Federal Reserve Bulletin, 2008-01
2008 Compilation Federal Reserve __ B U L L E T I N . ~
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Volume 94 D 2008 Compilation , Federal Reserve B U L L E T I N Board of Governors of the Federal Reserve System, Washington, D.C.
PUBLICAn ONS COMMITTEE Rosanna Pianalto Cameron, Chair 0 Scott G. Alvarez 0 Sandra F. Braunstein 0 Roger T. Cole o Maureen T. Hannan 0 Jennifer J. Johnson 0 Brian F. Madigan 0 Stephen R. Malphrus 0 H. Fay Peters o Louise L. Roseman 0 D. Nathan Sheets 0 Michelle A. Smith 0 David J. Stockton The Federal Reserve Bulletin is issued annually under the direction of the staff publications committee. This committee is responsible for opinions expressed excepl in official statements and Signed articles. II is assisled by the Publications Depanmen~ Office of Board Members, under the direction of Lucretia M. Boyer.
Table of Contents PREFACE ARTICLES Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 .. ......... .... ... . Al William F Bassett and Thomas King June 5 Industrial Production and Capacity Utilization: The 2008 Annual Revision. . . . . . . . . . . . . . . . . . . .. A41 Kimberly Bayard and Charles Gilbert August 7 Economic Development Incentives: Research Approaches and Current Views. . . . . . . . . . . . . . . . . .. A61 Dan Gorin . October 28 Recent Payment Trends in the United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. A 75 Geoffrey R. Gerdes October 28 The 2007 HMDA Data ..... .. ......... .. ... ... ..... .. ..... ... .... ..... .. ... ...... ........ Al 07 Robert B. Avery, Kenneth P Brevoort, and Glenn B. Canner December 23 LEGAL DEVELOPMENTS Fourth Quarter, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C 1 March 7 First Quarter, 2008 ..... .. ...... ... ...... ... .. ..... ..... .. ... .. ... .. .... ......... ...... .. C31 June 6 Second Quarter, 2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. C73 August 13 Third Quarter, 2008 ...... .... ... ... ........ .... .. ...... ...... .. ...... ... ..... ........... , C99 November 21 INDEX. ..... ....... ... .... ....... ...... .. .. .... .... ................ .... .... ... ..... .... . 01
Preface The Federal Reserve Bulletin was introduced in 1914 as a vehicle to present policy issues developed by the Federal Reserve Board. Throughout the years, the Bulletin has been viewed as a journal of record, serving to provide the public with data and research results generated by the Board. Authors from the Board's Research and Statistics, Monetary Affairs, International Finance, Banking Supervision and Regulation, Consumer and Community Affairs, Reserve Bank Operations, and Legal divisions contribute to the Bulletin, which includes topical research articles, orders on banking applications, and enforcement actions. Starting in 2004, the Bulletin was published quarterly rather than monthly. In 2006, in response to the increased use of the Internet-and in order to release articles and reports in a more timely fashion-the Board discontinued the quarterly print version of the Bulletin and began to publish the contents of the Bulletin on its public website as the information became available. All articles, orders on banking applications, and enforce ment actions that were published in the online Bulletin in 2008 are included in this print compilation. The tables that appeared in the Financial and Business Statistics section of the Bulletin from 1914 through 2003 were removed and published monthly as a separate print and online publication, the Statistical Supplement to the Federal Reserve Bulletin, from 2004 to 2008. Effective with the publication of the December 2008 issue, the Board discontinued both the print and online versions. The majority of data published in the Statistical Supplement are available elsewhere on the Federal Reserve Board's website at www.federalreserve.gov. The Board has created a webpage that provides a detailed list of links to the most recent data on its site and links to other data provided by the Federal Reserve Bank of New York, the U.S. Treasury, and the Federal Financial Institutions Examination Council. Online access to the Bulletin is free. A free e-mail notification service is available to alert subscribers to the release of articles and orders in the Bulletin, as well as press releases, testimonies, and speeches. The notification message provides a brief description and a link to the recent posting. Federal Reserve Bulletin: www.federalreserve.gov/pubs/bulletin Data published in the Statistical Supplement to the Federal Reserve Bulletin: www.federalreserve.gov/pubslsupplementlstatsupdata.htm Subscribe to e-mail notification service: www.federalreserve.gov/generalinfolsubscribe/notification.htm
Articles
Al June 2008 Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 William Bassett and Thomas King, of the Board's I. Bank prof1tabilily. 1985-1007 Division of Monetary Affairs, prepared this article. Thomas C. Allard assisted in developing the database Pcrccnl P.:n.::enl underlying much of the analysis. Adina Goldstein and 18 -- 1.8 Oren D. Ziv provided research assistance. Return on equity 16 1.6 The U.S. commercial banking industry faced signifi 14 1.4 cant challenges in 2007, including continued deterio 12 I.2 ration in the performance of subprime mortgage 10 1.0 related assets and a more general reassessment by 8 .8 investors of structured finance instruments. Those 6 .6 developments contributed to significant strains in 4 .4 financial markets and dislocations in bank funding 2 .2 markets over the second half of the year. Moreover, I I I I I I I I I I I I I I I I I I I I I I I I I economic growth slowed late in the year, and the 1986 1989 1992 1995 1998 2001 2004 2007 outlook for 2008 worsened. The turmoil in financial NOTE: The data are annual. markets hampered banks' securitization programs and their ability to syndicate leveraged loans, which Profitability-especially in the final quarter of 2007put considerable pressure on the balance sheet feU noticeably from the very high levels posted in capacity and liquidity positions of some banks. recent years (figure 1). The drop in profits, reflecting primarily lower trading revenue and significantly higher provisions for loan losses, was more pro NOTE: The data in this article cover insured domestic commercial banks and nondeposit trust companies (hereafter, banks). Except as nounced at large banks, but the net income of smaller otherwise indicated, the data are from the Consolidated Reports of banks also declined markedly. Condition and Income (Call Report). The Call Report consists of two Financial markets came under considerable pres forms submitted by domestic banks to the Federal Financial Institu tions Examination Council: FFIEC 031 (for those with domestic and sure in 2007. Problems that were mostly contained foreign offices) and FFIEC 041 (for those with domestic offices only). within the markets for subprime mortgages and The data thus consolidate information from foreign and domestic related structured products in the first half of the year offices, and they have been adjusted to take account of mergers and the effects of push-down accounting. For additional information on the intensified around midyear. In tum, the deepening adjustments to the data, see the appendix in William B. English and troubles in subprime mortgage credit quality caused William R. Nelson (1998), "Profits and Balance Sheet Developments investors to become increasingly concerned about the at U.S. Commercial Banks in 1997," Federal Reserve Bulletin, vol. 84 (June), p. 408. Size categories, based on assets at the start of each likely performance of even highly rated securities quarter, are as follows: the 10 largest banks. large banks (those ranked backed by subprime mortgages. Furthermore, inves II through 100), medium-sized banks (those ranked 10 I through tors reassessed the soundness of many structured 1,000), and small banks (those ranked 1,00 I and higher). At the start of the fourth quarter of 2007, the approximate asset sizes of the banks in financial products not backed by residential mort those groups were as follows: the 10 largest banks, more than gages, including asset-backed commercial paper and $140 billion; large banks, $7.2 billion to $140 billion; medium-sized collateralized loan obligations. Those developments, bankS, $494 million to $7.1 billion; and small banks, less than $494 million. along with emerging worries about the economic Data shown in this article may not match data published in earlier outlook, contributed to a broad-based reduction in years because of revisions and corrections. Call Report data reflect investors' appetite for risk over the second half of the information available as of April 16, 2008. In the tables, components may not sum to totals because of rounding. Appendix tables A.J.A year. As a consequence, the markets for some types of through A.I.E report portfolio composition, income, and expense structured investment products virtually dried up by items, all as a percentage of overall average net consolidated assets, year-end, and the prices of such securities dropped, for all banks and for each of the four size categories. Appendix table A.2 reports income statement data for all banks. events that generated large losses at some banks and
A2 Federal Reserve Bulletin 0 June 2008 2. Seleo.:led il1lere 1 rales. 2002-08 worsened, and forward-looking indicators of business spending also became less favorable. The weakening Percent outlook added to concerns about asset quality at banks. Measures of overall consumer price inflation S stepped up in 2007, but core inflation (which excludes the direct effects of movements in energy and food 4 prices) was little changed on balance. With downside risks to economic growth increasing, and with mon 3 etary policy makers generally expecting inflation to Target federal funds rate moderate somewhat in 2008 and 2009, the Federal 2 Open Market Committee substantially eased the stance of monetary policy in late 2007 and early 2008. I I I I The difficulties in financial markets, together with the ongoing weakness of the housing sector, had 14 significant effects on bank balance sheets, especially 13 over the second half of the year. As the residential real 12 estate market contracted and banks tightened their - II credit standards, the growth of residential mortgages 10 on banks' balance sheets slowed dramatically from 9 the rapid rates posted between 2002 and 2006. At the 8 same time, credit and liquidity concerns reduced 7 institutional investors' willingness to participate in - 6 the syndicated loan market. Large commercial banks, 30-year S which had underwritten a record volume of such _fixed-rate mongages 4 I I I I I I loans in the first half of the year, primarily to finance 2002 2003 2004 200S 2006 2007 2008 leveraged buyouts, found themselves unable to place NOTE: The data are monthly and extend through March 2008. these loans in the market. Commercial and industrial SOURCE: For Treasury securities, mongages, and Moody's corporate lending at those banks expanded rapidly for a time as bonds, Federal Reserve Board, Statistical Release H.IS, "Selected Interest Rates" (www.federalreserve.gov/releaseslhIS); for federal funds, Federal loans intended for syndication ended up on banks' Reserve Board (wwwJederalreserve.gov/fomc/fundsrate.htm); for high-yield books. At least partly in response to these unexpected bonds, Merrill Lynch Master 11 index. additions to assets, banks sold U.S. Treasury and agency securities and tightened standards and terms financial institutions. Yields on both investment on many types of loans. grade and speculative-grade corporate bonds in These balance sheet pressures, coupled with uncer creased, while those on Treasury securities fell be tainty about the size and distribution of losses on cause of easier actual and expected monetary policy subprime mortgages and structured financial prod as well as heightened demand for safer assets (fig ucts, also strained short-term bank funding markets. ure 2). Equity prices dropped over the second half of The Federal Reserve responded to the financial tur the year, and volatility in many financial markets moil with a series of actions to support liquidity and increased. functioning in bank funding markets (partly in coor Despite the deterioration in housing-related mar dination with foreign central banks).1 Core deposits kets and emerging financial strains, the U.S. economy continued to grow relatively slowly. As spreads on generally performed well through the first three quar interbank borrowing widened (figure 3), banks increas ters of 2007. However, economic growth weakened ingly funded asset expansion with managed liabilities, considerably in the fourth quarter as pressures in financial markets worsened, the downturn in the 1. The Federal Reserve conducted unusually large open market housing market intensified, and prices for crude oil operations, made adjustments to the primary credit rate and to and some other commodities rose. Consumer spend procedures for discount window borrowing and securities lending, established a Term Auction Facility, and entered into currency swap ing and business investment, which had both in arrangements with two other centra] banks. For a fuller discussion of creased at a healthy pace, on balance, over the first the measures employed by the Federal Reserve in 2007 to support three quarters of the year, slowed, which contributed orderly market functioning, see box "The Federal Reserve's Re sponses to Financial Strains," in Board of Governors of the Federal to reduced demand for credit from households and Reserve System (2008), Monetary Policy Report to the Congress businesses. Late in the year, consumer sentiment (Washington: Board of Governors, February), pp. 26-27.
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 A3 3. Spread:, of 3-month Libor over OIS rale, 200:2·08 4. I U mher r ban" . and share of a Sl.:ts at the largest banks. 1990--2007 na."iis puinl.'i Thou,·mnd ... -tOO Number 14 12 80 10 60 8 6 40 I I I I I I I I P~rcent 20 Share of assets 80 I I 2002 2003 2004 2005 2006 2007 2008 60 NOTE: The data are daily and extend through May 15, 2008. For Libor, quotes are as of 6 a.m.; for the OIS rate, quotes are as of the close of business 10 largest 40 of the previous trading day. An overnight index swap (OIS) is an interest rate swap with the noating rate tied to an index of daily overnight rates, such as 20 the effective federal funds rate. At maturity, two parties exchaoge, on the basis of the agreed notional amount, the difference between interest accrued I I I I I I I I I I I I I I I I I I I I I at the fixed rate and interest accrued through geometric averaging of the 1991 1993 1995 1997 1999 2001 2003 2005 2007 noating. or index, rate. SOURCE: For Libor, British Bankers' Association; for the OIS rate, Prebon. NOTE: The data are as of year-end. For the definition of bank size, see the general note on the first page of the main text. including Federal Home Loan Bank (FHLB) advances, The number of new commercial banks chartered foreign deposits, and, late in the year, large time edged down in 2007, and the average size of such deposits.2 Some large banks also received substantial banks declined considerably from that of the previous cash infusions from their parent holding companies. two years, Merger activity also dipped last year but Financial and economic developments contributed still outpaced bank formation. As a result, the number to the decline in the profitability of the banking of banks declined further, to about 7,300 at the end of industry last year after a long period of very strong 2007 from about 7,450 at the end of 2006 (figure 4). performance. As a consequence of the difficult condi The share of assets held by the top 10 banks increased tions in financial markets, several large banks experi further, reaching 53 percent at the end of 2007, and enced sharp reductions in trading revenue. Solid the share of assets held by the top 100 banks rose to revenues from investment banking activities and pri 80 percent. According to the Federal Deposit Insur vate asset-management businesses were insufficient ance Corporation, two banks with assets totaling to offset those decreases, and total non-interest in $100 million failed in 2oo7. come declined in 2007. Profitability was also de The formation of new bank holding companies pressed by a stepped-up rate of loss provisioning (BHCs) increased for the second consecutive year in which had been at very low levels-in response to an 2007 and was the highest in several years. Mergers across-the-board worsening of asset quality. In addi among BHCs also moved up last year, and the rate of tion, non-interest expense grew briskly last year mergers continued to exceed the rate at which new despite a slight deceleration in employee compensa BHCs were formed. The number of BHCs thus edged tion. Moreover, the declines in market interest rates down to about 5,070 from about 5,100 in 2006 (for and hjgher credit spreads observed in many sectors multi tiered BHCs, only the top-tier organization is over the second half of 2007 were inadequate to boost counted in these figures). The number of financial the industry wide net interest margin, which continued holding companies held fairly steady in 2007 at about its longer-run slide last year. 640.3 The share of BHC assets that were held by financial holding companies was unchanged in 2007 2. In this article, core deposil~ are defined as the sum of transaction at 86 percent. deposits, savings deposits (including money market deposit accounts), and small time deposits (time deposits issued in denominations of less than $100,000) held at domestic offices. Managed liabilities consist of 3. Statistics on financial holding companies include both domestic large ($100,000 or more) time deposil~ booked in domestic offices, SHCs that have elected to become financial holding companies and deposits booked in foreign offices, subordinated notes and debentures, foreign banking organizations operating in the United Slates as federal funds purchased and securities sold under repurchase agree financial holding companies and subject to the Bank Holding Com ments, FHLB advances, and other borrowed money. pany Act. For more information, see Board of Governors of the
A4 Federal Reserve Bulletin 0 June 2008 I. Changt' in balance ShC\!l il<!n1S. all U. . hank~. 1998-2007 Percent MEMO Dec, 2007 Item 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 (billions , I of r dollars) Assets ........................... .............. 8.21 5.47 8.78 5.13 7.23 7.25 10.80 7.79 12.36 10.81 11,077 Interest-earning assets ............. 8.19 5.91 8.67 3.97 7.58 7.35 11.31 8.04 12.45 10.12 9,569 Loans and leases (net) ........ .... 8.73 8.13 9.25 1.83 5.93 6.60 11.23 10.48 11.97 10.58 6.473 Commercial and industrial ............... 12.96 7.90 8.55 --{j.n -7.39 -4.52 4.37 12.54 11.81 20.38 1,362 Real estate ....... ............... . ..... 8.03 12.28 10.76 7.95 14.49 9.78 15.44 13.81 14.94 7.03 3,634 Booked in domestic offices ........ 8.01 12.42 11.04 8.03 14.90 9.69 15.1 I 13.93 15.05 6.77 3,565 One-to four-family residential ....... 6.39 9.73 9.29 5.71 19.92 10.05 15.76 11.95 15. \I 5.54 1,995 Other real estate .................... 10.34 16.16 13.34 10.97 8.85 9.22 14.24 16.62 14.96 8.37 1,570 Booked in foreign offices ............. 8.79 6.28 -1.62 3.97 -7.41 15.74 35.59 7.19 8.79 22.76 69 Consumer .. ............................ .38 -1.47 8.05 4.17 6.60 9.77 10.17 2.80 6.19 11.67 948 Other loans and leases ................... 13.50 7.19 7.01 -2.00 -.02 8.31 3.57 -.17 3.17 12.85 619 Loan-loss reserves and unearned income .. 3.10 2.40 8.00 13.17 5.82 -2.48 -4.18 -5.56 1.66 27.63 90 Securities ........ ..................... 8.45 5.14 6.39 7.26 16.28 9.46 10.59 2.40 11.53 4.57 2,195 Investment account ........... ........... 12.1I 6.71 2.89 8.92 13.60 8.73 6.17 1.\9 6.94 -4.42 1.562 U.S. Treasury ....... . . . . . . . . . . . . . . . . . -25.05 -1.87 -32.71 -40.23 41.93 14.14 -15.87 -17.59 -19.30 -26.90 29 U.S. government agency and corporation obligations ............ 17.03 1.87 3.81 12.90 18.15 9.70 9.48 -1.82 4.71 -12.13 893 Other .................. .. ............ 27.02 20.93 13.41 12.19 2.81 6.04 3.03 10.12 13.78 10.72 639 Ot T he ra r di . n . g . . a . c . c . o . u . n . t .. . . . . . . .. . .. . . . . .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13 3 . . 3 8 2 0 - -- 8 {j . .9 3 3 5 3 1 7 0 . .3 1 3 6 - 1 3 3 . . 7 0 2 4 - 3 2 6 . . 9 32 2 1 6 4 . .0 8 1 6 3 1 6 4 . . 8 2 1 9 5 7. .9 96 9 3 1 1 9 . . 3 2 2 9 2 3 2 6 . . 3 1 4 3 9 6 0 3 1 3 Non-interest-eaming assets ... .... ..... -..... 8.39 2.66 9.46 12.79 5.14 6.65 7.61 6.21 11.80 15.36 1,509 Liabi lities ................... ............ ...... 8.09 5.61 8.60 4.47 7.17 7.31 9.57 7.80 12.10 10.79 9,941 Core deposits .............. .......... ...... 7.08 .27 7.56 10.56 7.62 7.32 8.27 6.41 5.84 5.48 4,721 Transaction deposits .................. ..... -1.38 -8.93 -U8 10.22 -5.11 2.84 3.25 -1.19 -4.28 -1.21 695 Savings deposits (including MMDAs) ....... 18.35 6.71 12.53 20.69 18.51 13.71 11.73 6.94 5.53 3.33 2,995 Small time deposits ............ ........... .59 -{).70 7.24 -7.21 -4.85 --{j.67 1.61 12.90 16.97 18.00 1,031 Managed liabilities I .. ....................... 9.45 15.55 8.79 -2.71 5.38 7.09 12.07 12.26 19.45 16.58 4,550 Large time deposits ........................ 9.14 14.24 19.39 -3.64 5.18 1.84 21.89 23.00 15.95 1.92 1,024 Deposits booked in foreign offices .......... 8.71 14.60 7.84 -10.92 4.49 12.63 16.84 6.32 29.67 25.86 1,502 Subordinated notes and debentures .......... 17.00 5.07 13.98 9.56 -.59 5.08 10.49 11.42 22.60 16.83 174 Gross federal funds purchased and RPs ..... 4.38 1.57 6.49 5.74 12.76 -8.70 8.40 15.62 9.47 7.06 744 Other managed liabilities . , , ....... ... , ..... 15.66 35.29 1.80 -.28 1.00 22.11 1.37 6.15 18.89 28.44 1,106 Revaluation losses held in tmding accounts .... 3.44 -13,20 7.47 -17.06 33.44 14.02 -12.61 -17.86 6.89 42.20 205 Other ............ .... , ............. ........ 12.74 -1.25 20.63 14.92 5.24 5.30 17.19 -.82 22.34 3.35 465 Capital account ....• _. . ....... .... ...... ..... 9.58 3.92 10.68 12.32 7.87 6.69 23.15 7.73 14.69 10.96 1,136 MEMO C M o o m rt m ga e g r e c - ia b l a c re k a e l d e s s e ta c t u e r i l t o ie a s n s2 " ..... . . . . . . .. .. . . . .. . .. . . .. . . . 2 1 2 1 . . 1 4 4 0 - 1 3 5. ,3 5 3 2 1 3 2. .3 19 0 2 1 9 3. . 1 0 1 6 1 6 5 . . 8 6 6 0 1 9 0. .0 1 2 4 1 13 3. .9 45 7 1 2 6 . . 0 8 7 7 1 14 0 . . 9 2 1 2 -1 9 . .2 2 1 4 1, 9 5 6 78 0 Federal Home Loan Bank advances .... ........ R.a. D.a. n.a. n.a. 17.30 3.71 3.74 10.00 29.80 30.62 455 NOTe: Data are from year-end to year-end and are as of April 16, 2008. erties or by multifamily residential properties; and loans to finance commer I. Measured as the sum of large time deposits in domestic offices, deposits cial real estate, construction, and land development activities not secured by booked in foreign offices, subordinated notes and debentures, federal funds real estate. purchased and securities sold under repurchase agreements. Federal Home n.a. Not available. Loan Bank advances, and other borrowed ruoney. MMDA Money market deposit account. 2. Measured as the sum of construction and land development loans secured RP Repurchase agreement, by real estate; real estate loans secured by nonfarm nonresidential prop- BALANCE SHE·T DEVELOPMENTS led banks to become more cautious in the extension of credit and to take steps to bolster capital positions. Balance sheet developments in 2007 were influenced Total bank assets expanded 10,8 percent in 2007, importantly by the turbulence in financial markets in down somewhat from the previous year but still the second half of the year. The turmoil exerted strong by historical standards (table 1); indeed, the pressure on both the asset and liability sides of banks' growth rate easily outpaced that of total domestic balance sheets, as banks found markets less receptive nonfinancial debt. And, excluding the conversion of to sales of loans and securities and faced funding one commercial bank to a thrift institution in the first markets that were, at times, illiquid. Together with the quarter, bank assets grew even faster-l 1,9 percent. softening macroeconomic picture, these disruptions Loans expanded at about the same rate as assets, primarily because of rapid growth in commercial and industrial (C&I) lending. The demand for C&I loans Federal Reserve System (2003), Report to the Congress on Financial was spurred, in part, by vigorous capital investment Holding Companies under the Gramm-Leach-Bliley Act (Washington: and financing for mergers and leveraged buyouts Board of Governors, November), www.federalreserve.gov/pubs/ reports_other.htm. (LBOs) in the first half of the year. In the second half,
u.s. Profits and Balance Sheet Developments at Commercial Banks in 2007 AS the deterioration in credit markets caused C&I loans 5. Financing gap at nonfuml nonlinilndal corporations. that had been intended for syndication to accumulate 1990-2007 on banks' balance sheets. Residential mortgage lend Dillions of dollars ing slowed amid the contraction in home sal~s a~d the continuing decline in house prices, and lendIng In t~e 300 commercial real estate market also decelerated late In 250 the year. In contrast to the rapid pace of overall 200 lending, banks' securities holdings expanded rela 150 tively slowly, a development that was likely a result, 100 in part, of efforts to ease the pressures on balance 50 + sheets. Other types of bank assets expanded rapidly in o 2007 as commercial banks were net providers of 50 liquidity during the financial turbulence; in particular, 100 short-term loans to financial institutions-in the form 150 of federal funds sold, securities purchased under II I I I I 1 I I I I I I I I I I I I I I I resale agreements, and balances due from 1991 1993 1995 1997 1999 200 I 2003 2005 2007 depositories-increased 29 percent over the year. NOTE: The data are 4·quarter moving averages. The financing gap is the difference between capital expenditures and internally generated funds. On the liability side of the balance sheet, growth of SOURCE: Federal Reserve Board. Statistical Release Z.l, "Flow of Funds core deposits remained moderate. In the autumn, Accounts of the United States," table F.102 (www.federalreserve.gov/ releaseslz I) . banks attracted small time deposits by maintaining relatively high rates, on average, on such deposits banks were forced to retain on their balance sheets a while other short-term yields were falling, but these considerable amount of loans that were originally inflows were partly offset by the continued sluggish intended for syndication, many of which were ex growth of savings deposits (including money market tended to finance LBOs (see box "Market for U.S. deposit accounts). Given the relatively rapid growth Leveraged Syndicated Loans"). As the economic in assets, banks turned to managed liabilities for outlook weakened and banks tightened their credit funding. Moreover, in response to the pressures in standards, commercial real estate (CRE) lending, funding markets, banks increased their reliance on particularly for construction and land development, FHLB advances and subordinated debt late in the slowed somewhat from the rapid growth of recent year. years. Banks' capital expanded at about the same pace as According to respondents to the Federal Reserve's assets. The rise in equity capital was supported by quarterly Senior Loan Officer Opinion Survey on increased goodwill but was hampered by meager Bank Lending Practices (BLPS), demand for C&I retained earnings. Regulatory capital, which excludes loans softened steadily throughout the year as the goodwill, grew somewhat more slowly than equity economic outlook deteriorated (figure 6). Banks that capital and assets, and regulatory capital ratios edged experienced weaker C&I loan demand generally lower. A number of large institutions received sizable pointed to decreased needs by busines~es. to fina~ce cash injections from their parent holding companies, M&A activity and to fund investments In Jnventones which helped maintain capital ratios. As asset quality and in plant and equipment. Despite the reported deteriorated late in the year, many banks significantly weakening in demand for C&I loans, growth in such boosted loan-loss reserves. loans was evident at commercial banks of all sizes, although it was particularly concentrated among the LoallS to Businesses largest institutions, which are the most acti ve partici pants in the syndicated loan market.4 Meanwhile, C&I loans grew 20 percent during 2007. For most of some firms drew upon previously arranged backup the year, this growth was supported by robust fixed lines of credit with commercial banks as debt markets investment and merger and acquisition (M&A) activ tightened, a move that further boosted the volume of ity at nonfinancial corporations. Solid growth of C&I loans on banks' balance sheets. capital expenditures contributed to a large financing In light of the rapid growth of syndicated lending, gap, especially as corporate profit growth slowed late and the considerable extent to which such lending in the year (figure 5). As conditions in credit markets tightened, the pace of capital accumulation and new 4. In asking banks to report demand, the survey instructs them to borrowing slowed. Meanwhile, with conditions in the "consider only funds actually disbursed as opposed to requests for syndicated loan market also deteriorating, some large new or increased lines of credit."
A6 Federal Reserve Bulletin 0 June 2008 Market for U.S. Leveraged Syndicated Loans The market for U.S. leveraged syndicated loans was and the very substantial actual and anticipated volumes significantly affected by the disruptions in credit markets of, large LBOs. As a result, the flow of new deals slowed that first emerged in the summer of 2007. Although noticeably, but the pipeline of leveraged deals that banks issuance of leveraged loans posted a record of nearly had reportedly underwritten but not yet syndicated swelled $700 billion last year, reflecting a surge in merger and to about $250 billion from roughly $110 billion at the acquisition (M&A) activity and leveraged buyouts start of the year. In the secondary market, a drop in (LBOs), the bulk of the deals were struck in the first half average bid prices on leveraged loans and a worsening of of the year, with activity slowing significantly over the liquidity pushed the average bid-asked spread substan second hal f. I tial'ly higher. Meanwhile, the implied spread on the During the first and second quarters of 2007, issuance LCDX index-an equally weighted index of 100 loan of leveraged loans soared to an annualized rate of nearly only credit default swaps-rose sharply; the spread was $860 billion, an increase fueled by strong M&A activity allegedly boosted by investors positioning themselves and an unprecedented wave of large LBOs (figure A). to profit from a deterioration in credit quality as well Institutional investors represented an important source of as by strong hedging demand from both arrangers of funding for these deals: Issuance of institutional loans collateralized loan obligations (CLOs) and market partici that is, leveraged loans structured for institutional pants with exposure to the pipeline of leveraged deals investors-topped $290 billion and accounted for a record (figure B).4 share of leveraged lending? Against a backdrop of stron In August, as strains emerged in term bank funding ger demand from institutional investors and improved markets, conditions in the leveraged loan market deterio liquidity in the secondary market, loan credit spreads rated further. Several loan issues were postponed or continued to narrow over the first half of the year. restructured in response to investors' demands for wider Nonprice terms were also eased, with issuance of "cov spreads and tighter non price terms. Spreads on lower enant lite" loans and second-lien loans surging to record rated tranches of CLOs widened considerably, and issu highs? ance slowed markedly, developments that reportedly Early last summer, however, investors began pulling reflected investors' increased uncertainty about the appro back from the leveraged loan market, apparently in priate valuation of structured finance products used to response to concerns about the accommodative terms on, fund business credits. Because CLO vehicles had been the largest buyers of leveraged loans in recent years, banks faced severe difficulties syndicating previously I. Financial firms account for only a small share of funds rdised in lIle leveraged loan market. underwritten loans used to finance large LBOs and were 2. Institutional investors include a wide range of nonbank lenders, such subsequently forced to bring a number of such loans onto as loan mutual funds, issuers of collateralized loan Obligations, insurance companies, finance companies. hedge funds. and distressed and high-yield their books. As conditions in corporate credit markets funds. improved for a time in the fall, underwriters were success- 3. According to Standard & Poor's, covenant-lite loans are loans that have bond-like financial incurrence covennnts, which merely limit !he issuance of additional debt, ralller than lIle more restrictive maintenance covenants lIlat have traditionally been part of a syndicated loan agree ment. For more information, see Standard & Poor's (2007), A Guide 10 the 4. A loan-only credit default swap (LCDS) is similar to a standard Loan Markel (New York: S&p. October). credit default swap. The main difference is lIlat the reference obligation As lIleir name implies, second-lien loans are loans whose claims on for an LCDS is a syndicated secured loan of a reference entity with a collateral are behind lIlose of first-lien loans. designated priority (for example. first lien or second lien). was used to finance large LBOs and M&A activity, which probably reflected the concentration of this the July 2007 BLPS queried banks about their partici activity within a few large banks and the tendency of pation in the syndicated loan market. About one-half these banks to place large portions of LBO-related of domestic respondents indicated that syndicated syndications with institutional investors. loans accounted for 5 percent to 20 percent of the The accumulation of previously underwritten C&I C&I loans on their books, but a few large institutions loans may have been offset to some degree by a noted that syndicated loans accounted for more than growing reluctance to make new C&I loans in the 50 percent of their C&I loan portfolios. Most survey second half of the year. In the first- and second participants indicated that only a small fraction of the quarter BLPS, a majority of banks reported no change syndicated loans on their books were originated to in their underwriting standards for C&I loans. How finance LBOs. Indeed, nearly two-thirds noted that ever, as concerns about financial market conditions LBO-related syndicated loans accounted for less than mounted and the allocation of syndicated loans to 5 percent of the syndicated loans on their books, investors became difficult during the second half of
Profits and Balance Sheet Developments at Us. Commercial Banks in 2007 A 7 ful in some cases at reducing their exposures by selling some leveraged investors were reported to have unwound loans to investors, although often at prices well below par. their positions. average bid prices on leveraged loans All told, leveraged loan issuance slowed sharply in the plunged, and the implied LCDX spread widened sharply. second half of 2007, as institutional lending tumbled Loan market liquidity was reportedly poor, and the more than 50 percent from the level of the previous six average bid-asked spread widened to a level well above months, to about $140 billion. the peak reached in the summer of 2007. Since mid Pressures in the leveraged syndicated loan market have March 2008, conditions in financial markets appear to continued so far this year, and activity has remained have improved somewhat, and loan prices have reversed subdued. Financial market dislocations eased somewhat some of their earlier declines. Nonetheless, only $54 bil in January, but they subsequently intensified again. In lion of leveraged loans cleared the primary market in the addition, the financial market pressures and the ongoing first quarter of 2008, down from the $209 billion syndi decline in the housing sector led investors to mark down cated a year ago. Also as of the first quarter, issuance of their outlook for economic activity. As concerns about the institutional loans. at about $12 billion. dropped more eft'ect of slower growth on credit quality mounted and as than 90 percent from its year-earlier level. A. Issuance of U.S. leveraged syndicated loans, 2002-08 B. LCDX indexes, 2007-08 Billiom of dou.u. lIIIlusl nolO ___________________________________B_ u_w ~mg o Institutionat loans 500 • Bank loans - 800 400 - 600 300 200 100 I I 2007 2008 Non;: The data extend through 2008:QI. Institutional loans are term Non;: The data are daily and extend through March 31, 2008. Each loans of relatively long maturity and intended for institutional investors, LCDX index consists of 100 single-name credit default swaps including loan mutual funds, coUateralized loan obligalions, insurance referencing entities with flrSl-lien syndicaled secured loans that trade in companies, finance companies, and bedge funds. Bank loans are the the secondary market for leveraged loans. Series 8 began trading on remaining portions of syndicated leveraged loans and can include both May 22, 2007, rmd series 9 on October 3,2007. revolving credits and sborter-maturity term loans. SoURCE: Marltil. SouRCE: Reuters LPCIDcaIScan. 2007, significant net fractions of respondents tight activity. Real estate loans backed by nonfarm nonresi ened their credit standards and terms on C&I loans. dential structures, the largest category of CRE loans. CRE loans expanded 9.2 percent last year, down grew at a pace somewhat below its recent average, from the very rapid rates posted over the previous and CRE loans secured by multifamily dwellings also three years. The slowdown was widespread but was expanded somewhat more slowly than in 2006. somewhat more pronounced at the largest institutions. Smaller banks maintained the relatively high concen For 2007 as a whole, CRE lending was supported by trations of CRE lending that they had built over the growth of construction and land development loans, past two decades (figure 8).5 which accounted for more than one-third of all CRE loans at the end of the year (figure 7). However, the growth in this category of CRE loans, which includes 5. In view of the increasing concentration at smaller institutions, regulators issued interagency guidance in December 2006 to promote loans to residential real estate developers, slowed in sound risk-management practices at banks regarding their CRE loans. the second half of 2007 along with housing market See Office of the Comptroller of the Currency, Board of Governors of
A8 Federal Reserve Bulletin 0 June 2008 6. Change' in demand and upply conditions at elected 7. Change in commercial real esL:'lte loans, by major banks ror commercial and industrial loans to large and components, 1990---2007 middle-market tim1s. 1990-2007 Percent Percenl Net percentage of banks reporting stronger demand I 40 60 30 40 20 20 + o 10 + o 20 40 10 60 20 80 I I I I I I I I I I I I I I I I I I I I t I I I I I I I I I I I t I 1991 1993 1995 1997 1999 200 1 2003 2005 2007 NOTE: The data are annual. Net percentage of banks reporting tighter standards 2 60 8. Share or all loans con:;isling or commercial real e tate loans by hank size. 1990-2007 40 Percent 20 + 50 o 40 20 Medium-sized 30 I t I I I I II I I I I I t I I I I I I I I and small banks 1991 1993 1995 1997 1999 2001 2003 2005 2007 20 NOTE: The data are drawn from a survey generally conducted four times per year; the last observation is from the January 2008 survey. which covers 2007:Q4. Net percentage is the percentage of banks reponing ao increase in 100 largest banks 10 demand or a tightening of standards less, in each case, the percentage reponing the opposite. The definition for firm size suggested for. and I I I I I I I I I I I I I I t it I generally used by. survey respondents is that large and middle-market firms have annual sales of $50 million or more. 1991 1993 1995 1997 1999 2001 2003 2005 2007 I. Series begins with the November 1991 survey. NOTE: The data are quarterly. For the definition of bank size, see the 2. Series begins with the May 1990 survey. general note on the first page of the main tex\. SOURCE: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices (www.federa1reserve.gov/boarddocs/snloansurvey). toward a more stringent lending posture was likely due, in part, to the effect of the softening economic The lower growth rate of CRE loans in 2007 outlook on the expected credit performance of CRE appears to have reflected a moderation in demand and loans. In addition, banks may have been concerned a reduction in supply, trends that began in 2006 but about deteriorating conditions in the market for com accelerated last year (figure 9). Banks responding to mercial mortgage-backed securities (CMBS). Amid the BLPS indicated that demand for CRE loans the broad reassessment of the risks associated with weakened steadily throughout 2007. On the supply structured financial products, investors in CMBS side, a notable fraction of survey respondents reported retreated from the market, spreads moved signifi a tightening in their credit standards for CRE loans cantly higher, and issuance dried up. over the period. Terms on CRE loans were also tightened, with many banks requiring higher loan-to Loans to Households value and debt-service-coverage ratios. The move Pressures in the housing market, including outright the Federal Reserve System, and Federal Deposit Insurance Corpora declines in home prices in some areas, continued to tion (2006), "Federal Banking Agencies Issue Final Guidance on affect bank lending to households last year (fig Concentrations in Commercial Real Estate Lending," press re ure 10). In response to the easing of monetary policy lease, December 6, www.federalreserve.gov/newsevents/presslbcreg! 20061206a.htm. that started in September, mortgage rates moved
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 A9 ~. Ch,UlgI:S in demanu anu upply cunditil1n ilt to Ch,mge in prices of exisling single-family h mes, sel<!clect ban.ks for commercial real estale loans. 1988-07 1996-2007 PcrCl!nL ----------------------------------P-\!.rccm 20 Net percentage of banks reporting stronger demand 60 15 40 10 20 + o + o 20 40 10 60 I I I I I I I I I I I I I I I I I I I I I I I 1989 1991 1993 1995 1997 1999 200 I 2003 2005 2007 NOTE: The data are quarterly and extend through 2007:Q4; changes are Net percentage of banks reporting tighter standards from one year earlier. For the years preceding 1991, the repeat-transactions index includes appraisals associated with mortgage refinancings; beginning in 60 1991, it includes purchase transactions only. The S&P/Case-Shilier index refiects all arm's-length sales transactions in the metropolitan areas of Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San 40 Diego, San Francisco, and Washington. D.C. SOURCE: For repeat transactions, Office of Federal Housing Enterprise 20 Oversight; for S&P/Case-Shiller, Chicago Mercantile Exchange. + o and credit standards for prime, nontraditional, and subprime mortgages. In the year's remaining surveys, 20 large net percentages of banks reported weaker I I I I I I I I I 1 demand in all three loan categories and indicated that 1997 1999 2001 2003 2005 2007 they had tightened their credit standards for all three NOTE: See figure 6. general note and source note. types of residential mortgages. Not surprisingly, the tightening was especially pronounced for nontradi down over the remainder of 2007, and refinancing tional and subprime products, although only a small activity increased somewhat (figure 11). Neverthe number of banks reported that they originated less, the severe drop in home sales weighed on subprime loans during that period. residential mortgage lending, and turmoil in credit markets during the second half of 2007 impaired or II. Level refinancings of residenlial mortgages. securitizations of nonconforming mortgages. Overall, 1990--2007 the value of mortgages on banks' books grew just 5.5 percent last year; excluding the aforementioned January 26. t990 = t conversion of a large bank to a thrift charter, the 90 growth rate was 9.3 percent, still the lowest rate of 80 increase since 2001. 70 The slowdown in residential real estate lending 60 stemmed from both weaker demand and tighter credit 50 standards. In the BLPS survey conducted during the 40 first quarter of 2007, considerable net shares of 30 respondents reported reduced demand for residential 20 mortgages.6 Beginning in the second quarter, banks 10 were asked to report separately on changes in demand + o I I I I I I I I I I I I I I I I I I I I I - 6. In asking banks how demand for mortgages to purchase homes 1991 1993 1995 1997 1999 200 I 2003 2005 2007 has changed over the past three months, the BLPS instructs banks to NOTE: The data are 4-week moving averages. Residential mortgages consider only new originations as opposed to the refinancing of include both first and second liens secured by one-to four-family residential existing mortgages. However, that distinction may be difficult for properties. banks to make in practice. SOURCE: Mortgage Bankers Association.
AIO Federal Reserve Bulletin 0 June 2008 In contrast, consumer loans on banks' books ex 12. el percentage of selected bank reponing lighter panded 11.7 percent in 2007, almost double the pace standard' for consumer lending. 1996-2007 in 2006. Credit card loans grew 10 percent overall, Percent but growth was faster at large institutions, where such Credit card loans lending is concentrated. Growth in other consumer 50 lending was even more rapid. The pickup in con 40 sumer lending in the past two years might reflect, in part, a substitution away from cash-out refinancing, 30 as softer home prices have made such refinancing a 20 less viable option for some households. Nevertheless, most banks surveyed in the BLPS reported a weaken 10 ing of demand for consumer credit in 2007. In + o addition, as the outlook for household credit quality deteriorated, banks significantly tightened their lend 10 ing standards for non-credit-card consumer loans I.l. 1 1 (figure 12). According to the BLPS, the net percent Consumer loans other than credit card loans age of banks reporting tighter standards for such 30 loans reached its highest level on record in the fourth 25 quarter. In contrast, standards and terms for credit 20 card loans changed little, on net, during 2007. 15 JO Other Loans and Leases 5 + Other loans and leases grew 13 percent during 2007. 0 Lending to state and local governments grew robustly - 5 again in 2007, perhaps because of continued strong 10 growth in construction activity. Agricultural loans 1 1 1 1 1 1 1 1 1 1 expanded at a pace slightly below that of the preced 1997 1999 2001 2003 2005 2007 ing two years, as originations in this category ticked NOTE: See figure 6. general note and source note. down for most loan purposes.7 The remaining compo nents of other loans, such as lease financing receiv ables and loans to purchase and carry securities, were which led to the reclassification of certain types of about flat last year. securities (see box "New Rules on Fair Value Account iog "). Holdings of investment account securities Securities declined 4.4 percent, as banks of all sizes sold government-backed mortgage pools and collateral After growing at an average rate of about 10 percent ized mortgage obligations. In contrast, holdings of over the previous five years, overall holdings of pri vate mortgage-backed securities in investment securities at commercial banks rose just 4.6 percent accounts rose during the year. Holdings of Treasury last year. Growth in securities was particularly weak securities declined again in 2007, ending the year at in the second half of 2007, an indication that the just 2 percent of banks' investment accounts. Banks' slowdown likely resulted, in part, from banks' efforts holdings of securities issued by state and local gov to offset rapid growth elsewhere on their balance ernments kept pace with overall asset growth, al sheets. At the same time, banks shifted securities out though such securities ran off late in the year amid of investment accounts and into trading accounts; concerns that the private guarantors of municipal some of that shift is traceable to a few large institu securities held exposures to subprime mortgage tions that adopted new rules on fair value accounting, backed assets that imperiled their AAA ratings. 7. Using its Survey of Terms of Bank Lending to Farmers, the Federal Reserve estimates the amount of non-real-estate bank loans Liabilities made to farmers by loan purpose, such as to obtain farm equipment and machinery or to cover operating expenses. The information is Bank liabilities increased 10.8 percent in 2007, an published quarterly in Board of Governors of the Federal Reserve advance matching that in bank assets. Core deposits System, Statistical Release E.15, "Agricultural Finance Databook," section A, www.federalreserve.gov/releases/eI5. grew only 3.2 percent, the slowest rate since 1999,
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 A II New Rules on Fair Value Accounting Statement of Financial Accounting Standards (FAS) number of banks continuing to file this schedule declined No. 159, finalized by the Financial Accounting Standards through the remainder of the year (table A). Among these Board in 2007, provides an option to elect a fair value banks, the application of the fair value option has been measurement for most financial assets and liabilities. 1 limited. Although some banks elected the FVO for a The election of the fair value option (FVO) applies on an portion of their existing loan portfolio, the amount was instrument-by-instrument basis, is generally restricted to small relative to total loans outstanding, and few new use at the inception of a financial instrument (for example, loans have reportedly been placed under the FVO. Indeed, on the purchase date, on the origination date, or after a as of the end of the year, loans and leases reported at fair business combination). and is irrevocable. Although this value accounted for less than 2 percent of all loans and standard did not become effective until 2008. banks were leases. The bulk of these assets consisted of residential able to adopt the FVO earlier (starting with their March real estate loans intended to be secUlitized at a few large 2007 financial statements), provided that they were also banks. early adopters of FAS 157, which establishes the I1Iles The etl'ect of the FVO on some banks' securities governing fair value measurement.2 The FVO standard portfolios was somewhat more pronounced. In the first permitted a one-time application of fair value accounting quarter of last year. trading accounts at commercial banks to existing assets and liabilities. with the effect of the increased $70 billion. in part because some early adopters remeasurement reported in retained earnings and not in took advantage of the FVO and reclassified assets into net income. these accounts. At year-end. 85 percent of all trading The new rules had two possibly significant effects on assets were held by banks reporting on schedule RC-Q. bank balance sheets. First, business and residential real although. again. most of the amount was concentrated in a estate loans previously held at amortized cost could be handful of large institutions. revalued pursuant to an FVO election. Second, securities to which the FVO was applied were required to be A. Fair value of selected assets held by U.S. commer reclassified from available-for-sale or held-to-maturity cial banks. as reported under the fair value option. accounts to trading accounts. Because losses from the 2007 revaluation of these securities are not reported in current earnings, some banks may have had an incentive to Billions of dollars except as nOled reclassify large portions of their securities portfolios upon Number Loans and leases Trading assets adopting the FVO. of banks I I The overall effect of the FVO on bank balance sheets Period sc f h il e i d n u g le u R n e d p e o r n ! e h d e Total s F c i h le e r d s u o le f Total has been limited thus far. Fewer than 150 banks filed RC-Q FVO RC-Q schedule RC-Q of the Call Report, which is required for QI .. . . . . . . 148 83 5.910 563 679 Q2. ...... 122 102 6,100 614 723 FVO adopters, on the March 2007 reporting date, and the Q3 .. ..... III 107 6.316 678 803 Q4 .. .. 107 120 6,561 737 867 I. More·narrow fair value options are availabk in FAS 155, Account ing for Certain Hybrid Financial Instrumenl.<-An Amendment of FASB NOTE: Data are as of April 16,2008. Schedule RC-Q oJ" !he Call Re Swtements No. 133 and 140. and FAS 156, A<"cOIllltinl: for Sen'icing of pon is required for banks electing Ihe fair value option (FVO) under Financial Asset.,-An Am"ndment of FASB Statement No. 140. FAS 159. 2. Among olher innovations, FAS 157 implemenls a Ihree·liered SouRn: For the FVO value of loans and leases. Federal Financial In hierarchy for measuring fair value; an assel's classification depends on Ihe stitutions Examinalion Council, Consolidated Repons of Condition and relative reliabililY of Ihe inputs 10 Ihe measuremenl. based on Iheir Income (Call Repon). schedule RC-Q; J"or olher dala, Call Repon, observability. schedule RC. and transaction deposits contracted for the third con its. over the second half of the year (figure 13). Small secuti ve year.8 The rate of expansion of savings and time deposits grew somewhat faster than savings money market deposit accounts slowed despite the accounts; aggressive bidding for them by banks held decline in short-term market interest rates, which their yields steady even as other short-term rates lowered the opportunity cost of holding liquid depos- declined in the fall. Core deposits are generally a more important funding source for smaller banks than for larger institutions, but core deposit growth was 8. Before 2007, insured brokered deposits were included in large essentially zero for banks below the top 100 in 2007. time deposits on the Call Repon. As of the first quarter of last year, they are classified as small time deposits. The accounting change To compensate for the lackluster growth of core makes it appear as if there were rapid decreases in large time deposits deposits, banks-especially the largest institutions and rapid increases in small time deposits in that quarter. The growth continued to ramp up their managed liabilities. Those rates reponed in the text have been adjusted for this effect and thus do not match the numbers reponed in table I. funding sources accounted for 41 percent of the
A 12 Federal Reserve Bulletin 0 June 2008 13. Change in selected domestic liabiliLies al banks, 14. Regulatory capilal ralios. 1990-2007 1990-2007 Percen, Percent 14 25 13 20 12 15 1\ 10 5 Tier 1 10 + o - 9 5 Leverage 8 / 10 7 _ Small time deposits 15 6 20 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 1991 1993 1995 1997 1999 2001 2003 2005 2007 1991 1993 1995 1997 1999 200 1 2003 2005 2007 NOT~: The data are as of year-end. For the components of the ratios, see NOT~: The data are as of year-end. Savings deposits include money market text notes 9 and 10. deposit accounts. the second half of the year.9 Risk-weighted assets expanded 10.8 percent, a rate in line with that for total liabilities of all banks at year-end, up dramatically assets. As a result, the industry's tier 1 and total over the past decade. Given the deterioration in capital ratios ended the year a bit lower than they interbank markets late in the year, growth in managed were a year earlier. The regulatory leverage ratio, liabilities was due primarily to the expansion of which is based on tier 1 capital and tangible average nonbank deposits booked in foreign offices (the larg assets, also edged down.lo Nevertheless, the share of est component of managed liabilities) and to Flll...B assets at well-capitalized banks remained above advances, which grew 42 percent at the 10 largest 99 percent in 2007, although the average margin by banks. Although growth in FHLB advances was which banks remained well capitalized slipped to lower at medium-sized banks, those banks now use 1.84 percent, at the lower end of the range over which advances to fund more than 5 percent of their assets. it has fluctuated during the past decade (figure 15).11 Large time deposits expanded 13 percent, primarily in the second half of the year. 9. Tier 1 and tier 2 capital are regulatory measures. Tier I capital consists primarily of common equity (excluding intangible assets such CapitaL as goodwill and excluding net unrealized gains on investment account securities classified as available for sale) and certain perpetual pre ferred stock. Tier 2 capital consists primarily of subordinated debt, Equity capital held by commercial banks expanded preferred stock not included in tier J capital, and loan-loss reserves up 11 percent in 2007, about in line with asset growth. to a cap of 1.25 percent of risk-weighted assets. Total regulatory Retained earnings slipped to just 0.2 percent of assets, capital is the sum of tier I and tier 2 capital. Risk-weighted assets are calculated by multiplying the amount of assets and the credit the lowest level since 1991. However, mergers and equivalent amount of off-balance-sheet items (an estimate of the acquisitions boosted goodwill, leading to a rise in potential credit exposure posed by the items) by the risk weight for each category. The risk weights rise from 0 to 1 as the credit risk of the capital. In addition, parent holding companies in assets increases. The tier I ratio is the ratio of tier I capital to jected about $40 billion into their commercial bank risk-weighted assets; the total ratio is the ratio of the sum of tier I and subsidiaries in 2007, mostly late in the year, to bolster tier 2 capital to risk-weighted assets. 10. The leverage ratio is the ratio of tier I capital to average capital positions in view of the pronounced deteriora tangible assets. Tangible assets are equal to total average consolidated tion in asset quality and the C&I-fueled expansion of assets less assets excluded from common equity in the calculation of loan portfolios. About 60 percent of the volume of tier I capital. II. Well-capitalized banks are those with a total risk-based capital transfers from parent holding companies was attribut ratio of 10 percent or greater, a tier I risk-based ratio of 6 percent or able to one large commercial bank. greater, a leverage ratio of 5 percent or greater, and a composite Growth of regulatory capital generally slowed last CAMELS rating of I or 2. Each letter in CAMELS stands for a key element of bank financial condition--Capital adequacy, Asset quality, year (figure 14). Tier 1 capital grew 7.1 percent. The Management, Earnings, Liquidity, and Sensitivity to market risks. The gain of 9.7 percent in total regulatory capital reflected estimated average margin by which banks were well capitalized was a 20 percent increase in tier 2 capital. The rise in tier 2 computed as follows: Among the leverage, tier I, and total capital ratios of each well-capitalized bank, the institution's "tightest" capital capital, in tum, was attributable in part to higher ratio is defined as the one closest to the regulatory standard for being loan-loss reserves, as banks boosted provisioning in well capitalized. The bank's margin is then defined as the percentage
u.s. Profits and Balance Sheet Developments at Commercial Banks in 2007 A 13 15. Assets and regulatory capital at well- apit lilca banks. principal amount. The fair market values of contracts 1990-2007 with positive and negative values in 2007 were both about $1.9 trillion, representing increases of about i'lcn;cnl 60 percent over the year.12 The growth stemmed Share of industry assets at well-capitalized banks primarily from changes in the values of credit deriva 100 tives at large institutions. One important way for banks to hedge interest rate 80 risk, including that related to interest-sensitive assets such as mortgages and mortgage-backed securities, is 60 through the use of interest rate swaps.13 Those swaps are the most common type of derivative used by 40 banks and account for about two-thirds of the notional value of banks' derivative contracts, although most of 20 the swaps are held for trading and market-making I I I 1 purposes rather than for hedging. The notional value Percentage point" of interest rate swaps increased 27 percent in 2007, Average margin by which banks were well capitalized which is about the average pace over the past decade. Other types of interest rate derivative contracts em 3.0 ployed by banks include futures, forwards, and op tions. The notional value of these other derivative - 2.5 contracts also expanded at a brisk rate last year. Despite the growth in interest rate derivative con - 2.0 tracts, their share of total derivative contracts dropped 3 percentage points, to 78 percent. One of the fastest growing components of banks' 1.5 derivative portfolios in recent years has been credit derivatives. The notional value of such derivatives at 1 I I I I I I I I I I I I I I I I I I I , 1991 1993 1995 1997 1999 2001 2003 2005 2007 banks jumped 76 percent in 2007, a rate of increase somewhat faster than that in 2006. Increasingly, NOTE: The data are annual. For the definitions of "well capilalized" and of the margin by which banks remain well capitalized, see text note II. banks are participating in the credit derivatives mar ket by using credit default swaps written on loan Derivatives and O.ff~Balance-Sheel Items contracts rather than on corporate bonds. Amid the financial turmoil in the second half of the year, the The notional principal amount of derivative contracts market prices of many credit derivative contracts held by banks rose 26 percent last year, to more than changed so dramatically that their fair value more $160 trillion (table 2). Even though the notional value than doubled at many large banks. The concentration of derivative contracts grew at banks of all sizes, the in this market was even more apparent than in other share of industry contracts at the 10 largest banks has derivatives markets, as the 10 largest banks held more continued to edge higher and stood above 98 percent than 99 percent of the notional value of all the at the end of the year. The considerable concentration industry'S credit derivative contracts at the end of mostly reflects the role that some of the largest banks 2007. As dealers, the 10 largest banks are beneficia playas dealers in the derivatives markets. As dealers, ries of protection when they buy contracts and providthese banks often enter into offsetting positions, which significantly boost the notional value of their derivative contracts. The fair market value of deriva ti ve contracts held by banks reflects the contracts' 12. That the fair market values of banks' derivative contracts are replacement cost and is far smaller than the notional nearly offsetting does not mean that banks' aggregate exposures to the market and credit risk associated with the contracts are likewise nearly offselling because, for example, the counterparties to banks' positive point difference between its tightest capital ratio and the corresponding and negative-valued con1racts may differ. regulatory standard. The average margin among all well-capitalized 13. Interest rate swaps are agreements in which two parties contract banks-the measure referred to in figure IS-is the weighted average to exchange two payment streams, one based on a floating interest rate of all the individual margins; the weights are each bank's share of the and the other based on a fixed interest rate; the payment streams are total assets of well-capitalized banks. calculated on the basis of the notional principal amount of the contract.
A14 Federal Reserve Bulletin 0 June 2008 2. Chang in notional value and fair value of derivatives, all US. banks, 2002-07 Percent MEMO Dec. 2007 Item 2002 2003 2004 2005 2006 2007 (billions of dollars) Total derivatives Notional amount ................ 24.14 26.54 23.69 15.38 29.75 25.76 166.190 Fair value ..... .............. Positive .. ..... . ...... . .... 85.41 .36 13.71 -6.46 -4.50 57.78 1,902 Negative .............. ...... 89.18 1.00 13.75 -5.78 -4.27 56.63 1,869 Interest rate derivatives Notional amount .... ......... 26.83 27.62 22.07 11.92 27.11 20.63 129.560 Fair value .................... Positive. .................. 108.20 -5.95 13.14 -5.52 -14.55 42.22 1,194 Negative ............. ..... 113.02 -5.07 12.94 -5.15 -15.06 42.12 1,160 Exchange mte derivatives Notional amount ........ ..... 7.34 18.81 21.03 7.69 29.27 36.69 17.174 Fair value ........ ......... Positive ......... ........ 8.67 41.81 14.86 -35.84 22.86 44.38 260 Negative ..... ... . ..... 15.73 38.81 12.74 -37.36 21.39 45.02 254 Credit derivatives Notional amount . ............ 52.47 55.98 134.52 148.09 54.93 75.87 15,863 Guarantor . .. ............. 38.57 61.82 139.07 137.87 67.69 73.99 7,823 Beneficiary. ........ . ..... 66.36 51.13 130.46 157.53 44.03 77.74 8,040 Fair value .................... Guarantor .................. n.a. 68.31 69.92 81.43 92.96 295.25 274 Positive .................. n.a. 378.09 74.56 -5.62 201.40 -38.79 31 Ne~ative ................. o.a. -68.87 38.37 827.98 -1.59 1.187.41 243 Bene ciary ................. n.a. 19.85 51.28 83.50 90.26 301.20 312 Positive ........... ...... n.a . -63.13 2.64 505.51 3.98 1,086.95 267 Negative ...... .... . .... n.a . 295.74 66.36 2.79 187.44 -18.95 45 Other derivatives I Notional amount .... . .... 6.70 3.77 32.66 29.43 75.17 13.60 3,593 .... Fair value ........ .. Positive ......... ......... 20.28 3.16 8.55 58.51 18.99 32.76 ISO Negative ......... ......... 24.62 -5.25 19.73 74.29 24.15 30.67 167 NOTE: Data are from year-end to year-end and are as of April 16, 2008. I. Other derivatives consist of equity and commodity derivatives and other contracts. n.a. Not available. ers of protection (guarantors) when they sell. Banks 10 percent, and letters of credjt rose about 8 percent. are typically net beneficiaries of protection; as of The category "other unused commitments," which year-end, contracts in which banks were beneficiaries consists primarily of lines to businesses, grew 11 per of protection totaled $8.0 trillion, and contracts in cent over the year as a whole but contracted in the whjch they were guarantors totaled $7.8 trillion (fig fourth quarter. ure 16). Banks also use derivatives related to foreign ex 16. Notional amounts of credit derivatives for which change, equities, and commodities. Collectively, how banks were heneficiaries ur guarantor', 2000-07 ever, those instruments account for only 13.6 percent Trillions of dollars of the notional value of the derivative contracts held by banks. The notional value of banks' foreign 8.0 exchange-related contracts grew 37 percent in 2007, 7.0 considerably faster than in previous years. Bank 6.0 customers likely increased their hedging activity in 5.0 light of sharp exchange rate movements last year. Banks' notional holdings of equity and commodity 4.0 derivatives rose 14 percent in 2007. 3.0 Unused commitments at commercial banks grew 2.0 slightly more slowly than assets in 2007. Lines of 1.0 credit secured by one- to four-family residential + o properties grew just 5.8 percent amid the deteriora I I I I I I I I tion in the housing market, and commitments to fund 2000 200 I 2002 2003 2004 2005 2006 2007 CRE loans were flat. Credit card lines increased about NOTE: The data are quanerly.
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 A15 TRENDS IN PROFITABILITY A decline in non-interest income for the year-the first such dip in at least 40 years-contributed impor After many years of high earnings, the commercial tantly to the lower profitability of banks in 2007. banking industry posted significantly lower profits in Non-interest income was 2.1 percent of average total 2007. Industrywide net income contracted more than assets last year, the lowest share since 1995. Large 20 percent, primarily because of a sharp drop in banks experienced a substantial decline in revenue trading revenue and much higher provisions for loan from trading and loan sales, whereas smaller banks losses in response to deterioration in asset quality. registered slower growth in other types of non Return on equity (ROE) for the full year fell to less interest income. Non-interest expense grew rapidly than 10 percent from more than 13 percent in recent again in 2007, and the increase was spread across a years. Banks' return on assets (ROA) also declined range of categories. markedly last year, to less than I percent, its lowest Profits in 2007 were also significantly reduced by a level since the early 1990s. The sector's profitability surge in loss provisions stemming from a slump in which had weakened somewhat in the first half of the asset quality. Amid falling house prices and a slowing year-dropped sharply in the second half. In the economy, the delinquency rate on residential mort fourth quarter, ROE tumbled to around 4 percent and gages held by banks climbed to about 3 percent at ROA to 0.4 percent. year-end, its highest rate in more than a decade. The The decrease in profitability was most pronounced delinquency rate on CRE loans doubled to 2.7 percent among the largest commercial banks, but ROA and at year-end. That jump primarily reflected surging ROE decreased considerably for all bank-size groups. delinquencies on construction and land development In the fourth quarter, some of the largest commercial loans, particularly those used to finance residential banks posted substantial losses that reportedly re projects. Banks also recorded smaller but still notice sulted mainly from write-downs of the value of able increases in delinquency rates on consumer and mortgage-related assets and other structured invest C&I loans. Charge-off rates, which had been very low ment products; however, almost all of those banks in each of the past several years, moved up along with remained profitable for the year as a whole.14 Overall, delinquencies. the fraction of banks that incurred losses in 2007 Despite the steep drop in profits, banks still in increased notably, to about 10 percent, and those creased dividends in 2007 after having raised them institutions accounted for about 3 percent of industry more than 25 percent in 2006. As a result, dividends assets, the highest share since 2000. absorbed much of last year's profits, and retained Net interest margins of commercial banks slipped earnings contributed relatively little to capital. The further in 2007. Over the first half of the year, spreads erosion in profits as well as investors' concerns about reportedly were compressed by price competition in banks' exposures to structured investment products, business and mortgage lending. With financial mar leveraged loans, and subprime mortgages precipitated kets and institutions under pressure in the second half a sharp decline in bank stock prices, which consider of the year, interest rate spreads over market reference ably underperformed the S&P 500 last year (fig rates on many types of bank loans widened. Banks ure 17). Similarly, premiums on credit default swaps were unable to benefit fully from those developments on banks' subordinated debt widened sharply (fig because spreads on many types of bank funding, ure 18). especially term funding in wholesale markets, in creased well above their levels in recent years. The Inferest II/come and Expense unexpected growth of their balance sheets in the second half of 2007 also forced banks to rely more After increasing throughout 2006, the average interest heavily on managed liabilities and small time depos rates earned on assets and paid on liabilities peaked its, sources of funds that tend to have higher average around the beginning of 2007. Average interest rates interest rates than liquid deposits. on many of banks' assets and liabilities decreased late in the year, in part owing to the decline in market interest rates as the Federal Reserve eased the stance 14. It is worth emphasizing that the analysis in this article is based of monetary policy. However, this decline only partly on the Call Reports for commercial banks. For a commercial bank that reversed the run-up in 2006, and, as a result, average is a subsidiary of a bank holding company or a financial holding company, the Call Report does not include the assets, income, or effective interest rates on banks' assets and liabilities expenses of the other subsidiaries of the larger organization, including were somewhat higher in 2007 than in 2006. The nonbank subsidiaries. Thus. the profits of the commercial banks that average interest rate earned increased somewhat less are subsidiaries of a larger banking organization may differ substan tially fTOm the profits of the consolidated institution. than the average rate paid, and the industry wide net
A16 Federal Reserve Bulletin 0 June 2008 17. Stock price indexes. 200 J---08 19. el inlere t margin, by size of bank. 1990-2007 January 2007 ; 100 Percent All banks 4.50 - 100 4.25 4.00 - 80 3.75 3.50 - 60 3.25 I I I I I I I I I I I I I I I I I I 200 I 2002 2003 2004 2005 2()()6 2007 2008 NOTE: The data are monthly and extend through March 2008. SOURCE: Standard & Poor's and Dow Jones. 5.00 interest margin declined II basis points in 2007, to 4.50 3.36 percent (figure 19). The decline represented a continuation of the longer-term downward trend in 4.00 net interest margins evident since the mid-1990s. Particularly over the second half of the year, banks 3.50 took steps that could help stem the decline in net 3.00 interest margins. According to the BLPS for October 2007 and for January 2008, banks charged wider I I I I I I I I I I I I I I I I I I I I I spreads on C&I loans relative to their cost of funds in 1991 1993 1995 1997 1999 200 I 2003 2005 2007 the second half of last year-the first such increases NOTE: The data are annual. Net interest margin is net interest income in several years (figure 20). Similarly, about half the divided by average interest·earning assets. For the definition of bank size. see the general note on the first page of the main tex!. banks responding to a question in the January 2008 survey reported having increased spreads on CRE loans over the course of 2007 after they had reported The average interest rate on bank assets in 2007 narrowing spreads on such loans in 2006. Banks also increased 13 basis points, to 6.78 percent. The rise reported that, on net, they widened spreads on con mostly reflected higher average rates on trading sumer loans during 2007. account securities and on federal funds sold and reverse repurchase agreements. The measured returns 18. Premium on credit defaulL swaps on subordinated tlehl for the latter category were boosted by elevated at selected banking inslitulions. 2002-08 spreads in bank funding markets during the second half of the year. The average interest rate earned on __________________B"" _is poims loans and leases was little changed relative to 2006. After increasing throughout 2006, the average interest 120 rate earned by banks on business loans held steady 105 over much of 2007-at about the level that prevailed 90 in the second half of 2006-and then decreased some 75 late in the year. The November 2007 Survey of Terms of Business Lending, which measures the interest rate 60 on new loan originations at a broad sample of banks, 45 indicates that interest rates on new business loans fell 30 significantly relative to earlier in the year. According 15 to the survey, a majority of C&I loans have variable I I interest rates and are made under the terms of previ 2002 2003 2004 2005 2()()6 2007 2008 ously negotiated commitments; thus, their interest NOTE: The data are weekly and extend through March 2008. Median rates declined along with comparable-maturity mar spread of all available quotes. SOURCE: Markit. ket interest rates, and spreads on such loans remained
u.s. Profits and Balance Sheet Developments at Commercial Banks in 2007 A 17 20. et percentage r sdcl:teu domestic bank. reporting interest rates than liquid deposits. The rate on savings increased spreads of raIl! on various types of loans deposits (including money market deposit accounts) over cost of funus. 1990-2008 averaged 2.22 percent last year, somewhat higher than in 2006. The average interest rate on small time __________________- --.:...:Perccnl deposits increased significantly to 4.72 percent in Commercial and industrial 60 2007, and it remained elevated at the end of the year even though interest rates on other money market 40 instruments declined. Banks, particularly those expe 20 + riencing unplanned expansions of their balance sheets o or those leery of volatility in interbank funding 20 markets, likely kept rates on small time deposits relatively high-and, as noted earlier, boosted spreads 40 on large ti me deposi ts-to attract deposi tors. 15 60 The downward pressure on banks' net interest 80 margins last year was exacerbated by a decline in the I I I I I I I I I I I I I I I L I I I I I I share of bank assets funded by non-interest-bearing Imlml~I~lm~2~2~2D~8 liabilities and capital. 16 Because these instruments, by NOTE: The data are drawn from a survey generally conducted four times definition, have no explicit interest expense, the per year; the last observation is from the January 2008 survey, which covers 2007:Q4. Net percentage is the percentage of banks reporting an increase in returns on the interest-earning assets that they fund spreads less the percentage reporting a decrease. help support banks' net interest margins. SOURCE: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices (www.federalreserve.gov!boarddocs/snloansurvey). NOll-interest Income and Expense quite low in the November survey. The average interest rate earned on consumer loans rose somewhat Total non-interest income dipped in 2007, marking in 2007, to 10.2 percent. In contrast, the average the first time in at least 40 years that non-interest effective interest rate on real estate loans declined income contracted on an annual basis. As a result, during 2007 to a little less than 7 percent at year-end, total revenue of commercial banks, defined as net a decrease that partly reflected the effects of lower interest income plus non-interest income, edged up market interest rates on the portion of banks' real only 3.4 percent. The share of total revenue from estate portfolios that has variable interest rates. non-interest income dropped to 42 percent, its lowest Banks' increased reliance on managed liabilities, level since 1998 (figure 21). Non-interest expense which generally pay higher interest rates than other grew at a faster clip in 2007 than it had in 2006, and it funding instruments, contributed to a 23 basis point increased as a share of revenue to the upper end of its increase in the average interest rate paid on liabilities recent range. in 2007, to 3.82 percent. For 2007 as a whole, the In recent years, the growth of non-interest income interest rate on managed liabilities averaged 4.8 per has been concentrated among the largest banks, cent, a little higher than in 2006. Realized interest while smaller banks have seen this revenue source rates on the category called "other borrowed money," stagnate or decline. In 2007, non-interest income which includes FHLB advances, declined appreciably dropped at the largest banks and was flat to lower in in 2007. In contrast, interest rates on large time most other bank-size categories. The softness in deposits and on federal funds and repurchase agree non-interest income at the largest banks last year ments rose significantly between 2006 and 2007. primarily reflected steep declines in trading revenue Although the average effective interest rates paid by at a few of those institutions. Banks reported almost banks on those instruments moved down some late in $10 billion in net losses on the trading of credit the year as the Federal Open Market Committee eased policy, the spreads of those rates over various 15. The average interest rate paid on time deposits may adjust slowly to changes in market interest rates because time deposit rates short-term market interest rates jumped in the third are usually fixed for the duration of the instrument. However, about and fourth quarters of 2007 to fairly high levels. 30 percent of small time deposits, and more than 50 percent of large After a large advance in 2006, average effective time deposits, issued by banks had a remaining maturity of three months or less as of midyear 2007. Thus, the rates on a significant interest rates paid on core deposits increased some fraction of those deposits would have reset before the fourth quarter. what further in 2007, to 2.81 percent. The increase 16. For more information, see box "The Role of Non-Interest reflected both higher rates paid on each type of Bearing Instruments in the Net Interest Margin," in Mark Carlson and Roberto Perli (2004), "Profits and Balance Sheet Developments at deposit as well as the rapid growth of small time U.S. Commercial Banks in 2003," Federal Reserve Bulletin, vol. 90 deposits, which, as noted earlier, generally pay higher (Spring), p. 173.
Al8 Federal Reserve Bulletin 0 June 2008 21. . on-interest i11l:0me and selected components as 22. Income from deposit fees as a proportion or total a proportion of revenue. 1990-2007 domcsli.: deposits. 1990-2007 Percenl -----------------------------------Pcrccnl Total .80 - 45 .75 .70 - 40 .65 - 35 .60 .55 30 .so I I I I I I I I I I I I I I I I I I I I I I I I I I I 1991 1993 1995 1997 1999 200 I 2003 2005 2007 Selected components 30 NOTE: The data are annual. Other non-interest income 25 also advanced briskly, outstripping the muted growth 20 in deposits (figure 22)_ 15 The weakness in non-interest income at smaller Deposit fees 10 banks was widespread across many business lines_ = ::: Revenue from securitization activities and from loan 5 ==:t--~-----.t-~ + servicing operations declined, a development prob o ably related, in part, to the problems in the residential Trading income Fiduciary income - 5 mortgage markets. Income from subsidiaries and I I I I I I I I I I I I I I I I I I I I I other affiliates also dropped considerably at some 1991 1993 1995 1997 1999 200 I 2003 2005 2007 smaller banks; the decrease may have stemmed to NOTE: The data are annual. Revenue is calculated as the sum of non some degree from reduced contributions from mort interest income and net interest income. gage banking arms. Non-interest expense rose 9 percent in 2007, some exposures last year, which likely included some of what faster than in 2006. That increase, combined the substantial write-downs of mortgage-related struc with the sluggish growth in revenue, pushed non tured products as well as losses on collateralized interest expense to about 61 percent of total revenue, debt obligations and credit derivatives associated the top end of the range over the past 10 years with syndicated leveraged loans. Income from the (figure 23). Growth of employee compensation, which trading of equity exposures also dropped consider accounts for about 45 percent of non-interest expense, ably in the second half of the year, and trading slowed in 2007_ The easing in that category reflected revenue generated by other products-interest rate, both a reduced pace of net hiring as well as a foreign exchange, and commodities-weakened as slowdown in the growth of compensation per em well. In addition, several of the largest banks expe ployee. The cost of premises and fixed assets rose rienced losses or a steep drop in income from the modestly in 2007, about in line with recent annual sale of loans that were not held in their trading increases. Other non-interest expense, which accounts accounts, particularly in the second half of the year. for more than 40 percent of total non-interest expense, However, the difficulties were partly offset by increased more than 10 percent last year. The cat strong growth in other categories of non-interest egory includes various intercompany transactions, income at large banks. Revenue from investment such as payments to affiliates and to parent holding banking services increased as banks profited from companies, which appear to have increased notably in their role in financing robust M&A activity over 2007; it also includes expenses related to restructur much of 2007 and also benefited from high trading ing or mergers and the cost of amortization of good volumes, spurred by market volatility, in their wealth will and other intangible assets. The total of restruc management businesses. In a related area, several turing costs and amortization of intangible assets large institutions experienced jumps in income from accounted for about 15 percent of the increase in fiduciary activities. Fees collected on deposit accounts non-interest expense.
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 A19 23. on-intercst expense as a proporti n ~)f revenu.:. 24. Dclinquency and charge-off rales for loans l< 1990-2007 busine -se~. by type of loan. 1990-2007 Percenl Percent Delinquencies 70 12 68 9 66 64 6 62 3 60 + o 58 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 1991 1993 1995 1997 1999 200 I 2003 2005 2007 Net charge-oft's NOTE: The data are annual. 3.0 2.5 Loan Peliormance alld Loss Pro vi ionillg 2.0 Credit quality declined across all types of loans in 1.5 2007, and the overall delinquency rate at commercial banks rose to about 2.5 percent of total loans and 1.0 leases at year-end, its highest level since early 2003. .5 The aggregate charge-off rate also moved up, reach + o ing an annual rate of 0.72 percent in the fourth quarter, but for the year as a whole it was only a little I I I I I I I I I I I I I I I I I I I I I 1991 1993 1995 1997 1999 200 I 2003 2005 2007 more than half its recent peak in 2002. The most significant deterioration occurred in banks' residen NOTE: The data are quanerly and seasonally adjusted; the data for commercial real estate begin in 1991. Delinquent loans are loans that are not tial and commercial real estate portfolios; delinquen accruing interest and those that are accruing interest but are more than 30 cies and charge-offs on real estate loans rose to their days past due. The delinquency rate is the end-of-period level of delinquent loans divided by the end-of-period level of outstanding loans. The net highest levels in more than a decade. The erosion in charge-off rate is the annualized amount of charge·offs over the period. net of the credit quality of real estate loans was somewhat recoveries. divided by the average level of outstanding loans over the period. For the computation of these rates, commercial real estate loans exclude loans concentrated within geographic areas that were expe not secured by real estate (see table 1, note 2). riencing below-average economic growth or declines in residential home prices (see box "Geographic quite modest last year (figure 25). The default rate on Distribution of Delinquency Rates on Selected Loans corporate bonds also stayed low. Moreover, the rapid Held by Small Banks"). Charge-offs and delinquen growth in C&I loans may have reduced delinquency cies on consumer loans also moved higher during rates temporarily because loans are presumably less 2007. The credit quality of C&I loans remained fairly likely to become delinquent soon after they are strong but showed signs of slipping late in the year. extended. Charge-offs of C&I loans picked up a fair The significant rise in non performing loans and the bit in 2007, and in the fourth quarter they were about generally weaker economic outlook led banks to at their long-run average level. The rise in charge-offs substantially boost loss provisioning in 2007. mostly reflected deterioration among the portfo)jos of the largest banks. Respondents to the January 2008 C&T Loans BLPS expected the credit quality of C&I loans to weaken this year. The delinquency rate on C&I loans edged up over the second half of 2007, but it remained at a low level Commercial Real Estate Loan. (figure 24). The relatively strong performance of C&I loans throughout the year likely reflected continued The rate of delinquency on CRE loans doubled in strength in nonfinancial corporate profits and gener 2007, mostly because of a deterioration in the credit ally healthy corporate balance sheets; the interest quality of construction and land development loans. payment ratio for nonfinancial corporations remained In line with the problems in the housing sector, the
A20 Federal Reserve Bulletin 0 June 2008 Geographic Distribution of Delinquency Rates on Selected Loans Held by Small Banks The geographic distribution of delinquency rates in Many of those areas also experienced the largest increases national data on single-family mortgages has attracted in small-bank delinquency rates between year-end 2006 considerable attention. This box analyzes, as of the end of and the end of 2007. Those geographic patterns in 2007, the geographic distribution of delinquency rates at small-bank delinquency rates were broadly similar to small banks for loan categories that experienced notice those for individual mortgage loans detailed in other able detel;oration last year: residential real estate loans, sources. I However, smaller banks with headquarters in construction and land development loans, and consumer California or other western states had low delinquency loans. The analysis covers commercial banks with less rates at the end of 2007 relative to such rates at smaller than $2 billion in total assets: Because these banks likely banks in other states, even though data for individual extended the loans held on their balance sheets to busi mortgage loans show significant rates of impairment in nesses and households that are in relatively close proxim some of those western states. The divergence between ity to their head offices, the location of a head office is a individual delinquency rates and small-bank delinquency reasonably good proxy for loan location. Banks of that rates may reHect, in part, a decision by smaller banks in size held about 10 percent of the industry's residential those states not to compete vigorously in the local mortgages and about 12 percent of consumer loans at the residential mortgage markets during the housing boom. end of 2007. However, they held about one-third of all Indeed, smaller banks in those states had a relatively low construction and land development loans. concentration of residential mortgages on their books at The state-specific average delinquency rates on resi the end of 2007, and several major thrifts and large banks dential mortgages held by smaller commercial banks that specialize in residential mortgages have headquarters were generally highest in areas where economic growth in those areas. had lagged the national average or where home prices had declined after several years of rapid increases (figure A). At the end of 2007, residential mortgage quality at small commercial banks with headquarters in Michigan or other I. For illustralions of a variety of mongage loan conditions across the United States, see the set of dynamic maps and data provided by the states in the Great Lakes region was poor relative to that Federal Reserve Bank of New York (www.newyorkfed.org/ in other states. Delinquency rates on residential mort mortgagemaps); or Ben S. Bernanke (2008), "Mongage Delinquencies and Foreclosures," speech delivered at the Columbia Business School's gages at small banks were also higher than average in 32nd annual dinner. New York, May 5. www.federalreserve.gov/ Florida and many other states in the Southeast region. newsevents/speechlBernanke20080505a.htm. A. Delinquency rates on mortgages for one-to four-family homes, by state, December 31, 2007 Delinquency o rate (percent) Less !han 1.30 _ 1.30·1.67 01.68.2.37 Note: Delinquency rates for Delaware and Sout.h DakOta are not shown ~cause Ihl! data arc unrepn::sentativt: of condilions in those SlalL::S. 2.38 -2.87 Delinquency fOlie is the perct:nt ofloans 30 days or more past due or not accruing inle~st. Source: Fedl!fai FinanciallnsLirutions Examination Council. Consolidated Rcpons of Condition and Income (Call Repon). _ Greater tban 2.87
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 A21 Not surprisingly, the geographic distribution of state returns on some projects financed by nonresidential con specific average delinquency rates on residential construc struction and land development loans at small banks tion and land development loans held by small banks is depended, in part, on the anticipated population growth broadly similar to the distribution of such rates on troubled reflected in residential construction and land development residential loans (figure B). Residential developers were loans (for example, loans to finance the construction of probably aft'ected most heavily in areas where housing retail establishments). markets were weakest, leaving them with high inventories Households that have difficulty paying a mortgage may of unsold homes and reduced revenues from the homes also have difficulty making timely payments on consumer they did sell. For instance, high delinquency rates at small loans. Indeed, earlier this decade, the correlation between banks in the Midwest, Florida, and Georgia are common to the state-specific delinquency rates on those two types of both residential mortgages and residential construction loans was very high-an average of 0.77 between 2002 loans. The overall state-level correlation between the and 2005. The deterioration in the housing sector and small-bank delinquency rate on residential mortgages and tighter mortgage credit standards could also impair the that on residential construction loans was 0.54 at the end of credit quality of consumer loans if those developments 2007. The two geographic distributions differ notably in reduce the ability of consumers to use equity from their the western states, however. For example, smaller banks in homes to finance consumer spending or to payoff existing California, Nevada, and Arizona have very high delin consumer loans. Nonetheless, the correlation between the quency rates on residential construction loans but very 'low state-specific delinquency rate on consumer loans (other delinquency rates on residential mortgages. In contrast to than credit card loans) held by small banks and that on the relatively low concentration of residential mortgages residential mortgages at those institutions dipped to 0.67 in on the books of small banks in those states, the concentra 2006 and to 0.42 in 2007. The relative decoupling of tions of residential construction loans held by such banks delinquency rates on mortgage and consumer loans over are generally higher than the average concentration of such the past two years may partly stem from differences in loans at small banks across the country. some states between the condition of the housing sector The relationship between the state-specific delinquency and that of the broader state economy. In addition, the rate on other types of construction and land development changes in bankruptcy law enacted in 2005 may have loans (not shown) and that on residential construction temporarily depressed delinquency rates on consumer loans is also fairly strong, with a correlation of 0.37 at the loans in 2006 and, likely to a lesser extent, in 2007, which end of 2007. Such a relationship might be expected if may also have weakened the correlation. B. Delinquency rates on loans for residential construction and land development, by state, December 31,2007 Delinquency rate (percent) D Less lhan 2.32 _ 2.32.3.13 D 3.14·4.56 NOIe: Delinquency rat..:s for Delaware and South Dakota are nOl shown bct:ause tht: data are unrepresentative of conditions in those slates. _ 4.57.7.70 Delinquency (ale is the. perce", of loans 30 days or morc past due or not accruing interest. Source: fcdcraJ FinanciallnslitUlions Examination Council, Consolidated Reports of Condition and Income (Call Report). _ Greater than 7.70
A22 Federal Reserve Bulletin 0 June 2008 25. Interest-paymenl ralio for nonfinancial corpol1llion. . 26. D'linqucncy amI charge-ofr rates for construction 1990-2007 and land developmenl loans. by IYP~ of 103n. 2007 Percent Percen. _ Delinquencies 9 20 o Residenlial 8 18 • Other 7 16 -6 14 5 4 12 3 10 2 8 I I I I I I I I I I I I I I I I I I I I I 1991 1993 1995 1997 1999 200 I 2003 2005 2007 Net charge-orrs NOTE: The data are quanerly. The inlerest-payment ralio is calculated as inlerest payments as a percenlage of cash flow. SOURCE: Nalional income and producl accounts and Federal Reserve -1.2 Board. -1.0 delinquency rate on construction and land develop - .8 ment loans that financed residential development nearly tripled between the first and fourth quarters of 2007, to 7.3 percent at year-end (figure 26). More over, the majority of the increase in this delinquency rate was attributable to loans put on non-accrual status, which means that the banks perceive a very low probability that the borrowers will resume mak ing payments. Charge-off rates on those loans also NOTE: For definilions of delinquencies and net charge-offs, see the nOle for figure 24. rose considerably, from near zero in the first quarter to more than 1 percent at an annual rate in the fourth Loans to Households quarter of 2007. Other (nonresidential) construction and land development loans experienced marked The credit quality of household loans weakened, on increases in delinquency and charge-off rates as well, balance, in 2007, primarily because of a sharp in but the run-ups were somewhat less steep than in the crease in delinquencies and foreclosures on residen residential construction sector. tial mortgages. The performance of credit card and The credit quality of other types of CRE loans also other consumer loans also deteriorated. Household worsened in 2007, particularly that of loans for bankruptcy filings remained low relative to the levels multifamily residential properties. The delinquency seen before the changes in bankruptcy law imple and charge-off rates on loans backed by nonfarm mented in late 2005, but the bankruptcy rate moved nonresidential properties (for example, office build up a fair bit in 2007 (figure 27). The household ings) edged up but stayed within the very low ranges financial obligations ratio remained near its record that have prevailed over the past decade. In part, the high reached in 2006, as slower growth in household sustained strong performance in this sector reflected debt last year was offset by a deceleration in dispos fundamentals-such as vacancy rates, rents, and able personal income. prices-that remained solid through most of 2007. Nonetheless, by the end of the year, some of those Re idential Real E ·tale Loan' fundamentals had begun to show signs of erosion: Vacancy rates edged up, rent growth slowed, and Credit quality in the residential mortgage sector wors indicators of CRE prices slipped. The number of sales ened sharply in 2007. The deterioration was partly of commercial properties also slumped. rooted in the easing of underwriting standards around
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 A23 27. Indicators of hou eholt.! linanci<l] stre s, 1991-2007 2X. Rate of erious delinquency on residential mortgages. by type of mortgage ant.! type of intere l rate. 2000-08 Per IOO.tlOO persons Percent _ Household bankruptcy filings 900 SOO 25 700 20 600 Subprime, variable rate 500 15 400 10 )00 200 - 5 100 ====- Prime, fixed rate ? + o Prime. variable rate Percent ] I I I I 1 I 1 I 1 I I 2000 200 I 2002 2(0) 2004 2005 2006 2007 200S Financial obligations ratio NOTE: The data are monthly and extend through March 200S. Seriously 20 delinquent loans are 90 days or more past due or in foreclosure. The data are representative of al I residential mortgages, not just those held by commercial banks. 19 SOURCE: First American LoanPerformance. IS homes, making refinancing difficult. Moreover, large fractions of commercial banks tightened credit stan 17 dards on residential mortgages in 2007-not only on 16 subprime and nontraditional mortgages but also on loans to prime borrowers-which further impaired I I I I I I I 1 I I I I I I I 1 ] the ability of borrowers to refinance existing mort 1993 .1995 1997 1999 200 I 2(0) 2005 2007 gages. Reflecting these developments, national data NOTE: The data are quarterly. The series shown for bankruptcy filings on variable-rate mortgage loans show that delin begins in 1995:QI and is seasonally adjusted. The financial obligations ratio is an estimate of debt payments and recurring obligations as a percentage of quency rates on such loans increased more than those disposable personal income; debt payments and recurring obligations consist on fixed-rate loans, especially for lower-rated borrow of required payments on outstanding mortgage debt, consumer debt. auto leases. rent, homeowner's insurance. and property taxes. ers (figure 28). All told, the delinquency rate on SOURCE: For bankruptcy filings. staff calculations based on data from variable-rate subprime mortgages jumped to more Lundquist Consulting; for financial obligations ratio. Federal Reserve Board (www. fe deralreserve.gov Ireleaseslhousedebt). than 20 percent in December of last year and has increased further in 2008. the middle of the decade-a shift in lending posture At commercial banks, delinquencies on residential that was likely based to an extent on the assumption real estate loans were around 3 percent by the end of that house prices would continue to rise for some time 2007, their highest rate since the early 1990s and to come. The easing of credit standards on mortgages more than double their recent low posted in the fourth reportedly was more pronounced at nonbank financial quarter of 2004 (figure 29). Charge-offs had increased institutions than at commercial banks, in part because to 0.44 percent at an annual rate in the fourth quarter of different levels of regulation in those sectors. A of 2007, equal to the highest rate recorded si nce 1990. historically large fraction of the loans originated in Delinquency and charge-off rates rose across all types 2005 and 2006, particularly those to borrowers with of mortgage products and all bank sizes. Delinquency weaker credit histories (subprime loans), had high rates on closed-end one- to four-family mortgage loan-to-value ratios. Many subprime loans also had loans and on revolving home equity loans rose discounted introductory interest rates, which exposed substantially-to 3.6 percent on the closed-end mort borrowers to the potential for significantly higher gages (including both first and junior liens) and mortgage payments after the initial rates on the loans 1.7 percent on the revolving loans. Charge-off rates in reset, typically two to three years after origination. the fourth quarter on closed-end mortgages qua House prices generally decelerated in 2006, and in drupled from the year-earlier quarter to 0.36 percent, 2007 they declined in some areas of the country; and those on revolving loans rose from 0.19 percent consequently, many borrowers with high loan-to at year-end 2006 to 0.69 percent in the fourth quarter va1ue ratios were unable to build equity in their of 2007. The delinquency rate on closed-end mort-
A24 Federal Reserve Bulletin 0 June 2008 29. Delinquency and charge-off raLe' for residential rca I tutions. Most commercial banks responding to the 'LaLe loans al commercial banks, by type of loan. January 2008 BLPS indicated that loan modifications 1991-2007 based on individual borrowers' circumstances were Percenl an important part of their loss-mitigation strategies; many banks were also willing to refinance loans for Delinquencies some troubled borrowers. However, loans are often -4 packaged and sold in securitized pools owned by a dispersed group of investors, which makes the task of - 3 coordinating renegotiation to avoid foreclosure among all affected parties difficult. In part to address the challenges in modifying securitized loans, a diverse - 2 group of mortgage market participants joined in a collaborative effort called the Hope Now Alliance to - I facilitate cross-industry solutions to the problem.18 About one-third of respondents to the January 2008 I I I I I I I I I I BLPS said that streamlined modifications such as Net charge-offs those proposed by the Hope Now Alliance were -.70 important to their strategies for limiting losses. - .60 ReVOlving home equity -.50 Consumer Loans -.40 The delinquency rate on credit card loans held by Total -.30 banks rose a fair bit in 2007, especially in the second half of the year (figure 30). The charge-off rate on -.20 such loans fluctuated around 4 percent last year, a -.10 relatively low level compared with the rates that Olher I I I I I I I I I I I I I I I I I I I \ prevailed before the change in bankruptcy laws in 1991 1993 1995 1997 1999 2001 2003 2005 2007 2005.19 The delinquency rate on other (non-credit NOTE: The dala are quarterly and seasonally adjusled. For definitions of card) consumer loans also rose moderately but still delinquencies and net charge-offs, see Ihe note for figure 24. remained around the midpoint of its range over the past 15 years. Charge-off rates on those loans climbed gages rose most sharply at the 100 largest banks from about I percent in 2006 to 1.6 percent for 2007 advancing about 1.5 percentage points, to 3.8 per as a whole, a considerable increase that brought the cent-but it also moved up 0.7 percentage points at annual rate to its highest level in at least two decades. smaller banks, to about 2.5 percent; the rise in The weakening in the credit quality of consumer charge-off rates was also somewhat greater at larger loans may have reflected, in part, the pressures on banks than at smaller banks. households generated by troubles in the residential The sharp increase in mortgage loan delinquencies mortgage sector and the slower pace of economic and foreclosures over the past year-particularly for growth late in the year. Respondents to the BLPS subprime borrowers-has created distress for many expected further declines in the credit quality of both homeowners and communities. The Federal Reserve credit card and other consumer loans in 2008. has taken a number of actions intended to help distressed subprime borrowers and limit preventable foreclosures, as well as other actions aimed at reduc ing the likelihood of such problems in the future.17 18. The Hope Now Alliance (www.hopenow.com) aims to increase outreach efforts to contact at-risk borrowers and to play an important Moreover, avoiding foreclosure-even if it involves role in streamlining the process for refinancing and modifying granting concessions to the borrower----can be an variable-rate subprime mortgages. The alliance will work to expand the capacity of an existing national network to counsel borrowers and important loss-mitigation strategy for financial instirefer them to participating servicers, who have agreed to work toward cross-industry solutions to better serve the homeowner. 19. For a discussion of the change in bankruptcy law that was 17. For a detailed description of these aclions, see box "The implemented in 2005 and its effect on credit card loans, see box "The Federal Reserve's Responses to the Subprime Mortgage Crisis," in New Bankruptcy Law and Its Effect on Credit Card Loans," in Board of Governors of the Federal Reserve System (2008), Monetary Elizabeth Klee and Gretchen Weinbach (2006), "Profits and Balance Policy Report 10 the Congress (Washington: Board of Governors, Sheet Developments at U.S. Commercial Banks in 2005," Federal February), pp. 8-9. Reserve Bulletin, vol. 92 (June), p. A89.
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 A25 30. Delinquency ami charg~-otT rates for I ans Charge-off rates on securitized residential mortgages to h u cholds, by type of loun, 1990-2007 also changed little and stayed well below the rates on residential loans on banks' books. Pcn:cnl The relatively stable delinquency and charge-off Delinquencies rates on mortgages securitized by banks could be 6 attributable to several factors. Banks as a group may not have securitized large quantities of subprime mortgages or other types of mortgages that have 4 accounted for much of the run-up in overall mortgage delinquencies and foreclosures. Moreover, some secu 3 ritization structures require that banks repurchase 2 from the securitized pools those loans that become delinquent soon after origination, which could hold - 1 down losses on securitized loans and dilute the credit I I I I I I I I I I I quality of loans held on banks' books. The delinquency rate on securitized credit card _ Net charge-offs - 8 loans-which make up 22 percent of the loans secu ritized by banks-moved up, from about 3.7 percent 7 to just above 4 percent, in 2007, a rate that was still -6 below the midpoint of its range over recent years. 5 Charge-off rates on those loans continued to trend up 4 last year but stayed well below the rates that prevailed as recently as 2005. The delinquency rate on securi 2 tized credit cards has been somewhat lower than that Other consumer - I on credit cards held on banks' balance sheets, but + o charge-off rates on securitized loans have generally I I I I I I I I I I I I I I I I I I I I I been higher than those on loans held by banks. 1991 1993 1995 1997 1999 2(0) 2003 2005 2007 Delinquency and charge-off rates on the small amount NOTE: The dala are quarterly and seasonally adjusled; data for de of bank-securitized auto loans jumped considerably linquencies begin in 1991. For definilions of delinquencies and nel in 2007 and ended the year near the highest levels charge-offs. see the nOle for figure 24. recorded since the data became available in 2001. The credit quality of other types of securitized consumer Securitized Loans loans was fairly stable in 2007; the delinquency rate The credit quality of loans that were sold and securi on such loans edged higher, to about 5.4 percent, tized by banks that retained servicing rights or while the charge-off rate was generally lower in 2007 recourse or provided other credit enhancements to the than it was in 2006. securitization structure (hereafter referred to, for sim The delinquency and charge-off rates on the small plicity, as "securitized" loans) weakened in 2007, amount of securitized C&I loans rose considerably in though not, in most cases, to the same extent as loans the second half of 2007 but remained in the middle of that were held on banks' balance sheets.2o The major their recent ranges. About $200 billion in other types ity of loans securitized by banks are residential of loans and leases, a category that includes CRE mortgages on one- to four-family homes (63 percent). loans, are securitized by banks. The delinquency rate The delinquency rate on those mortgages (excluding on that category of loans declined, on balance, in revolving home equity loans) was 3.7 percent in the 2007 to just 0.2 percent, and the charge-off rate on fourth quarter of 2007, almost unchanged from its those loans was near zero. level at the end of 2006 and well below the levels seen earlier in the decade. Likewise, the delinquency Loss Provisioning rate on the small amount of securitized revolving home equity loans was little changed in 2007, though The erosion of credit quality spurred banks to step up it fluctuated near the high end of its recent range. the rate of loss provisioning in 2007, particularly in the second half of the year. Loss provisioning sub tracted 54 basis points from ROA and consumed 20. The analysis excludes loans that were sold to, and securitized more than 10 percent of total revenue in 2007, about by, a third party (for example, the Federal National Mortgage Associa tion or the Federal Home Loan Mortgage Corporation). double the effect in each of the previous two years
A26 Federal Reserve Bulletin D June 2008 31. Provi 'ions for loan and lea'e los es as a 32. Reserves for loan and lease losse , 1990-2007 proportion of lolal revenue. 1985-2007 Percent •_ _______ ___~ _______ _.:..:Pcrccnt As a percentage of totalloans and leases 3.0 2.5 25 2.0 20 1.5 1.0 15 I I I I I I I I I I I I I I I I I I 10 _ As a percentage of net charge-offs 500 - 5 400 300 11111111111111 1111111111 1987 1991 1995 1999 2003 2007 200 NOTE: The data are annual. 100 I I I I I I I I I I I I I I (figure 31). By those measures, loss provisioning in As a percentage of delinquenlloans 100 2007 was similar to that during the economic slow down in the early part of this decade but well below 80 the highs reached during the late 1980s and early 60 1990s. Provisioning increased most at large banks, 40 where it reached an annual rate of more than 1 per cent of average assets in the fourth quarter, compared I I I I I I I I ! I I I I I I I I I I I I 1991 1993 1995 1997 1999 2001 2003 2005 2007 with just about 0.36 percent in the fourth quarter of NOTE: The data are as of year-end. For definitions of delinquencies and net 2006. Nonetheless, the increase over 2007 was also charge-offs, see the note for figure 24. notable at smaller banks, where provisioning rose to an annual rate of 0.55 percent of assets in the fourth INTERNATIONAL OPERATIONS OF U.S, quarter from 0.22 percent in the year-earlier period. COMMERCIAL BANKS The rate of loss provisioning in 2007 considerably outpaced that of charge-offs and boosted total reserves The share of U.S. bank assets booked in foreign for loan and lease losses. As a result, reserves as a offices in 2007 increased about 100 basis points, to percentage of total loans and leases increased in 2007 14 percent, and remained highly concentrated among for the first time in several years, but that ratio the largest banks. However, U.S. commercial banks remained near the low end of its historical range lost money in 2007 on their international operations, (figure 32). The percentage increase in the stock of which subtracted about 6 percent from total consoli reserves, however, was smaller than that in charge dated net income. The losses were mostly attributable to just a few institutions and primarily reflected a offs and delinquencies, which led to declines in some jump in non-interest expense as we)) as a moderate other measures of reserve adequacy. At the average decline in non-interest income. charge-off rate for all of 2007 and without additional Banks' exposures to emerging market countries loss provisions, current reserves are sufficient to through lending and derivatives activities grew rap cover about 21/2 years of charge-offs, a typical reading idly in 2007.21 Banks' total exposure to Asian econo for this measure. As noted previously, however, mies climbed to 45 percent of tier 1 capital, in part charge-off rates over the latter part of 2007 ran because of a significant increase in lending to resiconsiderably above those that had prevailed earlier in the year. The ratio of reserves for loan and lease losses to total delinquent loans, which in recent years 21. The analysis in this paragraph draws from information in the had been running near the high end of its range over Country Exposure Report (FFlEC 009), which is tiled only by banks with significant international exposures. More information about the the past two decades, dropped substantially-to about report is available from the Federal Financial Institutions Examination 50 percent as of year-end, its lowest level since 1991. Council at www.ffiec.gov/formsOO9_009a.htm.
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 A27 :'1. Expo.ure of U.S. bank' LO selecwd economies al year-end rdative Lo Lier 1 capitol, 1998-2007 Percent Total Asia Latin America and the Caribbean Eastern exposure to Year All I Chinn I India I Korea All I Mexico I Brazil Europe developing economies 1998 .......•.... ........... 28.2 1.0 2.4 7.1 42.9 9.9 11.3 3.5 100.1 1999 ...............•........ 26.1 .8 2.4 6.6 39.0 9.5 10.5 2.9 90.7 2 2 0 0 0 0 1 0 ... .. . . . . . . .. . . .. . . . . . -., . . . . . . . . . . . . . . . . . . . . 2 24 2. .0 4 . . 9 8 2 2 . . 6 6 5 6. . 4 8 5 37 4. .9 1 2 9 6. . 0 1 1 3 1 . .2 0 4 4 . . 3 4 1 8 0 7 0 . .3 9 2002 ................ ....... 21.9 .9 2.7 5.8 38.9 20.8 8.4 5.5 84.8 2003 ........................ 22.8 1.3 3.9 5.5 32.9 18.0 6.8 5.4 79.8 2004 ........................ 32.2 1.4 4.2 15.0 31.8 16.7 6.5 6.1 89.2 2005 ........................ 30.7 2.4 4.9 12.9 31.8 17.4 6.9 5.9 86.4 2006 .................... ... 34.7 4.1 6.1 13.6 30.8 16.9 5.7 6.5 92.6 2007 ............ . .. . . . . . . . . 44.6 4.5 9.8 14.4 35.6 17.2 8.2 9.0 119.6 MEMO Total exposure (billions of dollars) 1998 .. ............ ........ 69.1 2.3 5.4 17.3 104.7 24.2 27.6 8.5 244.7 1999 .............. ......... 67.9 2.0 6.2 17.2 101.6 24.8 27.3 7.4 236.4 2000 ....... ................ 68.0 2.2 7.5 18.1 10703 25.7 31.6 12.3 249.1 2001 .................. ..... 67.2 2.7 7.7 17.5 162.4 78.0 39.0 12.9 301.4 2002 .................... 69.5 2.7 8.7 18.4 123.5 66.2 26.6 17.6 269.4 2003 .................. ..... 79.9 4.4 13.6 19.2 115.2 63.0 23.7 19.1 280.1 2004 ........................ 125.8 5.3 16.3 58.7 124.4 65.2 25.5 23.8 348.9 2005 ........... ............ 134.8 10.4 21.6 56.7 139.7 76.1 30.4 25.7 378.8 2006 ........... ............ 190.5 22.7 33.6 74.8 168.9 92.5 31.5 35.5 508.2 2007 ................... .... 249.8 25.5 54.9 80.8 199.3 96.1 46.2 50.2 670.6 NOTE: Exposures consist of lending and derivatives exposures for cross SOURCE: Federal Financial Institutions Examination Council, Statistical Re border and local-office operations. Respondents may file information on one lease E.16, "Country Exposure Lending Survey" (www.fliec.govIE16.htm). bank or on the bank holding company as a whole. For the definition of tier I capital, see text note 9. The year-end 2007 data cover 65 banks with a tOlal of $560.5 billion in tier I capital. dents of India (table 3). An increase in lending to corporate bonds and variolls types of asset-backed residents of Brazil helped push up banks' exposure to securities-increased across the ratings spectrum. Latin American and Caribbean economies to 36 per Against that backdrop, the Federal Open Market cent of tier 1 capital. Banks' exposure to eastern Committee cut the target for the federal funds rate European countries rose to 9 percent of tier 1 capital from 4 Y2 percent at the end of 2007 to 2 Y4 percent by in 2007, up from 6.5 percent the year earlier. the end of March. Yields on Treasury bills fell, at times, to their lowest levels in 50 years, declines that DEVELOPMENTS IN EARLY 2008 reflected heightened demand for safe and liquid assets. Yields on longer-term Treasury securities also U.S. economic activity, which was sluggish in the declined sharply; by the end of March, the 2-year fourth quarter of 2007, remained so in the first three yield had dropped to 1.61 percent and the 10-year months of 2008. Residential construction and home yield to 3.69 percent. The April 2008 BLPS indicated sales continued to contract, and home prices dropped. that large fractions of banks had tightened credit Consumer spending was subdued amid slumping standards and terms on loans to businesses and house sentiment and restrained growth in wealth and real holds during the first quarter. income, and business spending also weakened. En Various short-term funding markets had shown ergy prices jumped again during the first quarter; the some improvement in December and January with the price of oil rose to record highs, which added to the introduction of the Federal Reserve's Term Auction headwinds facing the economy and helped sustain Facility (TAF) and the passage of year-end. However, pressures on headline inflation. However, core con the further deterioration of those markets in February sumer price inflation decreased slightly in the first and March placed renewed pressures on banks and quarter. Concerns about the economic outlook and other financial institutions and possibly exacerbated fears regarding possible further large losses at banks the ongoing tightening of credit conditions. To pro and other financial institutions continued to put pres vide liquidity and foster smoother functioning of sure on financial markets through the first part of those markets, the Federal Reserve in mid-March 2008. Broad stock market indexes declined, and risk increased the TAF from $60 billion to $100 billion spreads on a wide range of debt securities-including and also expanded the size of its swap lines with the
A28 Federal Reserve Bulletin 0 June 2008 European Central Bank and the Swiss National Bank. :n Slock price indexc . 2007-08 Moreover, the Federal Reserve announced a new January I. 2007 = 100 Term Securities Lending Facility, which allowed pri mary dealers to borrow as much as $200 billion of 120 Treasury securities from the portfolio of the Federal S&P500 Reserve's System Open Market Account against high 110 quality collateral, including agency securities and 100 highly rated residential and commercial mortgage backed securities. Finally, the Federal Reserve cre 90 ated the Primary Dealer Credit Facility to improve the 80 ability of primary dealers to provide financing to 70 participants in securitization markets. The facility provides overnight loans collateralized by a specified 60 range of eligible investment-grade securities.22 I I , I Growth of domestic bank credit slowed somewhat 2007 2008 in the first quarter of 2008. Although banks tightened NOTE: The data are weekJy and extend through March 2008. standards and terms on C&I loans, such loans ex SOURCE: Standard & Poor's and Dow Jones. panded briskly on the heels of their robust fourth quarter pace, in part because of sustained disruptions loans reportedly contributed importantly to the drop in the syndicated loan market and drawdowns on in profitability in the first quarter at many banks. existing C&I credit lines. CRE loans also continued Banks also substantially increased loss provisions to advance despite reported further tightening of amid additional deterioration in the credit quality of credit standards in that sector. Residential real estate loans to residential developers and continued weak loans expanded modestly, partly as a result of signifi ness in residential mortgages. Delinquency rates on cant increases in revolving home equity loans, many consumer loans also increased, and those on C&I of which carry adjustable rates that may have become loans edged higher. more attractive as the market interest rates on which The stock prices of banking firms dropped further, they are often based declined. Consumer loans in and the spreads on their credit default swaps widened creased at a moderate rate but slowed somewhat through February. Sentiment improved in mid- to [ate compared with the pace in the second half of 2007. March, however, when the Federal Reserve an In the first quarter, profits of commercial banks nounced the measures to provide additional term declined markedly from year-ago levels, and some funding, and first-quarter results at a few investment banks reported significant losses. Write-downs of banks were seen as reassuring. On balance, bank mortgage-related assets and leveraged syndicated stock prices fell almost 10 percent in the first quarter of 2008, about in line with the change in the S&P 500 22. A concise summary of the Federal Reserve's recent initiatives (figure 33). The median spread on credit default to promote liquidity and smooth functioning in financial markets swaps for large banking organizations nearly doubled, is available at www.newyorkfed.org/marketslForms_oCFed_ Lending.pdf. to almost 100 basis points, over the same period. 0 Appendix tabLes slart 011 page A29
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 A29 A.!, Portfolio I:! mp )silion. jntere~1 raIl:", and im:omc and expense. U.S. banks. 1998-2007 A. All banks I I I I I I I I I I hem 1998 1999 2000 200 I 2002 2003 2004 2005 2006 2007 Balance sheel ilems as a percentage of average nel consolidated assets Inlerest-eaming assets ....... ................. . 86.76 87.03 87.13 86.49 86.42 86.08 86.90 86.82 86.86 86.94 Loans and leases (net) ...................... . 58.33 59.34 60.49 58.95 57.83 56.88 56.98 57.88 58.26 58.37 Commercial and industrial ..........•. 16.36 17.07 17.16 16.08 14.07 12.18 11.06 11.17 11.42 11.84 U.S. addressees ........................ . 13.61 14.43 14.67 13.69 12.04 10.48 9.52 9.64 9.73 9.86 Foreign addressees . . .. . .. . . . .. .. ... . 2.75 2.64 2.49 2.39 2.04 \.70 1.54 1.53 1.70 1.98 Consumer ............................... . 10.41 9.71 9.38 9.23 9.35 9.05 9.18 9.12 8.53 8.43 Credit card ................ .. ........ .. 4.02 3.51 3.52 3.69 3.78 3.54 3.87 4.05 3.73 3.72 Installment and other ................... . 6.39 6.20 5.87 5.55 5.57 5.51 5.31 5.06 4.80 4.71 Real estate. . . .. . . . . . . . . . . .. . . . . .. .... . .. 24.85 25.44 27.04 27.10 28.39 29.91 30.77 32.40 33.19 33.36 In domestic offices ............... .. 24.28 24.87 26.49 26.60 27.91 29.46 30.24 31.84 32.61 32.76 Construction and land development ... . \.86 2.18 2.51 2.85 2.98 2.99 3.26 3.90 4.73 5.05 Farmland ........................ . .55 .56 .56 .55 .56 .54 .54 .54 .53 .53 One- to four-family residential ....... . 14.25 14.10 14.96 14.67 15.40 16.96 17.42 18.26 18.23 18.31 Home equity ....... . ............. . 1.89 \.76 \.96 2.18 2.80 3.40 4.34 4.95 4.71 4.48 Otber.... .............. .. ...... . 12.37 12.34 13.00 12.49 12.60 13.57 13.08 13.31 13.51 13.82 Multifamily residential. . .. . .. _. ..... . .82 .88 .99 .97 1.02 \.05 1.06 1.08 1.06 1.04 Nonfarm nonresidential ... . ......... . 6.80 7.15 7.48 7.56 7.95 7.91 7.97 8.06 8.07 7.84 In foreign offices . . . . . . . .. . .. . .57 .57 .54 .50 .48 .46 .53 .56 .58 .60 To depository institutions and acceptances of other banks . . . . . . . .. .. 1.91 \.96 \.87 1.83 1.87 1.98 2.11 1.73 1.65 1.21 Foreign governments ....... .......... .. . .15 .16 .12 .10 .09 .08 .OS .06 .04 .03 Agricultural production ...... . . . .. .. ..... . .89 .83 .78 .75 .70 .63 .59 .56 .55 .52 Other loans ..................... . ...... .. 2.78 2.75 2.58 2.34 2.06 2.00 2.35 2.09 2.19 2.48 Lease-financing receivables ............. . 2.12 2.51 2.63 2.58 2.44 2.11 1.79 1.58 1.43 1.23 LESS: Uneamed income on loans.. . ...... . -.07 -.06 -.05 -.04 -.05 -.04 -.04 -.03 -.03 -.02 LES-" Loss reserves I .......... .. ...... .. -\.07 -\.04 -1.02 -1.04 -1.11 -\.04 -.91 -.79 -.71 -.70 Securities ................................. . 20.37 20.40 20.01 19.53 21.27 2\.90 22.57 22.04 21.32 20.77 Investment account ....................... . 17.48 18.33 17.59 16.82 18.30 18.97 18.99 17.87 16.89 15.41 Debt ............................... .. 16.93 17.73 16.93 16.48 17.99 18.72 18.79 17.71 16.73 15.23 U.S. Treasury .................... . 2.70 2.14 1.66 .85 .78 90 .89 .62 .47 .32 U.S. government agency and corporation obligations ........ . 10.28 10.85 10.31 10.08 11.46 12.26 12.37 11.51 10.65 9.32 Government-backed mongage pools. 5.16 5.24 4.75 5.13 6.09 6.75 7.13 6.78 6.43 5.82 Collateralized moogage obligations 2.12 2.15 \.92 1.95 2.35 2.34 2.01 1.80 1.58 1.34 Other ........................... .. 2.99 3.46 3.63 2.99 3.02 3.17 3.22 2.93 2.65 2.16 State and local government .......... . \.57 \.62 1.52 1.49 1.49 1.48 1.41 1.36 1.34 1.34 Private mongage-backed securities ... . .67 .88 .95 1.09 1.25 1.30 1.41 1.76 1.89 2.15 Other ............................. .. 1.70 2.24 2.48 2.98 3.01 2.78 2.72 2.47 2.37 2.10 Equity .................. ............ .. .55 .61 .66 .34 .31 .25 .20 .16 .16 .18 Trading account ......................... . 2.90 2.06 2.43 2.72 2.97 2.93 3.59 4.17 4.43 5.36 Gross federal funds sold and reverse RPs ... . 5.37 4.61 4.12 5.11 4.81 4.85 4.58 4.75 5.30 5.49 Interest-bearing balances at depositories ..... . 2.69 2.68 2.52 2.90 2.52 2.45 2.76 2.15 1.98 2.30 Non-interest-earning assets .................... . 13.24 12.97 12.87 13.51 13.58 13.92 13.10 13.18 13.14 13.06 Revaluation gains held in trading accounts ... . 2.95 2.57 2.28 2.37 2.42 2.70 2.19 1.82 1.64 1.73 Other .......................... .... .... . 10.29 10.41 10.58 11.15 11.16 11.22 10.91 11.36 11.50 11.33 Liabilities .................................... . 9\.51 91.52 91.58 91.25 90.85 90.96 90.57 89.91 89.84 89.78 Core deposits .......................... . 49.43 48.60 46.52 47.07 48.98 49.18 48.56 47.52 45.56 43.89 Transaction deposits ...................... . 14.10 12.58 11.07 10.36 10.06 9.74 9.10 8.46 7.45 6.43 Demand deposits .............. . 10.99 9.78 8.61 8.00 7.67 7.26 6.58 6.16 5.41 4.66 Other checkable deposits ............... ' 3.11 2.81 2.46 2.36 2.39 2.47 2.52 2.30 2.04 1.77 Savings deposits (including MMDAs) ..... . 20.87 22.47 22.43 24.53 28.13 30.12 31.19 30.83 29.49 28.21 Small time deposits ................. . ... . 14.46 13.55 13.01 12.18 10.80 9.33 8.27 8.23 8.62 9.26 Managed liabilities' ................... .. 34.97 36.59 38.83 37.42 35.05 34.61 35.69 36.25 38.29 39.86 Large time deposits .............. . ... . 7.67 7.89 8.77 8.89 8.30 8.09 8.00 9.11 10.07 9.13 Deposits booked in foreign offices .... . 10.59 10.96 11.43 10.66 9.42 9.38 10.25 10.39 11.18 12.81 Subordinated notes and debentures.. . .... . 1.30 1.36 1.37 1.43 \.40 1.33 1.30 1.34 1.40 1.55 Gross federal funds purchased and RPs .... . 7.98 7.97 7.83 7.95 7.77 7.75 7.24 7.05 7.53 7.06 Other managed liabilities .......... . 7.43 8.41 9.44 8.50 8.16 8.06 8.91 8.37 8.11 9.31 Revaluation losses held in trading accounts .. . 2.97 2.52 2.29 2.21 2.09 2.30 1.95 1.67 1.51 1.59 Other .................................... . 4.14 3.81 3.94 4.54 4.73 4.87 4.36 4.47 4.47 4.44 Capital account ... 8.49 8.48 8.42 8.75 9.15 9.04 9.43 10.09 10.16 10.22 MEMO Conunercial real estate loans] ................. . 10.11 10.87 1\.58 12.09 12.57 12.47 12.78 13.52 14.35 14.47 Other real estate owned" ......... . .......... . .08 .06 .05 .05 .06 .06 .06 .04 .05 .07 Mongage·backed securities .... . . . . . . . . .. . .. . 7.96 8.27 7.63 8.17 9.69 10.39 10.56 10.33 9.89 9.31 Federal Home Loan Bank advances. . . . . . . .. . .. n.a. n.a. 0.3. 2.89 3.17 3.19 3.07 3.04 3.07 3.66 Average net consolidated assets (billions of dollars) .. .. .. .. ... .. ........ 5.147 5,439 5,906 6.334 6,634 7.248 7.879 8.591 9.427 10.396
A30 Federal Reserve Bulletin 0 June 2008 A.!, Portfolio compo ilion, interest ratcs, nnd income and expense, . . bank~. 1998-2007-Colllinued A. All banks- Continued I I I I I I I I I Item 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Effective interest rate (percent)' Rales earned Interest-earning assets .. ....... , ................ 8.01 7.73 8.20 7.37 6.10 5.29 5.08 5.69 6.65 6.78 Taxable equivalent ...................... 8.07 7.78 8.26 7.42 6.15 5.33 5.12 5.73 6.68 6.82 Loans and leases, gross ... ......... .......... 8.85 8.50 9.00 8.15 6.89 6.15 5.91 6.52 7.55 7.54 Net of loss provisions ................... 8.30 7.99 8.3.~ 7.15 5.84 5.46 5.47 6.09 7.18 6.70 Sec In u v r T i e t a s i x e t a m s b e l . e n . t . e a . q c . u c . i o . v . u a . n l . e t . n . . t . . . . . . . . . . . . . . . . . . ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 6 6 6. . .6 3 4 3 4 8 6 6 6 . . . 2 4 3 8 8 0 6 6 6 . . . 4 6 4 7 5 5 6 6 6 . . . 2 0 0 5 2 4 4 5 5 . . . 9 0 1 5 4 0 4 4 3 . . . 9 0 1 6 0 0 3 3 3 . . .9 9 8 9 6 6 4 4 4 . . . 2 3 1 9 0 8 4 4 4 . . . 7 8 8 1 6 3 5 5 5 . . .0 1 1 2 4 3 U.S. Treasury securities and U.S. g (e o x v c e l r u n d m in e g n t M a B ge S n ) c y . . o .. b . li . g . a . t . i o .. n . s . . . . . . . . n.a. n.a. n.a. 5.76 4.42 3.29 3.11 3.46 4.19 4.71 O M t o h r e t r g a . g .e . - b . . a . c . k . e . d . . s . e . c . u . r . i t . i . e . s . . . . . . . . . . . . .. .. .. . . .. .. . . .. . n n . .a a. . n n . . a a . . n n . .a a . . 5 6 . .4 6 5 0 4 5 . .4 7 4 4 4 4 . .0 2 8 4 4 3 . . 3 7 8 6 4 4. . 2 6 3 0 4 5. .7 10 6 5 5 . . 2 0 9 2 Trading account ........................... 6.85 6.48 6.63 6.01 4.38 3.71 3.35 3.72 4.16 4.70 Gross federal funds sold and reverse RPs ..... 5.29 4.78 5.56 3.86 1.93 1.40 1.40 2.66 4.31 5.07 Interest-bearing balances at depositories ...... 6.32 5.95 6.48 4.01 2.79 2.09 1.98 3.70 5.10 5.15 Rales paid Interest-bearing liabilities .........•.. ........... 4.68 4.31 4.94 3.93 2.38 1.72 1.63 2.47 3.59 3.82 Interest.bearin~ deposits ..................... 4.31 3.88 4.45 3.61 2.11 1.47 1.36 2.06 3.05 3.39 In foreign 0 ces .......................... 5.66 4.91 5.61 3.94 2.38 1.62 1.72 2.77 3.92 4.23 In domestic offices ........................ 4.01 3.65 4.17 3.54 2.06 1.44 1.29 1.91 2.85 3.18 Other checkabte deposits ................ 2.29 2.08 2.34 1.96 1.06 .75 .77 1.41 1.88 2.04 Savings deposits ~in.fluding MMDAs) .... 2.79 2.50 2.86 2.19 1.13 .74 .72 1.24 2.01 2.22 Large ume depoSIts .................... 5.22 4.93 5.78 5.04 3.37 2.59 2.35 3.19 4.39 4.71 Other time deposits6 .................... 5.48 5.11 5.69 5.43 3.70 2.88 2.56 3.14 4.11 4.72 Gross federal funds purchased and RPs ....... 5.19 4.74 5.77 3.83 1.88 1.30 1.49 3.07 4.57 4.98 Other interest-bearing liabilities ..... ......... 6.50 6.49 6.97 5.91 4.49 3.69 3.34 4.57 6.28 5.46 Income and expense as a percentage of average net consolidated assets Gross interest income .......................... 6.98 6.75 7.18 6.38 5.27 4.54 4.43 4.96 5.85 5.94 Taxable equivalent ........................ 7.03 6.80 7.22 6.42 5.31 4.58 4.46 5.00 5.88 5.97 Loans ............... ........................ 5.27 5.13 5.53 4.92 4.06 3.55 3.42 3.82 4.48 4.47 Securities ..................... .............. 1.10 1.15 1.15 1.00 .89 .74 .74 .77 .84 .80 Gross federal funds sold and reverse RPs ..... .29 .23 .23 .20 .09 .07 .07 .13 .23 .28 Other ........................ ............... .32 .24 .27 .27 .22 .18 .20 .25 .31 .39 Gross interest expense ......................... 3.46 3.22 3.76 2.98 1.79 1.30 1.25 1.89 2.79 2.99 Deposits ..................... ............... 2.43 2.21 2.56 2.09 1.23 .86 .81 1.23 1.84 2.05 Gross federal funds purchased and RPs ... ... .43 .39 .45 .31 .15 .10 .11 .22 .36 .36 Other ............................ ....... .... .60 .63 .75 .58 AI .33 .33 .44 .59 .58 Net interest income ......................... ... 3.52 3.52 3.41 3.40 3.48 3.24 3.17 3.07 3.05 2.95 Taxable equivalent ........ ............ ... 3.57 3.57 3.46 3.44 3.52 3.28 3.21 3.t I 3.09 2.98 Loss provisions 7 ........... .................... 042 .39 .50 .68 .68 .45 .30 .30 .27 .54 Non-interest income ........................... 2.41 2.66 2.59 2.54 2.54 2.54 2.40 2.35 2.36 2.10 Service charges on deposits .................. .38 .40 .40 .42 .45 .44 .42 .39 .38 .38 FidUCiary activities .......................... .37 .38 .38 .35 .32 .31 .32 .31 .30 .32 Trading revenue ............................. .15 .19 .21 .20 .16 .16 .13 .17 .20 .05 Interest rate exposures ................ ..... .05 .07 .08 .09 .08 .07 .03 .05 .05 .04 Foreign exchange rate exposures ........... .09 .09 .08 .07 .07 .07 .07 .07 .08 .07 Other commodity and equity exposures ..... .01 .03 .04 .03 .01 .02 .03 .04 .07 .03 Other ....................................... 1.50 1.70 1.61 1.57 1.60 1.63 1.53 1.48 1.48 1.36 Non-interest expense ...... ................ ..... 3.77 3.77 3.66 3.57 3.47 3.36 3.34 3.19 3.13 3.09 Salaries, wages, and employee benefits ....... 1.55 1.59 1.51 1.49 1.51 1.50 1.46 1.44 1.44 1.39 Occupancy ...... ............................ .47 .48 .45 .44 .44 .43 .42 .41 .39 .37 Other ....................................... 1.76 1.71 1.70 1.64 1.51 1.43 1.46 1.34 1.30 1.33 Net non-interest expense ...... ................. 1.36 1.11 1.07 1.03 .93 .82 .94 .84 .76 .99 Gains on investment account securities ......... .06 • -.04 .07 .10 .08 .04 • -.01 -.01 Income before taxes and extraordinary items .... 1.81 2.03 1.81 1.77 1.96 2.05 1.97 1.93 2.00 J .41 Taxes ....... ................................ .62 .72 .63 .59 .65 .67 .64 .62 .65 .43 Extraordinary items. net of income taxes ..... .01 • • -.01 • .01 • • .03 -.02 Net income .................. .... ............. 1.20 1.31 1.18 1.17 1.32 1.39 1.33 1.31 1.39 .97 C R a e s u h ti n d e i d v id in e c n o d m s e d ec .. la . r . e . d . . .... . . . . . . . . . . . . .. . . . . . . . . . . . . . . .. . . . . . . .4 80 0 . . 9 3 6 5 . . 8 2 9 9 . .8 31 7 1 . .0 3 1 0 1 . .0 31 7 . .5 76 8 . .5 75 6 . .5 8 1 7 . . 8 1 2 5 MEMO: Return on equity ....... . . . . . . . . . . . . . . . . 14.07 15.43 13.97 13.4t 14.38 15.34 14.14 12.99 13.64 9.48 NOTE: Data are as of April 16,2008. 5. When possible, based on the average of quarterly balance sheet data re I. Includes allocated transfer risk reserve. ported on schedule RC-K of the quarterly Call Repon. 2. Measured as the sum of large time deposits in domestic offices. deposits 6. Before 1997. large time deposit open accounts were included in other booked in foreign offices. subordinated notes and debentures, federal funds lime deposits. purchased and securities sold under repurchase agreements, Federal Home 7. Includes provisions for allocated transfer risk. Loan Bank advances, and other borrowed money. • In absolute value, less than 0.005 percent. 3. Measured as the sum of construclion and land development loans secured n.a. Not available. by real estate; real estate loans secured by nonfarm nonresidential propenies or MMDA Money market deposit account. by multifamily residential properties; and loans to finance commercial real es RP Repurchase agreement. tate, construction, and land development activities not secured by real estate. MBS Mongage-backed securities. 4. Other real estate owned is a component of other non-interest-earning assets.
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 A31 A.I. Ponfolio composition. illler..:sl !"dIeS, and incom..: and expense. .5. banks. 1999-2007 B. Ten largest banks by assets Item 1998 I 1999 I 20c0 I 2001 I 2002 I 2003 I 2004 I 2005 I 2006 I 2007 I Balance sheet items as a percentage of average net consolidated assets Interest-earning assets.. . . . . . . . . .. . . . .. .. .... .. 81.25 81.49 82.23 81.74 81.68 81.39 83.54 83.96 84.68 85.04 Loans and leases (net) ..................... .. 50.76 53.37 55.22 53.86 5_'-61 52.20 51.29 51.35 52.03 53.21 Commercial and industrial . . . .. . ......... . 18.Q7 19.20 19.87 18.82 16.16 12.98 10.54 10.61 11.20 11.58 U.S. addressees .................... '" 11.76 13.14 13.95 13.42 11.69 9.40 7.49 7.74 8.08 8.05 Foreign addressees .................... .. 6.31 6.06 5.92 5.41 4.47 3.59 3.06 2.87 3.12 3.53 Consumer ..................... .. 6.04 5.94 5.43 6.17 7.82 7.96 8.49 8.80 8.17 8.98 Credit card ............................ . 1.30 1.36 1.34 1.69 2.90 2.81 3.19 3.60 3.05 3.87 Installment and other .................. .. 4.74 4.58 4.09 4.48 4.92 5.15 5.30 5.21 5.13 5.11 Real estate. . . . . . . . . . . . ................. . 16.51 16.96 19.82 19.23 20.78 22.68 23.21 24.55 25.51 27.04 In domestic offices ............ .. ...... . 15.08 15.55 18.48 18.05 19.70 21.74 22.21 23.52 24.50 26.00 Construction and land development ... . .77 .90 .98 1.27 1.42 1.36 1.40 1.70 2.01 2.01 Farmland .......................... .. .09 .10 .11 .11 .12 .10 .10 .10 .10 .09 One-to four-family residential ....... . 10.33 10.17 13.37 12.41 13.5 I 16.03 16.71 17.73 18.30 19.86 Home equity ...................... . 1.72 1.54 1.61 1.78 2.35 2.96 4.04 5.22 5.40 5.46 Other ............................. . 8.61 9.22 11.76 10.63 11.17 13.07 12.67 12.52 12.90 14.40 Multifamily residential ........ _. _. ... . .38 .43 .60 .51 .55 .47 .45 .44 .44 .55 Nonfarm nonresidential ..... . _. . ... . 3.51 3.35 3.42 3.76 4.09 3.78 3.55 3.55 3.65 3.49 In foreign offices ............. . ....... . 1.43 1.41 1.34 1.18 1.08 .94 1.00 1.03 1.01 1.03 To depository institutions and acceptances of other banks .....•...... 4.05 4.34 3.78 3.23 3.20 3.54 4.10 3.15 2.97 1.71 Foreign governments ............. .. .... . .35 .38 .28 .20 .20 .17 .16 .12 .07 .05 Agricultural production ................... . .28 .26 .23 .28 .23 .19 .22 .20 .20 .17 Other loans .............................. . 3.74 3.96 3.75 3.51 2.94 2.87 3.32 2.81 2.88 3.08 Lease-financing receivables ............... . 2.81 3.40 3.07 3.43 3.44 2.87 2.08 1.78 1.60 1.22 LESS: Unearned income on loans ....•...... -.06 -.05 -.04 -.04 -.08 -.06 -.04 -.04 -.02 -.02 LESS: Loss reserves I ........ .. ......... .. -1.01 -1.03 -.97 -.97 -1.12 -1.02 -.80 -.65 -.56 -.61 Securities .................................. . 19.72 18.34 18.98 17.81 20.54 21.22 22.95 23.37 23.05 21.98 Investment account ....................... . 12.12 13.08 13.71 12.14 14.35 15.31 15.99 15.58 15.12 12.81 Debt .................................. . 11.64 12.57 13.03 11.88 14.13 15.11 15.83 15.44 14.97 12.66 U.S. Treasury ..................... . 1.70 1.98 1.96 .68 .59 .82 .86 .56 .43 .24 U.S. government agency and corporation obligations ........ . 6.31 6.35 6.59 6.84 8.69 9.20 9.92 9.69 9.48 8.02 Government-backed mongage pools. 5.13 5.03 4.88 4.99 6.38 7.59 8.64 8.65 8.64 7.53 Collateralized mortgage obligations .93 .79 .93 1.11 1.52 .91 .70 .54 .53 .33 Other................... . ... . .26 .52 .78 .74 .79 .70 .58 .50 .32 .16 State and local government ....... . .47 .45 .51 .55 .59 .59 .57 .58 .64 .65 Private mortgage-backed securities .. .60 .57 .51 .58 .92 LlO .96 1.18 1.09 1.45 Other ............................ . .. 2.57 3.22 3.47 3.22 3.34 3.40 3.52 3.43 3.33 2.30 Equity ................................. . .47 .51 .68 .26 .22 .20 .16 .14 .15 .16 Trading account ...................... .. 7.60 5.25 5.26 5.67 6.18 5.91 6.96 7.79 7.94 9.16 Gross federal funds sold and reverse RPs .... . 7.81 6.64 5.02 6.38 5.26 5.79 6.37 6.96 7.60 7.47 Interest-bearing balances at depositories ..... . 2.96 3.14 3.01 3.69 2.28 2.18 2.93 2.28 1.99 2.38 Non-interest-earning assets .... ......... . .... . 18.75 18.51 17.77 18.26 18.32 18.61 16.46 16.Q4 15.32 14.96 Revaluation gains held in trading accounts ... . 7.62 6.66 5.66 5.48 5.40 5.79 4.45 3.50 307 3.03 Other ......... ........................... . 11.13 11.85 12.11 12.78 12.93 12.83 12.01 12.54 12.25 11.93 Liabilities .................................... . 92.58 92.28 92.36 92.14 91.52 91.94 91.64 90.81 91.10 90.82 Core deposits ....................... .. ... . 32.94 33.76 33.28 36.38 40.61 41.07 42.02 40.18 38.03 35.08 Transaction deposits ...................... . 9.45 8.55 8.01 8.40 8.34 7.74 6.65 6.05 5.41 4.69 Demand deposits . . .. . . . .. .. .. 8.46 7.83 7.28 7.50 7.40 6.72 5.43 4.90 4.32 3.80 Other checkable deposits ............... . .99 .72 .74 .90 .95 1.02 1.22 1.15 1.09 .89 Savings deposits (including MMDAs) .... . 17.07 18.94 19.24 22.21 26.82 28.99 31.54 30.11 28.11 25.55 Small time depoSits .... . . . ............ . 6.42 6.26 6.03 5.77 5.44 4.34 U3 4.02 4.52 4.84 Managed liabilities' ...... . . . . .. 44.42 45.49 46.84 43.41 38.89 38.60 39.33 40.83 43.75 46.83 Large time deposits ......... . .......... .. 5.04 5.19 5.55 5.46 5.13 5.53 5.21 6.28 6.85 6.13 Deposits booked in foreign offices ........ . 21.23 22.22 22.76 20.28 17.31 16.62 17.20 17.51 18.50 19.86 Subordinated notes and debentures ........ . 1.89 1.98 2.10 2.16 2.11 1.92 1.78 1.89 1.99 2.17 Gross federal funds purchased and R Ps ... . 9.78 8.84 8.89 9.04 8.83 8.62 7.79 8.39 9.51 8.42 Other managed liabi Iities ................. . 6.49 7.27 7.55 6.47 5.53 5.90 7.35 6.76 6.89 10.26 Revaluation losses held in trading accounts .' 7.67 6.51 5.69 5.10 4.63 4.88 3.95 3.21 2.83 2.78 Other ........ .. ...................... .. 7.55 6.52 6.55 7.26 7.39 7.40 6.34 6.60 6.47 6.13 Capital account .............................. .. 7.42 7.72 7.64 7.86 8.48 8.06 8.36 9.19 8.90 9.18 MEMO Commercial real estate loans' ........ _. ..... __. 5.61 5.69 5.87 6.68 6.92 6.31 5.99 6.33 6.73 6.64 Other real estate owned" ....................... .09 .06 .04 .04 .03 .03 .03 .02 .03 .05 Mongage-backed securities . . . . . . . . . . . . . . . . . . . . . 6.65 6.40 6.32 6.68 8.82 9.60 10.30 10.36 10.25 9.31 Federal Home Loan Bank advances. . . . . . . . . . . . . n.a. n.a. n.a. .82 .82 .84 .79 .63 .75 2.33 Average net consolidated assets (billions of dollars) ... .. .. .. .. .... .. . .. .. 1.820 1,935 2.234 2,527 2.785 3.148 3,654 4,232 4.759 5.469
A32 Federal Reserve Bulletin 0 June 2008 A.I. Portfolio comp\)silion, inl~re:,1 rates. and income and expense. . .S. hanks. 1998-2007-Conlillued B. Ten largesl banks by assels-Continued I J 1 I I I I Item 1998 I 1999 2000 2001 2002 I 2003 2004 2005 2006 2007 Effective interest rate (percentlS I Rales earned Interest-earning assets .......................... 7.55 7.37 7.76 6.83 5.82 4.99 4.71 5.29 6.32 6.52 Taxable equivalent ...................... 7.57 7.39 7.78 6.86 5.85 5.01 4.73 5.31 6.34 6.54 Loans and leases, gross ...................... 8.21 7.99 8.46 7.50 6.52 5.76 5.52 6.15 7.36 7.33 Net of loss provisions ................... 7.77 7.65 7.92 6.55 5.30 5.19 5.29 5.84 7.02 6.29 Securities ................................... 6.83 6.58 6.48 6.23 5.04 4.15 4.04 4.27 4.69 4.99 Taxable equivalem ..... ......... ........ 6.89 6.65 6.55 6.31 5.11 4.21 4.10 4.32 4.75 5.04 Investmem account ..... ..... ........ ...... 6.78 6.59 6.40 6.23 5.30 4.26 4.37 4.63 5.11 5.29 U.S. Treasury securities and U.S. government agency obligations (excluding MBSl ...... ....... ........ n.a . n.a. n.a. 5.01 3.74 2.62 2.92 3.29 4.15 4.15 O M t o h r e t r g ag .. e . -b .. a . c . k . e . d . . s . e . c . u . r . i t . i . e . s . . .. . . . . . . . . . . . . . . . . . . . . . . . . . n n . .a a . . n n . . a a . . n n. . a a . . 6 6 . . 4 3 2 4 5 5 . . 5 3 5 0 4 4. . 2 51 8 4 3 . . 8 7 3 6 4 4 . . 9 2 2 6 4 5. .8 3 1 0 5 5 . . 4 0 1 8 Trading accounl ........................... 6.92 6.56 6.70 6.24 4.46 3.87 3.32 3.57 3.90 4.57 Gross federal funds sold and reverse RPs ..... 5.20 4.52 4.93 3.86 2.20 1.60 1.43 2.46 4.07 5.06 Interest-bearing balances al depositories ..... 7.16 7.22 7.43 3.73 3.40 2.49 1.80 4.06 5.59 5.36 Rilles paid Interest-bearing liabilities ... ................. 4.94 4.52 5.03 3.78 2.33 1.67 1.62 2.52 3.74 3.87 Int [ e n r e f s o t r - e b i e g a n r in o g ff i d c e es p osits .. . . . .. .. . . . . . . .. . ., . .. .. .. . . . . . . .. . 4 5. .4 83 0 4 3 . . 9 8 9 2 5 4 . . 6 4 7 0 3 4 . . 2 0 7 2 2 1 . . 5 94 9 1 1 . . 7 3 4 4 1 1. . 8 2 1 9 2 2. . 0 7 1 7 2 3 . .8 9 8 6 3 4. . 2 3 8 0 [n domestic offices .......... ....... ..... 3.39 3.04 3.51 2.84 1.67 1.18 1.08 1.70 2.55 2.80 Other checkable deposits .......... , ... 1.67 1.44 1.61 1.67 .93 .80 .97 2.27 2.46 2.36 Saving~ deposits ~influding MMDAsl . 2.45 2.11 2.43 1.92 1.02 .73 .71 1.15 1.87 1.98 Large ume depoSIts .................. 4.53 4.36 5.32 4.40 3.26 2.36 2.14 3.06 4.32 4.72 Other time deposits· .................. 5.21 4.95 5.53 5.11 3.44 2.70 2.61 3.40 4.05 4.55 Gross federal funds purchased and RPs ....... 5.18 4.53 5.47 3.81 2.02 1.39 1.59 3.11 4.63 5.15 Other interest-bearing liabilities .............. 7.47 8.26 8.07 6.84 5.57 4.42 3.83 5.40 7.78 5.61 Income and expense as a percentage of average net consolidated assets Gross interest income ....................... 6.21 6.01 6.39 5.55 4.77 4.05 3.94 4.47 5.46 5.61 Taxable equivalent ........................ 6.22 6.03 6.41 5.57 4.79 4.07 3.96 4.48 5.48 5.63 S L e o c a u n r s i t . ie . s . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. .8 2 1 7 4. . 3 8 5 5 4. . 7 8 4 8 4. . 1 7 3 2 3. .7 5 3 7 3. . 0 63 4 2. .6 8 9 6 3. .7 1 2 9 3. . 9 8 1 0 3 . .9 6 8 9 Gross federal funds sold and reverse RPs .... .42 .30 .25 .25 .12 .10 .10 .18 .31 .38 Other ........... ............ ................ .70 .51 .51 .44 .35 .28 .30 .38 .45 .56 Gross interest expense ......................... 3.48 3.16 3.60 2.69 1.65 1.19 1.20 1.89 2.88 3.00 Deposits ........................ , ........ ,., 2.20 1.97 2.33 1.74 1.05 .74 .74 1.17 1.72 1.87 Gross federal funds purchased and RPs ....... .54 .40 .49 .35 .18 .13 .13 .27 .47 .46 Other .................. .. " ....... . " ....... .74 .79 .78 .59 .41 .33 .33 .45 .69 .68 Net interest income ..... ....................... 2.73 2.84 2.78 2.87 3.12 2.86 2.74 2.58 2.58 2.61 Taxable equivalent .. ........... , ...... . ... 2.75 2.86 2.80 2.89 3.14 2.88 2.76 2.59 2.60 2.63 Loss provisions 7 ...•.........•••••. ............ .31 .26 .38 .59 .73 .35 .16 .20 .22 .60 Non-interest income . . . . . . . . . . . . . ......... 2.15 2.55 2.54 2.26 2.31 2.32 2.21 2.37 2.35 1.95 Service charges on depOSits .................. .33 .37 .40 .44 .48 .46 .45 .42 .41 .40 T F r id ad uc in ia g r y r e a v c e t n iv u i e t ie . s . . . .. . . . . . . .. .. . . . . . . . . . ., . . . .. . . . . . . .. . . . . .. .. . . .. . . . . . 3 3 2 3 . . 3 4 1 6 . . 2 4 7 8 . . 4 2 3 9 . . 2 3 5 2 . .2 30 6 . . 2 2 3 4 . .3 2 1 7 . .2 3 3 7 . . 2 05 0 Interest rate exposures ..................... .10 .17 .20 .20 .15 .12 .07 .11 .09 .08 Foreign exchange rate exposures ........... .20 .19 .18 .14 .14 .14 .12 .12 .14 .09 Other commodity and equity exposures ..... .03 .09 .11 .08 .03 .04 .04 .07 .13 .06 Other .................... ................ ... 1.17 1.41 1.39 1.10 1.26 1.30 1.28 1.38 1.35 1.31 Non-interest expense ........................ ... 3.47 3.45 3.31 3.13 3.16 3.02 3.11 2.99 2.89 2.80 S O a c l c a u ri p e a s n , c w y a g .. e . s . . . a . n . d . . e . m .. p . l . o . y . e . e . . b . e . n .. e f . i t . s . . . .. . . . . . . . . . . . 1 . . 4 4 7 5 1 . . 5 57 0 1 . . 4 4 7 6 1 . . 4 38 5 1. . 4 4 1 6 1 . . 4 3 5 9 1 . . 4 3 3 4 1 . . 4 3 3 8 1 . .3 4 9 0 1 . . 3 32 7 Other .................. ..................... 1.54 1.38 1.39 1.30 1.28 1.18 1.33 1.19 1.09 1.12 Net non-interest expense . . . . . . . . . . . . . . . . . . . . . . . 1.32 .90 .77 .87 .85 .70 .91 .62 .54 .85 Gains on investment account securities ...... .... .11 .03 -.03 .08 .13 . 11 .07 • -.01 .02 Income before taxes and extraordinary items .... 1.22 1.71 1.60 1.48 1.67 1.92 1.74 1.75 1.82 1.18 T E a x x tr e a s o r . d . i . n . a . r . y . . i . te . m .. s . , . n , e . t . . o . f . . in . c . o .. m . e .. t . a . x . e . s . .. .. . . . . . . . • . 44 • . 66 • . 60 -. . 0 4 1 9 • . 56 • . 63 • . 56 • . 57 . .0 5 2 9 • . 33 Net income .................................... .78 1.05 1.00 .99 1.11 1.29 1.18 1.18 1.25 .85 Cash dividends declared .............••...... .53 .79 .86 .66 1.05 .99 .65 .59 .64 .60 Retained income .... ...... . ...... ........... .25 .26 .13 .32 .06 .30 .53 .59 .62 .25 MEMO: Return on equity . . . . . . . . . . . . . . . . . . . . . . . 10.53 13.58 13.04 12.55 13.14 16.06 14.07 12.86 14.08 9.23 NOTE: Data are as of April 16, 2008. 5. When possible, based on the average of quarterly balance sheet dala re I. Includes allocaled transfer risk reserve. poned on schedule RC-K of the quarterly Call Report. 2. Measured as the sum of large time deposits in domestic offices, deposits 6. Before 1997, large time deposit open accounts were included in other booked in foreign offices. subordinated notes and debentures, federal funds time deposits. purchased and securities sold under repurchase agreements, Federal Home 7. Includes provisions for allocaled transfer risk. Loan Bank advances, and other borrowed money. * [n absolute value, less than 0.005 percent. 3. Measured as the sum of construction and land developmenl loans secured n.a. Not available. by real estate; real estate loans secured by nonfarm nonresidential properties or MMDA Money market deposil account. by mullifamily residential properties: and loans to finance commercial real es RP Repurchase agreement. tate, construction, and land developmenl aClivities nOI secured by real estate. MBS Mortgage-backed securities. 4. Other real eSlale owned is a component of other non-interesl-eaming assets.
u.s. Profits and Balance Sheet Developments at Commercial Banks in 2007 A33 A.i. Portfolio composition. inl~reSI rale • anti income and expense. U.S. banks, 19lJH-2007 C Banks ranked II through 100 by assets hem 1998 2007 Balance sheet items as a percentage of average net consolidated assets Interest-earning assets ..... .................... 87.85 88.40 88.67 88.09 88.34 88.10 88.18 87.87 87.05 87.01 Loans and leases (net) .................. 64.37 64.22 64.88 62.14 60.00 59.48 60.63 63.37 62.77 60.99 Commercial and industrial .........•....... 18.92 19.39 18.19 15.84 13.27 11.96 11.90 12.17 12.13 12.74 U.S. addressees ......................... 17.59 18.17 17.64 15.36 12.94 11.66 11.64 11.91 11.81 12.41 Co F n o su re m ig e n r a . d . d . r . e . s . s . e . e . s . . .. .. .. . . .. . . . . .. . . . . . . . . . .. . . . . . . . . . . . . .. . 1 1 4 . . 3 5 3 2 13 1 . . 5 2 8 2 13 . .7 5 9 5 13. . 2 48 0 12 . . 3 7 3 9 12. . 5 3 7 0 12. . 7 2 4 6 12. .2 8 7 4 11 . . 3 9 2 4 9. .3 9 3 9 Credit card ............................. 7.67 6.79 6.97 7.05 6.56 6.35 6.90 7.45 7.12 5.29 Installment and other .................... 6.86 6.79 6.82 6.15 6.22 6.21 5.83 5.39 4.82 4.70 Real estate ............................... 24.59 24.79 26.21 27.29 28.94 30.67 32.16 34.89 35.23 33.53 In domestic offices ...................... 24.42 24.61 26.12 27.21 28.88 30.54 31.96 34.73 35.03 33.34 Construction and land development .... 2.03 2.44 3.00 3.31 3.36 3.22 3.51 4.21 5.27 5.95 Farmland . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 .19 .22 .23 .22 .20 .19 .19 .17 .21 One-to four-family residential 14.86 14.14 14.51 15.51 17.05 18.79 19.52 21.05 20.27 17.80 Home equity ....................... 2.17 2.08 2.49 2.90 3.92 4.74 5.90 6.04 5.01 4.01 Other .............. . . . . . . . . . . . . . . . . 12.69 12.06 12.02 12.60 13.13 14.05 13.62 15.01 15.26 13.79 Mullifamily residential ................ 1.00 1.02 1.11 1.16 1.20 1.32 1.34 1.45 1.45 1.26 Nonfarm nonresidential 6.36 6.81 7.28 6.99 7.05 7.00 7.41 7.83 7.86 8.13 In foreign offices ....................... .18 .19 .09 .09 .06 .13 .20 .16 .21 .18 To depository institutions and acceptances of other banks .. 1.09 .93 1.05 1.40 1.44 1.21 .54 .56 .45 1.05 Foreign governments .... .06 .06 .03 .03 .02 .02 .01 .02 .01 .01 Agricultural production .... ................ .33 .33 .37 .32 .27 .23 .19 .19 .18 .21 Other loans ................ 3.35 2.99 2.57 2.03 1.80 1.59 1.87 1.62 1.88 2.43 Lease-financing receivables .. ............. 2.71 3.28 3.82 3.18 2.65 2.35 2.30 2.07 1.83 1.80 Lp.ss: Unearned income on loans ........... -.04 -.04 -.03 -.02 -.02 -.02 -.02 -.01 -.01 -.01 LESS: Loss reserves I ...................... -1.16 -1.11 -1.12 -1.13 -1.17 -1.10 -1.06 -.97 -.87 -.75 Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.66 17.78 17.32 19.00 20.30 21.16 21.28 19.96 19.22 19.89 Investment account ......................... 16.13 17.27 16.10 17.71 19.17 20.09 20.12 18.80 17.72 17.99 Debt ................................... 15.58 16.62 15.50 17.32 18.82 19.88 19.96 18.69 17.60 17.88 U.S. Treasury ........................ 2.25 1.70 1.12 .67 .74 .95 .89 .60 .44 .38 U.S. government agency and corporation obligations ........... 9.93 10.57 9.70 10.09 11.45 12.99 12.80 11.62 10.07 9.06 Government-backed mortgage pools. 4.98 5.12 4.31 5.19 6.00 6.08 5.74 4.83 4.04 3.73 CollateraUzed mongage obligations 2.83 2.89 2.55 2.42 2.79 3.72 3.42 3.39 2.94 2.68 Other .............................. 2.12 2.56 2.84 2.48 2.65 3.19 3.64 3.40 3.10 2.65 Slate and local government . . . . . . . . . . . .92 .99 .96 .99 .97 .95 .96 .98 1.01 1.16 Private mongage-backed securities .96 1.33 1.66 2.01 2.13 2.14 2.65 3.58 4.29 4.60 Other ................................ 1.53 2.03 2.06 3.56 3.53 2.85 2.66 1.90 1.78 2.67 Equity .................................. .55 .65 .60 .39 .34 .21 .16 .11 .12 .12 Trading account ........................... .54 .51 1.22 1.29 1.13 1.07 1.16 1.16 1.50 1.90 Gross federal funds sold aud reverse RPs ..... 3.57 3.34 3.76 4.06 4.71 4.20 2.98 2.30 2.84 3.41 Interest-bearing balances at depositories ...... 3.24 3.06 2.71 2.88 3.33 3.26 3.29 2.24 2.22 2.72 Non-interest-earning assets ..................... 12.15 11.60 11.33 11.91 11.66 11.90 11.82 12.13 12.95 12.99 Revaluation gains held in trading accounts .... .75 .56 .40 .55 .47 .60 .42 .33 .30 .48 Other ....................... ................ 11.40 11.04 10.92 11.37 11.19 11.30 11.40 11.80 12.65 12.51 Liabilities ..................................... 91.63 91.66 91.57 91.15 90.79 90.65 89.87 88.86 88.08 88.40 Core deposits ........... ................... 49.89 48.33 46.28 46.28 47.07 47.93 46.55 48.18 46.84 47.44 Transaction deposits ....................... 14.15 12.12 9.93 8.37 7.49 7.29 7.06 6.64 5.74 5.15 Demand deposits ....................... 12.39 10.52 8.61 7.17 6.32 5.96 5.65 5.35 4.54 3.90 Other checkable deposits ................ 1.75 1.60 1.32 1.20 1.17 1.33 1.41 1.29 1.20 1.25 Savings deposits (including MMDAs) ...... 22.51 23.89 24.02 26.62 30.07 32.34 31.75 33.33 32.66 32.99 Small time deposits ....................... 13.24 12.31 12.33 11.28 9.51 8.30 7.74 8.20 8.44 9.30 Managed liabilities2. . ........................ , 38.11 39.85 41.98 40.81 39.48 38.12 39.29 37.04 37.60 37.02 Large Ume dePOSIlS ....................... 7.83 8.17 9.54 9.72 8.99 8.20 8.76 10.10 11.44 10.20 Deposits booked in foreign offices 8.37 8.20 7.56 7.05 6.28 6.54 7.21 6.02 6.43 8.52 Subordinated notes and debentures ......... 1.66 1.71 1.54 1.53 1.44 1.38 1.39 1.31 1.32 1.40 Gross federal funds purchased and RPs ... 9.48 9.78 9.28 9.71 9.66 9.69 8.95 7.17 6.74 6.79 Other managed liabilities .................. 10.77 11.99 14.07 12.79 13.11 12.30 12.97 12.44 11.66 10.10 Revaluation losses held in trading accounts ... .76 .58 .41 .52 .44 .56 .40 .34 .29 .47 Other ............ . . . . . . . . . . . . . . . . . . . . . 2.87 2.91 2.91 3.54 3.80 4.05 3.64 3.30 3.35 3.48 Capital account ................................ 8.37 8.34 8.43 8.85 9.21 9.35 10.13 11.14 11.92 11.60 C M o E m M m O ercial real estate loans3 . . . . . . . . . . . . 10.11 11.00 12.06 12.06 12.24 12.10 12.85 13.93 15.05 15.95 Other real estate owned4 ................. .04 .03 .03 .04 .05 .06 .05 .04 .05 .06 Mongage-backed securities ............•.... 8.76 9.34 8.52 9.63 10.93 11.93 11.81 11.81 11.27 11.01 Federal Home Loan Bank advances ...... n.a. n.a. n.a. 4.07 4.85 4.75 4.65 5.19 5.54 5.35 Avemge net consoUdated assets (billions of dollars) .............. 1.745 1.879 2.031 2.130 2.124 2.287 2.376 2.403 2.579 2.798
A34 Federal Reserve Bulletin 0 June 2008 A. L Portfolio l:omposilion. intcrc'l rates, and income and expense, .S. banks. 1998-2007- Collfinued C. Banks ranked II through 100 by assets-Continued ,I I Item 1998 I 1999 I 2000 I 2001 I 2002 I 2003 I 2004 I 2005 I 2006 I 2007 Effective inlerest rate (percent)' I Rates earned Interest-earning assets .......................... 8.12 7.90 8.44 7.54 6.03 5.30 5.21 5.98 6.93 6.87 Taxable equivalent .. .................... 8.16 7.94 8.48 7.58 6.07 5.33 5.24 6.02 6.97 6.91 Loans and leases, gross .............. , ....... 8.81 8.56 9.14 8.26 6.80 6.11 5.98 6.61 7.58 7.45 Net of loss provisions .................. 8.14 7.86 8.25 6.96 5.59 5.11 5.19 5.89 7.04 6.64 Securities ... , ............................... 6.31 6.41 6.64 5.96 4.79 3.80 3.63 4.18 4.99 5.25 Taxable equivalent ................ ...... 6.46 6.55 6.77 6.08 4.91 3.90 3.73 4.29 5.10 5.37 Investment account · . . . . . . . . . . . . . . . . . . ..... 6.33 6.43 6.66 604 4.86 3.87 3.64 4.11 4.84 5.18 U.S. Treasury securities and U.S. government agency obligations (excluding MBS) .............. ....... n.a . n.a. n.a. 5.83 4.28 3.17 2.94 3.47 4.28 4.85 Mongage-backed securities .............. n.a. n.a. n.a. 6.60 5.34 4.20 4.02 4.34 5.02 5.23 Other .................... ..... n.a. n.a . n.a. 5.13 4.22 3.61 3.29 4.06 4.87 5.28 5.86 5.62 6.25 4.83 3.59 2.56 3.39 5.30 6.74 5.94 G~~d;Je:~cfu~J; ~~id·~d·;.;~~~~~ 'RP~'::::: 5.46 5.13 6.06 3.86 1.68 1.14 1.25 3.24 4.96 5.12 Interest-bearing balances at depositories ...... 5.67 4.82 5.49 4.38 2.46 1.93 2.27 3.20 4.24 4.84 Rates paid Interest-bearing liabilities ....................... 4.55 4.23 4.97 3.94 2.22 1.61 1.56 2.44 3.48 3.72 Interest-bearing deposits ..................... 4.15 3.80 4.42 3.60 1.96 1.35 1.29 2.03 3.07 3.33 In foreign offices ........... ............... 5.22 4.71 5.38 3.67 1.70 1.23 1.42 2.76 4.10 4.01 In domestic offices · . . . . . . . . . . . . . . ......... 3.96 3.64 4.26 3.60 1.99 1.36 1.27 1.95 2.95 3.22 Other checkable deposits ................ 2.41 2.06 2.57 2.32 .94 .64 .72 1.29 2.12 2.60 Saving~ deposits !in,fluding MMDAs) .... 2.76 2.51 2.94 2.30 1.08 .66 .65 1.30 2.14 2.44 Large time dePOSitS .................... 5.32 5.00 5.88 5.11 3.37 2.70 2A9 3.31 4A5 4.46 Other time deposits· .................... 5.35 5.08 5.73 5.42 3.68 2.95 2.58 3.03 4.09 4.74 Gross federal funds purchased and RPs ....... 5.22 4.91 6.02 3.86 1.73 1.20 1.37 3.04 4.46 4.71 Other inlerest-bearing tiabilities .............. 5.75 5.44 6.25 5.29 3.65 3.04 2.77 3.81 4.90 5.25 Income and expense as a percentage of average net consolidated assets Gross interest income ........................ 7.15 7.03 7.54 6.70 5.31 4.67 4.63 5.28 6.08 5.99 Taxable equivalent ..... ...... ............. 7.19 7.07 7.57 6.73 5.34 4.70 4.65 5.31 6.11 6.02 Loans ..... ........ .......................... 5.78 5.60 6.05 5.28 4.15 3.72 3.71 4.27 4.85 4.60 Securities ........... ..................... 1.00 1.11 1.09 1.06 .90 .75 .73 .77 .87 .93 Gross federal funds sold and reverse RPs ..... .19 .18 .22 .15 .08 .04 .03 .06 .13 .17 Other ........ ........... .................... .18 .14 .18 .21 .18 .15 .15 .18 .23 .29 Gr D os e s p o in s l i e ts r es . t . . e . x . p . e . n . s . e . . . . . .. .. .. . . .. . . , . .. . . . . .. .. . . .. .. .. . . . . . . . . .. .. . . . 3 2 . . 4 23 5 3 2 . .0 2 4 9 3 2. . 4 9 1 6 3 2. . 0 1 1 4 1 1. . 7 0 7 9 1 . . 7 3 7 0 1 . . 7 2 4 6 1 1. . 1 9 8 4 2 1 . . 7 8 8 4 2 2. . 9 04 6 Gross federal funds purchased and RPs ....... .51 .51 .56 .38 .17 .12 .13 .23 .30 .32 Other ....................................... .71 .74 .99 .75 .51 .41 .40 .53 .63 .59 Net i T n a te x r a e b st l e i n e c q o u m iv e a le . n .. t .. · . , . . . . . . . . . . . . . , . .. , . . . . . . . . . .. . . , . . . . . , . ' . , . . 3 3 . .7 7 3 0 3 3. .7 7 5 8 3 3 . . 5 61 8 3 3 . . 5 5 9 6 3 3 . .5 5 7 4 3 3. . 4 37 0 3 3 . . 3 3 6 9 3 3. . 3 3 7 4 3 3. .3 33 0 3 3 . . 0 0 3 6 Loss provisions 1 ......... ... "., ........... "." .53 .55 .68 .91 .80 .67 .55 .52 .41 .55 Non-interest income ...... ,., .. , ....... " ...... 3.09 3.38 3.18 3.35 3.30 3.29 3.09 2.81 2.91 2.73 Service charges on deposits .................. .42 .42 .42 .42 .42 A2 .40 .37 .35 .33 T F r id a I d u n c i le n ia r g e r s y r t e a v r c a e t l n i e v u i e e t x i e p . s . o . s . . u . . r . , e . . s . . . . . . . . . . , , . . ' . . , . . . . , . . .. . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . .. . . . . . . . 4 0 03 9 9 . . .0 4 0 8 8 2 . . . 0 0 5 2 7 2 . . . 0 0 4 8 4 2 . . A 0 0 2 4 8 . . . 0 0 3 8 4 7 - . . .0 4 0 1 2 7 - . . . 0 3 0 1 5 6 . . A 0 0 7 2 I • . . 5 0 4 9 Foreign exchange rate exposures ........... .06 .05 .04 .0 3 .04 .04 .05 .04 .05 .08 Other commodity and equity exposures ..... • • • • • .01 .oJ .02 -.01 • Other ....................................... 2.09 2.40 2.18 2.43 2.37 2.41 2.20 2.03 2.09 1.77 Non-inlerest expense ............. ....... , ...... 4.05 4.15 4.00 3.95 3.73 3.64 3.55 3.36 3.34 3.45 S O O a t c l h c a e u r r i p e a . s n . . . c w . y . a . g .. . e . . s . . , . . a . . n . . d . , . , e ., m . , . . p . , l ., o . . y . . e . . e . . . . b . , e .. n , " e . f . . i . . t s . . . . . . . . . , . .', . . . . , . . . . ,. 2 1 . . . 0 4 5 6 6 3 2 1 . . . 4 5 1 4 6 6 2 1 . . . 4 4 1 3 4 4 2 1 . . . 0 4 4 7 7 2 1 1 . . . 4 4 8 9 4 0 1 1 . A . 4 7 7 6 l 1 1 . . . 4 3 7 5 9 0 1 1 . . . 3 3 6 7 7 2 1 1 . . . 3 3 6 3 4 8 1 1 . . . 3 7 3 4 9 2 Net non-inlerest expense ....................... .95 .77 .82 .60 .43 .35 .45 .55 .43 .71 Gains on investment account securities .......... .oJ -.01 -.05 .09 .10 .06 .03 • -.03 -.05 Income before taxes and extraordinary ilems .. ,. 2.24 2.42 2.02 2.14 2.41 2.42 2.39 2.27 2.43 1.71 Taxes ......... ,' ......... , .......... , .. ..... • . 78 • . 87 • . 70 • . 74 • . 82 • . 82 • . 82 .77 .83 .59 Extraordinary items, net of income taxes ..... .01 .07 -.05 Net income ................................ .. .. 1.45 1.55 1.32 1.39 1.59 1.59 1.57 1.50 1.67 1.06 Cash dividends declared ., ................ .... .96 1.17 .94 .96 .99 1.05 .95 1.00 1.37 1.26 Retained income ....... .. .............. .. .. . .49 .38 .38 .43 .60 .54 .62 .50 .30 -.20 MEMO: Return on equity .. . . . . . . . . . . . , . . . . . , . . . 17.37 18.59 15.72 15.74 17.24 17.Q3 15.54 13.48 14.05 9.16 NOTE: Data are as of April 16, 2008. 5. When possible, based on the average of quarterly balance sheet data re I. Includes allocated transfer risk reserve. ported on schedule RC-K of the quarterly Call Repon. 2. Measured as the sum of large time deposits in domestic offices, deposits 6. Before 1997, large time deposit open accounts were included in other booked in foreign offices, subordinated noleS and debentures, federal funds time deposits. purchased and securities sold under repurchase agreements, Federal Home 7. Includes provisions for allocated transfer risk. Loan Bank advances, and other borrowed money. * In absolute value, less than 0.005 percent. 3. Measured as the sum of construction and land development loans secured n.a. Not available. by real estate; real estate loans secured by nonfarm nonresidential properties or MMDA Money market deposit account. by multifamily residential properties; and loans to finance commercial real es RP Repurchase agreement. tate, construction, and land development activities not secured by real estate. MBS Mongage-backed securities. 4. Other real estale owned is a component of other non-interest-earning assets.
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 A35 A.1. Ponfolio composition, illleres! rales. and income and expense. .5. banks. (91)8-2007 D. Banks ranked 101 rnrough 1,000 by assets I hem 1998 I 1999 I 2000 I 2001 I 2002 I 2003 I 2004 I 2005 I 2006 I 2007 I r Bal8J)ce sheet items as a percentage of average net consolidated assets Interest-earning assets .......................... 91.38 91.68 91.50 91.16 91.36 91.34 91.56 91.31 91.07 91.29 Loans and leases (net) ..................... 61.23 61.48 62.15 62.46 61.46 61.32 63.33 65.15 67.04 68.85 Commercial and industrial ........• ...... 12.45 12.66 12.95 13.03 12.38 11.51 11.52 11.79 11.68 12.08 U.S. addressees ....................... 12.12 12.34 12.60 12.65 12.06 11.20 11.21 11.49 11.45 11.80 Foreign addressees ..................... .32 .32 .36 .38 .31 .31 .31 .30 .23 .27 Consumer ...................... 12.56 10.77 10.19 9.76 8.13 6.76 6.33 5.38 5.50 5.35 Credit card ............................. 4.78 3.37 3.27 3.65 2.63 1.79 1.91 1.20 1.63 1.88 Installment and orner ............... ..... 7.78 7.41 6.92 6.11 5.50 4.97 4.42 4.18 3.87 3.46 Real estale .................. .............. 33.83 35.89 36.93 37.64 38.93 40.97 43.38 45.88 47.88 49.49 In domestic offices .......... .......... 33.81 35.87 36.91 37.62 38.90 40.93 43.32 45.81 47.78 49.40 Construction and land development .... 2.87 3.48 4.15 4.90 5.40 5.90 7.01 8.87 11.01 12.85 Farmland ............................ .56 .58 .65 .66 .73 .80 .91 .99 1.07 1.16 One-to four-family residential ....... 18.14 18.26 17.17 16.18 15.39 15.71 15.33 15.18 14.76 14.08 Home equity ............... ........ 2.14 1.99 2.10 2.21 2.51 2.92 3.46 3.61 3.25 3.01 Other .............................. 16.00 16.26 15.06 13.97 12.88 12.79 11.87 11.57 11.51 11.07 Multifamily residential ......•..... ' ... 1.25 1.44 1.58 1.69 1.83 2.00 2.24 2.37 2.32 2.33 Nonfarm nonresidential .............•. 10.99 12.11 13.36 14.18 15.55 16.52 17.82 18.40 18.63 18.98 In foreign offices ........... ....... .02 .02 .02 .02 .03 .05 .06 .08 .10 .09 To depository institutions and acceptances of other banks . ........ ... .52 .46 .37 .38 .37 .37 .25 .13 .14 .14 Foreign governments .... .............. .. .03 .03 .03 .03 .02 .02 .01 • • • Agricultural production ..... .............. .80 .78 .82 .85 .86 .83 .82 .81 .84 .88 Orner loans .......................... .... 1.30 1.25 1.22 1.22 1.18 1.25 1.32 1.36 1.20 1.22 Lease-financing receivables ................ .99 .78 .75 .74 .75 .67 .75 .75 .75 .65 LESS: Unearned income 011 loans ........... . -.09 -.08 -.08 -.07 -.06 -.06 -.06 -.06 -.06 -.06 LESS: Loss reserves I . . . . . . . . . . . . . . . . . . . . . -1.15 -1.06 -1.04 -1.12 -1.09 -1.02 -.98 -.90 -.88 -.91 Securities ................................... 24.19 25.18 24.34 22.81 23.85 24.37 23.59 21.59 19.55 18.30 Investment account ........................ 24.08 25.10 24.25 22.70 23.80 24.23 23.54 21.51 19.47 18.10 De U bt . S. . . T .. re . a . s . u . r . y . .......... . . . . . . . . . . . . , . .. . . . . . . . . . . . . . . . 2 3 3 . . 9 3 1 9 24 2 . .5 3 3 4 23 1 . .8 4 1 6 22 1 . . 2 32 7 23 1 . . 3 23 0 23 1 . . 8 0 0 0 23 1 . .0 1 2 8 21. . 2 8 2 3 19 . . 5 2 9 0 17 . .6 47 9 U.S. government agency and corporation obligations ........... 15.08 16.28 15.56 14.70 15.85 16.96 16.70 15.06 13.55 12.32 Government-backed mortgage pools. 6.45 6.72 6.22 6.27 6.56 7.03 6.80 5.73 4.83 4.57 Collateralized mongage obligations 3.21 3.52 3.04 3.08 3.69 3.69 3.41 3.16 2.81 2.60 Other ......................... ..... 5.43 6.04 6.30 5.35 5.60 6.24 6.49 6.17 5.90 5.15 State and local government ........... 2.69 2.90 2.91 2.90 2.89 2.95 2.92 2.79 2.74 2.77 Private mongage-backed securities .... .65 1.03 .99 .94 .99 .87 1.08 1.17 1.08 1.01 Other ................................ 1.06 1.60 2.19 2.42 2.34 2.01 1.46 1.37 1.24 1.12 Equity .................................. .69 .77 .80 .43 .50 ,43 .36 .29 .27 ,41 Trading account ........................... .11 .08 .09 .11 .05 .14 .05 .08 .07 .20 Gross federal funds sold and reverse RPs ..... 4.16 3.35 3.40 4.20 4.15 3.85 2.95 2.82 2.81 2.57 Interest-bearing balances at depositories ...... 1.80 1.68 1.60 1.68 1.89 1.80 1.69 1.76 1.67 1.57 Non-interest-earning asselS ....... .............. 8.62 8.32 8.50 8.84 8.64 8.66 8.44 8.69 8.93 8.71 • • • Revaluation gains held in trading accounts .... .01 .02 .01 .01 * .03 .04 Orner ...................................... 8.62 8.31 8,49 8.84 8.64 8.66 8.44 8.68 8.90 8.67 Liabilities .. . . . . . . . . . . . ..................... 90.55 90.90 90.95 90.32 89.93 89.69 89.18 89.11 89.01 88.86 Core deposits ............................... 63.87 62.48 60.80 60.34 61.27 61.33 60.40 59.07 58.04 59.68 Transaction deposits .... ............. ...... 16.08 13.93 12.29 11.48 11.37 11.51 11.77 11.16 9.81 8.43 Demand deposits ....................... 11.87 10.19 8.97 8.23 8.05 7.97 8.13 7.87 6.99 5.94 Orner checkable deposits ............... 4.22 3.75 3.32 3.25 3.32 3.54 3.64 3.28 2.83 2,49 Savings deposits (including MMDAs) ...... 26,43 28.56 28.55 29.40 32.34 34.02 34,42 33.77 32.82 32.89 Small time deposits ................ ...... 21.36 19.98 19.96 19.46 17.55 15.80 14.20 14.14 15.41 18.36 Managed liabilities2 ......................... 24.65 26.33 28.01 27.75 26.57 26.38 26.98 28.38 29.32 27.51 Large time deposits ....................... 10.09 10.29 11.98 12.60 12.16 11.90 12.12 13.64 15.21 14,42 Deposits booked in foreign offices ......... 1.31 1.20 1.28 1.24 .88 .64 .65 .57 .52 .57 Subordinated notes and debentures ......... .37 .35 .30 .31 .34 .35 .35 .27 .24 .22 Gross federal funds purchased and RPs ..... 6.15 6.90 6.30 5.76 5.27 5.36 5.52 5.55 5.40 5.33 Other managed liabilities .................. 6.73 7.58 8.15 7.84 7.90 8.13 8.34 ·8.3 5 7.94 6.97 • • • Revaluation losses held in trading accounts ... .01 .01 .01 .01 .01 .01 Orner ........................ ., ... , .. 2.02 2.09 2.13 2.23 2.08 1.98 1.81 1.66 1.64 1.66 Capital account ................................ 9.45 9.10 9.05 9.68 10.07 10.31 10.82 10.89 10.99 11.14 MEMO Commercial real estate loans3 ........ " .... ... 15.33 17.27 19.32 21.03 23.06 24.64 27.28 29.85 32.22 34.52 Orner real estate owned" ..... ................ .09 .08 .07 .08 .10 .11 .10 .08 .08 .11 Mongage-backed securities ................. , ... 10.31 11.27 10.25 10.29 11.24 11.60 11.29 10.07 8.72 8.18 Federal Home Loan Bank advances ... ..... ... n.a. n.a. n.a. 5.27 5.71 6.29 6.46 6.43 6.11 5.53 Average net consolidated assets (billions of dollars) .. ......... .... ........ 938 974 987 1,002 1,022 1.072 1,080 1.152 1.249 1.267
A36 Federal Reserve Bulletin 0 June 2008 A.1. Portfolio compo 'ili( n. interest rales. and income and expense, . b,mks, 1998-2007-Colllillued D. Banks ranked 101 through 1,000 by assets-Continl/ed I I I I I I I I I ,hem 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Effective interest rate (percent)' Rutes enrned Interest-earning assets ......................... . 8.38 7.83 8.48 7.85 6.42 5.58 5.46 6.11 7.01 7.32 Taxable equivalent ..................... . 8.47 7.92 8.56 7.94 6.50 5.66 5.53 6.18 7.08 7.39 Loans and leases, gross ..................... . 9.41 8.74 9.42 8.76 7.30 6.55 6.25 6.89 7.79 8.02 Net of loss provisions .................. . 8.78 8.26 8.75 7.87 6.55 6.00 5.87 6.63 7.54 7.47 Securities ................................ . 6.30 6.04 6.45 5.96 4.95 3.81 3.79 4.03 4.53 4.86 Taxable equivalent ..................... . 6.57 6.29 6.71 6.24 5.21 4.06 4.04 4.28 4.80 5.14 Investment account ....................... . 6.30 6.03 6.45 5.96 4.92 3.82 3.78 4.02 4.53 4.86 U.S. Treasury securities and U.S. government agency obligations (excluding MBS) ................... .. n.a. n.a. n.a. 5.85 4.54 3.42 3.15 3.47 4.19 4.74 Mortgage-backed securities ............. . n.a. n.a. n.a. 6.33 5.38 3.95 4.01 4.23 4.64 4.96 Other ................................. . n.a. n.a. n.a. 5.40 4.50 4.07 4.21 4.42 4.81 4.81 Trading account .......................... . 6.84 7.33 9.30 6.60 14.05 3.07 10.30 6.59 4.92 5.25 Gross federal funds sold and reverse RPs .... . 5.31 4.98 6.15 3.91 1.73 1.27 1.57 3.31 4.94 5.07 Interest-bearing balances at depositories ... .. 5.77 5.07 5.76 3.93 1.79 1.26 1.47 3.29 4.58 4.94 ROles paid Interest-bearing liabilities .........•............. 4.50 4.09 4.79 3.97 2.44 1.79 1.65 2.36 3.38 3.79 Interest-bearing deposits .................... . 4.28 3.84 4.46 3.81 2.27 1.60 1.44 2.09 3.11 3.59 In foreign offices ......................... . 5.55 5.07 6.13 4.27 2.14 1.43 1.43 3.05 4.50 4.63 In domestic offices ....................... . 4.25 3.82 4.43 3.81 2.28 1.60 1.44 2.08 3.10 3.58 Other checkable deposits ............... . 2.15 1.99 2.27 1.81 1.06 .74 .72 1.18 1.74 1.89 Saving~ deposits ~in6cluding MMDAs) ... . 2.96 2.65 3.07 2.22 1.17 .76 .74 1.27 2.06 2.38 Large ume depoSIts ................... . 5.51 5.17 6.00 5.27 3.32 2.57 2.33 3.21 4.41 4.91 Other time deposits" ................... . 5.64 5.11 5.74 5.51 3.77 2.86 2.51 3.10 4.19 4.83 Gross federal funds purchased and RPs ...... . 5.13 4.82 5.95 3.82 1.83 1.29 1.45 2.94 4.52 4.62 Other interest-bearing liabilities ............. . 5.93 5.47 6.46 5.32 4.22 3.57 3.37 4.02 4.75 5.04 r----------------------------------------------------------------- Income and expense as a percentage of average net consolidated assets Gross interest income ...........••......• _. ... . 7.66 7.19 7.79 7.16 5.84 5.07 4.99 5.57 6.40 6.68 Taxable equivalent ....................... . 7.74 7.27 7.86 7.24 5.91 5.14 5.06 5.63 6.46 6.74 Loans ...................................... . 5.89 5.47 5.96 5.59 4.56 4.06 4.01 4.55 5.29 5.58 Securities .................................. . 1.50 1.51 1.58 1.33 1.15 .91 .88 .86 .89 .88 Gross federal funds sold and reverse RPs .... . .22 .17 .21 .16 .07 .05 .05 .09 .14 .13 Other ...................................... . .06 .04 .04 .08 .06 .05 .05 .07 .09 .09 Gross interest expense ........................ . 3.44 3.20 3.79 3.14 1.92 1.41 1.29 1.84 2.67 3.01 Deposits ................................... . 2.70 2.44 2.87 2.48 1.49 1.04 .92 1.34 2.04 2.41 Gross federal funds purchased and RPs ...... . .32 .34 .38 .22 .09 .07 .08 .16 .24 .25 Other ..................................... .. .42 .42 .54 .44 .34 .30 .29 .34 .39 .36 Net interest income ........................... . 4.21 3.99 4.00 4.02 3.92 3.66 3.70 3.72 3.73 3.67 Taxable equivalent ...................... .. 4.29 4.07 4.07 4.10 3.99 3.73 3.77 3.79 3.79 3.73 Loss provisions 7 .................•......•.•.... .49 .39 .52 .65 .54 .40 .30 .23 .23 .45 Non-interest income .......................... . 2.26 2.31 2.35 2.37 2.37 2.30 2.26 2.01 1.98 1.88 Service charges on deposits ................. . .39 .38 .36 .39 .41 .41 .39 .36 .35 .36 Fiduciary activities .................•........ .37 .38 .44 .40 .35 .34 .37 .35 .30 .31 • Trading revenue ........................... .. .02 .02 .01 • .01 .01 .01 .01 .01 Interest rate exposures .................... . .01 .01 .01 -.01 .01 .01 .01 Foreign exchange rate exposures .......... . • • * • • • • • • Other commodity and equity exposures .... . Other ..................................... . 1.49 1.53 1.55 1.58 1.60 1.54 1.49 1.29 1.32 1.20 Non-interest expense .. . . . . . . . .... . . . . . . . .. . .. . 3.86 3.70 3.84 3.88 3.72 3.59 3.54 3.37 3.35 3.26 Salaries, wages, and employee benefits ...... . 1.56 1.56 1.59 1.61 1.64 1.64 1.64 1.61 1.59 1.57 Occupancy ................................. . .47 .47 .47 .46 .45 .43 .43 .41 .40 .40 Other ..................................... .. 1.83 1.68 1.78 1.81 1.63 1.52 1.47 1.35 1.35 1.28 Net non-interest expense ..................... .. 1.60 1.39 1.48 1.52 1.35 1.29 1.29 1.36 1.36 1.38 Gains on investment account securities ......... . .04 -.01 -.04 .05 .04 .05 .02 -.01 -.01 -.01 Income before taxes and extraordinary items ... . 2.16 2.19 1.96 1.90 2.07 2.02 2.13 2.12 2.12 1.83 Taxes ........................ . ........ . .74 .74 .67 .66 .67 .66 .68 .68 .69 .58 Extraordinary items. net of income taxes .... . .06 .01 .01 .03 Net income ................................... . 1.47 1.46 1.29 1.25 1.39 1.39 1.45 1.45 1.43 1.25 Cash dividends declared ........... _. ...... .. 1.01 1.06 .92 1.33 1.19 1.64 .78 .86 .89 .91 Retained income ........................... . .46 .40 .37 -.08 .20 -.25 .68 .58 .54 .34 MEMO: Return on equity ...................... . 15.60 16.10 14.21 12.94 13.83 13.48 13.42 13.30 13.03 11.21 NOTE: Data are as of April 16, 2008. 5. Wllen possible, based on the average of quarterly balance sheet data re- I. Includes allocated transfer risk reserve. ported on schedule RC-K of the quarterly Call Report. 2. Measured as the sum of large time deposit~ in domestic offices, deposits 6. Before 1997, large time deposit open accounts were included in other booked in foreign offices, subordinated notes and debentures, federal funds time deposits. purchased and securities sold under repurchase agreements, Federal Home 7. Includes provisions for allocated transfer risk. Loan Bank advances, and other borrowed money. • In absolute value, less than 0.005 percent. 3. Measured as the sum of construction and land development loans secured n.a. Not available. by real estate; real estate loans secured by nonfarm nonresidential properties or MMDA Money market deposit account. by multifamily residential properties; and loans to finance commercial real es RP Repurchase agreement. tate, construction, and land development activities not secured by real estate. MBS Mortgage-backed securities. 4. Other real estate owned is a component of other non-interest-earning assets.
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 A37 A.I. Portfolio t:()mpO~ilion, inlerest rates, and income and expense. U.S. banks, 1998-2007 E. Banks not ranked amoog the 1,000 largest by assets Item 1998 I 1999 I 2000 I 2001 I 2002 I 2003 I 2004 I 2005 I 2006 I 2007 Balance sheet items as a percentage of average net consolidated assets lnterest-earning assets . .. . .................. .. 92.64 92.55 92.52 92.26 92.22 92.14 92.34 92.30 92.37 92.40 Loans and leases (net) ................... .. 59.11 59.76 62.31 62.67 62.72 62.31 63.80 65.44 66.65 67.29 Commercial and industrial. ... .. _. .. . 10.33 10.64 11.09 11.t0 10.71 10.42 10.29 10.21 10.17 10.25 U.S. addressees . . . . . . ... .. . .......... . 10.25 10.55 11.02 11.02 10.65 10.36 10.25 10.15 10.12 10.22 Foreign addressees ................... .. .08 .08 .07 .08 .06 .05 .04 .06 .05 .04 Consumer ................. . .. .. 8.46 8.17 7.98 7.42 6.77 6.16 5.45 4.97 4.63 4.36 Credit card ............ .. ............. . .70 .69 .59 .59 .49 .51 .40 .36 .37 .37 Installment and other .......... _. ....... . 7.76 7.47 7.39 6.83 6.28 5.65 5.05 4.61 4.25 3.99 Real estate . . .. . . . . . . . . .. . ............... . 36.04 36.83 39.29 40.30 41.52 42.30 44.75 46.97 48.54 49.28 In domestic offices ..................... . 36.04 36.83 39.29 40.30 41.52 42.30 44.75 46.97 48.53 49.28 Construction and land development ... . 3.02 3.28 3.70 4.23 4.51 4.99 6.01 7.46 9.10 10.01 Farmland ........................... . 2.83 2.95 3.06 3.04 3.08 3.13 3.22 3.25 3.26 3.38 One- to four-family residential 18.04 17.66 18.43 18.24 17.91 17.09 17.18 17.12 16.69 16.30 Home equity ..................... .. 1.21 1.17 1.28 1.37 1.62 1.79 2.11 2.20 2.06 2.01 Other ............................ . 16.83 16.49 17.15 16.87 16.29 15.29 15.06 14.93 14.63 14.30 Multifamily residential ............... . .93 .98 1.04 1.06 1.16 1.28 1.41 1.48 1.47 1.50 Nonfarm nonresidential .....•......... 11.22 11.% 13.06 13.71 14.86 15.82 16.93 17.66 18.01 18.09 • • • • • • • • • • In foreign offices ...................... . To depository institutions and acceptances of other banks ........... . .14 .14 .12 .12 .10 .09 .07 .05 .05 .06 Foreign governments ..................... . .01 .01 Agricultural production ................... . 4.27 4.06 3.85 3.76 3.64 3.40 3.26 3.21 3.22 3.26 Other loalls .............................. . .67 .67 .69 .67 .65 .66 .68 .70 .70 .70 Lease-financing receivables .. . ........... . .24 .26 .27 .27 .31 .26 .25 .24 .26 .27 LESS: Unearned income on loans .......... . -.20 -.15 -.tl -.09 -.07 -.06 -.06 -.05 -.05 -.04 LESS: Loss reserves I .................... .. -.86 -.87 -.88 -.88 -.90 -.92 -.89 -.87 -.87 -.87 Securities ................................. . 26.69 26.91 25.40 22.80 23.34 23.47 23.34 21.92 20.54 19.65 Investment account ...................... .. 26.66 26.88 25.38 22.79 23.32 23.44 23.33 21.90 20.52 19.57 Debt .................................. . 26.12 26.34 24.82 22.49 23.05 23.12 23.07 21.70 20.35 19.41 U.S. Treasury ....................... . 5.05 3.34 2.12 1.33 1.04 .90 .81 .71 .61 .47 U.S. government agency and corporation obligations .......... . 15.43 16.89 16.95 15.27 16.07 16.23 16.57 15.64 14.73 14.02 Government-backed mortgage pools. 3.90 3.95 3.47 3.78 4.54 4.&4 4.76 4.23 3.62 3.55 Collateralized mortgage obligations 2.02 2.00 1.70 1.94 2.30 2.20 1.96 1.71 1.50 1.55 Other ............................. . 9.51 10.93 11.78 9.56 9.23 9.19 9.85 9.70 9.61 8.92 State and local government .......... . 4.80 4.96 4.64 4.51 4.56 4.73 4.67 4.49 4.30 4.20 Private mortgage-backed securities ... . .16 .26 .23 .27 .26 .21 .19 .22 .24 .29 Other ............................... . .69 .89 .88 1.11 1.12 1.05 .83 .65 .48 .43 Equity ................................. . .54 .53 .56 JO .27 .31 .26 .20 .17 .17 Trading account .......................... . .04 .03 .02 .01 .01 .04 .01 .02 .02 .07 Gross federal funds sold and reverse RPs .... . 5.13 4.17 3.22 5.01 4.26 4.27 3.33 3.24 3.53 3.92 Interest-bearing balances at depositories ..... . 1.72 1.71 1.59 1.78 1.90 2.08 1.86 1.70 1.65 1.55 Non-interest-earning assets .................... . 7.36 7.45 7.48 7.74 7.78 7.86 7.66 7.70 7.63 7.60 • • • • • Revaluation gains held in trading accounts .. * Other ....... ..................... ...... . 7.36 7.45 7.48 7.74 7.78 7.86 7.66 7.70 7.63 7.60 Liabilities ........................... .. ...... . 89.53 89.75 89.88 89.59 89.73 89.58 89.55 89.49 89.35 88.95 Core deposits ................ . ........... .. 73.75 72.74 70.87 69.92 70.04 69.97 69.24 67.68 65.74 65.12 Transaction deposilS ...................... . 24.26 23.87 23.20 22.35 22.67 23.18 23.36 22.72 20.81 18.66 Demand deposits ...................... . 13.08 12.80 12.64 12.16 12.24 12.58 12.77 12.77 11.97 10.74 Other checkable deposits ............... . 11.18 11.07 10.57 10.19 10.42 10.60 10.59 9.95 8.&4 7.93 Savings deposits (including MMDAs) .... . 19.06 19.77 19.19 19.38 21.32 22.42 23.24 22.98 22.66 22.68 Small ti,:"e d.epo~ilS ..... ...... .. ... .. 30.43 29.10 28.48 28.19 26.05 24.36 22.64 21.98 22.28 23.77 Managed habillUes- ........................ . 14.76 16.09 18.08 18.67 18.79 18.77 19.57 21.04 22.76 22.92 Large time deposits ...................... . 11.11 11.52 12.51 13.55 13.21 13.07 13.16 14.53 16.49 16.91 Deposits booked ill foreign offices .07 .08 .05 .06 .07 .06 .07 .06 .06 .05 Subordinated notes alld debentures ........ . .01 .01 .02 .02 .04 .03 .04 .03 .03 .03 Gross federal funds purchased and RPs .... . 1.49 1.79 2.06 1.55 1.51 1.52 1.76 1.74 1.82 1.82 Other managed liabilities ................. . 2.08 2.69 3.44 3.49 3.96 4.09 4.55 4.68 4.36 4.11 • • • • • • • • Revaluation losses held in trading accounts .. . Other .......... .......................... . 1.03 .92 .93 1.00 .90 .84 .74 .77 .84 .91 Capital account ............................... . 10.47 10.25 10.12 10.41 10.27 10.42 10.45 10.51 10.65 11.05 MEMO Commercial real estate loans' ................. . 15.27 16.33 17.91 19.15 20.67 22.22 24.50 26.76 28.81 29.89 Other real estate owned" ...................... . .13 .11 .11 .12 .14 .15 .14 .13 .12 .16 Mortgage-backed securities .................... . 6.07 6.22 5.39 5.99 7.10 7.25 6.91 6.15 5.36 5.39 Federal Home Loan Bank advances. . . .. . ....•. D.n. n.3. n.3. 3.34 3.72 3.87 4.32 4.47 4.14 3.93 Average net consolidated assets (billions of dollars) .. . .. .. .. . .. .... . .... 644 651 655 674 704 741 768 804 840 862
A38 Federal Reserve Bulletin 0 June 2008 A.I. Portfolio compositi n, intl!r<!M ral<!s, and inc( me and ..:xpcn~e. U.S. banks. 1998-2007- CO/llilwed E. Banks not ranked among the 1,000 largest by assets-Conlinued I I I I I I I I I Item 1~8 1~9 20c0 2001 2002 2003 2~ 2005 2~ 2007 Effective interest rate (percent)' I Rate" earned Interest-earning assets ................ . 8.35 8.04 8.44 7.92 6.79 5.93 5.73 6.23 7.01 7.26 Taxable equivalent ........ _. ........... . 8.48 8.17 8.56 8.03 6.90 6.04 5.84 6.33 7.10 7.36 Loans and leases, gross ................. . 9.69 9.27 9.51 9.01 7.83 7.08 6.71 7.17 7.94 8.13 Net of loss provisions .................. . 9.34 8.89 9.14 8.60 7.39 6.71 6.45 6.94 7.74 7.83 Secunues .................................. . 6.04 5.88 6.15 5.86 5.03 3.87 3.74 3.87 4.28 4.68 Taxable equivalent ........... . 6.45 6.29 6.54 6.27 5.43 4.26 4.11 4.24 4.65 5.06 Investment account ................ . 6.04 5.88 6.15 5.86 5.02 3.87 3.73 3.86 4.28 4.68 U.S. Treasury securities and U.S. government agency obligations (excluding MBS) ... o.a. n.a. n.a. 5.97 4.80 3.74 3.38 3.53 4.12 4.70 Mortgage-backed securities ...... . n.a. n.a. n.a. 6.20 5.47 3.58 3.90 4.16 4.59 4.96 Other ................................. . n.a. n.a. n.a. 5.29 4.87 4.43 4.18 4.16 4.25 4.33 Trading account .......................... . 5.26 3.60 4.01 6.43 15.38 2.89 18.95 7.52 7.51 4.97 Gross federal funds sold and reverse RPs .... . 5.35 4.96 6.24 3.82 1.63 1.08 1.32 3.21 4.95 5.05 Interest-bearing balances at depositories ..... . 5.65 5.65 6.38 4.56 2.68 1.97 2.02 3.21 4.64 5.05 Rates paid Interest-bearing tiabilities .................. , .. 4.63 4.32 4.84 4.43 2.93 2.14 1.88 2.44 3.42 3.91 Interest-bearing deposits .................... . 4.52 4.21 4.67 4.31 2.78 2.02 1.75 2.29 3.28 3.81 In foreign offices ........................ . 4.84 4.12 5.13 3.97 1.67 .85 1.04 2.86 4.27 4.66 In domestic offices ....................... . 4.52 4.21 4.67 4.31 2.78 2.02 1.75 2.29 3.28 3.81 Other checkable deposits ............... . 2.44 2.27 2.47 1.97 1.16 .78 .69 .99 1.45 1.61 Saving~ deposits ~in.fluding MMDAs) ... . 3.38 3.20 3.56 2.81 1.72 1.13 1.04 1.53 2,34 2.67 Large lime depOSIts ................... . 5.53 5.21 5.89 5.52 3.61 2.78 2.47 3.21 4.37 4.90 Other time deposits· .......... . 5.63 5.24 5.70 5.60 3.88 2.96 2.55 3.04 4.12 4.79 Gross federal funds purchased and RPs ...... . 4.96 4.73 5.69 3.92 1.85 1.31 1.45 2.89 4.37 4.45 Other interest-bearing liabitities ............. . r--9-.5-6- ----8.-25- ----9-.1-3- ----8-.0-8 ----6-.8-2- ----5-.3-2 ----4-.-59- ----5-.0-1 -----5.-70- ----5-.8-2- - Income and expense as a percentage of average net consolidated assets Gross interest income ......................... . 7.74 7.48 7.83 7.33 6.31 5.46 5.32 5.78 6.49 6.74 Taxable equivalent ...................... . 7.86 7.60 7.95 7.44 6.41 5.56 5.41 5.87 6.58 6.82 Loans .................................... . 5.80 5.62 5.99 5.73 5.01 4.47 4.35 4.76 5.35 5.53 Securities ................. .. 1.59 1.58 1.57 1.32 1.16 .89 .87 .85 .88 .92 Gross federal funds sold and reverse RPs ..... .29 .22 .21 .20 .07 .05 .05 .11 .18 .20 Other ................................ .. .06 .06 .05 .08 .06 .06 .05 .06 .08 .08 Gross interest expense ..... . ........ .. 3.46 3.26 3.64 3.33 2.22 1.60 1.41 1.82 2.56 2.95 Deposits .............................. . 3.25 3.02 3.30 3.07 1.98 1.41 1.22 1.58 2.27 2.67 Gross federal funds purchased and RPs .. . .07 .08 .12 .06 .03 .02 .02 .05 .08 .08 Other ................................ .. .13 .15 .21 .20 .21 .17 .17 .19 .21 .20 Net interest income .................. , .... . 4.28 4.22 4.20 4.00 4.08 3.86 3.91 3.96 3.94 3.79 Taxable equivalent ......•.... 4.40 4.34 4.31 4.10 4.19 3.96 4.00 4.05 4.03 3.87 Loss provisions1 , ................ _ . .29 .31 .32 .33 .35 .29 .23 .21 .20 .27 Non-interest income ...... , .......• , 1.52 1.44 1.31 1.30 1.39 1.47 1.38 1.33 1.31 1.33 Service charges on deposils ... . ........... .. .42 .42 .43 .44 .45 .43 .43 .40 .38 .37 Fiduciary activities ........................ . .23 .26 .21 .25 .27 .28 .31 .33 .36 .38 Trading revenue .......................... . Interest rate exposures .................. . Foreign exchange rate exposures .......... . Other commodity and equity exposures .... . * Other ..................................... .. .86 .75 .67 .61 .67 .76 .64 .61 .57 .58 Non-interest expense ......................... .. 3.74 3.73 3.57 3.54 3.57 3.56 3.52 3.48 3.49 3.53 Salaries, wages, and employee benefits ...... . 1.82 1.82 1.78 1.79 1.82 1.82 1.81 1.79 1.82 1.84 Occupancy ................................. . .49 .49 .47 .47 .46 .45 .45 .44 .44 .44 Other ..................................... .. 1.43 1.42 1.31 1.28 1.28 1.28 1.26 1.25 1.24 1.25 Net non-interest expense 2.23 2.29 2.26 2.24 2.18 2.09 2.14 2.15 2.18 2.19 Gains on investment account securities ...... . .02 -.01 .04 .05 .04 .01 -.01 Income before taxes and extraordinary items 1.79 1.62 1.61 1.46 1.60 1.53 1.55 1.60 1.55 1.32 Taxes ..................................... . .53 .47 .45 .39 .41 .38 .37 .38 .36 .29 Extraordinary items, net of income taxes .... . -.01 Net income ............................... . 1.26 1.15 1.17 1.07 1.18 1.14 1.18 1.21 1.19 1.03 Cash dividends declared .. .81 .70 .79 .64 .68 .67 .64 .67 .65 .67 Retai ned income ............. . .45 .45 .38 .43 .50 .47 .54 .54 .53 .36 MEMO: Return on equity ... . 12.00 11.25 11.52 10.28 11.49 10.97 11.26 11.54 11.15 9.30 NOTE: Data are as of April 16,2008. 5. When possible, based on the average of quanerly balance sheet data re l. Includes allocated transfer risk rese(Ve. poned on schedule RC-K of the quanerly Call Repon. 2. Measured as the sum of large time deposits in domestic offices, deposits 6. Before 1997, large time deposit open accounts were included in other bOOked in foreign offices, subordinated notes and debentures, federal funds time deposits. purchased and securities sold under repurchase agreements, Federal Home 7. Includes provisions for allocated transfer risk. Loan Bank advances, and other borrowed money. * In absolute value, less than 0.005 percent. 3. Measured as the sum of construction and land development loans secured n.a. Not available. by real estate; real estate loans secured by nonfarm nonresidential propenies or MMDA Money market deposit account. by multifamily residential properties; and loans to finance commercial real es RP Repurchase agreement. tate, construction, and land development activities not secured by real estate. MBS Mongage-backed securities. 4. Other real estate owned is a component of other non-interest-earning assets
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 A39 A.2. Rep()rt of income, all U . . bunk', 1998-2007 Millions of dollars Item 1998 2007 Gross interesl income. . . ................... 359.478 367,128 423,840 404.250 349.583 329,138 348,663 426.535 551.042 617,099 Taxable equivalenl ....... . .......... 361.941 369,763 426,475 406.935 352.330 331,919 351,647 429,490 554,296 620,563 Loans .................................. 271.262 279,223 326,801 311.539 269.384 257.619 269,404 328,023 421.872 464,903 Securities ........................... 56,581 62.412 67,664 63,061 59.305 53.315 58.575 65.864 78.913 82,714 Gross federal funds sold and reverse repurchase agreemenls ......... 14.999 12,336 13.545 12.647 6.221 5.015 5.142 11,045 21.296 28,737 Olher ... ............... , ..... 16.636 13,158 15.829 17.006 14.672 13,187 15,538 21.602 28,959 40.744 Gross inleresl expense ....................... 178.133 175.399 222.159 188.746 118.731 94.098 98,539 162.499 263.372 310.496 DeposilS ........ . ............... 125,197 119,971 151.145 132,310 81.691 62,377 63,638 105.922 173,878 212,784 Gross federal funds purchased and repurchase agreemenls ..... 22,175 21.210 26,859 19,583 9.920 7,590 8.842 19,161 33,775 37.797 Olher ............... 30.759 34,216 44,155 36.852 27.121 24,131 26,058 37.416 55,720 59,914 Nel iRleresl income .......... ............. 181,345 191.729 201.681 215,504 230,852 235,040 250.124 264.036 287.670 306,603 Taxable equi valeRI ............... 183,808 194,364 204,316 218,189 233,599 237,821 253.108 266,991 290,924 310.067 Loss provisions ...... 21.413 21.222 29.386 43,084 45,205 32,702 23,893 25.540 25.384 56,445 Non-inleresl income ............ 124.047 144,794 153,101 160.897 168,231 183,745 188,998 201,628 222,887 218,586 Service charges on deposits ... ............. 19,769 21.590 23.720 26,872 29.628 31,692 33,454 33,830 36.194 39.185 Fiduciary aClivilies ..... ............. 19.267 20,532 22.212 21,988 21,403 22.453 25,088 26,381 28,312 32.973 T O r l a h d e i r n g . .. r . ev . e . n .. u . e . . . . . . . . . - .. . . . . . . . . . . . . . . . . .. .. .. .. . . . . .. .. . . .. .. . , .. . 7 7 7. ,6 3 9 1 3 6 9 1 2 0 . ,4 2 3 3 7 5 9 1 4 2, . 2 9 3 3 5 4 9 1 9 2 , , 6 3 5 8 8 0 1 1 06 0 , , 4 7 0 9 9 0 11 1 8 1 , . 0 5 1 8 5 5 12 10 0, ,3 1 0 5 3 4 12 14 7 . . 3 0 7 3 5 8 13 1 9 9, ,2 1 1 7 4 0 141 5, , 2 1 7 4 8 9 Non-inleresl expense ........................ 194,103 205,205 216.373 225.979 230,120 243,180 263.301 274,063 294.890 321.390 Salaries, wages, and employee benefils ..... 79.543 86,394 89,015 94.196 100,443 108,434 115.253 124,037 135,868 144,700 Occupancy ....... . . . . . . . . . . . . 24.162 25,944 26.761 27,939 29,309 31,312 33,252 35,050 36,393 38,526 Olher ..................... 90.397 92.867 100,598 103,846 100.365 103.433 114,797 114,976 122,628 138,164 Nel non-inlereSI expense ... 70.056 60,411 63.272 65,082 61.889 59,435 74.303 72,435 72,003 102,804 Gains on inveslment accouRl securilies ....•.. 3.090 246 -2.280 4.630 6.410 5,633 3.392 -220 -1,320 -618 Income before !axes ......................... 92.966 110,342 106,740 111,971 130,173 148.553 155,323 165.841 188.964 146,738 Taxes.............................. . .... 31.946 39,314 37,248 37.284 42,816 48,493 50,264 53.534 60,956 44,323 EXlraordinary ilems. nel of income laxes ... 506 169 -31 -324 -68 427 59 241 2.647 -1,674 Net income .......... 61,524 71,197 69,461 74,363 87,288 100,489 105,116 112,546 130,656 100,739 Cash dividends declared ............. 41.144 52,280 52,547 54,844 67.230 77,757 59,523 64,523 82,309 85,244 Relained income ................ 20.380 18,917 16,914 19,518 20.059 22,733 45.591 48.024 48.346 15,495 NOTE: Dala are as of April 16. 2008.
A41 August 2008 Industrial Production and Capacity Utilizatiol1: The 2008 Am1ual Revision Kimberly Bayard and Charles Gilbert, of the Board's 1 percentage point in 2006 and Y2 percentage point in Division of Research and Statistics, prepared this 2007; in both years, downward revisions were wide article. Betsy Wang provided research assistance. spread across industries. For the fourth quarter of 2007, the factory operating rate stood at 79.3 percent, On March 28, 2008, the Federal Reserve published a little below its long-run average of 79.7 percent. revisions to its index of industrial production (IP) and The utilization rate for mines was revised down the related measures of capacity and capacity utiliza almost 2 percentage points in the fourth quarter of tion. Although the revision affected the data from 2007; still, it then stood at 90.2 percent, 2.7 percent January 1972 through February 2008, most of the age points above its long-run average. The revised changes were for the period beginning in 2003.1 operating rate for utilities is lower, on balance, in Relative to earlier estimates, measured from fourth recent years than reported earlier.3 For the fourth quarter to fourth quarter, IP is now reported to have quarter of 2007, utilization was 85.9 percent, almost increased more slowly in 2006, but changes to output I percentage point lower than its long-run average. gains in other years since 2003 were more modest. Compared with the previous estimates, total indus The period from 2003 through 2007 was marked by a trial capacity is now reported to have risen more steady, moderate rise in industrial output; on average, slowly in 2006, but the rates of change in other recent production increased 2.2 percent per year, and the years are little different. The smaller increase in 2006 annual rates of change ranged from 1.5 percent to reflected downward revisions to manufacturing and 3.1 percent (table 1 ).2 utilities; the capacity index for mining is now reported The revision shows that the rates of capacity to have been higher than stated earlier. For high utilization for total industry in the fourth quarters of technology industries, capacity is now estimated to 2006 and 2007 were lower than previously estimated. have increased markedly less in 2005 and 2006, but The larger revision was for 2006, when utilization the revisions to the estimates for other recent years was restated to be 80.7 percent, 0.8 percentage point were more modest. lower than reported earlier. The downward revision Besides including the revised estimates and meth for the fourth quarter of 2007 was 0.5 percentage ods typical of annual revisions, the current revision point; at 81.0 percent, utilization was the same as its marks the incorporation of a six-month reporting (long-run) average for 1972 through 2007. The oper window. Beginning with the Federal Reserve's G.17 ating rate for manufacturing was revised down about Statistical Release of April 16,2008, monthly releases are based on a six-month reporting window: One month of new data is reported, and the previous five NOTE: Charles Gilbert directed the 2008 revision and, with Kim months of data are revised. For example, the monthly berly Bayard, David Byrne, Wendy Dunn, Christopher Kurz, Paul Lengermann, Norman Morin, Maria 0100, and Daniel Vine, prepared release issued on April 16 included new data for the revised estimates of industrial production. David Byrne prepared March and revised data for October through February. the improved estimates for communications equipment. Norman Previously, the monthly releases were issued with a Morin and Daniel Vine prepared the revised estimates of capacity and capacity utilization. four-month reporting window, which covered one 1. When necessary to maintain consistency with any revisions to month of new data and revisions to the previous the data for 1972 and subsequent years, the production and capacity three months of data. The incorporation of a six indexes for the years before 1972 were multiplied by a constant. However, utilization rates and rates of change in IP for the years before month window will allow for the inclusion of addi 1972 were not revised. tional data before an annual revision. From March 2. Revised data reported in tills article were published in Board of 2007 to March 2008, a six-month window would Governors of the Federal Reserve System (2008), Statistical Release G.I7, "Industrial Production and Capacity Utilization" (July 16). Data referred to in tills article as "previous" appeared in the G.17 release issued on March 17,2008. That release was the last G.l7 published 3. In tills article, "recent years" generally refers 10 years in the before the annual revision was issued on March 28. period from 2003 through 2007.
A42 Federal Reserve Bulletin D August 2008 I. Revised rates of change in industrial production and capacity. revist:d rates or caracity ulilizalion. and the dilfcrence between revised and pre iou,ly reponed rates. 2003-07 MEMO: Revised rate Difference between rates (percent) (revised minus previous. percentage points) Item 2006 I I I po p r r t o io - n 20 a 0 v 3 g - . m 1 2003 1 2004 2005 1 2006 2007 20 a 0 v 3 g - . 0 71 2003 2004 1 2005 2006 1 2007 1 Production Total index ... , ., . . . . . . . . . . . . .. . . . 100.0 2.2 1.5 3.1 2.6 1.7 2.1 -.3 .4 .1 -.6 -1.8 .4 Manufacturing ................ 79.2 2.5 1.7 3.7 3.7 \.I 2.3 -.3 .4 .2 -.7 -2.2 .6 Exc\udinl) so;lected high-tech ondustnes ................ 74.7 1.4 .2 3.3 2.5 .1 1.1 -.3 .0 .3 -.4 -1.9 .3 Selected high-tech industries .. 4.6 19.1 23.8 9.4 22.4 17.3 22.3 -.4 6.7 -1.0 -5.7 -7.3 5.5 Mining and utilities .. ..... .... 20.8 1.0 .7 .6 -1.6 3.9 1.6 -.1 .2 -.1 .0 -.1 -.5 Capacil)' Total index ............... ... . ... 100.0 .7 -.6 .2 .8 1.3 1.8 -.2 .3 .0 -.2 -\.I .0 Manufacturing . . . . . , . . . . . ...... 80.9 .9 -.6 .2 1.4 1.4 2.0 -.3 .3 .1 -.3 -1.3 -.2 Ex~ludin~ s~lected high-tech ondustnes ................. 75.7 .3 -.7 -.2 .7 .8 .8 -.1 .1 .0 .1 -.6 -.2 Selected high-tech industries .. 5.1 10.9 4.2 5.5 13.1 10.3 21.4 -1.7 2.8 1.2 -5.2 -9.3 1.9 Mining and utilities ............. 19.1 .9 1.4 .8 -.4 1.1 1.5 .1 .4 -.4 .5 -.3 .4 Capacity utilization Total index ..................... 100.0 79.6 76.8 79.1 80.4 80.7 81.0 -.3 .0 .0 -.2 -.8 -.5 Manufactuti ng ......... .... 80.9 78.0 74.8 77.5 79.2 79.0 79.3 -.4 -.2 -.1 -.3 -\.I -.5 Exdudinl! so;lected high-tech Industnes ................. 75.7 78.2 75.5 78.1 79.5 79.0 79.2 -.6 -.2 .0 -.3 -1.4 -1.0 Selected high-tech industries .. 5.1 74.3 67.1 69.5 75.2 80.0 79.9 .0 .3 -1.2 -1.3 .3 2.0 Mining and utilities ............. 19.1 87.0 86.9 86.7 85.6 87.9 88.1 -.1 .0 .3 -.2 .0 -.6 NOTE: For production and capacit)" the revised rates of change are from the Capacity utilization rates are for the fourth quarter of the year indicated; dif founh quarter of the previous year to the fourth quarter of the year indicated; ferences between revised and previously reported capacity utilization are also the differences between revised and previously reported prOduction are also calculated from Q4 rates. calculated fTom Q4-to-Q4 rates. I. Manufacturing excluding semiconductors and related electronic compo nents, computers and peripheral equipment, and communications equipment. have allowed an additional 3 percent to 4 percent of Services Annual Survey. Updated price deflators from IP to reflect primary source data that otherwise the Bureau of Economic Analysis are used in the would have been incorporated only at the time of an construction of the revised production estimates. In annual revision.4 The longer reporting window will addition, new annual data on mineral extraction for cause the latest month of data shown for a few 2005 and 2006 from the U.S. Geological Survey are indexes in the supplement to the G.17 release to be used. Finally, the new monthly production estimates as many as five months earlier than the latest value also reflect the incorporation of updated seasonal for aggregate IP; the monthly values for detailed factors and monthly source data that became avail production indexes are not shown until the underly able (or were revised) after the closing of the report ing data are available or the reporting window is ing window. closed. For the 12 months preceding the publication The revised capacity utilization rates incorporate of the 2008 annual revision, the data issued for only the results from the Census Bureau's 2006 Survey of one or two of the published indexes would have Plant Capacity for the fourth quarter of that year. been affected by this change. Moreover, the revisions to the capacity indexes and The updated measures of production incorporate capacity utilization rates reflect the revised produc several newly available sources of data. The primary tion indexes and newly available data on industrial source is the U.S. Census Bureau's 2006 Annual capacity from the U.S. Geological Survey, the Energy Survey of Manufactures (ASM), which shows a lower Information Administration of the U.S. Department annual level of output than previously estimated. The of Energy, and a number of private organizations. revision also incorporates other new source data from the Census Bureau, including manufacturing data RESULTS OF THE REV[SfON from selected 2006 Current Industrial Reports and As revised, total IP for the fourth quarter of 2007 was annual data on the publishing industry from the 112.2 percent of output in 2002, and capacity stood at 138.5 percent of output in 2002. Both indexes are 4. Some IP indexes are estimated from secondary source data until primary source data become available. lower than reported previously. The capacity utiliza-
Industrial Production and Capacity Utilization: The 2008 Annual Revision A43 1, Industrial production, capacity. and capacity utilization: Total industry, January I 999-June 2008 ProdlIction IIlld ClIJ>I I ICi Il' Ratio scale, 2002 oulpul = 100 C..,..ity UlJJJzation Perc:eol - Revised - Pn:violJil 140 84 130 82 Capacity 80 120 78 110 76 100 74 I I 1 I ,I 1 1 1 1 1 1 I I 1 1 I I I 1 1 1 1 I 1 I 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 NorE: Here and in the following figures, the shaded areas are periods of Statistical Release G.17, "Industrial Production and Capacity UtiIWltion," business recession as defined by the National Bureau of Economic published on July 16, 2008. Data labeled "previous" are those published Research. before the March 28, 2008, annual revision. Data labeled "revised" correspond to the data in the Federal Reserve's tion rate for total industry in the fourth quarter of that for total IP and has posted moderate gains in 2007, at 81.0 percent, was revised down slightly. recent years (figure 2 and table A.3). Compared with Detailed results of the revision can be found in the the previous estimates, the advance in the index is appendix tables.s now reported to have been 1.5 percent lower for 2006. Overall changes to the rates of increase in other Industrial Production years were smaller. The index rose 0.3 percent faster in 2003 and 0.4 percent slower in 2005; the revisions The overall contour of IP in this revision is similar to were even smaller in 2004 and 2007. that reported previously, although the revised data The rise in the output of consumer goods was show a slightly flatter trajectory since 2005 (figure 1). revised down, on net, over the period from 2003 The total index has risen modestly each year since through 2007. The output of durable consumer goods 2003. Relative to the previous estimates, total IP rose in 2003, 2005, and 2007 but declined in 2004 increased 1.8 percent less in 2006, but the changes to and 2006. The rates of change are now reported to the gains were smaller in other recent years. For have been lower than earlier estimates for all major earlier years, the change in total IP was revised up categories of consumer durables other than automo 0.4 percent in 2003 and 0.1 percent in 2004; it was tive products. The most notable revisions were for the revised down 0.6 percent in 2005. For 2007, the home electronics industry, in which output is now change in total IP was revised up 0.4 percent. reported to have risen significantly less from 2003 to Market Grou p 2007 than was previously stated. The index for consumer nondurables shows moder The production index for final products and non ate gains in output in each of the past several years. industrial supplies follows an output path similar to The index is now reported to have increased a little less, on balance, over the period from 2003 through 2007. Among consumer nondurables, the indexes for 5. Table A.I shows the revised data for total IP, and table A.2 shows the revised data for capacity and capacily utilization for total industry. foods and tobacco, clothing, and paper products were Tables A.3 and A.4 show the revised rates of change (fourth quarter to revised down for 2005 and 2006; however, the output fourth quarter) of IP for market groups, induslry groups, special aggregates, and selected detail for the years 2003 through 2007. Table of chemical products is now shown to have increased A.S shows the revised rates of change of annual IP indexes for market at a faster pace over the same time period. For 2007, and industry groups for the years 2003 through 2007. Tables A.6 and the output of clothing is now reported to have A.7 show the revised figures for capacity and capacity utilization. Table A.S shows the annual proportions of market groups and industry declined somewhat less than earlier reports sug groups in total JP. Tables A.3, A.4, A.S, and A.6 also show the gested. The index for consumer energy products is difference between the revised and previous rates of change. Table A.7 now reported to have edged down, rather than in shows the difference between the revised and previous rates of capacity utilization for the final quarter of the year. creased, in 2006, but revisions to the rates of change
A44 Federal Reserve Bulletin 0 August 2008 2. Industrial production: Market groups, January 1989-June 2008 Ratio scale, 2002 = 100 EqulplllelU Ratio scale, 2002 = 100 ISS 110 13S 100 liS 9S 90 7S 80 - 55 - 70 I, I I I I I I I (ndllltriDJ IIllIkriaI& 110 115 100 100 85 90 70 80 - 5S - 70 I I I I I I I!}~ I I I I I I I I I I I I I It...:! I I I I I I 1990 1993 1996 1999 2002 2005 2008 1990 1993 1996 1999 2002 2005 2008 for other years are fairly small. The path of consumer the rates of change for output in 2005 and 2006 are energy shows a decline in 2003, moderate gains in now reported to have been weaker than previously 2004 and 2005, a small dip in 2006, and another rise stated. in 2007. The production of materials has increased moder The production of business equipment has in ately in recent years since 2003. As revised, the index creased solidly since 2004; however, relative to pre for materials is now estimated to have expanded more viously published estimates, the revised index rose rapidly in 2003, 2004, and 2007 and more slowly in more slowly in 2005, 2006, and 2007. For transit 2005 and 2006. In particular, output gains for both equipment, the revised data show declines in output durable and nondurable materials were markedly less in 2003 and 2007 and smaller gains in 2005 and 2006 in 2006 than stated earlier, although the rates of than were reported earlier. The production index for change for both categories are now reported to have information processing equipment is now shown to been somewhat higher in 2007. Among durable mate have risen notably more rapidly in 2003 and 2006 rials, the downward revisions to the output index for than in previous reports. equipment parts in 2005 and 2006 tempered the In contrast to earlier estimates, the production of outsized gains in those years to render them more in defense and space equipment is now estimated to line with the strong gains in other recent years. On have fallen in 2006 and to have risen in 2007. balance, revisions to nondurable materials were small The output of construction supplies posted solid over the period from 2003 through 2007, as upward gains in 2004 and 2005 but fell back in 2006 and revisions to chemicals in every year except 2003 were 2007; relative to earlier estimates, the rates of change about offset by net downward revisions to textiles and in recent years are generally lower. Although the paper. In recent years, the output of textiles has production of business supplies edged down in 2006, trended down (sharply, in some years), the output of it increased moderately in all other years since 2003; paper has been generally flat, and the output of
Industrial Production and Capacity Utilization: The 2008 Annual Revision A45 chemicals has risen. The index for energy materials is 3. Industrial production: Manufacturing, and manufacturing now shown to have been slightly weaker, on net, from excluding selected high-technology industries, January I 989-June 2008 2003 through 2007. Ratio scale, 2002 = tOO Industry Groups 115 Manufacturing production has expanded in each year 105 since 2003 (figure 3), albeit at a somewhat slower rate, on balance, than initially reported (table A.3).6 95 Across all manufacturing industries, the largest down 85 ward revisions generally occurred for 2006, the year that marks the incorporation of the most recent ASM 75 data. For durable goods industries as a whole, output has 65 risen solidly in recent years, although these gains especially in 2006-have been moderated by the I I II I I I I I I recent revision. The overall rise in the production of ChonKO from y. ... e.tlic:r Percent durable goods has been bolstered by the continued --~~------------~---------rapid expansion of the computer and electronic prod Manufacturing ucts industry and by recent high rates of increase for - 10 aerospace and miscellaneous transportation equip ment. The revisions to the changes in output of most durable goods industries were relatively modest in + o 2003 and 2004; two notable exceptions include upward revisions of 4.3 percentage points in 2003 for computer and electronic products and of 1.4 percent age points in 2004 for aerospace and miscellaneous I I 1.1 I I I I I I I I I I ) I I I I I I I transportation equipment. Relative to previous re 1990 1993 1996 1999 2002 2005 2008 ports, changes in the output indexes are now stated to NoTE: For definition of manufacturing, refer to text note 6. be lower in 2005 and 2006 for nonmetallic mineral The selected high-technology industries are semiconductors and related products; computer and electronic products; electrical electronic components (NAlCS 334412-9), computers and peripheral equipment (NAlCS 3341), and communications equipment (NAlCS 3342). equipment, appliances, and components; motor ve hicles and parts; aerospace and miscellaneous trans computers and peripheral equipment, communica portation equipment; and miscellaneous manufactur tions equipment, and semiconductors and related ing. The rates of change for the production indexes electronic components-have registered gains each for most durable goods industries in 2007 are now year since 2003. However, relative to earlier esti higher than in earlier reports. mates, production for the high-technology aggregate The estimates for selected high-technology indus is now reported to have risen less sharply in 2004, tries posted sizable revisions over the period from 2005, and 2006 and to have increased more rapidly in 2003 through 2007 and warrant special mention 2003 and 2007. (figure 4 and table A.4). Overall, output in the high Among the major high-technology componenhs, technology sector is still reported to have increased increases in the index for computers and peripheral rapidly in recent years, and all major components- equipment were revised down in 2004, 2005, and 2007 but were revised up in 2003 and 2006. The average gain over the period from 2003 through 2007 6. In the IP index, manufacturing comprises the following catego for computers and peripheral equipment is about ries in the Nonh American Industry Classification System (NAICS): manufacturing (NAICS sectors 31-33), the logging industry (NAICS 15 percent, slightly lower than shown earlier; the 1133), and the publishing industry (NAICS SILL), which includes smallest annual increase over this period was 1.6 per publishers of newspapers, periodicals, books, and directories. Under cent in 2004, but that was followed by a gain of NAICS, logging and publishing are classified within agriculture and information, respectively; however, historically they were considered 28.8 percent in 2005. The output of communications manufacturing industries and were classified as such under the Stan equipment is now reported to have expanded less dard Industrial Classification (SIC) system. In December 2002, the rapidly in 2004 but more rapidly in other recent years. Federal Reserve reclassified all output indexes from the SIC system to NAICS. Except for 2004, the index for communications equip-
A46 Federal Reserve Bulletin 0 August 2008 4. Industrial production: Selected high-technology have declined in every year since 2003 except 2004. industries, January 1998-June 2008 The drop in 2006 was especially large. The revised index for mining is relatively little Ratio scale, 2002 - 100 changed from previous estimates. Output is still 360 280 reported to have risen in 2003, to have fallen back in 220 2004, to have dropped more sharply in 2005, and then 170 to have increased rapidly in 2006. The output gain in 120 2007 is more modest than in previous reports. For utilities, the revised output estimates are, in general, 90 70 very similar to those reported earlier. The main exception is a downward revision of about 1 percent 50 age point to the change in the index in 2006. 35 I 1 1 1 I, ,I 1 1 1 1 1 1 1 I Capacity 1998 2000 2002 2004 2006 2008 Non;; For the NAICS categories of these industries, refer to the Dote to Total industrial capacity is now estimated to have figure 3. risen at an average annual rate of 3/4 percent over the period from 2003 through 2007, l;4 percentage point ment has posted solid annual gains in every year since more slowly than previously stated. By far, the most 2003. The production of semiconductors and related significant revision to industrial capacity was for electronic components has risen robustly in each of 2006; capacity is now stated to have risen 1.1 percent the past five years; however, the rate of increase is age points more slowly than estimated earlier (table now reported to have been lower in 2005, and particu A.6). Relative to previous reports, total industrial larly in 2006, than estimated previously. capacity is now estimated to have declined a little less Production in nondurable manufacturing industries in 2003, to have risen more moderately in 2005, and has advanced in every year since 2003 but at a more modest pace than the output of durables. The largest to have been little changed in 2004 and 2007. The gain in nondurable output occurred in 2004. Within contour of manufacturing capacity and the revisions nondurable goods, the indexes for food, beverage, to that contour are similar to those for total industry. and tobacco products; petroleum and coal products; Manufacturing capacity is now shown to have ex and chemicals have generally provided support to the panded at an average annual rate of about 1 percent output gains for the aggregate in recent years. In over the period from 2003 through 2007, 1/4 percent contrast, the indexes for textile and product mills, age point less than estimated earlier. apparel and leather, and paper have generally fallen Within manufacturing, capacity for durable goods over the period. manufacturers increased modestly in 2003 and 2004 For most recent years, the change in output in the but rose more quickly in the subsequent years; how nondurable goods sector was similar to previous ever, the recent gains were tempered somewhat in the estimates, except in 2006, when it rose about I per current revision. Relative to earlier estimates, the centage point less than reported earlier. Relative to capacity index for nondurable goods is now reported earlier reports, the current revision found noticeably to have fallen less in 2003 and 2004, to have increased lower rates of change in 2005 and 2006 in food, more in 2005, and to have risen less in 2006 and beverage, and tobacco products; textile and product 2007. Capacity for the logging and publishing indus mills; apparel and leather; printing and support; and tries fell from 2003 through 2005 but has risen since plastics and rubber products. In contrast, the output of then; on balance, the rates of change are lower as a chemicals is now reported to have declined less in result of the revision. 2005, and to have risen more in 2006, than indicated For selected high-technology industries, aggregate earlier. capacity has increased substantially in recent years, The revision lowered the rates of change in the especially since 2005. Relative to earlier estimates, output index for the publishing and logging industries high-technology capacity rose less quickly in 2005 about 1 percentage point per year, on average, from and 2006 but increased somewhat more rapidly in 2003 through 2007; the IP index continues to include other recent years. Excluding high-technology indus these two industries under manufacturing, although tries, manufacturing capacity advanced less in 2006 they are classified elsewhere under NAICS. The and 2007 than previously reported; revisions to the revised output index for this group is now reported to changes for earlier years were minor.
Industrial Production and Capacity Utilization: The 2008 Annual Revision A47 Capacity at mines is still estimated to have con Among nondurable goods industries, only chemi tracted from 2003 to 2005 and to have expanded since cals registered higher rates of utilization since 2006 then. The gains in 2006 and 2007 are now reported to than previously reported; for all other categories, have been stronger than previously published. Capac operating rates are now reported to have been lower ity at electric and gas utilities has risen each year than stated earlier. Capacity utilization in the other since 2003. The current estimates show a noticeably manufacturing industries (logging and publishing) slower gain in 2006 than was reported earlier; revi was revised sharply downward for 2006 and 2007; sions to the estimates for other years since 2003 were utilization in the fourth quarter of 2007 was 79.2 per smaller. cent, 5.3 percentage points lower than its long-run By stage of processing, capacity in the crude stage average. is now reported to have risen more in 2006 and 2007 The operating rate for the selected high-technology than previously shown; on net, revisions to earlier category rose steadily from 2004 to 2006 but edged years were small. Capacity at the primary and semi down in 2007 (figures 5 and 6). Relative to earlier finished stages rose less in 2006 than stated earlier. estimates, capacity utilization is now reported to have Relative to previous estimates, increases in the index been lower in 2004 and 2005 but higher in 2006 and for finished goods processors were revised down, on 2007. In the fourth quarter of 2007, the utilization rate net, over the period from 2003 through 2007. was about 10 percentage points higher than it was in the fourth quarter of 2004, but at 79.9 percent, it was Capacity Utilization less than 2 percentage points above its long-run average. Among the selected high-technology indus For the past few years, the capacity utilization rate for tries for the period from 2004 through 2007, the total industry has remained near its long-run average operating rates for computers and peripheral equip of 81.0 percent (table A.7). On balance, the utilization ment and for communications equipment are now rates for the 2005-07 period are lower than reported shown to have been lower-especially for 2004, earlier, while those for earlier years are little changed. 2005, and 2007-than reported earlier. The utilization For the fourth quarter of 2007, total utilization stood rates for semiconductors and related electronic com at its average for 1972 through 2007 and was 0.5 per ponents are now higher in each year than previously centage point lower than reported earlier. The utiliza estimated. tion rate for total industry was revised down 0.8 per Capacity utilization in mining was revised up for centage point for the fourth quarter of 2006, but the 2004 and 2005, but it was revised down slightly for revision was smaUer for 2005. 2006 and lowered more noticeably for 2007. Never The capacity utilization rate for manufacturing is theless, as of the fourth quarter of 2007, the utiliza also now estimated to have been close to its long-run tion rate for mining stood at 90.2 percent, almost average in recent years. Relative to earlier reports, the 3 percentage points higher than its long-run average. factory operating rate was revised down in 2005, In electric and gas utilities, capacity utilization rates 2006, and 2007 and was little changed in 2004. For were revised down for 2005 through 2007. almost all major categories of manufacturing indus 5. Capacity utilization: Selected high-technology industries tries over the period from 2005 through 2007, utiliza and manufacturing excluding elecled high-technology tion is now reported to have been lower than stated industries, January J989-June 2008 earlier, and downward revisions were particularly noticeable for 2006. Among durable goods industries, some of the largest downward revisions to utilization over the period from 2005 through 2007 were for primary metals; electrical equipment, appliances, and compo nents; motor vehicles and parts; aerospace and mis cellaneous transportation equipment; and miscella neous manufacturing. The durable goods industries that recorded the largest upward revisions since 2005 were wood products and computer and electronic products. For 2007, upward revisions to the utiliza J I I I ! I I I I I I I I I I I I I I I I I I tion rate for computer and electronic products offset 1990 1993 t 996 1999 2002 200S 2008 some of the downward revisions to the utilization NoTE: The high-technology industries are identified in the note to rates for other durable goods industries. figure 3.
A48 Federal Reserve Bulletin 0 August 2008 6. Capacity utilization: Selected high-technology industries, factures to impute estimates of gross output for those January 1996-June 2008 industries no longer reported separately. Camp=uletS a=nd poripboraJ equlpmncnl Ratio scale. pen:cnl Chanf{es to IndividuaL Production Series 110 -~ 90 With this revision, the monthly production indicators L 70 for some series have changed, and some new series ~, so have been created. High-Technology Goods CommunicatiOrlS equipment CommuJlications eql/iprnelll " 110 90 Over the past several years, the Federal Reserve has regularly modified the IP index for the communica 70 tions equipment industry to keep pace with the rapid so technological change within the industry. Previous Bulletin articles have documented these changes, and the 2006 and current (2008) annual revisions have extended the Federal Reserve's earlier work.1 In particular, the two most recent revisions have (1) pro 110 vided a new structure for the measurement of commu 90 nications equipment products, (2) introduced new 70 data sources that provide extensive product-level 50 detail, (3) used the detailed product information to construct new quarterly and annual production and price indexes, and (4) published new and revised 1 1 1 1 1 I .. d 1 1 1 1 1 1996 1998 2000 2002 2004 2006 2008 price indexes at the detailed product level. Relative to the previous estimates, the combined effect of the 2006 and 2008 annual revisions on TECHNICAL ASPECTS OF THE REVISiON communications equipment is that the revised produc The benchmark indexes for manufacturing-defined tion index expanded faster over the time period from for each six-digit NAICS industry as nominal gross 1972 through 2000, fell less in 200 I and 2002, and output divided by a price index-were updated to has increased more slowly since then (figure 7). Much include new as well as revised information from the of the difference between the previous (pre-2006 2005 and 2006 ASMs. This revision also incorporates revision) and current estimates is derived from re the 2006 Survey of Plant Capacity, other annual cently constructed price deflators developed from industry reports, recent information on prices, and product-specific data. revised monthly source data on production, ship The enhancements introduced in the most recent ments, and production-worker hours. annual revision include the incorporation of new As mentioned earlier, the benchmark indexes for production data for a variety of types of communica most industries incorporate updated price indexes tions equipment and the development of new price from the industry output program of the Bureau of indexes at both quarterly and annual frequencies for Economic Analysis. However, the price indexes for the relevant products. The communications equip pharmaceutic"als (NAICS 325412), semiconductors ment industry is now represented by IP indexes for (NAICS 334413), and most components of communi six product groups: data networking equipment; enter cations equipment (NAICS 3342) are constructed by prise and home voice equipment; transmission, local the Federal Reserve from alternative sources. loop, and legacy central office equipment; wireless As in other recent years, the 2006 ASM did not system equipment; satellites and earth station equipprovide data for all six-digit NAICS industries but combined some of them into higher-level industry aggregates. To maintain benchmark references that 7. Charles Gilbert and Maria Otoo (2007), "Industrial Production and Capacity Utilization: The 2006 Annual Revision," Federal were consistent over time, the Federal Reserve used Reserve Bul/elill, vol. 93, pp. A 17-A35, www.federalreserve.gov/pubs/ detailed information from the 2002 Census of Manu- bulletin.
Industrial Production and Capacity Utilization: The 2008 Annual Revision A49 7. Industrial production: Communications equipment, of enterprise routers and service provider routers.IO January \ 972-June 2008 For switches, the index is aggregated from multiple product classes, grouped largely by speed. Ratio scale. 2002 ~ 100 The annual benchmark price deflator for data net working equipment incorporates additional data from 200 Gartner on prices of wireless and security equipment 100 that are available only on an annual basis. To con 50 struct the annual benchmark deflator, the quarterly price indexes constructed from the Synergy data on 20 routers and switches are converted to an annual 10 frequency and then combined with the Gartner-based price indexes on wireless and security equipment in a s chained Fisher price index. 2 ~II II IIII IIIIIII~ Enterprise and home voice equipment. The new IP till 11111 11 111 11111 III! index for enterprise and home voice equipment cov 1973 1978 1983 1988 1993 1998 2003 2008 ers products such as telephones, switches, and gate Average annual percent change ways used in PBX (private branch exchange) sys tems. The current revision incorporates quarterly data Period Pre·2006 revision 2008 revision on revenue and units of enterprise equipment; the 1972-94 average 6.8 9.6 data, from Synergy, extend from 2003. The two major 1995-2000 average 24.2 26.9 2001 -10.2 -2.7 subcategories of enterprise equipment are Internet 2002 -30.0 -22.7 2003 .1 4.5 Protocol telephony and traditional TDM (time 2004 16.6 12.4 division multiplexing) equipment; the Synergy data 2005 24.4 .1 2006 n.a. 28.6 cover a variety of detailed products within each of 2007 n.a. 14.1 these categories. n.8. Not available. The annual benchmark price deflator for enterprise and home voice equipment combines the quarterly price indexes (converted to an annual frequency) for ment; and other communications equipment.8 The the enterprise equipment with data on prices of home source data for estimating each of these indexes are voice equipment that are available only on an annual described next. The newly developed price indexes basis. For 1987 and subsequent years, the data on for each of the six product groups are also included in home voice equipment include information from the this article (tables A.9 and A.tO). Telecommunications Industry Association on fax machines, answering machines, corded telephones, Data networking equipment. The 2006 annual revi and cordless telephones. For 1975 to 1987, the annual sion introduced new source data for the index for data price index for home voice equipment is constructed networking equipment. For the period ending in from information in the Census Bureau's Current 2000, the index is based on quarterly data on U.S. Industrial Reports (CIR) on push-button and dial domestic absorption from Gartner, an industry re phones. search group. For the period beginning in 2001, the index uses quarterly data from a different industry Transmission, local loop, and legacy central office research group, Synergy, on U.S. domestic absorption equipment. Transmission equipment, local loop of selected routers and switches, measured in nominal equipment, and legacy central office equipment pro and unit terms. The quarterly matched-model price vide the infrastructure necessary to support large indexes are built from detailed product information scale telecommunications networks. Transmission available from the data sources and are aggregated to equipment includes the devices used to exploit under one index that covers all of data networking equip ground and undersea cables for long-haul, high mentY For routers, the data cover several categories capacity signal transmission. Local loop equipment refers to the cables that run from the central office of a 8. Although the Federal Reserve constructs IP indexes for the six product types, only Ihe aggregate index for communications equip ment is published in the G.17 Statistical Release. 10. Small officelhome office (SOHO) routers are omitted because 9. Matched-model price indexes are based on changes in the they are generally not manufactured domestically. Domestic absorp average prices of the same product in two different periods. tion reflects U.S. sales by domestic and foreign producers.
A50 Federal Reserve Bulletin D August 2008 telecom service provider to neighborhood homes and Satellites and earth station equipment. The monthly businesses. Legacy central office equipment histori production index for satellites and earth station equip cally includes the equipment that facilitates phone ment is based on production-worker hours. The 2006 connections and relays speech information. annual revision incorporated into the production This revision incorporates quarterly data on domes indexes annual data from Futron Corporation and the tic absorption of transmission equipment; the data, Satellite Encyclopedia on satellite manufacturing rev from the Dell'Oro Group, are for 1998 and subse enues and total satellite capacity launched (proxied quent years. For 1992 to 1997, information on trans by transponder bandwidth).12 The index for earth mission equipment comes from annual reports from stations is proxied by the index for cellular base Gartner. The Dell'Oro data provide detailed informa stations. tion on three main types of transmission technologies: Other communications equipment. The monthly in dense wave division mUltiplexing, SONET (Synchro dex for other communications equipment is based on nous Optical Network), and optical switching. production-worker hours. The annual benchmark The benchmark price indexes add data on local price index uses the relevant producer price indexes loop and legacy central office equipment that are with product weights developed from the CIR. available only at an annual frequency to the quarterly data on transmission equipment. The annual price COlllplllers data on local loop equipment are from Gartner and cover the period from 1993 to 2004. Since 200 I, The index for electronic computer manufacturing production of legacy central office equipment has (NAICS 334111) was split into six separate product been negligible, but for earlier years, the data under class indexes, and these indexes are now based on lying the benchmark price indexes are from multiple new source data and methods. The new product-based sources. For the period from 1995 through 200 I, the indexes are for consumer desktop computers, con data are from Gartner. For earlier years, the price sumer mobile computers, business desktop comput index is drawn from academic research in this area. ers, business mobile computers, business servers that For the period from 1972 through 1982, the index is use x86-based central processing units (CPUs), and derived from Flamm (1989); for the period from 1982 business servers that use CPUs other than those based through 1994, it is derived from the hedonic estimates on x86 architecture.13 Previously, electronic com of Grimm (1997) and Currie (2005).11 puter manufacturing comprised only two indexes: one for consumer computers and one for business comput Wireless system equipment. This revision incorpo ers. Although the six new product-level indexes are rates new quarterly data from Dell'Oro on domestic not published in the monthly statistical release, they absorption of wireless system equipment for 2000 are included in the broader IP aggregate for electronic and subsequent years. Such equipment (often located computer manufacturing. on towers or the sides of buildings) manages signals From 1995 forward, all of the product-based in to and from wireless handsets. Some of the main dexes for electronic computers are derived from types of equipment include base transceiver stations, quarterly data on domestic absorption from IDC, an base station controllers, and mobile switching cen industry research group. Data for 1994 are from ters. The data include additional detail on the techno Gartner, and data for earlier years are Federal Reserve logical standard for mobile transmissions, such as Board estimates based on the CIR for computers. To GSM (global system for mobile communications), construct the monthly indicator, the nominal absorp TDMA (time division mUltiple access), CDMA (code tion data are aggregated to the industry level and division multiple access), and W-CDMA (wideband converted to industry shipments based on trade data code division multiple access). from the Census Bureau (by adding exports and subtracting imports). The industry-level ratio of ship ments to domestic absorption is applied to each of the II. Kenneth Flamm (1989), "Technological Advance and Costs: six product-level absorption estimates to obtain Computers versus Communications," in Robert W. Crandall and Kenneth Flamm, eds., Changing the Rules: Technological Change, InternationaL Competition, and ReguLation in Communications (Wash 12. TBS Internet (2008), The SateLlite Encyclopedia (Caen, France: ington: Brookings Institution), pp. 13-61 and 371-410; Bruce T. TBS Internet, accessed January 23, 2008). Grimm (1997), "Quality-Adjusted Price Indexes for Digital Telephone 13. The index for consumer desktops also includes servers for Switches," memorandum, Bureau of Economic Analysis, May 20; and consumer use. The term "x86" refers to CPUs with an instruction set Kent A. Currie (2005), "Hedonic Price Indices for Digital Circuit that is based on the instruction set for the Intel 8086 CPU, which was Switching Equipment: 1980-1998," unpublished paper, SBC Services, introduced in 1978. These CPUs are used in most personal computers August 7. and in an increasing number of servers.
Industrial Production and Capacity Utilization: The 2008 Annual Revision A51 product-level shipments. These shipments are then Vacuum Cleaners adjusted by model-based estimates of the change in The index for household vacuum cleaner manufactur product-level inventories and divided by the relevant ing (NAICS 335212) is now based on monthly data producer price index issued by the Bureau of Labor on unit shipments from the Association of Home Statistics (BLS) to compute a production index. Appliance Manufacturers (AHAM) with a model The estimates for the change in inventories follow based inventory adjustment. Formerly, the index was a procedure introduced in the 2004 annual revision; based on quarterly data from the Vacuum Cleaner this procedure is currently used for several other Manufacturers Association (VCMA). In 2003, AHAM industries.14 In short, manufacturers are assumed to assumed responsibility from VCMA for issuing the want to hold inventories in proportion to their ex data. With this revision, the monthly time series was pected shipments. The estimate of inventory change long enough to construct seasonal factors. is computed as the sum of three components: a trend rate of stockbuilding, a portion of the adjustment to inventodes that a manufacturer would need to make ReliabiLity oj Monthly Estimates to reach a desired inventory level, and the effect on contemporaneous stocks of shipments deviating from The extended six-month reporting window will allow expected shipments. additional source data to be incorporated into IP before an annual revision. The first estimate of output Sefllicollducrors for a month is preliminary and is subject to revision in each of the subsequent five months as new source This revision introduced more detail and new price data become available. data to the MOS (metal-oxide semiconductor) memo Some of the IP series that particularly benefit from ries portion of the semiconductor and related device the new six-month window include electric and gas manufacturing index (NAICS 334413). Before the utilities (NAICS 2211 and 2212), crude oil extraction current revision, all components of MOS memories (part of NAICS 211111), and tobacco manufacturing were grouped in one index. To better track differential (NAICS 312221). The indexes for electric and gas movements in specific product categories, this revi utilities depend on data from the U.S. Department of sion split the MOS memory index into three compo Energy (DOE) that generally arrive with a three nents: an index for DRAM (dynamic random access month lag; however, the data for earlier months tend memory), an index for flash memory, and an index for to be revised, and these revisions often were not all other MOS memories (primarily SRAM, or static available in time to be incorporated into the four random access memory). The underlying source data month window. Although the aggregate data from on nominal shipments for all memory components DOE on crude oil extraction are available within the continue to be from the Semiconductor Industry four-month window, the full complement of detailed Association (SIA). The new indexes for MOS memo geographic data used for specific IP series typically ries are not published separately but continue to be was not available until after the window had closed. included in the larger index for semiconductor and The data on tobacco manufacturing are from the related device manufacturing. Alcohol and Tobacco Tax and Trade Bureau of the The current revision incorporated quarterly data on U.S. Department of the Treasury. Over the past prices from iSuppli, an industry research group, for several years, these data have been received with too all three categories of MOS memories. Previously, great a lag to get folded into the four-month IP the DRAM portion of the index relied on quarterly window; however, more recently, the timeliness has prices from Gartner, and the non-DRAM portion used improved somewhat. The six-month window will product-level producer price indexes from the BLS permit these data to be incorporated in a timely that have been discontinued. Monthly interpolations manner more often. of the quarterly iSuppli prices are based on average Most of the series that rely on quarterly data benefit sales prices from iSuppli for the DRAM index and on from the extended window. Under the four-month average sales prices from SIA for the indexes for flash window, some data that are quarterly in frequency and other memories. ardved too late to be fully incorporated into IP. Often, only one or two months of the quarter were open by the time the data were received. In addition, for some 14. Charles Gilben and Kimberly Bayard (2005), "Industrial Pro quarterly series such as construction paints and indus duction and Capacity Utilization: The 2004 Annual Revision," Federal trial paints (both in NAICS 325510), even when Reserve Bulletin, vol. 91 (Winter), pp. 9-25, www.federalreserve.gov/ pubslbulletin. preliminary estimates were available for much or all
AS2 Federal Reserve Bulletin D August 2008 2. Availabilily of monlhly IP data in puhlicalion window data on producer prices for the period after 2006. Percem of value added in 2007 Table A.8 shows the annual value-added proportions in the IP index from 1999 through 2007. Type of data 4th Revised Monthly Data Physical product ............ 29 42 56 56 Production-worker hours. . . . . 42 42 42 42 IP data received ....... 70 84 98 98 This revision incorporated product data that became IP data estimated .... 30 16 2 2 available, or were revised, after the regular four month reporting window for monthly IP was closed. of the quarter, these estimates were revised These data were released with too great a lag to be sometimes substantially-in later months, and the included with monthly IP estimates; however, the revisions could not be fully adopted because some or data were available for inclusion in the annual revi all of the relevant quarter had fallen outside the sion. reporting window. Table 2 shows the availability of source data during Revised easonal factors 2007 with a four-month reporting window. The six month window will permit almost all of the indexes Seasonal factors for all series were reestimated with estimated in the fourth month to be calculated from data that extend into 2007 or 2008. Factors for source data. production-worker hours-which adjust for timing, holiday, and monthly seasonal patterns-were up Weighrs for Aggregation dated with data through January 2008 and were The IP index is a Fisher index. This revision used prorated to correspond with the seasonal factors for information from the ASM to obtain updated esti hours aggregated to the three-digit NAICS level. The mates of the industry value-added weights used in the updated factors for the product series, which include aggregation of IP indexes and capacity utilization adjustments for holiday and workday patterns, used rates. The Federal Reserve derives estimates of value data through 2007. Seasonal factors for unit motor added for the electric and gas utility industries from vehicle assemblies have been updated, and projec annual revenue and expense data issued by other tions through December 2008 are on the Federal organizations. The weights for aggregation, expressed Reserve Board's website at www.federalreserve.gov/ as unit value added, were estimated with the latest releases/gI 7/mvsf.htm. D Appendix tables start on page A53
Industrial Production and Capacity Utilization: The 2008 Annual Revision A53 A.I. Revi cd <..lata for indu [rial production for lOlal induwy. 1978-2008 Seasonally adjusted data except as noted Quarter Annuat : Year Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. I I I avg.1 I 2 3 4 I Industrial production (percent change) 1978 ............ -1.4 .5 1.8 2.1 .3 .7 -.1 .4 .3 .8 .7 6 -1.3 16.7 3.5 7.5 5.5 1979 .............. -.7 .6 .3 -1.1 .8 .0 -.2 -.7 .1 .6 -.1 .1 1.9 -.6 -1.4 1.5 3.0 1980 .... , . ..... .5 .0 -.3 -2.0 -2.5 -1.2 -.7 .3 1.6 1.3 1.7 .6 1.8 -15.9 -{J.3 16.2 -2.5 1981 .... , ........ -.6 -.5 .6 -.5 .7 .5 .7 .0 -.6 -.8 -1.1 -1.1 .8 1.4 4.2 -8.7 1.3 1982 ... ........ -1.9 1.9 -.7 -.8 -.7 -.4 -.3 -.8 -.4 -.8 -.4 -.8 -7.8 -4.9 -5.8 -7.4 -5.2 1983 ...... ..... 1.9 -.6 .9 1.2 .7 .6 1.6 1.1 1.5 .8 .3 .5 4.6 9.5 14.6 10.8 2.8 1984 .... , ........ 2.0 .5 .5 .6 .5 .4 .3 .1 -.2 -.1 .4 .1 12.2 6.3 2.7 .3 8.9 1985 . . . . . . . . . . . . . . -.3 .4 .1 -.2 .1 .1 -.6 .4 .4 -.4 .3 1.0 1.2 .4 -.6 2.4 1.2 1986. ....... .... .5 -.7 -.6 .1 .1 -.3 .6 -.2 .2 .5 .5 .9 2.3 -2.4 1.7 4.6 1.0 1987. ........... -.3 1.3 .2 .6 .7 .5 .6 .7 .3 1.5 .5 .5 5.4 7.2 7.3 10.2 5.2 1988. ............. .0 .4 .3 .6 -.1 .2 .2 .5 -.3 .6 .2 .4 3.5 3.5 2.1 3.2 5.2 1989 .............. .2 -.5 .2 .0 -.7 .0 -.9 .9 -.3 -.1 .3 .7 1.5 -1.8 -2.5 1.8 .9 1990 ..... _. ...... -.5 .9 .5 -.1 .2 .3 -.1 .2 .2 -.7 -1.2 -.7 3.2 2.8 1.4 -{J.O 1.0 1991 ............. -.5 -.7 -.5 .2 1.0 1.0 .0 .1 .8 -.2 -.2 -.3 -7.5 2.6 5.5 .7 -1.6 1992 ............. -.6 .7 .8 .7 .4 .0 .8 -.5 .2 .7 .4 .0 -.3 7.3 2.9 3.9 2.8 1993 ........... .5 .3 .0 .3 -.4 .2 .3 .0 .4 .7 .4 .5 3.5 1.2 2.1 6.0 3.3 1994 .............. .4 .0 1.1 .5 .6 .7 .2 .5 .2 .8 .7 1.1 5.2 7.4 5.2 8.2 5.3 1995 .............. .3 .0 .1 -.1 .2 .3 -.4 1.3 .4 -.2 .3 .5 5.3 .9 3.8 3.3 4.8 1996 .... , ......... -.6 1.7 -.2 .7 .6 .9 -.1 .6 .5 .0 .9 .7 3.5 7.7 5.1 5.6 4.4 1997 .............. .1 1.2 .8 .0 .6 .5 .6 1.4 .9 .7 .9 .4 8.0 6.3 9.7 10.7 7.3 1998 .............. .4 .0 .0 .5 .6 -.5 -.4 2.1 -.3 .7 -.1 .3 4.1 3.1 2.9 5.2 5.9 1999 ........... ... .5 .4 .2 .2 .7 -.2 .6 .5 -.4 1.3 .6 .8 4.3 3.8 4.0 8.0 4.3 2000 .............. .1 .4 .4 .6 .2 .1 -.2 -.2 .4 -.4 .0 -.3 4.9 5.0 -.3 -1.3 4.2 2001 ....... .......... -.7 -.6 -.3 -.3 -.7 -.6 -.5 -.4 -.4 -.6 -.5 .0 -5.5 -5.2 -5.9 -5.2 -3.4 2002 ........ .5 .1 .7 .4 .5 1.0 -.3 .1 .0 -.3 .4 -.5 2.3 6.3 2.3 -.5 -.1 2003 ........ ..... .6 .4 -.2 -.8 .0 .2 .4 -.1 .5 .1 .8 -.1 2.7 -2.9 2.8 3.7 1.2 2004. ............ .3 .5 -.5 .5 .7 -.8 .7 .3 -.1 1.0 .3 .6 2.6 2.0 2.0 5.8 2.5 2005 .............. .5 .6 .0 -.1 .3 .4 .0 .2 -1.8 1.2 1.I .5 5.4 1.9 -.4 3.7 3.3 2006 ...... ...... .1 -.1 .2 .4 -.1 .5 .3 .1 -.4 -.1 -.2 .6 3.2 2.6 1.9 -.9 2.2 2007 .. ........... -,4 .7 -.1 .5 .0 .3 .6 .0 .3 -.4 .4 .1 1.5 3.2 3.6 .3 1.7 2008 .... , ......... .2 -.4 .1 -.7 -.2 .5 ... .. . .. . .. . .. . .. . .5 -3.1 .. . . .. . .. I Indusuial production (2002= I 00) 1978 .............. 53.5 53.7 54.7 55.8 56.0 56.4 56.4 56.6 56.7 57.2 57.6 58.0 54.0 56.1 56.6 57.6 56.1 1979 .......... .... 57.6 57.9 58.1 57.5 57.9 57.9 57.8 57.4 57.5 57.8 57.7 57.8 57.9 57.8 57.6 57.8 57.8 1980 ......... ..... 58.1 58.1 57.9 56.8 55.3 54.7 54.3 54.5 55.3 56.0 57.0 57.3 58.0 55.6 54.7 56.8 56.3 1981 .............. 57.0 56.7 57.0 56.7 57.1 57.4 57.8 57.8 57.5 57.0 56.4 55.8 56.9 57.1 57.7 56.4 57.0 1982 .............. 54.7 55.7 55.3 54.9 54.5 54.3 54.1 53.7 53.5 53.0 52.8 52.4 55.3 54.6 53.8 52.7 54.1 1983 .............. 53.4 53.1 53.5 54.2 54.6 54.9 55.8 56.4 57.2 57.7 57.9 58.2 53.3 54.6 56.5 57.9 55.6 1984 .............. 59.3 59.6 59.9 60.3 60.6 60.8 60.9 61.0 60.9 60.8 61.0 61.1 59.6 60.5 60.9 61.0 60.5 1985 ....... ...... 61.0 61.2 61.3 61.2 61.2 61.3 60.9 61.1 61.4 61.2 61.4 62.0 61.2 61.2 61.1 61.5 61.3 1986 .............. 62.3 61.8 61.4 61.5 61.6 61.4 61.8 61.7 61.8 62.1 62.3 62.9 61.8 61.5 61.7 62.4 61.9 1987 .............. 62.7 63.5 63.6 64.0 64.4 64.7 65.1 65.6 65.8 66.8 67.1 67.4 63.3 64.4 65.5 67.1 65.1 1988 ..... _. ....... 67.5 67.7 67.9 68.3 68.2 68.4 68.5 68.8 68.6 69.0 69.1 69.4 67.7 68.3 68.6 69.2 68.4 1989 .............. 69.6 69.3 69.4 69.4 69.0 69.0 68.3 69.0 68.8 68.7 68.9 69.4 69.4 69.1 68.7 69.0 69.1 1990 .............. 69.0 69.6 70.0 69.9 70.0 70.2 70.1 70.3 70.4 69.9 69.1 68.6 69.5 70.0 70.3 69.2 69.7 1991 ......... .... 68.3 67.8 67.5 67.6 68.3 69.0 68.9 69.0 69.6 69.5 69.4 69.1 67.8 68.3 69.2 69.3 68.7 1992 .............. 68.7 69.2 69.8 70.3 70.6 70.6 71.2 70.8 71.0 71.5 71.8 71.8 69.3 70.5 71.0 71.7 70.6 1993 ....... ....... 72.1 72.4 72.4 72.6 72.4 72.5 72.8 72.8 73.1 73.6 73.9 74.3 72.3 72.5 72.9 73.9 72.9 1994 .............. 74.6 74.6 75.4 75.8 76.2 76.7 76.9 77.3 77.4 78.1 78.6 79.5 74.9 76.2 77.2 78.7 76.8 1995 ........ ..... 79.7 79.7 79.8 79.7 79.9 80.1 79.9 80.9 81.2 81.0 81.3 81.7 79.8 79.9 80.7 81.3 80.4 1996 .............. 81.2 82.5 82.4 83.0 83.5 84.2 84.1 84.6 85.1 85.1 85.8 86,4 82.0 83.6 84.6 85.8 84.0 1997 .............. 86.5 87.6 88.3 88.3 88.9 89.3 89.8 91.0 91.8 92.5 93.4 93.8 87.5 88.8 90.9 93.2 90.1 1998 .............. 94.1 94.2 94.2 94.7 95.3 94.7 94.4 96.3 96.1 96.7 96.7 97.0 94.2 94.9 95.6 96.8 95,4 1999 .............. 97.5 97.9 98.1 98.3 99.0 98.9 99.5 100.0 99.6 100.9 101.6 102,4 97.8 98.7 99.7 101.6 99.5 2000 ...... ........ 102.5 102.8 103.2 103.9 104.1 104.3 104.0 103.8 104.3 103.8 103.8 103.5 102.8 104.1 104.0 103.7 103.7 2001 .............. 102.7 102.2 101.8 101.6 100.9 100.2 99.8 99.4 99.0 98.4 97.9 97.8 102.2 100.9 99.4 98.0 100.1 2002 ....... ...... 98.3 98.4 99.1 99.5 100.0 100.9 100.6 100.7 100.7 100.4 100.9 100.4 98.6 100.1 100.7 100.6 100.0 2003 .............. 101.0 101.4 101.3 100.4 100.4 100.6 101.1 101.0 101.5 101.6 102.4 102.3 101.2 100.5 101.2 102.1 101.2 2004 .............. 102.6 103.1 102.6 103.1 103.8 102.9 103.6 103.9 103.8 104.8 105.2 105.8 102.8 103.3 103.8 105.3 103.8 2005 .............. 1 106.3 106.9 106.8 106.8 107.1 107.6 107.6 107.7 105.8 107.1 108.2 IOS.8 106.7 107.1 107.0 108.0 107.2 2 2 0 0 0 0 7 6 . . . . . . . . . . . . . . . . . . . . ... . . .. . 1 1 0 0 8 9 . . 8 8 1 1 0 1 8 0 . .5 7 1 1 1 0 0 9 . . 4 0 1 1 0 1 9 1 . . 4 0 1 1 0 1 9 1 . . 3 0 1 1 0 1 9 1 . ,4 9 1 11 1 0 2 . . 1 0 1 1 1 1 2 0. . 2 0 1 1 0 12 9 . . 3 8 1 1 0 1 9 1 . . 7 8 1 1 0 1 9 2 . . 5 3 1 1 1 1 0 2 . . 2 4 1 1 0 1 8 0 . . 9 2 1 1 0 11 9 . . 1 5 1 1 1 1 0 2 . . 1 1 1 1 0 1 9 2. . 2 8 1 1 0 1 9 1 . .4 6 2008 ........... 112.6 112.2 112.2 111.4 111.2 111.7 112.3 111.4 NOTE: Monthly percent change figures show the change from the previous Estimates from February 2008 through June 2008 are subject to further revi month; quarterly figures show the change from the previous quarter at a com sion in the upcoming monthly releases. pound annual rate of change. Production and capacity indexes are expressed as I. Annual averages of indusuial production are calculated from not season percentages of output in 2002. ally adjusted indexes . . Not available as of July 16, 2008.
A54 Federal Reserve Bulletin 0 August 2008 A.2. Revi. ed data for capacity and capacity utilizalion lor tOUlI induslry. 197 -2008 Seasonally adjusted dala Quarter Annual Year Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. I I I I 2 I 3 I 4 avg. I Capacity (percent of 2002 output) 1978 .............. 65.0 65.2 65.4 65.6 65.7 65.9 66.1 66.3 66.5 66.6 66.8 66.9 65.2 65.7 66.3 66.8 66.0 J979 ............. 67.1 67.3 67.4 67.6 67.7 67.8 68.0 68.1 68.3 68.4 68.6 68.7 67.3 67.7 68.1 68.6 67.9 1980 ............ 68.8 69.0 69.1 69.3 69.4 69.6 69.7 69.9 70.1 70.2 70.4 70.5 69.0 69.4 69.9 70.4 69.7 1981 .. ........... 70.7 70.9 71.0 71.2 71.4 71.5 71.7 71.9 72.0 72.2 72.4 72.5 70.9 71.4 71.9 72.4 71.6 1982 .............. 72.7 72.8 73.0 73.1 73.3 73.4 73.5 73.6 73.7 73.8 73.9 73.9 72.8 73.3 73.6 73.9 73.4 1983 .............. 74.0 74.0 74.1 74.1 74.1 74.1 74.2 74.2 74.2 74.3 74.3 74.4 74.0 74.1 74.2 74.3 74.2 1984 .............. 74.5 74.6 74.7 74.8 74.9 75.0 75.2 75.4 75.5 75.7 75.9 76.0 74.6 74.9 75.4 75.9 75.2 1985 .............. 76.2 76.4 76.6 76.8 77.0 77.2 77.3 77.5 77.6 77.8 77.9 78.0 76.4 77.0 77.5 77.9 77.2 1986 .............. 78.2 78.3 78.4 78.4 78.5 78.6 78.7 78.8 78.9 79.0 79.1 79.2 78.3 78.5 78.8 79.1 78.7 J987 .............. 79.3 79.5 79.6 79.8 79.9 80.J 80.3 80.4 80.6 80.7 80.8 80.9 79.5 79.9 80.4 80.8 SO.2 1988 .............. 81.0 81.J 81.2 81.2 81.3 81.3 81.4 81.4 81.5 81.6 81.7 81.8 81.1 81.3 81.4 81.7 81.4 1989 ........ ..... 81.9 82.0 82.1 82.2 82.4 82.5 82.7 82.9 83.0 83.2 83.4 83.5 82.0 82.4 82.9 83.4 82.7 J990 .............. 83.7 83.9 84.1 84.2 84.4 84.6 84.7 84.9 85.0 85.2 85.3 85.5 83.9 84.4 84.9 85.3 84.6 J991 . ............ 85.6 85.7 85.8 86.0 86.1 86.2 86.3 86.4 86.5 86.6 86.7 86.9 85.7 86.1 86.4 86.7 86.2 1992 .............. 87.0 87.1 87.3 87.4 87.6 87.8 88.0 88.1 88.3 88.5 88.6 88.8 87.1 87.6 88.1 88.6 87.9 1993 .............. 88.9 89.1 89.2 89.3 89.4 89.5 89.6 89.7 89.8 90.0 90.1 90.3 89.1 89.4 89.7 9O.J 89.6 1994 .............. 90.4 90.6 90.9 91.J 91.3 91.6 91.9 92.2 92.5 92.8 93.1 93.4 90.7 91.4 92.2 93.J 91.8 J995 ............. 93.8 94.1 94.4 94.8 95.1 95.5 95.8 96.2 96.6 97.0 97.4 97.8 94.1 95.1 96.2 97.4 95.7 J996 .............. 98.3 98.7 99.2 99.6 100.1 100.6 101.0 101.5 102.0 102.5 103.0 103.5 98.7 100.1 101.5 103.0 100.8 1997 .............. 104.0 104.5 105.1 105.6 106.2 106.8 107.4 108.0 108.7 109.4 110.1 110.8 104.5 106.2 108.0 110.1 107.2 1998 .............. 111.5 112.2 112.9 113.6 114.3 J15.0 115.6 116.2 116.7 117.3 117.8 118.4 112.2 114.3 116.2 117.8 115.1 1999 .............. 118.9 119.4 119.8 120.3 120.8 121.2 121.7 122.1 122.6 123.1 123.5 124.0 119.4 120.8 122.1 123.5 121.4 2000 .............. 124.4 124.9 125.3 125.8 126.2 126.6 127.0 127.4 127.8 128.2 128.6 129.0 124.9 126.2 127.4 128.6 126.8 2001 .............. 129.4 129.8 130.1 130.5 130.8 131.2 131.5 131.8 132.1 132.4 132.7 132.9 129.8 130.8 131.8 132.7 131.3 2002 .............. 133.2 133.4 133.6 133.7 133.8 133.9 133.9 134.0 133.9 133.9 133.8 133.7 133.4 133.8 133.9 133.8 133.7 2003 .............. 133.6 133.5 133.4 133.3 133.2 133.1 133.1 133.0 133.0 133.0 132.9 132.9 133.5 133.2 133.0 132.9 133.2 2004 .............. 133.0 133.0 133.0 133.0 133.0 133.0 133.1 133.1 133.1 133.1 133.1 133.2 133.0 133.0 133.1 133.2 133.1 2005 .............. 133.2 133.3 133.3 133.4 133.5 133.6 133.7 133.8 134.0 134.1 134.3 134.4 1333 133.5 133.9 134.3 133.7 2006 ........... 134.6 134.7 134.9 135.0 135.2 135.3 135.4 135.6 135.7 135.9 136.0 136.2 134.7 135.2 135.6 136.1 135.4 2007 .............. 136.4 136.6 136.8 137.0 137.2 137.4 137.6 137.9 138.1 138.3 138.5 138.7 136.6 137.2 137.9 138.5 137.5 2008 ......... .... 139.0 139.1 139.3 139.5 139.7 139.9 .. . .. . .. . .. . .. . .. . 139.1 139.7 .. . .. . ... Capacity utilization (percent) 1978 .............. 82.3 82.4 83.6 85.1 85.2 85.6 85.3 85.4 85.4 85.9 86.3 86.6 82.8 85.3 85.3 86.2 84.9 1979 .............. 85.8 86.1 86.2 85.1 85.6 85.4 85.0 84.3 84.2 84.5 84.2 84.2 86.0 85.3 84.5 84.3 85.0 19SO .............. 84.4 84.2 83.8 81.9 79.7 78.6 77.9 77.9 79.0 79.8 81.0 81.3 84.1 SO. I 78.3 80.7 80.8 1981 .......... 80.6 80.0 80.3 79.7 80.1 80.3 80.6 80.4 79.8 79.0 77.9 76.9 SO.3 80.0 SO.3 77.9 79.6 1982 .............. 75.2 76.5 75.8 75.0 74.4 74.0 73.6 72.9 72.5 71.8 71.5 70.9 75.9 74.5 73.0 71.4 73.7 1983 .............. 72.2 71.7 72.3 73.2 73.7 74.1 75.2 76.0 77.1 77.7 77.9 78.2 72.1 73.6 76.1 77.9 74.9 1984 .............. 79.7 80.0 80.2 80.6 80.9 81.0 81.1 81.0 SO.6 80.4 SO.5 80.4 SO.O 80.8 80.9 80.4 SO.5 1985 .............. 80.0 80.1 SO.O 79.7 79.5 79.4 78.7 78.9 79.1 78.6 78.7 79.4 80.0 79.5 78.9 78.9 79.3 1986 .............. 79.7 79.0 78.4 78.4 78.4 78.1 78.5 78.3 78.3 78.6 78.8 79.4 79.0 78.3 78.4 78.9 78.7 1987 .............. 79.0 79.9 79.9 80.2 SO.6 80.8 81.2 81.6 81.7 82.8 83.1 83.4 79.6 80.5 81.5 83.1 81.2 1988 .............. 83.3 83.5 83.7 84.1 83.9 84.1 84.2 84.5 84.2 84.6 84.6 84.9 83.5 84.0 84.3 84.7 84.1 1989 .............. 85.0 84.5 84.6 84.4 83.7 83.6 82.6 83.2 82.8 82.6 82.6 83.1 84.7 83.9 82.9 82.8 83.6 1990 .............. 82.5 83.0 83.2 82.9 82.9 83.0 82.7 82.8 82.8 82.1 80.9 80.3 82.9 83.0 82.8 81.J 82.4 1991 .............. 79.8 79.1 78.6 78.6 79.3 80.0 79.9 79.9 80.5 80.2 80.0 79.6 79.2 79.3 80.1 79.9 79.6 1992 .............. 79.0 79.5 80.0 80.4 SO.5 80.4 80.9 80.3 80.4 SO.8 80.9 80.8 79.5 80.5 80.5 80.9 80.3 1993 ...... ....... 81.J 81.2 81.1 81.3 80.9 81.J 81.2 81.1 81.4 81.8 82.0 82.3 81.2 81.1 81.2 82.1 81.4 1994 .............. 82.5 82.3 83.0 83.2 83.4 83.7 83.7 83.8 83.7 84.2 84.4 85.1 82.6 83.4 83.7 84.5 83.6 1995 .............. 85.0 84.7 84.5 84.1 84.0 83.9 83.3 84.1 84.1 83.6 83.5 83.5 84.7 84.0 83.8 83.5 84.0 1996 .............. 82.6 83.6 83.1 83.3 83.4 83.7 83.2 83.4 83.4 83.0 83.4 83.5 83.1 83.5 83.3 83.3 83.3 1997 .............. 83.2 83.8 84.0 83.6 83.7 83.6 83.6 84.2 84.5 84.6 84.8 84.6 83.7 83.6 84.1 84.7 84.0 1998 .............. 84.4 83.9 83.4 83.3 83.3 82.4 81.6 82.9 82.3 82.5 82.0 82.0 83.9 83.0 82.3 82.2 82.8 1999 .............. 82.0 82.0 81.8 81.7 82.0 81.6 81.8 81.9 81.3 82.0 82.2 82.6 82.0 81.8 81.6 82.3 81.9 2000 .............. 82.4 82.4 82.4 82.6 82.5 82.4 81.9 81.5 81.6 81.0 80.7 80.2 82.4 82.S 81.6 80.6 81.8 2001 .............. 79.4 78.7 78.2 77.8 77.1 76.4 7S.9 7S.4 74.9 74.3 73.8 73.6 78.8 77.1 7S.4 73.9 76.3 2002 .............. 73.8 73.8 74.2 74.4 74.7 7S.4 75.1 7S.2 7S.2 7S.0 75.4 7S.1 73.9 74.8 7S.2 7S.2 74.8 2003 .............. 75.6 75.9 7S.9 75.3 75.4 7S.6 7S.9 75.9 76.3 76.4 77.0 77.0 7S.8 7S.4 76.1 76.8 76.0 2004 .............. 77.2 77.6 77.1 77.5 78.0 77.4 77.9 78.1 78.0 78.7 79.0 79.4 77.3 77.6 78.0 79.1 78.0 200S .............. 79.8 80.2 SO. I 80.0 80.2 80.5 80.4 80.S 79.0 79.8 80.6 80.9 80.0 80.3 80.0 80.4 80.2 2 2 0 00 0 7 6 . .. .. . . .. .. .. . . ,..., . . . .. . 8 80 0 . .9 5 8 80 0 . .7 9 8 8 0 0 . .7 8 8 81 1 . . J 0 8 80 0. . 9 9 8 8 1 1 . .0 2 8 8 1 1 . . 3 4 8 8 1 1 . . 2 3 8 8 1 0 . . 3 9 8 SO 0. .8 8 8 8 1 0 . . 1 5 8 8 0 1 . . 9 0 8 SO 0 . . 8 7 8 8 1 1 . . 0 0 8 8 1 1 . . 3 2 8 8 1 0 . .7 0 8 80 1 . . 9 0 2008 .............. 81.0 80.3 SO.5 79.9 79.6 79.9 .. . .. . .. . .. . .. . .. . 80.6 79.8 . .. . .. . .. NOTE: See the general note to lable A.I. . .. Not available as of July 16, 2008.
Industrial Production and Capacity Utilization: The 2008 Annual Revision A55 A.l Rates of change in industrial producti n. by market and indu lry groups, 200J-071 Difference between rates of change: Revised rate of change (percenl) Item NAICS revised minus previous (percentage points) code' I I I I I I I I 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 Total industry ......................... , .... ... 1.5 3.1 2.6 1.7 2.l .4 .1 -.6 -1.8 .4 MARKET GROUPS Final products and nonindustrial supplies ...... ... 1.5 2.6 4.4 1.0 1.3 .3 .0 -.4 -1.5 .1 Consumer goods ........ . . . . . . . . . . . . .. ...... ... 1.4 1.7 2.4 .2 1.1 .0 -.1 -.4 -.9 .1 Du A ra u b t l o e m o . t . i . v . e . . p . r . o . d . u . c . t . s . .. . . . . . . . . , . . . . . . . . . .. . . . . . . . . . . . . . . . . . . · . . . . 4 3. . 4 7 -2 -. . 7 9 -1 1 . . 9 5 - - 3 5. .9 3 3. . 6 9 -. . 1 0 -. . 4 3 - -. . 1 8 -1 -. . 7 4 -. . 1 9 Home electronics .............. ... ...... ... 18.5 2.5 11.0 11.5 14.2 -1.9 -11.8 -5.7 -1.6 -4.5 Appliances. furniture. carpeting .... . .. ... . .. 2.9 1.6 1.6 -{j.1 -{j.0 .6 -.6 -1.4 -1.4 -.5 Miscellaneous goods ... . . . . . . . . . . . . . . . . ... -1.4 2.0 5.6 -2.8 -1.5 -.1 -.1 -.7 -2.2 -.7 Nondurable .......................... ... .5 2.6 2.7 1.5 1.2 .0 .0 -.2 -.7 .1 Non-energy ........ .................. . .. 1.1 2.2 3.0 2.1 .9 .0 .0 -.3 -.6 .1 Foods and tobacco ................... ... 2.6 2.3 3.9 .3 1.5 .0 .0 -.9 -1.9 .2 Clothing ............................. ... -10.9 -9.8 -2.1 .3 -1.9 .0 .7 -1.9 -.4 1.4 Chemical products ................... . .. 2.1 4.0 JI 7.7 .0 -.2 .2 2.2 3.9 .3 Paper products ....................... . .. -3.8 2.2 -.9 -2.4 1.1 .5 -1.0 -3.1 -5.7 -.4 Energy ................................. ... -1.8 3.9 J.7 -.2 1.9 -.1 .2 .1 -.8 .0 Bu T I s n i r n f a o e n r s s m s it a e t q io u n ip m pr e o n c t e s . . s . . in . . . g . . .. . . . . , . . . . . .. . . . . . . . . . . . . . . . . .. . . . . . . . .. . .. . . . . . . . .. . . . . , . . . . . . . . .. . . - 1 1 0 1 . . . 2 5 9 6 7 5 . . . 3 2 2 1 1 t4 0 5 . . . 6 3 9 1 7 9 2 . . . 1 8 8 -3 8 2 . . . 4 8 9 -1 3 . . . 5 6 8 - 1 . . . 9 3 0 -4 - . . . 9 6 9 - -7 2 2 . . . 8 6 0 -5 -. . . 5 5 4 Industrial and other ....................... . .. -1.9 4.0 5.9 4.4 1.7 .1 .0 -.8 -2.5 .7 Defense and space equipmem .. . . . . . . . . . . . . ... 2.9 3.1 6.9 -2.6 5.2 1.3 .6 3.1 -4.9 5.8 Construction supplies ........................ ... .9 1.7 7.5 -3.5 -1.6 -.1 .2 -.5 -1.5 -.6 Business supplies ........................... . .. 1.3 3.2 2.6 -.3 1.1 .4 .2 -.7 -2.7 .0 Materials ...................................... ... 1.5 3.7 .3 2.5 3.2 .5 .3 -.8 -2.2 .7 Non-energy ................................. . .. 2.1 5.4 2.4 1.3 3.5 .7 .6 -1.1 -3.2 1.3 Durable ................................ . .. 4.1 6.0 5.4 1.2 5.4 1.1 .7 -1.6 -4.5 1.6 Consumer pans ......................... ... -1.4 .0 .5 -5.8 -2.0 .1 -.2 -1.2 -2.6 -.5 Equipment pans ........................ ... 12.0 11.1 11.3 9.4 12.5 3.2 J.7 -4.7 -10.0 5.7 No O n t d h u e r r a b . l . e . . .. .. . . .. . . .. .. . . . . .. . . . . .. . . . . , . .. .. . . . . . . . . . . . . . . .. . . . . .. . . . · . . . . -1. . 2 5 4 4 . .9 3 -2 2 . . 2 9 -2 1 . . 0 6 3. .6 0 -. . 1 0 . .5 6 -. . 2 2 - -1 1 . . 2 0 -. . 6 9 Te.tile ................................. · . -8.3 -.9 .5 -12.2 -9.4 -.7 2.5 .3 -4.9 .3 Paper ................ ................. · . -5.5 3.8 -1.1 1.6 -1.3 -.3 -.1 -1.0 -1.0 .7 Chemical ................. ............ .. 2.3 8.6 -5.8 4.9 2.1 -.2 .9 .8 .1 1.3 Energy ........................ , ............ . .. .2 -.5 -4.0 5.2 2.7 .1 -.3 .1 -.1 -.6 INDUSTRY GROUPS Manufacturing' ................. ... ............ . .. 1.7 3.7 3.7 1.1 2.3 .4 .2 -.7 -2.2 .6 Ma D n u u r f a a b c l t e u r m in a g n ( u N fa A ct I u C r S in ) g .. .. . . .. . . .. .. . . . . . . .. . . . . .. . . . . . . . . . .. 31 .. -3 . 3 3 2 . . 4 0 4 3 . .8 0 6 3 . . 9 9 1 1 . . 6 4 3 2 . .5 9 . . 4 8 . .2 3 -1 -. . 6 0 - - 2 3 . . 1 1 1 . . 6 0 Wood products ........... ............. 321 4.6 1.4 11.6 -13.3 -{j.8 .1 -.3 1.2 1.2 -1.4 Nonmetallic mi neral products . . . . . .. . . . . 327 U 4.4 5.3 -3.5 .7 -.6 .5 -.5 -1.6 .6 Primary metal ....................... ... 331 4.5 8.1 -1.1 -4.2 4.1 .2 .7 1.2 -.7 -1.9 Fabricated metal products ............. 332 -2.4 1.9 6.2 3.2 3.4 -.2 .3 .1 -.6 .9 Machinery ... -.-.................... ... 333 -2.0 5.1 8.3 2.5 -.7 .0 .2 .1 -2.8 .9 Computer and electronic products ..... .. 334 17.9 10.2 15.1 12.2 13.9 4.3 .0 -3.2 -{j.1 4.4 Electrical equipment. appliances. and components ............. ......... 335 -.9 2.3 1.8 -.5 3.7 .1 .3 -2.0 -2.8 1.1 Motor vehicles and parts ............. ... 3361-3 3.2 -1.4 -.3 -5.9 -2.2 .1 J -.6 -2.1 -.4 Aerospace and miscellaneous transportation equipment ......... 3364-9 -4.0 3.4 11.5 4.5 10.9 -.2 1.4 -3.6 -10.2 3.4 Furniture and related products ......•. ... 337 .2 3.4 1.6 -1.6 -1.7 .1 -.1 .0 -.4 1.2 Miscellaneous ........... .... ..... ..... 339 .3 1.6 6.6 2.7 1.5 .2 -.5 -2.1 -2.0 -1.7 Nondurable manufacturing ......... .. . .. .2 3.5 .7 1.3 .9 -.1 .3 -.2 -1.0 .3 Food. beverage, and tobacco products ... 311.2 2.5 1.3 4.1 .3 2.1 .0 .1 -1.1 -2.3 .4 Te.tile and product mills ....... . .. 313.4 -5.1 .5 -.3 -11.7 -8.1 -.4 1.2 -2.2 -4.0 -.2 Apparel and leather ... .................. 315.6 -10.6 -8.9 -1.3 -.8 -2.0 -.1 .7 -1.7 -.7 U Paper .............. ......... ........... 322 -5.6 2.8 -.7 .3 -2.2 -.2 -.2 -.6 .4 .2 Printing and support . . . . . . . . . . 323 -2.7 2.4 .5 1.9 -1.3 -.3 .6 -1.4 -3.3 .9 Petroleum and coal products . . . . . . . . . . . 324 .9 10.4 -3.7 2.2 -.5 -.2 .5 -.1 -.4 -.5 C Pl h a e s m tic ic s a a l n d . . r . u . b . b . e .. r . p . r . o . d . u . c .. t s . .. . . . . . . . . . . . . . . . . . . . . . . . 3 3 2 2 5 6 - 1 . . 2 9 6. . 6 9 -1 2 . . 2 6 -3 5 . . 6 0 4 1 . . 4 4 - . . 0 2 . . 5 1 - 1 . . 4 3 -3 1 . . 9 3 -. . 7 8 Other manufacturing (non·NAICS) ........... 1133.5111 -2.8 2.0 -.5 -4.5 -1.4 .6 -.6 -1.2 -4.7 -.8 Mining ..... ..... ............ .................. 21 1.0 -.9 -4.9 8.2 .2 .3 -.2 .6 .2 -1.0 Utilities ................... .................... 2211.2 .6 1.8 2.0 -.7 3.1 .0 .1 -.1 -1.0 .2 Electric ................... ........... .... 2211 1.9 2.3 3.5 -1.2 3.3 .1 .1 .1 -1.2 -.1 Natural gas ......... ......... ............... 2212 -{j.2 -1.1 -4.6 1.5 2.0 -.2 .3 -1.2 -.4 2.2 I. Rates of change are calculated as the percent change in the seasonally ad and pUblishing are classified elsewhere in NAICS (under agriculture and infor· justed index from the fourth quarter of the previous year 10 the fourth quarter mation respectively). but historically they were considered to be manufacturing of the year specified in the column heading. industries and were included in the industrial sector under the Standard Indus 2. North American Industry Classification System. trial Classification (SIC) system. In December 2002 the Federal Reserve reo 3. Manufacturing comprises North American Industry Classification System classified all its industrial output data from the SIC system 10 NAICS. (NAICS) manufacturing industries (sector 31·33) plus the logging industry and Not applicable. the newspaper, periodical, book. and directory publishing industries. Logging
A56 Federal Reserve Bulletin 0 August 2008 A.4. Rates of change in industIial production, specinl aggrcgmcs and sciccted detail, 200:l-071 Dilference between rates of change: Revised rate of change (percent) Item NAICS revised minus previous (percentage points) code' I I I I I I I I 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 Total industry ............................... . 1.5 3.1 2.6 1.7 2.1 .4 .1 -.6 -1.8 .4 Energy ....................................... . .7 1.3 -1.8 3.7 2.3 .1 -.2 .0 -.3 -.5 Consumer products ......................... . -1.8 3.9 1.7 -.2 1.9 -.1 .2 .1 -.8 .0 Commercial prOducts ....................... . 4.7 4.5 .4 1.2 2.0 .0 .0 -.1 -1.1 -1.2 Oil and gas well drilling .....••.....•........ 213111 21.3 8.4 11.9 14.8 -.8 .1 .1 .1 .1 -.2 Converted fue I ............................. . 1.0 2.3 -2.6 2.5 5.3 .0 .2 -.1 .3 -1.0 Primary materials .......................... . -.1 -1.7 -4.6 6.4 1.6 .3 -.5 .3 -.4 -.3 Non-energy .................................. . 1.7 3.5 3.9 1.I 2.1 .4 .2 -.7 -2.2 .6 Selected high-Iechnology industries 23.8 9.4 22.4 17.3 22.3 6.7 -1.0 -5.7 -7.3 5.5 Computers and peripheral equipment ...... . 3341 9.9 1.6 28.8 18.0 16.7 5.1 -4.9 -1.5 5.9 -7.7 Communications equipment ...... . 3342 17.4 .7 13.7 20.6 20.6 3.5 -5.5 .8 5.8 5.9 Semiconductors and related electronic components ........ . 334412-9 34.0 17.3 24.0 15.4 25.9 9.5 3.6 -9.7 -19.4 11.4 Excluding selected high-technology industries ................ . .2 3.1 2.7 .0 .8 .0 .3 -.4 -1.9 .3 Motor vehicles and parts ................. . 3361-3 3.2 -1.4 -.3 -5.9 -2.2 .1 .3 -.6 -2.1 -.4 Motor vehicles ........................ . 3361 7.7 -2.7 -2.3 -7.0 -2.7 .0 .3 .2 -1.0 -1.2 Motor vehicle pans .................... . 3363 -1.9 -.8 -.6 -4.3 .5 .2 .3 -1.9 -4.1 .6 Excluding motor vehicles and pans ......... . -.1 3.6 3.0 .6 1.I .0 .3 -.4 -1.9 .3 Consumer goods ......................... . 1.1 2.3 3.1 1.0 .3 .0 -.1 -.5 -.8 .0 Business equipment ...................... . -2.0 5.2 7.3 5.8 2.8 -.4 .8 -1.6 -4.4 .5 Construction supplies ................... .. .7 1.7 7.5 -3.7 -1.9 -.1 .2 -.4 -1.5 -.8 Business supplies ....................... . -.9 2.2 2.4 -1.6 -.1 .1 .2 -.7 -2.6 .0 Materials ................................ . -.5 5.0 .6 .7 1.8 -.1 .6 -.2 -1.6 .5 Mel/.sures excluding selected high-technolollY industries TO~a~~~~~~~gj·:::::::::::::::::::::::::.·· .3 2.7 1.6 .9 1.2 .0 .2 -.4 -1.5 .2 . .2 3.3 2.5 .1 l.l .0 .3 -.4 -1.9 .3 Durable................ . ........... . .6 3.2 4.7 -.5 1.5 -.1 .4 -.5 -2.5 .4 Mel/sures excluding mota,. vehicles l/1U1 parIS Total industry ..... . ......................... . 1.4 3.5 2.8 2.1 2.4 .4 .1 -.6 -1.8 .4 Manufacturing' ........................... . 1.6 4.2 4.0 1.7 2.6 .4 .2 -.7 -2.2 .7 Durable .............................. . 3.5 5.1 8.1 2.8 4.8 .9 .2 -1.1 -3.2 1.2 Measures excluding selected higlHechn% gy industries and motor vehicles and pans TO~I~~~~~~~gj' .1 3.1 1.7 1.4 1.4 .0 .2 -.3 -1.5 .2 : : : : : : : : :: : : ::: :: :: : : : : : : -.1 3.8 2.7 .6 1.3 -.1 .3 -.4 -1.9 .4 Measult's 0/ non-energy materials inpllls to Finished processors ........................... . 3.7 6.0 5.6 2.8 5.1 1.4 .8 -2.7 ...{j.2 2.8 Primary and semilinished processors ........ . .7 4.9 .1 .3 2.4 .0 .5 .1 -1.0 .2 Stage-oJ-process groups Crude ....................................... . -.3 2.6 ...{j.6 7.2 t.7 .1 -.4 .7 .3 -.5 Primary and semilinished .................... .. 1.I 3.7 3.3 -1.0 2.6 .5 .5 -1.0 -3.3 .7 Finished ..................................... . 2.7 2.4 5.4 3.4 1.7 .3 -.2 -.2 -.6 .2 I. Rates of change are calculated as the percent change in the seasonally ad 2. North American lndustry Classi fication System. justed index from the fourth quarter of the previous year 10 the fourth quarter 3. See table A.3. note 3. of the year specified in the column heading. Not applicable.
IndustriaL Production and Capacity UtiLization: The 2008 AnnuaL Revision AS7 A.S, Rates of change for annual industrial production indexes. 2003-071 I Difference between rates of change: Revised rate of change (percent) Item revised minus previous (percentage points) I I I I I I I I 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 Total industry . ............. ............. 1.2 2.5 J.J 2.2 1.7 .2 .0 .1 -1.8 -.4 " MARKET GROUPS Consumer goods .......... . . . 1.3 1.3 2.8 .3 1.7 .0 -.1 -,I -1.0 -.2 D N u o r n a d b u l r e a b " le " " . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 . . 5 2 1 1 . . 1 4 3, . 6 5 -1. , 3 8 2 -. .3 ~ -. . 1 0 - . . 0 3 -. . 5 1 -1 -. . 9 2 -1. . 3 1 Business equipment ............... -.3 5,2 7.3 10.4 3.3 -.5 ,9 -,6 -1.3 -2.9 Defense and space equipment .. .............. 6.3 -.8 10.5 -3.2 3,8 2.5 -1.0 5.1 -5.6 6.8 Construction supplies , ........... ,., ... ,., .• ' -.4 2.1 4.5 2.2 -2.5 -.2 .2 -,3 -1.3 -1.2 Business supplies, . , , , , , , .. ' ....... ' ... , .. , . , 1.7 2,2 3.4 .6 .6 ,3 .0 ,0 -2.4 -1.2 Materials .................................... 1.3 3.0 2.3 2,2 1.9 ,4 -,I ,2 -2.4 -.1 Non-energy ....•.. , ....... ,.,' ••......... 1.8 4.3 3.9 2.5 2.1 .6 ,0 .4 -3.4 .3 Energy .......... ............... ,0 -,4 -1.2 1.6 1.6 .1 -.2 .1 .0 -1.0 INDUSTRY GROUPS Manufacturing2 , .•. , ... . . . . . . . . . . . . 1.3 2.9 4,0 2.4 1.7 .2 .0 .1 -2.2 -.4 Manufacturing (NAICS) ....... " ." .... " . 1.5 3.1 4,2 2,8 1.8 .2 .1 .2 -2.2 -.2 Durable manufacturing ... , ........... , , . 2,7 4.1 5.5 4,6 2.6 ,4 ,I ,0 -3.0 -.4 Nondurable manufacturing .............. .1 1.9 2.8 .8 1.0 -,I .0 .4 -1.4 ,I Other manufacturing (non-NAICS) -2.9 .8 ,7 -4,3 -1.5 ,I -.1 -1.1 -3,0 -3.6 Mining ........ , .. , .. " .. , ....... .2 -,6 -1.3 3.1 ,I .3 .0 .4 .4 -1.1 Utilities" ". " ." " .. ........... ............ 1.9 1.4 2.1 -.6 3,3 .0 .0 ,0 -,8 .4 I. The rates of change are calculated from annual averages of seasonally ad· 2, See table A,3, note 3. justed industrial production indexes rather than between the founh quarter of one year and the founh quarter of the next. A.6. Rales or change in capacily. by induslry groups. 200~-O7\ Difference between rates of change: I Revised rote of change (percent) hem revised minus previous (percentage points) 2003 I 2004 I 2005 I 2006 I 2007 2003 I 2004 I 2005 I 2006 I 2007 Total industry .... ................. -.6 .2 .8 1.3 1.8 .3 .0 -.2 -1.1 .0 Manufacturing2 ...... ................. -.6 .2 1.4 1.4 2.0 .3 ,I -.3 -1.3 -.2 Ma D n u u r f a a b c l t e u r m in a g n ( u N fa A ct I u C r S in ) g .. . . , . . , . ., . . . . . . . . . . . . . . . . . . . . . . . . . . -. , 3 3 . . 2 5 2 1 , .5 6 2 1 . . 4 4 2 3 . .3 0 . .3 5 . . 0 1 - -. . 3 7 - - 1 1 . . 8 4 - - . , 2 2 Nondurable manufacturing . . . . . . . . . . . . . . -1.0 -.1 .5 .3 .7 .2 .3 .2 -.8 -,I .Other manufacturing (non-NAICS) .. -4,8 -,6 -,2 1.1 .6 -1.0 -.5 -,8 .1 -,2 Mmmg ............... _, , .. -1.4 -1.3 -1.1 1.4 1.7 ,7 -1.0 ,6 .8 1.3 Utilities 3.6 2.9 .7 .8 1.2 .5 .3 .7 -1.2 -.3 Selected high-technology industries ........... 4.2 5.5 13.1 10,3 21.4 2.8 1.2 -5.2 -9.3 1.9 Manufacturing except selected high-technology industries' .. -.7 -.2 ,7 .8 .8 ,I ,0 ,I -,6 -.2 Stage-o/·process groups Crude. .............. .......... , ........... -1.8 -,7 -,8 ,9 1.4 .4 -,6 .3 ,7 1.0 Primary and semifinished ................ -.. -.8 .7 ,8 1.2 2.1 .6 .3 -.6 -1.8 -,I Finished ................ .., ............. ,3 .4 2.3 1.8 1.7 ,0 -.1 ,3 -.5 -,3 I. Rates of change are calculated as the percent change in the seasonally ad 2, See table A.3, note 3, justed index from the founh quarter of the previous year to the founh quarter of the year specified in the column heading.
AS8 Federal Reserve Bulletin D August 2008 A.7. Capacity utilization rates. by induslry groups. 2(J04-07 Difference belween rates of change: Revised rate revised minus previous Item NAICS (percent of capacity, seasonally adjusted) (percentage points) code' I I I 20 1 0 9 7 7a2v-g.1 I 2004:Q4 2005:Q4 2006:Q4 2007:Q4 2004:Q4 I 2 005:Q4 12006:Q4 I 2 007:Q4 Total industry 81.0 79.1 80.4 80.7 81.0 .0 -.2 -.8 -.S Manufacturing2 . . . . . . . . . . . .. . . .• . ...•....... 79.7 77.5 79.2 79.0 79.3 -.1 -.3 -1.1 -.5 Manufacturing (NAICS) .................. . 31-33 79.5 77.1 78.9 78.9 79.3 -.1 -.4 -.9 -.3 Durable manufacturing ................ .. 78.0 74.8 78.0 77.3 77.8 .0 -.2 -l.l -.3 Wood products ..................... .. 321 79.9 81.4 89.9 75.9 70.1 .1 1.4 1.6 -.1 Nonmetallic mineral products 327 79.4 80.3 83.3 78.9 78.2 -.8 -.5 -.8 -.2 Primary metal ...................... .. 331 80.9 86.7 83.9 80.8 83.9 -.1 .2 -1.4 -2.6 Fabricated metal products ............ . 332 77.5 73.8 78.0 79.9 81.3 .2 .1 -.3 .2 Machinery ......................... .. 333 78.7 73.2 78.5 79.4 77.3 -.2 -.2 -1.5 -.6 Computer and electronic products .... . 334 78.3 71.1 74.7 78.0 77.4 -.6 -.4 .7 3.4 Electrical equip .• appliances, and components .................. . 335 83.2 79.9 83.2 82.1 83.4 .8 -.2 -2.2 -2.1 Motor vehicles and parts ............ . 3361-3 77.4 79.2 78.3 72.3 72.4 .3 -.3 -2.4 -3.7 Aerospace and miscellaneous transportation equipment .......... . 3364-9 72.7 63.0 70.0 72.8 SO.4 1.6 -.2 -5.9 -2.5 Furniture and related products ........ . 337 78.6 77.0 79.0 77.5 76.6 .5 .3 -.8 .6 Miscellaneous ....................... . 339 76.6 74.9 76.9 76.5 74.7 -.1 -1.4 -2.3 -3.0 Nondurabte manufacruring . . .. . .......... . 81.6 79.8 SO.O 80.8 81.0 -.3 -.6 -.8 -.4 Food, beverage, and tobacco products ... . 311,2 81.5 78.4 80.7 80.3 81.1 .3 -.7 -1.9 -1.0 Textile and product mills ............... . 313,4 82.0 77.2 79.7 72.5 68.9 1.6 -.1 -3.3 -2.8 Apparel and leather ................. . .. 315.6 78.4 67.9 69.6 71.8 73.0 .0 -1.9 -2.3 -1.3 Paper ................................ .. 322 87.6 83.7 84.0 84.3 82.6 -.8 -1.0 -1.2 -1.4 Printing and support ............. . 323 83.5 76.5 77.7 78.5 76.4 .6 -.3 -1.9 -.7 Petroleum and coal products ............ . 324 85.9 92.0 87.3 88.9 88.9 -2.4 -.6 -1.2 -1.3 Chemical .............................. . 325 78.3 78.1 75.5 79.1 78.9 -.4 -.1 1.4 1.4 Plastics and rubber products ............ . 326 83.6 83.8 85.9 82.3 84.6 -1.2 -1.4 -2.5 -2.1 Olher manufacturing (non·NAICS) ........ . 1133.5111 84.5 85.7 85.4 80.7 79.2 .5 .2 -3.9 -4.3 Mining .................... ........... . 21 87.5 88.8 85.5 91.2 90.2 .4 .4 -.1 -1.9 Utilities .................................... . 2211,2 86.8 84.6 85.7 84.4 85.9 .0 -.8 -.6 -.2 Selected high-technology industries .......... . 78.1 69.5 75.2 80.0 79.9 -1.2 -1.3 J 2.0 Computers and peripheral equipment ... . .. 3341 77.9 78.2 74.3 77.5 78.3 -1.6 -1.9 -.8 -2.3 Communications equipment ............... . 3342 75.7 52.4 61.8 73.3 80.1 -2.0 -2.0 .0 -1.9 Selniconductors and related electronic components ........................... . 334412-9 80.8 77.4 84.2 85.1 80.5 .6 1.0 2.4 5.6 Measure .. excludillg selected high-technology industrie. . Total industry ......... .. 8J.2 79.7 80.7 SO.7 81.0 .2 -.2 -1.0 -.8 Manufacturing' ...... . 79.8 78.1 79.5 79.0 79.2 .0 -.3 -1.4 -1.0 Stage-a!-process groups Crude ..................... ................ . 86.6 88.0 83.3 89.2 89.3 .1 .4 .0 -1.1 Primary and semifinished .................. .. 82.2 81.4 83.4 81.3 81.3 .0 -.1 -1.0 -.5 Finished .................................. .. 77.7 73.8 75.9 77.0 77.6 -.1 -.6 -1.3 -.7 I. North American Industry Classification System. Not applicable. 2. See table A.3, note 3.
- .- Industrial Production and Capacity Utilization: The 2008 Annual Revision A59 A.~. Annual proportion in industrial production, by market ",roups and indu try groups. 1999-2007 NAICS I I hem code' I 1999 I 2000 I 2001 I 2002 2003 I 2004 I 2005 2006 I 2007 Total industry .. . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 MARKET GROUPS Final products and nonindustrial supplies .. 57.4 57,2 58,7 58.5 57.8 56,6 56,6 56.5 56,1 Consumer goods ....... . . . . . . . . . . . . . . . . . . . 28.1 28,3 29,8 30,8 30,7 29,9 29,6 29.1 29,3 Durable ................................ 8.0 7,8 8.1 8,9 8.7 7.9 7.4 7.0 6.7 Automotive products ............ 3,9 3,7 4,0 4,7 4,6 4,0 3,6 3.3 3,2 Home electronics ... ",."" ... , .. ,4 .4 .4 ,4 ,4 ,4 .3 .3 .3 App~ances. furniture. carpeting .... 1.4 1.4 1.4 1.4 1.4 J.3 J.3 1.2 1.1 Miscellaneous goods, ' , , , , , , , , ... " .... 2.3 2,3 2.3 2,4 2.3 2,2 2,2 2,2 2,1 Nondurable ............. , .. , , , . , 20,1 20.5 21.7 21.9 22,0 22,0 22.2 22,1 22,6 Non·energy ................. 16,6 16,8 17,9 18.0 17,8 17,1 16.5 16,2 16.3 Foods and tobacco .. ",,".' 9,1 9,3 9,9 9,7 9,7 9.4 9,0 8,8 9,0 Clothing " ........ " .. " "" 1.3 1.2 1.1 ,9 .8 .7 ,6 ,6 .5 Chemical products 3,8 3,9 4.4 4,9 4.9 4,8 4,7 4,8 4.7 Paper products '''''''''''''''''''''' 1.9 1.9 2,0 2,0 1.8 1.7 J.7 1.6 1.6 Energy, , , , , , . , . , " , , ' , , ' " ... " . , . , ". 3.5 3,7 3.8 3.9 4,2 4,9 5.7 5.8 6.4 Business equipment ..................... 11.8 11.6 11.2 10,2 9.6 9.4 9.3 9,6 9.4 Transit ..........." ......... , ............. 2.3 2,0 2,0 1.8 1.6 1.6 1.6 1.8 J.7 Information processing , , , " , . ' ... , , , , ." , 4,1 4,1 3.8 3.1 2,9 2,9 2,8 2.8 2,7 Industrial and other " "".,.". 5.4 5,6 5.3 5,3 5,0 4.9 4,9 5,0 5,0 Defense and space equipment , , 1.8 1.5 1.8 1.8 1.8 1.7 1.8 1.7 J.7 Construction supplies, , , , ., , , , , , , , . ' 4,3 4.2 4.3 4,3 4.3 4.3 4,4 4.4 4,2 Business supplies . . . . . . . . . 11.1 11.1 11.1 11.0 11.0 10.8 10,9 10,8 10.6 Materials" " . " " " " " " •. " " , 42,6 42,8 41.3 41.5 42,2 43.4 43.4 43.5 43.9 Non-energy .,,""""" " ................ 33,1 32,1 30,6 30.5 30.0 30.0 29,6 29.6 29.3 Durable ......................... 21.4 20,8 19,5 19.0 18.6 18.5 18,1 18.0 17.6 Consumer parts. , .. ................... 4.3 4,1 3,8 4.0 3.8 3.5 3.3 3.1 2.9 Equipment parts ."" .. "." " , " " " " 8,1 8,1 7,3 6.6 6.5 6.4 6.2 6,1 6.0 Other ".,," " ................. 8,9 8.6 8.4 8.4 8.3 8.6 8.6 8.8 8,6 Nondurable , , ............... 11.7 11.3 11.2 11.5 11.4 11.5 11.5 11.6 11.7 Textile"" " . . . . . . . . . . . . . . . . . 1.0 ,9 .8 .8 ,7 ,7 .7 .6 ,5 Paper ,. , ........... ................. 2,9 2,8 2.8 2.7 2.5 2.4 2.3 2.3 2.2 Chentical ........... ................ 4,5 4.2 4.1 4,5 4,6 5.2 5.4 5.5 5.8 Energy . . . . . . . . . . . . . . . . . . 9,5 10,6 10.6 11.0 12,2 13.3 13,8 13.9 14,6 INDUSTRY GROUPS Manufacturing2"" .. , •. " ., .• " ... , .... 85.5 84,0 83.5 83.2 81.7 SO.5 79.5 79,2 78.7 Manufacturing (NAICS) "" "" " "" 31-33 SO,7 79,2 78.6 78,5 77,2 76.2 75,4 75.4 75,0 Durable manufacturing . , , , , , , , , . , , , 46.6 45,3 44,0 43,2 42,0 40,7 39.6 39,6 38.5 Wood products " ." .. ""''',, ..... ,,' 321 1.5 1.4 1.4 1.5 1.6 1.6 1.5 1.4 1.2 Nonmetallic ntineral products 327 2.3 2.2 2.2 2,2 2,2 2.2 2.3 2.3 2.2 Primary metal .. "".,,,,,,.,.,,., .. ,,. 331 2,8 2.5 2.3 2.3 2.3 2,7 2.6 2,8 2,7 Fabricated metal products . , , , . , 332 5,9 6,0 5.8 5.7 5,5 5,3 5.3 5,5 5,6 Machinery ............................ 333 5,8 5.9 5,5 5,3 5.0 4.9 4,9 5,0 4,9 Computer and electronic products ...... 334 10.5 10.4 9.4 8,1 7.9 7,8 7.4 7.2 6,8 Electrical equipment. appliances. and components ........ " . , , . , , , , , , , 335 2,5 2,5 2.4 2,2 2,0 1.9 1.9 1.9 1.9 Motor vehicles and parts .. , , , . " , , , , , , , 3361-3 7,0 6,6 6.5 7.4 7.2 6.4 5,9 5.5 5.1 Aerospace and miscellaneous transponation equipment 3364-9 3,7 3,2 3.7 3,5 3.3 3,1 3,2 3.3 3.5 Furniture and related products, , . , .. ' . , 337 1.7 1.7 1.7 1.8 1.7 1.6 1.6 1.5 1.4 Miscellaneous .",.",.,.", .. "."., .. 339 2,8 2.9 3,1 3.3 3,3 3.1 3.1 3.1 3.1 Nondurable manufacturing 34,2 33.9 34,6 35.3 35.2 35.5 35,8 35.7 36.5 Food. beverage. IUId tobacco products 311.2 10.4 10.6 11.3 11.3 11.4 10.9 10.5 10.4 10,7 Textile and product ntills ............." . 313,4 1.5 1.4 1.3 1.4 1.3 1.2 1.2 1.0 .9 Apparel and leather. , . , . , .. , .. , , , , ..... 315.6 1.4 J.3 1.2 1.0 .9 ,7 .6 ,6 .6 Paper " ,.,., .............. ,.,""."" 322 3,2 3.1 3,1 3.1 2.9 2,7 2.6 2,6 2.5 Printing and support ... """''',, .. '' 323 2.6 2,6 2.6 2.4 2,2 2.1 2.0 1.9 1.9 Petroleum and coal products ........... 324 1.7 1.8 J.7 1.8 2.1 3,2 4.2 4,5 5,2 Chentical .................... 325 9,5 9,3 9,7 10,7 10,8 11.2 11.3 11.4 11.6 Plastics and rubber products 326 3,8 3.7 3.7 3,8 3,6 3.4 3.3 3.2 3.0 Other manufacturing (non-NAICS) 1133.5111 4,8 4,8 4.8 4,7 4.5 4,3 4,1 3,9 3,7 Mining .. " , . , . , . , , , . , . , , , , , . , , , , , .. " , ... 21 5,9 7,1 7,1 7,2 8.5 9,8 10,7 11.0 11.6 Utilities". " " " , . , . , ..... , . , . , .......... ' , . , 2211,2 8.6 8.9 9.4 9,6 9.8 9,7 9,8 9.7 9,7 Electric .. " . " " .. " ... " " , .............. 2211 7.4 7,6 8,0 8,2 8,2 8.0 8,0 8.1 8.0 Natural gas ....... .................... 2212 1.2 1.4 1.4 1.4 1.6 1.7 1.8 1.6 J.7 NOTE: The IP proportion data are estimates of the industries' relative contri· I. North American Industry Classification System, butions to the overall IP change between the reference year and the following 2, See table A.3. note 3, year, For example. a I percent increase in durable goods manufacturing be- " , Not app~cable, tween 2007 and 2008 would account for a ,385 percent increase in total IP,
A60 Federal Reserve Bulletin 0 August 2008 A.9. Annual produ lion and plice indcxl.!s for elecLed comll1UniC,llil n$ e((uipmelll. 199H-2007 Index, 2002=100 I Year Data networking I Enterprise. and home I TIansmjssion and I Wireless system I Satellites and earth I Other I VOice related' station I I I I I I I I I I I Production Prices Production Prices Production Prices Production Prices Production Prices Production Prices 1998 ........ n.a. 234.4 n.a. 141.3 118.7 189.3 n.3, 167.7 76.7 163.1 83.4 108.4 1999 ........ n.a. 194.4 n.a. 130.5 153.5 169.6 n.3. 146.2 68.8 145.2 86.1 106.3 2000 ..... n.3. 174.1 n.a. 123.7 229.6 149.3 n.3. 131.3 92.7 131.7 110.7 100.4 2001 ... .... 123.6 133.2 n.3. 111.1 202.5 116.5 n.3 . 110.5 86.9 124.4 95.4 100.9 2002 ........ I 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 2003 ........ \13.2 76.6 84.5 94.6 80.7 90.5 118.1 88.5 IOS.1 99.0 98.4 98.6 2004 ........ 124.6 59.9 71.0 87.6 76.5 83.2 151.3 79.3 154.1 83.2 90.6 99.4 2005 ........ 161.5 54.1 63.2 80.9 61.7 77.4 168.9 76.9 150.5 85.5 71.3 100.4 2006 ........ 255.6 51.3 59.7 78.8 69.5 66.5 134.8 64.4 306.1 64.2 67.4 99.8 2007 ....... 287.8 n.n, 56.5 n.3. 76.5 n.3. 127.5 n.3. 391.0 n.a. 77.8 n.a. NOTE: The complete sel of annual prices necessary to compute the annual I. Calegory consislS of lransmission, local loop, and legacy cenlral office price indexes for 2007 are nOI available. The estimates for the quarlerly price equipment. indexes for 2007 (shown in table A.IO) are based on only incomplele data. n.a. NOI available. A.IO. Quarterly produclion amI price indexes for selected communic, lions equipment. I 998:Q t-2008:Q I Year and quarter ProduClion Prices 1998:QI n.n. n.a. n.a. n.a. 101.0 118.6 n.a. n.a. Q2 n.a. n.a. n.a. ll.a. 117.1 118.7 n.a. n.a. Q3 n.a. n.a. n.a. n.a. 122.9 117.1 n.a. n.n. Q4 ................ I n.a. n.a. n.a. n.a. 133.9 117.6 n.a. n.3 . 1999:QI n.a. n.a. n.a, n.3. 131.9 120.2 o.a. n.a. Q2 n.a. n.n. n.a. o.a. 142.9 127.2 o.a. Il.a. Q3 n.a. n.n. n.a. n.a. 166.1 129.2 n.a. n.a. Q4 n.a. n.a. n.a. n.a. 173.1 128.0 n.a. n.a. 2000:QI n.a. n.a. n.a. n.a. 198.7 134.0 n.3. 121.8 Q2 n.a. n.a. o.a. n.a. 232.7 138.0 n.n. 122.6 Q3 n.a. n.a. n.a. n.a. 238.1 140.0 n.a. 123.7 Q4 .. n.a. Il.a. n.a. n.a. 249.3 135.6 n.3. 124.6 200I:QI 150.8 148.0 n.a. n.3. 241.9 115.2 n.a. 124.3 Q2 126.7 137.1 n.a. n.3. 199.8 112.7 n.3. 122.3 Q3 110.0 127.4 n.3. n.a. 218.9 109.5 n.a. 114.6 Q4 107.6 126.9 0.3. n.a. 150.9 106.0 n.a. 110.6 2002:QI 104.5 110.7 115.7 n.a. 132.8 102.3 97.8 109.1 Q2 99.6 107.3 102.1 n.a. 104.7 102.2 100.3 106.2 Q3 98.4 91.6 92.5 n.a. 87.7 98.0 99.0 94.0 Q4 97.7 90.6 91.1 n.a. 75.8 97.6 101.7 90.9 2003:QI 97.2 87.9 91.4 104.3 81.3 94.7 100.4 87.5 Q2 110.4 80.8 84.8 100.7 78.7 91.1 102.6 83.8 Q3 119.8 70.7 89.3 97.9 78.6 89.2 124.6 69.3 Q4 125.2 63.0 73.6 97.2 84.3 91.6 143.0 65.8 2004:QI 139.3 60.5 76.8 97.2 79.2 92.1 149.8 65.9 Q2 119.9 59.6 74.5 95.4 76.3 89.6 147.0 68.7 Q3 123.3 58.2 68.3 90.9 73.6 88.1 148.6 68.6 Q4 116.4 56.4 65.3 89.4 77.2 88.5 158.0 74.1 2005:QI \32.0 53.9 60.1 86.4 71.1 85.2 164.5 77.2 Q2 147.7 53.5 61.8 86.7 63.4 79.3 174.4 74.8 Q3 162.1 53.0 66.8 82.9 58.2 79.2 171.0 70.3 Q4 203.6 51.9 64.7 82.1 54.6 76.4 163.7 66.4 2006:QI 217.2 51.9 62.0 82.1 59.0 75.8 150.3 64.5 Q2 247.6 50.6 61.5 81.1 68.3 74.2 141.1 65.3 Q3 .. 270.0 49.5 58.3 80.5 76.7 75.2 133.2 68.4 Q4 286.8 48.7 57.8 79.9 73.9 73.4 113.3 71.2 2007:QI 281.1 49.4 58.5 80.4 75.3 71.1 116.0 70.9 Q2 287.2 50.1 56.0 78.0 77.8 69.0 112.2 68.7 Q3 288.2 48.9 58.0 77.5 77.6 67.2 129.3 58.3 Q4 294.9 47.6 54.2 76.6 75.5 66.5 150.5 48.7 2008:QI 297.1 D.3. 52.9 n.a. 74.7 n.a. 163.7 n.a. NOTE: Quarterly production and price indexes are nOl available for lwo cal- 2. Index, 2003=100. egories of communications equipmem shown in table A.9: "satelliles aod earth n.a. NOI available. slation" and "other." I. Calegory consislS of lransmission, local loop. and legacy central office equipment.
A61 October 2008 Economic Development Incentives: Research Approaches and Current Views Dan Gorin, of the Board's Division of Consumer and locating a new facility in Kentucky.1 And the incen Community Affairs, prepared this article. tive packages were growing again before long. Al though BMW's 1992 package to locate in South Economic development incentives-state and local Carolina was reportedly just $150 million, Mercedes government efforts to encourage economic devel Benz reportedly received $258 million the next year opment-are one of a limited number of tools local to locate a facility in Alabama.2 policymakers have for stimulating local economies. News accounts of ever-larger incentive packages Some broad measures-investments in infrastructure caught the attention of economists and policy makers (such as transportation), human capital (education, as well as the public. An essay entitled "Congress for example), and social infrastructure (such as recre Should End the Economic War among the States" ational facilities)-may produce significant results appeared in the 1994 Annual Report of the Federal over the long term. Targeted measures crafted to Reserve Bank of Minneapolis.3 A few years later, a attract or retain businesses-usually a tax preference conference on the same topic brought together policy or financial assistance-offer the possibility of a makers, economists, tax experts, economic develop quick payoff. ers, and business-site location consultants from around Public interest in incentives has generally been the country to discuss the matter.4 Many questions muted, except when very generous incentive pack were raised, and research goals were identified, ages, egregious practices, or legal issues have among them the goal of establishing good data with prompted questions about their appropriateness and which to answer the economic questions. effectiveness. Policymakers struggling with practical In the past ten years, case studies, input-output decisions have frequently turned to economists for analyses, and other research techniques have ad guidance: Should incentives be offered? If so, how dressed some of the methodological flaws of earlier large should they be? And how can an incentive incentives studies. The availability of better data on program be designed to increase its effectiveness? both incentives and economic activity has also im Much of the research assessing the effectiveness of proved analyses of incentives research. The work incentives has been inconclusive or unsatisfactory, in described in this article illustrates some of the fresh part because of methodological flaws and inadequate ways that researchers have found to look at the effectiveness of incentives. The focus is not on prov data. ing or disproving the effectiveness of incentives as a Interest in incentives surged in the 1980s and 1990s as a result of very public bidding wars among 1. Jeffrey A. Finkle (1996), "Location Incentives Are Unfair and localities to entice businesses to their communities. In Poorly Justified," pp. 1-2, www.developmentalliance.comldoculpdf/ particular, the dollar amount of incentive packages 43300.pdf. offered to automobile manufacturers looking to locate 2. A delailed case study of the location of automobile assembly plants can be found on the Good Jobs First website at new facilities soared during that period. In 1980, www.goodjobsfirst.orglcorporate_subsidy/ Nissan received an estimated $33 million, or $8,000 automobile3ssembly _plants.cfm. per anticipated job, for locating a new facility in 3. Melvin L. Burstein and Arthur 1. Rolnick (1994), "Congress Should End the Economic War Among the States," Essay in 1994 Tennessee. The amount of subsequent incentive pack Annual Report of the Federal Reserve Bank of Minneapolis, ages handed out to Mazda, Saturn, DiamondStar, and www.minneapolisfed.orglpubslar/arI994.cfm?js=O Toyota, among others, rose over the next few years, 4. The conference, held in Washington, D.C., on May 21-22,1996, was hosted by Minnesota Public Radio's Civic Joumal.ism Initiative. and by 1987, Toyota was receiving an estimated For more information, see www.minneapolisfed.orglpublications_ $150 million, or $50,000 per anticipated job, for paperslstudies/econwar/index.cfm and related links.
A62 Federal Reserve Bulletin 0 October 2008 means of spurring economic development. Rather, the According to NASDA, the state spent $20.45 million intent is to demonstrate that new ways are being used on economic development in fiscal 1997. But this to advance the discussion. amount was simply the budget for the Oklahoma Department of Commerce, the state's lead develop THE CONVENTIONAL WISDOM, ment agency. The state's single largest incentive that TEN YEARS AGO year-worth just more than $1 billion-was a set of sales tax exemptions available to all manufacturers In the 1990s, many academics and policymakers for purchasing machinery, equipment, and goods used expressed skepticism that state and local economic and consumed in manufacturing. An argument could development incentives could induce firms to add be made that these sales tax exemptions were not jobs or invest in a particular locality. At the time, truly incenti ves and, therefore, were appropriately not researchers tended to conclude that incentives were included in the NASDA total because they were marginally effective at best. Such conclusions ap nondiscretionary and fairly common among the states. peared to corroborate the general notion that incen But there are other reasons to view the single NASDA tives in the form of state and local tax breaks are figure as inadequate. The most promoted incentive in ineffecti ve because state and local taxes typically Oklahoma in fiscal 1997-a wage subsidy offered constitute a small portion of a business's overall under the state's Quality Jobs program-cost the state costs. Furthermore, critics argued, if the incentives $2l.l million that year. But again, that amount was increased the amount of income or profit subject to not part of the Department of Commerce's budget. A federal income tax, a considerable portion of the second incentive, a local property tax abatement amount saved through state and local tax relief would costing $14.8 million in fiscal 1997, was a budget likely be offset by higher federal taxes. item at the state level, as the state reimbursed local Much research during the 1980s and 1990s was governments providing the incentive; but this incen based on flawed data or used independent variables tive was also not in the department's budget. A third that did not accurately represent the dollar amount of incentive in fiscal 1997-$13.2 million in tax credits incentives. For example, several studies used the for investment and job creation-was a standard tax number of incentive programs on a state's books as a preference, not an appropriated expenditure. Clearly, proxy for the state's total development effort. But the use of a narrowly focused budget figure as a proxy often this number does not provide a complete pic for the state's financial commitment to its major ture. Many states have on their books incentive incentives, while seemingly logical, is problematic, programs that are dormant, unfunded, or known to be and it is unlikely to result in meaningful conclusions ineffective. And some states treat their incentives as as to the benefits of the incentives. multiple programs, while others provide the same benefits within a single program. THE SEARCH FOR A Other early research on incentives used the budget BEITER RESEARCH DESIGN of a state's lead development agency as a proxy for development efforts. However, that amount is rarely The work of several researchers began to change the an accurate indicator of the amount spent directly on conventional wisdom that business incentives were incentives. For example, development agency funds marginally effective at best, as Fisher and Peters are typically used for other aspects of development, noted in 1997.5 By conducting and identifying studies such as marketing and staff payroll. Development that used more-detailed data and more-refined tech agency funds are also likely to be used for activities niques, Newman and Sullivan compiled evidence of not directly related to business development, such as the effectiveness of incentives.6 Bartik's contribution housing development or the promotion of tourism. to incentives research was twofold: his comprehen Moreover, funding for incentives may not come from sive literature review brought to light a substantial a development agency's budget. If the incentive takes body of work-released up through the early 1990sthe form of a tax preference, an appropriation may not be necessary. And if an appropriation is necessary, the funding for incentives may come from the budget of a 5. Peter S. Fisher and Alan H. Peters (1997). "Tax and Spending Incentives and Enterprise Zones," New England Economic Review different agency, such as education or transportation. (March-April), pp. 109-130, www.bos.frb.org/economic/neer/ Economic development data concerning the state neer1997/neer297f.pdf. of OkJahoma, provided by the National Association 6. Robert J. Newman and Dennis H. Sullivan (1988). "Econometric Analysis of Business Tax. Impacts on Industrial Location: What Do We of State Development Agencies (NASDA), illustrate Know. and How Do We Know It?" JOl/rnal of Urban Economics. the inadequacy of some data collection efforts. vol. 23 (2). pp. 215-234.
Economic Development Incentives: Research Approaches and Current Views A63 that tracked the relationship between incenti ves and Fisher and Peters noted that public interest in state and local development; furthermore, his system economic development incentives tends to focus on atic analysis of such variables as employment, home one-time deals (category 1).10 Much of the research prices, and wages in metropolitan areas illustrated the on incentives, however, has focused on tax-related effect on these variables of economic growth that may issues (categories 4 and 5), in part because identifying result from incentives and other development efforts.7 special provisions in state tax codes, and then calcu lating effective tax burdens, is generally easier than Defining Economic Development Incentives analyzing data for all the negotiated deals within a specific geographic region or for a particular type of Although research on incentives improved through program (assuming that all such data can even be the 1990s, more clarity was needed to ensure that amassed). Yet when a study considers only tax incen studies were based on complete data. At the root of tives offered by a state and ignores local or non tax the problem, as the Oklahoma example shows, was incentives, any conclusions will likely be faulty, as the lack of a comprehensive definition for "economic research has shown that local and nontax incentives development incentives." Fisher and Peters clarified can easily account for more than half the value of an the problem by identifying five categories of incen incentive package. tives:8 The following examples, based on actual state and 1. one-time deals negotiated with individual firms, local incentives, illustrate the need to consider the 2. grants and loans provided under programs that specifics of an incentive package. The first case receive annual state appropriations, involves property taxes, and the second, sales taxes. 3. programs establishing parameters and limits but • In one locality, a firm receives a property tax allowing some degree of local government discre abatement on a building (category 3); in a second tion, locality, a firm automatically qualifies for a similar 4. incentives that function as entitlements, whereby a abatement (category 4); and in a third locality, a firm receives the benefit automatically provided its firm receives reduced rent in a building owned by investment is in an eligible sector and the size of an industrial authority and not on the property tax the investment or number of new jobs created rolls (category 1). The reported value of these exceeds some threshold, and commonly offered incentives may be the same, but 5. code features that apply to all firms, but benefit researchers using different definitions or having some more than others and are often advertised by incomplete information may reach very different economic development agencies as reasons to conclusions about the effectiveness of these prop locate in a state. erty tax incentives. To this list might be added changes to state statutes • One state has a sales tax provision that exempts, at that have the effect of opening markets to firms in all times, all purchases by manufacturers of new particular industries. Examples include statute changes and used machinery and equipment; another state to allow certain industries, such as corporate farming, exempts purchases of only new machinery and to begin or expand operations in a state; changes to equipment; a third state exempts purchases only the apportionment formula for corporate income taxes when a facility is built; and a fourth state limits the (to be discussed later); and relaxation of state usury exemption to certain geographic areas and to only limits.9 those firms that apply for it. Once again, analyses that do not account for the differences among 7. Timothy Bartik (1991), "Who Benefits from State and Local incentive programs across jurisdictions may reach Economic Development Policies?" Upjohn Institute. different conclusions about the effectiveness of 8. Fisher and Peters, "Tax and Spending Incentives and Enterprise those programs. Zones." 9. Delaware and South Dakota, for example, relaxed their usury limits in an effort to induce large banks to locate their credit card IMPROVING INCENTIVES RESEARCH: REFINED operations within state borders-an effort that proved successful, as evidenced by the cluster of large banks with high credit card volumes APPROACHES, BETTER DATA SOURCES located in Delaware and the South Dakota return address on many credit card statements. For more information, see Steve Young (2002), Researchers have taken a number of approaches to "Repealed Usury Law Helped Lure Industry," Argus Leader, March 24; and Diane Ellis (1998), "The Effect of Consumer Interest Rate measuring the effectiveness of incentives. Economet- Deregulation on Credit Card Volumes, Charge-Olfs, and the Personal Bankruptcy Rate," FDIC Bank Trends Series 98-{)S (Washington, D.C.: Federal Deposit Insurance Corporation, March), www.fdic.gov/ 10. Fisher and Peters, "Tax and Spending Incentives and Enterprise bank/analyticallbanklbt_980S.html. Zones."
A64 Federal Reserve Bulletin D October 2008 ric modeling has been a common approach, albeit one Ohio. I3 Limiting her analysis to one state allowed with weaknesses. Misspecification of variables, for Loh to examine mUltiple categories of incentives example, can be a serious problem. Consider the available to businesses. Bartik's case study gauged various property tax incentives in the first of our prior effectiveness by determining whether the presence of examples. A model looking at only tax-based incen an incentive made a particular location a better choice tives will not capture the third type of property tax for General Motors than competing locations. Look incentive described, whereby the building is kept off ing at effectiveness from a different perspective, Loh the property tax rolls altogether. Similarly, a model measured effectiveness in terms of the effect (such as that incorporates only state-level tax incentives may employment growth or increased tax receipts), if any, be incomplete if local incentives constitute a large on local economies. For a variation on Loh's ap portion of an incentive package (as might be the case proach, see the box "The Texas Local Economic in the first type of property tax incentive described Development Sales Taxes," which describes a case earlier). However, when the incentives studied are study focusing on a homogeneous region. carefully identified and the data used are known to accurately represent the total incentive package, Illput-Output Analyses: Examining Linkages econometric modeling can provide a reliable picture Some recent studies employed input-output analyses of the effectiveness of incentives. Models are often to examine how an incentive offered to a single large used in conjunction with other research approaches, firm can ripple through an economy, in turn affecting such as case studies and input-output analyses. In such economic indicators as regional income and addition, incentives studies using all of these ap employment. Alwang, Peterson, and Mills reported proaches may tap national, state, or local data sets. on one such study, by the Virginia Economic Devel Case Studies: Varied Approaches to opment Partnership, and then conducted further analy sis.14 The initial study was conducted in compliance Analyzing Incentives with a Virginia requirement that a return-on Fisher and Peters created a hypothetical manufactur investment analysis be undertaken whenever state ing firm, and then used a case-study approach to look funds are to be used in an incentive package offered to at the effects of the incentives offered by enterprise a single firm. Alwang, Peterson, and Mills explain zones in more than 20 states and 100 cities. I I They that they used Implan computer software to "examine considered the details of the many incentive programs the linkages between the firm in question and its they studied, specifically taking into account the type suppliers, and expenditure patterns of people who and dollar amount of the incentives. This specificity earn incomes from the firm."ls Their further analysis in defining the study's variables is notable. Fisher and is significant because they were able to identify both Peters found that such incentives cut the firm's com the losers (such as firms that compete with the bined state and local taxes, on average and as a business being recruited) and winners (such as suppli percentage of its new investment, by some 20 per ers to the newly relocating firm and purchasers of its cent. Nevertheless, they believed the effect was too output) resulting from the awarding of an incentive. small to affect business-location decisions. Dauffenbach and Warner also used Implan soft Using the actual example of General Motors, Bar ware, in their case to develop a framework from tik looked at several competing incentive packages which to study two of Oklahoma's largest state-level and analyzed the benefit to the automaker (in terms of development incentives: wage subsidies provided its estimated transportation, labor, and tax costs) of under the "Quality Jobs" program and an exemption locating its Saturn plant in Spring Hill, Tennessee.12 from the ad valorem tax.16 They quantified the fiscal This actual case study is useful because it is limited to a specific firm and a finite number of locations. In 13. Eng Seng Loh (1993). "The Effects of Jobs-Targeted Develop another specific state case study, Loh considered the ment Incentive Programs." Growth and Change. vol. 24 (Summer). pp. 365-83. incentives offered by different communities within 14. Jeffrey Alwang. Everett B. Peterson. and Bradford Mills (2001). "Assessing the Impacts of Incentives to Attract New Businesses: A Case Study of the Scrap Recycling Industry" (October 23). Prelimi II. Fisher and Peters. ''Tax and Spending Incentives and Enterprise nary report available at dls.state.va.us/pubs/hjrl57.pdf. Zones." Enterprise zones are areas specially designated for develop· 15. Alwang. Peterson. and MiIJs. "Assessing the Impacts of Incen ment for various reasons. Businesses locating in enterprise zones are tives to Attract New Businesses" p. 36. typically exempt from certain taxes and receive other economic 16. Robert C. Dauffenbach and Larkin Warner (2004). "Oklaho assistance. ma's Ad Valorem Tax Exemptions and the Quality Jobs Act: Analysis 12. Timothy Bartik (1991). "Who Benefits from State and Local of Economic Impacts and Tests for Differential Growth." in Robert Economic Development Policies?" Dauffenbach. Alexander Holmes. Ronald L. Moomaw. Kent W. Olson.
Economic Development Incentives: Research Approaches and Current Views A65 benefits and costs of the two incentives and used the county employment-Edmiston used data on invest results to determine the incentives' effectiveness. For ments announced by firms adding at least 300 jobs at the Quality Jobs program, they calculated a benefit new or existing facilities in Georgia.ls He corrobo cost ratio of 6.60; in other words, each direct dollar of rated the announcement data using state administra incentive spending was associated with $6.60 of tive records. Edmiston found that existing business increased tax revenue. They then examined state expansions had a greater net effect on county employ level employment data and found that industries that ment than did the creation of new locations. This received large shares of Quality Jobs payments grew finding suggests that recruited businesses can crowd much faster than the national average for those indus out local investment, resulting in smaller (though still tries.17 Using the same approach to look at the ad positive) benefits for job growth. valorem tax exemption, Dauffenbach and Warner Lee used a confidential national data set, the Lon concluded that it is a drag on the state budget and gitudinal Research Database (LRD) compiled by the "fares poorly." Census Bureau, which includes information from the In the Oklahoma example, input-output analysis quinquennial Census of Manufacturing. 19 This data allowed Dauffenbach and Warner to estimate the base allowed Lee to look at the effects of the initial state's rate of return on its investment in the two locations and relocations of plants owned by manu development incentive programs. The data generated facturing firms having multiple plants throughout the by such an analysis can also be used to address the United States. Lee concluded that, for the years 1972 "but-for" question: but for the presence of the wage through 1992, plants located in states that imple subsidies provided under the Quality Jobs program mented new incentive programs tended to increase and by the tax exemption, would the employment total employment, capital, and output only slightly gains have occurred? In other words, were these more than plants in other states. incentives a factor in the decision to invest in Okla Greenstone and Moretti drew on another national homa? Although it is a fundamental question in database in order to look at the siting of new, incentives policy, researchers have had a very difficult "million-dollar facilities" throughout the United time answering the but-for question. No one has yet States.20 Using information from Site Selection maga been able to create a research design that randomly zine on "winning" and "runner-up" counties, in com assigns control and treatment groups. Still, Dauffen bination with other data, they were able to measure bach and Warner were able to quantify the economic the consequences of a county winning such a facility. and fiscal effects of growth likely induced by an According to Greenstone and Moretti, winning coun incentive. Making the connection between incentives ties had greater increases than corresponding and growth, though, is still an educated conjecture. runner-up counties in property values, wages, and local government revenues and expenditures in the Data-Driven Analyses: Examining years following a location. They noted that the possi Recently Available Data Sets bility of winning a plant location invariably prompted competitions between jurisdictions as they tried to Many studies glean information from a local, state, or develop more-attractive tax packages for businesses. national data set. These data sets are a relatively new resource; many were unavailable to researchers until New Tools and Resources: Providillg Better the mid-1990s. The included Texas case study lists and More-Comprehensive Ana/ysi local data from cities that did and did not adopt special taxes in order to analyze the effectiveness of The 1996 "War Among the States" conference called the state's economic development sales taxes. In on state governments and other agencies to develop another study not explicitly considering incentives better information on the costs and benefits of ecorather it served as an examination of the effects on 18. Kelly Edmiston (2004), "The Net Effects of Large Plant and Larkin Warner, Slate Policy and Economic Development in Locations and Expansions on County Employment," Journal of Oklahoma: 2004 (Oklahoma City: Oklahoma 21st Century, Inc.), Regiunal Science, vol. 44 (2), pp. 289-319. pp.13-27, www.okstatechamber.comlfile_uploadl0K2lst2004.pdf. 19. Yoonsoo Lee (2004), "Geographic Redistribution of U.S. 17. Dauffenbach and Warner's results are consistent with earlier Manufacturing and the Role of State Development Policy," Working survey work by Gorin suggesting that about half of all jobs in the Paper 04-15 (Cleveland: Federal Reserve Bank of Cleveland, Decem Oklahoma program were induced by the presence of the incentive. See ber), www.clevelandfed.org/Research/Workpaper12004/wP04-15.pdf. Dan Gorin (2000), "State Economic Growth Incentives and the 20. Michael Greenstone and Enrico Moretti (2004), "Bidding for Oklahoma Quality Jobs Program," Oklahoma Policy Studies Review, Industrial Plants: Does Winning a 'Million Dollar Plant' Increase vol. I, (Spring-Summer), pp. 7-12, www.libarts.ucok.eduJopsaJOPSRJ Welfare?" MIT Working Paper Series 04-39, (Cambridge, Mass.: Journal%20Voll-Numberl/page7-12.pdf. Massachusetts Institute of Technology. November).
A66 Federal Reserve Bulletin 0 October 2008 The Texas Local Economic Development Sales Taxes In 1989, the Texas legislature amended existing state law Funds raised through a 4A tax are perhaps the clearest to allow cities meeting certain criteria to adopt a dedi example anywhere of a dedicated pool of funds that policy cated sales tax to fund industrial development projects. 1 makers may use at their discretion to offer incentives. Follow-up legislation in 1991 allowed cities to adopt a Conversely, expenditures of funds raised through 4B taxes sales tax dedicated to quality-of-life improvements. These are more representative of the type of public expenditures two programs-known by their code designations as the for economic development desired by researchers and section 4A tax and the section 4B tax-are commonly policymakers who downplay the effectiveness of direct referred to as the Texas economic development sales business incentives. As of October 2007, of the more than taxes. Cities in counties whose population is less than 1,000 cities in Texas, the 4A tax was in place in 222, and the 500,000, and smaller cities in the six largest Texas 4B tax was in place in 439. Because of the relatively high counties (Bexar, Dallas, EI Paso, Harris, Tan'ant, and rate of participation in the programs, Texas may be an ideal Travis), are eligible to levy the taxes. case study for analyzing the effects of direct (4A) and The taxes may be imposed only if the citizens of a city indirect (4B) economic development incentives. approve their use in a regular election; the taxes stay in Cities adopting one or both of the taxes are required to effect either for the period specified on the ballot or, if no establish a community corporation to administer the funds end date is specified, until they are repealed. Each of the raised. The practical difference between the 4A and 4B two taxes may be authorized in increments of one-eighth taxes can be seen in the primary objectives of the commu of I percent, up to a maximum of 1/2 percent. A city may nity corporations as well as in the distribution of their have the two taxes in force simultaneously. However, the spending (tables I and 2). According to the most recent combined rate of all local sales and use taxes, including state report on these incentives (covering fiscal 2(05), job these special taxes, may not, under Texas law, exceed creation and job retention were the primary objectives in 2 percent. The uses for the two taxes, as defined in the nearly four out of five cities that had enacted a 4A tax, state laws creating them, are as follows: compared with about half of the cities that had enacted a 4B tax. Sports, recreation, and tourism development were • Section 4A. To acquire or pay for land, buildings, much more likely to be the focus of 4B cities. In fiscal equipment, facilities, expenditures, targeted infrastruc 2005, about 24 percent of 4A tax revenues were spent on ture and improvements for purposes related to manufac direct business incentives (such as buildings and equipment turing and industrial development. for businesses), compared with only 7 percent of 4B tax • Section 4B. To undertake projects for quality-of-life revenues. I n addition, almost 60 percent of 4A revenues were improvements that will attract and retain primary employers. Money may be spent on land, buildings, 1. Objectives of economic development reported by equipment, and facilities expenditures and improve adopting cities, by tax adopted, fiscal 2005 ments for tourism, entertainment, recreation, athletic Percent facilities, and parks; affordable housing; and municipal infrastructure. Tax adoplCd Objective I 4A 4B Job creal ion and job relenlion 167 212 I. For information aboullhe Texas Economic Developmenl Sales laxes, I.nfraslruclure projecls .... 101 254 see www.window.Slale.lx.usllaxinfo/laxpubslIx96_302.hlml. Seclion 4A Sporls facilities and recre8lion .... . II 137 and 4B program participalion, by communily, can be found al Ihe Texas Tourism ........................ . 14 125 Complroller of Public AccounlS websile. 31 www.window.Slale.lx.us/ Olher ...................... . 15 40 laXinfo/addil.hlml. Cily and counly sales lax dala used in Ihis analysis came Number of cities . 211 413 from a Freedom of Information requesl 10 Ihal office. New and expanding inveslmenl records were provided by Ihe slale's Business and Induslry Dala NOTE: Respondellls were asked 10 indicale Iheir primary objective for Cenler Ihrough Ihe Texas Office of Ihe Governor, Depanmcnl of Economic economic developmenl bUI were allowed 10 identify more Ihan one Developmenl and Tourism www.governor.slale.lx.uslecodev. primary objeclive. nomic development incentives and to disclose more State tax expenditure reports generally contain information about incentives. Ten years ago, fewer information about budget outlays; some also contain than half of states regularly published detailed reports data specifically on incentives. The 2005-07 Oregon on their tax expenditures; but by 2006, according to tax expenditure report, for example, discusses the the Center on Budget and Policy Priorities, two-thirds state's Strategic Investment Program. Under this of states were regularly preparing such reports, with major incentive program, in place since 1993, firms most of them made available online. may qualify for a IS-year exemption from property
Economic Development Incentives: Research Approaches and Current Views A67 2. Distribution of expenditures of 4A and 4B funds by community development corporations, by type of expense and type of corporation, fiscal year 2005 A II corporations Section 4A corporations Section 4B corporations Type of expense (588 cities) (208 cities) (380 cities) Dollars I Percent Dollars I Percent Dollars I Percent Direct business incentives ...... 80,397,570 14.6 59,118.504 24.4 21.279.066 6.9 Marketing and promotion ...... 10,054.118 1.8 6,107,685 2.5 3,946,433 1.3 Debt service ................... 112.558,737 20.4 38,292.808 15.8 74.265,929 24.1 Capital costs ................... 221.698,352 40.2 97.206.877 40.1 124,491.475 40.4 Personnel ...................... 25,879,928 4.7 12.725,439 5.2 13.154.489 4.3 Administration ................. 25.727.296 4.7 13.788,975 5.7 11.938,321 3.9 Atl'ordable housing ............. 2,429.992 .4 3,260 .0 2,426,732 .8 Payments to taxing units ....... 31,264,632 5.7 4,520,531 1.9 26,744,101 8.7 Job training ............... ... 1,771,460 .3 393,192 .2 1,378,268 .4 Other ... , ........... ..... .. . 39,106,266 7.1 10.384.887 4.3 28.721,379 9.3 Total .......................... 550,888,35 I )00.0 242,542,158 100.0 308,346,193 100.0 NOTE: Components may not sum to to\.1ls because of rounding. spent on marketing and promotion, debt service, and ment incentive. Among 4A cities, the prevalence of new capital costs. Much of the spending on debt service and firm announcements was most pronounced in the cities that capital costs is likely being used on land, the single most had populations between 5,000 and 30,000. Specifically, the prevalent capital asset reported by all 4A and 4B cities. 86 4A cities with between 5,000 and 30,000 residents Ultimately, analyzing program data (data on the pres accounted for 39.8 percent of all cities of this size and ence, duration, and size of the taxes) in combination with 54.2 percent of new-firm announcements. Among the cities general economic data (data on announced business with more than 30,000 residents, the 4A cities' shares were investments and growth in the tax base) provides informa 30.5 percent of the total number of cities and 34.7 percent of tion on the effects of the taxes. A starting point for such an new-firm announcements. analysis would be to compare the growth of gross busi ness sales in adopting and non-adopting cities. The data 3. Average annual growth of gross sales in cities with show that the average annual rate of growth of gross sales and without 4A and 48 taxes, 1992 to 2004 was higher in cities that had 4A taxes in at least half the years from 1992 to 2004 than in those that did not Average T value for annual (table 3). The same relationship held for 48 cities and City status growth difference Number of means non-48 cities and for cities having both taxes and those (percent) having neither; in all three data sets, the differences were 4A cities statistically signi fkant. With tax during period .......•. 6.51 2.11 167 Without tax during period ... 5.18 789 Another way of looking at program performance is to compare the number of announced investments by new 4B cities With tax during period ..... 6.87 4.01 255 and expanding businesses in cities that had and had not Without tax during period .... 4.74 625 adopted the section 4A tax. Table 4 shows that by 2003 4A and 4B cities some 20 percent of eligible Texas cities had adopted the With both taxes during period .. 8.80 2.88 48 4A tax.2 Those 4A cities accounted for more than 40 per With neither lax during period .. 4.58 503 cent of the announcements by new businesses-the firms All Texas cities .................. 5.48 1.012 most likely to be affected by the presence of a develop- NOTE: For cities without the tax(es), includes cities that did not have the tax during the entire period 1992-2004. For cities with the tax(es), in 2. Developing an incentive takes some time. For this reason. cities in cludes only those cities that had the tax(es) for at least six years during this analysis were accorded 4A status in the third year after they voted to the period 1992-2004. Excludes cities having either no population or no enact the tax. reponed business sales in either 1992 or 2004. taxes for new investments having an assessed value community service fees paid in lieu of property taxes, of more than $100 million. This exemption has been and unknown additional jobs, payroll, and spin-off used by six large semjconductor-fabrication establish effects. These figures provide policymakers with hard ments. The tradeoff for the state for the fiscal year data in evaluating the incentive's efficacy. 2005-D7 biennium was $159 million in lost property Other groups are also making infonnation on incen tax revenue versus a gain of $5.2 billion in continuing tives more widely available: investment, some $16 million in additional property tax on related non-exempt investment, $24 million in • The Council for Community and Economic Re-
A68 Federal Reserve Bulletin 0 October 2008 4. Distribution of announcements of large business investments in cities eligible to adopt the 4A tax, 1989 to 2003 Eligible cities Announcemenls of new inveslmenl Announcemenls of expansions Cily populalion and slatus I I Number II Percenl of lOla I Number Percenl Number Percenl Under 1,000 Wilh laX ... .......•.....••... 27 5.7 2 40.0 6 54.5 WithoUl lax ..........•.... . •.... 445 94.3 3 60.0 5 45.5 Total ............ ................. . 472 100.0 5 100.0 11 100.0 1,000 10 4,999 With lax ........................ . 107 24.5 II 29.7 14 40.0 Withoul lax ................... . 330 75.5 26 70.3 21 60.0 Total .............................. . 437 100.0 37 100.0 35 100.0 5,000 10 14.999 With 4A laX ........••......•..... 65 40.9 57 60.0 40 48.8 Withoul laX ..••............ 94 59.1 38 40.0 42 51.2 Total .............................. . 159 100.0 95 100.0 82 100.0 15,000 lO 29.999 With laX ................••.... 21 36.8 47 48.5 41 34.7 Withoul lax .. . ................. . 36 63.2 50 51.5 77 65.3 Total ................. , ......... . 57 100.0 97 100.0 118 100.0 30,000 and above With laX ..................... .. 18 30.5 126 34.7 116 29.8 WithoUl lax ..................... . 41 69.5 237 65.3 273 70.2 Total ............... .............. . 59 100.0 363 100.0 389 100.0 All eligible cities Wilh lax ............. .. 238 20.1 243 40.7 217 34.2 Withoul lax ........ .. .... . 946 79.9 354 59.3 418 65.8 Percenl in 4A cities ... ... . ...... .. 1.184 100.0 597 100.0 635 100.0 NOTE: For this lable, cilies were considered 10 have a 4A lax three years afler enacting the laX. Large inveslmenls are inveslmenls worth more lhan $100,000 or adding more than 100 jObs. The analysis of the effects of the Texas economic measure results. What other data, such as data on employ development sales taxes is extremely preliminary, and ment growth or property tax revenues. could be used as many questions remain unanswered. For example, what proxies for the effects of the taxes? And finally, if further other factors (such as the presence of other incentives) studies confirm that the Texas economic development sales could influence the finding that incentives made possible taxes are effective tools for stimulating local economies, by the special sales taxes are increasing business invest can the relative effect of 4A and 48 spending in each major ment? Furthermore, growth of gross sales and announce category-marketing and promotion, direct business incen ments of business investment are not the only ways to tives, or capital costs-he determined? search (C2ER, formerly ACCRA) maintains a direc improve researchers' ability to examine the effects tory of state incentives that contains more than of site-specific incentives. 1,500 records on distinct programs, many with • An increasing number of jurisdictions make avail contact information. Although this data set does not able to the public tax data on real estate parcels. currently contain measures of the effects of incen These databases provide such information as the tive programs, the descriptions, some including market value of land and equipment-information citations of enabling legislation, are quite detailed. that helps researchers examine business activity Policymakers can use the directory to compare related to incentives. incentive programs across states. Good Jobs First (GJF), a national policy resource • The Census Bureau's Local Employment Dynam center promoting corporate and government ac ics database contains longitudinal data, by indus countability in economic development, has been try, on the formation, growth, and decline of es instrumental in making incentive programs more tablishments, as well as employee hirings and transparent to the public. Spurred at least by lobby separations. ing by GJF state affiliates, a dozen states now • The Census Bureau's American Community Survey disclose information about incentives provided to (a new nationwide survey that will be an element of specific companies. The GJF website tracks legisla future censuses) will allow researchers to look at tion relating to disclosure laws and offers model areas as small in size as a census tract and thereby text for state and local governments. GJF also
Economic Development Incentives: Research Approaches and Current Views A69 publishes reports on accountable development, that are simply a waste of money the other 90 percent."22 is, development programs that are transparent and They calculated that each incentive-induced job in an include standards for evaluating the effectiveness of enterprise zone had a cost of some $42,000 over 20 incentives. years, and argued that even though the incentives did create jobs, the cost threw doubt on the incentives' Current Thinking 011 In entives effectiveness. Of course, this conclusion is based on a "consensus" elasticity of -0.3. If the actual elasticity The use of refined approaches and better data sets has were twice as large (-0.6), the success rate would be improved researchers' ability to evaluate the effec doubled, meaning that the incentives would generate tiveness of specific incentive programs. But funda 20 percent of the new jobs in the enterprise zones and mental concerns remain, and some researchers have could be revenue enhancing (under the reasonable begun to write off economic development incentives assumption that the incentive-induced jobs generate as ineffective or inefficient for a host of reasons. $21,000 in tax revenue over 20 years, or slightly more Several arguments underlie their conclusions: than $1,000 a year). Is it possible to design an incentive that is twice as • The magnitude of any economic development incen successful as the across-the-board enterprise-zone tax tive is generally too small to have a more-than cuts Fisher and Peters analyzed? Proponents argue marginal influence on the behavior of the typical that incentives can be made more effective by target new, relocating, or expanding firm. As a result, ing them to the needs of a particular region or set of public resources flow to firms that do not produce firms rather than applying them broadly to a large any economic benefits for the area. region or a wide range of businesses. One aspect of • Incentives are distortionary, that is, they misallocate targeting is designing an incentive in such a way as to private resources by leading firms to move to or exclude from the program those firms that would expand in suboptimal places. invest in the region even if they did not receive the • Incentives crowd out government spending on pub incentive. If a large enough number of such firms can lic goods. be excluded, the effectiveness of that incentive can be • The provision of incentives is a zero-sum game: improved. A second aspect of targeting is specifying gains in anyone location will be offset by losses in qualification requirements so as to reduce the possi other locations. bility of extending the incentive to firms that are not These arguments are not without their shortcom likely to change their behavior even if they do receive ings, as the following discussion demonstrates. it. Dauffenbach and Warner and Gorin studied an incentive program with such a qualification require "Incentives Are Too Small to Matter" ment: recipients of the wage subsidy provided under Oklahoma's Quality Jobs program were required to Fisher and Peters put forward the "too small to create at least 100 new jobs, making the incentive matter" argument in their 2004 paper "The Failures of more restrictive than other incentive programs in the Economic Development Incentives."21 In their analy state.23 Both sets of researchers concluded that the sis, they began by assuming that (1) an incentive that targeted program was as much as 50 percent effective, reduces a firm's state and local taxes will have a that is, for every ten jobs created, five were induced statistically significant effect on that firm's economic by the subsidy. While the conclusions were not the activity and (2) this effect is represented by an statistically significant result of rigorously designed elasticity of -0.3 (the "consensus" elasticity put for studies, the findings do merit consideration-and ward by Bartik), meaning that a 10 percent tax cut for further study. businesses will produce a 3 percent increase in invest Although targeted incentives-such as those pro ment or jobs by firms eligible for the tax cut. Apply vided under Oklahoma's Quality Jobs program-may ing this elasticity ratio to their research, Fisher and be more effective, targeting does raise the "but-for" Peters concluded that the incentives they analyzed question, as well as questions about fairness. To be were responsible for only about one in ten new jobs efficient as well as effective, incentives must be added in the enterprise zones: "Thus the best case is that incentives work about 10 percent of the time, and 22. Fisher and Peters, "The Failures of Economic Development 21. Peter Fisher and Alan Peters (2004), "The Failures of Economic Incentives," p. 32. Development Incentives," Journal of the American Planning Associa· 23. Dautfenbach and Warner (2004), "Oklahoma's Ad Valorem Tax tion, vol. 70, pp. 27-38 (Winter), http://locaJ.law.umn.eduJuploads/ Exemptions and the Quality Jobs Act"; and Gorin, "State Economic images/22221PetersFisherFailureofEconomicIncentives.pdf. Growth Incentives and the Oklahoma Quality Jobs Program."
A 70 Federal Reserve Bulletin 0 October 2008 Overcoming State-Tax-Related Market Distortions by Providing Local Incentives Distortions Related to Corporate Income Tax because a corporation has so little activity in a state to Apportionment Formulas which a sale is allocated. In such case, a "nexus" does not exist and. therefore, the state does not have the authority Firms that produce and sell goods or services in more to tax the corporation. Some states have enacted a "throw than one state generally are liable, in each of those states, back rule," under which profits from out-of-state sales for taxes on some portion of their corporate profits. Many profits that are not taxed by other states-are re-allocated to states determine the proportion of a firm's profits subject the enacting state. to state taxation on the basis of three equally weighted Such tax code differences among states play into deci factors: the percentage of the firm's (I) property located sions by businesses planning new facilities and operations. in the state, (2) sales made to residents of the state, and Suppose, for example, that a firm planning to build two (3) payroll paid to residents of the state. Uniform applica identical facilities tries to decide whether to locate both tion of this formula across the states would result in the facilities in state A, both in state B, or one facility in each states, collectively, taxing all of a firm's profit exactly state. Assume that the firm knows that it will sell 5 percent once, and only once. Some states, however, emphasize of its output in each state and 90 percent in the rest of the the sales factor in their formula by making it twice as country, and that both states tax corporate income at important as the other two factors, or double-weighting it. 6 percent of profits. State A will double-weight sales, while And a few states take the so-called single-sales-factor state B weights sales at 100 percent. State B does not have a approach, basing the proportion of profits subject to state throwback rule. Table I shows the firm's potential tax taxation solely on the percentage of sales in the state. liability under several scenarios, assuming annual profits of Emphasizing the sales factor may increase a state's $100 million. attractiveness as a place for corporate expansion, but such Locating both facilities in state B would save either an approach results in market distortions compared with $5.7 million or $2.85 million more than locating both in situations where the once-standard three-factor approach state A, depending upon whether state A has a throwback are employed. rule. Locating one facility in each state would result in a tax Emphasis on the sales factor magnifies the problem of liability either 20 or 5.5 times higher in state A than in state "nowhere income"-income that ends up not being taxed B. Thus, the firm might locate in state B-regardless of the I. State tax liability for a hypothetical firm, under different scenarios Dollars except as noted Finn's tax liability Scenario Comment To state A I To state B Both facilities in state A With throwback rule ... . ......•.......... 6,()()(),()()() o All profits revert to state A Without throwback rule .................•. 3,150,()()() o 52.5% of profits are assigned to state; the remainder are unassigned Both facilities in state B ............. . o 300,()()() 5% of profits are assigned to state B; the remainder are unassigned One facility in each state State A with throwback rule ..... 3.000,000 15Q,()()() 50% of profits revert back to state A Neither state with throwback rule .. 825,()()() 150,()()() State A accepts 27.5% of its profit: state B. 5% carefully targeted to exclude firms whose behavior offer different incentives to different firms)? Or would will not be affected by the presence of the incentive. the practice of targeting incentives be viewed as Can governments differentiate firms whose decisions inequitable? Gorin looked at both matters in connec about growth are likely to be affected by incentives tion with the Oklahoma Quality Jobs program. In a (that is, businesses that would not locate or expand in survey of participating firms, he found that the incen a region "but for" the incentive) from firms whose tive was nearly twice as important in securing the decisions do not depend on inducements? And would location or expansion of firms planning to add at least governments be willing to run the political risk of 100 new jobs as it was in securing the location or offering incentives to some firms but not others (or to expansion of firms expecting to add fewer than 100
Economic Development Incentives: Research Approaches and Current Views A 71 difference in its operating costs in that state relative to its 2. Property tax liability for a hypothetical firm, under costs in state A-resulting in an inefficient allocation of different scenarios resources. Dollars except where noted State A could, to make itself a more attractive location, adopt the same apportionment formula and rules as state Inventory Effective not eligible B. a strategy that could allow the firm to allocate its property Property tax Inventory on hand for freeport tax rate liability resources more efficiently; however, such a change could exemption (percent) (percent) radically affect many additional firms in state A. Alterna tively, state A might choose to use targeted incentives to Oklahoma Im:ation 100,000.000 ..... 10 1.10 110,000 overcome the distortions resulting from these differences in state tax code structures. Texas location I 100,000,000 ............... 90 2.85 2,565.000 Distortions Resulting from Application of the Freeport Exemption Suppose that a firm planning to build a warehouse to serve the Dallas area market is trying to decide whether to locate The tax codes of most states include a "freeport exemp in Oklahoma or Texas. It will import its entire product from tion," which exempts from inventory tax or property tax outside both states and will selJ 10 percent of the product in all property that is in the state for the purpose of being Oklahoma and 90 percent in Texas. The effective property assembled into other products (raw materials. for ex tax rate is 1.1 percent in Oklahoma and 2.85 percent in ample) or for distribution (such as finished goods), pro Texas.2 Property tax liability on inventory is calculated as: vided that the property comes into the state and leaves the state within a short period (typically three or nine Inventory on hand x Share of inventory not eligible months). In practical terms, the exemption means that for freeport exemption x Effective property tax rate. inventory in warehouses located in a state also serving as Table 2 shows that, with an average inventory valued at the "point of sale" generally is subject to property taxes. $100 million, the firm would save almost $2.5 million Thus, the freepOit exemption can distort firms' decision annually in taxes by locating in Oklahoma-possibly more making by creating a preference to locate a warehouse or than it could save in shipping costs by locating the ware distribution center some distance from the intended mar house in the Dallas area, close to its major market.3 Should ket, specifically, in a location across a state border. The a community in the Dallas area offer the firm an incentive results of such a distortion can be seen in the proliferation perhaps a partial property tax abatement-to locate closer of warehouses and distribution centers in Oklahoma, just to Dallas, the incentive could well overcome the misalloca north of the Oklahoma-Texas border, to serve markets tion of resources resulting from application of the freeport around Dallas. exemption. I. Michael Mazerov notes that at least eleven states estimated revenue loss attributable to adopting a sales-only formula. This loss of corporate 2. The Oklahoma rate in this example is the average for Ardmore and Marietta, the two largest Oklahoma communities on Interstate 35. just north income tax revenue was estimated to be above $100 million in California. of the Oklahoma-Texas border (data from the Oklahoma Department of Massachusetts. and New York. See Michael Mazerov (2005), "The 'Single Sales Factor' Formula for State Corporate Taxes: A Boon to Economic Commerce community profiles). The Texas rale is the average of five communities: Denton and Gainesville (two cities on Interstate 35 just south Development or a Costly Giveaway?" Center on Budget and Policy of the Oklahoma-Texas border): Dallas: and two Dallas suburbs, Plano and Priorities report. rev. September I, www.cbpp.orgl3-27-0Isfp.htm. Smaller Carrohon (data from community websites). businesses that do not benefit from the change to a sales-only fonnula (because all of their sales are in-state) might even fare worse if their taxes 3. The estimated annual property tax in Texas would be $100,000,000 x 90% x 2.85%, or $2.565,000. compared with $100.000.000 x 10% x 1.1%. are raised to compensate for the state tax revenue lost because of the or $110.000 in Oklahoma. change. jobs.24 This finding suggests that by specifying a proposals that would have weakened the targeting by readily identifiable criterion-number of new jobs to reducing the threshold for program participation from be added-the state was able to effectively limit 100 new jobs to a much lower number. participation in the incentive program. In other words, the survey data suggest that the state should be able to "Incentives Resulf ill Misallocatioll oj target the incentive. The question of political will was Private Resources" a different matter. Gorin noted that political consider ations prompted the issuance of numerous regulatory Economic development incentives are intended to induce capital investment in a jurisdiction in which such investment might not otherwise take place. 24. Gorin, "State Economic Growth Incentives and the Oklahoma Quality Jobs Program." Opponents of incentives argue that such inducements
A 72 Federal Reserve Bulletin D October 2008 result in the misallocation of private resources be resulting from a more robust economy) can make cause incentives cause capital to locate in a subopti spending on incentives as appropriate for a govern mal location, one in which the market would not ment as spending on traditional public goods. naturally place the investment. Opponents further Bartik recommends that governments focus on argue that this incenti ve-induced distortion has a productivity-enhancing incentives-such as job train negative effect on other firms in the same jurisdiction ing and helping resident entrepreneurs prepare busi (such as higher costs for purchased inputs, as dis ness plans-so that benefits might last longer.28 Eco cussed by Alwang, Peterson, and Mills 25). nomic development initiatives can also be used to However, not all incentives distort the allocation accomplish public objectives, and even save on costs, of private resources. In fact, they can be used to without explicitly spending public dollars. Maine's offset distortions resulting from differences in tax Progressive Alliance for Careers and Training pro bases across jurisdictions. Some jurisdictions may gram, for instance-a well-regarded effort targeted at rely primarily on personal income as a basis for building up small manufacturing, health care, and taxation, for example, while others may rely on information technology industries in economically personal property or retail sales. Two examples (see depressed areas of the state-tied financial assistance the box "Overcoming State-Tax-Related Market Dis for participating firms to their hiring of newly trained tortions by Providing Local Incentives") illustrate and dislocated workers. Other incentives that have a how variations in regional tax structures can result public purpose include the zoning incentives offered in the misallocation of resources and how such by some jurisdictions in the Washington, D.C. metro distortions might be overcome through carefully politan area. These incentives gi ve developers the designed incentives. These examples, representing right to build extra units of residential housing on actual situations faced by firms and jurisdictions fixed parcels of land if the developer sets aside a (though the numbers used are hypothetical), suggest certain percentage of the units for affordable housing. that more research is needed to determine the extent Contrary to the criticism that incentives necessarily to which incentives actually distort the allocation of crowd out the spending of limited public resources private resources. for public purposes, these examples show that incen tives can induce the private sector to allocate re "Incentives Given to Private Entities Crowd sources for a public purpose. alit Public Spending" "Incefllil es Are a Zero-Sum Proposition 0' Some critics argue that spending on incentives crowds out spending on public goods and services, such as Critics of incentives often invoke the "zero-sum" education and transportation. Burstein and Rolnick, argument. asserting that one locality's gain in jobs or for example, write that "[ w ]hen competition takes the other benefits is another locality's loss. Supporters form of preferential treatment for specific businesses, counter that even if incentives simply move jobs from it misallocates private resources and causes state and one place to another and spur no additional economic local governments to provide too few public goods."26 activity, they can still be beneficial overall. How is it Fisher and Peters have echoed this sentiment, and possible that the same business investment can raise proposed that economic development incentives be overall social welfare more in one place than another? discontinued in favor of spending on infrastructure Such a situation can arise if one community values and education.27 However, quantifying the effects of the jobs and investment more than another. spending on infrastructure and education may be just Communities' respective valuations of an oppor as difficult as quantifying the effects of spending on tunity for a new or expanded business can differ for development incentives. And the presence of exter a variety of reasons: economic objectives (such as nalities associated with firm location (such as lower higher employment rates and improved workforce social safety net costs and higher property values skills), community goals (such as growth), and views regarding externalities (for example, town A might be more inclined to have a prison or casino than 25. Alwang. Peterson. and Mills. "Assessing the Impacts of Incen town B, and city B might be more willing to accept tives to Anract New Businesses." additional noise or other adverse side effects than 26. Melvin L. Burstein and Arthur 1. Rolnick (1996). "Congress city A). One measure of this differing valuation or Should End the Economic War for Sports and Other Businesses" Federal Reserve Bank of Minneapolis. fedgazelle (January). www.minneapolisfed.org/pubs/fedgazJ96-0 I lop in i on.c fm. 27. Fisher and Peters. "Tax and Spending Incentives and Enterprise 28. Bartik. "Who Benefits from State and Local Economic Devel Zones." opment Policies?"
Economic Development Incentives: Research Approaches and Current Views A7 3 intensity of preference is willingness to pay, which and community needs and public concerns, but incen has as its proxy the size of the incentive package tives will undoubtedly remain a tool used by policy being offered by agents for a community. In some makers to stimulate local and state economic devel cases, these agents may act, at least in part, on their opment. Good public policy requires that the details own preferences or perceptions about community of incentive packages be disclosed and that the effec wishes. In other cases, community preferences are tiveness of incentives be measured. Policymakers can affirmed explicitly through the democratic process then be held accountable for their decisions on the when the public has the chance to vote on general basis of evidence rather than politics. New databases or specific incentive packages. Community prefer allowing more-accurate analysis are becoming avail ence for a project may even be confirmed or dis able, and new data sources are beginning to make proved after the fact by citizen response to employ public the details of incentive packages. The research ment opportunities. described in this article shows the ways in which data and methods have improved over the past ten years. Furthermore, the studies suggest that incentives can THE DISCU SION GOING FORWARD be effective in certain situations, and also buttress the The composition of economic development incen case for further research that makes use of the new tives may evolve over time in response to business data and investigative tools. 0
A75 October 2008 Recent Payment Trends in the United States Geoffrey R. Gerdes, of the Board's Division of number of debit card payments of relatively low Reserve Bank Operations and Payment Systems, pre value (on average, $39). Consumers' checks are also pared this article, with assistance from Kathy C. increasingly being "converted" into electronic pay Wang. ments made via the automated clearinghouse (ACH) system.3 In 2006, about 8 percent of all checks Survey data collected for the Federal Reserve in 2007 written were converted to ACH payments, compared show a continuation of significant changes in the way with fewer than 1 percent in 2003. consumers and businesses make payments. Data pre The interbank check-clearing system itself is also viously published by the Federal Reserve show that in rapidly becoming more electronic, as original paper 2003 the number of electronic payments in the United checks are increasingly being "truncated" and re States (made mostly through debit and credit card placed with electronic images during the check networks and the automated clearinghouse system) clearing process.4 The apparent catalyst for the dra exceeded the number of check payments for the first matic change in check clearing was passage of the time. t The recent data indicate that by 2006 the Check Clearing for the 21st Century Act (Check 21). number of electronic payments was more than twice Signed into law in October 2003 and taking effect in the number of check payments, or about two-thirds of October 2004, Check 21 allows a collecting bank to all noncash payments (table 1, chart I). The value of present a legally equivalent paper copy of an original electronic payments has also grown substantially, but check-called a "substitute check"-if the paying in 2006 they still accounted for less than half the bank requires a check to be presented for payment in value of noncash payments (45 percent).2 paper form.5 In early 2007, an estimated 57 percent of The use of checks has been declining since the all interbank checks in the United States were pre mid-1990s, generally because check payments-and sented in original paper form and about 43 percent most likely some cash payments-are being replaced were truncated and ultimately presented to the paying by payments made with electronic instruments. The bank either electronically or as a substitute check. Of latest data show a continuation of this trend. Consum the portion that were truncated, 66 percent were ers in particular are paying electronically much more presented electronically. The number of checks pre often than in the past, with most of the increase sented electronically in 2007 was approximately three between 2003 and 2006 due to a rapid rise in the times the number presented electronically just one year earlier. More recent data on the portion of NOTE: Darrel W. Parke and May X. Liu, of the Board's Division of interbank checks presented by the Federal Reserve Research and Statistics, provided valuable assistance with survey Banks indicate that dramatic changes have continued design, sampling, and production of the statistical estimates. since the 2007 surveys. Data for June 2008, for I. Previous reports include Geoffrey R. Gerdes, Jack K. Walton II, May X. Liu, and Darrel W. Parke (2005), "Trends in the Use of example, indicate that about 53 percent of checks Payment Instruments in the United States," Federal Reserve BIII/etin, vol. 91 (Spring), pp. 180--20 I, www.federalreserve.gov/pubslbulletinJ 2005/spring()5_payment.pdf; and Geoffrey R. Gerdes and Jack K. 3. Most check conversions take place at "lockboxes" to which bill Walton II (2002), "The Use of Checks and Other Noncash Payment payments are mailed; a small proportion take place at retail establish Instruments in the United States," Federal Reserve BIII/etin, vol. 88 ments when checks are tendered at the point of sale. Consumers whose (August), pp. 360--74, www.federalreserve.gov/pubslbulietinJ2002/ checks are going to be converted are permitted to "opt out." Under the 0802_2nd.pdf. rules of the National Automated Clearinghouse Association (NACHA), 2. Payments transmitted over large-value funds transfer systems corporate and business-format checks are not eligible for conversion to (such as Fedwire, operated by the Federal Reserve, and the Clearing ACH payments. House Interbank Payments System, or CHIPS, operated by the Clear 4. Interbank checks are checks that pass between depository insti ing House Payments Company), sometimes called wholesale pay tutions. ments, are outside the scope of this article. These systems are used 5. Before Check 21, paying banks' requirement that the original primarily for large monetary and financial transactions, such as check be presented was a major barrier to the widespread use of overnight loans between depository institutions. Including such trans electronic check-clearing technology. The option of providing a actions in the calculations reported in this article would not meaning substitute check gives depository institutions and their agents the fully affect the total number of payments but would dramatically freedom to use electronic check-processing methods for most or all of increase the value. An unknown number of transactions of other types a check's journey to the paying bank, as the substitute check is needed are made over these systems by consumers and businesses. only at the end of the process if the paying bank requires paper.
A 76 Federal Reserve Bulletin D October 2008 I. N nea h payments in the UniLed Stmes, by Iype of payment, 20m and 2006 Value Number Type of payment I Nominal Constant 2006 dollars I I I Billions of Percent Trillions of Percent Average, in Trillions of Percent I Average, payments of total dollars of total dollars dollars of total in dollars 2003 Check' ., .................... .. 37.3 45.S 41.1 60.9 1,103 45.1 60.9 1,209 Electronic ................... .. 44.1 54.2 26.5 39.1 599 29.0 39.1 656 Debit card ................. . 15.6 19.2 ,6 .9 40 .7 .9 44 Signature ................ . 10.3 12.6 .4 .6 42 .5 .6 46 PIN ., .. , .............. .. 5.3 6.6 .2 .3 38 .2 .3 42 Credit card ................ . 19,0 23.3 1.7 2.5 89 1.9 2.5 98 General-pu!]l!lse' .. , ..... . 15.2 18.7 1.4 2.1 93 1.5 2.1 102 Private-label' .,., .. , ... , .. 3.8 4.6 .3 .4 76 .3 .4 83 ACH4 ............. .. 8,8 10.7 24,1 35.7 2.754 26.4 35.7 3,017 Retail ........... , 7.3 9.0 S.I 12.0 l,t06 8.9 12.0 1.211 CCD ................... .. 1.4 1.7 16.0 23.7 11,272 17.5 23.7 t2,348 EBT' ..................... . ,8 1.0 • • 26 • • 29 Total noncash payments " " .. 81.4 100.0 67.6 100.0 830 74.1 100.0 909 MEMO Total checks written6 37,6 46.2 41.2 61.0 1,095 45,1 61.0 1,200 Checks converted to ACH .,. .3 .4 .1 .I 187 .1 .1 205 2006 Check' ........ ............ , .. 30.5 32,7 41.6 54.9 1.363 41.6 54.9 1,363 Electronic ... , ............ , .. ,. 62,8 67.3 34.2 45.1 544 34.2 45.1 544 Debit card ................ .. 25.3 27.1 1.0 1.3 39 1.0 1.3 39 Signature,.,., ...... ,., .. , 16.0 17.1 ,6 .8 40 .6 .8 40 PIN ................ , .... ' 9.4 10.0 .3 .5 37 .3 .5 37 Credit card .......... , ..... . 21.7 23.3 2.1 2.8 98 2.1 2.8 98 General-pu!]l!lse1 .. ,.,." . 19.0 20,3 1.9 2.5 99 1.9 2.5 99 Private-label' .... ,., .... ,. 2,S 3.0 .3 .3 92 .3 .3 92 ACH4 .................... .. 14,6 15.7 31.0 40.9 2,121 31.0 40.9 2,121 Retail ............... , ... ' 12.6 13,5 12.1 16.0 959 12.1 16.0 959 CCD ................... . 2,0 2.2 18.9 25.0 9.384 18,9 25.0 9,384 EBT' .................... .. J.I 1.2 • • 27 • • 27 Total noncash payments ,., .. 933 1000 758 1000 812 758 1000 812 MEMO Total checks written" 33.1 35.5 42.3 55.8 1.277 42.3 55.8 1,277 Checks convened to ACH .. 2.6 2.8 .7 .9 267 .7 .9 267 Value Number Nominal Constant 2006 dollars Change Annual Change Annual Change Change Annual Change over period rate of over period rate of in average over period rate of in average (billions of change (trillions of change over period (trillions of change over period payments) (percent)7 dollars) (percent)7 (dollars) dollars) (percent)' (dollars) Change. 2003 10 2006 Check .............. . -6.8 -6.5 .5 .4 259 -3,5 -2,6 154 Electronic .......... . 18.6 12,5 7.7 S.9 -55 5.2 5.6 -112 Debit card ................ . 9.7 17.5 ,4 16.0 -2 ,3 12,6 -5 Signature ............. . 5,7 15.8 .2 14.3 -2 ,2 10,9 -6 PIN .................... . 4.0 20,6 .1 19.5 -I .1 15.9 -5 Credit card ................ . 2,8 4,6 .4 7.S 8 .3 4.6 • General-purpose 3.7 7,6 .5 9.9 6 .3 6,6 -3 Private-label ............ .. -1.0 -9.6 -3,7 16 -,1 -6,6 9 ACH .............. . 5.9 18.7 6,9 8,8 -633 4,6 5.5 -896 Retail ................ , .. . 5.3 19,8 4,0 14.3 -147 3.2 10.8 -252 CCD .............. .. .6 12.4 2 • , 9 5,8 -1,888 1.4 2.6 -2,964 EBT .................. . .3 10,0 11.1 I 7.S -2 Total noncash payments .... 11.9 4.6 8.2 3.9 -18 1.7 .8 -97 MEMO Total checks written .......... . -4.5 -4.1 1.1 ,9 lSI -2,S -2,1 77 Checks converted to ACH .. . 2.3 98,7 .6 123.7 80 ,6 117,0 62 NOTE: The number and value of checks and ACH payments for 2003 are re 2. Includes four widely accepted credit and charge card networks. vised from figures reported in Gerdes and Wallon, ''Trends in the Use of Pay, 3. Includes private-label credit cards issued by oil companies and many ment Instruments in the United States," because of revisions to some banks' large retailers. reported data and because an adjustment was made to account for rapidly 4. Retail ACH payments include payroll, bill payments, and some payments changing ACH check conversion rates. The number and value of checks and associated with the retail sector of the economy. CCDs are cash concentration ACH payments for 2006 are revised from figures reponed in Federal Reserve or disbursement transactions, about half of which are most likely internal cor, System, ''The 2007 Federal Reserve Payments Study." Components may not porate transfers. Retait includes all other ACH payments. sum to totals and may not yield percentages shown because of rounding. 5. Electronic benefits transfer. I. Checks paid, that is, checks that were on-us (involving only one deposi 6, Total checks written includes checks paid through the check,clearing sys tory institution) and checks processed through the interbank check-clearing tem and checks converted to ACH payments. system, including original paper checks and truncated checks presented either 7. Compound annual growth rate. electronically or as paper substitute checks. Includes checks paid by depository • In absolute value, less than 0.05. institutions, U.S. Treasury checks, and U.S. Postal Service money orders.
Recent Payment Trends in the United States A 77 I. oncash payment~ in the United 'tates. selected years 2. oneash payments per capita in the United Stale . selected year BiIJioDa ofpayrmnta 70 Nurmcr per capita Beetronic 60 .a-k so n 40 ,... 30 20 r 10 0 1971 1979 1995 2000 2003 2006 1971 1979 2000 2003 2006 . NOTE: Check payments are checks paid, that is, checks that were on·us (involving onty one depository institution) and checks processed through the NOTE: Check payments are checks paid, that is, checks that were on-us Interbank check-clearIng system, Including original paper checks and truncated (involving only one depository institution) and checks processed through the checks preseoted either electronically or as paper substitute checks. Includes Interbank check-clearing system, including original paper checks and truncated checks paid by depository institutions, U.S. Treasury checks, and U.S. Postal checks presented either electronically or as paper substitute checks. Includes ServIce money orders. Checks converted to ACH payments are included in checks paid by depository institutions, U.S. Treasury checks, and U.S. Postal electronic payments. ServIce money orders. Checks converted to ACH paymeots are included in SOU.RCES: The 1971 check figure is from a survey conducted for the Federal electromc payments. DePOSit Insurance Corporation and reported in William R. Powers (1976), "A SOURCES: The 1971 check figure is from a survey conducted for the Federal Survey of Bank Check Volumes," Journal of Bank Research (Winter); for all DepOSIt Insurance Corporation and reported in William R. Powers (1976), "A other years, Federal Reserve Board data. Survey of Bank ClJeck Volumes," Journal of Bank Research (Winter); for all other years, Federal Reserve Board data. presented to depository institutions through the Re about 0.8 percent a year.? With the number of noncash serve Banks were presented electronically, compared payments rising faster than the aggregate value, the with about 30 percent in early 2007.6 constant-dollar average value of a payment declined This article examines findings from two surveys on $97 over the period (3.7 percent a year), compared the use of noncash payment instruments in the United with a decline of $56 between 2000 and 2003, These States conducted for the Federal Reserve-one of trends indicate that much of the growth in the number depository institutions (the 2007 depository institu of noncash payments was due to a large increase in tion survey) and the other of electronic payment the number of smaller-value noncash payments. networks, processors, and credit card issuers (the Driven by various socioeconomic factors, the an ~007 electronic payment survey). Analyses of change nual number of noncash payments per capita has IO recent years draw on similar surveys conducted in more than doubled since the 1970s, rising from fewer 2004 and 2001. The article also draws on a 2006 than 150 in 1971 to more than 300 in 2006 (chart 2). Board of Governors survey of checks paid by deposi Rising average wealth and income has allowed more tory institutions. Information about the surveys is consumption, which has evidently led to a rising given in the appendix. number of payments for products and services that in the past households either provided for themselves or TREND IN NONCASH PA YMENTS did without. Some of the increase in the number of noncash payments per capita most likely also came The total number of noncash payments in the United from the replacement of cash with noncash instru States (payments by check, ACH, debit and credit ments, as many small-value payments once made in card, and electronic benefits transfer, or EBT) in cash were increasingly being made via checks, or creased from 81 billion to 93 billion between 2003 debit or credit cards. (There is, however, no direct and 2006, or 4,6 percent a year. The nominal value of evidence to show whether cash payments themselves noncash payments increased from $68 trillion to increased or decreased overall.) $76 trillion, or 3.9 percent a year, over the same Growth in noncash payments may also be partly period. Restating values in constant 2006 dollars explained by changing payment processing methods thereby taking into account price inflation averagin~ themselves. In some cases, replacing a check with an 3.1 percent a year over the period, shows that the electronic payment increases the number of transacconstant-dollar, or "real," value of noncash payments increased only modestly between 2003 and 2006 , 7. Adjustments for inflation were made using the implicit price deflator for u.s. gross domestic product. In this article, amounts not 6. The Reserve Banks are estimated to have processed just over identified as constant dollars are nominal amounts, meaning that they 40 percent of all interbank checks in early 2007. are reported In actual dollars and have not been adjusted for inflation.
A78 Federal Reserve Bulletin 0 October 2008 tions needed to support a single payment. For ex he k. Paid ample, paying a bill online through a bank sometimes The total number of checks paid in the United results in two ACH transactions (in contrast to only States declined from an estimated 37.3 billion in one check payment in the past)-one to move the 2003 to 30.5 billion in 2006, a decline of 6.5 per funds from the payer's bank account to a service cent a year compared with an estimated decline of provider's general payment account, and another to 3.8 percent a year from 2000 to 2003 (table 1).10 move the funds from the general payment account to The increase in the rate of decline can be explained the biller's account. Likewise, processing practices by the rapid rise in the conversion of check pay that in the past might have involved consolidation of ments into (electronic) ACH payments. After de several payments into one check (a practice called cades of being the dominant noncash payment type, "check and list") are in some cases being replaced by by 2006 checks paid amounted to only one-third of practices that generate individual ACH payments. all noncash payments (chart I). While changes in processing methods undoubtedly In 1971, approximately 112 consumer, business, playa role in the growth of noncash payments, the and government checks were paid per capita in the extent of such changes has not been measured. United States (chart 2). At that time, cash was also used extensively to pay bills and to make other Check Payments everyday payments, and the use of electronic pay ments was negligible by comparison. In subsequent The number of checks is declining both because years, the number of checks paid per capita rose, fewer are being written and because some are being reaching 188 in 1995, with some checks replacing converted into electronic payments largely processed cash as a means of payment. The number of elec through the ACH system.8 Because of a rise in check tronic payments per capita also grew, but it was still conversions, the number of checks being paid is low relative to checks. After the mid-1990s, several falling faster than the number of checks being written. factors-the buildup of infrastructure for credit and Tracking only paid checks, therefore, does not pro debit card payments, the expanding issuance of cards, vide a complete picture of how checks are being used. and the increasing use of the ACH to make payroll Thus, this article reviews data on two types of checks: and bill payments-combined to reduce the use of checks, and by 2006 the annual number of checks • Checks paid-Checks that are "on us" (those paid per capita had fallen to 102, which was 91 per involving only one depository institution) and checks cent of the figure for 1971 and 54 percent of the figure processed through the interbank check-clearing sys for 1995,11 tem, including original paper checks and truncated Even as the number of checks paid was declining, checks (those replaced with electronic images) pre the nominal value of checks paid was increasing, sented either electronically or as paper substitute from $41.1 trillion in 2003 to $41.6 trillion in 2006. checks. In constant 2006 dollars, however, the value was • Checks converted to electronic payments-Checks decreasing-by 2.6 percent a year from 2003 to 2006, not processed through the check-clearing system compared with a decrease of just 1.0 percent a year but converted to electronic payments made via the from 2000 to 2003. Because the number of checks ACH. These items are ACH payments and do not paid was declining at a faster rate than the value, the have or retain any legal status as checks. Instead, average constant-dollar value of a check increased the original paper check that was converted is $154 over the latter period, reaching $1,363 in 2006. considered a "source document" for the ACH As discussed below, the increase in average value payment it generated. would not have been so great had the growth in For purposes of analysis, the aggregation of these two types of checks-paid checks and converted checks-is termed checks written.9 check or may simply hand a blank check to a cashier, who scans the information imprinted on the check, voids the check, and returns it to the customer. 10. The 2003 estimate (earlier reported as 36.6 billion) and the 8. A small but unknown proportion of checks may also be being 2000 to 2003 rate of decline are restatements of figures reported in converted into electronic payments processed over debit card net Gerdes and others, "Trends in the Use of Payment Instruments." The works. restatements are discussed in the appendix. 9. Although counted as "checks written," converted checks are not II. The number of checks per capita has declined not only in the necessarily written in a literal sense, but may merely be "tendered," or United States, but also in other countries. See the box "Payments in offered in payment at the point of sale. A customer may fill in the Other Countries."
Recent Payment Trends in the United States A7 9 Payments in Other Countries A comparison with selected industrialized economies electronic, as may also be the case in other countries. Japan, the European Monetary Union (EMU), the United Comparisons across economies of the number of checks Kingdom, and Canada-helps put the use of noncash and electronic payments should therefore take into consid payments in the United States in perspective. The number eration the extent of electronification in the various check of checks per capita declined from 2000 to 2006 in all five clearing systems. economies (chart). I Only in the United States, however, was there an Noncash payments per capita in selected economies, 2000, 2003, and 2006 accelerating decline in terms of both annual growth NUDer per capit8 rate-a decline of 7.4 percent a year from 2003 to 2006 compared with a decline of 4.7 percent a year from 2000 to 2003-and absolute number of checks per capita- a decline of 26 checks per capita from 2003 to 2006 compared with a decline of 20 checks per capita from 2000 to 2003. Nevertheless, the United States continued to have a significantly higher number of checks per capita, albeit to a lesser extent than the years 2000 and 2003. Among the economies considered, the number of elec tronic payments per capita rose fastest in the United 000306 000306 000306 000306 000306 States, at 11.4 percent a year from 2003 to 2006. By 2006, Japan European Uniled Canada United Monetary Kiagdom States the number of electronic payments per capita surpassed Union I the number per capita in all economies except Canada's. I. The European Monetary Union is made up of Austria, Belgium. The U.S. check-clearing system itself is becoming more Finland. France. Germany. Greece. Ireland, haly. Luxemburg, The Neth erlands. Portugal. and Spain. Cyprus. Malta, and Slovenia joined the EMU afler 2006 and were not included in calculations. I. The payments reported were made by both businesses and consum SOURCES: European Central Bank (2007), "Payment and Securities ers. To account for differences in size among the economies, each Settlement Systems in the European Union," August: Bank for Interna economy's payment figures were put on a per capita basis by dividing tional Settlements (2008). "Statistics on Payment Systems in the Group of them by the population of that economy. Ten Countries," March: and Federal Reserve Board. conversion of checks of relatively small value not checks was substantially lower than the average value been so substantial. of paid checks, in part because ACH rules prohibit conversion of large-size business and other checks for Check. Converted to Ele tronj Payment· large amounts. In fact, in 2006 the average value of 12 converted checks, which tend to be written by con The number of checks converted to electronic pay sumers, was very close to the average value of checks ments in 2006 was 2.6 billion, up from 0.3 billion in paid by credit unions (reported below), which gener 2003 (table 1), almost doubling each year. As noted ally serve consumer customers. earlier, about 8 percent of checks written in 2006 were converted to ACH payments, compared with Total hecks Written fewer than 1 percent in 2003. These were typically checks converted by companies receiving them The total number of checks written (paid checks plus through the mail in payment of a bill. Some checks converted checks) declined 4.5 billion, or 4.1 percent were tendered at the point of sale in retail establish a year, from 2003 to 2006, compared with 3.5 percent ments and were converted either at the cash register a year from 2000 to 2003 (table 1). (Checks paid and returned to the customer once the electronic declined even more-6.S percent a year from 2003 to information was captured, or in the back office and 2006 and 3.8 percent a year from 2000 to 2003.) The then archived or destroyed. average value of checks written in 2006 was $1,277. The average value of converted checks in 2006 was $267, up from $187 in 2003, for a growth rate of 12.5 percent a year. In constant 2006 dollars, how 12. Large-size business checks are lypicaUy 8 or 9 inches long and ever, the average value increased only 9.2 percent a have an "auxiliary on-us" field on the MICR line. Such checks, and year over the period. The average value of converted any check for more than $25,000, are ineligible for conversion.
A80 Federal Reserve Bulletin 0 October 2008 In constant 2006 dollars, the average value increased 3. Electronic payments in the $77 (or 2.1 percent a year) from 2003 to 2006, Billions ofpaymmu: compared with an increase of $92 (or 2.7 percent a 70 year) from 2000 to 2003. • Bcclronic benc6,. Ir. ... fer The increase in the constant-dollar average value 60 . ACH of checks written combined with a substantial decline • Debit cord 50 in the number written suggests that most checks being Creelt card replaced with electronic payments were smaller-value 40 checks-typically, checks written by consumers and, 30 to some extent, by businesses to consumers. Business to-business checks, on the other hand, were likely not 20 being replaced as rapidly. Evidence presented later 10 indicates that consumer-to-business debit card pay 0 ments are probably responsible for most of the 2000 2003 2006 replacement of checks written. SOURCE: Federal Reserve Board. Automated Clearinghouse Payment Electronic Paymenrs An automated clearinghouse payment can be either a The number of payments made over the major elec credit transfer or a debit transfer. A credit transfer is a tronic payment systems in the United States-the transaction in which the payer's bank originates the ACH system, debit and credit card systems, and the payment, sending funds to ("crediting") the payee's EBT system-grew from 44.1 billion to 62.8 billion bank account. A typical use of an ACH credit transfer between 2003 and 2006, for an annual rate of growth is for payroll, with an employer initiating a "direct of 12.5 percent (table 1, chart 3). More than half the deposit" from its bank account into that of an growth occurred in the debit card networks. However, employee. A debit transfer is a transaction originated among the major payment systems, the highest annual by the payee's bank, which draws funds out of rate of growth (1S.7 percent) was recorded by the ("debits") the payer's bank account. The processing ACH system, which started the period with a much flow for a debit transfer is similar to the flow for a smaller base than debit cards. Although the rate of check sent by the bank of first deposit to the payer's growth of electronic payments was somewhat slower bank for collection. Converted checks are a relatively between 2003 and 2006 than between 2000 and 2003 new type of ACH debit transfer; another, more tradi (13.0 percent), the absolute increase in the number of tional type is an arrangement whereby a biller, such as electronic payments was 5.1 billion greater over the an insurance or mortgage company, by prior customer latter period. authorization, periodically withdraws funds from a The value of electronic payments increased more customer's transaction account at a depository institu slowly than the number (S.9 percent a year compared tion. with 12.5 percent a year), and the average value of Most of the growth in ACH payments between electronic payments declined from $599 to $544 over 2003 and 2006 (approximately three-fourths) came the period. In constant 2006 dollars, the average value from ACH debit transfers, which increased 27.7 per declined 6.1 percent a year. Some of this decline was cent a year and by 2006 had surpassed credit transfers due to the replacement of smaller-value checks by for the first time. Just over half the growth in debit ACH payments, and some was due to the large transfers came from an increase in check conversion. increase in relatively small debit card payments. The large majority of converted checks were checks Increases in the number of payments made over the mailed to billers and converted at so-called lock major electronic payment systems are due to increas boxes, identified within the ACH system as accounts ing use of both traditional and innovative ways of receivable check conversion (ARC) transactions initiating payments. In addition, the use of private (table 2).13 Growth in the conversion of checks at the label prepaid cards, an innovation not included in the figures for the major electronic payment systems, has become significant. (See the box "Innovations in 13. Rules for using the ACH system, promulgated by NACHA, require banks to identify each payment according to a set of standard Electronic Payments" for a discussion of prepaid ent.ry classification (SEC) codes. References to "ARC" and similar cards and other new ways of initiating payments.) abbreviations in this section are SEC codes.
Recent Payment Trends in the United States A81 point of purchase (POP transactions) lagged by com the average value of ACH payments (and of retail parison, and back-office conversion (BOC) was new ACH payments in particular). and relatively small in 2007. While the number of CCD transactions rose An additional 1.4 billion of combined credit and 12.4 percent a year, the average value of a CCD debit transfer growth came from traditional prear payment declined almost 9 percent in constant 2006 ranged payment and deposit (PPD) transactions, most dollars over the period. The 2006 average value was likely many of which also replaced checks. Almost nearly one-fourth below the 2003 constant-dollar 1.0 billion of growth came from payments initiated average value. Changes in the use of CCD transac over the Internet (WEB transactions). WEB transac tions are less understood than are changes in the use tions made at retail websites may have replaced or of retail ACH payments. The decline in average value augmented payments made by credit or debit card, may, for example, be a sign of growing use of such while WEB transactions made at billers' websites transactions by smaller businesses, or a movement of may have replaced checks sent through the mail. some very large ACH payments to on-us transactions (internal to a depository institution) or to large-value Almost all the increase in the volume of transac funds transfer systems. tions over the ACH system came from payments that were smaller in value than typical ACH payments in Card Payments the past. In constant dollars, the average value of an ACH payment dropped 11 percent a year from 2003, The number of payments made by debit, credit, or falling to $2,121 in 2006. The constant-dollar average EBT card grew by 12.8 billion from 2003 to 2006, value of the debit transfer portion of ACH fell more reaching 48.1 billion and exceeding the number of than half, dropping 21.1 percent a year to reach checks paid by 17.6 billion (table 1, chart 3). Debit $1,535 in 2006. This huge drop in constant-dollar card payments grew more than payments of other average value is reflected in the growth rates for debit types, rising 9.7 billion over the period and contribut payments, which grew less than 1 percent a year in ing three times more to card growth than other types constant-dollar value-considerably less than the of cards combined. By 2006, the number of debit card 27.7 percent annual growth in number of debit pay payments (25.3 billion) exceeded the number of ments. credit card payments (21.7 billion). Distinguishing between large-value CCD (cash The value of debit card payments in 2006 ($1.0 tril concentration or disbursement) transactions (tradi lion), however, was less than half the value of credit tionally used for internal movement of corporate card payments ($2.1 trillion). The average value of account balances) and the more typical business and debit card payments declined to $39 in 2006, a consumer payments called "retail" (a category that decrease of about $1 from 2003. The average value of includes payroll, bill payments, and some payments credit card payments rose to $98, an increase of about associated with the retail sector of the economy) $8 from 2003. In constant dollars, the average value gives a different picture of change (tables 1 and 2).14 of a debit card payment decreased about 4 percent a As a proportion of retail ACH payments, checks year, while the average value of a credit card payment converted to ACH payments (ARC and POP transac decreased only slightly (0.01 percent a year). tions) rose from only 4.5 percent in 2003 to a sizable The decline in the constant-dollar average value of 20.7 percent in 2006.15 The increase in such debit card payments and the virtually flat growth in payments-ACH payments arising from check the constant-dollar value of credit card payments conversion-is the primary reason for the decline in suggest that much of the growth of payments by cards derived from payments of relatively sma)) value payments that otherwise would quite likely have been made in cash. Data reported by some card networks 14. Traditionally, CCD transactions have been thought of as trans fers initiated by large corporations to move funds between their own suggest that a large share of card payments in 2006 accounts for internal business and financial purposes; as such, they are were of relatively small value: an estimated 48 per not the focus of this article. However, a survey of members of the cent of combined debit and credit card payments Association of Financial Professionals (AFP) conducted by Dove Consulting and the AFP in 2003 suggests that around half of CCDs are (almost 23 billion) were for amounts less than $25; payments between counterparties, and not just internal transfers. The 26 percent were for amounts less than $15; and proportion of CCD value accounted for by payments between counter 3 percent were for amounts less than $5.16 Of the parties is unknown. 15. Coding for a third type of ACH payment arising from check conversion-back office check conversion, SEC code BOC-took effect in 2007; use of the code was not significant during the study 16. Estimates are based on data collected by Dove Consulting for period. the Cash Product Office at the Federal Reserve Bank of San Francisco.
A82 Federal Reserve Bulletin 0 October 2008 Innovations in Electronic Payments The 2007 electronic payment survey collected informa have been in use over the past decade.4 Uses include as tion about several significant types of "emerging pay gifts and for new types of electronic benefit transfers ments," including prepaid cards, online bill payments, (including state-administered child support disbursement person-to-person Internet payments, con tactless pay programs and unemployment insurance), international ments, and other, less frequently used types such as remittance payments, payment of health care expenses, and proprietary ACH card payments, deferred payments, and payroll. An estimated 0.3 billion open-system prepaid card mobile payments (those made from portable electronic payments, with a total value of $13 billion and an average devices such as a cellular phone). I value of $41, were made in 2006.5 As the number of Electronic prepaid cards have become increasingly closed-system prepaid card payments is estimated to have important replacements for paper-based payment instru been ten times the number of open-system payments and ments and related devices, such as gift certificates, paper the value three times that of open-system payments, it is tickets and tokens. and check-based rebates.2 A substan clear that closed-system cards have been relatively more tial number of prepaid cards are private-label, so-called successful to date. The lower popularity of open-system "closed-loop" or "closed-system," cards. This type of prepaid cards may be due in part to fees charged by card can be used only for purchases at, for example, a third-party issuers-designed to recoup costs-that are not merchant's chain of stores (similar to private-label credit typically charged on closed-system cards, which are essen cards) and are often given as gifts or used to access a tially issued by payees. These payments are included in, municipality's public transportation system. About 3 bil but add an insignificant percentage to, national card pay lion payments, with a total value of $36.6 billion and an ment totals and, depending on the network, are included in average value of $12, are estimated to have been made in either debit card or credit card payments. 2006 with private-label prepaid cards? These payments The vast majority of card payments made within the are not included in national card payment totals. If they United States are still being made using magnetic stripe were, they would add more than 6 percent to the number technology. More advanced chip-based technology, though of card payments nationwide in 2006. available on so-called "smart cards" for years, remains in General-purpose. so-called "open-loop" or "open limited use because merchants have not extensively adopted system," prepaid cards that can be processed on existing terminals that can read them. Other technologies, such as general-purpose credit card or debit card networks also radio frequency identification (RFIO), are also being used for making payments on a limited basis. RFlO technology in the form of an electronic key fob has, for example, been I. Figures for prepaid card paymenls reported in this box are nalional in use for more than a decade to make payments at the estimates because they include an estimaled amount for Ihe nelworks that retail outlets of one large oil company (Exxon-Mobil).6 did nOI report. Figures for other emerging payments include only reported amounts and therefore are lower bounds for the nalional totals. Data Such devices can be used to initiate individual payments collection and estimation are by Dove Consulting. from almost any debit card or credit card account. RFIO 2. The term "prepaid" is associated with products for which the prefunded value is recorded in a remote database that must be accessed for technology is also being used by highway authorities to pnyment authorization. The term describes most of the prefunded cards make toll transactions more convenient. At least 2 billion currently in use in the United States. Most prepaid cards serve a single payments, with a value of $3.6 billion, were initiated with purpose, but some may combine multiple funclions on one card. In addition, some prepaid cards, such as payroll cards, government benefit RFIO transponders at toll authorities in 2006. Toll tran cards, and some girt cards, can be reloaded with value. For more sponders (such as EZPass) carry a balance and typically are information on prepaid cards and related business and regulatory con cerns, see a summary of the November 12, 2004, Federal Reserve System Paymenl System Development Committee (PSDC) roundlable on stored 4. Like debil cards that can be authorized with a signature, some prepaid value cards at www.federalreserve.gov/paymentsystemslstoredvalue/ cards may bear the symbol of a major credit card network and may be used default.hlm. like a credit card. 3. About one-third of the total was reporled directly; the remainder was S. About one-third of the total was reported directly: the remainder was estimated on the basis of available information. Efforts were made to use estimated. Efforts were made to use available information to bound available information to keep estimates within reasonable boundaries, bUI estimates, but the amount of uncertainty is unknown. the amount of uncertainty is unknown. 6. The amount of use has not been reported. more than 1.4 biIJion card payments made for amounts has increased in recent years as card networks have of less than $5, the majority (53 percent) were debit made infrastructure and policy changes that accom card payments authorized on the basis of a personal modate the needs of previously cash-only merchants. identification number (PIN). For example, some quick-service restaurant chains, Although data from other years are not available, it including McDonald's, began accepting cards at most is likely that the share of relatively small payments of their locations in 2004 because of improvements
Recent Payment Trends in the United States A83 automatically reloaded with a fixed amount once the The number of payments initiated directly from billers' balance drops below a set Iimit.7 own websites, rather than depository institutions' websites, An RFID feature has also been added to existing smart is unknown. Industry research suggests that the number chip-based credit and debit card programs to create was initially greater than the number of payments through "contactless" cards such as MasterCard's PayPass and banking sites. Billers may credit accounts faster, and many American Express's Express Pay. These and similar cards offer greater choice of payment instruments, allowing the can be used at some gas stations, quick-service restau use of credit or debit cards while also offering payment rants (for example, McDonalds), convenience stores (for methods-such as online banking sites-that use the ACH example, 7-11 stores), and pharmacy chains (for example, system (discussed above) or that generate a so-called CVS). Using this technology, a consumer is able to "remotely created check" written by the payees' bank. initiate a payment through the major credit or debit card Some studies also suggest that payments through online networks by waving either a card or an electronic key fob banking sites could be growing faster than those made near a payment terminal-rather than by swiping a card directly at billers' websites. to Banks continue to work with and authorizing by either PIN or signature-thereby large billers to provide bill presentment along with pay reducing the amount of time and effort required to make a ment for customers who use their online websites. In some purchase. MasterCard reported that by the first quarter of cases, switching to this payment method eliminates the 2008, the number of cards that included PayPass technol periodic mailing of paper statements as well as the return ogy and the number of merchants accepting them both of a check in the mail. s had at least doubled in a year. While the number and Over 0.5 billion emerging payments of other types, with value of card payments initiated using this technology is a value of about $35 billion and an average value of $67, unknown, use is most likely still low at this time. are estimated to have been made in 2006. A small number About 3.4 billion online bill payments, with a total value were ACH payments initiated with proprietary, merchant of $1.2 trillion and an average value of $345, are estimated issued cards (often associated with, for example, some to have been initiated from consumer banking websites in grocery store customer-loyalty programs), mobile pay 2006. The first consumer banking websites allowing the ments, and deferred payments (such as those oltered by initiation of bill payment were reportedly introduced in the Bill Me Later for certain web purchases), but the vast mid-1990s, shortly after commercial use of web technol majority of these were person-ta-person web payments. ogy began to take hold. Since then, depository institutions The U.S. Department of Commerce estimates that Internet have increasingly offered websites capable of supporting (web) sales totaled about $128 billion in 2007, compared bill payment and other types of transactions. In early 2003, with $28 billion in 2000. As a fraction of total retail sales, fewer than half of commercial banks and state-regulated e-commerce grew from less than I percent in 2000 to over savings institutions oltered transactional websites, but by 3 percent in 2007. Thus, while Internet commerce is early 2008, over 80 percent offered them; in early 2004, growing rapidly, it remains a small fraction of retail sales. only 43 percent of federally regulated savings institutions As e-commerce grows, new and innovative methods of offered them, but by early 2008, 73 percent did; and in making electronic payments can also be expected to take early 2003, 29 percent of credit unions offered them, but hold. by early 2008, 58 percent did.9 7. The reloading may be done automatically by means of credit card or through the ACH, or by the customer initiating a payment by cash or check. 8. Although growth was significant, the totals are small compared with 10. Several articles in American Banker, including the following. report the tolal number of credit cards and the number of merchants that accept on some of these studies: Daniel Wolfe and Will Wade (2004), "CbeckFree: them. See Daniel Wolfe and Marc Hochstein (2008). "PayPass Issuance. Consolidators Will Win E·Billing Bailie," May 21; Daniel Wolfe (2004). Acceptanoe Double." American Banker, vol. 178 (May 2), p. 8. "Environment for EBPP Seen Shifting in Bankers' Favor," June 29; Steve 9. Data are from depository institution reports filed with the Federal Bills (2004), "The Tech Sccne: Instnnt Credit Gives Billers Big Edge in Reserve Board. These peroentages represent upper bounds on the percent· Web Payment," October 6; Chris Costanzo (2006). "Can Banks Catch Up ages of depository institution bill.payment websites because the share of to Billers in Presentment?" March 28: and Steve Bills (2007), "CheckFrce these transactional websites that offer bill payment is unknown. Deal: A Biller Willing to Use Bank Sites." December 7. allowing faster authorizations, new rules lifting sig Debit Card Payments. Debit card payments typi nature requirements for low-value payments, and cally are authorized either with a PIN or, if it carries lower fees for certain types of quick-service mer the Visa or MasterCard brand, by the cardholder's chants.17 signature (like a credit card). In some cases, such as when a purchase is made on a merchant's website or over the telephone, the cardholder is not required to 17. For details see, for example, W.A. Lee (2004), "How Cards authorize the payment with a PIN or a signature. Finally Won Reluctanl McDonald's Over," AmericaJl Banker, vol. 169 (59), pp. 1-2. Because such payments are processed on the same
A84 Federal Reserve Bulletin 0 October 2008 2. ACH transactions in the United States. by type of transaction. 200.1 and 2006 Number Value Type of transaction I Billions of I Percent Trillions of Percent Average, Percent returned transactions of total dollars I of total I in dollars I ~O::~1 ..........•........•..... I! 7.3 83.8 8.1 336 1.106 1.5 ARC ...................... . .2 2.0 .1 .2 296 .8 POP ....................... . .2 1.8 70 2.0 P R P C O K .. .. .. . . .. . . . . .. . . . . .. . . .. .. .. .. . . .. . . .. . . . . . . . 6 • . 0 68. .3 3 6•. 4 26 • . 6 1.0 1 7 5 2 5 54 1. . 1 5 TEL ....................... . .2 L7 .1 .2 374 7.0 WEB ..............•....... .6 7.0 .2 .7 291 1.8 Other ..................... . .2 2.6 1.4 5.8 6,239 .2 CCO .................. . 1.4 t6.2 16.0 66.4 11,272 .4 Total ACH transactions ...... . 8.8 100.0 24.1 100.0 2,754 1.3 2006 Retail ....................... .. 12.6 86.2 12.1 39.0 959 1.3 ARC ...................... . 2.3 15.9 .7 2.2 290 .4 POP ....................... . .3 2.0 .1 81 1.7 PPO ....................... . 7 • . 4 50.4 • 8. 1 26•, 2 1,102 LI RCK ..................... .. . 2 164 57.6 TEL ....................... . .4 2.4 .I .5 403 6.5 WEB ..................... .. 1.7 11.3 .6 2.1 386 1.5 Other ..................... .. .6 4.1 2.5 8.0 4,194 .2 CCO ........................ .. 2.0 13.8 18.9 61.0 9,384 .4 Total ACH transactions ...... . 14.6 100.0 31.0 100.0 2,121 1.1 Number Value Percent returned Change Annual Change Annual Change in Change over period rate of over period rate of I average over period (billions of change (trillions of change over period (percentage transactions) (percen!), dollars) (percent)' 'I (dollars) points) Change. 2003 to 2006 Retail ........................ . 5.3 19.8 4.0 14.3 -147 -.2 ARC ...................... . 2.1 137.6 .6 136.0 --6 -.4 POP ...................... .. .1 22.1 28.2 II -.3 PPO ....................... . •1. 4 7.2 1.7 8.2 31 • RCK ..................... .. -3.1 -1.2 9 3.2 TEL ...................... .. .2 32.7 .1 36.1 29 -.4 WEB ..................... .. 1.0 39.1 .5 53.0 96 -.3 Other ...................... . .4 38.4 1.1 21.2 -2,045 -.1 CCO ......................... . .6 12.4 2.9 5.8 -1,888 • Total ACH transactions ...... . 5.9 18.7 6.9 8.8 --633 -.2 NOTE: Retail ACH payments include payroll. bill payments. and some pay ment transactions. about half of which are most likely internal corporate trans ments assocjated with the retail sector of the economy. ARC, aCCQunlS receiv refS. Components may not sum [0 totals and may Dot yield percentages shown able check conversion; POP. point-or-purchase check conversion; PPD. prear because or rounding. ranged payment and deposit; RCK. re-presented check; TEL. telephone 1. Compound annual growth rale. "e-check"; WEB. web "e-check." CCDs are cash concentration or disburse- • In absolute value. less than 0.05. networks as signature payments, they are included in The number of debit card payments authorized the figures for signature payments. Most debit cards with a PIN grew from 5.3 billion in 2003 to 9.4 bil can be used not only to make payments, but also to lion in 2006. In absolute numbers, growth was greater access an ATM network by entering a PIN. for signature-based debit payments; but the rate of The number of signature-based debit card pay growth was greater for PIN-based payments-20.6 ments in the United States grew from 10.3 billion in percent a year versus 15.8 percent a year. The average 2003 to 16.0 billion in 2006, for an annual growth value of a PIN-based debit card payment declined rate of 15.8 percent. The growth, which accounted for from $38 in 2003 to $37 in 2006. In constant 2006 most of the increase in debit card payments, reflects dollars, the average value fell $12 from 2000 to 2003 incentives offered by issuing banks to users who and another $5 from 2003 to 2006. authorize payments with a signature rather than a When a debit card is used to make a purchase PIN. The average value of a signature-based debit authorized with a PIN, some merchants may, on payment decreased from $42 in 2003 to $40 in 2006. request by the user, return part of the payment in cash. In constant 2006 dollars, the average value of a Debit card purchases involving the return of cash are signature-based debit payment was flat from 2000 to typically called "cash back" transactions. In such 2003 but dropped $6 from 2003 to 2006. cases, the value of the payment includes both the
Recent Payment Trends in the United States A85 value of the purchase and the value of the cash to obtain cash in emergencies or when no other returned. The values of PIN-based debit card pay effective alternative exists, most likely because of the ments for 2003 and 2006 reported above have been typically higher fees and lower limits on cash ad adjusted to exclude an estimated portion of payment vances. The average value of such advances in 2006, value returned in cash. IS In 2006 an estimated 11.2 per at $190, was considerably higher than the average cent of PIN-based debit card payments involved the value of either ATM withdrawals or cash back on return of cash to the card user, and an estimated debit card purchases. 8.5 percent of the total value was returned as cash.19 For PIN-based debit card payments that involved TRENDS IN CASH PAYMENTS cash back, the value of the cash returned averaged about $31.20 Information on the use of cash for payments is difficult to obtain directly. Data showing a large Credit Card Payments. Overall, the number of credit increase in the number of card payments, in combina card payments grew at a relatively modest 4.6 percent tion with reports that some formerly cash-only busi a year from 2003 to 2006. The number of payments nesses are now accepting card payments, provide made by general-purpose credit card (Visa, Master some indirect evidence that cash is increasingly being Card, American Express, and Discover) rose from replaced by cards. Additional indirect evidence on the 15.2 billion to 19.0 billion over the period, for a use of cash comes from trends in cash obtained using growth rate of 7.6 percent a year. The number of ATM, debit, and credit cards and from trends in per payments made by private-label credit card, typically capita currency in circulation. issued by retail merchants and oil companies, dropped The number of ATM withdrawals-data collected to 2.8 billion in 2006, declining 9.6 percent a year as part of the 2004 and 2007 depository institution from 2003 to 2006. The decline may have been surveys-dropped slightly between 2003 and 2006, influenced by an expansion of programs that co-brand from 5.9 billion to 5.8 billion. The value of withdraw store cards with general-purpose credit cards.21 als rose, however, from $497 billion to $579 billion. Users who have been issued a PIN with their credit The average value of a withdrawal was $1.00 in 2006, card can use the card to obtain a cash advance at an compared with $85 in 2003, for an annual rate of ATM designed to accept credit cards. Credit cards are growth of 5.6 percent (2.4 percent in constant dol used far less often than debit/ATM cards to obtain lars ). cash. In 2006, the number of credit card cash ad Industry reports indicate that the number of ATMs vances, estimated at 87 million, amounted to 0.4 per in the United States more than tripled from 1995 to cent of total credit card payments and less than 2005 (growing at 12.5 percent a year) but dropped for 0.8 percent of total credit card value.22 These figures the first time in 2006.23 Industry data also indicate suggest that credit cards are probably used primarily that the number of ATM transactions overall including cash and check deposits, cash withdrawals, electronic funds transfers, and balance inquiries 18. Estimates of amounts returned to card users in 2003 and 2006 grew from 1995 to 2004, though at a much slower were based on data provided by a few large debit card networks. The pace (1.4 percent a year). Reports that the number of amount returned in 2000 is unknown. Therefore, how much of the ATM transactions has declined since then are consis decline in the average value of a PIN-based debit payment between 2000 and 2003 should be attributed to a decline in cash back, and how tent with an increase in the number of debit card much to a decline in average purchase value, is unclear. All of the purchases involving cash back as well as other fac decline in average value between 2003 and 2006 can be attributed to a tors, such as a decrease in the use of checks, some of decline in average purchase value. 19. Estimates are based on information from the few debit. card which would have been deposited at ATMs. The networks that were able to report the value of cash back and the number of daily cash withdrawals per ATM averaged number of PIN-based debit payments that involved the return of cash. 43 in 2003 but had dropped to 40 by 2006. 20. Because cash back was reported as a separate aggregate, it is not possible from the survey data to compare the average value of a Consumers may have been replacing ATM with PIN-based debit card payment that involved cash back with the drawals with cash-back transactions partly for convea verage val ue of one that did not. 21. Payments by such "co-branded" cards are included in the totals for general-purpose credit cards. 23. The source for 1995-2003 information on the number of ATMs 22. The estimated value does not include any cash given back by a is "Bank Network News and Debit Card News" (New York: Faulkner merchant as part of a credit card purchase at the point of sale. The and Gray). Information on ATMs for 2004-2006 is from "EFT Data amount given back in this way is likely to be small, as the merchant Book" (New York: Thomson Media). Also see Committee on Payment must pay the credit card network a percentage of the entire charge, and Settlement Systems (2008), Statistics on Payment and Selliement including a percentage of the amount of cash given back. At least one Systems in Selected Countries: Figures for 2006 (Basel: Bank for very large merchant (Wal-Mart) reportedly allows up to $20 in cash International Settlements, March) for a variety of statistics on currency back on credit card purchases. and other payment instruments (www.bis.orglpubUcpss82.pdt).
A86 Federal Reserve Bulletin 0 October 2008 3, Dehits LO IransacLion accounL held at de po ilory in. Ii lUI ions. hy type and si;:c of insLilulion. 2007 Type and size of Check payments I ACH payments' DebIit card payments insurution (transaction Number of I I Average I I Average Average depo o si f t s d o in l la m rs i ) ll ions instirutions (Nb ~mUobne: ) (tr d i V l o l l i a l o l a u n r e s s ) of (d v o a l l l u ar e s ) (Nb ~~obne: ) (tr d i V l o l l i a l o l a u n r e s s ) o f (d v o a l l l u a e rs ) ( N bi ~: I " O b n e s r ) (tr d i V l o l l i a l o l a u n r e s s ) of I I I , (d v o a l l l u ar e s ) All inslilutions .. ...... 13,316 29.38 41.164 1,401 18.07 142.688 7,896 30.35 1.244 41 600 and above ........ 106 17.34 30.679 1.770 13.05 135.935 10,419 19.55 .812 42 200-599 .... ......... 225 2.50 2.752 1.100 1.26 3.068 2,440 2.66 .104 39 100-199 .............. 475 1.92 1.848 963 .93 1.178 1.273 2.13 .085 40 0-99 .................. 12.510 7.62 5.883 772 2.84 2.508 883 6.01 .244 41 Commercial banks ... 6,186 24.36 38.787 1,592 14.82 139.430 9,406 21.32 .887 42 600 and above 86 16.09 29.820 1.854 11.95 134.011 11.211 16.78 .698 42 200-599 .............. 141 1.85 2.432 1,315 .83 2.675 3,223 1.23 .049 40 100-199 .............. 320 1.34 1.564 1.167 .57 .936 1,628 .98 .040 41 0-99 ............. ..... 5.639 5.09 4.970 977 1.47 1.809 1,234 2.34 .100 43 Savings instilutions ... 1,072 2.28 1.588 696 1.57 2.643 1,684 3.33 .137 41 600 and above 15 1.13 0.807 715 .98 1.886 1.929 2.29 .095 41 200-599 .............. 28 .24 0.175 741 .16 .281 1.767 .30 .012 41 100-199 .............. 50 .22 0.167 752 .11 .147 1.295 .24 .010 41 0-99 .......... .. ..... 979 .70 0.439 631 .32 .329 1,030 .49 .020 41 Credil unions .. ...... 6,058 2.74 0.789 288 1.68 .615 367 5.70 .220 39 600 and above ........ I 5 .12 0.052 430 .11 .039 335 .48 .019 39 200-599 .. .......... 56 .42 0.145 348 .27 .111 414 1.13 .043 38 100-199 .. ........... 105 .36 0.118 329 .24 .096 403 .91 .035 38 0-99 .................. 5.892 1.84 0.474 258 1.06 .370 350 3.19 .124 39 NOTE: Annualized figures based on survey data for March and April 2007. I. Checks paid. that is. checks that were on·us (involving only one deposi. Excludes instirutioos that had no transaction deposits. The number and value of tory instirution) and checks processed through the interbank check·c1earing debits to transaction accounts are revised from figures reported in Federal Re· system. including original paper checks and truncated checks presented either serve System. ''The 2007 Federal Reserve Payments Srudy." See the appendix electronically or as paper substirute checks. Does not include U.S. Treasury for details. Components may not sum to totals because of rounding. checks and U.S. Postal Service money orders. 2. Electronic payments processed through the automated clearinghouse sys· tern, including checks converted to electronic payments. nience and partly to avoid ATM fees. Although the 4. Value of low-tknomination curren y in circulation per number of ATM withdrawals has declined slightly, capita. 1960-2007 growth in cash back from debit card purchases has Coostant 2006 doUani been quite strong. More than 1.0 billion PIN-based ~r--------------------------------------' debit card payments in 2006 involved a return of cash 700 to the card holder (average of $31), compared with fewer than 0.6 billion in 2003. 600 The sum of the number of ATM withdrawals and 500 PIN-based debit card payments involving cash back 400 grew from 6.5 billion in 2003 to 6.9 billion in 2006. 300 As noted elsewhere, credit cards were used to obtain cash advances a relatively small number of times in 200 2006 (87 million). The total amount of cash obtained 100 in 2006 from these sources-ATM withdrawals, cash o~--------------------------------------~ back from debit card purchases, and credit card cash 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 advances-was $628 billion. NOTE: Includes $1. $2, $5, $10, and $20 notes. Change in the constant-dollar value per capita of SOURCE: Federal Reserve Board. low-denomination currency in circulation from 1960 borders, while $50 and $100 notes have been used to 2007 provides a long view of changes (chart 4).24 primarily as stores of value both domestically and Generally, low-denomination currency has histori abroad and have been used much less frequently for cally been used for making payments within U.S. domestic payments.25 The constant-dollar value of low-denomination currency in circulation peaked at 24. Currency in circulation-which includes all currency in the possession of consumers. businesses. and banks, except Ihe Federal Reserve Banks. including vault cash and currency held inside ATMs 25. An unknown and most likely small amount of low reached $792 billion at the end of 2007. denomination currency is also used abroad.
Recent Payment Trends in the United States A87 3.-Cominucd ATM withdrawals Total debits to transaction accounts MEMO I I Number (tri V lli a o lu n e s of I Average value Number (tri V lli a o lu n e s of I Averag~ value dep T o r s a i n ts s a ( c b t i i l o li n o ns ; To (b ta il l l i d o e n p s o o si f t s T (b o i t l a l l i o a n s s s e o ts f (billions) I dollars) (dollars) (billions) I dollars) (dollars) of dollars) dollars) dollars) 5.82 .579 100 83.62 185.7 2,220 843 7,177 11,196 3.59 .387 108 53.53 167.8 3,135 474 4.430 7.585 .50 .045 90 6.92 6.0 863 74 670 952 A2 .038 90 5AO 3.1 583 65 481 624 1.30 .109 84 17.78 8.7 492 230 1,596 2,036 3.89 .404 104 64.40 179.5 2.787 658 5,590 8,952 3.08 .334 109 47.90 164.9 3,442 409 3,911 6,740 .22 .019 89 4.12 5.2 1,255 48 468 672 .18 .016 90 3.07 2.6 833 44 303 402 A2 .034 82 9.31 6.9 743 158 909 1.138 .67 .067 99 7.85 4.4 565 95 958 1,507 AI .043 104 4.81 2.8 588 57 469 784 .07 .007 95 .77 .5 619 9 89 145 .06 .006 93 .64 .3 515 6 76 102 .13 .011 90 1.63 .8 490 22 324 475 1.25 .108 86 11.37 1.7 152 89 629 737 .10 .010 96 .81 .1 146 8 50 61 .21 .019 89 2.02 .3 157 17 114 134 .19 .017 89 1.69 .3 156 14 102 120 .75 .063 83 6.84 1.0 151 50 363 423 around $700 per capita in the late 1960s and early of institution and by region, Combined with another 1970s and then dropped relatively quickly until 1980, survey conducted in 2006, enough information was when it was around $500 per capita. Except for small available to study trends and variation in the use of fluctuations and a brief spike in 1999 due to a electronic images and paper in check processing, temporary increase in currency stock held at banks in The estimates reported in this section are annual response to the threat of a so-called millennium bug, ized from data for March and April of 2004 and 2007 the constant-dollar value of currency in circulation and are referred to as 2004 and 2007 estimates. per capita has been flat since 1980. It is possible, though only speculation, that if recent trends con Shares of Account Debits tinue, the per capita number of cash payments may among Depository Institutions begin to decline in the near future.26 For purposes of estimation and data analysis, deposi PAYMENTS AND WITHDRA WALS FROM tory institutions were grouped by type-commercial ACCOUNTS AT DEPOSITORY INSTITUTIONS banks, savings institutions, and credit unions-and, within each type, by size-largest, large, medium, The 2004 and 2007 depository institution surveys and small. Collectively. the largest institutions (those collected data on the number and value of several with transaction deposits of $600 million or more) types of debits to transaction accounts-including continued in 2007 to pay (on their customer's behalf) check payments, ACH payments, debit card payments the majority of account debits, with their shares of (both signature-based and PIN-based), and ATM each type of payment remaining nearly the same as in withdrawals-from a representative sample of deposi 2004. In 2007, this small group, comprising fewer tory institutions of different types and sizes (table 3).27 than 1 percent of the 13,316 depository institutions The surveys provide enough information to study that had transaction deposits at that time, held more trends and variation in account debits by type and size than 56 percent of total transaction deposits and paid 64 percent of account debits by number and more 26. For another look at trends in the use of cash. see Paul W. Bauer than 90 percent by value (table 4). In fact, the largest and Daniel A. Linman (2007). "Are Consumers Cashing Out?" depository institutions paid most of the debits of each Federal Reserve Bank of Cleveland. Economic Commentary (October I). www.clevelandfed.org/research/commentaryI2007/100107.cfm. payment type by both number and value. Among 27. Other means of debiting transaction accounts include internal types of account debits, the largest institutions' share transfers within a depository institution. wires over large-value funds by number was highest for ACH payments, at 72 per transfer systems. and cash payments by tellers that do not involve a check. cent. and smallest for checks, at 59 percent.
A88 Federal Reserve Bulletin 0 October 2008 or 4. Distribution of d'bit5 LO transaction accounts among depository institutions. hy type and size institution. 2007 Percent Type and size Check ACH Debit card ATM Total debits o ( f tr i a n n s s t a it c u t t i i o o n n Number payments' payments' payments withdrawals to a t C ra C n o s u a n c t t s i on ME,\!O of instideposits in tutions I I I I I I 1 millions of Number Value Number Value Number Value Number Value Number Value Tacrtainosn· Total Total dollars) 1 deposits deposlls assets All institutions .. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 600 and above .. .8 59.0 74.5 72.2 95.3 64.4 65.3 61.8 66.8 64.0 90.4 56.2 61.7 67.7 200-599 .. ..... 1.7 8.5 6.7 7.0 2.1 8.8 8.3 8.6 7.8 8.3 3.2 8.8 9.3 8.5 100-199 ........ 3.7 6.5 4.5 5.1 .8 7.0 6.8 7.3 6.6 6.5 1.7 7.7 6.7 5.6 0-99 ............ 93.8 25.9 14.3 15.7 1.8 19.8 19.6 22.4 18.8 21.3 4.7 27.3 22.2 18.2 Commercial banks .. ..... 46.5 82.9 94.2 82.0 97.7 70.2 71.3 66.9 69.8 77.0 96.7 78.1 77.9 80.0 600 and above .7 54.7 72.4 66.2 93.9 55.3 56.1 52.9 57.8 57.3 88.8 48.5 54.5 60.2 200-599 ........ 1.2 6.3 5.9 4.6 1.9 4.1 3.9 3.7 3.3 4.9 2.8 5.6 6.5 6.0 100-199 . ...... 2.8 4.6 3.8 3.2 .7 3.2 3.2 3.0 2.7 3.7 1.4 5.2 4.2 3.6 0-99 ............ 41.9 17.3 12.1 8.1 1.3 7.7 8.0 7.2 6.0 11.1 3.7 18.7 12.7 10.2 Savings institutions ... 8.0 7.8 3.9 8.7 1.9 11.0 11.0 11.6 11.5 9.4 2.4 11.3 13.3 13.5 600 and above .1 3.8 2.0 5.4 1.3 7.6 7.6 7.1 7.4 5.8 1.5 6.8 6.5 7.0 200-599 ........ .3 .8 .4 .9 .2 1.0 1.0 1.2 1.2 .9 .3 1.1 1.2 1.3 100-199 ........ .4 .8 .4 .6 .1 .8 .8 1.0 1.0 .8 .2 .8 1.1 .9 0-99 ............ 7.2 2.4 1.1 1.8 .2 1.6 1.6 2.2 2.0 2.0 .4 2.7 4.5 4.2 Credit unions ... 45.4 9.3 1.9 9.3 .4 18.8 17.7 21.5 18.7 13.6 .9 10.6 8.8 6.6 600 and above .. • .4 .1 .6 • 1.6 1.5 1.7 1.7 1.0 .1 .9 .7 .5 200-599 .... .... .2 1.4 .4 1.5 .1 3.7 3.4 3.6 3.3 2.4 .2 2.0 1.6 1.2 100-199 ........ , .6 1.2 .3 1.3 .1 3.0 2.8 3.2 2.9 2.0 .1 1.7 1.4 1.1 0-99 ............ 1 44.6 6.3 1.2 5.8 .3 10.5 10.0 13.0 10.9 8.2 .6 5.9 5.1 3.8 NOTE: Percentages based on annualized figures derived from survey data for I. Checks paid. that is. checks that were On-uS (involving only one deposi March and April 2007. Excludes institutions that had no transaction deposits. tory institution) and checks processed through the interbank check·c1earing The number and value of debits to transaction accounts are revised from fig· system. including original paper checks and truncated checks presented either ures reported in Federal Reserve System. "1loe 2007 Federal Reserve Payments electronically or as paper substitute checks. Does not include U.S. Treasury Study." See the appendix for details. Components may not sum to totals be· checks and U.S. Postal Service money orders. cause of rounding. 2. Electronic payments processed through the automated clearinghouse sys· tem. including checks converted to electronic payments. • In absolute value. less than 0.05. By type, commercial banks, which serve a broad As in 2004, the average value of account debits in range of customers, including consumers and large 2007 varied with depository institution size. For ACH corporations, held the majority of transaction deposits payments in particular, a substantial amount of value (78.1 percent) and assets (80.0 percent) in 2007. (93.9 percent) was concentrated at the largest com About 77.0 percent of account debits by number, and mercial banks, compared with 66.2 percent by num 96.7 percent by value, were paid from accounts at ber. A substantial portion of this value can be ex these banks. The second largest type of depository plained by unusually high average ACH values at a institution, as measured by both transaction deposits handful of institutions. As discussed later in the (11.3 percent) and assets (13.5 percent), were savings section "On Us Payments," much of this concentra institutions, which generally serve consumer and tion in ACH value is from internal payments. business customers, but not the largest corporations; Generally, the average values of ACH and check 9.4 percent of account debits, representing 2.4 percent payments increase in tandem with increasing com mercial bank size because of the greater presence of of total account debit value, were paid from accounts large business customers at larger commercial at these institutions. Credit unions, which generally banks.28 The group with the lowest average values for serve consumer customers rather than businesses, had ACH and check payments was credit unions, which, the smallest share of transaction deposits (10.6 per cent) and assets (6.6 percent). Although they ac counted for a larger proportion of account debits by 28. In 2000 the average value of checks written by consumers was number (13.6 percent) than did savings institutions, about $350. and by businesses, $1,700. These are the author's own estimates based on a study in which individual checks that could be they accounted for a smaller proportion by value (less classified were sorted by payer. See Federal Reserve System (2002), than 1 percent). "Retail Payment Research Project: A Snapshot of the U.S. Payments
Recent Payment Trends in the United States A89 as previously noted, typically do not handle transac were cash withdrawals from ATMs (table 5).30 The tion accounts for businesses. The average value of distribution had changed substantially from 2004, debit card payments did not vary significantly with when 26 percent of account debits were made by depository institution type or size, while average debit card, 51 percent were made by check, 15 per ATM withdrawals generally were larger at the largest cent were ACH payments, and 8 percent were cash institutions. withdrawals from ATMs. In 2004, checks were the predominant payment type at institutions of all types; Changes in Share from 2004 to 2007 by 2007, debit cards had become the predominant payment type overall, and predominant at credit The share of checks paid by commercial banks unions, savings institutions, and the largest commer increased 2.6 percentage points from 2004 to 2007, cial banks, while checks continued to be predominant reaching 82.9 percent (despite a decline of almost at smaller commercial banks. 4.7 billion in the number of checks paid). The share of At institutions of all types, check payments as a checks paid by credit unions dropped 2.2 percentage proportion of all debits to transaction accounts de points over the period, to 9.3 percent. The share of clined between 2004 and 2007-from 43 percent to checks paid by savings institutions remained rela 24 percent at credit unions; from 47 percent to tively flat, dropping only 0.4 percentage point. This 29 percent at savings institutions; and from 53 per pattem-decreasing share of checks for credit unions, cent to 38 percent at commercial banks.31 In 2007, as which generally serve only consumers, and increasing in 2004, there was an inverse relationship between the share for commercial banks, which serve businesses size of a given type of institution and its proportion of in addition to consumers-provides evidence that the total that were check payments: generally, the consumers' use of checks is declining faster than larger the institution, the smaller the share of checks businesses' use of checks. The decrease for credit with respect to total account debits. For commercial unions is due both to fewer checks being written by banks, the proportion of check payments at small credit union customers and to more of these custom banks (those with less than $100 million in deposits) ers' checks being converted to ACH payments. was about 55 percent, and at the largest banks, The share of ACH payments at savings institutions 34 percent. The proportion of checks may be smaller increased markedly from 2004 to 2007 (from 4.9 per at larger depository institutions because larger institu cent to 8.7 percent) because of a relatively large tions may provide for (and perhaps encourage) greater increase in the number of such payments at those use of ACH and debit cards. Larger depository insti institutions (from 0.5 billion to 1.6 billion, about tutions may also serve more-sophisticated or larger 45 percent a year). In contrast to the 3.8 percentage customers that may be more willing or able than point annual increase in share by number was a less-sophisticated or smaller customers to take advan 0.6 percentage point annual decline in share by value, tage of cost savings or other benefits afforded by other leading to a steep drop in the average value of ACH types of payment. payments at savings institutions (26.4 percent a year). In contrast to checks, ACH payments as a propor A significant increase in the conversion of small tion of all debits to transaction accounts increased at value consumer checks into ACH payments and a institutions of all types between 2004 and 2007decrease in the number of large-value ACH payments from 9 percent to 15 percent at credit unions; from reported (due to greater accuracy on the part of some 8 percent to 20 percent at savings institutions; and institutions) most likely were factors in these from 17 percent to 23 percent at commercial banks. changes.29 At commercial banks, the proportion of ACH pay ments by number increased with increasing size, possibly because of greater use of ACH by large Distribution of corporate account holders. The proportion of ACH Depository lnstitutiolls' Account Debits Overall, in 2007 about 36 percent of account debits were made by debit card, 35 percent were made by 30. The shares of account debits at depository institutions overall differ from the shares of corresponding payments in total noncash check, 22 percent were ACH payments, and 7 percent payments (as reported in table I), mainJy because debits to deposit accounts include ATM withdrawals and do not include credit card payments. 31. Generally, ACH and debit card payments grew as a proportion Landscape," pp. 12-14, www.frbservices.org/ftles/communicationsi of account debits between 2004 and 2007, and check payments and pd flresearc hlRetai IP a ymen ts Research Project.p d f. ATM withdrawals declined as a proportion, across institutions of all 29. See the appendi)( for details on changes in reporting accuracy. types and sizes.
A90 Federal Reserve Bul1etin 0 October 2008 5. Di ·tribution of debits 10 transaction accounts at depositor)' institutions. hy lype of debit. 2007 Percent Type and size of Total debits to institution (transaction Check payments I ACH payments' Debit card payments ATM withdrawals transaction accounts deposits in millions I of dollars) Number I Value Number I Value Number I Vatue Number I Value Number Value All institutions .. ..... 35.1 22.2 21.6 76.8 36.J .7 7.0 .J 100.0 100_0 600 and above ...... 32.4 18.3 24.4 81.0 36.5 .5 6.7 .2 tOO.O 100.0 200-599 ...... ....... 36.2 46.1 18.2 51.4 38.4 1.7 7.2 .8 100.0 100.0 tOO-t99 . ... ....... 35.5 58.7 17.1 37.4 39.5 2.7 7.8 1.2 100.0 100.0 0--99 . . . . . .. . . . . . . . . . . . 42.9 67.3 16.0 28.7 33.8 2.8 7.3 1.2 100.0 100.0 Commercial banb ... 37.8 21.6 23.0 77.7 33.1 .5 6.0 .2 100.0 100.0 600 and above ..... 33.6 18.1 25.0 81.3 35.0 .4 6.4 .2 100.0 100.0 200-599 .............. 44.8 47.0 20.1 51.7 29.8 .9 5.2 .4 100.0 100.0 100-199 ........ ..... 43.7 61.2 18.7 36.6 31.8 1.6 5.7 .6 100.0 100.0 0--99 .................. 54.7 71.9 15.7 26.2 25.1 1.4 4.5 .5 100.0 100.0 Savings institutions ... 29.1 35.8 20.0 59.6 42.4 3.1 8.6 1.5 100.0 100.0 600 and above ........ 23.5 28.5 20.3 66.6 47.7 3.4 8.6 1.5 100.0 100.0 200-599 .............. 30.8 36.9 20.7 59.1 39.1 2.6 9.4 1.4 100.0 100.0 100-199 ....... 34.7 50.7 17.7 44.6 38.1 3.0 9.5 1.7 100.0 100.0 0--99 ......... ........ 42.6 54.9 19.6 41.2 30.0 2.5 7.8 1.4 100.0 100.0 Credit uniom .. ...... 24.1 45.6 14.8 35.5 50.2 12.7 n.o 6.2 100.0 100.0 600 and above 15.0 44.0 14.1 32.4 58.6 15.6 12.3 8.1 100.0 100.0 200-599 .............. 20.6 45.7 13.3 35.0 55.7 13.4 10.5 5.9 100.0 100.0 100-199 ........... 21.1 44.4 14.0 36.1 53.9 13.2 11.0 6.3 100.0 100.0 0--99 ............ ..... 26.9 46.0 15.5 35.9 46.6 12.0 11.0 6.1 100.0 100.0 NOTE: Percentages based on annualized figures derived from survey data for I. Checks paid, that is, checks that were on-us (involving only one deposi March and April 2007. Excludes institutions that had no transaction deposits. lOry institution) and checks processed through the interbank check-clearing The number and value of debits to transaction accounts are revised from fig system, including original paper checks and truncated checks presented either ures reported in Federal Reserve System, "The 2007 Federal Reserve Payments electronically or as paper substitute checks. Does not include U.S. Treasury Study." See the appendix for details. Components may not sum to toUlIs be checks and U.S. Postal Service money orders. cause of rounding. 2. Electronic payments processed through the automated clearinghouse sys tem, including checks converted to electronic payments. payments for savings institutions and credit unions types and sizes. There was, however, substantial did not show a clear relationship with size. variation among responding institutions within size The proportion of debit card payments in account and type categories. debits for credit unions was just over 50 percent, higher than the proportion for savings institutions Electroni and Paper Check Processing (42 percent) and commercial banks (33 percent). Similarly, the proportion of ATM withdrawals was The traditional method of collecting a check is to greater for savings institutions and credit unions- deposit it at a depository institution, which, if the 9 percent and 11 percent, respectively-than for check is drawn on a different institution (an "inter commercial banks (6 percent). That debit card pay bank check"), then collects the funds by presenting ments and ATM withdrawals are proportionally more the original paper check to the institution responsible prevalent at credit unions than at other types of for paying it, the "paying bank." Presentment to the institutions is not unexpected, given their base of paying bank is done either directly or through one or primarily consumer customers. more intermediaries or agents, such as a Federal Estimates from the 2007 depository institution Reserve Bank or a private clearinghouse. Use of survey indicate that signature-based debit card pay original paper checks requires timely physical sorting ments, at 19.1 billion (63 percent of total debit card and transportation, often to remote, small-volume payments), were not quite twice as common as PIN locations, making this method of check clearing based debit card payments, at 11.2 billion (37 percent relatively costly compared with modern electronic of total debit card payments). Estimates from the methods. 2004 depository institution survey were in similar As an alternative to the presentment of original proportion-I 1.7 billion (65 percent) signature-based checks, some depository institutions have for decades, and 6.3 billion (35 percent) PIN-based. The ratio of by agreement, transmitted electronic information signature-based to PIN -based debit card payments about the checks they present. In this form of check was roughly simi lar across institutions of different presentment-a method historically called electronic
Recent Payment Trends in the United States A91 6. hecks paid by depository institutions. by rorm of presentm nt, and electronic checks depo ilcd, 2007 Number Value I Item Billions of I Percent of Trillions of I Percent of Average, checks interbank checks dollars illlerbank checks in dollars Checks paid I ..........• ,... . .......... . 29.4 41.2 1,401 Interbank checks ..... , ................ . 23.3 100.0 29.3 100.0 1.256 Paper ............. , ................ , 16.7 71.7 21.8 74.4 1.303 Original ......................... . 13.3 56.9 15.6 53.1 1,172 Substitute ....... _. ....... , ....... . 3.0 12.6 5.7 19.5 1.936 ECP ............................. . .5 2.2 .6 1.9 1,064 Electronic ... . ..................... . 6.6 28.3 7.5 25.6 1,137 Image .......................... . 6.4 27.5 7.4 25.4 1,161 M~R .................. _. ....... . .2 .8 .1 .2 280 On-us checks ................. , ....... . 6.1 11.9 1,958 Electronic checks depositecf Client image ...... . , ........ . 1.4 2.5 t,697 Branch/ATM image .......... ,. 2.1 2.0 927 MEMO Checks convened to ACH ..... . 3.3 .8 260 NOTE: Annualized figures based on survey data for March and April 2007. same-day settlement. Electronic checks do not involve presentment of a paper Excludes institutions that had no transaction deposits. The number and value of check and include checks presented as images as well as checks preseoted us checks are revised from figures reported in Federal Reserve System, ''The 2007 ing only data from the magnetic ink character recognition (MICR) tine at the Federal Reserve Payments Study." See the appendix for details. Components bottom of the check. may not sum to totals because of rounding. 2. Client images are checks remotely deposited electronically as images by 1. Does not include u.S. Treasury checks and U.S. Postal Service money bank customers. Branch/ATM images are checks imaged either at an ATM or orders. A substiMe check is a special paper copy of the original check. ECP is within a branch and forwarded on for collection. electronic check presentment with a paper check to follow, also called .. . Not applicable. check presentment (ECP)-the paper checks are typi that require paper,33 The Reserve Banks and some cally also delivered to the paying bank. But doing this private clearinghouses are facilitating the transition to for all checks would require banks to obtain agree the use of electronics by offering incentives for ments with all counterparties-including a very large depositing electronic images of checks and accepting number of institutions to which checks are presented electronic images for presentment. infrequently and in small volume. Further, as noted, The costs and benefits of adopting electronic check ECP typically includes the delivery of the paper image processing vary, are changing rapidly, and can checks to the paying bank, limiting the amount of cost be influenced by a variety of factors. For institutions savings that can be obtained. In the past, many that outsource some part of check processing, the depository institutions preferred the status quo timing of adoption may depend on when correspon exchanging original paper checks, which increased dent banks or third-party processors adopt. Each float for the paying bank-to adopting electronic depository institution chooses a time to adopt on the check-clearing methods.32 Thus, even with some basis of the expected future costs and benefits of potential benefits, depository institutions and their adopting at that time. In the long run, all depository agents were unable to substantially expand the pro institutions that process checks most likely will adopt portion of checks they presented electronically. In electronic image processing methods. 2007, an estimated 0.5 billion checks were presented Survey data collected in 2006 and 2007 indicate by ECP (table 6). that there have already been rapid changes in the With the changes governing check processing number of checks deposited and presented electroni resulting from the Check 21 law, banks may now cally and in the percentage of depository institutions truncate all checks and replace them with electronic accepting electronic image presentment. Data from images, presenting them electronically to paying early 2007 show that at that time there were meaning banks that agree or as paper substitute checks to those ful differences in the level of adoption of electronic 33. As noted in the introduction to this article, Check 21 (Check Clearing for the 21s t Century Act) removed a legal impediment to the replacement, during the collection process, of paper checks with 32. See James McAndrews and William Roberds (2000), "The electronic information ("check truncation"). Under Check 21, a Economics of Check Float," Federal Reserve Bank of Atlanta, Eco paying bank that does not accept electronic images of checks for nomic Review, vol. 85 (4th quarter), pp. 17-27, for a discussion of the payment must accept a "substitute check." For additional information, issues. see www.federalreserve.gov/paymentsystemsJtruncationJdefault.htm.
A92 Federal Reserve Bulletin 0 October 2008 7. Oi Iribulinn of interbank check' paid hy de po itory institution '. by form of presenlmenL 2007 Percent Type and size of institution Paper Electronic Total (transaction deposits : I I I in millions of doll=) Number Value Number Value Number Value All institutions ... ............ .... 71.7 74.4 28.3 25.6 100.0 100.0 Commercial banks ................ 69.8 73.7 30.2 26.3 100.0 100.0 600 and above . . . . . . . . . . . . . ....... 69.2 73.9 30.8 26.1 100.0 100.0 200-599 ........................... 84.3 83.6 15.7 16.4 100.0 100.0 100-199 ....................... 72.2 68.4 27.8 31.6 100.0 100.0 0--99 ............................... 65.6 69.6 34.4 30.4 100.0 100.0 Savings institutions ................ 91.9 91.9 8.1 8.1 100.0 100.0 600 and above ..................... 96.7 96.6 3.3 3.4 100.0 100.0 200-599 ........................... 94.2 94.0 5.8 6.0 100.0 100.0 100-199 ........................... 89.2 91.1 10.8 8.9 100.0 100.0 0--99 ............................... 83.9 82.6 16.1 17.4 100.0 100.0 Credit unions ...................... 70.4 71.8 29.6 28.2 100.0 100.0 600 and above ..................... 98.0 97.9 2.0 2.1 100.0 100.0 200-599 ..... ..................... 78.0 80.3 22.0 19.7 100.0 100.0 100-199 , .................... 78.6 80.6 21.4 19.4 100.0 100.0 0--99 ............................... 65.2 64.0 34.8 36.0 100,0 100.0 NOTE: Percentages based on annualized figures derived from survey data for March and April 2007. image processing among groups of institutions, reveal checks and about 3.0 billion substitute interbank ing that the timing of adoption was related to institu checks were being presented (table 6).35 Another tion size and type. However, there were also substan 6.6 billion interbank checks were being presented tial differences between institutions within groups, electronically (28.3 percent of interbank checks). evidence that size and type are not the only important Most of these (6.4 billion) were presented as images; indicators of the timing of adoption. the remainder were "MICR presentments," whereby Monthly data also reveal that between the refer only limited information about the check (account ence period of the 2007 survey (March and April) and number and dollar amount) is provided to the paying June 2008, the proportion of checks deposited with bank at the time of presentment.36 In all, an annual and presented by the Federal Reserve Banks as ized 9.S billion checks, or 40.9 percent of interbank electronic check images increased substantially, as checks, were truncated and presented electronically did the proportion of institutions depositing and or as substitute checks in 2007. receiving such images through the Reserve Banks. Commercial banks and credit unions paid paper The rapid increases reflect more-recent changes within and electronic interbank checks in about the same the interbank check-clearing system overall and sug proportions in 2007: roughly 70 percent paper and gest that the differences among groups of institutions 30 percent electronic (table 7). Savings institutions, at are less pronounced now. If, as expected, the rapid over 90 percent paper and fewer than 10 percent adoption of electronic check image processing contin electronic, paid a much smaller proportion of checks ues, the check-clearing system will become predomi electronjcally or as substitute checks. nantly electronic within only a few years.34 For each type of depository institution, the propor tion of checks presented to them electronically gener Check Paid, by Fonn of Presentment ally increased with decreasing size. One explanation could be that small institutions are more likely than A depository institution that requires presentment of a medium-size and large institutions to use intermediar paper check receives either the original check or, if ies, such as third-party processors or correspondent the check was truncated and replaced with an elec banks, that take advantage of the economies of scale tronic image, a substitute check. Figures based on and scope available with electronic check processing. data for March and April 2007 suggest that at that time, an annualized 13.3 billion original interbank 35. Another 0.5 billion checks were presented using ECP, that is, same· day settlement with paper to follow. 34. Checks converted to electronic ACH payments and therefore 36. Additional information, such as an image of the check, is not not processed within the check -clearing system are outside the scope routinely provided with MICR presentments but generally can be of this discussion. provided on request.
Recent Payment Trends in the United States A93 Such intermediaries play an important role in the 5. Distribution of responding institutions by t.he proportion adoption of electronic check image processing be of inlerbank checks Ihey received in electronic form. cause they can help depository institution customers 2007 adopt sooner by, for example, providing incentives Pen:enl and standardized processes for receiving electronic 70 check image presentment. Smaller institutions may also be better able to use "off-the-shelf" electronic check processing solutions that can help speed adop tion. Among commercial banks, the largest received a high proportion of electronic check images compared with large and medium-size banks. The largest com mercial banks may have adapted their proprietary check-processing systems to handle electronic check presentments sooner because they have greater oppor 2 4 6 7 9 10 tunities for cost savings from economies of scale and Decile scope and the capacity to manage multiple platforms. NOTE: The proponion of interbank checks presented electronically to the When a depository institution adopts technology depository institutions ranged from 0 to toO percent. In this chart. the range is enabling it to accept electronically presented inter divided into deciles, and each bar shows the percentage of respondents whose proportions fell within that increment. For example, the bar labeled decile I bank checks, the extra cost of simultaneously support shows the percentage of depository institutions that reponed receiving up to ing two technologies (traditional paper and new elec 10 percent of the interbank checks presented to them in electronic form. tronic technology) creates incentives to stop supporting paper technologyY The survey data pro portion receiving some or all checks in paper or vide evidence that most depository institutions use electronic form varied by size and type of ,institution. mainly one or the other technology. About 85 percent About half of the largest and medium-size commer of institutions received nearly all check presentments cial banks received at least some electronic checks, in either paper or electronic form in April 2007. A plot while about 40 percent of the large and small ones of survey respondents by the proportion of interbank did. For credit unions, the proportion of institutions checks they received in electronic form reveals that accepting electronic presentment increased with de most respondents were concentrated at the tails of the creasing size, rising from about 25 percent of the distribution, meaning that most responding institu largest to 46 percent of the smallest. Only 17 percent tions in the sample received almost all check present of the largest savings institutions received some ments in one form or the other (chart 5). At least some depository institutions, however, apparently sup 8. Depository institutions receiving interbank check ported both forms of check presentment, as an esti presentments in eleCLr ni form. 2007 mated 15 percent received between 10 and 90 percent Percent of interbank checks as truncated checks.38 Some of these institutions may have continued the exchange of Type and size of institution (transaction deposits in Some electronic All electronic local paper checks through clearinghouses when it millions of dollars) was cost effective to do so while receiving other All institutions ..... . 41.6 24.4 checks in electronic form, and some may have been in the midst of a transition to receiving all interbank Commercial banks ..... 40.8 22.0 checks electronically. 600 and above ......... . 50.9 .0 200-599..... . .............. .. 38.6 5.3 Overall, an estimated 42 percent of depository 100-t99 ......................... . 50.6 18.4 (}"'99 ..................... . 40.2 23.0 institutions received at least some interbank check presentments in electronic form (table 8).39 The pro- Savings institutions .........•.... 25.6 16.1 600 and above ............. .. 16.7 .0 200-599 ....................... .. 50.0 12.5 37. Because a paper check presented over the counter at a bank may 100-199 ........................ . 35.3 5.9 not be refused, some paper processing is inevitable. But depository (}"'99 ......... .. ....... .. 24.5 17.0 institutions may create electronic images of any paper checks they Credit unions ................... . 45.3 28.3 receive. 38. Depository institutions that receive some paper mayor may not 600 and above .................. .. 25.0 .0 200-599. .. .................. .. 27.8 11.1 create electronic images of the checks for internal processing pur 100-199 . ...................... .. 30.4 13.0 poses. (}"'99 .......................... .. 45.7 28.7 39. Estimates are based on the portion of complete survey responses for check payments that did not require the use of imputed data (see NOTE: Percentages based on annuatized figures derived from survey data for the appendix). April 2007.
A94 Federal Reserve Bulletin 0 October 2008 electronic checks, while about half of the large ones 6. hccks ocpositt:u and pre en ted eleclronically through did, and the proportion declined as size declined from the Reserve Banks, 2005-2008 large to small. Percent An estimated 24 percent of depository institutions 80 --OeposilOd elcctrooically reported receiving all interbank check presentments 70 (Fc~d) in electronic form. (A depository institution reporting •••• Pre.eDled electrooically that it received all check presentments electronically 60 (FecReceipl) . , . may have designated a third-party processor, a corre so . , ... spondent bank, or a Reserve Bank as its presentment . point. Given that the probability of receiving a paper 40 . . , • . check was still high during the survey period, that 30 . , designee likely received some paper checks, which it 20 .. • ' forwarded to the customer as electronic images.) 10 None of the largest institutions of any type received O~-===~~~~----r-------~----all checks in electronic form. Commercial banks and 2005 2006 2008 credit unions showed a pattern of increasing propor tions of institutions receiving all checks electronically SOURCE: Federal Reserve System Retail Payments Office, with decreasing size, while for savings institutions growth of 273 percent. An annualized 1.0 billion there was no clear relationship between size and the substitute checks were presented that same month, proportion receiving all checks electronically. implying year-to-year growth of 304 percent. The Credit unions as a group had the highest proportion proportion of depository institutions receiving elec of institutions receiving at least some interbank tronically presented checks also increased substan checks electronically (45 percent) and the highest tially; overall, the proportion receiving some checks proportion receiving all electronically (28 percent). electronically increased about 10 percentage points Many credit unions traditionally have provided infor and the proportion receiving all electronically, which mation about checks paid only as line-item entries on was relatively low in early 2006, increased about customers' bank statements and likely have faced the 16 percentage points from 2006 to 2007. fewest obstacles to receiving electronic information Other data show that electronic presentment of in place of paper checks.40 The smallest credit unions checks processed by the Reserve Banks has increased were more likely to accept some or all checks elec rapidly.41 Presentment of electronic check images to tronically than larger ones. Smaller institutions, includ depository institutions by the Reserve Banks, referred ing smaJler credit unions, are more likely to use to as Fed Receipt, was first offered in 2005.42 The correspondent banks, corporate credit unions, third percentage of FedReceipt checks in all checks pre party processors, or Reserve Banks as their present sented by the Reserve Banks grew somewhat during ment point and to outsource some of the processing, the initial months, reaching only 1.44 percent by receiving all checks in electronic form. Thus, in some March of 2006 (chart 6). During March and April cases the agent designated as the presentment point 2007, the same time period as the 2007 survey, may have received checks in paper form and sent around 20 percent of checks presented by the Reserve them to client institutions in electronic form. Banks were presented by electronic image, a lower While the use of electronic check processing meth proportion than estimated for interbank checks over ods was not universal in 2007, comparison with all (about 28 percent). The proportion of images in all earlier data shows that substantial growth had oc checks presented by the Reserve Banks was over curred over a period of one year. Estimates from a 53 percent by June 2008, for an annualized growth survey conducted by the Board in 2006 show that an rate of 119 percent since the 2007 survey, likely annualized 2.4 billion checks were presented elec reflecting a high overall growth rate for check present tronically in March 2006, implying year-to-year ments using electronic images. 41. The Reserve Banks are estimated to have processed 42 percent 40, Commercial banks and savings institutions, after paying the of all interbank commercial checks processed in the United Slates in original canceled checks, have traditionally mailed them to account 2006. down from 54 percent in 2003, holders along with their periodic statements, Many depository institu 42, Reported figures include electronic check images presented tions of all types now offer access to check images on online banking using the FedReceipt and Fed Receipt Plus products, Fed Receipt users. websites and have reduced the mailing of checks to customers, (In at no charge, received checks as electronic images or as paper. 2007, about three-fourths of commercial banks and two-thirds of depending on the way the check was deposited and processed, savings institutions had online banking websites capable of supporting FedReceipt Plus customers received all check presentments as images transactions; over half of credit unions did.) and paid for imaging those checks that were not deposited as images,
Recent Payment Trends in the United States A95 Electroni Check Dep sit 7. Depository institutions d~posiling .:hccks electronically. and recei ing checks presented electronically, through Some depository institutions have begun to allow the Re erve Banks, 2005-2008 check depositors (businesses and even, perhaps, con Pen;enl sumers) to truncate checks and make deposits by 90 sending electronic check images (known as "client --Dcpaoited cl..,troaically images") from a remote location rather than by 80 (Fe~ •••• Preseuted electronically 70 physically depositing the paper checks. During the (FelRoceipl) study period, 1.4 billion checks were deposited as 60 client images (table 6). Another means of check 50 electronification is for a depository institution to 40 image check deposits at special image-capable ATMs, 30 or at the branch at which the check was deposited, 20 and then forward the image on for collection. During to the study period, 2.1 billion checks were replaced with such "branchlATM" images. Collectively, these o~~~~--~~------~------~~----methods of imaging check deposits remotely are 2005 2006 2007 2008 referred to as "remote deposit capture." SOURCE: Federal Reserve System Retail Payments Office. Depository institutions can also image checks at ments. Until February 2008, the proportion of deposi their central processing locations, combine them with tory institutions depositing electronic check images any images deposited by customers or captured at with the Reserve Banks had exceeded the proportion ATMs or branches, and electronically deposit an receiving them (chart 7). In that month the propor electronic bundle of individual check images (known tions were about equal, and by June 2008 the propor as a cash letter) for collection through a Reserve tion of depository institutions using FedReceipt Bank, private clearinghouse, or third-party processor. reached almost 81 percent, compared with 69 percent The 2007 survey did not collect information on using FedForward. methods used for check collection, and industry-level The figures indicate that the check-clearing system data are incomplete. is rapidly transitioning to electronic processes and Depository institutions' electronic depositing of that the variation in adoption by size and type of check images with the Reserve Banks, through Fed institution has most likely changed dramatically since Forward, began in 2004 (chart 6). During March and March and April 2007. April 2007, the same time period as the 2007 study, around 33 percent of checks deposited by Reserve "On Us" Payments Bank customers were contained in electronic image cash letters. The proportion of checks deposited by Clearing and settlement of on-us payments electronic image with the Reserve Banks had grown payments that involve only one depository an annualized 93 percent since April 2007, reaching institution-occurs internally at the depository insti about 74 percent by June 2008. tution, so many of the costs associated with coordinat The number of checks deposited electronically ing payments with other depository institutions are with the Reserve Banks has always led the number of not incurred.44 electronic checks presented, likely reflecting the tran Among depository institutions, commercial banks, sition costs to depository institutions before receiving which typically have business customers, generally check presentments electronically and the lower had the highest proportion of on-us account debits, by prices charged by the Reserve Banks and other inter both number and value, while credit unions, which mediaries for electronic check deposits.43 Some pay typically do not have business customers, had the ing banks may also prefer to receive paper check lowest (table 9). Most checks involved a business and presentments because they mail canceled paper checks back to account holders along with periodic state- 44. For checks and ACH, "on us" means that the payer and the payee use the same depository institution. For ATMs, the term means 43. Although prices for electronic check deposits were generally that the withdrawal occurred at a proprietary ATM (an ATM owned by lower than those for paper check deposits, they were higher if the account holder's depository institution). Data on on-us debit card substitute checks had to be created because the paying bank required payments were not collected. On-us account debits plus interbank paper. account debits sum to total payments.
A96 Federal Reserve Bulletin D October 2008 9. Proportion or sl!iected debits to transaction account: at depository in ·tiLlItions that were on-u , 2007 Percent I Type and size of institution Check paymenls I ACH payments' ATM withdrawals (tr n a t n i s ll a i c o t n i s o n o f d d ep o o ll s a i r t s s ) in Number I Value Number I Value Number I Value I All institutions .... ............. .. 20.6 28-8 11-0 74.0 61.1 65.0 Commercial banks ................ 23.3 29.7 17.6 74_6 68.4 71.4 600 and above ..................... 21.0 28.1 20.0 76.1 69.9 73.0 200-599 ... , ....................... 26.4 37.4 12.2 54.4 68.0 67.6 100-199 ., .................. ...... 24.8 33.8 12.3 35.6 66.8 66.6 ~99 ........................... ... 29.2 33.7 3.0 12.8 58.4 60.1 Savings institutions ................ 12.0 19.0 28.1 60.7 62_7 6S_5 600 and above .. .................. 10.9 18.2 36.1 69.3 65.4 68.7 200-599 ........ .................. 12.9 19.1 27.8 51.6 64.8 67.3 100-199 .................. 12.4 19.1 12.0 38.4 59.2 61.8 ~99 ........... , .................. 13.3 20.4 9.3 29.5 54.3 54.2 Credit unions ..................... 3_7 6.8 1.1 1-6 37.6 40.9 6 2 0 0 0 0 - a 5 n 9 d 9 ab .. o . v . e . ., . . . .. .. .. .. . .. . . . .. .. .. .. .. .. .. .. . . . . . . . 4 1 . . 0 2 7 2. .4 3 1 1. . 9 2 1 1. . 5 6 4 5 8 2 . .4 2 4 5 9 1. . 7 8 100-199 ....... , ................. 4.1 7.1 1.8 1.8 44.8 47.2 ~99 . ............................. 3.7 7.0 .9 1.5 30.8 34.9 NOTE: Percentages based on annualized figures derived from survey data for I. Checks paid, that is, checks that were on-us (involving only one deposi March and April 2007. Excludes institutions that had no transaction deposits. tory institution) and checks processed through the interbank cheek-clearing The number and value of debits to transaction aCCOWlts are revised from fig system, including original paper checks and truncated checks presented either ures reported in Federal Reserve System, "The 2007 Federal Reserve Payments electronically or as paper substitute checks. Does not include U.S. Treasury Study." See the appendix for details. checks and U.S. Postal Service mooey orders. 2. Electronic payments processed through the automated clearinghouse sys tem, including checks converted to electronic payments. a consumer, so banks with both business and con reported ACH values. The increase in the proportion sumer customers were more likely to have on-us by value was due to a change in the survey form, payments.45 which allowed the separate reporting of network and Overall, 21 percent of checks paid in 2007 were on-us ACH volumes for 2007, leaving the overstate on-us checks, about 2 percentage points lower than ment to affect mainly the on-us amounts.46 the estimate from the 2004 depository institution Excluding the overstated ACH values, the largest survey. The on-us proportion declined overall for proportions of on-us account debits, by both number commercial banks and increased overall for savings and value, were consistently for ATM withdrawals. institutions and credit unions. Commercial banks had Most check and ACH transactions involve payments a higher on-us proportion (23 percent) in 2007 than to other parties, who choose the depository institution both savings institutions (12 percent) and credit in which to deposit funds. In the case of ATM unions (4 percent). In light of the dramatic growth of withdrawals, the account holder plays the role of check conversion, one possible explanation for in payee and payer, choosing the depository institution creases in the proportion of on-us account debits at all in both cases. Not surprisingly, therefore, these but the largest commercial banks and savings institu account debits are more likely to be on-us. Between tions is that smaller proportions of those institutions' 2004 and 2007, the on-us portion of ATM withdraw on-us checks were eligible-for-conversion consumer als overall increased slightly, from less than 60 per to-business checks. cent to over 61 percent by number, and from over The proportion of on-us ACH payments fell from 62 percent to 65 percent by value. For commercial 20 percent to 17 percent between 2004 and 2007. By banks, more than 68 percent of ATM withdrawals value, however, the proportion increased substan tially, from 43 percent to 74 percent. For both years, the estimated on-us proportion by value was over 46. Because the 2004 survey form intermingled interbank and on-us figures, institutions that had problems distinguishing offset stated, apparently because a handful of very large entries appeared to have overestimated the value of both on-us and institutions included internal account-balancing and interbank ACH. While offset entries continued to appear in the on-us settlement transactions, called offset entries, in their figures for 2007 and apparently have grown substantially larger for a few very large institutions, network value was not as overstated in 2007 as it was in 2004, owing in part to clarification of the survey 45. Gerdes and Walton, "The Use of Checks and Other Noncash instrument and to heightened efforts to inform survey respondents Payment Instruments." through additional communications.
Recent Payment Trends in the United States A97 were on-us in 2007 (71 percent by value). The larger (The average ACH value ranged from a low of $5,211 on-us shares for ATM withdrawals also reflect ac in the South to a high of $13,381 in the West.) The count holder avoidance of the fees commonly charged average value of check payments ranged from a low for using an ATM owned by another depository of $1,226 in the Midwest to a high of $1,646 in the institution or other company (non-proprietary ATMs). Northeast. By contrast, the average value of debit Commercial banks generally have the large'st net card payments differed little across regions, ranging works of ATMs, making their ATMs more accessible from a low of $39 in the Midwest to a high of $42 in to customers. Even credit unions, which own rela the Northeast and West. For ATM withdrawals, the tively few ATMs and for which the on-us ratios for lowest average value was also in the Midwest, at $95, checks and ACH were quite small, as a group had a and the highest was in the West, at $104. relatively large on-us share for ATM withdrawals of Some differences across regions may be due to 38 percent (41 percent by value). differences in population size. The number of account debits per capita in 2007 ranged from a low of 252 in Regional Variation the South to a high of 304 in the Northeast (the Midwest, at 303 account debits per capita, was a close Use of debit cards, checks, ACH, and ATM withdraw second).48 For debit card payments, the annual num als differed among the four major regions of the ber per capita was highest in the West, at 119, and United States defined by the U,S. Census Bureau: lowest in the South, at 90. The annual value of debit Northeast, South, Midwest, and West. Use of these card payments per capita also was highest in the West, instruments also varied between urban and rural at $4,987, and lowest in the South, at $3,675. For locations. check payments, the annual number per capita was lowest in the West, at 87, and highest in the Midwest, Variation by Ge graphic Region at 109. The value of checks per capita was also lowest In 2007, the number of payments by check as a in the West, but it was highest in the Northeast. For proportion of total account debits ranged from a low ATM withdrawals, both annual number and annual of 31 percent in the West to a high of 38 percent in the value per capita were highest in the Northeast and South (table 10). The proportion of payments by debit lowest in the South. card ranged from a low of 33 percent in the Northeast Other differences across regions may be due to to a high of 42 percent in the West. While the differences in economic output (defined as the sum of proportion of debit card payments nationwide (36 per gross state output for the states in the region). To cent) was greater than the proportion of check pay address this possibility, the regions were put on a ments nationwide (35 percent), by region that rela comparable basis by calculating payment figures in tionship held only in the West.47 In fact, in the West terms of number or value of account debits per $1,000 the number of debit card payments exceeded the of economic output. The number of account debits number of check payments by almost 37 percent. The per $1,000 of regional output in 2007 ranged from a proportion of ACH payments by number ranged from low of 6.0 in the South to a high of 7.3 in the a low of 20 percent in the South to a high of Midwest. The number of checks per $1,000 of eco 25 percent in the Northeast. The proportion of ATM nomic output was lowest in the West, at 1.9, and withdrawals by number also was lowest in the South, highest in the Midwest, at 2.6. The value of checks at 6 percent, and highest in the Northeast, at 8 per per $1,000 of economic output was also lowest in the cent. West, at $2,806, but was highest the Northeast, at In terms of value, check payments as a proportion $3,477. of total account debits ranged from a low of 14 per cent in the West to a high of 33 percent in the South. Urban and Rural Variation ACH payments followed the opposite pattern, ac counting for a low of 66 percent of total account In 2007, both the total number and the total value of debits by value in the South and a high of 85 percent payments were much smaller for rural areas than for in the West. The opposite pattern was due mainly to urban areas, reflecting the smaller population and an especially high average ACH value in the West. 47. National data for 2006 show that the number of card payments 48. Note that per capita figures are based on the entire population e~ceeded the number of check payments. However. data on the and include all payments. not just those made by consumers. Thus. regional use of credit cards are unavailable. so it is not possible to figures do not represent the behavior of adult consumers or heads of assess the relative use of cards overall among regions. household.
A98 Federal Reserve Bulletin D October 2008 10. Debits l() lranaction accounls at depository institulion . hy geographic region. 2007 l . Nonheast South Midwest West Total I I I I . I . I I . I Item r M eg u i . l o ti n - S re i g n i g . o l n e lU i A n i ~ i S o I n 1 - s r M eg u i l o ti n - r S e i g n i g o l n ~ t~ A ~ ~ ~ I o ~s I r M eg u i • l o ti n - f I r S e i g n i g . o l n ~ tu m A ti S o :I I n - s r M eg u i . l o ti n - S re i g n i g . o l n e tu m A li S o :I I n - s r M eg u i l o ti n - S re in gi g o l n e t~ A ~f : o ! ~ s Number (billions) ... 11.0 5.5 16.6 15.7 11.8 27.5 10.5 9.6 20.0 13.7 5.9 19.5 SO.9 32.8 83.6 Check ........ 3.7 2.0 5.7 5.4 5.1 10.5 3.4 3.9 7.2 4.0 2.0 6.0 16.4 12.9 29.4 ACH .... ..... 3.0 1.2 4.1 3.4 2.1 5.5 2.9 1.6 4.5 2.9 1.0 3.9 12.2 5.9 18.1 Debit card .... 3.6 1.8 5.4 5.9 3.9 9.8 3.6 3.4 7.0 5.8 2.4 8.2 18.8 11.5 30.4 ATM ........ .8 .5 1.3 1.0 .7 1.7 .6 .7 1.3 1.0 .4 1.4 3.4 2.4 5.8 Value (trillions of dollars) .. 29.9 3.3 33.2 33.3 9.9 43.2 41.9 5.3 47.3 56.8 5.3 62.1 161.8 23.8 185.7 Check ........ 7.7 1.7 9.4 8.9 5.2 14.1 5.8 3.1 8.9 6.5 2.3 8.8 29.0 12.2 41.2 ACH ......... 21.9 .1.5 23.4 24.0 4.5 28.5 35.9 2.1 38.0 49.9 .2.9 52.8 131.7 11.0 142.7 Debit card .... .2 .1 .2 .2 .2 .4 .1 .1 .3 .2 .1 .3 .8 .5 1.2 ATM ......... .1 .1 .1 .1 .2 .1 .1 . 1 .1 .I .4 .2 .6 Distribution by number (percent) ... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Check ........ 33.5 36.2 34.4 34.1 43.4 38.1 32.3 40.2 36.0 29.3 33.9 30.7 32.3 39.5 35.1 ACH ......... 26.9 21.0 24.9 21.7 17.6 19.9 27.5 17.2 22.6 21.5 17.0 20.2 24.0 17.9 21.6 Debit card .... 32.3 33.0 32.6 37.7 32.9 35.6 34.2 35.5 34.8 42.1 41.6 41.9 37.0 35.2 36.3 ATM ......... 7.3 9.8 8.1 6.5 6.1 6.3 6.0 7.2 6.6 7.1 7.5 7.2 6.7 7.3 7.0 Distribution by value (perunt) ... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Check . ...... 25.8 51.2 28.3 26.8 52.1 32.6 13.8 57.8 18.7 11.5 42.9 14.2 17.9 51.2 22.2 ACH ......... 73.4 45.1 70.6 72.1 45.8 66.0 85.7 38.6 80.4 87.9 54.3 85.0 81.4 46.0 76.8 Debit card .... .5 2.3 .7 .7 1.6 .9 .3 2.4 .6 .4 2.0 .6 .5 2.0 .7 ATM ......... .3 1.5 .4 .3 .6 .4 .2 1.\ .3 .2 .8 .2 .2 .9 .3 Number per capita ...... 202 101 304 144 108 252 158 145 303 198 8S 283 170 110 280 Check ........ 68 37 104 49 47 % 51 58 109 58 29 87 55 43 98 ACH ......... 54 21 76 31 19 50 43 25 68 43 14 57 41 20 60 Debit card .... 65 33 99 54 36 90 54 51 106 83 35 119 63 39 102 ATM ...... .. 15 10 25 9 7 16 10 10 20 14 6 20 II 8 19 Value per capita (dollars) .... 546,933 60.329 607,262 305,563 91,302 396,865 634.262 80,374 714,636 821,110 76,335 897,445 541.738 79,760 621,498 Check ........ 141.109 30.868 171.977 82.006 47,540 129.546 87.532 46,461 133.993 94.669 32.717 127.387 96.959 40.824 137.784 ACH ......... 401.403 27.195 428,598 220.289 41.781 262.070 543.611 31,049 574,659 721.467 41.488 762.955 440.938 36,672 477.611 Debit card .... 2.808 1.381 4.190 2.252 1.423 3.675 2.130 1,%8 4.098 3.454 1.532 4.987 2.605 1.561 4.166 ATM ......... 1.612 885 2,497 1.016 558 1.575 990 8% 1.886 1.519 597 2.116 1,236 702 1,937 Average value (dollars) .... 2,702 596 2.000 2.119 844 1,573 4,013 SS4 2,358 4.152 901 3,177 3,181 71:1 2,220 Check ........ 2,OSI 842 1.646 1.667 1,013 1.348 1.717 797 1.226 1.634 1.140 1,470 1.762 942 1.401 ACH .... ..... 7,379 1.279 5.665 7,()45 2.197 5.211 12.516 1,245 8,405 16.933 2,879 13.381 10.804 1.864 7.896 Debit card .... 43 41 42 41 40 41 39 38 39 41 43 42 41 40 41 ATM ......... 109 89 101 lOS 85 98 104 86 95 109 93 104 108 88 100 lower economic output of rural areas (table 11 )49 roughly the same in urban and rural areas ($41 versus Check payments constituted 46 percent of debits to $40), but the average value of check payments, ACH transaction accounts in rural areas and 34 percent in payments, and ATM withdrawals was smaller in rural urban areas. In contrast, electronic debits-ACH and areas. debit card payments and ATM withdrawals-were relatively more common in urban areas. Among elec Comparison with Earlier Findings tronic debits, the urban-rural difference was greatest for debit card payments, which accounted for 37 per The annual number of check payments declined in all cent of account debits in urban areas compared with regions between 2004 and 2007 (data not shown). 31 percent in rural areas. The most pronounced decline occurred in the For all types of account debits, the number and Midwest-almost 35 checks per capita. The smallest value of payments per capita was higher in urban decline was in the Northeast--over 21 checks per areas, reflecting greater wealth and business activity. capita. The number of checks declined faster in rural The average value of debit card payments was areas over the period, at 10.7 percent a year, than in urban areas, at 5.7 percent a year. For debit card payments, the largest increase in the 49. Note that by definition, rural areas include some suburban areas surrounding cities. annual number per capita was in the Northeast, at
Recent Payment Trends in the United States A99 1O,-Conlinued Northoast South Midwest West Total I I . I I . I J I I hem Muhi- Single A~I Multi- Single A:I MUlti- 1 Sin~le i~:L Multi- Sin~le i:':L MU.lli- sin~le.1 i:'~L region region I~~:O~S region region t~~~o~s region regIOn tUlions region region lui ions reg,on regton tut ions Number per 51 ,000 ,or outpul ..... 4_1 2-0 6.1 3.4 2.6 6.0 3.8 35 7.3 4.4 1.9 6.2 3_9 2-S 6.4 Check ........ 1.4 .7 2.1 1.2 1.I 2.3 1.2 1.4 2.6 1.3 .6 1.9 1.3 1.0 2.2 ACH ..... ... 1.I .4 1.5 .7 .5 1.2 1.0 .6 1.6 .9 .3 1.3 .9 0.4 1.4 Debit card .... 1.3 .7 2.0 1.3 .8 2.1 1.3 1.2 2.5 1.8 .8 2.6 1.4 0.9 2.3 ATM ...... .. .3 .2 .5 .2 .2 .4 .2 .3 .5 .3 .1 .4 .3 0.2 0.4 Value per 51,000 or oulpul (dollars) . ... 11,057 1,220 12,277 7,294 2,179 9,473 15,260 1,934 17,194 18.090 1,682 19,772 12,309 1,812 14,121 Check ........ 2.853 624 3.477 1.958 1.135 3.092 2.106 1.118 3.224 2.086 721 2.806 2.203 928 3.131 ACH ......... 8.115 550 8.665 5.258 997 6.256 13.079 747 13.826 15.895 914 16.809 10.018 833 10.852 Debit card .... 57 28 85 54 34 88 51 47 99 76 34 110 59 35 95 ATM ... .... 33 18 50 24 13 38 24 22 45 33 13 47 28 16 44 Number-Iode~ils ratiol ..... 95.5 965 95.8 127.6 72.7 96-4 124.9 8\,7 99_7 124.1 79.6 106.3 117.6 79.9 99-2 Check ..... ... 32.0 34.9 33.0 43.5 31.5 36.7 40.3 32.8 35.9 36.4 26.9 32.6 38.0 31.6 34.9 ACH ... ..... 25.7 20.3 23.9 27.7 12.8 19.2 34.3 14.1 22.5 26.7 13.5 21.4 28.2 14.3 21.4 Debit card .... 30.9 31.8 31.2 48.1 23.9 34.4 42.8 29.0 34.7 52.2 33.1 44.6 43.5 28.1 36.0 ATM ......... 7.0 9.5 7.8 8.3 4.4 6.1 7.5 5.9 6.6 8.8 6.0 7.7 7.9 5.8 6.9 Value-to- :!aToJils ..... 258,098 57,506 191.675 270,333 61,401 151,632 501,318 45,293 235,101 515,268 71.682 337,579 374,115 58.094 220,312 Check ........ 66.590 29.424 54.283 72,551 31.971 49.496 69.185 26.183 44.081 59.408 30.723 47.917 66,958 29,735 48.842 ACH ......... 189.423 25.922 135.282 194.891 28.098 100.130 429.668 17.497 189.051 452.740 38.959 286,990 304.504 26.711 169.306 Debit card .... 1,325 1,317 1.322 1.992 957 1.404 1.684 1.109 1.348 2.168 1.439 1.876 1.799 1,137 1.477 ATM ......... 761 843 788 899 376 602 782 505 620 953 561 796 853 511 687 Number of institutions .. 1.958 162 2.120 4.385 265 4.650 4.705 308 5.013 1.859 205 2.064 12.907 940 13.847 Population (millions) ... .. . .. . 54.6 .. . .. . 108.9 .. . . .. 66.1 .. . ... 69.1 . .. . .. 299 Ou o tp f u d t o ( l b la i r l s li ) o n . s . .. . ... 2.700 .. , .. . 4.562 .. . . . 2.749 .. . .. . 3.138 . .. ... 13.149 Transaction deposits (billions of dollars) ..... 116 57 173 123 162 285 84 117 201 110 74 184 433 410 843 NOTE: Annualized figures based on survey dara for March and April 2007. vada, New Mexico, Oregon, Utah, Washington, and Wyoming. ComponenL' Multiregion institutions are those that have deposits in more than one region; may not sum to torals and may not yield percentages shown because of single-region institutions have deposits in only one region. The Northeast re rounding. gion includes Connecticut, Maine, Massachusetts, New Hampshire, New 1er \. Output is measured as the sum of the gross state products in the region. sey, New York, Pennsylvania, Rhode Island, and Vermont. The South region 2. Annual number of debits per $1,000 of transaction deposits. includes Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, 3. Annual value of debits per $ I ,000 of transaction deposits. Kentucky, Louisiana, Maryland, Mississippi, North Carolina. Oklahoma, South • In absolute value. less than 0.05. Carolina, Tennessee, Texas, Virginia, and West Virginia. The Midwest region ... Not applicable. includes llIinois, Indiana, Iowa, Kansas, Michigan, Minnesora, Missouri, Ne SOURCES: Federal Reserve; and U.S. Department of Commerce, Bureau of braska, North Dakora, Ohio, South Dakora, and Wisconsin. The West region Economic Analysis and Bureau of the Census. includes Alaska, Arizona, California. Colorado, Hawaii, Idaho, Monrana, Ne- 47.7 per capita, followed closely by the Midwest, at RETURNED CHECKS AND ACH PAYMENTS 46.5 per capita; the smallest increase was in the South, at 31.3 payments per capita, followed by the Some checks that are presented for payment are West, at 39.3 per capita. In 2004, the Northeast had returned unpaid because of insufficient funds, closed the lowest number of debit card payments per capita; accounts, fraud, or other reasons. The same is true for by 2007 that region, at 99 payments per capita, had ACH payments.50 Because some payments returned surpassed the South, at 90 per capita-but both for insufficient funds are presented aga,in ("re regions remained behind the Midwest, which at 106 presented"), and may be returned yet again if funds payments per capita had come closer to the West, at 119 per capita. The proportion of account debits that 50. Credil card and debit card payments may fail because of credit were debit card payments increased faster in rural limits or insufficient funds, closed accounts, disputes, or fraud. Because most card payments are approved in real time and are not areas, at 14.4 percent a year, than in urban areas, at returned in the same sense as are checks and ACH payments, they are 11.9 percent a year. outside the scope of this discussion.
AIOO Federal Reserve Bulletin D October 2008 II. Debits to tran 'action accounts at depository in tiLUlioll . are still unavailable, the same returned payments may by urban or rurallucalioll, 2007 have been counted more than once. Therefore, the ratio of the number of times a payment, say a check, Item Urban Total is returned to the total number of check payments is an upper bound on the probability that a check will be Number (billions) ...... . 72.2 11.4 83.6 returned. Check .......................... .. 24.2 5.2 29.4 ACH ..... ............ . 16.0 2.0 18.0 Debit card ........................ . 26.8 3.5 30.4 Returned Checks ATM ........... . 5.2 .6 5.8 Value (trillions of dollars) ......... 169.3 16.2 185.5 Checks were returned an estimated 187 million times Check .. .. 36.2 4.9 41.1 in 2003, compared with 153 million times in 2006. It ACH ... . 131.4 11.1 142.6 Debit card ....................... .. 1.1 .1 1.2 is estimated that check returns accounted for, at most, ATM ..... .5 .1 .6 0.51 percent of the estimated total number of checks Distribution by number (percent) . . 100.0 100.0 100.0 paid in 2006, or about 5.1 returns for every 1,000 Check ....... ............... 33.5 45.9 35.2 checks paid-about the same proportion as in 2003- ACH ... ........................... 22.2 17.7 21.5 Debit card .............. 37.2 31.0 36.3 compared with about 5.8 returns for every 1,000 ATM ....... .......... ....... ..... 7.2 5.4 6.9 checks paid in 2000. Distribution by value (percent) .... 100.0 100.0 100.0 Some checks returned for insufficient funds are Check........... ....... 21.4 30.1 22.2 re-presented through the ACH system. When such ACH .......... .................... 77.6 68.7 76.9 ACH payments, identified by SEC code as RCK Debit card.................. .7 .9 .7 ATM .......... ................... .3 .3 .3 ("re-presented check"), are themselves returned, they Number per capita ................ 298 201 280 are returned through the ACH system and are no Check .... ........... ............. 100 92 98 longer identified as check returns. In 2006, about ACH .... ............. ........... 66 36 60 21 million checks were re-presented through the ACH Debit card ......................... 111 62 102 ATM .............. .... ....... 21 II 19 system. More than half of these ACH check re Value per capita (dollars) . . . . . . . . .. 699,174 286,358 620,961 presentments (about 12 million) were themselves returned. The number and value of RCK ACH pay Check ........................... .. 149.619 86.232 137.609 ACH 542.828 196.703 477.250 ments that were returned changed little between 2003 Debit card ............. .. 4.563 2.468 4.166 ATM ................. .. 2.164 955 1.935 and 2006. The number of returned checks processed Average value (dollars) .. 2,344 1,424 2,219 through the check collection system (153 million) and theACH system in 2006 totaled close to 165 million, Check ...... 1,497 934 1.397 ACH 8,215 5.532 7.915 or 5.5 returns for every 1,000 checks presented, also Debit card 41 40 41 ATM 101 88 100 virtually unchanged since 2003. Number.to.dcposits ratio I 102.4 83.0 99.2 Returned ACH Payments Check ........ .. 34.3 38.1 34.9 ACH ............................ .. 22.7 14.7 21.4 Debit card ....... .. 38.0 25.7 36.0 About 1.3 percent of retail network ACH payments ATM ............... .. 7.4 4.5 6.9 were returned in 2006, or 12.7 returns for every 1,000 Value.to-deposits ratio' ........... . 239,919 264,263 220,122 payments, over twice the rate for checks (table 2). Check .. .. .. .. .. .. . 51.341 35.602 48.781 Only about 0.4 percent of large-value CCD (cash ACH .. .. . .. • .. .. .. .. .... 186.269 81.210 169,179 Debit card ........................ 1,566 1.019 1,477 concentration or disbursement) transactions were ATM ...... ............. ........... 743 394 686 returned, a smaller proportion than for checks or retail Number of institutions . . . . . . . . . . . . . . 9.934 5,467 15.401 ACH payments. The percentage of retail ACH pay Population (millions) ..........•.... 242.2 56.6 298.8 Transaction deposits ments returned declined from 2003 (when it was (billions of dollars) . . 706 137 843 1.5 percent), willie the percentage of CCD transac NOTE: Annualized figures based on survey data for March and April 2007. tions returned remained flat. 5 I Most ACH returns in Excludes institutions that had no transaction deposits. Urban areas are defined as metropolitan s!atistical areas or New England county metropolitan s!atistical 2006 were PPDs (prearranged payment and deposit areas. and rural areas as all other areas. Rural areas include some urbanized ar entries), by far the largest type of ACH payment by eas, such as oullying suburbs that surround metropolitan statistical areas. Com number, with a rate of 1.1 percent. The second and ponents may not sum to totals and may not yield percentages shown because of rounding. I. Annual number of debits per $ 1,000 of transaction deposits. 2. Annual value of debits per $ \,000 of transaction deposits. 5 I. The 2003 percentages for retail ACH payments and CCD SOURCES: Federal Reserve; and U.S. Depanment of Commerce, Bureau of transactions referred to in lhis sentence are revised from those reported Economic Analysis and Bureau of the Census. in Gerdes and others, "Trends in the Use of Payment Instruments," due 10 a revision to the estimate of total ACH payments and a change in Ihe method of calculation.
Recent Payment Trends in the United States AlOI third most returns were for WEB (web e-check) and ready to do so. In the first quarter of 2007, about TEL (telephone e-check) transactions, which had 41 percent of interbank checks were electronified for return rates of 1.5 percent and 6.5 percent, respec some part of the check-clearing process (28 percent tively. RCK (re-presented check) payments had the were presented as images, and 13 percent were highest return rate, at 58 percent. presented as substitute checks). More recent data After having risen between 2000 and 2003, the show very rapid increases in the proportions of return rates for all types of ACH transactions exam checks presented by and deposited with the Federal ined except ACH RCKs declined between 2003 and Reserve Banks as electronic images. 2006. The reversal may confirm anecdotal evidence Implementation of changes that enable the elec that in response to earlier increases in ACH fraud, the tronic processing of checks requires the commitment banking industry stepped up measures to reduce the and coordination of substantial resources. Depository incidence of fraud and to hold depository institutions institutions, third-party processors, and the Reserve more accountable for customer abuse of the ACH Banks have been investing in new technological network. The declines suggest that such efforts are capabilities to support electronic check processing. having an effect on returns. Despite the substantial cost of making the transition, electronic processing of checks is moving ahead at a SUMMARY AND CONCLUSIONS rapid pace. Changes in payments behavior are due to a number At some point between 2003 and 2006, the number of of factors, including technology, preferences, and payments made by credit or debit card in the United costs as well as the regulations, policies, and practices States for the first time surpassed the number of that govern the payments system. The recent rapid checks paid. And also for the first time, the number of growth in electronic payments was supported by a debit card payments surpassed the number of credit very long buildup of technical infrastructure and by card payments. Among the major payment types, the spreading acceptance of traditional electronic pay greatest percentage increase, by number of payments, ment instruments. Legal and regulatory changes have was for payments made using the automated clearing removed significant barriers to the growth of elec house system, in part because of a rapid increase in tronic payments. Against this backdrop, rapid changes the conversion of checks into electronic ACH pay in the payment system will likely continue through ments. The number of checks written continued the the rest of this decade-and into the next. decline observed in earlier periods, and the decline accelerated because of ACH check conversion. By APPENDIX: SOURCES OF DATA AND 2006, the number of payments made by electronic METHODS OF ESTIMATION means was twice the number of payments made by check. Recent estimates of the number and value of noncash Later data show that by March and April 2007, the payments came from two surveys conducted in number of debit card payments exceeded the number 2007-one of depository institutions (the 2007 deposi of check payments. Debit card payments accounted tory institution survey) and the other of electronic for more than half of all debits to transaction accounts payment networks, card issuers, and card processors at credit unions, which serve mainly consumer cus (the 2007 electronic payment survey). Similarly, the tomers, while checks continued to be predominant at estimates for earlier years came from 2004 and 2001 commercial banks, which also serve business custom surveys of depository institutions (the 2004 and 2001 ers. The number of debit card payments per capita in depository institution surveys) and electronic pay the Northeast and Midwest regions had begun to ment networks, card issuers, and card processors (the catch up to the West, while growth in the South 2004 and 2001 electronic payment surveys).52 lagged by comparison. Electronic methods of check clearing are rapidly 52. The 2001, 2004, and 2007 surveys were conducted by the Retail replacing traditional paper methods. From early 2006 Payments Office at the Federal Reserve Bank of Atlanta in collabora· to early 2007, the number of checks presented elec tion with Board staff. Global Concepts assisted with all three deposi· tronically tripled. The number of substitute checks tory institution surveys; in addition, International Communications Research (lCR) assisted with the 2007 and 2004 surveys, and Westat which are created for banks that demand paper after a assisted with the 200 I survey. Dove Consulting assisted with all three check has been replaced with an electronic image electronic payment surveys. also tripled during the period. The creation of substi The report of the 2007 depository institution survey, "The Deposi tory Institutions Payments Study: A Survey of Depository Institutions tute checks allows banks to electronify their pro for the 2007 Federal Reserve Payments Study" (March 2008), and the cesses even if their paying bank counterparties are not report of the 2007 electronic payment survey, "The Electronic Pay-
A 102 Federal Reserve Bulletin D October 2008 The 2004 and 2007 depository institution surveys The population from which the 2007 sample was were similar in most respects. However, the 2007 drawn comprised 13,319 depository institutions (bank survey collected additional information on paper and subsidiaries of multi bank holding companies were electronic methods of clearing checks. In this article, treated as a single entity) that reported transaction that additional information is compared with informa deposits greater than zero as of September 2006 (June tion on methods of clearing checks collected by the 2006 for credit unions). Based on experience with the Board in a 2006 survey on check losses incurred by, 200 I and 2004 depository institution surveys, which and the funds availability and check-clearing prac had overall response rates higher than 50 percent, a tices of, depository institutions.53 The 2001 deposi stratified random sample of 2,700 depository institu tory institution survey collected information only tions was estimated to be needed to produce national about checks and did not collect information about estimates of the number and value of debits made via other debits to transaction accounts. check with a desired precision of at least ±5 percent at a 95 percent level of confidence. 2007 Depository Institution Survey For sampling and estimation purposes, depository institutions were separated into four groups Survey Design commercial banks; credit unions; and two types of savings institutions, those federally regulated by the The 2007 depository institution survey collected Office of Thrift Supervision and those regulated by information from three types of institutions: commer states.54 The largest institutions in each group, as cial banks (including agencies and branches of for determined by the value of their transaction deposits, eign banks); savings institutions (savings banks and and some institutions known to have highly unusual savings and loan associations); and credit unions. check volumes, such as issuers of rebate checks, were Information was collected on several types of debits sampled with certainty, meaning that all were in to transaction accounts: checks paid, ACH payments, cluded in the sample. The remaining institutions in debit card payments (both signature-based and PIN each group were then stratified by the value of their based), and ATM withdrawals. (Large-value transfers transaction deposits-eight strata for commercial and teller window withdrawals, which create debits, banks, seven strata for credit unions, and ten strata for as well as credit card and currency payments were savings institutions (five for federally regulated and outside the scope of the survey.) five for state regulated). Depository institutions were asked to report, via The final sample allocation was determined so as to questionnaire, the number and dollar value of debits minimize the approximate standard error of the esti to their accounts, by type of debit, during each of the mated total number of checks. Because the strata months March and April 2007. They were also asked containing the larger depository institutions typically to report the number and value of returned checks accounted for more paid checks in the 2001 and 2004 and, for all debit types except debit card payments, samples and had greater variance, they were assigned the number and value of on-us debits (debits for a larger proportion of the sample. The al1ocation of which the payee's account and the payer's account the sample between the institution types gave more are at the same depository institution). As noted weight to commercial banks because they were earlier, detailed information about methods of check expected to account for a disproportionate share of clearing was requested, including number and value checks and other account debits, but it also took into of checks presented by form of presentment (paper, account the desirability of producing estimates by either original or substitute, and electronic, either depository institution type. image or MICR line) and number and value of In all, 1,554 commercial banks, 333 savings insti deposited checks (with number of client images and tutions, and 813 credit unions were included in the branch/ATM images identified separately). sample. Responses were received from 853 commer cial banks (including all of the 38 largest), 191 savings institutions (including the 18 largest), and ments Study: A Survey of Electronic Payments for the 2007 Federal Reserve Payments Study" (March 2008). as well as documents related to the earlier surveys. are available at www.frbservices.orgl communicationslpayment_system_research.html. 53. The 2006 survey was conducted by the Board for a report to 54. The 200 I and 2004 surveys included a fifth group- Congress. See Board of Governors of the Federal Reserve System domestically chartered branches of foreign banks. Those institutions (2007). Reporl to Ihe Congress on the Check Clearing for Ihe 21s1 had low rates of response and collectively accounted for a very small Century Act of 2003 (Washington: Board of Governors. April). number and value of payments. and it was determined that they could www.federalreserve.govlboarddocsfRptCongress/check21/ be excluded from the 2007 survey without a significant loss of check21.pdf. information.
Recent Payment Trends in the United States A I 03 393 credit unions (including the 5 largest), for a total requested figures. As a result, some responses were of 1,437 respondents. not complete enough to produce reliable imputed By the time survey responses had been received, figures. later data on transaction deposits-data as of Because some respondents were able to provide March 31, 2007-had become available. Using those reasonable responses for some survey sections but not later data, the sample and population were restratified for others, imputation and estimation was conducted to produce estimates for the 13,316 depository insti by section. For the checks section to be considered tutions that reported transaction deposits greater than "complete" (that is, eligible for the imputation pro zero as of April 30, 2007, the end of the period for cess), a response was needed for at least one of the which data were collected. The major change result four figures for total paid checks. A total of 1,281 ing from the restratification was an adjustment to the responses met this criterion, for a potential of 81,984 largest size stratum for each depository institution figures; of these, 34,597 figures (42 percent) were group so that it would be a certainty stratum (that is, missing and were imputed. For the ACH payments all members of the stratum must have responded to section, a response needed to provide at least one the overall survey, although not necessarily to each figure for number of network or on-us ACH debits or item). Strata also changed somewhat because of the credits to be considered complete. (A response pro entry and exit of some institutions between Novem viding value figures only was not deemed sufficient ber 2006, when the sample was drawn, and April because some respondents' total ACH value was 2007, and also because of changes in the value of known to be overstated due to problems distinguish transaction deposits between September 2006, when ing ACH payments from other types of transactions, transaction deposits used for the sample were re as reported elsewhere in this appendix.) A total of ported, and March 2007. 1,287 responses met this criterion, for a potential of 46,332 figures; of these, 19,232 figures (42 percent) Item Nome ponse and Imputation were missing. For the ATMldebit card section, a response needed to provide at least one number or Each respondent was asked to provide four figures value for total ATM withdrawals, PIN-based debit (number and value for March and April of 2006) for card payments, or signature-based debit card pay each item in three questionnaire sections-16 items ments to be considered complete. A total of 904 concerning checks, 9 concerning ACH payments, and responses met this criterion, for a potential of 18,080 5 concerning ATM withdrawals and debit card figures; of these, 2,146 figures (12 percent) were payments-for a total of 120 figures. With 1,437 missing. institutions responding overall, there was a potential For imputation, respondents were grouped by type for 172,440 completed figures. (commercial bank, savings institution, or credit union) Each item included in the survey had logical and a matrix of covariances between figures in each relationships with other items. For example, groups section was estimated using a method that produces of subtotals should add up to-or, for incomplete sets, maximum-likelihood estimates in the presence of be less than-totals; and number-value pairs should missing data through the use of an iterative technique not have a zero amount accompanied by a nonzero called the EM algorithm.55 A value was imputed for amount. In order to use the variety of standard each missing figure, and after adjustments were made statistical methods that require a rectangular dataset to ensure that logical relationships were not violated, and to make the estimates adhere to logical relation the imputed values produced on the final iteration of ships, missing figures needed to be estimated using a the EM algorithm were used for estimation. The statistical process called imputation. Prior to imputa imputation model for each missing figure was a linear tion, responses were checked, and for any violations regression on a related figure from 50 other respon of identified logical constraints, respondents were dents closest in size as measured by value of transac contacted and, when appropriate, data edits were tion deposits. Imputations were performed in a hier made. In most cases in which logical inconsistencies archical fashion, by filling in totals first, followed by could not be resolved, figures were considered miss subtotals. Independent variables for the regressions ing and subsequently were imputed. were selected by identifying the closest reported Of the 1,437 respondents, one-fourth provided all the requested figures, half reported at least 70 percent of the figures, and about two-thirds reported at least 55. For information on the technique, see Roderick 1.A. Linle and 33 percent of the figures. Almost all of the remaining Donald B. Rubin (2002), Statistical Analysis with Missing Data, 2nd one-third reported only 8 percent or fewer of the ed. (Hoboken, N.J.: Wiley), sections 11.2.1-11.2.2 (pp. 223-25).
AI04 Federal Reserve Bulletin 0 October 2008 figure in a set of four or, if a subtotal was to be sufficient, when combined with external data on each imputed, a total within a logical relationship. depository institution's total deposits distributed by Each fitted regression yielded a predicted value and region, to make broad comparisons possible. For each an associated standard deviation for the missing item. of four regions-Northeast, South, Midwest, and Six datasets containing both actual responses and West-separate estimates were calculated for single imputations were created. The first dataset contained region depository institutions (those having deposits imputations that used the predicted, or expected, in only one region) and multi region depository insti value only. To arrive at an imputed value for the other tutions (those having deposits in more than one five datasets, a random deviate was added to the region). predicted value, drawn from a normal distribution The survey did not directly collect regional data having a mean of zero and the standard deviation from multiregion depository institutions. Information from the fitted regression. This imputation procedure on the distribution of each depository institution's was repeated five times, each time using a newly total deposits (transaction plus savings deposits) was drawn deviate in the calculation, to create the five available, so each type of account debit for each additional datasets. All the summary statistics based multiregion depository institution in the population on the 2007 depository institution survey are esti was assumed to be distributed across regions in mates calculated from the first dataset. The variation proportion to the location of the institution's deposits, among the estimates calculated using the other five and its data were allocated to regions accordingly.56 datasets provided information about the uncertainty Separate estimates were produced for each region in the overall estimate arising from the imputations using the data from single-region depository institu and was used to compute standard errors. tions and the allocated portion of multi region deposi tory institutions. New, separate ratio estimators were E timation produced following the procedure described in the preceding section. It turned out that national estimates The actual and imputed data for respondents were obtained from aggregating these regional estimates converted to estimates for the population using a were about the same as those obtained from the separate ratio estimator for each stratum, with the original analysisY For presentation purposes, any value of transaction deposits being the covariate for difference was proportionally allocated to the regional each item. That is, for a given item and within a estimates so that the sums of the regional estimates stratum, the sum of the respondents' data was multi added up precisely to the national estimates. plied by the ratio of the transaction deposits in the The assumption that the payments and transaction population to the transaction deposits at the respond deposits of depository institutions are regionally dis ino institutions. The associated sampling standard '" tributed in proportion to the distribution of their total error was based on a classical statistical formula that deposits is consistent with the hypothesis that custom accounts for the uncertainty arising from the use of a ers of multi region depository institutions are more sample rather than a census, and on the variation similar to each other in their payments behavior, even among imputed figures that accounts for the uncer when they are located in different regions, than they tainty arising from the fact that some items needed to are to customers of different depository institutions. be imputed. To put it another way, the regional estimates assume The 95 percent confidence intervals for the national that the regional fractions of a depository institution's estimate of checks were ±1.9 percent of the number customers exhibit similar payments behavior. While of checks paid and ±2.3 percent of the value of checks no better alternative for constructing regional esti paid. Both confidence interval half-widths were just mates appears to exist given available data, the one-tenth of one percentage point larger than those assumption could affect the accuracy of regional for the 2004 estimates, despite having used data from estimates, as the allocation of transaction deposits (or fewer respondents (l,281 versus 1,501). The confi account debits) would be too large (too small) for a dence intervals for the national estimates of other region if the actual ratio of total deposits to transacaccount debits were generally larger than those for the 2004 depository institution survey. Estimates by Geographic Region and by Urban or 56. For credit unions. the geographic distributions of an institu Rural Location of Deposits. Although the survey tion'S branches served as a proxy for the geographic distribution of its total depOsits. was not explicitly designed to facilitate geographic 57. Differences between the sum of regional estjmates and the analysis of account debit patterns, the responses were corresponding national estimates did not exceed I percent.
Recent Payment Trends in the United States A 105 tion deposits (or account debits) for a multiregion value of payments for nonrespondents was not esti institution was higher (lower) in that region. mated, so reported totals for emerging payments are The uncertainties that arise from allocation of data lower bounds for the national totals. to regions described above cause difficulties for the For the 2006 estimates, special efforts were made statistical analysis of the estimated differences among in estimating the number and value of payments using regions. Sampling standard errors were, therefore, not prepaid cards. A total of 52 prepaid card companies calculated for the regional estimates.58 were sent questionnaires, and 38 responded.60 Na Estimates of urban and rural debit activity were tional totals were constructed using respondent infor constructed using a method similar to that used to mation as well as public information about nonre construct regional estimates. Urban areas were de spondents. Nevertheless, the totals for payments by fined as metropolitan statistical areas, and rural areas prepaid card are not as reliable as the totals for as all other areas. Thus, some urbanized areas, such as payments by established types of payments, as the some outlying suburbs that surround metropolitan reported portion of totals for prepaid cards was only statistical areas, were included in the rural regions. 58 percent, by both number and value, compared with an overall reported portion for established payments 2007 Electronic Payment Survey of greater than 99 percent. For the 2007 electronic payment survey, question Comparison of 2006 and 2007 Estimates naires were sent to all 73 well-established electronic payment networks, card issuers, and card processors This article reports estimates of the national number in order to estimate the number and value of elec and value of payments in two ways-annualized tronic payments originated in the United States in March and April 2007 estimates of debits from 2006 by means of commonly used payment accounts at depository institutions (check, ACH, and instruments-general-purpose and pri vate-Iabel credit debit card payments and ATM withdrawals) and cards, signature-based and PIN-based debit cards, calendar-year 2006 estimates for check, ACH, debit ACH payments, and electronic benefits transfers. card, and credit card payments, electronic benefits Electronic payment networks, card issuers, and transfers, and ATM withdrawals. The 2007 estimates card processors can generally supply accurate data on of account debits are based only on the 2007 deposi the number and value of the payments they process tory institution survey, whereas the 2006 estimates for from business records, and 89 percent of established checks and ACH payments also use information from entities responded with information. Known informa the 2007 electronic payment survey. The 2006 esti tion on nonrespondents showed that, collecti vely, the mates of debit and credit card payments and EBTs are number and value of payments processed by this based solely on the 2007 electronic payment survey. group were likely very small. An informal method The 2007 estimates of ATM withdrawals from the based on publicly available information was used to depository institution survey are used for the 2006 estimate number and value of payments for nonre estimates. spondents; overall, the estimated portion of the total Estimates of checks paid in 2007 are for commer for nonrespondents was 0.2 percent by number and cial checks only (checks reported by depository insti 0.1 percent by value.59 tutions), whereas estimates of total checks paid in Questionnaires were also sent to 33 emerging 2006 are the sum of U.S. Treasury checks, U.S. Postal payments companies that handle online bill payment Service money orders, and commercial checks. The transactions, RFIO transponder-initiated payments, estimates of commercial checks paid for 2006 are and a variety of other kinds of payments that appear adjusted versions of the estimates of commercial to have potential for growth in the United States, such checks paid for 2007. The adjustment involved the as person-to-person Internet payments, proprietary use of NACHA data showing rapid changes in the cards issued by merchants that can initiate an ACH number of checks converted per month throughout payment, mobile payments, and deferred payments. 2006 and early 2007. As a result, the annualized total Surveys were returned by 16 companies. Number or number of checks converted in March and April 2007 was an estimated 3.39 billion, compared with 2.61 bil lion in 2006, a difference of 778 million. The differ- 58. For addilional details on the regional estimates see Gerdes and others. "Trends in lhe Use of Payment Instruments." 59. Because of the informal estimation approach. no statistical method of estimating uncertainty was available. Public information 60. States were also surveyed about the use of prepaid cards for about nonrespondents, however, suggests that the number and value of state-provided benefit programs, and 37 states provided information. payments they process constitute very small portions of the totals. Payments made with such cards are a subset of total prepaid payments.
A 106 Federal Reserve Bulletin 0 October 2008 ence in value was $178 billion. These differences difficulty distinguishing ACH payments from large represent a lower bound estimate (because of the value funds transfers called offset entries, inflating the decline in checks) of checks that would have been value of on-us ACH payments by an unknown counted as paid checks if data had been collected amount.61 The 2006 estimates of the value of on-us durjng 2006. Based on this argument, the 2006 esti ACH payments were calculated based on the assump mates for commercial checks were calculated as the tion that the average value of on-us ACH payments is sums of these differences and the 2007 estimates for equal to the average value of network ACH payments. commercial checks paid. Based on the same argu Actual on-us ACH value may be somewhere between ment, sirilllar adjustments were made for the 2003 the two estimates. These estimates-appropriately estimates of checks prud. adjusted-were used in conjunction with annual 2006 The 2007 electronic payment survey collected totals provided by electronic payment networks in the information on the number and value of network electronic payment surveys to estimate the 2006 (interbank) ACH payments. The 2007 depository figures. institution survey collected information on the num For estimates of total ACH, data from the 2007 ber and value of network, on-us, and direct (bilater depository institution survey were used to estimate ally exchanged) ACH payments. Separate proportions the fractions of ACH transactions, by number, that of ACH debits and credits by number estimated from were on-us and cleared in-house (separately for debit the depository institution survey, combined with net and credit transfers). The estimated fractions were work ACH debit and credit data from the 2007 applied to 2006 network ACH payment estimates electronic payment survey, were used to estimate total from the electronic payment survey to estimate on-us on-us ACH payments in 2006. Direct ACH payments ACH payments for 2006. These were added to the were negligible and were included in the on-us fig network ACH payments in 2006 to yield estimates for ures. The total number of ACH payments in 2006 was total ACH. 0 calculated as the sum of these on-us figures and the estimates of the number of network ACH payments from the 2007 electronic payment study. The 2007 estimates for the total value of ACH 61. The difficulty in separating offset entries from ACH payments payments are much rugher than the estimates for was due to the use of a shared platform to process both, a common practice at some of the largest depository institutions. The difficulty, 2006. Some of the large commercial banks that which involves a small number of very large value entries, did not responded to the depository institution surveys had substantially affect the estimates of the number of ACH payments.
A 107 December 2008 The 2007 HMDA Data Robert B. Avery, Kenneth P Brevoort, and Glenn B. ing virtually all the reported information for each Canner, of the Division of Research and Statistics, lending institution.s prepared this article. Cheryl R. Cooper, Christa N. The HMDA data consist of information reported by Gibbs, Rebecca Tsang, and Sean Wallace provided about 8,600 home lenders, including all of the na research assistance. tion's largest mortgage originators. The loans reported are estimated to represent about 80 percent of all The Home Mortgage Disclosure Act of 1975 (HMDA) home lending nationwide; thus, they likely provide a requires most mortgage lending institutions with broadly representative picture of home lending in the offices in metropolitan areas to publicly disclose United States. information about their home-lending activity. The This article presents key findings from the 2007 information includes characteristics of the home HMDA data. In doing so, it highlights the notable mortgages that lenders originate or purchase during a changes in relationships that are revealed when the calendar year, the geographic location of the proper 2007 data are compared with data from earlier years.6 ties related to these loans, and demographic and other Because of the importance of the loan-pricing infor information about the borrowers.l The disclosures are mation included in the HMDA data and because of intended not only to help the public determine the recent turmoil in the residential mortgage market, whether institutions are adequately serving their com particularly the higher-priced segment of the market, munities' housing finance needs but also to facilitate much of the focus here is on the data pertaining to that enforcement of the nation's fair lending laws and to market segment.7 inform investment in both the public and private sectors. Under the 1975 act, the Federal Reserve Board 5. The only reported items not included in the data made available to the public are the date of application and the date on which action implements the provisions of HMDA through regula was taken on the application. These items are withheld to help ensure tion.2 In addition, the Federal Financial Institutions that the individuals involved in the application cannot be identified. Examination Council (FFlEC) is responsible for col 6. Previously published assessments include Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner (2007), "The 2006 HMDA lecting the HMDA data and facilitating public access Data," Federal Reserve Bulletin, vol. 93 (December 21), pp. A 73to the information.3 Each September, the FFIEC A109; Robert B. Avery, Kenneth P. Brevoort, and Gtenn B. Canner releases summary tables pertaining to lending activity (2006), "Higher-Priced Home Lending and the 2005 HMDA Data," Federal Reserve Bulletin, vol. 92 (September 8), pp. AI23-66; and from the previous calendar year for each reporting Robert B. Avery, Glenn B. Canner, and Robert E. Cook (2005), lender and an aggregation of home-lending activity "New Information Reported under HMDA and Its Application in Fair by metropolitan statistical area (MSA).4 The FFlEC Lending Enforcement," Federal Reserve Bullerin, vol. 91 (Summer), pp.344-94. also makes available a consolidated data file contain- 7. Borrowers in the higher-priced market segment generally fall into one of two market categories-"subprime" or "near prime" (sometimes referred to as "alt-A"). Individuals in the subprime category generally pay the highest prices because they tend to pose the I. A description of the items reported under HMDA is provided in greatest credit or prepayment risk. Statistics prepared by the lending appendix A. industry do not characterize lending as higher priced but rather use the 2. HMDA is implemented by Regulation C (12 C.F.R. pt. 203) of terms subprime or air-A. Thus, when presenting data from industry the Federal Reserve Board. More information about the regulation is sources on loan performance or other aspects of the mortgage market, available at www.federalreserve.gov. this article will often refer to data on the subprime, alt-A, or prime 3. The FFIEC (www.ffiec.gov) was established by federal law in lending market. 1979 as an interagency body to prescribe uniform examination proce Mortgages with annual percentage rates (APRs, which encompass dures, and to promote uniform supervision, among the federal agen interest rates and fees) above designated thresholds are referred to here cies responsible for the examination and supervision of financial as "higher-priced loans"; all other loans are referred to as "lower institutions. The member agencies are the Board of Governors of the priced." For loans with spreads above designated thresholds, revised Federal Reserve System, the Federal Deposit Insurance Corporation, Regulation C requires the reporting of the spread between the APR on the National Credit Union Administration, the Office of the Comptrol a loan and the rate on Treasury securities of comparable maturity. The ler of the Currency, and the Office of Thrift Supervision. thresholds for reporting differ by lien status: 3 percentage points for 4. For the 2007 data, the FFIEC prepared more than 63,000 first liens and 5 percentage points for junior, or subordinate, liens. MSA-specific reports on behalf of reporting institutions. These and Further details are in note 12, p. A126, of Avery, Brevoort, and other reports are made available to the public by the FFIEC. Canner, "Higher-Priced Home Lending and the 2005 HMDA Data."
A 108 Federal Reserve Bulletin 0 December 2008 TURMOIL IN THE MORTGAGE MARKET tions and ongmations, particularly in the higher priced segments of the mortgage market. Also, some Both primary and secondary mortgage markets expe lenders that had previously reported HMDA data rienced considerable stress in 2007, a condition that ceased operations during 2007 and did not file a has continued into 2008.8 Delinquency rates on HMDA report even though they extended loans dur higher-priced home loans, particularly those with ing part of that year.'2 Although nonreporting by adjustable-rate features, first began to increase nota lenders that ceased operations affects the comprehen bly in 2006; those rates then rose sharply during 2007 siveness of the HMDA data each year to some extent, and far outpaced the performance problems that also nonreporting in 2007 had a much larger effect than in emerged in the lower-priced segment of the market.9 previous years. For 2007, many more lenders than in One consequence of deteriorating loan perfor earlier years ceased operations because of a bank mance and widespread declines in home values was a ruptcy or other adverse business event, and the non sharp contraction in 2007 in the willingness of lend reporting institutions accounted for a significant ers and investors to offer loans to higher-risk borrow minority of the loans originated in 2006 and an even ers or, in some cases, to offer certain loan products larger share of the higher-priced loans made that year. that entailed features associated with elevated credit Most important, the effects of nonreporting in the risk. to Moreover, to the extent that credit was still 2007 HMDA data amplified the measured decline in available, loan prices rose sharply, largely because of higher-priced lending from 2006. The amplification concerns about repayment prospects. In addition, occurred because some of the lenders that ceased many lenders whose business models relied on a operations originated loans in 2007, and according to robust secondary market to purchase the loans they these institutions' lending profiles in 2006, a dispro originated were forced to cease or curtail operations, portionate share of those originations consisted of as they could no longer obtain funds to operate or find higher-priced loans. For this reason, some caution investors willing to purchase their loan originations. should be exercised in using the 2007 data to docu Difficulties in the higher-priced portion of the ment the full extent of the disruptions in the higher mortgage market spilled over to other market seg priced lending market in that year. The effects of ments, including the market for loans for large nonreporting are difficult to quantify. This issue, amounts (the so-caUed jumbo market), in which among others, is addressed later in the article. credit spreads widened substantially. The widening of spreads led to higher interest rates on such loans, GENERAL FINDINGS FROM THE 2007 HMDA which effectively reduced credit availability. I I DATA The 2007 HMDA data reflect the difficulties in the housing and mortgage markets. Many reporting insti For 2007, lenders covered by HMDA reported infor tutions experienced a sharp reduction in loan applicamation on 21.4 million applications for home loans. Almost all of the applications were for loans to be 8. See, for example, Randall S. Kroszner (2007), 'The Challenges secured by one- to four-family (referred to here as Facing Subprime Mortgage Borrowers." speech delivered at the "single family") houses (table 1). These applications Consumer Bankers Association 2007 Fair Lending Conference. Wash ington. November 5. www.federalreserve.gov/newsevents/speech/ resulted in more than 10.4 million loan extensions kroszner2007I 105a.htm. (data not shown in table). Lenders also reported 9. Data from LoanPerformance. a subsidiary of First American information on 4.8 million loans that they had pur Core Logic. Inc .• show that 20.4 percent of the subprime loans with adjustable-rate features were seriously delinquent at the end of 2007. chased from other institutions and on 433,000 re By comparison, 8.2 percent of fixed-rate subprime loans. 1.0 percent quests for pre-approvals of home-purchase loans that of fixed-rate prime loans. and 4.2 percent of adjustable-rate prime had not resulted in a loan origination (data not shown loans were seriously delinquent at the end of that year. 10. Industry sources indicate that the dollar amount of originations in table); the pre-approval requests were turned down of subprime loans fell 68 percent from 2006 to 2007. to a level of only by the lender or were granted but not acted on by the $191 billion. Subprime loan originations in 2007 were the smallest applicant. since 2001. See Inside Mortgage Finance (2008). The 2008 Mortgage Market Statistical Annual. vol. 1: The Primary Market (Bethesda. The total number of reported applications feU Md.: Inside Mortgage Finance Publications). about 6.0 million, and the number of reported loans II. 1umbo loans are loans that exceed the size limits set for loans fell 3.5 million-or 22 percent and 25 percent, that Fannie Mae and Freddie Mac are permined to purchase (conform ing loans). Fannie Mae and Freddie Mac are government-sponsored enterprises that focus on conventional loans that meet certain size limits and other underwriting criteria. Available data indicate that the 12. As in earlier years. some institutions ceased operations because dollar amount of originations of jumbo loans fell nearly 30 percent of a merger or acquisition. Lending by these institutions is reported. in from 2006 to 2007. See Inside Mortgage Finance. The 2008 Mortgage most cases. by the acquiring institution on a consolidated basis or as Market Statistical Annual. two distinct filings.
The 2007 HMDA Data A 109 l. Home loan and reporting activity or lending institutions covered under the Home Mortgage Oi closure Act. 1990-2007 Number Applications received for home loans on 1-4 family propenies, and home loans purchased from another institution (millions) Disclosure Year Applications Loans Reponers repons2 pu H r o c m ha e s e I Refinance I imp H ro o v m em e ent I Total' purchased Total' 1990 .................... 3.3 1.1 1.2 5.5 1.2 6.7 9,332 24,041 1991 .................... 3.3 2.1 1.2 6.6 1.4 7.9 9,358 25,934 1992 .................... 3.5 5.2 1.2 10.0 2.0 12.0 9,073 28,782 1993. ... , .............. 4.5 7.7 1.4 13.6 1.8 15.4 9,650 35,976 1994 .................. 5.2 3.8 1.7 10.7 1.5 12.2 9.858 38,750 1995. ..... ........ ... 5.5 2.7 1.8 10.0 1.3 11.2 9.539 36,611 1996 ..... ........... .. 6.3 4.5 2.1 13.0 1.8 14.8 9,328 42,946 1997 .................... 6.8 5.4 2.2 14.3 2.1 16.4 7.925 47,416 1998. ......... ........ 8.0 11.4 2.0 21.4 3.2 24.7 7,836 57.294 1999 .................... 8.4 9.4 2.1 19.9 3.0 22.9 7,832 56.966 2000 ................ ... 8.3 6.5 2.0 16.8 2.4 19.2 7.713 52,776 2001 ................... 7.7 14.3 1.9 23.8 3.8 27.6 7,631 53,066 2002 .................. 7.4 17.5 1.5 26.4 4.8 31.2 7.771 56.506 2003. ............ ... 8.2 24.6 1.5 34.3 7.2 41.5 8,121 65,808 2004 ................... 9.8 16.1 2.2 28.1 5.1 33.3 8,853 72,246 2005 .................... 11.7 15.9 2.5 30.2 5.9 36.0 8,848 78,193 2006 ...... ............. 10.9 14.0 2.5 27.5 6.2 33.7 8.886 78.638 2007 .................... 7.6 11.5 2.2 21.4 4.8 26.2 8.610 63,055 NOlO: Here and in all subsequent tables, components may not sum to totals 2. A repon covers the mongage lending activity of a lender in a single met· because of rouodiog, and, except as noted, applications exclude requests for ropolitan statistical area in which it had an office during the year. pre·approval that were denied by the lender or were accepted by the lender but SOURCE: Here and in the subsequent tables and figure except as noted, Fed· not acted upon by the borrower. In this article, applications are defined as be· eral Financial Institutions Examination Council, data reponed under the Home ing for a loan on a specific propeny; they are thus distinct from requests for Mortgage Disclosure Act (www.ffiec.govlhmda). pre·approval. which are not related to a specific propeny. I. Applications for multifamily homes are included only in the total col· umns; for 2007. these applications numbered 54,232. respectively-from 2006 (2006 data not shown in affiliates of bank or savings association holding com tables). Lending for both home purchase and refinanc panies that reported data. ing fell as slower house price appreciation and, in In total, 169 institutions that reported 2006 data did some areas, outright declines in property values not report data pertaining to 2007 lending activity diminished the attractiveness of buying and selling (these institutions ceased operations and were not properties or limited opportunities to refinance out merged into, or acquired by, another reporting entity). standing loans. The imposition of tighter underwrit Some of the institutions that did not report were ing standards, an increase in mortgage interest rates, high-volume originators. In the aggregate, these non and the elimination of some loan products used to reporting institutions accounted for about 2.4 million stretch affordability also contributed to the reduction loans or applications that did not result in a credit in lending. Finally, a portion of the decline in lending extension, or about 7 percent of all the loan and activity was due to the nonreporting of loans made by 2. DislribUlion of reporter covered by the Home Mortgage institutions that reported data for 2006 but discontin Disclosure Act, by type of in titution. 2006. ....0 7 ued operations during 2007. I I 2006 2007 Reporting Institutions Type Number I Percent I Number I Percent Depo.<ilOry ins/i/lI/ion For 2007, 8,610 institutions reported under HMDA: Commercial bank ..... 3,900 43.9 3,910 45.4 3,910 commercial banks, 929 savings institutions Savings institution .... 946 10.6 929 10.8 Credit union 2.036 22.9 2.019 23.4 (savings and loans and savings banks), 2,019 credit All ............. 6.882 77.4 6.858 79.7 unions, and 1,752 mortgage companies (table 2). In MOr/guge company Independent . ...... 1,328 14.9 1.124 13.1 total, the number of reporting institutions fell about Affiliated' 676 7.6 628 7.3 3 percent from 2006, primarily because of a relatively All ................ 2,004 22.6 1,752 20.3 large decline in the number of independent mortgage All institutions ....... 8,886 100 8,610 100 companies-that is, mortgage companies that were I. Subsidiary of a depository institution or an affiliate of a bank holding neither subsidiaries of depository institutions nor company.
Alto Federal Reserve Bulletin 0 December 2008 application records included in the 2006 HMDA data. nance into an FHA loan.J4 The number of FHA (The effects of such nonreporting on the 2007 data are backed first-lien loans used to purchase homes or discussed in more detail later in the article.) refinance a home loan increased nearly 20 percent from 2006, and the FHA's share of all home lending increased to 4.6 percent in 2007 (data not shown in Di.\positioll of Applications, Loan Types. alld tables).15 The sharp curtailment of credit availability Activities Related to the Home Ownership in the subprime portion of the market, recent steps to and Equity Protection Act increase the maximum loan values that are eligible for FHA loan insurance, and a newly enacted foreclo For purposes of analysis, loan applications and loans sure prevention law are likely to result in a higher reported under HMDA can be grouped in many ways; incidence of FHA-insured lending in 2008.16 here the analysis focuses on 25 distinct product categories characterized by loan and property type, Loan Size and BOITower Incom purpose of the loan, and lien and owner-occupancy status. Each product category contains information on For each loan made, the HMDA data include the the number of total and pre-approval applications, amount borrowed and the incomes of the borrowers application denials, originated loans, loans with prices that were relied on in the loan underwriting decision. above the reporting thresholds established by Regula The analysis in this section considers four loan cat tion C for identifying higher-priced loans, loans cov egories: (I) conventional loans that met the threshold ered by the Home Ownership and Equity Protection for reporting as higher-priced loans under HMDA, Act (HOEPA), and the mean and median annual (2) all other conventional loans, (3) FHA-insured percentage rate (APR) spreads for loans priced above loans, and (4) loans guaranteed by the Department of the reporting thresholds specified in Regulation C Veterans Affairs. The analysis is limited to site-built, (tables 3 and 4).13 The following sections highlight owner-occupied. one- to four-family units, and the some notable aspects of the HMDA data for 2007 four categories are applied separately to home and, where relevant, earlier years. purchase loans and to refinancings. For 2007, about 91 percent of conventional loans Conventional and Government-Backed Loans for home purchase and about the same proportion of such loans for refinancing, whether higher priced or As in earlier years, most reported home loan activity not, were within the conforming loan-size limits in 2007 involved conventional loans-that is, non established for Fannie Mae and Freddie Mac government-backed loans (table 3). Such loans ac counted for about 94 percent of all loan extensions in (table 5). t7 Higher-priced loans tended to be some what smaller than others; for example, among con 2007. ventional home-purchase loans, the mean size of The share of all HMDA-reported loans backed by higher-priced mortgages was $208,000, compared the Federal Housing Administration (FHA) had fallen with $248,000 for others (table 5, memo item). over the past several years, from about 16 percent in FHA-insured loans tend to be considerably smaller 2000 to less than 3 percent in 2005 and 2006. than conventional loans; the difference reflects the More-limited product availability and the imposition relatively low insurance limits of the FHA and the of tighter underwriting standards in the higher-priced focus of the program on lower- and middle-income segment of the conventional mortgage market in 2007 borrowers who tend to buy more modestly priced encouraged borrowers to take out FHA loans. Also, toward the latter part of 2007, the FHA created a new lending program. FHASecure, to help qualified indi 14. See U.S. Department of Housing and Urban Development, Federal Housing Administration (2007), "Bush Administration to viduals with higher-priced conventional loans refi- Help Nearly One-Quarter of a Million Homeowners Refinance, Keep Their Homes," press release, August 31, www.hud.gov/news/ release.cfm?content=pr07 -123.cfm. 15. In contrast, the number of reported first-lien home-purchase 13. HOEPA is implemented by Federal Reserve Board Regula loans or refinancings that involved loans guaranteed by the Depart tion Z (12 C.F.R. pI. 226). Transition rules governing the reporting of ment of Veterans Affairs fell about 2 percent from 2006. the expanded HMDA data create problems for assessing the data on 16. Housing and Economic Recovery Act of 2008, Pub. L. No. loan pricing. manufactured-home lending. and pre-approvals. The 110-289 (2008). transition rules had a large influence on the data reported for 2004 and 17. For 2007, the conforming loan-size limit was $417,000 for a much smaller effects on the 2005 and 2006 data. In the 2007 data, single-unit property, with limits 50 percent higher for properties in transition rules affected only about 2,100 applications and 192 loans; Alaska and Hawaii. Higher limits are also established for two-, three-, the analyses here exclude those applications and loans when consider and four-unit properties; however, because the HMDA data do not ing data on loan pricing, manufactured-home lending, and pre distinguish among properties with fewer than five units, the analysis approvals. here uses the $417,000 limil.
The 2007 HMDA Data AlII homes. For 2007, the mean size of FHA-insured market, particularly regarding loans to purchase home-purchase loans was $142,000. homes. In piggyback lending, borrowers simulta Borrower incomes differ substantially by loan neously recei ve a first-lien mortgage and a junior-lien product and loan pricing (table 6). Most notably, the (piggyback) loan. The piggyback loan finances the mean income of borrowers with conventional loans, portion of the purchase price not being financed by regardless of loan pricing, was about 72 percent the first mortgage and sometimes any cash payment higher than that of borrowers with FHA-insured loans that might have been made; the junior-lien loan may (data derived from memo items in table). Among amount to as much as 20 percent of the purchase those obtaining conventional home-purchase mort price. gages, the mean income of individuals meeting the Piggyback loans are generally used to reduce the conforming loan-size limit established for Fannie cost of financing a home purchase. Often, they are Mae and Freddie Mac was $83,600, versus a mean designed to have a first-lien loan that can be financed income of $293,100 for those exceeding the conform at a lower price than a single loan for the total amount ing loan-size limit. Again, among borrowers with borrowed, such that the gains from the reduced conventional loans, those using higher-priced loans to finance costs on the first-lien loan outweigh the purchase a home or to refinance had a mean income higher finance costs on the junior-lien loan portion of about 20 percent lower than that of borrowers not the total borrowing. A prime example is the practice paying higher prices. of structuring the first-lien loan to avoid paying for private mortgage insurance (PMI) (for more informa Non-Owner-Occupant Lendi ng tion about PMI, see appendix B). Many of these loan transactions are structured so that the first-lien loan is Part of the strong performance of housing markets eligible for sale to Fannie Mae or Freddie Mac, both over the first half of this decade was due to the growth of which require PMI on first-lien loans for amounts in sales of homes to investors or individuals purchas that exceed 80 percent of the value of the property ing second or vacation homes, units collectively backing the loan. Another example is the structuring described as "non-owner occupied." HMDA data help document the role of investors and second-home of the loan transaction so that the first-lien loan can be buyers in the housing market because the data indi more readily securitized in the secondary market. cate whether the subject property is intended as the This practice has been common in the secondary borrower's principal dwelling-that is, as an owner market for subprime loans. Yet another example occupied unit.ls arises when the total amount requested exceeds the The share of non-owner-occupant lending among loan-size limits for Fannie Mae and Freddie Mac, first-lien loans to purchase one- to four-family site thereby requiring the borrower to pay the higher built homes rose in every year between 1996, when it interest rate usually charged on jumbo loans. Keeping was 6.4 percent, and 2005, when it reached a high of the size of the first-lien loan within the amount that 17.3 percent (table 7). For 2006, the share fell some conforms to the loan-size limits of Fannie Mae and what, to 16.5 percent, and in 2007 it declined further, Freddie Mac can possibly result in lower overall to 14.9 percent. Falling non-owner-occupant lending financing costs. likely reflected the reduced incentives for such bor The HMDA data can be used to help document rowing as house prices weakened or fell in many the extent of piggyback lending over time. How parts of the country and as the imposition of tighter ever, because not all lenders submit HMDA data, lending standards for borrowers in this market seg some of the junior-lien loans that are reported may ment reduced access to credit. not have the corresponding first-lien loan reported, and some of the first-lien loans that are reported Piggyback Lending may not have the associated junior-lien loan re ported. Also, some piggyback loans may be home In recent years, so-called piggyback loans emerged as equity lines of credit (HELOCs) rather than closed an important segment of the conventional mortgage end loans. Under the provisions of Regulation C, lenders need not report HELOCs. Nonetheless, a loan-matching process can be undertaken to deter 18. An investment property is a non-owner-occupied dwelling that is intended to be continuously rented. Some non-owner-occupied mine which reported junior-lien loans appear to be units-vacation homes and second homes-are for the primary use of associated with a reported first-lien loan. A junior the owner and thus would not be considered investment properties. lien loan was identified as a piggyback to a reported The HMDA data do not, however, distinguish between these two types of non-owner-occupied dwellings. first-lien loan if both loans (1) were conventional
A 112 Federal Reserve Bulletin 0 December 2008 3. Disposition of applications for hume luans. and origination and pricing of loans. by type of home and type of loan, 2007 r Applications Loans originated I Loans with APR spread above the threshold' Type of home and loan Number Acted upon by lender Number Distribution, by percentage points of APR spread ) submined N um be r I N d u en m i b ed e r I P d e e r n c i e e n d t Number Percent 3-3.99 I 4-4.99 I 5-6.99 I 7-8.99 I m 9 o o r r e 1-4 FAMILY NONBUSINESS RELATED' Owner occupied Site· built Home purchase Conventional First lien ...... ..... 4,654,084 4,120,941 783,972 19.0 2.928.820 411.263 14.0 49.4 17.1 26.8 6.5 .3 Junior lien .... ..... 927,255 828,053 170,231 20.6 548.567 118,673 21.6 . .. ... 65.8 30.0 4.3 Government backed First lien ............ 550,551 493.260 79,818 16.2 392.157 11,504 2.9 91.1 3.5 1.7 3.6 .1 Junior lien . . . . . . . . .. 1,348 1,138 85 7.5 1,008 65 6.4 .. . ... 76.9 18.5 4.6 Refinance Conventional First lien .. ......... 8,550,904 6.920,906 2,758,715 39.9 3,391,604 735,150 21.7 39.1 19.6 33.8 7.4 .1 Junior lien .......... 1.408,232 1,228,245 450,348 36.7 636,443 120,854 19.0 .. . . .. 58.0 32.4 9.5 Government backed First lien. ..... .... 342,768 288,814 91,106 31.5 179,330 11.893 6.6 92.1 4.3 2.7 .9 .0 Junior lien . ... .... 710 527 151 28.7 316 63 19.9 .. . ... 65.1 31.7 3.2 Home improvement Conventional First lien ....... .. 721,417 627,577 277,983 44.3 291,043 87,774 30.2 38.8 21.7 30.3 8.8 .5 Junior lien ..... .. 949,861 863,800 341,244 39.5 429,624 72.114 16.8 .. . . .. 45.3 32.5 22.2 Government backed First lien ..... .... .. to,962 9,614 2,347 24.4 6,666 410 6.2 59.5 7.6 22.7 8.0 2.2 Junior lien ..... ..... 3,407 2,789 866 31.1 1,577 1,044 66.2 . . . .. 39.8 31.6 28.5 Unsecured (conventional o ba r c g k o e v d e ) r n . m . e . n . . t . . . . . . . 347,359 340,661 167,456 49.2 146,395 .. . . . . . .. . ... ... Manufactured Conventional, first lien Home purchase ........ 359,351 347,819 175,312 50.4 94.247 57,954 61.5 25.8 23.9 31.0 13.5 5.8 Refinance .............. 146.597 132,750 64,384 48.5 55.069 30,880 56.1 29.1 26.2 32.9 9.8 2.0 Other ................. .. 141;807 127,179 48,899 38.4 69,077 16,142 23.4 36.0 12.2 24.8 16.5 10.4 NOll-owner occupied4 Conventional, first lien Home purchase ... ..... 908,416 813,364 167,875 20.6 564,719 112,711 20.0 59.4 20.0 15.6 4.5 .5 Refinance ........... ... 927,485 799,914 269.634 33.7 447,071 79,204 17.7 52.8 18.5 21.8 6.5 .4 Other .... ..... .... .... .. 275.273 244,145 87,984 36.0 129,959 31,731 24.4 15.5 7.3 45.0 21.6 10.6 BUSINESS RELATED' Conventional, first lien Home purchase ........ 19.798 17.626 1.983 11.3 14.863 881 5.9 60.5 14.5 23.7 1.0 .2 Refinance .............. 27.267 24,630 2,977 12.1 20,707 1,112 5.4 60.0 16.5 20.2 2.7 .5 Other. .............. .. 0. 7;156 6,867 1,074 15.6 5.463 149 2.7 28.9 11.4 45.0 12.1 2.7 MULTIFAMILY' Conventional, first lien Home purchase ........ 48,635 46,057 1.991 4.3 43,063 2,904 6.7 44.7 23.0 11.6 15.1 5.6 Refinance .............. 43,127 37.951 4,333 11.4 32,401 2.808 8.7 51.1 27.9 13.2 7.5 .3 Other ......... .......... 15,488 13,356 1.728 12.9 11,164 491 4.4 34.6 13.4 31.6 13.8 6.5 Total .................. .... Z1,389,258 18,331,983 5,952,496 32.5 10,441,353 1,'J07 ,114 18.3 36.4 15.1 34.1 11.5 2.4 NOTE: Excludes lransition-period applications (those submitted before 2004) 3. Business-related applications and loans are those for which the lender re and transition-period loans (those for which the application was submined be ported that the race, ethnicity, and sex of the applicant or co-appticant are "not fore 2004). applicable"; all other applications and loans are nonbusiness related. I. Annual percentage rate (APR) spread is the difference between the APR 4. Includes applications and loans for which occupancy StatuS was missing. on the loan and the yield on a comparable-maturity Treasury security. The 5. [ncludes business-related and nonbusiness-related applications and loans threshold for first-lien loans is a spread of 3 percentage points; for junior-lien for owner-occupied and non-owner-occupied properties. loans, it is a spread of 5 percentage points. Not applicable. 2. Loans covered by the Home Ownership and Equity Protection Act of 1994 (HOEPA), which does not apply to home-purchase loans. loans involving property in the same census tract, lng, and (3) had the same owner-occupancy status (2) were originated by the same lender with approxi and identical borrower income, race or ethnicity, mately the same dates of loan application and c1os- and sex.
The 2007 HMDA Data Al13 3. Dipo ilion of !lpplieution~ for home loans. und origination and pricing of IOUIlS, by type f home and type of loun, 2007-Conlillued I Loans originated MEMO Loans wilh APR spread above the threshold' Tmnsition-period applications (those submitted before 2004) APR spread (percentage points) Number of Loans originated Number of HOEPA- Number Number Percent I. HOEPA- I Mean I Median c l o o v a e n r s e ' d submitted denied denied Number ab P A o e v P r e c R e t n h s t p r e r w e sh a it o d h l d c l o o v a e n r s e ' d 4.5 4.0 .. . 305 10 5.9 67 6.0 ... 6.6 6.3 . . 19 I 9.1 6 0 ... 3.5 3.2 .. . 26 0 0 12 50.0 ... 6.7 6.4 .. . 0 0 0 0 0 ... 4.8 4.5 3,145 1,488 17 1.6 30 20.0 0 6.9 6.6 1,951 36 I 4.2 4 25.0 0 3.4 3.2 120 16 2 22.2 4 25.0 0 6.7 6.4 0 I 0 0 0 0 0 4.8 4.5 1.214 3 0 0 2 0 0 7.5 7.3 2,827 I 0 0 0 0 0 4.5 3.6 6 0 0 0 0 0 0 7.5 7.4 6 0 0 0 0 0 0 ... ... . .. 0 0 0 0 0 . .. 5.5 5.0 ... 4 0 0 I 0 . .. 5.1 4.8 1.184 9 0 0 I 0 0 5.6 5.1 810 4 0 0 I 0 0 4.2 3.8 ... 50 0 0 II 0 . .. 4.4 3.9 156 94 3 5.0 9 33.3 0 6.2 5.9 73 6 0 0 4 50.0 0 4.2 3.7 .. . 5 0 0 5 0 ... 4.3 3.8 3 5 0 0 5 0 0 5.3 5.2 I I 0 0 I 0 0 5.0 4.2 32 0 0 25 16.0 ... 4.4 4.0 6 I 0 0 I 0 0 5.5 5.1 2 9 0 0 3 0 0 5.1 4.8 11,504 2,IlS 34 2.3 192 14.1 0 Extent afpiggyback lending. The HMDA data show reported on about 1.37 million junior-lien loans used that lenders extended a substantial number of junior to purchase homes; for 2006, they reported on about lien loans to help individuals purchase homes (for 1.43 mjllion (data not shown in tables). In 2007, both owner-occupied and non-owner-occupied pur lenders covered by HMDA reported information on poses) in 2005 and 2006 but that such lending only about 600,000 junior-lien loans to purchase contracted sharply in 2007.19 For 2005, lenders homes, a decline of nearly 60 percent from the 2006 level. 19. A similar matching process was used to idenlify piggyback Regarding piggyback lending, our matching algo loans used for refinancing. HMDA reporting requirements, however, rithm indicates that about 12 percent of the 2.9 mil are less comprehensive for refinance loans, and therefore junior-lien lion 2007 first-lien home-purchase loans on owner loans used for refinancing are less likely to be reponed. As a result, we do not report data on piggyback loan transactions used for refinancing. occupied site-built homes for one to four families
A 114 Federal Reserve Bulletin D December 2008 4. Home-purchase lending that began with a reque t for pre-approval: Disp ~ilion and pricing, by lype of home, 2007 Requests for pre-approval Applications preceded by requests for pre-approval' : Acted upon by lender I Type of home Number acted Number Percent Number I upon by lender denied denied submitted Number I Number denied 1-4 FAMILY NONBUSINESS RELATEO) Ow"., occupied Site-built Conventional . First lien .. . . . . . . . . . . . . . . . . . . 754,318 209,478 27.8 420,435 371,847 37.300 Junior lien ........ ............ 95,782 28,538 29.8 54,088 48,760 5,585 Government backed First lien ........ ........... ,. 85,606 31,821 37.2 55.236 48,944 5,524 Junior lien ..................... 95 13 13.7 84 72 4 Manufactured Conventional, first lien ........... 45,358 22,802 50.3 42,728 37,831 20,624 Other ....................... _. ... 6,418 2,361 36.8 4,918 3,632 1,094 Non-owner occupied4 Conventional, first lien ........... 69.916 16,237 23.2 48,688 42,576 6,639 Other ............................ 6:040 1,850 30.6 4.637 4,020 1,032 BUSINESS RELATCo3 Conventional, first lien .............. 1,169 131 11.2 1,126 943 102 Other .......................... .. - 209 19 9.1 202 161 12 MULTIFAMILY' Conventional, first lien .... ........ 321 109 34.0 220 164 23 Other .... .. ......... . ........... 35 t 2.9 34 22 I Total ................. ............ 1,065,267 313,360 29.4 632,396 558,972 77,940 NOTE: Excludes transition-period requests for pre-approval (those submitted 4. Includes applications and loans for which occupancy status was missing. before 2004). See general note to table \. 5. Includes business-related and nonbusiness-related applications and loans \. These applications are included in the total of 21,389,258 reported in for owner-occupied and non-owner-occupied properties. table 3. ... Not applicable. 2. See note I, table 3. 3. Business·related applications and loans are those for which the lender reo ported that the race, ethnicity, and sex of the applicant or co-applicant are "not applicable"; all other applications and loans are nonbusiness relaled. involved a piggyback loan reported by the same category if three conditions were satisfied: (I) The lender, a proportion that was down 45 percent from first-lien loan in a piggyback loan transaction was not 2006 (data not shown in tables). higher priced, (2) the amount of the first-lien loan was under the conforming loan-size limit, and (3) the Changing nature of piggyback lending. A compari combined loan amount of the first- and junior-lien son of the 2007 HMDA data with the HMDA data for loans exceeded the conforming loan-size limit. For earlier years suggests that the nature of piggyback the first two categories of piggyback loans, the pre lending has changed. The HMDA data for 2005, sumption is that the piggyback loan was used to 2006, and 2007 can be used to distinguish three types facilitate sales to Fannie Mae or Freddie Mac. Conse of piggyback loan arrangements: (1) those likely to be quently, in the analysis, we distinguish between loans used as substitutes for PMI, (2) those intended prima that have been sold to Fannie Mae and Freddie Mac rily to keep the size of the first-lien loan within the and those that might be sold. The third category of limits set for loans that Fannie Mae and Freddie Mac piggyback loans consists of those that do not appear are allowed to purchase in a given year, and (3) those eligible to be sold to these two entities because the used for other purposes, most likely to facilitate sale first-lien loan is higher-priced or the loan amount of the loan to the secondary market. exceeds the conforming loan-size limit.2o For purposes of this analysis, piggyback loans were The analysis indicates that the share of piggyback assumed to be in the first category if two conditions loans used to keep the first-lien loan within the were satisfied: (1) The first-lien loan in a piggyback loan transaction was not higher priced, and (2) the combined loan amount of the first- and junior-lien 20. Higher-priced loans are generally not eligible for purchase by Fannie Mae or Freddie Mac. Such loans typically involve elevated loans was less than the conforming loan-size limit. credit risk or have other features that tend to make them ineligible for Piggyback loans were assumed to be in the second purchase by these institutions.
The 2007 HMDA Data AIlS 4. Home-purchase lending that began with n request for pre-approval: Disposition and pricing. by type of home, 2007-CmuillLled I Loan originations whose applications were preceded by requests for pre-approval MEMO Applications with transition-period requests for pre- I Loans with APR spread above the threshold2 approval (request submitted before 2004) APR spread Distribution, by percentage points of APR spread Loans originated (percentaoe points) Number Number Number Percent Percent Number Percent 3-3.99 4--4.99 5--{j.99 7--S.99 9 or Mean Median submitted denied denied Number w s it p h r e A ad P R I more spread spread above threshold 302.513 19,003 6.3 65.5 18.6 12.9 2.5 .4 4.0 3.6 7 0 0 2 0 35.759 3,609 10.1 71.9 21.9 6.2 6.4 5.9 3 0 0 2 0 41,437 1,357 3.3 74.3 9.7 3.5 12.5 0 4.0 3.4 8 0 0 7 85.7 64 I 1.6 100 0 0 5.3 5.3 0 0 0 0 0 9,754 6,999 71.8 14.3 23.2 45.2 15.1 2.1 5.6 5.5 0 0 0 0 0 2,425 331 13.6 73.7 .3 6.0 19.9 0 4.3 3.3 0 0 0 0 0 31,846 3.856 12.1 60.6 20.4 14.7 3.7 .5 4.2 3.7 I 0 0 I 0 2,209 405 18.3 .2 0 52.6 32.3 14.8 7.1 6.8 0 0 0 0 0 803 53 6.6 58.5 17.0 15.1 9.4 0 404 3.8 I 0 0 0 0 140 12 8.6 33.3 0 33.3 25.0 8.3 5.9 5.8 0 0 0 0 0 125 13 lOA 76.9 7.7 7.7 7.7 0 3.9 3.2 0 0 0 0 0 20 2 10.0 0 0 100 0 0 6.0 6.0 0 0 0 0 0 427,095 35,641 8.3 48.0 17.1 25.4 8.0 1.5 4.6 4.1 20 0 0 12 50.0 or 5. umulativc distribution borne loan . by loan amount and hy purpose. lype, and pricing of loan. 2007 Percent Upper bound Home purchase Refinance I of loan amount Conventional Conventional I (th d o o u l s l a a n rs d ) s ' of Lower Higher Total FHA I VA Lower I Higher I Total I FHA I VA priced I priced I priced priced I 24 .............. ... .2 1.0 .3 .1 .0 .7 2.3 1.1 .1 .1 49 .................. 1.8 5.5 2.3 2.2 A 3.3 7.1 4.1 1.0 .9 74 ............. . . .... 6.3 15.5 7.6 11.3 2.5 8.9 16.1 10.5 6.0 4.7 99 . . . . . . . . . . . . . . . . . 13.3 26.4 15.1 26.6 8.8 t6.4 26.2 18.5 17.3 t3.5 124 ................. 23.2 37.0 25.2 42.6 18.5 25.7 37.2 28.2 32.7 25.2 t49 ................. 33.5 47.3 35.5 60.6 32.9 34.5 47.0 37.2 50.2 40.1 174 ................. 43.2 55.6 45.0 75.0 47.8 43.5 55.8 46.2 65.t 53.0 199 ................. 51.4 62.3 53.0 85.1 60.6 51.1 62.8 53.7 76.5 64.5 224 ................. 59.1 68.2 60.4 90.9 7004 58.5 69.0 60.8 84.8 74.3 249 ................. 65.0 73.1 66.t 94.2 78.9 64.2 73.9 66.3 89.8 81.7 274 ................. 70.2 77.2 71.2 96.3 85.0 69.6 77.9 7104 93.4 87.5 299 ................. 74.3 80.5 75.2 97.7 89.3 73.7 81.2 75.3 95.7 91.0 324 ................. 78.3 83.4 79.0 98.5 92.5 77.9 84.1 79.2 97.3 93.9 349 ................. 81.3 85.7 81.9 99.1 94.9 80.9 86.4 82.1 98.4 95.8 374 ................. 84.0 87.9 84.5 99.7 96.7 83.8 88.5 84.8 99.6 97.5 399 ................. 86.2 89.8 86.7 99.7 98.0 86.1 90.1 87.0 99.7 98.6 417 ................. 90.5 91.4 90.6 99.8 99.5 90.3 91.5 90.5 99.7 99.6 449 ................. 91.2 92.7 91.4 99.9 99.6 91.2 92.9 91.6 99.8 99.8 499 ................. 92.7 94.6 93.0 99.9 99.8 92.9 94.9 93.3 99.9 99.9 549 ................. 94.2 96.1 94.5 100 99.9 94.5 96.3 94.9 100 99.9 599 ................. 95.2 97.0 95.5 tOO 99.9 95.5 97.2 95.9 100 100 649 ........... , ..... 96.2 97.8 96.4 tOO 100 96.5 97.9 96.8 tOO 100 699 ................. 96.8 98.3 97.0 100 100 97.2 98.4 97.4 100 100 749 ................. 97.3 98.6 97.5 100 tOO 97.6 98.7 97.8 100 100 799 ................. 97.7 98.8 97.9 100 100 98.0 98.9 98.2 100 100 More than 799 ...... tOO 100 100 100 tOO 100 tOO 100 100 tOO MEMO Loan amorml (thousands of dollars) Mean ............... 247.9 207.9 242.3 t42.3 t93.t 243.9 203.2 235.0 160.3 181.7 Median' ............ 194 157 189 134 t79 195 157 186 t49 168 NOTE: For definitions of lower-and higher-priced lending, see text note 7. FHA Federat Housing Administration. I. Loan amounts are reported under the Home Mortgage Disclosure Act to VA Department of Veterans Affairs. the nearest $1,000.
All6 Federal Reserve Bulletin 0 December 2008 6. Cumulative dislribution of home loans, by borrower income and by purpose. type. and pricing of loun. 2007 Percent I Upper bound of Home purchase Refinance borrower income Conventional II Conventional I (thousands of Lower Higher FHA VA Lower Higher FHA VA dollars)' priced I priced I Tot,,1 II I priced I priced I Total II 24 .............. .... 2.4 5.3 2.8 4.6 .7 2.7 5.1 3.2 2.9 3.6 49 ................... 24.2 35.1 25.7 43.5 28.2 22.6 33.6 25.0 34.2 29.4 74 .......... ........ 48.2 61.0 49.9 78.1 66.3 48.2 61.9 51.2 72.2 65.8 99 ............ ...... 65.9 76.6 67.4 92.4 87.5 67.4 78.9 69.9 91.1 86.4 124 ................. 77.4 85.3 78.5 96.9 95.7 79.4 87.7 81.2 97.4 95.5 149 .................. 84.1 90.0 84.9 98.4 98.5 85.9 92.0 87.3 99.0 98.5 199 .................. 91.5 94.9 91.9 99.3 99.8 92.7 96.1 93.5 99.7 99.6 249 ............ ..... 94.7 96.9 95.0 99.6 99.9 95.6 97.6 96.0 99.8 99.9 299 ............ ..... 96.3 97.8 96.5 99.7 100 96.9 98.4 97.2 99.8 99.9 More than 299 ....... 100 100 100 100 100 100 100 100 100 100 MEMO Borrower income, by selected loan type (thousands of doUars)2 All Mean ................ 105.5 85.5 102.8 59.8 68.3 101.3 80.6 96.8 64.2 67.7 Median' ............. 77 62 75 53 62 76 63 73 59 63 Be/ow Ihe conforming loan size) MeaD ................ 85.7 70.5 83.6 .. . . .. 84.5 68.2 80.9 .. . . .. Median' . . . . . . . . . . . 71 59 70 . .. ... 72 60 69 . .. . .. Above Ihe conforming loan size" M M e e a d n ia n . ' . .. .. . . . .. . .. . . . . . . . . .. . . . 2 2 9 1 8 0 . 1 2 1 5 81 6 .3 2 2 0 9 5 3. 1 . .. . . . . .. . . 2 1 5 8 9 4 . 1 2 1 1 63 8 .2 2 1 5 8 1 0 .2 ." .. . NOTE: For loans with two or more applicants, HMDA·covered lenders report 4. Loans above $417,000, the conforming loan-size limit established for data 00 only two. Income for two applicants is reported jointly. For definitions most loan purchases by Fannie Mae and Freddie Mac, are sometimes referred of lower· and higher.priced lending, see text note 7. to as jumbo loans. For more information, see text notes II and 17. I. Income amounts are reponed under HMDA to the nearest $1,000. . Not applicable. 2. By size, all loans backed by the FHA or VA are conforming. FHA Federal Housing Administration. 3. The confOrming loan·size limit established for most loan purchases by VA Depanment of Veterans Affairs. Fannie Mae and Freddie Mac is $417,000. For more information, see text note 17. 7. n-owner-occupied lending as a hare of' all first liens priced piggyback loans used to keep the first-lien loan to purcbase one- to four-family ice-built home. hy within the conforming loan-size limits increased from numb r ilntl dollar amount of loan', 1990-2()07 8.8 percent in 2006 to 12.3 percent in 2007 (data Percent derived from table 8). The number of piggyback loans sold to Fannie Mae or Freddie Mac that were used to Year Number Dollar amount keep the first-lien loan within the conforming loan 1990 . 6.6 5.9 size limits also increased from 2006 to 2007-by 1 19 9 9 9 1 2 . . . . . . . . . . . . . . . 5 5 . . 6 2 4 4. .0 5 some 63 percent-despite a sharp decline in the total 1993 ................ 5.1 38 number of piggyback loans over this period. These 1994 ................ 5.7 4.3 results suggest that in 2007 relatively more borrowers 1995 6.4 5.0 t996 ................ 6.4 5.1 used their piggybacks to take advantage of the lower 1 1 9 9 9 9 7 8 . .. .. .. . . .. .. .. .. .. . . .. .. .. .. . . . 7 7. . 1 0 6 5 . .8 0 rates available on the first-lien portion of their piggy 1999 ................ 7.4 6.4 back arrangements than to obtain a needed source of 2000 ................ 8.0 7.2 down payment. 2001 .... , ........... 8.6 7.6 In contrast, the data suggest that the use of piggy 2002 ................ 10.5 9.2 2003 . . . . . . . . . . . . 11.9 10.6 back loans as a substitute for PMI declined in 2007 2004 .......... 14.9 13.1 from 2006. This was true of the loans sold to Fannie 2005 ............. 17.3 15.7 2006 ................ 16.5 14.8 Mae and Freddie Mac as well as those that potentially 2007 ................ 14.9 13.8 were eligible for sale. The use of piggyback loans for purposes that made the loans non-eligible for sale to conforming loan-size limit increased in 2007 from Fannie Mae and Freddie Mac also declined signifi 2006 and 2005. For example, the share of lower- cantly. The decrease was most precipitous for higher-
The 2007 HMDA Data Al17 8. Distribulion of piggyback loan Lransactions involving home purchases. by . talus of first-lien loan. 2004-07 I I I 2004 2005 2006 2007 Status of first-lien loan Number I Percent I Number I Percent I Numbo:r I Percent I Number I Percent Higher priced ......................... 105,463 18.88 535.004 50.90 465.154 43.75 62.461 16.05 Lower priced Sold /0 Fannie Mae or Freddie Mac Combined with junior-lien loan Total is above the conforming loan size ............................ 4.503 .81 7.691 .73 to.l54 .95 16.546 4.25 Total is less than or equal to the conforming loan size ..................... 55.233 9.89 76.804 7.31 121,821 11.46 103.831 26.68 No/ sold /0 Fannie Mae or Fn:cklie Mat' Above the confonning loan size .............. 62.104 11.12 60.666 5.77 57.138 5.37 32,301 8.30 Less than or equal to the conforming loan size Combined with junior-lien loon Total is above the conforming loan size ...................... 40,725 7.29 43,734 4.16 42.704 4.02 23.761 6.11 Total is less than or equal to the confonning loan size ................. 290.602 52.02 327.270 31.13 366.306 34.45 150.254 38.61 Total lower priced ..................... 453.167 81.12 516.165 49.10 598.123 56.25 326,693 83.95 Total ....... ............. . .............. 558,630 )(JO 1,051,169 100 1,063,277 100 389,154 100 NOTE: In piggyback lending. borrowers simultaneously receive a first· lien loan and a junior-lien (piggyback) loan to purchase a home from the same lender. For definitions of ltigher-and lower-priced lending, see text note 7; for explanation of the conforming loan size established for most loan purchases by Fannie Mae and Freddie Mac. see note 3. table 6; for definition of jumbo loans. see note 4, tablo 6. priced first-lien loans, which fell 87 percent. This and junior-lien loans are different parties, the interests development was consistent with, and indeed part of, of the two loan holders may conflict, and the junior the more general mortgage market turmoil in 2007. lien holder may have little interest in working with the borrower or the holder of the first lien on a short Piggyback Lending and mortgage market difficuLties. sale or loan modification unless the first-lien holder Piggyback loans have contributed to the current mort provides the junior-lien holder with some financial gage market difficulties. As noted, many home pur incentive. chases financed with piggyback loans were used to Little information is available on the frequency minimize the cash contributions of borrowers toward with which holders of first liens and junior liens the purchase of the property. Because loan arrange differ. The HMDA data provide an opportunity to ments involve little borrower equity at the time of examine the relationships among loan holders in purchase, if housing prices fall, as they have in many piggyback loan arrangements, as the data include areas of the country for the past year or so, borrowers information on whether or not a reported loan was may find that they owe more on their combined first held in portfolio or sold; if the loan was sold, the data and junior-lien loans than the value of the property. also indicate the type of purchaser. Borrowers in these circumstances are much more The analysis here divides lenders into groups based likely to default than those with an equity stake in the on the type of originator. The analysis focuses on property.21 piggyback loan transactions in which the first- and Piggyback loan arrangements also can make it junior-lien loans were used to buy a property and the much more difficult to work out loan difficulties dates of the loan originations occurred in the first should borrowers fall behind on their loan payments. 10 months of the calendar year. The date restriction If property values have fallen below the amount owed addresses the concern that loan sales may not be on the combined loans, the junior-lien holder often immediate and that originations near the end of the has little prospect of recovering any money if the year that are reported in the data as retained in property is sold-either through a short sale or as a portfolio may not be, as at least some of the loan sales consequence of foreclosure. If the holders of the first- do not occur until the next calendar year. Because the pattern of loan holding and sale may differ by the credit risk embedded in the loans, the analysis is 21. See Ronel Elul (2006), "Residential Mortgage Default," Fed conducted separately for home-purchase transactions eral Reserve Bank of Philadelphia, Business Review (Third Quaner), in which the first-lien loan was higher priced (table 9). pp. 21-30; and Kerry D. Yandell (1995), "How Ruthless [s Mortgage For each group, the analysis indicates the propor Default? A Review and Synthesis of the Evidence," Journal of Housing Research, vol. 6 (2), pp. 245-M. tion of loan originations in which the lender held both
A 118 Federal Reserve Bulleti n 0 December 2008 9. Distribution of lower- and higher-priced first-Hcn loan~ in piggyhack loan lransactionl> involving home purcha Cl>. by lype of lender and lien statuS of loan thaI lender held at year-end. 2004-07 Percent Type of lender Lien status of loan that lender held Mortgage company Independent I at year-end Depository I affiliate of I mortgage I Total depository company Lower-priced first-tien loans involved in piggyback loan transactions 2004 First lien and junior lien ......... _. ..... _. ...... . 31.3 13.5 10.4 17.2 First lien only .................................. . 29.S 21.0 5.4 15.4 Junior lien only ......... . ......... . 11.5 2.S 3.5 5.S Neither' Different purchaser type ...................... . 6.9 32.3 12.7 14.4 Same purchaser type ... _. ...... . 20.5 30.4 67.9 47.3 Total .......................................... . 100 100 100 100 MEMO Percentage of piggyback loan originations 29.7 17.2 53.0 100 2005 First lien and junior lien .................... . 3S.4 20.0 10.7 21.6 First lien only .............................. . 33.S 25.1 2.S 17.2 Junior lien only ................................ . 3.2 3.5 5.2 4.2 Neither' Different purchaser type ..................... .. 6.6 23.2 12.4 12.5 Same purchaser type ... . .......... . IS.O 2S.2 68.9 44.5 Total .......................................... .. 100 100 100 100 MEMO Percentage of piggyback loan originations ....................... . 32.9 IS.7 4S.4 100 2006 First lien and junior lien ................... . 35.7 11.1 20.7 23.6 First lien only ... . ............................ .. 3S.3 21.5 5.2 19.5 Junior lien only .......................... . I.S 6.1 1.9 2.S Neither' Different purchaser type ..................... .. S.9 35.S II.S 16.0 Same purchaser type ........................ . 15.3 25.5 60.4 3S.1 Total ........................................... . 100 100 100 100 MEMO Percentage of piggyback loan originations 32.9 21.3 45.8 100 2007 First tien and junior lien .................. .. 40.9 7.2 19.3 2S.3 First lien onty ................................. .. 43.0 67.2 11.0 3S.1 Junior lien only ................................ . .5 .4 1.3 .7 Neither' Different purchaser type ..................... .. 7.3 12.8 11.7 9.6 Same purchaser type ......................... . 8.3 12.4 56.7 23.3 Total ........................................... . 100 100 100 100 MEMO Percentag!' of ~iggyback loan ongmatlons ............................. . 51.9 IS.7 29.4 100 Higher-priced first-lien loans involved in piggyback loan transactions 2004 I First lien and junior lien ........................ . 6.4 7.2 11.7 9.5 First lien only ............................. .. 3.4 2.9 7.5 5.7 Junior lien only ......................... . 2.2 1.7 1.5 1.7 Neither' Different purchaser type ..................... .. S.4 42.6 6.3 12.3 Same purchaser type ......................... . 79.5 45.7 73.0 70.S Total ........................................... . 100 100 100 100 MEMO Percentage of piggyback loan originations ............. . 2S.7 14.9 56.3 100 2005 First lien and junior lien ................ . 20.7 14.7 16.5 17.1 First lien only . . ................. .. 25.1 16.7 4.4 10.7 Junior lien only ......... .. ......... . 1.5 1.7 4.5 3.5 Neither' Different purchaser type .................... . 2.4 22.7 14.1 13.1 Same purchaser type .. . .............. . 50.3 44.3 60.5 55.7 Total ........................................... . 100 100 100 100 MEMO Percentag~ ?f ~iggyback loan onglOatlons ............................. . 20.5 16.2 63.3 100 I
The 2007 HMDA Data A1l9 or 9. Distrihulion lower- and highcr-pn ed lirst-lien loan' in piggyback loan lransactions involving home purchases. by type of lender and lien status of loan that lender held at year-end. 2004-07- onrirltled Percent Type of lender Lien status of loan that lender he Id Mongage company Independent I at year-end Depository I affiliate of I mongage Total depository company I 2006 First lien and junior lien ........................ . 15.1 9.8 13.9 13.3 First lien only ........................ . 10.5 21.5 6.4 10.6 Junior lien only ................................ . .9 2.6 1.7 1.7 Neither' Different purchaser type ...................... . 6.2 10.0 12.5 10.5 Same purchaser type ................... . 67.2 56.1 65.5 63.9 Total ........................................... . 100 100 100 100 MEMO Percentage of piggyback loan originations ............................. . 23.2 21.6 55.2 100 2007 First liell and junior lien ........................ . 60.2 64.2 28.0 52.6 First lien only 12.5 8.0 2.7 8.0 Junior lien only ...... . 1.8 1.7 4.5 2.5 Neither' Different purchaser type ...................... . 7.0 .7 5.4 4.1 Same purchaser type ...... . ............... . 18.5 25.4 59.5 32.7 Total ............... .. 100 100 100 100 MEMO Percentage of piggyback loan originations ............................. . 33.3 38.5 28.2 100 To!..1 2004 First lien and junior lien ........................ . 27.7 12.7 10.6 16.0 First lien only ..... '" ......................... .. 26.0 18.6 5.7 13.9 Junior lien only ................................ . 10.2 2.7 3.2 5.2 Neither' Different purchaser type ...................... . 7.2 .\3.6 11.7 14.1 Same purchaser type ............. .. 29.0 32.4 68.7 50.8 Total ........................................... . 100 100 100 100 MEMO Percentage of piggyback loan originations ............................ .. 29.6 16.9 53.5 100 2005 First lien and junior lien ...................... . 31.4 17.5 14.1 19.3 First lien only .......... .. 30.4 21.1 3.8 13.8 Junior lien only ................................ . 2.6 2.6 4.8 3.8 Neither' 93.9 58.1 76.2 36.9 Different purchaser type Same purchaser type .................... .. 5.0 23.0 13.4 12.8 To!.'I ........................................ . 30.7 35.9 64.0 50.3 MEMO Percentage of piggyback loan originations 26.6 17.4 56.0 100 2006 First lien and junior lien ....................... .. 28.3 10.5 17.4 19.0 First lien only .................................. . 28.3 21.5 5.8 15.6 Junior lien only ............................... .. 1.5 4.5 1.8 2.3 Neither' Different purchaser type ..... . .............. . 7.9 243 12.1 13.5 Same purchaser type ......................... . 33.9 39.2 62.9 49.5 Total ........................................... . 100 100 100 100 MEMO Percentage of piggyback lonn originations ............................. . 28.6 21.5 49.9 100 2007 First lien and junior lien ........................ . 43.2 24.0 20.7 32.4 First lien only .. . .................... . 39.4 49.7 9.6 33.0 Junior lien only ...................... . .6 .8 1.8 1.0 Neither' Different purchaser type ...................... . 7.3 9.2 10.7 8.7 Snme purchaser type .... . 9.5 16.3 57.2 24.9 Total .................... . 100 100 100 100 MEMO Percentage of piggyback 10.1n originations 48.8 22.0 29.2 100 I NOTE: For definition of piggyback lending, see note to table 8; for defini· tions of lower· and higher-priced lending, see text note 7. I. For purchaser types, see appendix A in the text.
A 120 Federal Reserve Bulletin 0 December 2008 the first-lien loan and the piggyback loan at the end of a piggyback loan transaction. For example, in 2006, the year or the incidence in which the loan holders depositories held both loans in lower-priced piggy differed. The following three lender categories are back transactions about 36 percent of the time; inde considered: (1) depository institutions, (2) mortgage pendent mortgage companies held both loans about company affiliates of depositories, and (3) indepen 21 percent of the time. Also, in 2006, depositories dent mortgage companies. The analysis examines were more likely than other originators to hold in loan originations from 2004 through 2007 (excluding portfolio both loans in a piggyback transaction when originations from the final two months of each year). the first-lien loan was higher priced. In 2007, the The analysis focuses on these four years because data likelihood of a depository's holding both loans in on lien status were not included in the HMDA data portfolio when the first-lien loan was higher priced for the years before 2004. increased substantially, from about 15 percent of the As mentioned earlier, the mortgage market turmoil transactions in 2006 to about 60 percent. Mortgage that deepened greatly during 2007 affected many company affiliates of depositories also experienced a similar substantial increase in the incidence of hold aspects of the market, including the market for piggy ing both loans in a piggyback transaction involving back loans. The HMDA data reflect these events. higher-priced first-lien loans: The incidence rose from Regarding piggyback lending patterns, relationships 10 percent in 2006 to 64 percent in 2007. found in 2004, 2005, and 2006 are in some respects similar to, but in others notably different from, rela tionships found in 2007. For example, independent Loans Covered by HOEPA mortgage companies were a significant source of Under HOEPA, certain types of mortgage loans that piggyback credit until 2007. Before 2007, indepen have rates or fees above specified levels require dent mortgage companies extended between 46 per additional disclosures to consumers and are subject to cent and 53 percent of the lower-priced piggyback various restrictions on loan terms. Under the 2002 loans and, depending on the year, between 55 percent revisions to Regulation C, the expanded HMDA data and 63 percent of the higher-priced piggyback loans. include a code to identify whether a loan is subject to From 2004 to 2006, depository institutions accounted the protections of HOEPA.22 for about 30 percent of the lower-priced piggyback Before the release of the 2004 data, little informa loans and about 20 percent to more than 28 percent of tion was publicly available about the extent of the higher-priced piggyback loans. In 2007, the HOEPA-related lending or the number or types of depositories accounted for a much larger share of the institutions involved in that activity.23 For 2007, piggyback loans that were reported-about 52 per roughly 1,050 lenders reported extending about 11,500 cent of such loans that were lower priced and about loans covered by HOEPA (data not shown in tables). 33 percent of those that were higher priced. Only II lenders made 100 or more HOEPA loans, and The HMDA data indicate that in most piggyback most lenders did not report any such loans (data not loan transactions one or both loans were sold by the shown in tables). In the aggregate, HOEPA-related lender. Overall, for loans originated in 2004, 2005, or lending accounts for a very small proportion of the 2006, both loans in higher-priced piggyback transac mortgage market: HOEPA loans made up less than tions were held in portfolio less than 20 percent of the 0.2 percent of all the originations of home-secured time. For lower-priced piggyback transactions, both refinancings and home-improvement loans reported loans were held in portfolio somewhat more often. for 2007 (data derived from table 3).24 The experience in 2007 was different, particularly regarding piggyback transactions in which the first 22. This reporting requirement relates to whether the loan is subject lien loan was higher priced: Here, in more than to the original protections of HOEPA, as determined by the coverage one-half of the transactions, both loans were held in test in the Federal Reserve Board's Regulation Z. 12 C.F.R. pI. the originating institutions' portfolios. The relati vely 226.32(a). The required reporting is not triggered by the more recently adopted protections for "higher-priced mortgage loans" under Regula low incidence of piggyback loan holding for loans tion Z. notwithstanding that those protections were adopted under originated before 2007 means that for those loan authority given to the Board by HOEPA. See 73 Federal Register transactions in which defaults occur, loss mitigation 44522 (July 30. 2008). 23. Although the expanded HMDA data provide important new problems are likely to be more difficult. information. the data do not capture all HOEPA-related lending. Some Patterns of loan holding or sale differ some by HOEPA loans are extended by institutions not covered by HMDA. and originator. For each of the years considered, deposi some HOEPA loans made by HMDA-covered institutions are not reported under Regulation C. which implements HMDA. The extent of tory institutions were more likely than independent HOEPA-related lending not reported under HMDA is unknown. mortgage companies to hold in portfolio both loans in 24. HOEPA does not apply to home-purchase loans.
The 2007 HMDA Data A 121 The 2007 HMDA Data on Loan Pri ing Incide1lce of Higher-Priced Lending The following sections assess the loan-pricing infor As in earlier years, most loans reported in 2007 were mation in the 2007 HMDA data. The analysis consid not higher priced as defined under Regulation e. ers changes in the incidence of higher-priced lending, Among all the HMDA-reported loans, 18.3 percent APR spreads paid on loans above the price-reporting were higher priced in 2007, down significantly from thresholds, and a description of the institutions in 28.7 percent in 2006 (data for 2007 shown in table 3; volved in higher-priced lending. data for 2006 not shown). The incidence of higher priced lending fell or was little changed across all loan product categories. Factors That Influence Higher-Priced A number of factors account for the decline in the Lending incidence of higher-priced lending as measured in the HMDA data. After increasing mildly in the first part The reported incidence of higher-priced lending under of 2007, interest rates generally fell during the HMDA can be affected by three broad factors (to be remainder of 2007 and ended the year well below the explained shortly) that are related to mortgage market initial levels; the decrease likely contributed to the conditions and the general economic environment observed decline from 2006 in the incidence of prevailing in a given year. In addition, the extent of higher-priced loans reported in 2007. Previous analy nonreporting by lenders that cease operations during, ses of changing patterns in the reported incidence of or shortly after the end of, a calendar year can higher-priced lending from 2004 through 2005 found influence the incidence of higher-priced lending. that increases in short-term interest rates relative to The three broad, market-environment-related fac longer-term rates help explain a portion of the in tors that influence the incidence of higher-priced crease over the period in the incidence of higher lending are (1) changes in the interest rate environ priced lending, as more higher-risk adjustable-rate ment, particularly changes in short-term rates relative loans moved above the HMDA price-reporting threshto longer-term rates; (2) changes in the business 01ds.25 From 2006 to 2007, the pattern reversed as practices of mortgage lenders and investors, particu short-term rates fell more than longer-term rates, larly in the array of products offered and the willing which suggests that some higher-risk adjustable-rate ness or ability of the parties to bear credit risk (for loans likely fell below the HMDA price-reporting example, the willingness to offer loans with high thresholds. However, given the magnitude of the loan-to-value ratios or adjustable-rate loans with ini difficulties in the mortgage and housing markets, it tial discounted interest rates); and (3) changes in the seems very likely that changes in lender and investor borrowing practices and perceptions of consumers circumstances and risk tolerances, changes in bor (such as changes in preferences for investment prop rower conditions and preferences, and nonreporting erties or in perceptions of future house price move by certain lenders explain most of the reported decline ments) or in consumers' credit-risk profiles (for in the incidence of higher-priced lending.26 example, changes in the distribution of credit risks for those seeking and obtaining loans). Rate Spreads for Higher-Prj ed Lending Aside from the effects that these broad economic factors may have on the incidence of higher-priced Most higher-priced loans have APR spreads within lending, changes in the number, size, and product 1 or 2 percentage points of the HMDA reporting offerings of reporters can matter. Of particular import thresholds. For example, for higher-priced conven for users of the HMDA data are the effects on the tional first-lien loans for owner-occupied site-built incidence of higher-priced lending of lenders that extended loans during a portion of 2007 but ceased 25. See Avery, Brevoort, and Canner, "Higher-Priced Home Lend operations during that year or in early 2008 and, ing and the 2005 HMDA Data." 26. Some of the change in lender behavior may stem from consequently, did not report any data to the FFIEe. In regulatory guidance provided by the bank regulatory agencies to most years, nonreporting has little effect on the banking institutions regarding their subprime and nontraditional lend HMDA data overall or on any particular aspect of the ing activities. See Board of Governors of the Federal Reserve System (2007), "Federal Financial Regulatory Agencies Issue Final data. But, as discussed later, it has a significant Statement on Subprime Mortgage Lending," press release, June 29, influence on the 2007 data because the institutions www.federalreserve.gov/newsevents/press/bcregl20070629a.htm ; and that ceased operations were generally focused on Board of Governors of the Federal Reserve System (2006), "Federal Financial Regulatory Agencies Issue Final Guidance on Nontradi higher-priced loans, and some of these lenders ex tional Mortgage Product Risks," press release, September 29, tended large numbers of such loans in previous years. www.federalreserve.gov/newsevents/press/bcregl20060929a.htm .
A122 Federal Reserve Bulletin 0 December 2008 homes, two-thirds of the loans have spreads within sis finds that 243 of the 987 lenders reporting at least 2 percentage points ofthe reporting threshold (table 3). 100 higher-priced loans, or about 3 percent of all As in earlier years, only a relatively small propor reporting institutions, might be classified as special tion of first-lien loans have very large spreads- ists (data not shown in tables). These specialized 7 percentage points or more. Similarly, only a rela lenders accounted for nearly 40 percent of all the tively small proportion of junior-lien loans have higher-priced lending reported in the 2007 HMDA spreads of 9 percentage points or more. data. Lenders and Higher-Priced Lending TURMOIL IN MORTGAGE MARKETS AND Most institutions covered by HMDA do little or no COVERAGE OF THE 2007 HMDA DATA higher-priced lending. For 2007, 56 percent of the 8,610 reporting institutions extended fewer than 10 Excluding government-backed lending, the HMDA higher-priced loans, and 33 percent of them origi data for 2007 show a substantial decline in mortgage nated no higher-priced loans (table 10). At the other lending activity from 2006 in all segments of the end of the spectrum, nearly 1,000 lenders reported market. These declines are apparent whether the making at least 100 higher-priced loans, and these metric used to measure lending activity is loan appli institutions accounted for 94 percent of all such loans. cations, loan originations, loan purpose or type, or The share of higher-priced lending attributable to the lending categorized by loan pricing. The HMDA data 10 lenders with the largest volume of higher-priced can be used to gauge the changes in lending activity loans dropped from 59 percent in 2005 to 35 percent by type of lender, population group, and geographies in 2006 and then to 31 percent in 2007 (data not sorted along a number of dimensions, including shown in table). demographic characteristics or measures of housing and mortgage market conditions. Higher-Priced Lending Specialists The Effects of Lenders That Ceased Another way to assess the higher-priced lending Opera/ion market is to examine the extent to which institutions that originate higher-priced loans may be consjdered As noted earlier, an issue when using the 2007 "specialists" in that acti vity-that is, institutions that HMDA data is that some lenders ceased operations have a large proportion of their lending in the higher partway through 2007, yet none of their lending priced category. Such specialized institutions can activity is included in the 2007 data because they have a business orientation that is quite different from did not report. As part of the HMDA data collection that of other lenders. For example, many of these effort, staff members of the Federal Reserve Board institutions hold relati vely few loans in portfolio and track each financial institution that is expected to rely greatly on their ability to sell loans to the report (including all lenders that reported data for secondary market. the previous calendar year) and contact, or attempt Taking 60 percent of loan originations as a bench to contact, those that did not submit a report.27 In mark for defining higher-priced specialists, the analysome cases, nonreporting is due to a cessation of business; in others, it is the result of a merger, 10. Higher-priced lending: Distribution by number of acquisition, or consolidation. When a merger, acqui higher-priced loans e .tended and by the number and sition, or consolidation occurs, all lending by the percenl of HMDA reporter' and higher-priced loans. 2007 institutions covered by HMDA in that year is re ported by the surviving entity; only when an institu I Number of HMDA reponers Higher-priced loans tion goes out of business is the volume of reported higher-priced loans e~lended Number I Percent I Number I Percent loans possibly affected. In some cases, a business o ................. 2,804 32.6 0 .0 closure does not compromise the completeness of 1-4 ............... 1,282 14.9 2.788 .1 the HMDA data because some of the closed institu 5-9 ... 726 8.4 4;925 .3 10-24 ... 1,212 14.1 19,425 1.0 tions report lending activity for the portion of the 25-49 ....... 881 10.2 31,127 1.6 year in which they extended loans. 50-99 ............. 718 8.3 50,742 2.7 100 or more ....... 987 11.5 1,798,767 94.3 Total ............. 8,610 100 1,907,774 100 Non;;: For definition of higher-priced lending, see text note 7. 27. Sometimes contacting a non reporting lender is impossible HMDA Home Mortgage Disclosure Act of 1975. because the firm has ceased operations.
The 2007 HMDA Data A123 Measuring the A LivilY of Nonreporter we focus on home-purchase and refinance lending for site-built properties. The volume of home-purchase The Federal Reserve's respondent tracking report originations peaked in June 2006 and declined over records what happened to each institution that failed the rest of the year (figure 1). The pattern for refinanc to report. For institutions that ceased operations, the ings was less consistent, as monthly originations tracking report also records, to the extent possible, the varied over the course of the year, with high points month that operations were discontinued. The track reached in both March and October 2006. ing report indicates that 169 institutions that reported Data for 2007 show a substantial falloff in activity HMDA data for 2006 ceased operations during 2007 from December 2006. The abrupt decline from De (or the very end of 2006) and did not report lending cember 2006 to January 2007 is likely a result of a activity for 2007 (for a list of the institutions that combination of nonreporting by the 169 institutions ceased operations and did not report, see appendix that ceased operations and the mortgage and housing table A.l, which has been posted separately as an market turmoil in 2007 that caused most lenders to Excel file).28 Of these institutions, two were subsid reduce origination activity. Among home-purchase iaries of banking institutions, and the remainder were loans, the greatest falloff in reported activity was in independent mortgage companies. (All other lenders the higher-priced segment, in which originations that ceased operations in 2007 either reported data for dropped some 32 percent from December 2006 to 2007 or were merged or acquired, and their 2007 January 2007. Overall, home-purchase lending fell lending activity was reported by the surviving entity.) It appears impossible to know how many loans I. Volum\! of home-purchase and refinance It1an these 169 institutions originated in 2007 before dis original..:d: Higher-and lower-priced loans. and. uch continuing operations. To help gauge their potential loans excluding those originated by closed lenders, hy or month origination, 2006-07 importance, an analysis of the lending activity of these institutions as recorded in the 2006 HMDA data Lower priced ((ho"sands of loans) was undertaken. Specifically, the 2006 HMDA data were reaggregated to exclude the lenders that ceased Home purchase operations and did not report in 2007. Although many - 400 150 of these lenders extended relatively few loans (30 per cent of the lenders extended fewer than 250 conven - 300 tional first-lien loans for site-built properties in 2006), 1011 a few were among the nation's leading lenders in - 200 2006. Moreover, some of these institutions were particularly active in the higher-priced segment of the 50 home-purchase or refinance market. In the aggregate, 100 these companies accounted for nearly 15 percent of the higher-priced conventional first-lien loans for I I " I , , I , , I , I , , I , , I , , I I site-built properties reported in 2006, and they ac IJIl:her prltro (U"""""dJ, or 100. ) Lower priced (thousands of loa~) counted for about 8 percent of all conventional first Refinance lien loans for such properties (data not shown in 200 tables).29 - 300 150 - ~ Time Pattern of Lending Aclivily Lower priced* - 200 The dates of loan origination reported in the HMDA IflO data can be used to review the pattern of monthly loan extensions over the course of 2006 and 2007 to help - 100 distinguish the effects of the mortgage market turmoil 511 on reported loan activity from the effects of closed lenders not reporting 2007 activity. For this analysis, NOTE: The data are monihly. Loans are convenlional first-lien mortgages for site-buill properties and exclude business loaos. Closed lenders are 28. The list of lenders that ceased operations and did not report is as lenders thai reported data for 2006 under the Home Mortgage Disclosure Act comprehensive as possible at this time. If additional information (HMDA) but that subsequently ceased operations and did not report HMDA becomes available, the list will be updated. data for 2007. For definitions of higher- and lower-priced loans, see text 29. Calculations exclude home-improvement loans and business note 7. related loans. * Excluding loans originated by closed lenders.
A 124 Federal Reserve Bulletin 0 December 2008 27 percent over this period. A similar pattern was that most of the decline in reported lending from 2006 found for refinancings. to 2007 was due to the effects of the market turmoil To better evaluate the effects of nonreporting on and not nonreporting. loan volumes in the early part of 2007, the loans of the 169 lenders that ceased operations and did not Higher-Priced Lending by Lender Typ report were removed from the total loan volumes Lending activity can be described by type of lender. reflected in the 2006 HMDA data. Excluding these Four groups of lenders are considered here: deposi lenders reduces by about 25 percent the differences in tory institutions and three types of mortgage the level of home-purchase (and refinance) lending companies-namely, independents, direct subsidiar reported between the end of 2006 and January 2007. ies of depository institutions, and affiliates of deposi The reduction is larger for the higher-priced loan tory institutions. In 2004 and 2005. independent segment (about 42 percent), a finding that reflects the mortgage companies originated about one-half of the greater focus of these institutions on that segment of higher-priced conventional first-lien loans related to the market. The fact that a large drop in lending site-built homes and about 30 percent of all conven activity is still observed after removing from the 2006 tional first-lien loans (table II). Depository institu data the institutions that ceased operations indicates tions extended about one-fourth of the higher-priced II. Oi tribulion of higher-priced lending. by lype of lender, Jnd incidence at each type of lemler. 2004-07 Percen! except as noted Higher.priced loans I MEMO: All loans I Type of lender I I I I I Number Distribution Incidence Number Distribution 2004 Independent mongage company .. ........ 789,337 50.6 25.5 3,093,777 27.8 Depository ....................... ....... 403.661 25.9 8.0 5,017,334 45.2 Subsidiary of depository ....... .......... 179;375 11.5 9.0 1,993,212 17.9 Af T fi o li t a a te l . o . f . d .. e . p . o . s . i . to . r . y . .. . . . . . . .. . .. . . . . .. . . . . . . . . . . . . . . . . . . . 1.5 1 5 8 9 7. ,6 2 6 9 9 6 10 12 0 . 0 1 14 8. .0 6 1 1 1 . , 0 1 0 1 6 0 , , 4 8 8 0 1 4 10 9 0 . 1 2005 Independen! mongage company. ......... 1,525,424 52.0 41.4 3.684,489 31.0 Deposi tory ., ............................. 670,024 22.8 12.8 5,217,810 43.8 Subsidiary of depository .......... ....... 381.228 13.0 20.7 1,842,652 15.5 Affiliate of depository . . . . . . .. . . . ..... 357,689 12.2 30.9 1.157.421 9.7 Total .......................... ....... 2.934,365 100 24.7 11.902.372 100 I 2006 I Independent mOrlgage company ........... 1,280,987 45.7 41.5 3,083,947 31.2 Depository ............................... 800,421 28.5 18.7 4,285,896 43.4 Subsidiary of depository .................. 346,882 12.4 22.9 1.517,564 15.4 Affiliate of depository .................... 1 377,286 13.4 37.9 996,614 10.1 Total .................................. 2,805,576 100 28.4 9.884.021 100 I 2006 (excluding loans by closed lenders) 1 Independent mOrlgage company ........... 880.927 36.7 37.6 2.341,193 25.6 Depository ..................... . . . . . . . . . 800,421 33.4 18.7 4.285.896 46.9 S A u f T b fi s o li i t a d a t i l e a r . o y . f . o . d . f e . p d . o e . s p . i o . to s . i . r t y . o . r . . y . . .. . . . ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 3 3 3 7 9 3 7 7 8, . , 7 2 3 5 8 9 8 2 6 10 1 15 0 4. . 1 7 2 3 2 7 2 6 . . . 5 9 3 9 1 , , 9 5 1 9 3 0 1 6 8 , . ,9 6 2 3 1 3 4 4 1 10 1 1 0 0 6 . . 9 5 2007 Independent mongage company ....•...... 292,571 20.5 20.1 1.453,385 19.0 Depository ............................... 654,176 45.8 14.8 4,408,656 57.7 Subsidiary of depository .................. 229,340 16.1 19.8 1,158,064 15.2 Affiliate of depository .................... 252,739 17.7 40.6 622,571 8.1 Total ........ ......................... 1,428,826 100 18.7 7.642,676 100 NOTE: Conventional first·lien mongages for site-built propenies; excludes L Closed lenders are lender.; that reponed dala for 2006 under the Home business loans. For definition of higher-priced lending. see text note 7. Mongage Disclosure Act (HMDA) but that subsequently ceased operations and did nol repon HMDA data for 2007.
The 2007 HMDA Data AI25 loans and about 45 percent of all loans. The HMDA 2006 Lending Profile f the 169 Clo ed data for 2006 show that independent mortgage com Institutions That Did Not Report panies accounted for a somewhat smaller share of the higher-priced loan market (but a nearly equivalent One way to learn about the activities of the institu share of the entire market): In that year, these compa tions that ceased operations in 2007 and did not report nies extended 46 percent of the higher-priced loans data is to examine the nature of their lending activi and 31 percent of all loans. ties in 2006 and to compare it with the lending of the As noted earlier, in 2007, turmoil in the subprime other reporting institutions for that year. For the mortgage sector caused a number of lenders to cease analysis, lending activities are described by a wide operations, curtail their activities, or transfer their range of borrower, location, and loan characteristics business to others; all but two of the institutions that and by local housing or mortgage market conditions ceased operations were independent mortgage compa (table 12). nies. The HMDA data portray the diminished role of The analysis identifies many differences between independent mortgage companies in the home the lending activities of the 169 institutions in 2006 lending market: In 2007, these companies originated and those of the other HMDA reporters. Most striking 21 percent of the reported higher-priced loans and is the much higher incidence of higher-priced lending 19 percent of all loans. for the 169 institutions than for the other reporters. The reduced role of the independent mortgage This difference is revealed in the profile of lending companies in the 2007 HMDA data is due partly to arrayed by either borrower income or by race or some of these lenders ceasing operations and partly to ethnicity of the borrower. For all income categories, a curtailment of activity among surviving institutions the incidence of higher-priced lending for the 169 of this type. Because the independent mortgage com institutions is about double the rate for the other panies that ceased operations in 2007 did not report HMDA reporters. Also striking is the very high any activity, it is impossible to determine the magni incidence of higher-priced lending for blacks (74 per tude of their lending in 2007. To help gauge their cent) and Hispanic whites (63 percent) among the 169 potential importance, the 2006 HMDA data were lenders. Regarding their overall lending, the 169 re-aggregated to exclude the independent mortgage lenders extended a higher share of their loans to companies that ceased operations during 2007 and blacks and Hispanic whites than the other HMDA did not report. Excluding these closed institutions reporters, and they also extended a higher share of reduces by some 31 percent the number of higher loans to borrowers in census tracts with larger frac priced loans originated by lenders in the independent tions of minority populations or lower incomes. mortgage company category in 2006 and raises by In 2006, the 169 institutions tended to extend between about 14 percent and 17 percent the share of somewhat larger loans and nearly double the share of higher-priced lending accounted for by the other piggyback loans. The loans they originated also were types of lenders in that year (data deri ved from more likely to be for properties in the western region table 11). of the country and in metropolitan areas that experi In the 2007 HMDA data, depository institutions are enced greater recent declines in home values and the leading providers of higher-priced loans. In part, greater increases in mortgage delinquencies. this finding is a reflection of the sharp reduction in lending by independent mortgage companies (both those that continued to operate throughout 2007 and Changes in Lending Activity b.v Borrower those that closed and did not report). The increased and Ceo mphy role of depository institutions in the higher-priced segment of the market is not an indication of ex The HMDA data can be used to track changes in panded lending; the number of higher-priced loans mortgage market activity between 2006 and 2007. that depository institutions extended in 2007 was Over this period, the mortgage market transitioned some 18 percent below the corresponding total for from one characterized by a relatively high incidence 2006. Rather, the increased role of such institutions of higher-priced lending and of mortgage loan sales to reflects the large contraction in activity of other one with a substantially lower share of both higher institutions in this part of the market. priced lending and loans sold to the secondary mar-
A126 Federal Reserve Bulletin 0 December 2008 12. Distribulion of all loans and of lower- and higher-priced loans. ant! inciden ~ of lowcr-and higher-priced lending. for the 169 closed lenders and for all other lender. . by characlt'rislic of horrowcr and nr loan and by localion of property. 2006 Percent Closed lenders All other lenders Characteristic and slatus All loans I Lower-priced loans I Higher-priced loans All loans I Lower-priced loans I Higher-priced loans Distribution ID istribution Ilncidence I ID istribution I Incidence I Distribution ID istribution I Incidence I ID istribution I Incidence I BORROWF.R Income ralio (percent of urell mediunf Lower .............. ...... 12.1 11.2 45.2 12.9 54.8 14.5 14.4 72.7 14.9 27.3 Middle ...................... 9.0 7.5 40.7 10.4 59.3 10.6 10.4 71.8 11.2 28.2 High ...... .................. 70.5 70.3 4S.6 70.S 51.4 69.0 69.3 73.6 68.3 26.4 Missing) . .................. S.4 11.1 64.2 5.9 35.8 5.9 6.0 74.7 5.6 25.3 Total . . . . . . . . . . . ........ 100 100 4S.S 100 51.2 100 100 73.3 100 26.7 Minorily SllllIlS· Black or African American ... 16.7 9.5 26.1 22.7 73.9 9.7 6.5 49.3 18.9 50.7 Hispanic white .... .... .... 22.1 I7.S 36.6 25.S 63.4 14.6 12.5 63.0 20.7 37.0 Asian ............. , .. .,.',. ... 4.3 5.2 55.1 3.5 44.9 4.5 5.1 83.4 2.9 16.6 Non-Hispanic while .. .. 56.9 67.5 54.1 4S.0 45.9 71.2 76.0 78.9 57.5 21.1 TOlal5 .... .. . . . . . . . . . . . 100 100 45.6 100 54.4 100 100 73.9 100 26.1 Sex Single female ...... ,. ...... 31.1 27.7 40.4 34.0 59.6 24.8 23.2 68.9 29.1 31.1 Single male .......... ...... 40.0 36.7 41.7 42.9 58.3 33.0 30.7 68.4 39.4 31.6 Joi T n o t ta fe l5 m a . l e . . a . n . d . . . m . a . l . e . 6 . . . .. . . . . . . . . . 1 2 0 8 0 . 8 1 3 0 5 0 . 7 5 45 6. . 3 5 1 2 0 3 0 . 1 4 5 3 4. . 5 7 1 4 0 2 0 .2 1 4 0 6 0 .0 8 73 0 . . 5 2 1 3 0 1 0 . 5 2 1 6 9 . . 5 8 loAN Amounl of loan (thousa1lds ............... t~~/tf::~\OO 15.3 8.7 26.3 20.8 73.7 20.5 17.8 63.6 28.0 36.4 100-249 ........... 49.0 50.4 47.3 47.9 52.7 48.0 48.5 74.2 46.4 25.8 250 or more ................. 35.7 40.9 52.7 31.3 47.3 31.5 33.7 78.3 25.6 21.7 Total5 .................... 100 100 46.0 100 54.0 100 100 73.3 100 26.7 Owner-occllpanty s1UII<5 Owner ...................... 85.1 85.1 46.0 85.0 54.0 86.2 86.3 73.4 86.2 26.6 Non-owner 7 .•.........•.•... 14.9 14.9 45.9 15.0 54.1 13.8 13.7 73.2 13.8 26.8 Total5 .................... 100 100 46.0 100 54.0 100 100 73.3 100 26.7 Type of property 1-4 family site-built ....•.... 99.6 99.3 45.9 99.8 54.1 98.0 98.6 73.8 96.2 26.2 Manufactured home ......... .4 .7 73.8 .2 26.2 2.0 1.4 49.9 3.8 50.1 Total5 .......... ......... 100 100 46.0 100 54.0 100 100 73.3 100 26.7 Pigg)'huck slalus Piggybacks ........... ...... 23.2 19.8 39.3 26.1 60.7 12.7 10.3 59.3 19.5 40.7 Not piggyback .............. 76.8 80.2 4S.0 73.9 52.0 87.3 89.7 75.4 80.5 24.6 Total5 ................... 100 100 46.0 100 54.0 100 100 73.3 100 26.7 LocATION Of PROPERTY, BY FREDDIE MAC REGION9 Northeasl ................... 18.9 19.5 46.9 IS.3 53.1 22.1 22.6 74.9 20.8 25.1 Southeast ................... 20.8 IS.3 39.S 22.9 60.2 22.1 21.2 70.6 24.4 29.4 North Central ............... 13.1 10.3 35.5 15.5 64.5 16.7 16.4 72.0 17.5 28.0 Southwest ................... 12.7 12.1 43.2 13.1 56.S 13.7 13.2 70.6 15.1 29.4 West ........................ 34.5 39.S 52.2 30.2 47.8 25.5 26.6 76.7 22.3 23.3 Total5 . . . . . . . . . . . . . . . . . . . . 100 100 45.3 100 54.7 100 100 73.3 100 26.7 CENSUS ThAn OF PROI'ERTY Income ralio (percenl of ureu median) 10 Lower ................... ... 24.2 IS.O 33.7 29.3 66.3 17.9 14.7 60.4 26.5 39.6 Middle ...................... 49.2 4S.4 44.4 49.9 55.6 50.9 50.2 72.2 53.1 27.8 Hi~~u.i; . : : : : : : : : : : : : : : : : : : .. 1 2 0 6 0 .6 1 3 0 3 0 .6 5 45 7 . .0 2 1 2 0 0 0 . 9 4 5 3 4. .0 S 1 3 0 1 0 . 2 1 3 0 5 0 . 1 7 82 3 . . 6 3 1 2 0 0 0 .4 2 1 6 7. .7 4 ket. As noted, a comparison of lending activity in quently, to reduce the uncertain effects of underreport these two years is complicated by an underreporting ing, we compare mortgage market activity in the first of loans in 2007 because some lenders went out of six months of 2006 with that in the last six months of business during the year and did not report HMDA 2007. data. Most of the lenders that did not report data for The comparison focuses primarily on the changes 2007 exited the market by the middle of that year, and in the number of originated loans, although changes therefore underreporting of data is much less likely to in the number of applications and of denials are also be a problem for the last half of the year. Conse- examined. Comparisons of loan originations are made
The 2007 HMDA Data A 127 12. Distribution of all loans and of lower- and higher-priced loans. and incidence or low 'r-and higher-priced lending, for the or 169 closed lender. and for all other lenders, by characteristic of borr()wer and loan and by location or properly, 2006-Conlilllled Percenl Ctosed lenders All other lenders Characteristic and status All loans I Lower-priced loans I Higher-priced loans All loans I Lower-priced loans I Higher-priced loans I I I I I I I I Distribution Distribution Incidence I Distribution Incidence I Distribution DislIibution Incidence ' Distribution Incidence I Racial or ethnic compositioll (minorities as a pen'elll of r'!s~/f~:'~o ................ 22.0 23.9 49.0 20.5 51.0 32.4 34.5 78.0 26.7 22.0 1{}-50 ....................... 48.5 53.5 49.9 44.3 50_1 47.9 49.2 75.3 44.3 24.7 50 or more .................. 29.5 22.6 34.7 35.1 65.3 19.7 16.3 60.8 28.9 39.2 Total' .. .................. 100 100 45.2 100 100 100 100 73.3 100 26.7 Credit SCOTl! of borrowers (percent of mongage borrowers with scores below 600)" 20 or more ........... ....... 17.3 9.8 26.0 23.7 74.0 13.9 10.2 53.7 24.1 46.3 1{}-20 ............ _. .. 32.8 30.0 42.1 35.2 57.9 30.6 28.5 68.4 36.3 31.6 Le T ss o t t a h l a ' n . 1 . 0 . . . . . . . . . . . . . . . . . . . . . . • .• . .• . •. . .4 . . . •.• . 1 4 0 9 0 . 9 1 6 0 0 0 . 1 4 5 6 5. . 5 0 1 4 0 1 0 . 1 4 5 4 4 . .0 5 1 5 0 5 0 . 5 1 6 0 1 0 . 3 8 7 1 3 . .3 0 1 3 0 9 0 . 6 2 1 6 9 . .0 7 MSA 01' PROPERTY Real price appreciatioll oj real estate (pen'en/)'2 -8orless .................. 54.6 55.9 46.4 53.6 53.6 44.3 44.4 73.6 44.3 26.4 -8-0 ........................ 33.8 32.4 43.6 34.9 56.4 41.9 41.8 73.5 42.1 26.5 o or more ................... 11.6 11.7 45.7 11.6 54.3 13.8 13.8 74.0 13.6 26.0 Total' .................... 100 100 45.4 100 54.6 100 100 73.6 100 26.4 Change in delinquincy rate [~rcb~II{j~; ................... 27.9 27.3 44.2 28.5 55.8 37.0 36.7 72.7 37.8 27.3 0.5-2 ......... _. ............ 44.9 43.0 43.3 46.5 56.7 42.9 42.4 72.3 44.5 27.7 2 or more ............... 27.2 29.7 49.5 25.1 50.5 20.1 20.9 76.4 17.8 23.6 Total' .................f .••.•. 100 100 45.2 100 54.8 100 100 73.3 100 26.7 NOTE: Conventional firsl-lien mongages for home purchase or refinance for 6. On Ihe applications for these loans, One applicant reported "male," and single-family houses; excludes business loans. For definition of closed lenders, the other reported "female." For female and for male. only sole applicanls see nOle I. table II; for definitions of lower- and higher-priced lending, see were considered. Excludes loans for which sex was missing on the application lexI nOle 7. and loans inVOlving two females or Iwo males. I. DislribuLion sums horizontally. 7. Includes loans for which occupancy Slarus was missing. 2. Borrower income is the lotal income relied upon by the lender in the loan 8. For definition of piggyback lending. see nOIe 10 table 8. underwriting. Income is expressed relative 10 the median family income of the 9. Freddie Mac defines ilS regions as follows: NOr/ileas/: N. Y, NJ., Pa., melIopolilan statistical area (MSA) or slatewide non-MSA in which Ihe prop Del., Md., D.C, Va., Wv., P.R., Maine, N.H., VI. Mass., RI.. Conn., v.i.; eny being purchased is localed. "Lower" is less than 80 percem of the median; SOIl/heast: N.C, S.C, Tenn., Ky., Ga., Ala., Aa., Miss.; Nonh Cell/ral: Ohio, "middle" is 80 percenl 10 119 percenl; and "high" is 120 percent or more. Ind., lll., Mich., Wis., Minn., Iowa, N.D., S.D.; Sourhwest: Texas, La., N.M., 3. Information for income Or propeny location was missing on the Okla., Ark .. Mo .. Kan .. Colo .. Neb., Wyo.: West: Calif., Ariz., Nev., Ore., application. Wash., U!ah, Idaho, Mon!., Hawaii, Alaska, Guam. 4. Categories for race and ethnicilY reftecI the revised standards established 10. The income category of a census lIacI is the median family income of in 1997 by the Office of Managemenl and Budge!. Applicanls are placed under the lIaCI relalive 10 thai of the melfopolitan statistical area (MSA) or slatewide only one category for race and ethnicily, generally according 10 the race and non-MSA in which the tracI is localed. "Lower" is less than 80 percent of the ethnicily of the person listed firsl on the application. However. under race, the median: "middle" is 80 percenl 10 119 percem; and "high" is 120 percem or application is designated as joillt if one applicam reponed the single designa more. lion of while and the other reponed one or more minority races. If Ihe applica II. Data from Equifax drawn from credil records of individuals as of De tion is nOI joinl but more than one race is reponed, Ihe following designations cember 31, 2006. A score below 600 generally conforms with borrowers in the are made: If al least IWO minorily races are reporled. Ihe application is desig subprime portion of the mongage marke!. Includes all borrowers with an oul naled as fWO or more minority races; if the firsl person lis led on an applicaLion standing mongage regardless of the year in which the loan was laken OUI. repons two races, and one is while, the application is calegorized under the mi 12. Housing price index from the Office of Federal Housing EllIerprise nority race. For loans with two or mOre applicanlS, lenders covered under the Oversigh!. House price changes calculaled using the percenl change in the in Home Mongage Disclosure ACI reporl dala on only IWO. dex from the founh quaner of 2006 through the firsl quarter of 2008. Based on 5. Excludes loans for which the information for the characleristic was miss the change in median home values for a constanl 2000-defined geography. ing on the application and loans deemed business relaled or multifamily. 13. Delinquency rales from Trend Data, a producI of TransUnion LLC The change in the mongage delinquency rate is calculated using delinquency rates from the fourth quarter of 2003 10 the founh quaner of 2007. for both lower-priced and higher-priced loans. Within the earlier analyses, we do not differentiate between the category of higher-priced loans, differentiation is government-backed and conventional loans. Changes made by the size of the reported APR spread. Loans in the number of loan originations are examined by for home purchase and for refinancing are examined borrower race or ethnicity, borrower income, census separately, and the analysis is restricted to first-lien tract income, and owner-occupancy status of the loans secured by a site-built property. Unlike some of property securing the loan.
A 128 Federal Reserve Bulletin D December 2008 13. Change in the numb..:r of loan applications. denials. and originations, and 'honge in the number of lower- and higher priced originations. for all loans and for jumbo loans. by characteristic of borrowel' and or census tra t, 2006:HI through 2007:H2 A. Home purchase Percent Applications Loans originated I i Higher priced Characteristic I Distribution, by percentage Jumbo I of borrower and Number points of APR spread I o s o t f w a l c U n e e S n r s - o u o f s c p c t u r r o a p c p a t e n , r c b t y y y u t p a e o c n t n d e e d b r y I N d u e m ni b e e d r All L pr o i w ce e d r All 1 3 - 3 . 99 4-4.99 m 5 o o r r e N a u c A m te p b d p e l r i ca N ti u o m ns b er All L pr o i w ce e d r H pr i i g c h e e d r upon by denied I lender OWNER OCCUPIED BORROWER Minori'" Slatll.\· 2 B[ack or African American .... -31.9 -25.7 -35.2 -2.3 -69.4 11.2 -46.7 -89.0 -37.3 -10.7 -57.2 -39.7 -74.5 Hispanic white) ............... -42.[ -30.7 -48.8 -26.8 -75.7 -25.0 -66.4 -94.0 -57.3 -32.5 -72.8 -65.[ -83.1 Olher nunonty ............... -23.1 -20.7 -26.2 -15.3 -73.4 -24.7 -71.2 -93.1 -35.9 -26.9 -43.4 -36.2 -75.6 Non-Hi~aJlic white ........... -20.1 -18.0 -21.8 -[4.3 -60.0 -11.4 -47.6 -88.5 -31.7 -12.1 -40.2 -37.[ -62.3 Missing """" " " " " " . " -27.5 -29.2 -26.3 -9.8 -71.1 -[1.2 -56.0 -91.1 -31.5 -19.0 -38.8 -31.2 -71.4 Minorily StaIUS. by income categor),' Lower Black or African American -30.8 -30.3 -30.0 5.2 -65.7 43.7 -32.8 -88.0 -15.0 -7.4 -25.9 .0 -87.5 Hispanic white . . ....." . -24.6 -21.7 -27.3 -4.7 -60.5 -1.2 -44.6 -90.6 -30.9 -12.2 -70.2 -65.0 -82.4 Other n1inority' ..." ......... -14.0 -12.0 -16.4 -6.0 -61.6 6.1 -54.6 -90.6 -36.5 -30.5 -53.7 -53.9 -50.0 Non-Hispanic white ...... -19.8 -20.3 -20.3 -11.7 -54.6 13.7 -35.8 -88.8 -20.7 1.9 -38.6 -34.9 -63.3 Total , . . . . . . . . . . . . . . . . . -22.9 -24.1 -22.6 -9.2 -59.2 15.4 -38.0 -88.9 -26.9 -13.3 -42.6 -37.8 -70.0 Middle " Black or African American -29.5 -24.7 -31.8 7.7 -64.4 28.9 -47.0 -90.0 -14.1 2.8 -29.2 -14.6 -55.6 Hispanic white ......... ..." . -36.9 -28.8 -42.1 -13.1 -70.3 -6.4 -64.0 -94.7 -44.4 -29.6 -58.3 -46.8 -80.5 O N t o h n e - r H n is 1 p in a o n r ic it y w ' h . i . le . . . . . .. . . . .." .. . - - 2 1 0 7 . . 0 5 - -1 1 4 9 . . 7 7 - -2 2 1 0 . . 1 2 -1 - 2 8 . . 2 8 - - 7 7 5 1 . . 1 0 -3. . 1 6 - - 4 6 9 8 . . 7 9 - -9 9 0 3 . . 1 4 - - 3 2 3 7 . . 8 8 - -1 1 1 2 . . 7 9 - - 3 4 5 2 . . 6 0 - - 3 4 1 0 . . 4 6 - - S 5 O 6 . . 3 9 Total .................... -23.6 -23.2 -24.7 -10.1 -67.9 3.0 -54.0 -91.3 -31.7 -15.5 -40.9 -36.1 -68.2 High B lack or African American .. -31.8 -20.3 -38.7 -6.9 -72.9 -.3 -57.5 -89.6 -38.1 -13.4 -57.2 -36.6 -76.4 Hispanic white .... ....... -48.8 -35.4 -57.3 -35.8 -81.5 -29.7 -75.1 -94.7 -57.7 -34.3 -72.9 -64.3 -83.9 Other nlinorily' ............ -23.6 -23.9 -27.0 -15.8 -77.1 -23.9 -75.9 -93.6 -34.6 -27.9 -42.0 -34.4 -75.7 No T n O -H lal i sp . a . n . i . c . . w . l . l . i t . e . . . . . . . . . . . .. . . . . . - -2 1 3 6 . . 9 9 - -2 1 1 2 . . 7 9 - - 1 2 9 6 . . 6 6 - -1 1 3 4 . . 3 6 - - 6 7 1 1 . .3 2 - - 1 1 5 7 . . 7 6 - -5 6 1 1 . . 1 9 - -9 8 0 7 . .0 9 - -3 3 5 0 . . 9 7 - - 1 2 2 0 . . 5 6 - - 3 44 9 . . 9 1 - -3 3 6 7 . . 1 7 - - 7 6 3 2. . 3 6 Missing4 ..................... -61.6 -36.4 -68.4 -67.7 -70.3 -70.2 -64.8 -80.7 -51.2 -2.9 -64.3 -64.6 -63.6 CENSUS TRACf OF PROPERTY Income CaleKOT),6 Lower ............. .......... -32.9 -29.5 -26.2 -13.2 -70.0 -8.1 -53.9 -90.8 -36.8 -19.3 -46.5 -38.8 -73.0 Middle .. , .................... -24.8 -22.6 -27.2 -13.2 -65.8 -10.3 -52.7 -90.3 -37.2 -19.3 -47.0 -40.0 -72.9 High ......................... -24.8 -18.5 -27.1 -16.3 -66.7 -20.4 -57.7 -90.0 -36.4 -19.8 -45.5 -38.8 -72.8 TOlal owner occupied ......... -25.2 -23.4 -26.9 -14.4 -67.1 -12.4 -54.1 -90.4 -36.6 -19.5 -45.9 -39.0 -72.9 NON-OWNER OCCUPIED? Total .... .............. , ...... -38.2 -29.2 -41.5 -32.6 -64.5 -52.0 -57.1 -86.1 -37.5 -25.3 -44.5 -40.2 -64.7 Total ......................... -27.4 -24.4 -29.3 -17.3 --06.6 -25.7 -54.7 -89.9 -36.7 -20.2 -45.7 -39.2 -71.9 NOTE: Conventional firsl-Iien mOrlgages for sile-buill properties; excludes 3. Olller n1inoriry cons isis of American Indian or Alaska Native, Asian, and business loans and applications. applications in U.S. terrilories, and applications Native Hawaiian or other Pacific Islander. n1issing cenSUS-ifact information. For definitions of lower- and higher-priced 4. Information for Ille characleristic was missing on Ille application. lending, see text nOle 7; for definition of jumbo loans, see nole 4, table 6. 5. See note 2, table 12. I. See note I, table 3. 6. See note 10, table 12. 2. See note 4, lable 12. 7. Includes applications and loans for which occupancy slatus was n1issing. hange in Lending Activity by Characteristic of Hispanic whites and for blacks. For example, home Borrower and Cell Ll Tract purchase loans to Hispanic white and black borrowers All borrower and census-tract groups, whether char fell 49 percent and 35 percent respectively, while such acterized by race or ethnicity, income, or owner loans to non-Hispanic white borrowers fell 22 percent occupancy status, experienced a decline in the number over the same period. Even when changes for borrow of loan originations for home purchase and for refi ers of similar income levels are compared, differences nancing (tables 13.A and 13.B, column 3). The per across racial or ethnic groups are found. However, the centage decline in loan originations was largest for overall differences across income classes, whether
The 2007 HMDA Data A129 13. Change in Lhe number of Joan applications. denials. and origination', and chang~ in Ihe number of lower- and higherpriced riginalions. for all 1 ans and for jumbo loans. by ch~IJacteri lie of borrower anu of census U-aCL. 2006:1-11 through 2007:1-12-Colllillued B. Refinance Percenl Applications Loans originated Higher priced I Characteristic Distribution. by percentage Jumbo of borrower and Number poinrs of APR spread I o s o f t w a c t n u e e s n r s - o u o f s c c p I u r r o a p c p a t e n , r c t b y y y u l p a e o c n n t d e e d b r y N d u e m nie b d e r All L pr o i w ce e d r All 5 or Nu A m p b p e li cations Lower Higher 3-3.99 4-4.99 more acted Number All priced priced upon by denied lender I OWNER OCCUPIED I BORROWF.R Minority status 2 Black or African American . -18.3 -.1 -37.4 -16.0 -59.0 -23.8 -51.6 -71.8 -25.3 15.0 -{i1.8 -57.2 -{i8.6 Hispanic. wh.ite, .............. -15.7 19.1 -40.6 -28.4 -{i3.4 -17.9 -55.2 -81.9 -22.1 26.5 -58.9 -55.2 -{i7.4 Other mmonty' ............... -12.2 14.6 -30.9 -22.3 -{iO.8 -25.6 -51.2 -79.5 -23.2 16.2 -49.1 -45.2 -{i6.6 Non-Hi~anic white ........... -15.6 -3.8 -24.4 -15.5 -51.9 -2003 -42.9 -71.2 -28.2 II.! -49.6 -48.4 -55.7 Missing ..................... -29.4 -28.8 -33.1 -16.8 -{i2.5 -19.5 -57.4 -79.5 -27.0 -9.8 -47.3 -44.4 -57.0 Minority status. by income categor),!5 Lower Black or African American .. -23.6 -11.4 -39.3 -9.8 -{il.! -25.9 -55.3 -72.6 6.2 19.1 -{iO.8 -32.0 -88.5 Hispanic white, ............. I -16.2 4.0 -35.5 -14.3 -{i6.0 -22.6 -58.0 -82.6 20.3 42.4 -54.2 -39.2 -90.5 Other mmonty ............. I -13.4 -1.6 -27.2 -13.8 -{iO.6 -34.2 -53.5 -75.0 23.7 36.8 -SO.O -49.0 -55.6 Non-Hlspamc while ........ I -24.6 -19.4 -29.9 -18.7 -54.8 -22.8 -47.5 -72.3 -4.6 4.5 -27.0 -17.6 -{i3.9 Total .................... -26.6 -21.6 -32.7 -16.9 -58.9 -24.0 -52.2 -74.7 -4.9 5.1 -38.2 -28.0 -71.6 Middle Black or African American .. -14.5 9.1 -36.5 -11.7 -59.6 -21.0 -51.8 -72.3 -9.3 37.9 -{i9.8 -58.7 -80.9 Hispanic white ............. -14.0 24.5 -39.5 -23.8 -{is.8 -16.9 -59.1 -82.4 -12.8 40.8 -{i3.7 -55.7 -84.2 Other minority' ............ -10.5 16.7 -30.1 -19.8 -{i1.2 -25.4 -49.1 -78.5 -11.3 35.0 -54.8 -49.4 -81.5 Non-Hispanic white ........ -16.0 -3.3 -25.3 -14.4 -54.3 -21.9 -46.3 -71.7 -33.5 3.7 -{i7.3 -{i2.2 -83.7 Total .................... -17.8 -4.1 -29.5 -15.S -S8.S -21.5 -50.7 -74.9 -26.0 7.3 -{i4.9 -58.3 -82.3 High Black or African American .. -10.5 19.1 -36.3 -21.9 -SS.3 -16.4 -44.7 -70.5 -27.6 13.0 -{i2.0 -57.9 -{i7.9 Hispanic white ............. -13.5 29.1 -41.9 -32.9 -{iO.9 -7.7 -50.1 -81.4 -24.0 23.2 -S8.8 -55.1 -{i7.3 Other minority' ............ -9.9 25.0 -30.6 -23.0 -{iLl -17.9 -51.5 -81.8 -24.1 13.8 -48.5 -44.4 -{i6.0 Non-Hispanic white -{i. I 15.0 -18.4 -11.3 -47.0 -10.1 -35.2 -70.0 -27.7 12.1 -49.0 -47.7 -55.2 Total .................... -9.6 11.0 -24.1 -IS.I -52.7 -10.3 -41.6 -74.2 -26.3 9.7 -SO.4 -47.9 -{iO.O Mjssing' ................... -40.8 -32.8 -44.5 -42.7 -54.2 -S4.4 -50.3 -57.3 -3S.1 .8 -S2.3 -53.9 -44.2 CF.NSUS TRACf OF PROPERTY Income categor,,6 Lower ........................ -23.2 -10.6 -29.0 -21.0 -59.3 -22.0 -51.4 -74.8 -2S.7 10.1 -SI.S -49.9 -59.1 Middle ....................... -17.9 -75 -28.9 -15.9 -55.1 -21.2 -46.7 -73.0 -26.4 8.9 -51.7 -49.3 -{iO.9 High .................. -15.4 -1.1 -28.8 -17.8 -56.8 -17.6 -48.3 -77.8 -26.3 8.7 -50.7 -48.0 -{i1.0 Total owner occupied -18.3 -{i.8 -28.8 -17.3 -56.5 -20.6 -48.2 -74.4 -26.4 9.0 -51.1 -48.5 -{iO.6 NON-OWNER OCCUPIED7 Total ................... -7.8 23.9 -23.0 -8.3 -{iO.5 -37.4 -49.9 -81.3 -19.1 16.2 -40.0 -32.8 -{i6.2 Total ......................... -17.4 -4.8 -28.2 -16.4 -56.9 -22.9 -48.3 -75.0 -25.8 9.5 -so. I -47.2 -41.1 NOTE: See notes to table 11A measured by the borrower's income or the median or no-documentation loans, two products that experi income for the census tract, are much smaller than the enced a sharp decline in 2007. differences across racial or ethnic groups. There are Most of the reduction in loan volume appears to be two notable exceptions: (1) The number of refinance driven by declines in the number of applications. A loans to high-income borrowers declined less than the portion of the decline in loan originations is also number to middle- or lower-income borrowers, and accounted for by a modest increase in denial rates. (2) lending to borrowers with missing income declined The increase in the denial rate is due to a smaller much more than that to borrowers whose income was reduction in the number of denials (tables 13.A and reported. Loans to borrowers with nonreported income 13.B, column 2) than in the number of applications may include a disproportionate share of stated-income (column 1).
Al30 Federal Reserve Bulletin 0 December 2008 The falloff in loan volumes differed substantially were greater for jumbo loans than for overall lending. across loan-pricing categories. For example, the num The difference was particularly large for lower-priced ber of home-purchase loans with APR spreads of loans. For example, jumbo lower-priced refinance 5 percentage points or above declined almost 90 per loans fell by almost one-half, while overall lower cent, whereas the number of lower-priced home priced refinance loans declined 16 percent. purchase loans declined only 17 percent. Differences in declines across pricing categories appear to explain Changes in Lending by Type of Lend r at least a portion of the racial differences described Changes in the number of loan originations differ earlier. For example, when comparisons are made for substantially across types of lenders (tables 14.A and borrowers within each of the 12 combinations of 14.B). For example, the number of higher-priced borrower income and loan-pricing categories, the refinance loans originated by independent mortgage decline in home-purchase lending to blacks was companies declined 85 percent between the first half lower than the decline in such lending to non of 2006 and the last half of 2007. In contrast, the Hispanic whites in 10 of the 12 cases. Thus, the much number of such loans originated by depository insti larger overall decline in lending to blacks must be tutions within their assessment areas actually rose driven by the fact that blacks in 2006 were dispropor 8 percent over the same period.3o These differences tionately in loan-pricing categories that experienced are indicative of depository institutions' larger market very large rates of decline. This pattern was less shares (in total lending and higher-priced lending) in evident for refinance loans: Black borrowers tended their assessment areas. However, the data in these to have greater declines than non-Hispanic whites, tables show that the shift in market share from even when the comparison was made for borrowers independent mortgage companies to depositories in of the same borrower income and loan-pricing cat their assessment areas has had very different patterns egory. However, these within-category differences across racial or ethnic groups. For example, deposi were much smaller than the overall racial differences tory institutions experienced an increase in their between black and non-Hispanic white borrowers. volume of lower-priced home-purchase lending to Generally, the large differences in the rates of decline black borrowers in their assessment areas by about in lending to Hispanic whites and non-Hispanic one-fifth for each income category. In contrast, lower whites persisted across the loan-pricing categories. priced home-purchase lending by depositories to non These differences appear to have been driven primar Hispanic white borrowers in their assessment areas ily by geography. For example, the rate of decline in fell for each income class. Similar differences are higher-priced home-purchase lending to Hispanic shown for higher-priced loans. Overall, higher-priced whites was 15 percentage points greater than the home-purchase lending by depository institutions in decrease in such lending to non-Hispanic whites. their assessment areas fell 17 percent, whereas higher More than two-thirds of this difference can be attrib priced lending to black borrowers fell only 3 percent. uted to differences in the distribution of Hispanic Another way of looking at differences in loan whites and non-Hispanic whites across MSAs (data originations across types of lenders is to examine how not shown in tables). This finding suggests that the the changes differed across geographies that were higher rates of decline in lending to Hispanic whites predominantly served by specific lender types in 2006 can be attributed primarily to a higher proportion of (tables 15.A and 15.B). Here we identify those census Hispanic white borrowers in MSAs where lending tracts where 50 percent or more of the loans in 2006 has declined the most. were originated by (1) independent mortgage compa The recent mortgage market turmoil has raised nies, (2) depository institutions in their assessment areas, or (3) lenders that went out of business during concerns about the condition of the market for loans 2007 (this group includes the 1691enders that did not above the conforming loan-size limit established by Fannie Mae and Freddie Mac (jumbo loans). The 2006 and 2007 HMDA data provide an opportunity to profile changes in this market segment. The number 30. Larger commercial banks and savings associations covered by of jumbo loan originations declined from the first half the Community Reinvestment Act of 1977 (CRA)-generally those with assets of $1 billion or more-are required to identify the census of 2006 to the last half of 2007 by a larger percentage tracts in their CRA assessment areas as of the end of each calendar than overall lending (46 percent compared with year. That information was used to determine which loans in the 29 percent), and it did so for every demographic HMDA data were for properties within the lenders' CRA assessment areas. When lenders were part of a bank or lIuift holding company, the category. Further, for both lower-priced and higher combined assessment areas of all banks in the holding company were priced loan categories, declines in loan originations used for the analysis.
The 2007 HMDA Data Al31 report HMDA data for 2007 as well as those lenders hange in Lendino by HOLlse Price Movement that went out of business and either reported 2007 To investigate the potential relationship between HMDA data or were merged or acquired). changes in housing market conditions and changes in Higher-priced home-purchase or refinance lending lending activity from 2006 to 2007, metropolitan declined more than the overall market in census tracts statistical areas were grouped into two categories that in 2006 were primarily served by lenders that corresponding to the percentage changes in the House went out of business by 2007. This was also true for Price Index of the Office of Federal Housing Enter census tracts that had been heavily served by indepen prise Oversight (OFHEO) from the first quarter of dent mortgage companies. In contrast, the decline in 2003 through the fourth quarter of 2006.31 Each of the higher-priced lending in census tracts that were pri two groups was split again according to the percent marily served by depository institutions in their age changes in the index from the fourth quarter of assessment areas was smaller than the declines in 2006 through the first quarter of 2008. This process other census tracts. Patterns for lower-priced loans grouped census tracts in MSAs into those that, in the are less consistent. For example, the number of initial period, had either relatively weak growth or lower-priced home-purchase loans in census tracts strong growth in home values and, in the more recent that in 2006 were primarily served by lenders that period, had small decreases, large decreases, or went out of business in 2007 declined less than the increases in home values. number of such loans extended to borrowers in other As noted, the HMDA data show a marked decline census tracts. In contrast, the number of lower-priced in lending from 2006 to 2007. The fallolf in lending refinance loans in census tracts that were primarily activity is related to the pattern of house price changes served by lenders that went out of business in 2007 over the previous few years. MSAs that experienced declined at a higher rate than the number of these larger declines in house prices from the fourth quarter loans in other census tracts. of 2006 through the first quarter of 2008 generally Differences in the rates of decline across racial or experienced larger declines in loan activity than ethnic groups for these census tracts characterized by MSAs in which house prices did not fall (tables 16.A concentrated lending are sometimes quite large. For and 16.B). Furthermore, in MSAs where house prices example, higher-priced home-purchase loans to black declined, the fall in home mortgage activity was borrowers in census tracts primarily served by lenders relatively greater in those MSAs that had experienced that went out of business decl ined 70 percent between larger house price appreciation from the first quarter the first half of 2006 and the last half of 2007. In of 2003 through the fourth quarter of 2006. Thus, the contrast, higher-priced home-purchase loans to non MSAs that experienced both the sharpest declines in Hispanic whites declined 53 percent over the same recent house prices and the largest increases in house period. Interestingly, the number of lower-priced prices in the preceding four years experienced the home-purchase loans to black borrowers in these largest declines in mortgage activity. For example, the census tracts increased 7 percent, while the number volume of lower-priced home-purchase lending for extended to non-Hispanic whites in the tracts de owner-occupied properties fell 53 percent in MSAs creased 3 percent. that experienced large recent declines in home values We also look at census tracts concentrated by after experiencing significant run-ups in such values factors other than lender type. Specifically, we exam in the preceding four years. By comparison, areas that ine census tracts of two types: (I) those where 50 also had large recent declines in house prices but percent or more of the originated loans in 2006 were smaller house price appreciation before 2006 experi· higher priced and (2) those where 50 percent or more enced a decline of lower-priced home-purchase lend of the loans were sold in the secondary market. The ing for owner-occupied propert1ies of about 5.3 per data indicate that the decline in the number of higher cent. The severity of declines in home lending was priced loan originations in the second half of 2007 larger for higher-priced loans than for lower-priced was greater in census tracts with a high concentration loans regardless of the changes in house price pat of sold loans in 2006 (72 percent) than in census terns in recent years. tracts with a high concentration of higher-priced lending (57 percent). For both home-purchase and refinance loans, and for both higher-priced and lower 31. OFHEO's House Price Index has been renamed the Federal priced loans, census tracts with high concentrations of Housing Finance Agency House Price Index. More information about sold loans showed higher-than-average declines. the index is available at www.ofheo.gov/hpi.aspx.
A132 Federal Reserve Bulletin D December 2008 14. hange in Lhc number of lowcr- and higher-priccd loan originations, hy Lype of lender and by Chan.lCleri 'lic of borrower and of censu. Iracl. 2006:H I Ihrough 2007:H2 A. Home purchase Percent Lower-priced loans Higher-priced loans Characteristic Type of lender Type of lender of borrower and Depository, by Depository, by of census tract, by owner-occupancy All property location Independent All property location Independent I status of property ass W es it s h m in e nt I a O s u se ts s i s d m e e o n f t m co o m rt p g a a n g y e ass W es it s h m in e nt I a O s u se ts s i s d m e e o n f t m co o m rt p g a a n g y e areal area areal area OWNER OCCUPIED BORROWER Minority status 2 Black or African American .... -2.3 17.8 4.8 -27.0 -{i9.4 -2.7 -{i3.0 -87.0 Hispanic White, ............... -26.8 -.9 -30.2 -47.6 -75.7 -24.0 -{i9.9 -91.5 Other mtnonty ............... -15.3 1.5 -17.4 -35.5 -73.4 -16.7 -{i8.0 -90.4 Non-Hi~anic white ........... -14.3 -4.2 -14.1 -29.5 -{i0.0 -17.4 -52.1 -82.7 Missing ..................... -9.8 7.0 -3.9 -33.7 -7 J.I -23.0 -53.7 -89.2 Mi,wriry sla/us, bv income category' . Lower Black or African American .. 5.2 20.6 12.3 -18.6 -{i5.7 -1.6 -{iQ.0 -84.3 Hispanic white ............. -4.7 8.2 -11.8 -17.5 -{iQ.5 -17.2 -55.0 -83.6 Other minority' ............ -{i.0 J.3 -7.5 -16.5 -{i1.6 -16.1 -57.2 -83.3 Non-Hispanic white ........ -11.7 -5.1 -11.2 -22.9 -54.6 -20.5 -47.7 -77.9 Total ..... ............... -9.2 -.4 -8.0 -23.7 -59.2 -17.4 -52.1 -81.2 Middle Black or African American .. 7.7 22.5 11.9 -9.4 -{i4.4 1.7 -{i4.6 -87.0 Hlsparuc whIte . ..... , .... -13.1 9.1 -19.1 -27.7 -70.3 -13.8 -{i9.9 -90.5 Other mtnOnly' ........ -8.8 5.9 -12.4 -22.6 -75.1 -16.2 -{i6.2 -87.3 Non-Hispanic white ........ -12.2 -2.2 -13.0 -24.3 -71.0 -20.9 -54.8 -82.6 Total ... , ............. -10.1 1.5 -10.8 -23.2 -{i7.9 -16.7 -{i0.3 -86.1 High Black Or African American .. -{i.9 17.1 -.7 -33.3 -72.9 -3.5 -{i6.7 -89.2 Hispanic white .. ........ -35.8 -7.1 -37.5 -58.2 -81.5 -29.5 -77.0 -94.0 Other minority' .. .. -15.8 1.5 -19.0 -36.6 -77.1 -15.5 -73.1 -92.5 Non-Hispanic white ........ -13.3 -2.7 -13.2 -29.9 -{i1.2 -5.7 -53.9 -85.0 Total .................... -14.6 -1.0 -14.8 -33.5 -71.3 -12.5 -{i3.8 -89.8 Missing· .................. ... -{i7.7 -40.8 -{i4.9 -86.4 -70.3 -48.7 -48.8 -91.1 CENSUS TRACT OF PROPERTY Income category 6 Lower .. .......... ............ -13.2 6.5 -14.3 -35.9 -70.0 -14.5 -{i2.3 -88.9 Middle ............ ........... -13.2 -1.0 -11.9 -30.7 -{i5.8 -19.2 -57.5 -85.8 High .............. . , ... .... -16.3 -4.7 -16.4 -32.4 -{i6.7 -15.5 -58.1 -86.8 Total owner occupied ......... -14.4 -1.5 -13.9 -32.1 -{i7.1 -17.2 -58.8 -86.9 NON-OWNER OCCUPIED' Total .... ................ .... -32.6 -15.3 -33.6 -56.9 -{i4.5 -16.0 -57.4 -91.8 Tolal ..................... , ... -17-3 -3_6 -17-4 -35-5 -66.6 -16.9 -58_6 -87.7 NOTE: Conventional first-lien mortgages for site-built properties; excludes 3. Other minority consists of American Indian or Alaska Native. Asian, and business loans. For definitions of lower- and higher-priced lending, see text Native Hawaiian or other Pacific Islander. note 7. 4. Information for the characteristic was missing on the application. 1. Includes lending by nonbank affiliates in the assessment areas of deposi 5. See note 2, table 12. tory instirulions covered by the Community Reinvestment ACI of 1977. For 6. See note 10. table 12. more information, see text note 30. 7. Includes loans for which occupancy starus was missing. 2. See note 4. table 12. House price changes in the initial period affected the earlier increase in home values and had more the magnitude of changes in refinance and home equity to extract or to offer as a down payment on the purchase markets differently. Markets that experi new loan. enced strong gains in home values from 2003 to 2006 experienced smaller declines in refinance lending Change in Lending by the Severity of Changes relative to the declines in home-purchase lending than in Mortgage Delinquency Rates did markets that witnessed the same recent changes in home values but weaker initial house price increases. To investigate the potential relationship between This may be because those refinancing benefited from changes in mortgage market conditions and changes
The 2007 HMDA Data A 133 14. Change in thl! numher of lower- and higher-pri ed loan originations. by lype of lender and by characteri tic of borrower and of census tract. 2(Xl6:H I through 2007:1-12- Conlinued B. Refinance Percent Lower-priced loans Higher-priced loans Characteristic Type of lender Type of lender of borrower and Depository. by Depository. by of census tract. by owner-occupancy All proPerty location Independent All property location Independent status of property Within Outside of mortgage Within Outside of mortgage assessment I assessment company assessment I 3SS<!ssment company areal area area' area I OWNER OCCUPIED BORROWER Minorit)' stlllU? Black or African American .... -16.0 -12.5 -5.7 -33.6 -59.0 -1.5 -46.3 -84.1 Hispanic. white, ............. .. -28.4 -15.6 -17,6 -56,7 -63,4 18,6 -52,5 -89.0 Other mlOonty ",',.,.,", .. , -22.3 -13.6 -16.2 -45.0 -60.8 3,5 -51.2 -87.6 Non-,Hi'Panic white. , , , • , , , . , . -15.5 -13,2 -8.3 -30,3 -51.9 7.2 -38.9 -83.4 Mlssmg ,., .. ,., .. , .... ,.,.,. -16.8 -10,6 2.0 -48,6 -62.5 6,7 -44.6 -81.2 Minority statlts. hI' income categon'.5 . Lower' Black or African American, . -9,8 -9,6 -2.1 -20,6 -61.1 -16,4 -49.4 -84,5 Hispanic. wh!te, ............. -14.3 -8.2 -1.4 -38.5 -66.0 -10,8 -53,1 -89,9 Other nunonty " . , ...... , ' -13,8 -8,7 -10.4 -27.9 -60,6 -26.7 -48.7 -85,8 Non-Hispanic white ........ -18,7 -21.0 -11.5 -25,7 -54,8 -10.5 -42.8 -84,2 Total .................... -16.9 -17,9 -7.4 -28.9 -58.9 -13,5 -45.5 -84.2 Middle Black or African American" -11.7 -10.9 1.7 -28.9 -59.6 1.6 -46,3 -84.2 Hispanic. white) ............ , -23.8 -16,6 -8.8 -49.2 -65.8 9.5 -55,5 -89.1 Other mmonty ...... , , , , , . -19,8 -18.3 -11.8 -32.8 -61.2 -8.4 -51.9 -86,1 Non-Hispanic white . . . . . . . . -14.4 -14.9 -6,9 -25,0 -54.3 ,8 -41.2 -83.4 Total .................... -15.5 -15,2 -4.9 -30,7 -58.5 ,7 -44,7 -83,9 High Black or African American. ' -21.9 -15.3 -12.1 -43.0 -55.3 23.9 -41.0 -84.3 Hispani~ white) ............ , -32,9 -16.3 -24.2 -63,7 -60.9 52,6 -53,0 -88,9 Other nunonty ,., .. ".,," -23,0 -12,5 -16.3 -49.8 -61.1 26.4 -53.2 -89,1 Non-Hisp.1nic white , ..... ,. -11,3 -7,0 -2.7 -31.2 -47.0 34,6 -33.0 -82.9 Total , .. , ..... ,.,.,., .... -15,1 -8.5 -5.3 -39.3 -52,7 37,6 -39,0 -84,1 Missing· ..................... -42,7 -24.1 -38.8 -68.3 -54,2 -20,0 -35.3 -80A CF.NSUS TRAer or PROPERTY Income ell/ellor)'· Lower .... ,.,., .... , ... ,.,., .. -21.0 -14.7 -10,8 -42,2 -59,3 4.7 -45.9 -85,2 Middle ............. " ... , .... -15,9 -13.5 -6,2 -33.8 -55,1 5,7 -40,9 -83,5 High ............... , ........ -17.8 -12.0 -9.7 -38.8 -56.8 14,7 -44.4 -83.7 Total owner occupied ......... -17.3 -13,2 -8.0 -36,8 -56.5 7,2 -42.8 -84,0 NON-OWNER OCCUPIED' Total .. ,.,.,., ... " .. , , ...... -8.3 7.8 -2.2 -46,9 -60.5 17.3 -47.0 -92,8 Total., .... ,.," ',., .. ," ',., . -16.4 -11.0 -7.4 -37.7 -56-9 8.3 -43.2 -84.9 NOIT: See notes to table 14,A. in lending activity from 2006 to 2007. census tracts in had relatively healthy. moderate. or weak-performing MSAs were grouped into three categories according mortgage markets over the past few years. to the percentage change in their MSA-wide rate of The 2006 and 2007 HMDA data show that changes serious mortgage delinquency from the fourth quarter in lending activity across MSAs were related not only of 2003 through the fourth quarter of 2007.32 This to the magnitude and timing of changes in home process grouped census tracts in MSAs into those that prices but also to changes in mortgage performance. In particular, the falloff in loan activity was larger in 32. Mortgage market delinquency rates by MSA were obtained MSAs that experienced the largest percentage in from the Trend Data database; Trend Data is a registered trademark of creases in their rates of serious mortgage delinquency TransUnion LLC (produclS.trendatatu.comlfaqs,asp), Trend Data are based on Ihe credil records of a geographically stralified random from the fourth quarter of 2003 through the fourth sample of aboul 30 million anonymous individuals drawn each quarter quarter of 2007 (table 17). This pattern held for both since 1992, The rate of serious mortgage delinquency is the percentage lower- and higher-priced lending and for virtually all of outstanding mortgages thai are 90 or more days delinquent or in foreclosure at the time the sample is pulled. demographic groups. For example, for lower-priced
A134 Federal Reserve Bulletin 0 December 2008 15. Change in the number of lower-and higher-priced loan originalions, by lype or loan com;cnlration and by charnel 'listie of borrow(;r and or eensu' Iract. 2006:H I Lhrough 2007:H2 A. Home purchase Percent Lower-priced loan originations Higher-priced loan originations Depos- Depos- Characteristic Hi~her- I Lender Inde- ilory Lender Inde- ilory of borrower and Sold out-of- pendent within Higher- Sold out-of- pendent within of census tract, by All pnced loan business mongage assess- All priced loan business mongage assess- I s o t w at n u e s r - o o f c c p u ro p p an en cy y l p o r w ic e e r d - c t o r l n a o ~ t a l e o n n n · I c lI o a n li c o e n n I . c tr o a l n o ti c a o e n n n 2 · c c o o m l n o C p a t n a !n n - y m c e o l n n o t c a e a n n r e - a h p i r g i h ce e d r- c t o r l a n o t c a i e o n n n - c tr o a n ti c o e n n I - c lr o a l n o t c i a o e n n n 2 - c c o o m l n o c p a e n a n n - y m c e o l n n o t c a e n a n r e - a tration tration tration:'\ I tration' 'I r OWNER OCCUPIED BORROWER Milloritv statu.,," Black ~r African American .... -2.3 -10.9 -1.9 6.S -2.6 5.1 --{)9.4 --{)2.2 -72.2 -70.1 -71.9 -39.0 Hispanic. white, ............... -26.& -34.4 -29.0 -27.1 -30.3 -10.& -75.7 -75.4 -7&.3 -82.7 -79.1 -45.6 Other nu nOnlY ............... -15.3 -9.7 -17.3 4.0 -21.2 10.7 -73.4 -70.3 -76.7 -76.0 -7S.7 -37.1 Non-Hi~nic white ......••... -14.3 -15.2 -14.1 -2.& -16.4 -9.1 --<>0.0 -49.9 --{)6.1 -52.9 --{)6.1 -30.6 Missing ..................... -9.S -7.2 -10.5 -7.1 -17.3 -2.4 -71.1 --{)2.& -75.2 -82.0 -7&.3 -35.7 Minority status, by income calel/or)' 7 . Lower Black or African American .. 5.2 6.& 6.5 11.5 &.0 9.5 --{)5.7 -44.& --{)8.5 --{)7.0 --{)7.3 -37.3 Hispanic white ............. -4.7 -.2 -5.7 -S.O 2.2 -8.1 --<>0.5 -42.1 --{)3.& --{)6.7 --{)2.2 -41.7 Other minority" ............ -6.0 4.3 -5.3 24.S 2.2 -10.1 --{)1.6 -54.& --{)6.& -56.7 --{)7.5 -34.4 Non-Hispanic white ........ -11.7 -9.9 -10.& -9.4 -&.1 -9.5 -54.6 -34.7 --<>0.6 -44.6 -57.4 -33.5 Total .. ........ . ........ -9.2 -7.3 -7.7 -5.7 -4.4 -9.2 -59.2 -3&.4 --{)4,4 --{)1.6 --{)2.9 -35.2 Middle Black or African American .. 7.7 5.3 7.6 7.9 12.1 15.2 --{)4.4 -4S.& -73.& --{)9.4 -71.4 -24.2 Hispanic. wh!te, ........... -13.1 -2.2 -19.3 --{).3 -S.9 -10.2 -70.3 -65.7 -7S.6 -S3.7 -76.7 -43.5 Other nu non ty- ............ -&.& -.& -11.7 31.7 -3.2 12.6 -75.1 -5S.3 -74.5 --{)9.4 -75.3 -3S.& Non-Hispanic white ........ -12.2 -11.& -12.7 -.2 -11.4 -9.0 -71.0 -47.S --{)&.7 -51.5 --{)6.6 -32.6 Total .................... -10.1 -8.9 -10.7 2.& -8.0 --{).4 --{)7.9 -51.9 -73.4 -72.9 -72.4 -34.5 High Black or African American .. --{).9 -17.& --{).S 9.7 -10.9 ,4 -72.9 -70.7 -75.4 -75.2 -76.4 -50.6 Hispanic white ............. -35.8 -42.3 -38.2 -36.0 -42.1 -10.7 -81.5 -SO.3 -S3.5 -86.6 -S4.5 -51.1 Other minority" ............ -15.8 -10.4 -19.3 -4.0 -25,4 15.0 -77.1 -72.9 -81.0 -79.6 -81.5 -35.6 Non-Hispanic white . . . . . . . . -13.3 -15.1 -12.8 1.4 -17.6 -7.6 --{)1.2 -54.5 --{)8.1 -59.1 --{)9.4 -24.9 Total .................... -14.6 -15.2 -16.0 --{).7 -22.1 -3.6 -71.3 --{)5.2 -76.9 -79.9 -78.8 -29.8 Missing" ..................... --{)7.7 -59.3 -73.4 --{)2.0 -75.8 -41.5 -70.3 -59.& -72.6 --<>0.6 -73.3 -51.7 CENSUS TRACT OF PROPERTY Income categoryt!o Lower ........................ -13.2 -9.3 -14.S -2.5 -17.6 -3.4 -70.0 --<>0.0 -73.8 -77.0 -76.2 -38.3 Middle ....................... -13.2 -12.7 -14.7 --{).3 -17.0 -3.1 --{)5.8 -56.5 -71.6 --{)8.5 -73.0 -31.2 High ...... ........... . . . . . .. -16.3 -16.3 -14.8 -11.2 -20.0 -9.3 --{)6.7 --{)1.0 -71.3 -73.2 -71.6 -34.7 Total owner occupied ... , . ... -14.4 -14.7 -14.8 --{),4 -18.2 --{).2 -<>7.1 -59.1 -72.3 -73.S -73.8 -33.6 NON· OWNER OCCUPlED9 Total ..... . , . . . . . . . . . . . . . . ... -32.6 -23.8 -39.5 -16.6 -40.4 -13.S --{)4.5 -45.9 --{)9.6 --{)6.7 --{)9.9 -40.6 Total ......................... -17.3 -16.0 -18.8 -7.9 -21.7 -7.3 -'6.6 -57.0 -71.7 -72.6 -73.1 -35.1 NOTE: See general note 10 table 14.A. Loan concentration is by census tract. 3. For explanation of lending within assessment area. see note I, table 14.A. Lending in a census tract is defined as concentrated if 50 percent or more of 4. See note 4, table 12. the loans originated in the tract in 2006 had a particular characteristic or if 50 5. Other minority consists of American Indian or Alaska Native, Asian. and percent or more of the loans originated in the tract in that year were originated Native Hawaiian or other Pacific Islander. by a particular type of lender. 6. Information for the characteristic was missing on the application. I. Sold loans are loans sold by the originator within the calendar year of 7. See note 2, table 12. origination. 8. See note 10, table 12. 2. Lenders thaI went out of business consist of lenders that ceased opera· 9. See note 7. table 12. tions during 2007 (this group includes the 169 lenders that did not repon data for 2007 under the Home Mongage Disclosure Act as well as those lenders that went out of business and either reponed 2007 HMDA data or were merged or acquired). home-purchase loans, the decline in lending in MSAs in delinquency rates: Lending of such loans fell more experiencing smaller increases in delinquency rates than 81 percent from 2006 to 2007. The relationship was about one-half of that in MSAs experiencing between the decline in lending activity and the sever very significant changes in delinquency rates. The ity of changes in mortgage delinquency was similar decline in lending was particularly severe for higher for refinancings, although the falloff in activity was priced loans in MSAs with very significant increases more muted.
The 2007 HMDA Data A135 15. hange in the number of lower- and higher-priced loan originations, by type of loan concentration and by chanK'lcristic of borrower and of census tract. 2006:H I through 2CXJ7:H2- Colllill!/ed B. Refinance Percem Lower-priced loan originations Higher-priced loan originations Depos- Depos- Characteristic Lender Inde- itory Lender Inde- itory of borrower and Higher- Sold out-of- pendent within Higher- Sold out-of- pendent within of census tract. by All priced loan business mortgage assess- All priced loan business mortgage assesss o t w at n u e s r - o o f c c p u ro p p a e n r c t y y l p o r w ic e e r d - co l n o c a e n n - c tr o a n t c io e n n ' - co l n o c a e n n - com lo p a a n n y me l n o t a n ar ea h p i r g i h ce e d r- co l n o c a e n n - c tr o a n t c io en n' - co l n o c a e n n - com lo p an a ny me l n o t a a n r ea tration concen- tration concentration' concen- tration' concentration tration tration' tration' I OWNER OCCUPIED BORROWER Minorit), .<lotus· Black or African American . -16.0 -32.0 -15.7 -30.6 -27.5 -3.5 -59.0 -43.7 -{i3.4 -{i1.0 -{i5. I -12.7 Hispanic. White, ............... -28.4 -40.2 -27.0 -35.9 -34.5 -20.2 -{i3.4 -55.3 -{i6.2 -{i4.2 -{i6.4 -32.6 Other nunonty ............... -22.3 -20.1 -25.9 -27.3 -34.9 7.2 -{i0.8 -51.2 -{i5.8 -{i().4 -{i8.4 -31.2 Non-Hispanic white ........... -15.5 -21.8 -17.7 -19.8 -26.3 -9.0 -51.9 -39.9 -59.9 -SO.8 -{i2.3 -15.8 Missing ..................... -16.8 -20.1 -19.0 -29.7 -28.7 -10.3 -{i2.5 -48.0 -{i6.9 -{i4.0 -{i6.8 -30.2 Minorit,· .flalus. by income category-7 • Lower Black or African American . -9.8 -18.9 -10.1 -22.5 -4.9 -{i.5 -{il.l -31.4 -{i5.8 -{i().9 -{i7.3 -19.1 Hispanic white ............. -14.3 -20.8 -16.3 -23.0 -8.1 -12.9 -{i6.0 -45.2 -{i9.0 -{i8.7 -{i9.5 -41.0 Other minority' ............ -13.8 3.5 -20.5 -26.2 -11.4 59.9 -{i().6 -46.0 -{i5.3 -50.9 -{i7.1 -50.5 Non-Hispanic white ....... -18.7 -21.5 -20.5 -18.4 -8.6 -13.9 -54.8 -37.0 -{i2.0 -51.9 -{i3.5 -22.0 Total .................... -16.9 -19.7 -18.1 -22.2 -23.1 -11.4 -58.9 -39.6 -{i4.9 -{i1.3 -{i6.8 -25.4 Middle Black or African American .. -11.7 -24.9 -12.7 -32.1 4.9 3.0 -59.6 -45.2 -{i4.0 -{i4.8 -{i5.9 -2.4 Hispanic white ............. -23.8 -31.7 -24.9 -34.2 7.7 -21.8 -{is.8 -57.6 -{i9.2 -{i3.4 -{i8.5 -26.2 Other minority' ............ -19.8 -21.8 -21.5 -22.5 -3.9 -{i. 3 -{i1.2 -56.1 -{i5.8 -{i().5 -{i7.9 -39.7 Non-Hispanic white ........ -14.4 -20.1 -17.0 -19.6 .4 -{i.9 -54.3 -44.5 -{i1.0 -54.6 -{i4.6 -22.3 Total .................. -15.5 -21.2 -17.8 -26.7 -26.0 -7.4 -58.5 -48.1 -{i4,4 -{i2.5 -{i6.6 -21.8 High Black or African American .. -21.9 -37.3 -21.4 -34.6 19.5 1.8 -55.3 -SO.7 -59.5 -58.1 -{i2.6 -8.5 Hispani~ white, ............. -32.9 -43.8 -29.0 -38.3 38.2 -16.4 -{i().9 -56.8 -{i3.2 -{i2.5 -{i4.4 -29.1 Other mmonty ........... -23.0 -20.4 -27.0 -25.8 31.5 6.7 -{il.l -51.2 -{i6.5 -{i3.7 -{i9.3 -20.0 Non-Hispanic white ........ -11.3 -20.2 -12.1 -17.2 18.8 -5.3 -47.0 -39.2 -56.3 -48.4 -{i().0 -{i.4 Total ......... . ... -15.1 -22.0 -16.8 -25.8 -29.8 -4.7 -52.7 -43.5 -{i().0 -57.4 -{i2.5 -11.1 Missing" . . . . . . . . . . . . . . . . . . . . . -42.7 -46.7 -45.3 -51.2 -50.8 -39.5 -54.2 -36.7 -56.7 -39.0 -54.6 -13.6 CENSUS TRACT Of PROPERTY Income <"Otegor),· Lower ........................ -21.0 -28.8 -22.1 -31.4 -30.7 -11.4 -59.3 -37.7 -{i3.8 -{i2.7 -{i6.0 -19.8 Middle ....................... -15.9 -23.6 -18.5 -24.9 -28.0 -2.3 -55.1 -40.9 -{i2.5 -54.9 -64.2 -17.2 High ................... ..... -17.8 -21.7 -18.3 -21.5 -28.7 -12.2 -56.8 -47.6 -{i3.2 -57.9 -{i3.8 -22.4 Total owner occupied ........ -17.3 -22.9 -19.3 -26.9 -28.8 -8.3 -56.5 -43.6 -{i3.0 -59.6 -{i4.7 -18.8 NON-OWNER OCCUPIED" TOlal ... ............ ... -8.3 -11.7 -10,2 -12.2 19.8 3.5 -{i().5 -48.7 -{i5.8 -{i7.3 -{i8.7 -29.4 Total ... ...................... -\6.4 -2\.8 -\8.3 -25_2 -27.4 -4.9 -56.9 -44.1 -6J.3 -60.7 -65_2 -\9.9 NOTE: See nOles to table 15.A. DIFFERENCES IN LENDING OUTCOMES BY lines; analyses further showed that such differences RACE, ETHNICITY, OR SEX OF THE could not be fully explained by factors included in the BORROWER HMDA data.33 Studies also found that difJerences across groups in mean APR spreads paid by those The HMDA data allow comparisons of the outcomes with higher-priced loans were generally small. of the lending process across borrowers grouped by The analysis here uses the 2007 HMDA data to their race, ethnicity, or sex. Three outcomes are examine these three lending outcomes across racial, considered here: (I) the incidence of higher-priced ethnic, and gender groups. The analysis focuses on lending, (2) the mean APR spreads paid by borrowers conventional first-lien home-purchase and refinance with higher-priced loans, and (3) denial rates. Analy ses of HMDA data from earlier years revealed sub 33. See Avery, Brevoort, and Canner, "The 2006 HMDA Dala" and stantial differences in the incidence of higher-priced "Higher-Priced Home Lending and Ihe 2005 HMDA Dam"; see also lending and in denial rates across racial and ethnic Avery. Canner, and Cook, "New Information Reported under HMDA."
A 136 Federal Reserve Bulletin 0 December 2008 16. Change in the number of' lower- and higher-priced loan originations. hy recent change in house price i.ndex in melropolitan statistical area and by characteristic of borrower and of censlIs tracl. 2006:H I through 2007:H2 A. Home purchase Percent II Lower priced Higher priced Change :~~use pri~Qitdex in MSA. Change in house price index in MSA. 2006: to 2008: I (percent) 2006:Q4 to 2008:Q I (percent) Characteristic I Large decn:ase Small decn:ase Increase Large decrease Small decrease Increase of borrower and (-8 or less) (-8-0) (0 or more) (-8 or less) (-8-0) (0 or more) of census tract, by Loans Loans owner-occupancy to all ChanllO in house price index in MSA. to all Change in house ~e index in MSA. status of propeny MSAs 2 3: 01 to 2006:~ (percent) MSAs 2003:01 to 2 :Q4 (percent) Small Large Small Large Small Large Small Large Small Large Small Large increase increase increase increase increase increase increase increase increase increase increase increase (less (30 or (less (30 or (less (30 or (less (30 or (less (30 or (less (30 or than 30) more) than 30) more) than 30) more) than 30) more) than 30) more) than 30) more) OWNER OCCUPIED BORROWER Minority status I Black or African American .... -2.9 -8.5 -21.7 1.6 -3.6 .8 2.8 --{i9.9 -57.9 -81.2 --{is. 8 -71.9 --{i7.5 --{i1.2 Hispanic. white ............... -27.7 -20.7 -45.4 -5.8 -30.6 -4.5 -1.2 -76.3 --{iO.2 -85.6 --{iO.8 -77.3 -56.8 -5S.8 Other nunonty 2 ............... -15.9 -12.1 -31.3 -4.8 -12.9 -8.0 -S.I -74.5 -57.4 -83.5 --{i6.5 -74.4 --{iQ.I -58.9 Non-.His.panic white ........... -15.6 -15.4 -29.1 -11.7 -18.8 -11.0 -10.1 --{i2.7 -46.7 -76.9 -57.4 --{is.2 -55.3 -57.0 MlSSlOg~ ..................... -10.2 -14.0 -31.7 -5.4 -11.3 1.5 6.5 -72.6 -76.5 -S3.6 -70.1 -73.5 --{i2.6 --{iO.1 Minority SlatllS, by income category' Lower Black or African American .. 5.1 -15.3 20.9 -1.2 \3.7 2.5 -.2 --{i6.0 -58.8 --{i9.7 --{i5.S --{i7.0 --{i8.2 --{iO.3 Hispanic. white •..•.•••....• -4.5 -27.4 21.5 -9.9 -5.7 -7.3 -3.9 --{il.l -57.6 --{i5.6 --{iO.8 --{i7.0 -56.6 -54.0 Other nuoonty 2 ............ --{i. I -18.4 43.3 -2.8 -3.0 -19.1 -10.4 --{i2.8 --{iO.7 --{i5.8 --{i5,4 --{i4.9 --{iO.6 -58.9 Non-Hispanic white .. ...... -12.5 -14.1 6.9 -13.6 -13.2 -14.1 -10.6 -56.8 -42.5 --{i5.8 -54.5 --{i4.4 -54.5 -57.2 Total ............... ..... -9.6 -15.9 12.1 -12.5 -8.7 -11.6 -8.7 --{iQ.9 -52.4 --{i6.2 -59.4 --{;6.4 -59.6 -57.8 Middle Black or African American .. 7.2 6.4 18.6 5.5 2.9 10.2 7.5 -71.0 -57.7 -79.9 -72.1 -72.6 --{i9.9 --{i3.9 Hispanic. white .. . . . . . . . . . . -14.0 -12.1 -3.6 -7.1 -26.0 -2.1 .5 -75.7 -70.5 -79.7 -71.3 -80.0 -57.7 --{i3.0 Other mmonty 2 ............ -9.6 -\3.0 11.7 -7.8 -13.3 -14.4 -8.2 -72.5 -49.1 -77.9 -74.6 -75.0 --{i7.1 -58.3 Non-Hispanic white ........ -13.4 -17.1 -7.9 -13.0 -17.2 -12.1 -9.5 --{i5.1 -49.7 -73.8 --{i1.7 -71.0 --{iO.2 --{i1.6 Total ... ................ -11.0 -14.8 -4.0 -11.3 -15.7 -8.8 --{i.5 --{i9.9 -56.7 -77.9 --{i6.3 -74.8 --{i3.3 --{i2.4 High Black or African American .. -7.9 --{i.4 -33.9 7.6 -10.7 6.0 7.9 -73.4 -53.3 -83.6 -72.2 -74.8 --{i2.4 -58.9 -so. Hispanic. white .•.•...•..... -36.9 -11.5 -54.6 8.1 -34.1 12.t 7.1 -81.9 -4S.3 -87.9 3 -79.2 -51.8 -58.1 Other mmonty 2 ............ -16.4 -3.8 -36.5 .4 -10.2 6.4 -2.9 -78.0 --{iO.S -84.5 --{i2.8 -75.7 -51.2 -59.0 Non-Hispanic white ........ -14.8 -13.2 -33.5 -5.9 -18.0 -5.1 -7.2 --{i4.4 -49.5 -78.4 -56.6 --{i7.4 -49.8 -50.7 Total .................... -16.0 -10.4 -3S.0 -3.4 -17.2 -1.8 -3.9 -73.5 -58.1 -84.5 -59.S -73.4 -54.1 -53.6 Missing' ..................... --{is.5 -50.6 -79.7 -58.3 -70.6 --{i1.6 -56.9 -70.6 --{i6.7 -77.5 --{iO.8 -72.2 --{i5.3 --{i5.2 CENSUS TRACr OF PROt'ERTY Income category S Lower. .................. -14.0 -30.2 -32.4 -11.7 -14.8 -2.8 -3.2 -70.9 --{i2.2 -84.9 --{i4.6 -73.5 -58.5 -58.3 Middle ....................... -14.8 -15.4 -33.1 -9.6 -19.1 --{i.5 -5.5 --{i8.7 -53.3 -82.5 --{iO.6 -72.7 -58.9 -58.5 High . . . . . . . . . . . -. . . . . . . . . . . . . -16.8 -7.9 -32.1 -100 -17.5 -12.1 -11.7 --{i7.7 -45.4 -79.0 -59.4 -70.1 --{i1.8 -58.0 Total owner occupied . . . . . . . . . -36.1 -5.3 -52.9 -15.4 -41.0 -19.0 -28.8 --{i6.3 --{il.l -80.2 -5S.6 --{i9.6 -56.3 -59.5 NON-OWNER OCCUPlED" Total .......... .......... .. -15.5 -14.6 -32.6 -10.0 -17.8 -8.6 -7.4 --{i9.1 -55.1 -82.4 --{i1.5 -72.4 -59.6 -58.4 Total .................. ...... -18.5 -14.0 -37.1 -10.5 -21.5 -9.8 -10.8 --{is.5 -56.6 ~.O -60.9 -71.9 -59,0 -58.6 NOTE: See general note to table 14.A. 5. See note 10, table 12. I. See note 4, table 12. 6. Includes loans for which occupancy starus was missing. 2. Other minority consists of American [ndian or Alaska Native, Asian, and MSA Merropolitan slatistical area. Native Hawaiian or other Pacific Islander. SOURCE: For house price index, Office of Federal Housing Enterprise Over 3. Information for the characteristic was missing on the application. sight (www.ofheo.gov/hpi.aspx). 4. See note 2, table 12. loans for owner-occupied, one- to four-family, site However, analysis using the HMDA data can account built homes, as these are the loan product categories for some factors likely related to the lending process. included in the HMDA data with the largest number Specifically, the HMDA data allow an accounting for of reported loans. property location (for example, the same metropoli Although the HMDA data include a variety of tan area), income relied on in underwriting, loan detailed information about mortgage transactions, amount, time of year when the loan was made, and many key factors that are considered by lenders in the presence of a co-applicant. To the extent that credit underwriting and pricing are not included. some of these HMDA factors are not used directly in
The 2007 HMDA Data AI37 16. Change in the number or lower- and higher-priced lonn llriginaLions, by recent change in house price index in metropolitan tatistical area and by characteristic of bOITOwer and of census traCl. 2006:H I lhrough 2007:Hl Contillued B. Refinance Percen! Lower priced Higher priced I Change in house pricc;..index in MSA, Change i'!.,~ ouse price~i.ndex in MSA. 2006:Q4 10 2008:l.ll (percent) 2006:1,l't to 2008:1.l1 (percenl) Characteristic Large decrease Small decrease Increase Large decrease Small decrease Increase of borrower and Loans f--'-(-8-"-'o''_r..:.:le;.:.ss'-'-)--.JL-----'(~-8=_-.:cO)'_____'_(::..::O....:o:.;.r..:.:m.:..:o:"r"e_'_)__1 Loans f--'-(--=S....:o"_r..:.:le;.:.ss'-'-)_L-----'(~-S=_-O.:c)'_____'_(::..::O....:o"_r..:.:m.:..::o.:..::re:..:..)_ of census tracl, by owner-occupancy to all Change in house price index in MSA. to all Change in house price index in MSA. status of property MSAs 2003:Q I to 2006:Q4 (percenl) MSAs f----:.,..,.-:-=2:.::,OO:=3:..:,: .:.J.: II: ". :.:to...:2:.::006-T=:,Q4.::o....:..",,(pe:..;:-:rrc:;:;en::.:t)<.,,-.,.,-__ Small Large Small Large Small Large Small Large Small Large Small Large increase increase increase increase increase increase increase increase increase increase increase increase (less (30 or (less (30 or (less (30 or (less (30 or (less (30 or (less (30 or than 30) more) than 30) more) than 30) more) than 30) more) than 30) more) than 30) more) I OWNER OCCUPIED BORROWER I Minority status' I Black or African American .... -16.S -37.9 -49.4 -<i.3 -16.4 14.2 13.7 -<i0.7 -72.0 -73.1 -57.2 -<i4.2 -52.8 -39.8 Hispanic white ............... -29.2 -18.6 -44.4 -2.0 -20.1 5.0 28.4 -<i4.1 -73.S -70.8 -53.1 -<i3.5 -55.6 -35.2 Other minority' ......... ...... -23.2 14.3 -42.4 .6 -14.7 10.2 10.1 -<i2.5 -43.9 -73.2 -55.2 -<iO.8 -46.9 -40.6 Non-Hispanic while ........... -17.1 -24.6 -42.7 -11.1 -17.3 .6 .6 -55.4 -<i8.5 -<i8.9 -54.7 -59.7 -46.2 -39.3 Missing' ...... .............. -IS.5 -32.4 -37.7 -5.7 -15.7 10.1 8.8 -<i3.3 -81.0 -<i7.0 -<i5.5 -<i4.7 -56.4 -53.8 Minor;t\" status, by income category· . Lower Black. or African American .. -10.2 -38.5 -38.7 -11.0 -12.5 7.8 13.2 -<i2.S -73.9 -76.4 -<i1.0 -<i6.6 -58.9 -46.3 Hispanic white ............ . -14.4 -IS.8 -28.3 -3.6 -12.6 -5.7 23.6 -<i6.7 -70.4 -72.8 -<i3.6 -<is.5 -<i2.8 -48.1 Other minority' ........... . -14.4 -19.8 -28.5 -12.0 -12.0 -4.5 -1.1 -<i2.7 -57.7 -74.3 -<iO.7 -<i5.1 -53.7 -52.7 Non-Hispanic white ....... . -19.3 -32.5 -37.2 -19.4 -20.4 -II.S -7.5 -58.2 -<i9.4 -74.1 -5S.4 -<i4.S -50.1 -45.4 TOlal .................. . -17.3 -33.3 -34.4 -17.5 -17.6 _8.5 -3.0 -<i1.4 -72.0 -73.9 -<iO.3 -<i6.4 -54.4 -47.7 Middle Black or African American .. -12.3 -40.5 -46.6 -2.0 -13.0 27.8 15.0 -<i1.0 -70.5 -75.2 -54.9 -<i5.2 -50.2 -38.0 HispaniC. white ............ . -24.8 -30.5 -38.4 -7.9 -IS.3 10.2 27.1 -<i6.6 -82.1 -74.0 -59.5 -<i6.3 -51.8 -35.9 Other mmomy2 ........... . -20.6 -<i.0 -3S.5 -3.5 -IS.4 11.8 10.6 -<i3.0 -<i7.2 -74.S -57.0 -<i3.4 -48.6 -40.9 Non-Hispanic while ....... . -15.5 -2S.S -39.9 -11.9 -17.4 .7 .S -57.4 -<is.6 -73.4 -55.S -<i2.3 -47.3 -41.1 Total ................... . -16.7 -29.S -39.5 -10.6 -16.9 4.2 3.S -<iO.S -71.5 -73.8 -57.5 -<i4.4 -49.1 -42.9 High Black or African American .. -23.6 -36.6 -52.8 -1.1 -20.2 20.6 23.7 -57.4 -<i5.5 -71.8 -49.4 -<iO.6 -39.0 -19.9 Hispanic while ........... .. -33.S -4.6 -48.3 15.0 -18.9 31.1 47.1 -<i1.7 -<i5.9 -<i9.5 -34.4 -58.5 -39.8 -15.7 Other minority' ........... . -23.9 39.6 -43.4 16.8 -10.1 24.6 22.3 -<i2.5 -4.S -73.1 -47.9 -58.0 -37.4 -26.2 Non-Hispanic while ....... . -13.S -15.4 -42.S .1 -11.8 12.7 10.3 -51.2 -<i5.9 -<i6.1 -47.6 -53.8 -3S.5 -29.3 TOlal ................... . -17.6 -14.3 -43.6 1.6 -12.6 15.2 13.4 -55.7 -<i6.4 -<i7.7 -4S.9 -56.7 -40.4 -30.2 Missing) ................... .. -43.2 -12.0 -<i1.0 -31.7 -46.4 -20.9 -33.S -54.5 -79.7 -55.4 -57.5 -50.4 -58.5 -55.0 CENSUS TRAer OF PROPIiRIT Income Calt1Nory!li Lower.... ....... .. ....... .... -21.9 -36.4 -43.3 -15.2 -15.0 -4.0 5.1 -<iO.6 -72.3 -70.S -<iO.1 -<i2.4 -50.5 -42.S Middle....................... -18.0 -27.7 -43.6 -11.1 -16.7 2.4 4.6 -58.6 -71.3 -71.0 -55.3 -<i2.2 -4S.0 -41.0 High.................. -IS.7 -16.2 -41.1 -4.7 -18.8 6.2 1.4 -58.3 -<i7.1 -<i6.4 -54.6 -<i1.2 -51.4 -41.9 Total owner occupied ......... -10.1 -15.3 -24.S -7.1 -7.1 -.5 S.3 -<i2.6 -<i5.5 -74.0 -<iO.4 -<i3.0 -54.4 -53.2 NON-OWNER OCCUPIED6 TOIaI ............ . -IS.S -24.S -42.6 -9.7 -17.1 2.9 3.6 -59.1 -70.8 -<i9.9 -56.4 -<i2.0 -49.4 -41.7 Total -18.0 -24.2 -40.7 -9.5 -16.2 2.6 4.1 -59.4 -70.1 -70.3 -56.9 -62.1 -50.0 -42.8 NOTE: See nOles to table 16.A. loan underwriting or pricing, they are included in the The pricing analysis focuses on both the incidence analysis as proxies for at least some of the factors that of higher-priced lending and the mean APR spreads are considered. Because of the focus here on specific paid by borrowers with higher-priced loans. Compari loan product categories, the analysis already accounts sons of average outcomes for each racial, ethnic, or In broad terms for loan type and purpose, type of gender group are made both before and after account property secunng the loan, lien status, and owner ing for differences In the borrower-related factors occupancy status. Given that lenders offer a wide cited earlier (income; loan amount; location of the variety of conventional loan products for which basic property, or MSA; presence of a co-applicant; and, in terms can differ substantially, the analysis can only be the comparisons by race and ethnicity, sex) and for viewed as suggestive. differences in borrower-related factors plus the spe-
A 138 Federal Reserve Bulletin D December 2008 17. Change in the number of lower- and higher-priced loan originmions for home purchase and ror rdlnancing. by change in mortgage delinquency rale in melropolitan statistical arell and by characteristic of bOil-ower and of censu. IraCI, 2006:H I lhrough 2007: H2 Percen! Home purchase Refinance I Characteristic Lower priced Higher priced Lower priced Higher priced I of borrower and Change in rnongage delinquency rate in MSA (percent)' of census tract, by owner·occupancy Small Very large Small Very large Small Very large Small Very large status of propen y change Large increase change Large increase change Large increase change Large increase increase increase increase increase I (less than (200 or (less than (200 or (less Ihan (200 or (less than (200 or (50--200) (50--200) (50--200) (50--200) SO) more) SO) more) SO) more) 50) more) ~ OWNER OCCUPIED BORROWER Minoril), slalllS 1 Black or African American .... 2.7 -4.4 -18.5 --{)3.7 -70.7 --81.5 10.9 -17.7 -49.0 -46.9 --{)6.2 -73.3 Hispanic. white, ............... -4.4 -27.4 -46.9 -58.6 -74.8 -86.3 19.0 -21.2 -45.1 -41.5 --{)6.0 -70.7 Olher mooorny' ............... -14.1 -12.7 -22.4 --{)2.5 -73.5 --82.0 4.9 -17.6 -35.0 -43.1 --{)4.6 -70.5 Non-Hi,anic white ........... -12.3 -16.8 -22.1 -57.3 --{)3.6 -74.7 -1.6 -17.3 -37.7 -43.4 --{)1.3 --{)6.7 Missing ..................... 3.4 -12.6 -25.9 --{)2.2 -72.7 -83.6 8.8 -18.5 -35.5 -55.7 --{)7.5 --{)5.7 Minority SIOIUS, b)' income calegoryS - Lower Black or African American .. 2.6 5.9 24.6 --{)2.3 --{)9.0 --{)9.0 8.7 -15.4 -38.5 -51.5 --{)9.7 -77.7 Hispanic. white, ............. -4.8 -7.9 22.0 -54.9 --{)3.6 --{)6.0 14.8 -15.6 -28.3 -49.5 -71.0 -73.4 Olher mmonty' ............ -12.7 -8.9 27.3 -57.5 --{)5.6 --{)7.9 -2.7 -20.5 -13.5 -52.3 -65.4 -74.1 Non.Hispanic white ........ -13.1 -13.5 -3.1 -56.1 -56.6 --{)4.8 -10.1 -22.5 -30.9 -49.2 --{)3.8 -70.2 Total ........ ............ -10.5 -10.8 3.1 -58.1 --{)2.7 --{)6.8 -5.5 -20.8 -29.8 -51.3 --{)7.2 -72.2 Middle Black or African American .. 8.7 4.3 19.4 --{)5.6 -72.0 --81.6 15.5 -13.3 -45.0 -45.3 --{)6.4 -75.5 Hispanic. wh!te, ............. -2.1 -23.2 -3.1 --{)3.7 -77.6 --80.8 18.9 -19.0 -39.8 -41.9 --{)8.8 -74.2 Omer mooonty· ............ -14.9 -12.5 tl.l --{)5.5 -74.5 -77.3 3.0 -16.2 -35.4 -46.0 --{)6.0 -73.2 Non-Hispanic white ........ -11.6 -16.3 -8.1 --{)1.7 --{)6.5 -72.8 -1.8 -18.0 -33.8 -45.0 -63.3 -71.0 Total .................... -8.8 -14.6 -4.4 --{)3.2 -71.9 -78.1 1.5 -17.6 -36.1 -46.8 --{)5.7 -72.6 High Black or African American .. 3.9 -7.1 -34.1 --{)3.8 -71.6 -84.1 15.4 -20.2 -52.9 -36.3 --{)0.5 -71.7 Hispanic. white, ............. 3.1 -30.9 -56.3 -55.2 -78.8 -88.4 33.9 -19.7 -48.8 -30.1 --{)Q.I -69.4 OIher rrunonty' ......... ... -10.6 -8.0 -28.3 --{)4.4 -75.1 --83.3 14.4 -13.2 -35.9 -31.8 -64.3 -69.8 Non.Hispanic white ........ -9.2 -14.8 -26.9 -52.9 --{)5.5 -77.4 7.8 -10.6 -39.0 -34.4 -57.0 --{)4.2 Total .................... --{).4 -14.5 -32.6 -56.2 -71.9 -84.5 10.3 -12.3 -40.3 -36.7 -59.4 --{)6.3 Missing" ..................... -59.8 -71.3 -74.0 --{)6.7 -71.9 -72.9 -28.9 -41.9 -58.6 -53.5 -56.3 -52.1 CENSUS TRACT or PROPERTY Income calegO/)' 6 Lower ........................ -4.8 -15.0 -26.8 -58.4 -70.6 --84.3 4.8 -18.5 -42.0 -45.5 -64.5 -7l.l Middle ................ .. ..... -8.6 -16.6 -26.3 -59.9 --{)9.0 -81.9 1.9 -18.3 -39.5 -45.5 --{)4.0 -69.2 High ............... .... . .... -13.0 -16.4 -26.3 -59.5 --{)8.6 -77.8 -1.0 -17.0 -36.6 -47.8 --{)3.2 -63.2 Total owner occupied ... ..... -28.3 -39.5 -43.6 -58.8 --{)8.4 -76.8 5.8 -1I.3 -24.5 -51.9 --{)5.1 -73.7 NON·OWNER OCCUPIED7 Total ..... .. ............. .... -9.8 -16.3 -26.4 -59.4 --{)9.4 -81.8 1.3 -17.9 -39.0 -46.0 --{)4.0 --{)8.5 Total ..... ............... .... -12.5 -19.7 -29.2 -59.3 -4\9.2 --81.1 1.8 -17.2 -37.5 -46.6 -64.1 -4\9.0 NOTE: See general note to table 14.A. 4. Information for me characteristic was missing on me application. I. Mortgage deUnquency rate is me percentage of mortgage borrowers 90 S. See nOle 2, table 12. days or more delinquent; calculated using delinquency rates for each metro· 6. See nole 10, lable 12. politan statistical area (MSA) from 2003:Q4 to 2007:Q4. 7. Includes loans for which occupancy starus was missing. 2. See note 4. table 12. SOURCE: For delinquency rale statistics, Trend Data, a producl of Trans 3. Other minority consists of American Indian or Alaska Nalive, Asian, and Union LLC Native Hawaiian or olher Pacific Islander. cific lending institution used by the borrower.34 The Comparisons for lending outcomes across groups method of controlling for these factors is to group are of three types: gross (or "unmodified"), modified borrowers into cells in which the individuals in each to account for borrower-related factors (or "borrower cell are similar along each dimension considered. modified"), and modified to account for borrower related factors plus lender (or "lender modified"). For purposes of presentation, the borrower- and lender 34. Excluded from the pricing analysis are applicants residing modified outcomes shown in the tables are normal outside the 50 states and the District of Columbia as well as applica tions deemed to be business related. ized so that, for the base comparison group (non-
The 2007 HMDA Data A 139 Hispanic whites in the case of comparison by race ferences in the incidences of higher-priced lending and ethnicity and males in the case of comparison by between Asians and non-Hispanic whites are gener sex), the mean at each modification level is the same ally relatively small. as the gross mean. Consequently, the borrower- and In the second half of 2007, for conventional home lender-modified outcomes for any other group repre purchase loans, the gross mean incidence of higher sent the expected average outcome under the assump priced lending was 29.5 percent for blacks and tion that the members of that group had the same 9.2 percent for non-Hispanic whites, a difference of distribution of control factors (income, loan amount, 20.3 percentage points (table 18.A). Borrower-related and the like) as the base comparison group. factors included in the HMDA data accounted for As noted earlier, mortgage market conditions 4.3 percentage points of the difference. Controlling changed significantly over the course of 2007. To further for the lender reduces the remaining gap to help account for the possible effects of these changing 11.1 percentage points. The results for Hispanic conditions on the patterns of lending outcomes across whites are similar to those for blacks. The difference population groups, the tables presented in this section between the gross mean incidence of higher-priced show loan activity by half-year for both 2006 and lending for Hispanic whites (24.3 percent) and the 2007. Our analysis of the lenders that did not report in corresponding incidence for non-Hispanic whites 2007 but that did so in 2006 indicates that by the (9.2 percent) is 15.1 percentage points. Borrower second half of 2007 virtually all of these lenders had related factors included in the HMDA data accounted gone out of business. As noted, these lenders tended for 5.7 percentage points of the difference. Control to be relatively more focused on the higher-priced ling further for the lender reduces the remaining gap segment of the market and on lending to minority to 6.2 percentage points. The situation for Asians borrowers. Consequently, the lending data for the differs greatly from that for blacks or Hispanic whites: second half of 2007 likely reflect a "truer" picture of Compared with non-Hispanic whites, Asians had a the entire market for that period than the data for the lower mean incidence of higher-priced lending for first half of 2007, which do not include loans extended home-purchase loans on both a gross and a modified during this period by lenders that ultimately ceased basis. operations and did not report. Comparing the differences in the incidences of Although the focus of the discussion that follows is higher-priced lending between the various minority on differences in lending outcomes across groups, it is groups and non-Hispanic whites in the second half of important to keep in mind that, as shown earlier, the 2006 with the differences between these groups in the overall, or gross, incidence of higher-priced lending second half of 2007 reveals relatively little change in in 2007 fell sharply from 2006. This drop was the gaps modified for borrower-related factors plus experienced by all groups of borrowers regardless of lender. For example, the fully modified gap between race, ethnicity, or sex. The decline is apparent when blacks and non-Hispanic whites was 13.4 percentage comparing the unmodified incidences in higher-priced points in the second half of 2006 and 11.1 percentage lending in 2007 for different groups with the unmodi points in the second half of 2007. Similarly, the fully fied incidences experienced by these groups in 2006. modified gap between Hispanic whites and non Hispanic whites was 6.6 percentage points in the Incidence oj Higher-Priced Lending by Race second half of 2006 and 6.2 percentage points in the and Elhnicity second half of 2007. The 2007 HMDA data, like those from earlier years, Rate Spreads by Race and Ethnicity indicate that black and Hispanic white borrowers are more likely, and Asian borrowers less likely, to obtain The 2007 data indicate that among borrowers with loans with prices above the HMDA price-reporting higher-priced loans, the gross mean prices paid by thresholds than are non-Hispanic white borrowers. black borrowers are moderately higher than-and These relationships are found for both home-purchase those paid by Hispanic white borrowers are nearly the loans and refinancings regardless of the specific same as-those paid by non-Hispanic white borrow period considered (tables 18.A and I8.B). Gross ers (tables 19.A and 19.B). Asian borrowers with differences in the incidence of higher-priced lending higher-priced loans also paid about the same mean between non-Hispanic whites, on the one hand, and prices, on average, as non-Hispanic whites with such blacks or Hispanic whites, on the other, are large, but loans. These relationships are little influenced by an these differences are substantially reduced after con accounting for borrower-related factors or the specific trolling for borrower-related factors plus lender. Dif- lender used by the borrowers.
A140 Federal Reserve Bulletin 0 December 2008 18. Incidence of highl:r-priced lending. unmodified and modified for horrowcr- and lender-related faclOrs. for conventional first liens on owner-occupied. onc- to four-r~'mily, site-buill homes. by half-year in which loan was originated and by race. elhnicily. (lnd e. of borrower, 2006-07 A. Home purchase Percent e<cept as noted Modi fied incidence, by Modified incidence, by modification factor modificalion faclor Race, ethnicity, and sell I Nu l m oa b n e s r of U i n n m cid o e d n if c ie e d Borrower- I Borrower- Nu l m oa b n e s r of U i n n m ci o d d en if c i e e d B o rro w e r- I Bo re r l r a o l w ed e rrelated related plus lender related plus lender 1 2006 HI I H2 I Race other than white only American Indian or Alaska Nati ve ..... ... 11,059 35.4 30.9 25.4 10,557 32.9 30.8 23.4 Asian .................................... 96,781 16.8 15.8 17.3 90,424 16.7 14.7 16.5 Black or African American ................ 156,337 56.5 SO. I 30.8 162.369 51.1 45.9 30.7 Native Hawaiian or other Pacific Islander .. 9,427 34.4 30.4 23.4 9.348 33.5 28.1 21.9 Two or more minorilY races ............... 1,038 29.6 30.5 19.8 1,074 25.7 26.7 20.6 Joinl ................. ................... 22,638 17.7 24.4 20.0 22,033 17.3 23.0 19.6 Missing ........... ... . ................. 187,627 28.5 31.2 23.6 190.450 29.9 32.3 23.2 White. hyethnicit), Hispanic while ........ .. ................ 235,283 48.1 36.9 24.5 229,008 45.1 34.0 23.9 Non-Hispanic while .... .. ............... 1,219,990 18.1 18.1 18.1 1,186,928 17.3 17.3 17.3 Sex One male .................... ...... ...... 635,262 33.2 33.2 33.2 620,402 31.4 31.4 31.4 O Tw ne o f m em al a e l s e .... .. . . . . .. .. . . . . .. . . . . . . .. . . .~ . . . .. . . . . .. . . . . . . . .,...,.' 46 1 1 8, , 8 9 7 0 1 7 3 2 1 4. . 6 8 3 24 0. .6 9 3 24 2. .6 0 46 1 3 7, , 5 1 4 8 1 6 2 3 3 0. . 0 3 2 2 9 3 . . 3 3 2 3 3 0. . 2 3 Two females .. ' ..... ................... 15.819 26.9 23.8 24.4 15,248 25.5 21.5 22.6 2007 I HI H2 I R{/£'I! other th,m white OIU\, American Indian or Alask3 Nati ve ......... 7,437 22.0 21.1 17.2 6,241 17.5 14.7 15.1 Asian ............................ ........ 75,610 9.6 9.9 11.0 70,801 5.6 6.9 7.8 Black or African American ................ 110,747 37.8 34.1 24.5 86,220 29.5 25.2 20.3 Native Hawaiian or other Pacific Islander .. 6,410 20.8 19.5 15.4 5.347 14.1 14.4 12.8 Two or more minority races ..... ......... 902 15.5 13.6 15.7 974 10.6 11.8 12.7 Joinl .................. ..... . ...... . ... 18,781 10.4 15.2 13.0 17.769 7.3 11.3 10.5 Missing ............ ........ .. ......... 146,171 16.7 21.3 16.2 131,177 11.4 15.4 12.3 White, hy ethnicit), Hispanic while ............ . ..... 152,901 31.8 23.9 17.6 Hl9.034 24.3 18.6 15.4 Non-Hispanic while ............. . ..... 1,031,059 11.8 11.8 11.8 919:507 9.2 9.2 9.2 Sex T O O w n n e e o f m m e a m a l l e a e l s e . . .. . .. . . . . .. . . . . . . . . . . . . .. . .. . . . . .. . . . .. . . . . . . .. . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 5 3 0 6 1 0 2 4, , . 5 4 2 0 6 6 8 4 6 2 1 1 0 6 9 . . . 3 8 4 2 1 1 0 8 6 . . . 7 4 8 2 1 1 0 6 9 . . . 8 5 4 4 3 0 0 1 5 1 4 , , . 6 8 1 5 3 45 9 6 1 1 1 5 2 4 . . . 9 4 8 1 1 1 3 2 5 . . . 6 8 9 1 1 1 5 4 2 . . . 9 3 8 Two females . . . . . . . . . . , . . . . ............ 12,553 17.7 15.0 16.5 11.886 12.8 11.4 12.6 NOTE: Excludes transition-period loans (those for which the applicalion was I. See note 4, table 12. Loans laken out jointly by a male and female are submitted before 2004). For definition of higher-priced lending, see 1e<1 nOIe 7; nol tabulaled here because Ihey would not be directly comparable with loans for e<planation of modification faclors, see tex!. taken oul by one borrower or by Iwo borrowers of the same se<. Pricing Differences by Sex cants grouped by race or ethnicity. For each broad loan product category in 2007 (first or second half), The 2007 HMDA data, like those in previous years, American Indians, blacks, and Hispanic whites had reveal relatively little difference in pricing outcomes higher gross denial rates than non-Hispanic whites; when borrowers are distinguished by sex, although blacks generally had the highest rates, and Hispanic single males experienced a somewhat higher modi whites had rates between those for blacks and those fied incidence of higher-priced lending than single for non-Hispanic whites (tables 20.A and 20.B). The females (tables l8.A and 18.B). The mean APR pattern for Asians was somewhat different, as the spreads paid by females are virtually the same as gross denial rate for them was either lower than, or those paid by males after accounting for the presence very similar to, the rate for non-Hispanic whites, or absence of a co-borrower (tables 19.A and 19.B). depending on the period and the loan purpose. Controlling for borrower-related factors in the Denial Rates by Race, Ethnicity, lind Sex HMDA data reduces the differences among racial and Analyses of the HMDA data from earlier years have ethnic groups. Accounting for the specific lender used consistently found that denial rates vary across appli- by the applicant almost always reduces differences
The 2007 HMDA Data A141 18. Incidence of highcr-priceu lending. wln1odit1ed and modi lieu for borrower- and lender-rduled faclU,rs. for conventional firsl liens on owner-occupieu. onc- 10 four-family. site-buill home , by half-year in which loan was originated and by race. ethnicity. lind sex of horrower, 2Q06-07- Continlled B. Refinance Percent except as noted Modified incidence. by Modified incidence. by modificatIio n factor modificatIio n factor Number of Unmodified Number of Unmodified Race, ethnicity, and sex 1 loans incidence Borrower- Bo re r l r a o t w ed e r- loans incidence B 0 r;ower- Bo re r l r a o t w ed e rrelated plus lender re ated plus lender I 2006 HI H2 I Race orher rhe/ll ",hire olily I American Indian or Alaska Native ......... 14.030 31.2 34.9 28.6 13,718 34.4 37.6 29.9 Asian .................................. 61,485 17.6 22.2 24.7 66,388 21.5 25.2 25.8 Black or African American ......... .... 195,050 52.0 49.4 31.9 202,412 53.6 50.8 34.4 Native Hawaiian or other Pacific Islander. 12,282 31.1 36.5 28.3 11,796 36.3 38.9 31.4 Two or more minority races .... .......... 1,474 27.1 29.5 28.6 1,439 28.8 29.3 33.4 Joint ........................... .. ...... 21,091 25.4 32.5 26.4 20,784 27.0 34.1 27.8 Missing .............. ......... ....... 281.183 36.3 42.3 29.6 289,263 40.1 45.1 32.0 Whire, by erhnicir), Hispanic white .... . . . . . . . . . . . ........ 213,338 35.4 36.4 28.4 223.825 39.9 37.7 31.0 Non-Hispanic white ....... ... . ... ..... 1.296.597 25.0 25.0 25.0 1.300:339 26.5 26.5 26.5 Sex ....... One male ............. .......... 591,436 33.4 33.4 33.4 605,743 35.8 35.8 35.8 One female .............................. 506.018 34.1 32.8 33.1 527,701 36.6 35.6 35.8 Two males ..................... ......... 13.457 26.3 26.3 26.3 13.879 27.0 27.0 27.0 Two females ............... . . . . . .. . . . . 15.620 33.2 28.9 27.2 15.559 35.1 30.6 26.0 2007 HI H2 R(lce orher rhan whire onh' I American Indian or Alaskil Native ..... ... 11,480 28.1 31.0 22.1 8,028 23.9 26.2 18.2 Asian .................................... 63.999 15.4 17.5 18.8 44,318 8.4 13.5 14.9 Black or African American ................ 158.416 44.6 41,6 27.1 108,245 36.8 35.4 22.6 Native Hawaiian or other Pacific Islander .. 9,518 25.7 29.1 24.3 6.283 18.9 24.3 19.0 Two or more minority races .. ............ 1,434 20.2 23.2 22.2 1.122 14.1 16.1 18.7 Joint ........................ ......... .. 19,892 19.6 24.8 20.4 14,413 17.2 21.6 17.0 Missing ....................... ......... 258.895 29.5 35.3 25.2 179.528 20.6 25.7 20.1 Whir •. by erhnicir), Hispanic white ........ . . . . . . . . . . 180,394 30.2 28.3 23.4 121,618 22.3 21.9 19.1 Non-Hispanic white .. ......... - ..... .. , 1,238,650 19.8 19.8 19.8 935.658 16.2 16.2 16.2 Sex One male ....... ............... . ... 546,140 26.6 26.6 26.6 381,204 19.9 19.9 19.9 One female .................... .... ... 451.279 27.6 26.7 26.5 327.198 21.1 19.8 19.4 Two males ............................... 12.931 21.0 21.0 21.0 10.216 17.4 17.4 17.4 Two females ............................. 13.992 28.5 24.0 22.7 11,371 24.2 20.2 18.8 NOTE: See notes to table 18.A. further, although unexplained differences remain be insufficient to account fully for racial or ethnic differ tween non-Hispanic whites and other racial and eth ences in the incidence of higher-priced lending; sig nic groups. nificant differences remain unexplained. Similar pat With regard to the sex of applicants, sole male terns are shown in racial or ethnic differences in applicants have marginally higher gross and modified denial rates. In contrast, only small differences across denial rates than single females. Also, dual male groups were found in the mean APR spreads paid by borrowers and dual female borrowers generally have those receiving higher-priced loans. Regarding the very similar denial rates, which are somewhat lower sex of borrowers, some very small differences were than those for single applicants. found in lending outcomes. Both previous research and experience gained in Some Limitations of the Data in AssessillR the fair lending enforcement process show that unex Fair LendilZg Compliance plained differences in the incidence of higher-priced Information in the HMDA data, including borrower lending and in denial rates among racial or ethnic income, loan amount, location of the property, date of groups stem in part from credit-related factors not loan origination, and the specific lender used, is available in the HMDA data, such as measures of
A 142 Federal Reserve Bulletin 0 December 2008 19. lean APR spreads, unmotlifietl and modifieu for bOlT(lWCf- <Inti lenuer-relateu factors. for higher-priced convcnLional lirsf liens on owner-occupied. onc- 10 four-family. ill.:-huilt home .• hy half-year in which loan was originatcd and by race. elhnicily. and sex of borrower. 2006-07 A. Home purchase Percentage points except as noted Modified mean spread. by Modified mean spread. by Number of Unmodified modificat I io n factor Number of Unmodified modificat I io n factor Race, ethnicity. and sex I high l e o r a - n p s ri ced mean spread Bo re r l r a o t w ed e r- Bo re r l r a o t w ed e r- high l e o r a - n p s r iced mean spread B o rrower- Bo re rr la o t w ed e rplus lender related plus lender I 2006 HI H2 Race other than while only American Indian or Alaska Native ......... 3.911 5.25 5.23 5.17 3,478 5.12 5.13 5.11 Asian ............ ' ....................... 16.307 5.11 5.13 5.15 15.089 4.97 5.07 5.11 Black or African American ............. 88.335 5.69 5.64 5.34 82,903 5.66 5.59 5.31 Native Hawaiian or other Pacific Islander .. 3.247 5.25 5.22 5.14 3.130 5.17 5.15 5.17 Two or more minority races .......... .... 307 5.42 5.38 5.16 276 5.43 5.45 5.37 J M oi i n ss t in . g .. . . . . . .. .. .. . . . . . . .. . . . . . . .. . . . . . . . . .. .. .. . ., . .. . . . . . . . . . .. . . . . . .. 53 3. , 9 55 9 7 9 5 5. . 4 3 1 0 5 5 . . 4 3 3 4 5 5 . .2 1 8 9 5 3 6 . .9 8 7 0 7 3 5 5. . 5 3 1 0 5 5. . 5 2 5 9 5 5 . . 1 2 2 6 White. by ethniciry Hispanic white .. . . . . . . . . . . . . . . . . . . 113.136 5.28 5.20 5.18 103,286 5.24 5.16 5.14 Non-Hispanic white ... .................. 221.352 5.16 5.16 5.16 204,795 5.13 5.13 5.13 Sex One male ................ ................ 210.792 5.33 5.33 5.33 194.624 5.30 5.30 5.30 One female .......... . .. . .. ............. 147,065 5.35 5.34 5.31 138.876 5.31 5.31 5.29 Two males . . . . . . . . . . . . . ... ............. 4.634 5.15 5.15 5.15 4,084 5.23 5.23 5.23 Two females .......................... ... 4.254 5.41 5.~3 5.24 3,889 5.45 5.35 5.32 2007 HI H2 Race other rhan whire only I American Indian or Alaska Native ......... 1,634 4.71 4.68 4.73 1,093 4.07 4.17 4.08 Asian .................................... 7,295 4.50 4.59 4.67 3,968 3.90 3.94 4.01 Black or African American ................ 41,836 5.24 5.19 4.92 25,395 4.44 4.47 4.32 Native Hawaiian or other Pacific Islander .. 1.332 4.80 4.81 4.77 754 4.02 4.17 4.10 Two or more minority races ............... 140 5.05 5.17 4.91 103 4.40 4.35 4.34 Joint ........ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.958 4.96 4.92 4.80 1,306 4.19 4.19 4.08 Missing ............................•..... 24.339 4.96 5.09 4.86 14,928 4.21 4.33 4.23 Whir., by erhniciry Hispanic white ................ ........... 48.619 4.77 4.70 4.71 26,484 4.06 4.13 4.07 Non-Hispanic white ... ........ .......... 121.526 4.66 4.66 4.66 84.943 4.06 4.06 4.06 Sex One male ............ ....... ............. 104.020 4.80 4.80 4.80 64.664 4.14 4.14 4.14 One female ................. ............. 69,928 4.80 4.82 4.81 43.499 4.11 4.10 4.12 Two males ................. .............. 2.377 4.85 4.85 4.85 1,812 4.14 4.14 4.14 Two females . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,219 5.18 4.99 4.88 1.524 4.26 4.10 4.40 NOTE: Spread is the difference between the annual percentage rate (APR) on the loan and the yield on a comparable-maturity TreasW')' security. Excludes transition-period loans (those for which the application was submitted before 2004). For definition of higher-priced lending, see text note 7; for explanation of modification factors, s~ text See also note I, table 18.A. credit history (including credit scores), loan-to-value with other information and risk factors, as directed by and debt-to-income ratios, and differences in choice the Interagency Fair Lending Examination Proce of loan products. Differential costs of loan origination dures.35 Risk factors for pricing discrimination in and the competitive environment also may bear on clude, but are not limited to, the relationship between the differences in pricing, as may differences across loan pricing and compensation of Joan officers or populations in credit-shopping activities. brokers, the presence of broad pricing discretion, and Differences in pricing and underwriting outcomes consumer complaints. may also reflect discriminatory treatment of minori It is difficult to draw conclusions from the HMDA ties or other actions by lenders, including marketing data about changes in the fair lending environment practices. The HMDA data are regularly used to from 2006 to 2007. For example, denial rate differ facilitate the fair lending examination and enforce ences between non-Hispanic whites and minorities ment processes. When examiners for the federal banking agencies evaluate an institution's fair lending 35. The Interagency Fair Lending Examination Procedures are risk. they analyze HMDA price data in conjunction available at www.ffiec.gov/PDF/fairlend.pdf.
The 2007 HMDA Data Al43 II). Mean APR 'preads, unmodiried and modified for hnrrower-and lender-related racl(lr·. for higher-priced conventional lirst liens on owner-occupied. one- to four-family. site-buill home, by half-year in which loan wa origin:lted and by ra e. elhnicity. tlnd SI.:X of borrower. "2CKl6-07-Colllillued B. Refinance Percentage points except as noted Modified mean spread. by Modified mean spread. by Number of modification factor Number of modification factor Race. ethnicity. and sex I high l e o r a - n p s ri ced m U e n a m n o s d p i r f e ie a d d Bo re r r la o t w ed e r- I Bo re r r la o t w ed e r- higb l e o r a -p n r s i ced m U e n a m n o s d p i r f e ie a d d Borrower- I Bo re r l r a o t w ed e rplus lender related plus lender I 2006 HI H2 Race OIher than ...h ile only American Indian or Alaska Native .....•.. 4.376 5.14 5.09 5.14 4.720 4.98 5.05 5.09 1 Asian .................................... 10.815 5.11 5.09 5.14 14.281 4.68 4.91 5.00 Black or African American ................ 101.506 5.42 5.37 5.23 108.406 5.30 5.24 5.08 Native Hawaiian or other Pacific Islander .. 3;819 5.29 5.21 5.21 4.283 5.01 5.07 5.03 Two or more minority races ............... 400 5.27 5.18 5.20 415 5.20 5.31 5.11 Joint ............. ........ ., ........ 5.354 5.08 5.14 5.16 5.604 4.96 5.07 5.03 Missing .................................. 101.960 5.35 5.36 5.16 115,955 5.20 5.25 5.02 While. by ethnicil)' Hispanic white ...... .................... 75.512 5.27 5.22 5.17 89.236 5.00 5.04 5.04 Non-Hispanic white . .................... 324.384 5.13 5.13 5.13 343,955 4.98 4.98 4.98 Sex O On n e e f m em ale a le . . . . . . . .. .. .. .. . . . . .. . .. . . . . . . .. . . .. . . . . . . .. . . . ., . .. .. .. .. .. . 1 1 9 7 7 2. .5 4 6 4 7 2 5 5 . . 2 3 9 0 5 5. . 2 29 8 5 5. . 2 2 9 9 2 1 1 9 6 2 , . 8 9 2 2 1 6 5 5 . .1 0 2 9 5 5 . . 0 0 9 9 5 5 . . 0 0 9 9 Two males ..................... ......... 3,533 5.08 5.08 5.08 3.743 5.02 5.02 5.02 Two females ... .............. . ......... 5.185 5.17 5.11 4.99 5.461 5.11 5.00 5.09 I 2007 ! HI H2 I Race olher Ihan ...h ile onll' American Indian or Alaskil Native ... ..... 3.227 4.79 4.77 4.88 1.918 4.73 4.79 4.67 Asian .................................... 9.848 4.37 4.72 4.80 3.733 4.11 4.44 4.51 Black or African American ................ 70.628 5.12 5.07 4.92 39.836 4.96 5.00 4.75 Native Hawaiian or other Pacific Islander .. 2.450 4.70 4.79 4.88 1.189 4.49 4.81 4.67 Two or more minority races ............... 289 4.85 4.86 4.89 158 4.82 4.94 4.63 Joint .............. ......... ............ 3.891 4.85 4.92 4.91 2.474 4.69 4.82 4.64 Missing .......... ........ ........... .. 76,469 5.02 5.09 4.82 37.003 4.60 4.72 4.59 While. by elhniciTy Hispanic white .... ................... .. 54,477 4.79 4.87 4.89 27.151 4.46 4.60 4.62 Non-Hispanic white , . . . . . . . . ......... 245.074 4.79 4.79 4.79 151.120 4.58 4.58 4.58 Sex One male ..................... 145.314 4.88 4.88 4.88 75.729 4.56 4.56 4.56 One female ..................... 124.764 4.88 4.85 4.87 68,930 4.60 4.56 4.54 Two males ......... ...... ...... ..... 2721 4.90 4.90 4.90 1•7 8 I 4.57 4.57 4.5 7 Two females ... 5.04 4.91 4.91 2.756 4.72 4.59 4.61 ... : ..... 1 NOTE: See note to table 19.A. widened from 2006 to 2007, although this develop APPENDIX A: ment may have reflected differences in the credit REQUIREMENTS OF REGULATION C characteristics or other circumstances of the pools of borrowers in the two years and not unfair treatment The Federal Reserve Board's Regulation C requires by lenders. Similarly, differences between non lenders to report the following information on home Hispanic whites and minorities in the incidence of purchase and home-improvement loans and on refi higher-priced lending generally declined, although nancings: the fully modified differences narrowed proportion For each applicatiol/ or loan ately Jess than the gross differences. Given the sub stantial decrease in overall higher-priced lending, it is • application date and the date an action was taken on difficult to know if this narrowing of the differences in the application the incidence of higher-priced lending was due to any • action taken on the application change in the relative treatment of minorities or to - approved and originated changes in the credit profiles of marginal borrowers - approved but not accepted by the applicant resulting from declines in applications and increased - denied (with the reasons for denial-voluntary denial rates. for some lenders)
A 144 Federal Reserve Bulletin 0 December 2008 20. Denial rates on applications, unmodified and modified for borrower- and lender-relutctl factors. for convenlional lin liens on owner-uc upied, onc- to four-fumily, site-built h lmc . by half-year in which application was acted upun by lender and by race. elhnicity, and sex of applicant, 2006-07 A. Home purchase Percent except as noted Modified denial rate, by Modified denial rate. by Number of modification faclor Number of modificatIio n factor applications Unmodified I applications Unmodified l Race, ethnicity. and sex I acted upon denial rate Borrower- Bo re r l r a o t w ed e r- acted upon denial rate Borrower- Bo re r l r a o t w ed e r- I by lender related plus lender by lender related plus lender I 2006 HI I H2 Race olher Ihan while only American Indian or Alaska Nalive ......... 17,523 26.7 22.6 19.3 17,123 25.0 21.7 17.1 Asian ........................... ........ 135.942 17.3 14.8 14.9 128.455 16.8 14.0 14.8 Black or African American ........ ....... 265,677 30.9 27.2 21.5 287,491 32.3 28.2 21.5 Native Hawaiian or other Pacific Islander .. 14,401 23.1 21.0 18.3 14.703 23.8 19.3 16.6 Two or more minority races ........... .. ,. 1,470 20.5 18.8 16.3 1,669 19.9 18.0 16.8 Joint ....................... .............. 29,107 13.8 17.0 14.9 28.674 13.4 16.8 14.6 Missing ................ .................. 300,767 24.3 23.4 17.9 310,302 24.1 23.8 17.8 While. by elhnicit)' Hispanic while ... ....................... 357,209 24.7 20.0 17.5 361,957 26.2 20.7 17.6 Non-Hispanic while ... .................. 1,543,650 13.2 13.2 13.2 1,519,786 13.1 13.1 13.1 Sex One male ................................ 915,120 21.3 21.3 21.3 918,501 22.1 22.1 22.1 One female .............................. 658,209 20.7 20.1 20.6 676,289 21.3 20.8 21.2 Two males .............. , ........... .. 26,074 19.8 19.8 19.8 24,431 18.6 18.6 18.6 Two females , ........................ .... 21,860 19.5 18.0 18.6 21,462 19.4 16.9 16.9 2007 HI H2 Race olher than white 0111)' American Indian or Alaska Native .......•. 12,326 28.6 25.1 21.4 10,301 27.0 23.8 20.0 Asian ................. "., ......... 106,595 17.1 14.6 15.0 104.233 17.7 15.2 15.1 Black or African American ................ 206,186 36.0 31.6 23.9 158,701 34.2 29.3 22.9 Native Hawaiian or other Pacific Islander .. 10.540 28.2 23.0 21.1 8,896 26.7 21.4 19.5 T J M o w i i n s o s t i o n . r g . . m . . . o . . r . e . . . m . . . , i . . n . , o . . r . . i . t . y . . . . r . a . . c . . e . . s . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2 3 4 1 , . , 9 6 3 4 8 1 7 4 0 2 2 1 5 5 4 . . . 4 7 9 2 2 1 4 4 8 . . . 7 4 5 2 1 1 1 8 5 . . . 4 9 1 20 2 7 3 1, , , 4 7 2 1 4 9 5 0 9 2 2 1 3 4 1 . . .3 6 4 2 1 17 1 9 . . . 5 6 3 1 1 1 9 5 6 . . . 3 7 3 White. by ethnicil), Hispanic white ..... ........ .... ...... 257,135 29.9 22.4 19.7 191,838 30.0 22.0 19.7 Non-Hispanic white .. ................... 1,307,913 13.3 13.3 13.3 1,187.866 13.2 13.2 13.2 Sex O O Tw n n e e o m f m e a m a l l e a e l s e , .,. . .. .. . . . . . .. . . . . . . . . . . . . .. . . . . . . . . . . . . .. ., . . . . . . . . .. . . . . .. . .. . .. . . . . . . . . . . . . . . . . . 7 5 3 2 2 0 7 9 , . ,0 7 1 6 0 7 2 8 2 2 2 2 2 2 1 . . . 2 9 4 2 2 22 1 1 . . . 4 9 7 2 2 2 2 2 1 . . . 1 9 4 6 44 1 2 0 0 0 . , , 6 4 1 4 2 4 6 0 9 2 2 2 2 0 0 . . . 6 4 9 2 2 2 2 0 0 . . . 4 6 6 2 2 22 1 0 . . . 2 6 4 Two females ., .......... ............ , ... 18,053 22.1 20.6 20.2 17,131 20.0 18.1 18.7 I NOTE: Includes tranSition-period applications (those submitted before 2004). For explanation of mOdification factors, see text. See also note I, table 18.A. - withdrawn by the applicant • lien status - file closed for incompleteness - first lien • pre-approval program status (for home-purchase - junior lien loans only) - unsecured - pre-approval request denied by financial institu • loan purpose tion - home purchase - pre-approval request approved but not accepted - refinance by individual - home improvement • loan amount • type of purchaser (if the lender subsequently sold • loan type the loan during the year) - conventional - Fannie Mae - insured by the Federal Housing Administration - Ginnie Mae - Freddie Mac - guaranteed by the Veterans Administration - Farmer Mac - backed by the Farm Service Agency or Rural - Private securitization Housing Service - Commercial bank, savings bank, or savings association
The 2007 HMDA Data A145 20. Denial rale~ on applic3lion.s. unmodified and modified for borrower- and It!nder-relaled faclors. for conventional fir I lien on owner-occupied. one- to four-family. ~it -buill homes. by hnlf-year in which application was a ted upon by lender and by race. eLhnicilY. and ex of applicanl. 2(X)6-{)7- Colllillued B. Refinance Percent except as noted Modified denial rate, by Modified denial rate. by Race. ethnicity. and sex I a a N p b c u p y te m li d l c e b a n u e t d r p io e o o n r n f s U de n n m ia o l d i r f a i t e e d Bo re r m l r a o o t w e d d i e f r ic . atIion p B lu f o r a s e r c l r a t l o o e t w e n r d d e r e · r a a N p b c p u y te m l i d l c e b a n u e t d r p io e o o n r n f s U de n n m ia o l d i r f a i t e e d B o r e 1 m 1 la 'o o t w e d d i e f r ic · at I io n p B lu f r o a e s r c l r a t l o o e t w e n r d d e r e · r I 2006 HI H2 Race olher lira" while Oil/)' American Indian or Alaska Native ..... 31,582 44.3 44.8 38.7 32,175 45.0 44.2 35.7 Asian ................... ....... . .... 104.007 28.3 33.6 35.3 111,165 27.1 33.0 33.8 Black or African American ................ 431.030 44.8 46.1 39.0 452.812 44.9 46.0 38.1 Native Hawaiian or other Pacific Islander .. 23.560 35.8 41.7 37.8 23,877 37.0 41.9 37.0 Two or more minority raceS ... .... . ... 2.804 40.0 43.0 36.1 3,074 40.9 43.4 36.8 Joint .......... ..... ................. .... 37,091 34.0 40.5 35.0 36,939 34.1 39.9 33.7 Missing ............. ................ .. 736,949 50.2 51.3 39.1 711,665 45.7 47.6 37.2 While. by elh"icit)" Hispanic white ...... ..................... 387,469 33.3 36.4 36.7 414,344 33.7 37.1 35.2 Non-Hispanic white .................... 2.180,168 31.3 31.3 31.3 2.163,111 30.0 30.0 30.0 Sex One male ............. ................... 1.151.237 38.3 38.3 38.3 1.172,849 36.9 36.9 22.1 One female .............................. 950.223 37.0 35.8 36.6 975,866 35.2 34.2 21.2 Two males ..... ................... 25.064 36.5 36.5 36.5 25.806 36.5 36.5 36.5 Two females .. ........................... 29,707 38.8 36.3 36.3 30.478 40.2 37.7 35.7 2007 I HI H2 Race other thall while o"ly American Indian or Alaska Native ......... 32.148 54.2 51.0 41.4 27.626 60.2 56.1 43.6 Asian ............................ ...... 111.681 30.1 35.5 36.4 90.733 35.6 38.8 39.5 Black or African American ................ 408.342 51.3 51.4 42.2 329.444 55.9 56.4 44.9 Native Hawaiian or other Pacific Islander .. 21,457 43.6 46.5 41.3 17.394 49.7 51.5 44.6 Two or more minority races ............... 3.276 49.2 50.4 41.8 2.928 53.0 53.9 47.0 Joint ....... ........ .. .................... 38,339 38.9 44.5 37.1 32.643 44.5 48.8 40.3 Missing .... .... . ... ...................... 646.545 48.5 49.8 39.4 500.917 50.7 49.7 41.2 White. by ethlliciry . Hispanic white . . . . . . . . . . . . . . . . . . . 377.168 40.1 42.0 39.8 318.369 47.3 46.6 43.4 Non-Hispanic white ...................... 2.149.801 32.7 32.7 32.7 1,767.691 35.7 35.7 35.7 Sex One male ...... ......•........ 1.125.730 40.6 40.6 40.6 891.020 44.2 44.2 44.2 One female ........ ............. 888.877 39.1 38.1 39.1 717,686 42.3 41.4 42.6 Two males ............................ ... 25.663 40.1 40.1 40.1 22.436 43.1 43.1 43.1 Two females ...................... ....... 29.119 43.4 40.8 40.5 26.193 46.2 43.8 41.7 NOTE: See nOle to table 20.A. - Life insurance company. credit union, mortgage • type of structure bank. or finance company - one- to four-family dwelling - Affiliate institution - manufactured home - Other type of purchaser - multifamily property (dwelling with five or more units) For eac/z applicant or co-applicant • occupancy status (owner occupied, non-owner oc cupied, or not applicable) • race • ethnicity For loans subject to price reporting • sex • income relied on in credit decision • spread above comparable Treasury security For each properlY For loans subject 10 tlze Home OlVnership and Equity Protection Act • location, by state, county, metropolitan statistical area, and census tract • indicator of whether loan is subject to the Home Ownership and Equity Protection Act
A 146 Federal Reserve Bulletin 0 December 2008 APPENDIX B: mirror the types of information submitted by lenders PRIVATE MORTGAGE INSURANCE DATA covered by HMDA. However, because the PMI com panies do not receive all the information about a Historically, mortgage lenders have required prospec prospective loan from the lenders seeking insurance tive borrowers to make a down payment of at least coverage, some HMDA items are not included in the 20 percent of a home's value before they will extend a PMI data. In particular, loan-pricing information, loan to buy a home or refinance an existing loan. Such requests for pre-approval, and an indicator of whether down payments are required because experience has a loan is subject to the Home Ownership and Equity shown that homeowners with little equity are substan Protection Act are unavailable in the PMI data. tially more likely to default on their mortgages. The seven PMI companies that issued PMI during Private mortgage insurance (PMI) emerged as a 2007 submitted data to the FFIEC through MICA. In response to creditors' concerns about the elevated total, these companies acted on nearly 2 million credit risk of lending backed by little equity in a home applications for insurance: 1.4 million applications to as well as to the difficulties that some consumers insure mortgages for purchasing homes and about encounter in accumulating sufficient savings to meet 540,000 applications to insure mortgages for refinanc the required down payment and closing costs. ing existing mortgages. PMI companies approved PMI protects a lender if a borrower defaults on a 92 percent of the applications they received. Approval loan; it reduces a lender's credit risk by insuring rates for PMI companies are notably higher than they against losses associated with default up to a contrac are for mortgage lenders because lenders applying for tually established percentage of the claim amount. PMI are familiar with the underwriting standards The costs of the insurance are typically paid by the used by the PMI companies and generally submit borrower through a somewhat higher interest rate on applications for insurance coverage only if the appli the loan. cations are likely to be approved. 0 In 1993, the Mortgage Insurance Companies of America (MICA) asked the Federal Financial Institu tions Examination Council (FFIEC) to process data from PMI companies on applications for mortgage insurance and to produce disclosure statements for the public based on the data.36 The PMI data largely quarters of each company and at a central depository in each metro politan statistical area (MSA) in which HMDA data are held. The 36. Founded in 1973. MICA is the trade association for the PM! central depository also holds aggregate data for all the PM! compames industry. The FFlEC prepares disclosure statements for each of the active in that MSA. In addition, the PMI data are avail.able from the PM! companies. The statements are available at the corporate head- FFlEC at www.ffiec.gov/reports.htm.
Legal Developments
Cl March 2008 Legal Developments: Fourth Quarter, 2007 ORDERS ISSUED UNDER BANK tive effects of the merger was requested from the United HOLDING COMPANY ACT States Attorney General and a copy of the request was provided to the Federal Deposit Insurance Corporation. The time for filing comments has expired, and the Board has ORDERS ISSUED UNDER SECTION 3 OF considered the applications in light of the factors set forth in section 3 of the BHC Act, the Bank Merger Act, and the THE BANK HOLDING COMPANY ACT FRA. First Citizens has total consolidated assets of approxi First Citizens Bane Corp mately $776.5 million and is the 27th largest depository organization in Ohio, controlling deposits of approximately Sandusky, Ohio $678.4 million, which represent less than 1 percent of the total amount of deposits of insured depository institutions The Citizens Banking Company in the state ("state deposits"}.6 First Citizens operates one Urbana, Ohio subsidiary depository institution, Citizens Bank, with branches only in Ohio. Order Approving Merger of Bank Holding Futura, a small bank holding company with banking assets of approximately $274.2 million, operates one Companies, Merger of Banks, and insured depository institution, Champaign Bank, in Ohio. Establishment of Branches Futura is the 67th largest depository organization in Ohio, controlling deposits of approximately $232.8 million. First Citizens Banc Corp ("First Citizens"), a financial On consummation of this proposal, First Citizens would holding company within the meaning of the Bank Holding become the 23rd largest depository organization in Ohio, Company Act ("BHC Act"), has requested the Board's with total consolidated assets of approximately $1.1 billion. approval under section 3 of the BHC Act! to merge with First Citizens would control deposits of approximately Futura Banc Corporation ("Fillura") and acquire its subsid $911.2 million, which represent less than 1 percent of the iary bank, Champaign National Bank ("Champaign Bank"), total amount of state deposits. both of Urbana, Ohio.2 In addition, First Citizens' subsid iary state member bank, The Citizens Banking Company ("Citizens Bank"), also of Sandusky, has requested the COMPETITIVE CONSIDERATIONS Board's approval under section 18( c) of the Federal Deposit Insurance Act3 ("Bank Merger Act") to merge with Cham The BHC Act and the Bank Merger Act prohibit the Board paign Bank, with Citizens Bank as the surviving entity. from approving a proposal that would result in a monopoly Citizens Bank also has applied under section 9 of the or would be in furtherance of any attempt to monopolize Federal Reserve Act ("FRAn) to establish and operate the business of banking in any relevant banking market. branches at the main office and branches of Champaign Both acts also prohibit the Board from approving a bank Bank.4 acquisition that would substantially lessen competition in Notice of the proposal, affording interested persons an any relevant banking market, unless the anticompetitive opportunity to submit comments, has been published in effects of the proposal are clearly outweighed in the public accordance with the relevant statutes and the Board's Rules interest by its probable effect in meeting the convenience of Procedure (72 Federal Register 60,019 (2007».5 As and needs of the community to be served.7 required by the Bank Merger Act, a report on the competi- First Citizens and Futura have subsidiary depository institutions that compete directly in the Logan County, 1. 12 U.S.c. § 1842. 2. First Citizens proposes to acquire the shares of the nonbanking subsidiaries of Futura in accordance with section 4(kJ of the SHC Act 6. Asset data are as of September 30. 2007. Statewide deposit and and the post-transaction notice procedures in section 225.87 of ranking data are as of June 30. 2007. and reHeet merger activity Regulation Y (12 U.S.c. § 1843(k); 12 CPR 225.87). through November 20, 2007. In this context, insured depository 3.12 U.s.c. § 1828(c). institutions include commercial banks, savings banks, and savings 4. 12 U.S.c. § 321. These branches are listed in the appendix. associations. 5. 12 CFR 262.3(b). 7, 12 U.S.c. § 1842(c)(l); 12 U.S.C. § 1828(c)(5).
C2 Federal Reserve Bulletin 0 March 2008 Ohio banking market.s The Board has reviewed carefully which other competitors in the market did not experience. the competitive effects of the proposal in this banking This decline in the deposits assumed by Citizens Bank market in light of all the facts of record. In particular, the indicates that using June 30, 2007, deposit data to calculate Board has considered the number of competitors that would the effects of this proposal on market concentration would remain in the market, the relative shares of total deposits in overstate to some degree the actual market presence of First depository institutions ("market deposits") controlled by Citizens. In addition, nine other insured depository institu First Citizens and Futura in the market,9 the concentration tions would continue to compete in the market after levels of market deposits and the increases in these levels consummation. as measured by the Herfindahl-Hirschman Index ("HHI") Moreover, the Board notes that one community credit under the Department of Justice Merger Guidelines ("DOJ union also exerts a competitive influence in the Logan Guidelines"),10 and other characteristics of the market. County banking market. 12 This institution offers a wide In the Logan County banking market, Citizens Bank is range of consumer products, operates street-level branches, the second largest depository institution, controlling depos and has membership open to almost all the residents in the its of approximately $119.6 million, which represent market. approxi mately 21.6 percent of market deposits. Champaign The DO] also conducted a detailed review of the poten Bank is the fifth largest depository institution in the market, tial competitive effects of the proposal and advised the controlling deposits of approximately $42 million, which Board that consummation of the transaction would not represent approximately 7.6 percent of market deposits. likely have a significantly adverse effect on competition in Based on deposit data as of June 30, 2007, Citizens Bank any relevant banking market. In addition, the appropriate would become the largest depository institution in the banking agencies have been afforded an opportunity to market, controlling deposits of approximately $161.6 mil comment and have not objected to the proposaL lion, which would represent 29.1 percent of market depos Based on all the facts of record, the Board concludes that its. The HHI would increase 326 points to 1963. consummation of the proposal would not have a signifi Several factors indicate that the increase in concentra cantly adverse effect on competition or on the concentra tion in this banking market, as measured by the HHI, tion of resources in the Logan County banking market, overstates the potential competitive effects of the proposal. where First Citizens and Futura compete directly, or in any The Board notes that First Citizens did not enter the Logan other relevant banking market. Accordingly, the Board has County banking market until October 4, 2007, when Citi determined that competitive considerations are consistent zens Bank assumed the insured deposits of a failed bank. I I with approval. The record shows that the offices of the acquired bank incurred a significant run-off of deposits in the market FINANCIAL, MANAGERIAL, AND SUPERVISORY between June 30, 2007, and the October 4 acquisition date, CONSlDERA TIONS Section 3 of the BHC Act and the Bank Merger Act require 8. The Logan County banking market is defined as Logan County. the Board to consider the financial and managerial re Ohio. sources and future prospects of the companies and deposi 9. Deposit and market-share data are based on data reported by tory institutions involved in the proposal and certain other insured depository institutions in the summary of deposits data as of June 30, 2007, adjusted to reflect mergers and acquisitions through supervisory factors. The Board has carefully considered November 20, 2007, and are based on calculations in which the these factors in light of all the facts of record, including deposits of thrift institutions are included at 50 percent. The Board confidential supervisory and examination information from previously has indicated that thrift institutions have become, or have the primary federal and state banking supervisors of the the potential to become, significant competitors of commercial banks. organizations involved in the proposal, publicly reported See, e.g., Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989); National City Corporation, 70 Federal Reserve Bulletin 743 and other financial information, and information provided (1984). Thus, the Board regularly has included thrift institution by First Citizens and Futura. deposits in the market-share calculation on a 50 percent weighted In evaluating financial resources in expansion proposals basis. See, e,g .. First Hawaiian, Inc., 77 Federal Reserve Bulletin 52 by banking organizations, the Board reviews the financial (1991). 10. Under the DOJ Guidelines, a market is considered unconcen condition of the organizations involved on both a parent trated if the post-merger HHI is less than 1000, moderately concen only and consolidated basis, as well as the financial condi trated if the post-merger HHI is between 1000 and 1800, and highly tion of the subsidiary depository institutions and the orga concentrated if the post-merger HHI is more than 1800, The Depart nizations' significant nonbanking operations. In this ment of Justice has informed the Board that a bank merger or evaluation, the Board considers a variety of information, acquisition generally will not be challenged (in the absence of other factors indicating anticompetitive effects) unless the post-merger HHI including capital adequacy, asset quality, and earnings is at least 1800 and the merger increases the HHI more than 200 pOints. The Department of Justice has stated that the higher-than normal HHI thresholds for screening bank mergers for anticompetitive 12. The Board previously has considered the competitiveness of effects implicitly recognize the competitive effects of limited-purpose certain active credit unions as a mitigating factor. See, e.g., Regions lenders and other non depository financial entities. Financial Corporation, 93 Federal Reserve Bulletin CI6 (2007); II. See Press Release, Federal Deposit Insurance Corporation, Wachovia Corporation, 92 Federal Reserve Bulletin CI83 (2006); FDIC Approves the Assumption of the Insured Deposits of Miami RN.B. Corporation, 90 Federal Reserve Bulletin 481 (2004); Gateway Valley Bank, Lakeview, Ohio (October 4, 2007). Bank & Trust Co., 90 Federal Reserve Bulletin 547 (2004).
Legal Developments: Fourth Quarter. 2007 C3 performance. In assessing financial factors. the Board the Comptroller of the Currency, as of July 22, 2003. After consistently has considered capital adequacy to be espe consummation of the proposal, Citizens Bank plans to cially important. The Board also evaluates the financial implement its CRA policies at Champaign Bank. First condition of the combined organization at consummation, Citizens has represented that the proposal would provide including its capital position, asset quality, and earnings greater convenience to customers through a larger network prospects, and the impact of the proposed funding of the of branches and ATMs and a broader range of financial transaction. products and services over an expanded geographic area. The Board has carefully considered the financial factors Based on all the facts of record, the Board concludes that of the proposal. First Citizens, Futura, and their subsidiary considerations relating to the convenience and needs of the depository institutions are well capitalized and would communities to be served and the CRA performance remain so on consummation of the proposal. Based on its records of the relevant depository institutions are consistent review of the record, the Board also finds that First Citizens with approval. has sufficient financial resources to effect the proposal. The proposed acquisition is structured as a partial share ex ESTABLISHMENT OF BRANCHES change and a partial cash purchase of shares. First Citizens will use a combination of existing resources and debt to As previously noted, Citizens Bank has also applied under fund the cash purchase of shares. section 9 of the FRA to establish branches at the locations The Board also has considered the managerial resources of Champaign Bank's existing main office and branches. of the organizations involved and the proposed combined The Board has assessed the factors it is required to consider organization. The Board has reviewed the examination when reviewing an application under section 9 of the FRA records of First Citizens, Futura, and their subsidiary and the Board's Regulation H and finds those factors to be depository institutions, including assessments of their man consistent with approval.14 agement, risk-management systems, and operations. In addition, the Board has considered its supervisory experi CONCLUSION ences and those of the other relevant banking supervisory agencies with the organizations and their records of com Based on the foregoing and all the facts of record, the pliance with applicable banking laws and with anti-money Board has determined that the applications should be, and laundering laws. First Citizens, Futura, and their subsidiary hereby are, approved. In reaching its decision, the Board depository institutions are considered to be well managed. has considered all the facts of record in light of the factors The Board also has considered First Citizens' plans for that it is required to consider under the BHC Act, the Bank implementing the proposal, including the proposed man Merger Act, and the FRA. The Board's approval is specifi agement after consummation. cally conditioned on compliance by First Citizens and Based on all the facts of record, the Board has concluded Citizens Bank with the conditions imposed in this order and that considerations relating to the financial and managerial the commitments made to the Board in connection with the resources and future prospects of the organizations involved applications. For purposes of this action, the conditions and in the proposal are consistent with approval, as are the other commitments are deemed to be conditions imposed in supervisory factors the Board must consider under the BHC writing by the Board in connection with its findings and Act and the Bank Merger Act. decision herein and, as such, may be enforced in proceed ings under applicable law. CONVENIENCE AND NEEDS AND CRA The proposed transactions may not be consummated PERFORMANCE CONSIDERATION before the 15th calendar day after the effective date of this order, or later than three months after the effective date of In acting on a proposal under section 3 of the BHC Act and this order, unless such period is extended for good cause by the Bank Merger Act, the Board also must consider the the Board or the Reserve Bank, acting pursuant to del effects of the proposal on the convenience and needs of the egated authority. communities to be served and take into account the records By order of the Board of Governors, effective Novem of the relevant insured depository institutions under the ber 30, 2007. Community Reinvestment Act ("CRA").13 Citizens Bank received a "satisfactory" rating at its most recent CRA Voting for this action: Chairman Bernanke, Vice Chairman Kohn, performance evaluation by the Federal Reserve Bank of and Governors Warsh, Kroszner, and Mishkin, Cleveland ("Reserve Bank"), as of September 25, 2006. Champaign Bank received a "satisfactory" rating at its ROBERT DEY. FRIERSON Deputy Secretary of the Board most recent CRA performance evaluation by the Office of 13. 12 U.S.c. § 2901 et seq.; 12 U.S,c. § 1842(c)(2). 14,12 U.S.c. §322; 12 CFR 20S.6(b).
C4 Federal Reserve Bulletin 0 March 2008 Appendix zation in the United States.3 KeyCorp's only insured depository institution, Key Bank National Association (HKeyBank"), also of Cleveland, operates in 14 states.4 In BRANCHES IN OHIO TO BE ESTABLISHED BY New York, KeyCorp is the 12th largest depository organi CITIZENS BANK zation, controlling $11.5 billion in deposits, which repre sents 1.4 percent of the total amount of deposits of insured Urbana depository institutions in the state ("state deposits").5 601 Scioto Street USB, with total consolidated assets of approximately 504 North Main Street $3 billion, controls one subsidiary bank, Union State Bank, which operates in New York and Connecticut. In New York, Russells Point USB is the 30th largest depository organization, controlling 330 South Orchard Island Road approximately $1.8 billion in state deposits. On consummation of the proposal, KeyCorp would West Liberty remain the 24th largest depository institution in the United 205 South Detroit Street States, with total consolidated assets of approximately $96.7 billion. KeyCorp would control deposits of approxi Troy mately $59.2 billion, which represent less than I percent of 115 South Market the total amount of deposits of insured depository institu Dublin tions in the United States. In New York, KeyCorp would 6400 Perimeter Drive become the ninth largest depository organization, control ling deposits of approximately $13.3 billion, which repre Hilliard sent approximately 2 percent of state deposits. 4501 Cemetery Road INTERSTATE ANALYSIS Plain City 320 South Jefferson Avenue Section 3(d) of the BHC Act allows the Board to approve an application by a bank holding company to acquire Akron control of a bank located in a state other than the bank 529 North Cleveland Massillon Road holding company's home state if certain conditions are met. For purposes of the BHC Act, the home state of KeyCorp KeyCorp is Ohio,6 and USB is located in New York and Connecticut. 7 Cleveland, Ohio Based on a review of all the facts of record, including relevant state statutes, the Board finds that the conditions Order Approving the Merger of Bank for an interstate acquisition enumerated in section 3(d) of Holding Companies the BHC Act are met in this case.8 In light of all the facts of KeyCorp, a financial holding company within the meaning 3. Asset and asset ranking data are as of June 30, 2007; national of the Bank Holding Company Act ("BHC Act"), has deposit and ranking data are a~ of March 31, 2007; statewide deposit requested the Board's approval under section 3 of the BHC and ranking data are as of June 30, 2006. Actl to acquire U.S.B. Holding Co., Inc. ("USB"), Orange 4. Key Bank operates branches in Alaska, Colorado, Florida, Idaho, burg, and its subsidiary bank, Union State Bank, Nanuet, Indiana, Kentucky, Maine, Michigan, New York, Ohio, Oregon, Utab, Vermont, and Washington. both of New York,2 5. In the context of this order, insured depository institutions Notice of the proposal, affording interested persons an include commercial banks, savings banks, and savings associations. opportunity to submit comments, has been published 6. See 12 U.S.c. § 1842(d). A bank holding company's horne state (72 Federal Register 52,129 (2007». The time for filing is the state in which the total deposits of all banking subsidiaries of comments has expired, and the Board has considered the such company were the largest on July I, 1966, or the date on which the company became a bank holding company, whichever is later. proposal and all comments received in light of the factors 7. For purposes of section 3(d ) of the BHC Act, the Board considers set forth in the BHC Act. a bank to be located in the states in which the bank is chartered or KeyCorp, with total consolidated assets of approxi headquartered or operates a branch. See 12 U.S.c. §§ 1841(0)(4)-(7) mately $93.5 billion, is the 24th largest depository organi- and 1842(d)(I)(A) and I 842(d)(2)(B). 8.12 U.S.c. §§ 1842(d)(I)(A)-(B) and I 842(d)(2)-(3). KeyCorp is adequately capitalized and adequately managed, as defined by appli cable law. Union State Bank ha~ been in existence and operated for the L 12 U.S.C § 1842. minimum period of time required by applicable New York law, and the 2. In connection with this proposal, KYCA, Cleveland, Ohio, a proposal is not subject to an age requirement under Connecticut law. wholly owned subsidiary of KeyCorp, has applied to become a bank See N.Y. Banking Law § 223-a (2001) (five years). On consummation holding company by merging with USB. The resulting institution will of the proposal, KeyCorp would control less than 10 percent of the merge with KeyCorp, with KeyCorp as the surviving institution. total amount of deposits of insured depository institutions in the KeyCorp also proposes to acquire the nonbanking subsidiaries of USB United States and less than 30 percent of the total amount of deposits in accordance with section 4(k) of the BHC Act, 12 U.S.C § I 843(k). of insured depository institutions in New York (12 U.S.C.
Legal Developments: Fourth Quarter, 2007 C5 record, the Board is permitted to approve the proposal Consummation of the proposal would be consistent with under section 3(d) of the BHC Act. Board precedent and within the thresholds in the DOJ Guidelines in the Metropolitan New York-New Jersey banking market On consummation of the proposal, the COMPETITIVE CONSIDERATIONS 13 market would remain moderately concentrated as measured Seetion 3 of the BHC Act prohibits the Board from by the HHI, and numerous competitors would remain in the approving a proposal that would result in a monopoly or market. would be in furtherance of an attempt to monopolize the The DOJ has conducted a detailed review of the poten business of banking in any relevant banking market. The tial competitive effects of the proposal and has advised the BHC Act also prohibits the Board from approving a bank Board that consummation of the transaction would not acquisition that would substantially lessen competition in likely have a significantly adverse effect on competition in any relevant banking market, unless the anticompetitive the banking market. In addition, the appropriate banking effects of the proposal are clearly outweighed in the public agencies have been afforded an opportunity to comment interest by the probable effect of the proposal in meeting and have not objected to the proposaL the convenience and needs of the community to be servedY Based on all the facts of record, the Board concludes that KeyCorp and USB have subsidiary depository institu consummation of the proposal would not have a signifi tions that compete directly in the Metropolitan New York cantly adverse effect on competition or on the concentra New Jersey banking market.10 The Board has reviewed tion of resources in the banking market where KeyCorp and carefully the competitive effects of the proposal in this USB compete directly or in any other relevant banking banking market in light of all the facts of record. In market Accordingly, the Board has determined that com particular, the Board has considered the number of competi petitive considerations are consistent with approval. tors that would remain in the market, the relative shares of total deposits in depository institutions controlled by Key FINANCIAL, MANAGERIAL, AND SUPERVISORY Corp and USB in the markets ("market deposits"),l1 the CONSIDERATIONS concentration level of market deposits and the increases in these levels as measured by the Herfindahl-Hirschman Section 3 of the BHC Act requires the Board to consider the Index ("HHI") under the Department of Justice Merger financial and managerial resources and future prospects of Guidelines ("DOJ Guidelines" ),12 and other characteristics the companies and depository institutions involved in the of the markets. proposal and certain other supervisory factors, The Board has considered these factors in light of all the facts of record, including confidential reports of examination and § I 842(d)(2)(B)). The proposed transaction is not subject to any other supervisory information received from the relevant deposit cap in Connecticut under the BHC Act because KeyCorp does federal and state supervisors of the organizations involved not operate in Connecticut or subject to any other relevant deposit cap under Connecticut law. See 12 U.S.C. § I 842(d)(2)(B)-(C). All other in the proposal, and publicly reported and other financial requirements of section 3(d) of the BHC Act would be met on information, including information provided by KeyCorp. consummation of the proposal. In evaluating financial factors in expansion proposals by 9.12 U.S.c. § 1842(c)(I). banking organizations, the Board reviews the financial 10. The Metropolitan New York-New Jersey banking market is condition of the organizations involved on both a parent defined as Bronx, Dutchess. Kings. Nassau, New York, Orange, Putnam, Queens, Richmond, Rockland, Suffolk, Sullivan, Ulster, and only and consolidated basis, as well as the financial condi Westchester counties, all in New York; Bergen, Essex, Hudson, tion of the subsidiary depository institutions and the orga Hunterdon, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, nizations' nonbanking operations. In this evaluation, the Sussex, Union, and Warren counties and the northern portions of Board considers a variety of information, including capital Mercer County, all in New Jersey; Monroe and Pike counties in Pennsylvania; Fairfield County and portions of Litchfield and New Ha adequacy, asset quality, and earnings performance. In ven counties in Connecticut. assessing financial factors, the Board consistently has II. Deposit and market share data are as of June 30, 2006, adjusted to reflect mergers and acquisitions through August I, 2007, and are based on calculations in which the deposits of thrift institutions are is at least 1800 and the merger increases the HHI more than 200 included at 50 percent. The Board previously has indicated that thrift points. The DOJ has stated that the higher-tban-normal HHI thresholds institutions have become, or have the potential to become, significant for screening bank mergers and acquisitions for anticompetitive effects competitors of commercial banks. See, e.g., Midwest Financial Group, implicitly recognize the competitive effects of limited-purpose and 75 Federal Reserve Bulletin 386, 387 (1989); National City Corpora other nondepository financial entities. tion, 70 Federal Reserve Bulletin 743, 744 (1984). Thus, the Board 13. On consummation, the HHI would remain unchanged at 1226 regularly has included thrift deposits in the market share calculation on for the Metropolitan New York-New Jersey banking market. KeyCorp a 50 percent weighted basis. See, e.g., First Hawaiian, Inc., 77 Federal operates the 45th largest depository institution in the market, control Reserve Bulletin 52, 55 (1991). ling deposits of approximately $1.6 billion, which represent less than 12. Under the DOJ Guidelines, a market is considered unconcen 1 percent of market deposits. USB controls $1.9 billion in deposits, trated ifthe post-merger HHI is under 1000, moderately concentrated which also represents less than I percent of market deposits. Key Bank if the post-merger HHI is between 1000 and 1800, and highly would become the 29th largest depository institution in the market. concentrated if the post-merger HHI exceeds 1800. The Department of controlling deposits of approximately $3.5 billion, which represent Justice (HDOJ") has informed the Board that a bank merger or approximately I percent of market deposits. On consummation of the acquisition generally will not be challenged (in the absence of other proposal, 276 depository institutions would remain in the banking factors indicating anticompetitive effects) unless the post-merger HHI market.
C6 Federal Reserve Bulletin 0 March 2008 considered capital adequacy to be especially important. The records of the subsidiary depository institutions of Key Board also evaluates the financial condition of the com Corp and USB, data reported by KeyCorp and USB under bined organization at consummation, including its capital the Home Mortgage Disclosure Act ("HMDA"),'6 other position, asset quality, and earnings prospects, and the information provided by KeyCorp, confidential supervisory impact of the proposed funding of the transaction. information, and a public comment received on the pro The Board has considered the proposal carefully under posal. The commenter generally alleged that KeyCorp and the financial factors. KeyCorp, USB, and their subsidiary USB have failed to meet the credit needs of the communi depository institutions are well capitalized, and KeyCorp ties they serve, particularly the needs of LMI and predomi and its subsidiary depository institutions would remain so nantly minority communities in Westchester County, on consummation of the proposal. Based on its review of New York. In addition, the commenter contended that USB the record, the Board finds that KeyCorp has sufficient had not adequately served LMI communities due to an financial resources to effect the proposal. The proposed alleged insufficient number of branches and services in transaction is structured as a combination share exchange LMI communities. The commenter also alleged that Key and cash purchase, and KeyCorp will use existing resources Corp and USB made an insufficient number of home to fund the cash portion of the purchase. mortgage and small business loans in LMI areas in The Board also has considered the managerial resources Westchester County and the City of Newburgh in Orange of the organizations involved and the proposed combined County, New York. Furthermore, the commenter asserted, organization. The Board has reviewed the examination based on HMDA data reported in 2003, that Union State records of KeyCorp, USB, and their subsidiary depository Bank had engaged in disparate treatment of minority institutions, including assessments of their management, individuals in home mortgage lending. risk-management systems, and operations. In addition, the Board has considered its supervisory experiences and those A. eRA Performance Evaluations of the other relevant bank supervisory agencies with the organizations and their records of compliance with appli As provided in the CRA, the Board has reviewed the cable banking law, including anti-money-Iaundering laws. convenience and needs factor in light of the evaluations by KeyCorp, USB, and their subsidiary depository institutions the appropriate federal supervisors of the CRA perfor are considered to be well managed. The Board also has mance records of the relevant insured depository institu considered KeyCorp's plans for implementing the pro tions. An institution's most recent CRA performance evalu posal, including the proposed management after consum ation is a particularly important consideration in the mation. applications process because it represents a detailed, on-site Based on all the facts of record, the Board has concluded evaluation of the institution's overall record of perfor that considerations relating to the financial and managerial mance under the CRA by its appropriate federal super resources and future prospects of the organizations involved visor.17 in the proposal are consistent with approval, as are the other KeyBank received an "outstanding" rating at its most supervisory factors under the BHC Act. recent CRA performance evaluation by the Office of the Comptroller of the Currency ("OCC"), as of September 1, 2003 (HKeyBank 2003 Evaluation").ls Union State Bank CONVENIENCE AND NEEDS CONSIDERATIONS received a "satisfactory" CRA performance rating by the Federal Deposit Insurance Corporation ("FDIC"), as of In acting on a proposal under section 3 of the BHC Act, the June 27, 2005 ("Union 2005 Evaluation").19 KeyCorp Board is required to consider the effects of the proposal on proposes to merge Union State Bank into KeyBank soon the convenience and needs of the communities to be served after consummation of the transaction and has represented and to take into account the records of the relevant insured that it will implement KeyBank's CRA program at the depository institutions under the Community Reinvestment combined institution.20 Act ("CRA").'4 The CRA requires the federal financial CRA Peiformance of KeyBank. In addition to the overall supervisory agencies to encourage insured depository insti "outstanding" rating that Key Bank received in the Key tutions to help meet the credit needs of the local communi Bank 2003 Evaluation, the bank received an "outstanding" ties in which they operate, consistent with their safe and rating on each of the lending, investment, and service tests sound operation, and requires the appropriate federal finan for its overall CRA performance. The bank also received cial supervisory agency to take into account a relevant depository institution's record of meeting the credit needs of its entire community, including low- and moderate 16. 12 U.S.c. § 2801 et seq. income ("LMI") neighborhoods, in evaluating bank expan 17. See Interagency Questions and Answers Regarding Community sionary proposals,!5 Reinvestment, 66 Federal Register 36.620 and 36,639 (2001). 18. The evaluation period was January 1, 1999, through Decem The Board has considered carefully all the facts of ber 31, 2002, for the lending test and March 1. 1999, to August 31, record, including evaluations of the CRA performance 2003, for the service and investment tests. 19. The evaluation period was generally from January l, 2003, to June 27, 2005. 14. 12 U.S.C. §2901 et seq.; 12 U.S.C. § 1842(c)(2). 20. Key Bank has filed an application under the Bank Merger Act 15.12 U.S.C. §2903. with the GCC for approval of the merger (12 U.S,c. § 1828(c».
Legal Developments: Fourth Quarter, 2007 C7 "outstanding" ratings for its overall CRA perfonnance in In the KeyBank 2003 Evaluation, examiners noted that New York and in each of the eleven other states reviewed. KeyBank had an excellent level of qualified investments in Examiners reported that KeyBank's overall lending perfor every state it served. Examiners concluded that KeyBank's mance with respect to HMDA-reportable loans and small performance under the investment test in the Newburgh loans to businesses21 was very good and that the geo and New York MSAs assessment areas was consistent with graphic distribution was excellent in assessment areas the bank's overall excellent performance under the invest representing 70 percent of the bank's deposits. They further ment test in the assessment areas in New York. KeyCorp noted that KeyBank's distribution of HMDA-reportable represented that its qualified investments have totaled loans and small loans to businesses among borrowers of $112 million in the bank's New York assessment areas different income levels was excellent in the majority of the since the KeyBank 2003 Evaluation and noted that the bank assessment areas that were rated. Examiners also reported had actively participated in the New Market Tax Credit that the bank had a substantial volume of community Program. development lending in every rated area as well as an In the Key Bank 2003 Evaluation, examiners stated that overall, KeyBank had provided excellent accessibility to its excellent level of qualified investments in every state it branches and ATMs in LMI areas and for people of served. different income levels in states representing 66 percent of Examiners commented that in New York, the bank's its bank-wide deposits and good accessibility in the remain overall distribution of loans to borrowers of different ing states. Examiners rated the bank's perfonnance under income levels was excellent and that its geographic distri the service test in New York as "high satisfactory." They bution of loans was good.22 In the bank's Newburgh and commended KeyBank's level of community development New York MSAs assessment areas, examiners concluded services and the overall accessibility of the bank's deposi that KeyBank's perfonnance under the lending test was tory facilities in the state. Since the KeyBank 2003 Evalu consistent with the bank's overall excellent perfonnance ation, Key Bank represented that it has expanded its ser statewide under that test. Examiners commended the bank's vices by allowing LMI customers to cash payroll and record of extending lending small loans to business in the government checks for a special low fee and by offering Newburgh and New York MSAs and noted that the bank them free checking accounts with no minimum deposit extended a higher percentage of its business loans in LMI requirement. census tracts than the percentage of businesses that were in eRA Performance of Union State Bank. As noted, Union such tracts. They also noted KeyBank's high volume of State Bank received an overall "satisfactory" rating in the community development loan originations in the New Union 2005 Evaluation.24 Under the lending test, Union burgh and New York MSAs. State Bank received a "high satisfactory" rating, and Since the KeyBank 2003 Evaluation, KeyBank has examiners reported that the bank's distribution of loans in maintained its high level of lending activity. For example, its assessment area reflected a good penetration among KeyBank's HMDA-reportable loans throughout its assess retail customers of different income levels and business ment areas totaled more than $2.8 billion in 2005 and 2006. customers of varying sizes. Examiners noted that the high In Orange and Westchester counties and the assessment cost of housing and low levels of owner-occupied housing areas in New York, KeyBank's percentage of those loans to units in those tracts available for originations limited LMI individuals exceeded the percentage of loans made by lending opportunities. They reported that USB made ongo lenders in the aggregate ("aggregate lenders")23 during this ing efforts to increase lending in LMI areas, including period. KeyBank also made a substantial portion of its Union State Bank's continued use of the Federal Home small loans to businesses in amounts of less than $100,000 Loan Bank's ("FHLB") First Home Club program for LMI in 2005 and 2006. In addition, Key Bank represented that it borrowers.25 made approximately $2.4 billion in total qualified commu Examiners concluded that Union State Bank's overall nity development loans throughout its assessment areas, lending levels reflected good responsiveness to its assess which included $475 million in loans in the state of ment area's credit needs. They commended the bank's New York, since the KeyBank 2003 Evaluation. perfonnance for originating loans of varying amounts to businesses of different sizes. In addition, the examiners 21. "Small loans to businesses" are loans with original amounts of $1 million or less that are either secured by nonfarm, nonresidential 24. During the Union 2005 Evaluation, USB's single assessment properties or classified as commercial and industrial loans. area included all of the areas in New York and Connecticut where USB 22. KeyCorp's statewide rating for New York was based on a operated branches. The FDIC's review of Union State Bank under the full-scope evaluation conducted in KeyCorp's Buffalo and Niagara lending test in this evaluation included one of USB's nondepository Falls Metropolitan Statistical Area ("MSA") assessment area. Limited subsidiaries for grants and donations. scope evaluations were conducted in KeyCorp's ten other New York 25. UBS offered a first-time homebuyer's program to LMI individu assessment areas and in particular, in the New York MSA, which als. Under this program, the FHLB provided down-payment and includes Westchester County and the Newburgh MSA, including the closing-cost assistance by granting up to $3 in matching funds for each city of Newburgh. $1 saved by the household. USB also offered participants a reduced 23. The lending data of the aggregate lenders represent the cumu interest rate and application fees as well as lower closing costs. lative lending for all financial institutions that reported HMDA data in Applicants were required to attend homeownership counseling with a a given market. local community housing organization.
C8 Federal Reserve Bulletin 0 March 2008 noted that a significant majority of Union State Bank's Although the HMDA data might reflect certain dispari business loan originations in 2003 were small loans to ties in the rates of loan applications, originations, and businesses with revenues of $ I million or less. They also denials among members of different racial or ethnic groups noted that Union State Bank's level of community develop in certain local areas, they provide an insufficient basis by ment lending was outstanding. themselves on which to conclude whether or not KeyCorp Examiners rated Union State Bank's community devel or USB are excluding any group on a prohibited basis. The opment investment efforts as "outstanding" under the Board recognizes that HMDA data alone, even with the investment test and reported that Union State Bank had recent addition of pricing information, provide only limited maintained an excellent level of qualified investments information about the covered loans.z8 HMDA data, there (approximately $24 million) within the areas under review. fore, have limitations that make them an inadequate basis, In addition, they also noted that Union State Bank pur absent other information, for concluding that an institution chased approximately $16.9 million in CRA-qualified has engaged in illegal lending discrimination. investments since its previous evaluation, a substantial The Board is nevertheless concerned when HMDA data amount of investments that evidenced USB's efforts to for an institution indicate disparities in lending and believes address qualified investment opportunities and to promote that all lending institutions are obligated to ensure that their affordable housing within its assessment area. Examiners lending practices are based on criteria that ensure not only also noted that USB participated in a consortium of lending safe and sound lending but also equal access to credit by institutions operating in New York and New Jersey that creditworthy applicants regardless of their race or ethnicity. provided affordable housing assistance by offering con Because of the limitations of HMDA data, the Board has struction and permanent financing for identified community considered these data carefully and taken into account other affordable housing projects, such as single-family, apart information, including examination reports that provide ment, or elderly housing throughout the two states. on-site evaluations of compliance with fair lending laws by In the Union 2005 Evaluation, Union State Bank re KeyCorp, USB, and their subsidiaries. The Board also has ceived a "high satisfactory" rating on the service test. consulted with the GCC, the primary federal supervisor of Examiners reported that the bank's delivery systems were KeyCorp's subsidiary bank, and the FDIC, the primary reasonably accessible to essentially all portions of the federal supervisor of USB's subsidiary bank, institution's assessment area, including LMI census tracts. KeyCorp has stated that its fair lending and consumer They noted that Union State Bank's services, including compliance policies and procedures will apply to the business hours, were tailored to the convenience and needs combined organization after consummation of the pro of the bank's assessment area, particularly LMI areas, and posal. KeyCorp also will continue to use its loan origina included Spanish-language services for Latino customers. tion, underwriting, processing, and servicing systems, The Examiners also commended USB for providing a relatively record, including confidential supervisory information, high level of community development services. In addition, indicates that KeyCorp has taken steps to ensure compli they noted that Union State Bank personnel provided free ance with fair lending and other consumer protection laws. technical assistance to small business owners and entrepre KeyCorp has corporate-wide policies and procedures to neurs in connection with the bank's establishment of a help ensure compliance with all fair lending and other Community Business Lending Team to increase lending in consumer protection laws and regulations, and its ongoing LMI communities.26 monitoring is designed to ensure compliance with policies and procedures. In addition, KeyCorp represented that its B. HMDA and Fair Lending Record compliance staff members frequently receive education on best compliance practices and that USB personnel will The Board has carefully considered the fair lending records receive the same training. and HMDA data of KeyCorp and USB in light of the public The Board also has considered the HMDA data in light comment received on the proposal. The commenter alleged, of other information, including the programs described based on HMDA data, that USB had denied the home above and the overall performance records of the subsid mortgage loan applications of African American and Latino iary banks of KeyCorp and USB under the CRA. These borrowers more frequently than those of nonminority appli established efforts and records of performance demonstrate cants. The Board has focused its analysis on the 2005 and 2006 HMDA data reported by KeyCorp and USB.27 ties, New York. The Board's analysis of HMDA data for Union State Bank's assessment area also included Fairfield County, Connecticut. 26. The commenter also challenged the location and record of 28. The data, for example, do not account for the possibility that an opening Union State Bank's branches. As noted above, Union State institution's outreach efforts may attract a larger proportion of margin Bank will be merged into Key Bank, and the OCC will review ally qualified applicants than other institutions attract and do not KeyBank's record of opening branches in New York in connection provide a basis for an independent assessment of whether an applicant with the merger application and during the course of conducting CRA who was denied credit was, in fact, creditworthy. In addition, credit evaluations. history problems, excessive debt levels relative to income, and high 27. The Board analyzed HMDA data for KeyBank's assessment loan amounts relative to the value of the real estate collateral (reasons areas nationwide, KeyBank's and Union State Bank's assessment most frequently cited for a credit denial or higher credit cost) are not areas in New York, and specifically in Westchester and Orange coun- available from HMDA data.
Legal Developments: Fourth Quarter. 2007 C9 that the institutions are active in helping to meet the credit Voting for this action: Chairman Bernanke, Vice Chairman Kohn, needs of their entire communities. and Governors Warsh, Kroszner, and Mishkin. C. Conclusion on Convenience and Needs and ROBERT DEY. FRIERSON Deputy Secretary of the Board CRA Performance The Board has considered carefully all of the facts of Midwest Regional Bancorp, Inc. record, including reports of examination of the CRA records of the institutions involved, information provided Festus, Missouri by KeyCorp, comments received on the proposal, and confidential supervisory information. KeyCorp represented Order Approving the Fonnation of a Bank that the proposal will result in greater convenience for Holding Company KeyCorp and USB customers through KeyCorp's explora tion of new methods and approaches to enhance the level of Midwest Regional Bancorp, Inc. ("Midwest") has re service provided to the communities currently served by quested the Board's approval under section 3 of the Bank USB, such as working to encourage residents who depend Holding Company Act ("BHC Act")1 to become a bank on alternative financial service providers for banking ser holding company and to acquire all the voting shares of vices to establish a customer relationship with KeyBank. In Federated Bancshares, Inc. ("Federated"), Stilwell, Kan addition, KeyCorp stated that its customers would benefit sas, and thereby acquire control of its subsidiary bank, The from a more extensive network of branch offices, ATMs, Bank of Otterville ("Bank"), Otterville, Missouri.2 telephone call centers, and other facilities. Based on a Notice of the proposal, affording interested persons an review of the entire record, and for the reasons discussed opportunity to submit comments, has been published above, the Board concludes that considerations relating to (72 Federal Register 19,705 (2007». The time for filing the convenience and needs factor and the CRA perfor comments has expired, and the Board has considered the mance records of the relevant insured depository institu application and all comments received in light of the tions are consistent with approval of the proposaL 29 factors set forth in section 3 of the BHC Act. Midwest is a newly organized corporation formed for the purpose of acquiring control of Federated and Bank. CONCLUSION Bank, with total assets of approximately $20 million, is the Based on the foregoing, and in light of all the facts of 298th largest insured depository institution in Missouri, record, the Board has determined that the applications controlling deposits of approximately $18.7 million, which should be, and hereby are, approved. In reaching its represent less than I percent of the total amount of deposits conclusion, the Board has considered all the facts of record of insured depository institutions in the state.3 in light of the factors that it is required to consider under the BHC Act and other applicable statutes. The Board's approval is specifically conditioned on compliance by COMPETITIVE CONSIDERATIONS KeyCorp with the conditions in this order and all the Section 3 of the BHC Act prohibits the Board from commitments made to the Board in connection with the approving a proposal that would result in a monopoly or proposaL For purposes of this transaction, these commit that would be in furtherance of an attempt to monopolize ments and conditions are deemed to be conditions imposed the business of banking in any relevant banking market. in writing by the Board in connection with its findings and The BHC Act also prohibits the Board from approving a decision and, as such, may be enforced in proceedings proposal that would substantially lessen competition in any under applicable law. relevant banking market, unless the anticompetitive effects The proposal may not be consummated before the 15th of the proposal are clearly outweighed in the public interest calendar day after the effective date of this order, or later by the probable effect of the proposal in meeting the than three months after the effective date of this order convenience and needs of the community to be served.4 unless such period is extended for good cause by the Board Midwest does not currently control a depository institu or by the Federal Reserve Bank of Cleveland, acting tion. Based on all the facts of record, the Board has pursuant to delegated authority. concluded that consummation of the proposal would not By order of the Board of Governors, effective Novem have a significantly adverse effect on competition or on the ber 2,2007. 29. The commenter also requested that KeyBank demonstrate that l. 12 U.S.C. § 1842. the compositions of its employees and board of directors reflect the 2. Federated owns approximately 93 percent of the voting shares of community which it serves. The Board notes that the racial, ethnic, or Bank. gender makeup of a banking organization's staff or management is not 3. Asset data, deposit data, and state rankings are as of June 30, a factor that the Board is permitted to consider under the BHC Act. See 2007. In this context, insured depository institutions include commer Western Bancshares, inc. v. Board of Governors, 480 F.2d 749 (lOth cial banks, savings banks, and savings associations. Cir. 1973). 4. See 12 U.S.C. § I 842(c)(1).
ClO Federal Reserve Bulletin 0 March 2008 concentration of banking resources in any relevant banking and has consulted the other relevant supervisory agencies market and that competitive considerations are consistent concerning those plans.6 with approval. Based on all the facts of record, including comments and information received from regulators and interested parties, the Board has concluded that considerations relating to the FINANCIAL, MANAGERIAL, AND SUPERVISORY financial and managerial resources and future prospects of CONSIDERATIONS the institutions involved in the proposal are consistent with approval, as are the other supervisory factors under the Section 3 of the BHC Act requires the Board to consider the BHCAct. financial and managerial resources and future prospects of the companies and depository institutions involved in the CONVENIENCE AND NEEDS CONSIDERATIONS proposal and certain other supervisory factors. The Board has considered these factors in light of all the facts of In acting on proposals under section 3 of the BHC Act, the record, including confidential reports of examination and Board also must consider the effects of the proposal on the other confidential supervisory information from the Divi convenience and needs of the communities to be served and sion of Finance of the State of Missouri and the Federal to take into account the records of the relevant insured Deposit Insurance Corporation ("FDIC"), the primary depository institutions under the Community Reinvestment state and federal supervisors of Bank, and information Act ("CRA").7 Bank received a "satisfactory" rating at its provided by Midwest. most recent CRA performance evaluation by the FDIC, as In evaluating financial factors in bank holding company of August 1, 2004. After consummation of the proposal, proposals, the Board reviews the financial condition of the Midwest does not plan to alter Bank's current CRA poli applicant and the target subsidiary depository institutions, cies. Midwest has represented that the proposal would particularly with respect to capital adequacy, asset quality, provide greater convenience to Bank's customers by offer and earnings performance. In addition, for proposals involv ing Internet access for their accounts and electronic balance ing small bank holding companies, the Board evaluates the transfers, automatic bill paying, and other services not institutions' compliance with the Board's Small Bank currently offered by Bank. Holding Company Policy Statement ("Policy Statement"), Based on all the facts of record, the Board has concluded including compliance with those measures that are used to that considerations relating to the convenience and needs assess capital adequacy and overall financial strength.s In factor and the eRA performance record of the relevant assessing financial factors, the Board consistently has depository institution are consistent with approval. considered capital adequacy to be especially important. The Board also evaluates the financial condition of the com CONCLUSION bined organization at consummation, including its capital position, asset quality, and earnings prospects, and the Based on the foregoing and all facts of record, the Board impact of the proposed funding of the transaction. has determined that the application should be, and hereby The Board has considered carefully the financial factors is, approved. In reaching its conclusion, the Board has of the proposal. Bank currently is well capitalized and considered all the facts of record in light of the factors that would remain so on consummation of the proposal, and it is required to consider under the BHC Act. The Board's Federated is in compliance with relevant capital standards. approval is specifically conditioned on compliance by Based on its review of the record, the Board also finds that Midwest with the conditions in this order and all the Midwest would have sufficient financial resources to effect commitments made to the Board in connection with the the proposal and to comply with the Board's Policy State proposal. For purposes of this action, these commitments ment. The proposed transaction is structured as a cash and conditions are deemed to be conditions imposed in purchase funded from the proceeds of an issuance of new writing by the Board in connection with its findings and holding company stock. decision and, as such, may be enforced in proceedings The Board also has considered the managerial resources under applicable law. of Midwest, Federated, and Bank. The Board has reviewed The proposed transaction may not be consummated the examination records of Federated and Bank, including before the 15th calendar day after the effective date of this assessments of their management, risk-management sys order, or later than three months after the effective date of tems, and operations. In addition, the Board has considered this order, unless such period is extended for good cause by its supervisory experiences and those of the other relevant the Board or the Federal Reserve Bank of Kansas City, bank supervisory agencies with the organizations and their acting pursuant to delegated authority. records of compliance with applicable banking laws and with anti-money-Iaundering laws. The Board also has 6. The Board received a comment regarding a member of Midwesfs considered Midwest's plans to implement the proposal, proposed management from a fonner employer. The Board has including the proposed management after consummation, considered carefully the management record in banking of the indi vidual identified by tbe commenter and hru; consulted with the primary federal and state supervisors of the banks where that individual wru; previously employed. 5. 12 CFR 225. Appendix C. 7. 12 U.S.c. §2901 et seq.
Legal Developments: Fourth Quarter, 2007 Cll By order of the Board of Governors, effective Novem Notice of the proposal, affording interested persons an ber S, 2007. opportunity to submit comments, has been published in accordance with the relevant statutes and the Board's Rules Voting for this action: Chairman Bernanke, Vice Chairman Kohn, of Procedure (72 Federal Register 56,762 (2007».6 As and Governors Warsh, Kroszner, and Mishkin. required by the Bank Merger Act, a report on the competi tive effects of the mergers was requested from the United ROBERT DEY. FRIERSON Deputy Secretary of the Board States Attorney General and a copy of the request was provided to the Federal Deposit Insurance Corporation ("FDIC"). The time for filing comments has expired. and ORDERS ISSUED UNDER SECTION 4 OF the Board has considered the proposal and all comments THE BANK HOLDING COMPANY ACT received in light of the factors set forth in the BHC Act, the Bank Merger Act, and the FRA. Allied Irish, with total consolidated assets equivalent to Allied Irish Banks, p. I. c. approximately $252 billion, is the largest depository orga Dublin, Ireland nization in Ireland and provides a full range of banking, financial, and related services primarily in Ireland, the United Kingdom, and the United States.7 Allied Irish M &T Bank Corporation operates a branch in New York and through M&T controls Buffalo, New York two subsidiary banks, M&T Bank and M&T Bank, National Association, Oakfield, New York, which operate in eight Order Approving Acquisition of a Savings states. M&T, with total consolidated assets of $57.4 billion. is the 30th largest depository organization in the United Association and a Bank, Merger of States, controlling $33.1 billion in deposits, which repre Depository Institutions, Establishment of sents less than I percent of the total amount of deposits of Branches, and Notice to Engage in insured depository institutions in the United States. M&T is Nonbanking Activities the seventh largest depository organization in New York, controlling deposits of approximately $20.4 billion in New York, which represent approximately 2.6 percent of Allied Irish Banks, p.Lc. (HAlIied Irish") and its subsidiary, the total amount of deposits of insured depository institu M&T Bank Corporation (HM&T") (collectively, "Appli tions in the state ("state deposits"). cants"), bank holding companies within the meaning of the Partners has total consolidated assets of approximately Bank Holding Company Act ("BHC Act"), have requested $3.7 billion, and its subsidiary insured depository institu the Board's approval under sections 4(c)(8) and 4(j) of the tions operate only in New York. Partners is the 28th largest BHC Act to merge M&T with Partners Trust Financial depository organization in New York, controlling deposits GrouP. Inc. ("Partners") and acquire its subsidiary savings of approximately $2.3 billion. association, Partners Trust Bank ("Partners Bank"), and On consummation of the proposal, and after accounting Partners' other non banking subsidiaries, all of Utica, for proposed divestitures, Allied Irish would become the New York. 1 Applicants also have requested the Board's 28th largest insured depository organization in the United approval under section 3 of the BHC Act to acquire States, with total consolidated assets of approximately Partners' indirect subsidiary bank, Partners Trust Munici $61.1 billion. Allied Irish would control deposits of approxi pal Bank ("Municipal Bank"),2 also of Utica.3 mately $35.3 billion, representing less than 1 percent of the In addition, M&T's subsidiary state member bank, total amount of deposits of insured depository institutions Manufacturers & Traders Trust Company ("M&T Bank"), in the United States. In New York, M&T would remain the also of Buffalo, has requested the Board's approval under seventh largest insured depository organization, controlling section IS( c) of the Federal Deposit Insurance Act4 ("Bank deposits of approximately $22.S billion, which represent Merger Act") to merge with Partners Bank and Municipal approximately 2.9 percent of state deposits. Bank, with M&T Bank as the surviving entity. M&T Bank The Board previously has determined by regulation that also has applied under section 9 of the Federal Reserve Act the operation of a savings association by a bank holding ("FRA") to establish and operate branches at the main office and branches of Partners Bank.s company is closely related to banking for purposes of section 4(c)(S) of the BHC Act.8 The Board requires that savings associations acquired by bank holding companies I. 12 U.S.c. §§ 1843(c)(8) and (j); 12 CFR 225.24. The nonbanking subsidiaries of Partners and activities for which Applicants have filed a notice under sections 4(c)(8) and 40) of the BHC Act are listed in 6. 12 CFR 262.3(b). Appendix A. 7. Asset and nationwide deposit-ranking data are as of June 30, 2. Municipal Bank, a wholly owned subsidiary of Partners Bank, is 2007. Statewide deposit and ranking data are as of June 30, 2006, and a limited-purpose bank that accepts only municipal deposits. reflect merger activity through June 30, 2007. In this context, insured 3. 12 U.S.C. § 1842. depository institutions include commercial banks. savings banks, and 4. 12 U.S.C. § 1828(c). savings associations. 5. 12 U.S.C. § 321. 8. 12 CPR 225.28(b)(4)(ii).
C 12 Federal Reserve Bulletin 0 March 2008 conform tbeir direct and indirect activities to tbose permis A. Acquisition of Insured Depository Institutions sible for bank holding companies under section 4 of tbe BHC Act.9 M&T has acknowledged that it is required to Applicants and Partners have subsidiary insured depository institutions that compete directly in three banking markets conform all the activities of Partners Bank to those that are in New York: Binghamton, Syracuse, and Utica-Rome. The permissible under section 4(c)(8) of the BHC Act and Board has reviewed carefully the competitive effects of the Regulation Y. The Board also has determined that the proposal in each of these banking markets in light of all the activities conducted by the nonbanking subsidiaries of facts of record. In particular, the Board has considered the Partners are closely related to banking, and M&T has number of competitors that would remain in the markets, acknowledged that it must conduct those activities in the relative share of total deposits of Applicants and accordance with the Board's regulations and orders. to Partners in the markets (Hmarket deposits"),15 tbe concen Section 4(j)(2)(A) of the BHC Act requires the Board to tration level of market deposits and the increase in this determine that the proposed acquisition of Partners Bank level as measured by the Herfindahl-Hirschman Index and the nonbanking subsidiaries of Partners "can reason ("HHl") under the Department of Justice Guidelines ably be expected to produce benefits to the public that ("DOJ Guidelines"), 16 other characteristics of the markets, outweigh possible adverse effects, such as undue concen and commitments made by Applicants to divest three tration of resources, decreased or unfair competition, con branches of M&T Bank in the Binghamton market. flicts of interests, or unsound banking practices." II As part Banking Market with Divestiture. M&T Bank is the of its evaluation under these public interest factors, the largest depository institution in the Binghamton banking Board reviews the financial and managerial resources of the market, controlling deposits of approximately $650.1 mil companies involved, the effect of the proposal on competi lion, which represent approximately 25.4 percent of market tion in the relevant markets, and the public benefits of the deposits.17 Partners Bank controls deposits of approxi proposal.12 In acting on a notice to acquire a savings mately $680.6 million, which when weighted at 50 percent association, the Board also reviews the records of perfor represent 13.3 percent of market deposits, making Partners mance of the relevant insured depository institutions under Bank the fifth largest depository institution in the market. the Community Reinvestment Act ("CRA").13 The Board To reduce tbe potential adverse effects on competition in has considered the proposal under these factors in light of the Binghamton banking market, Applicants have commit all the facts of record, including confidential supervisory ted to divest three branches of M&T Bank that have at least and examination information, publicly reported financial information, and other information provided by Applicants. 15. Deposit and market-share data are as of June 30, 2006, and reflect merger activity through June 30, 2007. The deposits of thrift institutions are included at 50 percent, except as noted below. The COMPETITIVE CONSIDERATIONS Board previously has indicated that thrift institutions have become, or have the potential to become, significant competitors of commercial The Board has considered carefully the competitive effects banks. See, e.g., Midwest Financial Group, 75 Federal Reserve of Applicants' proposed acquisition of Partners, including Bulletin 386 (1989); National City Corporation, 70 Federal Reserve Bulletin 743 (1984). Thus, the Board regularly has included thrift the acquisition of Partners Bank, Municipal Bank, and institution deposits in the market-share calculation on a 50 percent Partners' non banking subsidiaries in light of all the facts of weighted basis. See, e.g., First Hawaiian, Inc., 77 Federal Reserve record. Section 3 of the BHC Act and tbe Bank Merger Act Bulletin 52 (1991), In this case. Partners Bank's deposits are weighted prohibit the Board from approving a proposal that would at 50 percent pre-merger and at 100 percent post-merger to reflect the result in a monopoly or would be in furtherance of any resulting ownership by a commercial banking organization. 16. Under the DOJ Guidelines, a market is considered unconcen attempt to monopolize the business of banking in any trated if the post-merger HHI is under 1000, moderately concentrated relevant banking market. Both acts also prohibit the Board if the post-merger HHI is between 1000 and 1800, and highly from approving a bank acquisition unless the anticompeti concentrated if the post-merger HHI exceeds 1800. The Department of tive effects of the proposal are clearly outweighed in the Justice ("DO]") has informed the Board that a bank merger or acquisition generally will not be challenged (in the absence of other public interest by its probable effect in meeting the conve factors indicating anticompetitive effects) unless the post-merger HHI nience and needs of the community to be served.14 In is at least 1800 and the merger increases the HHI more than 200 addition, the Board must consider the competitive effects of points. The DOl has stated that the higher-than-normal HHI thresholds a proposal to acquire a savings association and other for screening bank mergers and acquisitions for anticompetitive effects nonbanking companies under the public benefits factor of implicitly recognize the competitive effects of limited-purpose and other nondepository financial entities. section 4 of the BHC Act. 17. The Binghamton banking market is defined as Broome and Tioga counties and the townships of Afton, Coventry, German, Greene, Lincklaen, McDonough, Otselic, Oxford, Pharsalia. Pitcher. Preston, and Smithville, all in Chenango County, New York; and the 9.Id. townships of Apolacon. Bridgewater, Choconut, Franklin, Forest 10. 12 CFR 225.28(b)(I), (2)(vi), and (7)(i). Lake. Friendsville Borough, Great Bend, Great Bend Borough, Hall II. 12 U.S.C. § 1843(j)(2)(A). stead Borough, Harmony, Jackson, Jessup, Lanesboro Borough, Lib 12. See 12 CFR 225.26; see, e.g., BancOne Corporation, 83 Fed erty, Little Meadows Borough, Middletown, Montrose Borough, eral Reserve Bulletin 602 (1997). New Milford, New Milford Borough, Oakland, Oakland Borough, 13. 12 U.S.c. § 2901 et seq. Silver Lake. and Susquehanna Depot Borough, all in Susquehanna 14. 12 U.S.C. § 1842(c)(1); 12 U.S.c. § 1828(c)(5). County, Pennsylvania.
Legal Developments: Fourth Quarter. 2007 Cl3 $94.5 million in total deposits.18 On consummation of the Moreover, the record of recent entry into the Bingham proposed merger, and after accounting for the proposed ton banking market evidences its attractiveness for entry. divestiture, M&T Bank would remain the largest deposi Since 2003, one depository institution has entered the tory institution in the market, controlling deposits of market de novo. Other factors also indicate that the market approximately $1.2 billion, which would represent not remains attractive for entry. For example, the market's more than 42.7 percent of market deposits. The HHI would average annualized income growth from 2001 to 2005 increase not more than 876 points to 2365. exceeded the average annualized income growth for the The Board has considered whether other factors either same period for all metropolitan areas in New York. mitigate the competitive effects of the proposal or indicate Banking Markets without Divestiture. The concentration that the proposal would have a significantly adverse effect levels on consummation of the proposal in the remaining on competition in the Binghamton market.19 A number of banking markets, Syracuse and Utica-Rome, would be factors indicate that the increase in concentration in this consistent with Board precedent and within the thresholds banking market, as measured by the HHI and market share in the DOJ Guidelines without divestiture.22 On consumma of the combined organization, overstates the potential tion of the proposal, the Syracuse and Utica-Rome banking competitive effects of the proposal in the market. On markets would remain moderately concentrated and numer consummation of the transaction and the proposed divesti ous competitors would remain in each market. ture to a competitively suitable insured depository institu tion, at least nine other insured depository institutions B. Other Nonbanking Activities would continue to compete in the market, including two banks with branch networks that are larger than Partners The Board also has carefully considered the competitive Bank's network. effects of M&Ts proposed acquisition of Partners' other Moreover, the Board notes that three community credit nonbanking subsidiaries in light of all the facts of record. unions also exert a competitive influence in the Bingham M&T and Partners both engage in credit extension, asset ton banking market.20 Each institution offers a wide range management, and securities brokerage activities. The mar of consumer products, operates street-level branches, and kets for those activities are regional or national in scope has memberships open to almost all the residents in the and unconcentrated, and there are numerous providers of market. The Board concludes that their activities in this these services. banking market exert a sufficient competitive influence to C, Agency Views and Conclusion on Competitive mitigate, in part, the potential competitive effects of the Considerations proposa\.21 The DOJ also reviewed the probable competitive effects of 18. Applicants have committed that, before consummation of the the proposal and advised the Board that consummation of proposed merger, they will execute an agreement for the proposed the transaction would not likely have a significantly adverse divestiture in the Binghamton banking market with a purchaser that effect on competition in any relevant banking market where the Board determines to be competitively suitable. Applicants also the subsidiary depository institutions of Applicants and have committed to complete the divestiture within 180 days after Partners compete directly or in any relevant market for the consummation of the proposed merger. In addition, Applicants have committed that, if they are unsuccessful in completing the proposed other proposed nonbanking activities. In addition, the divestiture within such time period, they will transfer any unsold appropriate banking agencies have been afforded an oppor branches to an independent trustee who will be instructed to sell the tunity to comment and have not objected to the proposal. branches to an alternate purchaser or purchasers in accordance with Based on all the facts of record, the Board concludes that the terms of this order and without regard to price. Both the trustee and any alternate purchaser must be deemed acceptable by the Board. See. consummation of the proposed transaction, including the e.g., BankAmerica Corporation, 78 Federal Reserve Bulletin 338 acquisition of Partners Bank, Municipal Bank, and Part (1992); United New Mexico Financial Corporation, 77 Federal ners' other nonbanking subsidiaries, would not have a Reserve Bulletin 484 (1991). significantly adverse effect on competition or on the con 19. The number and strength of factors necessary to mitigate the competitive effects of a proposal depend on the size of the increase and centration of resources in any relevant banking market or in resulting level of concentration in a banking market. See NationsBank any other relevant market. Corp., 84 Federal Reserve Bulletin 129 (1998). 20. The Board previously has considered the competitiveness of FINANCIAL, MANAGERIAL, AND SUPERVISORY certain active credit unions as a mitigating factor. See, e.g., Regions Financial Corporation, 93 Federal Reserve Bulletin CI6 (2007); CONSIDERATIONS Wachovia Corporation, 92 Federal Reserve Bulletin CI83 (2006); F.N.B. Corporation, 90 Federal Reserve Bulletin 481 (2004); Gateway In reviewing the proposal under sections 3 and 4 of the Bank & Trust Co., 90 Federal Reserve Bulletin 547 (2004). BHC Act and the Bank Merger Act, the Board is required to 21. The three community credit unions control approximately consider the financial and managerial resources and future $1 billion in deposits in the market, which represents approximately 16 percent of market deposits on a 50 percent weighted basis. prospects of the companies and depository institutions Accounting for the revised weightings of these deposits and taking the involved in the proposal and certain other supervisory proposed divestitures into account, Applicants would control approxi mately 36.3 percent of market deposits on consummation of the proposal, and the HHI would increase not more than 631 points to 22. The effects of the proposal on the concentration of banking 1886. resources in these markets are described in Appendix B.
Cl4 Federal Reserve Bulletin 0 March 2008 factors. The Board has carefully considered these factors in supervisory factors.23 Section 3 of the BHC Act also light of all the facts of record, including confidential provides that the Board may not approve an application supervisory and examination information from the various involving a foreign bank unless the bank is subject to U.S. banking supervisors of the institutions involved, pub comprehensive supervision or regulation on a consolidated licly reported and other financial information, and informa basis by the appropriate authorities in the bank's home tion provided by Applicants. The Board also has consulted country.24 As noted, the CBI is the primary supervisor of with the Central Bank of Ireland ("CBI"), the agency with Irish financial institutions, including Allied Irish. The Board primary responsibility for the supervision and regulation of previously has determined that Allied Irish is subject to Irish financial institutions, including Allied Irish. comprehensive supervision on a consolidated basis by its In evaluating the financial resources in expansion pro home-country supervisor.2.5 Based on this finding and all posals by banking organizations, the Board reviews the the facts of record, the Board has concluded that Allied financial condition of the organizations involved on both a Irish continues to be subject to comprehensive supervision parent-only and consolidated basis, as well as the financial on a consolidated basis by its home-country supervisor. condition of the subsidiary insured depository institutions and significant nonbanking operations. In this evaluation, CONVENIENCE AND NEEDS AND CRA the Board considers a variety of measures, including capital PERFORMANCE CONSIDERATIONS adequacy, asset quality, and earnings performance. In assessing financial resources, the Board consistently has In acting on a proposal under section 3 of the BHC Act and considered capital adequacy to be especially important. The the Bank Merger Act, the Board also must consider the effects of the proposal on the convenience and needs of the Board also evaluates the financial condition of the com bined organization at consummation, including its capital communities to be served and take into account the records of the relevant insured depository institutions under the position, asset quality, and earnings prospects, and the CRA. As noted, the Board also must review the records of impact of the proposed funding of the transaction. performance under the CRA of the relevant insured deposi The Board has carefully considered the financial re tory institutions when acting on a notice under section 4 of sources of the organizations involved in the proposal. The the BHC Act to acquire a savings association.26 M&T Bank capital levels of Allied Irish would continue to exceed the received an "outstanding" rating at its most recent CRA minimum levels that would be required under the Basel Capital Accord and are considered to be equivalent to the capital levels that would be required of a U.S. banking 23. Section 3 of the BHC Act also requires the Board to determine organization. In addition, M&T, Partners, and the subsid that an applicant has provided adequate assurances that it will make iary depository institutions involved are well capitalized available to the Board such information on its operations and activities and would remain so on consummation. Based on its and those of its affiliates that the Board deems appropriate to deter mine and enforce compliance with the BHC Act (12 U.S.C. review of the record, the Board finds that Applicants have § I 842(c)(3)(A»). The Board has reviewed the restrictions on disclosure sufficient financial resources to effect the proposal. The in the relevant jurisdictions in which Applicants operate and has proposed transaction is structured as a partial share ex communicated with relevant government authorities concerning access change and partial cash purchase of shares. Applicants will to information. In addition, Allied Irish previously has committed that, to the extent not prohibited by applicable law, it will make available to use existing resources to fund the cash purchase of the the Board such information on the operations of its affiliates that the shares. Board deems necessary to determine and enforce compliance with the The Board also has considered the managerial resources BHC Act, the International Banking Act, and other applicable federal of the organizations involved. The Board has reviewed the laws. Allied Irish also previously has committed to cooperate with the examination records of Applicants, Partners, and their Board to obtain any waivers or exemptions that may be necessary to enable its affiliates to make such information available to the Board. In subsidiary depository institutions, including assessments of light of these commitments. the Board has concluded that Allied Irish their management, risk-management systems, and opera has provided adequate assurances of access to any appropriate infor tions. In addition, the Board has considered its supervisory mation the Board may request. experiences and those of other relevant banking supervi 24. 12 U.S.c. § 1843(c)(3)(B). As provided in Regulation Y, the Board determines whether a foreign bank is subject to consolidated sory agencies, including the Office of Thrift Supervision home-country supervision under the standards set forth in Regula ("OTS") and the FDIC, with the organizations and their tion K See 12 CFR 225.13(a)(4). Regulation K provides that a foreign records of compliance with applicable banking law and bank will be considered subject to comprehensive supervision or with anti-maney-laundering laws. Applicants, Partners, and regulation on a consolidated basis if the Board determines that the their subsidiary depository institutions are considered to be bank is supervised or regulated in such a manner that its home-country supervisor receives sufficient information on the worldwide operations well managed. The Board also has considered Applicants' of the bank, including its relationship with any affiliates, to assess the plans for implementing the proposal, including the pro bank's overall financial condition and its compliance with laws and posed management after consummation. regulations. See 12 CFR 2IL24(c)(I). Based on all the facts of record, the Board has concluded 25. See Anglo irish Bank Corporation, p.l.c., 85 Federal Reserve Bulletin 587 (1999); Allied irish Banks. p.l.c., 83 Federal Reserve that considerations relating to the financial and managerial Bulletin 607 (1997). resources and future prospects of the organizations involved 26. See. e.g., North Fork Bancorporation. inc., 86 Federal Reserve .in the proposal are consistent with approval, as are the other Bulletin 767 (2000).
Legal Developments: Fourth Quarter; 2007 C 15 performance evaluation by the Federal Reserve Bank of notice should be, and hereby are, approved. In reaching this New York, as of May 8, 2006.27 Partners Bank received a conclusion, the Board has considered all the facts of record "satisfactory" rating at its most recent CRA performance in light of the factors it is required to consider under the evaluation by the OTS, as of January IS, 2005.28 After BRC Act, the Bank Merger Act, and the FRA. The Board's consummation of the proposal, M&T Bank plans to main approval is specifically conditioned on compliance by tain its CRA policies at Partners Bank. Based on all the Applicants with the conditions in this order and with all the facts of record, the Board concludes that considerations commitments made to the Board in connection with this relating to the convenience and needs of the communities proposal, including the branch divestiture commitments to be served and the CRA performance records of the discussed above, and receipt of all other regulatory approv relevant depository institutions are consistent with ap als. The Board's approval of the nonbanking aspects of the proval. proposal also is subject to all the conditions set forth in Regulation Y and to the Board's authority to require such PUBliC BENEFIT modification or termination of the activities of a bank holding company or any of its subsidiaries as the Board As part of its evaluation of the public interest factors under finds necessary to ensure compliance with, and to prevent section 4 of the BRC Act, the Board also has reviewed evasion of, the provisions of the BRC Act and the Board's carefully the public benefits and possible adverse effects of regulations and orders issued thereunder. For purposes of the proposal. The record indicates that consummation of this action, the commitments and conditions are deemed to the proposal would result in benefits to consumers and be conditions imposed in writing by the Board in connec businesses currently served by Partners. Applicants have tion with its findings and decision and, as such, may be represented that the proposed transaction would provide enforced in proceedings under applicable law. Partners' customers with expanded products and services, The banking acquisitions shall not be consummated including discount broker services, mutual funds, and before the 15th calendar day after the effective date of this insurance products, and an expanded branch network. order, and no part of the proposal may be consummated The Board has determined that the conduct of the later than three months after the effective date of this order, proposed non banking activities within the framework of unless such period is extended for good cause by the Board Regulation Y and Board precedent is not likely to result in or by the Federal Reserve Bank of New York, acting adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or pursuant to delegated authority. unsound banking practices. Based on all the facts of record, By order of the Board of Governors, effective Novem the Board has concluded that consummation of the pro ber 7, 2007. posal can reasonably be expected to produce public benefits Voting for this action: Chairman Bernanke, Vice Chairman Kohn, that would outweigh any likely adverse effects. Accord and Governors Warsh, Kroszner, and Mishkin. ingly, the Board has determined that the balance of the public benefits under section 4(j)(2) of the BRC Act is ROBERT DEY. FRIERSON consistent with approval. Deputy Secretary of the Board ESTABliSHMENT OF BRANCHES Appendix A As previously noted, M&T Bank has also applied under section 9 of the FRA to establish branches at the locations of Partners Bank's main office and branches. The Board has NONBANKING ACTIVITIES OF PARTNERS assessed the factors it is required to consider when review ing an application under section 9 of the f'RA and the (I) Extending credit and servicing loans, pursuant to sec Board's Regulation R and finds those factors to be consis tion 22s.28(b)( 1) of Regulation Y (12 CFR tent with approval. 29 22s.28(b)(1)), through Partners Preferred Capital Cor poration, Utica; (2) Asset management, servicing, and collection activities, CONCLUSION pursuant to section 22s.28(b)(2)(vi) of Regulation Y (12 CFR 225.28(b )(2)( vi)), through Partners NEWPRO, Based on the foregoing and in light of all the facts of Inc., Utica; record, the Board has determined that the applications and (3) Operating savings associations, pursuant to sec tion 22s.28(b)(4)(ii) of Regulation Y (12 CFR 27. M&T, National Association was rated "satisfactory" by the 22s.28(b)(4)(ii», through Partners Bank; and Office of the Comptroller of the Currency, as of May 26, 2006. (4) Securities brokerage activities, pursuant to sec 28. Municipal Bank is a special-purpose bank not subject to the tion 22s.28(b )(7)(i) of Regulation Y (12 CFR CRA. See 12 CFR 345. II (c)(3). 22s.28(b )(7)(i)), through Partners Trust Investment Ser 29. 12 USc. § 322; 12 CFR 208.6(b). vices, Inc., Utica.
C 16 Federal Reserve Bulletin 0 March 2008 Appendix B NEW YORK BANKING MARKETS WITHOUT DIVESTITURES Market Remaining Bank: nk: i Amount I deposit Resulting Change in i number of shares HHI HHI Ra _L:deposits ..... Competitors (percent) Syracuse-Cayuga, Onorulaga, arul Oswego counties; the townships of Cortlarulville, Cuyler, Homer, Preble, Scott, Solon, Taylor, arul Truxton in Cortlarul County; and the townships of Cazenovia, DeRuyter, Eaton. Fenner, Georgetown. Lebanon, Lenox, Lincoln, Nelson, Smithfield, and Sullivan in Madison County Applicants Pre-consummation ....... 1 $1.8 bi!. 20.7 1,308 113 27 Partners .................................... 10 $311.3 mil. l.8 1,308 113 27 Applicants Post-Consummation ..... I $2.1 bi!. 23.9 1,308 113 27 Utica-Rome-Herkimer arul Oneida counties; the townships of Greig. Lewis, Leyden, Lyonsdale, Martinsburg, Montague, Osceola, Turin, Watson, arul West Turin in Louis County; arul the townships of Brookfield, Hamilton, Madison, Oneida, and Stockbridge in Madison County Applicants Pre-Consummation ....... 13 $63.7 mi!. 1.7 1,590 489 15 Partners .................................... I $1.3 bi!. 18.2 1,590 489 15 Applicants Post-Consummation ..... I $1.4 bi!. 32.3 1,590 489 15 NOTE: All rankings. market deposit shares, and HHls are based on thrift in· stitution deposits weighted at 50 percent, except that Partners Bank', thrift in· stitiution deposits are weighted at 50 percent pre·merger and 100 percent post· merger. Citigroup Inc. the acquisition of all or part of the ongoing business New York, New York operations of the third parties, Section 4 of the BHC Act generally prohibits a bartk Order Determining That Certain Pension holding company, including an FHC, from directly or indirectly engaging in, or acquiring the shares of a com Activities are Financial in Nature pany engaged in, any nonbanking activity unless the activ ity is otherwise permissible under the act. Section 4(k) of Citigroup Inc. ("Citigroup"), a financial holding company the BHC Act, as amended by the Gramm-Leach-Bliley Act ("FHC") within the meaning of the Bank: Holding Com ("GLB Act"), permits a bank holding company that quali pany Act ("BHC Act"), I has proposed to acquire, manage, fies to be an FHC to engage in, and acquire and retain and operate in the United Kingdom defined benefit pension shares of any company engaged in, a broad range of plans established and maintained by unaffiliated third par activities that are defined by statute to be financial in ties ("third-party U.K. pension plans"). These activities nature.2 The BHC Act also permits an FHC to engage in, would be conducted by or through a nonbank: subsidiary of and acquire and retain shares of any company engaged in, Citigroup. Citigroup proposes to acquire third-party U,K. any activity that the Board determines, by order or regula pension plans in stand-alone transactions and not as part of tion and in consultation with the Secretary of the Treasury, 1. 12 U.S.c. §§ 1841 et seq. 2. See 12 U.S.c. § 1843(k)(4).
Legal Developments: Fourth Quarter, 2007 Cl7 to be financial in nature or incidental to a financial activity.3 and may include other ancillary benefits provided under As the Board previously has noted, the "financial in nature plan rules, such as spousal or survivor benefits.7 or incidental" standard represents a significant expansion The nonbank subsidiary of Citigroup that directly ac of the "closely related to banking" standard that the Board quires a third-party U.K. pension plan would assume the previously was required to apply in determining the permis responsibilities of the plan's sponsor under applicable U.K. sibility of nonbanking activities for bank holding compa law. In the United Kingdom, defined benefit pension plans nies.4 are regulated by the U.K. Pensions Regulator under the The BHC Act directs the Board to consider a variety of Pensions Act of 1995, the Pensions Act of 2004, and the factors in considering whether an activity is financial in general law of trusts. These laws provide that pension plans nature or incidental to a financial acti vity, including: (1) the must be managed and administered by a trustee that is purposes of the BHC and GLB Acts; (2) the changes or independent of the plan sponsor. Plan sponsors also must reasonably expected changes in the marketplace in which provide sufficient assets to a pension plan to pay all benefits FHCs compete; (3) the changes or reasonably expected under the plan,8 consult with the trustees for the pension changes in technology for delivering financial services; and plan concerning the investment strategy of the plan, and (4) whether the proposed activity is necessary or appropri agree with the plan trustees on a statement of funding ate to allow an FHC to compete effectively with companies principles that sets out the plan's funding target, methods, seeking to provide financial services in the United States, and assumptions. In addition, trustees and plan sponsors efficiently deliver financial information and services through must agree on amendments to any part of the plan. the use of technological means, and offer customers any Citigroup proposes to acquire a third-party U.K. pension available or emerging technological means for using finan plan only if no additional beneficiaries may be added to the cial services or for the document imaging of data.s The plan and existing beneficiaries may not accrue additional Board also may consider other factors and information that benefits under the plan (a "hard-frozen" plan). In addition, it considers relevant to its determination. Citigroup proposes that it would acquire a third-party U.K. As noted above, Citigroup proposes to acquire, manage, pension plan only if the plan at the time of acquisition is and operate third-party defined benefit pension plans in, fully funded by the selling sponsor based on the plan's and subject to the laws of, the United Kingdom. Citigroup assets and projected liabilities (using appropriate actuarial initially proposes to acquire, through a nonbank subsidiary, assumptions).9 Citigroup has indicated that, as part of its a third-party pension plan in the United Kingdom with due diligence process for each transaction, Citigroup will approximately $400 million in gross liabilities to the plan's employ qualified actuaries to review and analyze the existing beneficiaries. present value of benefits owed to plan beneficiaries to A defined benefit pension plan generally is a plan ensure that all pension plans acquired are fully funded by established by or on behalf of an employer (the plan the selling sponsor. "sponsor") that provides for the payment to employees, The activity of acquiring, operating, and managing typically beginning on their retirement or other termination third-party pension plans has not been determined to be of service, of benefits in an amount that is specified in and financial in nature or incidental to a financial activity for determinable under the plan, typically through a formula purposes of the BHC Act. The proposed activity is broader that takes into account the employee's pay, years of than the pension plan activities that FHCs currently are employment, age at retirement, and other factors.6 The permitted to conduct for third parties. For example, as terms of the plan itself also typically specify the circum discussed above, a nonbank subsidiary of Citigroup would stances under which benefits will be paid under the plan to assume the rights and obligations of the sponsor of an an employee, former employee, or related person (such as a acquired third-party U.K. pension plan and would do so in spouse) (collectively a "beneficiary"), and the length of transactions that do not represent the acquisition of a going time such payments will be made to a beneficiary. The concern or ongoing business operations by Citigroup. In benefits payable under a plan typically take the form of a addition, the assets and liabilities of an acquired third-party specified stream of payments that begin on retirement or, at U.K. pension plan (unlike assets held by an FHC as trustee the employee's option, a lump sum payable at retirement, for third parties or assets held by the pension plans 7. For purposes of this order, the term "defined benefit pension 3. [d. at § I 843(k)(I)(A) and (2). In addition, the BHC Act permits plan" does not include a plan that provides health insurance to an FHC to engage in any activity that the Board (in its sole discretion) employees or that guarantees or indemnifies employees for health determines, by regulation or order, is "complementary to a financial care costs. activity and does not pose a substantial risk to the safety or soundness 8. On the other hand, the sponsor may recover assets contributed to of depository institutions or the financial system generally." ld. at or held on behalf of a plan after all of the plan's obligations to § 1843(k)(l)(B). beneficiaries have been satisfied and the plan is closed out. 4. See 66 Federal Register 307,308 (Jan. 3, 2001). 9. For purposes of this order, the term "fully funded" means that, at 5. 12 U.S.c. § 1843(k)(3). the time of acquisition, the current value of the plan's assets is at least 6. On the other hand, a defined contribution plan is a benefit plan equal to the present value of the plan's projected liabilities, The selling under which an individual account is established for each participant sponsor may issue debt to the plan or Citigroup to fully fund the plan and the benefits payable to each participant are based on the amount at acquisition. [n some situations, the requirement of this order that a contributed to the participant's account, plus or minus income, gains, plan be fully funded may require funding in excess of the statutory expenses, and losses allocated to that account. funding requirements of the relevant jurisdiction.
Cl8 Federal Reserve Bulletin 0 March 2008 maintained for Citigroup's own employees) would be fully responsibility for administering the annuity contract both consolidated with the assets and liabilities of Citigroup on before and during its payout period. its balance sheet. 10 In connection with these activities, the issuer of fixed The Board concludes for the reasons set forth below, annuities is exposed to certain types of risks, which are part however, that there is a reasonable basis for determining of the activity determined to be financial in the GLB Act. that the acquisition, management, and operation by Citi These risks include the risk that (I) the life expectancy of group of hard-frozen, fully funded third-party U.K. pension annuitants, on average, will exceed the actuarial estimates plans is an activity that is financial in nature within the used in establishing the terms of and funding for the meaning of the BHC Act. The activity involves, at its core, annuities; (2) the inflation rate and other assumptions used the types of investment advisory and investment manage to determine the expected obligations under the annuity ment skills that are routinely exercised by banking organi contracts underestimate these obligations; and (3) pay zations and the types of operational and investment risks ments from the annuitant and the return obtained through that banking organizations routinely incur and manage. the investment of such payments will fall short of esti FHCs currently are permitted by the BHC Act to engage mates. in activities that are related or operationally and function Citigroup would perform essentially the same financial ally similar to the proposed activity and that involve similar functions and assume essentially the same financial obliga risks. For example, an FHC already is permitted to provide tions and risks through the acquisition of a third-party U.K. a wide variety of services to third-party pension plans, pension plan as an insurance company performs and including acting as trustee, custodian, or investment adviser assumes in connection with the issuance of fixed annuities. (with or without investment discretion) for a third-party The functional similarity between a plan sponsor's obliga benefit plan, as well as designing, assisting in the imple tions under a defined benefit pension plan and an insurance mentation of, providing administrative services to, and company's obligations under an annuity contract is espe developing employee communication programs for third cially close where, as proposed, the pension plan is both party benefit plans. I I FHCs engaged in these activities have fully funded and hard-frozen. In situations where a pension gained substantial expertise with the laws, regulations, and plan's obligations to plan beneficiaries are hard-frozen and fiduciary obligations associated with providing fiduciary, the plan is fully funded, one method commonly used by a custodial, and administrative services to pension plans. plan sponsor to close out a plan is to purchase a terminal Moreover, FHCs engaged in these plan-related activities funding group annuity contract from an insurance com have developed risk-management systems and internal pany. Through such an annuity contract, the provider of the controls to monitor, manage, and address the legal, opera annuity becomes obligated to satisfy the responsibility to tional, and reputational risks associated with managing the pay the benefits promised under the plan to the plan's investments of and administering third-party pension plans. beneficiaries. Accordingly, Citigroup's proposed activities The proposed acti vity also bears a strong functional would be specifically permitted under the BHC Act if resemblance to issuance of a group annuity contract. The provided through an annuity contract or other form of BHC Act, as amended by the GLB Act, expressly states that insurance. By permitting Citigroup to provide these ser providing and issuing annuities is an activity that is finan vices in an alternative way, the proposed activities shOUld cial in nature.I2 A company that issues a fixed annuity help Citigroup respond to changes or reasonably expected becomes obligated to make periodic payments to the changes in the marketplace for financial products and annuitant during his or her lifetime and to pay any death or services. survivor benefits in accordance with the terms of the In evaluating this proposal, the Board considered that, annuity contract. The company that issues a fixed annuity under U.K. law, the nonbank subsidiary established by assumes responsibility for investing and managing the Citigroup to acquire a third-party U.K. pension plan gener funds received from the annuitant and bears the risk that ally will bear sole responsibility for making additional such funds and the returns earned on the funds will not be contributions to the plan if the plan assets are not sufficient sufficient to payout the full amount of benefits promised to meet the plan's expected or actual liabilities. However, under the annuity contract. The company also assumes U.K. law also permits the u.K. Pensions Regulator in certain circumstances to commence proceedings to hold an affiliate of a plan sponsor (including a depository institution 10. Because Citigroup would acquire each third-party U.K. pension affiliate) responsible for the sponsor's obligations to the plan in a stand-alone transaction, and not as part of a business combination involving Citigroup and the selling sponsor, Citigroup plan. 13 has stated that it will fully reflect the assets and liabilities of an acquired plan as a~sets and liabilities of Citigroup on its balance sheet. This treatment differs from the manner in which the assets and liabilities of an internal pension plan of an employer typically are 13. See U.K. Pensions Act of 2004, § 38 (contribution notices) and accounted for on the balance sheet of the employer under U.S. § 43 (financial support directives). The U.K. Pensions Regulator may generally accepted accounting principles. See FAS 158, Accounting issue a contribution notice or financial support directive to an affiliate for Defined Benefit Pension and Other Post Retirement Plans. of a sponsor only if, among other things, the Pensions Regulator II. See 12 CFR 22S.28(b)(5), (6), and (9)(ii). determines that it is reasonable to impose the proposed financial 12. See 12 U.S.C. § 1843(k)(4)(8). obligations on the affiliate.
Legal Developments: Fourth Quarter. 2007 Cl9 The Board generally has taken the position that, when a third-party U.K. pension plan acquired by Citigroup must depository institution is secondarily liable for a financial otherwise be permissible for an FHC under the BHC Act obligation of an affiliate, even if the depository institution's and the Board's Regulation y'18 The statutory and regula liability is created by statute or regulatory action, the tory framework governing the establishment, operation, institution has issued a guarantee on behalf of an affiliate and management of pension plans varies considerably for purposes of section 23A of the Federal Reserve Act and across jurisdictions and, accordingly, the nature and scope the Board's Regulation W.14 Section 23A and Regula of risks associated with such activities may differ materi tion W impose quantitative and qualitative limits on cov ally depending on the jurisdiction involved.19 To provide ered transactions between a depository institution and its for the consideration of any special issues that may be affiliates. Covered transactions include, among other things, associated with the acquisition of third-pany pension plans an extension of credit by a depository institution to an in jurisdictions other than the United Kingdom, the autho affiliate and the issuance of a guarantee by a depository rization and determination granted by this order are limited institution on behalf of an affiliate. IS The limitations in to the acquisition, management, and operation by Citigroup section 23A and Regulation W provide imponant protec of third-pany pension plans in the United Kingdom.20 tions against a depository institution suffering losses due to Under the BHC Act, the Board may not determine, by covered transactions with its affiliates, and also limit the regulation or order, that an activity is financial in nature or ability of a depository institution to transfer to its affiliates incidental to a financial activity if the Secretary of the the subsidy arising from the institution's access to the Treasury ("Secretary") notifies the Board in writing that federal safety net. the Secretary believes the activity is not financial in nature, To address the potential section 23A and Regulation W incidental to a financial activity, or otherwise permissible issues presented by its initial proposed transaction, and in under section 4 of the BHC ACt,21 The Board has provided accordance with U.K. law,16 Citigroup has obtained written the Secretary notice of Citigroup's proposal in accordance assurances from the U.K. Pensions Regulator that it will with the BHC Act, and the Secretary has informed the not seek to hold any of Citigroup's depository institution Board in writing that the Secretary does not intend to subsidiaries that are subject to section 23A responsible for prevent the Board from authorizing Citigroup to engage in any shortfalls that may occur in the pension plan proposed the proposed U.K. pension activities, subject to the condi to be acquired by Citigroup in this initial transaction. As a tions and limitations set fonh in this order. condition of this order, Citigroup must obtain similar The Board's determination and approval is subject to all written assurances from the u.K. Pensions Regulator before the conditions set fonh in Regulation Y, including those in acquiring any additional third-pany U.K. pension plan,l7 section 225.7,22 and to the Board's authority to require Based on the foregoing and other facts of record, the modification or termination of the activities of a bank Board concludes that the acquisition, management, and holding company or any of its subsidiaries as the Board operation by Citigroup of hard-frozen, fully funded third finds necessary to ensure compliance with, or to prevent pany U.K. pension plans, when conducted in accordance evasion of, the provisions and purposes of the BHC Act and with the conditions and limitations set fonh in this order, is the Board's regulations and orders issued thereunder. The an activity that is financial in nature within the meaning of Board's decision is specifically conditioned on compliance section 4(k) of the BHC Act. Any investment made by a with all the commitments made to the Board in connection with the request, including the commitments and condi 14. See 12 U.S.c. § 37 Ic(b)(7)(E); 12 CFR 223.3(h)(5); Board tions discussed in this order. The commitments and condi Letter dated October 25, 2005, to Carl V. Howard, Esq. (Citigroup). tions relied on in reaching this decision shall be deemed to 15. See 12 U.S.C. §37Ic(b)(7); 12 CFR 223.3(h). be conditions imposed in writing by the Board in connec- 16. The Pensions Act of 2004 expressly authorizes the U.K. Pensions Regulator, on application by a plan or other person, to issue a "clearance statement" that determines that it would be unreasonable to 18. See, e.g., 12 U.S.c. § 1843(c)(S), (c)(6), and (k)(4)(H). issue a contribution notice or financial support directive to the plan or 19. In the United States, for example, the establishment and person under the circumstances described in the application. See operation of defined benefit pension plans are subject to extensive Pensions Act of 2004, §§42 and 46. Citigroup has received such a regulation under the Employee Retirement Income Security Act of clearance statement with respect to its initial proposed acquisition of a 1974, as amended ("ERISA"). See 29 U.S.c. §§ 1400 et seq. ERISA third-party pension plan in the United Kingdom. provides that all entities under common control with the sponsor of a 17. Citigroup has indicated that the written assurances provided by defined benefit plan are jointly and severally liable for the obligations the U.K. Pensions Regulator are subject to review and renewal by the of the plan at termination. For ERISA purposes, companies under regulator no later than five years after issuance. Before the expiration common control with a plan sponsor include any company that of any written assurances provided by tbe U.K. Pensions Regulator in directly or indirectly owns 80 percent or more of the voting stock of connection with the acquisition by Citigroup of a third-party U.K. the plan sponsor (the "parent company") and any company in which pension plan, Citigroup must either ensure that its activities conform the parent company directly or indirectly owns 80 percent or more of with those permitted under section 23A and Regulation W or obtain an the voting stock. See 29 U.S.C. §§ 1301(a)(I4)(A) and (B), (b)(I), and exemption from the Board from the limitations of section 23A and 1362(a); 26 CFR 1.4l4(c)-2. Regulation W with respect to the plan. The Board has not determined 20. Other FHCs may seek approval to engage in similar activities that section 23A applies to the contingent liabilities that may arise by requesting a determination with respect to their own proposed under applicable pension law from the establishment or operation by activities under section 4(k)(2)(A) of the BHC Act and section 225.88 an affiliate of a depository institution of employee benefit plans in the of the Board's Regulation Y (12 CFR 225.88). ordinary course of its other business to provide benefits to the 21. See 12 U.S.C. § I 843(k)(2)(A). employees or former employees of the affiliate. 22. 12 CFR 225.7.
C20 Federal Reserve Bulletin 0 March 2008 tion with its findings and decision and, as such, may be financial and nonfinancial assets ("Commodity Derivatives enforced in proceedings under applicable law. Activities") and (ii) to provide information, statistical By order of the Board of Governors, effective Octo forecasting, and advice with respect to any transaction in ber 12, 2007. foreign exchange, swaps, and similar transactions; com modities; and any forward contract, option, future, option Voting for this action: Chairman Bernanke, Vice Chairman Kohn. on a future, and similar instruments ("Deri vati ves Ad visory and Governors Warsh, Kroszner, and Mishkin. Services").4 Energy Management Services combine many of these permissible financial activities and other activities ROBERT DEV. FRIERSON that the Board has not previously determined to be permis Deputy Secretary of the Board sible for a BHC. Energy Management Services generally entail acting as a financial intermediary for a power plant Fortis S.A.IN. V. owner to facilitate transactions relating to the acquisition of fuel and the sale of power by the power plant owner and providing advice to assist the owner in developing its Fortis, N. V. risk-management plan. The BHC Act, as amended by the Gramm-Leach-B1iley Act (the "GLB Act"), permits BHCs that qualify as FlICs Fortis Brussels S.A.IN. V. to engage in an expanded set of acti vities that are defined by statute to be financial in nature,S as well as any additional activity that the Board determines, in consulta Fortis Bank S.A.IN. V. tion with the Secretary of the Treasury, to be financial in All of Brussels, Belgium nature or incidental to a financial activity.6 The BHC Act also permits FlICs to engage in any Order Approving Notice to Engage in activity that the Board determines is complementary to a Activities Complementary to a Financial financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the finan Activity cial system generally? The Congress intended that the Board use this complementary authority to allow FlICs to Fortis S.A.IN.V. ("Fortis"), a financial holding company engage, on a limited basis, in activities that, although not ("FlIC") for purposes of the Bank Holding Company Act necessarily financial in nature, are so meaningfully con (HBHC Act"), Fortis, N.V., Fortis Brussels S.AIN.V., and nected to financial activities that they complement those Fortis Bank S.AIN.V. (collectively, "Fortis") have re activities. In this way, FlICs would not be disadvantaged quested the Board's approval under section 4 of the BHC by market developments if commercial activities evolve Act! and the Board's Regulation y2 to provide energy into financial activities or competitors find innovative ways management services ("Energy Management Services") to to combine financial and nonfinancial activities. The BHC owners of power generation facilities under energy man Act provides the Board with exclusive authority to deter agement agreements ("EMAs") as an activity that is mine that an activity is complementary to a financial complementary to the financial activities of engaging as activity. principal in commodity derivatives and providing financial The BHC Act further provides that any FlIC seeking to and investment advisory services for derivatives transac engage in a complementary activity must obtain the tions.3 Board's prior approval. In reviewing such a proposal, the BHC Act requires the Board to consider whether perfor BACKGROUND mance of the activity by the FlIC can reasonably be expected to produce public benefits that outweigh possible Regulation Y permits bank holding companies ("BHCs") adverse effects.S The Board has approved physical com (i) to act as principal in derivative contracts based on modity trading ("Physical Commodity Trading") for Fortis and other FlICs, on a limited basis, as an activity that is 1. 12 V.S.C. § 1843. 2. 12 CFR Part 225. 3. In connection with its acquisition of Cinergy Marketing & Trading LP ("CMT") from Duke Energy Corp., Fortis received 4. 12 CFR 22S.28(b)(8) and (b)(6). approval to engage in the Vnited States in physical commodity trading S. 12 V.S.c. § 1843(k)(4). This set of financial activities includes activities, on a limited basis, as an activity that is complementary to any activity that the Board had determined to be closely related to the financial activity of engaging in commodity derivatives activities. banking. by regulation or order, prior to November 12, 1999. Com See Board Letter to David R. Sahr, Esq., dated September 29, 2006. [n modity Derivatives Activities and Derivatives Advisory Services were addition to its physical commodity trading activities, CMT, now Fortis determined to be closely related to banking before that date and, Energy Marketing & Trading GP ("FEMT"), also serves as an energy accordingly. providing those services are financial activities for pur manager under EMAs with several power generators. At the time poses of the BHC Act (12 V.S.c. § 1843(k)(4)(F». Fortis's request was approved. Fortis was informed that FEMT's 6. 12 V.S.C. § 1843(k)(l)(A). activities under the EMAs would continue to be reviewed fOf permis 7. 12 V.S.c. § 1843(k)(I)(B). sibility as an FHC activity. 8. 12 V.S.c. § 1843(j)(2)(A).
Legal Developments: Fourth Quarter, 2007 C2l complementary to the financial activity of engaging in the fixed costs of the facility and is not entitled to revenues Commodity Derivatives Activities.9 or other compensation, apart from the monthly fees. Fortis currently engages in Commodity Derivatives FEMT does not provide day-to-day operational services Activities and Derivatives Advisory Services (as noted, to the facility. Those tasks are generally performed by the both financial activities) in the United States and has owner or by an operator who is hired directly by the owner requested approval to provide Energy Management Ser and is not affiliated with FEMT. The operator manages and vices as an activity that is complementary to those activi maintains the facility on a daily basis, which typically ties. includes providing labor and support services. The operator provides FEMT with information on the operating status of FORTIS'S ENERGY MANAGEMENT SERVICES the facility, maintenance issues that might affect the avail ability of the facility to generate power, and scheduled Under FEMT's current EMAs, FEMT, as energy manager, outage and maintenance periods. assists power plant owners by providing transactional and FEMT may buy fuel for the facility from third parties advisory services. The transactional services consist prima and enter into a mirror transaction for the fuel with the rily of FEMT acting as a financial intermediary, substitut owner. The owner may then sell the power generated by the ing its credit and liquidity for those of the owner to facility to FEMT, and FEMT generally resells the power in facilitate the owner's purchase of fuel and sale of power. the market. In these circumstances, FEMT would be acting FEMT's advisory services include providing market infor as the financial intermediary for the owner, providing credit mation to assist the owner in developing and refining a and liquidity support, including posting any required collat risk-management plan for the plant. eral for transactions. Because FEMT substitutes its name FEMT provides services under an EMA within a strate and credit rating for the owner's, the terms of the transac gic framework established by the owner. The owner, in tions are generally more favorable than the owner could consultation with FEMT, establishes an energy negotiate on its own. management plan and risk-management policy to govern In addition, FEMT assumes responsibility for adminis how the generation facility should be operated. The energy trative tasks related to the fuel and power transactions so management plan sets out the amount of power the plant that the owner does not have to maintain an administrative should generate and determines how the plant will meet its infrastructure to support its transactions with third parties. reliability obligations to the power transmission grid. The These services include arranging for third parties to provide plant owner must approve all commodity contracts, includ fuel transportation or power transmission services, schedul ing all contracts for the purchase of fuel or the sale of ing those services, and resolving any resulting imbalances; electricity. In some cases, authority to enter into power or ensuring that fuel deliveries and power sales are properly fuel contracts may be delegated to FEMT if the contracts coordinated; negotiating contracts with and monitoring the satisfy specific criteria established by the owner; other credit support and collateral requirements of the owner's contracts must be approved by the owner. The owner also counterparties; assisting in complying with power tariffs; maintains the right, subject to FEMT's right of first refusal, and paying fuel suppliers. FEMT also may enter into to market and sell power directly to third parties. The transactions with third parties as necessary to ensure that owner ultimately retains all decisionmaking authority, the owner meets its power generation obligations to the including decisions relating to the facility's generation power grid in accordance with the energy-management output and, in particular, whether the facility should be shut plan. down for any period of time. FEMT may also provide risk-management and hedging An EMA's compensation structure reflects this alloca services to the owner in connection with both the purchase tion of responsibilities. When the facility is in operation, of fuel and the sale of power. These transactions may be FEMT is typically compensated on a monthly basis at the entered into with third parties back to back (with FEMT in greater of a monthly fixed fee or a stated percentage of the the middle) or may be direct hedging transactions between spread between delivered fuel prices and the realized power the owner and FEMT in which FEMT retains the risk that revenues (adjusted to reflect certain fees and costs). When the owner is hedging. In the first type of transaction, the the facility is not in operation, FEMT is not responsible for owner would inform FEMT of its intention to hedge the price of fuel or power for a specified term, and FEMT would then solicit bids or offers. After reviewing the 9. Board Letters to Gregory A. Baer, Esq., dated April 24, 2007 competing bids or offers, the owner would make a selection (Bank of America Corp.); Paul E. Glotzer, Esq., dated March 27, 2007 (Credit Suisse Group); and Elizabeth T. Davy, Esq., dated April 13, and direct FEMT to enter into the transaction with that 2006 (Wachovia Corporation); and Societe Generale, 92 Federal counterparty. FEMT and the owner then would enter into a Reserve Bulletin CI13 (2006); Deutsche BankAG, 92 Federal Reserve mirror transaction so that FEMT would not retain any risk Bulletin CS4 (2006); JPMorgan Chase & Co., 92 Federal Reserve exposure on the overall transaction. In the second type of Bulletin C57 (2006); Barclays Bank PLC, 90 Federal Reserve Bulletin 511 (2004); UBS AG, 90 Federal Reserve Bulletin 215 (2004); and transaction, FEMT would submit the offer for a hedging Citigroup Inc., 89 Federal Reserve Bulletin 508 (2003). transaction to the owner, who can accept or reject the offer.
e22 Federal Reserve Bulletin 0 March 2008 If the owner accepts the proposal, FEMT may enter into the vices complement its Commodity Derivatives Activities transaction directly with the owner. All these transactions and Derivatives Advisory Services. would be governed by International Swaps and Derivatives Association master agreements between the owner and RISKS AND PUBLIC BENEFITS OF ENERGY FEMT. The owner may also enter into hedging transactions MANAGEMENT SERVICES directly with a third party without FEMT's involvement. FEMT generally provides two types of market As noted above, to authorize Fortis to provide Energy information services to the owner. First, FEMT provides Management Services as a complementary activity under market and risk information to assist the owner in develop the OLB Act, the Board must determine that the activities ing its risk-management plan and strategy. Because FEMT do not pose a substantial risk to the safety or soundness of is a direct market participant, it has access to information depository institutions or the financial system generally. In that may help the owner refine its risk-management strate addition, the Board must determine that the performance of gies. Second, FEMT provides the owner with day-to-day Energy Management Services by Fortis "can reasonably be market information that the owner, in consultation with the expected to produce benefits to the public, such as greater operator of the power facility, uses to determine its short convenience, increased competition, or gains in efficiency, term dispatch guidelines (that is, the amount of power the that outweigh possible adverse effects, such as undue facility should generate to meet its contractual require concentration of resources, decreased or unfair competi ments and reliability obligations). tion, conflicts of interests, or unsound banking practices." 10 Moreover, the Board previously has stated that complemen ENERGY MANAGEMENT AS A COMPLEMENTARY tary activities should be limited in size and scope relative to ACTIVITY an FIfC's financial activities. I I Revenues attributable to FEMT's Energy Management For the reasons set forth below, the Board believes that Services have been small relative to Fortis's total revenues Energy Management Services are complementary, within on a consolidated basis. To limit the size, scope, and safety the meaning of the OLB Act, to the financial activities of and soundness risks of Energy Management Services, Commodity Derivatives Activities and Derivatives Advi Fortis has committed that the revenues attributable to sory Services. Energy Management Services would add to FEMT's Energy Management Services will not exceed these financial activities a number of agency and adminis 5 percent of Fortis's total consolidated operating revenues. 12 trative services that would facilitate providing Commodity Fortis's authority to provide Energy Management Ser Derivatives Activities and Derivatives Advisory Services vices is subject to several conditions that limit the respon on behalf of the plant owner. This combination of services sibilities and potential liabilities Fortis may assume under would complement and enhance Fortis's Commodity De an EMA. Specifically, Fortis may only act as energy rivatives Activities and Derivatives Advisory Services by manager if the relevant EMA provides that: allowing Fortis to offer power plant owners an integrated approach to managing the commodity-related aspects of • owner retains the right to market and sell power directly to third parties, which may be subject to the energy their business. Many owners need assistance in devising manager's right of first refusal; energy-management strategies and a market participant that • owner retains the right to determine the level at which the can substitute its credit and liquidity for the owner's to facility will operate (Le., to dictate the power output of facilitate transactions, and they would prefer to receive the facility at any given time); those services from a single source. Fortis also would gain • Neither the energy manager nor its affiliates guarantee additional information about energy markets in the course the financial performance of the facility; and of providing Energy Management Services that would • Neither the energy manager nor its affiliates bear any risk of loss if the facility is not profitable. improve Fortis's ability to manage its own commodity risks and to advise its clients on their commodity-related activi Permitting Fortis to engage in Energy Management ties. Services in the limited amounts and situations described A number of non-BRC participants in the energy trading above would not appear to pose a substantial risk to Fortis, markets, including diversified financial services compa depository institutions, or the U.S. financial system gener nies, offer Energy Management Services to clients in ally. As an energy manager, Fortis would enter into the connection with their commodity derivatives business. These companies can, and regularly do, provide Energy 10. 12 U.s.c. § I 843(j)(2)(A). Management Services to owners. Permitting FIfCs to pro II. See 68 Federal Register 68493, 68497 (Dec. 9, 2003); see also vide these services in connection with their commodity 145 Congo Rec. H1I529 (daily ed. Nov. 4, 1999) (Statement of derivatives business and commodity trading activities, Chainnan Leach) (Hit is expected that complementary activities would therefore, would enable FIfCs to offer the same integrated not be significant relative to the overall financial activities of the organization. "). services that are provided by a number of their competitors. 12. Total operating revenues are defined as net interest income and Based on the foregoing and all other facts of record, the all non-interest revenue, including net securities gains but excluding Board concludes that Fortis's Energy Management Ser- extraordinary items.
Legal Developments: Fourth Quarter, 2007 C23 same type of commodity derivatives transactions that it is commodity-related services consistent with existing market permitted to enter into currently, only it would enter into practice. Approval would likely enable Fortis to improve its these transactions to facilitate the business strategies of a understanding of physical commodity and commodity third-party owner. Through its existing authority to engage derivatives markets and its ability to serve as an effective in Commodity Derivatives Activities, Fortis already may competitor in those markets. incur the price risk of commodities. Allowing Fortis to The Board has considered the market for Energy Man expand its activities to enter into back-to-back commodity agement Services and the potential adverse effects arising transactions in connection with advice given as part of its from Fortis's provision of those services. Fortis's Energy Energy Management Services would not appear to increase Management Services should not result in an undue con its potential exposure to commodity price risk but only to centration of resources or other adverse effects on compe counterparty risk. Granting Fortis the authority to act as an tition because the market for Energy Management Services energy manager also would not expand its ability to engage is regional or national in scope. Any potential conflicts of in Physical Commodity Trading beyond what has been interests associated with Fortis's Energy Management Ser authorized by the Board. The potential safety and sound vices should be mitigated by the anti-tying provisions in ness risks of entering into these transactions are already section 106 of the Bank Holding Company Act Amend mitigated by the limits imposed on Fortis's Commodity ments of 1970. Derivatives Activities and Physical Commodity Trading by For these reasons, and based on Fortis's policies and regulation and order.l3 procedures for monitoring and controlling the risks of In addition, Fortis would remain subject to the securities, Energy Management Services, the Board concludes that commodities, and energy laws and to the rules and regula consummation of the proposal does not pose a substantial tions (including the antifraud and anti manipulation rules risk to the safety or soundness of depository institutions or and regulations) of the Commodity Futures Trading Com the financial system generally and can reasonably be mission and the Federal Energy Regulatory Commission expected to produce benefits to the public that outweigh generally and specifically to the extent applicable to For any potential adverse effects. tis's Energy Management Services. The advisory services Fortis would provide under the CONCLUSION EMAs also would not expose it to significant additional risks. The added risk to Fortis from providing these ser Based on all the facts of record, including the representa vices would principally be legal and reputational risks that tions and commitments made by Fortis to the Board in are generally present in any contractual relationship. Be connection with the notice, and subject to the terms and cause Fortis would assume specific responsibilities under conditions set forth in this order, the Board has determined an EMA, it could be subject to claims for breach of contract that the notice should be, and hereby is, approved. The if it fails to perform its duties under the contract or does so Board's determination is subject to all the conditions set in a negligent fashion (for example, by providing bad forth in Regulation Y and to the Board's authority to advice). require modification or termination of the activities of a The Board believes that Fortis has the managerial exper BHC or any of its subsidiaries as the Board finds necessary tise and internal control framework to manage the risks of to ensure compliance with, or to prevent evasion of, the providing Energy Management Services. Fortis has shown provisions and purposes of the BHC Act and the Board's it has the expertise and internal controls necessary to regulations and orders issued thereunder. The Board's effectively integrate the risk management of Energy Man decision is specifically conditioned on compliance with all agement Services into its overall risk-management frame the commitments made in connection with the notice, work. including the commitments and conditions discussed in this As noted above, to approve this proposal, the Board order. The commitments and conditions relied on in reach must find that the public benefits from Fortis's performance ing this decision shall be deemed to be conditions imposed of these services outweigh the potential adverse effects, in writing by the Board in connection with its findings and such as undue concentration of resources, decreased or decision and, as such, may be enforced in proceedings unfair competition, or conflicts of interests. Approval of the under applicable law. proposal would likely benefit Fortis's customers by enhanc By order of the Board of Governors, effective Decem ing its ability to provide efficiently a full range of ber4,2oo7. 13. The scope of Fortis's Commodity Derivatives Activities is Voting for this action: Chairman Bernanke, Vice Chairman Kohn, limited by the restrictions in 12 CFR 22S.28(b)(8)(ii) and its Physical and Governors Warsh, Kroszner, and Mishkin. Commodity Trading is limited hy its commitment to the Board that the market value of commodities it holds as a result of these activities will ROBERT DEV. FRIERSON not exceed 5 percent of its consolidated tier 1 capital and by several Deputy Secretary of the Board other commitments designed to address potential risks associated with the activities.
C24 Federal Reserve Bulletin 0 March 2008 ORDERS ISSUED UNDER subject to comprehensive supervision on a consolidated INTERNATIONAL BANKING ACT basis by its home-country supervisors.5 The Board also considers additional standards as set forth in the IBA and Regulation K. 6 China Merchants Bank Co., Ltd. The IBA includes a limited exception to the general standard relating to comprehensive, consolidated supervi Shenzhen, People's Republic of China sion.7 This exception provides that, if the Board is unable to find that a foreign bank seeking to establish a branch, Order Approving Establishment of a Branch agency, or commercial lending company is subject to comprehensive supervision or regulation on a consolidated China Merchants Bank Co., Ltd. ("CMB"), Shenzhen, basis by the appropriate authorities in its home country, the People's Republic of China, a foreign bank within the Board may nevertheless approve the application if: (i) the meaning of the International Banking Act ("IBA"), has appropriate authorities in the home country of the foreign applied under section 7(d) of the IBA 1 to establish a branch bank are actively working to establish arrangements for the in New York, New York. The Foreign Bank Supervision consolidated supervision of such bank; and (ii) all other Enhancement Act of 1991, which amended the IBA, pro factors are consistent with approval. 8 In deciding whether vides that a foreign bank must obtain the approval of the to exercise its discretion to approve an application under Board to establish a branch in the United States. authority of this exception, the Board must also consider Notice of the application, affording interested persons an whether the foreign bank has adopted and implemented opportunity to comment, has been published in a newspa procedures to combat money laundering.9 The Board also per of general circulation in New York, New York may take into account whether the home country of the (New York Post, March 7, 2007). The time for filing foreign bank is developing a legal regime to address money comments has expired, and the Board has considered all laundering or is participating in multilateral efforts to comments recei ved. combat money laundering. This is the standard applied by CMB, with total assets of approximately $145.6 billion, 10 the Board in this case. is the sixth largest bank in China.2 CMB is indirectly As noted above, CMB engages directly in the business controlled by the Government of China through a number of banking outside the United States. CMB also has of wholly owned companies. One of these companies, provided the Board with information necessary to assess China Merchants Group, Limited, Shenzhen, People's the application through submissions that address the rel Republic of China, indirectly owns approximately 17.6 per evant issues. cent of CMB's total outstanding shares.3 Two other Based on all the facts of record, the Board has deter government-owned companies, China Ocean Shipping mined that CMB' s home-country supervisory authority is (Group) Company and China Shipping (Group) Company, actively working to establish arrangements for the consoli own 6.4 percent and 5.4 percent, respectively, of the shares dated supervision of CMB and that considerations relating of CMB. No other shareholder owns more than 5 percent of to the steps taken by CMB and its home jurisdiction to the shares of CMB. combat money laundering are consistent with approval CMB engages primarily in corporate and retail banking under this standard. The China Banking Regulatory Com and treasury operations throughout China and operates a mission ("CBRC") is the principal supervisory authority branch and an investment advisor subsidiary in Hong ofCMB, including its foreign subsidiaries and affiliates, for Kong. In the United States, CMB operates a representative office in New York. CMB would be a qualifying foreign banking organization under Regulation K.4 5. 12 U.S.C §3105(d)(2); 12 CFR 211.24. In assessing this stan The proposed New York branch would engage in whole dard, the Board considers, among other indicia of comprehensive, sale deposit-taking, lending, trade finance, and other bank consolidated supervision, the extent to which the home-country super ing services. Under the IBA and Regulation K, in acting on visors: (i) ensure that the bank has adequate procedures for monitoring an application by a foreign bank to establish a branch, the and controlling its activities worldwide; (ii) obtain information on the condition of the bank and its subsidiaries and offices through regular Board must consider whether (1) the foreign bank engages examination reports, audit reports, or otherwise; (iii) obtain infor~a directly in the business of banking outside the United tion on the dealings with and relationship between the bank and Its States; (2) has furnished to the Board the information it affiliates, both foreign and domestic; (iv) receive from the bank needs to assess the application adequately; and (3) is financial reports that are consolidated on a worldwide basis or comparable information that permits analysis of the bank's financial condition on a worldwide consolidated basis; and (v) evaluate pruden l. 12 U.S.c. §3105(d). tial standards, such as capital adequacy and risk asset exposure, on a 2. Asset and ranking data are as of June 30, 2007. worldwide basis. No single factor is essential, and other elements may 3. China Merchants Group Limited has six director interlocks with inform the Board's determination. CMB and is considered to control CMB for purposes of the Bank 6.12 U.S.c. §3105(d)(3)-(4); 12 CFR 211.24(c)(2). Holding Company Act (12 U.S.C. § 1841 et seq). 7. 12 U.S.C. § 3105(d)(6). 4. 12 CFR 211.23(a). China Merchants Group Limited and CMB 8. 12 U.S.c. §3105(d)(6)(A). would also together meet the standards to be a qualifying foreign 9.12 USc. §3105(d)(6)(B). banking organization. 1O.ld.
Legal Developments: Fourth Quarter, 2007 C25 all matters other than laws with respect to money launder rules. Criminal violations are transferred to the judicial ing.lI The CBRC has the authority to license banks, authorities for investigation and prosecution. regulate their activities, and approve expansion, both In recent years, the Chinese government has enhanced domestically and abroad. It supervises and regulates CMB, its anti-money-laundering regime, In 2005, the Chinese including its subsidiaries and overseas operations, through government took initial steps to adopt an anti-money a combination of targeted on-site examinations and con laundering law, the PRC Anti-Money Laundering Law tinuous consolidated off-site monitoring. Since its establish ("AML Law"), The AML Law and two related rules, the ment in 2003, the CBRC has enhanced existing supervisory Rules for Anti-Money Laundering by Financial Institutions programs and developed new policies and procedures ("AML Rules") and the Administrative Rules for the designed to create a framework for the consolidated super Reporting of Large-Value and Suspicious Transactions by vision of banks in China. Financial Institutions ("LVT/STR Rules") were enacted in On-site examinations by the CBRC cover, among other October 2006 and December 2006, respectively. The AML things, the major areas of banks' operations: corporate Law and AML Rules became effective on January I, 2007, governance and senior management responsibilities, capital and the LVT/STR Rules became effective on March 1, adequacy, asset structure and asset quality (including struc 2007, Together, the law and two related rules establish a ture and quality of loans), off-balance-sheet activities, regulatory infrastructure to assist China's anti-money earnings, liquidity, liability structure and funding sources, laundering effort. expansionary plans, internal controls (including accounting An Anti-Money Laundering Bureau ("AML Bureau") control and administrative systems), legal compliance, was established within the PBOC in 2003.12 The AML accounting supervision and internal auditing (including Bureau coordinates anti-money-laundering efforts at the accounting control and administrative systems), and any PBOC and among other agencies. The AML Bureau also other areas deemed necessary by the CBRe. supervised the creation in September 2004 of the China Off-site monitoring is conducted through the review of Anti-Money Laundering Monitoring and Analysis Center required annual, semiannual, quarterly, or monthly reports ("AML Center"), The AML Center collects, monitors, on, among other things, asset quality, capital adequacy, analyzes, and disseminates suspicious transaction reports liquidity, corporate governance, affiliate transactions, and and large-value transaction reports, The AML Center sends internal controls. suspicious transaction reports to the AML Bureau for CMB is required to be audited annually by an account further investigation, The PBOC issued additional rules in ing firm approved by the PBOC, and the results are shared June 2007 providing clarification on reporting suspicious with the CBRC and the PBOC. The scope of the required transactions to the AML Center and on customer due audit includes a review of CMB's financial statements, diligence and recordkeeping, asset quality, and internal controls. The CBRC may order a China participates in international fora that address the special audit at any time. In addition, in connection with its prevention of money laundering and terrorist financing, listing on the Shanghai and Hong Kong stock exchanges, China is a member of the Financial Action Task Force CMB is required to have external audits conducted under (,'FATF")13 and is a party to the 1988 U,N, Convention both International Financial Reporting Standards and gen Against the Illicit Traffic of Narcotics and Psychotropic erally accepted accounting practices under Chinese law. Substances, the U.N. Convention Against Transnational CMB is required to publish its financial statements annu Organized Crime, the U,N. Convention Against Corrup ally. CMB conducts internal audits of its offices and tion, and the U.N. International Convention for the Sup operations, including its overseas operations, generally on pression of the Financing of Terrorism. an annual schedule. The internal audit results are shared As noted, the PBOC is China's primary supervisor for with the CBRC, the PBOC, and CMB's external auditors. anti-money-Iaundering matters. Like the CBRC, the PBOC The proposed branch would be subject to internal audits. supervises and regulates CMB through a combination of Chinese laws impose various prudential limitations on on-site examinations and off-site monitoring. On-site ex banks, including limits on transactions with affiliates and aminations focus on CMB's compliance with anti-money large exposures. The CBRC is authorized to require any laundering laws and rules, including the AML Law and the bank to provide information and to impose sanctions for AML and LVT/STR Rules. Off-site monitoring is con failure to comply. The CBRC also has authority to impose ducted through the review of periodic reports. In perform administrative penalties, including warnings, fines, and ing its responsibilities, the PBOC may require any bank to removal from office, for violations of applicable laws and provide information and can impose administrative penal ties for violations of applicable laws and rules. II. Before April 2003, the People's Bank of China ("PBOC") acted as both China's central bank and primary banking supervisor. including with respect to anti-money-laundering matters. In April 12. The AML Bureau conducts administrative investigations and 2003, the CBRC was established as the primary banking supervisor handles violations of AML Rules. Money laundering cases are referred and assumed the majority of the PBOC's regulatory functions. The to the Ministry of Public Security, China's main law enforcement PBOC maintained its roles as China's central bank and primary body, for investigation and prosecution. supervisor for anti-money-Iaundering matters. 13. China became a member of FATF in lune 2007.
C26 Federal Reserve Bulletin 0 March 2008 CMB has policies and procedures to comply with Chi of record, and subject to the condition described below, the nese laws and rules regarding anti-money laundering. CMB Board has determined that CMB has provided adequate has represented that it has taken additional steps on its own assurances of access to any necessary information that the initiative to combat money laundering and other illegal Board may request. activities. CMB states that it has implemented measures On the basis of all the facts of record, and subject to the consistent with the recommendations of FA1F and that it commitments made by CMB, as well as the terms and has put in place policies, procedures, and controls to ensure conditions set forth in this order, CMB's application to ongoing compliance with all statutory and regulatory establish a branch is hereby approved. Should any restric requirements, including designating anti-money-laundering tions on access to information on the operations or activi officers and conducting employee training at the head ties of CMB and its affiliates subsequently interfere with office, branch, and sub-branch levels. CMB's compliance the Board's ability to obtain information to determine and with anti-money-Iaundering requirements is monitored by enforce compliance by CMB or its affiliates with applicable the PBOC and by CMB's internal and external auditors. federal statutes, the Board may require termination of any The Board also has taken into account the additional of CMB's direct or indirect activities in the United States. standards set forth in section 7 of the IBA and Regula Approval of this application also is specifically conditioned tion K,14 The CBRC has no objection to CMB' s establish on compliance by CMB with the commitments made in ment of the proposed branch. connection with this application and with the conditions in The Board has also considered carefully the financial this order. IS The commitments and conditions referred to and managerial factors in this case. China has adopted above are conditions imposed in writing by the Board in risk-based capital standards that are consistent with those connection with its decision and may be enforced in established by the Basel Capital Accord ("Accord"). proceedings under 12 U.S.c. § 1818 against CMB and its CMB's capital is in excess of the minimum levels that affiliates. would be required by the Accord and is considered equiva By order of the Board of Governors, effective Novem lent to capital that would be required of a U.S. banking ber 8,2007. organization. Managerial and other financial resources of CMB are consistent with approval, and CMB appears to Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Kroszner. and Mishkin. have the experience and capacity to support the proposed branch. In addition, CMB has established controls and ROBERT DEY. FRIERSON procedures for the proposed branch to ensure compliance Deputy Secretary of the Board with U.S. law. In particular, CMB has stated that it will apply strict anti-money-laundering policies and procedures at the branch consistent with U.S. law and regulation and ICICI Bank Limited will establish an internal control system at the branch Mumbai, India consistent with U.S. requirements to ensure compliance with those policies and procedures. Order Approving Establishment of a Branch With respect to access to information about CMB's operations, the Board has reviewed the restrictions on ICICI Bank Limited (HBank"), a foreign bank within the disclosure in relevant jurisdictions in which CMB operates meaning of the International Banking Act ("IBA"), has and has communicated with relevant government authori applied under section 7(d) of the IBA I to establish a federal ties regarding access to information. CMB has committed branch in New York, New York. The Foreign Bank Super to make available to the Board such information on the vision Enhancement Act of 1991, which amended the IBA, operations of CMB and any of its affiliates that the Board provides that a foreign bank must obtain the approval of the deems necessary to determine and enforce compliance with Board to establish a branch in the United States. the IBA, the Bank Holding Company Act, and other Notice of the application, affording interested persons an applicable federal law. To the extent that the provision of opportunity to comment, has been published in a newspa such information to the Board may be prohibited by law or per of general circulation in New York, New York (The otherwise, CMB has committed to cooperate with the Daily News, June 21, 2004). The time for filing comments Board to obtain any necessary consents or waivers that has expired, and all comments received have been consid might be required from third parties for disclosure of such ered. information. In light of these commitments and other facts 15. The Board's authority to approve the establishment of the 14. See 12 U,S,C, §3105(d)(3)-(4); 12 CFR 2 [1.24(c)(2). The proposed branch parallels the continuing authority of the state of additional standards set forth in section 7 of the lBA and Regulation K New York to license offices ofa foreign bank. The Board's approval of include the following: whether the bank's home-country supervisor this application does not supplant the authority of the state of has consented to the establishment of the office; the financial and New York or its agent, the New York State Banking Department managerial resources of the bank; whether the appropriate supervisors (HDepartment"), to license the proposed office of eMB in accordance in the home country may share information on the bank's operations with any terms or conditions that the Department may impose. with the Board; whether the bank and its U.s. affiliates are in compliance with U.S. law; the needs of the community; and the bank's record of operation, L 12 U.S ,C. § 3105(d).
Legal Developments: Fourth Quarter, 2007 C27 Bank, with total assets of approximately $91.5 billion, is vision.s This exception provides that, if the Board is unable the second largest bank in India.2 The Government of India to find that a foreign bank seeking to establish a branch, and the Government of Singapore own approximately agency, or commercial lending company is subject to 9.6 percent and 8.3 percent of Bank's shares, respectively. 3 comprehensive supervision or regulation on a consolidated No other shareholder owns directly more than 5 percent of basis by the appropriate authorities in its home country, the Bank's shares. Board may nevertheless approve the application, provided Bank is a private sector bank and engages primarily in that (i) the appropriate authorities in the home country of corporate and retail banking and foreign exchange opera the foreign bank are actively working to establish arrange tions. Bank also provides through its subsidiaries insur ments for the consolidated supervision of such bank; and ance, brokerage, investment banking, and asset manage (ii) all other factors are consistent with approval.9 In ment services in India. Outside India, Bank operates deciding whether to exercise its discretion to approve an subsidiary banks in the United Kingdom, Canada, and application under authority of this exception, the Board Russia and branches in Bahrain, the Dubai International shall also consider whether the foreign bank has adopted Financial Center, Hong Kong S.A.R., Singapore, and Sri and implemented procedures to combat money launder Lanka. In the United States, Bank operates a representative ing.lo The Board also may take into account whether the office in New York, New York, and engages indirectly in home country of the foreign bank is developing a legal nonbank activities in the United States through a number of regime to address money laundering or is participating in subsidiaries.4 Bank would be a qualifying foreign banking multilateral efforts to combat money laundering. II organization under Regulation K. 5 As noted, Bank engages directly in the business of The proposed New York branch would engage in a banking outside the United States. Bank also has provided wholesale banking business, including providing lending, the Board with information necessary to assess the applica trade financing, and factoring services to U.S.-based sub tion through submissions that address the relevant issues. sidiaries of Indian companies. Based on all the facts of record, the Board has deter Under the rnA and Regulation K, in acting on an mined that Bank's home jurisdiction supervisory authority application by a foreign bank to establish a branch, the is actively working to establish arrangements for the con Board must consider whether (1) the foreign bank engages solidated supervision of Bank and that considerations relat directly in the business of banking outside the United ing to the steps taken by Bank and its home jurisdiction to States; (2) has furnished to the Board the information it combat money laundering are consistent with approval needs to assess the application adequately; and (3) is under this standard. The Reserve Bank of India ("RBI") is subject to comprehensive supervision on a consolidated the principal supervisory authority of Bank, including its basis by its home-country supervisors.6 The Board also foreign subsidiaries and affiliates. The RBI has the author considers additional standards as set forth in the rnA and ity to license banks, regulate their activities, and approve Regulation KJ expansions, both domestically and abroad, It supervises The rnA includes a limited exception to the general and regulates Bank through a combination of regular requirement relating to comprehensive, consolidated super- on-site reviews and off-site monitoring. On-site examina tions cover the major areas of operations, capital adequacy, management (including risk-management strategies), asset quality (including detailed loan portfolio analysis), earn 2. Asset data are as of March 31, 2007. Ranking data are as of March 31,2006. ings, liquidity, and internal controls and procedures (includ 3. The Life Insurance Corporation of India and other government ing anti-money-Iaundering controls and procedures). The owned companies collectively own approximately 9.6 percent of frequency of on-site examinations depends on a bank's risk Bank's shares. The Government of Singapore directly owns approxi profile, but generally all Indian banks, including Bank, are mately 1.8 percent of Bank's shares. Allamanda Investments Pte. examined at least annually. Limited, an investment company wholly owned by the Ministry of Finance of Singapore, indirectly owns 6.5 percent of Bank's shares. Off-site monitoring is conducted through the review of 4. See ICICf Bank Limited, 88 Federal Reserve Bulletin 227 (2002). required quarterly or monthly reports on, among other 5. 12 CFR 211.23(a). things, asset quality, earnings, liquidity, capital adequacy, 6. 12 U.S.c. § 3105(d)(2); 12 CFR 211.24. In assessing this stan loans, and on- and off-balance-sheet exposures. The RBI dard, the Board considers, among other indicia of comprehensive, consolidated supervision, the extent to which the home-country super monitors the foreign activities of Indian banks using guide visors: (i) ensure that the bank has adequate procedures for monitoring lines designed to ensure that banks identify, control, and and controlling its activities worldwide; (ii) obtain information on the minimize risk in the bank and in its joint ventures and condition of the bank and its subsidiaries and offices through regular subsidiaries. The RBI also periodically audits Indian banks' examination reports, audit reports, or otherwise; (iii) obtain informa foreign operations. tion on the dealings with and relationship between the bank and its affiliates, both foreign and domestic; (iv) receive from the bank Bank is required to be audited annually by a firm of financial reports that are consolidated on a worldwide basis or chartered accountants approved by the RBI, and the audit comparable information that permits analysis of the bank's financial condition on a worldwide consolidated basis; and (v) evaluate pruden tial standards, such as capital adequacy and risk asset exposure, on a 8. 12 U.S.c. § 3105(d)(6). worldwide basis. No single factor is essential, and other elements may 9. 12 U.S.C. § 3 !05(d)(6)(A). inform the Board's determination. 10. 12 U.S.c. § 3105(d)(6)(B). 7. 12 U.S.C. §3105(d)(3)-(4); 12 CFR 211.24(c)(2)-(3). 11. /d.
C28 Federal Reserve Bulletin 0 March 2008 report is submitted to the RBI. The scope of the required Convention Against Illicit Traffic in Narcotic Drugs and audit includes a review of financial statements, asset qual Psychotropic Substances and the U.N. International Con ity, internal controls, and anti-money-Iaundering proce vention for the Suppression of the Financing of Terrorism. dures. The RBI may order a special audit at any time. In Bank has policies and procedures to comply with Indian connection with its listing of American Depositary Shares laws and regulations and the RBI's Guidelines regarding on the New York Stock Exchange, Bank files a financial anti-money laundering. Bank has also taken additional report with the Securities and Exchange Commission that steps on its own initiative to combat money laundering and also is subject to annual external audit. In addition, Bank other illegal activities. Bank states that it has implemented conducts internal audits of its offices and operations gener the relevant recommendations of the FATF and that it has ally on an annual schedule. The proposed branch would be put in place enterprise-wide, risk-based anti-money subject to internal audits to determine compliance with laundering policies and procedures to ensure ongoing com internal controls and RBI guidelines. pliance with all statutory and regulatory requirements, Indian laws impose various prudential limitations on including designating compliance officers and conducting banks, including limits on transactions with affiliates and training for staff at all levels. Bank's compliance with large exposures. The RBI is authorized to request and anti-money-laundering requirements is monitored by the receive information from any bank and its domestic and RBI and by Bank's internal and external auditors. foreign affiliates and to impose penalties for failure to The Board also has taken into account the additional comply with a disclosure request or for providing false or standards set forth in section 7 of the IBA and Regula misleading information. The RBI also has the authority to tion K.13 The RBI has no objection to Bank's establishment impose conditions on licensees and to impose penalties for of the proposed branch. failure to comply with the RBI's rules, orders, and direc The Board has also considered carefully the financial tions. Penalties include monetary fines, removal of manage and managerial factors in this case. India's risk-based ment, and the revocation of the authority to conduct capital standards are consistent with those established by business. the Basel Capital Accord. Bank's capital is in excess of the In recent years, the Indian government has enhanced its minimum levels that would be required by the Accord and anti-money-laundering regime. In January 2003, India took is considered equivalent to capital that would be required of initial steps to adopt an anti-money-laundering law, the a U.S. banking organization. Managerial and other financial Prevention of Money Laundering Act. The law, related resources of Bank are consistent with approval, and Bank amendments, and implementing rules (collectively, the appears to have the experience and capacity to support the "PMLA") became effective in July 2005 and established a proposed branch. In addition, Bank has established controls regulatory infrastructure to assist the anti-money and procedures for the proposed branch to ensure compli laundering effort. In accordance with the PMLA, India has ance with U.S. law. established the Financial Intelligence Unit, India ("FlU With respect to access to information about Bank's IND"), which reports directly to the Economic Intelligence operations, the Board has reviewed the restrictions on Council headed by the Finance Minister of India. The disclosure in relevant jurisdictions in which Bank operates FlU-IND is responsible for receiving, processing, analyz and has communicated with relevant government authori ing, and disseminating information related to cash and ties regarding access to information. Bank has committed suspicious transaction reports. The Directorate of Enforce to make available to the Board such information on the ment, a department within the Ministry of Finance, is operations of Bank and any of its affiliates that the Board responsible for investigating and prosecuting money laun deems necessary to determine and enforce compliance with dering cases. In addition, the RBI issued "Know Your the IBA, the Bank Holding Company Act ("BHC Act"), Customer (KYC) Guidelines-Anti-Money Laundering and other applicable federal law. To the extent that the Standards" ("Guidelines") in November 2004 that require provision of such information to the Board may be prohib financial institutions to establish systems for the prevention ited by law or otherwise, Bank has committed to cooperate of money laundering. Indian banks were required to be with the Board to obtain any necessary consents or waivers fully compliant with the Guidelines by December 31,2005. that might be required from third parties for disclosure of The RBI issued further guidelines in February 2006 provid such information. In light of these commitments and other ing clarification on reporting cash and suspicious transac facts of record, and subject to the condition described tions to the flU-IND. India participates in international fora that address the prevention of money laundering and terrorist financing. 13. See 12 U.S.c. § 3105(d)(3)-(4); 12 CFR 21 L24(c)(2). The India is a member of the Asia/Pacific Group on Money additional standards set forth in section 7 of the IBA and Regulation K Laundering (Financial Action Task Force for the AsiaJ include the following: whether the bank's home- country supervisor Pacific region), an observer organization to the Financial has consented to the establishment of the office; the financial and Action Task Force ("FATF"), and is actively seeking to managerial resources of the bank; whether the appropriate supervisors join FATF as a member. 12 India is a party to the 1988 U.N. in the home country may share information on the bank's operations with the Board; whether the bank and its U.S. affiliates are in compliance with U.S. law; the needs of tile community; and the bank's 12. India became an observer to FATF in February 2007. record of operation.
Legal Developments: Fourth Quarter, 2007 C29 below, the Board has determined that Bank has provided conditions in this order. IS The commitments and conditions adequate assurances of access to any necessary information referred to above are conditions imposed in writing by the that it may request Board in connection with this decision and may be enforced On the basis of all the facts of record, and subject to the in proceedings under 12 U.S.c. § 1818 against Bank and its commitments made by Bank, as well as the terms and affiliates. conditions set forth in this order, Bank's application to By order of the Board of Governors, effective Octo establish a branch in New York, New York, is hereby ber 19, 2007. approved. Should any restrictions on access to information Voting for this action: Chairman Bernanke. Vice Chainnan Kolln, on the operations or activities of Bank and its affiliates and Governors Warsh, Kroszner. and Mishkin, subsequently interfere with the Board's ability to obtain information to determine and enforce compliance by Bank JENNIFER 1. JOHNSON or its affiliates with applicable federal statutes, the Board Secretary of the Board may require termination of any of Bank's direct or indirect activities in the United States, or in the case of any such operation licensed by the Office of the Comptroller of the Currency ("OCC"), recommend termination of such opera tion. Approval of this application also is specifically condi tioned on compliance by Bank with the commitmentsl4 made in connection with this application and with the section 4(c )(9) of the BHC Act that will pennit Bank to hold its shares 14. Bank Ilas committed that it will confonn its existing direct and of these companies for a temporary period. indirect nonbanking activities and investments to the requirements of 15, The Board's authority to approve the establishment of the acc the BHC Act Bank owns subsidiaries that engage in activities in the proposed branch parallels the continuing authority of the to United Stales that are not pennissible for a bank holding company. license offices of a foreign bank, The Board's approval of this acc Indian laws and rules restrict Bank's ability to conform its holdings of application does not supplant tile authority of the to license the these companies within the time period provided for in section 4(a)(2) proposed office of Bank in accordance with any tenns or conditions of the BHC Act. The Board has granted Bank an exemption under tllat it may impose.
__- ,,_ _ ____ '· _~. .M_~
C31 June 2008 Legal Developments: First Quarter, 2008 ORDERS ISSUED UNDER BANK National would become the 12th largest depository organi zation in Texas, controlling deposits of approximately HOLDING COMPANY ACT $4.7 billion, which would represent 1.1 percent of state deposits. ORDERS ISSUED UNDER SECTION 3 OF THE First National, together with its related interests and principal shareholders, currently owns 8.62 percent of BANK HOLDING COMPANY ACT Southside's voting shares and proposes to acquire the additional voting shares (up to 1.28 percent) through First National Bank Group, Inc. purchases on the open market. First National received approval from the Board to acquire up to 9.9 percent of the Edinburg, Texas voting shares of Southside on September 11, 2006.5 As part of the approval, First National agreed to abide by certain Order Approving the Acquisition of commitments previously relied on by the Board in deter Additional Shares of a Bank Holding mining that an investing bank holding company would not Company be able to exercise a controlling influence over another bank holding company or bank for purposes of the BHC First National Bank Group, Inc. ("First National"), a bank Act ("Passivity Commitments"). holding company within the meaning of the Bank Holding First National is proposing again to acquire up to Company Act ("BHC Act"), has requested the Board's 9.9 percent of the voting shares of Southside and has also approval under section 3 of the BHC Actl to acquire up to requested approval to control Southside for purposes of the 9.9 percent of the voting shares and control of Southside BHC Act.6 On acquiring control, First National would be Bancshares, Incorporated ("Southside"), Tyler, and acquire required to treat Southside Bank as a subsidiary of First indirect control of Southside's subsidiary banks, Southside National and would be subject to certain obligations Bank, also of Tyler, and Fort Worth National Bank, Fort imposed by the BHC Act and other federal statutes, includ Worth, all of Texas.2 ing obligations to serve as a source of financial and Notice of the proposal, affording interested persons an managerial strength to Southside.1 opportunity to submit comments, has been published in the The Board received a comment from the management of Federal Register (72 Federal Register 70862 (2007)). The Southside objecting to the proposal and questioning First time for filing comments has expired, and the Board has National's compliance with the Passivity Commitments. considered the proposal and all comments received in light Southside also expressed concems about the management of the factors set forth in section 3 of the BHC Act. of First National. The Board has considered carefully First First National, with total consolidated assets of $4.1 bil National's application and Southside's comments in light lion, is the 18th largest depository organization in Texas, of the factors it must consider under section 3 of the BHC controlling deposits of $3.3 billion, which represent less Act. than 1 percent of total deposits of insured depository institutions in Texas ("state deposits").3 Southside, with FINANCIAL, MANAGERIAL, AND SUPERVISORY total consolidated assets of $1. 9 billion, is the 29th largest CONSIDERATIONS depository organization in Texas, controlling deposits of $1.4 bilIion.4 On consummation of the proposal, First Section 3 of the BHC Act requires the Board to consider the financial and managerial resources and future prospects of the companies and banks involved in the proposal and I. 12 U.S.C. § 1842. certain other supervisory factors. The Board has considered 2. Southside has two intermediate bank holding companies in Delaware, Southside Delaware Financial Corporation, Dover. and Fort Worth Bancorporation, Inc., Wilmington. In addition, Southside has an iary bank. Fort Worth National Bank, Fort Worth, has assets of intermediate bank holding company in Texas. Fort Worth Bancshares. $125 million. These assets were not included in Southside's Septem Inc .. Fort Worth. ber 30, 2007, asset figures. 3. Asset data are as of September 30, 2007, and statewide deposit 5. 91 Federal Reserve Bulletin C164 (2006) ("2006 Order"). and ranking data are as of June 30, 2007. 6. As part of the proposal, First National requests relief from the 4. Southside acquired Fort Worth Bancshares, Inc. (a small bank Passivity Commitments. holding company) in October 2007. Fort Worth Bancshares' subsid- 7. See 12 CFR 225.4; 12 U.S.C. § 1815(e)(I).
C32 Federal Reserve Bulletin D June 2008 carefully these factors in light of all the facts of record, the president of Southside violated these commitments. including, among other things, confidential reports of Southside also asserted that a filing made by First National examination and other supervisory information received with the Securities and Exchange Commission ("SEC") from the primary federal supervisors of the organizations evidenced First National's intent to change or influence and institutions involved in the proposal, publicly reported control of Southside and was a prima facie violation of the and other financial information, information provided by Passivity Commitments, In addition, Southside alleged that First National, and public comment received on the pro the filing contained statements intended to force Southside posaL to change its business and operations. The Board has JO In evaluating financial factors in expansion proposals by reviewed the information provided by Southside and First banking organizations, the Board reviews the financial National as well as public and confidential supervisory condition of the organizations involved on both a parent information. Based on all the facts of record, the Board only and consolidated basis, as well as the financial condi finds that neither First National's request for information tion of the subsidiary banks and significant nonbanking nor its mandatory filing with the SEC violated the Passivity operations. In this evaluation, the Board considers a variety Commitments. of information, including capital adequacy, asset quality, Based on all the facts of record, the Board has concluded and earnings performance. In assessing financial factors, that the financial and managerial resources and the future the Board consistently has considered capital adequacy to prospects of First National, Southside, and their subsidiar be especially important. The Board also evaluates the effect ies are consistent with approval of this application, as are of the transaction on the financial condition of the appli the other supervisory factors the Board must consider under cant, including its capital position, asset quality, earnings section 3 of the BHC Act. prospects, and the impact of the proposed funding of the transaction. COMPETITIVE CONSIDERATIONS Based on its review of the financial factors, the Board finds that First National has sufficient resources to effect the Section 3 of the BHC Act prohibits the Board from proposal. First National, Southside, and their subsidiary approving a proposal that would result in a monopoly or banks are well capitalized and would remain so on consum would be in furtherance of any attempt to monopolize the mation of this proposal. g The proposed transaction is business of banking in any relevant banking market. Sec structured as a share purchase, and the consideration to be tion 3 also prohibits the Board from approving a proposal received by Southside's shareholders would be funded that would substantially lessen competition in any relevant from First National's existing liquid assets. banking market, unless the Board finds that the anticom The Board also has considered the managerial resources petiti ve effects of the proposal clearly are outweighed in the of the organizations involved in the proposed transaction. public interest by the probable effect of the proposal in The Board has reviewed the examination records of First meeting the convenience and needs of the community to be National, Southside, and their subsidiary banks, including served. II assessments of their management, risk-management sys First National's subsidiary bank, First National Bank, tems, and operations. In addition, the Board has considered Edinburg. and Southside Bank compete directly in the its supervisory experiences and those of the other relevant Dallas banking market. In addition, First National Bank banking supervisory agencies with the organizations and and Fort Worth National Bank compete directly in the Fort their records of compliance with applicable banking law, Worth banking market. The Board has reviewed carefully including anti-money-laundering laws. First National, the competitive effects of the proposal in both banking Southside, and their subsidiary banks are considered to be markets in light of all the facts of record. In particular, the well managed. Board has considered the number of competitors that would As noted, Southside has alleged that certain actions remain in the markets. the relative shares of total deposits taken by the management of First National violated the Passivity Commitments.9 Specifically, Southside alleged that requests made by First National for employment and 10. The SEC requires the owners of more than 5 percent of a class of equity securities of a registered company to file certain forms. See compensation information on employees who are related to 15 U.S.C. §78m(d); Rule 13d·l, 17 CFR 240.13d-l (2007). First National filed a Schedule l3D report with the SEC, which is required for a 5 percent shareholder who "holds the securities with a purpose or 8. As previously noted, the proposal provides that First National effect of changing or inlluencing control of the issuer, or in connection would acquire only up to 9.9 percent of Southside. Under these with or as a participant in any transaction having that purpose or effect circumstances, the financial statements of Southside and First National . , .". (17 CFR 240.13d-l(e)(1)(i) (2007», In its Schedule 13D report, would not be consolidated, Moreover, because First National will not First National stated that, after making its 2006 investment in South acquire a majority of the voting shares of Southside in this transaction, side, it wanted to change its investment goals with respect to Southside First National must obtain the Board's approval before acquiring more and, accordingly. filed this application with the Board requesting than 9.9 percent of Southside's voting shares. approval to increase its investment in Southside and to be relieved of 9. Southside also criticized the management of First National. as the Passivity Commitments. First National also stated that it did not trustee of First National's employee stock ownership plan ("ESOP"). intend to take any action inconsistent with the Passivity Commitments for causing the ESOP to purchase shares of Southside. The amount of until after the Board approved this application and the applicable shares acquired by the ESOP did not exceed the percentage of shares statutory waiting period expired. authorized by the Board in the 2006 Order, II. 12 U.S.c. § I842(c)(1).
Legal Developments: First Quarter, 2008 C33 of depository institutions in the markets ("market depos take into account the records of the relevant insured its") controlled by First National and Southside,12 the depository institutions under the Community Reinvestment concentration level of market deposits and the increase in Act ("CRA" ),15 The Board has considered carefully all the this level as measured by the Herfindahl-Hirschman Index facts of record, including evaluations of the CRA perfor ("HHI") under the Department of Justice Merger Guide mance records of First National's and Southside's subsid lines ("DOJ Guidelines"), 13 and other characteristics of the iary banks, other information provided by First National, markets. and confidential supervisory information. First National Consummation of the proposal would be consistent with Bank received an "outstanding" rating at its most recent Board precedent and the DOJ Guidelines in both the Dallas CRA evaluation by the Office of the Comptroller of the and Fort Worth banking markets.14 On consummation of Currency ("OCC"), as of September 9, 2006. Southside the proposal, the Dallas banking market would remain Bank also received an "outstanding" rating at its most moderately concentrated and the Fort Worth banking mar recent CRA performance evaluation by the Federal Deposit ket would remain unconcentrated, as measured by the HHI. Insurance Corporation, as of March 12, 2007.16 Based on There would be no change in the HHI's measure of all the facts of record, the Board concludes that consider concentration in either market, and numerous competitors ations relating to the convenience and needs factor and the would remain in both banking markets. CRA performance records of the relevant depository insti The Department of Justice also has reviewed the antici tutions are consistent with approval. pated competitive effects of the proposal and advised the Board that consummation would not likely have a signifi cantly adverse effect on competition in any relevant bank CONCLUSION ing market. In addition, the appropriate banking agencies Based on the foregoing and all the facts of record, the have been afforded an opportunity to comment and have Board has determined that the application should be, and not objected to the proposal. Based on all the facts of record, the Board concludes that hereby is, approved. 17 In reaching its conclusion, the Board has considered all the facts of record in light of the factors consummation of the proposal would not have a signifi that it is required to consider under the BHC Act and other cantly adverse effect on competition or on the concentra applicable statutes. The Board's approval is specifically tion of resources in either the Dallas or Fort Worth banking conditioned on compliance by First National with the market or in any other relevant banking market and that conditions imposed in this order and the commitments competitive considerations are consistent with approval. made to the Board in connection with the application. The conditions and commitments are deemed to be conditions CONVENIENCE AND NEEDS CONSIDERATIONS imposed in writing by the Board in connection with its findings and decision herein and, as such, may be enforced In acting on a proposal under section 3 of the BHC Act, the in proceedings under applicable law. Board also must consider the effects of the proposal on the The acquisition of additional Southside voting shares convenience and needs of the communities to be served and may not be consummated before the 15th calendar day after the effective date of this order, or later than three months 12. Deposit and market share data are as of June 30. 2007. are after the effective date of this order, unless such period is adjusted to reflect subsequent mergers and acquisitions as of Janu ary 28. 2008. and are based on calculations in which the deposits of extended for good cause by the Board or the Federal thrift institutions are included at SO percent. The Board previously has Reserve Bank of Dallas, acting pursuant to delegated indicated that thrift institutions have become. or have the potential to authority. become. significant competitors of commercial banks. See. e.g .. By order of the Board of Governors, effective Febru Midwest Financial Group. 75 Federal Reserve Bulletin 386 (1989); National City Corporation. 70 Federal Reserve Bulletin 743 (1984). ary 4,2008. Thus. the Board regularly has included thrift institution deposits in the market share calculation on a 50 percent weighted basis. See, e.g., Voting for this action: Chairman Bernanke, Vice Chairman Kohn, First Hawaiian, Inc., 77 Federal Reserve Bulletin 52 (1991). and Governors Warsh, Kroszner. and Mishkin. 13. Under the DOJ Guidelines. a market is considered moderately concentrated if the post-merger HHI is between 1000 and 1800 and ROBERT DEY. FRIERSON highly concentrated if the post-merger HHI exceeds 1800. The Depart Deputy Secretary of the Board ment of Justice has informed the Board that a bank merger or acquisition generally will not be challenged (in the absence of other factors indicating anticompetitive effects) unless the post·merger HHI is at least 1800 and the merger increases the HHI more than 200 IS. 12 U.S.C. §2901 et seq. points. The Department of Justice has stated that the higher-than 16. Fort Worth National Bank received a "satisfactory" rating at its normal HHI thresholds for screening bank mergers for anticompetitive most recent CRA performance evaluation by the OCC, as of Febru effects implicitly recognize the competitive effects of limited-purpose ary 21,2006. lenders and other nondepository financial institutions. 17. In granting this approval. the Board hereby relieves First 14. Those banking markets and the effects of the proposal on the National of the Passivity Commitments it provided in connection with concentrations of banking resources are described in the appendix. the 2006 Order.
C34 Federal Reserve Bulletin 0 June 2008 Appendix BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO] GUIDELINES , Amount Remaining I Resulting Change in Bank Rank of deposits I HHI I number of HHI (dollars) competitors .~------~~----- TEXAS BANKING MARKETS Dallas-Dallas County, the southeastern quadrant of Denton County (including Denton and Lewisville), the southwestern quadrant of Collin County (including McKinney and Plano), Rockwall County, the communities of Forney and Terrell in Kaufman County, and Midlothian, Waxahachie, and Ferris in Ellis County o First National Pre-Consummation .. . 52 $118 mil. .14 1,604 129 Southside ................................ .. 119 687 tho o 1,604 o 129 First National Post-Consummation .. 52 $118.8 mil. .14 1,604 o 129 Fort Worth-The Fort Worth Arlington Metropolitan division, which consists of Tarrant, Johnson, Parker, and Wise counties and excludes Mineral Wells in Parker County First National Pre-Consummation .. . 76 Minimal Minimal 886 o 79 o Southside ................................. . 29 $100.1 mil. .45 886 79 First National Post-Consummation .. 29 $110.1 mil. .45 886 o 79 NOTE: Deposit data are as of lune 30, 2007. and include mergers as of lanu ary 28, 2008. Deposit amounts are unweighted. Rankings. market deposit shares. and HHIs are based on thrift institution deposits weighted at SO percent. Frandsen Financial Corporation application and all comments received in light of the Arden Hills, Minnesota factors set forth in section 3 of the BHC Act. Frandsen, with total consolidated assets of $1.2 billion, Order Approving the Acquisition of a Bank operates seven subsidiary insured depository institutions in Minnesota, Wisconsin, and North Dakota. In Minnesota, Frandsen is the 12th largest depository organization, con Frandsen Financial Corporation ("Frandsen"), a bank hold trolling deposits of $758.6 million, which represent less ing company within the meaning of the Bank Holding than 1 percent of total deposits of insured depository Company Act (HBHC Act"), has requested the Board's institutions in the state ("state deposits").2 approval under section 3 of the BHC Actl to acquire First Bank is the 221st largest insured depository institution in National Bank of Montgomery ("Bank"), Montgomery, Minnesota, controlling deposits of approximately $55 mil Minnesota. lion. On consummation of this proposal, Frandsen would Notice of the proposal, affording interested persons an become the 11 th largest depository organization in Minneopportunity to submit comments, has been published (73 Federal Register 492 (2008)). The time for filing comments has expired, and the Board has considered the 2. Asset data are as of December 31, 2007, and statewide deposit and ranking data are as of June 30, 2007. In this context, insured depository institutions include commercial banks, savings banks, and 1. 12 U.S.C. § 1842. savings associations.
Legal Developments: First Quarter, 2008 C35 sota, controlling deposits of approximately $813.6 million, lis.6 Residents of the area also have highway access to the which represent less than 1 percent of state deposits. Minneapolis-St. Paul banking market for shopping and other purposes. These and other factors indicate that the COMPETITIVE CONSIDERATIONS Minneapolis-St. Paul banking market, which includes Montgomery, is the appropriate local geographic banking Section 3 of the BHC Act prohibits the Board from market for purposes of analyzing the competitive effects on approving a proposal that would result in a monopoly or this proposalJ would be in furtherance of an attempt to monopolize the The Board has reviewed carefully the competitive effects business of banking in any relevant banking market. The of the proposal in the Minneapolis-SL Paul banking market BHC Act also prohibits the Board from approving a where Frandsen and Bank compete directly in light of all proposal that would substantially lessen competition in any the facts of record. In particular, the Board has considered relevant banking market, unless the anticompetitive effects the number of competitors that would remain in the bank of the proposal are clearly outweighed in the public interest ing market, the relative shares of total deposits in deposi by the probable effect of the proposal in meeting the tory institutions in the market ("market deposits") con convenience and needs of the community to be served.3 In trolled by Frandsen and Bank,8 the concentration level of evaluating the competitive factors in this case, the Board market deposits and the increase in that level as measured has considered the assertion by several commenters that the by the Herfindahl-Hirschman Index ("HHI") under the proposal would create a monopoly or substantially lessen Department of Justice Merger Guidelines ("DOJ Guide competition for banking services by eliminating Frandsen's lines"),9 and other characteristics of the market. only competitor in Montgomery. Consummation of the proposal would be consistent with Frandsen and Bank compete directly in the Minneapolis Board precedent and within the thresholds in the DOl St. Paul banking market, as delineated by the Federal Guidelines as applied in the Minneapolis-St. Paul banking Reserve Bank of Minneapolis ("Reserve Bank").4 Frand market. On consummation, the HHI of the Minneapolis-St. sen Bank and Trust ("Frandsen Bank"), Lonsdale, Minne Paul banking market would remain highly concentrated, sota, a subsidiary bank of Frandsen, operates a branch in and the HHI would increase less than 1 point as a result of Montgomery. Frandsen Bank and Bank are the only two this transaction. In addition, numerous competitors would 10 insured depository institutions operating in Montgomery. remain in the market. In defining the relevant geographic market, the Board and the courts have consistently found that the relevant 6. Montgomery Township is the unincorporated area that surrounds geographic market for analyzing the competitive effects of Montgomery. a proposal must reflect commercial and banking realities 7. The Board also considered the significantly lower percentage of and should consist of the local area where customers can residents in Montgomery and Montgomery Township commuting to practicably tum for altematives.5 In reviewing this proposal other population centers in the surrounding counties outside the Minneapolis-St. Paul banking market and the availability and variety and the comments received, the Board has considered the of shopping alternatives in the surrounding area. geographic proximity of the Minneapolis-St. Paul banking 8. Deposit and market share data are based on data reported by market's population centers and the worker commuting insured depository institutions in the summary of deposits data as of data from the 2000 census. The data indicate that more than June 30, 2007, and are based on calculations in which the deposits of 40 percent of the labor force residing in Montgomery (and thrift institutions are included at 50 percent. The Board previously has indicated that thrift institutions have become. or have the potential to Montgomery Township) commute to work in the become, significant competitors of commercial banks. See, e.g., Minneapolis-St. Paul banking market. Montgomery is Midwest Financial Group. 75 Federal Reserve Bulletin 386 (1989); approximately 55 miles from the city center of Minneapo- National City Corporation, 70 Federal Reserve Bulletin 743 (1984). Thus, the Board regularly has included thrift institution deposits in the market share calculation on a 50 percent weighted basis. See, e.g., First Hawaiian, Inc., 77 Federal Reserve Bulletin 52 (1991). 3. 12 U.S.c. § 18 42(c)(l). 9. Under the DOJ Guidelines, a market is considered unconcen 4. The Minneapolis-St. Paul banking market is defined as Anoka, trated if the post-merger HHI is under 1000, moderately concentrated Hennepin, Ramsey, Washington, Carver, Scott, and Dakota counties; if the post-merger HHI is hetween 1000 and 1800, and highly the townships of Lent, Chisago Lake, Shafer, Wyoming, and Franconia concentrated if the post-merger HHI exceeds 1800. The Department of in Chisago County; the townships of Blue Hill, Baldwin, Orrock, Justice ("001") has informed the Board that a bank merger or Livonia, and Big Lake and the city of Elk River in Sherburne County; acquisition generally will not be challenged (in the absence of other the townships of Monticello, Buffalo, Rockford, and Franklin and the factors indicating anticompetitive effects) unless the post-merger HHI cities of Otsego, Alhertville, and Sl. Michael in Wright County; and is at least 1800 and the merger increases the HHI more than 200 the townships of Lanesburgh, Derrynane, and Montgomery and the points. The DOJ has stated that the higher-than-normal HHI thresholds city of Montgomery in Le Sueur County, all in Minnesota; and the for screening bank mergers and acquisitions for anticompetitive effects township of Hudson in St. Croix County, Wisconsin. implicitly recognize the competitive effects of limited-purpose and 5. See United States v. Phillipsburg National Bank, 399 U.S. 350 other nondepository financial entities. (1970); United States v. Philadelphia National Bank, 374 U.S. 321, 10. Frandsen operates the 77th largest depository institution in the 357 (1963). See also First York Ban Corp, 88 Federal Reserve Bulletin Minneapolis-St. Paul banking market, controlling deposits of approxi 251, (2002); First Union Corporation, 84 Federal Reserve Bulletin mately $72 million, which represent less than I percent of market 489, 491-92 (1998); First Union Corporation. 83 Federal Reserve deposits. Bank is the 87th largest depository institution in the market, Bulletin 1012, 1013-14 (1997); Chemical Banking Corporation, controlling deposits of approximately $55 million. After the proposed 82 Federal Reserve Bulletin 239, 241 (1996); and WYoming Bancor acquisition, Frandsen would operate the 50th largest depository insti poration, 68 Federal Reserve Bulletin 313, 314 (1982). tution in the market, controlling deposits of approximately $127 mil-
C36 Federal Reserve Bulletin 0 June 2008 The DOJ has conducted a detailed review of the poten nizations contemplating expansion to maintain strong capi tial competitive effects of the proposal and has advised the tal levels substantially in excess of the minimum levels Board that consummation of the proposal would not likely specified by the Board's Capital Adequacy Guidelines. The have a significantly adverse effect on competition in any Board also evaluates the financial condition of the com relevant banking market. In addition, the appropriate bank bined organization at consummation, including its capital ing agencies have been afforded an opportunity to comment position, asset quality, and earnings prospects, and the and have not objected to the proposal. impact of the proposed funding of the transaction. Based on all the facts of record, the Board concludes that The Board has considered carefully the proposal under consummation of the proposal would not have a signifi the financial factors. Frandsen, its subsidiary depository cantly adverse effect on competition or on the concentra institutions, and Bank are well capitalized and would tion of resources in the Minneapolis-St. Paul banking remain so on consummation. Based on its review of the market, where Frandsen and Bank compete directly, or in record, the Board also finds that Frandsen has sufficient any other relevant banking market.ll Accordingly, the financial resources to effect the proposal. The proposed Board has determined that competitive considerations are transaction is structured as a cash purchase that will be consistent with approval.12 funded through dividends from its subsidiary insured depository institutions. FINANCIAL, MANAGERIAL, AND SUPERVISORY The Board also has considered the managerial resources CONSIDERATIONS of Frandsen, its subsidiary depository institutions, and Bank, The Board has reviewed the examination records of Section 3 of the BHC Act requires the Board to consider the these institutions, including assessments of their manage financial and managerial resources and future prospects of ment, risk-management systems, and operations. In addi the companies and depository institutions involved in the tion, the Board has considered its supervisory experiences proposal and certain other supervisory factors. The Board and those of the other relevant banking supervisory agen has considered these factors in light of all the facts of cies with the organizations and their records of compliance record, including confidential reports of examination, other with applicable banking law, including anti-money supervisory information from the primary supervisors of laundering laws. Frandsen and its subsidiary depository the organizations involved in the proposal, publicly re institutions are considered to be well managed. The Board ported and other financial information, and information also has considered Frandsen's plans for implementing the provided by the applicant. proposal, including the proposed management at Bank after In evaluating financial factors in expansion proposals by consummation. banking organizations, the Board reviews the financial Based on all the facts of record, the Board has concluded condition of the organizations involved on both a parent that considerations relating to the financial and managerial only and consolidated basis, as well as the financial condi resources and future prospects of the organizations involved tion of the subsidiary banks and significant nonbanking in the proposal are consistent with approval, as are the other operations. In this evaluation, the Board considers a variety supervisory factors under the BHC Act. of information, including capital adequacy, asset quality, and earnings performance. In assessing financial factors, CONVENIENCE AND NEEDS CONSIDERATIONS the Board consistently has considered capital adequacy to be especially important. The Board expects banking orga- In acting on a proposal under section 3 of the BHC Act, the Board also must consider the effects of the proposal on the convenience and needs of the communities to be served and lion, which represent less than 1 percent of market deposits. One take into account the records of the relevant insured hundred and forty-seven insured depository institutions would remain depository institutions under the CRA. All of Frandsen's in the banking market. The HHl is 1858 and would increase less than I insured depository institutions received "outstanding" or point as a result of this proposal. 11. Until recently, the Reserve Bank included Montgomery and "satisfactory" ratings at their most recent CRA perfor Montgomery Township in the definition of the Mankato banking mance evaluations by the institutions' primary federal market. After a review of the facts and for the reasons discussed above, supervisors, Frandsen's lead bank, Frandsen Bank, received the Board reaffirms the Reserve Bank's inclusion of Montgomery and an "outstanding" rating at its most recent CRA perfor Montgomery Township in its revised definition of the Minneapolis-St. Paul banking market. If Montgomery and Montgomery Township mance evaluation by the Federal Deposit Insurance Corpo were included in the Mankato banking market, the competitive effects ration ("FDIC"), as of September 15,2003.13 The examin of the proposal also would be consistent with approval, Frandsen's ers noted that Frandsen Bank had an excellent distribution market share in the Mankato banking market would increase to of residential lending to borrowers of different incomes and 8.3 percent, and the HHI would increase 29 points to 650, 12, A commenter contended that the elimination of banking options in Montgomery would adversely affect a customer's ability to ensure the confidentiality of personal and business banking information, As 13. Frandsen Bank is the result of a merger involving affiliate banks noted above, Montgomery is in the Minneapolis-St. Paul banking in 2004, The FDIC conducted the last CRA performance evaluation of market and numerous banking options would remain for customers in Frandsen Bank while the bank was doing business as Valley Bank and the market. Moreover, Frandsen has an established privacy policy and Trust. The most recent CRA performance evaluation ratings of Frand customer information security policy and has represented that it will sen's other subsidiary insured depository institutions are listed in the implement these policies at Bank. appendix, ,,".-------
Legal Developments: First Quarter; 2008 C37 commended the bank's involvement in special home loan has considered all the facts of record in light of the factors programs to meet the needs of low- and moderate-income that it is required to consider under the BHC Act. The families. They also reported that the bank had a good Board's approval is specifically conditioned on compliance distribution of lending to businesses of different sizes. by Frandsen with the conditions imposed in this order and Bank received an "outstanding" rating at its most recent the commitments made to the Board in connection with the CRA performance evaluation by the Office of the Comp application. For purposes of this action, the conditions and troller of the Currency, as of March 4, 2003. Frandsen commitments are deemed to be conditions imposed in represented that the proposal would expand the availability writing by the Board in connection with its findings and of credit and the products and services available to Bank's decision herein and, as such, may be enforced in proceed customers.14 Based on all the facts of record, the Board ings under applicable law. concludes that considerations relating to the convenience The proposed transaction may not be consummated and needs factor and the CRA performance records of the before the 15th calendar day after the effective date of this relevant depository institutions are consistent with ap order, or later than three months after the effective date of proval. this order, unless such period is extended for good cause by the Board or the Reserve Bank, acting pursuant to del CONCLUSION egated authority. By order of the Board of Governors, effective Febru Based on the foregoing and all the facts of record, the ary 25, 2008. Board has determined that the application should be, and hereby is, approved. IS In reaching its conclusion, the Board Voting for this action: Chairman Bernanke and Governors Warsh, Kroszner, and Mishkin. Absent and not voting: Vice Chairman Kohn. 14. Some commenters expressed concern that the proposed acqui ROBERT DEY. FRIERSON sition would result in a loss of jobs and businesses in Montgomery. A Deputy Secretary of the Board proposed transaction's effect on those matters for a community is not among the factors that the Board is authorized to consider under the BHC Act, and the federal banking agencies, courts, and the Congress necessary or appropriate to clarify factual issues related to the consistently have interpreted the convenience and needs factor to application and to provide an opportunity for testimony (12 CFR relate to the effect of a proposal on the availability and quality of 225.l6(e), 262.25(d»). The Board has considered carefully the com banking services in the community. See, e.g., Wells Fargo & Com menters' requests in light of all the facts of record. In the Board's view, pany, 82 Federal Reserve Bulletin 445, 447 (1996). the commenters had ample opportunity to submit their views and, in 15. The commenters requested that the Board hold a public meeting fact, submitted written comments that the Board has considered or hearing on the proposal. Section 3 of the BHC Act does not require carefully in acting on the proposal. The commenters' requests fail to the Board to hold a public hearing on an application unless the demonstrate why written comments do not present their views appropriate supervisory authority for the bank to be acquired makes a adequately or why a meeting or hearing otherwise would be necessary written recommendation of denial of the application. The Board has or appropriate. For these reasons, and based on all the facts of record, not received such a recommendation from the appropriate supervisory the Board has determined that a public meeting or hearing is not authorities. Under its rules, the Board also may, in its discretion, hold a required or warranted in this case. Accordingly. the requests for a public meeting or hearing on an application to acquire a bank if public meeting or hearing on the proposal are denied. Appendix CRA PERFORMANCE EVALUATIONS Subsidiary Bank CRA Rating Date Supervisor Queen City Federal Savings Bank, Outstanding 3/29/2004 Office of Thrift Virginia, Minnesota Supervision Rural American Bank, Satisfactory 3/1212003 FDIC Braham, Minnesota Valley Bank, Satisfactory 10/3112007 FDIC Waterville, Minnesota Community Bank of the Red River Valley, Satisfactory 12115/2003 FDIC East Grand Forks, Minnesota Rural American Bank-Luck, Satisfactory 9/23/2002 FDIC Luck, Wisconsin Valley Bank Minnesota, Satisfactory 112112003 FDIC Jordan, Minnesota
C38 Federal Reserve Bulletin 0 June 2008 The PNC Financial Services Group, Inc. Columbia6 and engages in numerous nonbanking activities Pittsburgh, Pennsylvania that are permissible under the BHC Act. PNC is the largest depository organization in Pennsylvania, controlling depos its of approximately $35.2 billion. In Delaware, PNC is the PNC Bank Delaware eighth largest depository organization, controlling deposits Wilmington, Delaware of approximately $2.6 billion. Sterling has total consolidated assets of $3.2 billion, and Order Approving the Mergers of Bank its subsidiary banks operate in Delaware, Maryland, and Pennsylvania. In Pennsylvania, Sterling is the 22nd largest Holding Companies and Banks and the depository organization, controlling state deposits of ap Establishment of a Branch proximately $2.3 billion. In Delaware, Sterling is the 27th largest depository organization, controlling deposits of The PNC Financial Services Group, Inc. ("PNC"), a approximately $45.6 million. financial holding company within the meaning of the Bank On consummation of the proposal, PNC would become Holding Company Act (HBHC Act"), has requested the the 18th largest depository institution in the United States, Board's approval under section 3 of the BHC Act to merge with total consolidated assets of approximately $128.9 bil with Sterling Financial Corporation ("Sterling"), 1 Lan lion. PNC would control deposits of approximately $77 bil caster, Pennsylvania, and acquire Sterling's two subsidiary lion, which represent less than I percent of the total amount banks, BLC Bank, National Association ("BLC NA"), of deposits of insured depository institutions in the United Strasburg, Pennsylvania; and Delaware Sterling Bank & States. In Pennsylvania, PNC would remain the largest Trust Company ("DE Sterling Bank"), Christiana, Dela depository organization, controlling deposits of approxi ware. mately $37.5 billion, which represent approximately In addition, PNC Bank Delaware ("PNC Bank DE"), 14.5 percent of the total amount of deposits of insured Wilmington, Delaware, a state member bank, has requested depository institutions in the state ("state deposits"). In the Board's approval under section 18(c) of the Federal Delaware, PNC would remain the eighth largest depository Deposit Insurance Act2 ("Bank Merger Act") to merge organization, controlling deposits of approximately $2.6 bil with DE Sterling Bank, with PNC Bank DE as the surviv lion, which represent approximately 1.6 percent of state ing entity. PNC Bank DE also has applied under section 9 deposits. of the Federal Reserve Act ("FRA") to retain and operate a branch at the main office of DE Sterling Bank.3 Notice of the proposal, affording interested persons an INTERSTATE ANALYSIS opportunity to submit comments, has been published in accordance with relevant statutes and the Board's Rules of Section 3(d) of the BHC Act allows the Board to approve Procedure (72 Federal Register 45,426 (2007)).4 As re an application by a bank holding company to acquire quired by the Bank Merger Act, a report on the competitive control of a bank located in a state other than the home state effects of the bank merger was requested from the United of such bank holding company if certain conditions are States Attorney General, and a copy of the request was mel. For purposes of the BHC Act, the home state of PNC provided to the Federal Deposit Insurance Corporation is Pennsylvania, 7 and Sterling is located in Delaware, ("FDIC"). The time for filing comments has expired, and Maryland, and Pennsylvania.s the Board has considered the proposal and all comments Based on a review of all the facts of reeord, including the recei ved in light of the factors set forth in the BHC Act, the relevant state statutes, the Board finds that the conditions Bank Merger Act, and the FRA. for an interstate acquisition enumerated in section 3(d) of PNC, with total consolidated assets of approximately $125.7 billion, is the 20th largest depository organization in the United States, controlling deposits of approximately insured depository institutions include commercial banks, savings $74.4 billion, which represent less than I percent of the banks, and savings associations. total amount of deposits of insured depository institutions 6. PNC's largest subsidiary bank, PNC Bank National Association in the United States.s PNC operates three subsidiary insured ("PNC Bank"), Pittsburgh, Pennsylvania, operates branches in Dela ware, Florida, indiana, Kentucky, Maryland, New Jersey, Ohio, Penn depository institutions in nine states and the District of sylvania, Virginia, and the District of Columbia. PNC Bank DE operates in Delaware and Pennsylvania. On October 26, 2007, PNC acquired Yardville National Bancorp, Hamilton, New Jersey, and its 1. 12 U.S.C. § 1842. PNC proposes to acquire the nonbanking subsidiary bank, Yardville National Bank, which operates in New Jer subsidiaries of Sterling in accordance with section 4(k) of the BHC sey and Pennsylvania. Act, 12 U.S.C. § 1843(k). 7. A bank holding company's home state is the state in which the 2. 12 U.S.C. § 1828(c). total deposits of all subsidiary banks of the company were the largest 3. 12 U .S.c. § 321. The office is at 630 Churchrnans Road, Suite on July I, 1966, or the date on which the company became a bank #204, Christiana. holding company, whichever is later (12 U.S.c. § 1841(0)(4)(C». 4. 12 CFR 262.3(b). 8. For purposes of section 3(d), the Board considers a bank to be 5. National asset, deposit, and ranking data are as of June 30, 2007. located in the states in which the bank is chartered or headquartered or Statewide deposit and deposit ranking data are as of June 30, 2007, operates a branch (12 U.S.C. §§ 1841(0)(4)-(7) and 1842(d)(l)(A) and and reflect merger activity through January 9, 2008. [n this context, (d)(2)(B )).
Legal Developments: First Quarter, 2008 C39 the BHC Act are met in this case.9 In light of all the facts of Consummation of the proposal would be consistent with record. the Board is permitted to approve the proposal Board precedent and within the thresholds in the DOJ under section 3(d) of the BHC Act. Guidelines in each of the six banking markets.13 On consummation of the proposal, one market would remain COMPETITIVE CONSIDERATIONS concentrated, four markets would remain moderately con centrated, and one market would remain highly concen The BHC Act and the Bank Merger Act prohibit the Board trated, as measured by the HHL The change in the HHI's from approving a proposal that would result in a monopoly measure of concentration would be less than 100 points in or would be in furtherance of an attempt to monopolize the each market, and numerous competitors would remain in business of banking in any relevant banking market. Both all six banking markets. statutes also prohibit the Board from approving a bank The DOJ has conducted a detailed review of the poten acquisition that would substantially lessen competition in tial competitive effects of the proposal and has advised the any relevant banking market, unless the anticompetitive Board that consummation of the transaction would not effects of the proposal are clearly outweighed in the public likely have a significantly adverse effect on competition in interest by the probable effect of the proposal in meeting any relevant banking market. In addition, the appropriate the convenience and needs of the community to be served. \0 banking agencies have been afforded an opportunity to PNC and Sterling have subsidiary depository institutions comment and have not objected to the proposal. that compete directly in six banking markets: Wilmington Based on all the facts of record, the Board concludes that in Delaware and Maryland; Baltimore, Maryland; Harris consummation of the proposal would not have a signifi burg, Lancaster, and York, Pennsylvania; and Philadelphia cantly adverse effect on competition or on the concentra in Pennsylvania and New Jersey. The Board has reviewed tion of resources in any of the banking markets where PNC carefully the competitive effects of the proposal in each of and Sterling compete directly or in any other relevant these banking markets in light of all the facts of record. In banking market. Accordingly, the Board has determined particular, the Board has considered the number of competi that competitive considerations are consistent with ap tors that would remain in the markets, the relative shares of proval. total deposits in depository institutions in the markets ("market deposits") controlled by PNC and Sterling, II the FINANCIAL, MANAGERIAL, AND SUPERVISORY concentration level of market deposits and the increase in CONSIDERATIONS that level as measured by the Herfindahl-Hirschman Index ("HHI") under the Department of Justice Merger Guide Section 3 of the BHC Act and the Bank Merger Act require lines ("DOJ Guidelines"), 12 and other characteristics of the the Board to consider the financial and managerial re markets. sources and future prospects of the companies and deposi tory institutions involved in the proposal and certain other supervisory factors. The Board has considered these factors 9. 12 U.S.C §§ I 842(d)(l)(A)-(B) and l842(d)(2)-(3). PNC is adequately capitalized and adequately managed, as defined by appli in light of all the facts of record, including confidential cable law. Tllere are no minimum periods of time for which Sterling's reports of examination and other supervisory infonnation subsidiary banks are required to have been in existence under any received from the relevant federal and state supervisors of relevant state law. On consummation of the proposal, PNC would the organizations involved in the proposal, and publicly control less than 10 percent of the total amount of deposits of insured reported and other financial infonnation, including infonna depository institutions in the United States (12 U.S.C § 1842(d)(2)(A». In addition, PNC would controiiess than 30 percent. or the applicable tion provided by PNC, percentage established under state law. of the total amount of deposits In evaluating financial factors in expansion proposals by of insured depository institutions in Maryland and Delaware. See banking organizations, the Board reviews the financial 12 U.S.C § I 842(d)(2)(B)-(C); Md. Fin. Inst. §5-905. All other condition of the organizations involved on both a parent requirements of section 3(d) of the BHC Act would he met on only and consolidated basis, as well as the financial condi consummation of the proposal. 10. 12 U.S.C. § 18 42(c)(I). tion of the subsidiary depository institutions and the orga II. Deposit and market share data are as of June 30, 2007, adjusted nizations' nonbanking operations. In this evaluation, the to rellect mergers and acquisitions through January 14. 2008, and are Board considers a variety of infonnation, including capital based on calculations in which the deposits of thrift institutions are adequacy, asset quality, and earnings performance. In included at 50 percent. The Board previously has indicated tllat thrift institutions have become, or have the potential to become, significant assessing financial factors, the Board consistently has competitors of commercial banks. See, e.g., Midwest Financial Group, considered capital adequacy to be especially important. The 75 Federal Reserve Bulletin 386, 387 (1989); National City Corpora Board also evaluates the financial condition of the comtion. 70 Federal Reserve Bulletin 743. 744 (1984). Thus, the Board regularly has included thrift institution deposits in the market share calculation on a 50 percent weighted basis. See, e.g., First Hawaiian, factors indicating anticompetitive effects) unless the post-merger HHI Inc., 77 Federal Reserve Bulletin 52, 55 (1991). is at least 1800 and the merger increases the HHI more than 200 12. Under the DOJ Guidelines, a market is considered unconcen points, The DOJ has stated that tile higher-than-normal HHI thresholds trated if the post-merger HHI is under 1000, moderately concentrated for screening bank mergers and acquisitions for anticompetitive effects if the post-merger HHI is between 1000 and 1800, and highly implicitly recognize the competitive effects of limited-purpose and concentrated if the post-merger HHI exceeds 1800. The Department of other nondepository financial entities. Justice ("DOJ") has informed the Board that a bank merger or 13. Those banking markets and the effects of the proposal on their acquisition generally will not be challenged (in the absence of other concentrations of banking resources are described in Appendix A.
C40 Federal Reserve Bulletin 0 June 2008 bined organization at consummation, including its capital data reported by PNC and Sterling under the Home Mort position, asset quality, and earnings prospects, and the gage Disclosure Act ("HMDA"),16 as well as small busi impact of the proposed funding of the transaction. ness lending data reported under the CRA, other informa The Board has considered the proposal carefully under tion provided by PNC, confidential supervisory information, the financial factors. PNC and its subsidiary depository and public comments received on the proposal. A com institutions are well capitalized. PNC has represented that it menter criticized the CRA-related activities of PNC and will merge BLC NA into PNC Bank after consummation of Sterling and alleged that their banks' mortgage lending to this acquisition. On consummation of the proposed mergers LMI minority families in the New York-New Jersey of the parent companies and banks, PNC and its subsidiary Pennsylvania regional area ("Tri-State Region") was insuf banks would remain well capitalized. Based on its review ficient. In addition, the commenter criticized PNC's and of the record, the Board finds that PNC has sufficient Sterling's general records of home mortgage lending to financial resources to effect the proposal. The proposed minorities in the Tri-State Region.17 transaction is structured as a combination share exchange and cash purchase, and PNC will use existing resources to A. eRA Performance Evaluations fund the cash portion of the purchase. The Board also has considered the managerial resources As provided in the CRA, the Board has evaluated the of the organizations involved and the proposed combined convenience and needs factor in light of the evaluations by organization. The Board has reviewed the examination the appropriate federal supervisors of the CRA perfor records of PNC, Sterling, and their subsidiary depository mance records of the insured depository institutions of institutions, including assessments of their management, PNC and Sterling. An institution'S most recent CRA perfor risk-management systems, and operations. In addition, the mance evaluation is a particularly important consideration Board has considered its supervisory experiences and those in the applications process because it represents a detailed, of the other relevant bank supervisory agencies with the on-site evaluation of the institution's overall record of organizations and their records of compliance with appli performance under the CRA by its appropriate federal cable banking law, including anti-money-Iaundering laws. supervisor. IS PNC and its subsidiary depository institutions are consid PNC Bank received an "outstanding" rating at its most ered to be well managed. The Board also has considered recent CRA performance evaluation by the Office of the PNC's plans for implementing the proposal, including the Comptroller of the Currency ("OCC"), as of May 16, 2006 proposed management after consummation. ("PNC 2006 Evaluation"). PNC Bank DE also received an Based on all the facts of record, the Board has concluded "outstanding" rating at its most recent CRA evaluation.19 that considerations relating to the financial and managerial BLC NA, Sterling's largest bank based on both assets resources and future prospects of the organizations involved and deposits, was formed in 2007 by the consolidation of in the proposal are consistent with approval. as are the other four Sterling subsidiary banks, including its largest bank at supervisory factors under the BHC Act and the Bank that time, Bank of Lancaster County, National Association Merger Act. ("Lancaster Bank").20 The CRA performance of BLC NA has not yet been evaluated. The Board's analysis takes into consideration the eRA performance record of all of Ster- CONVENIENCE AND NEEDS CONSIDERATIONS In acting on a proposal under section 3 of the BHC Act and 16. 12 U.S.C. § 2801 et seq. the Bank Merger Act, the Board also must consider the 17. The commenter also urged the Board to require PNC to provide effects of the proposal on the convenience and needs of the specific CRA pledges or plans or to require it to take certain actions in communities to be served and take into account the records the future. The Board consistently has stated that neither the CRA nor the federal banking agencies' CRA regulations require depository of the relevant insured depository institutions under the institutions to make pledges or enter into commitments or agreements Community Reinvestment Act ("CRA").14 The CRA re with any organization and that the enforceability of any such third quires the federal financial supervisory agencies to encour party pledges. initiatives, or agreements are matters outside the CRA. age insured depository institutions to help meet the credit See, e.g., Wachovia Corporation, 91 Federal Reserve Bulletin 77 needs of the local communities in which they operate, (2005). Instead, the Board focuses on the existing CRA performance record of an applicant and the programs that an applicant has in place consistent with their safe and sound operation, and requires to serve the credit needs of its assessment areas at the time the Board the appropriate federal financial supervisory agency to take reviews a proposal under the convenience and needs factor. into account a relevant depository institution's record of 18. See Interagency Questions and Answers Regarding Community meeting the credit needs of its entire community, including Reinvestment, 66 Federal Register 36,620 at 36,640 (2001). 19. PNC Bank DE's most recent evaluation was as of January 21, low- and moderate-income ("LMI") neighborhoods, in 2003, by the FDIC In 2006, PNC Bank DE became a member of the evaluating bank expansionary proposals. IS Federal Reserve System and has not been examined since its member The Board has considered carefully all the facts of ship. Yardville National Bank received a "satisfactory" rating at its record, including reports of examination of the CRA perfor most recent performance evaluation by the acc, as of January 3, mance records of the subsidiary banks of PNC and Sterling, 2006. 20. On May 25,2007, the OCC approved the consolidation of the four depository institutions into BLC NA. In addition to Lancaster 14. 12 U.S.C. § 2901 et seq.; 12 U.S.C. § 1842(c)(2). Bank, Sterling's other subsidiary banks in the consolidation were 15. 12 U.S.c. §2903. Bank of Hanover and Trust Company, Pennsylvania State Bank, and
Legal Developments: First Quarter; 2008 C4l ling's unconsolidated CRA-reporting depository institu investments represented excellent responsiveness to the tions and focuses on Lancaster Bank's record of perfor needs of the Multi-State MA community, particularly for mance as the largest of the four banks. Lancaster Bank affordable housing. received an "outstanding" rating at its most recent perfor Examiners also concluded that the bank's delivery sys mance evaluation by the acc, as of June 13, 200S tems overall were accessible to all customers. In the ("Sterling 200S Evaluation"). DE Sterling Bank also Multi-State MA assessment area, examiners rated PNC received a "satisfactory" rating at its most recent perfor Bank's performance under the service test as "high satis mance evaluation by the fTIIC, as of November 6, 2006. factory" and reported that the bank offered an excellent PNC has represented that it will implement its program for level of community development services that benefited managing community reinvestment activities at Sterling's LMI individuals. They noted that PNC employees provided subsidiary banks on consummation of the proposal. community development services to approximately 200 CRA Peiformance of PNC Bank. In addition to PNC different organizations and groups and in educational set Bank's overall "outstanding" rating in the PNC 2006 tings, including finaneial-literacy assistance to LMI indi Evaluation,21 the bank received an overall "outstanding" in viduals. the Pennsylvania and Multi-State MA assessment areas and CRA Peiformance of Lancaster Bank. As noted, Lan "high satisfactory" ratings in each of the lending, service, caster Bank received an overall "outstanding" rating in the and investment tests in its New Jersey assessment area. Sterling 2005 Evaluation.22 Under the lending test, Lan Examiners reported that PNC Bank's overall lending per caster Bank also received an "outstanding" rating, and formance was good, as reflected by the bank's loan volume examiners reported that the bank's distribution of loans in and loan distribution by geography and borrower income. its assessment areas reflected a good penetration among They further noted that PNC Bank's overall community retail customers and an excellent distribution among retail development lending was strong and had a significant customers of different income levels and business custom positive impact on the bank's overall lending test. ers of varying sizes. They stated that the bank's lending Examiners reported that the bank's overall distribution levels reflected excellent responsiveness to community of loans in the Multi-State MA to borrowers of different credit needs. income levels and businesses of different sizes and the Examiners reported that Lancaster Bank's community geographic distribution of those loans was excellent. They development lending was responsive to the Lancaster AA's noted that the bank's percentage of small loans to busi need for affordable housing in LMI geographies, to the nesses represented a significant percentage of the bank's credit needs ofLMI individuals in the assessment area, and lending to businesses in each year of the evaluation period. to the revitalization needs of distressed communities. They Examiners noted that in the Multi-State MA, PNC Bank also commended the bank's performance for originating focused such lending on affordable housing and that the small loans to businesses, despite strong competition from bank also made a significant volume of community devel five large lenders in the Lancaster AA. opment loans for revitalization and stabilization of LMI Examiners rated Lancaster Bank's community develop areas. ment investment activities as "high satisfactory" under the In the PNC 2006 Evaluation, examiners also com investment test and reported that Lancaster Bank's quali mended PNC Bank's overall level of qualified investments fied investments reflected a good responsiveness to commu and concluded that the bank's performance under the nity revitalization needs. During the exam's evaluation investment test in the Multi-State MA assessment area was period, Lancaster Bank made investments and donations outstanding. They noted that the bank's level of qualifying totaling $1.4 million in the Lancaster AA. They also noted that Lancaster Bank had good investment performance despite limited investment opportunities in the Lancaster AA. For instance, the bank took the initiative to form Bay First Bank, National Association. The most recent CRA perfor manee ratings of those four banks before consolidation are in Appen Sterling Community Development Corporation LLC to dix B. help meet the affordable housing needs of LMI individuals. 21. Examiners considered the performance of certain relevant PNC In the Sterling 200S Evaluation, Lancaster Bank received subsidiaries in the PNC 2006 Evaluation. References to PNC Bank in a "high satisfactory" rating on the service test. Examiners the Board's convenience and needs analysis incorporate these entities. The PNC 2006 Evaluation focused on PNC Bank's performanee in found that the bank's services were accessible to all assessment areas in Pennsylvania and New Jersey and the Philadelphia portions of the Lancaster AA, including LMI geographies, Camden-Wilmington, PA-NJ-DE-MD Metropolitan Area ("Multi and they noted that Lancaster Bank provided Spanish State MA"), which together represented approximately 83 percent of the bank's deposits. Examiners considered PNC's HMDA-reportable loans and small loans to businesses for the period of January 1, 2002, through Deeember 31, 2005. "Small loans to businesses" are loans 22. Of Lancaster Bank's three assessment areas, examiners focused with original amounts of $1 million or less that are either secured by on the Lancaster assessment area ("Lancaster AA") in the Sterling nonfarm, nonresidential properties or classified as commercial and 2005 Evaluation. Lancaster Bank obtained the majority of its deposits industrial loans. PNC Bank's community development loans, invest from, and originated most of its loans in, the Lancaster AA. The ments, and services were evaluated for the period beginning April I, evaluation period was from January I, 2002, to June 13, 2005, for the 2002, through April 30, 2006. lending, investment, and service tests.
C42 Federal Reserve Bulletin 0 June 2008 language services, including services for Latino LMI cus Because of the limitations of HMDA data, the Board has tomers. They reported that the bank's employees provided considered these data carefully and taken into account other a high level of community services in the bank's assess information, including examination reports that provide ment areas. Examiners also commended Lancaster Bank on-site evaluations of compliance with fair lending laws by for providing technical and financial expertise to qualified PNC, Sterling, and their subsidiaries. The Board also has community organizations involved in activities that in consulted with the acc about the fair-lending compliance cluded assisting with support services and skill training record of PNC Bank. targeted to LMI individuals; addressing redevelopment The record of this proposal, including confidential super issues, urban revitalization, and property rehabilitation; visory information, indicates that PNC and Sterling have assisting start-up businesses; and helping families gain taken steps to ensure compliance with fair lending and access to affordable housing. other consumer protection laws, PNC has a fair-lending compliance program that includes a second review process B. HMDA and Fair Lending Record to identify any discriminatory practices with respect to the company's home mortgage lending. In addition, PNC has a The Board has carefully considered the fair lending records process for resolving fair lending complaints and conducts and HMDA data of PNC and Sterling in light of public periodic internal audits of its fair lending program. PNC comments received on the proposal. A commenter alleged requires its employees to complete fair-lending training that in the Tri-State region, PNC and Sterling provided an sessions. insufficient number of home mortgage loans to African Sterling's compliance program is handled by a consult American and Hispanic borrowers or otherwise engaged in ing firm that provides services regarding regulatory changes disparate treatment of those minority individuals in home and that is responsible for overseeing the implementation mortgage lending. The Board has focused its analysis on of regulatory changes. The firm monitors bank initiatives the 2005 and 2006 HMDA data reported by PNC Bank and and products, including a review of all marketing and Sterling's predecessor banks.23 advertising. In addition, the firm performs compliance Although the HMDA data might reflect certain dispari monitoring, prepares risk assessments, and oversees com ties in the rates of loan applications, originations, and pliance training. denials among members of different racial or ethnic groups PNC has represented that after the conversion of rel in certain local areas, they provide an insufficient basis by evant Sterling financial systems to PNC systems, PNC's themselves on which to conclude whether or not PNC or policies, procedures, processing systems, and personnel Sterling is excluding or imposing higher costs on any group will be used to ensure regulatory compliance, and PNC on a prohibited basis. The Board recognizes that HMDA plans to employ its lending system and processes across its data alone, even with the recent addition of pricing infor expanded network of branches. In addition, Sterling em mation, provide only limited information about the covered ployees will receive PNC's fair lending and compliance loans.24 HMDA data, therefore, have limitations that make training. them an inadequate basis, absent other information, for The Board also has considered the HMDA data in light concluding that an institution has engaged in illegal lending of other information, including the CRA-related small discrimination. business lending, and the overall performance records of The Board is nevertheless concerned when HMDA data the subsidiary banks of PNC and Sterling under the CRA. for an institution indicate disparities in lending and believes These established efforts and records demonstrate that the that all lending institutions are obligated to ensure that their institutions are active in helping to meet the credit needs of lending practices are based on criteria that ensure not only their entire communities. safe and sound lending but also equal access to credit by creditworthy applicants regardless of their race or ethnicity. C. Conclusion on Convenience and Needs and CRA Performance 23. The Board reviewed the HMDA data reported by PNC in its assessment areas in New Jersey and Pennsylvania, the Pittsburgh The Board has considered carefully all of the facts of Metropolitan Statistical Area (HMSA"), and the Philadelphia-Camden record, including reports of examination of the CRA Metropolitan District C"MD"), as well as the New Jersey portion of records of the institutions involved, information provided the New York-White Plains-Wayne MD. In addition, the Board reviewed the 2005 and 2006 HMDA data reported by Sterling's by PNC, the comment received on the proposal, and institutions in their assessment areas in Pennsylvania and the Lan confidential supervisory information. PNC represented that caster MSA. the proposal will result in greater convenience for PNC and 24, The data, for example, do not account for the possibility that an Sterling customers by enabling PNC to provide additional institution's outreach efforts may attract a larger proportion of margin ally qualified applicants than other institutions attract and do not products and services more efficiently through an enhanced provide a basis for an independent assessment of whether an applicant distribution system. Based on a review of the entire record, who was denied credit was, in fact, creditworthy. In addition, credit and for the reasons discussed above, the Board concludes history problems, excessive debt levels relative to income, and high that considerations relating to the convenience and needs loan amounts relative to the value of the real estate collateral (reasons factor and the CRA performance records of the relevant most frequently cited for a credit denial or higher credit cost) are not available from HMDA data. insured depository institutions are consistent with approval.
Legal Developments: First Quarter, 2008 C43 ESTABUSHMENT OF A BRANCH ments made to the Board in connection with the applica tions. and receipt of all other regulatory approvals. For As noted, PNC Bank DE also has applied under section 9 of purposes of this action, the conditions and commitments the FRA to establish a branch at DE Sterling Bank's main are deemed to be conditions imposed in writing by the office. The Board has assessed the factors it is required to Board in connection with its findings and decision herein consider when reviewing an application under section 9 of and, as such, may be enforced in proceedings under the FRA and the Board's Regulation H and finds those applicable law. factors to be consistent with approval.25 The proposal may not be consummated before the 15th calendar day after the effective date of this order, or later CONCLUSION than three months after the effective date of this order, unless such period is extended for good cause by the Board Based on the foregoing and all facts of record, the Board or the Federal Reserve Bank of Cleveland, acting pursuant has determined that the applications should be. and hereby to delegated authority. are. approved. In reaching its conclusion. the Board has By order of the Board of Governors, effective Janu considered all the facts of record in light of the factors that ary 25. 2008. it is required to consider under the BHC Act, the Bank Merger Act, and the FRA. The Board's approval is specifi Voting for this action: Chairman Bernanke. Vice Chairman Kahn. cally conditioned on compliance by PNC and PNC Bank and Governors Warsh, Kroszner. and Mishkin. DE with the conditions imposed in this order, the commit- ROBERT DEV. FRIERSON 25. 12 V.S.c. §322; 12 CFR 208.6(b). Deputy Secretary of the Board Appendix A BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO] GUIDEUNES Market Amount I Remaining deposit Resulting Change in Bank Rank of deposits number of shares HHI HHI (dollars) competitors (percent) I DELAWARE AND MARYLAND BANKING MARKETS Wilmington-New Castle County. Delaware and Cecil County. Maryland PNC Pre-Consummation .............. 3 2.0 bil. 6.5 3,580 7 21 Sterling .................................... 13 169.1 mil. .6 3,580 7 21 PNC Post-Consummation ............. 3 2.1 bil. 7.1 3,580 7 21 Baltimore-The Baltimore Ranally Metro Area (RMA) and the non- RMA portions of Harford and Carroll counties in Maryland (except that part in the Washington, DC RMA) PNC Pre-Consummation ... ... ... .. 2 4.8 bil. 12.1 1,214 7 74 ~ ~ ~ Sterling .................................... 34 IlO.3 mil. .3 1,214 7 74 PNC Post-Consummation ............. 2 4.9 bil. 12.4 1,214 7 74 PENNSYLVANIA BANKING MARKETS Harrisburg-Cumberland, Dauphin, Juniata, Lebanon, and Perry counties PNC Pre-Consummation .............. 4 968.2 mil. 9.8 765 55 31 Sterling .................................... II 274.1 mil. 2.8 765 55 31 PNC Post-Consummation ............. 2 1.2 bi!. 12.6 765 55 31
C44 Federal Reserve Bulletin 0 June 2008 Appendix A-Continued BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO] GUIDELINES-Continued Market Amount Remaining deposit Resulting Change in Bank Rank of deposits number of shares HHI HHI (dollars) competitors (percent) Lancaster-Lancaster County PNC Pre-Consummation .............. 14 55.3 mil. .7 1,422 23 18 Sterling .................................... 3 1.3 bil. 16.5 1,422 23 18 PNC Post-Consummation ............. 3 1.4 bil. 17.2 1,422 23 18 York-Includes Adams and York counties, excluding the Baltimore RMA PNC Pre-Consummation .............. 10 273.4 mil. 4.3 1,170 94 13 Sterling .................................... 3 675.9 mil. 10.8 1,170 94 13 PNC Post-Consummation ............. 2 949.3 mil. 15.1 1,170 94 13 Philadelphia and South Jersey- Bucks, Chester, Delaware, Montgomery, and Philadelphia counties in Pennsylvania; Burlington, Camden, Gloucester, and Salem counties in New Jersey; and the city of Trenton and Ewing, Hamilton, and Lawrence townships in Mercer County, New Jersey PNC Pre-Consummation .............. 4 9.8 bil. 9 1,075 121 Sterling .................................... 91 45.6 mil. .1 1,075 121 PNC Post-Consummation ............. 4 9.8 bil. 9.1 1,075 121 NOTE: Deposit data are as of June 30. 2007. and include mergers as of Janu· ary 14, 2008. Deposit amounts are unweighted. Rankings. market deposit shares. and HHIs are based on thrift institution deposits weighted at 50 percent. Appendix B CRA PERFORMANCE EVALUATIONS OF THE STERLING BANKS CONSOLIDATED TO FORM BLC BANK, NATIONAL ASSOCIATION Bank CRA Rating Date Supervisor Bank of Hanover and Trust Company, Satisfactory 111612006 FDIC Hanover, Pennsylvania Pennsylvania State Bank, Satisfactory 6/612005 FRB Camp Hill, Pennsylvania Bay First Bank, National Association, Satisfactory 212212002 OCC North East, Maryland Bank of Lancaster County, National Association, Outstanding 611312005 OCC Strasburg, Pennsylvania
Legal Developments: First Quarter, 2008 C45 Royal Bank of Canada depository organization, controlling deposits of $2.8 bil lion. ANB is the 23rd largest depository organization in Montreal, Canada Florida, controlling deposits of $2.1 billion, and is the 18th largest depository organization in Georgia, controlling Order Approving the Acquisition of a Bank deposits of $866.9 million. Holding Company On consummation of the proposal, RBC Centura would become the 47th largest depository organization in the Royal Bank of Canada (HRBC") and its subsidiary bank United States, with total consolidated assets of approxi holding companies (collectively, "Applicants"), including mately $33.3 billion. RBC Centura would control deposits RBC Centura Banks, Inc. (HRBC Centura"),! Raleigh, of approximately $ I 9.3 billion, which represent less than North Carolina, all financial holding companies within the I percent of the total amount of deposits of insured meaning of thc Bank Holding Company Act ("BHC Act"), depository institutions in the United States. In Alabama, have requested the Board's approval under section 3 of the RBC Centura would become the fifth largest depository BHC Act2 to acquire Alabama National BanCorporation organization, controlling deposits of approximately $4.5 bil ("ANB"), Birmingham, Alabama, and its ten subsidiary lion, which represent approximately 6 percent of the total banks. 3 amount of deposits of insured depository institutions in the Notice of the proposal, affording interested persons an state ("state deposits"). In Florida, RBC Centura would opportunity to submit comments, has been published become the 21 st largest depository organization, control (72 Federal Register 68,163 (2007». The time for filing ling deposits of approximately $3.3 billion, which represent comments has expired, and the Board has considered the less than I percent of state deposits. In Georgia, RBC proposal and all comments received in light of the factors Centura would become the eighth largest depository orga set forth in the BHC Act. nization, controlling deposits of approximately $3.1 bil RBC, with total consolidated assets equivalent to lion, which represent approximately 1.7 percent of state $569.8 billion, is the largest depository organization in deposits. Canada.4 RBC operates branches in New York City and Miami and through RBC Centura controls RBC Centura INTERSTATE ANALYSIS Bank ("Centura Bank"), Raleigh, which operates in six states.5 RBC Centura, with total consolidated assets of Section 3(d) of the BHC Act allows the Board to approve $25.5 billion, is the 53rd largest depository organization in an application by a bank holding company to acquire the United States, controlling $13.6 billion in deposits.6 control of a bank located in a state other than the bank RBC Centura is the sixth largest depository organization in holding company's home state if certain conditions are Alabama, controlling deposits of approximately $1.7 bil met. For purposes of the BHC Act, the home state of lion. In Florida, RBC Centura is the 35th largest depository Applicants is North Carolina,7 and ANB is located in organization, controlling deposits of approximately $1.1 bil Alabama, Florida, and Georgia.8 lion, and in Georgia, RBC Centura is the 9th largest Based on a review of all the facts of record, including depository organization, controlling deposits of approxi relevant state statutes, the Board finds that the conditions mately $2.2 billion. for an interstate acquisition enumerated in section 3(d) of ANB has total consolidated assets of approximately the BHC Act are met in this case.9 In light of all the facts of $7.8 billion, and its subsidiary banks operate in Alabama, Florida, and Georgia. In Alabama, ANB is the sixth largest 7. See 12 U.S.c. § 1842(d). A bank holding company's home state is the state in which the total deposits of all banking subsidiaries of such company were the largest on July I, 1966, or the date on which I. Applicants also include the following companies: Royal Bank the company became a bank holding company, whichever is later. Holding, Inc., Toronto, Canada; RBC Holdings (USA), Inc. and RBC 8. For purposes of section 3(d), the Board considers a bank to be USA Holdco Corporation, both of New York, New York; and Prism located in the states in which the bank is chartered or headquartered or Financial Corporation, Wilmington, Delaware. operates a branch (12 U.S.c. §§ 1841(0)(4H7) and 1842(d)(l)(A) and 2. 12 U.S.c. § 1842. (d)(2)(B)). 3. ANB's largest subsidiary bank, as measured by both assets and 9. 12 U.S.c. §§ I 842(d). Applicants are adequately capitalized and deposits, is First American Bank ("ANB Lead Bank"), Birmingham. adequately managed, as defined by applicable law. All of ANB's ANB's other subsidiary bank in Alabama is Alabama Exchange Bank, subsidiary banks have been in existence and operated for the minimum Tuskegee. ANB's subsidiary banks in Florida are Community Bank of period of time required by applicable state laws. See Ala. Code Naples, National Association, Naples; CypressCoquina Bank, Ormond §5-13B-6(d) (five years); Fla. Stat. §658.295(8)(a) (three years); Ga. Beach; First Gulf Bank, National Association, Pensacola; Florida Code § 7-1-622(b)(l) (three years). On consummation of the pro Choice Bank, Mount Dora; Indian River National Bank, Vero Beach; posal, Applicants would control less than 10 percent of the total and Millennium Bank. Gainesville. ANB's subsidiary banks in Geor amount of deposits of insured depository institutions in the United gia are Georgia State Bank, Mableton. and The Peachtree Bank, States and less than 30 percent of the total amount of deposits of Duluth. insured depository institutions in each of Alabama, Florida. and 4. Canadian asset and ranking data are as of October 31, 2007, and Georgia (12 US.c. § 1842(d)(2)(AHB). On consummation, Appli are based on the exchange rate as of that date. cants also would be in compliance with the deposit caps under relevant 5. Centura Bank operates branches in Alabama. Florida. Georgia, state law in Alabama, Florida, and Georgia, each of which is 30 per North Carolina, South Carolina, and Virginia. cent. See 12 U.S.c. § 1842(d)(2)(C); Ala. Code §5-13B-6(b); Fla. Stat. 6. Asset data and nationwide deposit ranking data are as of § 658.295(8)(b); Ga. Code § 7-1-622(b)(2). All other requirements of September 30, 2007. Statewide deposit and ranking data are as of section 3(d) of the BHC Act would be met on consummation of the June 30, 2007, and reflect merger activity as of that date. proposal.
C46 Federal Reserve Bulletin 0 June 2008 record, the Board is permitted to approve the proposal Guidelines in all eight banking markets. 13 On consumma under section 3( d) of the BHC Act. tion of the proposal, six of the banking markets would remain moderately concentrated. The Mobile area banking market would remain highly concentrated, and the Decatur COMPETITIVE CONSIDERATIONS area would become highly concentrated, as measured by the HHI, but the changes in the HHls in each market would The BHC Act prohibits the Board from approving a be less than 200 points. Moreover, numerous competitors proposal that would result in a monopoly or would be in would remain in each of the eight banking markets. furtherance of any attempt to monopolize the business of The DOJ has conducted a detailed review of the poten banking in any relevant banking market. The BHC Act also tial competitive effects of the proposal and has advised the prohibits the Board from approving a bank acquisition that Board that consummation of the transaction would not would substantially lessen competition in any relevant likely have a significant adverse effect on competition in banking market, unless the anticompetitive effects of the any relevant baking market. In addition, the appropriate proposal are clearly outweighed in the public interest by its banking agencies have been afforded an opportunity to probable effect in meeting the convenience and needs of the comment and have not objected to the proposal. community to be served.1O Based on all the facts of record, the Board concludes that Applicants and ANB have subsidiary depository institu consummation of the proposal would not have a signifi· tions that compete directly in eight banking markets: cantly adverse effect on competition or on the concentra tion of resources in any of the eight banking markets where Decatur area, Gulf Shores area, Huntsville area, and Mobile Applicants and ANB compete directly or in any other area in Alabama; Brevard County, Orlando area, and relevant banking market. Accordingly, the Board has deter· Sarasota area in Florida; and Atlanta area in Georgia. The mined that competitive considerations are consistent with Board has reviewed carefully the competitive effects of the approval. proposal in each of these banking markets in light of all the facts of record and public comment received on the pro posal. In particular, the Board has considered the number of FINANCIAL, MANAGERIAL, AND SUPERVISORY competitors that would remain in the banking markets, the CONSIDERATIONS relative shares of total deposits in depository institutions ("market deposits") controlled by Applicants and ANB in Section 3 of the BHC Act requires the Board to consider the the markets, the concentration levels of market deposits financial and managerial resources and future prospects of II and the increases in those levels as measured by the the companies and depository institutions involved in the Herfindahl-Hirschman Index ("HHI") under the Depart proposal and certain other supervisory factors. The Board ment of Justice Merger Guidelines ("DOJ Guidelines"), has carefully considered these factors in light of all the 12 facts of record, including confidential supervisory and and other characteristics of the markets. Consummation of the proposal would be consistent with examination information from the various U.S. banking supervisors of the institutions involved, publicly reported Board precedent and within the thresholds in the DOJ and other financial information, information provided by Applicants, and public comment received on the pro posal.14 The Board also has consulted with the Office of the 10. 12 U.S.C. § 1842(c)(1). Superintendent of Financial Institutions ("OSFI"), the II. Deposit and market share data are based on data reported by agency with primary responsibility for the supervision and insured depository institutions in the summary of deposits data as of regulation of Canadian banks, including RBC. June 30, 2007, adjusted to reflect mergers and acquisitions through January 11, 2008, and are based on calculations in which the deposits In evaluating the financial resources in expansion pro of thrift institutions are included at 50 percent. The Board previously posals by banking organizations, the Board reviews the has indicated that thrift institutions have become, or have the potential financial condition of the organizations involved on both a to become, significant competitors of commercial banks. See, e.g., parent-only and consolidated basis, as well as the financial Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989); condition of the subsidiary insured depository institutions National City Corporation. 70 Federal Reserve Bulletin 743 (1984). Thus. the Board regularly has included thrift institution deposits in the market share calculation on a 50 percent weighted basis. See, e.g., First Hawaiian, Inc., 77 Federal Reserve Bulletin 52 (1991). 13. Those banking markets and the effects of the proposal on the 12. Under the DOJ Guidelines, a market is considered unconcen concentration of banking resources therein are described in Appen trated if the post-merger HHI is less than 1000, moderately concen dix A. trated if the post-merger HHI is between 1000 and 1800, and highly 14. A commenter expressed concern about RBC Centura's relation concentrated if the post-merger HHI is more than 1800. The Depart ships with unaffiliated pawn shops and other nontraditional providers ment of Justice ("DOl") has informed the Board that a bank merger or of financial services. As a general matter, the activities of the consumer acquisition generally will not be challenged (in the absence of other finance businesses identified by the commenter are permissible, and factors indicating anticompetitive effects) unless the post-merger HHI the businesses are licensed by the states where they operate. RBC is at least 1800 and the merger increases the HHI more than 200 Centura has stated that it conducts substantial due diligence reviews of points. The DOl has stated that the higher·than-normal HHI thresholds its customers who provide alternative financial services, including for screening bank mergers for anti competitive effects implicitly reviews of anti-money-laundering and Bank Secrecy Act compliance, recognize the competitive effects of limited-purpose lenders and other and that it does not play any role in the lending practices, credit review nondepository financial entities. processes, or other business practices of those firms.
Legal Developments: First Quarter, 2008 C47 and significant nonbanking operations. In this evaluation, Section 3 of the BHC Act also provides that the Board the Board considers a variety of measures, including capital may not approve an application involving a foreign bank adequacy, asset quality, and earnings performance. In unless the bank is subject to comprehensive supervision or assessing financial resources, the Board consistently has regulation on a consolidated basis by the appropriate considered capital adequacy to be especially important. The authorities in the bank's home country. IS As noted, the Board also evaluates the financial condition of the com aSFI is the primary supervisor of Canadian banks, includ bined organization at consummation, including its capital ing RBC. The Board previously has determined that RBC is position, asset quality, and earnings prospects, and the subject to comprehensive supervision on a consolidated impact of the proposed funding of the transaction. basis by its home-country supervisor.19 Based on this The Board has carefully considered the financial re finding and all the facts of record, the Board has concluded sources of the organizations involved in the proposal. The that RBC continues to be subject to comprehensive super capital levels of RBC would continue to exceed the mini vision on a consolidated basis by its home-country supervi mum levels that would be required under the Basel Capital sor. Accord and are considered to be equivalent to the capital levels that would be required of a U.S. banking organiza CONVENIENCE AND NEEDS CONSIDERATIONS tion. In addition, RBC Centura, ANB, and the subsidiary depository institutions involved in the proposal are well In acting on a proposal under section 3 of the BHC Act, the capitalized and would remain so on consummation. Based Board is required to consider the effects of the proposal on on its review of the record, the Board finds that Applicants the convenience and needs of the communities to be served have sufficient financial resources to effect the proposaL and to take into account the records of the relevant insured The proposed transaction is structured as a partial share depository institutions under the Community Reinvestment exchange and partial cash purchase of shares. Applicants Act ("CRA").20 The CRA requires the federal financial will use existing resources to fund the cash purchase of supervisory agencies to encourage insured depository insti shares. tutions to help meet the credit needs of the local communi The Board also has considered the managerial resources ties in which they operate, consistent with their safe and of the organizations involved. IS The Board has reviewed sound operation, and requires the appropriate federal finan the examination records of Applicants, ANB, and their cial supervisory agency to take into account a relevant subsidiary depository institutions, including assessments of depository institution's record of meeting the credit needs their management, risk-management systems, and opera of its entire community, including low- and moderate tions. In addition, the Board has considered its supervisory income neighborhoods, in evaluating bank expansionary experiences and those of other relevant banking supervi proposals.21 sory agencies, including the Office of Comptroller of the Currency and the Federal Deposit Insurance Corporation, and those of its affiliates that the Board deems appropriate to deter with the organizations and their records of compliance with mine and enforce compliance with the BHe Act (12 U,S,C. applicable banking law and with anti-money-Iaundering § 1842(c)(3)(A)), The Board has reviewed the restrictions on disclo laws. Applicants, ANB, and their subsidiary depository sure in the relevant jurisdictions in which RBC operates and has institutions are considered to be well managed. The Board communicated with relevant government authorities concerning access to information, In addition, RBC previously has committed that, to the also has considered Applicants' plans for implementing the extent not prohibited by applicable law, it will make available to the proposal, including the proposed management after con Board such information on the operations of its affiliates that the Board 'o summation. deems necessary to determine and enforce compliance with the BHC Based on all the facts of record, the Board has concluded Act, the International Banking Act, and other applicable federal laws, RBC also previously has committed to cooperate with the Board to that considerations relating to the financial and managerial obtain any waivers or exemptions that may be necessary to enable its resources and future prospects of the organizations involved affiliates to make such information available to the Board, In light of in the proposal are consistent with approval, as are the other these commitments, the Board has concluded that RBC has provided supervisory factors. 17 adequate assurances of access to any appropriate information the Board may request. 18, 12 U,S,c. § 1843(c)(3)(B). As provided in Regulation Y, the 15, The commenter expressed concern about pending litigation in Board determines whether a foreign bank is subject to consolidated Canada involving RBC and a Canadian asset management firm that is home-country supervision under the standards set forth in Regula in receivership. The Board notes that the litigation will be resolved by tion K. See 12 CFR 225, 13(a)(4). Regulation K provides that a foreign a Canadian court with jurisdiction to adjudicate such matters, bank will be considered subject to comprehensive supervision or 16, The commenter expressed concern that Applicants have exer regulation on a consolidated basis if the Board determines that the cised control over ANB before the Board's consideration of this bank is supervised or regulated in such a manner that its home-country application, Commenter cited ANB's notice to some employees that supervisor receives sufficient information on the worldwide operations their jobs would be eliminated as a result of the proposed transaction, of the bank, including its relationship with any affiliates, to assess the Applicants have stated that they have taken no action with respect to bank's overall financial condition and its compliance with laws and ANB employees, and the record does not support a finding that regulations, See 12 CFR 211.24(c)(1). Applicants have prematurely attempted to control ANB for purposes 19, See Royal Bank of Canada, 89 Federal Reserve Bulletin 139 of the BHC Act. (2003); Royal Bank of Canada, 83 Federal Reserve Bulletin 443 17. Section 3 of the BHC Act also requires the Board to determine (1997), that an applicant has provided adequate assurances that it will make 20, 12 U,S,c. § 2901 et seq,; 12 U,S,c. § 1842(c)(2), available to the Board such information on its operations and activities 21. 12 U,S,C, § 2903,
C48 Federal Reserve Bulletin 0 June 2008 The Board has considered carefully all the facts of Although the HMDA data might reflect certain dispari record, including evaluations of the CRA performance ties in the rates of loan applications, originations, and records of the subsidiary banks of Applicants and ANB, denials among members of different racial or ethnic groups data reported by RBC Centura and ANB under the Home in certain local areas, they provide an insufficient basis by Mortgage Disclosure Act ("HMDA"),22 other information themselves on which to conclude whether or not RBC provided by Applicants, confidential supervisory informa Centura is excluding or imposing higher costs on any group tion, and a public comment received on the proposal. The on a prohibited basis. The Board recognizes that HMDA commenter alleged, based on HMDAdata reported in 2006, data alone, even with the recent addition of pricing infor that RBC Centur:;l had engaged in disparate treatment of mation, provide only limited information about the covered minority individuals in home mortgage lending. 10ans.28 HMDA data, therefore, have limitations that make them an inadequate basis, absent other information, for A. CRA Performance Evaluations concluding that an institution has engaged in illegal lending discrimination. As provided in the CRA, the Board has reviewed the The Board is nevertheless concerned when HMDA data convenience and needs factor in light of the evaluations by for an institution indicate disparities in lending and believes the appropriate federal supervisors of the CRA perfor that all lending institutions are obligated to ensure that their mance records of the relevant insured depository institu lending practices are based on criteria that ensure not only tions. An institution's most recent CRA performance evalu safe and sound lending but also equal access to credit by ation is a particularly important consideration in the creditworthy applicants regardless of their race or ethnicity. applications process because it represents a detailed, on-site Because of the limitations of HMDA data, the Board has evaluation of the institution'S overall record of perfor considered these data carefully and taken into account other mance under the CRA by its appropriate federal supervi information, including examination reports that provide sor.23 on-site evaluations of compliance with fair lending laws by Centura Bank received a "satisfactory" rating at its most RBC Centura and its subsidiaries. The Board also has recent CRA performance evaluation by the Federal Reserve consulted with the Federal Reserve Bank of Richmond Bank of Richmond, as of April \7,2006.24 ANB Lead Bank about the fair-lending compliance record of Centura Bank. received a "satisfactory" CRA performance rating by the The record of this application, including confidential Federal Reserve Bank of Atlanta, as of May I, 2006.25 supervisory information, indicates that RBC Centura has ANB's other subsidiary banks received ratings of "satisfac taken steps to ensure compliance with fair lending and tory" or "outstanding" at their most recent CRA perfor other consumer protection laws. RBC Centura's compli mance evaluations.26 Applicants have represented that RBC ance program includes statistical data analysis and file Centura will implement its current CRA program at ANB ' s reviews to ensure that mortgage lending and pricing deci subsidiary banks. sions are not made on a prohibited basis. In addition, RBC Centura provides annual online fair lending training to all B. HMDA and Fair Lending Record its employees, supplemented by ongoing in-person fair lending training for mortgage-lending employees. Appli The Board has carefully considered the fair lending records cants have stated that RBC Centura will review the fair and HMDA data of RBC Centura in light of the public lending programs of ANB's subsidiary banks and the comment received on the proposal. The commenter alleged, combined organization after consummation of the pro based on HMDA data, that RBC Centura had denied the posal, and they will adopt any of ANB' s fair lending home mortgage loan applications of African American and programs determined to be more effective than RBC Cen Latino borrowers more frequently than those of nonminor tura's programs. ity applicants. The Board has focused its analysis on the The Board also has considered the HMDA data in light 2006 HMDA data reported by Centura Bank.27 of other information, including the overall performance records of the subsidiary banks of Applicants and ANB under the CRA. These established efforts and records of 22. 12 U.S.C. §2801 et seq. performance demonstrate that the institutions are active in 23. See Interagency Questions and Answers Regarding Community helping to meet the credit needs of their entire communi Reinvestment, 66 Federal Register 36,620 and 36,639 (2001). ties, 24. The evaluation period was January I, 2004, through Decem ber 31, 2005, for the lending test and March 24, 2004, through December 31, 2005, for the service and investment tests. 28. The data, for example, do not account for the possibility that an 25. The evaluation period was January I, 2004, through Decem institution's outreach etIorts may attract a larger proportion of margin ber 31, 2005, for the lending test and January 1,2004, through May I, ally qualified applicants than other institutions attract and do not 2006, for the service and investment tests. provide a basis for an independent assessment of whether an applicant 26. Appendix B lists the most recent CRA performance ratings of who was denied credit was, in fact, creditworthy. In addition, credit these banks. history problems, excessive debt levels relative to income, and high 27. The Board reviewed HMDA data for Centura Bank's assess loan amounts relative to the value of the real estate collateral (reasons ment areas nationwide and in the Charlotte-Gas tonia-Concord and the most frequently cited for a credit denial or higher credit cost) are not Atlanta-Sandy Springs-Marietta Metropolitan Statistical Areas. available from HMDA data.
Legal Developments: First Quarter, 2008 C49 C. Conclusion on Convenience and Needs and conclusion, the Board has considered all the facts of record CRA Performance in light of the factors that it is required to consider under the BHC Act and other applicable statutes, The Board's The Board has considered carefully all the facts of record, approval is specifically conditioned on compliance by including reports of examination of the CRA records of the Applicants with the conditions in this order and all the institutions involved, information provided by Applicants, commitments made to the Board in connection with the comment received on the proposal, and confidential super proposal. For purposes of this transaction, these commit visory information. Applicants state that the proposal will ments and conditions are deemed to be conditions imposed result in increased credit availability and access to a in writing by the Board in connection with its findings and broader range of financial services for customers of RBC decision and, as such, may be enforced in proceedings Centura and ANB. Based on a review of the entire record, under applicable law, and for the reasons discussed above, the Board concludes The proposal may not be consummated before the 15th that considerations relating to the convenience and needs calendar day after the effective date of this order, or later factor and the CRA performance records of the relevant than three months after the effective date of this order insured depository institutions are consistent with approval unless such period is extended for good cause by the Board of the proposal. or by the Federal Reserve Bank of Richmond, acting pursuant to delegated authority, CONCLUSION By order of the Board of Governors, effective Febru ary 5, 2008. Based on the foregoing, and in light of all the facts of record, the Board has determined that the application Voting for this action: Chairman Bernanke. Vice Chairman Kohn, should be, and hereby is, approved.29 In reaching its and Governors Warsh, Kroszner, and Mishkin. ROBERT DEV. FRIERSON 29. The commenter requested that the Board hold a puhlic meeting Deputy Secretary of the Board or hearing on the proposal. Section 3 of the BHe Act does not require the Board to hold a public hearing on an application unless the appropriate supervisory authority for the bank to be acquired makes a the commenter had ample opportunity to submit its views and. in fact, written recommendation of denial of the application. The Board has submitted written comments that the Board has considered carefully in not received such a recommendation from the appropriate supervisory acting on the proposal. The commenter's request fails to demonstrate authorities. Under its rules, the Board also may, in its discretion, hold a why written comments do not present its views adequately or why a public meeting or hearing on an application to acquire a bank if meeting or hearing otherwise would be necessary or appropriate. For necessary or appropriate to clarify factual issues related to the these reasons, and based on all the facts of record, the Board has application and to provide an opponunity for testimony (12 CFR determined that a public meeting or hearing is not required or 225.16(e), 262.25(d»). The Board has considered carefully the com warranted in this case. Accordingly, the request for a public meeting or menter's request in light of all the facts of record. In the Board's view, hearing on the proposal is denied. Appendix A BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO] GUIDELINES Amount Remaining Resulting Increase in Bank Rank of deposits number of HHI HHI (dollars) competitors ALABAMA BANKING MARKETS Decatur area-Morgan County and the portion of the city of Decatur in Limestone County RBC Centura Pre-Consummation .. . 6 52.1 mil. 3.5 1,913 137 11 ANB ...................................... . 2 288.8 mil. 19.5 1,913 137 II RBC Centura Post-Consummation .. 2 340.9 miL 23 1,913 137 II Gulf Shores area-the towns of Elberta, Foley, Gulf Shores, Lillian, Magnolia Springs, and Orange Beach in Baldwin County RBC Centura Pre-Consummation .. . 14 01 o 1,704 o 12 ANB .............................. , ...... .. 3 273.4 mil, 19.3 1,704 o 12 RBC Centura Post-Consummation .. 3 273.4 mil. 19.3 1,704 o 12
C50 Federal Reserve Bulletin 0 June 2008 Appendix A-Continued BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO] GUIDELINES-Continued Market Amount I Remaining deposit I Resulting Increase in Bank Rank of deposits number of shares HHI (dollars) competitors tP I ALABAMA BANKING MARKETS- CONTINUED Huntsville area-Madison County and Limestone County, excluding the town of Ardmore and the city of Decatur RBC Centura Pre-Consummation ... 7 186.5 miL 3.4 1,738 56 21 ANB ....................................... 5 464.9 mil. 8.4 1,738 56 21 RBC Centura Post-Consummation .. 3 651.4 mil. 11.8 1,738 56 21 Mobile area-Mobile County and the towns of Bay Minette. Daphne, Fairhope, Loxley, Point Clear, Robertsdale, Silverhill, Spanish Fort, and Summerdale in Baldwin County RBC Centura Pre-Consummation ... 3 953.1 mil. 13.1 2,040 68 19 ANB ....................................... 8 186.7 mil. 2.6 2,040 68 19 RBC Centura Post-Consummation .. 2 1.1 bi!. 15.7 2,040 68 19 FLORIDA BANKING MARKETS Brevard-Brevard County RBC Centura Pre-Consummation ... 14 72 mil. 1 1,461 4 18 ANB ....................................... 12 148.0 mil. 2.1 1,461 4 18 RBC Centura Post-Consummation .. 10 220.0 mil. 3.2 1,461 4 18 Orlando area-Orange, Osceola, and Seminole counties; the western half of Volusia County; and the towns of Clermont and Groveland in Lake County RBC Centura Pre-Consummation ... 23 156.4 mil. .5 1,159 2 48 ANB ....................................... 12 476.0 mil. 1.7 1,159 2 48 RBC Centura Post-Consummation .. 11 632.4 mil. 2.2 1,159 2 48 Sarasota-Manatee and Sarasota counties, excluding that portion of Sarasota County that is both east of the Myakka River and south of Interstate 75 (currently the towns of Northport and Port Charlotte); the peninsular portion of Charlotte County west of the Myakka River (currently the towns of Englewood. Englewood Beach, New Point Comfort, Grove City, Cape Haze, Rotonda, Rotonda West, and Placida); and Gasparilla Island (the town of Boca Grande) in Lee County RBC Centura Pre-Consummation ... 10 392.1 mil. 2.4 1,141 1 49 ANB ....................................... 44 12.2 mil. .1 1,141 1 49 RBC Centura Post-Consummation .. 9 404.3 mil. 2.5 1,141 1 49
Legal Developments: First Quarter, 2008 C51 Appendix A-Continued BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO] GUIDELINES-Continued Market Amount Remaining deposit Resulting Increase in Bank Rank of deposits number of shares HIll HHI (dollars) competitors (percent) GEORGIA BANKING MARKET Atlanta-Bartow, Cherokee, Clayton, Cobb, Coweta, DeKalb, Douglas, Fayette, Forsyth, Fulton, Gwinnett, Henry, Newton, Paulding, Rockdale, and Walton counties; Hall County, excluding the town of Clermont; the towns of Auburn and Winder in Barrow County; and the town of Luthersville in Meriwether County RBC Centura Pre-Consummation ... 8 1.9 bil. 1.7 1,460 3 135 ANB ....................................... 13 857.9 mil. .8 1,460 3 135 RBC Centura Post-Consummation .. 7 2.7 bil. 2.5 1,460 3 135 :-IOTE: Deposit data are as of lune 30, 2007, and include mergers as of Janu· I, Centura Bank opened a de novo branch in the Gulf Shores area market ary II. 2008, Deposit amounts are unweighted. Rankings. market deposit on September 9, 2007, shares, and HHIs are based on thrift deposits weighted at 50 percent. Appendix B CRA PERFORMANCE EVALUATIONS OF ANB'S SUBSIDIARY BANKS Subsidiary Bank CRA Rating Date Supervisor Alabama Exchange Bank, Outstanding November 2006 Federal Reserve Tuskegee, Alabama Community Bank of Naples, National Association, Satisfactory August 2007 FDIC Naples, Florida Cypress Coquina Bank, Satisfactory May 2006 FDIC Ormond Beach, Florida First Gulf Bank, National Association, Satisfactory January 2004 OCC Pensacola, Florida Florida Choice Bank, Satisfactory March 2007 FDIC Mount Dora, Florida Georgia State Bank, Satisfactory March 2004 FDIC Mableton, Georgia Indian River National Bank, Satisfactory December 2003 OCC Vero Beach, Florida Millennium Bank, Satisfactory May 2007 FDIC Gainesville, Florida The Peachtree Bank, Satisfactory October 2004 Federal Reserve Duluth, Georgia The Toronto-Dominion Bank ULC (HTD ULC"), Calgary, Canada, and ID BankNorth, Inc. (HID Banknorth"), Portland, Maine (collectively, Toronto, Canada "Applicants"), have requested the Board's approval under section 3 of the Bank Holding Company Act ("BHC Act")! Order Approving the Acquisition of a Bank to acquire Commerce Bancorp, Inc. ("Commerce"), Cherry Holding Company Hill, New Jersey, and its two subsidiary banks, Commerce The Toronto-Dominion Bank ("ID") and its subsidiary bank holding companies, including TD US P&C Holdings 1. 12 U,S,C. § 1842.
C52 Federal Reserve Bulletin 0 June 2008 BankINorth (HCB North"), Ramsey, New Jersey, and Connecticut, Commerce is the 43rd largest depository Commerce Bank, National Association (HCB NA"), Phila organization, controlling deposits of approximately delphia, Pennsylvania.2 In addition, Applicants have ap $125.6 million. Commerce is the third largest depository plied to acquire Commerce's minority interest in Pennsyl organization in New Jersey, controlling deposits of $22.3 bil vania Commerce Bancorp, Inc. ("PCB"), Harrisburg, a lion, and in Pennsylvania, Commerce is the fifth largest bank holding company that controls Commerce Bank:! depository organization, controlling deposits of $8.4 bil Harrisburg National Association ("PCB Bank"), Lemoyne, lion. both of Pennsylvania.3 On consummation of the proposal, TD Banknorth would Notice of the proposal, affording interested persons an become the 19th largest depository organization in the opportunity to submit comments, has been published United States, with total consolidated assets of approxi (73 Federal Register 2,255 (2008». The time for filing mately $115 billion. TD Banknorth would control deposits comments has expired, and the Board has considered the of approximately $90.1 billion, which represent less than proposal and all comments received in light of the factors I percent of the total amount of deposits of insured set forth in the BHC Act. depository institutions in the United States. In New York, TD, with total consolidated assets equivalent to TD Banknorth would become the sixth largest depository $434.3 billion, is the second largest depository organization organization, controlling deposits of approximately in Canada.4 TD operates a branch in New York City and an $30.2 billion, which represent approximately 4.4 percent of agency in Houston and through TD Banknorth, controls TD thc total amount of deposits of insured depository institu Bank NA and TD Bank USA, National Association (HTD tions in the state ("state deposits"). In Connecticut, TD Bank USA"), New York, New York. TD Banknorth, with Banknorth would remain the sixth largest depository orga total consolidated assets of $63.5 billion, is the 25th largest nization, controlling deposits of approximately $4.1 billion, depository organization in the United States, controlling which represent approximately 5.9 percent of state depos $43.9 billion in deposits.s TD Banknorth's subsidiary banks its. In New Jersey, TD Banknorth would become the third operate in eight states.6 TD Banknorth is the eighth largest largest depository organization, controlling deposits of depository organization in New York, controlling deposits approximately $26.2 billion, which represent approxi of approximately $18.2 billion, and in Connecticut TD mately 13.5 percent of state deposits. In Pennsylvania, TD Banknorth is the sixth largest depository organization, Banknorth would become the fifth largest depository orga controlling deposits of approximately $3.9 billion. In nization, controlling deposits of approximately $9 billion, New Jersey, TD Banknorth is the 11th largest depository which represent approximately 3.8 percent of state depos organization, controlling deposits of approximately $3.9 bil its. lion, and in Pennsylvania, TD Banknorth is the 45th largest PCB has consolidated assets of approximately $2 bil depository organization, controlling deposits of approxi lion, and PCB Bank operates only in Pennsylvania. PCB is mately $575 million. the 23rd largest insured depository institution in Pennsylva Commerce has total consolidated assets of approxi nia, controlling deposits of approximately $1.5 billion, mately $49.4 billion, and its subsidiary banks operate in which represent less than I percent of state deposits. If TD eight states, including New York, Connecticut, New Jersey, Banknorth were deemed to control PCB on consummation and Pennsylvania; and the District of Columbia. In of the proposal, TD Banknorth would become the fifth New York, Commerce is the 13th largest depository orga largest banking organization in Pennsylvania, controlling nization, controlling deposits of $12.0 billion, and in approximately $11.1 billion in deposits, which would rep resent less than 5 percent of state deposits. TD has stated that it does not propose to control or 2. Applicants also include the following intennediate holding com exercise a controlling influence over PCB or PCB Bank and panies formed by TD to facilitate the Commerce acquisition: Cardinal has made certain commitments to the Board designed to Top Co., Cardinal Intermediate Co., and Cardinal Merger Co., all of New York, New York (collectively, "HCs"). HCs have requested the limit the influence TD may exercise.' Board's approval under Section 3 of the BHC Act to become bank holding companies and to acquire or merge with Commerce. TD, TD ULC, and TD Banknorth are all financial holding companies within 7. See, e.g., Emigrant Bancorp. Inc., 82 Federal Reserve Bulletin the meaning of the BHC Act. TD filed applications with the Office of 555 (1996); First Community Bancshares. Inc., 77 Federal Reserve the Comptroller of the Currency ("OCC") on January 25, 2008, for Bulletin 50 (1991). Although the acquisition of less than a controlling approval, under the Bank Merger Act 02 U.S.C. § I 828(c», to merge interest in a bank or bank holding company is not a normal acquisition CB NA and CB North into TD's indirect subsidiary bank, TD for a bank holding company, the requirement in section 3(a)(3) of the BankNorth, National Association, ("TD Bank NA"), Portland. BHC Act that the Board's approval be obtained before a bank holding 3. Commerce holds voting securities and warrants that collectively company acquires more than 5 percent of the voting shares of a bank represent 14.6 percent of PCB's voting shares. suggests that Congress contemplated the acquisition by bank holding 4. Canadian asset and ranking data are as of January 31, 2008, and companies of between 5 percent and 25 percent of the voting shares of are based on the exchange rate as of that date. banks. See 12 U.S.c. § I 842(a)(3). On this basis, the Board previously 5. Asset data and nationwide deposit ranking data are as of has approved the acquisition by a bank holding company of less than a December 31, 2007. Statewide deposit and ranking data are as of controlling interest in a bank or hank holding company. See, e.g., June 30, 2007, and reflect merger activity as of February 26, 2008. Brookline Bancorp, MCH, 86 Federal Reserve Bulletin 52 (2000) 6. TD Bank NA operates in Connecticut, Maine, Massachusetts, (acquisition of up to 9.9 percent of the voting shares of a bank holding New Hampshire, New Jersey, New York, Pennsylvania, and Vermont. company), The BHC Act would require TD to file an application and TD Bank USA operates only in New York. receive the Board's approval before the company could directly or
Legal Developments: First Quarter; 2008 C53 INTERSTATE ANALYSIS necticut; and Philadelphia and South Jersey, in New Jersey and Pennsylvania. 12 The Board has reviewed carefully the Section 3(d) of the BHC Act allows the Board to approve competitive effects of the proposal in each of these banking an application by a bank holding company to acquire markets in light of all the facts of record and public control of a bank located in a state other than the bank comment received on the proposal,I3 In particular, the holding company's home state if certain conditions are Board has considered the number of competitors that would met. For purposes of the BHC Act, the home state of TD is remain in the banking markets, the relative shares of total New York,s and Commerce is located in Connecticut, deposits in depository institutions ("market deposits") Delaware, the District of Columbia, Florida, Maryland, controlled by Applicants and Commerce in the markets, 14 New Jersey, New York, Pennsylvania, and Virginia.9 the concentration levels of market deposits and the in Based on a review of all the facts of record, including creases in those levels as measured by the Herfindahl relevant state statutes, the Board finds that the conditions Hirschman Index ("HHI") under the Department of Justice for an interstate acquisition enumerated in section 3(d) of Merger Guidelines ("DOl Guidelines"),15 and other char the BHC Act are met in this case.IO In light of all the facts acteristics of the markets. of record, the Board is permitted to approve the proposal Consummation of the proposal would be consistent with under section 3(d) of the BHC Act. Board precedent and within the thresholds in the DOJ Guidelines in all four banking markets.16 On consumma COMPETITIVE CONSIDERATIONS tion, each of the banking markets would remain moderately The BHC Act prohibits the Board from approving a 12. Applicants and PCB do not have subsidiary depository institu proposal that would result in a monopoly or would be in tions that compete directly in any banking market. furtherance of any attempt to monopolize the business of 13. SeveraJ commenters asserted that the proposal would result in banking in any relevant banking market. The BHC Act also an undue concentration of resources in Camden, New Jersey, which is prohibits the Board from approving a bank acquisition that part of the Philadelphia and South Jersey banking market, a~ defined by the Federal Reserve Bank of Philadelphia ("Reserve Bank"). The would substantially lessen competition in any relevant Reserve Bank's definition of this market is set forth in the appendix. In banking market, unless the anticompetitive effects of the reviewing this proposal and the comments received, the Board has proposal are clearly outweighed in the public interest by its considered whether to include Camden in this banking market. probable effect in meeting the convenience and needs of the Camden is directly across the Delaware River from Philadelphia and has been included in the Reserve Bank's definition of the Philadelphia community to be served. 11 and South Jersey banking market for over a decade. According to data Applicants and Commerce have subsidiary depository from the 2000 census, more than 65 percent of the labor force residing institutions that compete directly in four banking markets: in Camden commutes to other counties in the Philadelphia and South Atlantic City, New Jersey; Metropolitan New York Jersey banking market. These and other factors indicate that the New Jersey-Connecticut-Pennsylvania; New Haven, Con- Philadelphia and South Jersey banking market. including Camden, is the appropriate locaJ geographic market for purposes of analyzing the competitive effects of this proposaJ. indirectly acquire additional shares of PCB or attempt to exercise a 14. Deposit and market share data are based on data reported by controlling influence over PCB. insured depository institutions in the summary of deposits data as of 8. See 12 U.S.c. § I 842(d). A bank holding company's home state June 30. 2007, adjusted to reflect mergers and acquisitions as of is the state in which the total deposits of all banking subsidiaries of February 26, 2008, and are based on caJculations in which the deposits such company were the largest on July I, 1966, or the date on which of thrift institutions are included at SO percent. The Board previously the company became a bank holding company, whichever is later. has indicated that thrift institutions have become, or have the potential 9. For purposes of section 3(d), the Board considers a bank to be to become, signilicant competitors of commercial banks. See, e.g., located in the states in which the bank is chartered or headquartered or Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989); operates a branch (12 U.S.c. §§ 1841(0)(4)-(7) and I 842{d)(l)(A) and National City Corporation, 70 Federal Reserve Bulletin 743 (1984). (d)(2)(B )). Thus, the Board regularly has included thrift institution deposits in the 10. 12 U.S.c. §§ 1842(d)(I)(A)-(B) and 1842(d)(2)-{3). TO is market share calculation on a SO percent weighted basis. See, e.g., adequately capitalized and adequately managed, as defined by appli First Hawaiian, Inc., 77 Federal Reserve Bulletin 52 (1991). cable law. Both of Commerce's subsidiary banks have been in IS. Under the DOJ Guidelines, a market is considered unconcen· existence and operated for the minimum period of time required by trated if the post-merger HHI is less than 1000, moderately concen applicable state laws and for more than five years. See 12 U.S.c. trated if the post-merger HHl is between 1000 and 1800, and highly § I 842(d)(l)(B)(i)-(ii). On consummation of the proposal, Applicants concentrated if the post-merger HHI is more than 1800. The Depart would control less than IO percent of the total amount of deposits of ment of Justice ("DOJ") has informed the Board that a bank merger or insured depository institutions in the United Stales (12 U .S.c. acquisition generaJly will not be chaJlenged (in the absence of other § I 842(d)(2)(A». Applicants would control less than 30 percent, or a factors indicating anticompetitive effects) unless the post-merger HHI greater percentage established under applicable state law, of the state is at least 1800 and the merger increases the HHi more than 200 deposits in Connecticut, New Jersey, New York, and Pennsylvania points. The DOJ has stated that the higher-than-normaJ HHI thresholds (12 U.S.c. § I 842(d)(2)(B)-(D». In addition, Applicants would not for screening bank mergers for anticompetitive effects implicitly hold deposits in excess of an applicable deposit cap under the law of recognize the competitive effects of limited-purpose lenders and other any other stales where Commerce is located. All other requirements of non depository financial entities. section 3(d) of the BHC Act would be met on consummation of the 16. Definitions of the other three banking markets and the effects of proposaJ. the proposaJ on concentrations of banking resources in all the markets II. 12 U.S.c. § I 842(c)(l). are described in the appendix.
C54 Federal Reserve Bulletin 0 June 2008 concentrated as measured by the HHI, and the HHI changes parent-only and consolidated basis, as well as the financial would increase less than 200 points in each market. In condition of the subsidiary insured depository institutions addition, numerous competitors would remain in all the and significant nonbanking operations. In this evaluation, banking markets. the Board considers a variety of information, including The DOJ has conducted a detailed review of the poten capital adequacy, asset quality, and earnings performance. tial competitive effects of the proposal and has advised the In assessing financial resources, the Board consistently has Board that consummation of the transaction would not considered capital adequacy to be especially important. The likely have a significantly adverse effect on competition in Board also evaluates the financial condition of the com any relevant banking market. In addition, the appropriate bined organization at consummation, including its capital banking agencies have been afforded an opportunity to position, asset quality, and earnings prospects, and the comment and have not objected to the proposaL impact of the proposed funding of the transaction. Based on all the facts of record, the Board concludes that The Board has carefully considered the financial re consummation of the proposal would not have a signifi sources of the organizations involved in the proposal. The cantly adverse effect on competition or on the concentra capital levels of TD exceed the minimum levels that would tion of resources in any of the four banking markets where be required under the Basel Capital Accord and are there Applicants and Commerce compete directly or in any other fore considered to be equivalent to the capital levels that relevant banking market. Accordingly, the Board has deter would be required of a U.S. banking organization. In mined that competitive considerations are consistent with addition, the subsidiary depository institutions involved in approvaL the proposal are well capitalized and would remain so on consummation. Based on its review of the record, the Board finds that Applicants have sufficient financial re FINANCIAL, MANAGERIAL, AND SUPERVISORY sources to effect the proposal. The proposed transaction is CONSIDERATIONS structured as a partial share exchange and partial cash Section 3 of the BHC Act requires the Board to consider the purchase of shares. Applicants will use existing resources financial and managerial resources and future prospects of to fund the cash purchase of shares. IS the companies and depository institutions involved in the The Board also has considered the managerial resources proposal and certain other supervisory factors. The Board of the organizations involved. The Board has reviewed the has carefully considered these factors in light of all the examination records of Applicants, Commerce, and their facts of record, including confidential supervisory and subsidiary depository institutions, including assessments of examination information from the U.S. banking supervisors their management, risk-management systems, and opera of the institutions involved, publicly reported and other tions.19 In addition, the Board has considered its supervi financial information, information provided by Applicants, sory experiences and those of other relevant banking and public comment received on the proposaL 17 The Board supervisory agencies, including the OCC and the Federal also has consulted with the Office of the Superintendent of Deposit Insurance Corporation ("FDIC"), with the organi Financial Institutions ("OSFI"), the agency with primary zations and their records of compliance with applicable responsibility for the supervision and regulation of Cana banking law and with anti-money-Iaundering laws. Appli dian banks, including TD. cants, Commerce, and their subsidiary depository institu In evaluating the financial resources in expansion pro tions are considered to be well managed. The Board also posals by banking organizations, the Board reviews the has considered Applicants' plans for implementing the financial condition of the organizations involved on both a acquisition, including the proposed management after con summation. 20 17. Several commenters expressed concern about pending and prospective litigation in Canada and the United States involving TD and the effect of such litigation on TD' s managerial and financial 18. One commenter claimed that the amount of consideration TD is resources. The Canadian litigation involves a class action lawsuit offering in connection with the proposal is excessive. The amount of against TD based on allegations that credit cardholders were over consideration offered is a matter decided by the parties involved, and charged on foreign currency conversions and a lawsuit for allegedly the Board has reviewed this aspect of the proposal in its assessment of improperly withholding deposited funds. These pending cases will be the financial resources of the reSUlting organization. resolved by a Canadian court with jurisdiction to adjudicate such 19. Several commenters expressed concern about TD Banknorth's matters. relationships with unaffiliated pawnshops and other nontraditional The U.S. lawsuits include a discrimination case that has been providers of financial services. As a general matter, the activities of the settled. Another lawsuit involving the amount of consideration TD consumer finance businesses identified by the commenters are permis offered to shareholders in connection with a previous acquisition is sible, and the businesses are licensed by the states where they operate. currently under review by a court of competent jurisdiction. The Board TD noted that it has established a detailed review program for does not have authority to resolve the shareholders' dispute. See pawnshops and other money-service businesses ("MSBs"), including Western Bancshares, Inc. v. Board of Governors, 480 F.2d 749 (10th reviews for compliance with anti-money-Iaundering, Bank Secrecy Cir. 1973). Act, fair lending, and consumer protection requirements. Furthermore, Board action on this proposal would not interfere with Canadian or TD stated that TD Banknorth does not have any role in the lending U.S. courts' ability to resolve the pending lawsuits. Moreover, the practices, credit review, or other business practices of MSBs and does Board has taken these comments into account in its assessment of the not purchase any loans originated by MSBs. financial resources and future prospects of the companies and deposi 20. Several commenters expressed concern that the proposal would tory institutions involved in the proposaL jeopardize the combined organization's ability to serve as the desig-
Legal Developments: First Quarter, 2008 C55 Based on all the facts of record, the Board has concluded subject to comprehensive supervlslOn on a consolidated that considerations relating to the financial and managerial basis by its home-country supervisor.23 Based on this resources and future prospects of the organizations involved finding and all the facts of record, the Board has con in the proposal are consistent with approval, as are the other cluded that TD continues to be subject to comprehensive supervisory factors.21 supervision on a consolidated basis by its home-country Section 3 of the BHC Act also provides that the Board supervisor. may not approve an application involving a foreign bank unless the bank is subject to comprehensive supervision or CONVENIENCE AND NEEDS CONSIDERATIONS regulation on a consolidated basis by the appropriate authorities in the bank's home country.22 As noted, the In acting on a proposal under section 3 of the BHC Act, the OSFI is the primary supervisor of Canadian banks, inclUd Board is required to consider the effects of the proposal on ing TD. The Board previously has determined that TD is the convenience and needs of the communities to be served and to take into account the records of the relevant insured depository institutions under the Community Reinvestment nated bonding authority ("DBA") for the Department of Education's Act ("CRA").24 The CRA requires the federal financial ("DOE's") Historically Black Colleges and Universities Capital Financing Program ("CFP"). A Commerce subsidiary serves as the supervisory agencies to encourage insured depository insti DBA and administers the CFP. Several commenters asserted that tutions to help meet the credit needs of the local communi Commerce had performed poorly as the DBA, had insufficient mana ties in which they operate, consistent with their safe and gerial controls over the CFP, and had mismanaged the program. In sound operation, and requires the appropriate federal finan addition, several commenters alleged that Commerce, through its insistence on certain loan payment terms, had risked violating fair cial supervisory agency to take into account a relevant lending laws and that certain terms and conditions of loans under the depository institution'S record of meeting the credit needs CFP were abusive. of its entire community, including low- and moderate TO represented that key elements of the CFP, including pricing and income neighborhoods, in evaluating bank expansionary repayment, were established by a division of the Department of the proposals.25 Treasury, and not by the DBA. Final determinations on credit approv als and denials are determined by the DOE. Moreover, TO stated that The Board has considered carefully all the facts of the DBA has an extremely diligent loan review process and that no record, including evaluations of the CRA performance loan has defaulted under the CFP while the Commerce subsidiary has records of the subsidiary banks of TD Banknorth and served as the DBA. The Board expects all banking organizations to Commerce, data reported by TD Banknorth and Commerce conduct their operations in a safe and sound manner with adequate systems to manage operational, compliance, and reputational risks and under the Home Mortgage Disclosure Act ("HMDA"),26 will take appropriate supervisory actions to prevent and address other information provided by Applicants, confidential abusive lending practices. supervisory information, and public comments received on 21. Section 3 of the BHC Act also requires the Board to determine the proposal. Two commenters alleged, based on HMDA that an applicant has provided adequate assurances that it will make data reported in 2006, that TD Banknorth had engaged in available to the Board such information on its operations and activities and those of its affiliates that the Board deems appropriate to deter disparate treatment of minority individuals in home mort mine and enforce compliance with the BHC Act. (12 U.S.C. gage lending. § I 842(c)(3)(A). The Board has reviewed the restrictions on disclo sure in the relevant jurisdictions in which TO operates and has A. CRA Performance Evaluations communicated with relevant government authorities concerning access to information. In addition, TO previously has committed that, to the extent not prohibited by applicable law, it will make available to the As provided in the eRA, the Board has reviewed the Board such information on the operations of its affiliates that the Board convenience and needs factor in light of the evaluations by deems necessary to determine and enforce compliance with the BHC the appropriate federal supervisors of the relevant insured Act, the International Banking Act, and other applicable federal laws. depository institutions' CRA performance records. An insti TO also previously has committed to cooperate with the Board to tution's most recent CRA performance evaluation is a obtain any waivers or exemptions that may be necessary to enable its affiliates to make such information available to the Board. Based on all particularly important consideration in the applications facts of record, the Board has concluded that TD has provided process because it represents a detailed, on-site evaluation adequate assurances of access to any appropriate information the of the institution's overall record of performance under the Board may request. CRA by its appropriate federal supervisor.27 22. 12 U.S.c. § 1842(c)(3)(B). As provided in Regulation Y, the Board determines whether a foreign bank is subject to consolidated home-country supervision under the standards set forth in Regula tion K. See 12 CFR 225. \3(a)(4). Regulation K provides that a foreign 23. See The Toronto-Dominion Bank, 92 Federal Reserve Bulletin bank will be considered subject to comprehensive supervision or C100 (2006); The Toronto-Dominion Bank, 91 Federal Reserve Bulle regulation on a consolidated basis if the Board determines that the tin 277 (2005). bank is supervised or regulated in such a manner that its home-country 24. 12 U.S.c. § 2901 et seq.; 12 U.S.c. § I 842(c)(2). supervisor receives sufficient information on the worldwide operations 25. 12 U.S.c. §2903. of the bank, including its relationship with any affiliates, to assess the 26.12 U.S.C. §2801 et seq. bank's overall financial condition and its compliance with laws and 27. See Interagency Questions and Answers Regarding Community regulations. See 12 CFR 211.24(c)(I). Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
C56 Federal Reserve Bulletin 0 June 2008 TD Banknorth's subsidiary banks each received a "sat information, provide only limited information about the isfactory" rating at its most recent CRA performance covered loans.32 HMDA data, therefore, have limitations evaluation by the OCC.28 Both of Commerce's subsidiary that make them an inadequate basis, absent other informa banks received "outstanding" CRA performance ratings at tion, for concluding that an institution has engaged in their most recent evaluations by the relevant federal super illegal lending discrimination, visors.29 PCB's subsidiary bank, PCB Bank, received a The Board is nevertheless concerned when HMDA data "satisfactory" rating at its most recent CRA performance for an institution indicate disparities in lending and believes evaluation by the OCC, as of January 3, 2005. Applicants that all lending institutions are obligated to ensure that their have represented that no significant changes to the CRA lending practices are based on criteria that ensure not only programs at any subsidiary bank will take place until CB safe and sound lending but also equal access to credit by NA and CB North are merged into TD Bank NA, at which creditworthy applicants regardless of their race or ethnicity. time the banks will adopt the CRA program ofTD Bank, as Because of the limitations of HMDA data, the Board has modified to address issues specific to the banks' markets.30 considered these data carefully and taken into account other information, including examination reports that provide B. HMDA and Fair Lending Record on-site evaluations of compliance with fair lending laws by TD Banknorth and its subsidiaries. The Board also has The Board has carefully considered the fair lending records consulted with the OCC about the fair-lending compliance and HMDA data of TD Banknorth in light of the public record of TD Bank NA, TD Bank USA, and CB NA and comments received on the proposal. Two commenters with the FDIC about the fair-lending compliance record of alleged, based on HMDA data, that TD Banknorth denied CB North. the home mortgage refinance and home improvement loan The record of these applications, including confidential applications of African American borrowers more fre supervisory information, indicates that TD Banknorth has quently than those of nonminority applicants. The Board taken steps to ensure compliance with fair lending and has focused its analysis on the 2006 HMDA data reported by TD Banknorth NA.3J other consumer protection laws. TD Banknorth's board of Although the HMDA data might reflect certain dispari directors annually approves a fair-lending policy statement, ties in the rates of loan applications, originations, and which serves as a reference document for all employees. denials among members of different racial or ethnic groups TD Banknorth's compliance program includes risk assess in certain local areas, they provide an insufficient basis by ments, annual monitoring, monthly business line self themselves on which to conclude whether or not TD monitoring, complaint tracking, and reviews by regulatory Banknorth is excluding or imposing higher costs on any compliance and fair lending committees. The program group on a prohibited basis. The Board recognizes that includes statistical data analysis quarterly and annually to HMDA data alone, even with the recent addition of pricing identify trends and fair lending concerns. In addition, TD Banknorth provides annual training covering compliance related regulations to all employees based on job function. 28. The most recent CRA performance evaluations were as of Applicants stated that they would not change the fair December 30,2004, for TO Bank NA and as of January 16.2007, for lending compliance programs of TD Banknorth's and TO Bank USA. 29. The most recent CRA performance evaluation for CB NA by the Commerce's subsidiary banks until consummation of the OCC was as of October 2, 2006. The most recent CRA performance proposed merger of those banks, at which time the banks evaluation for CB North by the FDIC was as of May 15, 2006. will adopt the fair-lending compliance programs of TD 30. Two commenters expressed concern regarding the impact of the Banknorth, as modified to address issues specific to each acquisition on the types of loans, investments, and services provided by the subsidiary banks of TO Banknorth and Commerce. One bank's markets. commenter also requested that Applicants make specific commitments The Board also has considered the HMDA data in light with regard to the products and services olIered in the New York City of other information, including the overall performance Metropolitan Statistical Area ("MSA"). The Board has stated that the records of the subsidiary banks of Applicants and Com CRA neither requires a depository institution to provide any specific types of products or services nor prescribes the fees charged for them. merce under the CRA. These established efforts and records See Bank of America Corporation, 90 Federal Reserve Bulletin 217, of performance demonstrate that the institutions are active 226 footnote 49 (2004). The Board also has consistently found that in helping to meet the credit needs of their entire commu neither the CRA nor the federal banking agencies' CRA regulations nities. require depository institutions to enter into pledges, commitments, or agreements with any organization and that the enforceability of any such third-party pledges, initiatives, and agreements are matters outside the CRA. See Bank of America Corporation, 93 Federal Reserve Bulletin C109, C1l2 footnote 28 (2007); Citigroup Inc., 88 Federal Reserve Bulletin 485 (2002). Instead, the Board focuses on 32, The data, for example, do not account for the possibility that an the existing CRA performance record of an applicant and the programs institution's outreach elIorts may attract a larger proportion of margin that an applicant has in place to serve the credit needs of its assessment ally qualified applicants than other institutions attract and do not areas at the time the Board reviews a proposal under the convenience provide a basis for an independent assessment of whether an applicant and needs factor. who was denied credit was, in fact, creditworthy. In addition, credit 31. The Board reviewed HMDA data for TO Bank NA's assessment history problems, excessive debt levels relative to income, and high areas in Connecticut, Maine, Massachusetts. New Hampshire, New Jer loan amounts relative to the value of the real estate collateral (reasons sey, New York, Pennsylvania. Vermont, and the MSAs noted in the most frequently cited for a credit denial or higher credit cost) are not comments. available from HMOA data.
Legal Developments: First Quarter, 2008 C57 C. Conclusion on Convenience and Needs and conclusion, the Board has considered all the facts of record CRA Performance in light of the factors that it is required to consider under the BHC Act and other applicable statutes. The Board's The Board has considered carefully all the facts of record, approval is specifically conditioned on compliance by including reports of examination of the CRA records of the Applicants with the conditions in this order and all the institutions involved, information provided by Applicants, commitments made to the Board in connection with the comment received on the proposal, and confidential super proposal. For purposes of this transaction, these commit visory information. Applicants represented that the pro ments and conditions are deemed to be conditions imposed posal would result in increased credit availability and in writing by the Board in connection with its findings and access to a broader array of financial products and services decision and, as such, may be enforced in proceedings for customers of TD Banknorth and Commerce. Based on a under applicable law. review of the entire record, and for the reasons discussed The proposal may not be consummated before the 15th above, the Board concludes that considerations relating to calendar day after the effective date of this order, or later the convenience and needs factor and the CRA perfor than three months after the effective date of this order, mance records of the relevant insured depository institu unless such period is extended for good cause by the Board tions are consistent with approval of the proposal. or by the Federal Reserve Bank of New York, acting pursuant to delegated authority. CONCLUSION By order of the Board of Governors, effective March 13, 2008. Based on the foregoing, and in light of all the facts of record, the Board has determined that the applications Voting for this action: Chairman Bernanke, Vice Chairman Kohn, should be, and hereby are, approved.33 In reaching its and Governors Warsh, Kroszner, and Mishkin. ROBERT DEY. FRIERSON 33. Several commenters requested that the Board hold a public Deputy Secretary of the Board meeting or hearing on the proposal. Section 3 of the BHC Act does not require the Board to hold a public hearing on an application unless the appropriate supervisory authority for the bank to be acquired makes a the commenters had ample opportunity to submit their views and, in written recommendation of denial of the application. The Board has fact, submitted written comments that the Board has considered not received such a recommendation from the appropriate supervisory carefully in acting on the proposal. The commenters' requests fail to authorities. Under its rules, the Board also may, in its discretion, hold a demonstrate why written comments do not present their views public meeting or hearing on an application to acquire a bank if adequately or why a meeting or hearing otherwise would be necessary necessary or appropriate to clarify factual issues related to the or appropriate. For these reasons, and based on all the facts of record, application and to provide an opportunity for testimony (12 CFR the Board has determined that a public meeting or hearing is not 22S.l6(e), 262.2S(d)). The Board has considered carefully the com required or warranted in this case. Accordingly, the requests for a menters' requests in light of all the facts of record. In the Board's view, public meeting or hearing on the proposal are denied. Appendix BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO] GUIDELINES Market Amount Remaining deposit Resulting Increase in Bank Rank of deposits number of shares HHI HHI (dollars) competitors (percent) Atlantic City-Atlantic and Cape May counties in New Jersey TD Banknorth Pre-Consummation .. 17 48 mil. .8 1,325 33 21 Commerce ................................ 2 1.3 bil. 20.5 1,325 33 21 TD Banknorth Post-Consummation .. 2 1.3 bil. 21.3 1,325 33 21
C58 Federal Reserve Bulletin D June 2008 Appendix-Continued BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES-Continued I Market Amount Remaining deposit Resulting Increase in Bank Rank of deposits number of shares HHI HHI (dollars) competitors (percent) Metropolitan New York-New Jersey- Pennsylvania-Connecticut-Bronx, Dutchess, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond, Rockland, Suffolk, Sullivan, Ulster, and Westchester counties in New York; Bergen, Essex, Hudson, Hunterdon, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, Sussex, Union, and Warren counties and the northern portions of Mercer County in New Jersey; Monroe and Pike counties in Pennsylvania; and Fairfield County and portions of Litchfield and New Haven counties in Connecticut TD Banknorth Pre-Consummation .. 9 20.8 bil. 2.6 1,118 17 272 Commerce ................................ 8 26.1 bi!. 3.3 1,118 17 272 TD Banknorth Post-Consummation .. 4 46.9 bil. 5.9 1,118 17 272 New Haven-Clinton, Killingworth, and Westbrook townships in Middlesex County; and Bethany, Branford, Cheshire, East Haven, Guilford, Hamden, Madison, Meriden, New Haven, North Branford. North Haven, Orange, Wallingford, West Haven, and Woodbridge townships in New Haven County, all in Connecticut TD Banknorth Pre-Consummation .. 8 772 mil. .1 1,290 2 20 Commerce ................................ 19 14 mil. 7.3 1,290 2 20 TD Banknorth Post-Consummation .. 8 786 mil. 7.5 1,290 2 20 Philadelphia and South Jersey- Bucks, Chester; Delaware. Montgomery, and Philadelphia counties in Pennsylvania; Burlington, Camden, Gloucester; and Salem counties in New Jersey; and the city of Trenton and Ewing, Hamilton, and Lawrence townships in Mercer County, New Jersey TD Banknorth Pre-Consummation .. 13 1.2 bil. 1.4 1,032 39 118 Commerce ................................ 2 13.7 bil. 14 1,032 39 118 TD Banknorth Post-Consummation .. 2 14.9 bil. 15.4 1,032 39 118 NOTE: Deposit data are as of June 30, 2007, and include mergers as of feb· ruary 26, 2008. Deposit amounts are unweighred. Rankings, market deposit shares, and HHIs are based on thrift institution deposits weighred at SO percent.
Legal Developments: First Quarter; 2008 C59 ORDERS ISSUED UNDER SECTION 4 OF THE munity Reinvestment Act, which requires the Board to take into account a relevant institution's record of meeting the BANK HOLDING COMPANY ACT credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe Bank of America Corporation and sound operation of the institution (12 U.S.c. § 2903). Charlotte, North Carolina Testimony at the public meetings will be presented to a panel consisting of a presiding officer and other panel Notice of Public Meetings members appointed by the presiding officer. In conducting Los Angeles, California the public meetings, the presiding officer will have the authority and discretion to ensure that the meetings proceed Chicago, Illinois in a fair and orderly manner. In contrast to a formal administrative hearing, the rules for taking evidence will BACKGROUND AND PUBLIC MEETINGS NOTICE not apply to the public meetings. Panel members may On February 15, 2008, Bank of America Corporation, question witnesses but no cross-examination of witnesses Charlotte, North Carolina ("Bank of America"), requested will be permitted. The public meetings will be transcribed, the Board's approval under the Bank Holding Company and the transcripts will be posted on the Board's public Act (12 U.S.c. § 1841 et seq.) ("BHC Act") and related website within several days after the meetings. Information statutes to acquire Countrywide Financial Corporation, regarding the procedures for obtaining a copy of the Calabasas, California ("Countrywide"), and thereby ac transcript will be announced at the public meetings. quire Countrywide's wholly owned savings association All persons wishing to testify at the public meeting in subsidiary, Countrywide Bank, FSB, Alexandria, Virginia, Los Angeles must submit a written request to Scott Turner, and its other non banking subsidiaries. The Board hereby Community Affairs Officer, Federal Reserve Bank of San orders that public meetings on the Bank of America! Francisco, !O1 Market Street, San Francisco, California Countrywide proposal be held in Los Angeles, California, 94!O5 (facsimile: 415/393-1920) no later than 5:00 p.m. and Chicago, Illinois. PDT on April 8, 2008. All persons wishing to testify at the The public meeting in Los Angeles will be held at the public meeting in Chicago must submit a written request to Los Angeles Branch of the Federal Reserve Bank of San Alicia Williams, Vice President, Federal Reserve Bank of Francisco, 950 South Grand Avenue, Los Angeles, Califor Chicago, 230 South LaSalle Street, Chicago, Illinois 60604 nia, on Monday, April 28, and Tuesday, April 29, 2008, (facsimile: 312/913-2626) no later than 5:00 p.m. CDT on beginning at 8:30 a.m. Pacific Daylight Time ("PDT"). April 8, 2008. The public meeting in Chicago will be held at the The request to testify must include the following infor Federal Reserve Bank of Chicago, 230 South LaSalle mation: (i) identification of which meeting (and which day Street, Chicago, Illinois, on Tuesday, April 22, 2008, for the Los Angeles meeting) the participant wishes to beginning at 8:30 a.m. Central Daylight Time ("CDT"). attend; (ii) a brief statement of the nature of the expected In addition, the comment period on the application has testimony (including whether the testimony will support or been extended to close of business on Tuesday, April 29, oppose the proposed transaction or provide other comment 2008. on the proposal) and the estimated time required for the presentation; (iii) the address and telephone number (and e-mail address and facsimile number, if available) of the PURPOSE AND PROCEDURES individual testifying; and (iv) identification of any special The public meetings will collect information relating to needs, such as individuals needing translation services, factors the Board is required to consider under the BHC individuals with a physical disability who may need assis Act. The factors the BHC Act requires the Board to tance, or individuals requiring visual aids for their presen consider include whether the notificant's performance of tation. To the extent available, translators will be provided the activities can reasonably be expected to produce ben for those wishing to present their views in a language other efits to the public (such as greater convenience, increased than English if so requested in the request to testify. competition, and gains in efficiency) that outweigh possible Individuals interested only in attending the meeting, but not adverse effects (such as undue concentration of resources, testifying, need not submit a written request. decreased or unfair competition, conflicts of interests, and On the basis of the requests received, the presiding unsound banking practices). Consideration of the above officer will prepare a schedule for participants who will factors includes an evaluation of the financial and manage testify and establish the order of presentation. To ensure an rial resources of the notificant, including its subsidiaries, opportunity for all interested commenters to present their and any company to be acquired; the effect of the proposed views, the presiding officer may limit the time for presen transaction on those resources; and the management exper tation. Individuals not listed on the schedule may be tise, internal control and risk-management systems, and permitted to speak at the public meeting if time permits at capital of the entity conducting the activity. In acting on a the conclusion of the schedule of witnesses, at the discre notice to acquire a savings association, the Board also tion of the presiding officer. Copies of testimony may, but reviews the records of performance of the insured deposi need not, be filed with the presiding officer before a tory institutions involved in the proposal under the Com- participant's presentation.
C60 Federal Reserve Bulletin D June 2008 By order of the Board of Governors, effective March 27, on a future, and similar instruments ("Derivatives Advisory 2008. Services"), as activities that are closely related to banking.4 The BHC Act, as amended by the Gramm-Leach-Bliley ROBERT DEY. FRIERSON Act, permits BHCs that qualify as FHCs to engage in an Deputy Secretary of the Board expanded set of activities that are defined by statute to be financial in nature, as well as any additional activity that the Board determines, in consultation with the Secretary of the The Royal Bank of Scotland Group pic Treasury, to be financial in nature or incidental to a Edinburgh, Scotland financial activity.s The BHC Act also permits FHCs to engage in any Order Approving Notice to Engage in activity that the Board determines is complementary to a Activities Complementary to a Financial financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the finan Activity cial system generally.6 This authority is intended to allow the Board to permit FHCs to engage on a limited basis in The Royal Bank of Scotland Group pic ("RBS"), a finan activities that, although not necessarily financial in nature, cial holding company ("FHC") for purposes of the Bank are so meaningfully connected to financial activities that Holding Company Act ("BHC Act"), has requested the they complement those activities. In this way, FHCs would Board's approval under section 4 of the BHC Act! and the not be disadvantaged by market developments if commer Board's Regulation y2 to engage in physical commodity cial activities evolve into financial activities or competitors trading, which involves entering into contracts that may find innovative ways to combine financial and nonfinancial require making or taking physical delivery of or storing activities. The BHC Act provides the Board with exclusive commodities ("Physical Commodity Trading"), and pro authority to determine that an activity is complementary to viding energy management services ("Energy Manage a financial acti vity. ment Services") for owners of power generation facilities The BHC Act further provides that any FHC seeking to under energy management agreements. The Board has engage in a complementary activity must obtain the previously found Physical Commodity Trading and Energy Board's prior approval. When reviewing such a proposal, Management Services to be activities that are complemen the BHC Act requires the Board to consider whether tary to the financial activity of engaging as principal in performance of the activity by the FHC can reasonably be commodity derivatives transactions and, in the case of expected to produce public benefits that outweigh possible Energy Management Services, also complementary to pro adverse effects, such as "undue concentration of resources, viding financial and investment advisory services for decreased or unfair competition, conflicts of interests, or derivatives transactions. unsound banking practices."? Moreover, the Board previ In addition, RBS has requested approval to engage in ously has stated that complementary activities should be physically settled energy tolling by entering into tolling limited in size and scope relative to an FHC's financial agreements with power plant owners ("Energy Tolling") as activities.8 The Board has approved Physical Commodity an activity that is complementary to the financial activity of Trading9 and Energy Management ServiceslO as activities engaging as principal in commodity derivatives transac that are complementary to financial activities. As noted, the tions. The Board has not previously considered whether Energy Tolling is complementary to a financial activity. RBS proposes to engage in such complementary activities 4. 12 CFR 225.28(b )(8)(ii). Under Regulation Y, a BHC is permitted through a joint venture company ("N") formed with to engage in Commodity Derivatives Activities but is generally not Sempra Energy ("Sempra"), San Diego, California, an allowed to take or make delivery of the nonfinancial commodities energy services company.3 underlying commodity derivatives or purchase or sell nonfinancial commodities in the spot market. 5. 12 U.S.C. § 18 43(k)(1)(A). BACKGROUND 6. 12 U.S.C. § 1843(k)(1)(B). 7. 12 U.S.C. § I 843Q)(2)(A). The Board's Regulation Y currently permits bank holding 8. See 68 Federal Register 68493, 68497 (Dec. 9, 2003); see also companies ("BHCs") to (i) enter into derivative contracts 145 Congo Rec. H11529 (daily ed. Nov. 4, 1999) (Statement of that are based on nonfinancial commodities ("Commodity Chairman Leach) ("It is expected that complementary activities would not be significant relative to the overall financial activities of the Derivatives Activities"), and (ii) provide information, sta organization.") . tistical forecasting, and advice with respect to transactions 9. Board letters regarding Bank of America Corporation (April 24, in foreign exchange, swaps, and similar transactions; com 2007), Credit Suisse Group (March 27, 2007), Fortis S.A.IN.Y. modities; and any forward contract, option, future, option (September 29, 2006), and Wachovia Corporation (April 13, 2006); and Board orders regarding Societe Generale, 92 Federal Reserve Bulletin CI13 (2006); Deutsche Bank AG, 91 Federal Reserve Bulletin C54 (2005); lPMorgan Chase & Co., 91 Federal Reserve Bulletin C57 1. 12 U.S.C. § 1843. (2005); Barclays Bank PLC, 90 Federal Reserve Bulletin 511 (2004); 2. 12 CFR Part 225. UBS AG, 90 Federal Reserve Bulletin 215 (2004); and Citigroup Inc., 3. RBS would own 51 percent of N, which would be headquartered 89 Federal Reserve Bulletin 508 (2003). v., in the United Kingdom. 10. Fortis S.A.IN. 94 Federal Reserve Bulletin C20 (2008).
Legal Developments: First Quarter; 2008 C61 Board has not previously considered a request by an FHC delivery of permissible commodities pursuant to physically to engage in Energy Tolling. settled commodity derivatives; taking inventory positions RBS currently engages in Commodity Derivatives Ac in natural gas, oil, emissions allowances, and other permis tivities and Derivatives Advisory Services (both are finan sible commodities; and engaging in other spot market cial activities) in the United States. RBS has requested trading activities. RBS has also indicated that JV might approval to engage in Physical Commodity Trading and engage in commodity-related financing transactions, includ Energy Tolling as activities that are complementary to its ing volumetric production payment transactions Commodity Derivatives Activities and to provide Energy ("VPPs" ).14 Management Services as an activity that is complementary As noted, the Board previously has determined that to both its Commodity Derivatives Activities and Deriva Physical Commodity Trading is a permissible activity tives Advisory Services. because it complements the financial activity of engaging in Commodity Derivatives Activities. Most of the transac RBS's PROPOSAL tions in which RBS proposes to engage as part of Physical Commodity Trading do not differ from transactions that the RBS operates in the United States through Citizens Finan Board has approved. RBS proposes to engage, however, in cial Group, Inc., Providence, Rhode Island, a multibank a wider set of transactions under the Physical Commodity holding company, as well as through branches in New York, Trading authority and requests confirmation that these New York, and Greenwich, Connecticut, and representative activities are within the scope of that authority. offices in Houston, Texas, and Los Angeles, Califomia.lI Specifically, RBS proposes to enter into long-term power RBS also operates nonbanking companies in the United supply contracts with large commercial and industrial States, including a broker-dealer subsidiary, RBS Green end-users; to engage in physical trading in commodities for wich Capital, Greenwich, Connecticut. which derivatives contracts have not been approved by the RBS proposes to expand its commodity-related activities Commodity Futures Trading Commission ("CFTC") for by forming JV with Sempra. A subsidiary of Sempra, trading on a U.S. exchange or specifically approved by the Sempra Energy Trading Corp. ("SET"), that engages in Board; and to enter into contracts with third parties to commodity derivatives transactions and physical commod process, refine, or otherwise alter commodities. ity trading would be transferred to JV.12 SET acts as principal in commodity transactions in and outside the A. Long-Term Electricity Supply Contracts United States and takes and makes physical delivery of commodities in connection with those transactions. SET As part of its energy trading business, RBS proposes to also acts as an energy manager and enters into tolling enter into long-term electricity supply contracts with large agreements with power plant owners. RBS proposes to commercial and industrial customers. The current Physical engage in Physical Commodity Trading, Energy Tolling, Commodity Trading authority permits an FHC to take a and Energy Management Services under the complemen position in a commodity and does not limit the duration of, tary activity authority of section 4 of the BHC Act so that or counterparties to, an FHC's contracts. Most commodi the SET Companies transferred to JV may continue to ties in which an FHC may trade under the Physical conduct these activities.13 Commodity Trading authority, however, tend by their nature to be limited to the wholesale market. Electricity, on PHYSICAL COMMODITY TRADING the other hand, has a greater potential to be sold not only to end-users generally but also to small retail customers who RBS currently engages in Commodity Derivatives Activi are unlikely to be participants in the market for energy ties in the United States and proposes to expand those related derivatives products. activities and to engage in Physical Commodity Trading through Jv. N's activities would include taking or making 14. RBS may engage in VPPs on oil and gas as permissible credit transactions if it agrees to sell the oil or gas it receives under the VPP to third parties before delivery. VPPs are a means of financing oil and 11. RBS also holds a 38.3 percent interest in RFS, a financial gas exploration and production. Under a VPP, the lender or VPP holder holding company formed by a consortium of banking organizations. provides an up-front payment in exchange for a royalty interest that including Fortis N.V., Utrecht, Netherlands, and certain of its affiliates entitles the VPP holder to receive hydrocarbons on a regular basis and Banco Santander Central Hispano, S.A., Madrid, Spain, that during the life of the VPP transaction in quantities that will allow the recently acquired ABN AMRa Holding N.V., Amsterdam, Nether VPP holder to recover its up-front payment and a specified return. The lands (HABN AMRa"). On approval of the consortium's restructuring Board's General Counsel has determined that VPPs generally are plan by ABN AMRa's home-country supervisor, RBS will acquire considered extensions of credit permissible for a BHC under sec ABN AMRa's direct U.S. branches and representative offices. tion 225.28(b)(l) of Regulation Y, if the BHC agrees to sell the 12. JV proposes to purchase SET and its related energy trading commodities before delivery. See letter from Scott G. Alvarez to subsidiaries and affiliates ("SET Companies"), which would become Elizabeth T. Davy, May 15,2006, regarding UBS AG CUBS Letter"). lV's subsidiaries. RBS has confirmed thaI all VPP transactions will conform in all 13. As set forth in the appendix, RBS has committed that within material respects to the description of permissible VPP transactions set two years of consummation of the transaction it will conform, forth in the UBS Letter, including a commitment that any commodities including by divestiture if necessary, any activities that are impermis that RBS receives under the VPP and does not immediately sell to a sible for an FHC under the BHC Act or that are inconsistent with the third party will count against the 5 percent cap on RBS' s total physical activities permitted by this order. commodity holdings, which is discussed below.
C62 Federal Reserve Bulletin 0 June 2008 To ensure that RBS's activities remain consistent with because of the presence of an established foreign trading the general complementary nature of the activities permit market, which may deter a U.S. exchange from listing a ted under the Physical Commodity Trading authority, RBS similar product. The absence of CFfC approval in those has committed to enter into long-term supply contracts only cases generally would not indicate that taking and making with large industrial and commercial customers. Market physical delivery of the commodity would entail substan risk relating to these long-term contracts would be handled tially greater risks than taking and making delivery of a by the same methodologies used for other electricity trades. CFfC-approved commodity. As a general matter, the fact RBS has represented that in all states where the electric that a derivatives contract based on the commodity trades ity market has been deregulated, state regulations distin on a non-U.S. exchange that is subject to a regulatory guish among types of end-users. To distinguish types of structure comparable to the one administered by the CFfC customers, states generally rely on the customer's typical should be sufficient to demonstrate that there is a market in electricity consumption level.15 To ensure that RBS con financially settled contracts on the commodities, the com tracts only with customers who are sufficiently large and modity is fungible, and a reasonably liquid market for the sophisticated, RBS has committed that it will enter into commodity exists. long-term electricity supply contracts only with commer RBS specifically has requested approval to take and cial and industrial customers that consume electricity at a make physical delivery of nickel, a metal that is widely and rate of at least (i) 800 megawatt-hours/year (HMWHrs/ actively traded on the London Metal Exchange ("LME"), year") or (ii) the minimum consumption level for large one of the largest nonferrous metal markets in the world. commercial and industrial customers under applicable state The LME offers futures and options contracts for alumi law, whichever is greater. This restriction should be suffi num, copper, nickel, tin, zinc, and certain aluminum alloy cient to ensure that RBS transacts with financially sophisti contracts. The LME is a highly liquid,16 global market that cated purchasers (and not with retail purchasers) and thus derives more than 95 percent of its business from outside remains essentially a wholesale intermediary. the United Kingdom. The CFfC has determined that the LME is subject to a regulatory structure comparable to that B. Physical Trading in Certain Commodities Not administered by the CFfC under the Commodity Exchange Approved by the CFTC for Trading on a Futures Act. As a result, members of the LME may conduct Exchange brokerage activities for U.S. customers without having to register with the CFfC as a futures commission merchant The Board has conditioned its approval of notices to or otherwise comply with certain of the CFfC's consumer engage in Physical Commodity Trading on a commitment protection rules.17 Given the nature of the LME trading by the FHC to trade only in commodities for which market and the CFfC's determination that LME members derivative contracts have been approved for trading on a are subject to comparable regulatory oversight, the Board futures exchange by the CFfC (unless specifically excluded has determined that FHCs that receive approval to engage by the Board) or that have been specifically approved by in Physical Commodity Trading may take and make deliv the Board ("Approved Commodities Commitment"). This ery of nickel. The Board has determined that other FHCs commitment provided a means to ensure that the Physical that have already received approval to engage in Physical Commodity Trading remained complementary to the finan Commodity Trading may also make and take delivery of cial activity of Commodity Derivatives Activities because nickel, consistent with the Approved Commodities Com it helped demonstrate that there was a derivatives market mitment, as a commodity that has been specifically ap for the underlying commodity. This commitment also was proved by the Board. intended to prevent FHCs from dealing in finished goods 2. Commodities that are Not Approved for Trading in the and other items, such as real estate or industrial products United States or on Certain Non-U.S. Exchanges. Many that lack the fungibility and liquidity of exchange-traded commodities for which derivatives contracts have not been commodities. The Board believes that, subject to certain approved for trading by the CFfC or that are not traded on requirements, an FHC may take delivery of certain com a non-U.S. exchange may also be commodities that have modities that have not been approved by the CFfC cat egory but are similarly fungible and liquid without being exposed to significant additional risk. 16. In 2006, the LME reported that it recorded volumes of 87 mil lion lots, equivalent to $8.1 trillion annually and $35 billion to I. Commodities that are Approved for Trading on Non $45 billion on an average business day. U.S. Exchanges. The test that a commodity derivative be 17. The CFTC's Rule 30.10 permits a person affected by the approved by the CFfC is a useful, but not a comprehen requirements contained in Part 30 ofthe CFfC' s rules, which relate to sive, test of whether a derivative or the underlying com registration as a futures commission merchant, to petition the CFTC for an exemption from the requirements based on the person's modity is liquid and fungible. For some liquid and fungible substituted compliance with a foreign regulatory structure found commodities, no market-maker has sought CFfC approval comparable to that administered by the CFfC under the Commodities Exchange Act. The inclusion of the LME in the CFTC's so-called "30.10 program" is reflected in an order issued by the CFTC to the 15. For example, the minimum consumption level to be considered U.K.' s Financial Services Authority that consolidates the relief set a large commercial or industrial customer under state regulations is forth in prior orders issued pursuant to Rule 30.1 0 regarding sales of 175 MWHrslyear in California, 220 MWHrs/year in Pennsylvania, futures and options to customers in the U niled States by certain /inns and 876 MWHrs/year in Washington, D.C. in the United Kingdom, 68 Federal Register 58583 (2003).
Legal Developments: First Quarter, 2008 C63 viable markets with financially settled contracts on the product or lot would be included for contracts on the commodities and that satisfy fungibility and liquidity con commodity. In other words, the physical asset that may be cerns. In many cases, the existence of an established delivered to satisfy a contract would be, by nature or usage over-the-counter market obviates the need to seek CFfC of trade, the equivalent of any other unit of the asset. The approval for listing on a futures exchange. In addition, the Proposed Commodities, which trade on ICE, NYMEX, and particular commodity may be so similar to a CFfC Chemconnect, are fungible because market participants approved commodity, such as a product that is derived from contract for specific quantities of the commodity but cannot a CFfC-approved commodity, that the separate listing is specify the particular product they will receive. superfluous because market participants can use derivatives Liquidity. To ensure that the market for a particular contracts on the CFfC-approved commodity to hedge their commodity is sufficiently liquid, an FHC must demonstrate positions in the non-CFfC-approved derivative product. that an active trading market in the commodity exists that The Board believes that taking and making physical would allow the institution to limit its position in the delivery of non-CFfC-approved commodities may be con commodity relative to the volume that trades in the market sistent with the Physical Commodity Trading authority if generally. The Board believes the following factors indicate an FHC can demonstrate that (1) there is a market in that a reasonably liquid market exists: (i) reliable trading financially settled contracts on those commodities in addi volume in the commodity or production statistics exist that tion to the physically settled contracts, (ii) the particular demonstrate the size of the market in the commodity; (ii) commodity is fungible, and (iii) the market for the com daily or intraday price data on the commodity are pub modity is sufficiently liquid. In addition, the FHC must lished; and (iii) a number of market makers in the commod demonstrate that it has trading limits in place that address ity stand ready to buy or sell the commodity each day at both concentration risk and overall exposure to the com published bid and offer quotations. Each of the Proposed modity to ensure that the FHC could physically trade in Commodities is derived from CFfC-approved commodi these commodities without incurring significant additional ties (natural gas and oil) and is used, similar to CFfC risk. approved commodities, as fuel or as inputs for finished As noted above, RBS has requested authority to trade in products. The Proposed Commodities are traded widely certain natural gas liquids, oil products, and petrochemi through brokers on the ATPs discussed above and physi cals. Specifically, the proposed natural gas liquids are cally traded at various hubs in the United States and butane, ethane, and natural gasoline; the proposed oil abroad.18 There are numerous participants in the trading products are asphalt, condensate, boiler cutter, residual fuel markets for the Proposed Commodities, and published oil no. 6, kerosene, straight run, marine diesel, and naphtha; production statistics exist for all the Proposed Commodi and the proposed petrochemicals are ethylene, paraxylene, ties. Reliable independent price reporting for the Proposed styrene, propylene, and toluene ("Proposed Commodi Commodities is widely available from a number of sources, ties"). Contracts on these commodities are not approved such as Platts, a division of The McGraw-Hili Companies for trading on a U.S. futures exchange by the CFfC or on a that provides information on the energy and metals mar major non-U.S. exchange. Nonetheless, a number of con kets, and the Argus Media Group, an energy news and siderations support a Board determination that trading in price-reporting agency. Prices for both buy and sell offers the Proposed Commodities should be permitted as part of are posted daily by the ATPs on which the Proposed the Physical Commodity Trading authority. Commodities trade. Market in financially settled contracts. Many commodi Trading limits. An FHC that proposes to trade in a new ties trade on established alternative trading platforms commodity must demonstrate that it has established appro ("ATP") that are used by a wide variety of market partici priate limits on its trading in the commodity and has a pants, rather than on a futures exchange. If derivatives risk-management program in place to monitor compliance contracts on a commodity trade on a recognized ATP, that with those limits, which must include both concentration activity could serve as sufficient evidence that a market in limits and overall exposure limits. RBS has represented financially settled contracts on the particular commodity that as part of its risk-management program relating to the exists. Financially and physically settled contracts for all Proposed Commodities, it will impose appropriate concen the Proposed Commodities trade on recognized ATPs. tration and overall exposure limits for each Proposed Specifically, the natural gas liquids are traded on the Commodity. Intercontinental Exchange ("ICE") and on the New York In light of the characteristics of the Proposed Commodi Mercantile Exchange ("NYMEX") electronic trading plat ties and based on all the facts of record, the Board has forms; the distillate and residual oil products trade on ICE determined that taking physical delivery of the Proposed and NYMEX; and the petrochemicals are traded on the Chemconnect electronic trading platform. These ATPs are major platforms that are widely used by a variety of 18. Specifically, natural gas liquids are physically traded in the producers, consumers, and traders of the Proposed Com United States at hubs in Texas and Kansas; the distillate and residual oil products are physically traded at various points in the United States modities. as well as the Caribbean, Africa. Europe. and Singapore; and the Fungibility. To ensure that a commodity is fungible, an petrochemicals are physically traded at various points in the United FHC must demonstrate that no specification of exact States, South Korea, and Thailand,
C64 Federal Reserve Bulletin [] June 2008 Commodities is consistent with the complementary nature connection with the Board's approvals of their proposals to of Physical Commodity Trading and does not present engage in Physical Commodity Trading. In particular, RBS undue safety and soundness concerns for RBS.l9 has committed to limit the total market value of all 3. Altering Commodities. As noted, the Board has previ commodities that it will hold at anyone time relating to its ously approved Physical Commodity Trading, on a limited Physical Commodity Trading activities to 5 percent of its basis, subject to a number of commitments, including that consolidated tier I capital (as calculated under its home the FHC not process, refine, or otherwise alter a commod country standard).20 Additionally, RBS will notify the ity. RBS proposes to engage third parties to refine, blend, or Federal Reserve Bank of Boston if the market value of otherwise alter commodities for which it is permitted to commodities it holds as a result of its Physical Commodity take and make physical delivery. Trading exceeds 4 percent of its tier 1 capital. A number of considerations support the Board's determi nation that engaging a third party to alter a commodity is ENERGY TOLLING consistent with the existing Physical Commodity Trading authority. Permitting RBS to engage a third party to alter a As noted, the Board has not previously determined that commodity would not significantly increase the risks to the Energy Tolling is a complementary activity under section 4 institution from Physical Commodity Trading. Under this of the BHC Act. For the reasons stated below, a number of authority, an FHC may already engage a third party to store considerations support the Board's determination that commodities, which exposes an FHC to substantially the Energy Tolling is complementary to the financial activity of same types of risks as engaging a third party to alter a engaging in Commodity Derivatives Activities. commodity. Moreover, an FHC could sell a commodity to a refinery and buy back the refined commodity if both the A. RBS' s Proposed Energy Tolling Agreements commodity sold to and bought from the refinery were Under the energy tolling agreements that would be trans permissible commodities. Permitting an FHC to engage ferred to JV, SET, as toller, pays the plant owner a fixed third parties to alter commodities also would enhance an periodic payment that compensates the owner for its fixed FHC's ability to meet its customers' needs. costs ("capacity payments"), usually monthly, in exchange To ensure that the activity remains consistent with the for the right to all or part of the plant's power output. The scope of Physical Commodity Trading, RBS has made the plant owner, however, retains control over the day-to-day following commitments: (i) RBS will not alter commodi operations of the plant and physical plant assets at all ties itself; (ii) both the commodity input and the resulting times.21 The toller provides (or pays for) the fuel needed to altered commodity will be permissible commodities under produce the power that it directs the owner to produce. The the Board's decisions; and (iii) RBS will not have exclusive fuel and energy transactions that the toller enters into in rights to use the alteration facility. Requiring that both the these circumstances are generally physically settled.22 The commodity input and the altered commodity be permissible agreements also generally provide that the owner will commodities under the Board's decisions helps ensure that receive a marginal payment for each megawatt hour pro RBS would not assume the risk of taking and making duced by the plant to cover the owner's variable costs plus physical delivery of commodities that the Board has not yet a profit margin. The toll is similar to a call option on the evaluated. In addition, preventing RBS from having the power produced by the plant with a strike price linked to exclusive right to use an alteration facility should reduce fuel and power prices. In general, the toller would direct the RBS's exposure to the potential risks associated with operator to run the plant (i.e., the toller would exercise its operating commodity-altering facilities. option) when the price of power exceeds the cost of 4. Risks of Proposed Physical Commodity Trading producing that amount of power. Some tolling agreements Activities. Permitting RBS to engage in the limited amount may also give the toller the right to a plant's excess and types of Physical Commodity Trading described above does not appear to pose a substantial risk to RBS, deposi tory institutions, or the U.S. financial system generally. RBS has made commitments relating to its Physical Com 20. RBS would be required to include within this 5 percent limit the modity Trading that are designed to address the risks market value of any commodities held as a result of a failure of involved in the proposed activities. In addition to the reasonable efforts to avoid taking delivery of derivatives contracts that RBS enters into under the authority for BHCs in sec commitments discussed above, RBS provided substantially tion 225.2S(b )(S)(ii)(B) of Regulation y, the same commitments as those provided by other FHCs in 21. RBS has indicated that SET's tolling agreements are all medium term (generally two to five years), although some market participants enter into longer-term agreements. SET has not entered into longer 19. Because trading the Proposed Commodities might require that term contracts, however, because it can be difficult to hedge exposure an FHC adapt a particular risk-management program beyond what over a longer period of time. would be required to trade in the commodities that are currently 22. Because an FHC would generally take or make physical permissible, this order does not authorize an FHC with Physical delivery of fuel and electricity in connection with a tolling agreement, Commodity Trading authority to take and make delivery of the an FHC would need approval to engage in Physical Commodity Proposed Commodities. Trading to engage in Energy Tolling.
Legal Developments: First Quarter, 2008 C65 capacity, which the toller may sell to the market or use to plant. SET also provides a variety of administrative ser meet reliability obligations to the power grid. vices to support these transactions. The Board previously has determined that providing B. Energy Tolling as a Complementary Activity Energy Management Services complements the financial activities of Commodity Derivatives Activities and Deriva Energy Tolling is an outgrowth of the existing financial tives Advisory Services.23 Energy Management Services activity of engaging in Commodity Derivatives Activities. would complement RBS's current Commodity Derivatives As part of its Commodity Derivatives Activities, an FHC Activities and Derivatives Advisory Service by allowing may take a derivatives position in a commodity, including RBS to offer power plant owners certain agency and energy. Energy Tolling complements Commodity Deriva administrative services that would provide a power plant tives Activities by allowing an FHC to hedge its own, or owner with an integrated approach to managing the assist its clients to hedge, positions in energy. Engaging in commodity-related aspects of its business. The Energy energy tolling would also provide an FHC with additional Management Services that RBS proposes to provide do not information on the energy markets that would help the FHC differ in any significant way from the services that the manage its own commodity risks. The Board also notes that Board previously approved. Furthermore, RBS has made financial institution competitors of RBS that are not FHCs all the required commitments that generally limit the scope engage in tolling activities as part of their energy trading of the activities that it may perform as energy manager to operations. Based on the foregoing and all other facts of ensure that RBS is only taking on risks consistent with the record, the Board concluded that RBS's Energy Tolling agency nature of the Energy Management Services and complements its Commodity Derivatives Activities. limits the revenues attributable to RBS's Energy Manage ment Services to 5 percent of RBS's total consolidated C. Risks of Energy Tolling operating revenues.24 Granting RBS the authority to act as energy manager The primary risk to a toller is that the plant proves to be would not expand its ability to engage in physical commod uneconomical to operate. which can occur when the cost of ity trading beyond what it can do as part of its proposed producing power is greater than the power's market price. Physical Commodity Trading. The potential risks of provid In those cases, the toller has no ability to recover its ing Energy Management Services are already largely miti capacity payments. To limit the potential safety and sound gated by the limits imposed on RBS's Commodity Deriva ness risks of Energy Tolling, RBS has committed that it tives Activities and Physical Commodity Trading. will limit the amount of its Energy Tolling activities. Currently, all Physical Commodity Trading activities are RISKS AND PUBliC BENEFITS OF THE limited to a maximum of 5 percent of the FHC's tier I PROPOSED ACTIVITIES capital. RBS has committed to include the present value of its future committed capacity payments under an energy As noted, to authorize RBS to engage in a complementary tolling agreement in calculating the value of commodities activity, the Board must determine that the activity does not held by RBS under its Physical Commodity Trading author pose a substantial risk to the safety or soundness of ity to determine compliance with the cap of 5 percent of depository institutions or the financial system generally. tier I capital. As a result, allowing RBS to engage in Moreover, the Board previously has stated that complemen Energy Tolling would not increase the overall position that tary activities should be limited in size and scope relative to it may take in physical commodities. This cap would also an FHC's financial activities. ensure that Energy Tolling remains limited in size and Permitting RBS to engage in the proposed complemen scope relative to RBS's financial activities. tary activities of Physical Commodity Trading, Energy Tolling, and Energy Management Services in the limited ENERGY MANAGEMENT SERVICES amounts and situations described above would not appear to pose a substantial risk to RBS, depository institutions, or RBS has requested that the Board permit it to expand its the U.S. financial system generally. The commitments Commodity Derivatives Activities and Derivatives Advi described above and in the appendix should help limit the sory Services in the United States to include providing safety and soundness risks, size, and scope of the proposed Energy Management Services pursuant to energy manage activities. RBS may already incur the price risk of com ment agreements ("EMA") with plant owners. Under the modities under its existing Commodity Derivatives Activi EMAs to which SET is a party, the energy manager (SET) ties, and none of the proposed activities would appear to provides transactional and advisory services to power plant increase its potential exposure to that risk. In addition, RBS owners. The transactional services consist primarily of SET acting as a financial intermediary, substituting its credit and liquidity for those of the owner to facilitate the owner's v., 23. Fortis S.A.IN. 94 Federal Reserve Bulletin C20 (2008). purchase of fuel and sale of power. SET's advisory services 24. 'Total operating revenues" is defined as net interest income include providing market information to assist the owner in and all non-interest revenue, including net securities gains but exclud developing and refining a risk-management plan for the ing extraordinary items.
C66 Federal Reserve Bulletin 0 June 2008 would remain subject to the securities, commodities, and CONCLUSION energy laws and to the applicable rules and regulations (including the anti-fraud and anti-manipulation rules and Based on all the facts of record, including the representa regulations) of the CFTC and the Federal Energy Regula tions and commitments made by RBS to the Board in tion Commission. connection with the notice, and subject to the terms and The Board believes that RBS has the managerial exper conditions set forth in this order, the Board has determined tise and internal control framework to manage the risks of that the notice should be, and hereby is, approved. The engaging in Physical Commodity Trading, Energy Tolling, Board's determination is subject to all the conditions set and Energy Management Services. RBS has shown it has forth in Regulation Y and to the Board's authority to the expertise and internal controls necessary to effectively require modification or termination of the activities of a integrate the risk management of those activities into its BHC or any of its subsidiaries as the Board finds necessary overall risk-management framework. to ensure compliance with, or to prevent evasion of, the The Board must also determine that the performance of provisions and purposes of the BHC Act and the Board's these complementary activities by RBS "can reasonably be regulations and orders issued thereunder. The Board's expected to produce benefits to the public, such as greater decision is specifically conditioned on compliance with all convenience, increased competition, or gains in efficiency the commitments made in connection with the notice, that outweigh possible adverse effects, such as undue including the commitments and conditions discussed in this concentration of resources, decreased or unfair competi order. The commitments and conditions relied on in reach tion, conflicts of interests, or unsound banking practices." ing this decision shall be deemed to be conditions imposed Approval of the request to engage in Physical Commodity in writing by the Board in connection with its findings and Trading, Energy Tolling, and Energy Management Services decision and, as such, may be enforced in proceedings likely would benefit RBS's customers by enhancing RBS's under applicable law. ability to provide efficiently a full range of commodity By order of the Board of Governors, effective March 27, related services consistent with existing market practice. 2008. Approval also would enable RBS to improve its under Voting for this action: Chairman Bernanke, Vice Chairman Kohn, standing of physical commodity and commodity deriva and Governors Warsh, Kroszner, and Mishkin. tives markets and its ability to serve as an effective competitor in those markets. In addition, engaging in ROBERT DEY. FRIERSON Energy Tolling would allow RBS to provide risk Deputy Secretary of the Board intermediation services to clients whose businesses involve significant energy commodity risks. Energy Tolling also Appendix would allow RBS to participate more fully in Physical Commodity Trading by securing a source for its physically settled electricity derivatives contracts and to employ toIl COMMITMENTS BY RBS ing agreements as part of its own hedging strategies or those of its clients. RBS, together with its subsidiaries (collectively, "RBS"), RBS's Physical Commodity Trading, Energy Tolling, commits with respect to the notice ("Notice") it has filed and Energy Management Services should not result in an with the Board to engage in Physical Commodity Trading, undue concentration of resources or other adverse effects Energy Tolling, and Energy Management Services in the on competition because the market for these services is United States or by an entity located in the United States regional or national in scope. Any potential conflicts of that interests associated with RBS's activities should be miti 1. RBS will conduct its Physical Commodity Trading, gated by the anti-tying provisions in section 106 of the Energy Tolling, and Energy Management Services Bank Holding Company Act Amendments of 1970. exclusively pursuant to the authority of section 4 of the For these reasons, and based on RBS's policies and BHC Act and in accordance with the limitations that procedures for monitoring and controlling the risks of the the Board has placed on the conduct of such activities, and will not conduct such activities in the United States activities, the Board concludes that allowing RBS to engage in reliance on section 2(h)(2) of the BHC Act or in Physical Commodity Trading, Energy Tolling, and section 211.23(f)(5) of the Board's Regulation K. Energy Management Services on the limited bases de scribed above does not pose a substantial risk to the safety PHYSICAL COMMODITY TRADING ACTIVITIES and soundness of depository institutions or the financial system generally and can reasonably be expected to pro 2. RBS will limit the aggregate market value of physical duce benefits to the public that outweigh any potential commodities that it holds at anyone time as a result of adverse effects. Physical Commodity Trading to 5 percent of its tier 1
Legal Developments: First Quarter, 2008 C67 capital. RBS will include in this 5 percent limit the further commits that it will not contract for the exclu market value of any physical commodities it holds as a sive right to use a facility to alter commodities for any result of a failure of reasonable efforts to avoid taking period of time. Consistent with the Physical Commod delivery in commodities transactions conducted pursu ity Trading authority, RBS will contract with third ant to section 225.2S(b)(S)(ii)(B) of Regulation Y. In parties (i) to alter only an Approved Commodity and addition, RBS agrees to notify the Federal Reserve (ii) to alter the commodity only into another Approved Bank of Boston if the aggregate market value of Commodity. commodities held under this approval exceeds 4 per cent of RBS's tier 1 capital. ENERGY TOLLING 3. RBS will take and make physical delivery only of physical commodities for which derivative contracts 9. RBS will include the present value of all capacity have been authorized for trading on a U.S. futures payments to be made by RBS in connection with exchange by the Commodity Futures Trading Commis energy tolling agreements in calculating its compliance sion ("CFTC") or physical commodities of which the with the limit of 5 percent of tier I capital on the Board has specifically authorized RBS to take and aggregate market value of the physical commodities make physical delivery (colleetively, "Approved Com that it and any of its subsidiaries hold at anyone time modities"). as a result of Physical Commodity Trading. 4. RBS will enter into long-term electricity supply con tracts only with large commercial and industrial end VOLUMETRIC PRODUCTION PAYMENT users that consume electricity at a rate of at least 0) Soo TRANSACTIONS megawatt-hours/year or (ii) the minimum consumption level for large commercial and industrial customers 10. RBS will include any commodities that RBS receives under applicable state law, whichever is greater. under a volumetric production payment transaction and 5. RBS will not use this authority to own, invest in, or does not immediately sell to a third party in ealculating operate facilities for the extraction, transportation, stor its compliance with the limit of 5 percent of tier I age, or distribution of commodities but will only use capital on the aggregate market value of the physical storage and transportation facilities owned and oper commodities that it and any of its subsidiaries hold at ated by third parties. RBS will enter into service anyone time as a result of Physical Commodity agreements only with reputable independent third Trading. party facilities. 6. RBS will conform to the requirements of the BHC Act, ENERGY MANAGEMENT SERVICES including by divestiture if necessary, the activities of 11. Revenues attributable to RBS's Energy Management (i) owning, investing in, or operating storage facilities Services in the United States will not exceed 5 percent for commodities that it is not permitted to hold or store under the BHC Act and (ii) making and taking physical of its total consolidated operating revenues. I 12. RBS will only act as energy manager in the United delivery of commodities that are not Approved Com States if the energy management agreement under modities, including metal concentrates, acquired in which it performs its Energy Management Services connection with the transactions contemplated by the provides that Notice within two years of consummation of the a. The owner of the facility retains the right to market transactions, or such longer period as the Federal and sell power directly to third parties, which may Reserve in its discretion may grant. be subject to the energy manager's right of first 7. After consummation of the transactions contemplated refusal; by the Notice, RBS will not expand its direct or b. The owner of the facility retains the right to indirect activities or investments in the activities of 0) determine the level at which the facility will oper owning, investing in, or operating storage facilities for ate (i.e., to dictate the power output of the facility at commodities that it is not permitted to hold or store any given time); under the BHC Act and (ii) making and taking physical c. Neither the energy manager nor its affiliates guar delivery of commodities that are not Approved Com antee the financial performance of the facility; and modities, including metal concentrates. RBS will not d. Neither the energy manager nor its affiliates bear expand these activities or investments beyond those any risk of loss if the facility is not profitable. engaged in by the SET Companies immediately prior to the date of the consummation of the proposed RBS agrees that the foregoing commitments are deemed to transaction by directly or indirectly (i) acquiring direct be conditions imposed in writing by the Board in connec control of a company engaged in any activity, or acquiring any assets or business lines of another com tion with its findings and decision on the notice filed by pany that engages in impermissible activities, (ii) RBS to engage in Physical Commodity Trading, Energy increasing the types of investments, products, or ser Tolling, and Energy Management Services under sec vices to be engaged in or provided by RBS, or (iii) any tion 225.89 of Regulation Y and, as such, may be enforced similar transactions that would result in an expansion in proceedings under applicable law. of these activities. S. RBS will act solely as an intermediary in the physical commodities market and will not process, refine, or otherwise alter a physical commodity itself. RBS will I. Total operating revenues are defined as net interest income and contract with a third party for any services it needs in all non-interest revenue. including nel securities gains but excluding connection with the handling of any commodity. RBS extraordinary items.
C68 Federal Reserve Bulletin 0 June 2008 ORDERS ISSUED UNDER bank's dollar-denominated deposits in Japan. eBANK has INTERNATIONAL BANKING ACT committed, inter alia, that the representative office will not solicit deposits in the United States. In acting on a foreign bank's application under the IBA eBANK Corporation and Regulation K to establish a representative office, the Board must consider whether the foreign bank (1) engages Tokyo, Japan directly in the business of banking outside of the United States; (2) has furnished to the Board the information it Order Approving Establishment of a needs to assess the application adequately; and (3) is Representative Office subject to comprehensive supervision on a consolidated basis by its home-country supervisor.4 The Board also eBANK Corporation (HeBANK"), Tokyo, Japan, a foreign considers additional standards set forth in the IBA and bank within the meaning of the International Banking Act Regulation K. 5 ("IBA"), has applied under section lO(a) of the IBA to As noted above, eBANK engages directly in the busi establish a representative office in San Francisco, Califor ness of banking outside the United States. eBANK also has nia.1 The Foreign Bank Supervision Enhancement Act of provided the Board with information necessary to assess 1991, which amended the IBA, provides that a foreign bank the application through submissions that address the rel must obtain the approval of the Board to establish a evant issues. representative office in the United States. With respect to home-country supervision of eBANK, Notice of the application, affording interested persons an the Board has previously determined, in connection with opportunity to submit comments, has been published in a applications involving other Japanese banks, that those newspaper of general circulation in San Francisco (San banks were subject to home-country supervision on a Francisco Chronicle, March 16,2006). The time for filing consolidated basis.6 eBANK is supervised by the Japanese comments has expired, and all comments received have Financial Services Agency ("FSA") on substantially the been considered. same terms and conditions as those other Japanese banks. eBANK, with total consolidated assets of approximately Based on all the facts of record, including the above $6.1 billion,2 is an internet-only bank providing deposit information, it has been determined that eBANK is subject accounts and services and settlement services exclusively to comprehensive supervision on a consolidated basis by its to Japanese residents. eBANK's largest shareholder is the home-country supervisor. Development Bank of Japan, a government entity that The additional standards set forth in section 7 of the IBA owns 14.91 percent of the outstanding shares of the bank. and Regulation K also have been taken into account.? With eBANK's founder and president, Mr. Taiichi Matsuo, owns respect to the financial and managerial resources of eBANK, 6.47 percent of the outstanding shares of the bank, and NTT Finance Corporation, a Japanese company, owns 6.16 percent of the outstanding shares.3 4. 12 U.S.C. §3107(a)(2); 12 CFR 211.24(d)(2). In assessing this The bank, which commenced operations in July 2001, standard, the Board considers, among other factors, the extent to which accepts deposits but does not have branches or ATMs and the home-country supervisors (i) ensure that the bank has adequate does not engage in lending. The bank engages in financial procedures for monitoring and controlling its activities worldwide; (ii) obtain information on the condition of the bank and its subsidiaries advisory activities, including asset securitization advice, and offices through regular examination reports, audit reports, or research services, and investment administration services. otherwise; (iii) obtain information on the dealings with and relation eBANK, through a wholly owned subsidiary, also manages ship between the bank and its affiliates, both foreign and domestic; (iv) mutual funds that are publicly offered over the internet to receive from the bank financial reports that are consolidated on a worldwide basis or comparable information that permits analysis of Japanese investors. eBANK currently conducts no activi the bank's financial condition on a worldwide consolidated basis; and ties in the United States. The bank's only office outside (v) evaluate prudential standards, such as capital adequacy and risk Japan is a representative office in Hong Kong. asset exposure, on a worldwide basis. These are indicia of comprehen eBANK has stated that the establishment of the represen sive, consolidated supervision. No single factor is essential. and other tative office is part of its strategy to explore business and elements may inform the Board's determination. 5. 12 U.S.c. §3105(d)(3}-(4); 12 CFR 2lI.24(c)(2). technology opportunities in the United States. The pro 6. See e.g., The Wakashio Bank, Limited, 89 Federal Reserve posed representati ve office would research technology Bulletin 237 (2003); The Daiwa Bank. Limited, 89 Federal Reserve related to internet banking, identify business opportunities Bulletin 185 (2003). with banks and companies in the United States that have 7. See 12 U.S.C. §3I05(d)(3}-(4); 12 CFR 211.24(c)(2}-(3). These standards include; whether the bank's home-country supervisor has advanced information technology capabilities potentially consented to the establishment of the office; the financial and manage relevant to eBANK's internet banking activities, and iden rial resources of the bank; whether the bank has procedures to combat tify investment opportunities in the United States for the money laundering; whether there is a legal regime in place in the home country to address money laundering, and whether the home country is participating in multilateral efforts to combat money laundering; I. 12 U.S.c. § 3107(a). whether the appropriate supervisors in the home country may share 2. Asset data are as of September 30, 2007. information on the bank's operations with the Board; whether the bank 3. Citigroup Inc. indirectly owns 5.33 percent of eBANK. The and its U.S. affiliates are in compliance with U.S. law; the needs of the remaining shares are widely held by individuals and corporations. community; and the bank's record of operation.
Legal Developments: First Quarter, 2008 C69 taking into consideration eBANK's record of operations in eBANK's direct and indirect activities in the United States. its home country, its overall financial resources, and its Approval of this application also is specifically conditioned standing with its home country supervisor, financial and on compliance by eBANK with the commitments made in managerial factors are consistent with approval of the connection with this application and with the conditions in proposed representative office. eBANK appears to have the this order.9 The commitments and conditions referred to experience and capacity to support the proposed represen above are conditions imposed in writing by the Board in tative office and has established controls and procedures for connection with this decision and may be enforced in the proposed representative office to ensure compliance proceedings under applicable law. with U.S. law and for its operations in general. The FSA By order, approved pursuant to authority delegated by has no objection to the establishment of the proposed the Board, effective January 16,2008. representative office. Japan is a member of the Financial Action Task Force ROBERT DEY. FRIERSON ("FATF") and subscribes to the FATF's recommendations Deputy Secretary of the Board on measures to combat money laundering. In accordance with those recommendations, Japan has enacted laws and State Bank of India developed regulatory standards to deter money laundering. Money laundering is a criminal offense in Japan, and Mumbai, India Japanese financial institutions are required to establish internal policies, procedures, and systems for the detection Order Approving Establishment of a Branch and prevention of money laundering throughout their worldwide operations. The bank has policies and proce State Bank of India ("Bank"), Mumbai, India, a foreign dures to comply with these laws and regulations that are bank within the meaning of the International Banking Act monitored by governmental entities responsible for anti ("IBA"), has applied under section 7(d) of the IBAI to money-laundering compliance. establish a branch in Jackson Heights, New York. The With respect to access to information about eBANK's Foreign Bank Supervision Enhancement Act of 1991 operations, the Board has reviewed restrictions on disclo ("FBSEA"), which amended the IBA, provides that a sure in the relevant jurisdictions in which eBANK operates foreign bank must obtain the approval of the Board to and has communicated with relevant government authori establish a branch in the United States. ties regarding access to information. eBANK has commit Notice of the application, affording interested persons an ted to make available to the Board such information on its opportunity to comment, has been published in a newspa operations and any of its affiliates that the Board deems per of general circulation in Jackson Heights, New York necessary to determine and enforce compliance with the (The New York Times, August 5, 2005). The time for filing IBA, the Bank Holding Company Act, and other applicable comments has expired, and the Board ha<; considered all federal law. To the extent that the provision of such comments received. information to the Board may be prohibited by law or Bank, with total assets of approximately $187.5 billion, otherwise, eBANK has committed to cooperate with the is the largest bank in India.2 The government of India owns Board to obtain any necessary consents or waivers that approximately 63.8 percent of Bank's shares.3 No other might be required from third parties for disclosure of such shareholder owns directly more than 5 percent of Bank's information. In light of these commitments and other facts shares. of record, and subject to the condition described below, it Bank engages primarily in corporate and retail banking has been determined that eBANK has provided adequate and trade finance but also provides through its subsidiaries assurances of access to any necessary information that the life insurance, merchant banking, brokerage, credit card Board may request. processing, and credit information services in India. Out On the basis of all the facts of record, and subject to the side India, Bank maintains offices in 32 countries. In the commitments made by eBA."l'K and the terms and condi tions set forth in this order, eBANK's application to 9. The Board's authority to approve the establishment of the establish the representative office is hereby approved by the proposed representative office parallels the continuing authority of Director of the Division of Banking Supervision and California to license offices of a foreign bank. The Board's approval of RegUlation, with the concurrence of the General Counsel, this application does not supplant the authority of the California acting pursuant to authority delegated by the Board.s Department of Financial Institutions to license the proposed represen tative office of eBANK in accordance with any terms or conditions Should any restrictions on access to information on the that it may impose. operations or activities of eBANK or any of its affiliates subsequently interfere with the Board's ability to obtain I. 12 U.S.c. § 3105(d). information to determine and enforce compliance by 2. Asset data are as of March 31. 2007. Ranking data are as of eBANK or its affiliates with applicable federal statutes, the June 30. 2006. 3. In June 2007, the government of India purchased 59.7 percent of Board may require or recommend termination of any of Bank's shares from the Reserve Bank of India ("RBI") for approxi mately $8.7 billion. An additional 4.1 percent of Bank's shares are owned by the government of India through the Life Insurance Corpo 8. See 12 CFR 265.7(d)(l2). ration of India, a government-{)wned insurance company.
C70 Federal Reserve Bulletin 0 June 2008 United States, Bank operates insured branches in New York, ing.11 The Board also may take into account whether the New York, and Chicago, Illinois; an agency in Los Angeles, home country of the foreign bank is developing a legal California; and a representative office in Washington, D.C. regime to address money laundering or is participating in Bank also operates a wholly owned subsidiary, State Bank multilateral efforts to combat money laundering,12 This is of India (California), also in Los Angeles.4 Bank is a the standard applied by the Board in this case. qualifying foreign banking organization under Regula As noted above, Bank engages directly in the business of tion K.5 banking outside the United States. Bank also has provided The proposed Jackson Heights branch would offer a the Board with information necessary to assess the applica range of banking products and services, including permis tion through submissions that address the relevant issues. sible deposit accounts and small business loans, as well as Based on all the facts of record, the Board has deter remittance, investment advisory, and trade-related ser mined that Bank's home-country supervisory authority is vices.6 actively working to establish arrangements for the consoli Under the IBA and Regulation K, in acting on an dated supervision of Bank and that considerations relating application by a foreign bank to establish a branch, the to the steps taken by Bank and its home jurisdiction to Board must consider whether (1) the foreign bank engages combat money laundering are consistent with approval directly in the business of banking outside the United under this standard. 13 The RBI is the principal supervisory States; (2) has furnished to the Board the information it authority of Bank, including its foreign subsidiaries and needs to assess the application adequately; and (3) is affiliates. The RBI has the authority to license banks, subject to comprehensive supervision on a consolidated regulate their activities and approve expansion, both domes basis by its home-country supervisors.7 The Board also tically and abroad. It supervises and regulates Bank through considers additional standards as set forth in the rnA and a combination of regular on-site reviews and off-site moni Regulation K. 8 toring. On-site examinations cover the major areas of The rnA includes a limited exception to the general operation, capital adequacy, management (including risk standard relating to comprehensive, consolidated supervi management strategies), asset quality (including detailed sion.9 This exception provides that, if the Board is unable to loan portfolio analysis), earnings, liquidity, and internal find that a foreign bank seeking to establish a branch, controls and procedures (including anti-money-Iaundering agency, or commercial lending company is subject to controls and procedures). The frequency of on-site exami comprehensive supervision or regulation on a consolidated nations depends on a bank's risk profile, but generally all basis by the appropriate authorities in its home country, the Indian banks, including Bank, are examined at least annu Board may nevertheless approve the application, provided ally. that (i) the appropriate authorities in the home country of Off-site monitoring is conducted through the review of the foreign bank are actively working to establish arrange required quarterly Of monthly reports on, among other ments for the consolidated supervision of such bank; and things, asset quality, earnings, liquidity, capital adequacy, (ii) all other factors are consistent with approval.lO In loans, and on- and off-balance-sheet exposures. The RBI deciding whether to exercise its discretion to approve an monitors the foreign activities of Indian banks using guide application under authority of this exception, the Board lines designed to ensure that banks identify, control, and must also consider whether the foreign bank has adopted minimize risk in the bank and in its joint ventures and and implemented procedures to combat money launder- subsidiaries. The RBI also periodically audits Indian banks' foreign operations. Bank is required to be audited annually by a firm of 4. Bank's home state under the IBA and Regulation K is New York. chartered accountants approved by the RBI, and the audit All of Bank's operations in the United States were established before report is submitted to the RBI. The scope of the required enactment of FBSEA. audit includes a review of financial statements, asset qual 5. 12 CFR 21 L23(a). 6. The proposed branch would not be insured. ity, internal controls, and anti-money-laundering proce 7. 12 U.S.C. §3105(d)(2); 12 CFR 211.24. In assessing this dures. The RBI may order a special audit at any time. In standard, the Board considers, among other indicia of comprehensive. connection with its listing of Global Depository Receipts consolidated supervision, the extent to which the home-country super on the London Stock Exchange, Bank files reports with the visors (i) ensure that the bank has adequate procedures for monitoring and controlling its activities worldwide; (ii) obtain information on the London Stock Exchange that also are subject to annual condition of the bank and its subsidiaries and offices through regular external audit. In addition, Bank conducts internal audits of examination reports, audit reports, or otherwise; (iii) obtain informa its offices and operations on a risk-based schedule. The tion on the dealings with and relationship between the bank and its proposed branch would be subject to internal audits to affiliates, both foreign and domestic; (iv) receive from the bank determine compliance with internal controls and RBI financial reports that are consolidated on a worldwide basis or comparable information that permits analysis of the bank's financial guidelines. condition on a worldwide consolidated basis; and (v) evaluate pruden tial standards, such as capital adequacy and risk asset exposure, on a worldwide basis. No single factor is essential, and other elements may II. 12 U.S.C. § 3105(d)(6)(B). inform the Board's determination. 12. ld. S. 12 U.S.C. §3105(d)(3)-(4); 12 CFR 211.24(c)(2), 13. The Board recently approved an application by another Indian 9. 12 U.S.C. §3105(d)(6). bank under this standard. See IClel Bank Limited, 94 Federal Reserve \0, 12 U,S,C. §3105(d)(6)(A). Bulletin C26 (2008).
Legal Developments: First Quarter. 2008 C7l Indian laws impose various prudential limitations on branch-level and regional officers who are responsible for banks, including limits on transactions with affiliates and implementing Bank's anti-money-laundering policies and large exposures. The RBI is authorized to request and procedures. Bank's compliance with anti-money receive information from any bank and its domestic and laundering requirements is monitored by the RBI and by foreign affiliates and to impose penalties for failure to Bank's internal and external auditors. comply with a disclosure request or for providing false or The Board also has taken into account the additional misleading information. The RBI also has the authority to standards set forth in section 7 of the IBA and Regula impose conditions on licensees and to impose penalties for tion K.15 The RBI has no objection to Bank's establishment failure to comply with the RBI's rules, orders, and direc of the proposed branch. tions. Penalties include monetary fines, removal of manage The Board has also considered carefully the financial ment, and the revocation of the authority to conduct and managerial factors in this case. India's risk-based business. capital standards are consistent with those established by In recent years, the Indian government has enhanced its the Basel Capital Accord. Bank's capital is in excess of the anti-money-laundering regime. In January 2003, India took minimum levels that would be required by the Accord and initial steps to adopt an anti-money-laundering law, the is considered equivalent to capital that would be required of Prevention of Money Laundering Act. The law, related a U.S. banking organization. Managerial and other financial amendments, and implementing rules (collectively, the resources of Bank are consistent with approval, and Bank "PMLA") became effective in July 2005 and established a appears to have the experience and capacity to support the regulatory infrastructure to assist the anti-money proposed branch. In addition, Bank has established controls laundering effort. In accordance with the PMLA, India has and procedures for the proposed branch to ensure compli established the Financial Intelligence Unit, India ("FIU ance with U.S. law. IND"), which reports directly to the Economic Intelligence With respect to access to information about Bank's Council headed by the Finance Minister of India. The operations, the Board has reviewed the restrictions on FIU-IND is responsible for receiving, processing, analyz disclosure in relevant jurisdictions in which Bank operates ing, and disseminating information related to cash and and has communicated with relevant government authori suspicious transaction reports. The Directorate of Enforce ties regarding access to information. Bank has committed ment, a department within the Ministry of Finance, is to make available to the Board such information on the responsible for investigating and prosecuting money laun operations of Bank and any of its affiliates that the Board dering cases. In addition, the RBI issued "Know Your deems necessary to determine and enforce compliance with Customer (KYC) Guidelines - Anti-Money Laundering the IBA, the Bank Holding Company Act, and other Standards" ("Guidelines") in November 2004, which applicable federal law. To the extent that the provision of require financial institutions to establish systems for the such information to the Board may be prohibited by law or prevention of money laundering. Indian banks were re otherwise, Bank has committed to cooperate with the quired to be fully compliant with the Guidelines by Decem Board to obtain any necessary consents or waivers that ber 31,2005. The RBI issued further guidelines in February might be required from third parties for disclosure of such 2006 providing clarification on reporting cash and suspi information. In light of these commitments and other facts cious transactions to the FlU-IND. of record, and subject to the condition described below, the India participates in international fora that address the Board has determined that Bank has provided adequate prevention of money laundering and terrorist financing. assurances of access to any necessary information that it India is a member of the AsialPacific Group on Money may request. Laundering (Financial Action Task Force for the Asia! On the basis of all the facts of record, and subject to the Pacific region), an observer organization to the Financial commitments made by Bank, as well as the terms and Action Task Force (HFATF"), and is actively seeking to conditions set forth in this order, Bank's application to join FATF as a member.14 India is a party to the 1988 U.N. establish a branch in Jackson Heights. New York, is hereby Convention Against Illicit Traffic in Narcotic Drugs and approved. Should any restrictions on access to information Psychotropic Substances and the U.N. International Con on the operations or activities of Bank and its affiliates vention for the Suppression of the Financing of Terrorism. subsequently interfere with the Board's ability to obtain Bank has policies and procedures to comply with Indian information to determine and enforce compliance by Bank laws and regulations and the RBI's Guidelines regarding or its affiliates with applicable federal statutes, the Board anti-money laundering. Bank has also taken additional may require termination of any of Bank's direct or indirect steps on its own initiative to combat money laundering and other illegal activities. Bank states that it is committed to IS. See 12 U.S.c. §3105(d)(3)-(4); 12 CFR 21l.24(c)(2). The implementing the relevant recommendations of the FATF additional standards set forth in section 7 of the IBA and Regulation K and that it has put in place anti-money-laundering policies include the following: whether the bank's home-country supervisor and procedures to ensure ongoing compliance with statu has consented to the establishment of the office; the financial and managerial resources of the bank; whether the appropriate supervisors tory and regulatory requirements, including designating in the home country may share information on the bank's operations with the Board; whether the bank and its U.S. affiliates are in compliance with U.S. law; the needs of the community; the bank's 14. India became an observer to FATF in February 2007. record of operation.
en Federal Reserve Bulletin 0 June 2008 activities in the United States. Approval of this application ments and conditions referred to above are conditions also is specifically conditioned on compliance by Bank imposed in writing by the Board in connection with this with the commitments made in connection with this appli decision and may be enforced in proceedings under cation and with the conditions in this order.16 The commit- 12 U.S.c. § 1818 against Bank and its affiliates. By order of the Board of Governors, effective Janu ary 25, 2008. 16. The Board's authority to approve the establishment of the proposed branch parallels the continuing authority of the state of Voting for this action: Chairman Bernanke, Vice Chairman Kohn, New York to license offices of a foreign bank. The Board's approval of and Governors Warsh, Kroszner. and Mishkin. this application does not supplant the authority of the state of New York or its agent, the New York State Banking Department ("Department"), to license the proposed office of Bank in accordance ROBERT DEY. FRIERSON with any terms or conditions that the Department may impose. Deputy Secretary of the Board
C73 August 2008 Legal Developments: Second Quarter, 2008 ORDERS ISSUED UNDER BANK First Charter has total consolidated assets of approxi mately $4.9 billion and controls $3.2 billion in deposits. Its HOLDING COMPANY ACT only subsidiary bank, FC Bank, operates in North Carolina and Georgia. First Charter is the seventh largest depository ORDERS ISSUED UNDER SECTION 3 OF THE organization in North Carolina, controlling $3.1 billion in deposits, which represent 1.5 percent of the total amount of BANK HOLDING COMPANY ACT deposits of insured depository institutions in the state.s On consummation of the proposal, Fifth Third would Fifth Third Bancorp remain the 18th largest depository organization in the United States, with total consolidated assets of approxi Cincinnati, Ohio mately $115.8 billion. Fifth Third would control deposits of approximately $73.6 billion, which represent less than Fifth Third Financial Corporation I percent of the total amount of deposits of insured Cincinnati, Ohio depository institutions in the United States. Order Approving the Merger of Bank INTERSTATE ANALYSIS Holding Companies Section 3(d) of the BHC Act allows the Board to approve an application by a bank holding company to acquire Fifth Third Bancorp ("Fifth Third") and its wholly owned control of a bank located in a state other than the bank subsidiary, Fifth Third Financial Corporation (collectively holding company's home state if certain conditions are "Applicants"), both financial holding companies within met. For purposes of the BHC Act, the home state of Fifth the meaning of the Bank Holding Company Act ("BHC Third is Ohio,6 and First Charter is located in Georgia and Act"), have requested the Board's approval under section 3 North Carolina.7 of the BHC Actl to acquire First Charter Corporation ("First Charter") and its subsidiary bank, First Charter Based on a review of all the facts of record, including Bank ("FC Bank"), both of Charlotte, North Carolina. relevant state statutes, the Board finds that the conditions Notice of the proposal, affording interested persons an for an interstate acquisition enumerated in section 3(d) of opportunity to submit comments, has been published the BHC Act are met in this case.8 In light of all the facts of (72 Federal Register 54,446 (2007)). The time for filing comments has expired, and the Board has considered the 5. In this order. insured depository institutions include commercial proposal and all comments received in light of the factors banks, savings banks, and savings associations. set forth in the BHC Act.2 6. See 12 U.S.c. § I 842(d). A bank holding company's home state Fifth Third, with total consolidated assets of approxi is the state in which the total deposits of all banking subsidiaries of mately $111 billion, is the 18th largest depository organiza such company were the largest on July I, 1966, or the date on which tion in the United States.3 Fifth Third operates three the company became a bank holding company, whichever is later. 7, For purposes of section 3(d) of the BHCAct, the Board considers subsidiary banks in 11 states and controls $70.3 billion in a bank to be located in the states in which the bank is chartered or deposits.4 headquartered or operates a branch. See 12 U.S.c. §§ 1841(0)(4)-(7) and 1842(d)(l)(A) and 1842(d)(2)(B). 8. 12 U,S.C. §§ I 842(d)(l)(A)-(B) and I 842(d)(2)-(3). Applicants I. 12 U.S.C. § 1842. are adequately capitalized and adequately managed, as defined hy 2. Thirty-five commenters supported the proposal and ninety-eight applicable law. FC Bank has been in existence and operated for the commenters expressed concerns about various aspects of the proposal. minimum period of time required by applicable state laws and for 3. Asset, national ranking, and national deposit data are as of more than five years. See 12 USC. § 1842(d)(l) (B)(i)-(ii). On December 31, 2007. Statewide deposit data are as of June 30, 2007, consummation of the proposal, Applicants would control less than adjusted to reflect mergers through March 26, 2008. 10 percent of the total amount of deposits of insured depository 4. Applicants' subsidiary banks are Fifth Third Bank ("Ohio institutions in the United States (12 U,S,c. § I 842(d)(2)(A». Appli Bank"), Cincinnati, Ohio; Fifth Third Bank ("Michigan Bank"), cants would control less than 30 percent of the state deposits in Grand Rapids, Michigan; and Fifth Third Bank, N.A. ("Tennessee Georgia, and the proposal is not subject to any other deposit caps Bank"), Nashville, Tennessee. Through those banks, Applicants oper under state law (12 U.S.C. § 1842(d)(2)(B)-(D». All other require ate branches in Amida. Georgia. llIinois, Indiana. Kentucky. Michi ments of section 3(d) of the BHe Act would be met on consummation gan, Missouri, Ohio, Pennsylvania, Tennessee, and West Virginia. of the proposal.
C74 Federal Reserve Bulletin 0 August 2008 record, the Board is permitted to approve the proposal significant nonbanking operations. In this evaluation, the under section 3(d) of the BHC Act. Board considers a variety of information, including capital adequacy, asset quality, and earnings performance. In COMPETITIVE CONSIDERATIONS assessing financial resources, the Board consistently has considered capital adequacy to be especially important. The Section 3 of the BHC Act prohibits the Board from Board also evaluates the financial condition of the com approving a proposal that would result in a monopoly or bined organization at consummation, including its capital would be in furtherance of any attempt to monopolize the position, asset quality, earnings prospects, and the impact business of banking in any relevant banking market. The of the proposed funding of the transaction. BHC Act also prohibits the Board from approving a The Board has carefully considered the financial re proposed bank acquisition that would substantially lessen sources of the organizations involved in the proposal. competition in any relevant banking market, unless the Applicants, First Charter, and their subsidiary banks are anticompetitive effects of the proposal are clearly out well capitalized and would remain so on consummation of weighed in the public interest by its probable effect in this proposaL Based on its review of the record, the Board meeting the convenience and needs of the community to be finds that Applicants have sufficient resources to effect the served.9 proposed transaction, which is structured as a partial share Applicants and First Charter do not compete directly in exchange and partial cash purchase of shares. Applicants any relevant banking market. Based on all the facts of will use existing resources to fund the cash purchase of record, the Board concludes that consummation of the shares. proposal would have no significantly adverse effect on The Board also has considered the managerial resources competi tion or on the concentration of banking resources in of the organizations involved in the proposed transaction. any relevant banking market. Accordingly, the Board has The Board has reviewed the examination records of Appli determined that competitive factors are consistent with cants, First Charter, and their subsidiary banks, including approval. assessments of their management, risk-management sys tems, and operations. In addition, the Board has considered FINANCIAL, MANAGERIAL, AND SUPERVISORY its supervisory experiences and those of other relevant CONSIDERATIONS banking supervisory agencies, including the Office of the Section 3 of the BHC Act requires the Board to consider the Comptroller of the Currency ("OCC"), with the organiza financial and managerial resources and future prospects of tions and their records of compliance with applicable the companies and banks involved in the proposal and banking law and with anti-money-laundering laws. Appli certain other supervisory factors. The Board has carefully cants, First Charter, and their subsidiary depository institu considered these factors in light of all the facts of record, tions are considered to be well managed. The Board also inclUding confidential supervisory and examination infor has considered plans for implementing the proposal, includ mation received from the relevant federal and state super ing the proposed management after consummation. visors of the organizations involved, publicly reported and Based on all the facts of record, the Board has concluded other financial information, information provided by Appli that the financial and managerial resources and the future cants, and public comment received on the proposaL 10 prospects of the organizations involved in the proposal are In evaluating the financial resources in expansion pro consistent with approval, as are the other supervisory posals by banking organizations, the Board reviews the factors. financial condition of the organizations involved on both a parent-only and consolidated basis, as well as the financial Convenience and Needs Considerations condition of the subsidiary depository institutions and In acting on a proposal under section 3 of the BHC Act, the 9. 12 U.S.C. § 1842(c)(I). Board is required to consider the effects of the proposal on 10. Many of the commenters expressed concern over Applicants' the convenience and needs of the communities to be served employment practices, particularly in light of (1) Michigan Bank's settlement agreement in July 2004 in a suit brought by the United and to take into account the records of the relevant insured States Equal Employment Opportunity Commission ("EEOC") alleg depository institutions under the Community Reinvestment ing employment discrimination on the basis of gender in violation of Act ("CRA").11 The CRA requires the federal financial Title VII of the Civil Rights Act of 1964 ("Title VII"); and (2) Ohio supervisory agencies to encoumge insured depository insti Bank's March 2000 settlement agreement with the United States tutions to help meet the credit needs of the local communi Department of Labor ("DOL") to resolve allegations that the bank had engaged in race and gender discrimination at the bank's Cincinnati ties in which they operate, consistent with their safe and headquarters in violation of equal employment opportunity require sound operation, and requires the appropriate federal finan ments for federal contractors. Both settlement agreements involve cial supervisory agency to take into account a relevant issues entrusted to other federal agencies as a matter of law and were depository institution's record of meeting the credit needs resolved by those agencies. Under Title VII, the EEOC has primary federal responsibility for investigating and taking legal action against allegations of employment discrimination, and by executive order, DOL is responsible for ensuring that federal contractors comply with equal employment opportunity requirements. 11. 12 U.S.C. §2901 et seq.; 12 U.S.C. § l842(c)(2).
Legal Developments: Second Quarter. 2008 C75 of its entire community, including low- and moderate FC Bank received a "satisfactory" rating at its most income ("LMI") neighborhoods, in evaluating bank expan recent CRA performance evaluation by the Federal Reserve sionary proposals.12 Bank of Richmond, as of March 6, 2006 ("2006 Evalua The Board has considered carefully all the facts of tion").19 Fifth Third has represented that it will implement record, including evaluations of the CRA performance Fifth Third Bank's CRA program at the combined organi records of the subsidiary depository institutions of Appli zation on consummation of the proposal. cants and First Charter, data reported by Applicants and eRA Performance of Ohio Bank. In addition to the First Charter under the Home Mortgage Disclosure Act overall "outstanding" rating that Ohio Bank received in the ("HMDA"),13 other information provided by Applicants, 2005 Evaluation,20 the bank received separate overall "out confidential supervisory information, and public comment standing" or "satisfactory" ratings in all the states and received on the proposal.l4 Several commenters criticized multi state metropolitan areas reviewed.21 Examiners re the amounts and types of community development invest ported that Fifth Third Bank's overall level of lending ments made by the subsidiary banks of Applicants and First activity was excellent and that the geographic distribution Charter. Some commenters asserted that Applicants and of loans was good.22 They also stated that the bank's First Charter operate too few branches in LMI or predomi distribution of loans to borrowers reflected a good penetra nantly minority census tracts. IS In addition, a number of tion among customers of different income levels and to commenters contended, based on HMDA data, that Appli businesses of different revenue sizes. cants and First Charter had engaged in disparate treatment In the 2005 Evaluation, examiners characterized Ohio of minority individuals in home mortgage lending. Bank as a leader in making community development loans in its assessment areas, reporting that the bank made more A eRA Performance Evaluations than 190 community development loans totaling more than $220 million during 2003 and 2004, Examiners noted that As provided in the CRA, the Board has reviewed the this dollar volume represented an increase of more than convenience and needs factor in light of evaluations by the 46 percent from the volume of its community development appropriate federal supervisors of the CRA performance lending during the previous evaluation period. records of the relevant insured depository institutions. An institution'S most recent CRA performance evaluation is a particularly important consideration in the applications 19. The evaluation period for HMDA-reportable loans and small loans to businesses was January 1,2004, through December 31,2005. process because it represents a detailed, on-site evaluation "Small loans to businesses" are loans with original amounts of of the institution's overall record of performance under the $1 million or less that are either secured by nonfarm, nonresidential CRA by the institution's appropriate federal supervisor.16 properties or classified as commercial and industrial loans. The Ohio Bank, Applicants' largest subsidiary bank as mea evaluation period for the bank's community development loans, sured by assets and deposits. received an "outstanding" investments, and services was February 2, 2004, through Decem ber 31, 2005. rating at its most recent CRA performance evaluation by 20. Examiners considered the performance of certain subsidiaries the Federal Reserve Bank of Cleveland, as of July 5, 2005 of Applicants in the 2005 Evaluation. References to Ohio Bank. in the ("2005 Evaluation"),17 Applicants' two other subsidiary convenience and needs analysis in this order incorporate these entities. banks received ratings of "outstanding" or "satisfactory" The 2005 Evaluation focused on Ohio Bank's CRA performance in its at their most recent CRA performance evaluations.18 assessment areas in Ohio, which together accounted for more than 95 percent of the bank's lending activity during the evaluation period. In Ohio, examiners conducted full-scope reviews of the bank's performance in the Cincinnati and Columbus metropolitan statistical 12. 12 U.S.c. §2903. areas ("MSAs") and in nonmetropolitan areas in Northwestern Ohio 13. 12 U.S.C. §2S01 et seq. and in the Ohio Valley. which together accounted for approximately 14. Several commenters urged the Board to require Applicants to 58 percent of the bank's lending activity during the evaluation period. provide specific CRA pledges or plans or to require them to take Examiners also conducted limited-scope reviews of the bank.' s perfor certain actions in the future. The Board consistently has stated that mance in six other MSAs in Ohio. In addition, the 2005 Evaluation neither the CRA nor the federal banking agencies' CRA regulations reviewed Ohio Bank's CRA performance in Michigan. Pennsylvania, require depository institutions to make pledges or enter into commit and West Virginia and in the Huntington-Ashland multistate metropoli ments or agreements with any organization and that the enforceability tan area in Kentucky, Ohio, and West Virginia. of any such third-party pledges, initiatives, or agreements are matters 21. One commenter expressed concern that Ohio Bank received outside the CRA. See, e.g., Wachovia Corporation, 91 Federal Reserve "low satisfactory" or lower ratings under some of the component tests Bulletin 77 (2005). Instead, the Board focuses on the existing CRA for Michigan, Pennsylvania, and the Huntington-Ashland multistate performance record of an applicant and the programs that an applicant metropolitan area. Examiners noted that Ohio Bank entered Pennsyl has in place to serve the credit needs of its assessment areas at the time vania by establishing de novo branches in December 2004, which was the Board reviews a proposal under the convenience and needs factor. the end of the evaluation period. The bank. received higher ratings 15. For purposes of this analysis, a predominantly minority census under the lending and other tests in other areas, and examiners tract is a census tract with a minority population of SO percent or more. concluded that the bank's record of CRA performance during the 16. See Interagency Questions and Answers Regarding Community review period. when viewed as a whole, warranted a rating of Reinvestment, 66 Federal Register 36,620 and 36,639 (2001). "outstanding. " 17. The evaluation period was January I, 2003, through Decem 22. A commenter criticized the level of higber-cost loans made by ber 31, 2004. Ohio Bank in LMI census tracts in the Cincinnati MSA. The Board 18. Michigan Bank received an "outstanding" rating by the Federal notes that during 2005 and 2006 in that MSA, 6.4 percent of Reserve Bank of Chicago, as of July 5, 2005, and Tennessee Bank. Applicants' HMDA-reportable loans in LMI census tracts were higher received a "satisfactory" rating by the OCC, as of May 16,2005. cost loans, compared with 37 percent for lenders in the aggregate.
C76 Federal Reserve Bulletin 0 August 2008 Since the 2005 Evaluation, Ohio Bank has continued to investments facilitated housing for LMI residents of North make a substantial volume of loans. For example, the Carolina and provided for microenterprise development in bank's HMDA-reportable loans throughout its assessment the state. areas totaled more than $6.2 billion in 2005 and 2006. In In the 2006 Evaluation, FC Bank received a "low addition, Applicants represented that the bank made approxi satisfactory" rating on the service test. Examiners con mately $243 million in total qualified community develop cluded that FC Bank's branch locations were reasonably ment loans throughout its assessment areas in 2005 and accessible to all segments of the bank's assessment areas. 24 2006. Examiners reported that the bank provided a good level of In the 2005 Evaluation, examiners rated Ohio Bank's community development services. overall penormance under the investment test as "outstand ing." Qualifying community development investments B. HMDA and Fair Lending Record totaled more than $49 million during the evaluation period. Applicants represented that Ohio Bank has increased its The Board has carefully considered the fair lending records community development investment activity since the 2005 and HMDA data of Applicants and First Charter in light of Evaluation and noted that the bank had made qualified public comments received on the proposal. Two comment investments totaling more than $101 million during 2005 ers alleged that Applicants had made a disproportionately and 2006. small number of prime loans in predominantly minority In the 2005 Evaluation, examiners concluded that the census tracts in the Cincinnati MSA. 25 Several commenters bank's penormance under the service test was "outstand contended that from 2004 through 2006, First Charter's ing." Examiners found that the bank's retail delivery record of HMDA-reportable loans to minority borrowers systems were accessible to all segments of the bank's and communities indicated disproportionately low loan assessment areas. They reported that the geographic distri application rates, high denial rates, and low lending vol bution of the bank's Ohio branches was reasonable, with ume.26 Two commenters also stated that First Charter made 18 percent of its branches in the state in LMI areas, as of a disproportionately small number of prime loans to Afri year-end 2004. In addition, examiners noted that bank's can Americans in the Charlotte MSA. The Board has directors, officers, and employees participated in numerous focused its analysis on the 2005 and 2006 HMDA data organizations and activities that promoted or facilitated reported by Applicants and First Charter.27 affordable housing and services for LMI individuals and Many commenters expressed concern about Applicants' revitalization of LMI areas. Applicants have represented record of compliance with fair lending laws in light of an that since the 2005 Evaluation, Ohio Bank has continued to agreement between Applicants and the United States provide community development services, including finan Department of Justice ("DOJ") in 2004 ("2004 Agree cial literacy training for individuals and technical assis ment"). The 2004 Agreement settled allegations by DOJ tance to nonprofits and small businesses. that a banking corporation acquired by Fifth Third, Old CRA Performance of FC Bank. As noted, FC Bank Kent Financial Corporation ("Old Kent"), Grand Rapids, received an overall "satisfactory" rating in the 2006 Evalu Michigan, had violated federal fair lending laws between ation. Under the lending test, FC Bank received a "high 1996 and 2000. The alleged violations included operating satisfactory" rating, and examiners reported that the bank's more than 50 branches in the Detroit MSA but none in the distribution of lending in its assessment areas reflected a city of Detroit and making only 335 small business, home good penetration among retail customers of different improvement, and home refinance loans in predominantly income levels and business customers of varying sizes. minority census tracts in the MSA. Applicants acquired Old Examiners concluded that the bank's community develop Kent in 2001, and the matters addressed in the 2004 ment lending was adequate, noting that such lending Agreement occurred before that acquisition. included more than $5 million in loans to a consortium providing long-term permanent financing for LMI multi family housing developments throughout North Carolina.23 24. Three commenters alleged that a disproportionately small num The bank received a "low satisfactory" rating under the ber of the bank's branches were in LMI census tracts. As noted above, examiners concluded that FC Bank's branch locations were reasonably investment test in the 2006 Evaluation. Examiners reported accessible. After consummation of the proposal, examiners will con that the bank's level of qualified community development tinue to evaluate the branch network of the resulting bank's CRA investments was considered adequate relative to available performance under the service test. opportunities. The bank had qualified community develop 25. One commenter asserted that Applicants did not make an adequate number of small business loans in predominantly minority ment investments totaling approximately $4 million and communities or to minority borrowers generally. commitments to fund an additional $2.2 million. These 26. In addition, one commenter asserted that FC Bank deliberately located a branch in Landis, North Carolina, rather than in a nearby town with a larger population of African Americans. The Board notes 23. Several commenters asserted that the bank should have made that FC Bank acquired this branch in 1987 as part of the bank's merger more community development loans to, and more investments in, with Merchants & Farmers Bank, Landis. community development corporations. The CRA does not require 27, The Board analyzed HMDA data for Applicants' assessment banks to provide any particular type of qualified community develop areas nationwide and in Ohio and Cincinnati and for First Charter's ment loans or investments to meet the credit needs of their communi assessment areas in North Carolina and the Asheville, Charlotte, and ties. Raleigh MSAs.
Legal Developments: Second Quarter; 2008 e77 The 2004 Agreement required Applicants to open at least covered loans.34 HMDA data, therefore, have limitations three branches and to spend at least $3 million on interest that make them an inadequate basis, absent other informa rate subsidies, down-payment or closing-cost grants, or tion, for concluding that an institution has engaged in other financial assistance to small business and home illegal lending discrimination. mortgage borrowers in the city of Detroit during a three The Board is nevertheless concerned when HMDA data year period. Michigan Bank currently operates four branches for an institution indicate disparities in lending and believes in the city of Detroit, and in 2005 and 2006, Fifth Third that all lending institutions are obligated to ensure that their originated 425 small business, home refinance, and home lending practices are based on criteria that ensure not only improvement loans totaling more than $85 million in safe and sound lending but also equal access to credit by predominantly minority census tracts in the Detroit MSA. creditworthy applicants regardless of their race or ethnicity. The 2004 Agreement expired in February 2008. Because of the limitations of HMDA data, the Board has The Board and other federal banking agencies review considered these data carefully and taken into account other fair lending compliance in connection with their regular information, including examination reports that provide consumer compliance examinations of banks. Depending on-site evaluations of compliance with fair lending laws by on the risk factors presented, those examinations might Applicants, First Charter, and their subsidiaries. The Board include transactional analysis, analysis of potential evi also has reviewed its experience as the primary federal dence of "steering" and "redlining," and review of market supervisor of Ohio Bank, Michigan Bank, and FC Bank35 ing practices, among other matters.28 If during an examina and has consulted with the OCC, the primary federal tion the reviewing agency concludes that a bank has supervisor of Tennessee Bank. engaged in a pattern or practice of lending discrimination, The record of this proposal, including confidential super that agency must refer the evidence to D0J29 and must take visory information, indicates that Applicants and First the evidence into account when rating the bank's CRA Charter have taken steps to ensure compliance with fair performance.30 In connection with their ongoing supervi lending and other consumer protection laws. Applicants sory responsibilities, the Board and Reserve Banks will have stated that they conduct regular internal reviews of continue to periodically review the compliance of Ohio compliance with fair lending laws, using regression analy Bank and Michigan Bank with fair lending laws,31 and the sis, matched-pair loan evaluations, and reviews of over OCC will perform similar reviews of Tennessee Bank.32 ages, broker pricing, rate spreads, and other data. In As part of its compliance reviews, the Board carefully addition, Applicants require all employees involved in the assesses HMDA data reported by the banking organizations lending process to complete fair lending training annually. it supervises. As noted, the Board also has carefully Moreover, Applicants have complied with the settlement reviewed the HMDA data reported by Applicant and First agreement with DOJ regarding Old Kent and its behavior Charter in reviewing this proposal. Although the HMDA before being acquired by Applicants, and that agreement data might reflect certain disparities in the rates of loan has expired. applications, originations, and denials among members of First Charter's consumer credit loans are centrally under different racial or ethnic groups in certain local areas, they written and any overrides or exceptions are reviewed by provide an insufficient basis by themselves on which to credit-risk management to ensure compliance with fair conclude whether or not Applicants or First Charter exclude lending laws. First Charter requires new employees with any group on a prohibited basis. The Board recognizes that lending responsibilities to attend training covering pre HMDA data alone, even with the recent addition of pricing screening and other matters that raise fair lending issues. informalion,33 provide only limited information about the Applicants have stated that Fifth Third's fair lending and 28. See Interagency Fair Lending Examination Procedures, an U.S. Treasury securities of comparable maturity 3 or more percentage attachment to the Board's Consumer Affairs Letter No. CA 04-8, points for first-lien mortgages and 5 or more percentage points for dated October 24, 2004. second-lien mortgages (12 CFR 203.4). 29. 15 U.S.c. § 169Ie(g). 34, The data, for example, do not account for the possibility that an 30. See. e.g., 12 CPR 25.28(c); 12 CFR 228.28(c). institution's outreach efforts may attract a larger proportion of margin 31. Many commenters also expressed concern about an agreement ally qualified applicants than other institutions attract and do not in June 2006 between Ohio Bank and the United States Department of provide a basis for an independent assessment of whether an applicant Housing and Urban Development to settle allegations that the bank who was denied credit was, in fact, creditworthy. In addition, credit had denied an individual a home-purchase loan based on race. As part history problems, excessive deht levels relative to income. and high of the agreement, the bank paid the individual $125,000 and commit loan amounts relative to the value of the real estate collateral (reasons ted to increase its community development lending in the Northern most frequently cited for a credit denial or higher credit cost) are not Kentucky and Cincinnati areas, among other measures. In connection available from HMDA data. with its ongoing supervisory responsibilities for Ohio Bank, the Board 35. Several commenters contended that FC Bank does not maintain has reviewed the allegations and will continue to review the bank's an appropriate number of branches in predominantly minority census community development activities in the Northern Kentucky and tracts in North Carolina, and other commenters asserted that Appli Cincinnati regions and in the hank's other assessment areas. cants do not maintain an appropriate number of branches in predomi 32. The OCC has approved the proposed merger of FC Bank and nantly minority census tracts in the Cincinnati area. The Board notes Tennessee Bank. that the correlation between a bank's branch network and the racial 33. Beginning January 1, 2004, the HMDA data required to be demographics of the geographies it serves, if any, can be a factor in reported by lenders were expanded to include pricing information for determining the level of scrutiny and the matters covered in fair loans on which the annual percentage rate (APR) exceeds the yield for lending examinations of the bank.
C78 Federal Reserve Bulletin 0 August 2008 consumer compliance policies and procedures will be ments and conditions are deemed to be conditions imposed implemented at the combined organization after consum in writing by the Board in connection with its findings and mation of the proposal. decision and, as such, may be enforced in proceedings The Board also has considered the HMDA data in light under applicable law, of other information, including the overall performance The proposal may not be consummated before the 15th records of the subsidiary banks of Applicants and First calendar day after the effective date of this order, or later Charter under the CRA. These established efforts and than three months after the effective date of this order, records of performance demonstrate that the institutions are unless such period is extended for good cause by the Board active in helping to meet the credit needs of their entire or by the Federal Reserve Bank of Cleveland, acting communities. pursuant to delegated authority, By order of the Board of Governors, effective April 15, C. Conclusion on Convenience and Needs and 2008. CRA Performance Voting for this action: Chairman Bernanke, Vice Chairman Kohn, The Board has carefully considered all the facts of record, and Governors Warsh, Kroszner, and Mishkin. including reports of examination of the CRA records of the institutions involved, information provided by Applicants, ROBERT DEV. FRIERSON Deputy Secretary of the Board comments received on the proposal, and confidential super visory information. Applicants stated that the proposal would result in the availability of expanded products and IPMorgan Chase & Co. services on a more cost-effective basis for customers of New York, New York Applicants and First Charter. Based on a review of the entire record, and for the reasons discussed above, the Order Approving the Acquisition of Control Board concludes that considerations relating to the conve of a Bank nience and needs factor and the CRA performance records of the relevant insured depository institutions are consistent with approval of the proposal. JPMorgan Chase & Co. ("JPMC"), a financial holding company within the meaning of the Bank Holding Com pany Act ("BHC Act"), has requested the Board's approval CONCLUSION under section 3 of the BHC Actl to acquire indirect control of Bear Steams Bank & Trust ("BSB&T"), Princeton, Based on the foregoing, and in light of all the facts of New Jersey, a subsidiary of The Bear Steams Companies record, the Board has determined that the application should be, and hereby is, approved.36 In reaching its Inc. ("Bear Steams"), New York, New York.2 JPMC proposes to acquire more than 25 percent of the voting conclusion, the Board has considered all the facts of record shares of Bear Steams and then merge Bear Steams with a in light of the factors that it is required to consider under newly formed subsidiary of JPMC, with Bear Steams as the the BHC Act and other applicable statutes. The Board's surviving entity,3 Based on all the facts and circumstances, approval is specifically conditioned on compliance by the Board has determined that an emergency exists requir Applicants with the conditions in this order and all the ing expeditious action on the proposaJ.4 In making this commitments made to the Board in connection with the determination, the Board has considered the market condi proposaL For purposes of this transaction, these committions and the financial condition of Bear Steams, the parent company of BSB&T, as well as all the facts of record. The 36. Several commenters requested that the Board hold a public Board has provided notice to the primary federal and state meeting or hearing on the proposal. Section 3 of the BHC Act does not require the Board to hold a public hearing on an application unless the appropriate supervisory authority for the bank to be acquired makes a 1. 12 U.S.c. § 1842. written recommendation of denial of the application. The Board has 2. JPMC includes the intermediate holding companies through not received such a recommendation from the appropriate supervisory which it will own the shares of BSB&T. Although BSB&T is a "bank" authorities. Under its rules, the Board also may, in its discretion, hold a for purposes of the BHC Act, Bear Stearns is not treated as a bank public meeting or hearing on an application to acquire a bank if holding company under the act. Bear Stearns controls BSB&T pursu necessary or appropriate to clarify factual issues related to the ant to section 4(f) of the BHC Act, which exempts a company from application and to provide an opportunity for testimony (12 CFR treatment as a bank holding company if the company controlled 225.16(e), 262.25(d)). The Board has considered carefully the com certain "nonbank banks" prior to March 5,1987 (12 U.S.C. § 1843(f). menters' requests in light of all the facts of record. In the Board's view, JPMC does not qualify for this exemption, however, and requires the commenters had ample opportunity to submit their views and, in approval to acquire direct or indirect control of BSB&T. fact, submitted written comments that the Board has considered 3. JPMC is permitted by section 4(k) of the BHC Act to acquire carefully in acting on the proposal. The commenters' requests fail to control of Bear Stearns and its nonbanking subsidiaries without demonstrate why written comments do not present their views obtaining prior approval from the Board (12 U.S.C. § 1843(f)). adequately or why a meeting or hearing otherwise would be necessary Because JPMC qualifies as a financial holding company, the BHC Act or appropriate. For these reasons, and based on all the facts of record, requires only that JPMC provide the Board notice within 30 days after the Board has determined that a public meeting or hearing is not acquiring control of Bear Steams and its nonbanking subsidiaries required or warranted in this case. Accordingly, the requests for a (12 U.S.C. § I 843(k)(6); 12 CFR 225.87). public meeting or hearing on the proposal are denied. 4. 12 U.S.c. § 1842(b).
Legal Developments: Second Quarter, 2008 C79 supervisors of BSB&T and the Department of Justice Based on a review of all the facts of record, including ("DOJ"); all have indicated they have no objection to the relevant state statutes, the Board finds that the conditions consummation of the proposal. for an interstate acquisition enumerated in section 3(d) of JPMC, with total consolidated assets of approximately the BHC Act are met in this case.9 In light of all the facts of $1.6 trillion, is the third largest depository organization in record, the Board is permitted to approve the proposal the United States, controlling deposits of approximately under section 3(d) of the BHC Act. $511 billion, which represent 7.4 percent of the total amount of deposits of insured depository institutions in the COMPETITIVE CONSIDERATIONS United States.s JPMC operates four subsidiary insured depository institutions in 18 states6 and engages in numer Section 3 of the BHC Act prohibits the Board from ous nonbanking activities that are permissible under the approving a proposal that would result in a monopoly or BHC Act. JPMC is the sixth largest depository organization would be in furtherance of an attempt to monopolize the in New Jersey, controlling deposits of approximately business of banking in any relevant banking market. The $7.1 billion. BSB&T operates in New Jersey and is the 45th BHC Act also prohibits the Board from approving a bank largest depository organization in the state, controlling acquisition that would substantially lessen competition in deposits of approximately $398 million. On consummation any relevant banking market, unless the anti competitive of the proposal, JPMC would remain the third largest effects of the proposal are clearly outweighed in the public depository institution in the United States, with total con interest by the probable effect of the proposal in meeting solidated assets of approximately $1.6 trillion. JPMC would the convenience and needs of the community to be served. control deposits of approximately $5 II bi Ilion, which JPMC and Bear Steams have subsidiary depository represent 7.4 percent of the total amount of deposits of institutions that compete directly in the Metropolitan insured depository institutions in the United States, In New York-New Jersey banking market.1O The Board has New Jersey, JPMC would become the fifth largest deposi reviewed carefully the competitive effects of the proposal tory organization, controlling deposits of approximately in this banking market in light of all the facts of record. In $7.4 billion, which represent approximately 3.8 percent of particular, the Board has considered the number of competi the deposits in insured depository institutions in the state tors that would remain in the market. the relative shares of ("state deposits"). total deposits in depository institutions controlled by JPMC and Bear Steams in the market ("market deposits"),11 the concentration level of market deposits and the increases in INTERSTATE ANALYSIS Section 3(d) of the BHC Act allows the Board to approve 9. 12 U.S.C. §§ 1842(d)(I)(A}-(B) and I 842(d)(2}-(3). JPMC is an application by a bank holding company to acquire adequately capitalized and adequately managed, as defined by appli control of a bank located in a state other than the home state cable law. There is no applicable age-requirement law in New Jersey. of such bank holding company if certain conditions are and BSB&T has been in existence and operated for more than five met. For purposes of the BHC Act, the home state of JPMC years. See 12 U.S.c. § 1842(d)(1)(B)(i}-(ii). On consummation of the proposal, JPMC would control less than 10 percent of the total amount is New York,? and BSB&T is located in New Jersey.s of deposits of insured depository institutions in the United States and less than 30 percent of the state deposits in New Jersey. JPMC, therefore, would be in compliance with the relevant deposit cap under 5. National asset, deposit, and ranking data are as of December 31, New Jersey law, which is 30 percent (12 U.S.c. § I 842(d)(2)(B}-(D). 2007. Statewide deposit and deposit ranking data are as of June 30, All other requirements of section 3(d) of the BHC Act would be met 2007. In this context. insured depository institutions include commer on consummation of the proposal. cial banks, savings banks, and savings associations. 10. The Metropolitan New York-New Jersey banking market is 6. JPMC's largest subsidiary bank, JPMorgan Chase Bank, Na defined as Bronx, Dutchess, Kings, Nassau, New York, Orange. tional Association ("JPMC Bank"), Columbus, Ohio, operates branches Putnam, Queens, Richmond, ROckland, Suffolk, Sullivan, Ulster, and in Arizona. Colorado, Connecticut. Florida, Illinois, Indiana, Ken Westchester counties, all in New York; Bergen. Essex, Hudson, tucky, Louisiana, Michigan, New Jersey, New York, Ohio, Oklahoma, Hunterdon, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, Texas, Utah, West Virginia. and Wisconsin. JPMorgan Chase Bank. Sussex. Union, and Warren counties and the northern portions of Dearborn ("Dearborn Bank"), Dearborn, Michigan, operates only in Mercer County, all in New Jersey; Monroe and Pike counties in Michigan. Chase Bank USA. National Association ("Chase Bank"), Pennsylvania; and Fairfield County and portions of Litchfield and Newark, Delaware, operates as a credit card bank. JPMC also operates New Haven counties in Connecticut. J.P. Morgan Trust Company, National Association, Los Angeles. II. Deposit and market share data are as of June 30, 2007, and are California. which is an insured trust company. based on calculations in which the deposits of thrift institutions are 7. A bank holding company's home state is the state in which the included at 50 percent. The Board previously has indicated that thrift total deposits of all subsidiary banks of the company were the largest institutions have become, or have the potential to become. significant on July I, 1966, or the date on which the company became a bank competitors of commercial banks. See. e.g .. Midwest Financial Group, holding company, whichever is later (12 U.S.c. § 1841(0)(4)(C). 75 Federal Reserve Bulletin 386, 387 (1989); National City Corpora 8. For purposes of section 3(d) of the BHC Act, the Board considers tion. 70 Federal Reserve Bulletin 743, 744 (1984). Thus, the Board a bank to be located in the states in which the bank is chartered or regularly has included thrift institution deposits in the market share headquartered or operates a branch (12 U.S.c. §§ 18 4 I (0)(4}-(7) and calculation on a 50 percent weighted basis. See. e.g., First Hawaiian, 1842(d)(l)(A) and 1842(d)(2)(B)). Inc.,77 Federal Reserve Bulletin 52, 55 (1991).
C80 Federal Reserve Bulletin 0 August 2008 those levels as measured by the Herfindahl-Hirschman in the proposal, and other available financial information, Index ("HHI") under the Department of Justice Merger including information provided by JPMC. Guidelines ("DOJ Guidelines"), 12 and other characteristics In evaluating financial factors in expansion proposals by of the market. banking organizations, the Board reviews the financial Consummation of the proposal would be consistent with condition of the relevant companies involved on both a Board precedent and within the thresholds in the DOJ parent-only and consolidated basis, as well as the financial Guidelines in the Metropolitan New York-New Jersey condition of the subsidiary depository institutions and other banking market.13 On consummation of the proposal, the subsidiaries. In this evaluation, the Board considers a market would remain moderately concentrated as measured variety of information, including capital adequacy, asset by the HHI, and numerous competitors would remain in the quality, and earnings performance. In assessing financial market. factors, the Board consistently has considered capital The DOJ has conducted a review of the potential adequacy to be especially important. The Board also evalu competitive effects of the proposal and has advised the ates the financial condition of the applicant organization Board that consummation of the transaction would not after consummation of the proposed transaction. likely have a significantly adverse effect on competition in The Board has considered the proposal carefully under any relevant banking market. In addition, the appropriate the relevant financial factors. JPMC, its subsidiary deposi banking agencies have been afforded an opportunity to tory institutions, and BSB&T are well capitalized and comment and have not objected to the proposal. would remain so on consummation of the proposal. Based on all the facts of record, the Board concludes that The Board also has considered the managerial resources consummation of the proposal would not have a signifi of the organizations involved and the proposed combined cantly adverse effect on competition or on the concentra organization. The Board has reviewed the examination tion of resources in the banking market where JPMC and records of JPMC and its subsidiary depository institutions, Bear Steams compete directly or in any other relevant including assessments of their management, risk banking market. Accordingly, the Board has determined management systems, and operations. In addition, the that competitive considerations are consistent with ap Board has considered its supervisory experiences and those proval. of the other relevant bank supervisory agencies with the organizations and their records of compliance with appli cable banking law, including anti-money-Iaundering laws. FINANCIAL, MANAGERIAL, AND SUPERVISORY JPMC and its subsidiary depository institutions, as well as CONSIDERATIONS BSB&T, are considered to be well managed. Based on all the facts of record, the Board has concluded Section 3 of the BHC Act requires the Board to consider the that considerations relating to the financial and managerial financial and managerial resources and future prospects of resources and future prospects of the organizations involved the companies and depository institutions involved in the in the proposal are consistent with approval, as are the other proposal and certain other supervisory factors. The Board supervisory factors under the BHC Act. has considered these factors in light of all the facts of record, including confidential reports of examination and CONVENIENCE AND NEEDS CONSIDERATIONS other supervisory information received from the relevant federal and state supervisors of the organizations involved In acting on a proposal under section 3 of the BHC Act, the Board is required to consider the effects of the proposal on the convenience and needs of the communities to be served 12. Under the DOJ Guidelines, a market is considered unconcen and to take into account the records of the relevant insured trated if the post-merger HHI is under 1000, moderately concentrated depository institutions under the Community Reinvestment if the post-merger HHI is between 1000 and 1800, and highly Act ("CRA").14 concentrated if the post-merger HHI exceeds 1800. The DOJ has informed tbe Board that a bank merger or acquisition generally will As provided in the CRA, the Board has reviewed the not be challenged (in the absence of other factors indicating anticom convenience and needs factor in light of the evaluations by petitive effects) unless the post-merger HHI is at least 1800 and the the appropriate federal supervisors of the CRA perfor merger increases the HHI more than 200 points. The DOJ has stated mance records of the relevant insured depository institu that the higher-than-normal HHI thresholds for screening bank merg ers and acquisitions for anticompetiti ve effects implicitly recognize the tions. An institution's most recent CRA performance evalu competitive effects of limited-purpose and other nondepository finan ation is a particularly important consideration in the cial entities. applications process because it represents a detailed, on-site 13. JPMC operates the largest depository institution in the Metro evaluation of the institution's overall record of perfor politan New York-New Jersey banking market, controlling deposits of approximately $228 billion, which represent 29 percent of market mance under the CRA by its appropriate federal supervi deposits. BSB&T controls $398 million in deposits, which represents sor.15 Each of JPMC's subsidiary depository institutions less than I percent of market deposits. On consummation, JPMC that is subject to the CRA received an "outstanding" rating would remain the largest depository institution in the market, control ling deposits of approximately $228 billion, which represent approxi mately 29 percent of market deposits. Approximately 271 depository 14. 12 U.S.C. §2901 et seq.; 12 U.S.C. § I 842(c)(2). institutions would remain in the banking market. The HHI would 15. See Interagency Questions and Answers Regarding Community remain unchanged at 1118. Reinvestment,66 Federal Register 36,620 and 36.639 (2001).
Legal Developments: Second Quarter, 2008 C81 at its most recent CRA performance evaluation.16 BSB&T ORDERS ISSUED UNDER SECTION 4 OF currently does not receive a CRA evaluation due to the THE BANK HOLDING COMPANY ACT bank's designation as a special purpose bank by the Federal Deposit Insurance Corporation. 17 The Board has considered carefully all of the facts of Bank of America Corporation record, including reports of examination of the CRA records of the institutions involved and confidential super Charlotte, North Carolina visory information. JPMC's acquisition of BSB&T will enhance and maintain the level of service provided to the Order Approving the Acquisition of a customers currently served by BSB&T. Based on a review Savings Association and Other Nonbanking of the entire record, and for the reasons discussed above, Activities the Board concludes that considerations relating to the convenience and needs factor and the CRA performance Bank of America Corporation ("Bank of America"), a records of the relevant insured depository institutions are financial holding company within the meaning of the Bank consistent with approval of the proposal. Holding Company Act ("BHC Act"), has requested the Board's approval under sections 4(c)(8) and 40) of the CONCLUSION BHC Act and section 225.24 of the Board's Regulation yl to acquire Countrywide Financial Corporation ("Country Based on the foregoing, and in light of all the facts of wide"), Calabasas, California, and thereby indirectly ac record, the Board has determined that the application quire Countrywide's subsidiary savings association, Coun should be, and hereby is, approved. In reaching its decision, trywide Bank, FSB ("Countrywide Bank"), Alexandria, the Board has considered all the facts of record in light of Virginia.2 In addition, Bank of America has requested the the factors that it is required to consider under the BHC Board's approval to acquire indirectly certain other non Act. The Board's approval is specifically conditioned on banking subsidiaries of Countrywide and thereby engage in compliance by JPMC with the conditions in this order and the following activities: credit extension and loan servic all the commitments made to the Board in connection with ing; real estate and personal property appraisal; real estate the proposal. For purposes of this transaction, these com settlement; credit bureau services; asset management, ser mitments and conditions are deemed to be conditions vicing, and collection; acquiring debt in default; securities imposed in writing by the Board in connection with its brokerage; trust company functions; community develop findings and decision and, as such, may be enforced in ment; and tax services in accordance with section 225.28(b) proceedings under applicable law. of the Board's Regulation y'3 The transaction may not be consummated before the Bank of America, with total consolidated assets of fifth calendar day after the effective date of this order, or $1.7 trillion, is the largest depository organization in the later than three months after the effecti ve date of this order, United States measured by deposits, controlling deposits of unless such period is extended for good cause by the Board approximately $711.7 billion, which represent approxi or by the Federal Reserve Bank of New York, acting mately 10.04 percent of the total amount of deposits of pursuant to delegated authority. insured depository institutions in the United States.4 Bank By order of the Board of Governors, effective April 1, 2008. Voting for this action: Chairman Bernanke. Vice Chairman Kohn, I. 12 U.S.C. §§ I 843(c)(8) and (j); 12 CFR 225.24. and Governors Warsh, Kroszner. and Mishkin. 2. Bank of America has formed a wholly owned subsidiary, Red Oak Merger Corporation ("Red Oak"), for purposes of acquiring ROBERT DEY. FRIERSON Countrywide. Countrywide will merge with and into Red Oak, and Deputy Secretary of the Board Countrywide will become a subsidiary of Bank of America. In connection with this proposal, Bank of America also has applied to acquire from its subsidiary bank, Bank of America, National Associa tion ("BA Bank"). Charlotte, North Carolina, 20,000 shares of Series 16. JPMC's lead bank, JPMC Bank, received an "outstanding" B Nonvoting Convertible Preferred Stock of Countrywide, which is rating at its most recent CRA performance evaluation by the Federal convertible at the option of the holder into approximately 15.7 percent Reserve Bank of New York, as of September S, 2003. JPMC Bank of Countrywide'S voting common stock. converted to a national bank on November 13, 2004. The Board has 3. See the appendix for a listing of these subsidiaries and their consulted with the Office of the Comptroller of the Currency ("OCC"), respective activities. Bank of America also proposes to acquire certain which is now JPMC Bank's primary federal supervisor, about the other Countrywide subsidiaries in accordance with section 4(k) of the bank's performance since its evaluation in 2003. J.P. Morgan Trust BHC Act, 12 U.S.C. § 1843(k). Company received an "outstanding" rating at its most recent CRA 4. Asset and nationwide deposit-ranking data are as of Decem performance evaluation by the OCC, as of November 4, 2006. Chase ber 31, 2007. In this context, insured depository institutions include Bank received an "outstanding" rating at its most recent CRA commercial banks, savings banks, and savings associations. As examination by the OCC, as of January 9, 2006. Dearborn Bank explained below, the nationwide deposit cap restriction contained in engages in cash management activities for its affiliated banks and is section 3(d) of the BHC Act does not apply to this transaction because not subject to the CRA. tbe transaction involves the acquisition of a savings association and 17. 12 CFR 345.11. not a bank.
C82 Federal Reserve Bulletin 0 August 2008 of America controls eight insured depository institutions5 of the proposal on competition in the relevant markets, and that operate in 31 states and the District of Columbia. the public benefits of the proposal. 9 In acting on a notice to Countrywide, with total consolidated assets of approxi acquire a savings association, the Board also reviews the mately $199 billion, is the 17th largest depository organi records of performance of the relevant insured depository zation in the United States, controlling deposits of approxi institutions under the Community Reinvestment Act mately $61.7 billion, which represent less than I percent of ("CRA").IO the total amount of deposits of insured depository institu tions in the United States. Countrywide Bank, Country PUBLIC COMMENT ON THE PROPOSAL wide's only subsidiary insured depository institution, is located in Texas and Virginia. Notice of the proposal, affording interested persons an On consummation of the proposal, Bank of America opportunity to submit comments, has been published in the would remain the largest depository organization in the Federal Register (73 Federal Register 11,419 (March 3, United States, with total consolidated assets of approxi 2008) and 73 Federal Register 18,279 (April 3, 2008», and mately $1.9 trillion. Bank of America would control depos the time for filing comments has expired. The Board its of approximately $773.4 billion, representing approxi extended the initial period for public comment to accom mately 10.91 percent of the total amount of deposits of modate the broad public interest in this proposal, providing insured depository institutions in the United States. interested persons more than 50 days to submit written comments. FACTORS GOVERNING BOARD REVIEW OF THE Because of the extensive public interest in the proposal, TRANSACTION the Board held public meetings in Chicago, Illinois, and Los Angeles, California, to provide interested persons an The Board previously has determined by regulation that the opportunity to present oral testimony on the factors that the operation of a savings association by a bank holding Board must review under the BHC Act.lI Approximately eompany and the other nonbanking activities for which 150 people testified at the public meetings, and many of Bank of Ameriea has requested approval are closely related those who testified also submitted written comments. to banking for purposes of section 4(c)(8) of the BHC Act.6 In total, approximately 770 individuals and organiza The Board requires that savings associations acquired by tions submitted comments on the proposal through oral bank holding companies or financial holding companies testimony, written comments, or both. Commenters in conform their direct and indirect activities to those permis cluded members of Congress, a state government agency, sible for bank holding companies under section 4(c)(8) of community groups, nonprofit organizations, customers of the BHC Act,? Bank of America has committed that all the Bank of America or Countrywide, and other interested activities of Countrywide Bank and the other nonbanking organizations and individuals. subsidiaries of Countrywide that it proposes to acquire will A large number of commenters supported the proposal. conform to the requirements for permissible activities Many of the commenters in support of the proposal com under section 4 of the BHC Act and Regulation Y. mended Bank of America for its commitment to local Section 4(j)(2)(A) of the BHC Act requires the Board to communities and described favorable experiences with the determine that the proposed acquisition of Countrywide affordable mortgage, small business, and community devel Bank and Countrywide'S other nonbanking subsidiaries opment programs of the organization. Commenters also "can reasonably be expected to produce benefits to the praised the willingness of Bank of America to provide public, such as greater convenience, increased competition, CRA-related products and services, such as affordable or gains in efficiency, that outweigh possible adverse mortgage products, educational seminars, and loan funds, effects, such as undue concentration of resources, decreased to support community development activities. In addition, or unfair competition, conflicts of interests, or unsound commenters praised Bank of America's charitable contribu banking practices."8 As part of its evaluation under these tions and noted that officers and employees of the organi public interest factors, the Board reviews the financial and zations frequently provided valuable services to commu managerial resources of the companies involved, the effect nity organizations as board members and volunteers. 5. BA Bank is Bank of America's largest subsidiary depository institution, as measured by both assets and deposits. Bank of Ameri 9. See 12 CFR 225.26; see, e.g., Wachovia Corporation, 92 Federal ca's other subsidiary depository institutions are Bank of America Reserve Bulletin CU8 (2006); BancOne Corporation, 83 Federal Oregon, National Association ("BA Oregon"), Portland, Oregon; Reserve Bulletin 602 (1997). Bank of America California, National Association ("BA California"), 10. 12 U.S.c. § 2901 et seq. San Francisco, California; Bank of America Rhode Island, National II. The Board held the Chicago public meeting on April 22, 2008, Association ("BA Rhode Island"), Providence, Rhode Island; Bank of and the Los Angeles public meetings on April 28 and 29, 2008. A few America Georgia, National Association ("BA Georgia"), Atlanta, commenters requested that the Board hold additional public meetings Georgia; F1A Card Services, N.A., Wilmington, Delaware; LaSalle in New York and in other communities affected by the acquisition, as Bank National Association, Chicago, Illinois; and LaSalle Bank well as extend the public comment period. The Board believes, Midwest National Association, Troy, Michigan. however, that holding public meetings in Chicago and Los Angeles, as 6. 12 CFR 225.28(b)(I), (2), (4)(ii), (5), (6)(vi), (7)(i), and (12). well as giving all commenters an extended period to submit written 7. 12 CFR 225.28(b)(4)(ii) and 225.86. comments, provided sufficient opportunity for interested persons to 8. 12 U.S.c. § 1843(j)(2)(A). present relevant information to the Board.
Legal Developments: Second Quarter; 2008 C83 A significant number of commenters opposed the pro ing market and its wide use of nontraditional mortgage posal, requested that the Board approve the proposal sub products. A significant number of commenters criticized ject to certain conditions or expressed concerns about the the performance of Bank of America and Countrywide proposal.l2 Many commenters were concerned about the under the CRA. Some of these commenters criticized Bank impact of the proposal on Bank of America's share of of America's community development and philanthropic national deposits. Commenters expressed their belief that, initiatives. Other commenters expressed concern about the if approved by the Board, Bank of America's acquisition of impact of the acquisition on Bank of America's commit Countrywide would violate the statutory restriction on ment to CRA-related initiatives and its future performance interstate bank acquisitions contained in section 3(d) of the under the CRA. In addition, some commenters expressed BHC ACt.13 Many commenters also believed that the concern about Bank of America's and Countrywide's acquisition would reduce competition in the mortgage records of lending to minorities. origination and servicing markets and substantially increase In evaluating the statutory factors under the BHC Act, concentration in the banking and financial services indus the Board carefully considered the information and views try. In addition, commenters expressed concern about Bank presented by all commenters, including the testimony at the of America's plans for integrating Countrywide's opera public meetings and the written submissions. The Board tions, business model, and management. Many commenters also considered all the information presented in the notice urged Bank of America to retain Countrywide staff to help and supplemental filings by Bank of America, various adequately address borrowers' needs, and some comment reports filed by the relevant companies, publicly available ers suggested that Bank of America retain Countrywide's information, and other information and reports. In addition, main office and mortgage servicing headquarters. the Board reviewed confidential supervisory information, Several commenters expressed concerns about the safety including examination reports on the depository institution and soundness of the proposed acquisition, arguing that holding companies and the depository institutions involved Countrywide'S current condition may unduly strain Bank and other information provided by the relevant federal of America's financial and managerial resources. Com financial institution supervisory agencies ("federal supervi menters also expressed concerns about the effect of Coun sory agencies"), the Securities and Exchange Commission trywide's legal exposures on Bank of America's resources, ("SEC"), and the Department of Justice ("DOJ"). After a in light of lawsuits and investigations involving Country careful review of all the facts of record, and for the reasons wide. The majority of commenters urged Bank of America discussed in this order, the Board has concluded that the to develop a loss-mitigation plan for dealing appropriately statutory factors it is required to consider under the BHC with distressed borrowers or borrowers facing foreclosure. Act are consistent with approval of the proposal. Many commenters criticized Countrywide's lending and servicing operations and other business practices, focusing COMPETITIVE CONSIDERATIONS primarily on Countrywide'S presence in the subprime lend- The Board has considered carefully the competitive effects of Bank of America's acquisition of Countrywide, includ 12. Approximately 440 comments were submitted in the form of ing the acquisition of Countrywide Bank and the other one of two substantially identical e-mail messages. Countrywide non banking subsidiaries, in light of all the 13. A large number of commenters have expressed concern about facts of record. the impact of the proposal on the deposit cap provision of section 3(d) of the BHC Act. The Riegle-Neal Interstate Banking and Branching Efficiency Ac! of 1994 ("Riegle-Neal AC!"), Pub. L. 103-328 (1994), A. Acquisition of a Savings Association codified at 12 U.S.c. § 1842(d), provides that the Board may not approve any application for the interstate acquisition of a bank if Bank of America and Countrywide have subsidiary insured consummation of the acquisition would result in the applicant control depository institutions that compete directly in two banking ling more than 10 percent of the total amount of deposits of insured markets, Washington, D.C., and Fort Worth, Texas.14 The depository institutions in the United States. Countrywide Bank is Board has reviewed carefully the competitive effects of the chartered as a federal savings bank under the Home Owners' Loan Act (12 U.S.c. § 1461 et seq.) Section 2(c)(2)(B) of the BHC Act exempts proposal in both markets in light of all the facts of record, federally chartered savings associations and savings banks, as defined including public comment on the proposal. In particular, by section 2(j) of the BHC Act, from the definition of "bank." As a the Board has considered the number of competitors that result, Countrywide Bank is not a "bank," for purposes of the BHC would remain in the markets, the relative shares of total Act and the nationwide deposit cap contained in the BHC Act. Therefore, the provisions of the Riegle-Neal Act prohibiting the Board deposits in depository institutions in each market ("market from approving an application to acquire a bank if consummation of deposits") controlled by Bank of America and Country the acquisition would result in the applicant exceeding the national wide,15 the concentration levels of market deposits and the deposit cap do not apply to the present notice to acquire CountryWide Bank and the other nonblank subsidiaries of Countrywide. After consummation of the proposal, however, the calculation of Bank of 14. Countrywide Bank operates only two retail branches, one in America's total deposits would include Countrywide Bank's deposits Alexandria, Virginia, and one in Fort Worth, Texas. Countrywide Bank for purposes of calculating compliance with the nationwide deposit primarily delivers its products and services via Internet, call centers, cap requirement in connection with any subsequent application by and approximately 700 financial lending centers. rt focuses on provid Bank of America to acquire a bank pursuant to section 3 of the BHC ing residential mortgage credit. Act or by one of its subsidiary banks to merge with a bank pursuant to 15. Deposit and market share data are as of June 30, 2007, and are the Bank Merger Act. based on calculations in which the deposits of thrift institutions are
C84 Federal Reserve Bulletin 0 August 2008 increase in those levels as measured by the Herfindahl deposits.20 Countrywide operates the largest insured deposi Hirschman Index ("HHI") under the DOl Merger Guide tory institution in the market, controlling deposits of lines ("DOJ Guidelines"), 16 and other characteristics of the approximately $60.2 billion, which represent approxi markets. mately 73.2 percent of market deposits.21 On consumma Consummation of the proposal would be consistent with tion, Bank of America would operate the largest insured Board precedent and within the thresholds in the DOJ depository institution in the market, controlling deposits of Guidelines in the Washington, D.C. banking market.n On approximately $63.3 billion, which represent approxi consummation, this market would remain unconcentrated, mately 76.9 percent of market deposits. The HHI would as measured by the HHI, and numerous competitors would increase 539 points to 5962,22 remain in the market.ls In accordance with its precedent when the HID screen The structural effects of the proposal in the Fort Worth, ing measurement exceeded DOJ Guidelines, the Board has Texas banking market ("Fort Worth banking market"),19 as conducted an in-depth review of the competitive effects of measured by the HHI on the basis of deposits, would an acquisition. As the HHI increases or the change in the substantially exceed the DOJ Guidelines. According to the HHI resulting from a proposal becomes larger, increasingly Summary of Deposits ("SOD") as of June 30, 2007, with stronger mitigating factors are required to support a deter the deposits of Bank of America and Countrywide fully mination that the competitive effects of the proposal are not weighted, Bank of America operates the third largest significantly adverse. insured depository institution in the Fort Worth banking Bank of America asserts that inclusion of most deposits market, controlling deposits of approximately $3 billion, that were received and booked at Countrywide Bank's only which represent approximately 3.7 percent of market branch in the Fort Worth banking market ("Fort Worth Branch") in calculations of market share indices for this transaction would distort the measures of the competitive included at 50 percent. The Board previously has indicated that thrift effect of the proposal on the Fort Worth banking market. institutions have become, or have the potential to become, significant Bank of America has argued that, for purposes of evaluat competitors of commercial banks. See, e.g., Midwest Financial Group, ing the proposal's competitive effect in the Fort Worth 75 Federal Reserve Bulletin 386, 387 (1989); National City Corpora tion. 70 Federal Reserve Bulletin 743, 744 (1984). Thus, the Board banking market, the Board should exclude those deposits regularly has included thrift institution deposits in the market share received by the Fort Worth Branch from various Country calculation on a 50 percent weighted basis. See, e.g., First Hawaiian, wide affiliates and offices nationwide that are outside the Inc., 77 Federal Reserve Bulletin 52, 55 (1991). In the market share Fort Worth banking market. Approximately $60.2 billion of calculations in this case, the Board weighted Countrywide's deposits at 50 percent pre-acquisition and at 100 percent post-acquisition to the deposits in the Fort Worth Branch are escrow deposits, reflect the resulting control of such deposits by a commercial banking brokered deposits, commercial deposits from title insur organization. ance and investment companies throughout the country, 16. Under the DOJ Guidelines, a market is considered unconcen and deposits forwarded to the Fort Worth Branch from drop trated if the post-acquisition HHI is under 1000, moderately concen boxes in Countrywide'S national network of nonbanking trated if the post -acquisition HHI is between 1000 and 1800, and highly concentrated if the post-acquisition HHI exceeds 1800. The offices. These national business-line deposits were previ DOJ has informed the Board that a bank merger or acquisition ously maintained at Countrywide Bank's main office in generally will not be challenged (in the absence of other factors Alexandria until they were transferred to the Fort Worth indicating anticompetitive effects) unless the post-acquisition HHI is Branch in March 2005 to take advantage of lower state at least 1800 and the acquisition increases the HHI more than 200 points. The DOJ has stated that the higher -than-normal HHI thresholds franchise taxes. Less than $281 million, representing less for screening bank mergers and acquisitions for anticompetitive effects than 1 percent, of those deposits booked at the Fort Worth implicitly recognize the competitive effects of limited-purpose and Branch were in accounts of customers with addresses in the other nondepository financial entities. Fort Worth banking market. 17. The Washington, D.C. market is defined as the District of In conducting its competitive analysis in previous cases, Columbia; Calvert, Charles, Frederick, Montgomery, and Prince George's counties in Maryland; Arlington, Clarke, Culpeper, Fairfax, the Board generally has not adjusted its market share Fauquier, King George, Loudoun, Prince William, Spotsylvania, calculations to exclude out-of-market deposits because all Stafford, and Warren counties in Virginia; the cities of Alexandria, deposits are typically available to support lending and other Fairfax, Falls Chureh, Fredericksburg, Manassas, and Mana~sas Park banking activities at any location. The Board has adjusted in Virginia; and Berkeley and Jefferson counties in West Virginia. 18. Bank of America operates the second largest depository institu the market deposits held by an applicant to exclude specific tion in the Washington, D.C. banking market, controlling deposits of types of deposits only in rare situations, such as when approximately $21.6 billion, which represent approximately 14.6 per evidence supported a finding that the excluded deposits cent of market deposits. Countrywide operates the 42nd largest depository institution in the market, controlling deposits of approxi mately $380 million, which represent less than I percent of market 20. When Countrywide Bank's deposits are weighted at 50 percent deposits. On consummation, Bank of America would remain the pre-acquisition, Bank of America controls deposits representing second largest depository institution in the market, controlling deposits approximately 5.B percent of market deposits. of approximately $22 billion, which represent approximately 14.8 per 21. When Countrywide Bank's deposits are weighted at 50 percent cent of market deposits. Approximately 118 depository institutions pre-acquisition, Countrywide Bank controls deposits representing would remain in the Washington, D.C. banking markel. The HHI approximately 57.4 percent of market deposits. would increase 5 points to 877. 22. When Countrywide Bank's deposits are weighted at 50 percent 19. The Fort Worth banking market is defined as Tarrant, Johnson, pre-acquisition and at 100 percent post-acquisition, the HHI increases Parker (excluding Mineral Wells), and Wise counties in Texas. 2470 points to 5962.
Legal Developments: Second Quarter; 2008 C85 were not legally available for use in that market, and data Based on a careful review of these and all other facts of were available to make comparable adjustments to the record, the Board concludes that the increase in concentra market shares for all other market participants.23 The Board tion, as measured by the HHI using SOD data without also has adjusted deposit data in the rare circumstance adjustment, overstates the competitive effect of the pro where there was strong evidence that a depository organi posal in the Fort Worth banking market,26 The Board also zation moved its national business-line deposits to a par concludes that, with appropriate adjustment and after con ticular branch for business reasons unrelated to its efforts to sidering the structure of the market, consummation of the compete in that market and did not use these deposits to proposal would have no significantly adverse effect in the enhance its competitive ability in that market or to manipu Fort Worth banking market. late SOD data used in competitive analyses by a federal supervisory agency.24 B. Other Nonbanking Activities The Board has conducted a more detailed analysis of The Board also has carefully considered the competitive Countrywide's activities in the Fort Worth banking market effects of Bank of America's proposed acquisition of to evaluate whether the increase in concentration in the Countrywide'S other non banking subsidiaries and activities market, as measured by the HHI based on SOD data, in light of all the facts of record. Bank of America and overstates the anticompetitive effects of the proposal in the Countrywide both engage in the following activities: mort market. The Fort Worth Branch of Countrywide Bank is not gage lending and other credit extension originations and a conventional retail branch. It is in a large office park servicing; real estate and personal property appraisal; real building that is occupied primarily by Countrywide's estate settlement; credit bureau services; asset manage national mortgage loan processing facilities. Only one ment, servicing, and collection; acquiring debt in default; teller window capable of handling retail banking transac securities brokerage; community development; trust com tions operates at that location. The branch accepts cash pany functions; and tax services. Some commenters ex deposits but dispenses cash only by means of an automated pressed concern that the proposal would adversely affect teller machine ("ATM"). As noted, almost all deposits competition for mortgage lending in the United States, booked at the branch come from brokered deposits, depos Bank of America and Countrywide compete in the its related to its mortgage operations, or other deposits from mortgage servicing business. Countrywide is the largest locations across the United States other than the Fort Worth mortgage servicer in the United States. The Board previ banking market. ously has found that the geographic market for mortgage Countrywide placed the national business-line deposits servicing is national in scope, Although Bank of America in the Fort Worth Branch for business reasons unrelated to would become the largest mortgage loan servicer in the Countrywide's efforts to compete in the Fort Worth bank United States on consummation of the proposal, the mort ing market. There also is no evidence in the record that gage servicing market would remain unconcentrated and Countrywide moved the deposits to Fort Worth from numerous competitors would continue to engage in mort another branch in an attempt to manipulate the SOD data gage servicing. The HHI for this market would increase no used for competitive analyses by the appropriate federal more than 152 points to no more than 882.27 supervisory agency. Moreover, although Countrywide holds The geographic market for mortgage originations is less approximately $60.2 billion in deposits in the Fort Worth settled than for mortgage servicing, but current market market based on SOD data, this office holds loans totaling trends and evidence suggest that the appropriate geographic only approximately $30.1 million, which represents a loan market for mortgage originations also is national in scope.28 to-deposit ratio of 0.05 percent for Countrywide Bank in This conclusion is confirmed by analysis of the most recent the Fort Worth banking market. This unusually low loan-to Home Mortgage Disclosure Act ("HMDA") data.29 When deposit ratio is consistent with the conclusion that the SOD taken as a whole, the HMDA data on mortgage originations deposit data significantly overstate Countrywide's competi tive presence in the Fort Worth banking market.25 26. If the deposits attributable to customers with addresses outside The Board also examined other aspects of the structure tbe Fort Worth banking market were excluded from the calculation of of the Fort Worth banking market. After consummation of its market concentration, Countrywide Bank would have a market the proposal, a large number of competitors would remain share of less than I percent and Bank of America would remain the in the market. Seventy-three depository institutions would second largest insured depository institution in the market on consum mation of tbe proposal, controlling deposits of approximately $3.3 bil continue to compete in the Fort Worth banking market. lion, which represent approximately 14.8 percent of market deposits. The HHI would increase 24 points to 900. 27, Bank of America is the seventh largest mortgage loan servicer in the United States as of June 30, 2007. See American Banker, 23. See First Security Corp" 86 Federal Reserve Bulletin 122 October 12.2007, (2000), 28, Earlier Board orders focused on the fact that long·distance 24, See },p' Morgan Chase & Co" 90 Federal Reserve Bulletin 352, mortgage origination providers offered loan rates that were substan 355 (2004), tially higher than rates offered by local sources for mortgage financing, 25, Although Countrywide Bank's national business-line deposits This rate differential has decreased, however. as consumers have may be excluded from the Fort Worth banking market, the Board has access both directly and through mortgage brokers to lenders nation nevertheless taken into account the fact that these deposits were used wide, to fund Countrywide's nationwide mortgage operations. 29. 12 U,S,C. §2801 et seq.
C86 Federal Reserve Bulletin 0 August 2008 strongly suggest that the geographic market for mortgage resources. This review was conducted in light of all the originations is no longer local or statewide but national in facts of record, including confidential reports of examina scope. tion, other supervisory information from the primary fed On consummation of this proposal, Bank of America eral and state supervisors of the organizations involved in would become the largest mortgage loan originator in the the proposal, and publicly reported and other financial nation. The proposed acquisition would increase the HHI information, including infonnation provided by Bank of no more than 244 points to no more than 962. The market America and Countrywide. would remain unconcentrated with numerous mortgage The Board has consulted with the Office of the Comp originators.3o troller of the Currency ("OCC") and the Office of Thrift The Board also has considered the competitive effects of Supervision ("OTS"), as the primary federal supervisors of Bank of America's proposed acquisition of the other non Bank of America's and Countrywide's respective subsid banking subsidiaries of Countrywide. Most of the markets iary depository institutions. Additionally, the Board has in which the nonbanking subsidiaries of Bank of America conferred with the SEC regarding the securities activities of and Countrywide compete are regional or national in scope Bank of America and Countrywide. and unconcentrated with numerous competitors. Although The Board has also considered the public comments that community development, property appraisal, and real estate relate to these factors. Commenters expressed concern settlement activities generally are conducted locally, there about the size of the combined organization and whether it are numerous providers of these services and neither Bank would present special risks to the federal deposit insurance of America nor Countrywide control significant shares of fund or the financial system in generaL Several comment these markets. As a result, the Board expects that consum ers expressed concerns over Countrywide's risk mation of the proposal would have a de minimis effect on management systems, as well as concerns about Bank of competition for these services. America's ability to effectively manage Countrywide's operations.31 Moreover, several commenters expressed con C. Views of Other Agencies and Conclusion on cerns about existing and potential future investigations and Competitive Considerations lawsuits filed against Countrywide and its executives related to Countrywide'S operations,32 The DOl also conducted a detailed review of the probable In evaluating financial resources in expansionary propos competitive effects of the proposal, including the acquisi als by banking organizations, the Board reviews the finan tion of Countrywide Bank and the other nonbanking sub cial condition of the organizations involved on both a sidiaries of Countrywide. The DOJ has advised the Board parent-only and consolidated basis, as well as the financial that consummation of the transaction would not likely have condition of the subsidiary insured depository institutions a significantly adverse effect on competition in any relevant and the organizations' significant nonbanking operations. banking market, including the Washington, D.C. and Fort In this evaluation, the Board considers a variety of infonna Worth banking markets, or in any relevant market for the tion, including capital adequacy, asset quality, and earnings other proposed nonbanking activities. The appropriate fed perfonnance. In assessing financial factors, the Board eral supervisory agencies have also been afforded an consistently has considered capital adequacy to be espe opportunity to comment and have not objected to the cially important. The Board also evaluates the financial proposal. condition of the combined organization at consummation, Based on all the facts of record, the Board concludes that including its capital position, asset quality, and earnings consummation of the proposed transaction, including the prospects, and the impact of the proposed funding of the acquisition of Countrywide Bank and Countrywide's other transaction. In addition, the Board considers the ability of nonbanking subsidiaries, would not have a significantly the organization to absorb the costs of the proposal and the adverse effect on competition or on the concentration of plans for integrating operations after consummation, resources in the Washington, D.C. and Fort Worth banking The Board has considered carefully the financial factors markets, or in any other relevant banking or nonbanking of the proposaL Bank of America and its subsidiary deposi activities market. Accordingly, the Board has detennined tory institutions are well capitalized and would remain so that competitive considerations are consistent with ap on consummation of the proposal. In addition, Country proval. wide Bank is well capitalized and would continue to be so after consummation of the proposaL Based on its review of FINANCIAL AND MANAGERIAL RESOURCES In reviewing the proposal under section 4 of the BHC Act, 31. Several commenters expressed general and specific concerns over retention of Countrywide management staff and the existence of the Board has considered carefully the financial and mana "golden parachute" payments for certain Countrywide executives. On gerial resources of Bank of America, Countrywide, and consummation, Bank of America's overall organization will continue their subsidiaries, and the effect of the transaction on those to be governed by its policies, procedures, and senior executive leadership, The Board notes that "golden parachute" or indemnifica tion payments are subject to applicable federal regulations and may 30. As of June 30, 2007, Bank of America and Countrywide are, require approval by appropriate supervisors. See 12 CPR 359. respectivel y, the fifth largest and largest mortgage loan originators in 32. The Board will continue to monitor pending investigations and the United States, See American Banker, October 12,2007. litigation involving Bank of America or Countrywide.
Legal Developments: Second Quarter, 2008 C87 the record, the Board also finds that Bank of America has tory institution's record of meeting the credit needs of its sufficient financial resources to effect the proposal. The entire community, including low- and moderate-income proposed transaction is structured as a share exchange and ("LMI") neighborhoods, in evaluating bank expansionary would not increase the debt-service requirements of the proposals.34 combined company. The Board has considered carefully all the facts of The Board also has considered the managerial resources record, including reports of examination of the CRA perfor of the organizations involved and the proposed combined mance records of the subsidiary banks of Bank of America organization. The Board has reviewed the examination and Countrywide, data reported by Bank of America and records of Bank of America, Countrywide, and their subsid Countrywide under the CRA and the HMDA, other infor iary depository institutions, including assessments of their mation provided by Bank of America, confidential supervi management, risk-management systems, and operations. In sory information, and public comments received on the addition, the Board has considered its supervisory experi proposal. ences and those of the other relevant federal supervisory Approximately 160 individuals, organizations, and busi agencies with the organizations and their records of com nesses submitted comments or testified in support of the pliance with applicable banking laws and with anti-money proposal. These commenters commended Bank of Ameri laundering laws.33 Bank of America and its subsidiary ca's record of performance under the CRA, particularly its depository institutions are considered to be well managed. sponsorship of homebuyer education programs in LMI In addition, the Board has considered carefully Bank of communities and its financial support for community devel America's plans for implementing the proposal, including opment and small business programs. its proposed risk-management systems after consumma Approximately 610 individuals and groups expressed tion. The Board also has considered Bank of America's concerns in their comments and testimony that included the record of successfully integrating large organizations into mortgage and consumer lending records of Bank ofA merica its operations and risk-management systems after acquisi and Countrywide and Bank of America's ability to fulfill its tions. Bank of America will implement its risk-management CRA obligations after consummation of the proposal. policies, procedures, and controls at the combined organi Some commenters alleged that Countrywide's mortgage zation. Bank of America is devoting significant financial lending and servicing activities and the increasing rates of and other resources to address all aspects of the post foreclosures in its portfolio were harming borrowers and acquisition integration process. communities. Many commenters opposed the proposal or Based on all the facts of record, including a review of the recommended approval only if specific conditions were comments received, the Board has concluded that consider imposed.35 Many commenters also alleged that Bank of ations relating to the financial and managerial resources of America had not adequately addressed the community the organizations involved in the proposal are consistent reinvestment needs of California communities or expressed with approval under section 4 of the BHC Act. general concern about the CRA performance of Bank of America in the state. One commenter asserted that BA RECORDS OF PERFORMANCE UNDER THE eRA As noted previously, the Board reviews the records of performance under the CRA of the relevant insured deposi 34. 12 U.S.c. § 2903. 35. A number of commenters urged the Board to require Bank of tory institutions when acting on a notice to acquire any America to provide specific pledges or plans or to take certain future insured depository institution, including a savings associa actions, including meeting with particular organizations. Tbey also tion. The CRA requires the federal financial supervisory asked the Board to condition its approval on a commitment by Bank of agencies to encourage insured depository institutions to America to institute specific business practices and to take specific help meet the credit needs of the local communities in actions with regard to assisting Countrywide mortgage borrowers who were in default or at risk of defaulting. Some commenters criticized which they operate, consistent with their safe and sound Bank of America's performance under its previous community rein operation, and requires the appropriate federal financial vestment pledges and urged the Board to require Bank of America to supervisory agency to take into account a relevant deposi- improve the CRA records of its subsidiary institutions. The Board consistently has found that (I) neither the CRA nor the federal supervisory agencies' CRA regulations require depository institutions 33. Some commenters expressed concerns about Bank of Ameri to make pledges or enter into commitments or agreements concerning ca's relationship with certain unaffiliated payday lenders. As a general future performance under the CRA with any organization or to meet matter, the activities of the consumer finance businesses identified by with particular persons or organizations; and (2) the enforceability of the commenter are permissible and the businesses are licensed by the any third-party pledges, initiatives, or agreements are matters outside states where they operate. Bank of America has stated that it conducts the purview of the eRA. See Bank of America Corporation, 90 Fed substantial due diligence reviews of its customers who provide eral Reserve Bulletin 217, 232-33 (2004) ("BOA/Fleet Order"). alternative financial services, including reviews of anti-money Instead, the Board focuses on the existing CRA performance record of laundering and Bank Secrecy Act compliance, and that it does not play an applicant and the programs that an applicant has in place to serve any role in the lending practices, credit review processes, or other the credit needs of its assessment areas at the time the Board reviews a business practices of those firms. proposal.
C88 Federal Reserve Bulletin 0 August 2008 Bank had provided an insufficient amount of community almost all of the 38 areas rated. During the evaluation development loans and investments in New York City. period, BA Bank originated more than 3 million CRA reportable loans totaling more than $429 billion, including A. CRA Performance Evaluations home mortgage loans totaling $380 billion. Examiners reported that the bank's distribution of HMDA-reportable As provided in the CRA, the Board has evaluated the mortgage loans among borrowers of different income levels proposal in light of the evaluations by the appropriate was good.4O In addition, examiners reported that BA Bank's federal supervisors of the CRA performance records of the distribution of small business and small farm loans41 relevant insured depository institutions. An institution's among businesses and farms of different revenue sizes was most recent CRA performance evaluation is a particularly good. In the BOA Evaluation, examiners noted that the important consideration in the applications process because bank offered special loan products with flexible underwrit it represents a detailed, on-site evaluation of the institu ing standards that assisted the bank in meeting the eredit tion's overall record of performance under the CRA by its needs of LMI communities in its areas of operation. appropriate federal supervisor.36 Examiners also reported that BA Bank's level of commu Bank of America's lead bank, BA Bank, received an nity development lending significantly enhanced its lending "outstanding" rating at its most recent CRA performance test performance.42 evaluation by the OCC, as of December 31,2006 ("BOA After the BOA Evaluation, the bank has maintained a Evaluation").37 Two other subsidiary banks of Bank of substantial level of home mortgage, small business, and America subject to the CRA, LaSalle Bank National Asso community development lending. In 2007, the bank origi ciation, and FIA Card Services, N.A., also received "out nated HMDA-reportable loans totaling approximately standing" ratings at their most recent CRA performance $27 billion to LMI individuals throughout its assessment evaluations. A fourth subsidiary bank, LaSalle Bank Mid areas. BA Bank has continued to offer loan products with a west National Association, received a "satisfactory" rating variety of flexible down-payment and closing-cost options at its most recent CRA performance evaluation.38 as well as standard FHA and VA loan products. BA Bank Countrywide Bank received a "satisfactory" rating at its was also recognized in 2007 by the SBA for the tenth most recent CRA performance evaluation by the OCC, as consecutive year as the nation's leading small business of October 18, 2004 ("Countrywide Evaluation"), before it lender, with small business loan originations totaling more converted from a commercial bank to a savings bank than $25.6 billion. BA Bank represented that its community subject to the supervision of the OTS.39 The Board also has development lending during 2007 totaled approximately consulted with the OTS, the current primary federal super $2 billion. visor of Countrywide Bank. Bank of America has repre In the BOA Evaluation, examiners reported that BA sented that it would institute the community development Bank consistently demonstrated strong performance under and community investment policies of BA Bank at Coun the investment test, noting that its performance was exceltrywide Bank to strengthen and help meet the banking needs of the communities it serves. eRA Performance of BA Bank. BA Bank is Bank of 40. In BA Bank's assessment areas in California, examiners gener America's largest insured depository institution, represent ally found that the bank's lending levels reflected excellent or good ing approximately 79 percent of the organization's insured responsiveness to the credit needs of its assessment areas within the state. Examiners reported good distribution of loans among communi depository institution assets. In the BOA Evaluation, the ties and borrowers of different income levels throughout BA Bank's bank received "outstanding" ratings under the lending, California assessment areas. In the New York-White Plains-Wayne investment, and service tests. Examiners commended BA Multistate Metropolitan Division ("MMD") in New York and New Jer Bank's overall lending performance, which they described sey ("New York MMD"), examiners found that the bank's lending as demonstrating excellent or good lending-test results in levels reflected excellent responsiveness to the credit needs of its assessment areas, and they noted that community development lending levels had a significantly positive impact within the New York MMD. 36. See Interagency Questions and Answers Regarding Community 41. In this context, "small business loans" are loans with original Reinvestment, 66 Federal Register 36,620 and 36,639 (2001). amounts of $1 million or less that are secured by nonfarm, nonresiden 37. The period for the BOA Evaluation was January I, 2004, tial properties or are commercial and industrial loans to borrowers in through December 31, 2006. the United States. "Small farm loans" are loans with original amounts 38. laSalle Bank National Association was last evaluated by the of $500,000 or less that are either secured by farmland or are used to OCC as of December 31, 2002. FIA Card Services, NA, formerly finance agricultural production and other loans to farmers. known as MBNA America National Bank, National Association, was 42. Examiners commended BA Bank's community development last evaluated by the OCC as of April 4, 2005. LaSalle Bank Midwest lending performance under the investment test in California and acc National Association was last evaluated by the as of August I, New York. Examiners reported that the bank originated 222 commu 2006. The Board approved Bank of America's application to acquire nity development loans during the evaluation period, totaling more both LaSalle Bank and LaSalle Bank Midwest in 2007. See Bank of than $851 million, in the areas rated that included Los Angeles and San America Corporation, 93 Federal Reserve Bulletin CI09 (2007) Francisco. Examiners noted that many of those loans were for ("BOAlLaSaUe Order"). BA California, BA Georgia, BA Oregon, and economic development or affordable housing and helped create more BA Rhode Island are special-purpose banks that are not subject to the than 1,500 jobs and 700 units ofLMI housing. Examiners reported that CRA. the bank originated 167 community development loans, totaling more 39. Before March 2007, Countrywide Bank was supervised by the than $562 million, in the New York MMD during the evaluation period OCc. The period for the OCC's Countrywide Evaluation was Janu and noted that a large number of such loans were for affordable ary 1,2002, through December 31, 2003. housing and helped create more than 3,200 housing units in LMI areas.
Legal Developments: Second Quarter, 2008 C89 lent or good in 99 percent of its assessment areas. During developed more than 5,700 housing units through invest the evaluation period. BA Bank made more than 10,500 ments totaling $520 million nationwide from 2005 through investments, including grants and contributions, that totaled 2007. almost $4.8 billion.43 BA Bank funded the development of In the BOA Evaluation, examiners commended BA approximately 100,000 housing units for LMI families Bank's performance under the service test throughout its through its qualified investments in its assessment areas.44 assessment areas.49 Examiners noted that the bank's provi Examiners commended BA Bank for demonstrating signifi sion of retail services showed excellent responsiveness to cant leadership in its qualified investment activities and the banking needs of the communities and individuals of commented that the bank ranked among the most signifi different income levels in the bank's assessment areas.50 cant investors in both Low Income Housing Tax Credit They reported that SA Bank's retail delivery systems were ("LIHTC") and New Market Tax Credit ("NMTC") excellent, with the percentage of the bank's branches in projects and was the largest financial institution investor in LMI census tracts within its assessment areas approximat Community Development Financial Institutions ("CDFI") ing or exceeding the overall percentage of the population projects.45 In addition, examiners noted that BA Bank was residing in such LMI census tract.~.51 one of a handful of financial institutions that acted as a CRA Performance of Countrywide Bank. As noted direct developer of large scale multifamily housing projects above, Countrywide Bank received an overall "satisfac in LMI areas.46 Examiners also reported that the bank was tory" rating in its 2004 CRA evaluation, with "low satis the second largest corporate donor in the United States in factory" ratings on both the lending and service tests and an 2005 with cash donations of $130 million, more than half "outstanding" rating on the investment test. Examiners of which qualified for CRA credit.47 noted in the Countrywide Evaluation that the bank's distri BA Bank also has maintained a substantial level of bution of home mortgage loans reflected adequate penetra community development investments in its assessment tion of LMI areas in its two assessment areas when areas since the BOA Evaluation. Bank of America repre compared with the distribution of owner-occupied housing sented that BA Bank made more than 6,000 community units in those areas. In addition, examiners found that development investments, totaling more than $2.2 billion, Countrywide Bank's lending performance to borrowers of during 2007.48 In addition, Bank of America represented different income levels in both assessment areas was that the bank's community development subsidiary has adequate considering the affordability barriers for low income families in those areas. Examiners noted that the bank's qualified investments and grants to community 43. Examiners reported that BA Bank made almost 500 qualified development organizations in its assessment areas were investments totaling more than $506 million during the evaluation excellent relative to its financial resources. They com period in the areas rated that included Los Angeles and San Francisco mended the institution'S responsiveness to the areas most and helped create approximately 2,900 housing units in LMI areas. pressing community development needs. In addition, exam Examiners also found that retail banking services were readily acces sible to areas and individuals of different income levels throughout iners found that Countrywide Bank's branches, products, California. In the New York MMD, examiners considered the bank's and services were reasonably accessible to communities performance under the investment test to be outstanding. The bank and individuals of differing income levels and were deli vmade more than 300 investments totaling approximately $280 million in the New York MMD during the evaluation period, helping to create approximately 2,500 housing units in LMI areas. 44. BA Bank's CRA-qualified community development lending during 2007 in its California and New York assessment areas totaled 49. One commenter asserted that Bank of America should ensure approximately $385.4 million and $l60.5 million, respectively. that certain banking products and services are made available to LMI 45. Examiners also highlighted BA Bank's significant investments customers in California. Although the Board has recognized that banks in LIHTC, NMTC, and CDFI projects in the New York MMD. can help to serve the banking needs of communities by making certain 46. Examiners also commended BA Bank for creating its Neighbor products or services available on certain terms or at certain rates, the hood Excellence Initiative, a program in 44 of the bank's markets that CRA neither requires an institution to provide any specific types of is designed to develop relationships with nonprofit organizations that products or services nor prescribes their costs to the consumer. focus on community development. Exanliners noted that the bank 50. BA Bank has entered into partnerships with national and local invested almost $50 million in the initiative during the evaluation housing counseling agencies to offer pre- and post-purchase home period. mortgage counseling to LMI borrowers. Such counseling includes 47. Some commenters criticized the amount of Bank of America's reviewing the buyer's credit report, income, and debt; preparing a charitable donations and its methodology for making these donations. budget; and conducting an afford ability analysis. Bank of America represented that it has a record of providing 51. One commenter alleged that BA Bank's branch network did not significant corporate philanthropic donations in all the communities adequately serve LMI communities in New York City. Examiners that it serves. The Board notes that neither the CRA nor the federal found that BA Bank's retail services were reasonably accessible to supervisory agencies' implemcnting rules require that institutions areas and individuals of different income levels in the New York engage in charitable giving. MMD. Examiners noted that the bank's recent branch openings and 48. Bank of America represented that BA Bank's community relocations improved accessibility to the bank's retail services, particu development investments during 2007 in its California and New York larly in LMI areas. assessment areas totaled approximately $476.6 million and $126.8 mil lion, respectively.
e90 Federal Reserve Bulletin 0 August 2008 ered primarily through alternative delivery systems, such as borrowers. 55 Some of these commenters also alleged that the Internet call centers and a network of financial lending Countrywide often made such loans without regard to the centers. 52 borrower's qualifications for lower-cost, conventional mort gage loans, In addition, many commenters alleged that B. Conclusion on CRA Performance Countrywide had engaged in various abusive practices in mortgage sales, including concealing key loan provisions The Board has considered carefully all the facts of record, and terms, refusing to assist at-risk or defaulting customers, including reports of examination of the CRA performance prematurely referring mortgages to foreclosure attorneys, records of the institutions involved, information provided and aiding and abetting abusive or discriminatory sales by Bank of America, comments received on the proposal practices conducted by various third parties, such as mort and responses to those comments, and confidential supervi gage brokers or home builders. sory information. The Board has also considered that Bank The Board's analysis of the lending-related concerns of America proposes to institute its CRA policies and included a review of 2006 and preliminary 2007 HMDA procedures at Countrywide. Based on a review of the entire data reported by BA Bank and Countrywide Bank and their record, and for the reasons discussed above, the Board lending affiliates.56 Although the HMDA data might reflect concludes that the CRA performance records of the rel certain disparities in the rates of loan applications, origina evant insured depository institutions are consistent with tions, and denials among members of different racial or approval of the proposaL 53 ethnic groups in certain local areas, they provide an insufficient basis by themselves on which to conclude whether or not Bank of America or Countrywide Bank has OTHER CONSIDERATIONS excluded or imposed higher costs on any group on a In light of the public comments received on the proposal, prohibited basis. The Board recognizes that HMDA data the Board has considered carefully the compliance records alone, even with the recent addition of pricing information, of Bank of America and Countrywide with fair lending and provide only limited information about the covered loans. 57 other consumer protection laws in its evaluation of the HMDA data, therefore, have limitations that make them an public interest factors. Some commenters alleged, based on inadequate basis, absent other information, for concluding HMDA data, that Bank of America and Countrywide that an institution has engaged in illegal lending discrimi denied the home mortgage loan applications of African nation. American and Hispanic borrowers more frequently than The Board is nevertheless concerned when HMDA data those of non minority applicants nationwide and in certain for an institution indicate disparities in lending and believes Metropolitan Statistical Areas C'MSAs").54 Several com that all lending institutions are obligated to ensure that their menters alleged, based on reviews of HMDA data, that lending practices are based on criteria that ensure not only Bank of America and Countrywide made disproportion safe and sound lending but also equal access to credit by ately higher-cost loans to African American and Hispanic creditworthy applicants regardless of their race or ethnicity. Moreover, the Board believes that all bank holding compa nies and their affiliates must conduct their mortgage lend- 52. As noted, Countrywide Bank only operates a retail branch in Alexandria and Fort Worth and both branches only permit customers to conduct limited transactions. 53. One commenter has reiterated his comments from previous 55. Beginning January 1, 2004, the HMDA data required to be Bank of America applications that urged the Board not to approve the reported by lenders were expanded to include pricing information for proposal until Bank of America met certain "commitments" regarding loans on which the annual percentage rate (APR) exceeds the yield for its lending programs in Hawaii and its goal for mortgage lending to U.S. Treasury securities of comparable maturity 3 or more percentage Native Hawaiians on Hawaiian Home Lands. See. e.g., BOA/Fleet points for first-lien mortgages and 5 or more percentage points for Order at 232-33. In October 2007, the state of Hawaii Department of second-lien mortgages (12 CFR Part 203.4). Hawaiian Homelands informed Bank of America that it had met its 56. The Board reviewed HMDA data for Bank of America in BA commitment to the state. As noted in the BOA/Fleet Order, Bank of Bank's combined assessment areas nationwide and in California and America's publicly announced plans to engage in certain lending North Carolina, in its assessment areas in the Charlotte, North programs in Hawaii were not commitments to the Board, and those Carolina MSA. and in the MSAs cited by commenters. The Board plans were not conditions of the Board's approvals in earlier applica reviewed HMDA data for Countrywide Bank in its combined assess tions by Bank of America or its predecessors. See id. As also ment areas (consisting of the Washington, D.C. MMD, the Bethesda, previously noted, the Board views the enforceability of such third Maryland Metropolitan Division, and the Dallas-Fort Worth, Texas party pledges, initiatives, and agreements to be matters outside the MSA), in California and Delaware, and in the MSAs cited by purview of the CRA. commenters. The Board notes that 2007 HMDA data are preliminary 54. Some commenters also questioned Bank of America's efforts in and that final data will not be available for analysis until fall 2008. awarding contracts to minority-and women-owned businesses. Bank 57. The data, for example, do not account for the possibility that an of America represented that 16 percent of its expenditures in 2007 institution'S outreach efforts may attract a larger proportion of margin were to finns that are majority owned by women, minorities, or ally qualified applicants than other institutions attract and do not disabled individuals. Although the Board fully supports programs provide a basis for an independent assessment of whether an applicant designed to promote equal opportunity and economic opportunities for who was denied credit was, in fact, creditworthy. In addition, credit all members of society, the comments about supplier diversity pro history problems, excessive debt levels relative to income, and high grams are beyond the factors the Board is authorized to consider under loan amounts relative to the value of the real estate collateral (reasons the BHC Act See. e.g .. Deutsche Bank AG, 86 Federal Reserve most frequently cited for a credit denial or higher credit cost) are not Bulletin 509,513 (1999). available from HMDA data.
Legal Developments: Second Quartet; 2008 C9l ing operations without any abusive lending practices and in disclosure of available product options, features, rates, and compliance with all consumer protection laws. terms; and strengthening internal training and compliance In carefully reviewing the concerns about the organiza programs.59 tions' lending activities, the Board has taken into account In addition, Bank of America represented that it would other information, including examination reports that pro dedicate substantial financial, staffing, and other resources vide on-site evaluations of compliance with fair lending at the combined mortgage operations to assist customers in and other consumer protection laws and regulations by BA default or at risk of default with loan workouts to mitigate Bank, Countrywide, and their lending affiliates. The Board foreclosures. Bank of America plans to enhance loss also has consulted with the OCC, the primary federal mitigation training, responsiveness to customers, manage supervisor of Bank of America's subsidiary banks, and ment oversight, and audits of loan workouts and loss with the OTS, the primary federal supervisor of Country mitigation activities. Bank of America also stated that it wide and Countrywide Bank. In addition, the Board has would enhance the combined mortgage operation's risk considered information provided by Bank of America, management systems for originating and servicing loans including its plans for managing the combined mortgage received through brokers and correspondents to ensure operations of BA Bank and Countrywide after consumma compliance with fair lending and other consumer protec tion of the proposal. tion laws and regulations, as well as with prudent safety The Board notes that Bank of America has represented it and soundness standards. These measures would include will operate the combined mortgage operations of BA Bank establishing qualification criteria for those third-party origi and Countrywide under BA Bank's policies, procedures, nators and monitoring their performance; requiring an internal controls, and other risk-management systems to executed agreement with those third parties to abide by ensure compliance with fair lending and other consumer applicable laws, regulations, and Bank of America's com protection laws and regulations. The record, including prehensive guidelines; subjecting all loans received from confidential supervisory information, indicates that Bank of third parties to automated fraud prevention and underwrit America has implemented many processes to help ensure ing systems for approval; and limiting total broker compen compliance with all consumer protection laws and regula sation.60 tions.58 Bank of America's compliance program includes Based on all the facts of record, the Board has concluded fair lending policy and product guides, compliance file that considerations relating to the fair lending and con reviews, testing of HMDA data's integrity, and other sumer protection law compliance are consistent with quality-assurance measures to help ensure compliance with approval under section 4 of the BHC Act. consumer protection laws. Bank of America also stated that it provides annual training to ensure that Bank of America's associates understand their responsibility for complying 59. Many commenters expressed concern regarding the types of with the organization's fair lending and consumer protec mortgage products to be sold by the combined mortgage operations of tion policies. Bank of America and Countrywide after consummation of the pro Bank of America represented that it would review and posaL Bank of America represented that it would offer a range of make appropriate modifications to the fair lending and products that would continue to respond to market conditions and consumer protection policies and procedures that would consumer demands, including confornring loans that are underwritten according to guidelines of government-sponsored entities or other apply to the operations of Countrywide after consummation standard guidelines; interest-only, fixed-rate, and adjustable-rate mort of the proposal and that it would institute unified policies gage ("ARM") products. subject to a IO-year minimum interest-only and procedures for originating affordable mortgages, reduc period; and fixed-period ARMs subject to protections against severe ing foreclosure rates, serving traditionally underserved step-ups in payment amounts. 60. Some commenters expressed concerns about Bank of Ameri communities, and enhancing customer protections. Those ca's relationships with unaffiliated third parties engaged in subprime measures would include discontinuing the origination of lending. The commenters provided no evidence that Bank of America subprime loans and nontraditional mortgage products that originated, purchased, or securitized "predatory" loans or otherwise may result in negative amortization; offering customers engaged in abusive lending practices. Bank of America has policies loan products for which they qualify; providing adequate and procedures to help ensure that the subprime loans it purchases and securitizes are in compliance with applicable state and federal con sumer protection laws. As noted in the BOA/LaSalle Order. Bank of 58. Some commenters alleged that the terms and fees associated America has stated that it conducts extensive due diligence reviews of with the credit card and some checking accounts offered by Bank of the third-party loan originators with which it does business, as well as America are unfair or deceptive. As noted previously in the BOAI the loans that it purchases and the servicers of each pool, to help LaSalle Order, Bank of America has stated that it does not engage in or ensure that Bank of America is not facilitating "predatory" lending. condone deceptive practices and that it conducts multiple. ongoing See BOA/LaSalle Order at C112. The Board expects all banking reviews to ensure that the terms, conditions, and marketing of its credit organizations to conduct their operations in a safe and sound manner card products are appropriate and comply with applicable laws and with adequate systems to manage operational, compliance, and repu regulations, including the Truth in Lending Act and the Board's tational risks and will take appropriate supervisory actions to address Regulation Z. See BOA/LaSalie Order at C 115. and prevent abusive lending practices.
C92 Federal Reserve Bulletin 0 August 2008 PUBLIC BENEFITS such period is extended for good cause by the Board or by the Federal Reserve Bank of Richmond, acting pursuant to As part of its evaluation of the public interest factors under delegated authority. section 4 of the BHC Act, the Board has reviewed carefully By order of the Board of Governors, effective June S, the public benefits and possible adverse effects of the 200S. proposal. The record indicates that consummation of the proposal would result in benefits to consumers currently Voting fOf this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Kroszner, and Mishkin. served by Countrywide. The proposal would also allow Bank of America to offer a wider array of affordable ROBERT DEV. FRIERSON mortgage loans, enhanced loan remediation processes, and Deputy Secretary of the Board other banking products and services to Countrywide cus tomers. Bank of America has represented that it would Appendix grant Countrywide Bank customers access to BA Bank's ATM network and branch locations on the same terms and Other Nonbanking Subsidiaries of Countrywide to be conditions as BA Bank customers. As noted, Bank of Acquired under Section 4 of the BHC Act America also would implement enhanced risk-management (I) CB Securities Holdings I, Inc. and CB Securities systems at the combined organization. Holdings 2, Inc., both of Thousand Oaks, California; The Board has determined that the conduct of the Countrywide Asset Management Corp., Countrywide proposed nonbanking activities within the framework of Commercial Administration LLC, Countrywide Com Regulation Y and Board precedent is not likely to result in mercial Real Estate Finance, Inc., Countrywide Home significant adverse effects, such as undue concentration of Loans, Inc., Countrywide Mortgage Ventures, LLC, resources, decreased or unfair competition, conflicts of Countrywide Servicing Exchange, and LandSafe Ap praisal Services, Inc., all of Calabasas, California; interests, or unsound banking practices. Moreover, based Countrywide Home Loans Servicing LP, Plano, Texas; on all the facts of record, the Board has concluded that Countrywide Warehouse Lending, West Hills, Califor consummation of the proposal can reasonably be expected nia; CTC Real Estate Services, Simi Valley, California; to produce public benefits that would outweigh any likely CWB Venture Management Corporation, Countrywide adverse effects. Accordingly, the Board has determined that KB Home Loans, LLC, and CWB Mortgage Ventures, the balance of the public benefits under the standard of LLC, all of Thousand Oaks, California; LandSafe section 40)(2) of the BHC Act is consistent with approval. Credit, Inc., LandSafe Flood Determination, Inc., and LandSafe Title of Texas, Inc., all of Richardson, Texas; LandSafe Services of Alabama, Inc., Montgomery, Alabama; LandSafe Title of California, Inc., Rose CONCLUSION mead, California; LandSafe Title of Florida, Inc., Fort Lauderdale, Florida; and LandSafe Title of Maryland, Based on the foregoing and all the facts of record, the Inc., Baltimore, Maryland, and thereby engage in Board has determined that the proposal should be, and extending credit and activities usual in connection with hereby is, approved. In reaching its conclusion, the Board making, acquiring, brokering, or servicing loans or has considered all the facts of record in light of the factors other extensions of credit, in accordance with sec tions 22S.28(b)(1) and (2) of Regulation Y (12 CFR that it is required to consider under the BHC Act. The 22S.28(b)(l) and (2)); Board's approval is specifically conditioned on compliance (2) ReconTrust Company, National Association and Recon by Bank of America with the conditions imposed in this Trust Company, both of Thousand Oaks, California, order and the commitments made to the Board in connec and thereby engage in trust company activities in tion with the notice. The Board's approval also is subject to accordance with section 22S.2S(b )(S) of Regulation Y all the conditions set forth in Regulation Y, including those (12 CFR 22S.2S(b)(S»; in sections 22S.7 and 22S.2S(c),61 and to the Board's (3) Countrywide Tax Services Corp., Plano, Texas, and thereby engage in providing tax services for residential authority to require such modification or termination of the mortgage transactions in accordance with sec activities of the bank holding company or any of its tion 22S.2S(b)(6) of Regulation Y (12 CFR subsidiaries as the Board finds necessary to ensure compli 225.2S(b)(6»; ance with, and to prevent evasion of, the provisions of the (4) Countrywide Capital Markets Asia (H.K.) Limited, BHC Act and the Board's regulations and orders issued Hong Kong, Special Administrative Region, People's thereunder. For purposes of this action, these conditions Republic of China; Countrywide Capital Markets Asia Singapore Pte. Ltd., Republic of Singapore; Country and commitments are deemed to be conditions imposed in wide Investment Services, Inc., Chandler, Arizona; and writing by the Board in connection with its findings and thereby engage in providing securities brokerage ser decisions herein and, as such, may be enforced in proceed vices in accordance with section 22S.2S(b)(7) of Regu ings under applicable law. lation Y (12 CFR 22S.28(b)(7»; and The acquisition shall not be consummated later than (S) The Countrywide Foundation, Calabasas, California; three months after the effective date of this order, unless and CWB Community Assets, Inc., Thousand Oaks, California, and thereby engage in community develop ment activities in accordance with sec tion 22S.2S(b)(l2) of Regulation Y (12 CFR 61. 12 CFR 225.7 and 22S.25(c). 22S.2S(b )(12».
Legal Developments: Second Quarter, 2008 C93 ORDERS ISSUED UNDER FEDERAL In considering the financial history and condition, future RESERVE ACT earnings prospects, and capital adequacy of Bank, the Board has reviewed reports of examination, other supervi sory information, publicly reported and other financial Rolling Hills Bank & Trust information, and information provided by Bank and the commenters. Bank is well capitalized and would remain so Atlantic, Iowa on consummation of the proposal. The Board also has reviewed Bank's business plan and financial projections for Order Approving Establishment of a Branch the branch, including the projections for deposits, income, and costs. After carefully considering all the facts of record, Rolling Hills Bank & Trust ("Bank"), a state member the Board has concluded that the financial history and bank, has requested the Board's approval under section 9 of condition, capital adequacy, and future earnings prospects the Federal Reserve Act ("Act")! to establish a branch at of Bank are consistent with approval of the proposal. The 502 Broad Street, Adair, Iowa. Board also has reviewed Bank's proposed investment for a Notice of the proposal, affording interested persons an branch in Adair and concluded that its investment is opportunity to submit comments, has been publishe~ in consistent with regulatory limitations on investment in accordance with the Board's Rules of Procedure.2 The time bank premises.s for filing comments has expired, and the Board has consid In considering Bank's managerial resources, the Board ered the notice and all comments received in light of the has reviewed the bank's examination record, including factors specified in the Act. assessments of its management, risk-management systems, Bank is the 108th largest depository institution in Iowa, and operations. The Board also has considered its supervi controlling approximately $113.4 million in deposits, which sory experiences with Bank and the ba~k's r~cord ~f represents less than 1 percent of the total amount of compliance with applicable banking law, mcludmg antl deposits of insured depository institutions in the state.3 money-laundering laws. Bank is considered to be well Bank's main office and five branches are in Cass, Greene, managed. Based on this review and all the facts of record, and Pottawattamie counties, and the proposed branch the Board has concluded that the character of Bank's would be in Adair County, all in Iowa. management is consistent with approval of the proposal. Section 9(3) of the Act4 requires a state member bank to The Board also has considered the convenience and obtain the Board's approval before establishing a branch. needs of the community to be served, taking into account When acting on a branch application, the Board is required the comments received, and the bank's performance under by section 9(4) of the Act to consider the financial con~ the eRA. Bank received a "satisfactory" rating by the tion of the applying bank, the general character of Its Federal Reserve Bank of Chicago at its most recent CRA management, and whether its corporate powers are consis performance evaluation, as of December 6, 2004.9 The tent with the purposes of the Act.5 Under the Board's Board notes that the proposed new entry provides an regulation implementing section 9(4),6 the factors that. the additional source of products and services to consumers Board must consider in acting on branch applIcations and businesses. 10 The bank has represented that it currently include (I) the financial history and condition of the receives deposits from and makes loans to customers in applying bank and the general character of its management; Adair and the surrounding areas in Adair County and that (2) the adequacy of the bank's capital and its future the proposed branch would provide residents of th~se earnings prospects; (3) the convenience and needs of the communities with a more convenient source of banking community to be served by the branch; (4) in the case of services.1l In reviewing this proposal, the Board also has branches with deposit-taking capability, the bank's perfor considered the commenters' allegations in light of Bank's mance under the Community Reinvestment Act ("CRA");7 income and expense projections for the proposed branch, as and (5) whether the bank's investment in bank premises in well as its financial and managerial resources. For these establishing the branch satisfies certain limitations. 12 The Board has carefully considered the application in light of these factors and public comments received from a S. 12 CPR 20S.21(a). competing bank in Adair and from residents of the sur 9. An institution's most recent CRA performance evaluation is a rounding areas. The commenters asserted that their commu particularly important consideration in the applications ~roces~ b~ cause it represents a detailed, on -site evaluatIon of the mstItuttOn s nity's demographic and economic characteristics would not overall record of performance under the eRA by its appropriate support another branch profitably. federal supervisor. See Interagency Questions and Answers Regarding Community Reinvestment, 66 Federal Register 36,620 at 36,640 (2001). L 12 U.S.c, § 321 et seq. 10. Commenters speculated that another branch in Adair would 2. 12 CPR 262.3(b). harm the performance of both Bank and an existing institution and 3. Statewide ranking and deposit data are as of June 30, 2007, and negatively affect the community. reflect mergers as of April 11, 2008. II, Bank reported approximately $2.3 million in deposits from and 4. 12 U.S.C. §321 and 12 CFR 20S.6(b). approximately $1.3 million in loans to customers who work or reside 5.12 U.S.C. §322. in the area that would be served by the proposed branch. 6. 12 CFR 20S.6(b). 12. The Board also reviewed the deposit and demographic data for 7. 12 U.S.c, § 2901 et seq. the Adair County, Iowa banking market, which is defined as Adair
C94 Federal Reserve Bulletin 0 August 2008 reasons and based on a review of the entire record, the applied under section lO(a) of the IDAI to establish a Board has concluded that the convenience and needs representative office in New York, New York. The Foreign considerations and Bank's record of performance under the Bank Supervision Enhancement Act of 1991, which CRA are consistent with approval of the proposal. amended the IDA, provides that a foreign bank must obtain Based on the foregoing and all the facts of record, the the approval of the Board to establish a representative Board has determined that the application should be, and office in the United States. hereby is, approved, n The Board's approval is specifically Notice of the application, affording interested persons an conditioned on Bank's compliance with all commitments opportunity to submit comments, has been published in a made to the Board in connection with the proposal. The newspaper of general circulation in New York (The Daily commitments and conditions relied on by the Board are News, New York, New York). The time for filing comments deemed to be conditions imposed in writing in connection has expired, and all comments received have been consid with its findings and decision and, as such, may be enforced ered. in proceedings under applicable law. Bank, with total consolidated assets of approximately Approval of this application is also subject to the $65.6 billion,2 is a newly created indirect subsidiary that is establishment of the proposed branch within one year of the wholly owned by Kreditanstalt fUr Wiederaufbau (" KfW"), date of this order, unless such period is extended by the also of Frankfurt.3 Bank engages in project and export Board or the Federal Reserve Bank of Chicago, acting finance activities. Ktw is a government-owned develop under authority delegated by the Board. ment bank that engages in lending and financing activities By order of the Board of Governors, effective May 2, in furtherance of public-sector initiatives. In the United 2008. States, Ktw operates a representative office in New York, New York ("KfW Office"), and Ktw International Finance, Voting for this action: Chairman Bernanke, Vice Chairman Kohn, Inc., Wilmington, Delaware, a finance vehicle established and Governors Warsh. Kroszner, and Mishkin. to access U.S. capital markets. On January 1,2008, pursuant to an agreement between ROBERT DEY. FRIERSON Ktw and the European Commissioner for Competition, Deputy Secretary of the Board Ktw established Bank as a separately incorporated subsid iary and transferred its export and project finance activities to Bank.4 Bank's proposed representative office would act ORDERS ISSUED UNDER as a liaison with existing and potential customers and INTERNATIONAL BANKING ACT conduct market research for Bank.s In acting on a foreign bank's application under the IDA and Regulation K to establish a representative office, the KjW [PEX-Bank GmbH Board shall take into account whether the foreign bank Franlifurt, Germany engages directly in the business of banking outside of the United States and has furnished to the Board the informa Order Approving Establishment of a tion it needs to assess the application adequately.6 The Representati ve Office Board also shall take into account whether the foreign bank is subject to comprehensive supervision on a consolidated Ktw IPEX-Bank GmbH ("Bank"), a foreign bank within basis by its home-country supervisor.7 Under Regulation K, the meaning of the International Banking Act ("IDA"), has a representative office application may be approved if the Board determines that the applicant bank is subject to a 1. 12 U.S.C. § 3107(a). County. The data indicate a modest decrease in population from 2000 2. Asset data are as of December 31, 2007. to 2006 and a moderate increase in deposits during the same period. 3. The federal government of Germany owns 80 percent of the 13. A commenter requested that the Board hold a public meeting or shares of KIW; the remaining 20 percent is owned by various state hearing on the proposal. The Act does not require the Board to hold a governments in Germany. public hearing on an application to establish a branch. Under its rules, 4. The purpose of the transaction was to ensure that these activities the Board may, in its discretion, hold a public meeting or hearing on an would be conducted in a manner consistent with KIW's status as a application if necessary or appropriate to clarify factual issues related government-owned development bank and in compliance with Euro to the application and to provide an opportunity for testimony (12 CFR pean Union competition policy. To facilitate the transfer. KIW first 262.3(e), 262.25(d»). The Board has considered carefully the com established a separate division within KIW, KIW IPEX Bank ("IPEX menter's request in light of all the facts of record. In the Board's view, Division"), in January 2004, and transferred the export and project the commenter had ample opportunity to submit his views and, in fact. finance activities to IPEX Division. KIW subsequently received Board submitted written comments that the Board has considered carefully in approval to establish KIW Office. See Kreditanstalt fUr Wiederaufbau, acting on the proposal. The commenter's request fails to demonstrate 92 Federal Reserve BulielinCl35 (2006). KfW stated that it will close the why written comments do not present his views adequately or why a KIW Office when Bank's proposed representative office is established. meeting or hearing otherwise would be necessary or appropriate. For 5. KIW also has representative offices in Brazil, China, India, these reasons, and based on all the facts of record, the Board has Russia, Thailand, Turkey, and the United Kingdom that have or will determined that a public meeting or hearing is not required or become offices of Bank. warranted in this case. Accordingly, the request for a public meeting or 6. 12 U.S.C. §3107(a)(2). hearing on the proposal is denied. 7. /d.
Legal Developments: Second Quarter, 2008 C95 supervisory framework that is consistent with the activities been determined that Ktw and Bank are subject to a of the proposed representative office, taking into account supervisory framework that is consistent with the activities the nature of such activities.8 This is a lesser standard than of the proposed representative office, taking into account the comprehensive, consolidated supervision standard ap the nature of such activities. plicable to applications to establish branch or agency The additional standards set forth in section 7 of the IBA offices of a foreign bank. The Board considers the lesser and Regulation K also have been taken into account. IS With standard sufficient for approval of representative office respect to the financial and managerial resources of Bank, applications because representative offices may not engage taking into consideration Bank's record of operation as in banking activities.9 The Board also considers additional Ktw's IPEX Division in its home country, its overall standards set forth in the IBA and Regulation K.1O financial resources, and its standing with its home-country As noted above, Ktw and Bank engage directly in the supervisor, financial and managerial factors are consistent business of banking outside the United States. Bank also with approval. Bank appears to have the experience and has provided the Board with information necessary to capacity to support the proposed representative office and assess the application through submissions that address the has established controls and procedures for the proposed relevant issues. In the proposed representative office, Bank representative office to ensure compliance with U.S. law may engage only in activities permissible for a representa and for its operations in general. The BaFin has no tive office under Regulation K, which include the proposed objection to the establishment of the proposed office. customer liaison and market research activities noted Germany is a member of the Financial Action Task above.ll Force and subscribes to its recommendations regarding With respect to supervision by home-country authorities, measures to combat money laundering and international the Board previously determined that Ktw is subject to a terrorism. In accordance with these recommendations, Ger supervisory framework that is consistent with the activities many has enacted laws and created legislative and regula of Ktw Office, taking into account the nature of such tory standards to deter money laundering, terrorist financ activities.12 There has been no material change in the ing, and other illicit activities. Money laundering is a manner in which Ktw is supervised by the Federal Minis criminal offense in Germany, and Bank is subject to laws try of Finance. With respect to Bank, the Board has that require it to establish internal policies, procedures, and considered that Bank is supervised by the Bundesanstalt fUr systems for the detection and prevention of money launder Finanzdiestleistungsaufsicht ("BaFin"), the primary regu ing throughout its worldwide operations. Bank has policies lator of commercial banks in Germany. The Board previ and procedures to comply with these laws and regulations, ously has considered the supervisory regime in Germany which include reporting suspicious transactions promptly for commercial banks in connection with applications to the German Financial Intelligence Unit and other appro involving other German banks.13 Bank is supervised by priate law enforcement authorities. BaFin on substantially the same terms and conditions as With respect to access to information on Bank's opera those other banks. 14 Based on all the facts of record, it has tions, the restrictions on disclosure in relevant jurisdictions in which Bank operates have been reviewed and relevant government authorities have been communicated with 8. 12 CFR 21L24(d)(2). regarding access to information. Bank has committed to 9. A representative office may engage in representational and make available to the Board such information on the administrative functions in connection with the banking activities of the foreign bank, including soliciting new business for the foreign operations of Bank and any of its affiliates that the Board bank; conducting research; acting as a liaison between the foreign deems necessary to determine and enforce compliance with bank's head office and customers in the United States; perfonning the IBA, the Bank Holding Company Act of 1956 (HBHC preliminary and servicing steps in connection with lending; and Act"), as amended, and other applicable federal law, To the performing back-office functions. A representative office may not extent that the provision of such information to the Board contract for any deposit or deposit-like liability, lend money, or engage in any other banking activity (\2 CFR 211.24(d)(l». may be prohibited by law or otherwise, Bank has commit 10. See 12 U.S.c. § 3105(d)(3H4); 12 CFR 211.24(c)(2). These ted to cooperate with the Board to obtain any necessary standards include (1) whether the bank's home-country supervisor has consents or waivers that might be required from third consented to the establishment of the office; (2) the financial and parties for disclosure of such information. In addition, managerial resources of the bank; (3) whether the bank has procedures to combat money laundering, whether there is a legal regime in place subject to certain conditions, the BaFin may share informa in the horne country to address money laundering, and whether the tion on Bank's operations with other supervisors, including horne country is participating in multilateral efforts to combat money the Board. In light of these commitments and other facts of laundering; (4) whether the appropriate supervisors in the horne record, and subject to the condition described below, it has country may share information on the bank's operations with the Board; and (5) whether the bank and its U.S. affiliates are in compliance with U.S. law; the needs of the community; and the bank's record of operation. bank parent is subject to comprehensive, consolidated supervision. See II. See supra note 9. 12 CFR 211.24(c)(I)(A). The order approving KtW's representative 12. KreditanstaltJiir Wiederaufbau, supra note 4. office application in 2006 applied the lesser supervision standard to 13. See. e.g. . Deutsche GenossenschuJts·lfypothekenbank AG, KtW because a determination of comprehensive, consolidated super 92 Federal Reserve Bulletin C61 (2006). vision was not required. The same standard has been applied in this 14. To find that a foreign bank is subject to comprehensive, case. consolidated supervision, the Board also must find that any foreign 15. See supra note 10.
C96 Federal Reserve Bulletin 0 August 2008 been determined that Bank has provided adequate assur Notice of the application, affording interested persons an ances of access to any necessary information that the Board opportunity to submit comments, has been published in a may request. 16 newspaper of general circulation in Arlington, Virginia On the basis of all the facts of record, and subject to the (The Washington Post, February 6, 2008). The time for commitments made by Bank and the terms and conditions filing comments has expired, and all comments received set forth in this order, Bank's application to establish the have been considered. representative office is hereby approved by the Director of Bank. with total consolidated assets of approximately the Division of Banking Supervision and Regulation, with $17 billion,2 is the tenth largest bank in the Netherlands by the concurrence of the General Counsel, acting pursuant to asset size.3 Bank provides project financing, participation authority delegated by the Board. 17 Should any restrictions financing, and investment financing.4 Bank and its subsid on access to information on the operations or activities of iaries conduct business in Europe, Canada, and the United Bank or any of its affiliates subsequently interfere with the States. Bank currently operates a number of nonbanking Board's ability to obtain information to determine and subsidiaries in the United States that engage in real estate enforce compliance by Bank or any of its affiliates with financing and other real estate activities. Bank operates one applicable federal statutes, the Board may require termina representative office in Paris, France. tion of any of Bank's direct and indirect activities in the The proposed representative office would act as a liaison United States. Approval of this application also is specifi between Bank's head office in the Netherlands and existing cally conditioned on compliance by Bank with the commit and prospective customers in the United States. The office ments made in connection with this application and with would perform market research, conduct preliminary under the conditions in this order. 18 The commitments and condi writing analysis, make new loan solicitations, and prepare tions referred to above are conditions imposed in writing by loan proposals for internal review and approval by Bank's the Board in connection with its finding and decision and head office. In connection with Bank's lending and real may be enforced in proceedings under applicable law. estate operations. the proposed office would perform pre By order, approved pursuant to authority delegated by liminary tasks, including assembling credit information, the Board, effective June 23, 2008. making property inspections, requesting appraisals, and securing title information. ROBERT DEY. FRIERSON Under the IBA and Regulation K, in acting on an Deputy Secretary of the Board application by a foreign bank to establish a representative office, the Board must consider whether the foreign bank: SNS Property Finance B. V. (I) engages directly in the business of banking outside of the United States; (2) has furnished to the Board the Hoevelaken, The Netherlands information it necds to assess the application adequately; and (3) is subject to comprehensive supervision on a Order Approving Establishment of a consolidated basis by its home-country supervisor.s The Representative Office SNS Property Finance B.V. ("Bank"), Hoevelaken, the 2. Data are as of December 31. 2007. 3. Bank is the largest project finance company and the third largest Netherlands, a foreign bank within the meaning of the investment finance company in the Netherlands by asset size. International Banking Act ("IBA"), has applied under 4. Bank is wholly owned by SNS Bank N.V., which is in tum section toea) of the IBAI to establish a representative office wholly owned by SNS REAAL N.V. ("Company"). Stichting Beheer in Arlington, Virginia. The Foreign Bank Supervision SNS REAAL ("Stichting Beheer"), a Dutch foundation, owns Enhancement Act of 1991, which amended the IBA, pro approximately 54.2 percent of Company, and the remaining shares are publicly held. Stichting Beheer's activities are limited to holding vides that a foreign bank must obtain the approval of the shares of Company, representing and safeguarding the interests of Board to establish a representative office in the United Company, and making disbursements of a philanthropic or social States. nature. Aviva pic, London, United Kingdom, indirectly owns a 5.S5 percent interest in Company, and no other shareholder owns as much as 5 percent of the shares of Company. 16. In addition. KfW previously made the same commitments in 5. 12 U.S.c. § 3107(a)(2); 12 CFR 211.24(d)(2). In assessing this connection with its application to establish KfW Office. In light of standard, the Board considers, among other indicia of comprehensive, these commitments, the Board has concluded that KfW also ha~ consolidated supervision, the extent to which the home-country super provided adequate assurances of access to any appropriate information visors (i) ensure that the bank has adequate procedures for monitoring the Board may request. and controlling its activities worldwide; (ii) obtain information on the 17. See 12 CFR 265.7(d)(12)." condition of the bank and its subsidiaries and offices through regular IS. The Board's authority to approve the establishment of the examination reports, audit reports, or otherwise; (iii) obtain informa proposed representative office parallels the continuing authority of the tion on the dealings with and relationship between the bank and its state of New York to license offices of a foreign bank. The Board's affiliates, both foreign and domestic; (iv) receive from the bank approval of this application does not supplant the authority of the financial reports that are consolidated on a worldwide basis or New York State Banking Department to license the proposed represen comparable information that permits analysis of the bank's financial tative office of Bank in aceordance with any terms or conditions that it condition on a worldwide consolidated basis; (v) evaluate prudential may impose. standards, such as capital adequacy and risk asset exposure, on a worldwide basis. No single factor is essential, and other elements may 1. 12 U.S.c. § 3107(a). inform the Board's determination.
Legal Developments: Second Quarter. 2008 C97 Board also considers additional standards set forth in the Central Bank has no objection to the establishment of the IBA and Regulation K.6 The Board considers the supervi proposed representative office. sion standard to have been met when it determines that the With respect to the financial and managerial resources of applicant bank is subject to a supervisory framework that is Bank, taking into consideration its record of operations in consistent with the activities of the proposed representative its home country, its overall financial resources, and its office, taking into account the nature of such activities.1 standing with its home-country supervisor, financial and This is a lesser standard than the comprehensive, consoli managerial factors are consistent with approval of the dated supervision standard applicable to applications to proposed representative office. Bank appears to have the establish branch or agency offices of a foreign bank. The experience and capacity to support the proposed represen Board considers the lesser standard sufficient for approval tative office and has established controls and procedures for of representative-office applications because representative the proposed representative office to ensure compliance offices may not engage in banking activities.s This applica with U.S. law. tion has been considered under the lesser standard. The Netherlands is a member of the Financial Action As noted above, Bank engages directly in the business of Task Force ("FATF") and subscribes to its recommenda banking outside the United States. Bank also has provided tions on measures to combat money laundering. In accor the Board with information necessary to assess the applica dance with these recommendations, the Netherlands has tion through submissions that address the relevant issues. enacted laws and created legislative and regulatory stan With respect to supervision by home-country authorities, dards to deter money laundering, terrorist financing, and the Board has considered the following information. The other illicit activities. Money laundering is a criminal Board previously has determined, in connection with appli offense in the Netherlands, and financial institutions are cations involving other banks in the Netherlands, that those required to establish internal policies, procedures, and banks were subject to home-country supervision on a systems for the detection and prevention of money launder consolidated basis.9 Bank and SNS Bank N. V. are primarily ing throughout their worldwide operations. Bank has poli supervised by the De Nederlandsche Bank N.V. ("Central cies and procedures to comply with these laws and regula Bank") on substantially the same terms and conditions as tions that are monitored by governmental entities responsible those other banks. to Based on all the facts of record, for anti-money-laundering compliance. including the above information, it has been determined With respect to access to information on Bank's opera that Bank and SNS Bank N.V. are subject to a supervisory tions, the restrictions on disclosure in relevant jurisdictions framework that is consistent with the activities of the in which Bank operates have been reviewed and relevant proposed representative office, taking into account the government authorities have been communicated with nature of such activities. regarding access to information. Bank and Stichting Beheer The additional standards set forth in section 7 of the IBA have committed to make available to the Board such and Regulation K have also been taken into account.1I The information on the operations of Bank and any of its affiliates as the Board deems necessary to determine and 6. 12 U.S.C. §3105(d)(3)-(4); 12 CFR 211.24(c)(2)-(3). enforce compliance with the IBA, the Bank Holding Com 7. See, e.g .. Kreditanstalt for Wiederaufoau, 92 Federal Reserve pany Act of 1956, as amended, and other applicable federal Bulletin CB5 (2006); Macquarie Bank Limited, 90 Federal Reserve Bulletin 105 (2004); RHEINHYP Rheinische Hypothekenbank AG, law. To the extent that the provision of such information to 87 Federal Reserve Bulletin 558 (2001). the Board may be prohibited by law or otherwise, Bank and 8. 12 CFR 21 I. 24(d)(2). Stichting Beheer have committed to cooperate with the 9. See, e.g., ING Bank, 85 Federal Reserve Bulletin 448 (1999); Board to obtain any necessary consents or waivers that Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., Rabobank Nederland, 80 Federal Reserve Bulletin 947 (1994). might be required from third parties for disclosure of such 10. On January I, 2007, a new financial institutions law, the Act on information. In addition, subject to certain conditions, the Financial Supervision (" AFS"), became effective in the Netherlands. Central Bank may share information on Bank's operations The AFS and subsequent regulations transitioned the Netherlands from with other supervisors, including the Board. In light of sector-based to function-based supervision of financial institutions. these commitments and other facts of record, and subject to The AFS was not intended to revise the material standards for financial supervision in the Netherlands and has not changed the material the condition described below, it has been determined that substantive standards for the supervision of Bank. Bank and Stichting Beheer have provided adequate assur 11. See 12 U.S.C. § 3105(d)(3)-(4); 12 CFR 211.24(c)(2)-(3). ances of access to any necessary information that the Board These standards include (1) whether the bank's home-country super may request. visor has consented to the establishment of the office; (2) the financial and managerial resources of the bank; (3) whether the bank has procedures to combat money laundering, whether there is a legal regime in place in the home country to address money laundering, and whether the home country is participating in multilateral efforts to the Board; and (5) whether the bank and its U.S. affiliates are in combat money laundering; (4) whether the appropriate supervisors in compliance with U.S. law; the needs of the community; and the bank's the home country may share information on the bank's operations with record of operation.
C98 Federal Reserve Bulletin 0 August 2008 Based on the foregoing and all the facts of record, and indirect activities in the United States. Approval of this subject to the commitments made by Bank and Stichting application also is specifically conditioned on compliance Beheer and the terms and conditions set forth in this order, by Bank and Stichting Beheer with the conditions imposed Bank's application to establish the representative office is in this order and the commitments made to the Board in hereby approved by the Director of the Division of Banking connection with this application. For purposes of this Supervision and Regulation, with the concurrence of the action, these commitments and conditions are deemed to be General Counsel, pursuant to authority delegated by the conditions imposed in writing by the Board in connection Board,12 Should any restriction on access to information on with its findings and decision and may be enforced in the operations or activities of Bank or any of its affiliates proceedings under applicable law. subsequently interfere with the Board's ability to obtain By order, approved pursuant to authority delegated by information to determine and enforce compliance by Bank the Board, effective May 23, 2008. or its affiliates with applicable federal statutes, the Board may require termination of any of Bank's direct and ROBERT DEY. FRIERSON Deputy Secretary of the Board 12. See 12 CFR 265.7(d)(12).
C99 November 2008 Legal Developments: Third Quarter, 2008 ORDERS ISSUED UNDER BANK considered the application and all comments received in HOLDING COMPANY ACT light of the factors set forth in section 3 of the BHC Act. As a standalone organization, C-B-G has banking assets of approximately $206 million, and it is the 72nd largest ORDERS ISSUED UNDER SECTION 3 OF THE depository organization in Iowa, controlling deposits of approximately $174.2 million.4 Washington. with total BANK HOLDING COMPANY ACT banking assets of approximately $111.7 million, is the 158th largest depository organization in Iowa, controlling C-B-G, Inc. deposits of approximately $78.4 million. As a combined organization, C-B-G and Washington would be the 45th West Liberty, Iowa largest depository organization in Iowa, controlling depos its of approximately $252.6 million, which represent less Order Approving the Acquisition of than 1 percent of total deposits of insured depository Additional Shares of a Bank Holding institutions in Iowa.5 Company The Board received comments objecting to the proposal from Washington's management.6 The Board previously C-B-G, Inc. ("C-B-G"), a bank holding company within the has stated that, in evaluating acquisition proposals, it must meaning of the Bank Holding Company Act ("BHC Act"), apply the criteria in the BHC Act in the same manner to all has requested the Board's approval under section 3 of the proposals, regardless of whether they are supported or BHC Actl to acquire additional voting shares sufficient to opposed by the management of the institutions to be increase its holdings to more than 50 percent of the voting acquired,? Section 3(c) of the BHC Act requires the Board shares of Washington Bancorp ("Washington") and thereby to review each application in light of certain factors increase its indirect ownership interest in Washington's specified in the BHC Act. These factors require consider subsidiary bank, Federation Bank, both of Washington, ation of the effects of the proposal on competition, the Iowa. C-B-G and related persons currently own 28 percent financial and managerial resources and future prospects of of Washington's voting shares? and C-B-G proposes that it the companies and depository institutions concerned, and and related persons will acquire additional voting shares the convenience and needs of the communities to be through purchases on the open market. 3 served. 8 Notice of the proposal, affording interested persons an In considering these factors, the Board is mindful of the opportunity to submit comments, has been published in the potential adverse effects that contested acquisitions might Federal Register (73 Federal Register 31,668 (2008». The have on the financial and managerial resources of the time for filing comments has expired, and the Board has 4. Asset data are as of June 30, 2008. Statewide deposit and ranking I. 12 U.S.C. § 1842. data are as of June 30, 2007, and reflect merger and acquisition activity 2. In May 2007, the Board approved C-B-G's application to acquire as of July 21, 2008. control of Washington and up to 35 percent of Washington's voting 5. In this context, insured depository institutions include commer shares. C-B-G, Inc., 93 Federal Reserve Bulletin C88 (2007) ("2007 cial banks, savings banks, and savings associations. Order"). Previously, the Board approved in April 2005 C-B-G's 6. Washington's management made many of the same comments in application to acquire up to 24.35 percent of Washington's voting connection with the proposal by C-B-G to acquire control and up to shares as a noncontrolHng investment. C-B-G, Inc., 91 Federal 35 percent of the voting shares of Washington. The Board reaffinns Reserve Bulletin 421 (2005). and adopts by reference the findings it made in approving that 3. [n this context, "related persons" include C-B-G's subsidiaries proposal. See 2007 Order. and the directors, executive officers, and principal shareholders of 7. See, e.g., Juniata Valley Financial Corp., 92 Federal Reserve C-B-G and its subsidiaries (excluding Washington and its subsidiar Bulletin C171 (2006) ("Juniata"); Central Pacific Financial Corp., ies). The Board attributes acquisitions of Washington shares by related 90 Federal Reserve Bulletin 93, 94 (2004) ("Central Pacific"); North persons to C-B-G for purposes of the BHC Act. C-B-G has represented Fork Bancorporation. Inc., 86 Federal Reserve Bulletin 767, 768 that under the current proposal, its total direct purchase of additional (2000) ("North Fork"); and The Bank of New York Company, Inc., Washington shares will not exceed $500,000. C-B-G also has repre 74 Federal Reserve Bulletin 257, 259 (1988) ("BONY"). sented that related persons will fund any acquisitions of Washington 8. [n addition, the Board is required by section 3(c) of the BHC Act shares from their own resources and that C-B-G's subsidiary banks to disapprove a proposal if the Board does not receive adequate will not lend to related persons to fund their acquisitions of Washing assurances that it can obtain information on the activities or operations ton shares. of the company and its affiliates. See 12 U.S.C. § 1842(c).
ClOO Federal Reserve Bulletin 0 November 2008 company to be acquired and the acquiring organization. The Board has considered carefully the proposal under The Board has long held that, if the statutory criteria are the financial factors. C-B-G, Washington, and their subsid met, withholding approval based on other factors, such as iary banks currently are well capitalized and would remain whether the proposal is acceptable to the management of so on consummation. Based on its review of the record, the the organization to be acquired, would be outside the limits Board also finds that C-B-G has sufficient financial re of the Board's discretion under the BRC Act.9 As explained sources to effect the proposal. C-B-G plans to make its below, the Board has carefully considered the statutory direct acquisitions of additional Washington shares as cash criteria in light of all the comments received and informa purchases without any debt financing. tion submitted by C-B-G. The Board also has carefully The Board also has considered the managerial resources considered all other available information, including infor of C-B-G, Washington, and their subsidiary depository mation accumulated in the application process, supervisory institutions. II The Board has reviewed the examination information of the Board and other agencies, and relevant records of these institutions, including assessments of their examination reports. In considering the statutory factors, management, risk-management systems, and operations. In particularly the effect of the proposal on the financial and addition, the Board has considered its supervisory experi managerial resources of C-B-G, the Board has reviewed ences and those of the other relevant banking agencies with financial information, including the terms and cost of the the organizations and their records of compliance with proposal and the resources that C-B-G proposes to devote applicable banking laws, including anti-money-Iaundering to the transaction. laws. C-B-G, Washington, and their subsidiary banks are considered to be well managed. Based on all the facts of record, including public com FINANCIAL, MANAGERIAL, AND SUPERVISORY ments, the Board has concluded that considerations relating CONSIDERATIONS to the financial and managerial resources and future pros pects of the organizations involved in the proposal are Section 3 of the BRC Act requires the Board to consider the consistent with approval, as are the other supervisory financial and managerial resources and future prospects of factors under the BRC Act. the companies and depository institutions involved in the proposal and certain other supervisory factors. The Board has considered these factors in light of all the facts of COMPETITIVE AND CONVENIENCE AND NEEDS record, including confidential reports of examination and CONSIDERATIONS other supervisory information from the primary supervisors Section 3 of the BRC Act prohibits the Board from of the organizations involved in the proposal, publicly approving a proposal that would result in a monopoly or reported and other financial information, information pro would be in furtherance of any attempt to monopolize the vided by C-B-G, and public comment received on the business of banking in any relevant banking market. Sec proposal. 10 tion 3 also prohibits the Board from approving a proposal In evaluating financial factors in expansion proposals by that would substantially lessen competition in any relevant banking organizations, the Board reviews the financial banking market, unless the Board finds that the anticom condition of the organizations involved on a parent-only petitive effects of the proposal clearly are outweighed in the and a consolidated basis, as well as the financial condition public interest by the probable effect of the proposal in of the subsidiary depository institutions and significant meeting the convenience and needs of the community to be nonbanking operations. In this evaluation, the Board con siders a variety of information, including capital adequacy, served. 12 In connection with its review in 2007 of C-B-G's asset quality, and earnings performance. In assessing finan application to acquire control and up to 35 percent of cial factors, the Board consistently has considered capital Washington's shares, the Board considered the competitive adequacy to be especially important. The Board also evalu ates the financial condition of the combined organization at effects of C-B-G's acquisition of control of Washington. 13 The Board reaffirms, as noted in the 2007 Order, that consummation, including its capital position, asset quality, C-B-G and Washington do not compete directly in any and earnings prospects, and the impact of the proposed relevant banking market. In this light, and based on all the funding of the transaction. II. In connection with its review of the managerial resources and 9. See Juniata; Central Pacific; North Fork; FleetBoston Finoncial future prospects of the organizations, the Board has considered Corporation, 86 Federal Reserve Bulletin 751, 752 (2000); and carefully the assertion by Washington's management that the current BONY. application has made it difficult for Federation Bank to hire the lO. Washington's management reiterated its assertion that, because additional personnel needed to implement a management succession the voting rights of Washington shareholders owning more than program. The Board has also consulted with the Federal Deposit 10 percent of voting shares are restricted under the articles of Insurance Corporation ("FDIC") and the Iowa Division of Banking, incorporation, C-B-G would have only limited influence over the Federation Bank's primary supervisors, about the bank's managerial organization. See 2007 Order at C89, footnote 7. The Board has resources, the managerial challenges faced by the bank, and the bank's considered the eifect of the proposal on C-B-G's financial condition overall condition. more generally and not just from the perspective suggested by the 12. 12 u.S.C. § 18 42(c)(I). comment. 13.2007 Order at C89.
Legal Developments: Third Quarter. 2008 ClOl facts of record, the Board has concluded that consumma The Goldman Sachs Group, Inc. tion of the current proposal would have no significantly adverse effect on competition or on the concentration of Goldman Sachs Bank USA Holdings LLC banking resources in any relevant banking market and that New York, New York competitive factors are consistent with approval. In addition, considerations relating to the convenience Order Approving Fonnation of Bank Holding and needs of the communities to be served, including the Companies records of performance of the institutions involved under the Community Reinvestment Act ("CRA"),14 are consis tent with approval of the application. Community Bank, The Goldman Sachs Group, Inc. ("Goldman") and Gold Muscatine, Iowa, C-B-G's largest subsidiary bank as mea man Sachs Bank USA Holdings LLC ("Goldman Hold sured by assets and deposits, received a "satisfactory" ings") each has requested the Board's approva1 under rating and Federation Bank received an "outstanding" section 3 of the Bank Holding Company Act ("BHC Act") rating at their most recent evaluations for CRA perfor (12 U.S.C. § 1842) to become a bank holding company on mance by the FDIC.15 C-B-G has represented that the conversion of Goldman Sachs Bank USA, Sa1t Lake City, proposal will not result in any changes in the services or Utah (HGoldman Bank"), to a state-chartered bank. 1 Gold products offered by Federation Bank. man Bank currently operates as an industrial loan company that is exempt from the definition of "bank" under the BHC Act,2 CONCLUSION Goldman, with tota1 consolidated assets of approxi Based on the foregoing and all the facts of record, the mately $1.1 trillion, engages in investment banking. secu Board has determined that the application should be, and rities underwriting and dea1ing, asset management, trading hereby is, approved. 16 In reaching its conclusion, the Board and other activities through a variety of subsidiaries both in has considered all the facts of record in light of the factors the United States and overseas.3 Its principal subsidiaries that it is required to consider under the BHC Act. The include Goldman Sachs & Co., New York, New York, a Board's approval is specifically conditioned on compliance broker-dealer registered with the Securities and Exchange by C-B-G with the conditions imposed in this order and the Commission under the Securities Exchange Act of 1934 commitments made to the Board in connection with the (15 U.S.c. § 78a et seq.). application. For purposes of this action, the conditions and Goldman Bank has total consolidated assets of approxi commitments are deemed to be conditions imposed in mately $25 billion and has deposits of approximately writing by the Board in connection with its findings and $23 billion. Goldman Bank engages primarily in extending decision herein and, as such, may be enforced in proceed credit, including corporate loans and loan commitments, ings under applicable law. and taking deposits of the type permissible under the The proposed transaction may not be consummated exception in section 2(c)(2)(H) of the BHC Act for an before the 15th calendar day after the effective date of this industrial loan company. order, or later than three months after the effective date of this order, unless such period is extended for good cause by the Board or the Federal Reserve Bank of Chicago, acting FACTORS GOVERNING BOARD REVIEW OF pursuant to delegated authority. TRANSACTION UNDER THE BRC ACT By order of the Board of Governors, effective August 14, 2008. The BHC Act sets forth the factors that the Board must consider when reviewing the formation of a bank holding Voting for this action: Chairman Bernanke. Vice Chairman Kohn, company or the acquisition of banks. These factors are the and Governors Warsh, Kroszner. Mishkin. and Duke. competitive effects of the proposal in the relevant geo graphic markets; the financial and managerial resources ROBERT DEY. FRIERSON Deputy Secretary of the Board and future prospects of the companies and banks involved in the proposal; the convenience and needs of the commu nity to be served, including the records of performance 14. 12 U.S.c. § 2901 et seq. under the Community Reinvestment Act (12 U.S.c. § 2901 15. The most recent CRA performance evaluations of Community et seq.) ("CRA") of the insured depository institutions Bank and Federation Bank were as of May 2004 and December 2004 involved in the transaction; and the availability of informarespectively. Wilton Savings Bank, a subsidiary bank of C-B-G that was merged into Community Bank in January 2006, received a "satisfactory" rating at its last CRA evaluation, as of November 2003. 16. As noted, C-B-G has proposed that related persons acquire additional shares of Washington. Because the identity of related 1. Goldman Holdings is a wholly owned subsidiary of Goldman persons and the number of shares to be acquired by them are unknown, through which Goldman owns all of the voting stock of Goldman the Board's approval of the current application does not exempt related Bank. persons from any filing requirements that might be triggered under the 2. See 12 U.S.C. § I 841(c)(2)(H). SHC Act or the Change in Bank Control Act (12 U.S.C. § 1817(j» by 3. Asset data for Goldman are as of May 30. 2008. Asset and their purchases of Washington shares. deposit data for Goldman Bank are as of June 30, 2008.
C102 Federal Reserve Bulletin 0 November 2008 tion needed to determine and enforce compliance with the banking market and that the competitive factors under BHC Act and other applicable federal banking laws.4 section 3 of the BHC Act are consistent with approval of Section 3(b)( 1) of the BHC Act5 requires that the Board the proposal. provide notice of an application under section 3 to the appropriate federal or state supervisory authority for the FINANCIAL, MANAGERIAL, AND OTHER bank to be acquired and provide the supervisor a period of SUPERVISORY CONSIDERATIONS time (normally 30 days) within which to submit views and recommendations on the proposaL Section 3(b)(1) also Section 3 of the BHC Act requires the Board to consider the permits the Board to shorten or waive this notice period in financial and managerial resources and future prospects of certain circumstances. the companies and banks involved in the proposal and The Board has notified the Commissioner of the Utah certain other supervisory factors.9 The Board has carefully Department of Financial Institutions ("Commissioner"), considered the factors in light of all the facts of record, the appropriate state supervisory authority for Goldman including supervisory information received from the rel Bank, of the proposed transaction. The Commissioner has evant federal and state supervisors of the organizations notified the Board that the Commissioner does not object to involved in the proposal and other available financial approval of the proposal. information, including information provided by Goldman. In light of the unusual and exigent circumstances affect The Board consistently has considered capital adequacy ing the financial markets, and all other facts and circum to be an especially important aspect in analyzing financial stances, the Board has determined that emergency condi factors. Goldman is adequately capitalized, and all the tions exist that justify expeditious action on this proposal.6 Goldman entities that are subject to regulatory capital For the same reasons, and in light of the fact that this requirements currently exceed the relevant requirements. In transaction represents the conversion of an existing subsid addition, Goldman Bank currently is well capitalized under iary of the applicants from one form of depository institu applicable federal guidelines. Goldman Bank also would be tion to another, the Board has waived public notice of this well capitalized on a pro forma basis on consummation of proposal,7 the proposal. Other financial factors are consistent with approval. The Board also has carefully considered the managerial COMPETITIVE CONSIDERATIONS resources of Goldman in light of all the facts of record, including confidential supervisory information and infor Section 3 of the BHC Act prohibits the Board from mation provided by Goldman. Based on all the facts of approving a proposal that would result in a monopoly. The record, the Board concludes that considerations relating to BHC Act also prohibits the Board from approving a the financial and managerial resources and future prospects proposed bank acquisition proposal that would substan of the organizations involved are consistent with approval, tially lessen competition in any relevant banking market as are the other supervisory factors the Board must con unless the anticompetitive effects of the proposal are sider. clearly outweighed in the public interest by the probable effect of the proposal in meeting the convenience and needs CONVENIENCE AND NEEDS FACTOR of the community to be served.8 The proposal involves the conversion of an existing, The Board also has carefully considered the effect of the wholly owned industrial loan company subsidiary of Gold proposal on the convenience and necds of the communities man into a bank with no resulting change in the ownership to be served in light of all the facts of record. The Board has of Goldman Bank or Goldman. In addition, Goldman does long held that consideration of the convenience and needs not propose to acquire an additional bank as part of this factor includes a review of the records of the relevant proposal. Based on all the facts of record, the Board depository institutions under the CRA. As provided in the concludes that consummation of the proposal would not CRA, the Board evaluates the record of performance of an result in any significantly adverse effects on competition or institution in light of examinations by the appropriate on the concentration of banking resources in any relevant federal supervisors of the CRA performance records of the relevant institutions. An institution's most recent CRA performance evaluation is a particularly important consid eration in the applications process because it represents a 4. In cases involving interstate bank acquisitions by bank holding detailed, on-site evaluation of the institution's overall companies, the Board also must consider the concentration of deposits in the nation and relevant individual states, as well as compliance with record of performance under the CRA by its appropriate the other provisions of section 3( d) of the BHC Act. Because the federal supervisor.10 proposed transaction does not involve an interstate bank acquisition by a bank holding company. the provisions of section 3(d) of the BHC Act do not apply in this case. 9. 12 U.S.C. § I 842(c)(2) and (3). 5. 12 U.S.C. § 1842(b)(1). 10. The Interagency Questions and Answers Regarding Commu 6. See 12 CFR 22S.14(d)(4). nity Reinvestment provide that a eRA examination is an important and 7. 12 CFR 22S.16(b)(3). often controlling factor in the consideration of an institution's CRA 8. 12 U.S.c. § 1842(c)(l). record. See 64 Federal Register 23.641 (1999).
Legal Developments: Third Quarter, 2008 C103 Goldman Bank, which is the only institution that Gold Board is required to consider under the BHC Act. The man controls that is subject to evaluation under the CRA, Board's approval is specifically conditioned on compliance received a "satisfactory" CRA performance rating from the by Goldman and Goldman Bank with all the commitments Federal Deposit Insurance Corporation at its most recent made in connection with the applications, including the examination, as of May 22, 2006. In addition, Goldman's commitments and conditions discussed in this order. The conversion of Goldman Bank into a bank for purposes of Board's approval also is subject to all the conditions set the BHC Act will enhance the ability of Goldman Bank to forth in Regulation Y and to the Board's authority to meet the convenience and needs of its communities by require such modification or termination of the nonbanking permitting the bank to offer a wider array of deposit activities of a bank holding company or any of its subsid products. iaries as the Board finds necessary to ensure compliance Based on a review of the entire record, and for the with, and to prevent evasion of, the provisions of the BHC reasons discussed above, the Board has concluded that Act and the Board's regulations and orders issued thereun considerations relating to the convenience and needs factor der. These commitments and conditions are deemed to be and the CRA performance records of Goldman Bank are conditions imposed in writing by the Board in connection consistent with approval of the proposal. with its findings and decision and, as such, may be enforced in proceedings under applicable law. Because the proposal does not involve the acquisition, NONBANKING ACTIVITIES AND FINANCIAL merger, or consolidation of a bank, the post-consummation HOLDING COMPANY DECLARATION period in section II of the BHC Act does not apply.14 Goldman engages in a wide range of nonbanking activities Accordingly, the transaction may be consummated imme that have been determined to be financial in nature, inciden diately and may not be consummated later than three tal to a financial activity, or complementary to a financial months after the effective date of this order, unless such activity pursuant to section 4(k) of the BHC Act. These period is extended for good cause by the Board or by the II activities include, among other things, underwriting, deal Federal Reserve Bank of New York, acting pursuant to ing, and making a market in securities; providing financial, delegated authority. investment, or economic advisory services; acting as a By order of the Board of Governors, effective Septem placement agent in the private placement of securities; ber 21,2008. engaging in merchant banking activities; acting as principal Voting for this action: Chairman Bernanke, Vice Chairman Kohn, in foreign exchange and in derivative contracts based on and Governors Warsh, Kroszner, and Duke. financial and nonfinancial assets; and making, acquiring, or brokering loans or other extensions of credit. 12 ROBERT DEY. FRIERSON Goldman expects promptly to file an election to become Deputy Secretary of the Board a financial holding company pursuant to sections 4(k) and (l) of the BHC Act and section 225.82 of the Board's Regulation Y. Section 4 of the BHC Act by its terms Morgan Stanley provides any company that becomes a bank holding com pany two years to conform its nonbanking investments and Morgan Stanley Capital Management LLC activities to the requirements of section 4 of the BHC Act, with the possibility of three one-year extensions.13 Gold Morgan Stanley Domestic Holdings, Inc. man must conform to the BHC Act any impermissible All of New York, New York nonfinancial activities it may conduct within the time requirements of the Act. Order Approving Formation of Bank Holding Goldman has also provided notice of its proposal to Companies and Notice to Engage in Certain retain its foreign bank subsidiaries under section 4(c)(l3) Nonbanking Activities of the BHC Act. Based on the record. the Board has no objection to the retention of such subsidiaries. Morgan Stanley ("Morgan"), Morgan Stanley Capital Man agement LLC, and Morgan Stanley Domestic Holdings, CONCLUSION Inc. (collectively, "Applicants") each has requested the Based on the foregoing, and in light of all the facts of Board's approval under section 3 of the Bank Holding record, the Board has determined that the applications Company Act ("BHC Act") (12 U.S.c. § 1842) to become a under section 3 of the BHC Act should be, and hereby are, bank holding company on conversion of Morgan Stanley approved. In reaching its decision, the Board has consid Bank, Salt Lake City, Utah ("MS Bank"), to a bank. I MS ered all the facts of record in light of the factors that the 14, 12 U.S.c. § 18 49(b)(I). II. See 12 U.S.c. §1843(k). 12. See 12 U.S.c. § 1843(k)(4)(C), (E). and (H); 12 CFR 1. In addition to controlling MS Bank, Morgan also controls 225.28(b)(1) and (b)(8)(ii) and 225.171 et seq. Morgan Stanley Trust National Association, Wilmington, Delaware 13. See 12 U.S.c. § I 843(a)(2). ("MSTNA"). a limited-puI]Jose national bank that engages solely in
CI04 Federal Reserve Bulletin 0 November 2008 Bank currently operates as an industrial loan company that Section 3(b)(I) of the BHC Act6 requires that the Board is exempt from the definition of "bank" under the BHC provide notice of an application under section 3 to the Act.2 Morgan also has provided notice of its proposal to appropriate federal or state supervisory authority for the retain its foreign bank subsidiaries under section 4(c)(l3) bank to be acquired and provide the supervisor a period of of the BHC Act. 3 In addition, as part of its proposal to time (normally 30 days) within which to submit views and become a bank holding company, Morgan has requested the recommendations on the proposal. Section 3(b)(l) also Board's approval under sections 4(c)(8) and 4(i) of the permits the Board to shorten or waive this notice period in BHC Act (12 U.S.c. § I 843(c)(8) and (i» and sec certain circumstances. tion 22S.24 of the Board's Regulation Y (12 CFR 22S.24) The Board has notified the Commissioner of the Utah to retain its voting shares of Morgan Stanley Trust National Department of Financial Institutions ("Commissioner"), Association ("MSTNA") and Morgan Stanley Trust the appropriate state supervisory authority for MS Bank, of ("MST"). the proposed transaction. The Commissioner has notified Morgan, with total consolidated assets of approximately the Board that the Commissioner does not object to $1.0 trillion, engages in investment banking, securities approval of the proposal. underwriting and dealing, asset management, trading, and In light of the unusual and exigent circumstances affect other activities both in the United States and overseas.4 Its ing the financial markets, and all other facts and circum principal subsidiaries include Morgan Stanley & Co., Incor stances, the Board has determined that emergency condi porated, New York, New York, a broker-dealer registered tions exist that justify expeditious action on this proposal. 7 with the Securities and Exchange Commission under the For the same reasons, and in light of the fact that this Securities Exchange Act of 1934 (IS U.S.C. § 78a et seq.). transaction represents the conversion of an existing subsid MS Bank, with total consolidated assets of approxi iary of Applicants from one form of depository institution mately $38.S billion has deposits of approximately $30 bil to another, the Board has waived public notice of the lion. MS Bank engages primarily in financing and lending proposals involving retention of the depository institu activities and taking deposits of the type that are permis tions.s sible for an industrial loan company under the exception in section 2( c )(2)(H) of the BHC Act. MST, with total consoli dated assets of approximately $S.4 billion, has deposits of COMPETITIVE CONSIDERATIONS approximately $4.8 billion. MST engages primarily in Section 3 of the BHC Act prohibits the Board from transfer agency and sub-accounting activities. approving a proposal that would result in a monopoly. The BHC Act also prohibits the Board from approving a FACTORS GOVERNING BOARD REVIEW OF proposed bank acquisition that would substantially lessen TRANSACTION competition in any relevant banking market unless the anticompetitive effects of the proposal are clearly out The BHC Act sets forth the factors that the Board must weighed in the public interest by the probable effect of the consider when reviewing the formation of a bank holding proposal in meeting the convenience and needs of the company or the acquisition of banks. These factors are the community to be served.9 competitive effects of the proposal in the relevant geo The proposal involves the conversion of an existing, graphic markets; the financial and managerial resources wholly owned industrial loan company subsidiary of Mor and future prospects of the companies and banks involved gan into a bank with no resulting change in the ownership in the proposal; the convenience and needs of the commu of Morgan, MS Bank, or any other depository institution nity to be served, including the records of performance controlled by Morgan. In addition, Morgan does not pro under the Community Reinvestment Act (12 U.S.c. § 2901 pose to acquire any additional bank or depository institu et seq.) ("CRA") of the insured depository institutions tion as part of this proposal. Based on all the facts of involved in the transaction; and the availability of informa record, the Board concludes that consummation of the tion needed to determine and enforce compliance with the proposal would not result in any significantly adverse BHC Act and other applicable federal banking laws.s effects on competition or on the concentration of banking resources in any relevant banking market and that the competitive factors under section 3 of the BHC Act are trust or fiduciary activities pursuant to section 2(c)(2)(D) of the BHC consistent with approval of the proposal. The competitive Act (12 U.S.c. § I 841(c)(2)(D», and Morgan Stanley Trust, Jersey City, New Jersey ("MST'), a federal savings association. These effects of the proposed nonbanking activities are discussed subsidiaries are described in the appendix. below. 2. 12 U.S.C § 1841(c)(2)(H). 3. 12 U.S.C § 1843(c)(13). 4. Asset data for Morgan are as of May 31, 2008, and asset and deposit data for MS Bank and MST are as of June 30, 2008. a bank holding company, the provisions of section 3( d) of the BHC Act 5. In cases involving interstate bank acquisitions by bank holding do not apply in this ca~e. companies, the Board also must consider the concentration of deposits 6. 12 U.S.C § 1842(b)(l). in the nation and relevant individual states, as well a~ compliance with 7. See 12 CFR 225.l4(d)(4). the other provisions of section 3(d) of the BHC Act. Because the 8. 12 CFR 225. 16(b)(3). proposed transaction does not involve an interstate bank acquisition by 9. 12 U.S.C. § 1842(c)(l).
Legal Developments: Third Quarter, 2008 ClO5 FINANCIAL, MANAGERIAL, AND OTHER 2006 (the "2006 Examination"). 12 Consistent with the CRA SUPERVISORY CONSIDERATIONS regulations adopted by the federal banking agencies, MS Bank was evaluated under the community development test Section 3 of the BHC Act requires the Board to consider the as a wholesale bank.13 The 2006 Examination indicated financial and managerial resources and future prospects of that MS Bank originated and funded new community the companies and banks involved in the proposal and development loans totaling $7.7 million during the exami certain other supervisory factors. to The Board has carefully nation period (March II, 2003, through January 30, 2006) considered these factors in light of all facts of record, and had more than $14 million in unfunded community including supervisory information received from the rel development loan commitments. The 2006 Examination evant federal and state supervisors of the organizations also determined that MS Bank provided an outstanding involved in the proposal and other available financial level of community development investments. Morgan's information, including information provided by Morgan. conversion of MS Bank to a bank for purposes of the BHC The Board consistently has considered capital adequacy Act purposes also will enhance the ability of the bank to to be an especially important aspect in analyzing financial meet the convenience and needs of its communities by factors. Morgan is adequately capitalized and all the Mor permitting the bank to offer a wider array of deposit gan entities that are subject to regulatory capital require products. ments currently exceed the relevant requirements. In addi Based on a review of the entire record, and for the tion, MS Bank and MST are currently well capitalized reasons discussed above, the Board has concluded that under applicable federal guidelines. MS Bank and MST considerations relating to convenience and needs consider also would be well capitalized on a pro forma basis on ations and the CRA performance record of MS Bank are consummation of the proposal. Other financial factors are consistent with approval of the proposal. consistent with approval. The Board also has carefully considered the managerial NONBANKING ACTIVITIES AND FINANCIAL resources of Morgan in light of all the facts of record, HOLDING COMPANY DECLARATIONS including confidential supervisory information and infor mation provided by Morgan. Based on all the facts of Morgan engages in a wide range of nonbanking activities record, the Board concludes that considerations relating to that have been determined to be financial in nature, inciden the financial and managerial resources and future prospects tal to a financial activity, or complementary to a financial of the organizations involved are consistent with approval, activity pursuant to section 4(k) of the BHC Act. 14 These as are the other supervisory factors under the BHC Act. activities include, among other things, underwriting, deal ing, and making a market in securities; providing financial, investment, or economic advisory services; acting as a placement agent in the private placement of securities; CONVENIENCE AND NEEDS FACTOR engaging in merchant banking activities; acting as principal The Board also has carefully considered the effect of the in foreign exchange and in derivative contracts based on proposal on the convenience and needs of the communities financial and nonfinancial assets; and making, acquiring, or to be served in light of all the facts of record. The Board has brokering loans or other extensions of credit. IS long held that consideration of the convenience and needs Morgan has filed an election to become a financial factor includes a review of the records of the relevant holding company pursuant to sections 4(k) and (I) of the depository institutions under the CRA. As provided in the BHC Act and section 225.82 of the Board's Regulation Y. CRA, the Board evaluates the record of performance of an Section 4 of the BHC Act by its terms also provides any institution in light of examinations by the appropriate company that becomes a bank holding company two years federal supervisors of the CRA performance records of the to conform its existing nonbanking investments and activi relevant institutions. An institution's most recent CRA ties to the requirements of section 4 of the BHC Act, with performance evaluation is a particularly important consid the possibility of three one-year extensions. 16 Morgan must eration in the applications process because it represents a conform to the BHC Act any impermissible nonfinancial detailed, on-site evaluation of the institution'S overall activities it may conduct within the time requirements of record of performance under the CRA by its appropriate the Act. federal supervisor. 11 Morgan also has filed notice under sections 4(c)(8) and MS Bank received an "outstanding" rating under the 40) of the BHC Act to retain its ownership interests in MST CRA at its most recent performance evaluation by the and MS1NA and thereby operate a savings association and Federal Deposit Insurance Corporation, as of January 30, 12, MSTNA is not an insured depository institution, and MST is not subject to the CRA pursuant to regulations issued by the Office of Thrift Supervision, See 12 CFR 563e.I 1( c)(2), 10. 12 U,S.C. § 1842(c)(2) and (3). 13. See. e.g" 12 CFR 228.2l(a)(2). 11, The Interagency Questions and Answers Regarding Community 14. See 12 U,S,c' § 1843(k). Reinvestment provide that a CRA examination is an important and 15. See 12 U.S.c' § 1843(k)(4)(C), (E), and (H); 12 CFR often controlling factor in the consideration of an institution's CRA 225.28(b)(l) and (8)(ii) and 225.171 et seq. record. See 64 Federal Register 23,641 (1999), 16. See 12 U,S,C. § 1843(a)(2).
ClO6 Federal Reserve Bulletin 0 November 2008 engage in trust company activities. The Board determined consider under the standard of section 4(j) of the BHC Act by regulation before November 12, 1999, that such activi is favorable and consistent with approval. ties are so closely related to banking as to be a proper Morgan also has provided notice of its proposal to retain incident thereto for purposes of section 4(c)(8) of the BHC its foreign bank subsidiaries under section 4(c)(l3) of the ActP BHC Act. Based on the record, the Board has no objection To approve the notice, the Board also must determine to the retention of such subsidiaries. that the acquisition of the nonbank subsidiaries and the performance of the proposed nonbanking activities by CONCLUSION Morgan can reasonably be expected to produce benefits to the public that outweigh possible adverse effects, such as Based on the foregoing, the Board has determined that the undue concentration of resources, decreased or unfair applications under section 3 and the notice under sec competition, conflicts of interests, or unsound banking tion 4(c)(8) of the BHC Act should be, and hereby are, practices. IS approved. In reaching its conclusion, the Board has consid The proposed transaction is expected to create a stronger ered all the facts of record in light of the [actors that the and more diversified financial services organization and Board is required to consider under the BHC Act. The would provide the current and future customers of Morgan, Board's approval is specifically conditioned on compliance MST, and MSTNA with improved financial products and by Morgan with all the commitments made in connection services. In addition, there are public benefits to be derived with the applications and notice, including the commit from permitting capital markets to operate so that bank ments and conditions discussed in this order. The Board's holding companies can make potentially profitable invest approval of the non banking aspects of the proposal also is ments in nonbanking companies and from permitting bank subject to all the conditions set forth in Regulation Y and to ing organizations to allocate their resources in the manner the Board's authority to require such modification or they consider to be most efficient when such investments termination of the activities of a bank holding company or and actions are consistent, as in this case, with the relevant any of its subsidiaries as the Board finds necessary to considerations under the BHC Act. ensure compliance with, and to prevent evasion of, the As part of its evaluation of the statutory factors, the provisions of the BHC Act and the Board's regulations and Board considers the financial and managerial resources of orders issued thereunder. These commitments and condi the notificant, its subsidiaries, and any company to be tions are deemed to be conditions imposed in writing by the acquired; the effect the transaction would have on such Board in connection with its findings and decision and, as resources; and the management expertise, internal control such, may be enforced in proceedings under applicable law. and risk-management systems, and capital of the entity Because the proposal does not involve the acquisition, conducting the activity.19 For the reasons discussed above, merger, or consolidation of a bank, the post-consummation and based on all the facts of record, the Board has period in section II of the BHC Act does not apply.20 concluded that financial and managerial considerations are Accordingly, the transaction may be consummated imme consistent with approval of the notice. diately and may not be consummated later than three The Board has carefully considered the competitive months after the effective date of this order, unless such effects of Morgan's proposed retention of MST and MSTNA period is extended for good cause by the Board or by the under section 4 of the BHC Act. The proposal would result Federal Reserve Bank of New York, acting pursuant to in no loss of competition because it does not result in the delegated authority. acquisition of any entity and instead is tantamount to a By order of the Board of Governors, effective Septem corporate reorganization. For these reasons, and based on ber 21,2008. all the facts of record, the Board concludes that consumma Voting for this action: Chairman Bernanke. Vice Chairman Kohn, tion of the proposal would have a de minimis effect on and Governors Warsh, Kroszner, and Duke. competition. The Board also believes that the conduct of the proposed ROBERT DEY. FRIERSON nonbanking activities within the framework established in Deputy Secretary of the Board this order, prior orders, and Regulation Y is not likely to result in adverse effects, such as undue concentration of Appendix resources, decreased or unfair competition, conflicts of interests, or unsound banking practices that would not be outweighed by the public benefits of the proposal, such as NONBANKING SUBSIDIARIES OF MORGAN increased customer convenience. Accordingly, based on all STANLEY the facts of record, the Board has determined that the (l) Morgan Stanley Trust, Jersey City, New Jersey, and balance of public interest factors that the Board must thereby engage in operating a savings association in accordance with section 225.28(b)(4)(ii) of Regula tion Y (12 CFR 225.28(b)(4)(ii)); and 17. See 12 CFR 225.2S(b)(4)(ii) and (5). IS. See 12 U.S.c. § 1843(j)(2)(A). 19. See 12 CPR 225.26. 20. 12 U.S.c. § 1849(b)(l).
Legal Developments: Third Quarter. 2008 CI07 (2) Morgan Stanley Trust National Association, Wilming business of banking in any relevant banking market. The ton, Delaware, and thereby engage in trust company BHC Act also prohibits the Board from approving a functions in accordance with section 22S.2S(b)(S) of proposal that would substantially lessen competition in any Regulation Y (12 CPR 22S.2S(b)(S». relevant banking market, unless the anticompetitive effects of the proposal are clearly outweighed in the public interest Whitney Holding Corporation by the probable effect of the proposal in meeting the convenience and needs of the community to be served.6 New Orleans, Louisiana Whitney and Parish have subsidiary depository institu tions that compete directly in three banking markets: Order Approving the Merger of Bank New Orleans and Tangipahoa, both in Louisiana, and Fort Holding Companies Walton Beach, Florida. The Board has reviewed carefully the competitive effects of the proposal in each of these Whitney Holding Corporation ("Whitney"), a bank holding banking markets in light of all the facts of record. In company within the meaning of the Bank Holding Com particular, the Board has considered the number of competi pany Act ("BHC Act"), has requested the Board's approval tors that would remain in the banking market, the relative under section 3 of the BHC Actl to acquire Parish National shares of total deposits in depository institutions in the Corporation ("Parish"), Covington, and its subsidiary bank, market ("market deposits") controlled by Whitney and Parish National Bank ("Parish Bank"), Bogalusa, both of Parish,? and the concentration level of market deposits and Louisiana.2 the increase in that level as measured by the Herfindahl Notice of the proposal, affording interested persons an Hirschman Index (HHHI") under the Department of Justice opportunity to submit comments, has been published Merger Guidelines ("DOJ Guidelines").8 (73 Federal Register ISO (200S». The time for filing Consummation of the proposal would be consistent with comments has expired, and the Board has considered the Board precedent and within the thresholds in the DOJ application and all comments received in light of the Guidelines in all three banking markets.9 On consumma factors set forth in section 3 of the BHC Act. 3 tion, one banking market would remain unconcentrated, Whitney, with total consolidated assets of $11 billion, and the other two markets would remain moderately con controls one subsidiary bank, WNB, which operates in five centrated. In addition, numerous competitors would remain states.4 Whitney is the fourth largest depository organiza in each of the three banking markets. tion in Louisiana, controlling deposits of approximately The DOJ has conducted a detailed review of the poten $S.7 billion, which represent approximately S percent of tial competitive effects of the proposal and has advised the total deposits of insured depository institutions in the state Board that consummation of the proposal would not likely ("state deposits' V have a significantly adverse effect on competition in any Parish is the eighth largest insured depository organiza relevant banking market. In addition, the appropriate bank tion in Louisiana, controlling deposits of approximately ing agencies have been afforded an opportunity to comment $690 million. Its only subsidiary bank, Parish Bank, oper and have not objected to the proposal. ates in Louisiana and Florida. On consummation of this proposal, Whitney would remain the fourth largest depository organization in Louisi 6. 12 U.S.C. § 1842(c)(I). ana, controlling deposits of approximately $6.3 billion, 7. Deposit and market share data are based on data reported by which represent 8.9 percent of state deposits. insured depository institutions in the summary of deposil~ data as of June 30, 2007, and are based on calculations in which the deposits of thrift institutions are included at 50 percent. The Board previously has indicated that thrift institutions have become. or have the potential to COMPETITIVE CONSIDERATIONS become, significant competitors of commercial banks. See. e.g .. Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989); Section 3 of the BHC Act prohibits the Board from National City Corporation, 70 Federal Reserve Bulletin 743 (1984). approving a proposal that would result in a monopoly or Thus, the Board regularly has included thrift institution deposits in the would be in furtherance of an attempt to monopolize the market share calculation on a 50 percent weighted basis. See, e.g .. First Hawaiian. Inc., 77 Federal Reserve Bulletin 52 (1991). 8. Under the DOJ Guidelines, a market is considered unconcen I. 12 U.S.c. § 1842. trated if the post-merger HHI is under 1000, moderately concentrated 2. Under the proposal. Parish would merge with and into Whitney. if the post-merger HHI is between 1000 and 1800, and highly Immediately thereafter, Whitney would merge Parish Bank with and concentrated if the post-merger HHI exceeds 1800. The Department of into Whitney's subsidiary bank, Whitney National Bank ("WNB"), Justice ("D01") ha<; informed the Board that a bank merger or New Orleans, Louisiana, subject to approval of the Office of the acquisition generally will not be challenged (in the absence of other Comptroller of the Currency ("OCC"). factors indicating anticompetitive effects) unless the post-merger HHI 3. Seven commenters expressed concerns with the proposal. is at least 1800 and the merger increases the HHI more than 200 4. WNB operates branches in Alabama, Florida, Louisiana, Missis points. The DOl has stated that the higher-than-normal HHI thresholds sippi, and Texas. for screening bank mergers and acquisitions for anticompetitive effects 5. Asset data are as of June 30, 2008, and statewide deposit and implicitly recognize the competitive effects of limited-purpose and ranking data are as of June 30, 2007, adjusted to reflect mergers and other nondepository financial entities. acquisitions through September 11, 2008. In this conteKt, insured 9. Those banking markets and the effects of the proposal on the depository institutions include commercial banks, savings banks, and concentration of banking resources therein are described in the savings associations. appendix.
CI08 Federal Reserve Bulletin D November 2008 Based on all the facts of record, the Board concludes that Whitney, Parish, and their subsidiary depository institu consummation of the proposal would not have a signifi tions are considered to be well managed. The Board also cantly adverse effect on competition or on the concentra has considered Whitney's plans for implementing the pro tion of resources in any of the three banking markets where posal, including the proposed management after consum Whitney and Parish compete directly, or in any other mation of the proposal. relevant banking market Accordingly, the Board has deter Based on all the facts of record, the Board has concluded mined that competitive considerations are consistent with that considerations relating to the financial and managerial approval. resources and future prospects of the organizations involved in the proposal are consistent with approval, as are the other supervisory factors under the BHC Act. FINANCIAL, MANAGERIAL, AND SUPERVISORY CONSIDERATIONS CONVENIENCE AND NEEDS CONSIDERATIONS Section 3 of the BHC Act requires the Board to consider the financial and managerial resources and future prospects of In acting on a proposal under section 3 of the BHC Act, the the companies and depository institutions involved in the Board also must consider the effects of the proposal on the proposal and certain other supervisory factors. The Board convenience and needs of the communities to be served and has considered these factors in light of all the facts of take into account the records of the relevant insured record, including confidential reports of examination, other depository institutions under the Community Reinvestment supervisory information from the primary fedeml and state Act ("CRA").ll The CRA requires the federal financial supervisors of the organizations involved in the proposal, supervisory agencies to encourage insured depository insti and publicly reported and other financial information, tutions to help meet the credit needs of the local communi including information provided by Whitney. ties in which they operate, consistent with their safe and In evaluating financial factors in expansion proposals by sound operation, and requires the appropriate federal finan banking organizations, the Board reviews the financial cial supervisory agency to take into account a relevant condition of the organizations involved on both a parent depository institution's record of meeting the credit needs only and consolidated basis, as well as the financial condi of its entire community, including low- and moderate tion of the subsidiary depository institutions and the orga income ("LMI") neighborhoods, in evaluating bank expan nizations' significant nonbanking opemtions. In this sionary proposals.12 evaluation, the Board considers a variety of information, The Board has considered carefully all the facts of including capital adequacy, asset quality, and earnings record, including evaluations of the CRA performance performance. In assessing financial factors, the Board records of the subsidiary depository institutions of Whitney consistently has considered capital adequacy to be espe and Parish, data reported by Whitney and Parish under the cially important. The Board also evaluates the financial Home Mortgage Disclosure Act ("HMDA"),13 other infor· condition of the combined organization at consummation, mation provided by Whitney, confidential supervisory including its capital position, asset quality, and earnings information, and public comments received on the pro prospects, and the impact of the proposed funding of the posal. Seven comment letters were received by the Board. 14 transaction. The commenters generally alleged, based on a national The Board has considered carefully the proposal under organization'S study of 2006 HMDA data reported by the financial factors. Whitney, Parish, and their subsidiary lenders in the city of New Orleans and the New Orleans depository institutions are well capitalized and would Metropolitan Statistical Area ("MSA"), that WNB made an remain so on consummation of the proposal. Based on its insufficient proportion of its prime home purchase loans to review of the record, the Board also finds that Whitney has LMI borrowers and women and African American borrow sufficient financial resources to effect the proposal. The ers in the New Orleans MSA. One commenter asserted that proposed transaction is structured as a combination share WNB needed to increase its small business lending activity exchange and cash purchase. in LMI census tracts in the New Orleans MSA. Several 10 The Board also has considered the managerial resources commenters urged WNB to improve its CRA and fair of the organizations involved and the proposed combined lending records by expanding products and services for organization. The Board has reviewed the examination these borrowers in New Orleans.15 Various commenters records of Whitney, Parish, and their subsidiary depository institutions, including assessments of their management, II. 12 U.S.c. §2901 et seq., 12 U.S.c. § I 842(c)(2). risk-management systems, and operations. In addition, the 12. 12 U.S.c. § 2903. Board has considered its supervisory experiences and those 13. 12 U.S.c. §2801 et seq. of the other relevant banking supervisory agencies with the 14. One comment letter was submitted on behalf of 27 entities. I S. Most of the commenters urged the Board to require Whitney to organizations and their records of compliance with appli commit to increase its lending activity, enter into a eRA agreement, or cable banking law, including anti-money-laundering laws. to take other future actions, including meeting with particular organi· zations. The Board consistently has found that (I) neither the eRA nor the federal supervisory agencies' eRA regulations require depository 10. Whitney proposes to use existing resources and cash dividends institutions to make pledges or enter into commitments or agreements from WNB to fund the purchase. concerning future performance under the eRA with any organization
Legal Developments: Third Quarter, 2008 ClO9 also contended, based on HMDA data, that WNB had an overall excellent level of community development engaged in disparate treatment of minority individuals in its investments given the bank's resources and capacity. home mortgage lending. In Louisiana, examiners characterized Whitney'S lend ing responsiveness to the credit needs of its assessment A. eRA Performance Evaluations areas as excellent, particularly in the New Orleans AA. They concluded that the bank's distribution of home pur As provided in the CRA, the Board has reviewed the chase and home improvement loans by borrower income proposal in light of the evaluations by the appropriate level was good. Examiners noted that WNB's use of federal supervisors of the CRA performance records of the innovative and flexible loan products contributed signifi relevant insured depository institutions. An institution's cantly to the bank's lending performance. Such products most recent CRA performance evaluation is a particularly included its specialized residential loan programs designed important consideration in the applications process because to assist LMI individuals and communities and low-rate it represents a detailed, on-site evaluation of the institu bridge loans for small businesses affected by hurricanes tion's overall record of performance under the CRA by its Katrina and Rita. Examiners particularly commended Whit appropriate federal supervisor.16 ney's level of community development lending in Louisi WNB received an "outstanding" rating at its most recent ana. During the evaluation period, Whitney CDC and WNB CRA performance evaluation by the OCC, as of Febru originated approximately 300 community development ary 7, 2007 ("WNB Evaluation"). 17 Parish Bank received a loans totaling $399.5 million in Louisiana, including "satisfactory" CRA performance rating by the OCC, as of $273 million to address affordable housing needs in the June IS, 2006. Whitney represented that it would continue New Orleans AA. Examiners reported that Whitney's excel its CRA program in the combined organization. lent level of community development lending for afford In the WNB Evaluation, the bank received an "outstand able housing and revitalization of LMI geographies in the ing" rating on each of the lending, investment, and service New Orleans AA particularly benefited low-income areas, tests for its CRA performance overall and in Louisiana.Is neglected neighborhoods, and other areas affected by hurri Examiners noted that WNB was primarily a small business canes Katrina and Rita. Since WNB's last performance lender but had recently increased its volume of home evaluation, Whitney represented that WNB and Whitney mortgage-related lending. Examiners reported that WNB's CDC originated community development loans totaling lending volume was excellent given its size and the compe approximately $27 million to address reconstruction and tition in its primary markets. They also reported that the affordable housing needs in the New Orleans AA. bank's geographic distribution of loans and its distribution In the WNB Evaluation, examiners rated WNB's overall of loans to borrowers of different income levels were good, performance under the investment test as "outstanding" in including in Louisiana and the bank's New Orleans AA. Louisiana and found that the bank's performance in the They also reported that WNB's community development New Orleans AA was excellent. Examiners concluded that lending activity significantly enhanced its overall lending despite the disruption of normal business activities as a test performance. 19 Examiners further noted that WNB had result of Hurricane Katrina, WNB's investments were responsive to the identified needs in the New Orleans AA and in Louisiana in generaL Examiners noted that during or to meet with particular persons or organizations, and (2) the the evaluation period, WNB invested $25 million in a state enforceability of any third-party pledges, initiatives, or agreements is a bond program that provided funds for debt-service pay matter outside the purview of the eRA. See Bank of America Corporation, 90 Federal Reserve Bulletin 217, 232-33 (2004). ments by political subdivisions affected by hurricanes Instead, the Board focuses on the existing CRA performance record of Katrina and Rita while they focused on revitalizing and an applicant and the programs that an applicant has in place to serve stabilizing disaster areas. In addition, WNB directly made the credit needs of its assessment areas at the time the Board reviews a 184 qualified investments totaling $2.3 million in the proposal. 16. See Interagency Questions and Answers Regarding Community New Orleans AA, including approximately $1.8 million in Reinvestment, 66 Federal Register 36,620 and 36,639 (2001). donations to organizations in the New Orleans AA that help 17. The evaluation period for the WNB Evaluation was January I, provide affordable housing and community services to LMI 2003, through December 31, 2006, for the lending test, and January 7, individuals. Since WNB's last performance evaluation, 2003, through February 7, 2007, for the investment and service tests. Whitney represented that WNB directly or indirectly made Examiners stated that more weight was placed on the 2004-2006 evaluation period. except in tbe bank's New Orleans assessment area approximately $96 million in community development ("AA"), where slightly more weight was placed on WNB's perfor investments, including a $6.5 million investment to rebuild mance in 2004--2005 because the effects of Hurricane Katrina made it a school in New Orleans and various other projects in the difficult to realistically assess performance for 2006. The bank's New Orleans AA. New Orleans AA included seven parishes in the New Orleans Metairie-Kenner MSA. Examiners rated WNB's overall performance under the 18. WNB's statewide rating for Louisiana was based primarily on a service test in Louisiana as "outstanding" and found that full-scope evaluation conducted in the bank's New Orleans AA, the the bank's performance in the New Orleans AA was bank's primary market in Louisiana. Tbe New Orleans AA represented approximately 45 percent of the bank's branch network and 70 percent of its deposit base in Louisiana. 19. Whitney conducts community development lending through ("Whitney CDC"), whose lending efforts were included by examiners WNB and through its own Community Development Corporation in the most recent performance evaluation.
C llO Federal Reserve Bulletin 0 November 2008 excellent. Examiners reported that WNB's branches and consumer protection laws and regulations. Whitney repre other service-delivery systems were readily accessible to sented that it has corporate-wide policies and procedures to geographies and individuals of different income levels. In help ensure compliance with all fair lending laws appli addition, examiners noted that WNB had a highly effective cable to its lending activities. Whitney's compliance pro program for providing a high level of community develop gram includes annual training and testing of lending per ment services, particularly in the New Orleans AA. sonnel, fair lending analyses, and oversight and monitoring of lending functions. Whitney represented that WNB uses a B. HMDA and Fair Lending Record centralized underwriting process for all residential mort gage loans and that the bank performs secondary and in The Board has carefully considered the fair lending records some cases tertiary post-denial reviews on all denied and HMDA data of Whitney and Parish in light of public HMDA-reportable loans to ensure that it does not overlook comments received on the proposal. As previously stated, any factors in analyzing a mortgage loan application and to various commenters alleged, based on 2006 HMDA data, detennine whether an applicant qualifies for any other that WNB made a disproportionately low number of available program. In addition, Whitney represented that it HMDA-reportable prime home purchase loans to minority performs a semiannual analysis of denied HMDA applicants in WNB's New Orleans AA. The Board has reportable loans, which includes a comparative file review focused its analysis on the 2007 HMDA data reported by of all such denials, a review of the terms offered to the WNB.20 customers, and further data analysis to verify equivalent Although the HMDA data might reflect certain dispari treatment of similarly qualified applicants. Whitney repre ties in the rates of loan applications, originations, and sented that its fair lending policies will apply to the denials among members of different racial or ethnic groups combined institution on consummation of the proposaL in certain local areas, they provide an insufficient basis by The Board also has considered the HMDA data in light of themselves on which to conclude whether or not Whitney is other information, including the programs described above excluding or imposing higher costs on any group on a and the overall performance record of WNB under the prohibited basis. The Board recognizes that HMDA data CRA. These established efforts and record of performance alone, even with the recent addition of pricing information, demonstrate that the institution is active in helping to meet provide only limited information about the covered 10ans.21 the credit needs of its entire communities. HMDA data, therefore, have limitations that make them an inadequate basis, absent other information, for concluding C. Conclusion on Convenience and Needs and that an institution has engaged in illegal lending discrimi CRA Performance nation. The Board is nevertheless concerned when HMDA data The Board has considered carefully all the facts of record, for an institution indicate disparities in lending and believes including reports of examination of the CRA records of the that all lending institutions are obligated to ensure that their institutions involved, information provided by Whitney, lending practices are based on criteria that ensure not only comments received on the proposal, and confidential super safe and sound lending but also equal access to credit by visory information. The record indicates that consumma creditworthy applicants regardless of their race or ethnicity. tion of the proposal would result in benefits to consumers Because of the limitations of HMDA data, the Board has currently served by Parish by allowing Whitney to offer a considered these data carefully and taken into account other wider array of banking products and services to Parish information, including examination reports that provide customers. Whitney represented that the proposal would on-site evaluations of compliance with fair lending laws by result in greater convenience for Parish customers through Whitney and its subsidiary. The Board also has consulted 24-hour automated account information, toll-free customer with the OCC about WNB's record of fair lending compli service, an expanded ATM network, and online access to ance. information and services through WNB's website. Based The record of this application, including confidential on a review of the entire record, and for the reasons supervisory information, indicates that Whitney has taken discussed above, the Board concludes that considerations steps to ensure compliance with fair lending and other relating to the convenience and needs factor and the CRA performance record of the relevant insured depository institutions are consistent with approval of the proposal. 20. The Board reviewed HMDA data reported by WNB in its New Orleans AA and its assessment areas in Alabama, Florida, CONCLUSION Louisiana, Mississippi, and Texas. 21. The data, for example, do not account for the possibility that an Based on the foregoing and all the facts of record, the institution's outreach efforts may attract a larger proportion of margin ally qualified applicants than other institutions attract and do not Board has determined that the application should be, and provide a basis for an independent assessment of whether an applicant hereby is, approved. In reaching its conclusion, the Board who was denied credit was, in fact, creditworthy. In addition, credit has considered all the facts of record in light of the factors history problems, excessive debt levels relative to income, and high that it is required to consider under the BHC Act and other loan amounts relative to the value of the real estate collateral (reasons applicable statutes. The Board's approval is specifically most frequently cited for a credit denial or higher credit cost) are not available from HMDA data. conditioned on compliance by Whitney with the conditions
Legal Developments: Third Quarter, 2008 Clli imposed in this order and the commitments made to the the Board or the Reserve Bank of Atlanta, acting pursuant Board in connection with the application. For purposes of to delegated authority. this action, the conditions and commitments are deemed to By order of the Board of Governors, effective Septem be conditions imposed in writing by the Board in connec ber 25, 2008. tion with its findings and decision herein and, as such, may be enforced in proceedings under applicable law. Voting for this action: Chainnan Bernanke, Vice Chairman Kohn, The proposed transaction may not be consummated and Governors Warsh, Kroszner, and Duke. before the 15th calendar day after the effective date of this order, or later than three months after the effective date of ROBERT DEY. FRIERSON this order, unless such period is extended for good cause by Deputy Secretary of the Board Appendix BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO] GUIDEUNES Market Amount Remaining Change in Bank Rank of deposits number of HHI (dollars) competitors LOUISIANA BANKING MARKET New Orleans-Jefferson, Orleans, Plaquemines, St. Bernard, St. Charles, St. John the Baptist, and St. Tammany Parishes and St. James Parish, excluding the town of Union Whitney Pre-consummation ............ 3 4,233,690 11.29 1,764 56 39 Parish ........................................ 9 473,620 2.20 1,764 56 39 Whitney Post-consummation ........... 3 4,707,310 13.50 1,764 56 39 Tangipahoa-Tangipahoa Parish, excluding the city of Kentwood Whitney Pre-consummation ............ 15 0 .00 1,457 01 14 Parish ........................................ 5 78,381 6.38 1,457 01 14 Whitney Post-consummation ........... 5 78,381 6.38 1,457 01 14 FLORIDA BANKING MARKET Fort Walton Beach-Okaloosa and Walton counties and the town of Ponce de Leon in Holmes County Whitney Pre-consummation ............ 7 243,946 6.51 753 5 23 Parish ........................................ 20 13,133 .35 753 5 23 Whitney Post-consummation ........... 6 257,079 6.85 753 5 23 NOTE: Data are as of June 30, 2007. All deposit amounts are unweighted. All 1. No deposit data are available for WNB's brancn in this market because it rankings, market deposit snares, and HHIs are based on thrift institution depos· is a de novo branch that opened in 2008. its weighted at 50 percent.
C 112 Federal Reserve Bulletin 0 November 2008 ORDERS ISSUED UNDER Board determines that the applicant bank is subject to a supervisory framework that is consistent with the activities INTERNATIONAL BANKING ACT of the proposed representative office, taking into account the nature of such activities.7 This is a lesser standard than Andhra Bank the comprehensive, consolidated supervision standard ap plicable to applications to establish branch or agency Hyderabad, India offices of a foreign bank. The Board considers the lesser standard sufficient for approval of representative office Order Approving Establishment of a applications because representative offices may not engage Representative Office in banking activities.s The Board also considers additional standards set forth in the rnA and Regulation K.9 Andhra Bank, Hyderabad, India ("Bank"), a foreign bank As noted above, Bank engages directly in the business of within the meaning of the International Banking Act banking outside the United States. Bank also has provided ("rnA"), has applied under section lO(a) of the mAl to the Board with information necessary to assess the applica establish a representative office in Jersey City, New Jersey. tion through submissions that address the relevant issues. The Foreign Bank Supervision Enhancement Act of 1991, At the proposed representative office, Bank may engage which amended the rnA, provides that a foreign bank must only in activities permissible for a representative office obtain the approval of the Board to establish a representa under Regulation K, which include the proposed customer tive office in the United States. liaison, marketing, and research activities noted above.lO Notice of the application, affording interested persons an With respect to supervision by home-country authorities, opportunity to submit comments, has been published in a the Board has considered that Bank is supervised by the newspaper of general circulation in New Jersey (The Reserve Bank of India ("RBI"), the primary regulator of Star-Ledger, July 24, 2007). The time for filing comments financial institutions in India. The Board previously has has expired, and all comments received have been consid considered, in connection with applications involving other ered. Indian banks, the supervisory regime in India for financial Bank, with total consolidated assets of approximately institutions,1I Bank is supervised by the RBI on substan $14.2 billion,2 is the 21st largest bank in India. The tially the same terms and conditions as those other banks. Government of India owns approximately 52 percent of Based on all the facts of record, it has been determined that Bank's shares.3 The remaining shares are held widely by Bank is subject to a supervisory framework that is consis individuals and institutional investors.4 Bank currently has tent with the activities of the proposed representative office, operations primarily in India, where it provides commercial taking into account the nature of such activities. and retail banking services and investment banking ser The additional standards set forth in section 7 of the IBA vices throughout the country. Bank also operates a repre and Regulation K have also been taken into account. 12 With sentative office in the United Arab Emirates. The proposed representative office would market products of Bank in the United States, act as a liaison between Bank's head office in 7, 12 CFR 211.24(d)(2). India and its prospective U.S.-based customers, and con 8. A representative office may engage in representational and duct research. administrative functions in connection with the banking activities of the foreign bank, including soliciting new business for the foreign In acting on a foreign bank's application under the rnA bank; conducting research; acting as a liaison between the foreign and Regulation K to establish a representative office, the bank's head office and customers in the United States; performing Board shall take into account whether the foreign bank preliminary and servicing steps in connection with lending; and engages directly in the business of banking outside of the performing back-office functions, A representative office may not contract for any deposit or deposit-like liability, lend money, or engage United States and has furnished to the Board the informa in any other banking activity (12 CPR 211.24(d)(l)). tion it needs to assess the application adequately.s The 9. See 12 U.S,c. §3105(d)(3}-(4); 12 CPR 211.24(c)(2). These Board shall also take into account whether the foreign bank standards include (I) whether the bank's home-country supervisor has is subject to comprehensive supervision on a consolidated consented to the establishment of the office; the financial and manage basis by its home-country supervisor.6 Under Regulation K, rial resources of the bank; (2) whether the bank has procedures to combat money laundering, whether there is a legal regime in place in a representative-office application may be approved if the the home country to address money laundering, and whether the home country is participating in multilateral efforts to combat money laundering; (3) whether the appropriate supervisors in the home I. 12 U,S,C, §3107(a), country may share information on the bank's operations witb the 2, Data are as of March 31, 2008, Board; and (4) whether the bank and its U.S, affiliates are in 3, The President of India, acting through the Ministry of Finance, compliance with U,S, law; the needs oftbe community; and the bank's holds these shares on behalf of the government of India, record of operation, 4, Life Insurance Corporation of India owns 7.5 percent, and 10, See supra note 7, Genesis Indian Investment Co, Limited owns 5.7 percent. No share II. See State Bank of India. 94 Federal Reserve Bulletin C69 holder of the bank, other than the government of India, by law is (2008) and see IC/C/ Bank Limited, 94 Federal Reserve Bulletin C26 entitled to exercise voting rights in excess of I percent of the total (2008), In connection with each of tbese applications, the Board voting rights of all the shareholders of the bank, determined that the RBI is actively working to establish arrangements 5. 12 U,S,c. §3107(a)(2), for the consolidated supervision of the particular bank. 6.ld, 12, See supra note 8,
Legal Developments: Third Quarter, 2008 e1l3 respect to the financial and managerial resources of Bank, With respect to access to information about Bank's taking into consideration its record of operation in its home operations, the Board has reviewed the restrictions on country, its overall financial resources, and its standing disclosure in relevant jurisdictions in which Bank operates with its home-country supervisor, financial and managerial and has communicated with relevant government authori factors are consistent with approval. Bank appears to have ties regarding access to information. Bank has committed the experience and capacity to support the proposal and has to make available to the Board such information on its established controls and procedures for the proposed repre operations and any of its affiliates that the Board deems sentative office to ensure compliance with U.S. law and for necessary to determine and enforce compliance with the its operations in general. The RBI has no objection to the IBA, the Bank Holding Company Act, and other applicable establishment of the proposed representative office. federal law. To the extent that the provision of such In recent years, the Indian government has enhanced its information to the Board may be prohibited by law or anti-money-laundering regime. In January 2003, India took otherwise, Bank has committed to cooperate with the initial steps to adopt an anti-money-laundering law, the Board to obtain any necessary consents or waivers that Prevention of Money Laundering Act. The law, related might be required from third parties for disclosure of such amendments, and implementing rules (collectively, the information. In addition, subject to certain conditions, the "PMLA") became effective in July 2005 and established a RBI may share information on Bank's operations with regulatory infrastructure to assist the anti-money other supervisors, including the Board. In light of these laundering effort. In accordance with the PMLA, India has commitments and other facts of record, and subject to the established the Financial Intelligence Unit, India ("FlU condition described below, it has been determined that IND"), which reports directly to the Economic Intelligence Bank has provided adequate assurances of access to any Council headed by the Finance Minister of India. The necessary information that the Board may request. FlU-IND is responsible for receiving, processing, analyz Based on the foregoing and all the facts of record, and ing, and disseminating information related to cash and subject to the commitments made by Bank and the terms suspicious transaction reports. The Directorate of Enforce and conditions set forth in this order, Bank's application to ment, a department within the Ministry of Finance, is establish the representative office is hereby approved.14 responsible for investigating and prosecuting money laun Should any restrictions on access to information on the dering cases. In addition, the RBI issued "Know Your operations or activities of Bank and its affiliates subse Customer (KYC) Guidelines Anti-Money Launder quently interfere with the Board's ability to obtain informa ing Standards" ("Guidelines") in November 2004, which tion to determine and enforce compliance by Bank or its require financial institutions to establish systems for the affiliates with applicable federal statutes, the Board may prevention of money laundering. Indian banks were re require termination of any of Bank's direct or indirect quired to be fully compliant with the Guidelines by Decem activities in the United States. Approval of this application ber 31, 2005. The RBI issued further guidelines in February also is specifically conditioned on compliance by Bank 2006 providing clarification on reporting cash and suspi with the conditions imposed in this order and the commit cious transactions to the FlU-IND. India participates in ments made to the Board in connection with this applica international fora that address the prevention of money tion.IS For purposes of this action, these commitments and laundering and terrorist financing. conditions are deemed to be conditions imposed by the India is a member of the AsialPacific Group on Money Board in writing in connection with these findings and Laundering, an observer organization to the Financial decision and, as such, may be enforced in proceedings Action Task Force ("FATF'), and is actively seeking to join under applicable law. FATF as a member.13 India is a party to the 1988 U.N. By order, approved pursuant to authority delegated by Convention Against Illicit Traffic in Narcotic Drugs and the Board, effective July 23, 2008. Psychotropic Substances and the U.N. International Con vention for the Suppression of the Financing of Terrorism. ROBERT DEY. FRIERSON Bank has policies and procedures to comply with Indian Deputy Secretary of the Board laws and regulations and the RBI's Guidelines regarding anti-money laundering. Bank has represented that it will 14. Approved by the Director of the Division of Banking Supervi adopt a compliance program for the proposed representa sion and Regulation, with the concurrence of the General Counsel, tive office to establish and maintain procedures to monitor pursuant to authority delegated by the Board. See 12 CFR 265.7(d)(12). 15. The Board's authority to approve the establishment of the compliance with the Bank Secrecy Act and its implement proposed representative office parallels the continuing authority of the ing regulations. state of New Jersey to license offices of a foreign bank. The Board's approval of this application does not supplant the authority of the state of New Jersey or its agent. the New Jersey Department of Banking and Insurance, to license the proposed office of Bank in accordance with 13. India became an observer to FATF in February 2007. any terms or conditions that it may impose.
Cl14 Federal Reserve Bulletin 0 November 2008 Industrial and Commercial ICBC engages primarily in corporate and retail banking Bank of China, Limited and treasury operations throughout China, including Hong Kong and Macau. Outside China, ICBC operates subsidiary Beijing, People's Republic of China banks in Almaty, Jakarta, London, Luxembourg, and Mos cow and branches in a number of countries, including Order Approving Establishment of a Branch Japan, Indonesia, Korea, Germany, and the United King dom. In the United States, ICBC operates a representative Industrial and Commercial Bank of China Limited office in New York. ICBC would meet the requirements for ("ICBC"), Beijing, People's Republic of China, a foreign a qualifying foreign banking organization under Regula bank within the meaning of the International Banking Act tion K.5 ("IBA"), has applied under section 7(d) of the IBAl to The proposed New York branch would engage in whole establish a branch in New York, New York. The Foreign sale deposit-taking, lending, trade finance, and other bank Bank Supervision Enhancement Act of 1991, which ing services. amended the IBA, provides that a foreign bank must obtain Under the IBA and Regulation K, in acting on an the approval of the Board to establish a branch in the application by a foreign bank to establish a branch, the United States. Board must consider whether (1) the foreign bank engages Notice of the application, affording interested persons an directly in the business of banking outside the United opportunity to comment, has been published in a newspa States; (2) has furnished to the Board the information it per of general circulation in New York, New York (The needs to assess the application adequately; and (3) is New York Times, April 11, 2007). The time for filing subject to comprehensive supervision on a consolidated comments has expired, and the Board has considered all basis by its home-country supervisors.6 The Board also comments received. considers additional standards as set forth in the IBA and ICBC, with total assets of approximately $1.3 trillion, is Regulation K.7 the largest bank in China.2 The government of China owns The IBA includes a limited exception to the general approximately 74.8 percent of ICBC's shares.3 No other standard relating to comprehensive, consolidated supervi shareholder owns more than 5 percent of ICBC's shares.4 sion.8 This exception provides that, if the Board is unable to find that a foreign bank seeking to establish a branch, agency, or commercial lending company is subject to comprehensive supervision or regulation on a consolidated 1. 12 U.S.c. §3105(d). 2, Asset and ranking data are as of March 31, 2008. basis by the appropriate authorities in its home country, the 3. The government of China directly owns approximately 35.3 per Board may nevertheless approve the application provided cent of lCBC's shares through its Ministry of Finance, Central SAFE that (i) the appropriate authorities in the home country of Investments Limited (also known as "Huijin") and the Social Security the foreign bank are actively working to establish arrange Fund of the People's Republic of China hold approximately 35,3 and ments for the consolidated supervision of such bank; and 4.2 percent of ICBC's shares respectively, Huijin is currently owned directly by the government of China and was fonned to assist in the (ii) all other factors are consistent with approval.9 In restructuring of major Chinese banks. The government transferred deciding whether to exercise its discretion to approve an shares of several Chinese banks, including ICBC, to Huijin at the time application under authority of this exception, the Board of the recapitalization and restructuring of these banks between 2004 must also consider whether the foreign bank has adopted and 2006, In addition to its interest in ICBC, Huijin also owns a majority interest in Bank of China Limited, which operates three and implemented procedures to combat money launder branches in the United States. The government of China intends to ing.lO The Board also may take into account whether the transfer the ownership of Huijin to China Investment Corporation home country of the foreign bank is developing a legal ("CIC"), a recently created investment fund that is also wholly owned by the government of China. Under the lBA, any company that owns a foreign bank with a 5. 12 CPR 211.23(a). branch in the United States is subject to the Bank Holding Company 6. 12 U.S.c. §3105(d)(2); 12 CFR 211.24. In assessing this stan Act ("BHC Act") as if it were a bank holding company. As a result of dard, the Board considers, among other indicia of comprehensive, its ownership of Bank of China Limited, Huijin is subject to the BHC consolidated supervision, the extent to which the home-country super Act. Upon the transfer of Huijin to CIC, CIC would also become visors (i) ensure that the bank has adequate procedures for monitoring subject to the BHC Act. and controlling its activities worldwide; (ii) obtain infonnation on the Both CIC and Huijin are non-operating companies that hold condition of the bank and its subsidiaries and offices through regular investments on behalf of the government of China. Neither CIC nor examination reports, audit reports, or otherwise; (iii) obtain informa Huijin engages directly in commercial or financial activities. By letter tion on the dealings with and relationship between the bank and its of August 5, 2008, the Board provided certain exemptions to CIC and affiliates, both foreign and domestic; (iv) receive from the bank Huijin under section 4(c)(9) of the BHC Act (12 U.S.C. § 1843(c)(9». financial reports that are consolidated on a worldwide basis or Section 4(c)(9) authorizes the Board to grant exemptions to foreign comparable infonnation that permits analysis of the bank's financial companies from the nonbanking restrictions of the BHC Act where the condition on a worldwide consolidated basis; and (v) evaluate pruden exemptions would not be substantially at variance with the purposes of tial standards, such as capital adequacy and risk asset exposure, on a the BHC Act and would be in the public interest. The exemptions worldwide basis. No single factor is essential, and other elements may provided to CIC and Huijin would not extend to ICBC or any other infonn the Board's determination. banking subsidiary of elC or Huijin that operates a branch or agency 7. 12 U.S.C. §3105(d)(3)-(4); 12 CPR 211.24(c)(2)-(3). in the United States. 8. 12 U.S.C. § 3 !05(d)(6). 4. Goldman Sachs and American Express own 4.9 percent and less 9. 12 U.S.C. § 3105(d)(6)(A). than I percent of ICBC's shares respectively. 10. 12 U.S.C. § 3105(d)(6)(B).
Legal Developments: Third Quarter, 2008 Cll5 regime to address money laundering or is participating in listings on the Shanghai and Hong Kong stock exchanges, multilateral efforts to combat money laundering. 11 This is ICBC is required to have external audits conducted under the standard applied by the Board in this case. both International Financial Reporting Standards and gen As noted above, ICBC engages directly in the business erally accepted accounting practices under Chinese law. of banking outside the United States. ICBC also has ICBC is required to publish its financial statements annu provided the Board with information necessary to assess ally. ICBC conducts internal audits of its offices and the application through submissions that address the rel operations, including its overseas operations, generally evant issues. based on an annual schedule. The internal audit results are Based on all the facts of record, the Board has deter shared with the CBRC, the PBOC, and the external auditors mined that ICBe's home-country supervisory authority is of ICBe. The proposed branch would be subject to internal actively working to establish arrangements for the consoli audits. dated supervision of the bank and that considerations Chinese laws impose various prudential limitations on relating to the steps taken by ICBC and its home jurisdic banks, including limits on transactions with affiliates and tion to combat money laundering are consistent with large exposures. The CBRC is authorized to require any approval under this standard. The China Banking Regula bank to provide information and to impose sanctions for tory Commission ("CBRC") is the principal supervisory failure to comply. The CBRC also has the power to apply authority of ICBC, including its foreign subsidiaries and administrative penalties, including warnings, fines, and affiliates, for all matters other than laws with respect to removal from office, for violations of applicable laws and anti-money laundering.12 The CBRC has the authority to rules. Criminal violations are transferred to the judicial license banks, regulate their activities, and approve expan authorities for investigation and prosecution. sion, both domestically and abroad. It supervises and In recent years, the Chinese government has enhanced regulates ICBC, including its subsidiaries and foreign its anti-money-Iaundering regime. In 2005, the Chinese operations, through a combination of targeted on-site government took initial steps to adopt an anti-money examinations and continuous consolidated off-site monitor laundering law, the PRC Anti-Money Laundering Law ing. Since its establishment in 2003, the CBRC has ("AML Law"). The AML Law and two related rules, the enhanced existing supervisory programs and developed Rules for Anti-Money Laundering by Financial Institutions new policies and procedures designed to create a frame (HAML Rules") and the Administrative Rules for the work for the consolidated supervision of banks in China. Reporting of Large-Value and Suspicious Transactions by On-site examinations by the CBRC cover, among other Financial Institutions ("LVT/STR Rules") were enacted in things, the major areas of operation: corporate governance October 2006 and December 2006 respectively. The AML and senior management responsibilities; capital adequacy; Law and AML Rules became effective on January 1,2007, asset structure and asset quality (including the structure and and the LVT/STR Rules became effective on March I, quality of loans); off-balance-sheet activities; earnings; 2007. Together, the law and related rules establish a liquidity; liability structure and funding sources; expansion regulatory infrastructure to assist China's anti-money ary plans; internal controls (including accounting control laundering effort. and administrative systems); legal compliance; accounting An Anti-Money Laundering Bureau ("AML Bureau") supervision and internal auditing (including accounting was established within the PBOC in 2003.13 The AML control and administrative systems); and any other areas Bureau coordinates anti-money-laundering efforts at the deemed necessary by the CBRe. PBOC and among other agencies. The AML Bureau also Off-site monitoring is conducted through the review of supervised the creation in September 2004 of the China required annual, semiannual, quarterly, or monthly reports Anti-Money Laundering Monitoring and Analysis Center on, among other things, asset quality, capital adequacy, ("AML Center"). The AML Center collects, monitors, liquidity, risk management, corporate governance, affiliate analyzes, and disseminates suspicious transaction reports transactions, and internal controls. and large-value transaction reports. The AML Center sends ICBC is required to be audited annually by an account suspicious transaction reports to the AML Bureau for ing firm approved by the PBOC, and the results are shared further investigation. The PBOC issued additional rules in with the CBRC and the PBOC. The scope of the required June 2007 providing clarification on reporting suspicious audit includes a review of ICBC's financial statements, transactions to the AML Center and on customer due asset quality, and internal controls. The CBRC may order a diligence and recordkeeping. special audit at any time. In addition, in connection with its China participates in international fora that address the prevention of money laundering and terrorist financing. China is a member of the Financial Action Task Force II. !d. (HFATF")14 and is a party to the 1988 U.N. Convention 12. Before April 2003, the People's Bank of China ("PBOC') acted as both China's central bank and primary banking supervisor, includ ing with respect to anti-money-Iaundering matters. In April 2003, the 13. The AML Bureau conducts administrative investigations and CBRC was established as the primary banking supervisor and assumed handles violations of AML Rules. Money laundering cases are referred the majority of the PBOC's regulatory functions. The PBOC main to the Ministry of Public Security, China's main law enforcement tained its roles as China's central bank and primary supervisor for body, for investigation and prosecution. anti-money-Iaundering matters. 14. China became a member of FATF in June 2007.
Cl16 Federal Reserve Bulletin 0 November 2008 Against the Illicit Traffic of Narcotics and Psychotropic money-laundering policies and procedures at the branch Substances, the U.N. Convention Against Transnational consistent with U.S. law and regulation and will establish Organized Crime, the U.N. Convention Against Corrup an internal control system at the branch consistent with tion, and the U.N. International Convention for the Sup U.S. requirements to ensure compliance with those policies pression of the Financing of Terrorism. and procedures. As noted, the PBOC is China's primary supervisor for With respect to access to information about ICBC's anti-money-laundering matters. Like the CBRC, the PBOC operations, the Board has reviewed the restrictions on supervises and regulates ICBC through a combination of disclosure in relevant jurisdictions in which ICBC operates on-site examinations and off-site monitoring. On-site ex and has communicated with relevant government authori aminations focus on ICBC's compliance with anti-money ties regarding access to information. ICBC has committed laundering laws and rules, including the AML Law, AML to make available to the Board such information on the Rules, and LVT/STR Rules. Off-site monitoring is con operations of ICBC and any of its affiliates that the Board ducted through the review of periodic reports. In perform deems necessary to determine and enforce compliance with ing its responsibilities, the PBOC may require any bank to the IBA, the BHC Act, and other applicable federal law. To provide information and can impose administrative penal the extent that the provision of such information to the ties for violations of applicable laws and rules. Board may be prohibited by law or otherwise, ICBC has ICBC has policies and procedures to comply with committed to cooperate with the Board to obtain any Chinese laws and rules regarding anti-money laundering. necessary consents or waivers that might be required from ICBC represents that it has taken additional steps on its third parties for disclosure of such information. In light of own initiative to combat money laundering and other these commitments and other facts of record, and subject to illegal activities. ICBC states that it has implemented the condition described below, the Board has determined measures consistent with the recommendations of the FATF that ICBC has provided adequate assurances of access to and that it has put in place policies, procedures, and any necessary information that the Board may request controls to ensure ongoing compliance with all statutory On the basis of all the facts of record, and subject to the and regulatory requirements, including designating anti commitments made by ICBC, as well as the terms and money-laundering compliance personnel and conducting conditions set forth in this order, ICBC's application to routine employee training at all ICBC branches. ICBC's establish a branch is hereby approved. Should any restric compliance with anti-money-Iaundering requirements is tions on access to information on the operations or activi monitored by the PBOC and by ICBC's internal and ties of ICBC and its affiliates subsequently interfere with external auditors. the Board's ability to obtain information to determine and The Board also has taken into account the additional enforce compliance by ICBC or its affiliates with appli standards set forth in section 7 of the IBA and Regula cable federal statutes, the Board may require termination of tion K.15 The CBRC has no objection to ICBC's establish any of ICBC's direct or indirect activities in the United ment of the proposed branch. States. Approval of this application also is specifically The Board has also considered carefully the financial conditioned on compliance by ICBC with the commitments and managerial factors in this case. China has adopted made in connection with this application and with the risk-based capital standards that are consistent with those conditions in this order. The commitments and conditions 16 established by the Basel Capital Accord ("Accord"). ICBC's referred to above are conditions imposed in writing by the capital is in excess of the minimum levels that would be Board in connection with this decision and may be enforeed required by the Accord and is considered equivalent to in proceedings under 12 U.S.c. § 1818 against ICBC and capital that would be required of a U.S. banking organiza its affiliates. tion. Managerial and other financial resources of ICBC are By order of the Board of Governors, effective August 5, consistent with approval, and ICBC appears to have the 2008. experience and capacity to support the proposed branch. In addition, ICBC has established controls and procedures for Voting for this action: Chairman Bemanke, Vice Chairman Kohn, and Governors Warsh, Kroszner, and Mishkin. the proposed branch to ensure compliance with U.S. law. In particular, ICBC has stated that it will apply strict anti- ROBERT DEV. FRIERSON Deputy Secretary of the Board 15. See 12 U.S.C. §3105(d)(3)-(4); 12 CFR 211.24(c)(2). The additional standards set forth in section 7 of the (BA and Regulation K include the following (1) whether the bank's home-country supervisor 16. The Board's authority to approve the establishment of the has consented to the establishment of the office; (2) the financial and proposed branch parallels the continuing authority of the state of managerial resources of the bank; (3) whether the appropriate supervi New York to license offices of a foreign bank. The Board's approval of sors in the home country may share information on the bank's this application does not supplant the authority of the state of operations with the Board; and (4) whether the bank and its U.S. New York or its agent. the New York State Banking Department affiliates are in compliance with U.S. law; the needs of the community; ("Department"), to license the proposed office of ICBC in accordance and the bank's record of operation. with any terms or conditions that the Department may impose.
Legal Developments: Third Quarter; 2008 Cl17 International Bank of Azerbaijan the nature of such activities.6 This is a lesser standard than Baku, Azerbaijan the comprehensive, consolidated supervision standard ap plicable to applications to establish branch or agency offices of a foreign bank. The Board considers the lesser Order Approving Establishment of a standard sufficient for approval of representative office Representative Office applications because representative offices may not engage in banking activities.7 International Bank of Azerbaijan ("Bank"), Baku, Azer The Board also considers additional standards set forth baijan, a foreign bank within the meaning of the Interna in the IBA and Regulation K. 8 As noted above, Bank tional Banking Act ("IBA"), has applied under section IO (a) engages directly in the business of banking outside the of the rnA 1 to establish a representative office in New York, United Slales. Bank also has provided the Board with New York. The Foreign Bank Supervision Enhancement information necessary to assess the application through Act of 1991, which amended the IBA, provides that a submissions that address the relevant issues. foreign bank must obtain the approval of the Board to In connection with this application, Bank has provided establish a representative office in the United States. certain commitments that limit the activities of the repre Notice of the application, affording interested persons an sentative office. It has committed that the representative opportunity to submit comments, has been published in a office will engage only in certain specified activities and newspaper of general circulation in New York, New York will not make credit decisions, solicit or accept deposits, (New York Daily News, August 13, 2007). The time for process or initiate transactions on behalf of Bank, or filing comments has expired, and all comments received engage in activities related to securities trading, foreign have been considered. exchange, or money transmission. Bank, with total consolidated assets of approximately As noted above, Bank engages directly in the business of $3.2 billion? is the largest commercial bank in Azerbaijan banking outside the United States. Bank also has provided and provides wholesale and retail banking services through the Board with information necessary to assess the applica a network of domestic branches as well as several foreign tion through submissions that address the relevant issues. offices and subsidiaries.3 With respect to supervision by home-country authorities, The proposed representative office is intended to act as a the Board has considered the following information. Bank liaison between Bank's head office in Azerbaijan, other is supervised by the National Bank of Azerbaijan ("NBA"), U.S. financial institutions, and its existing and prospective which is responsible for the regulation and supervision of customers in Azerbaijan and the United States. The office financial institutions operating in Azerbaijan and is in the would engage in representative functions in connection process of enhancing its supervisory framework. The NBA with the activities of Bank, solicit new business, provide issues rules and implements regulations concerning account information to customers concerning their accounts, pro ing requirements, asset quality, management, operations, mote business investment in and trading opportunities with capital adequacy, loan classification, and loan-loss-reserve Azerbaijan, conduct research, and receive applications for requirements. In addition, the NBA has authority to order extensions of credit and other banking services on behalf of corrective measures, impose sanctions, and assume man Bank. agement of a financial institution or liquidate it. In acting on a foreign bank's application under the IBA The NBA supervises and regulates Bank in Azerbaijan and Regulation K to establish a representative office, the through a combination of on-site examinations and off-site Board shall take into account whether the foreign bank engages directly in the business of banking outside of the United States and has furnished to the Board the informa 6. 12 CFR 211.24(d)(2). tion it needs to assess the application adequately.4 The 7. A representative office may engage in representational ana Board shall also take into account whether the foreign bank administrative functions in connection with the banking activities of the foreign bank, including soliciting new business for the foreign is subject to comprehensive supervision on a consolidated bank; conducting research; acting as a liaison between the foreign basis by its home-country supervisor.5 Under Regulation K, bank's head office and customers in the United States; performing a representative-office application may be approved if the preliminary and servicing steps in connection with lending; and Board determines that the applicant bank is subject to a performing back-office functions. A representative office may not contract for any deposit or deposit-like liability, lend money, or engage supervisory framework that is consistent with the activities in any other banking activity (12 CFR 211.24(d)(l»). of the proposed representative office, taking into account 8. See 12 U.S.c. § 3105(d)(3)-(4); 12 CFR 211.24(c)(2). These standards include (l) whether the bank's home-country supervisor has consented to the establishment of the office; the financial and manage rial resources of the bank; (2) whether the bank has procedures to I. 12 U.S,C. § 31 07(a). combat money laundering, whether there is a legal regime in place in 2. Unless otherwise indicated, data are as of December 31, 2007. the home country to address money laundering. and whether the home 3. Bank is majority owned by the government of Azerbaijan country is participating in multilateral efforts to combat money through its Ministry of Finance and operates as a commercial bank in laundering; (3) whether the appropriate supervisors in the home addition to promoting trade by and with Azeri companies. No other country may share information on the bank's operations with the shareholder owns more than 5 percent of the shares of Bank. Board; and (4) whether the bank and its U.S. affiliates are in 4. 12 U.S.C. § 3107(a)(2). compliance with U.S. law; the needs oflhe community; and the bank's 5. [d. record of operation.
Cl18 Federal Reserve Bulletin 0 November 2008 monitoring. On-site examinations are conducted annually With respect to access to information on Bank's opera and cover capital adequacy, asset quality, profitability, tions, the restrictions on disclosure in relevant jurisdictions liquidity, and compliance with the law. If necessary, the in which Bank operates have been reviewed and relevant NBA can also conduct special on-site examinations. The government authorities have been communicated with NBA conducts off-site monitoring of Bank through the regarding access to information. Bank has committed to review of required biannual reports. An external audit is make available to the Board such information on the also part of the supervisory process and must be conducted operations of Bank and any of its affiliates as the Board at least annually. deems necessary to determine and enforce compliance with Based on all the facts of record, including the commit the IBA, the Bank Holding Company Act of 1956, as ments provided by Bank limiting the activities of the amended, and other applicable federal law. To the extent proposed office, it has been determined that Bank is subject that the provision of such information to the Board may be to a supervisory framework that is consistent with the prohibited by law or otherwise, Bank has committed to activities of the proposed representative office, taking into cooperate with the Board to obtain any necessary consents account the nature of such activities. or waivers that might be required from third parties for The additional standards set forth in section 7 of the IBA disclosure of such information. In addition, subject to and Regulation K have also been taken into account.9 The certain conditions, the NBA may share information on NBA has no objection to the establishment of the proposed Bank's operations with other supervisors, including the representative office. Board. In light of these commitments and other facts of With respect to the financial and managerial resources of record, and subject to the condition described below, it has Bank, taking into consideration its record of operations in been determined that Bank has provided adequate assur its home country, its overall financial resources, and its ances of access to any necessary information that the Board standing with its home-country supervisor, financial and may request. managerial factors are consistent with approval. Bank Based on the foregoing and all the facts of record, and appears to have the experience and capacity to support the subject to the commitments made by Bank and to the terms proposed representative office and has established controls and conditions set forth in this order, Bank's application to and procedures for the proposed representative office to establish the representative office is hereby approved by the ensure compliance with U.S. law. Director of the Division of Banking Supervision and Although Azerbaijan is not a member of the Financial Regulation, with the concurrence of the General Counsel, Action Task Force, it participates in international fora that pursuant to authority delegated by the Board. \3 Should any address the prevention of money laundering.1O Money restrictions on access to information on the operations or laundering is a criminal offense in Azerbaijan, and banks activities of Bank or any of its affiliates subsequently are required to establish internal policies and procedures interfere with the Board's ability to obtain information to for the detection and prevention of money laundering.ll determine and enforce compliance by Bank or its affiliates Legislation and regulations require banks to adopt know with applicable federal statutes, the Board may require or your-customer policies and maintain records.'2 Bank has recommend termination of any of Bank's direct and indi established anti-money-laundering policies and procedures, rect activities in the United States. Approval of this appli which include the implementation of know-your-customer cation also is specifically conditioned on compliance by policies, suspicious activity reporting procedures, and Bank with the conditions imposed in this order and the related training programs and manuals. Bank's internal and commitments made to the Board in connection with this external auditors review compliance with requirements to application.14 For purposes of this action, these commit prevent money laundering. ments and conditions are deemed to be conditions imposed in writing by the Board in connection with its finding and decision and may be enforced in proceedings under 12 U.S.c. § 1818 against Bank and its affiliates. 9. See supra note 8. 10. Azerbaijan is a party to the 1988 UN Convention Against the By order, approved pursuant to authority delegated by Hlicit Traffic of Narcotics and Psychotropic Substances. the UN the Board, effective July 31, 2008. International Convention Against Transnational Organized Crime, the UN International Convention for the Suppression of the Financing of ROBERT DEY. FRIERSON Terrorism, the 2004 UN Convention Against Corruption, and the Deputy Secretary of the Board Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of Proceeds from Crime. Azerbaijan is also a member of the Council of Europe's Select Committee of Experts on the Evalua 13. See 12 CFR 26S.7(d)(l2). tion of Anti-Money Laundering Measures. 14. The Board's authority to approve the establishment of the 1 L Azerbaijan has taken steps to strengthen its anti-money-Iaun proposed representative office parallels the continuing authority of the dering policies and procedures; the Board believes that factors related state of New York to license offices of a foreign bank. The Board's to anti-money laundering are consistent with approval of the applica approval of this application does not supplant the authority of the state tion to establish a representative office. of New York or its agent, the New York State Banking Department, to 12. Bank's internal guidelines require that it report suspicious license the proposed office of Bank in accordance with any terms or transactions. conditions that it may impose.
Legal Developments: Third Quarter, 2008 C119 The Shizuoka Bank, Ltd. permitted under section 44(a)(5) of the Federal Deposit Insurance Act.s These requirements have been met in this Shizuoka, Japan case.6 Under the IBA and Regulation K, in acting on an Order Approving Establishment of a Branch application by a foreign bank to establish a branch, the Board must consider whether the foreign bank (1) engages The Shizuoka Bank, Ltd. ("Bank"), Shizuoka, Japan, a directly in the business of banking outside of the United foreign bank within the meaning of the International Bank· States; (2) has furnished to the Board the information it ing Act ("IDA"), has applied under section 7(d) of the IDA I needs to assess the application adequately; and (3) is to upgrade its existing agency in New York, New York, to a subject to comprehensive supervision on a consolidated branch. The Foreign Bank Supervision Enhancement Act basis by its home-country supervisorJ The Board also of 1991, which amended the IDA, provides that a foreign considers additional standards as set forth in the IDA and bank must obtain the approval of the Board to establish a Regulation K.8 branch in the United States. As noted above, Bank engages directly in the business of Notice of the application, affording interested persons an banking outside the United States. Bank also has provided opportunity to comment, has been published in a newspa the Board with information necessary to assess the applica per of general circulation in New York, New York (The tion through submissions that address the relevant issues. New York Times, November 29, 2007). The time for filing With respect to supervision by home-country authorities, comments has expired, and the Board has considered all the Federal Reserve previously has determined, in connec comments received. tion with applications involving other banks in Japan, that Bank, with total assets of approximately $91.6 billion, is those banks were subject to comprehensive supervision on the 13th largest bank in Japan.2 No shareholder owns more a consolidated basis by their home-country supervisor, than 5 percent of Bank's shares. Japan's Financial Services Agency ("FSA").9 Bank is Bank is a commercial bank and engages primarily in supervised by the FSA on substantially the same terms and retail banking and foreign exchange operations. It also conditions as those other banks. Based on all the facts of engages in other related services through its subsidiaries, record, it has been determined that Bank is subject to including bilI collections, issuance of guarantees, acceptan ces of letters of credit, e·banking services, and securities investments. Outside Japan, Bank operates a subsidiary 5. 12 U.S,C. § 183Iu(a)(5). bank in Belgium, a branch in Hong Kong SAR, People's 6. New York permits a foreign bank to upgrade an ex.isting agency Republic of China, and representative offices in China and to a branch. See NY Banking Law § 202-g, Bank's ex.isting agency in New York was established in June 1989. Singapore. In the United States, Bank operates a branch in 7. 12 U,S,C. § 3105(d)(2); 12 CFR 211.24, In assessing this stan Los Angeles and an agency in New York. Bank is a dard, the Board considers, among other indicia of comprehensive. qualifying foreign banking organization under Regula consolidated supervision, the extent to which the home-country super tion K.3 visors (i) ensure that the bank has adequate procedures for monitoring and controlling its activities worldwide; (ii) obtain information on the Bank's home state is California. Bank proposes to condition of the bank and its subsidiaries and offices through regular establish a branch outside its home state by upgrading its examination reports, audit reports, or otherwise; (iii) obtain informa New York agency to a branch pursuant to section 5(a)(7)(B) tion on the dealings with and relationship between the bank and its of the IDA.4 The proposed branch would continue the affiliates, both foreign and domestic; (iv) receive from the bank business of the New York agency, but the upgrade would financial reports that are consolidated on a worldwide basis or comparable information that permits analysis of the bank's financial also enable Bank to accept at its New York office wholesale condition on a worldwide consolidated basis; and (v) evaluate pruden and other limited deposits from U.S. residents. tial standards. such as capital adequacy and risk asset exposure, on a To approve a proposal to establish a branch in a state worldwide basis, No single factor is essential, and other elements may outside a foreign bank's home state by upgrading an agency inform the Board's determination, 8. 12 U.S,c. § 3105(d)(3)-{4); 12 CFR 211.24(c)(2)-(3), under section 5(a)(7)(B) of the IDA, the Board is required 9. See Mizuho Holdings, Inc., 89 Federal Reserve Bulletin 181 to determine that the establishment of such branch is (2003); Mitsubishi Tokyo Financial Group. lnc., 87 Federal Reserve permitted by the state where the branch is to be established Bulletin 349 (2001); The Fuji Bank, Limited, 85 Federal Reserve and that the agency to be upgraded was in operation in that Bulletin 338 (1999), state (i) prior to September 28, 1994; or (ii) for a period of 10, The additional standards set forth in section 7 of the IBA and Regulation K include the following (I) whether the bank's home time that meets the state's minimum age requirements country supervisor has consented to the establishment of the branch; the financial and managerial resources of the bank; (2) whether the appropriate supervisors in the home country may share information on the bank's operations with the Board; (3) whether the bank and its l. 12 U.S.C. § 3 \05(d). home country have adopted and implemented policies and procedures 2. Asset and ranking data are as of March 31, 2008. to address and combat money laundering; and (4) whether the bank 3. 12 CFR 211.23(a), and its U,S, affiliates are in compliance with U,S, law; the needs of the 4. 12 U.S.c. § 3103(a)(7)(B), community; and the bank's record of operation.
Cl20 Federal Reserve Bulletin 0 November 2008 comprehensive supervision on a consolidated basis by its necessary consents or waivers that might be required from home-country supervisor. third parties for disclosure of such information. In addition, The additional standards set forth in section 7 of the IBA subject to certain conditions, the FSA may share informa and Regulation K have also been taken into account. to The tion on Bank's operations with other supervisors, including FSA has no objection to the establishment of the proposed the Board. In light of these commitments and other facts of agency. record, and subject to the condition described below, it has Japan's risk-based capital standards are consistent with been determined that Bank has provided adequate assur those established by the Basel Capital Accord ("Accord"). ances of access to any necessary information that the Board Bank's capital is in excess of the minimum levels that may request. would be required by the Accord and is considered equiva On the basis of all the facts of record, and subject to the lent to capital that would be required of a U.S. banking commitments made by Bank, as well as the terms and organization. Managerial and other financial resources of conditions set forth in this order, Bank's application to Bank are considered consistent with approval, and Bank establish a branch in New York, New York, is hereby appears to have the experience and capacity to support the approved.lI Should any restrictions on access to informa proposed branch. In addition, Bank has established controls tion on the operations or activities of Bank and its affiliates and procedures for the proposed branch to ensure compli subsequently interfere with the Board's ability to obtain ance with U.S. law and for its operations in general. information to determine and enforce compliance by Bank Japan is a member of the Financial Action Task Force or its affiliates with applicable federal statutes, the Board ("FATF") and subscribes to the FATF's recommendations may require termination of any of Bank's direct or indirect on measures to combat money laundering and terrorist activities in the United States. Approval of this application financing. In accordance with these recommendations, also is specifically conditioned on compliance by Bank Japan has enacted laws and developed regulatory standards with the commitments made in connection with this appli to deter money laundering and terrorist financing. Money cation and with the conditions in this order.12 The commit laundering is a criminal offense in Japan, and Japanese ments and conditions referred to above are conditions financial institutions are required to establish internal poli imposed in writing by the Board in connection with this cies, procedures, and systems for the detection and preven decision and may be enforced in proceedings under appli tion of money laundering and terrorist financing throughout cable law. their worldwide operations. Bank has policies and proce By order, approved pursuant to authority delegated by dures to comply with these laws and regulations that are the Board, effective September 23, 2008. monitored by governmental entities responsible for anti money-laundering compliance. ROBERT DEY. FRIERSON With respect to access to information on Bank's opera Deputy Secretary of the Board tions, the restrictions on disclosure in relevant jurisdictions in which Bank operates have been reviewed and relevant government authorities have been contacted regarding access to information. Bank has committed to make avail II, Approved by the Director of the Division of Banking Supervi sion and Regulation, with the concurrence of the General Counsel, able to the Board such information on the operations of pursuant to authority delegated by the Board, Bank and any of its affiliates that the Board deems neces 12. The Board's authority to approve the establishment of the sary to determine and enforce compliance with the IBA, the proposed branch parallels the continuing authority of the state of Bank Holding Company Act, and other applicable federal New York to license branches of a foreign bank, The Board's approval of this application does not supplant the authority of the state of law. To the extent that the provision of such information to New York or its agent. the New York State Banking Department the Board may be prohibited by law or otherwise, Bank has ("Department"), to license the proposed branch of Bank in accordance committed to cooperate with the Board to obtain any with any terms or conditions that the Department may impose.
Index
Dl Index A Balance sheet developments.......................... .. ... A4--14 ARTICLES Capital ........................................................... Al2 Economic Development Incentives: Research Derivatives and off-balance-sheet items ................... AI3-14 Approaches ........................................... A61-73 Developments in early 2008 ............................... A27-28 Industrial Production and Capacity Utilization: Fair value accounting, new rules ............................... A 11 The 2008 Annual Revision ........................... A41--60 Interest income and expenses .............................. A 15-17 Profits and Balance Sheet Developments at International operations . . . . . . ... . .......................... A26-27 U.S. Commercial Banks in 2007 ....................... AI-39 Liabilities ........................ . ......................... A 10-12 Recent Payment Trends in the United States ............ A75-106 Loans held by small banks, delinquency rates by 2007 HMDA Data, The .................................. A 107-146 geographic region ...................... ........... .. A20-21 Automated clearinghouse payments or returns ... A80-81, A 99-10 I Loans, types and performance . . .. . . . . . . . .. . ... . ......... A 19-26 Avery, Robert B., article .................................... AI07-146 Non-interest income and expenses ......................... Al7-18 Profitability ............... ... . ......... A 15-26 B Securities, holdings of .......................................... AIO Securitiz.ed loans ............................................. , .. A25 BALANCE sheet developments, commercial banks .......... A4--14 Syndicated loans, leveraged, market for ...................... A6--7 Bank Holding Company Act of 1956, orders issued under Commercial real estate loans ................. .............. A 19-22 Allied Irish Banks, p.!.c ..................................... C11-16 Community development Bank of America Corporation .................... C59--60, C81-92 (See Economic development incentives: research C-B-G, Inc ................................................. C99-101 approaches and current views, article) Citigroup, Inc ................................................ C16-20 Corporate income tax, apportionment formulas ........ . .... A 70--71 Citizens Banking Company, The ............................. C 1--4 Credit (See Loans) Fifth Third Bancorp ................................. .. ... C73-7S Fifth Third Financial Corporation .......................... C73-78 D First Citizens Bank Corp ...................................... CI--4 First National Bank Group, Inc ............................. C31-34 DEPOSITORY institutions, payments and withdrawals ..... A87-97 Fortis Bank S.A.IN.V. ..................................... C20--23 Fortis Brussels SAIN.V. .................................. C20-23 E Fortis SAIN.V. ............................................. C20--23 ECONOMIC development incentives: research Fortis, N.V. .................................................. C20--23 approaches and current views, article ................... A61-73 Frandsen Financial Corporation ............................ C34--37 Corporate income tax, apportionment formulas ........... A 70--71 Goldman-Sachs Bank USA Holdings, LLC ............. ClOl-103 Data sources and types ..................................... A63--69 Goldman-Sachs Group, Inc., The....... ....... .. ...... C101-I03 Industrial development projects and sales tax, Texas ..... A66--68 IPMorgan Chase & Co. .. .................................. C78-S1 Electronic and paper check processing ...................... A90--95 M&T Bank Corporation ................................... Cll-16 Electronic payments and trends Midwest Regional Bancorp, Inc. ........................... C9-11 Regional variation .......................................... A97-98 Morgan Stanley .......................................... ClO3-107 Electronic payments, innovations ............................. A82-83 Morgan Stanley Capital Management LLC ............. C103-I07 Morgan Stanley Domestic Holdings, Inc ................ CI03-107 F Royal Bank of Canada ...................................... C4S-51 FEDERAL Reserve Act, orders issued under Royal Bank of Scotland Group pic, The...... . ... C60--67 Rolling Hills Bank & Trust ............................... C93-94 Toronto-Dominion Bank, The .............................. C51-59 FFIEC, HMDA data ........................................ A107-I46 Whitney Holding Corporation ........................... C107-111 Fortis Bank S.AJN.V., financial holding company ........... C20--23 Bank Merger Act of 1960, orders issued under Fortis Brussels S.A.IN.V., financial holding company ....... C20-23 KeyCorp ....................................................... C4--9 Fortis N.Y., financial holding company ....................... C20--23 PNC Bank Delaware ........................................ C38-44 Fortis S.A.IN.Y., financial holding company ....... C20--23 PNC Financial Services Group, Inc., The ................. C38-44 Banking industry, U.S. G Profits and balance sheet developments ..................... A4--26 Bassett, William F., article ..................................... AI-39 GERDES, Geoffrey R., article ...... . .. ..... A75-106 Bayard, Kimberly, article ..................................... A41--60 Gilbert, Charles, article ............ . . ... A4l--60 Brevoort, Kenneth B., article ............................... A107-146 Gorin, Dan, article .................. . ........................ A61-73 C H CANNER, Glenn B., article ................................. A107-46 HOME Mortgage Disclosure Act (HMDA) 2007 data, Capacity utilization (See Industrial production and article .................................................. A 107-146 capacity utilization) Horne Ownership and Equity Protection Act Capital, commercial banks ........................................ A 12 (HOEPA) ....................................... AI 10. A143-146 Cash payments, U.S. . ......................................... AS5-87 Households. loans to ........ . .......................... A8-1O, A22 Check payments, U.S., ........................................ A7S-S0 I Check use in the United States ..................... A 78-80, A90-97 Citigroup, Inc., financial holding company ................... C 16-20 INDUSTRIAL development projects, Texas ......... A66--68 Commercial and industrial (C&I) loans .......................... A19 Industrial production and capacity utilization Commercial banks Appendix tables ............................................. A53--60 Appendix tables ............................................. A29-39 Article, 2008 annual revision .............................. A41--60 Article ........................................................ AI-39 Capacity and capacity utilization ........................... A46-47
D2 Federal Reserve Bulletin u 2008 Industrial production .. ,.",.",."""" .... ,, " .... , ... ,'. A43-46 M Technical aspects of the revision, , ..... " , .. " " .. , .. " .... A48-52 MORTGAGE loans Interest income and expense, commercial banks .... " ....... A 15-J 7 Home Mortgage Disclosure Act (HMDA) International Banking Act, orders issued under 2007 data, article ." ............ , ........ ,., ... "." A107-146 Andhra Bank "" .......................... " .. " ...... " C1l2-113 China Merchants Bank Co., Ltd ....... " " .. ,,"" ... ,. " C24--26 N eBank Corporation" ... , .. , " . , .. " .... " " , ... , .... " ...... C68-69 NON-INTEREST income and expense, commercial ICICI Bank Limited ...... "."" ................. ,,"".. . C26-29 banks ........ " .. " .. "."""" .. ""." ... ""., .... ,,., A 17-18 Industrial and Commercial Bank of China, Noncash payments, other countries .,."."", .. ' ......... " .... ,. A 79 Limited ." ..... " .......... ''',.",,,.,, ... , ........ CII4--116 Noncash payments, United States " .. "."." ... " .... " ..... A 77-85 International Bank of Azerbaijan ........................ C 117-118 KfW IPEX-Bank GmbH ... "" .. ,',.,,, .. ,,,, .......... ,,,. C94--96 P Shizuoka Bank, Ltd., The "." .. " " .. " . " .... " ... " . " C 119-120 SNS Property Finance BY ." .... ' ... , ........ , ... , ........ C96-98 PAYMENT trends, United States, article ... " .. "." ....... A75-106 State Bank of India ... ",,,.,, ... ,, ..... ,,.,.,,,.,",, .. ,'" C69-72 Data sources and estimation methods, appendix . , ... , ' . A I 0 I-I 06 International operations, commercial banks ."." ... "",, ... A26-27 Electronic payments, innovations ., .... , ... ,., .. ,', .. " .... A82-83 Payments, other countries ., ... , .... "',,," ... , ...... " .. ,,,'. A 79 Regional variation" ... "., .... , ........... , ... " .... ".,.,. A97-98 Production (See Industrial production and capacity K utilization) KING, Thomas, article ." ........ ",.",.,'""" .. ",,",, .... A 1-39 Profits and balance sheet developments at U.S. commercial banks in 2007, article""". "" ... AI-39 R L REAL estate loans, commercial " ... ".""' .. "".,, ... " .. A 19-22 LEGAL Developments Recent payment trends in the United States, article ".,' .. , A 75-106 (See also Bank Holding Company Act, orders issued under; Regulations, Board of Governors Federal Reserve Act, orders issued under; International C, Home Mortgage Disclosure Act ... "" ............ ,, A107-146 Banking Act, orders issued under) First quarter, 2008 ".,"'"", .. " ... ,.".,.,,",.,,, .. ,"" C31-72 S Fourth quarter. 2007 .. " .... ".""" ......... " ....... ,, .... CI-30 SALES tax and industrial development projects, Texas ..... A66-68 Second quarter, 2008 ".. " ... " .. " ... ""." ........... " C73-98 Securities, commercial bank holdings of .. "" ........... ,, .. A I 0-12 Third quarter, 2008 ... ,", ....... " ... "."", ... ',, ... ,," C99-120 Liabilities, commercial banks, ....... , ... , ... , ..... , ... " .... , AIO-I2 T Loans Business "., .... ,,,.,, .......... ,.,., .... , .. ,.,,.,,, ....... ,,,. A5-8 TAXES Commercial and industrial ...... " ... " .... "" .. " .... " .. " .. A 19 (See Economic development incentives: research Commercial real estate .".,,, ..... ,,, ...... , .... "".,,"" A 19-22 approaches and current views, article) Household ".... . ....... , .. , ... ,." ... , ......... , .. ",. A8-10, A22 u Loss provisioning" ...... "." .. """,,.,,""""'" A19, A25-26 Securitized '''''''''''''''''''''''''' ... , ...... ", .. ,'" ..... ,,' A25 U.S. commercial banks, article on profits and balance Syndicated." ............ , .. " .... " ... " ......... ,' .. ,,," .... A6-7 sheet developments in 2007 .................... " ........ AI-39
INSPECTOR GENERAL HOTLINE (800) 827-3340 You may use this number to report suspected instances of impropri ety. wrongdoing. fraud. waste. and abuse in programs and opera tions administered or financed by the Federal Reserve Board.
~'_'~""._~~"'_<c""'""'"'''''''''"'''''l!~~'~· __. ..._ _______________________________. ..._ __________. ...... ____. ~ ________
Cite this document
Federal Reserve (2007, December 31). Federal Reserve Bulletin, 2008-01. Bulletin, Federal Reserve. https://whenthefedspeaks.com/doc/bulletin_200801
@misc{wtfs_bulletin_200801,
author = {Federal Reserve},
title = {Federal Reserve Bulletin, 2008-01},
year = {2007},
month = {Dec},
howpublished = {Bulletin, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/bulletin_200801},
note = {Retrieved via When the Fed Speaks corpus}
}