22,159 30,456 45,106 24,112 17,372 17,729 16,120 22.726 16,656 24,445 16,570 17,954 24 U.S. Treasury—General account 41,801 4,107 5,127 4.697 5,013 5,490 28.014 5,693 199 154 155 174 179 167 162 156 26 Other . . 343 375 373 371 311 354 360 309 27 Deferred credit items 6,814 7,381 6.341 6,635 9,016 8,260 5,500 4,931 4,838 4,802 4.771 4,715 4,639 4,601 5.155 4,993 29 Total liabilities 523,294 488,229 486,999 494,046 492.853 493,412 507,449 489,602 CAPITAL ACCOUNTS 30 Capital paid in 5,475 5,487 5,563 5,658 5.720 5,471 5,475 5,721 5 220 5,220 5,220 5,220 5.220 5.202 5,220 5,218 602 941 613 658 714 434 1,043 811 33 Total liabilities and capital accounts 534,591 499,877 498,395 505,582 504,508 504,519 519,187 501,352 MEMO 34 Marketable U.S. Treasury securities held in custody for foreign and international accounts 604,030 605,791 606,862 608,700 606,305 613,236 604.758 606.393 Federal Reserve note statement 35 Federal Reserve notes outstanding (issued to Banks) 560,370 561,661 563,638 564,878 565.846 553,090 560,384 566,773 36 LESS: Held by Federal Reserve Banks 108.444 107,980 109,528 110,149 108.807 102,995 108,697 111,209 37 Federal Reserve notes, net 451.926 453,681 454,110 454,728 457,038 450,095 451,687 455,565 Collateral held against notes, net 38 Gold certificate account 11.048 11.048 11.048 11,048 11,049 11,049 11,048 11,049 39 Special drawing rights certificate account 9,200 9.200 9,200 9,200 9,200 9.200 9,200 9,200 40 Other eligible assets 0 0 0 0 0 0 0 0 41 U.S. Treasury and agency securities 431,677 433,433 433,862 434,480 436,790 429,846 431.438 435,316 42 Total collateral 451,926 453,681 454,110 454,728 457,038 450,095 451,687 455,565 1. Some of the data in this table also appear in the Board's H.4.1 (503) weekly statistical 3. Valued monthly at market exchange rates. release. For ordering address, see inside front cover. 4. Includes special investment account at the Federal Reserve Bank of Chicago in Treasury 2. Includes securities loaned—fully guaranteed by U.S. Treasury securities pledged with bills maturing within ninety days. Federal Reserve Banks—and includes compensation that adjusts for the effects of inflation on 5. Includes exchange-translation account reflecting the monthly revaluation at market the principal of inflation-indexed securities. Excludes securities sold and scheduled to be exchange rates of foreign exchange commitments. bought back under matched sale-purchase transactions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks Al 1 1.19 FEDERAL RESERVE BANKS Maturity Distribution of Loan and Security Holding Millions of dollars Wednesday End of monlh Type of holding and maturity 1998 1998 Apr. 29 May 6 May 13 May 20 May 27 Mar. 31 Apr. 30 May 31 1 Total loans 125 2 Within fifteen days1 56 7 20 123 116 17 62 78 4 62 69 12 9 12 24 58 3. Sixteen days to ninety days 4 Total U.S. Treasury securities2 468,453 437,682 437,644 445,765 442,643 440.028 457,364 443,976 41,303 12,917 13,312 17,747 16,211 20.423 21.350 5,745 5 Within fifteen days' 97.214 88,524 87.861 91,940 96,740 94,170 91,141 102.385 6 Sixteen days to ninety days 139.521 146,068 146.298 145,420 139,033 137.838 154,703 145,188 7 Ninety-one days to one year 99,016 98.772 98,772 96,868 96,868 97.095 98,772 8 One year to five years 40,622 40,623 40,623 43,013 43,013 40.126 40,622 43,013 9 Five years to ten years 50.776 50,777 50,777 50,777 50,777 50,376 50,777 50,777 10 More than ten years 11 Total federal agency obligations 2,359 551 551 1,601 551 2,075 2,209 781 12 Within fifteen days' 0 0 1,050 0 1,510 1,658 230 13 Sixteen days to ninety days 0 0 50 50 50 14 0 75 14 Ninety-one days to one year 175 175 125 125 125 175 175 125 15 One year to five years 126 126 126 126 126 126 126 126 16 Five years to ten years 225 225 225 225 225 225 225 200 17 More than ten years 25 25 25 25 25 25 25 25 1. Holdings under repurchase agreements are classified as maturing within fifteen days i 2. Includes compensation that adjusts for the effects of inflation on the principal of accordance with maximum maturity of the agreements. inflation-indexed securities. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A12 Domestic Financial Statistics • August 1998 1.20 AGGREGATE RESERVES OF DEPOSITORY INSTITUTIONS AND MONETARY BASE1 Billions of dollars, averages of daily figures 1997 1998 1994 1995 1996 1997 Dec. Dec. Dec. Dec. Oct. Nov. Dec. Jan. Mar. Apr.' May Seasonally adjusted ADJUSTED FOR CHANGES IN RESERVE REQUIREMENTS 1 Total reserves3 59.41 56.40 50.08 46.67 45.96 46.31 46.67 46.50 45.72 46.05 45.96 45.60 2 Nonborrowed reserves4 59.20 56.14 49.93 46.35 45.69 46.16 46.35 46.29 45.66 46.01 45.89 45.44 3 Nonborrowed reserves plus extended credit" 59.20 56.14 49.93 46.35 45.69 46.16 46.35 46.29 45.66 46.01 45.89 45.44 4 Required reserves 58.24 55.12 48.66 44.99 44.56 44.69 44.99 44.72 44.20 44.73 44.61 44.45 5 Monetary base 418.12 434.17 452.38 480.15 471.98 476.19 480.15 482.85 484.24 485.90 487.27 489.19 Not seasonally adjusted 6 Total reserves 61.13 58.02 51.52 47.97 45.69 46.53 47.97 47.49 44.99 45.55 46.53 44.87 7 Nonborrowed reserves 60.92 57.76 51.37 47.65 45.42 46.38 47.65 47.28 44.94 45.50 46.45 44.72 8 Nonborrowed reserves plus extended credit5. . . 60.92 57 76 51.37 47.65 45.42 46.38 47.65 47.28 44.94 45.50 46.45 44.72 9 Required reserves8 59.96 56.74 50.10 46.29 44.30 44.91 46.29 45.71 43.47 44.23 45.18 43.72 10 Monetary base9 422.51 439.03 456.72 485.11 470.41 476.62 485.11 484.42 481.36 484.04 487.42 488.37 NOT ADJUSTED FOR CHANGES IN RESERVE REQUIREMENTS10 11 Total reserves11 61 34 57.90 51.24 47.88 45.62 46.45 47.88 47.50 44.97 45.51 46.48 44.81 12 Nonborrowed reserves 61.13 57.64 51,09 47.56 45.35 46.30 47.56 47.29 44.92 45,47 46.40 44.66 13 Nonborrowed reserves plus extended credit5 61.13 57.64 51.09 47.56 45.35 46.30 47.56 47.29 44.92 45.47 46.40 44.66 14 Required reserves 60.17 56.62 49.82 46.20 44.23 44.83 46.20 45.71 43.45 44.19 45.13 43.66 15 Monetary base 427.25 444.45 463.49 491.92 477.28 483.50 491.92 491.62 488.43 491.00 494.17 495.04 16 Excess reserves13 1,17 1.28 142 1.68 1,40 1.62 1.68 1.78 1.52 1.32 1.35 1.15 17 Borrowings from the Federal Reserve .21 .26 .16 .32 .27 .15 .32 .21 .06 .04 .07 15 1. Latest monthly and biweekly figures are available from the Board's H.3 (502) weekly 8. To adjust required reserves for discontinuities that are due to regulatory changes in statistical release. Historical data starting in 1959 and estimates of the effect on required reserve requirements, a multiplicative procedure is used to estimate what required reserves reserves of changes in reserve requirements are available from the Money and Reserves would have been in past periods had current reserve requirements been in effect. Break- Projections Section, Division of Monetary Affairs, Board of Governors of the Federal Reserve adjusted required reserves include required reserves against transactions deposits and nonper- System, Washington, DC 20551. sonal time and savings deposits (but not reservable nondeposit liabilities). 2. Figures reflect adjustments for discontinuities, or "breaks." associated with regulatory 9. The break-adjusted monetary base equals (1) break-adjusted total reserves (line 6), plus changes in reserve requirements. (See also table 1.10.) (2) the (unadjusted) currency component of the money stock, plus (3) (for all quarterly 3. Seasonally adjusted, break-adjusted total reserves equal seasonally adjusted, break- reporters on the "Report of Transaction Accounts, Other Deposits and Vault Cash" and for all adjusted required reserves (line 4) plus excess reserves (line 16). those weekly reporters whose vault cash exceeds their required reserves) the break-adjusted 4. Seasonally adjusted, break-adjusted nonborrowed reserves equal seasonally adjusted, difference between current vault cash and the amount applied to satisfy current reserve break-adjusted total reserves (line 1) less total borrowings of depository institutions from the requirements. Federal Reserve (line 17). 10. Reflects actual reserve requirements, including those on nondeposit liabilities, with no 5. Extended credit consists of borrowing at the discount window under the terms and adjustments to eliminate the effects of discontinuities associated with regulatory changes in conditions established for the extended credit program to help depository institutions deal reserve requirement-,. with sustained liquidity pressures. Because there is not the same need to repay such 11. Reserve balances with Federal Reserve Banks plus vault cash used lo satisfy reserve borrowing promptly as with traditional short-term adjustment credit, the money market effect requirements. of extended credit is similar to that of nonborrowed reserves. 12. The monetary base, not break-adjusted and not seasonally adjusted, consists of (1) total 6. The seasonally adjusted, break-adjusted monetary base consists of (1) seasonally reserves (line 11), plus (2) required clearing balances and adjustments to compensate for float adjusted, break-adjusted total reserves (line 1), plus (2) the seasonally adjusted currency at Federal Reserve Banks, plus (3) the currency component of the money stock, plus (4) (for component of the money stock, plus (3) (for all quarterly reporters on the "Report of all quarterly reporters on the "Report of Transaction Accounts, Other Deposits and Vault Transaction Accounts, Other Deposits and Vault Cash" and for all diose weekly reporters Cash" and for all those weekly reporters whose vault cash exceeds their required reserves) the whose vault cash exceeds their required reserves) the seasonally adjusted, break-adjusted difference between current vault cash and the amount applied to satisfy current reserve difference between current vault cash and the amount applied to satisfy current reserve requirements. Since the introduction of contemporaneous reserve requirements in February requirements. 1984, currency and vault cash figures have been measured over the computation periods 7. Break-adjusted total reserves equal break-adjusted required reserves (line 9) plus excess ending on Mondays reserves (line 16) 13. Unadjusted total reserves (line 11) less unadjusted required reserves (line 14). 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 1998' 1994 1995 1996 1997' Dec. Dec. Dec. Dec. Feb. Mar. Apr. May Seasonally adjusted Measures' 1 Ml 1,150.7 1,128.7 1,082.8 1,076.0 1,076.5 1,081.1 1,080,8 1,078.1 2 M2 3,503.0 3,651.2 3.826.1 4,045.8 4,103.9 4,132.3 4,165.0 4,174.6 3 M3 4,333.6 4,595.6 4,931.1' 5,374.9 5,464.8 5,532.3 5,581.9 5,611.4 4 L 5,315.8 5,702.2 6,083.9' 6,609.4 6,744.9 6.813.6 6,830.9 n.a. 5 Debt 13,003.1r 13,702.3' 14.4322' 15.170.7 15.330.8 15.413.4 15,476.9 n.a. MI components 6 Currency" 354.3 372.4 394.9 425.5 431.0 432.4 433.7 435.6 7 Travelers checks4 8.5 8.9 8.6 8.2 8.1 8.1 8,0 8.0 8 Demand deposits5 384.0 391.0 403.6 397.1 391.9 391.2 388.6 388.0 9 Other checkable deposits6 403.9 356.4 275.9 245.2 245.5 249.5 250.5 246.5 Nontransaction components 10 In M27 2,352.3 2.522.6 2,743.2 2,969.7 3.027.4 3.051.2 3,084.1 3.096.5 11 InM3 only8 830.6 944.4 1,105.0' 1,329.1 1,360.9 1,400.0 1.416.9 1,436.8 Commercial banks 12 Savings deposits, including MMDAs . .. 752.6 775.0 904.8 1,020.9 1,044.7 1.055.2 1,078.0 1,078.2 13 Small time deposits9 503.2 575.8 594.5 625.7 626.3 626.2 626.5 624.4 14 Large time deposits10" M 298.7 345.4 413.2 487.5 504.9 524.2 521.2 524 4 Thrift institutions 15 Savings deposits, including MMDAs. .. 397.3 359 7 366.9 376.6 382.9 386.6 390.0 395.3 16 Small time deposits9 314.2 357.2 354.3 343.9 344.5 342.9 339.8 338.1 17 Large time deposits10 64.7 74.2 78.0 85.4 87.8 87.2 88.2 86.9 Money market mutual funds 18 Retail 385.0 454 9 5228 602.6 629.0 640.3 649 9 660.6 19 Institution-only 203.1 253.9 310.3 376.2 384.7 391.9 408.8 422.0 Repurchase agreements and Eurodollars 20 Repurchase agreements'" 183.3 182.4 194.2 234.8 239.9 257.6 257.0 258.4 21 Eurodollars12 80.8 88,6 109.2' 145.2 143.5 139.1 141.7 145.1 Debt components 22 Federal debt 3.492.4r 3,638.9' 3.780.6' 3,798.4 "i.792.9 3.797.3 3.788.9 n a. 23 Nonfederal debt 9,510.7' 10,063.4' 10,651.6' 11.372.3 11,537.9 11.616.1 11.688 0 Not seasonally adjusted Measures 24 Mi 1.1744 1,152.4 1,104.9 1,097.6 1,063.9 1.074,6 1.086.2 1.068.7 25 M2 3.523.4 3.672.0 3,845.4 4,064.7 4.090.6 4,143.5 4.185 7 4,154.0 26 M3 4.353.2 4,615.2 4,948.9' 5,392.1 5,462.6 5,551.1 5,596.4 5,589.4 27 L 5,344.6 5,732.7 6,111.9' 6,634.9 6,737.3 6,835.9 6,852.3 n.a. 28 Debt 13,004.5' 13.702.5' 14,431.0' 15,168.8 15.294.1 15,390.6 15,450.2 n.a. Ml components 29 Currency 357.5 376.2 397.9 429.0 428.9 431.5 433 7 436.2 30 Travelers cheeks'* 8.1 8.5 8.3 79 7.8 7.9 7.9 7.9 31 Demand deposits3 400.3 407.2 419.9 413.0 383.1 385.4 388.7 3SO.3 32 Other checkable deposits". , , 408.6 360.5 278.8 247.7 244.1 249.9 255.9 244.4 Nontransaction components 33 In M27 2,349.0 2,519 6 2,740.5 2,967.1 3,026.6 3.068.9 3,099.5 3,085.3 34 In M3 only* 829.7 943.2 1.103.5' 1,327.4 1.372.1 1.407.6 1,4107 1,435.4 Commercial banks 35 Savings deposits, including MMDAs 751.7 774 1 903.3 1,019.0 1,040.2 1,060.2 1.083 3 1,076 7 36 Small time deposits 501.5 5718 592.7 624.1 626.5 626.6 627 2 625.0 37 Large time deposits10" " 298.9 345.8 413.6 487.9 501.5 522.9 517.7 525.6 Thrift institutions 38 Savings deposits, including MMDAs . . 396.8 359.2 366.4 375.9 381.2 388.4 391.9 394.7 39 Small time deposits9 313.2 355.9 353.2 343.0 344.7 343.1 340.2 3185 40 Large time deposits10 64.8 74.3 78.1 85.4 87.2 87.0 87.6 87 1 Money market mutual funds 41 Retail 385.9 456.4 524.8 605.1 634.0 650.5 656.9 650.4 42 Institution-only 204.6 255.8 312.7 378.9 397.7 400.2 405.8 414.1 Repurchase agreements and Eurodollars 43 Repurchase agreements'" 179.6 178.0 188.8 228.2 239.9 256.5 257.4 262.4 44 Eurodollars 81.8 89.4 110.3' 146.9 145.8 141.0 142.2 146.1 Debt components 45 Federal debt .... 3,499.0 3,645.9 3,787.9 3,805.8 3,795.3 3,820.7 3,800.5 n.a. 46 Nonfederal debt.. 9,505.5' 10,056.6' 10,643 1' 11,363.1 11,498.8 11.569.9 11,649.7 n.a. Footnotes appear on following page. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A14 Domestic Financial Statistics • August 1998 NOTES TO TABLE 1.21 1. Latest monthly and weekly figures are available from the Board's H.D (50S) weekly these assets. Seasonally adjusted L is computed by summing U.S. savings bond?,, short-term statistical release Historical data starting in 1959 are available from the Money and Reserves Treasury securities, commercial paper, and bankers acceptances, each seasonally adjusted Projections Section, Division of Monetary Affairs, Board of Governors of the Federal Reserve separately, and then adding this result to M3. System, Washington. DC 20551. Debt: The debt aggregate is the outstanding credit market debt of the domestic nonhnancial 2. Composition of the money stock measures and debt is as follows: sectors—the federal sector (U.S. government, not including government-sponsored enter- Ml: (I) currency outside (he U.S. Treasury, Federal Reserve Banks, and the vaults of prises or federally related mortgage pools) and the nonfederal sectors (state and local depository institutions. {2\ travelers checks of nonbank issuers, (3) demand deposits m all governments, households and nonprofit organizations, nonlinaiKial corporate antl nontarm commercial banks other than those owed to depository institutions, the U.S. government, and noncorporate businesses, and farms). Nonfederal debt consists of mortgages, tax-exempt and foreign banks and official institutions, less cash items in the process of collection and Federal corporate bonds, consumer credit, bank loans, commercial paper, and other loans. The data, Reserve Moat, and (4) other checkable deposits (OCDs), consisting of negotiable order of which are derived from the Federal Reserve Board's flow of funds accounts, are breakwithdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, adjusted (that is, discontinuities in the data have been smoothed into the series) and credit union share draft accounts, and demand deposits at thrift institutions. Seasonally month-averaged (that is, the data have been derived by averaging adjacent month-end levels) adjusted Ml is computed by summing currency, travelers checks, demand deposits, and 3. Currency outside the U.S. Treasury, Federal Reserve Banks, and vaults of depository OCDs. each seasonally adjusted separately. institutions. M2: Ml plus (1) savings deposits (including MMDAs), (2) small-denomination time 4. Outstanding amount of U.S. dollar-denominated travelers checks of nonbank issuers. deposits (lime deposits—including retail RPs—in amounts of less than $100,000), and (3) Travelers checks issued by depository institutions are included in demand deposits balances in retail money market mutual funds (money funds with minimum initial invest- 5. Demand deposits at commercial banks and foreign-related institutions other than those ments of less than $50,000). Excludes individual retirement accounts (IRAs) and Keogh owed to depository institutions, ihe I1 S. government, and foreign banks and official institubalances at depository institutions and money market funds. Seasonally adjusted M2 is tions, less cash items in the process of collection and Federal Reserve float. calculated by summing savings deposits, small-denomination time deposits, and retail money 6. Consists of NOW and ATS account balances at all depository institutions, credit union fund balances, each seasonally adjusted separately, and adding this result to seasonally share draft account balances, and demand deposits at thrift institutions. adjusted Ml. 7. Sum of (I) savings deposits (including MMDAs), <2) small time deposits, and (3) retail M3' M2 plus (I) large-denomination time deposits (in amounts of $100,000 or more) money fund balances. issued by all depository institutions, (2) balances in institutional money funds (money funds 8. Sum of (1) large time deposits, (2) institutional money fund balances, (3) RP liabilities with minimum initial investments of $50,000 or more), (3) RP liabililies (overnight and term) (overnight and term) issued by depository institutions, and (4) Eurodollars (overnight and issued by all depository institutions, and (4) Eurodollars (overnight and term) held by U.S. term) of U.S. addressees. residents at foreign branches of U.S. banks worldwide and at all banking offices in the United 9. Small time deposits—including retail RPs—are those issued in amounts of less than Kingdom and Canada. Excludes amounts held by depository institutions, the U.S. govern- $100,000. All IRAs and Keogh accounts at commercial banks and thrift institutions are ment, money market funds, and foreign banks and otricuil institutions. Seasonally adjusted subtracted from small time deposits. M3 is calculated by summing large time deposits, institutional mone> fund balances. RP 10. Large time deposits are those issued in amounts of $100,000 or more, excluding those liabilities, and Eurodollars, each seasonally adjusted separately, and adding this result to booked at international banking facilities. seasonally adjusted M2. 1 I. Large time deposits at commercial banks less those held by money market funds, L: M3 plus the nonbank public holdings of U.S. savings bonds, short-term Treasury depository inscicutions, the U.S. government, and foreign banks and official institutions. securities, commercial paper, and bankers acceptances, net of money market fund holdings of I 2. Includes both overnight and term. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Commercial Banking Institutions—Assets and Liabilities A15 1.26 COMMERCIAL BANKS IN THE UNITED STATES Assets and Liabilities' A. All commercial banks Billions of dollars Monthly averages Wednesd y figures Account 1997 1997' 1998' 1998 May Nov. Dec. Jan. Feb. Mar. Apr. May May 6 May 13 May 20 May 27 Seasonall^ adjusted Assets 1 Bank credit 3,907.4 4.069.5 4.090.7 4,148.2 4,179.6 4,217 4 4.203.1 4.234.3 4,232 2 4.229 1 4.230.3 4.2JO.7 2 Securities in bank credit 1,012.0 1.075.9 1.082.7 1,104.5 1,108.6 1,127.0 1,106.7 1.122.2 1,117.7 1.116.3 1.125.5 1.127.8 3 U.S. government securities 714.4 742.2 746.7 760.3 767.8 779 4 762.0 769.3 771 9 764.4 770.2 771.(1 4 Other securities 297.6 333.7 336.0 344.1 340.8 347.6 .344.7 352.9 345.8 351.9 355.3 3568 5 Loans and leases in bank credit- . . 2,895.3 2,993.6 3,008.0 3,043.8 3,071.0 3.090.4 3,096.6 3,112.1 3,114.5 3.112.8 3,104.8 3.112.9 6 Commercial and industrial 812.5 844.1 851.8 861.7 868.9 870.5 868.8 876.7 873.7 874.1 876.0 878.1 7 Real estate 1,180.2 1 225 6 1 2292 1,232.9 1.247.9 1.259.2 1 267 7 1.269.1 1,272.1 1,269.7 1.266.0 1.268.4 8 Revolving home equity 90.6 96.7 97.6 98,0 98.2 98.3 98.6 98.1 98.4 98.3 98,1 98.0 9 Other 1,089.6 1.128.8 1,131.6 1,134.9 1,149.7 1.160 8 1,169.1 1.171.0 1.173.6 1,171.3 1,167.9 1.170.3 10 Consumer 517.9 507.3 507.3 504.6 503.0 502.1 496.6 496.6 497.1 495.6 4966 497.8 1 1 Security1 89.8 99.3 96.8 116.2 117.9 116.8 111.9 120.0 117.8 125.2 117.6 119.4 12 Other loans and leases 295.0 317.3 322.9 328.3 333.4 1418 351.6 349.7 351.8 348.3 348.7 349.2 13 Interbank loans 217.9 204.0 211.8 201.2 199.8 216.7 212.6 201.8 200.3 201.7 205.8 196.8 14 Cash assets4 246.3 274.3 263.6 265.4 269.2 281.0 274.1 257.1 25.1.7 252.6 261.0 271.3 15 Other assets-^ 281.9 290.3 289.5 290.6 293.3 292.2 305.9 313.7 308.2 .117.8 314.5 312.9 1 6 Total assets'1 4396.9 4.781.5 4,799.0 4*48.9 4,885.2 4,950.3 4,938.8 4,949.8 4.937J 4.944.1 4,954.3 4,964.6 Liabilities 17 Deposits 2.941.0 3.104.8 3,110.9 3,113.8 3,150.2 3.189.3 3.201.2 3.197.1 3,192.6 3.194.9 3.185.1 3.210.5 IK Transaction 691.5 693.0 686.8 678.4 684.9 695.7 693.6 684.5 673.3 682.4 681.1 712.9 19 Nontransaction 2,249.5 2.411." 2.424.0 2.435.4 2.465.2 2.493.6 2.507.6 2,512.6 2,519.3 2.512.4 2.504.0 2.497 7 20 Large time 566.7 633.2 636.5 643.4 659.4 673.5 670.2 672.3 671.6 671.2 671.1 668.2 21 Other 1.682.8 1.778.7 1.787.5 1.791.9 1.805.9 1,820.1 1.837.4 1.840.3 1,847.7 1,841.2 1.832.9 1.829.5 22 Borrowings 766.0 81.5.9 821.2 828.8 829.0 859.7 870.7 867.9 872.1 862.2 874.0 8663 2.1 From banks in the U.S 311/ 300.3 304.1 291.3 2923 307.2 307.7 286.5 291.9 284.2 288.2 279.3 24 From others 454.4' 5157 517.1 537.6 536.7 552.5 563.0 581.5 580.1 578.0 585.8 587.0 25 Net due to related foreign offices 231.3 192.3 202.4 2.30.7 22.1(1 201.1 17.1.9 167.0 171.2 167.6 170.4 162.4 26 Other liabilities 268.9 2846 282.9 294.8 298.7 293 9 288.5 293.5 290.4 292.4 294.7 295.9 27 Total liabilities 4207.2 4J97.7 4,417.5 4,468.2 4500.8 4,543.9 4,5343 4,525.6 4,526.2 4317.1 4324.2 4335.1 28 Residual (assets less liabilities)7 389.7 383.8 381.5 380.7 384.4 4063 404.4 424.2 411.0 427.0 430.1 429.5 Not seasonally adjusted Assets 29 Bank credit 3,903.8 4.077 2 4.100.5 4.155.5 4,177.0 4,207.8 4.207.9 4.229.2 4,243.0 4,221.7 4.218.6 4,222.8 30 Securities in bank credit 1,017.1 1.075.5 1,077.9 1.104.9 1,112.0 1.128.3 1.117.3 1,126.8 1,132.3 1,121.2 1.125.3 1,125.3 3] U.S. government securities 718.S 743.7 744.7 757.0 766.7 782.7 770.4 773.8 780.8 768.7 773.7 771.6 32 Other securities 298.3 331.7 333.2 347° 345.3 345.6 147 0 353.0 351.5 352.4 351.6 151.7 33 Loans and leases in bank credit- 2.8866 3.001 7 3.022.6 3.050.5 3.065.0 3,079.5 1.090.6 3,102.4 3,110.7 3,100.6 3.093.3 3.097.4 34 Commercial and industrial .... 817.6 842.8 850.1 859.4 868.8 8740 876.3 882.1 883.5 879.6 881.4 880.1 35 Real estate 1,174 9 1.231.7 1.232.7 1,233.0 1.242.6 1,252.7 1.261.2 1.262.8 1,265.5 1.263.4 1.259.0 1.261.5 36 Revolving home equity 90.3 97.4 97.9 98,3 97.8 97.3 97.7 97.8 98.1 98.0 97.8 97.7 37 Other ' . . . 1,084.6 1.134.3 1,134.8 1.134.7 1.144.8 1.155.3 1.163.5 1,165.0 1.167.4 1.165.4 1.161.3 1.163.8 38 Consumer 512.9 5(19.9 513.6 511.4 502.5 495.6 491.8 491.5 492.0 489.9 491.2 492 7 39 Security' S9.2 100.1 99.3 116.4 119.4 117.7 113.5 119.6 119.6 124.2 117.4 117.7 40 Other loans and leases 292 0 317.1 327.0 330.4 311.7 339.6 347.8 346.4 350.1 141.4 344.3 345.4 41 Interbank loans 213.9 209.3 221.2 208.1 202.8 216.2 215.3 197.4 199.6 195.5 199.3 188.9 42 Cash assets4 242.1 284.3 282.8 276.4 269.3 269.4 269.3 252.7 248.4 244.8 245.6 271.1 43 Other assets^ 281.4 291.4 289.9 289.1 294.4 292.1 303.9 313.1 309.8 317.4 311.6 311.5 44 Total assets' 4,585.0 4,805.4 4,837.7 4,872.8 4.887.0 4,928.6 4.939.8 4,935.4 4,943.7 4JI22.4 4,918.1 4,9373 Liabilities 45 Deposits 2,926.7 3,122.9 3.143.2 3,119.9 3.137.4 3.180.1 3.200.7 3,180.8 3,183.7 3,173.1 3,154.8 3,184.8 46 Transaction 680.0 703.8 721.0 690.4 678.2 683.4 698.8 672.8 669.6 666.2 657.9 693.8 47 Nonlransaction 2,246.7 2,419.2 2.422.2 2,429.5 2,459.2 2,496 7 2.501.9 2,508.0 2,514.1 2,507.0 2.496.9 2.491.0 48 Large time 567.4 638.9 641.1 641.7 658.3 671.0 664.7 672.6 670.8 670.6 671.0 670.1 49 Other 1.679.3 1.780.3 1,781.1 1,787.8 1.800.9 1.825.7 1,837.2 1.835.4 1,843.3 1,836.3 1.825.9 1.820.8 50 Borrowings 770.3 813.4 819.2 835.3 829.7 851 7 870.8 873.4 885.5 868.3 877.2 868.0 5 1 From banks in the U.S 31 Iff 300.6 307.9 294.7 293.3 304.8 307.0 287.6 295.8 284.5 288.8 279.7 52 From others 457.3' 5I2.S 511.3 540.5 536.4 546 9 561.8 585.8 589.7 583.7 588.5 588.3 ^} Net due to related foreign offices. . 236.5 188.4 200.3 231.0 221.1 199.4 173.1 177.4 174.9 176.8 181.2 179.5 54 Other liabilities 268.4 286.2 283.9 294.9 299.9 294.2 287.6 292.9 289.8 292.2 293.9 295.3 55 Total liabilities 4319 4,411.0 4,446.6 4,481.1 4.488.1 4325J 43327 4324-5 4333.9 4310.4 4307.2 4327.7 56 Residual (assets less liabilities)' .... 383.1 394.5 391.1 391.7 398.9 403.3 407.6 410.9 409.8 411.9 410.9 409.8 MEMO 57 Revaluation gains on off-balance-sheet items* S2.4 84.2 82.5 93.1 87.5 872 83.5 85.5 84.3 84.3 85.0 86.7 58 Revaluation losses on off-balancesheet items* 85.5 85.4 85.8 95.6 89.8 89.4 84.6 85.0 82.8 83.2 86.1 86.5 Footnotes appear on p. A21. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A16 Domestic Financial Statistics • August 1998 1.26 COMMERCIAL BANKS IN THE UNITED STATES Assets and Liabilities'—Continued B. Domestically chartered commercial banks Billions of dollars Monthly averages Wednesdjy figures Account 1997 1997' 1998' 1998 May Nov. Dec. Jan. Feb. Mar. Apr. May May 6 May 13 May 20 May 27 Seasonally adjusted Assets 1 Bank credit 3,373.1 3.521.0 3.546.7 3,579.5 3,611.0 3,651.5 3,648.7 3,670.1 3,663.5 3,668.6 3.668.2 3,674.8 2 Securities in bank credit 843.2 883.6 895.5 911.4 915.6 929.6 915.5 928.1 920.6 927.9 931.7 931.7 3 US. government securities 631.8 663.0 670.5 679.1 684.0 691.9 674.8 681.3 679.5 681.6 683.6 681.5 4 Other securities 211.4 220 6 225.1 232 2 231 6 237 7 240 7 246.8 241.1 246.3 248.1 250.2 5 Loans and leases in bank credit2... . 2.529.9 2.637.4 2,651.2 2,668.2 2.695.4 2,721.9 2,733.2 2,742.0 2,742.9 2,740.7 2,736.5 2,743.1 6 Commercial and industrial 591.2 622.6 630.5 638.5 646.4 650.2 654.2 663.2 658.7 661.4 662.0 665.7 7 Real estate 1,149.4 1.198.9 1.203.3 1,206.4 1,222.0 1.234.5 1,243.6 1,246.0 1,248.5 1.246.6 1,243.1 1.245.3 8 Revolving home equity 90.6 96.7 97.6 98.0 98.2 98.3 98.6 98.1 98.4 98.3 98.1 98.0 9 Other 1.058.9 1.102.2 1,105.7 1,108.3 1,123.8 1.136.2 1,145.0 1,147.9 1,150.0 1,148.2 1.145.0 1,147.3 10 Consumer 517.9 507.3 507.3 504.6 503.0 502.1 496.6 496.6 497.1 495.6 496.6 497.8 11 Security^ 45.9 57.6 53.0 61.4 63.1 68.0 63.8 62.0 61.4 64.5 60.9 61.1 12 Other loans and leases 225.4 250.9 257.1 257.3 261.0 267.1 274.9 274.2 277.3 272.7 273.8 273.2 13 Interbank loans 197.8 180.3 180.5 173.2 175.0 195.8 192.4 181.2 178.4 182.4 184.0 177.5 14 Cash assets4 212.3 239.4 230.1 232.6 236.5 246.9 238.8 222.6 219.4 217.3 226.7 237.0 15 Other assets5 242.8 245.1 247.2 250.0 250.9 249.3 263.5 271.8 267.3 272.4 273.5 272.8 16 Total assets6 3,969.7 4,129.4 4,148.1 4,179.0 4,217.0 4,286.9 4,286.6 4,288.8 4,271.7 4,283.7 4,295.1 4305.2 Liabilities 17 Deposits "•693 7 2.812.0 2,838 3 2,840.3 2,865.3 2 900 4 2 909 4 2 902.9 2.896.8 2 900 0 2,892.7 2,920.3 18 Transaction 680.8 682.7 677.0 668.2 674.8 685.1 682.6 673.9 662.9 672.0 671.4 700.7 19 Nontransaction 2,013.0 2,149.3 2,161.4 2,172.1 2,190.6 2.215.3 2,226.8 2.228.9 2,234.0 2.227.9 2,221.4 2.219.6 20 Large time 331.9 373.9 376.7 381.9 386.5 396.9 390.3 388.6 386.6 387.2 388.6 389.7 21 Other 1.681.1 1.775.3 1,784.7 1,790.2 1,804.0 1,818.4 1.836.5 1.840.4 1.847.3 1,840.8 1,832.8 1,830.0 22 Borrowings b24.3 659.6 671.7 679 1 684.2 705.7 705.7 699.7 7064 691.7 704.3 699.9 23 From banks in the US 279.3' 271.3 278.3 267.7 269.6 281.3 281.1 262.4 270.5 259.5 263.5 256.6 24 From others 345.01 388.3 393.4 411.4 414.6 424.4 424.7 437.3 435.9 432.2 440.7 443.3 25 Net due to related foreign offices .... 87.9 75.2 80.8 91.1 88.3 82.6 75.5 70.0 63.9 79.0 73.9 65.2 26 Other liabilities 177.7 188.6 187.4 198.3 201.1 199.7 197.9 200.0 198.5 195.5 202.1 203.9 27 Total liabilities 3.583.6 3,755.5 3.778.2 3,808.8 3,838.9 3,888.4 3,888.5 3,872.6 3,865.6 3,866.2 3,873.1 3,889.2 28 Residual (assets less liabilities)7 386.1 373.9 369.8 370.1 378.2 398.4 398.1 416.2 406.1 417.5 422.0 416.0 Not seasonally adjusted Assets 29 Bank credit 3,368.5 3,533.8 3,557.4 3,589.9 3,609.0 3.642.3 3.653.6 3,663.4 3,671.5 3,660.4 3.656.4 3.657.1 30 Securities in bank credit 845.0 886.7 894.5 917.2 922.1 932.9 924.7 928.8 930.3 929.3 928.7 926.4 31 U.S. government securities 635.8' 663.4 668.7 677.8 683.7 694.5 684.6 685.3 686.6 686.0 686.7 682.4 32 Other securities 209.2 223.3 225.8 239.4 238.4 238.5 240.1 243.5 243.7 243.3 242.0 244.0 33 Loans and leases in bank credit- 2,523.5 2,647.1 2,662.9 2,672.7 2.686.8 2.709.3 2,728.9 2,734.6 2.741.2 2,731.1 2,727.7 2,730.7 34 Commercial and industrial 596.8 621.6 627.9 635.3 645.1 653.0 661.7 669.2 668.7 667.4 668.1 669.2 35 Real estate 1,144.3 1,204.8 1,206.6 1,206.4 1,216.5 1.228.0 1X17.4 1.239.8 1,242.0 1,240.4 1,236.3 1,238.6 36 Revolving home equity 90.3 97.4 97.9 98.3 97.8 97.3 97.7 97.8 98.1 98.0 97.8 97.7 37 Other ' 1.054.0 1.107.4 1,1 OR.7 1,108.2 1.118.7 1.130.7 1,139.7 1,142.0 1.143.9 1.142.4 1,138.5 1,140.9 38 Consumer 512.9 509.9 5136 5114 502.5 495 6 491 8 491.5 492 0 489 9 491 2 492.7 39 Security3 46.0 58.6 54.3 61.5 64.4 68.2 65.9 62.1 63.2 64.2 61.4 59.7 40 Other loans and leases 223.5 252.2 260.5 258.1 258.3 264.5 272.1 272.0 275.3 269.1 270.8 270.5 41 Interbank loans 193.9 185.6 189.9 180.0 178.0 195.3 195.1 176.8 177.7 176.1 177.5 169.6 42 Cash assets4 2086 248.6 247.7 243.6 237.3 236.4 235.8 218.5 215.1 210.2 211.8 236.9 43 Other assets5 241.9 245.5 246.8 248.1 250.5 249.2 263.9 270.8 268.9 271.2 270.0 271.1 44 Total assets6 .... 3,956.8 4,157.1 4,185.3 4,205.5 4,218.4 4,266.7 4,291.9 4,272.7 4,276.3 4,261.1 4,258.8 4,278.1 Liabilities 45 Deposits 2,677.3 2,850.6 2.867.6 2,848.3 2,854.8 2,890.0 2,910.5 2,883.7 2,886.6 2,876.7 2,860.4 2,889.4 46 Transaction 669.6 693.6 710.7 680.3 668.3 672.9 688.1 662.5 659.5 656.2 648.5 681.8 47 Nontransaction 2,007.7 2,157.1 2.156.8 2,168.1 2,186.6 2,217.1 2,222.3 2,221.2 2,227.1 2,220.5 2.211.9 2,207.5 48 Large time 330.9 378.4 376.9 381.2 386.9 392.3 386.1 386.8 384.8 385.1 387.0 387.6 49 Other 1,676.7 1.778.7 1.779.9 1,786.8 1,799.6 1,824.7 1.836.3 1,834.4 1.842.3 1,835.4 1,824.9 1,819.9 50 Borrowings 628.6' 657.1 669.7 685.5 684.9 697.7 705.8 705.2 719.8 697.8 707.5 701.6 51 From banks in the ILS 280.6' 271.6 282.0 271.2 270.6 278.8 280.4 263.5 274.4 259.9 264.1 257.0 52 From others 347.91 385.5 387.6 414.4 414.3 418.9 425.4 441.7 445.4 438.0 443.5 444,6 53 Net due to related foreign offices. . 92.3 70.6 73.8 86.5 85.1 81.8 76.3 79.4 68.7 85.5 83.7 80.4 54 Other liabilities 177.7 188.6 187.4 198.3 201.1 199.7 197.9 200.0 198.5 195.5 202.1 203.9 55 Total liabilities 3,575.9 3,767.0 3,798.4 3,818.8 3,825.9 3,869.2 3,890.4 3,868.3 3,873.5 3,855.5 3,853.8 J.875.2 56 Residual (assets less liabilities!7 3809 390.1 386.9 386.8 392.5 397.5 401.5 404.4 402.9 405.5 404.9 402.9 MEMO 57 Revaluation gains on off-balance-srieel itemss 42.0 41.3 41.1 49.9 47.0 47.3 44.2 45.9 45.5 45.7 45.1 46.3 58 Revaluation losses on off-balancesheet items* 4V4 43.4 44.0 52 6 49.2 49.6 45 6 46.5 45 2 45.7 47.4 47.1 59 Mortgage-backed securities9 252.0 275.1 281.0 289.7 293.8 299.5 293.4 294.7 294.6 296.9 296.9 291.5 Footnotes appear on p. A21. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Commercial Banking Institutions—Assets and Liabilities A17 1.26 COMMERCIAL BANKS IN THE UNITED STATES Assets and Liabilities1—Continued C. Large domestically chartered commercial banks Billions of dollars Monthly averages Wednesd y figures Account 1997 1997' 1998' 1998 May Nov. Dec. Jan. Feb. Mar. Apr. May May 6 May 13 May 20 May 27 Seasonally adjusted Assets I Bank credit 2,026.6' 2,094.4 2,108.6 2,138.2 2,164.2 2,199.6 2,192.4 2,206.1 2,202.3 2,208.2 2,202.9 2,208.2 2 Securities in bank credit 444.6' 473.8 482.7 501.1 506.9 518.7 506.1 515.0 509.0 515.5 517.4 517.6 3 U.S. government securities 315.7 337.8 343.1 354.1 360.7 368.8 355.5 359.1 358.2 359.9 360.4 358.3 4 Trading account 19.4 26.7 27.4 29.1 28.0 27.5 23.7 25.7 23.5 23.7 24.5 27.5 5 Investment account 296.3 311.2 315.8 325.0 332.8 341.4 331.8 333.4 334.7 336.2 335.9 330.8 6 Other securities 128.9 135.9 139 6 147.0 146.2 149.9 150.5 155.9 150.9 155.6 157.1 159.3 7 Trading account 63.2 63.5 63.4 69.6 67.5 71.0 69.7 74.6 69.8 74.9 75.2 78.2 8 Investment account 65.7 72.5 76.2 77.4 78.7 78.9 80.9 81.3 81.0 80.6 81.9 81.0 9 State and local government.. 21.4 22.3 22.1 22.5 22.7 22.8 23.0 22.8 22.9 22.8 22.8 22.7 10 Other 44.4 50.2 54.1 54.9 56.0 56.2 57.9 58.5 58.1 57.9 59.1 58.3 11 Loans and leases in bank credit2 ... 1,582.0' 1,620.6 1,625.9 1,637.1 1.657.3 1,680.9 1,686.3 1.691.1 1,693.3 1,692.7 1.685.4 1,690.6 12 Commercial and industrial 420.0 438.9 445.7 451.9 458.3 461.9 464.2 471.0 467.1 469.7 470.1 472.8 13 Bankers acceptances 1.6 1.3 1.2 1.2 1.2 1.3 1.2 1.2 1.2 1.1 1.2 1.2 14 Other 418.4 437.6 444.5 450 7 457.1 460.7 463.0 469.8 467.3 470.0 470.2 473.0 15 Real estate 651.0 650.1 647.5 658.0 668.1 672.7 672.7 676.3 674.7 669.5 670.9 16 Revolving home equity 64.0' 67.5 68.1 68.6 68.6 68.9 69.3 68.6 69.0 69.0 68.6 68.4 17 Other 584.9 583.5 582.0 578.9 589.4 599.2 603.4 6O4.0 607.3 605.7 600.9 602.5 18 Consumer 308.7 296.4 295.0 293.9 292.6 294.1 290.6 290.0 290.4 289.8 289.5 291.1 19 Security' 41.6 52.1 47.3 55.8 57.3 61.8 57.4 56.1 55.4 58.5 55.1 55.3 20 Federal funds sold to and repurchase agreements with broker—dealers 24.2 35.7 30.9 39.4 41.1 43.7 39.7 37.5 37.2 39.0 36.0 37.7 21 Other 17.5 16.4 16.4 164 162 18.1 17.8 18.5 18.2 19.5 19.1 17.7 22 State and local government 11.2 10.9 10.8 10.7 10.7 10.5 10.6 10.7 10.6 10.8 10.7 10.6 23 Agricultural 9.4 9.6 9.6 9.5 9.5 9.6 9.7 9.7 9.7 9.7 9.7 9.7 24 Federal funds sold to and repurchase agreements with others 6.0 8.9 11.1 7.7 6.1 7.1 7.1 5.9 6.9 6.0 6.3 5.3 25 All other loans 64.8 73.4 74.9 76.2 79.9 81.1 84.5 82.9 85.9 82.1 82.0 82.2 26 Lease-financing receivables 71.3 79.5 81.3 83.9 84.9 86.7 89.5 92.1 90.9 91.4 92.5 92.7 27 Interbank loans 151.9 124.5 124.4 116.8 117.7 130.7 125.9 114.4 113.9 114.9 118.0 110.7 28 Federal funds sold to and repurchase agreements with commercial banks 97.2 81.9 82.2 76.3 68.9 80.4 74.4 63.3 63.2 63.4 67.6 59.5 29 Other 54.7 42.6 42.2 40.5 48.8 50.3 51.5 51.1 50.7 51.5 50.4 51.2 30 Cash assets4 147.6 166.8 158.5 160.5 163.7 173.3 164.2 148.1 145.6 144.1 151.6 159.2 31 Other assets5 188.9 180.4 184.3 186.5 185.9 184.8 194.9 200.4 198.1 200.7 202.7 199.5 32 Total assets' 2,477.7r 23293 2339.1 2365J 23947 2,651.4 2,04(1.4 2,631.9 2,622.9 2,631.0 2^38.1 2,640.8 Liabilities 33 Deposits 1,507.3' 1,554.5 1,555.4 1,553.9 1.572.8 1,600.2 1,601.9 1.587.6 1.587.4 1,589.5 1,581.0 1,595.5 34 Transaction 387.7 382.7 378.7 371.2 375.5 383.0 381.4 373.4 367.0 374.2 370.5 390.6 35 Nontransaction 1,119.6' 1,171.8 1,176.7 1,182.7 1,197.2 1,217.2 1,220.5 1,214.1 1,220.4 1,215.2 1,210.5 1,204.9 36 Large time 178.3 206.7 209.0 213.6 216.0 225.9 218.3 214.7 214.8 214.8 215 9 2131 37 Other 941.3' 965.1 967.8 969.2 981.2 991.3 1,002.2 999.5 1,005.6 1,000.5 994.6 991.8 38 Borrowings 475.8 505.5 513.8 520.9 525.0 544.3 542.3 534.3 543.5 528.8 536.6 532.4 39 From banks in the US 200.9 200.6 205.8 195.3 197.0 208.9 208.1 188.5 197.5 187.5 187.6 182.8 40 From others 274.9 304.9 308.0 325.6 328.0 335.4 334.2 345.8 346.0 341.4 349.0 349.6 4] Net due to related foreign offices 83.7 70.2 76.5 86.9 82.1 78.5 72.1 66.2 60.5 75.0 70.3 60.9 42 Other liabilities 152.4' 159.9 158.3 169.5 171.7 169.3 166.9 168.8 167.0 163.8 170.8 173.3 43 Total liabilities yiw 2,290.0 2304.0 2331.2 2351.6 23923 2383.2 2356.8 2358.4 2357J 2358.8 2362J 44 Residual (assets less liabilities)' 258.5 239.4 235.2 234.0 243.2 259.1 257.2 275.2 264.4 273.8 279.3 278.6 Footnotes appear on p, A21. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A18 Domestic Financial Statistics • August 1998 1.26 COMMERCIAL BANKS IN THE UNITED STATES Assets and Liabilities1—Continued C. Large domestically chartered commercial banks—Continued Monthly averages Wednesday figures 1998 May Dec. Mar. Apr. May May 6 May 13 May 20 May 27 Not seasonally adjusted Assets 45 Bank credit 2,015.4' 2,107.8 2,118.7 2,153.7 2,170.7 2,194.0 2,191.5 2,192.3 2,202.8 2,191.7 2,184.4 2,183.9 46 Securities in bank credit 442.3' 480.0 483.5 508.5 515.5 520.6 509.7 511.6 513.7 512.0 511.0 508.5 47 U.S. government securities . ... 316.4 341.0 342.9 354.2 362.5 370.2 360.2 359.8 361.0 360.3 360.9 356.4 48 Trading account 18.9 28.0 27.0 28.2 28.4 28.3 23.9 24.9 22.7 22.6 24.5 25.3 49 Investment account 297.5 313.0 315.9 326.1 334.1 341.9 336.4 334.9 338.3 337.7 336.3 331.0 50 Mortgage-backed securities. 189.9 207.1 211.9 220.2 222.8 227.4 220.7 220.2 219.9 222.0 222.3 217.5 51 Other 107.6 105.9 104.0 105.8 111.2 114.5 115.6 114.7 118.4 115.6 114.1 113.5 52 One year or less 28.9 29.4 28.1 27.1 29.1 29.8 31.0 29.6 32.3 31.3 28.5 28.1 53 Between one and five years 59.2 53.6 53.3 52.2 51.3 51.2 50.5 49.1 51.3 49.9 49.0 ill 54 More than five years .... 19.4 22.9 22.6 26.5 30.9 33.5 34.1 36.1 34.8 34.5 36.5 37.7 55 Other securities 125.8 139.0 140.6 154.3 153.0 150.4 149.5 151.8 152.7 151.7 150.1 152.1 56 Trading account 60.6 65.7 63.7 76.2 74.2 71.4 69.3 71.1 72.4 71.7 69.1 71.8 57 Investment account 65.2 73.3 77.0 78.0 78.8 79.0 80.2 80.6 80.3 80.0 81.1 80.3 58 State and local government .. 21.4 22.3 22.2 22.5 22.7 22.7 22.9 22.7 22.8 22.7 22.7 22.8 59 Other 43.9 51.0 54.8 55.6 56.1 56.3 57.3 57.9 57.5 57.3 58.3 57.5 60 Loans and leases in bank credit- .. 1,573.1' 1,627.8 1,635.1 1,645.2 1,655.2 1,673.4 1,681.8 1,680.7 1,689.1 1,679.7 1,673.4 1,675.4 61 Commercial and industrial 423.2' 439.0 443.6 449.5 457.5 463.8 469.3 474.6 474.3 473.1 473.5 474.1 62 Bankers acceptances 1.6 1.4 1.3 1.2 1.2 1.2 1.2 1.2 1.2 1.1 1.2 1.2 63 Other 421.6 437.6 442.3 448.3 456.3 462.6 468.1 473.4 473.1 472.0 472.3 472.9 64 Real estate 642.3 655.0 652.6 650.6 656.3 663.9 666.8 664.9 669.0 666.8 660.7 662.1 65 Revolving home equity 63.6 68.2 68.4 68.9 68.2 67.9 68.2 68.2 68.5 68.4 68.1 68.0 66 Other 358.7 361.4 358.7 358.2 363.6 371.6 372.8 370.2 373.8 371.8 366.3 367.1 67 Commercial 220.0 225.4 225.4 223.5 224.5 224.4 225.8 226.5 226.7 226.6 226.3 227.0 68 Consumer 304.9 297.3 298.9 299.0 292.3 289.5 286.7 286.1 286.3 285.1 285.3 287.5 69 Security3 41.7 53.1 48.6 55.9 58.6 61.9 59.5 56.1 57.2 58.3 55.6 54.0 70 Federal funds sold to and repurchase agreements with broker-dealers... . 24.2 36.6 31.3 39.5 42.4 43.9 41.6 37.5 39.1 39.0 36.1 36.0 71 Other 17.5 16.5 17.3 16.4 16.3 18.0 17.9 18.6 18.1 19.3 19.4 18.0 72 State and local government 11.1 11.0 10.9 10.7 10.7 10.5 10.4 10.5 10.5 10.6 10.6 10.5 73 Agricultural 9.3 9.6 9.6 9.4 9.1 9.2 9.3 9.5 9.5 9.5 9.5 9.6 74 Federal funds sold to and repurchase agreements with others 6.0 8.9 11.1 7.7 6.1 7.1 7.1 5.9 6.9 6.0 6.3 5.3 75 All other loans 63.8 74.5 78.2 76.8 78.4 80.2 83.4 81.6 85.1 79.8 80.0 80.3 76 Lease-financing receivables .... 70.9 79.5 81.6 85.7 86.2 87.3 89.3 91.4 90.4 90.6 91.7 92.0 77 Interbank loans 150.9 126.5 129.8 122.2 116.7 126.4 126.6 113.7 114.2 112.4 116.4 110.2 78 Federal funds sold to and repurchase agreements with commercial banks 96.8 83.6 86.3 80.3 68.1 77.1 75.5 62.9 64.7 61.9 66.1 58.6 79 Other 54.2 42.9 43.4 41.9 48.6 49.3 51.1 50.8 49.5 50.6 50.3 51.6 80 Cash assets4 144.0 173.5 172.5 170.4 164.6 164.5 161.8 144.0 141.3 138.4 139.4 158.2 81 Other assets5 188.9 180.4 184.3 186.5 185.9 184.8 194.9 200.4 198.1 200.7 202.7 199.5 82 Total assets6 2/1*2.1' 155\A 2^5 2,5963 2.60U lfi}2.9 2,6382 2,613.6 2.619.6 2,606.4 2,606.0 A615.2 Liabilities 83 Deposits 1,490.4' 1.566.6 1,576.9 1,563.3 1,565.2 1,588.2 1,594.7 1,567.9 1,571.5 1,565.6 1,553.2 1,568.9 84 Transaction 379.ff 389.2 401.8 380.8 372.4 373.9 383.4 364.1 361.5 361.7 354.4 377.3 85 Nontransaction 1.111.4' 1,177.5 1,175.1 1,182.5 1.192.8 1.214.3 1,211.3 1,203.9 1,210.1 1,203.9 1,198.9 1,191.6 86 Large time 177.3 211.2 209.2 212.9 216.4 221.3 214.1 212.9 212.9 212.7 214.3 211.1 87 Other 934.1' 966.3 965.8 969.6 976.5 993.0 997.2 990.9 997.1 991.2 984.6 980.5 88 Borrowings 479.5' 503.4 511.0 526.4 527.5 539.5 544.1 539.3 555.8 533.5 539.3 534.2 89 From banks in the US 201.4 201.8 209.4 198.3 198.7 207.6 207.7 188.9 200.5 186.8 187.3 182.6 90 From nonbanks in the U.S 278.0 301.5 301.6 328.1 328.8 331.9 336.4 350.5 355.3 346.7 352.1 351.6 91 Net due to related foreign offices .... 88.1 65.6 69.5 82.3 79.0 77.7 72.8 75.6 65.3 81.5 80.2 76.2 92 Other liabilities 152.4' 159.9 158.3 169.5 171.7 169.3 166.9 168.8 167.0 163.8 170.8 173.3 93 Total liabilities . 2J10Jr 1295.5 2315.6 2341.6 2343.4 2374.7 2378.6 2351.6 2359.7 23444 2343.6 235Z6 94 Residual (assets less liabilities)7.. . 251.8 255.9 252.8 254.7 257.8 258.2 259.6 262.0 259.9 262.0 262.5 262.6 MEMO 95 Revaluation gains on off-balancesheet items8 42.0 41.3 41.1 49.9 47.0 47.3 44.2 45.9 45.5 45.7 45.1 96 Revaluation losses on off-balancesheet items8 43.4 43.4 44.0 52.6 49.2 49.6 45.6 46.5 45.2 45.7 47.4 47.1 97 Mortgage-backed securities9 209.3 225.1 229.9 238.6 242.3 247.4 240.8 241.4 241.1 243.4 243.7 238.7 98 Pass-through securities 142.6 154.4 157.5 162.7 164.9 169.4 164.5 163.7 163.0 165.1 166.1 161.3 99 CMOs, REMICs, and other mortgage-backed securities. 66.7 70.7 72.4 75.9 77.4 78.0 76.3 Til 78.1 78.3 77.6 100 Net unrealized gains (losses) on available-for-sale securities10 -0.1 2.3 2.1 3.0 3.3 2.9 3.0 2.8 27 2.7 2.7 2.7 101 Offshore credit to U.S. residents11 . 33.6 34.4 34.2 35.5 36.2 35.2 35.5 36.0 35.6 36.1 36.1 35.7 Footnotes appear on p. A21. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Commercial Banking Institutions—Assets and Liabilities A19 1.26 COMMERCIAL BANKS IN THE UNITED STATES Assets and Liabilities1—Continued D. Small domestically chartered commercial banks Billions of dollars Monthly averages Wednesday figures Account 1997 1997 1998' 1998 May Nov. Dec. Jan. Feb. Mar. Apr. May May 6 May 13 May 20 May 27 Seasonally adjusted Assets 1 Bank credit 1,346.5' 1,426.6' 1,438.1' 1,441.4 1,446.8' 1,451.9 1,456.3 1,464.1 1,461.2 1.460.4 1,465.3 1,466.6 2 Securities in bank credit 398.6' 409.8 412.8 410.3 408.7 410.9 409.4 413.1 411.6 412.4 414.2 414.1 3 U.S. government securities . 316.1 325.2 327.4 325.0 323.3 323.1 319.3 322.2 321.3 321.7 323.3 323.2 4 Other securities 82.6 84.6 85.5 85.3 85.4 87.8 90.2 90.8 90.3 90.7 91.0 90.9 5 Loans and leases in bank credit2. 947.9 1,016.8' 1,025.3' 1,031.1 1,038.1' 1,041.0 1,046.9 1,051.0 1,049.6 1.048.0 1,051.1 1,052.5 6 Commercial and industrial . 171.2 183.8 184.8 186.5 188.0T 188.3 190.0 192.1 191.6 191.6 192.0 192.8 7 Real estate 500.6 547.91 553.2 558.8 563.91 566.4 571.0 573.3 572.2 571.8 573.7 574.4 8 Revolving home equity . . 26.6 29.2 29.6 29.5 29.6 29.5 29.3 29.5 29.4 29.3 29.5 29.6 9 Other 474.0 518.7' 523.6' 529.4 534.4 536.9 541.6 543.8 542.8 542.5 544.1 544.8 10 Consumer 209.2 210.9 212.3 210.7 210.3' 208.0 206.0 206.6 206.7 205.8 207.1 206.8 11 Security' 4.3 5.5 5.7 5.6 5.8 6.3 6.3 6.0 6.0 6.0 5.8 5.7 12 Other loans and leases 62.6 68.7 69.3' 69.5 70.ff 72.1 73.5 73.0 73.2 72.8 72.5 72.7 13 Interbank loans 46.0 55.8 56.0 56.4 57.3 65.1 66.5 66.8 64.5 67.4 66.0 66.8 14 Cash assets4 64.7 72.6 71.6 72.0 72.8 73.6 74.6 74.5 73.9 73.1 75.0 77.8 15 Other assets5 53.9 64.6 62.9 63.6 64.5 68.6 71.4 69.2 71.7 70.7 73.3 16 Total assets* 1,492.1' 1,608.9' 1,613.8 1,6223' 1,635.5 1,646.2 1,656.9 1,648.9 1.65Z7 1,657.0 1,664.5 Liabilities 17 Deposits 1,186.4' 1,277.5' 12X2.9 1,286.4 L292.61 1,300.2 1,307.4 1,315.3 1,309.4 1,310.5 1,311.8 1,324.8 18 Transaction 293.O1 300.1 298.3 297.1 299.2' 302.1 301.1 300.5 295.9 297.8 300.9 310.1 19 Nontransaction 893.4' 977.4' 984.6' 989.4 993.3' 998.1 1,006.3 1,014.8 1,013.6 1.012.7 1,010.9 1,014.7 20 Large time 153.6 167.2 167.7 168.4 170.5' 171.0 172.0 173.9 171.8 172.4 172.7 176.6 21 Other 739.8 810.2' 816.91 821.0 822.8' 827.1 834.3 840.9 841.8 840.3 838.2 838.2 22 Borrowings 148.5 154.2 157.9 158.2 159.2 161.4 163.5 165.5 162.9 162.9 167.6 167.5 23 From banks in the U.S 78.4' 70.7' 72.5' 72.4 72.6' 72.4 73.0 73.9 73.0 72.0 75.9 73.8 24 From others 70.1' 83.5' 85.4' 85.8 86.6' 89.0 90.5 91.5 90.0 90.8 91.7 93.6 25 Net due to related foreign offices 4.2 5.0 4.3 4.2 6.1 4.1 3.5 3.8 3.4 4.0 3.6 4.2 26 Other liabilities 25.3 28.8 29.1 29.4 30.5 31.0 31.2 31.4 31.7 31.3 30.5 27 Total liabilities 1364^' l,474.2r 1,477.6 1/1873' 1,496.1 1,5053 1,515.8 1,507.2 1,509.1 L5143 1,527.1 28 Residual (assets less liabilities)7. 127.6 134.7 136.1 135.0 139.4 140.8 141.1 141.7 143.7 142.8 137.4 Not seasonally adjusted Assets 29 Bank credit 1,353.2' 1.426.0' 1.438.7' 1,436.2 1,438.3' 1,448.3 1,462.0 1,471.1 1,468.7 1.468.7 1,472.0 1,473.2 30 Securities in bank credit 402.8 406.7 411.0 408.7 406.6 412.3 415.0 417.2 416.6 417.3 417.7 417.9 31 U.S. government securities .. 319.4 322.4 325.8 323.6 321.2 324.2 324.3 325.5 325.6 325.7 325.8 326.0 32 Other securities 83.4 84.3 85.1 85.1 85.4 88.1 90.6 91.7 91.0 91.7 91.9 91.9 33 Loans and leases in bank credit2. . 950.4' 1,019.3' 1,027.8' 1,027.5 1.031.7' 1,035.9 1,047.0 1,053.9 1,052.1 1,051.3 1,054.3 1,055.3 34 Commercial and industrial . . 173.6 182.6 184.2 185.7 187.7 189.2 192.4 194.7 194.4 194.4 194.5 195.1 35 Real estate xaff 549.8' 554.1 555.8 560.2 564.1 570.6 575.0 573.1 573.6 575.6 576.5 36 Revolving home equity ... 26.7' 29.3 29.5 29.4 29.5 29.4 29.5 29.6 29.6 29.6 29.7 29.7 37 Other 475.3 520.6 524.6 526.5 530.6' 534.7 541.2 545.3 543.4 544.0 545.9 546.8 38 Consumer 207.9 212.6 214.7 212.4 210.2 206.1 205.1 205.3 205.8 204.8 205.8 205.2 39 Security' 4.3 5.5 5.7 5.6 5.8 6.3 6.3 6.0 6.0 6.0 5.8 5.7 40 Other loans and leases 62.5 68.7' 69.1' 67.9 67.8' 70.3 72.6 73.0 72.9 72.6 72.6 72.8 41 Interbank loans 43.0 59.2 60.1 57.8 61.3 68.9 68.6 63.0 63.4 63.7 61.1 59.4 42 Cash assets4 64.6 75.1 75.2 73.2 72.6 71.9 74.0 74.4 73.7 71.7 72.3 78.7 43 Other assets5 53.0 65.1 62.5 61.6 64.6 64.4 69.0 70.4 70.8 70.5 67.3 71.6 44 Total assets6 l,605.7r 1.609J 1,617.2' 1,633.8 1,653.7 1,659.0 1,656.7 1,654.7 1,652.7 1,662.9 Liabilities 45 Deposits 1,187.(7 U84.0' 1,290.7' 1,285.0 1,289.6' 1,301.7 1,315.8 1,315.8 1,315.0 1,311.1 1,307.2 1,320.5 46 Transaction 290.7 304.4 308.9 299.4 295.9 299.0 304.7 298.4 298.0 294.5 294.1 304.6 47 Nontransaction 896.3 979.6' 981.8' 985.6 993.7' 1,002.7 1,011.0 1,017.4 1,017.0 1,016.6 1,013.1 1.015.9 48 Large time 153.6 167.2 167.7 168.4 170.5' 171.0 172.0 173.9 171.8 172.4 172.7 176.6 49 Other 742.7 812.4 814.1' 817.2 823.2 831.7 839.1 843.5 845.2 844.2 840.4 839.4 50 Borrowings 149.1 153.7 158.6 159.1 157.4 158.2 161.7 165.9 164.0 164.3 168.2 167.4 5 5 1 2 F F r r o o m m o b t a h n e k r s s in the U.S 7 69 9 . . 9 2 " ' 6 8 9 4. . 0 8 1 ' 7 8 2 6 . . 6 ^ ' 7 8 2 6 . . 9 2 7 85 1 . . 5 8 ' ' 7 8 1 7 . . 2 0 7 8 2 9 . . 7 0 7 9 4 1 . . 6 2 7 90 3 . . 1 9 7 9 3 1 . . 1 2 7 9 6 1 . . 8 4 7 9 4 3 . . 4 0 53 Net due to related foreign offices. 4.2 5.0 4.3 4.2 6.1 4.1 3.5 3.8 3.4 4.0 3.6 4.2 54 Other liabilities 25.3 28.8 29.1 29.4 31.0 31.2 31.4 31.7 31.3 30.5 28.8 30.5 55 Total liabilities 1365.6' 1,482.8' 1,482.5' 1,511.8 1,516.7 1,513.8 L511.1 1,5103 1,522.6 1,477.2 1,494.5 56 Residual (assets less liabilities)7. . 129.1 134.2 134.01 134.7 142.3 142.9 143.6 142.4 140.3 132.1 139.3 MEMO 57 Mortgage-backed securities9 50.0 53.5 53.2 Footnotes appear on p. A21. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A20 Domestic Financial Statistics • August 1998 1.26 COMMERCIAL BANKS IN THE UNITED STATES Assets and Liabilities'—Continued E. Foreign-related institutions Billions of dollars Monthly averages Wednesday figures 1997 May Apr. May May 6 May 13 May 20 May 27 Seasonally adjusted Assets 1 Bank credit 534.3 548.5 544.0 568.7 568.6 565.9 554.5' 564.2 568.7 560.5 562.1 565.9 2 Securities in bank credit 168.8 192.3 187.2 193.1 193.0 197.3 191.2 194.1 197.1 188.4 193.8 196.2 3 U.S. government securities 82.7 79.2 76.3 81.2 83.8 87.5 87.2 88.0 92.4 82.8 86.5 89.5 4 Other securities 86.2 113.1 110.9 111.9 109.2 109.8 104.0 106.1 104.7 105.6 107.2 106.6 5 Loans and leases in bank credit3 . 365.5 356.2 356.8 375.6 375.6 368.5' 363.4 370.1 371.5 372.1 368.3 369.8 6 Commercial and industrial . .. . 221.3 221.4 221.3 223.2 222.5 220.3 214.6 213.5 215.0 212.7 213.9 212.4 7 Real estate 30.7 26.6 25.9 26.5 25.9 24.7 24.0 23.1 23.6 23.1 22.8 23.1 8 Security' 43.8 41.7 43.8 54.8 54.8 48.8 48.1 58.0 56.4 60.7 56.7 58.3 9 Other loans and leases 69.6 66.4 65.8 71.0 72.4 74.7 76.6' 75.5 76.5 75.5 74.9 76.0 10 Interbank loans 20.0 23.7 31.3 28.0 24.8 20.9 20.2 20.7 21.9 19.3 21.8 19.3 11 Cash assets4 34.0 34.9 33.5 32.9 32.6 34.1 35.3 34.6 34.3 35.3 34.4 34.3 12 Other assets5 39.1 45.2 42.3 40.6 42.4 42.9 42.4 41.8 40.9 45.5 41.1 40.1 13 Total assets6 627.2 652.1 650.9 670.0 668.2 663/4r 652.1r 661.0 665.5 660.4 659.2 659/1 Liabilities 14 Deposits 247.2 272.8 272.5 273.5 284.8 288.9 291.9" 294.3 295.8 294.9 292.4 290.2 15 Transaction 10.7 10.3 9.8 10.2 10.1 10.6 11.0 10.6 10.4 10.4 9.7 12.2 16 Nontransaction 236.5 262.6 262.7 263.3 274.7 278.3 280.8' 283.7 285.3 284.5 282.6 278.1 17 Large time 234.8 259.3 259.9 261.5 112.9 276.6 279.91 283.7 285.0 284.1 282.5 278.5 18 Other 1.7 3.3 2.8 IS 1.8 1.7 0.9 0.0 0.4 0.4 0.1 -0.5 19 Borrowings 141.7 156.3 149.5 149.7 144.8 154.0 165.0 168.2 165.7 170.5 169.7 166.4 20 From banks in the US 32.4 29.0 25.9 23.6 22.7 25.9 26.7 24.1 21.4 24.7 24.7 22.7 21 From others 109.3 127.3 123.6 126.2 122.1 128.1' 138.3 144.1 144.2 145.8 145.0 143.7 22 Net due to related foreign offices 143.4 117.1 121.7 139.6 134.7 118.4' 98.3' 97.0 107.3 88.6 96.5 97.3 23 Other liabilities 91.2 96.0 95.5 96.5 97.6 94.2 90.6 93.5 91.9 96.9 92.5 92.0 24 Total liabilities 623.5 642.2 6392 659.4 661.9 645.8' 653.0 660.6 650.8 651.1 645.9 25 Residual (assets less liabilities)7. . . 3.6 9.9 10.6 6.3 8.0 4.9 9.5 8.0 13.5 Not seasonally adjusted Assets 26 Bank credit 535.2 543.3 543.1 565.6 568.0 565.5 554.3' 565.8 571.5 561.4 562.2 565.7 27 Securities in bank credit 172.1 188.7 183.4 187.7 189.9 195.3 192.6' 198.0 202.0 191.9 196.7 198.9 28 U.S. government securities . . 83.0 80.3 75.9 79.2 83.0 88.2 85.8 88.6 94.2 82.8 87.0 89.2 29 Trading account 16.6 16.0 13.7 14.6 14.1 17.6 18.4 20.4 24.5 14.4 20.4 22.2 30 Investment account 66.4 64.3 62.2 64.6 68.9 70.6 67.4 68.2 69.7 68.3 66.6 67.0 31 Other securities 89.1 108.4 107.4 108.5 106.9 107.1 106.8 109.4 107.8 109.1 109.6 109.7 32 Trading account 50.9 60.9 60.0 62.9 61.3 59.7 58.4 59.8 57.9 58.4 60.0 61.3 33 Investment account 38.2 47.5 47.4 45.6 45.6 47.4 48.4 49.6 49.9 50.7 49.7 48.5 34 Loans and leases in bank credit 363.1 354.6 359.7 377.8 378.1 370.2 361.7 367.8 369.5 369.5 365.6 366.8 35 Commercial and industrial . . 220.8 221.2 222.2 224.1 223.6 221.0 214.6 212.9 214.8 212.1 213.4 210.9 4 4 3 3 3 3 0 1 6 7 8 9 C I O n a t t h s e h e rb r O R S a a e a e t n s h c s a s k s u e e l e r r t l e s t i o t s l s 4 y o a 5 ta 3 a n t n s e s and leases 4 3 6 2 3 3 3 3 8 9 0 0 . . . . . . 2 7 5 5 0 6 4 4 2 6 2 3 5 1 3 5 5 6 . . . . . . 8 6 7 7 0 9 4 4 2 6 3 3 3 5 5 6 6 1 . . . . . . 1 0 1 5 0 3 4 2 5 7 2 3 1 8 6 4 2 2 . . . . . . 0 0 6 9 3 8 4 2 5 7 2 3 3 4 3 2 6 4 . . . . . . 9 8 4 0 1 9 4 4 2 7 2 3 9 2 5 3 0 4 . . . . . . 5 9 0 0 9 7 4 4 2 7 2 33 0 7 5 0 3 . . . . . 5 . 1 6 7 2 8 ' 4 2 5 7 2 3 2 0 7 4 3 4 . . . . . . 3 7 5 4 0 2 4 2 5 7 2 3 0 4 3 6 1 3 . . . . . . 9 8 5 4 9 3 4 2 6 7 3 1 6 3 0 4 4 9 . . . . . 4 2 0 0 6 3 2 4 5 7 2 3 2 1 6 3 3 1 . . . . . . 7 0 6 4 9 8 2 5 7 3 4 1 2 8 4 4 0 9 . . . . . . 9 0 2 9 4 3 42 Total assets6 628.2 648.3 652.4 6672 668.6 662.0 647.^ 662.7 6674 661J 659.3 659.4 Liabilities 43 Deposits 249.4 272.3 275.6 271.6 282.6 290.1 290.2' 297.1 297.1 296.5 294.4 295.5 44 Transaction 10.4 10.2 10.3 10.1 9.9 10.5 10.6 10.3 10.1 10.0 9.4 12.0 45 Nontransaction 239.0 262.1 265.3 261.5 272.6 279.6 279.6' 286.7 287.0 286.5 285.0 283.5 46 Large time 236.4 260.5 264.2 260.5 271.4 278.7' 278.6' 285.8 286.0 285.5 284.0 282.5 47 Other 2.6 1.6 1.2 1.0 1.2 1.0 1.0 1.0 1.0 1.0 1.0 1.0 48 Borrowings 141.7 156.3 149.5 149.7 144.8 154.0 165.0 168.2 165.7 170.5 169.7 166.4 49 From banks in the US 32.4 29.0 25.9 23.6 22.7 25.9 26.7 24.1 21.4 24.7 24.7 22.7 50 From others 109.3 127.3 123.6 126.2 122.1 128.1' 138.3 144.1 144.2 145.8 145.0 143.7 51 Net due to related foreign offices . 144.2 117.8 126.5 144.5 136.0 117.6' 96.9" 98.0 106.3 91.3 97.5 99.2 52 Other liabilities 90.7 97.6 96.5 96.5 94.4 89.7 92.9 91.4 96.7 91.8 91.4 53 Total liabilities 626.0 644.0 64&2 662.3 662.2 656.1' 64L8r 656.2 660.4 654.9 6533 65Z5 54 Residual (assets less liabilities)7 2.2 4.4 4.9 6.4 5.8 6.6 7.0 6.4 6.9 MEMO 55 Revaluation gains on oif-balance-sheet items* 40.4 42.8 41.4 43.2 40.4 40.0 39.3 39.7 38.9 38.6 39.9 40.4 56 Revaluation losses on off-balancesheet items8 42.1 42.0 41.8 42.9 40.6 39.8 38.9 38.4 37.6 37.5 38.7 39.4 Footnotes appear on p. A21. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Commercial Banking Institutions—Assets and Liabilities A21 NOTES TO TABLE 1.26 NOTE. Tables 1.26. 1.27, and 1.28 have been revised to reflect changes in the Board's H.8 group that contained the acquired bank and put into past data for the group containing the statistical release, "Assets and Liabilities of Commercial Banks in the United States." Table acquiring bank. Balance sheet data for acquired banks are obtained from Call Reports, and a 1.27, "Assets and Liabilities of Large Weekly Reporting Commercial Banks," and table 1.28, ratio procedure is used to adjust past levels. "Large Weekly Reporting U.S. Branches and Agencies of Foreign Banks," are no longer 2. Excludes federal funds sold to, reverse RPs with, and loans made to commercial banks being published in the Bulletin. Instead, abbreviated balance sheets for both large and small in the United States, all of which are included in "Interbank loans." domestically chartered banks have been included in table 1.26, parts C and D. Data are both 3. Consists of reverse RPs with brokers and dealers and loans to purchase and carry merger-adjusted and break-adjusted. In addition, data from large weekly reporting U.S. securities. branches and agencies of foreign banks have been replaced by balance sheet estimates of all 4. Includes vault cash, cash items in process of collection, balances due from depository foreign-related institutions and are included in table 1.26, part E. These data are break- institutions, and balances due from Federal Reserve Banks. adjusted. 5. Excludes the due-from position with related foreign offices, which is included in "Net The not-seasonally-adjusted data for all tables now contain additional balance sheet items, due to related foreign offices." which were available as of October 2, 1996. 6. Excludes unearned income, reserves for losses on loans and leases, and reserves for I. Covers the following types of institutions in the fifty states and the District of transfer risk. Loans are reported gross of these items. Columbia: domestically chartered commercial banks that submit a weekly report of condition 7. This balancing item is not intended as a measure of equity capital for use in capital (large domestic); other domestically chartered commercial banks (small domestic); branches adequacy analysis. On a seasonally adjusted basis this item reflects any differences in the and agencies of foreign banks, and Edge Act and agreement corporations (foreign-related seasonal patterns estimated for total assets and total liabilities. institutions). Excludes International Banking Facilities. Data are Wednesday values or pro 8. Fair value of derivative contracts (interest rate, foreign exchange rate, other commodity and rata averages of Wednesday values. Large domestic banks constitute a universe; data for equity contracts) in a gain/loss position, as determined under FASB Interpretation No. 39. small domestic banks and foreign-related institutions are estimates based on weekly samples 9. Includes mortgage-backed securities issued by U.S. government agencies, U.S. and on quarter-end condition reports. Data are adjusted for breaks caused by reclassifications government-sponsored enterprises, and private entities. of assets and liabilities. 10. Difference between fair value and historical cost for securities classified as available- The data for large and small domestic banks presented on pp. AI7-19 are adjusted to for-sale under FASB Statement No. 115. Data are reported net of tax effects. Data shown are remove the estimated effects of mergers between these two groups. The adjustment for restated to include an estimate of these tax effects. mergers changes past levels to make them comparable with current levels. Estimated 1 ]. Mainly commercial and industrial loans but also includes an unknown amount of credit quantities of balance sheet items acquired in mergers are removed from past data for the bank extended to other than nonfinancial businesses. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A22 Domestic Financial Statistics • August 1998 ] .32 COMMERCIAL PAPER AND BANKERS DOLLAR ACCEPTANCES OUTSTANDING Millions of dollars, end of period Year ending December 1997 1993 1994 1995 1996 1997 Dec. Dec. Dec. Dec. Dec. Apr. Commercial paper (seasonally adjusted unless noted otherwise} 1 All issuers 555,075 595,382 674,904 940,524 966,699 973,761 1,004,662 1,049,222 1,041,681 Financial companies' 2 Dealer-placed paper", total 218.947 223.038 275.815 361.147 513.307 4S3.475 513,307 509,950 520,940 550,670 558,817 3 Directly placed paper\ total. . . 180,389 207.701 210,829 229.662 252,536 249.781 252,536 254,926 268,001 282.083 275.415 4 Nontinancia! companies 207,268 200,857 216,469 207,449 Bankers dollar acceptances (nol seasonally adjusted)5 5 Total. 32348 29,835 29,242 25,754 By holder 6 Accepting banks 12,421 11,783 7 Own bills 111,707 10,462 8 Bills bought from other banks 1,714 1,321 Federal Reserve Banks6 9 Foreign correspondents 725 410 10 Others 19,202 17,642 Sv basis 11 Imports into United States 10,217 10,062 12 Exports from United States. . . . 7.293 6,355 13 All other 14.838 13.417 1 Institutions engaged primarily tn commercial, savings, and mortgage banking; sales, 5 Data on bankers dollar acceptances are gathered Irom approximately 100 institutions. personal, and mortgage financing: factoring, finance leasing, and other business lending: The reporting group is revised every January. Beginning January 1995. data for Bankers insurance underwriting; and other mveslment activities. dollar acceptances arc reported annually in September 2. Includes all financial-company paper sold by dealers in the open market. 6 In 1977 the Federal Reserve discontinued operations in bankers dollar acceptances for 3. As reported by financial companies that place their paper directly with investors. its own account. 4. Includes public utilities and firms engaged primarily in such activities as communications, construction, manufacturing, mining, wholesale and retail trade, transportation, and services. 1.33 PRIME RATE CHARGED BY BANKS Short-Term Business Loans1 Percent per year Date of change Rate Period Av r e a r t a e ge Period Av r e a r t a e ge Period Av r e a r t a e ge 1995—Jan. 1 8.50 1995 8.83 1996—Jan 8.50 1997—Jan 8.25 Feb. 1 9.00 1996 8.27 Heb 8.25 Heb 8.25 July 7 8.75 1997 8.44 Mar 8.25 Mar 8.10 Dec. 20 8.50 Apr 8.25 Apr 8.50 1995—Jan S.5O Mav 8.25 May 8.50 1996—Feb. 1 8.25 Feb 9.00 June 8.25 June 8.50 Mar 9.00 July 8.25 July 8.50 19i)7_Mar 26 8.50 Apr 9.00 Aug 8.25 Aug 8.50 May 9.00 Sept 8.25 Sept 8.50 June 9.00 Oct 8.25 Oct 8.50 July 8.80 Nov 8.25 Nov 8.50 Aug 8.75 Dec 8.25 Dec 8.50 Sept 8.75 Oct 8.75 1998—Jan 8.50 Nov 8.75 Feb 8.50 Dec 8.65 Mar 8.50 Apr 8.50 May 8.50 June 8.50 I. The prime rate is one of several base rates that banks use lo price short-term business Report Data in this table also appear in the Board's H.15 (519) weekly and G.I3 (415) loans. The table shows the diitc on which a new rate came to be the predominant one quoted monthly statistical releases. For ordering address, see inside front cover. by a majority of ibe twenty-live largest banks by assel size, based on the most recent Call Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Financial Markets A23 1.35 INTEREST RATES Money and Capital Markets Percent per year; figures are averages of business day data unless otherwise noted 1998 1998, weekending Item 1995 1996 1997 Feb. Mar. Apr. May May 1 May 8 May 15 May 22 May 29 MONEY MARKET INSTRUMENTS 1 Federal funds123 5.83 5.30 5.46 5.51 5.49 5.45 5.49 5.40 5.35 5.49 5.60 5.45 2 Discount window borrowing2'4 5.21 5.02 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 Commercial paper'•4-^-t> Non financial 3 1 -month n.a. n.a. 5.57 5.47 5.51 5.49 5.49 5.49 5.48 5.49 5.49 5.50 4 2-month n.a. n.a. 5.57 5.44 5.49 5.48 5.49 5.49 5.48 5.48 5.50 5.50 5 3-month 5.56 5 42 5.46 5.46 5.48 5.49 5.47 5 48 5.49 5.48 Financial 6 1 -month n.a. n.a. 5.59 5.4<) 5.53 5.51 5.50 5.51 5.50 5.51 5.51 5.51 7 2-month n.a. n.a. 5.59 5.47 5.51 5.49 5.50 5.50 5.49 5.51 5.51 5.50 8 3-month n.a. n.a. 5.60 5.45 5.49 5.48 5.50 5.50 5.49 5.50 5.51 5.49 Commercial paper (historical) " ' J 9 1-month 5.93 5.43 5.54 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 10 3-month 5.93 5.41 5.58 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 11 6-month 5.93 5.42 5.62 n.a. n.a. n.a. n.a. n.a. n.a. n a. n.a. n.a. Finance paper, directly placed ihistorical) ~ -7'1 ^ 12 1-month 5.81 5.31 5.44 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 13 3-month 5.78 5.29 5.48 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 14 6-month 5.68 5.21 5.48 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Bankers acceptances'" • IS 3-nionth 5.81 5.31 5.54 5.46 5.50 5.4S 5.48 5.47 5.49 5.48 5.48 5.48 16 6-month 5.80 5.31 5.57 5.41 5.46 5.44 5.44 5.43 5.46 5.44 5.43 5.44 Certificates of deposit, secondary market'' 17 1 -month 5.87 5.35 5.54 5.53 5.58 5.56 5.56 5.57 5.56 5.56 5.56 5.56 IS 3-month 5.92 5.39 5.62 5.54 5.58 5.58 5.59 5.60 5.58 5.59 5.60 5.59 19 6-month 5.98 5.47 5.73 5.55 5.61 5.63 5.67 5.69 5.66 5.67 5.67 5.66 20 Eurodollar deposits, 3-month • 5.93 5.38 5.61 5.53 5.56 5.56 5.57 5.57 5.57 5.57 5.57 5.57 V. S- Treasury bills Secondary market1'5 21 3-month 5.49 5.01 5.06 5.09 5.03 4.95 5.00 4.91 4.97 5.01 5.08 4.95 22 6-month 5.56 5.08 5.18 5.07 5.04 5.06 5.14 5.09 5.11 5.16 5.18 5.15 23 1-year 5.60 5.22 5.32 5.04 5.11 5.10 5.16 5.17 5.15 5.18 5.17 5.15 Auction average^'5'12 24 3-month 5.51 5.02 5.07 5.11 5.03 5.00 5.03 4.94 4.99 5.01 5.08 5.02 25 6-month 5.59 5.09 5.18 5.07 5.04 5.08 5.15 5.12 5.11 5.17 5.16 5.17 26 1 -year 5.69 5.23 5.36 4.97 5.13 5.12 5.15 5.13 n.a. n.u. n.a. 5.15 U.S. TREASURY NOTES AND BONDS Constant maturities ' 27 1-year 5.94 5.52 5.63 5.31 5.39 5.38 5.44 5.45 5.43 5.46 5.45 5.43 28 2-year 6.15 5.84 5.99 5.42 5.56 5.56 5.59 5.66 5.59 5.62 5.60 5.56 29 3-year 6.25 5.99 6.10 5.43 5.57 5.58 5.61 5.69 5.62 5.64 5.60 5.56 30 5-year 6.38 6.18 6.22 5.49 5.61 5.61 5.63 5.72 5.63 5.67 5.63 5.57 31 7-vear 6.50 6.34 6.33 5.60 5.71 5 70 5.72 5.81 5.74 5.76 5.72 5.65 32 10-year 6.57 6.44 6.35 5.57 5.65 5.64 5.65 5.75 5.68 5.70 5.64 5.57 13 20-ycar 6.95 6.83 6.69 5.96 6.01 6.00 6.01 6.10 6.03 6.06 6.00 5.93 34 30-year 6.88 6.71 6.61 5.89 5.95 5.92 5.93 6.02 5.96 5.98 5.92 5.83 Composite 35 More than 10 years (long-term) 6.93 6.80 6.67 5.94 6.00 5.98 5.99 6.08 6.01 6.04 5.98 5.91 STATE AND LOCAL NOTES AND BONDS Mottdy's series** 36 Ami 5.S0 5.52 5.32 4.92 5.03 5.00 n.a. 5.05 5.01 5.09 n.a. n.a. 37 Baa 6.10 5.79 5.50 5.09 5.25 5.21 n.a. 5.27 5.23 5.29 n.a. n.a. 38 Bond Buyer series'5 5.95 5.76 5.52 5.10 5.21 5.23 5.20 5.32 5.26 5.23 5.16 5.13 CORPORATE BONDS 39 Seasoned issues, all industries16 7.83 7.66 7.54 6.95 7.00 6.99 6.98 7.07 7.01 7.04 6.97 6.91 Rating group 40 Aaa 7.59 Til 7.27 6.67 6.72 6 69 6.69 6.78 6.72 6.74 6.69 6.61 41 Aa 7.72 7.55 7.48 6.88 6.93 6.90 6.91 6.98 6.93 6 95 6.92 6.86 42 A 7.83 7.69 7.54 7.01 7.05 7.03 7.03 7.11 7.06 7.07 7.02 6.95 43 Baa 8.20 8.05 7.87 7.25 7.32 7.33 7.30 7.40 7.34 7.35 7.27 7.21 44 A-raled. recently offered utility bonds17 7.86 111 7.71 7.02 7.11 7.10 7.16 7.19 7.19 7.18 7.18 7.04 MHMO DivhIeiul-prUe ratio" 45 Common stocks 2.56 2.19 1.77 1.55 1.48 1.43 1.45 1.47 1.46 1.43 1.43 1.46 1. The daily effective federal funds rate is a weighted average of rates on trades through 13. Yields on actively traded issues adjusted to constant maturities. Source: U.S. Depart- New York brokers. ment of the Treasury. 2. Weekly figures are averages of seven calendar days ending on Wednesday of the 14. General obligation bonds based on Thursday figures; Moody's Investors Service. current week; monthly figures include each calendar day in the month. 15. State and local government general obligation bonds maturing in twenty years arc used 3. Annualized using a 360-day year for bank interest. in compiling this index. The twenty-bond index has a rating roughly equivalent to Moodys" 4. Rate for the Federal Reserve Bank of New York. AI rating. Based on Thursday figures. 5. Quoted on a discount basis. 16. Daily figures from Moody's Investors Service. Based on yields to maturity on selected 6. An average of offering rates on commercial paper for firms whose bond rating is AA or long-term bonds. the equivalent. 17. Compilation of the Federal Reserve. This series is an estimate of the yield on recently 7. Series ended August 29, 1997. offered, A-rated utility bonds wilh a thirty-year maturity and five years of call protection. 8. An average of offering rales on paper directly placed by finance companies. Weekly data are based on Friday quotations. 9. Representative closing yields for acceptances of the highest-rated money center banks. 18. Standard & Poor's corporate scries. Common stock ralio is based on the 500 stocks in 10. An average of dealer offering rates on nationally traded certificates of deposit. the price index. 11. Bid rates for Eurodollar deposits al approximately 11:00 a.m. London time. Data are NOTE. Some of the data in this table also appear in the Board's H.I5 (519) weekly and Digitizedfo fro inrd FicaRtioAnS puErpRos es only. G.I3 (415) monthly statistical releases. For ordering address, see inside front cover. http://frase1r2.. sAtluoctuioins fdeatde .foorrg da/ ily data; weekly and monthly averages computed on an issue-date basis. Federal Reserve Bank of St. Louis

A24 Domestic Financial Statistics • August 1998 1.36 STOCK MARKET Selected Statistics 1997 1998 Indicator 1995 1996 1997 Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May Prices and trading volume (averages of daily figures)1 Common slock prices (indexes) 1 New York Stock Exchange (Dec. 31, 1965 = 50) 291.18 357.98 456.99 489.74 499.25 492.14 504.66 504.13 532.15 560.70 578.05 574.46 2 Industrial 367.40 453.57 574.97 617.94 625.22 615.65 623.57 624.61 660.91 693.13 711.89 712.39 3 Transportation 270.14 327.30 415.08 451.63 466.04 453.56 461.04 458.49 485.73 508.06 523.73 505.02 4 Utility 110.64 126.36 143.87 145.96 157.83 153.53 165.74 146.25 170.96 191.67 207.32 198.25 5 Finance 238.48 303.94 424.84 459.86 476.70 465.35 490.30 479.81 508.97 539.47 563.07 551.28 6 Standard & Poor's Corporation (1941-43 = 10)2 541.72 670.49 873.43 937.02 951 16 938.92 962.37 963.36 1,023.74 1,076.83 1,112.20 1.108.42 7 American Stock Exchange (Aug. 31, 1973 = 50)' 498.13 570.86 628.34 678.05 702.43 674.37 667.89 665.72 685.73 722.37 742.33 735.02 Volume of trading (thousands of shares) 8 New York Stock Exchange 145,729 409,740 523.254 541,204 606,513 531,449 541,134 632.895 610,958 619.366 647,110 569,239 9 American Stock Exchange 20,387 22.567 n.a. 28,252 32,873 27,741 27,624 28.199 26,808 28,943 29,544 27,004 Customer financing (millions of dollars, end-of-period balances) 10 Margin credit at broker-dealers4 76,680 »7,400 126,090 126,050 128,190 127,330 126,090 127,790 135,590 140,340 140,240 143,600 Free credit balances at broker:? 11 Margin accounts6 16.250 22,540 31.410 23,630 26,950 26,735 31,410 29,480 27,450 27,430 28,160 26,200 12 Cash accounts 34.340 40,430 52,160 43,770 47,465 45,470 52,160 48,620 48,640 51,340 51.050 47,770 Margin requirements (percent of market va ie and effective date) Mar. 11, 1968 June 8. 1968 May 6. 197(1 Dec. 6, 1971 Nov. 24. 1972 Jan. 3. 1974 13 Margin slocks 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. Daily data on prices are available upon request to the Board of Governors. For ordering 6. Series initiated in June 1984. address, see inside front cover. 7. Margin requirements, stated in regulations adopted by the Board of Governors pursuant 2. In July 1976 a financial group, composed of banks and insurance companies, was added to the Securities Exchange Act of 1934, limit the amount of credit that can be used to to the group of slocks on which the index is based. The index is now based on 400 industrial purchase and carry "margin securities" (as defined in the regulations) when such credit is stocks (formerly 425), 20 transportation (formerly 15 rail), 40 public utility (formerly 60), and collateralized by securities. Margin requirements on securities are the difference between the 40 financial. market value (100 percent) and the maximum loan value of collateral as prescribed by the 3. On July 5, 1983, the American Stock Exchange rebased its index, effectively cutting Board. Regulation T was adopted effective Oct. 15, 1934; Regulation U, effective May 1, previous readings in half. 1936; Regulation G, effective Mar. 11, 1968; and Regulation X, effective Nov. I, 1971. 4. Since July 1983, under the revised Regulation T, margin credit at broker-dealers has On Jan. I. 1977. the Board of Governors for the first time established in Regulation T the included credit extended against stocks, convertible bunds, stocks acquired through the initial margin required for writing options on securities, setting it at 30 percent of the current exercise of subscription rights, corporate bonds, and government securities. Separate report- market value of the stock underlying the option. On Sept, 30, 1985. the Board changed the ing of data for margin stocks, convertible bonds, and subscription issues was discontinued in required initial margin, allowing it to be ihe same as the gption maintenance margin required April 1984. by the appropriate exchange or self-regulatory organization; such maintenance margin rules 5. Free credit balances are amounts in accounts with no unfulfilled commitments to must be approved by the Securities and Exchange Commission, brokers and are subject to withdrawal by customers on demand Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Finance A25 1.38 FEDERAL FISCAL AND FINANCING OPERATIONS Millions of dollars Fiscal year Calendar year Type of account or operation Dec. Jan. Feb. Mar. Apr. May US. budget1 1 Receipts, lotal 1,351,830 1.453.062 1.579,292 168,000 162,610 97,952 117,930 261,002 95,278 2 On-budget 1,000,751 1,085,570 1,187,302 135,342 123,367 65,051 80,647 216,988 61,790 3 Off-budget 351,079 367,492 391,990 32,658 39,243 32,901 37,283 44,014 33.488 4 Outlays, total 1.515,729 1,560,512 1,601,235 154,361 137,231 139,701 131,743 136.400 134,057 5 On-budget 1,227,065 1,259,608 1,290,609 146,649 108,843 109,393 101.967 108,569 102,381 6 Off-budget 288,664 300,904 310,626 7,712 28,388 30,309 29,775 27,830 31.676 7 Surplus or deficit (-), total . -163,899 -107,450 -21,943 13,639 25,379 -41,750 -13,813 124,603 -38.779 8 On-budget -226,314 -174.038 -103,307 -11,307 14,524 -44,342 -21.320 108,419 -40,591 9 Off-budget 62,415 66,588 81,364 24,946 10,855 2,592 7,508 16,184 1,812 Source of financing (total) 10 Borrowing from the public 171,288 129.712 38,171 -1.771 -24,807 30.565 20,137 -60.S87 -8,597 11 Operating cash (decrease, or increase (-)). -2,007 -6,276 604 -12,107 -8,422 24,027 -11,352 -60,398 51,899 12 Other2 -5,382 -15,986 -16,832 239 7,850 -12,842 5,028 -3,618 -4,523 MEMO 13 Treasury operating balance (level, end of period) 37,949 44,225 43,621 31,885 40,307 16,280 27,632 88,030 36,131 14 Federal Reserve Banks 8,620 7,700 7,692 5,444 5,552 5,037 5,490 28.014 5,693 15 Tax and loan accounts 29,329 36,525 35,930 26,441 34,756 11,243 22,141 60,016 30,438 1. Since 1990, off-budget items have been the social security trust funds (federal old-age net gain or loss for U.S. currency valuation adjustment; net gain or loss for IMF loansurvivors insurance and federal disability insurance) and the U.S. Postal Service. valuation adjustment; and profit on sale of gold. 2. Includes special drawing rights (SDRs); reserve position on the U.S. quota in the SOURCE. Monthly totals: U.S. Department of the Treasury, Monthly Treasury Statement of International Monetary Fund (IMF); loans to the IMF; other cash and monetary assets; Receipts and Outlays of the U.S. Government; fiscal year totals: U.S. Office of Management accrued interest payable to the public; allocations of SDRs; deposit funds; miscellaneous and Budget, Budget of the U.S. Government. liability (including checks outstanding) and asset accounts; seigniorage; increment on gold; Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A26 Domestic Financial Statistics • August 1998 1.39 U.S. BUDGET RECEIPTS AND OUTLAYS1 Millions of dollars Fiscal year Calendar year Source or type 1996 1997 1998 HI H2 HI H2 Mar. Apr. May RECEIPTS 1 All sources 1,453,062 1,579,292 767,099 707,552r 845,527 773,812r 117,930 261,002 95,278 2 Individual income taxes, net 656,417 737,466 347.285 323,884 400,436 354,072 39,662 158.284 29,974 3 Withheld 533.080 580,207 264,177 279,988 292,252 306.865 55,290 51.811 49,854 4 Nonwithheld 212.168 250,753 162,782 53,491 191,050 58.069 7.332 129,520 4,196 88.897 93,560 79.735 9,604 82,926 10.869 22,973 23,059 24,086 Corporation income taxes 6 Gross receipts 189,055 204,493 96,480 95,364 106,451 104.659 23,153 29,910 4,706 17,231 22,198 9,704 10,053 9,635 10.135 3,66) 2,549 1,447 8 Social insurance taxes and contributions, net ... 509,414 539,371 277.767 240,326 288,251 260,795 48,027 61.465 51.239 9 Employment taxes and contributions 476,361 506,751 257.446 227,777 268,357 247.794 47,389 56.544 42.560 10 Unemployment insurance 28.584 28,202 18,068 10,302 17,709 10,724 301 4,589 8,273 11 Other net receipts3 4,469 4,418 2,254 2,245 2,184 2.280 337 332 406 12 Excise taxes 54.014 56.924 25,682 27.016 28,084 31.132 4.499 5,742 4.841 13 Customs deposits 18,670 17.928 8,731 9,294 8,619 9.679 1,412 1,428 1.297 17,189 19.845 8,775 8,835 10,477 10.262 1,845 4,198 1,845 15 Miscellaneous receipts4 25,534 25.465 12,087 12,889' 12,866 13,348' 2,994 2,525 2,823 OUTLAYS 16 All types 1,560,512 1,601,235 785,368 800,177 797,418 824,370' 131,743 136,400 134,057 17 National defense 265,748 270,473 132,599 139,402 132,698 140.873 20,326 22,065 23.212 18 International affairs 13,496 15.228 8,076 8,532 5,740 9,420 979 1,460 720 19 General science, space, and technology 16.709 17.174 8,897 8,260 8,938 10,040 1,617 1.702 1.548 20 Energy 2.844 1,483 1,356 695 803 411 40 -34 42 21 Natural resources and environment 21,614 21,369 10,254 10,307 9,628r 11.106 1,556 1,575 1.574 9,159 9.032 73 11.037 1,465 10,590 283 119 -451 23 Commerce and housing credit -10,472 -14,624 -6.885 -5,899 -7,575 -3.526 -972 -814 791 24 Transportation 39,565 40,767 18,290 21,512 16,847 20,414 2,734 2,511 2,746 25 Community and regional development 10,685 11,005 5.245 5,498 5,678' 5.749 503 1,121 873 26 Education, training, employment, and social services 52,001 53,008 25,979 27,524 25,080 26.851 2,888 4,428 2.798 27 Health 119,378 123,843 59,989 61,595 61,809 63.552 10,876 11,259 10,419 28 Social security and Medicare 523.901 555,273 264,647 269,412 278,863 283.109 45,815 48,351 46,831 29 Income security 225.989 230,886 121,186 107,631 124,034 106.353 22,853 20,757 18,705 30 Veterans benefits and services 36,985 39,313 18,140 21,109 17,697' 22.077 1,883 4,056 3,604 31 Administration of justice 17,548 20,197 9,015 9,583 10,670' 10.212 1,764 1,757 1,781 32 General government 11.892 12,768 4,641 6,546 6,623 7.302 1,012 1.178 925 33 Net interest5 241.090 244,013 120.576 122,573 122,655' 122.620 20.651 20.961 20,855 34 Undistributed offsetting receipts'1 -37,620 -49,973 -16.716 -25,142 -24.235 -22,795 -3.064 -6.054 -2,916 1. Functional details do not sum to total outlays for calendar year data because revisions to 4. Deposits of earnings by Federal Reserve Banks and other miscellaneous receipts. monthly totals have not been distributed among funclions. Fiscal year total for receipts and 5 Includes interest received by trust funds. outlays do not correspond to calendar year data because revisions from the Budget have not 6. Rents and royalties for the outer continental shelf, U.S. government contributions for been fully distributed across months. employee retirement, and certain asset sales. 2. Old-age, disability, and hospital insurance, and railroad retirement accounts. SOURCE. Fiscal year totals: U.S. Office of Management and Budget, Budget of the US. 3. Federal employee retirement contributions and civil service retirement and Government, Fiscal Year 1999: monthly and half-year totals: U.S. Department of the Treadisability fund. sury, Monthly Treasury Statement of Receipts ami Outlays of the U.S. Government. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Finance A27 ] .40 FEDERAL DEBT SUBJECT TO STATUTORY LIMITATION Billions of dollars, end of month 1996 1997 1998 Item Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec 31 Mar. 31 1 Federal debl outstanding 5,153 5,197 5,260 5,357 5,415 5,410 5,446 5,536 5,573' 2 Public debt securities 5.118 5,161 5,225 5,123 5.381 5,376 5,413 5,502 5,542 3 Held by public 3,764 3.739 3,778 3.826 3.874 3,805 3,815 3.847 3,872' 1 354 1 497 1 507 1 572 1 599 1 656 1 670' 5 Agency securities 36 16 35 34 34 34 33 34 31' 6 Held by public 28 28 27 27 26 26 26 27 26' 7 Held by agencies 8 8 8 8 8 7 7 7 5' 8 Debt subject ta statutory limit 5,030 5,073 5,137 5,237 5,294 5,290 5,328 5,417 5,457 9 Public debt securities 5.030 5,073 5,137 5,237 5,294 5.290 5,328 5,416 5,456 10 Other debt . . 0 0 0 0 0 0 0 0 0 MEMO 11 Statutory debt limit 5,500 5,500 5.500 5,500 5,500 5,500 5.950 5,950 5,950 I. Consists of guaranteed debt of US- Treasury and other federal agencies, specified SOURCE US. Department of the Treasury, Monthly Statement of the Public Debt of the participation certificates, notes to international lending organizations, and District of Colum- United States and Treasury Bulletin. bia stadium bonds. 1.41 GROSS PUBLIC DEBT OF U.S. TREASURY Types and Ownership Billions of dollars, end of period 1997 Type and holder 02 Q3 Q4 Ql 1 Total gross public debt 4,800.2 4,988.7 5,323.2 5,502.4 5,376.2 5,413.2 5,502.4 5,542,4 By type 2 Interest-bearing 4,769.2 4,964.4 5.317.2 5,494.9 5,370.5 5,407.5 5,494.9 5,535.3 3 Marketable 3.126.0 3,307.2 3,459.7 3.456.8 3.433.1 3,439,6 3,456.8 3,467.1 4 Bills 733.8 760.7 777.4 715.4 704.1 701.9 715.4 720.1 5 Notes 1.867.0 2.010.3 2.112.3 2,106.1 2.132.6 2.122.2 2.106.1 2.091.9 6 Bonds 510.3 521.2 555.0 587.3 565.4 576.2 587.3 598.7 7 Inflation-indexed notes and bonds n.a. n.a. n.a. 33.0 15.9 24.4 33.0 41.5 8 Nonmarketable2 1,643.1 1,657.2 1.857.5 2,038.1 1.937.4 1,967.9 2,038.1 2,068.2 9 State and local government series 132.6 104.5 101.3 124.1 107.9 111.9 124.1 139.1 10 Foreign issues3 42.5 40.8 37.4 36.2 35.4 34.9 36.2 35.4 11 Government 42.5 40.8 47.4 36 2 35.4 34.9 36.2 36.4 12 Public .0 .0 .0 .0 .0 .0 .0 .0 13 Savings bonds and notes 177.8 181.9 182.4 181.2 182.7 182.7 181.2 181.2 14 Government account seriesJ 1,259.8 1,299.6 1.505.9 1,666.7 1,581.5 1,608.5 1,666.7 1,681.5 15 Non-interest bearing 31.0 24.3 6.0 7.5 5.7 5.6 7.5 7.2 By holder' 16 U.S. Treasury and other federal agencies and trust funds 1,257.1 1,304.5 1.497.2 1,655.7 1,571.6 1.598.5 1,655.7 1,670.4 17 Federal Reserve Banks 374.1 391.0 410.9 451.9 426.4 436.5 451.9 400.0 18 Private investors 3,168.0 3,294.9 3.411.2 3,393.4 3,361.7 3.388.9 3,393.4 3,430.7 19 Commercial banks 290.4 278.7 261.8' 269.8' 265.9' 261.8' 269.8' 275.0 20 Money market funds 67.6 71.5 91.6' 88.9' 77.4 75.5 88.9' 84.8 21 Insurance companies 240.1 241.5 214.1 224.9' 217.7' 222.7' 224.9' 225.5 22 Other companies 224.5 228.8 258.5 265.0 261.0 266.5 265.0 268.1 23 State and local treasuries ' 541.0' 469.6' 482.5' 493.0' 488.3' 486.6' 493.0' 494.6 Individuals 24 Savings bonds 180.5 185.0 187.0 186.5 186.3 186.2 186.5 186.3 25 Other securities 150.7 162.7 169.6 168.4 169.1 168.6 168.4 165.8 26 Foreign and international 688.7' 862.2 1,135.6 1.278.0' 1.221.9" 1.266.0' 1,276.0' 1,288.0 27 Other miscellaneous investors7'9 784.6' 794.9' 610.5' 418.8' 474.2' 454.5' 418.8' 442.5 1. The U.S. Treasury first issued inflation-indexed securities during the first quarter of 7. In March 1996, in a redefinition of series, fully defeased debt backed by nonmarketable 1997. federal securities was removed from "Other miscellaneous investors" and added to "State and 2. Includes (not shown separately) securities issued to the Rural Electrification Administra- local treasuries." The data shown here have been revised accordingly. tion, depository bonds, retirement plan bonds, and individual retirement bonds. 8. Consists of investments of foreign balances and international accounts in the United 3 Nonmarketable series denominated in dollars, and series denominated in foreign cur- Slates. rency held by foreigners. 9. Includes savings and loan associations, nonprofit institutions, credit unions, mutual 4. Held almost entirely by U.S. Treasury and other federal agencies and trust funds. savings banks, corporate pension trust funds, dealers and brokers, certain U.S. Treasury 5. Data for Federal Reserve Banks and U.S. government agencies and trust funds are actual deposit accounts, and federally sponsored agencies. holdings; data for other groups are Treasury estimates. SOURCE. U.S. Treasury Department, data by type of security, Monthly Statement of the 6. Includes slate and local pension funds. Public Debt of the United States; data by holder, Treasury Bulletin. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A28 Domestic Financial Statistics • August 1998 1.42 U.S. GOVERNMENT SECURITIES DEALERS Transactions' Millions of dollars, daily averages 1998 1998, week ending Item Feb. Mar. Apr. Apr. 1 Apr. 8 Apr. 15 Apr. 22 Apr. 29 May 6 May 13 May 20 May 27 OUTRIGHT TRANSACTIONS2 By type of security 1 U.S. Treasury bills 39.988' 35,701' 38,290' 43.584' 36,486' 47,926 32,172 38,463 33,191 26,997 28,682 35.436 Coupon securities, by maturity 2 Five years or less 120.542' 119,974' 112,975' 134,927' 116,132' 98,456 93,500 132,337 133,880 125,667 90,080 112.805 3 More than five years 82.796' 64,952' 65,132' 67,180' 84,844' 54,609 52,391 63,256 79,709 80,015 67,683 77,873 4 Inflation-indexed 493 412 1,720 696 3,346 1,316 1,381 1,083 1.101 871 552 298 Federal agency 5 Discount notes 36,835 38,968 39,114 46,898 40,084 40,436 38,736 36,834 34,486 30,572 38,697 36.436 Coupon securities, by maturity 6 One year or less 1,738 2,086 1,620 2,913 987 1,481 1,683 2,141 1,130 1,189 974 1.569 7 More than one year, but less than or equal to five years 3,452 4,051 4,041 3,873 3.940 4,512 4,166 3,774 3.535 2,606 2,325 2,521 8 More than five years 2,676 2,425 3,118 3,103 5.277 2.598 1,968 2,354 3,988 3,540 1,520 2,109 9 Mortgage-backed 64,305 62,728 67.799 55,006 96,057 70,033 52,683 55,953 65,172 89,857 45,313 40,504 By type of counterparty With interdealer broker 10 U.S. Treasury 138.024' 125,029' 120,163' 133.994' 135,974' 109,897 97,073 129,930 134,955 134,625 103,942 127.882 11 Federal agency 1,987 2,101 2,417 2.681 3,115 2.558 2,070 1,831 2.759 2,428 1,384 1,456 12 Mortgage-backed 21,100 19,793 21,335 15.069 28,495 21,460 20,433 16,318 20,903 30,793 16,107 12,525 With other 13 US Treasury 105,795' 96,010' 97,954' 112,392' 104,834' 92,410 82,372 105,210 112,926 98,926 83,054 98,530 14 Federal agency 42,715 45,429 45.476 54,106 47,173 46.468 44,483 43 272 40,381 35,479 42,132 41,178 15 Mortgage-backed 43,204 42,934 46,463 39.937 67,562 48.572 32,250 39,635 44.269 59.064 29,206 27.979 FUTURES TRANSACTIONS' By type of deliverable security 16 US. Treasury bills '. 244' 289' 173r 133' 83' 530 114 39 202 231 74 57 Coupon securities, by maturity 17 Five years or less 2,549' 2,555' 2,084' 2.375' 2,598' 1,844 1.347 2,417 2.199 1.667 1,788 3.040 18 More than five years 16.512' 15,909" 14,015' 13.120' 17,193' 13,302 10.835 14,885 13,430 12,396 12,057 17.433 19 Inflation-indexed 0 0 0 0 0 0 0 0 0 0 0 0 Federal agency 20 Discount notes 0 0 0 0 0 0 0 0 0 0 0 0 Coupon securities, by maturity 21 One year or less 0 0 0 0 0 0 0 0 0 0 0 0 22 More than one year, but less than or equal to five years 0 0 0 0 0 0 0 0 0 0 0 0 23 More than five years 0 0 0 0 0 0 0 0 0 0 0 0 24 Mortgage-backed 0 0 0 0 0 0 0 0 0 0 0 0 OPTIONS TRANSACTIONS* By type of underlying security 25 US. Treasury bills 0 0 0 0 0 0 0 0 0 0 0 0 Coupon securities, by maturity 26 Five years or less 2,652 2,305 2,407' 1.754 1,856 2.775 2,308 2,828 2,735 2,119 1,457 1.957 27 More than five years 6,080" 5,422' 5,815' 6.002 6,382 4,438 4,917 7,365 5.044 6,318 7,135 7,112 28 Inflation-indexed 0 0 25 0 0 0 100 0 n.a. 240 n.a. 0 Federal agency 29 Discount notes o o o o o 0 o o 0 0 0 0 Coupon securities, by maturity 30 One year or less 0 0 0 0 0 0 0 0 0 0 0 0 31 More than one year, but less than or equal to five years 0 0 0 0 0 n.a. n.a. 0 0 0 n.a. 0 32 More than five years 0 0 0 0 0 0 0 0 0 0 0 0 33 Mortgage-backed 636 602 750 587 745 914 447 990 603 618 427 539 1. Transactions are market purchases and sales of securities as reported to the Federal Forward transactions are agreements made in the over-the-counter market that specify Reserve Bank of New York by the U.S. government securities dealers on its published list of delayed delivery. Forward contracts for U.S. Treasury securities and federal agency debt primary dealers. Monthly averages are based on the number of trading days in the month. securities are included when the time to delivery is more than five business days. Forward Transactions are assumed to be evenly distributed among the trading days of the report week. contracts for mortgage-backed agency securities are included when the time to delivery is Immediate, forward, and futures transactions are reported at principal value, which does not more than thirty business days. include accrued interest; options transactions are reported at the face value of the underlying 3. Futures transactions are standardized agreements arranged on an exchange. All futures securities. transactions are included regardless of time to delivery. Dealers report cumulative transactions for each week ending Wednesday. 4. Options transactions are purchases or sales of put and call options, whether arranged on 2. Outright transactions include immediate and forward transactions. Immediate delivery an organized exchange or in the over-the-counter market, and include options on futures refers to purchases or sales of securities (other than mortgage-backed federal agency securi- contracts on U.S. Treasury and federal agency securities. ties) for which delivery is scheduled in five business days or less and "when-issued" NOTE, "n.a." indicates that data are not published because of insufficient activity. securities that settle on the issue date of offering. Transactions for immediate delivery of mortgage- Major changes in the report form filed by primary dealers induced a break in the dealer data backed agency securities include purchases and sales for which delivery is scheduled in thirty business series as of the week ending January 28, 1998. days or less. Stripped securities are reported at market value by maturity of coupon or corpus. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Finance A29 1.43 U.S. GOVERNMENT SECURITIES DEALERS Positions and Financing' Millions of dollars 1998 1998, week ending Item Feb. Mar. Apr. Apr. 1 Apr. 8 Apr. 15 Apr. 22 Apr. 29 May 6 May 13 May 20 Positions NET OUTRIGHT POSITIONS3 Bv type of security 1 US Treasury bills 8,517 16.723 16,747 21,969 23,704 21.401 13,518 8,359 11,566 9.031 3,450 Coupon securities, by maturity 2 Five years or less -7,847 -11,431 -17,750 -11,646 -11,992 -14,310 -20,678 -23,201 -29,578 -25,584 -28.624 3 More than five years -21,431 -23,667 -27,081 -21,115 -21,661 -25,413 -26,804 -34,907 -29,821 -29.783 -23,874 4 Inflation-indexed 1,422 1.099 2,058 1,097 2,536 2,132 1.592 2,092 2,176 2,098 2.132 5 F D e i d sc e o ra u l n t a g n e o n t c e y s 18,759 16.943 18,148 15,215 17,680 20,726 18,940 16,103 15,075 18,257 16,571 Coupon securities, by maturity 6 One year or less 3,013 3,593 3.215 2,824 3.553 3,276 3.580 2.538 2.982 2,603 2,443 7 More than one year, but less than or equal to five years 5,753 7.378 8,394 7,372 7,935 8.629 8.556 8,694 7,746 8,045 8,141 8 More than five years 8,898 9,095 11,588 8,280 11,530 11,823 12,385 10,984 12.315 11,718 11.338 9 Mortgage-backed 50,013 51,110 55.843 51,988 63.690 58,167 52,983 49,240 54,756 62,528 55.492 NET FUTURES POSITIONS4 Bv type of deliverable security 10 U.S. Treasury bills -4.872 -2,503 -1,040 -103 -86 -1,581 -1,325 -1,312 -966 -466 -217 Coupon securities, by maturity 11 Five years or less -752 2,023 698 565 -1.069 -696 329 3,898 3.129 1,858 2,967 12 More than five years -18.954 -15,929 -15.744 -16,718 -21.091 -17,265 -15,953 -8.843 -13.543 -16,865 -22,468 13 Inflation-indexed 0 0 0 0 0 0 0 0 0 0 0 Federal agency 14 Discount notes 0 0 0 0 0 0 0 0 0 0 0 Coupon securities, by maturity 15 One year or less 0 0 0 0 0 0 0 0 0 0 0 16 More than one year, but less than or equal to five years 0 0 0 0 0 0 0 0 0 0 0 17 More than five years 0 0 0 0 0 0 0 0 0 0 0 18 Mortgage-backed 0 0 0 0 0 0 0 0 0 0 0 NET OPTIONS POSITIONS Bv type of deliverable security 19 U.S.'Treasury bills '. 0 0 0 0 0 0 0 0 0 0 0 Coupon securities, by maturity 20 Five years or less -1,366 1,215 628 1,110 1,695 388 495 -319 1.903 2.147 1,214 21 More than five years 2,729 3,020 1,561 1.771 3.691 1,749 1,011 -145 929 453 52 22 Inflation-indexed n.a. n.a. 70 n.a. 0 0 154 126 n.a. n.a. n.a. Federal agency 23 Discount notes 0 0 0 0 0 0 0 0 0 0 0 Coupon securities, by maturity 24 One year or less 0 0 0 0 0 0 0 0 0 0 0 25 More than one year, but less than or equal to five years 0 0 0 0 0 n.a. n.a. n.a n.a. n.a. n.a. 26 More than five years n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 27 Mortgage-backed 907 1,119 435 415 -34 55 288 1,413 566 659 667 Financing5 Reverse repurchase agreements 28 Overnight and continuing 352,692' 359,012' 365,357 368,925' 374,177 357,521 358.878 370,855 361.782 141,254 390,603 29 Term 722,028 758,517 822,709 746,266 799.086 801,292 836.706 862,109 840.643 875,843 732,919 Securities borrowed 30 Overnight and continuing ... ... 215,207' 213.254' 208,558 206.231' 207 284 211,269 205,611 209,488 214 956 214,832 218,560 31 Term 80,881 89,659' 99.303 92.064 95,425 95.220 104.223 102.952 102.290 104.623 99,240 Securities received as pledge 32 Overnight and continuing 3,842' 2.526' 2,591 2,700' 2,598 2.745 2,496 2.491 2,732 3.288 3.394 33 Term Repurchase agreements 34 Overnight and continuing 735,077' 740,803 788,452 750,037 773.282 808,266 810.360 771,881 757.011 752,310 781,666 35 Term 639,985 671,254 726,216 651,398 708.229 703,484 727.513 773,149 748.465 791,540 654.576 Securities loaned 36 Overnight and continuing 8,566' 9,825' 11,640 10.816 11,669 11,533 12,062 11,446 11,426 11,594 10,653 37 Term 3,883' 4,240' 2.120 2,987' 2.509 1,917 2,024 1,934 1,915 1,890 3.429 Securities pledged 38 Overnight and continuing 54,500' 52,797' 48,773 50,636' 49,189 50,095 48,371 47,059 49,555 49,217 50,613 39 Term 2.838r 5,181' 5.693 6,111' 5,947 5,668 5,888 5,292 5.102 5,137 4,856 Collateralized loans 40 Total 9,536 12,421 11,714 12,865 16.152 11,822 13,481 5,580 9.297 11,466 10,618 1. Data for positions and financing are obtained from reports submitted to the Federal securities are included when the time to delivery is more than five business days. Forward Reserve Bank of New York by the US government securities dealers on its published list of contracts for mortgage-backed agency securities are included when the time to delivery is primary dealers. Weekly figures are close-of-business Wednesday data Positions for calendar more than thirty business days. days of the report week are assumed to be constant. Monthly averages are based on the 4. Futures positions reflect standardized agreements arranged on an exchange. All futures number of calendar days in the month. positions are included regardless of time to delivery. 2. Securities positions are reported at market value. 5. Overnight financing refers to agreements made on one business day that mature on the 3. Net outright positions include immediate and forward positions. Net immediate posi- next business day; continuing contracts are agreements that remain in effect for more than one tions include securities purchased or sold (other than mortgage-backed agency securities) that business day but have no specific maturity and can be terminated without advance notice by have been delivered or are scheduled to be delivered in five business days or less and either party; term agreements have a fixed maturity of more than one business day. Financing "when-issued" securities that settle on the issue date of offering. Nel immediate positions for data are reported in terms of actual funds paid or received, including accrued interest. mortgage-backed agency securities include securities purchased or sold that have been NOTE, '"n.a." indicates that data are not published because of insufficient activity. delivered or are scheduled to be delivered in thirty business days or less. Major changes in the report form filed by primary dealers induced a break in the dealer data Forward positions reflect agreements made in the over-the-counter market that specify series as of the week ending January 28, 1998. delayed delivery. Forward contracts for U.S. Treasury securities and federal agency debt Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A30 Domestic Financial Statistics • August 1998 1.44 FEDERAL AND FEDERALLY SPONSORED CREDIT AGENCIES Debt Outstanding Millions of dollars, end of period 1997 1998 Agency 1994 1995 1996 1997 Nov. Dec. Jan. Feb. Mar. 1 Federal and federally sponsored agencies 738,928 844,611 925,823 1,022,609 1,014,907 1,022,609 1,032,486 1,038,348 1,059,043 2 Federal agencies, 39.186 37,347 29,380 27,792 27.500 27,792 27,110 27,101 27,227 3 Defense Department^1 6 6 6 6 6 6 6 6 6 4 Export-Import Bank" 3.455 2,050 1,447 552 1,295 552 682 549 549 5 Federal Housing Administration4 116 97 84 102 93 102 133 79 97 6 Government National Mortgage Association certificates of participation n a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 7 Postal Service'1 8,073 5,765 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 8 Tennessee Valley Authority 27,536 29,429 27,853 27,786 27.494 27,786 27,104 27,095 27.221 9 United States Railway Association6 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 10 Federally sponsored agencies7 699,742 807,264 896,443 994,817 987,407 994,817 1,005,376 1,011,247 1.031,816 11 Federal Home Loan Banks 205.817 243.194 263,404 313.919 308,745 313,919 311,385 312,017 117,%7 12 Federal Home Loan Mortgage Corporation 93,279 119,961 156,980 169,200 174,900 169,200 181,948 184,100 193,300 13 Federal National Mortgage Associaiion 257,230 299,174 331,270 369,774 361,602 369,774 370,524 373,574 381,093 14 Farm Credit Banks8 53,175 57,379 60.053 63,517 61,093 63.517 61,317 61.177 62,327 15 Student Loan Marketing Association 50,335 47,529 44.763 37,717 40,321 37,717 39.375 39,570 36,310 16 Financing Corporation10 8,170 8,170 8.170 8.170 8,170 8,170 8.170 8,170 8,170 17 Farm Credit Financial Assistance.,Corporation 1,261 1,261 1.261 1,261 1,261 1,261 1,261 1,261 1,261 18 Resolution Funding Corporation12 29,996 29.9% 29,996 29,996 29,996 29,996 29.996 29,996 29,996 MF.MO 19 Federal Financing Bank debt13 103,817 78,681 58,172 49,090 32,523 49,090 48,321 47,341 45,487 Lending in federal ami federally sponsored agencies 20 Export-Import Bank1 3.449 2,044 1,431 552 1,295 552 549 549 549 21 Postal Service6 8.073 5,765 22 Student Loan Marketing Association n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 23 Tennessee Valley Authority 3,200 3,200 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 24 United States Railway Association6 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Other lending" 25 Farmers Home Administration 33,719 21,015 18,325 13,530 13,530 13.530 13,530 13,160 13,030 26 Rural Electrification Administration 17J92 17J44 16J02 K898 14819 14^898 14^841 14A52 I4J15 27 Other 37,984 29,513 21,714 20.110 2,879 20,110 19,401 18,780 17,593 1, Consists of mortgages assumed by the Defense Department between 1957 and 1963 10. The Financing Corporation, established in August 1987 to recapitalize the Federal under family housing and homeowners assistance programs. Savings and Loan Insurance Corporation, undertook its first borrowing in October 1987. 2, Includes participation certificates reclassified as debt beginning Oct. 1, 1976. 11. The Farm Credit Financial Assistance Corporation, established in January 1988 to 3, On-budgct since Sept 30, 1976. provide assistance to the Farm Credit System, undertook its first borrowing in July 1988. 4 Consists oi debentures issued in payment of Federal Housing Administration insurance 12. The Resolution Funding Corporation, established by ihe Financial Institutions Reform, claims. Once issued, these securities may be sold privately on the securities market. Recovery, and Enforcement Act of 1989. undertook its first borrowing in October 1989. 5. Certificates of participation issued before fiscal year 1969 by the Government National 13. The FFB, which began operations in 1974, is authorized to purchase or sell obligations Mortgage Association acting as trustee for ihe Farmers Home Administration, the Department issued, sold, or guaranteed by other federal agencies. Because FFB incurs debt solely for the of Health. Education, and Welfare, the Department of Housing and Urban Development, lhe purpose of lending to other agencies, its debt is not included in the mam portion of the table to Small Business Administration, and the Veterans Administration avoid double counting. 6 Off-budgfl. 14. Includes FFB purchases of agency assets and guaranteed loans; the latter are loans 7. Includes outstanding noncontingent liabilities: notes, bonds, and debentures. Includes guaranteed by numerous agencies, with the amounts guaranteed by any one agency generally Federal Agricultural Mortgage Corporation, therefore details do not sum to total. Some data being small. The Farmers Home Administration entry consists exclusively of agency assets, are estimated. whereas the Rural Electrification Administration entry consists of both agency assets and 8 Excludes borrowing by the Farm Credit Financial Assistance Corporation, which is guaranteed loans. shown on line 17. 9. Before late 1982. the association obtained financing through the Federal Financing Bank (FFB). Borrowing excludes that obtained from the FFB. which is shown on line 22. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Securities Markets and Corporate Finance A31 1.45 NEW SECURITY ISSUES Tax-Exempt State and Local Governments Millions of dollars 1997 1998 Type of o is r s u u e s e or issuer, 1995 1996 1997 Oct. Nov. Dec. Jan. Feb. Mar. Apr. May 1 AH issues, new and refunding1 145,657 171,222 214.694' 21,898 20,207 21342 16,770 21,306 27,859' 20,271 22,862 By type of issue 2 General obligation 56,980 60,409 69,934 7,837 5,713 8,005 5,608 9.893 9,597 8.154' 4,827 88 677 110 813 114 989 14 061 13 337 11 413 18 261 [8 035 Bv tvpe of issuer 4 State 14,665 13,651 18,237 2,392 509 1,702 1,268 2,420 2,375 3.548 1,146 5 Special district or statutory authority2 93.500 113,228 134,919 13,195 13.586 15,600 11,794 14,228 19,629 12.504 16,865 6 Municipality, county, or township 37.492 44,343 70.558 13,920 5.920 4.098 3,708 4.65B 5.859 4.219 4.851 7 Issues for new capital 102390 112,298 U5,S19r 12,981 12,979 13,487 9,696 12.538 15,134 12,616 15,281 By use of proceeds 8 Education 23,964 26,851 31,860 2,647 2,973 2,981 2,338 3.525 4.297 4,080 2,819 9 Transportation 11,890 12,324 13.951 1,215 1.420 1.144 1,521 1,760 771 1.089 1,043 10 Utilities and conservation 9,618 9,791 12,219 1,402 1.217 683 598 687 1,866 749 5 971 11 Social welfare 19.566 24,583 27.794 2,341 4,090 2.940 1,540 2.903 3,104 2.820 2.390 12 Industrial aid 6,581 6,287 6,667 729 574 897 448 581 1,236 678 576 13 Other purposes 30.771 32,462 35.095 4,642 2.705 4,842 3,251 3,082 3,860 3.255 2.482 1. Par amounts of long-term issues based on date of sale. SOURCE. Securities Data Company beginning January 1990; Investment Dealer's 2. Includes school districts. Digest before then. 1.46 NEW SECURITY ISSUES U.S. Corporations Millions of dollars 1997' 1998 Type of issue, offering, 1995' 1996' 1997' or issuer Sept. Oct. Nov. Dec. Jan.' Feb.' Mar.' Apr 1 All issues' 673,779 n.a. n.a. 85,001 71,219 58,350 63,992 73.614 68,361 108,094 75,973 2 Bonds 573,206 n.a. n.a. 75,166 58,166 46,543 55,973 66.198 57396 89,723 64,329 By type of offering 3 Pubiic. domestic 408.804 465,489 537.810 60,226 46.967 42,969 54.443 55,647 50,453 81.778 55,452 4 Private placement, domestic3 87.492 n.a. n.a. n.a. n.a n.a. n.a. n.a. n.a. n.a n.a. 5 Sold abroad 76,910 83,433 103.188 14.941 11.199 3.574 1,530 10.551 6,943 7.946 8.878 By industry group 231,941 239,530 260,091 11,346 15,977 6,794 7,696 21,039 12,133 17,301 16,985 7 Financial 739.069 858.313 1,021.905 63,820 42,189 39,750 48,276 45,159 45,263 72.422 47,345 8 Stocks2 100.573 n.a n.a. 10,401 13,965 12.416 8.490 7,667 11,181 18,399 12,469 Bv tvpe of offering 9 Public 146,446 244,(112 235,760 10,401 13.965 12,416 8,490 7.667 11,181 18,399 12.469 10 Private placement3 32,100 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a Bv industry group 52,707 80.460 60,386 6.383 6.897 6,861 3.039 1,761 5,736 10.604 5.550 12 Financial 20.516 41,546 57.494 4,018 7.068 5,555 5.451 5,906 5.445 7,795 6.919 I. Figures represent gross proceeds of issues maturing in more than one year; they are the 2. Monthly data cover only public offerings. principal amount or number of units calculated by multiplying by the offering price. Figures 3. Monthly data are not available. exclude secondary offerings, employee stock plans, investment companies other than closed SOURCE. Beginning July 1993, Securities Data Company and the Board of Governors of end. intracorporate transactions, and Yankee bonds. Stock data include ownership securities the Federal Reserve System. issued by limited partnerships. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A32 Domestic Financial Statistics • August 1998 1.47 OPEN-END INVESTMENT COMPANIES Net Sales and Assets' Millions of dollars 1997 1998 hem 1996 1996 Oct. Nov. Dec. Jan. Feb. Mar. Apr.r May 1 Sales of own shares2 934,595 1,190,900 VI 5,343 94,478 110,452 119,488 114,219 128,348 128,828 112,668 2 Redemptions of own shares 702,711 918,728 91.654 66,135 89,982 92.621 81,688 97,248 97,087 84,158 3 Net sales3 231,885 272.172 23,689 28,343 20,471 26.867 32,532 31,100 31,741 28.510 4 Assets4 2,624,463 3,409,315 3484,252 3,356,347 3,409,315 3,459,354 3,675,392 3,843,971 3,909,932 3,878,148 5 Cash5 138,559 174,154 179,909 186,582 174,154 183,648 180,415 174,058 170,045 173,377 6 Other 2.485,904 3,235.161 3,104,343 3,169,765 3,235,161 3.275,706 3,494,977 3.669,913 3.739,887 3,704,771 1. Data include stock, hybrid, and bond mutual funds and exclude money market mutual 4 Market value at end of period, less current liabilities. funds. 5. Includes all U.S. Treasury securities and other short-term debt securities. 2. Excludes reinvestment of net income dividends and capital gains distributions and share SOURCE. Investment Company Institute. Data based on reports of membership, which issue of conversions from one fund to another in the same group. comprises substantially all open-end investment companies registered with the Securities and 3. Excludes sales and redemptions resulting from transfers of shares into or out of money Exchange Commission. Data reflect underwriting s of newly formed companies after their market mutual funds within the same fund family. initial offering of securities. 1.48 CORPORATE PROFITS AND THEIR DISTRIBUTION Billions of dollars; quarterly data at seasonally adjusted annual rates 1996 1997 1998 Account 1995 1996 1997 Q2 03 Q4 Ql Q2 03 Q4 Ql' 1 Profits with inventory valuation and capital consumption adjustment 650.0 735.9 805.0 738.5 739.6 747.8 779.6 795.1 827.3 818.1 8">7 7 2 Profits before taxes 622.6 676.6 729,8 682.2 679.1 680.0 708.4 719.8 753.4 737.3 723.8 3 Profits-tax liability 213.2 229.0 249.4 232.2 231.6 226.0 241.2 244.5 258.2 253.6 246.0 4 Profits after taxes 409.4 447.6 480.3 450.0 447.5 454.0 467.2 475.3 495.2 483.7 477.9 5 Dividends 264 4 304 8 336 1 303 7 105 7 309 1 126 8 333 0 339 1 345 6 352 2 6 Undistributed profits 145.0 142.8 144.2 146.4 141.8 144.9 140.3 142.3 156.1 138.1 125.7 7 Inventory valuation -24 3 -2.5 5.5 -5.4 -2.7 3.3 3.5 5.9 3.6 9.2 30.1 8 Capital consumption adjustment 51.6 61.8 69.7 61.6 63.2 64.4 67.7 69.4 70.3 71.6 73.7 SOURCE. U.S. Department of Commerce, Survey of Current Business. 1.51 DOMESTIC FINANCE COMPANIES Assets and Liabilities1 Billions of dollars, end of period; not seasonally adjusted 1996 1997 1998 Account 1995 1996 1997 Q3 Q4 Ql Q2 Q3 Q4 Ql ASSETS 1 Accounts receivable, gross" 607.0 637.1 663.3 628.1 637.1 648.0 651.6 660.5 663.3 666.8 2 Consumer 233.0 244 9 256.8 244.4 244.9 249.4 255.1 254.5 256.8 251.3 3 Business 301.6 309.5 318.5 301.4 309.5 315.2 311.7 319.5 318.5 325.9 4 Real estate 72.4 82.7 87.9 82.2 82.7 83.4 84.8 86.4 87.9 89.6 5 LESS: Reserves for unearned income 60.7 55.6 52.7 54.8 55.6 51.3 57.2 54.6 52.7 52.1 6 Reserves for losses 12.8 13.1 13.0 12.9 13.1 12.8 13.3 12.7 13.0 13.1 7 Accounts receivable, net 5335 568.3 597.6 560.5 568.3 583.9 581.2 593.1 597.6 601.6 250 9 290 0 3124 268 7 290 0 289 6 306 8 289 1 3124 329 9 9 Total assets 784 4 858.3 910.0 829.2 858.3 873.4 887.9 882.3 910.0 931.5 LIABILITIES AND CAPITAL 10 Bank loans 15.3 19.7 24.1 18.3 19.7 18.4 18.8 20.4 24.1 22.0 168 6 177 6 201 5 173 1 177 6 185 3 193 7 189 6 •>01 5 •>11 7 Debt 12 Owed to parent 51.1 60.3 64.7 57.9 60.3 61.0 60.0 61.6 64.7 64.6 13 Not elsewhere classified 300.0 332.5 328.8 322.3 .332.5 324.6 345.3 322.8 328.8 338.1 14 All other liabilities 163.6 174.7 189.6 164.8 174.7 189.2 171.4 190.1 189.6 193.0 15 Capital, surplus, and undivided profits 85.9 93.5 101.3 92.8 93.5 94.9 98.7 97.9 101.3 102.0 16 Total liabilities and capital 784.4 858.3 910.0 829.2 858.3 873.4 887.9 882.3 910.0 931.5 1. Includes finance company subsidiaries of bank holding companies but not of retailers 2. Before deduction for unearned income and losse and banks. Data are amounts carried on the balance sheets of finance companies; securitized pools are not shown, as they are not on the books. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Securities Market and Corporate Finance A3 3 1.52 DOMESTIC FINANCE COMPANIES Owned and Managed Receivables' Billions of dollars, amounts outstanding Type of credit Nov. Dec. Apr. Seasonally adjusted I Total 682.4 762.4 810.4 805.7 810.4 811.0 821.1 818.3' 2 Consumer 281.9 306.6 326.9 323.7 326.9 324.9 326.2 326.7' 328.9 3 Real estate 72.4 111.9 121.1 121.7 121.1 121.9 123.7 121.6 121.9 4 Business 328.1 343.8 362.4 360.3 362.4 364.3 371.1 369.9 372.8 Not seasonally adjusted 5 Total 689.5 769.7 818.1 806.9 818.1 812.2 819.6 819.4' 824.9 6 Consumer 285.8 310.6 330.9 325.4 330.9 326.2 324.8 325.01 326.3 7 Motor vehicles loans 81.1 86.7 87.0 86.0 87.0 87.4 84.7 86.8' 90.6 8 Motor vehicle leases 80.8 92.5 96.8 96.4 96.8 94.5 94.7 95.2 95.9 9 Revolving2 28.5 32.5 38.6 34.8 38.6 37.6 36.9 36.3' 29.9 10 Other' 42.6 33.2 34.4 35.5 34 4 34.5 34.1 33.01 33.4 Securitized assets4 11 Motor vehicle loans 34.8 36.8 44.3 42.5 44.3 42.8 45.3 45.0 42.8 12 Motor vehicle leases .... 3.5 8.7 10.8 11.0 10.8 10.7 10.6 10.5 10.4 13 Revolving n.a. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.3 14 Other 14.7 20.1 19.0 19.2 19.0 18.7 18.5 18.2 18.1 15 Real estate 72.4 111.9 121.1 121.7 121.1 121.9 123.7 121 6 121.9 16 One- to four-family n.a. 52.1 59.0 59.4 59.0 59.8 62.2 61.5 62.4 17 Other 30.5 28.9 29.0 28.9 29.1 29.0 28.1 28.1 Securitized real estate assets4 18 One- to four-family 28.9 33.0 33.0 33.0 32.8 32.3 31.8 31.2 19 Other n.a. 0.4 0.2 0.2 0.2 0.2 0.2 0.2 0.2 20 Business 331.2 347.2 366.1 359.8 366.1 364.0 371.1 372.7 376.7 21 Motor vehicles 66.5 67 1 63.5 62.0 63.5 61.8 64.8 67.8 68.2 22 Retail loans 21.8 25.1 25.6 26.3 25.6 26.1 26.4 27.3 28.3 23 Wholesale loans5 36.6 33.0 27.7 25.8 27.7 25.6 28.2 30.2 29.5 24 Leases 8.0 9.0 10.2 9.8 10.2 10.1 10.2 10.2 10.4 25 Equipment 8.0 9.0 10.2 198.9 203.9 204.2 204.7 206.5 207.8 26 Loans 8.0 9.0 10.2 49.6 51.5 50.7 49.9 508 51.2 27 Leases 8.0 9.0 10.2 149.4 152.3 153.5 154.8 155.7 156.7 28 Other business receivables6. . 8.0 9.0 10.2 54.0 51.1 52.1 55.6 51.6 54.0 Securitized assets4 29 Motor vehicles 8.0 9.0 10.2 32.4 33.0 31.5 31.2 32.1 31.6 30 Retail loans 8.0 9.0 10.2 2.5 2.4 2.3 2.2 2.0 1.9 31 Wholesale loans 8.0 9.0 10.2 29.8 30.5 29.2 29.0 30.0 29.6 32 Leases 8.0 9.0 10.2 0.0 0.0 0.0 0.0 0.0 0.0 33 Equipment 8.0 9.0 10.2 9.9 10.7 10.4 10.8 10.5 10.3 34 Loans 8.0 9.0 10.2 4.1 4.2 3.9 4.3 4.2 4.1 35 Leases 8.0 9.0 10.2 5.8 6.5 6.5 6.5 6.3 6.2 36 Other business receivables6 8.0 9.0 10.2 2.6 4.0 4.0 4.0 42 4.7 NOTE. This table has been revised to incorporate several changes resulting from the before deductions for unearned income and losses. Components may not sum to totals benchmarking of finance company receivables to the June 1996 Survey of Finance Compa- because of rounding. nies. In that benchmark survey, and in the monthly surveys that have followed, more detailed 2. Excludes revolving credit reported as held by depository institutions that are subsidiarbreakdowns have been obtained for some components. In addition, previously unavailable ies of finance companies. data on securitized real estate loans are now included in this table. The new information has 3. Includes personal cash loans, mobile home loans, and loans to purchase other types of resulted in some reclassification of receivables among the three major categories (consumer, consumer goods such as appliances, apparel, boats, and recreation vehicles. real estate, and business) and in discontinuities in some component series between May and 4. Outstanding balances of pools upon which securities have been issued; these balances June 1996. are no longer carried on the balance sheets of the loan originator. Includes finance company subsidiaries of bank holding companies but not of retailers and 5. Credit arising from transactions between manufacturers and dealers, that is, floor plan banks. Data in this table also appear in the Board's G.20 (422) monthly statistical release. For financing. ordering address, see inside front cover. 6. Includes loans on commercial accounts receivable, factored commercial accounts, and I. Owned receivables are those carried on the balance sheet of the institution. Managed receivable dealer capital; small loans used primarily for business or farm purposes; and receivables are outstanding balances of pools upon which securities have been issued: these wholesale and lease paper for mobile homes, campers, and travel trailers. balances are no longer carried on the balance sheets of the loan originator. Data are shown Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A34 Domestic Financial Statistics • August 1998 1.53 MORTGAGE MARKETS Mortgages on New Homes Millions of dollars except as noted 1997 1998 Hem 1995 1996 1997 Nov. Dec. Jan. Feb. Mar. Apr. May Terms and yields in primary and secondary markets PRIMARY MARKETS Terms1 175.8 182.4 180.1 184.0 190.7 184.1 195.3 191.7 189.5 195.6 2 Amount of loan (thousands of dollars) 134.5 139.2 140.1 143.5 149.8 142.3 148.5 149.5 147 1 150.2 3 Loan-to-price ratio (percent) 78.6 78.2 80.4 80.8 81.0 80.5 78.6 81.0 80.4 79.1 4 Maturity (years) 27.7 27.2 28.2 28.6 28.2 28.5 28.0 28.3 28.4 28.3 5 Fees and charges (percent of loan amount)2 1.21 1.21 1.02 0.95 0.96 0.91 0.99 0.95 0.87 0.85 Yield (percent per year) 7.65 7.56 7.57 7.26 7.25 7.13 7.09 7.03 7.05 7.05 7 Effective rate1' 7.85 7.77 7.73 7.40 7.40 in 7.24 7.17 7.19 7.18 8 Contract rate (HUD series)4 8.05 8.03 7.76 7.38 7.25 7.16 7.22 7.16 7.20 7.11 SECONDARY MARKETS Yield (percent per year) 9 FHA mortgages (Section 203)5 8.18 8.19 7.89 7.51 7.17 7.08 7.06 7.09 7.37 7.07 10 GNMA securities6 7.57 7.48 7.26 6.84 6.74 6.56 6.63 6.66 6.63 6.63 Activity in secondary markets FEDERAL NATIONAL MORTGAGE ASSOCIATION Mortgage holdings (end of period) 11 Total 253.511 287,052 316.678 314,627 316,678 320,062 322,957 327,025 333,571 343,922 12 FHA/VA insured 28,762 30,592 31,925 31,878 31,925 31,621 31,650 31,965 32,734 32,771 13 Conventional 224,749 256,460 284.753 282.749 284.753 288,441 291,307 295,060 300,837 311,151 14 Mortgage transactions purchased (during period) 56,598 68,618 70,465 8,166 6,692 7,647 8.630 12.095 14,668 17,423 Mortgage commitments (during period) 15 Issued7 56.092 65.859 69,965 5.123 6.275 12.199 10.587 14,057 17,556 10,612 16 To sell8 360 130 1,298 139 140 60 0 92 0 0 FEDERAL HOME LOAN MORTGAGE CORPORATION Mortgage holdings (end of period)8 17 Total 107,424 137.755 164.421 160.974 164,421 169.142 175,770 185,928 189,471 192,603 18 FHA/VA insured 267 220 177 180 177 173 170 166' 162' 160 19 Conventional 107,157 137,535 164,244 160,794 164,244 168,969 175,600 185,762' 189,309' 192,443 Mortgage transactions (during period) 98,470 125,103 117,401 11,152 15,979 13,120 13,610 21,011 25,132 23,743 21 Sales 85,877 119,702 114,258 10,832 14,587 12,702 12,481 19,085 24,479 23,338 22 Mortgage commitments contracted (during period)9 118,659 128,995 120,089 12,047 15,805 15,638 17,397 23,060 24,468 26.100 1. Weighted averages based on sample surveys of mortgages originated by major institu- 6. Average net yields to investors on fully modified pass-through securities backed by tional lender groups for purchase of newly built homes; compiled by die Federal Housing mortgages and guaranteed by die Government National Mortgage Association (GNMA), Finance Board in cooperation with the Federal Deposit Insurance Corporation. assuming prepayment in twelve years on pools of thirty-year mortgages insured by the 2. Includes all fees, commissions, discounts, and "points" paid (by the borrower or the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. seller) to obtain a loan. 7. Does not include standby commitments issued, but includes standby commitments 3. Average effective interest rate on loans closed for purchase of newly built homes, converted. assuming prepayment at the end of ten years. 8. Includes participation loans as well as whole loans 4. Average contract rate on new commitments for conventional first mortgages; from U.S. 9. Includes conventional and government-underwritten loans. The Federal Home Loan Department of Housing and Urban Development (HUD). Based on transactions on the first Mortgage Corporation's mortgage commitments and mortgage transactions include activity day of the subsequent month. under mortgage securities swap programs, whereas the corresponding data for FNMA 5 Average gross yield on thirty-year, minimum-downpayment first mortgagee insured exclude swap activity. by ihe Federal Housing Administration (FHA) for immediate delivery in the private secondary market. Based on transactions on first day of subsequent month. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Real Estate A35 1.54 MORTGAGE DEBT OUTSTANDING1 Millions of dollars, end of period Type of holder and property Ql Q2 Q4 Ql" 1 All holders 4,395,888' 4,608,162r 4,936,041r 4,991,477' 5,070,645' 5.189,141' 5,288.301 5,383,193 By type of property 2 One- to four-family residences 3,355,868' 3.530,400' 3,761,560' 3,806,060' 3,860,806' 3.958,109' 4.030.312 4,097,033 3 Multifamily residences 275.005' 287,483' 312,388' 315,282' 320,601' 323,349' 332,200 339,789 4 Nonfarm, nonresidential 682,044' 705,719' 774,960' 782 482' 800,560' 817,924' 835,372 854,949 5 Farm 82,971 84.561 87,134 87,653 88.678 89,759' 90.417 91,422 By type of holder 6 Major financial institutions 1,819,806 1,894.420 1,979.114 1,993,046 2.033,662' 2.068.022' 2,086.747 2,118.968 7 Commercial banks' 1,012,711 1.090,189 1,145.389 1.160.136 1,196,524' 1,227,151' 1.244,146 1,269,973 8 One- to four-family 615,861 669,434 698,508 708,802 733.737' 752,334' 762.580 779,924 9 Multifamily 39,346 43,837 46.675 47,618 49.118' 49,169' 50.643 51,777 10 Nonfarm. nonresidential 334,953 353,088 375,322 378,474 387,608' 398,847' 403,945 410,818 11 Farm 22,551 23,830 24,883 25,242 26,061 26,800' 26.978 27,453 12 Savings institutions3 596,191 596.763 628,335 626,381 629,062 631,444' 631.809 636.759 13 One- to four-family 477.626 482.353 513,712 513,393 516,521 519.564' 520.660 526,984 14 Mullifamily 64,343 61,987 61.570 60.645 60,070 60,348' 59,543 58.884 15 Nonfarm. nonresidential 53,933 52,135 52,723 52,007 52,132 51,187' 51.251 50.522 16 Farm 289 288 331 336 338 346' 354 369 17 Life insurance companies 210,904 207,468 205,390 206,529 208,077 209,426 210 792 212,235 18 One- to four-family 7,018 7,316 6,772 6,799 6,842 7,080 7,186 7,321 19 Mullifamily 23,902 23,435 23,197 23,320 23,499 23,615 23,755 23,902 20 Nonfarm, nonresidential 170,421 167.095 165,399 166,277 167,548 168.374 169,377 170,423 21 Farm 9.563 9.622 10,022 10.133 10,188 10.358 10.473 10,589 22 Federal and related agencies 315.580 306,774 300,935 295.203 292.966 291,410 292,581 293.499 23 Government National Mortgage Association . . . 6 2 2 6 7 7 24 One- to four-family 6 2 2 6 7 7 25 Multifamily 0 0 0 0 0 0 0 0 26 Farmers Home Administration4 41,781 41,791 41,596 41.485 41.400 41,332 41.195 40,972 27 One- to four-family 18,098 17.705 17,303 17,175 17,239 17.458 17,253 17,160 28 Multifamily 11,319 11,617 11,685 11,692 11.706 11.713 11.720 11,714 29 Nonfarm, nonresidential 5,670 6,248 6,841 6,969 7,135 7.246 7,370 7.369 30 Farm 6,694 6,221 5.768 5,649 5,321 4,916 4,852 4.729 31 Federal Housing and Veterans' Administrations 10,964 9,809 6,244 4,330 4,200 3,462 3,821 3,694 32 One to four-family 4,753 5,180 3,524 2,335 2,299 2,810 3,091 2,966 33 Multifamily 6,211 4,629 2,719 1,995 1,900 652 730 729 34 Resolution Trust Corporation 10,428 1.864 0 0 0 0 0 0 35 One- to four-family 5,200 691 0 0 0 0 0 0 36 Multifamily 2,859 647 0 0 0 0 0 0 37 Nonfarm, nonresidential 2.369 525 0 0 0 0 0 0 38 Farm 0 0 0 0 0 0 0 0 39 Federal Deposit insurance Corporation 7,821 4,303 2,431 2,217 1,816 1,476 724 786 40 One- to four-family 1.049 492 365 333 272 221 109 118 41 Multifamily 1.595 428 413 377 309 251 123 134 42 Nonfarm. nonresidential 5,177 3,383 1,653 1,508 1.235 1,004 J92 534 43 Farm 0 0 0 0 0 0 0 0 44 Federal National Mortgage Association 174,312 176,824 174,556 172,829 170,386 168.458 167,722 166,670 45 One- to four-family 158,766 161.665 160,751 159,634 157,729 156.363 156,245 155,876 46 Multifamily 15,546 15,159 13,805 13,195 12,657 12,095 11,477 10.794 47 Federal Land Banks 28,555 28,428 29,602 29,668 29,963 30,346 30,657 31,005 48 One- to four-family 1.671 1,673 1,742 1,746 1,763 1,786 1,804 1,824 49 Farm 26,885 26.755 27,860 27,922 28,200 28,560 28,853 29,181 50 Federal Home Loan Mortgage Corporation 41,712 43.753 46,504 44,668 45,194 46.329 48.454 50,364 51 One- to four-family 38,882 39,901 41,758 39.640 40,092 40.953 42,629 44,440 52 Multifamily 2,830 3,852 4,746 5.028 5,102 5,376 5,825 5.924 53 Mortgage pools or trusts5 1,732,347 1.866,763 2.070,436 2.113,770 2,153,812 2.210.930 2,282,566 2,334,416 54 Government National Mortgage Association . . . 450,934 472,283 506.340 513,471 520,938 529,867 536,810 533.011 55 One- to four-family 441,198 461,438 494.158 500,591 507,618 516,217 523,156 519,152 56 Multifamily 9,736 10.845 12,182 12,880 13,320 13,650 13,654 13,859 57 Federal Home Loan Mortgage Corporation J90.851 515.051 554.260 562.894 567.187 569.920 579.385 583,144 58 One- to four-family 487,725 512,238 551,513 560.369 564,445 567,340 576,846 580,715 59 Multifamily 3,126 2,813 2,747 2,525 2,742 2,580 2,539 2,429 60 Federal National Mortgage Association 530,343 582.959 650,780 663,668 673,931 690,919 709,582 730.832 61 One- to four-family 520,763 569,724 633,210 645.324 654,826 670,677 687,981 708,125 62 Multifamily 9.580 13,235 17,570 18,344 19.105 20,242 21,601 22.707 63 Farmers Home Administration4 19 II 3 3 2 2 2 -> 64 One- to four-family 3 2 0 0 0 0 0 0 65 Mullifamily 0 0 0 0 0 0 0 0 66 Nonfarm, nonresidential 9 5 0 0 0 0 0 0 67 Farm 7 4 3 3 1 2 2 2 68 Private mortgage conduits 260,200 296,459 359.053 373,734 391,753 420,222 456,787 487,427 69 One- to four-family6 208,500 227,800 261,900 271,100 279,450 299,400 318,000 330,300 70 Multifamily 14,925 21,279 33.689 35.607 38,992 41.973 48,261 54,6S0 71 Nonfarm. nonresidential 36,774 47,380 63.4 64 67,027 73.312 78,849 90.526 102,447 72 Farm 0 0 0 0 0 0 0 0 73 Individuals and others7 528,155' 540,206' 585.556' 589,458' 590.206' 618,779' 626,408 636.310 74 One- to four-family 368,749' 372,786' 376.341' 378,815' 377,966' 405,900' 412,763 422,120 75 Multifamily 69,686' 73,719' 81,389' 82,054' 82.081' 81,684' 82,329 82,257 76 Nonfarm, nonresidential 72,738' 75,859' 109.558' 110,220' 111,591' 112,418' 112,411 112.834 77 Farm 16,983 17,841 18,268 18.368 18,567 18.777' 18.905 19,099 1. Mullifamily debt refers to loans on structures of five or more units. 6. Includes securitized home equity loans. 2. Includes loans held by nondeposit trust companies but not loans held by bank trust 7. Other holders include mortgage companies, real estate investment trusts, state and local departments, credit agencies, state and local retirement funds, norunsured pension funds, credit unions, and 3. Includes savings banks and savings and loan associations. finance companies. 4. FmHA-guaranteed securities sold to the Federal Financing Bank were reallocated from SOURCE. Based on data from various institutional and government sources. Separation of FmHA mortgage pools to FmHA mortgage holdings in 1986:04 because of accounting nonfarm mortgage debt by type of property, if nol reported directly, and interpolations and changes by the Fanners Home Administration. extrapolations, when required for some quarters, are esiimated in part by the Federal Reserve 5. Outstanding principal balances of mortgage-backed securities insured or guaranteed by Line 69 from Inside Mortgage Securities and other sources. the agency indicated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A36 Domestic Financial Statistics • August 1998 1.55 CONSUMER CREDIT' Millions of dollars, amounts outstanding, end of period 1997 1998 Holder and type of credit 1995 1996 1997 Nov. Dec. Jan. Feb. Mar.' Apr. Seasonally adjusted 1 Total 1,094,197 1,179,892 1,230,695' 1,226,947 1,230,695' 1,235,669' 1,242,912' 1,244,920 1,250,369 2 Automobile 364,231 392,370 413,453 406,892 413,453 415,485 416,755 419,717 420,887 442,994 499,209 530,801 529,800 530,801 532,864 536,592 537,055 539,381 4 Other 286,972 288.313 286,441' 290,255 286,441' 287.320' 289,565' 288,148 290,101 Not seasonally adjusted 5 Total 1,122,828 1,211,590 1,264,103' 1,234,477 1,264,103' 1,245,726' 1,237,687' 1,233,469 1,239,056 By major holder 6 Commercial banks 501,963 526,769 512,563' 506,497 512,563' 501,975' 497,804' 492,221 502,412 152,123 152,391 160,022 156,375 160.022 159,493 155,675 156,140 153,857 8 Credit unions 131,939 144,148 152,362 150,649 152.362 151,024 149,804 149,334 149,064 9 Savings institutions 40,106 44,711 47,172 47,611 47,172 46,733 46,295 45,856 45.418 10 Nonfinancial business3 85,061 77,745 78,927 70,464 78,927 75,355 72,772 72,669 65,012 11 Pools of securitized assets4 211,636 265,826 313,057 302,881 313,057 311,146 315,337 317,249 323,293 By major type of credit5 12 Automobile 367,069 395,609 416,962 411,097 416,962 413,727 412,461 415,656 415,889 151,437 157,047 155,254 156,232 155,254 154,413 152,747 153,627 150,651 14 Finance companies 81,073 86,690 87,015 86,046 87,015 87,379 84,685 86,834 90,564 15 Pools of securitized assets4 44,635 51,719 64,950 60,378 64,950 63,066 65,957 65,062 63.596 464,134 522,860 555,858 532,897 555.858 541,386 535,936 531,092 532,446 17 Commercial banks 210,298 228,615 219.826 212,726 219,826 208.750 204,564 197,264 205.316 18 Finance companies 28,460 32,493 38,608 34,789 38,608 37,603 36,851 36,273 29,927 19 Nonfinancial business 53,525 44,901 44,966 38,865 44,966 42,689 40,976 41,246 33,487 20 Pools of securitized assets 147,934 188.712 221,465 216,411 221,465 221.805 223,400 226.562 233,986 21 Other 291,625 293.121 291,283' 290,483 291,283' 290,613' 289,290' 286,721 290,721 140,228 141,107 137,483' 137,539 137,483' 138,812' 140,493' 141,330 146,445 23 Finance companies 42,590 33,208 34,399 35,540 34.399 34,511 34,139 33,033 33,366 24 Nonfinancial business3 31,536 32,844 33,961 31,599 33,961 32,666 31,796 31,423 31,525 25 Pools of securitized assets 19,067 25.395 26,642 26,092 26,642 26,275 25.980 25,625 25,711 1. The Board's series on amounts of credit covers most short- and intermediate-term credit 3. Includes retailers and gasoline companies. extended to individuals. Data in this table also appear in the Board's G.19 (421) monthly 4. Outstanding balances of pools upon which securities have been issued; these balances statistical release. For ordering address, see inside front cover. are no longer carried on the balance sheets of the loan originator. 2. Comprises mobile home loans and all other loans that are not included in automobile or 5. Totals include estimates for certain holders for which only consumer credit totals are revolving credit, such as loans for education, boats, trailers, or vacations. These loans may be available. secured or unsecured. 1.56 TERMS OF CONSUMER CREDIT1 Percent per year except as noted 1997 1998 Item 1995 1996 1997 Oct. Nov. Dec. Jan. Feb. Mar. Apr. INTEREST RATES Commercial banks1 1 48-month new car 9.57 9.05 9.02 n.a. 8.96 n.a. n.a. 8.87 n.a. n.a. 2 24-month personal 13.94 13.54 13.90 n.a. 14.50 n.a. n.a. 14.01 n.a. n.a Credit card plan 16.02 15.63 15.77 n.a. 15.65 n.a. n.a. 15.65 n.a. 15 79 15 50 15 57 15.62 15 33 Auto finance companies 5 New car 11.19 9.84 7.12 7.27 6.85 5.93 6.12 6.98 5.94 6.20 14.48 13.53 13.27 13.22 13.14 13.16 12.77 12.87 12.79 12.76 OTHER TERMS3 Maturity (months) 54.1 51.6 54.1 54.4 53.7 53,5 52.8 52.6 51.5 50.7 8 Used car 52.2 51.4 51.0 50.6 50.5 50.5 52.2 52 5 52.6 52 9 Loan-to-value ratio 92 91 92 92 91 92 92 92 92 91 10 Used car 99 100 99 101 99 99 98 97 97 98 Amount financed (dollars) ] 1 New car 16,210 16,987 18,077 18,779 18.923 19,121 18,944 18,825 18,932 18,922 12 Used car 11,590 12,182 12,281 12,287 12,389 12,547 12,391 12,356 12,431 13,490 1. The Board's series on amounts of credit covers most short- and intermediate-term credit 2 Data are available for only the second month of each quarter. extended to individuals. Data in this table also appear in the Board's G.19 (421) monthly 3. At auto finance companies. statistical release. For ordering address, see inside front cover. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Flow of Funds A37 1.57 FUNDS RAISED IN U.S. CREDIT MARKETS1 Billions of dollars; quarterly data at seasonally adjusted annual rates 1997 1998 Transaction category or sector Q3 Q4 Ql Q2 Q3 Q4 QI Nonrinancial sectors 1 Total net borrowing by domestic nonflnancial sectors. 574.6 702.8 727.8 764.2 685.5 625.4 712.3 624.4 786.9 933.4 By sector and instrument 2 Federal government 256.1 155.9 144.4 145.0 23.1 155.3 112.3 64.9 -43.5 30.3 40.8 -30.0 3 Treasury securities 248.3 155.7 142.9 146.6 23.2 158.4 115.6 66.3 -43.8 31.2 39.0 -27.6 4 Budget agency securities and mortgages 7.8 2 1.5 -1.6 -.1 -3.1 -3.3 -1.4 .2 - 9 1.7 -2.4 5 Nonfederal 418.7 558.3 582.8 741.1 530.2 513.1 647.4 667.9 756.6 892.6 fly instrument 6 Commercial paper 10.0 21.4 18.1 -.9 13.7 -14.2 -24.1 7.2 20.3 14.5 12.8 53.9 7 Municipal securities and loans . 74.8 -35.9 -48.2 2.6 71 4 -64.7 41.6 43.4 96.7 56.4 89.3 124.3 8 Corporate bonds 75.2 23.3 73.3 72.5 90.7 67.8 89.9 79.4 86.1 122.9 74.4 157.2 9 Bank loans n.e.c 6.4 75.2 102.3 66.2 101.5 138.3 27.2 143.1 105.0 16.8 141.0 63.7 10 Other loans and advances -18.9 34.0 67.2 33.8 66.8 63.0 3.9 37.5 18.5 76.3 134.9 94.8 11 Mortgages 123.7 175.8 206.7 320.0 344.5 258.1 336.0 266.0 281.4 419.2 411.4 420.5 12 Home 156.2 178.5 174.5 264.9 268.8 239.7 249.9 228.4 191.2 344.5 310.9 315.8 13 Multifamily residential -6.8 1.9 10.6 18.6 17.2 12.9 27.1 9.5 18.8 7.7 33.0 27.7 14 Commercial -26.7 -6.9 19.9 33.9 55 2 3.3 57.4 25.9 67.3 62.7 64.9 72.9 15 Farm 1.0 2.2 1.6 2.6 3.3 2.2 1.6 2.1 4.1 4.3 2.6 4.0 16 Consumer credit 60.7 124.9 138.9 88.8 52.5 81.9 38.6 70.8 60.0 50.5 28.8 56.9 By borrowing sector 17 Household 205.9 309.3 348.9 372.7 350.3 355.2 298.5 339.2 292.5 381.4 388.0 426.9 18 Nonfinancial business 51.3 141.7 245.5 195.8 311.3 224.9 163.3 252.9 274.7 311.6 406.0 4197 19 Corporate 45.5 134.1 218.6 146.5 241.5 19.3.4 92.9 200.3 199.6 242.8 323.4 323.8 20 Nonfarm noncorporate 3.2 3.3 23.9 44.5 63.5 30.9 61.2 48.3 68.5 65.7 71.3 88.9 21 Farm 2.6 4.4 2.9 4.8 6.4 .6 9.2 4.3 6.7 3.1 11.3 7.0 22 State and local government 74.7 -32.3 -36.0 14.3 79.5 -49.9 51.4 55.3 100.7 63.6 98.6 124.6 23 Foreign net borrowing in United States . 69.8 -14.0 71.1 70.5 51.5 105.7 87.9 26.3 56.4 87.8 35.5 60.3 24 Commercial paper -9.6 -26.1 13.5 11.3 3.7 .37.5 4.4 15.5 10.4 -11.6 .7 56.0 25 Bonds 82.9 12.2 49.7 49.4 41.3 60.2 78.5 11.0 34.3 94.6 25.3 8.4 26 Bank loans n.e.c .7 1.4 8.5 9.1 8.5 4.7 7.8 -.7 11.5 7.3 15.7 5.5 27 Other loans and advances -4.2 -1.5 -.5 .8 -2.0 3.4 -2.7 .5 .2 -2.5 -6.1 -9.6 28 Total domestic plus foreign 657.8 560.5 773.8 798.3 815.7 791.2 713.3 738.6 680.8 874.7 968.9 1,001.5 Financial sectors 29 Total net borrowing by financial sectors . . 468.4 456.4 556.2 649.2 456.5 664.0 342.5 679.6 603.1 971.7 By instrument 30 Federal government-related 165.3 287.5 204.1 231.5 212.8 222.9 252.8 105.7 286.2 161.0 298.1 227.3 31 Government-sponsored enterprise securities . 80.6 176.9 105.9 90.4 98.4 80.0 123.3 -8.9 198.1 46.4 157.9 142.4 32 Mortgage pool securities 84.7 115.4 98.2 141 1 114.4 142.9 129.6 114.6 88.1 114.6 140.3 84.8 33 Loans from US. government .0 -4.8 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 34 Private 129.1 180.9 252.3 324.7 436.5 233.6 411.1 236.8 393.4 442.1 673.5 601.2 35 Open market paper -5.5 40.5 42.7 92.2 166.7 84.4 162.0 175.9 77.8 168.2 244.6 236.7 36 Corporare bonds 123.1 121.8 196.7 179.7 206.8 104.0 187.9 63.4 234.8 202.0 327.0 304.6 37 Bank loans n.e.c -14.4 -13.7 3.9 16.9 19.7 .9 25.1 11.4 10.3 24.3 32.8 19.2 38 Other loans and advances 22.4 22.6 3.4 27.9 35.6 33.3 31.2 -20.1 63.0 37 5 61 7 32.7 39 Mortgages 3.6 9.8 5.6 7.9 7.8 11.0 4.9 6.2 7.5 10.1 7.3 8.0 By borrowing sector 40 Commercial banking 13.4 20.1 22.5 13.0 46.1 14.7 26.8 13.7 77.3 32.0 61.4 83.2 41 Savings institutions 11.3 12.8 2.6 25.5 19.7 25.8 23.0 -16.8 31.9 22.3 41.7 9.8 4 4 2 3 C Li r f e e d i i r n s u u n r i a o n n c s e companies . . 2 2 .2 - - .1 .1 1. . 1 1 .1 2 -.4 .3 2. . 0 3 _ . 2 8 . . 2 1 ' 2 .2 -.3 .3 !b 44 Government-sponsored enterprises 80.6 172J 105.9 90.4 98.4 80.0 123.3 -8^9 198.1 46.4 157.9 142.4 45 Federally related mortgage pools 84.7 115.4 98.2 141 1 114.4 142.9 129.6 114.6 88.1 114.6 140.3 84.8 46 Issuers of asset-backed securities (ABSs) 83.6 72.9 141.1 153.6 203.3 109.6 160.2 84.5 116.5 231.0 381.2 239 8 47 Finance companies -1.4 48.7 50.2 45.9 48.7 30.7 43.8 7.2 123.8 -2 9 66.5 82.2 48 Mortgage companies .0 -11.5 4 12.4 4.8 1.7 12.1 5.9 5.0 3.6 4.9 8.3 49 Real estate investment trusts (REITs) 3.4 13.7 5.7 11.0 24.8 11.8 15.2 15.1 19.8 32.0 32.1 36.3 50 Brokers and dealers 12.0 .5 -5.0 -2.0 8.1 5.7 4.9 -2.9 34.9 -6.9 7.0 -I.I 51 Funding corporations 6.3 23.1 34.9 64.1 80.7 33 7 123.0 129.4 -16.1 130.7 78.7 142.1 1 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A38 Domestic Financial Statistics • August 1998 1.57 FUNDS RAISED IN U.S. CREDIT MARKETS'—Continued 1996 1997 1998 Transaction category or sector 1993 1994 1995 1996 1997 Q3 Q4 Ql Q2 Q3 Q4 Ql All sectors 52 Total net borrowing, all sectors 952.2 1.028.9 1,230.2 1,354.5 1,464.9 1.247.7 1,377.3 1,081.1 1,360.4 1,477.8 1,940.5 1,830.0 53 Open market paper -5.1 35.7 74.3 102.6 184.1 107.7 142.3 198.6 108.5 171.1 258.1 346.6 54 U.S. government securities 421.4 448.1 348.5 376.5 235.9 378.2 365.1 170.6 242.6 191.3 338.9 197.2 55 Municipal securities 74.8 -35.9 -48.2 2.6 71.4 -64.7 41.6 43.4 96.7 56.4 89.3 124.3 56 Corporate and foreign bonds 281.2 157.3 319.6 301.7 338.8 232.0 356.2 153.8 155 2 419.5 426.6 470.3 -7.2 62.9 114.7 92.1 129.6 143.8 60.1 153.8 126.8 48.4 189.5 88 4 58 Other loans and advances -.8 50.3 70.1 62.5 100.4 99.7 32.4 17.9 81.7 111.3 190.5 117.8 59 Mortgages 127.3 185.6 212.3 127.9 352.3 269.1 140.9 272.2 288.9 4293 418.7 428.5 60 Consumer credit 60.7 124.9 138.9 88.8 52.5 81.9 38.6 70.8 60.0 50.5 28.8 56.9 Funds raised through mutual funds andcorporate equities 429.7 125.2 1».9 230.5 184.5 71.9 156.0 186.1 131.8 291.1 128.8 258.1 62 Corporate equities 137.7 24.6 -3.5 -7.0 -79.0 -100.1 -20.3 -67.3 -109.1 -12.6 -126.9 -78.2 21.3 -44.9 -58.3 -64.2 -114.8 -127.6 -56.0 -90.4 -141.6 -83.2 -144 1 -109 6 64 Foreign shares purchased by U.S. residents 63.4 48.1 50.4 58.8 38.0 32.7 42.3 47.0 53.0 62.2 -10.4 9.3 53.0 21.4 4.4 -1.6 -2.1 -5.1 -6.7 -23.9 -20.6 8.4 27.6 22.1 66 Mutual fund shares 292.0 100.6 147.4 237.6 263.4 171.9 176.3 253,4 240.9 303.7 255.7 336.2 1. Data in this table also appear in the Board's Z.I (780) quarterly statistical release, table* F.2 through F.4. For ordering address, see inside front cover. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Flow of Funds A39 1.58 SUMMARY OF FINANCIAL TRANSACTIONS' Billions of dollars except as noted; quarterly data at seasonally adjusted annual rates 1996 1997 1998 Transaction category or sector 1993 1994 1995 1996 1997 Q3 Q4 Ql Q2 Q3 Q4 Ql NET LENDING IN CREDIT MARKETS2 1 Total net lending in credit markets 952.2 1,028.9 1,230.2 1,354.5 1,464.9 1,247.7 1,377.3 1,081.1 1,360.4 1,477.8 1,940.5 1,830.0 2 Domestic nonfederat nonfinancml sectors 41.6 241.1 -92.6 7.2 -97.3 -202.6 -145.2 -193.4 -21.4 -164.4 -9.8 -145.3 3 Household 1.0 277.8 2 8 11.5 -109.5 -106.5 -36.6 -245.9 -10.3 -158.9 -23 0 -228.6 4 Nonfinancial corporate business 9.1 n.i -8.8 15.6 9.9 -10.0 -33.2 77.9 -53.3 34.4 -19.5 86.2 5 Nonfarm noncorporate business -1.1 .6 4.7 4.4 2.7 4.4 4.4 2.5 2.7 2.8 2.9 3.0 6 State and local governments 32.6 -55.0 -91.4 - 23.7 -.3 -90.5 -79.9 -27.9 39.5 -42 7 29.8 -5.S 7 Federal government -18.4 -27.5 _ t -7.7 4.9 -7.1 -4.1 1.9 5.6 3.0 9.1 13.8 8 Rest of the world 129.3 132.3 273.9 409.3 320.4 485 3 532 2 373 6 301.2 405 4 201.4 242 3 9 Financial sectors 799.7 683 0 1.049.1 945.8 1,236.9 972.1 9945 898.9 1,075.0 L23V7 1,739.8 1.7192 10 Monetary authority 36.2 31.5 12.7 12.3 38.3 11.5 8.4 37.4 47.2 14.3 54.3 30.5 11 Commercial banking 142.2 163.4 265.9 187.5 324.8 196.1 248.3 308.1 309.2 209.8 472.2 291.8 12 US -chartered banks 149.6 148.1 186.5 119.6 274.9 119.5 158.9 195.9 301.1 209.5 393.1 257.5 13 Foreign banking offices in United States -9.8 11.2 75.4 63.3 40.2 71.1 80.5 104.0 1.1 -.6 56.4 13.5 14 Bank holding companies .0 .9 -.3 3.9 5.4 4.8 10.5 2 2 5.1 -5.0 19.4 15.2 15 Banks in U S.-affiliated areas 2.4 3.3 4.2 .7 4.2 .7 -1.6 6.\ 1.8 5.8 3.2 5.6 16 Savings institutions -33.3 6.7 -7.6 19.9 -4.7 49.7 -47.9 -5.3 23.8 -35.3 -20 8.1 17 Credit" unions 21.7 28.1 16.2 25.5 16.8 21.1 24.3 18.5 28.3 14.4 5.8 16.9 18 Bank personal trusts and estates 9.5 7.1 -83 -7.7 7.6 -14.8 -2.5 3.4 10.7 7.3 8.8 2.4 19 Life insurance companies 100.9 66.7 99.2 72.5 113.2 123.2 118.1 94.3 175.0 107.0 76.4 104.1 20 Other insurance companies 27.7 24.9 21 5 22.5 23.3 14.2 27.7 -.1 27.9 32.4 32.8 25.5 21 Private pension funds 49.5 45.5 61.3 48.3 67.6 42.7 34.1 55.0 58.5 66.2 90.7 72 6 22 State and local government retirement funds 22.7 22.3 27.5 45.9 36.6 45.5 41.9 3.6 39.2 90.6 13.0 38.2 23 Money market mutual funds 20 4 30.0 86.5 88.8 845 83.0 81.3 65.2 19.7 123.6 129.3 174.6 24 Mutual funds 159.5 -7.1 52.5 48.9 79.3 27.5 25.3 61.9 91.6 103.6 60.0 118.2 25 Closed-end funds 20.0 -3.7 10.5 2.2 1.2 2 2 2.2 2.7 1.3 •3 .4 .6 26 Government-sponsored enterprises 87.8 117.8 84.7 92.0 95.0 8L4 137.9 45.1 119.2 55.5 160.0 166.2 27 Federally related mortgage pools 84.7 115.4 98.2 141.1 114.4 142.9 129.6 114.6 88.1 114.6 140.3 84.8 28 Asset-backed securities issuers (ABSs) 81.0 65.8 119.3 123.4 164.9 83.6 111.2 60.9 101.7 168.4 328.4 190.7 29 Finance companies -20.9 48.3 49 9 18.4 21.9 13.2 -6.2 44.9 1.9 65.2 -24.3 33.6 30 Mortgage companies .0 -24.0 -3.4 8.2 16.4 3.4 4.1 -1.3 -24.4 82.9 8.3 10.4 31 Real estate investment trusts (RElTs) .6 4.7 2 2 2.0 -2.0 3.4 -2.1 -2.1 -2.1 -2.1 -1.7 -2.0 32 Brokers and dealers 14.8 -44.2 90 1 -15.7 13.7 35.5 82.7 -14.5 -11.7 15.8 65.3 253.4 33 Funding corporations -.35.3 -16.2 -29.7 9.8 24.4 7.0 -24.0 6.5 -30.0 -.7 121.7 98.5 RELATION OF LIABILITIES TO FINANCIAL ASSETS 34 Net flows through credit markets 952.2 1,028.9 1,230.2 1,354.5 1.464.9 1,247.7 1,377.3 1,081.1 1,360.4 1,477.8 1,940.5 1,830.0 Other financial sources 35 Official foreign exchange .8 -5.8 8.8 -6.3 .7 -26.6 .7 -17.6 .4 24 17.5 -.8 36 Special drawing rights certificates .0 .0 2.2 -.5 -.5 -1.8 .0 -2.1 .0 .0 .0 .0 37 Treasury currency .4 .7 .6 .0 .0 2.3 -2.3 .4 .2 1.3 -1.9 3 38 Foreign deposits -18.5 52.9 35.3 82.0 89.0 ] [9.7 104.5 188.6 18.8 105.4 43.1 52.2 39 Net interbank transactions 5o!s 89's 9.9 -51.6 -46.3 -97.2 17.6 -86.1 -46.4 -42.6 -10.0 61.9 40 Checkable deposits and currency 117.3 -9.7 -127 15.8 41.5 105.9 -53.3 85.3 64.2 -49.2 65.6 72 5 41 Small time and savings deposits -70.3 -39.9 96.6 97.2 97 1 94.2 90.1 157.9 24.5 53.8 152.3 165.6 4^ Large time deposits -23.5 19.6 65 6 114.0 122.5 180 2 135.4 49.9 176.3 194.1 69.9 105 0 43 Money market fund shares 20.2 43.3 142.3 145.8 157.6 145J 187.5 182.4 58.5 243.6 146.0 2832 44 Security repurchase agreements 71.3 78.2 110 4 40.0 115.2 -16.7 84.3 36.5 198.0 121.1 105.3 253.2 45 Corporate equities 137 7 24.6 -3.5 -7.0 -79.0 -100.1 - 20..3 -67.3 -109.1 -12.6 -126.9 -78.2 46 Mutual fund shares 292.0 100.6 147 4 237.6 263.4 171.9 176.3 253.4 240.9 303 7 255.7 336.2 47 Trade payable* 52.0 93.7 101.9 72.1 96.3 -14.7 109.3 63.1 63.1 135.5 123.3 84 4 48 Security credit 61.4 -.1 26.7 52.4 110 1 5.3 125.2 117.1 137.4 79.7 106.3 150.7 49 Life insurance reserves 36.0 34.5 44.9 43.6 560 59.2 66.7 39 8 77.5 62.8 43.7 52.9 50 Pension fund reserves 255.6 246.1 233.4 232.1 290.2 225.0 283.9 256.8 337.3 321.8 244.7 281.2 51 Taxes payable 11.4 2.6 5.1 15.0 13.9 13.5 17.6 31.0 2.4 30.5 -8.4 24.0 52 Investment in bank personal trusts .9 17.8 4 0 -8.6 75.0 -17.4 -4.2 68.S 71.8 80.8 78.4 25 7 53 Noncorporate proprietors' equity 25.5 57.5 53.8 30.8 22.5 51.3 17.6 33.1 25.7 28.5 2.8 12.9 54 Miscellaneous 346.6 251.0 444 3 434.9 584.4 406.1 572.6 632.3 529.8 531.1 644.6 841.2 55 Total financial sources 2,319.3 2,086.4 2,747.2 2.893.8 3,474.5 2,552.9 3,286.6 3,104.4 3,231.6 3,669.4 3,892.7 4,554.0 Liabilities not identified as assets (—) 56 Treasury currency - 2 -.2 -.5 -1.0 -.6 1..3 -3.1 -.3 -.5 .8 -2.4 -.4 57 Foreign deposits -5.7 43.0 25 1 55 4 71.5 86.1 36 1 178.7 -10 5 83.1 34.7 58 Net interbank liabilities 4.2 -2.7 -3.1 :33 -19.8 -4.4 4^2 26.9 -24.4 -51.6 -30.0 10T4 59 Securilv repurchase agreements 46.4 69.4 22.9 - 7 71.9 -101.2 114.7 -91.5 172.1 27.4 179.9 171.5 60 Taxes pavable 15.8 16.6 17 8 16 3 14.1 20 3 21.6 12.2 28 3 11 2 4.9 - 9 61 Miscellaneous -164.2 -144.2 -211.7 -89.8 -249.7 -124.5 -8.2 -104.2 -372.5 -212.1 -310.0 -382.8 Floats not included in assets (-) 62 Federal government checkable deposits -1.5 -4.8 -6.0 .5 -2.7 27.1 -21.4 -9.4 16.1 2.1 -19.5 .9 63 Other checkable deposits -1.3 -2.8 -3.8 -4.0 -3.9 -4.7 -3.7 -2.6 -4.8 -3.4 -4.8 -9.3 64 Trade credit -4.3 .3 -12.2 -32.2 3.8 -102.5 -41.2 13.1 -72.0 68.6 5.5 -26.2 65 Total identified to sectors as assets 2,430.0 2,111.8 2,918.8 2,952.6 3,589.7 2,755.5 3,187.5 3,081.5 3,499.8 3,743.2 4,034.6 4,697.6 I. Data in this table also appear in the Board's Z.I (780) quarterly statisticial release, tables 2. Excludes corporate equities and mutual fund shares, F. I and F.5. For ordering address, see inside front cover. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A40 Domestic Financial Statistics • August 1998 1.59 SUMMARY OF CREDIT MARKET DEBT OUTSTANDING1 Billions of dollars, end of period Transaction category or sector 1995 Q3 04 Ql Q2 Q3 Q4 Ql Nonfinancial sectors 1 Total credit market debt owed by domestic nonfinancial sectors 13,016.8 13,719.6 14,447.4 15,210.1 14,252.1 14,447.4 14,613.7 14,729.1 14,933.9 15,210.1 15.435.2 By sector and instrument 2 Federal government 3.492.3 3,636.7 3,781.8 3,804.9 3,733.1 3.781.8 3,829.8 3.760.6 3,771.2 3,804.9 3,830.8 3 Treasury securities 3,465.6 3,608.5 3 755.1 3,778.3 3,705.7 3.755.1 3,803.5 3,734.3 3,745.1 3,778.3 3.804.8 4 Budget agency securities and mortgages .. . 26.7 28.2 26.6 26.5 27.4 26.6 26.3 26.3 26.1 26.5 25.9 5 Nonfederal 10,665.6 11.405.2 10,519.0 10.665.6 10,783.9 10,968.5 By instrument 6 Commercial paper 139.2 157.4 156.4 168.6 173.0 156.4 168.7 179.3 176.6 168.6 193.1 7 Municipal securities and loans 1,341.7 1.293.5 I 296.0 1,367.5 1.281.7 1.296.0 1,305.1 1.326.8 1,340.2 1,367.5 1.397.1 8 Corporate bonds 1,253.0 1,326.3 1,398.8 1,489.5 1.376.4 1.398.8 1,418.7 1,440.2 1.470.9 1,489.5 1,528.8 9 Bank loans n.e.c 759.9 862.1 928.3 1,029.8 920.5 928.3 962.9 994.2 994.2 1,029.8 1,045.1 10 Other loans and advances 669.6 736.9 770.6 837.4 769.4 770.6 784.4 788.0 803.1 837.4 865.7 11 Mortgages 4,377.2 4.5S3.9 4,903.8 5,248.3 4,824.6 4,903.8 4,957.7 5.035.0 5.151.0 5,248.3 5.341.2 12 Home 3,355.9 3.530.4 3,761.6 4,030.3 3,703.8 3.761.6 3,806.1 3,860.8 3,958.1 4,030.3 4,097.0 13 Multifamily residential 268.8 279.5 301.7 319.0 295.0 301.7 304.1 308.8 310.7 319.0 325.9 14 Commercial 669.5 689 4 753.4 808.6 739.0 753.4 759.9 776.7 792.4 808.6 826.8 15 Farm 83.0 84.6 87.1 90.4 86.7 87.1 87.7 88.7 89.8 90.4 91.4 16 Consumer credit 983.9 1.122.8 1.211.6 1.264.1 1.173.5 1.211.6 1,186.4 1,205.0 1.226.7 1,264.1 1,233.5 By borrowing sector 17 Household 4,446.2 4,800.4 5 143.9 5.497.0 5,043.7 5.143.9 5,174.6 5,260.7 5.374.4 5,497.0 5,546.5 18 Nonfinancial business 3,927.1 4,167.3 4,392.3 4,699.3 4,361.9 4.392.3 4,466.9 4,543.0 4,608.2 4,699.3 4,818.3 19 Corporate 2,663.1 2,876.5 3,052.1 3,289.3 3,038.1 3,052.1 3,116.3 3,170.2 3,217.6 3,289.3 3,387.1 20 Nonfarm noncorporate 1.121.8 1,145.8 1.190.2 1.253.7 1,174.3 1,190.2 1,202.2 1,219.3 1,235.2 1.253.7 1,275.9 21 Farm 142.2 145.1 149.9 156.3 149.5 149.9 148.3 153.4 155.4 156.3 155.3 22 State and local government 1,151.1 1,115.1 1,129.4 1,209.0 1,113.4 1.129.4 1,142.4 1,164.8 1,180.1 1,209.0 1,239.6 23 Foreign credit market debt held in United Stales 371.8 442.9 513.4 558.8 490.2 513.4 517.8 531.6 548.7 558.8 571.3 24 Commercial paper 42.7 56.2 67.5 65.1 65.8 67.5 69.3 71.3 64.3 65.1 76.7 25 Bonds 242.3 291.9 341.3 382.6 321.7 341.3 344.1 352.7 376.3 382.6 384.7 26 Bank loans n.e.c 26.1 34.6 43.7 52.1 41.7 43.7 43.5 46.4 48.2 52.1 53.5 27 Other loans and advances 60.8 60.2 61.0 59.0 61.0 61.0 60.9 61.2 59.9 59.0 56.4 28 Total credit market debt owed by nonfinancial sectors, domestic and foreign 13,388.7 14,162.5 14,960.8 15,768.9 14,960.8 15,131.5 15,260.7 15.482.6 15,768.9 16,006.5 Ftnancial sectors 29 Total credit market debt owed by 3,822.2 4,281.2 4,837.3 5,453.5 4,672.0 4.837.3 4,918.2 5,090.9 5.211.8 5,453.5 5,655.7 By instrument 30 Federal government-related 2,172.7 2,376.8 2.608.3 2,821.0 2,545.1 2.608.3 2,634.7 2,706.2 2.746.5 2,821.0 2,877.9 31 Government-sponsored enterprise securities 700.6 806.5 896.9 995.3 866.1 896.9 894.7 944.2 955.8 995.3 1,030.9 32 Mortgage pool securities 1,472 1 1,570.3 1.711.4 1,825.8 1,679.0 1,711.4 1,740.0 1,762.1 1,790.7 1,825.8 1,847.0 33 Loans from U.S. government .0 0 .0 .0 .0 .0 .0 .0 .0 .0 .0 34 Private 1,649.5 1,904.4 2.229.1 2,632.5 2,126.9 2.229.1 2,283.5 2,384.7 2,465.3 2,632.5 2,777.9 35 Open market paper 441.6 486.9 579.1 745.7 538.6 579.1 623.0 642.5 684.7 745.7 804.9 36 Corporate bonds 1,008.8 1,205.4 1,385.1 1,558.9 1,339.4 1,385.1 1,396.5 1.457.7 1,478.6 1.558.9 1.630.3 37 Bank loans n.e.c 48.9 52.8 69.7 89.4 62.8 69.7 72.2 75.2 80.7 89.4 94.0 38 Other loans and advances 131.6 135.0 162.9 198.5 155.1 162.9 157.9 173.7 183.0 198.5 206.6 39 Mortgages 18.7 24.3 32.2 40.0 31.0 32.2 33.8 35.6 38.2 40.0 42.0 By borrowing sector 40 Commercial banks 94.5 102.6 113.6 140.6 107.7 113.6 115.3 125.7 130.0 140.6 148.7 41 Bank holding companies 133.6 148.0 150.0 168.6 149.1 150.0 151.6 160.5 164.0 168.6 181.3 42 Savings institutions 112.4 115.0 140.5 160.3 134.8 140.5 136.3 144.3 149.8 160.3 162.7 43 Credit unions .5 .4 .4 .6 .4 .4 .4 .4 .5 .6 .7 44 Life insurance companies .6 .5 1.6 1.8 1.1 1.6 1.8 1.8 1.9 1.8 1.8 45 Government-sponsored enterprises 700.6 806.5 896.9 995.3 866.1 896.9 894.7 944.2 955.8 995.3 1,030.9 46 Federally related mortgage pools 1,472.1 1,570.3 1,711.4 1,825.8 1,679.0 1,711.4 1,740.0 1,762.1 1,790.7 1,825.8 1,847.0 47 Issuers of asset-backed securities (ABSs) 579.0 720.1 873.8 1,088.1 830.5 873.8 889.9 918.0 989.6 1,088.1 1.142.7 48 Brokers and dealers 34.3 29.3 27.3 35.3 26.1 27.3 26.6 35.3 33.6 35.3 35.1 49 Finance companies 433.7 483.9 529.8 554.5 513.7 529.8 528.4 557.8 532.7 554.5 571.8 50 Mortgage companies 18.7 19.1 31.5 36.4 28.5 31.5 33.0 34.3 35.2 36.4 38.5 51 Real estate investment trusts (REFTs) 31.1 36.8 47.8 72.6 44.0 47.8 51.6 56.6 64.6 72.6 81.7 52 Funding corporations 211.0 248.6 312.7 373.8 291.0 312.7 348.6 350.0 363.4 373.8 412.9 53 Total credit market debt, domestic and foreign 17,210.9 18,443.7 19,798.2 21,222.4 19,414.3 19,798.2 20,049.6 20,351.6 20,694.4 21,222.4 21,662.2 54 Open market paper 623.5 700.4 803.0 979.4 777.4 803.0 861.1 893.1 925.7 979.4 1,074.8 55 U.S. government securities 5.665.0 6,013.6 6,390.0 6,625.9 6,278.2 6,390.0 6.464.5 6.466.8 6.517.7 6,625.9 6,708.6 56 Municipal securities 1,341.7 1,293.5 1.296.0 1,367.5 1,281.7 1.296.0 1,305.1 1,326.8 1.340.2 1,367.5 1,397 1 57 Corporate and foreign bonds 2,504.0 2,823.6 3,125.3 3,431.0 3,037.5 3,125.3 3,159.3 3,250.6 3,325.9 3,431.0 3,543.8 58 Bank loans n.e.c 834.9 949.6 1,041.7 1,171.3 1,025.0 1,041.7 1,078.6 1,115.7 1,123.1 1,171.3 1,192.6 59 Other loans and advances 862.0 932 1 994.5 1.094.9 985.4 994.5 1,003.2 1.022.9 1,046.0 1,094.9 1.128.7 60 Mortgages 4,395.9 4,608.2 4,936.0 5,288.3 4,855.6 4.936.0 4,991.5 5,070.6 5.189.1 5,288.3 5,383.2 61 Consumer credit 983.9 1,122.8 1,211.6 1,264.1 1,1735 1,211.6 1,186.4 1,205.0 1.226.7 1,264.1 1.233.5 1. Data in this table also appear in the Board's Z.I (7801 quarterly statistical release, tables L.2 through L.4. For ordering address, see inside front cover. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Flow of Funds A41 1.60 SUMMARY OF FINANCIAL ASSETS AND LIABILITIES1 Billions of dollars except as noted, end of period 1996 1997 1998 Transaction category or sector 1994 1995 1996 1997 Q3 Q4 01 Q2 Q3 Q4 Qi CREDIT MARKET DEBT OUTSTANDING2 1 Total credit market assets 17,210.9 18,443.7 19,798.2 21,222.4 19,414.3 19,798.2 20,049.6 20,351.6 20,694.4 21,222.4 21,662.2 2 Domestic nonfederal nonfinancial sectors 3,002.4 2,874.6 2,926.9 2,793.6 2,911.5 2,926.9 2,854.7 2,812.5 2,758.3 2,793.6 2.736.5 3 Household 1,945.7 1,913.3 1,979.3 1,833.8 1,955.9 1,979.3 1,920.2 1,873.7 1,822.7 1,833.8 1,783.5 4 Nonfinancial corporate business 289.2 280.4 286.0 295.9 275.7 286.0 281.8 271.9 280.3 295.9 292.3 5 Nonfarm noncorporate business 37.6 42.3 46.7 49.4 45.6 46.7 47.4 48.0 48.7 49.4 50.2 6 State and local governments 729.9 638.6 614.8 614.5 634.4 614.8 605.4 618.9 606.6 614.5 610.5 7 Federal government 204.4 204.2 196.5 201.4 197.5 196.5 196.9 198.3 199.1 201.4 204.8 8 Rest of the world 1,254.8 1,563.1 1,953.6 2,274.0 1,844.8 1,953.6 2,052.7 2.126.4 2,229.1 2.Z74.0 2,340.0 9 Financial sectors 12.749.2 13,801.8 14,721.2 15,953.4 14,460.5 14.721 2 14,945.4 15.214.3 15,507.8 15,953.4 16,381.0 10 Monetary authority 368^2 380^8 393 A 431.4 386^2 393.1 '397.1 4124 412.7 43 L4 433 8 11 Commercial banking 3,254.3 3,520.1 3,707.7 4,032.5 3,643.3 3,707.7 3,775.7 3,856.8 3,912.9 4,032.5 4.095.8 12 U.S.-chartered banks 2,869.6 3,056.1 3,175.8 3.450.7 3,135.3 3,175.8 3,218.1 3,295.2 3,351.9 3,450.7 3,507.1 13 Foreign banking offices in United States 337.1 412.6 475.8 516.1 454.2 475.8 499.5 501.8 501.0 516.1 517.7 14 Bank holding companies 18.4 18.0 22.0 27.4 19.3 22.0 22.5 23.8 22.5 274 31.2 15 Banks in U.S.-affiliaied areas 29.2 33.4 34.1 38.3 34.5 34.1 35.6 36.1 37.5 38.3 39.7 16 Savings institutions 920.8 913.3 933.2 928.5 945.2 933.2 931.9 937.8 929.0 928.5 930.5 17 Credit unions 246.8 263.0 288.5 305.3 282.6 288.5 291.2 299.9 303.9 305.3 3075 18 Bank personal trusts and estates 248.0 239.7 232.0 239.5 232.6 232.0 232.8 235.5 237.3 239.5 240.1 19 Life insurance companies 1,482.6 1,581.8 1,654.3 1,767.4 1,627.0 1,654.3 1,680.2 1,724.1 1,750.4 1,767.4 1,795.7 20 Other insurance companies 446.4 468.7 491.2 514.4 484.2 491.2 491.2 498.1 506.2 514.4 520.8 21 Private pension funds 656.9 718.2 766 5 834 2 758.0 766 5 780.3 794.9 811.5 834.2 852.3 22 State and local government retirement liinds 455^8 4833 529.2 565.8 517.7 529.2 531.6 542.7 562.0 565'8 577^0 23 Money market mutual funds 459.0 545.5 634.3 718.8 606.6 634.3 659.0 656.5 678.7 718.8 770.1 24 Mutual funds 7188 771.3 820.2 899.5 818.3 820.2 838.3 860.6 889.2 899.5 931.6 25 Closed-end funds 86.0 96.4 98 7 99.8 98.1 98.7 99.3 99.7 99.7 99.8 100.0 26 Government-sponsored enterprises 663.3 748 0 813.6 908.6 779.3 813.6 824.3 854.8 868.7 908.6 949.5 27 Federally related mortgage pools 1,472.1 1,570.3 1,711.4 1.825.8 1,679.0 1.711.4 1,740.0 1,762.1 1,790.7 1,825.8 1.847.0 28 Asset-backed securities issuers (ABSs) 541.7 661.0 784.4 949.2 753.4 784.4 794.6 819.0 863.9 949.2 991.5 29 Finance companies 476.2 526.2 544.5 566.4 538.3 544.5 552.4 553.1 564.4 566.4 571.6 30 Mortgage companies . . . ... 36.5 33.0 41.2 57.6 40,2 41.2 40.9 34.8 55 5 57.6 60 "> 31 Real estate investment trusts (RElTs) 13.3 15.5 17.5 15.5 18.0 17.5 17.0 16.5 15.9 15.5 15.0 32 Brokers and dealers 93.3 183.4 167.7 181.4 147.1 167 7 164.1 1612 165 1 181.4 244.8 33 Funding corporations 109.3 82.2 92.0 111.7 105.4 92^0 103.6 93.8 90.1 111.7 145.9 RELATION OF LIABILITIES TO FINANCIAL ASSETS 34 Total credit market debt 17,210.9 18,443.7 19,798.2 21,222.4 19,414.3 19,798.2 20,049.6 20,351.6 20,694.4 2U22.4 21,662.2 Other liabilities 35 Official foreign exchange 53.2 63.7 53.7 48.9 54.3 53.7 46.3 46.7 46.1 48.9 48.2 36 Special drawing rights certificates 8.0 10.2 9.7 9.2 9.7 9.7 9.2 9.2 9.2 9.2 9.2 37 Treasury currency 17.6 18.2 18.2 18.2 18.8 18 2 18 3 18.3 18.7 18.2 18 3 38 Foreign deposits 324.6 359.2 438.1 527.0 415.1 438.1 485.2 489.9 516.2 527.0 540^1 39 Net interbank liabilities 280.1 290.7 240.8 192.8 225.8 240 8 210.9 197.1 186.9 192.8 201.2 40 Checkable deposits and currency 1.242XJ 1,229.3 1,245.1 1,286.6 1,220.8 1,245.1 1,220.0 1.265.3 1,234.2 1,286.6 1.259.8 41 Small lime and savings deposits 2 183 2 2.279.7 2,377 0 2,474.1 2,357.9 2,377.0 2,427.1 2,432.3 2,438.8 2.474.1 2,526.0 42 Large time deposits 411.2 476.9 590.9 713.4 557.2 590.9 606.0 646.7 696.1 713.4 742.4 43 Money market fund shares 602.9 745.3 891.1 1 048 7 838 1 891.1 950 8 952 4 1 005 1 1 048 7 1 IS'' 9 44 Security repurchase agreements 549.5 659'9 699.9 '815.1 686.9 699.9 713.8 766.7 '795.4 '815.1 88L1 45 Mutual fund shares 1,477.3 1.852.8 2,342.4 2.994.7 2,211.6 2,342.4 2,411.5 2,719.6 2,977.0 2,994.7 3,348.4 46 Security credil 279.0 305.7 358.1 468 2 317.8 358.1 380.0 414.8 432.2 468.2 49R.6 47 Life insurance reserves 505.3 550.2 593.8 649 7 577.1 593.8 603.7 623.1 638.8 649.7 663.0 48 Pension fund reserves 4,880.1 5,599.6 6,329.5 7,452.2 6,039.8 6,329.5 6,417.1 6.942.5 7,331.8 7,452.2 8.036.2 49 Trade payables 1.141.5 1,243.4 1,315.5 1,411.8 1.260.6 1,315.5 1,300.4 1.321.9 1,351.9 1.411.8 1,401.7 50 Taxes payable 101.4 106.5 121.5 135.4 119.1 121.5 134.8 130.7 139.5 135.4 147.1 51 Investment in bank personal trusts 699.4 803.0 871.7 1,082.8 843.1 871.7 888 7 982.9 1,058.9 1,082.8 1,173 1 52 Miscellaneous 5,397.3 5,767.7 6.082.7 6,489.0 5,972.2 6,082.7 6,276.5 6,224.3 6,396.9 6,489.0 6,725.1 53 Total liabilities 37,364.7 40,805.7 44,377.7 49,040.3 43,140.3 44,377.7 45.150.1 46,536.0 47,968.1 49,040.3 51,014.5 Financial assets not included in liabilities (+) 54 Gold and special drawing rights 21.1 22.1 21.4 21.1 21.2 21.4 20.9 21.1 21.0 21.1 21.2 55 Corporate equities 6.237.9 8,331.3 10,061.1 12.958.6 9,340.5 10.061.1 10,072.3 11.719.8 12,804.6 12,958.6 14,618.6 56 Household equity in noncorporate business 3,422.6 3,647.5 3,863.3 4,156.7 3,817.7 3.863.3 3,947.1 4,030.7 4,093.1 4,156.7 4.203.9 Liabilities not identified as assets ( —) 57 Treasury currency -5.4 -5.8 - 6.8 -74 -6.0 -6.8 -6.9 -7.0 -6.8 -7.4 -7 5 58 Foreign deposits 276.2 300.6 353.1 424.6 347.0 353.1 397.8 395.2 416.0 424.6 425.2 59 Net interbank transactions -6.5 -9.0 -10.6 -32.1 -11.6 -10.6 -1.6 -8.1 -22.1 -32.1 -2.2 60 Security repurchase agreements 67.8 90.7 90.0 162.0 72.1 90.0 68.4 109.2 126.0 162.0 203.8 61 Taxes payable 48.8 61.3 74.7 88.5 68.9 74.7 72.3 74.3 84.2 88.5 84.9 62 Miscellaneous -983.1 -1,260.8 -1,650.8 -1.960.4 -1,492.7 -1.650.8 -1,606.0 -1,745.9 -1.789.5 -1.960.4 -2,070.6 Floats not included in assets ( -) 63 Federal government checkable deposits 3.4 3.1 -1.6 -8.1 -1 7 -1.6 -9.7 -6.8 -7.8 -8.1 -104 64 Other checkable deposits 38.0 34.2 30.1 26.2 23.1 30.1 25.6 27.9 19.5 26.2 19.9 65 Trade credit -245.8 -258.1 -290.3 -297.5 -359.7 -290.3 -345.8 -371.8 -380.2 -297.5 -364.2 66 Total identified to sectors as assets 47,852.8 53,850.5 59,735.7 67,780.8 57,680.3 59,735.7 60,596.4 63,840.5 66,447.6 67,780.8 71,579.2 1. Data in this table also appear in the Board's Z. 1 (780) quarterly statistical release, tables 2. Excludes corporate equities and mutual fund shares. L, 1 and L.5. For ordering address, see inside front cover. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A42 Domestic Nonfinancial Statistics • August 1998 2.10 NONFINANCIAL BUSINESS ACTIVITY Selected Measures Monthly data seasonally adjusted, and indexes 1992 = 100, except as noted 1997 1998' Measure 1995 1996 1997 Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May 1 Industrial production1 114.5 118.5 124.5 125.6 126.5 127.5 127.9 127.8 127.3 127.8 128.2 128.8 Market groupings 110.6 113.7 118.5 119.1 120.2 121.2 121.0 121.3 120.6 121.2 121.7 122.2 3 Final, total 111.3 114.6 119.6 120.3 121.5 122.5 122.2 122.6 121.5 122.4 123.1 123.7 4 Consumer goods 109.9 111.8 114.4 114.5 115.9 116.7 115.9 116.6 115.1 116.0 116.5 117.0 113.8 119.6 128.8 130.6 131.3 132.8 133.4 133.1 133.1 133.6 134.8 135.5 6 Intermediate 108.3 110.8 115.1 115.2 116.3 117.3 117.4 117.4 117.6 117.5 117.5 117.9 7 Materials 120.8 126.2 134.1 136.1 136.7 137.7 138.9 138.2 138.2 138.5 138.5 139.2 Industry groupings 8 Manufacturing 116.0 120.2 127.0 128.0 129.1 130.4 130.9 131.1 130.6 130.6 131.2 131.5 9 Capacity utilization, manufacturing (percent)2. . 82.8 81.4 81.7 81.6 81.9 82.3 82.3 82.1 81.4 81.0 81.1 80.9 10 Construction contracts"* 122.1' 130.7 141.0' 141.0 141.0 142.0' 142.01 141.0 143.0 138.0 139.0 135.0 11 Nonagricultural employment, total4 114.9 117.2 119.9 120.9' 121.2' 121.6' 121.9' 122.3 122.4 122.5 122.8 123.1 12 Goods-producing, total 98.3 99.0 100.3 101.3' 101.5' 101.7' 102.1' 102.5 102.6 102.4 102.7 102.5 13 Manufacturing, total 97.5 97.2 97.6 98.4' 98.5' 98.7' 98.9' 99.1 99.1 99.1 99.1 99.0 14 Manufacturing, production workers 99.0 98.4 98.9 99.7' 99.9' 100.1' 100.41 100.5 100.6 100.5 100.4 100.2 15 Service-producing 120.2 123.0 126.2 127.2' 127.5' 127.9' 128.2' 128.6 128.8 128.9 129.2 129.7 16 Personal income, total 158.2 167.0 176.8 178.3 179.2 180.5 181.3 182.3 183.4 184.0 184.8 n.a. )7 Wages and salary disbursements 150.9 159.8 170.6 172.3 173.5 175.6 176.4 177.7 179.2 179.7 180.5 n.a. 18 Manufacturing 130.4 135.7 142.0 142.8 144.4 145.7 146.4 146.6 147.0 147.1 146.7 n.a. 19 Disposable personal income5 158.7 166.2 174.4 175.8 176.6 177.7 178.4 179 0 179.9 180.5 181.1 n.a. 20 Retail sales5 151 5 159 6 166 9 168 0 167 8 168 4 169 1 170 8 17'2 17? 4 173 6 175 2 Prices'" 21 Consumer (1982-84=100) 152.4 156.9 160.5 161.2 161.6 161.5 161.3 161.6 161.9 162.2 162.5 162.8 22 Producer finished goods (1982=100) 127.9 131.3 131.8 131.8 132.3 131.7 131.1 130.3 130.1 129.7 130.0 130.4 1. Data in this table also appear in the Board's G.17 (419) monthly statistical release. For 4. Based on data from U.S. Department of Labor, Employment and Earnings. Series covers the ordering address, see the inside front cover. The latest historical revision of the industrial employees only, excluding personnel in the armed forces. production index and the capacity utilization rates was released in December 1997. The recent 5. Based on data from U.S. Department of Commerce, Survey of Current Business. annual revision is described in an article in the February 1998 issue of the Bulletin. For a 6. Based on data not seasonally adjusted. Seasonally adjusted data for changes in the price description of the aggregation methods for industrial production and capacity utilization, see indexes can be obtained from the U.S. Department of Labor, Bureau of Labor Statistics, •'Industrial Production and Capacity Utilization: Historical Revision and Recent Develop- Monthly Labor Review. ments," Federal Reserve Bulletin, vol. 83 (February 1997), pp. 67-92. For details about the NOTE. Basic data (not indexes) for series mentioned in noles 4 and 5, and indexes for series construction of individual industrial production series, see "Industrial Production: 1989 mentioned in notes 3 and 6, can also be found in the Survey of Current Business. Developments and Historical Revision," Federal Reserve Bulletin, vol. 76 (April 1990), pp. Figures for industrial production for the latest month are preliminary, and many figures for 187-204. the three months preceding the latest month have been revised. See "Recent Developments in 2. Ratio of index of production to index of capacity. Based on data from the Federal Industrial Capacity and Utilization," Federal Reserve Bulletin, vol. 76 (June 1990), pp. Reserve, DRI McGraw-Hill, U.S. Department of Commerce, and other sources. 411-35. See also "Industrial Production Capacity and Capacity Utilization since 1987," 3. Index of dollar value of total construction contracts, including residential, nonresiden- Federal Reserve Bulletin, vol. 79 (June 1993), pp. 590-605. tial, and heavy engineering, from McGraw-Hill Information Systems Company, F.W. Dodge Division. 2.11 LABOR FORCE, EMPLOYMENT. AND UNEMPLOYMENT Thousands of persons; monthly data seasonally adjusted 1997' 1998' Category 1995 1996 1997 Oct. Nov. Dec. Jan. Feb. Mar. Apr. May HOUSEHOLD SURVEY DATA1 132,304 133,943 126,297 136,406 136,864 137,169 137,493 137.557 137,523 137,242 137,364 Employment 2 Nonagricultural industries1 121,460 123,264 126,159 126,583 127,191 127.392 127,764 127,829 127.862 128,033 128,118 3 Agriculture 3,440 3.443 3.399 3.327 3.384 3,385 3,319 3.335 3,132 3,350 3,335 Unemployment 4 Number 7,404 7,236 6.739 6,496 6,289 6,392 6,409 6,393 6,529 5,859 5,910 5 Rate (percent of civilian labor force) 5.6 54 4.9 4.8 4.6 4.7 4.7 4.6 4.7 4.3 4.3 ESTABLISHMENT SURVEY DATA 6 Nonagricultural payroll employment4 117,191 119,523 122.257 123,568 123.944 124,289 124,640 124.832 124,914 125,216 125,512 7 Manufacturing 18,524 18,457 18,538 18,718 18,758 18,791 18,824 18,822 18,829 18,826 18,800 8 Mining 581 574 573 592 591 592 592 590 587 582 581 5,160 5.400 5.627 5,722 5.750 5,810 5,881 5.902 5,860 5,926 5,917 10 Transportation and public utilities 6,132 6,261 6,426 6,453 6,456 6,451 6,473 6,494 6,504 6.512 6,534 11 Trade 27,565 28,108 28,788 28,802 28,917 28,976 29,039 29,052 29,042 29,125 29,223 12 Finance 6,806 6,899 7.053 7,151 7,172 7.194 7,213 7,232 7,258 7,286 7,306 13 Service 33,117 34,377 35.597 36,484 36.638 36,795 36,932 37.020 37,106 37,195 37.346 19,305 19,447 19,655 19,646 19.662 19,680 19,686 19,720 19,728 19,764 19,805 1. Beginning January 1994, reflects redesign of current population survey and population 4. Includes all full- and part-time employees who worked during, or received pay for. the controls from the 1990 census. pay period that includes the twelfth day of the month; excludes proprietors, self-employed 2. Persons sixteen years of age and older, including Resident Armed Forces. Monthly persons, household and unpaid family workers, and members of the armed forces. Data are figures are based on sample data collected during the calendar week that contains the twelfth adjusted to the March 1992 benchmark, and only seasonally adjusted data are available at this day; annual data are averages of monthly figures. By definition, seasonably does not exist in time. population figures. SOURCE. Based on data from U.S. Department of Labor, Employment and Earnings. 3. Includes self-employed, unpaid family, and domestic service workers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Selected Measures A43 2.12 OUTPUT, CAPACITY, AND CAPACITY UTILIZATION1 Seasonally adjusted 1997 1998 1997 1998 1997 1998 Series Q2 Q3 04 Ql' Q2 Q3 Q4 Ql Q2 Q3 Q4 Ql' Output (1992=100) Capacity (percent of 1992 output) Capacity utilization rate (percent)2 1 Total industry 123.3 125.1 127.3 127.6 149.6 151.3 153.0 154.8 82.4 82.7 83.2 82.5 2 Manufacturing 125.7 127.6 130.1 130.8 154.3 156.3 158.3 160.4 81.5 81.6 82.2 81.5 3 Primary processing' 117.7 118.5 119.8 120.1 136.9 138.0 139.2 140.4 86.0 85.8 86.0 85.6 4 Advanced processing11 129.7 132 1 135.3 136.1 163.2 165.7 168.1 170.7 79.5 79.8 80.4 79.7 5 Durable goods 140.2 143.7 147.2 148.0 173.8 177.2 180.6 184.2 807 81 1 81.5 80.4 6 Lumber and products 116.4 114.9 114.7 115.6 138.6 140.0 141.3 142.2 84.0 82.1 81.2 81.3 7 Primary metals 123.8 125.5 127.8 128.1 136.0 137.2 138.5 140.1 91.0 91.5 92.3 91.4 8 Iron and steel 122.6 122.8 126.5 127.2 135.4 136.6 137.9 139.4 90.6 89.9 91.8 91.2 9 Nonferrous 125.3 128.8 129.4 129.2 136.4 137.7 138.9 140.7 91.8 93.5 93.2 91.8 10 Industrial machinery and equipment 168.2 173.9 177.6 180.9 199.0 204.4 210.0 215.9 84.5 85.1 84.6 83.8 ) 1 Electrical machinery 226.6 236.6 246.0 253 6 276.7 289.1 301.9 315.6 81 9 81.9 81.5 80.4 12 Molor vehicles and pans 130.5 136.7 144.0 136.8 182.6 184.7 186.7 18S.8 71.4 74.0 77.1 72.4 13 Aerospace and miscellaneous transportation equipment 92.8 95.6 98.6 101.2 123.4 124.1 124.8 125.4 75.2 77.1 79.0 80.7 14 Nondurable goods 110.7 111.1 112.6 113.1 134.3 135.0 135.7 136.5 82.4 82.3 82.9 82.9 15 Textile mill products 108.5 110.9 111.5 110.0 131.1 131.7 132.3 132.9 82.8 84.3 84.3 82.8 16 Paper and products 112.2 114.1 113.5 113.0 125.5 126.0 126.7 127.4 89.4 90.5 89.6 88.7 17 ChemicaK and products 114.8 114.8 117.1 118.2 145.1 146.3 147.5 148.7 79.1 78.5 79.4 79.5 18 Plastics materials 127.6 130.6 131.4 130.8 138.1 140.0 I4L9 143.7 92 4 93.3 92.6 91.0 19 Petroleum products 111.0 109.5 109.8 113.0 114.7 115.2 115.7 116.2 96.8 95.1 94.9 97.3 20 Mining 106.0 106.4 105.9 108.3 117.9 118.1 118.2 118.4 89.9 90.1 89.6 91.5 21 Utilities 111.7 114.0 115.5 110.6 126.3 126.7 127.1 127.4 88.5 90.0 90.9 86.8 22 Electric 111.3 114.2 115.7 112.1 124.6 125.0 125.4 125.7 89.3 91.4 92.3 89.2 197,1 1975 Previous cycle Latest cycle6 1997 1997 1998 High Low High Low High Low May Dec. Jan. Feb.' Mar.' Apr. Mayn Capacity utlization rate (percent)" 1 Total industry 89.2 72.6 87.3 71.1 85.4 78.1 82.4 83.3 82.9 82.2 82.2 82.1 82.2 2 Manufacturing 88.5 70.5 86.9 69.0 85.7 76.6 81.4 82.3 82.1 81.4 81.0 81.1 80.9 3 Primary processing3 91.2 68.2 88.1 66.2 88.9 77.7 86.0 86.3 86.1 855 85.0 84.9 84.6 4 Advanced processing 87.2 71.8 86.7 70.4 84.2 76.1 79.4 80.5 80.3 79.6 79.2 79.4 79.2 5 Durable goods 89.2 68.9 87.7 63.9 84.6 73.1 80.6 81 7 81.0 80.2 79.9 79.8 79.6 6 Lumber and products 88.7 61.2 87.9 60.8 93.6 75.5 84.0 80.7 80.8 82.0 81.0 81.5 81.6 7 Primary metals 100.2 65.9 94.2 45.1 92.7 73.7 91.4 91.6 92.7 91.4 90.1 89.0 88.9 8 Iron and steel 105.8 66.6 95.8 37.0 95.2 71.8 91.6 91.2 92.2 91.1 90.4 88.8 88.9 9 Nonferrous 90.8 59.8 91.1 60.1 89.3 74.2 91.3 92.3 93.6 92.0 89.9 89.5 89.0 10 Industrial machinery and equipment 96.0 74.3 93.2 64.0 85.4 72.3 84.5 84.3 84 3 83.1 84.0 83.8 8<6 11 Electrical machinery 89.2 64.7 89.4 71.6 84.0 75.0 81.8 81.6 81.4 80.5 79.2 78.9 78.4 12 Motor vehicles and parts 93.4 51.3 95.0 45.5 89.1 55.9 70.8 78.2 73.5 72.4 71.4 72.9 73.1 13 Aerospace and miscellaneous transportation equipment 78.4 67.6 81.9 66.6 87.3 79.2 75.1 80.5 81.3 80.6 80.2 79.2 79.9 14 Nondurable goods 87.8 71.7 87.5 76.4 87.3 80.7 82.5 83.0 83.4 828 82.4 82.7 82.4 13 Textile mill products 91.4 60.0 91.2 72.3 90.4 77 7 81.8 83.4 84.3 82.5 81.6 81.3 82.6 16 Paper and products 97.1 69.2 96.1 80.6 93.5 85.0 89.7 89.9 88.4 90.0 87.8 88.4 88.3 17 Chemicals and products 87.6 69.7 84.6 69.9 «6.2 79.3 79.0 79 9 80.1 79.1 79.3 79.4 79.0 18 Plastics materials 102.0 50.6 90.9 63.4 97.0 74.8 92.2 93.7 93.9 90.3 88.9 19 Petroleum products 96.7 81.1 90.(1 66.8 88.5 85.1 97.2 94.6 96.7 96.3 98.7 98.8 97.5 20 Mining 94.3 88.2 96.0 80.3 88.0 87.0 90.5 89.4 91.6 91.9 91.0 90.8 91.9 21 Utilities 96.2 82.9 89.1 75.9 92.6 83.4 88.5 89.9 85.4 84 9 90.2 88.1 90.5 22 Electric 99.0 827 88.2 78.9 95 0 87 1 88.6 91.0 87.7 87.9 91.8 89 6 929 1. Data in this table also appear in the Board's G.I7 (419) monthly statistical release. For 3. Primary processing includes textiles; lumber; paper; industrial chemicals; synthetic the ordering address, see the inside front cover. The latest historical revision of the industrial materials; fertilizer materials; petroleum products; rubber and plastics, stone, clay, and glass; production index and the capacity utilization rates was released in December 1997. The recent primary metals; and fabricated metals. annual revision is described in an article in the February 1998 issue of the Bulletin. For a 4. Advanced processing includes foods: tobacco: apparel; furniture and fixtures: printing description of ihe aggregation methods for industrial production and capacity utilization, see and publishing: chemical products such as drugs and toiletries; agricultural chemicals; leather "Industrial Production and Capacity Utilization: Historical Revision and Recent Develop- and products; machinery; transportation equipment, instruments; and miscellaneous manufacments," Federal Reserve Bulletin, vol 83 (February 1997), pp. 67-92. For details about the tures. construction of individual industrial production series, see "Industrial Production: 1989 5. Monthly highs, 1978-80; monthly lows, 1982. Developments and Historical Revision," Federal Reserve Bulletin, vol. 76 (April 1990), pp. 6. Monthly highs, 1988-89; monthly lows, ) 990-91. 187-204. 2. Capacity utilization is calculated as the ratio of the Federal Reserve's seasonally adjusted index of industrial production to the corresponding index of capacity. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A44 Domestic Nonfinancial Statistics • August 1998 2.13 INDUSTRIAL PRODUCTION Indexes and Gross Value1 Monthly data seasonally adjusted 1992 1997 1998 pro- 1997 Group por- avg. tion May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb.' Mar.' Apr. Mayp Index (1992 =100) MAJOR MARKETS 1 Total index 100.0 124.5 123.3 123.5 124.5 125.2 125.6 126.5 127.5 127.9 127.8 127.3 127.8 128.2 128.8 2 Products 60.5 118.5 117.7 117.6 118.1 119.2 119.1 120.2 121.2 121.0 121.3 120.6 121.2 121.7 122.2 3 Final products 46.3 119.6 118.6 118.6 119.2 120 5 120.3 121.5 122.5 122.2 122 6 121.5 122.4 123.1 123.7 4 Consumer goods, total 29.1 114.4 113.9 113.5 113.9 114.6 114.5 115.9 116.7 115.9 116.6 115.1 116.0 116.5 117.0 5 Durable consumer goods 6.1 131.3 128.8 129.8 ]2S 1 132 1 131.9 131.4 136.5 134.7 135.6 134.3 134.6 135.7 137.2 6 Automotive products 2^6 129.9 124.6 126.7 1203 131.6 132.8 131.2 138.4 133.8 132.6 131.0 131.3 132.1 134.3 7 Autos and trucks 1.7 136.5 127.6 130.3 120.2 137.6 140.9 1397 147.8 142.7 139 9 137 2 135.8 139.3 141.1 8 Autos, consumer .9 115.2 112.4 110.8 113.0 118.6 119.9 115.2 120.3 113.9 116.0 105.7 105.2 107.7 108.8 9 Trucks, consumer 7 159.1 147.3 154.2 131.9 161.2 166.5 168.6 179.8 175.7 168.2 172.7 170.3 174.8 177.3 10 Auto parts and allied goods .9 119.3 119.1 120.3 119.3 121.8 120.1 117.9 123.8 120.1 120.9 121.0 123.7 120.6 123.4 11 Other 3.5 132.3 132.1 132.3 134.4 132.5 131.1 131.5 135.0 1353 138.0 136.9 137.3 138.7 139.5 12 Appliances, televisions, and air conditioners 1.0 168.6 166.5 165.4 174.8 169.8 166.0 169.4 177.2 178.7 186.4 188.6 192.6 198.2 202.3 13 Carpeting and furniture .8 117.0 117.7 119.0 116.4 117.7 116.2 116.5 122.1 116.8 122.5 117.7 115.8 117.5 118.8 14 Miscellaneous home goods 1.6 120.0 120.2 120.3 122.1 119.8 119.4 118.6 119.2 122.1 121.0 120.7 120.9 120.5 119.8 15 Nondurable consumer goods 23.0 110.2 110.1 109.4 110.3 110.3 110.2 112.1 111.8 111.3 112.0 110.4 111.5 111.8 112.1 16 Foods and tobacco 10.3 109.3 108.9 108.1 109.6 108.9 108.6 109.7 110.7 110.0 113.0 111.8 111.5 112.2 112.5 17 Clothing 2.4 95.9 95.8 95.4 95.8 96.0 96.0 96.4 95.1 95.1 95.2 93.5 943 94.0 93.7 18 Chemical products 4.5 119.1 119.3 119.1 117.3 119 4 119 4 123 0 121 3 121.8 122 9 121 8 122.2 123.7 123.7 19 Paper products 2.9 109.3 108.9 109.8 110.8 109^8 110.1 111.3 111.7 110.1 110.2 107.8 106.0 106.8 106.5 20 Energy 2.9 111.3 112.8 109.7 112.4 112.8 112.4 116.2 113.9 113.5 107.4 104.6 113.7 111.1 113.2 21 Fuels .8 109.3 111.3 111.5 108.8 111.0 110.8 112.0 106.7 109.3 110.5 110.0 111.3 111.7 109.8 22 Residential utilities 2.1 112.0 113.0 108.3 113.7 113.2 112.8 117.8 117.1 115.1 105.4 101.5 114.4 110.4 114.4 23 Equipment 172 128 8 126 8 127.7 128.6 130 9 130.6 131.3 132.8 133.4 133 1 133 1 133.6 134.8 135.5 24 Business equipment 13.2 141.9 139.0 140.2 141.6 144.6 144.4 145.5 147.5 148.6 147.3 146.8 147.8 149.9 150.5 25 Information processing and related 5.4 168.1 164.4 166.8 169.3 171.1 172.9 1743 174.7 176.0 175.4 178.0 179.3 183.2 184.2 26 Computer and office equipment 1.1 385.6 365.3 375.8 391.6 407.1 414.6 4203 427.3 440.1 457.1 476.1 499.2 515.6 529.0 27 Industrial 4.0 133.3 131.5 131.7 133.7 135.8 133.8 135.9 1363 137.8 136.4 134.2 136.4 136.1 135.5 28 Transit 2.5 111.2 106.7 107.3 106.9 113 3 114 2 113.0 119.9 121.2 119.8 117.9 116 3 119.2 121.5 29 Autos and trucks 1.2 119.7 114.6 113.6 111.5 1203 120.2 117.0 128.2 124.6 116.4 1147 121.7 124.5 30 Other 1.3 135.0 135.2 136.3 136.3 137.9 135.1 137.5 137 3 136 2 133 6 132.7 134.5 136.4 1357 31 Defense and space equipment 33 75^2 75^6 76.0 74.9 75.0 74.7 74.7 74.5 74.5 75J 75.9 75.2 75.1 76^2 32 Oil and gas well drilling .6 149.7 150.7 150.9 152.1 153.2 153.1 149.1 150.0 145.9 154.0 158.9 158.6 150.5 151.2 33 Manufactured homes 139.1 141.9 139.1 143.5 139.5 137.2 136.9 138.1 132.4 144.0 148.6 145.4 34 Intermediate products, total 14.2 115.1 114.9 114.7 114.6 115.3 115.2 1163 1173 117.4 117.4 117.6 117.5 117.5 117.9 35 Construction supplies 5.3 121.8 122.2 122.2 121.2 122.7 120.4 1213 123.6 123.2 125.2 126.2 124.9 124.7 125.4 36 Business supplies 8.9 111.1 110.6 110.2 110.6 111.0 112.2 113.4 113.5 113.9 112.9 112.6 113.1 113.2 113.4 37 Materials 39.5 134.1 132.4 133.0 134.9 134.9 136.1 136.7 137.7 138.9 138.2 138.2 138.5 138.5 139.2 38 Durable goods materials 20.8 158.2 155.4 156.9 159.3 160.3 161.3 163.2 165.0 166.5 166.2 165.8 166.1 166.5 166.5 39 Durable consumer pans 4.0 139.2 134.7 136.2 139.2 140.3 140.7 141.8 1423 146.9 138.5 139.3 138.8 139.5 137.7 40 Equipment parts 7.6 221.9 216.7 220.0 224.6 227.6 229.6 2333 237.9 240.9 245.5 245.7 246.9 247.6 249.8 41 Other 92 125.5 124.5 125.0 125.9 126.0 126.6 127.8 128.8 128.3 128.8 127.7 127.8 127.9 127.6 42 Basic metal materials 3.1 120.6 119.9 121.2 121.1 121.8 121.7 122.5 124.9 122.2 125.0 125.4 122.6 121.3 121.4 43 Nondurable goods materials 8.9 113.0 111.8 111.9 113.5 1123 113.3 113.1 114.4 116.0 114.5 114.8 113.5 1133 113.6 44 Textile materials 1.1 109.3 106.1 108.1 112.3 108.4 111.4 111.9 111.0 112.5 107.9 108.5 107.6 1073 108.5 45 Paper materials 1.8 112.6 112.6 110.9 113.8 114.3 112.7 113.4 112.2 113.7 112.3 114.0 111.1 110.8 111.1 46 Chemical materials 3.9 115.2 113.8 113.8 115.1 113.9 115.6 115.0 116.5 119.1 119.2 117.6 116.7 116.7 116.4 47 Other 2.1 110.3 109.5 110.8 110.1 108.6 109.5 109.0 1137 113.3 109.4 112.5 111.6 111.4 112.2 48 Energy materials 9.7 103.9 103.7 103.2 104.6 103.9 105.5 104.7 103.9 104.2 103.7 103.7 105.7 105.3 107.7 49 Primary energy 6.3 101.7 102.1 101.0 102 3 102.4 102 2 101 7 101 4 1007 102 8 103 0 103 6 103.5 105.9 50 Converted fuel materials 3.3 108.3 106.8 107.3 109!o 11L8 110.6 108.6 110.9 105^5 105X1 109.6 108.9 111.1 SPECIAL AGGREGATES 51 Total excluding autos and trucks 97.1 124.3 123.4 123.6 124.8 125.1 125.4 126.5 127.2 127.7 127.7 127.3 127.9 128.1 128.6 52 Total excluding motor vehicles and pacts 95.1 123.8 123.0 123.1 124.3 124.6 124.8 125.9 126.6 127.0 127.3 126.9 127 4 127.6 128.2 53 Total excluding computer and office equipment 98.2 121.9 120.9 121.1 122.0 122.6 122.9 123.8 124.8 125.1 124.9 124.3 124.7 125.0 125.5 54 Consumer goods excluding autos and trucks 27.4 112^5 113^5 113.4 113.0 114.6 115.0 114.4 115^4 113.9 114^9 115^2 I15J 55 Consumer goods excluding energy 26.2 114.8 114.0 114.0 114 1 114.9 114.7 115.9 117.0 116.2 117.9 116.5 116.3 117.2 117.5 56 Business equipment excluding autos and trucks 12.0 144.5 141.9 143.4 145.2 147.5 147.3 149.0 149.7 151.5 150.5 150.5 151.9 153.3 153.6 57 Business equipment excluding computer and office equipment 12.1 129.1 126.9 127.7 128.6 131.2 130.8 131.8 133.5 134.4 132.7 131.7 132.1 133.7 134.0 58 Materials excluding energy 29.8 143.7 141.4 142.5 144.6 144.8 145.8 147.0 148.6 150.2 149.4 1493 149.0 149.2 1493 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Selected Measures A45 2.13 INDUSTRIAL PRODUCTION Indexes and Gross Value1—Continued 1992 1997 1998 Group c S o I d C e p po ro r- - 1 av 9 g 9 . 7 tion May June July Aug. Sept. Oct. Nov Dec. Jan. Feb.' Mar' Apr. Mayp Index 11992 = 100) MAJOR INDUSTRIES 59 Total index 100.0 124.5 123.3 123.5 124.5 125.2 125.6 126.5 127.5 127.9 127.8 127.3 127.8 128.2 128.8 60 Manufacturing 85.4 127.0 125.7 126.1 126.9 127.9 128.0 129.1 130.4 130.9 131.1 130.6 130.6 131.2 131.5 61 Primary processing 26.5 118.1 1177 117.7 118.3 118.5 118.6 118.9 120.0 120.5 120.6 120.1 119.7 119.9 119.8 62 Advanced processing 58.9 131.4 129.6 130.2 131.2 132.5 132.7 134.1 135.5 136.1 136.4 135.8 136.0 136.9 137.4 63 Durable goods 45.0 142.3 140.1 141.2 142.4 144.3 144.4 145.5 147.7 148.6 148.3 147.8 148.1 148.9 149.6 64 Lumber and products 24 2.0 114.9 116.4 117.0 116.1 115.4 113.3 112.9 117.0 114.4 114 8 116.7 115.4 116.2 116 5 65 Furniture and fixtures 25 1 4 122.5 123.3 123.5 124.2 121.1 122.0 123.0 124.1 124.4 122.5 120.4 122.0 122.7 122.1 66 Stone, clay, and glass products 32 2.1 120.5 119.4 120.0 120.9 120.5 121.2 121.0 122.1 123.4 122.3 121.4 121.8 121.0 121.7 67 Primary metals 33 3.1 124.5 124.2 124.9 125.2 125.5 125.9 127.4 128.9 127.2 129.3 128.1 126.9 126.0 126.4 68 Iron and steel 331.2 1.7 122.8 123.9 122.6 122.2 121.8 124.5 126.4 127.0 126.1 127.9 127.0 126.6 124.9 125.6 69 Raw 5leel 33IPT I 115^9 115.4 114.9 115.5 116J 119.2 1177 120.9 119^2 122.8 I23J 119.5 122.8 122.6 70 Nonferrous 333-6.9 1.4 126.4 124.6 127.7 128.8 129.9 127.7 128.6 131.1 128.5 131.0 129.4 127.2 127.4 127.3 71 Fabricated metal products. . 34 5.0 122.9 122.7 121.9 122.4 122.8 122.7 124.4 124.7 126.7 125.6 124.3 124.7 124.6 124.6 72 Industrial machinery and equipment 35 8.0 171.4 168.0 168.8 172.2 175.9 173.7 176.5 177.7 178.6 180.3 179.4 182.9 184.4 185.7 73 Computer and office equipment 357 1.8 382.3 361.4 372.3 388.5 403.9 412.0 418.0 425.7 438.3 457.1 476.6 500.5 517.5 531.5 74 Electrical machinery 36 7.3 231.5 226.3 229.7 235.5 236.8 237.5 240.8 247.4 249.9 252.9 254.1 253.8 256.5 258.9 75 Transportation equipment. . 37 9.5 115.6 110.8 113.0 112.2 117.0 118.8 118.3 121.6 123.4 119.9 118.8 117.9 119.0 120.0 76 Motor vehicles and parts . 371 49 137.2 129.2 132.5 130.0 138.9 141.2 139.6 145.9 146.6 138.3 136.7 135.3 138.7 139.5 77 Autos and light trucks . 37IPT 2.6 128.3 120.6 122.4 115.0 129.5 132.3 130.4 137.7 132.5 130.8 126.7 125.5 128.7 130.3 78 Aerospace and miscellaneous transportation equipment 372-6,9 4.6 94.4 92.7 93.8 94.6 95.5 96.8 97.3 97.9 100.6 101 8 101.1 100.7 99.7 100.7 79 Instruments 38 5.4 108.0 107.6 107.9 108.0 109.2 108.9 109.7 109.5 109.0 109.0 109.6 109.9 110.6 110.8 80 Miscellaneous 39 1.3 125.9 125.5 126.0 127.0 126.7 126.1 126.5 126.2 128.5 128.0 128.4 128.5 128.8 127.0 81 Nondurable goods 40.4 lll.l 110.7 110.5 110.9 111.0 111.3 112 2 112.6 112.9 113.6 113.0 112.6 113.2 113.1 82 Foods 20 94 109.6 109.2 108.8 110.0 108.9 108.6 109^2 110.9 110.9 112.9 112.0 111.6 112.5 112.8 83 Tobacco products 21 16 112.7 111.5 109.0 1105 112.5 112.0 118.8 115.9 110.1 116.9 115.9 114.9 114.2 114.7 84 Textile mill products 22 1.8 109.6 107 2 109.1 110.7 110.7 111.4 111.6 1125 110.4 111.8 109.6 108.6 108.4 110.1 85 Apparel products 23 2.2 99.6 99.8 99.6 99.7 99.1 99.1 99.3 98.6 99.3 99.1 97.7 98.1 98.0 97.4 86 Paper and products 26 3.6 112.9 112.6 111.7 114.2 114.4 113.7 112.8 113.6 114.1 112.4 114.6 112.1 113.0 113.2 87 Printing and publishing 27 6.7 104.9 104.5 104.1 104.1 104.4 105.1 106.7 107.4 107.1 106.5 105.6 104.5 104.7 104.8 88 Chemicals and products .... 28 9.9 115.3 114.5 114.6 114.3 114.5 115.6 116.7 116.5 118.2 118.7 117.6 118 1 118.5 118.2 89 Petroleum products 29 1.4 109.4 111.4 111.3 108.9 109.7 110.1 111.2 108.6 109.7 112.3 111.9 114.8 115.1 113.7 90 Rubber and plastic products . 30 3.5 126.4 125.4 125.6 126.0 127.9 127.6 127.4 129.6 129.3 129.3 129.4 129.6 131.2 129.7 91 Leather and products 31 .3 73.7 75.3 74.0 74.0 71.2 70.9 72.4 71.0 71.3 694 70.8 69.7 67.9 67 4 92 Mining 6.9 106.0 106.7 105.7 106.5 106.3 106.5 105.9 106.1 105.7 108.4 108.8 107.8 107.6 108.9 93 Metal. . , 10 .5 106.9 105.9 109 9 105.2 106.0 105.3 lll.l 113.2 103.8 105.3 119.5 106.2 103.1 102.4 94 Coal 12 1.0 109.9 115.9 107.4 112.1 107.7 109.5 109.6 111.2 117.4 116 0 108.4 109.4 110.6 118.2 95 Oil and gas extraction 13 4.8 103.2 103.4 102.9 103.9 104.1 104.3 103.1 102.6 101.7 105.(1 105.9 106.0 105.2 1058 % Stone and earth minerals .... 14 .6 118.8 118.2 120.9 117.8 119.9 117.7 116.2 119.2 120.2 124.3 122.6 118.3 123.2 122.9 97 Utilities 7.7 112.5 111.8 110.9 113.S 113.0 115.1 116.9 115.3 114.3 108.7 108.2 115.0 112.5 115.7 98 Electric 491.493PT 6.2 113.1 110.4 110.7 113.8 113.1 115.7 118.1 114.7 114.2 110.2 110.6 115.6 112.8 117.0 99 Gas 492 493PT 1 6 1110 117.1 111.9 111.5 112.5 112.7 1 11.9 117.8 115.0 103.0 99.0 1 12 7 lll.l 110.2 SPECIAL AGGREGATES 100 Manufacturing excluding motor vehicles and parts 80.5 126.4 125.5 125.7 126.7 127.2 127.3 128.4 129 4 130.0 130.7 130.2 130.3 130.8 131.1 101 Manufacturing excluding office and computing machines . . . 83.6 124.1 122 9 123.2 123.9 124.8 124.9 125.9 127.2 127.6 127 8 127.1 126.9 127.5 127.7 Gross value (billitins of 1992 dollars, annual rates) M41OR MARKETS 102 Products, total 2,001.9 2,373.2 2,345.8 2,365.3 2,368.'! 2,402.0 2,396.9 2,416.1 2,442.2 2,435.3 2,442.8 2,427.7 2,439.6 2,455.5 2,466.2 103 Final 1.552.1 1,855.8 1.844.4 1,844.6 1,849.1 1,879.3 1,875.6 1,890.6 1,911.0 1,904.9 1,911.9 1,895.0 1.907 2 1.923.1 1,932.0 104 Consumer goods 1,049.6 1,195.5 1.194.1 1,190.2 1.191.0 1,205.2 1,203.3 1,215.9 1.224.1 1,215.7 1,224.6 1,209.6 1,2190 1,225.8 1.230.2 105 Equipment 502.5 660.0 649.8 654.1 657.8 674.0 672.3 674.5 686.9 689.4 687.3 685.5 688.4 697.5 702.2 106 Intermediate 449.9 518.1 521.7 521.0 519.9 523.7 522 2 526.5 532.3 531.4 532.0 533.3 531.2 533.6 535.4 1. Data in this table also appear in the Board's G. 17 (419) monthly statistical release. For ments," Federal Resen>e Bulletin, vol. K3 (February 1997), pp. 67-92. For details about the the ordering address, see the inside front cover. The latest historical revision of the industrial construction of individual industrial production series, see "Industrial Production: 1989 production index and the capacity utilization rates was released in December 1997. The recent Developments and Historical Revision," Federal Reserve Bulletin, vol 76, (April 1990), pp, annual revision is described in an article in ihe February 1998 issue of the Bulletin. For a 187-204. description of the aggregation methods for industrial production and capacity utilization, see 2. Standard industrial classification. "Industrial Production and Capacity Utilization: Historical Revision and Recent Develop- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A46 Domestic Nonfinancial Statistics • August 1998 2.14 HOUSING AND CONSTRUCTION Monthly figures at seasonally adjusted annual rates except as noted 1997 1998 Item 1995 1996 1997 July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. Private residential nal estate activity (thousands of units except as noted) NEW UNITS 1 Permits authored 1.333 1.426 1.442 1.441 1.445 1.475 1.502 1.475 1.467 1.553 1.635 1 569 1.517 2 One-family 997 1,070 1.056 1.052 1.059 1.084 1.106 1.102 1.094 1.142 1 176 1.136 1.145 3 Two-family or more 335 356 387 389 386 391 396 373 373 411 459 433 372 4 Started 1,354 1,477 1,474 1,461 1.383 1.501 1,529 1.523 1,540 1,545 1 616 1,585' 1,541 5 One-family 1,076 1,161 1,134 1,144 1,076 1.174 1,124 1,167 1,130 1,225 1,263 1,239' 1,233 6 Two-family or more 278 316 340 317 307 327 405 356 410 320 353 346' 308 7 Under construction at end of period1 lib 820 834 836 834 843 853 862 872 888 907' 911' 908 8 One-family 554 584 570 570 567 571 574 575 580 593 609 616' 616 9 Two-family or more 222 235 264 266 267 272 279 287 292 295 298' 295' 292 10 Completed 1.319 1,405 1.407 1.331 1.335 1.433 1.184 1.432 1.413 1.114 1.461' 1.489' 1,530 11 One-family 1,073 1.123 1.122 1,074 1.062 1.133 1.063 1.145 1.094 1.007 1.142' 1.131' 1,212 12 Two-family or more 247 283 285 257 273 300 321 287 319 307 319' 358' 318 13 Mobile homes shipped 341 361 354 356 354 351 349 352 153 362 377 374 370 Merchant builder activity in one-familv units 14 Number sold 667 757 803 808 799 809 805 875 805 853' 881' 844' 888 15 Number for sale at end of period1 374 326 287 288 286 284 284 280 282 281' 281' 285' 287 Price of units sold (thousands of dollars)2 16 Median 133.9 140.0 145.9 145.9 144.0 146.3 141.5 145.0 145.9 148.0 155.6' 151.5' 147.0 17 Average 158.7 166.4 175.8 175.5 170.7 177.5 172.9 175.4 175.8 178 6' 180.4' 180.1' 173.2 EXISTING UNITS (one-family) 18 Number sold 3,812 4,087 4,215 4,180 4,280 4,300 4,380 4,390 4.370 4.370 4,770 4,890 4,770 Price of units told (thousands of dollars? 19 Median 113.1 118.2 124.1 126.5 127.5 125.8 124.4 124.3 125.9 126.1 124.5 127.1 128.2 20 Average 139.1 145.5 154.2 157.6 159.1 155.4 154.7 155.0 157.5 156.8 153.9 157.2 159.7 Value of new construction (rrillions of dollars)3 CONSTRUCTION 21 Total put in place 534,463 567,179 600.U6 603,002 603,684 605,748 611,742 610,933 616,027 619,733 624,635 624,995 630.142 22 Private 407.370 435,929 461,401 464.326 465.236 468.822 469.560 470.041 475,262 483,253 486,346 489,255 493.799 23 Residential 231.230 246,659 259.575 258.803 259.958 263.799 265.422 267.207 270,822 275,667 279,229 283.292 285.789 24 Nonresident! al 176,140 189,271 201,826 205.523 205,278 205.023 204,138 202.834 204,440 207,586 207,117 205,963 208,010 25 Industrial buildings 32.505 31,997 30.707 31,796 31,480 30,675 30,048 29,352 29,697 29,885 30.850 31,409 30,783 26 Commercial buildings 68 221 74.591 80 821 82.346 81,552 80,551 81.489 81.511 82.104 84,528 80.509 81.176 83,890 27 Other buildings 27.0S9 30,525 36.998 36,672 37.274 38.729 37,707 37.681 38.345 37,787 38,520 38,060 39.148 28 Public utilities and other 48,323 52 156 53 298 54,709 54,972 55.068 54,894 54.290 54,294 55,386 57,238 55,318 54.189 29 Public 127 0<i"> 131 250 138 715 118 676 138 448 136 926 142 182 140 893 140 765 136 480 138,289 135,740 136.343 30 Military 2.983 2.541 2.553 2.738 2,767 2.451 2.H27 2.740 2.234 2,483 2.918 2.865 2,484 31 Highway 36.319 37.898 41.148 4I.U87 41.715 40,126 39.484 44.271 42.114 41,718 42,986 42,012 42.805 32 Conservation and development 6,391 5,807 5.467 5 002 5,469 6,177 4,859 5,209 5.910 5,270 6,193 5,449 4.920 33 Other 81,399 85,005 89,547 89,849 88,497 88,172 95.012 88,673 90.507 87,009 86.192 85,414 86.134 1. Not at annual rates. SOURCE. Bureau of the Census estimates for all series except (1) mobile homes, which are 2. Not seasonally adjusted, private, domestic shipments as reported by the Manufactured Housing Institute and season- 3. Recent data on value of new construction may not be strictly comparable with daia for ally adjusted by the Census Bureau, and (2) sales and prices of existing units, which are previous periods because of changes by [he Bureau of the Census in its estimating techniques. published by the National Association of Realtors. All back and current figures are available For a description of these changes, see Construction Reports (C-30-7f>-5), issued by the from the originating agency. Permit authorizations are those reported to the Census Bureau Census Bureau in July 1976. from 19.000 jurisdictions beginning in 1994. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Selected Measures A47 2.15 CONSUMER AND PRODUCER PRICES Percentage changes based on seasonally adjusted data except as noted C m ha o n n g th e s fr e o a m rli e 1 r 2 Change f ( r a o n m nu 3 a m ra o t n e t ) hs ealier Change rom 1 month earlier Index Item level. 1997 1998 1998 May 1997 1998 1998' May May June Sept. Dec. Mar. Jan. Feb. Mar. Apr. May CONSUMER PRICES' (1482-84=100) 1 All items 2.2 1.7 1.5 2.J 1.5 .2 .0 .1 .0 .2 .3 162.8 3.0 24 2.1 2.8 1.5 1.3 3 .0 0 .1 .6 160 3 3 Energy items -2.7 -5.6 -11.8 8.3 -7.7 -21.1 -2.4 -2.2 -1.2 -.1 103.S 4 All items less food and energy 2.5 2.6 1 7 2.4 2.4 2 .3 1 .3 2 173.1 5 Commodities 1.1 1 7 .6 -.3 .6 .8 i 2 -.1 I .1 143.6 3 2 3 1 26 3 3 3 0 2 3 2 4 1 189 8 T, 1 PRODUCER PRICES (1982=100) .4 -.9 -3.0 1.2 -1.2 -4.2 -.6' _ i' -.3 .2 2 130.4 2.8 -1.3 -3.5 -1.5 1.5 -2.1 -.4' T -.4 .4 -.3 133.5 9 Consumer energy -2.8 -7.2 -13.0 6.0 -5.7 -26.2 -3.7' -i'y' -1.9 -.1 .8 76.3 10 Other consumer goods .4 1.4 -.6 1.7 -.3 .6 .0' i .1 .3 .5 146.9 11 Capititl equipment -.1 -.6 -.9 .6 -2.0 -.3 -A' .0' .0 .1 -.2 137.3 Intermediate materials 12 Excluding foods and feeds -.6 -1.2 -1.6 .6 -.6 -4.4 - .5 -.4 .1 -.1 12.3.8 13 Excluding energy .1 -.1 .3 .6 .0 -1.2 -I -,i -.1 .0 134.0 Crude materials 14 Foods -8.1 -9.5 -I0.S -5.0 4.1 -13.4 -3.4 -.7 .7 .3 -1 4 106.2 ] 5 Energy -3.0 -109 11.3 21.8 54 -54.6 -11.2' -3.5' -4.3 3.5 6 720 16 Other - 7 -6.5 -3.7 .3 -8.2 -14.7 -1.9' -,r -1.9 - 9 .5 1475 t. No! seasonally adjusted. SOURCE. U.S. Department of Labor, Bureau of Labor Statistic: 2. Figures tor consumer prices are for all urban consumers and reflect a rental-equivalence measure of homeownership. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A48 Domestic Nonfinancial Statistics • August 1998 2.16 GROSS DOMESTIC PRODUCT AND INCOME Billions of current dollars except as noted; quarterly data at seasonally adjusted annual rates 1997 1998 Account 1995 1996 1997 01 Q2 Q3 04 01 GROSS DOMESTIC PRODUCT I Total 7,265.4 7,636.0 8,079.9 7,933.6 8,034.3 8,124.3 8,227.4 8J44.9 By source 2 Personal consumption expenditures 4,957.7 5,207.6 5,485.8 5,405.7 5,432.1 5.527.4 5.577.8 5,666.5 3 Durable goods 608.5 634.5 659.3 658.4 644.5 667.3 666.8 688.8 4 Nondurable goods 1,475.8 1,534.7 1,592.0 1,587.4 1,578.9 1,600.8 1,600.9 1.621.2 5 Services 2,873.4 3,038.4 3,234.5 3.159.9 3,208.7 3,259.3 3,310.0 3.356.5 6 Gross private domestic investment 1,038.2 1,116.5 1,242.5 1.193.6 1,242.0 1.250.2 1,284.1 1.352.1 7 Fixed investment 1,008.1 1.090.7 1,174.1 1,127.5 1,160.8 1.201.3 1.206.8 1,248.6 8 Nonresidential 723.0 781.4 846.9 811.3 836.3 872.0 868.0 896.3 9 Structures .... . . ... 200.6 215.2 230.2 227.4 226.8 232.9 233.9 230.9 10 Producers' durable equipment 522.4 566.2 616.7 583.9 609.5 639.1 634.2 665.4 11 Residential structures 285.1 309.2 327.2 316.2 324.6 329.3 338.8 352.3 12 Change tn business inventories 30.1 25.9 68.4 66.1 81.1 48.9 77.2 103.5 13 Nonfarm 38.1 23.0 61.7 62.2 74.9 40.9 68.7 96.5 14 Net exports of goods and services -86.0 -94.8 -101.1 -98.8 -88.7 -111.3 -105.3 -136.8 15 Exports 818.4 870.9 957.1 922.2 960.3 965.8 980.0 960.4 16 Imports 904.5 965.7 1.058.1 1,021.0 1.049.0 1,077.1 1.085.4 1.097.2 17 Government consumption expenditures and gross investment 1,355.5 1.406.7 1,452.7 1,433.1 1,449.0 1,457.9 1,470.9 1,463.1 18 Federal 509.6 520.0 523.8 516.1 526.1 525.7 527.3 515.3 19 State and local 846.0 886.7 928.9 917 0 923.0 932.3 943.6 947.7 By major type of product 20 Final sales, total 7.235.3 7.610.2 8.011.5 7,867.4 7,953.2 8,075.3 8.150.2 8,241.3 21 Goods 2.637.9 2.759.3 2.876.7 2,838.4 2,854.9 2,903.2 2.910.4 2,951.5 22 Durable 1.133.9 1.212.0 1.284.0 1.248.0 1,275.3 1.305.3 1.307.3 1,335.1 23 Nondurable 1,503.9 1.547.3 1,592.8 1.590.4 1,579.6 1.597.9 1,603.1 1,616.4 24 Services 3,980.7 4,187.3 4.430.4 4.138.2 4,400.1 4,462.3 4,521.0 4.560.7 25 Structures 616.8 663.6 704.4 690.8 698.2 709.8 718.8 729.1 26 Change in business inventories 30.1 25.9 68.4 66.1 81.1 48.9 77.2 103.5 27 Durable goods . . . 29.1 16.9 33.0 31.8 46.8 18.6 34.8 47.3 28 Nondurable goods I.I 9.0 35.4 34.3 34.4 30.3 42.4 56.3 MEMO 29 Total GDP in chained 1992 dollars 6,742.1 6,928.4 7,188.8 7,101.6 7,159.6 7,214.0 7,280.0 7,365.6 NATIONAL INCOME 30 Total 5,912.3 6,254.5 6,649.7 6,510.0 6,599.0 6,699.6 6,790.1 6,902.9 31 Compensation of employees 4.215.4 4,426.9 4,703.6 4,606.3 4.663.4 4.725.2 4.819.6 4,916.7 32 Wages and salaries 3,442.6 3,633.6 3.878.6 3,792.7 3,842.7 3,897.3 3.981.6 4.066.2 33 Government and government enterprises 623.0 642.6 665.3 657.8 662.0 667.7 673.7 682.1 34 Other 2,819.6 2,991.0 3.213.3 3.134.9 3,180.8 3,229.6 3.307.9 3.384.1 35 Supplement to wages and salaries 772.9 793.3 825.0 813.6 820.7 827.9 837.9 850.5 36 Employer contributions for social insurance 366.0 385.7 408.4 401.3 405.6 410.2 416.6 425.5 37 Other labor income 406.8 407.6 416.6 412.3 415.1 417.7 421.4 425.1 38 Proprietors' income 489.0 520.3 544.5 534.6 543.6 547.2 552.5 556.7 39 Business und professional' 465.5 483.1 503.8 494.4 500.0 506.3 514.3 524.2 40 Farm1 23.4 37.2 40.7 40 2 43.6 40.9 38.2 32.5 41 Rental income of persons2 132.8 146.3 147.9 149.0 148.7 148.0 145.7 143.6 42 Corporate profits 650.0 735.9 805.0 779.6 795.1 827.3 818.1 822.5 43 Profits before tax3 622.6 676.6 729.8 708.4 719.8 753.4 737.3 718.4 44 Inventory valuation adjustment -24.3 -2.5 5.5 3.5 5.9 3.6 9.2 30.2 45 Capital consumption adjustment 51.6 61.8 69.7 67.7 69.4 70.3 71.6 73.9 46 Net interest 425.1 425.1 448.7 440.5 448.1 451.8 454.2 463.3 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. U.S. Department of Commerce, Sunev of Current Business. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Selected Measures A49 2.17 PERSONAL INCOME AND SAVING Billions of current dollars except as noted; quarterly data at seasonally adjusted annual rates 1997 1998 Account 1995 1996 1997 Ql Q2 03 Q4 Ql PERSONAL INCOME AND SAVING 1 Total personal income 6,150.8 6,495.2 6,873.9 6,746.2 6,829.1 6,906.9 7,013.5 7,125.9 2 Wage and salary disbursements 3,429.5 3,632.5 3,877.4 3,791.5 3,841.6 3,896.1 3,980.4 4,065.0 3 Commodity-producing industries 864.4 909.1 960.3 942.9 952.8 961.4 984.1 997.9 4 Manufacturing 648.4 674.7 706.0 694.1 700.3 706.0 723.4 730.4 5 Distributive industries 783.1 823.3 876.3 856.8 867.0 880.8 900.6 919.0 6 Service industries 1,159.0 1,257.5 1,375.5 1,334.1 1,359.8 1,386.3 1,422.0 1,466.1 7 Government and government enterprises 623.0 642.6 665.3 657.8 662.0 667.7 673.7 682.1 8 Other labor income 406.8 407.6 416.6 412.3 415.1 417.7 421.4 425.1 9 Proprietors' income 489.0 520.3 544.5 534.6 543.6 547.2 552.5 556.7 10 Business and professional1 465.5 483.1 503.8 494.4 500.0 506.3 514.3 524.2 11 Farm . 23.4 37.2 40.7 40.2 43.6 40.9 38.2 32.5 12 Rental income of persons2 132.8 146.3 147.9 149.0 148.7 148.0 145.7 143.6 13 Dividends 251.9 291.2 321.5 312.5 318.3 324.5 330.7 336.8 14 Personal interest income 718.9 735.7 768.6 757.2 766.1 772.6 778.4 783.3 15 Transfer payments 1,015.0 1,068.0 1,121.1 1,107.2 1.117.0 1,125.7 1.134.8 1,153.6 16 Old-age survivors, disability, and health insurance benefits 507.8 537.6 566.7 558.9 564.4 569.4 574.2 584.9 17 LESS' Personal contributions for social insurance 293.1 306.3 323.7 318.2 321.3 324.8 330.4 338.2 18 EQUALS: Personal income 6,150.8 6,495.2 6,873.9 6,746.2 6,829.1 6.906.9 7.013.5 7,125.9 19 LESS: Personal tax and nontax payments 795.1 886.9 988.7 955.7 979.2 998.0 1,022.1 1,059.7 20 EQUALS: Disposable personal income 5,355.7 5,608.3 5,885.2 5,790.5 5,849.9 5,908.9 5,991.4 6,066.3 21 LESS: Personal outlays 5,101.1 5,368.8 5,658.5 5.574.6 5.602.8 5,700.8 5,755.6 5,844.1 22 EQUALS: Personal saving 254.6 239.6 226.7 215.9 247.0 208.2 235.8 222.1 MEMO Per capita (chained 1992 dollars) 23 Gross domestic product 25,615.7 26.085.8 26,834.0 26,597.8 26,765.0 26.897.9 27,073.3 27.340.9 24 Personal consumption expenditures 17.459.2 17,748.7 18,168.9 18.045.2 18,053.9 18,255.7 18,319.6 18,558.0 25 Disposable personal income 18,861.0 19,116.0 19.493.0 19.331.0 19,439.0 19,518.0 19.681.0 19,865.0 26 Saving rate (percent) 4.8 4.3 3.9 3.7 4.2 3.5 3.9 3.7 GROSS SAVING 27 Gross saving 1,165.5 1,267.8 1394.3 1,332.9 1396.9 1,411.6 1,435.8 1,493.6 28 Gross private saving 1,093.1 1,125.5 1.164.2 1,134.0 1.178.1 1,159.6 1,185.2 1,184.2 29 Personal saving 254.6 239.6 226.7 215.9 247.0 208.2 235.8 222.1 30 Undistributed corporate profits1 172.4 202.1 219.5 211.5 217.6 230.0 218.9 224.9 31 Corporate inventory valuation adjustment -24.3 -2.5 5.5 3.5 5.9 3.6 9.2 30.2 Capital consumption allowances 32 Corporate 428.9 452.3 475.6 467.4 472.6 478.0 484.5 489.7 33 Noncorporate 224.1 230.5 241.2 238.0 239.7 242.4 244.9 246.4 34 Gross government saving 72.4 142.3 230.1 198.9 218.8 251.9 250.6 309.3 35 Federal -103.6 -39.3 42.8 15.9 34.7 60.8 59.7 120.4 36 Consumption of fixed capital 70.9 71.2 71.6 71.4 71.5 71.6 71.8 71.5 37 Current surplus or deficit (-), national accounts -174.4 -110.5 -28.8 -55.5 -36.8 -10.8 -12.1 49.0 38 State and local 176.0 181.5 187.3 182.9 184.1 191.1 190.9 188.9 39 Consumption of fixed capital 72.9 76.2 79.5 78.2 79.2 79.7 80.8 81.3 40 Current surplus or deficit (-), national accounts 103.1 105.3 107.8 104.7 104.9 111.4 110.1 107.6 41 Gross investment 1,137.2 1,207.9 1,308.3 1,268.6 1,323.4 1308.4 1,332.7 1379.2 42 Gross private domestic investment 1,038.2 1,116.5 1,242.5 1,193.6 1.242.0 1,250.2 1,284.1 1,352.1 43 Gross government investment 213.4 224.3 226.0 223.3 227.4 227.1 226.1 223.8 44 Net foreign investment -114.4 -132.9 -160.2 -148 4 -146.0 -168.9 -177.4 -196.7 45 Statistical discrepancy -28.2 -59.9 -86.0 -64.3 -73.5 -103.2 -103.1 -114.4 1. With inventory valuation and capital consumption adjustments. SOURCE. U.S. Department of Commerce, Survey of Current Business. 2. With capital consumption adjustment. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A50 International Statistics • August 1998 3.10 U.S. INTERNATIONAL TRANSACTIONS Summary Millions of dollars; quarterly data seasonally adjusted except as noted1 1997' 1998 Item credits or debits 1995' 1996' 1997' Ql Q2 Q3 Q4 Qlp 1 Balance on current account -115.254 -134.915 -155,215 -36,990 -35,090 -38,094 -45.043 -47.210 "^ N4erchandise trade balance —173.729 — 191 337 -197,954 -49,723 -49,096 -49,296 -49.839 -55,698 3 Merchandise exports 575^845 6IL983 679!.325 163^499 169240 172302 174.284 17L469 4 Merchandise imports -749.574 - 803.320 -877.279 -213,222 -218,336 -221,598 -224,123 -227.167 5 Military transactions, net 4.769 4,684 6.781 1,542 2,191 1,945 1,103 1,530 6 Other service transactions, net 69.069 78,079 80,967 20.051 20,390 20,246 20,277 19,306 7 Investment income net 19.275 14,236 -5,318 14 460 -1 544 -4,247 -3,124 8 U.S. government grants -1U70 -15!o23 -12,090 -2.241 -2,274 -2,362 -5,213 -2,257 9 U.S. government pensions and other transfers -3.433 -4,442 -4,193 -1.013 -1,055 -1,056 -1,069 -1.071 10 Private remittances and other transfers -20.035 -21,112 -23.408 -5.620 -5,706 -6,027 -6,055 -5.896 11 Change in U.S. government assets other than official reserve assets, net (increase. -) -589 -708 174 -22 -269 436 29 -426 12 Change in U.S. official reserve assets (increase. -) -9,742 6,668 -1,010 4,480 -236 -730 -4,524 -444 13 Gold 0 0 0 0 0 0 0 0 14 Special drawing rights (SDRs) -808 370 -350 72 -133 -139 -150 -182 15 Reserve position in International Monetary Fund -2,466 -1,280 -3.575 1.055 54 -463 -4,221 -85 16 Foreign currencies -6,468 7,578 2,915 3.353 -157 -128 -153 -177 17 Change in U.S. private assets abroad (increase. -) -317,122 -374,761 -477.666 -149.597 -86,101 -123,023 -118,946 -43,877 18 Bank-reported claims3 -75,108 -91,555 -147.439 -63.698 - 26,625 -29.577 -27,539 12,903 19 Nonbank-reported claims -45,286 -86,333 -120,403 -37,880 -9,825 -24.791 -47,907 20 U.S. purchases of foreign securities, net -100,074 -115.801 -87,981 -15.521 -23,263 -41.167 -8,030 -5,173 21 U.S. direct investments abroad, net -96,654 -81,072 -121,843 -32.498 -26,388 -27.488 -35,470 -30,924 22 Change in foreign official assets in United States (increase, f) 109,768 127,344 15.817 26.949 -5,411 21,258 -26,979 10,181 23 U.S. Treasury securities 68,977 115,671 -7.270 22.311 -11,689 6,686 -24.578 11,337 24 Other U.S. government obligations 3,735 5,008 4.134 754 827 2.667 86 2,610 25 Other U.S. government liabilities4 -217 -362 -2.521 -587 -523 -1,167 -244 -1,059 26 Other U.S. liabilities reported by U.S. banks' 34,008 5.704 21.928 7,696 5,043 12,439 -3,250 -1.751 27 Other foreign official assets5 3,265 1,323 -654 -3,225 931 633 1.007 -956 28 Change ui foreign private assets in United States (increase. +} 355.681 436.013 717.624 154,786 155.184 160,180 247.470 80,712 29 U.S. bank reported liabilities3 30.176 16,478 148.059 17,743 28,067 12.606 89.643 -41.199 30 US. nonbank-reported liabilities 59.637 39.404 107.779 28,840 5,274 26.275 47.390 31 Foreign private purchases of U.S. Treasury securities, net 99.548 154.996 146.710 33,363 42,614 35,432 35.301 -1,363 32 Foreign purchases of other U.S. securities, net 96.367 130,151 196,845 45,477 54,258 60.327 36.783 76,656 33 Foreign direct investments in United States, net 57.653 77.622 93.449 25,879 20,149 18.964 28,453 25.020 34 Allocation of special drawing rights 0 0 0 0 0 0 0 0 35 Discrepancy -22.742 -59,641 -99.724 394 -28,077 -20,027 -52.007 1,064 36 Due to seasonal adjustment 5,812 685 -10,018 3.528 6,260 37 Before seasonal adjustment -22.742 -59.641 -99.724 -5,418 -28,762 -10,009 -55.535 -5,196 MEMO Changes in official assess 38 U.S. official reserve assets (increase, -) -9,742 6,668 -1,010 4,480 -236 -730 -4,524 -444 39 Foreign official assets in United States, excluding line 25 (increase, +) 109,985 127,706 18,338 27.536 -4.888 22,425 -26,735 11,240 40 Change in Organization of Petroleum Exporting Countries official assets in United States (part of line 22) 4,239 14,911 10.822 7.103 1,970 3,031 -1.282 348 1. Seasonal factors are not calculated for line?. 12-16. 18-20. 22-34. and .18-40. 4. Associated primarily with military sales contracts and other transactions arranged with 2. Data are on an international accounts- basis. The daia differ from the Census basis data. or through foreign official agencies. shown in table 3.11, for reasons of coverage and liming. Military exports; are excluded from 5. Consists of investment in U.S. corporate stocks and in debt securities of private merchandise trade data and are included in line 5. corporations and slale and local governments. 3. Reporting banks include all types- of depository institution!, as well as some brokers and SOURCE. U.S. Department of Commerce. Bureau o1 Economic Analysis, Survey of Current dealers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Summary Statistics A51 3.11 U.S. FOREIGN TRADE1 Millions of dollars; monthly data seasonally adjusted 1997' 1998 Item 1995 1996 1997 Oct. Nov. Dec. Jan.' Feb.' Mar. Apr.p 1 Goods and services, balance -101,857 -111,040 -113,684 -8,651 -9,600 -10.205 -9,935 -11,720 -13,209' -14.274 2 Merchandise -173,560 -191.170 -198,975 -16.271 -16.605 -16.962 -17,075 -18.120 -20,504' -21,115 3 Services 71,703 80.130 85,291 7.620 7,005 6.757 7,140 6,400 7,295 7.061 4 Goods and services, exports 794.610 848,833 931.370 80.589 79,088 79.784 79,571 77.684 79,148 77.219 5 Merchandise 575.871 612,069 678,150 58.467 57,482 58,336 57,902 56,350 57,217 55.315 6 Services 218,739 236,764 253,220 22,122 21,606 21,448 21,669 21.334 21,931 21.884 7 Goods and services, imports -896,467 -959,873 -1,045.054 -89,240 -88,688 -89,989 -89,506 -89,404 -92,356 -91.493 8 Merchandise -749,431 -803,239 -877,125 -74.738 -74,087 -75,298 -74,977 -74,470 -77,720 -76,670 9 Services -147,036 -156,634 -167,929 -14,502 -14,601 -14,691 -14,529 -14,934 -14,636 -14.823 1. Data show monthly values consistent with quarterly figures in the U.S. balance of SOURCE, FT900, U.S. Department of Commerce, Bureau of the Census and Bureau of payments accounts. Economic Analysis. 3.12 U.S. RESERVE ASSETS Millions of dollars, end of period 1997 1998 Asset 1994 1995 1996 Oct. Nov. Dec. Jan. Feb. Mar. Apr. May1" 1 Total 74,335 85,832 75,090 68,036 67,112 69,954 70,003 70,632 69,354 70,328 70,723 2 Gold stock, including Exchange Stabilization Fund1 11,051 11,050 11,049 11,050 11.050 11,050 11,046 11,050 11,050 11,048 11,049 3 Special drawing rights 3 10,039 11,037 10,312 10.132 10.120 10,027 9,998 10,217 10.108 10.188 10,296 4 Reserve position in Internationa] Monetary Fund2 '. ... 12,030 14,649 15,435 14,243 14.571 18,071 18.039 18,135 17.976 18,218 18,957 5 Foreign currencies 41,215 49,096 38.294 32,611 31.371 30,809 30.920 31.230 30.220 30,874 30,421 1. Gold held "under earmark" at Federal Reserve Banks for foreign and international SDR holdings and reserve positions in the IMF also have been valued on this basis since July accounts is not included in the gold stock of the United States; see table 3.13, line 3. Gold 1974, stock is valued at $42.22 per fine troy ounce. 3. Includes allocations of SDRs by the International Monetary Fund on Jan. 1 of the year 2. Special drawing rights (SDRs) are valued according to a technique adopted by the indicated, as follows: 1970—$867 million; 1971—5717 million; 1972—$710million; 1CJ79— International Monetary Fund (IMF) in July 1974. Values are based on a weighted average of $1,139 million; 1980—$1,152 million; 1981—$1,093 million; plus net transactions in SDRs. exchange rates for the currencies of member countries. From July 1974 through December 4. Valued at current market exchange rates. 1980. sixteen currencies were used; since January 1981, five currencies have been used. U.S. 3.13 FOREIGN OFFICIAL ASSETS HELD AT FEDERAL RESERVE BANKS1 Millions of dollars, end of period 1997 1998 Asset 1994 1995 1996 Oct. Nov. Dec. Jan. Feb. Mar. Apr. Mayr 1 Deposits 250 .186 167 190 167 457 215 24.1 167 162 156 Held in custody 2 U.S. Treasury securities" 441,866 522.170 638,049 638,100 635,092 620,885 625,219 621,956 630,602 622,220 622,557 3 Earmarked gold3 12.033 11.702 11.197 10.793 10,793 10.763 10,709 10,705 10,664 10,651 10,641 1. Excludes deposits and U.S. Treasury securities held for international and regional 3. Held in foreign and international accounts and valued at $42.22 per fine troy ounce; not organizations. included in the gold stock of the United States. 2, Marketable U.S. Treasury bills, notes, and bonds and nonmaskable U.S. Treasury securities, in each case measured at face (not market) value. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A52 International Statistics • August 1998 3.15 SELECTED U.S. LIABILITIES TO FOREIGN OFFICIAL INSTITUTIONS Millions of dollars, end of period 1997 1998 Item 1995 1996 Oct. Nov. Dec. Jan. Feb. Mar. Apr.p 1 Total1 630,918 758,624 798,696 791,668 776,986 778,915 778,873' 788,925 786,920 By type 2 Liabilities reported by banks in the United States2 107,394 113,098 153,804 147,796 135,026 140,511 139.471' 134,075 144,929 3 U.S. Treasury bills and certificates3 168,534 198,921 153,283 150,102 148,301 145.609 144.324 153,335 138,418 U.S. Treasury bonds and notes 293,690 379,497 421,412 423,243 422,876 421.687 422,929 428,962 430,478 5 Nonmarketable4 6.491 5,968 5,919 5,955 5,994 6,031 6,069 6,110 6,149 6 U.S. securities other than U.S. Treasury securities 54.809 61,140 64,278 64,572 64,789 65,075 66.080 66,443 66,946 By area 7 Europe1 222.406 257,915 280,589 272,680 263,078 261,505 260,840 258,384 268,823 8 Canada 19.473 21,295 19,418 19,275 18,749 18,339 19,065 20,280 20,254 9 Latin America and Caribbean 66.721 80.623 90,190 94,135 97,316 96,697 99,381r 98,028 101,191 10 Asia 311,016 385,484 391,541 390,203 381,196 386,007 384,151 395,956 380,662 11 Africa 6,296 7,379 9,812 9,542 10,118 10,213 10,518 11,440 11.281 5.0O4 5,926 7,144 5,831 6,527 6,152 4,916 4,835 4,707 1. Includes the Bank for International Settlements. Venezuela, beginning December 1990, 30-year maturity issue: Argentina, beginning April 2. Principally demand deposits, time deposits, bankers acceptances, commercial paper, 1993, 30-year maturity issue. negotiable time certificates of deposit, and borrowings under repurchase agreements. 5. Debt securities of U.S. government corporations and federally sponsored agencies, and 3. Includes nonmarketable certificates of indebtedness and Treasury bills issued to official U.S. corporate stocks and bonds. institutions of foreign countries. SOURCE. Based on US. Department of the Treasury data and on data reported to the 4. Excludes notes issued to foreign official nonreserve agencies. Includes current value of department by banks (including Federal Reserve Banks) and securities dealers in the United zero-coupon Treasury bond issues to foreign governments as follow-,: Mexico, beginning States, and on the 1989 benchmark survey of foreign portfolio investment in the United March 1988, 20-year maturity issue and beginning March 1990, 30-year maturity issue; States. 3.16 LIABILITIES TO, AND CLAIMS ON, FOREIGNERS Reported by Banks in the United States' Payable in Foreign Currencies Millions of dollars, end of period 1997 1998 Item 1994 1995 1996 June Sept. Dec. Mar. I Banks' liabilities 89,258 109,713 103,383 110,224 120,105 116,738 100,101 2 Banks' claims 60,711 74,016 66,018 85,305 91,158 82,732 82,143 19.661 22,696 22,467 28,900 32.154 28,355 28,076 41,050 51,320 43.551 56.405 59,004 54.377 54,067 10.878 6.145 10.978 10.265 10,210 8.476 7,926 I. Data on claims exclude foreign currencies held by U.S. monetary authorities. 2. Assets owned by customers of the reporting bank located in the United States that represent claims on foreigners held by reporting banks for the accounts of the domestic customers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Bank-Reported Data A53 3.17 LIABILITIES TO FOREIGNERS Reported by Banks in the United States' Payable in U.S. dollars Millions of dollars, end of period 1995 Feb. Mar. Apr.p BY HOLDER AND TYPE OF LIABILITY 1 Total, all foreigners 1,099,549 1,162,148 1,283^34 1,226.033 1.240,488 1,283,334 1,264,391 1,283,416' 1,254,843 1,270,297 2 Banks" own liabilities 753.461 758.998 883,238 824,677 834,237 883,238 864,362 879,659' 843,906 861,380 3 Demand deposits 24,448 27,034 32,104 33,503 35,690 32,104 29,716 29,691' 32,588 32,149 4 Time deposits2 192,558 186,910 198.S07 193,751 191,970 198,507 187,719 183,494' 183,109 186,179 5 Other1 140,165 143,510 167,676 193,950 180,925 167,676 184,826 189,318 188,425 203,856 6 Own foreign offices 396,290 401,544 484,951 403.473 425,652 484,951 462,101 477,156' 439,784 439,196 7 Banks' custodial liabilities5 346,088 403,150 400.096 401,356 406.251 400,096 400,029 403,757 410,937 408,917 8 U.S. Treasury bills and certificates6 197,355 236,874 193,325 200,215 196,476 193.325 184,881 186.564 191,571 174.252 9 Other negotiable and readily transferable instruments7 52.200 72,011 93.604 95,108 99,882 93.604 96,945 99.370 96,332 111.420 10 Other 96,533 94.265 113.167 106,033 109.893 113.167 118,203 117,823 123,034 123.245 11 Nonmonetary international and regional organizations* 11.039 13,972 11,390 13,914 12.469 11,390 11,240 16,452 15,890 14,793 12 Banks' own liabilities 10.347 13,355 11,186 13.509 12,205 11.186 11,048 16,123 15,569 14,377 13 Demand deposits 21 29 16 36 43 16 175 74 98 365 14 Time deposits2 4,656 5,784 5,466 5,161 6,310 5,466 5,023 5,416 6,062 6,646 15 Other3 5,670 7,542 5,704 8,312 5,852 5,704 5,850 10,633 9,409 7,366 16 Banks' custodial liabilities5 692 617 204 405 264 204 192 329 321 416 17 U.S. Treasury bills and certificates'' 350 352 69 148 46 69 149 247 344 18 Other negotiable and readily transferable instruments7 341 265 133 257 217 133 107 180 72 72 19 Other 1 0 0 I 2 0 0 2 0 20 Official institutionsg 275,928 312,019 283,327 307,087 297,898 283,327 286,120 283.795' 287,410 283 347 21 Banks' own liabilities 83,447 79,406 101,610 118,154 109,988 101,610 110.607 109,691' 103,362 105,731 22 Demand deposits 2,098 1,511 2,314 2,034 1,891 2,314 1,682 1,910 2,051 2.532 23 Time deposits2 30.717 33,336 41,120 41,770 39,716 41,120 38,306 37,142' 40.160 38.797 24 Other3 50,632 44,559 58,176 74,350 68,381 58,176 70,619 70,639 61.151 64.402 25 Banks' custodial liabilities5 192.481 232,613 181,717 188,933 187,910 181,717 175,513 174,104 184.048 177.616 26 U.S. Treasury' bills and certificates6 168.534 198,921 148,301 153,283 150,102 148.301 145,609 144,324 153,335 138.418 27 Other negotiable and readily transferable instruments7 23,603 33,266 33,211 35,236 37,374 33,211 29,614 29,643 .10,183 38,745 28 Other 344 426 205 414 434 205 290 137 530 453 29 Bank;10 691 412 694,835 816,263 732,963 765,574 816,263 792,291 799,916' 763,349 776,137 30 Banks' own liabilities 567,834 562,898 642,523 568,367 595,667 642,523 618,053 62.1,186' 585.083 596,327 31 Unatnliated foreign banks 171,544 161,354 157,572 164,894 170,015 157,572 155,952 146,030' 145,299 157.131 32 Demand deposits 11.758 13,692 17,527 18,354 21,316 17,527 15,974 16,084 18,350 17,152 33 Time deposits 103,471 89.765 83,770 83,162 84,621 83,770 79.573 75,464' 70,060 73,108 34 Other3 56.315 57.897 56,275 63,378 64,078 56,275 60.405 54.482 56.889 66,871 35 Own foreign offices 396.290 401.544 484,951 403,473 425,652 484,951 462,101 477.156' 439,784 439.196 36 Banks' custodial liabilities5 123.578 131.937 173.740 164.596 169.907 173.740 174.238 176.730 178.266 179,810 37 U.S. Treasury bills and certificates6 15.872 23.106 31,915 33.085 32.995 31,915 27,607 30,620 28,499 26,650 38 Other negotiable and readily transferable instruments7 13,035 17.027 35.333 32,065 3.3,826 35,333 35,266 35,107 34,962 37,992 39 Other 94.671 91,804 106.492 99,446 103,086 106.492 111,365 111,003 114,805 115,168 40 Other foreigners 121.170 141.322 172,354 172.069 164,547 172,354 174,740 183,253' 188,194 196,020 41 Banks' own liabilities 91,833 103,339 127,919 124,647 116,377 127,919 124,654 130,659' 139,892 144,945 42 Demand depposits 10.571 11,802 12,247 13,079 12.440 12,247 11,885 11,623' 12,089 12.100 43 TTiim e depodsiits 53.714 58,025 68,151 6.3,658 61.323 68,151 64,817 65,472' 66,827 67.628 44 Other' 27.548 33,512 47,521 47.910 42,614 47.521 47,952 53.564 60,976 65.217 45 Banks' custodial liabilities 29.337 37,983 44.435 47,422 48,170 44,435 50,086 52,594 48,302 51.075 46 U.S. Treasury bills and certificates6 12,599 14,495 1.1,040 13,699 13.333 13,040 11.580 11.471 9,490 8.840 47 Other negotiable and readily transferable instruments7 15,221 21.453 24.927 27,550 28,465 24,927 31,958 34,440 31,115 34,611 48 Other 1,517 2,035 6,468 6,173 6,372 6,468 6,548 6,683 7,697 7.624 MEMO 49 Negotiable time certificates of deposit in custody for foreigners 9.103 14.573 16.046 15.485 16,553 16,046 17,038 20.791 22,384 22.472 1. Reporting banks include all types of depository institutions as well as some brokers and 6. Includes nonmarketable certificates of indebtedness and Treasury bills issued to official dealers. Excludes bonds and notes of maturities longer tban one year. institutions of foreign countries. 2. Excludes negotiable lime certificates of deposit, which are included in "Other negotia- 7. Principally bankers acceptances, commercial paper, and negotiable time certificates of ble and readily transferable instruments." deposit. 3. Includes borrowing under repurchase agreements 8. Principally the International Bank for Reconstruction and Development, the Inter 4. For U.S. banks, includes amounts owed to own foreign branches and foreign subsidiar- American Development Bank, and the Asian Development Bank. Excludes "holdings of ies consolidated in quarterly Consolidated Reports of Condition filed with bank regulatory dollars" of the International Monetary Fund. agencies. For agencies, branches, and majority-owned subsidiaries of foreign banks, consists 9. Foreign central banks, foreign central governments, and the Bank for International principally of amounts owed to the head office or parent foreign bank, and to foreign Settlements. branches, agencies, or wholly owned subsidiaries of the head office or parent foreign bank. 10, Excludes central banks, which are included in "Official institutions." 5. Financial claims on residents of the United States, other than long-term securities, held by or through reporting banks for foreign customers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A54 International Statistics • August 1998 3.17 LIABILITIES TO FOREIGNERS Reported by Banks in the United States'—Continued 1997 1998 Item 1995 1996 1997 Oct. Nov. Dec. Jan. Feb. Mar. Apr.p AREA 50Total, all foreigners 1,099,549 1,162,148 1,283,334 1,226,033 1,240,488 1,283,334 1,264,391 1,283,416' 1,254,843 1,270,297 51Foreign countries 1,088,510 1,148,176 1,271,944 1,212,119 1,228,019 1,271,944 1,253,151 l,266,964r 1,238,953 1,255,504 52Europe 362,819 376,590 420,487 418,988 425,584 420,487 401.454 419,718' 390,074 406,177 53 Austria 3.537 5.128 2,717 2,679 2.319 2,717 2.787 2,774 2,375 3,000 54 Belgium and Luxembourg 24,792 24 084 41,007 46,067 46.258 41,007 39,018 38,178 33,244 38,487 55 Denmark 2^921 2'.565 1.514 2.359 2J57 1.514 U625 1,215 L094 2,588 56 Finland 2,831 1.958 2.246 1.997 1,969 2,246 2,177 2,136 1,549 1,768 57 France 39,218 35.078 46.607 45,057 45,653 46,607 44,77.3 44,990 44,027 48,468 58 Germany 24.035 24.660 23.737 22,117 23,040 23,737 21,988 23.290 20,971 24,895 59 Greece 2,014 1.835 1.515 2.075 1,229 1,515 1,676 1,663 1,988 2,351 60 Italy 10.868 10.946 11,378 11.449 10,713 11,378 9,854 9,804 9,631 10,600 61 Netherlands 1 ?,745 11.110 7,385 8.119 7.010 7.385 6.287 7.043 8,208 8,051 62 Norway 1,394 1.288 317 1,022 1,793 317 955 845 346 514 63 Portugal 2,761 3.562 2.262 1,888 1,987 2,262 1,515 1.437 1.426 2.273 64 Russia 7,948 7.623 7,968 11,722 6,938 7,968 5,573 6 118 6.466 5.381 65 Spain 10.011 17.707 1H.989 21,934 20.921 18,989 19,413 20.137 16.315 18.071 66 Sweden 3.246 1.623 1.628 1,348 1,614 1,628 1,415 2,055 1.967 1,785 67 Switzerland 43.625 44.538 39.258 37.075 39.665 39,258 37,340 .37,157' 35,463 32,341 68 Turkey 4,124 6.738 4.054 4.661 4,218 4,054 3,659 4,047 4,154 4,340 69 United Kingdom 139.183 153,420 181,904 165.199 177,781 181,904 176,457 191,181 174,198 172.647 70 Yugoslavia1' ^ 177 206 239 233 234 239 292 244 236 246 71 Other Europe and other former U S.S.R.1" 26.389 22.521 25.762 31,987 30,085 25,762 24.650 25,404 26,416 28,371 72Canada 30.468 38.920 2S.34I 30.282 30.921 28,341 29.035 29,470 27.121 27,398 73 Latin America and Caribbean 440,213 467,529 536,365 502,099 499.513 536.365 530,589 533,680' 529,204 552.882 74 Argentina 12.235 13,877 20,199 17,700 18.358 20.199 19.215 18,278 18,835 17,766 75 Bahamas 94,991 88,895 112,217 89.631 92.390 112.217 117.457 110,882' 109,041 112,510 76 Bermuda 4,897 5.527 6,911 6.209 6.012 6.911 6.279 8,283 8,273 6,657 77 Brazil 23,797 27.701 31.037 31,680 32,614 31.037 31,857 33,026 34,017 36,777 78 British West Indies 239,083 251.465 276,389 269,997 263,763 276.389 266,023 273,264' 261,300 273.747 79 Chile 2.826 2,915 4,072 3,579 3,283 4,072 4,514 4,450 3,975 4,198 80 Colombia 3.659 3,256 3.652 3.47S 3.341 3,652 3,584 3,904' 4,200 4,212 81 Cuba 8 21 66 71 57 66 6.3 58 55 57 82 Ecuador 1,314 1.767 2.078 1.671 1.704 2.078 1.867 1,997 1,814 1,737 83 Guatemala 1,276 1.282 1.494 1,399 1,361 1,494 1,492 1,382 1,438 1.478 84 Jamaica 481 628 450 481 445 450 449 437 431 449 85 Mexico 24.560 31,240 33,972 32.749 32.678 33.972 33,230 33,611 35.708 37.559 86 Netherlands Antilles 4,673 6,099 5,085 6,069 4 995 5.085 5,777 5.417 11,351 17,569 87 Panama 4.264 4.099 4.241 4.109 4.293 4.241 3.921 4,087 3,958 4,211 88 Peru 974 R14 893 917 907 893 876 912 878 878 89 Uruguay 1.836 1.890 2,382 2,184 2.247 2,382 2.201 2,247 2.228 2.097 90 Venezuela 11,808 17.363 21,601 20,699 22.111 21,601 22,339 21,887 21,474 20,696 91 Other 7.53] 8 670 9,626 9,476 8,954 9,626 9.445 9,558 10,228 10,284 92 Asia 240.595 249.083 269.198 242.064 255.000 269.198 274.301 267.957 275.215 251,423 93 Mainland 33,750 30.438 18,252 16,234 17,433 18,252 20.153 18.575 20.743 20.281 94 Taiwan 11 714 15.995 11 760 15 207 13,586 11,760 12.936 12.942 13.619 13.712 95 Hong Kong 20J97 18,789 17/722 19/755 18*886 17,722 18.002 17.797 17.825 19^662 96 India 3,373 .1,930 4,567 5,131 4.913 4.567 5.331 5.265 5,586 4.813 97 Indonesia 2,708 2 298 3,554 4.568 3.092 3,554 2,909 2,989 4,015 4,266 98 Israel 4.041 6.051 6.281 4,21X1 3,745 6,281 7,190 7,197 7.589 7,348 99 Japan 109,193 117.316 143.401 116,852 133,690 143,401 138.685 140,426 137.700 113,183 100 Korea (Soulh) 5.749 5,949 12,959 8,597 9,982 12,959 11.703 12.530 11,233 13,811 101 Philippines 3.092 3 378 3,250 2.505 2.558 3,250 2.530 2.872 3,009 2,870 102 Thailand 12.279 10,912 6.501 6.988 5.824 6 501 5.858 4.676 9,073 7,928 103 Middle Eastern oil-e\portinc countries11 15.582 16.285 14.959 14,436 14,017 14,959 16.059 14.146 14,613 14,776 104 Other " 18,917 17.742 25.992 27.591 27,274 25.992 32,945 26.736 28,606 26.449 105Africa 7.641 8,116 10,347 10.310 9.520 10.347 10,291 9,670 11.385 11,160 106 Egypt 2.136 2,012 1.663 1.742 1.836 1.663 1,949 1,670 1.449 1,236 107 Morocco 104 112 138 105 69 138 131 73 88 131 108 Soulh Africa 739 458 2.I5R 2.028 1.615 2,158 I.6S5 1,825 2,547 2,556 109 Zaire .... 10 10 10 3 5 10 7 4 10 3 110 Oil-exporting countries14 1.797 2.626 3,060 3.194 2,948 3,060 3,470 2,959 3,515 3,622 111 Other 2.855 2.898 3.318 3.238 3.047 3.318 3,049 2,619 3.016 2,902 112Other 6,774 7 938 7.206 8 376 7.481 7.206 7,481 6,469 5.954 6,464 113 Australia 5.647 6,479 6.304 7,284 6.283 6.304 6,385 5,466 4,989 5,450 114 Other 1,127 1.459 902 1.092 1.198 902 1,096 1,003 965 1.014 115Nonmonetary international and regional organizations.. . 11.039 13,972 11.390 13.914 12,469 11,390 11,240 16,452 15,890 14.793 [16 International15 9.300 12,099 10.217 11.943 10,926 10.217 10,016 14.859 14.975 13,330 117 Latin American regional111 893 1 339 424 1.277 1.053 424 975 1,217 536 762 118 Other regional 846 534 749 694 490 749 249 376 379 701 11. Since December 1992, has excluded Bosnia, Croatia, and Slovenia. 15. Principally the International Bank for Reconstruction and Development. Excludes 12. Includes the Bank for International Settlements Since December 1992, has "holdings of dollars" of the International Monetary Fund. included all parts of the former US.S.R. (except Russia), and Bosnia. Croatia, and Slovenia. 16. Principally the Inter-American Development Bank. 13. Comprises Bahrain. Iran, Iraq, Kuwait, Oman. Qatar, Saudi Arabia, and United Arab 17. Asian. African. Middle Eastern, and European regional organizations, except the Bank Emirates (Trucial States). for International Settlements, which is included in "Other Europe." 14. Comprises Algeria, Gabon, Libya, and Nigeria. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Bank-Reported Data A55 3.18 BANKS' OWN CLAIMS ON FOREIGNERS Reported by Banks in the United States' Payable in U.S. Dollars Millions of dollars, end of period Area or country Oct. Feb. Mar. Apr.1 1 Total, all foreigners 532,444 599,925 708,233 681,287 699,095 708,233 703,148 703,808' 687,571 701,266 2 Foreign countries 530,513 597,321 705,770 679,539 696,609 705,770 700,231 701,053' 684,623 697,973 3 Europe 132.150 165,769 199,880 213,472 215,077 199,880 204,763 212,249' 205,525 208,497 4 Austria 565 1,662 1,354 1,913 2,034 1,354 1,917 1,934 1,566 1,827 5 Belgium and Luxembourg 7.624 6.727 6,641 8.347 7,475 6,641 5,714 6,021 6,145 5,527 6 Denmark 403 492 980 896 844 980 1,531 907 895 968 7 Finland 1,055 971 1,233 1,808 1.259 1.2.33 1,492 1,554 1,686 1.018 8 France 15,03.3 15,246 16,239 16,831 19.817 16.239 21.474 18,963 18,206 17,182 9 Germany 9,263 8,472 12,676 11,617 13.245 12.676 10,849 10,752 13,047 16,730 10 Greece 469 568 402 463 401 402 504 504 503 442 11 Italy 5,370 6,457 6,230 7,145 6.871 6,230 6.655 5,974 6,601 6,938 12 Netherlands 5.346 7,117 6,141 11,503 11,496 6,141 5,384 5,447 6,618 5,851 13 Norway 665 808 555 1.419 2,080 555 989 1,296 850 662 14 Portugal 888 418 777 615 695 777 655 533 589 935 15 Russia 660 1,669 1,248 2,054 2,207 1,248 1,297 1,143 1,115 1,153 16 Spain 2,166 3,211 2.942 6,625 6,339 2,942 6,926 6,255 5.778 7,438 17 Sweden 2,080 1,739 1,854 1,838 1,804 1,854 1,736 2,184 2,798 2,975 18 Switzerland 7,474 19,798 28,846 29.779 29,399 28.846 28,515 29,006' 31,306 25,067 19 Turkey 803 1,109 1.558 1.424 1.572 1,558 1.648 1,675 1.914 2,324 20 United Kingdom 67,784 85,234 103,143 102,405 100.870 103.143 99,302 110,307 97,588 103,274 21 Yugoslavia- 147 115 52 75 74 52 53 53 61 59 22 Other Europe and other former U.S.S.R.1 4.355 3.956 7,009 6,715 6.595 7,009 8,122 7,741 8.259 7.927 23 Canada 20.874 26.436 27,176 22,815 24,765 27.176 25,155 24,872 29,827 25,784 24 Latin America and Caribbean 256,944 274.153 343,820 303,917 317,508 343,820 345,787 345,639' 338.857 354,253 25 Argentina 6.439 7,400 8,924 8,129 8,761 8,924 9,076 9,402 8,726 8,540 26 Bahamas 58,818 71,871 89,379 73,838 72,739 89,379 90.823 84,982 77,533 82.659 27 Bermuda 5,741 4,129 8,782 8,008 6,552 8,782 9.385 8,917 8,997 9,462 28 Brazil 13,297 17.259 21,696 20.134 20,390 21,696 22.541 23.987 25.283 26.140 29 British West Indies 124,037 105,510 145,471 133,309 141,801 145,471 145.935 149.516' 147,910 159,534 30 Chile 4.864 5,136 7,913 7,304 7,783 7.913 7.910 8.249 8.171 8,449 31 Colombia 4.550 6.247 6,945 6,869 6,976 6,945 6.733 6,729 6.783 6.772 32 Cuba 0 I) 0 0 3 0 0 0 0 0 33 Ecuador 825 1,031 1,311 1,307 1,292 1,311 1,390 1,198 1,476 1.522 34 Guatemala 457 620 886 761 787 886 863 868 904 955 35 Jamaica 323 345 424 364 405 424 410 401 364 385 36 Mexico 18,024 18,425 19,518 18,584 18,904 19,518 20,515 21.107 20,680 20,907 37 Netherlands Antilles 9.229 25,209 17,838 12,274 17,064 17.838 16.026 15.594 17,618 14,073 38 Panama 3,008 2,786 4,364 3,958 4,089 4.364 4.074 4.232 4,108 4.422 39 Peru 1,829 2,720 3,491 3,185 3,457 3,491 3.413 3.550 3,538 3,644 40 Uruguay 466 589 629 709 651 629 588 594 920 773 41 Venezuela 1,661 1,702 2.129 1.642 1,921 2,129 2,257 2,334 2,169 2.194 42 Other 3,376 3.174 4.120 3.542 3.933 4.120 3.848 3.779 3,677 3.822 43 Asia 115.336 122.478 125.024 129.622 129.760 125,024 114,415 108,927 101,331 99.121 China 44 Mainland 1.023 1,401 1.579 2.345 2,102 1.579 2,534 1,988 2,762 2.965 45 Taiwan 1,713 1,894 921 1,271 1,000 921 847 820 740 895 46 Hong Kong 12.821 12,802 13.990 15,338 15,151 13.990 14.548 13,477 12,608 10.129 47 India 1.846 1,946 2,200 2.360 2,501 2,200 2,299 2,172 1,927 1.807 48 Indonesia 1.696 1.762 2.634 2.731 2,774 2.634 2.361 2.266 2.289 2.212 49 Israel 739 633 768 1,539 1,201 768 946 987 812 874 50 Japan 61,468 59,967 59.540 59,437 60,195 59,540 52,904 51,891 46,660 44.939 51 Korea (South) 13,975 18.901 18.123 19,927 19,258 18,123 14,429 12,741 11,520 10.852 52 Philippines 1,318 1.697 1.689 1.455 1,533 1,689 1,794 1,645 1,813 1.522 53 Thailand 2,612 2,679 2,259 2,317 2,180 2,259 2,164 2,138 2,144 1,971 54 Middle Eastern oil-exporting countries"1 9.639 10.424 10,790 8.490 8.909 10,790 9,133 9,101 8,921 1 1.028 55 Other 6,486 8,372 10,531 12,412 12,956 10,531 10,456 9.701 9,135 9.927 56 Africa 2,742 2,776 3 530 3,342 3.332 3,530 3,580 3 403 3 567 1310 57 Egypt 210 247 247 245 282 247 279 304 289 294 58 Morocco 514 524 511 599 412 511 498 514 518 483 59 South Africa 465 584 805 557 743 805 694 573 559 490 60 Zaire 1 0 0 0 0 0 0 0 0 0 61 Oil-exporting countries5 552 420 1.212 I.Ill 1.091 1,212 1,324 1.219 1.364 1,194 62 Other 1,000 1,001 755 830 804 755 785 793 837 869 63 Other 2,467 5,709 6,340 6,371 6,167 6.340 6.531 5.963 5,516 6,988 64 Australia 1,622 4,577 5,299 5,296 4,962 5.299 5.419 5.139 5,011 6,513 65 Other 845 1,132 1.041 1,075 1.205 1.041 1,112 824 505 475 66 Nonmonetary international and regional organizations" 1.931 2.604 1.748 2,486 2,463 2,917 2.755 2,948 3,293 1. Reporting banks include all types of depository institutions as well as some brokers and 4. Comprises Bahrain. Iran. Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab dealers. Emirates (Trucial States). 2. Since December 1992, has excluded Bosnia, Croatia, and Slovenia. 5. Comprises Algeria, Gabon, Libya, and Nigeria. 3. Includes the Bank for International Settlements. Since December 1992. has included all 6. Excludes the Bank for International Settlements, which is included in "'Other Europe." parts of the former U.S.S.R. (except Russia), and Bosnia, Croatia, and Slovenia. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A56 International Statistics • August 1998 3.19 BANKS' OWN AND DOMESTIC CUSTOMERS' CLAIMS ON FOREIGNERS Reported by Banks in the United States' Payable in U.S. Dollars Millions of dollars, end of period 1997 1998 Type of claim 1995 1996 1997 Oct. Nov. Dec. Jan. Feb.' Mar. Apr.p 1 Total 655,211 743,919 857,967 857,967 842,384 2 Banks' claims 532,444 599,925 708,233 681,287 699,095 708,233 703,148 703,808 687.571 701,266 3 Foreign public borrowers 22,518 22,216 20,660 29,795 27,739 20,660 30,184 27,041 28.226 32,840 4 Own foreign offices2 307,427 341,574 431,685 400,207 409.314 431,685 415,690 421,633 402,367 411,514 5 Unaffiliated foreign banks 101,595 113,682 109,224 115,095 122,350 109,224 111,015 106,577 107,750 104,125 6 Deposits 37,771 33,826 31,042 31,711 33.850 31,042 30,768 26,559 25,605 24.296 7 Other 63.824 79,856 78,182 83,384 88.500 78.182 80,247 80,018 82,145 79,829 8 All other foreigners 100,904 122,453 146,664 136,190 139.692 146,664 146,259 148,557 149,228 152,787 9 Claims of banks' domestic customers1 122,767 143,994 149,734 149,734 154,813 58,519 73,110 73,110 85,406 11 Negotiable and readily transferable 77,657 instruments4 44,161 53,967 53,967 51,594 12 Outstanding collections and other 51,207 claims 20,087 22,657 22,657 17,813 15.130 MEMO 13 Customer liability on acceptances 8,410 10,388 9,624 9,624 7,496 14 Dollar deposits in banks abroad, reported by nonbanking business enterprises in the United States5 30,717 39,661 34,046' 39,091' 37,541' 34,046' 35,831' 36,615 32.028 31.789 1. For banks' claims, data are monthly; for claims of banks' domestic customers, data are principally of amounts due from the head office or parent foreign bank, and from foreign for quarter ending with month indicated. branches, agencies, or wholly owned subsidiaries of the head office or parent foreign bank. Reporting banks include all types of depository institution as well as some brokers and 3. Assets held by reporting banks in the accounts of their domestic customers. dealers. 4 Principally negotiable time certificates of deposit, bankers acceptances, and commercial 2. For U.S. banks, includes amounts due from own foreign branches and foreign subsidiar- paper ies consolidated in quarterly Consolidated Reports of Condition filed with bank regulatory 5. Includes demand and time deposits and negotiable and nonncgotiable certificates of agencies For agencies, branches, and majority-owned subsidiaries of foreign banks, consists deposit denominated in US. dollars issued by banks abroad. 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 Maturity, by borrower and area 1995 1996 Sept. Mar.p 1 Total 202,282 224,932 258,106 272,014 280,968 276,558 285,440 fly borrower 2 Maturity of one year or less . . 170,411 178,857 211,859 210,882 217,949 205,859 214,777 3 Foreign public borrowers . . . . 15,435 14.995 15.411 17.979 20.123 12,134 16,945 4 All other foreigners 154,976 163.862 196,448 192,903 197.826 193.725 197,832 5 Maturity of more than one year . 31,871 46,075 46,247 61,132 63.019 70.699 70,663 6 Foreign public borrowers 7,838 7.522 6,790 11,406 8,752 8.525 11,312 7 All other foreigners 24,033 38.553 39.457 49,726 54.267 62.174 59,351 y area Maturity of one year or less 8 Europe 56,381 55,622 55.690 69,233 69,204 58.294 69,245 9 Canada 6,690 6,751 8.339 10,381 8,460 9.917 9,304 10 Latin America and Caribbean.. 59,583 72,504 103,254 87,059 99,918 97,277 100,958 II Asia 40,567 40,296 38.078 38,435 34,629 33,972 28,746 12 Africa 1,379 1,295 1,316 1,899 2,157 2,211 2,239 13 All other5 5,811 2,389 5,182 3,875 3,581 4.188 4.285 Maturity of more than one year 14 Europe 4,358 4,995 6,965 11,884 11,202 13,240 15.118 15 Canada 3,505 2,751 2,645 3,174 3,842 2,512 2,752 16 Latin America and Caribbean. 15,717 27,681 24,943 31,001 34,988 42,069 39,338 17 Asia 5,323 7,941 9.392 12,509 10,393 10,159 10,708 18 Africa 1,583 1,421 1.361 1,264 1,236 1,236 1,243 19 All other3 1,385 1.286 941 1,300 1.358 1,483 1,504 1. Reporting banks include all types of depository institutions as well as some brokers and 2. Maturity is time remaining until maturity. dealers. 3. Includes nonmonetary international and regional organizations. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Bank-Reported Data A57 3.21 CLAIMS ON FOREIGN COUNTRIES Held by U.S. and Foreign Offices of U.S. Banks1 Billions of dollars, end of period 1998 Area or country Mar. June Sept. Dec. Sept. 1 Total 499.5 551.9 574.7 612.8 586.2 645.3 688.4 718.7 747.8 764.9 2 G-10 countries and Switzerland 191.2 206.0 203.4 226.9 220.0 228.3 255.9 274.0 268.4 261.6 3 Belgium and Luxembourg 7.2 13.6 11.0 11.4 11.3 11.7 15.2 10.8 12.5 11.5 4 France 19.1 19.4 17.9 18.0 17.4 16.6 21.5 19.3 21.6 17.6 5 Germany 24.7 27.3 31.5 31.4 33.9 29.8 34.0 35.1 37.3 32.4 6 Italy 11.8 11.5 13.2 14.9 15.2 16.0 16.4 23.1 22.4 17.5 7 Netherlands 3.6 3.7 3.1 4.7 5.9 4.0 4.6 7.1 7.7 6.7 8 Sweden 2.7 2.7 3.3 2.7 3.0 2.6 3.4 3.6 4.1 3.3 9 Switzerland 5.1 6.7 5.2 6.3 6.3 5.3 6.1 5.5 4.9 7.2 10 United Kingdom 85.8 82.4 84.7 101.6 90.5 104.7 112.7 119.9 115.9 119.9 11 Canada 10.0 10.3 10.8 12.2 14.8 14.0 17.0 17.5 15.8 14.0 12 Japan 21.1 28.5 22.7 23.6 21.7 23.7 25.1 32.1 26.2 31.6 13 Other industrialized countries . 45.7 50.2 61.3 55.5 62.1 65.7 67.4 72.7 74.7 65.5 14 Austria 1.1 .9 1.3 1.2 1.0 1.1 2.0 1.6 1.8 1.5 Denmark 1.3 2.6 3.4 3.3 1.7 1.5 1.7 2.8 3.7 2.4 Finland .9 .8 .7 .6 .6 .8 .7 1.4 1.9 1.3 Greece 4.5 5.7 5.6 5.6 6.1 6.7 6.3 6.1 6.2 5.1 Norway 2.0 3.2 2.1 2.3 3.0 8.0 5.3 4.7 4.6 3.6 Portugal 1.2 1.3 1.6 1.6 1.4 .9 1.0 1.2 1.4 1.1 Spain 13.6 11.6 17.5 13.6 16.1 13.2 15.0 16.2 14.6 12.3 Turkey 1.6 1.9 2.0 2.3 2.8 2.7 2.8 3.4 4.4 4.5 Other Western Europe 3.2 4.7 3.8 3.4 4.8 4.7 6.3 5.5 6.1 8.2 South Africa 1.0 1.2 1.7 2.0 1.7 2.0 1.9 1.9 1.9 2.2 Australia 15.4 16.4 21.7 19.6 22.8 24.0 24.5 27.8 28.1 23.2 25 OPEC" 24.1 22.1 21.2 20.1 19.2 19.7 22.1 22.5 23.2 26.3 26 Ecuador .5 .7 .8 .9 .9 II 1.1 1.0 1.3 1.3 Venezuela 3.7 2.7 2.9 2.3 2.3 2.4 2.0 2.1 2.3 2.6 28 Indonesia . 3.8 4.8 4.7 4.9 5.4 5.2 5.0 5.7 6.6 6.8 29 Middle East countries 15.3 13.3 12.3 11.5 10.2 10.7 13.3 12.6 11.8 14.4 30 African countries .9 .6 .6 .5 .4 .4 .7 1.2 1.2 1.2 31 Non-OPEC developing countries . 96.0 112.6 118.6 126.5 131.9 144.8 141.4 143.7 Latin America Argentina 11.2 12.9 12.7 14.1 15.0 14.3 14.9 16.9 17.5 18.8 Brazil 8.4 13.7 18.3 21.7 17.8 20.7 22.7 28.3 27.4 29.9 Chile 6.1 6.8 6.4 6.7 6.6 7.0 7.1 7.9 8.3 9.2 Colombia 2.6 2.9 2.9 2.8 3.1 4.1 3.9 3.6 3.6 3.7 Mexico 18.4 17.3 16.1 15.4 16.3 16.2 17.9 17.4 17.1 18.3 Peru .5 .9 1.2 1.3 1.6 1.7 1.6 2.0 2.1 Other 2.7 3.1 3.0 3.0 3.3 3.6 3.7 3.8 4.3 Asia China 39 Mainland 1.1 1.8 3.3 2.9 2.6 2.5 2.7 3.6 4.3 3.2 40 Taiwan 9.2 9.4 9.7 9.8 10.4 10.3 10.5 10.6 9.7 9.0 41 India 4.2 4.4 4.7 4.2 3.8 4.3 4.9 5.3 5.0 5.0 42 Israel .4 .5 .5 .6 .5 .5 1.0 1.1 1.5 1.2 43 Korea (South) 16.2 19.1 19.3 21.7 21.9 21.5 14.9 16.6 16.5 15.9 44 Malaysia 3.1 4.4 5.2 5.3 5.5 6.0 6.5 6.4 5.6 5.1 45 Philippines 3.3 4.1 3.9 4.7 5.4 5.8 6.1 7.0 5.7 5.7 46 Thailand 2.1 4.9 5.2 5.4 4.8 5.7 6.8 7.3 6.2 5.4 47 Other Asia 4.7 4.5 4.3 4.8 4.1 4.1 4.4 4.8 4.6 4.4 Africa Egypt .4 .6 .7 .9 1.1 .9 Morocco .7 7 .7 .6 .7 .7 Zaire .0 .0 .1 .0 .0 .0 Other Africa3 .9 1.0 .9 .9 .9 .9 52 Eastern Europe.. 2.7 4.2 6.3 5.1 5.3 6.9 9.0 7.2 9.9 9.2 53 Russia4 .8 1.0 1.4 1.0 1.8 3.7 3.6 4.2 5.1 5.1 54 Other 1.9 3.2 4.9 4.1 3.5 3.2 5.4 3.0 4.7 4.0 55 Offshore banking centers 72.9 99.2 101.3 106.1 105.2 134.7 142.5 140.0 149.6 159.4 56 Bahamas 10.2 11.0 13.9 17.3 14.2 20.3 21.1 17.2 20.5 31.1 57 Bermuda 8.4 6.3 5.3 4.1 4.0 4.5 6.7 7.9 9.8 9.8 58 Cayman Islands and other British West Indies 21.4 32.4 28.8 26.1 32.0 37.2 41.2 43.1 52.1 51.5 59 Netherlands Antilles .. . 1.6 10.3 11.1 13.2 11.7 26.1 20.0 15.9 21.8 14.7 60 Panama5 1.3 1.4 1.6 1.7 1.7 2.0 2.2 2.7 2.3 3.4 61 Lebanon .1 .1 .1 .1 .1 .1 .1 I .1 .1 62 Hong Kong, China 20.0 25.0 25.3 27.6 26.0 27.9 30.9 35.2 27.3 32.3 63 Singapore 10.1 13.1 15.4 15.9 15.5 16.7 20.3 17.7 15.9 16.7 64 Other*. .. .1 .1 .1 .1 .1 .1 .1 .3 .1 .1 65 Miscellaneous and unallocated7 . 66.9 57.6 62.6 72.7 50.0 59.6 59.6 57.6 99.1 I. The banking offices covered by these data include U.S. offices and foreign branches of 2. Organization of Petroleum Exporting Countries, shown individually; other members of U.S. banks, including U.S. banks that are subsidiaries of foreign banks. Offices not covered OPEC (Algeria, Gabon, Iran, Iraq. Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, and United include U.S. agencies and branches of foreign banks. Beginning March 1994, the data include Arab Emirates); and Bahrain and Oman (not formally members of OPEC). large foreign subsidiaries of U.S. banks. The data also include other types of U.S. depository 3. Excludes Liberia. Beginning March 1994 includes Namibia. institutions as well as some types of brokers and dealers. To eliminate duplication, the data 4. As of December 1992, excludes other republics of the former Soviet Union. are adjusted to exclude the claims on foreign branches held by a U.S. office or another foreign 5. Includes Canal Zone. branch of the same banking institution. 6. Foreign branch claims only. These data are on a gross claims basis and do not necessarily reflect the ultimate country 7. Includes New Zealand, Liberia, and international and regional organizations. risk or exposure of U.S. banks. More complete data on the country risk exposure of U.S. banks are available in the quarterly Country Exposure Lending Survey published by the Federal Financial Institutions Examination Council. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A58 International Statistics • August 1998 3.22 LIABILITIES TO UNAFFILIATED FOREIGNERS Reported by Nonbanking Business Enterprises in the United States Millions of dollars, end of period Type of liability, and area or country 1996 Sept. Sept. 1 Total 54,309 46,448 54,798 51,604 54,798 58,667' 55,J41r 55,639r 58,295 2 Payable in dollars 38,298 33,903 38,956 36,374 38,956 39,861' 38,651' 39,746' 41,888 3 Payable in foreign currencies 16,011 12,545 15,842 15,230 15,842 18,806 16,690 15,893 16,407 By type 4 Financial liabilities 32,954 24,241 26,065 25.445 26,065 29,633 27.103' 26,209' 27,790 5 Payable in dollars 18,818 12,903 11,327 11,272 11,327 11,847 11,442' 11,487' 12,975 6 Payable in foreign currencies 14,136 11,338 14,738 14,173 14,738 17,786 15,661 14,722 14,815 7 Commercial liabilities 21,355 22,207 28,733 26,159 28,733 29,034' 28,238' 29.430' 30,505 8 Trade payables 10,005 11,013 12,720 11,791 12,720 11,432' 10,885' 10,904 9 Advance receipts and other liabilities 11,350 11,194 16,013 14,368 16,013 17,602 17,198 18.545 19,601 10 Payable in dollars 19,480 21,000 27,629 25,102 27,629 28,014' 27,209' 28,259' 28,913 11 Payable in foreign currencies 1,875 1.207 1,104 1,057 1.104 1.020 1,029 1,171 1,592 By area or country Financial liabilities 12 Europe 21,703 15,622 16,195 16,086 16,195 20,081 18,530 18,019 19.121 13 Belgium and Luxembourg 495 369 632 547 632 769 238 89 186 14 France 1,727 999 1,091 1,220 1,091 1,205 1,280 1,334 1.684 15 Germany 1,961 1,974 1,834 2,276 1,834 1,589 1,765 1,730 2,018 16 Netherlands 552 466 556 519 556 507 466 507 494 17 Switzerland 688 895 699 830 699 694 591 645 776 18 United Kingdom 15,543 10,138 10,177 9.837 10,177 13,863 12,968 12,165 12,201 19 Canada 629 632 1.401 973 1,401 602 456 399 1,186 20 Latin America and Caribbean 2,034 1,783 1,668 1,169 1,668 1,876 1,285' 1,067' 1,386 21 Bahamas 101 59 236 50 236 293 124 10 141 22 Bermuda 80 147 50 25 50 27 55 64 229 23 Brazil 207 57 78 52 78 75 97 52 143 24 British West Indies ... 998 866 1,030 764 1,030 965 775r 6691 604 25 Mexico 0 12 17 13 17 16 15 76 26 26 Venezuela 5 2 1 1 1 I I 1 1 27 Asia 8.403 5,988 6,423 6,969 6,423 6,370 6,248' 6,239' 5,394 28 Japan 7,314 5,436 5,869 6,602 5,869 5,794 5,668' 5,725' 5,085 29 Middle Eastern oil-exporting countries 35 27 25 25 25 72 39 23 32 30 Africa 135 150 38 153 38 29 29 33 60 123 122 0 12) 0 0 0 0 0 31 Oil-exporting countries 32 All other1 340 Commercial liabilities 6,773 7,700 9.767 8,680 9,767 9,524' 8,683' 9,343' 10,228 33 Europe 241 331 479 427 479 639' 736' 703' 666 34 Belgium and Luxembourg 728 481 680 657 680 679' 708' 782' 764 35 France 604 767 1,002 949 1,002 1,043' 845' 945' 1,274 36 Germany 722 500 766 668 766 551' 288' 452' 439 37 Netherlands 327 413 624 405 624 480' 429' 400' 375 38 Switzerland 2,444 3,568 4,303 3,663 4,303 4,158' 3,818' 3,829' 4,086 39 United Kingdom 40 Canada 1.037 1,040 1,090 1,144 1,090 1,068 1,136 1,150 1,175 41 Latin America and Caribbean 1.857 1,740 2,574 2.386 2,574 2,562' 2,500' 2,224' 2,176 42 Bahamas 19 1 63 33 63 43 33 38 16 43 Bermuda 345 205 297 355 297 479 397 180 203 44 Brazil 161 98 196 198 196 200' 225 233 220 45 British West Indies 23 56 14 15 14 14 26 23 12 46 Mexico 574 416 665 446 665 633 594 562 565 47 Venezuela 276 221 328 341 328 318 304 322 261 48 Asia 10,741 10,421 13,422 12,227 13,422 13,915' 13,875' 14,628' 14,966 49 Japan 4,555 3.315 4,614 4,149 4,614 4,465' 4,430' 4,553' 4,500 50 Middle Eastern oil-exporting countries1. . . 1,576 1.912 2.168 1,951 2,168 2,495 2.420 2,984 3,111 51 Africa 428 619 1,040 1,020 1,040 1,037 941 929 874 52 Oil-exporting countries 256 254 532 490 532 479 423 504 408 53 Other3 928' 1,103' 1,156' 1,086 1. Comprises Bahrain. Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab 2. Comprises Algeria. Gabon, Libya, and Nigeria. Emirates (Tnicial States). 3. Includes nonmonetary international and regional organizations. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Nonbank-Reported Data A59 3.23 CLAIMS ON UNAFFILIATED FOREIGNERS Reported by Nonbanking Business Enterprises in the United States Millions of dollars, end of period 1996 1997 Type of claim, and area or country 1994 1995 1996 Sept. Dec. Mar. June Sept. Dec. 1Total 57.888 52,509 63.642 59,092 63.642 68,102' 68,266' 70,760' 70,077 2 Payable in dollars 53.805 48,711 58.630 55,014 58.630 62,126' 62,082' 64,144' 62,173 3 Payable in foreign currencies 4,083 3.798 5.012 4,078 5.012 5,976 6,184 6,616 7,904 By lype 4 Financial claims 33,897 27,398 35.268 34,200 35,268 40,547' 40,717' 42,059' 38,908 5 Deposits 18,507 15,133 21,404 19,877 21,404 22,150' 24,106' 23,951' 23,139 6 Payable in dollars 18,026 14,654 20,631 19,182 20,631 20,499' 22,615' 22,392' 21,290 7 Payable in foreign currencies 481 479 773 695 773 1,651 1,491 1,559 1,849 8 Other financial claims 15,390 12,265 13.864 14,323 13.864 18,397 16,611' 18,108 15,769 9 Payable in dollars 14,306 10,976 12.069 12,234 12.069 15,381 13,354' 14,795 11,576 10 Payable in foreign currencies 1,084 1.289 1.795 2.089 1.795 3,016 3,257 3,313 4,193 Commercial claims 23,991 25,111 28.374 24,892 28.374 27,555 27,549 28,701 31,169 12 Trade receivables 21,158 22,998 25,751 22,454 25.751 24,801 24,858 25,110 27.536 13 Advance payments and other claims 2,833 2,113 2,623 2.438 2,623 2.754 2,691 3.591 3.633 14 Payable in dollars 21,473 23,081 25,930 23.598 25.930 26,246 26,113 26.957 29.307 15 Payable in foreign currencies 2,518 2,030 2 444 1,294 2.444 1,309 1,436 1,744 1.862 By aren or toiinrn' Financial claims 16 Europe 7.936 7,609 9.282 9,777 9 282 13,076' 12,904' 15,862' 16,948 17 Belgium and Luxembourg 86 193 185 126 185 119 203 360 406 18 Fiance 800 803 694 733 694 760 680 1,112 1.015 19 Germany 540 436 276 272 276 324 281 352 427 20 Netherlands 429 517 493 520 493 567 519 754 677 21 Switzerland 523 498 474 432 474 570 447 448 434 22 United Kingdom 4.649 4,303 6.119 6,603 6,119 9.837' 9.814' 11.254' 12.286 23 Canada 3,581 2,851 3,445 4.502 3,445 4.917 6.422 4.279 3,313 24 Latin America and Caribbean 19,536 14,500 19.577 17,241 19.577 19,742 18.725 19.176' 15.543 25 Bahamas 2.424 1.965 1.452 1,746 1.452 1,894 2.064 2.442 2.459 26 Bermuda 27 81 140 113 140 157 188 190 108 27 Brazil 520 830 1,468 1,438 1.468 1,404 1.617 1,501 1,313 28 British West Indies 15.228 10,393 15,182 12.819 15.182 15,176 13,553 12,957' 10.311 29 Mexico 723 554 457 413 457 517 497 508 537 30 Venezuela 35 32 31 20 31 22 21 15 36 31 Asia 1.871 1,579 2,221 1,834 2.221 2,068 1,934 2.015 2.133 32 Japan 953 871 1,035 1,001 1,035 831 766 999 823 33 Middle Eastern oil-exporting countries1 141 3 22 13 22 12 20 15 11 34 Africa ... 373 276 174 177 174 182 179 174 319 35 Oil-exporting countries 0 5 14 13 14 14 15 16 15 36 All other^ 600 583 569 669 569 562 553 553 652 Commercial claims 37 Europe 9.540 9.824 10 443 9.288 10,443 9,863 9,603 10.486 12.120 38 Belgium and Luxembourg 213 231 226 213 226 364 327 331 328 39 France 1.881 1.830 1.644 1,532 1,644 1,514 1,377 1,642 1,796 40 Germany 1,027 1.070 1,337 1.250 1,337 1,364 1,229 1,395 1,614 41 Netherlands 311 452 562 424 562 582 613 573 597 42 Switzerland 557 520 642 594 642 418 389 381 554 43 United Kingdom 2.556 2.656 2.946 2,516 2.946 2,626 2,836 2,904 3.660 44 Canada 1.988 1,951 2.165 2,083 2.165 2,381 2,464 2.649 2,660 45 Latin America and Caribbean 4,117 4,364 5,27<i 4,409 5.276 5,067 5,241 5,028 5.750 46 Bahamas 9 30 35 14 35 40 29 22 27 47 Bermuda 234 272 275 290 275 159 197 128 244 48 Brazil 612 898 1.303 968 1.303 1,216 1,136 1,101 1,162 49 British West Indies 83 79 190 119 190 127 98 98 109 50 Mexico 1,243 993 1,128 936 1.128 1,102 1,140 1.219 1.392 51 Venezuela 348 285 357 316 357 330 451 418 576 52 Asia 6,982 7,312 8.376 7,289 8.376 8,348 8.460 8,576 8.713 53 Japan 2,655 1,870 2.003 1,919 2,003 2,065 2.079 2,048 1,976 54 Middle Eastern oil-exporting countries' 708 974 971 945 971 1,078 1.014 987 1.107 55 Africa 454 654 746 731 746 718 618 764 680 56 Oil-exporting countries2 67 87 166 142 166 100 81 207 119 57 Other' 910 1,006 1.368 1,092 1,368 1.178 1.163 1,198 1,246 I. Comprises Bahrain, Iran, Iraq, Kuwait. Oman, Qatar, Saudi Arabia, and United Arab 2. Comprises Algeria, Gabon, Libya, and Nigeria, Emirates (Trucial States). 3. Includes nonmonetary international and regional organizations. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A60 International Statistics • August 1998 3.24 FOREIGN TRANSACTIONS IN SECURITIES Millions of dollars Transaction, and area or country 1996 J A an pr .- . Nov. Dec. Feb. Mar. Apr.p U.S. corporate securities STOCKS 1 Foreign purchases 590.714 963,885 434,953 106,673 85,149 90.994 90,106 99,164' 124.730 120.953 578.203 897,850 401.620 105,668 80,133 85,670 83,839 89,137' 111,960 116.684 2 Foreign sales 12,511 66,035 33,333 1,005 5,016 5,324 6,267 10,027' 12,770 4,269 3 Net purchases, or sales (—) 12,585 66,175 33,400 1,023 5,024 5,358 6,319 10,017' 12,774 4,290 4 Foreign countries 5,367 59,041 32,980 5,910 5,318 5,832 6.637 9,625 10,499 6,219 5 Europe -2,402 3,134 2,437 -80 -65 299 665 492 831 449 6 France 1,104 9,075 3.394 538 857 788 546 768 627 1,453 7 Germany 1,415 3,833 1.471 757 579 409 613 140 557 161 8 Netherlands 2,715 7,845 4,745 848 1,043 1,474 683 1,132 1,956 974 1 Switzerland 4,478 22,215 11,343 i 444 1,875 1,232 2,755 4.588 3,406 594 10 United Kingdom 2,226 -1.174 -92 -520 -344 -304 -254 -459' 566 55 11 Canada 5,816 5,264 3,251 -4,091 -627 -1,224 2,646 2,184 2,110 -3,689 1 1 2 3 M La i t d in d le A m Ea e s r t i 1 ca and Caribbean -1.6 9 0 1 0 8 2,0 1 6 7 1 1 -2 - , 2 2 6 5 3 5 -50 7 8 8 88 1 8 5 1,07 2 1 1 -2 - , 1 6 6 9 6 3 - - 2 9 7 4 3 4 - - 2 1 0 7 1 1 1, 3 5 4 8 7 3 14 Other Asia -372 4,780 -2,646 229 709 551 -1,112 -667 -1,422 555 15 Japan -85 471 258 80 -36 7 34 13 83 128 16 Africa -57 341 -479 74 -190 -45 115 -129 -112 -353 17 Other countries 18 Nonmonetary international and regional organizations .... -140 -67 10 -21 BONDS2 19 Foreign purchases 393,953 614,253 270,734 58,462 52,632 52,484 57,479 67,414 69,758 76,083 268,487 477,786 196,655 44,435 48,772 43,171 44,334 49,991 50,174 52,156 20 Foreign sales 125,466 136,467 74,079 14,027 3,860 9,313 13,145 17,423 19,584 23,927 21 Net purchases, or sales (-) ... 125,295 135,875 73,633 13,500 3,948 9,302 13,113 17,354 19,445 23,721 22 Foreign countries 77,570 74,301 44,678 3,598 2,395 4,575 5,416 8,249 12,374 18,639 23 Europe 4,460 3,300 1,106 142 546 -67 74 272 727 33 24 France 4.439 2,742 2.132 120 165 -474 289 419 249 1,175 25 Germany 2.107 3,576 650 369 185 425 -433 199 364 520 26 Netherlands 1,170 187 2,554 -109 712 733 760 266 358 1,170 27 Switzerland 60,509 56,804 34,060 2,611 -104 3,069 4,163 6,243 9,538 14,116 28 United Kingdom 4,486 6,264 2,286 866 459 677 1,409 114 400 363 29 Canada 17,737 34,821 17,943 3,712 3.884 7,220 5,339 5,512 4,835 2,257 3 3 0 1 L M a i t d in d le A m Ea e s r t i 1 ca and Caribbean .. 23 1 , . 7 67 6 9 2 17 1 , ,6 0 5 1 6 7 6 1 , , 1 4 6 8 5 9 - 5, 1 6 8 3 3 4 -3,1 1 9 9 3 9 -3,5 1 2 4 6 2 48 7 5 8 2, 8 4 2 2 0 8 1, 5 1 2 7 2 4 2,0 6 7 9 8 32 Other Asia 14,173 9,354 3,582 5,207 -2.883 -3,764 -958 886 750 2,904 33 Japan 624 1,005 151 II 88 49 142 36 -72 45 34 Africa -563 811 921 -138 116 165 244 195 212 270 35 Other countries 36 Nonmonetary international and regional organizations . . . 171 446 32 69 139 206 Foreign securities 37 Stocks, net purchases, or sales (—) -59,268 -40,243 -2,801 -2,820 2,045 1,541 156 -1,211' -1,596 -150 38 Foreign purchases 450,365 719,145 292,881 79,549 70,286 64,328 62,333 68,620' 81,342 80,586 39 Foreign sales 509,633 759,388 295,682 82,369 68,241 62,787 62,177 69,831' 82,938 80.736 40 Bonds, net purchases, or sales (-) -51,369 -47,241 -13,108 -739 -4.468 -3,062 -3,725 -2,691' 2,797 -9,489 41 Foreign purchases 1,114,035 1,466,784 447.759 163,626 111,000 115,302 95,481 102,429' 132,741 117,108 42 Foreign sales 460,867 164,365 115,468 118,364 99,206 105,120' 129,944 126,597 1,165.404 1,514.025 43 Net purchases, or sales (—), of stocks and bonds -15,909 -3459 -2,423 -1,521 -3,569 -3,902' 1,201 -9,639 -110,637 -87,484 44 Foreign countries -15,786 -3,394 -2J75 -1,435 -3,480 -3,860' 1,229 -9,675 -109,766 -87,428 45 Europe -930 -5,227 -2,528 909 -3,963 -1,821' -34 46 Canada -57,139 -28,060 -592 412 557 -78 842 600" -1,561 -473 47 Latin America and Caribbean -7,685 -3,794 -3,759 1,899 -2,160 -2,918 829 510' 569 -5,667 48 Asia -11,507 -25,043 -9,596 889 1,684 936 -1,119 -3,098' -2,598 -2,781 49 Japan -27,831 -24,972 -1.945 1.828 2.261 1,862 -413 -1,831' -1,732 2,031 50 Africa -5.887 -10.014 -739 -1,027 -380 -74 -114 -151' -169 -305 51 Other countries -1.517 -3.296 -170 -340 452 -210 45 100' 100 -415 -4,087 -2.263 52 Nonmonetary international and regional organizations -871 -56 -123 -165 -86 -42 -28 36 1. Comprises oil-exporting countries as follows: Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, 2. Includes state and local government securities and securities of U.S. government Saudi Arabia, and United Arab Emirates (Trucial States). agencies and corporations. Also includes issues of new debt securities sold abroad by U.S. corporations organized to finance direct investments abroad. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Securities Holdings and Transactions/Interest and Exchange Rates A61 3.25 MARKETABLE U.S. TREASURY BONDS AND NOTES Foreign Transactions1 Millions of dollars; nel purchases, or sales ( —) during period Area or country J A an p . r - . Nov. Apr.P 1 Total estimated 232,241 183,596 17,360 16,858 15,909 -9,398 5,512 9.957 -4,091 5.982 2 Foreign counlries 234.083 183,179 16.721 17,094 15.489 -7,788 4,990 10.091 -5.287 6,927 3 Europe 118,781 144.920 30.706 23,102 10,158 -37 18,215 6.798 -857 6,550 4 Belgium and Luxembourg 1,429 3,427 1,095 357 384 161 304 252 704 -165 5 Germany 17.980 22,471 1,079 4,847 5,255 3,052 -1,085 1.096 1.897 -829 6 Netherlands -582 1,746 -1,992 334 375 -1,525 403 -792 -1.733 130 7 Sweden 2.242 -465 -150 302 -67 -124 82 -430 400 -202 8 Switzerland 328 6,028 3,796 690 1.395 2.847 2.419 1,690 170 -483 9 United Kingdom 65,658 98,253 19,834 18,779 5,640 -1.792 11,879 5.875 -3,705 5 785 10 Other Europe and former U.S.S.R 31,726 13.460 7,044 -2.207 -2.824 -2.656 4,213 -893 1,410 2.314 11 Canada 2,331 -811 1.205 -730 730 -2,132 266 -517 1.457 12 Latin America and Caribbean 20.785 -2.541 -17.K6O -1.434 6.512 3.737 -3,619 2.123 -8,383 -7.981 13 Venezuela -69 655 -13 107 397 -36 4 97 -128 14 14 Other Latin America and Caribbean 8,439 -536 4,017 -3,723 -723 2.485 1,711 2,949 -II -632 15 Netherlands Antilles 12,415 -2,660 -21,864 2.182 6.838 1,288 -5,334 -923 -8,244 -7,363 16 Asia 89,735 39,047 4,211 -5,394 -1,002 -10.359 -8,757 1,348 3,522 8 098 17 Japan 41,366 20,360 413 4.160 -4,784 -7.860 -6,484 764 -168 6,301 18 Africa 1,083 1,523 269 45 -82 268 -4.3 176 154 -18 19 Other 1.368 1,041 -1.810 1,505 -827 735 -805 -620 794 -1.179 20 Nonmonetary international and regional organization; -1,842 417 639 -236 420 -1,610 522 -134 1,196 -945 21 International -1.390 552 316 -74 451 -1,025 445 -223 900 -806 22 Latin American regional -779 173 25 78 -24 -131 32 -29 10 i: MEMO 23 Foreign countries 234,083 183,179 16,721 17,094 15.489 -7,788 4.990 10,091 -5,287 6.927 24 Official institutions 85,807 43,379 7,602 -12,848 1.831 -367 -1,189 1,242 6,033 1.516 25 Other foreign 148.276 139.800 9.119 29,942 13,658 -7,421 6,179 8,849 -11,320 5,411 Oil-exporting countries 26 Middle East2 10,232 7,116 -3,877 3,175 -1,506 -2,411 409 1,325 - 203 27 Africa' 1 -13 0 0 0 1 0 0 0 1. Official and private transactions in marketable U.S. Treasury securities having an 2, Comprises Bahrain, Iran. Iraq, Kuwait, Oman, Qatar. Saudi Arabia, and United Arab original maturity of more than one year. Data are based on monthly transactions reports. Emirates (Trucial States) Excludes nonmarketable U.S. Treasury bonds and notes held by official institutions of foreign 3. Comprises Algeria, Gabon, Libya, and Nigeria countries. 3.26 DISCOUNT RATES OF FOREIGN CENTRAL BANKS1 Percent per year, averages of daily figures Rate on June 30, 1998 Rate on June 30, 1998 Country Country Percent Month Percent Month effective effective Austria 2.5 Apr. 1996 Germany 2.5 Apr. 1996 Belgium 2.75 Oct. 1997 Italy 5,0 Apr. 1998 Canada 5.0 Jan. 1998 Japan ,5 Sept. 1995 Denmark 3.75 May 1998 Netherlands 2,5 Apr 1996 France2 3.3 Oct. 1997 Switzerland 1.0 Scpl 1996 1. Rates shown are mainly those at which the central bank eiiher discounts or makes 2. Since February 1981, the rate has been that at which the Bank of France discounts advances against eligible commercial paper or government securities for commercial banks or Treasury bills for seven to ten days. brokers. For counlries with more than one rate applicable to such discounts or advances, the rate shown is the one at which it is understood that the central bank transacts the largest proportion of its credit operations. 3.27 FOREIGN SHORT-TERM INTEREST RATES1 Percent per year, averages of daily figures 1997 1998 Type or country 1995 1996 1997 Dec. Jan. Feb. Mar. Apr. May June 5.93 5.38 5.61 5,79 5.53 5.53 5.56 5.56 5.57 5.57 2 United Kingdom 6.63 5.99 6.81 7.60 7.49 746 7,47 7.41 7 37 7.61 3 Canada 7.14 4.49 3.59 4.61 4.68 5.02 4,93 4.94 5.09 5.10 4 Germany 4.43 3.21 3.24 3.67 3.51 3.45 3.44 3.56 3.55 3.49 2,94 1,92 1.58 1.56 1.27 .98 1.06 1.39 1.52 LSI 6 Netherlands 4.30 2.91 3.25 3.61 3.42 3.36 3.42 3.52 3.53 3.51 7 France 6.43 3.81 3.35 3.57 3.50 3.45 3.45 3.50 3.50 3.47 8 Italy 10.43 8.79 6.86 6.07 6.05 6.12 5.59 5.09 4.98 4.99 4.73 3.19 3.40 3 61 3.47 3.53 3.61 3.69 3.67 3.62 10 Japan 1.20 58 .58 .78 .77 .84 .74 .66 .56 57 1. Rates are for three-month interbank loans, with the following exceptions; Canada, finance company paper; Belgium, three-month Treasury bills; and Japan, CD rale. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A62 International Statistics • August 1998 3.28 FOREIGN EXCHANGE RATES' Currency units per dollar except as noted 1998 Counlry/eurreiKy unit [995 1996 1997 Jan. Feb. Mar. Apr. May June 1 Australia/dollar 74.073 78.283 74.368 65.659 67.436 66.963 65.231 63 124 60.456 2 Austria/schilling 10.076 10.5S9 12.206 12.765 12.735 12.852 12.760 12.491 12.615 3 Belgium/franc 20.472 10.970 .15.807 37.536 37.417 37.699 37.424 36.624 36.981 4 Canada/dollar 1 3725 1.3638 1.3849 1.4409 1.4334 1.4166 1.4298 1.4452 1.4655 5 China, P.R./yuan 8.3700 S33S9 8.3193 8.3094 8.3072 8.3076 8.3058 8.3084 8.3100 6 Denmark/krone 5.5999 5 8003 6.6092 6.9190 6.9089 6.9661 6.9174 6 7662 6.8294 7 Finland/markka 4.3763 4.5948 5.1956 5.5006 5.4999 5.5467 5.5053 53966 5.4503 8 France/franc 4.9864 5.1158 5.8193 6.0832 6.0744 6.1257 6.0782 5.9528 6.0118 9 Germany/deulsche mark 1.4321 1.5049 1.7148 1.8165 1.8123 1.8272 1.8132 1 7753 1.7928 10 Greece/drachma 231.68 240.82 273.28 287.24 286.70 306.05 315.82 307.22 304 24 11 Hong Kong/dollar 7 7357 7.7345 7.7431 7.7425 7.7412 7.7458 7 7497 7.7490 7.7471 12 India/rupee. . s 32.418 35 506 36.365 39.391 39.008 39.569 39.703 40.469 42.367 13 Ireland/pound" 160.35 159.95 151.63 138.19 137.71 136.72 138.94 141 74 140.51 14 Italy/lira 1,629.45 1.542.76 1,703.81 1,787.87 1.788.28 1,799.07 1.791.24 1.750.79 1,766.32 15 Japan/yen 93.96 108.78 121 06 12955 125.85 129.08 131.75 134.90 140.33 16 Malaysia/ringgit 15073 2.5154 2.8173 4.4093 3.8148 3.7456 3.7376 1.8204 4.0006 17 Netherlands/suiilder 1.6044 1.6863 1.9525 2 0472 2.0432 2.0598 2.0422 2.0005 2.O2OS 18 New Zealand/dollar2 65.625 68.765 66.247 57.925 58.286 57.261 55.339 53.876 51.231 19 Norway/krone 6.3355 6.4594 7.0857 7.5007 7.5530 7.5833- 7.5315 7.4539 7.5785 20 Portugal/esiudo 149.88 154.28 175.44 185.80 185.54 187.03 185.81 181.87 183.58 21 Singapore/dollar 1.4171 1.4100 1.4857 1.7477 1.6509 1.6188 1.6007 1 6374 1.6941 22 South Africa/rand 3.6284 4.3011 4.6072 4.9417 4.9337 4.9746 5.0459 5.0927 5.3910 23 South Korea/won 772.69 805.00 950.77 1,707.30 1.628.42 1.489.36 1.391.55 1.399.05 1,397.77 24 Spain/peseta 124.64 126.68 146.53 153.93 153.61 154.95 15399 150.81 152 18 25 Sri Lanka/rupee 51.047 55.289 59.026 62.281 62.363 62.083 62 903 64.261 65.150 26 Sweden/krona 7.1406 6.7082 7.6446 8.0193 8.0723 7.9677 7.8238 7.7026 7.9174 27 Switzerland/franc 1.1812 1.2361 1.4514 1.4748 1.4631 1.4901 1.5051 1.4790 1.4949 28 Taiwan/dollar 26.495 27.468 28.775 34.117 32.948 32.524 33.016 33.466 34.553 29 Thailand/baht 24.921 25.359 31.072 52.983 45.987 41.366 39.654 39.198 42.332 30 United Kingdom/pound2 157.85 156.07 163.76 163.50 164.08 166.19 167.23 163.82 165.04 MEMO .31 United States/dollar1 84.25 87.34 96.38 100.52 99.93 100.47 100.30 99.61 100.90 1. Averages of certified noon buying rates in New York for cable transfers. Data in this 3. Index of weighted-average exchange value of U.S. dollar againnst the currencies of ten table also appear in the Board's G.5 (405) monthly statistical release. For ordering address, industrial countries. The weight for each of the ten countries is the 11997722--7766 aavveerraaggee wwoorrlldd see inside from cover. trade of that country divided by the average world trade of all ten countries combined. Series 2 Value in US. cents. revised as of August 1978 (see Federal Reserve Bulletin, vol. 64 (August I97X), p. 700). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A63 Guide to Statistical Releases and Special Tables STATISTICAL RELEASES—List Published Semiannually, with Latest Bulletin Reference Issue Page Anticipated schedule of release dates for periodic releases June 1998 A72 SPECIAL TABLES—Data Published Irregularly, with Latest Bulletin Reference Title and Date Issue Page Assets and liabilities of commercial banks June 30, 1997 November 1997 A64 September 30, 1997 February 1998 A64 December 31, 1997 May 1998 A64 March 31, 1998 August 1998 A64 Terms of lending at commercial banks August 1997 November 1997 A68 November 1997 February 1998 A68 February 1998 May 1998 A66 May 1998 August 1998 A67 Assets and liabilities of U.S. branches and agencies of foreign banks June 30, 1997 November 1997 A72 September 30, 1997 February 1998 A72 December31, 1997 May 1998 A70 March 31, 1998 August 1998 A72 Pro forma balance sheet and income statements for priced service operations June 30, 1997 October 1997 A68 September 30, 1997 January 1998 A64 March 31, 1998 July 1998 A64 Residential lending reported under the Home Mortgage Disclosure Act 1994 September 1995 A68 1995 September 1996 A68 1996 September 1997 A68 Disposition of applications for private mortgage insurance 1996 September 1997 A76 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A64 Special Tables • August 1998 4.20 DOMESTIC AND FOREIGN OFFICES Insured Commercial Bank Assets and Liabilities Consolidated Report of Condition, March 31, 1998 Millions of dollars except as noted Banks with domestic Banks with foreign offices offices only2 Domestic total 1 Total assets3 5,075,292 4,361,320 3,400.105 2,686,133 133,401 281,787 2 Cash and balances due from depository institutions 329,431 254.877 249.500 174.946 65,845 14,086 3 Cash items in process of collection, unposted debits, and currency and coin 117.659 115.013 35.393 4 Cash items in process of collection and unposted debits n.a. 90,517 23,767 5 Currency and coin n.a. 24.496 11,626 6 Balances due from depository institutions in the United States 41,618 33.062 19.899 7 Balances due from banks in foreign countries and foreign central banks 73,125 9,875 2,234 8 Balances due from Federal Reserve Banks 17.099 16,996 8,318 MEMO 9 Non-interest-bearing balances due from commercial banks in the United States (included in balances due from depository institutions in the United States) 9,954 14,634 5,362 10 Total securities, held-to-maturity (amortized cost) and available-for-sale (fair value) 893,268 492,249 325,673 75,346 11 U.S. Treasury securities 158,005 79,118 62,509 16,378 12 U.S. government agency and corporation obligations (excludes mortgage-backed securities) 148,016 41,327 78,404 28,285 13 Issued by U.S. government agencies 6,250 3,400 2,047 803 14 Issued by U.S. government-sponsored agencies 141,766 37,927 76,357 27,482 15 Securities issued by states and political subdivisions in the United States 77,837 22,890 41,786 13,161 16 General obligations 58,023 16,331 32,103 9,589 17 Revenue obligations, 18,969 6,011 9.438 3.520 18 Industrial development and similar obligations 845 548 245 52 19 Mortgage-backed securities (MBS) 398,410 258,705 124,827 14,878 20 Pass-through securities 265,856 179,507 76,862 9,486 21 Guaranteed by GNMA 79,119 54,917 21,041 3,161 22 Issued by FNMA and FHLMC 184,796 123,182 55,316 6.298 23 Privately issued 1,940 1,408 506 27 24 Other mortgage-backed securities (includes CMOs, REMICs, and stripped MBS) 132,554 79,198 47,965 5,391 25 Issued or guaranteed by FNMA, FHLMC or GNMA 104,766 60.488 39,179 5,098 26 Collateralized by MBS issued or guaranteed by FNMA. FHLMC, or GNMA 2,504 800 1,549 155 27 All other mortgage-backed securities 25,284 17,909 7,237 138 28 Other debt securities 84,067 73,523 9,265 1,279 29 Other domestic debt securities n.a. 21.868 9,080 n.a. 30 Foreign debt securities n.a. 51,655 185 n.a. 31 Equity securities 26,933 16.686 8,881 1,367 32 Investments in mutual funds and other equity securities with readily determinable fair value 9,001 5.993 2,579 428 33 All other equity securities 10,693 6.301 938 17.933 34 Federal funds sold and securities purchased under agreements to resell 202,830 205,028 52,460 18,224 275.712 35 Total loans and lease-financing receivables, gross 2,712,235 1,947,650 1,653,653 892,717 165,864 36 LESS: Unearned income on loans 3.006.232 3,117 1,675 870 1,644 604 37 Total loans and leases (net of unearned income) 3.923 2,709,118 1,945,975 1,652,784 891,074 165,260 38 LESS: Allowance for loan and lease losses 3,002.309 35,112 17,365 2,412 39 LESS: Allocated transfer risk reserves 54.889 23 0 0 40 EQUALS: Total loans and leases, net 23 1,910.840 873,709 162,848 2.947,396 Total loans and leases, gross, by category 41 Loans secured by real estate 1.263,945 1,235,060 697,626 668,741 472,678 93,640 42 Construction and land development 90,028 42,864 40,298 6,866 43 Farmland 27,453 3,903 12,400 11,151 44 One- to four-family residential properties 731,388 432,736 250,314 48,339 45 Revolving, open-end loans, extended under lines of credit 96,769 66,972 27,475 2,322 46 All other loans 634,619 365,764 222,839 46,017 47 Multifamily (five or more) residential properties 42,090 22,525 17,582 1.984 48 Nonfarm nonresidential properties 344,100 166,714 152,085 25.301 44 Loans to depository institutions 68,660 91,586 65,620 2,962 77 50 Commercial banks in the United States n.a. n.a. 49,028 48,299 2,614 n.a. 51 Other depository institutions in the United States n.a. n.a. 11,850 11,750 91 n.a. 52 Banks in foreign countries n.a. n.a. 30,708 5,571 258 n.a. 53 Loans to finance agricultural production and other loans to farmers 42,883 42,153 9,521 8,792 15,667 17,694 54 Commercial and industrial loans 815,532 651,615 636,817 472,901 150,784 27,931 55 U.S. addressees (domicile) n.a. n.a. 497,688 466,391 150,089 n.a. 56 Non-U.S. addressees (domicile) n.a. n.a. 139,129 6,509 694 n.a. 57 Acceptances of other banks 1,779 781 1.548 550 179 52 58 U.S. banks n.a. n.a. 331 330 n.a. n.a. 59 Foreign banks n.a. n.a. 1.217 220 n.a. 60 Loans to individuals for household, family, and other personal expenditures (includes purchased paper) 536,022 500,407 285,593 249,977 226,178 24,251 61 Credit cards and related plans 210,877 n.a. 100,555 n.a. 108,948 1,373 62 Other (includes single payment and installment) 325,146 n.a. 185,038 n.a. 117.230 22.878 63 Obligations (other than securities) of slates and political subdivisions in the United States (includes nonrated industrial development obligations) 18,071 18,066 10,655 10,650 6,611 805 64 All other loans 130,270 95,702 121,641 87,073 7,833 796 65 Loans to foreign governments and official institutions n.a. n.a. 7,029 618 30 n.a. 66 Other loans n.a. n.a. 114,612 86,455 7,803 n.a. 67 Loans for purchasing and carrying securities n.a. n.a. n.a. 18,947 1,610 n.a. 68 All other loans (excludes consumer loans) n.a. n.a. n.a. 67,508 6,193 n.a. 69 Lease-financing receivables 103,105 99,791 92,663 89,349 9.824 618 t 70 Assets held in trading accounts 304,965 303,676 1,235 7! Premises and fixed assets (including capitalized leases) 67,454 40,772 21,427 5.255 7 7 2 3 O In t v h e e s r t m re e a n l ts e s i t n at e u n o c w o n n e so d lidated subsidiaries and associated companies 4 5 , , 2 6 5 7 8 5 n.a. 2 5, , 2 4 2 6 5 7 1, 4 4 1 2 4 5 3 3 6 6 6 74 Customers' liability on acceptances outstanding 15,053 I 14,849 198 7 75 Net due from own foreign offices. Edge Act and agreement subsidiaries, and IBFs n.a. n.a. 43,542 n.a. n.a. 76 Intangible assets 65,996 50,655 n.a. 14,555 785 77 All other assets 166,084 43,542 124,844 n.a. 36.460 4.780 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Commercial Banks A65 4.20 DOMESTIC AND FOREIGN OFFICES Insured Commercial Bank Assets and Liabilities—Continued Consolidated Report of Condition, March 31. 1998 Millions of dollars except as noted Banks with foreign offices1 Bank o s ff i w ce i s th o d n o l m y' estic Domestic total Total Over 100 Under 100 78 Total liabilities, limited-life preferred stock, and equity capital 5,075,292 3,400,105 1,393,401 281,787 79 Total liabilities 4,648,087 3,934,115 3,138,239 2,424,267 1,258,330 251,518 80 Total deposits 3,444,766 2,916,345 2,157,505 1,629,084 1.044,911 242.350 8811 InIddiviidiudalls, partnerships, and corporations 3,069,809 2,716,452 1.883,404 1,530,046 967,240 219,165 82 U.S. government n.a. 4,743 3,846 736 161 83 States and political subdivisions in the United States n.a. 125.692 n.a. 49,263 57,070 19,359 84 Commercial banks in the United States 65.476 35,827 55,087 25,438 9,548 841 85 Other depository institutions in the United States 8,286 n.a. 3,935 3,153 1.198 86 Foreign banks, governments, and official institutions 145,024 9,455 144,581 9,011 435 87 Banks n.a. n.a. 100,984 7,795 406 n.a. 88 Governments and official institutions n.a. n.a. 43.597 1,217 30 n.a. 89 Certified and official checks 16,626 15,890 8,280 7,544 6,729 1,617 90 Total transaction accounts 727,528 409,113 249,011 69.404 91 Individuals, partnerships, and corporations 630,344 351,058 218,656 60,630 92 U.S. government 1,757 1,240 433 84 93 States and political subdivisions in the United States 39,304 16.535 16,106 6,663 94 Commercial banks in the United States 27,935 21,674 5,948 312 95 Other depository institutions in the United States 3,785 2,880 812 93 96 Foreign banks, governments, and official institutions 8,512 8.180 327 5 97 Banks n.a. 7,462 322 n.a. 98 Governments and official institutions n.a. 718 5 n.a. 99 Certified and official checks 15,890 7,544 6,729 1.617 100 Demand deposits (included in total transaction accounts) . 563,361 360.484 167,388 35,488 101 Individuals, partnerships, and corporations 489.692 309,475 148,129 32,087 102 U.S. government 1.639 1,187 380 72 103 States and political subdivisions in the United States.. . 15.947 9,549 5,089 1,308 104 Commercial banks in the United States 27,920 21,674 5.935 311 105 Other depository institutions in the United States 3,765 2,877 799 90 106 Foreign banks, governments, and official institutions. .. 8,508 8,178 326 107 Banks n.a. 7,462 322 108 Governments and official institutions n.a. 716 5 109 Certified and official checks 15,890 7,544 6,729 1,617 110 Total nontransaction accounts 2,188.817 1,219,971 795,900 172,946 111 Individuals, partnerships, and corporations 2,086,107 1,178,988 748.584 158.536 112 U.S. government 2,986 2,606 303 78 113 States and political subdivisions in the United States 86,388 32,728 40,964 12.696 114 Commercial banks in the United States 7,892 3,763 3,600 529 115 Other depository institutions in the United States 4,500 1,055 2,341 1.104 116 Foreign banks, governments, and official institutions 943 831 109 3 117 Banks n.a. 333 84 n.a. 118 Governments and official institutions n.a. 498 25 n.a. 119 Federal funds purchased and securities sold under agreements to repurchase 421,601 376.981 348.138 303.518 71,110 2,353 120 Demand notes issued to the U.S. Treasury 19,935 19,935 17,283 17.283 2,558 93 121 Trading liabilities 206,401 n.a. 206,320 n a. 80 I 122 Other borrowed money 343,975 302.935 230,602 189,561 109,376 3,997 123 Banks' liability on acceptances executed and outstanding 15,224 11,568 15.019 11,363 198 7 124 Notes and debentures subordinated to deposits 65,968 n.a. 60,881 n.a. 5,069 18 125 Net due to own foreign offices, Edge Act and agreement subsidiaries, and IBFs n.a. 86,896 n.a. 86,896 n.a. n.a. 126 All other liabilities 130.219 n.a. 102.491 n.a. 25,028 2,699 127 Total equity capital 427,206 261,866 135,071 30,268 MEMO 128 Trading assets at large banks4 304.655 94,252 303,604 93.201 1,051 129 U.S. Treasury securities (domestic offices) t 17,561 t 17,149 412 130 U.S. government agency corporation obligations 2,572 2,303 268 131 Securities issued by states and political subdivisions in the United States 828 765 63 132 Mortgage-backed securities 7,310 n.a. 7.169 141 133 Other debt securities 8,781 8,622 159 134 Other trading assets 13,020 13,017 3 135 Trading assets in foreign banks 210.403 0 210,403 0 0 136 Revaluation gains on interest rate, foreign exchange rate, and other commodity and equity contracts 44.180 44,180 44,175 44,175 5 137 Total individual retirement (IRA) and Keogh plan accounts 151,435 78,494 59,898 13,043 138 Total brokered deposits 56,486 34,015 20,987 1,485 139 Fully insured brokered deposits 46,307 25,628 19,269 1.411 140 Issued in denominations of less than $100.000 9,740 4.845 3,776 1,118 141 Issued in denominations of $100,000, or in denominations greater than $100,000 a participated out by the broker in shares of $100,000 or less 36,567 20.783 15,492 293 142 Money market deposit accounts (MMDAs) 684.572 471,180 188,390 25.003 143 Other savings deposits (excluding MMDAs) 361,266 196,822 140,297 24,147 144 Total time deposits of less than $100,000 744,055 325,590 326,095 92,370 145 Total time deposits of $100,000 or more 398,924 226,380 141,118 31.426 146 All negotiable order of withdrawal (NOW) accounts 161,426 48,272 80,060 33,094 147 Number of banks 9,007 9,007 163 2.961 5,883 NOTE. Table 4.20 has been revised; it now includes data that was previously reported in 2. "Over 100" refers to banks whose assets, on June 30 of the preceding calendar year, table 4.22, which has been discontinued. were $100 million or more. (These banks file the FFIEC 032 or FFIEC 033 Call Report.) The notation "n.a." indicates the lesser detail available from banks that don't have foreign "Under 100" refers to banks whose assets, on June 30 of the preceding calendar year, were offices, the inapplicability of certain items to banks that have only domestic offices or the less than $100 million. (These banks file the FFIEC 034 Call Report.) absence of detail on a fully consolidated basis for banks that have foreign offices. 3. Because the domestic portion of allowances for loan and lease losses and allocated 1. All transactions between domestic and foreign offices of a bank are reported in "net due transfer risk reserves are not reported for banks with foreign offices, the components of total from" and "net due to" lines. All other lines represent transactions with parties other than the assets (domestic) do not sum to the actual total (domestic). domestic and foreign offices of each bank. Because these intraoffice transactions are nullified 4. Components of "Trading assets at large banks" are reported only by banks with either by consolidation, total assets and total liabilities for the entire bank may not equal the sum of total assets of $1 billion or more or with $2 billion or more in the par/notional amount of their assets and liabilities respectively of the domestic and foreign offices. otF-balance-sheet derivative contracts Foreign offices include branches in foreign countries, Puerto Rico, and U.S. territories and possessions; subsidiaries in foreign countries; all offices of Edge Act and agreement corporations wherever located; and IBFs. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A66 Special Tables • August 1998 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Financial Markets A67 4.23 TERMS OF LENDING AT COMMERCIAL BANKS Survey of Loans Made, May 4-8, 1998 A. Commercial and industrial loans made by all commercial banks1 W l e a o f e v a f i e e n g c r h t a r i t g v a e e t e d e - A o ( f m m l d o o il o a u li l n n o l s a t n r o s s f ) ( A th v o d e u r o a s s l i g a l z a e n e r d s l ) s o a o n f W m av e a i t e g u r h r a i t g t e y e d- Secured by Amount of loan p s S r e u ( p p b a e je y r c c m t e e n t n o t) t Made under ba c s o e M r m a p o t m e r s i 4 o t ci n ng (percent) Days collateral penalty commitment LOAN RISK5 1 AH commercial and industrial loans 6.80 134,664 805 269 36.6 117 31.0 73.5 Foreign 2 Minimal risk 6.13 7,025 1,295 109 49.3 4.0 67.0 91.6 Foreign 3 Low risk 6.26 30,549 1,692 158 24.4 7.2 50.9 81.5 Foreign 4 Moderate risk 6.86 49,989 655 349 34.1 16.3 21.9 77.0 Foreign 5 Other 7.08 31,379 852 237 42.5 11.0 31.6 66.3 Fed funds By maturity/repricing intervalb 6 Zero interval 8.46 19,319 268 697 56.3 13.6 8.4 70.4 Prime 7 Minimal risk 7.89 331 251 517 14.7 23.4 42.3 96.7 Prime 8 Low risk 7.34 2.438 ill 485 34.4 14.5 9.6 88.1 Other 9 Moderate risk 8.51 7,286 199 836 50.0 20.6 10.5 90.5 Prime 10 Other 9.16 3,696 173 684 59.0 14.1 10.3 97.1 Prime 11 Daily 6.19 60,675 2,293 83 34.5 10.3 37.3 63.3 Fed funds 12 Minimal risk 5.88 4,191 6,243 53 73.0 1.2 79.6 92.5 Foreign 13 Low risk 6.03 17,948 7,524 49 20.8 5.9 58.5 77.2 Foreign 14 Moderate risk 6.27 19,028 1,598 132 37.4 18.9 14.1 60.5 Fed funds 15 Other 6.28 14,086 2,716 73 39.7 6.5 39.9 36.7 Fed funds 16 2 to 30 days ... 6.68 26,180 1,212 154 24.3 12.6 29.0 83.0 Foreign 17 Minimal risk 6.27 1,313 1,910 83 11.1 7.9 69.4 98.7 Domestic 18 Low risk .. 6.20 4.951 2,686 210 16.3 5.4 48.2 87.4 Foreign 19 Moderate risk 6.50 11.154 1,753 143 15.9 17.1 26.5 80.6 Domestic 20 Other 7.32 5,578 1,384 165 42.0 8.2 22.7 86.6 Foreign 21 31 to 365 days 6.96 24,877 763 381 35.4 11.4 37 1 91.0 Foreign 22 Minimal risk 6.20 1,108 547 135 12.5 3.8 28.3 80.8 Foreign 23 Low risk . . . 6.50 4,496 679 213 37.4 53.4 89.6 Foreign 24 Moderate risk 6.99 10,849 736 500 32.7 36.4 93.8 Foreign 25 Other 7.23 7,381 1,800 310 37.8 33.7 91.4 Foreign 26 More than 365 days.. . 7.97 2,923 245 48 62.3 8.6 -26.7 66.2 Other 27 Minimal risk 7.77 44 109 93 84.5 5.4 .7 22.4 Other 28 Low risk 7.53 591 484 44 63.6 4.1 1.2 70.0 Other 29 Moderate risk 7.78 1,495 269 42 57.1 5.5 41.4 69.3 Other 30 Other 8.63 474 287 55 61.9 19.4 30.5 66.2 Prime Weighted- Weighted- average average risk maturity/ rating5 repricing interval SIZE OF LOAN (thousands of dollars) 31 1-99 9.68 2,779 3.2 149 84.5 32.6 4.9 78.5 Prime 32 100-999 8.65 11.233 3.1 119 69.0 23.0 14.0 86.5 Prime 33 1,000-9,999 ... 7.25 34,497 3.1 74 38.1 14.2 29.2 83.2 Foreign 34 10,000 or more. 6.29 86.155 2.9 24 30.3 8.5 34.9 67.7 Fed funds Average size (thousands of dollars) BASE RATE OF LOAN4 35 Prime7 8.96 21,163 3.2 84 62.9 20.7 9.2 77.8 195 36 Fed funds 6.03 36,186 3,4 10 30.8 6.6 26.5 39.8 9,367 37 Other domestic. 6.17 16,886 2.9 16 15.3 34.7 31.0 77.7 3,277 38 Foreign 6.59 40,550 2.7 47 42.5 4.8 48.6 94.6 3,917 39 Other 6.89 19,880 2.8 102 25.4 5.7 26.1 83.5 506 Footnotes appear at the end of the table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A68 Special Tables • August 1998 4.23 TERMS OF LENDING AT COMMERCIAL BANKS Survey of Loans Made, May 4-8, 1998 B. Commercial and industrial loans made by domestic banks1 Weighted- Amount of loans (percent) W e a f e v f i e e g c r h t a i t g v e e e d- Am lo o a u n n s t of Aver s a i g z e e loan m av at e u r r a i g ty e co M m o m s o t n ( l p o e a r n c e r n a t t ) e 2 o ( f m d il o l l i l o a n r s s) (tho d u o s l a la n r d s s ) of Days S c e o c l u la re te d r a b l y p S re u p p b e a n je y a c m l t t y e t n o t c M om ad m e i u tm nd e e n r t base r a p te ri 4 cing LOAN RISK' 1 All commercial and industrial loans 7.23 70,741 453 419 37.1 9.9 73.3 Prime 2 Minimal risk 6.41 2,686 524 265 12.5 38.8 80.1 Other 3 Low risk 6.58 11,280 710 331 24.1 15.1 17.7 80.9 Other 4 Moderate risk 7.14 29,986 417 492 36.1 17.1 8.4 76.0 Prime 5 Other 7.81 12.737 386 356 47.2 9.1 8.2 87.6 Prime By maturity/repricing inter\alb 6 Zero interval 8.41 18,186 260 693 57.1 12.2 8.4 68.6 Prime 7 Minimal risk 7.85 318 251 523 15.3 21.5 44.2 96.5 Prime 8 Low risk 7.29 2,349 424 471 32.6 13.5 9.0 88.3 Other 9 Moderate risk 8.44 6,680 187 825 51.3 18.6 11.1 89.7 Prime 10 Other 9.13 3,272 161 693 60.8 13.0 10.1 96.8 Prime 11 Daily 6.57 21.932 922 185 28.4 21.5 4.8 60.8 Fed funds 12 Minimal risk 6.11 1.103 2,055 197 5.0 4.5 25.5 76.3 Domestic 13 Low risk 6.26 3.642 2,344 204 20.2 24.7 10.9 66.7 Domestic 14 Moderate risk 6.55 9,811 898 231 37.4 27.2 3.0 51.9 Domestic 15 Other 7.25 2.736 605 158 40.2 11.6 .6 64.8 Prime 16 2 to 30 days 6.72 15,504 795 165 22.3 10.6 13.8 86.0 Other 17 Minimal risk 6.18 660 1,091 152 9.8 15.3 60.7 98.0 Domestic 18 Low risk 6.09 3,038 2,202 181 10.6 4.8 35.4 94.0 Domestic 19 Moderate risk 6.50 6,158 1,133 179 16.0 11.0 6.7 85.9 Domestic 20 Other 7.40 2,998 874 152 43.6 5.0 6.8 93.4 Other 21 31 to 365 days 7.08 11,926 412 491 33.9 6.3 13.5 88.4 Foreign 22 Minimal risk 6.16 529 269 189 19.3 3.3 41.9 59.8 Foreign 23 Low risk 6.86 1,543 256 299 33.0 13.8 19.0 81.2 Foreign 24 Moderate risk 7.11 5,803 440 665 30.5 5.9 9.9 91.9 Foreign 25 Other 7.17 3.195 1,171 249 38.0 4.5 13.2 95.0 Foreign Months 26 More than 365 days 7.99 2,690 230 47 66.3 7.9 21.8 63.3 Other 27 Minimal risk 7.77 44 109 93 84.5 5.4 .7 22.4 Other 28 Low risk 7.53 590 63.7 4.1 1.0 69.9 Other 29 Moderate risk 7.84 1,364 248 41 62.2 5.6 36.2 66.3 Other 30 Other 8.72 372 251 52 69.8 15.7 20.5 57.0 Prime Weighted- Weighted- average average risk maturity/ rating5 repricing interval Days SIZE OF LOAN (thousands of dollars) 31 1-99 9.71 2,713 3.2 150 85.4 32.7 4.4 78.2 Prime 32 100-999 8.81 9,621 3.1 128 72.9 22.5 8.9 85.4 Prime 33 1,000-9,999 .. . 7.47 20,478 3.0 91 41.6 11.6 11.6 79.9 Prime 34 10,000 or more. 6.52 37,929 2.9 37 22.1 11.4 9.6 66.4 Domestic Average size (thousands of dollars) BASE RATE OF LOAN4 35 Prime7 8.91 19,384 3.2 85 64.0 17.3 8.3 76.0 184 36 Fed funds 6.07 10,119 2.8 20 26.5 22.3 4.7 46.8 5,364 37 Other domestic 6.08 11,959 2.8 15 8.0 20.1 14.0 69.0 2,713 38 Foreign 6.86 13,651 3.0 62 38.5 5.5 15.5 86.6 2,588 39 Other 7.08 15,628 2.9 129 31.6 7.1 6.7 79.0 398 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Financial Markets A69 4.23 TERMS OF LENDING AT COMMERCIAL BANKS Survey of Loans Made, May 4-8. 1998 C. Commercial and industrial loons made by large domestic banks1 Weighted- Amount of Average loan Weighted- Amount of loans (percent) Most average loans size maturity common item effective (millions (thousands of Subject to base pricing ( l p o e a r n c e r n a t t ) e 2 of dollars) dollars) Days S c e o c l u la re te d r a b l y Callable pre p p e a n y a m lty ent c M om ad m e i u tm nd e e n r t rate4 LOAN RISK5 1 All commercial and industrial loans .... 7.04 60,441 952 192 32.1 12.7 9.6 71.9 Prime 2 Minimal risk 6.20 2,263 3.042 216 4.4 3.0 454 81.4 Domestic 3 Low risk 6.32 9.035 2.324 313 19.2 14.7 21.2 80.6 Other 4 Moderate risk 6.91 26.340 969 463 31.1 15.8 7.6 75.8 Domestic 5 Other 7.69 10.624 586 315 38.6 8.2 5.6 87.1 Prime By maturity/repricing interval 6 Zero interval 8.24 14.619 536 714 52.7 8.1 7.9 64.6 Prime 7 Minima! risk 7.72 224 816 702 13.1 3.1 63.8 99.7 Prime 8 Low risk 6.99 1.719 1,057 447 25.3 9.5 11.0 91.7 Other 9 Moderate risk 8.14 5.004 387 868 42.9 13.4 11.5 91.1 Prime 10 Other 8.98 2,497 242 742 50.7 12.6 6.5 97.6 Prime 11 Daily 6.50 20.220 1,135 184 27 7 22.2 5.0 58.7 Fed funds 12 Minimal risk 6.06 1,010 4,032 182 1.4 1.0 27.8 76.3 Domestic 13 Low risk 6.24 3,217 3,150 227 22.0 27.7 12.3 62.8 Domestic 14 Moderate risk 6.51 9,370 1,059 231 37.3 27.3 2.7 51.7 Domestic 15 Other 7.24 2.566 661 161 36.8 11.5 .3 62.8 Prim 16 2 to 30 days 6.61 14.020 1.244 159 18.5 10.3 13.2 85.2 Oihe 17 Minimal risk 6.03 566 7,564 130 1.9 8.4 69.4 100.0 Donieslie 18 Low risk 6.02 2.769 4,984 191 8.1 3.8 37.4 93.8 Domeslie 19 Moderate risk 6.41 5.836 3,137 174 13.2 10.6 5.0 85.9 Domeslie 20 Other 7.33 2.580 1.388 127 35.9 4.0 4.1 93.0 Othe 21 31 «i 365 days 6.88 9.718 2,375 501 26.0 4.6 12.3 90.4 Foreign 22 Minimal risk 5.97 458 5.091 195 9.3 * 47.2 61.0 Foreign 23 Low risk 6.20 963 2.293 341 21.7 12.8 29.0 80.3 Foreign 24 Moderate risk 6.89 5,031 2.558 678 24.2 4.1 7.9 94 6 Foreign 25 Other 7.21 2,706 2.148 176 29.9 3.6 9.0 95.1 Foreign Months 26 More than 365 days 7.39 1,667 1.018 38 50.9 .7 33.3 72.2 Other 27 Minimal risk * * * * * * * * 28 Low risk 6.57 328 2.520 44 44.2 * 1,2 83.2 Other 29 Moderate risk 7.34 1.002 1.390 32 50.0 2 47,1 70.2 Foreign 30 Othei 8.51 220 495 49 49.3 4.4 32.3 78.7 Prime Weighted- Weighted- average average risk maturity/ rating5 repricing interval'' Days SIZE OF LOAN {thousands of dollars) 31 1-99 9.42 1.112 3.4 44 84.0 41.2 5.2 91.8 Prime 32 100-999 8.64 5.95Z 3 3 53 67.2 20.5 8.2 90.3 Prime .1.1 1,000-9.999 7.44 17,252 1.0 68 38.3 10.1 10.3 78.0 Prime 34 10.000 or more 6.51 36.125 2.9 37 21.8 11.7 9.7 65.2 Domestic Average size (thousands of dollars) BASE RATE OF LOAN4 35 Prime' 8.73 14.539 3.2 63 59.0 13.1 8.0 74.5 326 36 Fed funds 6.05 9,612 2.9 18 26.7 22.7 1.7 46.2 7,980 37 Other domestic 6.06 11,789 2.8 12 7.0 20.1 14.2 68.9 5,616 38 Foreign 6.87 11,170 3.1 62 36.2 5.7 14.0 84.3 2,969 39 Other 6.91 13,330 2.9 71 25.5 5.4 7.3 79.7 1,126 Footnotes appear at the end of the table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A70 Special Tables • August 1998 4.23 TERMS OF LENDING AT COMMERCIAL BANKS Survey of Loans Made, May 4-8, 1998 D. Commercial and industrial loans made by small domestic banks' Weighted- Amount of loans (percent) W a e v i e g r h a t g e e d- A lo a ,.l n n( s ..[ Avera si g z e e loan maturity' co M m o m s o t n Item ( l e p o f e a fe r n c c e t r i n v a t t e ) e 2 o ( f m d il o l l i l o a n r s s) (tho d u o s l a la n r d s s ) of Days S c e o c l u la re te d r a b l y Callable p S re u p p b e a n je y a c m l t t y e t n o t c M om ad m e it u m nd en er t base r a p te ri 4 cing LOAN RISKS 1 All commercial and industrial loans .... 8.34 10,300 111 579 66.3 20.3 11.2 82.0 Prime 2 Minimal risk 7.52 423 97 561 55.5 39.9 4.0 73 1 Other 3 Low risk 7.60 2 245 187 402 43.9 16.8 3.8 82.3 Foreign 4 Moderate risk 8.82 3.647 82 710 71.9 26.6 14.5 77.0 Prime 5 Other 8.39 2.112 142 575 90.6 13.7 21 4 90.0 Prime By maturitv/repricing inten-alb 6 Zero interval 9.12 3.566 83 599 75.4 29.0 10.1 85.3 Prime 7 Minimal risk S.14 94 95 158 20.5 59.7 3.6 89.1 Prime 8 Low risk 8.09 630 161 538 52.5 24.5 3.6 79.1 Prime 9 Moderate risk 9.33 1,676 73 691 76.2 34.2 10.0 85.5 Prime 10 Other 9.62 775 77 537 93.0 14.3 21.2 94.1 Prime 11 Daily 7.37 1.712 286 192 36.3 13.3 3.0 85.0 Prime 12 Minimal risk 6.71 93 324 362 43.9 42.5 .2 76.5 Foreign 13 Low risk 6.42 426 799 51 6.1 2.1 .1 96.3 Foreign 14 Moderate risk 7.55 440 212 235 40.7 24.6 9.5 55.9 Fed funds 15 Other 7.36 170 267 122 90.3 13.8 5.3 94.7 Foreign 16 2 to 30 days 7.76 1,484 181 222 58.0 13.6 19.4 94.1 Foreign 17 Minimal risk 7.09 94 178 332 57.0 56.8 8.2 85.8 Other 18 Low risk 6.87 269 326 78 35.7 15.2 14.5 96.1 Foreign 19 Moderate risk 8.22 322 90 284 65.5 18.3 37.0 87.0 Foreign 20 Other 7.83 418 266 302 90.9 11.5 23.4 96.1 Foreign 21 31 to 365 days 7.97 2,209 89 448 68.7 13.9 19.0 80.0 Foreign 22 Minimal risk 7.38 71 38 149 83.6 24.4 8.1 51.6 Other 23 Low risk 7.96 580 104 229 51.8 15.4 1.7 82.7 Foreign 24 Moderate risk 8.55 772 6S 575 71.2 n.o 23.1 74.5 Foreign 25 Other 6.94 489 333 654 83.0 9.6 36.0 94 7 Foreign Months 26 More than 365 days 8.97 1,023 102 64 91.4 19.7 3.0 48 8 Other 27 Minimal risk 7.81 42 106 97 84.1 5.8 * 18.5 Other 28 Low risk 8.72 262 243 44 88.2 9.3 .8 53.1 Other 29 Moderate risk 9.20 362 76 67 95.8 20.4 6.1 55.5 Other 30 Other 9.03 153 147 56 99.2 31.8 3.7 25.8 Prime Weighted- Weighted- average average risk maturity/ rating5 repricing interval6 Days SIZK OF LOAN (thousands of dollars) 31 1-99 9.92 1,601 3.0 222 86.3 26.8 3.8 68.7 Prime 32 100-999 9.07 3,669 2.9 250 82.1 25.6 10.0 77.3 Prime 33 1,000-9,999 7.65 3,225 3.0 219 59.1 19.6 18.2 90.1 Foreign 14 10,000 or more 6.71 1,804 2.8 36 29.3 4.8 7.6 88.8 Foreign Average size (thousands of dollars) BASE RATE OF LOAN4 35 Prime7 944 4,845 3.1 154 79.1 30.0 8.9 80.5 80 36 Fed funds 6.37 507 2.5 65 21.6 15.8 19.7 57.8 743 37 Other domestic 7.97 169 2.3 225 79.7 23.9 .4 76.9 73 38 Foreign 6 84 2,481 3.0 62 49.0 4.9 21.8 96.8 1.640 39 Other 8.12 2^298 2.7 481 66.9 17.1 3.3 74.9 ' 84 Footnotes appear at the end of the table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Financial Markets A 71 4.23 TERMS OF LENDING AT COMMERCIAL BANKS Survey of Loans Made, May 4-8. 1998 E. Commercial and industrial loans made by U.S. branches and agencies of foreign banks' Weighted- Amount of Weighted- Amount of loans (percent) Most Item ( l e p a o f % e a f r e n e c c r e t a r i n g a v t t e e ) e 5 o ( f m l d o il o a l l i n l o a s n r s s) (tho d u o s s l i a l z a n e r d s s ) of ma D tu a r y i s ty S c e o c l u la re te d r a b l y Callable p S re u p p b e a n je y a c m l t t y e t n o t c M om ad m e i u tm nd e e n r t ba c s o e r m a p l m e ri J o ci n ng LOAN RISK5 1 All commercial and industrial loans .... 6.34 63,923 5.817 115 36.1 9.4 53.9 73.6 Foreign 2 Minimal risk 5.95 4,339 14,386 15 72.1 1.0 84.3 98.7 Foreign 3 Low risk 6.08 19,269 8,857 66 24.6 2.6 70.2 81.8 Foreign 4 Moderate risk 6.44 20.003 4,525 151 31.2 15.2 42.1 78.5 Fed funds 5 Other 6.57 18.642 4,917 160 39.2 12.2 47 4 51.8 Fed funds By malurity/reprU'ing inrcivitl0 6 Zero interval 9.29 1.133 530 827 42.4 35.5 8.8 98.5 Prime 7 Minimal risk t * * * * 8 Low risk 8.81 89 355 1137 82.0 40.4 24.6 83.5 Prime 9 Moderate risk 9.29 606 691 1156 35.4 43.2 4.1 99.7 Prime 10 Other 9 40 424 431 604 45.1 22.5 12 4 99.8 Prime 11 Daily 5.98 38.743 14,558 33 3S.0 4.3 54.6 64.7 Fed funds 12 Minimal risk 5.80 3.089 22,913 1 97.2 *. 98.9 98.3 Foreign 13 Low risk 5.97 14J06 17,205 16 21.0 1.1 70.7 79.9 Foreign 14 Moderate risk 5.98 9.218 9,396 47 37.4 10.0 25.8 69 6 Fed funds 15 Other 6.05 11,351 17.043 54 39.5 5.2 49.3 29.9 Fed funds 16 2 to 30 days 6.62 10,676 5,050 138 27.1 15.5 50.9 78.6 Foreign 17 Minimal risk 635 653 7.891 16 12.4 4 78.1 99 5 Foreign 18 Low risk 6.37 1.912 4,129 258 25.3 6.4 68.6 77.0 Foreign 19 Moderate risk 6.49 4,996 5 37(1 98 15.7 24.6 50.8 74.0 Foreign 20 Other 7.22 2,581 4.287 181 40.1 11.8 40.9 73.7 Foreign 21 31 to 365 days 6.84 12.950 .3,573 281 36.7 16.0 58.6 93.4 Foreign 22 Minimal risk 6 25 578 9,631 85 6.3 4.3 15.9 100.0 Foreign 23 Low risk 6.31 2,953 4,873 167 39.7 6.3 70 6 94.0 Foreign 24 Moderate risk 6.85 5,0-17 3.234 313 35.4 12.1 665 95 9 Foreign 25 Other 7.27 4,186 3,054 357 37.5 29.8 490 88.6 Foreign Months 26 More than 365 davs 7.64 234 973 59 16.7 16.7 83.3 100 0 Foreign 27 Minimal risk * * • * 28 Low risk 29 Moderate risk 7 17 131 2,189 54 4.4 4.4 95.6 100.0 Foreign 30 Other 8.27 101 602 67 32.8 32.8 67.2 100.0 Prime Weighted- Weighled- average average risk maturity/ rating'1 repricing interval6 Days SIZE OF LOAN (thousands of dollars) 31 1-99 8.50 66 3.3 91 51.1 30.7 23.8 91.4 Prime 32 100-999 7.73 1,612 61 46.0 26 1 44.1 93.6 33 1,000-9.999 6.9.3 14,019 1.2 48 33.0 17.9 54.4 87.8 Foreign 34 10.000 or more 6.11 48,226 5.9 14 36.6 6.4 54.1 68.8 Fed funds Average size (thousands of dollars) BASE RATE OF LOAN4 35 Prime' 9.57 1.779 3.3 71 50.4 56.2 19.3 97.9 56K 36 Fed funds 6.01 26.067 3 5 5 32.5 1.3 33.9 37.0 13,187 37 Other domestic 6.38 4,927 3.1 19 32.9 70.2 72.2 99.0 6,616 38 Foreign 6 46 26,899 25 39 44 5 4.5 65 4 98.7 5,297 39 Other 6.15 4,252 2.6 7 2.6 .4 97.5 100.0 75.847 NOTE. This table has been revised to reflect several changes in the E.2 statistical release, 5. A complete description of these risk categories is available trom the Banking and the "Survey of Terms of Business Lending." This survey collects data on gross loan Money Market Statistics Section, Mail Stop 81, Board of Governors of the Federal Reserve extensions made during the first full business week in the mid-month of each quarter. The System, Washington, DC 20551. The category "Moderate risk" includes the average loan, authorized panel size for the survey is 348 domestically chartered commercial banks and fifty under average economic conditions, at the typical lender. The category "Other" includes loans U.S. branches and agencies of foreign banks. The sample data are used to estimate the terms rated "acceptable" as well as special mention or classified loans. The weighted-average risk of loans extended during that week ai all domestic commercial banks and all U.S. branches ratings published for loans in rows 31-39 are calculated by assigning a value of "I1" to and agencies of foreign banks. Note thai the terms on loans extended during the survey week minimal risk loans; "2" to low risk loans; "3" to moderate risk loans, "4" to acceptable risk may differ from those extended during other weeks of the quarter. The estimates reported here loans; and "5" to special mention and classified loans. These values are weighted by loan are not intended io measure the average terms on all business loans in bank portfolios. amount and exclude loans wuh no risk rating. Some of the loans in lines 1,6, II. 16. 21, 2fi, 1. As of December 31, 1996, assets of most of the large banks were at least $7.0 billion. and 31-39 are not rated for risk. Median total assels for all insured banks were roughly $62 million. Assets at all U.S. branches 6. The maturity/repricing interval measures the period from the date the loan is made until n and agencies averaged 1.3 billion. first may reprice or it matures. For floating-rate loans that are subject to repricing at any 2. Effective (compounded) annual interest rates are calculated from the stated rate and time—such as many prime-based loans—the maturity/repricing interval is zero. For floating-rate other terms of ihe loans and weighted by loan amount. The standard error of the loan rate for loans thai ha\e a scheduled repneing interval, the maturity/repricing interval measures the number ail commercial and industrial loans in the current survey (line I. column 1) is 0.11 percentage of d;iys between the date the loan is made and the dale on which it is next scheduled to reprice For points. The chances are about two out of three that the average rate shown would differ by less loans having rates that remain fixed until the loan matures (fixed-rate loans), the matunty/repricing than this amount from the average rate that would be found by a complete survey of the interval measures the number of days between the date the loan is made and the date on which it universe of all banks. matures. Loans that reprice daily mature or reprice on the business day after they are made. Owing 3. Average maturities are weighted by loan amount and exclude loans with no stated to weekends and holidays, such loans may have maturity/repricing intervals in excess of one day; maturities. such loans are not included in the "2 to 30 day" category. Digitized fo4r. TFhRe AmoSstE cRom mon base pricing rate is that used to price the largest dollar volume of 7. For the current survey, the average reported prime rate, weighted by the amount of loans. Base pricing rales include the prime rate (sometimes referred io as a bank's "base" or loans priced relative to a prime base rate, was 8.53 percent for all banks; 8.50 percenl for http://fra•s"reefre.rsentcleo"u riastef)e; dth.eo fregde/r al funds rate, domestic money market rate.i other than the prime large domestic banks, tf.64 percent for small domestic banks; and 8.50 percent for US Federal rRatee asned rtvhee f eBdearanl kfu nodfs Sratte.; Lfooreuigins money market rates; and other base rates not included branches and agencies of foreign banks.

A72 Special Tables D August 1998 4.30 ASSETS AND LIABILITIES of U.S. Branches and Agencies of Foreign Banks, March 31, 19981 Millions of dollars except as noted Allstates2 NewYork Califomta Ilinois Item inc I T B l o u F t d a s i l n 3 g o IB nl F y s 3 inc T I l B o u t F d a s i l ng I o B n F ly s inc T I l B o u t F d a s i l ng I o B n F ly s inc T I l B o u t F d a s i l ng I o B n F ly s 1Total assets 918,559 249,561 727,489 217.860 49,897 9,297 62,149 7,522 2 Claims on nonrelated parties 761.544 112.797 595,970 96,644 46919 4,656 62,083 2,490 3Cash and balances due from depository institutions 87,968 54,835 83.149 52,445 1,249 652 1,644 1,005 4 Cash items in process of collection and unposted debits 3.777 0 3.638 0 19 0 32 0 5 Currency and coin (U.S. and foreign) 19 n.a. 14 n.a. 1 n.a. 1 n.a. 6 Balances with depository institutions in United Slates 51,370 26.519 48.304 25,299 795 286 1,200 624 7 U.S. branches and agencies of other foreign banks (including IBFs) 46,519 25,674 44,158 24,457 577 286 916 624 8 Other depository institutions in United States (including IBFs).... 4,851 845 4.146 841 218 0 284 0 9 Balances with banks in foreign countries and with foreign central banks 32.050 28.316 30,551 27,146 403 366 398 381 10 Foreign branches of U.S. banks 840 744 '777 699 0 0 28 28 11 Banks in home country and home-country central banks 7.767 6,926 7,544 6,800 14 14 50 50 12 All other banks in foreign countries and foreign central banks . . . 23,443 20,646 22,229 19,647 389 352 320 302 13 Balances with Federal Reserve Banks 752 n.a. 641 n.a. 30 n.a. 13 n.a. 14Total securities and loans 478,718 49,227 346,189 36,131 43,452 J.765 46,381 1,237 15Total securities, book value 117,836 6,122 110,186 5.216 1 947 650 3,753 219 16 U.S. Treasury 26,205 n.a. 24,299 n.a. 95 n.a. 888 n.a. 17 Obligations of U.S. government agencies and corporations 42,769 n.a. 42.375 n.a. 189 n.a. 21 n.a. 18 Other bonds, notes, debentures, and corporate stock (including state and local securities) 48,863 6,122 43.513 5,216 1,663 650 2,844 219 19 Securities of foreign governmental units 16,752 3,151 16,056 2,865 412 165 214 107 20 All Other 32,110 2,971 27.457 2,351 1,251 485 2,630 112 21Federal funds sold and securities purchased under agreements to resell 64,698 6,339 54.660 5,957 737 134 7,552 200 22 U.S branches and agencies of other foreign banks 13,123 4.131 12.040 3,824 483 84 360 200 23 Commercial banks in United States 6,009 276 5.288 276 122 0 203 0 24 Other 45,567 1.932 37.331 1,857 132 50 6,989 0 25Total loans, gross 361,126 43.139 236.168 30.941 41.541 3.116 42,636 1.019 26 LESS: Unearned income on loans 245 34 165 26 36 1 8 1 27 EQUALS: Loans, net 360,882 43,105 236.003 30,914 41,505 3.115 42,628 1,018 Total htans, gross, by category 28Real estate loans 22,948 132 14 466 64 5,524 68 1,102 0 29 Loans to depository institutions 33,372 23,279 19,625 14,477 3.021 2,135 1,294 744 30 Commercial banks in United States (including IBFs) 7,863 4,439 4.894 2,806 1.978 1,182 339 197 U S branches and agencies of other foreign banks 6,390 4,125 3,766 2,526 1,816 1,182 201 167 32 Other commercial banks in United States L473 314 U28 280 163 0 138 30 33 Other depository institutions in United States (including IBFs) 38 0 14 0 0 0 0 0 34 Banks in foreign countries 25,472 18,840 14.717 11,671 1,043 954 955 547 35 Foreign branches of U.S. banks 739 507 598 389 1 1 0 0 36 Other banks in foreign countries 24,733 18,333 14,118 11,283 1,043 953 955 547 37Loans to other financial institutions 53.591 1,679 43,740 1,525 2,177 0 6,210 13 38Commercial and industrial loans 224,482 15,816 136,532 12,866 29.389 844 32.169 260 39 U S addressees (domicile) 184 842 73 107,616 72 26.889 29.755 0 40 Non-U.S. addressees (domicile) 39^640 15,743 28^916 12,793 2^500 84? 260 41 Acceptances of other banks 321 32 136 32 ]7 0 158 0 42 U S banks 23 o 13 0 0 0 0 43 Foreign banks 298 32 123 32 15 0 158 0 44 Loans to foreign governments and official institutions (including foreign central banks) 3,462 2,081 2,730 1,915 250 38 89 3 45 Loans for purchasing or carrying securities (secured and unsecured) . . . 16,392 24 15,024 23 437 0 73 0 46 All other loans 5,811 97 3,515 40 725 31 1.195 0 47 Lease financing receivables (net of unearned income) 747 0 400 0 0 0 346 0 48 U.S. addressees (domicile) 747 0 400 0 0 0 346 0 49 Non US addressees (domicile) 0 0 0 0 0 0 0 0 50 Trading assets 98,591 400 85,190 398 68 0 5 004 51 All other assets 31,568 1,996 26J83 1,713 1.414 104 L502 46 52 Customers" liabilities on acceptances outstanding 4,969 n.a. 3.825 n.a. 654 n.a. 263 n.a. 53 U.S. addressees (domicile) 3,058 n a. 2.407 n.a. 508 n.a 102 n.a. 54 Non-U S addressees (domicile) 1,911 1418 146 161 55 Other assets including other claims on nonrelated parties 1.996 22:958 1,713 760 104 1,239 46 56Net due from related depository institutions5 157^015 136.764 131.519 121,216 2.978 4,641 66 5.032 57 Net due from head office and other related depository institutions5. . . 157.015 n a. 131,519 n.a. 2.978 n.a. 66 n.a 58 Net due from establishing entity, head office, and other related depository institutions5 n.a. 136,764 n.a. 121,216 n.a. 4,641 n.a. 5,032 59Total liabilities4 918,559 249,561 727.489 217,860 49,897 9,297 62,149 7,522 60 Liabilities to nonrelated parties 772,311 224,361 659,004 197,862 19,406 8,575 40,548 7,030 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

U.S. Branches and Agencies A73 4.30 ASSETS AND LIABILITIES of U.S. Branches and Agencies of Foreign Banks, March 31, 1998'—Continued Millions of dollars except as noted All states2 New York California Illinois Item Total Total Total Total ex I c B u F d s i 3 ng o IB nl F y s exc I B u F d s ing I o B n F ly S exc IB lu F d s ing I o B n F ly s exc IB lu F d s ing I o B n F ly s 61 Total deposits and credit balances 295,863 169,034 252,146 154.677 6,397 1.298 14,713 4.749 62 Individuals, partnerships, and corporations 211,325 12,792 173,766 7.287 4,699 487 12,804 93 63 U.S. addressees (domicile) 195,307 185 164,937 20 2,480 0 12.271 65 64 Non-U.S. addressees (domicile) 16,018 12,607 8,829 7,168 2,219 4S7 533 28 65 Commercial banks in United States (including IBFs) 52,150 28,030 48,861 27,000 617 112 896 698 66 U.S. branches and agencies of other foreign banks 17,379 25,723 15,997 24,770 396 77 176 691 67 Other commercial banks in United States 34,772 2,307 32,864 2,230 221 35 720 7 68 Banks in foreign countries 12,153 83,812 10,827 80,065 842 107 24 1.935 69 Foreign branches of US banks 4,134 3,568 3,355 3.305 720 5 30 258 70 Other banks in foreign countries 8,019 80,243 7,472 76,759 122 102 94 1,677 71 Foreign governments and official institutions (including foreign central banks) 6,957 44,253 5,542 40,188 216 582 841 2,022 72 All other deposils and credit balances 13,083 147 12,986 136 14 10 45 1 73 Certified and official checks 194 j 164 1 10 , 2 74 Transaction accounts and credit balances (excluding IBFs) 9,624 7,614 406 342 75 Individuals, partnerships, and corporations 7,763 6,198 377 334 76 US addressees (domicile) 5 537 4,912 191 3W 77 Non-US, addressees (domicile) 2,226 1,286 186 2 78 Commercial banks in United States (including IBFs) 77 72 1 0 79 U.S. branches and agencies of other foreign banks 11 9 0 0 80 Other commercial banks in United States 66 64 I 0 81 Banks in foreign countries 964 636 14 2 82 Foreign branches of U S banks 9 5 0 0 83 Other banks in foreign countries 955 631 14 2 84 Foreign governments and official institutions (including foreign central banks) 435 369 1 2 85 All other deposits and credit balances 191 174 3 0 86 Certified and official checks 194 164 10 2 87 Demand deposits (included in transaction accounts and credit balances) 8.977 7,264 288 340 88 Individuals, partnerships, and corporations 7.230 5,949 262 332 89 U.S. addressees (domicile) 5.329 4.737 173 330 90 Non-U S addressees (domicile) 1.901 213 89 2 91 Commercial banks in United States (including IBFs) 62 '~58 0 0 92 U.S. branches and agencies of other foreign banks 6 n.a. 4 n.a. 0 n.a. 0 n.a. 93 Other commercial banks in United States 57 54 0 0 94 Banks in foreign countries 911 585 14 2 95 Foreign branches of U S banks 5 o o 96 Other banks in foreign countries 902 579 14 2 97 Foreign governments and official institutions (including foreign central banks) 425 365 1 2 98 All other deposits and credit balances 154 143 1 0 99 Certified and official checks 194 164 10 100 Nontransaction accounts (including MMDAs, excluding IBFs) 286,238 244,532 5,991 14,371 101 Individuals, partnerships, and corporations 203,562 167,568 4.322 12,470 102 U.S. addressees (domicile) ] 89,770 160,025 2,289 11,939 103 Non-U.S. addressees (domicile) 13,792 7,543 2,033 531 104 Commercial banks in United States (including IBFs) 52,073 48,789 616 895 105 U.S. branches and agencies of other foreign banks 17,368 15,989 396 176 106 Other commercial banks in United States 34,705 32,801 220 719 107 Banks in foreign countries 11,189 10,191 828 108 Foreign branches of U.S. banks 4,125 3,350 720 30 109 Other banks in foreign countries 7,064 6.841 108 92 110 Foreign governments and official institutions (including foreign central banks) 6,522 5,173 215 839 Ill All other deposits and credit balances 12,892 1 12,812 1 11 45 112 IBF deposit liabilities 169,034 154,677 1,298 4,749 113 Individuals, partnerships, and corporations 12.792 7,287 487 93 114 US. addressees (domicile) 185 120 0 65 115 Non-U.S. addressees (domicile) 12,607 7,168 487 28 116 Commercial banks in United States (including IBFs) 28,030 27,000 112 698 117 US. branches and agencies of other foreign banks 25,723 24,770 77 691 118 Other commercial banks in United Stales n.a. 2,307 n.a. 2,230 n.a 35 n.a. 7 119 Banks in foreign countries 83,812 80,065 107 1.935 120 Foreign branches of U.S. banks 3,568 3,305 5 258 121 Other banks in foreign countries 80,243 76,759 102 1,677 122 Foreign governments and official institutions (including foreign central banks) 44,253 40,188 582 2.022 123 All other deposils and credit balances 147 136 10 1 Footnotes appear at end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A74 Special Tables • August 1998 4.30 ASSETS AND LIABILITIES of U.S. Branches and Agencies of Foreign Banks, March 31, 1998'—Continued Millions of dollars except as noted All states in I c T B l o u F t d a s i l 1 ng o IB nl F y s 3 inc T I l B o u t F d a s i l ng I o B n F ly s inc T I l B o u t F d a s i l ng I o B n F ly s inc T I l B o u t F d a s i l ng I o B n F ly s 124 Federal funds purchased and securities sold under agreements to repurchase 130,489 19,985 118,151 18,401 1.646 408 7.568 936 125 U.S. branches and agencies of other foreign banks 13,150 4,397 10,379 3,996 618 242 1,178 160 126 Other commercial banks in United States 10,292 156 9,182 98 665 58 108 0 127 Other 107,047 15.432 98,590 14,307 363 109 6,281 776 128 Other borrowed money 87.371 32.875 62,813 22.508 8,934 6,798 7,813 1,298 129 Owed to nonrelaled commercial banks in United Slates (including IBFs) 13.975 6,796 9,544 3,882 3,057 2,148 131 130 Owed to U.S. offices of nonrelated U.S. banks 4,855 725 4,037 404 510 278 16 0 131 Owed to U.S. branches and agencies of nonrelated foreign banks 9,120 6.071 5,507 3,478 2,546 1,870 264 131 132 Owed to nonrelated banks in foreign countries 21.299 19.490 14.700 13.206 4,662 4,511 952 948 133 Owed to foreign branches of nonrelated U.S. banks 861 756 459 385 263 261 60 60 134 Owed to foreign offices of nonrelated foreign banks 20,438 18,735 14,241 12,821 4.399 4,250 892 888 135 Owed to others 52,097 6.588 38,569 5,420 1,216 138 6,581 219 136 All other liabilities 89,555 2,467 71.217 2.276 1.132 72 5,705 137 Branch or agency liability on acceptances executed and outstanding 5,248 n.a. 4,123 n.a. 685 n.a. 186 138 Trading liabilities 60,269 139 47,663 139 56 0 4,366 0 139 Other liabilities to nonrelated parties 24,038 2,329 19,431 2.138 390 72 1,152 48 140 Net due to related depository institutions 146,248 25,201 68,485 19,997 30.491 722 21,601 491 141 Net due to head office and other related depository institutions3 146,248 n.a. 68,485 n.a. 30.491 n.a. 21,601 n.a. 142 Net due to establishing entity, head office, and other related depository institutions 25,201 19,997 MEMO 143 Non-interesi-bearing balances with commercial banks in United States 995 50 144 Holding of own acceptances included in commercial and industrial loans 4,434 2,828 1,148 145 Commercial and industrial loans with remaining maturity of one year or less (excluding those in nonaccrual status) 128.292 74,292 16,779 23.007 146 Predetermined interest rates 80,157 46,423 7,751 19,356 147 Floating interest rates 48,135 27,869 9,028 3,651 148 Commercial and industrial loans with remaining maturity of more than one year (excluding those in nonaccrual status) 94,937 61,433 12,554 9,122 149 Predetermined interest rates 21.739 16,174 2,022 2,283 150 Floating interest rates 73.197 45,259 10,531 6,839 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

U.S. Branches and Agencies A75 4.30 ASSETS AND LIABILITIES of U.S. Branches and Agencies of Foreign Banks. March 31, 1998'—Continued Millions of dollars except as noted All states2 New York California Illinois Item ex I c T B l o u F t d a s i l 1 ng o IB nl F y s 3 ex T c IB l o u t F d a s i l ng I o B n F ly s ex T c I l B o u t F d a s i l ng I o B n F ly s ex T c IB l o u t F d a s i l ng I o B n F ly s 151 Components of total nontransaction accounts, included in total deposits and credit balances (excluding IBFs) 285,603 n.a. 246.812 n.a. 3,377 n.a. 14,427 n.a. 152 Time deposits of $100,000 or more 277,193 n.a. 239,654 n.a. 3,311 n.a. 14.047 n.a. 153 Time CDs in denominations of $100,000 or more with remaining maturity of more than 12 months 8.411 n.a. 7.159 n.a 67 n.a. 380 n.a. All states2 New York California Illinois inc T I l B o u t F d a i s l ng I o B n F ly s inc T I l B o u t F d a i s l ng I o B n F ly s inc T I l B o u t F d a i s l ng I o B n F ly s inc T I l B o u t F d a i s l ng I o B n F ly s 154 Immediately available funds with a maturity greater than one day included in other borrowed money 39,586 n.a. 29,864 n.a. 5,151 n.a. 2.863 n.a. 155 Number of reports filed6 457 0 229 0 97 0 36 0 ] Data are aggregates of categories reported on the quarterly form FF1EC 002, "Report of either because the item is not an eligible IBF asset or liability or because that level of detail is Asseti and Liabilities of U.S. Branches and Agencies of Foreign Banks." The form was first not reported for IBFs. From December 1981 through September 1985, IBF data were used for reporting data as of June 30, 1980, and was revised as of December 31, 1985. From included in all applicable items reported. November 1972 through May 1980, U.S. branches and agencies of foreign banks had filed a 4. Total assets and total liabilities include net balances, if any, due from or owed to related monthly FR 886a report. Aggregate data from that report were available through the Federal banking institutions in the United States and in foreign countries (see note 5). On the former Reserve monthly statistical release G.I 1, last issued on July 10, 1980. Data in this table and in monthly branch and agency report, available through the G.ll monthly statistical release, the G.I I tables are not strictly comparable because of differences in reporting panels and in gross balances were included in total assets and total liabilities. Therefore, tutal asset and total definitions of balance sheet items. liability figures in this table are not comparable to those in the G.I 1 tables. 2. Includes the District of Columbia. 5. Related depository institutions includes the foreign head office and other U.S. and 3. Effective December 1981, the Federal Reserve Board amended Regulations D and Q to foreign branches and agencies of a bank, a bank's parent holding company, and majoritypermit banking offices located in the United States to operate international banking facilities owned banking subsidiaries of the bank and of its parent holding company (including (IBFs). Since December 31, 1985, data for IBFs have been reported in a separate column. subsidiaries owned both directly and indirectly) These data are either included in or excluded from the total columns as indicated in the 6. In some cases two or more offices of a foreign bank within the same metropolitan area headings. The notation "n.a." indicates that no IBF data have been reported for that item, file a consolidated report. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A76 Index to Statistical Tables References are to pages A3-A75 although the prefix "A" is omitted in this index ACCEPTANCES, bankers (See Bankers acceptances) FARM mortgage loans, 35 Assets and liabilities (See also Foreigners) Federal agency obligations, 5, 9, 10, 11, 28, 29 Commercial banks, 15-21, 64, 65 Federal credit agencies, 30 Domestic finance companies, 32, 33 Federal finance Federal Reserve Banks, 10 Debt subject to statutory limitation, and types and ownership Foreign banks, U.S. branches and agencies, 72-75 of gross debt, 27 Foreign-related institutions, 20 Receipts and outlays, 25, 26 Automobiles Treasury financing of surplus, or deficit, 25 Consumer credit, 36 Treasury operating balance, 25 Production, 44, 45 Federal Financing Bank, 30 Federal funds, 23, 25 BANKERS acceptances, 5, 10. 22, 23 Federal Home Loan Banks, 30 Bankers balances, 15-21, 72-75. (See also Foreigners) Federal Home Loan Mortgage Corporation, 30, 34, 35 Bonds (See also U.S. government securities) Federal Housing Administration, 30, 34, 35 New issues, 31 Federal Land Banks, 35 Rates, 23 Federal National Mortgage Association, 30, 34, 35 Business activity, nonfinancial, 42 Federal Reserve Banks Business loans (See Commercial and industrial loans) Condition statement, 10 Discount rates (See Interest rates) U.S. government securities held, 5, 10, 11, 27 CAPACITY utilization, 43 Federal Reserve credit, 5, 6, 10, 12 Capital accounts Federal Reserve notes, 10 Commercial banks, 15-21, 64, 65 Federally sponsored credit agencies, 30 Federal Reserve Banks, 10 Finance companies Central banks, discount rates, 61 Assets and liabilities, 32 Certificates of deposit, 23 Commercial and industrial loans Business credit, 33 Loans, 36 Commercial banks, (5-21, 64, 65, 67-71 Paper, 22, 23 Weekly reporting banks, 17, 18 Float, 5 Commercial banks Flow of funds, 37^41 Assets and liabilities, 15-21, 64, 65 Foreign banks, U.S. branches and agencies, 71, 72-75 Commercial and industrial loans, 15-21, 64, 65, 67-71 Foreign currency operations, 10 Consumer loans held, by type and terms, 36, 67-71 Foreign deposits in U.S. banks, 5 Number, by classes, 64, 65 Foreign exchange rates, 62 Real estate mortgages held, by holder and property, 35 Foreign-related institutions, 20 Terms of lending, 67-71 Foreign trade, 51 Time and savings deposits, 4 Foreigners Commercial paper, 22, 23, 32 Claims on, 52, 55, 56, 57, 59 Condition statements [See Assets and liabilities) Liabilities to, 51, 52, 53, 58, 60, 61 Construction, 42, 46 Consumer credit, 36 Consumer prices, 42 GOLD Consumption expenditures, 48, 49 Certificate account, 10 Corporations Stock, 5, 51 Profits and their distribution, 32 Government National Mortgage Association, 30, 34, 35 Security issues, 31,61 Gross domestic product, 48, 49 Cost of living (See Consumer prices) Credit unions, 36 HOUSING, new and existing units. 46 Currency in circulation, 5, 13 Customer credit, stock market, 24 INCOME, personal and national. 42, 48, 49 Industrial production, 42, 44 DEBT (See specific types of debt or securities) Insurance companies, 27, 35 Demand deposits, 15-21 Interest rates Depository institutions Bonds, 23 Reserve requirements, 8 Commercial banks, 67-71 Reserves and related items, 4, 5, 6, 12, 64, 65 Consumer credit, 36 Deposits (See also specific types) Federal Reserve Banks, 7 Commercial banks, 4, 15-21, 64, 65 Foreign banks, U.S. branches and agencies, 71 Federal Reserve Banks, 5, 10 Foreign central banks and foreign countries, 61 Discount rates at Reserve Banks and at foreign central banks and Money and capital markets, 23 foreign countries (See Interest rates) Mortgages, 34 Discounts and advances by Reserve Banks (Sec Loans) Prime rate, 22 Dividends, corporate, 32 International capital transactions of United States, 50-61 International organizations, 52, 53, 55, 58, 59 EMPLOYMENT, 42 Inventories. 48 Eurodollars, 23,61 Investment companies, issues and assets, 32 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A77 Investments (See also specific types) SAVING Commercial banks, 4, 15-21, 64, 65 Flow of funds, 37-41 Federal Reserve Banks, 10, 11 National income accounts, 48 Financial institutions, 35 Savings institutions, 35, 36, 37-41 Savings deposits (See Time and savings deposits) LABOR force, 42 Securities (See also specific types) Life insurance companies (See Insurance companies) Federal and federally sponsored credit agencies, 30 Loans (See also specific types) Foreign transactions, 60 Commercial banks, 15-21. 64, 65, 67-71 New issues, 31 Federal Reserve Banks, 5, 6, 7, 10, 11 Prices, 24 Financial institutions, 35 Special drawing rights, 5, 10. 50, 51 Foreign banks, U.S. branches and agencies, 71 State and local governments Insured or guaranteed by United States, 34, 35 Holdings of U.S. government securities, 27 New security issues, 31 MANUFACTURING Rates on securities, 23 Capacity utilization, 43 Stock market, selected statistics, 24 Production, 43, 45 Stocks (See also Securities) Margin requirements, 24 New issues, 31 Member banks (See also Depository institutions) Prices, 24 Reserve requirements, 8 Student Loan Marketing Association, 30 Mining production, 45 Mobile homes shipped, 46 TAX receipts, federal, 26 Monetary and credit aggregates, 4, 12 Thrift institutions, 4. (See also Credit unions and Savings Money and capital market rates, 23 institutions) Money stock measures and components, 4, 13 Mortgages (See Real estate loans) Time and savings deposits, 4, 13, 15-21, 64. 65 Mutual funds, 13, 32 Trade, foreign, 51 Mutual savings banks (See Thrift institutions) Treasury cash, Treasury currency, 5 Treasury deposits. 5, 10, 25 Treasury operating balance, 25 NATIONAL defense outlays, 26 National income, 48 UNEMPLOYMENT, 42 OPEN market transactions, 9 U.S. government balances Commercial bank holdings, 15-21 PERSONAL income, 49 Treasury deposits at Reserve Banks, 5, 10, 25 Prices U.S. government securities Consumer and producer, 42, 47 Bank holdings, 15-21,27 Stock market, 24 Dealer transactions, positions, and financing, 29 Prime rate, 22 Federal Reserve Bank holdings, 5, 10, 11, 27 Producer prices, 42, 47 Foreign and international holdings and Production, 42, 44 transactions, 10,27,61 Profits, corporate, 32 Open market transactions, 9 Outstanding, by type and holder, 27, 28 REAL estate loans Rates, 23 Banks, 15-21,35 U.S. international transactions. 50-62 Terms, yields, and activity, 34 Utilities, production, 45 Type of holder and property mortgaged, 35 Reserve requirements, 8 VETERANS Administration, 34, 35 Reserves Commercial banks, 15-21 Depository institutions. 4, 5. 6, 12 WEEKLY reporting banks, 17, 18 Federal Reserve Banks, 10 Wholesale (producer) prices, 42, 47 U.S. reserve assets, 51 Residential mortgage loans, 34, 35 Retail credit and retail sales, 36, 42 YIELDS (See Interest rates) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A78 Federal Reserve Bulletin • August 1998 Federal Reserve Board of Governors and Official Staff ALAN GREENSPAN, Chairman EDWARD W. KELLEY, JR. ALICE M. RIVLIN, Vice Chair LAURENCE H. MEYER OFFICE OF BOARD MEMBERS DIVISION OF INTERNATIONAL FINANCE LYNN S. FOX. Assistant to the Board EDWIN M. TRUMAN. Staff Director DONALD J. WTNN, Assistant to the Board LEWIS S. ALEXANDER, Associate Director THEODORE E. ALLISON, Assistant to the Board for Federal DALE W. HENDERSON, Associate Director Reserve System Affairs PETER HOOPER III, Associate Director WINTHROP P. HAMBLEY, Special Assistant to the Board KAREN H. JOHNSON, Associate Director BOB STAHI.Y MOORE, Special Assistant to the Board DAVID H. HOWARD, Senior Adviser DIANE E. WERNEKE, Special Assistant to the Board DONALD B. ADAMS, Assistant Director THOMAS A. CONNORS, Assistant Director LEGAL DIVISION DIVISION OF RESEARCH AND STATISTICS J. VIRGIL MATTINGLY. JR., General Counsel MICHAEL J. PRELL, Director SCOTT G. ALVAREZ, Associate General Counsel EDWARD C. ETTIN, Deputy Director RICHARD M. ASHTON, Associate General Counsel DAVID J. STOCKTON, Deputy Director OLIVER IRELAND, Associate General Counsel WILLIAM R. JONES, Associate Director KATHLEEN M. O'DAY, Associate General Counsel MYRON L. KWAST, Associate Director KATHERINE H. WHEATLEY, Assistant General Counsel PATRICK M. PARKINSON, Associate Director THOMAS D. SIMPSON. Associate Director LAWRENCE SLIFMAN, Associate Director OFFICE OF THE SECRETARY MARTHA S. SCANLON, Deputy Associate Director JENNIFER J. JOHNSON, Secretary PETER A. TINSLEY, Deputy Associate Director ROBERT DEV. FRIERSON, Associate Secretary DAVID S. JONES, Assistant Director BARBARA R. LOWREY. Associate Secretary and Ombudsman STEPHEN D. OLINER, Assistant Director STEPHEN A. RHOADES, Assistant Director JANICE SHACK-MARQUEZ, Assistant Director DIVISION OF BANKING CHARLES S. STRUCKMEYER, Assistant Director SUPERVISION AND REGULATION ALICE PATRICIA WHITE. Assistant Director RICHARD SPILLENKOTHEN, Director JOYCE K. ZICKLER, Assistant Director STEPHEN C. SCHEMERING, Deputy Director GLENN B. CANNER, Senior Adviser HERBERT A. BIERN, Associate Director JOHN J. MINGO, Senior Adviser ROGER T. COLE, Associate Director WILLIAM A. RYBACK. Associate Director DIVISION OF MONETARY AFFAIRS GERALD A. EDWARDS, JR.. Deputy Associate Director STEPHEN M. HOFFMAN, JR., Deputy Associate Director DONALD L. KOHN, Director JAMES V. HOUPT, Deputy Associate Director DAVID E. LINDSEY, Deputy Director JACK P. JENNINGS, Deputy Associate Director BRIAN F. MADIGAN. Associate Director MICHAEL G. MARTINSON, Deputy Associate Director RICHARD D. PORTER, Deputy Associate Director SIDNEY M. SUSSAN, Deputy Associate Director VINCENT R. REINHART, Assistant Director MOLLY S. WASSOM, Deputy Associate Director NORMAND R.V. BERNARD, Special Assistant to the Board HOWARD A. AMER, Assistant Director NORAH M. BARGER, Assistant Director DIVISION OF CONSUMER BETSY CROSS, Assistant Director AND COMMUNITY AFFAIRS RICHARD A. SMALL, Assistant Director DOLORES S. SMITH, Director WILLIAM SCHNEIDER, Project Director, GLENN E. LONEY, Deputy Director National Information Center SANDRA F. BRAUNSTEIN. Assistant Director MAUREEN P. ENGLISH. Assistant Director ADRIENNE D. HURT, Assistant Director IRENE SHAWN MCNULTY, Assistant Director Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A79 ROGER W. FERGUSON, JR. EDWARD M. GRAMLICH OFFICE OF DIVISION OF RESERVE BANK OPERATIONS STAFF DIRECTOR FOR MANAGEMENT AND PAYMENT SYSTEMS S. DAVID FROST, Staff Director CLYDE H. FARNSWORTH, JR.. Director SHEILA CLARK, EEO Programs Director DAVID L. ROBINSON, Deputy Director (Finance and Control) JOHN R. WEIS, Adviser LOUISE L. ROSEMAN. Associate Director PAUL W. BETTGE, Assistant Director MANAGEMENT DIVISION JACK DENNIS. JR.. Assistant Director EARL G. HAMILTON. Assistant Director S. DAVID FROST, Director STEPHEN J. CLARK, Associate Director. Finance Function JOSEPH H. HAYES. JR., Assistant Director DARRELL R. PAULEY, Associate Director, Human Resources JEFFREY C. MARQUARDT, Assistant Director Function MARSHA REIDHILL, Assistant Director DIVISION OF SUPPORT SERVICES OFFICE OF THE INSPECTOR GENERAL BARRY R. SNYDER, Inspector General ROBERT E. FRAZIER, Director DONALD L. ROBINSON, Assistant Inspector General GEORGE M. LOPEZ, Assistant Director DAVID L. WILLIAMS, Assistant Director DIVISION OF INFORMATION RESOURCES MANAGEMENT STEPHEN R. MALPHRUS, Director MARIANNE M. EMERSON, Assistant Director Po KYUNG KIM, Assistant Director RAYMOND H. MASSEY, Assistant Director EDWARD T. MULRENIN, Assistant Director DAY W. RADEBAUGH, JR., Assistant Director ELIZABETH B. RIGGS, Assistant Director RICHARD C. STEVENS, Assistant Director Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A80 Federal Reserve Bulletin • August 1998 Federal Open Market Committee and Advisory Councils FEDERAL OPEN MARKET COMMITTEE MEMBERS ALAN GREENSPAN, Chairman WILLIAM J. MCDONOUGH, Vice Chairman ROGER W. FERGUSON, JR. EDWARD W. KELLEY, JR. WILLIAM POOLE EDWARD M. GRAMLICH LAURENCE H. MEYER ALICE M. RIVLIN THOMAS M. HOENIG CATHY E. MINEHAN JERRY L. JORDAN ALTERNATE MEMBERS EDWARD G. BOEHNE MICHAEL H. MOSKOW GARY H. STERN ROBERT D. MCTEER, JR. STAFF DONALD L. KOHN, Secretary and Economist LYNN E. BROWNE, Associate Economist NORMAND R.V. BERNARD, Deputy Secretary STEPHEN G. CECCHETTI, Associate Economist LYNN S. FOX, Assistant Secretary WILLIAM G. DEWALD, Associate Economist GARY P. GILLUM, Assistant Secretary CRAIG S. HAKKIO, Associate Economist J. VIRGIL MATTINGLY, JR., General Counsel DAVID E. LINDSEY, Associate Economist THOMAS C. BAXTER, JR., Deputy General Counsel MARK S. SNIDERMAN, Associate Economist MICHAEL J. PRELL, Economist THOMAS D. SIMPSON, Associate Economist EDWIN M. TRUMAN, Economist DAVID J. STOCKTON, Associate Economist PETER R. FISHER. Manager, System Open Market Account FEDERAL ADVISORY COUNCIL THOMAS H. JACOBSEN, President CHARLES T. DOYLE, Vice President WILLIAM M. CROZIER, JR., First District NORMAN R. BOBINS, Seventh District DOUGLAS A. WARNER III, Second District THOMAS H. JACOBSEN, Eighth District WALTER E. DALLER, JR., Third District RICHARD A. ZONA, Ninth District ROBERT W. GILLESPIE. Fourth District C. Q. CHANDLER, Tenth District KENNETH D. LEWIS, Fifth District CHARLES T. DOYLE, Eleventh District STEPHEN A. HANSEL, Sixth District DAVID A. COULTER, Twelfth District HERBERT V. PROCHNOW. Secretary Emeritus JAMES ANNABLE. Co-Secretary WILLIAM J. KORSVIK, Co-Secretarx Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A81 CONSUMER ADVISORY COUNCIL WILLIAM N. LUND, Augusta, Maine, Chairman YVONNE S. SPARKS, St. Louis, Missouri, Vice Chairman RICHARD S. AMADOR. LOS Angeles, California MARTHA W. MILLER, Greensboro, North Carolina WALTER J. BOYER, Garland, Texas DANIEL W. MORTON, Columbus, Ohio WAYNE-KENT A. BRADSHAW, LOS Angeles, California CHARLOTTE NEWTON, Washington, DC JEREMY EISLER, Biloxi, Mississippi CAROL PARRY, New York, New York ROBERT F. ELLIOT, Prospect Heights, Illinois PHILIP PRICE, JR., Philadelphia, Pennsylvania HERIBERTO FLORES, Springfield, Massachusetts DAVID L. RAMP, Minneapolis, Minnesota DWIGHT GOLANN, Boston, Massachusetts MARILYN ROSS, Omaha, Nebraska MARVA H. HARRIS, Pittsburgh, Pennsylvania MARGOT SAUNDERS, Washington, D.C. KARLA IRVINE, Cincinnati, Ohio ROBERT G. SCHWEMM, Lexington, Kentucky FRANCINE C. JUSTA, New York, New York DAVID J. SHIRK, Eugene, Oregon JANET C. KOEHLER, Jacksonville, Florida GAIL SMALL, Lame Deer, Montana GWENN KYZER, Allen, Texas GREGORY D. SQUIRES, Milwaukee, Wisconsin JOHN C. LAMB, Sacramento, California GEORGE P. SURGEON, Chicago, Illinois ERROL T. LOUIS, Brooklyn, New York THEODORE J. WYSOCKI, JR., Chicago, Illinois THRIFT INSTITUTIONS ADVISORY COUNCIL CHARLES R. RINEHART, Irwindale, California, President WILLIAM A. FITZGERALD, Omaha, Nebraska, Vice President GAROLD R. BASE, Piano, Texas F. WELLER MEYER, Falls Church, Virginia DAVID A. BOCHNOWSKI, Munster, Indiana EDWARD J. MOLNAR, Harleysville, Pennsylvania DAVID E. A. CARSON, Bridgeport, Connecticut GUY C. PINKERTON, Seattle, Washington RICHARD P. COUGHLIN, Stoneham, Massachusetts TERRY R. WEST, Jacksonville, Florida STEPHEN D. HAILER, Akron, Ohio FREDERICK WILLETTS, III, Wilmington, North Carolina Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A82 Federal Reserve Bulletin • August 1998 Federal Reserve Board Publications For ordering assistance, write PUBLICATIONS SERVICES, Federal Reserve Regulatory Service. Four vols. (Contains all MS-127, Board of Governors of the Federal Reserve System, four Handbooks plus substantial additional material.) $200.00 Washington, DC 20551, or telephone (202) 452-3244, or FAX per year. (202) 728-5886. You may also use the publications order Rates for subscribers outside the United States are as follows form available on the Board's World Wide Web site and include additional air mail costs: (http://www.bog.frb.fed.us). When a charge is indicated, payment Federal Reserve Regulatory Service. $250.00 per year. should accompany request and be made payable to the Board of Each Handbook, $90.00 per year. Governors of the Federal Reserve System or may be ordered via FEDERAL RESERVE REGULATORY SERVICE FOR PERSONAL Mastercard, Visa, or American Express. Payment from foreign COMPUTERS. CD-ROM; updated monthly. residents should be drawn on a U.S. bank. Standalone PC. $300 per year. Network, maximum 1 concurrent user. $300 per year. Network, maximum 10 concurrent users. $750 per year. BOOKS AND MISCELLANEOUS PUBLICATIONS Network, maximum 50 concurrent users. $2,000 per year. THE FEDERAL RESERVE SYSTEM—PURPOSES AND FUNCTIONS. Network, maximum 100 concurrent users. $3,000 per year. 1994. 157 pp. Subscribers outside the United Slates should add $50 to cover ANNUAL REPORT, 1997. additional airmail costs. ANNUAL REPORT: BUDGET REVIEW, 1998-99. THE U.S. ECONOMY IN AN INTERDEPENDENT WORLD: A MULTI- FEDERAL RESERVE BULLETIN. Monthly. $25.00 per year or $2.50 COUNTRY MODEL, May 1984. 590 pp. $14.50 each. each in the United States, its possessions, Canada, and INDUSTRIAL PRODUCTION—1986 EDITION. December 1986. Mexico. Elsewhere, $35.00 per year or $3.00 each. 440 pp. $9.00 each. ANNUAL STATISTICAL DIGEST: period covered, release date, num- FINANCIAL FUTURES AND OPTIONS IN THE U.S. ECONOMY. ber of pages, and price. December 1986. 264 pp. $10.00 each. 1981 October 1982 239 pp. $ 6.50 FINANCIAL SECTORS IN OPEN ECONOMIES: EMPIRICAL ANALY- 1982 December 1983 266 pp. $ 7.50 SIS AND POLICY ISSUES. August 1990. 608 pp. $25.00 each. 1983 October 1984 264 pp. $11.50 RISK MEASUREMENT AND SYSTEMIC RISK: PROCEEDINGS OF A 1984 October 1985 254 pp. $12.50 JOINT CENTRAL BANK RESEARCH CONFERENCE. 1996. 1985 October 1986 231 pp. $15.00 578 pp. $25.00 each. 1986 November 1987 288 pp. $15.00 1987 October 1988 272 pp. $15.00 1988 November 1989 256 pp. $25.00 1980-89 March 1991 712 pp. $25.00 EDUCATION PAMPHLETS 1990 November 1991 185 pp. $25.00 Short pamphlets suitable for classroom use. Multiple copies are 1991 November 1992 215 pp. $25.00 available without charge. 1992 December 1993 215 pp. $25.00 1993 December 1994 281 pp. $25.00 1994 December 1995 190 pp. $25.00 Consumer Handbook on Adjustable Rate Mortgages 1990-95 November 1996 404 pp. $25.00 Consumer Handbook to Credit Protection Laws A Guide to Business Credit for Women, Minorities, and Small Businesses SELECTED INTEREST AND EXCHANGE RATES—WEEKLY SERIES OF Series on the Structure of the Federal Reserve System CHARTS. Weekly. $30.00 per year or $.70 each in the United The Board of Governors of the Federal Reserve System States, its possessions, Canada, and Mexico. Elsewhere, The Federal Open Market Committee $35.00 per year or $.80 each. Federal Reserve Bank Board of Directors REGULATIONS OF THE BOARD OF GOVERNORS OF THE FEDERAL Federal Reserve Banks RESERVE SYSTEM. A Consumer's Guide to Mortgage Lock-Ins ANNUAL PERCENTAGE RATE TABLES (Truth in Lending— A Consumer's Guide to Mortgage Settlement Costs Regulation Z) Vol. I (Regular Transactions). 1969. 100 pp. A Consumer's Guide to Mortgage Refinancings Vol. II (Irregular Transactions). 1969. 116 pp. Each volume Home Mortgages: Understanding the Process and Your Right $5.00. to Fair Lending GUIDE TO THE FLOW OF FUNDS ACCOUNTS. 672 pp. $8.50 each. How to File a Consumer Complaint FEDERAL RESERVE REGULATORY SERVICE. Loose-leaf; updated Making Deposits: When Will Your Money Be Available? monthly. (Requests must be prepaid.) Making Sense of Savings Consumer and Community Affairs Handbook. $75.00 per year. SHOP: The Card You Pick Can Save You Money Monetary Policy and Reserve Requirements Handbook. $75.00 Welcome to the Federal Reserve per year. When Your Home is on the Line: What You Should Know Securities Credit Transactions Handbook. $75.00 per year. About Home Equity Lines of Credit The Payment System Handbook. $75.00 per year. Keys to Vehicle Leasing Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A83 STAFF STUDIES: Only Summaries Printed in the 166. THE ECONOMICS OF THE PRIVATE PLACEMENT MARKET, by BULLETIN Mark Carey, Stephen Prowse, John Rea, and Gregory Udell. January 1994. Ill pp. Studies and papers on economic and financial subjects that are of general interest. Requests to obtain single copies of the full text or 167. A SUMMARY OF MERGER PERFORMANCE STUDIES IN BANKto be added to the mailing list for the series may be sent to ING, 1980-93, AND AN ASSESSMENT OF THE "OPERATING Publications Services. PERFORMANCE" AND "EVENT STUDY" METHODOLOGIES, by Stephen A. Rhoades. July 1994. 37 pp. 168. THE ECONOMICS OF THE PRIVATE EQUITY MARKET, by Staff Studies 1-157 are out of print. George W. Fenn, Nellie Liang, and Stephen Prowse. November 1995. 69 pp. 158. THE ADEQUACY AND CONSISTENCY OF MARGIN REQUIRE- 169. BANK MERGERS AND INDUSTRYWIDE STRUCTURE, 1980-94, MENTS IN THE MARKETS FOR STOCKS AND DERIVATIVE by Stephen A. Rhoades. February 1996. 29 pp. PRODUCTS, by Mark J. Warshawsky with the assistance of 170. THE COST OF IMPLEMENTING CONSUMER FINANCIAL REGU- Dietrich Earnhart. September 1989. 23 pp. LATIONS: AN ANALYSIS OF EXPERIENCE WITH THE TRUTH 159. NEW DATA ON THE PERFORMANCE OF NONBANK SUBSIDI- IN SAVINGS ACT, by Gregory Elliehausen and Barbara R. ARIES OF BANK HOLDING COMPANIES, by Nellie Liang and Lowrey, December 1997. 17 pp. Donald Savage. February 1990. 12 pp. 171. THE COST OF BANK REGULATION: A REVIEW OF THE EVI- 160. BANKING MARKETS AND THE USE OF FINANCIAL SER- DENCE, by Gregory Elliehausen, April 1998. 35 pp. VICES BY SMALL AND MEDIUM-SIZED BUSINESSES, by Gregory E. Elliehausen and John D. Wolken. September 1990. 35 pp. 161. A REVIEW OF CORPORATE RESTRUCTURING ACTIVITY, REPRINTS OF SELECTED Bulletin ARTICLES 1980-90, by Margaret Hastings Pickering. May 1991. Some Bulletin articles are reprinted. The articles listed below are 21pp. those for which reprints are available. Beginning with the Janu- 162. EVIDENCE ON THE SIZE OF BANKING MARKETS FROM MORT- ary 1997 issue, articles are available on the Board's World Wide GAGE LOAN RATES IN TWENTY CITIES, by Stephen A. Web site (http://www.bog.frb.fed.us) under Publications, Federal Rhoades. February 1992. 11 pp. Reserve Bulletin articles. 163. CLEARANCE AND SETTLEMENT IN U.S. SECURITIES MAR- KETS, by Patrick Parkinson, Adam Gilbert, Emily Gollob, Limit of ten copies Lauren Hargraves, Richard Mead, Jeff Stehm, and Mary Ann Taylor. March 1992. 37 pp. FAMILY FINANCES IN THE U.S.: RECENT EVIDENCE FROM THE 164. THE 1989-92 CREDIT CRUNCH FOR REAL ESTATE, by SURVEY OF CONSUMER FINANCES. January 1997. James T. Fergus and John L. Goodman, Jr. July 1993. 20 pp. 165. THE DEMAND FOR TRADE CREDIT: AN INVESTIGATION OF MOTIVES FOR TRADE CREDIT USE BY SMALL BUSINESSES, by Gregory E. Elliehausen and John D. Wolken. September 1993. 18 pp. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A84 Federal Reserve Bulletin • August 1998 Maps of the Federal Reserve System irto.,. EW YORK :ADELPHIA HAWAII LEGEND Sor/z pages Facing page • Federal Reserve Bank city • Federal Reserve Branch city • Board of Governors of the Federal — Branch boundary Reserve System, Washington, D.C. NOTE The Federal Reserve officially identifies Districts by num- of Puerto Rico and the U.S. Virgin Islands; the San Franber and Reserve Bank city (shown on both pages) and by cisco Bank serves American Samoa, Guam, and the Comletter (shown on the facing page). monwealth of the Northern Mariana Islands. The Board of In the 12th District, the Seattle Branch serves Alaska, Governors revised the branch boundaries of the System and the San Francisco Bank serves Hawaii. most recently in February 1996. The System serves commonwealths and territories as follows: the New York Bank serves the Commonwealth Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A85 2-B 3-C 4-D 5-E ME Pittsburgh Baltimore MD VT NC NH ^ • Cincinnati - •Charlotte Buffalo ,'•* MA .< NY sc BOSTON NEW YORK PHILADELPHIA CLEVELAND RICHMOND 6-F 7-G 8-H KY MI WI VL Detroit • isville IA AK • Memphis 1L IN ATLANTA CHICAGO ST. LOUIS 9-1 MET • MN Mi MINNEAPOLIS 10-J 12-L WY .' M Denver NM Oklahoma Cit\ OK KANSAS CITY ID 11-K Sdt Lake City NM El Paso •Los Angeles San Antonio AZ DALLAS SAN FRANCISCO Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

A86 Federal Reserve Bulletin • August 1998 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 William C. Brainard Cathy E. Minehan William O. Taylor Paul M. Connolly NEW YORK* 10045 John C. Whitehead William J. McDonough Thomas W. Jones Vacant Buffalo 14240 Bal Dixit Carl W. Turnipseed1 PHILADELPHIA 19105 Joan Carter Edward G. Boehne Charisse R. Lillie William H. Stone, Jr. CLEVELAND* 44101 G. Watts Humphrey, Jr. Jerry L. Jordan David H. Hoag Sandra Pianalto Cincinnati 45201 George C. Juilfs Charles A. Cerino1 Pittsburgh 15230 John T. Ryan III Robert B. Schaub RICHMOND* 23219 Claudine B. Malone J. Alfred Broaddus, Jr. Robert L. Strickland Walter A. Varvel Baltimore 21203 Daniel R. Baker William J. Tignanelli1 Charlotte 28230 Dennis D. Lowery DanM. Bechter1 ATLANTA 30303 David R. Jones Jack Guynn John F. Wieland Patrick K. Barron James M. Mckee Birmingham 35283 Patricia B. Compton FredR. Herr1 Jacksonville 32231 Judy Jones James D. Hawkins1 Miami 33152 R. Kirk Landon James T. Curry 111 Nashville 37203 Frances F. Marcum Melvyn K. Purcell New Orleans 70161 Lucimarian Roberts Robert J. Musso CHICAGO* 60690 Lester H. McKeever, Jr. Michael H. Moskow Arthur C. Martinez William C. Conrad Detroit 48231 Florine Mark David R. Allardice' ST. LOUIS 63166 John F. McDonnell William H. Poole Susan S. Elliott W. LeGrande Rives Little Rock 72203 Betta M. Carney Robert A. Hopkins Louisville 40232 Roser Reynolds Thomas A. Boone Memphis 38101 Carol G. Crawley Martha L. Perine MINNEAPOLIS 55480 David A. Koch Gary H. Stern James J. Howard Colleen K. Strand Helena 59601 William P. Underriner John D.Johnson KANSAS CITY 64198 Jo Marie Dancik Thomas M. Hoenig Terrence P. Dunn Richard K. Rasdall Denver 80217 Peter I. Wold Carl M. Gambs' Oklahoma City 73125 Barry L. Eller Kelly J. Dubbert Omaha 68102 Arthur L. Shoener Steven D. Evans DALLAS 75201 Roger R. Hemminghaus Robert D. McTeer, Jr. James A. Martin Helen E. Holcomb El Paso 79999 Patricia Z. Holland-Branch Sammie C. Clay Houston 77252 Edward O. Gaylord Robert Smith, [II' San Antonio 78295 H. B. Zachry, Jr. James L. Stull' SAN FRANCISCO 94120 Gary G. Michael Robert T. Parry Cynthia A. Parker John F. Moore Los Angeles 90051 Anne L. Evans MarkL. Mullinix1 Portland 97208 Carol A. Whipple Raymond H. Laurence1 Salt Lake City 84125 Richard E. Davis Andrea P. Wolcott Seattle 98124 Richard R. Sonstelie Gordon R. G. Werkema- *Additional offices of these Banks are located at Windsor Locks, Connecticut 06096; East Rutherford, New Jersey 07016; Utica at Oriskany, New York 13424; Columbus, Ohio 43216; Columbia, South Carolina 29210; Charleston, West Virginia 25311; Des Moines, Iowa 50306; Indianapolis, Indiana'46204, Milwaukee, Wisconsin 53202; and Peoria, Illinois 61607. 1. Senior Vice President. 2. Executive Vice President Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis