Federal Reserve Bulletin, 2009-01

2009 Compilation Federal Reserve ~"IW:"." B U L L E T I N

The Federal Reserl'e BlIlletin (1 SN 0014-(201) is puolished annually hy the Board of Governors of the Federal Reserve System, Washington, DC 20551, and may be ootained from Publications Fulfillm nt, Mail or SLOp N-127. Board of Governor' the Federal Re erve System, Washington, DC 20551. Call' pertaining to order~ should be directed to Publications Fulfillment (_02) 452-3~45. E-mails should be sent to Puolicalions BOG@Crh.go . The Federal Resen'e BlIlletill may al:o he ohlained hy using thc puhlications order rorm availaole on the Board's website, at wwwJcderalreserve.gnv/puo /order/htm. The price in the United States and its tommonwealth' anu territories, and in Bolivia, anada, Chile, Colombia, Costa Rica, Cuha, Dominican Repuolic, Ecuador, Guatemala, .Haiti. Repuhlic \)1' Honduras, Mexico Nicaragua, Panama, Paraguay. Peru, El Salvador, UrugUllY, and Venezuela is 25.00 pcr copy; elsewhere, $35.00 per copy. Remittance should he made payable tll lhc order of the Board of Governors of the Federal Re rye ySlem in a form c )lIeclihk at par in U.S. currency. The content of the Federal Reserve BlllIelin is al. publj 'heu, as it becomes available. on the B )anJ's wehsile, I) at www.fedcralrc crvc.g v/puhs/hullerin.

Volume 95 0 2009 Compilation Federal Reserve B U L L E T I N Board of Governors of the Federal Reserve System, Washington, D.C.

PUBLICA nONS COMMITTEE Rosanna Pianallo, Chair D Scott G. Alvarez D Sandra F. Braunstein D Elizabeth A. Coleman D Lynn S. Fox D Maureen Hannan D Jennifer J. Johnson D Brian F. Madigan D Stephen R. Malphrus D Patrick M. Parkinson o H. Fay Peters 0 Louise L. Roseman D D. Nathan Sheets 0 Michelle A. Smith D David J. Stockton The Federal Reserve 8"lIeti" Compilation is published annually under the direction of the Federal Reserve Board's Publications Committee. This comminee is responsible for opinions expressed except in official statements and signed anicles. It is assisted by the Publishing & Communications Services Depanment in the Office of Board Members. under the direction of Lucretia M. Boyee

Table of Contents PREFACE ARTICLES Changes in US. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Al Brian K. Bucks, Arthur B. Kennickell, Traci L. Mach, and Kevin B. Moore February 12 Profits and Balance Sheet Developments at US. Commercial Banks in 2008 ........... ..... ... A57 Morten L. Bech and Tara Rice June 2 US. Households' Access to and Use of Electronic Banking, 1989-2007 . . . . . . . . . . . . . . . . . . . . . .. A99 Catherine J. Bell, Jeanne M. Hogarth, and Eric Robbins July 27 Industrial Production and Capacity Utilization: The 2009 Annual Revision .. ....... .. .... ...... A 125 Anne Hall August 13 The Financial Crisis and U.S. Cross-Border Financial Flows ... ... .. .. ...... .... .. .. .... ..... . A 147 Carol C. Bertaut and Laurie Pounder November 18 The 2008 HMDA Data: The Mortgage Market during a Turbulent Year .............. ... .. ..... A 169 Robert B. Avery, Neil Bhutta, Kenneth P. Brevoort, Glenn B. Canner, and Christa N. Gibbs April 2010 (revises 2009 draft release, includes revised data) LEGAL DEVELOPMENTS Fourth Quarter, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B I March 17 First Quarter, 2009 ......................... ... .... ... .. ..... ..... .... ... ........... ... .. B64 June 25 Second Quarter, 2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. B 81 August 19 Third Quarter, 2009 ..... ....... .. ..... ............. .... .. ..... ............ .. ... .. .... .... BIOI November 6 INDEX .. .... .... .. ... .. .... ............... ...... ... .... ... ..... ..... .... .... ... ......... CI

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 2009 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/pubslbulletin Data sources for the tables in the discontinued Statistical Supplement to the Federal Reserve Bulletin: www.federalreserve.gov/pubs/supplementlstatsupdatalstatsupdata.htm Subscribe to e-mail notification service: www.federalreserve.gov/generalinfo/subscribe/notification.htm

Articles

Al February 2009 Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances (Errata paragraph added on March 6, 2009; see p. A56) Brian K. Bucks, Arthur B. Kennickell, Traci L. Mach, 1. Cbange in median and mean incomes, 1998-2007 SCF and Kevin B. Moore, of the Board's Division of Research and Statistics, prepared this article with ---------------------------------Percent assistance from Gerhard Fries, Daniel J. Grodzicki, • Median Mean and Richard A. Windle. 20 The Federal Reserve Board's Survey of Consumer 15 Finances for 2007 provides insights into changes in family income and net worth since the 2004 survey. I \0 The survey shows that, over the 2004-07 period, the median value of real (inflation-adjusted) family in 5 come before taxes was little changed; median income + o had grown slightly in the preceding three-year period (figure 1). Across most demographic groups, the I I I I pattern of change was mixed, but a few changes stand 1998·2001 200\·04 2004-07 out: Income increased markedly for Hispanic or SOURCE: Federal Reserve Board, Survey of Consumer Finances. nonwhite families, while it declined substantially for families living in the Northeast or the Midwest and means within demographic groups that differed sub for families headed by a person who was retired or stantially, either in terms of relative magnitude or in otherwise not working. In contrast to median income, the direction of change. Median and mean net worth mean income in the recent period climbed 8.5 per for the lowest 25 percent of the distribution of net cent, and the increases were spread broadly across worth plunged 36.8 percent and 43.8 percent, respec demographic groups. The increases were most strik tively; median net worth for the lowest 20 percent of ing for families in the top 10 percent of the distribu the distribution of income fell 1.2 percent, but the tion of net worth and for families headed by a single mean rose 31.8 percent. Percentage increases in parent, a person who was self-employed, or a person who was aged 65 to 74. Over the preceding three 2. Change in median and mean net worth, 1998-2007 SCF years, mean income had declined broadly. Differ ences in the rates of change in the median and mean --------------------------------P-ert:CD! signal a change in the distribution of income. • Median Unlike family income over the 2004-07 period, Mean 35 both median and mean net worth increased; the 30 median rose l7.7 percent, and the mean rose 13.0 per 25 cent (figure 2). The increases were fairly broadly spread, but with a number of noteworthy exceptions, 20 some of which entailed changes in medians and 15 \0 I. For a detailed discussion of the 200 I and 2004 surveys as well as references to earlier surveys, see Brian K. Bucks, Arthur B. Kennick 5 ell, and Kevin B. Moore (2006), "Recent Changes in U.S. Family Finances: Evidence from the 200 I and 2004 Survey of Consumer Finances," Federal Reserve Bu lie till , vol. 92, pp. A I-A38, www.federaJreserve.gov/pubslbullelinldefaull.hlm. SOURCE: Federal Reserve Board, Survey of Consumer Finances.

A2 Federal Reserve Bulletin 0 February 2009 median and mean net worth were similar for white year. However, toward the end of 2007, the pace of non-Hispanic families, while the increase in the economic activity slowed noticeably. The unemploy median for nonwhite or Hispanic families was only ment rate stood at 5.5 percent in mid-2004, fell to about one-fifth of that for other families, and the 4.5 percent by late 2006, and then increased to increase in the mean was nearly three times the size 5.0 percent at the end of 2007. The rate of inflation, as of that for other families. Relative to other regions, measured by the consumer price index for all urban both the Northeast and the Midwest saw sizable consumers (CPI-U-RS), increased somewhat over the declines in median net worth. The clearest gains in period, from an annual average of 2.7 percent in 2004 both median and mean net worth were for high-net to 2.9 percent in 2007; the increase was driven, in worth families, high-income families, families headed part, by the escalation of food and energy prices. by a person aged 65 or older, and families headed by a Developments in financial markets over the three person who worked for someone else or who worked year period were varied. The major stock market in a technical, sales, or service occupation. In the indexes climbed over most of the period before preceding three years, median net worth had increased beginning a decline in late 2007; from September only slightly (1.0 percent), while the mean had risen 2004 to September 2007, the Wilshire 5000 index more strongly (6.0 percent); over that time, the data rose 41.7 percent. Interest rates on new consumer had shown a more complex pattern of mixed increases loans generally increased; for example, the interest and decreases in wealth. rate on a new 30-year fixed-rate mortgage averaged Unrealized capital gains were a particularly impor 5.75 percent in September 2004, when about one-half tant factor in the increase in net worth over the of the interviews for the 2004 survey had been 2004-07 period. The share of total assets attributable completed, and was 6.38 percent three years later. to unrealized capital gains from real estate, busi Yields also rose on liquid deposits, time deposits, and nesses, stocks, or mutual funds rose 5.1 percentage bonds; for example, the rate on a three-month certifi points, to 35.8 percent in 2007. Although the level of cate of deposit rose from an average of 1.86 percent debt owed by families rose noticeably, debt as a in September 2004 to 5.46 percent in September percentage of assets was little changed. The largest 2007. percentage change in debt was in borrowing for The national purchase-only LoanPerformance residential real estate other than a primary residence. Home Price Index, produced by First American Core With median and mean debt advancing faster than Logic, increased more than 12.4 percent between income, payments relative to income might be ex September 2004 and September 2007. Price increases pected to increase substantially. In fact, total pay varied sharply across areas of the country. The largest ments relative to total income barely increased, and increase in the index was a 49.9 percent rise for the median of payments relative to income rose at a Hawaii. While most states saw an increase, the index slower pace than it did between 200] and 2004. declined 8.0 percent for Michigan and by smaller Nonetheless, the share of families with high payments amounts for Ohio, Rhode Island, and Massachusetts. relati ve to their incomes increased notably. Homeownership rates were little changed over the This article reviews these and other changes in the financial condition of U.S. families between 2004 and period after a long and steady increase. Nonetheless, 2007.2 The discussion draws on data from the Federal the number of homeowners rose with population Reserve Board's Survey of Consumer Finances (SCF) growth, and subprime mortgages are generally thought for those years; it also uses evidence from earlier to have played an important part in financing home years of the survey to place the 2004-07 changes in a purchases. broader context. No major tax legislation was passed during the period, but other important institutional changes ECONOMIC BACKGROUND occurred. The Bankruptcy Abuse Prevention and Con sumer Protection Act of April 2005 altered the rules Families' finances are affected by both their own for liquidation of consumers' liabilities under bank decisions and the state of the broader economy. Over ruptcy. In particular, the new rules require that con the 2004-07 period, real gross domestic product sumers with a certain level of income pay back at (GOP) increased, on average, about 2.5 percent per least part of their outstanding debts, whereas in the past the entire amount might have been liquidated. 2. See box "The Data Used in This Article" for a general descrip The law also mandated financial counseling for any tion of the data. The appendix to this article provides a summary of one declaring bankruptcy. Continuing innovation in key technical aspects of the survey. See also Bucks, Kennickell, and Moore, "Recent Changes in U.S. Family Finances." financial markets over the period supported further

Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A3 proliferation of hedge funds and other sophisticated three-year period, the median had increased 1.7 per instruments for money management. cent, and the mean had declined 2.3 percent. The Several demographic shifts had important conse changes for both periods stand in much stronger quences for the structure of the population. The aging contrast to a pattern of substantial increases in both of the baby-boom population from 2004 to 2007 the median and the mean dating to the early 1990s. drove a 12.5 percent increase in the population aged Underlying the recent change was a shift in the 55 to 64. Overall population growth was about composition of income between 2004 and 2007 2.9 percent, and, according to figures from the U.S. (table 2). The share of family income attributable to Census Bureau, 37.3 percent of that growth was due wages and salaries fell 5.2 percentage points over the to net immigration. Also according to Census Bureau period, which approximately balanced a 3.5 percent estimates, the number of households increased 2.3 per age point rise in the share of realized capital gains and cent-about the same pace as in the 2001-04 period a 2.7 percentage point increase in income from and the average number of persons per household self-employment, a farm, or a business. These shifts rose slightly, from 2.59 people in 2004 to 2.61 in were seen across all wealth groups except the group 2007. between the 75th and 90th percentiles. As may be Only a small fraction of the 2007 SCF interviews seen across the years shown in the table, wage income took place in 2008. Thus, the survey data are largely tends to be a smaller factor for the highest wealth unaffected by the declines in economic activity in group. 2008, the fall in the market price of corporate equi Some patterns of income distribution hold gener ties, and the continued slide in house prices. Nonethe ally across the years of SCF data shown in table 1.5 less, readers' views of the survey results may be Across age classes, median and mean incomes show a colored by the knowledge that, in the first three life-cycle pattern, rising to a peak in the middle age quarters of 2008, a broad measure of the value of groups and then declining for groups that are older corporate equities declined more than one-third, and and increasingly more likely to be retired. Couples house prices overall declined approximately an addi tend to have higher incomes than single persons, in tional 5 percent. At a few places in the article, an part because couples have more potential wage earn attempt is made to gauge the first-order effects of ers. Income also shows a strong positive association these changes on families' finances. with education; in particular, incomes for families headed by a person who has a college degree are INCOME substantially higher than for those with any lesser amount of schooling. Incomes of white non-Hispanic The change in real before-tax family income between families are substantially higher than those of other 2004 and 2007 diverged from the pattern seen in the families.6 Families headed by a self-employed worker preceding three-year period.3 While median income consistently have the highest median and mean declined slightly over the more recent period, the incomes of all work-status groups. Families headed mean rose 8.5 percent (table 1 ).4 Over the preceding by a person in a managerial or professional 3. To measure income. the interviewers request information on the family's cash income, before taxes, for the full calendar year preced the mean rises 11.0 percent (to $86,900). The substantial difference in ing the survey. The components of income in the SCF are wages; mean levels is likely the result of the truncation of large values in the self-employment and business income; taxable and tax-exempt inter CPS data above a certain amount, which is done with the intent of est; dividends; realized capital gains; food stamps and other, related minimizing the possibility that participants in that survey might be support programs provided by government; pensions and withdrawals identifiable. from retirement accounts; Social Security; alimony and other support 5. Tabular information from the survey beyond that presented in payments; and miscellaneous sources of income for all members of the this article is available at www.federalreserve.gov/pubs/oss/oss2/2007/ primary economic unit in the household. scf2007home.html. This information includes versions of all of the 4. Over the 2004--07 period, estimates of inflation-adjusted house numbered tables in this article, for all of the surveys from 1989 to 2007 hold income for the previous year from the Current Population Survey where the underlying information is available. Mean values for the (CPS) of the Census Bureau show an increase in both the median demographic groups reported in this article are also provided. The (1.4 percent) and the mean (2.7 percent). Typically, the SCF shows a estimates of the means, however, are more likely to be affected by higher level of mean income than does the CPS; for 2007, the SCF sampling error than are the estimates of the medians. In addition, some yields an estimate of $84,300, while the CPS yields an estimate of alternative versions of the tables in this article are given. For those $68,400. As discussed in more detail in the appendix, the two surveys who wish to make further alternative calculations, this website pro differ in their definitions of the units of observation and in other vides a utility ("tabling wizard") that may be used to compute aspects of their methodologies. Most relevant here is the fact that a estimates of customized tables based on the variables analyzed in this CPS household can contain more people than a corresponding SCF article, as well as data files that may be used as inputs to more family. If the SCF measure is expanded to include income of house sophisticated statistical software. hold members nOl included in the SCF definition of a family, the 6. See the appendix for a discussion of racial and ethnic identifica median rises 2.7 percent (to $49.400) over the three-year period, and tion in the SCF.

A4 Federal Reserve Bulletin 0 February 2009 I. Before-tax family income, percentage of families that saved. and di tribulion or families, by selected characteristics of familie', 1998-2007 urveys Thousands of 2007 dollars except as noted 1998 2001 I I I I Family characteristic Income o P f e r f c a e m n i t l a i g e e s Percentage Income o P f e r f c a e m n i t l a i g e e s Percentage Median I Mean I that saved of families Median I Mean I that saved of fanHhes All families ............... 42.6 67.7 55.9 100.0 46.7 79.5 59.2 100.0 (1.0) (1.4) (.9) (2.3) PI!n:entile of income Less than 20 10.5 10.1 32.1 20.0 12.0 11.7 300 20.0 20-39.9 . 25.8 25.7 45.5 20.0 28.5 28.2 53.4 20.0 40-59.9 .... ........... 42.6 43.3 56.1 20.0 46.7 47.1 6U 20.0 60-79.9 .. 67.8 69.1 67.9 20.0 75.8 76.2 72.0 20.0 80-89.9 .. 100.6 101.3 73.7 10.0 115,4 114.7 74.9 10.0 90-100 ",., 166.3 279.5 82.0 10.0 198.3 354.1 84.3 10.0 Age of head (years) Less than 35 .................... 34.9 46.0 53.0 23.3 39.1 51.7 52.9 22.7 . 35-44 . . . . . . . . . . . . . . . . . . . . . 53.6 76.4 57.3 23.3 60.1 90.2 62.3 22.3 45-54. 64.5 88.9 57.8 19.2 63.7 109.0 61.7 20.6 55-64 .. . ............. 49.1 91.4 61.1 12.8 52.9 101.7 62.0 13.2 65-74 .......... ... 31.0 59.5 56.3 11.2 32.5 68.0 61.8 10.7 75 or more ..............~ ........... 21.3 37.2 48.6 10.2 26.2 43.0 55.5 lOA Family slruclllre Single with child(ren) 25.8 33.6 42.1 6.8 28.4 36.1 47.3 6.0 Single, no child, age less than 55 . 29.7 37.6 48.3 20.4 31.5 43.5 52.5 20.4 Single, no ch.ild. age 55 or more 21.0 33.0 47.8 14.3 19.7 37.9 49.4 13.3 Couple with child(ren) . 64.5 85.6 62.1 12.3 66.1 98.6 63.3 11.8 Couple, no child. 61.4 92.0 62.1 46.2 67.1 106.8 65.3 48.5 &/ucarioll of head No high school diploma 19.8 27.6 39.5 16.5 19.8 29.4 38.7 16.0 High school diploma 37.2 47.1 53.7 31.9 39.7 52.4 56.7 31.7 Some college ................. 45.2 64.7 56.7 18.5 47.9 64.9 61.7 18.3 College degree . . . . . . . . . . , . 70.0 109.0 65.6 33.2 79.4 1.l6.4 70.0 34.0 Race or er/llliciT), of responde'" White non-Hispanic . . . . . . . . . . . 48.6 75.4 60.0 76.8 52.9 90.0 63.1 75.4 Nonwhite or Hispanic .. 29.7 42.3 42.3 23.2 30.1 47.6 47.4 24.6 Current work ,wrus of head Working for someone else 51.6 68.2 59.8 59.2 55.3 78.8 61.6 60.9 Self·employed ................ 67.1 139.2 61.1 11.3 74.1 161.8 70.4 11.7 Retired. 24.5 42.0 48.7 24.4 24.6 46.8 50.6 22.9 Other not working 14.8 27.7 33.3 5.1 19.3 42.6 42.3 4.5 Currenr occuparioll of head Managerial or professional ........... 77.5 123.1 68.4 24.2 83.2 146.4 72.4 27.1 Technical, sales. or services 39.1 59.7 55.6 21.0 42.1 62.3 58.2 23.7 Other occupation ........... 47.8 54.2 55.6 25.3 48.1 573 56.6 21.8 Retired or other not working 22.6 39.7 46.1 29.5 24.2 46.1 49.2 27.4 Region Northeast ......................... 45.2 77.6 53.5 19.3 48.3 90.9 58.1 19.0 Midwest 41.9 62.4 58.3 23.6 51.3 75.7 63.0 23.0 South ... ................ 40.2 63.0 55.0 35.7 42.1 71.8 57.3 36.2 West .. . ......................... 46.1 72.7 56.9 21.3 47.6 86.6 59.5 21.8 Url)(micir), Metropolitan s!atistical area (MSA) . 45.2 71.9 56.3 85.3 48.1 84.6 59.7 86.2 Non·MSA .. 35.6 43.2 53.6 14.7 35.4 47.9 563 13.8 Hous;nR slatus Owner ..... 55.7 84.9 62.2 66.2 60.9 99.5 66.7 67.7 Renter or other ...... ............ 25.8 34.0 43.4 33.8 28.9 37.7 43.6 32.3 Pen:enrile of lIer worrh Less than 25 ........ , .... 20.3 25.9 36.3 25.0 23.0 28.1 34.5 25.0 25-49.9 .... 38.7 43.1 50.3 25.0 40.9 46.2 54.2 25.0 50-74.9 .... 51.6 59.6 61.8 25.0 59.8 68.9 68.2 25.0 75-89.9 ........ 72.3 86.0 72.0 15.0 81.4 91.9 77.4 15.0 90-100 ........ . ........... 112.5 226.6 80.0 10.0 147.9 299.5 84.1 10.0 NOTE: For questions on income, respondents were asked to base their an- index for all urban consumers (see box "The Data Used in This Anicle"). See swers on the calendar year preceding the interview. For questions on saving, the appendi, for details on s!'lndard errors (shown in parentheses below the respondents were asked to base their answers on the 12 months preceding the first row of data for the means and medians here and in table 4) and for defini· interview. tions of family and family head. Percentage distributions may not sum to 100 because of rounding. Dollars have been converted to 2007 values with the current-met.hods consumer price

Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances AS I. Before-tax family income. percentage of familie. that saved, and distribution of families, by elected characteristic, of familie . J 998-2007 . urvey - COli till lied Thousands of 2007 dollars except as noted 2004 2007 I I I I Family characteristic Median Inco I m e Mean I ~ P h fe a rfc t e ~ n ~ tT ~ a e g J e o P f e r f c a e m n i t l a i g e e s Median Inco I m e Mean I o P th f e a r f t c a e m s n a i t v l a i e g e d e s o P f e r f c a e m m il a i g e e s All families . ........ -........... 47.5 77.7 56.1 100.0 47.3 84.3 56.5 100.0 (.9) (1.3) (.8) (1.3) Percelllile '!f ill come 2 L 0 es - s 3 9 th .9 a ll . . 2 . 0 . . . " . . . ." . . . . " . . . . . . . . . . . . . . . . . . . . , .... " . . . 2 t2 8 . .2 2 2 1 8 1 . . 6 9 4 3 3 4 . . 3 0 2 2 0 0 . . 0 0 2 1 8 2 . . 8 3 2 1 8 2. . 3 3 3 45 3 . .7 1 2 20 0 . .0 0 6 4 8 9 0 0 0 0 - - - - 7 5 8 1 9 9 9 0 . . . 0 9 9 9 . . . . . . . . . . . .. . . . . . . . ., . . . . . . . . . . . . . . . . . . . ' 1 . . . . .. ' . ' . ' . " '' . . ' . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .. . . . 2 1 0 1 4 7 7 3 5 4 . . . .1 5 0 9 3 1 7 4 3 1 7 6 1 7 . . . . 7 9 0 0 8 5 6 7 9 4 0 7 . . . . 3 5 8 6 2 2 1 1 0 0 0 0 . . . . 0 0 0 0 2 1 4 7 0 1 5 7 6 4 . . . . 1 3 9 0 3 1 7 4 9 1 7 7 6 6 . . . . 6 3 7 0 8 6 7 5 2 6 4 7 . . . . 9 8 8 8 2 2 1 1 0 0 0 0 . . . . 0 0 0 0 A~e of head Iyear.,) L 3 e ~ ss 4 t h . a . n . . 3 . 5 . .. .. . . . . . . . . . . . . .. . ... .. . . . .. .. .. , . . .. . - . . . . . . 5 36 4 . . 1 9 8 4 1 9 . . 1 6 5 5 5 8 . . 0 0 2 2 0 2. .6 2 5 37 6 . .6 4 8 5 3 1. . 7 7 5 58 6. . 4 9 2 1 1 9 . . 7 6 5 4 5 5 - - 6 5 4 4 . . . .. .. . .. . . . .. .. . . . . . . . . . . . . . , . . . . . . .. . . . .. . . . .. . .. . . . . .. . .. . . 5 67 9 . . 1 8 1 1 0 1 3 0 . .2 6 5 5 8 8. . 5 5 2 1 0 5 . . 8 2 5 64 4 . . 2 6 1 11 1 1 2. . 4 2 5 5 5 8. . 4 8 2 1 0 6 . . 8 8 65-74 .. ........ ......... 36.6 65.6 57.1 10.5 39.0 92.4 56.7 10.5 75 or more . ... . ... ,. . . . . . . . " . . . .. 26.0 44.9 45.7 10.7 22.8 45.7 49.4 10.6 Family structure Single with child(rcn) ......... .... .. 31.6 38.t 40.7 7.2 30.9 46.0 45.8 6.4 Single, no child. age less than 55 ..... 30.5 40.8 49.2 20.0 30.9 44.9 50.1 19.3 Single. no child. age 55 or more .... 23.4 37.4 46.0 14.8 24.6 36.3 48.0 15.4 Couple with child(ren) ... ..... ... .. 71.1 99.8 61.6 12.6 67.9 105.4 61.8 12.3 Couple, no child ..... . . . . . . . . . . . . . . . 67.7 107.4 63.3 45.4 66.5 116.2 62.0 46.5 Edllcation of head N 0h"io,h sch ooI dip Io ma ..... ... 21.3 28.5 15.9 14.4 22.2 11.1 41 .6 13.5 High school diploma ... 39.3 49.2 54.0 30.6 36.7 51.1 51.1 32.9 Some college.. . ............ , .. . ' :1 45.1 61.6 51.0 18.4 45.6 68.1 53.6 18.4 College degree 80.5 129.1 68.3 36.6 78.2 141.8 68.6 35.3 Rac~ or et/lllicily of respondelll White non-Hispanic ...... . 54.3 88.6 60.1 72.2 51.8 96.9 58.8 70.7 Nonwhite or Hispanic 32.7 49.4 45.6 27.8 36.8 53.7 50.8 29.3 Current work .\"tatu.f of head Working for someone else 54.1 77.0 59.2 60.1 56.6 83.1 60.3 59.9 Self-employed ........... . 73.3 155.5 68.7 11.8 75.7 191.8 62.8 10.5 Retired. . .. . 26.8 47.5 44.0 23.7 24.7 51.1 46.6 25.0 Other not working ... 22.6 41.0 44.9 4.4 20.4 35.4 45.4 4.6 Currenr oCCllp(J/ion of head Managerial or prolessional 84.8 140.9 67.7 28.3 85.4 156.1 70.2 27.5 Technical. sales. or services . 41.1 58.3 55.4 22.1 44.2 67.6 55.6 21.8 Other occupalion .. . ...... . 49.6 55.6 57.3 21.6 49.4 57.9 53.6 21.1 Retired or other not working 26.2 46.5 44.1 28.1 23.8 48.7 46.4 29.6 Region Northeast .. 55.9 96.1 59.5 IS.8 51.4 100.4 53.5 18.3 Midwest 49.6 74.1 59.9 22.9 44.2 74.9 58.2 22.8 South ...... 40.6 68.0 52.5 36.3 42.9 79.3 56.9 36.7 West . 50.7 81.9 55.2 22.0 51.9 88.7 56.3 22.1 Urbanicif'l' Metropolitan statistical area (MSA) . 50.8 84.5 56.9 82.9 50.4 91.3 57.0 82.9 Non-MSA. 32.8 45.0 52.3 17.1 36.0 50.2 54.0 17.1 HousinR xtwus Owner ............ . 60.6 96.0 62.3 69.1 61.7 105.6 60.9 68.6 Renter or other 27.1 37.0 42.3 30.9 27.8 37.5 46.7 31.4 Percentile of "el worth Less than 25 22.6 27.5 34.8 25.0 23.6 29.2 40.4 25.0 25-49.9 40.6 46.4 53.6 25.0 41.0 46.5 52.9 25.0 50-74.9 .. 57.5 66.5 62.2 25.0 56.7 66.6 59.0 25.0 75-89.9 84.6 96.5 72.4 15.0 82.3 92.9 69.0 15.0 90-100 157.9 281.4 76.0 10.0 158.4 347.5 80.2 10.0

A6 Federal Reserve Bulletin D February 2009 The Data Used in This Article Data from the Survey of Consumer Finances (SCF) are of earlier surveys. I Differences between estimates from the basis of the analysis presented in this article. The SCF earlier surveys as reported here and as reported in earlier is a triennial interview survey of U.S. families sponsored Federal Resen'e Bulletin articles are attributable to addi by the Board of Governors of the Federal Reserve System tional statistical processing, correction of minor data with the cooperation of the U.S. Department of the errors, revisions to the survey weights, conceptual changes Treasury. Since 1992, data for the SCF have been col in the definitions of valiables used in the articles, and lected by NORC, a research organization at the Univer adjustments for inflation. In this article, all dollar amounts sity of Chicago, roughly between May and December of from the SCF are adjusted to 2007 dollars using the each survey year. "current methods" version of the consumer price index for The majority of statistics included in this article are all urban consumers (CPl-U-RS). The appendix provides related to characteristics of "families." As used here, this additional detail on the adjustments. term is more comparable with the U.S. Census Bureau Tile principal detailed tables describing asset and debt definition of "households" than with its use of "fami holdings focus on the percentage of various groups that lies," which excludes the possibility of one-person fami have such items and the median holding for those that lies. The appendix provides full definitions of "family" have them.2 This conditional median is chosen to give a for the SCF and the associated family "head." The survey sense of the "typical" holding. Generally, when one deals collects information on families' total income before with data that exhibit very large values for a relatively taxes for the calendar year preceding the survey. But the small part of the population-as is the case for many of the bulk of the data cover the status of families as of the time items considered in this article--estimates of the median of the interview, including detailed information on their are often statistically less sensitive to such outliers than are balance sheets and use of financial services as well as on estimates of the mean. their pensions, labor force participation, and demographic One liability of using the median as a descriptive device characteristics. Except in a small number of instances is that medians are not additive; that is, the sum of the (see the appendix and the text for details), the survey medians of two items for the same population is not questionnaire has changed in only minor ways relevant to generally equal to the median of the sum (for example, this article since 1989, and every effort has been made to median assets less median liabilities does not equal median ensure the maximum degree of comparability of the data net worth). In contrast. means for a common population are over time. additive. Where a comparable median and mean are given, The need to measure financial characteristics imposes the gain of the mean relative to the median may usually be special requirements on the sample design for the survey. taken as indicative of relatively greater change at the top of The SCF is expected to provide reliable information both the distribution: for example, when the mean increases on attributes that are broadly distributed in the population more rapidly than the median, it is typically taken to (such as homeowners hip) and on those that are highly indicate that the values in the top of the distribution rose concentrated in a relatively small part of the population more rapidly than those in the lower part of the distribution. (such as closely held businesses). To address this require To provide a measure of the significance of the develop ment, the SCF employs a sample design, essentially ments discussed in this article, standard errors due to unchanged since 1989, consisting of two parts: a stan sampling and imputation for missing data are given for dard, geographically based random sample and a special selected estimates. Space limits prevent the inclusion of the oversample of relatively wealthy families. Weights are standard errors for all estimates. Although we do not used to combine information from the two samples to directly address the statistical significance of the results, the make estimates for the full population. In the 2007 article highlights findings that are significant or are inter survey, 4,422 families were interviewed. and in the 2004 esting in a broader context. survey, 4,522 were interviewed. This article draws principally upon the final data from 1. Additional information about the survey is available at www.federalreserve.gov/pubsiossloss2nOO7/scf2007home.html. the 2007 and 2004 surveys. To provide a larger context, 2. The median of a distribution is defined as the value at which equal pans some information is also included from the final versions of Ule population considered have values larger or smaller.

Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A7 2. Amount of before-lax family income, dLtrihuted hy income source , by percenlile of net worth. 2004 and 2007urvey' Percent J Percentile of net worth hlCome source Less than 25 I 25-49.9 I 50--74.9 I 75-89.9 I 90--100 I All families 2004 SlITYey of Consumer Finallces Wages. .._. 82.1 85.4 79.3 72.4 53.0 69.7 Interest or dividends ....................• T .3 .7 1.8 8.2 3.5 Business, farm, self·employment . 1.1 2.7 5.0 85 21.5 10.9 CapilaJ gains t t 1.2 8.3 3.2 Social Security or retirement . 96 9.2 13.2 15.4 8.2 10.9 Transfers or othe r 7.2 2.5 1.7 .7 .8 1.8 Total .............. . 100 100 100 100 100 100 2007 Survey ,,{ Consumer Finances Wages _. . _. .. _. . _. ... __ .. . 79.9 79.9 77.8 72.4 46.2 64.5 Interest or dividends ..... . .1 .3 .7 1.9 7.8 U Business. farm. self·employment . 1.8 5.3 6.9 7.9 24.7 13.6 Capital gains ..... .1 .4 1.3 2.9 14.4 6.7 Social Security or retirement . . ......... . 9.5 10.9 11.8 14.1 6.2 9.6 Transfers or other ... 8.6 3.2 1.6 .8 .7 1.9 Total .. 100 100 100 100 100 100 t Less than 0.05 percent. occupation have higher incomes than families in the income measured in the survey had been relatively three remaining occupation categories. Income is also flat for all income groups since 2001 after an earlier higher for homeowners than for other families, and it period of growth before 1998. Over this longer is progressively higher for groups with greater net period, the rise in the mean was greatest for the top worth.? Across the four regions of the country as decile of the income distribution despite a dip for this defined by the Census Bureau, the ordering of median group between 200 I and 2004. For the rest of the incomes over time has varied, but the means gener distribution, the increase of the mean more closely ally show higher values for the Northeast and the resembled that of the median. West than for the Midwest and the South. Finally, Substantial proportional gains or losses in median families living in metropolitan statistical areas income occurred across all age groups in the recent (MSAs), which are relatively urban areas, have higher three-year period. The median declined for the age median and mean incomes than those living in rural groups between 45 and 64 and for the 75-or-more age areas.s group, while it rose for the rest. For the 75-or-more age group, the decline was 12.3 percent. Since 1998, Income by Demographic Category the age groups between 55 and 74 experienced the largest proportional rises in the median. In contrast to Across the income distribution between 2004 and the recent changes in the median, the mean rose for 2007, only the second quintile and the top decile all groups but especially for the 45-to-54 age group experienced substantial percentage changes in median (8.5 percent) and the 65-to-74 age group (40.9 per income; the medians for both groups rose approxi cent); these groups had experienced a decline in the mately 2 percent, though the dollar amount of the mean between 2001 and 2004. increase for the second quintile was only about $600.9 By family structure, median incomes declined over For other groups, changes in the median varied in the 2004-07 period for all groups except childless direction, and in all instances they were less than single families (those headed by a person who was 1 percent in absolute value. Similarly, the direction of neither married nor living with a partner); median changes in mean income was mixed, and the only income rose the most (5.1 percent) for childless substantial increase in dollar terms occurred for the families headed by a person aged 55 or older. The top decile of the income distribution; the mean for largest decline (4.5 percent) was for couples (families that group rose almost 20 percent, more than twice in which the family head was either married or living the rate of change in the overall mean. Median with a partner) with children. In contrast, mean income rose for all types of families except childless 7. In this article, a family is treated as a homeowner if at least one single families headed by a person aged 55 or older, person in the family owns at least some part of the family's primary for whom it fell 2.9 percent. Mean income rose the residence. 8. For the Office of Management and Budget's definition of MSAs, most (20.7 percent) for single families with children. see www.whitehouse.gov/omblbulletins/fy2008Ib08·01.pdf. Across education groups, median incomes rose 9. Selected percentiles of the income distribution for the past four only for families headed by a person with less than a surveys are provided in the appendix. along with definitions of selected subgroups of the distribution. high school diploma and for families headed by a

A8 Federal Reserve Bulletin 0 February 2009 person with only some college education (who at incomes had risen only for the retired and other-not tended college but did not receive a degree); the working groups, and the mean had risen only for the increase of median income was relatively strong for retired group. the former group-4.2 percent-but that group still Across occupation groups, median income rose had the lowest median income of all education moderately for families headed by a person working groups. Mean incomes rose substantially for all edu in a technical, sales, or service job (an increase of cation groups after declines in the preceding three 7.5 percent), and it fell strongly for families headed year period. The increases were particularly pro by a person who was not working (a decline of nounced for the groups with families headed by a 9.2 percent). For the other-occupation group, a group person with only some college education (10.6 per that predominantly comprises workers in traditional cent) or by a person with a college degree (11.4 per blue-collar occupations, the median was barely cent). changed. In contrast, mean income rose for all groups, In the 2004-07 period, the median income for particularly for families headed by a person in a white non-Hispanic families fell 4.6 percent, and the managerial or professional position (an increase of mean rose 9.4 percent. In contrast, the median for 10.8 percent) and for those headed by a person ina nonwhite or Hispanic families rose 12.5 percent, and technical, sales, or service position (an increase of the mean rose 8.7 percent. However, both the median 16.0 percent), the groups with the highest mean and the mean values for nonwhites or Hispanics were incomes in 2007. Since 1998, the only substantial substantially lower than the corresponding figures for changes in the median were the increases for the non-Hispanic whites. Since 1998, the total gain in managerial or professional group and for the techni median income for nonwhite or Hispanic families cal, sales, or service group. The means for the groups was 23.9 percent, whereas it was 6.6 percent for other showed a general pattern of increase over the period families; the gain in the mean over this period was since 1998. larger and more similar for the two groups-27.0 By region, median family incomes in the Northeast percent for nonwhite or Hispanic families and 28.5 per and the West converged from different directions to cent for other families. to about the same value in 2007, and the medians in the Median income rose from 2004 to 2007 for fami Midwest and the South similarly converged. The lies headed by a person who was working for some median increased between 2004 and 2007 for families one else (a rise of 4.6 percent) or was self-employed living in the South and the West, and it fell for others. (a rise of 3.3 percent); the median fell for the retired The 8.1 percent decline for families in the Northeast group (7.8 percent) and the other-not-working group offset only about one-half of a steep increase between (9.7 percent).' J In contrast, the mean over this period 2001 and 2004_ The rise for the West continued the rose for all groups except the other-not-working only uninterrupted trend in the median across regions group, for which it fell 13.7 percent. Of the increases for the period shown. Declines in the median income in the mean, the largest proportional change was the in the Midwest since 2001 erased most of the substan 23.3 percent rise for the self-employed group-the tial gains between 1998 and 200 I. In 2007, mean group with the highest levels of median and mean income was highest in the Northeast, followed by the income by far. Over the previous three years, median West. In 2001, the two had been closer, but growth Aattened out for the West, while it continued for the Northeast. The mean incomes in the Midwest and the 10. As noted in the appendix, the questions underlying the defini South have been comparable with one another since tion of race or ethnicity changed in earlier surveys. When restrictions 1998, though the mean for the South increased are placed on the definition of the variable for racial and ethnic strongly over the recent period while the mean for the classification used in the tables in the article to make the series more comparable over time, the estimates change only slightly. Midwest feJl back slightly since 2001. 11. To be included in the retired group, the family head must repon In the recent three-year period, families in MSAs being retired and not currently working at any job or repon being out saw a 0.8 percent decline in median income, while of the labor force and over the age of 65. The other-not-working group comprises family heads who are unemployed and those who are out of those living in other areas saw a rise of 9.8 percent. the labor force but are neither retired nor over age 65; the composition Mean income has shown a general rise for both of this group shifted from 2004 to 2007 to include fewer families with a head who had a college degree, thereby reversing a change seen groups since 1998. between 2001 and 2004. In 2007. 66.9 percent of the other-not By housing status, median and mean incomes rose working group was unemployed. and the remainder was out of the both for homeowners and for other families from labor force; in 2004, 62.2 percent of the group was unemployed (data 2004 to 2007. All the increases were modest except not shown in the tables).

Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A9 the 10.0 percent increase in the mean for homeown Saving ers. As noted later in this article, homeownership declined slightly in the recent three-year period after Because saving out of current income is an important rising for a number of years. Thus, changes in the determinant offamily net worth, the SCF asks respon composition of the group are likely to be smaller than dents whether, over the preceding year, the family's in earlier years. Nonetheless, such changes were spending was less than, more than, or about equal to sufficient to cause the change in the median for both its income. Though only qualitative, the answers are a groups to be positive at the same time that the change useful indicator of whether families are saving. Ask in the overall median was negative. ing instead for a specific dollar amount would require By percentile of net worth, median income rose much more time from respondents and would likely more than 1 percent over the recent three-year period lower the rate of response to the survey. only for the lowest quartile, for which the median Overall, from 2004 to 2007, the proportion of increased 4.4 percent; the median declined somewhat families that reported that they had saved in the for the third quartile and for the group between the preceding year was about unchanged at 56.5 percent, 75th and 90th percentiles. 12 The mean increased over a bit higher than the level in 1998 but still lower than the period for the lowest quartile (an increase of the 2001 level. The general pattern of changes across 6.2 percent), but it rose much more strongly (23.5 per demographic groups in the recent three-year period is cent) for the top decile. Over the earlier years shown one of small shifts. The previous survey had shown a in the table, the most dramatic cumulative gains in the broad pattern of declines. median were clearly for the top two groups. The mean Estimates of the personal saving rate from the rose at least somewhat for all groups, but the change national income and product accounts (NIPA) show was largest by far for the wealthiest 10 percent. an annual saving rate of less than 1 percent over the 2004-07 period. However, the SCF and NIPA con Income Variability cepts of saving differ in some important ways. First, the underlying SCF question asks only whether the For a given family, income at a particular time may family's spending has been less than, more than, or not be indicative of its "usual" income. Unemploy about the same as its income over the past year. Thus, ment, a bonus, a capital loss or gain, or other factors families may be saving, but those that are doing so may cause income to deviate temporarily from the may be saving a relatively small amount; those that usual amount. Although the SCF is a cross-sectional are spending more than their incomes may be spend survey, it does provide some information on income ing a relatively large amount. Second, the NIPA variability. In 2007, 23.7 percent of families reported measure of saving relies on definitions of income and that their income for the preceding year was unusual- consumption that may not be the same as those that 9.2 percent reported it was unusually high, and respondents had in mind when answering the survey 14.5 percent reported it was unusually low (data not questions. For example, the NIPA measure of per shown in the tables). For those reporting unusual sonal income includes payments employers make to income, the median deviation of actual income from their employees' defi ned-benefit pension plans but the usual amount was negative 17.3 percent of the not the payments made from such plans to families, normal level. A larger fraction of families in 2004 whereas the SCF measure includes only the latter. reported that their income was unusual-8.7 percent The SCF measure also includes realized capital gains, reported it was unusually high, and 19.8 percent whereas the NIPA measure excludes capital gains of reported it was unusually low. all forms, realized and unrealized. Although a family's income may vary, such vari A separate question in the survey asks about fami ability may be a well-recognized part of its financial lies' more typical saving habits. In 2007, 6.0 percent planning. In 2007, 31.4 percent of families reported of families reported that their spending usually ex that they did not have a good idea of what their ceeds their income; 16.1 percent reported that the two income would be for the next year, and 27.2 percent are usually about the same; 35.7 percent reported that reported that they do not even usually have a good they typically save income "left over" at the end of idea of their next year's income. The figures for 2004 the year, income of one family member, or unusual were similar. additional income; and 42.2 percent reported that they save regularly (data not shown in the tables). The fact that these figures are not much changed over the last 12. Selected percentiles of the distribution of net worth for the past four surveys are provided in the appendix. three surveys suggests that variations in economic

A to Federal Reserve Bulletin D February 2009 3. Reasons respondents gave as most important for their 3.1. families' saving. t1Llributed by lype of reason. 1998- 2007 surveys Median of ratio Median of desired of desired amount Percent Family characteristic precautionary saving to usual income (2007 dollars) ---- (percent) Type of reason 1998 2007 All families 5,000 9.2 Education . 11.0 10.9 11.6 8.4 Pt:!n;enfile of usual income B Fo u r y i t n h g e o fa w m n i ly ho . m e . . . . .. . . . . . 4 4 . . 4 1 5 4. . 2 1 4 5. .7 0 4 5 . . 2 5 0 2 - 0 1 -3 9 9 .9 . 9 2 3, ,0 0 0 0 0 0 1 9 4. . 0 7 Purchases 9.7 9.5 7.7 10.0 40-59.9 5.000 9.4 Retirement .... 33.0 32.1 34.7 33.9 60-79.9 . 5,000 7.6 Liquidity 29.8 31.2 30.0 32.0 80-89.9 . 10,000 8.1 Investments 2.0 1.0 1.5 1.6 90-100 .. .. .......... . 20.000 88 No particular reason ..... 1.3 1.1 .7 1.1 When asked for a reason. reponed do not sa ve . 4.9 4.9 4.0 3.3 Total 100 100 100 100 sets and their liabilities-rose strongly, both in terms of the median and the mean (table 4). The median NOH: See note to table I and text note 13. rose 17.7 percent, and the mean rose 13.0 percent; the conditions over this period have had little effect on corresponding values for the period from 2001 to the longer-run saving plans of families. 2(){)4 were 1.0 percent and 6.0 percent. Both the The SCF also collects information on families' median and the mean have risen consistently over the most important motivations for saving (table 3). In period since 1998, but overall the mean has gained J} 2007, the most frequently reported motive was retire more-54.7 percent, compared with a 31.8 percent ment related (33.9 percent of families), and the next increase in the median. most frequently reported was liquidity related Movements in the dollar value of families' net (32.0 percent of families), a response that is generally worth are, by definition, a result of changes in taken to be indicative of saving for precautionary investment, valuation, and patterns of ownership of reasons. At least since 1998, these have been the financial assets (tables 5, 6, and 7) and nonfinancial t4 dominant reported reasons, but saving for retirement assets (tables 8, 9, and to), as well as decisions about has increased in importance. The education-related acquiring or paying down debt (tables II through 18). motive also appears to be important but less so in the A variety of financial decisions underlie these changes. latest survey; in 2007, 8.4 percent offamilies reported The box "Shopping for Financial Services" provides it as their primary motive, down 3.2 percentage points a discussion of the intensity of families' decisionmak from 2004. The importance of saving for purchases ing efforts and their sources of financial information. rose 2.3 percentage points in 2007 after falling since After the end of 2007, house prices continued to before the 1998 survey in its prevalence as a reported decline, and equity prices fell sharply. Although the motive for saving. survey cannot provide direct results about the overall The survey asks families to estimate the amount of effects of these and other such changes, it can provide savings they need for emergencies and other unex some indication of the implications for families' pected contingencjes, a measure of desired savings finances. For this purpose, the value of assets invested for precautjonary purposes.J5 The desired amount directly or indirectly in publicly traded equity, the increases with income, but the amount is a lower value of privately held businesses, and the net value percentage of usual jncome for higher levels of such of nonresidential real estate are assumed to have income than for lower levels (table 3.1). fallen at the overall rate of the Wilshire 5000 index from the time of the interview until October 2008. In NET WORTH addition, the value of residential properties-both primary residences and other residential real estate From 2004 to 2007, inflation-adjusted net worth are assumed to have fallen in line with LoanPerfor (wealth)-the difference between families' gross as- mance Home Price Indexes from the time of the interview until October 2008.16 Changes are assumed 13. Although families were asked to report their motives for saving to have affected all holders proportionately, and fami regardless of whether they were currently saving. some families lies are assumed to have made no changes in their reported only that they do not save. The analYSis here is confined to the holdings of these assets or any other assets or liabilifirst reason reported by families. 14. Liquidity-related reasons include "emergencies," the possibili ties of unemployment and illness. and the need for ready money. 15. For an extended analysis of precautionary saving as measured 16. Values of primary residences are adjusted by the state-level in the SCF. see Arthur B. Kennickell and Annamaria Lusardi (2004). index. For other residential real estate, the geographic location is not "Disentangling the Importance of the Precautionary Saving Motive." reported in the SCF; thus, the national-level index is used to adjust NBER Working Paper Series 10888 (Cambridge. Mass.: National values of these properties. The LoanPerformance Home Price Indexes Bureau of Economic Research. November). are not seasonally adjusted.

Changes in U.S. FamiLy Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A II or 4. Family nel wonh. by elected hanlclerislics families. 1998--2007 surveys Thousands of 2007 dollars I I I 1998 2001 2004 2007 Family cbaracteristic Median I Mean I Median I Mean I Median I Mean I Median I Mean All ramilies 91.3 359.7 101.2 464.4 102.2 492.3 120.3 556.3 (3.5) (11.7) (3.6) (7.9) (4.7) (10.6) (5.6) (9.2) Pen;enlile of income Less than 20 ............ 7.4 60.8 9.2 61.8 8.2 79.8 8.1 105.2 20-39.9 . 42.2 122.4 43.8 134.8 37.1 133.4 37.9 134.9 40-59.9 .. 68.0 161.0 74.5 190.3 79.0 213.7 88.1 209.9 60-79.9 . 143.0 261.7 167.5 344.0 175.7 374.3 204.9 375.1 80-89.9 .. .. .............. 240.0 414.1 307.8 534.8 344.1 535.3 356.2 606.3 90-100 575.9 1.970.1 975.0 2.647.5 1,015.0 2,783.7 1.119.0 3,306.0 Age of IIeati (years) Less than 35 11.6 81.3 13.7 106.1 15.6 80.7 11.8 106.0 35-44 . . 80.8 249.9 90.7 303.7 76.2 328.6 86.6 325.6 45-54 . . . . . . . . . . . . . . . . . . 134.5 461.5 155.4 568.4 158.9 596.1 182.5 661.2 55-{i4 . 162.8 677.6 216.8 856.0 273.1 926.7 253.7 935.8 65-74. 186.5 594.2 207.9 793.5 208.8 758.8 239.4 1,015.2 75 or more . ' .......... 159.9 395.7 181.6 548.6 179.1 580.0 213.5 638.2 Family structure Single with child(ren) ...... 36.0 132.9 27.4 135.0 36.0 159.8 41.0 232.2 Singk, no child, age less than 55 . 15.5 120.3 17.5 153.1 19.3 152.7 18.0 181.3 Single. no clUld, age 55 or more 104.3 .~04.9 105.7 336.9 126.3 390.9 140.8 382.7 Couple with child(ren) . 119.6 410.5 131.2 504.9 134.2 496.0 141.1 594.5 Couple. no child 143.9 502.0 172.8 660.9 186.9 727.0 191.0 804.5 Etlucati01/ of IIeati H N i o g h h ig sc h h s o c o h l o d o i l p l d o i m pl a o ma " ., . . .. • . . ., . .. . ., . .. . . 6 2 8 6 . .9 8 2 1 0 0 0 0. . 4 9 6 2 7 9. . 8 9 2 1 1 2 1 1 . . 9 7 7 2 5 2 . . 5 6 2 1 1 4 6 9 . .9 2 3 8 3 0 . .3 2 2 1 5 4 1 2 . . 6 9 Some college ........... , 94.0 302.6 85.1 335.7 76.1 338.9 84.7 365.9 College degree .......... 186.4 672.4 249.5 931.2 248.4 935.0 280.8 1.097.8 Race or elhnicil), of respondent White non-Hispanic .... , 121.9 429.5 143.0 571.2 154.5 617.0 170.4 692.2 Nonwhite or Hispanic 21.2 128.0 21.0 137.4 27.2 168.2 27.8 228.5 Cllrrelll work S/atus (411ead Working for someone else 67.2 213.9 76.1 263.9 73.8 294.9 93.2 350.1 Self.employed ..... 316.3 1,176.5 412.0 1.474.7 368.6 1,563.1 388.7 1.%1.3 Retired ..... ............... 143.9 391.6 135.2 531.1 153.6 515.1 161.3 543.1 Other not working ......... 4.5 94.2 10.4 211.1 13.0 178.2 5.7 /24.1 ClIrrenl occlIpation of head Managerial or professional . 168.5 688.2 231.1 898.3 216.2 947.2 245.8 1,116.4 Technical. sales, or services .. 51.9 245.7 54.7 233.4 49.4 270.2 73.5 310.4 Other occupation ........... 63.7 161.0 561 159.2 62.0 162.0 64.3 191.7 Retired or other not working .' 104.3 341.6 112.9 478.5 122.1 462.8 128.8 477.6 Region Northeast 120.1 385.7 109.1 530.6 177.6 625.0 159.4 652.7 Midwest ................. 102.3 316.8 124.4 399.0 126.3 479.0 107.5 467.5 SOU~I ............................ 78.0 340.0 86.3 440.0 70.1 3822 %.0 499.3 West " ... . ............ 78.0 416.3 102.6 516.6 104.1 575.1 156.2 662.7 Urba1/icirl' Metropol;'tan statistical area (MSA) . 92.3 389.8 102.7 500.6 114.5 554.1 132.4 621.2 Non-MSA .. ............. 87.9 184.3 93.6 238.7 65.1 193.2 77.2 241.4 HOllsillg sWills Owner .. 168.2 514.7 201.8 655.5 202.6 686.3 234.2 778.2 Renter or other ..... 5.4 55.3 5.6 64.4 4.4 59.4 5.1 70.6 Perrentile of net W0I1h Less than 25 ............... .6 -2.4 1.3 1.9 -1.6 1.2 -2.3 25-49.9 41.6 45.7 47.8 51.8 47.9 51.7 54.2 57.9 50-74.9 153.4 163.7 184.7 195.4 187.4 203.6 219.8 227.0 75-89.9 . 392.8 409.3 503.8 527.9 556.6 578.5 571.4 586.1 90-100 1.141.2 2.464.6 1.524.7 3,233.2 1,570.6 3,420J 1,890.7 3.975.7 NOTE: See note to table I. t Less than 0.05 ($50).

A 12 Federal Reserve Bulletin 0 February 2009 Shopping for Financial Services As a normal part of their financial lives, families must intended to elicit a description of behavior in general, the make a variety of decisions to select particular invest behavior reported could still be more reflective of the ments for any savings they may have, as well as to select short-term needs for such services and consequently the the forms and terms of credit they may use. To the extent immediate need for shopping. When broken out by that families devote more or less attention to such activi categories of net worth, the patterns are very similar for ties or that they are better or worse informed. the wealth aLl families for loan shopping (data not shown in the of otherwise comparable families may differ substantially tables). For investment shopping, the data show a more over time. pronounced gradient toward more intensive shopping by The Survey of Consumer Finances (SCF) contains a families with higher levels of wealth. self-assessment of families' intensity of shopping for More families turn to friends, family members, or borrowing or investing services. In 2007, about 55 per associates for financial information than to any other cent of families reported that they undertake a moderate source of information on bOll'owing or investing (table amount of shopping for either of these types of financial B). This result suggests that there may be important services (table A).I Only about one-fourth of families feedback elfects in financial outcomes; that is, families A. Intensity of shopping for bon'owing or investing, 2007 B. Information used for decisions about borrowing or Percent investing, 2007 Percent Type of service Intensity of shopping Borrowing I Investing Type of service Source I Almost none .. 20.6 25.4 Borrowing Investing Moderate amount 54.8 54.6 A great deal 24.6 20.1 Calling around 33.4 18.0 Magazines. nt:wspapers. and olher media , . 19.7 17.5 reported shopping a great deal for loan terms, and only Malerial in Ihe mail 35.9 21.5 about one-fifth reported shopping a great deal for the best [nternel ,.,. 38.4 28.3 Friends. relatives. associ ales 46.0 42.3 terms on investments. Even though the survey question is Bankers. brokers. and olher sellers of financial services 38.6 38.3 Lawyers. accoumants. and other I. The underlying queslion allows the survey respondent to shade the financial advisors ... 19.5 29.3 intermediate response toward a greater or lesser amount of shopping. Does nO! borrow or i nveSI 9.5 9.9 About one-third of the respondents choose to do so, and of Ihose, somewhat more than one-half shaded tlleir response toward a grealer NOTE: Figures sum 10 more than 100 because of reponing of multiple degree of shopping. sources. ties. Taken together, these assumptions imply large age group. This pattern reflects both life-cycle saving drops in median and mean net worth since the 2007 behavior and a historical pattern of long-run growth survey-17.8 percent and 22.7 percent, respectively. in inflation-adjusted wages. The median and mean Relative to the values in the 2004 SCF, adjusted values of wealth rise in tandem with income, a median net worth is 3.2 percent lower, and the relationship reflecting both income earned from assets adjusted mean is 12.7 percent loweLt? and a higher likelihood of saving among higher By age group, median and mean net worth show a income families. Wealth shows strong differentials "hump" pattern that generally peaks in the 55-to-64 across groups defined in terms of family structure, education, racial or ethnic background, work status, occupation, housing status, and the urbanicity and 17. Most of the projected decline in the median is a result of the adjustments to primary residences and publicly traded equity; if only region of residence; these differentials generally mir the values of primary residences and of directly or indirectly held ror those for income, but the wealth differences are equity are adjusted, median net worth as of October 2008 declines larger. I S.O percent relative to the level observed in the 2007 survey. In contrast, the corresponding mean of the data under the more limited adjustment is only 12.0 percent lower than the unadjusted value. or Net Worth by Demographic CategolY just more than one-half of the decline implied by the broader set of adjustments; this result reflects the fact that the value of businesses and Analysis by demographic group for the 2004-07 real estare other than primary residences is relatively concentrated among wealthier families. period shows a pattern of gains of varying sizes in

Changes in US Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances AI3 who know relatively well-informed people may obtain C. Use of the Internet for financial information or better services, Sellers of financial services-bankers, financial services, by age of head, 2007 brokers, and so on-are the second most frequently cited Percent source of information for borrowing or investing, The Internet was reported by 38,4 percent of families as a Family characteristic Percentages of families source for information on borrowing and by 28.3 percent All families. 59.7 for information on investing. Although the Internet, in Age of head (ymrs) principle, makes an enormous amount of information Less than 35 71.9 available to a family, interpretation of the information 35-44 . 70.8 45-54 . 69.1 may still be an important consideration. However, the 55--M .............. . 59.1 proliferation of financial planning tools may mitigate this 65-74 . .,'. 40.3 75 or more 16.5 concern. When viewed across categories of net worth, the data show similar patterns of use of sources of informa MEMO All families. 2004 46.5 tion by all groups (data not shown in the tables). All families. 2001 •.. 32.5 In addition to serving as a source of information, the Internet can also be a medium for obtaining financial Internet for financial information or services. whereas the services. In 2007,49,4 percent of families reported using figure for families with a head aged 75 or older was only the Internet to access at least some type of service at one 16.5 percent. If the relatively greater expression of such of the financial institutions they used (data not shown in behavior by younger families persists as they age. and if the tables). If accessing information and using services succeeding cohorts follow their example. Internet-based are combined, the Internet played a part in the financial financial services may become even more important in life of 59.7 percent of all families (table C). This figure is the future? up sharply from 46.5 percent in 2004 and 32.5 percent in 200 I. The proportion of such users rises strongly over net worth groups: Among the least wealthy 25 percent of families, 50.3 percent made such use of the Internet, 2. For a discussion of the definition of local banking markets. see whereas the figure was 75.6 percent for the wealthiest Dean F. Amel. Anhur B. Kennickell, and Kevin B. Moore (2008), 10 percent (data not shown in the tables). More striking is "Banking Market Definition: Evidence from the Survey of Consumer Finances." Finance and Economics Discussion Series 2008-35 (Wash the variation over age groups. Among families headed by ington: Board of Governors of the Federal Reserve System. October). a person younger than 35, 71.9 percent reported using the www.federalreserve.govipubsifeds!2008!2008351200835pap.pdf. median and mean net worth for most groups. But a which the median rose 16.6 percent; the mean for this small number of groups experienced losses, and some group was little changed. Families in the lowest had noticeably different shifts in their median and income quintile had the largest proportional increase mean net worth. in the mean-31.8 percent-a rise due, in part. to an Median net worth rose for all percentile groups of increase in the fraction of the group consisting of the distribution of net worth except for families in the relatively wealthy families with incomes that are lowest quartile. In that group, the median fell from likely to have been temporarily low (data not shown $1,900 to $1,200; the mean fell from negative $1,600 in the tables). The mean rose for the other income in 2004 to negative $2,300 in 2007. For the rest of the groups, and it rose most for the highest deci Ie distribution of net worth, the median and mean over group-an 18.8 percent gain. Over the preceding the recent three-year period rose substantially for all years shown, median net worth had increased for all other groups except the 75th-to-90th percentile group, groups except the second income quintile; the mean which had seen relatively large gains over the preced had risen for all income groups. ing three years. Gains for the top wealth group were The survey shows some substantial movements of unbroken back to at least 1998. net worth by age group between 2004 and 2007. Over the recent period, median net worth increased Median net worth rose most strongly-19.2 percent for aU income groups above the 20th percentile and for the 75-or-more age group, which had seen rela especially for families in the fourth quintile, for tively modest change over the previous three-year

A 14 Federal Reserve Bulletin 0 February 2009 period. The less-than-35 age group saw a large decline median net worth from 2004 ($22,400) to 2007 in the median-24.4 percent-over the more recent ($17,000), but their mean net worth rose 9.3 percent, period; at the same time, median wealth fell 7.1 per from $121,500 to $132,800; over the 200 1-04 period, cent for the 55-to-64 age group. Mean wealth rose the median for the group had shown virtually no just more than 10 percent for families in the 45-to-54 change, while the mean had risen 36.4 percent (data and 75-or-more age groups, and it increased more not shown in the tables). than 30 percent for families in the less-than-35 and Among work-status groups, median and mean net 65-to-74 age groups; mean wealth declined, however, worth rose from 2004 to 2007 for all families except for the 35-to-44 group and was about unchanged for those headed by persons who were not working for the 55-to-64 group. Many of the changes observed reasons other than retirement (the other-not-working contrast in size or direction with the changes in the group), which showed substantial declines in both preceding three-year period. measures. The group had the lowest levels of both By family structure, single families with children median and mean net worth of all work-status groups. had the largest increases from 2004 to 2007 in both Although the dollar amounts of the changes in median median and mean net worth-13.9 percent and and mean net worth for the self-employed group were 45.3 percent, respectively-but these families had the far larger than those for the other groups over the second-lowest level of net worth (after younger single period from 1998 to 2007, the percentage increase in families without children). Median net worth in the median for the self-employed group was below creased for all family-structure groups except younger the rates for all other work-status categories except single families without children, and the mean in the retired group. The percentage increase in the creased for all except older single families without mean for the self-employed group was just slightly children. higher than that for the working-for-someone-else From 2004 to 2007, median net worth increased for group. all education groups. The change was particularly Median and mean net worth increased for all large--46.9 percent-for the no-high-school-diploma occupation groups in the recent three-year period, but group. At the same time, this group was the only one they did so most markedly for families headed by a that did not see a rise in mean net worth; its mean worker in a technical, sales, or service occupation or declined 4.7 percent. The shifts for this group were by a worker in a managerial or professional occupa the opposite of the pattern in the preceding three-year tion. Over the period since 1998, the median for period, during which the median fell and the mean families in the residual other-occupation category rose. barely rose, and the increase in the mean was the The data show gains from 2004 to 2007 in median smallest of any occupation group. All other groups and mean wealth for both categories of race or had greater than a 20 percent increase in their median ethnicity. Gains in the median and the mean were and mean net worth over this period. roughly the same for white non-Hispanic families- Between 2004 and 2007, median net worth fell for 10.3 percent and 12.2 percent, respectively. But for families living in the Northeast or the Midwest, while nonwhite or Hispanic families, the change in the it rose strongly for those in the South or the West. median-2.2 percent-was far smaller than that in the mean-35.9 percent. 18 In the preceding three-year Mean net worth for families in the Northeast or the period, both the median and the mean for nonwhites Midwest also lagged behind that for families in the or Hispanics had risen more strongly than those for other regions. Over the longer period from 1998 to other families. Despite some continuing signs of 2007, median and mean net worth moved up most convergence, in 2007, the median and mean of net strongly in the Northeast and the West; these regions worth for white non-Hispanic families remained ended the period with quite similar medians and much higher than those for nonwhite or Hispanic means. The Midwest and the South also ended the families. In contrast to the whole group of nonwhite period with fairly similar values, at levels consider or Hispanic families, the subgroup of African Ameri ably below those for the Northeast and the West. can families saw a 24.1 percent decline in their By urbanicity of the place of residence, in the recent three-year period, median net worth increased by about the same proportion in MSA and non-MSA 18. If the additional information on Hispanic or Latino ethnic identification available in the SCF is used in the classification of the areas, but the mean advanced by a much larger 2007 results, the median net worth of nonwhites or Hispanics was proportion in non-MSA areas. However, over the $31,000, and the mean was $237,900; for other families, the median longer period since 1998, median and mean wealth was $174, I 00, and the mean was $701.800. These figures are all Slightly higher than the corresponding values reported in table 4. rose more rapidly for MSAs, and in 2007 both the

Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A 15 median and mean net worth for families in MSAs S. Value of financial a :Cl' of all f:lmili~s, di tribu[ed by remained substantially above that for families in type of as el. 1998-2007 surveys non-MSAs. Percent By housing status, the percentage increases in Type of financial asset 2007 median net worth between 2004 and 2007 were very similar for both groups, and the increase in the mean Transaction accounts .. 11.4 11.4 13.2 11.0 Certificates of deposit .. 4.3 3.1 3.7 4.1 for non-homeowners (hereafter, renters) was some Savi ngs bonds .. ......... - ... .7 .7 .5 .4 Bonds 4.3 4.5 5.3 4.2 what higher. From 1998 to 2007-a time of rising Stocks ....................... 22.7 21.5 17.6 17.9 house prices, on balance-the increase in median and Pooled investment funds (excluding money market funds) 12.4 12.1 14.7 15.9 mean net worth for homeowners far outstripped that Retirement accounlS 27.6 28.9 32.0 34.6 Cash value life insurance 6.4 5.3 3.0 3.2 for renters. Other managed assets ... 8.6 10.5 8.0 6.5 Other ............ ",. .... . . . . . . .. 1.7 1.9 2.1 2.1 Tota[ ............... [00 [00 100 100 ASSETS MEMO Financial assets as a share At 97.7 percent in 2007, the overall proportion of of total assets ........... 40.7 42.2 35.7 33.9 families with any asset was barely changed from NOTE: For this and following tables, see text for definition of asset catego 2004 (first half of tables 9.A and 9.B, last column). ries. Also see note to table I. Overall, this figure has risen 0.9 percentage point si nce 1998 (data not shown in the tables). Across Hispanic families, median assets rose 9.9 percent, demographic groups, the pattern of changes in the while median net worth rose 10.3 percent; but for recent three-year period is mostly one of small nonwhites or Hispanics, median assets rose 36.4 per increases or decreases. Noticeable exceptions are cent, and median net worth rose only 2.2 percent. For declines for the following groups: the lowest quintile homeowners, median assets increased 8.1 percent, but of the income distribution (2.4 percentage points); median net worth increased 15.6 percent; for renters, single families with children (1.2 percentage points); median assets barely changed, but median net worth younger single families without children (1.7 percent rose 15.9 percent. Percentage changes in the medians age points); families headed by a person whose work of assets and net worth were similar across region and status was retired (1.6 percentage points) or who was urbanicity of the place of residence. Over the preced in the related retired-or-other-not-working category ing three-year period, median assets had risen 9.8 per (1.2 percentage points); families headed by a person cent and mean assets had risen 8.3 percent, compared aged 75 or older (1.5 percent); and families living in with corresponding figures for net worth of 1.0 per the Northeast (3.3 percentage points).'9 For many cent and 6.0 percent. groups, the figure remained at or near 100 percent. From 2004 to 2007, median assets for families Financial Assets having any assets rose 16.6 percent, from $189,900 to $221,500 (second half of tables 9.A and 9.B, last Although the level of financial assets rose from 2004 column), and the mean rose 13.1 percent, from to 2007, financial assets as a share of total assets fell $591,300 to $668,500 (memo line). These percentage 1.8 percentage points, to 33.9 percent (table 5, memo changes closely resemble those for overall net worth, line); this movement continues a decline in this share but examination of changes in median assets by from a level in 200 I (42.2 percent) that marked the demographic groups reveals differences. Because high point observed in the survey since at least 1989. changes in ownership were generally small, these The relative shares of various financial assets also differences must largely represent variations in the shifted. Declines in the percentage shares of transac amount of borrowing. Across net worth groups, the tion accounts, bonds, and "other managed assets" percentage changes in median assets and net worth were mostly offset by increases in the shares of were most similar for families in the top quartile of retirement accounts and pooled investment funds.2o the distribution of net worth; for all except the lowest After declines in the previous two surveys, the share quartile of that distribution, the changes were more of assets attributable to publicly traded stocks held roughly similar; and for the lowest quartile of the directly by families edged up. distribution, the percentage decline in assets was Overall, the rate of ownership of any financial asset much larger than that for net worth. For white non- was virtually unchanged over the recent survey 19. The reLired-or-oLher-not-working occupation category encom 20. The definitions of asset categories in table 5 are given later in passes the retired and the other-not-working work-status categories. lhe article, in the sections of texl devoted to those categories.

A 16 Federal Reserve Bulletin 0 February 2009 6. Family holdings of financial assel5. by selected characleri~lic. of familie. and lype of assel. 2004 and 2007 urveys A. 2004 Survey of Consumer Finances Pooled Trans- Cenifi- Savings invest- Retire- Cash Other Any Family characteristic action cales of Bonds Stocks ment value life managed Other financial bonds ment accounls deposit accounts insumnce assets asset funds Percentage of families holding asset All families .. .. ... , ......... 91.3 12.7 17.6 1.8 20.7 15.0 49.7 24.2 7.3 10.0 93.8 Pen:elllile of income 6 9 4 8 2 L 0 0 0 0 0 e - - - s - - 7 5 8 1 3 s 9 9 9 9 0 t . . . . h 0 9 9 9 9 a n · · . . . . 2 . . 0 . . . . . . . . . . . . . . . . , . . . ,. . . . , . . . . " . . . . . . . . . . . . . . . . . . . . . · . . . . · . . . . . , . . . 0 . . . . . . , 0 . . . . . . . . , . . . .. . . . . . . . . , . . . . . .. . . . . .. . . . . . . . . . . . 1 7 9 9 9 8 0 9 5 8 5 7 0 . . , . . . 1 5 4 9 0 ) 2 1 1 1 1 1 5 2 6 1 5 . . . . . . 5 8 7 3 0 0 3 2 2 1 6 6 2 8 9 5 . . . . . , 5 3 2 9 8 4 8 2 2 · • * . . . 1 9 9 5 3 2 1 8 8 5 5 5 6 . . . . . . 1 2 9 4 0 1 3 2 1 1 7 6 9 8 3 2 . . . . . . 6 6 7 6 2 1 6 8 8 5 2 1 8 9 3 9 1 0. . . . . . 1 8 5 5 7 9 3 2 2 2 1 1 8 9 9 4 4 9 . . , . . . 1 7 4 6 0 0 1 1 7 7 4 3 3 2 . . . . . . 9 0 9 8 2 ,1 1 1 1 7 9 9 3 1 1 . . . . , . 1 4 4 9 2 3 1 9 9 9 9 8 0 1 0 9 8 9 0 . . . . . . 1 5 5 0 8 1 Alie of head (years) Less than 35 .. ......... ...... 86,4 5.6 15.3 * 1.1.3 8.3 40.2 11.0 2.9 11.6 90.1 4 3 5 5 - - 5 4 4 4 . .. . .. . . .,". . .... .. .. .. . . . . . . . . .. . . . . . . .. . . 9 9 0 1 . . 8 8 1 6 1 . . 7 9 2 2 1 3. . 3 0 1 . . 6 8 2 1 3 8 . .5 2 1 1 8 2 . .3 2 5 5 7 5 . . 7 9 2 2 6 0 . . 0 1 6 3. . 7 2 1 1 2 0 . . 1 0 9 9 3 3. .6 6 55-64 . ... ...... , ....... ........ 93.2 18.1 15.2 3.3 29.1 20.6 62.9 32.1 9.4 7.2 95.2 65-74 .... ........... ..... ........... 93.9 19.9 14.9 4.3 25.4 18.6 43.2 34.8 12.8 8.1 96.S 75 or more ... ... . .... ....... ..... 96.4 25.7 11.0 3.0 18.4 16.6 29.2 34.0 16.7 8.1 97.6 Family slm"lu", Single widl child(ren) .... ..... 87.2 8.8 9.4 * 9.6 7.4 34.1 19.9 3.7 13.7 9L1 Single, no child, age less Ulan 55 . 85.1 5.9 11.9 J 12.4 10.2 37.5 14.0 2.8 13.8 88.9 Single. no child, age 55 or more ... 91.8 18.8 9.1 2.6 18.0 16.0 32.8 28.8 14.0 7.8 94.4 Couple with child(ren) . 93.5 14.9 25.1 .9 23.3 11.7 61.4 24.7 6.1 7,4 96.4 Couple, no child ...... 94.0 13.6 22.1 2.7 26.2 19.0 59.8 27.7 7.9 9.1 95.5 Educaliull of head · H N i o g h h ig sc h b o sc o h l o d o i l p l d o i m pl a o m . a . . .. . . . . . . " . . .. . . . . . . _ . . . 8 72 9 . . 4 1 1 5 2 . .9 6 1 4 4 . . 2 2 .4 1, 4 2. . 4 7 9 2 . .3 2 4 1 3 6 . .2 6 2 1 3 3 . .7 0 5 3 . . 4 0 8 5 . . 4 2 7 9 7 2 . . 4 9 Some college ..... ................ 94.3 9,4 19.3 .6 17.7 12.6 47.7 23.8 6.2 14,4 96.6 College degree .. ... ... . ....... ., .... 99.1 17.0 24.9 4.1 35.3 26.1 68.9 29.5 10.9 10.9 99.6 Race or elhlli61), of re.'polldem White non-Hispanic ..... 95.5 15.3 21.1 2.5 25.5 18.9 56.1 26.8 9.2 10.2 97.2 Nonwhite or Hispanic .... 80.6 6.0 8.5 * 8.0 5.0 32.9 17.4 2.1 9.4 85.0 Cu rrenl wurk .ItalllS of head Worki ng for someone else ........ 92.2 9.8 20.1 .8 19.6 13.5 57.1 21.8 5.4 9.5 94.5 Self-employed . ... ... , . 94,4 14.2 18.7 4.3 31.6 22.1 54.6 29.8 7.6 15.1 96.1 Retired .......... ........ .. ..... 90,4 20.2 11.4 3.5 19.0 16.2 32.9 29.7 12.8 8,4 93.6 Other not working .. ... ......... 76.2 7.9 14.5 • 14.3 10.2 24.9 10.7 • \I .5 79.6 Current occupalion of head Managerial or professional ........... 98.5 14.8 25.5 3.1 32.9 24.3 68.5 27.5 8.2 13.2 99.5 Technical, sales, or services ......... 90.1 8.9 18.5 ·.3 IS.6 9.7 48.5 21.9 4.9 8.6 92.9 Other occupation . .................. 87.2 6.4 13.8 13.0 8.1 49.7 18.7 3.3 8.5 90,4 Retired or other not working ........ 88.2 18.3 11.8 3.0 18.2 15.3 316 26.8 ILl 8.9 91.4 Region Northeast ... , .... -.................. 94.6 15.3 21.5 1.9 27.8 18.8 57.0 24.6 7.7 8.6 96.4 S M W O i e U d s l t w Il e . s . t . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . .. .. . . . .. . . . . . . . . . 8 9 9 4 2 6 . . . 9 4 6 1 1 9 4 1 . . 7 7 9 2 1 1 3 6 2 . . . 1 7 6 2 1 1 . . . 0 7 6 2 2 1 0 3 5 0 . . 4 4 4 1 1 IS 2 5. . . 6 6 2 5 4 4 7 8 1. . . 9 3 6 3 2 1 4 0 7 . . . . 5 ~ I \ 4 6 I . . . 7 7 5 1 1 9 0 1 . . . 7 5 0 9 9 9 6 4 0 . . . 5 7 0 U,hulI;c;IY Metropolit.1O statisical area (MSA) 91.6 12.3 18.4 2.0 22.6 16,4 51.8 24.6 7.8 lOA 93.9 Non-MSA .' ... .......... ... 90.0 14.6 14.0 • 11.0 8.S 39.5 22.3 4.8 7.9 93.2 Housing status O Re w nL n e e r r o . r o . t . h . e . r . . . . . . . .. . . . . .. . . .. . . . . .. .. . .. . . . . . . ... 9 8 6 0 . . 0 9 1 5 5 . . 6 9 2 9 1 . . 5 2 2. .2 6 2 9 5 . . 1 8 1 5 9 . . 7 2 6 2 0 6 . . 2 2 3 1 0 "- . 0 1 9 2 . . 6 0 1 9 0 . .9 6 8 9 5 7. . 5 5 Percentile of nel worth Less than 25 ........ ..... 7S.4 2.2 6.2 • 3.6 2.0 14 ..l 7.7 • 6.9 79.8 25-49.9 .. ... ....... ..... ..... 92.0 6.5 13.2 * 9.3 7.2 43.1 19.3 2.3 9.5 96.1 7 5 5 0 - - 8 7 9 4 . . 9 9 . · . . . . . . . . . . . . . . . . . . . .. . . . .. . . . .. . . .. . . . . . . . . . . . . .. 9 9 8 9. .0 7 2 1 4 6 . . 2 0 2 22 8 . . 7 5 3 * . 2 3 2 9 1. . 0 1 3 1 2 2. .4 5 6 7 1 7 . . 8 6 3 3 6 0. .7 1 1 8 5 . .6 8 1 1 0 1 . . 2 2 1 9 0 9 0 . .0 4 90-100 .... ........ ..... ... 100.0 28.8 28.1 12.7 62.9 47.3 82.5 43.8 21.0 16,4 100.0

Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A 17 6. Family holding' of financial a ets, hy selected characteri tics of familit!S and type of asset, 2004 and 2007 surveys- Conlinued A. 2004 Survey of CODsumer Finances-continlled Pooled Family characteristic a T c a c c r o a ti n u o s n n l s c d c a e e t p e r o s ti s o f it i f - I I S b a o v n m. d g s s Bonds Stocks i f n m u v n e e d n s s t t a R c m c e o t e i u n r n e t ts i v n a s C l u u a r e a s h n li c f e e m a O a s n t s h a e g e ts r e d Other fin a A a s n s n e c y t i al Median value of holdings for families holding asset (thousands of 2007 dollars) AU families .... ...............• 4.1 16.5 1.1 71.4 16.5 44.4 38.7 6.6 49.4 4.4 25.3 Percentile of income Less than 20 .7 11.0 ,4 6.6 16.8 5.5 3.1 24.1 2.7 1.5 20-39.9 . 1.6 15,4 .7 8.8 27.5 11.0 4.1 54.9 2.2 53 40-59.9 . 3.3 11.0 .9 13.2 25.3 19.0 5.5 39.5 2.7 17.0 60-79.9 .. 7.1 19.8 1.1 87.9 11.0 28.0 35.1 7.7 38,4 4.4 53.2 80-89.9 .. 12.1 22.0 .9 38.4 16.5 36.8 76.9 11.0 54.9 5.5 119.1 90-100 30.8 36.2 2.2 175.7 64.5 137.3 201.4 22.0 109.8 22.0 401.2 Age of head (yea,.,) Less than 35 2.0 4.4 .5 4.8 8.8 12.1 3.3 5.5 1.1 5.7 35-44 . .................. 3.3 11.0 .5 11.0 11.0 17.5 30.6 5.5 20.1 3.8 20.9 45-54 5.3 12.1 1.1 32.9 15.9 54.9 61.0 8.8 47.2 5.5 42,4 55-64 .. 7.4 31.9 2.7 87.9 27.5 82.4 91.2 11.0 71.4 7.7 85.7 65-74 " 6.0 22.0 3.3 43.9 46.1 65.9 87.9 8.8 65.9 11.0 39.6 75 or more ............ 7.1 24.2 5.5 324.0 54.9 65.9 32.9 5.5 54.9 24.2 42.6 Family structure Sing"; with child(ren) ... 1.4 11.0 .4 6.6 23.1 15.4 2.2 6.6 3.3 5.5 Single. no child. age less than 55 1.6 11.0 1.1 32.9 8.8 16.5 15,4 5.5 32.9 2.2 6.0 Single. no child. age 55 or more 3.3 20.0 2.2 68.1 30.4 68.6 40.6 3.5 71.4 11.0 27.0 Couple with child(ren) . 5.3 11.0 .9 109.8 6.7 24.2 39.0 5.5 32.9 5.5 32.4 Couple. no child .. 6.7 22.0 1.1 87.9 22.0 54.9 58,4 1,1.0 49.4 6.6 48.3 Edllcation of head No high school diploma 1.2 16.5 .5 8.2 7.9 13.7 3.5 16.5 2.2 2.4 High school diploma 2.8 19.2 .7 22.0 8.2 27.3 22.5 5.5 54.9 3.3 13.2 Some college. ,. 2.9 11.0 .9 168.6 13.2 43.9 23.1 5.9 31.9 4.4 17.6 College degree 10.1 20.9 1.1 87.9 22.0 58.2 70.6 11.0 54.9 7.7 85.9 Race or el/micil), of respondent . White non-Hispanic . . . . . . . . . . . . . . . . 5.5 17.6 1.1 87.9 19.8 49.4 45.0 7.7 49.4 5.5 39.5 • Nonwhite or Hispanic 1.6 13.2 .7 5.8 19.8 17.6 5.5 43.9 2.7 5.5 Current work SIll/US of head Working for someone else ........... 3.5 11.0 .8 27.5 11.0 27.5 32.9 5.9 54.9 3.3 22.5 Self.employed ... .................... 11.0 22.0 2.1 142.8 27.5 65.9 65.9 11.5 46.1 6.6 58.4 Retired. ..................... 4.6 27.5 3.3 98.8 49,4 82.4 51.6 5.5 49.4 11.0 29.1 Other not wor~ing .. 2.2 8.8 2.2 5.5 17.5 34.0 9.2 3.3 5.5 C"/'TY!nt occupation of head Managerial or professional 8.9 16.5 1.1 54.9 22.0 44,4 65.9 11.0 49.4 6.6 73.2 Technical. sales. or services. 2.6 13.2 .9 38.4 8.8 27.3 23.8 5.5 65.9 3.3 13.4 Other occupation ......... 2.7 6.4 .5 5.5 22.0 22.0 5.5 39.5 2.2 12.5 Retired or other not working 3.9 24.2 2.3 87.9 38.4 72.2 46.1 5.5 49.4 7.7 21.4 Region Northeast 6.6 19.8 1.6 164.7 16.5 54.9 57.9 6.6 54.9 4,4 47.4 Midwest 4.5 11.4 .9 71.4 13.2 49.4 41.7 7.7 46.1 4.4 33.9 South . 3.3 15.4 1.1 43.9 17.6 49.4 29.7 5.5 49.4 4.1 13.4 West. 3.7 24.2 .7 109.8 19.8 28.6 32.9 6.6 49.4 5.5 25.3 Urbollicity Metropol,tan statistical area (MSA) . 4.6 16.5 1.1 87.9 18.7 54.9 43.9 6.9 49.4 5.3 30.3 • Non-MSA .. 2.4 16.5 1.1 8.8 27.5 22.0 5.5 35.5 2.2 10.3 Housing x/a/us Owner. ........ , ............. 6.6 22.0 1.1 71.4 22.0 54.9 50.5 7.7 49.4 6.6 52.6 Renter or other 1.2 7.7 .8 142.8 4.9 11.0 12.1 3.3 46.1 2.2 3.3 Pen:entile of nel wonh Less than 25 . . . . . . . . . . . . . . . . .6 2.2 .3 2.1 2.2 3.2 .9 .8 1.1 25-49.9 . 2.2 6.4 .5 3.8 8.1 12.9 4.4 10.3 2.2 10.9 50-74.9 ................. 6.4 11.4 1.1 8.8 17.6 36.8 5.5 24.1 5.5 51.8 75-89.9 .. ' 17.4 34.0 2.2 27.5 22.0 54.9 105.1 11.0 54.9 7.7 223.0 90-100 47.2 50.5 2.7 122.0 120.8 175.7 289.9 22.0 148.3 43.9 800,4 MEMO Mean value of holdings for families holding asset 29.8 60.2 6.3 600.8 176.1 202.0 133.2 25.3 227.4 43.4 220.4 NOTE: See note to table J. * Ten or fewer observations.

A 18 Federal Reserve Bulletin 0 February 2009 6. Fnmily holdings of financial assets, by selected characleri 'lics of families [lIJd type of asset, 2004 and 2007 survey'- Contillued B. 2007 Survey of Consumer Finances Pooled Family characteristic T ac ra ti n o s n - c C a e te rt s i f o i· f Savings Bonds Stocks invest- R m et c i n re t · va C lu a e s h li fe m O an th ag er e d Other fin A an n c y i al bonds ment accounts deposit accounts insurance assets asset funds Percentage of families holding asset All families . ............ 92.t 16.1 14.9 1.6 17.9 11.4 52.6 23.0 5.8 9.3 93.9 PeR'ell/ill! of income Less than 20 74.9 9.4 3.6 5.5 3.4 10.7 12.8 2.7 6.6 79.1 20--39.9 90.1 12.7 8.5 7.8 4.6 35.6 16.4 4.7 8.8 93.2 40--59.9 %.4 15.4 15.2 14.0 7.1 55.2 21.6 5.3 10.2 97.2 60--79.9 ................... 99.3 19.3 20.9 1.4 23.2 14.6 73.3 29.4 5.7 8.4 99.7 80--89.9 100.0 19.9 26.2 1.8 30.5 18.9 86.7 30.6 7.6 9.8 100.0 90--100 100.0 27.7 26.1 8.9 47.5 35.5 89.6 38.9 13.6 15.3 100.0 Age of head (years) Less than 35 87.3 6.7 13.7 13.7 5.3 41.6 11.4 10.0 89.2 35-44 . 91.2 9.0 16.8 .7 17.0 11.6 57.5 17.5 2.2 9.6 93.1 45-54 . 9,J,7 14.3 19.0 1.1 18.6 12.6 64.7 22.3 5.1 10.5 93.3 55--& ............. 96.4 20.5 16.2 2.1 21..l 14.3 60.9 35.2 7.7 9.2 97.8 65-74. 94.6 24.2 10.3 4.2 19.1 14.6 51.7 34.4 13.2 9.4 96.1 75 or more ................ 95.3 37.0 7.9 3.5 20.2 13.2 30.0 27.6 14.0 5.3 97.4 Family structure Single with child(ren) .. 84.8 9.6 10.1 8.4 9.0 36.1 24.8 13.2 88.2 Single, no child. age less than 55 . 84.3 9.6 9.9 14.7 7.7 42.8 11.4 1.6 11.1 86.9 Single. no child, age 55 or more 94.3 23.3 9.9 2.1 13.1 10.4 36.2 23.1 10.8 7.6 96.3 Couple with child(ren) 95.5 15.1 22.8 1.2 20.2 13.6 62.5 27.5 5.3 7.5 96.2 Couple, no child. 94.8 17.6 17.1 2.2 21.5 12.9 61.8 26.3 6.3 9.0 96.1 Edllcatioll of head . No high school diploma . . . . . . . . . . 75.7 9.5 3.4 3.9 2.2 21.6 12.6 L7 7.1 79.7 High school diploma ............. 90.9 14.1 11.5 .6 9.3 5.8 43.2 22.6 4.2 8.2 93.3 Some college ..... 93.9 14.1 16.4 1.2 17.4 8.9 52.5 23.4 6.6 9.8 95.5 Co liege de gree ... 98.7 21.6 21.6 3.3 31.5 21.4 73.3 27.1 8.5 10.9 98.9 Race or elhnicilY of respolldent White non-Hispanic 95.5 19.4 17.8 2.1 21.4 13.7 58.2 25.3 7.3 9.7 96.8 Nonwhite or Hispanic 83.9 8.2 7.8 .4 9.4 5.8 39.1 17.6 2.3 8.3 86.7 CII rrent work statuS of head Working for someOne else 92.6 13.2 17.0 .9 17.8 10.4 62.1 20.3 3.7 9.2 94.1 Self·employed ....................... 96.9 15.0 15.9 4.2 24.3 21.4 55.3 32.1 6.9 i4.8 98.0 Retired .... . . . . . . . . . . . . . . . . 91.6 25.7 10.2 2.3 16.4 11.3 34.2 27.3 11.2 7.0 93.7 Other not working . . . . . . . . . . . . . 78.6 5.6 10.7 • 12.8 2.4 22.6 14.5 10.6 81.4 Cllrrent occupation of head Managerial or professional . 98.3 18.2 21.1 3.1 28.7 i9.7 74.1 24.9 6.7 11.1 98.7 Technical. sales, or services . 91.9 11.5 15.0 .4 14.9 8.8 54.5 21.3 4.0 9.1 94.0 Other occupation 87.9 9.2 13.1 9.9 5.4 51.0 19.0 I I 9.6 90.2 Retired or other not working .. 89.5 22.5 10.3 2.0 15.8 9.9 32.4 25.3 9.8 7.6 91.8 Region Northeast 91.3 18.1 18.9 2.0 21.4 15.5 53.3 23.5 6.4 5.4 92.5 Midwest 93.6 16.8 16.0 1.2 17.9 10.6 57.8 26.6 6.7 9.2 95.4 South ... 91.3 15.1 12.0 1.7 15.4 9.7 48.8 23.3 5.2 8.6 93.5 West. 92.7 15.5 15.0 1.6 19.2 11.5 52.9 18.3 5.5 13.9 93.9 Urballicit), Metropolitan slatisticai area (MSA) 92.8 16.2 i5.1 l.8 19.4 12.i 54.8 22.2 5.9 9.5 94.3 Non-MSA ..................... 88.7 15.9 13.8 .8 10.9 7.7 42.0 26.7 5.5 8.6 91.8 Housing status Owner ........ 97.3 20.0 18.2 2.2 22.4 15.0 63.3 28.9 7.5 9.4 98.4 Renter or other .. 80.8 7.7 7.5 .4 8.1 3.5 29.2 10.1 2.1 9.1 84.0 Percentile of IIet worth Less than 25 ........... 76.4 2.5 4.7 4.3 19.1 7.8 7.4 79.6 25-49.9 . . ................. 93.6 9.9 12.3 10.2 3.6 48.1 19.7 1.9 8.8 96.4 50--74.9 . 98.6 19.3 17.5 17.3 10.5 62.9 28.5 6.2 8.8 99.5 75-89.9 ............. ............ iOO.O 32.6 25.9 31.6 22.5 77.4 32.1 11.2 9.4 100.0 90--100 ........... . . . . . . . . . . . . . 100.0 33.0 23.3 11.8 52.3 42.5 84.6 41.9 20.3 16.6 100.0

Changes in U.S. Family Fiiwnces from 2004 to 2007: Evidence from the Survey of Consumer Finances A 19 6. Pamily holding of financial assets, by 'elected characteristics of families and type of a ct. 2004 and 2007 urveys Continued B. 2007 Survey of Consumer Finances-(;ontinued I Pooled Family characteristic T ac ra ti n o s n · I c C a e te rt s i f o i· f S b a o v n in d g s s Bonds Stocks in m v e e n s t t · R m et e i n re t · va C lu a e s h li fe m O an th ag e e r d Other fin A an n c y i al accounts deposit funds accounts insurance assets asset Median value of holdings for families holding asset (thousands of 2007 dollars) All families , .. ,.,. . . . . . . . . . 4.0 20.0 1.0 80.0 17.0 56.0 45.0 8.0 70.0 6.0 28.8 Percentile uf income · 6 L 2 4 0 0 0 es - - - s 7 5 3 9 9 9 th . . ,9 9 9 a n . . , . . 2 . , . 0 . . . . . , ' . . " . . . . . , . . . . . . . . . . . . . , . . .. . . • . . • . .• .. .· .••. . . . • . . 1 . .• •. . . . • . . . . . , . . . . . . . . . . 6 2 1 . . . , 7 8 0 6 1 1 1 1 7 8 8 1 . , . . 0 0 0 0 1 1 . . . . 7 5 0 0 1 • • 9 .0 1 1 5 3 4 0 . . . , 5 8 0 0 3 3 3 3 5 0 7 0. . . . 0 0 5 0 4 2 1 8 3 6 2 . . , . 5 9 0 0 1 5 5 2 0 . , , , 5 2 0 0 1 8 5 5 0 6 9 2 0 . . . . 0 0 0 0 1 4 3 0 1 . . . . 0 0 0 5 5 1 8 7 8 1 . , , . 0 7 6 3 80-89.9 ,. ..... " ..... ...... ..... 12.9 20.0 2,0 81.0 15,0 46.0 85.0 9.0 30.0 10.0 129.9 90-100 ......... ..... 36.7 42.0 2,5 250.0 75.0 180,0 200.0 28.1 90,0 45,0 404.5 Age of head (years) Less than 35 2.4 5.0 .7 3,0 18.0 10,0 2.8 * 1.5 6,8 35-44 .. , 3.4 5.0 1.0 9,7 15,0 22.5 36.0 8.3 24.0 8.0 25,8 45-54 ... 5.0 15.0 1.0 200.0 18.5 50.0 67.0 10.0 45.0 6.0 54,0 5~4 ... 5.2 23.0 1.9 90.8 24.0 112.0 98.0 10,0 59.0 20.0 72.4 65-74. , 7.7 23.2 1.0 50.0 38.0 86.0 77.0 10.0 70.0 10.0 68.1 , ••••••••••••••••••••• 0.11 75 or more . 6.1 30.0 20.0 100.0 40.0 75.0 35.0 5.0 100.0 15.0 41.5 Family slruClllre Single with child(ren) ..... 2.4 7,5 1.0 13.0 46,0 30,0 5.0 5.5 10.3 Single. no child. age less than 55 .. 2.0 5,5 1.5 3.8 18.0 20.0 5.2 50.0 3.0 8.9 Single, no child. age 55 or more 2.5 28.0 3,0 50.0 25.0 77.0 45.0 5,0 100.0 3.6 24.4 Couple with child(ren) 5.0 10,0 ,8 530.0 15.0 45,0 52.0 9,0 30.0 10.0 36.3 Couple. no child. 6.0 20,0 1.0 80.0 24.0 60,0 55, I 10,0 52.0 10.0 46.1 Education of head No high school diploma 1.2 14.0 1.0 2.7 64.0 15.0 2.5 30.0 1.5 3.0 High school diploma 2.5 16.0 1.0 46.5 10.0 30,0 28.5 5,2 80.0 5.0 14.2 Some college, . , 2.8 18.0 1.0 50.0 6.0 25.0 32.0 8.0 52.0 4.0 20,0 College degree 10,0 25.0 l.l 100.0 25,0 75.0 75,0 13,0 75.0 10.0 95.7 R(lce or elhnicil), of respondelll White non·Hispanic ............... ,. 5, I 20.0 1.0 95.9 19,0 64.0 52.7 9.0 70.0 10,0 44.3 Nonwhite or Hispanic , . . . . . . . . . . . . 2.0 10.0 1.0 23.1 8,0 30.0 25.4 5.0 30.0 3,0 9.0 Current work SWluS of "elid Working ror someone else 3.8 10.0 1.0 46.8 10.5 42.0 40,0 7,5 27.2 5,0 28,5 Selr-employed .. ' .. 9.9 25.0 1.0 150.0 60.0 80.0 91.0 24,0 80.0 16,0 54,1 Retired. 4.0 30.0 2.5 79.5 28.7 78,2 48.0 5,5 100.0 10.0 29.7 Other not worki ng 1.0 15.0 2.0 • 6.3 50.0 20,8 2,2 • 3.0 3.7 Cutrrml occupatio" of head Managerial or prolessional .. 8.8 15.0 1.0 80.0 20,0 75.0 72.0 13,0 59.0 10.0 77.0 Technical, sales. or services 3.0 15.0 1.0 123.2 12.0 40,0 30,0 9.0 10,0 5.0 17,6 Other occupation ............ 2.5 10.0 .7 • 4.0 18.0 24.3 5.0 20.0 5.0 13.8 Retired or other not working .. 3.3 30.0 2.0 95.9 25.0 78.2 45.0 5,0 100.0 5.5 2.1.7 Region Northeast ......................... 5.1 20,0 1.0 114.7 17.9 50.0 57.5 9.0 73.0 10.0 43.8 Midwest -.......... ............ 3.8 12.0 1.0 49.3 14.0 37.5 36.0 7.0 67.0 6.0 31.0 South ............ 3,5 20.0 1.2 100.0 17,9 70.0 40.0 8.0 80.0 4.0 20.8 West . . . . . . . . . .. . 4,3 23,0 1.0 60.0 18.0 58.8 45,6 10.0 60.0 6.0 29.1 Urbanicitl' Metropolitan statistical area (MSA) . ,. 4.5 20.0 1.0 100.0 19.0 60.0 48.0 9.0 70.0 8.0 32.6 Non·MSA ... 2.5 10.0 1.2 50,0 11.0 34,0 31.3 5.0 45,0 2.4 15,8 Housing slalll,\' Owner , 6.2 20.0 1.0 100.0 20.0 60.0 57,0 10.0 70,0 10,0 54.3 Remer or other 1.2 10.0 .7 15,0 5.5 40,0 10.0 2,0 54,0 1.8 3.8 Percentile of net wonh Less than 25 .7 2.0 .5 l.l 3.2 1.2 1.2 1.4 25-49.9 . 2.0 7.0 ,7 3.0 9.0 15,0 3,0 13,8 3.0 13,2 50-74.9 ,., ........... 6.1 15.0 I.2 6.0 25,0 48.6 6.5 50,0 10,0 59.6 75-89.9 .... 15.5 25.0 2.0 20.0 50,0 117,0 15.0 80.0 20.0 215.0 90-100 46.5 50.0 3.5 150,0 125.0 264.0 314,0 30.0 180.0 50.0 773.0 MEMO Mean value or holdings for ramilies holding asset 26.4 55,6 6.6 57403 221.1 309.7 145,8 31.3 248.8 50.3 235.8 NOTE: See note to table I. • Ten or fewer observations.

A20 Federal Reserve Bulletin D February 2009 period, at 93.9 percent (first half of tables 6.A and was neither working nor retired, to be renters, or to 6.B, last column). However, the recent data show have net worth in the bottom quartile. See box changes for some demographic groups. By income "Decisions about Checking Accounts" for a discus percentile groups, ownership fell for the first and third sion of the reasons families do or do not have a quintiles and rose or stayed the same for other income checking account. Over the 2004-07 period, transac groups; by age, an increase appeared only for the tion account ownership rose noticeably-by 3 to 55-to-64 age group; by family structure, ownership 4 percentage points-for families in South, nonwhite increased for childless couples and childless single or Hispanic families, and families headed by a person families headed by a person older than age 55 but who did not graduate from high school or who was declined for other single families; and by work status, aged 55 to 64. ownership rose substantially for families headed by a The slight overall expansion in ownership of trans person who was self-employed or neither working action accounts in the recent three-year period is nor retired. Ownership increased for nonwhite or reflected in the small changes in the types of transac Hispanic families and decreased for white non tion accounts held by families. Ownership of check Hispanic families. The share of homeowners with ing and savings accounts inched up, while ownership financial assets rose, but the ownership rate fell for of money market and call accounts slightly declined renters. (table 6.1). In contrast to the drop in the overall ratio of financial assets to total assets over the recent period, 6.1. the median holding of financial assets for families All families having such assets rose 13.8 percent (second half of Type of transaction account 2007 I Change. 2004--{)7 tables 6.A and 6.B, last column), while the mean rose (percent) (percentage points) 7.0 percent (memo line). The recent change in the Checking . 89.7 .3 median did not completely offset the decrease over Savings. 47.2 .1 Money market 20.9 -.2 the previous three-year period. The more detailed Call .. 2.1 -4 picture is one of increases in the medians over the recent period for most demographic groups, including The savings account category includes a relatively substantial increases for the lowest two income quin small number of tax-preferred accounts such as medi tiles and all age groups except the 55-to-64 and calor health savings accounts and Coverdell or 529 75-or-more categories. Median holdings increased education accounts.21 For families with a savings most markedly for single families with children and account, ownership of any of these types of tax younger childless single families; for families in the preferred accounts increased, from 2.5 percent in 65-to-75 age group; for families living in the South or 2004 to 3.8 percent in 2007. In both of these survey outside of MSAs; and for nonwhite or Hispanic years, 529 plans accounted for about 80 percent of the families. Mean holdings of those with financial assets number of tax-preferred savings accounts. generally rose; among the scattered declines, the Median holdings in transaction accounts for those largest was a 52.0 percent drop for families in the who had such accounts fell 2.4 percent from 2004 to other-not-working work-status group (means by 2007, while the mean fell 1 1.4 percent. Across demo groups are not shown in the tables). graphic groups, the patterns of changes in the median are mainly a mixture of substantial increases and Tran action Accounts and Certificates of D po, it decreases. Median balances rose for the lowest and highest income groups and the lowest net worth In 2007, 92.1 percent of fami lies had some type of quartile and fell or was unchanged for the middle transaction account-a category comprising check income groups and all the other wealth groups; across ing, savings, and money market deposit accounts; age groups, the median increased substantially for the money market mutual funds; and call or cash accounts less-than-35 and the 65-to-74 age groups and fell or at brokerages. The increase of 0.8 percentage point in rose slightly for other families. By family structure, ownership since 2004 resumed the upward trend seen median balances increased sharply for single families in earlier surveys after the ownership rate had re with children and rose for childless single families mained essentially unchanged over the previous headed by a person aged less than 55, but they fell for three-year period. Families that did not have any type other families. Across work-status groups, median of transaction account in 2007 were disproportion ately likely to be in the bottom income quintile group, 21. Coverdell savings accounts, formerly known as education to be headed by a person younger than 35, to be individual retiremenl accounts, and 529 saving plans are tax-deferred nonwhite or Hispanic, to be headed by a person who plans that parents or others may use to save for educational expenses.

u.s. Changes in Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A21 Decisions about Checking Accounts Between 2004 and 2007. the proportion of families with tables), the general pattern of responses is similar to that any type of transaction account edged up slightly (table 6 for all families without a checking account, but some in the main text). while the share without a checking differences are evident. For families that once had a account fell 0.3 percentage point, from 10.6 percent to checking account, the proportion reporting that they did 10.3 percent (data not shown in the tables). The decline in not like banks, found service charges too high, or had the fraction of families without a checking account follows credit problems all rose from 2004. These increases were a longer trend; in 1989, the share was 18.7 percent. I offset by decreases in the proportion reporting that they Among families without a checking account in 2007, did not write enough checks, could not manage or bal.ance 52.7 percent had held such an account in the past, a checking account, or did not have enough money for an 63.2 percent had incomes in the lowest quintile of that account to be worthwhile. distribution. 56.3 percent were headed by a person The SCF asked all families with a checking account to younger than 45. and 58.3 percent were nonwhite or give the most important reason they chose the financial Hispanic. The SCF asked all families that did not have a institution for their main checking account (table B). In checking account to give a reason for not having an B. Distribution of reasons cited by respondents as the account (table A). The most commonly reported reasonmost important reason for choosing institution for A. Distribution of reasons cited by respondents for their main checking account, 1998-2007 surveys their families' not having a checking account, by Percent reason, 1998-2007 surveys I I I Percent Re,lson 1998 200 I 2004 2007 I I I Location of their offices ........ 43.6 42.8 45.4 45.9 Reason 1998 200 I 2004 2007 Had the lowest fees/minimum balance requirement . 18.4 16.6 16.3 13.7 Do not write enough checks to Able to obtain many services make it wonhwhile 28.4 28.5 27.9 18.7 at one place. 16.0 16.4 15.3 16.2 Minimum balance is too high . 8.6 6.5 5.6 7.6 Recommended: friend/family Do not like dealing witll banks IS.5 22.6 22.6 25.2 has account there ......... 3.6 4.7 3.9 4.2 Service charges are too high . 11.0 10.2 11.6 12.3 Personal relationship: they Cannot manage or balance a know me: family member checking account .......... 7.2 6.6 6.S 3.9 works there . 3.9 4.0 35 4.2 No bank has convenient hours Connection through work or 10c.1ti on . . . . . . . . . . . . . . . . . .... 1.2 .4 l.l .8 or school 1.4 2.0 3.5 3.3 Do not have enough money ... .... 12.9 14.0 14.4 10.4 Always done business there: Credit problems . 2.7 3.6 2.4 6.6 banked there a long time: Do not need or want account 6.3 5.1 5.2 S.9 other business there .... 2.7 2.4 2.9 3.0 Other .. 3.1 2.3 2.4 5.6 OO'ered safety and absence Total .. 100 100 100 100 of risk .. . . . . . .. . 2.1 2.2 1.9 2.9 Other convenience: payroll deduction/direct deposit I.2 U 1.2 1.0 given by 25.2 percent of such families-was that the Other ... . . . . . . . . . 7.1 7.5 6.1 6.1 family did not like dealing with banks. Another 18.7 per Total . ..... 100 100 100 100 cent did not write enough checks to make account ownership worthwhile; this reason had been the most 2007, 45.9 percent of families chose the institution for frequently reported one in each of the earlier years their main checking account for reasons related to the shown. The proportion reporting they did not have enough location of the offices of the institution.2 Another 16.2 per money to make an account worthwhile also declined cent placed the most importance on the ability to obtain notably-from 14.4 percent in 2004 to 10.4 percent in many services at one place, and 13.7 percent singled out 2007. Another 12.3 percent of families said that service the importance of obtaining the lowest fees or minimum charges were too high. The SCF showed a sizable increase balance requirements. Absence of risk was of primary in the fraction of families reporting credit problems as a importance for only a relatively small fraction of families. reason-from 2.4 percent in 2004 to 6.6 percent in 2007: Over the 2004-07 period, the most noticeable changes in the fraction of families that cited they did not need or these responses were a decrease in the fraction of families want an account as a reason also increased substantially, citing reasons related to the lowest fees or minimum from 5.2 percent in 2004 to 8.9 percent in 2007. balance requirements and the increase in the fraction When attention is further restricted to families that Citing reasons related to the safety and absence of risk once had a checking account (data not shown in the oll"ered by the institution. I. For the definition of "transaction account," see the main text. For a 2. For a discussion of the definilion of local banking markels. see more extensive discussion of the ways that families obtain checking and Dean FAme!. Anhur B. Kennickell. and Kevin B. Moore (2008), credit services, see Jeanne M. Hogarth. Christoslav E. Anguelov, and "Banking Market Definition: Evidence from rhe Survey of Consumer linkook Lee (2005), "Who Has a Bank Account') Exploring Changes over Finances." Finance and Economics Discussion Series 2008-35 (Wash· Time, 1989-2001," }ollmal of Family & Econumic {""lies. vol. 26 ington: Board of Governors of the Federal Reserve System. October), (I). pp. 7-30. www.federalreservc.gov/pubs/fedS/200SI200S351200835pap.pdf.

A22 Federal Reserve Bulletin 0 February 2009 balances fell for all groups except the working-for in the fraction of families owning bonds of multiple someone-else category. Holdings increased for house types. The proportion of families that owned govern holds headed by a person in a technical, sales, or ment bills and bonds, mortgage-backed bonds, and service occupation but decreased for the remaining corporate or foreign bonds fell in the recent period, three occupation groups. Median balances increased while ownership of tax-exempt bonds was unchanged strongly for nonwhite or Hispanic families and fell (table 6.2). somewhat for other families. By region, median holdings declined substantially for families in the 6.2. Northeast and Midwest. Certificates of deposit (CDs)-interest-bearing de All families Type of bond 2007 Change, 2004--07 posits with a set term-are traditionally viewed as a (percent) I (percentage points) low-risk saving vehicle, and they are often used by Government ............ . .4 -.1 persons who desire a safe haven from the volatility of Tax exempt ................ . 1.0 t Mongage backed . .3 -.1 financial markets. Over the 2004-07 period, the Corporate or foreign . .4 -.4 attractiveness of CDs increased as the interest rates + Less than 0.05 percent. on them rose. The resulting increase of 3.4 percentage points in ownership was the largest increase observed Ownership of any type of bond is concentrated in the SCF since 1989. Over the recent period, among the highest tiers of the income and wealth ownership increased among almost all demographic distributions, and these groups saw little change in groups. Increases in ownership were particularly ownership from 2004 to 2007. The median value of strong for the top income group, the oldest age group, bonds for families that had them rose 12.0 percent, retired families, and the next-to-highest net worth while the mean fell 4.4 percent. group. The overall median value of holdings of CDs increased 21.2 percent over the three-year period, Publicly Traded Stock while the mean value decreased 7.6 percent. Consid eration of changes in the median across demographic The direct ownership of publicly traded stocks is groups reveals substantial increases for the first and more widespread than the direct ownership of bonds, third income quintiles, the some-college education but, as with bonds, it is also concentrated among group, the other-not-working group, and the other high-income and high-wealth families. The share of occupation group. The overall decline in the mean families with any such stock holdings declined 2.8 per suggests that balances on most new accounts tended centage points from 2004 to 2007, to 17.9 percent, to be moderate. thereby continuing a decline observed over the previ ous three-year period. Across demographic groups, Saving Bonds and Other Bonds the recent decline was most marked for the highest decile of the income distribution, families headed by Savings bonds are owned disproportionately by fami a person who was aged 55 to 74 or who was lies in the highest 40 percent of the income distribu self-employed, families in the Northeast or the Mid tion and by families in the top half of the distribution west, and fami lies in the top quartile of the net worth of net worth. Over the 2004-07 period, the ownership distribution. of savings bonds declined 2.7 percentage points, to The major stock price indexes increased about 14.9 percent overall, and it fell for virtually all 30 percent over the 2004-07 period; at the same time, demographic groups. Median holdings fell 9.1 per the median amount of directly held stock for families cent, but the mean rose 4.8 percent. with such assets rose 3.0 percent, and the mean Other bond types tend to be very narrowly held, climbed 25.6 percent. The median value declined for and the ownership rate fell to 1.6 percent in 2007, a many demographic groups but rose substantially for drop of 0.2 percentage point from 2004.22 Although the two family-structure groups with children and for the ownership rate for such bonds fell only slightly, the self-employed. The mean amount of directly held changes in the types of bonds held by families were stock increased across most demographic groups somewhat larger and were driven mainly by a decline (data not shown in the tables). The great majority of families with directly held 22. "Other bonds" as reported in the survey are held directly and stock owned stock in only a small number of compa include corporate and mortgage-backed bonds; federal, state, and local nies. Over the three-year period, the share of families government bonds; and foreign bonds. In this article, financial assets owning stock in only one company increased held indirectly are those held in retirement accounts or in other managed assets. (table 6.3).

Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A23 6.3. 6.4. Families with directly held stock.s All families Number of I Type of pooled directly held stocks 2007 Change, 2004-07 investment fund 2007 I Change, 2004-07 (percent) (percentage points) (percent) (percentage points) I 36.4 1.8 Stock. 10.2 3.2 2 to 9. 47.6 -.1 Tax·free bond . 2.1 -.8 10 or more . ............ . 16.0 -\.7 Government bond .. 1.2 .1 Other bond. 1.0 -.5 Combination . 1.4 -1.3 Other .. .5 -.2 For 36.1 percent of stockowners in 2007, at least one of the companies in which they owned stock was one that employed, or had employed, the family head Reliremenl Accounts or that person's spouse or partner. Ownership of stock in a foreign company was less common; only 15.8 per Ownership of tax-deferred retirement assets such as cent of stockholders had this type of stock (data not personally established indi vidual retirement accounts shown in the tables). The 2004 data show a similar (IRAs) or job-based 401(k) accounts tends to increase pattern. with families' income and net worth.24 For several reasons, ownership is also more likely among fami Poled Lnvestment Funds lies headed by a person less than 65 years of age than among the older groups. First, even though retirement Pooled investment funds are among the least com accounts have been in existence for more than 25 monly held of the specific financial assets shown in years, they may not have become common until table 6,23 As was the case for directly held bonds and relati vely late in the careers of many persons in the stocks from 2004 to 2007, direct ownership of pooled older groups. Second, beginning in the year that a investment funds fell-a decline of 3.6 percentage person reaches age 591/2, funds held by that person in points, to 11.4 percent of families in 2007. Ownership retirement accounts may be withdrawn without pen of pooled investment funds declined for almost every alty, and some in the two oldest age groups may have demographic group over the three-year period. Both already done so. Third, families may have used funds the overall change and the changes for demographic from retirement accounts accumulated from previous groups continue the pattern observed in the previous employment to purchase an annuity at retirement; three-year period. annuities are treated in the SCF as a separate type of The survey also collects information on the differ managed asset. ent types of pooled investment funds owned by From 2004 to 2007, the fraction of fami I ies wi th families. Ownership shifted over the recent period to retirement accounts rose 2.9 percentage points, to stock funds from most other types of funds; the 52.6 percent; the increase offset most of the 3.0 per residual "other" category, which consists almost centage point decrease over the preceding three years. entirely of hedge funds and exchange-traded funds, In the recent period, the fraction of families that had decreased slightly (table 6.4). some type of account plan associated with a current Among families owning pooled investment funds, or past job or that held an IRA or Keogh account the value of holdings has continued an increase seen over the preceding decade; in the recent three-year period, the median holdi ng rose 26.1 percent, and the 24. Tax-deferred retirement accounts consist of IRAs, Keogh mean rose 53.3 percent. Median and mean values accounts, and certain employer·sponsored accounts. Employer· increased across almost every demographic group, sponsored accounts consist of 401(k), 403(b), and thrift savings accounts from current or past jobs; other current job plans from which evidence that the decrease in ownership was concen loans or withdrawals can be made; and accounts from past jobs from trated among families with small account balances which the family expects to receive the account balance in the future. (data not shown in the tables). This definition of employer-sponsored plans is intended to confine the analysis to accounts that are portable across jobs and for which families will ultimately have the option to withdraw the balance. 23. In this article, pooled investment funds exclude money market IRAs and Keoghs may be invested in virtually any asset. including mutual funds and indirectly held mutual funds and include all other stocks, bonds, pooled investment funds, options, 'and real estate. In types of directly held pooled investment funds, such as traditional principle, employer-sponsored plans may be invested in a similarly open-end and closed-end mutual funds, real estate investment trusts, broad way, but, in practice, a person's choices for investment are and hedge funds. sometimes limited to a narrower set of assets.

A24 Federal Reserve Bulletin D February 2009 increased, and the fraction that had at least one is typically based on workers' salaries and years of account of each type rose as well (table 6.5). work with an employer, a group of employers, or a union. Unfortunately, future income streams from 6.5. OASI and defined-benefit plans cannot be translated directly into a current value because valuation de All families pends critically on assumptions about future events Type of retirement account 2007 Change, 2004-07 (percent) I (percentage points) and conditions-work decisions, earnings, inflation rates, discount rates, mortality, and so on-and no Account plan from current or past job . 38.0 2.0 widely agreed-upon standards exist for making these Individual retirement account or Keogh. 30.6 1.6 assumptions.26 However, the SCF does contain substantial infor MEMO Both types . 14.3 1.8 mation for family heads and their spouse or partner regarding any defined-benefit plans or other types of Over the 2004-07 period, ownership increased for plans with some kind of account feature to which they nearly all groups. Substantial increases were reported have rights from a current or past job.27 In 2007, for families in the 45-to-54 and 65-to-74 age groups, 57.7 percent of families had rights to some type of nonwhite or Hispanic families, families living in the plan other than OASI through the current or past South, and families in the technical, sales, or services work of either the family head or that person's spouse occupation group. or partner, a level nearly the same as in 2004. For this In a continuation of the trend over the preceding group of families, the fraction with a standard defined decade, holdings in retirement accounts increased benefit plan with an annuity payout scheme declined markedly in the 2004-07 period; for families having over the recent period, while the fraction with a plan retirement accounts, the median rose 16.3 percent, with at least some account feature and the fraction and the mean rose 9.5 percent. Gains also appeared in that had both types of plans increased (table 6.6). the median holdings of most demographic groups 6.6. over the recent period; some of the largest increases were for families in the middle of the income and Families with any pension plan wealth distributions, families in the high-school Type of pension plan 2007 Change, 2004-07 diploma and some-college education groups, single (percent) (percentage points) families with children, nonwhite or Hispanic families, Defined benefit 55.8 -1.6 Account plan . 658 3.3 the self-employed work-status group, families in the South and West, and families residing in nOD-MSA MEMO Both types . 21.6 1.8 areas. Although tax-deferred retirement assets are clearly In many pension plans with account features, con an important element in retirement planning, families tributions may be made by the employer, the worker, may hold a variety of other assets that are intended, at or both. In some cases, these contributions represent a least in part, to finance retirement. Such other assets substantial amount of saving, though workers may might also be used for contingencies as necessary. offset this saving by reducing their saving in other Similarly, a need for liquidity might drive a family to forms. An employer's contributions also represent liquidate or borrow against a tax-deferred retirement additional income for the worker. In 2007, 87.1 per asset, even if it will be assessed a penalty for doing cent of families with an account plan on a current job so. Two common and often particularly important 26. For one possible calculation of net worth that includes the types of retirement plans are not included in the assets annuity value of payments from defined-benefit pensions and OAS!, described in this section: Social Security (the feder see Arthur B. Kennickell and Annika E. Sun den (1997), "Pensions, Social Security, and the Distribution of Wealth," Finance and Econom ally funded Old-Age and Survivors' Insurance pro ics Discussion Series 1997-55 (Washington: Board of Governors of gram, or OASI) and employer-sponsored defined the Federal Reserve System, October), www.federalreserve.gov/ pubs/ benefit plans. OASI is well described elsewhere, and feds! 1997/index.html. 27. The definition of account plan used here differs slightly from it covers the great majority of the population.25 The that used in computing the survey wealth measure, which includes retirement income provided by defined-benefit plans account balances only if the family has the ability to make withdrawals from, or borrow against, the account. Here the only criterion used in classification is whether any account balance exists. For example, a 25. For a detailed description of OASI, see Social Security Admin defined-benefit plan with a portable cash option, which would allow istration, "Online Social Security Handbook," Publication 65-008, the covered worker to receive a lump sum in lieu of regular payments www.ssa.gov/OP_Home/handbook/ssa-hbk.htm. in retirement, would be treated as an account plan here.

Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A25 of either the family head or that person's spouse or policy payments are invested. Investment returns on partner had an employer that made contributions to such policies are typically shielded from taxation the plan, a decline of 1.6 percentage points from until the money is withdrawn; if the funds remain 2004. In 2007, 91.4 percent of families with such untapped until the policyholder dies, the beneficiary plans made contributions themselves, an increase of of the policy may receive, tax-free, the death benefit 2.1 percentage points from 2004. The median annual or the cash value, whichever is greater. In contrast, contribution by employers who contributed to such term insurance, the other popular type of life insur accounts was $2,200 in 2007, and the median contri ance, offers only a death benefit. One attraction of bution by families that contributed was $2,500; both cash value policies for some people is that they amounts fell slightly from 2004 levels (data not promote regular saving funded through the required shown in the tables). policy premium. The eligibility of working heads of families to Ownership of cash value life insurance is broadly participate in any type of job-related pension rose spread across demographic groups, with a tendency from 54.8 percent in 2004 to 55.9 percent in 2007; it toward increasing rates among families with higher had declined 2.4 percentage points over the preceding levels of income and net worth and those with older three years (data not shown in the tables). Participa family heads. Ownership of cash value policies over tion by eligible workers is usually voluntary. In 2007, the 2004-07 period continued a declining trend, 83.8 percent of family heads who were eligible to decreasing 1.2 percentage points, to 23.0 percent of participate elected to do so, down slightly from families in 2007. The decline was shared by most 84.1 percent in 2004.28 The choice to participate demographic groups. Over the three-year period, appears to be related strongly to income. In 2007, the ownership of any type of life insurance, cash value or fraction of eligible family heads declining to partici term, also fell slightly-from 65.4 percent in 2004 to pate fell as income rose, and this general pattern was 64.9 percent in 2007 (data not shown in the tables). not substantially altered from 2004 (table 6.7). Of those families with some type of life insurance, the proportion with term policies was about unchanged, 6.7. while the proportion with cash value policies fell; these changes are similar to trends in the earlier Families headed by a person who was eligible for a work-related surveys. retirement plan on a current job and Percentile of income who declined to panicipate After declining over the previous three-year period, I the median value of cash value life insurance for 2007 Change, 2004-07 (percent) (percentage points) fami lies that had any such insurance rose 21.2 percent Less than 20 54.3 3.7 between 2004 and 2007, and the mean rose 23.7 per 20-39.9 . 28.1 -1.6 40-59.9 18.5 3 cent. The median showed increases across most 60-79.9 .. 10.5 -1.5 demographic groups, although it declined consider 80-89.9. ......... . 10.9 2.0 90-100 6.5 1.5 ably for families in the other-not-working work-status category, renter families, and families in the second Ca h Value Life lnSllraJlCe quartile of the wealth distribution. Cash value life insurance combines an investment Other Managed As_e ts vehicle with insurance coverage in the form of a death benefit.29 Some cash value life insurance poli Ownership of other managed assets-personal annu ities and trusts with an equity interest and managed cies offer a high degree of choice in the way the investment accounts-is concentrated among fami lies with higher levels of income and wealth and 28. An analysis of the March Current Population Survey (CPS) among families headed by a person who is aged 55 or with a definition of family head that is closest to that in this article shows an opposite trend in pension eligibility for employed family older or who is retired.3o Ownership of these assets heads, but that trend is at a similar level as in the SCE The CPS eligibility estimate for family heads with a job in the past year was 57.8 percent in 2004 and 53.9 percent in 2007. Differences in the 30. Annuities may be those in which the family has an equity definition of the relevant employment may explain some of the interest in the asset or in which the family possesses an entitlement difference in the levels in the two surveys. Unlike the SCF, the CPS only to a stream of income. The wealth figures in this article include shows a small increase in the uptake rate for such eligible workers only the annuities in which the family has an equity interest. In 2007. from 83.0 percent in 2004 to 83.3 percent in 2007. 5.5 percent of families reported having any type of annuity. and of 29. The survey measures the value of such policies according to these families. 81.0 percent reported having an equity interest. The their current cash value, not their death benefit. The cash value is trusts or managed investment accounts included in other managed included as an asset in this article only when the cash value at the time assets are those in which families have an equity interest and for which of the interview was nonzero. component parts were not separately reported. Typically. such accounts

A26 Federal Reserve Bulletin 0 February 2009 declined 1.5 percentage points between 2004 and this article, the median holding rose 9.1 percent, to 2007 after a small increase over the previous three $120,000 (data not shown in the tables). years. Ownership fell in the recent three-year period As noted in the discussion of retirement accounts, for almost every demographic group, with the largest some families use settlements from retirement ac declines for families in the Midwest and for the counts to purchase an annuity. In 2007, 30.4 percent next-to-highest income and net worth groups. Across of families with annuities had done so (data not all families, the fraction with an annuity declined over shown in the tables). Of these families, 71.7 percent the period, and the fraction with a trust or managed had an equity interest in their annuities. investment account inched up, while the fraction with both categories of managed assets was essentially Other Financial Assets unchanged (table 6.8). Ownership of other financial assets-a heterogeneous 6.8. category including oil and gas leases, futures con tracts, royalties, proceeds from lawsuits or estates in All families settlement, and loans made to others-fell 0.7 per Type of olher managed assel 2007 I Change. 2004-07 centage point between 2004 and 2007, to 9.3 percent. (percenl) (percentage poinls) Ownership of such assets tends to be more common Annuily . 4.5 -1.4 Trust or managed inveslment among higher income and wealth groups, younger account J.7 .1 age groups, and families headed by a person who is MEMO self-employed. Ownership across demographic groups Both lypeS . .3 generally declined over this period, while the median t Less than 0.05 percent. holding for those who had such assets increased 36.4 percent, to $6,000. Between 2004 and 2007, the median value of other Holdings may be grouped into four categories: managed assets for families that had such assets cash, which includes money owed to families by increased 41.7 percent, an increase that offset the other persons; future proceeds, which include amounts decline in the preceding three-year period. Over the to be received from a lawsuit, estate, or other type of more recent period, the corresponding mean value settlement; business items, which include deferred increased 9.4 percent. Median holdings rose for many compensation, royalties, futures contracts, and deri va demographic groups; noticeable exceptions were fami tives; and other. The proportion of families holding lies in the top two income deciles and families headed various types of other financial assets remained fairly by a person who was working for someone else or constant over the three-year period, with cash being who was working in a technical, sales, or service job by far the most frequently held component (table 6.9). or a job in the other-occupation category. The rise in the median value reflects substantial increases in 6.9. annuities and modest increases in trusts or managed investment accounts. For families with an equity All faIm ities interest in an annuity, the median holding rose Type of other financial assel 2007 Change. 2004-07 (percent) (percentage points) 23.1 percent, to $50,000 in 2007; for families with a trust or managed investment account as defined in Casb. 8.1 -.8 Fulure proceeds .9 . I Business items . .5 . I Other .. are those in which the owner>hip is complicated or the management is undertaken by a professional. In 2007, 84.8 percent of families with ;. Less than 0.05 percent. trusts or managed investment accounts had an equity interest in such an account. Some publicly traded companies offer stock op The survey encourages respondents who have trusts or managed tions to their employees as a form of compensation.)' investment accounts that are held in relatively common investments to report the components. Of the 3.8 percent of families that reported Although stock options, when executed, may repre having any kind of trust or managed investment account in 2007. sent an appreciable part of a family's net worth, the 47.1 percent of them reported at least one of the component assets survey does not specifically ask for the value of these separately. Of families that detailed the components in 2007. 84.8 per cent reported some type of financial asset. 19.0 percent reported a optionsY Instead, the survey asks whether the family primary residence, 15.3 percent reponed other real estate, 15.3 percent reported a business, and 2.9 percent reported another type of asset (data not shown in the tables). The fraction of these families reporting 31. See Jeffrey L. Schildkraut (2004), "Stock Options: National the primary residence as a trust component increased 8.0 percentage Compensation Survey Update" (Washington: Bureau of Labor Statis points between 2004 and 2007, and the fraction reporting a business tics. September), www.bls.gov/opub/cwc/cm20040628ybOlpl.htm. increased 11.7 percentage points; the fraction reporting other real 32. Because such options are Iypically not publicly traded or their estate or another type of asset was linle changed. e)(ecution is otherwise constrained. their value is uncertain until the

u.s. Changes in Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A27 7. Direct and imiirect family holdings of stock. by selecll:d characteristics of familjes. 1998-2007 surveys Percent except as noted Families having stock holdings, Median value among families with holdings II Stock holdings as share of direct or indirect (thousands of 2007 dollars) 'I group's financial assets Family characteristic -- I 1998 2001 I 2004 I 2007 1998 I 2001 I 2004 I 2007 I 1998 I 2001 I 2004 I 2007 All families . ... 48.9 52.2 50.2 51.1 31.8 40.4 35.7 35.0 54.0 56.1 51.3 53.3 Perr:enlile oJ income Less than 20 ..... 10.0 12.9 11.7 \3.6 6.4 8.8 8.2 6.5 20.4 37.4 32.0 39.0 6 2 4 0 0 0 - - - 7 5 3 9 9 9 . . . 9 9 9 . . . . . .. . . . . . . . . . . . . ., . . .. . . . . .,.. 3 6 5 9 0 0. . . 8 3 2 5 3 75 2 4 . . . 5 7 1 5 6 2 9 9 1. . . 9 7 6 4 7 3 9 0 4 . . .0 5 5 2 1 1 4 2 5. . . 3 7 2 3 1 3 9 7 . . . 5 5 1 2 1 11 8 6 . . . 0 5 7 3 1 4 8 7 . . . 8 7 1 2 4 3 5 9 8. . . 8 8 1 4 3 5 6 2 5. . .0 8 6 4 4 3 3 0 \, . . 7 4 9 5 3 3 4 8 2 . . . 3 3 5 80-89.9 ............. 77.9 82.0 83.8 84.4 57.3 75.6 60.9 62.0 50.4 57.3 48.8 49.3 90-100 .......... 90.4 89.7 92.7 9\.0 17\.9 289.7 225.2 219.0 62.5 60.5 57.5 57.6 Age oJ head (years) Less than 35 ........ 40.8 49.0 40.8 38.6 8.9 8.2 8.8 7.0 44.9 52.5 40.3 44.3 35-44 . ...... 56.7 59.5 54.5 53.5 25.5 32.2 22.0 26.0 55.0 57.2 53.5 53.7 45-54. .... ........ 58.6 59.3 56.5 60.4 48.4 58.5 54.9 45.0 55.7 59.1 53.8 53.0 55-64 .... ..... .. 55.9 57.4 62.8 58.9 59.8 94.2 78.0 780 58.4 56.2 55.0 55.0 65-74 .. ........ 42.7 40.0 46.9 52.1 71.3 175.8 76.9 57.0 51.3 55.4 5\.5 55.3 75 or more . ........ 29.4 35.7 34.8 40.1 76.4 128.7 94.3 41.0 48.7 51.8 39.3 48.1 HOI/sing slaws Owner ......... 59.8 62.4 60.9 62.5 43.3 585 49.4 41.2 55.1 56.8 51.9 53.8 Renter or other . .... 27.5 30.9 26.4 26.0 9.5 8.2 96 8.6 40.5 46.2 39.2 45.0 NOTE: Indirect holdings are those in pooled investment trusts, retirement ac counts, and other managed assets. See also note to table I. head or that person's spouse or partner had been person younger than 45 or aged 55 to 64; ownership given stock options by an employer during the pre rose substantially for fami lies headed by a person ceding year. In 2007, 8.3 percent of families reported aged 45 to 54 or older than 65. having received stock options, a decline of 1.0 per At the same time, the overall median value of centage point below the level in 2004; this decrease direct and indirect stock holdings dropped 2.0 per continues a downward trend since the peak of 11.4 per cent. Changes in the median value across demo cent recorded in the SCF in 2001 (data not shown in graphic groups were mixed, with declines more com the tables).33 mon for groups that experienced increases in ownership, an indication that most new owners had Direct and Indirect Hiding, of Publicly Traded small amounts. As a proportion of financial assets, Stocks holdings rose 2.0 percentage points overall, with substantial increases for the first and fourth income Families may hold stocks in publicly traded compa quintiles and the oldest age group. nies directly or indirectly, and information about each As noted earlier in the discussion on net worth, the of these forms of ownership is collected separately in stock markets have undergone sizable declines since the SCF. When direct and indirect forms are com the data collection for the 2007 SCF was completed. bined, the 2007 data show a resumption of a trend of To gauge the potential effect of these changes on the increasing stock ownership (table 7). Between 2004 median amount of equity held by families, the equity and 2007, the fraction of families holding any such values in the survey were deflated by the ratio of the stock rose 0.9 percentage point, to 51.1 percent, a average of the Wilshire 5000 index in October 2008 level still below the 2001 peak of 52.2 percent. Much to the value of the index on the day of the interview, like ownership of directly held stock, ownership of assuming a homogeneous rate of return for all equity direct and indirect equity holdings is more common holders and no changes in the portfolios of families among higher-income groups and among families since the time of the survey. Under this scenario, the headed by a person aged 35 to 64. Over the recent median value of equity falls 35.7 percent, from the three-year period, ownership increased for all income 2007 value of $35,000 to $22,500 (data not shown in groups except the third quintile and top decile. Across the tables). age groups, ownership fell for families headed by a Among families that held equity, either directly or indirectly, in 2007, ownership through a tax-deferred exercise date; until then, meaningful valuation would require complex retirement account was most common, followed by assumptions about the future behavior of stock prices. direct holdings of stocks, direct holdings of pooled 33. Data on the awarding of options have been collected in the SCF since 1995. investment funds, and managed investment accounts

A28 Federal Reserve Bulletin D February 2009 or an equity interest in a trust or annuity. Over the share of nonfinancial assets fell 2.2 percentage points, 2004-07 period, ownership of tax-deferred accounts to 48.1 percent, still above its share before 2004. The rose, while ownership of all other types of equities share of equity in nonresidential property also de fell; the fraction of equity owners with mUltiple types clined. The largest offsetting increase was in the share also declined (table 7.1). of business equity, which rose 3.8 percentage points over the period to its highest recorded share of 7.1. 29.7 percent in 2007. In 2007, the level of ownership of nonfinancial Families with equity Type of direct or assets was 92.0 percent of families, 0.5 percentage indirect equity 2007 Change, 2004-07 (percent) (percentage points) point lower than in 2004 (first half of tables 9.A and Tax-deferred account 839 3.3 9.B, next-to-Iast column). Across most of the demo Directly held stock .. 35.1 -6.0 graphic groups shown, the 2007 rate was 85 percent Directly held pooled investment fund . 21.1 -7.3 or more; exceptions were the lowest income and Managed investment account. or equity interest in a trust wealth groups, younger childless single families, or annuity 8.1 -1.3 families headed by a person who was neither working MEMO nor retired, renters, families headed by a person Multiple types. 37.3 -6.7 without a high school diploma, and families living in the Northeast. Over the 2004-07 period, ownership The distribution of amounts of holdings over these rose most for the 55-to-64 age group, families with types of equities shows a different pattern. Of the total children, nonwhite or Hispanic families, and families amount of equity, 37.8 percent was held in tax living in the South. Substantial declines in ownership deferred retirement accounts, 33.6 percent as directly were seen by the oldest age group, the lowest quintile held stocks, 22.1 percent as directly held pooled of the income distribution, families without children, investment funds, and 6.5 percent as other managed families headed by a retiree, and families living in the assets (data not shown in the tables). Northeast. Over the recent period, the median holding of Nonfinancial Assets nonfinancial assets for families having any such assets rose 9.3 percent, and the mean increased By definition, a rise in nonfinancial assets as a share 16.7 percent. Across demographic groups, substantial of total assets must exactly offset the 1.8 percentage gains in the medians far outnumbered declines. The point drop in the share of financial assets from 2004 largest gains in the median value occurred for the to 2007, which was discussed earlier in this article lowest quinti Ie of the income distribution, and smaller (table 5). The changes in these shares may have been gains were observed in the top four deciles, with driven by changes in portfolio choices, portfolio small declines for the middle groups. Median hold valuation, or both. The 2001 estimate of the value of ings also climbed substantially among families headed nonfinancial assets as a share of total assets, at by a person who was not a high school graduate, the 57.8 percent, appears to be the low point since 1998 education group with the lowest ownership of such (table 8); the 2007 level of 66.1 percent is near the assets. middle of the range over the past seven surveys (data not shown in the tables). Over the recent Vehicles three-year period, the value of primary residences as a Vehicles continue to be the most commonly held 8. Value of nonfinancial as elS of all familie , di tributcd by nonfinancial asset.34 From 2004 to 2007, the share of type of assel, 1998-2007 surveys families that owned some type of vehicle rose 0.7 per Percent centage point, to 87,0 percent. Trends in ownership Type of nonfinancial asset 1998 2007 rates over the recent three years were mixed across most demographic groups. Across age groups, owner Vehicles I . 6.5 5.9 5.1 4.4 Primary residence 47.0 46.9 50.3 48.1 ship increased for all groups except the 35-to-44 and Other residential propeny . 8.5 8.1 9.9 10.7 Equity in nonresidential propeny . 7.7 8.2 7.3 5.8 75-or-more age categories. Vehicle ownership de- Business equity. 28.5 29.3 25.9 29.7 Other ...... . . . . . . . . . . . . . . . . . . . . . 1.7 1.6 1.5 U Total ...... ................... 100 100 100 100 34. The definition of vehicles in this article is a broad one that MEMO includes cars, vans. spon utility vehicles. trucks. motor homes. Nonfinancial assets as a share of total assets .................... 59.3 57.8 64.3 66.1 recreational vehicles. motorcycles. boats. airplanes. and helicopters. Of families owning any type of vehicle in 2007. 99.8 percent had a car. NOTE: See note to table I. van. spon utility vehicle. motorcycle, or truck. The remaining types of I. For definition, see text note 34. vehicJes were held by 15.4 percent of families.

u.s. Changes in Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A29 9. Family holding' of nonfinancial 3. selS and of any ass l., by selected characlerislics of families and lype f as el. 2004 and 2007 su rvey A. 2004 Survey of Consumer Finances Family characteristic Vehicles Any asset Percentage of families holding asset All families .. 86.3 69.1 12.5 8.3 II.S 7.8 n.s 97.9 Percentile oj income Less than 20 ••••••••• 1. 65.0 40.3 3.6 2.7 3.7 3.9 76.4 92.2 20-39.9 ... 85.3 56.9 6.9 3.8 6.7 4.3 92.0 97.8 40-59.9 . 91.6 71.6 10.0 7.6 9.5 7.6 96.7 99.8 60-79.9 95.3 83.1 14.0 10.5 12.1 10.4 98.4 100.0 80-89.9 .. 95.9 91.9 19.4 12.9 15.9 8.4 99.1 99.8 90-100 93.1 94.7 37.2 20.8 34.7 16.7 99.3 100.0 Age oj head (wars) Less than 35 ........................ 82.9 41.6 5.1 3.3 6.9 5.5 88.6 96.5 4 3 5 5 - - 5 4 4 4 " .. , ............. . . . .............. 8 88 9. . 4 8 6 7 8 7. . 3 3 1 9 6 . . 4 3 1 6 1 . . 4 4 1 15 3 . . 7 9 9 6 . . 7 0 9 9 4 3 . . 7 0 9 97 8. . 3 7 55-64 ..... 88.6 79.1 19.5 12.8 15.8 9.2 92.6 97.5 65--74 ..... 89.1 81.3 19.9 10.6 8.0 9.0 95.6 99.5 75 or more . . ............... 76.9 85.2 9.7 7.7 5.3 8.5 92.5 99.6 Family structure Singh: with child(rcn) . 80.0 60.6 6.4 5.0 4.9 5.9 88.4 96.9 Single. no child. age less than 55 77.3 42.0 7.1 3.9 7.0 6.7 84.1 95.4 Single. no child. age 55 or more 75.2 70.0 11.4 6.8 5.3 7.9 88.2 97.8 Couple with child(ren) .. 91.3 75.8 14.4 7.7 12.2 6.4 95.7 99.1 Couple. no child .. 93.6 80.1 15.8 11.4 16.3 8.8 97.4 98.9 Educatiotl oj head No high school diploma ............. . 70.1 56.3 5.6 4.0 4.2 1.9 81.9 91.1 S H o ig m h e s c c o h l o le o g l e d i . p . l . o . m .. a ........ ~ " 8 8 7 8 . . 6 2 6 6 5 4 . . 8 5 1 8 2 . . 3 2 8 6. . 1 1 1 1 0 0 . . 4 7 9 5 . . 4 3 9 9 3 2 . . 3 4 9 99 8 . . 1 1 College degree . 90.7 79.1 19.0 11.9 15.6 11.3 96.5 99.9 Race or etJmiciry oj respondenT White non· Hispanic ... 90.3 76.1 14.0 9.2 13.6 9.3 95.8 99.3 Nonwhite or Hispanic ...... 76.1 50.8 8.9 5.8 5.9 3.8 84.0 94.4 Current work staTus oj head Working for someone else 89.7 66.5 lOA 6.8 5.8 7.1 93.8 98.4 Self-employed .. 91.2 79.1 25.8 18.7 58.1 12.9 97.5 99.1 Retired ......... ............ 79.0 75.8 12.8 7.9 3.5 7.1 89.8 97.7 • Other not work.ing 66.9 40.0 5.4 6.9 6.4 76.3 89.6 Curr.:nI occupatioll of head Managerial or professional .. 92.0 78.1 19.6 11.3 21.2 10.4 97.0 99.9 Technical. sales. or services .. 85.1 58.2 8.2 6.9 9.7 7.2 90.9 97.4 Other occupation ...... 92.1 66.6 9.0 7.4 10.2 5.9 94.7 97.8 Retired or other not work.ing 77.2 70.3 11.6 7.1 4.0 7.0 87.7 96.4 Region Northeast .. , ............... ........ 80.4 69.8 12.6 6.0 11.1 6.4 90.3 97.9 Midwest .............. ~ 89.4 73.5 12.6 8.2 12.6 8.8 94.2 99.2 South 84.9 68.9 10.2 8.8 10.1 7.1 92.1 97.3 West .. 90.6 64.0 16.3 9.6 13.0 8.9 93.4 97.7 Urballici/)' Metropolitan s(atistieal area (MSA) 85.9 68.0 13.J 8.0 11.6 8.3 92.1 97.8 Non-MSA .... ................ 88.3 74.0 8.7 9.8 11.0 5.1 94.6 98.4 HOllsing sta/Wi Owner. .................... 92.3 100.0 15.7 11.0 14.7 9.2 100.0 100.0 Renter or other 73.0 * 5.4 2.4 43 4.6 75.9 93.3 PercenTile oj net won" Less than 25 ................ 69.8 15.2 2.9 73.7 91.7 25-49.9 ..... ............. 89.2 71.2 4.9 4.1 5.6 504 97.5 100.0 50-74.9 ...... 92.0 93.4 12.7 8.3 11.2 7.8 99.0 100.0 7 9 5 0 - - - 1 8 0 9. 0 9 ....•... . . . . . . . . . . , . 9 9 5 3 . . 2 1 9 9 6 6 . .9 2 4 2 5 3. . 1 6 2 1 8 5. . 1 8 4 1 0 9 . . 8 9 1 1 2 8 . .8 3 9 9 9 9 . . 8 9 1 1 0 0 0 0 . . 0 0

A30 Federal Reserve Bulletin 0 February 2009 9. Family holdings of nonfinancial as elS and of any asset. by selected characteristics of families and Iype of as '01. 2004 and 2007 surveys- Continued A. 2004 Survey of Consumer Finances-continued Other I II I I Family characteristic Vehicles Primary residential noEnrqeusiitdye ninti al Business Other nonfAinnayn cial Any asset I r«!sidence equity I .- 1 prop<:rty property asset Median value of holdings for families holding asset (thousands of 2007 dollars) All families ., ' ......... , ........ 15.6 175.7 109.8 65.9 109.8 16.5 162.3 189.9 Percentile of income Less than 20 5,0 76.9 36,2 12.1 32,9 4.9 24,6 18,7 20-39,9 . . ............ 8,5 109,8 71.4 32.9 32,9 7,7 78,0 85,9 ............. 40-59,9 ., 14.4 148,3 60.4 39,5 68,6 11,0 145.3 169.7 60-79,9 .............. 21.8 192.2 109,8 47,2 164.7 11,0 216,5 317,6 80-89,9 ............. ................ 28,3 247.1 107,6 65,9 109,8 19,2 309,5 503.6 90-100 .. 36,2 494,2 286,9 207,6 384.4 54,9 715,2 1,271.5 Age oj head (years) Less than 35 12.4 148,3 90,6 60.4 54,9 5.5 35.5 4.1.0 35-44, 17,2 175,7 87,9 46.3 109,8 11.0 166,2 190.4 45-54 .. 20,6 186,7 98,8 47,2 158,2 22,0 202,6 258,0 55-{j4 , ' ........... 20.5 219,7 148 ..~ 82.4 209,7 27,5 248,6 385,7 65-74 .. /3,6 164,7 87,9 85,7 109,g 32,9 177,0 256,1 75 or more., ................. 9.2 137.3 1647 94,3 88,2 12,1 150,6 203.4 Famil~' srrltcl!lr(~ Single with child(ren) " ' 8,7 131.8 27.5 1'5,5 55,9 11,0 98,9 95,9 Single, no child, age less tllan 55 9.4 137.3 87,9 61.5 63,9 /I ,0 43.9 47.5 Single, no child, age 55 or more 7,2 130,9 93,4 90,1 115.3 II ,0 117,5 154,2 Couple with child(ren) 20,9 175,7 98,8 71.7 109,8 22.0 195.4 250.4 Couple, no chi Id , 21.6 214,2 126,3 68.9 154,6 22,0 224,6 314,2 Education oj head No high school diploma ............. 8,2 82.4 94.5 17,6 60.4 5,5 59,9 54,8 High school diploma /3,6 137,3 76,9 27.5 88.5 11,0 119,9 146,5 Some college. , 14,5 169,1 87,9 101.0 164,7 11,0 150.9 165,3 College degree ........... 20,7 263.6 159.3 87.9 164,7 22,0 264,9 392,1 Race or e,"nidly oj I'I!sponJem White non-Hispanic 17,3 181.2 115,3 72.5 148.3 18,1 181.0 246.6 Nonwhite or Hispanic .... 10,7 142,8 87,9 32,9 73.2 11.0 70.4 65.4 Current work statuS oj hemf Working for someone else 16,3 175,7 96,6 43,9 54,9 11.0 155,8 177.0 Self-employed 24,1 272.4 155.4 137,3 19L1 32,9 368,3 514,3 Retired, , ................. ILl 142.8 109,8 65,9 UI.8 27.5 144,7 181.9 Other not working .. ' ........... 11.8 142,8 94.5 • 27.5 22.0 65,9 33,3 Curren' occupation oj heaJ Managerial or professional '" 21.2 263,2 131.8 98,6 175,7 19,2 266,2 383,9 Technical. saJes. or services ... 14,0 164,7 liS,) 65.9 82.4 11.0 121.9 125,6 Other occupation . 16,0 142,8 92,3 24,2 82.4 11.0 126.6 145.9 Retired or other not working 11.1 142.8 103,2 65,9 109.8 27,5 139,6 1629 Regio" Northeast ................ 17,2 274.6 115,3 6,';,9 109,8 16,5 228,1 297,1 Midwest 15.3 159.3 109.8 64,5 148,3 16,5 165,0 214,3 South 15.1 142,8 98,8 38.4 94.9 16.5 13104 145.2 West " 15,6 247,1 120.8 137,3 164,7 16,5 191.6 218.7 Urbanicit)' Metropolitan statistical area (MSA) . ' 15,8 197,7 120,8 76,9 118. I 16,5 178.4 218,3 NOIl-MSA, 14,3 98,8 74,1 27.5 86,5 II ,0 104,0 122.2 Housing status Owner,. , 19,2 175,7 109,8 68,1 134,8 19,2 221.4 318,4 Renter or other , 7,9 87.9 61.5 54,9 8,8 9,2 13.4 Percentile of net worth Less than 25 6,1 71.4 I 3.3 8,1 8.4 25-49,9 " 130 93.4 28, 16,3 19,2 6,6 79,5 92.8 50-74,9 19.1 175,0 71.4 27,5 60.4 11,0 206,5 282.5 75-89.9 .' 24,8 274.6 109,8 8Ll 164,7 27,5 3%.2 659.2 90-100 ............ 33,6 494,2 356,9 274,6 579,3 87,9 996,9 1.727,1 MEMO Mean value of holdings for families holding asset ......... ,. 22.1 271.1 293,6 327.4 840,7 73,1 402.3 591.3 NOTE: See nOte to table 8 . • Ten or fewer observations,

u.s. Changes in Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A31 9. Family holdings of nonfinancial assets and 0 any asset, by selecled characleristics of families and lype of asset, 2004 and 2007 surveys-ColLlinlled B. 2007 Survey of Consumer Finances Family characteristic Vehicles Primary res O id t e h n e t r i al I n onErqeusiidtye nitnir u I I Business Other I nonfAinnayn cial I Any asset I residence I propeny propeny equity I asset I Percentage of families holding asset All families . 87.0 68.6 13.7 8.1 12.0 7.2 92.0 97.7 Perc:emiie of income Less than 20 ............ 64.4 41.4 5.4 2.5 3.0 3.9 73.4 89.8 2G--39.9 . . ............... 85.9 55.2 6.5 3.9 4.5 5.1 91.2 98.9 4G--59.9 . . . . . . . . . . . 94.3 69.3 9.9 7.4 9.2 7.4 97.2 100.0 6G--79.9 ... ........... 95.4 83.9 15A 9.4 15.9 7.2 98.5 100.0 8G--89.9 . .......................... 95.6 92.6 21.0 13.6 17.0 9.0 99.6 100.0 9G--100 ............ 94.8 94.3 42.2 21.0 375 14.1 99.7 100.0 '" AKe of head (years) Less than 35 85A 40.7 5.6 3.2 6.8 5.9 88.2 97.1 35-44. .............. 875 66.1 12.0 7.5 16.0 5.5 91.3 96.9 45-54 ... 903 77.3 15.7 9.5 15.2 8.7 95.0 97.6 55-·64 ... 92.2 81.0 20.9 11.5 16.3 8.5 95.6 99.1 65--74 .. ............................. 90.6 85.5 18.9 12.3 10.1 9.1 94.5 98.4 75 or more ................. 71.5 no 13.4 6.8 3.8 5.8 87.3 98.1 Family structure Single with child(ren) ...... 80.5 53.4 8.9 5.6 5.6 5.8 89.5 95.7 no Single, no child. age less than 55 42.6 6.2 2.9 7.5 7.0 82.5 93.7 Single. no child, age 55 or more 73.9 68.1 11.8 7.3 3.3 5.7 85.1 97.7 Couple with child(ren) .. 94.0 78.3 14.8 8.4 15.6 8.9 96.9 98.8 Couple, no child. 94.6 79.2 18.0 10.8 16.6 7.4 973 99.4 Education of head No high school diploma 73.7 52.8 5.8 2.6 5.3 2.2 80.9 91.7 High school diploma 87.5 68.9 10.0 7.3 8.7 5.1 92.2 97.7 Some college "I 86.7 62.3 13.2 65 10.7 7.0 91.0 98.5 College degree ... 91.9 71.8 20.6 II.S 18.2 11.0 96.6 99.6 RIlCe or etllllicit), of respondent White non-Hispanic 89.6 75.6 15 ..' 9.0 13.9 8.4 94.6 98.9 Nonwhite or HisPlUlic 80.9 51.9 10.0 5.9 7.4 4.3 85.8 94.9 Current work S/(IIIIS of head Working for SOmeone else 91.3 67.2 11.9 7.0 6.3 7.1 94.4 98.6 Self-employed. 90.6 82.4 26.5 17.3 68.4 11.0 97.6 99.7 Retired ........ 78.6 72.9 14.6 7.7 3.6 5.4 87.2 96.1 Other not working ...... 693 33.3 3.8 4.7 3.6 8.5 74.8 90.0 Currelll occupalion oj head Managerial or professional . 93.1 78.2 20.7 10.8 no 9.9 97.2 99.8 Technical, sales, or services 87A 61.5 10.2 7.3 9.2 7.7 91.6 97.8 Other occupation ...... 92.6 66.3 9.6 6.7 13.6 4.9 95.2 98.5 Retired or other not working . 77.1 66.7 12.9 7.2 3.6 5.9 85.2 95.2 RegiolJ Northeast 75.4 66.1 13.3 5.6 7.8 5 ..~ 84.2 94.6 S M o i u d t w h est . . . , . .. . . . , 8 8 9 9 . . 5 2 7 7 1 0 . . 3 2 1 1 3 1 . .3 7 S 8. .8 4 1 I 3 IA .1 6 7 . . 4 2 9 9 3 3 . . 4 8 9 9 8 8 . . 5 4 West ........ 90.5 65.4 18.3 8.7 15.3 9.3 94.1 98.4 Urbanicill' Metropolitan statistical area (MSA) .. 86.2 68.1 14.2 7.6 12.3 7.6 91.5 97.7 Non-MSA ....... 90.9 71.1 11.7 10.7 10.6 5.1 94.3 97.9 Huusing SlUllIl" O Re w n o te c r r o . r . o . t . h . e . r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 72 3 . . 3 8 10•0 .0 17 5. . 6 5 1 2 0 . . 1 8 1 4 5 . , 5 4 5 8 . . 3 0 1 7 0 4 0 . . 5 0 1 9 0 2 0. .8 0 Percentile of nel worth Less than 25 ............ 69.5 13.8 1.2 1.3 2.4 71.6 90.9 7 5 2 G 5 5 - - -- 8 4 7 9 9 4 . . . 9 9 9 .. .. , ........ .. . . , . , • .. .. ..... , 9 9 9 4 1 3 . . 3 2 5 9 7 9 2 2 5 . . . 1 3 8 2 1 6 7 1 . . . 1 2 9 1 3 7 6 . . . 7 7 4 1 1 6 7 1 . . . 2 9 6 6 7 7 . . . 5 5 8 9 9 9 7 9 9 . . . 7 5 0 1 1 1 0 0 0 0 0 0 . . . 0 0 0 9G--100 .. ........................... 93.6 96.9 47.7 27.3 45.1 IS.5 99.6 100.0

A32 Federal Reserve Bulletin D February 2009 9. Family holding' of nonfinancial assets and of any a. el. by selecled characleriSlic;; of families and lype of J el. 2004 and 2007 survcys-Conlillued B. 2007 Survey of Consumer Finances---conllntled Family characteristic Vehicles Any asset Median value of holdings for families holding asset (tllOusands of 2007 dollars) All families .. 15.5 200.0 146.0 75.0 100.5 14.0 177.4 221.5 Percentile of income Less than 20 5.6 100.0 60.0 65.0 100.0 3.0 40.0 23.5 20-39.9 .. 9.2 120.0 57.5 60.0 25.0 6.0 77.2 84.9 40-59.9 14.6 150.0 100.0 40.0 53.7 10.0 139.0 183.5 60-79.9 20.4 215.0 120.0 71.0 81.0 15.0 246.3 342.8 80-89.9 25.4 300.0 175.0 72.0 100.0 20.0 360.1 558.1 . 90-100 ............ . . . . . . . . . . 33.9 500.0 324.0 175.0 500.0 75.0 799.9 1,358.4 Age of head (years) Less than 35 13.3 175.0 85.0 50.0 59.9 8.0 30.9 38.8 35-44 . 17.4 205.0 150.0 50.0 86.0 10.0 182.6 222.3 45-54 18.7 230.0 150.0 80.0 100.0 15.0 224.9 306.0 55--&1 .. ":[ 17.4 210.0 157.0 90.0 116.3 20.0 233.1 347.0 65-74 .. ............ ... 14.6 200.0 150.0 75.0 415.0 20.0 212.2 303.3 75 or more .. ..........~,. .. 9.4 150.0 100.0 110.0 250.0 25.0 157.1 219.3 Famil\' s/ruclllre Single with child(ren) ... 8.3 165.0 90.0 71.0 100.0 9.0 106.9 116.4 Single, no child, age less than 55 9.8 155.0 120.0 48.8 50.0 9.0 52.0 52.6 Single, no child, age 55 or more 7.4 140.0 80.0 75.0 300.0 10.0 133.0 177.1 Couple with child(ren) 20.8 225.0 133.0 50.0 81.8 12.5 218.0 292.8 Couple, no child . .............. 20.6 230.0 165.0 85.0 130.0 20.0 235.6 312.1 Educalion of head No high school diploma 10.4 122.5 65.0 125.0 66.0 13.2 84.4 64.6 High school diploma ................ 13.3 150.0 76.0 50.0 100.0 7.3 137.7 161.8 Some college •••.•••.••.•.•.•• 1 ••• 14.6 192.0 100.0 52.8 81.2 13.0 157.3 186.3 College degree ........... 19.9 280.0 200.0 90.0 125.4 20.0 289.4 435.4 :1 Race or elhniciry of respolldelll White non-Hispanic ...... 17.1 200.0 136.5 75.0 112.5 15.0 203.8 271.0 Nonwhite or Hispanic 12.0 180.0 175.0 62.7 60.0 8.0 102.0 89.2 Current work status of head Working for someone else 17.0 200.0 120.0 52.8 50.0 10.0 167.1 213.3 Self-employed ... 22.1 300.0 293.0 152.5 150.0 50.0 455.0 543.9 Retired. ............... 11.4 155.0 100.0 75.0 212.6 13.2 156.0 203.5 Other not working .. 6.9 160.0 130.5 48.8 103.1 2.5 29.3 28.9 Currell! occupation of head Managerial or professional 20.2 270.0 200.0 105.0 200.0 20.0 278.9 411.2 Te.chnical, sales, or services ::1 14.4 200.0 125.0 85.0 40.0 15.0 155.0 187.0 Other occupation .... . . ... 16.7 157.9 90.0 37.0 68.6 10.8 135.6 157.6 Retired or other not working . 10.4 155.0 100.0 75.0 196.9 12.5 146.7 177.1 Region Northeast 14.5 275.0 190.0 112.0 150.0 20.0 250.0 290.4 Midwest 14.6 155.0 110.0 52.8 112.4 10.0 157.5 204.7 South 15.6 160.0 120.0 71.5 93.8 15.0 145.8 180.9 West .. 17.1 300.0 210.0 90.0 101.4 14.0 251.6 293.2 Urbaniciry Metropolitan statistical area (MSA) 15.8 220.0 150.0 82.5 105.0 13.5 194.0 243.9 Non-MSA ... 14.5 115.0 80.0 50.0 100.0 22.0 118.6 149.2 Housing status Owner. 18.4 200.0 150.0 80.0 113.4 20.0 253.5 344.2 Renter or other .. 8.6 85.0 38.0 50.0 5.4 10.1 13.6 Percentile of ner worrh Less than 25 ............ . . .. . . .. . . . . . . . ... 6.9 81.0 12.0 4.0 1.3 8.6 8.1 25-49.9 ....... . 13.1 100.0 30.0 25.0 20.0 7.5 95.8 107.8 50-74.9 17.5 200.0 60.0 38.4 67.6 13.0 229.1 304.3 75-89.9 . ............. 22.0 317.2 146.0 82.5 125.0 30.0 443.7 687.1 90-100 ........... 31.1 550.0 400.0 266.7 690.0 75.0 1,160.0 2,104.0 MEMO Mean value of holdings for families holding asset .. 22.0 302.4 335.6 309.4 1071.1 80.7 469.5 668.5 NOTE: See note to table 8. * Ten or fewer observations.

Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A33 creased for families headed by a person who was Hispanic families, families with relatively low income retired, self-employed, or otherwise not working; for or wealth, families living in the Northeast or the West, single families without children; and for families single families, and families headed by a person who living in the Northeast or the West. was neither working nor retired, who was aged less The median market value of vehicles for those who than 45, or who had less than a high school diploma owned at least one vehicle declined 0.6 percent from or only some college education. Over the three-year 2004 to 2007, and the mean declined 0.5 percent.35 period, homeownership rose most for the lowest The median value of vehicle holdings fell most quintile of the income distribution; families headed substantially for families in the other-not-working by a person aged 65 to 74; families headed by a work-status group, families in the Northeast, and the person who was self-employed or working in a 55-to-64 age group. Other relatively large declines in technical, sales, or service job; or families headed by the median included those for the highest three a high school graduate. The largest declines in the income and wealth groups. For most other families, homeownership rate were for single families with the median rose or held about steady. These trends are children and families in the 75-or-more age group or essentially the opposite of those observed between the other-not-working work-status group. 200 I and 2004, when median values fell for the Housing wealth represents a large component of lowest two income and wealth groups, the two oldest total family wealth; in 2007, the primary residence and the youngest age groups, nonwhite or Hispanic accounted for 31.8 percent of total family assets. families, renters, and families headed by a person Over the 2004-07 period, this percentage declined who was retired. However, continuing a trend, the slightly overall. The relative importance of housing in share of the total value of owned vehicles attributable the total asset portfolio varies substantially over the to sport utility vehicles rose over the recent period, income distribution, with housing generally constitut from 19.1 percent to 20.9 percent (data not shown in ing a smaller share of the portfolio with increasing the tables). levels of income (table 9.1). Some families have vehicles that they lease or that are provided to them by an employer for personal use. 9.1. The share of families having a vehicle from any source rose 0.3 percentage point over the recent House value as a percenUlge period, to 89.6 percent. The small difference between Family characteristic of all assets of group 2007 , Change, 2004--{)7 this rate and the ownership rate for personally owned (percent) (percentage points) vehicles belies a larger change in the rates of holding All families .. 31.8 ~.S for leased and employer-provided vehicles. The pro Percentile oj income portion of families with a leased vehicle rose, from Less than 20 . 47.1 -1.5 20-39.9 . 51.8 2.2 4.0 percent to 5.2 percent, while that of families with 40-59.9 .......... . 48.4 -1.5 an employer-provided vehicle fell, from 7.7 percent 60-79.9 45.3 2.5 80-89.9 44.5 2.7 to 6.8 percent. 90-100 19.8 -1.1 Primary Residence and Other Residential Real Estate The median and mean values of the primary resi dences of homeowners rose from 2004 to 2007; The homeownership rate turned down slightly over overall, the median increased 13.8 percent, and the the 2004-07 period, falling 0.5 percentage point, to mean rose 11.5 percent. These percentage gains in the 68.6 percent. 36 In 2007, grou ps that had an ownershi p median and mean translated into large dollar gains: rate less than the overall rate included nonwhite or $24,300 for the median and $31,300 for the mean. Homeowners in all demographic groups saw gains in 35. Survey respondents are asked to provide the year, make, and the median, most of them substantial. The only breaks model of each of their cars, vans, sport utility vehicles, and trucks. in the pattern of gains in median values across groups This information is used to obtain market prices from data collected by were a decline of 4.4 percent for families headed by a the National Automobile Dealers Association and a variety of other sources. For other types of vehicles, the respondent is asked lO provide person aged 55 to 64 and a decline of 2.7 percent for a best estimate of the current value. homeowners in the Midwest. One of the largest 36. This measure of primary residences comprises mobile homes increases was the 26.1 percent rise in the median and their sites, the parts of farms and ranches not used for a farming or ranching business, condominiums, cooperatives, townhouses, other value of primary residences for nonwhite or Hispanic single-family homes, and other permanent dwellings. The 2004 and families; in contrast, the median for other families 2007 SCF estimates of homeownership differ only marginally from rose 10.4 percent. Other sizable increases included those of the CPS for a comparable specification of household; the CPS shows an identical decline in the homeownership rate. those for families headed by a person without a high

A34 Federal Reserve Bulletin D February 2009 school diploma (48.7 percent) and for families in the ship follows approximately the same relative distribu bottom income quintile (30.0 percent). tion across demographic groups as does the owner As discussed earlier, the national housing market ship of other residential real estate. Changes in continued to decline after data collection for the ownership during the recent period were mixed across 2007 SCF had been completed. Assuming that home demographic groups. Ownership increased modestly ownership did not change and that changes in house in the top two deciles of the income distribution, prices occurred uniformly across all homeowners in a while it decreased modestly in most of the lower given state, then the state-level purchase-only Loan portion of the distribution. By educational attainment, Performance Home Price Index can be used to ownership increased only among families headed by approximate the effects of declines in house prices a person with a high school diploma. Overall, the from the time of the interview until October 2008. median value of such property for owners rose Under these assumptions, the median value falls from 13.8 percent, and the mean fell 5.5 percent. Particu $200,000 for 2007 to $181,600, still a gain of 3.4 per larly large gains in the median value were seen for cent from 2004; the mean falls from $302,400 for families in the lowest income group, single-parent 2007 to $265,600 in October 2008, a decline of families, and families headed by a person without a 2.0 percent from 2004. high school diploma-all groups with below-average In 2007, 13.7 percent of families owned some form ownership rates. of residential real estate other than a primary resi dence (second homes, time-shares, one- to four Nel Equity in Privately Held Bu inesses family rental properties, and other types of residential The share of families that owned a privately held properties), a level that is up 1.2 percentage points business interest edged up 0.5 percentage point dur from the figure in 2004.37 Although the survey does ing the recent period, to 12.0 percent.39 The propornot ask directly about ownership of second homes, such homes should largely be captured as residential properties that are owned 100 percent by the family 38. Nonresidential real estate comprises the following types of propenies unless they are owned through a business: commercial and for which no rent was collected; in 2007,6.1 per propeny, renlal propeny with five or more unils, farm and ranch land, cent of families had at least one such property, up undeveloped land. and all olher types of nonresidenlial real eSlate. 1.5 percentage points from 2004 (data not shown in Mosl often. nonresidential real eSlale propenies are functionally more like a business than a residenlial property. They may have a number of the tables). owners, Ihey are typically worth a considerable amounl, and Ihey often Ownership of other residential real estate is much carry large mortgages, which appear 10 be paid from Ihe revenues from more common among the highest income and wealth the propeny, not Ihe family's olher income. As in Ihe case of privately owned businesses, the value of Ihe property in Ihis analysis is laken to groups, the age groups between 45 and 74, and be the net value. families headed by a self-employed person, a person 39. The forms of business in this category are sole proprietorships, working in a managerial or professional occupation, limiled partnerships, other Iypes of partnerships, subchapter S corpo rations and olher Iypes of corporations Ihat are not publicly traded, or a person who was a college graduate. The median limiled liability companies, and other types of private businesses. If and mean values of other residential real estate the family surveyed lived on a farm or ranch Ihal was used at least in increased proportionately more than the median and part for agricultural business, the value of thai part, net of Ihe corresponding share of associaled debls, is included with other mean values of primary residences over the recent business assets. period; the median rose 33.0 percent, and the mean In Ihe survey, self-employmenl stalus and business ownership are rose 14.3 percent. Most of the demographic groups independenlly determined. Among the 12.0 percent of families with a business in 2007, 70.1 percent had a family head or the spouse or saw substantial gains in the median. Declines in partner of Ihe head who was self-employed; among the 12.5 percenl of median values were observed for several groups, families in which either the head or Ihe spouse or partner of Ihe head including the youngest and oldest age groups, fami was self-employed, 67.5 percent owned a business (data not shown in the tables). lies whose head had not attended college, and fami The 2004 and 2007 surveys differ in the ways that business lies headed by a person who was retired. ownership was determined. In both surveys, respondents were asked directly aboul business ownership. In the 2004 and earlier surveys, it had been nOliced al the stage of data ediling that some respondenls had Nel Equity in Nonresidential Real Estate reponed themselves as self-employed and as having substantial asso ciated business assets bUI had failed to repon ownership of a business, The owners hi p of nonresidential real estate fell perhaps as a result of some confusion about the intent of the business slightly, to 8.1 percent of families in 2007.38 Owner- ownership question; where possible, Ihe data were corrected for such misunderstandings. Beginning with the 2007 survey, a new follow-up queslion was asked of every person who was reported as being self-employed but who had not been noted as working for a business 37. This measure of residential real estate also includes outstanding owned by Ihe family. The question asked whether a business with balances on loans that the family may have made to finance the sale of some value was associated with Ihe self-employmenl. If so, Ihen propenies they previously owned. several additional questions were asked aboullhe business's value and

Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A35 tion has changed little over the past several surveys. families in the other-not-working work-status group. Ownership of this type of asset tends to increase with Changes in the medians for other categories included income, wealth, and education and to be the highest increases and decreases of smaller magnitudes. for families headed by a person who is aged 35 to 64, The SCF classifies privately owned business inter who is married or living with a partner, or who has at ests into those in which the family has an active least some college education. Business ownership is management role and those in which it does not. Of about three times as prevalent among homeowners as families having any business interests in 2007, renters; it is generally lowest in the Northeast and 92.0 percent had an active role, and 12.0 percent had highest in the West. Over the recent three-year period, a non-active role; 3.9 percent had interests of both increases in ownership were largely concentrated in types (data not shown in the tables). In terms of the highest income and net worth deciles. By region, assets, actively managed interests accounted for ownership declined in the Northeast, while increases 89.1 percent of total privately owned business inter were reported in the South and West. Breaking a ests. The median number of actively managed busi pattern seen in the preceding three years, ownership nesses was 1. The businesses reported in the survey also increased substantially among families headed were a mixture of very small businesses with moder by a person who was self-employed. ate values and businesses with substantially greater As noted earlier, equity in privately held businesses values. makes up a large portion of families' total nonfinan The SCF attempts to collect information about cial assets. This pattern has strengthened over the items owned or owed by a family's business interests recent period. Across the income distribution, the separately from items owned or owed directly by the share of assets attributable to business equity has a family. But, in practice, the balance sheet of a busi U-shape, with the largest shares at the top and bottom ness that is actively managed by a family is not of the income distribution (table 9.2). always separate from that of the family itself. Fami lies often use personal assets as collateral or guaran 9.2. tees for loans for the businesses, or they loan personal Net equity in business as a funds to their businesses. In 2007, 17.8 percent of percentage of all assets Family characteristic families with actively managed businesses reported 2007 Change. 2004-07 (percent) I (percentage points) using personal assets as collateral, and 17.5 percent of families reported lending the business money; both All families . 19.6 3.0 percentages are down from their 2004 levels of Percen/ite of incume Less than 20 . 18.8 4.2 19.7 percent and 20.2 percent, respectively (data not 2{}-39.9 . 4.2 -5.0 40--59.9 . 9.! 3.2 shown in the tables). 6{}-79.9 . 6.8 -1.4 Families with more than one actively managed 8{}-89.9 .. . 11.4 4.7 9{}-100 ................ . 28.1 3.7 business are asked to report which business is most important; that business is designated as the primary The median holding of business equity for those one.40 In 2007, the vast majority of primary busi having any such equity declined 8.5 percent while the nesses operated in an industry other than manufactur mean increased 27.4 percent. These changes follow a ing; the most common organizational form of those decline of 6.2 percent in the median and an increase businesses was sole proprietorship, and the median of 11.4 percent in the mean between the 2001 and number of employees was 2. However, primary 2004 surveys. In 2007, median values were generally actively managed businesses with more than two increasing in income, age, and net worth. Median net employees accounted for 80.4 percent of the value of equity in businesses owned by white non-Hispanic all such businesses, and the largest shares of value families and homeowners are substantially higher were attributable to businesses organized as sub than for the complementary groups. Over the recent chapter S corporations or limited liability companies, three-year period, large increases in median net equity each of which accounted for just more than 30 per in businesses were observed in the lowest income cent. These patterns are also typical of those observed quintile, in the oldest two age categories, in single in the earlier surveys. families headed by a person aged 55 or older, and in income. and that information was introduced inlO the appropriate 40. For families with only one business. that business is, by default. places in the section of the survey covering businesses. It is possible considered the primary one. In 2007, primary actively managed Ihat the systematic approach in 2007 discovered more private busi businesses accounted for 78.0 percent of the value of all actively nesses than had previously been detected through editing. managed businesses.

A36 Federal Reserve Bulletin D February 2009 10. Family holdings of uIlfeaJized capital gains on selected ass 'Is as a hure or toW I . 'sets, by selected characterisLics of families, 1998-2007 urvcys Percenl 1998 2001 2004 2007 Family characleristic Real I Busi· I Fi~an-I All Real I Busi- I Fi~aJ1-1 All Real .1. Busi- I Finan-I All Real 1 Busi- 1F ilwn-I All eslale ness CIaI eSlale ness clUl eslale ness cial estale ness clUl All families ... U.s IJ.6 4.3 29.3 14.S JJ.6 2.3 28.7 \S.7 10.9 1.1 30.7 18.9 14.2 2.6 35.8 Percentile of income Less Ihan 20 .. ....... 27.6 4.9 .3 32.8 26.7 2.0 -.1 28.6 29.3 7.7 -.6 36.4 30.5 10.6 1.4 42.5 20-39.9 .. ... ... .. 22.5 2.3 1.3 26.1 27.0 3.9 -.3 30.7 28.3 5.9 .3 34.5 31.4 3.2 .3 .U.O 40-59.9 ...... ... . . .. . . . .. .. 20.8 5.6 1.3 27.7 18.8 3.9 .2 22.9 25.9 3.0 .5 29.4 24.7 5.6 .8 31.1 60-79.9 ....... 16.0 6.3 2.4 24.6 17.0 5.2 1.7 24.0 23.1 4.0 .5 27.6 23.1 3.8 1.6 28.6 80-89.9 ......... ... .. . 14.1 6.5 2.8 23.4 IS.7 7.8 1.8 25.3 19.4 4.4 .8 24.7 23.8 8.8 .9 33.6 90-100 .......... .... 9.1 17.2 6.4 32.7 11,4 16.9 3.3 31.6 14.3 16.6 1.6 32.5 13.8 20.8 3.9 38.5 Alie of head (years) Less than 35 . . . . . . . . . . . . 7.1 7,4 .9 15.3 8.1 10.7 2.1 20.8 13,4 7.5 -,4 20.4 12.6 14.6 1.0 28.2 35-44 ....... ...... .... 9.4 11.7 3.1 24.2 12.7 14.8 .2 27.7 16.2 12.0 1.4 29.6 16.2 12.3 ,4 28.9 45-54. .... ..... 10.8 15.7 2.8 29.3 12.9 12.6 2.0 27.5 16.7 13.5 1.1 31.3 18.3 15.5 2.1 36.0 6 5 5 5 - - 7 6 4 4 . .. . . . .. . . ......,. . . . .. . . . .. 1 18 2 . . 3 9 1 9 2. . 9 1 6 6 . . 0 1 3 32 3. .0 5 2 1 0 3 . . 0 8 1 12 0. . 3 5 3 2 . .0 5 2 3 8 3. . 8 3 2 1 0 9 . . 8 0 1 8 1 . . 8 8 2 " .1 3 31 0 . . 8 8 2 1 0 7 . , 6 4 I 15 H .4 4 3. .0 2 3 3 8 6 . . 4 0 75 or more ..... ....... 25.5 5.0 S.3 35.8 21.1 5.1 5.2 31.4 26.5 5.5 2.4 34.4 28,4 11.0 4.0 43.S MEMo Percent of families with any such gains .. ... 65.5 10.7 26.3 71.0 67.2 11.6 27.6 72.1 68.8 11.1 25.1 73.0 69.0 11.5 21.7 72.4 Median for Ihose wilh any such gains .... 37.8 39.5 4.6 39.5 45.1 59.6 .6 46.8 61.0 49.4 .7 59.3 71.0 50.0 3.5 75.0 Mean for Ihose with any such gains ... 86.2 453.7 67.8 172.9 116.6 530.4 43.9 210.4 157.6 567.6 24.3 243.1 179.2 80~.1 79.3 322.9 NOTE: See nOle 10 lable I. t Less than 0.05 ($50). Other Nonfinancial Assets demographic groups. For families having such assets, the median value fell 15.2 percent over the recent In 2007, ownership of the remaInIng nonfinancial period, and the mean rose 16.7 percent. Across assets (tangible items including artwork, jewelry, income groups, median holdings rose for families in precious metals, antiques, hobby equipment, and col the top three groups and declined for families in the lectibles) was not very widespread and decreased second and third quintiles. marginally compared with the level in the previous survey period, to 7.2 percent. Among other nonfinan Unrealized Capital Gains cial assets, the most commonly held items are an tiques and other collectibles, which were held by only Changes in the values of assets such as stock, real 3.6 percent of families. The composition of other estate, and businesses are a key determinant of nonfinancial assets changed little from 2004 changes in families' net worth. Unrealized gains are (table 9.3). increases in the value of assets that are yet to be sold. To obtain information on this part of net worth, the 9.3. survey asks about changes in value from the time of purchase for certain key assets- publicly traded All families Type of olher stocks, pooled investment funds, the primary resi nonfinancial assel 2007 Change, 2004-{)7 (percent) (percentage points) dence, other real estate, and the current tax basis of 1 Gold, silver, or jewelry .' 2.1 t businesses.4l Among families with any unrealized Antiques, collectibles . 3.6 -.2 capital gain, the median value of that gain moved up An objecls . 1.8 -.2 Other . .9 -3 26.5 percent over the 2004-07 period, and the mean moved up 32.8 percent (table LO). These unrealized t Less than 0.05 percent. capital gains are a very important part of family assets; in 2007, they represented 35.8 percent of total Groups most likely to hold other nonfinancial family assets, a fraction larger than that observed in assets generally include families in the top two deciles any other SCF since 1989. Unrealized capital gains of the income distribution, families headed by a college graduate, homeowners, and families in the top 41. The survey does not collect information on capital gains on two quartiles of the net worth distribution. Minor every asset for which such gains are possible. Most important, it does changes in holdings were evident across all the not collect such information for retirement accounts.

u.s. Changes in Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A37 11. Amount 01 deht of all familie . disLributed by type of 12. Leverage ratio of group by selected family debt 1998-2007 surveys eharaeteri sties. 1998-2CXl7 surveys Percent Percent Type of debt 1998 Family characteristic 1998 2007 Secured by residential property All families 14.2 12.1 1S.0 14.9 Primary residence .......... 71.4 75.2 75.2 74.7 Other .............. 7.5 6.2 8.5 10.1 Percentile of infOme Lines of credit not secured Less than 20 .................. 12.7 13.5 15.1 13.5 by residential property .3 .5 .7 .4 20-39.9 ... 14.4 14.5 19.4 18.5 Installment loans .. 13.1 12.3 11.0 10.2 40-59.9 .................. 20.6 19.2 23.2 24.3 Credit card balances 3.9 3.4 3.0 3.5 60-79.9 .................. 23.1 18.0 21.7 25.3 Ot T he o r t a . l .. . . . .. . . . . . . .. . . . . . . . . . . . . . . . . . .... 10 3 0 . 7 10 2 0 . 3 100 1. 6 100 1. 1 8 9 0 0- - 1 8 0 9 0 .9 . . . .. . ... . . . . . . . . . . . . .. 2 8 0 . . 9 1 1 7 8 . . 4 1 2 9 2. . 8 2 2 8 3 . .4 4 NOTE: See note to table I. A L i e l s e s o t f h a h n e a 3 d 5 (yelln) ................. 36.6 )3.5 46.4 44.3 35-44 ...... 25.1 22.6 26.0 28.2 tend to increase with age as a fraction of total family 45-54 ..... .......... ........... 15.7 13.5 17.3 16.3 55--64 ..... ......................... 9.0 7.2 9,3 10.3 assets. The fraction of total family assets attributable 65-74 .... 4.7 4.2 5.2 6.5 to unrealized capital gains decreases and then in 75 or more . 2.2 1.8 4.0 2.2 creases across income groups. In 2007, this fraction Edllwtiull of head No high school diploma 13.5 13.4 14.0 18.2 was lowest for families in the third income quintile. High school diploma 15.6 16.1 19.4 20.5 Some college. 17.9 15.1 19.5 19.1 The largest component of unrealized capital gains in College degree .. 12.9 104 13.3 12.5 all years of the SCF shown was real estate; the Race or et/micit)' of resporuJe1lI next-most-important components were gains in busi White non-Hispanic . 13.3 11.0 13.5 12.9 Nonwhite or Hispanic 23.5 23.4 27.2 27.1 nesses and financial assets. In 2007, total unrealized Region capital gains in real estate represented 18.9 percent of Northeast ................ 13.2 10.2 12.8 12.7 total family assets. In general, the relative importance Midwest . 14.1 13.0 14.4 14.4 South . . . . . . . . . . . . . 13.5 11.4 15.2 144 of unrealized capital gains in real estate decreases West ...................... 16.2 13.8 17.1 17.4 with family income and increases with the age of the Urbanici/)' family head. Metropolitan statistical area (MSA) . 14.2 12.0 14.8 14.7 Non-MSA .. 15.1 13.2 17.8 17.3 Housing stallls LiABILITIES Owner _. ..... 14.1 12.0 14.9 14.7 Renter or other 16.4 14.2 16.7 17.9 The composition of household debt shifted between Pell:enrile oJ IWt won" 2004 and 2007. Debt secured by the primary resi 2 L 5 es - s 4 9 th .9 a n . 25 ........... 1 5 12 1 . . 3 0 9 47 9. . 8 9 1 5 07 4 . .2 4 1 5 08 6 . . 6 5 dence remained the largest component of overall 50-74.9 . ............ ............ 27.1 26.2 33.3 31.7 household debt, but its share fell back 0.5 percentage 9 7 0 5 - - 1 8 0 9 0 .9 . . . . . . . . . . . . . . . . . . . . . . ................ 1 5 6. .9 1 1 4 4. .8 4 1 6 6 . . 4 3 1 6 7. . 6 1 point between the most recent surveys (table J 1).42 This decline was more than offset by a 1.6 percent families that had any debt declined somewhat more, age point increase in the fraction of debt secured by from 19.9 percent in 2004 to 19.4 percent in 2007 residential property other than the primary residence. (data not shown in the tables). The share of outstanding credit card balances in The overall leverage ratio differs considerably creased 0.5 percentage point over the three-year across types of family groups. It rises and then falls period, while the fraction of nonmortgage installment across income groups. By comparison, the ratio debt declined 0.8 percentage point, in line with a declines with age, a result consistent with the ex longer-term trend evident since at least the 1998 pected life-cycle patterns of asset and debt accumula survey. tion. These general patterns in the leverage ratios The overall value of families' liabilities increased among groups hold across survey years, but the between 2004 and 2007 at a rate just short of the variation among income groups was slightly more corresponding rate for families' assets. Accordingly, pronounced in 2007 than in 2004 (table J2 ). the ratio of the sum of the debt of all families to the sum of their assets-the leverage ratio--was little changed, ticking down O. J percentage point, to Holdings of Debt 14.9 percent. The leverage ratio for the subset of The share of families with any type of debt increased 0.6 percentage poi nt, to 77.0 percent over the 2004-07 42. The SCF measure of liabilities excludes debt owed by busi period (first half of tables 13.A and 13.B, last col nesses owned by the family and debt owed on nonresidential real estate. umn), and has risen a total of 2.9 percentage points

A38 Federal Reserve Bullelin 0 February 2009 or 13. Family holdings debt. by elected characteristic, of families and lype of debl. 2004 and 2007 surveys A. 2004 Survey of Consumer Finances Secured by residential propeny Lines of credit not Installment Credit card Fami Iy characteristic secured by Other Any debt r P es r i i d m e a n r c y e I Other loans balances re p s r i o d p e. e n n ti y a l Percentage of families holdi ng debt All fan.ilies .. ..... , ......... 47.9 4.0 46.0 46.2 1.6 7.6 76.4 Percentile of inwmt! Less than 20 ............... 15.9 26.9 28.8 4.6 52.6 20-39.9 . 29.6 1.5 39.8 42. . 9 1.5 5.8 69.8 40-59.9 .. 51.6 2.6 52.5 55. I 1.8 8.0 84.0 60-79.9 . ............... , ........ , ... 65.8 4.1 57.9 56.1 1.8 8.3 86.6 80-89.9 ............. 76.8 7.6 60.0 57.6 2.6 12.2 91.9 90-100 76.2 1.).4 45.7 38.5 2.5 10.6 86.3 Age of head (yellrs) Less than 35 37.7 2.1 59.4 47.5 2.2 6.2 79.8 35-44 . 62.8 4.0 55.7 58.8 1.5 IJ.3 88.6 45-54 .... . ................... 64.6 6.3 50.2 54.0 2.9 9.4 88.4 55--64 . 51.0 5.9 42.8 42.1 .7 8.4 76.3 65-74. 32.1 3.2 27.5 31.9 .4 4.0 58.8 75 or more .. . ................... 18.7 1.5 13.9 23.5 2.5 40.3 Famify strtlClIIre Single with child(ren) . 48.1 1.5 41.9 48.7 6.7 79.6 Single, no child. age less than 55. 34.1 3.2 46,4 47.9 1.6 7.7 77.6 Single. no child, age 55 or more 22.1 2.5 20.5 27.9 :f! 5.0 47.7 Couple with child(ren) . 64.1 5.2 61.2 58.5 2.2 8.1 87.8 Couple, no child. 57.9 5.0 50.6 47.5 1.9 8.4 81.6 Edl/wtion of head No high school diploma 24.8 28.0 29.5 5.7 53.4 High school diploma ., .......... 42.2 2.2 44.3 48.2 1.8 5.9 73.2 Some college. 48.7 4.7 55.3 54.4 1.8 10.3 84.2 College degree ....... 61.3 6.7 49.9 47.0 1.7 8.5 84.3 Race or ethnicit)' of responde'" White non-Hispanic 51.9 4.4 47.0 46.0 1.7 7.8 78.0 Nonwhite or Hispanic 37.4 3.0 43.2 46.7 1.1 7.3 72.5 Current work SllIllIS of head Working for someone else 56.1 4.1 55.7 54.9 1.9 98 86.1 Self-employed. 59.5 10.2 43.5 44.3 3.0 5.8 81.5 Retired ............. , .... ,. 24.6 1.2 22.8 25.9 " 3.9 50.7 Other not working ... 30.3 45.6 41.0 70.4 Current occupation of head Managerial or professional ... 67.7 7.8 52.4 50.8 1.8 10.2 89.3 Technical. sales, or services 45.7 3.4 52.5 5-1.2 2.4 7.5 81.5 Other occupation ...... 53.4 3.2 56.6 55.2 2. I 9.6 84.0 Retired or other not working. 25.5 J.3 26.3 28.2 3.6 53.7 Region Nonheast 47.4 3.5 42.4 46.6 1.1 7.8 76.3 Midwest .... . .. .. .. ................. 51.9 4.1 49.9 44.7 1.6 86 75.4 South ......... 45.2 3.2 44.2 46.0 1.6 6.5 75.0 West. ~ 48.7 5.8 47.9 47.5 1.8 8.4 79.9 Urbwlicil), Metropolitan statistical area (MSA) .. 49.0 4.4 45.4 46.9 1.6 7.9 76.8 Non-MSA. 42.5 2.0 48.6 42.8 1.6 6.4 74.7 HOllsing status Owner .. . ................... 69.4 5.1 46.6 48.8 1.3 7.7 82.3 Reuter or other 1.7 44.6 40.4 2.1 7.3 63.4 Percentile of IIet worth Less than 25 12.4 47.5 40.3 1.3 6.2 64.9 25-49.9 . 52.8 1.4 52.4 57.9 1.7 9.4 83.8 50-74.9 66.1 4.5 49.1 52.8 1.9 7.0 83.2 75-89.9 . ........................ 61.6 5.7 40.2 40.5 J.3 7.1 74.6 90-100 58.4 16.6 27.2 23.4 1.4 9.1 72.7

Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A39 13. Family holding of deht. by elected chamctllristics 0 familie. and type of debt. 2004 and 2007 surveys- olltilwed A. 2004 Survey of Consumer Finances-conrinued Secured by residential properly Lines of credit not Installment Credit card Family characteristic r P es r i i d m e a n r c y e I Other loans balances s r e e p c s r u i o d r p e e e n d r t t i y b a y l Other Any debt Median value of holdings for families holding debt (thousands of 2007 dollars) All families . 104.3 95.6 12.7 2.4 3.3 4.4 60.7 Pelt'en/ile of income Less than 20 40.6 6.1 1.1 2.2 7.7 20-39.9 59.3 35.7 8.8 2.0 .3 2.9 17.6 40-59.9 ... 84.8 72.5 11.8 2.4 1.1 2.5 48.8 60-79.9 ... 106.5 68.1 15.2 3.3 7.7 3.8 102.6 80-89.9 .. 146.1 85.7 16.6 3.0 15.4 5.5 149.4 90-100 .. 203.2 174.6 19.8 4.4 43.9 10.4 229.5 Age uf hetld (years) Less than 35 117.5 68.6 13.1 1.6 1.1 3.3 36.9 35-44. 120.8 82.4 13.2 2.7 2.1 4.4 95.8 45-54 ...... .................... 106.5 95.6 13.1 3.2 7.7 4.4 91.4 55-{;4. 91.2 119.5 14.2 2.4 15.4 6.0 52.7 65-74 ....... ........................ 56.0 109.8 9.1 2.4 4.4 5.5 27.5 75 or more. 34.0 42.8 7.4 1.1 2.2 16.9 Family SITllClUre Single with child(ren) ........... 71.4 71.4 9.3 2.4 * 2.2 44.0 Single. no child, age less than 55 . 97.7 72.5 9.8 2.1 1 • .1 .\.3 23.4 Single. no child. age 55 or more 52.7 87.9 8.8 2.0 2.2 18.1 Couple wilh child(ren) . 104.3 153.8 14.6 3.3 4.4 4.9 97.0 Couple, no child ... ........... 119.7 104.3 15.0 2.3 9.9 5.5 93.4 Educarion of head . No high school diploma . . . . . . . . . . . . 48.3 7.7 1.3 * 4.4 13.2 High school diploma 76.9 51.6 9.9 2.1 1.6 3.3 34.0 Some college. ............ 94.5 82.4 13.0 2.4 3.3 3.7 49.4 College degree 137.3 115.3 16.9 3.0 4.4 5.5 117.7 Rae:" 01' ",/lIIiei,), of responde,,' White non· Hispanic 107.6 95.6 1.1.7 2.7 4.4 4.4 76.3 Nonwhite or Hispanic 91.2 72.5 10.5 1.7 .4 3.3 33.5 Curre'" wurk s"Jlus uf head Working for someone else 109.8 91.2 13.2 2.5 4.4 3.8 78.9 Self-employed. 131.6 109.8 16.9 3.0 2.4 7.7 102.6 Retired .......... ................... 46.1 86.8 8.0 1.6 3.3 16.9 Other not working ... 85.7 8.2 2.7 23.1 CUTrI!III OCCIlplllion of head Managerial or professional .. 141.7 101.0 16.5 3.3 8.8 5.5 127.3 Technical. sales. or services 97.7 115.3 12.2 2.2 1.6 3.3 47.6 Other occupation ..... 90.8 85.7 11..1 2.5 1.6 3.3 56.4 • Retired or other not working . 54.9 106.5 8.2 1.6 4.4 17.7 Region Northeast ....... .... 122.5 109.8 13.0 2.7 .4 5.5 60.1 Midwest 94.5 87.9 12.1 2.2 3.3 4.4 75.4 South .... 86.8 91.2 12 ..1 2.2 8.8 4.4 44 ..1 West ..... ......................... 140.7 95.6 14.1 2.7 4.4 3.3 85.2 UrbllnidlJ Metropolitan statistical area (MSA) 115.3 96.6 13.2 2.4 2.4 4.4 75.8 Non·MSA ........... 54.9 69.2 10.9 2.2 22.0 4.4 28.9 Housing Slillus O Re w n n te e r r o . r . . o ther . . . . . . . , . .. . . .. . . . . .. .. . . . . .. . . .. .. .. . . . . . 10 • 4 .3 9 9 8 1 . . 8 2 1 9 4 . .2 6 2 1 . . 7 6 8. . 8 5 4 3. . 3 4 10 8 5 . . 6 2 Perr:enlile of nel wonh .. Less than 25 . ,.-- 78.0 11.5 1.9 .3 4.4 12.5 25-49.9 .. 82.4 28.9 10.2 2.2 1.1 2.2 48.6 50-74.9 .. 106.5 51.6 14.6 2.7 8.8 4.4 98.9 75-89.9 ... ............... .. 126.3 108.7 14.2 3.3 24.2 5.5 121.6 90-100 .. , ....... 204.4 162.5 19.2 3.3 54.9 22.0 209.5 MEMO Mean value of holdi ngs for families holding asset L36.2 183.1 20.7 5.6 40.2 18.7 113.5 NOTE: See nOle to table II. • Ten Or fewer observations.

A40 Federal Reserve Bulletin 0 February 2009 L. Family holdings of debt. by selected characteri lies of families and type of debt. 2004-2007 'urveys--ComiIlLled B. 2007 Survey of Consumer Finances Secured by residential property Lines of credit not lnstallment Credit card Family characteristic secured by Other Any debt r P es r i i d m e a n r c y e I Other loans balances re p s r i o d p e e n r t t i y a l Percenlage of families holding debt All families . . ............ 48.7 5.5 46.9 46.1 1.7 6.8 77.0 Percentile of income Less than 20 . 14.9 1.1 27.8 25.7 3.9 51.7 20-39.9 ... . . . . . . . . . . . . . . 29.5 1.9 42.3 39.4 1.8 6.8 70.2 • 40-59.9 50.5 2.6 54.0 54.9 6.4 83.8 60-79.9 .. 69.7 6.8 59.2 62.1 2.1 8.7 90.9 ••• 1 •••••••••••••• • 80-89.9 .. 80.8 8.5 57.4 55.8 9.6 89.6 90-100 ................ 76.4 21.9 45.0 40.6 2.1 7.0 87.6 Age of head (years) Less than 35 ... ............... 37.3 3.3 65.2 48.5 2.1 5.9 83.5 35-44 59.5 6.5 56.2 51.7 2.2 7.5 86.2 45-54. . ............ 65.5 8.0 51.9 53.6 1.9 9.8 86.8 55-64 . ........... . .............. 55.3 7.8 44.6 49.9 1.2 8.7 81.8 65-74 ... ............. 42.9 5.0 26.1 37.0 1.5 4.4 65.5 75 or more . 13.9 .6 7.0 18.8 * 1.3 31.4 Famih .wructure Single with child(ren) ... 38.0 3.5 48.3 45.6 11.1 81.6 Single. no child. age less than 55 35.6 3.0 46.7 43.5 2.0 7.4 76.1 Single. no child. age 55 or more 23.2 1.8 19.4 30.5 * 4.1 49.0 Couple with child(ren) . 67.0 6.9 63.9 55.7 1.9 6.5 90.4 Couple, no child. . . . . . . . . . . . . . 59.1 7.7 5 1.4 49.8 1.7 7.0 82.5 Education of head No high school diploma ............. 26.0 1.9 33.3 26.9 53 55.5 High school diploma ................ 45.0 3.2 46.0 46.8 1.4 6.4 75.1 Some college. 46.9 6.4 54.3 51.0 2.2 9.3 80.8 College degree .... . . . . . . . . . . . . . 61.6 8.7 49.1 50.2 I.7 6.5 85.1 Race or ethnidry of respondent . White non-Hispanic . . . . . . . . . . 52.1 5.8 46.1 45.1 1.6 6.7 76.8 Nonwhite or Hispanic 40.4 4.8 48.9 48.4 2.0 7.0 77.7 C W ll o r r r k e i l n lt g w f o or r k s o s m tat e u o s n e o f e h ls e e l ld . . . . . . . . . . . 56.7 5.4 57.5 53.7 1.9 8.7 86.2 Self-employed .. 64.8 15.1 43.9 48.9 3.6 4.7 86.8 Retired .... . . . . . . . . . . . . . . . 27.0 2 • . 6 23.6 28.2 •.8 3.2 52.3 Other nOl working . 25.4 42.8 36.8 7.5 69.7 Current occupation of head ManageriaJ or professional ... 67.6 10.0 56.2 52.7 1.8 7.0 90.9 Technical. sales. or services 49.7 4.5 52.2 53.2 2.7 7.9 81.8 O~ler occupation 53.6 5.1 57.8 53.2 2.1 9.7 84.9 Retired or other not working . 26.7 2.5 26.6 29.6 .7 3.9 55.0 Region Northeast ........................... 48.4 4.9 40.7 44.3 5.6 73.3 Midwest .............. 51.0 5.2 47.9 45.5 1.9 7.0 78.3 South 46.6 4.6 48.5 43.4 1.7 6.9 75.3 West . . ............... 49.9 8.1 48.4 52.4 2.7 75 81.6 Urb(lllicin' Metropolitan statistical area (MSA) . 49.7 6.1 46.0 46.3 1.8 6.6 77.4 Non-MSA ... 43.5 2.9 51.2 44.8 1.6 8.0 75.0 Housing status Owner ......... 70.9 6.9 46.1 50.1 1.3 6.8 82.4 • Renter or other . 2.6 48.6 37.3 2.8 6.9 65.4 PeTt.'enri/e of net worth Less than 25 .. ,. 1l.0 54.2 41.0 2.6 6.7 68.9 25-49.9 .. .. "., ....... 56.1 3.2 52.1 52.9 1.3 8.2 82.4 5 75 0 - - 8 7 9 4 . . 9 9 . . .. .. . . .. . . .. . . .. . . . . . . , . 6 6 4 3 . . 3 9 4 8 . . 8 5 4 3 6 9. . 8 1 4 5 4 1 . . 1 7 1 J. . 5 6 7 3 . . 4 8 7 80 6 . . 3 9 90-100 ., ........... ............... 62.1 21.8 28.2 30.3 1.5 6.7 75.9

Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A41 13. Family holdings of debt. by elected characteristics of families and type of debt, 2004-2007 surveYfr--Coflfillued B. 2007 Survey of Consumer Finances-comililled Secured by residential property Lines of credit not Family characteristic In>~tallment Credit card secured by Other Any debt r P es r i i d m e a n r c y e I Olher loans balances re p s r i o d p e e n r t t i y a l Median value of holdings for families holding debt (thousands of 2007 dollars) All families . . ............ 107.0 100.0 13.0 3.0 3.8 5.0 67.3 Percenlile oj income Less than 20 . . . . . . . . . . . 40.0 70.0 6.5 1.0 * 3.0 9.0 20-39.9 51.0 42.0 9.8 1.8 1.3 4.0 18.0 40-59.9 88.7 68.9 12.8 2.4 4.0 545 8 6 0 0 - - 8 7 9 9 . . 9 9 . . .. , ......................... 1 11 6 5 4 . . 0 0 1 8 2 3 5. .0 0 1 17 6. . 3 3 4 5. . 5 0 5 • . 1 5 5 . . 3 0 1 1 8 1 2 1 . . 2 3 90-100 .... ................... 201.0 147.5 18.3 7.5 17.3 7.5 235.0 Alie oj head (years) Less than 35 ........... 135.3 78.0 15.0 1.8 1.0 4.5 36.2 35-44 ............... 128.0 1001.6 13.5 3.5 4.6 5.0 106.2 45--54 ......... 110.0 82.0 12.9 3.6 6.0 4.5 95.9 55--64 . 85.0 130.0 10.9 3.6 10.0 6.0 60.3 65--74. 69.0 125.0 10.3 3.0 30.0 5.0 40.1 75 or more .. 40.0 50.0 8.0 .8 4.5 13.0 Family strllcture Single with child(ren) ............ 97.0 92.5 10.0 2.0 7.0 27.9 Single. no child. age less than 55 . 93.9 80.0 10.0 1.5 .4 4.5 31.0 Single, no child. age 55 or more 50.0 135.0 6.0 2.3 3.8 15.9 Couple with child(ren) . 119.0 114.8 13.0 4.1 3.5 6.0 103.0 Couple. no child ..................... 119.0 100.0 15.8 3.5 5.1 5.0 102.7 Edllcutioll oj head No high school diploma ............. 50.0 53.3 8.8 1.5 4.0 19.5 High school diploma ............ 84.0 82.0 10.2 2.3 1.4 4.5 40.0 Some college ... 97.0 80.0 12.1 2.9 3.8 5.0 54.4 College degree 142.7 125.0 17.4 4.0 6.0 6.0 124.3 Race or elhnicity oj re£pondenl White non-Hispanic 106.0 90.8 13.4 3.3 5.0 5.0 76.4 Nonwhite or Hispanic ............... 113.0 114.8 12.0 2.0 .8 5.0 43.9 CllrTl!nl work stalllS olhead Working for someone else ........... 117.0 89.0 13.5 3.0 2.9 5.0 82.1 Self-employed. 135.0 151.6 15.5 4.3 5.0 10.0 122.7 Retired .... . ................... 47.1 100.0 8.6 1.5 6.4 4.5 20.0 Other not working . 90.0 10.7 1.8 8.0 21.9 Cllrrent occllpation oj head Managerial or professional ........... 148.0 130.0 16.3 4.5 9.0 7.0 137.6 Technical, sales. or services. 100.9 105.0 12.2 3.0 3.5 4.0 65.8 Other occupation .................... 94.0 60.0 12.0 2.5 4.0 4.8 64.1 Retired or other not working 53.0 100.0 9.7 1.5 6.4 5.0 20.0 Region Northeasl ...... , .................... 107.0 95.0 12.1 3.0 6.5 66.6 Midwest ........................... 93.9 82.5 tl.O 3.0 5.0 5.0 61.2 South . ................ 99.0 80.0 13.2 2.8 3.2 4.5 60.9 West . 150.8 160.0 14.2 3.0 3.8 6.0 95.5 Urballidrr Metropol,tan statistical area (MSA) . 118.2 101.0 13.3 3.0 3.5 5.0 78.1 Non-MSA ....... 60.7 70.0 11.7 2.0 6.0 5.0 29.8 HOllsing StatllS Owner . 107.0 100.0 14.2 J6 7.5 5.0 111.1 Renter or other .. 80.0 10.3 1.3 1.0 4.9 9.2 Percenlile oj net worth Less than 25 107.0 11.4 1.5 1.0 5.0 11.9 25-49.9 ............ 85.0 74.0 13.0 2.8 2.0 3.9 64.2 50-74.9 .............................. 104.0 72.0 14.0 3.5 4.2 5.0 97.5 ... 75--89.9 .. ............ 130.0 94.0 12.0 4.0 10.3 5.0 127.0 90-100 ............ 180.0 160.0 17.1 4.5 43.0 15.0 203.0 MEMO Mean value of holdings for families holding asset 149.0 177.3 21.0 7.3 24.8 15.5 126.0 NOTE: See note to table II • Ten or fewer observations.

A42 Federal Reserve Bulletin D February 2009 since the 1998 survey (data not shown in the tables). service job. The median decreased by the greatest In general, borrowing is less prevalent among child proportion for families in the 75-or-more age group, less single families headed by a person aged 55 or single fami lies with children, and families living in older and families headed by a person who is retired the Midwest. or is 75 or older. Families in the lowest income, wealth, and education groups-which tend to have M rtgages and Other Borrowing on the Primary Re idence fewer economic resources-are also less likely to have any debt. Across income groups, borrowing The share of families with debt secured by a primary peaks among families above the median. In contrast, residence (hereafter, home-secured debt) continued to by net worth group, debt ownership peaks among trend up, from 47.9 percent in 2004 to 48.7 percent in families below the median, in the second quartile. 2007.43 The increase was driven by the rise in the Families in the highest three income groups, couples fraction of homeowners with a mortgage, which rose with children, and families headed by a person 1.5 percentage points, to 70.9 percent in 2007. employed in a managerial or professional position Families with higher levels of income, education, have comparatively high rates of debt ownership. and wealth are generally more likely to have mort Debt ownership did not rise uniformly across gage debt, as are couples and families headed by a households between 2004 and 2007. The fraction of person who is employed in a managerial or profes families with any debt fell for at least one group sional job or who is self-employed. Across age within most of the sets of demographic categories groups, the rate of borrowing peaks among families in shown in table 13. By age group, debt ownership rOse a middle age group and declines sharply among older 5.5 percentage points for households in the 55-to-64 age groups, a pattern also seen in earlier years.44 age group and 6.7 percentage points for those in the White non-Hispanic families are more likely to have 65-to-74 age group, but it fell 8.9 percentage points home-secured debt than are nonwhite or Hispanic for families in the oldest age category. Similarly, families.45 Between 2004 and 2007, the prevalence of changes within income and wealth groups ranged home-secured debt tended to increase for families from declines of 2 to 3 percentage points to gains of with higher levels of income or wealth, and it also 4 percentage points or more. The percentage of rose for families headed by a person who was self families with debt increased just more than 5 percent employed or employed in a technical, sales, or service age points for nonwhite or Hispanic families as well occupation and for families headed by a person who as for those headed by a self-employed person, was aged 55 to 74; the proportion of families with whereas the fraction rose more modestly or declined home-secured debt declined most for single-parent among families in the complementary categories. families, the oldest age group, and families in the The overall median and mean values of outstand other-not-working category. The measure shifted com ing debt for families that had any such debt rose about paratively little for other demographic groups. 11 percent from 2004 to 2007, a slower rate of Overall, the median amount of home-secured debt increase than in the previous three-year period, when rose 2.6 percent from 2004 to 2007, and the mean the median and mean both rose nearly 34 percent. rose 9.4 percent; the median had increased 27.4 per- Median debt tends to rise with income, education, and wealth; the median by age peaks among households 43, Home-secured debt consists of first-lien and junior-lien mort gages and home equity lines of credit secured by the primary headed by a person aged 35 to 44. The median residence, For purposes of this article, first-and junior-lien mortgages amount of outstanding debt is also higher for couples, consist only of closed-end loans-that is, loans typically with a homeowners, and families headed by a person who one-time extension of credit, a set frequency of repayments, and a required repayment size that may be fixed or vary over time in was self-employed or who was working in a manage accordance with a pre-specified agreement or with changes in a given rial or professional position. Over the recent three market interest rate, As a type of open-ended credit, home equity lines year period, the median amount of outstanding debt typically allow credit extensions at the borrower's discretion subject to a prearranged limit and allow repayments at the borrower's discretion rose for most demographic subgroups. The largest subject to a prearranged minimum size and frequency, increases in the median amount of debt were for 44, Of the families that owned a home, the fraction of homeowners families headed by a person who lacked a high school with mortgage debt was highest among families in the youngest age group in 2007, For homeowners in the 2004 survey, ownership of diploma (47.7 percent) and families headed by a home-secured debt peaked among families headed by a person aged 35 person aged 65 to 74 (45.8 percent); other relatively to 44, large increases in the median included those for 45, This pattern reverses, however, when only homeowners are considered; for example, in 2007, 68,9 percent of white non-Hispanic families Ii vi ng in the South and for families headed homeowners had a mortgage, compared with 77,7 percent of nonwhite by a person who worked in a technical, sales, or or Hispanic homeowners,

Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A43 14. Type of home-secured debt held by homeowners, 1998-2()()7 surveys Percent Homeowners with home-secured debt Type of home·secured debt 1998 I 2001 I 2004 I 2007 First·lien mortgage . . .................•.. 62.2 62.6 65.2 66.1 For home purchase ...... . ..........•. 36.8 35.8 28.2 30.4 Refinanced Extracted equity ...... . 9.8 9.7 12.9 14.3 No extracted equity . 15.6 17,1 24.0 21.5 Ju nior·lien mortgage .. . 9.4 8.5 6.1 8.5 For home purchase ........... _ 1.0 1.3 1.5 2.1 Other purpos~ . . . . . . . . . . . . . .......... I 8.5 7.2 4.7 6.4 Home equity line of credit . . ............ ,. 10.6 11.2 17.8 18.4 Currently borrowing, 6.7 7.1 12.4 12.4 n.a. Not available (relevant data not collected). cent over the preceding three years, and the mean had ownership, stayed constant from the time of the increased 26.9 percent. Changes in the median amount interview until October 2008, the LoanPerformance of home-secured debt were mixed across groups. The Home Price Index can be used to approximate the median fell more than to percent for families in the effect of house price declines on home equity. This second-lowest income group, families in the top net assumption, together with the house price adjustment, worth group, and families living in the Northeast. The implies that as of October 2008, median home equity largest increases in the median value of home-secured for those with mortgage debt was $71,600 (6.9 per debt were for single-parent families and families in cent lower than the 2004 value), and the median ratio the bottom net worth quartile. Both of these groups, of home-secured debt to house values for families but particularly the former, experienced declines in with mortgage debt was 58.5 percent. Under this the prevalence of home-secured debt, which suggests scenario, the aggregate ratio of home-secured debt to that the proportion of smaller home-secured debts house values for homeowners was 39.8 percent in among these families fell over the recent period. October 2008.47 Other increases in the median were concentrated Mortgage interest rates rose slightly, on net, over among the youngest and oldest age groups and among the 200~7 period, but they remained low relative to nonwhite or Hispanic families. prevailing rates in the 1990s. Comparatively low The rising values of primary residences over the interest rates, appreciation in house values, changes 200~7 period outpaced the increases in home in mortgage-lending practices, and the deductibility secured debt and, thus, raised the typical amount of of interest payments on mortgage debt may have home equity held by families with home-secured provided an incentive for families to borrow against debt. Median home equity among that group rose the equity in their home. Such borrowing against from $76,900 to $91,000 over the period, an 18.3 per home equity may take the form of refinancing an cent increase (data not shown in the tables).46 Among existing first-lien mortgage for more than the out those with such debt, the median ratio of home standing balance, obtaining a junior-lien mortgage, or secured debt to the value of the primary residence fell accessing a home equity line of credit. The survey 2.7 percentage points, to 53.3 percent in 2007; the provides detailed information on all these options for drop extended a trend in this measure since 1998, home equity borrowing. The share of homeowners when the median ratio was 58.8 percent. Over the that had a first lien increased 0.9 percentage point, to recent three-year period, an SCF-based estimate of 66.1 percent in 2007 (table 14). The fraction of the aggregate ratio of home-secured debt to home homeowners with junior-lien mortgage debt climbed values for all homeowners held steady at 34.9 per more substantially-2.4 percentage points-to 8.5 per cent. Nonetheless, at the time of the 2007 SCF cent in 2007. The proportion of homeowners that had interview, 1.0 percent of homeowners had home a home equity line of credit increased 0.6 percentage secured debt greater than the reported value of their primary residence. As discussed earlier, home values generally de 46. Among all homeowners in 2007, median home equity was $105,000; in 2004, it had been $94.500. clined after the data collection for the 2007 SCF was 47. This scenario implies that the adjusted median home equity completed. Assuming that all else, including home- among all homeowners was $90,200 in October 2008.

A44 Federal Reserve Bulletin D February 2009 point, to 18.4 percent in 2007, but the share of the length of time over which the loan must be repaid. homeowners with an outstanding balance held steady Between 2004 and 2007, the share of fi xed-term at 12.4 percent; the median amount borrowed against first-lien mortgages with a term of at least 30 years such lines likewise changed little and inched down rose, and the share with a term of 15 years or less from $24,200 in 2004 to $24,000 in 2007 (data not declined (table 14.2). shown in the tables).48 Overall, the share of total 14.2. home-secured debt that was attributable to outstand ing balances on home equity lines of credit fell across First-lien mortgage with a fixed term the 2004 and 2007 surveys (table 14.1). MOrlgage contract length I 2007 Change. 2004-07 (percent) (percentage points) 14.1. 15 years or shoner . 25.6 -7.3 16-29 years . 9.4 -.3 30 years or longer . 65.1 7.6 Share of total home-secured debt Type of home-secured debt 2007 I Change, 2004-07 (percent) (percentage points) Another factor that may affect a borrower's ability First tien . 9t.4 .6 to service a loan is the extent to which the payment Junior lien . 4.0 1.0 Home equity line of credit. 4.6 -1.6 may change over the life of the loan. Recent declines in house prices and changes in benchmark interest rates have brought particular attention to mortgages In 2007, an increased share of the stock of first with payments that may vary over the life of the loan, liens consisted of either loans for home purchase or including mortgages that do not require the borrower loans that had been refinanced and on which the to pay back the entire principal over the contract borrower had extracted additional equity at the time period of the loan; in such cases, a "balloon pay of the most recent refinancing (table 14). Among ment" of the remaining principal remains at the end borrowers in the 2007 survey who extracted equity as of the loan term. From 2004, the fraction of first-lien a part of their most recent refinancing, the median mortgages on the primary residence that had a poten amount extracted was $28,900, compared with tially variable rate fell 0.8 percentage point, to $22,000 in 2004 (data not shown in the tables). The 14.2 percent in 2007 (data not shown in the tables); prevalence of both types of junior liens rose over the over the same period, the share of first-lien mortgages recent three-year period. In the 2007 survey, the most with a balloon payment increased 0.5 percentage commOn use of extracted equity was for home point, to 4.6 percent. The level of interest rates is improvement, which accounted for 39.8 percent of another key determinant of the size of the regular outstanding balances attributable to equity extraction payment that a borrower must make to repay a loan. on a first lien, a junior lien, or a home equity line of Between 2004 and 2007, the median interest rate on credit. the stock of outstanding first-lien mortgages on pri Families headed by a self-employed person were mary residences rose 0.10 percentage point, to more likely than families overall to have a home 6.00 percent, and the mean interest rate rose 0.13 per equity line of credit-20.4 percent of self-employed centage point, to 6.32 percent. families, compared with 12.6 percent overall in 2007-and to be borrowing against such a line-ll.O Bon·owing on Other Residential Real E tat percent of self-employed families, compared with 8.5 percent for all families in 2007 (data not shown in The overall prevalence of debt owed on residential the tables). These differences reflect, in part, the real estate other than a fami ly' s pri mary residence relatively higher rates of homeownership among increased 1.5 percentage points between 2004 and families headed by a self-employed person. 2007, the largest increase in prevalence of any of the Amid rising house prices between 2004 and 2007, types of debt considered in table 13. The increase much discussion focused on how families have man reflected not only the rise in the share of families with aged to finance the purchase of a home. One impor other residential real estate (discussed earlier) but tant determinant of the size of the regular payment also a higher rate of borrowing against such proper that families must make to service their mortgages is ties among families that owned them. In 2004, 32.0 percent of families with other residential real 48. Of all families, 45.4 percent had a first-lien mongage in 2007 estate owed money On a loan collateralized by the (45.0 percent in 2004), 5.8 percent had a junior-lien Illongage property, and in 2007 this proportion had risen to (4.2 percent in 2004), 12.6 percent had a home equity line of credit 40.3 percent. Borrowing on other residential real (12.3 percent in 2004), and 8.5 percent had a home equity line of credit with an outstanding balance (8.6 percent in 2004). estate is more common among households with

Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A45 higher levels of income, education, or wealth; couples, for younger families and families in the lowest wealth as well as families headed by a person who was category shown (table 15); the shares of installment self-employed or who was employed in a managerial debt attributable to education loans decline with age or professional position, are also relatively likely to and wealth, and-as might be expected-the share have such debt. These same groups generally experi rises sharply with education. 50 enced the largest increases in the use of such debt. From 2004 to 2007, the median amount owed on The median amount of debt on other residential installment loans rose 2.4 percent, and the mean rose real estate for families having such debt moved up 1.4 percent. Changes in the median within demo 4.6 percent in 2007, but the mean amount fell 3.2 per graphic categories include both increases and de cent. These changes are modest compared with the creases. The largest gains occurred among families in sharp rises between 2001 and 2004 in the median and the second net worth quartile and families headed by mean amounts, each of which more than doubled. a person who was retired or otherwise not working, Changes over the recent three-year period in the while the sharpest declines occurred among families median and mean amounts exhibited a mixed pattern headed by a person aged 55 to 64 and chil.dless single of increases and decreases for subgroups of families; families headed by a person aged 55 or older. shifts in the medians and means for subgroups were generally in the same direction. Credit Card Balance and Other Lines of Credit In talLm nl Borrowing As with installment borrowing, the carrying of credit Installment borrowing is about as common as home card balances is widespread but considerably less secured borrowing.49 In 2007, 46.9 percent of fami common among the highest and lowest income groups, lies had installment debt, an increase of 0.9 percent the highest wealth group, and families headed by a age point over the level for 2004. Although the use of person who is aged 65 or older or who is retired.51 installment borrowing has increased in each of the The proportion of families carrying a balance, 46.1 per past three surveys, the overall rate of use is compa cent in 2007, was barely changed from 2004. Under rable with the levels seen in the four surveys from lying this stability in the share of all families carrying 1989 to 1995. The use of installment borrowing is a balance were larger shifts for many demographic broadly distributed across demographic groups, with groups, with increases and decreases of 3 percentage notably lower use by families in the lowest income points or more for many of the groups. group, those in the highest wealth group, childless Overall, the median balance for those carrying a single families headed by a person aged 55 or older, balance rose 25.0 percent, to $3,000; the mean rose families headed by a retired person, and families 30.4 percent, to $7,300. These increases followed headed by a person aged 65 or older. By comparison, slower changes over the preceding three years, when the median amount of outstanding installment debt the median increased 9.1 percent and the mean varies more clearly across many groups: That amount climbed 16.7 percent (data not shown in the tables). tends to rise with income, education, and occupa Over the recent period, the median balance rose tional status, and it falls with age. The median amount strongly for most demographic groups, particularly of installment debt is fairly comparable for families for higher-income families, childless couples, and with net worth below the 90th percentile and is families headed by a person who was aged 55 to 64 or sharply higher for families in the top net worth group. who was self-employed. However, the median bal Installment borrowing is used for a wide variety of ance fell roughly 30 percent for the oldest age group, purposes. In 2007, 51.7 percent of such borrowing younger childless single families, and families headed was related to the purchase of a vehicle, and 33.2 per cent of outstanding installment debt was owed for educational purposes. In general, balances on vehicle 50. For an expanded version of table 13, including the categories of loans account for a disproportionate share of install installment loans given in table 15, see www.federa/reserve.gov/pubs/ ossloss2l2007/scf2007home.html. ment debt for those families headed by a person with 51. In this article, credit card balances consist of balances on at most a high school degree; vehicle debt constitutes bank-type cards (such as Visa, Master{:ard, and Discover as well as a relatively low proportion of total installment debt Optima and other American Express cards that routinely allow carry ing a balance), store cards or charge accounts, gasoline company cards, so-called travel and entertainment cards (such as American 49. The term "installment borrowing" in this article describes Express cards that do not routinely allow carrying a balance and closed-end consumer loans-that is. loans that typically have fixed Diners Club), other credit cards, and revolving store accounts that are payments and a fixed term. Examples are automobile loans, student not tied to a credit card. Balances exclude purchases made after the loans, and loans for furniture, appliances, and other durable goods. most recent bill was paid.

A46 Federal Reserve Bulletin 0 February 2009 15. Value of installment debt distributed by type of installment debt by selected charn tcristics of familie. with in lallment debt. 2004 and 2007 urvey Percent 2007 Family characteristic Education Other Education Vehicle Other All families ... ........ , ........ 26.0 55.5 18.5 33.2 51.7 15.1 Percl!lIIih; of income Less than 20 55.8 .H.9 lOA 47.0 24.4 28.6 20-39.9 30.6 405 28.9 29.9 43.9 26.3 40-59.9 ... ......................... 29.2 56.7 14.0 33.6 54.7 11.7 60-79.9 23.8 61.1 15.1 32.7 59.4 7.9 80-89.9 17.3 64.6 18.2 38.3 56.2 5.6 90-100 ............................. 19.0 56.9 24.2 25.5 50.9 23.6 Age of head (years) Less than 35 42.6 45.9 11.5 53.1 41.2 5.6 4 3 5 5 - - 5 4 4 4 . . .. . .'.''. 1 2 2 6 3 . . 4 6 6 6 1 3 . . 3 3 1 12 3 . . 2 0 2 2 4 7 . . 3 2 5 5 3 7. . 8 5 1 19 7 . . 4 8 55~ . . . . . . . . . . . . . . . 15.8 68.5 15.7 21.7 53.8 24.5 65-74. ................... * 72.0 27.4 73.2 19.0 75 or more . 19.5 88.0 Edllcatioll of hmd No high school diploma 8.1 70.0 21.9 12.8 71.5 15.8 High school diploma 12.6 70.7 16.7 15.0 69.6 15,4 Some college ..... 26.7 61.8 11.5 23.6 53.0 23.5 College degree ........... 33.4 45.3 21.3 48.1 40.2 11.7 Race or ethnicity of responde", White non-Hispanic . . . . . . . . . . . 25.9 56.3 178 32.1 52.1 15.9 Nonwhite or Hispanic 26.6 52.7 20.7 36.2 50.6 13.2 Percentile of lIet worth Less than 25 . . . . . . . . . . . . 45.2 33.0 21.8 47.9 32.5 19.6 25-49.9 27.2 67.8 5.0 30.3 60.9 8.8 50-74.9 .............. 21.5 67.1 11.2 30.2 60.4 9.4 75-89.9 .............. 19.0 72.5 8.5 25.7 66.0 S.3 90-100 ........... 3.8 43.4 52.7 16.7 47.6 35.7 NOTE: See nOle to table I. • Ten or fewer observations. by a person who was neither working nor retired; 15.1. median balances declined more modestly for selected other groups. Families wilh credil cards Many families with credit cards do not carry a Type of credit card 2007 Change. 2004-07 (percent) (percentage points) balance.52 Of the 73.0 percent of families with credit Bank 96.1 .7 cards in 2007, only 60.3 percent had a balance at the Store 56.7 -1.7 Gasoline. ll.9 -5.4 time of the interview; in 2004, 74.9 percent had cards, Travel and enlenainment . 7.4 -2.6 and 58.0 percent of these families had an outstanding Miscellaneous . 3.7 I I balance on them (data not shown in the tables). The proportion of cardholders who had bank-type cards gasoline companies and in the issuance of new types increased over this three-year period, as did the of American Express cards that routinely allow carry proportion with miscellaneous other credit cards, ing a balance. while the share of cardholders having gasoline or Bank-type cards are the most widely held type of travel and entertainment card types declined consid card and thus hold particular importance. Indeed, erably (table 15.1). These declines probably reflect, at balances on such cards accounted for 87.1 percent of least in part, a rise during the period in the issuance of outstanding credit card balances in 2007, up from bank-type cards under the brand names of stores and 84.9 percent in 2004 (data not shown in the tables). The proportion of holders of bank-type cards who had a balance went up 2.1 percentage points, to 58.3 per cent; the proportion of holders of bank-type cards 52. The remaining discussion of credit cards excludes revolving who reported that they usually pay their balances in store accounts that are not tied to a credit card. In 2007. 5.4 percent (5.9 percent in 2004) of families had such an account. the median full retreated a bit, from 55.7 percent in 2004 to outstanding balance for families that had a balance was $700 ($790 in 55.3 percent in 2007. Over the recent three-year 2004), and the total of such balances accounted for 4.4 percent period, the median outstanding charges for the month (4.3 percent in 2004) of the total of balances on credit cards and such store accounts (data not shown in the tables). preceding the interview on all bank-type cards held

Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A47 by the family fell from $280 in 2004 to $250 in 2007. higher levels of income, education, or net worth; the For families having any bank-type cards, the median rate of use rose for the age groups between 45 and 74 number of such cards remained at 2; the median and for all occupation categories except the credit limit on all such cards rose 21.4 percent, to managerial-or-professional group. $18,000, and the median interest rate on the card with The median amount owed by families with this the largest balance (or on the newest card, if no type of debt rose 13.6 percent, to $5,000, between outstanding balances existed) rose 1.0 percentage 2004 and 2007; over the same period, the mean fell point, to 12.5 percent. 17.1 percent. In 2007, 36.6 percent of the total Only 3.8 percent of families had an established line amount of this type of debt was attri butable to margin of credit other than a home equity line in 2007 (data loans (50.4 percent in 2004), 21.3 percent to loans not shown in the tables).53 Even fewer families- against a pension from a current job of the family 1.7 percent-had a balance on such a line, an increase head or that person's spouse or partner (21.2 percent of 0.1 percentage point since 2004 and only 0.2 per in 2004), 12.1 percent to loans against cash val ue life centage point since 2001. The median amount out insurance policies (9.8 percent in 2004), and the standing on these lines climbed 15.2 percent between remaining 30.0 percent to miscellaneous loans the most recent surveys, while the mean fell 38.3 per (18.7 percent in 2004) (data not shown in the tables). cent. In 2007, the SCF collected information for the first Borrowing on other lines of credit was more com time on whether a family member had taken out a mon among households headed by a person who was loan in the past year that was supposed to be repaid in self-employed, a pattern that is apparent in earlier full out of that person's next paycheck. 55 Overall, SCF surveys; a similar pattern also holds when the 2.4 percent of families reported having taken out a analysis considers all available lines, not just those so-called payday loan. The fraction of families that against which families carried a balance. had taken out a payday loan declined with age, falling from 4.9 percent of families headed by a person Other Debt younger than age 35 to essentially 0 percent for families headed by a person aged 65 or older (data not From 2004 to 2007, the proportion of families that shown in the tables). Across income groups, the share owed money on other types of debts decreased of families that reported such a loan was between 0.8 percentage point, to 6.8 percent.54 The ownership 3.5 percent and 4.0 percent for the bottom three of each underlying type of such debt also declined quintiles, but families in the top two quintiles reported (table 15.2). virtually no use of this type of short-term loan. Similarly, 5.8 percent of families in the bottom net 15.2. worth quartile reported having taken out a payday All families loan, while 3.7 percent of families in the second Type of other debt 200? I Change. 2~? quartile and virtually no families with net worth (percent) (percentage points) above the median reported having done so. Cash value life insurance The data indicate that families tend to take out loans. .9 --D.? Pension account loans . 3.4 --D. I payday loans to finance immediate expenses. The Margin account loans. .5 t Other miscellaneous loans .. 2.4 -.3 most common reason given for choosing a payday loan for families that had taken out such a loan was t Less than 0.05 percent. "emergencies" and similar urgent needs or a lack of Rates of use of other debt were noticeably lower other options (35.9 percent).56 Roughly equal shares for families in the bottom income group as well as for of families cited convenience in obtaining the loan families headed by a person who is 75 years of age or (21.0 percent) or the need to pay for living expenses, older or who is retired and for families in the next-to including food, gas, vehicle expenses, medical pay highest net worth group. The highest rate of other ments, utility costs, or rent (20.6 percent). A smaller debt ownership was for single families with children. fraction, 10.8 percent, of these fami lies reported a The prevalence of such debt fell for families with need to pay other bills and loans. The remaining 53. In this article, borrowing on lines of credit excludes borrowing 55. The family mayor may not have had such a loan outstanding at on credit cards. the time of the interview. 54. The "other debt" category comprises loans on cash value life 56. This discussion considers the primary reasons given by families insurance policies, loans against pension accounts, borrowing on when asked why they chose this type of loan. Families could provide margin accounts, and a miscellaneous category largely comprising up to two reasons, but 92.0 percent of those who had taken out a personal loans not explicitly categorized elsewhere. payday loan in the past year provided only one.

A48 Federal Reserve Bulletin 0 February 2009 12.6 percent of families with a payday loan in the past 17. Amount or dehl of all ramilic , di tributed by type of year cited other needs, including "Christmas" or the lending institution, 1998-2007 surveys need to "help family." Percent Reasons for Borrowing Type of institution 1998 2007 Commercial bank ......... 32.8 34.1 35.1 37.3 The SCF provides information on the reasons that Thrift institution I ... 9.7 6.1 7.3 4.2 Credit union 4.3 5.5 3.6 4.2 families borrow money (table 16). One subtle prob Finance or loan company --. 4.1 4.3 4.1 3.4 Brokerage .... 3.8 3.1 2.5 1.6 lem with the use of these data is that, even though Mortgage or real estate lender. 35.6 38.0 39.4 41.6 money is borrowed for a particular purpose, it may be O In t d h i e v r i d n u o a n l fi l n e a n n d c e i r a l . . . . . . . . . . . . . 3 1 . . 3 3 2 1 . . 0 4 2 1 . . 0 7 2 1 . . 0 4 employed to offset some other use of funds. For Government ...... __ ............. .6 1.1 .7 .4 Credit card issuer. .............. 3.9 3.7 3.0 3.6 example, a family may have sufficient funds to pur Pension ............ .4 .3 .3 .2 chase a home without using a mortgage but may Ot T he o r t al ........... , ......... 100 .3 100 .5 100 .2 100 . 2 instead choose to finance the purchase to free existing NOTE: See note to table I. funds for another purpose. Thus, trends in the data I. Savings and 10em association or savings bank. can only suggest the underlying use of funds by families. on the primary residence. In 2007, the fraction of debt Although the survey information on use is substan owed for goods and services exceeded the share of tial, it is not exhaustive, Most important, in the case borrowing for vehicles for the first time in any SCF of credit cards, it was deemed impractical to ask survey since 1989, largely because of a decline in the about the purposes of borrowing, which might well be share for vehicles between 2004 and 2007. The heterogeneous for individual families. For the analy majority of the debt in the goods and services cat sis here, all credit card debt is included in the egory, 56.5 percent, was outstanding balances on category "goods and services," The surveys before credit cardsY 2004 lack information on the use of funds borrowed through a first-lien mortgage; therefore, for purposes Choice of Lenders of this calculation, all funds owed on a first-lien The survey provides information on the types of mortgage on a primary residence are assumed to have lenders to which families owe money at the time of been used for the purchase of the home, even when the interview (table 17). Over the past decade, regu the homeowner had refinanced the mortgage and latory changes and other shifts have contributed to extracted equity for another purpose. consolidation of financial institutions; at the same The great majority of family debt is attributable to time, consumers have witnessed a continuing prolif the purchase of a primary residence; however, from eration of similarly named subsidiaries of large finan 2004 to 2007, the share of debt for this purpose cial institutions, which may offer a variety of possibly declined 0.7 percentage point after a similar decline overlapping financial services. As a result, fami lies in in the 2004 survey. Looking more broadly at debt for the SCF appear to have had difficulty in accurately residential real estate, the drop in debt for home classifying the institutional type of lender holding purchase was more than offset by both an increase in their loans. A parent company may, for example, offer balances owed on residential real estate other than the installment loans through both a subsidiary commer primary residence-the second-largest share of debt cial bank and a subsidiary finance company with and a slight rise in balances owed for improvements similar names. Thus, the proportions shown in the 16. Amounl of debl of all families. di lributed by purpose table are only indicative, and small differences across of debt. 1998-2007 surveys categories or years should be interpreted with particu Perce III lar caution. The share of total debt reportedly owed to thrift Purpose of de bt 1998 2007 institutions (savings and loan associations and sav- Primary residence Purchase ............. __ . 67.9 70.9 70.2 69.5 Improvement. . . . . . .. 2.1 2.0 1.9 2.3 57. The surveys beginning with 2004 con13in information on the Other residential property ...... . 7.8 6.5 9.5 10.8 Investments excludi ng real estate . 3.3 2.8 2.2 1.6 use of funds ob13ined from refinancing a first-lien mortgage. If this Vehicles. .. . .. .. . .. __ ... __ ... 7.6 ~8 67 ~5 information for 2007 is used to classify outstanding debt by purposes, Goods and services . 63 ~8 60 62 the shares of debt were, for home purchase, 65.6 percent; for home Education .. . 3.5 3.1 3.0 3.6 Other ..... ____ .. 1.5 1.1 .6 .5 improvements, 3.9 percent; for other residential real eS13te, 11.1 per Total ............. . 100 100 100 100 cent; for investments other than real estate, 1.9 percent; for vehicles, 5.7 percent; for goods and services, 7.7 percent; for education, NOTE: See note to table 8. 3.6 percent: and for other unclassified purposes, 0.5 percent.

Changes in U.s. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A49 ings banks) fell 3.1 percentage points between 2004 families, 15.3 percent had considered applying but and 2007. The estimated shares held by finance and subsequently did not do so because they thought the loan companies or brokerages declined 0.7 and 0.9 per application would be denied (15.8 percent in 2004). centage point, respectively. The largest increases over The most common reasons reported for either having the period were the reported rise of 2.2 percentage been denied credit or having not applied for credit points in the shares of debt owed to a commercial were reasons related to the borrower's credit charac bank and to mortgage or real estate lenders, followed teristics, such as the lack of a credit history, previous by gains of 0.6 percentage point for both credit unions performance on a loan or account from another and credit card issuers. institution, and the amount of debt held by the In some cases, loans may have been held at the borrower (table 17.1).59 time of the interviews by institutions other than the ones that originally made the loans. This fact might 17.1. likewise make determining the type of financial insti tution that holds such debt more difficult. Resale of Families who applied Families who did for credit and were loans is particularly important for mortgage debt. Reason IUmed down turned down or not apply for credit because they expected or did not apply received less credit According to the 2007 survey, 39.5 percent of the than the amount to be turned down (percent) first-lien mortgages on primary residences were held requested (percent) by lenders other than the ones that made the original Personal characteristics . 1.8 3.9 Credit characteristics 59.9 67.7 loans, a figure 2.0 percentage points lower than in Financial characteristics 29.4 22.9 2004.58 In dollar-weighted terms, the results are simi Miscellaneous, including no reason given . 8.8 5.5 lar; mortgages with non-originating lenders accounted for 40.3 percent of the outstanding balances on first-lien mortgages for primary residences in 2007 Debt Burden and 43.3 percent in 2004 (data not shown in the tables). The ability of individual families to service their loans is a function of two factors: the level of their Credit Market Experiences loan payments and the income and assets they have available to meet those payments. In planning their The SCF also collects some information on families' borrowing, families make assumptions about their recent credit market experiences. Specifically, the future ability to repay their loans. Problems may survey asks whether the family had applied for any occur when events turn out to be contrary to those type of credit in the past five years and, if so, whether assumptions. If such misjudgments are sufficiently any application was either turned down or granted for large and prevalent, a broad pattern of default, a lesser amount than the amount initially requested. restraint in spending, and financial distress in the Families that gave such responses were asked the wider economy might ensue. reason given for the decision. The survey also asks The Federal Reserve staff has constructed an whether, at any time in the past five years, the family aggregate-level debt service ratio, defined as an esti ever considered applying for credit but then decided mate of total scheduled loan payments (interest plus not to apply because of a belief that the application minimum repayments of principal) for all house would be rejected. Such families were asked the holds, divided by disposable personal income. From reason they believed they would have been turned the third quarter of 2004 to the same period in 2007, down. the aggregate-level measure stepped up 0.74 percent In 2007, 66.3 percent of families had applied for age point, to 14.39 percent.60 credit at some point in the preceding five years (68.7 percent in 2004). Of these families, 29.7 percent had at least once been either turned down for credit or 59. Personal characteristics include responses related to family approved for less credit than they had applied for in background or size, marital status, sex, or age; credit characteristics include responses related to the need to have a checking or savings the past five years (30.4 percent in 2004). Of all account, lack of a credit history, credit reports from a credit rating agency or from other institutions, or the level of outstanding debt and insufficient credit references; financial characteristics include re 58. Mortgages and other loans may also be serviced by an institu sponses related to previous difficulty gening credit. more "strict" tion other than the current lender, and some respondents may mistak lending requirements of the institution, an error in processing the enly report their loan as having been sold even though it is simply application, or credit problems of an ex-spouse. being serviced by an institution other than the current lender. Because 60. Data on tltis measure, the "debt service ratio," and a description a loan can also be sold without changing the servicer, some borrowers of the series are available at www.federalreserve.gov/releases/ may mistakenly report that their loan has not been sold. housedebtldefaull.htm. See Karen Dynan, Kathleen Johnson, and

A50 Federal Reserve Bulletin 0 February 2009 18. Ralio of debt payments to family income (aggregate and median). shEm: of debtor families with ralio grentcr than 40 percent. and share of ueblOrs with any payment 60 day or more past due, 1998-2007 survey Percent Debtors with rdtio greater Debtors with any payment Aggregate Median for debtors Family characteristic than 40 percent past due 60 days or more I I I I I I I I I I I I I 998 200 I 2004 2007 1998 2001 2004 2007 1998 2001 2004 2007 1998 200 I 2004 2007 All families ............. 14.9 12.9 14.4 14.5 17.9 16.7 18.0 18.6 13.6 11.8 12.2 14.7 8.1 7.0 8.9 7.1 Pen'emile of income Less than 20 ...... .. ... 18.8 16.1 18.2 17.6 18.6 19.2 19.7 19.0 29.8 29.3 26.8 26.9 13.0 13.4 15.9 15.1 4 2 0 0 - -3 5 9 9 . . 9 9 . . . . .. , . , . . . . . . . . . . . . 1 18 6 . . 7 6 1 17 5. . 8 1 1 1 9 6 . .6 4 1 19 7. . 2 8 1 1 7 9 . . 5 4 1 17 6. . 7 6 1 1 9 7 . .4 5 2 1 0 7 . . 3 0 1 18 5 . . 3 9 1 1 6 2 . . 6 3 1 13 8 . . 7 5 1 1 9 4 . . 5 5 1 1 2 0 . . 4 0 1 7 1 . .7 9 1 13 0. . 4 8 1 8 1 . .5 3 60-79.9 ......... ....... 19.1 16.8 18.5 21.7 19.5 18.1 20.6 21.9 9.8 6.5 7.1 12.7 5.9 4.0 7.1 4.1 80-89.9 .. .............. 16.8 17.0 17.3 19.7 17.8 17.2 18.1 19.3 3.5 3.5 2.4 8.1 3.9 2.6 2.3 2.1 90-100 10.3 8.1 9.3 8.4 13.7 11.2 12.7 12.5 2.8 2.0 1.8 3.8 1.6 U .3 .2 Age of head (years) Less than 35 17.2 17.2 17.8 19.7 16.9 17.7 18.0 17.5 12.9 12.0 12.8 15.1 11.1 11.9 13.7 9.4 3 45 5 - - 5 4 4 4 . . . . . .. . . . . . .. . . . . .. . .".". .." .. .. 1 17 6 . .4 7 1 1 5 2 . . 1 8 1 15 8. .3 2 1 1 8 4 . .9 5 2 1 0 7 . .9 0 1 1 7 7 . . 4 8 2 1 0 8. . 4 6 2 1 0 9 . , 3 J 1 12 2. .8 5 1 1 0 1 . . 1 6 1 1 2 3 . . 5 1 1 1 2 6 . .0 7 7 8 . . 4 4 6 5 . . 2 9 1 7 1. . 7 6 7 8. .3 6 6 55 5 - - - 7 0 4 4 . . ..... ... . . , . . . . . . . , . ' .. 1 8 3 . . 8 4 1 9 0. . 9 2 1 8 1. . 5 7 1 9 2. . 5 6 1 17 3 . . 6 2 1 1 4 6 . .0 3 1 1 5 5. . 6 7 1 1 7 7 . .9 5 1 1 4 8 . . 0 1 1 1 2 4 . . 3 7 1 1 0 1. 2 6 1 1 4 5 . .6 5 7 3. . 1 5 7 1 . . 1 5 4 3. . 4 2 4 4 . . 9 4 75 or more .. 4.1 3.9 7.1 4.4 8.1 8.0 12.8 13.0 21.4 14.6 10.7 13.9 1.1 .8 3.9 1.0 Percentile of net worth Less than 25 15.0 13.4 13.0 15.0 13.6 11.5 13.0 12.1 13.1 11.6 10.5 10.4 16.3 17.7 22.9 16.8 25-49.9 .. ............. 20.1 18.1 19.5 22.4 20.2 20.1 21.2 23.4 15.9 14.2 15.8 19.3 9.8 7.1 11.0 7.7 50-74.9 ............. 18.3 16.7 20.6 20.3 20.2 18.3 21.4 21.5 13.0 11.2 12.8 15.9 5.5 3.6 3.2 4.2 75--89.9 14.8 15.4 15.1 17.0 17.8 16.9 17.8 18.2 12.3 10.6 9.6 13.0 1.0 .7 1.1 1.2 90-100 ••.•.•. .6 .•.•.• ••..• •, 6. ... 10.2 7.4 8.5 8.0 14.1 11.2 12.6 12.6 12.2 8.5 7.6 11.1 .2.4 .3 .1 .7 Huusing slDtus Owner .. 16.3 13.9 15.6 15.6 21.2 20.0 21.5 22.8 16.5 14.7 14.9 18.0 6.1 4.3 5.6 4.8 Renter or other .." '6' 8.2 7.4 7.2 7.9 8.5 8.3 8.1 8.2 6.5 4.2 4.3 5.4 12.9 14.0 18.6 13.5 NOTE: The aggregate measure is the ralio of total debt payments to towl in come for all families. The median is the median of the distribution of ralios calculated for individual families with debt. Also see note 10 table I. The survey data for individual families may be family income of all families.62 From 2004 to 2007, used to construct a similar estimate of debt burden for the SCF-based estimate rose, albeit by less than the families overall as well as for various demographic aggregate-level measure, increasing 0.1 percentage groups (table 18).61 The SCF-based estimate is the point, to 14.5 percent. In the previous three-year ratio of total debt payments for all families to total period, the SCF measure had increased at a faster pace than the aggregate-level measure; between 200 I Karen Pence (2003). "Recent Changes to a Measure of U.S. House and 2004, the aggregate estimate of the debt-burden hold Debt Service." Federal Reserve Bulle/ill. vol. 89 (October), ratio rose 1.4 percentage points, and the SCF-based pp.4l7-26. 61. The survey measure of payments relative to income may differ measure increased 1.5 percentage points. If total from the aggregate-level measure for several reasons. First, the debt payments and incomes are computed from the survey payments included in each measure are different. The aggregate-level data using only families with debt payments, the measure includes only debts originated by depositories, finance com panies, and other financial institutions. whereas the survey includes. in results for the recent period show a slightly larger principle, debts from all sources. increase, from 17.7 percent in 2004 to 18.0 percent in Second, the aggregate-level measure uses an estimate of disposable 2007; if the ratio is computed using only families personal income from the national income and product accounls for the period concurrent with the estimated payments as the denominator with home-secured debt, the data show a rise from of the ratio. whereas the survey measure uses total before-tax income 20.2 percent in 2004 to 20.5 percent in 2007 (data not reported by survey families for the preceding year; the differences in shown in the tables). The SCF-based estimate of the these two income measures are complex. Third, the payments in the aggregate-level measure are estimated aggregate debt-burden ratio increased for most demo using a formula that entails complex assumptions about minimum graphic groups over the recent three-year period. payments and the distribution of loan terms at any given time; the survey measure of payments is directly asked of the survey respon dents but may also include payments of taxes and insurance on real estate loans. Fourth, because the survey measures of payments and income are 62. The definition of debt payments in the SCF does not include based on the responses of a sample of respondents. they may be payments on leases or rental payments. The survey collects informa affected both by sampling en-or and by various types of response tion on vehicle lease payments and rent on primary residences. and, en-ors. As mentioned earlier in this article, the survey income measure thus. in principle a broader measure of debt payments could be tracks the most comparable measure of income in the Census Bureau's constructed, one that would be similar to the "financial obligations Cun'ent Population Survey. ratio" estimated by the Federal Reserve staff.

u.s. Changes in Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances ASl The ability to look at the distribution of payments had relatively high payment-to-income ratios based relative to income at the level of families potentially on the previous year's income but would not have if offers insights that are not available from any of the income had been at its usual level, and (2) 1.4 percent aggregate-level figures. In particular, the survey al of families with debt had debt payments less than or lows a detailed look at the spectrum of payments equal to 40 percent of last year's income but would relative to income across all families with debts. Over have had a ratio above 40 percent if income had been the recent period, the median of the ratios for indi at its usual level. Families may draw on assets as well vidual families that had any debt rose 0.6 percentage as income to meet debt payments. For all families point, to 18.6 percent in 2007, a gain that extends a with debt, 57.7 percent had transaction account bal series of increases in this measure since 1989 that ances equal to at least three months of debt payments. were interrupted only by a decline between 1998 and For families with payment-to-income ratios above 200 I. The median ratio of debt payments to income 40 percent, however, this share falls to 25.9 percent. also rose at least slightly in the recent period for most Other commonly used indicators of debt-repayment demographic groups shown; the median fell for fami problems are aggregate delinquency rates-that is, lies with wealth in the lowest quartile, for families the percentage of delinquent accounts or the percent with income in the two lowest quintiles or the highest age of total balances on which payments are late. decile, and for families headed by a person younger Both account-based and dollar-weighted aggregate than 45.63 measures indicate that delinquencies on mortgages A limitation of the median ratio is that it may not rose, on net, from the third quarter of 2004 to the third be indicative of distress because it reflects the situa quarter of 2007, but they began to rise more sharply tion of only a typical family. Unless errors of judg thereafter. Over the 2004--07 period, the percentage ment by both families and lenders are pervasive, one of delinquent automobile loans declined, while a would not expect to see signs of financial distress at corresponding dollar-weighted measure rose; the frac the median. Thus, a more compelling indicator of tion of delinquent loans leveled off in 2008, while the distress is the proportion of families with unusually dollar-weighted measure continued to rise. On net, a large total payments relative to their incomes. From dollar-weighted delinquency measure for other c1osed 2004 to 2007, the proportion of debtors with pay end loans was unchanged from the third quarter of ments exceeding 40 percent of their incomes rose 2004 to the third quarter of 2007, while the percent 2.5 percentage points, to 14.7 percent; in the preced age of delinquent loans rose; over the following year, ing three years, the proportion had increased 0.4 per both measures rose. Delinquency measures for credit centage point. The increase was shared by all demo cards also differed by whether the measure was based graphic groups except families in the bottom net on dollar volume or delinquent accounts, but all worth group, for which the share edged back 0.1 per pointed to comparatively small changes between the centage point, to 10.4 percent; in contrast, this frac third quarter of 2004 and the third quarter of 2007; tion increased between 3.0 and 3.S percentage points over the following four quarters, all of these measures for each of the other net worth groups. Compared showed clear increases.65 with the increases for lower income groups, the share A related measure is collected in the SCF. Families of families with income between the 60th and 90th that have any debt at the time of their interview are percentiles who had a relatively high ratio of debt asked whether they have been behind in any of their payment to income rose especially sharply.64 loan payments in the preceding year. This measure Fluctuations in a family's income away from its differs conceptually from the aggregate delinquency usual level can have substantial effect on the family's rates in that the survey counts multiple occasions of payment-to-income ratio. If the ratio is defined in late payments as one, counts families instead of terms of families' reported usual incomes, the frac balances or accounts, and includes all types of loans; tion of families with a ratio exceeding 40 percent falls because it counts individual families, not their bal to 13.6 percent. This 1.1 percentage point difference ances, it is closer in spirit to aggregate measures reflects two facts: (I) 2.5 percent of families with debt based on the numbers of delinquent accounts than to those based on the amounts of delinquent balances. The survey shows a decrease from 8.9 percent in 63. The median of the ratio for families with home-secured debt in 2004 to 7.1 percent in 2007 in the proportion of 2007 was 25.1 percent, up from 24.2 percent in 200 I (data not shown in the tables). 64. Of families with home-secured debt, the proportion that had total payments of more than 40 percent of their income was 20.1 per 65. The most commonly used such measures are from the Consoli cent in 2007, a level 3.0 percentage points higher than that in 2004 dated Reports of Condition and Jncome (Call Report), the American (data not shown in the tables). Bankers Association, and Moody's Investors Service.

A52 Federal Reserve Bulletin 0 February 2009 debtors who were 60 or more days late with their Home-secured debt fell slightly as a share of total payments on any of their loans in the preceding year. family debt, but in 2007 it remained by far the largest This measure feJl for families in each of the income component of family debt. The share of borrowing for groups but particularly for families in the middle residential real estate other than the primary residence 60 percent of the income distribution; the percentage increased appreciably. The percentage of families declined for families with net worth below the using credit cards for borrowing changed only slightly median, and it rose for families with higher levels of over the period, but the median balance on their net worth.66 The share of families with debt who were accounts rose 25.0 percent, and the mean rose 30.4 per at least 60 days late on a payment during the preced cent. ing year rose for families headed by a person aged 55 Despite a moderate rise in typical consumer loan to 74 and fell for both homeowners and, more sub interest rates from 2004 to 2007, the median ratio of stantially, renters. For families with a payment-to loan payments to family income for debtors, a com income ratio of 40 percent or more, 13.9 percent mon indicator of debt burden, at 18.6 percent, barely missed a debt payment by 60 days or more; by rose over the period; in the previous three years, this comparison, 6.0 percent of debtor families with lower measure had risen more steeply. But data from the ratios had fallen behind in debt repayment. recent three-year period show an increase of 2.5 per centage points in the proportion of debtors with loan SUMMARY payments exceeding 40 percent of their income, a level traditionally considered to be high; the share of Data from the 2004 and 2007 SCF show that median families with payment ratios this high was 14.7 per income barely changed, while mean income rose cent in 2007. substantially, an indication that income gains were much greater for families in the uppermost part of the APPENDIX: distribution. Although overall both median and mean SURVEY PROCEDURES AND STATISTICAL net worth increased strongly over this period-l7.7 percent and 13.0 percent, respectively-these mea MEASURE sures declined for families at the bottom of the wealth Detailed documentation of the SCF methodology is distribution. The preceding three years had seen only available elsewhere.67 The 2007 data used here are small changes in median and mean income and in deri ved from the final internal version of the survey median net worth but a sizable gain in mean net information. Data from this survey, suitably altered to worth. protect the privacy of respondents, along with addi Although the median and mean of families' hold tional tabulations of data from the surveys beginning ings of financial assets increased overall from 2004 to with 1989, are expected to be available in February 2007, financial assets declined as a share of total 2009 on the Federal Reserve's website at www. assets, continuing an earl ier trend. The offsetting federa Ireserve. gov fpu bsfossfoss2f2007 fsc f2007 data. expansion in the share of nonfinancial assets was htm!. Links to the data used in this article for earlier most strongly driven by greater holdings of private periods are available on that site. Results reported in business equity and, to a lesser degree, of residential this article for earlier surveys may differ from the real estate other than a primary residence. The home results reported in earlier articles because of addi ownership rate, which had risen noticeably between tional statistical processing, correction of data errors, the 2001 and 2004 surveys, turned down slightly. revisions to the survey weights, conceptual changes Unrealized capital gains were an important part of the in the definitions of variables used in the articles, and increase in assets; in 2007, 35.8 percent of total assets adjustments for inflation. was attributable to unrealized capital gains, and those As a part of the general reconciliations required for gains were most concentrated in holdings of real this article, the survey data were compared with many estate and private business equity. In 2004, unrealized external estimates, a few of which are mentioned in gains accounted for 30.7 percent of assets. Debt and assets rose in about equal proportions over the recent three-year period. Thus, overall 67. See Arthur B. Kennickell (2000), "Wealth Measurement in the indebtedness as a share of assets was little changed. Survey of Consumer Finances: Methodology and Directions for Future Research" (Washington: Board of Governors of the Federal Reserve System, May); Arthur B. Kennickell (2001), "Modeling Wealth with 66. For families with home-secured debt, the result is very similar Multiple Observations of Income: Redesign of the Sample for the to that for homeowners overall. The proportion with payments late 60 2001 Survey of Consumer Finances" (Washington: Board of Gover days or more in 2007 was 4.8 percent afler rising to an estimated nors of the Federal Reserve System, October), www,federalreserve.gov/ 5.7 percent in 2004 (data not shown in the tables). pubs/oss/oss2lmethod.html; and references cited in these papers.

Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A53 the text. Generally, the survey estimates correspond person or couple (whether married or living together fairly well to external estimates. One particularly as partners) and all other persons in the household important comparison is between the SCF and the who are financially interdependent with that economi Federal Reserve's flow of funds accounts for the cally dominant person or couple. household sector. This comparison suggests that when This report also designates a head of the PEV, not the definitions of the variables in the two sources can to convey ajudgment about how an individual family be adjusted to a common conceptual basis, the esti is structured but as a means of organizing the data mates of totals in the two systems tend to be close. consistently. If a couple is economically dominant in The data series in the SCF and in the flow of funds the PEV, the head is the male in a mixed-sex couple accounts usually show very similar growth rates.68 In or the older person in a same-sex couple. If a single general, the data from the SCF can be compared with person is economically dominant, that person is des those of other surveys only in terms of the medians ignated as the family head in this report. because of the special design of the SCF sample. Percentiles of the Distributions of Income Adjustment for Inflation and Nee Worth In this article, all dollar amounts from the SCF are Throughout this article, references are made to vari I adjusted to 2007 dollars using the "current methods" ous percentile groups of the distributions of income version of the consumer price index (CPI) for all or net worth. For a given characteristic, a percentile urban consumers. In an ongoing effort to improve can be used to define a family's rank relative to other accuracy, the Bureau of Labor Statistics has intro families. For example, the 10th percentile of the duced several revisions to its CPI methodology. The distribution of income is the amount of income current-methods index attempts to extend these received by a family for whom just less than 10 per changes to earlier years to obtain a series as consis cent of families have lower income and 90 percent tent as possible with current practices in the official have higher income. The percentiles of the distribu CPI.69 To adjust assets and liabilities to 2007 dollars tions of income and net worth used to define the and to adjust family income for the preceding calen income and net worth groups in the tables in the dar year to 2007, the figures given in table A.I were article are given in table A.2. applied. A.2. A.!, Survey year Adjustment factor Adjustment factor for Item 1998 I 2001 I 2004 I 2007 Survey year for assets and debts in income in the calendar year the survey year I before the survey year Percentile of income 20 . 17,700 19,700 20,800 20,600 2 2 2 1 0 0 9 0 0 0 0 9 4 7 1 8 . . . . . . 1 1 1 1. . . 0 0 2 1 0 9 7 6 0 3 8 9 0 3 6 2 1 1 1 \. . . . 2 0 2 1 0 9 2 2 2 8 8 1 4 4 0 0 9 6 4 80 0 0 0 . . . . . . . . . . . , . , . , . . . . . . . . , , . . . . . . . . 1 3 8 5 1 3 6 4 9 . , , ,6 9 6 2 0 0 0 0 0 0 0 0 1 6 3 9 39 6 6 0 , , , , 2 0 1 10 0 0 0 0 0 0 0 1 9 4 5 3 8 7 8 2 , , , , 9 2 1 1 0 0 0 0 0 0 0 0 1 3 9 5 4 9 8 6 0 . , , , 5 2 6 9 0 0 0 0 0 0 0 0 PercentiLe of /lei worth Definition of "Family" in the SCF 25 . 12,700 14,900 14,600 14.100 50 .. 91,300 101,200 102.200 120.300 75 . 265,900 335,800 360.700 372.000 The definition of "family" used throughout this 90 .. 628.300 865,700 913,300 90S ,200 article differs from that typically used in other govern ment studies. In the SCF, a household unit is divided The groups that are created when a distribution is into a "primary economic unit" (PEV)-the family divided at every 10th percentile are commonly re and everyone else in the household. The PEV is ferred to as deciles. Similarly, when a distribution is intended to be the economically dominant single di vided at every 20th (25th) percentile, the groups are known as quinti1es (quartiles). Families in the first 68. For details on how these comparisons are structured and the income decile, for example, are those with income results of comparisons for earlier surveys, see Rochelle L. Antoniewicz below the 10th percentile. (2000), "A Comparison of the Household Sector from the Flow of Funds Accounts and the Survey of Consumer Finances" (Washington: Board of Governors of the Federal Reserve System, October), Racial and Ethnic Identification www.federalreserve.gov/pubs/oss/oss2lmethod.html. 69. For technical information about the construction of this index. In this article, the race and ethnicity of a family in the I see Kenneth J. Stewart and Stephen B. Reed (1999), "Consumer Price SCF are classified according to the self-identification Index Research Series Using Current Methods, 1978-1998," MonthLy Labor Review, vol. 122 (June). pp. 29-38. of that family's original respondent to the SCF inter-

A54 Federal Reserve Bulletin D February 2009 view. The questions underlying the method of classi aspects of the sample design that address this require fication used in the survey were changed in both 1998 ment have been constant since 1989, The SCF com and 2004. Starting in 1998, SCF respondents were bines two techniques for random sampling, First, a allowed to report more than one racial identi fication; standard multistage area-probability sample (a geo in surveys before then, only one response was re graphically based random sample) is selected to corded. For maximum comparability with earlier provide good coverage of characteristics, such as data, respondents reporting multiple racial identifica homeownership, that are broadly distributed in the tions were asked to report their strongest racial iden population. tification first. Second, a supplemental sample is selected to dis Beginning with the 2004 survey, the question on proportionately include wealthy families, which hold racial identification is preceded by a question on a relatively large share of such thinly held assets as whether respondents consider themselves to be His noncorporate businesses and tax-exempt bonds, Called panic or Latino in culture or origin; previously, such the "list sample," this group is drawn from a list of ethnic identification was captured only to the extent statistical records derived from tax returns, These that it was reported as a response to the question on records are used under strict rules governing confi racial identification. The sequence of these two ques dentiality, the rights of potential respondents to refuse tions in the 2004 SCF is similar to that in the CPS. participation in the survey, and the types of informa When families in the March 2004 CPS are classified tion that can be made available. Persons listed by in the way most compatible with the SCF, the propor Forbes magazine as being among the wealthiest 400 tion of Hispanic families is 10.5 percent; the 2004 SCF people in the United States are excluded from sam estimate is 11.2 percent. Differences in these propor pling. tions are attributable to sampling error and possibly to Of the 4,422 interviews completed for the 2007 SCF, differences in the wording and context of the ques 2,915 were from the area-probability sample, and tions. 1,507 were from the list sample; for 2004, 3,007 were For greater comparability with the earlier SCF from the area-probability sample, and 1,515 were data, the data reported in this article ignore the from the list sample. The number of families repre information on ethnic identification available in 2007, sented in the surveys considered in this article is but respondents reporting multiple racial identifica given by table A.3. tions in the surveys starting with 1998 are classified as "nonwhite or Hispanic." In the 2007 SCF, 5.4 per A.3. cent of respondents reported more than one racial Year Number of families represenled (millions) identification, up from 2.3 percent in 2004 and 1.5 percent in 2001. Of those who responded affirma 1998 . 102.6 2001 106.5 tively to the question on Hispanic or Latino identifi 2004 . 112.1 2007. 1161 cation in 2007, 82.8 percent also reported "Hispanic or Latino" as one of their racial identifications, and 74.5 percent reported it as their primary racial identi The Interviews fication. Because the question on Hispanic or Latino ethnicity precedes the one on racial identification in The survey questionnaire has changed in only minor the 2004 and 2007 surveys, the answer to the second ways since 1989, except in a small number of of these two questions may have been influenced by instances in which the structure was altered to accom the answer to the first.70 modate changes in financial behaviors, in types of financial arrangements available to families, and in The Sampling TechniqlteJ regulations covering data collection. In these cases and in all eartier ones, every effort has been made to The survey is expected to provide a core set of data on ensure the maximum degree of comparability of the family income, assets, and liabilities. The major data over time. Except where noted in the article, the data are highly comparable over time. 70. For a review of the effects of various approaches to measuring The generosity of families in giving their time for race and ethnicity, see Clyde Tucker, Ruth McKay, Brian Kojetin, interviews has been crucial to the SCF. In the Roderick Harrison, Manuel de la Puente, Linda Stinson, and Ed Robinson (1996), "Testing Methods of Collecting Racial and Ethnic 2007 SCF, the median interview length was about 80 Information: Results of the Current Population Survey Supplement on minutes. However, in some particularly complicated Race and Ethnicity," BLS Statistical Notes 40, CPS Publications cases, the amount of time needed was substantially (Washington: Bureau of Labor Statistics, June), www.bls.census.gov/ cps/racethnlI995/stat40rp.htm. more than two hours. The role of the interviewers in

Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances A55 this effort is also critical. Without their dedication and Sources of Error perseverance, the survey would not be possible. The SCF interviews were conducted largely be Errors may be introduced into survey results at many tween the months of May and December in each stages. Sampling error-the variability expected in survey year by NORC, a social science and survey estimates based on a sample instead of a census-is a research organization at the University of Chicago. particularly important source of error. Such error can The majority of interviews were obtained in person, be reduced either by increasing the size of a sample although interviewers were allowed to conduct tele or, as is done in the SCF, by designing the sample to phone interviews if that was more convenient for the reduce important sources of variability. Sampling respondent. Each interviewer used a program running error can be estimated, and for this article we use on a laptop computer to administer the survey and replication methods to do so. collect the data. Replication methods draw samples, called repli The use of computer-assisted personal interview cates, from the set of actual respondents in a way that ing has the great advantage of enforcing systematic incorporates the important dimensions of the original collection of data across all cases. The computer sample design. In the SCF, weights were computed program developed to collect the data for the SCF for all the cases in each of the replicates.72 For each was tailored to allow the collection of partial informa statistic for which standard errors are reported in this tion in the form of ranges whenever a respondent article, the weighted statistic is estimated using the either did not know or did not want to reveal an exact replicate samples, and a measure of the variability of dollar figure. these estimates is combined with a measure of the The response rate in the area-probability sample is variability due to imputation for missing data to yield more than double that in the list sample. In both 2004 the standard error. and 2007, about 70 percent of households selected for Other errors include those that interviewers may the area-probability sample actually completed inter introduce by failing to follow the survey protocol or views. The overall response rate in the list sample misunderstanding a respondent's answers. SCF inter was about 30 percent; in the part of the list sample viewers are given lengthy, project-specific training to likely containing the wealthiest families, the response minimize such problems. Respondents may introduce rate was only about 10 percent. error by interpreting a question in a sense different from that intended by the survey. For the SCF, Weighting extensive pretesting of questions and thorough review of the data tend to reduce this source of error. To provide a measure of the frequency with which Nonresponse--either complete nonresponse to the families similar to the sample families could be surveyor nonresponse to selected items within the expected to be found in the popUlation of all families, an analysis weight is computed for each case, account survey-may be another important source of error. ing both for the systematic properties of the sample As noted in more detail above, the SCF uses weight design and for differential patterns of nonresponse. ing to adjust for differential nonresponse to the The SCF response rates are low by the standards of survey. To address missing information on indi some other major government surveys, and analysis vidual questions within the interview, the SCF uses of the data confirms that the tendency to refuse statistical methods to impute missing data; the tech participation is highly correlated with net worth. nique makes multiple estimates of missing data to However, unlike other surveys, which also almost allow for an estimate of the uncertainty attributable certainly have differential nonresponse by wealthy to this type of nonresponse. 0 households, the SCF has the means to adjust for such nonresponse. A major part of SCF research is devoted to the evaluation of nonresponse and adjustments for nonresponse in the analysis weights of the survey,?l Board of Governors of the Federal Reserve System, January), www.federalreserve.gov/pubs/ossloss2/method.html. 71. The weights used in this al1icie are adjusted for differential 72. See Al1hur B. Kennickell (2000), "Revisions to the Variance rates of nonresponse across a number of groups. See Arthur B. Estimation Procedure for the SCF" (Washington: Board of Governors Kennickell (1999), "Revisions to the SCF Weighting Methodology: of the Federal Reserve System, October), www.federalreserve.gov/ Accounting for RaceiEthnicity and Homeownership" (Washington: pubs/oss/oss2/method.html.

A56 Federal Reserve Bulletin 0 February 2009 ERRATA held business with a value different from zero; the median and mean values for families having such In the analysis of the SCF reported in the article, businesses were $100,500 and $1,071,100, respec privately held businesses do not include businesses tively. If businesses with a value of zero are included that were reported to have a net value of zero; this fact in the business definition in 2007, ownership rises to was not made clear in the definition given in footnote 13.6 percent of families, and the median and mean 39. In 2007, 12.0 percent of families had a privately values fall to $92,200 and $946,300, respectively.

A57 June 2009 Profits and Balance Sheet Developments at U.S. Commercial Bal1ks in 2008 Morten L. Bech and Tara Rice, of the Board's Divi I. Bank prol'ilabilily. 1985--2008 sion of Monetary Affairs, prepared this article. Tho mas C. Allard and Mary E. Muething assisted in I~rcen( Percent developing the database underlying much of the 18 1.8 analysis. lin ide Avellaneda and Robert Kurtzman 16 Re-tu-r-n- on equity 1.6 provided research assistance. 14 1.4 12 L2 The continued fallout from the ongOIng financial to 1.0 turmoil and the economic downturn weighed heavily 8 .8 on the performance of the U.S. commercial banking 6 .6 industry in 2008.' As house prices continued to 4 .4 decline, the performance of mortgage-related assets 2 .2 deteriorated further, and, with the onset of recession, + + 0 o credit problems spread to other asset classes and to a II I I I I I I I I I I , I I I I I I I I I I I I I , wider range of financial institutions. Delinquent loans 1987 1990 1993 1996 I 999 2002 2005 2008 (those whose payments are 30 days or more past due) NOTE: The data are annual. on banks' books continued to mount in all major loan SOURCE: Here and in subsequent figures and tables except as noted, Federal Fimlncial Institutions Examination Council. ConSOlidated Repons of categories, particularly among residential mortgages Condition and Income (Call Repon). and construction and land development loans related to residential projects. Sizable losses and writedowns deepened concerns about the condition of some very large financial institutions, including some of their large commercial bank subsidiaries. When the NOTE: The data in this article cover insured domestic commercial financial strains intensified in the second half of 2008, banks and nondeposit trust companies (hereafter, banks). Except as otherwise indicated, the data are from the Consolidated Reports of the ensuing turmoil in global credit markets contrib Condition and Income (Call Report). The Call Report consists of two uted to a steep decline in economic activity late in the forms submitted by domestic banks to the Federal Financial Institu year. At the same time, interest rate spreads on a wide tions Examination Council: FFfEC 031 (for those with domestic and foreign offices) and FFIEC 041 (for those with domestic offices only). range of private debt instruments widened further, The data thus consolidate information from foreign and domestic and the functioning of many credit markets was, at offices, and they have been adjusted to take account of mergers and the times, significantly impaired. Credit default swap effects of push-down accounting. For additional information on the adjustments to the data, see the appendix in William B. English and (CDS) premiums for banking organizations, which William R. Nelson (1998), "Profits and Balance Sheet Developments reflect investors' assessments of the likelihood of a at U.S. Commercial Banks in 1997," Federal Reserve Bill/erin, vol. 84 default, shot Up.2 The stock prices of bank holding (June), p. 408. Size categories, based on assets at the start of each quarter, are as follows: the to largest banks, large banks (those ranked companies (BHCs) fell steeply for the year, underper II through 100), medium-sized banks (those ranked 101 through forming the overall market by a wide margin. 1,000), and small banks (those ranked 1,001 and higher). At the start of Against this backdrop, the net income of the com the fourth quarter of 2008, the approximate asset sizes of the banks in those groups were as follows: the 10 largest banks, more than mercial banking industry contracted substantially in $171 billion; large banks, $8.3 billion to $163 billion; medium-sized 2008, and the industry return on equity for the full banks, $528 million to $8.2 billion; and small banks, less than year fell to less than 1 percent (figure 1). Industry $528 million. I. It is worth emphasizing that the analysis in this article is based on the Call Reports for commercial banks. For a commercial bank that is a subsidiary of a bank holding company or a financial holding 2. A CDS is a contract bel ween two parties, whereby one party (the company, the Calf Report does not include the assets, liabilities, guarantor) provides protection against the default of an underlying income, or expenses of the other subsidiaries of the larger organiza asset to an investor seeking such protection (the beneficiary). The CDS tion. Thus, the profits of the commercial banks that are subsidiaries of premium is the annual fixed fee the buyer of protection pays to the a larger banking organization may differ substantially from the profits seller of protection over the term of the contract, expressed as a of the consolidated institution. percentage of the dollar amount of protection purchased.

AS8 Federal Reserve Bulletin 0 June 2009 profits were particularly hard hit in the fourth quarter, absorbed significant losses.4 Soon after, Wachovia when banks in all size groups experienced losses. The Corporation, the fourth-largest commercial bank at primary drivers of the profitability slump were sizable the time, experienced acute funding pressures and provisions for loan losses in response to further agreed to merge with Wells Fargo & Company. In deterioration in asset quality, goodwill impairment addition, a number of smaller banks, many located in losses, heavy write-downs on securities holdings, and states that had experienced the largest house price a sharp drop in trading revenue. For the year as a fluctuations in recent years (most notably California, whole, losses were especially acute at some of the Florida, Georgia, and Nevada), failed in 2008. At largest commercial banks. year-end, the total number of banking institution The ongoing financial turmoil resulted in a steady failures reached 25, the highest since 1993. The list of stream of acquisitions and reorganizations in 2008, as problem banks compiled by the Federal Deposit financial institutions failed or required government Insurance Corporation (FDIC) reached 252 banking assistance amid growing losses on mortgage-related institutions, with combined assets of $159 billion. and other assets. In March, a liquidity crisis at The Through mid-April of 2009, an additional 25 banking Bear Steams Companies, Inc., a major investment institutions had fai led. bank, led to its acquisition (with government assis In mid-September, in large part because of losses tance) by JPMorgan Chase & Co. In July, Country on Lehman Brothers' debt, the net asset value of a wide Financial Corporation, a thrift institution and the prominent money market mutual fund fell below $1 largest U.S. mortgage originator, was acquired by per share-a development known as "breaking the Bank of America Corporation. In addition, the failure buck" -a rare event that had not occurred in many that month of IndyMac Bank, FS.B., a large thrift years. Investors responded with massive withdrawals institution, raised further concerns about the profit from prime money market mutual funds, which hold ability and asset quality of financial institutions. The substantial amounts of commercial paper. These out failure also raised depositors' concerns about the flows severely undermined the stability of short-term safety of deposits held by banks. funding markets, upon which many large corpora In early September, the Treasury Department and tions rely heavily to meet their short-term borrowing the Federal Housing Finance Agency announced that needs. As a result, many financial and nonfinancial the housing-related government-sponsored enter firms turned to their backup lines of credit at commer prises (GSEs), Fannie Mae and Freddie Mac, had cial banks for funding. been placed into conservatorship. The GSEs' equity In response to the pressures on financial institu prices dropped conSiderably in response, and, as a tions and the associated uncertainty about their finan result, many smaller banks that held sizable amounts cial condition, banks and investors pulled back from of the preferred stock of the two GSEs had to risk-taking even further last fall, and conditions across recognize substantial losses in the third quarter. Amid most financial markets deteriorated sharply. With plummeting investor confidence, and after posting banks reluctant to lend to one another, the cost of sizable losses, several large nonbank financial institu borrowing in the interbank market-as exemplified tions came under extreme pressure: Lehman Brothers by the London interbank offered rate, or Libor, a Holdings filed for bankruptcy on September 15,2008; reference rate for a wide variety of contracts, includ during the same tumultuous period, Bank of America announced its intention to acquire Merrill Lynch & ing floating-rate mortgages-increased appreciably Co., Inc.; the Federal Reserve, with the full support of (figure 2). Securitization markets, with the exception the Treasury, agreed to provide liquidity support to of those for government-supported mortgages, essen American International Group, Inc., or AIG; and the tially shut down, boosting the unanticipated demand Federal Reserve approved the applications by Gold for funds from commercial banks. man Sachs Group, Inc., and Morgan Stanley to In an attempt to restore liquidity and stability to the become BHCs.) Upon its collapse on September 25, U.S. financial system in general and the banking 2008, Washington Mutual Bank, a large thrift institu system in particular, public authorities took a number tion, became the largest failure ever of a financial institution in the United States; its stakeholders 4. The Federal Deposit Insurance Corporation was able to resolve the failure without any loss to the insurance fund when most assets and 3. See Ben S. Bernanke (2009). "American International Group." liabilities were bought by JPMorgan Chase. See Federal Deposit statement before the Committee on Financial Services. U.S. House of Insurance Corporation (2008), "JPMorgan Chase Acquires Banking Representatives. Washington. March 24. www.federalreserve.gov/ Operations of Washington Mutual." press release. September 25, newsevents/testimonylbernanke20090324a.htm. www.fdic.gov/news/news/pressI2008/prQ8085.html.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008 A59 2. preads of 3-month Libor oVt!r 01. rale 2002---09 In addition, the Federal Reserve established several temporary lending facilities over the course of the Da'\is poinL~ year. In March 2008, to address increasing liquidity - 400 pressures in funding markets, the Federal Reserve established the Term Securities Lending Facility - 350 (TSLF). Under the TSLF, the Federal Reserve lends - 300 Treasury securities to primary dealers, and the lend - 250 ing is secured by a pledge of other securities. After - 200 the demise of Bear Steams, the Federal Reserve - 150 created the Primary Dealer Credit Facility to improve -- 100 the ability of primary dealers to provide financing to SO participants in securitization markets. In addition, the + o Federal Reserve lowered the spread between the I I I I I I I I I I primary credit rate at the discount window and the 2002 2003 2004 2005 2006 2007 2008 2009 intended target for the effective federal funds rate to NOTE: The data are daily and extend through April 16, 2009. For the 25 basis points and temporarily allowed primary London interbank offered rate (Ubor), quotes are as of 6 a.m.; for the credit loans for terms of up to 90 days. overnight index swap (OIS) rate, quotes are as of the close of business of the previous trading day. An OIS is an interest rate swap with the !loating rate In September, the Treasury and the Federal Reserve tied to an index of daily overnight rates, such as the effective federal funds took several steps to ease investor concerns about the rate. At maturity, two parties exchange, On the basis of the agreed notional amount, the difference between interest accrued at the fixed mte and interest money market mutual fund industry and support the accrued through geometric averaging of the fioating, or index, rate. functioning of the commercial paper market. The SOURCE: For Libor, British Bankers' Association; for the OIS rate, Prebon. Treasury introduced an insurance program for money market mutual fund investors, and the Federal Re of unprecedented actions during 2008.5 To address serve announced the creation of the Asset-Backed elevated pressures in a number of funding markets, Commercial Paper Money Market Mutual Fund Li the Federal Reserve augmented many of its existing quidity Facility (AMLF) to extend nonrecourse loans lending facilities. As demand for dollar funding rose to banks to finance their purchases of high-quality further over the course of 2008, the Federal Reserve asset-backed commercial paper from money market expanded and extended the term of both the Term mutual funds. The following month, the Commercial Auction Facility (TAF), under which term funds are Paper Funding Facility was created to provide a auctioned off to depository institutions against the liquidity backstop to U.S. issuers of commercial wide variety of collateral that can be used to secure paper.6 Most Federal Reserve facilities have been loans at the discount window, and the temporary extended through October 30, 2009.7 reciprocal currency arrangements (swap lines) with In October, the Congress passed the Emergency the European Central Bank and the Swiss National Economic Stabilization Act (EESA), a move that, Bank. In the fall of 2008, the formal quantity limits among other things, created the $700 billion Troubled on these lines, as well as the swap lines that had been Asset Relief Program (TARP). The TARP was in set up with the Bank of Japan and the Bank of tended to reduce the strains in financial markets England, were eliminated, and the Federal Reserve created by the substantial amount of illiquid struc introduced new liquidity swap lines with 10 other tured securi ties and mortgages sti II held by hanks. central banks. At year-end 2008, $450 billion and The EESA also raised basic deposit insurance cover $553 billion were outstanding under the TAF and the age to $250,000 on a temporary basis. In addition, the swap lines, respectively. Moreover, in several cases, FDIC announced the Temporary Liquidity Guarantee the Federal Reserve Board granted exemptions from Program (TLGP), under which it provides guarantees restrictions under section 23A of the Federal Reserve of non interest-bearing transaction deposits and se- Act in an effort to allow banks greater scope to provide liquidity to their nonbank affiliates. 6. The Money Market Investor Funding Facility (MMIFF) was also 5. The appendix to the Federal Reserve's February 2009 Mon created in October 2008. Under the MMIFF, the Federal Reserve will e/ary Policy Report to the Congress contains a description of the provide senior secured funding to a series of special purpose vehicles Federal Reserve initiatives to address the financial strains. See Board to facilitate an industry-supported private-sector initiative to finance of Governors of the Federal Reserve System (2009), "Appendix: the purchase of eligible assets from eligible investors. As of year-end Federal Reserve Initiatives to Address Financial Strains," in Mon 2008, the facility had not been used. etary Policy Report 10 the Congress (Washington: Board of Gover 7. The Term Asset-Backed Securities Loan Facility has been author nors, February 24), www.federalreserve.gov/monetarypolicy/lilesl ized through December 31, 2009. Other Federal Reserve liquidity 20090224_mprfullreport.pdf. facilities, such as the TAP, do not have a fixed expiration date.

A60 Federal Reserve Bulletin 0 June 2009 lected newly issued senior unsecured obligations of :1. Selectcd intcrest rates, 2002-09 participating banks.8 Shortly thereafter, the Treasury established the voluntary Capital Purchase Program - ----------------------P-l!rccllt (CPP), under which it has used TARP funds to inject 6 about $200 billion of capital into U.S. banking orga nizations. In November, the U.S. government entered 5 into an agreement with Citigroup, Inc., which pro 4 vided the company-in exchange for preferred stock-with protection against the possibility of unusually large losses on an asset pool of loans and 2 securities backed by residential and commercial real estate and other such assets. The Treasury provided Target federal funds rate + another $20 billion of TARP capital to Citigroup as o part of the same transaction. Economic activity, the growth of which had slowed noticeably, on average, over the first three quarters of 22 the year, contracted significantly in the final quarter 20 of 2008, with nearly all major sectors of the economy 18 registering steep declines in activity. At the same 16 time, inflation pressures diminished appreciably as 14 the margin of resource slack in the economy widened 12 and commodity prices dropped considerably. In view 10 of the implications of the substantial reduction in 8 credit availability and the continuing deterioration in ---~~~--~- -......- 6 the economic outlook, the Federal Open Market 3Q-year --- ---fixed-rate mortgages 4 Committee (FOMC) reduced the target federal funds I I I t I I I \ I I rate from 4Y4 percent at the end of 2007 to a range of 2002 2003 2004 2005 2006 2007 2008 2009 o to 1/4 percent by the end of 2008 (figure 3). NOTE: The data are monthly and extend through March 2009. On December 16,2008, the Federal Open Market Committee established a target Moreover, at its December 2008 meeting, the FOMC range for the federal funds rate of 0 to '", percent. The black rectangle indicated that economic conditions were likely to represents this range. SOURCE: For Treasury securities, mortgages, and Moody's corporate warrant exceptionally low levels of the federal funds bonds, Federal Reserve Board, Statistical Release H.15, "Selected Interest rate for some time. Rates" (www.federalreserve.goy/releaseslhI5); for federal funds. Federal Reserve Board (www.federalreserve.gov/fomc/fundsrate.htm); for high-yield With monetary policy easing, the economy slow corporale bonds. Merrill Lynch Master II index. ing, and inflation pressures abating, most interest rates moved lower over 2008. Money market rates generally followed the federal funds rate lower, mortgages fell about 100 basis points, on net, after the though widened risk spreads in the Eurodollar and November 25, 2008, announcement of the Federal commercial paper markets muted the decline some Reserve's program to purchase mortgage-backed what. Yields on Treasury coupon securities declined securities (MBS) backed by the housing-related GSEs substantially, particularly late in the year, pressed and Ginnie Mae. However, the spread between the lower, in part, by speculation that the Federal Reserve rates for nonconforming jumbo fixed-rate loans and might begin purchasing large quantities of longer those for conforming mortgages widened further. As maturity Treasury securities. Interest rates on conditions in financial markets deteriorated in Sep adjustable- and fixed-rate mortgages, while volatile, tember and October, credit spreads on investment moved mostly sideways for the better part of 2008. grade and high-yield corporate bonds, measured rela However, rates on 30-year fixed-rate conforming tive to yields on comparable-maturity Treasury securities. surged from already elevated levels. The combination of financial turmoil and the down 8. The FDIC's establishment of the TLGP was preceded by a turn in economic activity exerted pressure on both determination of systemic risk by the Secretary of the Treasury (after sides of banks' balance sheets as institutions became consultation with the President) following receipt of the written recommendation of the FDIC Board, along with a similar written more cautious in the extension of credit, saw losses recommendation of the Board of Governors of Ihe Federal Reserve deplete capital, and relied less on market sources of System. See Federal Deposit Insurance Corporation (2009), "Tempo funding. In addition, the asset, liability, and capital rary Liquidity Guarantee Program," resource for bank officers and directors, www.fdic.gov/regulations/resources/tlgplindex.html. positions of banks were materially affected by the

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008 A61 4. Number or bank~, and share of ru sets allhc largest slowed in 2008 to the lowest rate in the past two banks, 1990-200 decades. Mergers among BHCs, however, rose for the fourth consecutive year, exceeding the rate at which Thousands new BHCs were formed. The number of BHCs thus Number 14 fell to about 5,000 in 2008 (for multi tiered BHCs, only the top-tier organization is counted in these 12 figures). The number of financial holding companies 10 declined slightly.9 ____ - 8 - 6 BAlANCE SHEET DEVELOPMENT. I I I t I I I I I I I I I ----------------------------------P-ercenl Balance sheet developments in 2008 continued to be influenced importantly by the turbulence in the finan Share of assets - 100 cial markets, which intensified markedly after the 100 largest __- ----~ 80 bankruptcy of Lehman Brothers in mid-September. 60 Moreover, banks were increasingly affected by the 10 largest __- 40 fallout from the slowdown in economic activity that began at the end of 2007 and accelerated late in 2008. 20 I I I I I I I I I I I I I I I I I I I I I I In addition, as noted earlier, bank balance sheets were 1990 1992 1994 t996 1998 2000 2002 2004 2006 2008 materially affected by the policy actions taken by public authorities in response to the financial and 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. economic challenges. Using funds from the TARP, the Treasury established the CPP, under which the policy actions taken by public authorities in response U.S. government bought preferred shares from a large to the rapidly evolving financial and economic land number of eligible banking organizations. The Fed scape. Total bank assets expanded about 10 percent in eral Reserve's expansion of its liquidity facilities for 2008, owing, in part, to the absorption of assets from banks, as well as the FDIC's introduction of the nonbank financial firms; after taking into account a TLGP, improved the industry'S access to funding. few of the largest structure events that occurred The increase in deposit insurance coverage to during the year, the expansion of total bank assets was $250,000 and the full guarantee of noninterest only about 6 percent (see box "Adjustments to the bearing deposits supported strong growth in core Balance Sheet Data for Structure Activity"). The deposits in the latter part of the year. Depositoty value of loans on the books of banks was essentially institutions' holdings of reserve balances increased flat last year after accounting for major structure substantially over the last few months of the year, and events. Residential real estate loans contracted, and the Federal Reserve began to remunerate reserve other major loan categories, including commercial balances. and industrial (C&I) loans, consumer loans, and Total loans on banks' books increased about 2 per commercial real estate (CRE) loans, grew modestly. cent in 2008 (table 1). However, the growth was due The number of new commercial banks chartered in mainly to the substantial structure events that took 2008 edged down. Merger activity also slowed last place during the year, and loans were essentially flat year but still outpaced bank formation. As a result, the last year after removing the effects of these events. number of banks declined further, to about 7,100 at Residential mortgages experienced an outright de the end of 2008 from about 7,300 at the end of 2007 cline, and growth in several other major loan catego (figure 4, top panel). The share of assets held by the ries was subdued. In contrast, loans drawn on home 10 largest banks increased 1 percentage point over the equity lines of credit expanded at a solid pace. The year, to 54 percent at the end of 2008, and the share of sluggish pace of lending reflected a confluence of assets held by the top 100 banks rose about 1.5 per centage points, to 82 percent, over the same period 9. Statistics on financial holding companies include both domestic (figure 4, bottom panel). BHCs that have elected to become financial holding companies and foreign banking organizations operating in the United States as The financial turmoil resulted in the conversion of financial holding companies and subject to Ihe Bank Holding Com several large financial companies to BHCs, with at pany Act. For more information, see Board of Governors of the least one subsidiary assuming a commercial bank Federal Reserve System (2003), Report to the COIIWess (Ill Finullciu/ Holding Compallies IInder the Gramm-Leach-Bliley Act (Washington: charter, in part to gain access to more-stable insured Board of Governors, November), www.federalreserve.gov/pubs/ deposits. Nonetheless, the formation of new BHCs reports_other.htm.

A62 Federal Reserve Bulletin 0 June 2009 Adjustments to the Balance Sheet Data for Structure Activity One consequence of the turmoil in financial markets in In general, the eti'ects of such bank-nonbank structure 2008 was a steady stream of acquisitions and reorganiza activity on bank balance sheet data do not reHect net asset tions by major financial institutions. Such structure activ creation or elimination. To better capture balance sheet ity may or may not ati'ect the aggregated commercial growth in recent quarters that stems from continuing bank balance sheet data discussed in the main text of this operations, the data shown in table A have been adjusted to article. In general, consolidation activity that involves remove the eti'ects on the series that have resulted from only commercia'! banks would not impact aggregate recent sizable structure events. Speci fically, the growth industry assets. [n contrast, consolidation of nonbank rates of selected balance sheet components given i'n the assets onto the books of commercial banks would increase table have been adjusted to remove the estimated effects of the assets. as described in this article, of the commercial the following five major structure events that involved bank banking sector. and nonbank organizations:3 Several high-profile structure events involving some of the largest bank holding companies occurred in 2008. • Goldman Sachs Group, Inc., reorganized some of its I For example, in March, JPMorgan Chase & Co. acquired subsidiaries and consolidated a portion of its assets in a The Bear Stearns Companies, Inc., but as of year-end commercial bank subsidiary on November 29, 2008, 2008, that consolidation occurred only at the holding boosting industry assets by about $125 billion. company level and therefore did not directly affect the • JPMorgan Chase acquired nearly all of Washington commercial bank aggregates reported in this anicle.2 But Mutual Bank's assets and liabilities on September 26, in September. JPMorgan Chase acquired the banking 2008, boosting industry assets by about $270 billion. operations of Washington Mutual Bank, a thrift institu • Wachovia Corporation acquired some assets and liabili tion, causing banking industry assets and liabilities to ties of World Savings Bank, FS.B., on October 12, 2007, jump. boosting industry assets by about $80 billion. I. In publishing its H.8 statistical release, .. Assets and Liabilities of 3. TIle structure-adjusted growth rates shown in Ihe lable were generally Commercial Banks in the United States," each week. the Federal Reserve based on Ihe diilerence belween the end-of-period reponed data and the describes nonbank structure activity that affects bank assets by $5.0 billion beginning-of-period dala adjusted for the structure event. To adjust for or more. For a list of such activity dating 10 December 16, 2005. see the Citibank. N.A., in 2006:04. Wachovia Corporation in 2007:Q4, and lPMor "Notes on the Data" link on the release's webpage (www. gan Chase in 2008:Q3. the beginning-of-period values were determined by federalreserve.gov/releaseslhSIhSnOles.htm). In addition. information aboul adding the value of Ihe asselS of the acquired thrifl(s) 10 the reponed data for structure activity involving any banking organization is available in the the previous quaner. To adjust for Countrywide's chaner conversion in Federal FinaJlciallnstilulions Examination Council's central repository of 2007:Q I. the beginning-of-period value was determined by subtracting data, the National Information Center (www.ffiec.gov/nicpubwcb/nicweb/ Countrywide's assets from Ihe reponed data for the previous quaner. nichome.aspx). Because of the complexilY of the Goldman Sachs reorganization and the 2. Bank of America Corporation announced ils intention to purchase lack of regulatory dal1l for Ihe quaner before the firm's conversion 10 a bank Merrill Lynch & Co .. Inc .. in Seplember, but the acquisition did not holding company, all commercial bank assets of Goldman Sachs were become elfeclive until January 1.2009. subtracted from the data for both 2008:Q3 and 2008:Q4. both supply and demand factors. Throughout the year, of various liquidity and credit facilities by the Federal banks reported in the Federal Reserve's Senior Loan Reserve was consistent with a substantial increase in Officer Opinion Survey on Bank Lending Practices the excess reserve balances held by banks in the (SLOOS) that they had continued to tighten credit second half of 2008. Indeed, roughly 75 percent of standards and terms on loans in all major categories. the structure-adjusted growth in banks' balance sheets Indeed, the fractions of banks tightening lending last year was accounted for by the surge in their standards neared or surpassed historical highs for all reserve balances. major loan categories. Moreover, banks reportedly On the liability side of the balance sheet, core reduced or canceled lines of credit to both businesses deposits expanded as a share of bank funding for the and households, and unused commitments to fund first time in years. In contrast, managed liabilities, loans contracted, particularly in the fourth quarter. At which had been an important source of funds in the the same time, considerable fractions of banks re latter part of 2007, when assets unexpectedly came ported a broad reduction in demand for loans, espe onto banks' balance sheets, grew only moderately last cially late in the year. year. For example, banks' borrowing from the Fed The expansion of the Federal Reserve's balance eral Home Loan Bank (FHLB) system grew just sheet resulting from the expansion and establishment 3 percent, on net, after adjusting for a money center

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008 A63 • Countrywide Bank converted to a thrift charter on unadjusted growth rates shown in table I of the main text. March 12, 2007, reducing industry assets by about The adjustments are particularly important for the second $90 billion. half of 2008. Notably, after accounting for JPMorgan • Citibank, N.A., consolidated two related federal sav Chase's acquisition of Washington Mutual Bank, the ings banks onto its books on October I, 2006, boosting growth of residential real estate loans in the third quarter industry assets by about $200 billion. was markedly lower, more clearly reflecting the contraction in most residential real estate markets over that period. These events resulted in the net addition of more than Overall, the adjusted data on growth in total loans show $580 billion of nonbank assets to commercial banks' that, after abstracting for major structure events, bank balance sheets over the nine quarters ending in the fourth lending stepped down noticeably over the second half of quarter of 2008. As a consequence, the adjusted growth 2008, along with the pace of economic activity. rates shown in the table are generally lower than the A. Structure-adjusted change in selected balance sheet items, all U.S. banks, 2006--08 Percent, annual rate I Balance sheet 2006 2007 I 2008 I 2007 2008 category Q4 I QI I Q2 I Q3 I Q4 I QI I Q2 I Q3 I Q4 I I Assets ..... .............. ...... 7.31 5.43 11.01 14.76 9.67 11.43 -2.45 11.12 4.05 10.60 6.13 Loans and leases (gross) . .... . .. 7.55 4.38 12.81 14.20 8.36 2.35 .86 1.23 -Q.OO 10.29 -.40 Commercial and industrial . 10.06 11.04 16.73 30.83 17.26 8.85 1.41 7.34 -4.57 20.29 3.26 Consumer _. ... 18.11 -7.64 15.25 19.69 18.08 -2.22 7.74 6.00 .77 11.67 3.09 One-to four-family residential .. 4.70 8.04 10.37 3.63 -5.62 -3.93 -8.60 -7.52 -3.73 4.12 -5.82 Commercial real estate loans 1 ... 11.% 6.14 9.76 9.22 9.49 5.05 5.32 4.62 .80 8.93 4.00 Other loans and leases. 7.15 2.30 11.82 11.% 12.77 5.90 5.84 11.41 -11.62 10.05 2.82 Securities . . .. 8.08 11.81 1.87 4.66 2.76 7.14 -3.76 8.54 -16.83 5.36 -1.35 Mortgage-backed securities . 7.36 7.83 -2.58 -7.58 5.36 19.25 15.52 -13.10 15.49 .71 9.39 Liabilities .................... .... 7.06 5.28 11.85 14.24 9.97 12.14 -2.63 13.08 5.22 10.73 7.08 Capital account ...... ... ...... 9.48 6.69 .169 19.40 7.06 5.19 -.90 -4.89 -Q.85 9.49 -1.88 MEMO Unused loan commitments " ." .,' 9.55 11.67 10.04 13.79 1.19 -3.02 -4.36 -12.55 -33.98 9.46 -12.99 Federal Home Loan Bank advances . 1.53 22.09 10.09 92.30 .38 15.53 8.02 52.85 -56.15 33.27 3.13 NOTE: Data are from period-end to period-end and are as of April 16, commercial real estate, construction. and land development activities not 2009, for commercial banks and as of February 23, 2009, for thrift secured by real estate. institutions. For the definition of structure-adjusted change, see the box text: SOURCE: Federal Financial Institutions Exrunination Council, Consoli for an explanation of lhe adjustment calculation, see note 3 of the box text. dated Reports of Condition and Income (Call Report) for commercial banks: I. Measured as the sum of construction and land development loans Office of Thrift Supervision. Thrift Financial Reports for thrifts; staff secured by real estate: real eslate loans secured by nonfarm nonresidential calculations. properties or by multifamily residential properties: nnd 1o.1ns to finance bank's assumption of the advances of a large failed the fourth quarter, as the holding companies down thrift 10 As judged by regu latory standards, a large streamed capital received under the CPP II majority of banks remained well capitalized at year end 2008, partly reflecting sizable common equity Loans to Businesses transfers from their parent bank holding companies in C&I loans expanded around 3.5 percent during 2008the lowest rate since 2003 and well below the 20 per cent increase recorded in 2007. The growth in C&I loans was not materially affected by the signi ficant structure activity during the year. According to the 10. The FHLBs were established in 1932 as GSEs chartered to SLOOS, the deceleration in such loans can be ex provide a low-cost source of funds, primarily for mortgage lending. They are cooperatively owned by their member financial institutions, a plained, in part, by businesses' reduced demand to group that originally was limited to savings and loan associations, savings banks, and insurance companies. Commercial banks were first able to join FHLBs in 1989, and since then FHLB advances have II. The reported regulatory capital ratios are consistent with a become a significant source of funding for them, particularly for "well capitalized" designation under prompt corrective action stan medium-sized and small banks. The FHLBs are cooperatives, and the dards enacted with the Federal Deposit Insurance Corporation Improve purchase of stock is required in order to borrow. ment Act of 1991.

A64 Federal Reserve Bulletin 0 June 2009 I. Change in balance sht.: 't item . all U.S. banks. 1999-2008 Percent I MEMO Dec. hem 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 I 2008 '(billions I I of ! dollars) As I s n e t t L e s r o e a . s n . t . - s e . a a . r n . n d . i . n l . g e . a . a s . e s . s s . e . t ( s n . . e . t . ) . . . . . , . . . . . , . . . . . . . ., . . . ., . . . . . . . . . . . . . . .. . . . . . .. .. . .. 8 5 5 . . . 4 8 1 4 7 0 9 8 8 . . . 2 7 6 6 4 6 5 3 1 . . . 1 9 8 1 2 6 5 7 7 . . . 1 5 9 9 3 0 6 7 7 . . .5 1 2 1 7 8 1 1 " 0 1. . . 2 2 7 1 9 8 1 7 7 0 . . . 9 7 3 3 7 9 1 1 1 2 2 1 . . . 9 4 3 7 5 6 1 1 10 0 0 . . . 8 5 1 1 1 7 1 8 2 0 . . . 5 2 23 4 9 1 1 6 2 0 , , ,3 2 6 1 8 17 2 9 Commercial and industrial .... 7.88 8.54 ...{,.73 -7.41 -4.56 4.35 12.53 11.81 20.27 3.49 1.408 Real eSlate . ..... , . .... 12.22 10.74 7.94 14.44 9.75 15.41 13.80 14.94 7.04 4.49 3,797 Booked in domestic offices ... .... 12.36 11.02 8.02 14.85 9.66 15.09 13.93 15.05 6.77 4.76 3.735 One-to four-family residential ... 9.70 9.28 5.70 19.86 10.01 15.75 11.95 15.11 5.53 3.08 2.056 Other real estale ...... 16.06 13.31 10.95 8.81 9.19 14.20 16.61 14.96 8.39 6.89 1,678 Booked in foreign offices .' .... ..... 6.28 -1.62 3.97 -7.41 15.74 35.59 7.19 8.79 22.76 -9.31 63 Consumer ...... , . ...... -1.48 8.04 4.16 6.55 9.31 10.16 2.30 6.19 11.67 4.22 988 Other loans and leases .......... ... ... 7.17 7.01 -2.02 -.03 8.31 3.57 -.18 3.17 13.01 "'{'.26 581 Loan loss reserves and unearned income. 2.37 7.98 13.15 5.73 -2.68 -4.19 -5.75 1.63 27.97 75.00 158 Securities ..... ............ ... 5.11 6.36 7.22 16.20 9.44 10.58 2.40 11.53 4.54 .60 2.208 Investment account .. ..... . .............. 6.68 2.85 8.88 \3.53 8.70 6.15 1.19 6.94 -4.42 10.08 1,719 U.S. Treasury . ..................... -1.89 -32.72 -40.27 41.92 14.14 -15.87 -17.59 -19.30 -26.93 7.96 .12 U.S. government agency and corporal ion obligations .......... 1.83 3.75 12.84 18.09 9.68 9.46 -1.83 4.71 -12.15 14.81 1.025 Other. .... ,., ... 20.90 13.39 12.18 2.72 5.98 3.02 10.12 13.78 10.75 3.57 662 Trading account ... ...... . .... ...{,.93 37.16 -3.72 36.12 14.()1 36.81 7.96 31.32 35.98 -22.78 489 No O ni t n h t e e r r est-earning assets . " ... ., ... . . . . . . . . . " . . . . -8 2 . . 3 6 7 4 1 9 0 . . 4 3 5 0 1 1 3 2 . . 0 7 9 4 -2 5 . .1 9 1 3 6 6 . . 6 7 4 6 1 7 4 . . 6 2 1 5 5 6 . . 8 1 1 9 1 1 9 1 . . 3 7 1 9 2 1 2 5 . . 3 4 5 2 7 2 3 0 . . 6 7 8 5 1 1 . . 5 8 6 2 5 3 ..... Liabilities . . , .. - ... .. . ....... 5.58 8.59 4.45 7.13 7.24 9.56 7.74 12.10 10.79 11.28 11.063 Core deposits . ... " .. .23 7.53 10.55 7.58 7.29 8.25 6.40 5.84 5.49 14.47 5.405 Tnmsaclion deposits ................ ....... -8.97 -1.31 10.20 -5.12 2.82 3.20 -1.18 -4.28 -1.22 20.51 838 Savings deposits (including MMDAs) ....... 6.68 12.51 20.68 18.46 13.71 11.72 6.93 5.53 3.34 10.03 3.295 Small time deposits . . . . . . . . . . . ..... .. -.... -.76 7.20 -7.23 -4.92 ...{,.79 1.58 12.88 16.97 18.03 23.29 1.272 Managed liabilities I ... .... .......... 15.54 8.79 -2.73 5.34 6.96 12.06 12.24 19.45 16.57 6.49 4.845 Large time deposits. .... 14.19 19.37 -3.65 5.05 1.42 21.86 22.88 15.94 1.90 4.75 1,072 Deposits booked in foreign offices . 14.60 7.84 -10.96 4.49 12.63 16.84 6.32 29.67 25.86 2.46 1.539 Subordinated notcs and debentures. 5.07 13.98 9.56 -.59 5.08 10.49 11.41 22.60 16.83 4.60 182 Gross federal funds purchased and RPs ... .. 1.56 6.49 5.72 12.75 -8.70 8.40 15.62 9.47 7.06 5.76 786 Other managed liabilities. 35.27 1.80 -.28 .97 22.00 1.37 6.15 18.89 28.44 14.38 1.265 Revaluation losses held in trading accouQls . ... -13.20 7.47 -17.06 33.44 14.03 -12.61 -17.86 6.89 42.66 88.60 388 Other ......... . . . . . . . . . . -1.26 20.61 14.90 5.23 5.28 17.19 -1.60 22.33 3.21 -8.45 425 Capital account ................................. 3.89 10.65 12.29 7.84 6.61 23.14 7.59 14.69 10.94 1.15 1.149 MEMO Commercia.! real eSlate loans2 .. ....... ...... .. 15.42 12.16 13.10 6.82 8.99 13.93 16.87 14.91 9.20 6.77 1.684 Mortgage-backed securities ........ -3.34 3.29 29.05 15.54 10.12 13.45 2.06 10.22 -1.24 11.37 1.069 Federal Home Loan Bank advances n.a. n.a. n.a. 17.21 3.71 3.73 10.00 29.80 30.62 15.60 526 NOTE: Dala are from year-end to year·end and are as of April 16.2009. 2. Measured as the sum of construction and land developmem loans secured I. Measured as the sum of large time deposits in domestic offices. deposits by real estale; real estate loans secured by nonfarm nonresidential propenies or booked in foreign offices, subordinated notes and debentures, federal funds by muhifamily residential properties; and loans to finance commercial real es purchased and securities sold under repurchase agreements, Federal Home late. construction, and land development activities nOt secured by real eSlate. Loan Bank advances, and other borrowed money. n.a. Not available. MMDA Money market deposit account. RP Repurchase agreement. finance inventory accumulation and fixed investment. cent. The slower growth in C&I lending at larger The financing gap-the difference between capital banks was attributable not only to the domestic expenditures and internally generated funds-at non factors mentioned earlier but also to international financial corporations declined in the second half of ones, In particular, the restructuring of foreign opera 2008 (figure 5). Moreover, the slowdown in the pace tions by one large bank contributed to an 11 percent of merger and acquisition activity contributed to a drop in C&I loans booked to non-U.S. addressees, substantial drop in net equity retirement over the For the industry as a whole, C&I loans expanded course of 2008, which also reportedly played a role in over the first three quarters of the year and then the decreased demand for C&I loans, as repurchases contracted in the fourth quarter. Early in the year, of equity are frequently financed with bank loans, at strains in the syndicated loan market likely forced least initially. banks to hold loans on their balance sheets that had C&I loan growth differed markedly by bank-size been intended for sale to market investors. After the grou p last year. At the top 100 banks, C&I loans severe financial market disruptions in the fall, some expanded only a little more than 2 percent, while C&I nonfinancial companies drew heavily on committed loans at banks outside the top 100 grew about 10 per- lines of credit with banks, which caused the growth of

u.s. Profits and Balance Sheet Developments at Commercial Banks in 2008 A65 5. Financing gap and net equity r~tir~mt:nl at nonfarm 7_ hanges In demand and supply conditions at 'elected nonfinancial corp rations, 1990--2008 banks for commercial and industrial loan to large and middle-market tlrms, 1990--2008 ------------------------------B-il-lio-n-s of dollars Percent 1,000 Net percentage of banks reporting stronger demand I 60 SOO 40 600 20 + 400 o 200 20 + o 40 60 200 so I I I I I I I I I I I I I I I I I I I I I I 1990 1992 1994 1996 1995 2000 2002 2004 2006 2008 I I " I I I I I I I I I I I II I Non:: The data are four-quaner moving averages. The financing gap is the difference between capital expenditures and internally generated funds. Net Net percentage of banks reporting tighter standards 2 IlJO equity retirement consists of funds used to repurchase equity less funds raised in equity markets. 80 SOURCE: Federal Reserve Board, Statistical Release Z.I, "Flow of Funds Accounts of the United States." table F.I02 (www.federalreserve.gov/ 60 releaseslz I). 40 C&I loans to spike in September and October (fig 20 + ure 6). In fact, according to a special question on the o October 2008 SLOOS, nearly 45 percent of banks, on 20 net, reported an increase in the dollar amount of C&I loans drawn under preexisting commitments over the 40 previous three months. Nevertheless, despite the I I I I I I I I I I I I I I I I I I I _LLJ 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 unanticipated demand at times over the year, SLOOS NOTE: The data are drawn from a survey generally conducted four times respondents indicated weaker demand for C&I loans, per year; the last observation is from the January 2009 survey, which covers on net, throughout 2008, especially in the fourth 2008:Q4. Net percentage is the percentage of banks reponing an increase in demand Or a tightening of standards less, in each case. the percentage quarter (figure 7, top panel). reponing the opposite. The definition for firm size suggested for, and Each quarter last year, considerable numbers of generally used by, survey respondents is that large and middle-market firms have annual sales of $50 million or more. banks indicated in the SLOOS that they had further I. Series begins with the November 1991 survey. 2. Series begins with the May 1990 survey. 6. Commercial and industrial loans al domestically SOURCE: Federal Reserve Board, Senior Loan Ofticer Opinion Survey on Bank Lending Practices (www.federalreserve.govlboarddocslsnloansurvey). chartered commercial banks_ 2007-08 Billions of dollars tightened their credit policies for C&I loans (figure 7, bottom panel). Significant majorities reported tighten 1.300 ing credit standards; at the same time, many banks reported that they had increased spreads of C&I loan 1,200 rates over their cost of funds, were charging higher premiums on riskier loans, and had increased the 1,100 costs of credit lines to nonfinancial firms. In addition, substantial fractions of SLOOS respondents indicated 1,000 having tightened nonprice terms on C&I loans, which involved, for example, reducing the maximum size, 900 shortening the maturity, and strengthening the cov I I enants associated with loans or credit lines. By late in 2007 2008 the year, nearly all of the respondent banks were NOTE: The data are weekly and seasonally adjusted. reporting that the move to a more stringent lending SOURCE: Federal Reserve Board, Statistical Release H.8, "Assets and Liabilities of Commercial Banks in the United States" (www.federalreserve. posture importantly reflected a less favorable or a gov/releaseslhS). more uncertain economic outlook, and large fractions

A66 Federal Reserve Bulletin 0 June 2009 8. Change in commercial real estate loans. by major 9. Change in unused hank loan commitments 10 components. 1990-200 businesses and households. 1990-200 ___ _______ _ _______~ Pcrccm Percent. annual rate Commercial real estate, 40 construction, and 60 land development loans 30 40 20 20 + to o + o 20 to 40 20 60 30 80 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 I 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 NOTE: The data are annual and adjusted for major structure events. NOTE: The data. which are quarterly, begin in 1990:Q2 and are not seasonally adjusted. The total consists of unused commitments relating to credit card hnes; revolvIOg, open-end lines secured by one· to four-family of banks pointed to their reduced tolerance for risk. resldenlJal propertieS; commercial real estate, construction. and land development loans: securities underwriting; and "other." Large fractions also noted concerns about the capital position of their own bank as a reason for tightening which account for about one-third of all CRE loans, standards and terms on C&I loans. contracted 5 percent in 2008, with the decline accel The Federal Reserve's quarterly Survey of Terms erating over the course of the year. Commercial of Business Lending also showed a tightening of construction loans associated with one- to four-family terms for C&I loans last year. The spread of C&I loan residential projects dropped particularly sharply in rates over Eurodollar and swap yields of comparable the second half of 2008, Banks' unused commitments maturity increased for all loan sizes and all bank-size to fund construction of both commercial and residen groups surveyed last year. The survey results also tial properties fell about 30 percent for the year as a indicated a greater reluctance to lend to new custom whole (figure 9). The growth of CRE loans has been ers, as the share of loans originated under previous slowing since 2006, a trend reflecting both modera commitment increased to the top of its historical tion in demand and reduction in supply. Loan demand range. In addition, spreads on loans not made under was damped last year by a further deterioration in commitment, which generally reflect the most recent market fundamentals, including falling rents, rising loan pricing, increased sharply late in the year. vacancies, and a rapid decline in CRE prices (fig CRE loans grew about 7 percent last year, down a ure 10, top panel). On the supply side, significant net couple of percentage points from 2007 and the slow fractions of respondents reported having tightened est rate since 2004. After adjusting for the major CRE lending standards over the past year (figure 10, structure events, CRE loans grew just 4 percent for bottom panel). In addition, in response to special the year, with the rate of expansion tailing off to near questions on CRE lending in the January 2009 zero in the fourth quarter. Loans secured by nonfarm SLOOS, significant net fractions of banks reported nonresidential properties, which account for about having tightened all queried loan policies in 2008. By 60 percent of all CRE loans, expanded about 10 per year-end, CRE loans constituted 13 percent of the cent in 2008 (figure 8). Growth in this CRE compo assets of all commercial banks. The share of CRE nent was supported by a 15 percent expansion in loans relative to all loans at medium-sized and small loans backed by owner-occupied property, which banks declined marginally but stayed quite high last often function as C&I loans with real estate collateral year (figure II). pledged.12 Construction and land development loans, In the second half of 2008, issuance of commercial mortgage-backed securities (CMBS) essentially 12. Beginning last year, banks report the amount of loans secured ceased (figure 12). In a response to a special question, by nonfarm nonresidential properties that are backed by owner· some SLOOS respondents indicated that the shutoccupied property. Such loans account for about one-half of all loans secured by nonfarm nonresidential properties. These loans often function as C&I loans with real estate collateral pledaed because unlike other CRE loans secured by nonfarm nonresidential propertie; properties, loans secured by owner-occupied properties are underwrit that are underwritten based on the rental or lease income from the ten based on the future business revenues of the property's owner.

Profits and Balance Sheet Developments at US. Commercial Banks in 2008 A67 10. Change. in demand and supply condition at 12. Gross i suancc ,\' selected mortgage-and a 'et-ba ked selected banks for commercial real estate loans. securities. 2003-08 1996-2008 Billions or dollars. annual rale Percent Non-agency RMBS Net percentage of banks reporting stronger demand • CMBS 1,800 60 • Consumer ABS 1,500 40 20 1.200 + o 900 20 600 40 300 60 I I Non:: The data are monthly. Non-agency RMBS are residential Net percentage of banks reporting tighter standards mongage-backed securities issued by institutions other than Fannie Mae, - 100 Freddie Mac, and Ginnie Mae; CMBS are commercial mongage-backed securities; and consumer ABS (asset-backed securities) are securities backed 80 by credit card loans. nonrevolving consumer loans, and auto loans. SOUHCE: For RMBS and ABS, Imide MBS & ABS and Merrill Lynch; for 60 CMBS, Commercial Mongage Alen. 40 extended or refinanced maturing CRE loans that 20 + borrowers were unable to refinance in the CMBS o market. 20 Loans to Households 40 I I I I I I I I I I I I The continuing deterioration in housing market activ 1996 1998 2000 2002 2004 2006 2008 ity and the outright declines in home prices substan NOTE: See figure 7, general nOle and source note. tially affected bank lending to households last year down of that market had led to an increased volume (figure 13). Overall, the value of loans backed by one of CRE loans on their books in the latter part of the to four-family residential properties held by commeryear. With the CMBS market impaired, banks report 13. Change in pric" of exi. ling single-family homes, edly faced Jess competition for higher-quality, longer 1990-200 term CRE debt, and, in other cases, banks likely or II. Commercial real estate loans a a share all loan . by bank size. 1990-2008 20 LP price index 15 Percenl 10 50 5 + o 40 5 - Medium-sized 30 10 and small banks 15 20 I I I I I I I I I I I I I I I I I I I I I I 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 10 largest banks 10 Nan:: The data are quanerly and extend through 2008:Q4: changes are from one year earlier. The LP price index includes purchase transactions I I I I I I I I I I I I I I I I I I I I I I only. For 1990, the FHFA index (formerly calculated by the Office of Federal 1990 t 992 1994 1996 1998 2000 2002 2004 2006 2008 Housing Enterprise Oversight) includes appraisals associated with mongage refinaneings; beginning in 1991. it includes purchase transactions only. NOTE: The data are quanerly. For the definition of bank size, see the SOURCE: For LP, LoanPerformance, a division of First American general note on the first page of the main text. CoreLogic; for FHFA, Federal Housing Finance Agency.

A68 Federal Reserve Bulletin 0 June 2009 14. Level of refinancings of re idenlial morlgage$, In contrast, loans drawn under revolving home 1990-2009 equity lines of credit grew a solid 10 percent in 2008-the largest increase since 2004----even after January 26. 1991l = I adjusting for major structure events that took place last year. As households' access to other types of 100 credit became tighter and "cash out" refinancing in 80 many instances was no longer feasible, households probably drew on existing lines of credit. Moreover, 60 because these loans usually carry variable interest rates, declining interest rates over the year likely 40 spurred demand. On the supply side, banks sought to 20 limit their exposure to home equity lines by cancel + ing, suspending, or reducing such lines of credit, o likely because of borrower financial difficulties and I I I I I I I I I II I I I I I I I I I I j I falling house prices that eliminated part or all of the 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 collateral used to secure the 10ans.13 In fact, unused NOTE: The dala. which are weekly and ex lend Ihrough April 17.2009. are commitments secured by residential housing dropped four-week moving averages. Residenlial mongages include bOlh firsl and an unprecedented 10 percent last year after adjusting second liens secured by one-10 four-family residenlial propenies. SOURCE: Mongage Bankers Associalion. for major structure events. Amid deteriorating credit quality, waning demand cial banks grew just 3 percent. However, after adjust for consumer durables, and disruptions in the securi ing for major structure events, residential real estate tization markets, consumer loans on banks' books loans held by banks, which had grown every year expanded modestly in 2008. Credit card loans, which since at least the 1980s, posted an outright decline of at year-end accounted for about 40 percent of the about 6 percent for the year. More broadly, according value of consumer loans on banks' books, increased to data from the Federal Reserve's Z.I statistical 5 percent, whereas other consumer loans grew less release ("Flow of Funds Accounts of the United than 2 percent, down from 13 percent in 2007 (all States"), household mortgage debt from all sources adjusted for major structure events). According to the declined last year for the first time since data were SLOOS, banks further tightened standards on con recorded in the Aow of funds beginning in 1945. sumer loans each quarter last year (figure 15, top Survey evidence indicates that the decline in resi panel). Particularly in the second half of the year, dential real estate lending last year stemmed from banks cut unused commitments for credit cards sig both tighter credit standards and weaker demand. nificantly as the unemployment rate climbed and Substantial fractions of SLOOS respondents reported disruptions in funding markets intensified. In addi tighter credit standards on such loans throughout tion, sizable net fractions of banks responding to the 2008. Not surprisingly, the tightening of credit stan SLOOS reported having lowered credit limits on dards tended to be more pronounced for nontradi existing credit card accounts to both prime and non tional and subprime mortgage products than for prime prime borrowers, citing the less favorable economic mortgage products. Indeed, only a few banks reported outlook, reduced tolerance for risk, and declines in that they had originated subprime loans during the customer credit scores as important reasons for their year. The fraction of banks reporting tighter credit moves. Moreover, banks generally reported weak standards on prime mortgages spiked to a record high demand for consumer loans. The net fraction of banks of 75 percent in the July 2008 survey, and the reporting an increased willingness to make consumer fractions that so reported remained high in the Octo ber 2008 and January 2009 surveys. In addition, SLOOS respondents indicated further weakening in 13. In June 2008. the FDIC issued supervisory guidance reminding institutions that although reducing or suspending home equity lines of demand for residential mortgages each quarter last credit may be an appropriate way to manage credit risk. cenain legal year, though to a lesser extent in the final quarter of requirements, in place to protect the borrowers, had to be followed. the year. Refinancing activity picked up at the end of Specifically, the FDIC urged the institutions to work with borrowers to minimize hardships that may result from reductions or suspensions of last year as households-specifically, those that were credit lines. More information is in Federal Deposit Insurance Corpo not constrained by deteriorating credit scores or ration (2008), "Consumer Protection and Risk Management Consider increasing loan-to-value ratios-took advantage of ations When Reducing or Suspending Home Equity Lines of Credit and Suggested Best Practices for Working with Borrowers," financial the decline in mortgage rates late in the year (fig institution letter, June 26. www.fdic.gov/news/news/financiaI12008/ ure 14). fi108058a.html.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008 A69 15. Changes in supply conditions at selected banks for 16. Bank holdings of securities as a proportion or tOlal con umer lending and for con umer insl IImenlloans. bank asselS, 1990-2008 1996-2008 Percent Percent Net percentage of banks reporting tighter 26 - standards for consumer lending so 24 60 40 22 20 20 + o IS 20 I ! I I I I I I I I I I I I I I I I I I I I 1990 1992 1994 1996 1998 2000 2002 2004 2006 200S NOTe: The data are quanerly. Net percentage of banks reporting increased - willingness to make consumer installment loans 40 outright sales of Treasury securities held by the 20 Federal Reserve. But after the bankruptcy of Lehman + Brothers, the magnitude of liquidity added to the o system through various facilities and special interven 20 tions exceeded the Federal Reserve's ability to steril ize increases in reserves with draining operations. 40 However, in December, the FOMe lowered its target for the federal funds rate to a range of 0 to 1/4 percent. 60 This low target was consistent with a very high level I I I I I I I I I I of banking system reserves. All told, reserve balances 1996 1998 2000 2002 2004 2006 2008 due from Federal Reserve Banks increased from NOTE: See figure 7, general note and source note. about $20 billion at the beginning of 2008 to around $520 billion at year-end. 14 installment loans in the October 2008 survey fell to Securities its lowest level since at least 1990; banks continued to report decreased willingness to make such loans, on Overall holdings of securities by banks were almost net, in the January 2009 survey (figure 15, bottom flat last year, growing a mere 0.6 percent, the slowest panel). The broad pullback in consumer credit also rate in more than a decade. Securities holdings were likely reflected, in part, difficulties in the market for only marginally affected by the major structure events asset-backed securities (ABS), which had typically described earlier. As a proportion of total assets, funded a considerable fraction of consumer credit. In banks' holdings of securities declined to 18 percent at the second half of 2008, ABS issuance virtually the end of 2008 (figure 16). However, the aggregate ceased. numbers conceal developments in the underlying investment and trading accounts. Holdings of securi Reserve Balances ties in banks' investment accounts grew 10 percent last year, whereas the value of the holdings of securi In response to widespread financial market strains that emerged in August 2007, the Federal Reserve ties in their trading accounts declined 23 percent, as holdings booked in foreign accounts were roughly established several new facilities to provide liquidity halved. to banks and other financial institutions and made several important modifications to its existing facili ties and operations. Before September 2008, the 14. Total reserve balances, which include balances of thrift institu aggregate supply of reserve balances was not materi tions and foreign banks, grew from $33 billion at the beginning of ally affected by the liquidity facilities, as any in 2008 to $856 billion at year-end (see the Federal Reserve Board's H.4.1 statistical release, "Factors Affecting Reserve Balances of creases in reserve balances from the payouts of loans Depository Institutions and Condition Statement of Federal Reserve were Jargely offset (sterilized) by redemptions or Banks," www.federalreserve.gov/releaseslh41; Wednesday levels).

A70 Federal Reserve Bulletin D June 2009 Widespread deterioration in financial market con 17. Selected domestic liabilities at bank a a proportion or ditions caused the value of banks' securities holdings lheir IOlal domestic liabililie . 1990-2008 to decline throughout 2008. The difference between Percent the reported fair value measurements and book values ----------------------------------of available-for-sale securities in investment accounts widened significantly. The largest revaluation losses - 40 were incurred in non-agency MBS and domestic ABS portfolios, and the largest banks were more adversely 30 affected than other bank-size groups. The 10 largest 20 banks held roughly 45 percent of the available-for sale securities in investment accounts at the begin 10 ning of the year but accounted for two-thirds of the revaluation losses for the year. + o In the third quarter of 2008, held-to-maturity secu rities in investment accounts surged as banks pur I I I I I I I I ! 1 ! ! 1 1 I , I ! I I I I chased a large amount of high-quality asset-backed 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 commercial paper from money market mutual funds NOTF.: The data are quanerly. Savings deposits include money market deposit accounts. with funding provided by the Federal Reserve's AMLF. On the year, held-to-maturity securities in Liabilities investment accounts rose more than 60 percent but still accounted for only a very small fraction of Bank liabilities increased 11 percent in 2008, outpac banks' total securities holdings at year-end. ing the growth in assets by 1 percentage point. Adjusting for major structure events, the annual Other Loans and Leases growth in liabilities was 7 percent. Core deposits grew 11 percent (adjusted) and, for the first time since Other loans and leases decreased 8 percent during 2003, increased as a share of bank funding. At IS 2008, the largest drop in more than a decade. The year-end, they composed 49 percent of bank liabili decline in this volatile loan category occurred despite ties, compared with 47 percent at the end of 2007 a spike during the financial turmoil in September and (figure 17). Core deposits are traditionally a more October, when unplanned overdrafts by a wide range important source of funding for smaller institutions of customers, including some money market mutual than for larger ones. However, in 2008, the growth fund complexes, increased markedly and many non rate of core deposits at the largest 100 banks outpaced bank financial firms drew down their lines of credit to the rate at institutions outside that bank-size category. ensure access to funds. The overall drop in other All components of core deposits grew during 2008. loans and leases likely reflected a confluence of The majority of the expansion occurred over the factors related to the general economic slowdown and second half of the year and was due to a range of continuing distress in the financial markets. Loans to factors, including a substantial easing of monetary other banks dropped 18 percent at an annual rate, policy, the continuing and intensifying financial tur probably reflecting, in part, concerns about the sol moil, increasing economic uncertainty, and regulatory vency of some institutions and lower demand as a changes. Falli ng market interest rates reduced the result of the expansion of the Federal Reserve's opportunity cost of holding deposits, thereby spurring liquidity facilities. Loans for purchasing or carrying their growth. Moreover, turbulence in financial mar securities also fell with the deterioration in financial kets and economic uncertainty tend to generate market conditions. Leases, which are made primarily demand for liquid and safe assets. In particular, the to businesses for financing equipment or to house turmoil created by the bankruptcy of Lehman Broth holds for financing automobiles, declined signifi ers and the resulting outflows from the money market cantly as well, along with the step-down in capital mutual fund sector contributed to strong demand for investment and automobile sales. In contrast, bank bank deposits in the fall (figure 18). To help maintain lending to state and local governments grew robustly consumers' confidence in the banking system, the in 2008, perhaps because higher costs of bond issu Emergency Economic Stabilization Act temporarily ances and dislocations in municipal bond markets, increased basic FDIC insurance coverage from including markets for auction rate securities and variable-rate demand obligations, strained municipal 15. Core deposits consist of savings deposits, small-denomination governments' ability to borrow in capital markets. time deposits, and transaction deposits.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008 A7 1 18. et flows into money market mutual funds attractive rates to their members. As a result, FlH.,B and deposits at commercial bank, 2008 advances extended to banks grew (after adjusting for the resolution of Washington Mutual Bank, under Billions of dollars which lPMorgan Chase assumed the failing financial 200 institution's advances) an average of 25 percent at an 150 annual rate during the first three quarters of 2008, only to reverse most of the increase in the fourth 100 quarter. All told, such advances ended the year up 50 + 3 percent (adjusted). The slowdown late in the year o likely reflected, in part, the introduction of the TLGP, 50 which provided an FDIC guarantee for some newly 100 issued senior debt of banking organizations. 150 200 Capital IL ~I __~ ~_-L~ __~ ~ __~ ~~L-~I __~ , __~ I~I F M A MAS 0 N D Equity capital at commercial banks rose 1.2 percent NOTE: The data are aggregated from weekly to biweekly frequency. in 2008, the second-lowest rate since the 1980s and SOURCE: For money market mutual funds, iMoneyNet; for deposits, just one-ninth of the growth rate of assets in 2008. Federal Reserve Board, Statistical Release H.S, "Assets and Liabilities of Commercial Banks in the United States" (www.federalreserve.gov/ Adjusted for major structure events, the industry'S releasesIhS). equity capital contracted 2 percent. Nonetheless, both the tier 1 and tier 2 risk-based capital ratios for the $100,000 to $250,000 per depositor in October 2008. industry as a whole rose noticeably in the fourth In addition, in mid-October, the FDIC announced that quarter of 2008.16 At year-end, commercial banks the TLGP would provide an unlimited guarantee of maintained a total risk-based capital ratio of 12.8 per deposits held in noninterest-bearing transaction ac cent, compared with 12.5 percent at the end of the counts at participating depository institutions. third quarter. This increase was more than accounted In line with these developments, savings deposits for by $66 billion of capital transferred during the expanded in the first and fourth quarters of 2008, the fourth quarter from parent bank holding companies periods in which the bulk of the 400 basis point (the largest such transfer reported over the past 25 easing in monetary policy occurred. Small time years), much of which was presumably TARP money deposits grew briskly over the second half of 2008. (figure 19). Without those capital injections, and After declining for three consecutive years, transac holding risk-weighted assets constant, the total risk tion deposits increased one-fifth in 2008. The growth based capital ratio at year-end would have declined to was particularly strong in the fourth quarter-64 per 12.0 percent. Alternatively, some banks may have cent at an annual rate-likely driven by the TLGP. chosen to reduce their risk-weighted assets in order to Managed liabilities grew 6.5 percent over the year, maintain a higher year-end capital ratio. the lowest rate in half a decade. With the growth of Although risk-based capital measures ticked up, core deposits outstripping that of assets, banks were the considerable pressures that remain on banks' able to reduce their reliance on generally more expen balance sheets may affect their future capital posi sive and less stable sources of funds. Moreover, tions. Banks recorded $26 billion in net unrealized access to and usage of the Federal Reserve's discount losses on available-for-sale securities in 2008. If window and TAF further reduced the banks' need for market-sensitive funding options. In contrast to their 16. Tier I and tier 2 capital are regulatory measures. Tier I capital experience over the two previous years, banks did not consists primarily of common equity (excluding intangible assets such rely on deposits booked in foreign offices to fund as goodwill and excluding net unrealized gains on investment account asset growth for the year as a whole. securities classified as available for sale) and certain perpetual pre ferred stock. Tier 2 capital consists primarily of subordinated debt. After the financial crisis began in the summer of preferred stock not included in tier I capital. and loan loss reserves up 2007, the Flll.-B system became an increasingly to a cap of 1.25 percent of risk-weighted assets. Total regulatory important source of funding for banks because the capital is the sum of tier I and tier 2 capital. Risk-weighted assets are calculated by mulliplying Ihe amount of assets and the credit FHLBs were able to lend against mortgages accumu equivalent amount of off-balance-sheet items (an estimate of the lated on banks' balance sheets. Heightened uncer potential credit exposure posed by the items) by the risk weight for tainty led investors to put a higher premium on the each category. The risk weights rise from 0 to I as the credit risk of the perceived implicit government guarantee of Flll.-B assets increases. The tier I ratio is the ratio of tier I capital to risk-weighted assets; the total ratio is the ratio of the sum of tier I and debt, which, in turn, allowed the FHLBs to offer tier 2 capital to risk-weighted assets.

A 72 Federal Reserve Bulletin 0 June 2009 It). apilallransfers to commercial banks from tives, which at year-end accounted for 82 percent of parent bank holding l:ompanie', 199{}-2008 all contracts held at banks. The notional principal amounts for all other types of derivatives contracts BilJions of dollars were little changed or even fell. 70 As dealers, banks often enter into offsetting posi tions, a strategy that significantly boosts the notional 60 value of their derivatives contracts. The fair market 50 value of derivatives contracts held by banks reflects 40 the contracts' replacement cost and is far smaller than 30 the notional principal amount. The fair market value of contracts with a positive value in 2008 was about 20 $7.0 trillion, whereas for contracts with a negative 10 + value, it was roughly $6.9 trillion. o An important way for banks to hedge interest rate I I I I I I I I I I I I I I I I I I I I I risk, including that related to interest-sensitive assets 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 such as mortgages and mortgage-backed securities, is Nm'E: The data are quanerly. through the use of interest rate swaps. Those swaps banks decide to sell the securities, then the remaining are the most common type of derivative used by unrealized losses on the securities currently recorded banks and account for about three-fourths of the in other comprehensive income would be moved to notional value of banks' derivatives contracts, though net income and subtracted from retained earnings, most of the swaps are held for trading and market which would reduce regulatory capital. The industry making purposes rather than for hedging. The no leverage ratio showed a modest decline last yearP tional value of interest rate swaps increased 27 per The dichotomy between the increase in the risk-based cent in 2008, but the increase was only 6 percent after capital ratios and the decrease in the leverage ratio adjusting to remove the effect of the dealer's reorga reflected a substantial accumulation of cash assets nization. Other types of interest rate derivatives con particularly reserve balances-which have a risk tracts employed by banks include futures, forwards, weight of zero. At the BHC level, regulatory capital and options. The notional value of these other interest ratios improved during 2008, supported importantly rate deri vati ves contracts also grew 6 percent (ad by substantial private capital investments in a few justed). companies during the first half of the year and by the One of the fastest growing components of banks' significant CPP investments by the Treasury toward derivatives portfolios in recent years has been credit the end of the year. derivatives, which, prior to last year, had grown an average of 71 percent per year since 2000. Without Derivatives adjusting to remove the impact of the dealer's reorga nization mentioned earlier, the notional principal In 2008, the notional principal amount of derivatives amount of credit derivatives held by banks grew in contracts held by banks rose $35 tri I I ion, or 21 per 2008 but only by 0.2 percent. Subtracting the year cent, to more than $200 trillion (table 2). However, end holdings of the reorganized dealer implies that this surge importantly reflected the reorganization of the notional amount of credit derivatives held by a prominent derivatives dealer, which substantially banks dropped 9 percent over the year. Credit deriva increased the amount of derivatives booked at one of tives include total return swaps and credit options, but its commercial bank subsidiaries. If the effects of the credit default swaps account for 98 percent of the reorganization are removed, the notional amount grew notional value of credit derivatives held by banks. only 3 percent last year. In either case, the growth in Banks are beneficiaries of protection when they buy the notional principal amount of derivatives contracts credit derivatives contracts and providers of protec stemmed almost entirely from interest rate deriva- tion (guarantors) when they sell. Banks are typically net beneficiaries of protection; as of year-end, con 17. The leverage ratio is the ratio of tier I capital to average tracts in which banks were beneficiaries of protection tangible assets. Tangible assets are equal to total average consolidated totaled $8.0 trillion in notional value, and contracts in assets less assets excluded from common equity in the calculation of lier I capital. which they were guarantors totaled $7.8 trillion (fig-

Profits and Balance Sheet Developments at U. S. Commercial Banks in 2008 A 73 2. hange in notional valut! and fair value of derivative', all U. .. hanks. 2003--08 Percenl MEMO Dec. 2008 Hem 2003 2004 2005 2006 2007 2008 (billions of dollars) Total derivatives NOlional amount .. ..... .. ,.,.- 26.54 23.69 15.38 29.75 25.68 2106 201.070 Fair value N Po e s g i a li t v iv e e .... .. , . ... . .. . . . . , . . . .. . . .. . . . 1 . 0 36 0 1 1 3 3 . .7 71 5 - - 6 5 . .7 4 8 6 - -4 4 . . 5 27 0 6 6 S 5 . .7 1 7 8 2 24 50 9 . . 2 27 0 7 6 . ,9 1 0 0 8 0 Interest rate derivatives Notional amount . ..... ...... 27.62 22.07 1192 27.11 20.54 26.98 164.397 Fair value Positive ................ ... -5.95 n.14 -5.52 -14.55 56.19 290.51 5,120 Negative ... . . . . . . . . ... .. -5.07 12.94 -5.15 -15.06 58.19 286.47 4.989 Exchange rate derivalives Notional amount . ....... IS.81 2103 7.69 29.27 36.69 2.03 17.523 Fair value . P N o e s g it a iv ti e v e . . . . . . . . . . . . . . . . .. , . . .'." . .... 3 4 8 1. . 8 8 1 1 1 14 2 . . 8 74 6 - - 3 3 5 7 . . 8 3 4 6 2 2 2 1 . . 8 3 6 9 4 4 3 3. .5 40 9 1 14 6 9 3 . .8 12 0 6 66 4 1 5 Credit derivatives Notional amount . ... 55.98 134.52 148.09 54.93 75.87 .21 15.897 .... Guarantor .. . 6182 139.07 137.87 67.69 73.94 -.12 7.811 Beneficiary . . . . . . . .' . " . . . . . . 5113 130.46 157.53 44.03 77.79 .54 8.086 Fair value Gu P a o ra s n il t i o ve r . .. . . . .. .. . . .. . . . .. . .... . . . . . .. 3 6 78 8. .0 3 9 1 6 74 9 . .9 56 2 8 -5 1 . 4 6 3 2 2 9 0 2 1. .9 4 6 0 - 29 38 5. . 2 79 5 28 41 1 . . 9 9 7 7 1.04 44 8 Negative ................. -68.87 38.37 827.98 -159 1187.41 312.45 1.004 Beneficiary ..... ........ ... 19.85 51.28 83.50 90.26 301.20 260.81 1,126 Positive .. ............. -63.13 2.64 505.51 3.98 1086.95 303.42 1,078 Negative ................ 295.74 66.36 2.79 187.44 -18.95 6.54 48 Oth N e o r t i d o e n r a i l v a a t m i v o e u s n I t .. .. .." 3.77 32.66 29.43 75.17 13.44 -9.31 3.254 Fair value Positive . ........ 3.16 8.55 58.51 18.99 41.22 33.70 213 Negative . .... .... ... ... -5.25 19.73 74.29 24.15 15.66 39.27 206 NOTE: Data are from year-end to year-end and are as of April 16.2009. I. Other derivatives consist of equity and commodity derivatives and other contracts. ure 20). At year-end 2008, credit derivatives ac instruments account for 10 percent of the notional counted for 8 percent of the notional principal value value of the derivatives contracts held by banks. As of all derivatives contracts held by banks. with other derivatives, the pricing and volume of Banks also use derivatives related to foreign ex foreign-exchange-related contracts were affected by change, equities, and commodities. Collectively, those the financial turmoil. Increased market volatility raised the cost of hedging foreign exchange positions, 20. Notional amounts of' credil derivatives for which and counterparty concerns reduced liquidity in some banks were beneficiurie~ or guarantors. 2000-08 foreign exchange markets. The semiannual survey of North American foreign exchange volume conducted Trillions of (jollars by the Foreign Exchange Committee, or FXC, showed 9.0 year-over-year declines in trading volumes for several 8.0 categories of foreign-exchange-related derivatives in 7.0 2008.18 These declines were the first recorded since 6.0 the survey began in 2004. Banks' notional holdings of 5.0 foreign-exchange-related derivatives grew 2 percent 4.0 in 2008, but, after adjusting for the derivatives deal 3.0 er's reorganization, they dropped almost 8 percent. 2.0 Banks' holdings of equity and commodity derivatives 1.0 + o I I I I I I I I 18. The FXC is an indust.ry group and includes representatives of 2000 2001 2002 2003 2004 2005 2006 2007 2008 major financial institutions engaged in foreign exchange trading in the United States. It is sponsored by the Federal Reserve Bank of NOTE: The dala are quanerly. New York and maintains a website at www.newyorkfed.orglFXC.

A7 4 Federal Reserve Bulletin 0 June 2009 fell 13 percent and 2 percent, respectively, in 2008, 21. Distribution or return on a sels al(;ommcrcial banks, and these two categories were materially unaffected by percentage of tOLaI indu try-wide assets, 1985-2008 by the structure change. I~rcell(agc of lola I industry-wide as.~L\j The reorganization of the large derivatives dealer also affected the industry-wide concentration of de rivatives contracts. As reported in previous versions - - 1985-2007 average 50 of this article, the share of industry contracts (in terms • 2008 of notional value) at the 10 largest banks (in terms of 40 assets) had for years been more than 97 percent, a 30 concentration ratio that reflected the role that some of the largest banks playas dealers in the derivatives 20 markets. However, at the end of 2008, that share declined to 84 percent, as the bank created by the 10 reorganization was only the 11th-largest bank. Still, banks' derivatives holdings remained highly concen trated last year: For each individual category of derivatives contracts discussed earlier, the 10 banks with the largest holdings accounted for more than 2007 50 99 percent of the notional principal value of contracts • 2008 ---- 40 held by all banks. 30 TRENDS IN PROFITABILITY 20 Total annual net income of the commercial banking industry declined sharply in 2008; it was down 92 per 10 cent from the 2007 level. The primary drivers of the contraction were sizable provisions for loan losses in response to further deterioration in asset quality, -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 Return on assets (percent) heavy write-downs of securities holdings, goodwill impairment charges, and a marked drop in trading NOTE: Total industry-wide assets are deflated by a gross domestic product price deflator. revenue. Return on equity for the full year fell to less than 1 percent, down from 9.5 percent in 2007. A drop in noninterest income for the year-the Banks' annual return on assets (ROA) also dropped second consecutive annual decline--contributed im considerably, to 0.07 percent last year, its lowest level portantly to lower bank profitability in 2008. Nonin since 1991. The decrease in profitability was most terest income was about 1.8 percent of average total pronounced in the fourth quarter; indeed, commercial assets last year, the lowest share since 1990. Trading banks posted an aggregate loss in that period. activities resulted in an aggregate net loss to banks in Until the second half of 2007, the profitability of 2008 of $2.3 billion, the first annual loss reported in commercial banks had been relatively high and con that business line in at least 25 years. The loss was sistent for some time. The distribution of ROA among driven by a $13.9 billion realized loss from credit commercial banks between 1985 and 2007 is centered exposures in the trading account in 2008, three between 1 and 1.5 percent, with negative returns fourths of which was incurred by the top 10 banks.19 accounting for less than 7 percent of industry-wide In addition, banks took other losses owing to substan assets (figure 21, top panel). The leftward shift in the tial asset markdowns in 2008. Realized losses distribution of ROA in 2008 shows the widespread which affect the income statement directly-reached nature of the deterioration in profitability last year. their highest levels ever in the third quarter, in part Bank profitability in 2008 eroded significantly even because of large third-quarter losses on GSE pre when compared with 2007, when strains on banks and ferred stock held by many, especially smaller, banks. their profitability had already emerged (figure 21, Profits in 2008 were also hit by a dramatic increase bottom panel). The fraction of banks that incurred in loan loss provisions as credit quality worsened annual losses in 2008 doubled from 2007 to about 20 percent, and these institutions accounted for about 19. In this contex.i. credit exposures are defined as cash debt 35 percent of industry assets, the highest share since instruments (such as debt securities) and credit derivatives contracts 1987. (such as credit default swaps).

u.s. Profits and Balance Sheet Developments at Commercial Banks in 2008 A7 5 22. 2:1. Premjum on credit default swaps on subordinated deht at selected banking in~Lilulions. 2001-09 January 2001 = Ill() ----------------------------------D-a'-\is points. 160 140 280 120 240 100 200 80 1.60 60 120 40 80 20 40 I I I I I + o 2001 2002 2003 2004 2005 2006 2007 2008 2009 NOTE: The data are monthly and eXiend Ihrough March 2009. I I I I SOURCE: Standard & Poor's and Dow Jones. 200 1 2002 2003 2004 2005 2006 2007 2008 2009 NOTE: The data are weekly and eXlend through April 15,2009. Median spread of all available quotes. appreciably for all major loan categories. The delin SOURCE: Markit. quency rate for all loans and leases held by banks increased to about 4.6 percent in the fourth quarter. Interest Income and Expense The delinquency rate on residential real estate loans climbed to 6.3 percent, its highest rate in more than In response to the Federal Reserve's easing of mon 15 years, while the delinquency rate on CRE loans etary policy, the rates that banks earned on their assets rose to 5.4 percent. The increase in CRE loan delin and paid on their liabilities declined markedly over quencies primarily reflected soaring delinquencies on the year, generally following the rates on market construction and land development loans. Especially instruments. Banks earned an average of 5.7 percent late in the year, banks also experienced a noticeable on their assets in 2008, down from 6.8 percent in increase in delinquency rates on C&I and consumer 2007, and paid an average of 2.5 percent on their loans, particularly credit card loans. The total charge liabilities, compared with 3.8 percent in 2007. Be off rate, which had started to climb in 2007, rose to cause the aggregate rate paid on banks' liabilities nearly 2 percent of all loans and leases in the fourth dropped slightly more than the aggregate interest quarter, increasing at a faster rate last year than the earned on banks' assets, the industry-wide net interest delinquency rate. The charge-off rate for CRE loans margin edged up to 3.43 percent in 2008, compared increased more than fivefold in the fourth quarter with 3.37 percent in 2007 (figure 24, top panel). This from the year-earlier quarter to just more than 2 per increase was concentrated at larger banks, as small cent, and that for C&I loans more than doubled to and medium-sized banks experienced declines in 1.4 percent. their net interest margins (figure 24, bottom panel). With steep declines in profitability, dividends paid Core deposits are an attractive source of funding in 2008 were about one-half of the amount paid to for banks because they tend to be fairly stable, as well shareholders in 2007. Even so, di vidends exceeded as relatively inexpensive, compared with managed earnings for the year. Investors remained concerned liabilities. The average effective interest rate that about the further erosion in profits driven by deterio banks paid on core deposits dropped from 2.8 percent rating asset quality and continued uncertainties about in 2007 to 1.9 percent in 2008. Taken together, banks banks' exposures to structured finance products. As a lowered the rates paid on the components of core result, the Dow Jones stock price index for banks fell deposits fairly uniformly: Banks paid an average of considerably in 2008, significantly underperforming 3.8 percent on small time deposits, 1.3 percent on the S&P 500 index (figure 22). Reflecting the increase savings deposits (including money market deposit in the perceived riskiness of banks, CDS premiums accounts), and l.2 percent on other checkable depos on banking institutions' subordinated debt moved its, with each rate almost 1 full percentage point less noticeably higher, on net, in 2008 (figure 23). than in 2007. Nonetheless, funds flowed into these

A76 Federal Reserve Bulletin 0 June 2009 24. el interest margin, by ize of bank. 1990-2008 sury bill yields in response to the pronounced flight to quality, suggests that managed liabilities were a rela ------------------------------------- Percent tively more expensive source of funds for banks last All banks year than in 2007. 4.50 The average interest rate earned on banks' assets in 2008 fell more than I percentage point, to 5.7 percent. 4.25 The decline was due mostly to lower rates earned on 4.00 loans and leases, which dropped 1.15 percentage points on average. However, the effective rate of 3.75 return on loans was significantly lower as a result of 3.50 the deterioration in asset quality. Net of loss provi sions, the rate earned on loans and leases was a bit 3.25 Jess than 4 percent, a historical low. The average I I I 1 I I 1 I interest rate earned on loans to both businesses and households declined last year. After holding steady in 2007, the average interest rate earned on business 5.00 loans tumbled over the course of 2008. The Survey of Terms of Business Lending, which measures the 4.50 interest rate on new C&I loan originations at a broad sample of banks, indicates that interest rates on new 4.00 C&I loans fell 3 percentage points over the year (between the November 2007 and November 2008 3.50 surveys).22 Despite this decline, spreads on C&I loans widened over the year as banks adjusted their pricing 3.00 in response to the deterioration in the economic I I 1 1 I I I I I I I I I I I I I I 1 I I I outlook and other factors. The weighted-average 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 spread of C&I loan rates over Eurodollar and swap NOTE: The data are annual. Net interest margin is net interest income yields of comparable maturity increased about 30 ba divided by average interest-earning assets. For the definition of bank size, see sis points in 2008, a development consistent with the the generat note on the first page of the main tex!. indication by large fractions of SLOOS respondents deposit accounts, as investors, seeking the safety and that they had increased the spread on C&I loans to liquidity of FDIC-guaranteed accounts, withdrew both large and middle-market firms and to small firms investments from money market mutual funds, longer over the course of 2008 (figure 25). term mutual funds, equity markets, and hedge funds. The average interest rate earned on consumer loans In addition, a small number of banks increased their decreased to 9.5 percent in 2008 from 10.2 percent in core deposit rates to attract funds, evidently to obtain 2007, while the average effective interest rate on real stable funding during the crisis period. estate loans decreased about 1 percentage point dur The rates paid on banks' managed liabilities, which ing 2008, to 6.1 percent. Partly as a result of the generally exceed those on other funding instruments, dislocations in both the asset-backed and mortgage dropped 1.7 percentage points in 2008 to 3.1 percent backed securities markets, the spreads on credit cards, on average.20 However, although the rate fell substan auto loans, and residential mortgages widened in tially, its spread over market yields on short-term 2008. The widening of spreads curbed the decline in Treasury securities was considerably higher at the end household borrowing rates relative to the decline in of 2008 than in 2007.2J That relatively high spread, market interest rates. The rate earned on real estate which reflected the especially sharp decline in Trea- loans was also supported by the longer average maturity of such loans and the relatively high percent age of these loans with fixed interest rates. Moreover, 20. Managed liabilities consist of large time deposits in domestic offices, deposits booked in foreign offices, subordinated notes and because of reduced credit availability and increasing debentures, federal funds purchased and securities sold under repur chase agreements, Federal Home Loan Bank advances, and other borrowed money. Managed liabilities are generally funds over which Treasury bills was 2.4 percentage points in the fourth quarter of 2008, the bank has significant discretion to increase or decrease in response while that spread was just 1.3 percentage points in the year-earlier to changing funding needs created by deposit outflows or new loan quarter. demand. 22. The effective (compounded) annual interest rates are calculated 21. For example, the difference between the average rate paid on from the stated rates and other terms of the loans and weighted by the banks' managed liabilities and the average yield on three-month loan amounts.

u.s. Profits and Balance Sheet Developments at Commercial Banks in 2008 A 77 25. Net pcrcenlage or selected domestic bank reporting 26. Noninlercsl inc me as a proportion of lOlai asseLS, increa ed spreads of rates over cost of funds. by type 1990-2008 of loan, 1990--2008 Percent Percenl 100 3.0 80 60 2.5 40 2.0 20 + o 1.5 20 40 1.0 60 80 I I I 1 I I I I I I I , I I 1 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 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 1990 1992 1994 L996 1998 2000 2002 2004 2006 2008 NOTE: The data are quanerly. NOTE: See figure 7, general note and source note. for advertising and marketing, data processing, and loan-to-value ratios, along with elevated interest rates consulting and advising. on nonconforming mortgages, refinancing was not Noninterest income dropped about 5 percent over viable for many households. the year, primarily as a result of a steep decline in trading revenue (figure 28, top panel). Banks reported Noninterest Income and Expense nearly $14 billion in losses on the trading of credit exposures last year, which likely reflected substantial Total noninterest income declined for the second write-downs of some mortgage-related structured consecuti ve year, to its lowest level since J 990 (fig products as well as losses on collateralized debt ure 26). Total noninterest expense rose in the fourth obligations, credit derivatives, and syndicated lever quarter of 2008 because of the sizable goodwill aged loans. Moreover, an unprecedented number of impairment losses that some large banks recorded in credit events occurred in the CDS market in the that quarter (figure 27, top panel).23 Aside from the second half of 2008, including events involving Leh goodwill impairment charges, however, noninterest man Brothers and the GSES.24 These events resulted expense was flat at 2.9 percent of assets at year-end in the termination of a large number of credit deriva 2008. The cost of premises and fixed assets, which tives contracts, and guarantors suffered large losses account for 12 percent of noninterest expense, fell on many of them. Aggregate losses also resulted from modestly relative to average total assets in 2008, as equity security and index trading. Revenue from did salaries and benefits (figure 27, bottom panel). interest-rate-related trading was down from 2007 but Other indications that commercial banks were able to remained positive. Revenue from commodity-related make progress in moderating personnel costs were a trading and foreign-exchange-related trading in slight decline in the number of full-time-equivalent creased somewhat in 2008, perhaps, in part, because employees in 2008 and a growth rate for salaries and the increased volatility in both of these markets compensation per employee that was the second boosted trading volume, allowing banks to earn more lowest in at least the past 25 years. Finally, other fee income. Deposit fees, which accounted for 20 per noninterest expense, which accounts for about 38 per cent of the total noninterest income of large banks and cent of noninterest expense, moved down slightly last 26 percent of that of small banks, were relatively year. This category includes a wide range of items that are not reported separately, including expenses 24. Twelve credit events occurred in 2008. Under definitions established by the International Swaps and Derivatives Association, 23. Banks incur goodwill impairment losses when the market value Inc., a credit event is a bankruptcy, obligation acceleration. obligation of their business segments (or reporting units) drops below the fair default, failure to pay, repudiation/moratorium, or restructuring. The value recorded by the company. Companies must test for impairment senlement of outstanding CDS contracts proceeded smoothly. For a of goodwill annually or when events occur that would likely reduce review of the management of the CDS credit events, see Federal the fair value of a reporting unit (business segment) below the carrying Reserve Bank of New York (2009), "Senior Supervisors Group Issues value. Assets are wriuen down when considered overvalued compared Report on Management of Recent Credit Ddault Swap Credit with the market value-that is, the amount that a potential (or actual) Events," press rdease, March 9, www.newyorkfed.org/newsevents/ acquirer would be willing to pay (or had paid) for the assets. newslbanking/2009/ma090309.html.

A7 8 Federal Reserve Bulletin 0 June 2009 27, Nonimere t cxpcn c and goodwill impairmenllos cs, 28. SelecteJ components of nonintcresl income unci of and selected components or noninlereS! expense. as n other noninterc t income as a proportion or ltlwl proportion of total assets. 2002-D8 assets,2002-D8 Percent Percent Noninterest expense and goodwill impairment losses Selected components of noninterest income 2,0 4 NoniolereSI expense less goodwill impainnent losses 1.6 Other 1.2 2 ,8 Deposil fees .4 .-l -~/\ + V, _ o Goodwill imp.;nnen! losses + o _ Fiduciary income .4 Tmding income I I I I Selected components of noninterest expense Selected componel1ts of other noninterest income 2,0 L2 Salaries and benefils 1.5 "Olher" .8 1.0 Nel servicing and secnrilization income .4 Premises and fixed asselS ~nl banking income .5 + o Amortization and goodwill impairment losses + o Income from insurance aClivilies .4 I I I I Nel gains (losses) on lhe sale of assets 2002 2003 2004 2005 2006 2007 2008 I I I I 2002 2003 2004 2005 2006 2007 2008 NOT~: The dala are quarterly, For Ihe definilion of goodwill impairment losses, see lexI nOle 23; for the definilion of other noninleresl expense, see NOTE: The data are quarterly. For definilions of other noninteresl income Ihe main lext. and ils "olher" component see Ihe main lext. Nel gains (losses) on the sale of asselS consisl of Ihe sale of loans and leases, olher real eSlale owned. and olher asselS (excluding securilies), stable over the year. Likewise, income from fiduciary acti vities held up fairly well amid the financial crisis. Loan Peiforman e and Los!} Provisioning Other noninterest income, which accounts for about 65 percent of total noninterest income, moved down Credit quality declined across all major loan catego last year. Other noninterest income includes net ser ries in 2008, and the overall delinquency rate at vicing and securitization income, investment banking commercial banks (consisting of loans whose pay income, income from insurance activities, net gains ments are 30 days or more past due) rose to 4.6 per (losses) on the sale of assets, and an "other" category cent at year-end, its highest level since late 1992. The (figure 28, bottom panel). The largest components of aggregate charge-off rate also moved up, to 1.9 per the "other" category in 2008 were bank card and cent of total loans, and the charge-off rate at the top credit card interchange fees, earnings on the cash 100 banks exceeded 2 percent. The most significant surrender value of bank-owned life insurance pro deterioration occurred in banks' residential and com grams, and fees from automated teller machines.25 mercial real estate loan portfolios, where delinquen cies and charge-offs rose to their highest levels in more than a decade (figure 29). Delinquencies and 25, Earnings on the cash surrender value of bank-owned life insurance (BOll) programs are available to a bank when it cashes in charge-offs on consumer loans also moved higher (or "surrenders") the insurance policy or receives the proceeds of a during 2008. The credit quality of C&I loans, which death benefit upon the death of an insured employee, BOll generally appeared fairly robust early in 2008, deteriorated later may be used only in an amount appropriate to fund a bank's exposure arising from employee compensation or benefits programs and is not to be used to fund other normal operating expenses or for speculation, More information is available in Board of Governors of the Federal ment of Life Insurance," Supervision and Regulation Letter SR 04-I 9 Reserve System, Division of Banking Supervision and Regulation (December 7), www.federalreserve,gov/boarddocs/srlellersI2004/ (2004), "Interagency Statement on the Purchase and Risk Manage- sr0419.htm,

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008 A7 9 29. Delinquency and charge-off rates for loans [0 30. Interest-payment ralio for nonfinancial corporations, businesses, by type of loan, 1990-2008 1990-2008 Percent Pcr(!l!nt Delinquencies 15 20 18 12 Commercial reul estate 16 9 14 6 12 3 10 + o 8 I I I I I I I I I I I I 1 I I I I I I I I I I I I I I I I I I I I I Imlmlml~lm2000~22004 2006~8 Nel charge-offs NOTE: The data are quanerly. The interest-payment ratio is calculated as 3.0 interesl payments as a percentage of cash flow. SOURCe: National income and product accounts and Federal Reserve 2.5 Board. 2.0 1.5 Charge-off rates for C&I loans more than doubled year over year for banks of all sizes. Both charge-offs 1.0 and delinquencies climbed in the latter part of 2008 as .5 nearly all major sectors of the economy registered + o steep declines in activity and the profitability of I I I I I I I I I I I I I I I I I I I 1 I I nonfinancial firms plummeted. Reflecting these ad 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 verse developments, the interest-payment ratio for NOTE: The data are quanerly and seasonally adjusted; the dala for nonfinancial firms, calculated as interest payments as commercial real eSlate begin in 1991. Delinquent loans are loans Ihal are nOI a percentage of cash flow, moved up a bit in the accruing interest and those that are accruing interest but are more than 30 days past due. The delinquency rate is the end-of-period level of delinquent second half of the year. Although this ratio remained loans divided by the end-of-period level of outstanding loans. The net in the bottom part of its historical range, the recent charge-off rate is Ihe annualized amount of charge-offs over the period, nel of recoveries, divided by the average level of outstanding loans over the period. increase suggests that credit strains are likely to For the computation of these rates, commercial re.11 estate loans exclude loans intensify over coming quarters (figure 30). not secured by real estate (see table I, note 2). C&I is commercial and industrial. Commercial Real tate Loans in the year. The significant rise in nonperforming The rate of delinquency on CRE loans doubled in loans and the potential for even greater losses given each of the past two years, mainly because of deterio the generally weaker economic outlook led banks to ration in the credit quality of construction and land substantially boost their loss provisions in 2008. development loans, particularly those linked to resi Nevertheless, some measures of reserve adequacy dential projects (figure 31). Reflecting the ongoing remained very low by historical standards. problems in the housing sector, the delinquency rate C&I Loans on construction and land development loans that financed residential development jumped sixfold, to The delinquency rate on C&I loans, which had been 17.3 percent, from the beginning of 2007 to year-end near the lower end of its historical range over the past 2008, while the charge-off rate rose from near zero to several years, rose in 2008 to 2.6 percent by year-end. 7.4 percent over the same time period. Those in The increase was concentrated among the larger creases occurred despite a tightening of credit stan banks, where delinquencies jumped from about dards on CRE loans that began in the second half of 1.2 percent at the end of 2007 to about 2.5 percent at 2006. Moreover, the share of construction and land the end of 2008. The deterioration at smaller banks development loans in total CRE loans declined from was also noticeable, with the delinquency rate increas 34 percent in 2007 to 32 percent by the end of 2008. ing about 70 basis points, to about 2.8 percent. In part because of an increase in vacancy rates, the

A80 Federal Reserve Bulletin D June 2009 31. Delinquency and charge-orr rates for construction ~_. Indicawrs or household financial 'tre. s, 1991-2008 and Innd development loans, by type ()f loan, 2007-08 ----------------------------------Percent Percent Financial obligations ratio _ Delinquencies IS 20.0 o Resident iaJ 16 Other 19.0 14 12 18.0 10 S 17.0 6 16.0 4 2 I I Per (OO,oon persons Net charge-offs _ Household bankruptcy filings - 1.000 - 8.0 900 - 7.0 800 - 6.0 700 - 5.0 600 500 - 4.0 400 - 3.0 300 200 100 I I I I I I I I I 1994 1996 1998 2000 2002 2004 2006 200S NOT": The data are quarterly. The financial obligations ratio is an estimate Non,: For definitions of delinquencies and net charge-offs, see the nOte for of debt payments and recurring obligations as a percentage of disposable figure 29. personal income; debt payments and recurring obligations consist of required payments on outstanding mongage debt, consumer debt, auto leases, rent, homeowner's insurance. and propeny taxes. The series shown for bankruptcy filings begins in 1995:QI and is seasonally adjusted. delinquency rate on multifamily properties rose from SOURCE: For financial obligations ratio. Federal Reserve Board 1.9 percent at the end of 2007 to 3.2 percent at the end (www.federalreserve.gov/releases/housedebl); for bankruptcy filings, slaff calculations based on data from Lundquist Consulting. of last year. Amid a sharp deterioration in the eco nomic fundamentals for commercial buildings, the delinquency rates on loans secured by existing non the credit quality of credit card and other consumer residential structures significantly increased in 2008 loans declined appreciably. Although household bank from 1.5 percent to 2.5 percent. ruptcy filings remained low relative to the levels seen before the 2005 changes in bankruptcy laws, the Loans LO Households bankruptcy rate moved up in 2008 (figure 32, bottom panel). Financial conditions in the household sector deterio rated further, on balance, in 2008, reflecting signifi Residential Real state Loan cant job losses, lower equity and housing wealth, and depressed consumer sentiment. Against this back The credit quality of residential mortgages continued drop, consumer credit growth weakened considerably to worsen sharply in 2008, with the subprime mort over the year. Partly as a result of lower interest rates gage deterioration that began in 2007 spreading to on consumer loans, the household financial obliga stronger credits. Default rates on alt-A mortgages rose tions ratio, an estimate of debt payments and recur as house prices dropped further. The weakening in the ring obligations as a percentage of disposable income, economy affected the credit quality of the full range edged down to 19 percent from its recent high of of mortgage products, and, throughout 2008, credit 19.4 percent (figure 32, top panel). In such adverse rating agencies downgraded residential mortgage economic circumstances, delinquencies and foreclo backed securities backed by prime, alt-A, and sures on residential mortgages climbed further, and subprime mortgages. In addition, mortgage securitiza-

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008 A81 :n. Rate of serious delinquency on residential mortgages, 34. D linquency and charge-off rate. [or residential real by lype of mortgage and type of interest rate. 2000-09 e tale loans at commercial banks, hy lype of I n, 1991-2008 -----------------------------------Percent Pcrc~m 40 Delinquencies 35 8 30 - 7 Subprime. variable rate 25 6 20 5 Subprime. lixed mte 15 4 10 _/'~ --~~ 3 ,-~o~ Prime. variable rate - 5 ======- + 2 o Prime. fixed mte I I I I I I I I I I I I - I 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 I I I 1 1 I I NOTE: The data are monthly and extend through January 2009. Seriously delinquent loans are 90 days or more past due or in foreclosure. The prime Net charge-offs mongage data are representative of all residential mongages. not just those 2.0 held by commercial banks. The subprime mongage data cover only securitized loans. 1.6 SOURCE: For prime mongages. McDash Analylics; for subprime mongages. LoanPerformance. a division of First American CoreLogic. tions other than those backed by the housing-related .8 GSEs and Ginnie Mae essentially ceased last year. .4 Regarding the supply of mortgage credit, large frac + tions of commercial banks reported in the SLOOS o that they had tightened credit standards on a broad I I I 1 I I I I I I 1 I I I I I I range of residential mortgage products, a move that 1996 1998 2000 2002 2004 2006 2008 further impaired the ability of borrowers to refinance NOTE: The data are quanerly and seasonally adjusted. For definitions of existing mortgages. Reflecti ng these developments, delinquencies and net charge-offs. see the nOle for figure 29. national data on variable-rate mortgage loans show that delinquency rates on such loans increased more delinquency rates on those products than on first-hen than those on fixed-rate loans, especially for subprime mortgages. However, in the event of a default, a bank borrowers (figure 33). All told, the delinquency rate that holds a loan secured by a junior lien on a one- to on variable-rate subprime mortgages jumped to more four-family residential property is repaid only after than 35 percent by the end of 2008. the first-lien mortgage has been fully repaid. In the At commercial banks, delinquencies on residential case of foreclosure, the holder of a junior-lien mort real estate loans reached 6.3 percent at the end of gage may not be repaid at all, especially if the 2008, their highest rate on record (figure 34). Net property has lost a significant portion of its value. charge-offs on these loans increased to 1.6 percent at Indeed, while the charge-off rates on all types of an annual rate in the fourth quarter of 2008, also a residential mortgages increased considerably last record high. The deterioration in the credit quality of year, the charge-off rate on closed-end junior liens residential mortgages on banks' books was wide (3.9 percent) was about four times higher than that on spread last year; delinquency and charge-off rates closed-end first liens (1.1 percent). However, although rose across all types of mortgage products and all the charge-off rate was much higher for closed-end bank sizes. junior liens, the volume of such loans was just Delinquency rates on closed-end one- to four 15 percent of the total aggregate volume of first liens family mortgage loans held by banks rose to 7.9 per at the end of 2008. Charge-off rates on revolving cent on first-lien mortgages and 5.1 percent on junior home equity lines of credit more than doubled last lien mortgages in the fourth quarter. Delinquency year, increasing from 0.7 percent at year-end 2007 to rates on revolving home equity lines of credit also 1.9 percent at year-end 2008. rose substantially, to 3.2 percent. In general, junior The credit quality of residential mortgages wors liens and home equity lines of credit are offered to ened the most at the 100 largest banks in 2008. For higher-quality borrowers, as suggested by the lower closed-end mortgages, the delinquency rate increased

A82 Federal Reserve Bulletin 0 June 2009 about 4.8 percentage points at the largest banks, to of 2008.26 The delinquency rate on other (non-credit 8.5 percent, but it also moved up more than 1 percent card) consumer loans also rose somewhat, to 3.3 per age point at smaller banks, to about 3.7 percent. Last cent at year-end. Charge-off rates on those loans year's rise in charge-off rates was also somewhat climbed from about 1.7 percent in 2007 to 2.7 percent greater at larger banks than at smaller banks. in 2008, a considerable increase that brought the rate to its highest \eve I in at least the past 25 years. Con, umer Loan Se lIfitiz d Loans The weakening in the credit quality of consumer The credit quality of loans that were sold and securi loans no doubt reflected the slower pace of economic tized weakened in 2008, though not, in most cases, to growth, the rise in the unemployment rate, and slower the same extent as loans that were held on banks' growth in households' income. Moreover, financial balance sheetsY The majority of loans securitized by pressures on households were intensified by the banks in this manner are residential mortgages on inability of some borrowers to lower their interest one- to four-family homes (63 percent). At year-end payments and to obtain cash by refinancing mort 2008, the volume of securitized one- to four-family gages. The delinquency rate on credit card loans held residential real estate loans stood at about one-third of by banks rose moderately over most of 2008, but it the volume of such loans held on banks' balance jumped noticeably in the fourth quarter to 5.6 percent sheets. The delinquency rate on securitized one- to (figure 35). The charge-off rate on such loans in four-family residential mortgages was about 8 per creased more steadily over the year, rising from cent in the fourth quarter of 2008, up significantly 4.1 percent at the end of 2007 to 6.3 percent at the end from 2007. Charge-off rates on these mortgages increased modestly but stayed well below the rates on residential loans on banks' books. 15. Delinquency <md charge-off rates for loan' The delinquency rate on securitized credit card 10 hOll 'cholds, by type of loan. t 990-2008 loans-which make up roughly one-fourth of the loans securitized by banks and are about equal in Percclll dollar value to the credit card loans that banks hold on Delinquencies their balance sheets-moved up, from about 4 percent - 6 in 2007 to 5.3 percent in 2008. Charge-off rates on those loans increased significantly last year, from 4.8 percent at year-end 2007 to 7.2 percent at year 4 end 2008. Other consumer Delinquency rates on the small amount of bank - 3 securitized auto loans, which make up less than 2 1 percent of total securitized loans, remained rela tively stable in 2008 after a modest run-up in 2007, - I whereas charge-off rates doubled. Delinquency and I I I I I I II I I I 1 charge-off rates on the small amount of securitized C&I loans (also less than I percent of total securitized _ Net charge-offs 8 loans) rose last year. - 7 Outstanding securitizations of other types of loans and leases, a category that includes CRE loans and 6 accounts for about 11 percent of all loans securitized 5 4 26. For a discussion of the change in bankruptcy law that was 3 implemented in 2005 and its effect on credit card loans, see the box "The New Bankruptcy Law and Its Effect on Credit Card Loans," in Other consumer Elizabeth Klee and Gretchen Weinbach (2006), "Profits and Balance Sheet Developments at U.S. Commercial Banks in 2005," Federal + o Reserve Bulletin, vol. 92 (June), p. A89. I I I I I I I I I I I I I I I I I I I I I I 27. Loans that banks sold and securitized with servicing rights 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 retained or with recourse or other seller-provided enhancements are hereafter referred to, for simplicity, as "securitized" loans. The NOTE: The data are quarterly and seasonally adjusted; data for de analysis excludes loans that were sold to, and securitized by, a third linquencies begin in 199 I. For definitions of delinquencies and net party (for example, the Federal National Mortgage Association or the charge-offs, see the note for figure 29. Federal Home Loan Mortgage Corporation).

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008 A83 by banks, amounted to about $200 billion. These 37. Reserve. for I an and Jease 10 se~. 1990-2008 securitizations equal roughly 45 percent of the total Percenl volume of these types of loans held on banks' books. ----------------------------- The delinquency rate on such securitizations rose As a percentage of total loans and leases 3.0 modestly over the year to about 0.8 percent, though 2.5 the charge-off rate was about zero. 2.0 1.5 Lo s Provisi ning 1.0 The continued erosion of credit quality spurred banks I I I I I I I , I 1 I I I to step up appreciably the annual rate of loan loss provisioning in 2008 to almost 1.5 percent of total As a percentage of net charge-offs 500 assets. As a proportion of total assets, loss provision 400 ing in 2008 surpassed the highs reached during the 300 late 1980s and early 1990s (figure 36). Loss provi sioning consumed more than 30 percent of total 200 revenue in 2008. 100 Provisioning increased considerably at banks of all I I I I I I I 1 I 1 1 I I I I I I sizes. At the top 100 banks, provisioning reached an As a percentage of delinquent loans annual rate of 1.9 percent of average assets in the 100 fourth quarter, compared with 0.9 percent at the end 80 of 2007. Provisioning at banks outside the top 100 rose to 1.3 percent of assets at the end of 2008, more 60 than double the rate at the end of 2007. 40 For the second consecutive year, the rate of loss provisioning significantly outpaced that of charge I I I I I I I I I I I I I I I 1 I I I I 1 I 1990 1992 1994 19% 1998 2000 2002 2004 2006 2008 offs, implying an increase in reserves as a percentage NOTE: The data are as of year·end. For definitions of delinquencies and net of total loans and leases (figure 37, top panel). charge-offs. see the note for figure 29. However, net charge-offs rose appreciably as well, leading to declines in some measures of reserve assets, reached nearly 11 percent in the fourth quarter, adequacy. At the average charge-off rate for all of the highest level in the past two decades. Yet reserves 2008 and without additional loss provisions. current are sufficient to cover only about 47 percent of reserves are sufficient to cover only about 1.6 years of delinquent loans (figure 37, bottom panel). charge-offs, a record low level (figure 37, middle panel). The ratio of charge-offs to delinquent loans. INTERNATlONAL OPERATIONS OF U.S. an estimate of recent loss rates on nonperforming COMMERCIAL BANK 36. Provisions for loan and lea e 10 se as a The share of U.S. bank assets booked in foreign proportion of total assets, 1985-2008 offices declined from 14 percent at year-end 2007 to about 12 percent at year-end 2008. Assets booked in ----------------------------------PCft:Cnl foreign offices remained highly concentrated among the largest banks. On the whole, commercial banks 1.5 lost money on their international operations in 2008. Net income abroad was significantly adversely af fected by restructuring acti vity at one large bank, 1.0 which consolidated some of its foreign operations into its domestic operations. Other reported losses at .5 banks' foreign offices were attributable to securities write-downs and higher loan loss provisions. + o Loan loss provisions in banks' foreign offices increased about 67 percent from the level of a year I I I I I I I I I I I I I I I II I I I I I I I I I earlier, a substantially smaller increase than was 1988 1992 1996 2000 2004 2008 posted at domestic offices. While interest income NOTE: The data are annual. declined 20 percent in 2008, interest expense dropped

A84 Federal Reserve Bulletin 0 June 2009 :1. Exposure of .S. banks to selected economics at year-end relative 10 lier I capital. 1997-200 Percent I I Year Asia I Latin America and the Caribbean Eastern I G.- IO and I dNeovne-lGo -IOd Towl All I China I India I Korea I All I Mexico I Brazil I Europe Switzerland' countries, 1997 .... ......... n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a . n.a. 1 19 9 9 9 8 9 . . ... .. . . . , . . . .. . . . . . . . , . . - .. 2 26 8 . . 1 2 1 . . 8 0 2 2 . . 4 2 6 7 . . 6 1 4 3 2 9 . . 9 0 9 9 . . 5 9 1 11 0. . 5 3 3 2. . 9 5 1 1 8 6 2 4 . . 5 2 3 3 2 7 . . 5 1 2 2 9 6 4 4. . 6 3 2000 . 24.0 .8 2.6 6.4 37.9 9.1 11.2 4.4 174.6 32.8 273.7 2001 . .............. 22.4 .9 2.5 5.8 54.1 26.0 13.0 4.3 164.8 28.4 274.0 2 2 0 0 0 0 3 2 . . ... . .. . . . . . . . . . . .. . . . ... 2 2 2 1. .8 9 1 . . 9 3 3 2 . . 9 7 5 5 . . 5 8 3 3 2 8 . . 8 9 2 '1 0 8 . . 8 0 8 6. .4 8 5 5 . . 4 5 1 1 7 8 2 2 . . 1 0 3 2 5 9. . 8 0 2 27 5 8 9 . . 1 8 2004 .. .............. 32.2 1.4 4.2 15.0 31.8 16.6 6.5 6.1 198.2 37.2 305.4 2005 ........... 30.7 2.4 4.9 12.9 31.8 17.4 6.9 5.9 165.2 31.6 265.3 2006 .. .. ..... 34.7 4.1 6.1 13.6 .108 16.8 5.7 6.5 174.7 38.5 285.1 2007 ......... . .. ..... 44.6 4.5 9.8 14.4 35.6 17.2 8.2 9.0 219.3 48.3 356.6 2008 .. . . . . . , . . . . . . 30.8 3.4 6.1 10.7 25.5 12.9 5.0 5.4 166.3 35.3 263.3 MEMO Total exposure (billions of dollars) 1997 .. ............ 87.1 3.5 5.1 25.3 101.7 18.8 33.4 11.9 354.9 88.7 644,3 1998 ............... 69.1 2.3 5.4 17.3 105.0 24.1 27.6 8.5 446.3 90.8 719.6 2 1 0 9 0 9 0 9 . . .. . . . . . .. . . . . . , . . . . .. . . .. .. . 6 6 7 8 . . 9 0 2 2 . . 0 2 6 7. . 5 2 1 1 8 7. . 2 1 1 1 0 0 7 1. .3 6 2 25 4. .7 8 2 3 7 1 . . 3 6 1 7 2 . . 4 3 4 4 2 9 7 4 . .6 8 9 8 3 4 . . 0 7 6 77 8 5 9 . . 3 5 2001 ......... ..- .. .. 67.2 2.7 7.7 17.5 162.4 78.0 39.0 12.9 495.1 85.4 823.0 2002 .......... ., 69.5 2.7 8.7 18,4 123.5 66.2 26.6 17.5 546.5 94.7 824.7 2003 ............... 79.9 4.4 13.6 19.2 115.2 63.0 23.7 19.1 638.5 122.7 975.4 2004 ..... ....... .. 125.8 5.3 16.3 58.7 124.4 65.2 25.5 23.8 775.7 145.5 1.195.4 2005 . .. ......... 134.8 10.4 21.6 567 1.19.7 76.1 30.4 25.7 724.8 1386 1,163.5 2006 . ............... 190.5 22.7 33.6 74.8 168.9 92.5 31.5 35.5 959.1 211.2 1,565.2 2007 .. .......... 249.8 25.5 54.9 80.8 199.3 96.1 46.2 50.2 1.229.0 270.5 1.998_8 2008 ................ 217.4 24.3 43.1 75.3 179.7 90.7 35.6 37.9 1.172.9 248.6 1.856.5 NOTE: Exposures consist of lending and derivatives exposures for crOss 2. The non-G-I 0 developed countries include Australia, Austria. Denmark, border and local-office operations. Respondents may file information on one Finland, Greece. Iceland, Israel, New Zealand, Norway. Ponugal. South Africa, bank or on the bank holding company as a whole. For the definition of tier I Spai n, and Turkey. capiwl, see text note 16. n.a. Not available. The 2008 data cover 68 banks with a towl of $705.1 billion in tier I capilal. SOURCE: Federal Financial Institutions Examination Council, Statistical Re I. The G-IO (Group of Ten) countries are Belgium, Canada, France. Ger lease E.16, "Country Exposure Lending Survey" (www.fliec.govIE16.htm). many, Iwly, Japan. Luxembourg, the Netherlands, Sweden, and the United Kingdom. more than twice that amount. The resulting rise in net banks' exposures to some emerging market econo interest income boosted net income at foreign offices. mies declined the most. The regions of Eastern Trading revenue, which accounts for about one-third Europe, Asia, and Latin America showed declines in of noninterest income, rose about 85 percent in 2008, dollar exposures of 25 percent, 13 percent, and 10 per but other noninterest income and income from invest cent, respectively (table 3). ment banking activities, which account for most of Overall, the decline in U.S. banks' exposures to the rest of noninterest income, were both down foreign economies was likely attributable to the sharp moderately at foreign offices. decline in foreign economic activity and the attendant Banks' total exposures to foreign economies reduction in credit demand. In addition, exposures through lending and derivatives activities dropped were likely reduced as banks pulled back from lend about 7 percent in 2008 after two years of sizable ing to foreign accounts in an effort to boost capital growth.28 While banks reduced their exposures to ratios and limit their credit and market risk. Indeed, both advanced foreign economies and emerging mar total exposures from lending to foreign residents ket economies, the most pronounced declines in U.S. (excluding derivatives activity) fell about 17 percent banks' cross-border lending and derivatives in 2008.30 activity-in dollar terms-occurred in the advanced foreign economies.29 In relative terms, however, U.S. DEVELOPMENTS IN EARLY 2009 U.S. economic activity continued to contract in the 28. These exposures declined more significantly relative to tier I first quarter of 2009.31 The deterioration in labor capital because the reponing institutions' tier I capital increased from $560 billion in 2007 to $705 billion in 2008. 29. The advanced foreign economies are those of Australia, Aus tria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, 30. Exposures to foreign residents arising from derivatives activi Iceland, Ireland, Israel, Italy, Japan, Luxembourg, the Netherlands, ties with foreign counterparties actually doubled in 2008, most likely New Zealand, Norway, Ponugal, South Africa, Spain, Sweden, Swil because of greater volatility in financial markets, especially late in !.he zerland, Turkey, the United Kingdom, and "other non-G-IO developed year. countries ... 31. This section reflects information available through mid-April.

u.s. Profits and Balance Sheet Developments at Commercial Banks in 2008 A8S market conditions accelerated in the first few months that the Federal Reserve would increase its long-term of the year, with steep job losses across virtually all asset purchases, indicating that it would buy an sectors. In the first quarter, consumer spending showed additional $750 billion of MBS (up to a total of some tentative signs of stabilization around the low $1.25 trillion) and an additional $100 billion of level at which it ended 2008. Available data suggest agency debt (up to a total of $200 billion) this year to that the outstanding amount of consumer credit was provide greater support to mortgage and housing flat over the first two months of the year. Although markets. The Committee also announced that it would housing market activity rebounded a little in February purchase up to $300 billion in longer-term Treasury and March, for the quarter as a whole, single-family securities over the period ending September 2009 to starts declined to a post-World War II low of about help improve conditions in private credit markets. 350,000 units at an annual rate. Delinquencies on Long-term Treasury yields, which had risen earlier in residential real estate loans rose further in the first the year as market participants anticipated a greater part of the year, but foreclosures on residential prop supply of Treasury securities resulting from federal erties were about flat, in part because of the tempo budget deficits, declined on the FOMC's announce rary moratoriums by the housing-related GSEs and ment, and fixed-rate mortgage rates for high-quality major banks on such foreclosures. Nonresidential borrowers dropped below 5 percent. Mortgage rates construction also weakened further in the first quarter. declined to their lowest levels since at least the 1970s, The April 2009 SLOOS indicated that banks contin when these data were first collected. ued to tighten standards and terms on all major types In January 2009, the U.S. government, as part of its of loans to businesses and households during the first commitment to support financial market stability, quarter and that demand continued to weaken for entered into an agreement with Bank of America. In nearly all types of loans. exchange for preferred stock, the government pro Against this backdrop, financial markets and insti vided Bank of America with protection against the tutions generally remained under pressure through the possibility of unusually large losses on certain pools first part of 2009. Early in the year, investors contin of on-balance-sheet securities backed by residential ued to be very reluctant to bear risk, and broad equity and commercial real estate loans and by other assets. price indexes declined steeply in January and Febru Moreover, the government invested an additional ary while corporate bond spreads remained very high. $20 billion from the TARP in the bank. However, sentiment in financial markets appears to In February, the Treasury, FDIC, Office of the have improved noticeably since then, partly reflecting Comptroller of the Currency, Office of Thrift Super positive investor guidance on first-quarter earnings at vision, and Federal Reserve initiated a Capital Assis some major banks as well as investors' positive tance Program to ensure appropriate capitalization of reception of the actions announced by the FOMC the banks. Under the program, the bank supervisory after its March meeting. Equity prices rose, on bal agencies assessed the capital needs of 19 major U.S. ance, in March while high-yield corporate bond banking institutions with year-end 2008 assets exceed spreads narrowed. Nonetheless, for the first quarter as ing $100 billion under a baseline and a more challeng a whole, bank stock prices declined considerably, on ing economic scenario. Should that evaluation indi net, with the S&P bank stock index down about cate that an additional capital buffer is warranted, an 40 percent. Premiums on credit default swaps for institution will have an opportunity to turn first to commercial banking firms also rose in the first quarter private markets to raise capital. If the firm is unable to of 2009, on net, and the largest institutions experi raise sufficient private capital, the temporary capital enced the greatest widening. buffer will be made available from the government. Reflecting the ongoing financial strains and the The Public-Pri vate Investment Program, introduced deterioration in the economic outlook, the Federal by the Treasury in March, with the participation of the Reserve and the Treasury took a number of further FDIC and the Federal Reserve, will establish public actions during the first quarter to provide additional private investment funds to purchase legacy assets. support to financial markets and institutions and Capital for the funds will be provided jointly by contribute to a resumption of economic growth. The private investors and the Treasury. In addition, the Federal Reserve began purchasing agency MBS dur government will provide the funds with leverage ing January.J2 In addition, at the conclusion of its (through Federal Reserve lending or FDIC guaran March FOMC meeting, the Committee announced tees) that currently cannot be raised from market 32. The program was first announced in November 2008; more New York (2009), "Agency Mortgage-Backed Securities Purchase information on the MBS purchases is in Federal Reserve Bank of Program," www.newyorkfed.org/markets/mbs.

A86 Federal Reserve Bulletin 0 June 2009 sources, allowing the funds to increase their pur slight upturn in applications for mortgages to pur chases of legacy assets. chase homes and a substantial rise in applications for In March, the Federal Reserve initiated operations refinancing. Assuming the economy progresses ac of the Term Asset-Backed Securities Loan Facility cording to consensus forecasts, a significant majority (TALF), originally announced in November 2008. of banks reported that delinquencies and charge-offs The TALF is designed to catalyze the securitization on existing loans to businesses and households were markets by providing financing to investors to sup likely to deteriorate further over the remainder of this port their purchases of certain AAA-rated asset year. backed securities. The market for ABS had been [n early April, the Financial Accounting Standards virtually shuttered since the worsening of the finan Board issued guidance related to fair value measure cial crisis in October 2008. The program initially ments and other-than-temporary impairments (OTTl). accepted ABS backed by student loans, auto loans, The new fair value guidance reduces the emphasis to credit card loans, and loans guaranteed by the Small be placed on the "last transaction price" in valuing Business Administration, but various types of ABS assets when markets are not acti ve and transactions backed by loans to businesses were added in April, are likely to be forced or distressed. The new guid and several other asset types were being evaluated for ance may result in higher fair value estimates if acceptance, including commercial mortgage-backed current fair values inappropriately rely on distressed securi ties and non-agency residential mortgage transaction prices. The new OTIl guidance will backed securities. Under the TALF, the Federal require impairment write-downs through earnings Reserve lends an amount equal to the market value of only for the credit-related portion of a debt security's the ABS less a "haircut," and the loan is secured at all fair value impairment when two criteria are met: times by the ABS. The Treasury-under the TARP (I) The institution does not have the intent to sell the provides further credit protection to the Federal debt security, and (2) it is unlikely that the institution Reserve in connection with the TALF. will be required to sell the debt security before a According to the Federal Reserve's weekly data, forecasted recovery of its cost basis. This guidance domestic commercial bank credit contracted in the may result in reductions in impairments, thus improv first quarter of 2009. C&I loans ran off as demand ing institutions' earnings.33 waned and as banks reported widespread paydowns By the middle of April, about one-half of banking of outstanding loans. A temporary buildup of residen organizations had reported their earnings for the first tial real estate loans on banks' books was unwound in quarter of 2009. While earnings per share (EPS) March, as banks reportedly sold large amounts of results were better than expected at some (especially such loans to the housing-related GSEs. Revolving large) banking organizations, about one-third of the home equity loans continued to grow despite further firms reported losses, and about two-thirds fell short tightening of lending standards and terms reported by of analysts' expectations. Banks cited continued banks. Consumer loans increased slightly as a result declines in house prices as well as the weakening of significant purchases of loans from nonbanks, economic environment and its impact on commercial likely owing, in part, to banks' better access to loan portfolios as the primary reasons for the losses. funding while the market for credit card and auto Their earnings results, coupled with analysts' esti securitizations was impaired. mates available through mid-April, indicated that According to the April SLOOS, banks continued to banking firms will earn in the first quarter of 2009, on tighten standards and terms over the first quarter of average, about one-fourth of their EPS in the same 2009 on all major categories of loans to both busi quarter last year and just slightly more per share than nesses and households. Although the net percentage in the fourth quarter of 2008. 0 of banks that reported having done so declined in some cases relative to the January survey, these percentages remained in the high end of their histori 33. Mo(e information on the guidance, which consists of State cal ranges for all loan categories. Respondents also ment of Financial Accounting Standards (FAS) 157-e, FAS liS-a, indicated that demand for all types of loans continued FAS 124-a, and guidance from the Emerging Issues Task Force, EITF 99-20-b, is in Financial Accounting Standards Board (2009), to weaken, with the notable exception of prime "Summary of Board Decisions," April 2, www.fasb.org/actionJ residential mortgages. This result coincided with a sbd040209.shtml. Appendix tables start on p. A87

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008 A87 A.I. Portfolio composiLion, inlere l rale , and income anti e:v.pen e, .S. hanks, 19 ~9-2008 A .. AII banks Item 1999 I 2000 I 2001 I 2002 I 2003 I 2004 I 2005 I 2006 I 2007 I 2008 Balance sheet items as a percentage of average net consolidated assets Interest-earning assets I ......... ....... ....... 87.03 87.13 86.49 86.42 86.08 86.90 86.82 86.86 86.94 85.30 Lo C an o s m a m n e d r c l i e a a. l ~ e a s n d (n i e n t) d u . s tr . i . a . l . . .. . . . . . . .. . . .. . . .. . . . .. . . .. . . . 5 17 9. .0 3 7 4 6 1 0 7 . . 4 1 8 6 5 1 8 6 . . 9 0 5 8 5 1 7 4 . .0 8 7 3 5 1 6 2 . . 8 1 8 8 5 11 6. . 9 0 8 6 5 1 7 1 . . 8 1 8 7 5 I 8 IA .2 2 6 5 1 8 1 . . 3 8 7 4 5 1 6 2 . . 7 0 3 8 F U o .S re . i a g d n d a re d s d s r e e e s s s e . e . s . . .. . .. ... . . . . . . .. .. . . . . . . . - . . . . . . . . . . . 1 2 4 . A 6 3 4 1 2 4 A .6 9 7 1 2 3 . . 3 69 9 1 2 2 . . 0 04 4 IO 1. A 7 8 0 9 1 . . 5 54 2 9 1 . . 6 5 4 3 9 1 . . 7 7 3 0 9 1 . . 8 9 6 8 10 1 . . 1 9 2 6 Consnmer ......... ...... 9.71 9.38 9.23 9.35 9.06 9.18 9.12 8.53 8.43 8.33 Credit card .......... ......... .... 3.51 3.52 3.69 3.78 3.55 3.87 4.06 3.73 3.72 3.68 Installment and other. ... ...... . ....... 6.20 5.87 5.55 5.57 5.51 5.31 5.06 4.80 4.71 4.65 . Real estate . -. . . . . . . . 25.44 27.04 27.10 28.39 29.91 30.77 32.40 33.19 33.37 31.95 In domestic offices.. . .. . ......... 24.87 26.49 26.60 27.91 29.45 30.24 31.84 32.61 32.76 31.35 Construction and land development. 2.18 2.51 2.85 2.98 2.99 3.26 3.90 4.73 5.05 4.72 Farmland ....... ...... -. .56 .56 .55 .56 .54 .54 .S4 .53 .53 .52 One-to four-family residential .... 14.10 14.96 14.67 15.40 16.96 17.42 18.26 18.23 18.31 17.29 Home equity . .............. . ..... 1.76 1.96 2.18 2.80 3.40 4.34 4.95 4.71 4.49 4.60 Other .. . ...... 12.34 13.00 12.49 12.60 I3.S7 13.08 13.31 13.51 13.82 12.70 Multifamily residential. . ....... .88 .99 .97 1.02 1.05 1.06 1.08 1.06 1.04 1.10 Nonfarm nonrcsioontial . . ...... 7.IS 7.48 7.56 7.95 7.91 7.97 8.06 8.07 7.84 7.72 In foreign offices .................... .. .57 .54 .so .48 A6 .53 .56 .58 .60 .61 To depository institutions and acceptances of other banks ... 1.96 1.87 1.83 1.87 1.98 2.11 1.73 1.65 1.21 1.19 Foreign governmeors . . . . . . . . . . . . ........ .16 .12 .10 .09 .08 .08 06 .04 .oJ .02 Agricultural production .. ........ 83 .78 .75 .70 .63 .59 .56 .55 .52 .49 Other loans .. • • • • • • • • j .• .... 2.75 2.58 2.34 2.06 2.00 2.35 2.09 2.19 2.48 2.64 Lease-financing receivables .............. 2.51 2.63 2.58 2.44 2.11 1.79 1.58 1,43 1.23 1.08 LESS: Unearned income on loans .. ...... -.06 -.05 -.04 -.05 -.04 -.04 -.03 -.03 -.02 -.02 LESS: Loss reserves2 ...... .... ........... -1.04 -1.02 -1.04 -1.11 -1.04 -.91 -.79 -.71 -.70 -1.03 Securities ............. ... .......... 20AO 20.02 19.53 21.27 21.90 22.57 22.04 21.32 20.77 19.29 Investment account ..... _. . ...... ....... 18.33 17.59 16.82 18.30 18.97 18.99 17.87 16.89 15.41 14.13 Debt ......... ... -....... 17.7.~ 16.93 16.48 17.99 18.72 18.79 17.71 16.73 15.23 13.95 U.S. Treasury ...... 2.14 1.66 .85 .78 .90 .89 .62 .47 .32 .24 U.S. government agency and corporation obligations ..... 10.85 10.31 10.08 11.46 12.26 12.37 11.51 10.65 9.32 8.11 Government-backed mortgage pools. 5.24 4.75 5.13 6.09 6.75 7.13 6.78 6A3 5.82 5.47 Collateralized mortgage obligations 2.15 1.92 1.95 2.35 2.34 2.01 1.80 1.58 1.34 1.24 Other ............... . ... 3.46 3.63 2.99 3.02 3.17 3.22 2.93 2.65 2.16 lAO State and local government 1.62 1.52 1.49 1.49 1,48 IAI 1.36 1.34 1.34 1.20 Private mongage-backed securities .88 .95 1.09 1.25 1.30 IAI 1.76 1.89 2.15 2.13 Other . ..... . ....... 2.24 2A8 2.98 3.01 2.78 2.72 2.47 2.37 2.10 2.28 Equity ....... ....... . ... . . .61 .66 .34 .31 .25 .20 .16 .16 .18 .18 Trading account ..................... ... -. 2.06 2.43 2.72 2.97 2.93 3.59 4.17 4.43 5.36 5.16 Gross federal funds sold and reverse RPs .. 4.61 4.12 5.11 4.81 4.85 4.58 4.75 5.30 5.49 6.03 Balances at depositories I . ... -..... 2.68 2.52 2.90 2.52 2.46 2.76 2.14 1.98 2.30 3.25 Nonintercst-earning assets I ... ........ 12.97 12.87 13.51 13.58 13.92 13.10 13.18 13.14 13.06 14.70 Revaluation gains held in trading accounts ... 2.57 2.28 2.37 2.42 2.70 2.19 1.82 1.64 1.73 2.83 Other ...... .... . ............... 10AI 10.58 11.14 11.16 11.22 10.91 11.36 11.51 11.33 11.87 Liabilities . . . . . . ...... . . . . . . . . . . 91.52 91.58 91.25 90.85 90.96 90.57 89.91 89.84 89.78 90.07 Core deposits .... . . . . . . . . . . . . ... 48.60 46.52 47.07 48.98 49.18 48.56 47.52 45.56 43.89 42.71 Transaction deposits ... ............ 12.58 11.07 10.36 10.06 9.73 9.10 8.46 7.45 6,43 6.16 Demand deposits 9.78 8.61 8.00 7.67 7.26 6.58 6.16 5AI 4.66 4.S3 Other checkable deposits .. .... 2.81 2,46 2.36 2.39 2,47 2.52 2.30 2.04 1.77 1.63 Savings deposits (including MMDAs) . 22047 22A3 24.53 28.13 .~0.12 31.19 30.83 29.49 28.21 27.04 Small time deposits .. 13.55 13.01 12.18 10.80 9.33 8.27 8.23 8.62 9.26 9.50 Managed liabilities' .. 36.59 38.83 37A2 35.05 .~4.61 35.69 36.25 38.29 39.85 41.08 Large time deposits .. .............. 7.89 8.77 8.89 8.30 8.09 8.00 9.11 10.07 9.13 9.13 Deposits booked in foreign offices 10.96 11.43 10.66 9.42 9.38 10.25 10.39 11.18 12.81 13.09 Subordinated notes and debentures ....... 1.36 1.37 1.43 lAO 1.33 1.30 1.34 lAO 1.55 1.51 Gross federal funds purchased and RPs . 7.97 7.83 7.95 7.77 7.75 7.24 7.05 7.53 7.06 6.98 Other managed liabilities ........... ...... 8.40 9.44 8A9 8.16 8.06 8.91 8.37 8.11 9.31 10.38 Revaluation losses held in trading accoullls 2.52 2.29 2.21 2.09 2.30 1.95 1.67 I.SI 1.59 2.27 Other .. .......... . . J81 3.94 4.54 4.73 4.87 4.36 4.47 4A7 4.44 4.01 Capital account ........•. ........ ...... ...... 8A8 8.42 8.75 9.15 9.04 9.43 10.09 10.16 10.22 9.93 MEMO Commercial real estate loans' ......... ........ 10.87 11.58 12.09 12.57 12.47 12.78 13.52 14.35 14.47 14.10 Other real estate owned' ................... .06 .05 .05 .06 .06 .06 .04 .05 .07 .13 Mongage-backed securities .... ... ....... .... 8.27 7.63 8.17 9.69 10.39 10.56 10.33 9.89 9.31 8.84 Federal Home Loan Bank advances .. ........... n.a. n.a . 2.89 3.17 3.19 3.07 3.04 3.07 3.66 4.44 Balances at the Federal Reserve I .... ...... .... .52 042 .40 .38 .40 .35 .29 .24 .20 3.44 N In o te n r i e n s t t e - r e c a s r t n -e in a g rn . i ng ...... . .. . ...... . . . .. .. . . .. . . . . . . .. . . . . n . .a 5 . 2 n. . 3 4 . 2 n . .a 4 . 0 n . .a 3 . 8 n. 0 a 4 . 0 n . .a 3 . 5 n. . a 2 . 9 n. . a 2 . 4 n . .a 2 . 0 3 . .0 44 0 Interest-earning balances at depositories other than the Federal Reserve ... ........ 2.68 2.52 2.90 2.52 2.46 2.76 2.14 1.98 2.30 2.69 Average net consolidated assets (billions of dollars) .... .......... 5.439 5.907 6 ..1 34 6.6.'5 7.249 7.879 8.592 9,427 10.W6 II,S78

A88 Federal Reserve Bulletin 0 June 2009 A.!, Portfolio composition. inIcrcst rates, and income and expen 'C, ,So bank . 1999-2008-Cominued A. All banks-Conriflud hem 1999 I 2000 I 2001 I 2002 I 200~ I 2004 I 2005 I 2006 I 2007 I 2008 Effective interest rale (percent)6 Rates eurnt!d Interest T -e a a x r a n b in le g e a q s u s i e v t a s l . e nt ... , ......... . . .. .. .. . . . .... 7 7 . . 7 7 3 8 8 8. .2 2 0 6 7 7. . 3 4 7 2 6 6 . . 1 1 5 0 5 5. .2 3 9 3 5 5. . 0 1 8 2 5 5 . . 7 73 0 6 6 . . 6 6 5 8 6 6. . 8 7 2 8 5 5 . .7 72 5 Loans and 'Ieases, gross . ..... .......... 8.50 9.00 8.15 6.89 6.15 5.91 6.52 7.55 7.54 6.39 Net of loss provisions . ..... ........... - 7.99 8.33 7.15 5.84 5.47 5.47 6.09 7.18 6.70 3.91 Securities .. .... ..... . ..... ........ 6.30 6.47 6.04 4.95 3.96 3.86 4.18 4.71 5.02 4.87 Taxable equivalenl .. .... .......... . . . .. . 6.48 6.65 6.22 5.10 4.10 3.99 4.30 4.83 5.14 4.95 Investment accounl ................. ... ... 6.28 6.45 6.05 5.04 4.00 3.96 4.29 4.86 5.13 4.93 U.S. Treasury securities and U.S. government agency obligations (excluding MBS) . .... .... n.a . n.a. 5.76 4.42 3.29 3.11 3.46 4.19 4.71 4.23 Mongage-backed securities . ........ .. n.a. n.a . 6.45 5.44 4.24 4.38 4.60 5.10 5.29 5.21 Olher .. ...... . ... ........... n.a . n.a. 5.60 4.74 4.08 3.76 4.23 4.76 5.02 4.58 Trading account .... . .... . . . . . . . . . . . 6.48 6.63 6.01 4.38 3.71 3.35 3.72 4.16 4.70 4.67 Gross federal funds sold and reverse RPs .. 4.78 5.56 3.86 1.93 1.40 1.40 2.66 4.31 5.07 2.53 Imerest-bearing balanc~s al depositories I 5.95 6.48 4.01 2.79 2.09 1.98 3.70 5.10 5.13 3.23 Rales paid Interesl-bearing liabilities .. ....... ..... 4.31 4.94 3.93 2.38 1.72 1.63 2.47 3.59 3.82 2.53 Inleresl-bearing deposils .. +. ..... . ... 3.88 4.45 3.61 2.11 1.47 1.36 2.06 3.05 3.39 2.26 In foreign offices. ............ .... 4.91 5.61 3.94 2.38 1.62 1.72 2.77 3.92 4.23 2.47 In domeslic offices .... .... ... . .... 3.64 4.17 3.54 2.06 1.44 1.29 1.91 2.85 3.18 2.21 Omer checkable deposilS . ....... .... 2.08 2.34 1.96 1.06 .75 .77 1.41 1.88 2.04 1.16 Savings deposils (including MMDAs) . ... 2.50 2.86 2.19 1.13 .74 .72 1.24 2.01 2.22 1.26 Large ti me deposits .... ...... .... .. 4.93 5.78 5.04 3.37 2.59 2.35 3.19 4.39 4.71 3.48 Other ti me deposits 5.11 5.69 5.43 3.70 2.88 2.56 3.14 4.11 4.72 3.82 Gross federal funds purchased and RPs . 4.74 5.77 3.83 1.88 1.30 1.49 3.07 4.57 4.97 2.39 Olher imerest-bearing liabilities .... ...... 6.49 6.97 5.91 4.49 3.69 3.34 4.58 6.28 5.46 4.05 Income and expense as a percentage of average nel consolidared assels Gross interest income ......... ...... 6.75 7.18 6.38 5.27 4.54 4.43 4.97 5.85 5.94 4.89 Taxable equivalent ... .................. .... 6.80 7.22 6.42 5.31 4.58 4.46 5.00 5.88 5.97 4.91 Loans .............. ......... . . . . . . . . . . . . ... 5.13 5.53 4.92 4.06 3.55 3.42 3.82 4.48 4.47 3.68 Securilies 1.15 1.15 1.00 .89 .74 .74 .77 .84 .80 .70 Gross federal funds sold and reverse RPs .... .23 .23 .20 .09 .07 .07 .13 .23 .28 .15 Other ........ . . . . . . . . . . . . . . . . .24 .27 .27 .22 .18 .20 .25 .31 .39 .36 Gross interest expense ... ... 3.22 3.76 2.98 1.79 1.30 1.25 1.89 2.79 2.99 1.96 Deposits ..... 2.21 2.56 2.09 1.23 .86 .81 1.23 184 2.05 1.34 Gross federal funds purChased and RPs .. .... .39 .45 .31 .15 .10 .11 .22 .36 .36 .17 Odler ..... ............... . . . . . . .63 .75 .58 .41 .33 .33 .44 .59 .58 .45 Nel interest income ..................... . . . . . .. . ., 3.52 3.41 -'.40 3.48 3.24 3.17 3.07 3.05 2.95 2.93 Taxable equivalenl ......... ......... 3.57 3.46 3.44 3.52 3.28 3.21 3.11 309 2.98 2.95 Loss provisions7 ................ ............ ... .39 .50 .68 .68 .45 .30 .30 .27 .55 1.47 Noninterest income ..... .. ................. 2.66 2.59 2.54 2.54 2.54 2.40 2.35 2.36 2.10 1.80 ....... ..... S F e id rv u i c c i e a r c y h a a c r t g i e v s i ti o e n s d . e . p . o . sils ... ...... .. . . . 4 3 0 8 . .3 4 8 0 . . 3 4 5 2 . . 3 4 2 5 . .4 31 4 . .3 42 2 . . 3 3 1 9 . 3 3 8 0 . . 3 3 8 2 . .2 3 8 7 Trading revenue ... ....... .... ... .19 .21 .20 .16 .16 .13 .17 .20 .05 -.02 InlereSI rate exposures ... ...... .... .07 .08 .09 .08 .07 .03 .05 .05 .04 . . 01 Foreign exchange mle exposures .... ... .09 .08 .07 .07 .07 .07 .07 .08 .07 .10 Other commodity and equity cxposur~s . .03 .04 .03 .01 .02 .03 .04 .07 .03 Credit exposures ................ n.a . n.a. n.a. n.a. n.a. n.a. n.a. n.a. -.09 -.12 Other .... ...... .......... 1.70 1.61 1.57 1.60 1.63 1.53 1.48 1.48 1.36 1.16 Noninterest expense . ...... ......... 3.77 3.66 3.57 3.47 3.36 3.34 3.19 3.13 3.09 3.07 Salaries. wages, and employee bcnefils .. ..... 1.59 1.51 1.49 1.51 1.50 1.46 1.44 1.44 1.39 1.27 Occupancy ....... ... .... ..... ............. .48 .45 .44 .44 .43 .42 .41 .39 .37 .35 Other ... .............. ... .... . ...... 1.71 "'10 1.64 1.51 1.43 1.46 1.34 1.30 1.33 1.45 Net noninlere'l expense .......... .... ..... 1.11 1.07 1m .93 .82 .94 .84 .76 .99 1.28 Gains on investment account securities. ...... .. • -.04 .07 .10 .08 .04 • -.01 -.01 -.14 Income before taxes and extraordinary items .. 2.03 1.81 1.77 1.96 2.05 1.97 1.93 2.00 1.41 .04 Taxes ........ ........... .. .... .72 .63 .59 .65 .67 .64 .62 .65 .43 .02 • • • • • EXlraordlllary lIems. nel of Income taxes ..... I -.0 1 .01 .03 -.02 .05 Net income . . 1.31 1.18 1.17 1.32 1.39 1.33 1.31 1.39 .97 .07 Cash dividends declared .96 .89 .87 1.01 1.07 .76 .75 .87 .82 .37 Relained income .. .35 .29 .31 .30 .31 .58 .56 .51 .15 -.31 MEMO: Return on equity ....................... 15.43 13.97 13.41 1438 15.34 14.14 12.99 13.64 9.45 .69 NOTE: Data are as of April 16,2009. by muliifamily residemial properties; and loans 10 finance commercial real es I. Effective October I, 2008, the Federal Reserve began paying interest on tale. construction, and land development aClivities nOI secured by real eSlate. depository institutions' required and excess reserve balances. Beginning with 5. Other real eSlale owned is a componenl of olher noninteresl-earning the 2008:Q4 Call Report, balances due from Federal Reserve Banks are now asselS. reported under "lnteresl-earning assets" rather than "Noninleresr-earning assets." 6. When possible, based on the average of quarterly balance sheel dala re- 2. Includes allocated transfer risk reserve. ported on schedule RC-K of Ihe quarlerly Call Report. 3. Measured as the sum of large time deposits in domestic offices, deposits 7. Includes provisions for allocated lIansfer risk. booked in foreign offices, subordinated noles and debenrures, federal funds • In absoJule value, less Ihan 0.005 percenl. purchased and securities sold under repurchase agreemenrs, Federal Home n.a. NOI available. Loan Bank advances, and olher borrowed money. MMDA Money markel deposil accounl. 4. Measured as the sum of construction and land developmenl loans secured RP Repurchase agreemenl. by real esate; real eslllie loans secured by nonfarm nonresidential properties or MBS Mortgage-backed securities.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008 A89 A.I. Portfolio composition. interesl rale . and income and ex pen e, .S. banks. 1999-2008 B. Ten larges! banks by asseLS I hem 1999 I 2000 I 2001 I 2002 I 2003 I 2004 I 2005 2006 I 2007 I 2008 Balance sheet items as a percemage of average net consolidated assets Interest·earning assets' ....... 81.49 82.23 81.74 81.68 81.39 83.54 83.96 84.68 85.03 83.09 Loans and leases (net) . . ............... 53.37 55.22 53.86 53.61 52.20 51.29 51.35 52.03 53.21 50.66 Co U m . m S. e r a c d i d a r l e a ss n e d e s in . d . u . s . tr . ial .. . . , . . . . . . . . . .. . . . . . . ... . . . . 1 19 3 . . 2 14 0 1 13 9 . . 9 8 5 7 1 1 3 8 . . 4 8 2 2 1 1 6 1 . . 1 69 6 1 9 2 . .9 4 8 0 1 7 0 . . 4 54 9 1 7 0. . 6 7 1 4 1 8 1 . . 0 2 8 0 1 8 1 . . 0 5 5 8 1 8 1 . . 4 8 5 5 Co C F n o r s e r u d e m i i g t e n r c a a r d d d ressees . . .. . . . . .. . . - . .. . . . . . . . . . . .. . . . .. . . . . . . , . . .. . . . . . . . 6 5 1 . . . 9 0 3 4 6 6 5 5 1 . . J 4 9 4 3 2 6 5 1 . . . 4 1 6 1 7 9 7 2 4 . . .9 4 8 7 2 0 7 3 2. . . 8 9 5 1 6 9 8 3 3 . . .0 4 1 6 9 9 8 2 3 . . . 8 8 6 7 0 0 8 3 3 . . .0 1 1 7 5 2 8 3 3 . . . 9 8 5 7 3 8 . 8 3 1 . .5 4 4 3 4 0 Installment and other. . ........ ..... 4.58 4.09 4.48 4.92 5.15 5.30 5.21 5.13 5.11 4.89 Real estate ... . . . . . . . . . . . 16.96 19.82 19.23 20.78 22.68 23.21 24.55 25.51 27.04 25.26 In domestic offices .. 15.55 18.48 18.05 19.70 21.74 22.21 23.52 24.50 26.00 24.29 Construction and land development. .90 .98 1.27 1.42 1.36 1.40 1.70 2.01 2.01 1.86 Farmland ........ .... .10 .11 .11 .12 .10 .10 .10 .10 .09 .09 One-to four-family residential .. 10.77 13.37 12.41 13.51 16.03 16.71 17.73 18.30 19.86 18.40 O H t o h m er e . e q . u . i . t . y . . . . . . . . . . . . . . . .. ' . . . . . . . . . . . . .. . . . 9 1 . . 2 5 2 4 1 1 1 . . 6 7 1 6 10 1 . . 6 78 3 1 2 1 . . 3 1 5 7 13 2. .0 9 7 6 1 4 2 . . 0 6 4 7 1 5 2 . .5 22 2 1 5 2 . . 4 9 0 0 1 5 4 . . 4 4 6 0 1 5 2 . . 5 8 9 0 Multifrunily residential ........ ....... .43 .60 .51 .55 .47 .45 .44 .44 .55 .69 Nonfarm nonresidemial .' .. ..... , .. .. .. .. . 3.35 3A2 3.76 4.09 3.78 3.55 3.55 3.65 3.49 3.25 In foreign offices -.. - 1.41 1,34 1.18 1.08 .94 1.00 1.03 1.01 1.03 .97 To depository institutions and acceptances of other banks ....... ..... 4.34 3.78 3.23 3.20 3.54 4.10 3.15 2.97 1.71 1.67 ..... Foreign governments .. .38 .28 .20 .20 .17 .16 .12 .07 .05 .02 Agricultural production ... ... .... ....... .26 .23 .28 .23 .19 .22 .20 .20 .17 .15 Other loans . ....... . ......... 3.96 3.75 3.51 2.94 2.87 3.32 2.81 2.88 3.08 3.21 Lease-financing receivables .... ...... ...... 3.40 3.07 3.43 3.44 2.87 2.08 1.78 1.60 1.22 1.06 LESS: Unearned income on loans. ...... -.05 -.04 -.04 -.08 -.06 -.04 - 04 -.02 -.02 -.02 LESS: Loss reserves' .. ........... ... ...... -1.03 -.97 -.97 -1.12 -1.02 -.80 -.65 -.56 -.60 -.98 Securities ... .,., . . . . . . . 18.34 18.98 17.81 20.54 21.22 22.95 23..07 13.05 21.97 21.02 Investment account .....•.. . . . . . , ... . . ... 13.08 13.71 12.14 14.35 15.31 15.99 15.58 15.12 12.81 12.44 Debt ... ., 12.57 13.03 11.88 14.13 15.11 15.83 15.44 14.97 12.66 12.32 U.S. Treasury ........... ...... 1.98 1.96 .68 .59 .82 .86 .56 .43 .24 .16 U.S. government ag~ncy and corporation obligaLions ..... 6.35 6.59 6.84 8.69 9.20 9.92 9.69 9.48 8.02 6.90 Government-backed mongage pools. 5.03 4.88 4.99 6.38 7.59 8.64 8.65 8.64 7.53 6.48 Collateralized mongage Obligations .79 .93 1.11 1.52 .91 .70 54 .53 .33 .33 Other. ...... .52 .78 .74 .79 .70 .58 .50 .32 .16 .09 State and local government .45 .51 .55 .59 .59 .57 .58 .64 .65 .55 Private mongage-backed securities .. .57 .51 .58 .92 1.10 .96 1.18 1.09 1.45 2.06 Other ..... .. ....... . ..... 3.22 3.47 3.22 3.34 3.40 3.52 3.43 3.33 2.30 2.66 Equity ..... ........ .51 .68 .26 .22 .20 .16 .14 .15 .1,6 .12 Tradi ng account .................... ..... 5.25 5.26 5.67 6.18 5.91 6.96 7.79 7.94 9.16 8.57 Gross federal funds sold and reverse RPs ..... 6.64 5.02 6.38 5.26 5.79 6.37 6.96 7.60 7.47 8.13 Balances at depositories' .' ...... 3.14 3.01 3.69 2.28 2.18 2.93 2.28 1.99 2.38 3.28 Noninterest-earning assets I ....... 18.51 17.77 18.26 18.32 18.61 16.46 16.04 15.32 14.97 16.91 Revaluation gains held in trading accounLS . 6.66 5.66 5.48 5.40 5.79 4.45 3.50 3.07 3.03 4.77 Other . ' .... ....... . ... , . 11.85 12.11 12.78 12.93 12.83 12.01 12.54 12.25 11.93 12.14 Liabilities ... ........ ..... 92.28 92.36 92.14 91.52 91.94 91.64 90.81 91.10 90.82 91.34 Core deposits .......• . • . • . • . •• .. •• . 0 . - • ...... , .. ... 33.76 33.28 36.38 40.61 41.07 42.02 40.18 38.03 35.08 34.49 Transaction depoSiLS . ....... ...... 8.55 8.01 8.40 8.34 7.74 6.65 6.05 5.41 4.69 4.73 Demand deposits ... ............ .. 7.83 7.28 7.50 7.40 6.72 5.43 4.90 4.32 3.80 3.91 Other checkable deposits . , ..... ...... .72 .74 .90 .95 1.02 1.22 1.15 1.09 .89 .81 Savings deposits (including MMDAs) .. ... 18.94 19.24 22.21 26.82 28.99 31.54 30.11 28.11 25.55 24.59 Small time deposits 6.26 6.03 5.77 5.44 4.34 -'.83 4.02 4.52 4.84 5.18 Managed liabilities' .. ............. ....... 45.49 46.84 43.41 38.89 38.60 39.33 40.83 43.75 46.83 47.69 Large time deposits ............ ...... 5.19 5.55 5.46 5.13 5.53 5.21 6.28 6.85 6.13 6.72 Deposits booked in foreign offices ....... 22.22 22.76 20.28 17.31 16.62 17.20 17.51 18.50 19.86 20.16 Subordinated notes and debentures ... ...... 1.98 2.10 2.16 2.11 1.92 1.78 1.89 1.99 2.17 2.09 Gross federal funds purchased and RPs .. 8.84 8.89 9.04 8.83 8.62 7.79 8.39 9.51 8.42 8.18 Other managed liabilities ....... 7.27 7.55 6.47 5.53 5.90 7.35 6.76 6.89 10.26 10.54 Revaluation losses held in trading accounts . 6.51 5.69 5.10 4.63 4.88 3.95 3.21 2.83 2.79 3.77 Other ....... ...... . . . . . . . ...... . ...... ... 6.52 6.55 7.26 7.39 7.40 6.34 6.60 6.47 6.12 5.39 Capital account . . . . . .. . . . . . . ........ ..... , .. 7.72 7.64 7.86 8.48 8.06 8.36 9.19 8.90 9.18 8.66 C O M o t E h m M e m r O r e e r a c l i a e l s t r a e t a e l o es w ta n t e e d l ' o a . n . s . 4 . ..... . . .. . . . . . . .. .. . . ' ... . . . . . 5. . 6 0 9 6 5. . 8 0 7 4 6. .0 6 4 8 6 . .9 03 2 6. .0 31 3 5. .0 9 3 9 6. . 3 02 3 6 . .7 m 3 6. . 6 05 4 6. . 3 0 7 9 M F~d o e n r g a a l g e H - o b m ac e k e L d o a s n e c B u a r n it k i e a s d . vances . . .. .. . . . . . . .. . . . . .. . . . . . . . 6 n. . n 4 . 0 6 n . .a 3 . 2 6. . 6 8 8 2 8. . 8 8 2 2 9. .8 6 4 0 10. .7 3 9 0 10 . . 6 3 3 6 10. .7 25 5 9 2 . . 3 3 1 3 8 2 . .7 87 9 Balances at the Federal Reserve' ............... .26 .20 .27 .23 .23 .25 .21 .17 .15 3.92 Interest-earning ... ....... n.a. n.a. n.a. n.a. n.a. Il.a. n.a . n.a. Ita. 3.61 Noninterest-earning . ... .. -...... ... ...... .26 .20 .27 .23 .23 .25 .21 .17 .15 .32 Int~rest-earning balances at depositories other than the Federal Reserve . ... 3.14 3.01 3.69 2.28 2.18 2.93 2.28 1.99 2.38 2.69 Average net consolidated assets (billions of dollars) .. .. 1.935 2,234 2.527 2.785 3,148 3.654 4,232 4.759 5.469 6.241 ••••• 0-••

A90 Federal Reserve Bulletin D June 2009 Al. Portfolio compo ilion. interest rate. and in orne anLi expense, U.S. banks, 1999-200 ollfillued B. Ten largesl banks by assels-Continued Item 1999 I 2000 I 2001 I 2002 I 2003 I 2004 I 2005 I 2006 I 2007 I 2008 Effective imerest rale (percent)6 Rml!J earned lnterest-earning assets. , ............. ....... 7.37 7.76 6.83 5.82 4.99 4.71 5.29 6.32 6.52 5.44 S Lo e W cu IS r T N i t a e a i x e t n a s d o b f l l e e l o a e s s . q s e . u s . p i , . v r . g o a . r l v . o e i n s . s s . i t o .. n . .. . . s . . . . . . . . . . . . . . . . . . . , . . . . . ,. . . . . . . . , . . . . . . . . . . . . . .. . . . . . . . . . . .. . . . . . . . 6 7 7 7 . . . . 9 3 5 65 8 9 9 7 8 6 7 . . . . 4 7 4 9 8 8 2 6 6 6 6 7 . . . . 8 5 5 23 6 5 0 5 5 5 6. . . . 5 8 0 3 2 5 4 0 5 4 5 5 . . . . 1 7 0 1 1 5 6 9 4 4 5 5 . . . . 7 0 5 2 3 4 2 9 6 4 5 5 . . . . 1 2 8 31 5 7 4 6 7 7 4 . . . . 3 6 0 3 2 9 4 6 6 4 6 7 . . . . 3 9 5 2 3 9 4 9 4 5 6 3 . . . . 9 4 2 1 1 5 3 4 Taxable equivalent ... ... • . • . • . • . 0 . •• .. • ........ .. 6.65 6.55 6.31 5.11 4.21 4.10 4.32 4.75 5.04 4.94 Investment account . ..... ... . . . . . . . . .. 6.59 6AO 6.23 5.30 4.26 4.37 4.63 5.11 5.29 5.14 U.S. Treasury securities and U.S. government agency obligations (excluding MBS) . n.a. n.a. 5.01 3.74 2.62 2.92 3.29 4.15 4.15 3.02 Mortgage-backed securities. ...... ....... n.a. n.a . 6.42 5.55 4.51 4.83 4.92 5.30 5.41 5.34 Other ....... ..... n.a . n.a. 6.34 5.30 4.28 3.76 4.26 4.81 5.08 4.77 Trading account .......... .... ......... 6.56 6.70 6.24 4.46 3.87 3.32 3.57 3.90 4.57 4.56 Gross federal funds sold and reverse RPs . 4.52 4.93 3.86 2.20 1.60 1.43 2.46 4.07 5.06 2.59 Interest-bearing balances at depositories I 7.22 7.43 3.73 3.40 2.49 1.80 4.06 5.59 5.36 3.46 Rales paid Interest-bearing liabilities. ............... .... 4.52 5.03 3.78 2.33 1.67 1.62 2.52 3.74 3.87 2.47 Interest-bearing deposits .." ....... ........... 3.82 4.40 3.27 1.94 1.34 1.29 2.01 2.96 3.30 2.08 In foreign offices . . . . . . . . . . . . . . . . . - 4.99 5.67 4.02 2.59 1.74 1.81 2.77 3.88 4.28 2.52 In domestic offices 3.04 3.51 2.84 1.67 1.18 1.08 1.70 2.55 2.80 1.85 Other checkable deposits .......... ... 1.44 1.61 1.67 .93 .80 .97 2.27 2.46 2.36 1.13 Savings deposits (including MMDAs) .. 2./1 2.43 1.92 1.02 .73 .71 1.15 1.87 1.98 1.10 Large time deposits ..... 4.36 5.32 4.40 3.26 2.36 2.14 3.06 4.32 4.72 3.35 Other time deposits ... 4.95 5.53 5.11 3.44 2.70 2.61 3.40 4.05 4.55 3.46 Gross federal funds purchased and RPs ... .... 4.53 5.47 3.81 2.02 1.39 1.59 3.11 4.63 5.15 2.54 Other interest-bearing liabilities . " ......... 8.26 8.07 6.84 5.57 4.42 3.83 5.40 7.78 5.61 4.32 Income and expense as a percentage of average net consolidated assets Gross interest income ... . _,-. ........ 6.01 6.39 5.55 4.77 4.05 3.94 4.47 5.46 5.61 4.52 Lo T an a s x a . b . l e e .. qu .. i . v . a . l en .. t .. .. . . . . , . .. . . . . . . . . .. .... 4 6 . . 3 0 5 3 4 6. . 4 7 1 4 4 5. . 5 1 7 3 4 3 . .5 7 7 9 4 .\. .0 0 7 4 3 2. . 8 % 6 4 3 . . 4 1 8 9 5 3. . 9 4 1 8 5 3. . 9 63 8 4 3. .5 1 3 5 Securities -... ". . . . . . . . . . . . .85 .88 .72 .73 .63 .69 .72 .80 .69 .65 Gross federal funds sold and reverse RPs . " - .30 .25 .25 .12 .10 .10 .IS .31 .38 .20 Other ..... .... ...... .51 .51 .44 .35 .2S .30 .38 45 .56 .51 Gross interest expense 3.16 3.60 2.69 1.65 1.19 1.20 1.89 2.88 3.00 1.88 Deposits . . . . . . . . . . . . . . . . . ... . . . . . . . . . . . . . . 1.97 2.33 1.74 1.05 .74 .74 1.17 1.72 I.S7 1.17 Gross federal funds purchased and RPs . .40 .49 .35 .IS .13 .13 .27 .47 .46 .21 Other ................ ... ..... .79 .78 .59 .41 .. 13 .33 .45 .69 .68 .50 Net interest income . .. .. .. .... .. ....... . .... 2.84 2.78 2.87 3.12 2.86 2.74 2.58 2.58 2.61 2.63 Taxable equivalent .... ...... . .... 2.86 2.80 2.89 3.14 2.88 2.76 2.59 2.60 2.63 2.65 Loss provisions 1 .. ............ .. . ....... .26 .38 .59 .73 .35 .16 .20 .22 .60 1.52 Noninterest income ....... ... 2.55 2.54 2.26 2.31 2.32 2.21 2.17 2.35 1.95 1.66 Service charges on deposits ... ... .37 .40 .44 .48 .46 .45 .42 .41 .40 .40 Fiduciary activities ........ .. , ............... .31 .27 .29 .25 .26 .24 .27 .23 .20 .21 Trading revenue .... , .. ....... ............ .., .46 .48 .43 .32 .30 .23 .31 .37 .05 -.01 [nterest rate exposures ..... ...... ..... .17 .20 .20 .15 .12 .07 .11 .09 .08 .03 Foreign exchange rate exposures ... .19 .18 .14 .14 .14 .12 .12 .14 .09 .14 Other commodilY and equity exposures. .09 .11 .08 .03 .04 .04 .07 .13 .06 -.01 Ot C he r l e d . i . t . e . x . p . o . s .. u . r e .. s .. . . . . . . . . . . . . . . . . . , n 1 . . a 4 . 1 n 1 . . a 3 . 9 n 1 . . i 1 l. 0 n 1 . . a 2 . 6 n 1 . . a 3 . 0 n 1 , . a 2 . 8 n 1 . . a 3 . 8 n 1 . . a 3 . 5 - 1 . .3 1 1 8 - 1 . . 1 0 7 7 Noninterest expense. ... . ..... 3.45 3.31 3.13 3.16 3.02 3.11 2.99 2.89 2.80 2.71 Salaries. wages, and employee benefits 1.57 1.46 1.38 1.4/ 1.39 1.34 1.38 1.39 1.32 1.20 Occupancy ...... .......... .50 .47 .45 .4{, .45 .43 .43 .40 .37 .35 Other . . . . . . . . . . -. . ........ 1.38 1.39 1.30 1.28 1.18 1.33 1.19 1.09 1.12 1.17 Net nonintcrest expense ....... ............ . .... .90 .77 .87 .85 70 .91 .62 .54 .85 1.05 Gains on investment account securities. ... .03 -.03 .08 .13 .11 .07 • -.01 .02 -.05 Income before taxes and extraordinary items 1.71 1.60 1.48 1.67 1.92 1.74 1.75 1.82 118 * Taxes .. ...... . . . . . . . ..... .... ....... .66 .60 .49 .56 .63 .56 .57 .59 .33 -.07 Extraordinary it~ms. net of income taxes ... • • -.01 • • • • .02 • .09 Net income ..... ... . . . . . . . . -. . . . . . .. 1.05 1.00 .99 1.11 1.29 1.18 1.18 1.25 .85 .16 C R a e s ta h i n d e i d v id in e c n o d m s e d ec .. l a . r . e . d . .. .. . . . . . . . . . , , . . . . . . . . . . . . . . . . . . . . . . . . 7 2 9 6 . . 1 8 3 6 . . 6 3 6 2 1 . . 0 05 6 . .3 9 0 9 . .5 65 3 . . 5 59 9 . . 6 62 4 . .2 6 5 0 -. . 1 2 1 8 MEMO: Return on equity ..... ....... . ..... 13.58 13.04 12.55 13.14 16.06 14.07 12.86 14.08 9.23 1.89 NOTE: Data are as of April 16,2009. by multi family residential properties: and loans to finance commercial real es I. Effective October I, 2008, the Federal Reserve began paying interest on late. construction, and land development activities not secured by real estate. depository institutions' required and excess reserve balances. Beginning with 5. Other real estate owned is a com pone", of other noninterest-earning the 2008:Q4 Call Report, balances due from Federal Reserve Banks are now assets. reported under "Inlerest-earning assets" r'drher than "Noninteresl-eaming assets," 6. When possible. based on the average of quarterly balance sheet data re- 2. Includes allocated transfer risk reserve. poned on schedule RC-K of the quarterly Call Repon. 3. Measured as the sum of large time deposils in domestic offices, deposits 7. Includes provisions for allocated transfer risk. booked in foreign offices, subordinated notes and debentures, federal funds " In absolute value. less Ihan 0.005 percent. purchased and securities sold under repurchase agreements. Federal Home n.a. Not available. Loan Bank advances, and other borrowed money. MMDA Money market deposit account. 4. Measured as the sum of construction and land development lowls secured RP Repurchase agreemenl. by real estate; real estrue loans secured by nonfarm nonresidential properties or MBS Mongage·backed securities.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008 A91 A.!, P rtfolio compo 'ilion, inlere l rale , and income and expense, .S. banks, 1999-2008 c. Banks ranked II through 100 by asselS I I I I I I I I I hem 1999 2000 200 I 2002 2003 2004 2005 2006 2007 2008 Balance sheet items as a percentage of average net consolidated assets Interest~earning assets 1 .•• , ".,........ " '" 88.40 88.67 88.09 88.34 88.10 88.18 87.87 87.05 87.01 85.34 Loans and leases (net) ....... . ..........•.. 64.22 64.88 62.14 60.00 59.48 60.63 63.37 62.77 60.99 60.04 Commercial and industrial . . ............ . 19.39 18.19 15.84 13.27 11.96 11.90 12.17 12.13 12.74 12.80 U.S. addressees ............•... " ... . 18.17 17.64 15.36 12.94 11.66 11.64 11.91 11.81 12.41 12.46 Foreign addressees. . .............. . 1.22 .55 .48 .33 .30 .26 .27 .32 .33 .34 Consumer ......••......•... 13.58 13.79 IUO 12.79 12.57 12.74 12.84 11.94 9.99 10.61 Credit card ................. . 6.79 6.97 7.05 6.56 6.35 6.90 7.45 7.12 5.29 5.67 Installment and other .......•. 6.79 6.82 6.15 6.22 6.21 5.83 5.39 4.82 4.70 4.94 Real estate .. 24.79 26.21 27.29 28.94 30.67 32.16 34.89 35.23 33.53 32.50 In domestic offices. .. . .... 24.61 26.12 27.21 28.88 30.54 31.96 34.73 35.03 33.35 32.19 Construction and land development. 2.44 JOO 3.31 3.36 3.22 3.51 4.21 5.27 5.95 5.62 Farmland .19 .22 .23 .22 .20 .19 .19 .17 .21 .26 One- to four-family residential 14.14 14.51 15.51 17.05 18.79 19.52 21.05 20.27 17.80 16.57 Home equity. . .. ,. . ..... . 2.08 2.49 2.90 3.92 4.74 5.90 6.04 5.01 4.01 3.90 Other.......... . .. . 12.06 12.02 12.60 13.13 14.05 13.62 15.01 15.26 13.79 12.67 Multifamily residential. . . ...•..... 1.02 1.11 1.16 1.20 1.32 1.34 1.45 1.45 1.27 1.22 Nonfarm nonresidential ............. . 6.81 7.28 6.99 7.05 7.00 7.41 7.83 7.86 8.13 8.52 In foreign offices . . . . . . . .. . .. .19 .09 .09 .06 .13 20 .16 .21 .18 .31 To depository institutions and acceptances of other banks ...... . .93 1.05 1.40 1.44 1.21 .54 .56 .45 1.05 .94 Foreign governments . . . . . . . . . . . .. .. .06 .03 .03 .02 .02 .01 .02 .01 .01 .03 Agricultural production . . ........... . .33 .37 .32 .27 .23 .19 .19 .18 .21 .23 Other loans .••. 2.99 2.57 2.03 1.80 1.59 1.87 1.62 1.88 2.43 2.56 Lease-financing receivables . . .. . 3.28 3.82 3.18 2.65 2.15 2 ..~ 0 2.07 1.83 1.80 1.51 LESS: Unearned income on loans . ..... . -.04 -.03 -.02 -.02 -.02 -.02 -.01 -.01 -.01 -.01 LESS: Loss reserves' . . . . . . . . . . . . . ... . -1.11 -1.12 -1.13 -1.17 -1.10 -1.06 -.97 -.87 -.75 -1.12 Securities ................. . ..... . 17.78 17.32 19.00 20.30 21.16 21.28 19.96 19.22 19.89 16.87 Investment account ....................... . 17.27 16.10 17.71 19.17 20.09 20.12 18.80 17.72 17.99 14.99 Debt ....... . .. . 16.62 15.50 17.32 18.82 19.88 19.96 18.69 17.60 17.88 14.84 U.S. Treasury ............ . 1.70 1.12 .67 .74 .95 .89 .60 .44 .38 .31 U.S. government agency and corporation obligations ... 10.57 9.70 10.09 11.45 12.99 12.80 11.62 10.07 9.06 7.72 Government-backed mongage pools. 5.12 4.31 5.19 6.00 6.08 5.74 4.83 4.04 .n3 3.76 Collateralized mortgage obligations 2.89 2.55 2.42 2.79 3.72 3.42 3.39 2.94 2.68 2.43 Other. ............. .. . 2.56 2.84 2.48 2.65 3.19 3.64 3.40 3.10 2.65 1.54 State and local government .99 .96 .99 .97 .95 .96 .98 1.01 1.16 1.03 Private mongage-backed securities .... 1.33 1.66 2.01 2.13 2.14 2.65 3.58 4.29 4.60 3.23 Other ................. . 2.03 2.06 3.56 3.53 2.85 2.66 1.90 1.78 2.67 2.54 Equity. .. ........... . .65 .60 .39 .34 .21 .16 .11 .12 .12 .14 Trading account ..... .51 1.22 1.29 1.13 1.07 1.16 1.16 1.50 1.90 1.89 Gross federal funds sold and reverse RPs ..... 3.34 3.76 4.06 4.71 4.20 2.98 2.30 2.84 3.41 4.27 Balances at depositories I 3.06 2.71 2.88 3.33 3.26 3.29 2.24 2.22 2.72 4.16 Noninterest-earning assets I ... , ........... . 11.60 11.33 11.91 11.66 11.90 11.82 12.13 12.95 12.99 14.66 Revaluation gains held in trading accounts . .56 .40 .55 .47 .60 .42 .33 .30 .48 .91 Other ................ . ....... . 11.04 10.92 11.37 11.19 11.30 11.40 11.80 12.65 12.51 13.75 Liabilities ............... , •... 91.66 91.57 91.15 90.79 90.65 89.87 88.86 88.08 88.40 88.17 Core deposits .................... . .... . 48.33 46.28 46.28 47.07 47.93 46.55 48.18 46.84 47.44 46.35 Transaction deposits. . .. . . . . . .. .. 12.12 9.93 8.37 7.49 7.29 7.06 6.64 5.74 5.15 5.13 Demand deposits . . . . ...... . 10.52 8.61 7.17 6.32 5.96 5.65 5.35 4.54 3.90 3.89 Other checkable deposits .............. . 1.60 1.32 1.20 1.17 1.33 1.41 1.29 1.20 1.25 1.24 Savings deposits (including MMDAs) . 23.89 2402 26.62 30.07 32.34 31.75 33.33 32.66 32.99 31.51 Small tIme dePOSitS ..... . 12.3t 12 ..\ 3 11.28 9.51 8.30 7.74 8.20 8.44 9.30 9.71 Managed liabIlities' .......... . 39.85 41.98 40.81 39A8 38.12 39.29 37.04 37.60 37.02 37.82 Large time deposits ...... . 8.17 9.54 9.72 8.99 8.20 8.76 10.10 11.44 10.20 9.76 Deposits booked in foreign offices 8.20 7.56 7.05 6.28 6.54 7.21 6.02 6.43 8.52 7.80 Subordinated notes and debentures . . ... 1.71 1.54 1.53 1.44 1.38 1.39 1.31 1.32 lAO 1.31 Gross federal funds purchased and RPs .' .. 9.78 9.28 9.71 9.66 9.69 8.95 7.17 6.74 6.79 6.72 Other managed liabilities .. . ........ . 11.99 14.07 12.79 13.11 12.30 12.97 12.44 11.66 10.10 12.23 Revaluation losses held in trading accounts .58 .41 .52 .44 .56 .40 .34 .29 .47 .85 Other ................. . ....... .. 2.91 2.91 3.54 3.80 4.05 3.64 3.30 3.35 3.48 3.15 Capital account ............................... . 8.34 8.43 8.85 9.21 9.35 10.13 11.14 11.92 11.60 11.83 MEMO Commercial real estate loalls~ .....••. . ....... . 11.00 12.06 12.06 12.24 12.10 12.85 13.93 15.05 15.95 16.01 Other real estate owned' .......... . .......... . .03 .03 .04 .05 .06 .05 .04 .05 .06 .10 Mongage-backed securities ................... .. 9.34 8.52 9.63 10.93 11.93 11.81 11.81 11.27 11.01 9.42 Federal Home Loan Bank advances . n.3, n.a. 4.07 4.85 4.75 4.65 5.19 5.54 5.35 6.45 Balances at the Federal Reserve I ..........••. .64 .43 .36 .37 .37 .28 .21 ..1 8 .19 3.89 Interest-earning ........... . n.a. n.a. n.n. n.a. 0.8. 0.8. n.a. ",3. o.a. 3.18 Noninterest-earning ......... . .64 .43 .36 .37 .37 .28 .21 .18 .19 .72 Interest-earning balances at depositories other than the Federal Reserve . . ... _. .... 3.06 2.71 2.88 3.33 3.26 3.29 2.24 2.22 2.72 3.43 Average net consolidated assets (billions of dollars) . 1,879 2.031 2.130 2,124 2.287 2.376 2,403 2,579 2,798 3,177

A92 Federal Reserve Bulletin 0 June 2009 A.!. Portfolio compo-ilion. inlerest rates, and income and cxpcn.c. U.S. banks. J999-2008-Col7tillued C. Banks ranked II through 100 by assets-Conlinued Item 1999 I 2000 I 2001 I 2002 I 2003 I 2004 I 2005 I 2006 I 2007 I 2008 Effective interest rate (percent)" Rates earned Interest-earning assets. .... ... ..... ..... 7.90 8.44 7.54 6.03 5.30 5.21 5.98 6.93 6.87 5.86 Taxable equivalent ......... .... . . .. ...... 7.94 8.48 7.58 6.07 5.33 5.24 6.02 6.97 6.91 5.88 Loans and leases, gross .... . . . . . . . . . . . .. ........ 8.56 9.14 8.26 6.80 6.11 5.98 6.61 7.58 7.45 6.44 Secur N it e ie t s o f . . l . os . s . . p . r . o . v . i . s . i o . n . . s . . . . . . . . . . . . . . . . . . . . . . .. . . . " . .. 7 6. . 4 8 1 6 8 6 . .6 2 4 5 5 6 . .9 9 6 6 4 5 . . 7 5 9 9 5 3. . 8 11 0 5 3 . .6 1 3 9 4 5 . . 1 8 8 9 7 4 . . 0 9 4 9 6 5. .6 25 4 4 3 . . 8 7 5 6 Taxable equivalent ...... ...... 6.55 6.77 6.08 4.91 3.90 3.73 4.29 5.10 5.37 4.93 Investment account ..... , ......... ........ 6.43 6.66 6.04 4.86 3.87 3.64 4.11 4.84 5.18 4.74 U.S. Treasury securities and U.S. government agC!ncy obligatjons Mo (e rt x g c a l g u e d - i b n a g c k M e B d S s ) e c . u . rities. . , .. .... . . . . .. n n. . a a. . n n . .a a . . 5 6 . .6 83 0 4 5 . . 2 3 8 4 3 4 . .2 17 0 4 2. .0 9 2 4 4 3 . . 3 4 4 7 4 5 . . 2 0 8 2 4 5. .8 23 5 3 5 . . 9 02 2 Other .... .......... .. . . n.a. n,a . 5.13 4.22 3.61 3.29 4.06 4.87 5.28 4.42 Trading account. . ............. ,. 5.62 6.25 4.83 3.59 2.56 3.39 5.30 6.74 5.94 5.72 Gross federal funds sold and reverse RPs . 5.13 6.06 3.86 1.68 1.14 1.25 3.24 4.95 5.16 2.47 Interest.bearing balances at depOSitories I ..... 4.82 5.49 4.38 2.46 1.93 2.27 3.20 4.24 4.84 2.97 R(I1es paid Interest-bearing liabilities. .............. ..... 4.23 4.97 3.94 2.22 1.61 1.56 2.44 3.48 3.72 2.40 Interest-bearing deposits .. ... ..... ........ 3.80 4.42 3.60 1.96 135 1.29 2.03 3.07 3.33 2.16 In foreign offices . ............... .. ...... 4.71 5.38 3.67 1.70 1.23 1.42 2.76 4.10 4.01 2.21 In domestic offices ... 3.64 4.26 3.60 1.99 1.36 1.27 1.95 2.95 3.22 2.15 Other checkabl~ deposits ... ... , ..... ... 2.06 2.57 2..12 .94 .64 .72 1.29 2.12 2.60 1.33 Savings deposits (including MMDAs) ... 2.51 2.94 2.30 1.08 .66 .65 1.30 2.14 2.44 1.36 Large ti me deposits . .... . ... 5.00 5.88 5.1 I 3.37 2.70 2.49 3.31 4.45 4.46 3.14 Gross O t f h ed e e r r t a i l m f e u n d d e s p o p s u it r s c h , a . s , e . d . . a . n . d . . R Ps .. ..... 4 5. . 0 91 8 5 6 . .0 73 2 5 3 . . 4 8 2 6 3 1 . . 6 7 8 3 2 1 . . 9 2 5 0 2 1 . . 5 37 8 3 3 . . 0 0 3 4 4 4 . .0 4 9 6 4 4. .7 7 1 4 3 2 . . 8 07 7 Other interest-bearing liabilities ... ......... 5.44 6.25 5.29 3.65 3.04 2.77 3.81 4.90 5.25 3.66 Income and expense as a percentage of average net consolidated assets ..... Gross interest iocome .......... . ..... .... 7.03 7.54 6.70 5.31 4.67 4.63 5.28 6.08 5.99 5.02 Taxable equivalent .......... ....... 7.07 7.57 6.73 5.34 4.70 4.65 5.31 6.11 6.02 5.04 Loans ............... .................. .. 5.60 6.05 5.28 4.15 3.72 3.71 4.27 4.85 4.60 3.95 Securities ...... ..... 1.11 1.09 1.06 .90 .75 .73 .77 .87 .93 .71 Gross federal funds sold and reverse RPs .. ". .18 .22 .15 .08 .04 .03 .06 .13 .17 .10 Other ....... , . ...... ,. .14 .18 .21 .18 .15 .15 .18 .23 .29 .26 Gr D os e s p o in s t i e ts r est ex .. p . e . n , s . e " . , . .. . ., ...... .,.,',. 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 84 8 2 2. .0 9 4 6 1 1 . . 2 9 8 0 Gross federal funds purchased and RPs . .51 .56 .38 .17 .12 .13 .23 .30 .32 .14 Other .... ... .... .74 .99 .75 .51 .41 .40 .53 .63 .59 .48 ".," Net i T nt a e x r a e b st l e i n e c q o u m iv e a lent ..... .. . . .. .. . . .. .. . .. . . . . . . . .. . . . , .. 3 3 . . 7 7 5 8 3 3. . 6 5 1 8 3 3 . .5 5 9 6 3 3. . 5 57 4 3 3. . 3 4 7 0 3 3 . . 3 36 9 3 B .3 7 4 3 3 . . 3 3 3 0 3 3. . 0 0 3 6 3 3. . 1 1 2 4 Loss provisions' .... ............ .... .55 .68 .91 .80 .67 .55 .52 .41 .55 1.69 Noninterest income ....... . ... 3.38 3.18 3.35 3.30 3.29 3.09 2.81 2.9t 2.73 2.35 T S F r e id a rv d u i c i c n i e a g r y c r h e a v a c r e t g n i e v u s i e t i o e . n s . . d . e . p . o . s . i . ts .. . . . . . . . . .. . . . . . . .. . . . . . .. . . . ., . . . . . . . . .. . . . .. . . . .0 4 4 8 2 8 . . . 4 5 07 2 2 . . .4 0 4 2 8 2 . . . 0 4 4 8 2 2 . . .. 4 0 1 2 9 7 . . A 0 4 O 7 2 . . . 0 3 3 7 5 6 . . . 0 4 3 1 7 5 . . . 3 0 5 3 9 4 -. . , 0 4 ,\ 1 4 2 Interest rate exposures. ..... , .... .02 .02 .04 .04 .04 -.01 -.01 .02 " -.02 O Fo th re e i r g n co e m x m ch o a d n i g ty e a ra n t d e e e q x u p i o ty su e r x es p o . s ures .. " .0 5 * .0 4 • .0 3 • .0 4 . . 0 0 1 4 . . 0 0 3 5 . .0 0 4 2 • .0 5 . " 08 • .0 8 Oth C e r r e dit exposures .... ..... , .. , .......... . ... 2 n. . a 4 . 0 2 Il . . 1 a. 8 2 o. .4 a 3 . 2 n. . a 3 . 7 2 n. A a. I 2 n. . a 2 . 0 2 n . .a 0 . 3 2 n . .a 0 . 9 1 . . 0 7 1 7 - 1 . . 1 6 0 6 Noninterest expense .. ..... 4.15 4.00 3.95 3.73 3.64 3.55 .\..\6 3.34 345 3.54 Salaries, wages, and employee benefits .... .. 1.54 1.44 1.47 1.49 1.47 1.45 1.37 1.34 1.32 1.22 Occupancy . ...... . . . . . . . . . .46 .43 .42 .40 .41 .39 .37 .33 .34 .32 Other .... , ........ . . . , . , . . . . . . . . . . .. 2.16 2.14 2.07 1.84 1.76 1.70 1.62 1.68 1.79 2.00 Net noninterest expense .......... ........ . ... .77 .82 .60 .43 .35 .45 .55 .43 .72 1:19 Gains on investment account securities .......... -.01 -.05 .09 .10 06 .03 " -.03 -.05 -.29 Income before \HXeS and extraordinary items 2.42 2JJ2 2.14 2.41 2.42 2.39 2.27 2.4.\ 1.71 -.05 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 , i . n . c . ome taxes . . . . . .. . , • .8 7 • .7 0 • .7 4 • .8 2 • .8 2 •.8 2 . . 7 01 7 . . 8 0 3 7 - . .0 5 5 9 -. . 0 1 1 2 Ne C t a i s n h c o d m iv e id . end .. s . d .. e . c l . a . re . d . .. . . . . . . . . , .... .. .. . . .. . . ... . . . . . . 1 1 . . 5 1 5 7 1 . . 9 3 4 2 1 . . 9 3 6 9 1 . . 9 5 9 9 1 1 . . 0 5 5 9 1 . . 9 57 5 1 1 . . 0 5 0 0 1 1 . . 3 6 7 7 1 1. . 0 2 6 6 -. A 1 3 8 Retained income ,., . .... .. ................ ,. .38 .38 .43 .60 .54 .62 .50 .30 -.20 -.62 MEMO: Return on equity .. ... ... 18.59 1.'1.72 15.74 17.24 17.03 15.54 13.48 14.05 9.16 -1.55 NOTE: Data are as of Apri I 16, 2009. by multifamily residential properties; and loans to finance commercial real es I. Effective October I, 2008, the Federal Reserve began paying interest on une, construction. and land development activities not secured by real estate. depository inslitutjons' required and excess reserve balances. Beginning with 5. Other real estate owned is a component of other noninterest-earning the 2008:Q4 Call Report, balances due from Federal Reserve Banks are nOw assets. reported under "Interest-eaming assets" rather Ihan "Noninlerest-earning assets." 6. When possible. based on the average of quarterl), balance sheet data re- 2. InCludes allocated transfer risk reserve. poned on schedule RC-K of the quarterly Call Repon. 3. Measured as the sum of large time deposits in domestic offices. deposits 7. Includes provisions for allocated transfer risk. booked in foreign offices, subordinated notes and debentures, federal funds * In absolute value. less U13n 0.005 percent. purchased and securities sold under repurchase agreements. Federal Home n.a. Not available. Loan Bank advances, and other borrowed money. MMDA Money market deposit account. 4. Measured as the sum of construction and land development loans secured RP Repurchase agreement. by real estate; real estate loans secured by nonfam, nonresidential properties or M BS Mongage-backed securities.

u.s. Profits and Balance Sheet Developments at Commercial Banks in 2008 A93 A.1. Portfolio composition, interesl rates, and income and expense, U . . banks, 1999-2008 D. Banks ranked 101 through 1,000 by assets Irem 1999 I 2000 I 2001 I 2002 I 2003 I 2004 I 2005 I 2006 I 2007 I 2008 I Balance sheet items as a percentage of average net consolidated assets Interest-earning assets' . ... . . ........ 91.68 91.50 91.16 91.36 91.34 91.56 91.32 91.07 91.28 91.28 Lo C an o s m a m n e d r c le ia a l s e a s n d (n i e n t) d u . s . tr . i . a . l . . . . . . . . . . . ... . . . . .. . . . . .. .. .. . . 6 1 1 2 . . 4 6 8 6 6 1 2 2 . .9 1 5 5 6 1 2 3 . . 4 03 6 6 1 1 2 . .3 4 8 6 6 1 1 1 . . 3 5 2 0 6 1 3 1 . . 3 5 3 2 6 1 5 1 . .7 1 8 5 6 1 7 1 . . 0 6 4 8 6 1 8 2 . . 8 07 5 7 1 0 2 . . 5 5 2 8 U.S. addressees . ..... .. . .... ...... 12.34 12.60 12.65 12.06 11.20 11.21 11.48 11.45 11.80 12.31 Foreign addressees . .... , .. ....... .32 .36 .38 .31 .31 .31 .30 .23 .27 .27 Consumer . . . . . . . . . . . . . . . . ..... 10.77 10.19 9.76 8.13 6.80 6.33 5.42 5.50 5.35 5.15 Credit card ........ ....... 3.37 3.27 3.65 2.63 1.82 1.91 1.24 1.63 1.88 1.76 Installment and other .. ... ..... . . 7.40 6.92 6.11 5.50 4.98 4.42 4.18 3.87 3.46 3.39 Real estate . .......... . . . . . . . ." .0 .' .. 35.89 36.93 37.64 38.92 40.95 43.38 45.86 47.88 49.50 50.78 In domestic offices .. . .. 35.87 36.91 37.62 38.89 40.90 43.32 45.78 47.78 49.41 50.78 Construction and land development .... 148 4.15 4.90 5.40 5.89 7.01 8.86 11.01 12.85 13.04 Farmland ... .58 .65 .66 .73 .80 .91 .99 1.07 1.16 1.22 One-to four· family residential ..... ... 18.26 17.17 16.18 15.39 15.71 15.33 15.17 14.76 14.08 14.16 Home equity . . . . . . . .... ............ 1.99 2.10 2.21 2.51 2.92 3.46 3.60 3.25 3.01 3.19 Other .............. ..... . ....... 16.26 15.06 13.97 12.88 12.79 11.87 11.57 11.51 11.07 10.97 In N M fo o u r n e lt f i i g a f n r a m m o i f n l f y o ic n e r r e s e s s i i d d e e n n t t i i a a l l .. " . . . . . . ," . . .... . .. . . . . . . . , , . . . 12 1 . . .0 1 4 2 4 2 13 1 . . . 0 3 5 2 6 8 14 1 . . . 0 6 1 2 9 8 15 1 . . . 0 5 8 3 3 5 1 2 6 . . . 0 5 0 1 5 0 17 2. . . 2 8 0 4 2 6 1 2 8 . . . 0 . 3 n 8 9 1 2 8 . . . 3 1 6 2 3 0 18 2. . . 0 3 9 3 9 9 1 2 9 .. . 4 9 1 5 ' To depository institutions and acceptances of other banks ............ .46 .37 .38 .37 .37 .25 .13 .14 .14 .,.2 7 Foreign governmenls . . " .... ., .. " ... .03 .03 03 .02 .02 .01 • :+; • O A t g h r e ic r u l l o tn a r n a s l p .. r . o . d . u . c . t . io .. n . . . . , .. , ... , . . . . . . . . . . . . . , 1 . . 7 2 8 5 1 . . 8 2 2 2 1 . . 8 2 5 2 1 . . 8 18 6 1 . . 8 2 3 5 1 . . 8 32 2 1 . . 8 3 1 6 1 . . 8 2 4 0 1 . . 8 2 8 2 1 . . 9 37 0 L LE e S a S s : e - U fi n n e a a n r c n in ed g r in ec c e o i m va e b o le n s l , o . a . n . s . . , ... , .....' . -. . 0 7 8 8 -. . 0 7 8 5 -. . 0 7 7 4 -. . 0 75 6 -. .6 0 7 6 -. . 0 7 6 5 -. . 0 75 6 - . .0 75 6 - . . 6 0 5 6 - . . 6 0 5 6 Lr.ss: Loss reserves' . ...... ....... -1.06 -1.04 -1.12 -1.10 -1.02 -.98 -.90 -.88 -.91 -1.12 Securities ......... ....... ...... 25.18 24.34 22.81 23.86 24.36 23.59 21.57 19.55 18.30 16.96 Investment account ......... .... ........... 25.10 24.25 22.70 23.80 24.23 23.54 21.50 19.47 18.10 16.80 Debt . . . . . . . .. . . . 24.34 23.46 22.28 23.30 23.79 13.18 21.21 19.20 17.69 16.27 .... U.S. Treasury .... 2.53 1.81 1.32 1.22 1.00 1.02 .83 .59 .47 .36 U.S. governmeOl agency and corporation obligations . . . . . . . . . . . 16.28 15.56 14.70 15.85 16.96 16.70 15.05 13.55 12.32 11.32 Government·backed mongage pools. 6.72 6.22 6.27 6.55 7.03 6.80 5.73 4.83 4.57 5.24 Collateralized mortgage obligations 3.52 3.04 3.08 3.69 3.69 3.41 3.16 2.81 2.60 2.42 Other .. .... . ........ 6.04 6.30 5.35 5.60 6.24 6.49 6.16 5.90 5.15 3.66 State and local government ....... 2.90 2.91 2.90 2.89 2.95 2.92 2.78 2.74 2.77 2.73 Private mongage-backed securities ... 1.03 .99 .94 .99 .87 1.08 1.17 1.08 1.01 .86 Other .. ....................... 1.60 2.19 2.42 2.34 2.01 1.46 1.37 1.24 1.12 1.00 Equity ... ..... . . . . . . . . . . . . . . ..... ... .77 .79 .43 .50 .43 .36 .29 .27 .41 .53 Trading account ..... .............. ........ .08 .09 .11 .06 .14 .05 .08 .07 .20 .17 Gross federal funds sold and reverse RPs ..... 3.35 3.40 4.20 4.15 3.85 2.95 2.8.~ 2.81 2.57 2.01 Balances at depositories I . ..... .. ... 1.68 1.60 1.68 1.89 1.81 1.69 1.76 1.67 1.57 1.78 No R n. e in v l a e l r u e a s t l i - o ea n r g n a in in g s a h s e sc ld tl i i I n . t . r . a ding . . a . c . c . o . u . n . t s 8. .0 3 1 2 8. .0 5 2 0 8. .0 8 1 4 8. .0 6 1 4 8 • .6 6 8 ' . " 44 8 * .6 8 8 . . 0 9 3 3 8. . 7 0 2 4 8. . 7 0 2 6 Other ........ ..... ... . ..... 8.31 8.49 8.84 8.64 8.66 8.44 8.68 8.90 8.67 8.66 Liabilities .... ... ............ ............ 90.90 90.95 90.32 89.93 89.68 89.18 89.10 89.01 88.87 89.23 Core deposits ·1···· ...... ...... 62.48 60.80 60.33 61.26 61.30 60.39 59.03 58.04 59.68 58.91 Transaction deposits .. ...... ..... .... 13.93 12.29 11.48 11.37 11.50 11.77 11.15 9.82 8.43 7.74 Demand deposits ....... ..... ....... 10.19 8.97 8.23 8.05 7.96 8.12 7.87 6.99 5.94 5.32 Other checkable deposits . 3.74 3.32 3.25 3.32 3.54 3.64 3.28 2.83 2.49 2.42 Savings deposils (including MMDAs) . 28.56 28.55 29.40 3B4 34.00 34.42 33.75 32.82 32.89 31.04 Small time deposits . ...... 19.98 19.96 19.46 17.55 15.80 14.21 14.13 15.41 18.36 2013 Managed liabilities' .. ..... ..... 26.33 28.01 27.75 26.57 26.40 26.98 28.38 29.32 27.51 28.74 Large ti me deposits ......... ............. 10.29 11.98 12.60 12.17 11.92 12.12 13.64 15.21 14.42 14.15 Deposits booked in foreign offices ...... 1.20 1.28 1.24 .88 .64 .65 .57 .52 .57 .72 Subordinated notes and debentures ..... .35 .30 .31 .34 .35 .35 .27 .24 .22 .21 Gross federal funds purchased and RPs . ., .. 6.90 6.30 5.77 5.27 5.35 5.52 5 . .54 5.40 5.33 5.26 Other managed liabilities ... . ...... 7.58 8.15 7.84 7.90 8.13 8.34 8.35 7.94 6.97 8.39 Revaluation losses held in trading accounts .01 • .01 .01 • • .01 .01 .02 Other . .......... .............. 2.09 2.13 2.23 2.08 1.98 1.81 1.69 1.64 1.66 1.57 Capit.11 account . ... ...... ....... ........ 9.10 9.05 9.68 10.07 10.32 10.82 10.90 10.99 11.13 10.77 C M o E m M m O ercial real estate loans· ........ ....... 17.27 19.32 21.03 23.05 24.62 27.28 29.84 32.22 34.52 35.86 .... Other real estate owned' .. ........... ... . .08 .07 .08 .10 .11 .10 .08 .08 .11 .28 Mongage·backed securities ... .... ... .. .... 11.27 10.25 10.29 11.24 11.59 11.29 10.06 8.72 8.18 8.52 F B e a d I l n a e t n r e a c r l e e s H s t a · o t e m a t r h e n e i L n F o g e a d n .. e r B a a l n R k e . a s . e d . r v v a e n I c . e . . s . . . . .. . . . . . , . . '. . . . . . . . . . . . . . . . . . . . . . . . . n n. . . a a 5 . . 5 n n. . . a a 5 . 7 , 5 n. . . a 2 5 . 7 4 5 n . . . 7 a 5 . 1 2 6 n. . . a 5 2 . 9 9 6 n . . . 4 5 a. 5 6 6 n . . . 4 a 4 . 2 7 6 D . . . 1 a 3 1 . 6 5 n. . . a 5 2 . 3 9 7 J 1 . . . 0 J 4 4 4 5 Noninrerest·earning .... ........... ... ........ .55 .57 .54 .52 .59 .55 .47 .36 .29 .31 Intcrest-earning balances at depositories other than the Federal Reserve ... ......... 1.68 1.60 1.68 1.89 1.81 1.69 1.76 1.67 1.57 1.55 Average net consolidated assets (billions of dollars) ........ ... ... ....... 974 986 1.002 1.022 1.072 1,080 1,152 1,249 1.267 1.278

A94 Federal Reserve Bulletin 0 June 2009 A.1. Portfolio composition. inter SI rilleS, and income and expense, .S. barrks.1999-2008- Colllillued D. Banks ranked 101 through t,ooo by assets- Conlinued hem 1~9 I 2000 I 2001 I 2~ I 2003 I 2~ I 2005 I 2~ I 2007 I 2008 Effective interest rate (percent)" Rates earned Interesl-earning assets .........•................ 7.83 8,48 7.85 6.42 5.59 5.46 6.12 7.01 7.31 6.24 Taxable equivalent .............. . 7.92 8.56 7.94 6.50 5.67 5.53 6.19 7.08 7.38 6.30 Loans and leases. gross . 8.74 9,42 8.76 7.31 6.56 6.25 6.90 7.79 8.02 6.72 Net of loss provisions. 8.25 8.75 7.87 6.55 6.01 5.87 6.64 7.54 7.44 5.09 Securities .,.. . ....................... . 6.04 6.45 5.96 4.95 3.81 3.79 4.03 4.53 4.86 4.76 Taxable equivalent 6.29 6.71 6.24 5.21 4.06 4.04 4.28 4.80 5.14 5.01 Investment account ... 6.03 6.45 5.95 4.93 3.82 3.78 4.02 4.53 4.85 4.76 U.S. Treasury securities and U.S. govemment agency obligations (excluding MBS) .......... .. n.a. n.a. 5.85 4.54 3.42 3.15 3.'17 4.19 4.74 4.45 ~Iortgage-backed securities n.a. Il.a. 6.33 5.38 3.95 4.01 4.23 4.64 4.96 5.09 Other n.a. n.3. 5.40 4.51 4.07 4.21 4.'12 4.81 4.81 4.42 Trading account ... 7.18 9.30 6.60 14.05 3.07 10.30 6.59 4.92 5.25 4.44 Gross federal funds sold and reverse RPs 4.98 6.15 3.91 1.73 1.27 1.57 3.31 4.94 4.87 2.12 [nterest-bearing balances at depositories I 5.07 5.76 3.93 1.79 1.26 1.47 3.29 4.58 4.56 2.21 Rules paid Interest-be.'U"ing liabilities 4.09 4.79 3.97 2.45 1.80 1.65 2.36 3.38 3.78 2.79 Interest-bearing deposils 3.84 4.46 3.81 2.28 1.61 1.44 2.09 3.11 3.59 2.72 In foreign offices .. 5.07 6.13 4.27 2.14 1,43 1.43 3.05 4.50 4.63 2.29 In domestic offices .. 3.82 4.43 .'\.81 2.28 1.61 1.44 2.08 3.10 3.58 2.73 Other checlmble deposits I.~ 2.27 1.81 1.06 .74 .72 Ll8 1.74 1.89 1.17 Savings deposits (including MMDAs) .. 2.65 3.07 2.22 1.17 .75 .74 1.27 2.06 2.38 1.39 Large time deposits 5.17 6.00 5.27 3.32 2.58 2.33 3.21 4.41 4.90 3.91 Other time deposits .................... . 5.11 5.74 5.51 3.77 2.86 2.51 3.10 4.19 4.83 4.03 Gross federal funds purchased and RPs .. 4.82 5.95 3.82 1.83 1.29 lAS 2.94 4.52 4.49 2.30 Other interest-bearing liabilities 5.47 6.46 5.32 4.22 3.57 3.37 4.02 4.75 5.04 3.66 Income and expense as a percentage of average net consolidated assets Gross interest income 7.19 7.79 7.16 5.84 5.07 4.~ 5.57 6.40 6.67 5.71 Taxable equivalent 7.27 7.86 7.23 5.91 5.15 5.06 5.64 6.46 6.74 5.76 Loans. 5.47 5.96 5.59 4.56 4.07 4.01 4.55 5.29 5.58 4.80 Securities ........... . 1.51 1.58 1.33 1.15 .91 .88 .86 .89 .88 .80 Gross federal funds sold and reverse RPs . .17 .21 .16 .07 .05 .05 .09 .14 .12 .04 Other .04 .04 .08 .06 .05 .05 .07 .09 .09 .06 Gross inlerest expense ...... . 3.20 3.79 3.14 1.92 1.41 1.29 1.84 2.67 3.00 2.24 Deposits ............. .. 2.44 287 2.48 1.49 1.04 .92 1.34 2.04 2,41 1.81 Gross federal funds purchased and RPs . .34 .38 .22 .09 .07 .08 .16 .24 .24 .12 Other .42 .54 .44 .34 .30 .29 .34 .39 .36 .31 Net interest iucome 3.99 4.00 4.02 3.92 3.67 3.70 3.73 3.73 3.67 3.47 Taxable equivalent 4.07 4.07 4.10 3.~ 3.74 3.77 3.79 3.79 3.73 3.52 Loss provisions7 .39 .52 .65 .54 .40 .30 .24 .23 .47 1.22 Noninteresl income ............... ,. 2.31 2.35 2.37 2.36 2.30 2.26 2.02 1.98 1.88 1.50 Service charges on deposils .38 .36 .39 AI ,41 .39 .36 .35 .36 .36 Fiduciary activities .38 .44 .40 .35 .34 .37 .35 .30 .31 .31 Trading revenue ............ .. .02 .01 .01 .01 .01 .01 .01 -.01 Interest rate exposures. .01 .01 -.01 .01 .01 .01 Foreign exchange rate exposures .. Other commOdity and equity exposures .. -.01 Credit exposures ............. . n.a. n.3. n.a. n.a. n.n. n.a. n.3. n.3. Other 1.53 1.55 1.58 1.60 1.54 1,49 1.30 1.32 1.20 .83 Noninterest expense .... 3.70 3.84 3.88 3.72 3.59 3.54 3.37 3.35 3.26 3.38 Salaries. wages. and employee benefits 1.56 1.59 1.61 1.64 1.64 1.64 1.61 1.59 1.57 1.46 Occupancy .. .47 .47 .46 AS .43 .43 .41 .40 .40 .39 Other...... . ........... . 1.68 1.78 1.81 1.63 1.53 1.48 1.36 1.35 1.28 1.53 Net noninterest expense 1.39 1.48 1.52 1.35 1.29 1.29 1.35 1.36 1.38 1.88 Gains on investment account securities. -.01 -.04 .05 .04 .05 .02 -.01 -.01 -.01 -.21 Income before taxes lUld extraordinary items 2.19 1.96 1.90 2.07 2.02 2.13 2.13 2.12 1.81 .15 Taxes ............ . .74 .67 .66 .67 .66 .68 .68 .69 .57 .14 Extraordinary items, net of income taxes .. .01 .01 .03 Net income ... 1.46 1.29 1.25 1.39 1.39 1.45 1.45 1.43 1.23 .01 Cash dividends d~c1ared 1.06 .92 1.33 Ll9 1.64 .78 .87 .89 .91 .57 Retained income .40 .37 -.08 .20 -.25 .68 .58 .54 .32 -.56 Memo: Return on equity 16.10 14.21 12.93 13.83 13.46 13.42 13.33 13.03 11.08 .07 NOTE: Data are as of April 16,2009. by multifamily residential properties: and loans to finance commercial real es I. Effective October I, 2008. the Federal Resen'e began paying interest on tate. conslruction. and land developmenl activities not secured by real estate. depository institutions' required and excess reserve balances. Beginning with 5. Other real estate owned is a component of other noninleresl-earning the 2008:Q4 Call Report. balances due from Federal Reserve Banks are now assel.s. reported under "Interesl-earning assets" rather than "Noninterest-earning assels." 6. When possible. based on the average of quarterly balance sheel data re- 2. Includes allocated transfer risk reserve. ported on schedule RC-K of the quarterly Call Report. 3. Measured as the sum of large time deposits in domestic offices, deposils 7. Includes provisions for allocated transfer risk. booked in foreign offices, subordinaled notes and debentures. federal funds * In absolule value, less Ihan 0.005 percent. purchased and securities sold under repurchase agreements. Federal Home n.a. Not available. Loan Bank advances. and other borrowed money. MMDA Money market deposit account. 4. Measured as the sum of construction and land development loans secured RP Repurchase agreement. by real estate; real estale loans secured by nonfarm nonresidential properties or MBS Mortgage-backed securities.

u.s. Profits and Balance Sheet Developments at Commercial Banks in 2008 A95 A.I Ponf lio compo ilion, interest rate, and in orne llnd expen. e. U.S. banks. 1999-2008 E. Banks nO! ranked among the 1,000 largest by assets I I I I I I I I I Item 1999 2000 200 I 2002 2003 2004 2005 2006 2007 2008 Balance sheet items as a percentage of average net consolidated assets Interest.earning assets I ....................... .. 92.55 92.52 92.30 92.27 92.16 92.34 92.29 92.36 92.39 92.15 Loans and leases (net) . 59.76 62.31 62.67 62.72 62.32 63.80 65.43 66.65 67.29 67.82 Commercial and industrial.. . .•........... 10.64 11.09 11.10 10.71 10.42 10.29 10.21 10.17 10.25 10.35 U.S. addressees ... 10.55 11.02 11.02 10.65 10.37 10.25 10.15 10.12 10.21 10.30 Foreign addressees. . . ........... . .08 .07 .IJ7 .06 .05 .04 .05 .04 .04 .04 Consumer .................... . 8.16 7.98 7.42 6.77 6.16 5.45 4.97 4.63 4.36 4.07 Credit card . . . ... . ....... . .69 .59 .59 .49 .51 .40 .36 .37 .37 .35 Installment and other ........•......... 7.47 7.39 6.83 6.28 5.64 5.05 4.61 4.25 3.99 .1.72 Real estate . . . . . . . . . . . . ..... . 36.84 39.29 40.30 41.52 42.30 44.75 46.97 48.54 49.28 50.09 In domestic offices .......... . 36.83 39.29 40.30 41.52 42.30 44.74 46.97 48.53 49.28 50.09 Construction and land development . 3.28 3.70 4.23 4.51 4.99 6.01 7.46 9.10 10.01 9.63 Farmland ............. . 2.95 3.06 3.04 3.08 3.13 3.22 3.25 3.26 3.38 3.48 One· to four-family residential .. 17.66 18.43 18.24 17.91 17.08 17.17 17.12 16.69 16.31 16.63 Home equity . . . ............ . 1.17 1.28 1.37 1.62 1.79 2.11 2.20 2.06 2.01 2.11 Other........... . ....... . 16.49 17.15 16.87 16.29 15.29 15.06 14.93 14.63 14.30 14.52 Multiiamily residential. . .... . .98 1.04 1.06 1.16 1.28 1.41 1,48 1.47 1.50 1..61 Nonfarm nonresidential ............. . 11.96 13.06 13.71 14.86 15.82 16.94 17.66 18.01 18.W 18.73 • • • • • • • In foreign offices .......... . * To depository institutions and acceptances of other banks ........... . .14 .12 .12 .10 .09 .05 .05 .06 .06 Foreign governmems .. . . .. . .. . .01 .01 Agricultural production. ..... . .... . 4.06 3.85 3.76 3.64 HO 3.26 3.21 3.22 3.26 3.24 Other loans . . ............ . .67 .69 .67 .65 .66 .68 .70 .70 .70 .73 Lease-financing receiv:obles ... . ..... . .26 .27 .27 .31 .26 .25 .24 .26 .27 .26 LESS: Unearned income on loans .......... . -.15 -.11 -.09 -.07 -.06 -.06 -.05 -.05 -.04 -.04 LF.ss: Loss reserves' .. . .............. . -.87 -.88 -.88 -.90 -.92 -.89 -.87 -.87 -.87 -.93 Securities ... ... . 26.91 25.40 22.80 23.34 23.47 23.34 21.92 20.54 19.65 19.20 Investment account ..................... . 26.88 25.38 22.79 23.33 23.43 23.34 21.91 20.52 19.58 19.16 Debt 26.34 24.82 22.49 23.05 23.12 23.07 21.70 20.35 19.41 18.97 U.S. Treasury ................ . ... . 3.34 2.12 1.33 1.04 .90 .81 .71 .61 .47 .33 U.S. government agency and corporation obligations. 16.89 16.95 15.27 16.07 16.23 16.57 15.64 14.73 14.01 13.44 Government-backed mongage pools. 3.95 3.47 3.78 4.54 4.84 4.76 4.23 3.62 3.55 4.80 Collateralized mortgage Obligations 2.00 1.70 1.94 2.30 2.20 1.96 1.71 1.50 1.55 1.76 Other................ . .. 10.93 11.78 9.56 9.23 9.19 9.85 9.70 9.61 8.92 6.88 State and local government ... 4.96 4.64 4.51 4.56 4.73 4.67 4.49 4.30 4.20 4.24 Private mongage-backed securities .26 .23 .27 .26 .21 .19 .22 .24 .29 .47 Other ........................ .. .89 .88 1.11 1.12 1.05 .83 .65 .48 .43 .49 Equity.. ...... . .53 .56 .30 .27 .31 .26 .20 .17 .17 .19 Trading account. . ............ . .Q3 .02 .01 .01 .04 .01 .02 .02 .07 .04 Gross federal funds sold and reverse RPs . 4.17 3.22 5.01 4.26 4.27 3.33 3.24 3.53 3.92 3.29 Balances at depositories I . . . . . . . . . . .... 1.71 1.59 1.82 1.95 2.11 1.86 1.69 1.64 1.54 1.84 Non R i e n v t a c l r u e a ~ t t io - n ea g mi a n in g s a h s e s l e d ts i I n , t . r ading accounts . 7 • .4 5 7 • .4 8 7 • .7 0 7 • .7 3 7.84 7.66 7.71 7 * .6 4 7.61 7.85 Other .... ... .. ..... 7.45 7.48 7.70 7.73 7.84 7.66 7.71 7.64 7.61 7.85 Liabilities .. . . .. .. .. .. .. . ......... .. 89.75 89.88 89.59 89.73 89.58 89.55 89.49 89.35 88.95 89.12 Core deposits .................. .. 72.74 70.87 69.92 70.04 69.96 69.24 67.68 65.74 65.12 64.27 Transaction deposits. . ................. . 23.87 23.20 22.35 22.66 23.18 23.36 22.72 2081 18.66 17.75 Demand deposits . . . . . . .. . ... . 12.80 12.64 12.16 12.24 12.58 12.77 12.77 11.97 10.73 10.06 Other checkable deposits .......... . 11.07 10.57 10.19 10.42 10.60 10.59 9.95 8.84 7.93 7.68 Savings deposits (including MMDAs) . 19.77 19.19 19.38 21.32 22.43 23.24 22.98 22.66 22.68 22.56 Small time deposits ........ . 29.10 28.48 28.20 26.05 24.36 22.64 21.98 22.28 23.78 23.97 Managed liabilities) ............... . .. . 16.09 18.08 18.67 18.79 18.78 19.57 21.04 22.76 22.92 24.02 L.'Ifge time deposits .............. . ... . 11.52 12.51 13.55 13.21 13.07 13.15 14.53 16.49 16.91 16.64 Deposits booked in foreign offices ... . .08 .05 .06 .07 .06 .07 06 .06 .05 .06 Subordinated nOles and debentures .. . .01 .02 .02 .04 .03 .04 .03 .03 .03 .03 Gross lederal funds purchased and RPs .... . 1.79 2.06 1.55 1.51 1.52 1.76 1.74 1.82 1.82 1.87 Other managed liabilities ... .... . .. . 2.69 3.44 3 • A 9 3 • .9 6 4.09 4.54 4.68 4.36 4.11 5.41 Revaluation losses held in trading accounts . Other ................. ..... .. . .92 .93 1.00 .90 .84 .74 .77 .84 .91 .82 Capital account ................... _" 10.25 10.12 lOA I 10.27 10.42 10.45 10.51 10.65 11.05 10.88 MEMO Commercial real estate loans4 ............ . 16.33 17.91 19.15 20.67 22.23 24.50 26.77 28.81 29.88 30.34 Other real estate owned' . . . . . ........ . .11 .11 .12 .14 .15 .14 .13 .12 .16 .35 Mongage-backed securities .................... . 6.22 5.39 5.99 7.10 7.25 6.91 6.16 5.36 5.39 7.03 Federal Home Loan Bank advances. . .. n.a. n.a. 3.34 3.71 3.87 4.32 4.46 4.14 193 5.20 Balances at the Federal Reserve I ........•••... .93 .93 .76 .79 .87 .78 .70 .57 .45 1.26 Interest-earning. . . . . . . .. . ....... . n.a. n.a. n.a. 11.3. n.a. n.U. n.n. n.n. n.a. .82 Nonjnterest-earning . . . . . . .. . . . . . . . . . . . . . . . . .93 .93 .76 .79 .87 .78 .70 .57 .45 ,45 Interest·earning balances at depositories other than the Federal Reserve ............ . 1.71 1.59 1.82 1.95 2.11 1.86 1.69 1.64 1.54 1.71 Average net consolidated assets (billions of dollars).. " .... " ...... " .... 652 655 675 704 742 768 805 840 862 882

A96 Federal Reserve Bulletin 0 June 2009 A.1. Ponrolio ·onlposition. interest rates, and income and expense, .S. banks. 1999-2008- Conlil/lled E. Banks not ranked among the 1.000 largest by assets-Continued I I I I I I I I I Item 1999 2000 200 I 2002 2003 2004 2005 2006 2007 2008 Effective interest rate (percent)" Rates earned Interest-earning assets ... 8.04 8.44 7.92 6.79 5.94 5.73 6.23 7.01 7.26 6.34 Taxable equivalent 8.17 8.56 8.03 6.90 6.05 5.84 6.33 7.10 7.35 6.42 Loans and leases. gross 9.27 9.51 9.01 7.83 7.08 6.72 7.17 7.94 8.13 7.03 Net of loss provisions 8.89 9.14 8.60 7.39 6.72 6.45 6.94 7.74 7.81 6.18 Securities .. 5.88 6.15 5.86 5.03 3.87 3.74 3.87 4.28 4.68 4.70 Taxable equivalent. 6.29 6.54 6.27 5.43 4.26 4.1 I 4.24 4.65 5.06 5.05 Investment account. . ................. . 5.88 6.15 5.86 5.02 3.87 3.73 3.86 4.28 4.68 4.70 U.S. Treasury securities and U.S. government agency obligations (excluding MBS) ... . ............ . n.a. n.a. 5.97 4.80 3.74 .1.38 3.53 4.12 4.69 4.62 Mongage·backed securities .. n.a. n.a. 6.20 5.47 3.58 3.90 4.17 4.59 4.96 5.08 Other ...... . ................ . n.a. n.a. 5.29 4.87 4.43 4.18 4.16 4.25 4.33 4.28 Trading account. . ....................... . 3.60 4.01 6.43 15.38 2.89 18.95 7.52 7.50 4.74 4.34 Gross federal funds sold and reverse RPs 4.96 6.24 3.82 1.63 1.08 1.J2 3.21 4.95 5.05 2.17 Interest·bearing balances at depositories I . 5.65 6.38 4.56 2.68 1.97 2.02 3.21 4.64 5.06 3.03 Rates paid Interest·bearing liabilities. 4.32 4.84 4.43 2.93 2.14 1.88 2.44 3.42 3.91 3.06 Interest·bearing deposits 4.21 4.67 4.31 2.78 2.02 1.75 2.29 3.28 3.81 2.99 In foreign offices ... 4.12 5.U 3.97 1.67 .85 1.04 2.86 4.27 4.66 2.28 In domestic offices 4.21 4.67 4.31 2.78 2.02 1.75 2.29 3.28 3.80 2.99 Other checkable deposits ............. . 2.28 2.47 1.97 1.16 .78 .69 .99 1.45 1.62 1.11 Savings deposits (including MMDAs) . 3.20 3.56 2.81 1.72 1.13 1.04 1.53 2.34 2.67 1.65 Large time deposits 5.21 5.89 5.52 3.61 2.79 2,47 3.21 4.37 4.90 4.03 Other time deposits 5.24 5.70 5.60 3.88 2.96 2.55 3.04 4.12 4.79 4.06 Gross federal funds purchased and RPs . 4.73 5.69 3.92 1.85 1.31 1,45 2.89 4.37 4.46 2.35 Other interest·bearing liabilities ..... 8.25 9.13 8.08 6.82 5. ., I 4.59 5.01 5.70 5.81 4.50 Income and expense as a percentage of average net consolidated assets Gross interest income 7.48 7.83 7.33 6.31 5.46 5.32 5.78 6.49 6.73 5.87 Taxable equivalent 7.60 7.95 7.44 6.41 5.56 5.41 5.87 6.58 6.82 5.95 Loans .. 5.61 5.99 5.73 5.01 4.47 4.35 4.76 5.35 5.53 4.83 Securities 1.58 1.57 1.32 1.1-6 .89 .87 .85 .88 .92 .90 Gross federal funds sold and reverse RPs . .22 .21 .20 .07 .05 .05 .11 .18 .20 .07 Other .............. . .06 .05 .08 .06 .06 .05 .06 .08 .08 .07 Gross interest expense 3.26 3.64 3.33 2.22 1.60 1.41 1.82 2.56 2.95 2.33 Deposits 3.02 3.30 3.07 1.98 1.41 1.22 1.58 2.27 2.67 2.08 Gross federal funds purchased and RPs . .08 .12 .06 .03 .02 .02 .05 .08 .08 .04 Other .. .15 .21 .20 .21 .17 .17 .19 .21 .20 .21 Net interest income .. 4.22 4.20 4.00 4.08 3.86 3.91 3.96 3.94 3.79 3.54 Taxable equivalent 4.34 4.31 4.10 419 3.96 4.00 4.05 4.03 3.87 3.62 Loss provisions' ..... . .31 .32 .33 .35 .29 .23 .21 .20 .28 .64 Noninterest income ............ . 1.44 1.31 1.30 1.39 1.47 1.38 1.33 J.31 1.33 1.19 . Service charges on deposits ................ .. .42 .43 .44 .45 .43 .43 .40 .38 .37 .36 Fiduciary activities .26 .20 .25 .27 .28 .31 .33 .36 .38 .32 Trading revenue ., • • • • Interest rate exposures ... Foreign exchange rate exposures .. Other commOdity and equity exposures. Credit exposures n.a. n.a. n.a. n.n. n.a. n.a. n,o. n.a. Other . .75 .67 .61 .67 .76 .64 .61 .57 .58 .50 Noninterest expense . 3.73 3.57 3.54 3.57 3.55 3.52 3.48 JA9 .,.53 3.50 Salaries, wages, and employee benefits 1.82 1.78 1.79 1.82 1.82 1.81 1.79 1.82 1.84 1.76 Occupancy ..... .49 .47 047 .46 .45 .45 .44 .44 .44 .44 Other .. 1.42 1.31 1.28 1.28 1.28 1.26 1.25 1.24 1.25 1.30 Net nonimerest expense 2.29 2.26 2.24 2.18 2.09 2.14 2.15 2.18 2.19 2.32 Gains on investment account securities. -.01 .04 .05 .04 .01 -.01 -.09 Income before taxes and extraordinary items 1.62 1.61 1.46 1.60 1.53 1.55 1.60 1.55 1.31 .48 Taxes .. .47 .45 .39 AI .38 .37 .38 .36 .29 .10 Extraordinary items. net of income laxes -.01 Net income .......... 1.15 1.17 1.07 1.18 1.14 1.18 1.21 1.19 1.01 .38 Cash dividends declared .. .70 .79 .64 .68 .67 64 .67 .65 67 .56 Retained income ............ . .46 .38 .43 .50 047 .54 .54 .53 .35 -.18 MEMO: Return on equity 11.26 11.52 10.28 11.49 10.97 11.25 11.54 11.14 9.18 3.53 NOTE: Data are as of April 16,2009. by multifamily residential propenies; and loans to finance commercial real es· I. Effective October I, 2008, the Federal Reserve began paying interest on tate. construction, and land development activities not secured by real estate. depository institutions' required and excess reserve balances. Beginning with 5. Other real estate owned is a component of other noninterest·earning the 2008:Q4 Call Repon, balances due from Federal Reserve Banks are now assets. reponed under "(meresl~eaming assets" rawer than "Noninreresl-earning assets." 6. When possible, based on the average of quarterly balance sheet data reo 2. Includes allocated transfer risk reserve. poned on schedule RC·K of the quanerly Call Repon. 3. Measured as the sum of large time deposits in domestic offices, deposits 7. Includes provisions for allocated transfer risk. booked in foreign offices, subordinated notes and debentures. federal funds * In absolute value, less than 0.005 percent. purchased and securities sold under repurchase agreements, Federal Home n.a. Not available. Loan Bank advances, and other borrowed money. MMDA Money market deposit account. 4. Measured as the sum of construction and land development loalls secured RP Repurchase agreement. by real estate: real eslate loans secured by nonfarm nonresidential properties or MBS Mongage·backed securities.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008 A97 A.2. Repon of illcome, all U.S. bank 1999-2008 Millions of dollars lIem 1999 2008 Gross interest income .. ............. 367.123 423.845 404,251 349,603 329.218 348,667 426.600 551,039 616.995 566,000 Taxable equivalent ........... 369.758 426,479 406,937 352.351 332,000 351.651 429.556 554,295 620,456 568.685 LOilllS 279,217 326,804 3 \I ,539 269,397 257.697 269.408 328.088 421.879 464.879 426.181 Securities . 62,415 67.666 63,061 59,3 \I 53,316 58,577 65,864 78,913 82,710 81,548 Gross federal funds sold and reverse repurchase agreements . 12,337 \3,546 12,647 6.221 5,015 5.142 11.045 21,288 28.682 16,853 Other. 13.157 15,829 17,006 14,672 13.189 15,538 21,602 28,959 40.723 41.418 Gross interest expense . . . . . . . . . . . . . . . 175,397 222.161 188,746 \18,741 94.123 98.541 162.501 263,372 3100412 227,066 Deposits .. 119,969 151,147 \32.311 81,701 62,400 63,639 105.922 173,878 212,783 154,812 Gross federal funds purchased and repurchase agreements . 21.210 26,860 19,583 9,920 7,590 8,842 19.161 33,775 37,715 19,755 Other ......................... 34,215 44.155 36,852 27,122 24.133 26.058 37,418 55,720 59,914 52,499 .. Net interest income . . . . . . . . . . 191,726 201.684 215.505 230,862 235.095 250,126 264.099 287.667 306.583 338.934 Taxable equivalent .........~ .. 194.361 204,318 218.191 233,610 237,877 253,110 267.055 290.923 310.044 341.619 Loss provisions. 21.220 29.386 43,084 45,206 32.742 23.894 25.579 25,386 56.746 170,019 .... Noninterest income. ....... 144.800 153.101 160.902 168.236 183.792 188.999 201.768 222,887 218,554 207,880 Service charges on deposits. ~ 21.591 23.720 26,872 29,629 31.692 33,454 33.830 36.194 39.187 42.540 Fiduciary activities ... 20.519 22,202 21.988 21.404 22,453 25.088 26.381 28.312 32,962 32,907 Trading revenue ................. 10,437 12.235 12.382 10,794 \1,605 10.303 14.375 19,170 5.289 -2.336 Other. 92.256 94,945 99,658 106.410 118.042 120,154 127.180 139.213 141,115 134.767 Noninterest expense 205.207 216,375 225.979 230.128 243.214 263,304 274,136 294,890 321,406 355,910 Salaries, wages, and employee benefits . 86,396 89,016 94,196 100,447 108.446 115,254 124.038 135.868 144.700 147,595 Occupancy. 25,945 26.762 27,939 29,311 31,314 33,253 35.051 36,393 38.531 40,909 Other. 92.867 100,598 103.846 100,368 103,453 114.797 115.048 122,629 138,177 167,406 Net noninterest expense .. 60,407 63,274 65.077 61.892 59.422 74,305 72.368 72.003 102,852 148,030 Gains on investment account securities 246 -2,280 4.630 6.411 5,633 3.393 -220 -1.320 -649 -16,186 1n co me before taxes . 110.345 106.741 111,971 130.176 148,563 155.322 165.933 188.960 146.335 4.698 Taxes. 39,315 37,249 37,284 42,816 48.498 50,264 53,568 60,956 44.230 2,199 Extraordinary items, net of income taxes 169 -31 -324 ...{j8 427 59 241 2.647 -1,672 5.388 Net income. 71,199 69,461 74,363 87,291 100,494 105,115 112,604 130,652 100,433 7,887 Cash dividends declared . 52.280 52.547 54,844 67,230 77,757 59.523 64,624 82,310 85,265 43.253 Retained income 18.919 16.915 19,519 20,062 22.738 45,591 47,981 48.340 15,168 -35.367 NOTE: Data are as of April 16,2009.

A99 July 2009 u.s. Households' Access to and Use of Electronic Banking, 1989-2007 Catherine J. Bell and Jeanne M. Hogarth, of the years have reduced consumers' willingness to use Board's Division of Consumer and Community Af some technologies.3 fairs, and Eric Robbins, of the Federal Reserve Bank This article examines changes over time in con of Kansas City, prepared this article. sumers' access to, adoption of, and attitudes toward various forms of electronic banking (e-banking), Consumers are increasingly embracing electronic including the use of automated teller machines technology as a means of making payments and (ATMs), debit cards, direct deposit, preauthorized managing their personal finances. Data from the 2007 payments, phone banking, online banking, smart Federal Reserve Payments Study show a continuing cards, and prepaid cards. The article also updates data shift away from paper-based transactions, such as on electronic banking reported earlier and looks at payments by cash and check, and toward electronic several emerging technologies.4 The analyses are transactions, in particular, automated deposits and based on data from two sources: the Federal Re payments and payments by debit card. I The number serve's triennial Survey of Consumer Finances (SCF) of debit card payments, for example, increased from (surveys for 1989 through 2007) and questions in 15.6 billion to 25.3 billion between 2003 and 2006, cluded by the Federal Reserve in the University of and the dollar value of debit card payments increased Michigan Survey Research Center's Surveys of Con as well (see box "How Would You Like to Pay for sumers (surveys in 1999, 2003, and 2006). The two That?"). (Payments by credit card, as a proportion of surveys are described in appendix A. Unless stated all payments, remained constant over the period.) otherwise, all analyses were restricted to households Managing their financial matters electronically that reported having an account with a bank, thrift offers consumers many potential benefits: they can, institution, or credit union. for example, arrange for timely payments at virtually any time of the day or night and can avoid overdrafts by reviewing their account balances throughout the ACCES lBlL/TY OF BANKING SERVICES month. Yet concern remains that some technologies As the financial services industry has evolved, con are not available to consumers at all income levels.2 sumer access to financial services has increased, both There is also concern that data breaches in recent in the number of brick-and-mortar bank branches and in the availability of e-banking services, such as I. Federal Reserve System (2007), "The 2007 Federal Reserve ATMs and online banking. Despite a decline of Payments Study: Noncash Payment Trends in the United States: almost 50 percent in the number of banks between 2003-2006," www.frbservices.orglfiles/communicationslpdflresearch/ 2007 _payments_study.pdf. Also see Geoffrey R. Gerdes (2008), "Recent Payment Trends in the United States," Federal Reserve Bulletin, vol. 94 (October), pp.7S-106, www.federalreserve.gov/pubs/ 3. In a survey by the Princeton Research Group on behalf of bulletinl2008/pdflpayments08.pdf; Geoffrey R. Gerdes, Jack K. Wal Consumer Reports Web Watch, respondents reported having altered ton II, May X. Liu, and Darrel W. Parke (200S), "Trends in the Use of their use of credit cards because they were concerned about identity Payment Instruments in the United States," Federal Reserve Bulletin, theft; see Consumer Reports Web Watch (2005), "Leap of Faith: vol. 91 (Spring), pp. 180-20 I, www.federalreserve.gov/pubs/bulletinl Using the Internet Despite the Dangers" (October 26), www. 200S/springOS_paymen!.pdf; and Visa USA Research Services (2006). consumerwebwatch.orglpdfslprinceton.pdf. Security concerns have "VISA Payment Panel Study: 2006 Payment Trends Study." also been cited as a barrier to consumer adoption of mobile banking; 2. Eun-Ju Lee and Jinkook Lee (2000), "Haven't Adopted Elec see Niina Mallat (2007). "Ex.ploring Consumer Adoption of Mobile tronic Financial Services Yet? The Acceptance and Diffusion of Payments: A Qualitative Study," loumal of Strategic Information Electronic Banking Technologies," Financial Counseling and Plan Systems. vol. 16 (December), pp. 413-32. ning, vol. I I (I). pp. 49-60; Jeanne M. Hogarth, Jane M. Kolodinsky, 4. Earlier data were reported in Christoslav E. Anguelov. Marianne and Tatiana Gabor (2006), "Consumer Payment Choices: Paper, A. Hilgert. and Jeanne M. Hogarth (2004). ·'U.S. Consumers and Plastic-<lr Electrons')" Consumer Iltlerests Annual (Proceedings of Electronic Banking, 1995-2003," Federal Reserve Bulletill. vol. 90 the 2006 annual conference of the American Council on Consumer (Winter), pp. 1-18, www.federalreserve.gov/pubs/bulletin/2004/ Interests), vol. S2, pp. 127-40. www.consumerinterests.orglfilesl winter04_ca.pdf. See that article for a comprehensive glossary of publiclHogarth_ConsumerPaymentChoicesPaperPlasticorElectrons.pdf. e-banking terms and a discussion of e-banking services.

AIOO Federal Reserve Bulletin 0 July 2009 How Would You Like to Pay for That? As new payment technologies have developed, consum payments by check, mid-value payments by cash or bank ers have changed the way they pay for the goods and debit card, and low-value payments by cash? Another services they buy. Although the number and volume of study found that the nature of the transaction, the transac consumers' cash transactions cannot be measured accu tion value, the environment at the point of sale, the bill's rately, indirect evidence suggests that cash transactions frequency, and the variability of the transaction value have declined. I It is certain that the use of checks as a affect consumers' decisions about which form of payment form of payment has declined substantially (table A). The to use.3 Similarly. the 2006 Visa Payment Panel Study decline between 2003 and 2006 was accompanied by an showed that in 2005. U.S. consumers were more likely to increase in the use of debit cards and the number of ACH use a credit card than another form of payment to pay for payments (for example, preauthonzed payments). a meal at a high-priced restaurant. were likely to use cash Several studies have looked at consumers' choices of or credit card to pay for a meal at a mid-priced restaurant, form of payment under differing circumstances. One study found that French consumers make high-value 2. David BOUltie and Abel Francois (2006), "Cash. Check or Bank I. Geoffrey R. Gerdes (200S). "Recent Payment Trends in the United Card? The Effects of Transaction Characteristics on Ihe Use of Payment States," Federal Reserve Bulletill. vol. 94 (October). pp.75-106. Instruments." University of Paris Working Paper, www.bos.frb.org/ IVww.federalrescrve.gov/pubslbulietin/200S/pdt1payments08.pdf; Paul W. economic/cprg/conferences/payments2006/papers/Bounie.pdf. Bauer and Daniel Littman (2007), ., Are Consumers Cashing Out?" 3. Fumiko Hayashi and Elizabeth Klee (2003), "Technology Adoption Federal Reserve Bank of Cleveland Economic Commentary (October). and Consumer Payments: Evidence from Survey Data." Review (4 Net www.clevelandfed.org/research/commentaryn007/100107.cfm. work EcUlWlllics, vol. 2 (June). pp. 175-90. A. Distribution of payments, by payment method, 2003 and 2006 Percent 2003 2006 Change, 2003 to 2006 Payment method I Dollar value I t N ra u n m sa b c e ti r o o n f s Dollar value t N ra u n m sa b c e ti r o o ns f Dollar value I lT N a u n m sa b c e t r io o ns f Checks. ... ............... 60.9 45.S 54.9 12.7 -9.S -28.6 Cards ........ ............. ... Credi t cards ... ..... . ....... 2.5 23.3 2.S 23.3 12.0 .0 Debit cards ... .............. .9 19.2 1.3 27.1 44.4 41.1 ACH ......... . . . . . . . . 35.7 10.7 40.9 15.7 14.6 46.7 Electronic benefit transfers .. • 1.0 • t.2 20.0 NOTE: Components may not sum to 100 percent because of rounding. . .. Not applicable. * In absolute value, less than .05 percent. SOURC'E: Gerdes. "Recent Payment Trends in the United States." 1980 and 2007 due to industry consolidation, the 1. Number of bank branches and ATM. in the number of bank branches has climbed steadily, at a nited Ultcs, 1980-2007 compound annual rate of growth of 2.7 percent.5 lbouoon<b Tbousanda of Growth in the number of ATMs has been even more ofATMs bulk branches soo 100 rapid, with a compound annual growth rate of 12.2 per cent (figure 1). In particular, the growth of off 400 premises ATMs (ATMs not located within a bank ---_ .... branch) has allowed consumers greater access to their 300 . -..... B .. a nk bnwch .. e . s ".-. 60 accounts. 200 .-..... - 40 100 20 S. One possible explanation for bank branch growth in an increas ingly electronic world relates to the benefit of branch networks. 1986 1989 1992 t99S 1998 2001 2004 2007 Research by the Federal Deposit Insurance Corporation shows that SOURCE: Summary of Deposits and American Bankers Association. The banks with larger branch networks have greater deposit growth and Summary of Deposits (SOD) is an annual survey conducted by the Federal higher returns on inveslment. See Gary Seale (2004), "Branching Deposit Insurance Corporation (FDIC) of branch office deposils as of June 30 for Continues to Thrive as the U.S. Banking System Consolidates," FYI: all FDIC-insured commercial banks, FDJC-supefl'ised savings banks, and An Update on Emerging Issues in Banking (October 20), www.fdic.gov/ insured branches of all foreign banks. Current and h.iSlOrical SOD data can be bankJanalyLicalJfyil20041 I 02004fyi .html. accessed through the FDIC's website. at www2.fdic.gov/sod.

u.s. Households' Access to and Use of Electronic Banking, 1989-2007 AlOl and were likely to use cash at a quick-service restaurant tions (table C). For Internet transactions. a small propor (table B).4 tion of consumers use third-party payment systems (Pay Data from the 2006 Michigan Surveys of Consumers Pal, for example), perhaps reflecting concerns about fraud also reveal the tendencies of U.S. consumers to use and data security. Although these transactions are settled different forms of payment for different types of transac- within the banking system, many third-party services operate outside the regulated banking industry. 4. Visa USA Research Services. "Visa Payment Panel Study." B. Distribution of consumer payments at various locations, by payment method, 200S Percent Payment method Payment location I. ,I I Cash I Check (gen C e r r e a d l i t p c u a rp rd o se) o~ C ~ r ; e ~ d ~ it ~ ~ c ~ ar ~ d ~ ) Debit card I Other Gas stations ............... 20 4 35 8 30 I Grocery stores .. 21 18 25 I 33 3 Department slOres .. 9 13 33 26 17 3 Discount stores ... 16 17 26 3 37 2 Hotels. ... 9 2 73 5 10 High-priced restaurants .. 20 3 59 I 12 Mid·priced restaurants .. 36 2 36 2 23 Quick·service restaurants. 66 3 12 0 17 NOTE: Components may not sum to 100 percent because of rounding. SOURCE: Visa USA Research Services. "VISA Payment Panel Study." C. Method of payment, by transaction type, 2006 Percent Payment method Transaction type Cash I Check I Credit card I Debit card I Prep.1id card I Third pany' In store (under $25) .. 43 8 18 31 0 n.u. In store (ovcr $25). 16 16 35 33 0 n.a. Internet. . n.a. I 7-1 20 0 7 NOTE: Components may not sum to 100 percent because of rounding. n.a. Not available. I. For example, Pay Pal. SOURCE: Michigan Surveys of Consumers. Growth in the number of bank branches and ATMs that consumers can initiate most transactions 24 hours narrows the distance between consumers and their a day, from remote locations. financial services providers. In the 1989 Survey of As the adoption of e-banking grows, one might Consumer Finances, 36 percent of respondents re expect brick-and-mortar branches to lose importance. ported living or working within one mile of the However, surveys continue to show that the majority nearest branch or ATM of their primary financial institution; by 2007, the proportion had grown to I. Di lance of home or workplace from clo e~l branch or 41 percent (and 86 percent lived or worked within ATM. 1989 and 2007 five miles) (table 1). Percent of respondents Consumers' Banking Tendencies Year Less than More than I mile 10 miles The ubiquity of bank branches means that most 1989 ..... 36.3 47.8 9.3 6.2 2007.. ... 40.8' 45.4 7.7 4.6 consumers have convenient access to traditional banking channels, such as brick-and-mortar branches Non: Percentages do nOI sum 10 100 percent because table does not include respondents who reported "mail" or "telephone" as the distance from the clos and ATMs. And the use of direct deposit and preau est branch. thorized payments, together with the availability of i. Includes 37.6 percent reponing "within I mile" and 3.2 percent reporting "the Internel"; Ihe Internct was not mentioned in 1989. financial services via telephone and computer, means SOURCE: Survey of Consumer Finances.

AI02 Federal Reserve Bulletin 0 July 2009 2. Main way of doing husiness with primary linancial institution, by demographic characteristic, 2006 Percent Demogrnphic characteristic In person Online ATM Phone Direct deposit A II responden ts .. ............ 53.6 20.8 17.1 3.5 1.1 Respondents using online banking .. 30.9 44.5 19.1 3.2 1.1 Household income (by income percemile)' 20% or less .. 68.6 3.1 17.0 4.6 .0 21%-40% .. ................. 61.5 12.9 15.7 4.8 2.5 41'70-QO% .. ............ 55..1 16.2 18.3 3.5 1.3 61%-80'70 ... ............................. , 42.7 31.8 19.1 4.0 1.5 81 '70-100% ... 36.6 41.6 16A 1.5 .4 Alie of respondent (yean) Younger than 35 .. 37.0 33.8 22.7 3.3 2.5 35-44. 44.4 32.2 17.9 4.7 .4 4 5 5- ~ 54 . . . . . .. ,. .. 5 67 1 . . 5 3 1 12 9 . . 8 9 1 1 9 2 . . 8 8 2 1 . . 4 7 1 1 . . 3 4 65 and older.. ............ ~ .... , 70.0 4.5 11.9 4.9 .0 Eduwtion of respondellt No ,high school diploma .. .................... 80.4 2.8 4.7 2.3 .0 High school diploma. 62.0 12.2 16.9 2.9 .7 Some college ... 56.9 15.1 20.3 2.8 1.6 Bachelor's degree ................ 45.9 28.0 17.3 4.8 1.3 Postgraduate education. 39.2 36.4 17.3 3.2 1.1 Raceielhnicity of respmuielll White. ............. 54.3 21.2 16.1 3.6 1.1 Black ... ....... , ....... 52.4 15.7 21.8 4.4 1.0 Hispanic ............ 47.9 22.1 22.1 2.3 1.9 Othei' . 51.0 27.5 14.8 2.7 .0 Marital status of r(!~,;pOndenl Married. 49.1 26.8 15.6 3.2 1.0 Single female . ........... 58.6 lOA 20.9 5.1 .9 Si.ngle male . 63.4 14.0 17.1 1.6 1.6 f1ol1U!ownership ,fill/US Own home. 54.0 21.5 16.2 3.2 1.1 Do not own home ... 52.0 18.2 20.7 4.6 1.3 Gender of resp(}fIlJ~nt Male .. 52.5 22.5 16.4 3.0 1.0 Female ... . . .. . . . . . . . 54.6 19.4 17.8 3.9 1.1 Region West ... .............. , .......... 48.5 25.3 19.8 3.6 1.5 Midwest .. 56.7 18.6 15.9 3.4 2.2 Northeast ........... 52.1 18.3 22.4 3.7 .0 South ...... 55.4 21.1 13.5 3.3 .7 I NOTE: Percentages do not sum 10 100 because of nonresponse. 2. Includes Asian, Pacific Islander. and Native American. I. Income percentiles are based on Ihe income of all responding households. SOURCE: Michigan Surveys of Consumers. Thus, of respondents in the lowesl 20 percent of the income dislribulion. 68.6 percenl reported doing business wilh their primary financial instilUtion mainly in person and 3.1 percelll reported doing business mainly online. of consumers still conduct their bank business mainly Looking at just those respondents who bank online in person (table 2). In the 2006 Michigan Surveys of presents a far different picture. For example, a much Consumers, 54 percent of respondents said that smaller proportion of online bankers--only 31 per in-person interaction was their main way of doing cent-reported in-person interaction as their main business with their primary financial institution. In way of doing business with their primary financial contrast, 21 percent reported conducting bank busi institution. A larger proportion-45 percent ness mainly online, and 17 percent reported conduct reported online banking as their main means of ing transactions mainly using ATMs. These results conducting business. differ from those of the Survey of Consumer Fi Differences in practices also exist among demo nances, which asks about the "main ways of conduct graphic groups. For example, consumers in the top ing business" with their financial institution, thus allowing for multiple responses. In the 2004 SCF, 6. Lorella 1. Mester (2006), "Changes in the Use of Electronic 77 percent of respondents said they did their banking Means of Payment: 1995-2004," Federal Reserve Bank of Phila delphia Business Review (2nd quarter), pp. 26-30, www. in person, 64 percent reported using ATMs, and phi lade Ip hiafed. org/research-and -data/pub Ii cationslbus i ness-rev iew / 50 percent reported using the maiL6 2006/q2Ibr_q2-2006-4_changes-electronic-means.pdf.

u.s. Households' Access to and Use of Electronic Banking, 1989-2007 A 103 3. Consumer access to Internet and use of Internet for online banking. by dcm graphic characleri tic. 2006 Percent Internet access at home Distribution of online bankers by Internet location most frequently used to Demographic characteristic Dis o tr f i b c u o t n io n n e c b ti y o n ty pe a a t c w ce o s r s k : access their financial institution Have access I Have access I I Dial.up High·speed Home Work Both equally All respondents ..... ......... . 72.3 27.1 72.9 52.2 ... Respondents using online banking. 95.1 18.7 81.3 75.5 78.2 14.4 7.4 HOllselwld income (by income percentile)' 20% or less ......................... . 36.6 41.0 59.0 17.2 89.1 10.9 .0 21%-40%.... ...... . ......... . 61.1 44.8 55.2 41.0 72.3 16.9 10.7 41%-4>%. . ...... . ....•....... 76.7 32.5 67.5 54.2 80.2 15.7 4.2 61%--80%......... .•..... . ... .... . 88.8 22.9 77.1 73.5 81.4 14.3 4.4 81%-100% ........ . 96.3 10.7 89.3 77.4 74.6 14.2 11.2 Age of responde/ll (years) Younger than 35. . . . . .. . ... _. . 79.2 25.5 74.5 67.S 73.3 21.1 5.6 35-44 ................. .. ....... . 86.9 20.1 79.9 73.2 80.0 12.6 7.4 45-54.. . ...•.......•......... 79.1 22.5 77.5 66.5 75.0 14.4 10.6 55-64 ........ ......... .......... . 73.1 33.8 66.2 46.3 81.6 8.6 9.9 65 and older .... . .. . 45.9 42.5 57.5 9.8 95.0 5.0 .0 Edllcation of respondent No high school diploma. . . . . .. . ........ . 21.8 57.5 42.6 11.6 50.0 .0 50.0 High school diploma. . . .... . 60.7 40.9 59.2 32.4 83.5 10.5 60 Some college. .. ..... . ........... . 71.0 30.2 69.8 51.2 76.4 13.6 10.1 Bachelor s degree ........... . 84.6 21.2 78.8 66.8 78.3 13.1 8.6 Postgraduate education. . . .. 89.7 16.2 83.8 74.1 77.3 20.8 2.0 Race/crlmicity of respondent White............... . ........ . 75.1 27.3 72.7 52.5 78.3 13.9 7.8 Black. . .................. . 55.7 28.7 71.3 56.0 70.1 27.8 2.1 Hispanic.............. . ..•............. 59.6 18.9 81.1 46.8 89.7 .0 10.3 Other> ..... . ..... . .. . .. .... 79.4 22.7 77.3 52.3 73.9 23.1 3.1 Marital statlls of respolldent Married.... ....... . ........ . 81.6 27.0 730 57.8 78.6 13.0 8,4 Single female ..... . . . .... . 54.9 27.6 72.4 39.2 82.9 12.5 4.6 Single male. . . .. . ...... . 63.9 27.0 73.0 51.1 73.5 20.9 5.6 Homeowllership staills Own home ...... ..... . 76.5 28.6 71.4 53.2 80.0 14.0 6.1 Do not ow n home. . .. . 55.4 19.0 81.0 47.9 70.2 16.1 13.7 Gender (if respondem Male.......................... . ..... . 76.0 25.2 74.8 58.8 79.2 11.3 9.6 Female ...... . 69.2 28.9 71.1 46.5 77.3 17.3 5.4 Region Wes\. ............. . 78.0 23.2 76.8 53.0 83.0 11.7 5.3 Midwest. . .... . •......•.. 70.6 32.6 67.4 47.1 75.7 18.6 5.8 Northeast. ............................. . 73.4 22.2 77.8 54.9 75.4 17.7 6.9 South ............. . 69.6 28.8 71.2 53.7 78.2 11.3 10.4 NOTE: Some percentages do not sum to 100 because of rounding Or 2. Includes Asian, Pacific Islander, and Native American . nonr esponse. . Not applicable. I. Income percentiles are based on the income of all responding households. SOURCE: Michigan Surveys of Consumers. Thus, of respondents in the lowest 20 percent of the income distribution, 36.6 percent reponed having Internet access at home and, of lhat group. 41.0 percent reponed having a dial·up connection. fifth in terms of income tended to report using online dents wi th a bachelor's degree or postgraduate educa banking as their main way of doing business with tion reported online banking as their main way of their primary financial institution (42 percent), whereas banking. consumers with less income reported in-person bank ing as their main way of conducting bank business Extent of Consumer Access to the Internet (perhaps in part because of a lack of access to the Internet). Compared with those over the age of 45, Nearly three-fourths of respondents to the 2006 larger proportions of respondents under 45 reported Michigan Surveys of Consumers reported having using online banking or ATMs as their main way of Internet access at home (72 percent), and about half doing business with their primary financial institu reported having access at work (52 percent). Most tion. Education level appears to be associated with consumers with home access had a high-speed con online banking as well: larger proportions of respon- nection (73 percent) (table 3). For online bankers, the

A I 04 Federal Reserve Bulletin D July 2009 majority (78 percent) reported that they do their connection rather than a high-speed connection. This online banking most often from home. finding has implications for the use of online banking, Several demographic factors-including age, edu as consumers may find online banking via a dial-up cation, race and ethnicity, and income-seem to be connection cumbersome and may believe that high associated with Internet access. The same groups less speed connections are more secure. As discussed likely to cite online banking as their primary means of later, consumers' perceptions of the convenience and conducting bank business were also less likely to security of e-banking products affect their willingness have Internet access at home. For example, respon to adopt these products. dents older than 65 were less likely to have Internet access at home and less likely to have a high-speed TRENDS IN CONSUMER ADOPTION Internet connection. Similarly, only 22 percent of OF E-BANKING respondents without a high school diploma reported having Internet access at home, and only 12 percent Consumer adoption of some mature e-banking tech reported having access at work. In addition, black and nologies seems to have reached saturation. For ex Hispanic respondents were less likely than white and ample, the proportion of households reporting that "other" (predominantly Asian, Pacific Islander, and they use direct deposit for income or benefits pay Nati ve American) respondents to have Internet access ments was at 80 percent in 2007 (table 4). ATM use at home-although those who had home access were remained fairly stable, at 67 percent and 69 percent in just as likely as white and "other" respondents to 2003 and 2006, respectively (though a higher propor have a high-speed connection. In a multivariate mod tion reported using ATM cards in 2007). eling of Internet access, black respondents were the Adoption of other, newer e-banking technologies only group statistically less likely to have access, has been growing. In particular, the use of debit cards either at work or at home (data not shown). has increased in recent years-although some con Between 2000 and 2006, access to computers and sider debit cards a "mature" technology, given their the Internet became more widespread across all widespread use.9 (Debit cards have been around long income groups.? However, data from the 2006 Michi enough and have been used in a sufficient number of gan Surveys of Consumers indicate that differences transactions that a few problems are being recog among households in different income groups remain. nized, among them account overdrafts; see box About 50 percent of low- and moderate-income "Account Debits and Overdrafts.") Only 20 percent households (those in the first and second income of respondents to the 1995 Survey of Consumer quintiles, the lower 40 percent of the income distribu Finances had used a debit card; by 2007, the percent tion) had Internet access at home, compared with age had more than tripled, to 71 percent. The increase nearly 90 percent of middle- and higher-income may have been due to several factors. In the midhouseholds (those in the upper 60 percent of the 1990s, banks began to issue debit cards imprinted income distribution); similarly, about 30 percent in with the Visa or MasterCard logo, leading to accep the lower income group reported having Internet tance by more merchants.lo Also, the addition of access at work, compared with nearly 70 percent in national credit card networks enabled consumers to the upper income group.8 complete transactions with only a signature anywhere Even for those with Internet access at home, the a merchant accepted the card-in contrast to the type of access varies by income, with higher propor requirement, when debit cards were introduced, that tions of lower income households accessing their they use a personal identification number (PIN). home Internet service provider via a slower dial-up Wider merchant acceptance and the elimination in many instances of the PIN requirement resulted in a significant increase in debit transactions in general, 7. U.S. Census (200 I), "Home Computers and Internet Use in the United States: August 2000" (September), www.census.gov/prod/ 200Ipubslp23-207.pdf; U.S. Census (2005), "Computer and Internet Use in the United States: 2003" (October), www.census.gov/prod/ 9. Julia S. Cheney (2007), "An Update on Trends in the Debit Card 2005pubslp23-208.pdf; 2008 Statistical Abstract of the United Market," Payment Cards Center Discussion Paper 07-07 (Phila States, "Internet Access and Usage and Online Service Usage: delphia: Federal Reserve Bank of Philadelphia, June), www. 2006" (table 1127). www.census.gov/compendialstatabn008/tables/ philadelphiafed.orglpayment-cards-center/publications/discussion 08s I I 27.pdf. papers/20071D2007 June U pdateDebitCard MarketTrends. pdf. 8. Here and elsewhere in this article, "low income" refers to 10. Stan Sienkiewicz (2002), "The Evolution of EFT Networks households in the first income quintile (lowest 20 percent of the from ATMs to New On-Line Debit Payment Products," Payment income distribution), "moderate income" refers to those in the second Cards Center Discussion Paper 02-04 (Philadelphia: Federal Reserve quintile, "middle income" refers to those in the third quintile, and Bank of Philadelphia, April), www.philadelphiafed.org/pcc/papers/ "higher income" generally refers to those in the upper two quintiles. 2002IEFTNetworks_042002.pdf.

u.s. Households' Access to and Use of Electronic Banking, 1989-2007 A105 4. Proponion of .,. household Ihal u 'e various eleclrOni banking technologies. selected years Percent Survey of Consumer Finances Michigan Surveys of Consumers I I Technology Change, Change, 1995 1998 2001 2004 2007 1995 to 1999 2003 I 2006 1999 to I I I I 2007 I 2006 Direct deposit. 53 67 73 76 80 50 65 70 77 19 ATM card. 35 55 58 66 76 116 59 67 69 16 Debit card ..... 20 37 50 63 71 254 n.a. 54 62 . .. Preauthorized payment .. 25 40 44 51 49 95 31 46 57 84 Automated phone system. n.a. 26 23 21 25 . .. 40 44 46 16 Online banking. 4 7 21 35 53 1,228 10 32 51 411 Smart card. I 2 3 n.a. n.a. n.a. 6 12 Prepaid card .. n.a. n.a. n.a. Il.a. n.a. n.a. 7.l 73 NOTE: The numbers in this table differ from those in Mester, "Changes in Each Instrument: 1995, 1998,2001, and 2004") indicates that she included any the Use of Electronic Means of Payment: 1995-2004," in that Mester's data in· household that reported owning an ATM card. clude all households whereas the data in this table include only those house Calculations may not yield change shown because of rounding. holds that have bank accounts, consistent with Anguelov, Hilgert, and Hogarth, n.a. Not available . "U.S. Consumers and Electronic Banking." In addition, for those households . . . Not applicable. with ATM cards. this table includes only those households that use the product, SOURCE: Survey of Consumer Finances and Michigan Surveys of whereas Mester (see note b to her table "Percent of U.S. Households Ihat Use Consumers. and in signature debit transactions (as opposed to PIN allow consumers to have many types of bills paid debit transactions) in particular. automatically from their bank account-rent or mort The data indicate that consumers may be using gage, car payments, utility bills, or gym member some technologies as substitutes (using one or the ships, for example. Paying in this way helps consum other) and other technologies as complements (using ers avoid late fees and maintain a sound credit record. both). For example, there is some evidence that While preauthorized payments can reduce consum consumers are using debit cards as substitutes for ers' costs in terms of their time and effort, they can checks and cash and that those who are not using also increase their "switching" costs, for example, debit cards for transactions are using credit cards. the time it takes to change to a new financial institu I I (The decision about which form of payment to use tion, or the expense of stopping payment should the may be driven in part by the size and circumstances consumer wish to terminate his or her relationship of the transaction; see box "How Would You Like to with a current recipient of a preauthorized payment. Pay for That?") Similarly, consumers may use either Online banking has clearly been the fastest grow online or phone banking, rather than both. Or they ing e-banking technology over the past decade: fewer may use preauthorized payments and phone or online than 5 percent of consumers were banking online in banking as complementary means of paying bills. 1995, compared with 53 percent in 2007. While most In 2006, more than half of consumers reported online bankers use the service to monitor their using preauthorized payments, up from about one accounts or transfer funds, a significant proportion in fourth in the mid-1990s. Preauthorized payments 2006 were using online banking to pay bills (table 5). In 2003, only 32 percent of households reported I I. Ron Borzekowski, Elizabeth K. Kiser, and Shaista Ahmed banking online, and 55 percent of those online bank (2006), "Consumers' Use of Debit Cards: Paltems, Preferences, and ers were paying bills online; by 2006, of the 51 per- Price Response," Finance and Economics Discussion Series 2006-16 (Washington: Board of Governors of the Federal Reserve System, April), www.federalreserve.gov/pubs/fedsl2oo61200616/200616pap. 5. Proportion of online bankers using various online pdf; Elizabeth Klee (2006), "Families' Use of Payment Instruments banking service', 2003 and 2006 during a Decade of Change in the U.S. Payment System," Finance and Economics Discussion Series 2006-0 I (WaShington: Board of Percent Governors of the Federal Reserve System, February), www. federalreserve.gov /pubs/fedsI2006120060 1120060 I pap. pdf; Fumi ko Service 2003 2006 Hayashi and Elizabeth Klee (2003). "Technology Adoption and Consumer Payments: Evidence from Survey Data," Review of Net Monitor accounts .. 95.4 97.7 work Economics, vol. 2 (June), pp 175-90; Elizabeth KIee, "How Transfer funds between accounts 63.9 70.1 Pay bills ........ .. 54.7 76.0 People Pay: Evidence from Grocery Store Data" (2008), Journal of Open new accounts. ".a. 14.8 Monetary Economics, vol. 55 (April), pp. 526--41; Marques Benton, Apply for loans ... n.a. 11.1 Krista Blair, Marianne Crowe, and Scon Schuh (2007), "The Boston Fed Study of Consumer Behavior and Payment Choice: A Survey of MEMO Proportion of respondents banking online .. 32 51 Federal Reserve System Employees," Public Policy Discussion Papers No. 07-1 (Boston: Federal Reserve Bank of Boston, February), n.a. Not available. www.bos.frb.org/economiclppdp/2007/ppdp0701.pdf. SOUHCE: Michigan Surveys of Consumers.

AI06 Federal Reserve Bulletin 0 July 2009 Account Debits and Overdrafts A 2007 study by PULSE EFf Association and Dove tion E (Electronic Fund Transfers). provide certain con Consulting found that an increasing proportion of debit sumer protections related to the assessment of overdraft card programs authorize purchases "even when there are fees. insufficient funds in the underlying demand deposit • Consumer choice regarding overdraft services. The account at the time of the transaction, in essence allowing proposal solicits comment on two approaches to giving cardholders to overdraw their accounts.'" In these cases, consumers a choice regarding the payment of ATM and consumers may face an overdraft fee from their bank. one-time debit card overdrafts by their financial insti Financial institutions contend that consumers may be tution. willing to pay overdraft fees rather than have their transactions denied. while consumer advocates contend - Opt-out. Under one approach. an institution would that consumers should be gi ven the choice of canceling or be prohibited from imposing an overdraft fee continuing their transactions. unless (I) the consumer is given an initial notice In December 2008, the Federal Reserve Board issued and a reasonable opportunity to opt out of the final rules that amend the Board's Regulation DD (Truth institution's overdraft service and (2) the consumer in Savings) to address depository institutions' disclosure does not opt out. practices related to overdrafts. The new rules take effect - Opt-in. Under the other approach, an institution January I, 20 I O. would be prohibited from imposing an overdraft fee unless the consumer affirmatively consents • Disclosure of aggregate overdraft fees. All institutions ("opts in") to the institution's overdraft service. must disclose on their periodic statements the aggre gate dollar amounts charged for overdrafts and re • Debit holds. The proposed rules would prohibit institu turned items, both for the statement period and for the tions from imposing an overdraft fee when the account year to date. (Previously, only institutions that promote is overdrawn because of a hold on funds in the or advertise the payment of overdrafts were required 10 consumer's account that exceeds the actual transaction disclose aggregate amounts.) amount. For example, when a consumer uses a debit • Disclosure of balance information. Institutions that card to pay for gasoline, the initial authorization may provide account balance information through an auto p~ace a hold for $50; the consumer may want to mated system must provide a balance that does not purchase only $20 worth of gas, but if he or she has include additional funds that may be made available to only $40 in the account, the $50 hold may overdraw cover overdrafts. the account. The proposed rule is limited to debit card At the same time the Board issued these final rules, it transactions in which the actual transaction amount also issued proposed rules for overdraft services. The generally can be determined within a short time after proposed rules. which would amend the Board's Regula- the transaction is authorized (for example, transactions at gas stations and restaurants). I. The PULSE EFT Associalion and Dove Consulling slUdy is described in Julia S. Cheney (2007). "An Updale on Trends in the Debit For details and to track the progress of these proposals, Card Markel." Paymenl Cards CeDler Discussion Paper 07-07 (Phil visit www.federaJreserve.gov/newsevents/press/bcreg/ adelphia: Federal Reserve Bank of Philadelphia. June). www. 2008 J 218a.htm. The comment period for these proposals philadelphiafed.org/payrnenl-cards-cenler/publicalionsldiscussion-papers/ 2007tD2007JuneUpdateDebitCardMarketTrends.pdf. closed on March 30. 2009. cent of households banking online, 76 percent were Nearly three out of four respondents to the 2003 paying bills online. and 2006 Michigan Surveys of Consumers reported Compared with online bill paying, other online using some type of prepaid, or stored-value, card. banking services, such as opening new accounts, are Some of these cards may be closed-system, or single used much less frequently (appendix table B.l). In vendor, cards (for example, gift cards from a particu 2006, only about 15 percent of online bankers used lar store); others may be general-purpose cards that online banking to open a new account, and only carry a Visa, MasterCard, or American Express logo. II percent used online banking to apply for a loan. Some cards are designed for a single use, while others Because not all banks offer a full range of services are reloadabJe; for example, some employers issue online, some of these numbers may reflect the supply reloadable payroll cards to employees who do not of, as well as the demand for, e-banking services. have their pay deposited directly into a bank

u.s. Households' Access to and Use of Electronic Banking, 1989-2007 A 107 account.12 Between 2004 and 2007, the number of products used by consumers has increased, it may be transactions made via prepaid cards grew from 2.4 bil instructive to look at how various demographic lion to 4.3 billion; the dollar volume grew in approxi groups-some of which may be underrepresented mately the same proportion, from $64 billion to among electronic bankers-have fared, $113 billion. While the majority of these prepaid card transactions were made by closed-system cards, the I[)come and -Banking share made by general-purpose cards grew from Data from the Michigan Surveys of Consumers con 20 percent to 28 percent over the period.13 Consumer firm that higher income households are more likely and community educators have advocated the use of than those in other income groups to have a bank these cards as a way to transition unbanked and account and to use each of the electronic banking underbanked households to the mainstream banking services covered in the surveys (table 6). However, system. However, many of these cards are not associ low- and moderate-income households appear to be ated with a bank account. catching up: by 2006, 80 percent of low-income households and 94 percent of moderate-income house Users of E-Banking holds reported having a bank account. And while each In addition to the benefits of using e-banking products income group has shown growth in the adoption of and services noted earlier, studies suggest that con e-banking technologies, the growth has been espe sumers who monitor their bank accounts electroni cially noticeable among low- and moderate-income cally identify fraudulent transactions earlier than con consumers. For example, the proportion of .Iow- and sumers who rely on paper statements.14 If this is the moderate-income households using preauthorized pay case, then it is important to identify barriers to the ments more than dou bled between 1999 and 2006. adoption of e-banking technologies so that consumers And low-income consumers reported an even larger can be encouraged to use these products for their own increase in online banking, with the proportion rising benefit. tenfold, from 3 percent to 30 percent, between 1999 Consumers' access to bank accounts and their use and 2006. Despite significant growth in the percent of e-banking products is correlated with demographic age of low-income consumers banking online, the factors such as age, income, race and ethnicity, and difference between the lowest and highest income education. IS Given that the number of e-banking groups in the percentages banking online appears to have widened over time, from 19 percentage points in 1999 to 26 percentage points in 2003 to 40 percentage 12. James C. McGrath (2007), "General-Use Prepaid Cards: The points in 2006. Finally, the proportion of low-income Path to Gaining Mainstream Acceptance," Payment Cards Center consumers banking by phone more than doubled from Discussion Paper 07-03 (Philadelphia: Federal Reserve Bank of Philadelphia, March), www.philadel phiafed.orgJpcc/papers/2007 / 1999 to 2006, perhaps an indication that phone D2007MarchGeneraIUsePrepaidCards.pdf; Julia S. Cheney and banking is a substitute for online banking among Sherrie L.w. Rhine (2006), "Prepaid Cards: An impOllant Inno lower-income households. vation in Financial Services," Payment Cards Center Discus sion Paper 06-07 (Philadelphia: Federal Reserve Bank of Does their increased use of online banking, phone Philadel phia, July), www.philadelphiafed .orgJpcc/papersI2006/ banking, and preauthorized payments mean that low D2006JulyPrepaidCardsACClcover.pdf; Julia S. Cheney (2007), "Pay and moderate-income consumers are better off? While ments, Credit, and Savings: The E){perience for LMI Households," Summary of Payment Cards Center conference (Philadelphia: Federal this question cannot be answered definitively, it is Reserve Bank of Philadelphia), www.philadelphiafed.org/pcc/ possible that these consumers are better able to conferencesl2007/C2007MayE){perienceforLMI.pdf. monitor their account activity and balances with these 13. Aite Group (2007), "Prepaid Cards: The State of Ihe Indus try," Report 200707231 (July), www.aitegroup.com/reports/ e-banking technologies. Interestingly, when attitudes 20070723J.php; and ATM & Debit News and Prepaid Trends, and other demographic characteristics were con New York: Source Media, September 27, 2007. Gerdes ("Recent trolled for in the 2006 data, income was not a Payment Trends in the United States") estimates that appro){imately 3.3 billion prepaid card payments, with a dollar volume of appro){i significant determinant of whether a household banked mately $49.6 billion, were made in 2006. online, banked by phone, or used preauthorized pay j 4. Mary T. Monahan (2007), "Identify Fraud Is Dropping, Contin ment (data not shown). ued Vigilance Necessary," Javelin Strategy and Research 2007 iden tilY Fraud Survey Repon (February). 15. Lee and Lee, "Haven't Adopted Electronic Financial Services Yet?"; Eun Ju Lee, Jinkook Lee, and David Eastwood (2003), "A Marketing, vol. 22 (4), pp. 238-59; Borzekowski, Kiser. and Ahmed. Two-Step Estimation of Consumer Adoption of Technology-Based "Consumers' Use of Debit Cards"; Michal Polasik and Tomasz Piotr Service Innovations," Journal of Consumer Affairs, vol. 37 (Decem Wisniewski (2008), "Empirical Analysis of Internet Banking Adop ber), pp. 256-82; Jane M. Kolodinsky, Jeanne M. Hogarth, and tion in Poland" (June 22), paper presented at the 21st Austral Marianne A. Hilgen (2004), "The Adoption of Electronic Banking asian Finance and Banking Conference, papers.ssrn.com/soI3/ Technologies by U.S. Consumers," International JournaL of Bank papers.cfm?abstracUd= I j 16760.

A 108 Federal Reserve Bulletin 0 July 2009 6. U c of e-banking products and 'ervices by consumers who have a bank :lccount. hy demographic chardctcrislic. selected years Percenl ProducI or service Have a bank accounl - Demographic characlerislic ATM card I Debil card I DirecI deposit I I I I 1999 I 2003 I 2006 1999 I 2003 I 2006 1999 2003 I 2006 1999 2003 I 2006 All respondents .. .... 89 86 92 60 67 69 n.a. 54 62 66 70 77 "" Household income (by iJicome percentile) I 20% or less ... ... ... 67 67 80 34 57 58 n.a . 49 50 63 59 71 4 8 6 2 1 1 1 1 ' 0 % 7 % / 0 0 - - - - - - 6 8 4 1 0 0 0 0 % % % 0% . . " . " . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . , " . . , . . . . . . . . . . , . . . . . . . . . . . . . . . . " . . . . . . . 9 8 9 9 3 8 7 9 8 9 9 9 8 2 2 2 9 9 9 9 7 4 7 8 4 8 6 6 7 8 2 0 7 6 7 7 1 8 2 2 6 6 7 8 3 9 6 3 n n n n . . . . a a a a . . . . 6 5 5 55 8 3 0 6 6 6 7 1 1 5 9 6 6 7 7 5 0 2 0 8 6 6 73 9 8 0 8 8 7 7 1 4 9 4 Age of respondent (years) Younger than 35 .... ". ......... , . ...... 87 81 88 79 84 89 n.a . 79 86 58 60 71 4 3 5 5 - - 5 4 4 4 . " . .... , • " • .•• 1 ... . ·· . · . · .. · . . , wo . .. · . · ·..· . · . .· . .. . · 8 91 7 9 8 0 8 9 9 5 5 7 5 4 8 6 7 2 7 7 8 6 0 n n . . n a . . 4 6 3 4 6 7 4 6 6 6 7 0 7 6 0 6 7 7 3 8 55--64" ... "."" ......... ......... 87 91 91 52 58 57 n.a . 39 52 57 76 75 65 and older. ..... .... . , ............. 91 83 92 19 45 41 n.a . 30 32 89 83 89 EJllcat;on of respondent No high school diploma .. ......... 67 44 70 23 55 49 n.a . 42 44 61 47 62 High school diploma .. ....... 88 81 88 45 60 57 n.a . 51 53 62 63 70 Some college .... ..... ..... . . .. . . .. ... 93 88 97 70 70 73 n.a . 61 72 64 71 79 Bachelor's degree .. ' , ... 92 95 95 67 72 77 n,a . 58 65 72 75 83 POSlgradnale educalion .. 97 97 99 85 71 75 n.a. 49 63 73 78 83 Race/ethn;c;r)' of respondent While .. .. 92 90 95 58 64 68 n.a . 50 61 65 70 78 Black. ... ................. 75 66 80 61 80 75 n.a . 68 70 71 71 83 Hispanic .. ..... ..................... 71 69 81 79 90 76 n.a . 86 68 63 60 66 Olher> ... ....... ........... 87 86 90 71 67 63 n.3. 67 63 74 86 74 Mar;/(f! s/(ftus of ''f,pv1l<Iem Married .. ....... ... 94 90 94 64 69 71 n.a. 57 64 66 75 78 Single female ... ...... .... 83 79 88 51 64 64 n.a . 50 59 70 67 80 Single male ...... ............ ... 83 85 91 60 67 68 o.a . 53 59 59 55 69 Humeowflership sWIllS . O Do w n n o h t o o m w e n . home . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 8 93 0 9 7 1 4 9 8 5 4 5 69 6 6 7 3 8 6 7 7 7 n n . . a a. . 6 5 7 0 7 5 3 9 7 57 0 6 7 4 2 7 75 8 Gender of ''fsponJelll Male. "" .... ......... .... 91 87 93 62 68 71 n.a . 54 63 63 69 75 Female .... ......... 87 85 92 58 67 67 n.a . 55 61 69 71 79 Reg;on S W M N o o e i u S d r t t I w h h e e . . a s . . l s . . l . . .. . . . . . . . . . . . . .. . . . , . . . . . , . . . . . . . . .. . .. . ~ . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . 9 8 8 91 0 9 6 8 8 8 8 9 4 9 3 8 9 9 9 3 4 6 9 7 6 6 SO 0 0 0 6 5 7 7 7 3 8 0 6 6 7 7 4 6 5 4 n n n n . . . . a a a n . . . . 6 4 5 44 7 5 8 6 5 6 61 7 2 8 6 6 6 7 9 2 0 0 6 6 7 71 7 4 6 7 8 8 7 4 4 0 0 I. I nco me percentiles are based on the income of all respondi ng households. 2. Includes Asian, Pacific Islander. and Native American. Thus, of respondents in Ihe lowesl 20 percem of lhe income dislribulion. n.a. Not available. 67 percenl had a bank account in 1999 and 2003 and 80 percenl had a bank SOURCE: Michigan Surveys of Consumers. account in 2006. Age and E-Banking ATMs and preauthorized payment doubled from 1999 to 2006, the proportion using phone banking tripled, Younger consumers (under age 35) are slightly less and the proportion using online banking increased likely to have a bank account than consumers more tenfold. typically in the workforce. However, among consum ers with a bank account, the use of ATMs, debit cards, Education and E-Banking and online banking decreases consistently as age increases: younger households are much more likely Consumers who have no post-secondary education than older households to use these services. The are less likely than their more-educated counterparts service that is the exception is direct deposit, the use to have a bank account. And among less-educated of which generally increases with age. When consid consumers who have a bank account, smaller propor ering changes over time, however, growth rates for tions use e-banking services. The most widely used adoption among older consumers (those 65 and service among those with no post-secondary educa above) have surpassed rates for other age groups. For tion is direct deposit, followed by prepaid cards and example, the proportion of older consumers using ATMs.

u.s. Households' Access to and Use of Electronic Banking, /989-2007 A109 6.- ol1lil1!1ed Percen! Product or service 1999 2006 31 46 57 40 44 46 10.7 31.9 51.1 n.3. 6 12 n.3. 73 73 23 35 46 22 22 50 3 17 30 n.a. 4 9 n,n. 59 59 21 39 50 30 47 43 6 27 38 n,n. 6 12 n.a. 74 70 27 47 59 45 45 40 9 32 50 n.a. 5 10 n.a. 77 76 39 53 58 45 50 53 II 38 64 n,a. 8 15 n.il. 79 76 42 55 69 58 53 48 22 43 70 o.a, 7 J3 n.3. 78 79 25 47 62 45 53 50 16 48 67 n.a. 8 21 n.a. 81 87 40 51 62 60 52 47 13 36 65 lI,a. 6 8 n.a. 84 78 37 44 55 43 48 50 9 31 53 n.a. 7 II n.il. 73 73 27 41 53 35 42 45 9 26 43 n.il. 6 12 n.il. 71 74 26 44 52 II 18 36 2 9 20 n.a. I 7 n.a. 51 52 19 30 31 II 13 33 3 II 10 n.n. 3 3 n.a. 57 49 26 38 50 29 36 44 6 18 35 n.n. 4 8 n.n. 68 63 30 51 54 39 42 49 12 37 53 n.a. 5 14 n.a. 73 77 37 51 60 56 55 48 15 41 59 n.a. 9 14 n.a. 77 79 38 47 73 62 48 44 17 37 64 n.a. 7 14 n.3. 82 75 31 45 56 40 43 48 II 31 53 n.a. 6 12 n.3. 74 74 27 49 53 37 51 37 8 22 39 n.a. 5 7 n.il. 70 61 38 49 65 44 51 50 II 36 51 n,n. 4 12 n.n. 79 60 n 39 61 73 54 54 34 25 49 47 n.a. 16 12 n.n. 68 35 51 57 45 49 46 13 36 56 n.n. 6 13 n.a. 77 76 n 27 42 52 37 36 50 7 22 42 n.a. 5 7 n.a. 70 25 33 49 30 38 40 II 33 45 n.n. S 15 n.3. 63 60 36 48 58 38 44 46 9 32 51 n.a. 6 10 n.a. 74 81 21 40 52 46 44 52 15 31 49 n.3. 7 16 n.n. 71 68 31 47 54 37 45 45 12 35 53 n.a. 5 14 n.a. 66 69 31 46 59 43 43 48 10 29 49 n.3. 7 9 n.n. 79 75 31 46 59 51 47 54 15 34 57 n,a. 6 8 n.3. 74 74 36 45 54 31 37 41 7 28 53 n.a. 7 II n.n. 74 69 23 44 53 38 46 47 8 26 48 n.a. 3 12 "-a. 71 79 31 48 60 42 47 45 12 36 48 n.iI. 7 14 n.n. 74 69 About one in ten of the least-educated consumers ATMs in 2006 than in 1999 but were more likely to (those without a high school diploma) bank online. In report using debit cards; it may be that these consum- 2006, 22 percent of respondents in this group had ers were substituting debit card transactions for ATM access to the Internet at home, and about 12 percent transactions. Similarly, consumers with more educahad access at work (table 3), hindering their ability to tion appear to have switched from phone banking to access and become familiar with online banking online banking over time, as might be expected, as products. Thus, while an increasing percentage of access to the Internet is also greater for those with less-educated consumers are using e-banking, their more education. adoption of these services pales in comparison with consumers in other education groups. When control- Race, Ethnicity, and E-Bankinoling for attitudes and other demographic characteristics, education is a significant factor for the use of all Compared with white consumers, lower proportions e-banking technologies except phone banking. of black and Hispanic consumers report having a With a few notable exceptions, between 1999 and bank account. Over time, however, the proportions of 2006, the use of e-banking grew among most educa- banked black and Hispanic consumers have increased, tional groups. It is interesting that respondents with by 5 percentage points for black households and the most education were less likely to report using 10 percentage points for Hispanic households from

AII0 Federal Reserve Bulletin 0 July 2009 7. Proportion of consumers using c-banking technologies. by type of user. selected years Percenl Minimal users Limiled users Early adoplers and heavy users Technology 1 1 1 I 1999 2003 2006 1999 I 2003 2006 1999 2003 I 2006 A D T eb M it c c a a r r d d .. .. .. . ... . . , . . . . . . . . . . . . . . . . . . . . . . .. n 6 . 8 a . 22 7 4 3 3 8 n. 5 a 7 . 6 44 0 5 2 1 8 lI 7 . 6 a . 8 9 7 8 9 95 5 Direct deposit . . ......... 31 63 51 100 62 83 34 80 86 Auto bill payment . .... 57 35 12 40 17 68 93 71 67 Phone banking .... ......... ... 18 34 II 58 17 38 57 67 59 O Pr n e l p in a e id b c a a n r k d i n . g . .. . . . . . . . . .. .. . ., . .. .. . . , . . n. 5 a . 9 1 7 3 25 8 o.a 7 . 1 II 8 9 32 0 .. 5 . 0 a . 9 57 2 8 7 3 3 ~ All respondenls ........ ,. ... 37 29 22 48 26 26 15 45 51 NOTE: Components may nol sum 10 100 perce III because of rouoding. SOURCE: Michigan Surveys of Consumers. n.a. Not available. 1999 to 2006. Among those with a bank account. more than half of consumers have come to be classi black consumers appear more likely to use debit cards fied as heavy users. than their white counterparts but are less likely to bank online. Consumer Attitude toward Adoption of electronic banking products and ser Emerging Payment Technologies vices generally seems to have increased over time for all the racial and ethnic categories surveyed. A notable The 2006 Michigan Surveys of Consumers asked exception is the use of phone banking and preautho about the use of emerging payment products, such as rized payments: a substantially smaller proportion of contactless cards and wireless payment devices. Con "other" consumers (predominantly Asians. Pacific tactless payment cards, which operate by transmitting Islanders, and Native Americans) reported banking by a radio signal to a payment terminal or a handheld phone in 2006 compared with previous surveys, and a device (instead of by being swiped at a terminal), substantially larger proportion of this group reported were not available in the United States until re using preauthorized payments. cently. In fact, only 6.3 percent of survey respon 17 dents with a bank account reported having received a Cornbinatiotls oj E-Bcmking Services contact less payment card from their bank or credit Used hy Consumers card company (data not shown). Some consumers have been exposed to contact less payments through As e-banking has become more popular, consumers the use of electronic pass devices at toll booths and have adopted various combinations of e-banking electronic tokens at gas pumps. The main selling products and services. Cluster analysis makes it pos points of contactless payment cards are greater speed sible to look at those combinations and the character and convenience: such payments may make for faster istics of the users. In general, consumers can be transactions, allowing consumers to maintain control sorted into several groups: early adopters and heavy over the card rather than hand it to a merchant. users, who try everything; minimal users, who use Among all respondents, more than half (52 per very few, if any, e-banking services; and one or more cent) said they would or might use contactless pay limited-user groups "in the middle," who adopt dif ment cards in the future (table 8). Among online ferent combinations of products and services.16 bankers (recall that they make up about 51 percent of Minimal users seem to make use of direct deposit the full sample), nearly two-thirds (65 percent) said and ATM and debit services (debit cards and preau they would or might use this means of payment. thorized payments), but little else (table 7). Limited users may add phone banking to these more basic services. Heavy users are just that-they make use of most e-banking services. While it is the case that 17. The Smart Card Alliance. an industry association of payment system participants. estimates that 21 million contactless cards had about one out of five consumers did not make much been issued in the United States by April 2007. See Smart Card use of electronic banking services in 2006, over time Alliance (2007). "Proximity Mobile Payments: Leveraging NFC and the Contactless Financial Payments Infrastructure," Smart Card Alli ance Contact less Payments Council white paper (September), 16. Hogarth. Kolodinsky. and Gabor. "Consumer Payment Choices: www.smaI1cardalliance.orglpages/publications-proximity-mobi le Paper. Plastic---or Electrons?" payments.

u.s. Households' Access to and Use of Electronic Banking, /989-2007 Alll 8. Con umers' expectations regarding the use of emerging payment technologies in the rUlure, 2006 Percent All respondents Respondents who bank online Expectation Yes I Maybe I No Yes I Maybe I No Use contacltess payments in fUlure . . . . . . . .. . . .. . .. 37.8 t4.7 47.5 51.6 13.8 34.6 Use wireless paymenls in fUlure .... 16.3 7.2 76.5 24.0 7.7 68.2 NOTE: ComponenlS may not sum to 100 because of rounding. SOURCE: Michigan Surveys of Consumers. The future success of contactless payments may be and Payments"). Access to mobile technology is now tied to the same demographic characteristics that widespread in the United States; an estimated 80 per appear to influence adoption of other electronic bank cent of the population have access to mobile phones, ing products. Income, age, education, and race and and some industry analysts predict that mobile phone ethnicity, for example, appear to be associated with use in the United States will approach 100 percent in the adoption of electronic banking products. Simi a few years.19 As of early 2009, all the major financial larly, consumers with higher income and more educa institutions in the United States offer mobile banking tion, and younger households, were more likely to services that provide account access via mobile indicate a willingness to use contactless payment phones and PDAs, and many smaller banks are products in the future (see appendix table B.2). adding technologies to provide mobile banking ser Wireless payment devices were described in the vices.20 These services generally allow consumers to survey as cellular phones and PDAs that can be transfer funds between accounts, schedule online equipped with a computer chip that allows users to payments, and conduct other online banking transac charge items to their phone bill using the device tions using their mobile device, but most do not allow instead of to a credit or debit card. Applications are consumers to use their mobile device to make pay also being developed, in a partnership between banks ments at the point of sale. Third-party providers are and telecommunications companies, that will debit beginning to offer mobile payment options using users' bank account or bill their credit card account short message service (SMS) technology, and niche rather than charge their phone bi II. markets, such as the Metropolitan Transit Authority in Compared with contactless payments, the potential New York City, are using near-field communication success of other types of wireless payment devices is (NFC) chip technology to enable payments.21 much less clear. The majority of respondents to the Before mobile payments can become more wide 2006 Michigan Surveys of Consumers (77 percent) spread and accepted by both merchants and consum said they were unlikely to use wireless payments in ers, financial institutions, mobile carriers, mobile the future, and consumers who reported banking hardware producers, and other stakeholders must online were only slightly more likely to say they cooperate to develop standards that will allow in would likely adopt wireless payment technology. teroperability among mobile devices and bank tech What accounts for this difference between consum nology networks. Although adoption has already ers' willingness to use contactless and wireless pay occurred in Asia and Europe, most industry insiders ments? Some researchers suggest that consumers do believe it will take several years, perhaps until not necessarily see a need for wireless products. IS 2012, for mobile payments to become widespread in Moreover, as is the case with contactless cards, the United States.22 However, the recent rapid adopfamiliarity with these products is directly related to their availability, and the infrastructure enabling mer 19. Joseph Salesky (2007), "Mobile-Phone Banking: Coming to a chant acceptance of contactless and wireless cards is Bank Near You," U.S. Banker (July), www.americanbanker.coml still developing in the United States. To date, wireless usb_article.html?id=20070626A2K9LH3P. 20. Marianne Crowe (2008), Emerging Paymellts-The Changing payments systems have been deployed in parts of Landscape, Presentation to Maine Association of Community Banks Europe and Asia but still face significant technologi and New Hampshire Communily Bankers Association (Boston: Fed cal and infrastructural barriers in the United States. eral Reserve Bank of Boston, April), www.bos.frb.org/economic/eprg/ presentations/2008/crowe04151708.pdf. Mobile banking and payments, via such devices as 21. Nasreen Quibria (2008), The Contactless Wave: A Case Study mobile (or "cell") phones and PDAs, have gained ill Trallsit Paymeflls, Emerging Payments Industry Briefing (Boston: attention in recent years (see box "Mobile Banking Federal Reserve Bank of Boston, June), www.bos.frb.org/economic/ e prg/paperslbrie fi ngsltrans it. pd f. 22. According to the 2007 Mobile Financial Services Study. 51 per 18. Dan Schau (2007), US Mobile Banking: Beyond the Buzz cent of survey respondents believe mobile payments will be a reality in (Boslon: Celent). five to ten years, while 20 percent expect it to take more than ten years.

A 112 Federal Reserve Bulletin 0 July 2009 Mobile Banking and Payments In Zagreb, Croatia. consumers can board the local street • short message service (SMS)-a technology that lever car and pay their fare via their mobile phone. In Kuala ages text messaging to monitor account balances and Lumpur, Malaysia, consumers can use their mobile phone authorize and track payments; widely considered to be to pay for parking and restaurant meals. In Stockholm, the fastest growing and most popular platform at Sweden, consumers can buy a cup of coffee using their present mobile phone. • near-field communication (NFC) chip-a computer Technologies using mobile (or "cell") phones, PDAs, chip similar to those found in contactless payment and other wireless handheld devices are also making an cards. In 2006, New York's Metropolitan Transit appearance in the U.S. financial services market, initially Authority (MTA) implemented a pilot program for as mobile banking. The recent implementation of pro using contact less cards to pay fares and. a few months grams at major U.S. financial institutions, coupled with into the trial. added NFC-enabled mobile phone pay the emergence of pilot programs at many regional and ments as an alternative to card payments. The early local banks, indicates that mobile banking is about to response was positive, with the MTA reporting that become a widely accepted banking medium. Industry customer acceptance was good, there were no con experts believe that the evolution in mobile technology, sumer complaints about MTA charges, no instances in together with consumer demand for more-convenient which the MTA had to return funds to a consumer, and access to their banks' products and services, especially no fraud. I among younger generations. will create a viable market Companies adopting mobile payment technology now for mobile banking. indude nontraditional banking institutions and third Mobile banking is a logical extension of online bank party payment providers such as PayPal, Obopay, and ing and thus may be a comfortable next step for online Amazon. The industry is also looking at GPS technology bankers. But extending the use of mobile devices beyond in mobile phones to allow customers to locate financial banking transactions to point-of-sale and person-to products and services (such as ATMs) and to identify person fund transfers may require innovations in mer targeted promotions when they are within a reasonable chant, telecommunication, and financial services infra distance of products and services that might be of interest structure as well as consumer willingness to try new to them. payment technologies. The "electronic waHet" (stored, encrypted credit card or bank account information that can be used to make Technology behind Mobile Banking electronic payments without entering the information for and Payments each transaction), which was developed for online trans Cunently, mobile banking and transactions rely on one of actions, is also being adapted for mobile devices and several basic technologies: dubbed the "m-wallet." The m-wallet will include down loadable applications to enable customers to manage • web access protocol (WAP)-a technology generally routine financial transactions, including both debit and used for mobile banking; has the familiar look and feel of online banking • downloadable application-a technology that allows users to download the platform needed for a transac I. Nasreen Quibria (2008). The Contactless ~/"e: A Case 5111dy in hans;t Payments. Emerging Paymenls Industry Briefing (Boston: Federal tion; look and feel of platforms similar to online Reserve Bank of Boston, June), www.bos.frb.org/economic/eprglpapersJ banking briefings/transit.pdf. tion of smartphone technology may serve to expe familiarity with mobile devices, along with additional dite the process (a smartphone is a mobile phone experience with text messaging technology (SMS), with advanced features, often with PC-like function contactless payment cards, and wireless Internet, will ality). speed the adoption of a variety of mobile banking Insights provided by the Diffusion of Innovation technologies. Online banking and contactless pay model and the Technology Acceptance Model (de ments may be the building blocks for further scribed in the next section) suggest that consumers' adoption.23 See Edgar, Dunn & Company (2007), 2007 Mobile Financial Services 23. Julia S. Cheney (2008), "An Examination of Mobile Banking SlUdy: Key Findings Reporl (San Francisco: Edgar, Dunn & Company, and Mobile Payments: Building Adoption as Experience Goods?" February). Payment Cards Center Discussion Paper 08-06 (Philadelphia: Federal

u.s. Households' Access to and Use of Electronic Banking, 1989-2007 A 113 credit transactions, and conduct routine banking func an increase in the amount of control they had over their tions. One vendor promotes an m-wallet product that finances.4 includes bill payment, prepaid airtime replenishment, Businesses providing these services may be able to prepaid shopping cards, money orders, money transfers, capture the unmet demand for banking products and coupons, person-to-person transactions, gift/loyalty cards, services among the unbanked and underbanked-groups ticketing. and point-of-sale transactions.2 The evolution that, according to the Center for Financial Services and adoption of "smart phone" technology ha,provided a Innovations (CFSI), account for nearly 40 percent of U.S. solid platform for developing, launching. and marketing households. CFSI believes that widespread use of alterna applications for those functions. tive service providers (such as payday lenders and check cashers) and the fact that approximately 65 percent of Anticipated Adoption Americans own a mobile phone are indications of poten Market reports indicate that despite earlier failures in tial demand. ~ introducing mobile banking products and services. de Barriers to Adoption: Infrastructure and Security mand may finally be sufficient to support mobile com merce. One report predicts that 30 percent of onLine Among the factors hindering adoption of mobile banking banking households will use mobile banking by the end and commerce is the lack of infrastructure that can of 20 I o? In a survey described in the report, 50 percent optimize the functionality of these products. Key chal of the Generation Y cohort (defined as persons age lenges to service providers lie in providing ease of use 18-25) indicated that they considered the availability of and interoperability-features crucial to widespread adop mobile banking a "very important" or "somewhal impor tion. The current generation of mobile products and tant" factor when choosing a financial institution; 84 services appears to be functioning efficiently without set percent of this group (the early adopters of mobile standards for interoperability. SMS technology is leading banking technology) said they already use their mobile the way. However, the next generation, which is expected phone for functions other than making calls. to rely on a combination of SMS technology and down The features of mobile commerce that are attractive to loadable applications (in many cases relying heavily on consumers are similar to those of online banking. namely. the adoption of smart phone technology), has greater convenience and ease of use. In addition, mobile com infrastructure requirements. Service providers also face merce enables consumers to access their accounts from the challenge of persuading potential customers that their almost anywhere at almost any time. Immediate access to products and services are safe and secure. The data on account balances and overdraft alerts have the potential to online banking analyzed for this article indicate that a enable consumers to exercise responsible control over perception of safety is an important consideration in their finances. In a recent consumer trial of mobile adoption. Consumer concerns include customer authenti banking products, 75 percent of participants thought that cation (verification that the user is in fact the authorized mobile banking allowed them to make better-informed user), the interception of private data, and the loss of spending decisions, and more than 50 percent reported sensitive information if the mobile device is lost or stolen. 4. Michael Lindsey (2008). "Mobile Banking Case SlUdy: Lessons 2. Motorola. Inc. (2008). "Motorola M-Wallet Sotution: New Transac Learned from a Pilot Rollout," NACHA Tele.eminar: Case Sludies from tion Options for Subscribers. New Revenue Opportunities for Bank Mobile Implementations. You" (brochure). www.motorola.com/staticfiles/Business/_Documcnts/ 5. Caroline Boyd and Kat)' Jacob (2007). Mobile FillUlzeial Services slatic%20files/M-WallecBRO_06083hv2.pdf. and the Underbanked: Opportllnities alld Challenges Jor Mbwzkillg alld 3. Dan Schatt (2007), US Mobile Banking: Beyond the Bu'-Z (Boston: Mpayments (Chicago: Cenler for Financial Services Innovation, April). Celent). www.cfsinnovation.com/documentlmbanking.pdf. In addition to issues of access, availability, and of mobile banking, wireless, and contactless pay familiarity, there are concerns about the security and ments. A 2007 report noted that 82 percent of sur privacy of financial information related to contactless veyed banks thought resolving security issues was card, wireless, and mobile transactions_ These con "important or very important to resolve for success cerns may be the greatest impediments to the success ful mobile banking."24 24. Aile Group (2007), "Mobile Banking Security: The Black Reserve Bank of Philadelphia, June). www.philadelphiafed.org/pcc/ Cloud Attached to the Silver Lining," Report 200710241 (October), papers120081D2008MobileBanking.pdf. www.ailegroup.com/reportsl200710241.php.

A 114 Federal Reserve Bulletin 0 July 2009 9, Consumers' perceptions of e-banking, selected years Mean of responses I Percent who agree or strongly agree Perception 1999 I 2003 I 2006 1999 I 2003 I 2006 Conveniellce Electronic banking is convenient... . . . . .. 3.8 3.9 4.0 76 81 80 There are enough advantages of electronic banking for me to consider using it. . . . . .............. . 3.1 3.4 3.4 46 58 56 Electronic banking helps me to beller manage my personal finances. 3.0 3.3 3.3 37 48 50 It bothers me to use a machine for banking transactions when I could talk with a person instead .................... . 3.2 3.1 2.9 53 46 42 Electronic banking products will reduce the need for having traditional bank accounts in Ihe future ..... . n.a. n.a. 3.4 1I.a. n.a. 53 Familiarity ami east! of use Electronic banking is the wave of Ihe fulure .. 3.8 4.0 3.9 72 82 74 Electronic banking services are used by llIallY people ........ . 3.7 39 3.9 70 83 80 I have the opportunity to try various electronic banking services .. 3.1 3.6 3.5 49 70 64 I have seen how others use electronic banking .. 3.0 3.5 3.4 41 64 57 I need to familiarize myself with electronic banking technology. .. 3.5 3.3 3.4 63 53 57 Electronic b<ulking is difficult to use. . . . . . . . .. . . ..... ' 2.6 2.5 2.3 21 17 15 My use of electronic banking keeps me from switching to other financial service providers .. n.a. n,a. 2.8 n.a. n.a. 28 Secnrily and privacy When I use eleclronic banking, my money is as safe as when I use other banking services. . . . . . . . . . . . . . .. " .. 3.2 3.3 3.4 49 55 54 Mi r s e t g ak u e la s r a b re a n m ki o n r g e . . likely 1 . 0 . o . . c . c . u . r . w . . i . t h . e . l . e . c . t . ro .. n . ic .. b . ' , m . king thall with. 3.0 2.9 2.9 41 36 31 Mislakes with electronic banking are more difficult to get corrected than with regular banking. . . . ..... 33 3.3 3.2 50 49 45 I feel comfortable providing my personal information tllrough . electronic banking syslems. . . . . . . . .. . ............ . 2.7 2.9 2.9 35 41 40 I worry aboul the privacy of my information when using elecu'onic banking systems. . . . . . . . . .. n.n. 3.5 n.a. n.a. 63 n.a. I worry that electronic banking systems are not secure enough 10 protect my personal financial information. . !l.a. 3.2 3.3 n.a. 52 52 I worry thai electronic banking systems arc nol secure enough and I could lose my money.. . . . . . . . . . .......... . n.u. 3.0 3.1 n.a. 40 46 Electronic banking increases the likelihood that I will become a victim of identity thefl. ... . . . . . .. ..... .. ............. . l1.a. n,a. 3.5 n.a. n.a. 60 I. On a scale of I 10 5, with l being "strongly disagree," 3 "neutral," and n.a. NOI available. 5 "strongly agree." SOURCE: Mich.igan Surveys of Consumers. CHANGES IN CONSUMER A IT/TUDES TOWARD based on the TAM and its extensions has found E-BANKING OVER TiME consistently positive relationships between useful ness, and to a lesser extent ease of use, and the Two theories have emerged to explain why and how adoption of a variety of technologies, including com consumers adopt new technologies. Both are relevant puter software and e-mail,26 to an evolving payment system: the Diffusion of Innovation model and the Technology Acceptance Convenience Model (TAM),25 Both models incorporate, among other characteristics of new technologies, the idea of Overall, research indicates that the more observable, relative advantage, which prompts consumers both to compatible, simple, and useful a technology is and try out and to adopt the technology. In the Dj ffusion the more advantages it offers, the more likely consum of Innovation model, relative advantage is character ers are to adopt it. Consumers continue to recognize ized as the degree to which consumers perceive a new the convenience of electronic banking services product or service as different from, and better than, (table 9).27 As measured by the 1999, 2003, and 2006 its substitutes. The counterpart to relative advantage Michigan Surveys of Consumers, growing propor in the TAM is perceived usefulness. In the case of tions of consumers report that e-banking helps them electronic payments, convenience and savings of ti me better manage their personal finances, and smaller and money have been cited as relative advantages, proportions report being bothered by not interacting and privacy concerns as a relative disadvantage, Empirical research on the diffusion of technologies 26. Hoganh, KoJodinsky, and Gabor, "Consumer Payment Choices: Paper. Plastic-{)r Electrons?" 25. Everett M. Rogers (1962), The Diffusion of Innovatio/l 27. [n a 2007 study by the Federal Reserve Bank of Boston, both (New York: Free Press); Frederick D. Davis (1989), "Perceived users and nonusers recognized the convenience of e-banking services Usefulness, Perceived Ease of Use, and User Acceptance of Informa (Benton, Blair, Crowe, and Schuh, "The Boston Fed Siudy of Con tion Technology," MIS Quarterly, vol. 13, pp. 319-40. sumer Behavior and Payment Choice").

u.s. Households' Access to and Use of Electronic Banking, 1989-2007 A115 with people in their banking transactions. A new decreased and the percentage of consumers paying question in the 2006 survey asked about the need for their bills online increased, yet data on Internet traditional bank accounts; more than half of respon transactions by payment type show that the propor dents (53 percent) said that e-banking products will tion of credit card payments declined over the same reduce the need. period.28 One interpretation is that the decline in Internet credit card transactions reflects consumers' Familiarity and Ease of Use concerns about security. Analysis of the adoption of Internet banking in Poland found a relationship Consumers' perceptions regarding familiarity and between the decision to open an online account and ease of use of e-banking technology, as reported in the perceived level of security of Internet transac the 2006 Michigan Surveys of Consumers, reveal an tions: a 1 percentage point decrease in perceived interesting dichotomy (table 9). On the one hand, the security was associated with a drop of almost 29 per majority reported that e-banking is widely used cent in the probability of opening an online account.29 (80 percent) and that they have seen how others use it A 2007 study by the Boston Federal Reserve Bank (57 percent). On the other hand, nearly three out of also found that the main barriers to using online bill five (57 percent) felt that they need to become more payment were concerns about privacy and identity familiar with e-banking services. Clearly there is a theft. 30 need for bankers and community educators to find out Increasingly, consumers are targeted with com which aspects of e-banking are unfamiliar to consum puter viruses, spam, and phishing e-mail messages ers and to craft outreach and education opportunities that attempt to steal their personal information. Data to address information gaps. security requires providing security for data at rest E-banking can be perceived as a set of services that (data residing on computers within organizations), engenders loyalty in a customer base. Once consum data in transit (data moving over networks), and data ers have signed up for direct deposit, online banking, "on travel" (data on laptops or other portable de or preauthorized payment, they may perceive the vices).3l Reports of data breaches involving consum transition costs involved in switching banks-in ers' names, account numbers, and other information terms of both time and mental energy-as quite high. have received attention from state and federal law However, only about one-fourth (28 percent) of sur makers. In mid-2003, California became the first state vey respondents felt that their use of electronic bank to require businesses to notify consumers of data ing keeps them from switching to another financial breaches that result in the loss of their personal services provider. The message to financial institu information.32 Since then, all but six states have tions is c1ear-even e-bankers feel empowered to enacted laws requiring notification of data breaches.33 vote with their feet. Before these notification laws took effect, news reports of breaches were infrequent; after 2003, pub Security and Privacy lic announcements became much more frequent (figure 2).34 Consumers also report disparate perceptions with respect to security and privacy. Over time, the propor tions of consumers expressing concern about mis 28. Crowe, Emerging Payments-The Changing Landscape. takes connected with e-banking and about difficulty 29. Polasik and Wisniewski, "Empirical Analysis of Internet Bank ing Adoption in Poland." in resolving errors have declined. In addition, more 30. Benton, Blair, Crowe, and Schuh, "The Boston Fed Study of than half the respondents to the 2006 Michigan Consumer Behavior and Payment Choice." Surveys of Consumers (54 percent) reported feeling 31. Bruce Summers, cited in James C. McGrath and Ann Kjos (2006), "Information Security, Data Breaches, and Protecting Card that e-banking was "as safe as when I use other holder Information: Facing Up to the Challenges," Summary of banking services." However, more than half (52 per Payment Cards Center and Electronic Funds Transfer Association cent) were concerned that e-banking systems were conference. September 2006 (Philadelphia: Federal Reserve Bank of Philadel phi a), www.philadelphiafed.org/pcc/conferences/2007/ not secure enough to protect their personal financial C2006SeptlnfoSecuritySummary.pdf. information, and three out of five (60 percent) agreed 32. California implemented the law in 2003. See the California or strongly agreed that e-banking would increase the civil code, section 1798.80-1798.84. 33. National Conference of State Legislatures, "State Security likelihood of their becoming a victim of identity theft Breach Notification Laws," December 16, 2008, www.ncsl.org/ (table 9). programs/liS/cip/priv/breachlaws.htm. These results are consistent with related findings 34. Several very large data breaches (not included in figure 2) came to light as a result of the notification laws, including the 1055 of from other studies. For example, between 2005 and 40 million records by MasterCard reported in 2005; 26.5 million 2007 consumers' concerns about online security records by the Veterans Administration reported in 2006; and more

A 116 Federal Reserve Bulletin 0 July 2009 2. umber of con, umer data records reported losl 10. Probability of being a heavy user of e-banking per month. 2000-20{)7 technologies. by con umcr anitude toward u, peets of e-banking, 2001 Thouuods of m:onIs 4,500 4,000 I Attitude Aspect -T 3,500 p H o i s g it h i l v y e M th i e d d r l o e a d o f I n H eg ig a h ti l v y e 3,000 I Security and privacy. .80 .70 .45 2.500 Convenience ... .84 .57 .35 Familiarity and ease of use. .77 .56 .26 2,000 I I I,SOO SOURCE: Hogarth, Kolodinsky. and Gabor, "Consumer Payment Choices: Paper. Plastic-or Electrons')" (based on 2003 Michigan Surveys of Consum 1.000 ers data). soo \ .A.. , Rights Clearinghouse identified incidents occurring 2000 200t 2002 2003 2004 200S 2006 2007 between January 2005 and April 2009 that resulted in NOTE: Excludes data losses exceeding 4 million records, including a loss of 40 more than 253 million lost or stolen recordsY million records reported in 2005 by MasterCard; a loss of 26.5 million records reported in 2006 by the Veterans Administration; and a loss of more than 94 In 2003, three out of five consumers (63 percent) million records exposed in a data breach 8tthe TJMaxx parem company reported reported being worried about the privacy of their in 2007. SOURCE: Rita Tehan (2007). "Data Security Breaches: Context and Index consumer information when banking electronically, Summaries," Congressional Research Service Report RL33199 (May 7). and in 2006 about the same proportion (60 percent) www.fas.orglsgp/crs/misC/RL33199.pdf. felt that e-banking would increase the likelihood of Some observers claim that a very small percentage their becoming an identity theft victim (table 9). The of data breaches actually result in fraud.35 Neverthe large number of data losses-whether or not they less, notification may make consumers better off, result in fraud-may be contributing to consumers' because they are better able to protect themselves concerns. Looking to the future, some research sug against fraudulent use of their personal financial gests that improvements to hardware and to software information. In some instances, consumers whose authentication techniques could be effective in reduc data have been breached are provided with credit ing identity theft, augmenting the current practice of monitoring services, whereby one of the credit report reJying on fixed passwords, which most banks use for ing agencies alerts them whenever their credit file is their online services. accessed. Consumers may also be able to place a The Importance of Attitudes fraud alert on their credit file or freeze their credit file altogether, preventing anyone but themselves from When other key variables-such as income, age, using their personal financial information to obtain education, marital status, race and ethnicity, gender, credit. (See box "Reducing the Risks from Identity and region-are held constant, attitudes become Theft. ") important predictors of consumers' adoption of Despite indications that the number of identity e-banking technologies. It appears, for example, that theft incidents is declining, the media continue to pay increasing consumer confidence in the security and significant attention to data losses-possibly increas privacy of various technologies could bring about a ing consumer concern about security and privacy.36 large increase in their use: in the 2003 Michigan Studies by the Congressional Research Service esti Surveys of Consumers, respondents with highly posi mate total data losses between 2000 and 2007 to have tive perceptions of e-banking's security and privacy been 100 million records, not including losses exceed had an 80 percent probability of using a full range of ing 4 million records or incidents in which the the technologies, compared with a 45 percent prob number of losses is unknown (figure 2). The Privacy ability for those with highly negative perceptions (table 10). To improve consumer attitudes, financial than 94 million records by TJX, parent company of TJMaxx and institutions may want to consider ways of providing Marshalls, reported in 2007. evidence of the security and privacy of their elec 35. A Javelin Strategy and Research study showed that fewer than tronic payment services, although changing consum I percent of lost data records result in fraudulent activities (Mary T. Monahan (2006), "Data Breaches and Identity Fraud: Misunderstand ers' perceptions may be a challenge when phishing ing Could Fail Consumers and Burden Businesses" (August». and identity theft continue to be in the news. 36. The number of identity theft victims declined from an estimated 8.9 million adults in 2005 to an estimated 8.4 million adults in 2006 (Javelin Strategy and Research, 2007 Identity Fraud Survey Report 37. Privacy Rights Clearinghouse, "A Chronology of Data (February 2007), as cited on the Privacy Rights Clearinghouse web Breaches," updated April 9. 2009, www.privacyrights.org/ar/ site, www.privacyrights.orglar/idtheftsurveys.htm#Jav2007). ChronDataBreaches.htm.

u.s. Households' Access to and Use of Electronic Banking, J 989-2007 A 117 Reducing the Risks from Identity Theft Technology offers some help to consumers in reducing • Experian. \-888-EXPERIAN (1-888-397-3742); the consequences of identity theft. For example, elec www.experian.com; P.O. Box 9532. Allen, TX tronic banking technologies allow them to monitor their 75013 account activity, thereby helping them identify fraudulent • TransUnion. 1-800-680-7289; www.transunion. activities sooner than they otherwise might. The financial com; Fraud Victim Assistance Division, P.O. Box industry also benefits from technological innovations, for 6790, Fullerton, CA 92834-6790 example, modeling techniques that monitor account activ 2. Close the accounts that you know, or believe, have ity and identify anomalies associated with potentially been tampered with or opened fraudulently. fraudulent transactions. 3. File a complaint with the Federal Trade Commission. Consumer liability in the event of identity theft (as well Use the FTC's online complaint form (www. as credit card theft) is limited both by state and federal ftccomplaintassistant.gov/); or call the FTC's Identity regulations that protect consumers and by industry rules. Theft Hotline, toll-free, at 1-877-ID-THEFT (1-877- Credit card users in particular are protected by the Truth 438-4338); TTY: 1-866-653-4261; or write to the in Lending Act and the Federal Reserve Board's Regula Identity Theft Clearinghouse, Federal Trade Commis tion Z, which limit their liability for unauthorized trans sion. 600 Pennsylvania Avenue NW, Washington. actions to $50. In addition, the Electronic Fund Transfer DC 20580. Act and the Board's Regulation E specify liability limits 4. File a report with your local police or the police in the for unauthorized electronic transactions and set forth procedures for recouping funds stolen from consumers' community where the identity theft took place. If the police are reluctant to take your report, ask to file a bank accounts. The limits are $50 if the consumer notifies the bank within 2 days of learning of the loss or theft of a "miscellaneous incident" report, or try another author debit card and up to $500 if the consumer notifies the ity, such as your state police. You can also check with your state attorney general's office to find out if state bank after 2 days but within 60 days after the bank sends law requires the police to take reports for identity a statement containing an unauthorized transfer or trans theft. Check the Blue Pages of your telephone direc action. Consumers who do not report an unauthorized tory for the phone number, or check www.naag.org transfer appearing on a statement within 60 days after the for a list of state attorneys general. statement is sent risk unlimited loss on their account plus the maximum amount of their overdraft line of credil, if The FTC encourages consumers to take the following any. Some debit and credit card issuers guarantee that a precautions to guard against identity theft: consumer will not be held responsible for fraudulent • Deter identity thieves by safeguarding your informa charges incurred with the consumer's card or account tion, including your social security number and ac information. count numbers. Consumers who are victims of identity theft should • Detect suspicious activity by routinely monitoring take the following steps, as laid out on the Federal Trade your financial accounts. billing statements, and credit Commission's website: reports. I. COlllactthe credit reporting companies, place a fraud • Defend against identity theft as soon as you suspect it alert on your credit reports, and review your credit by taking the four steps listed above. reports. For more information, visit www.ftc.gov/bcp/edu/ • Equifax. 1-800-525-6285; www.equifax.com; P.O. microsites/idtheftl and www.bos.frb.org/consumer/ Box 740241, Atlanta, GA 30374-0241 identityfindex.htm. Similarly, changing consumer attitudes about the more convenient. For example, they might point out convenience of e-banking technologies could bolster that using preauthorized payments ensures that bills their use. In the 2003 survey, consumers with highly are paid on time, thus eliminating late fees. positive perceptions of the convenience of e-banking Increasing familiarity and ease of use may offer the were more than twice as likely as those with negative greatest potential for increasing adoption of e-banking perceptions to adopt a wider range of e-banking technologies. The data reviewed in this article indi services. Both financial institutions and community cate that hel ping people access and become more based educators can help consumers identify ways in familiar with these technologies and demonstrating which payment technologies can make bill paying their ease of use could lead to as much as a 51 per-

AI18 Federal Reserve Bulletin 0 July 2009 Policy Challenges and Opportunities Policy makers face several challenges in the e-banking ers to see the required disclosures "clearly and conspicu market, including providing data security and consumer ously"? Can financial services providers group the re protection and regulating the involved entities. quired information together on a small screen so that Federal. state, and local laws set the basic parameters consumers can take in the meaning? What is a consum for data security; industry best practices and individual er's recourse if a mobile transaction goes awry? Does the firms' policies also require certain data security safe consumer contact the mobile provider or the financial guards. However, as new products and services evolve, institution, or both? laws, regulations, and policies often struggle to keep up The entry of nonbank providers into the financial with the evolving risks. Also, the once-clear definition of services market presents another set of challenges. Some who is a financial services provider has become blurred as legislation. such as the Truth in Lending Act, makes it nonbank providers such as telecommunications firms and clear that the law and associated regulations cover non other third parties have moved into the market and are bank entities. But coverage under other laws and regula now providing payment serv,ices and financial transfers. tions is less clear. Some have argued that the regulatory Multiple regulators and regulations may be involved in a environment needs to be updated to reflect new and single transaction. emerging technologies and relationships. I Related to the blurring of regulatory lines are the matters of consumer protection and avenues of recourse. Although it is possible for consumers to receive disclo I. Gail Hillebrand (2008). "Before the Grand Rethinking: Five Things to Do Today with Payments Law and Ten Principles to Guide New sures via a handheld device-a PDA or mobile phone Payments Products and New Payments Law." Chicago-Kelll Lnw Re"iew_ questions remain. Is the screen large enough for consum- vol. 83 (2). pp. 769-81 I. centage point increase (from 26 percent to 77 percent) that can act as substitutes for online banking and in the probability of adopting more of these tech through improved web access protocols for mobile nologies. phone banking. These are natural extensions of cur rent trends; financial institutions may want to do even EXPANSION OF E-BANKINC more to provide and promote alternative ways of banking. Expansion of e-banking is a matter of both supply and However, expanding e-banking may not be a case demand. On the supply side, merchant acceptance of "if you build it, they will come." While the seems to be key to expanding from magnetic stripe proportion of heavy users of e-banking has increased technologies to radio-frequency, smart-card, and other over time, more than one out of five survey respon chip-based technologies. Fee structures and payment dents in 2006 (22 percent) were classified as minimal streams for issuers, merchants, and consumers are users, making use of only direct deposit and ATM or also important.)8 On the demand side, consumer debit cards. The data suggest that attitudes may play access-a payment infrastructure that provides an important role in expanding adoption. Consumers e-banking services and broad consumer ability to need to perceive that e-banking is safe and that their bank electronically-and positive consumer attitudes information is secure. Both financial institutions and are essential to wider adoption of e-banking. policymakers have a role in ensuring a safe data Expanding access through improved infrastructure environment for e-banking (see box "Policy Chal does not have to rely on extreme technological solu lenges and Opportunities"). Beyond safety, consum tions. A first step may be to continue to reduce the ers need to perceive that e-banking is convenient and persistent digital divide between upper- and lower easy to use. As policymakers and financial institutions income households. One approach is to increase continue to address the issues of access and attitudes, access to high-speed Internet connections. Another is consumers can fully realize the potential of e-banking to expand the availability of phone banking, both to help them manage their payments and increase through improved and expanded automated systems their financial security. 38. Margaret Canen, Dan Littman, Scott Schuh, and Joanna Stavins APPENDIX A: OURCES OF DATA (2007), "Consumer Behavior and Payment Choice: 2006 Conference Summary," Public Policy Discussion Paper 07-4 (Boston: Federal The data on which this article is based come from two Reserve Bank of Boston), www.bos.frb.orgleconomic/ppdp/2007/ ppdp0704.pdf nationally representative surveys-the triennial Sur-

u.s. Households' Access to and Use of Electronic Banking, 1989-2007 AIl9 vey of Consumer Finances and the monthly Michigan Interviewers used a program running on laptop com Surveys of Consumers. Although the surveys have puters to administer the survey and collect the data. different sampling schemes and differ in some other Respondents were encouraged to consult their records ways, the data from the two are sufficiently compa as necessary during the interviews. rable to give a general picture of consumer use and To gather information that is both representative of perceptions of electronic banking technologies. Data the U.S. population and reliable for those assets from the two surveys were not combined for analysis; concentrated in affluent households, the SCF employs rather, a separate analysis was carried out on each a dual-frame sample design consisting of a standard, data set, and the results in some discussions were geographically based random sample and an over viewed together to extend the period of analysis and sample of aftluent households. Weights are used to thus get a better idea about trends. combine data from the two samples so that the data In general, the terms households, consumers,fami from the sample families represent the population of lies, and respondents are used interchangeably in all families.40 A total of 4,299 households (represent discussions of the data and elsewhere in the article. ing 99.0 million families) were interviewed for the To be specific, however, data from the Survey of 1995 survey; 4,309 households (representing Consumer Finances are for what was referred to as 102.6 million families) for the 1998 survey; 4,449 the primary economic unit, defined as an economi households (representing 106.5 million families) for cally dominant single individual or couple (married the 2001 survey; 4,522 households (representing or living as partners) in a household and all other 112.1 million families) for the 2004 survey; and individuals in the household who are financially 4,422 households (representing 116.1 million fami dependent on that individual or couple. For example, lies) for the 2007 survey. Missing data-missing in the case of a household composed of a married because of lack of response to individual interview couple who own their home, a minor child, a depen questions, for example-are imputed by making mul dent adult child, and a financially independent parent tiple estimates of the missing data to allow for an of one of the members of the couple, the primary estimate of uncertainty. economic unit would be the couple and the two The analysis was restricted to those households children. Data from the Michigan Surveys of Con that reported having an account with a bank, thrift sumers are for families, defined as any group of institution, or credit union. For the 1995 survey, this persons living together who are related by marriage, group constituted 87.6 percent of households; for the blood, or adoption or any individual living alone or 1998 survey, 90.5 percent; for the 200 I survey, with a person or persons to whom the individual is 90.9 percent; for the 2004 survey, 91.3 percent; and not related. for the 2007 survey, 92. I percent. Survey of Consumer Firumces Univer'ily of Michigan Survey oj Consumers The Survey of Consumer Finances (SCF) is a trien nial survey of U.S. families (defined as primary The Surveys of Consumers, initiated in the late 1940s economic units, as described above) sponsored by the by the Survey Research Center at the University of Federal Reserve, in cooperation with the Statistics of Michigan, measure changes in consumer attitudes Income Division of the Internal Revenue Service, and and expectations with regard to consumer finance conducted by NORC, a national organization for decisions.41 Each monthly survey of about 500 house research at the University of Chicago.39 The survey holds includes a set of core questions. For the October provides detailed information on U.S. families' bal and November 1999, June and July 2003, and Novem ance sheets, use of financial services, demographics, ber and December 2006 surveys, the Federal Reserve and labor force participation. The great majority of Board commissioned additional questions concerning interviews were conducted in person, although inter households' use and perceptions of electronic bankviewers were allowed to conduct telephone inter views if that was more convenient for the respondent. 40. See Arthur B. Kennickell (1999). "Revisions to the SCF Weighting Methodology: Accounting for RacelEthnicity and Home 39. See Arthur B. Kennickell (2000). "Wealth Measurement in the ownership" (Board of Governors of the Federal Reserve Sys Survey of Consumer Finances: Methodology and Directions for Future tem, January), www.federalreserve.gov/pubs/oss/oss2/papers/weight. Research" (paper prepared for the annual meetings of the American revision.pdf. Association for Public Opinion Research. Portland, Oregon, May 41. For more information on sample design, questionnaire develop 2000) (www.federalreserve.gov/pubs/ossloss2/papers/measurement. ment, and interviewing protocols, refer to the Surveys of Consumers pdf and references cited therein). website. at www.sca.isr.umich.edu/main.php.

A120 Federal Reserve Bulletin D July 2009 ing technologies. Some of these additional questions in 2003 (June and July surveys combined), and 1,002 were based on questions in the Survey of Consumer respondents in 2006 (November and December sur Finances to allow for comparison of responses to the veys combined). The collected data were weighted to two surveys. be representative of the population as a whole, Interviews were conducted by telephone, with tele thereby correcting for differences among families in phone numbers drawn from a cluster sample of the probability of their being selected as survey residential numbers. The sample was chosen to be respondents. All survey data in the tables are based on broadly representati ve of the four main regions of the weighted observations. country-Northeast, Midwest, South, and West-in As with the Survey of Consumer Finances, the proportion to their populations. Alaska and Hawaii analysis was restricted to those households that re were not included. For each telephone number drawn, ported having an account with a bank, thrift institu an adult in the family (as previously defined) was tion, or credit union. For the 1999 survey, this group randomly selected as the respondent. The surveys constituted 89 percent of households; for the 2003 yielded data from 1,000 respondents in 1999 (October survey, 86 percent; and for the 2006 survey, and November surveys combined), 1,002 respondents 92 percent. D

u.s. Households' Access to and Use of Electronic Banking, 1989-2007 Al21 R.I, Proportion of con lim r' who bank online and reasons for hanking online, by demographic characteristic. selected years Percelll Reason for banking online Bank online Open new Apply for Demographic characteristic Pay bills accounts loans 1999 I 2003 I 2006 2003 I 2006 2006 2006 All respondents ..... .......... .. ' -" . 10.7 31.9 51.1 54.7 76.0 14.6 11.1 2 H 0 O % ll s o eh r o l l e d s s in . c ome . ( . b . y . . in . c .. o . m . e .. p .. e . rc . e . n . tile)' ... 2.6 16.8 30.4 38.1 71.5 4.6 6.2 4 2 1 1% % - -{ 4 j( 0 )% % . . . .. . . . . . . .. .. .. . ,. . . . .. . . . .. .. . ., . .. . ... " ..... .. 6 9 . . 4 2 3 2 1 6. . 7 9 4 3 9 8. . 4 7 5 5 5 0. .2 9 6 7 9 9 . .7 1 1 9 3. .9 0 1 8 8 . . 3 7 61%-80% .. ........ .... .. . .... 10.6 38.4 64.2 55.4 75.6 15.6 11.0 81%-100%. ... ....... . .... 21.8 43.4 70.1 58.9 79.7 20.2 9.1 Aile of responde", Crean) Younger than 35. .. ................. 16.1 47.6 67.3 51.4 80.0 16.9 12.6 35-44 ..... . . . . . . . . , . . . . . . . 13.4 36.4 65.2 59.2 81.1 16.9 14.2 4 5 5 5 - - - - 5 6 4 4 . . . . . . . . . . . . . ... .... . . . . . . . . .. , . . . . . .. . . .. .. . . . .... 8 9 . . 7 2 3 25 0 . . 7 6 4 5 3 2. . 7 2 4 59 6 . . 1 3 7 70 0. . 9 1 1 9 2 . . 4 7 1 9 0 . . 7 2 65 and older.. ~. .......... 2.0 8.5 20.3 54.0 68.9 16.0 .0 Educatiun l~r respondent No high school diploma. ........ , ...... ... 3.0 47.6 10.4 66.6 100.0 .0 .0 High school diploma. ................. ... .. . 5.9 36.4 35.3 52.4 67.2 6.6 5.2 Some college. .......... .... 11.9 30.6 53.5 50.9 71.9 13.2 15.8 Bachelor's degree . ....... ... .. . . . . . . .. ... 14.7 25.7 58.6 56.7 78.2 17.6 9.1 Postgraduate education. .... 17.0 8.5 63.6 56.8 82.9 18.8 14.0 Racelethnidf), of f'I!.'pondent H W Bl i a h sp c it · a k e n . . i . c . ' ....... . . . , . .. . . . . . . . . . . . . . . . . . . , . ' . . , . . . . , . .. . . . . . . . ., . .. , . . 1 1 8 0 0 . . . 5 5 6 : 1 l 1 7 8 1. . . 1 4 2 5 5 38 2 1. . . 3 7 8 5 5 8 7 0 1 . . . 6 6 9 8 8 7 1 0 4 . . .4 9 4 1 1 1 8 3 6 . . . 9 6 4 1 8 2 2 . . . 3 6 6 Other' ... , ... ... .......~ . , .... .. . 24.6 41.0 47.0 73.3 90.0 28.8 2.9 I. Income percentiles are based on the income of all responding households. 2. Includes Asian, Pacific Islander, and Native American. Thus, of respondents in the lowest 20 percent of the income disuibution, SouRn: Michigan Surveys of Consumers. 2.6 percent banked online in 1999 and 30.4 percent banked online in 2006. 8.2. Proportion of onsumers who would lise conwcLless or wireless paymcn ' in Ihe fUllIre. by uemographic characterislic, 2006 Percent Contactless payments Wireless payments Demographic characteristic I All respondents I Online bankers All respondents I Online bankers Have used I Yes I Maybe I No I Yes I Maybe I No Likely I Even I U nlikely I Likely I Even I U nlikely All respondents ......... . . . . . , 19.4 37.8 14.7 47.5 51.6 13.8 34.6 16.3 7.2 76.5 24.0 7.7 68.2 Hf}lueho/d income (by income,' percemiie)J 2 20 1 % % - o 4 r 0 % les . s . . . . . . . .... . . ....,...,. " ...... . ... . . . . . . . 1 2 1. . 1 6 3 2 0 7. . 6 2 1 13 2. . 5 8 5 58 7. . 3 7 4 5 3 9 . . 4 7 1 7 0. .6 4 4 3 6 2. . 8 2 1 13 6 . .8 8 6 5 . . 8 5 7 7 7 9 . . 7 4 3 18 0. . 2 6 8 1 . . 3 6 6 79 1. . 6 8 41 '1r-{)0% . ... ·····f· ... . .. .. .. . . . . .... ...... 14.8 35.7 16.3 48.0 42.5 19.5 38.0 12.0 5.2 82.9 19.9 7.2 73.0 61%-80% .. ........ 25.9 46.1 15.1 38.8 48.9 14.9 36.2 16.8 7.5 75.7 18.8 8.0 73.3 81%-100%. ·,,1 .. ', . ....... ., .. 39.7 55.5 13.3 31.2 63.1 9.6 27.3 23.8 10.5 65.7 28.5 9.6 62.0 Age of respondent (yew:» 3 Y 5 o - u 4 n 4 g . e . r . t . h . a . n . . 3 . 5 . . . . . .. . . . . . . . . . . . . . . . . . . , . .. . ... . ." .. . . . . 2 2 8 2. .5 7 4 5 4 0. . 5 6 1 9 7 . .2 7 3 3 9 8 . . 8 2 5 5 6 7 . . 5 0 1 5 4. .7 1 3 28 7 . . 9 8 2 2 4 7 . . 0 6 1 7 0. . 4 9 6 68 2. . 1 1 3 30 2. . 4 9 6 7 . . 3 4 6 6 1 1 . . 4 8 4 5 5 5- - { 5 ) 4 4 . .. . ... , .... . . . . . ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1 0 5 . . 3 3 3 4 7 0. . 6 3 1 17 5. . 2 3 4 4 4 5 . .5 2 4 5 4 0 . . 4 2 2 1 0 6 . . 3 1 3 29 9 . . 5 5 1 13 0 . . 1 6 6 9 . . 0 3 7 8 7 3 . . 6 4 1 8 8 . .9 0 1 8 1 . . 0 1 8 70 3 . . 1 9 65 and older .. .. ,.,.,.,., ..... , . ... 10.0 16.8 14.5 68.7 37.0 24.1 38.9 6.3 2.5 91.1 10.9 4.2 84.9 Education of respondent H No ig h h ig sc h h o sc o h l o d o i l p l d o i m pl a o . m . a .. . . . . . ..... , .. .. 1 2 0 . . 8 4 27 8 . . 2 2 2 1 1 0 . . 2 1 6 7 2 0 . . 8 7 4 50 3 . J 0 9. . 2 0 4 5 7 0 . . 5 0 1 8 8 . . 8 3 4 5. . 6 9 8 7 5 6 . .8 7 35. .0 4 1 . . 0 2 1 6 0 3 0 . .0 5 Some college .... .... .... ....... .. . .... 13.2 35.5 17.7 46.9 43.8 19.1 37.2 11.9 6.0 82.1 15.4 5.5 79.1 Bachelor's degree .... , .. .... 28.0 47.2 15.6 37.2 54.2 14.2 31.6 18.3 7.2 74.5 24.8 8.5 66.7 Postgraduate education. ... ,. ... 33.3 53.2 13.7 33.1 63.7 10.2 26.1 18.9 13.2 67.9 25.4 14.2 60.4 Race/ethnicif)' of respondent W H Bl i h a s c p it k a e n . . i c . .. . . . . .. . . ' .... . . . , .. .. . . . . , . ' . .. . . . . ,. . ' . . . . . . . . . . . . . . . . . .. . . . . . . . . . . .. . .. 1 1 1 9 9 2 . . . 7 5 3 3 3 3 8 9 7. . . 8 4 1 2 1 7 7 4 . . . 7 6 5 4 5 3 7 4 2 . . . 7 9 3 6 4 5 8 3 2. . . 4 0 2 1 1 9 7 3 . . . 9 5 6 4 3 1 4 6 4 . . . 0 9 4 2 2 1 3 3 4 . . . 5 5 5 4 7 7. . . 2 6 1 6 7 7 8 2 9 . . 3 4 0 2 2 2 2 8 2 . . . 7 3 9 1 4 7 1 . . . 4 3 4 6 6 6 6 7 9. . . 8 3 0 Other2 .. .. .... ..... . ... 29.4 32.4 12.6 55.0 5.4 16.2 784 24.1 14.5 61.4 37.5 17.2 45.3 ' NOTE: Components may not sum to 100 percent because of rounding. 2. Includes Asian, Pacific Islander. and Native American. t. Income percentiles are based on the income of all responding households. SOURCE: Michigan Surveys of Consumers. Thus, of respondents in the lowest 20 percent of the income disuibution, 2.6 percent had used a contact less payment device in 2006 and 30.2 percent said they would use contact less payments in the future.

AI2S August 2009 Industrial Production and Capacity Utilization: The 2009 Annual Revision Anne Hall, of the Board's Division of Research and quarter of 2008, the factory operating rate stood at Statistics, prepared this article. Deepti Iyer provided 70.9 percent, 8Y4 percentage points below its long research assistance. run average.3 The utilization rate for mines was revised down about 1/2 percentage point in 2006 but On March 27, 2009, the Federal Reserve published was little revised in other years; at the end of 2008, it revisions to its index of industrial production (IP) and stood at 89.6 percent, about 2 percentage points the related measures of capacity and capacity utiliza above its long-run average. The operating rate for tion. Although the revision affected the data from utilities was revised down 0.7 percentage point in January 1972 through February 2009, most of the both 2006 and 2007; in 2008, it was revised down changes were for the period beginning in 2004.1 The 0.6 percentage point, to 83.6 percent, and was 3.2 per overall contour of total IP is little changed by the centage points below its long-run average. revision. Industrial output rose steadily at an average Compared with the previous estimates, total indus annual rate of 2.3 percent from 2004 through 2007, trial capacity is now reported to have risen 0.4 per then fell sharply in 2008 at a rate of negative 6.7 per centage point less in 2008 and is expected to fall cent (table 1). Measured from fourth quarter to fourth 0.6 percentage point more in 2009. The smaller quarter, the increase in total IP in 2007 is now increase in 2008 reflected a substantial downward reported to have been 0.3 percentage point Jess, and revision to capacity in the high-technology manufac the decrease in total IP in 2008 is now reported to turing industries; the capacity indexes for mining, for have been 0.6 percentage point more, than earlier utilities, and for manufacturing outside of the high estimates.2 technology industries are all now reported to have The revision shows that the rates of capacity been higher in 2008 than stated previously. The larger utilization for total industry in the fourth quarters of decrease in total industrial capacity in 2009 reflects 2007 and 2008 were both about V2 percentage point downward revisions to the indexes for both durable lower than previously estimated. Utilization in 2007 and nondurable manufacturing and for mining; the was 80.4 percent, about V2 percentage point below its capacity indexes for other manufacturing (logging long-run (1972 through 2008) average, and, in 2008, and publishing) and utilities were little changed from it was 74.2 percent, 6.7 percentage points below its their previous estimates. long-run average. The operating rate for manufactur Although comprehensive benchmark production ing was revised down 0.6 percentage point in 2007 data for manufacturing for 2007 are not yet available, and 0.8 percentage point in 2008; for the fourth the updated measures of production incorporate sev eral newly available sources of data. Estimates of manufacturing (NAICS) production were updated NOTE: Charles Gilbert directed the 2009 revision and, with Kim with data from selected 2007 Current Industrial berly Bayard, David Byrne, Norman Morin, and Daniel Vine, prepared the revised estimates of industrial production. Norman Morin and Reports (CIRs) from the U.S. Census Bureau. Esti Daniel Vine prepared the revised estimates of capacity and capacity mates of other manufacturing (logging and publish utilization. ing) were updated with annual data on logging for I. When necessary to maintain consistency with any revisions to the data for 1972 and subsequent years. the levels of the production 2007 from the U.S. Forest Service and with annual and capacity index.es for the years before 1972 were multiplied by a data on the publishing industry from the Census constant. However, utilization rates and rates of change in IP for the Bureau's Service Annual Survey. The index for minyears before 1972 were not revised. 2. Revised data reported in this article were published in Board of Governors of the Federal Reserve System (2009), Statistical Release G.17, "Industrial Production and Capacity Utilization" (July 15), 3. Manufacturing consists of those industries in the North Ameri www.federalreserve.gov/releases/gI7/releases_2009.htm. Data re can Industry Classification System, or NAICS, definition of manufac ferred to in this article as "previous" appeared in the G.17 release turing plus those industries- logging and newspaper, periodical, book, issued on March 16, 2009. That release was the last G.17 published and directory publishing-that traditionally have been considered to before the annual revision was issued on March 27. be manufacturing.

A 126 Federal Reserve Bulletin 0 August 2009 or I. Rcvi ed rates of change in industrial production and capacit)'. revised rates capacit)' utilization. and the difference between revised and previously reported rate . 2004-08 Revised rale Dillerence belween rales MEMO: 2007 (percenl) (revised minus previous, percentage points) Item po p r r o o o - n 2~81 2004 2005 1 2006 1 2007 1 2008 20 a 0 v 4 g - . 0 8 1 2004 1 2005 1 2006 1 2007 1 2008 1 Prodllction Total inde •. ....... .... , ..... 100.0 .5 3.0 2.6 1.8 1.8 --6.7 -.2 -.1 .0 .1 -.3 -.6 Manufacturing. 78.6 .3 3.6 3.8 1.2 1.9 -8.7 -.2 -.1 .1 .1 -.4 -.8 hcludin~ s.;lecled high-tech JOdustnes ............... .. 74.4 -.4 3.2 2.5 .4 .9 -8.9 -.1 -.1 .1 .3 -.2 -.4 Selected high-tech industries .. 4.2 11.1 8.6 22.6 13.1 18.2 --6.9 -3.1 -.7 .2 -4.2 -4.1 --6.4 Mining and uti1ities . 21.4 1.1 .6 -1.6 4.2 1.6 6 .1 .0 .0 .3 .1 .2 Capacity Total inde •...... ..... ...... . ... 100.0 1.1 -.1 .8 1.5 2.0 1.1 -.1 -.3 .0 .2 .2 -.4 Manufacturing ... ...... ... 80.9 1.2 -.1 1.3 1.4 2.2 1.3 -.1 -.:\ -.1 .1 .3 -.5 Exdudin~ sc;lected high-tech JOduslnes ................. 76.2 .7 -.2 .6 1.1 1.0 1.0 .1 .0 .0 .3 .3 .2 Selected high-Iech industries .. 4.7 9.7 1.7 11.9 5.7 22.9 6.3 -3.9 -3.8 -1.2 -4.7 1.5 -11.2 Mining and utilities ....... 19.1 1.0 .4 .0 1.9 1.2 1.4 .1 -.4 A .8 -.3 .0 Capacity utilizatioll To M lal a n in u d fa ex c t . u . r . i . n . g .... . . . ". . . . . . , . . . . . . . 1 8 00 0 . . 0 9 7 7 8 7 . . 9 0 7 77 9 . . 3 0 8 79 0 . A 2 7 8 9 0. .0 6 8 7 0 8 . . 4 7 7 74 0. .2 9 - - . . 3 3 - - . . 1 1 . . 0 0 -. .0 1 - - . . 5 6 - - . . 7 8 Exdudin:; s~lected high-Iech mdustnes .. ,. _. ........... 76.2 77.1 77.8 79.3 78.8 78.7 71.0 -A -.2 -.2 -.2 -.5 -1.0 Selected high-Iech industries .... 4.7 76.1 70.7 77.4 82.8 79.6 69.8 1.3 1.1 2.2 2.9 -.9 1.5 Mining and utilities .. .......... 19.1 86.8 86.8 8504 87.3 87.7 86.9 -.2 .1 -.2 -.6 -.3 -.2 NOTE: For produclion and capacily, the revised rates of change are from the I. Manufacturing excluding semiconduclors and related electronic compo founh quaner of Ihe previous year 10 Ihe fourth quaner of Ihe year indicated; nents, compulers and peripheral equipment. and communicalions equipment. Ihe differences belween revised and previously reponed production are also calculated from Q4-lo-Q4 rates. Capacity utilization rales are for the founh quaner of the year indicaled; dif ferences belween revised and previously reponed capacilY ulilizalion are also calculated from Q4 rates. ing was updated with new annual data on mineral rates incorporate the revised production indexes and extraction for 2006 and 2007 from the U,S. Geologi newly available data on industrial capacity from the cal Survey (USGS). The weights that allocate indi USGS, the Energy Information Administration of the vidual production indexes into multiple market groups U.S. Department of Energy (DOE), and other organi were previously derived from the benchmark input zations. output accounts for 1997 from the Bureau of Eco nomic Analysis (BEA); with this revision, these RESULTS OF THE REVISION weights were updated using data from the benchmark input-output accounts for 2002.4 Updated price defla As revised, total IP for the fourth quarter of 2008 was tors from the BEA were used in the construction of 104.4 percent of output in 2002, and capacity stood at the revised production estimates. FinaJJy, the new 140.7 percent of output in 2002. Both indexes are monthly production estimates also reflect the incorpo lower than reported previously. The capacity utiliza ration of updated seasonal factors and monthly source tion rate for total industry in the fourth quarter of data that became available (or were revised) after the 2008 was 74.2 percent, 0,7 percentage point below closing of the reporting window. The results of both what was stated earlier. Detailed results of the revi the 2007 Census of Manufactures and the 2008 sion can be found in the appendix tables,5 Annual Survey of Manufactures (both from the Cen sus Bureau) should be available for the 2010 revision 5. Table A.I shows Ihe revised data for total IP, and table A.2 shows to the IP indexes. Ihe revised data for capacity and capacity utilization for total industry. Results from the Census Bureau's Quarterly Sur Tables A.J and A.4 show the revised rates of change (fourth quarter to vey of Plant Capacity for the fourth quarters of 2007 fourth quarter) of IP for markel groups, industry groups, special aggregates, and selected detail for the years 2004 through 200S. Table and 2008 were used to update the capacity indexes A.S shows the revised rales of change of annual IP indexes for market and capacity utilization rates, In addition, the revi and industry groups for the years 2004 through 200S. Tables A.6 and sions to the capacity indexes and capacity utilization A.7 show the revised figures for capacity and capacity utilization. Table A.S shows the annual proponions of market groups and industry groups in total IP. Tables A.3, A.4, A.5, and A.6 also show the 4. The updated weights are based on the original release of the difference between the revised and previous rates of change. Table A.7 benchmark input-output accounts from September 2007, not on the shows the difference between the revised and previous rates of revised version of Ihe accounts released in January 200S. capacity utilization for the final quarter of the year. Table A.9 shows

Industrial Production and Capacity Utilization: The 2009 Annual Revision A 127 1. lndustrial produc6on, capacity, and capacity utilization: Total industry, January 199 June 2009 PmdllCtiCD and capacity Ratio scale, 2002 output ~ 100 Pcn:cnt -Revised - Previous 84 140 82 130 80 Capacity 78 120 76 74 110 72 100 70 68 I I I I I I I I I I 1 I I I I I I I I I I I 1999 200 I 2003 2005 2007 2009 1999 2001 2003 2005 2007 2009 NoTE: Here and in the following figures, the shaded areas are periods of Data labeled "revised" correspond to the data in the Federal Reserve's business recession as defmed by the National Bureau of Economic Statistical Release G.17, "Industrial Production and Capacity Utilization," Research (NBER). The last shaded area begins with the peak as defined by published on July 15,2009. Data labeled "previous" are those published the NBER and ends at the trough of a three-month moving average of before the March 27, 2009, annual revision. manufacturing !P. Industrial Production index for final products and nonindustrial suppJies is now reported to have advanced 0.5 percentage point The overall contour of IP in this revision is similar to less in 2007 and to have decreased 0.4 percentage that reported previously (figure 1). The total index point more in 2008. Overall changes to the rates of rose modestly each year from 2004 through 2007 and increase in other years were minimal; the change in then dropped in 2008. Relative to the previous esti the index was revised down 0.1 percentage point in mates, total IP increased 0.3 percentage point less in 2004 and was essentially unrevised in 2005 and 2006. 2007 and fell 0.6 percentage point more in 2008. The change in the output of consumer goods was Revisions to the changes in other recent years were revised down 1 percentage point in 2007; revisions to smaller. The change in total IP was revised down other years were small. The output of durable con 0.1 percentage point in 2004 and was revised up sumer goods declined in 2004 and 2006, rose slightly 0.1 percentage point in 2006; it was not revised in 2005 and 2007, and dropped sharply in 2008. The noticeably in 2005. rates of change are now higher than earlier estimates suggested in 2004 and in 2006 through 2008, and they Market Groups are a touch lower in 2005 than previously reported. Although the aggregate index for IP was little revised Among durable consumer goods, the most significant before 2007, revisions to the indexes for some market revisions were in the index for home electronics, groups were significant. These revisions largely re which now is estimated to have increased less rapidly sulted from the incorporation of the 2002 benchmark in 2005 and 2006, to have increased more rapidly in input-output accounts from the BEA, which, as dis 2004 and 2007, and to have posted an advance instead cussed further in the section on technical aspects of of a decline in 2008. Elsewhere within durable con the revision, updated the weights used to allocate sumer goods, the index for miscellaneous durable individual production indexes to multiple market consumer goods is now estimated to have increased groups. less rapidly in 2005, and to have decreased less The production index for final products and nonin rapidly in 2006, than previously reported. Revisions dustrial supplies follows an output path similar to that to the indexes for the other major categories of for total IP; moderate gains in 2004 through 2007 durable consumer goods were smaller. were followed by a drop in 2008 (figure 2 and table The index for consumer nondurables shows moder A.3). Compared with the previous estimates, the ate gains in output in 2004 through 2006, but, with this revision, it now posts a decline instead of an the annual production and price indexes for selected categories of advance in 2007. The index also drops slightly in communications equipment, and table A.IO shows the quarterly 2008. Revisions in recent years besides 2007 were production and price indexes for some of the same categories of small. Among consumer nondurables, the changes in communications equipment. Table A.II shows the quarterly price indexes for selected categories of semiconductors. the index for clothing were revised down for 2004

AI28 Federal Reserve Bulletin 0 August 2009 2. Industrial production: Market groups, January I 989-June 2009 Ratio "",Ie, 2002 - 100 Equipmcru Ralio scale, 2002 = 100 155 110 135 100 115 95 90 75 80 - 55 - 70 I I I I I II I U J I I 1 I I I 1 I I. I NOIIinduslrialllUpplies Ind""lrial malflrial. 110 115 100 100 85 90 70 80 - 55 - 70 I I I I I I I I I I I I I I I I I I 1 I I I I I I I I I I J I I I I J I I 1 I 1991 1994 1997 2000 2003 2006 2009 1991 1994 1997 2000 2003 2006 2009 through 2006 and revised up for 2007 and 2008. The reported previously. The production of information index for chemical products, which was previously processing equipment is now estimated to have flat in 2007 and declined slightly in 2008, now moves expanded less rapidly over the past few years than down significantly in both years. The index for paper reported earlier, and the production of industrial and products was revised up for 2005 and 2006, revised other equipment in 2007 and 2008 appears slightly down for 2004 and 2007, and stood below its previ weaker. The production of defense and space equip ous level for the fourth quarter of 2008. The index for ment is now higher than estimated previously in 2005 consumer energy products was revised up in 2008 and through 2008. posted moderate increases, on net, over the past few After posting gains in 2004 and 2005, the output of years. construction supplies decreased moderately in 2006 The production of business equipment increased and 2007 and then dropped sharply in 2008. The solidly from 2004 through 2006, rose slightly in revisions to this index were relatively small, and its 2007, and then fell in 2008. Relative to previous level in the fourth quarter of 2008 is nearly the same estimates, the rates of change in the index were as reported earlier. The production of business sup noticeably lower in 2005 and 2007; the revisions to plies rose modestly from 2004 through 2007 and then the data for other recent years were smaller. For slumped in 2008; the rates of change are higher than transit equipment, output rose substantially, on net, reported earlier for 2005 through 2007 but are lower from 2004 through 2006 and decreased in 2007; the for 2004 and 2008. index plummeted in 2008, partly because of weakness The production of materials expanded over the in the motor vehicle industry and partly because of a years 2004 through 2007, then fell markedly in 2008; strike at a major aircraft producer in the second half the rates of change for this index are little revised of the year. Although the rates of change in the index before 2008, but the drop in 2008 is larger than for transit equipment were revised down in 2004, estimated previously. The indexes for durable and 2005, and 2008 and were revised up in 2007, the level nondurable materials both fell more than 10 percent of output at the end of 2008 was nearly the same as in 2008 after having increased moderately, on net,

Industrial Production and Capacity Utilization: The 2009 Annual Revision A 129 3. fndustrial production: Manufacturing, and manufacturing the peak in manufacturing production moved from excluding selected high-technology industries, July 2007 to December 2007. January 1989-June 2009 For durable goods industries as a whole, output rose in each year from 2004 through 2007 and fell Level Ratio scale, 2002 = 100 sharply in 2008. Revisions to the index for durable 115 goods industries for the past few years were small on 105 net. Among durable goods industries, most major categories followed contours similar to that of the 95 durable goods aggregate, with net increases from 85 2004 through 2007 followed by sharp drops in 2008. Notable exceptions were wood products, nonmetallic 75 mineral products, motor vehicles and parts, and furni ture and related products; the indexes for these cat 65 egories started trending down before 2008. The revisions to the changes in the output of most major categories of durable goods before 2007 were liang< from year earlier Pcrcc:nt slight; exceptions include computer and electronic Manufacturing products, in which the gain in output in 2006 is now 10 stated to have been significantly lower, and aerospace and miscellaneous transportation equipment, in which 5 + the gain in output in 2006 is now stated to have been o somewhat higher. For 2007, the output indexes were revised down noticeably for wood products, nonme 5 tallic mineral products, computer and electronic prod 10 ucts, and furniture and related products but were revised up for miscellaneous manufacturing. For 15 2008, relative to previous estimates, higher output i l l l l lll l llll ' " 1 1 1 11 indexes are reported for electrical equipment, appli 1991 1994 1997 2000 2003 2006 2009 ances, and components and for furniture and related NoTE: For definition of manufacturing, see text note 3. products, but the production indexes for wood prod The selected high-technology industries are semieonductors and related electronic components (NAlCS 334412-9), computers and peripheral ucts, primary metals, machinery, computer and elec equipment (NAlCS 3341), and communications equipment (NAlCS 3342). tronic products, and motor vehicles and parts were revised down moderately. from 2004 through 2007. The production of durable Production in nondurable manufacturing industries materials is now estimated to have risen more slowly followed a contour similar to that of durable manufac in 2006 and 2007 and to have fallen more quickly in turing, with advances in every year from 2004 2008. These revisions were due in large part to through 2007 followed by a decline in 2008. Neither revisions to the index for equipment parts. For nondu the overall advance in the earlier years nor the decline rable materials, the output gains in 2006 and 2007 are last year was as great as the swings in durable now higher than stated earlier, largely because the manufacturing. The output index for the nondurable declines in textile materials in those years are now not goods sector in most recent years was little revised, as steep as previously reported and the increases in on net, compared with previous estimates. The cur chemical materials in the same years were revised up. rent revision reports noticeably higher rates of change The index for energy materials edged up in 2008 after in 2007 in textile and product mills, apparel and having increased moderately in the previous two leather, and petroleum and coal products but a notice years, and it is little changed by the revision. ably lower rate of change in chemicals. For 2008, Production by Indu try Group output is now reported to have fallen markedly faster for textile and product mills, apparel and leather, Manufacturing production expanded each year from printing and support activities, chemicals, and plas 2004 through 2007 and then slumped in 2008 (fig tics and rubber products compared with previous ure 3 and table A.3). The output of manufacturing estimates. advanced less in 2007, and contracted more in 2008, The revised output index for other manufacturing than reported earlier. With this revision, the month of (logging and publishing) fell each year from 2005

A I 30 Federal Reserve Bu lletin 0 August 2009 4. Industrial production: Selected high-technology through 2007 but contracted significantly in 2008. industries, January I9 98-June 2009 The expansion in production from 2004 through 2007 was considerably Jess than stated earlier, and the Ratio sc.a.l e, 2002 = 100 i 360 slight decline previously estimated for 2008 has been revised down to a significant decrease. 280 220 170 Capacit) 120 90 Total industrial capacity is estimated to have risen at 70 an average annual rate of 1.4 percent in 2005 through 2008 (table A.6). The average annual rate is the same 50 as previous estimates, but the rates of change in 2006 35 and 2007 are slightly higher, and the rate of change in 2008 is somewhat lower, than stated previously. In I I I I I. II I I I I I I I I t 999 200 I 2003 2005 2007 2009 2009, total industrial capacity is now expected to NOTE: For the NAICS categories of these industries, see the note to decline nearly 1 percentage point; this decline is figure 3. larger than estimated previously. The contour of manufacturing capacity and the through 2008, with a particularly sharp drop in 2008. revisions to that contour are similar to those for total Output in these industries is now estimated to have industry. Manufacturing capacity is now shown to decreased substantially less in 2006 than reported have expanded at an average annual rate of about earlier, but revisions to the rates for other years were 1.6 percent from 2005 through 2008, about 0.1 per smaller. centage point less than estimated earlier. In 2009, The index for mining rose moderately in the past manufacturing capacity is now expected to contract two years after a jump in 2006; the increase in 2006 1.2 percent. was revised up relative to previous estimates, but the index is otherwise similar to what was previously Within manufacturing, the capacity of durable reported. For utilities, the revised output estimates are goods manufacturers expanded moderately in each also, in general, very similar to those reported earlier. year from 2005 through 2008 and is expected to The estimates for selected high-technology contract somewhat in 2009. The increase in 2008 was industries-computers and peripheral equipment, tempered considerably by the recent revision. The communications equipment, and semiconductors and capacity of nondurable goods manufacturers followed related electronic components-were revised signifi a similar contour to that of durable goods manufactur cantly over the 2004-08 period (figure 4 and table ers, but the increases from 2005 through 2008 were A.4). On net, output in the high-tech sector is still smalJer, and the decline in 2009 steeper. Nondurable reported to have posted gains in recent years, with goods manufacturing capacity is expected to decrease robust increases from 2004 through 2007 followed by more in 2009 than in previous estimates; rates of a contraction in 2008. However, the increases in 2006 change in capacity for most major nondurable indus and 2007 are now shown to have been slower, and the try groups were marked down. Capacity for the decrease in 2008 is now shown to have been steeper, logging and publishing industries rose, on net, from than reported earlier. 2005 through 2008 but is expected to fall in 2009; the Among the major high-tech components, produc rates of change are higher as a result of the revision. tion of computers and peripheral equipment rose Aggregate capacity for the selected high solidly in each of the years from 2004 through 2007 technology industries advanced substantially in each and then fell in 2008; the rates of change were revised year from 2005 through 2008 and is expected to up in each of the past few years except 2005. The expand appreciably in 2009. Relative to previous output of communications equipment expanded in reports, capacity in these industries rose less quickly each of the past few years, but the rates of increase in in 2005, 2006, and especially 2008, but it increased most years are markedly lower than estimated previ somewhat more rapidly in 2007. It is expected to rise ously. Most notably, the increase of 20.6 percent that faster in 2009 than previously estimated. Excluding was reported earlier for 2007 has been revised down high-technology industries, manufacturing capacity to 6.6 percent based on shipments data from the CIR expanded slightly from 2005 through 2008 but is for telecommunications. Production of semiconduc expected to decline in 2009. The current estimates are tors and related components rose solidly from 2004 similar to previous reports except for 2009, during

Industrial Production and Capacity Utilization: The 2009 Annual Revision A 131 which the contraction in capacity is now anticipated their long-run averages, and two durable goods indus to be greater than stated previously. tries (wood products and motor vehicles and parts) Capacity at mines is estimated to have fallen in had utilization rates more than 20 percentage points 2005 and to have expanded from 2006 through 2008; below their long-run averages. it is expected to recede somewhat in 2009. The gains Among durable goods industries, nonmetallic min in 2006 and 2008 are now reported to have been erai products had the largest downward revisions to larger than previously published, but the increase in utilization over the 2005-08 period; other industries 2007 has been revised down, and capacity at mines is with large downward revisions to their capacity utili now expected to contract rather than expand in 2009. zation rates were wood products and motor vehicles Capacity at electric and gas utilities has risen each and parts. The durable goods industries that reported year since 2004. The current estimates show larger the largest nel upward revisions since 2005 were gains in 2005 and 2006 than reported earlier; revi machinery, aerospace and miscellaneous transporta sions to other recent years were negligible. tion equipment, and furniture and related products. By stage of processing, capacity in the crude stage Utilization rates for many nondurable goods indus is now reported to have risen more in 2006 and 2008 tries were somewhat below their long-run averages in than previously shown but is now expected to fall in 2005 through 2007 and then fell further in 2008, but 2009. The rates of change for capacity in the primary the declines in 2008 were not as great, on average, as and semifinished stages were revised down for 2008 the declines in the utilization rates for durable goods and 2009; revisions to earl ier years were slight. industries. In the fourth quarter of 2008, four nondu Relati ve to previous estimates, increases to the index rable goods industries (textile and product mills, for finished goods processors were revised up in 2007 paper, printing and support activities, and plastics and and 2008, but capacity is expected to fall more in rubber products) had utilization rates between 10 and 2009 than stated previously. 20 percentage points below their long-run averages. The nondurable goods industries with the largest Capacity Utilization downward revisions to utilization rates over the 2005-08 period were food, beverage, and tobacco From 2005 through 2007, the capacity utilization rate products; petroleum and coal products; and plastics for total industry stood a little below its long-run and rubber products. Apparel and leather had the most average of 80.9 percent, but in 2008 it fell to 74.2 per noticeable upward revisions to its utilization rate over cent, a level 6.7 percentage points below its long-run this period; other nondurable goods industries with average (table A.7). The utilization rate for total large upward revisions were textile and product mills industry was revised down about 1/2 percentage point and printing and support activities. in 2007 and 0.7 percentage point in 2008; revisions Capacity utilization in the other manufacturing for earlier years were smaller. Similarly, manufacturing capacity utilization, on category (logging and publishing) was revised down balance, spent most of 2005 through 2007 at a little in 2005 and revised up from 2006 through 2008. It below its long-run average of 79.6 percent. The stood more than 10 percentage points below its utilization rate in manufacturing tumbled during long-run average in the fourth quarter of 2008. 2008, reaching 70.9 percent in the fourth quarter of Capacity utilization in mining was generally above 2008, 83/4 percentage points below its long-run aver its long-run average from 2006 through 2008 and, in age. Relative to earlier reports, the factory operating the fourth quarter of 2008, stood at 89.6 percent, rate was revised down in 2007 and 2008 but was little about 2 percentage points higher than its long-run changed in earlier years. Within durable goods, utili average. Relative to earlier estimates, the utilization zation rates for many industries were near their rate for mining was a little lower in 2006 and 2008 long-run averages from 2005 through 2007 and then but was little changed in 2005 and 2007. At electric dropped well below average in 2008; among the and gas utilities, capacity utilization rates were re exceptions were motor vehicles and parts, nonmetal vised down for 2005 through 2008, and capacity lic mineral products, and wood products, in which the uti lization in the fourth quarter of 2008 is now utilization rate was significantly below average in estimated to have been more than 3 percentage points 2006 and 2007 and then fell even further in 2008. In below its long-run average. the fourth quarter of 2008, three durable goods indus The operating rates for the selected high tries (nonmetallic mineral products, primary metals, technology industries were above their long-run aver and furniture and related products) had uti lization ages in the fourth quarters of 2006 and 2007 but fell rates between 10 and 20 percentage points below to more than 8 percentage points below their long-run

A 132 Federal Reserve Bulletin 0 August 2009 5. Capacity utilization: elected .high-technology industries, 6. Capacity utilization: Selected high-technology industries, and manufacturing excluding selected high-technology January J 996-June 2009 industrie , January I 989-June 2009 Ratio scale, percent __~ _ _ _ ______ _ ____. -_Percenl - Revised 110 - Previous Manufacturing excluding selected 95 90 high-technology industries 85 70 ~ 75 - 50 65 55 I I I. r I I I l I I 1 1 1 1 1 1 1 I 1 1 1 1 1 1 1 I Conummicauans <quipmcru 1991 1994 1997 2000 2003 2006 2009 NOTE: The high-technology industries are identified in the nOle to 110 figure 3. 90 averages in 2008 (figures 5 and 6 and table A.7). 70 Relative to earlier estimates, capacity utilization is now reported to have been higher in 2005, 2006, and 2008 but lower in 2007. The operating rate for the - 50 computers and peripheral equipment industry is now shown to have been higher than previously reported in each of the past few years, particularly 2008, but, in the fourth quarter of 2008, stood about 4 percent SemiconduCIOl1 find rclaU:d c.lcclronic componcd15 age points below its long-run average. The utilization rate for communications equipment was more than 110 8 percentage points below its long-run average in 90 2005 and rose to more than 6 percentage points above its long-run average in 2006 before dropping in 2007 70 and 2008; at the end of 2008, the rate was 1.7 percent age points below its long-run average. Capacity utili zation for communications equipment is now higher - 50 than previously reported in 2005 and 2006 but lower in 2007 and 2008. Capacity utilization in the semicon ductor and related electronic components industry is I I I I I I I 1 now lower than earlier estimates in every year after 1997 1999 200 I 2003 2005 2007 2009 2005. The operating rate in this industry was above or near its long-run average from 2005 through 2007 but indexes from the Bureau of Economic Analysis and stood more than 16 percentage points below its from improved estimates of price indexes for commu long-run average in the fourth quarter of 2008. nications equipment output constructed by the Fed eral Reserve (discussed later in the article). In addi tion, the benchmark production indexes for other TECHNICAL ASPECTS OF THE REVISION manufacturing (logging and publishing) were ad Comprehensive benchmark data for manufacturing vanced through 2007 and updated for 2006 based on production in 2007 were not available for this revi data from the Forest Service and the Census Bureau. sion. After incorporating the limited information that The IP indexes in recent years incorporated infor was available, the benchmark production indexes for mation from selected CIRs for 2007 from the Census manufacturing-defined for each six-digit NAICS Bureau, the revised benchmark input-output accounts industry as nominal gross output divided by a price for 2002 from the BEA, the Quarterly Survey of Plant index-were little changed before 2007. The princi Capacity from the Census Bureau for 2007 and 2008, pal changes resulted from small revisions to price and other annual industry reports. The indexes also

Industrial Production and Capacity Utilization: The 2009 Annual Revision A 133 incorporated revised monthly and quarterly source Plant Capacity (ASPC) and on each industry's cycli data on production, shipments, inventories, and cal patterns. With this revision, the allocation of THS production-worker hours. employment among industries within manufacturing As mentioned earlier, the benchmark production was updated based on data from the ASPC for 2002 indexes for most industries incorporate updated price through 2005.7 indexes from the industry output program of the In addition, this revision updates the method for BEA. However, the price indexes for pharmaceuticals estimating each industry's monthly baseline share of (NAICS 325412), for semiconductors (NAICS temporary help employment use in manufacturing. 334413), and for most components of communica Previously, this share was held constant for each tions equipment (NAICS 3342) are constructed by the industry at the level estimated according to the Federal Reserve from alternative sources. This article method just described. With this revision, the share is provides annual and quarterly price indexes for the allowed to evolve based on the industry's share of relevant components of communications equipment, total manufacturing employment. THS employment along with quarterly semiconductor price indexes is multiplied by assumptions on hours worked and on (tables A.9, A.l 0, and A.ll). the productivity of a THS worker relative to a perma nent worker to estimate the effective hours contrib Changes to the Methodology for Adjusting uted by THS workers for each three-digit manufactur for Temporary Help Supply Employees ing industry. The THS hours are added to the reported production-worker hours for each industry to produce The compilation of the initial IP estimate for a given an adjusted production-worker hour series. The per month relies heavily on the hours worked by produc centage adjustment for each three-digit industry'S tion workers in the manufacturing sector when the hours is then applied to the hours series for each of its availability of the other IP source data is limited. The component industries. hours data are adjusted to account for the labor input of temporary help supply (THS) employees who Estimating the EJt'ect of Hurricanes on work in the manufacturing sector; this adjustment is Production necessary because these workers are on the payrolls of companies that are c1assi fied in the service sector Industrial production in the United States was se of the economy by the Bureau of Labor Statistics. verely affected by hurricanes in both 2005 (Hurri These adjusted detailed hours series are used in canes Katrina and Rita) and 2008 (Hurricanes Gustav maki ng (1) estimates for those IP series based on and Ike). Industries with a large presence in the Gulf labor input for the period for which benchmark output Coast region include oil and natural gas extraction, indexes are not yet available and (2) preliminary petroleum refining, petrochemical manufacturing, and estimates of those IP series based on physical product plastic resin manufacturing. These industries were data for which the current source data are not yet mostly shut down during the storms, and storm available. damage sometimes delayed their return to operation. The procedure for implementing this adjustment is In addition, some other industries in the afflicted areas as follows. An estimate is made of the component of also shut down factories. The data on which the IP THS employment that is allocated to manufacturing. indexes are based for many of these industries are not This estimate begins with a baseline figure projected available on a timely basis; initial estimates for them from the Current Population Survey but varies based were made from other sources. The estimation of on the cyclical movements of the manufacturing crude oil extraction and petroleum refining output sector and the rest of the economy-THS employ was relatively straightforward with the availability of ment has a cyclical pattern similar to that of manufac weekly data from the Department of Energy. Timely turing.6 output data on natural gas extraction were less avail The THS employment in manufacturing is then able, but reports by the Minerals Management Ser allocated among the NAICS three-digit industries vice of the U.S. Department of the Interior on shut-in based on each industry's use of THS workers as capacity provided a good first estimate until data on reported in the Census Bureau's Annual Survey of output became available from the DOE. Weekly data 6. See Marcello Estevao and Saul Lach (1999), "Measuring Tem· porary Labor Outsourcing in U.S. Manufacturing," Finance and 7. For several years. the ASPC collected information about the Economics Discussion Series 1999-57 (Washington: Board of Gover· share of production workers that consisted of temporary workers; this nors of the Federal Reserve System, October), www,federalreserve.gov/ information is not collected in the Qual1erly Survey of Plant Capacity, pubS/feds/ I 999/index .html. which replaced the ASPC in 2007.

A 134 Federal Reserve Bulletin 0 August 2009 on railcar loadings of chemicals from the Association tory adjustment.8 Formerly, it was based on monthly of American Railroads and information on shut-in data from the same source. A cubic spline is used to capacity of petrochemical plants from Chemical Mar interpolate monthly values from the quarterly figures, ket Associates, Inc., and PetroChem Wire were used a method similar to that used for the other series for to inform the IPestimates for petrochemical manufac which only quarterly physical product data are avail turing; reports from the National Petrochemical and ableY Refiners Association on quarterly petrochemical out put became available later and improved the esti High-Technology Good mates. Anecdotal information from contacts in the Communicarion eqllipmem plastic resin industry on output was used until monthly data on production from the American Chemistry Price indexes for two product classes of communica Council became available. The effect of the storms on tions equipment were revised to incorporate addi other industries was estimated based on data on the tional detail. The price index for enterprise and home regional distribution of industrial activity from the voice equipment (part ofNAICS 33421) was updated. County Business Patterns report of the Census Bu A price index for telephones and answering machines, reau. one of the two product categories in this industry, was previously calculated using average selling prices for Estimation 0/ Capacit)' in the Light MOlOr two types of phones (corded and cordless) but is now Vehicle Industry a matched-model index constructed using detailed data, beginning in 1997, from the Consumer Electron Capacity for light duty motor vehicles (NAICS ics Association on transmission frequency, number of 33611) is expected to contract significantly in 2009. lines, and presence of other features such as caller The estimate for motor vehicle assembly capacity for identification, speakerphone, and integrated answer a year is constructed from estimates of the peak ing machine. The price index for wireless system historical assembly-line speed over the previous 10 equipment (part of NAICS 33422), which covers years and the number of hours that can be worked at mobile phone infrastructure, was improved by fold each plant in the United States. Annual line speed ing in additional detail on base-station radio transmis data and the number of shifts at individual plants are sion capacity using data from the De II' Oro Group, a reported in Ward's Automotive Yearbooks. An annual market research firm. The resulting mobile infrastruc capacity count for a plant is calculated by multiplying ture price index fell 4 percentage points faster per the peak line speed by the hours per year that the plant year, on average, from 2000 to 2008. could run. New plants are added to capacity when Updated price indexes for the six product groups in they start production, and plants are removed from communications equipment, introduced in the 2008 capacity when they are permanently shuttered. An revision, are included in this article (table A.9). adjustment is made to reflect manufacturers' plans to open or close assembly plants only when the dates COTllpurers have been confirmed and specific plants have been With this revision, a change to the method for estimat named. Plant-level data are aggregated using price ing the domestic shipments share of domestic absorp weights for the different models of light vehicles, and tion in electronic computer manufacturing (NArCS if a plant produces multiple models on one assembly 334111) was introduced. The six product-based in line, capacity is split among models based on esti dexes for computer manufacturing are derived from mated production levels for the models at the plant. quarterly data on nominal domestic absorption from IDC, an industry research group. For each product, an Changes to Individual Production Series estimate of the domestic shipments share of domestic With this revision, the monthly production indicators for some series have changed. 8. Factory production is calculated as shipments plus the change in factory inventories. When only shipments are available. a model-based inventory adjustment is applied. See Charles Gilbert and Kimberly Carpet and Rug Mills Bayard (2005), "Industrial Production and Capacity Utilization: The 2004 Annual Revision." Federal Reserve Bulletin. vol. 9J (winter). The index for carpet and rug mills (NArCS 3141 I) is pp. 9-25. www.federalreserve.gov/pubslbulletin/2005/0Sindex.htm. 9. See Richard D. Raddock (1993). "Industrial Production, Capac based on quarterly data on unit shipments from the ity, and Capacity Utilization since 1987." Federal Reserve Bulletill. Carpet and Rug Institute with a model-based inven- vol. 79 (June). pp. S9~OS.

Industrial Production and Capacity Utilization: The 2009 Annual Revision A 135 absorption-derived from the Census Bureau's CIR is estimated by combining data on aircraft deli veries for computers and peripheral equipment-is used to with an assumption about the time required to build a convert the IDC domestic absorption data to a domes plane and the intensity of activity during that period. tic shipments concept. 10 Previously, the production index for aircraft was The domestic shipments share for each of the six based on a 10-month build period, during which indexes was constructed by di viding the relevant 43 percent of production was assumed to have annual measure of domestic product shipments from occurred in the three months immediately before the the CIR by the corresponding measure of annual delivery and 57 percent was assumed to have oc domestic absorption from IDe. Each of these shares curred in the seven preceding months. Based on is converted to a quarterly frequency and projected discussions with contacts in the aircraft industry, the forward for more-recent quarters when the CIR data new indexes assume a shorter build period. Specifi are not yet available. Prior to the current revision, cally, they now assume that commercial aircraft take projections of the individual domestic shipments either two or three months to build. The new assump shares were based on monthly data on foreign trade in tions were applied to the entire history of aircraft computers from the Census Bureau. Specifically, models that are still in production; the data for models domestic absorption forthe industry (NAICS 334111) that are no longer in production were left unrevised. was adjusted by net exports to obtain domestic ship ments; the change in the ratio of domestic shipments Change to Individual Capacity Series to domestic absorption was applied to the shipments share for each of the six product indexes. With the current revision, the foreign trade data are no longer lectri ity Generation used. Instead, the CIR-based individual domestic The capacity index for electric power generation, shipments shares are extended out with a model transmission, and distribution (NAICS 2211) is now based trend for quarters when the annual CIR data are based on generation capability data from the DOE; not yet available. Examination of all relevant data previously it was based on electricity generation sources suggests that the shares derived from model capacity data from the North American Electric Reli based trends lead to more-accurate measures of ability Corporation (NERC). The change was made domestic production than the shares derived from because the DOE data are compiled using a more trade data. consistent definition over time. However, because the DOE data are published with a lag, the capacity Semiconductors projection for the most recent year or two is estimated Beginning with the 2008 revision, detailed price data by extending the DOE generation capability series by on MOS (metal-oxide semiconductor) memory prod the rate of change shown for the NERC electricity ucts (part of NAICS 334413) from iSuppli, an indus generation capacity data. try research group, have been used to construct quarterly indicator quality-adjusted price indexes for Nonferrous M lals (except Aluminum) three categories-DRAM (dynamic random access memory), Hash memory, and other memory. These The capacity index for nonferrous metal (except prices are included in this article (table A.ll). aluminum) production and processing (NAICS 3314) is now based on copper smelting, copper refining, and Civilian Aircraft zinc smelting data from the U.S. Geological Survey. Formerly the capacity index was based on the USGS With this revision, a change to the methods used for data on just copper smelting and copper refining. the calculation of the index of industrial production for civilian aircraft (part of NAICS 336411) was introduced. Production in the civi lian aircraft industry Natural Gas Extra tion The DOE no longer publishes physical capacity esti 10, Prior to 2006, the CIR for computers and peripheral equipment mates for natural gas extraction (part of NAICS was released annually. Beginning in 2006, the Census Bureau began to 211111). Capacity estimates for recent years are issue quarterly reports along with annual summaries, For the construc tion of the domestic shipments share for 2006 onward, the Federal based on trend-through-peak estimates of capacity Reserve used only the annual summaries, not the quarterly reports, using the IP index and output projections from the However, the Federal Reserve carefully follows the quarterly CIR Short-Term Energy Outlook (STEO) and Annual releases and expects to use them more fully in a few years, when a longer history will be available, Energy Outlook (AEO) reports of the DOE.

A 136 Federal Reserve Bulletin 0 August 2009 Trend-through-Peak Estimate' Manufactures. The Federal Reserve derives estimates of value added for the electric and gas utility indus As with recent years for natural gas extraction, the tries from annual revenue and expense data issued by trend-through-peak method of estimating capacity is other organizations. The weights for aggregation, also used for those industries in mining and utilities expressed as unit value added, were estimated with for which no physical capacity sources are available the latest data on producer prices for the period after seven individual series accounting for about 5 percent 2006. Table A.8 shows the annual value-added pro of capacity. With this revision, the trend-through portions in the IP index from 200 I through 2008. peak method used to estimate capacity indexes for oil The outputs of most industries are inputs to mul extraction (part of NAICS 2UIII), natural gas liquid tiple markets. Although data that directly split the extraction (NAICS 211112), and natural gas sales and output of an industry by its purchaser are sometimes transmission (NAICS 2212) is based on production available, most industry output measures do not pro indexes that are extended using output projections vide that detail. With the 2002 annual revision, from the STEO and AEO reports. weights that allocate individual IP indexes into mul The basic method in estimating trend-through-peak tiple market groups were derived from the Standard capacities for these industries is to construct baseline Make and Use Tables (at the detailed level) from the estimates of capacity by connecting peaks in produc 1997 benchmark input-output accounts of the BEA.'3 tion, with these peaks representing 100 percent utili With this revision, the weights for 2002 were updated zation. In practice, the procedure involves a fair using estimates from the same tables from the 2002 degree of judgment and deviates from a strict trend input-output accounts; years subsequent to 2002 were through-peak approach in a variety of ways. First and assumed to have weights identical to those for 2002. most important, if a peak in production was reached The weights for the period up through 1997 are still several years ago and production has not subse computed from the 1997 accounts, and the weights quently approached that previous maximum, pub between 1997 and 2002 are linear combinations of lished capacity levels generally will, after a time, the 1997 and 2002 weights. trend downward. That is, they will tend to follow recent IP. Second, the capacity levels corresponding Revised Monthly Data to peaks in production for different series have yielded a variety of peak uti lization rates historically. This revision incorporates product data that became available or were revised after the regular six-month Weights for Aggregation reporting window for monthly IP was closed. These data were released with too great a lag to be included The aggregation method for the IP index is a version with monthly IP estimates but were available for of the Fisher ideal index formula." In the IP index, inclusion in the annual revision. series that measure the output of an indi vidual indus try are combined using weights derived from their Revised Seasonal Factors proportion in the total value-added output of all industries.'2 The weights for manufacturing indus Seasonal factors for all series were reestimated using tries are derived from value-added measures from the data that extend into 2008 or 2009. Factors for Census of Manufactures and the Annual Survey of production-worker hours-which adjust for timing, holiday, and monthly seasonal patterns-were up II. A Fisher ideal index estimates the change in aggregate output dated with data through February 2009. The updated between two periods as the geometric average of two aggregate output factors for the physical product series, which include indexes-{)ne that weights the component output indexes based on adjustments for holiday and workday patterns, used prices from the earlier period and one that uses prices from the later period. An aggregate IP index is the cumulative product of Fisher data through 2008. Seasonal factors for unit motor indexes computed for each period, with concurrent prices (derived as vehicle assemblies have been updated, and projec unit value added) applied to the component output indexes for every period. tions through September 2009 are on the Federal 12. For detailed discussions of the aggregation method, see Carol Reserve Board's website at www.federalreserve.gov/ Corrado, Charles Gilbert, and Richard Raddock (1997), "Industrial releases/g 17/mvsf.htm. 0 Production and Capacity Utilization: Historical Revision and Recent Developments," Federal Reserve Blllletin, vol. 83 (February), pp. 67- 92, www.federalreserve.gov/pubslbulletin/1997/97bulletin.htm#feb; and Carol Corrado (2001), "Industrial Production and Capacity Utili 13. See Carol Corrado (2003), "Industrial Production and Capacity zation: The 2000 Annual Revision," Federal Reserve Bullerin, vol. 86 Utilization: The 2002 Historical and Annual Revision," Federal (March), pp. 132-48, www.federalreserve.gov/pubs/bulietin/200J/ Reserve Bllllerin, vol. 89 (April), pp. 151-76, www.federalreserve.gov/ 01 index.htm. pubslbu Ileti n/2003/03index.h tm.

Industrial Production and Capacity Utilization: The 2009 Annual Revision A 137 A.1. Revised dala for indu, trial produclion for lOlai industry. 11)79-200'> Seasonally adjusted data except as noted 1 I I Quaner Annual Year Jan. Feb. Mar. j Apr. May June July Aug. Sept. Oct. Nov. Dec. I I 2 I 3 I 4 avgl Industrial prOduction (percent change) 1979 .... ,., .. -.7 .6 .3 -1.1 .8 .0 -.2 -.7 .1 .6 -.1 .1 1.7 -.6 -1.'1 1.5 3.0 1980 .. ...... A .1 -.3 -2.0 -2.5 -1.2 -.7 .4 1.6 1.3 1.7 .6 1.7 -15.8 --{i.3 16.4 -2.5 1981 .. ..... .... -.6 -.5 .5 -.6 .7 .5 .7 .0 -.6 -.7 -1.1 -1.1 .9 1.0 4.3 -8.5 1.3 1982... .......... -1.9 2.0 -.7 -.9 -.7 -.4 -.4 -.9 -.4 -.8 -3 -.7 -7.7 -5.1 --{i.0 -7.1 -5.2 1983.. .. .... .. , .. 1.9 -.6 .8 1.2 .7 .5 1.5 1.1 1.5 .8 .3 .5 4.9 9.2 14.4 10.8 2.8 1984 .... .......... 2.0 .5 .5 .6 .5 .4 .3 .0 -.1 -.1 .4 .1 12.4 6.3 2.8 .4 8.9 1985... , .......... -.3 .5 .1 -.2 .1 .1 -.6 .4 .5 -A .3 1.0 1.0 .4 -.7 2.4 1.2 1986. .,.,_. .5 -.7 -.6 .1 .1 -.3 .6 -.1 .2 .5 .5 .9 2.3 -2.4 1.6 4.7 1.0 1987 . ....... .. .. -.3 1.3 .1 .6 .7 .5 .6 .7 J 1.5 .5 .5 5.5 7.0 7.3 10.2 5.2 1988. . .. .. . . . . . . . . .. . . . . . . .. .0 .4 .2 .5 -.1 .2 .2 .5 -.3 .5 .2 .4 3.6 3.6 2.1 2.9 5.2 1989 .2 -.4 .3 .0 -.7 .0 -.9 .9 -.3 -.1 .3 .6 1.6 -1.7 -2.4 1.8 .9 1990 ... ....... .. -.5 .9 .5 -.1 .2 .3 -.1 .2 .2 -.7 -1.2 -.7 3.1 2.8 1.2 --{i. I 1.0 1991 .. ........... -.5 -.6 -.5 2 1.0 1.0 .0 .1 .9 -.2 -.1 -.4 -7.4 2.6 5.5 .9 -1.6 1992 ......... .... -.6 .8 .8 .7 .4 .0 .8 -.5 .2 .7 .4 .0 -.5 7.2 2.9 4.0 2.8 1993. ...... .. .5 .3 .0 .3 -.4 .2 .4 .0 .4 .7 .4 .5 3.6 .9 2.1 6.0 3.3 1 1 9 9 9 9 4 5 . . .. . . .. .,.,. .... . .. .. . .. . A 3 . .0 0 1. . 1 2 . .0 5 . . 6 2 . . 3 7 - . . 2 4 1 . .4 5 . .4 2 - . .2 9 . . 6 3 1. . 1 4 5 5 . .2 1 7 1 . . 5 2 5 3 . .9 1 8 3. . 4 1 4 5 . . 8 3 1996. ...... -.7 1.7 -.2 .8 .6 .9 -.1 .6 .6 .0 .8 .6 2.9 8.1 5.4 5.6 4.4 1997. ........... - .1 1.2 .8 .0 .7 .5 .5 1.4 .9 .7 .9 .4 7.9 6.4 9.6 10.4 7.3 1998 .. . . .. . . .. . . ... .5 .0 .1 .4 .7 -.6 -.4 2.1 -3 .7 -.1 .3 4.4 3.2 2.9 S.I 5.9 1999. , .. .5 .4 .2 .2 .7 -.2 .6 .5 -3 1.4 .6 .8 4.'1 3.7 4.1 8.1 4.3 ...... 2000. .0 .4 .4 .6 .2 .1 -.2 -.2 .5 -.4 .0 -.4 4.8 4.9 -.3 -1.2 4.2 .... 2001. -.7 -.6 -.3 -.3 -.7 -.6 -.4 -.4 -.3 -.6 -.5 .0 -5.7 -5J -5.7 -5.0 -3.4 2002. -...... .5 .0 .8 .3 .5 .9 -.3 .1 .1 -.3 .4 -.5 2.5 5.9 2.1 -.4 -.1 2003. .... .7 .3 -.1 -.8 .0 .1 .4 -.1 .6 .1 .9 -.1 2.9 -3.0 2.6 4.1 1.3 2004 .. ....... .... .3 .5 -.6 .5 .7 -.9 .7 .2 .0 .9 .2 .7 2.8 1.8 1.9 5.7 2.5 2005 .. ..... ...... - .4 .6 -.1 .0 .3 .4 -.1 .2 -1.7 1.1 1.1 .6 5.7 1.7 -.7 4.0 3.3 2006 . .... .. .0 .0 .2 .4 -.1 .4 .2 .2 -.3 -.1 -.2 .8 3.6 2.2 2.0 -.6 2.3 2007 .. .... - ... -.5 .8 -.2 .4 .1 .0 .3 .1 .4 -.5 .6 .3 1.8 2.4 2.1 .8 1.5 2008 .. ... . . . . .. . -.1 -.3 -.4 -.6 -.3 -.2 -.1 -1.1 -4.0 1.3 -1.3 -2.3 .2 -4.6 -9.0 -13.0 -2.2 2009 .... -2.2 -.8 -\.7 -.7 -1.2 -.4 -19.1 -11.6 Industrial production (2002= I 00) 1979. ... 57.6 57.9 58.1 57.5 57.9 57.9 57.8 57.4 57.5 57.8 57.8 578 57.9 57.8 57.6 57.8 57.7 ........ 1980 .. ... 58.0 58.1 57.9 56.8 55.3 54.6 54.3 5-1.5 55.3 56.1 57.0 57.3 58.0 55.6 54.7 56.8 56.3 1981 .. . - . . ---. . - 57.0 56.7 57.1 56.7 57.1 57.4 57.8 57.8 57.4 57.0 56.4 55.8 56.9 57.1 57.7 56.4 57.0 1982 ... .... 54.7 55.8 55.4 54.9 54.5 54.3 54.1 53.6 53.4 53.0 52.8 52.4 55.3 54.6 53.7 52.7 54.1 1983 ... ..... - 53.4 53.1 53.6 54.2 54.6 54.9 55.7 56.4 57.2 57.7 57.9 58.1 53.4 54.6 56.4 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 61.1 61.1 59.6 60.5 60.9 61.0 60.5 1985. .... ,,, ... 60.9 61.2 61.3 61.2 61.2 61.3 60.9 61.1 61.4 61.1 613 62.0 61.2 61.2 61.1 61.5 61J 1 1 9 9 8 8 7 6 . . ... .. .. .. .. . . . . . . " .. . . . 6 62 2. . 3 7 6 63 1. . 8 5 6 63 1. . 4 6 6 6 4 1. .0 5 6 6 1 4 . . 6 4 6 64 1. . 4 7 6 6 5 1. . 7 1 6 65 1. . 6 6 6 65 1. . 8 8 6 66 2. .8 0 6 67 2. . 3 1 6 6 2 7 . . 9 4 6 63 1. . 8 3 6 6 4 1 . .5 4 6 6 1 5 . . 7 5 6 67 2. . 4 1 6 6 5 1. . 9 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 69.1 68.4 1989 69.6 69.3 69.4 69.4 68.9 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 70.2 70.4 69.9 69.0 68.6 69.5 70.0 70.2 69.2 69.7 1991 .. . 68.2 67.8 67.5 67.6 68.3 68.9 68.9 69.0 69.6 69.5 69.'1 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. 72.2 72.4 72.4 72.6 72.3 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 79.4 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 ~J.3 81.1 81.3 ~1.7 79.7 79.9 80.7 81.4 80.4 1996 .... 81.1 82.4 82.3 83.0 83.5 84.2 84.2 84.7 85.1 85.2 85.9 86.4 82.0 83.6 84.7 85.8 84.0 1997 86.5 87.6 88.3 88.3 88.9 89.3 89.8 91.0 91.9 92.5 93.3 93.7 87.5 88.8 90.9 93.2 90.1 1998. 94.1 94.2 94.2 94.6 95.3 94.8 94.4 96.3 96.1 96.7 96.6 97.0 94.2 94.9 95.6 96.8 95.'1 1999 .. 97.5 97.9 98.1 98.3 99.0 98.8 99.5 100.0 99.7 101.0 101.6 102.4 97.8 98.7 99.7 101.7 99.5 2000 ........... .. 102.4 102.9 103.3 103.9 104.1 104.3 104.0 103.8 104.3 103.9 103.9 103.5 102.9 104.1 104.0 103.7 103.7 2001. 102.7 102.1 101.8 101.5 100.8 100.1 99.7 99.3 99.0 98.4 97.9 97.9 102.2 100.8 99.3 98.1 100.1 2002. 98.4 98.4 99.2 99.5 100.0 100.9 100.6 100.6 100.7 100.'1 100.9 100.4 98.7 100.1 100.6 100.6 100.0 2003 10l.l 101.4 IOU 100.5 100.5 100.6 101.0 100.9 101.5 101.6 102.5 102.'1 101.3 100.5 101.2 102.2 101.3 2004. 102.7 103.3 102.7 103.1 103.9 103.0 103.7 103.9 103.9 104.8 105.1 105.8 102.9 103.3 10.U 105.3 103.8 2005 106.3 107.0 106.9 106.8 107.1 107.5 107.5 107.7 105.8 107.0 108.2 108.9 106.7 107.2 107.0 108.0 107.2 2006. 108.9 108.9 109.1 109.5 109.4 109.9 110.1 110.3 110.0 109.8 109.6 110.5 109.0 109.6 110.1 110.0 109.7 2007 .. 109.9 110.8 110.6 111.1 111.1 111.2 111.5 111.6 112.0 lilA 112.1 112.4 110.5 IIl.1 111.7 112.0 111.3 2008 .. 112.3 112.0 111.6 111.0 110.7 110.4 110.4 109.2 104.8 106.2 104.8 102.4 112.0 110.7 108.1 104.4 108.8 2009 ...... 100.1 99.4 97.7 96.9 95.8 95.4 99.0 96.0 NOTE: Monthly percent change figures show the change from the previous Estimates from Febmary 2009 through June 2009 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 industrial production are calculated from not season percentages of output in 2002. ally adjusted indexes. . .. Not available as of July 15. 2009.

A138 Federal Reserve Bulletin 0 August 2009 A.2. Revised data for Cap<lCily and capacity ulilization for LOlal indu 'try. 1979-2009 Seasonally adjusted data I Quaner Annual Year Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. I I 2 I 3 I 4 avg. 'I Capacity (pen::ent of 2002 output) 1979, ........ .... 67.1 67.3 67.4 67.6 67.8 67,9 68.1 68.2 68.4 68.5 68.6 68.8 67.3 67.8 68.2 68,6 68.0 1980. ........... 68.9 69,1 69.2 69,3 69.5 69.6 69.8 69.9 70.1 70.2 70.4 70.5 69.1 69.5 69.9 70.4 69.7 1981 .." ........ .. 70.7 70.9 71.0 71.2 71.4 71.5 71.7 71.9 72.1 72.2 72.4 72.6 70.9 71.4 71.9 72.4 71.6 1 19 9 8 8 3 2 " .. . " .. .. .. ... . , , . .. .. . . . 7 7 2 4 . . 7 0 7 7 4 2. .0 9 7 74 3. .0 0 7 73 4. .2 1 7 74 3. . 3 1 7 74 3 . . 1 4 7 74 3. , 5 1 7 74 3 . 6 2 7 7 4 3. . 7 2 7 7 3 4 . . 8 2 7 7 3 4. .9 3 7 74 3 . . 4 9 7 74 2. . 9 0 7 74 3 . . 1 3 7 74 3. . 6 2 1 74 3 . . 3 9 7 74 3. . 4 1 1984. ". . ..~., ...... 74.5 74.5 74,7 74.8 74.9 75.1 75.2 75.4 75.6 75.7 75.9 76.1 74.6 74.9 75.4 75.9 75.2 1985. . .... ..... 76.3 76.5 76.7 76.9 77.1 77.2 77.4 77.6 77.7 77.8 78.0 78.1 76.5 77.1 77.6 78.0 77.3 1986 . ....... ...... 78.2 78.3 78.4 78.5 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 1987. . ......... 79.3 79,5 79.6 79.8 79.9 80.1 80.2 80.4 80.5 80.6 80.7 80.8 79.5 79.9 80.4 80,7 80.1 1988. " .... . . 80.9 81.0 81.1 81.1 81.2 81.2 81.2 81.3 81.4 81.4 81.5 81.6 81.0 81.2 81.3 815 81.2 1989" " .... ..... 81.7 81.8 82.0 82.1 82.3 82.4 82.6 82.8 82.9 83,1 83.3 83.5 81.8 82.3 82.8 83.3 82.5 1990 ...... 83.7 83.8 84.0 84.2 84.3 84.5 84.6 84,8 84.9 85,1 85.2 85.3 83.8 84.3 84.8 85.2 84.5 ... 1991" . . 85.5 85,6 85.7 85.8 85.9 86.0 86.1 86.2 86.3 86.5 86.6 86.7 85.6 85.9 86.2 86.6 86.1 1992 .... " ...." 86.8 87,0 87.1 87.3 87.5 87.7 87.9 88.0 88.2 88.4 88.5 88.7 87.0 87.5 88.0 88.5 87.8 1993. " ...... ,. 88.8 89.0 89.1 89.2 89.3 89.4 89.5 89.6 89,7 89.9 90.1 90.2 89.0 89.3 89.6 90.1 89.5 1 1 9 9 9 9 4 5 . ..••..•.••. .0 . ". " . 9 93 0 . . 9 4 9 9 4 0 . . 2 6 9 9 4 0 . . 5 9 9 91 4 . . 1 8 9 95 1. . 4 1 9 9 5 1 . . 5 7 9 95 2 . . 8 0 9 92 6 . . 3 2 9 92 6. , 5 6 9 9 2 6 . . 9 9 9 97 3. .3 2 9 9 3 7 . . 5 7 9 94 0. . 6 2 9 9 1 5 . . 4 1 9 % 2. . 3 2 9 97 3 . . 3 2 9 95 1 . . 7 9 1996 ...... ........ 98.1 98.6 99.0 99.5 99.9 100.4 100.9 lOLA 101.8 102.3 102.8 103.3 98.6 99.9 lOLA 102.8 100.7 1997 . ..... ...... 103.8 104.3 104.9 105.4 106.0 106.6 107.2 107.8 108.5 109.1 109.8 110.5 104.3 106.0 107.8 109.8 107.0 1998 . ........... 111.2 112.0 112.7 II3A 114.1 114.7 115.4 116.0 116.6 117.1 117.7 118.2 112.0 114.1 116.0 117.7 114.9 1999" . .......... 118.8 119.3 119.8 120.3 120.7 121.2 121.7 122.1 122.6 IHI 123.5 124.0 119.3 120.7 122.1 123.5 121A 2000 . ...... ..... 124.5 124.9 125.4 125.8 126.2 126.7 127.1 127.5 127.9 128.3 128.7 129.2 124.9 126.2 127.5 128.7 126.9 2001 .. ." 129.6 129.9 130.3 130.7 131.1 131.4 131.8 132.1 132.4 132.7 133.0 133.3 129.9 131. I 132.1 133.0 131.5 2002 . ..... 133.5 133.7 133.9 134.0 134.1 134.2 134.2 134.2 134.2 134.2 134.1 134.1 133.7 134.1 134.2 134.1 134.0 2003. · . . . . . . . . . 134.0 133.9 133.8 133.8 133.7 133.6 133.6 133.6 133.5 133.5 133.5 133.5 133.9 133.7 133.6 133.5 133.7 2004 · . . . . . . . . . 133.5 133.5 133.4 133.4 133.4 133.4 133.3 133.3 133.3 13.3.3 133.3 133.3 133.5 133.4 133.3 133.3 133.4 2 2 0 0 0 0 6 5 . . .....".." 0' " 1 1 3 3 4 3. . 3 7 1 1 3 3 3 4 . . 4 9 1 13 3 5 3. ,0 4 1 13 3 3 5 . .2 5 1 13 3 5 3 . . 4 6 1 13 3 3 5 . .5 7 1 1 3 3 3 5 . . 8 7 1 13 3 5 4 . . 9 0 1 1 ~ 3 4 6 . , 1 I 1 1 3 3 6 4 . .3 3 1 1 3 3 6 4 . . 5 4 1 1 3 3 4 6 . . 6 7 1 13 3 4 3. . 4 9 1 1 3 3 5 3 . . 4 6 1 13 3 5 4 . . 9 0 1 13 3 6 4 . . 5 4 1 1 3 3 3 5 . . 8 7 2007. . ..... 136.9 137.1 137.3 137.6 137.8 138.0 138.3 138.5 138.7 139.0 139.2 139.4 137.1 137.8 138.5 139.2 138.1 2008 .. . . . . . . . 139.6 139.8 139.9 140.1 140.2 140.4 140.5 140.6 140.7 140.7 140.7 140.7 139.8 140.2 140..6 140.7 140.3 2009 ... ........ 140.7 140.7 140.6 140.5 140.4 140.2 .. . 140.7 140.4 ., . .. Capacity utilization (percent) 1979 ... ........ 85.8 86.1 86.1 85.0 85.5 85.3 84.9 84.1 84.1 84.4 84.1 84.0 86.0 85.3 84.4 84.2 85.0 1980 .. .......... 84.2 84.1 83.7 81.9 79.7 78.5 77.8 77.9 79,0 79.8 81.0 81.3 84.0 80.0 78.2 80.7 80,7 1981 .... ... 80.7 80.1 803 79.7 80.0 80.2 80.6 80.4 79.7 79.0 77.9 76.9 80.3 80.0 80.2 77.9 79.6 1982. ...... , .. 75.2 76.5 75.8 75.0 74.4 73.9 73.6 72.8 72.5 71.8 71.5 70.9 75.9 74.4 72.9 71.4 73.7 1983 ... ...... - 72.2 71.8 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 80.8 81.0 81.0 80.9 80.6 80.3 80.4 80.3 80.0 80.8 80.8 80.3 80.5 1985, .. , .. 79.9 80.0 79,9 79.6 79.5 79.3 78.7 78.8 79.0 78.5 78.7 79.4 79.9 79.5 78.8 78.9 79.3 1986 ..... 79.6 79.0 78.4 78,3 78.4 78,1 78.4 78.2 78.3 78.6 78.8 79.4 79.0 78.3 78.3 78.9 78.6 1987. .... .... -,-, 79.0 79.9 79.9 80.2 80.6 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 ... ...... , .. , .. 83.4 83.6 83.8 84.2 84.1 84.2 84,3 84.7 84.3 84.7 84.8 85.0 83.6 84,2 84.4 84.8 84.3 1989 .......... 85. I 84.6 84.7 84.6 83.8 83.7 82.8 83.3 83.0 82.7 82.8 83.1 84.8 84.0 83.0 82.9 83,7 1990 ... ........ 82.5 83. I 83.3 83.0 83.0 83. I 82.8 82.9 82.9 82.2 81.0 80.3 83.0 83.1 82.9 81.2 82.5 1991. ......... 79.9 79.2 78.7 78.8 79.5 80.1 80.0 80.0 80,6 80.4 80.2 79.8 79.3 79.5 80.2 80.1 79.8 1992 .. ....... 79.1 79.6 80.1 80.5 80,6 80.5 81.0 80.4 80,5 80.9 81.1 80.9 79.6 80.6 80,6 81.0 80.4 1993 ... .. . . . .... 81.2 81.4 81.3 81.4 81.0 81.1 81.3 81.2 8 1.4 8\..9 82.1 82.3 81.3 81.2 81.3 82.1 81.5 1994. .. . ... . . . . 82.5 82.3 83.0 83.2 83.4 83.7 83.6 83.7 83.6 84.1 84.3 84.9 82.6 83.4 83.6 84.4 83.5 1 1 9 9 9 9 6 5 . .. . .,- ..... .... . . 8 8 4 2 . . 9 6 8 8 4 3 . . 6 6 8 83 4. . 4 1 8 84 3 . . 1 4 8 8 3 4 . . 5 0 8 8 3 3. . 9 9 8 8 3 3. . 4 3 8 8 3 4 . . 5 2 8 84 3. .2 6 8 83 3 . , 7 2 8 83 3 . . 5 6 8 83 3. . 6 7 8 84 3. ,6 1 8 8 4 3. .0 6 8 8 3 3. . 5 9 8 8 3 3 . .5 6 8 83 4 . . 4 0 1997. ....•. ...... 83.3 83.9 84.2 83.8 83.9 83.8 83.8 84.4 84.7 84.7 85.0 84.7 83.8 83.8 84.3 84.8 84.2 1998. ..... 84.6 84.1 83.6 83.5 83.6 82.6 81.8 83.1 82.4 82.6 82.1 82.0 84.1 83.2 82.4 82.2 83.0 1999. ...... 82.1 82.1 81.9 81.7 82.0 81.5 81.8 81.9 81.3 82.1 82.2 82.6 82.0 81.8 81.6 82.3 81.9 2000. ......... .. .. 82.3 82.4 82.4 82.6 82,5 82.3 81.8 81.4 81.5 80.9 80.7 80.1 82.4 82.5 81.6 80.6 81.7 2001 ... ..... 79.3 78.6 78,1 77.7 76.9 76.2 75.7 75.2 74.7 74.1 73.6 73.5 78.7 76.9 75.2 73.7 76.1 2002 ....... ... .. 73.7 73.6 74.1 74.2 74.5 75.2 74.9 75.0 75.0 74.9 75.2 74.9 73.8 74.7 75.0 75.0 74.6 2 2 0 0 0 0 3 4 . . .. . .. . . . . . . . , . .. .. . . . . 7 7 5 7 . . 5 0 7 7 7 5. . 8 4 7 7 5 6. . 9 7 7 75 7. . 3 1 7 75 7 . . 2 9 7 7 7 5 . . 2 3 7 75 7. . 7 6 7 7 7 5 . . 9 6 7 77 6 . . 9 0 7 7 8 6 . . 7 1 7 78 6 . ,8 8 7 7 6 9 . . 7 4 7 7 5 7. . 6 I 7 7 7 5 . . 5 2 7 7 7 5. . 7 9 7 79 6 . , 0 5 7 75 7. . 9 8 2005. ............ 79.7 80.2 80.1 80.0 80.2 80A 80.3 80.4 78.9 79.7 80.5 80.9 80.0 80.2 79.9 80.4 80.1 2006 .. ...... .. 80.9 80.8 80.8 81.0 80.8 81.1 81.1 81.2 80.8 80.6 80.3 80.9 80.8 81.0 81.1 80.6 80.9 2007 ... .. ... 80.3 80.8 80.6 80.7 80.7 80.6 80.7 80.6 80.7 80.2 80.5 80.6 80.6 80.6 80.7 80.4 80.6 2008 · . . . . . . . . ... 80.5 80.2 79.8 79.2 78.9 78.7 78.6 77.6 74.5 75.4 74.4 72.7 80.1 78.9 76.9 74.2 77.6 2009 .... .. ... . ... 71.1 70.6 69.5 69.0 68.2 68.0 ... 70.4 68.4 NOTE: See the general note to table A.I. . .. Not available as of July 15, 2009.

Industrial Production and Capacity Utilization: The 2009 Annual Revision A 139 .". Rates of change in inuustrial production, by market and industry group'. 2004-{)81 Difference belween rales of change: Revised rale of change (percent) NAICS revised minus previous (percentage points) Item code' 2004 1 2005 1 2006 1 2007 1 2008 2004 1 2005 1 2006 1 2007 1 2008 Total industry ........ . 3.0 2_6 1.8 1.8 ..... 7 -.1 .0 .1 -.3 -.6 MARKET GROUPS Final products and nonindustrial supplies ...... . 2.5 4.4 1.1 .8 -5.8 -.1 .0 .0 -.5 -.4 Consumer goods ........................ . 1.5 2.5 .1 .2 -4.2 -.1 .1 -.1 -1.0 -.2 Durable ......... .. -.5 1.2 -3.2 1.1 -17.2 .2 -.2 .7 2 .3 Automotive producls .... . -3.2 -1.5 -5.2 3.2 -22.4 -.4 .5 .2 -.4 .0 Home electronics ....... . 7.4 7.8 8.8 15,3 1.6 4.9 -3.2 -2.7 1.2 3.4 Appliances. furniture, carpeting 1.6 1.5 -5.6 -5.1 -20.4 .0 -.1 .5 .9 .2 Miscellaneous goods ....... . 2.5 4.4 -.7 -1.0 -10.9 .6 -1.2 2.0 .5 -.2 Nondurable . .. .. .. ............. .. 2.3 2.9 1.2 -.1 -.4 -.3 .2 -.4 -1.3 -.2 Non·energy ................... , .... . 1.9 3.4 1.6 -.9 -1.8 -.3 .3 -.5 -1.8 -.2 Foods and tobacco ." ....... , .. . 2.3 4.0 .0 1.1 -1.2 .0 .1 -.3 -.4 .4 Clolhing ..... .. ............ . -13.9 -5.8 -4.8 -.5 -6.7 -4.1 -3.7 -5.1 1.4 .8 Chemical products ............... . 3.5 4.2 5.8 -4.2 -2.2 -.4 1.2 -1.9 -4.2 -1.5 Paper products ............ . .9 -.4 .1 -1.8 -4.1 -1.3 .5 2.6 -2.9 -.2 Energy ...... ...... . 4.0 1.7 -.1 1.9 J6 .0 .0 .1 .0 .2 Business equipment ................. , ... . 5.3 9.2 7.4 2.3 -8.4 .1 -1.1 -3 -.6 .1 Transit ..... . 6.2 \5.0 9.2 -1.4 -29.0 -1.0 -.9 .1 2.0 -1.4 Information processing _.... . ... , ..... 7.0 12.1 10.8 6.6 2.0 .7 -2.6 -1.9 -2.3 2.0 Industrial and other 4.0 5.6 4.8 1.1 -7.4 .0 -.4 .4 -.6 -.7 Defense and space equipment ....••..... 1.7 8.0 -1.9 5.7 -.5 -1.4 1.1 .7 .5 .7 Constrllction supplies 2.0 7 ..1 -3.3 -1.0 -11.6 .3 -.2 .2 .6 -.4 Business supplies . 2.9 3.0 .4 1.3 -6.9 -,3 .3 .7 .2 -.8 Materials ........ . .................... . 3.7 .4 2.7 3.2 -7.9 .0 .1 .2 -.1 -.9 Non-energy ... , ...... ,............ . ... , .. 5.4 2.6 1.4 35 -12.0 .0 .1 .1 .0 -1.4 Durable ... ....... . ................... . 5.8 5.9 .4 4.7 -12.0 -.3 .5 -.7 -.7 -1.9 Consumer pariS .. . .............. . .0 .6 -5.7 -2.2 -20.3 .0 .1 .1 -.2 -.5 Equipment pans ...... .. .... . 10.3 12.7 6.9 10.3 -6.5 -.8 1.4 -2.4 -2.1 -3.9 Other .. .. ........ _. .......... .. 5.0 10 -1.8 3.2 -12.9 .0 .1 .1 .1 -.9 Nondurable ........................ .. 4.8 -2.6 3.1 1.8 -12.0 .5 -.4 1.5 1.3 -.5 Textile ......................... . -.8 .5 -11.5 -6.9 -1.1.7 .1 .0 .7 2.5 .7 Paper ........................ . 3.8 -1.0 1.8 -1.4 -10.8 .0 .2 .2 -.1 .1 Chemical ............... . 9.6 -7.3 6.9 4 ..1 -15.8 1.0 -1.5 2.1 2.3 -1.1 Energy ....... .. ............... .. -.5 -4.1 5.5 2.5 .2 .0 .0 .. 1 -.2 .2 INDUSTRY GROUPS Manufacturing'~ ........... , .....•.. _. . 3.6 3.8 1.2 1.9 -8.7 -.1 .1 .1 -.4 -.8 Manufacturing (NAICS) . . . . . . ..... 31-33 3.7 4.0 1.3 2.0 -8.7 -.1 .0 -.1 -.4 -.8 Durable manufacturing ...........•..... 3.8 7.0 1.2 3.2 -11.1 -.2 .0 -.3 -.6 -.8 Wood products .............. . . 321 1.4 11.8 -13.0 -7.5 -20.7 .0 .1 .3 -.7 -.5 Nonmetallic mineral products .......... . 327 4.4 5.5 -3.6 -1.2 -10.3 .0 .1 -.1 -2.0 .1 Primary metal ...... . 331 8.3 -.7 -4.2 4.3 -26.8 .2 .4 .0 .2 -2.7 Fabricated metal products ........ . 332 1.8 6.1 3.3 3.3 -7.0 .0 -.1 I -.1 .3 Machinery . .... . ................ . 333 5.2 8.3 2.8 -1.0 -10.6 .0 .0 .3 -.3 -1.2 Computer and electronic products ..... . 3]4 9.7 15.3 9.3 11.0 -2.6 -.5 .1 -2.9 -2.9 -3.0 Electrical equipment, appliances, and components ..................... . 335 2.4 1.7 -.4 3.3 -2.9 .1 -.1 .1 -.4 1.8 MOlor vehicles and pans ..... . 3361-3 -1.8 .1 -6.2 -1.9 -23.3 -.4 .5 -.3 .4 -.5 Aerospace and miscellaneous transportation equipmenl ............ . 3364-9 2.9 10.9 5.6 11.1 -12.7 -.5 -.6 1.1 .1 -.2 Furniture and related producls ... , , ... . 337 3.4 1.6 -1.7 -2.6 -17.8 .0 .0 -.1 -.9 .6 Miscellaneous . . . . . . . ...... . 339 1.8 6.4 3.5 2.9 -2.3 .1 -.2 .8 1.3 -3 Nondurable manufacruring 3.5 .7 1.4 .8 -6.3 .0 .0 .1 -.2 -.8 Food, beverage, and tobacco products .. 311 ,2 1.3 4.2 .2 1.9 -1.6 .0 .1 -.2 -.3 .0 Textile and product mills ...... . 313.4 .5 -3 -11.4 -7.3 -13.8 .0 -.1 .3 .8 -1.2 Apparel and leather .... . ........... . 315.6 -8.9 -1.4 -.4 -.8 -8.2 .1 -.1 .4 1.3 -.7 Paper... ...... ..... . ...... .. 322 2.9 -.5 .5 -2.1 -10.9 .0 .2 .2 .1 .1 Printing and support ............. , .... . 323 2.5 .6 2.4 -1.5 -9.6 .1 .1 .4 -.2 -1.3 Petroleum and coal products ......•..... 324 10.5 -3.7 2.3 .3 .5 .0 .0 .0 .7 .0 Chemical ............................. . 325 6.6 -1.2 5.1 .7 -9.8 .1 .0 .1 -.7 -1.3 Plastics and rubber products ... . ...... . 326 .9 2.5 -3.0 4.5 -11.9 o -.1 .7 .1 -1.3 Other manufacturing (non-NAICS) 1133,5111 1.4 -3 -1.2 -1.8 -8.8 -.7 .2 3.3 -.5 .0 Mining ...... . , ................ . 21 -.9 -4.9 8.7 .3 .8 .0 .0 .5 .1 .2 Utilities...................... .•...... .... . .. 2211.2 1.8 2.0 -.6 3.1 .3 .0 .0 .1 .1 .1 Electric .................................. . 2211 2.4 3.5 -1.1 3.5 -.8 .1 .1 .1 .2 .3 Naruml gas ........................... . 2212 -1.2 -4.8 1.4 1.6 5.9 -.1 -.2 -.1 -.4 -.2 I. Rates of change are caiculated as the percent change in Ihe seasonally ad and publiShing are classified elsewhere in NAtCS (under ag'riculrure and infor justed index from the fourth quaner of the previous year to the fourth quaner mation, respectively), but hislorically they were considered to be manufaclur of the year specified in the column heading. ing industries and were included in the industrial seclor under the Standard In 2. North American Industry Classification Syslem. dustrial Classification (SIC) system. In December 2002, the Federal Reserve 3. Manufacruring comprises North American Industry Classification Syslem reclassified all its industrial oulPUI dala from the SIC system 10 NAICS. (NAICS) manufacruring industries (sector 31-33) plus Ihe logging industry and ... Not applicable. the newspaper, periodical, book, and directory publishing industries. Logging

A140 Federal Reserve Bulletin 0 August 2009 AA. Rates of change in industrial production. special aggregates and selected det:lil. 2004-081 Difference bel ween rates of change: Revised mte of change (percent) Item NAICS II revised minus previous (percentage points) code' ~ 2004 I 2005 I 2006 I 2007 I 2008 2004 I 2005 I 2006 I 2007 I 2008 Total industry .................. 3.0 2.6 1.8 1.8 ...{).7 -.1 .0 .1 -.3 -.6 Energy 1.3 -1.8 3.9 2.1 1.3 .0 .0 .2 -.1 .2 Consu mer products 4.0 1.7 -.1 1.9 3.6 .0 .0 .1 .0 .2 Commercial products 4.5 .4 1.2 1.9 .5 .0 .0 .0 -.1 .5 Oil and gas well drilling 213111 8.4 11.9 14.9 -.7 6.9 .0 .0 .1 .1 .0 Convened fuel 2.3 -2.6 2.6 5.7 -4.4 .0 .0 .0 .4 -.3 Primary materials. -1.7 -4.7 6.8 1.2 2.0 .0 .0 .4 -.4 .5 Non-energy 3.4 4.0 1.2 1.7 -9.4 -.1 .0 .1 -.4 -.7 Selected high-technology industries 8.6 22.6 13.1 18.2 -6.9 -.7 .2 -4.2 -4.1 -6.4 Computers and peripheral equipment 3341 3.5 25.3 22.1 24.2 -11.9 1.8 -3.6 4.2 7.4 2.2 Communicalions equipment . 3342 2.6 8.9 12.4 66 10.4 1.9 -4.8 -8.2 -14.0 1.7 Semiconductors and related electronic components .. 334412-9 13.8 28.4 9.8 22.3 -15.0 -3.5 4.3 -5.7 -3.7 -14.7 Excluding selected high-technology industries .. 3.0 2.7 .4 .7 -9.5 -.1 .1 ..~ -.1 -.4 Motor vehicles and parts 3361-3 -1.8 .1 -6.2 -1.9 -23.3 -.4 .5 -.3 .4 -.5 Motor vehicles . 3361 -3.4 -1.4 -7.6 -1.9 -30.3 -.7 .9 -.6 .8 -.8 Motor vehicle parts 3363 -1.0 -.6 -4.3 .3 -14.8 -.2 .0 .0 -.3 -.3 Excluding motor vehicles and parts 35 30 .9 .9 -8.5 .0 .0 .4 -.1 -.4 Consumer goods ... 2.1 3.2 .8 -1.1 -4.2 -.2 .1 -.2 -1.4 -.1 Business equipment . 5.1 6.6 6.2 2.3 -8.8 -.1 -.7 .4 -.5 .0 Construction supplies 1.9 7.4 -3.4 -1.0 -11.8 .2 -.2 .3 .9 -.3 Business supplies 1.9 2.7 -.6 .4 -9.8 -.3 .3 1.1 .5 -.9 Materials ..... 5.3 .5 1.4 2.4 -11.2 .3 -.1 .7 .6 -.5 Measures exdudinR selected hiRh-technology industries Total industry ......... 2.7 1.6 1.2 1.1 -<"J.7 -.1 .0 .3 -.1 -.3 Manufacturing3 . 3.2 2.5 .4 .9 -8.9 -.1 .1 3 -.2 -.4 Durable .. 3.1 4.8 -.4 1.4 -11.7 -.1 .1 .1 -.2 .0 MeaJ'lfes excluding motor vehicles alld parIs Total industry .... 3.4 2.8 2.3 2.0 -5.9 -.1 .0 .1 -.4 -.6 Manufacturing' 4.1 4.0 1.8 2.1 -7.8 -.1 .0 .1 -.5 -.8 Durable .. 4.9 8.1 2.5 4.0 -9.3 -.1 .0 -.4 -.8 -.8 Measures exc/udinll selected hillh-tec!moIOIlY industries and Ilw/Or vehicles and parts Total industry ....... 3.1 1.7 1.7 1.2 -5.8 .0 .0 .3 -.2 -.3 Manufacturing' . 3.7 2.7 1.0 1.1 -7.8 .0 .0 3 -.2 -.4 Measllres of non-energy materia!',· illPlIfS Finished processors 5.6 6.2 1.7 4.0 -11.1 -4 .7 -1.1 -1.2 -2.2 Primary aud semi finished processors 5.3 -.2 1.3 3.2 -12.5 .4 -.3 1.0 .9 -.8 Stage-oj-process groups Crude 2.6 -6.5 7.6 1.2 -4.6 .0 .0 .3 -.5 -.4 Primary and semi finished ............. 3.5 3.5 -.8 2.5 -8.0 -.2 .2 .2 -.1 -1.0 Finished . 2.5 5.2 3.3 1.1 -5.8 .1 -.2 -.1 -.6 -.1 I. Rates of change are calculated as the percent change in the seasonally ad- 2. North American Industry Classification System. justed index from the fourth quarter of the previous year 10 the founh quarter 3. See table A.3, nOle 3. of the year specified in Ule column heading. Not applicable.

Industrial Production and Capacity Utilization: The 2009 Annual Revision A 141 A.5. Ralt:S of change for annual indu. trial production Indexes. 2004-081 Difference between rates of change: Revised rate of change (percent) revised minus previous (percentage points) Item 2004 I 2005 I 2006 I 2007 I 2008 2004 I 2005 I 2006 I 2007 I 2008 Total industry. . ........... 2.5 3.3 2.3 1.5 -2.2 .0 .0 .1 -.2 -.5 MARKET GROUPS Consumer goods . 1.2 2.7 .4 1.0 -2.7 -.1 -.1 .1 -.7 -.5 Durable ............. 1.4 .5 -1.0 .4 -9.9 .3 .0 .3 .7 -.2 Nondurable 1.2 3.4 .9 1.1 -.5 - 2 -.1 .1 -1.2 -.5 ........ Business equipment .... ...... " 5.3 7.0 9.4 2.7 -1.1 .1 -.3 -1.0 -.7 .1 Defense and space equipment -1.8 10.6 -2.1 3.7 2.5 -1.0 .0 1.2 .0 1.0 Construction supplies 2.3 4.5 2.3 -1.9 ..{).3 .1 .0 .0 .6 -.1 Business supplies -....... -.. 2.1 3.3 1.2 1.3 -2.9 -.1 -.1 .6 .7 -.7 Materials ... 3.1 2.4 2.4 2.0 -1.9 .1 .1 .1 .1 -.5 Non·energy .......... ' . 4.5 4.0 2.7 2.1 -3.7 .2 .1 .2 .0 -.8 Energy . -.4 -1.2 J.7 1.8 1.8 .0 .0 .0 .2 .2 INDU 'RY GROUPS ManufaClurin~? . _ ......... 3.0 4.0 2.5 1.4 -3.2 .0 -.1 .1 -.3 -.6 Manufacturing (NAICS) 3.1 4.2 2.7 1.5 -3.1 .0 .0 -.1 -.3 -.6 Durable manufacturi ng 4.1 5.5 4.4 2.1 -3.3 .1 .0 -.2 -.6 -.7 Nondurable manufacturing ... 1.9 2.8 .8 1.0 -2.9 .0 .0 .0 .0 -.5 Other manufacturing (non-NAICS) .8 -.3 -1.0 -1.3 -5.7 .0 -1.0 3.3 .1 .1 Mining ... -.6 -1.3 3.3 .6 2.1 .0 .0 .2 .5 .3 Utilities 1.4 2.1 -.6 3.4 .3 .0 0 .0 .1 -.2 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 U,an between the fourth quarter of one year and the fourth quarter of the next. A.6. Rale of change in capacity. by industry groups. 2005-091 Difference between rates of change: Revised rate of change (percent) revised minus previous (percentage points) Item 2005 I 2006 I 2007 I 2008 I 2009 2005 I 2006 I 2007 I 2008 I 2009 Total industry .8 1.5 2.0 1.1 -.9 .0 .2 .2 -.4 -.6 Manufacturing2, ..... , 1.3 1.4 2.2 1.3 -1.2 -.1 .1 .3 -.5 -.6 Manufacturing (NAICS) 1.4 1.4 2.3 1.3 -1.2 -.1 .1 .3 -.5 -.6 Durable manufacturing 2.4 2.0 3.7 2.0 -.6 -.2 -.4 .4 -1.0 -.2 Nondurable manufacturing . .5 .8 1.0 .8 -1.7 .1 .5 .2 .1 -1.0 Other manufacturing (non-NAICS) -.2 1.1 .6 .9 -.9 .0 .0 .0 .7 .1 Mining -1.1 2.3 1.4 1.1 -.7 .0 1.0 -.4 .4 -1.5 Utilities 1.5 1.3 1.3 2.3 1.8 8 5 .0 .1 .1 Selected high·technology industries 11.9 5.7 22.9 6.3 8.4 -1.2 -4.7 1.5 -11.2 1.2 Manufacruring except selected high·technology industries' . .6 1.1 1.0 1.0 -1.6 .0 .1 .3 .2 -.7 Srage·of-process groups Crude .. ........... , -.9 1.5 1.4 1.2 -1.2 -.1 .6 .0 .7 -1.4 Primary and semifinished 1.0 1.3 2.0 .8 -1.0 .2 .1 -.1 -1.1 -.5 Finished .. 1.9 1.8 2.4 2.2 -.6 -.3 .1 .7 .4 -.5 I. Rates of change are calculated as the percent change in the seasonally ad- 2. See lable A.3, no Ie 3. justed iodex from the fourth quarter of the previous year to the fourth quarter of the year specified in the column heading.

Al42 Federal Reserve Bulletin 0 August 2009 A. 7. Capacit utilization rates, by indu try groups. 2005-08 Difference between rates of change: Revised rate Item N c A od IC e' S (percent of cap I ac ity. seaso I n ally adjus I te d) rev (p is e e r d c e m nt i a n g u e s p p o re in v t i s o ) u s 2008 avg.1 2005:Q4 2006:Q4 2007:Q4 2008:Q4 2005:Q412006:Q4 1 2007:Q41~008:Q4 Total industry ..... ........ ........... ... 80.9 80.4 80.6 80.4 74.2 .0 -.1 -.5 -.7 Manufacturing2 .... ..... ...... 79.6 79.2 79.0 78.7 70.9 .0 .0 -.6 -.8 Manufacturing (NAICS) .... ....... 31·33 79.4 78.9 78.8 78.6 70.9 .0 -.1 -.6 -.9 Durable manufacturing .... 77.8 77.9 77.3 77.0 67.1 .0 .0 -.8 -.7 Wood products ....... 321 79.2 89.2 75.2 68.6 54.8 -.7 -.7 -1.5 -1.5 Nonmetallic mineral products ... ... 327 77.7 78.1 72.6 70.5 63.0 -5.3 -{).3 -7.5 -5.9 P F r a i b m ri a c r a y t e m d e m ta e I t al . . p . r . o . d , u . c .. ts . .. ..".0 ' 3 3 3 3 1 2 8 77 0 . .5 S 8 7 3 7. . 6 3 8 79 0 . . 5 4 8 S 4 O . .5 1 6 74 1. . 4 1 - - . . 4 6 - - . . 4 4 - . .8 3 -1 -. . 7 5 Mach.inery ..................... 333 78.6 79.8 81.8 79.8 70.3 1.3 2.4 2.6 1.5 Computer and electronic products . 334 78.3 75.3 78.4 75.4 69.4 .6 .4 -2.5 -.6 Electrical equip .• appliances. and components. .... 335 83.2 83.1 82.2 82.8 78.4 -.1 .2 -.6 .7 Motor vehicles and parts 3361·3 76.7 76.4 70.3 70.2 53.6 -1.9 -2.0 -2.1 -2.2 Aerospace and miscellaneous transportation equipment. . . . . . . . . . 3364·9 73.2 73.2 77.3 84.2 72.0 3.2 4.5 3.9 2.9 Furniture and related products 337 78.4 79.8 79.0 77.6 65.1 .8 1.5 1.0 2.1 Miscellaneous ... . ..... 339 76.5 77.0 76.3 74.4 69.4 .2 -.2 -.4 -2.4 Nondurdble manufacturing .. 81.5 80.1 80.6 80.5 74.8 .1 -.2 -.5 -1.2 Food, beverage, and tobacco products . 311.2 81.5 80.3 79.4 79.7 77.1 -.5 -.9 -1.4 -1.9 Textile and product mills 313.4 81.6 78.5 73.1 71.3 64.7 -1.2 .6 2.5 2.6 Apparel and leather 315.6 79.5 75,2 76.8 77.7 72.2 5.7 4.9 4.7 2.4 Paper ....... 322 87.6 84.4 84.2 82.6 74.4 .4 -.1 .0 .5 Printing and suppon , ... - 323 83.4 78.3 79.7 78.4 72.7 .6 1.1 1.9 3.5 Petroleum and coal products . 324 86.1 88.4 88.8 87.1 85.7 1.1 -.1 -1.7 -3.7 Chemical .. . . . . . , . 325 78.2 75.7 79.0 78.5 70.0 .2 -.1 -.5 -1.3 Plastics and rubber products . 326 83.6 85.2 81.9 84.1 72.7 -.7 -,4 -.5 -1.5 Other manufacturing (non·NAICS) .. .. " . 1133.5111 84.2 84.1 82.2 80.2 72.5 -1.2 1.5 1.1 .5 Mining . 21 87.6 854 90.8 89.8 89.6 -.1 -.5 -.1 -.2 Utilities .... 2211,2 86.8 85.3 83.7 85.2 83.6 -.4 -.7 -.7 -.6 Selected high· technology industries ..... 78.2 77.4 82.8 79.6 69.8 2.2 2.9 -.9 1.5 Computers and peripheral equipment ..... 3341 78.1 74.3 79.5 81.6 74.1 .0 2.0 3.0 13.7 Communications equipment 3342 76.2 67.5 82.3 77.3 74.3 5.7 8.9 -3.6 -5.3 Semiconductors and related electronic components ... . ... 334412·9 80.6 84.6 84.9 80.0 64.5 .4 -.] -1.3 -.9 Measures excluditif.: selected high·technology industries Total industry ........ ............ . .. 81.0 80.5 80.5 80.5 74.4 -.2 -.3 -.5 -.8 Manufacturing2 ... ......... ... 79.7 79.3 78.8 78.7 71.0 -.2 -.2 -.5 -1.0 SlOge·of-process groups Crude ........ . . . . . . . . . . .' . 86.6 83. I 88.7 88.3 83.8 -.2 -.4 -.8 -1.7 P F r in im is a h r e y d a . n , d . . s , e mifin .. is . h ed ... " ..... .... 7 8 7 2 . . 7 0 8 7 2 6. . 6 6 8 77 0 . . 6 7 8 77 0 . . 2 7 7 7 3 1 . . 4 0 -. . 7 7 -. .6 7 - -. . 4 6 - - . . 6 7 I. North American Industry Classification System. Not applicable, 2. See table A.3, note 3.

Industrial Production and Capacity Utilization: The 2009 Annual Revision A143 A.8. Annual prop )rtion in industrial production, by market groups and induslry groups. 2000-08 NAICS Item 2008 code' . 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 57.5 59.0 58.9 58.2 57.0 56.9 56.8 56.2 57.0 Consumer goods . 28.4 30.0 31.0 31.0 30.2 29.8 29.3 29.2 29.5 Du A ra U b l l O e m . O live products .. . . . . . . . . . . . . 7 3 . .7 9 4 8 . . 0 1 4 8 . . 7 9 4 8. .6 7 4 8 . . 0 0 7 3 . . 4 6 7 3. . 3 1 6 3. .8 2 6 2 . . 3 9 Home electronics ..... .4 .4 .4 .4 .4 .4 .4 .3 .3 ~pliances. fumirure. carpeting 1.4 1.4 1.4 1.3 1.3 1.3 1.2 1.1 1.0 i sce lI,neous goods .......... 2.4 2.3 2.4 2.3 2.3 2.2 2.2 2.1 2.1 Nondurable . . . . . . . . . . . . . 20.5 21.8 22.1 22.2 22.2 22.4 22.2 22.4 23.2 Non-energy .. 16.8 18.0 18.2 18.0 17.3 16.7 16.4 16.2 17.1 Foods and tobacco . 9.2 9.8 9.6 9.6 9.3 8.9 8.7 8.8 9.4 Clothing 1.2 1.1 .8 .7 .6 .5 .4 .4 .4 Chemical products ......... , .. 4.0 4.6 5.2 5.2 5.1 5.0 5.1 4.8 5.1 Paper products ............... 2.0 2.1 2.1 2.0 1.9 1.8 1.7 1.7 J.7 Energy 3.7 3.8 3.9 4.2 4.9 5.7 5.8 6.2 6.1 Business equipment ... ........... 11.6 11.2 10.2 9.6 9.4 9.3 9.6 9.3 9.5 Transit ..... 1.9 2.0 1.8 1.6 1.6 1.6 1.8 1.6 1.5 Information processing 4.1 3.9 3.2 3.0 3.0 2.8 2.9 2.8 2.9 Industrial and other 5.5 5.3 5.2 5.0 4.9 4.8 5.0 4.9 5.0 Defense and space equipment 1.4 1.6 1.6 1.6 1.5 1.6 1.5 1.5 1.7 Construction supplies 4.6 4.8 4.9 4.9 4.8 4.9 5.0 4.9 4.9 Business supplies 11.0 11.0 10.8 10.8 10.6 10.6 10.5 10.5 10.7 Materials ............... 42.5 41.0 41.1 41.8 43.0 43.1 43.2 43.8 43.0 Non-energy ................ 31.9 30.3 30.1 29.6 29.7 29.3 29.3 29.2 29.0 Durable .. .................. 20.6 19.2 18.7 18.3 18.2 17.8 17.7 17.2 16.8 Consumer parts 4.1 3.8 4.0 3.8 3.6 3.3 3.2 2.9 2.7 Equipment parts 8.0 7.2 6.5 6.4 6.3 6.2 6.0 5.8 5.9 Other 8.4 8.2 8.1 8.1 8.3 8.3 8.5 8.4 8.2 Nondurable ........... IU 11.1 11.4 11.3 11.4 11.5 11.6 12.0 12.2 Textile " .9 .8 .8 .7 .7 .7 .6 .5 .5 Paper .............. , 2.9 2.8 2.8 2.5 2.4 2.3 2 __1 2.3 2.3 Chemical ... 4.3 4.1 4.4 4.5 5.1 5.3 5.5 5.9 5.9 Energy . . . . . . . . . . . . . . . 10.6 10.7 11.0 12.2 13.3 13.8 13.8 14.6 14.0 INl>usrRY GROUPS Manufacturing2, ........... 84.0 83.5 83.2 81.7 80.5 79.5 79.3 78.6 79.0 Manufacturing (NAICS) 31-33 79.2 78.6 78.5 77.2 76.2 75.5 75.4 74.8 75.3 Durable manufacturing 45.3 44.0 43.2 42.0 40.7 39.7 39.6 38.4 38.1 Wood products 321 1.4 1.4 1.5 1.6 1.6 1.5 1.4 1.2 1.0 Nonmetallic mineral products ...... 327 2.2 2.2 2.2 2.2 2.2 2.3 2.3 2.2 2.2 Primary metal . . . . . . . . . . . . . . 331 2.5 2.3 2.3 2.3 2.7 2.6 2.8 2.7 2.5 Fabricated metal products 332 6.0 5.8 5.7 5.5 5.3 5.3 5.5 5.6 5.9 Machinery ................... 334 5.9 5.5 5.3 5.0 4.9 4.9 5.0 4.9 4.9 Computer and electronic products . 334 10.5 9.3 8.1 7.9 7.8 7.4 7.2 6.7 6.9 EleCtrical equipment. appliances. and components. 335 2.5 2.4 2.2 2.0 1.9 1.9 1.9 1.9 2.0 Motor vehicles and parts 3361-3 6.6 6.5 7.4 7.2 6.4 5.9 5.5 5.1 4.5 Aerospace and miscellaneous lranSpOrlalion equipment. ... 3364-9 3.2 3.7 3.5 3.3 3.1 3.2 3.2 3.4 3.5 Furniture and related products 337 1.7 1.7 1.8 1.7 1.6 1.6 1.5 1.4 1.3 Miscellaneous 339 2.9 3. I 3.3 3.3 3.1 3.1 3.1 3.1 3..1 Nondurable manufacturing . 33.9 34.6 35.3 35.2 35.5 35.8 35.7 36.5 37.2 Food. beverage. and tobacco producl.l .. 311.2 10.6 11.3 I 1.3 11.4 10.9 10.6 10.4 10.7 11.5 Textile and product mills 3 I 3,4 1.4 1.3 1.4 J.3 1.2 1.2 I.J .9 9 Apparel and leather 315,6 J.3 1.2 1.0 .9 .7 .6 .6 .6 .6 Paper ........... , ..". . ' . . . . . . . . . . . . . . . . 322 3.1 3.1 3.1 2.9 2.7 2.6 2.6 2.5 2.6 Printing and support 323 2.6 2.6 2.4 2.2 2.1 2.0 1.9 1.9 1.8 Pelroleum and coal products .. 324 1.8 1.7 1.8 2.1 3.2 4.2 4.5 5.0 4.7 Chemical 325 9.3 9.7 10.7 10.8 11.2 11.3 11.4 IJ.7 12.1 Plaslics and rubber products ... 326 3.7 3.7 3.8 3.6 3.4 3.3 3.2 3.1 3. I Olher manufacturing (non-NAICS) 325 4.8 4.8 4.7 4.5 4.3 4.1 4.0 3.8 3.7 Mining 21 7.1 7.1 7.2 8.5 9.8 10.7 11.0 11.7 10.6 UtiUties ............. 221 I 8.9 9.4 9.6 9.8 9.7 9.8 9.7 9.7 10.4 Electric 2212 7.6 8.0 8.2 8.2 8.0 8.0 8.1 8.0 8.7 Narural gas .. 2211 1.4 1.4 1.4 1.6 1.7 1.8 1.6 1.7 1.8 NOTE: The IP proportion daw are estimates of the industries' relative contri- I. North American Industry Classification System. butions to the o_erall lP change between the reference year and the following 2. Sec table A.3, note 3. year. For example, a I percent increase in durable goods manufacturing be- Not applicable. tween 2008 and 2009 would account for a .381 percent increase in tOlal IP.

A144 Federal Reserve Bulletin 0 August 2009 .9. Annual production and price indexes for elected communications equipmcnl. \998-2008 Index. 2002=100 I I Year Datn networlJng Enterpriseand home Transmission and I Wireless system I Satellites and earth I Other vOice related' station I I I I I 1 I I I I I Production Prices Production Prices Production Prices Production Prices Production Prices Production Prices ., 1998. .. n.a 234.4 n.a 170.6 118.2 189.3 n.a 164.8 78.0 160.9 83.6 108.4 1999. n.a 194.4 n.a 154.3 155.7 169.6 n.a 143.7 70.0 143.2 86.4 106.3 2000. ....... n.a 174.1 n.a 145.3 228.7 149.~ n.a 129.0 94.6 129.9 111.5 100.4 2001 .. ...... 123.3 133.2 n.a 123.1 202.6 116.5 n.a 114.6 82.9 131.1 95.9 100.9 2002. .... 100.0 100.0 100.0 108.8 100.0 '100.0 100.0 100.0 100.0 100.0 100.0 100.0 2003 ....... 112.9 76.6 86.6 100.0 81.0 90.5 123.9 83.7 117.2 90.3 97.3 98.6 2004. ...... 124.2 59.9 74.0 91.0 77.3 83.2 161.8 73.2 175.0 72.4 89.5 99.4 2005. 160.5 54.3 67.1 82.4 62.2 77.4 159.3 71.7 188.6 75.6 70.6 100.4 2006. ... 254.1 51.4 64.0 79.8 69.8 66.5 148.3 67.7 260.2 69.2 66.8 99.8 2007 ... .. 276.1 50.2 69.3 77.5 91.1 61.1 115.5 62.9 286.2 66.1 66.5 99.8 2008 .. 282.6 n.a 61.9 n.a 91.8 n.a 146.2 n.a 365.5 n.a 73.2 n.a NOTE: The complete set of annual prices necessary to compute the annual I. Category consists of transmission. local loop, and legacy central office price indexes for 2008 are not available. The estimates for the quarterly price equipment. indexes for 2008 (shown in table A.I 0) are based on only incomplete data. n.a. Not available. A. 10. Quarterly production and price indexes for sclected communications equipment, 1998:Q 1-2008:Q4 Index, 2002= I0 0 Y q e u a a r rt a e n r d Data networlU ng I Enterprise and haOle voice I Transmission and relaled I I Wireless system - Production I Prices I Production I Prices' I Production J Prices J Production I Prices 1998:QI .... ... n.a n.a n.n n.a 96.9 118.6 n.a n.n Q2 . n.a n.a n.n n.a 1\5.2 118.7 n.a n.a Q3 . ... n.a n.a n.a n.a 1,24.8 117.1 n.a n,a Q4 . n.a n.n n.a n.a 135.2 117.6 n.a n.a 1999:QI .... ... n.a n.il n.a n.a 123.9 120.2 n.a n.n Q2 ........ n.a n.a n.a n.a 143.5 127.2 n.a n.a Q3 ..... n.a n.a n.a n,n 166.8 129.2 n.a n.a 04 , ....... n.a n.a n.a n.a 187.8 128.0 n.il n.a 2000:QI .. ..... n.a n.a n.a 11.a 213.0 134.0 n.a 121.9 Q2 ... ..... n.a n.a n.n n.a 235.9 138.0 n.a 122.6 Q3 ... n.a n.o n.a n.a 228.2 140.0 n.a 123.7 04 · n.n n.a n.a n.a 237.4 135.6 n.a 124.7 200I:QI 150.9 148.0 n. • n.a 250.0 115.2 n.a 124.4 Q2 ... 126.2 137.1 n.a n .• 210.6 112.7 n.a 122.4 Q3 . 109.6 127.4 n.a n.a 206.2 109.~ n.H 114.7 04 .. 107.3 126.9 n.a n.a 144.7 106.0 n.a 110.7 2002:QI . " .. 1 105.0 110.7 116.9 n.a 131.8 102.3 98.0 109.2 Q2 . 99.3 107.3 102.2 n.a 105.2 102.2 99.7 106.3 Q3 ... 98.3 91.6 91.4 n.a 88.1 98.0 99.3 93.9 04 · 97.5 90.6 90.0 n.n 75.6 97.6 103.0 90.9 2003:QI 97.7 87.9 91.5 104.3 80.9 94.7 103.3 87.4 Q2. .... 109.8 80.8 87.0 100.7 81.9 91.1 106.4 83.8 Q3 ... ..... 119.4 70.7 92.2 97.9 79.1 89.2 131.8 69.2 04 ........ 124.4 63.0 75.9 97.2 82.0 91.6 153.6 65.7 2004:QI 139.8 60.5 79.1 97.2 82.2 92.1 163.9 65.8 Q2 . 118.9 59.6 77.5 95.4 80.7 89.6 160.4 68.6 Q3 ........ 122.8 58.2 70.7 90.9 72.4 88.1 161.2 68.5 Q4. 115.6 56.4 68.7 89.4 73.9 88.5 161.9 74.1 2005:QI . . . . . . . 128.7 54.0 65.5 86.4 69.0 85.2 158.6 77.1 Q2 .. ..... 146.9 53.5 658 86.4 64.7 79.3 16.~.1 74.8 Q3 .... 162.6 52.9 69.2 82.6 58.7 79.2 160.3 70.2 04 · 203.1 51.9 67.9 81.5 56.6 76.4 155.4 66.3 2006:QI .. 220.4 51.9 64.3 81.5 61.2 75.8 159.2 64.4 Q2 ... 245.4 50.6 64.8 80.5 69.1 74.2 160.5 65.2 Q3 ........ 269.5 49.5 61.7 79.8 74.2 75.2 154.5 68.3 04· 280.3 48.7 65.4 79.2 74.5 73.4 119.5 71.1 2007:QI ...... 276.9 49.0 69.1 79.1 84.6 71.1 113.0 71.0 Q2 ........ 271.9 50.0 69.7 77.5 89.9 69.0 103.9 68.4 Q3 ... ... I 276.6 49.2 71.3 76.8 93.0 67.2 115.2 58.0 04 · .. I 279.0 47.9 66.9 75.8 96.9 656 129.6 48.2 2008:QI ... ..... 287.5 49.3 65.3 76.7 96.1 65.2 139.6 48.7 Q2 ... ... 295.5 48.1 62.7 76.0 96.7 62.5 158.6 48.3 Q3 . 279.6 48.6 64.3 73.6 87.9 60.0 144.5 47.7 04 ...... 268.1 47.5 55.2 73.1 86.7 57.0 142.3 46.9 NOTE: Quarterly production and price indexes are not available for two cat· 2. Index, 2003= 100. egories of communication equipment shown in t.1ble A.9: "satellites and earth n.a. Not available. swtion" and "other." I. Category consists of transmission, local loop, and legacy central office equipment.

Industrial Production and Capacity Utilization: The 2009 Annual Revision A 145 .11. Quarterly pri e indexe~ for selected semicunductors. 1998:QI-200R:Q4 Index, 2002=100 Year and Dynamic random Flash Other quaner access memory memory memory' Prices Prices Prices 1998:QI . ...... 956.2 367.2 514.6 Q2 . 689.7 340.0 478.0 Q3 . 530.0 286.0 439.5 04 .... 572.6 280.3 421.9 1999:QI . 640.0 234.5 439.6 Q2 . 520.3 229.9 471.3 Q3 . 493.0 285.7 469.9 Q4 . 663.0 321.3 465.7 2000:QI .' 516.1 314.1 396.6 Q2 . .... 482.6 327.9 410.7 Q3 . 513.8 317.5 409.3 Q4 .. 319.6 300.5 385.9 200I:QI 206.1 232.8 275.1 Q 2 . 125.6 202.9 231.3 Q3 . 72.6 164.6 188.3 04 · 59.8 136.4 155.5 2002:QI . 125.2 109.7 114.9 Q2 .. 10l.2 103.7 103.8 Q3 . 85.4 96.3 9~.7 04 · 88.8 90.5 86.9 2003:QI . 63.9 84.2 91.7 Q2 . 56.8 74.1 85.2 Q3 67.5 69.3 79.4 Q4 .. . 64.1 66.5 77.3 2004:QI .... . 62.1 61.5 74.7 Q2 . 65.9 58.4 69.0 Q3 . 62.2 45.4 73.8 04 53.4 35.9 68.8 2005:QI . 43.5 31.8 63.0 Q2 . 32.9 29.0 61.3 Q3. 32.3 26.2 58.7 Q4 .. 29.1 24.3 59.5 2006:QI . 28.7 19.6 66.4 Q2 28.9 16.9 63.7 Q3 . 30.5 14.6 61.6 Q4 33.5 14.0 59.1 2007:QI 25.6 10.8 60.2 Q2 . 15.2 10.8 59.1 Q3 . 13.6 12.5 50.2 04 9.1 10.3 42.1 2008:QI .... 6.9 7.3 521 Q2 7.9 6.6 50.9 Q3 6.6 4.8 SO.8 Q4 . 4.6 4.0 46.1 I. Other memory comprises all lypeS of memory excepl flash memory and dynamic random access memory; static random access memory is ilS largesl componen!.

A147 November 2009 The Financial Crisis and U.S. Cross-Border Financial Flows Carol C. Bertaut and Laurie Pounder, of the Board's positions.2 These positions are primary components Division of International Finance, prepared this of the net international investment position of the article. James Coonan provided research assistance. United States, which measures the country's interna tional financial indebtedness. We identify three major This article examines the effects of the recent finan channels through which cross-border flows and posi cial crisis, which began in August 2007, on U.S. tions were affected by the crisis: financial flows. Cross-border financial flows are of 1. "Right to safety" shifts in portfolio composition interest for several reasons, including the information away from riskier securities and toward invest they provide about changes in a country's indebted ments in safe and liquid markets, particularly U.S. ness, foreign investor attitudes toward domestic as Treasury securities3 sets, and the current account balance. Cross-border 2. unusual flows through the banking system result financial flows are the counterparts to transactions ing from a shortage of dollar liquidity abroad and recorded in the current account, the broadest measure the breakdown in interbank markets of a country's transactions with the rest of the world. 3. a pullback from cross-border positions during the When a country runs a deficit in the current financial crisis, reflecting a general increase in risk account-as has been the case for the United States aversion. We find that although both U.S. and since the early 1990s-this imbalance implies that foreign investors did reduce their holdings of foreign investors must, on net, be acquiring the cross-border securities and foreign deposits, the country's assets. In essence, the United States has adjustments in cross-border portfolio holdings been borrowing from the rest of the world to finance were relatively minor compared with the substan the excess of imports over exports.' Foreigners' tial valuation losses that investors faced. We find willingness to continue investing in the United States, somewhat more evidence of such a pullback in and the nature of those investments, determines the banks' own cross-border positions. price that the United States must pay to continue These channels, of course, interact in their effects running current account deficits. on financial flows and portfolio positions. Flight-to U.S. financial inflows typically occur through for safety concerns over foreign exposure can result in eign purchases of U.S. securities, net lending to U.S. reduced cross-border positions, and risk aversion can banks and other firms, and foreign direct investment intensify funding pressures. in the United States. During the financial crisis, The first section of the article addresses the flight however, the composition of inflows changed dra to-safety flows of private investors out of risky secu matically, and some inRows came from unusual rities and toward U.S. Treasury securities, as weB as sources. the shift by official investors to an even heavier In this article, we focus on cross-border Rows in concentration of their purchases in U.S. Treasury securities-both foreign purchases of U.S. securities securities. This section also discusses the unusual and U.S. purchases of foreign securities-as well as flows resulting from the flight of U.S. investors out of on cross-border bank flows to characterize the effect foreign securities. Before the crisis, financial inflows of the crisis on net inflows. In addition to flows, we from foreign investors were typically partially offset analyze the (related) influence of the crisi s on gross by outflows from U.S. purchases of foreign securities. cross-border securities, banking, and nonbank During the crisis, these flows reversed. 2. We discuss only certain positions of nonbank firms. In particular, 1. Alternatively. one could argue that the desire of the rest of the we exclude direct investment positions. world to invest in the United States causes an imbalance that drives the 3. For the purposes of this article, "Treasury securities" refers to U.S. current account to be in deficit. U.S. Treasury securities.

A 148 Federal Reserve Bulletin 0 November 2009 The second section of the article describes the I. For.:ign net purchases of . . securities. by type of unusual net lending flows from the United States to purchaser. and U.S. current account deficit, 2002-09 Europe-through interbank markets and through li fiiUions of U.S. dollars. annual rdlC quidity swap lines with the Federal Reserve-in U Foreign official response to a shortage of dollar liquidity abroad. This 1.600 • Foreign private section breaks the crisis into three distinct phases. - U.S. current account 1.400 deficit- During the first phase, covering the first year of the 1.200 crisis, the majority of banking offices directed lending 1,000 to the home region of the parent bank. The second 800 phase, the most intense period of the crisis, can be 600 characterized by a breakdown of interbank markets and cross-border borrowing of foreign central banks 400 from the Federal Reserve. Finally, the third phase is 200 + the slow recovery of interbank markets in 2009. The o analysis disaggregates total net lending by nationality I I I 1 1 I I I I I I 2002 2003 2004 2005 2006 2007 2008 2009 of the parent bank and aggregates individual bank level data by banks' lending behavior. NOTE: For stacked bars, a pOSitive value indicates net purchases of securities, and a negative value indicates net sales of securities. While the first two sections discuss net flows for • For illustrative purposes, the U.S. current account deficit is shown as a specific sectors of the financial account, the third positive value. SOURCE: For foreign official and foreign private, and in subsequent figures section documents declines in gross cross-border except as noted, staff estimates from data collected through the Treasury positions and a slowdown in cross-border trading International Capital reponing system: for U.S. current account deficit. Bureau of Economic Analysis. during the crisis across most instrument types associ ated with the financial account (including securities, interbank lending, borrowing and lending by nonbank representing net purchases both by foreign pri vate firms, and trade credit). This section shows that the investors and by foreign official investors, typically retreat from securities positions during the crisis has amounted to more than the current account deficit been minor, but that banking and other positions have (figure I). Foreign private investors include foreign experienced more-significant drops. banks, non-government-operated investment funds, The final section concludes, adding a discussion of and foreign corporations, as well as individual inves other countries' experiences of flight to safety and tors. Foreign official investors are primarily foreign declining cross-border positions during the crisis. The central banks and finance ministries but also include article also includes two boxes. The first box provides investment funds operated by central governments background on the data collected by the Treasury (so-called sovereign wealth funds). During the crisis, International Capital (TIC) reporting system and on both types of investors exhibited flight to safety in the challenges that the crisis presented to the measure their securities portfolios, with the result that total ment of financial transactions and cross-border port foreign purchases of U.S. securities fell below the folio positions (see box "The Treasury International current account deficit. This section discusses that Capital Data Reporting System"). For example, bank flight to safety and the unusual flows resulting from ruptcy filings, takeovers, and the transition of some the flight of U.S. investors out of foreign securities, financial firms to bank holding company status gener which made up, in part, for the gap between the ated changes that made it difficult to assess whether current account deficit and foreign purchases of U.S. financial flows were being correctly reported. The securities. second box, "Difficulties in Assessing Market Values u.s. of Securities during the Financial Turmoil," discusses Increased Purchases of Treasury the problems inherent in determining the market Securities values of some cross-border securities positions when trading becomes extremely thin. As concerns rose over the risks associated with various U.S. securities that were structured around FUGHT-TO-SAFETY HIFTS IN PORTFOLIOS U.S. subprime loans and other forms of real estate loans and consumer credit during the summer of DURING THE CRISt 2007, foreign investors began to acquire increasing In recent years before the crisis, most of the inflows to amounts of U.S. Treasury securities, with correspond the United States occurred through foreign acquisi ing movements out of other, riskier securities. We tions of U.S. securities. These foreign acquisitions, interpret these movements in cross-border portfolios

The Financial Crisis and U.S. Cross-Border Financial Flows At49 The Treasury International Capital Data Reporting System The primary data source for U.S. cross-border financial vidual security level. the surveys can provide consider portfolio Hows and positions is the data collected by the able additional information on cross-border securities Treasury International Capital (TIC) reporting system. holdings, including greater detail on the types of securi The TIC system includes monthly and quarterly data ties held, their maturity structure. and the face and market collected in aggregate by country, broad instrument type, values of the individual securities. and type of foreign counterparty, as well as periodic (now annual) in-depth surveys of cross-border holdings of both Financial Accounts of the Bureau of Economic long-and short-term securities. I Analysis and Adjustments to the TIC Data The TIC data, including both the monthly and quarterly Components of the TIC System data as well as the annual surveys, are the primary source Information on foreign purchases of U.S. long-term secu data for many of the items in the official international rities and on U.S. purchases of foreign long-term securi financial transactions accounts compiled by the Bureau of ties is collected monthly on the TIC S form. Data are Economic Analysis (BEA). In our analysis, we use esti collected on foreign gross purchases and gross sales by mates at a monthly frequency. prepared by stalf members country for four types of long-term U.S. securities: U.S. at the Federal Reserve Board, that are similar to those Treasury debt securities, U.S. agency debt securities, U.S. reported by the BEA. These flows may differ somewhat debt securities issued by all other institutions (primarily from the underlying as-reported TIC data, because the corporate issuers), and U.S. equity. These data distinguish BEA and the Board's stall adjust reported flows to foreign official purchases of U.S. securities from pur reconcile the information obtained from the monthly and chases by other foreigners. The TIC 5 form also reports quarterly data with that obtained in the annual surveys U.S. cross-border purchases and sales of foreign long and other data sources. In particular. net purchases of term debt and equity, again by country. For analytical securities attributed to foreign official investors are larger purposes, the sales of each type of security are usually in this analysis than in the underlying TIC data because subtracted from gross purchases to measure net transac the TIC 5 data do not identify as foreign official acquisi tions. tions those that occur through foreign private intermedi The TIC B forms collect data on cross-border positions aries. Because of these additional acquisitions. when a in the form of deposits, loans, brokerage balances. and new survey of foreign holdings of U.S. securities is repurchase agreements. Although these data are com conducted, foreign official holdings of U.S. securities are monly referred to as the TIC banking data. they also often revealed to be larger than would be estimated from include positions reported by other depository institu summing official net purchases since the previous survey. tions, by bank and financial holding companies, and by securities brokers and dealers. The TIC B forms also Complications from the Financial Crisis in Assessing collect selected data on cross-border holdings of short Correct TIC Reporting term securities, such as short-term Treasury bills and Aspects of the crisis itself have complicated the measure certi ficates, commercial paper. and negotiable certi ficates ment of financial transactions and cross-border portfolio of deposit. Like the TIC S data, the TIC B data are positions. In particular. bankruptcy filings and mergers reported by country and by type of foreign counterparty. and takeovers of major market participants generated Cross-border positions of non banks (including entities changes in reporter panels as well as some unusual such as exporters and importers, industrial firms, insur unwinding of positions that made it difficult to assess ance companies, and pension funds) are collected quar whether financial flows were being correctly reported. terly by country on the TIC C forms. These forms For example, Lehman Brothers Holdings Inc. held large distinguish between "financial" claims and liabilities cross-border positions in repurchase agreements, in which (such as deposits, short-term securities, and loans) and they lent securities to foreign banks in exchange for a "commercial" claims and liabilities (such as accounts cash loan. In order to correctly measure financial flows, it receivable or payable arising from import or export was necessary to determine the resolution of these and activities). other such positions-that is, whether securities changed In addition to the monthly and quarterly data, more hands as a result of failure to repay, whether positions comprehensive data on foreign holdings of U.S. securities were taken over by companies acquiring subsets of and U.S. holdings of foreign securities are available from Lehman's business, or whether the positions are still detailed annual surveys of cross-border portfolios. Be pending bankruptcy court outcomes. cause the annual survey data are collected at the indi- In addition, changes in reporter classifications resulting l. For further information on thl! TIC systl!m for collecting cross· from the creation of several bank holding companies border financial data, see Carol C. Benaut. William L. Griever. and Ralph generated new reporting responsibilities, which in turn W. Tryon (2006). "Understanding U.S. Cross· Border Securities Data." generated inconsistent definitions of data series and fur Federal Reserve Bulletin, vol. 92 (May), pp. A59-A 75, www.federalreserve.gov/pubslbulleli nl2006/cross_bordecsecuri lies.p df. ther complicated the analysis of financial flows.

Al50 Federal Reserve Bulletin 0 November 2009 2. TOlal foreign holdings and foreign oflicial hiding' the ultimate investors. Thus, if an investor in France of U.S. Treasury securities, 1995-2009 purchases a Treasury security but the transaction is booked through a London intermediary, the TIC Dillioll,'\ of U.S. dollars system will report a sale of U.S. Treasury securities to the United Kingdom, not France. This example high 3.500 lights the "financial center bias" in the data: Roughly 3.000 one-third of all purchases and sales of U.S. long-term 2.500 securities in the TIC system are recorded against the United Kingdom, with nearly as many recorded col 2.000 lectively against the Caribbean financial centers of 1.500 the Bahamas, Bermuda, and the Cayman Islands. Nonetheless, in both the summer of 2007 and the 1.000 fall of 2008, net purchases of Treasury securities by Foreign official 500 entities in the Caribbean banking centers, especially I I I I I 1 I 1 I I I I I I the Cayman Islands, picked up notably. This increase 1995 1997 1999 200 I 2003 2005 2007 2009 in Treasury acquisitions is consistent with shifts in the portfolios of hedge funds and other investment funds as reflecting changes in investor risk aversion or located in these offshore financial centers to safer and flight-to-safety portfolio motives. These movements more-liquid investments during periods of pro became more pronounced with the intensification of nounced market turmoil. More recently, foreign pri the crisis in the fall of 2008 but reversed somewhat vate investors have reduced their purchases of Trea with the stabilization of financial markets through the sury securities, and net purchases of such securities first half of 2009. through Caribbean financial centers have reversed to Although foreign investors historically have held a net sales. These developments may indicate increased large share of U.S. Treasury securities, most of these risk tolerance and a diminution of "safe haven" securities are held by official investors and, in large flows. part, reflect official reserve holdings. Official holdings Foreign official investors also increased their pur of U.S. Treasury securities grew especially rapidly chases of Treasury securities, especially in the second between 2002 and mid-2007-more than doubling half of 2008, and their acquisitions of these securities from roughly $700 billion to more than $1.6 tril have remained high in 2009 (figure 3, white bars). lion-as many Asian central banks acquired large Total foreign acquisitions of Treasury securities (offi amounts of dollar reserves over this period (figure 2). cial and private purchases combined) amounted to U.S. Treasury securities make up a much smaller more than $1 trillion in the two years since summer share of foreign private portfolios and typically have 2007, raising estimated total foreign holdings to accounted for a much smaller fraction of foreign nearly $3.4 trillion by mid-2009. However, because private investors' purchases of U.S. securities: U.S. the issuance of Treasury securities has been heavy Treasury securities accounted for only about 12 per cent of foreign private investors' securities holdings 3. Foreign nel purcha~es of .S. Treasury e ·urities. by type of pu!cila cr. 2002-09 in 2003 and for less than 10 percent in 2006. Although foreign private investors made large purchases of Billions tlfU.S.llollars. annual rale Treasury securities during months of market turbu U Foreign official lence (for example, in August 2007 and April 2008), • Foreign private 1.000 they did not noticeably shi ft their purchases into such securities until the intensification of the crisis in the 800 fall of 2008 (figure 3, solid bars). Foreign private 600 monthly purchases reached a record $93 billion in October 2008 and remained sizable through the first 400 quarter of 2009. Identifying the foreign counterparties for these 200 recent large private purchases of Treasury securities + o is difficult. The TIC system that collects the underly ing data for transactions in long-term securities is I 1 I I 1 I 2002 2(0) 2004 2005 2006 2007 2008 2009 designed to record transactions between U.S. resi dents and their direct cross-border counterparties, not NOTP.: See general nole 10 figure I.

The Financial Crisis and U.S. Cross-Border Financial Flows A 151 4. foreign official and foreign private acqUIsitIOns of Treasury securities has been Treasury bills: From June 2007 through June 2009, total foreign holdings of Treasury bills increased more than $625 billion, to Billions of U.S. dollars more than $850 billion, accounting for about two U.S. Treasury securities outstanding thirds of the total increase in foreign holdings of - 6.000 Treasury securities. More than one-half of these - 5.000 short-term Treasury securities were acquired during the turbulent market conditions last fall. In part, All 4.000 increased foreign holdings of short-term Treasury 3,000 securities reflect changes to the issuance patterns of Treasury debt last fall: Newly issued Treasury bills 2,000 accounted for much more of the increase in debt Treasury bills outstanding than has been typical in recent years 1,000 (figure 4, top panel). Nonetheless, the share of short I I term Treasury bills held by foreign investors has risen 2006 2007 2008 2009 Pen;cnt slightly over the past couple of years, from about _ Foreign holdings of U.S. Treasury securities as a 38 percent before the onset of the crisis to about 75 share of such securities outstanding 43 percent as of June 2009 (figure 4, bottom panel). 70 65 harply Reduced Purchases of Other Types u.s. 60 of Securities 55 Although foreign private investors had made rela 50 tively small purchases of Treasury securities prior to 45 the turmoil, they had made sizable acquisitions of 40 other, riskier securities. Indeed, in 2005, 2006, and 35 the first half of 2007, foreign private investors' I I acquisitions of long-term securities other than Trea 2006 2007 2008 2009 sury securities had accounted for the bulk of financial NOT!': U.S. Treasury securities outstanding are constructed as marketable U.S. Treasury debt held by the public, excluding holdings of the Federal inflows. Their purchases, on net, of these other secu Reserve System Open Market Account. rities dropped to essentially zero in the first half of SOURCE: For U.S. Treasury securities outstanding, staff estimates from U.S. Treasury, Monthly Statement of the Public Debt of the United States; 2008 and reversed to sizable net sales in the second and Federal Reserve Board, Statistical Release H.4.1, "Factors Affecting half of the year (figure 5). Foreign investors contin- Reserve Balances." For foreign holdings of U.S. Treasury securities, staff estimates from data collected through the Treasury International Capital reponing system. S. Foreign privale net purchase of U. . securities other than .S. Treasury securities. by type of security, over the past two years, these record foreign acquisi 2002-09 tions have not resulted in foreign investors acquiring Billions of U.S. dollars. annual rail: a disproportionate share of U.S. Treasury securities o Equity outstanding. As of June 2009, foreign investors were Long-term corporate debt 1.500 estimated to hold about 58 percent of the marketable [J Short-term corporate and other debt Treasury debt held by the public, a share about • U.S. government agency 1.200 unchanged from June 2006 (figure 4).4 900 Foreign holdings of Treasury securities typically 600 have been concentrated in long-term bonds and notes-that is, securities with an original maturity of 300 more than one year. However, with the onset of the + o financial turmoil, a much larger fraction of both 300 I I I I I I I I I t I 4. We constructLOtai marketable Treasury debt held by the public as 2002 2003 2004 2005 2006 2007 200S 2009 the total marketable Treasury debt outstanding and held by the public as reponed by the Momhly St.atemem of the Public Debt of the United NOTE: Shon-term corporate and other debt consists primarily of States. minus Treasury securities held by the Federal Reserve System commercial paper, negotiable certificates of deposit. and bankers' acceptances. See also general note to figure I. in the System Open Market Account.

AI52 Federal Reserve Bulletin D November 2009 ued to sell U.S. corporate and agency debt securities 6. U.S. issuance, and foreign gro's purcha es, of U. corporaLC debt. 2006-09 in early 2009 but resumed purchasing U.S. equity, especially in the second quarter. Dillion.Ii of U.S. dollars Much of the falloff in foreign purchases of other types of securities reflects markedly reduced pur U.s. issuance 300 chases of U.S. corporate debt securities: After amount ing to more than $500 billion of foreign inflows in 250 2006 and nearly $350 billion in the first six months of 200 2007, foreign private net purchases of U.S. corporate debt totaled less than $50 billion from summer 2007 150 through the end of 2008. 100 The reduction in U.S. corporate debt issuance since mid-2007 may have been a factor contributing to the 50 marked slowdown in foreign net purchases of corpo 11",,,,,, ,,,1 ,,,, ,,,,,,1,, ,, ,,,,, 1,,,,,,,, 1 rate debt securities over this period and especially in 2006 2007 2008 2009 the fourth quarter of 2008. Foreign purchases of U.S. SOURCE: For U.S. issuance. staff estimates based on data from Ihe corporate debt partly reflect acquisitions of newly Depository Trusl & Clearing Corporation and Thomson Financial; for foreign issued debt, and foreign gross purchases are corre gross purchases, staff estimates from dala collecled lhrough Ihe Treasury Internalional Capital reponing syslem. lated with U.S. corporate bond issuance (figure 6). Even as lower corporate issuance reduced foreign rate ABS increased by more than $300 billion be gross purchases of U.S. corporate debt, however, tween June 2006 and June 2007, accounting for more foreign sales of debt remained high because foreign than 40 percent of the total increase in holdings of gross sales of U.S. corporate debt partly reflect corporate debt securities. At $902 billion, foreigners' redemptions of maturing securities. According to the holdings of corporate ABS accounted for about one detailed survey data, roughly 8 percent of corporate third of their holdings of corporate debt securities by debt held by foreign investors over the past two years the end of June 2007.5 had a remaining maturity of less than one year. With By June 2008, however, foreign investors held only total foreign holdings of corporate debt amounting to $760 billion in U.S. corporate ABS, about $150 bil $2.7 trillion as of June 2007 and to $2.8 trillion as of lion less than they did the year before. In large part, a year later, redemptions of maturing debt amount to the notably lower foreign holdings in June 2008 about $225 billion in each of those years and are thus reflect sizable valuation losses on these securities: recorded in the TIC system as sales of U.S. corporate Compared with the relative stability in their prices debt by foreign residents. As new issuance of U.S. over the previous 12 months, prices of corporate ABS corporate debt slowed sharply, especially in the sec fell roughly 13.5 percent by mid-2008 (see box ond half of 2008, net sales by foreign investors may "Difficulties in Assessing Market Values of Securities have been explained, in part, by limited acquisitions during the Financial Turmoil"). The underlying sur of newly issued debt that were insufficient to offset vey data indicate somewhat lower aggregate holdings the maturing bonds in their portfolios. But at the same of these securities as well. Nonetheless, foreign inves time, net sales by foreign investors also indicated tors also appear to have continued buying some U.S. weak foreign demand for such securities, as limited corporate ABS between the two surveys. Of the $760 billion in corporate ABS held in June 2008, issuance of U.S. corporate debt largely reflected weak about $2 I 5 billion reflects securities that were not demand by investors, including foreign investors. held in 2007, including roughly $105 billion in Much of the previous foreign demand for long securities issued over the 12-month period. In con term corporate debt appears to have been for corpo trast, roughly $280 billion in individual corporate rate asset-backed securities (ABS), including sizable ABS held in 2007 was no longer held by June 2008. acquisitions of corporate mortgage-backed securities. Foreign investors did not substantially change their Although the monthly transactions data over this total holdings of short-term U.S. corporate debt period do not distinguish transactions in corporate ABS from transactions in other corporate debt securi ties, we can use information from the detailed surveys 5. The underlying survey data indicate that most of the increase in the value of total foreign investment in U.S. corporate ASS between of foreign holdings of U.S. securities to learn more June 2006 and June 2007 appears to have arisen from increased about the types of securities acquired. According to foreign holdings rather than from valuation changes: The average the survey data, foreign investors' holdings of corpo- effective price increase in these securities during that period was only about I V2 percent.

The Financial Crisis and U.S. Cross-Border Financial Flows A153 Difficulties in Assessing Market Values of Securities during the Financial Thrmoil The Treasury Inlernational Capital surveys of foreign values because of their different risk characteristics, a fact holdings of U.S. securities and U.S. holdings of foreign that makes crosschecking and verifying prices across securities collect data both at face value (or, for equity, reporters and with commercial data sources considerably number of shares) and at market value as of the survey more difficult. Furthermore, prices were more difficult to date (end of June for foreign holdings of U.S. securities obtain for some ABS-particularly those in smaller, more and end of December for U.S. holdings of foreign securi risky tranches-than for others. As market functioning lies). As part of the comprehensive process for reviewing for ABS became impaired, tracking prices became harder, the survey data, prices assigned to individual securities especially for these more risky tranches. And although are crosschecked across survey respondents and with riskier tranches tend to be smaller, they are numerous and commercial data sources to verify the assigned market in aggregate can account for a sizable portion of cross values. For securities such as Treasury securities or border positions. For example, the June 2008 survey of commonly traded U.S. equities, determining the correct foreign holdings of U.S. securities identified roughly price as of the survey dates is fairly straightforward: 8,000 individual ABS with face values of more than Because these securities trade in large, liquid markets, $25 million. These 8,000 securities accounted for roughly prices for the securities are readily available and easily three-fourths of the total face value of corporate ABS held verifiable. by foreigners. But more than 28,000 individual ABS. If we want to understand how cross-border portfolios each with a face value of $25 million or less. collectively were affected by valuation gains or losses as the financial accounted for the n:maining one-fourth of corporate ABS crisis unfolded, however, we need to be able to estimate held. A further complication has been that many ABS such valuation changes for dates other than those of the particularly those issued in the Cayman Islands and held surveys. This requirement is especially true for estimating by U.S. investors-were privately placed. with little valuation effects for foreign holdings of U.S. securities, information on the price of the securities even at issue, let because the most recent survey collected holdings in June alone on the price as of the survey date. 2008, before the intensification of the crisis in the fall of ABS price indexes can provide some guidance on how 2008. Estimating valuation gains or losses for periods ABS prices are likely to have moved between surveys, beyond survey dates is a somewhat more complicated besides providing a means to estimate more recent valua process because the composition of investor portfolios tion gains or losses. Because roughly two-thirds of U.S. may change over the period. However, foreign holdings corporate ABS held by foreign investors was floating-rate of most classes of U.S. securities such as U.S. Treasury debt. using an average of an index of floating-rate ABS. securities and equities in aggregate are similar to the such as the Barclays Capital U.S. Floating-Rate Asset composition of standard price indexes of U.S. Treasury Backed Securities Index, and an index of fixed-rate ABS. securities or of equities weighted by market capitaliza such as the Barclays Capital U.S. Asset-Backed Securities tion. Thus, to create estimates of foreign holdings of U.S. Index, is a reasonable guide to estimating current valuation securities for non survey dates, we update the survey effects. By this measure, prices for U.S. corporate ABS values of holdings with net purchases as recorded in the were little changed between June 2006 and June 2007 but monthly transactions data, and we apply aggregate price fell roughly 13 percent between July 2007 and June 2008; indexes to these estimates to adjust for valuation gains or they had declined a further 18 percent by year-end 2008 losses over nonsurvey intervals. Similarly. we can esti (figure A). Although these price declines are sizable, they mate valuation gains or losses on U.S. holdings of foreign may actually understate total foreign losses on U.S. equity and foreign debt by applying foreign equity and corporate ABS. as the indexes themselves capture price bond price indexes to our holdings of foreign securities. 1 changes only for securities that are actively traded. However, market conditions during the financial tur moil made the task of assessing market prices of securi A. Change in prices ofV.S. corporate asset-backed ties that became very thinly traded extremely difficult, securities, by type of security, 2006-09 even on survey dates. This problem was especially true for corporate asset-backed securities (ABS). for which the difficulty was compounded by the very large number of securities involved. ABS typically are issued in differ Fixed rate 100 ent tranches. Each tranche is usually relatively small. and different risk characteristics may be associated with each 90 tranche. As a result, many securities that superficially appear similar because they are issued by the same ABS 80 issuer on the same date can have very different market Floating rate - 70 t. For more detail on how 10 construct monthly estimates of securities positions accounting for net transactions and valuation changes, see Carot l ,j".,,!,,1 ,I,,! ,111."1,, ... ,.11,, 1,,1 .1 ,, 1 C. Bertaut and Ralph w. Tryon (2007). "Monthly Estimates of U.S. 2006 2007 2008 2009 Cross-Border Securities Positions," International Finance Discussion Papers 910 (Washington: Board of Governors of the Federal Reserve SoURCE: For fIXed rate, staff calculations from Barclays Capitat U.S. System. November). www.federalreserve.gov/pubslifdp/2007/9101 Asset-Backed Se<:urities Index; for floating rate, staff calculations from ifdp910.pdf. B=lays Capital u.s. Asset·Backed Securities Floating-Rate Index.

A 154 Federal Reserve Bulletin 0 November 2009 between June 2007 and June 2008. However, as with 7. Foreign official nel purchases of .S. securilies. by lype of security. 2002-09 long-term debt, the asset-backed portion of foreign holdings declined. In mid-2007, asset-backed com lJillions of U.S. dollars. annual rate mercial paper (ABCP) accounted for nearly 40 per o U.S government agency cent of foreign holdings of U.S. short-term corporate 1.000 • U.S. Treasury debt. By mid-2008, this figure had declined to about • All other 800 25 percent. Starting in the third quarter of 2008, as QIQ2 600 short-term funding markets ceased normal function 400 ing, foreign investors did decrease their overall posi 200 + tions in short-term U.S. corporate debt. Such posi o tions dropped about 30 percent between June and 200 December of 2008 and continued falling more gradu 400 ally in 2009, losing another 10 percent by June 2009. 600 Foreign private investors also slowed their net 800 purchases of U.S. government agency debt and equity I I I I I I I I I I I 2002 2003 2004 2005 2006 2007 2008 2009 in the second half of 2007, turning to net sales of these securities in 2008. However, the magnitude of NOTE: All other consists of long·term corporate debt and equity. See also general note to figure I. this reversal was considerably less dramatic than the marked slowdown in net purchases of corporate debt securities. Although concerns about the financial period, foreign official purchases of agency securities viability of Fannie Mae and Freddie Mac gained accounted for more than two-thirds of the net issu particular market attention in the summer of 2008, ance of agency debt. foreign private investors had been net sellers of The composition of foreign official inflows was agency securities since mid-2007. Foreign private little affected by the onset of financial turmoil in interest in agency debt does not appear to have been mid-2007 but changed markedly with the intensifica affected by the move in September 2008 to place tion of the turmoil in the second half of 2008. As we Fannie Mae and Freddie Mac into conservatorship, as saw with foreign private investors, official investors foreign private net sales of agency securities have made large net purchases of Treasury securities and continued thus far in 2009, though at a somewhat net sales of other types of securities beginning in slower pace than in the previous few quarters. summer 2008. However, some special factors influ Although foreign private purchases of U.S. equity enced the timing and extent of the shift in the did show some sizable swings during months of more composition of official inflows. pronounced market turmoil, foreign acquisitions, on Official net purchases of agency securities re net, were not affected to the same degree as were mained strong in 2007 and through the first half of foreign purchases of corporate debt securities. For 2008 but began to weaken as concerns about Fannie eign purchases of equity remained sizable in the Mae and Freddie Mac began to surface in July 2008. second half of 2007. And despite the sharp drop in Beginning in July 2008, most official investors ap U.S. equity prices in the fall of 2008, foreign inves peared to allow maturing issues of long-term agency tors made only limited net sales of U.S. stocks, securities in their portfolios to be redeemed without though, as we discuss in the section "Marked Slow making offsetting new purchases, resulting in a small down in Cross-Border Securities Trading" (p. A162), net decline in their holdings of agency securities. gross trading in U.S. equity was sharply curtailed. From October 2008 through the end of that year, More recently, foreign investors have returned to however, some official investors made sizable out purchasing U.S. equity. right sales of their holdings of agency securities as they intervened to support their currencies. These Portfolio hilts jor Foreign Official Investors outright sales of agency securities continued through the end of 2008 and contributed to an unusual net Foreign official investment has typically occurred outflow from official investors for the quarter. through purchases of U.S. Treasury securities, but in Official investors had also acquired increasing recent years, official investors began to acquire an amounts of other U.S. securities, primarily U.S. cor increasing amount of U.S. agency securities (fig porate stocks and bonds, in 2006 and the first half of ure 7). For the period 2005 through summer 2007, 2007. These official inflows largely reflect acquisi official purchases of agency securities accounted for tions by sovereign wealth funds willing to invest in about one-half of all official inflows. During this somewhat riskier U.S. securities. Although inflows

u.s. The Financial Crisis and Cross-Border Financial Flows A155 into such securities actually picked up in the second but made fairly sizable net sales of foreign equity in half of 2007 and the first half of 2008, they, too, the second half of 2008 as foreign stock markets reflect aspects of the financial turmoil: Official pur plunged. chases in late 2007 and early 2008 were boosted by U.S. residents' net purchases of foreign bonds the well-publicized injections of capital by some slowed notably in the first half of 2008 and reversed sovereign wealth funds into U.S. financial institutions to large net sales in the second half of that year. As as the financial crisis unfolded. with foreign purchases of U.S. corporate bonds, the So far in 2009, official inflows have remained deterioration in U.S. purchases of foreign bonds may sizable, but they continue to be concentrated in U.S. reflect, in part, weak global debt issuance since the Treasury securities. onset of the turmoil. Another similarity to the foreign sales of U.S. corporate debt is an apparent reduction Flight-to- aJety Shift · in Securities Portfolio. in U.S. demand for foreign-issued ABS. Although the u.s. of Investors majority of foreign debt securities owned by U.S. investors are conventional debt securities issued by U.S. purchases of foreign securities are outflows in foreign governments and corporations, a sizable por the financial account and thus typically offset some of tion of the increase in U.S. investors' holdings of the financial inflows recorded through foreign official foreign long-term debt between 2005 and the onset of and foreign private purchases of U.S. securities. U.S. the crisis came from increased purchases of foreign investors had acquired increasing amounts of foreign issued ABS.6 Of the $720 billion in foreign private stocks and bonds from 2004 through the first half of sector debt held by U.S. residents at year-end 2005, 2007. They continued to acquire foreign securities about $131 billion, or roughly 18 percent, consisted through the first half of 2008, though at a reduced of foreign-issued ABS. By the end of 2007, total pace, but began to sell foreign securities in the holdings of foreign private-sector debt had grown to summer of 2008 (figure 8). These record sales of $1.2 trillion, and holdings of foreign ABS had more foreign securities in the second half of 2008 provided than doubled, increasing to $330 billion, which a financial inflow to the United States, making up, in accounted for 27 percent of foreign private-sector part, for the gap between the current account deficit debt held. and foreign purchases of U.S. securities evident in By December 2008, U.S. investors' holdings of figure 1. foreign private-sector debt had declined to $945 bil Increased risk aversion and an interest in reducing lion, and holdings of foreign ABS had decreased to foreign exposure (a form of flight to safety) are likely $231 billion. As with foreign holdings of U.S.-issued motivations for the pullback in U.S. investors' hold corporate ABS, much of the decline in the market ings of foreign securities, especially investments in value of holdings of foreign ABS between 2007 and foreign equity, which are the bulk of U.S. external 2008 reflects sizable estimated valuation losses on securities portfolios. U.S. investors continued to this debt: Between December 2007 and December acquire foreign equity through the first half of 2008 2008, prices of these securities are estimated to have fallen roughly 25 percent. 8. U .. net purcha~es of foreign securities, by type of U.S. residents' holdings of foreign-issued short security, 2002-09 term debt also grew rapidly in the years before the crisis, reaching $368 billion by December 2006. Billions of U.S. dllilars. annual mlc o Much of this increase likely reflected increased hold Equity 600 ings of foreign ABCP: The share of commercial paper • Long-tenn debt 500 • Shon-tenn securities Q2 (ABCP and unsecured) in these holdings increased 400 from about 15 percent in December 2003 to almost 300 50 percent in December 2006. This fraction stayed 200 I~ 0 6. Much of this foreign-issued ABS was backed, at least in pan, by 100 U.S. loans; this characteristic of foreign-issued ABS was especially 200 true for U.S. holdings of ABS issued through the Cayman Islands, 300 which amounted to nearly $200 billion in December 2007. For further 400 information, see Daniel O. Beltran, Laurie Pounder, and Charles I I I I I I I I I I Thomas (2008), "Foreign Exposure to Asset-Backed Securities of 2002 2003 2004 2005 2006 2007 2008 2009 U.S. Origin," International Finance Discussion Papers 939 (Wa~hing­ ton: Board of Governors of the Federal Reserve System, August), NOTE: See general note to figure I. www.federalreserve.gov/pubs/ifdpI2008/939/ifdp939.pdr.

A156 Federal Reserve Bulletin 0 November 2009 fairly constant at about 50 percent over 2007 and I U. Banking offices in the niled Stales: Bank • ~lwn gross cross-border claims on foreigner. and their own 200S, while total holdings of short-term foreign debt gross cro s-bordcr liabilities to private foreigners dropped. Overall, from the onset of the crisis in 2004-09 ~ , August 2007 through March 2009, U.S. holdings of short-term foreign debt declined by about one-third. Billions of U.S. dollar ... With an easing of tensions in financial markets, an improved environment for foreign bond issuance, and 3.500 a recovery in global equity markets so far this year, U.S. residents have resumed purchases of both for 3.000 eign stocks and bonds. 2,500 BANKING DEVELOPMENTS 2,000 Banks' cross-border positions (which include some positions of securities brokers) are quite volatile, and 1,500 large net flows for a gi ven month are not unusual. Over longer periods of time, however, banking usu 2004 2005 2006 2007 2008 2009 ally contributes little to net U.S. financial flows, as was the case for the period 2004 through early 2007 June 2009, new net lending abroad by banks in the (figure 9, solid bars). However, since mid-2007, United States cumulated to about $4S0 billion. cross-border banking flows have exhibited unusual This pattern was driven mainly by significant U.S. patterns that reflect features of the financial crisis. dollar liquidity needs of European banks. Through Even as the crisis slowed the growth in gross much of the crisis, banks located in the United States positions, net changes in positions showed a substan played a primary role in funding dollar needs abroad. tial increase in net lending abroad, or outflows, During the height of the crisis in the fall of 200S, between mid-2007 and mid-200S. These outflows however, foreign central banks provided dollars, were followed by a large inflow between September drawn from their swap lines with the Federal Reserve, and December 200S as previous net lending was to foreign banks directly. This section will elaborate retracted; finally, renewed sizable outflows from Janu on these unusual flows from banking and the official ary to June 2009 reflected a resurgence in net lending. swap lines (figure 9, white bars). Over the whole period from August 2007 to 9. .S. cro 's-horder net banking flows for banks' own Background on Cross-Border Banking accounts, and central bank swap flows and other U.S. Positions fficial asset flows. 1004-09 Gross cross-border positions reported by banks in the BilliolL,\ of u.s. dollars United States are sizable: Gross cross-border claims o• Net banking !lows for banks' own accounts and liabilities each represent just more than one-fifth, Central bank swap !lows and other 600 U.S. ofticial asset !lows respectively, of U.S.-owned assets abroad (claims) 400 and foreign-owned assets in the United States (liabili 200 ties) in the U.S. international investment position. At + the end of 2007, these positions amounted to about o $3.S trillion in gross claims on foreigners and about 200 $4.2 trillion in gross liabilities to private foreigners. Most of these positions, about SO percent on each 400 side, are banks' own claims and liabilities. We report 600 banks' own gross positions in recent years (figure 10). I I The remaining 20 percent of the positions are banks' 2004 2005 2006 2007 2008 2009 holdings of short-term securities and deposits on NOTE: Semiannual values nO! annualized. A positive value indicates a net behalf of customers, which are discussed elsewhere in financial innow to the United Stales, and a negative value indicates a net financial outflow from the United States. this article.7 SOURCE: For net banking !lows for banks' own accounts, Slaff estimates from data collected through the Treasury Internalional Capital reponing system; for central bank swap !lows and other U.S. official asset !lows. 7. Changes in customers' shon-term securities ponfolios are dis Federal Reserve Board, Stalistical Release H.4.I, "Factors Affecling Reserve cussed earlier in the section "Flight-lo·Safety Shifts in Pot1folios Balances." during the Crisis" (p. A 148). The decline in customers' banking

The Financial Crisis and U.S. Cross-Border Financial Flows A 157 II. Banking orfice 111 the United Stares: Gross cross 12. Banking office in the Unitcd States: Gross ero horder claims on foreigners and gross cross-border border claims on foreigners. gr s cross-b rdef liabilities to privatc foreigner~. by nati nality f parenl liabilities to private foreigners. and net position for bank. 2004-08 . .-owned offices and for European-owned office . 2004-09 [lillion> of U.S. doll"" J3illions of U.S. doll ... • U.S.-owned o • Europc:an-owned 4.000 U.S.-owned offices All other 3.500 Net borrowing 2.000 1.800 3.000 1.600 2.500 1.400 2.000 1,200 1,500 1.000 1.000 800 500 600 2004 2005 2006 2007 2008 2009 European-owned offices Billions of U.~. dollars Banks' own cross-border claims consist mainly of 1.800 • Net borrowing deposits with foreign banks, loans, resale agreements, Net lending 1.600 and their holdings of foreign certificates of deposit (CDs) and short-term securities. Banks' own cross 1,400 border liabilities consist mainly of deposits by for 1,200 eigners and repurchase agreements (repos). A substan tial fraction-more than two-thirds-of banks' own 1.000 cross-border positions are with affiliated banking 800 offices abroad (that is, intercompany positions). By definition, banking offices located in the United 600 States include both U.S.-owned banks and U.S. I ! 2004 2005 2006 2007 2008 2009 offices of foreign-owned banks. Therefore, for foreign owned banks in the United States, affiliated offices abroad include the parent office. Gross U.S. cross Increased Net Lending through Mid-200B border positions are roughly split between U.S. owned banks and offices of banks headquartered in Normally, banks generate little net flows, meaning Europe (figure 11). Banking offices with headquarters little new net borrowing or lending, because banks' elsewhere (primarily Asia, Canada, and Australia) gross cross-border liabilities to foreigners and gross account for less than 10 percent of gross positions. cross-border claims on foreigners typically grow at For several years before the crisis, U.S.-owned about the same rate. However, between mid-2007 and banks, as a group, were substantial net borrowers mid-2008, a substantial gap opened between the paths from abroad, which means that their liabilities ex of liabilities and claims (figure 13, top panel). New ceeded their claims (figure 12, top panel, shaded net lending, by our definition, occurs when claims area). However, this position was fairly stable, with rise relative to liabilities, regardless of the absolute little new net borrowing or lending over the 2004 to position of claims and liabilities initially. Figure 13 2006 period. Offices of foreign-based banks, which illustrates new net lending by showing the cumulative are primarily European, maintained a more neutral changes in claims and liabilities. At its peak in early cross-border position in the pre-crisis period: Claims fall of 2008, this gap cumulated to about $430 billion were nearly equal to liabilities (figure 12, bottom in new net lending abroad by banks located in the panel). These positions also created little new net United States since January 2007, about $390 billion borrowing or lending before 2007. of which occurred between August 2007 and August 2008. The gap then narrowed dramatically through the fall of 2008, retracting nearly 80 percent of that positions is discussed in a later section, "Reductions in Foreion Exposure in Securities. Banking, and Nonbank Positions" (p. A 160). lending, but opened again beginning in January 2009,

A 158 Federal Reserve Bulletin 0 November 2009 13. Banking oftiecs in the nited State': Cumulative 14. et nows of .S.-owned and European-owned banks change since 2004 in gross ero s-border claims and of banks with owner of other nationaliLie . on foreigner and in gros' cross-border liabilities lO Augu t 2007 lhrough August 2008 private foreigners. ,Uld new net borrowing or lending, for all oftices and for European-owned oftices. Dilliolls or u.s. dollars 2004-09 • European·owned U.S.-owned 200 o Billion. ." of U.S. dollars All other 100 All offices + 1.800 o New net borrowing New net lending 1.600 100 1.400 200 1.200 300 1,000 400 800 500 600 400 NOTE: A positive value indicates a net financial innow to the United 200 States, and a negative value indicates a net financial outnow from the United States. 2004 2005 2006 2007 2008 2009 European-owned offices Billion.~ oi .s. doll:1rs structured investment vehicles (SIVs). These vehicles New net borrowing 1.000 issued hundreds of billions of dollars of ABS, includ New net lending ing ABCP, into the U.S. market. When ABCP markets 800 froze in the fall of 2007, European banks not only lost a source of new funding, but also needed to payoff 600 the commercial paper and medium-term notes matur ing throughout late 2007 and early 2008 that could 400 not be rolled over in the market.8 Because many of the assets backing the commercial paper were illiq 200 uid, European banks needed other sources of U.S. dollars. This need added substantially to the demand for dollars by European banks at a time when liquid ity was at a premium and financial markets, including foreign exchange markets, were under stress from cumulating to about $435 billion in new net lending many angles. between January and June 2009. The notion of a dollar liquidity crunch in Europe is supported by the fact that net lending to Europe European-Owned Banks during the first year of the crisis was widespread across many banks, whereas banking flows are usu The increased net lending abroad between mid-2007 ally dominated by the few largest banks. The U.S. and mid-2008 is mainly attributable to U.S. offices of offices of 30 banks each lent more than $10 bi Ilion European-owned banks lending to their affiliated abroad, on net, between August 2007 and August offices in Europe. Although U.S. banking offices with 2008,9 Of those banks, 22 were European owned, and European parents make up less than one-half of U.S. all but 4 had sponsored SPVs. gross cross-border positions, their increased lending more than explains the overall pattern for the first U.S.-Owned Banks year of the crisis (figure 13, bottom panel). European owned offices in the United States generated an If Europe had such strong demand for dollars, why outflow of more than $450 billion over the first year were U.S.-owned banks not also lending to Europe? of the crisis (figure 14). Furthermore, almost all of that new lending was to affiliated offices, often the 8. Allhough the ABS were liabilities of the SPVs and not of lhe parent office. banks themselves, most banks chose, as a maner of reputation, to In the several years prior to the crisis, many intervene to support the SPVs they had created. 9. [n this analysis, securities brokerage arms that report separately European banks directly or indirectly sponsored more (for example, J.P. Morgan Worldwide Securities Services) are counted than 100 special purpose vehicles (SPVs), including as separate banks.

The Financial Crisis and U.S. Cross-Border Financial Flows A 159 15. Summed nel flow' and gross po itions of U.S.-owned did not have access to borrowing from the Federal banks, August 2007 through August 2008 Reserve early in the crisis and likely turned to their own foreign offices instead for needed cash. Billions of U.S. dollars The group of U.S.-owned banks that generated Summed net nows of individual U.S.-owned banks - identilied as net borrowers, and of indi vidual gOO $235 billion in outflows, or net lending, during the U.S.-owned banks identified as net lenders first year of the crisis had both increasing gross 600 Net borrowers cross-border claims and decreasing gross cross-border • Net lenders 400 liabilities (figure 15, bottom panel). Looking at each bank individually suggests that this group encom 200 + passes two very different sets of banks in terms of o their situation and behavior during the crisis. One set 200 had increasing gross claims abroad over the first year Aug. 2007-Aug. 2008 of the crisis and roughly flat gross liabilities. In 400 J particular, these banks increased their gross claims on L-___________________________ unaffiliated foreigners during this period, suggesting Billions of U,S. dollars that they were lending to European banks and not just Gross positions of U.S.-owned banks identified as their own offices abroad. Such banks presumably had net lenders o 700 sufficient liquidity at home to enable them to fulfill Net lending some of the dollar demand in Europe. 600 In contrast, a second set of U.S.-owned banks and brokers started from a large net borrowing position 500 (meaning that their liabilities to foreigners were greater than their claims on foreigners) and then saw 400 Liabilities their gross cross-border liabilities plummet nearly 50 percent during the first year of the crisis, which 300 also generated outflows. If these institutions were I • I I I among those in which the market lost confidence, A SON D J FMAMJJA 2007 200S such that foreign counterparties were unwilling to continue lending to them, then these U.S.-owned NOTE: For summed net nows, a positive value indicates a net financial innow to the United States, and a negative value indicates a net financial banks and brokers would have been forced to payoff out now from the United States. The ouUlows from net lenders shown in the their liabilities to foreigners. This situation is a plau top panel reneet the change in gross positions shown in the bottom panel. sible explanation for the data pattern. Indeed, this set includes some institutions that eventually required The net position of U.S.-owned banks changed little substantial government rescues or entered bank during the first year of the crisis, generating a small ruptcy. When only net flows are considered, the data net inflow. But this result obscures the many ways for these two very different sets of U.S.-owned banks that cross-border flows of U.S.-owned banks re are observationally equivalent. Although only one set sponded to the crisis. Some U.S.-owned banks actu of banks actually lent more abroad, both sets pro ally did lend abroad-as much as $235 billion during the first year of the crisis (figure 15, top panel). duced net outflows, which are generally referred to as net lending. However, those amounts were more than offset by about $270 billion in inflows from other U.S.-owned During the first year of the crisis, many of the institutions that were net borrowers. This latter group depository institutions that lent abroad (or generated of U.S.-owned banks appears to have borrowed from outflows), both U.S.-owned and European-owned foreign affiliates to shore up the liquidity of the parent offices, also borrowed from the Federal Reserve's bank, similar to the behavior of the European-owned discount window, which included use of the Term banks. Presumably their need for liquidity at home Auction Facility. But even among those banks, aver outweighed the profit to be gained from lending age borrowings from the discount window during that abroad. A majority of the $270 billion in inflows period equaled at most 10 percent of their net lending generated by these U.S.-owned net borrowers was abroad, suggesting that the Federal Reserve was not attributable to securities brokers. These institutions the primary source of those funds.

A160 Federal Reserve Bulletin 0 November 2009 Crj is JTltel1s~fication.: September to that borrowing, possibly because more funds were December, 2008 available at home from the Federal Reserve at the height of the crisis. Starting in September 2008, however, the Federal Reserve began to playa key role in providing dollar Gradual bnprovement in 2009 liquidity abroad. In response to the severe dollar shortage, the Federal Reserve dramatically increased As the tone of interbank markets began to improve the availability of dollars to foreign central banks slowly during the winter, foreign central banks de through liquidity swap facilities. Outstanding amounts creased their drawings on the swap lines with the drawn on the swap lines reached $288 billion in Federal Reserve, leaving $310 billion outstanding at September, $534 billion in October, and a peak of the end of March and just $114 billion at the end of $554 billion at the end of December 2008. More than June. The decline in the swaps is recorded as an three-fourths of these funds were drawn by central inflow for the United States as the Federal Reserve banks in Europe. decreases its claims on foreign central banks. Pri vate Because of the swap lines, the foreign banks that banking offices in the United States (this time, more had been borrowing heavily from their U.S. offices U.S. and Asian banks than European banks) stepped were able to obtain dollars directly from their own back in to provide dollar liquidity abroad (figure 16). central banks. In response, the U.S. offices of many of Between January and June of 2009, net bank lending those foreign banks were able to decrease their lend abroad increased almost dollar for dollar with the ing position to their parents, receiving a flow of funds decline in the swaps, an indication that the strength of back into the United States between September and demand for dollar funding abroad was undiminished December of 2008. Specifically, European-owned but that banks regained the ability to provide that banks accounted for inflows of about $290 billion funding through interbank markets in the first half of over this period (figure 16). 2009. The cross-border flows of U.S.-owned banks also Overall, cross-border bank flows reflected the crisis showed the severity of the crisis during this period. through the channeling of liquidity "home" to protect U.S.-owned banks that had been lending early in the the parent bank, with European banks generating by crisis stopped lending. Meanwhile, nearly all securi far the strongest net flows from U.S. offices in order ties brokers, even those that had been able to borrow to meet extraordinary demand for dollars in Europe. from affiliates earlier in the crisis, generated large This channeling of liquidity and the subsequent outflows as their borrowings from foreigners col breakdown in interbank markets, failure of banking lapsed. These events resulted largely from the break institutions, and intervention of central banks re down in the market for repos, an important source of flected concerns over risk similar to those we saw in funding for many securities brokers. Finally, U.S. the cross-border securities flows. These characteris owned depository institutions that had been borrow tics of the crisis are also apparent in the contraction of ing from their foreign offices abroad also decreased gross banking positions, discussed in the next section. 16. el nows of U.S.-owned and European-owned banks and of banks with owners of other nationalities. eptember 2008 through June 2009 REDUCTION IN FOREIGN Expo URE fN SECURITIES, BANKING, AND NONBANK Dill ions of u.s. dollars POSITIONS • European-owned • U.S.-owned 800 As discussed earlier, increased risk aversion during o All other 600 the crisis led to notable flight-to-safety flows in securities portfolios, including net sales of foreign - 400 assets by U.S. investors and net sales of riskier U.S. - 200 + assets by foreign investors, as well as flows due to o banks channeling liquidity "home." Flows, of course, 200 represent changes in positions, so these movements imply a broad reduction in outstanding cross-border - 400 Jan.-June. 2009 positions-in other words, a retraction of foreign 600 exposure. Perhaps surprisingly, however, such reduc tions are significant only in banking and certain other NOTE: See nOle 10 figure 14. nonsecuri ties positions.

The Financial Crisis and U.S. Cross-Border Financial Flows A 161 17. Foreign holdings of .S. ecurilies adjusted for 18. .S. holdings of foreign securitie adjusted for . foreign nel acquisitions. ami such holdings 01'0 net acquisition .. and such holdings also adjusted for adju led for valuation changes, by type of security, valuation changes, by rype ofccurity. 2005-09 2005-09 l3illions of U.S. doll"" Billions of U.S. dollars Foreign holdings adjusted for foreign net _ U.S. holdings adjusted for U.S. net acquisitions - acquisitions 16.000 o 9.000 o Equity o Equity t4.000 • Debt 8.000 Corponlle debt 7.000 U.S. government agency t2.000 • U.S. Treasury 6.000 10.000 5.000 8.000 4.000 6.000 3.000 4.000 - 2.000 2.000 I !I : 1I1I ! I ! ~ i i ! I 1.000 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Billions or u.s. dollars Billions or u.s. dl,llars Foreign holdings adjusted for foreign net U.S. holdings adjusted for U.S. net - acquisitions and valuation changes 16.000 .- acquisitions and valuation changes 9.000 n Equity 14.000 o Equity 8,000 n Corporate debt • Debt 7.000 U.S. government agency 12.000 • U.S. Treasury 6.000 to.OOO 5.000 8.000 4.000 6.000 3.000 4.000 2.000 2.000 1.000 2005 2006 2007 2008 2009 NOTE: Data extend through June 2009. NOTE: Data extend through June 2009. Limited Effects of Recenl Sales on Overall ered in light of the sizable valuation losses foreign Cross-Border Securities Holding. investors have faced on their cross-border securities portfolios (figure 17, bottom panel). While foreign Although the financial crisis had a marked effect on net acquisitions of corporate and agency securities the composition of securities flows, the size of cross left foreign holdings of these securities about un border positions is sufficiently large that the pullback changed from summer 2007 through year-end 2008, in cross-border securities holdings resulting from the adjusting these holdings by incorporating valuation record cross-border securities sales last fall shows up losses shows a much more pronounced decline. more as a slight flattening out of securities holdings Cumulative valuation losses on foreign holdings of than as an outright reduction in cross-border expo these securities from mid-2007 through the end of sure. Foreign holdings of U.S. corporate equity, cor 2008 were about $1.6 trillion, or roughly 23 percent porate debt, and agency securities moved down some of their pre-turmoil value. The recovery in equity what in the second half of 2008, but, on net, total markets and in corporate bond prices in the first half foreign holdings of securities other than Treasury of 2009, however, reversed about $200 billion of securities were little changed from their pre-turmoil these losses. levels (figure 17, top panel). And total foreign hold We provide a similar analysis of the data on U.S. ings of Treasury securities rose by a more than holdings of foreign stocks and debt securities (fig offsetting amount, so that total foreign holdings of ure 18). A slight reduction in U.S. holdings resulting U.S. securities actually continued to rise slightly from U.S. net sales of foreign securities is evident in through the second half of 2008 and in 2009. the second half of 2008, but this pullback in cross These limited reductions in foreign holdings of border positions was just about reversed in the first U.S. securities are put into perspective when consid- half of 2009 (figure 18, top panel). However, U.S.

Al62 Federal Reserve Bulletin 0 November 2009 investors faced considerable valuation losses on their 20. Cros -border repurcha e agreements. by type of posiLion, 2004--09 cross-border holdings, especially their holdings of foreign equity in 2008 (figure 18, bottom panel). Total Billions (If U.S. dollars valuation losses are estimated at nearly $2.5 trillion, or nearly 40 percent of the value as of June 2007. 1.200 Most of these losses are valuation losses on foreign equity, and although foreign equity markets recovered 1.<XXl some in the first half of 2009, we estimate that by 800 June 2009, foreign portfolios of U.S. investors had recovered only to about where they were in early 600 2006. 400 Marked lowdown in Cross-Border Secl/.rities 200 Trading I I 2004 2005 2006 2007 2008 2009 Although securities positions were little changed by cross-border net sales, gross cross-border trading in U.S. securities was sharply curtailed in the fall of peaks of early 2008 by about 15 percent for claims 2008, a further sign of investor caution. In a typical and 30 percent for liabilities (see figure 10). month, total foreign gross purchases and sales of U.S. A major contributor to the decline in banking securities greatly exceed net purchases (figure 19). positions was the particularly striking drop in repos, From 2005 through mid-2007, gross cross-border an important form of short-term interbank lending trading, especially of equities and Treasury securities, (figure 20). Cross-border repos are primarily under grew rapidly, and trading remained at high levels taken by securities brokers (included as reporters in even after the onset of the financial crisis in the the banking data). The cross-border repo market summer of 2007. With the intensification of the crisis flattened out in the first three quarters of the crisis but in October 2008, however, gross trading fell back came under further stress with the collapse of The sharply to the levels last seen in 2005. Trading has Bear Stearns Companies Inc. in March 2008 as fears been slow to recover but has picked up a bit in recent about counterparty risk increased. The decline in months, at least with respect to Treasury securities. repos accelerated dramatically with the collapse of Lehman Brothers Holdings Inc. in September 2008. Drop-Off in Gross Banking Positions From March through December of 2008, cross-border repo positions shrank 47 percent on the claims side In contrast to the limited pullback in securities posi and 57 percent on the liabilities side. Meanwhile, tions, the decline in cross-border banking positions other banking positions fell steeply in September and was substantial. Gross positions declined from their October of that year as hedge fund liquidations and concurrent declines in derivatives trading contributed 19. F reign gross purchases and foreign gross sales of to a drop in brokerage balances, which are included in .. long-term se urilics, and foreign nel purchaslls deposits. of such secUl; ties, 2000--09 Decline ill Nonbank Positions Billions or u.s. dollars This section addresses pullbacks in positions, exclud 3.500 ing securities and direct investment, of nonbank 3,000 entities located in the United States (including indi 2.500 viduals).'o In general, the gross positions of nonbank 2,<XXl entities declined during the crisis as firms and inves tors brought money home, reducing cross-border 1.500 1.<XXl 500 JO . Positions of nonbank entities are compiled by the Bureau of Foreign net purchases + Economic Analysis (BEA), combining data reported on the TIC ~I'--""\ ~ o system's C form, which collects positions of U.S. nonbank firms with unaffiliated foreigners, with surveys conducted by the BEA, which I I I I I I 2001 2003 200S 2007 2009 collect positions with affiliated foreigners, plus additional estimates by BEA staff.

The Financial Crisis arul U.S. Cross-Border Financial Flows A 163 21. Cross-border loan and bank deposit positions of of negotiable CDs are also included in this category. nonbanks, by type of posilion. 2006-09 Liabilities (loans to the United States) fell about 10 percent in 2008 and a little further in early 2009. Billion.'> of U.S. dollars Claims (loans to foreigners and deposits in foreign Liabilities 1.800 banks) fell more steeply-almost one-third in 2008. t.600 Cross-border commercial positions also exhibited 1.400 declines. These positions are primarily trade payables and advance receipts (liabilities) and trade receiv 1.200 ables and advance payments (claims). The gross level - - t.ooo QI Q2 of commercial positions (not shown) declined about - - 800 10 to 20 percent in the second half of 2008 with the - - 600 fall in trade and the tightness of trade financing. - - 400 Cross-border positions of financial intermediaries - - 200 that are neither banks nor securities brokers also fell I I I II II I dramatically during the crisis.14 However, as with 2006 2007 2008 2009 securities, the financial crisis exacerbated or high llillion....,: of U.S. dollars Claims lighted difficulties in measuring certain nonbank 1.800 financial flows. This circumstance was particularly - - 1.600 true for positions of the many financing vehicles that - - 1.400 QI Q2 were not full-fledged firms in the sense of having - - 1.200 employees or physical headquarters. During the cri - - 1.000 sis, the Bureau of Economic Analysis discovered that - - 800 many SPVs or SIVs located in offshore financial - - 600 centers had affiliated vehicles in the United States that - - 400 issued securities and loaned the proceeds to the - - 200 offshore entities. J 5 Such direct loans are difficult to I I II II I survey. The size of the cross-border position resulting 2006 2007 2008 2009 from these loans is estimated by the amount of NOTE: Liabilities are loans made 10 U.S. resident firms or individuals by securities issued by the vehicles known to have this foreigners, mostly foreign banks; claims are loans 10 foreigners and deposits in foreign banks made by U.S. resident firms or individuals. structure. When markets for ABCP froze in the fall of SOURCE: Data collected through the Treasury International Capital 2007, the U.S. vehicles were unable to roll over reporting system, combined with balance of payments data from the Bureau of Economic Analysis. short-term debt securities. To payoff maturing secu rities, the U.S. vehicles had to reclaim the funds they investments. This decline was a reversal of the trend had loaned to the offshore entities, thereby creating an for both U.S.-residents' investments abroad and for inflow of $170 billion in the second half of 2007 and eign investments in the United States." a significant decline in the level of cross-border The decrease is evident in the data on the cross claims. Overall, as markets deleveraged and some border loan and bank deposit positions of nonbank vehicles ceased to exist, cross-border claims fell firms and individuals (figure 21).t2 Here, liabilities nearly 40 percent, and liabilities about 23 percent, are loans made to U.S. entities by foreigners, mostly from their peaks in 2007 (figure 22). foreign banks (figure 21, top panel). In the other direction, claims are loans to foreigners and deposits in foreign banks made by U.S. entities (figure 21, bottom panel). Cross-border holdings by nonbanks 13 positions that use a U.S. bank as a custodian are reported in the TIC II. The decline in foreign holdings of U.S. short·term securities data and are included in the financial account as positions reported by and the decrease in holdings of foreign commercial paper by U.S. banks. The positions held directly with foreign counterparties are not residents are discussed earlier in the section "Flight·to-Safety Shifts in included in the TIC data; in the financial account, these are positions Portfolios during the Crisis" (p. A 148). with unaffiliated foreigners reported by U.S. nonbanking concerns. 12. The term loans is used broadly to denote other financial 14. Examples of such entities include insurance firms, financial positions that are not explicitly securities, negotiable CDs, deposits, management firms, and securitization vehicles. direct investment, or commercial (that is, trade). IS. Intercompany positions are generally considered direct invest· 13. This category includes both positions for which firms use a U.S. ment, which is not discussed in this article, except for non·equity bank as a custodian or servicer of their foreign accounts and positions positions between financial firms such as banks, securities brokers, and that U.S. firms enter into directly with firms or banks abroad. The financing vehicles.

AI64 Federal Reserve Bulletin 0 November 2009 22. r ss-border posiliom; of nonbank linanciaJ investment in securities other than those of the home intermediaries. by type of p ilion, 2006-09 country of the investor. Similar to the pattern of cross-border investment !Jillions or u.s. dollars for U.S. investors, investors in both the euro area and Liabilities the United Kingdom had made sizable and growing 600 cross-border securities purchases in the years leading 500 up to the financial turmoil. In both regions, home investors also reduced their net purchases of "for 400 eign" securities (that is, securities issued outside of 300 the home country) following the onset of the crisis in 2007 and made large net sales of such securities in the 200 I UI QI Q2 second half of 2008 (figure 23, top and middle 1-,1111.11 11,11 panels). As financial markets stabilized more recently, these net sales again reversed to show net purchases, '00 though the reversal through June 2009 is relatively 2006 2007 2008 2009 small for the euro area. Financial flow data for Japan, Claims lliUions of U.S. dollar." however, do not show a similar pullback from foreign 600 investment (figure 23, bottom panel). Instead, Japa - - 500 nese investors acquired increasing amounts of foreign securities through the first half of 2008, suggesting - - 400 that the financial crisis may have affected U.S. and QI Q2 European investors sooner and to a greater extent - - 300 than it did Asian investors. And although global - -- 200 equity prices fell sharply in the second half of 2008, Japanese investors increased their purchases of for - - 100 eign equity, though they did reduce their purchases of I I I II I I foreign bonds. 2006 2007 2008 2009 We also look at foreign investment in the euro area, NOTe: The majorily of these claims and liabilities are in the fom1 of the United Kingdom, and Japan to see if the data for intercompany balances. Such balances represent transactions between firms in a direct investment relationship. but the transactions are excluded from these countries show patterns similar to that for the direct invesunent data when both fim1S are classified in the flOance industry. United States-that is, reduced foreign purchases of and they are excluded from banking data when the firms are neither banks nor securities brokers. riskier securities issued by these countries. The pat SOURC(: Bureau of Economic Analysis. tern of a flight to safety by foreign investors does seem to be present in the euro-area data: We see a marked slowdown in purchases of euro-area equities by foreign investors during the onset of the crisis in CONCLUSION AND GLOBAL OVERVIEW: the second hal f of 2007 and a shift to large sales of SlMILAR PORTFOLIO SHIFTS IN OTHER euro-area equity during the intensification of the COUNTRY STA Tl TICS? crisis in the second half of2008 (figure 24, top panel). U.S. cross-border financial flows indicate pronounced The euro-area data also show reduced foreign pur flight-to-safety swings in the composition of securi chases of euro-area bonds, especially in the second ties purchased during the financial crisis, with foreign half of 2008. Detail underlying this slowdown indi investors, on net, selling U.S. securities other than cates offsetting purchases of euro-area sovereign U.S. Treasury securities and U.S. investors, on net, bonds and sales of other, presumably riskier, euro selling foreign securities, especially in the second half area debt securities. In contrast, foreign inflows into of 2008. We look next to see whether such shifts in money market instruments jumped sizably in the cross-border securities purchases are also evident in second half of 2008. These inflows, concentrated in financial flow data for the euro area, the United September and October of 2008, were mostly in the Kingdom, and Japan. And although we did not see form of increased foreign purchases of short-term much evidence of a pullback in cross-border securi euro-area government securities, consistent with for ties investment relative to the size of cross-border eign investor demand for safer or more-liquid invest holdings in the U.S. data, we consider whether data ments during the intensification of the financial crisis. for these countries indicate a global pullback in The Japanese data also suggest flight to safety, as they

u.s. The Financial Crisis and Cross-Border Financial Flows A 165 23. ero s-border portfolio investment: Domestic net 24. eros -border portrolio investment oreign n >t acquisitions of foreign securities for the cum area, the acquisitions or dome tic securiLic for the euro area, nit d Kingdom, and Japan. by type of ecurity. the United Kingdom. and Japan, by rype of c urity, 2002-09 2002-09 Billions uf U.S. dollars. annual mlC Billions of U.S. dollars. annual rate Eur o o a rea 1,200 _ Eur o o a rea 1.400 Equity 1.000 Equity 1.200 • Bonds and notes • Bonds and notes 1.000 800 • M ins o t n ru ey m e m n a ts rk et 600 • M ins o t n ru e m y e m n a ts rk et Q2 _ 800 QI 600 400 400 200 + 200 o + 0 200 200 400 400 600 600 I I I I I I I I I 2002 2003 2004 2005 2006 2007 2008 2009 2002 2003 2004 2005 2006 2007 2008 2009 United Kingdom BiIliOO:i of U.S. dollurs. annual rale United Kingdom ))iIIinn!'i l)l~ U.S. Jo1la.1','\, dnnual rale o 800 o 600 Equity Equity • Bonds and notes 600 II Bonds and notes 500 • Money market • Money market instruments 400 instruments 400 QI 200 300 + o Q2 _ 200 200 100 + 400 0 I I I I I I 1 2002 2003 2004 2005 2006 2007 2008 2009 2002 2003 2004 2005 2006 2007 2008 2009 _ Japan BiUiool\ of U.S. dollars. annual rate _ Japan Dillion .... of U.S. Jollar,'\, annual TalC o 400 o 600 Equity Qt Equity • Bonds and notes 350 Bonds and notes 500 • Money market instruments 300 • Money markel 400 instrumenls 300 250 200 Q2 200 100 150 + o 100 100 50 200 + o 300 I I I I I I I I I I I I I I 1 2002 2003 2004 2005 2006 2007 2008 2009 2001 2003 2004 2005 2006 2007 2008 2009 NOTE: See general note to figure I. NOTE: See general nOle 10 figure I. SOURCE: Staff estimates from balance of payments accounts as reported by SOURCE: Staff eSlimates from balance of payments accounts as reported by the European Central Bank. U.K. Office for National Statistics, and Bank of the European Cenlral Bank, U.K. Office for National Stalistics, and Bank of Japan via Haver Analytics. Japan via Haver Analytics. show net sales of Japanese equity and large inflows U.K. equity appear to have been Jess influenced by into liquid money market instruments beginning in market swings (figure 24, middle panel). The U.K. the summer of 2007 and then a switch to net sales of data also indicate continued strong foreign purchases all types of Japanese securities by foreign investors in of long-term U.K. debt securities, even in the second the second half of 2008 (figure 24, bottom panel). half of 2008. However, detai I underlying these figures Evidence of such flight-to-safety flows is less shows a shift in the composition of foreign purchases apparent in the U.K. data, as foreign purchases of that is similar to the shift evident in the euro-area data:

A 166 Federal Reserve Bulletin 0 November 2009 25. Cross-border portfolio investmem: Domestic holdings 26. TO '-border portfolio investment Foreign holdings of for~ign ecurilies adjusted for domestic nel of doml:stic securities adju ted for foreign net acquisitions for the curo area. the United Kingdom. acquisitions for the euro area. the United Kingdom. and Japan. and su h holdings also adjusted for and Japan. and 'uch holdings also adju ted for valuation ,hanges. 200--09 valuation changes. 2005-09 Billions of U,S. dollars Billions of U.S. dullars Euro area Euro area I \'000 8.000 Adjusted for foreign nel acquisilions Adjusted for domestic net acquisitions and valuation chnnges 10,000 and valuation changes 7.000 9,000 6,000 8,000 Adjusted for foreign net 7,000 - 5.000 acquisitions 6,000 - 4,000 S,OOO I ! I I 2005 2006 2007 2008 2009 200S 2006 200? 2008 2009 United Kingdom Billions of U.S. l.Iollurs United Kingdom (Jillions or u.s. dollars 4,500 - 4,000 Adjusted for foreign net acquisitions Adjusted for domestic net acquisitions and valuation changes 4,000 and valuation changes 3.500 3.500 - 3,000 3.000 - 2,500 2,500 Adjusted for domestic net acquisitions - 2,000 2.000 2005 2006 2007 2008 2009 2005 2006 200? 2008 2009 Japan llillions or u.s. dllll:trs Japan Billions of U.S. doll an; 300 250 Adjusted for domestic net acquisitions 225 and valuation changes 275 Adjusted for foreign nel acquisilions 200 and valuation changes 250 175 225 150 Adjusted for domestic net acquisitions 200 Adjusted for foreign net 125 acquisitions 175 100 t i 2005 2006 200? 2008 2009 2005 2006 200? 200S 2009 SOURCE: Staff estimates from international investment positions and SOURCE: Staff estimates from iOlernaiional inveslmenl posilions and balance of payments accounts as reported by the European Cenlral Bank, balance of payments accounlS as reponed by Ihe Europe.1O Central Bank, U.K. Office for Nalional Sialislics. and Bank of Japan via Haver Analylics. U.K. Office for National Slalistics, and Bank of Japan via Haver Analytics. Foreign investors' purchases of U.K. government industrial countries do not indicate a signi ficant pull securities picked up in the second half of 2008, while back in the overall size of such countries' cross their purchases of debt securities issued by financial border securities positions (figure 25). In the euro institutions fell sharply and remained weak in the first area and the United Kingdom, recent reductions in half of 2009. holdings of foreign securities arising from sales of But as with the U.S. data, these effects on the foreign securities (thin lines) are small relative to the composition of cross-border financial flows in other size of holdings and compared with the actual move-

The Financial Crisis and U.S. Cross-Border Financial Flows A167 ments in investment positions incorporating valuation that investors are making renewed purchases of changes (thick lines). And the reduction in foreign riskier foreign securities such as equities and that holdings of Japanese securities arising from foreign purchases are no longer concentrated in safer and sales of such securities since mid-2008 also is quite more-liquid short-term government debt securities. small, especially relati ve to valuation losses incurred Increased cross-border interbank lending and the con on these holdings (figure 26). current decline in central bank swaps indicate that Similarly, the fall in cross-border banking activity banks are again able to provide funding through evident in the U.S. data was mirrored by declines in interbank markets. However, cross-border data to banking activity around the globe. The external (that date also indicate some longer-lasting effects of the is, cross-border) claims of all banks located in coun financial crisis. The slow recovery in interbank repo tries reporting to the Bank for International Settle positions and still-subdued gross cross-border securi ments fell about 8 percent between March and ties trading suggest continued investor caution. More December of 2008.16 Declines early in the year were over, many of the institutions directly affected by the concentrated in the United States and the United crisis-SPVs and SIVs active in the issuance of Kingdom, but in the fourth quarter, sizable drops ABS-were located in offshore financial centers, and occurred in the euro area, developing countries, and the unwinding of their activity and the closure of offshore financial centers as well. some of these entities have had a notable effect on the With the improvement in the tone of financial size of nonbank cross-border positions. And because markets so far in 2009, many of the unusual cross much of the pre-crisis growth in cross-border pur border financial flows generated by the financial crisis chases of corporate debt securities was in the form of appear to be reversing. U.S. and foreign data indicate corporate ABS, the disruption in corporate ABS mar kets and the curtailment of corporate ABS issuance 16. See the figure "Cross-border positions" in Bank for Interna show through as significantly reduced foreign pur tional Settlements (2009), BIS Quarterly Review, "Statistical Annex," chases of corporate debt securities. 0 table lA (Basel. Switzerland: BIS, June). p. A4, www.bis.org/publ/ qtrpdF/cqs0906.pdf.

A169 April 2010 (revises 2009 draft release, includes revised data) The 2008 HMDA Data: The Mortgage Market during a Turbulent Year Robert B. Avery, Neil Bhutta, Kenneth P Brevoort, cal area (MSA) and for the nation as a whole.4 The Glenn B. Canner, and Christa N. Gibbs, of the FFIEC also makes available a consolidated data file Division of Research and Statistics, prepared this containing virtually all the reported information for article. Cheryl R. Cooper and Christine Coyer pro each lending institution.s vided research assistance. The 2008 HMDA data consist of information reported by about 8,400 home lenders, including all The Home Mortgage Disclosure Act of 1975 (HMDA) of the nation's largest mortgage originators. The requires most mortgage lending institutions with loans reported are estimated to represent the majority offices in metropolitan areas to publicly disclose of home lending nationwide. Thus, they likely pro information about their home-lending activity. The vide a broadly representative picture of home lending information includes the disposition of applications in the United States. for mortgage credit, the characteristics of the home This article presents a number of findings from our mortgages that lenders originate or purchase during a initial review of the 2008 HMDA data. Three of those calendar year, the location of the properties related to findings are noted here. First, the 2008 HMDA data those loans, and personal demographic and other reflect the ongoing difficulties in the housing and information about the borrowers.' The disclosures are mortgage markets. Reported loan application and intended not only to help the public determine origination volumes fell sharply from 2007 to 2008 whether institutions are adequately serving their com after already falling considerably from 2006 to 2007. munities' housing finance needs, but also to facilitate A reduction in lending occurred among all groups of enforcement of the nation's fair lending laws and to borrowers regardless of race, ethnicity, or income, inform investment in both the public and private although lending for some groups declined more sectors. sharply than for others. The Federal Reserve Board implements the provi Second, the Federal Housing Administration's sions of HMDA through regulation.2 The Federal (FHA) role in the mortgage market expanded consid Financial Institutions Examination Council (FFIEC) erably during 2008. The increasing use of FHA insured loans in 2008 appears to be related to a is responsible for collecting the HMDA data and number of factors, including difficulties faced by facilitating public access to the information.3 Each private mortgage insurance (PMI) companies and September, the FFIEC releases summary tables per their pullback from the marketplace. taining to lending activity from the previous calendar Third, the data show a decline in the incidence of year for each reporting lender and aggregations of reported higher-priced lending between 2007 and home-lending activity for each metropolitan statisti- 2008.6 However, atypical changes in the interest rate environment, related primarily to widening spreads I. A deSCription of the items reponed under HMDA is provided in appendix A. 4. For the 2008 data, the FFlEC prepared and made available to the 2. HMDA is implemented by Regulation C (12 C.F.R. pI. 203) of public more than 51,100 MSA-specific HMDA repons on behalf of the Federal Reserve Board. Information about the regulation is reporting institutions. The FFIEC also makes available to the public available at www.federalreserve.gov. reports about private mortgage insurance (PMI) activity. All the 3. The FFIEC (www.ffiec.gov) was established by federal law in HMDA and PMI reports are available on the FFIEC's repons website 1979 as an interagency body to prescribe uniform examination proce at www.ffiec.gov/repons.htm. dures and to promote uniform supervision among the federal agencies 5. The only reponed items not included in the data made available responsible for the examination and supervision of financial institu to the public are the loan application number, the date of application, tions. The member agencies are the Board of Governors of the Fedeml and the date on which action was taken on the application. Those items Reserve System, the Federal Deposit Insurance Corporation, the are withheld to help ensure that the individuals involved in the National Credit Union Administmtion, the Office of the Comptroller of application cannot be identified. the Currency, the Office of Thrift Supervision, and representatives 6. Loans are reponed as higher priced in HMDA if their annual from state bank supervisory agencies. percentage interest mte (APR) spread is 3 percentage points or higher

A170 Federal Reserve Bulletin 0 April 2010 between the yields on Treasury secuntles and the Di fficulties in the housing and financial markets interest rates on prime mortgage loans, resulted in a advanced into a broad-based economic recession.8 By large number of loans being reported as higher priced December 2008, the unemployment rate had risen to in 2008 that would not have been so reported a year 7.2 percent from 4.9 percent a year earlier, and the earlier. As a result, the decline in the incidence of number of employed individuals fell by nearly 3 mil reported higher-priced lending actually understates lion during the year.9 The deterioration in household the true extent of the decline in subprime lending. income and wealth as well as fears about buying into Also the distortion led to an increase in the reporting a falling market may have weakened demand for of higher-priced loans for FHA even though it appears housing and mortgages. that FHA pricing was relatively unchanged. On the supply side, strained lending institutions, The article proceeds in seven major sections. The facing the risks posed by falling home prices and a next section briefly describes the economic environ weakening economy, were apprehensive or unable to ment in 2008. The following two sections provide an offer loans that did not have some form of govern overview of the mortgage market along several ment backing. Potential borrowers, especially those dimensions in 2008 and its evolution over time based with blemished credit histories and those seeking on the HMDA data. The fourth section discusses in "jumbo" mortgages, likely found it more difficult detail how changes in the interest rate environment than in previous years to obtain a mortgage. 10 Those affected the reporting of higher-priced lending in the with adequate credit histories but little money for a HMDA data and provides estimates of higher-priced down payment also faced a more challenging situa lending that adjusts for these changes. The fifth tion since PMI companies, which suffered large losses section analyzes the surge in government-backed in 2007 and 2008, tightened their standards and raised lending, assessing the importance of higher loan prices. t I Lenders also sharply curtailed the issuance limits and changes in pricing and coverage by PMI of second-lien loans used heavily in previous years to companies. This section also draws on industry data help finance home purchases. Partly in response to to help describe changes in the credit-risk profile of difficulties in the private market, the government government-backed loans. The sixth section describes raised the size limits on loans eligible to be purchased how the reduction in mortgage lending during 2008 by Fannie Mae or Freddie Mac and insured by the played out across different demographic groups. And FHA as well as the guarantee limit for loans backed finally, the last section presents analyses that speak to by the Department of Veterans Affairs (VA) as part of issues of fair lending. the Economic Stimulus Act of 2008. 2008: A TURBULENT YEAR MORTGAGE MARKET TREND FROM THE HMDA DATA The 2008 HMDA data reflect a sharp deterioration in economic conditions during the year. The housing For 2008, 8,388 institutions reported under HMDA: market's continued decline was reflected in the Fed 3,942 commercial banks, 913 savings institutions eral Housing Finance Agency's (FHFA) nationwide home price index, which posted a year-over-year decline of more than 8 percent by November 2008, backed securities. See Board of Governors of the Federal Reserve compared with less than 3 percent in January. At the Syslem (2009), Monerary Policy Report 10 the Congress (Washington: Board of Governors. February), www.federalreserve.gov/ same time, mortgage-related losses conti nued to monetarypolicy/mpc20090224_part I. htm. weigh on the confidence of investors and the health of 8. The National Bureau of Economic Research declared the start of financial institutions. A number of major financial the recession as December 2007. 9. Employment statistics from the Bureau of Labor Statistics; institutions either failed, merged under distress, or based on individuals 16 years or older. received government assistance. The government 10. Industry sources indicate that the dollar amount of originations sponsored enterprises (GSEs) Fannie Mae and Fred of subprime loans fell 88 percent from 2007 to 2008, to a level of $23 billion. Jumbo loans are loans that exceed the size limits set for die Mac were placed into conservatorship by the loans that Fannie Mae and Freddie Mac are permit1ed to purchase FHFA in September'? (commonly referred to as conforming loans). Available data indicate that the dollar amount of originations of jumbo loans fell 72 percent from 2007 to 2008. to a level of $97 billion. See Inside Mortgage for a first lien or 5 percentage points or higher for a junior lien than the Finance (2009), The 2009 Mortgage Market StatistiClJI Annual, Vol. J: yield on a comparable-maturity Treasury security. The Primary Market (Bethesda, Md.: Inside Mortgage Finance Publi 7. To maintain the GSEs' ability to purchase home mortgages, the cations). Treasury announced plans to establish a backstop lending facility for J I. See Mortgage Insurance Companies of America (2009), 2009the GSEs, to purchase up to $100 billion of preferred stock in each of 2010 Fact Book & Member Directory (Washington: MICA). www. the two firms, and to initiate a program to purchase agency mortgage- privatemi.comJnews/factsheets/2009-20 I O.pdf.

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A171 I. Oi tribution of reporters covered by the H me Mortgage Disclosure Act, by type of instilulion, 2006-08 2006 I 2007 I 2008 Type Number I Percent I Number I Percent I Number I Percent Depository inst;tutiolJ Commercial bank .. 3.900 43.9 3.910 45.4 3.942 47.0 Savings institution 946 10.6 929 10.8 913 10.9 Credit union .... 2,036 22.9 2,019 23.4 2,026 24.2 All. 6,882 77.4 6,858 79.7 6,881 82.0 M In o d n ep g e a n g d e e n (o t mpall . ) ' . . . . . . . . . . . . 1.328 14.9 1,124 13.1 957 11.4 Af A fil ll i ate . d . ' . . . , . ..... , .~ , ... -... 2. 6 0 7 0 6 4 22 7 . . 6 6 1. 6 7 2 5 8 2 2 7 0. . 3 3 1, 5 50 5 7 0 1 6 8 . . 6 0 All institutions 8,886 100 8,610 100 8,388 100 NOTE: Here and in all subsequent tables, components may nOt sum to totals SOURCE: Here and in the subsequent tables and figures except as noted, Fed because of rounding. eral Financial institutions Examination Council, data reported under the Home I. Subsidiary of a depository institution or an affiliate of a bank holding Mongage Disclosure Act (www.ffiec.govlhmda). company. (savings and loans and savings banks), 2,026 credit less than 300,000 loans at the peak month (June) in unions, and 1,507 mortgage companies (table 1) ,12 2008. The bottom panel of figure 1 indicates that The number of reporting institutions fell nearly 3 per refinance lending jumped at the beginning of 2008 to cent from 2007, primarily because of a relatively a level in February exceeding any month in 2006 or large decline in the number of independent mortgage companies-that is, mortgage companies that were I. Volume f home-purchase and refmance onginaLions and neither subsidiaries of depository institutions nor annual percentage raLe, by month, 2006-08 affiliates of bank or savings institution holding com 1110usalKls or loum Perce mage point.. panies that reported data, Reporting lenders submitted information on Home purchase 14.2 million applications for home loans of all types 500 in 2008, down 34 percent from 2007 and almost 8 50 percent from 2006 (table 2). Lenders also reported 4tl() information on 2,9 million loans that they had pur chased from other institutions and on 276,000 re 300 7 quests for preapprovals of home-purchase loans that 200 did not result in an application for a loan (preapproval APR 6 data not shown in table). 100 The top panel of figure 1, which shows the monthly counts of loans, indicates a downward trend in home I ! I " I , ! I , , I " I !! • , t I , , I , • ! " I , • ! purchase lending from 2006 to 2008. For instance, the fbo"",nds ur 16m I~rcenlagc mint.. 2006 peak month for home-purchase lending (in Refrnance June) was more than 400,000 loans, compared with 400 8 12. Not all mortgage lenders have to provide HMDA data. Depositories must have had an office in a metropolitan area and had assets of more than $37,000,000 at the end of 2007 to report data for 300 7 2008. For filing year 2008, 55.7 percent of the commercial banks in existence on December 31, 2008, filed HMDA data. However, the 200 filers had 93.0 percent of the total mortgage dollars outstanding on commercial bank portfolios at that time. For savings institutions, 6 70.9 percent of existing institutions holding 94.1 percent of the 100 mortgage dollars filed. For credit unions, only 25.4 percent of the institutions filed; however, these institutions held 92.5 percent of the mortgage dollars outstanding on credit union balance sheets. I , I , ' r " , " , ' 1 ,1", ,."I " t" " " ,1,1 2006 2007 2008 Independent mortgage banks needed to meet other criteria related to their dollar volume of mortgage lending, the share of mortgage lending NOTE: The data are monthly. Loans are first-lien mongages for site-built of their total lending, and their lending in metropolitan areas to be properties and exclude business loans. Annual percentage rate (APR) is the eligible for reporting. There is no comprehensive list of independent average monthly rate for a 30-year fixed-rate mortgage from the Primary mortgage lenders, so it is difficult 10 know the full scope of HMDA Mortgage Market Survey. as reported by the Federal Financiul Institutions Examination Coune ii, www.ffiec.govlratespreadfnewcalc.aspx. data coverage of such lenders.

Al72 Federal Reserve Bulletin D April 2010 2. Home loan llnd reporting activity of lending in. tilution~ covered under the Home Mortgage Disclosure Act, 1990-2008 Number Applications (millions) Applications received for home loans on 1-4 Loans Year family properties, and home loans purchased purchased Total' Reporters Disclosure from I another institut I io n Total' (millions) (millions) I reports' Home purchase Refinance imp H ro o v m em e ent ..... 1 1 9 9 9 90 1 . " . . . . . . . . . .. . ....... 3 3 . . 3 3 2 1. . 1 1 1 1 . . 2 2 6 5 . . 6 5 1 1. . 2 4 6 7 . .9 7 9 9. .3 3 5 32 8 2 2 5 4 . .0 9 4 3 1 4 1992. .... .... .. 3.5 5.2 1.2 10.0 2.0 12.0 9.073 28.782 1993. ... ..... . ... 4.5 7.7 1.4 '1'3.6 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 1 19 9 9 97 8 . . .. . , . . . . . . . . . . . . . . .~ . . .. .. . . . 8 6. . 8 0 1 5 1 . . 4 4 2 2. . 0 2 2 1 1 4 . . 4 3 3 2. .2 1 2 1 4 6. .7 4 7 7. . 9 8 2 3 5 6 4 5 7 7. . 2 4 9 1 4 6 1999 ....... ........ ... .. 8.4 9.4 2.1 19.9 3.0 22.9 7,832 56.966 2 2 20 0 0 0 0 0 1 0 2 . . . . . , . .. . . . . . .. . . . . . . . . . . . . ". . . . . . . . . . . . . . . 8 7 7 . . , 7 4 ) l 1 7 6 4 . . . 5 5 3 2 1 1. . .0 5 9 2 2 1 6 3 6 . . . 4 8 8 4 3 2 . . .4 8 8 3 2 1 7 1 9 . . .6 2 2 7 7 7. . .7 7 6 7 3 1 1 1 3 ' 5 5 5 2 3 6. . , 5 7 0 7 6 0 6 6 6 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 2008. .. . . . . . . . . . . 5.0 7.7 1.4 14.2 2.9 17.1 8.388 51.109 NOTE: Except as noted. applications exclude requests for preapproval that I. App~cations for multifamily homes are included only in the total col· were denied by the lender or were accepted by the lender but not aCled upon umns: for 2008. U,ese applications numbered 42.792. by the borrower. In Utis article. applications are defined as being for a Joan on 2. A report covers the mortgage lending activity of a lender in a single met a specific property; U,ey are thus distinct from requests for preapprovaJ, which ropolitan statistical area in which it had an office during U,e year. are not related to a specific propeny. 2007. Refinance lending then fell sharply during the business; in others, it is the result of a merger, remainder of 2008. Figure 1 also shows that the acquisition, or consolidation. When a merger, acqui annual percentage interest rate (APR) for a 30-year sition, or consolidation occurs, all lending by the fixed-rate prime mortgage fell sharply at the end of institutions covered by HMDA in that year is reported 2007 to levels not seen in several years; it continued by the surviving entity; only when an institution goes to fall in early 2008 and dipped below 6 percent in out of business is the volume of reported loans January 2008, which may have triggered the jump in possibly affected. refinance lending.13 The Federal Reserve's respondent tracking report records what happened to each institution that failed The Potential Effect of NOl1reporters on to report. For institutions that ceased operations, the Lending Volume in the 2008 HMDA Data tracking report also records, to the extent possible, the month that operations were discontinued. The track As part of the HMDA data collection effort, the ing report indicates that 15 institutions that reported Federal Reserve Board tracks each financial institu HMDA data for 2007 ceased operations during 2008 tion that is expected to report (including all lenders or at the beginning of 2009 and did not report lending that reported data for the previous calendar year) and activity for 2008.15 Of the 15 nonreporting institu then contacts those that did not submit a report. 14 In tions, 3 were banking institutions and 12 were inde some cases, nonreporting is due to a cessation of pendent mortgage companies. Although it is not possible to know how many D. The APRs for prime loans are based on data from Freddie loans these 15 institutions originated in 2008 before Mac's Primary Mortgage Market Survey and reflect inlerest rates and discontinuing operations, one can gauge their potendiscount points offered to consumers during the first three days of each week. For more details, see note 29. Loan counts in figure I are aggregated to the monthly level using the date of loan origination, as opposed to an earlier date when the interest rate for the loan was 15. The list of lenders that ceased operations and did not report is Jocked. If the HMDA data were aggregated using the "lock" date, the as comprehensive as possible at this time. [f additional information spike in refinancings would likely occur closer to the January dip in becomes available, the list will be updated on the Federal Reserve the APR. Board's website. For a list of the institutions that ceased operations 14. Sometimes contacting a nonreporting lender is impossible and did not report, see appendix table A.I, which has been posted because the firm has ceased operations. separately as an Excel file.

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A 173 tial importance by measuring their lending activity in Share of home loans. by lyp of loan. 19 0-_008 2007.16 In the aggregate, these 15 nonreporting com Percent panies accounted for about 5 percent of all conven tional first-lien loans for site-built properties in the Year Conventional All 2007 HMDA data (data not shown in tables).17 The 1990 . 77.4 IB.I 100 tracking reports indicate that the 15 nonreporting 1991 81.7 13.B 100 1992 87.1 B.B 100 institutions had exited the marketplace by the middle 1993 81.5 13.0 100 1994 81.5 12.6 100 of 2008, so their effects on the completeness of the HMDA data are confined to the first half of the year. 1995 .. 81.9 12.7 5.5 100 1996 .. 82.5 12.7 4.8 100 1997 _. . 82.7 12.9 4.4 100 1998 85.7 10.0 4.3 100 Government-Backed Lending 1999 848 11.8 3.4 100 2000 . 84.4 12.7 2.8 100 Government-backed loans-those insured by the FHA 2001 87.1 10.3 2.6 100 and those backed by guarantees from the VA, the 2002 . 90.1 7.6 2.3 100 2003 91.3 6.2 2.5 100 Farm Service Agency, or the Rural Housing Service 2004 . 93.0 5.1 1.9 100 rose in 2008 relative to 2007. The rise in FHA 2005 95.3 3.4 1.3 100 insured lending was particularly large. The number of 2006 95.2 3.5 1.3 100 2007 92.5 5.6 1.9 100 reported FHA-insured loans was almost three times 2008 74.3 21.5 4.2 100 greater in 2008 than in 2007, and the FHA-insured NOTE: Includes home-purchase and refinance loans for t-4 family, Owner share of home-purchase and refinance loans rose to occupied properties. more than 21 percent in 2008 from less than 6 percent I. Includes loans guaranteed by the U.S. Depanmelll of Veterans Affairs, the Farm Service Agency, or the Rural Housing Service. in 2007 (table 3).18 Moreover, by December of 2008, FHA Federal Housing Administration. the FHA's share of home-purchase and refinance lending was about 30 percent (data not shown in payment.19 Such credit enhancements protect lenders tables). against loss if the borrower defaults. Lenders typically require borrowers to purchase The VA guarantees a percentage of the loan amount mortgage insurance (through the FHA or PMI compa up to a certain limit (but with no cap on the loan size), nies) or a credit guarantee (through the VA, for while the FHA cannot insure mortgages that are larger example) when the borrower provides a small down than legislated limits. Historically, these limits have been set at levels that were sufficiently low that many ) 6. An estimate of the underreponing of first liens for single homebuyers in areas with high home prices have not family propenies can be made using quarterly financial data filed with been able to use these programs. Under the Economic the Office of Thrift Supervision for the two largest institutions, Washington Mutua) Bank and IndyMac Bank. These institutions Stimulus Act of 2008, the limits were raised in accounted for 88 percent of the loans made in 2007 by the 15 high-cost areas. In a later section, "The Surge in FHA nonreporting institutions. Assuming the first liens on one- to four and VA Lending," we will analyze more closely the family properties originated by these thrifts in 2008 were of the same average loan amount as those originated in the corresponding quarters contribution of increased limits to the increase in in the 2007 HMDA data, the 2008 HDMA data is underreported FHA and VA-backed lending. We will also examine because of these two institutions by about 1.7 percent for the year: whether difficulties facing PMI companies contrib 59,000 loans in the first quarter (3.2 percent), 39,500 in the second (2.2 percent), 2,900 in the third (0.2 percent), and 4,000 in the fourth uted to the shift to government-backed lending. (0.3 percent). These values may not be evenly distributed across loan purposes. In 2007, Washington Mutual originated refinance loans as a Loan Sales higher proportion of all of its lending in all quarters than did all HMDA lenders (a 15 percentage point average difference). IndyMac's relative shares were similar to those of HMDA lenders overall. Most of The HMDA data document the importance of the the loans originated by Washington Mutual in 2008 were included in secondary market for home loans. Just over 73 per the HMDA data as purchased loans by JPMorgan Chase Bank and not cent of the first-lien home loans reported in 2008 as originations. 17. Market shares reported in this article are based on the number were sold during the same year (table 4).20 Notably, of loans and not the dollar amounts. the rise in government-backed lending between 2007 18. Loans are for owner-occupied, one- to four-family properties. and 2008 described earlier has resulted in a sharp Junior-lien loans and loans for manufactured homes are included because the HMDA data prior to 2004 do not separately identify these increase in the proportion of loans sold into pools loans. The FHA share of home-purchase and refinance lending in 2008, excluding junior-lien and manufactured-home loans, was 22.5 percent. For more information about the reporting details, see 19. For more details about PMI, see appendix B, "Private Mort Roben B. Avery, Glenn B. Canner, and Robert E. Cook (2005), gage Insurance Data." "New Information Reponed under HMDA and Its Application in Fair 20. Loans that are sold in a different calendar year than the year of Lending Enforcement," Federal Resen'e Bulletin, vol. 9) (Summer), origination are recorded as being held in the lender's portfolio in the pp.344-94. HMDA data.

A174 Federal Reserve Bulletin 0 April 2010 4. Dislribulion of loam . old during year of original ion. by lype of purcha~er. number of loans, and amount of loans, 2006--08 Percent 2006 2007 2008 Type of purchaser By number By amount By number By amount By number By amount of loans I of loans of loans I of loans of loans I of loans Fannie Mae ... .....•- - ...... 17.2 14.3 23.4 21.2 25.8 27.1 Ginnie Mae .... .... ,. . ... - 2.2 1.4 .1.5 2.4 11.4 9.5 Freddie Mac . . ... , ............. /0.7 8.9 15.3 13.4 16.2 16.2 Fanner Mac ... ........ .0 .0 .0 .0 .0 0 Private securitization 9.0 11.0 3.6 5.0 .5 .6 Commercial bank or savings institution ... ............. 6.9 7.6 6.8 7.6 8.8 8.8 Insurance company ........ ........ 15.7 15.5 10.S 10.3 9.7 9.4 Affiliate of institution ...... , ..... .. 14.5 16.2 21.4 23.4 12.3 13.5 O To th ta e l r .... - , .. . . - . , . .. . . . . . . . ~ . . . - -- . - .. . 1 2 0 3 0 .8 1 2 0 5 0 .0 10 15 0 .6 10 1 0 6 .7 10 1 0 5 .4 10 1 0 4 .8 MEMO Share of all originalions sold 72.2 71.9 69.5 67.0 73.2 72.0 NOTE: Includes only first-lien loans. guaranteed by the Government National Mortgage credit unions across the country served upward of Association (Ginnie Mae). 90 million members. The vast majority of credit More prominent in the secondary market are Fan unions are small measured by asset size, and many do nie Mae and Freddie Mac. For the most part, the little home lending. As such, only about 2,000 credit purchases made by Fannie Mae and Freddie Mac unions report under HMDA each year (table I). consist of conventional loans originated to purchase Unlike other types of lenders, credit unions have homes or to refinance existing loans. Fannie Mae and not experienced a significant reduction in home Freddie Mac are restricted by law to purchase mort lending activity over the past couple of years gages with origination balances below a specific (table S.A). As a consequence, their share of one- to amount, known as the conforming loan limit. As with four-family, site-built HMDA loans has risen, particu the FHA loan limits mentioned earlier, the Economic larly for junior liens (a 28.2 percent share in 2008). Stimulus Act of 2008 increased the conforming loan Their high market share of junior liens can be limits.21 explained, in part, by the collapse of the piggyback In 2008, sales to Fannie Mae and Freddie Mac market, discussed later in the section "Piggyback accounted for about 42 percent of the loans reported Lending." Piggyback junior-lien home-purchase loans as sold, compared with about 28 percent in 2006. At are issued as part of a purchase package. Less than least in part, this increase in market share reflects the 5 percent of credit union junior liens have been for reduction during this period in the higher-priced share home purchases, so they were not particularly affected of loans, which the GSEs typically do not purchase by this collapse. directly. Higher-priced loans were often sold through The credit union data afford a unique opportunity the private securitization process; indeed, loans sold to benchmark the HMDA data. Unlike other deposi through this process diminished considerably, from tories, all credit unions are required to report their about 10 percent of sold loans in 2006 to less than aggregate first- and junior-lien mortgage originations 1 percent in 2008. by number each year as part of their regulatory filings. Savings and loan institutions that report to the Credit Unions Office of Thri ft Supervision also report aggregated A credit union is a cooperative financial institution information, but in dollar amounts instead of number formed by a group of people with a common bond, of loans (table S.B). These data allow a determination such as employees of a firrri or members of a religious of the HMDA-filer coverage relative to all credit organization, university, or governmental entity.22 union and savings and loan mortgage lending. The Members of a credit union pool their funds to extend credit union data show that for 2008, almost 90 per credit to their fellow members. In 2008, about 7,700 cent of all credit union mortgage originations were made by lenders who reported under HMDA. For first 21. For more on the conforming loan limit, see www.fhfa.gov/ liens, the numbers reported in regulatory filings by Defaulr.aspx?Page= 185. these lenders corresponded relatively closely to the 22. The notion of a common bond has been expanded some in number reported in HMDA (93 percent of first-lien recent years, for example, to include individuals from broad geo graphic areas. loan originations are reported in HMDA, data derived

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A 175 5. Home lending, 2004--08 A. By credit unions, number of loans MEMO: First liens Junior liens Unsecured Originations in credit union reports of condition and income First liens Closed-end junior liens Number of Year Number Number HELOCs HMDA HMDA HMDA originated HMDA originated HMDA originated Number percent Number percent Number percent by HMDA share of all by HMDA share of all by HMDA distribution distribution distribution reporters such liens reporters such liens reporters 2004 . .. ..... -.... 357,433 2.7 166.028 9.9 21,940 13.7 381,683 87.2 343.150 88.1 740,962 2005 ... -..... .... 341,307 2.7 197,070 7.6 20,382 12.9 372,517 88.1 412.253 89.9 651,507 2006 . .......... 291.863 2.7 237,361 7.8 19,053 11.7 329.108 87.7 497.898 90.8 539,658 2007. .. .... " ., 313.447 3.7 205.231 12.0 19.128 12.0 336.229 88.7 424.611 90.8 461,292 2008. .. ...... , .. 359,645 5.5 145,500 28.2 18,656 11.4 386.079 89.8 305.204 89.6 451,725 NOTE: Excludes loans for multifamily properties. SOURCE: Credit union reports of condition and income from National Credit HELOC Home equity line of credit. Union Administration. 5. Home lending. 2004-08 B. By savings and loan institutions, thousands of dollars II MEMO: Originations in thrift reports First liens Junior liens Unsecured of condition and income First liens' Closed-end junior liens' Year trhousands 0 trhousands 0 HMDA HMDA HMDA dollars HMDA share dollars HMDA share trhousands 0 percent housands 0 percent Thousands 0 percent originated of all such originated of all such dollars dollars dollars distribution distribution distribution by HMDA liens by HMDA liens reporters reporters 2004 ......... ... ... 581.777,825 23.4 11,797,538 15.4 48.902 3.6 596.252,410 98.7 . .. 2005 ...... ........ 582.083.085 21.1 22,907,264 17.4 65.940 4.4 648,433,523 98.7 . . 2006 .. ....... .. 457:429,907 18.7 22.984.024 13.5 135.685 8.2 436,043,072 78.6 . .. 2007 ........ 486.826.148 24.7 16:573,910 16.8 155,330 9.8 562.351.440 98.9 63,642,622 97.9 2008 ..... , ....... 313:662:849 22.7 3,973.576 13.4 189.703 11.3 265,559,705 86.1 30,351.849 85.9 NOTE: Excludes loans for multifamily properties and those originated by in 2004-06 inclUdes junior liens. stitutions that did not report origination data to the Office of Thrift Supervision ... Not available. for the fu II calendar year. SOURCE: Thrift reports of condition and income from the Office of Thrift Su I. Prior to 2007, data from the Office of Thrift Supervision did not differen perviSion. tiate between first and junior liens. As a result, the column for first liens for from table 5.A). However, for closed-end junior liens, ity was much steeper for site-built homes than for only about 48 percent appear to be reported, which manufactured homes. Over this longer period, the suggests that many of these loans are junior liens not number of loans to buy site-built homes fell 48 per reportable under HMDA rules because they are nei cent, and the number to buy manufactured homes fell ther for home purchase, home improvement, or refi 25 percent. nancing of an existing lien. The mean loan amount used to purchase manufac tured homes in 2008 was $75,000, which was much Lending f r Manufactured Homes smaller than the mean loan amount of $217,000 for site-built homes. Similarly, the mean income of bor Since 2004, the HMDA data have distinguished rowers purchasing manufactured homes in 2008 was between loans secured by site-built properties and $48,400, which was much smaller than the mean those related to manufactured homes. Manufactured income of $93,300 for purchasers of site-built homes home lending differs from lending for site-built prop for the same period. erties along a number of dimensions, including typi cal loan amounts, borrower incomes, and the share of Lending for Noo-Owner-O clipied Propertie such loans that are higher priced. The reported number of manufactured-home loans One factor contributing to the strong performance of fell by about the same proportion as for site-built housing markets over the first half of this decade was homes from 2007 through 2008 (table 6). However, the growth in sales of homes to investors or indi vidu when measured from 2005 (a year when mortgage als purchasing second or vacation homes, which are markets were quite robust), the decline in loan activ- collectively referred to here as non-owner-occupied

AI76 Federal Reserve Bul\etinDApril201O o. Manufactured and sile-built home Ientling. 2004-08 ManufaclUred homes Site-built homes Year I Number I Percent Number I Percent distribution disuibution 2004 129.150 2.7 4.654,243 97.3 2005 .... .. 127,336 2.6 4,830.594 97.4 2006 ................ . 131.188 3.0 4.290,023 97.0 2007.. .. 122,834 3.6 3,325,082 96.4 2008 ........... . 95.895 3.7 2,511.827 96.3 MEMO Bonvwer income (thousallds of dll//ars), Mean .... 48.4 93.3 Median . 42.0 69.0 Loan amollllt (thousalld., IIf do//"I'.,')' Mean ... . 74.6 216.9 Medi'Ul .... . 62.0 176.0 NOTE: Includes only first-lien, owner-occupied home-purchase loans for t-4 I. For loans originated ill 2008. family homes. .. Not applicable. properties.23 From 1996 through 2005, the share of 7. NOIl-owner-occupicd lending a a hare of all first liens one- to four-family, site-built home purchase loans for to purchase or refinance one- lO four-family. site-built home. by number and dollar amOunt of loan. 1990non-owner-occupied properties rose each year, in 2008 creasing from 6.4 percent to 17.3 percent over the Percent period (table 7). This share has since faJ len to 13.5 percent in 2008. Home purchase Refinance Currently, loans for non-owner-occupied properties Year I Dollar I Dollar are not eligible for the FHA or VA programs. How Number amount Number amount ever, the GSEs can purchase non-owner-occupied 1990 ... 6.6 5.9 9.0 8.4 1991. 5.6 4.5 5.8 4.9 property loans that otherwise meet their requirements, 1992 .. .............. 5.2 4.0 4.7 4.0 1993 .. 5.1 3.8 5.1 4.3 but they typically demand interest rates that are about t994 5.7 4.3 8.0 6.6 3/8 of a percentage point higher than the interest rates 1995 6.4 5.0 7.8 6.4 on loans for similar owner-occupied properties. Per 1996 .. 6.4 5.1 6.7 5.8 1997 .. 7.0 5.8 6.8 5.7 haps reflecting less of an appetite for such loans on 1998 7.1 6.0 5.2 4.4 the part of private lenders, the GSE market share of 1999 7.4 6.4 6.7 5.9 both home-purchase and refinance non-owner 2000 .. ., ............ 8.0 7.2 7.4 7.0 200t ................. 8.6 7.6 5.8 5.2 occupied property lending grew about 10 percentage 2002 10.5 9.2 6.1 5.3 2003 11.9 10.6 6.2 5.6 points from 2007 to 2008 (33.8 percent to 43.1 per 2004 .. 14.9 13.1 8.3 7.2 cent for home-purchase lending and 28.4 percent to 2005 .. t7.3 15.7 8.8 7.9 39.2 percent for refinance lending). Nevertheless, 2006 ................ 16.5 14.8 10.7 9.9 2007 .. 14.9 13.8 11.3 10.6 non-owner-occupied property lending remained a 2008 .... 13.5 12.3 10.0 9.5 comparatively small part of overall GSE lending in 2008 (17.9 percent of home-purchase lending and In piggyback lending, borrowers simultaneously re 11.3 percent of refinance lending; data not shown in ceive a first-lien mortgage and a junior-lien (piggy tables). back) loan. The piggyback loan finances the portion of the purchase price not being financed by the first Piggyback Lending mortgage and sometimes any cash payment that might have been made; the junior-lien loan may Since the early 2000s, piggyback loans emerged as an amount to as much as 20 percent of the purchase important segment of the conventional mortgage mar price. In many cases, borrowers used piggyback loans ket, particularly regarding loans to purchase homes. to avoid the need to obtain PMI.2A Sometimes, piggy back loans were used to keep the size of the first-lien 23. An investment property is a non-owner-occupied dwelling that is intended to be rented or resold for a profit. Some non-owner occupied units-vacation homes and second homes-are for the 24. One advantage of piggyback loans over those backed by PMI primary use of the owners and thus would not be considered invest insurance was that PM! payments made by the borrower did not ment properties. The HMDA data do not, however, distinguish qualify as deductible interest under Internal Revenue Service (IRS) between these two types of non-owner-occupied dwellings. guidelines. whereas interest payments on many piggyback loans did.

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A177 8. Piggyback home-pur hru e lending. 2004-08 I MEMO Year Number Incidence I Higher-priced proponion Piggyback proportion or or piggyback loans higher-priced loans 2004 .. 530.740 12.9 19.1 22.5 2005 950.965 21.5 53.2 46.7 2006 ... 950.408 24.3 44.4 42.8 2007 356,959 12.2 16.0 13.9 2008 43.017 2.7 3.0 1.1 NOTE: Conventional first-lien mongages for owner-occupied. 1-4 ramily. site-built properties. loan within the Fannie Mae and Freddie Mac con THE DISPOSITION OF APPLICATIONS By LOAN forming loan limits so the borrower could take advan CHARA TERISTICS IN 2008 tage of the lower interest rates available on conform ing loans. Thus far, our analysis of the HMDA data has focused The HMDA data help document the extent of primarily on how the mortgage market has evolved piggyback lending over time. However, because not over the past few years. In this section, we examine all lenders submit HMDA data, some of the junior the information provided by HMDA about what home lien loans that are reported may not have the corre lending looked like in 2008. sponding first-lien Joan reported, and some of the Table 9 categorizes every loan application reported first-lien loans that are reported may not have the in 2008 into 25 distinct product categories character associated junior-lien loan reported. Also, some pig ized by loan and property type, purpose of the loan, gyback loans may be open-end loans that do not need and lien and owner-occupancy status. Each product to be reported under HMDA. category contains information on the number of total The HMDA data for 2005 and 2006 show that applications, application denials, originated loans, lenders extended about l.2 million junior-lien loans loans with prices above the reporting threshollds to help individuals purchase one- to four-family, site established by HMDA reporting rules for identifying built homes for owner-occupied properties in each of higher-priced loans, loans covered by the Home these years. The number of reported junior-lien loans Ownership and Equity Protection Act (HOEPA), and contracted sharply in 2007 to about 550,000 such the mean and median APR spreads for loans reported loans. This contraction continued as the number of as higher priced.26 junior-lien loans declined by 83 percent from the The 2008 HMDA data include information on 2007 level to only about 92,000 loans in 2008. 14 million loan applications, about 12 million of A loan-matching process can be undertaken to which were acted upon by the lender. The vast determine which reported junior-lien loans in the majority of these applications were for first-lien loans HMDA data appear to be associated with the appro on one- to four-family, site-built homes. Among these priate reported first-lien loans.25 Our matching algo applications, about two-thirds of home-purchase ap rithm indicates that in 2008, 2.7 percent of the nearly plications and four-fifths of refinance applications 1.6 million first-lien conventional loans to purchase were for conventional loans. These shares of applica one- to four-family, site-built owner-occupied homes tions for conventional loans are considerably lower involved a piggyback loan reported by the same than were observed in earlier years (data not shown in lender, a proportion that was down 77 percent from tables). 2007 (table 8). 26. The type of information provided in tables 9 and lOis identical to that provided in analyses of earlier years of HMDA data. Compari The Congress allowed the deductibility of PMl premiums of some sons of the numbers in these two tables with earlier years can be made borrowers starting in 2007, which reduced the relative attractiveness by consulting the following anicles: Roben B. Avery, Kenneth P. of piggybacks. Brevoon, and Glenn B. Canner (2008), "The 2007 HMDA Data," 25. For the analysis here, a junior-lien loan was identified as a Federal Reserve Bulletin, vol. 94, pp. Al07-AI46; Robel1 B. Avery, piggyback loan to a reponed first-lien loan if both loans (I) were Kenneth P. Brevoon, and Glenn B. Canner (2007), "The 2006 HMDA conventional loans involving propeny in the same census tract; Data," Federal Reserve Bulletin, vol. 93, pp. A 73-A 109; Roben B. (2) were originated by the same lender with approximately the same Avery, Kenneth P. Brevool1, and Glenn B. Canner (2006). "Higher dates of loan application and closing; and (3) had the same owner Priced Home Lending and the 2005 HMDA Data," Federal Reserve occupancy status and identical borrower income, race or ethnicity, and Bulletin, vol. 92, pp. A l23-A 166; and Avery, Canner, and Cook, sex. "New Information Reponed under HMDA."

A178 Federal Reserve Bulletin 0 April 2010 9. Disposition of applicalions for home loan', and origination and pricing of loans, by Iype of home and IY~ of loan, 2008 Applications Loans originated 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 submitted Number 1 N d U e 1 J T ll ! e b d e r.1 P d e e r J c ll .e e n d t Number Percent 3-3.99 1 4-4.99 1 5--{i.99 1 7-8.99 1 m 9 o o r r e 1-4 FAMtLY NONBUStNESS REI.ATW' Owner occ'upied Site-built Horne purchase Conventional First lien 2,491.474 2.166.315 391.045 18.1 1,565,612 113.767 7.3 69.9 16.4 11.7 1.7 .4 Junior lien. 146.420 127.818 22.858 17.9 90.232 9.899 11.0 93.1 6.2 .7 Government backed First lien .. 1.369.879 1.211.975 209.886 17.3 941,575 89.882 9.5 93.1 5.0 J.3 .6 .1 Junior lien ... 1.301 1.161 95 8.2 1.043 4 .4 100.0 .0 .0 Refinance Conventional First lien ...... 5.227.940 4.395.340 1.627.99'1 37.0 2.328.102 245.118 10.5 47.7 18.3 20.9 12.6 .6 Junior lien . 471.860 419.789 173.203 41.3 214.579 31.571 14.7 55.2 23.0 21.9 Government backed First lien ........ 1.189.774 944.697 387,460 41.0 498.271 65.784 13.2 92.7 6.1 .9 .2 .0 Junior lien ... 937 752 262 34.8 372 4 1.1 75.0 25.0 .0 Home improvement Conventional First lien 451.561 389.513 187.249 48.1 172,328 53,476 31.0 41.6 19.9 21.5 ~5.5 1.5 Junior lien . 421.964 373.086 165.662 44.4 179.313 22.670 12.6 59.0 21.1 19.9 Government backed First lien 21.632 17.866 6.770 37.9 9.834 1.360 13.8 81.7 10.1 5.8 2.3 .2 Junior lien. 2:928 2.493 524 21.0 1.602 1,211 75.6 33.2 40.7 26.1 Unsecured (conventional o b r a c g k o e v d e ) r n . m . e . n . t 384,490 378.389 188.293 49.8 151,475 ., . .' . . , . .. . .. Manufactured Conventional. first lien Home purchase 296.213 287.601 156,475 54.4 68.147 51,354 75.4 19.6 21.6 31.2 17.3 10.3 Refinance . ......... 114.728 103.996 51.076 49.1 42.098 26.791 63.6 22.2 19.7 33.5 20.9 3.7 Other ...... .... 137.052 121,464 45.691 37.6 65,414 16:599 25.4 52.0 10.2 22.0 11.0 4.9 Non-owner occupiecr Conventional. first lien Home purchase 592.174 521.870 104.761 20.1 368.595 57.323 15.6 74.0 15.4 7.5 1.9 1.2 Refinance ....... 593.296 507.391 167.245 33.0 293.490 34.433 11.7 68.1 16.0 12.1 3.1 .8 Other ........ ....... 118.535 106.634 44.147 41.4 55.145 8.259 15.0 35.3 17.1 36.6 8.2 2.9 BUSINESS RELATE[)] Conventional. first lien Home purchase 49,316 47.546 2.091 4.4 44.217 2.317 5.2 39.9 29.4 19.3 5.7 5.7 Refinance .. 46.847 44.599 3.095 6.9 39.935 1.865 4.7 43.2 33.6 18.6 4.2 .5 Other ... ...... 20.828 17.529 2.522 14.4 14.374 972 6.8 47.4 8.1 38.2 4.7 1.5 MULTtFA~ILy5 Conventional. first lien Home purchase 13.921 12.625 1.913 15.2 10.065 474 4.7 56.8 24.9 16.7 1.3 .4 Refinance . 23.244 21.580 3.488 16.2 17.089 634 3.7 53.6 24.3 20.2 1.9 .0 Other ... . . . . . . . . .. 5.627 5.327 800 15.0 4.355 125 2.9 47.2 19.2 24.8 8.0 .8 Total ..... ... , . .. 14,193,941 12,227,356 3,944,602 32.3 7,177,262 835,892 11.6 55.1 14.1 19.1 8.9 2.8 I. Annual percentage rale (APR) spread is the difference between the APR reported that the race. ethnicity, and sex of the applicant or co-applicant are nOi on the loan and the yield on a comparable-maturity Treasury security. The applicable: all other applications and loans are nonbusiness related. threshold for first-lien 10aJls is a spread of 3 percentage points: for junior-lien 4. Includes applicalions and loans for which occupancy status was missing. loans. it is a spread of 5 percentage points. 5. Includes business-relaled and nonbusiness-related applications and loans 2. Loans covered by the Home Ownership and Equity Prolection ACI of for owner-occupied and non-owner-occupied properties. 1994 (HOEPA). which does not apply 10 home-purchase loans. Not applicable. 3. Business-related applications and loans are those for which the lender Patterns in the denial rates are consistent with cations backed by manufactured housing are gen what has been observed in earlier years. Denial rates erally higher than those backed by sile-built on applications for home-purchase loans are gen homes. erally lower than those observed for either refinance Furthermore, requests for a first-lien, conventional, or home-improvement loans. Denial rates on appli- home-purchase loan backed by a manufactured home

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A 179 9. Disposition of applicalions for home loans, and origination and pricing of loan . by type of home and type of I an. 200 Ofllinued Loans originated Loans with APR spread above the threshold I Type of home and loan I, APR spread (percentage points) I IN umber of HOEPA·covered loans' Mean Median t-4 F,\MtLY NONBUSINESS RELATED' Owner occupied Site-built Home purchase Conventional First lien. 3.9 3.5 Junior lien . 5.7 5.5 Government backed First lien. . ............ . 3.4 3.2 Junior lien . . . .......... . 5,9 5.7 Refinance Conventional First lien .. 4.7 4.1 2.686 Junior lien ..... , ......... , ... , 7.2 6,6 873 Government backed First lien, , , .. 3.4 3.3 583 Junior lien ... 6.2 5.8 0 Home improvemenl Conventional First lien ........... .. 5.0 4.4 1,085 Junior lien ........ , . , .. 7.1 6.4 854 Government backed First lien. 3.7 3.3 8 Junior lien 7.8 7.7 27 Unsecured (convenlional or government backed) Manufactured Conventional. first lien Home purchase 6.0 5.5 Refinance., . 5.7 5.5 1,650 Other., . 4.9 3.9 614 Non-owner occupied" Conventional. first lien Home purchase 3,9 3.5 Refinance., . 4.0 36 128 Other. 5.1 4.8 76 BUSINESS RELATED' Conventional. first lien Home purchase .. , .. 4.9 4.3 Refinance. 4.4 4.2 4 Other .. 4.6 4.2 3 MUtTiFAMILY.s Conventional. first lien Home purchase., . 4.2 3,8 Refinance .. 4,2 3.9 o Other .. 4.6 4.1 2 Total, . 4.6 3.8 8,593 is the only one of the 25 product categories for which fied levels require additional disclosures to consum the majority of applications are denied. ers and are subject to various restrictions on loan In addition to the application data provided under terms.27 For 2008, 2,281 lenders reported extending HMDA, about 734.000 requests for preapprovals that about 8,600 loans covered by HOEPA (data regard were acted on by the lender were reported under ing lenders not shown in tables). In comparison, HMDA (table 10). Almost one-quarter of these re quests for preapproval were denied by the lender. Of 27. The requirement to repon HOEPA loans in HMDA relates to the applications acted on by the lender and preceded whether the loan is subject to the original protections of HOEPA. as determined by the coverage test in the Federal Reserve Board's by requests for preapproval, more than 88 percent Regulation Z, 12 C.FR. pI. 226,32{a). The required reponing is not were approved (data derived from table 10). triggered by the more recently adopted protections for "higher-priced The HMDA data also indicate which loans were mongage loans" under Regulation Z, notwithstanding that those protections were adopted under authOrity given to the Board by covered by HOEPA. Under HOEPA, certain types of HOEPA. See 73 Fed. Reg. 44522 (July 30, 2008), The more recent mortgage loans that have rates or fees above speci- HOEPA regulations do not lake effect until October I, 2009.

A180 Federal Reserve Bulletin 0 April 2010 10. Home-purchase lending that began with a request for preapproval: Disposition and pricing. by type or home. 2008 Requesls for preapproval Applications preceded by requests for preapprovall I . I . ,I Type of home ACled upon by lender u N po u n m b b e y r l a e c n t d ed er Number demed Percent demed Number submilled I I L Number Number denied 1-4 FAMILY NONlJl1SINESS RE1.ATE!')) Owner occupied Sile-buill Conventional . Firsl lien. 455.565 103,025 22.6 275.844 245.481 33,303 Junior lien 24.846 5,767 23.2 15.112 14.394 1.820 Govemmenl backed J F u ir n s i l o r li e l n ien . . . . . . . , . . . . . . . . . . . . . . . . . . .• , ' . 172,21 81 7 54.00 3 4 0 3 3 1 7 . .0 4 107,06 47 5 97.42 3 2 8 12,46 11 1 ManufaclUred . Conventional, firsl lien . . . . . . . . . . 21.908 1.600 7.3 20.102 17.155 8.027 Other .. 4.955 1.541 31.1 3.173 2.926 417 Non-owner occllpiecf Conventional, firsl lien 51.442 9,970 19.4 34.662 30.768 4,669 Olher ....... 2.003 530 26.5 1.328 1.009 284 BUSINESS RELr\TE03 Conventional, first lien .... 1.059 62 5.9 960 842 71 Other 268 9 3.4 255 203 24 MUl.TIFAMIL ,,5 Conventional, firsl lien 117 6 5.1 105 91 9 Olher . ,., ............. 17 0 .0 17 15 3 TOlal ... 734,478 J76,544 24.0 458,670 410,344 61,099 I. These applications are included in the 10lal reported in table 9. 4. See nOle 4. table 9. 2. See nole I, lab Ie 9. 5. See nOle 5, table 9. 3. See nOle 3, lable 9. . . NOI applicable. lenders reported on about 11,500 loans covered by and the interest rates on prime mortgage loans-that HOEPA in 2007. In the aggregate, HOEPA-related may have led to variation over time in whether a lending made up less than 0.2 percent of all the loan was reported as higher priced in HMDA. Un originations of home-secured refinance mortgages derstanding how these changes in the interest rate and home-improvement loans reported for 2008 (data environment affected the reported incidence of derived from table 9).28 higher-priced lending is important when attempting Relative to previous years, a smaller proportion of to draw inferences about how lending to high-risk loans were reported as higher priced in 2008, and a borrowers has changed. larger proportion of reported higher-priced loans had In the following sections, we discuss how changes an APR less than I percentage point above the in the interest rate situation during 2007 and 2008 reporting threshold. Furthermore, a substantial frac may have affected the reported incidence of higher tion of loans in 2008 were likely reported as higher priced lending. We then present the methodology we priced because of atypical changes in the interest rate use to adjust for changes in the interest rate environ environment, rather than because the loans repre ment in a manner that provides a clearer picture of sented relatively high credit risk. We discuss this how home lending to high-credit-risk borrowers has issue in detail in the next section and formulate an changed. We then discuss what the 2008 HMDA data adjusted measure of higher-priced loans that is more indicate about lending to high-risk borrowers. consistent over time. How the Interest Rate Situation AiJ.'ected the THE 2008 HMDA DATA ON LOAN PRICING Reporting of Higher-Pri eel Loans A number of factors can alter the incidence of The reporting rules governing HMDA require lenders reported higher-priced lending without any corre to use the yield on a Treasury security with a compa sponding changes in subprime lending activity. In rable term to maturity in determining whether a loan 2008, we identify two factors related to the overall was required to be reported as higher priced under interest rate environment-a steepening of the yield HMDA. Because most mortgages prepay well before curve and widening spreads between Treasury rates the stated term of the loan, lenders typically use relatively shorter-term interest rates when setting the 28. HOEPA does not apply to home-purchase loans. price of mortgage loans. For example, lenders often

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A181 10. Home-puIcha'e lending that began with a requesl f r preapprovul: Dispo'iLion and pri ing. by type of home, 2008-Cominlled Loan originations whose applications were preceded by requests for preapprovaJ '-- Loans with APR spread above the threshold' Type of horne APR spread (percentage Number Distribution, by percentage points of APR spread points) Number Percent I Median 3-3.99 I 4-4.99 I 5-6.99 I 7-8.99 9 or more Mean spreadl sprelld 1-4 FAMtLY NONBUSINESS RELATED' Owner occupied Site-built Conventional First lien .. 190.583 6.881 3.6 84.6 11.4 3.4 .4 .1 3.5 3.3 Junior Ikn . . , .. 10,987 1.279 11.6 .. . . 97.3 2.7 .1 5.6 5.4 Government backed First lien .... ... 80,369 7,844 9.8 94.4 4.9 .5 .1 .1 3.4 3.2 Junior lien . 27 I 3.7 . ,. 100.0 .0 .0 5.8 5.8 Manufactured Conventional, first lien .. 6.928 4.592 66.3 12.6 21.4 40.6 19.5 5.9 6.0 6.0 Otber ..... ............ 2,293 594 25.9 86.7 8.1 4.4 .8 .0 3.6 3.3 Non-owner occllpied' Conventional. first lien .. 23.382 2.086 8.9 82.2 12.4 3.8 1.0 .6 3.7 3.4 Other .. ,. -...... ... 646 33 5.1 24.2 0 72.7 3.0 .0 5.0 5.2 BUSINF.SS RF.l.ATED' Conventional. first lien . .. 731 53 7.3 50.9 32.1 15.1 1.9 .0 4.2 3.9 Other ........ . ..... 172 15 8.7 86.7 13.3 .0 .0 .0 3.4 3.2 MULTIFAMIt.Y' Conventional. first lien .. 71 I 1.4 .0 .0 100.0 .0 .0 6.0 6.0 Other ....... .... .. ,., . II I 9.1 100.0 .0 .0 .0 .0 3.0 3.0 .. Total. " ......... 316,200 23,380 7.4 68.8 10.6 15.1 4.2 1.3 4.1 3.5 price 30-year fixed-rate mortgages based on the yields Treasury securities, which displays how the yields on on securities with maturities of fewer than 10 years, these securities vary with the term to maturity. and they typically set interest rates on adjustable-rate Through the first seven months of 2007, the yield mortgages (ARMs) on the basis of securities with curve was relatively flat and then began to steepen, so much shorter terms. Thus, a change in the relationship that the differences between the yield on a 3D-year between shorter-term and longer-term yields can Treasury security and the yields on the five-year and affect the reported incidence of higher-priced lending. one-year Treasury securities increased (figure 2). For example, if short-term interest rates fall relative Overall, this steepening continued in 2008; while to long-term rates, then the number and proportion of loans reported as higher priced will fall even if other 2. pread between interest rates on JO-year and S-year a factors, such as lenders' underwriting practices or well as 30-ycar and I-year Treasury honds, 2006--08 borrowers' characteristics, are unchanged. For ARMs, Pcn:cnlage JlOinl'i this effect is further exacerbated by the manner in which APRs are calculated. The interest rates on most 3.0 ARM loans, after the initial interest rate reset date, are typically set based on interest rates for one-year 2.5 securities. As a result, the APRs for ARMs-which 2.0 take into account the expected interest rates on a loan, 1.5 assuming that the loan does not prepay and that the index rates used to establish interest rates after the 1.0 reset do not change-will be particularly sensitive to .5 changes in one-year interest rates. Consequently, + higher-priced lending reported for ARMs will fall 0 when one-year interest rates decline relative to other 1,1 rates even if the relationship between long-term and intermediate-term rates is constant. NOTE: The data are weekly. Prior to mid-February 2006, the 30-year Treasury bond was not available. and the data are missing. The relationship between shorter- and longer-term SOURCE: Federal Reserve Board, Statistical Release H.15, interest rates can be seen in the yield curve for ww w Jedera Irese rve.g ovlre leaseslh J 5/data. htm.

A 182 Federal Reserve Bulletin 0 April 2010 3. HMDA price-reporting lhreshold. interest rales for tixcd By the end of 2008, this gap had narrowed to and adjuslable-nlle loans, and spreads between the approximately 0.77 percentage points, as the falling threshold and uch rates, 2006-08 yields on Treasury securities pulled the HMDA reporting threshold closer to the prime mortgage rate. Pen:cnlagc poinl"i As a result, an increasing share of near-prime loans 8.0 would have been reported as higher priced toward the 7.0 end of 2008 over what had been reported earlier in the 6.0 year. Widening spreads between the interest rates on 5.0 Treasury securities and the rates on prime mortgage loans would be expected to increase the overall 4.0 incidence of higher-priced lending, even if the credit 3.0 risk profile of borrowers remained unchanged. 2.0 These two changes in the interest rate environment 1.0 in 2008, therefore, worked in opposite directions. The o expected net effect of these two competing forces can 1,1" ,,,, ,,, ,, 1,, , ,' , , ,I",,,, ",, 1,1 be discerned from figure 3. The top line in that figure 2006 2007 2008 shows the HMDA reporting threshold in effect from NOTE: For explanalion of Home Mortgage Disclosure ACI (HMDA) 2006 through 2008. The middle three lines show the price-reporting lhreshold, see lex!. The threshold and annual percenlaoe rales (APRs) are for convenlional firsl-lien 30-year prime loans. 00 APRs calculated from the interest rates reported in SOURCE: APRs from lhe Freddie Mac Primary Mortgage Markel Survey: Freddie Mac's PMMS for the three 30-year loan see nOles 10 figure I. products reported in that survey: a fixed-rate loan, a 5-year ARM, and a I-year ARM. As expected, the steepening of the yield curve had a much larger effect spreads did narrow during the spring and at the very on the APRs associated with ARMs than on fixed-rate end of 2008, they remained consistently above the loans, though rates on alJ three products were gener spreads observed in 2007. As discussed earlier, this ally lower in 2008 than they had been in earlier years. change would be expected to decrease the incidence The change during 2008 in the spreads between the of reported higher-priced lending, particularly for APRs on these prime loans and the HMDA reporting ARMs, even in the absence of any changes in high threshold (shown by the bottom three lines in fig risk lending activity. ure 3) suggests that the net effect of these changes In addition to the steepening yield curve, a second depended on whether the loan had a fixed or adjust change in the interest rate environment affected the able rate. For ARMs, the spreads appeared to have likelihood that a loan was reported as higher priced in widened substantially in 2008, suggesting that the HMDA in 2008. As a result of the "flight to quality" incidence of reported higher-priced lending for these and liquidity concerns caused by the financial crisis loans should have decreased in 2008 even without late in 2008, the spreads between the yields on changes in borrower characteristics. For fixed-rate Treasury securities and other securities and loans, loans, spreads appear to have narrowed relative to including 30-year fixed-rate loans, widened consider earlier years. Consequently, the incidence of reported ably. At the beginning of 2008, the HMDA reporting higher-priced lending for fixed-rate loans should have threshold was 7.66 percent, and the APR on a 30-year increased. fixed-rate prime loan, based on the rates reported by The difference in the net effects of the changes in Freddie Mac's Primary Mortgage Market Survey the interest rate environment between fixed- and (PMMS), was 6.12 percent (figure 3).29 This differ adjustable-rate loans complicates an analysis of the ence resulted in a gap between the HMDA reporting HMDA data, because one cannot determine whether a threshold and the APR on a prime 30-year fixed-rate loan in the HMDA data is a fixed- or adjustable-rate loan of 1.54 percentage points. loan. Using industry data, however, it is possible to estimate the monthly volume of both loan types.30 29. The weekly Freddie Mac Primary Mortgage Market Survey These data show that at the beginning of 2007, ARMs reports the average contract interest rates and discount points for all loans and the margin for adjustable-rate loans for loans offered to prime borrowers (those with the lowest credit risk). The survey currently reports information for two fixed-rate mortgage products (30 30. Source: Lender Processing Services, Inc. (LPS). LPS claims year and 15 year) and two ARM products (one-year adjustable rate and coverage of ~bout 70 percent of the mortgage market, including all a five-year adjustable rate). For more information, see loans of 9 of the top 10 mortgage servicers (see www.lpsvcs.com). www.freddiemac.comldlinklhtmUPMMS/display/ Their coverage is nonrandom and appears to overrepresent government PMMSOutputYr.jsp. related lending and underrepresent jumbo and subpri me lending.

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year Al83 II. Share of mortgage origination, by type and length of loan and by month of clo ing, 2006-08 Percent 30-year Less than 5-year or Year Month 15-year FRM Total FRM 5-year ARM longer ARM 2006 January 55.9 10.1 16.7 17.3 100 February 58.4 10.1 14.6 17.0 100 March 58.7 9.0 15.8 16.5 100 April 59.7 8.1 16.0 16.2 100 May 59.1 7.3 16.7 17.0 100 June 59.4 6.8 15.6 18.2 100 July 58.4 6.7 17.4 17.6 100 August 60.6 6.9 16.5 15.9 100 September 63.7 7.5 13.5 15.3 100 October 65.2 7.9 12.3 14.6 100 November 69.8 7.8 10.5 11.9 100 December 71.6 7.9 8.9 11.6 100 2007 January 73.8 8.4 7.4 10.4 100 February 75.8 8.0 7.2 9.0 100 March 77.6 7.9 4.8 9.7 100 April 79.0 8A 3.7 8.9 100 May 79.7 8.1 3.5 8.8 100 June 79.8 7.5 3.8 9.0 100 July 77.3 7.1 4.5 11.1 100 August 77.7 7.3 3.9 11.1 100 September 83.2 7.9 2.3 6.5 100 October 83.4 8.8 1.6 6.1 100 November 82.5 9.0 1.5 7.1 100 December 82.5 10.1 1.5 6.0 100 2008 January 81.9 12.6 .9 4.6 100 February 76.1 17.8 1.0 5.1 100 March 701 19.7 1.9 8.3 100 April 71.2 20.7 2.2 5.8 100 May 76.7 17.6 1.2 4.5 100 June 75.4 15.6 1.3 7.6 100 July 76.2 14.2 1.5 8.1 100 August 75.7 14.5 1.9 7.8 100 September 79.9 14.0 1.7 4.4 100 October 84.0 13.4 1.1 1.5 100 November 85.3 12.4 1.0 1.3 100 December 88.4 lOA .6 .6 100 NOTE: Restricted 10 conventional first liens for owner-occupied. 1-4 family. ARM Adjustable-rate mongage. site-built properties. SOURCE: Lender Processing Services. Inc. FRM Fixed-rate mongage. accounted for about 17.8 percent of the market, credit-risk component of pricing so that we have a falling to a range of between 5 and 6 percent at the definition of a "higher-priced loan" that is more beginning of 2008 (table 11). During 2008, ARM constant over time and, therefore, more fully reflec activity continued to fa]] (particularly in the latter tive of high-risk lending activity, we construct an portion of the year) to less than 2 percent. Given the adjusted measure. small share of ARMs in the marketplace in 2008, the We define the credit-risk component of a loan as majority of distortions in the incidence of reported the difference between the APR on that loan and the higher-priced lending caused by changes in the inter APR available to the lowest-risk prime borrowers at est rate environment can be attributed to fixed-rate that time. This credit-risk component is assumed to be lending. constant over time.3l In other words, we assume that a nonprime borrower who received a loan with an APR Adju ting for Changes in the Interest Rate that was 0.25 percentage points above the APR Environment. 2006-08 available to prime borrowers at that time would receive a loan that was 0.25 percentage points above The changes in the interest rate environment dis the available rate for prime borrowers at all other cussed in the previous section can result in loans of a times, regardless of any changes in the interest rate given level of credit risk being reported as higher environment. We then examine the share of loans priced in the HMDA data at some points in time but over time with credit-risk components above specific not others. This variation makes drawing inferences about changes in high-credit-risk lending based upon 31. The credit-risk component that we are defining here may changes in the incidence of reported higher-priced include other risk components besides credit risk (for example, lending much more complicated. To better isolate the prepayment risk).

A184 Federal Reserve Bulletin 0 April 2010 thresholds. This approach should provide a more Incidence of Higher-Priced Lendin.g accurate depiction of how the extent of high-risk lending has changed that is relatively free of the As in earlier years, most loans reported in 2008 were distortions introduced in the incidence of reported not higher priced as defined under HMDA reporting higher-priced lending by changes in the interest rate rules. Among all the HMDA-reported loans secured environment. by one- to four-fami Iy properties, 11.6 percent were In estimating the credit-risk component of loans in higher priced in 2008, down significantly from the the HMDA data, we use, as the measure of the rate historic high point of 28.7 percent in 2006 and from available to prime borrowers, the APR derived from 18.3 percent in 2007 (data for 2008 shown in table 3; the information reported in the Freddie Mac PMMS data for 2006 and 2007 are not shown in tables). The for a 30-year fixed-rate loan.32 As an approximation incidence of higher-priced lending fell from the 2007 of the APR on loans in HMDA, we add the reported levels for all conventional loan product categories, spread (for higher-priced loans) to the appropriate with the exception of those related to manufactured HMDA reporting threshold for a 30-year loan. We homes. refer to the resulting estimate of the credit-risk com Looking exclusively at changes in the annual rates ponent as the PMMS spread.33 of higher-priced lending can obscure the information PMMS spreads can only be calculated for loans about how the mortgage market is developing over with reported spreads in HMDA. Loans with PMMS time. To better illustrate how changes in higher-priced spreads below 0.95 percentage points would not have lending have played out in recent years, we examine been reported as higher priced at any time between monthly patterns in higher-priced lending activity. 2006 and 2008. We are therefore unable to identify The top line in the upper panel of figure 4 shows the these loans in the data. Loans with PMMS spreads incidence of reported higher-priced, home-purchase between 0.95 and 1.75 percentage points would have lending. The monthly data show that the overall been reported as higher priced at some points during annual decline in the incidence of higher-priced lend the three years but not at others, so we can only ing between 2007 and 2008 obscures a substantial identify these loans at some points in time. Only those rebound in the incidence of reported higher-priced loans with a PMMS spread of more than 1.75 percent lending in the second half of 2008. A similar rebound age points have been consistently identified in the in the incidence of reported higher-priced lending is HMDA data as higher priced. Therefore, we focus on observed for the refinance loans (shown in the bottom loans with a PMMS spread greater than 1.75 percent panel of figure 4). age points in examining how high-risk lending has This rebound in the incidence of reported higher changed over time, as this measure should be free of priced lending appears to reflect changes in the the distortions introduced by changes in the interest interest rate environment and not changes in actual rate environment and should more accurately reflect high-risk lending activity. Using our methodology to changes in high-risk lending activity over time. We correct for distortions caused by changes in the refer to loans with a PMMS spread in excess of interest rate environment, we see that the share of 1.75 percentage points as adjusted higher-priced adjusted higher-priced loans (shown in figure 4 as loans. "PMMS + 1.75") continued to decline in 2008 and remained at historically low levels, even when the incidence of reported higher-priced lending in HMDA began to increase. There does appear to have been 32. By using the APR for the 3D-year fixed-rate mortgage, we are implicitly treating all loans in the HMDA data as though they were something of a rebound in the share of adjusted 3D-year fixed rate loans. Because of the small market share for ARMs higher-priced home-purchase loans at the very end of and the prevalence of 3D-year loans, we do not expect this simplifying 2008, though, even after this increase, the incidence assumption to have a substantive effect on our analysis of 2008 data. However, note that the share of loans that were ARMs in 2006 and of adjusted higher-priced lending remained below the early 2007 was much higher than in 2008. As such, one should levels observed throughout 2007. exercise caution when comparing incidences of adjusted higher-priced The pattern for refinance lending appears some lending across these periods. 33. Under new rules adopted by the Federal Reserve Board in what different than that for home-purchase lending. 2008, the spread between a loan's APR and the APR of comparable The incidence of adjusted higher-priced refinance prime PMMS loan will be used to determine whether a loan is reported lending fell at the beginning of 2008 and then as higher priced in HMDA. The new rules take effect for all loans with application dates on or after October 1,2009, and for loans regardless remained relatively flat throughout the rest of the of application date if originated in 20 I O. APRs of first-lien loans with year. The timing of this decline, and the fact that a a PMMS-APR spread of 1.50 percentage points or more must be similar decline was not observed for home-purchase reported. For second-lien loans, the reporting threshold is a PMMS APR spread of 3.50 percentage points. lending, suggests that this may be the result of a

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A18S 4. Higher-priced 'hare of lending. by annual percentage more than 3.75 percentage points ("PMMS + 3.75"). rate thre hold. 2006-08 Most of the adjusted higher-priced loans had PMMS spreads in excess of 2.75 percentage points for most Percentage [li)inl's of 2006. In 2007, this circumstance changed dramati Home purchase cally as the shares of both home-purchase and refi 25 nance lending accounted for by these loans fell precipitously. While starting 2008 from much lower 20 levels than previous years, the share of loans made up of these loans that were very higher priced continued PMMS + 1.75 15 to fall in 2008, though the decline seems to have slowed somewhat. Nevertheless, loans with PMMS 10 spreads in excess of 2.75 percentage points now PMMS + 3.75 - 5 account for a negligible share of home-purchase lending and for a very small share of refinance lending. This suggests that. as in 2007, the decline in Pr.:rn:magc point.. . the incidence of adjusted higher-priced lending has Refinance been greater for the highest-risk borrowers. 35 30 Higher-Priced Lendin!? by Lender Type 25 Higher-priced lending activity can also differ by type 20 of lender. Three types of lender are considered here: 15 depository institutions, subsidiaries or affiliates of depository institutions, and independent mortgage 10 companies. In 2006, independent mortgage compa nies originated almost one-half of all higher-priced loans and accounted for 31.7 percent of all first-lien loans (table 12). For that year. depository institutions NOTE: The data are monthly. Loans are fIrst-lien mongages for site-built accounted for a smaller share of higher-priced lending propenies and exclude business loans. Annual percentage rates are for conventional 3D-year fixed-rate prime mongages. (26.8 percent of adjusted higher-priced lending) than PMMS Freddie Mac Primary Mongage Market Survey. independent mortgage companies. HMDA Home Mongage Disclosure Act. Since 2006, the share of higher-priced loans origi changing mix of borrowers caused by the refinancing nated by independent mortgage companies has fallen boom in early 2008. This refinancing boom. which dramatically. Independent mortgage companies ac coincided with a sharp decline in the prime mortgage counted for 18.2 percent of reported higher-priced rate. may have encouraged a large number of high loans in HMDA in 2008, down from 45.7 percent of credit-quality borrowers to refinance their prime such loans in 2006. When using the adjusted higher mortgages in order to take advantage of relatively low priced loan definition, the decline has been even mortgage rates. A tendency of high-credit-quality steeper (particularly between 2007 and 2008), with borrowers to refinance when rates are low and to the share of higher-priced loans extended to indepen refrain when rates are high may explain why the dent mortgage companies falling to 11.9 percent. incidence of adjusted higher-priced refinancing lend The share of adjusted higher-priced loans origi ing exhibits more variation than home-purchase lend nated by depository institutions has increased sub ing. A comparison of the incidence of adjusted higher stantially from 26.8 percent in 2006 to 61.6 percent in priced lending and volume of refinancing suggests 2008, though the incidence of adjusted higher-priced that increases (decreases) in refinancing activity often lending has also fallen for depository institutions over occur at the same time as decreases (increases) in the this period from 14.7 percent to 5.6 percent. These incidence of adjusted higher-priced lending (figures 3 numbers suggest that the increased share of adjusted and 4). higher-priced lending of depository institutions re Figure 4 also shows the share of home-purchase flects the sharp decline in high-risk lending by inde and refinance lending that was composed of loans pendent mortgage companies and not an increased with PMMS spreads of more than 2.75 percentage focus on high-risk lending by depository institutions. points (shown in the figure as "PMMS + 2.75") and Some of the increased share for the depository insti-

Al86 Federal Reserve Bulletin D April 2010 12. DistribuLion of reportl!d higher-priced lending, by lype of lender, and incid 'nce al each Iypt: of lender, 2006-08 Percent except as noted MEMO: Type of lender Higher-priced loans Adjusted higher-priced loans I All loans I I I I I Number Distribution Incidence Number Distribution Incidence Number Distribution 2006 Independent mOl1gage company ..... 1,287,869 45.7 39.1 1,163,602 47.7 35.3 3,292,281 31.7 Depository ................ ...... 802,125 28.5 18.0 653,985 26.8 14.7 4,455,331 42.9 Alii liate or SUbsidiary of depository .. 725,953 25.8 27.6 624.179 25.6 23.7 2.633,237 25.4 Tolal . 2,815.947 100 27.1 2.441:766 100 23.5 10.380.849 100 2007 Independenl mOl1gage company 306.675 21.1 18.2 264.893 21.7 15.7 1,685.948 20.5 ~tl\'t7!:~o~ s~bs;di.;ry~t' d~p~~ii~~y 660.744 45.5 14.2 519.662 42.6 11.2 4.648,082 56.5 •. 485.287 33.4 25.7 436,425 35.7 23.1 1.888,347 23.0 Total ............. ...... 1,452.706 100 17.7 1.220.980 100 14.8 8.222.377 100 2008 Independent mOl1gage company 120,605 18.2 9.1 43.894 11.9 3.3 1,319.714 21.3 Depository . . . . . . . . , . . . 401,594 60.8 9.9 228,252 61.6 5.6 4.044,889 65.3 Affiliate or subsidiary of depository. 138,709 21.0 16.8 98,232 26.5 11.9 826,848 13.4 Total .. 660,908 100 10.7 370.378 100 6.0 6,191,451 100 NOTE: First-lien mOl1gages for site·buill properties: excludes business loans. (APRs) 1.75 percentage poinls or more above the 30-year fixed-rate APR from For definition of higher·priced lending, see lext. Ihe Freddie Mac Primary MOrlgage Markel Survey. I. Adjusted higher-priced loans are those with annual percentage rates tutions may reflect acqUlsItlons of previously inde of home-purchase loans and one-quarter of refinance pendent mortgage companies. loans were backed by either the FHA or the VA, and fewer than 15 percent of originations were sold to THE SURGE IN FHA AND VA LENDING unaffiliated institutions or into the private securitiza tion market (however, recall table 4, which indicates Figure 5 illustrates the changing structure of the that almost no loans were sold into the private mortgage market between 2006 and 2008. It groups securitization market in 2008). The two GSEs in first-lien owner-occupied site-built mortgages for creased their market share in 2007, but then relin home purchase and refinance into six distinct catego quished much of these gains during 2008. ries: (1) loans sold to an affiliate or held in the While the decline of the subprime-based private portfolio of the originating lender ("Portfolio"), securitization market was well under way by 2007, (2) loans sold into the private securitization market or FHA and VA lending did not surge until 2008. At least to unaffiliated institutions ("Private"), (3) loans sold two events in early 2008 may help explain the timing to Fannie Mae or Freddie Mac (GSEs), (4) loans of this surge. First, as part of the Economic Stimulus insured by the FHA, (5) loans backed by the VA, and Act passed in February, the Congress authorized an (6) loans insured by the Farm Service Agency or increase in the loan-size limits applicable for the FHA Rural Housing Service, The data show that approxi and VA programs and GSE purchases. Second, begin mately 40 percent of loans in early 2006 were sold ning in the early part of 2008, PMI companies started into the private securitization market or to an unaffili limiting their issuance of insurance and raising prices ated institution,34 By the end of 2008, nearly one-half because of rising claims and binding capital restric tions in certain states. As a consequence, Fannie Mae 34. Classifying loans by their ultimate disposition is complicated and Freddie Mac substantially reduced their pur by HMDA reporting rules. A loan is classified as sold if the sale takes chases of loans with loan-to-value ratios (LTV) above place within the HMDA reporting year. In other words, a loan originated in December must be sold within the same month 10 be 80 percent, which by statute require PMI (or other classified as sold. Since lenders often hold loans for several months credit enhancement), Both GSEs also raised their before selling them, there is an "underreporting" in loan sales in HMDA for loans originated toward the end of the year. Analysis of Ihe credit guarantee fees for such loans at this time as HMDA data indicates that most loans are sold within three months if well. We examine the effects of these events in the they were sold. To adjust for the underreporting in October-December, following two sections, we used an imputation formula based on the allocation of loans originated in September (and the following January for 2006 and 2007 data) to allocate conventional loans among the first three groups shown in figure 5. Data in all of the tables presented in this section are based on this imputation.

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year Al87 5. Adjusted share of owner-occupied fir l-lien lendino, by the FHA could not insure single-family home loans type of loan. 2006-08 above $271,050 in most areas of the country.36 VA loans do not have a size limit, but they do have Percentage (Xlinl.\; a guarantee limit that is tied to GSE loan limitsY The Home purchase VA guarantees the smaller of 25 percent of the loan 50 amount or 25 percent of the applicable GSE loan Private' 40 limit. As such, increases to the GSE loan limit raise the maximum VA guarantee amount. To understand the potential effect of the higher limits, we divided loans originated in 2008 into four categories based on the size of the loan and the location of the property securing the loan: (I) loans smaller than the applicable 2007 FHA limit; (2) loans larger than the applicable 2007 FHA loan limit, but I, I" " , , , , , "I " " " "" I" , ' , , , " " I ,I less than $417,000 and the applicable 2008 FHA Pcrcclliagt' pOinL'i limit; (3 ) loans larger than $417,000 but under the 2008 high-cost area limit common to the FHA, VA, Refinance 50 and GSEs; and (4) all other loans. Changes in the loan-size limits directly affected the options available 40 to borrowers for loans in categories 2 and 3 but did not affect those in categories 1 and 4. 30 Table 13 displays the share of loans in these four 20 categories by month, loan purpose, and loan product type (FHA, VA, GSE, and other).38 Among FHA 10 loans, there is a noticeable rise in the share of o "newly FHA-eligible" loans (categories 2 and 3) in the first half of the year when the limits were 1, 1, ,,, , ,, ,,,1, ,,,, , ,,, ,,1,, ,,,,,, , ,1,1 increased for both home-purchase and refinance 2006 2007 2008 loans. For 2008 overall, the share of FHA-insured NOTE: The data are monthly. Loans are for site-buill propenies and exclude business loans. For each year, the founh quaner is adjusted for the home-purchase loans in categories 2 and 3 was government-sponsored entity (GSE), private, and ponfolio loans. See text 9.7 percent, compared with 2.4 percent in 2007.39 note 34 for details. l. Private loans are conventional loans sold to a nongovernment-related or This increase implies that the limit changes lifted non-affiliate instirution. FHA home-purchase lending by 7.4 percent in 2008, 2. Ponfolio loans are conventional loans held by the lender or sold 10 an affiliate institution. 3. GSE loans are all originations categorized as conventional and sold 10 Fannie Mae, Freddie Mac, Ginnie Mae, or Farmer Mac. FHA Federal Housing Administration-insured. 36. The GSE loan limits were higher in Alaska and Hawaii; the VA Depanment of Veterans Affairs-guaranteed. maximum loan size for the FHA program was as low as $201,160 in FSAJRHS Fann Service Agency or Rural Housing Service-guaranteed. some low-cost areas. 37. VA loans larger than the GSE limits, however, cannot be sold into Ginnie Mae security pools. 38. The other category includes ponfolio loans, private loans, and loans insured by the Farm Service Agency or the Rural Housing The £.fJect of Higher Loan-Size Limits Service (a very small pan of the category). Loan growth during 2008 (panicularly for the first half of the year), New standards released on March 6, 2008, raised shown in table 13, is likely understated because of the omission of data the GSE and FHA loan-size limits up to $729,750 in from the 15 lenders who failed to repon HMDA data, as discussed earlier. In December 2007, these lenders accounted for 3.4 percent of certain areas designated by the Department of Hous home-purchase loans and 6.0 percent of refinance loans in HMDA; ing and Urban Development as "high cost." 35 FHA however, these loans were not proponionately distributed among the loan limits were also raised above their 2007 levels four loan types examined here. For the same period, these lenders represented less than 2 percent of FHA loans and 0.0 I percent of VA in many other areas to new levels. Prior to these loans. Their market share of GSE loans was 3. I percent for home changes, the GSEs could not purchase single-family purchase loans and 5.7 percent for refinance loans; for "other" loans, home loans above $417,000 in most states, while their share was 4.1 percent for home-purchase loans and 6.7 percent for refinance loans. 39. FHA-insured loans in the 2007 HMDA data for amounts that exceed the single-family loan limit can be attributed to recording 35. More than one-half of the 2008 loans in the high-cost areas errors in the data or to loans for two-, three-, or four-family Sl.ructures, were in California. One-third of the loans were in the mid-Atlantic which have higher loan limits and are not identified separately in the states of New York, New Jersey, Maryland, and Virginia. HMDAdata.

A 188 Federal Reserve Bulletin 0 April 2010 13. Percent f h mc-pufcha e anu refinance loan. , by category or FHA and GS . eligibility. by type of loan and monLh or origination Percent except as noted Home purchase Refinance Type of loan Newly Other Newly Other of b o y r i m gi o n n a t t h io n Nu l m oa b n e s r of Growth M sh a a rk re e t n e o l F i c g H h ib a A l n e g . e e N l F i e g H w ib A l l y e GS F E H A an d I 'eli o g r i b n i o li ty Nu l m oa b n e s r of Growth M sh a a rk re e t n e o l i F c g H h ib a A l n e g , e e N l F i e g H w ib A l l y e PS F E H A an e eli o g r i b n il o i ty eligible ' change' eligible change' FHA 2008 January .. 21.857 100.0 14.1 96.0 3.1 .2 .7 25,634 100.0 9.9 93.9 5.0 .3 .9 February 31.099 142.3 17.6 95.7 3.4 .2 .7 35.100 136.9 8.5 93.8 5.1 .3 .8 March. 43.193 197.6 20.9 94.1 4.8 .3 .7 38,896 151.7 10.1 92.2 6.5 .4 .9 April . ... 56.654 259.2 25.7 90.3 7.5 1.1 1.0 43,173 168.4 12.4 85.7 12.0 .9 1.4 May ... ... 70.554 322.8 28.5 88.1 9.1 1.6 1.3 39.700 154.9 15.5 83.6 13.4 1.3 1.7 June ....... 75,493 345.4 29.1 87.0 9.5 1.8 1.6 37,073 144.6 17.4 83.4 13.1 1.4 2.2 July. 79,949 365.8 31.4 87.1 9.4 1.9 1.6 35.697 139.3 21.4 83.5 12.8 1.4 2.2 August. 80.968 370.4 33.7 87.3 9.0 1.9 1.8 34.773 135.7 24.7 83.7 12.6 1.6 2.1 September .. 90,597 414.5 40.5 88.2 8.4 1.8 1.7 37,068 144.6 26.6 815 12.8 1.6 2.2 October 72.304 330.8 35.3 87.3 8.6 2.1 2.0 46,682 182.1 25.5 82.6 13.3 1.3 2.9 November . 54.914 251.2 36.5 88.0 8.2 1.9 1.9 33,774 131.8 28.8 83.0 13.2 1.2 2.7 December . 64.245 293.9 38.2 87.3 8.5 2.1 2.2 51,327 200.2 24.9 80.8 14.5 1.2 3.5 Total .. 741,827 29.6 88.7 8.1 1.6 1.6 458,897 16.2 85.4 11.5 LI 2.0 2007 Second half. 149,428 .. . 9.4 96..1 2.7 .2 .8 108.094 ... 7.0 94.5 4.3 .3 1.0 Total . 257,674 . .. 7.8 96.7 2.4 .2 .7 164.063 . .. 4.6 94.9 3.9 .3 1.0 VA 2008 January .... 6,976 100.0 4.5 77.2 17.4 .6 4.8 2,625 100.0 1.0 74.7 17.9 .3 7.2 February ... 8,747 125.4 5.0 76.7 17.4 .6 5.3 5,026 191.5 1.2 70.7 21.8 .2 7.2 March .. 10.661 152.8 5.2 75.8 18.0 1.1 50 4.709 179.4 1.2 71.7 21.0 .4 6.9 April. .. .... 11.710 167.9 5.3 75.1 17.9 1.4 5.7 4,437 169.0 1.3 74.8 18.2 .4 6.7 May ... .... 13.651 195.7 5.5 73.6 18.5 1.3 6.5 3,441 131.1 1.3 77.5 16,4 .6 5.5 June . 14.707 210.8 5.7 72.0 19.8 1.2 7.1 2,565 97.7 1.2 77.4 16.4 ,4 5.8 July .. 14,948 214.3 5.9 73.0 18.8 1.3 6.9 2,071 78.9 1.2 80.6 14.1 .6 4.7 August. . 14.071 201.7 5.9 73.7 18.5 1.4 6.5 1,746 66.5 1.2 82.4 12.8 .5 4.4 September. . 12.532 179.6 5.6 75.2 17.4 1.4 6.0 1.906 72.6 1.4 78.5 14.4 .7 6.4 October .. 13,202 189.2 6.4 76.0 16.2 1.5 6.3 3.111 118.5 1.7 73.9 18.1 .9 7.2 November .. 10,307 147.7 6.9 77.0 15.7 1.6 5.6 1.939 73.9 1.7 73.4 16.8 1.4 8.4 December .. 12.131 173.9 7.2 76.2 15.4 1.8 6.7 4.953 188.7 2.4 67.5 21.6 .9 10.0 Total .. 143.643 5.7 74.9 17.7 1.3 6.1 38,529 1.4 74.0 18,4 .6 7.0 2007 Second half 56,002 ... 3.5 75.8 18.8 .1 5.3 8.129 .5 79.6 15.3 .2 4.8 Total. ..... 106.710 . .. 3.2 76.2 18.7 .1 51 15.019 ... ,4 80.5 14.9 .2 4.4 GSE2 2008 January . .. 59,029 100.0 38.0 72.1 19.9 .6 7.4 105.505 100.0 40.9 74.3 18.6 .2 6.9 February .. 63,165 107.0 35.8 71.9 20.1 .5 7.5 177.617 168.3 43.0 71.9 20.1 .2 7.8 March . 70.510 119.4 34.1 70.9 20.9 .4 7.8 157.348 149.1 40.9 74.9 18.0 .2 6.8 April.. 68.462 116.0 31.1 70.6 20.8 .6 8.0 132.992 126.1 38.1 76.3 16.9 .2 6.5 .. May .... 71.840 121.7 29.0 69,4 20.6 1.2 8.8 86.447 81.9 33.9 76.7 16.3 .5 6.6 June .... 72,736 123.2 28.1 68.0 20.1 2.4 9.5 69,358 65.7 32.6 74.6 15.8 2.7 6.8 July .. 67,790 114.8 26.6 68.3 19.2 3.3 9.2 47,377 44.9 28.4 76.9 14.3 2.5 6.4 August .. 61.150 103.6 25.4 68.4 18.6 3.7 9.3 37,482 35.5 26.6 77.3 13.7 2.2 6.7 September. . ' 50.053 84.8 22.4 70.4 17.3 3.8 8.4 38.002 36.0 27.3 76.0 14.5 2.4 7.1 October .. 48,782 82.6 23.8 71.0 16.3 4.2 8,4 54.018 51.2 29.5 71.4 16.6 3.9 8.2 November. . 34.849 59.0 23.2 71.2 16.7 3.9 8.3 31.474 29.8 26.8 75.1 14.8 2.6 7.5 December .. 36.962 62.6 22.0 70.3 17.1 3.8 8.9 60.730 57.6 29.5 68.2 19.8 2.3 9.7 Total 705.328 28.1 70.1 19.3 2.2 8.5 998.350 35.3 74.3 17.4 1.I 7.2 2007 Second half 539,637 32.5 75.4 17.11 .3 6.4 449.999 25.2 78.3 16.1 .3 5.3 Total .... 1,109.069 32.6 77.1 16.7 .3 6.0 995,889 26.2 79.4 15.1 .:1 5.1 assuming that the share of FHA lending in each of increases (category 3). Under the same assumption these categories would have remained at its 2007 used above, we estimate that GSE home-purchase level in the absence of limit changes (derived from lending would have been 1.9 percent lower and GSE table). This same assumption would imply that FHA refinance lending only 0.8 percent lower in 2008 had refinance lending was 8.9 percent higher because of the GSE limits not been changed. the limit changes. In sum, the effect of the limit increases on FHA, In contrast to the patterns for FHA lending, the VA, and GSE lending appears to have been modest; proportion of VA loans in the four categories changed the vast majority of the overall growth in both FHA little over the course of the year, suggesting that the and VA lending was in the categories in which there limit increases had little effect on VA lending. GSE was no change in the eligibility standards. lending showed only a modest boost from the limit

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A189 13, Percent of home-purchase and refinance loan , hy category or HA and GSE eligibility. hy Iype of Joan and month of originalion-Colllirlued Percent except as nmed Home purchase Refinance Type of loan Newly Other Newly Other of b o y r i m gi o n n a t t h io n Nu l m oa b n e s r 0 Growth M sh a a rk re e t eli c g F h ib a H n le A g , e n o e N l F i e g H w i A b l l y e G e S l F i E g H i A b a l n e d e c li h o g a r i b n n i g o l e i t ' y Nu l m oa b n e s r 0 Growth M sh a a rk re e t eli c g h F i - b a H n le A g , e no e N l F i e g H w i A b l l y e P e S l F i E g H i b A a l n e d e c li h o g a r i n b n g il o e i t l y Other' 2008 January .... 67,503 100.0 43.4 67.8 14.3 3.9 13.9 124,272 100.0 48.2 72.5 13.9 2.8 7.2 February ... 73.628 109.1 41.7 68.4 14.7 3.3 13.7 195,520 157.3 47.3 710 15.7 2.1 10.7 March .. 82,163 121.7 39.8 67.7 14.9 3.3 14.1 183,400 147.6 47.7 72.4 13.9 2.3 11.2 April. .. .. 83,434 123.6 37.9 68.2 14.5 3.4 13.9 168.781 135.8 48.3 74.1 13.2 2.0 11.4 M"y ....... 91,289 135.2 36.9 67.9 14.7 3.2 14.2 125.791 1OJ.2 49.3 75.1 12.3 2.2 10.7 June .. ... 96,353 142.7 37.2 66.4 15.2 3.3 15.2 103.786 83.5 48.8 75.3 11.6 2.7 10.4 July .. .... 91,786 136.0 36.1 675 14.5 3.5 14.5 81.7 I5 65.8 49.0 76.3 10.6 2.7 lOA August . ... 84.186 124.7 35.0 68.1 13.9 3.6 14.3 66,685 5.l7 47.4 78.1 9.8 2.6 lOA September. . 70,329 104.2 31.5 70.1 13.4 3.4 13.1 62,133 50.0 44.7 77.2 10.6 2.6 9.6 October .. 70.623 104.6 34.5 70.8 13.3 3.2 12.7 79,514 64.0 43.4 74.0 13.2 2.9 9.6 November .. 50.385 74.7 33.5 71.5 12.6 3.3 12.6 50.156 40A 42.7 75.9 11.0 2.9 9.8 December. 54,709 81.1 32.6 71.0 12.8 12 13.0 88,828 71.5 43.2 70.3 15.4 2.8 10.2 Towl. ... ... 916,388 .. 36.6 68.5 14.2 3.4 13.9 1,330.581 47.1 73.8 13.1 2.4 11.5 2007 Second half 838.703 ... 54.6 67.6 14.3 5.1 13. I 983.519 .. , 67.3 74.4 12.0 4.6 9.1 Total .... .. 1.847,598 .. . 56.4 67.5 13.2 6.3 13.0 2,396.004 ... 68.7 72.1 11.4 6.5 9.9 Total market 2008 January . 155,365 100.0 100 73.8 15.0 2.0 9.2 258.036 100.0 100 75.4 15.0 1.5 8.1 February .. 176,639 113.7 100 74.9 14.8 1.6 8.8 413.263 160.2 100 73.3 16.7 1.I 8.8 March . 21)6,527 132.9 100 74.8 15.0 1.6 8.7 384.353 149.0 100 75.4 14.9 1.2 8.4 April .... ... 220,260 141.8 100 75.0 14.9 1.8 8.3 349,383 135.4 100 76.4 14.5 1.2 7.9 May. 247,334 159.2 100 74.4 15.0 2.0 8.5 255.379 99.0 100 77.0 13.9 1.5 7.7 JUlie. .. 259,289 166.9 100 73.2 15.1 2.5 9.2 212,782 82.5 100 76.5 IJ3 2.4 7.8 July .... 254.473 163.8 100 74.2 14.4 2.8 8.6 166,860 64.7 100 78.1 12.2 2.3 7.4 August. 240,375 154.7 100 75.0 13.7 2.9 8.4 140.686 54.5 100 79.3 11.6 2.2 6.9 September. . 223,511 143.9 100 77.8 12.5 2.7 7.0 139.109 53.9 100 78.6 12.3 2.2 6.9 October .... 204.911 131.9 100 77.0 12.5 3.0 7.5 183,325 71.0 100 75.4 14.3 2.8 7.5 November. . 150,455 96.8 100 77.8 12.1 2.8 7.2 117,343 45.5 100 77.7 12.7 2.3 7.3 December. . , 168,047 108.2 100 77.4 12.3 2.8 7.5 205.838 79.8 100 72.3 16.6 2.2 8.9 Total ... .... 2507,186 .. . 100 75.3 14.0 2.4 8.3 2.826.357 . . 100 75.8 145 1.7 8.0 2007 Second half 1,583,770 ... 100 73.1 14.5 2.9 9.5 1.549,741 .. , 100 76.8 12.5 3.2 7.6 Total ....... 3,321,051 100 73.2 13.7 3.6 9.5 3,570,975 100 75.1 12.0 46 8.3 NOTE: First-lien mongages for owner-occupied, 1-4 family, site-built prop 10 Fannie Mae, Freddie Mac, Ginnie Mae, or Farmer Mac by the end of the enies; excludes business loans. Government-sponsored entity (GSE) and other calendar year. loans have been adjusted for the rounh quaner of 2008; for more details, see 3. Other loans include loans originated with a Farm Service Agency or Ru text. raj Housing Service guarantee and conventional loans nOI sold 10 a I. Includes loans that were not FHA or GSE eligible or were always GSE government-related institution . eligible. . Not applicable. 2. GSE loans include all originations categorized as conventional and sold Pullback by PM! Companies and Its Both the FHA and VA loan programs offer a form Implication for FHA and VA Lending of credit insurance and, consequently, compete with the PMI companies. The two government programs With losses mounting in 2007 and 2008, PMI compa likely increased their market share, at least to some nies started raising prices and limiting coverage in extent, because the PMI and GSE price increases some areas in the spring of 2008. These changes pushed the price of conventional higher-LTV loans likely reduced the ability of the GSEs to purchase above that for the FHA and VA programs for some higher-LTV loans (loans with LTVs above 80 per cent) because of the statutory requirement that such loans carry PMI (or a comparable credit enhance ment) in order to be eligible for GSE purchase. The GSEs also raised their own underwriting fees for relatively high-LTV loans in March 2008 and further to a range of 0.75 to 2.00 percentage points, depending on the in June.40 borrower's credit score. On March 9, 2008, both GSEs added a 0.25 percentage point additional fee for "market conditions." In June 2008, the GSEs raised their fees again, by an average of 0.50 percen! 40. PMI annual premiums for loans with LTVs above 80 percent age points. [n the summer of 2008, many PMI companies announced range from 0.50 percentage points to greater than 1.00 percentage further increases in their rates, particularly in markets they defined as poin!. On March I, 2008, Fannie Mae and Freddie Mac raised their "distressed." In some areas, it became almost impossible to obtain one-time delivery fees for 30-year loans with LTVs above 70 percent PM[ for loans with LTVs of greater than 90 percen!.

Al90 Federal Reserve Bulletin 0 April 2010 14. Disposilion of home-purcha'c and refinance application. for private mortgag> insurance, convel1lional 103ns. and nonconvenlional loans. by month of aClion taken. 2008 Private mortgage insurance Conventional Purpose o f o o f r l ig oa in n a t a io nd n month a N pp u l m ic b a e ti r o o n f s I lo N an u s m c b o e v r e o re f d I w P it e h r d c r e a n w t n I P ercent denied a N pp u l m ic b a e t r io o n f s I Nu l m oa b n e s r of I w P it e h r d c r e a n w t n I P ercent denied Home purchase January. ... .. 102.859 73.644 3.2 3.0 217.027 124.433 14.2 21.2 February. -......... 89,047 59.372 3.9 4.2 217.777 134.085 13.0 19.4 March .. ....... 95,190 61.160 4.7 7.1 238.353 149.236 11.9 18.6 April ........ .. .. 96.396 65.874 4.2 4.8 239.885 147.684 13.2 19.7 May. .... ... . .... 86,310 56.563 4.9 5.7 241.888 158.238 12.3 16.5 June ... ... . ...... 83.544 54.739 3.8 6.4 246.414 163,806 11.8 16.1 July .. ..... 82,427 53,663 3.7 6.7 238,464 154.109 12.9 16.4 August. .. ......... ... .. 71.505 45,766 4.5 6.2 213,776 139.688 12.8 16.3 September. .. ..... 59.115 36,044 7.1 7.3 183.792 115,074 1.1.5 18.0 October .. ... .... .. 69.844 32.936 12.6 7.6 183:889 113.280 14.3 18.4 November. . ......... .... 47,634 26.140 7.9 7.3 133;188 80.344 14.3 19.2. December .. 44.118 24.680 6.3 8.4 138.183 86.176 14.0 17.6 Refinance January .... ............ 53.565 37,895 3.3 3.1 562.486 229,794 16.7 40.6 February. . . . . . . . . . . . . ... 56.450 39.379 5.6 3.9 721.408 373.119 15.4 30.3 .... J M M A u p n a a r y r e i c l . h . . . . . . . . . .. .. . . . . .. . . . . . - - . , , . , . . . . . . . . " . .' - 6 5 3 4 5 5 6 6 , , . , 2 0 4 8 8 4 5 8 1 0 2 0 4 3 2 1 7 5 6 7 . . , , 5 9 0 36 3 5 0 2 6 6 4 5 6 5 7 . . . . 5 6 9 6 5 5 6 6 . . . . 6 5 7 4 6 6 4 40 3 7 8 1 2 1 5 . . . , 8 1 8 9 4 8 9 5 5 5 5 8 2 3 3 1 0 1 4 7 1 3 2 0 . . . . 7 6 2 1 4 9 3 5 1 1 8 6 1 1 1 1 4 5 4 4 . . . . 6 0 0 9 3 3 3 3 4 1 7 6 . . . . 2 6 8 5 July .. . ......... 31.766 11.779 6.8 7.5 344,968 129.109 16.6 43.0 AuguSI .. ............ 25,533 8.976 7.2 6.9 281.635 104,170 16.8 44.6 September ........... 19.050 7.310 9.2 8.8 266.415 100.132 16.7 45.2 October. . ...... 30.028 8.841 17.7 7.1 311.590 133,495 15.9 41.0 November. .. ....... ,. 17.166 6,464 12.4 7.5 216,267 81.625 18.4 44.6 December .. .. ' .. ", .. 16.166 7,187 11.8 15.9 332.578 149.506 21.2 34.6 NOTE: First-lien mongages for owner-occupied. 1-4 family. site-built properties; excludes business loans. borrowers.41 Consistent with this account, figure 5 of the HMDA data filed by the PMI industry (appen indicates that the increase in FHA's home-purchase dix B). These data reAect the disposition of applica and refinance market shares accelerated just as GSE tions for mortgage insurance received by the eight market shares began falling in early 2008. VA market large PMI companies in 2008. These applications are shares, however, rose more steadily over time. arrayed by month, disposition, and loan type (table 14). To further examine the potential link between PMI For context, we also provide monthly information on issuance and FHA and VA lending, we take advantage application disposition for conventional (GSE, portfo lio, and private) and nonconventional (FHA, VA, and Farm Service Agency or Rural Housing Service) 41. For the first half of 2008, the FHA charged a flat delivel)' fee of 1.50 percentage points and an annual premium of 0.50 percentage lending. points to insure 30-year mortgages. On July 14, 2008, the FHA The data on PMI denial and withdrawal rates implemented a risk-based insurance system with upfront fees for reveal only mild evidence of a change in PMI compa 30-year mortgages ranging from 1.25 to 2.25 percentage points and annual premiums from 0 to 0.55 percentage points, depending on the nies' underwriting practices. Nevertheless, the sharp LTV and credit score of the borrower. The price changes were rolied reduction in PMI issuance during 2008 (for instance, back by the Congress, however, which passed legislation prohibiting the ratio of PMI issuance to conventional home the use of a risk-based pricing system after October l, 2008. On that dale, the FHA announced a new fee schedule with an upfront fee of purchase lending was almost 0.60 in January and fell 1.75 percentage points and an annual premium of 0.55 percentage to 0.27 in December) is consistent with the view that points for 30-year loans with LTVs of 90 percent and higher and much of the high-LTV market shifted from the con 0.50 percentage points for those with lower LTVs. During the period in which Ihe FHA charged risk-based rates (and during the post-March ventional market to the FHA and VA during 2008. In fixed-rate period), FHA fees were lower than those of the GSEs with fact, on a county-by-county basis, we find a strong PM! for all borrowers except those with high credit scores. correlation between declines in PMI issuance and The VA charged a 2.15 percentage point upfront fee and no annual premium for a veteran using the program for the first time with no increases in FHA lending.42 down payment (the dominant choice); the fee was reduced to 1.50 per centage poinls with a 5 percenl down paymenl and to 1.25 percentage points with a down payment of 10 percent or more. Fees were higher (at least 3.3 percentage poinls) for veterans using the program for a 42. Care must be exercised in comparing the PMI and loan data second or third time (there are also lifetime limits on coverage, which reported in HMDA. Only the largest PMI companies report HMDA discourage or eJiminate multiple usages). The VA has a streamlined data, but those that do report provide information on all their issu refinance program that allows the refinancing of a VA loan into another ances, regardless of property location. HMDA loan reporting require VA loan with little documentation and a refinance fee of 0.50 percent ments favor urban areas, implying different underreporting patterns age points (other refinance loans have the standard fees). VA slatistics than the PMI data. Further, some PM! policies are written "after the state that the average VA premium in 2008 was 2.13 percentage points. fact" for loans that have already been originated, and as a result, the

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A191 14. Dispo ilion of home-purchase and refinance applications for privat mongage in 'urance. conventional loans. and noneonventional loans. by monLh of action lfIken. 2008--Conlillued Nonconventional Purpose of loan and month of origination I I I Number of applications Number of loans Percent withdrawn Percent denied Home purchase January . . ...... -... 48,005 31,019 12.4 21.0 February .. . ........ .. 60,525 42,643 104 17.4 March . ~ 82,971 57,397 11.1 18.1 ~ril .... • ••..•.••. 4. .•.•.•.•.• .••. .................... - 106,114 72,723 11.5 18.6 ay ..... 124,497 89.270 10.3 16.2 J J A S u u e u n l p y g e t u e . . s m . . t . . b . . e . r .. . , . . . . . .. .. .. .. . . . . . . . .. . . . . . . .. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . .. . .. . . . . , . . . . . . . . . . . ,. 1 1 1 1 3 4 4 5 5 5 5 6 . , , . 9 2 8 3 5 3 2 4 1 8 0 0 1 1 1 9 0 0 0 5 8 0 0 . . . ,6 5 9 7 9 9 1 0 6 8 4 3 1 1 1 1 0 1 1 1 . . . . 3 7 5 4 1 1 1 1 7 6 6 6 . . . . 9 6 2 1 October. .. 140.518 91.831 13.1 18.6 November 106,654 70:271 12.8 18.2 December .................... 119,790 82.030 12.0 16.2 Refinance January. 58,180 28,355 15.0 36.4 February . .................... 72,641 40.302 15.3 29.1 March .............. 85.825 43.779 17.0 32.5 M Ap a r y il . . ......... . . . . . . .. . . .. .. . .. .. .. . . . .. . .,..~. . .. .. . ... , 1 10 0 1 4, ,3 20 99 6 4 47 3 , ,2 80 8 1 4 1 18 9. . 5 8 4 37 0. . 4 2 June ................................ 100,743 39.739 20.8 43.0 July .. 104,345 37,863 21.8 46.4 August. .. ............ 101.003 36,617 22.5 46.2 September .. ......................... 105,068 39.094 a o 45.7 October. . 126.943 49,935 22.2 43.5 November ....... ........ 101,505 35,798 23.9 47.9 December ... ...................... 130,673 56.460 22.8 38.9 Data collected by LPS from the large mortgage refinance loans peaked during the refinancing boom servicers provide more direct evidence that high-LTV in early 2008. This share declined somewhat after borrowers shifted to government-backed loans during that, but remained at higher levels than in 2007. For 2008. These data show that the FHA share of first both home-purchase and refinance loans with LTVs lien, home-purchase loans with LTVs in excess of of 80 percent or less, the VA market share was higher 80 percent rose sharply in 2008 from just over in 2008 than in 2007, but was consistently under 20 percent to about 70 percent (figure 6). Similar to I percent. figure 5, the share of high-LTV loans sold to the GSEs began falling sharply just as the FHA's share began 6. Shan: of LP accelerating. The GSE share fell from more than 50 percent to 20 percent during 2008. The FHA share of loans with LTVs of 80 percent or Percentage poinls below in the LPS data also increased yet remained at a low level, rising from 1 percent to almost 9 percent FHA 70 in 2008 (data not shown in figure). At the same time, 60 the share of loans with LTVs of 80 percent or below that were sold to the GSEs held relatively constant 50 throughout this period (after a brief increase early in 40 2007) at levels just over 80 percent. These patterns 30 observed for home-purchase loans are also generally observed for refinance loans in the LPS data. 20 The VA share of high-LTV home-purchase loans VA 10 grew modestly during most of 2007 and 2008, with a somewhat sharper increase at the end of 2008. By I I 20 I 0 7 , , I I I I , . I , 20 I 0 8 I , I I I 1 I December 2008, this share exceeded 11 percent. NOTE: The data are monthly. Loans are first liens. For more information Somewhat differently, the VA share of high-LTV about Lender Processing Services, Inc. (LPS), sec text. l. Other loans are Farm Service Agency or Rural Housing Service-guaranteed loans and conventional loans not sold to a GSE. FHA Federal Housing Administration-insured. timing of the two data sources may not align perfectly. Nevertheless, GSE Government-sponsored entity-owned. the general relationship pan ems between the two series should be V A Depanment of Veterans Affairs-guaranteed. informative. SOURCE: Lender Processing Services, Inc.

A 192 Federal Reserve Bulletin 0 April 20 10 15. Percent of home-purchase and relinancl! loans lhal are higher priced. hy lhreshold and by Iype of loan and month of origination, 2008 Percent Home purchase Refinance Type of loan by month of origination Above HMDA I Above PMMS I Above PMMS I Hi~h payment· Above HMDA I Above PMMS I Above PMMS I;Hi!\h payment- + 1.75' + 2.75' to-lOCO me raoo + 1.75' + 2.75' to-income ratio FHA 2008 January 5.8 3.3 .2 7.9 8.9 5.0 .2 9.8 February 4.6 3.0 .2 7.5 7.4 5.0 .2 8.2 March 4.0 1.7 .2 9.0 7.1 3.5 .3 10.5 April 4.4 1.7 .2 8.6 7.4 3.1 .2 10.1 May .. 3.8 U .2 9.4 7.2 2.6 .3 10.8 JUlie 4.1 1.2 .2 10.1 8.2 2.8 .2 12.0 July. 6.0 J.3 .3 11.2 " .7 3.0 .3 13.3 August ., . 15.7 1.3 .3 13.1 23.9 2.5 .2 16.0 September 17.3 1.9 .3 13.2 22.7 3.0 .2 15.4 October .... 20.7 2.S .3 13.7 22.1 3.4 .2 15.6 November .. 23.2 3.1 .3 13.8 25.9 3.9 .2 16.1 December 19.1 6.7 1.0 11.6 17.1 6.3 .8 11.6 Tolal 11.6 2.3 .3 11.3 14.3 3.7 .3 12.5 2007 Second half. . 5.2 2.4 .3 9.7 8.8 4.0 .4 II.S Total ............ 4.3 2.1 .3 9.4 7.2 3.4 .5 " .2 VA 200S January .... .4 .2 .0 15.9 .6 .3 .1 3.5 February .. .3 .2 .0 14.2 .1 .1 .0 3.0 March .... .2 .2 .1 16.2 .2 .1 .0 304 April ... .4 .2 .2 14.9 A .2 .1 3.0 May .... . .3 .2 .2 14.9 A .1 .0 2.9 June ... . . . . . . . . . -. .3 .1 .1 16.3 .3 .1 .0 3.6 July ..... .5 .3 .2 17.2 .7 .1 .0 4.7 August _ 1.0 .2 .1 17.8 1.2 .2 .1 5.3 September 1.5 .3 .2 17.4 1.5 .1 .1 5.0 October ............. 2.6 .3 .2 16.4 1.0 .2 .1 4.0 November ......... ,. 3.6 .2 .2 15.2 1.1 .1 .0 4.8 December 4.1 1.5 .3 12.5 104 A .1 4.1 Total . 1.3 .3 .2 15.8 .7 .2 .1 3.7 2007 Second half. . .2 .1 .0 18.9 .3 .1 .0 6.7 Total .2 .1 .1 17.9 .3 .1 .1 6.6 GSE' 200S January . 8.2 6.1 1.2 13.7 3.5 2.7 .5 13.8 February . 7.2 5.3 1.0 12.3 1.9 1.5 .3 10.5 March. ............. 6.8 3.6 .5 13.3 2.4 1.4 .3 12.0 A M p a r y il . . . . . . . .. . . .. .. . . . . .. .. . . . .,.. 5 3 . . 4 1 2 1 0 .1 4 . .1 2 1 1 2 2 . .8 5 3 2. . 7 1 1 1 . . 5 5 . . 3 2 1 1 3 1 . . 6 7 June .. 2.3 .8 .0 I3.S 3.0 1.5 .2 15.1 July 2.3 .5 .0 14.7 2.8 .8 .1 16.6 August. 5.3 .4 .0 14.7 5.6 .5 .0 17.0 September .. 5.1 .5 .0 14.4 5.7 .5 .0 15.8 October ... 6.4 .7 .0 14.0 4.8 .6 .0 14.2 November ............ 5.8 .5 .0 13.6 5.4 .4 .n 14.6 December. ............. 4.1 .8 .0 12.2 2.1 .3 .0 lOA Total .. 5.1 2.0 .3 13.5 J.O 1.4 .2 12.9 2007 Second half 10.0 7.2 2.5 15.8 6.6 4.8 1.3 18.2 Total ..... 9.0 6.6 2.2 14.9 5.1 3.6 .9 17.1 Evidence on (he Quality of FHA and VA Loans reported in HMDA as higher priced, those with a PMMS spread (defined earlier) of at least 1.75 per The HMDA data contain only limited information centage points, and those with a PMMS spread indicative of the credit risk posed by borrowers. First, greater than 2.75 percentage points (likely subprime a payment-to-income (PTI) ratio can be estimated loans). We also show the proportion of loans with using reported income and loan size (if assumptions estimated PTIs above 30 percent-the edge of an are made about interest rates on loans based on the acceptable range In many loan underwriting date of loan origination). Second, loan pricing infor programs. mation reported in the HMDA data might also be Table 15 shows a striking increase in the incidence used to infer risk. of HMDA-reported higher-priced FHA home We examine the monthly profiles of both of these purchase and refinance lending. However, these risk measures by loan purpose and by the four loan increases seem to be driven largely by the widening product types (table 15). For each loan purpose and gap between Treasury and mortgage market interest type, we show the proportion of loans that were rates during 2008. When incidence was calculated

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A193 15. Percent of home-purchase and refinance loan' lhal are higher priced. by lbreshold and by type of Joan and month of originalion. 2008-Coll/irwed Pereen! . Home purchase Refinance Type of loan by month I I I I I I,High of origination Ab ove HMDA Abo + v e 1 . P 75 M 1 MS Abo + v e 2 . P 75 M1M S t H o- ig in h c o p m ay e m r e a n ti t o - Ab ove HMDA Abo + v e 1 . P 75 M1M S Abo + v e 2 . P 75 M 1 M S to-inco p m ay e m r e a n ti t o - Other' 2008 January . 12.0 9.6 3.7 15.6 19.7 17.8 11.3 16.1 February .... to.2 8.5 3.2 13.4 12.1 10.9 6.6 12.4 March 9.5 6.9 3.1 14.7 13.3 10.8 6.7 13.9 April .. 8.7 6.2 2.9 13.9 14.6 11.7 7.0 12.8 May. 7.1 4.9 2.3 13.8 15.5 11.8 7.3 13.2 June ... 5.6 3.7 1.7 13.8 14.5 11.0 6.9 14.1 July .. 5.9 3.5 1.6 14.4 16.8 12.1 7.9 14.8 August ... 8.9 3.6 1.6 14.7 22.7 13.7 9.2 14.5 September. 9.2 4.2 2.0 14.5 24.5 16.5 10.8 14.6 October. . 10.2 4.4 2.1 13.6 19.2 11.8 7.8 14.2 November _. ... 10.7 4.6 2.5 13.6 22.2 14.2 9.7 14.5 December. 10.4 6.9 3.6 11.8 14.3 11.2 7.4 11.8 Total 8.8 5.4 2.5 14.0 16.1 12.4 7.8 1'3.7 2007 Second half. . 12.7 9.7 4.5 18.1 23.1 19.7 12.0 20.7 Total .•... 16.8 14.1 8.7 17.8 28.0 24.7 16.3 21.9 Total market 2008 January .. 9.1 7.0 2.1 13.8 11.8 10.2 5.7 14.4 February .. 7.7 6.0 1.7 12.0 7.2 6.3 3.3 11.1 March .... 7.0 4.3 1.5 13.1 8.0 6.1 3.3 12.6 April 6.1 3.5 1.2 12.1 9.0 6.6 3.5 11.9 May .. 4.6 2.5 .9 12.3 9.8 6.7 3.7 12.8 June .... 3.9 2.0 .7 12.9 9.5 6.3 3.5 13.9 July 4.7 1.8 .7 13.7 11.5 6.8 4.0 14.8 August .. 9.8 1.8 .7 14.3 18.2 7.2 4.4 15.4 September 11.1 2.2 .8 14.1 18.6 8.3 4.9 15.0 October 12.5 2.7 .9 13.9 15.4 6.2 3.4 14.4 November. 13.6 2.8 1.0 13.8 18.4 7.3 4.2 14.8 December. . 11.9 5.1 1.6 11.9 11.1 6.5 3.4 11.1 Total ..... ........... 8.1 3.3 1.1 13.2 11.0 6.9 3.8 13.1 2007 Second hal f. . 10.7 7.8 3.3 16.6 17.8 14.7 8.5 19.4 Total ....... 12.7 10.3 5.6 16.2 28.0 24.7 16.3 21.9 NOTE: First-lien mortgages for owner-occupied, 1-4 family, site-built prop I. PMMS is the prime APR from the Freddie Mac Primary Mortgage Mar erties; e~c1udes business loans. Government-sponsored entity (GSE) and other ket Survey; see notes to figure I. loans have been adjusted for the fourth quarter of 2008; for more details. see 2. See note 2, table 13. tex!. For e~planation of Home MO[lgage Disclosure Act (HMDA) price· 3. See note 3, table 13. reporting threshold, see tex!. The threshold and annual percentage rates (APRs) are for conventional first-lien 3D-year prime mortgages. using the PMMS-adjusted spreads, which better reflect ber only had to be priced 0.25 percentage points the true credit-risk premium, higher-priced lending above prime to be reported as higher priced in rose far less dramatically. While the incidence of HMDA after insurance fees were factored into the HMDA reported higher-priced FHA home-purchase APR.43 VA loans only had to be priced 0.55 percent loans more than doubled between 2007 and 2008 age points above prime to be reported as higher (4.3 percent versus 11.6 percent), the incidence of priced during this period. loans with a PMMS spread greater than 1.75 percent Caution must be exercised in drawing too strong an age points was small and nearly unchanged (2.1 per inference about the quality of FHA and VA loans on cent versus 2.3 percent). Virtually none of the FHA or the basis of a low incidence of PMMS-spread, higher VA loans had PMMS spreads above 2.75 percentage priced loans. The FHA (and to a lesser extent, the VA) points. cover most of the credit risk in a loan and, except for Nevertheless, both FHA and VA show a significant the brief period in the summer of 2008, charged flat percentage of their loans with APRs in the range of rates. Consequently, pricing on FHA loans may not be prime plus 1.00 to 1.75 percentage points, which particularly sensitive to the loan's credit risk.44 results in their being flagged as "higher priced" in HMDA; these loans are clearly not priced as prime loans. Much of the pricing can be attributed to FHA 43. FHA fees added about 0.65 percentage points to an APR at the beginning of 2008 and rose slightly during the year. and VA insurance and guarantee fees. By our esti 44. Even though the FHA and VA cover most of the credit risk in a mates, the average FHA loan in October and Novem- loan, they do not cover all of it. Lenders face recourse risk in the case

A I 94 Federal Reserve Bu lletin 0 Apri I 2010 Table IS also shows an increase in the percentage The LPS data also indicate that FHA lending in of FHA borrowers with high PTI ratios for both 2008 continued to involve very low levels of bor home-purchase and refinance lending during 2008 as rower equity in the home. While the share of FHA well as relati ve to 2007, a potential sign of an home-purchase loans with LTVs exceeding 95 per increased risk profile for the FHA program. We note cent fell modestly from 72.3 percent in 2007 to that this increase stems primarily from borrowers 67.4 percent in 2008, the median LTV on these loans whose loans were newly eligible for FHA financing remained above 97 percent. Nevertheless, there is because of the limit increases. The incidence of high evidence that the credit scores of high-LTV borrowers PTI ratios for borrowers that would have been eli improved as well. For example, while one-third of gible for FHA loans under 2007 limits rose only 2007 FHA home-purchase loans went to borrowers modestly (data not shown in tables). with LTVs in excess of 95 percent and FICO scores LPS data provide more precise information on the below 620, this share declined to 15 percent in 2008. credit quality of government-backed loans. In addi The numbers for FHA-insured refinancing are some tion to LTV, these data provide borrower FICO what different, but they show a very similar trend scores, a commonly used credit score. Credit scores, toward borrowers with higher credit scores. Taken such as FICO, provide a numeric ranking of the together, the FICO scores and LTVs reported in the relative credit risk posed by a borrower and are a LPS data for 2008 suggest that the growth of FHA widely used measure of the credit risk of a loan.45 loans has predominantly involved loans with lower In 2007, the median FICO score of an FHA risk characteristics than in 2007. home-purchase loan in the LPS data at time of For VA loans, the LPS data indicate that 90 percent origination was approximately 625, just above the of VA first-lien, home-purchase loans had LTVs in range of credit scores often associated with subprime excess of 95 percent in 2007, compared with 86 per borrowers and about 100 points below the median cent in 2008. Like FHA loans, while LTVs have FICO score for conventional loans in the LPS data remained high on VA loans, the credit scores of VA (data not shown in tables). Similarly, the median LTV borrowers in the LPS data increased in 2008. The on 2007 FHA loans was 97.6 percent-more than median credit score for first-lien, home-purchase VA 15 percentage points higher than the median for borrowers was 672 in 2007 (within the range gener conventional loans in 2007.46 ally considered to be prime quality), and rose to 687 A comparison of the FICO scores of FHA borrow in 2008. ers in 2007 and 2008 suggests that the growth of FHA It is important to keep in mind when interpreting loans has predominantly involved loans to borrowers the LPS data on FICO scores and LTVs that while with higher credit scores. The median credit score these data suggest that the expansion of the FHA and rose to 664 in 2008. The share of FHA home VA programs has been primarily to borrowers with purchase loans to prime borrowers (those with scores higher credit scores, the performance of these loans greater than 660) grew from 30 percent in 2007 to depends on many factors, including the future path of more than 50 percent in 2008. In addition, the LPS house prices and economic activity. Predicting how data suggest that over 60 percent of the increase in FHA and VA loans will perform is beyond the scope FHA home-purchase activity between 2007 and 2008 of this article. was to borrowers with prime-quality FICO scores. CHANGES IN TOTAL LEND/NG By BORROW R of fraud and servicing costs in the case of borrowers who do not make their payments. VA coverage may also be limited if the loan size is AND AREA CHARACTERISTICS above the loan's coverage cap. 45. FICO scores are one summary measure of the credit risk posed As highlighted in a previous article, the mortgage by an individual based solely on the information contained in the market experienced a severe contraction in lending credit reports maintained by the three national credit reporting agen cies. FICO scores are produced using statistical models developed by from the beginning of 2006 to the end of 2007 related Fair Isaac Corporation. A FICO score of 660 or more is often viewed primarily to the collapse of the subpri me mortgage as a score range associated with prime quality borrowers; a score market.47 As discussed above, 2008 was character under 620 is often associated with borrowers wilh subprime credit qUality. For more information, see www.myfico.comlCreditEducation. ized by the increased role of FHA and VA as the 46. The LPS data tend to underrepresenl the share of subprime overall mortgage market continued to decline. This loans; therefore, the median FICO score for conventional loans may be section examines whether these changes had a differoverstated. Also, LPS does not collect information on the combined LTV ratio of loans in its database. Because conventional loans may be more likely to involve junior liens, median LTVs for conventional loans will not accurately relleclthe amount of borrower equity in the home. 47. See Avery, Brevoort, and Canner, "The 2007 HMDA Data."

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A195 ential effect across borrower groups. As before, par Borrowers of different demographic groups showed ticular focus is paid to the effect of the surge in FHA large differences in their propensity to use different and VA lending. types of lenders with signi ficant changes from year to year. All groups showed significant increases in their Overall Changes from 2006 through 2008 reliance on loans from banking institutions within their assessment areas.50 The substantial increase in On the whole, lending for first-lien, site-built, owner market share by banks in their assessment areas (see occupied home purchases reported in HMDA fell bottom three rows) appears to have come from a 22.3 percent from 2006 through 2007 and dropped an decline in independent mortgage companies' market additional 24.S percent from 2007 through 2008. share between 2006 and 2007, and then a signi ficant Refinance lending fell 18.3 percent from 2006 through shift by banks from outside their assessment areas 2007, and 20.9 percent from 2007 through 2008.48 (where their past lending activity was more similar to Although lending to all groups fell considerably that of independent mortgage companies) to lending during these years, some groups experienced steeper within assessment areas between 2007 and 2008. declines than others. Market shares for both black and Borrowers of different demographic groups showed Hispanic white borrowers fell from 2006 through large differences in their propensity to use different 2007 and further declined in 2008, implying that types of loans, with significant changes from year to lending to these groups fell more quickly than aver year. All groups showed significant increases in their age between 2006 and 2008 (column 1, labeled use of FHA and VA programs from 2006 through "market share" in tables 16.A and 16.B). In contrast, 2008, especially black and Hispanic white borrowers. the share of lending to Asian and non-Hispanic white In 2008, more than 60 percent of home-purchase borrowers rose. loans and almost 40 percent of refinance loans to Overall patterns for lower-income lending (borrow black borrowers were government-backed. For His ers with incomes below 80 percent of the median panic white borrowers, nearly SO percent of home family income in their area or borrowers who live in purchase loans and 21 percent of refinance loans in census tracts with median family incomes in the year 2008 were government-backed. 5 t 2000 that were less than 80 percent of the median In contrast, the share of loans sold to a non family income of their area) differ between home government entity fell sharply, particularly so among purchase and refinance lending and between lower loans to black and Hispanic white borrowers. About income borrowers and lower-income census tracts. one-half of their home-purchase and refinance loans The share of home-purchase loans made to lower were sold in the nongovernment secondary market in income borrowers increased each year, while the share made to borrowers living in lower-income census tracts consistently fell. The share of refinance refinance lending fell from 31.7 percent in January to 27.2 percent in lending made to both lower-income groups decreased February and increased to 28.7 percent in March, suggesting that the refinance boom disproportionately involved higher-income borrowers. each year with the exception of a slight uptick of The damping of the incidence of lower-income refinance lending lending to lower-income borrowers in 2008.49 during this period was sufficiently large to explain much of the difference in the 2007-08 overall changes between home-purchase and refinance lending. 48. The decline in lending from 2006 to 2007 is likely to be 50. The Community Reinvestment Act (CRA) requires commer overstated and the decline from 2007 to 2008 understated because of a cial banks and savings institutions to identify the geographic areas that serious reporting problem in the 2007 data. Federal Reserve tracking they designate as their assessment areas. which are areas in which the reports indicated that 169 lenders that reported HMDA data for 2006 institution has special responsibilities under the CRA. Typically, and ceased operations sometime in 2007 or 2008 did not report assessment areas correspond to the counties or markets in which the HMDA data for 2007 (in an earlier section, we discuss the more institution has banking branches. Each year, larger banking institutions limited problem of IS nonreporting lenders in the 2008 HMDA data). file a list of the census tracts that compose their assessment areas. We Overall, these lenders accounted for about 8 percent of the site-built use this list to determine whether a loan originated by a banking conventional first-lien loans in 2006. Since many of these lenders went institution (or an affiliate) and reported in HMDA is within the out of business at or before the middle of 2007, there is reason to institution's assessment area. For smaller institutions who do not believe that loan activity in the first half of 2007 is understated in the supply a list, we approximate their assessment area by taking into HMDA data (by up to 8 percent), though lending activity reported in account the counties in which they have banking offices. HMDA in the second half of the year is likely to be more accurate. 51. One can derive from table 16 that there was a disproportionate Since these lenders specialized in higher-priced subprime loans and increase in higher-income FHA lending. The expansion of FHA loan disproportionately served blacks and Hispanic whites, the undercounts limits helps explain this disproportionate increase. For instance. only in the 2007 HMDA data were likely larger for these groups. For 8.6 percent of the FHA home-purchase loans originated in 2008 that additional information, see Avery, Brevoort, and Canner, "The 2007 would /lot have been eligible under 2007 loan limits were made to HMDA Data." lower-income borrowers or tracts. In contrast, 48.0 percent of the 2008 49. Monthly data suggest that the refinance boom in the beginning FHA home-purchase loans that would have been eligible in earlier of 2008 may account for some of the overall decline in lower-income years were deemed lower income, numbers largely unchanged fTom refinance lending for 2008. The overall incidence of lower-income 2007 (47.5 percent and 41.5 percent, respectively).

A 196 Federal Reserve Bulletin 0 April 20 I 0 J6 . Markel share of home-purchase and refinance Joan~, by Iype of Originator. type of loan, and loan pricing and by characleri lie of borrower, of census traci. and of loan. 200(r08 A. Home purchase Percent Originating institution Type of loan Depository (excluding o C f h c a e r n ac su te s r i t s r t a i c c t , o a f n b d o r o r f o w lo e a r n . Year M sh a a rk re e t c p r r e o d p it e n u y n I io l o n c s a ) t , i o b n y Credit In m d o ep rt e g n a d g e e n t FHA VA RHSIFSA GSE So n ld o n to - a Held in Within CRA Outside CRA union company gover~n~ent ponfolio I assessment assessment entlly' area' area Minor;tv SlatllS4 Black or African American .. 2006 8.7 20.8 33.3 1.3 44.4 9.1 4.2 .2 13.1 51.1 22.4 2007 7.6 32.4 36.4 2.0 29.1 15.0 6.0 .6 25.9 20.8 31.6 2008 6.3 40.8 21.2 2.7 35.3 51.4 10.8 2.1 15.0 7.9 12.9 Hispanic white ........ 2006 12.1 23.8 32.0 .9 43.2 5.6 1.4 .3 13.8 52.4 26.5 2007 9.5 38.0 34.0 1.6 26.5 9.7 2.2 .8 27.5 21.6 38.2 2008 8.5 47.0 16.2 2.2 34.6 44.7 4.5 2.3 22.9 9.1 16.5 Asian. .............. ....... 2006 4.5 31.8 32.3 1.4 34.4 1.5 .5 .0 26.4 41.4 30.2 2007 4.5 41.7 32.4 2.1 23.7 1.9 .6 .1 33.9 23.3 40.3 2008 4.9 55.7 17.2 3.2 24.0 11.9 1.3 .2 46.2 17.4 23.0 Other minority' ...... ....... 2006 1.0 24.5 33.6 1.7 40.0 6.4 2.5 .4 17.4 48.1 25.2 2007 .9 37.5 35.4 2.8 24.5 10.1 3.6 .8 27.9 22.2 35.4 2008 .9 46.3 21.2 3.7 28.8 39.1 7.3 2.1 25.3 11.2 14.9 ...... Non-Hispanic white . 2006 62.7 31.0 34.9 2.7 31.5 6.1 2.7 .6 28.5 35.1 26.9 2007 66.8 36.5 36.3 3.5 23.7 7.3 3.1 1.0 34.3 23.9 30.4 2008 69.1 44.6 24.8 4.4 26.2 27.4 5.5 2.6 28.2 16.3 20.1 Missing('. _. ..... 2006 10.9 23.5 30.3 3.0 43.0 4.0 2.6 .1 21.S 42.3 29.2 2007 10.6 33.2 34.7 3.7 28.3 6.0 3.6 .3 31.S 23.4 35.1 2008 10.4 47.2 21.3 4.7 26.7 26.7 7.1 .9 .~1.5 13.6 20.2 B(irrOWer Incon,e' Lower .......... .,'''' .. 2006 23.5 31.6 32.7 2.S 33.0 11.4 2.4 1.0 25.7 34.1 25.4 2007 24.8 3S.3 33.6 3.5 24.6 11.7 2.6 1.6 33.6 21.6 28.8 2008 2S.1 44.3 22.9 3.9 28.9 37.6 4.3 4.2 23.4 14.0 16.5 Middle. .................... 2006 24.7 26.2 35.1 2.6 36.0 8.0 4.0 .6 26.4 38.4 22.6 2007 25.2 33.3 36.4 3.5 26.7 10.S 4.S 1.2 33.7 22.2 27.4 2008 27.1 42.5 23.5 4.1 30.0 35.6 7.7 2.8 25.6 13.5 14.7 High .. ........ ,.,' . ... .... 2006 46.S 28.9 34.6 2.1 34.4 2.6 2.2 .1 24.1 42.2 28.8 2007 47.0 37.2 36.6 2.9 23.3 4.4 2.9 .3 32.2 24.2 36.1 2008 43.1 48.4 23.0 4.2 24 ..~ 20.6 5.5 .6 33.2 16.3 23.9 Missing6. . , .. ........ . ... 2006 5.0 19.6 24.2 1.1 54.7 1.1 .4 .2 11.6 50.9 35.8 2007 3.1 29.0 33.1 2.2 35.8 3.3 .9 .5 21.7 33.2 40.4 200S 1.7 33.2 19.2 4.4 43.2 30.4 3.8 3.0 17.2 16.5 29.1 CeflSuS-ITlU;t incomeH Lower ..... , .. .. , ....... 2006 15.7 25.6 33.0 1.7 39.6 7.6 1.7 .3 18.3 46.0 26.2 2007 14.4 37.7 34.8 2.6 24.9 10.8 2.3 .7 30.1 21.3 34.9 2008 13.1 46.8 20.6 3.4 29.2 39.2 4.5 1.9 24.4 11.8 18.2 Middle ... ., .. " ............. 2 2 0 0 0 0 7 6 4 4 9 9 . .6 7 3 27 5 . . S 0 3 37 4. . 9 1 3 2. . 5 4 2 3 4 4. . 8 5 6 9. . 0 9 3 3 . . 2 9 1 . . 7 2 2 n 4 o .9 3 2 8 2. . 4 7 2 3 5 0. . 4 7 2008 49.9 44.1 24.3 4.2 27.3 32.8 6.6 3.3 25.8 13.6 17.9 High ... .................... 2006 33.8 31.4 33.0 2.2 33.5 3.7 2.2 .2 27.0 38.5 28.5 2007 35.1 38.2 34.3 2.9 24.6 4.7 2.6 .3 33.4 25.2 33.8 2008 35.9 4B.O 22.1 3.9 26.0 21.6 5.0 .8 33.1 17.6 21.B Missing6. ................. 2006 1.0 2.1 15.2 9.6 72.3 3.8 2.2 1.2 1,[,2 43.5 38.1 2007 .8 2.5 23.9 14.5 59.2 10.2 3.3 2.3 19.0 32.5 32.8 2008 I.l 2J 24.4 12.3 61.1 33.4 3.9 5.1 15.0 18.7 23.9 Subprime indicators High PT[' ....... .. ", ..... 2006 16.4 25.4 31.8 2.0 40.6 3.7 2.8 J 17.7 47.3 28.1 2007 16.2 35.1 34.6 2.9 27.4 4.5 3.6 .6 30.0 25.9 35.5 2008 13.2 43.4 21.7 3.2 31.7 25.4 6.9 1.8 28.8 17.9 19.2 Piggyback .................. 2006 22.2 15.9 34.0 .4 49.4 .0 .0 .0 13.4 66.1 20.4 2007 10.8 33.3 38.5 1.0 27.4 .0 .0 .0 33.0 33.6 33.4 2008 1.7 68.3 IB.O 4.8 8.9 .0 .0 .0 56.7 IS.6 24.7 TUlal ........................ 2006 100 28.4 33.8 2.3 35.5 5.9 2.6 .4 24.4 39.8 26.8 2007 100 36.2 35.7 3.2 24.9 7.8 3.2 .8 32.6 23.3 32.2 2008 100 45.4 23.0 4.1 275 29.6 5.7 2.2 28.1 14.9 19.4 NOTE: First-tien mortgages for owner-occupied, 1-4 family. site-built prop reports as two races, and one is white, the application is categorized under the erties; excludes business loans. minority race. For loans with two or more applicants, lenders covered under I. Includes lending by nondeposilOry affiliates in the assessment areas of the Home Mortgage Disclosure Act report data on only two. depository institutions covered by the Community Reinvestment Act of 1977 5. Other minority consists of American Indian or Alaskan Native, and Na (CRA). tive Hawaiian or other Pacific Islander. 2. Includes loans sold into a private security, to another commercial bank, 6. Information for the characteristic was missing on the application. savings bank or savings association, or a life insurance company. 7. Borrower income is the IOta I income relied upon by the lender in the loan 3. Freddie Mac Primary Mortgage Market Survey annual percentage rate underwriting. Income is expressed relative to the median family income of the (PMMS APR) is for a 3D-year fixed-rate mortgage; for more details, see text. metropolitan statistical area (MSA) or statewide non-MSA in which the prop 4. Categories for race and ethnicity reAect revised staJ.dards established in erty being purchased is located. "Lower" is less than 80 percent of the median; 1997 by the Office of Management and Budget. Applicants are placed under "middle" is 80 to 119 percent; and "high" is 120 percent or more. only one category for race and ethnicity, generally according to the race and 8. The income category of a census tract is the median family income of the ethnicity of the person listed first on the application. However, under race, the tract relative to that of the MSA or statewide non-MSA in which the tract is lo application is designated joint if one applicant reported the single designation cated. "Lower" is less than 80 percent of the median; "middle" is 20 to of white and the other reported one or more minority races. If the application 119 percent; and "high" is 120 percent or more. is nor joint but more than one race is reported, the following designations are 9. High payment-to-income ratio (PTI) is 30 percent or more. made: If at least two minority races are reported, the application is designated FSA Farm Service Agency. as two or more minority races; if the first person listed on the application RHS Rural Housing Service.

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A197 16. Market share of home-purchase and refinance loans. hy type of origimltor. type of loan, anJ loan pricing anJ by characleri tic or borrower. of censu~ tract, and of loan. 2006---08 A. Home purchase-Continued Percent Loan pricing Characteristic of borrower, I Higher priced, by percentage points above PMMS APR' of census tract. and of loan Year Market share Lower priced -. Less than 1.75 I 1.75-2.74 I 2.75 or more M i1lorifl' slallls 4 Black or African American. 2006 8.7 53.3 3.4 5.8 37.6 2007 7.6 72.3 3.9 8.4 15.3 2008 6.3 85.6 8.8 4.2 1.5 Hispanic white .. .. ... 2006 12.1 57.6 4.6 6.8 31.0 2007 9.5 75. I 4.7 9.1 11.1 2008 8.5 84.8 9.3 4.2 1.6 Asian . ........... ..... 2006 4.5 83.6 2.5 2.9 11.0 2007 4.5 92.4 1.8 3.0 2.8 2008 4.9 96.0 2.6 1.0 .4 Other minority' .. ..... 2006 1.0 68.8 3.8 5.3 22.1 2007 .9 83.4 3.3 6.0 7.3 2008 .9 90.5 5.8 2.3 1.4 Non-Hispanic white .. ...... 2006 62.7 83.9 2.4 3.3 10.4 2007 66.8 90.4 2.1 3.7 3.8 2008 69.1 92.8 4.2 1.9 1.1 Missing6 . ....... 2006 10.9 74.4 2.5 3.6 19.6 2007 10.6 87.6 2.2 4.1 6.1 2008 10.4 93.6 4.2 1.7 .6 Borrower income 7 Lower .. .. .. . ..... 2006 23.5 74.5 2.9 4.3 18.3 2007 24.8 85.0 3.1 5.6 6.3 2008 28.1 89.0 6.8 3.0 1.2 Middle •. .. -.... .... 2006 24.7 75.6 2.4 3.5 18.6 2007 25.2 87.4 2.4 4.2 6.0 2008 27.1 92.1 5.0 2.0 .9 High ........ ..... .. . ..... 2006 46.8 79.0 2.3 3.2 15.5 2007 47.0 89.3 1.9 3.6 5.1 2008 43.1 93.7 3.5 1.7 1.1 Missing6 .. .......... .. 2006 5.0 74.4 8.9 11.4 5.3 2007 3.1 74.0 6.2 14.5 5.3 2008 1.7 91.7 3.7 2.2 2.5 Cen.~us-Irac' incomeS Lower. .. ....... , ..... - 2006 IS.7 62.5 3.7 5.5 28.3 2007 14.4 79.1 3.7 7.3 9.9 2008 13.1 87.0 7.9 3.7 1.4 Middle. . . . . . . . . . .. . . . . . 2006 49.6 75.8 3.0 4.2 17.1 2007 49.7 86.4 2.7 5.0 5.9 2008 49.9 91.0 5.4 2.4 1.2 High .............. ...... 2006 33.8 84.7 2.1 2.8 10.3 2007 35.1 91.7 1.7 3.1 3.5 2008 35.9 94.8 3.1 1.3 .8 Missing" .......... 2006 1.0 90.2 2.2 3.4 4.2 2007 .8 93.1 1.7 3.5 1.7 2008 1.1 92.4 4.1 1.8 1.7 Suhprime indicators High PT!" ....... ........... ' 2006 16.4 63.2 1.6 2.6 32.6 2007 16.2 82.4 2.4 4.7 10.6 2008 13.2 93.9 3.2 1.6 1.3 Piggyback ..... ... .. 2006 22.2 55.3 3.4 4.8 36.5 ~ 2007 10.8 84.0 2.0 2.9 11.0 2008 1.7 97.0 1.5 1.1 .4 TOlat . ........ ... . .... 2006 100 76.9 2.8 3.9 16.4 2007 100 87.3 2.S 4.6 5.6 2008 100 91.9 4.9 2.2 1.1 2006, compared to less than 10 percent in 2008. In through 2008, but rose slightly for refinance loans in 2007, the GSEs and portfolio lenders captured market 2008 from 2007. Almost 60 percent of these refinance share among virtually all demographic groups. In loans were FHA-or VA-backed, indicative of "stream 2008, the GSEs and portfolio lenders gave way in the lined" refinance programs in both agencies for which home purchase lending market to the FHA and VA; income data are not used. however, the GSEs continued increasing their share The incidence of higher-priced lending signifi of refinance loans made to all demographic groups cantly declined among all groups from 2006 to 2008 that year. (last three columns, tables 16.A and 16.B). In total, The share of borrowers with income missing from the share of home-purchase loans priced 1.75 percent home purchase loan applications fell from 2006 age points over PMMS fell from 20.3 percent in 2006

A 198 Federal Reserve Bulletin 0 April 20 I 0 16. Markd share of hOO1I:-purchase and refinance loan., hy lyp vf originator. type 01 loan. and loan pricing and by characteristic of borrower. of cen u tracl. and of loan. 2006-08 B. Refinance Percent Originating institution Type of loan Depository (excluding o C f h c a e r n ac su te s r i t s r t a i c c t , o a f n b d o r o r f o w lo e a r n . Year M sh a a rk re e t c p r r e o d p it e n u y n I i l o o n c s a ) t . i o b n y Credit In m de o p rt e g n a d g e e n t FHA VA RHS/FSA GSE So 0 ld 0 0 t - o a Held in Within CRA Outside CRA union company government ponfolio assessment assessment enlj[y2 areal area Millor;tv SllllUS4 Black or African American . 2006 9.5 20.9 37.3 2.1 39.5 3.7 .7 .0 12.5 48.9 34.3 2007 8.3 27.9 44.2 3.2 24.6 9.1 J.I .0 19.7 23.1 47.0 2008 6.0 39.9 27.8 5.4 26.9 35.1 4.0 .0 22.4 8.5 29.9 Hispanic white ....... ' ...... 2006 10.5 29.4 28.7 1.6 40.2 1.8 .1 .0 14.7 49.2 34.2 2007 9.2 40.4 34.6 2.7 22.3 3.8 .2 .0 24.7 23.9 47.3 2008 5.7 52.9 190 5.7 22.5 19.5 1.2 .0 36.3 11.8 31.2 Asian . ......... ......... 2006 30 34.8 30.6 1.8 32.6 .5 .0 .0 20.2 41.5 37.8 2007 3.1 42.3 33.8 2.8 21.0 .9 .1 .0 26.8 22.8 49.5 2008 3.1 55.4 20.5 5.7 18.4 4.4 .3 .0 48.4 16.2 30.7 Other minority" .......... , 2006 1.2 29.0 32.3 2.3 36.4 2.0 .2 .0 16.5 44.8 36.4 2007 1.0 37.4 38.5 3.4 20.7 3.7 .3 .0 23.8 ZJ3 48.9 2008 .7 47.9 25.2 6.6 20.2 16.0 1.5 .0 35.2 13.1 34.2 Non·Hispanic white. .... 2006 61.3 29.5 35.2 3.7 31.8 2.3 .3 .0 22.4 38.2 36.8 2007 64.4 33.8 39.1 4.8 22.3 4.5 .4 .0 27.7 23.9 43.6 2008 72.5 44.7 27.1 7.4 20.7 14.7 1.2 .0 35.3 16.9 31.8 Missing6, .. ...... , 2006 14.5 21.4 32.7 3.0 42.6 1.6 .3 .0 17.4 49.4 31.3 2007 14.0 27.7 40.5 3.7 28.1 3.8 .5 .0 24.3 28.4 43.0 2008 12.0 45.2 25.2 7.1 22.6 17.5 J.7 .0 37.8 14.4 28.6 Borrower income 7 Lower ........ ,. ............ 2006 24.6 27.1 34.9 3.8 34.2 2.S .1 .0 20.5 40.7 35.9 2007 23.3 32.0 40.0 4.S 23.2 5.6 .2 .0 26.5 22.9 44.8 2008 23.5 44.0 26.7 7.3 22.1 17.9 .3 .1 32.7 15.2 33.9 Middle .. .. ,., ........ ... 2006 26.2 25.5 34.8 3.4 36.2 2.5 .2 .0 2\3 42.3 33.7 2007 25.6 30.7 40.2 4.6 24.6 6.0 .2 .0 27.7 24.0 42.2 ... 200S 25.5 43.3 26.4 7.4 22.9 19.2 .4 .0 35.3 15.8 29.3 High .. . . .. ....... 2006 43.8 29.5 33.3 2.9 34.4 1.0 .1 .0 IS.7 43.3 37.0 2007 46.2 35.S 38.0 4.0 22.2 2.5 .1 .0 25.6 25.6 46.2 200S 44.9 4S.3 25.5 7.5 18.7 10.2 .3 .0 38.4 17.6 33.5 Missing6 .. ..... .... ~ .. 2 2 0 0 0 0 7 6 5 5. . 4 0 3 2 1 4. . 8 2 4 35 0 . .9 1 1 1 . . 7 2 3 2 S 6 . . S 5 1 7 1 . .7 7 5 3 . . 5 5 . . 0 0 2 1 3 7. . 9 1 2 40 3 . . 1 2 3 3 0 6 . . 7 5 2008 6.2 37.0 29.3 2.1 31.7 41.7 17.0 .0 23.3 5.0 13.0 Census-Iracl illcvmeN. Lower .. ................ 2006 17.9 24.9 33.1 2.4 39.3 2.6 .2 .0 15.2 47.2 34.7 2007 16.0 33.0 39.5 3.5 24.0 5.9 .3 .0 22.9 24.3 46.6 2<X)8 11.9 44.8 25.6 6.4 23.3 23.4 1.2 .0 30.5 12.5 32.3 Middle .. , ..... ............ 2006 52.0 26.9 352 3.3 34.6 2.5 .4 .0 20.6 41.1 35.5 2007 52.2 31.9 40.6 4.4 23.1 5.3 .5 .0 26.7 23.7 43.S 2008 52.0 43.7 27.6 7.3 21.4 IS.6 1.6 .0 33.9 14.9 31.0 High. .......... . ........... 2006 29.5 31.1 33.2 3.0 32.S 1.4 .2 .0 21.4 4O.S 36.2 2007 31.0 36.8 37.0 3.9 22.3 2.7 .3 .0 27.3 25.6 44.1 Missing6 .. .... , ... " ' ...... 2 2 0 0 0 0 8 6 35. .6 1 49 2 . . 2 7 2 21 4 . . 1 5 17 6. . 5 S 5 1 7 9 . . 2 8 10 1 . . 2 6 1 1. . 1 0 . .1 0 3 1 9 0. .5 3 5 1 7 8. . 1 7 3 2 1 9 . . 1 4 2007 .7 2.4 24.6 19.1 54.1 8.2 .6 .0 19.1 29.1 43.1 2008 1.0 2.2 24.9 22.3 50.9 22.1 1.6 .1 20.5 19.7 36.0 Suhprime indiclIIVrs High PT)" .. , _. .... , .... 2006 24.0 20.3 32.9 1.6 44.8 .9 .1 .0 13.5 56.2 29.3 2007 20.1 28.2 40.5 2.5 28.6 2.6 .1 .0 22.3 31.6 43.4 200S 13.1 39.5 27.3 4.5 2S.6 15.5 .4 .0 34.8 20.3 29.0 Piggyback 10. . ............ - 2006 2007 .. . .. 2008 ... Total ........................ , 2006 100 27.6 34.2 3.1 35.1 2.2 .3 0 19.8 42.2 35.5 2007 100 33.4 39.2 4.2 23.2 4.6 .4 .0 26.2 24.4 44.3 2008 100 45.3 26.2 7.1 21.3 16.3 1.4 .0 35.3 15.8 31.3 NOTE: See notes to table 16.A. 10. Piggyback data for refinance loans are omitted due to possibly signifi cant underreporting of such loans . . Not applicable. to 10.2 percent in 2007 and further to 3.3 percent in home-purchase lending in 2006, and saw outsized 2008, reflecting the collapse of the subprime market. declines in the incidence of these loans by 2008. This trend was driven primarily by the striking Other indicators of subprime lending also show dec/ine in very high-priced lending (2.75 percentage declines from 2006 through 2008, For example, there points or more above PMMS). Black and Hispanic was a reduction in the number of borrowers with PTls white borrowers and borrowers in lower-income tracts above 30 percent and a virtual elimination of piggy recorded the highest incidence of very high-priced back loans. In 2006, more than 22 percent of home-

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A 199 16. Market share of home-purchase and refinance loans. by Iype of originalor. Lype of loan. anti loan pricing and by charaCleri lie of borrower. of census Irael. and of loan, 2006--08 B. Refinance-Continued Percent Loan pricing Characteristic of borrower. Higher priced. by percentage points above PMMS APR' Year Market share of census tracl, and of loan Lower priced Less Ihan 1.75 I 1.75-2.74 I 2.75 or more Mil/orin' status4 Black or African American 2006 9.5 49.4 4.2 9.5 37.0 2007 8.3 62.1 3.7 9.9 24.3 2008 6.0 77.1 7.4 5.6 9.9 Hispanic while ........ 2006 10.5 63.5 4.6 7.6 24.3 2007 9.2 74.1 4.2 8.5 13.3 2008 5.7 85.3 5.5 4.4 4.9 Asian ....... .... 2006 3.0 80.5 3.2 4.8 11.4 2007 3.1 87.6 2.4 5.4 4.6 2008 3.1 96.8 1.4 1.0 .7 Olher minorily" . ...... 2006 1.2 67.4 4.0 7.4 21.2 2007 1.0 75.6 3.4 7.7 13.3 2008 .7 84.5 4.3 3.9 7.3 Non-Hispanic while. 2006 61.3 75.0 3.2 6.1 IS.7 2007 64.4 82.5 2.4 5.9 9.3 2008 72.5 89.8 .1.8 2.9 3.6 Missing" . ...... ..... 2006 14.5 63.2 3.6 7.7 2S.6 2007 14.0 75.3 3.1 7.5 14.2 2008 12.0 90.3 4.4 3.1 2.3 Borrower income? Lower ... ....... 2006 24.6 62.4 3.6 7.9 26.1 2007 23.3 73.8 3.0 7.7 15.6 2008 23.5 82.9 S.9 4.7 6.5 Middle ....... ..... 2006 26.2 66.7 3.3 6.9 23.1 2007 25.6 77.3 2.8 6.6 13.3 2008 25.5 88.0 4.6 3.3 4.0 Higb . . . . . . . . . . . . , . . , 2006 43.8 74.2 3.3 6.0 16.6 2007 46.2 82.1 2.6 6.1 9.2 2008 44.9 91.8 3.1 2.4 2.7 MissingO . . . . . . . . . . . .. ... 2006 5.4 81.2 5.8 8.0 4.9 2007 5.0 84.7 3.7 7.7 3.9 2008 6.2 95.7 2.1 1.1 1.1 Census-Iract incomeS Lower .. 2006 17.9 57.7 4.3 8.6 29.5 2007 16.0 69.1 3.7 9.0 18.1 ..... 2008 11.9 81.2 6.5 5.2 7.1 Middle , ...... 2006 52.0 68.6 3.6 7.2 20.6 2007 52.2 77.9 2.9 7.0 12.2 2008 52.0 8V 4.7 3.6 4.5 High ........ ..... . ...... 2006 29.5 78.7 2.9 5.0 13.5 2007 31.0 85.9 2.2 4.9 7.0 2008 35.1 94.1 2.4 1.8 1.7 Missing6 . ......... 2006 .6 85.0 3.0 5.3 6.7 2007 .7 90.3 1.8 4.6 3.3 2008 10 91.8 3.0 2.4 2.8 SlIbprime ;,uJit:atorJ High PTI". ......... 2006 24.0 54 ..1 2.4 5.4 37.9 2007 20.1 70.6 2.3 6.3 20.7 Piggyback 10 • .............. 2 20 0 0 0 8 6 13.1 89.7 3.0 2.6 . 4 ..7. 2007 .. . .. . 2008 ... . Towi .. ...... . . . . , . . . . . . . 2006 100 69.7 3.5 6.8 20.0 2007 100 79.1 2.8 6.7 II.S 2008 100 89.0 4.1 3.1 3.8 purchase loans had piggyback loans. Two-thirds of Borrower In omes and Loan Sizes these loans were sold into the private secondary More detailed information on borrower incomes and market, and more than 36 percent were very high loan sizes by year and loan type is shown in tables priced (PMMS spread of more than 2.75 percentage 17.A, 17.B, 18.A, and 18.B. The data show that the points). By 2008, virtually none of the piggyback mean income for borrowers using FHA, VA, and loans that remained were higher priced, and most "other" loans (almost all of which are conventional were sold to the GSEs.

A200 Federal Reserve Bulletin 0 April 20 to 17. Cumulati e dislrihulion of home loans. by borrower income and by purpo ·c. lype, and pricing of loan, 2007-08 A. Home purchase Percent Upper bound of FHA VA Other Total Higher priced Adjusted higher borrower income priced' (thousands of dollars)' 2007 I 2008 2007 I 2008 2007 I 2008 2007 I 2008 2007 I 2008 2007 I 2008 24 ... ............... ... 4.6 3.0 .8 .6 2.9 3.0 3.0 2.9 5.4 6.6 5.4 8.1 4 74 9 . .. . ... . . . . . . . . .. .. .. .. .. .. . . . ., ... 4 78 3. . 5 I 6 3 8 5. . 7 9 6 2 6 8 . . 3 2 6 24 0. . 5 1 2 5 6 0. . 4 2 2 48 5 . . 2 1 2 5 7 3. .6 1 5 28 5 . . 2 1 6 35 1. . 6 6 4 68 2. .8 2 3 61 5 . . 3 2 6 4 7 2. . 8 2 99. .............. 92.4 86.5 87.5 82.3 67.7 65.5 70.3 72.7 77.1 82.9 76.9 80.7 124 . . . . . . . . . . . , . . . 96.9 93.9 95.7 92.5 78.7 76.9 80.7 82.9 85.7 89.7 85.6 87.7 149 ... ......... 98.4 96.9 98.5 96_8 85.1 83.8 86.6 88.4 90.3 93.2 90.3 91.4 199 ................. 99.3 99.0 99.8 99.3 92.0 91.2 92.9 94.0 95.0 96.3 95.1 95.1 2 29 49 9 . . . . .. . . . . . . . . . . . ...... . . 9 99 9 . . 6 7 9 99 9 . . 8 6 1 9 0 9 0. .9 0 9 99 9 . .8 9 9 9 6 5 . . 6 1 9 % 4 . .5 2 9 9 5 6. .6 9 9 9 6 7. . 5 3 9 9 7 7. . 0 8 9 9 7 8 . .2 6 9 97 7. .9 1 9 9 7 6 . . 6 7 More than 299 . ... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 MEMO Borrower income by "elected 10a1l ,>pe (thol/sands vf dol/ars), Mean ......... ........ 59.8 67.1 68.3 73.7 102.2 107.1 97.7 93.3 84.6 77.0 84.6 83.1 Median ........ .. 53.0 59.0 62.0 66.0 74.0 77.0 71.0 69.0 62.0 550 62.0 55.0 Non: Includes only first-lien originations for owner·occupied, l-4-family. 2. Other loans include loans originated with a Farm Service Agency or Ru site-built properties; excludes business-related loans. For loans with two or ral Housing Service guarantee and convenljonal loans. more applicants, lenders covered under the Home Mortgage Disclosure ACI 3. Adjusted higher-priced loans are those with annual percentage rates (HMDA) repon data on only two. Income for two appUcants is reponed (APRs) 1.75 percentage points or more above the 30-year fixed-rate APR from jointly. For definitions of lower-and higher-priced lending. see lext. the Freddie Mac Primary Mortgage Market Survey. I. Income amounts are reponed under HMDA 10 the neareSI $1,000. 17. Cumulative di lribulion of home loans, by borrower income and by purpose, lype. and priCing of loan. 2007-08 B. Refinance Percent b U o p rr p o e w r e b r o i u n n c d o m of e FHA VA Other' Total Higher pric~d Adju p s r te ic d e d h ' i gher (thousands of dollars)' 2007 I 2008 2007 I 2008 2007 I 2008 2007 I 2008 2007 I 2008 2007 I 2008 4 2 9 4 . . . . . . . . . . . . . . .. ., . . . . . . . . . .. .. .. .. . . . .... 34 2. . 9 2 3 2 0 . . 6 5 29 3. .4 6 2 2 3. . 9 7 25 3 . . 0 2 2 3 3. ,3 1 2 3 5. . 4 2 24 3 . . 2 2 33 5 . . 7 1 4 8 2 . . 5 1 34 5 . .2 5 4 9 4. . 4 9 9 74 9 . . .. . .. .. . . . . .. .. . .. . . , . . . .. . . . . . . . .. 9 7 1 2 . . 1 2 8 65 6 . .3 9 8 65 6 . . 9 4 8 5 0 7. . 3 1 6 5 9 1. . 2 9 6 47 6. . 5 7 5 70 2. .8 1 6 5 9 0 . .4 5 6 7 2 9 . . 1 1 8 7 5 0. . 5 5 6 80 3. . 2 0 8 71 6 . 0 7 124. .. ..' .......... 97.4 94.8 95.5 91.6 81.2 78.8 81.9 81.2 87.9 82.3 88.6 92.5 149 ... ..... ......... 99.1 97.8 98.5 96.4 87.3 85.7 87.8 87.5 92.1 95.4 92.6 95.4 199 .. ...... ........ 96.7 99.5 99.6 99.2 93.5 92.8 93.7 93.8 96.1 97.7 96.4 97.7 249 ..... ... ., .... 99.8 99.8 99.9 99.7 96.0 95.7 96.2 96.3 97.7 98.6 97.9 98.6 299 ........ " . ...... .... 99.8 99.9 99.9 998 97.2 97.1 97.3 97.5 984 99.0 98.5 99.0 More than 299 .... -.... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 MEMO Borrower income b,' selected loan n'pe (ihuusaruls of doliar,,), Mean .. .. .. . . ... 64.2 68.3 67.7 75.3 96.8 101.7 95.3 96.7 80.3 69.1 78.7 67.5 Median . . . , . , . . . . . ..... 59.0 62.0 63.0 68.0 73.0 770 72.0 74.0 62.0 55.0 62.0 54.0 NOTE: See notes 10 table 17.A. loans) increased for both home-purchase and refi government-insured or guaranteed loans generally nance lending from 2007 through 2008. Though the being smaller than conventional loans. In 2008, income of FHA and VA borrowers rose relative to though, the upward shift in the distribution of loan borrowers using other loans, FHA and VA borrowers amounts for both FHA-insured and VA-guaranteed continued to have relatively low income levels. Mean loans contrasted with a downward shift in the distri while, the incomes of borrowers with higher-priced bution for other loans. Overall, average loan amounts loans, already lower than that of borrowers with for all loans fell for both home-purchase and refi lower-priced loans, fell relatively more in 2008. nance lending, but the drop was largest among higher Loan amounts also differed across loan types, with priced loans.

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A201 18. Cumulalive distribulion of home loans, by loan amollnl and by lype. 2007-08 A. Home purchase Percent Upper bound of FHA VA Other Total Higher priced Adjusted higher borrower income J I I J I pric I e d' (thousands of dollars)' 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2~ 24 .............. .. .1 .1 .0 .0 .4 .5 J .3 1.0 2.0 1.1 3.9 49 ................. .. 2.2 1.5 .4 .3 2.3 2.8 2.3 2.3 5.6 10.0 5.8 15.0 74.. . .. . 11.4 7.9 2.5 2.2 7.8 8.4 7.9 7.9 15.9 23.6 16.3 29.6 99 .................. .. 26.6 18.9 8.8 7.3 15.5 16.0 16.1 16.3 27.1 37.8 27.6 42.5 149 ................. .. 60.6 47.6 32.9 28.7 35.9 35.6 37.7 38.7 48.1 61.8 48.7 63.3 199.... ........ .. 85.1 71.4 60.6 55.4 53.4 52.4 56.1 58.2 63.1 76.4 63.5 75.8 274 ......... .... .. 96.3 89.1 85.0 80.2 71.4 70.6 73.8 76.6 77.7 87.1 78.0 86.1 417 .................... . 99.8 98.2 98.9 97.0 88.6 89.0 89.8 92.2 91.2 95.3 91.4 94.4 625... .. .•. 100.0 99.7 100.0 99.8 96.1 96.5 96.5 97.6 97.5 98.4 97.7 98.0 729. .. ....... . 100.0 99.9 100.0 100.0 97.4 97.6 97.7 98.4 98.5 98.9 98.7 98.6 More than 799 .. .. . .. . 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 MF.MO Loan amount (thousands of dollars) Mean ... ,....... ...... 142.3 171.3 193.1 207.3 241.1 238.4 231.9 216.8 205.5 164.5 202.6 164.6 Median . ... . . . 134.0 154.0 179.0 188.0 188.0 190.0 180.0 176.0 155.0 124.0 152.0 116.0 NOTE: Includes only first-lien originations for owner-occupied, 1-4 family, the nearest $1,000. site-built properties; excludes business-related loans. For definitions of lower 2. See note 2, table 17.A. and higher-priced lending, see text. 3. See note 3, table 17.A. I. Loan amounts are reported under the Home MOJ1gage Disclosure Act to 18. Cumulative distribulion of home loans. by loan <lffiOunl and by type, 2007-08 B. Refinance Percent Upper bound of FHA VA Other Total Higher priced Adjusted higher borrower incon1\! priced' (thousands of dollars)' 2007 I 2008 2007 I 2008 2007 I 2008 2007 I 2008 2007 J 2008 2007 I 2008 24 ... . . . . . . . . . . .1 .0 .1 .0 1.1 1.1 1.0 .9 2.2 5.3 2.3 7.1 49 .... 1.0 .7 .9 .7 4.1 4.8 3.9 4.0 7.0 17.7 7.1 21.5 74 ... ..• .•.• w. .•.• •• •.• .. .. . 6.t 4.7 4.7 4.0 10.5 11.7 10.3 10.5 16.0 33.1 16.3 37.7 99 ............ .......... 17.3 13.5 13.5 10.9 IS.5 20.2 18.4 19.0 26.2 46.8 26.8 51.1 149 ........... ...... 50.2 41.3 40.1 32.6 37.2 39.7 37.8 39.8 47.2 68.7 48.4 71.6 199 .. ........... ........ 76.5 66.7 64.5 56.1 53.7 56.4 54.8 58.1 63.2 81.8 64.4 83.5 274. ........... .... ... 93.4 88.1 87.5 81.1 71.4 74.2 72.5 76.5 78.2 91.1 79 ..~ 91.8 417 ....... ...... 99.7 98.7 99.3 98.1 88.9 92.0 89.4 93.1 91.5 97.2 92.1 97.3 625 ........ ::: . ... ... 100.0 99.8 100.0 99.9 96.4 97.7 96.6 98.1 97.7 99.1 97.9 99.1 729 .......... ...... .. 100.0 100.0 100.0 100.0 97.7 98.4 97.8 98.7 98.6 99.4 98.8 99.4 More than 799 ......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 MEMO Loan amount (thaI/sand.,' of dollars) Mean. 160.3 179.6 181.7 200.2 235.0 217.2 231.4 210.8 202.3 138.0 197.0 130.6 Median ........ .. ..... 149.0 164.0 168.0 186.0 186.0 178.0 183.0 175.0 157.0 105.0 153.0 97.0 NOTE: See notes LO table IS.A. DIFFERENCES IN LENDING OUTCOMES By ences across groups in mean APR spreads paid by RACE, ETHN1C1TY, AND SEX OF THE those with higher-priced loans were generally smal1.53 BORROWER Here we examine the 2008 HMDA data to determine the extent to which these differences persist, compar Analyses of HMDA data from earlier years revealed ing results for 2008 with those for 2007. substantial differences in the incidence of higher Although the HMDA data include a variety of priced lending and in denial rates across racial and detailed information about mortgage transactions, ethnic lines; analyses further showed that such differ ences could not be fully explained by factors included in the HMDA data.52 Studies also found that differ- 53. See, for example, Andrew Haughwout, Christopher Mayer, and Joseph Tracy (2009), SlIbprime Mortgage Pricin}i: The Impact of Race, Ethniciry, and Gender on the Cost of Borrowing, Staff Report 52. See Avery, Brevoort, and Canner, "The 2006 HMDA Data"; no. 368 (New York: Federal Reserve Bank of New York. April): and Avery, Brevoort, and Canner, "Higher-Priced Home Lending and the Marsha Courchane (2007), "The Pricing of Home Mortgage Loans to 2005 HMDA Data"; and Avery, Canner, and Cook, "New Information Minority Borrowers: How Much of the APR Differential Can We Reported under HMDA." Explain?" Journal of Real Estate Research, vol. 29 (4), pp. 400-39.

A202 Federal Reserve Bulletin 0 April 2010 many key factors that are considered by lenders in rect for the distortions introduced by these changes, credit underwriting and pricing are not included. we rely on the PMMS spread, which was defined in Accordingly, it is not possible to determine from an earlier section as the difference between the APR HMDA data alone whether racial and ethnic pricing on a loan and the interest rate available on loans to disparities reflect illegal discrimination. However, prime borrowers with the best credit quality, assum analysis using the HMDA data can account for some ing the loan is a 30-year fixed-rate loan. In the factors that are likely related to the lending process. tables presented in this section, we report disparities Given that lenders offer a wide variety of loan in the incidence and level of pricing using the products for which basic terms can differ substan reported HMDA pricing definition of higher-priced tially, the analysis here can only be viewed as sugges lending, labeled "unadjusted," and the PMMS tive. spread definition, labeled "PMMS-spread adjusted." Comparisons of average outcomes for each racial, A loan with a PMMS spread of greater than 1.75 per ethnic, or gender group are made both before and centage points is treated as higher priced in the after accounting for differences in the borrower adjusted analysis. related factors contained in the HMDA data (income, Finally, in previous years, analyses were conducted loan amount, location of the property or MSA, and only for conventional loans, because the incidence of presence of a co-applicant) and for differences in higher-priced lending for FHA and VA loans was so borrower-related factors plus the specific lending low that a meaningful statistical comparison across institution used by the borrower.54 Comparisons for different groups was not possible. As discussed ear lending outcomes across groups are of three types: lier, this was not the case in 2008 when at least the gross (or "unmodified"), modified to account for unadjusted incidence levels for nonconventional lend borrower-related factors (or "borrower modified"), ing were at almost the same levels as conventional and modified to account for borrower-related factors lending. Consequently, the analysis for 2008 (but not plus lender (or "lender modified"). 2007) was conducted separately for both conven As described earlier, changes in the interest rate tional and nonconventionallending.55 environment over the course of 2008 may have affected whether a loan's APR exceeded the report Incidence of Higher-Pri ed Lending by Race ing threshold set by the rules governing HMDA, and Ethllicity making comparisons of unadjusted data on reported higher-priced lending potentially misleading. To cor- The frequency of reported higher-priced lending var ies across racial and ethnic groups. The 2008 HMDA data, like those from earlier years, indicate that black 54. Excluded from the analysis are applicants residing outside the and Hispanic white borrowers are more likely, and 50 states and the District of Columbia as well as applications deemed to be business related. Asian borrowers less likely, to obtain conventional Borrower-related factors are controlled for as follows: Loans are loans with prices above the HMDA price-reporting placed in cells based on their size (arrayed into buckets), the borrow thresholds than are non-Hispanic white borrowers er's income (also arrayed into buckets), the product type, MSA, number of applicants (one or two), whether the loan was originated (tables 19.A and 19.B). These relationships hold for through a preapproval program, and, for home-purchase loans, whether both home-purchase and refinance lending and persist a piggyback junior lien was associated with it. The applicant's (and whether the analysis focuses on unadjusted or PMMS co-applicanL's) gender was further used to define cells in the analyses of differences among racial and ethnic groups, and the applicant's (and spread-adjusted data. However, relative to 2007, inci co-applicant's) race was used in the analyses of gender differences. dences declined in 2008, and differences among Once loans are placed in cells, "within cell" differences in the groups appear to be narrowing. For example, the incidence of higher-priced lending (or APR spreads or denial rates) are computed. These differences are averaged across cells to create a gross PMMS-spread-adjusted home-purchase inci modified disparity controlling for borrower-related characteristics. For dence was 29.7 percent for black borrowers in 2007, the second stage of the analyses, cells are further defined by the falling to 10.5 percent in 2008. The PMMS-spread HMDA lender, and again, average within-cell disparities are com puted. These disparities control for bOLh borrower-related characteris adjusted incidence declined as well for non-Hispanic tics and lender. white borrowers but by a smaller amount, from For purposes of presentation, the average borrower- and lender 8.4 percent to 3.7 percent. controlled within-cell disparities for each comparison group are added to the average gross incidence (or APR spread or denial rate) of the base comparison group (non-Hispanic whites in the case of compari son by race and ethnicity, and males in the case of comparison by sex). An interpretation of this number is that it is the best guess as to the 55. Although results are reported for nonconventional lending as a incidence of higher-priced lending (or APR or denial rate) that the whole, the analysis controls for the specific type of governmenL comparison group would have if it had the same average borrower backed loan program (FHA, VA, or Farm Service AgencylRural characteristics (and lender) as the base comparison group. Housing Service) used.

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A203 19. In ide nee of higher-priced lending. unmodified and mooiticd for b rrower- and lender-relaled factors. for I1rsl liens on )wncr-o cupied. one- to four-family. site-buill homes, by race. elhnicilY. and sex of borrower A. Conventional home purchase. adjusted and unadjusted for changes in interest rales, 2007-08 Percent except as noted Modified incidence. by Modified incidence, by J modificatIio n factor modification factor Number of Unmodiijed Number of Unmodified Race. ethnicity, and sex loans incidence Borrower- Bo re r l r a o t w ed e r- loans incidence Borrower- Bo re r l r a o t w ed e rrelated plus lender related plus lender 2007 Unadjusted spread I Adjusted s!,read Race ol"er Ihall ... hile on I\' American Indian or Alaska Native 13.678 19.9 17.9 15.8 13.678 16.4 15.0 13.0 Asian ............. . ... '" 146.411 7.7 8.3 9.5 146.411 5.9 6.5 7.6 Black or African American 196.967 34.1 29.7 22.5 196,967 29.7 25.9 18.6 Native Hawaiian or other Pacific Islander 11,757 17.7 17.0 14.2 11.757 14.1 14.0 11.4 Two or more minority races 1.876 13.0 12.8 13.3 1,876 10.8 10.4 10.7 Joint ...... ,' 36.550 8.9 13.4 12.0 36.550 7.3 11.1 9.6 Missing .... 277.348 14.2 18.7 14.4 277,348 11.7 15.9 11.8 While. by elllllicil), H N i o s n p - a H n i i s c p w an h i i c t e w . h . i . t e .. . . . .. .. . . . . . .. . , .... , ... 1,9 2 5 61 0. , 5 93 6 5 6 2 1 8 0 . . 7 6 2 10 1 . . 6 3 1 1 6 0 . . 5 6 1. 2 9 6 5 1 0 , ,5 93 6 5 6 23 8 . .4 6 1 8 7 . .5 4 1 8 3 . . 4 0 Sex One male ... ............ ............. 906.127 18.6 18.6 18.6 906.127 15.2 15.2 15.2 One female . .......... ............ 664.102 17.1 16.4 17.2 664.102 13.9 13.4 14.1 Two males ........... ...... 28.649 14.6 14.6 14.6 28.649 11.9 11.9 11.9 Two females . .. ..... ...... .. . 24.439 15.3 13.3 14.0 24,439 12.9 11.0 12.0 2008 Unadjusted spread Adjusted spread Race uther Ihan w"ile on/\, American Indian or Alaska Native. ,-" .. 5,969 11.7 10.1 9.4 5.969 7.2 5.7 5.0 Asian .. ...... .... 105.156 3.3 5.9 6.4 105,156 1.4 3.2 3.6 Black or African American. . . ....... .. 55,987 17.1 14.4 14.0 55,987 10.5 8.7 8.0 Native Hawaiian or other Pacific Islander 4.986 7.2 8.3 8.9 4.986 3.2 4.5 4.6 Two or more minority races ... ... . ..... 1,132 5.0 5.4 8.6 1.132 2.0 3.0 4.1 Joint ................ .... ..... .. . . ...... 21,215 4.9 7.3 7.3 21,215 2.8 4.2 4.1 Missing. ............. . ..... 146.339 4.9 7.2 7.5 146.339 2.4 3.9 4.3 While, by elhniciT), H N i o s n p - a H n i i s c p w an h i i c t e w . h . i . te . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . ... 1,1 9 0 1 9 . ,5 80 8 4 7 1 6 5 . . 5 4 1 6 1 . . 5 9 1 6 1 . .1 5 1,1 9 0 1 9. ,8 58 0 7 4 8 3. . 7 5 6 3. . 7 8 5 3. .8 7 I Sex One male ........ ............ -... . , .. .. 440,197 8.9 8.9 8.9 440.197 5.0 5.0 5.0 One female .. ........ .... ..... 314.078 7.7 7.5 7.9 314,078 4.1 4.0 4.4 Two males .. ..... .. ...... . ... 17,547 9.6 9.6 9.6 17.547 5.6 5.6 5.6 Two females . .. 13.498 7.6 7.7 9.1 13,498 4.1 4.1 5.4 I NOTE: Excludes transition-period loans (those for which the application was jointly by a male and female are not tabulated here because they would not be submitted before 2004), For definition of higher. priced lending and explana directly comparable with loans taken out by one borrower or by two borrowers tions of spread adjustment and modification factors, see text. Loans taken out of the same sex. The gross differences in the incidence of higher As noted, changes in the interest rate environment priced lending between non-Hispanic white borrow had a particularly distorti ve effect on the incidence of ers, on the one hand, and black or Hispanic white higher-priced lending reported for FHA and VA loans. borrowers, on the other, are relatively large; these These distortions are apparent in comparisons across differences are reduced some, but not completely. racial and ethnic groups (table 19.C). The unadjusted after controlling for borrower-related factors plus incidence of higher-priced home-purchase lending is lender. For example, the gross 2008 PMMS-spread 12.0 percent for black borrowers. almost 4 percentage adjusted difference for home-purchase lending be points higher than the incidence of 8.1 percent for tween Hispanic white and non-Hispanic white bor non-Hispanic whites. However, the PMMS-spread rowers falls 2.7 percentage points when other factors adjusted incidences are only 2.6 percent and 1.5 per are accounted for (8.5 percent minus 3.7 percent cent for the two groups, respectively. Like conven versus 5.8 percent minus 3.7 percent). Differences in tionallending, controlling for borrower characteristics the incidences of higher-priced lending between Asian and lender narrows the differences among groups, but and non-Hispanic white borrowers are generally small they do not entirely disappear. Overall. the results and largely disappear after adjusting for borrower suggest that racial and ethnic disparities in the inci related factors and lender. dence of higher-priced lending may be less of an issue

A204 Federal Reserve Bulletin 0 April 2010 19. Incidence of higher-priced lending. unmodified and modified for borrower- and lender-related factors, for Ir t liens on owner-occupied. one- to four-family. site-built homes. by race, ethni ity, and . ex or borrower B. Conventional refinance, adjusted and unadjusted for changes in interest rates, 2007~8 Percent excepl as nOled Modified incidence, by Modified incidence. by modification faclor modification faclor Race. ethnicily, and sex Nu l m oa b n e s r of U in nm cid o e d n if c i e e d Borrower- I Bo re r l r a o t w ed e r- Nu l m oa b n e s r of U in n c m id o e d n if c i e e d Borrower- I Borrowerrelaled related relaled plus lender plus lender 2007 U nadj u Sled spread Adjusled spread Race other than white only American Indian or Alaska Nalive ... 19.508 26.4 29.2 20.3 19.508 23.1 26.1 17.6 Asian ..... .................... 108.317 12.5 15.8 17.3 108,317 10.1 U.4 14.8 Black or African American. 266,661 41.4 38.8 25.1 266.661 37.8 35.3 22.0 Nalive Hawaiian or olher Pacific Islander. 15.801 23.0 26.9 21.9 15.801 19.5 23.9 19.0 J T o w in o l. o r more . m . i . n . o . r . il . Y .. . ra . ce . s . . .... ",. 34 2. .3 5 0 5 5 6 1 17 8 . .6 5 2 1 3 9 . . 3 3 2 1 0 9 . . 6 0 34 2. . 5 30 5 5 6 1 1 5 6 . . 3 4 2 1 0 7. .7 5 1 17 6 . . 8 6 Missing .... ..... ... . .......... 438,423 25.9 31.4 22.7 438.423 22.8 28.2 19.8 White. b\' ethnicir.,. H N i o s n p - a H n i i s c p w an h i i c t e w . h . i . l . e . . . . . . . . . .. . . . . . . .. . .. . , . . . .. .. .. . . ... 2. 3 1 0 7 2 4 , . 0 3 1 08 2 2 1 7 8 . .2 0 2 1 5 8 . . 3 2 2 1 1 8 . . 4 2 2.1 3 7 0 4 2 . ,0 3 1 0 2 8 2 1 2 5 . . 8 8 2 1 1 5 . . 9 8 1 15 8 . .5 8 ' Sex One male. . . . . .... . ........ . .... 927,344 23.8 23.8 23.8 927.344 20.6 20.6 20.6 T O w lle o f m em al a e l s e . . . , . , . . . . . . ~ . . . . . . . . . .. . . .. .. . . . .. .. .. . ... . ..... 77 23 8, . 4 1 7 4 7 7 2 1 4 9 . . 9 4 2 1 3 9 . . 8 4 2 1 3 9 . . 6 4 77 2 8 3 . .1 4 4 7 7 7 2 1 1 7 . .0 6 2 1 0 7 . . 5 0 2 1 0 7 . .0 4 Two females . ...................... .. 25.363 26.6 22.2 20.7 25,363 23.8 19.6 18.3 200S Unadjusted spread Adjusled spread Race other than white onlY American Indian or Alaska Nalive. 9.693 19.7 18.8 12.6 9.693 15.7 15.4 9.3 Asian. ... " . 83,697 2.9 8.0 9.3 83.697 1.7 5.6 6.8 Black or African American. 102.119 27.9 24.8 15.2 102.119 22.7 20.4 11.0 Native Hawaiian or olher Pacific Islander. 6,924 10.7 14.9 11.0 6.924 7.9 11.2 7.7 Two or more mi non ty races ..... 2.050 6.2 10.4 10.6 2.050 4.3 7.4 7.1 Joinl .. . ........ 26.145 8.1 11.6 10.4 26.145 6.1 8.6 7.7 Missing. .... ...... .. . 244,501 7.8 10.9 10.9 244.501 5.4 7.6 8.0 White. b\' ethnici/)' ........ .... Hispanic while ... . .... IIS,457 14.4 11.2 11.4 118,457 10.2 9.5 S.1 Non-Hispanic while ......... ... . .... - 1.708,479 9.9 9.9 9.9 1.708.479 7.1 7.1 7.1 Sex O O n n e e f m em ale a le .. .. . , ... ....,..f ' .. .. .. . . . . .. . .. 5 44 4 1 2. . 4 11 4 3 9 1 1 2 1 . .2 6 1 1 0 1 . . 9 2 1 1 0 1 . .2 8 5 44 4 1 2. . 4 1 4 1 9 3 9 8 . .0 2 7 8. . 0 9 7 8 . .0 8 Two males ......... .....•. . ....... 16.661 10.3 10.3 10.3 16.661 7.3 7.3 7.3 Two females . .. ' ... 17.633 14.4 11.9 11.1 17.633 10.9 8.9 7.7 NOTE: See nOles to lable 19.A. for FHA or VA lending than for conventional lending, Rate Spreads by Race and Elhnicity particularly when corrections are made for the distor tions created by the interest rate environment.56 The 2008 data indicate that among borrowers with higher-priced loans, the gross mean prices paid rela tive to prime (the PMMS-adjusted spread) are similar 56. It is difficulllO know how 10 interpret pricing disparities across across groups for both home-purchase and refinance groups in FHA and VA lending programs. For the most part, neither lending (tables 20.A, 20.8, and 20.C). This circum program's fees have been risk based, so it is tempting to attribute any stance holds for both conventional and nonconven differences in rales across groups to discrimination or olher factors unrelated to credit risk. However, this may be an unwarranted tional lending. For example, for conventional home simplification. Even though the FHA and VA cover most of the credit purchase loans, the gross mean PMMS-adjusted risk in a loan, they do not cover all of it. Lenders face recourse risk in spread was 2.76 percentage points for both Hispanic the case of fraud. and elevated servicing costs in the case of borrowers who do not make their payments. Thus, FHA and VA loan rates are still white and black borrowers, while the mean APR likely to vary with credit risk, albeit not as much as they would if the spread for non-Hispanic white borrowers was some program fees were fully risk based. Beyond credit risk. other risk what higher at 2.89 percentage points. Accounting for factors, such as prepayment risk, may influence FHA and VA Joan pricing. borrower-related factors or the specific lender used by

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A205 19. Incidence of higher-priced lending, unmodified and modified for borrower- and lender-related factors. for first liens n owner-occupied, one- to four-family, sile-built homes. by race, clhnicity. and sex of horrower C. Nonconventional home purchase and refinance, 2008 Percent except as noted Modified incidence, by Modified incidence. by modificalion faclor modification faclor Number of Unmodified I Number of Unmodified I Race. ethnicity. and sex loans incidence Borrower- Bo re r l r a o l w ed e r- loans incidence Borrower- Borrowerrelaled relaled related plus lender plus lender Unadjusted spread Home purchase Refinance Race other ,han whitt' Dilly American Indian or Alaska Native ....... 7.546 8.1 9.8 10.5 2.270 10.8 13.3 12.8 Asian. ........ ... . .... 19.360 7.9 9.1 9.2 4,758 8.2 9.3 10.4 Black or African A" merican .. 111.375 12.0 11.9 11.2 73.007 13.8 16.1 14.7 Native Hawaiian or olher Pacific Islander. 4,782 8.8 10.4 9.9 1,566 12.0 16.5 15.1 Two or more minority races .... 802 11.3 12.4 10.6 305 15.7 20.5 II I Joint. . .... 20.081 7.0 9.8 9.7 7.692 8.8 11.2 11.3 Missing. . . . . . . . . . . . . . . . . . . 87,225 8.4 10.7 9.6 63.069 15.4 16.8 12.9 White. by etl",idly Hispanic white ..... ........ ' ...... 107,031 12.4 9.6 9.7 32.361 10.3 12.0 12.3 Non-Hispanic while .. ...... 719,687 8.1 8.1 8.1 368,192 11.7 11.7 11.7 Sex ..... O T O w n n e e o I m m i:m a a. l l e a e s le . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . .. . . . . . . . . - . . . . . . . . . .. . .. , . 3 2 2 1 2 3 1 8 . , , 6 0 8 8 4 8 2 3 2 1 1 9 0 2. . . 6 6 1 1 8 9 2. . . 8 6 1 1 9 8 2. . .9 6 1 1 1 4 07 8 5. . . 3 4 98 2 1 8 7 9 1 1 13 2 2 . . .4 5 5 1 1 1 2 2 1 . . . 5 9 5 1 1 12 2 2. . .2 5 5 Two females . ...... ................ .. 17,412 12.3 11.8 6.8 7.148 13.8 12.0 10.8 Adjusted spread Home purchase I Refinance Race other thaTi while OTi/)' American Indian or Alaska Native .. .. 7,546 1.4 1.7 2.3 2.270 2.6 3.2 2.8 Asian ........... .............. 19,360 1.1 1.2 1.5 4,758 1.4 1.7 2.0 Black or African American ............... 111,375 2.6 2.4 2.2 73.007 3.9 4.6 17 Native: Hawaiian or other Pacific Islande:r 4,782 1.5 1.8 1.8 1,566 3.6 15 2.7 Two or more: minority races .. 802 3.1 4.9 2.3 305 6.2 9.7 3.3 Joinl ....... .. . ... . ... 20.081 1.4 2.0 1.9 7.692 2.4 3.4 3.7 Missing ........ ..... ..... .... ... 87,225 1.6 2.5 2.0 63.069 4.3 4.1 3.3 White. byethnidty Hispanic white: .. .......... 107,031 2.3 1.7 1.7 32,361 2.3 2.9 2.9 Non-Hispanic white .. ........ .... 719,687 1.5 1.5 1.5 368.192 2.7 2.7 2.7 Sex One male ..... .......... ............ ... 328,082 1.8 1.8 1.8 148,319 3.1 3.1 3.1 T O w ne o f m em al a e l s e . . . .. . . . . .• .. .. .. . ... .... . . .. . . . .. .. . . . .. . ... 21 2 3 1 . . 6 8 8 4 2 3 2 2 . .3 1 2 2 . . 3 1 V 1.6 107 5. , 9 42 8 7 8 3 2 . . 4 7 2 2 . .9 7 2 1 .7 0 Two females . .... . .~ . . . . . , . . . . , 17,412 2.3 2.2 2.0 7,148 3.3 2.9 2.9 NOTE: Excludes transition-period loans (those for which lbe app~cation was male are not tabulated here because they would not be directly comparable submiued before 2004). For definition of higher-priced lending and explana. with loans taken out by one borrower or by twO borrowers of the same sex. lion of modification factors, see text. Loans taken out jointly by a male and fethe borrowers alters the relationships, but in unpre Denial Rate by Race, Ethnicity, and e dictable ways; black and Hispanic white borrowers now have higher modified spreads relative to non Analyses of the HMDA data from earlier years have Hispanic white borrowers. Patterns are similar when consistently found that denial rates vary across appli the analysis focuses on nonconventional loans. cants grouped by race or ethnicity. In 2008, for both home-purchase and refinance conventional lending, black and Hispanic white applicants had notably Pricing Difj'erence by Sex higher gross denial rates than non-Hispanic white The 2008 HMDA data, like those in previous years, applicants. Generally, denial rates for black appli reveal relatively little difference in pricing outcomes cants have been the highest, and denial rates for (PMMS-spread adjusted or spread unadjusted) when Hispanic white applicants were between those for borrowers are distinguished by sex. This holds for black and those for non-Hispanic white applicants both incidence and rate-spread comparisons (tables (tables 21.A and 21.B). The pattern for Asians was 19 and 20). somewhat different, as the gross denial rate for this

A206 Federal Reserve Bulletin 0 April 20 I 0 20. Mean APR ·preads. unmodified and modified for harrower- amI I~nder-rclated factors. for higher-priced loan!> on one- to four-family h me . by typt! of loan and by race, ethnicity. and sex uf borrower A. Coventional home purchase, adjusted and unadjusted for changes in interest rates, 2007-08 Percent except as noted Modi fied mean spread. by Modified mean spread. by Number of modi fication factor Number of modification factor Race. ethnicity. and sex higher-priced Unmodified I higher-priced Unmodified I loans mean spread Bo rr I o t w ed e r- re B l o at r e ro d w p e l r u - s loans mean spread Bo re r l r a o t w ed e r- r B el o a r te ro d w p e l r u - s re a lender lender 2007 Unadjusted spread Adjusted spread Race other than white unll' American Indian or Alaska Native ... 2.727 4.46 4.48 4.49 2.244 3.27 .~.26 3.34 Asian ...... ...... 11.263 4.29 4.33 4.39 8.627 3.18 3.22 3.27 Black or African American ......... 67,231 4.94 4.92 4.67 58.491 3.73 3.71 3.49 Native Hawaiian or other Pacific Islander 2,086 4.52 4.59 4.53 1.654 3.42 3.42 3.40 J T M o w i i n s o s t i o n r . g . m .. . o . . r . . e . minority . . r . a . c . e . s . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . .. 39 3 . . 2 2 2 6 4 6 3 7 4 4 4 4 . . . 6 6 7 5 8 8 4 4 4 . . . 8 8 6 3 4 0 4 4 4 . . . 5 7 6 5 2 0 3 2 2 . . 6 5 2 1 6 0 1 3 7 3 3 3 . . . 5 5 6 2 2 2 3 3 3. . .6 6 47 3 4 3 3 3 . . . 4 6 3 3 8 7 White. by "tlmidt)' Hispanic white . ....... ... 75.103 4.52 4.49 4.45 61,754 3.35 3.31 3.30 Non-Hispanic white .. ......... ....' 206,469 4.42 4.42 4.42 164.132 3.28 3.28 3.28 Sex . T O O w n n e e o m f m e a a m l l e e a s . l e. . . . . . . . . . . . . . . . . . . . . .. . . . .. . . . . . . . . . .. . .. . . . . . . . . . . . . . . . . . . . , . .. . . . . . 1 1 6 1 4 8 3 , . . 6 4 1 8 2 8 4 7 9 4 4 4 . . . 5 5 5 4 4 5 4 4 4 . . .5 5 5 5 4 4 4 4 4 . . . 5 5 5 5 5 4 1 9 3 2 8 3 . . . 3 3 0 9 7 8 7 5 4 3 3 3 . . . 4 3 3 0 9 9 3 3 3 . . .4 4 3 0 9 0 3 3 3 . . . 4 4 3 0 9 0 Two females ......................... ... 3.743 4.81 4.63 4.59 3.153 3.65 3.46 3.41 2008 Unadjusted spread Adjusted spread Race other than white on/\' American Indian or Alaska Native ...... 700 4.16 4.17 4.23 427 3.12 3.19 3.34 Asian .. , ......... .. 3,465 3.65 3.85 3.86 1.460 2.63 2.69 2.63 Black or African American ........ 9.601 3.88 4.02 4.10 5.855 2.76 2.90 2.99 Native Hawaiian or other Pacific Islander 357 3.70 3.87 4.01 159 2.73 2.80 3.24 Two or more minority races .. ....... 57 3.73 4.39 4.35 23 2.85 3.59 3.74 Joint ... ....... . . . . . . . . . . 1.045 4.05 3.93 4.06 596 3.02 2.88 2.93 Missing ........ ..... ..... 7,241 3.69 3.79 4.01 3.540 2.64 2.72 2.92 White. by ethnicity Hispanic white ...... ........... . .... . ... 14.130 3.83 3.96 4.05 7.776 2.76 2.84 2.98 Non-Hispanic white .......... ....... . ... 72.549 3.97 -'.97 3.97 41,588 2.89 2.89 2.89 Sex One male . ... ...................... 39,093 3.87 3.87 3.87 21.852 2.79 2.79 2.79 One female . .. ...... .. ....... 24.189 3.80 3.81 3.83 12,907 2.72 2.75 2.76 Two males ............... .. , .... 1,683 3.99 3.99 3.99 985 2.87 2.87 2.87 Two females. ...... 1.023 3.88 3.86 4.05 547 2.83 2.82 2.86 NOTE: Unadjusted-spread annual percentage rate (APR) is the difference be (those for which the application was submitted before 2004). For definition of tween the APR on the loan and the yield on a comparable-maturity Treasury higher-priced lending and explanation of modification factors. see text. Loans secuoity. Adjusted-spread APR is the difference between the APR on the loan taken out jointly by a male and female are not tabulated here because they and the estimated APR reported by Freddie Mac for a 30-year fixed-rate loan would not be directly comparable with loans taken out by one borrower or by in its Primary MOrlgnge Market Survey. Excludes transition-period loans two borrowers of the same sex. group was higher for home-purchase loans than for virtually all minority groups (with the exception of non-Hispanic whites, but about the same for Asians) increased by about one-tenth over the previ refi nancing. ous year while the denial rate fell for non-Hispanic Controlling for borrower-related factors in the white applicants. As a result, denial-rate differences HMDA data reduces the differences among racial and between minorities and non-Hispanic whites widened. ethnic groups. Accounting for the specific lender used The rank ordering of denial rates across groups is by the applicant reduces differences further, although similar for nonconventional lending in 2008 unexplained differences remain between non (table 21.C). However, differences among groups Hispanic whites and other racial and ethnic groups. are narrower because denial rates are uniformly For home-purchase conventional lending, denial rates lower for black and Hispanic white applicants and increased only modestly for virtually all groups from higher for Asians and non-Hispanic whites as com 2007 through 2008 with differences between groups pared with conventional lending. Group differences also changing little. Patterns for conventional refi are reduced, but do not disappear, when borrower nancing are less straightforward. Denial rates for characteristics and lender are controlled for. With

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A207 20. Mean APR spreads, unmodified and modified for borrower- and lender-related factors, for hjgher-pri cd I ans on ooe- to four-famjly homes, by type of loan and by race, ethnicity. and ex of borrower B. Conventional refinance, adjusted and unadjusted for changes in interest rates, 2007-08 Percent except as noted Modified mean spread. by Modified mean spread. by Number of Unmodified modificatiIo n foctor Number of Unmodified modificatiIo n factor Race. ethnicity, and sex higher'priced higher.priced mean spread Borrower. Borrower· mean spread Borrower- Borrowerloans ltd related plus loans r lated related plus re a e lender e lender 2007 Unadjusted spread Adjusted spread Race olher Ihall ",hile onll' A B A l s m a ia c e k n ri c o a r n A I f n ri d c ia a n n . o A . r . m . A . e l r . a i . c s . a k . n a . . Na . ti . v . e . .. . . ' . ., . . ,. . 11 1 5 3 0 , , . 5 4 1 8 6 4 4 5 1 5 4 4. . . 0 7 2 7 6 9 4 4 5 . . . 6 0 7 4 7 2 4 4 4 . . . 7 6 8 9 9 6 10 1 4 0 0 . . , 5 6 9 1 9 5 5 5 0 3 3 3. . . 5 7 11 7 2 3 3 3 . . . 4 5 7 1 5 0 3 3 3 . . . 6 4 5 1 7 4 Native Hawaiian or other Pacific Islander 3,639 4.63 4.82 4.81 3,075 3.44 3.55 3.56 Two or more minority races ......... 447 4.83 4.84 4.75 392 3.59 3.58 3.51 Joint ............. - ... 6,365 4.79 4.90 4.82 5.631 3.53 3.63 3.58 Missing . . . . . . . . ... 113,472 4.88 4.97 4.75 100,081 .1.64 3.71 3.51 While, by el/llli<"iry Hispanic white ... ...... .. ... .. . 81,628 4.68 4.77 4.80 68.909 3.50 3.54 3.57 Non-Hispanic white ... ... .. .. .... .. 396,194 4.71 4.71 4.71 344.009 3.47 3.47 3.47 Sex One male ... . .. .... .... . ....... 221.043 4.77 4.77 4.77 191,322 3.55 3.55 3.55 One female .... ......... . ... . ... 193,694 4.78 4.75 4.76 167,975 3.56 3.53 3.53 Two males ......... ........ ... 4,502 4.77 4.77 4.77 3.937 3.52 3.52 3.52 Two females ........ ...... .... 6.750 4.91 4.82 4.79 6.046 3.64 3.57 3,52 2008 Unadjusted spread Adjusted spread Race OIher Ihan .... hire on/)' American Indian or Alaska Native .. 1.914 5.12 5.00 4.68 1.525 3.93 3.79 3.58 Asian ..... ....... .., .. 2.429 4.08 4.47 4.59 1,450 3.08 3.43 3.47 Black or African American .... .. 28,476 5.28 5.38 4.89 23.191 4.11 4.17 3.75 Native Hawaiian or other Pacific Islander 743 4.71 4.91 4.70 549 3.62 3.74 3.66 Two or more minority races .. 128 4.76 5.12 4.83 88 3.89 4.28 3.99 Joint ., ... ..... , ..... , 2,115 4.72 4.78 4.73 1,584 3.58 3.64 3.58 Missing . , .... ,. ....... 19,179 4.46 4.58 4.67 13.155 3,42 3.54 3.52 While. byelhnicil)' ..... Hispanic white .......... . ..... 17.025 4.63 4.69 4.71 12.080 3.58 3.57 3.63 Non-Hispanic white ..... ......... 168,484 4.66 4.66 4.66 122,082 3.54 3.54 3.54 Sex O O n n e e f m e a m le a le . . .. . . . . . . . . . . .. . .. . . . . , . . . .. .. . . .. . . . . . . . . . . . . . . . 6 55 0. , 5 6 8 66 4 4 4. .6 77 3 4 4 . . 6 7 3 2 4 4 . . 6 63 3 4 40 3, ,7 23 79 2 3 3 . . 6 5 9 6 3 3 . . 5 64 6 3 3 . . 5 5 4 6 Two males ....... .......... .... 1.710 4.50 4.50 4.50 1.221 3.36 3.36 3.36 Two females .... . . . . . . . . . . . . . . . ... . . I 2,540 4.84 4.68 4.39 1,921 3.72 3.45 3.28 NOTE: See notes to table 20.A. regard to the sex of applicants, there are no notable ing given the apparent increase in higher-priced non differences for either conventional or nonconven conventional lending in 2008. However, removing the tional lending. effects of the reporting distortions created by changes in the interest rate environment eliminates much of the difference in incidence rates among groups in ome Limitations of the Data in Assessing nonconventional lending. Regarding the sex of bor Fair Lending Compliance rowers, only very small differences were found 10 Information in the HMDA data, including borrower lending outcomes. and loan characteristics, property location, loan origi Both previous research and experience gained in nation date, and the lender identity, does not account the fair lending enforcement process show that unex fully for racial or ethnic differences in the incidence plained differences in the incidence of higher-priced of higher-priced conventional lending or in denial lending and in denial rates among racial or ethnic rates for all lending types; significant differences groups often stem, at least in part, from credit-related remain unexplained. In contrast, only small differ factors not available in the HMDA data, such as ences across groups were found in the mean APR measures of credit history (including credit scores), spreads paid by those receiving higher-priced loans loan-to-value and debt-to-income ratios, and differ and in the incidence of higher-priced lending for ences in choice of loan products. Differential costs of nonconventionallending. The latter finding is reassur- loan origination and the competitive environment

A208 Federal Reserve Bulletin 0 April 2010 20. Mean APR spreads, unmodified and modified for horrnwcr- ~lnd lender-related factOfs. for higher-priced IOilns on onc- to rouf·ramily homes. by type of loan and by rat:c, cthnieiLy, and sex of borrower C. Nonconventional home purchase and refinance, 2008 Percentage points except as noted Modi fied mean spread. by Modified mean spread, by Number of modification faclor Number of modi fication faclor Unmodified Unmodified Race. ethnicity, and sex higher-priced higher-priced loans mean spread Bo re r l r a o t w ed e r- .I re B l o a r te ro d w p e l r u - s loans mean spread Borr I o I w d e r- 1 re B l o a r te ro d w p e l r u - s lender re a e lender Unadjusted spread Home .purchase Refinance Race nlher Ihun while nllly American Indian or Alaska Native 610 3.34 3.34 3.38 245 3.38 3.43 3.45 Asian .... . ..... ......... 1.527 3.32 3.31 3.37 392 3.31 3.31 3.49 Black or African American ........... 13.388 3.39 3.40 3.41 10,103 3.40 3.39 3.41 Nalive Hawaiian or other Pacific Islander 422 3.36 339 3.38 188 3.62 3.32 3.35 Two or more minority races ... 91 3.38 3.37 3.31 48 3.37 3.51 3.30 J M o i in ss t ing . . . . . . . . . . . . . . . . . . . .. . . . .. . . . . . . .. . . . . . . ' . 7 1 , ,3 33 9 5 9 3 3 . . 3 49 4 3 3. . 3 39 9 1 3. 3 4 9 0 9. 6 71 74 2 3 3 . . 3 38 8 3 3 . .3 35 9 3 3 . . 4 4 1 5 While. by ellmicir), Hispanic white .. .... ........... . .. .. . .. 13.267 3.40 3.38 3.37 3,334 3.44 3.82 3.37 Non-Hispanic white ............ 58,517 3.37 3.37 3.37 42.901 3.37 3.37 3.37 Sex One male ..... ................ 31,483 3.37 3.37 3.37 18,522 3.38 3.38 338 T O w ne o f m em al a e l s e .......... .. .. . . . . , ... -..... , 2 2 2. . 7 6 2 5 2 0 3 3 . .3 3 9 7 3 3. .4 37 0 3 3 . . 3 37 7 14. 7 4 5 0 1 3 3 .D .4 6 0 3 3 . .3 5 6 0 3 3 . . 3 3 6 6 Two females 2.138 3.36 3.35 3.35 985 3.37 3.39 3.44 Adjusted spread Home purchase I Refinance Race otlrer lhan white only American Indian or Alaska Native 109 2.26 2.14 2.36 58 2.07 2.30 2.32 Asian . . . . . . . . . . . . . . .......... , 211 2.30 2.08 2.27 67 2. II 1.62 2.45 Black or African American . . . . . . . . .. 2,906 2.26 2.38 2.45 2.831 2.19 2.U 2.25 Native Hawaiian or other Pacific Islander 71 2,41 2.16 2.27 56 2.88 2.02 2.35 Two or more minority races 25 2.17 1.74 2.21 19 2.03 2.34 2 ..~ 4 Joint , ........ , .... 277 2.91 2.31 2.29 181 2.20 2.16 2.42 Missing 1.401 2.19 2.37 2.40 2.713 2.09 2.02 2.32 While. by elhniciry . H N i o s n p - a H n i i s c p w an h i i c t e w . h . i . te . . . . . . . . . . . . . . . . . . . . ., ..... 1 2 0 . . 4 5 1 5 1 3 2 2 . . 4 3 7 6 2 2 . . 3 3 5 6 2 2 . .2 3 7 6 10. 7 0 3 5 1 7 2 2 . .6 2 1 4 3 2. , 2 4 4 2 2 2 . . 2 2 3 4 Sex One male ............................ 5,992 2.30 2.30 2.30 4.600 2.20 2.20 2.20 One female ......•.. 4.386 2.36 2.50 2.28 3.634 2.27 2.27 2.11 Two males .. 498 2.30 2.30 2.30 162 2.21 2.21 2.21 Two females . 392 2.26 2.28 2.37 238 2.13 1.71 2.72 NOTE: Spread annual percentage rate (APR) is the difference between the fication factors. see leXL Loans taken out jointly by a male and female are not APR on Ihe loan and the yield on a comparable-marurily Treasury securilY. Ex· tabulaled here because they would nO! be directly comparable with loans taken eludes transition-period loans (those for which the application was submined OUI by one borrower or by IWO borrowers of the same sex. before 2004). For definition of higher·priced lending and explanation of modialso may bear on the differences in pricing, as may differences across populations in credit-shopping activities. Differences in pricing and underwriting outcomes may also be due to discriminatory treatment of minorities or other actions by lenders, including marketing practices. The HMDA data are regularly used to facilitate the fair lending examination and enforcement processes. When examiners for the fed eral banking agencies evaluate an institution's fair lending risk, they analyze HMDA price data in con junction with other information and risk factors, as directed by the Interagency Fair Lending Examina tion ProceduresY 57. The Interagency Fair Lending Examination Procedures are available at www.ffiec.govIPOF/fairiend.pdf.

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A209 21. Denial rales on applications. unmodified and modified for borrower- and lemler-related factors, for lirslliens on owner occupied. one-La four-family, site-buill homes. hy race, ethnicily. and ex of applicant A. Conventional home purchase, 2007---08 Percent except as noted Modified dlen ial rate. Modi fied denial rate. Number of by modification factor Number of by modification factor appUcations Unmodified applications Unmodified Race, ethnicity. and sex .1 a b c y te d le n u d p e o r n denial rate Borr I o t w ed e r· re B l o a r te ro d w p e l r u - s a b c y te d le n u d p e o r n denial rate BO~otw~r- re B l o at r e ro d w p e l r u - s re a lender re a e lender 2007 2008 Race other tlran white on/)' American Indian or Alaska N. ative. .... 22,627 27.9 24.8 20.7 9,939 29.7 24.6 21.0 Asian . . . . . , . . . . . . . ... 210.828 17.4 15.0 15.1 152.213 18.7 16.6 16.8 Black or African American ............... 364.887 35.3 30.4 23.5 105.001 36.1 29.7 25.4 Native Hawaiian or other Pacific Islander 19,436 27.5 21.9 20.2 8.016 26.9 22.7 21.0 .. Two or more minOrity races .. . 2,824 23.5 21.7 21.4 1.669 23.6 21.9 23.8 Joint ....... ... 48.325 14.5 18.2 15.5 28.195 14.8 17.6 15.3 Missing .... .. .... . ........ 441,246 24.5 23.2 17.8 220.395 21.5 19.9 17.0 While. by elhnicit)' Hispanic white . .......... ..... .. 448.973 29.9 22.1 19.5 160.823 31.1 22.7 22.0 Non-Hispanic white .. .... ......... .... .. 2.495.779 13.2 13.2 13.2 1,425.869 13.6 13.6 13.6 S O e n x e male ..... , ... ......... ......... ... 1.349.211 22.7 22.7 22.7 640.030 21.3 21.3 21.3 One female .. ...... ........ . ...... .... 967,818 21.6 21.3 21.7 443.753 19.8 19.4 19.9 T T w w o o f m em ale a s le s . .. . . . . . . . . .. . ... .. . . . . .. . . . . .. . . . . .. .. . . .. . . .. " 4 3 1 5 . . 1 1 2 8 8 4 2 21 1 . . 1 0 2 1 1 9 . . 0 3 2 1 1 9 . .5 0 2 1 5 9 . . 1 1 9 4 5 8 2 20 1 . .1 4 2 1 1 9 . . 1 3 2 1 1 9 . . 1 6 NOTE: Includes transition-period applications (those submitted before 2004). comparable with applications made by one applicant or by two appUcanls of For explanation or modification factors. see text. Applications made jointly by the same sex. a male and femak are not tabulated here because they would nOI be direclly 21. Denial rates on appliculions, unmodified <tnd modi lied for borrower- and lender-related factors. for Ii ·t liens on Qwner occupied. one- to four-family. ite-built home', by race, ethnicity, and sex of applicanl B. Conventional refinance, 2007---08 Percent except as noted Modified denial rate. Modified denial rate. Number of by modification factor Number of by modi fication factor applications Unmodified I applications Unmodified I Race. ethnicity. and sex acted upon denial rate Borrower- Borrower- acted upon denial rate Borrower. Borrowerby lender ltd related plus by lender related related plus re a e lender lender 2007 2008 Race other thun while only American Indian or Alaska Native ...... 59.774 57.0 53.7 42.5 36.265 65.4 56.7 43.0 Asian .. . ........ 202.414 32.6 37.2 38.0 150.970 31.6 35.4 36.1 Black or African American. ............. 737.786 53.3 53.5 43.6 343.389 61.2 59.9 44.9 Native Hawaiian or other Pacific Islander 38.851 46.3 48.5 43.0 19.275 51.8 52.2 43.4 Two or more minority races. ........ .. 6,204 51.0 51.2 44.6 4.682 50.5 49.7 42.0 Joint ..... ..... ... ... . ... 70.982 41.4 46.5 38.5 53.200 41.8 46.0 36.8 Missing. .. . . . . . . . ...... ... 1,147.462 49.4 49.8 40.4 532.425 41.5 42.5 37.8 White. by elhnicity N H o is n p - a H n i i s c p w an h i i c t e w . h . i . te . . . . . .. . . . . . . . , . . . . . , . . ., . . . . . . . . . . .. '" . . 3. 6 9 9 1 5 7, , 4 5 9 3 2 7 4 3 3 4 . .0 4 4 3 4 4 . . 0 0 4 3 1 4 . . 6 0 2.8 3 9 2 4 0. . 8 1 4 5 5 4 3 5 1 0 . .6 7 4 3 5 1. . 7 3 4 3 1 1 . . 3 7 Se.t One male ......... . . . , . . -......... . 2,016.750 42.2 42.2 42.2 l.l25.624 41.5 41.5 41.5 T O w ne o f m em al a e l s e . .. . . . .. . . . . . . . ... ..... .. , . . . . ..... .'." 1.6 4 0 8 6 . . 0 5 9 6 9 3 4 4 1 0 . . 5 6 4 3 1 9. . 5 5 4 4 1 0 . . 5 6 88 32 9, ,0 3 1 3 4 4 3 4 8 0 . . 2 7 3 3 9 8 . . 0 2 3 .\ 8 9 . .6 2 Two females ...... ...... ....... .. 55,312 44.7 42.2 40.9 35.706 41.7 38.5 36.9 NOTE: See notes to table 21.A.

A210 Federal Reserve Bulletin 0 April 2010 21. Denial rales on applications, unmodified and modified for borrower- and lender-relHled factors. for fir t liens on owner occupied. one- 10 four-family, site-built homes, by race, elhnicily, and sex of applicant C. Nonconventional home purchase and refinance, 2008 Percent except as noted Modified denial rate, Modified denial rate. a N p u p m lic b a e t r io o n f s Unmodified by modificIat ion factor a N p u p m lic b a e t r io o n f s Unmodified by modification factor Race, ethnicity, and sex acted upon denial rate Borrower- Borrower- acted upon denial rate Borrower- I Borrowerby lender re l a t e d rela le te n d d e p r l us by lender II related 'I rela le te n d d e p r l us Home purchase Refinance Race other than while onll' American Indian or Alaska Native ... 10.154 19.7 20.6 18.6 5.229 49.7 49.6 43.6 Asian ..... 26,711 21.3 19.2 18.6 11.836 51.5 49.0 45.1 Black or African American .. 161.187 25.0 24.0 22.6 155.665 45.0 47.2 46.1 Native Hawaiian or other Pacific Islander 6,581 21.7 18.9 18.3 3.643 49.7 47.7 47.2 Two or more minority races ... .... 1,141 23.8 23.3 17.3 873 58.2 59.7 53.1 10int ...... ..... . .. 25,123 14.7 16.2 16.3 14.154 38.7 44.1 42.2 Missing .... ... , . ...... ..... 121,400 21.9 20.8 19.8 165,776 54.6 47.7 43.9 While. by ellllliciry Hispanic white . . . . . . . . . .. . . .. 152,228 24.0 19.8 20.0 73.118 47.6 44.1 44.3 Non-Hispanic white .. ............. ..... 890,659 14.1 14.1 14.1 662,593 37.5 37.5 37.5 Sex ...... .. One male . .. . 433.829 19.0 19.0 19.0 300.070 42.8 42.8 42.8 T O w ne o f m em al a e l s e . .. .. . . ... . . . . . .. .. . ... . . .. . . . . .. . . . . . .. _ . ._ . , . - .... 28 2 3 9. , 7 4 7 0 2 4 2 1 0 9. .9 2 2 1 0 7 . . 9 7 2 1 0 7 . . 9 B 21 1 9 1 . , 5 8 0 2 3 6 4 41 4 . . B 0 4 4 1 1 . . B 2 4 4 1 1 . . B 3 Two females .. .. " ..... .. .. 23,519 20.5 IB.7 18.5 13,B08 41.2 40.3 40.3 NOTE: See notes to table 21.A. APPENDIX A: REQUIREMENTS OF - backed by the Farm Service Agency or Rural REGULATION C Housing Service • lien status The Federal Reserve Board's Regulation C requires - first lien lenders to report the following information on home - junior lien purchase and home-improvement loans and on refi - unsecured nance loans: • loan purpose home purchase For each application or loan - refinance • application date and the date an action was taken on - home improvement the application • type of purchaser (if the lender subsequently sold • action taken on the application the loan during the year) approved and originated Fannie Mae approved but not accepted by the applicant Ginnie Mae denied (with the reasons for denial-voluntary Freddie Mac for some lenders Farmer Mac withdrawn by the applicant Pri vate securitization file closed for incompleteness Commercial bank, savings bank, or savings asso • preapprovaJ program status (for home-purchase ciation loans only) Life insurance company, credit union, mortgage preapproval request denied by financial institu bank, or finance company tion Affiliate institution preapproval request approved .but not accepted Other type of purchaser by individual • loan amount For each applicant or co-applicant • loan type conventional • race insured by the Federal Housing Administration • ethnicity guaranteed by the U.S. Department of Veterans • sex Affairs • income relied on in credit decision

The 2008 HMDA Data: The Mortgage Market during a Turbulent Year A211 For each property tually established percentage of the claim amount. The costs of the insurance are typically paid by the borrow • location, by state, county, metropolitan statistical er through a somewhat higher interest rate on the loan. area, and census tract In 1993, the Mortgage Insurance Companies of • type of structure America (MICA) asked the Federal Financial Institu - one- to four-family dwelling tions Examination Council (FFIEC) to process data - manufactured home from PMI companies on applications for mortgage - multifamily property (dwelling with five or insurance and to produce disclosure statements for more units) the public based on the data.58 The PMI data largely • occupancy status (owner occupied, non-owner mirror the types of information submitted by lenders occupied, or not applicable) covered by the Home Mortgage Disclosure Act of 1975 (HMDA). However, because the PMI compa For loans subject to price reporting nies do not receive all the information about a prospective loan from the lenders seeking insurance • spread above comparable Treasury security coverage, some HMDA items are not included in the PMI data. In particular, loan pricing information, For loans subject to the Home Ownership requests for preapproval, and an indicator of whether and Equity Protection Acl a loan is subject to the Home Ownership and Equity Protection Act are unavailable in the PMI data. • indicator of whether loan is subject to the Home The eight PMI companies that issued PMI during Ownership and Equity Protection Act 2008 submitted data to the FFlEC through MICA. In ApPENDrx B: PRIVATE MORTGAGE total, these companies acted on more than 1.55 mil lion applications for insurance, including 1.06 million INSURANCE DATA applications to insure mortgages for purchasing homes Historically, mortgage lenders have required a pro and 490,000 applications to insure mortgages for spective borrower to make a down payment of at least refinancing existing mortgages. PMI companies ap 20 percent of a home's value before they will extend proved 87 percent of the applications they received. a loan to buy a home or refinance an existing loan. Approval rates for PMI companies are notably higher Such down payments are required because experience than they are for mortgage lenders because lenders has shown that homeowners with little equity are applying for PMI are familiar with the underwriting substantially more likely to default on their mort standards used by the PMI companies and generally gages. Private mortgage insurance (PMI) emerged as submit applications for insurance coverage only if the a response to creditors' concerns about the elevated applications are likely to be approved. 0 credit risk of lending backed by little equity in a home as well as the difficulties that some consumers encounter in accumulating sufficient savings to meet 58. Founded in 1973, MICA is the trade association for the PMI the required down payment and closing costs. industry. The FFIEC prepares disclosure statements for each of the PMI protects a lender if a borrower defaults on a PMI companies. The statements are available at the corporate head quarters of each company and al a central depository in each metro loan; it reduces a lender's credit risk by insuring politan statistical area in which HMDA dala are held. The PM! data are against losses associated with default up to a contrac- available from the FFIEC at www.ffiec.gov/reports.htm.

Legal Developments

BI March 2009 Legal Developments: Fourth Quarter, 2008 ORDERS ISSUED UNDER BANK Columbia.s PNC is the 12th largest depository organization in Ohio, controlling deposits of approximately $2.2 bil HOLDING COMPANY ACT lion.6 National City, with total consolidated assets of approxi ORDERS ISSUED UNDER SECTION 3 OF THE mately $143.7 billion, is the 16th largest depository organi zation in the United States. NC Bank, its only depository BANK HOLDING COMPANY ACT institution, operates in nine states and controls deposits of approximately $94.3 billion. National City is the largest The PNC Financial Services Group, Inc. depository organization in Ohio, controlling deposits of $34.7 billion. Pittsburgh, Pennsylvania On consummation of this proposal, and after taking into account the proposed divestitures, PNC would become the Order Approving the Merger of Bank eighth largest depository organization in the United States, Holding Companies with total consolidated assets of approximately $288.5 bil lion. PNC would control total deposits of $174.8 billion, The PNC Financial Services Group, Inc. ("PNC"), a representing less than 1 percent of the total amount of financial holding company within the meaning of the Bank deposits of insured depository institutions in the United Holding Company Act (HBHC Act"), has requested the States. In Ohio, PNC would become the largest depository Board's approval under section 3 of the BHC Actl to organization, controlling deposits of approxi mately acquire National City Corporation ("National City") and $36.9 billion, which represent approximately 17.4 percent thereby indirectly acquire National City's subsidiary bank, of the total amount of deposits of insured depository National City Bank ("NC Bank"), both of Cleveland, institutions in the state. Ohio.2 Notice of the proposal, affording interested persons an FACTORS GOVERNING BOARD REVIEW OF THE opportunity to submit comments, has been published TRANSACTION (73 Federal Register 65,854 (2008)). The time for filing comments has expired, and the Board has considered the The BHC Act enumerates the factors the Board must proposal and all comments received in light of the factors consider when reviewing the merger of bank holding set forth in the BHC Act. 3 companies or the acquisition of banks. These factors are the PNC, with total consolidated assets of approximately competitive effects of the proposal in the relevant geo $145.6 billion, is the 14th largest depository organization in graphic markets; the financial and managerial resources the United States, controlling deposits of approximately and future prospects of the companies and banks involved $84.6 billion, which represent less than I percent of the in the transaction; the convenience and needs of the total amount of deposits of insured depository institutions communities to be served;7 the records of performance in the United States.4 PNC controls two insured depository under the Community Reinvestment Act ("CRA")8 of the institutions that operate in nine states and the District of insured depository institutions involved in the transaction; 5. PNC's subsidiary insured depository institutions are PNC Bank, I. 12 U.S.C. § 1842. National Association ("PNC Bank"), Pittsburgh, Pennsylvania; and 2. PNC also proposes to acquire Ohio National Corporation Trade PNC Bank, Delaware. Wilmington, Delaware. Services, Cleveland, the agreement corporation subsidiary of National 6. Statewide deposit and ranking data are as of June 30, 2008. City under section 25 of the Federal Reserve Act ("FRA") and the 7. A majority of commenters expressed concern that the proposed Board's Regulation K, 12 U.S.c. §§ 601 et seq. and 12 CFR 211.5(g). acquisition would result in the loss of jobs. The effect of a proposed In addition, PNC proposes to acquire the nonbanking subsidiaries of transaction on employment in a community is not among the factors National City in accordance with section 4(k) of the BHC Act that the Board is authorized to consider under the BHC Act, and the (12 U.S.c. § 1843(k)). federal banking agencies, courts. and the Congress consistently have 3. Ninety-four commenters expressed concerns about certain as interpreted the convenience and needs factor to relate to the effect of a pects of the proposal. proposal on the availability and quality of banking services in the 4. Asset, national deposit. and ranking data are as of September 30, community. See, e.g., Wells Fargo & Company. 82 Federal Reserve 2008. In this context, insured depository institutions include commer Bulletin 445, 457 (1996). cial banks. savings banks, and savings associations. 8. 12 U.S.c. §2901 et seq.

B2 Federal Reserve Bulletin 0 March 2009 and the availability of information needed to determine and would substantially lessen competition in any relevant enforce compliance with the BHC ActY In cases involving banking market, unless the anticompetitive effects of the interstate bank acquisitions, the Board also must consider proposal are clearly outweighed in the public interest by the the concentration of deposits nationwide and in certain probable effect of the transaction in meeting the conve individual states, as well as compliance with other provi nience and needs of the community served.14 sions of section 3(d) of the BHC Act. IO PNC's subsidiary depository institutions and NC Bank directly compete in 10 banking markets, including markets in Florida, Kentucky, Ohio, and Pennsylvania. The Board INTERSTATE ANALYSIS has reviewed carefully the competitive effects of the pro Section 3(d) of the BHC Act allows the Board to approve posal in each of these banking markets in light of all the an application by a bank holding company to acquire facts of record and public comments on the proposal. 15 In control of a bank located in a state other than the home state particular, the Board has considered the number of competi of such bank holding company if certain conditions are tors that would remain in the banking markets, the relative met. For purposes of the BHC Act, the home state of PNC shares of total deposits in depository institutions in the is Pennsylvania, II and NC Bank is located in nine statesY markets ("market deposits") controlled by PNC's insured Based on a review of all the facts of record, including depository institutions and NC Bank,16 the concentration relevant state statutes, the Board finds that the conditions levels of market deposits and the increase in those levels as for an interstate acquisition enumerated in section 3(d) of measured by the Herfindahl-Hirschman Index ("HHI") the BHC Act are met in this case.13 In light of all the facts under the Department of Justice Merger Guidelines ("DOJ of record, the Board is permitted to approve the proposal Guidelines"),17 and other characteristics of the markets. In under section 3(d) of the BHC Act addition, the Board has considered commitments made by PNC to the Board to reduce the potential that the proposal COMPETITIVE CONSIDERATIONS would have adverse effects on competition by divesting 61 NC Bank branches (the "divestiture branches"), which The Board has considered carefully the competitive effects of the proposal in light of all the facts of record. Section 3 of the BHC Act prohibits the Board from approving a 14. 12 V.S.c. § 1842(c)(I). proposal that would result in a monopoly or would be in 15. Several commenters expressed general concerns about the competitive effects of this proposal and the effects it could have on furtherance of an attempt to monopolize the business of consumer choices for banking services. banking in any relevant banking market The BHC Act also 16. Deposit and market share data are as of June 30, 2008, adjusted prohibits the Board from approving a bank acquisition that to reReet mergers and acquisitions through Novemher 4, 2008, and generally are based on calculations in which the deposits of thrift institutions are included at 50 percent. In recognition that thrift 9. Some commenters urged the Board to deny the proposal hecause institutions have become, or have the potential to become, significant National City's board of directors allegedly breached its fiduciary competitors of commercial banks, the Board regularly has included duties in entering into the merger agreement with PNC and hecause thrift institution deposits in the market concentration and market share the purchase price was inadequate and would harm the interests of calculations on a 50 percent weighted basis, See. e.x" First Hawaiian, National City's shareholders. These allegations are subject to litigation Inc., 77 Federal Reserve Bulietin 52, 55 (1991), In some markets before a court of competent jurisdiction and are not within the noted in this order, the market concentration and market share are discretion of the Board to resolve. See Western Bancshares, Inc. v. based on calculations in which the deposits of certain thrift institutions Board a/Governors, 480 F.2d 749 (10th Cir. 1973). The Board also are weighted at 100 percent. The Board previously has indicated that it notes that approval of the National City shareholders is required to may consider the competitiveness of a thrift institution at a level consummate the proposal. greater than 50 percent of its deposits when appropriate if competition 10. 12 V.S.C. § 1843(d). from the institution closely approximates competition from a commer 11. A bank holding company's home state is the state in which the cial bank. See, e.g., Banknorth Group, Inc., 75 Federal Reserve total deposits of all subsidiary banks of the company were the largest Bulletill 703 (1989). In evaluating when it is appropriate to increase on July I, 1966, or the date on which the company became a bank the weighting of a thrift institution'S deposits in a banking market, the holding company, whichever is later. See 12 V.S.C. § 1841(0)(4)(C). Board considers whether the thrift institution serves as a significant 12. For purposes of section 3(d), the Board considers a bank to be source of commercial loans in the market and provides a broad range located in the states in which the bank is chartered or headquartered or of consumer, mortgage, and other banking products. See, e.g., The operates a branch. See 12 V,S.c' §§ t 84 I (0)(4H7) and 1842(d)(I)(A) PNC FifUlllcial Services Group, Inc., 93 Federal Reserve Bul/etin C65 and (d)(2)(B). NC Bank operates branches in Florida, llIinois, Indiana, (2007): First Ullion Corporation, 84 Federal Reserve Bulletin 489 Kentucky, Michigan, Missouri, Ohio, Pennsylvania, and Wisconsin. (1998). 13. 12 V.S.C. §§ 1842(d)(IH3). Applicant is adequately capital 17. Vnder the DOJ Guidelines, a market is considered unconcen ized and adequately managed, as defined by applicable law. NC Bank trated if the post-merger HHI is less than 1000, moderately concen has been in existence and operated for the minimum period of time trated if the post-merger HHI is between 1000 and 1800, and highly required by applicable state laws, See 12 V.S.c. § 1842(d)(I)(B). On concentrated if the post-merger HHI is more than 1800. The Depart consummation of the proposal, applicant would control less than ment of Justice ("001") has informed the Board that a bank merger or 10 percent of the total amount of deposits of insured depository acquisition generally will not he challenged (in the absence of other institutions in the Vnited States (12 V.S.C. § I 842(d)(2)(A». Applicant factors indicating anticompetitive effects) unless the post-merger HHI also would control less than 30 percent of, and less than the applicable is at least 1800 and the merger increases the HHI more than 200 state deposit cap for, the total amount of deposits in insured depository points, The DOJ has stated that the higher-than-normal HHI thresholds institutions in the relevant states (12 V.S.C. §§ I8 42(d)(2)(BHD». All for screening bank mergers for anticompetitive effects implicitly other requirements of section 3(d) of the BHC Act would be met on recognize the competitive effects of limited-purpose lenders and other consummation of the proposal. nondepository financial entities.

Legal Developments: Fourth Quarter, 2008 B3 account for approximately $4 billion in deposits, in five size of the increase in and resulting level of concentration banking markets in Pennsylvania. in a banking market,2° In each of these markets, the Board has identified factors that indicate the proposal would not A. Banking Markets within Established Guidelines have a significantly adverse impact on competition, not withstanding the post-consummation increase in the HHI Consummation of the proposal would be consistent with and market share. Board precedent and within the thresholds in the DOJ Among the factors reviewed, the Board has considered Guidelines in five of the banking markets in which PNC's the competitive influence of community credit unions in subsidiary depository institutions and NC Bank directly these banking markets. Those credit unions offer a wide compete. IS On consummation of the proposal, one market range of consumer products, operate street-level branches, would remain highly concentrated, two markets would and have membership open to almost all residents in the remain moderately concentrated, and two would remain applicable market. The Board has concluded that the unconcentrated, as measured by the HHI. The change in activities of such credit unions in the three markets exert HHI in the one highly concentrated market would be small competitive influence that mitigates, in part, the potential and consistent with Board precedent and the thresholds in effects of the proposaJ.21 the DOJ Guidelines. In each of the banking markets, Pittsburgh. The structural effects of the proposal in the numerous competitors would remain. Pittsburgh banking market ("Pittsburgh Market") as mea sured by applying the HHI to the June 30, 2008, Summary B. Certain Banking Markets with Divestitures of Deposit data ("SOD") would substantially exceed the DOJ Guidelines. According to those data, PNC operates the After accounting for the branch divestitures, consummation largest insured depository institution in the Pittsburgh of the merger would be consistent with Board precedent Market,22 controlling approximately $26 billion in depos and the thresholds in the DOJ Guidelines in two banking its, which represents approximately 37 percent of market markets in Pennsy Ivania: Franklin-Titusville-Oil City deposits. NC Bank operates the second largest insured ("FTO") and Warren.'9 Although both markets would depository institution in the Pittsburgh Market, controlling remain highly concentrated, the HHI would not increase in approximately $11 billion in deposits, which represents either market. In addition, six competitors would remain in approximately 16 percent of market deposits. After the the FTO banking market, including a depository institution proposed merger, PNC would remain the largest depository that would control 33 percent of market deposits. Although institution in the market, controlling deposits of approxi only four competitors would remain in the Warren banking mately $38 billion, representing approximately 53 percent market, one depository institution competitor of PNC of market deposits.23 would control 52 percent of market deposits. To reduce the potential adverse effects on competition in the Pittsburgh Market, PNC has proposed to divest 50 of C. Three Banking Markets Warranting Special NC Bank's branches that account for approximately $3.5 bil Scrutiny lion in deposits. On consummation of the merger and after PNC's subsidiary depository institutions and NC Bank compete directly in three banking markets in Pennsylvania 20. See Regions Financial Corp., 93 Federal Reserve Bulletin Cl6 that warrant a detailed review: Pittsburgh, Erie, and Mead (2007); NationsBank Corporation, 84 Federal Reserve Bulletin 129 ville. In each of these markets, all with proposed divesti (1998). tures, the concentration levels on consummation of the 21. The Board previously has considered the competitiveness of certain active credit unions as a mitigating factor. See. e.g .. Wells proposal would exceed the threshold levels in the DOJ Fargo & Company, 95 Federal Reserve Bulletin B39: The PNC Guidelines or the resulting market share of PNC would Financial Services Group, Inc., 93 Federal Reserve Bulletin C65 exceed 35 percent. (2007); Regions FinanC'ial Corp., 93 Federal Reserve Bulletin CI6 For each of these markets, the Board has considered (2007); Wachovia Corp., 92 Federal Reserve Bulletin CI83 (2006). 22. The Pittsburgh Market is defined as the counties of Allegheny, carefully whether other factors either mitigate the competi Armstrong, Beaver, Butler. Fayette (e)(cept Point Marion Borough and tive effects of the proposal or indicate that the proposal Springhill Township), Greene. Lawrence. Washington, and Westmore would have a significantly adverse effect on competition in land. the market. The number and strength of factors necessary to 23. These market concentration and market share calculations mitigate the competitive effects of a proposal depend on the include the weighting of deposits controlled by five thrift institutions in the market at 100 percent. Two of these thrift institutions were considered to be active in the Pittsburgh commercial lending market as 18. These banking markets and the effects of the proposal on their a result of having a ratio of commercial and industrial ("C&I") loans concentrations of banking resources are described in Appendi)( A. to assets of at least 5 percent. A third thrift institution had ratios of C&I 19. These banking markets and the effects of the proposal on their loans to total loans of more than 10 percent, which is comparable to concentrations of banking resources are described in Appendi)( B. The the national average for all commercial banks. The remaining two analysis of the effects of the proposal in these markets includes the thrift institutions had C&lloan-to-asset ratios slightly below 5 percent weighting of deposits controlled by one thrift institution operating in and were deemed to be active commercial lenders based on discus both the markets at 100 percent. The thrift institution was deemed to sions with personnel of the thrift institutions and commercial bank be an active commercial lender based on lending data and discussions competitors in the Pittsburgh Market, who indicated that the thrift with personnel of the thrift institution and commercial bank competi institutions were active participants in the market's commercial lend tors indicating that it was an active commercial lender in both markets. ing sector.

B4 Federal Reserve Bulletin D March 2009 accounting for the proposed divestiture, PNC would remain late SOD data used in competitive analyses by a federal the largest depository institution in the market, controlling supervisory agency.26 deposits of approximately $34 billion, which represent PNC has stated that approximately $10 billion in out-of approximately 48 percent of market deposits. The HHI market deposits was assigned to PNC's head office for would increase 752 points to 2640. business reasons unrelated to its efforts to compete in the The proposal raises special concerns in the Pittsburgh Pittsburgh Market. PNC has represented that these deposits Market because PNC, the largest institution in the banking were transferred because that office houses the "Intrader" market, proposes to merge with the market's second largest accounting system, which is used to track PNC's wholesale competitor and all other competitors in the market have CDs and broker-dealer trust accounts, both nationally and significantly smaller market shares. The Board has previ internationally. In addition, PNC has represented that the ously recognized that merger proposals involving the larg deposits maintained by the Intrader system are segregated est depository institutions in markets structured like the from the deposit account system on which the head office Pittsburgh Market warrant close review due to the size of generally operates. Furthermore. the head office systems those institutions relative to other market competitors.24 are separate from the retail branch located in the same The Board, therefore, has carefully considered whether building, and the retail branch personnel cannot access the other factors indicate that the increase in market concentra Intrader system.27 PNC has represented that it placed the tion, as measured by SOD data, overstates the potential Intrader deposits in its head office for administrative conve competitive effects of the proposal in the market nience unrelated to PNC's efforts to compete in the Pitts The Board has considered PNC's assertion that inclusion burgh Market and that none of the account holders booked of certain deposits that were received and booked at PNC's on Intrader are domiciled in the Pittsburgh Market. head office in the Pittsburgh Market in calculations of PNC has also argued that other deposits associated with market share indices for this transaction would distort the out-of-market customers should be excluded from PNC's measures of the competitive effect of the proposal on the head office deposits, including deposits that were generated Pittsburgh Market. PNC has argued that, for purposes of from various municipalities and governments outside the evaluating the proposal's competitive effect in the Pitts Pittsburgh Market, that involve escrow accounts for mort burgh Market, the Board should exclude those deposits gages and other transactions outside the market, or that booked at PNC's head office that have no relation to the represent correspondent banking accounts with institutions Pittsburgh Market. Approximately $17 billion of the depos outside the market. PNC is limited by law, contract, or its at PNC's head office are government deposits, out-of duration of relationship from using these deposits for any market escrow deposits, correspondent banking deposits, activity other than to support the deposit account,28 Other wholesale certificates of deposit and related accounts deposits PNC asserted should be excluded are accounts ("CDs"), broker-dealer trust accounts, and certain corpo from large corporations located outside the Pittsburgh rate deposits. Market. In conducting its competitive analysis in previous cases, There is no evidence in the record that PNC moved the the Board generally has not adjusted its market share deposits in question to the head office from another branch calculations to exclude out-of-market deposits because all in an attempt to manipulate the SOD data used for competi deposits are typically available to support lending and other tive analyses by the appropriate federal supervisory agency. banking activities at any location. The Board has adjusted Although PNC holds approximately $26 billion in deposits the market deposits held by an applicant to exclude specific in the Pittsburgh Market based on SOD data, it holds loans types of deposits only in limited situations, such as when in the Pittsburgh Markel ("market loans") totaling approxi evidence supported a finding that the excluded deposits mately $2 billion, which represents a loan-to-deposit ratio were not legally available for use in that market and data of 8.1 percent for PNC in the Pittsburgh Market. In were available to make comparable adjustments to the contrast, PNC's ratio of market loans to deposits associated market shares for all other market participants.25 The Board with customers in the Pittsburgh Market is 22.4 percent. In also has adjusted deposit data in the limited circumstance addition, PNC's total market loans have decreased 3 per when there was strong evidence that a depository organiza cent in the period since December 31, 2006, while its total tion moved its national business-line deposits to a particu deposits held at the Pittsburgh office have increased 29 per lar branch for business reasons unrelated to its efforts to cent. Furthermore, the market deposits of PNC associated compete in that market and did not use those deposits to enhance its competitive ability in that market or to manipu- 26. See Bank afA merica Corporation, 94 Federal Reserve Bulletin C81, C84-C85 (2008); l.P. Morgan Chase & Co., 90 Federal Reserve Bulletin 352. 355 (2004). 24. See First Busey Corporation, 93 Federal Reserve Bulletin C90, 27. The wholesale funds booked to PNC's head office support the C91 (2007); Firstar Corporation. 87 Federal Reserve Bulletin 236. entire multi state branch footprint of PNC and its national and interna 238 (2001). tional nonbank operational footprint. 25. See First Security Corp., 86 Federal Reserve Bulletin 122 28. See First Security Corp., 86 Federal Reserve Bulletin 122, (2000). 126-127 (2000).

Legal Developments: Fourth Quarter, 2008 B5 with out-of-market customers increased 41 percent during Based on a careful review of these and all other factors the same period while its market deposits associated with of record, the Board concludes that, with the proposed customers in the Pittsburgh Market increased 13 percent. divestitures, appropriate adjustment, and consideration of These facts, and in particular the fact of the decrease in loan other mitigating factors, consummation of the proposal market share in comparison to a significant increase in the would have no significantly adverse effects in the Pitts deposits held by the Pittsburgh head office from out-of burgh Market. market customers, is consistent with the conclusion that the Erie. In the Erie banking market (HErie Market"),30 SOD deposit data significantly overstate PNC's competi PNC operates the largest depository 'institution in the tive presence in the Pittsburgh Market. market, controlling deposits of approximately $820 mil The Board has also taken into consideration the fact that lion, which represent approximately 27 percent of market the next largest competitor (other than NC Bank) to PNC in deposits. NC Bank operates the second largest depository the Pittsburgh Market has significantly more branches than institution in the market, controlling deposits of approxi PNC in the market but has average market deposits per mately $459 million, which represent approximately 15 per branch of less than 17 percent of PNC's average market cent of market deposits. To reduce the potential for adverse deposits per branch. The other commercial bank and thrift effects on competition in the Erie Market, PNC Bank has institution competitors of PNC that have at least half as proposed to divest six of NC Bank's branches that account many branches as PNC have average market deposits per for $294.6 million in total deposits. On consummation of branch of less than 14 percent of PNC's average market the merger and after accounting for the proposed divesti deposits per branch. PNC's high average market deposits tures, PNC would remain the largest depository institution per branch further supports the conclusion that the SOD in the market, controlling deposits of approximately deposit data significantly overstate PNC's competitive pres $985 million, which represent approximately 32 percent of ence in the Pittsburgh Market. market deposits. The HHI would increase 246 points to Based on a careful review of these and all other facts of 2060.31 record, the Board concludes that the concentration level for Several factors indicate that the increase in concentra PNC in the Pittsburgh Market, as measured by the HHI tion in the Erie Market, as measured by the HH1 and PNC's using SOD data without adjustment, overstates the competi market share, overstates the potential competitive effects of tive effect of the proposal in the Pittsburgh Market. If the the proposal in the market. After consummation of the $17 billion in deposits discussed above with no relation to proposal, eight other commercial bank and thrift institution the Pittsburgh Market is excluded from the calculation of competitors would remain in the market, including two its market concentration, the market share held by PNC on other competitors with a significant presence in the market. consummation of the proposal would be approximately The second and third largest depository institution organi 38 percent, after accounting for the effects of the proposed zations in the market would control approximately 24 per divestitures. PNC would remain the largest insured deposi cent and 12 percent of market deposits, respectively. The tory institution in the market on consummation of the second largest depository organization would also control proposal, controlling adjusted market deposits of approxi 22 branches, the largest branch network of any depository mately $21 bilJion. If PNC's proposed divestitures were institution in the Erie Market. purchased by the largest in-market institution, the resulting In addition, the Board has evaluated the competitive HHI would increase 529 points to 1835. influence of four active community credit unions in the Erie The Board also examined other mitigating factors in the Market. These credit unions control approximately Pittsburgh Market. A large number of commercial bank and $467 million in deposits in the market that, on a 50 percent thrift institution competitors (57) would remain in the weighted basis, represent approximately 7.14 percent of market after consummation of the proposal, including two market deposits. Accounting for the revised weightings of competitors that each have more than a 12 percent market these deposits, PNC would control approximately 30.1 per share.29 The proposed divestiture of 50 branches would cent of market deposits, and the HHI would increase 212 significantly strengthen the competitive position of a bank points to 1795. ing organization operating in the Piltsburgh Market or In addition, the record of recent entry into the Erie bring a new, sizable competitor into the market. Further Market is evidence of the market's attractiveness for entry. more, the record of recent entry into the Pittsburgh Market Two depository institutions have entered the market since is evidence of its attractiveness for entry by out-of-market 2004. competitors. Six banking organizations have entered the Based on a careful review of all the facts of record, and market in the past four years. taking into account the proposed divestitures, the Board 29. The Board also has concluded that the activity of one commu 30. The Erie Market is defined as Erie County. nity credit union in the market exerts sufficient competitive influence 31. This analysis inclUdes the weighting of deposits controlled by to mitigate. in part, the potential adverse competitive effects of the one thrift institution in the market at 100 percent. The thrift institution proposal. This active credit union controls approximately $554 million was deemed to be an active commercial lender based on lending data of deposits in the market. Accounting for a 50 percent weighting of and discussions with personnel of the thrift institution and other these deposits, PNC would control approximately 37 percent of commercial banking competitors indicating that the thrift institution market deposits, and the HHI would increase 522 points to 1813. was an active commercial lending participant in the Erie Market.

B6 Federal Reserve Bulletin D March 2009 concludes that consummation of the proposal would not D. View of Other Agencies and Conclusion on substantially lessen competition in the Erie Market. Competitive Considerations Meadville. In the Meadville banking market ("Mead ville Market"),32 PNC operates the third largest depository The DOl also has conducted a detailed review of the institution in the market, controlling deposits of approxi potential competitive effects of the proposal and has mately $113 million, which represent approximately 13 per advised the Board that, in light of the proposed divestitures, cent of market deposits. NC Bank operates the largest consummation of the proposal would not likely have a depository institution in the market, controlling deposits of significantly adverse effect on competition in any relevant approximately $341 million, which represent approxi banking market. 34 In addition, the appropriate banking mately 40 percent of market deposits. To reduce the agencies have been afforded an opportunity to comment potential for adverse effects on competition in the Mead and have not objected to the proposal. Based on these and all other facts of record, the Board ville Market, PNC has proposed to divest three of NC Bank's branches that account for $93.9 million in total has concluded that consummation of the proposal would not have a significantly adverse effect on competition or on deposits. On consummation of the merger and after account ing for the proposed divestiture, PNC would become the the concentration of resources in any relevant banking largest depository institution in the market, controlling market. Accordingly, based on all the facts of record and subject to completion of the proposed divestitures, the deposits of approximately $360 million, which represent approximately 43 percent of market deposits. The HHI Board has determined that competitive considerations are would increase 130 points to 2498.33 consistent with approval. Several factors indicate that the increase in concentra tion in the Meadville Market, as measured by PNC's FINANCIAL, MANAGERIAL, AND SUPERVISORY market share, overstates the potential competitive effects of CONSIDERA TIONS the proposal in the market. After consummation of the Section 3 of the BHC Act requires the Board to consider the proposal, five other commercial banking and thrift institu financial and managerial resources and future prospects of tion competitors would remain in the market. The Board the companies and banks involved in the proposal and notes that there are other competitors with a significant certain other supervisory factors. The Board has carefully presence in the market. The second and third largest considered these factors in light of all the facts of record, depository institution organizations in the market would including confidential supervisory and examination infor control approximately 16 percent and 14 percent of market mation received from the relevant federal and state super deposits, respectively. Furthermore, a commercial bank visors of the organizations involved, publicly reported and competitor would have a larger number of branches in the other financial information, information provided by PNC, Meadville Market than PNC, and four other institutions and public comments received on the proposaJ.35 would have branch networks comparable to PNC's net In evaluating the financial resources in expansion pro work. posals by banking organizations, the Board reviews the In addition, the Board has evaluated the competitive financial condition of the organizations involved on both a influence of one active community credit union in the parent-only and consolidated basis, as well as the financial market. This credit union controls approximately $39 mil condition of the subsidiary depository institutions and lion in deposits in the market that, on a 50 percent weighted significant nonbanking operations. In this evaluation, the basis, represents approximately 2.3 percent of market Board considers a variety of information, including capital deposits. Accounting for the revised weightings of these adequacy, asset quality, and earnings performance. In deposits, PNC would control 4 J.6 percent of market depos assessing financial resources, the Board consistently con its, and the HHI would increase 124 points to 2390. siders capital adequacy to be especially important. The Based on a careful review of all the facts of record, and Board also evaluates the financial condition of the resulting taking into account the proposed divestitures, the Board concludes that consummation of the proposal would not substantially lessen competition in the Meadville Market. 34. PNC has committed to the Board that it will comply with the divestiture agreement between the DOJ and PNC dated December 11. 2008. 32. The Meadville Market is defined as Crawford County. exclud 35. Many commenters expressed concern that National City was ing the city of Titusville. not provided federal financial assistance to help it remain an indepen 33. This analysis includes the weighting of deposits controlled by dent organization while PNC is scheduled to receive federal funding one thrift institution in the market at 100 percent. The thrift institution under the Department of the Treasury's Capital Purchase Program is the same institution weighted at 100 percent in the Erie Market and ("CPP"), which would help PNC finance the proposed transaction. As the basis for weighting this institution's deposits at 100 percent in the explained in more detail above, the Board has carefully considered all Meadville Market is the same as the basis in the Erie Market. See the facts of record in assessing the financial and managerial resources footnote 31 above. and future prospects of the companies involved.

Legal Developments: Fourth Quarter, 2008 B7 organization at consummation, including its capital posi mation of this proposal will benefit those markets by tion, asset quality, earnings prospects, and the impact of the providing financial strength and stability to National City proposed funding of the transaction. In addition, the Board that will allow it to continue to provide banking services to considers the ability of the organization to absorb the costs households, businesses, and other customers. The proposed of the proposal and the plans for integrating operations acquisition will also allow those NC Bank offices to after consummation. provide additional services currently offered by PNC. The The Board has carefully considered the financial re record indicates that PNC has the financial and managerial sources of the organizations involved in the proposal in resources to serve as a source of strength to NC Bank and light of information provided by PNC and National City the other operations of National City. and supervisory information available to the Federal Re Based on all the facts of record, the Board has conduded serve through its supervision of these companies and from that the financial and managerial resources and the future the OCC, the primary supervisor of the depository institu prospects of the organizations involved in the proposal are tion subsidiaries of these organizations. The Board has consistent with approval, as are the other supervisory considered that, although National City is well capitalized, factors. it has experienced severe financial strains and liquidity pressures during the last year that have weakened its CONVENIENCE AND NEEDS CONSIDERATIONS condition and stressed its operations. National City has had AND CRA PERFORMANCE difficulty raising sufficient private capital to address these issues without a merger partner. PNC is well capitalized, In acting on a proposal under section 3 of the BHC Act, the would remain well capitalized after consummation of this Board also must consider the effects of the proposal on the proposal, and would provide operational and capital strength convenience and needs of the communities to be served and to National City. Consummation of this proposal would take into account the records of the relevant insured create a combined organization that can withstand the depository institutions under the CRA.37 The CRA requires financial pressures in the present exigent market conditions the federal financial supervisory agencies to encourage and restore a strong provider of banking and other financial insured depository institutions to help meet the credit needs services in the markets served by National City. The of the local communities in which they operate, consistent proposed transaction is structured as a share exchange. with their safe and sound operation, and requires the Based on its review of the record, the Board finds that PNC appropriate federal financial supervisory agency to take has sufficient resources to effect the proposal. into account a relevant depository institution's record of The Board also has considered the managerial resources meeting the credit needs of its entire community, including of the organizations involved in the proposed transaction. low- and moderate-income (HLMI") neighborhoods, in The Board has reviewed the examination records of PNC, evaluating bank expansionary proposals. 3M its subsidiary depository institutions, and NC Bank and The Board has considered carefully all the facts of other nonbanking companies involved in the proposal. In record, including reports of examination of the CRA perfor addition, the Board has considered its supervisory experi mance records of the subsidiary banks of PNC and National ence and that of other relevant banking supervisory agen City, data reported by PNC and National City under the cies, including the OCC, with the organizations and their Home Mortgage Disclosure Act ("HMDA"),39 as well as records of compliance with applicable banking law and other information provided by PNC, confidential supervi anti-money-laundering laws.36 sory information, and public comments received on the The Board also has considered carefully the future proposal. Several commenters expressed general concerns prospects of the organizations involved in the proposal. regarding the effect of the proposal on the amount of Moreover, the Board has considered information on PNC's community development lending or investment and chari plans to implement its risk-management policies, proce table donations in areas served by NC Bank.40 Two comdures, and controls at National City and how PNC would manage the integration of National City into PNC. The Board also considered PNC's extensive experience in 37. 12 U.S.C. §1842(c)(2). 38. 12 U.s.c. §2903. acquiring bank holding companies and successfully inte 39. 12 U.S.c. §2801 et seq. grating them into its organization. 40. Two commenters also urged the Board to require or encourage PNC does not have a significant presence in many of the PNC to enter into agreements to provide CRA loans, investments, and markets served by National City. In particular, PNC does services to low-income communities or to require it to take certain not compete in the markets in Ohio and Indiana where actions in the future. A community group commenter generally supported National City's CRA record in Milwaukee but requested National City has the majority of its operations. Consumthat PNC meet with the group to discuss CRA-related concerns. The Board consistently has stated that neither the CRA nor the federal banking agencies' CRA regulations require depository institutions to 36. Several commenters expressed concern over reports of large make pledges or enter into commitments or agreements with any payments to be made to certain National City executives on the organization and that the enforceability of any such third-party acquisition by PNC. As part of its review of financial factors, the pledges, initiatives, or agreements are matters outside the CRA. See, Board has reviewed the proposed severance payments to be provided e.g .. Wachovia Corporation, 91 Federal Reserve Bulletin 77 (2005). by PNC as well as the limitations imposed on those payments in Instead, the Board focuses on the existing CRA performance record of connection with the request for funding under the CPP. an applicant and the programs that an applicant has in place to serve

B8 Federal Reserve Bulletin 0 March 2009 menters also expressed concern regarding the potential the facts and findings detailed in that order concerning PNC impact of branch closures. One commenter expressed Bank's CRA performance record. PNC also provided the concern that the proposal would inhibit small business Board with additional information about its CRA perfor lending in Michigan and Ohio.41 In addition, one com mance since the Board last reviewed such matters in the menter criticized PNC's and National City's records of PNC-Sterling Order. In addition, the Board has consulted home mortgage lending in LMI and minority communities with the OCC with respect to PNC Bank's CRA perfor in Ohio, PNC's home mortgage lending to minorities in mance since the PNC-Sterling Order and has reviewed Pittsburgh and Philadelphia, and National City's home information provided by PNC regarding its CRA-related mortgage lending to minorities in Cleveland. acti vities since that order. In addition to PNC Bank's overall "outstanding" rating A. eRA Performance Evaluations in the PNC 2006 Evaluation,46 the bank received an overall "outstanding" rating in Pennsylvania and in the Cincinnati As provided in the CRA, the Board has considered the Metropolitan Area ("MA"). Examiners reported that PNC convenience and needs factor in light of the evaluations by Bank's overall lending performance was good, as reflected the appropriate federal supervisors of the CRA perfor by the bank's loan volume and loan distribution by geogra mance records of the insured depository institutions of phy and borrower income, and that its performance in the PNC and National City. An institution's most recent CRA Pittsburgh and Cincinnati assessment areas was excellent. performance evaluation is a particularly important consid They further noted that PNC Bank's level of community eration in the applications process because it represents a development lending in Pennsylvania and in the Cincinnati detailed, on-site evaluation of the institution's overall MA was excellent and had a positive impact on the bank's record of performance under the CRA by its appropriate overall performance under the lending test. federal supervisor.42 Examiners reported that the bank's distribution of small PNC's lead subsidiary insured depository institution, loans to businesses was excellent in Pennsylvania.47 They PNC Bank, received an "outstanding" rating at its most noted that the bank's market share of small loans to recent CRA performance evaluation by the OCC, as of businesses in LMI areas exceeded the bank's overall May 16,2006 ("PNC 2006 Evaluation"). Both of PNC's market share of loans across its Pennsylvania assessment other subsidiary insured depository institutions received an areas in each year of the evaluation period. In Pennsylva "outstanding" or "satisfactory" rating at their most recent nia, examiners also noted that PNC Bank placed significant CRA performance evaluations.4~ NC Bank received an community development lending emphasis on economic "outstanding" rating at its most recent CRA performance revitalization and affordable housing, Since the PNC 2006 evaluation by the OCC, as of June 30, 2005 ("NC Bank Evaluation, PNC Bank has continued its high level of CRA 2005 Evaluation" ).44 lending activity by making more than $230 million in CRA Perfonnance oj PNC Bank. PNC Bank's 2006 community development loans in its assessment areas in Evaluation was discussed in the Board's order approving 2006 and 2007, PNC's acquisition of Sterling Financial Corporation, Lan In the PNC 2006 Evaluation, examiners also com caster, Pennsylvania, in 2008.45 Based on a review of the mended PNC Bank's overall level of qualified investments record in this case, the Board hereby reaffirms and adopts and concluded that the bank's performance under the investment test was "high satisfactory" in the Pennsylvania assessment area and was "outstanding" in the Cincinnati the credit needs of its assessment areas at the time the Board reviews a proposal under the convenience and needs factor. MA. They noted that the bank's level of qualifying invest 41. One commenter expressed concern that the proposal would ments represented excellent responsiveness to the needs of have an adverse effect on loss mitigation efforts for assumed and the Cincinnati MA community, particularly in relation to outstanding subprime mortgage loans from NC Bank. affordable housing. Since the 2006 Evaluation, PNC Bank 42. The Interagency Questions and Answers Regarding Commu nity Reinvestment provide that a CRA examination is an important and has continued to make a significant amount of CRA often controlling factor in the consideration of an institution's CRA qualified investments in community development projects. record. See Interagency Questions and Answers Regarding Commu In 2006 and 2007, PNC Bank made more than 160 nity Reinvestment, 66 Federal Register 36,620 at 36,640 (2001). investments totaling approximately $370 million. 43. PNC Bank, Delaware received an "outstanding" rating at its most recent evaluation by the Federal Reserve Bank of Cleveland, as Examiners also concluded that the bank's delivery sys of February 4, 2008. tems overall were accessible to its customers. In the 44. One commenter expressed concern that NC Bank's 2005 Evaluation excluded the Pittsburgh Metropolitan Statistical Area ("MSA"). The commenter also criticized the length of time since the 46. The PNC 2006 Evaluation focused on PNC Bank's perfor most recent exam and requested that the OCC conduct a targeted CRA mance in assessment areas throughout Pennsylvania and New Jersey exam for the Pittsburgh MSA At the time of the 2005 Evaluation, NC and in the Philadelphia-Camden-Wilmington, PA-NJ-DE-MD Multi Bank had a minimal presence in Pennsylvania, consisting of a single state Metropolitan Area, which together represented approximately branch in Philadelphia. An affiliated but separate institution, National 83 percent ofthe bank's deposits. The evaluation periods for different City Bank of Pennsylvania, Pittsburgh, held a significant market share a,pects of PNC Bank's CRA performance ranged from January J, in the state. The two institutions merged in 2006, providing NC Bank 2002, to April 30, 2006. with much of its share of market deposits in Pennsylvania. 47, "Small loans to businesses" are loans with original amounts of 45. See The PNC Financial Services Group, Inc., 94 Federal $1 million or less that are either secured by nonfarm, nonresidential Reserve Bulletin C38 (2008) ( .. PNC-Sterling Order"). properties or classified as commercial and industrial loans.

Legal Developments: Fourth Quarter, 2008 B9 Pennsylvania assessment area, examiners rated PNC Bank's reasonable alternative to acquire similar services. The performance under the service test as "outstanding" and policy requires that, before a final decision is made to close reported that the bank's performance in the Pittsburgh a branch, management will consult with members of the assessment area was excellent for both retail banking community in an effort to minimize the impact of the services and community development services. PNC repre branch closing. sented that there have been no material changes to its CRA The Board also has considered that federal banking law programs since the 2006 evaluation. provides a specific mechanism for addressing branch clos CRA Performance of NC Bank. The NC Bank 2005 ings,50 Federal law requires an insured depository institu Evaluation was discussed in the Board's order approving tion to provide notice to the public and to the appropriate National City's acquisition of Mid America Bank fsb, federal supervisory agency before closing a branch and to Clarendon Hills, Illinois, in 2007.4K Based on a review of adopt a policy regarding branch closures. 51 the record in this case, the Board hereby reaffirms and In the most recent CRA performance examinations, adopts the facts and findings detailed in that order concern examiners found that the banks' records of opening or ing NC Bank's CRA performance record. closing branches had not adversely affected the accessibil In addition to the overall "outstanding" rating that NC ity of delivery systems, particularly in LMI areas and to Bank received in its 2005 evaluation, the bank received LMI individuals. In addition, the Board notes that the OCC separate overall "outstanding" or "satisfactory" ratings for will continue to review the branch closing record of PNC its CRA performance in each of the states reviewed. Bank and NC Bank in the course of conducting CRA Examiners reported that the bank's distribution of HMDA performance evaluations. loans to borrowers of different income levels was excellent. Examiners also stated that the bank's record of community C. HMDA and Fair Lending Record development lending and qualified community develop ment investments demonstrated excellent responsiveness to In light of the public comments received on the proposal, community credit and investment needs. the Board has considered carefully the compliance records Examiners rated NC Bank's performance under the of PNC and National City with fair lending and other investment test as "outstanding" or "high satisfactory" in consumer protection laws in its evaluation of the public most of the states reviewed.49 They reported that the bank's interest factors. Two commenters alleged, based on HMDA investments demonstrated excellent responsiveness to the data, that PNC and National City denied the home mort needs of the community. Examiners concluded that NC gage loan applications of African American and Hispanic Bank's retail banking services generally were accessible to borrowers more frequently than those of nonminority appli geographies and individuals with different income levels. cants in certain MSAs. A commenter also alleged, based on They also reported that the bank generally provided a high 2007 HMDA data, that NC Bank made disproportionately level of community development services. higher-cost loans to African American and Hispanic bor rowers than to nonminority borrowers. 52 One commenter B. Branch Closings also alleged that PNC extended a disproportionately small Two commenters expressed general concern that the pro posal, or the eventual merger of PNC Bank and NC Bank SO. Section 42 of the Federal Deposit Insurance Act. 12 U.S.c. § 1831r-1 ("FDI Act"), as implemented by the Joint Policy Statement after consummation of the proposal, would lead to branch Regarding Branch Closings (64 Federal Register 34,844 (1999)), closures and adversely affect banking services in LMI requires that a bank provide the public with at least 30 days' notice and areas. PNC has stated that it has not made any decisions the appropriate federal supervisory agency and customers of the regarding potential branch closures but that any closures branch with at least 90 days' notice before the date of the proposed would not take place until PNC merges PNC Bank and NC branch closing. The bank also is required to provide reasons and other supporting data for the closure, consistent with the institution's written Bank at some point after consummation of the proposal. policy for branch closings. PNC also stated that it intends to continue to serve LMI 5 I. One commenter requested the Federal Reserve to hold hearings communities through its branch network. under the FDI Act before any branch in a LMI area is closed. The FDI In addition, PNC has stated that, on consummation of Act provides that, in cases where an interstate bank proposes to close a branch in an LMI area. an individual from the area where such branch the proposal, it expects to implement its current branch is located may request a meeting between the bank's primary federal closing policy at NC Bank. PNC's branch closing policy regulator and community leaders. Such requests must be made to the requires the bank to make every effort to minimize the bank's primary federal regulator after notice of a branch closure has customer impact in the local market and to provide a been made to its customers. As noted above, PNC has not made any decisions regarding potential branch closures. which makes such a request premature. In addition, any such requests for a hearing with 48. See National Cit}' CorporaIion. 93 Federal Reserve Bulletin regard to branch closures by either PNC Bank or NC Bank must be CI27 (2007). made to the OCC, the primary federal regulator of both banks. The 49. Two commenters expressed concern about the impact of the Board has forwarded the commenter's letter to the OCC for consider proposal on charitable donations made by NC Bank. PNC represented ation. that it plans to surpass NC Bank's 2008 goal for charitable donations 52. Beginning January I. 2004. the HMDA data required to be across all markets. The Board notes that neither the CRA nor the reported by lenders were expanded to include pricing information for agencies' implementing rules require institutions to engage in chari loans on which the annual percentage rate (APR) exceeds the yield for table donations. U.S. Treasury securities of comparable maturity 3 or more percentage

B 10 Federal Reserve Bulletin 0 March 2009 percentage of loans to African Americans in Pittsburgh employee training; review by senior management of credit when compared to the percentage of African American decisions, pricing, and marketing; and fair lending policies households in that area. and procedures to help ensure compliance with ConSumer The Board's analysis of the lending-related concerns protection laws. PNC's fair-lending compliance program included a review of HMDA data reported by PNC Bank that includes a second-review process to identify any and NC Bank and their lending affiliates.53 Although the discriminatory practices with respect to the company's HMDA data might reflect certain disparities in the rates of home mortgage lending. In addition, PNC has a process for loan applications, originations, and denials among mem resolving fair lending complaints and conducts periodic bers of different racial or ethnic groups in certain local internal audits of its fair lending program. PNC requires its areas, or in the pricing of loans to such groups, they provide employees to complete fair-lending training sessions. PNC an insufficient basis by themselves on which to conclude has stated that NC Bank operations will be integrated into whether or not PNC Bank or NC Bank has excluded or PNC's existing fair-lending and consumer-protection com imposed higher costs on any group on a prohibited basis. pliance programs after consummation of the proposal.55 The Board recognizes that HMDA data alone, even with The Board also has considered the HMDA data in light the recent addition of pricing information, provide only of other information, including the overall performance limited information about the covered loans.54 HMDAdata, records of the subsidiary banks of PNC and National City therefore, have limitations that make them an inadequate under the CRA. These established efforts and record of basis, absent other information, for concluding that an performance demonstrate that the institutions are active in institution has engaged in illegal lending discrimination. helping to meet the credit needs of their entire communi The Board is nevertheless concerned when HMDA data ties. for an institution indicate disparities in lending and believes that all lending institutions are obligated to ensure that their D. Conclusion on Convenience and Needs and lending practices are based on criteria that ensure not only CRA Performance safe and sound lending but also equal access to credit by The Board has considered carefully all the facts of record, creditworthy applicants regardless of their race or ethnicity. Moreover, the Board believes that all bank holding compa including reports of examination of the CRA performance records of the institutions involved, information provided nies and their affiliates must conduct their mortgage lend by PNC, comments received on the proposal, and confiden ing operations without any abusive lending practices and in compliance with all consumer protection laws. tial supervisory information. PNC represented that the proposal would result in greater convenience for customers In carefully reviewing the concerns about the organiza tions' lending activities, the Board has taken into account of PNC and National City through expanded delivery other information, including examination reports that pro channels and a broader range of products and services. In vide on-site evaluations of compliance with fair lending addition, the Board previously noted the severe financial strains and liquidity pressures that National City has been and other consumer protection laws and regulations by experiencing, which are likely to adversely affect services PNC Bank, NC Bank, and their lending affiliates. The to its customers. In light of these circumstances, the Board Board also has consulted with the OCC, the primary federal supervisor of both PNC Bank and NC Bank. In addition, recognizes that the proposed merger would allow the the Board has considered information provided by PNC, combined organization LO continue to provide banking and other financial services in support of the convenience and including its plans for managing the consumer compliance operations of PNC Bank and NC Bank after consummation needs of the communities currently served by both organi zations. Based on a review of the entire record, and for the of the proposal. The record, including confidential supervisory informa reasons discussed above, the Board concludes that consid tion, indicates that PNC has implemented many processes erations relating to the convenience and needs factor and the CRA performance records of the relevant insured to help ensure compliance with all consumer protection depository institutions are consistent with approval of the laws and regulations. PNC's compliance program includes proposal. points for first-lien mortgages and 5 or more percentage points for AGREEMENT CORPORATION second-lien mottgages (12 CFR 203.4). 53. The Board reviewed HMDA data for 2006 and 2007 for PNC As noted, PNC also has provided notice under section 25 of Bank in the Pittsburgh assessment area and the Cincinnati and Philadelphia MSAs; for NC Bank in the Cincinnati. Cleveland. and the FRA and the Board's Regulation K to acquire the Pittsburgh MSAs; and for both PNC Bank and NC Bank in Pennsyl agreement corporation subsidiary of National City. The vania and Ohio. 54. The data, for example. do not account for the possibility that an institution's outreach efforts may attract a larger proportion of margin 55. One commenter reiterated concerns regarding alleged disparate ally qualified applicants than other institutions attract and do not pricing of subprime loans originated by a former National City provide a basis for an independent assessment of whether an applicant subsidiary, First Franklin. that the commenter made in connection with who was denied credit was, in fact, creditwotthy. In addition, credit National City Corporation's application to acquire Provident Bank. history problems, excessive debt levels relative to income, and high The Board considered those comments when it approved that pro loan amounts relative to the value of the real estate collateral (reasons posal. See NatiofUlI City Corporation. 90 Federal Reserve Bulletin most frequently cited for a credit denial or higher credit cost) are not 382.384 (2004). National City sold First Franklin to Merrill Lynch & available from HMDA data. Co. • Inc. in 2006.

Legal Developments: Fourth Quarter, 2008 B 11 Board concludes that all factors required to be considered on compliance by PNC with the conditions imposed in this under the FRA and the Board's Regulation K are consistent order and all the commitments made to the Board in with approval. connection with the proposal. These conditions and com mitments are deemed to be conditions imposed in writing by the Board in connection with its findings and decision CONCLUSION and, as such, may be enforced in proceedings under Based on the foregoing, the Board has determined that the applicable law. applications under section 3 of the BHC Act and section 25 The acquisition of National City may not be consum of the FRA should be, and hereby are, approved. 56 In mated before the 15th calendar day, or later than three reaching its conclusion, the Board considered all the facts months, after the effective date of this order, unless such of record in light of the factors that the Board is required to period is extended for good cause by the Board or by the consider under the BHC Act, the FRA, and other applicable Federal Reserve Bank of Cleveland, acting pursuant to statutes.57 The Board's approval is specifically conditioned delegated authority. By order of the Board of Governors, effective Decem ber 15,2008. 56. A number of commenters requested an extension of the com ment period or delayed action on the proposal, and one commenter has Voting for this action: Chairman Bernanke, Vice Chairman Kohn, requested Board review of a decision under authority delegated by the and Governors Warsh, Kroszner, and Duke, Board that denied his request for an extension of the comment period, See letter dated November 26, 2008, from Robert deV. Frierson, ROBERT DEY. FRIERSON Deputy Secretary of the Board_ to the Honorable Dennis 1. Kucinich, Deputy Secretary of the Board As previously noted, notice of the proposal was published in the Federal Register on November 5, 2008, Newspaper notices were published on October 30 and November 3 in the appropriate newspa require the Board to hold a public hearing on an application unless the pers of record, and the comment period ended on December 2, appropriate supervisory authority for the bank to be acquired makes a Accordingly, interested persons had approximately 33 days to submit written recommendation of denial of the application. The Board has their views, This period provided sufficient time for commenters to not received such a recommendation from the OCe. Under its rules, prepare and submit their comments and, as noted above, many the Board also may, in its discretion, hold a public meeting or hearing commenters have provided written submissions, all of which the on an application to acquire a bank if necessary or appropriate to Board has considered carefully in acting on the proposal, The Board clarify material factual issues related to the application and to provide also has accumulated a significant record in this case, including reports an opportunity for testimony (12 CFR 225,16(e), 262.25(d)), The of examination, confidential supervisory information and public Board has considered carefully the commenters' requests in light of all reports and information, in addition to public comments. Moreover, the facts of record, As noted, the commenters had ample opportunity to the Board is required under applicable law and its regulations to act on submit their views and, in fact, submitted written comments that the applications submitted under the BHC Act within specified time Board has considered carefully in acting on the proposal. The com periods. Based on all the facts of record. the Board has concluded that menters' requests fail to demonstrate why written comments do not the record in this case is sufficient to warrant action at this time and present their views adequately or why a meeting or hearing otherwise that neither an extension of the comment period nor further delay in would be necessary or appropriate. For these reasons, and based on all considering the proposal is necessary, the facts of record, the Board has determined that a public meeting or 57. A number of commenters requested that the Board hold a public hearing is not required or warranted in this case. Accordingly, the meeting or hearing on the proposal. Section 3 of the BHC Act does not requests for a public meeting or hearing on the proposal are denied. Appendix A PNC AND NATIONAL CITY BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES WITHOUT DIVESTITURES Market Amount Remaining Bank Rank of deposits • deposit Resulting Change in number of shares HHI HRI (dollars) competitors (percent) FLORIDA BANKING MARKET Indian River County PNC Pre-Consummation .............. 14 30.9 mil. .9 1,753 18 17 National City ............................. 3 361.2 mil. 10.1 1,753 18 17 PNC Post-Consummation ............. 2 392.1 mil. 11.0 1,753 18 17 Naples Area-Collier County, excluding the town of Immokalee PNC Pre-Consummation .............. 34 15.5 mil. .2 993 0 43 National Cityl ............................ 42 o mil. .0 993 0 43 PNC Post-Consummation ............. 34 15.50 mil. .2 993 0 43

B 12 Federal Reserve Bulletin 0 March 2009 Appendix A-Continued PNC AND NATIONAL CITY BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO} GUIDELINES WITHOUT DIVESTITURES-Continued Market Amount Remaining deposit Resulting Change in Bank Rank of deposits number of shares HHi HHi (dollars) competitors (percent) KENTUCKY BANKING MARKET Lexington-Bourbon, Clark, Fayette, Jessamine, Nicholas. Powell, Scott, and Woodford counties PNC Pre-Consummation .............. 15 123.7 mil. 1.6 848 27 35 National City ............................. 4 670.2 mil. 8.5 848 27 35 PNC Post-Consummation ............. 4 793.9 mil. 10.1 848 27 35 Louisville, Kentucky-Indiana- Bullitt. Henry. Jefferson, Meade. Nelson, Oldham. Shelby, and Spencer counties, the Bedford census county division in Trimble County, the West Point census county division and the cities of Vine Grove and Radcliff in Hardin County, and the city of Irvington in Breckinridge County, all in Kentucky; Clark, Floyd. Harrison. and Washington counties, and Crawford County, excluding Patoka township, all in Indiana PNC Pre-Consummation .............. 3 2.2 biL 10.1 1239 378 53 National City ............................. J 4.0 bil. 18.8 1,239 378 53 PNC Post-Consummation ............. 1 6.2 bil. 28.8 1,239 378 53 Cincinnati. Ohio-Indiana- Kentucky-Brown, Butler, Clermont, Hamilton. and Warren counties in , OhIO, Dearborn County In Indtana, Boone, Bracken. Campbell, Gallatin, Grant, Kenton, and Pendleton counties, and the New Liberty and Owenton census county divisions in Owen County, all in Kentucky PNC Pre-Consummation ............ .. 4 2.4 bil. 4.4 2,421 48 82 National City ........................... .. 3 2.9 biL 5.5 2,421 48 82 PNC Post-Consummation ........... .. 3 5.3 biL 9.9 2,421 48 82 NOTE: Data are as of June 30, 2008. All amounts of deposits are un weighted, All rankings, market deposit shares. and HHis are based on thrift in stitution deposits weighted at 50 percent. L National City established a branch in the Naples Area banking market in late 2007. As of June 30. 2008, no deposits had been recorded. _____. ._ __t ~ -,->v'.-"" "'

Legal Developments: Fourth Quarter, 2008 B 13 Appendix B PNC AND NATIONAL CIIT BANKING MARKETS IN PENNSYLVANIA CONSISTENT WITH BOARD PRECEDENT AND DO] GUIDELINES AFTER DIVESTITURES Market Amount Remaining deposit Resulting Change in Bank Rank of deposits number of I shares HHI HHI (dollars) competitors lJJ?ercent) , ........ ~. .. ...... ~ .. -~ Franklin-TItusville-Oil Venango County and the city oj Titusville in Craw ord Coun ) Pre-Di vestiture PNC Pre-Consummation , ..... , ... . 7 40.8 miL 4.5 2,319 254 8 National City ......................... . 2 250.8 mil. 27.9 2,319 254 8 PNC Post-Consummation ......... . I 291.6 mil. 32.5 2,319 254 8 Post-Divestiture PNC Post-Consummation ......... . 2 199.2 mil. 22.2 1,863 -202 9 Branches Divested to 3 92.4 mil. 10.3 1,863 -202 9 Out-of-Market Purchaser ......... .. (I branch) Warren-Warren County Pre-Di vestiture PNC Pre-Consummation .......... . 3 92.5 mil. 13.7 4,766 871 4 National City ......................... . 2 216.3 mil. 31.9 4,766 871 4 PNC Post-Consummation ........ .. 2 308.8 mil. 45.6 4,766 871 4 Post-Divestiture PNC Post-Consummation ........ .. 2 188.4 mil. 27.8 3,779 -117 5 Branches Divested to 3 120.5 mil. 17.8 3,779 -II7 5 Out-of-Market Purchaser .......... . (I branch) NOTE: Data are as of June 30. 2008. All amounts of deposits are unweighted. All rankings. market deposit shares. and HHls are based on thrift institution deposits weighted at 50 percent, except for one thrift institution operating in both markets for which deposits are weighted at 100 percent. ORDERS ISSUED UNDER SECTION 4 OF THE America has requested the Board's approval to acquire Merrill Lynch Bank USA (HML USA"), Salt Lake City, BANK HOLDING COMPANY ACT Utah, and thereby engage in operating an industrial loan company.2 Bank of America also has filed notice to acquire Bank of America Corporation Merrill Lynch Yatirim Bank A.S., Istanbul, Turkey, pursu ant to section 4(c)(l3) of the BHC Act and the Board's Charlotte, North Carolina Regulation K.3 Notice of the proposal, alrording interested persons an Order Approving the Acquisition of a opportunity to submit comments, has been published in the Savings Association and an Industrial Loan Federal Register (73 Federal Register 61, 130 (2008». The Company time for filing comments has expired, and the Board has considered the proposal and all comments received in light Bank of America Corporation ("Bank of America"), a of the factors set forth in section 4 of the BHC Act. financial holding company within the meaning of the Bank Bank of America, with total consolidated assets of Holding Company Act (HBHC Act"), has requested the $ 1.8 trillion, is the largest depository organization in the Board's approval under sections 4(c)(8) and 4(j) of the United States, as measured by deposits, and controls depos BHC Act and section 225.24 of the Board's Regulation yl its of approximately $774.2 billion, which represent approxi to acquire Merrill Lynch & Company, Inc. ("Merrill"), and mately 10.8 percent of the total amount of deposits of thereby indirectly acquire Merrill's subsidiary savings asso ciation, Merrill Lynch Bank & Trust Co., FSB ("ML Bank"), both of New York, New York. In addition, Bank of 2. 12 CFR 225.28(b)(4)(i). 3. 12 U.S.c. § 18 43(c)(I3); see 12 CFR 211.9(0. Bank of America also proposes to acquire Menill" s other subsidiaries in accordance with sections 4(c)(I3) or 4(k) of the BHC Act(l2 U,S.c. §§ 18 43(c)(I3) I. 12 U.S.c. §§ 1843(c)(8) and 0); 12 CFR 225.24. and (k)).

Bl4 Federal Reserve Bulletin D March 2009 insured depository institutions in the United States.4 Bank Act and Regulation Y,8 Bank of America has certified that of America controls six insured depository institutions5 that Merrill is substantially engaged in activities that are finan operate in thirty-one states and the District of Columbia. cial in nature, incidental to a financial activity, or otherwise Merrill has total consolidated assets of approximately permissible for a financial holding company under sec $875 billion and controls deposits of approximately tion 4(c ) of the BHC Act. 9 Bank of America has committed $77.8 billion, which represent approximately 1.1 percent of that it will confonn, terminate, or divest, within two years the total amount of deposits of insured depository institu of the acquisition of Merrill, all the activities and invest tions in the United States. ML Bank and ML USA operate ments of Merrill that are not pennissible for a bank holding in nine states. company under section 4(c) of the BHC Act. 10 On consummation of the proposal, Bank of America To approve the proposal, section 4(j)(2)(A) of the BHC would remain the largest depository organization in the Act requires the Board to detennine that the proposed United States, with total consolidated assets of approxi acquisition of ML Bank and ML USA "can reasonably be mately $2.7 trillion. Bank of America would control depos expected to produce benefits to the public, such as greater its of approximately $852 billion. representing approxi convenience, increased competition, or gains in efficiency, mately 11.9 percent of the total amount of deposits of that outweigh possible adverse effects, such as undue insured depository institutions in the United States.6 concentration of resources, decreased or unfair competi tion, conflicts of interests, or unsound banking practices." II FACTORS GOVERNING BOARD REVIEW OF THE As part of its evaluation under these public interest factors, PROPOSAL the Board reviews the financial and managerial resources of the companies involved, the eirect of the proposal on The Board previously has detennined by regulation that the competition in the relevant markets, and the public benefits operation of a savings association and an industrial loan of the proposal, 12 In acting on a notice to acquire a savings company by a bank holding company are activities closely association or an insured industrial loan company, the related to banking for purposes of section 4(c)(8) of the Board also reviews the records of performance of the BHC Act.7 The Board requires that savings associations, relevant insured depository institutions under the Commu industrial loan companies, and any other entities acquired nity Reinvestment Act ("CRA").I> by bank holding companies or financial holding companies conform their direct and indirect activities to the require COMPETITIVE CONSIDERATIONS ments for permissible activities under section 4 ofthe BHC The Board has considered carefully the competitive effects of Bank of America's acquisition of Merrill, including the 4. Asset and nationwide deposit-ranking data are as of lune 30. 2008. In this context. insured depository institutions include commer acquisition of ML Bank and ML USA, in light of all the cial banks. savings banks, and savings associations. facts of record, Bank of America and Merrill have subsid 5. Bank of America, National Association ("BAN A"), CharloUe, iary insured depository institutions that compete directly in North Carolina, is Bank of America's largest subsidiary depository 11 banking markets in California, Massachusetts, Nevada, institution, as measured by both assets and deposits. 6. The Riegle-Neal Interstate Banking and Branching Efficiency New York, and Oregon.14 The Board has reviewed care- Act of 1994 (HRiegle-Neal Act") provides that the Board may not approve an application for the interstate acquisition of a bank if consummation of the acquisition would result in the applicant control 8. A savings association operated by a bank holding company may ling more than 10 percent of the total amount of deposits of insured engage only in activities that are permissible for bank holding depository institutions in the United States. Pub. L. 103-328 (1994), companies under section 4(c)(8) of the BHC Act (12 CFR 225.28(b)(4) codified at 12 U.S.c. § I 842(d). ML Bank is chartered as a federal and 225.86(a». savings bank under the Home Owners' Loan Act and. therefore, is 9. A company is substantially engaged in activities permissible for exempt from the definition of "bank" (12 U.S.c. § 1461 et seq.; a financial holding company if at least 85 percent of the company's 12 U.S.c. § 1841(c)(2)(B». ML USA operates as an industrial loan consolidated total annual gross revenue is derived from, and at least company and also is exempt from the definition of "bank" under the 85 percent of the company's consolidated total assets is attributable to, BHC Act. See 12 U.S.c. § l841(c)(2)(H). As a reSUlt, ML Bank and the conduct of activities permissible for a financial holding company ML USA are not "banks" for purposes of the BHC Act and its 12 CFR 225.85(a)(3)(iO. nationwide deposit cap. Accordingly, the Riegle-Neal Act's prohibi 10. 12 CFR 225.85(a)(3). tion against approving proposals that would result in the applicant 11. 12 U.S.c. § 1843G)(2)(A). exceeding the nationwide deposit cap does not apply to the proposed 12. See 12 CFR 225.26. See, e.g. . Waehol'ia Corporation, 92 Fed acquisition of Merrill, ML Bank, and ML USA. After consummation eral Reserve Bulletin CI83 (2006): Bane One Corporation, 83 Fed of the proposal, however, the calculation of Bank of America's total eral Reserve Bulletill 602 (1997). deposits would include the deposits of ML Bank and ML USA for 13. 12 U.S.c. §2901 et seq. purposes of calculating compliance with the nationwide deposit cap 14. ML Bank operates 54 branches in California, Connecticut, prohibition in connection with any subsequent application by Bank of Massachusetts, Nevada, New Jersey, New York. Oregon, and Pennsyl America to acquire a bank pursuant to section 3 of the BHC Act or by vania and offers a full range of banking products and services to its one of its subsidiary banks to merge with an unaffiliated bank pursuant customers. ML USA operates three branches in New Jersey, New York, to the Bank Merger Act (12 U.S.c. § 1828(c». and Utah. ML USA accepts money market deposit accounts, transac 7. 12 CFR 225.28(b)( I), (2), (4). (5). (6). (7). and (12). tion accounts, and certificates of deposit. It also makes loans and

Legal Developments: Fourth Quarter; 2008 B15 fully the competitive effects of the proposal in all markets Based on all the facts of record, the Board concludes that in light of all the facts of record. In particular, the Board has consummation of the proposal would not have a signifi considered the number of competitors that would remain in cantly adverse effect on competition or on the concentra the markets, the relative shares of total deposits in deposi tion of resources in any relevant banking market. Accord tory institutions in each market ("market deposits") con ingly, the Board has determined that competitive trolled by Bank of America and Merrill, 15 the concentration considerations are consistent with approval. levels of market deposits and the increase in those levels as measured by the Herfindahl-Hirschman Index (HHHI") FINANCIAL AND MANAGERIAL RESOURCES under the Department of Justice Merger Guidelines ("DOJ Guidelines"),16 and other characteristics of the markets. In reviewing the proposal under section 4 of the BHC Act, Consummation of the proposal would be consistent with the Board has considered carefully the financial and mana Board precedent and within the thresholds in the DOJ gerial resources of Bank of America, Merrill, and their Guidelines in all the banking markets in which the insured subsidiary insured depository institutions and the effect of depository institutions of Bank of America and Merrill the transaction on those resources. This review was con directly compete. I? On consummation of the proposal, two ducted in light of all the facts of record, including confiden of the banking markets would remain unconcentrated and tial reports of examination, other supervisory information eight would remain moderately concentrated. One banking from the primary federal and state supervisors of the market would continue to be highly concentrated but with organizations involved in the proposal, and publicly re no increase in the HHI. In each of the 11 banking markets, ported and other financial information, including informa numerous competitors would remain. tion provided by Bank of America. The Board also has The DOJ also reviewed the proposal and has advised the consulted with the Office of Thrift Supervision (HOTS") Board that consummation of the transaction would not and Federal Deposit Insurance Corporation ("FDIC"), the likely have a significantly adverse effect on competition in primary federal supervisors of Merrill's subsidiary insured any relevant banking market or in any relevant market. The depository institutions. appropriate federal supervisory agencies also have been In evaluating financial resources in expansionary propos afforded an opportunity to comment and have not objected als by banking organizations, the Board reviews the finan to the proposal. cial condition of the organizations involved on both a parent-only and consolidated basis, as well as the financial condition of the subsidiary insured depository institutions serves as a transfer agent. subaccountant, registrar, and fiscal agent for and the organizations' significant nonbanking operations_ nonproprietary money market funds and mutual funds. In this evaluation, the Board considers a variety of informa 15. Deposit and market share data are as of June 30, 2008. and are tion, including capital adequacy, asset quality, and earnings based on calculations in which the deposits of thrift institutions are performance. In assessing financial factors, the Board included at 50 percent. The Board previously has indicated that thrift consistently has considered capital adequacy to be espe institutions have become, or have the potential to become. significant competitors of commercial banks. See. e.g. . Midwest Financial Group, cially important. The Board also evaluates the financial 75 Federal Reserve Bulletin 386, 387 (1989); National Ciry Corpora condition of the combined organization at consummation, tion. 70 Federal Reserve Bulletin 743. 744 (1984). Thus, the Board including its capital position, asset quality, and earnings regularly has included thrift institution deposits in the market share prospects, and the impact of the proposed funding of the calculation on a 50 percent weighted basis. See. e.g .• Fiw Hawaiian. Inc .• 77 Federal Reserve Bulletin 52, 55 (1991). In the market share transaction. In addition, the Board considers the ability of calculations in this case, the Board weighted the deposits of ML Bank the organization to absorb the costs of the proposal and the at 50 percent on a pre-acquisition basis and at 100 percent on a plans for integrating operations after consummation. posl-acquisition basis to reflect the resulting control of such depOsits The Board has considered carefully the financial factors by a commercial banking organization. ML USA offers only limited services and its offices are not open to the public. The Board, therefore, of the proposal. Bank of America and its subsidiary deposi excluded the deposits of ML USA on a pre-acquisition basis and tory institutions are well capitalized and would remain so weighted them at 100 percent on a post-acquisition basis to reflect the on consummation of the proposal. ML Bank and ML USA resulting control of such deposits by a commercial banking organiza also are well capitalized and would remain so after consum tion. mation of the proposal. Based on its review of the record, 16. Under the DO] Guidelines. a market is considered unconcen trated if the post-acquisition HHI is under 1000, moderately concen including all of the considerations noted above, the Board trated if the post-acquisition HHI is between 1000 and 1800, and finds that Bank of America has sufficient financial resources highly concentrated if the post-acquisition HHI exceeds 1800. The to effect the proposal.18 Department of Justice ("DO]") has informed the Board that a bank The Board also has considered the managerial resources merger or acquisition generally will not be challenged (in the absence of other factors indicating anticompetitive effects) unless the post of the organizations involved and the proposed combined acquisition HHI is at least 1800 and the acquisition increases the HHi organization. The Board has reviewed the examination more than 200 points. The OOJ has stated that the higher-than-normal records of Bank of America and its subsidiary depository HHI thresholds for screening bank mergers and acquisitions for anticompetitive effects implicitly recognize the competitive effects of limited-purpose and other nondepository financial entities. 18. The proposed transaction is structured as a share exchange and 17. Those banking markets and the effects of the proposal on their would not increase the debt-service requirements of the combined concentration of banking resources are described in the appendix. company.

B 16 Federal Reserve Bulletin 0 March 2009 institutions, and ML Bank and ML USA, including assess institutions of Bank of America were rated "outstanding" ments of their management, risk-management systems, and or "satisfactory" at their most recent CRA performance operations. In addition, the Board has considered its super evaluations. visory experiences and those of the other relevant federal ML USA received an "outstanding" rating at its most supervisory agencies with the organizations and their recent CRA performance evaluation by the FDIC, as of records of compliance with applicable banking laws and January 10, 2006.22 ML Bank has not yet received a CRA with anti-money-laundering laws. The Board also has rating because before its conversion to a savings associa considered carefully Bank of America's plans for imple tion on August 5, 2006, it was a trust company and thus not menting the proposal, including its proposed risk subject to the CRA. Bank of America has represented that it management systems after consummation. Bank of America will institute the community development and community plans to implement enhanced risk-management policies, investment policies of BANA at ML Bank to strengthen the procedures, and controls at the combined organization and bank's CRA policies, and to help meet the credit needs of is devoting significant financial and other resources to the communities it serves. address all aspects of the post-acquisition integration pro Based on a review of the entire record, and for the cess. The Board also has considered Bank of America's reasons discussed above, the Board has concluded that record of successfully integrating large organizations into considerations relating to the CRA performance records of its operations and risk-management systems after acquisi the relevant insured depository institutions are consistent tions. with approval of the proposal. Based on all the facts of record, the Board has concluded that considerations relating to the financial and managerial PUBLIC BENEFITS resources of the organizations involved in the proposal are consistent with approval under section 4 of the BHC Act. As part of its evaluation of the public interest factors under section 4 of the BHC Act, the Board has reviewed carefully RECORDS OF PERFORMANCE UNDER THE eRA the public benefits and possible adverse effects of the proposal. The record indicates that consummation of the As noted previously, the Board reviews the records of proposal would result in benefits to consumers currently performance under the CRA of the relevant insured deposi served by ML Bank and ML USA by providing them access tory institutions when acting on a notice to acquire an to additional banking and nonbanking products and ser insured depository institution, including a savings associa vices from Bank of America, Bank of America has repre tion or industrial loan company. The CRA requires the sented that it would grant customers of ML Bank and ML federal financial supervisory agencies to encourage insured USA access 1O BANNs ATM network and branches on the depository institutions to help meet the credit needs of the same terms and conditions as BANA customers, As noted, local communities in which they operate, consistent with Bank of America also would implement enhanced risk their safe and sound operation, and requires the appropriate management systems at the combined organization. federal financial supervisory agency to take into account For the reasons discussed above and based on all the the relevant depository institution's record of meeting the facts of record, the Board has determined that the conduct credit needs of its entire community, including low- and of the proposed nonbanking activities within the frame moderate-income (HLMI") neighborhoods, in evaluating work of Regulation Y and Board precedent is not likely to bank expansionary proposals.19 result in significantly adverse effects, such as undue con As provided in the CRA, the Board has evaluated the centration of resources, decreased or unfair competition, proposal in light of the evaluations by the appropriate conflicts of interests, or unsound banking practices. For the federal supervisors of the CRA performance records of the reasons discussed above and based on the entire record, the relevant insured depository institutions. An institution's Board has concluded that consummation of the proposal most recent CRA performance evaluation is a particularly can reasonably be expected to produce public benefits that important consideration in the application process because would outweigh any likely adverse effects. Accordingly, it represents a detailed, on-site evaluation of the institu the Board has determined that the balance of the public tion's overall record of performance under the CRA by its benefits under the standard of section 4(j)(2) of the BHC appropriate federal supervisor.20 Act is consistent with approval. Bank of America's lead bank, BANA, received an Bank of America also has provided notice under sec "outstanding" rating at its most recent CRA performance tion 4(c)(13) of the BHC Act and the Board's Regulation K evaluation by the Office of the Comptroller of the Currency, to acquire Merrill Lynch Yatirim Bank A.S. The Board as of December 31, 2006.21 All other insured depository concludes that all factors required to be considered under the BHC Act and the Board's Regulation K are consistent with approval. 19. 12 U.S.c. §2903 20. See Interagency Questions and Answers Regarding Community Reinvestment, 66 Federal Register 36,620 and 36,639 (2001). 21. The period for the BANA evaluation was January 1. 2004, 22. The period for the ML USA evaluation was April J, 2003, through December 31, 2006. through December 31,2005.

Legal Developments: Fourth Quarter, 2008 B 17 -------------------- CONCLUSION finds necessary to ensure compliance with, and to prevent evasion of, the provisions of the BHC Act and the Board's Based on the foregoing and all the facts of record, including regulations and orders issued thereunder. For purposes of reports of examination of the institutions involved, informa this action, these conditions and commitments are deemed tion provided by Bank of America, and confidential super to be conditions imposed in writing by the Board in visory information, the Board has determined that the connection with its findings and decisions herein and, as proposal should be, and hereby is, approved. In reaching its such, may be enforced in proceedings under applicable law. conclusion, the Board has considered all the facts of record The proposal shall not be consummated later than three in light of the factors that it is required to consider under months after the effective date of this order, unless such the BHC Act. The Board's approval is specifically condi period is extended for good cause by the Board or by the tioned on compliance by Bank of America with the condi Federal Reserve Bank of Richmond, acting pursuant to tions imposed in this order and all the commitments made delegated authority. to the Board in connection with the proposal. The Board's By order of the Board of Governors, effective Novem approval also is subject to all the conditions set forth in ber 26, 2008. Regulation Y, including those in sections 225.7 and 225.25(c),23 and to the Board's authority to require such Voting for this action: Chairman Bernanke. Vice Chairman Kohn. and Governors Warsh. Kroszner, and Duke. modification or termination of the activities of the bank holding company or any of its subsidiaries as the Board ROBERT DEY. FRIERSON Deputy Secretary of the Board 23. 12 CFR 225.7 and 225.25(c). Appendix BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES Market Amount Remaining deposit Resulting Change in Bank Rank of deposits number of shares HHI HHI (dollars) competitors (percent) -~'----.. CALIFORNIA BANKING MARKETS Los Angeles-the Los Angeles Ranally Metropolitan Area and the cities of Acton in Los Angeles County and Rosamond in Kern County Bank of America Pre-Consummation ... 1 58.8 bil. 19.8 824 16 198 Merrill .......................................... 40 1.4 bil. .3 824 16 198 Bank of America Post-Consummation .. I 60.3 bil. 20.3 824 16 198 Napa-the Napa Ranally Metropolitan Area and the cities of Calistoga and St. Helena in Napa County Bank of America Pre-Consummation ... 2 423.8 mil. 16.0 1,127 27 18 Merrill .......................................... 16 32.8 mil. .6 1,127 27 18 Bank of America Post-Consummation .. 2 456.7 mil. 17.2 1,127 27 18 Palm Springs-Cathedral City-Palm Desert-the Palm Springs-Cathedral City-Palm Desert and Indio-Coachella Ranally Metropolitan Areas and the cities of Joshua Tree, Twentynine Palms, and Yucca Valley in San Bernardino County Bank of America Pre-Consummation 1 1.2 bil. 19.1 936 9 26 Merrill ........................................ .. 23 18.9 mil. .2 936 9 26 Bank of America Post-Consummation .. 1 1.2 bil. 19.3 936 9 26

BI8 Federal Reserve Bulletin 0 March 2009 Appendix-Continued BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES-Continued ':1;b , . Market Amount • d . .! g .. Remaining Bank Rank of deposits L~ s h" ar t es R" H " H 'b I n g , • ChO H O HI num e~ 0 (dollars) (percent) ~ competitors .... ----.. .. .. .... ... .... .._- San Diego-the San Diego Ranally Metropolitan Area and the cities of Camp Pendleton and Pine Valley in San Diego County Bank of America Pre-Consummation I 7.9 bi!. 17.3 1,090 34 70 Merrill .......................................... 17 633.6 mil. .7 1,090 34 70 Bank of America Post-Consummation .. I 8.5 bi\' 18.6 1,090 34 70 San Francisco-Oakland-San Jose-the San Francisco-Oakland-San Jose Ranally Metropolitan Area, and the cities of Byron in Contra Costa County, Hollister and San Juan Bautista in San Bonito County, Pescadero in San Mateo County and Point Reyes Station in Marsh County Bank of America Pre-Consummation I 56.8 bi!. 25.3 1,497 85 115 Merrill .......................................... 12 5.1 bi!. 1.I 1,497 85 115 Bank of America Post-Consummation .. I 61.9 bi!. 27.3 1,497 85 liS Santa Barbara-the Santa Barbara Ranally Metropolitan Area Bank of America Pre-Consummation 2 648.8 mil. 10.4 1,423 18 18 Merrill .......................................... 13 162.2 mi!. 1.3 1,423 18 18 Bank of America Post-Consummation .. 2 811 mil. 12.8 1,423 18 18 Santa Rosa-the Santa Rosa Ranally Metropolitan Area and the city of Cloverdale in Sonoma County Bank of America Pre-Consummation 2 845.6 mil. 12.9 1,003 16 21 Merrill .......................................... 16 62.7 mil. .5 1,003 16 21 Bank of America Post-Consummation .. 2 908.4 mil. 13.8 1,003 16 21 MASSACHUSETTS BANKING MARKET Boston-the Boston Ranally Metropolitan Area and the towns of Amherst, Antrim, Atkinson, Bennington, Brookline, Chester; Danville, Deering, Derry, Dublin, East Hamstead, Fitzwilliam, Francestown, Fremont, Greenfield, Greenville, Hampstead, Hancock, Hollis, Hudson, Jaffrey, Kingston, Litchfield, Lyndeboro, Mason, Merrimac, Milford, Mont Vernon, Nashua City, New Ipswich, Newton, Pelham, Peterborough, Plaistow, Raymond, Rindge, Salem, Sandown, Seabrook, Sharon, South Hampton, South Nashua, Temple, Wilton, and Windham in New Hampshire Bank of America Pre-Consummation I 29.6 bi!. 22.0 1,202 7 159 Merrill .......................................... 67 314.2 mil. .I 1,202 7 159 Bank of America Post-Consummation .. 1 29.9 bi!. 22.2 1,202 7 159

Legal Developments: Fourth Quarter, 2008 B 19 Appendix-Continued BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO] GUIDELINES-Continued Market Amount Remaining deposit Change in Bank Rank of deposits number of HHI (dollars) competitors NEVADA BANKING MARKET Las Vegas-the Las Vegas Ranally Metropolitan Area Bank of America Pre-Consummation 3 6.8 bil. 4.2 3,635 -1 47 Merrill .......................................... 27 99.9 mil. .0 3,635 -1 47 Bank of America Post-Consummation .. 3 6.9 bil. 4.2 3,635 -I 47 NEW YORK BANKING MARKET 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, Mercer, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, Sussex, Union, and Warren counties in New Jersey; Monroe and Pike counties in Pennsylvania; and Failfield County and portions of Litchfield and New Haven counties in Connecticut Bank of America Pre-Consummation ... 2 67.2 bil. 8.5 1,278 8 301 Merrill .......................................... 17 12.2 bil. .8 1,278 8 301 Bank of America Post-Consummation .. 2 79.4 bil. 10.0 1,278 8 301 OREGON BANKING MARKET Portland-the Portland Ranally Metropolitan Area; the cities of Banks, Molalla, Mount Angel, North Plains, Saint Helens, Scappoose, Vernonia. and Woodburn in Oregon; and the city of Yacolt in Washington Bank of America Pre-Consummation ... 2 4.8 bil. 17.5 1,304 0 44 Merrill .......................................... 42 0 .0 1,304 0 44 Bank of America Post-Consummation .. 2 4.8 bil. 17.5 1,304 0 44 NOTE: All ranlcings. market deposit shares. and HHls are based on thrift in· were excluded on a pre-acquisition basis and weighted at I ()() percent on a stirotion deposits weighted at 50 percent, except tor the savings association de· post·acquisition basis. The effects of these modifications on the post. posil' of Merrill, which are weighted at 50 percent before consummation of the consummation market shares and HHls are more evident in some markets [han proposal and I( )() percent after consummation. The deposits of ML Bank US in others.

B20 Federal Reserve Bulletin 0 March 2009 ORDERS ISSUED UNDER SECTIONS 3 AND 4 authorizes the Board to reduce or eliminate these notice periods under certain circumstances. OF THE BANK HOLDING COMPANY ACT 10 In light of the unusual and exigent circumstances affect ing the financial markets, and all other facts and circum American Express Company stances, the Board has determined that emergency condi tions exist that justify expeditious action on this proposal in New York, New York accordance with the provisions of the BHC Act and the Board's regulations. The Board has provided notice to the I I American Express Travel Related Services primary federal and state supervisors of AMEX Bank, the Company, Inc. Federal Deposit Insurance Corporation ("FDIC") and Commissioner of the Utah Department of Financial Institu New York, New York tions; to the primary federal supervisor of AMEX Thrift, the Office of Thrift Supervision ("OTS"): and to the Order Approving Formation of Bank Holding Department of Justice ("DOJ"). Those agencies have Companies and Notice to Engage in Certain indicated that they have no objection to approval of the Nonbanking Activities proposal. For the same reasons, and in light of the fact that this transaction represents the conversion of an existing American Express Company ("AMEX") and American subsidiary of Applicants from one form of a depository Express Travel Related Services Company, Inc. (" AMEX institution to another, the Board has also waived public Travel") (collectively, "Applicants") have requested the notice of this proposal.'2 Board's approval under section 3 of the Bank Holding AMEX, with total consolidated assets of approximately Company Act ("BHC Act")1 to become bank holding $127 billion, provides charge and credit payment-card companies on conversion of American Express Centurion products and travel-related services and engages in other Bank ("AMEX Bank"), Salt Lake City, Utah, to a bank.2 activities both in the United States and abroadP AMEX AMEX Bank currently operates as an industrial loan Bank has total consolidated assets of approximately company and is exempt from the definition of "bank" $25.3 billion and controls deposits of approximately under the BHC Act.3 Applicants have also filed with the $7.2 billion. It engages primarily in financing and lending Board elections to become financial holding companies on activities and taking deposits of the type that are permis consummation of the proposal pursuant to sections 4(k) and sible for an industrial loan company under the exception in (l) of the BHC Act and section 225.82 of the Board's section 2(c)(2)(H) of the BHC Act. AMEX Thrift has total Regulation Y. 4 consolidated assets of approximately $25 billion and con In addition, as part of their proposal to become bank trols deposits of approximately $7.2 billion. AMEX Thrift holding. companies, AMEX and AMEX Travel have re engages primarily in credit card lending activities. quested the Board's approval under sections 4(c)(8) and 4(j) of the BHC Act and section 225.24 of the Board's FACTORS GOVERNING BOARD REVIEW OF Regulation ys to retain their voting shares of American TRANSACTION Express Bank, FSB, Salt Lake City (HAMEX Thrift"), a federal savings association.6 AMEX has also provided The BHC Act sets forth the factors that the Board must notice of its proposal to retain its foreign bank subsidiaries consider when reviewing the formation of a bank holding under section 4(c)(13) of the BHC Ac£.1 company or the acquisition of a bank. These factors are the Section 3(b)( 1) of the BHC Act requires that the Board competitive effects of the proposal in the relevant geo provide notice of an application under section 3 to the graphic markets; the financial and managerial resources appropriate federal or state supervisory authority for the and future prospects of the companies and banks involved banks to be acquired and provide the supervisor a period of in the proposal; the convenience and needs of the commu time (normally 30 days) within which to submit views and nity to be served, including the records of performance recommendations on the proposal.8 Section 4(i)(4) of the under the Community Reinvestment Actl4 ("CRA") of the BHC Act imposes a similar requirement with respect to a insured depository institutions involved in the transaction; notice to acquire a savings associationY The BHC Act also and the availability of information needed to determine and enforce compliance with the BHC Act and other applicable federal banking laws.15 1. 12 U.S.C. § 1842. 2. AMEX Bank is a direct subsidiary of AMEX Travel and an indirect subsidiary of AMEX. 10. 12 U.S.c. §§ I 842(b)(I) and 1843(1)(4). 3. 12 U.S.c. § I 84I(c)(2)(H). 11. ld.; 12 CFR 225.16(b)(3), 225.16(g)(2), 225.25(d), and 262.3(1). 4. 12 U.S.C. §§ I 843(k) and (I); 12 CFR 225.82. 12. 12 CFR 22S.l6(b)(3). 225.16(g)(2), 225.25(d), and 262.3(1), 5. 12 U.S.C. §§ I 843(c)(8) and (i); 12 CFR 225.24. 13. Asset data for AMEX are as of September 30, 2008, and asset 6. AMEX Thrift is a direct subsidiary of AMEX Travel and an and deposit data for AMEX Bank and AMEX Thrift are as of June 30, indirect subsidiary of AMEX. 2008. 7. 12 U.s.c. § 1843(c)(I3). 14. 12 V.S.c. §2901 et seq. 8. 12 U.S.C. § I 842(b)(I); 12 CFR 225.15(b). 15. In cases involving interstate bank acquisitions by bank holding 9. 12 U.S.c. § 18430)(4). companies. the Board also must consider the concentration of deposits

Legal Developments: Fourth Quarter; 2008 B21 An acquisition of a savings association requires Board The Board has carefully considered these factors in light of approval under sections 4(c)(8) and 4(j) of the BHC Act. 16 all the facts of record, including supervisory and examina The Board previously has detennined by regulation that the tion infonnation received from the relevant federal and operation of a savings association is closely related to state supervisors of the organizations involved in the banking for purposes of section 4(c)(8) of the BHC Act. 17 proposal and other available financial information, includ The Board also must detemline that the operation of ing infonnation provided by AMEX and AMEX Travel. In AMEX Thrift by Applicants "can reasonably be expected addition, the Board has consulted with the primary federal to produce benefits to the public, such as greater conve and state supervisors of Applicants, AMEX Bank, and nience, increased competition, or gains in efficiency, that AMEX Thrift. outweigh possible adverse etfects, such as undue concen The Board consistently has considered capital adequacy tration of resources, decreased or unfair competition, con to be an especially important aspect in analyzing financial fiicts of interests, or unsound banking practices." IH factors. AMEX and AMEX Travel are adequately capital ized and all the AMEX entities that are subject to regula COMPETITIVE CONSIDERA nONS tory capital requirements currently exceed the relevant requirements. In addition, AMEX Bank and AMEX Thrift Section 3 of the BHC Act prohibits the Board from are currently well capitalized under applicable federal approving a proposal that would result in a monopoly. The guidelines. AMEX Bank and AMEX Thrift also would be BHC Act also prohibits the Board from approving a well capitalized on a pro forma basis on consummation of proposed bank acquisition that would substantially lessen the proposal. Other financial factors are consistent with competition in any relevant banking market unless the approval. anticompetitive effects of the proposal are clearly out In addition, the Board has carefully considered the weighed in the public interest by the probable effect of the managerial resources of AMEX and AMEX Travel in light proposal in meeting the convenience and needs of the of all the facts of record, including confidential supervisory community to be served.19 In addition, the Board must and examination infonnation and infonnation provided by consider the competiti ve effects of a proposal to acquire a Applicants. The Board has considered the supervisory savings association under the public benefits factor of experience of the relevant federal and state supervisory section 4(j) of the BHC Act. agencies of Applicants and their insured depository institu The proposal involves the conversion of an existing, tions with the organizations and institutions and their wholly owned industrial loan company subsidiary of Appli records of compliance with applicable banking law and cants into a bank, with no resulting change in the owner anti-money-laundering laws.21 ship of Applicants, AMEX Bank, or AMEX Thrift. In Based on all the facts of record, the Board concludes that addition, Applicants do not propose to acquire any addi considerations relating to the financial and managerial tional depository institution as part of this proposal. Based resources and future prospects of the organizations involved on all the facts of record, the Board concludes that consum are consistent with approval, as are the other supervisory mation of the proposal would not result in any significantly factors under the BHC Act. adverse effects on competition or on the concentration of banking resources in any relevant banking market and that the competitive factors are consistent with approval of the CONVENIENCE AND NEEDS AND CRA proposal. PERFORMANCE CONSiDERATIONS In acting on a proposal under section 3 of the BHC Act, the FINANCIAL, MANAGERIAL, AND OTHER Board must consider the effects of the proposal on the SUPERVISORY CONSIDERATIONS convenience and needs of the communities to be served and to take into account the records of the relevant depository Section 3 of the BHC Act requires the Board to consider the institutions under the CRA.22 The Board must also review financial and managerial resources and future prospects of the records of performance under the CRA of the relevant the companies and banks involved in the proposal and certain other supervisory factors.2o The Board also reviews insured depository institutions when acting on a notice the financial and managerial resources of the organizations involved in the proposal under section 4 of the BHC Act. 21. A former subsidiary of Applicants was subject to a cea>e and desist order and concurrent ci vii money penalties related to Bank in the nation and relevant individual stales, as well as compliance with Secrecy Act violations issued by the Board on August 3, 2007. AMEX the other provisions of section 3(d) of the BHC Act. Because the Travel was subject to related civil money penalties issued by the proposed transaction does not involve an interstate bank acquisition by Financial Crimes Enforcement Network. The subsidiary at which the a bank holding company, the provisions of section 3(d) of the BHC Act violations occurred, and against which the cease and desist order was do not apply in this case. applied, American Express Bank International, was sold by Applicants 16. 12 U.S.C. §§ I 843(c)(8) and IS43(j); See 12 U,S.c. § 1843(i), in late 2007. In reviewing the statutory factors, the Board has 17, 12 CFR 225.28(b)(4)(ii). consulted with the relevant federal and state supervisors about the IS, 12 U.S,c. § I 843(j)(2)(A). compliance by Applicants and their subsidiary depository institutions 19, 12 U.S.c. § I 842(c)(I), with anti-money-Iaundering laws, 20. 12 U,S,c. § IS42(c)(2) and (3). 22, 12 U,S.c. §2903,

B22 Federal Reserve Bulletin 0 March 2009 under section 4 of the BHC Act to acquire voting securities NONBANKING ACTIVITIES AND FINANCIAL of an insured savings association.23 HOLDING COMPANY DECLARATIONS The Board has carefully considered the convenience and needs factor and the CRA performance records of the Applicants engage in a wide range of nonbanking activities subsidiary depository institutions of the Applicants in light that have been determined to be financial in nature or of all the facts of record. As provided in the CRA, the incidental to a financial activity pursuant to section 4(k) of Board evaluates the record of performance of an institution the BHC Act,26 These activities include, among other in light of examinations by the appropriate federal supervi things, extending credit and servicing loans, engaging in sors of the CRA performance records of the relevant activities related to extending credit, issuing and selling consumer-type payment instruments, providing data pro institutions. An institution's most recent CRA performance cessing services, and operating travel agencies.27 evaluation is a particularly important consideration in the Applicants also have filed a notice under sections 4(c)(8) applications process because it represents a detailed, on-site and 40) of the BHC Act to retain their ownership interest in evaluation of the institution's overall record of perfor AMEX Thrift and thereby operate a savings association. As mance under the CRA by its appropriate federal supervi part of its evaluation of the public interest factors under sor.24 section 40) of the BHC Act, the Board also must determine AMEX Bank received an "outstanding" rating under the that the acquisition of the nonbank subsidiary and the CRA at its most recent performance evaluation by the performance of the proposed nonbanking activities by FDIC as of January 9, 2006 (the "FDIC Examination"). Applicants can reasonably be expected to produce benefits Consistent with the CRA regulations adopted by the federal to the public that outweigh possible adverse effects, such as banking agencies, AMEX Bank was evaluated under the undue concentration of resources, decreased or unfair community development test as a limited-purpose institu competition, conflicts of interests, or unsound banking tion.25 The FDIC Examination indicated that AMEX Bank practices.28 originated and funded new community development loans The record indicates that consummation of the proposal totaling $6.04 million during the examination period (Janu would create a stronger and more diversified financial ary 28, 2003, through January 9, 2006) and had more than services organization and would provide the current and $3 million in community development loan commitments. future customers of AMEX, AMEX Travel, and AMEX The FDIC Examination also determined that AMEX Bank Thrift with expanded financial products and services. For provided an outstanding level of community development the reasons discussed above, and based on the entire record, investments. Applicants have represented that the conver the Board has determined that the conduct of the proposed sion of AMEX Bank to a bank for purposes of the BHC Act nonbanking activities within the framework of Regula will enhance its ability to meet the convenience and needs tion Y and Board precedent is not likely to result in of its communities by permitting the bank to offer a wider signi ficantly adverse effects, such as undue concentration array of deposit products. of resources, decreased or unfair competition, conflicts of AMEX Thrift received an "outstanding" rating under interests, or unsound banking practices. Moreover, based the CRA at its most recent performance evaluation by the on all the facts of record, the Board has concluded that OTS, as of October 12, 2006 (the "OTS Examination"). consummation of the proposal can reasonably be expected AMEX Thrift also was evaluated under the community to produce public benefits that would outweigh any likely development test as a limited-purpose institution. The OTS adverse effects. Accordingly, the Board has determined that Examination indicated that AMEX Thrift originated and the balance of the public benefits under the standard of funded new community development loans totaling section 40)(2) of the BHC Act is consistent with approval. $16.0 million during the examination period (March I, As noted, Applicants have filed elections to become 2004, through September 30, 2006), and that it provided financial holding companies pursuant to sections 4(k) and more than $118.8 million in qualifying community devel (I) of the BHC Act and section 225.82 of the Board's opment investments. Regulation Y. Applicants have certified that AMEX Bank Based on a review of the entire record, and for the and AMEX Thrift are well capitalized and well managed reasons discussed above, the Board has concluded that and have provided all the information required under considerations relating to convenience and needs consider Regulation Y. Based on all the facts of record, the Board ations and the CRA performance records of AMEX Bank has determined that these elections to become financial and AMEX Thrift are consistent with approval of the holding companies will become effective on consummation proposal. of the proposal if, on that date, AMEX Bank and AMEX 23, See, e.g .• North Fork Bancorporation. Illc. • 86 Federal Reserve 26. See 12 U.S.c. § 1843(k). Bulletin 767 (2000). 27. See 12 V,S,c. § 1843(k)(4)(A) and (F); 12 CFR 225,28(b)(1). 24. The Interagency Questions and Answers Regarding Commu· (2), and (13), Financial holding companies may engage, in the United nity Reinvestment provide that a CRA examination is an important and States and abroad. in travel agency services in connection with often controlling factor in the consideration of an institution' s CRA financial services offered by the financial holding company or others record. See 64 Federal Register 23.641 (1999). (12 U.S.C. § 18 43(k)(4)(G); 12 CFR 225.86(b)(2». 25. See. e.g. . 12 CFR 228.2I(a)(2), 28, See 12 U.S.C. § 1843G)(2)(A).

Legal Developments: Fourth Quarter, 2008 823 Thrift remain well capitalized and well managed and each Voting for this action: Chairman Bernanke, Vice Chairman Kohn, institution has a rating of at least "satisfactory" at its most and Governors Warsh, Kroszner, and Duke. recent performance evaluation under the CRA. ROBERT DEY. FRIERSON Section 4 of the BHC Act by its terms also provides any Deputy Secretary of the Board company that becomes a bank holding company two years within which to conform its existing nonbanking invest ments and activities to the section's requirements, with the Caja de Ahorros y Monte de Piedad de possibility of three one-year extensions.29 Applicants must Madrid conform to the BHC Act any impermissible nonfinancial activities and investments that they currently conduct or Madrid, Spain hold, directly or indirectly, within the time requirements of the act. Caja Madrid Cibeles S.A. AMEX also has provided notice of its proposal to retain its foreign bank subsidiaries under section 4(c)(l3) of the Madrid, Spain BHC Act. Based on the record, the Board has no objection to the retention of such subsidiaries. CM Florida Holdings, Inc. Coral Gables, Florida CONCLUSiON Order Approving the Acquisition of a Bank Based on the foregoing and all the facts of record, the Holding Company Board has determined that the applications under section 3 and the notices under section 4 of the BHC Act should be, Caja de Ahorros y Monte de Piedad de Madrid ("Caja and hereby are, approved. In reaching its conclusion, the Madrid"), Madrid, Spain, a foreign banking organization Board has considered all the facts of record in light of the subject to the Bank Holding Company Act ("BHC Act"), I factors that the Board is required to consider under the and its subsidiary holding companies, Caja Madrid Cibeles BHC Act. The Board's approval is specifically conditioned SA ("CMC"), also of Madrid, and CM Florida Holdings, on compliance by Applicants with the conditions imposed Inc. ("CM Florida"), Coral Gables, Florida (collectively, in this order and all the commitments made to the Board in HA pplicants"), have requested the Board's approval under connection with the applications and notices. The Board's section 3 of the BHC Act2 to acquire 83 percent of the approval of the nonbanking aspects of the proposal also is voting securities of City National Bancshares, Inc. ("CNB") subject to all the conditions set forth in Regulation Y, and thereby acquire control of its subsidiary bank, City including those in sections 225.7 and 225.25(c),30 and to National Bank of Florida (HCN Bank"), both of Miami, the Board's authority to require such modification or Florida. Caja Madrid is treated as a financial holding termination of the activities of a bank holding company or company within the meaning of the BHC Act. CMC and any of its subsidiaries as the Board finds necessary to CM Florida (jointly, "FHC electors") have also filed with ensure compliance with, and to prevent evasion of, the the Board elections to become financial holding companies provisions of the BHC Act and the Board's regulations and on consummation of the proposal pursuant to section 4(k) orders issued thereunder. These commitments and condi and (I) of the BHC Act and section 225.82 of the Board's tions are deemed to be conditions imposed in writing by the Regulation y.~ Board in connection with its findings and decision and, as Notice of the proposal, affording interested persons an such, may be enforced in proceedings under applicable law. opportunity to submit comments, has been published The proposal does not involve the acquisition, merger, or (73 Federal Register 30,942 (2008». The time for filing consolidation of a bank. On this basis and after consultation comments has expired, and the Board has considered the with the DOJ, the Board has determined that the post proposal and all comments received in light of the factors consummation period in section 11 of the BHC Act does set forth in the BHC Act. not apply to consummation of the conversion of AMEX Bank.31 Accordingly, the transaction may be consummated immediately but not later than three months after the effective date of this order, unless such period is extended I. Caja Madrid operates an agency in the United States and is, for good cause by the Board or by the Federal Reserve therefore, subject to the BHC Act (12 usc. §3106(a». Bank of New York, acting pursuant to delegated authority. 2. 12 U.S.c. § 1842. 3. See 12 V.S.c. § I 843(k) and (I); 12 CFR 225.82. FHC electors By order of the Board of Governors, effective Novem have certified that CN Bank is well capitalized and well managed and ber 10, 2008. have provided all the information required under Regulation Y. Based on all the facts of record, the Board has determined that these elections to become financial holding companies will become effective on consummation of the proposal if, on that date. CN Bank remains well 29. See 12 V.S.c. § \843(a)(2). capitalized and well managed and has a rating of at least "satisfac 30. 12 CFR 225.7 and 225.25(c). tory" at its most recent performance evaluation under the Community 31. 12 V.S.c. § 1849(b)(l). Reinvestment Act CCRA") (12 U.S.C. §2901 et seq.)

B24 Federal Reserve Bulletin 0 March 2009 Caja Madrid, with total consolidated assets equivalent to The Board has carefully considered the financial re $269 billion, is the fourth largest depository organization in sources of the organizations involved in the proposal. The Spain.4 Caja Madrid operates an agency in Miami. capital levels of Caja Madrid continue to exceed the CNB has total consolidated assets of approximately minimum levels that would be required under the Basel $2.8 billion, and CN Bank operates only in Florida. CNB is Capital Accord and are considered to be equivalent to the the 21 st largest depository organization in Florida, control capital levels that would be required of a U.S. banking ling deposits of $2.1 billion.5 organization. In addition, CNB and CN Bank are well capitalized and would remain so on consummation. Based on its review of the record, the Board finds that Applicants COMPETITIVE CONSIDERATIONS have sufficient financial resources to effect the proposal. The proposed transaction is structured as a cash purchase of The BHC Act prohibits the Board from approving a shares. Applicants will use existing resources to fund the proposal that would result in a monopoly or would be in purchase. furtherance of any attempt to monopolize the business of The Board also has considered the managerial resources banking in any relevant banking market. The BHC Act also of the organizations involved. The Board has reviewed the prohibits the Board from approving a bank acquisition that examination records of Applicants, CNB, and CNB's sub would substantiaUy lessen competition in any relevant sidiary depository institution, including assessments of banking market, unless the anticompetitive etlects of the their management, risk-management systems, and opera proposal are clearly outweighed in the public interest by its tions. In addition, the Board has considered its supervisory probable effect in meeting the convenience and needs of the experiences and those of other relevant banking supervi community to be served.6 sory agencies, including the Office of the Comptroller of Caja Madrid does not control a U.S. depository institu the Currency ("OCC"), with the organizations and their tion, and the proposal would not result in an expansion of records of compliance with applicable banking law and CNB's operations. Based on all the facts of record, the with anti-money laundering laws. Applicants and CNB are Board concludes that consummation of the proposal would considered to be well managed. The Board also has consid have no significantly adverse etl'ect on competition or on ered Applicants' plans for implementing the proposal, the concentration of resources in any relevant banking including the proposed management after consummation. market. Accordingly, the Board has determined that com Based on all the facts of record, the Board has concluded petitive considerations are consistent with approval. that considerations relating to the financial and managerial resources and future prospects of the organizations involved FINANCIAL, MANAGERIAL, AND SUPERVISORY in the proposal are consistent with approval, as are the other CONSIDERATIONS supervisory factors.7 Section 3 of the BHC Act also provides that the Board Section 3 of the BHC Act requires the Board to consider the may not approve an application involving a foreign bank financial and managerial resources and future prospects of unless the bank is subject to comprehensive supervision or the companies and depository institutions involved in the regulation on a consolidated basis by the appropriate proposal and certain other supervisory factors. The Board authorities in the bank's home country.H As noted, the Bank has considered these factors carefully in light of all the facts of record, including confidential supervisory and examination information from the various U.S. banking 7. Section 3 of the BHC Act also requires the Board to determine supervisors of the institutions involved, and publicly that an applicant has provided adequate assurances that it will make reported and other financial information, including informa available to the Board such information on its operations and activities tion provided by Applicants. The Board also has consulted and those of its affiliates that the Board deems appropriate to deter mine and enforce compliance with the BHC Act (12 U.S.c. with the Bank of Spain, the agency with primary responsi § I 842(c)(3)(A)). The Board has reviewed the restrictions on disclo· bility for the supervision and regulation of Spanish banks, sure in the relevant jurisdictions in which Caja Madrid operates and including Caja Madrid. has communicated with relevant government authorities concerning In evaluating the financial factors in proposals involving access to information. In addition, Caja Madrid previously has com· mitted that, to the extent not prohibited by applicable law, it will make the formation of bank holding companies, the Board available to the Board such information on the operations of its reviews the financial condition of the applicant and the affiliates that the Board deems necessary to determine and enforce target depository institution. The Board also evaluates the compliance with the BHC Act, the International Banking Act, and financial position of the pro forma organization, including other applicable federal laws. Caja Madrid also previously has com its capital position, asset quality, and earnings prospects, mitted to cooperate with the Board to obtain any waivers or exemp· tions that may be necessary to enable its affiliates to make such and the impact of the proposed funding of the transaction. information available to the Board. In light of these commitments, the Board has concluded that Caja Madrid has provided adequate assur· ances of access to any appropriate information the Board may request. 4. Spanish asset and ranking data are as of June 30. 2008, and are 8. 12 U.S.c. § 1843(c)(3)(B). As provided in Regulation Y, the based on the exchange rate as of that date. Board determines whether a foreign bank is subject to consolidated 5. Statewide deposit and ranking data are as of June 30, 2007, and home-country supervision under the standards set forth in Regula· reflect merger activity through October 10,2008. tion K. See 12 CPR 22S.13(a)(4). Regulation K provides that a foreign 6. 12 U.S.C. § 1842(c)(l). bank will be considered subject to comprehensive supervision or

Legal Developments: Fourth Quarter; 2008 B25 of Spain is the primary supervisor of Spanish banks, CN Bank received an "outstanding" rating at its most including Caja Madrid. The Board previously has deter recent CRA performance evaluation by the DCC, as of mined that Caja Madrid is subject to comprehensive super April 6, 2006.14 Applicants have represented that they do vision on a consolidated basis by its home-country supervi not intend to make changes to CN Bank's CRA program on sorY Based on this finding and all the facts of record, the consummation. Board has concluded that Caja Madrid continues to be subject to comprehensive supervision on a consolidated B. HMDA and Fair Lending Record basis by its home-country supervisor. The Board has carefully considered the fair lending record and HMDA data of CN Bank in light of the public CONVENIENCE AND NEEDS CONSIDERATIONS comment received on the proposal. The commenter alleged, In acting on a proposal under section 3 of the BHC Act, the based on HMDA data, that CN Bank denied a dispropor Board is required to consider the effects of the proposal on tionate percentage of loan applications from African Ameri the convenience and needs of the communities to be served cans in the Metropolitan Statistical Areas ("MSAs") that and to take into account the records of the relevant insured include Miami and Ft Lauderdale. The Board focused its depository institutions under the CRA.IO The CRA requires analysis on the 2006 and 2007 HMDA data reported by CN the federal financial supervisory agencies to encourage Bank.ls insured depository institutions to help meet the credit needs Although the HMDA data might reflect certain dispari of the local communities in which they operate, consistent ties in the rates of loan applications, originations, and with their safe and sound operation, and requires the denials among members of different racial or ethnic groups appropriate federal financial supervisory agency to take in certain local areas, they provide an insufficient basis by into account a relevant depository institution's record of themselves on which to conclude whether or not CN Bank meeting the credit necds of its entire community, including is excluding or imposing higher costs on any group on a low- and moderate-income neighborhoods, in evaluating prohibited basis. The Board recognizes that HMDA data bank expansionary proposals. 11 alone, even with the recent addition of pricing information, The Board has considered carefully all the facts of provide only limited information about the covered loans. 16 record, including evaluations of the CRA performance HMDA data, therefore, have limitations that make them an records of CN Bank, data reported by CNB under the Home inadequate basis, absent other information, for concluding Mortgage Disclosure Act ("HMDA"),12 other information that an institution has engaged in illegal lending discrimi provided by Applicants, confidential supervisory informa nation. tion, and a public comment recei ved on the proposaL The The Board is nevertheless concerned when HMDA data commenter alleged, based on HMDA data reported in 2006, for an institution indicate disparities in lending and believes that CN Bank had engaged in disparate treatment of that all lending institutions are obligated to ensure that their minority individuals in home mortgage lending. lending practices are based on criteria that ensure not only safe and sound lending but also equal access to credit by eRA creditworthy applicants regardless of their race or ethnicity. A. Performance Evaluations Because of the limitations of HMDA data, the Board has As provided in the CRA, the Board has reviewed the considered these data carefully and taken into account other convenience and needs factor in light of the evaluations by information, including examination reports that provide the appropriate federal supervisor of the CRA performance on-site evaluations of compliance with fair lending laws by record of the relevant insured depository institution. An CN Bank. The Board also has consulted with the DCC institution's most recent CRA performance evaluation is a about the fair lending compliance record of CN Bank. particularly important consideration in the applications process because it represents a detailed, on-site evaluation of the institution's overall record of performance under the 14. With the exception of community development loans, the CRA by its appropriate federal supervisor. n evaluation period was January 1, 2002, through December 31. 2005. for the lending test. The evaluation period for community development loans, the investment test, and the service test was January 6, 2003. regulation on a consolidated basis if the Board determines that the through April 6. 2006. bank is supervised or regulated in such a manner that its home-country IS. The Board reviewed HMDA data from the Miami and Ft. supervisor receives sufficient information on the worldwide operations Lauderdale MSAs, as well as from CN Bank's entire CRA assessment of the bank, including its relationship with any affiliates, to assess the area. bank's overall financial condition and its compliance with laws and 16. The data, for example, do not account for the possibility that an regulations. See 12 CFR 211.24( c)(I). instiwtion's outreach efforts may attract a larger proportion of margin 9. See Caja de Ahorros y Monle de Piedad de Madrid. 87 Federal ally qualified applicants than other institutions attract and do not Reserve Bulletin 785 (2001). provide a basis for an independent assessment of whether an applicant 10. 12 U.S.c. § 1842 (c)(2). who was denied credit was. in fact, creditworthy. In addition, credit II. 12 U.s.c. §2903. history problems, excessive debt levels relative to income, and high 12. 12 U.S.C. §2801 et seq. loan amounts relative to the value of the real estate collateral (reasons 13. See Interagency Questions and Answers Regarding Community most frequently cited for a credit denial or higher credit cost) are not Reinvestment, 66 Federal Register 36,620 and 36,639 (2001). available from HMDA data.

B26 Federal Reserve Bulletin 0 March 2009 The record of this application, including confidential Applicants with the conditions in this order and all the supervisory information, indicates that CN Bank has taken commitments made to the Board in connection with the steps to ensure compliance with fair lending and other proposal. For purposes of this transaction, these commit consumer protection laws. CN Bank's compliance program ments and conditions are deemed to be conditions imposed includes self-assessments, fair lending internal audits, and in writing by the Board in connection with its findings and ongoing fair lending training for its employees. Applicants decision and, as such, may be enforced in proceedings have stated that they do not intend to change CN Bank's under applicable law. fair lending programs. The proposal may not be consummated before the 15th The Board also has considered the HMDA data in light calendar day after the effective date of this order, or later of other information, including the overall performance than three months after the effective date of this order, record of CN Bank under the CRA. These established unless such period is extended for good cause by the Board efforts and record of performance demonstrate that CN or by the Federal Reserve Bank of Atlanta, acting pursuant Bank is active in helping to meet the credit needs of its to delegated authority. entire community. By order of the Board of Governors, effective Octo ber 16, 2008. C. Conclusion on Convenience and Needs and CRA Performance Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Kroszner, and Duke, The Board has considered carefully all the facts of record, ROBERT DEY. FRIERSON including reports of examination of the CRA record of the Deputy Secretary of the Board institution involved, information provided by Applicants, comment received on the proposal, and confidential super visory information. The proposal will result in increased CIT Group Inc. credit availability and access to a broader range of financial New York, New York services for customers of CN Bank. Based on a review of the entire record, and for the reasons discussed above, the Order Approving Fonnation of a Bank Board concludes that considerations relating to the conve Holding Company and Notice to Engage in nience and needs factor and the CRA performance record of the relevant insured depository institution are consistent Certain Nonbanking Activities with approval of the proposal. CIT Group Inc. ("CIT Group") has requested the Board's approval under section 3 of the Bank Holding Company CONCLUSION Act ("BHC Act")1 to become a bank holding company on Based on the foregoing, and in light of all the facts of conversion of CIT Bank, Salt Lake City, Utah, to a state record, the Board has determined that the application bank. CIT Bank currently operates as an industrial loan should be, and hereby is, approved.17 In reaching its company that is exempt from the definition of "bank" conclusion, the Board has considered all the facts of record under the BHC Act? CIT Group has also requested the in light of the factors that it is required to consider under Board's approval pursuant to sections 4(c)(8) and 4(j) of the BHC Act and other applicable statutes. The Board's the BHC Act' to retain nonbanking subsidiaries that engage approval is specifically conditioned on compliance by in certain activities that are permissible for bank holding companies under the Board's Regulation Y, including credit extension, loan servicing, and related activities; 17. The commenter requested that the Board hold a public meeting leasing; financial and investment advisory services; private or hearing on the proposal. Section 3 of the BHC Act does not require placement services; certain investment transactions as prin the Board to hold a public hearing on an application unless the appropriate supervisory authority for the bank to be acquired makes a cipal; and credit-related insurance agency and underwriting written recommendation of denial of the application. The Board has activities.4 In addition, CIT Group has provided notice of not received such a recommendation from the appropriate supervisory its proposal to retain its foreign subsidiaries under sec authorities, Under its rules, the Board also may, in its discretion, hold a tion 4(c)(l3) of the BHC Act.s public meeting or hearing on an application to acquire a bank if Section 3(b)( 1) of the BHC Act requires that the Board necessary or appropriate to clarify factual issues related to the application and to provide an opportunity for testimony (12 CFR provide notice of an application under section 3 to the 225.I6(e), 262.25(d», The Board has considered carefully the com appropriate federal or state supervisory authority for the menter" s request in light of all the facts of record. In the Board's view, bank to be acquired and provide the supervisor a period of the commenter had ample opportunity to submit its views and. in fact, time (normally 30 days) within which to submit views and submitted written comments that the Board has considered carefully in acting on the proposal. The commenter's request fails to demonstrate why written comments do not present its views adequately or why a meeting or hearing otherwise would be necessary or appropriate, For I. 12 U.S.c. § 1842, these reasons, and based on all the facts of record, the Board has 2, 12 U,S,c' § 184I(c)(2)(H). determined that a public meeting or hearing is not required or 3, 12 U,S,c. §§ 1843(c)(8) and 18430). warranted in this case, Accordingly, the request for a public meeting or 4, See 12 CFR 22S.28(b)(1)-(3), (6), (8), and (II). hearing on the proposal is denied, 5, 12 U,S.c. § 1843(c)(13).

Legal Developments: Fourth Quarter, 2008 B27 -_ _-.----------.------- .... recommendations on the proposa\.6 The BHC Act also COMPETITIVE CONSIDERATIONS authorizes the Board to reduce or eliminate this notice period under certain circumstances.? Section 3 of the BHC Act prohibits the Board from In light of the unusual and exigent circumstances affect approving a proposal that would result in a monopoly. The ing the financial markets, and all other facts and circum BHC Act also prohibits the Board from approving a stances, the Board has determined that emergency condi proposed bank acquisition that would substantially lessen tions exist that justify expeditious action on this proposal in competition in any relevant banking market unless the accordance with the provisions of the BHC Act and the anticompetitive effects of the proposal are clearly out Board's regulations.s The Board has provided notice to the weighed in the public interest by the probable effect of the primary federal and state supervisors of CIT Bank, the proposal in meeting the convenience and needs of the Federal Deposit Insurance Corporation (HFDIC") and community to be served." Commissioner of the Utah Department of Financial Institu The proposal involves the conversion of an existing, tions and to the Department of Justice ("DOJ"). Those wholly owned industrial loan company subsidiary of CIT agencies have indicated that they have no objection to the Group into a bank with no resulting change in the owner approval of the proposal. For the same reasons, and in light ship of CIT Group or CIT Bank. In addition, CIT Group of the fact that this transaction represents the conversion of does not propose to acquire any additional depository an existing subsidiary of the CIT Group from one form of a institution as part of this proposal. Based on all the facts of depository institution to another, the Board has also waived record, the Board concludes that consummation of the public notice of this proposal.9 proposal would not result in any significantly adverse CIT, with total consolidated assets of approximately effects on competition or on the concentration of banking $80.8 billion, provides a variety of commercial financing resources in any relevant banking market and that the and leasing products and services.lO CIT Bank has total competitive factors are consistent with approval of the consolidated assets of approximately $3.1 billion and con proposal. trols deposits of approximately $2.3 billion. CIT Bank engages primarily in financing and lending activities and in FINANCIAL, MANAGERIAL, AND OTHER taking deposits of the type that are permissible for an SUPERVISORY CONSIDERATIONS industrial loan company under the exception in sec tion 2(c)(2)(H) of the BHC Act. 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 FACTORS GOVERNING BOARD REVIEW OF certain other supervisory factors. 14 The Board has carefully TRANSACTION considered these factors in light of all facts of record, The BHC Act sets forth the factors that the Board must including supervisory and examination information re consider when reviewing the formation of a bank holding ceived from the relevant federal and state supervisors of the company or the acquisition of a bank. These factors are the organizations involved in the proposal and other available competitive effects of the proposal in the relevant geo financial information, including information provided by graphic markets; the financial and managerial resources CIT Group. In addition, the Board has consulted with the and future prospects of the companies and banks involved primary federal and state supervisors of CIT Group and in the proposal; the convenience and needs of the commu CIT Bank. nity to be served, including the records of performance The Board consistently has considered capital adequacy under the Community Reinvestment Act" ("CRA") of the to be an especially important aspect in analyzing financial insured depository institutions involved in the transaction; factors. CIT Group has converted debt and raised a material and the availability of information needed to determine and amount of capital from third parties. CIT Group is ad enforce compliance with the BHC Act and other applicable equately capitalized and as a result of its successful efforts federal banking laws.12 to raise additional capital, will be well capitalized prior to consummation. In addition, CIT Bank is currently well capitalized under applicable federal guidelines, and it will 6. 12 U.S.C. § 1842(b)(\); 12 CFR 225. I 5(b). remain well capitalized on a pro forma basis on consumma 7. 12 U.S.c. § 1842(b)(1 l. 8. 12 U.S.c. § \ 842(b)(I); 12 CFR 225.l6(b)(3), 225. 16(g)(2), and tion of the proposaL Other financial factors are consistent 262.3(1). with approval. 9. ld. In addition, the Board has carefully considered the 10. Asset data for CIT Group and asset and deposit data for CIT managerial resources of CIT Group and CIT Bank in light Bank are as of September 30, 2008. of all the facts of record, including confidential supervisory II. 12 U.S.c. §2901 et seq. 12. In cases involving interstate bank acquisitions by bank holding and examination information and information provided by companies, the Board also must consider the concentmtion of deposits CIT Group. The Board has considered the supervisory in the nation and relevant individual states, as well as compliance with experience of the relevant federal and state supervisory the other provisions of section 3(d) of the BHC Act. Because the proposed transaction does not involve an interstate bank acquisition by a bank holding company, the provisions of section 3(d) of the BHC Act 13. 12 U.S.C. § I 842(c)(I). do not apply in this case. 14. 12 U.S.C. § 1842(cl(2) and (3).

B28 Federal Reserve Bulletin 0 March 2009 agencies of CIT Group and its insured depository institu has reviewed information from CIT Bank about the actions tion with the organization and institution and their records it proposes to take with respect to its consumer lending of compliance with applicable banking law and anti activities and has consulted with the FDIC about these money-laundering laws. The Board has engaged in discus proposed actions. Importantly, the Board has also consid sions with the FDIC regarding its views on management ered the FDIC's most current review of the CRA perfor processes and risk-management systems at both CIT Group mance and compliance activities of the bank and the and CIT Bank. In addition, the Board has carefully consid FDIC's views on this application, ered information from CIT Group about the organization's Based on a review of the entire record and for the business strategy and the actions it is taking and proposing reasons discussed above, including the consultations with to take to strengthen the organization's risk-management the FDIC, the Board has concluded that considerations systems, as well as its business plans for the bank. The relating to convenience and needs and the CRA perfor Board also has consulted with the FDIC about these plans mance record of CIT Bank are consistent with approval of and actions to strengthen CIT Group's risk-management the proposal. systems. Based on all the facts of record, the Board concludes that NONBANKING ACTIVITIES considerations relating to the financial and managerial resources and future prospects of the organizations involved As noted, CIT Group also has filed a notice under sec are consistent with approval, as are the other supervisory tions 4(c)(8) and 4(j) of the BHC Act to engage in certain factors under the BHC Act. lending, leasing, advisory, securities, investment, and insur ance activities that are permissible for bank holding com panies through its non banking subsidiaries. The Board has CONVENIENCE AND NEEDS AND CRA determined by regulation that such activities are permis PERFORMANCE CONSIDERATIONS sible for a bank holding company under Regulation Y,18 and CIT Group has committed to conduct these activities in In acting on a proposal under section 3 of the BHC Act, the accordance with the limitations set forth in Regulation Y Board must consider the effects of the proposal on the and the Board's orders governing these activities. convenience and needs of the communities to be served and To approve this notice, the Board must also determine to take into account the records of the relevant depository that the performance of the proposed activities by CIT institutions under the CRA.IS Group "can reasonably be expected to produce benefits to The Board has carefully considered the convenience and the public . , . that outweigh possible adverse effects, such needs factor and the CRA performance records of CIT as undue concentration of resources, decreased or unfair Bank in light of all the facts of record. As provided in the competition, conflicts of interests, or unsound banking CRA, the Board evaluates the record of performance of an practices." As part of its evaluation of these factors, the institution in light of examinations by the appropriate 19 Board has considered the financial and managerial re federal supervisors of the CRA performance records of the sources of CIT Group and its subsidiaries and the efiect of relevant instilutions.16 the proposed transaction on their resources. For the reasons CIT Bank received a "satisfactory" rating under the noted above, and based on all the facts of record, the Board CRA at its most recent performance evaluation by the has concluded that financial and managerial considerations FDIC, as of October 28, 2002. Consistent with the CRA are consistent with approval of the notice. regulations adopted by the federal banking agencies, CIT In addition, the Board must consider the competitive Bank was evaluated under the community development test efiects of a proposal to engage in nonbanking activities as a limited purpose institution,l7 CIT Group has repre under the public benefits factor of section 4(j) of the BHC sented that the conversion of CIT Bank to a bank for Act. The proposal involves the retention of CIT Group's purposes of the BHC Act will enhance the ability of the existing nonbank subsidiaries, and CIT Group would not bank to meet the convenience and needs of its community acquire any additional nonbank subsidiaries as part of this and customers nationwide by permitting the bank to offer a proposaL Accordingly, the Board concludes that consum wider array of deposit products. mation of the proposal would not result in any significantly The Board has engaged in discussions about CIT Bank's adverse effects on competition in any relevant market. CRA and consumer compliance performance with the CIT Group is a leading provider of factoring services in FDIC, which is the primary federal supervisor for CIT the United States and a leading lender in the Small Bank and examines the bank for its CRA performance. In Business Administration's 7a programs. The proposal particular, the Board has considered information collected would benefit the public by strengthening CIT Group's by the FDIC since its last evaluation. In addition, the Board ability to offer its non banking products and services to customers nationwide. 15. 12 U.S.c. §2903; 12 U.S.c. § 1842(c)(2). The Board concludes that the conduct of the proposed 16. The Interagency Questions and Answers Regarding Commu nonbanking activities within the framework of Regulanity Reinvestment provide that a CRAex:amination is an important and often controlling factor in the consideration of an institution's CRA record. See 64 Federal Register 23,641 (1999). 18. 12 CFR 225.28(b)(I H3). (6), (8), and (11). 17. See. e.g., 12 CFR 228.2I(a)(2). 19. See 12 U.S.c. § 1843(j)(2)(A).

Legal Developments: Fourth Quarter, 2008 B29 tion Y and Board precedent can reasonably be expected to termination of the activities of a bank holding company or produce public benefits that would outweigh any likely any of its subsidiaries as the Board finds necessary to adverse effects. Accordingly, based on all the facts of ensure compliance with, and to prevent evasion of, the record, the Board has determined that the balance of the provisions of the BHC Act and the Board's regulations and public benefits factor under section 40)(2) of the BHC Act orders issued thereunder. These conditions and commit is consistent with approval. ments are deemed to be conditions imposed in writing by CIT Group engages in a small amount of activities that the Board in connection with its findings and decision and, may not conform to the requirements of the BHC Act. as such, may be enforced in proceedings under applicable Section 4 of the BHC Act by its terms also provides any law. company that becomes a bank holding company two years The proposal does not involve the acquisition, merger, or within which to conform its existing nonbanking invest consolidation of a bank. On this basis and after consultation ments and activities to the section's requirements, with the with the DOJ, the Board has determined that the post possibility of three one-year extensions.20 CIT Group must consummation period in section II of the BHC Act does conform any impermissible nonfinancial activities and not apply to consummation of the conversion of CIT investments that it currently conducts or holds, directly or Bank.23 Accordingly, the transaction may be consummated indirectly, to the requirements of the BHC Act within the immediately but not later than three months after the time periods provided by the act. effective date of this order, unless such period is extended CIT Group also has provided notice of its proposal to for good cause by the Board or by the Federal Reserve retain its foreign bank subsidiaries under section 4(c)(I3) Bank of New York, acting pursuant to delegated authority. of the BHC Act. Based on the record, the Board has no By order of the Board of Governors, effective Decem . objection to the retention of such subsidiaries. ber 22.2008. Voting for this action: Chairman Bcrnanke, Vice Chairman Kohn. CONCLUSION and Governors Warsh, Kroszner, and Duke. Based on the foregoing and all the facts of record, the ROBERT DEY. FRIERSON Board has determined that the application under section 3 Deputy Secretary of the Board and notices under section 4 of the BHC Act should be, and hereby are, approved.21 In reaching its conclusion, the GMAC LLC Board has considered all the facts of record in light of the factors that the Board is required to consider under the BHC Act. The Board's approval is specifically conditioned IB Finance Holding Company, LLC on compliance by CIT Group with all the conditions Detroit, Michigan imposed in this order and all the commitments made to the Board in connection with the application and notices. The Order Approving Formation of Bank Holding Board's approval of the nonbanking aspects of the proposal also is subject to all the conditions set forth in Regulation Y, Companies and Notice to Engage in Certain including those in sections 225.7 and 225.25(c),22 and to Nonbanking Activities the Board's authority to require such modification or GMAC LLC and IB Finance Holding Company, LLC ("IBFHC") (collectively, "GMAC" or "Applicants") have 20. See 12 U.S.C. § 1843(a)(2). requested the Board's approval under section 3 of the Bank 21. A commenter requested that the Board hold a public meeting or hearing on the proposal. Section 3(b) of the BHC Act does not require Holding Company Act ("BHC Act")l to become bank the Board to hold a public hearing on an application unless the holding companies on conversion of GMAC Bank, Mid appropriate supervisory authorities for the bank to be acquired make a vale, Utah, to a commercial bank.2 GMAC Bank currently timely written recommendation of denial of the application. The Board operates as an industrial loan company and is exempt from has not received such a recommendation from the appropriate super the definition of "bank" under the BHC AcP GMAC has visory authorities. The Board's regulations provide for a hearing under section 4 of the BHC Act if there are disputed issues of material fact also requested the Board's approval pursuant to sec that cannot be resolved in some other manner (12 CFR 225.25(a)(2». tions 4(c)(8) and 40) of the BHC Act4 to retain its Under its regulations. the Board also may, in its discretion. hold a nonbanking subsidiaries that engage in certain activities puhlic meeting or hearing on an application to acquire a bank if a that are permissible for bank holding companies under the meeting or hearing is necessary or appropriate to clarify factual issues related to the application and to provide an opportunity for testimony Board's Regulation Y, including certain credit extension, (12 CFR 225.16(e». The Board has considered carefully the comment er's request in light of all the facts of record. The request fails to identify disputed issues of fact that are material to the Board's decision 23. 12 U.S.C. § I 849(b)(1). that would be clarified by a public meeting or hearing. For these reasons, and based on all the facts of record, the Board has determined I. 12 U.S.c. § 1842. that a public meeting or hearing is not required or warranted in this 2. GMAC Bank is a direct subsidiary of IBFHC and an indirect case. Accordingly, the request for a public meeting or hearing on the subsidiary of GMAC LLC. proposal is denied. 3. 12 U.S.c. § 184I(c)(2)(H). 22. 12 CFR 225.7 and 225.25(c). 4. 12 U.S,c. §§ I 843(c)(8) and (j).

B30 Federal Reserve Bulletin 0 March 2009 loan servicing, leasing, and related activities.s GMAC has Community Reinvestment Act ("CRA")12 of the insured also provided notice to retain its foreign subsidiaries under depository institutions involved in the transaction; and the section 4(c)( 13) of the BHC Act.6 availability of infonnation needed to detennine and enforce Section 3(b)( I) of the BHC Act requires that the Board compliance with the BHC Act and other applicable federal provide notice of an application under section 3 to the banking laws.13 appropriate federal or state supervisory authority for the In addition, this application presents a number of unique banks to be acquired and provide the supervisor with a issues. In particular, GMAC has a long historical relation period of time (normally 30 days) within which to submit ship with General Motors Corporation ("GM"). Since views and recommendations on the proposaJ.7 The BHC founding GMAC, GM has held a significant ownership Act also authorizes the Board to reduce or eliminate these position in GMAC, and GMAC has been the primary notice periods under certain circumstances.~ source of financing to customers and dealerships seeking to In light of the unusual and exigent circumstances affect purchase or lease GM vehicles. GMAC proposes to con ing the financial markets, and all other facts and circum tinue to provide funding to customers and dealerships to stances, the Board has determined that emergency condi enable them to acquire and lease vehicles from GM, though tions exist that justify expeditious action on this proposal in as noted below, GMAC proposes to diversify its activities accordance with the provisions of the BHC Act and the and has modified in significant ways its agreement with Board's regulationsY The Board has provided notice to the GM to provide customer and dealership financing. Al primary federal and state supervisors of GMAC Bank, the though GM owns a significant portion of GMAC, a group Federal Deposit Insurance Corporation ("FDIC") and the of entities controlled by or aftiliated with a private invest Commissioner of the Utah Department of Financial Institu ment firm, Cerberus Capital Management, L.P. ("Cer tions ("UDFl"), and to the Department of Justice ("DOJ"). berus"), currently owns a majority of the shares of GMAC. Those agencies have indicated that they have no objection Neither GM nor Cerberus is able to comply with the to approval of the proposaL For the same reasons, and in nonbanking activities restrictions in the BHC Act. Conse light of the fact that this transaction involves the conversion quently, neither may retain a controlling interest in GMAC, of an existing subsidiary of Applicants from one fonn of a within the meaning of the BHC Act, if this application is depository institution to another and the retention of Appli approved. cants' existing nonbanking subsidiaries, the Board has also In reviewing the factors under the BHC Act, including waived public notice of this proposaL the issues noted above, the Board has considered all the lO GMAC, with total consolidated assets of approximately facts and circumstances. This review has included the $211.3 billion, engages in automotive financing, commer record regarding the financial and managerial resources of cial financing, mortgage financing, insurance, and other GMAC and GMAC Bank, their future prospects, and the activities both in the United States and abroad.11 GMAC effects of this proposal on the convenience and needs of the Bank has total consolidated assets of approximately $33 bil communities served by these entities. Among other things. lion and controls deposits of approximately $17 billion. the Board has considered the business plans of GMAC's GMAC Bank engages primarily in lending and other management to diversify the activities of GMAC and its financing activities and taking deposits of the type that are plans for GMAC Bank; the successful efforts of manage pennissible for an industrial loan company under the ment of GMAC to raise capital; the experience of senior exception in section 2(c)(2)(H) of the BHC Act management of GMAC in other organizations that are regulated as bank holding companies; the steps taken by the FACTORS GOVERNING BOARD REVIEW OF THE management of GMAC and GMAC Bank to address PROPOSED BANK HOLDING COMPANIES concerns raised by the bank's supervisors and to prepare to operate within the framework established by the BHC Act; The BHC Act sets forth the factors the Board must consider and the public benefits that would accrue from approval of when reviewing the fonnation of a bank holding company this proposal, including those resulting from the operation or the acquisition of a bank. These factors are the competi of GMAC as a regulated entity. The Board has also tive effects of the proposal in the relevant geographic considered the steps taken by the Department of the markets; the financial and managerial resources and future Treasury to provide assistance to GM and thereby help prospects of the companies and banks involved in the ensure the viability of a major business partner of GMAC proposal; the convenience and needs of the community to and GMAC Bank. In addition, the Board has had extensive be served including the records of perfonnance under the consultations with the FDIC, the primary federal supervisor 5. 12 CFR 225.28(b)(l)-{3). 6. 12 U.S.C. § I 843(c)(13). 12. 12 U.S.C §2901 et seq. 7. 12 U.S.C § I 842(b)(l); 12 CFR 225.15(b). 13. In cases involving interstate bank acquisitions by bank holding 8. 12 U.S.C § I 842(b)(I). companies. the Board also must consider the concentration of deposits 9. 12 U.S.C. § 1842(b)(I); 12 CFR 225.16(b)(3), 225.16(g)(2), and in the nation and relevant individual states, as well as compliance with 262.3(/). the other provisions of section 3(d) of the BHC Act. Because the 10. 12 CFR 225.16(b)(3), 225.16(g)(2}. and 262.3(1). proposed transaction does not involve an interstate bank acquisition by II. Asset and deposit data for GMAC and GMAC Bank are as of a bank holding company. the provisions of section 3( d) of the BHC Act September 30. 2008. do not apply in this case.

Legal Developments: Fourth Quarter, 2008 B3l ------of GMAC Bank, and has consulted with the UDFI, the have any advisory relationships with GMAC or any inves chartering authority and state supervisor for GMAC Bank. tor regarding the vote or sale of shares or the management The Board has also carefully considered the plans and or policies of GMAC or GMAC Bank.17 commitments made by GM and Cerberus promptly to Based on the entire record, and for the reasons explained conform their respective ownership interests in GMAC to more fully below, the Board has determined that the the requirements of the BHC Act. To address concerns that proposal meets the requirements of the BHC Act and, GM could control GMAC and GMAC Bank for purposes consequently, has approved the proposal. of the BHC Act, GM has committed to the Board that before consummation of the proposal, GM will reduce its FINANCIAL, MANAGERIAL, AND OTHER ownership interest in GMAC to less than 10 percent of the SUPERVISORY CONSIDERATIONS voting and total equity interest of GMAC. GM's remaining equity interest in GMAC will be transferred to a trust that Section 3 of the BHC Act requires the Board to consider the has a trustee acceptable to the Board and the Department of financial and managerial resources and future prospects of the Treasury, who will be entirely independent of GM and the companies and banks involved in the proposal and have sole discretion to vote and dispose of the GMAC certain other supervisory factors.lg The Board also reviews equity interests.14 The trustee must dispose of the equity the financial and managerial resources of the organization interests held in the trust within three years of the trust's involved in the proposal under section 4 of the BHC Act. creation. In addition, GM has made commitments to the The Board has carefully considered these factors in light of Board that are similar to those the Board previously has all the facts of record, including supervisory and examina relied on to ensure that a company could not exercise a tion information received from the relevant federal and controlling influence over a bank or bank holding com state supervisors of the organizations involved in the pany.IS Until the trust fully divests the shares, the limita proposal and other available financial information, includ tions of sections 23A and 23B of the Federal Reserve Act ing information provided by Applicants. In addition, the will apply to GM and GMAC Bank as if they were Board has consulted with the primary federal and state affiliates.16 GMAC has committed to amend its existing supervisors of GMAC Bank. agreements with GM to remove any restrictions on GMAC' s In analyzing financial factors, the Board consistently has ability to engage in transactions with unrelated third parties considered capital adequacy to be an especially important and to ensure that GMAC has complete discretion to set the aspect. The Board has considered GMAC's successful terms of its financing arrangements. efforts to raise additional capital and that, as a reSUlt, To ensure that Cerberus's holdings in GMAC are consis GMAC will be well capitalized on completion of the tent with the Board's precedent on noncontrolling invest proposal, as well as commitments GMAC has made to ments in banks and bank holding companies, each Cerberus maintain its capital at a high level for a specified time fund that holds interests in GMAC will distribute its equity period. In addition, GMAC Bank is currently well capital interests in the company to its respective investors. As a ized under applicable federal guidelines. GMAC Bank also result of this distribution, the aggregate direct and indirect would be well capitalized on a pro forma basis on consum investments controlled by Cerberus and its related parties mation of the proposal. The Board has consulted with the would not exceed 14.9 percent of the voting shares or FDIC, the primary federal supervisor of GMAC Bank, 33 percent of the total equity of GMAC LLC. The investors about the adequacy of the bank's capital for its current and that receive shares in the distribution from the Cerberus pro forma operations and the future prospects of GMAC funds are each sophisticated investors and are independent Bank in light of its business plans. Moreover, as noted of Cerberus and independent of each other. No investor above, the Board has considered that the Department of the WOUld, after this distribution, own, hold, or control 5 per Treasury has taken a number of steps including providing cent or more of the voting shares or 7.5 percent of the total credit to GM, which for some time will continue to be a equity of GMAC LLC. Cerberus has made a number of major business partner of GMAC, in order to help stabilize commitments previously found by the Board to be helpful GM and improve its viability. in limiting the ability of an investor to exercise a control In addition, the Board has considered carefully the ling interest over a banking organization. In addition, managerial resources of Applicants in light of all the facts Cerberus employees and consultants would cease providing of record, including confidential supervisory and examina services to, or otherwise functioning as dual employees of, tion information and information provided by the Appli GMAC, and neither Cerberus nor any affiliated entity will cants. The Board has considered the supervisory experience of the relevant federal and state supervisory agencies with 14. The trust agreement and trustee must be acceptable to the 17. A commenter opposed approval of the application because. in Board. the comrnenter' s view. approval would breach the separation between 15. In rare and unusual situations when warranted by the public banking and commerce in the BHC Act. As discussed above. GM and interest. the Board previously has used the device of a trust as an Cerberus have restructured their respective ownership interests to be interim measure to facilitate the sales of shares to conform with the consistent with the BHC Act limitations on banking and commerce requirements of the BHC Act. See Board Letter to Stuart M. Plevin, and with the Board's policies and precedent on noncontrolling invest Esq. dated June 26. 2000. ments in banks and bank holding companies. 16. 12 U.S.C. §§ 371c and 371 c-1. 18. 12 U.s.c. § I 842(c)(2) and (3).

B32 Federal Reserve Bulletin D March 2009 Applicants and GMAC Bank and their records of compli market and that the competitive factors are consistent with ance with applicable banking law and anti-money approval of the proposal. laundering laws. The Board also has considered the experi ence of management of GMAC, both at GMAC and more CONVENIENCE AND NEEDS AND CRA broadly in managing a regulated entity subject to the PERFORMANCE CONSIDERATIONS requirements applicable to bank holding companies. The Board has consulted the FDIC regarding its views on In acting on a proposal under section 3 of the BHC Act, the management processes and risk-management systems at Board must consider the effects of the proposal on the both GMAC and GMAC Bank. In addition, the Board has convenience and needs of the communities to be served and carefully considered information from GMAC about the take into account the records of the relevant depository organization's business strategy, as well as its business institutions under the CRA.20 plans for the holding company and bank, and the actions it The Board has carefully considered the convenience and is taking and proposing to take to strengthen the organiza needs factor and the CRA performance records of GMAC tion's risk-management infrastructure and to diversify its Bank in light of all the facts of record. As provided in the customer base and sources of income. The Board also has CRA, the Board evaluates the record of performance of an consulted with the fUIC about these plans and actions to institution in light of examinations by the appropriate strengthen GMAC and GMAC Bank's risk-management federal supervisors of the CRA performance records of the infrastructure and diversify its business operations. relevant institutions.21 The Board also has considered carefully the future GMAC Bank received an "outstanding" rating under the prospects of GMAC and GMAC Bank, including their CRA at its most recent performance evaluation by the business plans, in light of all the facts and circumstances, FDIC, as of February 27, 2006 (the "FDIC Examination"). and the actions they already have taken and plan to take to Consistent with the CRA regulations adopted by the federal strengthen their financial condition and management sys banking agencies, GMAC Bank was evaluated under the tems and to diversify their business operations. As noted, community development test as a limited purpose institu the Board also has considered the actions taken by the tion.22 Applicants have represented that the conversion of Department of the Treasury to provide financial assistance GMAC Bank to a bank for purposes of the BHC Act will to stabilize GM, which would benefit GMAC and GMAC enhance the ability of the bank to meet the convenience and Bank while they remain an important provider of financing needs of its communities by permitting the bank to offer a for vehicles manufactured by GM. wider array of deposit products and strengthening the Based on all the facts of record, the Board concludes that bank's ability to continue to serve as a significant source of considerations relating to the financial and managerial automobile financing, including for vehicles from compa resources and future prospects of the organizations involved nies other than GM. are consistent with approval, as are the other supervisory The Board has engaged in extensive consultation with factors under the BHC Act. the FDIC about GMAC Bank's CRA and consumer com pliance performance since its last evaluation. In addition, the Board has received information from GMAC Bank COMPETITIVE CONSIDERATIONS about the actions it will take with respect to its consumer lending activities on conversion of the industrial loan Section 3 of the BHC Act prohibits the Board from company to a bank and has consulted with the FDIC about approving a proposal that would result in a monopoly. The these proposed actions. BHC Act also prohibits the Board from approving a Based on a review of the entire record, and for the proposed bank acquisition that would substantially lessen reasons discussed above, the Board has concluded that competition in any relevant banking market unless the considerations relating to convenience and needs consider anticompetitive efrects of the proposal are clearly out ations and the CRA performance record of GMAC Bank weighed in the public interest by the probable efrect of the are consistent with approval of the proposal. proposal in meeting the convenience and needs of the community to be served. 19 The proposal involves the conversion of an existing. NONBANKING ACTIVITIES wholly owned industrial loan company subsidiary of Appli As noted, GMAC also has filed a notice under sec cants into a bank with no resulting change in the ownership tions 4(c)(8) and 4(j) of the BHC Act to engage in certain of GMAC Bank. Applicants do not propose to acquire any credit extension and servicing, leasing, and related activi additional depository institution as part of this proposal. ties that are permissible for a bank holding company Based on all the facts of record, the Board concludes that consummation of the proposal would not result in any significantly adverse efl'ects on competition or on the 20. 12 V.S.c. *2903; 12 V.S.c. § 18 42(c)(2). concentration of banking resources in any relevant banking 21. The Interagency Questions and Answers Regarding Commu nity Reinvestment provide that a CRA examination is an important and often controlling factor in the consideration of an institution's CRA record. See 64 Federal Register 23,641 (1999). 19. 12 V.S.c. § 1842(c)(1). 22. See, e.g. . 12 CFR 228.21 (a)(2).

Legal Developments: Fourth Quarter, 2008 B33 directly and through its nonbanking subsidiaries.23 GMAC CONCLUSION has committed to conduct these activities in accordance with the limitations set forth in Regulation Y and the Based on the foregoing, the Board has determined that the Board's orders governing these activities. application under section 3 and the notices under section 4 To approve this notice, the Board must also determine of the BHC Act should be, and hereby are, approved.26 In that the performance of the proposed activities by GMAC reaching its conclusion, the Board has considered all the "can reasonably be expected to produce benefits to the facts of record in light of the factors that the Board is public ... that outweigh possible adverse effects, such as required to consider under the BHC Act. The Board's undue concentration of resources, decreased or unfair approval is specifically conditioned on compliance by competition, conflicts of interests, or unsound banking Applicants and GMAC's shareholders with the conditions practices."24 As part of its evaluation of these factors, the imposed in this order and all the commitments they made to Board has considered the financial and managerial re the Board in connection with the application and notices. sources of GMAC and its subsidiaries and the effect of the The Board's approval of the nonbanking aspects of the proposed transaction on their resources. For the reasons proposal also is subject to all the conditions set forth in noted above, and based on all the facts of record, the Board Regulation Y, including those in sections 225.7 and has concluded that financial and managerial considerations 225.25(c),27 and to the Board's authority to require such are consistent with approval of the notice. modification or termination of the activities of a bank In addition, the Board must consider the competitive holding company or any of its subsidiaries as the Board effects of a proposal to engage in nonbanking activities finds necessary to ensure compliance with, and to prevent under the public benefits factor of section 40) of the BHC evasion of, the provisions of the BHC Act and the Board's Act. The proposal involves the retention of GMAC's regulations and orders issued thereunder. These commit existing non banking subsidiaries, and GMAC would not ments and conditions are deemed to be conditions imposed acquire any additional nonbanking subsidiaries as part of in writing by the Board in connection with its findings and this proposal. Accordingly, the Board concludes that con decision and, as such, may be enforced in proceedings summation of the proposal would not result in any signifi under applicable law. cantly adverse effects on competition in any relevant The proposal does not involve the acquisition, merger, or market. consolidation of a bank. On this basis and after consultation GMAC is one of the nation's largest automoti ve finance with the DOl, the Board has determined that the post companies. The proposal would benefit the public by consummation period in section 11 of the BHC Act does strengthening GMAC's ability to fund the purchases of not apply to the consummation of the conversion of GMAC vehicles manufactured by GM and other companies and by Bank.28 Accordingly, the transaction may be consummated helping to normalize the credit markets for such purchases. immediately but may not be consummated later than three The Board concludes that the conduct of the proposed months after the effective date of this order, unless such nonbanking activities within the framework of Regula period is extended for good cause by the Board or by the tion Y and Board precedent can reasonably be expected to Federal Reserve Bank of Richmond, acting pursuant to produce public benefits that would outweigh any likely delegated authority. adverse effects. Accordingly, based on all the facts of By order of the Board of Governors, effective Decem record, the Board has determined that the balance of the ber 24,2008. public benefits factor under section 40)(2) of the BHC Act is consistent with approval. GMAC engages in a small amount of activities that may 26. A commenter requested that the Board hold a public meeting or not conform to the requirements of the BHC Act. Section 4 hearing on the proposal. Section 3(b) of the B He Act does not require the Board to hold a public hearing on an application unless the of the BHC Act by its terms also provides any company appropriate supervisory authority for the bank to be acquired makes a that becomes a bank holding company two years within timely written recommendation of denial of the application. The Board which to conform its existing nonbanking investments and has not received such a recommendation from the appropriate super activities to the section's requirements, with the possibility visory authorities. The Board's regulations provide for a hearing under section 4 of the BHC Act if there are disputed issues of material fact of three one-year extensions.25 GMAC must conform to the that cannot be resolved in some other manner (12 CFR 225.25(a)(2». BHC Act any impermissible nonfinancial activities and Under its regUlations, the Board also may, in its discretion, hold a investments that they currently conduct or hold, directly or public meeting or hearing on an application to acquire a bank if a indirectly, within the time requirements of the act. meeting or hearing is necessary or appropriate to claritY factual issues GMAC also has provided notice of its proposal to retain related to the application and to provide an opportunity for testi mony (12 CFR 22S.I6(e». The Board has considered carefully the comment its foreign subsidiaries under section 4(c)(13) of the BHC er's request in light of all the facts of record. The request fails to Act. Based on the record, the Board has no objection to the identify disputed issues of fact that are material to the Board's decision retention of such subsidiaries. that would be clarified by a public meeting or hearing. For these reasons. and based on all the facts of record, the Board has determined that a public meeting or hearing is not required or warranted in this case. Accordingly, the request for a public meeting or hearing on the 23. 12 CFR 225.28(b)(I)-(3). proposal is denied. 24. See 12 U.S.c. § 1843(j)(2)(A). 27. 12 CPR 225.7 and 225.25(c). 25. See 12 U.S.c. § 1843(a)(2). 28. 12 U.S.c. § 1849(b)(I).

B34 Federal Reserve Bulletin 0 March 2009 Voting for this action: Chairman Bernanke, Vice Chairman Kohn, BHC Act imposes a similar requirement with respect to a and Governors Warsh, and Kroszner. Voting against this action: notice to acquire a savings association.6 In light of the Governor Duke. unusual and exigent circumstances affecting the financial markets and all other facts and circumstances, and in JENNIFER J. JOHNSON accordance with the provisions of the BHC Act and the Secretary of the Board Board's regulations, the Board has shortened to 10 days the notice and comment period to the primary regulators of the Mitsubishi UFJ Financial Group, Inc. banks and savings associations involved in, and waived Tokyo, Japan public notice of, this proposal? The Board has contacted the primary federal supervisors of the insured depository institutions and the Department of Justice; those agencies Order Approving Acquisition of Interests in a have indicated they have no objection to consummation of Bank Holding Company and Certain the proposal. Nonbanking Subsidiaries Based on all the facts of record, the Board has concluded that all the factors it must consider in acting on the Mitsubishi UFJ Financial Group, Inc. ("MUFG"), a for application and notices are consistent with approval. The eign banking organization that is a financial holding com application and notices are hereby approved by the Board pany I for purposes of the Bank Holding Company Act for the reasons set forth in the Board's Statement, which (HBHC Act"), has requested the Board's approval under will be released at a laler date. section 3 of the BHC Act2 to acquire up to 24.9 percent of The Board's approval is specifically conditioned on the voting shares of Morgan Stanley ("Morgan"), compliance by MUFG with all the commitments made in New York, New York, and thereby indirectly acquire an connection with the proposal and on the receipt, in a form interest in Morgan's subsidiary bank, Morgan Stanley acceptable to the Board, of commitments by MUFG that it Bank, National Association, Salt Lake City, Utah. In addi will not exercise a controlling influence over Morgan. This tion, MUFG has requested the Board's approval under approval also is subject to all the conditions set forth in sections 4(c)(8) and (4)(j) of the BHC Act to acquire an Regulation Yand to the Board's authority to require such indirect interest in Morgan's subsidiary savings associa modification or termination of the nonbanking activities of tion, Morgan Stanley Trust, Jersey City, New Jersey, and a bank holding company or any of its subsidiaries as the Morgan's subsidiary trust company, Morgan Stanley Trust Board finds necessary to ensure compliance with, and to National Association, Wilmington, Delaware.' MUFG also prevent evasion of, the provisions of the BHC Act and the has provided notice of its proposal to acquire an indirect Board's regulations and orders issued thereunder. These interest in the foreign bank subsidiaries of Morgan under commitments and conditions are deemed to be conditions section 4(c)(l3) of the BHC Act.4 imposed in writing by the Board in connection with its Section 3(b)( I) of the BHC Act requires that the Board findings and decision and, as such, may be enforced in provide notice of an application under section 3 to the proceedings under applicable law. appropriate federal or state supervisory authority for the The acquisition may not be consummated before the banks to be acquired and provide the supervisor a period of fifth calendar day after the effective date of this order, or time (normally 30 days) within which to submit views and later than three months after the effective date of this order, recommendations on the proposal.s Section 4(i)(4) of the unless such period is extended for good cause by the Board or by the Federal Reserve Bank of San Francisco, acting I. The elections by MUFG. The Bank of Tokyo-Mitsubishi UFJ, pursuant to delegated authority. Ltd., and Mitsubishi UFJ Trust and Banking Corporation, all of Tokyo, By order of the Board of Governors, effective October 6, and UnionBanCaI Corporation, San Francisco, California, to become 2008. financial holding companies pursuant to sections 4(k) and (l) of the BHC Act and sections 225.82(b)( \) and 225.91 (b)(I) of Regulation Y Voting for this action: Chairman Bernanke, Vice Chairman Kohn, became effective as of October 6, 200S. See Board leIter to Donald J. and Governors Warsh, Kroszner, and Duke. Tourney, Esq., dated October 6, 200S. 2. 12 US.C. § 1842. See 12 CFR 225.15. 3. 12 US.C § IS43(c)(S) and (j). See 12 CFR 225.24. The Board ROBERT DEY. FRIERSON previously has determined by regulation that the operation of a savings Deputy Secretary of the Board association and a trust company by a bank holding company is closely related to banking for purposes of section 4(c)(S) of the BHC Act (12 CFR 225.2S(b)(4)(ii) and (5»). 6. 12 U.S.c. § 1843(i)(4). 4. 12 U.S.c. § 1S 43(c)(I 3). 7. 12 U.S.C. §§ I 842(b)(I) and 1843(i)(4); 12 CFR 225.16(b)(3), 5. 12 U.S.C. § 1842(b)(1); 12 CFR 225.15(b). 225.16(g)(2), 225.25(d), and 262.3(1).

Legal Developments: Fourth Quarter, 2008 B35 ------------------------------------~ Mitsubishi UFJ Financial Group, Inc. Justice ("DOJ"); those agencies have indicated that they have no objection to the consummation of the proposaJ.7 Tokyo, Japan For the same reasons, and in light of the fact that this transaction represents a minority, noncontrolling invest Statement by the Board of Governors of the ment in Morgan and its subsidiary depository institutions, Federal Reserve System Regarding the the Board has waived public notice of the proposal.8 Application and Notices by Mitsubishi UFJ MUFG, with total consolidated assets of approximately Financial Group, Inc., to Acquire Interests in $1.7 trillion as of December 31, 2007, is the largest banking organization in Japan. MUFG owns The Bank of Tokyo a Bank Holding Company and Certain Mitsubishi UFJ, Ltd. ("BTMU") and Mitsubishi UFJ Trust Nonbanking Subsidiaries and Banking Corporation ("MUTB"), both of Tokyo. BTMU operates branches, agencies, and representative By Order dated October 6, 2008, the Board approved the offices in several states,9 It also controls Bank of Tokyo application of Mitsubishi UFJ Financial Group, Inc. Mitsubishi UFJ Trust Company (HBTMUT"), New York, (HMUFG"), a foreign banking organization that is a finan New York, and UnionBanCal Corporation and its subsid cial holding company! for purposes of the Bank Holding iary bank, Union Bank of California, N.A. ("Union Bank"), Company Act ("BHC Act"), under section 3 of the BHC both of San Francisco. MUTB operates a branch in Act2 to acquire up to 24.9 percent of the voting shares of New York, New York, and controls Mitsubishi UFJ Trust & Morgan Stanley (HMorgan"), New York, New York, and Banking Corporation (U.SA) ("MUTB USA"), New York, thereby indirectly acquire an interest in Morgan's subsid New York. MUFG controls deposits of approximately iary bank, Morgan Stanley Bank, National Association $42 billion, which represent less than I percent of the total (HMS Bank"), Salt Lake City, Utah.3 In addition, the Board amount of deposits of insured depository institutions in the approved MUFG's notice under sections4(c)(8) and (4)(j) of United States, 10 the BHC Act to acquire an indirect interest in Morgan's Morgan, with total consolidated assets of approximately subsidiary savings association, Morgan Stanley Trust $1.0 trillion, engages in investment banking, securities (HMST"), Jersey City, New Jersey, and Morgan's subsid underwriting and dealing, asset management, trading, and iary trust company, Morgan Stanley Trust National Associa other acti vities both in and outside the United States, Its I J tion ("MSTNA"), Wilmington, Delaware.4 The Board also principal subsidiaries include Morgan Stanley & Co., Incor approved MUFG's notice of its proposal to acquire an porated, New York, New York, a broker-dealer registered indirect interest in the foreign bank subsidiaries of Morgan with the Securities and Exchange Commission under the under section 4(c)(l3) of the BHC Act.S The Board hereby Securities Exchange Act of 1934 (I5 U.S.c. § 78a et seq.). issues this Statement regarding its approval Order. Through MS Bank and MST, Morgan controls deposits of In light of the unusual and exigent circumstances afiect approximately $34.8 billion, which represent less than ing the financial markets, and all other facts and circum I percent of the total amount of deposits of insured stances, the Board has determined that emergency condi depository institutions in the United States.12 If MUFG tions exist that justify expeditious action on this proposal.6 were deemed to control Morgan, MUFG would become the The Board has provided notice to the Office of the Comp troller of the Currency ("OCC") and the Office of Thrift Supervision (HOTS"), the primary federal supervisors of 7. Section 3(b)(l) of the BHC Act requires that the Board provide MS Bank and MST, respectively, and to the Department of notice of an application under section 3 to the appropriate federal or state supervisory authority for the bank to be acquired and provide the supervisor a period of time (normally 30 days) within which to submit L The elections by MUFG, The Bank of Tokyo-Mitsubishi UFJ. views or recommendations on the proposal. Section 40)(4) of the BHC Ltd., and Mitsubishi UFJ Trust and Banking Corporation, all of Tokyo, Act imposes a similar requirement with respect to a notice to acquire a and UnionBanCal Corporation, San Francisco, California, to become savings association. Sections 3(b)(1) and 4(i)(4) also permit the Board financial holding companies pursuant to sections 4(k) and (I) of the to shorten or waive this notice period in certain circumstances BHC Act and sections 225.S2(b)(I) and 225.91(b)(l) of Regulation Y (12 USc. §§ 1842(b)(1) and 1843(1)(4); 12 CFR 225. 16(g)(2». became effective as of October 6, 200S. See Board letter to Donald J. 8. 12 CFR 225.I6(b)(3), 225.25(d), and 262.3(1). Tourney, Esq., dated October 6, 2OOS. 9. BTMU operates branches in California, Illinois, New York, 2. 12 U.S.c. § 1842. See 12 CFR 225.15. Oregon. and Washington; agencies in Georgia and Texas; and has 3. As a result of acquiring Morgan's voting shares, MUFG would representative offices in the District of Columbia, Kentucky, Minne acquire an indirect interest in Morgan Stanley Capital Management sota, New Jersey, and Texas. LLC and Morgan Stanley Domestic Holdings, Inc., both financial 10. Deposit data for MUFG's subsidiary banks are as of June 30, holding companies of New York, New York. 2008. 4. 12 U.S.C § 1843(cj(8) and (j). See 12 CFR 225.24. The Board II. Asset data for Morgan are as of May 31, 200S, and asset and previously has determined by regulation that the operation of a savings deposit data for MS Bank and MST are as of June 30, 2008. association and a trust company by a bank holding company is closely 12. In this context, the "United States" includes any state of the related to banking for purposes of section 4(c)(8) of the BHC Act United States, the District of Columbia, any territory of the United (12 CFR 225.28(b)(4)(ii) and (5». States, Puerto Rico, Guam, American Samoa, and the Virgin Islands. 5. 12 U.S.c. § IS43(c)(l3). Also in this context, depository institutions include commercial banks, 6. See 12 U.S.c. §§ I 842(b)(l) and 18 43(i)(4). savings banks, and savings associations.

B36 Federal Reserve Bulletin 0 March 2009 14th largest depository organization in the United States, COMPETITIVE CONSIDERATIONS with total consolidated assets of approximately $2.7 tril lion, and would control deposits of approximately $76.6 bil The Board has carefully considered the competitive effects lion. of the proposal in light of all the facts of record. Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or would be in NONCONTROLLlNG INVESTMENT furtherance of any attempt to monopolize the business of banking in any relevant banking market. The BHC Act also Although the acquisition of less than a controlling interest prohibits the Board from approving a proposal that would in a bank or bank holding company is not a normal substantially lessen competition in any relevant banking acquisition for a bank holding company, the requirement in market, unless the anticompetitive effects of the proposal section 3(a)(3) of the BHC Act to obtain the Board's clearly are outweighed in the public interest by the prob approval before a bank holding company acquires more able effect of the proposal in meeting the convenience and than 5 percent of the voting shares of a bank suggests that needs of the community to be servedP Under the public Congress contemplated acquisitions by bank holding com benefits factor of section 4 of the BHC Act, the Board also panies of between 5 percent and 25 percent of the voting considers the competitive effects of a proposal to acquire a shares of banks. L3 On this basis, the Board previously has savings association. approved the acquisition by a bank holding company of The Board previously has stated that one company need less than a controlling interest in a bank or bank holding not acquire control of another company to lessen competi company.L4 MUFG has stated that it does not propose to control or tion between them substantially. IS The Board has found that noncontrolling interests in directly competing deposi exercise a controlling influence over Morgan and that its tory institutions may raise serious questions under the BHC indirect investment in Morgan's subsidiary depository insti Act and has stated that the specific facts of each case will tutions would also be a passive investment. MUFG has determine whether the minority investment in a company provided certain commitments that are similar to commit would be anti competitive. L9 ments previously relied on by the Board in determining that The subsidiary insured depository institutions of MUFG an investing bank holding company would not be able to and MST compete directly in the Metropolitan New exercise a controlling influence over another bank holding York-New Jersey-Pennsylvania-Connecticut ("Metro company for purposes of the BHC Act. For example, New York") banking market,20 The Board has reviewed MUFG has committed not to exercise or attempt to exercise carefully the competitive effects of the proposal in the a controlling influence over the management or policies of Metro New York banking market in light of all the facts of Morgan or any of its subsidiaries and committed not to record. In particular, the Board has considered the number have more than one representative serve on the board of of competitors that would remain in the banking market, directors of Morgan or its subsidiaries. L5 The commitments the relati ve shares of total deposits in depository institu also include certain restrictions on the business relation tions in the market ("market deposits") controlled by ships of MUFG with Morgan. MUFG and Morgan,2L and the concentration level of Based on these considerations and all the other facts of market deposits and the increase in that level as measured record, the Board has concluded that MUFG would not by the Herfindahl-Hirschman Index ("HHI") under the acquire control of, or have the ability to exercise a control ling influence over. Morgan or its subsidiary depository institutions through the proposed acquisition of Morgan's 17. 12 U.S.c. § 1842(c)(l). 18. See, e.g .• SunTntst Banks, inc., 76 Federal Reserve Bulletin voting shares. The Board notes that the BHC Act would 542 (1990). require MUFG to file an application and receive the 19. See. e.g .. BDK Financial Corp., 81 Federal Reserve Bulletin Board's approval before it could directly or indirectly 1052, 1053-54 (1995). acquire additional shares of Morgan or attempt to exercise 20. The Metro New York banking market includes Bronx, Dutch ess, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond, a controlling influence over Morgan. L6 Rockland, Suffolk, Sullivan, Ulster, and Westchester counties in New York; Bergen, Essex, Hudson, Hunterdon, Middlesex, Mon mouth, Morris, Ocean, Passaic, Somerset, Sussex, Union, and Warren 13. See 12 U.S.C. § I 842(a)(3). counties and the northern portions of Mercer County in New Jersey; 14. See. e.g .• The Bank of Nova Scotia. 93 Federal Reserve Bulletin Monroe and Pike counties in Pennsylvania; and Fairfield County and C 136 (2007); Passumpsic Bancorp, 92 Federal Reserve Bulletin C 175 portions of Litchfield and New Haven counties in Connecticut. (2006); Brookline Bancorp. MHC, 86 Federal Reserve Bullefin 52 21. Deposit and market share data are based on data reported by (2000). insured depository institutions in the summary of deposits data as of 15. Consistent with the Board's policy statement on equity invest June 30, 2007. and are based on calculations in which the deposits of ments in banks and bank holding companies, MUFa proposes also to thrift institutions are included at 50 percent. The Board previously has have a representative serve as an observer at meetings of Morgan's indicated that thrift institutions have become, or have the potential to board of directors. See Policy Statement on Equity investments in become, significant competitors of commercial banks. See, e.g., Banks and Bank Holding Companies (September 22, 2008) Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989); (www.federalreserve.gov/newsevents/press/bcreg/20080922c.htm). NalimUlI City Corporation, 70 Federal Reserve Bulletin 743 (1984). 16. See, e.g., Emigrant Bancorp. inc., 82 Federal Reserve Bulletin Thus. the Board regularly has included thrift institution deposits in the 555 (1996); First Community Bancshares, inc. • 77 Federal Reserve market share calculation on a 50 percent weighted basis. See, e.g., Bulletin 50 (1991). First Hawaiiall, inc., 77 Federal Reserve Bulletin 52 (1991).

Legal Developments: Fourth Quarter; 2008 B37 Department of Justice Merger Guidelines ("DOJ Guide parent-only and on a consolidated basis, as well as the lines").22 Consummation of the proposal would be consis financial condition of the subsidiary insured depository tent with Board precedent and within the thresholds in the institutions and significant nonbanking operations. In this DOJ Guidelines in the Metro New York banking market. evaluation, the Board considers a variety of information, On consummation, the Metro New York banking market including capital adequacy, asset quality. and earnings would remain moderately concentrated, and numerous performance. In assessing financial resources, the Board competitors would remain in the market.23 consistently has considered capital adequacy to be espe The DOJ also has reviewed the proposal and has advised cially important. The Board also evaluates the financial the Board that it does not believe that MUFG's proposal condition of the pro forma organization, including its would likely have a significantly adverse effect on compe capital position, asset quality, and earnings prospects, and tition in any relevant banking market. The appropriate the impact of the proposed funding of the transaction. banking agencies have been afforded an opportunity to The Board has carefully considered the financial re comment and have not objected to the proposal. sources of the organizations involved in the proposal. The Based on all the facts of record, the Board has concluded capital levels of MUFG exceed the minimum levels that that consummation of the proposal would not have a would be required under the Basel Capital Accord and are significantly adverse effect on competition or on the con therefore considered to be equivalent to the capital levels centration of resources in any relevant banking market. that would be required of a U.S. banking organization. In Accordingly, the Board has determined that competitive addition, the subsidiary depository institutions involved in factors are consistent with approval of the proposal. the proposal are well capitalized and would remain so on consummation. Based on its review of the record, the Board finds that MUFG has sufficient financial resources to FINANCIAL, MANAGERIAL, AND OTHER effect the proposal. SUPERVISORY CONSIDERATIONS The Board also has carefully considered the managerial resources of the organizations involved. The Board has Section 3 of the BHC Act requires the Board to consider the reviewed the examination records of MUFG, its depository financial and managerial resources and future prospects of the companies and depository institutions involved in the institutions. and the U.S. banking operations of Morgan, including assessments of their management, risk proposal and certain other supervisory factors. The Board management systems, and operations. In addition, the also reviews financial and managerial resources of the organizations involved in a proposal under section 4 of the Board has considered its supervisory experiences and those BHC Act.24 The Board has carefully considered these of other relevant banking supervisory agencies with the organizations and their records of compliance with appli factors in light of all the facts of record, including confiden cable banking law and with anti-money-laundering laws. tial supervisory and examination information from the various U.S. banking supervisors of the institutions in Based on all the facts of record, the Board has concluded volved, publicly reported and other financial information, that considerations relating to the managerial resources and future prospects of the organizations involved are consis and information provided by MUFG. In addition, the Board tent with approval. Section 3 of the BHC Act also provides has consulted with the Japanese Financial Services Agency ("FSA"), the agency with primary responsibility for the that the Board may not approve an application involving a foreign bank unless the bank is subject to comprehensive supervision and regulation of Japanese banking organiza supervision or regulation on a consolidated basis by the tions, including MUFG. In evaluating the financial resources in expansion pro appropriate authorities in the bank's home country.2~ As posals by banking organizations, the Board reviews the noted, the FSA is the primary supervisor of Japanese financial condition of the organizations involved both on a banking organizations. The Board previously has deter mined that BTMU and MUTB are subject to comprehen sive supervision on a consolidated basis by their home 22. Under the 001 Guidelines, a market is considered unconcen country supervisor.26 In that determination, the Board took trated if the post-merger HHI is under 1000, moderately concentrated if the post-merger HHI is between 1000 and 1800. and highly concentrated if the post-merger HHI exceeds 1800. The Department of 25. 12 U.S.C. § IS43(c)(3)(B). As provided in Regulation Y, the lustice ("001") has informed the Board that a bank merger or Board determines whether a foreign bank is subject to consolidated acquisition generally will not be challenged (in the absence of other home-country supervision under the standards set forth in Regula factors indicating anticompetitive effects) unless the post-merger HHI tion K. See 12 CFR 225.I3(a)(4). Regulation K provides that a foreign is at least 1800 and the merger increases the HHI more than 200 bank will be considered subject to comprehensive supervision or points. The 001 has stated that the higher-than-normal HHI thresholds regulation on a consolidated basis if the Board determines that the for screening bank mergers and acquisitions for anticompetitive effects bank is supervised or regulated in such a manner that its home-country implicitly recognize the competitive elfects of limited-purpose and supervisor receives sufficient information on the worldwide operations other nondepository financial entities. of the bank, including its relationship with any affiliates, to assess the 23. On consummation. the HHI would remain unchanged at 1146, bank's overall financial condition and its compliance with laws and and 265 insured depository institution competitors would remain in the regulations. See 12 CFR 211.24(c)(I). Metro New York banking market. The deposits of MUFG and Morgan, 26. See Mitsubishi Tokyo Finunciul Group. Inc., 87 Federul Reserve on a combined basis, would represent less than I percent of market Bulletin 349 (2001). At that time, BTMU was named The Bank of deposits. Tokyo-Mitsubishi, Ltd. and MUTB was named The Mitsubishi Trust 24. 12 CPR 225.26(b). and Banking Corporation.

B38 Federal Reserve Bulletin D March 2009 into account the FSA's supervisory authority with respect MUFG's subsidiary banks each received "outstanding" to MUFG (operating at that time as Mitsubishi Tokyo or "satisfactory" ratings, and MS Bank received an "out Financial Group, Ine.) and its nonbanking subsidiaries.27 standing" rating, at their most recent evaluations for CRA Based on this finding and all the facts of record, the Board performance by the OCC or the Federal Deposit Insurance has concluded that BTMU and MUTB continue to be Corporation ("FDIC").32 Consistent with the CRA regula subject to comprehensive supervision on a consolidated tions adopted by the federal banking agencies, BTMUT, basis by their home-country supervisor. MUTB USA, and MS Bank were evaluated under the Based on all the facts of record, the Board has concluded community development test as wholesale banks.:u that considerations relating to the financial and managerial Based on all the facts of record, the Board has concluded resources and future prospects of the organizations involved that considerations relating to convenience and needs of the in the proposal are consistent with approval, as are the other communities to be served and the CRA performance supervisory factors.28 records of the relevant depository institutions are consistent with approval of the proposal. CONVENIENCE AND NEEDS AND CRA NONBANKING ACTIVITIES PERFORMANCE CONSlDERA TlONS As noted above, MUFG has filed a notice under sec In acting on a proposal under section 3 of the BHC Act, the tions 4(c)(8) and 4(j) of the BHC Act for its proposed Board also must consider the effects of the proposal on the indirect investment in MST and MSTNA, which are convenience and needs of the communities to be served and engaged in activities that the Board has determined by take into account the records of the relevant insured regulation are so closely related to banking as to be a depository institutions under the Community Reinvestment proper incident thereto for purposes of section 4(c)(8) of Act ("CRA").29 In addition, the Board must review the the BHC Act.34 To approve this notice, the Board must also records of performance under the CRA of the relevant determine that the proposed acquisition of MST and insured depository institutions when acting on a notice MSTNA "can reasonably be expected to produce benefits under section 4 of the BHC Act to acquire voting securities to the public that outweigh possible adverse effects, such as of an insured savings association.30 undue concentration of resources, decreased or unfair As provided in the CRA, the Board has evaluated the competition, conflicts of interests, or unsound banking proposal in light of the evaluations by the appropriate practices. "35 federal supervisors of the CRA performance records of the As part of its evaluation of the public interest factors relevant insured depository institutions. An institution's under section 4 of the BHC Act, the Board has reviewed most recent CRA performance evaluation is a particularly carefully the public benefits and possible adverse effects of important consideration in the applications process because the proposal. The record indicates that consummation of it represents a detailed, on-site evaluation of the institu the proposal would result in benefits to customers currently tion's overall record of performance under the CRA by its served by Morgan. MUFG's investment in Morgan, and appropriate federal supervisor.31 thus indirectly in MST and MSTNA, would strengthen Morgan's capital position and allow Morgan to better serve its customers. For the reasons discussed above and based 27. Id. on the entire record, the Board has determined that the 28. Section 3 of the BHC Act also requires the Board to determine that an applicant has provided adequate assurances that it will make conduct of the proposed non banking activities within the available to the Board such information on its operations and activities framework of Regulation Y and Board precedent is not and those of its affiliates that the Board deems appropriate to deter likely to result in adverse effects, such as undue concentra mine and enforce compliance with the BHC Act (12 U.S.C. tion of resources, decreased or unfair competition, conflicts § 1842(c)(3)(A)). The Board has reviewed the restrictions on disclo of interests, or unsound banking practices. sure in the relevant jurisdictions in which the applicant operates and has communicated with relevant government authorities concerning Based on all the facts of record, the Board concludes that access to information. In addition. MUFG previously has committed consummation of the proposal can reasonably be expected that. to the extent not prohibited by applicable law. it will make to produce public benefits that would outweigh any likely available to the Board such information on the operations of its affiliates that the Board deems necessary to determine and enforce compliance with the BHC Act. the International Banking Act. and 32. The most recent eRA performance evaluation of Union Bank. other applicable federal law. MUFG also previously has committed to the largest of MUFG's subsidiary banks, by the oce was as of cooperate with the Board to obtain any waivers or exemptions that October 2005. The most recent CRA performance evaluations of may be necessary to enable its affiliates to make such information BTMUT ("outstanding") and MUTB USA ("satisfactory") by the available to the Board. In light of these commitments, the Board has FDIC were as of September 2007 and December 2006. respectively. concluded that MUFG has provided adequate assurances of access to MS Bank received an "outstanding" rating under the eRA at its most any appropriate information the Board may request. recent performance evaluation by the FDIC. as of January 2006. 29. 12 U.S.c. §290l et seq.; 12 U.S.c. § I 842(c)(2). MSTNA is not an insured depository institution. and MST is not 30. See, e.g., North Fork Bancorporation, Inc .. 86 Federal Reserve subject to the CRA pursuant to regulations issued by the OTS. See Bulletin 767 (2000). 12 CFR 563e.ll(c)(2). 31. See Interagency Questions and Answers Regarding Community 33. See. e.g., 12 CFR 228.2I(a)(2). Reinvestment, 66 Federal Register 36,620 at 36.640 (2001); 72 Fed 34. See 12 CFR 225.28(b)(4)(ii) and (5). eral Register 37.922 at 37.951 (2007). 35. See 12 U.S.c. § I 843(j)(2)(A).

Legal Developments: Fourth Quarter, 2008 B39 adverse effects. Accordingly, the Board has determined that Wachovia Corporation ("Wachovia"),' Charlotte, North the balance of the public benefits under section 4G)(2) of Carolina, and thereby indirectly acquire Wachovia's subsid the BHC Act is consistent with approval. iary banks, Wachovia Bank, National Association ("Wacho MUFG also provided notice of its proposal to acquire an via Bank"), Charlotte, and Wachovia Bank of Delaware, indirect interest in the foreign bank subsidiaries of Morgan National Association, Wilmington, Delaware.2 In addition, under section 4(c)(l3) of the BHC Act. Based on the Wells Fargo has requested the Board's approval under record, the Board has no objection to the acquisition of section 4 of the BHC Act3 to acquire the nonbanking such interesp6 subsidiaries of Wachovia, including Wachovia's two sub sidiary savings associations.4 Wells Fargo also proposes to CONCLUSION acquire the agreement corporation and Edge Act subsidiar ies and the foreign operations of Wachovia pursuant to Based on the foregoing and all the facts of record, the sections 25 and 25A of the Federal Reserve Act and the Board has determined that the application and notices Board's Regulation K.5 should be, and hereby are, approved. In reaching its Section 3(b)( I) of the BHC Act requires that the Board conclusion, the Board has considered all the facts of record provide notice of an application under section 3 to the in light of the factors that it is required to consider under appropriate federal or state supervisory authority for the the BHC Act. As noted in the Board's Order approving banks to be acquired and provide the supervisor a period of MUFG's proposal, the Board's approval is specifically time (normally 30 days) within which to submit views and conditioned on compliance by MUFG with all the commit recommendations on the proposal.6 Section 4(i)(4) of the ments made to the Board in connection with MUFG's BHC Act imposes a similar requirement with respect to a application and notices. The Board's approval of the non notice to acquire a savings association.? In light of the banking aspects of the proposal is also subject to all the unusual and exigent circumstances affecting the financial conditions set forth in Regulation Y, including those in markets, the weakened financial condition of Wachovia, sections 225.7 and 225.25(c),37 and to the Board's authority and all other facts and circumstances, the Board has to require such modification or termination of the activities shortened to 10 days the notice period to the primary of MUFG or any of its subsidiaries as the Board finds regulators of the banks and savings associations involved necessary to ensure compliance with, and to prevent eva in, and waived public notice of, this proposal, in accor sion of, the provisions of the BHC Act and the Board's dance with the provisions of the BHC Act and the Board's regulations and orders issued thereunder. For purposes of regulations.H The Board has contacted the primary federal this action, the conditions and commitments are deemed to supervisors of the insured depository institutions and the be conditions imposed in writing by the Board in connec Department of Justice; those agencies have indicated that tion with its findings and decisions and, as such, may be they have no objection to the approval of the proposal. enforced in proceedings under applicable law. October 7, 2008 ROBERT DEY. FRIERSON I. 12 U.S.c. § 1842. Deputy Secretary of the Board 2. Wells Fargo initially would acquire shares of newly issued voting preferred securities of Wachovia, representing approximately 39.9 percent of aggregate voting securities. After shareholder approval, Wells Fargo & Company a wholly owned subsidiary of Wells Fargo would merge with and into Wachovia, with Wachovia surviving the merger and becoming a San Francisco, California wholly owned subsidiary of Wells Fargo. Wells Fargo also seeks the Board's approval pursuant to section 3 of the BHC Act to acquire Order Approving the Acquisition of a Bank Wachovia's indirect ownership of 5.7 percent of the voting shares of United Bancshares, Inc. ("United") and thereby indirectly acquire Holding Company voting shares of United's subsidiary bank, United Bank of Philadel phia, both of Philadelphia, Pennsylvania. Wells Fargo & Company ("Wells Fargo"), a financial 3. 12 U.S.c. § 1843. 4. Wachovia's two savings associations are Wachovia Mortgage, holding company within the meaning of the Bank Holding ES.B., North Las Vegas, Nevada, and Wachovia Bank, ES.B., Hous Company Act ("BHC Act"), has requested the Board's ton, Texas. Wells Fargo also proposes to acquire all of Wachovia's approval under section 3 of the BHC Act to acquire other nonbanking subsidiaries pursuant to section 4 of the BHC Act, including (but not limited to) Wachovia Bank's insured credit card subsidiary, Wachovia Card Services, National Association, Atlanta, 36. Morgan became subject to the BHC Act on September 21, Georgia, and its nondepository trust company, Delaware Trust Com 2008, and as a new bank holding company has a two-year period, with pany, National Association, Wilmington, Delaware. See 12 U.S.c. the possibility of three one-year extensions, to conform its existing § 1843. Both of these Wachovia Bank subsidiaries engage only in nonbanking investments and activities to the requirements of section 4 limited operations and, therefore, are not banks for purposes of the of the BHC Act (12 U.S.c. § 1842(a)(2». MUFG, as a financial BHC Act. See 12 U.S.c. § 1841(c)(2)(D) and (F). holding company, may acquire more than 5 percent of the voting 5. 12 U.S.c. §§601 et seq. and 611 et seq.; 12 CFR Part 211. shares of a company, such as Morgan, that is substantially engaged in 6. 12 U.S.c. § 1842(b)(I); 12 CFR 225.25(b). financial activities subject to a two-year divestiture period (12 CFR 7. 12 U.S.c. § 18 43(i)(4). 225.85(a)(3)). 8. 12 U.S.c. §§ 1842(b)(l) and 1843(i)(4); 12 CFR 225.16(b)(3), 37. 12 CFR 225.7 and 225.25(c). 225.16(g)(2), 225.25(d), and 262.3(1).

B40 Federal Reserve Bulletin 0 March 2009 The Board has carefully considered the statutory factors Holding Company Act ("BHC Act"), under section 3 of in light of all the facts of record, including confidential the BHC Act, to acquire Wachovia Corporation ("Wacho I examination and other supervisory information, publicly via"),2 Charlotte, North Carolina, and thereby indirectly reported and additional financial information, the supervi acquire Wachovia's subsidiary banks, Wachovia Bank, sory experiences of the Board and the other federal super National Association ("Wachovia Bank"), Charlotte, and visors of the organizations and institutions involved in the Wachovia Bank of Delaware, National Association, Wilm proposal, information provided by Wells Fargo and Wacho ington, Delaware.3 In addition, the Board approved Wells via, and comments received on the proposal. Based on all Fargo's notice under section 4 of the BHC Act4 to acquire the facts of record, the Board has concluded that all the all the nonbanking subsidiaries of Wachovia, including factors the Board must consider in acting on the application Wachovia's two subsidiary savings associations, Wachovia and notices are consistent with approval. The application Mortgage, ES.B., North Las Vegas, Nevada, and Wachovia and notices are hereby approved by the Board for the Bank, ES.B., Houston, Texas.s The Board also approved reasons set forth in the Board's Statement, which will be Wells Fargo's notice to acquire the agreement corporation released at a later date. and Edge Act subsidiaries and the foreign operations of The Board's approval is specifically conditioned on Wachovia pursuant to sections 25 and 25A of the Federal compliance by Wells Fargo with all the commitments made Reserve Act ("FRA") and the Board's Regulation K.6 The in connection with the proposal, including the commit Board hereby issues this statement regarding the approval ments and conditions discussed in the forthcoming State order. ment. This approval also is subject to all the conditions set In light of the unusual and exigent circumstances affect forth in Regulation Y and to the Board's authority to ing the financial markets, the weakened financial condition require such modification or termination of the nonbanking of Wachovia, and all other facts and circumstances, the activities of a bank holding company or any of its subsid Board determined in its order that emergency conditions iaries as the Board finds necessary to ensure compliance existed that justified expeditious action on this proposal.7 with, and to prevent evasion of, the provisions of the BHC The Secretary of the Treasury (in consultation with the Act and the Board's regulations and orders issued thereun President) determined, on the recommendation of the Fed der. These commitments and conditions are deemed to be eral Deposit Insurance Corporation ("FDIC") and the conditions imposed in writing by the Board in connection Board (both by a vote of 5 members), that compliance by with its findings and decision and, as such, may be enforced the FDIC with the least-cost provisions of the Federal in proceedings under applicable law. Deposit Insurance Act ("FDI Act") with respect to Wacho The proposed bank-related acquisitions may not be via could likely result in serious adverse effects on eco consummated before the fifth calendar day after the effec nomic conditions or financial stability. The proposed acqui tive date of this order, and the proposal may not be sition of Wachovia by Wells Fargo as currently structured consummated later than three months after the effective would avoid those adverse effects without reliance on date of this order, unless such period is extended for good assistance by the FDIC. The Board provided notice of this cause by the Board or by the Federal Reserve Bank of San Francisco, acting pursuant to delegated authority.9 By order of the Board, effective October 12, 2008. I. 12 U.S.c. § 1842. 2. Wells Fargo initially would acquire shares of newly issued voting preferred securities of Wachovia, representing approximately Voting for this action: Chairman Bernanke, Vice Chairman Kohn, 39.9 percent of aggregate voting securities. After shareholder approval, and Governors Warsh, Kroszner, and Duke. a wholly owned subsidiary of Wells Fargo would merge with and into ROBERT DEY. FRIERSON Wachovia, with Wachovia surviving the merger and becoming a wholly owned subsidiary of Wells Fargo. Deputy Secretary of the Board 3. The Board also approved the acquisition by Wells Fargo of Wachovia's indirect ownership of 5.7 percent of the voting shares of Wells Fargo & Company United Bancshares, Inc. ("United") and thereby the indirect acquisi tion of voting shares of United's subsidiary bank, United Bank of San Francisco, California Philadelphia, both of Philadelphia, Pennsylvania. 4. 12 U.S.c. § 1843. Statement by the Board of Governors of the 5. Wells Fargo proposes to acquire Wachovia's other nonbanking subsidiaries that are engaged in financial activities in accordance with Federal Reserve System Regarding the section 4(k)(4)(A)-(H) and section 225.86 of the Board's Regula tion Y (12 U.S.c. § I 843(k)(4)(A)-(H); 12 CFR 225.86(a)-(d) and Application and Notices by Wells Fargo & 225.170-177). In addition, Wells Fargo proposes to acquire Wacho Company to Acquire Wachovia Corporation via's non banking subsidiary that is engaged in certain physical commodity trading activities as an activity that is complementary to a and Wachovia's Subsidiary Banks and financial activity under section 4(k)(I)(B) of the BHC Act ("Comple· Nonbanking Companies mentary Activity"). See Board letter to Elizabeth T. Davy, April 13, 2006. Wells Fargo also received authority to engage in such physical trading activities as a Complementary Activity. See Board letter to By order dated October 12, 2008, the Board approved the John Shrewsberry, April 10,2008. Wachovia also has other nonbank· application of Wells Fargo & Company ("Wells Fargo"), a ing subsidiaries that do not require Board approval, in accordance with financial holding company within the meaning of the Bank section 225.22 of Regulation Y (12 CFR 225.22). 6. 12 U.S.c. §§601 et seq. and 611 et seq.; 12 CFR ParI 211. 7. See 12 U.S.c. §§ I 842(b)(l) and 1843(i)(4). A commenter object· 9. 12 U.S.c. § 1849(b)(I); 12 CFR 225.16(h)(2). ing to the proposal asserted that expeditious action was not warranted.

Legal Developments: Fourth Quarter, 2008 B41 proposal to the Office of the Comptroller of the Currency An acquisition of a savings association requires Board ("OCC') and the Office of Thrift Supervision ("OTS"), approval under sections 4(c)(8) and 4(j) of the BHC Act.lJ the primary federal supervisors of Wachovia's subsidiary The Board previously has determined by regulation that the banks and savings associations, in accordance with the operation of a savings association is closely related to requirements of sections 3 and 4 of the BHC Act and the banking for purposes of section 4(c)(8) of the BHC Act. 14 Board's Regulation Y governing emergencies that require The Board also must determine that the proposed acquisi expeditious action. The Board also provided notice of this tion ofWachovia's savings associations "can reasonably be proposal to the Department of Justice ("DOJ"). Those expected to produce benefits to the public, such as greater agencies have indicated that they have no objection to convenience, increased competition, or gains in efficiency, approval of the proposal.s For the same reasons, and in that outweigh possible adverse effects, such as undue accordance with the provisions of the Board's regulations, concentration of resources, decreased or unfair competi the Board waived public notice of this proposalY tion, conflicts of interests, or unsound banking practices," 15 Wells Fargo, with total consolidated assets of approxi mately $609.1 billion, is the fifth largest depository organi INTERSTATE AND DEPOSIT CAP ANALYSIS zation in the United States.1O Wells Fargo controls nine insured depository institutions that operate in twenty-three Section 3(d) of the BHC Act allows the Board to approve states. an application by a bank holding company to acquire Wachovia, with total consolidated assets of approxi control of a bank located in a state other than the bank mately $812.4 billion, is the third largest depository orga holding company's home state if certain conditions are nization in the United States. Wachovia controls five met. For purposes of the BHC Act, the home state of Wells insured depository institutions that operate in twenty-one Fargo is Minnesota,16 and the banks to be acquired are states and the District of Columbia. On consummation of located in 21 states and the District of Columbia. 17 this proposal, Wells Fargo would become the second largest The Board may not approve an interstate proposal under depository organization in the United States, with total section 3(d) of the BHC Act if the applicant (including all consolidated assets of approximately $1.37 trillion. its insured depository institution affiliates) controls, or on consummation of the proposal would control, more than FACTORS GOVERNING BOARD REVIEW OF THE 10 percent of the total amount of deposits of insured depository institutions in the United States ("nationwide TRANSACTION deposit cap"). The nationwide deposit cap was added to The BHC Act sets forth the factors that the Board must section 3(d) when Congress broadly authorized interstate consider when reviewing the acquisition of banks. For acquisitions by bank holding companies and banks in the direct or indirect acquisitions of banks under section 3 of Riegle-Neal Interstate Banking and Branching Efficiency the BHC Act, these factors are the requirements for inter Act of 1994.1R Although the nationwide deposit cap prohib state bank acquisitions; the competitive effects of the its interstate acquisitions by a company that controls deposproposal in the relevant geographic markets; the financial and managerial resources and future prospects of the that Wells Fargo's agreement to acquire Wachovia violated Wacho companies and banks involved in the proposal; the conve via's prior agreement to negotiate exclusively with Citigroup on an nience and needs of the communities to be served; the acquisition agreement and improperly interfered with plans by the records of performance under the Community Reinvest FDIC to provide assistance pursuant to section 13( c) of the FDI Act for ment Act11 ("CRA") of the insured depository institutions Citigroup's proposed acquisition of some or all of Wachovia (12 U .S.c. involved in the transaction; and the availability of informa § 1823(c». These allegations are the subject of litigation between Citigroup, Wells Fargo, and Wachovia. The litigation is before a court tion needed to determine and enforce compliance with the of competent jurisdiction. and the matters at issue in the litigation are BHC Act and other applicable federal banking laws.12 not within the discretion of the Board to resolve. See Western Bancshares, Inc. v. Board of Governors, 480 F,2d 749 (10th Cir. 1973) ("Western"). As explained in more detail above, as part of its review 8. Section 3(b)( I) of the BHC Act requires that the Board provide of this proposal. the Board has carefully considered all of the facts of notice of an application under section 3 to the appropriate federal or record in assessing the financial and managerial resources and future state supervisory authority for the bank to be acquired and provide the prospects of the companies involved. supervisor a period of time (normally 30 days) within which to submit \3. 12 U.S.c. §§ 1843(i), 1843(c)(8), and 1843(j). views or recommendations on the proposal. Section 4(i)(4) of the BHC 14. 12 CFR 225.28(b)(4)(ii). Act imposes a similar requirement with respect to a notice to acquire a 15. 12 U.S.C. § I 843(j)(2)(A). savings association. Sections 3(b)(I) and 40)(4) also permit the Board 16. See 12 U.S.C. § I 842(d). A bank holding company's home state to shorten or wai ve this notice period in certain circumstances is the state in which the total deposits of all banking subsidiaries of (12 U.S.C. §§ I 842(b)(l) and 1843(i)(4); 12 CFR 225.16(g». such company were the largest on July I, 1966, or the date on which 9. Id.; 12 CFR 225.16(b)(3), 225.25(d), and 262.3(1). the company became a bank holding company, whichever is later. 10. Asset, national deposit, and ranking data are as of June 3D, 17. For purposes of section 3(d), the Board considers a bank to be 2008. In this context, insured depository institutions include commer located in the states in which the bank is chartered or headquartered or cial banks, savings banks, and savings associations. operates a branch. See 12 U.s.c. §§ 184\(0)(4)-(7) and 1842(d)(l)(A) II. 12 U.s.c. §2901 et seq. and (d)(2)(B). 12. The Board received comments from Citigroup Inc. ("Citi 18. Pub. L No. 103-328, 108 Stat. 2338 (1994). The nationwide group"), New York, New York, objecting to the proposal, which the deposit cap was intended to help guard against undue concentrations Board carefully considered. Among other things, Citigroup contends of economic power. See S. Rep. No. 102-167 at 72 (1991).

B42 Federal Reserve Bulletin 0 March 2009 its in excess of the cap, it does not prevent a company from insured depository institutions in the United States was exceeding the nationwide deposit cap through internal approximately $7.195 trillion. The data indicate that, on growth and effective competition for deposits or through June 3D, 2008, Wells Fargo controlled deposits of approxi acquisitions entirely within the home state of the acquirer. mately $298.2 billion, and Wachovia controlled deposits of As required by section 3(d), the Board has carefully approximately $429.6 billion. As of that date, the combined considered whether Wells Fargo controls, or on consumma firm would have controlled approximately 10.1 J 6 percent tion of the proposed transaction would control, more than of the total amount of deposits of insured depository \0 percent of the total amount of deposits of insured institutions in the United States on consummation of the depository institutions19 in the United States. In analyzing proposaL this matter, the Board calculated the percentage of total Wells Fargo and Wachovia provided data on their respec deposits of insured depository institutions in the United tive adjusted deposit totals as of September 30, 2008. These States and the total deposits that Wells Fargo controls, and data indicate that, on a combined basis, Wells Fargo would on consummation of the proposal would control, based on control approximately $731.1 billion in deposits on con the definition of "deposit" in the FDI Act,20 the latest summation of the proposaL Deposit amounts for other available deposit data collected in reports filed by all insured depository organizations are not available because insured depository institutions (data as of June 30,2008),21 institutions are not required to file Call Reports for the third deposit information available from the companies involved quarter until the end of October, and such data will not be in this transaction, other information available to the Board, available for review until later in November. and the methods and adjustments used by the FDIC to The prohibition in the BHC Act, by its terms, applies if compute total deposits. These calculations have been made "upon consummation of the acquisition (em°p hasis added)" using the methodology described in the Board's order in the applicant would control more than J percent of the 2004 approving Bank of America Corporation's acquisition total amount of deposits of insured depository institutions of FleetBoston Financial Corporation22 and take into in the United States. While the June 30, 2008, deposit data account the use of revised Call Report and Thrift Financial are the most recent data currently available on a uniform Report forms, which became etlective for calendar year basis, the Board believes that other evidence indicates that 2008.23 In light of the turmoil in the financial markets since the June 30, 2008, data do not reHect the current situation June 30, 2008, the Board also analyzed more recent nor would those data accurately reHect the deposit ratio at adjusted deposit data from Wells Fargo and Wachovia and the time required by the statute, which is the time of other sources of deposit data. consummation of the acquisition. Based on data as of June 30, 2008, which represent the Other data sources indicate, for example, that the total latest adjusted deposit data available from all insured amount of deposits in the United States has significantly depository institutions, the total amount of deposits of increased since June 30, 2008. Deposit data collected by the Federal Reserve in its survey of domestically chartered commercial banks and reported on the Board's H.8 Release 19. The BHC Act adopts the definition of "insured depository institution" used in the FDI Act. See 12 U.S.c. § 184l(n). The FDI (Assets and Liabilities of Commercial Banks) for Septem Acl's definition of "insured depository institution" includes all banks ber 2008 indicate that total deposits of insured commercial (whether or not the institulion is a bank for purposes of the BHC Act), banks in the United States increased approximately savings banks, and savings associations that are insured by the FDIC, 3.9 percent during the third quarter of 2008. Estimated and insured U.S, branches of foreign banks, as each of those terms is defined in the FDI Act. See 12 U.S,c. § 1813(c)(2). nationwide deposit growth in excess of 3 percent is cor 20, Section 3(d) of the BHC Act specifically adopts the definition roborated by other deposit data sources.24 If total deposits of "deposit" in the FDI Act (12 U.S.c. § 1842(d)(2)(E) incorporating reported on June 30, 2008, are adjusted to account for this the definition of "deposit" at 12 U.S.c. § 1813 (I». level of growth, the combined deposits of Wells Fargo and 21, Each insured bank in the United States must report data Wachovia as of September 30, 2008, would be below regarding its total deposits in accordance with the definition of "deposit" in the FDI Act on the institution's Consolidated Report of 10 percent of nationwide deposits. Indeed, WelIs Fargo's Condition and Income ("Call Report"). Each insured savings associa percentage of total nationwide deposits would be less than tion similarly must report its total deposits on the institution's Thrift 10 percent if adjusted deposits for all insured depository Financial Report Deposit data for FDIC-insured U.S. branches of institutions in the United States grew by at least 1.62 per foreign banks and federal branches of foreign banks are obtained from cent since June 30, 2008, which would result in a total the Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks. These data are reported quarterly to the FDIC and are amount of adjusted deposits all for insured depository publicly available. institutions of at least $7.311 trillion. Based on all the 22. Bank of America Corporation, 90 Federal Reserve Bulletin information available to the Board, the Board concluded 217,219 (2004); see also Bank of America Corporation, 93 Federal that the combined organization would not control an Reserve Bulletin C I 09 (2007) (order approving the acquisition of ABN AMRa North America Holding Company); Bank of America Corpo amount of deposits that would exceed the nationwide ration, 92 Federal Reserve Bulletill C5 (2006) (order approving deposit cap on consummation of the proposal. To ensure merger with MBNA Corporation), compliance with the deposit limits on acquisitions, Wells 23. The revisions to the Call Report and Thrift Financial Report that were introduced in 2007 have simplified the adjusted deposit-cap calculation for depository organizations. The methodology for comput 24. Deposit data collected from commercial banks on the FR 2900 ing the amount of deposits held by institutions for purposes of (Report of Transaction Accounl~, Other Deposits and Vault Cash) calculating the nationwide deposit cap is outlined in Appendix A. show a similar trend.

Legal Developments: Fourth Quarter, 2008 B43 Fargo ha" committed that, on consummation, the combined Wells Fargo's and Wachovia's subsidiary depository organization would not exceed the nationwide deposit cap institutions directly compete in 49 banking markets, includ based on the data reported by all depository institutions as ing markets in Arizona, California, Colorado, Illinois, of September 30, 2008. This commitment includes a com Nevada, and Texas. The Board has reviewed carefully the mitment that Wells Fargo will reduce its deposits by any competitive effects of the proposal in each of those banking amount that exceeds the nationwide deposit cap based on markets in light of all the facts of record. In particular, the Call Report data a" of September 30, 2008, by no later than Board has considered the number of competitors that would December 31, 2008.25 remain in the banking markets, the relative shares of total Section 3(d) also prohibits the Board from approving a deposits in depository institutions in the markets ("market proposal if, on consummation, the applicant would control deposits") controlled by Wells Fargo and Wachovia,29 the 30 percent or more of the total deposits of insured deposi concentration levels of market deposits and the increase in tory institutions in any state in which both the applicant and those levels as measured by the Herfindahl-Hirschman the organization to be acquired operate an insured deposi Index ("HHI") under the Department of Justice Merger tory institution, or the applicable percentage of state depos Guidelines ("DO] Guidelines"), 30 and other characteristics its established by state law ("state deposit cap").26 On of the markets. In addition, the Board has considered consummation of the proposal, Wells Fargo would control commitments made by Wells Fargo to the Board to reduce less than 30 percent of, and less than any applicable state the potential that the proposal would have adverse effects deposit cap for, the total amount of deposits of insured on competition by divesting six branches (the "divestiture depository institutions in the relevant states. branches"), which account for approximately $1.46 billion All other requirements of section 3(d) of the BHC Act of deposits,3l in six banking markets (Hthe divestiture also would be met on consummation of the proposal. 27 markets").32 Wells Fargo has proposed to transfer all the Based on all the facts of record, the Board is permitted to divestiture branches to out-of-market competitors. approve the proposal under section 3(d) of the BHC Act. 29. Deposit and market share data are as of June 3D, 2007, adjusted COMPETITIVE CONSIDERATIONS to reflect mergers and acquisitions through October 3, 2008, and are based on calculations in which the deposits of thrift institutions are The Board has considered carefully the competitive effects included at 50 percent. The Board previously has indicated that thrift of the proposal in light of all the facts of record. Section 3 institutions have become, or have the potential to become, significant competitors of commercial banks. See. e.g. . Midwest Financial Group. of the BHC Act prohibits the Board from approving a 75 Federal Reserve Bulletin 386,387 (1989); National City Corpora· proposal that would result in a monopoly or would be in tion, 70 Federal Reserve Bulletin 743, 744 (1984). Thus, the Board furtherance of an attempt to monopolize the business of regularly has included thrift institution deposits in the market share banking in any relevant banking market. The BHC Act also calculation on a 50 percent weighted basis. See. e.g. . First Hawaiian, Inc .. 77 Federal Reserve Bulletin 52, 55 (1991). In this case, the prohibits the Board from approving a bank acquisition that savings association deposits of Wachovia are weighted at 100 percent would substantially lessen competition in any relevant both before and after consummation of the proposal because the banking market, unless the anticompetitive effects of the savings associations are, and on consummation would continue to be, proposal are clearly outweighed in the public interest by the controlled by a bank holding company. probable effect of the transaction in meeting the conve 30. Under tbe DOJ Guidelines. a market is considered unconcen trated if the post-merger HHI is less than 1000, moderately concen nience and needs of the community to be served.28 In trated if the post-merger HHI is hetween 1000 and 1800, and highly addition, the Board must consider the competitive effects of concentrated if the post-merger HHI is more than 1800. The Depart a proposal to acquire a savings association under the public ment of Justice has informed the Board that a bank merger or benefits factor of section 4(j) of the BHC Act. 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 25. Institutions reponing quarterly deposit data may find it neces points. The Department of Justice has stated that the higher.than sary to make adjustments after the due date of the quarterly report. normal HHI thresholds for screening bank mergers for anticompetitive Accordingly, for purposes of this commitment, Wells Fargo and the effects implicitly recognize the competitive effects of limited-purpose Board will evaluate the third quarter 2008 deposit data on Novem lenders and other nondepository financial entities. her 3D, 2008, by which time reponing institutions should have 31. Wells Fargo proposes to divest five Wachovia branches with completed any necessary adjustments. approximately $1.33 billion of deposits in California and one Wacho 26. 12 U.S.C. § 1842(d)(2)(BHD). Wells Fargo and Wachovia both via branch with approximately $127 million of deposits in Colorado. operate insured depository institutions in Arizona, California, Colo 32. Wells Fargo has committed that, not later than 60 days after rado, Illinois, Nevada. and Texas. consummating the proposed acquisition, it will exec ute an agreement 27. Wells Fargo is adequately capitalized and adequately managed for the proposed divestitures in each divestiture market with a as required under section 3(d) (12 U.S.c. § 1842 (d)(I)(A)). The purchaser that tbe Board determines to be competitively suitable. subsidiary banks of Wachovia have been in existence and operated for Wells Fargo also has committed to divest total deposits in each the minimum period of time required by applicable state law. See divestiture market of at least the amount specified in the commitment 12 V.S.c. § I 842(d)(I)(B). Wachovia Bank's subsidiary insured credit and discussed in this order and to complete divestitures within 180 card company, Wachovia Card Services, National Association, Atlanta, days of consummation of the proposal. In addition, Wells Fargo has Georgia, was established in 2007 but engages only in limited opera committed that, if it is unsuccessful in completing the proposed tions and. therefore, is not a bank for purposes of the BHC Act. See divestiture within this time period, it will transfer the unsold branches 12 U.S.c. § 1841(c)(2)(D). The other requirements in section 3(d) of to an independent trustee that will be instructed to sell such brancbes the BHC Act also would be met on consummation of the proposal. to an alternate purchaser or purchasers. without regard to price. Both 28. 12 U.S.C. § I 842(c)( I). the trustee and any alternate purchaser must be acceptable to the

B44 Federal Reserve Bulletin 0 March 2009 A. Banking Markets within Established Guidelines For each of these markets, the Board has considered carefully whether other factors either mitigate the competi Consummation of the proposal would be consistent with tive effects of the proposal or indicate that the proposal Board precedent and within the thresholds in the DOJ would have a significantly adverse effect on competition in Guidelines in 37 of the banking markets in which Wells the market. The number and strength of factors necessary to Fargo's and Wachovia's subsidiary depository institutions mitigate the competitive effects of a proposal depend on the directly compete.33 On consummation of the proposal, two size of the increase in, and resulting level of, concentration of these banking markets would remain unconcentrated, in a banking marketY In each of these markets, the Board twenty-seven banking markets would be moderately con has identified factors that indicate the proposal would not centrated, and eight banking markets would be highly have a significantly adverse impact on competition, despite concentrated, as measured by the HHI. The change in HHI the post-consummation increases in the HHI and market in the eight highly concentrated markets would be small or shares. otherwise within the DOJ Guidelines. In each of the 37 Among the factors reviewed, the Board has considered banking markets, numerous competitors would remain on the competitive influence of community credit unions in consummation of the proposal. these banking markets. In each of the markets, certain credit unions ofter a wide range of consumer products, B. Certain Banking Markets with Divestitures operate street-level branches, and have membership open to almost all residents in the applicable market. The Board After accounting for the branch divestitures, consummation has concluded that the acti vities of such credit unions in of the merger would be consistent with Board precedent each of these markets exert competitive influence that and the thresholds in the DOJ Guidelines in five banking mitigates, in part, the potential effects of the proposal. 38 markets.34 In three of these markets, Wells Fargo proposes to divest all branches to be acquired from Wachovia and, therefore, the levels of concentration as measured by the BANKING MARKET IN ARIZONA HHI would not increase on consummation of the merger and the proposed divestitures.35 In two markets, the HHI Cottonwood. In the Cottonwood banking market,39 Wells would be consistent with Board precedent and thresholds in Fargo is the second largest depository organization, control the DOJ Guidelines on consummation of the merger and ling deposits of approximately $ I 72.8 million, which rep the proposed divestitures.36 After accounting for the pro resent approximately 15.3 percent of market deposits. posed di vestitures, four banking markets would be moder Wachovia is the fifth largest depository organization in the ately concentrated, and one banking market would be market, controlling deposits of approximately $129 mil highly concentrated on consummation. In addition, numer lion, which represent approximately IIA percent of market ous competitors would remain in each of the five banking deposits. On consummation of the merger, Wells Fargo markets. would remain the second largest depository organization in the market, controlling deposits of approximately $301.8 million, which represent approximately 26.6 per C. Seven Banking Markets Warranting Special Scrutiny cent of market deposits. The HHI would increase 347 points to 2305. Wells Fargo and Wachovia compete directly in seven Several factors indicate that the increase in concentra banking markets that warrant a detailed review: Cotton tion in the Cottonwood banking market, as measured by the wood, Arizona; Hanford, Hemet, Oroville, Placerville, and HHI and Wells Fargo's market share, overstates the poten Santa Cruz, all in California; and Grand Junction, Colo tial competitive effects of the proposal in the market. After rado. In each of these markets, including one with proposed consummation of the proposal, nine other commercial divestitures and six without proposed divestitures, the banking and thrift institution competitors would remain in concentration levels on consummation of the proposal the market. The Board notes that there are other competi would exceed the threshold levels in the DOJ Guidelines or tors with a significant presence in the market. The largest the resulting market share of Wells Fargo would exceed depository organization in the market would control 35 percent. 37. See Re!.[ions Financial Corp., 93 Federal Reserve Bulletin CI6 Board. See Regions Financial Corp., 93 Federal Reserve Bulletin C16 (2007); NationsBank Corporation, 84 Federal Reserve Bulletin 129 (2007); BankAmerica Corp., 78 Federal Reserve Bulletin 338 (1992); (1998). United New Mexico Financial Corp., 77 Federal Reserve Bulletin 484 38. The Board previously has considered the competitiveness of (1991). certain active credit unions as a mitigating factor. See, e.g., The PNC 33. The effects of the proposal on the concentrations of banking Financial Services Group. Inc., 93 Federal Reserve Bulletin C65 resources in these banking markets are described in Appendix B. (2007); Regions Financial Corp., 93 Federal Reserve Bulletin Cl6 34. The effects of the proposal on the concentrations of banking (2007); Wachovia Corp., 92 Federal Reserve Bulletin CI83 (2006); resources in these markets are descrihed in Appendix C. F.N.B. Corporation, 90 Federal Reserve Bulletin 481 (2004). 35. The three markets are Davis and Grass Valley. both in Califor 39. The Cottonwood banking market in Arizona is defined as the nia, and Fremont County in Colorado. northeastern comer of Yavapai County and includes the towns of 36. The two markets are Monterey-Seaside-Marina and Sonora. Camp Verde and Clarkdale and the cities of Cottonwood, Sedona, and both in California. West Sedona.

Legal Developments: Fourth Quarter; 2008 845 34.8 percent of market deposits, and two other bank control approximately 32.3 percent of market deposits, and competitors each would control more than 12 percent of the HHI would increase 521 points to 1675.42 market deposits. The Board also has evaluated the competitive influence Hemet. In the Hemet banking market,43 Wells Fargo is the of one active community credit union in the market. This sixth largest depository organization, controlling approxi credit union controls approximately $88.3 million of depos mately $124.4 million of deposits, which represents approxi il<; in the market, which, on a 50 percent weighted basis, mately 7.2 percent of market deposits. Wachovia is the represents approximately 3.8 percent of market deposits. largest depository organization in the market, controlling After accounting for these credit union deposits, Wells deposits of $391.6 million. which represent 22.6 percent of Fargo on consummation of the proposal would control market deposits. On consummation of the proposal, Wells approximately 25.6 percent of market deposits, and the Fargo would become the largest depository organization in HHI would increase 322 points to 2149.40 the market, controlling deposits of approximately $516 mil In addition, the record of recent entry into the Cotton lion. which represent approximately 29.8 percent of market wood banking market evidences the market's attractiveness deposits. The HHI would increase 324 points to 1809. for entry. The Board notes that five depository institutions Several factors indicate that the proposal would not have have entered the market de novo since 2004. Other factors a significantly adverse effect on competition in the Hemet indicate that the market remains attractive for entry. From banking market. After consummation of the proposal. 12 2004 to 2007, the annualized population growth for the other commercial banking and thrift institution competitors county in which the Cottonwood market is located ex would remain in the market. Three of those remaining ceeded the average annualized population growth for non competitors would each control more than 10 percent of metropolitan counties in Arizona. market deposits. In addition, the Board has concluded that the activities of two community credit unions in the market exert a BANKING MARKETS IN CALIFORNIA sufficient competitive influence to mitigate, in part, the potential adverse competitive effects of the proposal. These Hanford. In the Hanford banking market,41 Wells Fargo is active credit unions control approximately $186.3 million the fourth largest depository organization, controlling of deposits in the market, which, on a 50 percent weighted deposits of approximately $148.3 million, which represent basis, represents approximately 5.1 percent of market approximately 17.4 percent of market deposits. Wachovia deposits. After accounting for those credit union deposits, is the third largest depository organization in the market, Wells Fargo would control approximately 28.2 percent of controlling deposits of approximately $159.9 million, market deposits on consummation of the proposal, and the which represent approximately 18.7 percent of market HHI would increase 292 points to 1644.44 deposits. On consummation of the merger, Wells Fargo would become the largest depository organization in the Oroville. In the Oroville banking market,45 Wells Fargo is market, controlling deposits of approximately $308.2 mil the sixth largest depository organization, controlling depos lion, which represent 36.1 percent of market deposits. The its of approximately $49.1 million, which represent approxi HHI would increase 650 points to 2045. mately 7.3 percent of market deposits. Wachovia is the Several factors indicate that the proposal would not have largest depository organization in the market, controlling significantly adverse competitive effects in the Hanford deposits of approximately $144.9 million, which represent banking market. After consummation of the proposal, ten approximately 21.6 percent of market deposits. On consum other commercial banking competitors would remain, mation of the proposal, Wells Fargo would become the including two other competitors with a significant presence largest depository organization in the market. controlling in the market. The second and third largest depository deposits of approximately $194 million. which represent organizations would control market deposits of more than 29 percent of market deposits. The HHI would increase 317 20 percent and 12 percent, respectively. points to 1854. The Board also has evaluated the competitive influence of three active community credit unions in the market. These credit unions control approximately $200.6 million 42, With the deposits of these credit unions weighted at 50 percent, of deposits in the market, which, on a 50 percent weighted Wells Fargo would be the fourth largest depository organization in the basis, represents approximately 10.5 percent of market market, with approximately 15,5 percent of market deposits, and Wachovia would be the third largest depository organization in the deposits. After accounting for these credit union deposits, market. controlling approximately 16.8 percent of market deposits. Wells Fargo on consummation of the proposal would 43, The Hemet banking market in California is defined as the Hemet Ranally Metro Area. 44, With the deposits of these credit unions weighted at 50 percent. 40. With the deposits of this credit union weighted at 50 percent, Wells Fargo would he the sixth largest depository organization in the Wells Fargo would be the second largest depository organization in the market. with approximately 6.8 percent of market deposits, and market, with approximately 14,7 percent of market deposits. and Wachovia would be the largest depository organization in the market, Wachovia would be the fifth largest depository organization in the controlling approximately 21.4 percent of market deposits, market. controlling approximately II percent of market deposits, 45. The Oroville banking market in California is defined as the 41. The Hanford banking market in California is defined as Kings southern portion of Butte County. excluding the city of Chico but County and the city of Riverdale in Fresno County, including the towns of Gridley and Oroville,

B46 Federal Reserve Bulletin 0 March 2009 Several factors indicate that the increase in concentra basis, represents approximately 13.1 percent of market tion in the Oroville banking market, as measured by the deposits. After accounting for these credit union deposits, HHI and Wells Fargo's market share, overstates the poten Wells Fargo on consummation of the proposal would tial competitive effects of the proposal in the market. After control approximately 33,8 percent of market deposits, and consummation of the proposal, seven other commercial the HHI would increase 538 points to 1738,48 banking competitors would remain in the market. The Board notes that there are other competitors with a signifi Santa Cruz, In the Santa Cruz banking market,49 Wells cant presence in the market. The second largest depository Fargo is the second largest depository organization, control organization in the market would control approximately ling deposits of approximately $653.9 million, which rep 21.6 percent of market deposits, and two other bank resent approximately 19.1 percent of market deposits. competitors each would control more than 10 percent of Wachovia is the largest depository organization in the market deposits. market, controlling deposits of approximately $912 mil The Board also has evaluated the competitive influence lion, which represent approximately 26.6 percent of market of two active community credit unions in the market. These deposits. To reduce the potential for adverse effects on credit unions control approximately $37.5 million of depos competition in the Santa Cruz banking market, Wells Fargo its in the market, which, on a 50 percent weighted basis, has proposed to divest one of Wachovia's branches, with represents approximately 2.7 percent of market deposits. deposits of $285.2 million, to an out-of-market depository After accounting for these credit union deposits, Wells organization. On consummation of the proposal and after Fargo on consummation of the proposal would control accounting for the proposed divestiture, Wells Fargo would approximately 28.2 percent of market deposits, and the become the largest depository organization in the market, HHI would increase 300 points to 1759.46 controlling deposits of approximately $1.28 billion, which represent 37.4 percent of market deposits. The HHI would Placerville. In the Placerville banking market,47 Wells increase 394 points to 2103. Fargo is the third largest depository organization, control Several factors indicate that the proposal would not have ling deposits of approximately $137.6 million, which rep significantly adverse competitive effects in the Santa Cruz resent approximately 15.7 percent of market deposits. banking market. After consummation of the proposal, 12 Wachovia is the largest depository organization in the other commercial banking competitors would remain in the market, controlling deposits of approximately $220.3 mil market. The Board notes that there are other competitors lion, which represent approximately 25.1 percent of market with a significant presence in the market, including three deposits. On consummation of the proposal, Wells Fargo bank competitors that would each control more than 10 per would become the largest depository organization in the cent of the market. market, controlling deposits of approximately $357.9 mil The Board also has evaluated the competitive influence lion, which represent approximately 40.7 percent of market of three active community credit unions in the market. deposits. The HHI would increase 784 points to 2403. These credit unions control approximately $511 million of Several factors indicate that the proposal would not have deposits in the market, which, on a 50 percent weighted a significantly adverse effect on competition in the Placer basis, represents approximately 6.9 percent of market ville banking market. After consummation of the proposal, deposits. After accounting for these credit union deposits seven other commercial banking and thrift institution com and for the branch divestiture, Wells Fargo on consumma petitors would remain in the market. The Board notes that tion of the proposal would control approximately 34.8 per there are other competitors with a significant presence in cent of market deposits, and the HHI would increase 341 the market, including two bank competitors that each points to 1855.50 would control more than 12 percent of the market deposits. In addition, the record of recent entry into the Santa Cruz The Board also has evaluated the competitive influence banking market evidences the market's attractiveness for of five active community credit unions in the market. These credit unions control approximately $277.2 million of deposits in the market, which, on a 50 percent weighted 48. With the deposits of these credit unions weighted at 50 percent, Wells Fargo would be the third largest depository organization in the market, with approximately J3 percent of market deposits, and 46. With the deposits of these credit unions weighted at 50 percent, Wachovia would be the largest depository organization in the market, Wells Fargo would be the sixth largest depository organization in the controlling approximately 20.8 percent of market deposits. market, with approximately 7.1 percent of market deposits, and 49. The Santa Cruz banking market in California is defined as the Wachovia would be the largest largest depository org'anization in the Santa Cruz Ranally Metro Area. market, controlling approximately 21.1 percent of market deposits. 50. With the deposits of these credit unions weighted at 50 percent, 47. The Placerville banking market in California is defined as Wells Fargo would be the second largest depository organization in the western EI Dorado County outside of the Sacramento banking market, market, with approximately 17.8 percent of market deposits, and including the cities of Diamond Springs, Georgetown, Placerville, and Wachovia would be the largest depository organization in the market, Pollock Pines. controlling approximately 24.8 percent of market deposits.

Legal Developments: Fourth Quarter, 2008 B47 entry. The Board notes that two depository institutions have not have a significantly adverse effect on competition or on entered the market de novo since 2004. the concentration of resources in any relevant banking market and that competitive considerations are consistent BANKING MARKET IN COLORADO with approval. Grand Junction. In the Grand Junction banking market,51 FINANCIAL, MANAGERIAL, AND SUPERVISORY Wells Fargo is the largest depository organization, control CONSIDERATIONS ling deposits of approximately $500.9 million, which rep resent approximately 23.7 percent of market deposits. Section 3 of the BHC Act requires the Board to consider the Wachovia operates the second largest depository organiza financial and managerial resources and future prospects of tion in the market, controlling deposits of approximately the companies and banks involved in the proposal and $291.8 million, which represent approximately 13.8 per certain other supervisory factors. The Board also reviews cent of market deposits. On consummation of the proposal, the financial and managerial resources of the organizations Wells Fargo would remain the largest depository institution involved in the proposal under section 4 of the BHC Act. in the market, controlling deposits of approximately The Board has carefully considered these factors in light of $792.7 million, which represent 37.5 percent of market all the facts of record, including confidential supervisory deposits. The HHI would increase 653 points to 1877. and examination information received from the relevant Several factors indicate that the increase in concentra federal and state supervisors of the organizations involved, tion in the Grand Junction banking market, as measured by publicly reported and other financial information, informa the HHI and Wells Fargo's market share, overstates the tion provided by Wells Fargo and Wachovia, and public potential competitive effects of the proposal in the market. comments received on the proposal..';3 After consummation of the proposal, 13 other commercial In evaluating the financial resources in expansion pro bank competitors would remain in the market. posals by banking organizations, the Board reviews the The Board also has evaluated the competitive influence financial condition of the organizations involved on both a of two active community credit unions in the market. These parent-only and consolidated basis, as well as the financial credit unions control approximately $83.6 million in depos condition of the subsidiary depository institutions and its in the market, which, on a 50 percent weighted basis, significant nonbanking operations. In this evaluation, the represents approximately 1.9 percent of market deposits. Board considers a variety of information, including capital After accounting for these credit union deposits, Wells adequacy, asset quality, and earnings performance. In Fargo on consummation of proposal would control approxi assessing financial resources, the Board consistently con mately 36.7 percent of market deposits, and the HHI would siders capital adequacy to be especially important. The increase 628 points to 1808.52 Board also evaluates the financial condition of the resulting In addition, the record of recent entry into the Grand organization at consummation, including its capital posi Junction banking market evidences the market's attractive tion, asset quality, earnings prospects, and the impact of the ness for entry. The Board notes that two depository institu proposed funding of the transaction. tions have entered the market de novo since 2004. Other The Board has carefully considered the proposal under factors indicate that the market remains attractive for entry. the financial factors. 54 The proposed transaction is struc From 2004 to 2007, the market's annualized population tured as a share exchange. The subsidiary depository growth exceeded the average annualized population growth institutions of Wells Fargo and Wachovia are well capital for metropolitan counties in Colorado. ized and would remain so on consummation of this pro posal. Wells Fargo is well capitalized and has announced D. Views of Other Agencies and Conclusion on that it intends to raise additional capital. In light of its Competitive Considerations capital-raising efforts, Wells Fargo would remain well capitalized after consummation of this proposal. The Board The DOJ also has reviewed the proposal and has advised has also considered the other financial factors noted above the Board that it does not believe that the proposal would likely have a significant adverse effect on competition in any relevant banking market at this time. The appropriate 53. Citigroup contends that its acquisition of Wachovia ultimately federal supervisory agencies have been afforded an oppor would be less costly 10 the federal government than an acquisition by Wells Fargo. In addition, Citigroup claims that Wells Fargo's acquisi tunity to comment and have not objected to the proposal. tion of Wachovia would discourage companies from future involve Accordingly, based on all the facts of record, the Board ment in a proposal which, like Citigroup's proposed acquisition of has concluded that consummation of the proposal would Wachovia, involves FDIC assistance. These comments were weighed in the Board's consideration of the financial and managerial resources of the companies involved in the transaction to the extent they relate to 51. The Grand Junction banking market in Colorado is defined as those factors. See Western. Mesa County. 54. Citigroup asserted that Wells Fargo's financial condition could 52. With the deposits of these credit unions weighted at 50 percent, be adversely affected if a recent IRS ruling that provided banks Wells Fargo would be the largest depository organization in the accelerated tax relief on certain built-in loan losses is invalidated. In market, with approximately 23.2 percent of market deposits, and analyzing the financial factors in this proposal, the Board has reviewed Wachovia would be the second largest depository organization in the carefully information regarding the impact of the ruling on Wells market, controlling approximately 13.5 percent of market deposits. Fargo's overall financial condition.

B48 Federal Reserve Bulletin 0 March 2009 in light of infonnation provided by Wells Fargo and under section 4 of the BHe Act to acquire voting securities Wachovia and supervisory information available to the of an insured savings associationY Federal Reserve through its supervision of these companies The Board has carefully considered the convenience and and from the primary supervisors of the depository institu needs factor and the eRA perfonnance records of the tion subsidiaries of these companies. Based on its review of subsidiary depository institutions of Wells Fargo and the record, the Board finds that Wells Fargo has sufficient Wachovia. The Board has considered carefully all the facts resources to effect the proposal. of record, including the evaluations of the eRA perfor The Board also has considered the managerial resources mance records of the subsidiary depository institutions of of the organizations involved in the proposed transaction. Wells Fargo and Wachovia, data reported by Wells Fargo The Board has reviewed the examination records of Wells and Wachovia under the Home Mortgage Disclosure Act Fargo and Wachovia, their respective subsidiary depository ("HMDA"),58 other infonnation provided by Wells Fargo, institutions, and other nonbanking companies involved in confidential supervisory information, and comments re the proposal. In addition, the Board has considered its ceived on the proposal,5,! supervisory experience and that of other relevant supervi As provided in the eRA, the Board evaluates the record sory agencies, including the Gee and the GTS, with the of perfonnance of an institution in light of examinations by organizations and their records of compliance with appli the appropriate federal supervisors of the eRA perfor cable banking law and anti-money-Iaundering laws. mance records of the relevant institutions. An institution's The Board also has considered the future prospects of most recent eRA performance evaluation is a particularly the organizations involved in the proposal. As part of this important consideration in the applications process because evaluation, the Board considered infonnation regarding it represents a detailed, on-site evaluation of the institu how Wells Fargo would manage the integration of Wacho tion's overall record of performance under the eRA by its via into Wells Fargo.55 The Board also considered Wells appropriate federal supervisor,60 Fargo's extensive experience in acquiring bank holding Wells Fargo's lead subsidiary insured depository institu companies and successfully integrating them into its orga tion, Wells Fargo Bank, National Association, Sioux Falls, nization. Moreover, as noted above, the Board found that South Dakota, received an "outstanding" rating at its most expeditious approval of the proposal was warranted in light recent eRA performance evaluation by the Gee, as of of the weakened condition of Wachovia and the tunnoil in September 30, 2004. Each of Wells Fargo's other subsid the financial markets. The record indicates that Wells Fargo iary insured depository institutions received an "outstand has the financial and managerial resources to serve as a ing" or "satisfactory" rating at its most recent eRA source of strength to Wachovia and its subsidiary deposi perfonnance evaluation.51 tory institutions. Wachovia's lead subsidiary insured depository institu Based on all the facts of record, the Board has concluded tion, Wachovia Bank, received an "outstanding" rating at that the financial and managerial resources and the future its most recent eRA perfonnance evaluation by the ace, prospects of the organizations involved in the proposal are as of June 30, 2006, Wachovia's other subsidiary insured consistent with approval, as are the other supervisory depository institutions also received "outstanding" ratings factors. at their most recent eRA perfonnance evaluations.62 The Board also considered the fair lending records of, and the 2007 lending data reported under HMDA by, Wells CONVENIENCE AND NEEDS AND CRA Fargo and Wachovia in light of comment received on the PERFORMANCE CONSIDERATIONS proposal,63 Although the HMDA data might reflect certain In acting on a proposal under section 3 of the BHe Act, the 57. See. e,g" North Fork Bancorporation, Inc, 86 Federal Reserve Board must consider the effects of the proposal on the Bulletin 767 (2000). convenience and needs of the communities to be served and 58. 12 U.S,C §2801 etseq. take into account the records of the relevant depository 59. A commenter expressed concern about certain subprime lend institutions under the eRA. 56 The Board also must review ing activities of Wells Fargo. 60. The Interagency Questions and Answers Regarding Commu the records of perfonnance under the eRA of the relevant nity Reinvestment provide that a CRA examination is an important and insured depository institutions when acting on a notice often controlling factor in the consideration of an institution'S CRA record. See 64 Federal Register 23,641 (1999). 6 L Appendix D provides the most recent CRA ratings of those institutions. 55. Citigroup also questioned, in light of the risk profile of Wacho 62. Wachovia Bank of Delaware, National Association, was last via's assets and the absence of FD IC assistance to the transaction, evaluated hy the OCC as of June 30, 2006. Wachovia Bank, F.S.B., whether Wells Fargo possesses sufficient financial and managerial and Wachovia Mortgage, ES.B.. formerly known as World Savings resources. The Board has considered carefully this comment in light of Bank, ES.B. (Texas) and World Savings Bank, ES.B., respectively, information received about Wachovia's asset portfolio from the rel were last evaluated by the OTS as of August 15,2005. Wachovia Card evant supervisors of Wachovia's subsidiary banks, other supervisory Services, National Association, was established in January 2007, and infonnation, and infonnation received from Wells Fargo, including has not yet been evaluated for CRA performance. information about due-diligence reviews performed by Wells Fargo 63, A commenter also asserted that Wachovia made a disproportion with respect to Wachovia's asset portfolio. ately larger percentage of higher-cost loans to Hispanic borrowers than 56, 12 U.S,c. §2901 et seq.; 12 U.S.c. § 1842(c)(2). to nonminority borrowers. In addition, the commenter referred to news

Legal Developments: Fourth Quarter, 2008 B49 disparities in the rates of loan applications, originations, Wachovia Bank, F.S.B. As part of its evaluation of the denials, or pricing among members of different racial or public interest factors under section 4 of the BHC Act, the ethnic groups in certain local areas, the data provide an Board has reviewed carefully the public benefits and insufficient basis by themselves on which to conclude possible adverse effects of the proposaL The record indi whether or not Wells Fargo or Wachovia has excluded or cates that consummation of the proposal would benefit imposed higher costs on any group on a prohibited basis. consumers currently served by Wachovia's subsidiary sav The Board recognizes that HMDA data alone, even with ings associations by providing them access to additional the recent addition of pricing information,64 provide only banking and non banking products and services of Wells limited information about the covered loans.65 HMDAdata, Fargo. As noted, the proposal would also strengthen therefore, provide an inadequate basis, absent other infor Wachovia and all its subsidiary depository institutions. mation, for concluding that an institution has engaged in For the reasons discussed above, and based on the entire illegal lending discrimination. record, the Board has determined that the conduct of the Accordingly, the Board has taken into account other proposed non banking activities within the framework of information, including examination reports by the primary Regulation Y and Board precedent is not likely to result in federal supervisors of the organizations' subsidiary institu significantly adverse effects, such as undue concentration tions that provide on-site evaluations of compliance with of resources, decreased or unfair competition, conflicts of fair lending laws by institutions, and has consulted with interests, or unsound banking practices. Moreover, based those supervisors. The record, including confidential super on all the facts of record, the Board has concluded that visory information, also indicates that Wells Fargo has consummation of the proposal can reasonably be expected taken steps to ensure compliance with fair lending and to produce public benefits that would outweigh any likely other consumer protection laws and regulations, by estab adverse effects. Accordingly, the Board has determined that lishing corporate policies and procedures and implement the balance of the public benefits under the standard of ing audits of compliance management oversight. In addi section 4(j)(2) of the BHC Act is consistent with approvaL tion, Wells Fargo employees involved in the lending As noted. Wells Fargo also has provided notice under process receive fair lending training, and Wells Fargo sections 25 and 25A of the FRA and the Board's Regula maintains second-review procedures for home mortgage tion K to acquire the agreement corporation and Edge Act lending. subsidiaries and the foreign operations of Wachovia. The Based on a review of the entire record, and for the Board concludes that all factors required to be considered reasons discussed above, the Board has concluded that under the FRA and the Board's Regulation K are consistent considerations relating to the convenience and needs factor with approval. and the CRA performance records of the relevant insured depository institutions are consistent with approval of the CONCLUSION proposal. Based on the foregoing, the Board determined in its order of October 12 that the application and notices should be PUBLIC BENEFITS approved.66 In reaching its conclusion, the Board consid As noted above, Wells Fargo has filed a notice under ered all the facts of record in light of the factors that the sections 4(c)(8) and 4(j) of the BHC Act for its proposed indirect acquisitions of Wachovia Mortgage, ES.B. and 66. A commenter requested that the Board hold a public meeting 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 reports that the city of Baltimore filed litigation against Wells Fargo supervisory authority for the bank to be acquired makes a written asserting that certain subsidiaries of Wells Fargo had engaged in recommendation of denial of the application. The Board has not predatory lending in predominantly African American areas of Balti received such a recommendation from the appropriate supervisory more. The litigation is before a court of competent jurisdiction, and the authorities. The Board's regulations provide for a hearing on a notice Board and the OCC will continue to monitor its progress and to review filed under section 4 of the BHC Act if there are disputed issues of Wells Fargo's compliance with fair lending and other consumer material fact that cannot be resolved in some other manner (12 CFR protection laws and regulations in future examinations. 225.25(a)(2)). Under its rules. the Board also may, in its discretion, 64. Beginning January I, 2004, the HMDA data required to be hold a public meeting or hearing on an application to acquire a bank if reported by lenders were expanded to include pricing information for necessary or appropriate to clarify factual issues related to the loans on which the annual percentage rate (APR) exceeds the yield for application and to provide an opportunity for testimony (12 CFR U.S. Treasury securities of comparable maturity 3 or more percentage 225.16(e), 262.25(d». The Board has considered carefully the com points for first-lien mortgages and 5 or more percentage points for menter's requests in light of all the facts of record. The commenter's second-lien mortgages (12 CFR 203.4). request fails to demonstrate why its written comments do not present 65. The data, for example, do not account for the possibility that an its views adequately or why a meeting or hearing otherwise would be institution'S outreach efforts may attract a larger proportion of margin necessary or appropriate. In addition, in light of the unusual and ally qualified applicants than other institutions attract and do not exigent circumstances affecting the financial markets, the weakened provide a basis for an independent assessment of whether an applicant financial condition of Wachovia, and all other facts and circumstances, who was denied credit was, in fact, creditworthy. [n addition, credit the Board waived public notice of this proposal. For these reasons, and history problems, excessive debt levels relative to income, and high based on a11lhe facts of record, the Board has determined that a public loan amounts relative to the value of the real estate collateral (reasons meeting or hearing was not required or warranted in this case, and the most frequently cited for a credit denial or higher credit cost) are not request for a public meeting or hearing on the proposal is accordingly available from HMDA data. denied.

B50 Federal Reserve Bulletin D March 2009 Board is required to consider under the BHC Act. As noted Board finds necessary to ensure compliance with, and to in the Board's order, the Board's approval is specifically prevent evasion of, the provisions of the BHC Act and the conditioned on compliance by Wells Fargo with all the Board's regulations and orders issued thereunder. These commitments made to the Board in connection with the commitments and conditions are deemed to be conditions application and notices, including the commitments and imposed in writing by the Board in connection with its conditions discussed in this order. The Board's approval of findings and decision and, as such, may be enforced in the nonbanking aspects of the proposal also is subject to all proceedings under applicable law. the conditions set forth in Regulation Y, including those in sections 225.7 and 225.25(c),67 and to the Board's authority OcTOBER 2 I, 2008 to require such modification or termination of the activities of a bank holding company or any of its subsidiaries as the ROBERT DEV. FRIERSON Deputy Secretary of the Board 67. 12 eFR 225.7 and 225.25(c). Appendix A COMPUTATION OF THE AMOUNT OF DEPOSITS HELD BY INSTITUTIONS USING THE REVISED CALL REPORT AND THRIFT FINANCIAL REPORT FORMS Insured Banks without Foreign Deposits Section 3(1) of the FDI Act and FDIC regulations," reported on Schedule RC-O, and adding the "Interest The amount of deposits held by insured banks without accrued and unpaid on deposits in domestic offices," foreign deposits using the revised Call Report was com reported on Schedule RC-G. puted by adding the "Total deposit liabilities before exclu sions (gross) as defined in Section 3(1) of the FDI Act and FDIC regulations," reported on Schedule RC-O, and the Insured Savings Associations "Interest accrued and unpaid on deposits in domestic The amount of deposits held by insured savings associa offices," reported on Schedule RC-G. tions using the revised Thrift Financial Report was com puted by subtracting "Total foreign deposits" from the Insured Banks with Foreign Deposits "Total deposit liabilities before exclusions (gross) as de The amount of deposits held by insured banks with foreign fined in Section 3(1) of the FDI Act and FDIC regula deposits using the revised Call Report was computed by tions," reported on Schedule DI, and adding the "Ac subtracting "Total foreign deposits" from the "Total crued Interest Payable-Deposits," reported on Schedule deposit liabilities before exclusions (gross) as defined in SC. Appendix B W2':LLS FARGO AND WACHOVIA BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO] GUIDELINES WITHOUT DIVESTITURES Increase in Pro Forma Pro Forma Pro Forma Market HHI HHI market share rank ARIZONA BANKING MARKETS Phoenix .......................................... .. 164 1,874 23.9 2 Prescott ........................................... . 395 1,708 28.7 Tucson ........................................... .. 261 1,767 26.5 CALIFORNIA BANKING MARKETS Chico .............................................. . 344 1,702 26.2 I Fresno ............................................ .. 185 1,322 20.1 2 Hesperia-Apple Valley-Victorville ........ . 265 1,607 23.7 1 Lake County ................................... .. 183 1,732 27.1 1 Los Angeles .................................... .. 107 957 16.3 2 Modesto .......................................... . 275 1,215 23.5 1 Napa .............................................. . 493 1,593 31.7 1

Legal Developments: Fourth Quarter. 2008 B5l Appendix B-Continued WELLS FARGO AND WACHOVIA BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES WITHOUT DIVESTITURES-Continued Increase in Pro Forma Pro Forma Pro Forma Market HHI HHI market share rank Oxnard-Thousand Oaks-Ventura ........... . 361 1,607 27.2 I Palm Springs-Cathedral City ............... . 219 1,148 21.1 1 Riverside-San Bernardino ................... . 70 1.541 15 2 Sacramento ...................................... . 414 1,550 30.8 1 Salinas ............................................ . 239 1,722 22.3 2 San Diego ........................................ . 198 1,265 22.8 1 San Francisco-Oakland-San Jose .......... . 236 1,681 28.3 I Santa Barbara ................................... . 149 1,672 17.4 2 Santa Maria ..................................... . 264 1,702 24.5 2 Santa Rosa ....................................... . 179 1,168 19.7 I Stockton .......................................... . 209 1,229 21.2 I Temecula ......................................... . 307 1,538 25.3 1 COLORADO BANKING MARKETS Colorado Springs ............................... . 388 1,193 29.2 1 Denver-Boulder ................................ . 324 1,185 28 1 Fort Collins-Loveland ........................ . 88 1,428 15.2 2 Pueblo ............................................ . 571 1,797 34.1 1 Weld County .................................... . 46 1,959 12.6 2 ILLINOIS BANKING MARKET o Chicago ........................................... . 775 0.6 25 NEVADA BANKING MARKETS Las Vegas ........................................ . 16 3,547 5.6 3 Reno .............................................. . 69 2,697 17.4 2 TEXAS BANKING MARKETS Amarillo .......................................... . 60 2,725 12.9 2 Austin ............................................. . 157 1,152 20.5 1 Beaumont-Port Arthur ....................... .. 234 1,701 23.9 2 Dallas ............................................. . 19 1,591 6.4 4 Fort Worth ....................................... . 6 5,894 4.5 3 Houston .......................................... . 100 1,806 14.3 2 San Antonio ..................................... . 28 2,243 8.3 4 NOTE: Data are as of June 30, 2007. adjusted to reflect merger and acquisi Reserve Bank of San Francisco, www.frbsf.orglpublicationslbanking/marketf tions through October 3. 2008. All rankings, market deposit shares, and HHls marketdef.pdf: in Colorado on tbe website of the Federal Reserve Bank of are based on thrift institution deposits weighted at 50 percent. except for the Kansas City. www.kansascityfed.orglhomelsubwebnav.cfm?level=3&theID= savings association deposits of Wachovia. which are weighted at 100 percent 9638&SubWeb=2: and in Texas on the website for the Federal Reserve Bank both before and after consummation of the proposal. These savings associa· of Dallas. dallasfed.orglbanking/apPs/mkdef.html. tions are, and on consummation will continue to be. controlled by a bank hold- The Chicago. Illinois banking market is defined as Cook. Du Page. and Lake company. counties in Illinois. purposes of this appendix. the definitions of the banking markets in Ari zona, California. and Nevada may be found on the website of the Federal

B52 Federal Reserve Bulletin 0 March 2009 Appendix C l¥ELLS FARGO AND WACHOVIA BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES AFTER DIVESTITURES Change in Pro Forma Pro Forma Pro Forma Market HHI HHI market share rank --~ .. --~ ... CALIFORNIA BANKING MARKETS Davis ............................................... 0 1,852 18.3 3 Grass Valley ...................................... 0 1,558 13.9 5 Monterey-Seaside-Marina .................... 147 1,595 26.6 I Sonora ...................... " ...................... -222 1,685 30.9 I COLORADO BANKING MARKET Fremont County ................................. 0 1,726 15.3 4 KOTE: Data are as of June 30. 2007. adjusted to reflect merger and acquisi For purposes of this appendix, the definitions of the banking markets in tions through October 3. 2008. All rankings. market deposit shares. and HHls California may be found on the website of the Federal Reserve Bank of San are based on thrift institution deposits weighted at 50 percent, except for the Francisco. www.frbstorg/publicationsibanking/marketlmarketdef.pdf. savings association deposits of Wachovia, which are weighted at 100 percent The Fremont County. Colorado banking market is defined as Fremont both before and after consummation of the proposal. These savings associa· County. tions are. and on consummation will continue to be. controlled by a bank hold· ing company. Appendix D MOST RECENT CRA RATINGS OF l¥ELLS FARGO's SUBSIDIARIES Subsidiary bank CRA rating Date Supervisor ....- --.. - -- .... ~ .. ~ ... --~ .. -~ Wells Fargo Bank Northwest, National Association, Ogden, Utah ..................................... .. Satisfactory December 2005 OCC Wells Fargo HSBC Trade Bank, National Association, San Francisco, California .................... .. Outstanding June 2006 OCC Wells Fargo Financial National Bank, Las Vegas, Nevada ............................ .. Outstanding June 2006 OCC Wells Fargo Financial Bank, Sioux Falls, South Dakota .................... . Outstanding March 2005 FDIC Shoshone First Bank, Cody, Wyoming ................................. . Outstanding February 2003 FRB Sheridan State Bank, Sheridan, Wyoming ............................ . Satisfactory February 2008 FRB First State Bank of Pinedale, Pinedale, Wyoming ............................ .. Satisfactory August 2007 FRB Jackson State Bank and Trust, Jackson, Wyoming ............................. .. Satisfactory July 2006 FRB

Legal Developments: Fourth Quarter, 2008 B53 ORDERS ISSUED UNDER needs to assess the application adequately; and (3) is INTERNATIONAL BANKING ACT subject to comprehensive supervision on a consolidated basis by its home-country supervisors.4 The Board also considers additional standards as set forth in the IBA and Banco Espfrito Santo de Investimento, S.A. Regulation K,5 As noted above, Bank, BES, and Credit Agricole all Lisbon, Portugal engage directly in the business of banking outside the United States. Bank also has provided the Board with Order Approving Establishment of a Branch information necessary to assess the application through submissions that address the relevant issues. Banco Espfrito Santo de Investimento, S.A. ("Bank"), With respect to supervision by home-country authorities Lisbon, Portugal, a foreign bank within the meaning of the in connection with applications involving other banks in International Banking Act ("IBA"), has applied under Portugal, including BES, the Federal Reserve previously section 7(d) of the IBAI to establish a branch in New York, has determined that those banks were subject to compre New York. The Foreign Bank Supervision Enhancement hensive supervision on a consolidated basis by their home Act of 1991, which amended the IBA, provides that a country supervisor, Banco de PortugaL6 Bank is, and BES foreign bank must obtain the approval of the Board to remains, supervised by Banco de Portugal on substantially establish a branch in the United States. the same terms and conditions. The Federal Reserve also Notice of the application, affording interested persons an has previously determined that Credit Agricole is subject to opportunity to comment, has been published in a newspa comprehensive supervision on a consolidated basis by its per of general circulation in New York, New York (The home-country supervisor, the Commission Bancaire.7 Credit New York Post, October 18, 2007). The time for filing Agricole also remains supervised by the Commission comments has expired, and the Board has considered all Bancaire on substantially the same terms and conditions. comments received. Based on all the facts of record, it has been determined that Bank is a wholly owned subsidiary of Banco Espfrito Bank, BES, and Credit Agricole are each subject to com Santo, S.A. eBES"), also in Lisbon, and an indirect prehensive supervision on a consolidated basis by their subsidiary of Credit Agricole SA ("Credit Agricole"), respective home-country supervisors. Paris, France. Bank provides investment banking and advi The additional standards set forth in section 7 of the IBA sory services, including project finance, corporate restruc and Regulation K have also been taken into account.K turing, securities trading and brokerage, and securities underwriting and distribution. Outside Portugal, Bank oper ates branches in Spain and the United Kingdom, subsidiar ies in Brazil and Ireland, and a joint venture in Poland. 4, 12 U.S,c, §§310S(d)(2); 12 CFR 211.24. In a5sessing this Bank would be a qualifying foreign banking organization standard, the Board considers, among other indicia of comprehensive, under Regulation K.2 consolidated supervision. the extent to which the home-country super visors (i) ensure that the bank has adequate procedures for monitoring BES, with consolidated assets of $115 billion,) is the and controlling its activities worldwide; (ii) obtain information on the third largest banking group in Portugal and provides bank condition of the bank and its subsidiaries and offices through regular ing services to retail and corporate customers through more examination reports, audit reports, or otherwise; (iii) obtain informa, than 700 branches in Portugal. In the United States, BES tion on the dealings with and relationship between the bank and its operates a branch in New York City and controls Espirito affiliates, both foreign and domestic; (Iv) receive from the bank financial reports that are consolidated on a worldwide basis or Santo Bank, Miami, Florida. Credit Agricole provides a comparable information that permits analysis of the bank's financial wide range of banking and financial services to retail and condition on a worldwide consolidated basis; and (v) evaluate pruden corporate customers around the world and is the largest tial standards. such as capital adequacy and risk asset exposure. on a banking group in France, with assets of approximately worldwide basis, No single factor is essential. and other elements may inform the Board's determination. $2.3 trillion. S, 12 U.S.C. §§3105(d)(3)-(4); 12 CFR 211.24(c)(2)-(3). The proposed branch would facilitate transactions in the 6. See Banco Santander lima. SA.. 93 Fe dera/ Reserve Bulletin United States, Canada, and Latin America for Bank's C71 (2007); Caixa Ecotll}mica Montepio Gem/, 86 Federal Reserve clients by offering advisory and other services for project Bulletin 700 (2000): Banco Comercial Portu{?,ues. S.A., 86 Federal finance, leveraged financing, and structured commodity Reserve Bulletin 6 I3 (2000); Banco Esp{rito Santo, SA, et al,. 86 Federal Reserve Bulletin 418 (2000). finance and by providing asset and derivatives trading. 7. See Federation Nationale du Credit Agrico/e, 92 Federal Under the IBA and Regulation K, in acting on an Reserve Bulletin C 159 (2006), application by a foreign bank to establish a branch, the 8, The additional standards set forth in section 7 of the IBA and Board must consider whether the foreign bank (I) engages Regulation K include the following (I) whether the bank's home country supervisor has consented to the establishment of the bmnch; directly in the business of banking outside of the United the financial and managerial resources of the bank; (2) whether the States; (2) has furnished to the Board the information it appropriate supervisors in the home country may share information on the bank's operations with the Board: (3) whether the bank and its home country have adopted and implemented policies and procedures I. 12 U,S.c. §3105(d), to address and combat money laundering; and (4) whether the bank 2. 12 CFR 21 1.23(a) , and its U.S. affiliates are in compliance with U.S. law; the needs of the 3. Asset and ranking data are as of June 30, 2008. community: and the bank's record of operation.

B54 Federal Reserve Bulletin D March 2009 Banco de Portugal has no objection to the establishment of federal statutes, the Board may require termination of any the proposed branch. of Bank's direct or indirect activities in the United States. Portugal's risk-based capital standards are consistent Approval of this application also is specifically conditioned with those established by the Basel Capital Accord ("Ac on compliance by Bank with the commitments made in cord"). Bank's capital is in excess of the minimum levels connection with this application and with the conditions in that would be required by the Accord and is considered this order. 10 For purposes of this action, these commitments equivalent to capital that would be required of a U.S. and conditions are deemed to be conditions imposed in banking organization. Managerial and other financial re writing by the Board in connection with its findings and sources of Bank are consistent with approval, and Bank decision and, as such, may be enforced in proceedings appears to have the experience and capacity to support the under 12 U.S.c. § 1818 and other applicable law. proposed branch. In addition, Bank has established controls By order, approved pursuant to authority delegated by and procedures for the proposed branch to ensure compli the Board, effective November 5, 2008. ance with U.S. law and for its operations in general. Portugal is a member of the Financial Action Task Force ROBERT DEV. FRIERSON ("FATF") and subscribes to its recommendations on mea Deputy Secretary of the Board sures to combat money laundering. In accordance with these recommendations, Portugal has enacted laws and China Construction Bank Corporation developed regulatory standards to deter money laundering. Money laundering is a criminal offense in Portugal, and Beijing, People's Republic of China Portuguese 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 and terrorist financing throughout their worldwide operations. Bank has policies China Construction Bank Corporation ("CCB"), Beijing, and procedures to comply with these laws and regulations People's Republic of China, a foreign bank within the that are monitored by governmental entities responsible for meaning of the International Banking Act ("IBA"), has anti-money-Iaundering compliance. applied under section 7(d) of the IBAI to establish a branch With respect to access to information on Bank's opera in New York, New York. The Foreign Bank Supervision tions, the restrictions on disclosure in relevant jurisdictions Enhancement Act of 1991, which amended the IBA, pro in which Bank operates have been reviewed and relevant vides that a foreign bank must obtain the approval of the government authorities have been contacted regarding Board to establish a branch in the United States. access to information. Bank and its parent companies have Notice of the application, affording interested persons an committed to make available to the Board such information opportunity to comment, has been published in a newspa on the operations of Bank and any of its affiliates that the per of general circulation in New York, New York (The Board deems necessary to determine and enforce compli New York Post, March 12, 2008). The time for filing ance with the IBA, the Bank Holding Company Act, and comments has expired, and the Board has considered all other applicable federal law. To the extent that the provi comments received. sion of such information to the Board may be prohibited by CCB, with total assets of approximately $1.1 trillion, is law or otherwise, Bank and its parent companies have the second largest bank in China.2 The government of committed to cooperate with the Board to obtain any China owns approximately 57.0 percent of CCB's shares.' necessary consents or waivers that might be required from third parties for disclosure of such information. In addition, 10. The Board's authority to approve the establishment of the subject to certain conditions, Banco de Portugal may share proposed branch parallels the continuing authority of the state of information on Bank's operations with other supervisors, New York to license branches of a foreign bank. The Board's approval including the Board. In light of these commitments and of this application does not supplant the authority of the state of other facts of record, and subject to the conditions described New York or its agent, the New York State Banking Department below, it has been determined that Bank has provided ("Department"). to license the proposed branch of Bank in accor dance with any terms or conditions that the Department may impose. adequate assurances of access to any necessary information that the Board may request. I. 12 U.S.c. § 3 \05(d). Based on the foregoing and all the facts of record, 2. Asset and ranking data are as of September 30, 2008. Bank's application to establish a branch in New York, 3. Central SAFE Investments Limited (also known as "Huijin") directly and indirectly owns approximately 57.0 percent of CCB's New York, is hereby approvedY Should any restrictions on shares. Huijin is currently owned directly by the government of China access to information on the operations or activities of and was formed to assist in the restructuring of major Chinese banks. Bank and its affiliates subsequently interfere with the The government transferred shares of several Chinese banks. includ Board's ability to obtain information to determine and ing CCB. to Huijin at the time of the recapitalization and restructuring enforce compliance by Bank or its affiliates with applicable of these banks between 2004 and 2006. Huijin also owns a majority interest in Bank of China Limited. which operates three branches in the United States. and. together with the Chinese Ministry of Finance. 9. Approved by the Director of the Division of Banking Supervi it owns a majority interest in Industrial and Commercial Bank of sion and Regulation, with the concurrence of the General Counsel. China Limited ("ICBC"). which operates a branch in New York. The pursuant to authority delegated by the Board. government of China intends to transfer the ownership of Huijin to

Legal Developments: Fourth Quarter, 2008 B55 Bank of America Corporation4 and Temasek Holdings, a considers additional standards as set forth in the IBA and sovereign wealth fund owned by the government of Sin Regulation K.9 gapore, own 19.1 and 5.7 percent, respectively, of the The IBA includes a limited exception to the general shares of CCB. No other shareholder owns more than standard relating to comprehensive, consolidated supervi 5 percent of CCB's shares.5 sion.to This exception provides that, if the Board is unable CCB engages primarily in corporate and retail banking to find that a foreign bank seeking to establish a branch, and treasury operations throughout China, including Hong agency, or commercial lending company is subject to Kong and Macau. Outside China, CCB operates branches comprehensive supervision or regulation on a consolidated in Singapore, Japan, South Africa, Korea, and Germany basis by the appropriate authorities in its home country, the and representative offices in the United Kingdom and Board may nevertheless approve the application provided Australia. In the United States, CCB operates a representa that (i) the appropriate authorities in the home country of tive office in New York.6 CCB would meet the require the foreign bank are actively working to establish arrange ments for the consolidated supervision of such bank; and ments for a qualifying foreign banking organization under Regulation K.7 (ii) all other factors are consistent with approval.ll In deciding whether to exercise its discretion to approve an The proposed New York branch would engage in whole application under authority of this exception, the Board sale deposit-taking, lending, trade finance, and other bank must also consider whether the foreign bank has adopted ing services. and implemented procedures to combat money launder Under the IBA and Regulation K, in acting on an ing,12 The Board also may take into account whether the application by a foreign bank to establish a branch, the home country of the foreign bank is developing a legal Board must consider whether (l) the foreign bank engages regime to address money laundering or is participating in directly in the business of banking outside the United States; (2) has furnished to the Board the information it multilateral efforts to combat money laundering. 13 This is the standard applied by the Board in this case. needs to assess the application adequately; and (3) is As noted above, CCB engages directly in the business of subject to comprehensive supervision on a consolidated banking outside the United States. CCB also has provided basis by its home-country supervisors.H The Board also the Board with information necessary to assess the applica tion through submissions that address the relevant issues. Based on all the facts of record, the Board has deter mined that CCB's home-country supervisory authority is China Investment Corporation (,'CIC"), an investment fund that is also wholly owned by the government of China. Both CIC and Huijin actively working to establish arrangements for the consoli are non-operating companies that hold investments on behalf of the dated supervision of the bank and that considerations government of China. Neither CIC nor Huijin engages directly in relating to the steps taken by CCB and its home jurisdiction commercial or financial activities. to combat money laundering are consistent with approval Under the IBA. any company that owns a foreign bank with a under this standard. The China Banking Regulatory Com branch in the United States is subject to the Bank Holding Company Act (HBHC Act") as if it were a bank holding company. As a result of mission ("CBRC") is the principal supervisory authority the ownership by Huijin of Bank of China Limited and ICBC, Huijin is of CCB, including its foreign subsidiaries and affiliates, for subject to the BHC Act. On the transfer of Huijin to CIC. CIC would all matters other than laws with respect to anti-money also become subject to the BHC Act. laundering, The CBRC has the authority to license banks, The Board has provided certain exemptions to CIC and Huijin 14 under section 4(c)(9) of the SHC Act (\ 2 U.S.C. § 1843(c)(9». which regulate their activities and approve expansion, both domes authorizes the Board to grant exemptions to foreign companies from tically and abroad. It supervises and regulates CCB, includ the nonbanking restrictions of the BHC Act where the exemptions ing its subsidiaries and foreign operations, through a comwould not be substantially at variance with the purposes of the act and would be in the public interest. The exemptions provided to CIC and Huijin would not extend to CCB or any other Chinese banking tion on the dealings with and relationship between the bank and its subsidiary of CIC or Huijin that operates a branch or agency in the affiliates, both foreign and domestic; (Iv) receive from the bank United Stales. See Board letter to H. Rodgin Cohen. dated August 5, financial reports that are consolidated on a worldwide basis or 2008. comparable information that permits analysis of the bank's financial 4. Under the Board's Regulation K, Bank of America Corporation condition on a worldwide consolidated basis; and (v) evaluate pruden is required to seek the Board's approval to retain its investment in tial standards, such as capital adequacy and risk asset exposure, on a CCB once CCB establishes a branch in the United States. worldwide basis. No single factor is essential, and other elements may 5. HKSCC Nominees Limited holds 10.8 percent of the shares of inform the Board's determination. CCB as the registered nominee of several shareholders that each owns 9. 12 U.S.c. §3105(d)(3)-(4); 12CFR 211.24(c)(2)-(3). less than 5 percent of the shares of CCB. 10. 12 U.S,c. §3105(d)(6). 6. CCB represents that the New York representative office would be II. 12 U.S.c. § 3105(d)(6)(A). closed when the branch is established. 12. 12 U.s.c. §3105(d)(6)(B). 7. 12 CFR 211.23(a). 13. Id. 8. 12 U.S.c. §3105(d)(2); 12 CFR 211.24. In assessing this stan 14. Before April 2003, the People's Bank of China (UPBOC") dard. the Board considers, among other indicia of comprehensive. acted as both China's central bank and primary banking supervisor, consolidated supervision, the extent to which the home-country super including anti-money-Iaundering matters. In April 2003, the CBRC visors (i) ensure that the bank has adequate procedures for monitoring was established as the primary banking supervisor and assumed the and controlling its activities worldwide; (ii) obtain information on the majority of the PBOC's regulatory functions. The PBOC maintained condition of the bank and its subsidiaries and offices through regular its roles as China's central bank and primary supervisor for anti examination reports, audit reports, or otherwise; (iii) obtain informa- money -laundering matters.

B56 Federal Reserve Bulletin D March 2009 bination of targeted on-site examinations and continuous and the LVT/STR Rules became effective on March I, consolidated off-site monitoring. Since its establishment in 2007. Together, the law and related rules establish a 2003, the CBRC has enhanced existing supervisory pro regulatory infrastructure to assist China's anti-money grams and developed new policies and procedures designed laundering e1fort. to create a framework for the consolidated supervision of An Anti-Money Laundering Bureau ("AML Bureau") banks in China. was established within the PBOC in 2003.15 The AML On-site examinations by the CBRC cover, among other Bureau coordinates anti-money-laundering efforts at the things, the major areas of operation: corporate governance PBOC and among other agencies. The AML Bureau also and senior management responsibilities; capital adequacy; supervised the creation of the China Anti-Money Launder asset structure and asset quality (including the structure and ing Monitoring and Analysis Center (HAML Center") in quality of loans); off-balance-sheet activities; earnings; September 2004. The AML Center collects, monitors, liquidity; liability structure and funding sources; expansion analyzes, and disseminates suspicious transaction reports ary plans; internal controls (including accounting control and large-value transaction reports. The AML Center sends and administrative systems); legal compliance; accounting suspicious transaction reports to the AML Bureau for supervision and internal auditing (including accounting further investigation. The PBOC issued additional rules in control and administrative systems); and any other areas June 2007 providing clarification on reporting suspicious deemed necessary by the CBRC. transactions to the AML Center and on customer due Off-site monitoring is conducted through the review of diligence and recordkeeping. required annual, semiannual, quarterly, or monthly reports China participates in international fora that address the on, among other things, asset quality, capital adequacy, prevention of money laundering and terrorist financing. liquidity, risk management, corporate governance, affiliate China is a member of the Financial Action Task Force transactions, and internal controls. (H}'ATF")16 and is a party to the 1988 U.N. Convention CCB is required to be audited annually by an accounting Against the Illicit Traffic of Narcotics and Psychotropic firm approved by the PBOC, and the results are shared with Substances, the U.N. Convention Against Transnational the CBRC and the PBOC. The scope of the required audit Organized Crime, the U.N. Convention Against Corrup includes a review of CCB' s financial statements, asset tion, and the U.N. International Convention for the Sup quality, and internal controls. The CBRC may order a pression of the Financing of Terrorism. special audit at any time. In addition, in connection with its As noted, the PBOC is China's primary supervisor for listings on the Shanghai and Hong Kong stock exchanges, anti-money-laundering matters. Like the CBRC, the PBOC CCB is required to have external audits conducted under supervises and regulates CCB through a combination of both International Financial Reporting Standards and gen on-site examinations and off-site monitoring. On-site ex erally accepted accounting practices under Chinese law. aminations focus on CCB's compliance with anti-money CCB is required to publish its financial statements annu laundering laws and rules, including the AML Law, AML ally. CCB conducts internal audits of its offices and opera Rules, and LVT/STR Rules. Off-site monitoring is con tions, including its overseas operations, generally based on ducted through the review of periodic reports. In perform an annual schedule. The internal audit results are shared ing its responsibilities, the PBOC may require any bank to with the CBRC, the PBOC, and the external auditors of provide information and can impose administrative penal CCB. The proposed branch would be subject to internal ties for violations of applicable laws and rules. audits. CCB has policies and procedures to comply with Chi Chinese laws impose various prudential limitations on nese laws and rules regarding anti-money laundering. CCB banks, including limits on transactions with affiliates and represents that it has taken additional steps on its own large exposures. The CBRC is authorized to require any initiative to combat money laundering and other illegal bank to provide information and to impose sanctions for activities. CCB states that it has implemented measures failure to comply. The CBRC also has the power to apply consistent with the recommendations of the FATF and that administrative penalties, including warnings, fines, and it has put in place policies, procedures, and controls to removal from office, for violations of applicable laws and ensure ongoing compliance with all statutory and regula rules. Criminal violations are transferred to the judicial tory requirements, including designating anti-money authorities for investigation and prosecution. laundering compliance personnel and conducting routine In recent years, the Chinese government has enhanced employee training at all CCB branches. CCB's compliance its anti-money-laundering regime. In 2005, the Chinese with anti-money-Iaundering requirements is monitored by government took initial steps to adopt an anti-money the PBOC and by CCB's internal and external auditors. laundering law, the PRC Anti-Money Laundering Law The Board also has taken into account the additional ("AML Law"). The AML Law and two related rules, the standards set forth in section 7 of the IBA and Regula- Rules for Anti-Money Laundering by Financial Institutions ("AML Rules") and the Administrative Rules for the 15. The AML Bureau conducts administrative investigations and Reporting of Large Value and Suspicious Transactions by handles violations of AML Rules. Money laundering cases are referred Financial Institutions ("LVT/STR Rules") were enacted in to the Ministry of Public Security, China's main law enforcement October 2006 and December 2006, respectively. The AML body, for investigation and prosecution. Law and AML Rules became effective on January 1, 2007, 16. China became a member of FATF in June 2007.

Legal Developments: Fourth Quarter, 2008 B57 tion KY The CBRC has no objection to CCB's establish connection with this application and with the conditions in ment of the proposed branch. this order. IS The commitments and conditions referred to The Board has also considered carefully the financial above are conditions imposed in writing by Board in and managerial factors in this case. China has adopted connection with this decision and may be enforced in risk-based capital standards that are consistent with those proceedings under 12 U.s.c. § 1818 against CCB and its established by the Basel Capital Accord ("Accord"). affiliates. CCB's capital is in excess of the minimum levels that By order of the Board of Governors, effective Decem would be required by the Accord and is considered equiva ber 8, 2008. lent to capital that would be required of a U.S. banking organization. Managerial and other financial resources of Voting for this action: Chairman Bernanke, Vice Chairman Kohn, CCB are consistent with approval, and CCB appears to and Governors Warsh, Kroszner, and Duke. have the experience and capacity to support the proposed ROBERT DEY. FRIERSON branch. In addition, CCB has established controls and Deputy Secretary of the Board procedures for the proposed branch to ensure compliance with U.S. law. In particular, CCB has stated that it will apply strict anti-money-laundering policies and procedures Corpbanca at the branch consistent with U.S. law and regulation and Santiago, Chile will establish an internal control system at the branch consistent with U.S. requirements to ensure compliance Order Approving Establishment of a Branch with those policies and procedures. With respect to access to information about CCB's Corpbanca ("Bank"), Santiago, Chile, a foreign bank operations, the Board has reviewed the restrictions on within the meaning of the International Banking Act disclosure in relevant jurisdictions in which CCB operates and has communicated with relevant government authori ("IBA"), has applied under section 7(d) of the IBAI to ties regarding access to information. CCB has committed to establish a federal branch in New York, New York. The make available to the Board such information on its Foreign Bank Supervision Enhancement Act of 1991, operations and any of its affiliates that the Board deems which amended the IBA, provides that a foreign bank must necessary to determine and enforce compliance with the obtain the approval of the Board to establish a branch in the IBA, the BHC Act, and other applicable federal law. To the United States. extent that the provision of such information to the Board Notice of the application, affording interested persons an may be prohibited by law or otherwise, CCB has commit opportunity to comment, has been published in a newspa ted to cooperate with the Board to obtain any necessary per of general circulation in New York, New York consents or waivers that might be required from third (New York Post, July ll, 2(07). The time for filing com parties for disclosure of such information. In light of these ments has expired, and all comments received have been commitments and other facts of record, and subject to the considered. conditions described below, the Board has determined that Bank, with total consolidated assets of approximately CCB has provided adequate assurances of access to any $9.7 billion, is the fifth largest bank in Chile.2 Corp Group necessary information that the Board may request. Banking S.A, Santiago, owns approximately 49.6 percent On the basis of all the facts of record, and subject to the of Bank's shares.3 Two other entities, Compana Inmobil commitments made by CCB, as well as the terms and iaria y de Inversiones Saga S.A. ("Saga") and Inversiones conditions set forth in this order, CCB's application to Mineras del Cantabrico S.A., directly own approximately establish a branch is hereby approved. Should any restric 9.2 percent and 6.6 percent of Bank's shares, respectively. tions on access to information on the operations or activi ties of CCB and its affiliates subsequently interfere with the Board's ability to obtain information to determine and enforce compliance by CCB or its affiliates with applicable 18. The Board's authority to approve the establishment of the proposed branch parallels the continuing authority of the state of federal statutes, the Board may require termination of any New York 10 license offices of a foreign bank. The Board's approval of of CCB's direct or indirect activities in the United States. this application does not supplant the authority of the stale of Approval of this application also is specifically conditioned New York or its agent, the New York State Banking Department on compliance by CCB with the commitments made in ("Department"), to license the proposed office of CCB in accordance with any terms or conditions that the Department may impose. 17. See 12 U.S.c. §3105(d)(3)-(4); 12 CFR 21L24(c)(2J. The L 12 U.S.c. §3105(d). additional standards set forth in section 7 of the IBA and Regulation K 2. Asset and ranking data are as of June 30. 2008. include the following (I ) whether the bank's home-country supervisor 3. Silver Star Securities Ltd. (HSilverstar"), Tortola, British Virgin has consented to the establishment of the office; the financial and Islands, indirectly controls all the shares of Corp Group Banking S.A. managerial resources of the bank; (2) whether the appropriate supervi through two levels of intermediate holding companies. Mr. Alvaro sors in the home country may share information on the bank's Saieh Bendeck, a citizen of Chile, and his family indirectly own all the opemtions with the Board; and (3) whether the bank and its U.S. shares of Silverstar. Mr. Saieh Bendeck, his wife, and their fi ve affiliates are in compliance with U.S. law; the needs of the community; children each hold their Silverstar shares through a personal holding the bank's record of operation. company (collectively, "Personal Holding Companies").

B58 Federal Reserve Bulletin 0 March 2009 The remaining shares of Bank are held by the pUblic. No determined that Bank is subject to comprehensive supervi other shareholder owns more than 5 percent of Bank's sion on a consolidated basis by its home-country supervi shares. sor.8 Bank provides a variety of banking services to retail and The additional standards set forth in section 7 of the IBA corporate customers. Bank's subsidiaries engage in insur and Regulation K also have been taken into account.9 The ance brokerage, securities brokerage, mutual fund manage SBIF has no objection to the establishment of the proposed ment, financial advisory services, and legal advisory ser branch. vices. Bank, Silverstar, and the Personal Holding Companies Chile's risk-based capital standards are consistent with would be qualifying foreign banking organizations under those established by the Basel Capital Accord. Bank's Regulation K.4 capital is in excess of the minimum levels that would be The proposed New York branch would be Bank's only required by the Basel Capital Accord and is considered office outside Chile. It would engage in a wholesale equivalent to capital that would be required of a U.S. banking business, with a focus on trade finance, lending, banking organization. Managerial and other financial re and banking services for high-net-worth individuals. sources of Bank are consistent with approval, and Bank Under the IBA and Regulation K, in acting on an appears to have the experience and capacity to support the application by a foreign bank to establish a branch, the proposed branch. In addition, Bank has established controls Board must consider whether the foreign bank (1) engages and procedures for the proposed branch to ensure compli directly in the business of banking outside of the United ance with U.S. law, as well as controls and procedures for States; (2) has furnished to the Board the information it its worldwide operations generally. needs to assess the application adequately; and (3) is Chile is a member of GAFISUD (Financial Action Task subject to comprehensive supervision on a consolidated Force of South America), which is an associate member of basis by its home-country supervisor.5 The Board also the Financial Action Task Force. Chile has enacted laws considers additional standards set forth in the IBA and and created legislative and regulatory standards to deter Regulation K.6 As noted above, Bank engages directly in money laundering. Money laundering is a criminal offense the business of banking outside the United States. Bank in Chile, and financial institutions are required to establish also has provided the Board with information necessary to internal policies, procedures, and systems for the detection assess the application through submissions that address the and prevention of money laundering throughout their relevant issues. worldwide operations. Bank has policies and procedures to With respect to supervision by home-country authorities, comply with these laws and regulations. Bank's compli the Board previously has determined, in connection with ance with applicable laws and regulations is monitored by applications involving other banks in Chile, that those the SBIF and Bank's internal and external auditors. banks were subject to comprehensive supervision on a With respect to access to information about Bank's consolidated basis by the Superintendencia de Bancos e operations, the restrictions on disclosure in relevant juris Instituciones Financieras ("SBIF"), Bank's primary home dictions in which Bank operates have been reviewed and country supervisor.7 Bank is supervised by the SBIF on relevant government authorities have been communicated substantially the same terms and conditions as those other with regarding access to information. Bank, Silverstar, and banks. Based on all the facts of record, it has been the Personal Holding Companies have committed to make available to the Board such information on the operations of Bank and any of its affiliates that the Board deems 4.12CFR211.23(a). 5. 12 U.S.c. §3105(d)(2); 12 CFR 211.24. In assessing this stan 8. In reaching this conclusion, the oversight of Bank's parent dard, the Board considers, among other indicia of comprehensive, holding companies ha~ been considered. Bank's parent holding com consolidated supervision, the extent to which the home-country super panies are required to provide financial and other relevant information visors (i) ensure that the bank has adequate procedures for monitoring to the SBIF on a regular basis. The SBIF has authority to limit and controlling its activities worldwide; (ii) obtain information on the transactions by Bank with its affiliates and can exercise direct supervi condition of the bank and its subsidiaries and offices through regular sion over all the subsidiaries of Bank. In addition, the Chilean General examination reports, audit reports, or otherwise; (iii) obtain informa Banking Law and the Chilean Corporations Law contain restrictions tion on the dealings with and relationship between the bank and its on transactions with related parties. All the companies controlled by affiliates, both foreign and domestic; (iv) receive from the bank Mr. Saieh Bendeck are considered to be related parties of Bank. financial reports that are consolidated on a worldwide basis or 9. See 12 U.S.c. § 3105(d)(3H4); 12 CFR 211.24(c)(2)-(3). These comparable information that permits analysis of the bank's financial standards include (I) whether the bank's home-country supervisor has condition on a worldwide consolidated basis; and (v) evaluate pruden consented to the establishment of the office; the financial and manage tial standards, such as capital adequacy and risk asset exposure, on a rial resources of the bank; (2) whether the bank has procedures to worldwide basis. No single factor is essential, and other elements may combat money laundering. whether there is a legal regime in place in inform the Board's determination. the home country to address money laundering. and whether the home 6. 12 U.S.c. §3105(d)(3}-(4); 12 CFR 211.24(c)(2)--(3). country is participating in multilateral efforts to combat money 7. See Banco del Estado de Chile, 91 Federal Reserve Bullelin 442 laundering; (3) whether the appropriate supervisors in the home (2005); Banco de Chile, 90 Federal Reserve Bulletin 550 (2004); and country may share information on the bank's operations with the Banco de Credito e Inversiones SA, 85 Federal Reserve Bulletin 446 Board; and (4) whether the bank and its U.S. affiliates are in (1999). See also, Banco de Chile, 80 Federal Reserve Bullet!1! 179 compliance with U.S. law; the needs of the community; and the bank's (1994). record of operation.

Legal Developments: Fourth Quarter, 2008 B59 necessary to determine and enforce compliance with the Monte de Piedad y Caja de Ahorros San IBA, the Bank Holding Company Act, and other applicable Fernando de Huelva, Jerez y Sevilla federal law. To the extent that the provision of such Seville, Spain information to the Board may be prohibited by law or otherwise, Bank, Silverstar, and the Personal Holding Order Approving Establishment of a Companies have committed to cooperate with the Board to Representative Office obtain any necessary consents or waivers that might be required from third parties for disclosure of such informa tion. In addition, subject to certain conditions, the SBIF Monte de Piedad y Caja de Ahorros San Fernando de Huelva, Jerez y Sevilla ("Bank"), Seville, Spain, a foreign may share information on Bank's operations with other bank within the meaning of the International Banking Act supervisors, including the Board. In light of these commit ("IBN'), has applied under section lO(a) of the IBAI to ments and other facts of record, and subject to the condition establish a representative office in Miami, Florida. The described below, it has been determined that Bank has Foreign Bank Supervision Enhancement Act of 199 J, provided adequate assurances of access to any necessary which amended the IBA, provides that a foreign bank must information that the Board may request. obtain the approval of the Board to establish a representa Based on the foregoing and all the facts of record, tive office in the United States. Bank's application to establish the proposed branch is Notice of the application, affording interested persons an hereby approved.1O Should any restrictions on access to opportunity to comment, has been published in a newspa information on the operations or activities of Bank and its per of general circulation in Miami (Miami Herald. July 25, affiliates subsequently interfere with the Board's ability to 2008). The time for filing comments has expired, and all obtain information to determine and enforce compliance by comments received have been considered. Bank or its affiliates with applicable federal statutes, the Bank, a savings bank with total consolidated assets of Board may require termination of any of Bank's direct or approximately $43.6 billion,2 is the 15th largest bank in indirect activities in the United States, or in the case of any Spain.3 Bank provides retail banking services through its such operation licensed by the Office of the Comptroller of branch network in Spain and provides corporate banking the Currency ("OCC"), recommend termination of such services to Spanish and foreign corporations. Bank also operation. Approval of this application also is specifically provides investment services primarily to its retail banking conditioned on compliance by Bank, Silverstar, and the customers and distributes insurance products. Bank cur Personal Holding Companies with the commitments made rently does not have any offices outside Spain. The pro to the Board in connection with this application and with posed representative office would promote and market the conditions in this order. I I These commitments and Bank's products and services, provide support to Spanish conditions are deemed to be conditions imposed in writing companies with respect to their U.S. activities, identify by the Board in connection with this decision and, as such, investment projects that could be financed from Spain, and may be enforced in proceedings under applicable law perform other typical representative office runctions:~ against Bank and its affiliates. By order, approved pursuant to authority delegated by the Board, effective October 22, 2008. I. 12 U.S.c. §3107(a). 2, Asset data are as of June 30, 2008, 3. Bank has no shareholders. Bank's operations are controlled and ROBERT DEY. FRIERSON governed by a general assembly and a board of directors. The Deputy Secretary of the Board membership of the 320-member general assembly includes represen tatives of the municipalities in which Bank operates (approximately 22 percent); Bank's depoSitors (approximately 27 percent); represen tatives designated by the regional parliament of the Autonomous 10, Approved by the Director of the Division of Banking Supervi Community of Andalusia (15 percent); and Bank's employees (15 per sion and Regulation, with the concurrence of the General Counsel, cent), Bank's board of directors is composed of 40 members, propor pursuantto authority delegated by the Board. See 12 CFR 265,7(d)(12), tionally representing the entities constituting the general assembly, II. The Board's authority to approve the establishment of the 4, A representative office may engage in representational and proposed branch parallels the continuing authority of the OCC to administrative functions in connection with the banking activities of license offices of a foreign bank. The Board's approval of this the foreign bank, including soliciting new business for the foreign application does not supplant the authority of the OCC to license the bank; conducting research; acting as a liaison between the foreign proposed office of Bank in accordance with any terms or conditions bank's head office and customers in the United States; performing that it may impose, preliminary and servicing steps in connection with lending; and

B60 Federal Reserve Bulletin 0 March 2009 In acting on an application under the IRA and Regula respect to the financial and managerial resources of Bank, tion K by a foreign bank to establish a representative office, taking into consideration its record of operations in its the Board shall take into account whether the foreign bank home country, its overall financial resources, and its stand engages directly in the business of banking outside the ing with its home-country supervisor, financial and mana United States and has furnished to the Board the informa gerial factors are considered consistent with approval. tion it needs to assess the application adequately.s The Bank appears to have the experience and capacity to Board shall also take into account whether the foreign bank support the proposed representative office. In addition, is subject to comprehensive supervision on a consolidated Bank has established controls and procedures for the basis by its home-country supervisor.6 The Board also proposed representative office to ensure compliance with considers additional standards set forth in the IRA and U.S. law and for its operations generally, The Bank of Regulation K.7 Spain has no objection to the establishment of the proposed As noted above, Bank engages directly in the business of office. banking outside the United States. Bank also has provided Spain is a member of the Financial Action Task Force the Board with information necessary to assess the applica and subscribes to its recommendations on measures to tion through submissions that address the relevant issues. combat money laundering and international terrorism. In With respect to supervision by home-country authorities, accordance with those recommendations, Spain has enacted the Board previously has determined, in connection with laws and created legislative and regulatory standards to applications involving other banks in Spain, that those deter money laundering, terrorist financing, and other illicit banks were subject to comprehensive supervision on a activities. Money laundering is a criminal offense in Spain, consolidated basis by their home-country supervisor, the and Bank is subject to laws that require it to establish Bank of Spain.H Bank is supervised by the Bank of Spain internal policies, procedures, and systems for the detection on substantially the same terms and conditions as those and prevention of money laundering throughout its world other banks. Based on all the facts of record. it has been wide operations. Bank has policies and procedures to determined that Bank is subject to comprehensive supervi comply with these laws and regulations that are monitored sion on a consolidated basis by its home-country super by governmental entities responsible for anti-money visor. laundering compliance. The additional standards set forth in section 7 of the IRA With respect to access to information about Bank's and Regulation K also have been taken into account.Y With operations, the restrictions on disclosure in relevant juris dictions in which Bank operates have been reviewed and performing back-office functions. A representative office may not the relevant government authorities have been communi contract for any deposit or deposit-like liability, lend money, or engage cated with regarding access to information. Bank has in any other banking activity (12 CFR 211.24(d)(\)). committed to make available to the Board such information 5. 12 U.S.c. § 3107(a)(2). on the operations of Bank and any of its affiliates that the 6. [d.: 12 CFR 211.24(d)(2). In assessing this standard, the Board Board deems necessary to determine and enforce compli considers. among other factors, the extent to which the home-country supervisors (i) ensure that the bank has adequate procedures for ance with the IRA, the Bank Holding Company Act of monitoring and controlling its activities worldwide: (ii) obtain infor 1956, as amended. and other applicable federal law. To the mation on the condition of the bank and its subsidiaries and offices extent that the provision of such information to the Board through regular examination reports. audit reports, or otherwise: (iii) may be prohibited by law or otherwise, Bank has commit obtain information on the dealings with and relationship between the bank and its affiliates, both foreign and domestic; (iv) receive from the ted to cooperate with the Board to obtain any necessary bank financial reports that are consolidated on a worldwide basis or consents or waivers that might be required from third comparable information that permits analysis of the bank's financial parties for disclosure of such information. In light of these condition on a worldwide consolidated basis; and (v) evaluate pruden commitments and other facts of record, and subject to the tial standards, such as capital adequacy and risk exposure on a condition described below, it has been determined that worldwide basis. These are indicia of comprehensive, consolidated supervision. No single factor is essential, and other elements may Bank has provided adequate assurances of access to any inform the Board's determination. necessary information that the Board may request. 7. See 12 U.S.C. §3105(d)(3)-(4); 12 CFR 211.24(c)(2). These On the basis of the foregoing and all the facts of record, standards include (I) whether the hank's home-country supervisor has and subject to the commitments made by Bank to the consented to the establishment of the office; the financial and manage rial resources of the bank; (2) whether the bank has procedures to Board, as well as the terms and conditions set forth in this combat money laundering, whether there is a legal regime in place in order, Bank's application to establish a representative office the home country to address money laundering, and whether the home in Miami, Florida, is hereby approved.lo Should any restric country is participating in multilateral efforts to combat money tions on access to information regarding the operations or laundering; (3) whether the appropriate supervisors in the home activities of Bank and its affiliates subsequently interfere country may share information on the bank's operations with the Board; and (4) whether the bank and its U.S. affiliates are in with the Board's ability to obtain information to determine compliance with U.S. law; the needs of the community; and the bank's and enforce compliance by Bank or its affiliates with record of operation. applicable federal statutes, the Board may require termina- 8. See Caja de Ahorros del Mediterrdneo, 92 Federal Reserve Bulletin C133 (2006); Caja de AllOrros de Galicia, Caixa Galicia. 92 Federal Reserve Bulletin CI32 (2006): Banco Popular Espaiiol 10. Approved by the Director of the Division of Banking Supervi SA, 92 Federal Reserve Bulletin CI30 (2006). sion and Regulation. with the concurrence of the General Counsel. 9. See supra note 7. pursuant to authority delegated hy the Board. See 12 CFR 265.7(d)( 12).

Legal Developments: Fourth Quarter, 2008 B61 tion of any of Bank's direct or indirect activities in the restitution or prohibition from banking (12 U.S.c. United States. Approval of this application also is specifi §§ 1818(b), 1818(e)(4». The ALJ issues a recommended cally conditioned on compliance by Bank with the commit decision that is referred to the Board together with any ments made in connection with this application and with exceptions to those recommendations filed by the parties. the conditions in this order. I I The commitments and condi The Board makes the final findings of fact, conclusions of tions referred to above are conditions imposed in writing by law, and determination whether to issue the requested the Board in connection with this decision and may be orders (12 CPR 263.38). enforced in proceedings under applicable law against Bank The FDI Act sets forth the substantive basis upon which and its affiliates. a federal banking agency may issue against a bank official By order, approved pursuant to authority delegated by or employee an order of prohibition from further participa the Board, effective December 19, 2008. tion in banking. To issue such an order, the Board must make each of three findings ( I) that the respondent engaged ROBERT DEY. FRIERSON in identified misconduct, including a violation of law or Deputy Secretary of the Board regulation, an unsafe or unsound practice, or a breach of fiduciary duty; (2) that the conduct had a specified effect, FINAL ENFORCEMENT DECISION including financial loss to the institution or gain to the respondent; and (3) that the respondent's conduct involved ISSUED BY THE BOARD either personal dishonesty or a willful or continuing disre gard for the safety or soundness ofthe institution (12 U.S.c. IN THE MATTER OF § 1818(e)(l)(AHc»· The FDI Act also spells out the requirements for an order Kelly M. Dulaney, A former Institution requiring restitution, which is a type of cease-and-desist Affiliated Party of Fifth Third Bank, Grand order under the Act. Specifically, a cease-and-desist order may be imposed when the agency has reasonable cause to Rapids, Michigan, Respondent. believe that the respondent has engaged or is about to engage in an unsafe or unsound practice in conducting the Docket Nos. 08-008-B-I, 08-008-E-I business of a depository institution, or that the respondent has violated or is about to violate a law, rule, or regulation FINAL DECISION or condition imposed in writing by the agency (12 U.S.C. § l818(b)(I». Such an order may require the respondent to This is an administrative proceeding pursuant to the Fed make restitution if the respondent was "unjustly enriched" eral Deposit Insurance Act ("the FDI Act") in which the in connection with the violation or practice, or the violation Board Enforcement Counsel seeks to prohibit the Respon or practice in involved "reckless disregard" of the law or dent, Kelly M. Dulaney ("Respondent"), from further applicable regulations or a prior agency order (12 U.S.C. participation in the affairs of any financial institution and to § 18 I 8(b)(6)(A». require her to pay restitution based on actions she took An enforcement proceeding is initiated by filing and while employed at Fifth Third Bank, Grand Rapids, Michi serving on the respondent a notice of charges setting forth gan (the "Bank"). the basis for relief and the relief sought. Under the Board's Upon review of the administrative record, the Board regulations, the respondent must file an answer within 20 issues this Final Decision adopting the Recommended days of service of the notice (12 CPR 263.l9(a». Failure to Decision ("Recommended Decision") of Administrative file an answer constitutes a waiver of the respondent's right Law Judge C. Richard Miserendino (the "AU"), and to contest the allegations in the notice, and a tinal order orders the issuance of the attached Order of Prohibition and may be entered unless good cause is shown for failure to to Cease and Desist. file a timely answer (12 CFR 263.19(c )( 1». 1. STATEMENT OF THE CASE B. Procedural History A. Statutory and Regulatory Framework On April 11, 2008, the Board issued a Notice of Intent to Under the FDI Act and the Board's regUlations, the AU is Prohibit and Notice of Charges and of Hearing ("Notice") responsible for conducting proceedings on a notice of that sought an order of prohibition against Respondent charges relating to a proposed order requiring payment of based on her conduct while employed at the Bank and an order requiring her to make restitution to the Bank. II. The Board's authority to approve the establishment of the Enforcement Counsel sent the Notice to Respondent by proposed representative office parallels the eontinuing authority of the Federal Express and by certified mail on the date of State of Florida to license offices of a foreign bank. The Board's issuance, but both copies were returned stating that Respon approval of this application does not supplant the authority of the State dent had moved and left no forwarding address. At the of Florida or its agent, the Florida Office of Financial Regulation, to direction of Enforcement Counsel, a licensed process server license the proposed representative office of Bank in accordance with any terms or conditions that it may impose. personally served the Notice on Respondent on June 4,

B62 Federal Reserve Bulletin 0 March 2009 2008. The Notice directed Respondent to file a written [a respondent's] right to appear and contest the allegations answer within 20 days of the date of service of the Notice in the notice" (12 CFR 263.l9(c)). Ifthe ALJ finds that no in accordance with 12 CFR 263.19, and warned that failure good cause has been shown for the failure to file, the judge to do so would constitute a waiver of her right to appear "shall file ... a recommended decision containing the and contest the allegations. Nonetheless, Respondent failed findings and the relief sought in the notice." Id. An order to file an answer within the 20-day period or thereafter. based on a failure to file a timely answer is deemed to be On July II, 2008, Enforcement Counsel filed a Motion issued by consent. Id. for Entry of an Order of Default against Respondent. On In this case, Respondent failed to file an answer to the July 28, 2008, the ALJ issued an Order to Show Cause, Notice despite notice to her of the consequences of such providing Respondent until August 18, 2008, to show cause failure, and also failed to respond to the ALl's Order to why a timely answer to the Notice was not filed and why a Show Cause. Respondent's failure to file an answer consti defauJtjudgment granting the relief requested in the Notice tutes a default. should not be entered against Respondent. The Order was Respondent's default requires the Board to consider the delivered by overnight delivery to Respondent's address. allegations in the Notice as uncontested. The allegations in To date, Respondent has not filed any reply to the Order to the Notice, described above, meet all the criteria for entry Show Cause or answered the Notice. of an order of prohibition under 12 U.S.c. § 1818(e). It was a breach of fiduciary duty, unsafe and unsound practice, C. Respondent's Actions and violation of law, for Respondent to falsify Bank debit and credit tickets and customer checks to make unautho The Notice alleges that Respondent was employed as a rized withdrawals from the CD accounts of the Bank's customer service manager at the Port Orange, Florida, customers and to manipulate the Bank's systems and branch location of the Bank and its predecessors from no records to conceal her actions. Respondent's actions re later than April 2004 through August 2006, when she sulted in loss to the Bank and financial gain to the resigned from the Bank. Her responsibilities included Respondent, in that the Respondent used the proceeds for maintaining relationships with customers, creating certain her own purposes and the Bank was forced to repay its accounting entries, and reconciling the Bank's cash items customer for the amounts defalcated by Respondent. Fi account. The cash items account was a general ledger nally, such actions also exhibit personal dishonesty and account where "rejected items," such as deposit tickets willful or continuing disregard for the safety and soundness with incorrect account numbers, were sent for reconcilia of the Bank. tion. Respondent had complete control over the cash items For the same reasons, the allegations in the Notice meet account until shortly before she resigned. all the criteria for the entry of an order requiring restitution. By virtue of her responsibilities, Respondent was able to Respondent engaged in unsafe or unsound practices and falsify Bank debit and credit tickets and customer checks to violations of law when she falsified Bank debit and credit make unauthorized withdrawals from the certificate of tickets and customer checks to make unauthorized with deposit ("CD") accounts of three of the Bank's customers, drawals from the CD accounts of the Bank's customers and using the proceeds for her own purposes. She concealed her manipulated the Bank's systems and records to conceal her activity by making unauthorized transfers between the CD actions, and she was unjustly enriched by her actions in that accounts of the customers and the general ledger account. she used the proceeds of her defalcation for her own When one of the Bank's customers sought to roll over a purposes. Respondent's unsafe or unsound practices and matured CD into a new CD, Respondent provided the violations of law also involved a reckless disregard for the customer with a CD account receipt and subsequently law. requested that the CD be purged from the Bank's records in Accordingly, the requirements for an order of prohibi order to conceal her activity. tion and for an order for restitution have been met and the Respondent's actions were discovered when that cus Board hereby issues such an order. tomer asked the Bank about the status of his CD accounts and learned that one account had no remaining funds and the other CD account had been purged. Respondent re CONCLUSION signed several months before the customer's inquiry and before the Bank's discovery of her defalcation. The Bank For these reasons, the Board orders the issuance of the restored its customer's accounts with interest for the attached Order of Prohibition and Order to Cease and amounts defalcated by Respondent. As a result of these Desist. actions, the Bank's total loss was approximately $203,923. By Order of the Board of Governors, this 15th day of December, 2008. II. DISCUSSION BOARD OF GOVERNORS OF THE The Board's Rules of Practice and Procedure set forth the FEDERAL RESERVE SYSTEM requirements of an answer and the consequences of a failure to file an answer to a Notice. Under the Rules, ROBERT DEY. FRIERSON failure to file a timely answer "constitutes a waiver of Deputy Secretary of the Board

Legal Developments: Fourth Quarter, 2008 B63 ORDER OF PROHIBITION AND TO CEASE AND (c) from violating any voting agreement previously DESIST approved by any federal banking agency; or (d) from voting for a director, or from serving or acting as an institution-affiliated party as defined in sec Whereas, pursuant to sections 8(b) and 8(e) of the Federal tion 3(u) of the FDIAct (12 U.S.c. § I813(u», such Deposit Insurance Act, as amended, (the "FDI Act") as an officer, director, or employee in any institution (12 U.S.c. § 1818(b) and (e», the Board of Governors of described in section 8(e)(7)(A) of the FDI Act the Federal Reserve System ("the Board") is of the opin (12 US.c. § I 818(e)(7)(A». ion, for the reasons set forth in the accompanying Final 2. (a) Dulaney shall make restitution to the Bank in the Decision, that a final Order of Prohibition and to Cease and sum of $203,923 for its loss as a result of Dulaney's violations of law and unsafe or unsound practices; Desist should issue against KELLY M. DULANEY ("Du (b) the restitution shall be remitted in full, payable to laney"), a former employee and institution-affiliated party, the "Board of Governors of the Federal Reserve as defined in Section 3(u) of the FDI Act (12 US.c. System" and forwarded to Jennifer 1. Johnson, § I8l3(u», of Fifth Third Bank, Grand Rapids, Michigan Secretary of the Board, Board of Governors of the (the "Bank"). Federal Reserve System, Washington, DC 20551, NOW, THEREFORE, IT IS HEREBY ORDERED, pur who shall make remittance of the same to the Bank. suant to section 8(e) of the FDI Act, 12 U.S.c. § 18 I 8(e), 3. Any violation of this Order shall separately subject Dulaney to appropriate civil or criminal penalties or that: both under section 8 of the FDI Act (12 US.c. § 1818). I. In the absence of prior written approval by the Board, 4. This Order, and each and every provision hereof, is and and by any other federal financial institution regulatory shall remain fully effective and enforceable until ex agency where necessary pursuant to section 8(e)(7)(B) pressly stayed, modified, terminated, or suspended in of the FDI Act (12 U.S.C. § 1818(e)(7)(B», Dulaney is writing by the Board. hereby prohibited: (a) from participating in any manner in the conduct of This Order is effective upon service on the Respondent. the affairs of any institution or agency specified in section 8(e)(7)(A) of the FDI Act (12 US.C. By Order of the Board of Governors, this 15th day of § 1818( e )(7)(A», including, but not limited to, any December, 2008. insured depository institution, any insured deposi tory institution holding company or any U.S. branch BOARD OF GOVERNORS OF THE or agency of a foreign banking organization; FEDERAL RESERVE SYSTEM (b) from soliciting, procuring, transferring, attempting to transfer, voting or attempting to vote any proxy, consent or authorization with respect to any voting ROBERT DEY. FRIERSON rights in any institution described in subsec Deputy Secretary of the Board tion 8(e)(7)(A) of the FDI Act (12 U.S.C. § 18 I 8(e)(7)(A»;

B64 Federal Reserve Bulletin D June 2009 Legal Developments: First Quarter, 2009 ORDERS ISSUED UNDER BANK FACTORS GOVERNING BOARD REVIEW OF THE HOLDING COMPANY ACT PROPOSED BANK HOLDING COMPANY The BHC Act sets forth the factors the Board must consider ORDERS ISSUED UNDER SECTION 3 OF when reviewing the formation of a bank holding company or the acquisition of a bank. These factors are the competi THE BANK HOLDING COMPANY ACT tive effects of the proposal in the relevant geographic markets; the financial and managerial resources and future Protective Life Corporation prospects of the companies and banks involved in the proposal; the convenience and needs of the community to Birmingham, Alabama be served, including the records of performance under the Community Reinvestment Act ("CRA")4 of the insured Order Approving Formation of Bank Holding depository institutions involved in the transaction; and the Company availability of information needed to determine and enforce compliance with the BHC Act and other applicable federal banking laws.5 Protective Life Corporation ("Protective Life") has re quested the Board's approval under section 3 of the Bank Holding Company Act ("BHC Act")l to become a bank COMPETITIVE CONSIDERATIONS holding company by acquiring all the shares of Bonifay Section 3 of the BHC Act prohibits the Board from Holding Company, Inc. ("BHCI") and its subsidiary bank, approving a proposal that would result in a monopoly. The the Bank of Bonifay ("Bank"), both of Bonifay, Florida. BHC Act also prohibits the Board from approving a Notice of the proposal under section 3 of the BHC Act, proposed bank acquisition that would substantially lessen affording interested persons an opportunity to submit com competition in any relevant banking market unless the ments, has been published (73 Federal Register 69,663 anticompetitive effects of the proposal are clearly out (2008)). The time for filing comments has expired, and the weighed in the public interest by the probable effect of the Board has considered the proposal and all comments proposal in meeting the convenience and needs of the received in light of the factors set forth in section 3 of the community to be served.6 BHC Act. The proposal involves the acquisition of a bank by Protecti ve Life. with total consolidated assets of $41.1 bil Protective Life, which does not own a commercial bank or lion, is an insurance and financial services firm engaged savings association. Based on all the facts of record, the principally in the business of underwriting life and property Board concludes that consummation of the proposal would insurance.2 Protective Life also offers annuity and other ~ot result in any significantly adverse etl'ects on competi investment products and related services. tIOn or on the concentration of banking resources in any Bank, which is the primary asset of BHCI, has total relevant banking market and that the competitive factors consolidated assets of $220.0 million and is the l43rd are consistent with approval of the proposal. largest depository institution in Florida. It controls deposits of approximately $209.4 million in the state, which repre sents less than 1 percent of the total amount of deposits of 4. 12 U.S.c. §2901 et seq. 5. In cases involving interstate bank acquisitions by bank holding insured depository institutions in the state.3 ~ompames. the Board also must consider the concentration of deposits In the nation and relevant individual states, as well as compliance with the other provisions of section 3(d) of the BHC Act. Because the 1. 12 U.S.c. § 1842. proposed transaction does not involve an interstate bank acquisition by 2. Asset data for Protective Life are as of September 30, 2008. a bank holdmg company, the provisions of section 3(d) ofthe BHC Act 3. Asset data for Bank are as of September 30, 2008, and deposit do not appl y in this case. and ranking data are as of June 30, 2008. 6. 12 U.S.C. § 1842(c)(I).

Legal Developments: First Quarter, 2009 B65 FINANCIAL, MANAGERIAL, AND SUPERVISORY are consistent with approval, as are the other supervisory CONSlDERA TlONS factors under the BHC Act. The Board notes further that a substantial proportion of Section 3 of the BHC Act requires the Board to consider the Protective Life's activities are conducted in subsidiaries financial and managerial resources and future prospects of that are subject to functional regulation by state insurance the companies and banks involved in a proposal and certain commissions or by the Securities and Exchange Commis other supervisory factors.? The Board has carefully consid sion ("SEC"). The Board will, consistent with the provi ered these factors in light of all the facts of record, sions of section 5 of the BHC Act, as amended by the including supervisory and examination infonnation re Gramm-Leach-Bliley Act, rely on the appropriate state ceived from the relevant federal and state supervisors of the insurance regulators and the SEC for examination and other organizations involved in the proposal, publicly reported supervisory infonnation to the extent appropriate in fulfill and other available financial infonnation, and information ing the Board's responsibilities as the holding company's provided by Protective Life. In addition, the Board has supervisor. consulted with the Federal Deposit Insurance Corporation (HFDIC"), the primary federal supervisor of Bank, about CONVENIENCE AND NEEDS AND CRA the proposal's effect on the financial and managerial PERFORMANCE CONSIDERATIONS resources and future prospects of Bank. In evaluating financial factors, the Board consistently In acting on a proposal under section 3 of the BHC Act, the has considered capital adequacy to be an especially impor Board must consider the etfects of the proposal on the tant aspect. Protective Life is well capitalized, and all convenience and needs of the communities to be served and entities of Protective Life that are subject to regulatory take into account the records of the relevant depository capital requirements currently have capital levels that institutions under the CRA.9 The Board has carefully exceed those relevant minimum requirements. Although considered the convenience and needs factor and the CRA Bank reports capital ratios that meet the well-capitalized performance records of Bank in light of all the facts of standards under applicable federal guidelines, Bank's capi record. As provided in the CRA, the Board evaluates the tal level is not considered sufficient given its current risk record of perfonnance of an institution in light of examina profile.!! Bank's financial position would be improved, tions by the appropriate federal supervisors of the CRA however, through this transaction because a significant performance records of the relevant institutions. to Bank portion of Bank's assets to be chosen by Protective Life received a "satisfactory" rating under the CRA at its most would be retained by BHCI's existing shareholders. Protec recent perfonnance evaluation by the FDIC, as of Octo tive Life would remain well capitalized on consummation ber 1,2004 (the "FDIC Examination"). The FDIC Exami of the proposal. Based on its review of the record, the nation indicated that Bank's loans were reasonably dis Board finds that Protective Life has sufficient resources to persed among borrowers of different incomes and businesses effect the proposal and that all other financial factors are of different sizes and that its average loan-to-deposit ralio consistent with approval. was excellent in light of Bank's capacity and lending In addition, the Board has carefully considered the opportunities within the assessment area. Protective Life managerial resources of Protective Life in light of all the has represented that consummation of the proposal would facts of record, including confidential supervisory and pennit Bank to continue its existing CRA programs and examination information and infonnation provided by Pro strengthen its ability to service low- and moderate-income tective Life. The Board has considered the supervisory communities. Based on a review of the entire record, the experience of the relevant state supervisory agencies of Board has conduded that considerations relating to conve Protective Life and considered information submitted by nience and needs considerations and the CRA perfonnance state insurance regulators in response to requests by the record of Bank are consistent with approval of the pro Board. The Board has likewise considered its supervisory posal. experience with BHCI and the supervisory experience of the relevant federal and state supervisory agencies of Bank NONBANKING ACTIVITIES and Bank's record of compliance with applicable banking law and anti-money-laundering laws. In addition, the Board Protective Life engages in insurance and securities activi has carefully considered infonnation from Protective Life ties that are only permissible for a bank holding company about its business plans for BHCI and Bank, and the that elects to become a financial holding company I I and in actions it is taking and proposing to take to strengthen the activities that may not conform to the requirements of the organization's risk-management infrastructure. BHC Act. Section 4 of the BHC Act by its terms provides Based on all the facts of record, the Board concludes that considerations relating to the financial and managerial resources and future prospects of the organizations involved 9. 12 V.S.c. §2903: 12 V.S.c. § 1842(c)(2). 10. The Interagency Questions and Answers Regarding Commu nity Reinvestment provide that a CRA examination is an important and 7. 12 V.S.c. § 1842(c)(2) and (3). often controlling factor in the consideration of an institution's CRA 8. Bank is subject to a cease and desist order from the Florida record. See 74 Federal Register 498 at 527 (2009). Office of Financial Regulation. II. See 12 V.S.c. § I 843(k).

B66 Federal Reserve Bulletin 0 June 2009 any company that becomes a bank holding company two approval under section 3 of the BHC Act! to increase its years within which to conform its existing nonbanking ownership interest to 9.9 percent of the voting shares of investments and activities to the section's requirements, ECB Bancorp, Inc. ("ECB") and thereby inerease its with the possibility of three one-year extensions. 12 Protec indirect interest in ECB's subsidiary bank, The East Caro tive Life must conform any impermissible nonfinancial lina Bank ("East Carolina Bank"), both of Engelhard, activities to the BHC Act and investments that it currently North Carolina. Southern currently owns 4.9 percent of conducts or holds, directly or indirectly, within the time ECB's voting shares. requirements of the act. Protective Life should be able to Notice of the proposal, affording interested persons an conform the majority of its activitics to the requirements of opportunity to submit comments, has been published the BHC Act by filing an effective election to become a (73 Federal Register 78,359 (2008». The time for filing flnancial holding company under section 4(1) of the BHC comments has expired, and the Board has considered the Act. 13 application and all comments received in light of the factors set forth in section 3 of the BHC Act. Southern, with total banking assets of approximately CONCLUSION $1.2 billion, controls one depository institution, Southern Bank and Trust Company ("Southern Bank"), Mount Based on the foregoing and all the facts of record, the Olive, that operates only in North Carolina. Southern Bank Board has determined that the application under section 3 is the 17th largest insured depository institution in North of the BHC Act should be, and hereby is, approved. In Carolina, controlling deposits of approximately $1.01 bil reaching its conclusion, the Board has considered all the lion, which represent less than I percent of the total amount facts of record in light of the factors that the Board is of deposits of insured depository institutions in the state required to consider under the BHC Act and other appli ("state deposits").2 cable statutes. The Board's approval is specifically condi East Carolina Bank, with total assets of approximately tioned on compliance by Protective Life with the condi $738 million, is the 33rd largest insured depository institu tions imposed in this order and all the commitments it made tion in North Carolina. The bank operates only in North to the Board in connection with the application. For Carolina and controls deposits of approximately $588.9 mil purposes of this action, the conditions and commitments lion. If Southern were deemed to control ECB on consum are deemed to be conditions imposed in writing by the mation of the proposaI,3 Southern would become the Board in connection with its findings and decision herein seventh largest banking organization in North Carolina, and, as such, may be enforced in proceedings under controlling approximately $1.6 billion in deposits, which applicable law. would represent less than 1 percent of state deposits. The proposed transaction may not be consummated Southern has stated that it does not propose to control or before the 15th calendar day after the effective date of this exercise a controlling influence over ECB and that its order, or later than three months after the efiective date of indirect investment in East Carolina Bank would also be a this order, unless such period is extended for good cause by passive investment. In this light, Southern has agreed to the Board or by the Federal Reserve Bank of Atlanta, acting abide by certain commitments on which the Board has pursuant to delegated authority. previously relied in determining that an investing bank By order of the Board of Governors, elfective Janu holding company would not be able to exercise a controlary 15, 2009. Voting for this action: Chairman Bemanke. Vice Chairman Kohn. and Governors Warsh, Kroszner, and Duke. I. 12 U.S.c. § 1842. 2. Asset data are as of June 30, 2008; statewide deposit and ranking data are also as of June 30, 2008, and reflect merger and acquisition ROBERT DEV. FRIERSON activity through that date. In this context, insured depository institu Deputy Secretary of the Board tions include commercial banks, savings banks, and savings associa tions, 3. Although the acquisition of less than a controlling interest in a Southern BancShares (N.C.), Inc. bank or bank holding company is not a normal acquisition for a bank holding company, the requirement in section 3(a)(3) of the BHC Act Mount Olive, North Carolina that the Board's approval he obtained before a bank holding company acquires more than 5 percent of the voting shares of a bank suggests Order Approving the Acquisition of Shares that Congress contemplated the acquisition by bank holding compa nies of hetween 5 percent and 25 percent of the voting shares of banks. of a Bank Holding Company See 12 U.S.c. § I 842(a){3). On this basis. the Board previously has approved the acquisition by a bank holding company of less than a Southern BancShares (N.C.), Inc. ("Southern"), a bank controlling interest in a bank or bank holding company. See. e.g .. Penn holding company within the meaning of the Bank Holding Banc.\iU1res. inc., 92 Federal Reserve Builetin C37 (2006) (acquisition of up to 24.89 percent of the voting shares of a bank holding Company Act ("BHC Act"), has requested the Board's company); S&T Bancorp Inc., 91 Federal Reserve Bulletin 74 (2005) (acquisition of up to 24.9 percent of a bank holding company); Brookline BWleorp, MHC, 86 Federal Reserve Bulletin 52 (2000) 12. See 12 U.S.C. §1843(a)(2). (acquisition of up to 9.9 percent of the voting shares of a bank holding 13. 12 U.S.c. 1843(1)(1): 12 CFR 225.82. company).

Legal Developments: First Quarter; 2009 B67 ------------ling influence over another bank holding company or bank deposits and the increase in the level as measured by the for purposes of the BHC Act ("Passivity Commitments").4 Herfindahl~Hirschman Index ("HHI") under the Depart For example, Southern has committed not to exercise or ment of Justice Merger Guidelines ("DOJ Guidelines");R attempt to exercise a controlling influence over the manage other characteristics of the market; and the Passivity Com ment or policies of ECB or any of its subsidiaries; not to mitments made by Southern with respect to ECB and East have or seek to have any employee or representative of Carolina Bank. Southern or its affiliates serve as an officer, agent, or employee of ECB or any of its subsidiaries; and not to seek A. Banking Markets within Established Guidelines or accept representation on the board of directors of ECB or any of its subsidiaries. Southern has additionally commit Consummation of the proposal would be consistent with ted not to enter into any agreement with ECB or any of its Board precedent and within the thresholds in the DOJ subsidiaries that substantially limits the discretion ofECB's Guidelines in five of the banking markets in which South management over major policies or decisions. ern Bank and East Carolina Bank directly compete.9 On Based on these considerations and all the other facts of consummation of the proposal, four markets would remain record, the Board has concluded that Southern would not highly concentrated, and one market would remain moder acquire control of, or have the ability to exercise a control ately concentrated, as measured by the HHI. The change in ling influence over, ECB or East Carolina Bank through the HHI in the four highly concentrated markets would be proposed acquisition of the ECB's voting shares. The consistent with Board precedent and the thresholds in the Board notes that the BHC Act would require Southern to DOJ Guidelines. In each of the fIve banking markets, a file an application and receive the Board's approval before number of competitors would remain. the company could directly or indirectly acquire additional shares of ECB or attempt to exercise a controlling influence B. Banking Market Warranting Special Scrutiny over ECB or East Carolina Bank.5 Southern Bank and East Carolina Bank compete directly in one banking market in North Carolina that warrants a COMPETITIVE CONSIDERATIONS detailed review: the Washington County banking market. [() In this banking market, the concentration levels on consum The Board has considered carefully the competitive etlects mation of the proposal would exceed the threshold levels in of the proposal in light of all the facts of record. Section 3 the DOJ Guidelines. Southern Bank is the fifth largest of the BHC Act prohibits the Board from approving a depository institution in the market, controlling $11.8 mil proposal that would result in a monopoly or would be in lion in deposits, which represents 8.9 percent of market furtherance of an attempt to monopolize the business of deposits. East Carolina Bank is the third largest depository banking in any relevant banking market. The BHC Act also institution in the market, controlling $24.2 million in prohibits the Board from approving a bank acquisition that deposits, which represents 18.3 percent of market deposits. would substantially lessen competition in any relevant If considered a combined organization on consummation of banking market, unless the anticompetitive effects of the the proposal, Southern Bank and East Carolina Bank would proposal are clearly outweighed in the public interest by the be the second largest depository organization in the Wash probable effect of the proposal in meeting the convenience ington County banking market, controlling $36 million in and needs of the community to be served.6 deposits, which would represent approximately 27.2 per Southern Bank and East Carolina Bank compete directly cent of market deposits. The proposal would exceed the in six banking markets in North Carolina. The Board has DOJ Guidelines because the HHI for the Washington reviewed carefully the competitive effects of the proposal County banking market would increase 326 points to 2609. in this banking market in light of all the facts of record. In particular, the Board has considered the number of competi --_ .. . _-----------------tors that would remain in the banking markets; the relative regularly has included thrift institution deposits in the market share shares of total deposits in depository institutions in the calculation on a 50 percent weighted basis. See. e.g., First Hawaiian. Inc., 77 Federal Reserve Bulletin 52. 55 (1991), markets ("market deposits") controlled by Southern Bank 8. Under the 001 Guidelines, a market is considered unconcen and East Carolina Bank;7 the concentration level of market trated if the post-merger HHI is under 1000, moderately concentrated if the post-merger HHI is between 1000 and 1800, and highly concentrated if the post-merger HHI exceeds 1800, The Department of 4. The commitments made by Southern are set forth in Appendix A. Justice ("DO]") has informed the Board that a bank merger or 5, See. e,g .. Emigrant Bancorp. Inc" 82 Federal Reserve Bulletin acquisition generally will not be challenged (in the absence of other 555 (1996); First Community Ballcshares. Inc., 77 Federal Reserve factors indicating anticompetitive effects) unless the post-merger HHI Bulletin 50 (1991). is at least 1800 and the merger increases the HH I more than 200 6. 12 U.S,c. § I 842(c)(l). points. The DOl has stated that the higher-than-normal HHI thresholds 7, Deposit and market share data are as of June 30, 2008, and are for screening bank mergers and acquisitions for anti competiti ve effects based on calculations in which the deposits of thrift institutions are implicitly recognize the competitive effects of limited-purpose and included at 50 percent. The Board previously has indicated that thrift other nondeposilory financial entities. institutions have become. or have the potential to become, significant 9. These banking markets and the effects of the proposal on their competitors of commercial banks. See. e,g.. Midwest Financial Group, concentrations of banking resources are described in Appendix B. 75 Federal Reserve Bulletin 386, 387 (1989); National City Corpora 10. The Washington County banking market includes Washington tion, 70 Federal Reserve Bulletin 743, 744 (1984). The Board County. North Carolina.

B68 Federal Reserve Bulletin 0 June 2009 The market indexes suggest that consummation of the banking products, and operates street-level branches with proposal would raise competitive issues in the Washington drive-up service lanes.12 County banking market. After careful analysis of the record, however, the Board has concluded that no signifi C. Views of Other Agencies and Conclusion on cant reduction in competition is likely to result from Competitive Considerations Southern's proposed indirect investment in East Carolina The DOJ also has reviewed the proposal and has advised Bank. Of particular significance in this case is the structure the Board that it does not believe that the acquisition would of the proposed investment and the commitments Southern has provided to the Board, which are designed to limit the likely have a significantly adverse effect on competition in ability of Southern to use its proposed investment to engage any relevant banking market. The appropriate banking agencies have been afforded an opportunity to comment in any anticompetitive behavior. and have not objected to the proposal. The Board previously has noted that one company need not acquire control of another company to lessen competi Accordingly, in light of all the facts of record, the Board concludes that consummation of the proposal would not tion between them substantially and has reeognized that a significant reduction in competition can result from the have a significantly adverse effect on competition or on the sharing of nonpublic financial information between two concentration of resources in any relevant banking market and that competitive considerations are consistent with organizations that are not under common control. In each approval. case, the Board analyzes the specific facts to determine whether the minority investment in a competitor would result in significant adverse competitive effects in a bank FiNANCIAL, MANAGERIAL, AND SUPERVISORY ing market. 11 CONSIDERATIONS The Board has conduded, after careful analysis of the entire record, that no significant reduction in competition Section 3 of the BHC Act requires the Board to consider the will likely result from Southern's proposed minority invest financial and managerial resources and future prospects of ment in ECB. As noted, Southern has committed not to the companies and depository institutions involved in the exercise a controlling influence over ECB or East Carolina proposal and certain other supervisory factors. The Board Bank and not to seek or accept representation on the board has considered these factors in light of all the facts of of directors of ECB or East Carolina Bank. Southern also record, including confidential reports of examination, other has committed not to acquire or seek to acquire non public supervisory information from the primary supervisors of financial information from ECB or East Carolina Bank. the organizations involved in the proposal, publicly re These commitments are designed to prevent anticompeti ported and other financial information, and information tive behavior that otherwise might occur through either provided by Southern. influencing the behavior of ECB or East Carolina Bank or In evaluating financial factors in expansion proposals by the coordination of Southern's activities with those ofECB banking organizations, the Board reviews the financial or East Carolina Bank. In addition, there are no legal, condition of the organizations involved on both a parent contractual, or statutory provisions that would otherwise only and consolidated basis, as well as the financial condi allow Southern to have any access to financial information tion of the subsidiary banks and significant nonbanking of ECB or East Carolina Bank beyond the information operations. The Board also evaluates the financial condition already available to it as a shareholder with a less than of the combined organization, including its capital position, 5 percent interest. These limitations restrict Southern's asset quality, and earnings prospects, and the impact of the access to confidential information that could enable it to proposed funding of the transaction. In assessing financial engage in anticompetitive behavior in the Washington factors, the Board consistently has considered capital County banking market with respect to East Carolina Bank. adequacy to be especially important. The Board also has considered additional facts indicat The Board has carefully considered the financial factors ing that the proposal is not likely to have a significantly of the proposal. Southern and Southern Bank are well adverse effect on competition in the Washington County capitalized and would remain so on consummation of the banking market. In addition to Southern Bank and East proposal. Based on its review of the record, the Board also Carolina Bank, three other bank competitors, each with finds that Southern has sufficient financial resources to market shares of at least 15 percent, provide additional effect the proposal and that the financial resources of sources of banking services to the market. The Board also Southern and its subsidiaries would not be adversely notes that the market includes one community credit union with broad membership criteria that include most of the 12. The Board previously has considered competition from certain residents in the market, offers a wide range of consumer active credit unions as a mitigating factor. See Passumpsic at CI77; Capital City Group. Inc .• 91 Federal Reserve Bulletin 418 (2005); FN.B. Corporation, 90 Federal Reserve Bulletin 481 (2004); Gateway I L See, e.g., The Bank ({[Nova Scotia, 93 Federal Reserve Bulletin Bank & Trust Co., 90 Federal Reserve Bulletin 547 (2004). If Southern C136 (2007); Passumpsic Bancorp, 92 Federal Reserve Bulletin CI75 Bank and East Carolina Bank were considered as a combined organi (2006) ("Passumpsic"); BOK Financial Corp., 81 Federal Reserve zation on consummation of the proposal. the HHI for the Washington Bulletin 1052, 1053-54 (1995); Sun Banks, Inc .. 71 Federal Reserve County banking market would increase 263 points to 2209 when the Bulletin 243 (1985). deposits of the credit union are weighted at 50 percent.

Legal Developments: First Quarter. 2009 B69 affected by the proposaL The proposed transaction would consider under the BHC Act and other applicable statutes. be funded by a dividend from Southern Bank and by The Board's approval is specifically conditioned on com Southern's existing financial resources. pliance by Southern with the conditions imposed in this The Board also has considered the managerial resources order and the commitments made to the Board in connec of Southern, ECB, and their subsidiary banks. The Board tion with the application. For purposes of this action, the has reviewed the examination records of these institutions, conditions and commitments are deemed to be conditions including assessments of their management, risk imposed in writing by the Board in connection with its management systems, and operations. In addition, the findings and decision herein and, as such, may be enforced Board has considered its supervisory experiences and those in proceedings under applicable law. of other relevant banking supervisory agencies with the The proposed transaction may not be consummated organizations and their records of compliance with appli before the 15th calendar day after the effective date of this cable banking law, including anti-money-laundering laws. order, or later than three months after the effective date of Southern, ECB, and their subsidiary banks are considered this order, unless such period is extended for good cause by to be well managed. the Board or the Federal Reserve Bank of Richmond, Based on all the facts of record, the Board has concluded acting pursuant to delegated authority. that considerations relating to the financial and managerial By order of the Board of Governors, effective March 9, resources and future prospects of the organizations involved 2009. are consistent with approval, as are the other supervisory factors under the BHC Act. Voting for Ihis action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Duke, and Tarullo. CONVENIENCE AND NEEDS AND CRA ROBERT DEV. FRIERSON PERFORMANCE CONSIDERATIONS Deputy Secretary of the Board In acting on a proposal under section 3 of the BHC Act, the Appendix A Board must consider the effects of the proposal on the convenience and needs of the communities to be served and PASSIVITY COMMITMENTS take into account the records of the relevant depository institutions under the Community Reinvestment Act Southern BancShares (N.C.), Inc., Mount Olive, North ("CRA" ).11 The Board has carefully considered the conve Carolina ("Southern"), will not, without the prior approval nience and needs factor and the CRA performance records of the Board or its staff, directly or indirectly of Southern Bank and East Carolina Bank in light of all the l. Exercise or attempt to exercise a controlling influence facts of record. As provided in the CRA, the Board over the management or policies of ECB Bancorp, Inc., evaluates the record of performance of an institution in Engelhard, North Carolina (HECB"). or any of its light of examinations by the appropriate federal supervisors subsidiaries, including The East Carolina Bank, Engel of the CRA performance records of the relevant institu hard, North Carolina; tions.14 Southern Bank received an "outstanding" rating 2. Seek or accept representation on the board of directors of ECB or any of its subsidiaries; and East Carolina Bank received a "satisfactory" rating at 3. Have or seek to have any employee or representative of their most recent examinations for CRA performance by Southern and its affiliates (the "Southern Group") the Federal Deposit Insurance Corporation, as of Febru serve as an officer, agent, or employee of ECB or any ary 28, 2006, and October 3, 2006, respectively. Based on a of its subsidiaries; review of the entire record, the Board has concluded that 4. Take any action that would cause ECB or any of its considerations relating to convenience and needs consider subsidiaries to become a subsidiary of Southern; 5. Own, control, or hold with power to vote securities that ations and the CRA performance records of Southern Bank (when aggregated with securities that the officers and and East Carolina Bank are consistent with approval of the directors of the Southern Group own, control, or hold proposaL with power to vote) represent 25 percent or more of any class of voting securities of ECB or any of its CONCLUSION subsidiaries; 6. Own or control equity interests that would cause the Based on the foregoing and all the facts of record, the combined voting and nonvoting equity interests of the Southern Group and its officers and directors to equal Board has determined that the application under section 3 or exceed 25 percent of the total equity capital of ECB of the BHC Act should be, and hereby is, approved. In or any of its subsidiaries; reaching its conclusion, the Board has considered all the 7. Propose a director or slate of directors in opposition to facts of record in light of the factors that it is required to a nominee or slate of nominees proposed by the management or board of directors of ECB or any of its 13. 12 U.s.e. §2901 et seq.; 12 U.s.e. §2903; 12 U.S.e. subsidiaries; § 1842(c)(2). 8, Enter into any agreement with ECB or any of its 14. The Interagency Questions and Answers Regarding Commu subsidiaries that substantially limits the discretion of nity Reinvestment provide that a CRA examination is an important and ECB's management over major policies and decisions, often controlling factor in the consideration of an institution's CRA including, but not limited to, policies or decisions record. See 74 Federal Register 498 at 527 (2009). about employing and compensating executive officers;

B70 Federal Reserve Bulletin 0 June 2009 engaging in new business lines; raising additional debt 11. Enter into any other banking or nonbanking transac or equity capital; merging or consolidating with another tions with ECB or any of its subsidiaries, except that firm; or acquiring, selling, leasing, transferring, or the Southern Group may establish and maintain deposit disposing of material assets, subsidiaries, or other accounts with The East Carolina Bank, provided that entities; the aggregate balance of all such deposit accounts does 9. Solicit or participate in soliciting proxies with respect not exceed $500,000 and that the accounts are main to any matter presented to the shareholders of ECB or tained on substantially the same terms as those prevail any of its subsidiaries; ing for comparable accounts of persons unaffiliated 10. Dispose or threaten to dispose (explicitly or implicitly) with ECB. of equity interests of ECB or any of its subsidiaries in any manner as a condition or inducement of specific The terms used in these commitments have the same action or non-action by ECB or any of its subsidiaries; meanings as set forth in the Bank Holding Company Act of or 1956, as amended, and the Board's Regulation Y. Appendix B SOUTHERN AND ECB BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO] GUIDELINES 1i i Amount Market R .. of deposits deposit Resulting Change in I : em~mm~ Bank RankL!>!m~~:~;2(;:r~::t)_i ~H_I _~~I~U_~~:~e~t~t~~r_s __ __,. ... Beaufort County, North Carolina Beaufort County Southern Pre-consummation .............. . 4 58.8 8.5 2,303 59 5 ECB ............................................ . 7 24.0 3.5 2,303 59 5 Southern Post-consummation ............ . 4 82.8 12.0 2,303 59 5 Dare, North Carolina-Dare, Hyde, and Tyrrell counties Southern Pre-consummation ............. .. 7 27.9 2.4 2,084 148 to ECB ............................................ . 356.7 30.7 2,084 148 10 Southern Post-consummation ............ . 384.6 33.1 2,084 148 10 Greenville, North Carolina-Includes the Ranally Metro Area (RMA) and non-RMA portions of Pitt County Southern Pre-consummation .............. . 6 111.5 6.7 1,487 48 11 ECB ............................................ . 9 59.5 3.6 1,487 48 11 Southern Post-consummation ............ . 5 171.0 10.3 1,487 48 11 Martin County, North Carolina Martin County Southern Pre-consummation .............. . 3 25.6 8.4 2,817 108 6 ECB ............................................ . 5 19.6 6.4 2,817 108 6 Southern Post-consummation ............ . 3 45.2 14.8 2,817 108 6 New Bern, North Carolina-Carteret County (excluding the Jacksonville RMA portion), Craven County, Pamlico County, and the eastern half of Jones County (excluding the Jacksonville RMA portion) Southern Pre-consummation .............. . 10 8.2 .4 2,223 11 ECB ............................................ . 9 29.9 1.3 2,223 11 Southern Post-consummation ........... .. 9 38.2 1.7 2,223 11 NOTE: Data are as of June 30. 2008. All amounts of deposits are un weighted. All rankings. market deposit shares. and HHls are based on thrift in stitution deposits weighted at 50 percent.

Legal Developments: First Quarter, 2009 B71 ORDERS ISSUED UNDER SECTION 4 OF accordance with the provisions of the BHC Act and the Board's regulations.6 The Board has provided notice to THE BANK HOLDING COMPANY ACT OTS, the primary federal supervisor of FTC and Federal Trust, and to the Department of Justice ("DOr). Those Allianz SE agencies have indicated they have no objection to approval Munich, Germany of the proposaL For the same reasons, and because this transaction represents a minority, noncontrolling invest Order Approving the Acquisition of Shares ment in The Hartford and its proposed subsidiary deposi tory institution, the Board has waived public notice of the of a Savings Association proposal. Allianz, with total consolidated assets of approximately Allianz SE ("Allianz"), a company that is treated as a $1.4 trillion, provides insurance, banking, and asset financial holding company within the meaning of the Bank management products and services in more than 70 coun Holding Company Act (HBHC Act"), has requested the tries. AIlianz's banking activities are conducted primarily Board's approval under sections 4(c)(8) and 40) of the through Dresdner. Dresdner also owns Dresdner Kleinwort BHC Act and section 225.24 of the Board's Regulation yl Securities, LLC, a U.S. broker-dealer. to retain its interest in The Hartford Financial Services The Hartford, with total consolidated assets of $312 bil Group, Inc. (,'The Hartford"), Hartford, Connecticut, on lion, is a diversified insurance and financial services com consummation of The Hartford's proposal to become a pany, with international operations in Japan, the United savings and loan holding company by indirectly acquiring Kingdom, Canada, Brazil, and Ireland. FTC, with total all the shares of Federal Trust Bank ("Federal Trust"), consolidated assets of approximately $602 million, oper Sanford, Florida, a federal savings association. ates one insured depository institution, Federal Trust, which Section 4 of the BHC Act requires a bank holding has offices only in Florida and controls deposits of approxi company to obtain the Board's approval before acquiring mately $415 million.? more than 5 percent of the voting shares of a savings The Board previously has determined by regUlation that association. regardless of whether the acquisition would the operation of a savings association by a bank holding represent a controlling interest.2 Allianz is subject to the company is closely related to banking for purposes of BHC Act as a result of its ownership of Dresdner Bank AG section 4(c)(8) of the BHC Act.s The Board requires that ("Dresdner"), Frankfurt am Main, Germany, which oper savings associations acquired by bank holding companies ates a branch in New York, New York.3 AlIianz owns or financial holding companies conform their direct and 23.7 percent of the voting shares of The Hartford, a indirect activities to those permissible for bank holding diversified financial services company. On November 14, companies under section 4(c)(8) of the BHC Act. Allianz 2008, The Hartford applied to the Office of Thrift Supervi has committed to conform or divest its interests in The sion ("OTS") to acquire Federal Trust Corporation Hartford if The Hartford, FTC, Federal Trust, or any of ("FTC"), the parent savings and loan holding company of their subsidiaries engage in activities that are impermissible Federal Trust, and thereby acquire control of Federal Trust. under the BHC Act. Section 4(i)(4) of the BHC Act requires the Board to In reviewing the proposal, the Board is required by provide the director of OTS with notice of an application to section 40)(2)(A) of the BHC Act to determine that the acquire a savings association and to provide the director a proposed acquisition of FTC and Federal Trust "can rea period of time (normally 30 days) within which to submit sonably be expected to produce benefits to the public that views and recommendations on the proposaJ.4 The BHC outweigh possible adverse effects, such as undue concen Act also authorizes the Board to reduce or eliminate this tration of resources, decreased or unfair competition, con notice period under certain circumstances.5 flicts of interests, or unsound banking practices."9 As part In light of the unusual and exigent circumstances affect of its evaluation of a proposal under these public interest ing the financial markets, and all other facts and circum factors, the Board reviews the financial and managerial stances, the Board has determined that emergency condi resources of the companies involved, the effect of the tions exist that justify expeditious action on this proposal in proposal on competition in the relevant markets, and the public benefits of the proposal. In acting on a notice to 10 I. 12 U.S.C §§ 1843(c)(8) and (j); 12 CFR 225.24. acquire a savings association, the Board also reviews the 2. See 12 U.S.C §§ I 843(c)(8), 1843(i). As discussed more fully below, the Board has determined that Allianz would not control or exercise a controlling influence over The Hartford based on all the facts and circumstances of the investment, including commitments and representations provided by Allianz to the Board. 6. 12 U.S.C § I 843(i)(4); 12 CFR 225.25(d) and 262.3(1). 3. A foreign bank that operates a branch or agency in the United 7. Asset data are as of June 30, 2008. Deposit data are as of States (and any company that owns or controls such foreign bank) is September 30, 2008. subject to the BHC Act as if it were a bank holding company. 8. 12 CFR 225.28(b)(4)(ii). 12 U.S.C § 3106(a). 9. 12 U.S.C § 18 43(j)(2)(Al. 4. 12 U.S.C § I 843(i)(4). 10. See 12 CFR 225.26; see, e.g .. BancOne Corporation. 83 Fed 5. ld. eral Reserve Bulletin 602 (1997).

B72 Federal Reserve Bulletin D June 2009 records of performance of the relevant insured depository forma organization, including its capital position, asset institutions under the Community Reinvestment Act quality, and earnings prospects, and the impact of the ("CRA").1l proposed funding of the transaction. In reviewing the proposal under section 4 of the BHC The capital levels of AlIianz exceed the minimum levels Act, the Board has considered the financial resources of that would be required of a foreign bank under the Basel Allianz, The Hartford, FTC, and Federal Trust. The Board Capital Accord and are, therefore, considered to be equiva has also reviewed the effect that the transaction would have lent to the capital levels that would be required of a U.S. on those resources in light of all the facts of record, banking organization. The Board has also consulted with including confidential reports of examination, other super the OTS about the financial resources of The Hartford, visory information from the primary federal and state FTC, and Federal Trust, including those resources on supervisors of the organizations involved in the proposal, consummation of the proposal. Based on its review of the publicly reported and other financial information, and record, the Board finds that Allianz has sufficient resources information provided by Allianz. to retain its interest in The Hartford. The Board also has considered the managerial resources NONCONTROLLING INVESTMENT of the organizations involved. The Board has considered available supervisory information concerning Dresdner's AlIianz has stated that it does not propose to control or U.S. operations, FTC, and Federal Trust. In addition, the exercise a controlling influence over The Hartford and that Board has considered its supervisory experiences and those as a result, its indirect investment in FTC and Federal Trust of the other relevant banking supervisory agencies with the would be a passive investment. Allianz has provided cer organizations and their records of compliance with appli tain commitments that are similar to commitments previ cable banking laws and with anti-money-laundering laws. ously relied on by the Board in determining that an The Board has also consulted with the OTS about the investing bank holding company would not be able to managerial resources of, and its supervisory experiences exercise a controlling influence over another company for with, FTC and Federal Trust. purposes of the BHC Act. For example, AlIianz has com Based on all the facts of record, the Board has concluded mitted not to exercise or attempt to exercise a controlling that the financial and managerial resources of the organiza influence over the management or policies of The Hartford tions involved in the proposal are consistent with approval or any of its subsidiaries and has committed not to have under section 4 of the BHC Act. more than one representative serve on the board of The Hartford or its subsidiaries. The commitments also include COMPETITIVE CONSIDERATIONS AND CRA certain restrictions on the business relationships of AlIianz PERFORMANCE RECORDS with The Hartford, FTC, and Federal Trust. Based on these considerations and all other facts of As part of the Board's consideration of the public interest record, the Board has concluded that Allianz would not factors under section 4 of the BHC Act, the Board has control The Hartford or its subsidiary depository institution considered carefully the competitive effects of the proposal solely by virtue of the proposed retention of its interest in in light of all the facts of record. The Board has found that The Hartford. The Board notes that the BHC Act would noncontrolling interests in directly competing depository require Allianz to file an application and receive the institutions may raise serious questions under the BHC Act Board's approval before it could directly or indirectly and has stated that the specific facts of each case will acquire additional shares of, or attempt to exercise a determine whether the minority investment in a company controlling influence over, The Hartford}2 would be anticompetitive.13 Dresdner, the subsidiary for eign bank of Allianz, however, does not compete directly FINANCIAL AND MANAGERIAL RESOURCES with FTC in any relevant banking market. Based on all the facts record, the Board concludes that the consummation of In evaluating financial resources, the Board reviews the the proposal would have no significantly adverse effect on financial condition of the organizations involved on both a competition or on the concentration of banking resources in parent-only and consolidated basis, as well as the financial any relevant banking market. condition of the subsidiary insured depository institutions As provided in the CRA, the Board has evaluated the and significant nonbanking operations. In this evaluation, proposal in light of the evaluations by the appropriate the Board considers a variety of measures, including capital federal supervisors of the CRA performance records of the adequacy, asset quality, and earnings performance. In relevant insured depository institutions. An institution's assessing financial resources, the Board consistently has most recent CRA performance evaluation is a particularly considered capital adequacy to be especially important. The important consideration in the applications process because Board also evaluates the financial condition of the pro it represents a detailed, on-site evaluation of the institu tion's overall record of performance under the CRA by its II. 12 U.S.c. §2901 et seq. 12. See. e.g., Emigrant Bancorp, Inc., 82 Federal Reserve Bulletill 555 (1996); First Community Bancshares, Inc., 77 Federal Re.lerve 13. See. e.g. BOK Financial Corp., 81 Federal Reserve Bulletin Bulletin 50 (1991). 1052, 1053-54 (1995).

Legal Developments: First Quarter. 2009 B73 appropriate federal supervisor.'4 Federal Trust received a By order of the Board of Governors, effective Janu "satisfactory" rating on June 26, 2006, its most recent ary 14.2009. CRA examination. Based on a review of the entire record and for the reasons stated above, the Board concludes that Voting for this action: Chairman Bernanke. Vice Chairman Kohn. and Governors Warsh, Kroszner, and Duke. the CRA performance records of the relevant depository institutions are consistent with approval. ROBERT DEY. FRIERSON Deputy Secretary of the Board PUBUC BENEFITS ORDERS ISSUED UNDER FEDERAL As part of its evaluation of the public interest factors under section 4 of the BHC Act, the Board has reviewed carefully RESERVE ACT the public benefits and possible adverse effects of the proposal. The record indicates that consummation of the proposal would result in benefits to consumers currently ICE US Trust LLC served by FTC and Federal Trust by strengthening the New York, New York financial and managerial resources available to Federal Trust and thereby enhancing Federal Trust's future pros Order Approving Application for pects. Membership For the reasons discussed above and based on all the facts of record, the Board has determined that the conduct ICE US Trust LLC ("ICE Trust"). a de novo uninsured of the proposed nonbanking activities within the frame trust company organized under New York law,' has re work of Regulation Y and Board precedent is not likely to quested the Board's approval under section 9 of the Federal result in significantly adverse effects, such as undue con Reserve Act ("Act")2 to become a member of the Federal centration of resources, decreased or unfair competition, Reserve System.3 ICE Trust proposes to operate as a central conflicts of interests, or unsound banking practices. Based counterparty ("CCP") and clearinghouse for credit default on all the facts of record, the Board has concluded that swap ("CDS") transactions conducted by its participants. consummation of the proposal can reasonably be expected ICE Trust will become a wholly owned subsidiary of to produce public benefits that would outweigh any likely ICE US Holding Company LP ("ICE LP"),4 which will be adverse effects. Accordingly, the Board has determined that controlled indirectly by Intercontinental-Exchange, Inc. the balance of the public benefits under the standard of ("ICE" )• .5 an operator of futures exchanges and over-the section 4(j)(2) of the BHC Act is consistent with approval. counter markets for commodities and derivative financial products.6 ICE has entered into an agreement to acquire CONCLUSION Based on the foregoing and all the facts of record, the I. Under New York law, a limited liability trust company may not Board has determined that the notice should be, and hereby accept deposits from the general public and must obtain an exemption is, approved. In reaching its conclusion, the Board has from the general requirement under state law that New York-chartered considered all the facts of record in light of the factors that banks and trust companies have federal deposit insurance. See it is required to consider under the BHC Act. The Board's New York Banking Law §§ 32, I02a. The New York State Banking Board ("NYSBB") has approved ICE Trust's charter application and approval is specifically conditioned on compliance by its exemption from the deposit insurance requirement. Letter from Allianz with the conditions imposed in this order and the NYSBB to Bradley K. Sabel, Esq .• Decemher 4,2008. commitments made to the Board in connection with the 2. 12 U.S.c. §321 et seq. notice. The Board's approval also is subject to all the 3. 12 U .S.c. §§ 221 and 321. ICE Trust is a bank for purposes of the Act and. therefore, is eligible for membership in the Federal Reserve conditions set forth in Regulation Y, including those in System. sections 225.7 and 225.25(c), 15 and to the Board's authority 4. ICE LP is organized under the law of the Cayman Islands but has to require such modification or termination of the activities consented to the jurisdiction of United States courts and government of Allianz or any of its subsidiaries as the Board finds agencies with respect to matters arising out of federal banking laws. necessary to ensure compliance with, and to prevent eva ICE LP also has committed to make available to the Board such information on the operations of ICE Trust and its affiliates as the sion of, the provisions of the BHC Act and the Board's Board deems necessary to enforce compliance with the Act and other regulations and orders issued thereunder. For purposes of applicable federal law. this action, these conditions and commitments are deemed 5. ICE's wholly owned subsidiary, ICE US Holding Company GP to be conditions imposed in writing by the Board in LLC ("ICE GP"), a Delaware limited liability company, will be the general partner of ICE LP. ICE, ICE GP, and ICE LP have committed connection with its findings and decisions herein and, as that ICE LP will not, without the prior approval of the Board. engage such, may be enforced in proceedings under applicable law. in any activity or make any investment other than holding an interest in ICE Trust and TCC. 6. ICE Trust is not a bank as defined in the Bank Holding Company 14. See Interagency Questions and Answers Regarding Community Act ("BHC Act") (12 U.S,c. § 1841 et seq.). See 12 U.S.c. Reinvestment. 74 Federal Register 498 at 527 (2009). § 1841(c)(I). ICE LP, ICE GP, and ICE, therefore, would not he bank 15. 12 CFR 225.7 and 225.25(c). holding companies for purposes of the BHC Act. No bank holding

B74 Federal Reserve Bulletin 0 June 2009 The Clearing Corporation (HTCC"), a derivatives clearing Initially, ICE Trust proposes to clear only contracts that house.7 are based on certain CDX North American indices and are ICE Trust is being organized to reduce the risk associ submitted by the participants as principals. 10 Incidental to ated with the trading and settlement of CDS transactions.lI clearing such transactions, ICE Trust also would provide The CDS market as measured by the total notional amount certain transaction-related administrative services to par of outstanding contracts has grown significantly, from ticipants. ICE Trust proposes to charge a fee for its CDS approximately $6.4 trillion by year-end 2004 to approxi clearing services to participants primarily on a per mately $57.3 trillion by mid-year 2008.9 In the second half transaction basis. of 2008, however, dealers in CDS contracts were able to As a member of the Federal Reserve System, ICE Trust reduce the total notional amount of outstanding contracts would be eligible to open an account with, and receive by approximately $32 trillion through regular and frequent payment services from, the Federal Reserve Bank of portfolio compression activity. CCPs interpose themselves New York. ICE Trust proposes to obtain a number of between counterparties to flnancial contracts, becoming the services from TCC and ICE. ICE Trust would use TCC's buyer to the seller of the contract and the seller to the existing infrastructure for clearing operations and its risk contract's buyer. In the absence of a CCP, each market management services, ICE would provide internal audit participant bears the risk, known as counterparty credit functions for ICE Trust. risk, that one or more of its counterparties will default. By interposing itself between participants and thereby assum ing counterparty credit risk, a CCP enables market partici FACTORS GOVERNING BOARD REVIEW OF THE pants to accept the best bids and offers without concern that PROPOSAL a counterparty may default. In acting on an application for membership in the Federal By assuming counterparty credit risk and enforcing Reserve System, the Board is required by the Act and participation standards and margin requirements, CCPs Regulation H to consider the financial history and condition also can help diminish systemic risk in market settlement of the applying bank; the adequacy of its capital in relation activities. In addition, establishment of a CCP can lower to its assets and to its prospective deposit liabilities and systemic risk by instituting procedures for the orderly close other corporate responsibilities; its future earnings pros out of the positions of any participant who defaults and by pects; the general character of its management; whether its mutualizing the cost of the close-out process. corporate powers are consistent with the purposes of the PROPOSED ACTIVITIES Act; and the convenience and needs of the community to be served, II Because ICE Trust's primary business would be ICE Trust would act as the CCP for its participating acting as a CCP and clearinghouse for CDS transactions, financial institutions by novating CDS contracts between the Board has reviewed the applicable financial and mana participants. Through novation, ICE Trust would be posi gerial factors in light of the Federal Reserve's Policy on tioned between the parties to a CDS contract, thereby Payments System Risk (HPSR Policy"), including its mini becoming the counterparty to each party. ICE Trust would mum standards for systemically important central counter net out the overall positions of each participam and, parties.12 These standards address, among other matters, accordingly, would receive payments from and make pay financial resources, measurement and management of credit ments to each participant on a net basis. In this manner, ICE exposures, margin requirements, and default procedures. Trust would reduce the volume of settlement paymems among participants and reduce the counterparty, credit, and other risks and the transaction costs associated with CDS FINANCIAL CONSIDERATIONS contracts. In considering the financial history and condition. future earnings prospects, capital adequacy of ICE Trust, and company will directly or indirectly control more than 5 percent of the other financial factors, the Board has reviewed its business voting shares of ICE Trust. 7. TCC also will become a wholly owned subsidiary of ICE LP. plan and financial projections and has assessed the ad TCC will provide certain clearing services to ICE Trust. equacy of ICE Trust's anticipated capital levels in light of 8. In the simplest form of a CDS arrangement, the seller of a CDS agrees to pay the buyer the full principal amount of the debt obligation underlying the CDS in exchange for periodic payments to cover the cost of the credit-risk protection. Tbe seller is then obligated to pay the 10. These indices include certain investment·grade indices; buyer if the maker of the obligation defaults or declares bankruptcy. In investment-grade, high-volatility sub-indices; and high-yield indices. index-based CDS contracts, the parties' payment obligations are based II. 12 U.S.C. §§ 322 and 329; 12 CFR 208.3(b)(3). on an index of debt obligations of multiple companies, such as an 12. Federal Reserve Policy on Payments System Risk. available at index of U.S. investment-grade or emerging-market bonds, rather than www.federalreserve.gov/paymentsystems/psr/default.htm. The PSR on a single obligation. Policy incorporates the minimum standards for systemically important ors 9. See Bank for International Settlements, Derivatives Market central counterparties in the RecommendatiollS flJr Central Counter Activity in the First Half of 2008 (November 2008); Bank for parties ("RCCP"), jointly issued in November 2004 by the Commit ors International Settlements, Derivatives Market Activity in the tee on Payment Settlement Systems of the Bank for International Second Half of 2005 (May 2006). The notional amount refers to the Settlements and by the Technical Committee of the International principal amount of obligations underlying CDS contracts. Organization of Securities Commissioners.

Legal Developments: First Quarter, 2009 B75 its proposed assets and liabilities. ICE Trust would main calculations of credit exposure and margin requirements to 13 tain capital that is adequate to cover its start-up costs, determine the sufficieney of the financial resources needed projected operational losses, and unanticipated losses and to withstand participant defaults under a range of plausible to allow for an orderly wind-down of positions if con market scenarios. To ensure its liquidity, margin collateral fronted with the need to cease operations. would be required to be in the form of cash or G7 In assessing the adequacy of ICE Trust's capital levels, government debt. the Board has taken into account the financial resources In addition to margin requirements, ICE Trust would maintained by ICE Trust to enable it to withstand a default require each participant to contribute a minimum of in extreme but plausible market conditions by the partici $20 million to the guaranty fund plus additional amounts pant to which it has the largest exposure.1-l For ICE Trust, based on the participant's expected level of position expo as for many CCPs, these resources include margin collat sures. Additional contributions would be assessed at least eral posted by participants based on the value and risk quarterly. associated with their open positions and participants' con The establishment of ICE Trust as a CCP for CDS tributions to a guaranty fund. The Board expects ICE Trust contracts is expected to minimize the impact on financial at all times to maintain financial resources commensurate markets of a failure by a single participant by collateraliz with the level and nature of the risks to which it is exposed. ing counterparty risk exposures through the standardized If a participant defaults, ICE Trust would draw on application of margin and guaranty fund requirements, by margin collateral posted by the participant. If the margin reducing exposures through the netting of CDS transactions collateral is insufficient, ICE Trust would then look to the on a multilateral basis, and by standardizing and centrally defaulting participant's guaranty fund contribution. Should managing the close out of a defaulting participant's posi the defaulting participant's margin collateral and guaranty tions with the CCP. fund contribution be insufficient to cover any losses on the After carefully considering all the facts of record, the defaulted obligations, ICE Trust would be authorized to Board has concluded that ICE Trust's financial condition. use, as needed, other participants' guaranty fund contribu capital adequacy, future earnings prospects, and other tions to satisfy any remaining obligations of the defaulting financial factors are consistent with approval of the pro party. If the guaranty fund in total is inadequate to cover posal. losses on the defaulted obligations, ICE Trust would have the ability to assess additional guaranty fund contributions MANAGERIAL CONSIDERATIONS on nondefaulting participants. To limit the risk of default by participants, ICE Trust In reviewing ICE Trust's managerial resources, the Board proposes to establish strong and objective participant eligi has considered carefully the experience of ICE Trust's bility requirements. For example, only a firm with a net proposed management, as well as its planned risk worth of $5 billion or more and a credit rating of "A" or management systems, operations, and anti-money better may become a participant. Among other criteria, laundering compliance program. In addition, because ICE each prospective participant also would be required to Trust proposes to be a CCP, the Board has considered ICE demonstrate that it has systems, management, and risk Trust's plans for managing the counterparty credit risk, management expertise with respect to CDS transactions. operational risk, legal risk, and other risks that CCPs Margin requirements for participants in ICE Trust would commonly encounter. IS be comprised of two components: (I) initial margin collat The most significant risk that a CCP for CDS transac eral provided at the time of contract novation that is tions experiences is counterparty credit risk. The Board has intended to cover losses from a defaulting participant's carefully reviewed ICE Trust's risk-management frame positions under normal market conditions; and (2) mark-to work and its ability to measure accurately its exposure to market margin requirements that are calculated at the end counterparty credit risk. ICE Trust proposes to measure its of each day based on a participant's outstanding positions. credit-risk exposures to clearing participants on a daily ICE Trust plans to regularly perform stress testing on its basis, using a value-at-risk methodology to calculate the appropriate level of margin, and to calculate the margin requirement and collect the required margin collateral from 13. 12 V.S.c. §§322 and 329; 12 CFR 20S.3(b)(3). As required by its regulations, the Board has used the definition of capital in Appendix each participant daily. ICE Trust has conducted extensive A to Regulation H in assessing ICE Trust's capital adequacy (12 CFR validation of its models for each of the products it initially 208.4(a». In light of the fact that ICE Trust would (I) take no deposits intends to clear, The Board also has reviewed independent from the general public, (2) have no federal deposit insurance, assessments of ICE Trust's models. To manage concentra (3) engage in no activities apart from serving as a CCP and clearing house. and (4) have assets and liabilities that reHeet its status as a CCP tion risk, ICE Trust will charge additional margin collateral and clearinghouse, the Board will not require ICE Trust to meet the for positions exceeding pre-set notional thresholds. To risk-based capital requirements or the leverage requirements set forth in Appendices A, B, E, and F of Regulation H. The Board retains the authority. however. to specify capital requirements for ICE Trust and 15. ICE Trust has committed that it will provide the Federal to require ICE Trust to increase its capital if the Board at any time Reserve System with a 60-day prior notice of material changes to its concludes that ICE Trust's capital is inadequate in view of its assets, rules to provide time for an adequate review by the Federal Reserve liabilities, and responsibilities (12 CPR 208.4(a)). System and the opportunity to raise any supervisory or regulatory 14. RCCP at 23. objections.

B76 Federal Reserve Bulletin 0 June 2009 address liquidity risk, ICE Trust will ensure that it has The Board also has considered the convenience and ready access to sufficient sources of liquidity to meet its needs of the community to be served.19 As noted, the payment obligations on a same-day basis. establishment of ICE Trust as a CCP for CDS contracts is The Board also has reviewed ICE Trust's other mecha expected to benefit financial markets significantly, by nisms for controlling counterparty credit risk, including the reducing systemic risks associated with counterparty credit adequacy of its policies and procedures for identifying any exposures in CDS transactions, and thereby enhance the instance of default by a participant and for the orderly close stability of the overall financial system. In addition, ICE out of a defaulting participant's positions. The Board has Trust would promote greater market transparency by mak carefully reviewed ICE Trust's plan to limit investment risk ing publicly available the closing settlement price and by investing cash margin it receives in certain highly liquid related volume and open interest data for each cleared instruments. To address settlement risks associated with product, on terms that are fair, reasonable, and not unrea participants' payments of margin collateral, guaranty fund sonably discriminatory. For these reasons and based on a review of the entire record, the Board has concluded that contributions, and other monies, ICE Trust will establish a the convenience and needs considerations are consistent program to monitor payment concentration among settle with approval of the proposal. ment banks, evaluate the impact of settlement-bank failure, and develop measures to mitigate associated risks. The Board has also considered the legal framework CONCLUSION within which ICE Trust would operate as a CCP, including Based on the foregoing and all the facts of record, including the planned contractual arrangements and applicable gov all the commitments, stipulations, and representations made erning statutes and regulations with respect to the novation in connection with the application, and subject to all the process, netting arrangements, settlements, and procedures terms and conditions set forth in this order, the Board has in the event of a participant default. The Board also has determined that ICE Trust's proposed membership in the considered information regarding the legal implications of Federal Reserve System should be, and hereby is, approved. cross-border participation in ICE Trust. In addition, the The Board's approval is specifically conditioned on com Board has reviewed ICE Trust's proposed operational and information technology infrastructure, including its busi pliance with Regulation H,20 with receipt of required authorizations from certain other agencies,21 and with all ness continuity plans and the adequacy of its management the commitments, stipulations, and representations made in controls. connection with the application, including the commit Based on this review and all the facts of record, the ments and conditions discussed in this order. The commit Board has concluded that the general character of ICE ments, stipulations, representations, and conditions relied Trust's management is consistent with approval of the on in reaching this decision shall be deemed to be condi proposal. tions imposed in writing by the Board in connection with its findings and decision and, as such, may be enforced in proceedings under applicable law. OTHER CONSIDERATIONS ICE Trust will become a member of the Federal Reserve System on its purchase of stock in the Federal Reserve In considering whether the corporate powers exercised by Bank of New York ("Reserve Bank"). This transaction ICE Trust are consistent with the purposes of the Act, the must occur not later than three months after the effective Board notes that ICE Trust's proposed activities are permis date of this order, unless such period is extended for good sible for a state member bank under the Act's applicable provisions.16 Under Regulation H, ICE Trust would be cause by the Board or the Reserve Bank acting pursuant to delegated authority. required to obtain the Board's approval before changing the By order of the Board of Governors, effective March 4, general character of its business or the scope of the 2009. corporate powers it exercises. 17 In addition, ICE Trust has provided the Board with several commitments intended to Voting for Ihis action: Chairman Bernanke. Vice Chainnan Kohn, ensure that the Board will have adequate enforcement and Governors Warsh. Duke. and Tarullo. authority over ICE Trust as an uninsured state member bank. IS For these reasons and based on a review of the ROBERT DEY. FRIERSON entire record, the Board has concluded that this consider Deputy Secretary of the Board ation is consistent with approval of the proposal. 16. See 12 U.S.C. §§ 330 and 335. 17. 12 CFR 208.3(d)(2), 19. Because ICE Trust will not accept deposits or have federal 18, ICE Trust has stipulated that it would be subject to the deposit insurance. it will not be subject to the Community Reinvest supervisory, examination, and enforcement authority of the Board ment Act (12 U.S ,C. § 2901 et seq,). under the Federal Deposit Insurance Act as if ICE Trust were an 20. 12 CFR Part 208, insured depository institution for which the Board is the appropriate 21, Those agencies are the NYSBB and the Securities and Ex federal banking agency under thaI act. change Commission.

Legal Developments: First Quarter, 2009 B77 ORDERS ISSUED UNDER Landesbank Kreditanstalt Oldenburg-Girozentrale and Nieba, controls 19.22 percent of GLB.s INTERNATIONAL BANKING ACT The proposed representative office would market real estate credit and loan products on behalf of the Bank's head office in Germany. The office would perform representa DekaBank Deutsche Girozentrale tional and administrative functions, such as acting as a Frankfurt am Main, Germany liaison between Bank's offices outside the United States and correspondent banks in the United States, and would Order Approving Establishment of a engage in market research, business solicitation, loan pro Representative Office duction, and relationship-management activities.6 In acting on an application under the IBA and Regula tion K by a foreign bank to establish a representative office, DekaBank Deutsche Girozentrale ("Bank"), Frankfurt am the Board shall take into account whether the foreign bank Main, Germany, a foreign bank within the meaning of the and any parent foreign bank directly engages in the busi International Banking Act ("IBA"), has applied under ness of banking outside of the United States and whether section lO(a) of the IBA I to establish a representative office the foreign bank has furnished to the Board the information in New York, New York. The Foreign Bank Supervision it needs to assess the application adequatelyJ The Board Enhancement Act of 1991, which amended the IBA, pro shall also take into account whether the foreign bank and vides that a foreign bank must obtain the approval of the any foreign bank parent are subject to comprehensive Board to establish a representative office in the United supervision on a consolidated basis by their home-country States. Notice of the application, affording interested persons an supervisor.~ The Board also considers additional standards set forth in the IBA and Regulation K,9 opportunity to submit comments, has been published in a As noted above, Bank and its parent bank, LBBW, newspaper of general circulation in New York (The New York engage directly in the business of banking outside the Times, October 3, 2007). The time for filing comments has expired, and all comments received have been considered. Bank, with total consolidated assets of approximately 5. Other shareholders that own an interest of more than 5 percent in $198 billion? is the 18th largest bank in Germany by asset GLB are HSH Nordbank AG, WestLB AG, Landesbank Hessen size. Bank engages in wholesale banking and investment Thiiringen Girozentrale, and Bayerische Landesbank. fund activities and provides investment fund management 6. A representative office may engage in representational and services to German savings banks and other financial administrative functions in connection with the banking activities of the foreign bank, including soliciting new business for the foreign service providers. Outside Germany, Bank has subsidiaries bank. conducting research. acting as a liaison between the foreign in Luxembourg, Switzerland, Ireland, and Grand Cayman bank's head office and customers in the United States, performing and representative offices in Italy and Spain. preliminary and servicing steps in connection with lending, and Deutscher Sparkassen- und Giroverband O.K. performing back-office functions. A representative office may not (UDSGY"), Bonn, Germany, owns 50 percent of Bank.3 contract for any deposit or deposit-like liability. lend money, or engage in any other banking activity (12 CPR 211.24(d)(I». GLB GmbH & Co. OHG ("GLB"), Frankfurt am Main, 7. 12 U.S.C. § 3107(a)(2). owns 49.2 percent of Bank. The remaining shares of Bank 8. [d.; 12 CPR 211.24(d)(2). In assessing this standard, the Board are owned by Niedersiichsische Bank GmbH (HNieba"). considers, among other factors, the extent to which the home-country Landesbank Baden-Wilrttemberg ("LBBW"), Stuttgart, supervisors (i) ensure that the bank has adequate procedures for monitoring and controlling its activities worldwide; (ii) obtain infor Germany, owns 30.05 percent of GLB.4 LBBW is one of mation on the condition of the bank and its subsidiaries and offices the largest savings banks in Germany. In the United States through regular examination reports, audit reports, or otherwise; (iii) it operates through a New York branch and nonbanking obtain information on the dealings with and relationship between the subsidiaries. Both LBBW and its parent, SBW, are treated bank and its affiliates. both foreign and domestic; (iv) receive from the as financial holding companies. Norddeutsche Landesbank bank financial reports that are consolidated on a worldwide basis or comparable information that permits analysis of the bank's financial Girozentrale, directly and through its subsidiaries, Bremer condition on a worldwide consolidated basis; and (v) evaluate pruden tial standards, such as capital adequacy and risk asset exposure, on a worldwide basis. These are indicia of comprehensive, consolidated supervision. No single factor is essential, and other elements may 1. 12 U.S.c. § 3107(a). inform the Board's determination. 2. Unless otherwise indicated, data are as of September 30, 2008. 9. See 12 U.S.C. §3I05(d)(3)-(4); 12 CPR 211.24(c)(2H3). These 3. The 12 shareholders of DSGV, all of which are German regional standards include (I) whether the bank's home-country supervisor has savings banks associations, exercise their voting rights directly in consented to the establishment of the office; the financial and manage Bank in proportion to their participation in DSGV. The seven savings rial resources of the bank; (2) whether the bank has procedures to banks associations that own an interest of 5 percent or more in DSGV combat money laundering, whether there is a legal regime in place in are Sparkassenverband Baden-Wtirttemberg, Rheinischer Sparkassen the home country to address money laundering, and whether the home und Giroverband, Westfalisch-Lippischer Sparkassen- und Girover country is participating in multilateral efforts to combat money band, Sparkassen- und Giroverband Hessen-Thtiringen, Sparkassen laundering; (3) whether the appropriate supervisors in the home verband Bayem, Sparkassenverband Niedersachsen, and Sparkassen country may share information on the bank's operations with the und Giroverband Rheinland-Pfalz. Board; and (4) whether the bank and its U.S. affiliates are in 4. Sparkassenverband Baden-Wtirttemberg ("SBW"), Stuttgart, compliance with U,S. law; the needs of the community; and the bank's owns 35.61 percent of LBBW. record of operation.

B78 Federal Reserve Bulletin 0 June 2009 United States. Bank also has provided the Board with have committed to make available to the Board such information necessary to assess the application through information on the operations of Bank and any of its submissions that address the relevant issues. affiliates as the Board deems necessary to determine and With respect to supervision by home-country authorities, enforce compliance with the IBA, the BHe Act, and other the Board previously has determined that LBBW's prede applicable federal law, To the extent that the provision of cessor, Siidwestdeutsche Landesbank Girozentrale, was such information to the Board may be prohibited by law or subject to comprehensive consolidated supervision and otherwise, Bank, GLB, and DSGV have committed to regulation in connection with its application to establish a cooperate with the Board to obtain any necessary consents branch olIke in the United States. to In addition, the Board or waivers that might be required from third parties for has determined that other German banks are subject to disclosure of such information. In addition, subject to home-country supervision on a consolidated basis by the certain conditions, BaFin may share information on Bank's Bundesanstalt Finanzdiestleistungsaufsicht (" BaFin"), the operations with other supervisors, including the Board. In primary regulator of commercial banks in Germany. II Bank light of these commitments and other facts of record, and is supervised by BaFin on substantially the same terms and subject to the condition described below, it has been conditions as those other banks. Based on all the facts of determined that Bank, GLB, and DSGV have provided record, it has been determined that Bank is, and LBBW adequate assurances of access to any necessary information continues to be, subject to comprehensive supervision and that the Board may request. regulation on a consolidated basis by their home-country On the basis of the foregoing and all the facts of record, supervisor. and subject to the commitments made by Bank, GLB, and The additional standards set forth in section 7 of the IBA DSGV, and the terms and conditions set forth in this order, and Regulation K have also been taken into account.12 Bank's application to establish the representative office is BaFin has no objection to the establishment of the proposed hereby approved, U Should any restrictions on access to representati ve office. information on the operations or activities of Bank and its With respect to the financial and managerial resources of affiliates subsequently interfere with the Board's ability to Bank, taking into consideration its record of operations in obtain information to determine and enforce compliance by its home country, its overall financial resources, and its Bank or its affiliates with applicable federal statutes, the standing with its home-country supervisor, financial and Board may require termination of any of Bank's direct and managerial factors are consistent with approvaL Bank indirect activities in the United States. Approval of this appears to have the experience and capacity to support the application also is specifically eonditioned on compliance proposed representative office and has established controls by Bank with the conditions imposed in this order and the and procedures for the proposed representative office to eommitments made to the Board in connection with this ensure compliance with U.S. law. application.14 For purposes of this action, these commit Germany is a member of the Financial Action Task ments and conditions are deemed to be conditions imposed Force ("FATF") and subscribes to its recommendations on in writing by the Board in connection with its finding and measures to combat money laundering. In accordance with decision and may be enforced in proceedings under these recommendations, Germany has enacted laws and 12 U.S.c. § 1818 against Bank and its affiliates. created legislative and regulatory standards to deter money By order, approved pursuant to authority delegated by laundering, terrorist financing, and other illicit activities. the Board, effective January 13, 2009. Money laundering is a criminal offense in Germany, and credit institutions are required to establish internal policies, ROBERT DEV. FRIERSON procedures, and systems for the detection and prevention of Deputy Secretary of the Board money laundering throughout their worldwide operations. Bank has policies and proeedures to comply with these laws and regulations that are monitored by governmental entities responsible for anti-money-Iaundering compliance. With respect to access to information on Bank's opera tions, the restrictions on disclosure in relevant jurisdictions in which Bank operates have been reviewed and relevant government authorities have been eommunicated with regarding access to information. Bank. GLB, and DSGV 13. Approved by the Director of the Division of Banking Supervi sion and Regulation, with the concurrence of the General Counsel, pursuantto authority delegated by the Board. See 12 CFR 265.7(d)(12). 14. The Board's authority to approve the establishment of the proposed representative office parallels the continuing authority of the 10. See Siidwestdeutsche Landesbunk Girozentrule, 83 Federal state of New York to license offices of a foreign bank. The Board's Reserve Bulletin 937 (1997). approval of this application does not supplant the authority of the state II. See e.g.. Deutsche Genossenschafts-Hypothekenbunk AG, of New York or its agent, the New York State Banking Department, to 92 Federal Reserve Bulletin C61 (2006). license the proposed office of Bank in accordance with any terms or 12. See supra note 9. conditions that it may impose.

Legal Developments: First Quarter, 2009 B79 FINAL ENFORCEMENT DECISION ment of this proceeding without protracted or extended ISSUED BY THE BOARD hearings or testimony: IT IS HEREBY ORDERED, pursuant to sections 8(e), (i)(2) and (i)(3) of the FDI Act, 12 U.S.c. §§ 1818(e), (i)(2) IN THE MATTER OF and (3), that: I. Chupik, without the prior written approval of the Board of Governors and, where necessary pursuant to sec G. Craig Chupik, A fanner Institution tion 8(e)(7)(B) of the FDIAct, 12 U.S.c. § 1818(e)(7)(B), Affiliated Party of PlainsCapital Bank, another federal financial institutions regulatory agency, is hereby and henceforth prohibited from: Dallas, Texas (a) participating in any manner in the conduct of the affaifs of any institution or agency specified in Docket Nos. 09-37-E-I, 09-37-CMP-I section 8(e)(7)(A) of the FDI Act, 12 U.S.c. § 1818(e)(7)(A), including, but not limited to, any insured depository institution Of any holding com ORDER OF PROHIBITION AND ORDER OF pany of an insured depository institution; ASSESSMENT OF CIVIL MONEY PENALTY (b) soliciting, procuring, transferring, attempting to ISSUED UPON CONSENT PURSUANT TO transfer, voting Of attempting to vote any proxy, consent, or authorization with respect to any voting SECTIONS 8(E) AND 8(1) OF THE FEDERAL rights in any institution described in sec DEPOSIT INSURANCE ACT, AS AMENDED tion 8(e)(7)(A) of the FDI Act, 12 U.S.c. § 1818(e )(7)(A); WHEREAS, pursuant to sections 8(e), 8(i)(2) and 8(i)(3) of (c) violating any voting agreement previously approved the Federal Deposit Insurance Act, as amended (the "FDI by any federal banking agency; or Act"), 12 U.s.C. §§ 1818(e), (i)(2) and (i)(3), the Board of (d) voting for a directof, or serving or acting as an Governors of the Federal Reserve System (the "Board of institution-affiliated party, as defined in section 3(u) Governors") issues this combined Order of Prohibition and of the FDI Act, 12 U.S.C. § 1813(u), such as an Order of Assessment of Civil Money Penalty (the "Order") officer, director or employee, in any institution described in section 8(e)(7)(A) of the FDI Act, upon the consent of G. Craig Chupik, a former employee 12 U.S.c. § 1818(e)(7)(A). and institution-affiliated party, as defined in section 3(u) of IT IS HEREBY FURTHER ORDERED, pursuant to the FOI Act, 12 U.S.c. § 1813(u), of PlainsCapital Bank section 8(i) of the FDI Act, 12 U.S.C. § 1818(i), that: (the "Bank"), a state member bank; 2. Chupik shall forfeit and pay a ci vii money penalty in the WHEREAS, Chupik, while employed as a vice president amount of $20,000. and loan officer at the Bank, allegedly engaged in violations 3. The civil money penalty paid by Chupik pursuant to this of law, unsafe and unsound banking practices, and breaches Order shall be remitted in full prior to the date this Order of fiduciary duty, including, inter alia, Chupik's (i) receipt becomes effective, payable to "the Board of Governors of cash fees from prospective bank customers in exchange of the Federal Reserve System" and forwarded with an executed copy of this Order to Jennifer 1. Johnson, for recommending the approval of Bank loans to such Secretary of the Board, Board of Governors of the customers; (ii) withdrawal of proceeds from a relative's Federal Reserve System, Washington, DC, 20551, or, line of credit at the Bank for Chupik's personal use; and alternatively, by Fedwire transfer to the Federal Reserve (iii) check writing activities from his personal accounts. Bank of Richmond, ABA No. 05 1000033, beneficiary, WHEREAS, by affixing his signature hereunder, Chupik Board of Governors of the Federal Reserve System. The has consented to the issuance of this Order by the Board of Board of Governors or the Federal Reserve Bank of Governors and has agreed to comply with each and every Richmond on its behalf shall remit the funds to the United States Treasury as required by statute. provision of this Order, and has waived any and all rights 4. No portion of the penalty paid pursuant to this Order he might have pursuant to 12 U.S.c. § 1818, 12 CFR Part shall be, directly or indirectly, paid, advanced, reim 263, or otherwise (a) to the issuance of a notice of intent to bursed or otherwise funded by Bank. prohibit or notice of assessment of civil money penalty on 5. All communications regarding this Order shall be ad any matter implied or set forth in this Order; (b) to a dressed to: hearing fOf the purpose of taking evidence with respect to (a) Richard M. Ashton, Esq. Deputy General Counsel any matter implied or set forth in this Order; (c) to obtain Board of Governors of the Federal Reserve System judicial review of this Order or any provision hereof; and 20th & C Sts. N.W., (d) to challenge or contest in any manner the basis, Washington, DC 20551 issuance, terms, validity, efJ'ectiveness, or enforceability of (b) Mr. G. Craig Chupik this Order or any provision hereof. 5109 Birchman Ave. NOW THEREFORE, prior to the taking of any testi Fort Worth, TX 76107 With a copy to: mony or adjudication of or finding on any issue of fact or David Reed law implied or set forth herein, and without this Order Meadows Collier Reed Cousins & Blau LLP constituting an admission by Chupik of any allegation 3700 Bank of America Plaza made or implied by the Board of Governors in connection 901 Main Street with this proceeding, and solely for the purpose of settle- Dallas, TX 75202

B80 Federal Reserve Bulletin 0 June 2009 6. Any violation of this Order shall separately subject By order of the Board of Governors of the Federal Chupik to appropriate civil or criminal penalties, or Reserve System, effective this 19th day of March, 2009. both, under sections 8(i) and (j) of the FDI Act, 12 U.S.C §§ 1818(i) and (j). BOARD OF GOVERNORS OF THE 7. The provisions of this Order shall not bar, estop, or FEDERAL RESERVE SYSTEM otherwise prevent the Board of Governors, or any other federal or state agency or department. from taking any other action affecting Chupik; provided, however, that (signed) the Board of Governors shall not take any further action against Chupik relating to the matters addressed by this JENNifER J. JOHNSON Order based upon facts presently known by the Board of Secretary of the Board Governors. 8. Each provision of this Order shall remain fully effective (signed) and enforceable until expressly stayed, modified, termi nated, or suspended in writing by the Board of Gover nors. G. Craig Chupik

B81 August 2009 Legal Developments: Second Quarter, 2009 ORDERS ISSUED UNDER BANK Bank also has applied under section 9 of the Federal HOLDING COMPANY ACT Reserve Act to establish and operate branches at the main office and branches of Provident Bank.4 Notice of the proposal, affording interested persons an ORDERS ISSUED UNDER SECTION 3 OF opportunity to submit comments, has been published (74 Federal Register 5656 (2009». The time for filing THE BANK HOLDING COMPANY ACT comments has expired, and the Board has considered the proposal and all comments received in light of the factors Allied Irish Banks, p.l.c. set forth in the BHC Act. Dublin, Ireland Allied Irish, with total consolidated assets equivalent to approximately $244 billion. is the second largest deposi tory organization in Ireland and provides a full range of M &T Bank Corporation banking, financial, and related services primarily in Ireland, Buffalo, New York the United Kingdom, and the United States.5 Allied Irish operates a branch in New York and through M&T controls two subsidiary banks, M&TBank and M&TBank, National First Empire State Holding Company Association, Oakfield, New York, which operate in seven Buffalo, New York states and the District of Columbia.6 M&T, with total consolidated assets of $64.8 billion, is the 23rd largest depository organization in the United States, controlling Manufacturers and Traders Trust Company $38.4 billion in deposits. M&T is the fifth largest deposi Buffalo, New York tory organiz.ation in Maryland, controlling deposits of approximately $7.4 billion. Order Approving the Acquisition of a Bank Provident has total consolidated assets of approximately Holding Company, Merger of Banks, and $6.6 billion, and Provident Bank, Provident's only subsid Establishment of Branches iary insured depository institution,7 operates in Maryland, Pennsy Ivania, Virginia, and the District of Columbia. Provi dent is the eighth largest depository organization in Mary Allied Irish Banks, p.l.c. ("Allied Irish") and its subsidiary. land, controlling deposits of approximately $3.85 billion. M&T Bank Corporation ("M&T"), bank holding compa nies within the meaning of the Bank Holding Company Act On consummation of the proposal, M&T would become ("BHC Act"), and First Empire State Holding Company the 21st largest depository organization in the United ("First Empire")1 (collectively, "Applicants") have re States, with total consolidated assets of approximately quested the Board's approval under section 3 of the BHC $71.4 billion. M&T would control deposits of approxi Act2 to acquire Provident Bankshares Corporation ("Provi mately $43.2 billion, which represent less than I percent of dent") and thereby indirectly acquire Provident's subsid the total amount of deposits of insured depository institu iary bank, Provident Bank of Maryland ("Provident Bank"), tions in the United States. In Maryland, M&T would both of Baltimore, Maryland. In addition, M&T's subsid become the second largest depository organiz.ation, control iary state member bank, Manufacturers and Traders Trust ling deposits of approximately $11.3 billion, which repre- Company ("M&T Bank"), Buffalo, has requested the Board's approval under section 18( c) of the Federal Deposit Insurance Act3 ("Bank Merger Act") to merge with Provi 4.12U.S.C.§321. dent Bank, with M&T Bank as the surviving entity. M&T 5. Asset and nationwide deposit-ranking data are as of Decem ber 31, 2008. Statewide deposit and ranking data are as of June 30, 2008, and reflect merger activity through April 16,2009. I. First Empire also has applied to become a bank holding company 6. M&T Bank operates in Delaware, Maryland, New Jersey. in connection with this application. First Empire is a newly formed, New York, Pennsylvania, Virginia, West Virginia, and the District of wholly owned subsidiary of M&T. M&T proposes to merge Provident Columbia. Top of Form M&T Bank, National Association, operates into First Empire, with First Empire as the survivor. only in New York. 2. 12 U.S.C. § 1842. 7. For purposes of this order, insured depository institutions include 3. 12 U.S.c. § I 828(c). commercial banks, savings banks, and savings associations.

B82 Federal Reserve Bulletin 0 August 2009 sent approximately 12 pereent of the total amount of ing markets, the relative shares of total deposits in deposi deposits of insured depository institutions in the state. tory institutions in the markets ("market deposits") con trolled by Applicants' subsidiary depository institutions and by Provident Bank,12 the concentration levels of mar INTERSTATE ANALYSIS ket deposits and the increase in those levels as measured by Section 3(d) of the BHC Act allows the Board to approve the Herfindahl-Hirschman Index (HHHI") under the De an application by a bank holding company to acquire partment of Justice Merger Guidelines ("DOJ Guide control of a bank located in a state other than the bank lines"),13 and other characteristics of the markets. holding company's home state if certain conditions are Consummation of the proposal would be consistent with met. For purposes of the BHC Act, the home state of M&T Board precedent and within the thresholds in the DOJ is New York,s and Provident is located in Maryland, Guidelines in all three banking markets. 14 On consumma Pennsylvania, Virginia, and the District of ColumbiaY tion of the proposal, each of the three markets would Based on a review of all the facts of record, including remain moderately concentrated, as measured by the HHI, relevant state statutes, the Board finds that the conditions and the chartge in the HHI would be less than 200 points in for an interstate acquisition enumerated in section 3(d) of each market. In addition, numerous competitors would the BHC Act are met in this case. 10 In light of all the facts remain in all three banking markets. of record, the Board is permitted to approve the proposal The DOJ has conducted a detailed review of the poten under section 3(d) of the BHC Act. tial competitive effects of the proposal and has advised the Board that consummation of the transaction would not likely have a significantly adverse effect on competition in COMPETITIVE CONSIDERA TIONS any relevant banking market. In addition, the appropriate The BHC Act and the Bank Merger Act prohibit the Board banking agencies have been afforded an opportunity to from approving a proposal that would result in a monopoly comment and have not objected to the proposal. or would be in furtherance of an attempt to monopolize the Based on all the facts of record, the Board concludes that business of banking in any relevant banking market. Both consummation of the proposal would not have a signifi statutes also prohibit the Board from approving a bank cantly adverse effect on competition or on the concentra acquisition that would substantially lessen competition in tion of resources in any of the three banking markets where any relevant banking market, unless the anticompetitive the subsidiary depository institutions of Applicants and effects of the proposal are clearly outweighed in the public Provident compete directly or in any other relevant banking interest by the probable effect of the proposal in meeting market. Accordingly, the Board has determined that com the convenience and needs of the community to be served. petitive considerations are consistent with approval. I I Applicants and Provident have subsidiary depository institutions that compete directly in three banking markets: FINANCIAL, MANAGERIAL, AND SUPERVISORY Washington, DC-Maryland-Virginia-West Virginia; Balti CONSIDERATIONS more, Maryland-Pennsylvania; and Annapolis, Maryland. The Board has reviewed carefully the competitive effects of Section 3 of the BHC Act and the Bank Merger Act require the proposal in each of these banking markets in light of all the Board to consider the financial and managerial rethe facts of record. In particular, the Board has considered the number of competitors that would remain in the bank- 12. Deposit and market share data are as of June 30, 2008, adjusted to reflect mergers and acquisitions through March 30, 2009, and are based on calculations in which the deposits of thrift institutions are 8. See 12 U.S.C. § 1842(d). A bank holding company's home state included at 50 percent. The Board previously has indicated that thrift is the state in which the total deposits of all banking subsidiaries of institutions have become, or have the potential to become, significant such company were the largest on July I, 1966, or the date on which competitors of commercial banks. See, e.g., Midwest Financial Group, the company became a bank holding company, whichever is later. 75 Federal Reserve Bulletin 386, 387 (1989); Provident Corporation, 9. For purposes of section 3(d) of the BHC Act, the Board considers 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. See 12 U.S.C. §§ 1841(0)(4)-(7) calculation on a 50 percent weighted basis. See. e.g .• First Hawaiian. and 18 42(d)(l)(A) and 1842(d)(2)(B). Inc., 77 Federal Reserve Bulletin 52, 55 (1991). 10. 12 U.S.c. §§ I 842(d)(l)(A)-(B) and I 842(d)(2)-(3). Appli 13. Under the DOJ Guidelines, a market is considered unconcen cants are adequately capitalized and adequately managed, as defined trated if the post-merger HHI is under 1000, moderately concentrated by applicable law. Provident Bank has been in existence and operated if the post-merger HHI is between 1000 and 1800, and highly for the minimum period of time required by Maryland law and for concentrated if the post-merger HHI exceeds 1800. The Department of more than five years. See 12 U.S.C. § 1842(d)(I)(B)(iHii), On Justice ("001") has informed the Board that a bank merger or consummation of the proposal, Applicants would control less than acquisition generally will not be challenged (in the absence of other 10 percent of the total amount of deposits of insured depository factors indicating anti competitive effects) unless the post-merger HHI institutions in the United States (12 U,S.c. § 1842(d)(2)(A», Appli is at least 1800 and the merger increases the HHI more than 200 cants also would control less than 30 percent of, and less than the points. The DOJ has stated that the higher-than-normal HHI thresholds applicable state deposit cap for, the total amount of deposits in insured for screening bank mergers and acquisitions for anticompetitive effects depository institutions in the relevant states (12 U.S.c. implicitly recognize the competitive effects of limited-purpose and §§ 1842(d)(2)(B)-(0)). All other requirements of section 3(d) of the other nondepository financial entities. BHC Act would be met on consummation of the proposal. 14. Those banking markets and the effects of the proposal on their II. 12 U.S.C. § 1842(c)(1) and 12 U.S,c. § I 828(c)(5). concentrations of banking resources are described in the appendix.

Legal Developments: Second Quarter. 2009 B83 sources and future prospects of the companies and deposi The Board also has considered the managerial resources tory institutions involved in the proposal and certain other of the organizations involved. The Board has reviewed the supervisory factors. The Board has considered these factors examination records of Applicants. Provident. and their carefully in light of all the facts of record, including subsidiary depository institutions, including assessments of confidential supervisory and examination information from their management, risk-management systems, and opera the U.S. banking supervisors of the institutions involved, tions. In addition, the Board has considered its supervisory and publicly reported and other financial information, experiences and those of other relevant banking supervi including information provided by Applicants. The Board sory agencies. including the Federal Deposit Insurance also has consulted with the Irish Financial Services Regu Corporation ("FDIC"), with the organizations and their latory Authority ("Financial Regulator"), the agency with records of compliance with applicable banking law and primary responsibility for the supervision and regulation of with anti-money-laundering laws. The Board also has Irish banks, including Allied Irish. considered Applicants' plans for implementing the pro 15 In evaluating the financial resources in expansion pro posal. including the proposed management after consum posals by banking organizations, the Board reviews the mation. financial condition of the organizations involved on both a Based on all the facts of record, the Board has concluded parent-only and consolidated basis, as well as the financial that considerations relating to the financial and managerial condition of the subsidiary depository institutions and resources and future prospects of the organizations involved significant nonbanking operations. In this evaluation, the in the proposal are consistent with approval, as are the other Board considers a variety of information, including capital supervisory factorsY adequacy, asset quality, and earnings performance. In Section 3 of the BHC Act also provides that the Board assessing financial resources, the Board consistently has may not approve an application involving a foreign bank considered capital adequacy to be especially important. The unless the bank is subject to comprehensive supervision or Board also evaluates the financial condition of the com regulation on a consolidated basis by the appropriate bined organization at consummation, including its capital authorities in the bank's home country. IS As noted, the position, asset quality, earnings prospects, and the impact Financial Regulator is the primary supervisor of Irish of the proposed funding of the transaction. banks. including Allied Irish. The Board previously has The Board has carefully considered the financial re determined that Allied Irish is subject to comprehensive sources of the organizations involved in the proposal. The supervision on a consolidated basis by its home-country capital levels of Allied Irish would continue to exceed the supervisor.'9 Based on this finding and all the facts of minimum levels that would be required under the Basel record, the Board has concluded that Allied Irish continues Capital Accord and are considered to be equivalent to the capital levels that would be required of a U.S. banking organization.lo In addition, M&T, Provident, and the sub 17. Section 3 of the BHC Act also requires the Board to determine sidiary depository institutions involved are well capitalized that an applicant has provided adequate assurances that it will make and would remain so on consummation. Based on its available to the Board such information on its operations and activities review of the record. the Board finds that Applicants have and those of its affiliates that the Board deems appropriate to deter sufficient financial resources to effect the proposal. The mine and enforce compliance with the BHC Act (12 U.S.c. § IS42(c)(3)(A)). The Board has reviewed the restrictions on disclo proposed transaction is structured as a share exchange. sure in the relevant jurisdictions in which Allied Irish operates and has communicated with relevant government authorities concerning access to information. In addition, Allied Irish has committed that, to the extent not prohibited by applicable law, it will make available to the 15. The Central Bank of Ireland was restructured and renamed Board such information on its operations and those of its affiliates that as the Central Bank and Financial Serv ices Authority of Ireland the Board deems necessary to determine and enforce compliance with ("CBFSAI") in 2003. The Financial Regulator is an autonomous the BHC Act, the International Banking Act. and other applicable entity within the CBFSAI and has responsibility for financial sector federal laws. Allied Irish also has committed to cooperate with the regulation and consumer protection. Board to obtain any waivers or exemptions that may be necessary to 16. The Irish government has announced a plan, subject to certain enable its affiliates to make such information available to the Board. approvals, to invest up to $4.9 billion in Allied Irish in exchange for Based on all the facts of record, the Board has concluded that Allied noncumulative preference shares plus warrants. The minister for Irish has provided adequate assurances of access to any appropriate finance would have the right to appoint 25 percent of the board of information the Board may request. directors of Allied Irish and would have 25 percent of total ordinary IS. 12 U.S.C. § IS43(c)(3)(B). As provided in Regulation Y, the voting rights for change of control proposals and board appointments. Board determines whether a foreign bank is subject to consolidated The recapitalization program will be funded from the National Pen home-country supervision under the standards set forth in Regula sions Reserve Fund ("Fund"), which is an asset of the Irish govern tion K. See 12 CFR 225.13(a)(4). Regulation K provides that a foreign ment and appears on the government's balance sheet. The Fund is bank will be considered subject to comprehensive supervision or controlled and managed by the National Pensions Reserve Fund regulation on a consolidated basis if the Board determines that the Commission. which is a government agency and performs its func bank is supervised or regulated in such a manner that its home-country tions through another government agency, the National Treasury supervisor receives sufficient information on the worldwide operations Management Agency. Because the investment in Allied Irish is being of the bank, including its relationship with any affiliates, to assess the made and managed by the Irish government. and not through a hank's overall financial condition and its compliance with laws and government-owned or government-controlled company, approval is regulations. See 12 CFR 211.24( c)(I). not required under section 3 of the BHC Act for the government's 19. See. e.g., Allied Irish Banks. p.l.c., 94 Federal Reserve Bulletin indirect investment in M&T or Provident. CII (2007).

B84 Federal Reserve Bulletin 0 August 2009 to be subject to comprehensive supervision on a consoli factory" rating at its most recent CRA performance evalu dated basis by its home-country supervisor. ation by the FDIC, as of July 2, 2007.25 In addition to the overall "outstanding" rating that M&T Bank received in the 2008 Evaluation, the bank received CONVENIENCE AND NEEDS CONSIDERATIONS separate overall "outstanding" or "satisfactory" ratings in all the states and multistate metropolitan areas reviewed.26 In acting on a proposal under section 3 of the BHC Act and Examiners reported that M&T Bank's geographic distribu the Bank Merger Act, the Board is required to consider the tion of loans was good. They also stated that the bank's effects of the proposal on the convenience and needs of the distribution of loans to borrowers reflected a good penetra communities to be served and to take into account the tion among customers of different income levels and to records of the relevant insured depository institutions under businesses of different revenue sizes.27 In addition, exam the Community Reinvestment Act (HCRA").20 The CRA iners noted that M&T Bank offered a Federal National requires the federal financial supervisory agencies to Mortgage Association affordable mortgage product in all its encourage insured depository institutions to help meet the assessment areas that had resulted in the origination of credit needs of the local communities in which they almost 1,000 mortgages totaling $89 million during the operate, consistent with their safe and sound operation, and evaluation period. requires the appropriate federal financial supervisory agency In the 2008 Evaluation, examiners characterized M&T to take into account a relevant depository institution's Bank as a leader in making community development loans record of meeting the credit needs of its entire community, in its assessment areas, reporting that the bank made more including low- and moderate-income ("LMI") neighbor than 455 community development loans totaling $1.96 bil hoods, in evaluating bank expansionary proposals.21 lion during the evaluation period.28 Examiners noted that The Board has considered carefully all the facts of the bank's community development lending volume gener record, including evaluations of the CRA performance ally exceeded similarly situated banks in the New York, records of M&T Bank and Provident Bank, data reported Pennsylvania, and Maryland assessment areas.29 by M&T under the Home Mortgage Disclosure Act In the 2008 Evaluation, examiners rated M&T Bank's (HHMDA"),22 other information provided by Applicants, overall performance under the investment test as "outstand confidential supervisory information, and a public com ing." Qualifying community development investments ment received on the proposal. The commenter generally totaled more than $246 million, representing an increase commended M&T Bank's CRA performance record and from its previous evaluation. commitment to community development, but the com In addition, examiners concluded that the bank's perfor menter recommended that M&T Bank strengthen its afford mance under the service test was "outstanding." Examin able home mortgage lending product, increase community ers found that the bank's retail delivery systems were development and multifamily loans in LMI census tracts, readily accessible to all portions of its assessment areas.30 provide more community development loans to not-for profit organizations, and increase the number of its branches in LMI neighborhoods. recent CRA performance evaluation by the Office of the Comptroller of the Currency, as of May 26, 2006, A. eRA Performance Evaluations 25. Examiners considered home mortgage loans. small business loans, and consumer loans originated during 2005 and 2006, The bank As provided in the CRA, the Board has reviewed the did not originate any small farm loans during the evaluation period. convenience and needs factor in light of the evaluations by 26. Examiners considered HMDA-related and CRA·reportable the appropriate federal supervisor of the CRA performance small business loans that were originated between January I. 2006, and December 31, 2007. Examiners also reviewed community devel· record of the relevant insured depository institution. An opment loans, investments. services, and activities pertaining to the institution's most recent CRA performance evaluation is a service test for the same period, particularly important consideration in the applications 27, The commenter criticized M&T Bank's affordable mortgage process because it represents a detailed, on-site evaluation product, alleging that it is less attractive than such products offered by other banks and that the bank does not have a sufficient number of loan of the institution's overall record of performance under the officers who are familiar with New York City's lower-income commu CRA by its appropriate federal supervisor.23 nities and the housing groups that serve those communities. M&T has M&T Bank received an "outstanding" rating at its most represented that the mortgage division of M&T Bank has added recent CRA performance evaluation by the Federal Reserve full-time originators to its staft· who specialize in lending to LMI Bank of New York ("Reserve Bank"), as of May 12,2008 borrowers to better serve its urban markets. ("2008 Evaluation"}.24 Provident Bank received a "satis- 28. The commenter a~serted that the bank should commit to make at least 50 percent of its community development loans to not-for profit borrowers. The CRA does not require banks to provide any particular type of qualified community development loans to meet the 20. 12 U.S.c. § I 842(c)(2). credit needs of their communities, 21. 12 U.S.c. § 2903. 29. These states received full-scope assessments during the 2008 22. 12 U.S.c. §2801 et seq. Evaluation, 23. See Interagency Questions and Answers Regarding Community 30, The commenter criticized the fact that M&T Bank's branch Reinvestment, 74 Federal Register 498 and 527 (2009). network includes New York County (Le., Manhattan) but excludes 24, M&T s other bank subsidiary. Manufacturers and Traders Bank, Bronx County, one of tbe area's poorest counties. Examiners reviewed National Association, received a "satisfactory" rating at its most the bank's activities in the New York-Northern New Jersey-Long

Legal Developments: Second Quarter; 2009 B85 They reported that 20 percent of M&T Bank's branches of the entire record, and for the reasons discussed above, were in LMI tracts and that 19 percent of the bank's ATMs the Board concludes that considerations relating to the were in LMI areas, which enhanced the bank's perfor convenience and needs factor and the CRA performance mance under the service test in those communities. Exam records of the relevant insured depository institutions are iners also noted that M&T Bank's customers could use consistent with approval of the proposal. ATMs owned by institutions that had business relationships with the bank without paying a fee and that six of them were in LMI areas. In addition, examiners noted that M&T CONCLUSION Bank is a leader in providing community development services throughout its assessment areas, including sponsor Based on the foregoing, and in light of all the facts of ing and participating in a significant number of seminars record, the Board has determined that the applications and presentations relating to affordable mortgages, small should be, and hereby are, approved. In reaching its business assistance, and other banking education. These conclusion, the Board has considered all the facts of record types of events provided technical assistance and training in light of the factors that it is required to consider under to LMI indi viduals, community organizations, small busi the BHC Act, the Bank Merger Act, the Federal Reserve nesses, and housing agencies. Act, and the statutory factors it is required to consider when reviewing an application for retaining and operating B. Conclusion on Convenience and Needs and branches. The Board's approval is specifically conditioned CRA Performance on compliance by Applicants with the conditions in this order and all the commitments made to the Board in The Board has considered carefully all the facts of record, connection with the proposal. For purposes of this pro including reports of examination of the CRA records of the posal, these commitments and conditions are deemed to be institutions involved, information provided by Applicants, conditions imposed in writing by the Board in connection a public comment received on the proposal, and confiden with its findings and decision and, as such, may be enforced tial supervisory information. Applicants represented that in proceedings under applicable law. the proposal will result in increased credit availability and The proposal may not be consummated before the 15th access to a broader range of financial services for custom ers of M&T Bank and Provident Bank. Based on a review calendar day after the effective date of this order, or later than three months after the effective date of this order, unless such period is extended for good cause by the Board Island. NY·NJ·PA Multistate Metropolitan Area ("the Multistate Area") and concluded that the bank's retail delivery systems were or by the Reserve Bank, acting pursuant to delegated reasonably accessible to significant portions of the bank's geographies authority. and individuals of different income levels in the Multistate Area. By order of the Board of Governors, effective May 8, Although the bank does not have any branches in Bronx County. the 2009. bank originated 22 HMDA-related loans and 17 small business loans in the county during 20m, representing 8.5 percent and 8.6 percent, Voting for this action: Chairman Bernanke, Vice Chairman Kohn, respectively. of the bank's HMDA and small business loan volume in and Governors Warsh, Duke, and TaruIJo. the five counties of New York City. In the Multistate Area, M&T Bank originated 132 community developments loans totaling $457 million and made 209 community development investments totaling $29 mil ROBERT DEY. FRIERSON lion during 2006 and 2007. Deputy Secretary of the Board

B86 Federal Reserve Bulletin 0 August 2009 Appendix M&T AND PROVIDENT BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO] GUIDELINES Market Amount ! Remaining deposit Resulting Change in Bank Rank of deposits number of shares HHI HHI (dollars) competitors (percent) Washington DC-MD-VA-WVincludes the Washington. D. C. Ranally Metropolitan Area (URMAH the non-RMA portions of ). the counties of Calvert, Charles, Frederick. Prince George's, and Sf. Mary's, Maryland. and Fauquier and Loudoun, Virginia; the cities of Alexandria. Fairfax. Falls Church, and Manassas, Virginia; and Jefferson County, West Virginia M&T Pre-Consummation ............. 10 2.04 bit. 1.9 1,259 3 91 Provident .................................. 14 1.14 bil. .9 1,259 3 91 M&T Post-Consummation ............ 8 3.18 bil. 2.8 1,259 3 91 Baltimore MD-PA-includes the Baltimore. Maryland RMA. the non- RMA portions of the counties of Harford and Carroll, Maryland (excludes the Washington DC-MD- VA-WV RMA portion); and Baltimore, Maryland M&T Pre-Consummation ............. 2 5.2 bi!. 12.5 1,430 185 73 Provident .................................. 5 3.1 bil. 7.4 1,430 185 73 M&T Post-Consummation ............ 2 8.3 bi!. 19.9 1,430 185 73 Annapolis-includes the Annapolis. Maryland RMA M&T Pre-Consummation ............ . 9 133 mil. 3.97 1,157 3 19 Provident ................................. . 17 16 mil. .48 1,157 3 19 M&T Post-Consummation ........... . 9 149 mil. 4.45 1,157 3 19 ,",OTE: Data are as of June 30. 2008. All amounts of deposits are un weighted. All rankings. market deposit shares. and HHIs are based on thrift in stitution deposits weighted at 50 percent. Morgan Stanley acquire up to an additional 5.1 percent of the voting shares of Chinatrust Financial Holding Company, Ltd. (HChi New York, New York natrust"), Taipei, Taiwan,2 and thereby increase its indirect Order Approving the Acquisition of interest up to 9.9 percent in Chinatrust Bank (U.S.A.) Additional Shares of a Bank Holding Company 2, Morgan proposes to acquire the additional voting shares of Chinatrust through open market transactions by the following subsid· iaries: (I) MS Holdings, Inc., Morgan Stanley Private Equity Asia Ill, Morgan Stanley ("Morgan"), New York, New York, a Inc" Morgan Stanley Private Equity Asia m, L.L.c., and MSPEA financial holding company within the meaning of the Bank Holdings. Inc" all of Wilmington. Delaware; and (2) Morgan Stanley Holding Company Act ("BHC Act"), has requested the Private Equity Asia III, L.P., Morgan Stanley Private Equity Asia Board's approval under section 3 of the BHC Actl to Employee Investors III, L.P" Morgan Stanley Private Equity Asia III Holdings (Cayman) Ltd" MSPEA Formosa Holdings (Cayman) Lim ited, and Morgan Stanley Formosa Holdings (Cayman) Limited, all of I. 12 V.S,c. § 1842. George Town, Grand Cayman, Cayman Islands.

Legal Developments: Second Quarter. 2009 B87 ("Bank"), Torrance, California. Morgan has also filed a investment.!! In this light, Morgan has agreed to abide by notice under section 4(c)(l3) of the BHC Act3 and the certain commitments substantially similar to those on Board's Regulation K4 to increase its indirect interest in which the Board has previously relied in determining that Chinatrust. 5 an investing bank holding company would not be able to Notice of the proposal, affording interested persons an exercise a controlling influence over another bank holding opportunity to submit comments, has been published company or bank for purposes of the BHC Act ("Passivity (73 Federal Register 76,653 (200S». The time for filing Commitments").!2 For example, Morgan has committed comments has expired, and the Board has considered the not to exercise or attempt to exercise a controlling influence proposal and all comments received in light of the factors over the management or policies of China trust or any of its set forth in sections 3 and 4 of the BHC Act,li subsidiaries; not to seek or accept more than one represen Morgan, with total consolidated assets of approximately tative on the board of directors of Chinatrust (the same $626 billion, engages in commercial and investment bank director may serve on the board of directors of Chinatrust ing, securities underwriting and dealing, asset manage Bank under conditions outlined in the Passivity Commit ment, trading, and other activities both in the United States ments); and not to have any other director, officer, em and abroad. Morgan controls Morgan Stanley Bank, Na ployee, or agent interlocks with Chinatrust or any of its tional Association ("Morgan Bank"), Salt Lake City, Utah, subsidiaries. The Passivity Commitments also include cer which operates one branch in the state, with total consoli tain restrictions on the business relationships of Morgan dated assets of approximately $66.2 billion and deposits of with Chinatrust. approximately $54.1 billion. In addition, Morgan controls Based on these considerations and all the other facts of Morgan Stanley Trust (HMS Trust"), Jersey City, New Jer record, the Board has concluded that Morgan would not sey, a federal savings association, with total consolidated acquire control of, or have the ability to exercise a control assets of $6.6 billion and deposits of $5.S billion.7 ling influence over, Chinatrust, Chinatrust Bank, or Bank Chinatrust, with total consolidated assets of $53.9 bil through the proposed acquisition of the Chinatrust voting lion, is the sixth largest depository organization in Taiwan.s shares. The Board notes that the BHC Act requires Morgan Chinatrust, through Chinatrust Bank, operates a state to file an application and receive the Board's approval licensed branch in New York, New York, a representative before it directly or indirectly acquires additional shares of office in Los Angeles, California, and Bank. Chinatrust or attempts to exercise a controlling influence Bank, with total consolidated assets of approximately over Chinatrust, Chinatrust Bank, or Bank. 13 $2.4 billion, operates in four states'> and controls deposits of approximately $2 billion. 10 COMPETITIVE CONSIDERATIONS NONCONTROLLING INVESTMENT The Board has considered carefully the competitive effects of the proposal in light of all the facts of the record. Section Morgan has stated that it does not propose to control or 3 of the BHC Act prohibits the Board from approving a exercise a controlling influence over Chinatrust and that its proposal that would result in a monopoly or would be in indirect investment in Chinatrust Bank would be a passive furtherance of any attempt to monopolize the business of banking in any relevant banking market. The BHC Act also prohibits the Board from approving a proposal that would substantially lessen competition in any relevant banking 3. 12 V.S.c. § I 843 (c)(1 3). 4. 12 CFR 211. market, unless the anticompetitive effects of the proposal 5. Chinatrust owns Bank indirectly through Chinatrust Commercial clearly are outweighed in the public interest by the prob- Bank. Ltd. ("Chinatrust Bank"). Taipei. and also engages in securities. insurance. venture-capital. and asset-management activities outside the United States. II. Although the acquisition of less than a controlling interest in a 6. Thirty-seven commenters expressed concerns about certain bank or bank holding company is not a normal acquisition for a bank aspects of the proposaL Several commenters objected to the Boatd' s holding company. the requirement in section 3(a)(3) of the BHC Act waiver of public notice of Morgan's application last September to that the Boatd's approval be obtained before a bank holding company become a bank holding company. In its order approving that applica acquires more than 5 percent of the voting shates of a bank suggests tion and Morgan's election to hecome a financial holding company. the that Congress contemplated the acquisition by bank holding compa Boatd explained its rationale for waiving the public comment period. nies of between 5 percent and 25 percent of the voting shates of banks. Morgan Stanley, 94 Federal Reserve Bulletin CI03 (2008) ("Morgan See 12 V.S.C. § I 842(a)(3). On this basis. the Board previously has FHC Order"). approved the acquisition by a bank holding company of less than a 7. Asset and deposit data ate as of Match 31. 2009. Morgan also controlling interest in a bank or bank holding company. See, e.g., controls Morgan Stanley Trust, National Association ("MSTNA"). Mitsubishi UFG Financial Group, Inc .. 95 Federal Reserve Bulletin Wilmington. Delaware. a limited-purpose national bank that engages B34 (2009) (acquisition of up to 24.9 percent of the voting shates of a solely in trust or fiduciary activities and is exempt from the definition bank holding company); Brookline Bancorp, MHC. 86 Federal of "bank" under the BHC Act pursuant to section 2(c)(2)(D) of the Reserve Bulletin 52 (2000) (acquisition of up to 9.9 percent of the BHC Act (12 U.S.c. § 1841(c)<2)(D». voting shates of a bank holding company); Mansura Bancshares. Inc .• 8. Taiwanese asset data ate as of Septemher 30. 2008, and ranking 79 Federal Reserve Bulletin 37 (1993) (acquisition of 9.7 percent of data ate as of December 31, 2007. the voting shates of a bank holding company). 9. Bank operates branches in California, New Jersey, New York. 12. These commitments are set forth in the appendix. and Washington. 13. 12 U.S.C. § 1842. See, e.g., Emigrant Bancorp, Inc .• 82 Federal 10. Asset and deposit data are as of Match 31.2009. Reserve Bulletin 555 (\996).

B88 Federal Reserve Bulletin 0 August 2009 able effect of the proposal in meeting the convenience and finds that Morgan has sufficient capital and other resources needs of the community to be served.14 to effect the proposal. The proposed transaction is struc Morgan and Chinatrust do not compete directly in any tured as a share purchase in the open market and would be relevant banking market. Based on all the facts of record, funded from Morgan's available funds. The Board also the Board has concluded that consummation of the pro notes that Morgan has recently raised a substantial amount posal would not have a significantly adverse effect on of private capital.l~ competition or on the concentration of banking resources in The Board also has considered the managerial resources any relevant banking market and that competitive factors of the organizations involved in the proposed transaction. 19 are consistent with approval of the proposal. The Board has reviewed the examination records of Mor gan, Morgan's subsidiary depository institutions, Bank, FINANCIAL, MANAGERIAL, AND OTHER and Chinatrust Bank's U.S. offices, including assessments SUPERVISORY CONSIDERATIONS of their management, risk-management systems, and opera tions. In addition, the Board has considered its supervisory Section 3 of the BHC Act requires the Board to consider the experiences and those of the other relevant banking super financial and managerial resources and future prospects of visory agencies with the organizations and their records of the companies and depository institutions involved in the compliance with applicable banking law, including anti proposal and certain other supervisory factors. The Board money-laundering laws. has carefully considered these factors in light of all the Based on all the facts of record, the Board has concluded facts of record, including confidential supervisory and that the financial and managerial resources and the future examination information received from the relevant federal prospects of Morgan, its subsidiary depository institutions, and state supervisors of the organizations involved, pub and Bank are consistent with approval of this application, licly reported and other financial information, information as are the other supervisory factors the Board must consider provided by Morgan, and public comment received on the under section 3 of the BHC Act. proposal. Several commenters opposed the combination of commercial banking and investment banking in Morgan. CONVENIENCE AND NEEDS CONSIDERATIONS Congress specifically has authorized the combination of commercial banking and investment banking for bank In acting on a proposal under section 3 of the BHC Act, the holding companies that meet certain requirements and elect Board also must consider the effects of the proposal on the to become financial holding companies.15 Morgan met convenience and needs of the communities to be served and those requirements when it elected to be a financial holding take into account the records of the relevant insured company and has continued to satisfy the criteria for depository institutions under the Community Reinvestment financial holding company status. If> In evaluating financial factors in expansion proposals by banking organizations, the Board reviews the financial condition of the organizations involved on both a parent 18. The Board also considered public comments related to Mor only and consolidated basis, as well as the financial condi gan's financial condition. Commenters alleged that Morgan does not tion of the subsidiary depository institutions and significant have the financial capacity to complete the acquisition of Chinatrust, noting that a credit rating agency had lowered Morgan's credit rating nonbanking operations. In this evaluation, the Board con with a negative outlook. Several comments also referenced funding siders a variety of information, including capital adequacy, that Morgan received from the U.S. Department of the Treasury under asset quality, and earnings performance. In assessing finan the Troubled Asset Relief Program and Morgan's alleged use of those cial factors, the Board consistently has considered capital funds for purposes other than providing liquidity to the credit markets adequacy to be especially important. The Board also evalu in the United States. 19. Several commenters expressed general concerns ahout Mor ates the effect of the transaction on the financial condition gan's management, including allegations about Morgan's accounting of the applicant, including its capital position, asset quality, practices, activities relating 10 auction-rate securities, an investigation earnings prospects, and the impact of the proposed funding on energy pricing by a Morgan affiliate, and allegations that a Morgan of the transaction. 17 Stanley employee violated the Foreign Corrupt Practices Act. In approving Morgan's application under the BHC Act last September, The Board has carefully considered the financial factors the Board carefully considered the managerial resources of Morgan in of the proposal. Morgan, Morgan Bank, and MS Trust are light of all the facts of record, including confidential supervisory well capitalized. Bank is also well capitalized, and the information and information provided by Morgan. See Morgan FHC financial factors related to Chinatrust are consistent with Order, at C105. The Board also has communicated with relevant approval. Based on its review of the record, the Board also federal and state agencies with respect to the auction-rate securities activities and pricing investigation. The Board considered the August 2008 settlement between Morgan and tbe Attorney General of the state of New York and pending litigation involving these matters. As part of 14. 12 U.S.C. § 1842(c)(I). its ongoing supervision of Morgan, the Board monitors the status of 15. See 12 U.S.c. § I 843(k); 12 U.S.c. § 1843(1). government investigations, consults as needed with relevant regula 16. Morgan FHC Order. tory authorities, and periodically reviews Morgan's potential liability 17. As previously noted, Morgan would acquire only up to 9.9 per from material litigation. In addition, Morgan announced that it has cent of Chinatrust. Under these circumstances, Morgan would not fired the employee who allegedly violated the Foreign Corrupt Prac consolidate the financial statements of Chinatrust for regulatory tices Act, reported the activity to appropriate authorities, and will purposes. continue to investigate the matter.

Legal Developments: Second Quarter, 2009 B89 Act ("CRA").2o The CRA requires the federal financial Morgan Bank received an "outstanding" rating at its supervisory agencies to encourage insured depository insti most recent CRA evaluation by the Federal Deposit Insur tutions to help meet the credit needs of the local communi ance Corporation ("FDIC"), as of January 30, 2006 ("2006 ties in which they operate, consistent with their safe and Evaluation").25 The Board considered Morgan Bank's sound operation, and requires the appropriate federal finan CRA performance record and discussed the 2006 Evalua cial supervisory agency to take into account a relevant tion in the Morgan FHC Order. Based on a review of the depository institution's record of meeting the credit needs record in this application, the Board hereby reaffirms and of its entire community, including low- and moderate adopts the facts and findings concerning Morgan Bank's income ("LMI") neighborhoods, in evaluating expansion CRA performance record. The Board also has considered ary proposals.21 information provided by Morgan about its CRA perfor The Board has considered carefully all the facts of mance since the Board reviewed such matters in connection record, including evaluations of the CRA performance with the Morgan FHC Order. records of Morgan's and Chinatrust's subsidiary banks, Consistent with the CRA regulations adopted by the data reported by Morgan under the Home Mortgage Disclo federal banking agencies, the FDIC evaluated Morgan sure Act ("HMDA"),22 other information provided by Bank under the community development test as a whole Morgan, confidential supervisory information, and public sale bank.26 In the 2006 Evaluation, examiners found comments. Commenters criticized Morgan's record of lend Morgan Bank to be highly proactive with regard to assess ing in LMI communities and its CRA plan.23 In addition, ing the needs of its community and providing extensive commenters alleged, based on HMDA data, that Morgan resources in addressing the resulting needs identified. has engaged in disparate treatment of LMI and minority Examiners reported that the bank extended, funded, and individuals in home mortgage lending. Some commenters committed almost $59 million in qualified community expressed concern about the CRA performance record of development loans and investments during the evaluation Chinatrust Bank. Commenters also expressed concern over period.27 Examiners also reported that bank personnel and sub prime lending by Morgan and by Saxon Mortgage, Inc. affiliate staff provided more than 5,000 CRA qualified ("Saxon Mortgage"), a subsidiary Morgan acquired in service hours to their respective communities. 2006. Morgan represented that it currently does not directly Morgan Bank's current CRA plan prioritizes meeting the or indirectly originate subprime loans, nor does it provide community development needs of its assessment area, warehouse lending or custodian services for subprime which includes Salt Lake County, part of the Salt Lake lenders. City, Utah, Metropolitan Statistical Area ("MSA"), as well as the needs of the adjoining counties to its assessment area A. eRA Performance Evaluations and the rest of Utah and the contiguous states.28 The bank's CRA program is currently focused on community develop An institution's most recent CRA performance evaluation ment activities that revitalize or stabilize LMI individuals is a particularly important consideration in the applications and geographies. These activities include financing afford process because it represents a detailed, on-site evaluation able housing construction and rehab financing; promoting of the institution's overall record of performance under the economic development; targeting community services to CRA by its appropriate federal supervisor.24 LMI individuals; and using Morgan Bank's financial exper- 25. Morgan Bank converted to a national charter on September 23, 20. 12 U.S.c. §2901 et seq.; 12 U.S.c. §2903; 12 U.S.c. 2008. MSTNA is not an insured depository institution, and MS Trust is § 1842(c)(2). not subject to the CRA pursuant to regulations issued by the Office of 21. 12 U.S.c. § 2903. Thrift Supervision. See 12 CFR 563e.ll (c)(2). 22. 12 U.S.c. §2801 et seq. 26. See 12 CFR 345.21(a)(2). 23. Two commenters also urged the Board to require Morgan to 27. The 2006 Evaluation covered the period from March 1 I, 2003, enter into agreements or to take certain future actions in connection through January 20, 2006. with its community development activities: The Board consistently has 28. Several commenters criticized Morgan and Morgan Bank's stated that neither the CRA nor the federal banking agencies' CRA records of home mortgage lending in LMI communities, indicated that regulations require depository institutions to make pledges or enter the bank's assessment area for purposes of CRA performance evalua into commitments or agreements with any organization and that the tion should be expanded to include the office locations of affiliates enforceability of any such third-party pledges, initiatives, or agree (such as Morgan's broker-dealer offices), and alleged that Morgan has ments is outside the CRA. See, e.g., The PNC Financial Services not provided a sufficient CRA plan for making credit and other Group, Inc., 95 Federal Reserve Bulletin B I (2009); Wachovia banking services available to LMI communities in such an expanded Corporation, 91 Federal Reserve Bulletin 77 (2005). Instead, the assessment area. Under the CRA regulations, the assessment area for a Board focuses on the existing CRA performance record of an applicant wholesale or limited-purpose bank consists generally of one or more and the programs that an applicant has in place to serve the credit MSAs or Metropolitan Divisions, or one or more contiguous subdivi needs of its assessment areas at the time the Board reviews a proposal sions in which the bank has its main office, branches, and deposit under the convenience and needs factor. taking ATMs. See 12 CFR 25.41; 12 CFR 228.41; 12 CFR 345.41. A 24. The Interagency Questions and Answers Regarding Commu bank's CRA assessment area is not determined by the location of nity Reinvestment provide that a CRA examination is an important and offices of affiliates. The Office of the Comptroller of the Currency often controlling factor in the consideration of an institution's CRA ("OCC"), as the primary supervisor of Morgan Bank, will evaluate record. See Interagency Questions and Answers Regarding Commu the bank's qualification as a wholesale bank and its assessment area nity Reinvestment, 74 Federal Register 498 at 527 (2009). and CRA plan as part of its ongoing supervision of the bank.

B90 Federal Reserve Bulletin 0 August 2009 tise to provide financial services activities. Morgan Bank's the covered loans.3o HMDA data, therefore, have limita community development lending and investment activities tions that make them an inadequate basis, absent other have included direct lending to nonprofit affordable hous information, for concluding that an institution has engaged ing organizations; construction participation loans with in illegal lending discrimination. retail banks; investments in loan consortia that manage and The Board is nevertheless concerned when HMDA data fund small business loans, multifamily rental housing, and for an institution indicate disparities in lending and believes financing and construction of community facilities; and that all lending institutions are obligated to ensure that their direct investments in Small Business Investment Company lending practices are based on criteria that ensure not only venture-capital and various national community reinvest safe and sound lending but also equal access to credit by ment funds. creditworthy applicants regardless of their race or ethnicity. Bank received a "needs to improve" rating at its most Moreover, the Board believes that all bank holding compa recent CRA evaluation by the FDIC, as of July 16, 2007 nies and their affiliates must conduct their mortgage lend ("2007 Evaluation"). Some commenters raised concerns ing operations without any abusive lending practices and in about this rating and Bank's CRA performance generally. compliance with all consumer protection laws. Chinatrust has developed a corrective action plan to Because of the limitations of HMDA data, the Board has improve Bank's CRA performance and has been submitting considered these data carefully and taken into account other quarterly reports to the FDIC. The Board has consulted information, including examination reports that provide with the FDIC about actions Chinatrust has taken to on-site evaluations of compliance by Morgan's subsidiary improve Bank's CRA performance since the 2007 Evalua insured depository institutions with fair lending laws. The tion. Board also has consulted with the FDIC and DCC, the former and current primary federal supervisors, respec B. HMDA and Fair Lending Record tively, of Morgan Bank. In addition, the Board has consid ered information provided by Morgan about its compliance The Board has carefully considered the fair lending records risk-management systems. and HMDA data of Morgan in light of public comments As noted in the Morgan Herald Order, the record, received on the proposal. Several commenters alleged, including confidential supervisory information, indicates based on 2007 HMDA data, that Saxon Mortgage made a that Morgan has taken steps to ensure compliance with fair disproportionately larger number of high-cost loans to lending and other consumer protection laws and regula African American, Hispanic, and other minority borrowers tions.31 Morgan currently originates residential mortgage than to nonminority borrowers. This issue was previously loans only through MSCC and services subprime loans raised by a different commenter and considered by the only through Saxon Capital. Morgan represented that Board in the application by Morgan to retain up to 9.9 per MSCC and Saxon Capital have policies and procedures to cent of the voting shares of Herald National Bank, help ensure compliance with fair lending and other con New York, New York.29 The Board hereby reaffirms and sumer protection laws and regulations. For example, MSCC adopts the facts and findings concerning Morgan Bank's uses an automated underwriting and loan-pricing system HMDA and fair lending record made in the Morgan Herald that substantially limits discretionary criteria and, before Order. The Board's consideration of HMDA-related comments 30. The data, for example, do not account for the possibility that an included a review of 2007 HMDA data reported by Saxon institution's outreach efforts may attract a larger proportion of margin Mortgage and Morgan Stanley Credit Corporation ally qualified applicants than other institutions attract and do not ("MSCC"). Morgan acquired Saxon Capital, Inc. ("Saxon provide a basis for an independent assessment of whether an applicant Capital"), the parent of Saxon Mortgage, in 2006 and who was denied credit was, in fact, creditworthy. In addition, credit MSCC in 1997. Morgan now originates residential mort history problems, excessive debt levels relative to income, and high loan amounts relative to the value of the real estate collateral (reasons gage loans only through MSCC, which currently originates most frequently cited for a credit denial or higher credit cost) are not only prime mortgage loans. Morgan services mortgage available from HMDA data. loans through Saxon Capital, including subprime loans 31. Commenters expressed concern about Morgan's alleged ware originated by Morgan and others. house financing to subprime lenders and securitization of sub prime loans. Morgan represented that it does not provide warehouse lending Although the HMDA data might reflect certain dispari or custodian services for subprime lenders. To the extent it provides ties in the rates of loan applications, originations, denials, servicing activities for subprime loans, Morgan asserted that it con or pricing among members of different racial or ethnic ducts due diligence to promote compliance with fair lending laws. groups in certain local areas, they provide an insufficient Morgan also has asserted that, to the extent it underwrites securities for or participates in commercial loans to subprime lenders, Morgan has basis by themselves on which to conclude whether or not no role in the lending or credit review practices of those lenders. In Morgan is excluding or imposing higher costs on any racial addition. Morgan has represented that. to the extent it underwrites or ethnic group on a prohibited basis. The Board recognizes securities for subprime lenders, its due diligence procedures seek to that HMDA data alone, even with the recent addition of ensure that mortgage pools supporting securitizations do not include pricing information, provide only limited information about loans subject to the Home Ownership and Equity Protection Act of 1994 or loans with predatory lending features. As noted above. the Board will continue to require all bank holding companies and their 29. Morgan Stanley, 95 Federal Reserve Bulletin B93 (2009) affiliates to conduct their lending operations without any abusive ("Morgan Herald Order"). lending practices and in compliance with all applicable laws.

Legal Developments: Second Quarter, 2009 B91 denying a loan application, MSCC makes reasonable efforts should be, and hereby are, approved.34 In reaching its to gather additional information that could appropriately conclusion, the Board has considered all the facts of record qualify an applicant. MSCC employees do not have over in light of the factors that it is required to consider under ride authority in pricing loans, and their compensation is the BHC Act and other applicable statutes.35 The Board's not based on loan pricing. Morgan has represented that approval is specifically conditioned on compliance by Saxon Capital clearly discloses fees to consumers and Morgan with the conditions imposed in this order and the monitors fees to ensure compliance with applicable law. In commitments made to the Board in connection with the addition, MSCC and Saxon Capital provide training in fair application. For purposes of this action, the conditions and lending and consumer protection law to employees involved commitments are deemed to be conditions imposed in in originating and servicing loans and maintain complaint writing by the Board in connection with its findings and resolution systems. MSCC's fair lending compliance proce decision herein and, as such, may be enforced in proceed dures include reviews of loan origination and pricing data ings under applicable law. that use statistical and comparative file analyses. The acquisition of Chinatrust's voting shares may not be The Board also has considered the HMDA data in light consummated before the 15th calendar day after the effec of other information, including the CRA performance tive date of this order, or later than three months after the record of Morgan Bank. These established efforts and this effective date of this order, unless such period is extended record of performance demonstrate that Morgan Bank is for good cause by the Board or the Federal Reserve Bank of active in helping to meet the credit needs of its entire New York, acting pursuant to delegated authority. community. By order of the Board of Governors, effective June 26, 2009. C. Conclusion on Convenience and Needs and Voting for this action: Chairman Bernanke and Governors Warsh. CRA Performance Duke, and Tarullo. Absent and not voting: Vice Chairman Kohn. The Board has carefully considered all the facts of record, ROBERT DEV. FRIERSON including reports of examination of the CRA performance Deputy Secretary of the Board records of the institutions involved, information provided by Morgan, comments received on the proposal, and confi ---------"""---"" dential supervisory information.32 Based on a review of the determined that all factors required to be considered under the BHC entire record, including the noncontrolling nature of the Act and Regulation K are consistent with approval. 34. The Board also has approved the indirect acquisition of the proposed investment in Chinatrust, the Board concludes interest in Chinatrust by Mitsubishi UFJ Financial Group, Inc. that considerations relating to the convenience and needs ("MUFG"), Tokyo, Japan. MUFG, a financial holding company factor and the CRA performance records of the relevant within the meaning of the BHC Act. currently controls approximately insured depository institutions are consistent with approval. 21 percent of the voting shares of Morgan Stanley. The Board notes that MUFG has provided no funding for Morgan's acquisition of the Chinatrust shares, and Morgan's acquisition of the Chinatrust shares CONCLUSION would not alter the current structure of MUFG's investment in Morgan. In addition. MUFG's U.S. subsidiary banks remain well Based on the foregoing and all the facts of record. the capitaliz.ed. The Board previously has determined that the foreign Board has determined that the application and notice33 banks controlled by MUFG are subject to comprehensive supervision on a consolidated basis by their home-country supervisor, the Japanese Financial Services Agency ("FSA"). The Board has determined that these banks continue to be subject to comprehensive supervision on a 32. Commenters also alleged that Morgan has not taken sufficient consolidated basis by the FSA. The other statutory factors are consis action to prevent foreclosures. Morgan noted that through Saxon tent with approval. Capital. it modified approximately 12,875 mortgages in 2008 and that 35. Several commenters requested that the Board hold a public Saxon Capital has initiatives underway to increase its modification meeting or hearing on the proposal. Section 3 of the BHC Act does not capacity in 2009. In addition to modifications, Saxon Capital has require the Board to hold a public hearing on an application unless the pursued other forms of home preservation and loss mitigation to avoid appropriate supervisory authority for the bank to be acquired makes a foreclosures where possible. Finally, Morgan indicated that Saxon written recommendation of denial of the application. The Board has Capital remains actively engaged in industry-wide efforts and other not received such a recommendation from the appropriate supervisory public and private partnerships to address the current foreclosure authorities. Under its rules, the Board also may. in its discretion, hold a crisis, including Hope Now, the State Foreclosure Prevention Working public meeting or hearing on an application to acquire a bank if Group, the Ohio Compact to Prevent Foreclosures, and the National necessary or appropriate to clarify factual issues related to the Community Stabilization Trust. application and to provide an opportunity for testimony (12 CFR 33. Morgan proposes to acquire an indirect interest in Chinatrust's 225.16(e) and 262.25(d». The Board has considered carefully the FHC-permissible nonbanking business pursuant to section 4(k) of the commenters' requests in light of all the facts of record. In the Board's BHC Act. As noted above, Morgan proposes to acquire its indirect view, the commenters had ample opportunity to submit their views interest in Chinatrust's businesses that are not being acqui red pursuant and, in fact, submitted written comments that the Board has considered to section 3 or 4(k) of the BHC Act pursuant to section 4(c)(I3) of the carefully in acting on the proposal. The commenters' requests fail to BHC Act and Regulation K. Because Morgan's investment in Chi demonstrate why written comments do not present their views natrust qualifies as a portfolio investment under section 211.8 of adequately or why a meeting or hearing otherwise would be necessary Regulation K (12 CFR 211.8(e», Chinatrust's U.S. activities are or appropriate. r'or these reasons, and based on all the facts of record, permitted, provided that Chinatrust derives no more than 10 percent of the Board has determined that a public meeting or bearing is not its total revenues from activities in the United States (12 CFR required or warranted in this case. Accordingly. the requests for a 211.8(e)(l)(ii)(A». Based on all the facts of record, the Board has public meeting or hearing on the proposal are denied.

B92 Federal Reserve Bulletin 0 August 2009 Appendix ti~nal debt or equity capital; merging or consolidating wlt~ anothe~ fi~; or acquiring, selling, leasing, trans femng, or dlsposmg of material assets, subsidiaries or Passivity Commitments other entities; , 10. Except in c~:)flnection with the Morgan Stanley Group's representation on the board of directors of Chinatrust Morgan Stanley ("Morgan"), New York, New York, and its or C.CB (or. efforts to continue such representation) subsidiaries (collectively, the "Morgan Stanley Group") 70nsls.te.n~ With pa~gra~h 3 above, solicit or participate will not, without the prior approval of the Board or its staff, 10 soliCiting proxies With respect to any matter pre directly or indirectly: sented to the shareholders of Chinatrust or any of its subsidiaries; I. Exercise or attempt to exercise a controlling inHuence II. Dispo~e o.r threaten to di.spose (explicitly or implicitly) over the management or policies of Chinatrust Finan ?f e9U1ty IOterests of ChlOatrust or any of its subsidiar cial Holding Company, Ltd., Taipei, Taiwan, Republic Ies 10 any manner as a condition or inducement of of China ("Chinatrust") or any of its subsidiaries; specific action or nonaction by Chinatrust or any of its 2. Have or seek to have any representative of the Morgan subsidiaries; or Stan~e~ <!roup se~ve on the board of directors of any 12. ~nter i,:to any other banking or nonbanking transac subsldlanes of Chmatrust, except that the single repre tIOns With <;hm~trust or a~y of its subsidiaries, except sentative of Morgan Stanley Group who serves on the for transactions 10 the ordmary course of business that board of Chinatrust may also serve as a director of are non:exclusive (ex~ept to the extent any individual Chinatrust Commercial Bank, Ltd. ("CCB") if all transaction may contalO an exclusivity provision lim other outside directors of Chinatrust also serve on the ited to that transaction) and are on terms and under board of directors of CCB; circumstances that in good faith would be offered to, or 3. Have or seek to have more than one representative of would apply to, companies that are not affiliated with the Morgan Stanley Group serve on the board of Morgan or Chinatrust, including, but not limited to directors of Chinatrust, and CCB under the terms of the securitie~ l!~derwriti.ng, hroke:age and trading, merger~ prior commitment, or permit any representative of the and acquisitions adViSOry services and investment man Morgan Stanley Group who serves on the board of agement ser~ices, provided that the aggregate balance dir~ctors of Chinatrust and CCB to serve (i) as the of all deposit. accounts he I? by the Morgan Stanley chaIrman of the board of directors of Chinatrust or Group at Chmatrust and Its subsidiaries does not CCB, (ii) as the chairman of any committee of the exceed I percent of the total deposits held at Chinatrust board of directors of Chinatrust or CCB, or (iii) serve a.nd its subsidiaries and that the aggregate amount of as a member of any committee of the board of directors (I) gross revenues Morgan, on a consolidated basis of Chinatrust or CCB if such representative occupies earns from its business relationships with Chinatrust more than 25 percent of the seats on the committee; and its subsidiaries does not exceed 0.5 percent of 4. Have or seek to have any employee or representative of Morgan's annual gross revenues, on a consolidated the Morgan Sta~ley Group serve as an officer, agent, or basis, and (ii) gross revenues Chinatrust, on a consoli employee of Chmatrust or any of its subsidiaries' dated basis, earns from its business relationships with 5. :rake an,Y .ac~ion that would cause ~hinatrust or ~y of the M?rgan Stanley Group does not exceed 0.5 percent Its subsidlanes to become a subsidiary of Morgan; of ChlOatrust's annual gross revenues, on a consoli 6. Own, control, or hold with power to vote securities that dated basis, in each case under (i) and (ii) as calculated (when aggregated with securities that the officers and based on the rolling average of the prior four quarters. directors of the Morgan Stanley Group own control or hold with power to vote) represent 25 perc~nt or m~re The terms used in these commitments have the same of any class of voting securities of Chinatrust or any of meanings as those set forth in the Bank Holding Company its subsidiaries; Act of 1956 (HBHC Act"), as amended, and the Board's 7. Own or control equity interests that would result in the combined voting and nonvoting equity interests of the Regulation Y. Morgan Stanley Group and its officers and directors to Morgan understands that these commitments constitute eql!al or exceed 25 percent of the total equity capital of conditions imposed in writing in connection with the Chmatrust or any of its subsidiaries; Board's findings and decisions in Morgan's application to 8. Except in C~:)flnection with the Morgan Stanley Group's acquire additional common shares up to 9.9 percent of the representatIOn on the board of directors of Chinatrust outstanding common shares of Chinatrust, pursuant to or C.CB (or. efforts to continue such representation) section 3(a)(3) of the BHC Act, and, as such, may be consistent with paragraph 3 above, propose a director or slate of directors in opposition to a nominee or slate enforced in proceedings under applicable law. Morgan of nominees proposed by the management or board of further understands that it generally must file an application direct~rs of Chinatrust or any of its subsidiaries; and receive prior approval of the Board, pursuant to 9. Enter mto any agreement with Chinatrust or any of its section 3(a)(3) of the BHC Act, for any subsequent acqui subsidiaries that substantially limits the discretion of sition of control of voting shares of Chinatrust that would Chinatrust's management over major pOlicies and deci result in Morgan, directly or indirectly, owning or control s!ons, including, but. not limited to, policies or deci sions about employlOg and compensating executive ling additional voting shares in excess of 9.9 percent of the officers; engaging in new business lines; raising addi- outstanding common shares of Chinatrust.

Legal Developments: Second Quarter, 2009 B93 Morgan Stanley NONCONTROLLING INVESTMENT New York, New York Morgan has stated that it does not intend to control or exercise a controlling influence over Herald and that its Order Approving Retention of Shares of a investment in Herald is a passive investment,6 In this light, Bank Morgan has agreed to abide by certain commitments sub stantially similar to those on which the Board has previ Morgan Stanley ("Morgan"), a financial holding company ously relied in determining that an investing bank holding within the meaning of the Bank Holding Company Act company would not be able to exercise a controlling ("BHC Act"), has requested the Board's approval under influence over another bank holding company or bank for section 3 of the BHC Actl to retain up to 9.9 percent of the purposes ofthe BHC Act ("Passivity Commitments"),7 For voting shares of Herald National Bank ("Herald"), both of example, Morgan has committed not to exercise or attempt New York, New York, a newly chartered national bank.2 to exercise a controlling influence over the management or Notice of the proposal, affording interested persons an policies of Herald or any of its subsidiaries; not to seek or opportunity to submit comments, has been published accept more than one representative on the board of (73 Federal Register 66,246 (2008». The time for filing directors of Herald; and not to have any other ollicer, comments has expired, and the Board has considered the employee, or agent interlocks with Herald or any of its proposal and all comments received in light of the factors subsidiaries. The Passivity Commitments also include cer set forth in section 3 of the BHC Act.3 tain restrictions on the business relationships of Morgan Morgan, with total consolidated assets of approximately with Herald. $626 billion, engages in commercial and investment bank Based on these considerations and all the other facts of ing, securities underwriting and dealing, asset manage record, the Board has concluded that Morgan has not ment, trading, and other activities in the United States and acquired control of, nor has the ability to exercise a abroad. Morgan controls Morgan Stanley Bank, National controlling influence over, Herald through the acquisition Association ("Morgan Bank"), Salt Lake City, Utah, which of the bank's voting shares. The Board notes that the BHC operates one branch in the state, with total consolidated Act requires Morgan to file an application and receive the assets of approximately $66.2 billion and deposits of Board's approval before it directly or indirectly acquires approximately $54.1 billion. In addition, Morgan controls additional shares of Herald or attempts to exercise a Morgan Stanley Trust ("MS Trust"), Jersey City, New Jer controlling influence over Herald.s sey, a federal savings association, with total consolidated assets of $6.6 billion and deposits of $5.8 billion.4 Herald, COMPETITIVE CONSIDERA TlONS which controls deposits of $114.7 million, operates only in New York.s The Board has considered carefully the competitive effects of the proposal in light of all the facts of the record. Section 3 of the BHC Act prohibits the Board from approving a I. 12 U.S.C § IS42. proposal that would result in a monopoly or would be in 2. Herald began operations on November 24, 200S, as Heritage Bank, National Association, until it was renamed on January 2.2009. furtherance of any attempt to monopolize the business of Morgan holds the shares of Herald through two subsidiary hedge banking in any relevant banking market, The BHC Act also funds: Frontpoint Financial Services Fund. L.P. and Frontpoint Finan cial Horizons Fund, L.P., both of Greenwich, Connecticut. Morgan acquired the shares in Herald's public offering as a passive fund investment. No shareholder of Herald controls more than 10 percent of operations, and Morgan's status as a minority investor in Herald, the bank's voting shares, although SCJ, Inc .. Irvine, California, and the Morgan has been permitted to retroactively file an application to retain Carpenter Funds it controls, have received approval under section 3 of the Herald shares. the BHC Act to acquire up to IS percent of Herald's voting shares. 6. Although the acquisition of less than a controlling interest in a 3. A commenter objected to the Board's waiver of public notice of bank or bank holding company is not a normal acquisition for a bank Morgan's application Jast September to become a bank holding holding company, the requirement in section 3(a)(3) of the BHC Act company. In its order approving that application and Morgan's elec that the Board's approval be obtained before a bank holding company tion to become a financial holding company, the Board explained its acquires more than 5 percent of the voting shares of a bank suggests rationale for waiving the public comment period. Morgan Stanley, that Congress contemplated the acquisition by bank holding compa 94 Federal Reserve Bulletin CI03 (2008) ("Morgan FHC Order"). nies of between 5 percent and 25 percent of the voting shares of banks. 4. Asset and deposit data are as of March 31, 2009. Morgan also See 12 U.S.C § IS42(a)(3). On this basis, the Board previously has controls Morgan Stanley Trust National Association ("MSTNA"), approved the acquisition by a bank holding company of less than a Wilmington, Delaware, a limited-purpose national bank that engages controlling interest in a bank or bank holding company. See, e.g., only in trust or fiduciary activities and is exempt from the definition of Mitsubishi UFG Financial Group, 95 Federal Rese!1;e Bulletin B34 "bank" under the BHC Act pursuant to section 2(c)(2)(D) of the BHC (2009) (acquisition of up to 24.9 percent of the voting shares of a bank Act (12 US.C § IS41(c)(2)(D». holding company); Brookline BatU'orp, MHC, S6 Federal Reserve 5. In acting on Morgan's application last September, the Board Bulletin 52 (2000) (acquisition of up to 9.9 percent of the voting shares determined that emergency conditions existed at the time that justified of a bank holding company); Mansura Bancshares, Inc., 79 Federal the Board's expeditious action on the proposal. Morgan FHC Order. Reserve Bulletin 37 (1993) (acquisition of 9.7 percent of the voting When Morgan's application was approved on September 21, 2008, shares of a bank holding company). Herald was well advanced in its preparations to commence operations. 7. These commitments are set forth in the appendix. In light of the emergency conditions when the Board approved 8. 12 U.S.c. § 1842. See, e.g., Emigralll Bancorp, Inc., 82 Federal Morgan's application, the timing of Herald's plans to commence Reserve Bulletin 555 (1996).

B94 Federal Reserve Bulletin 0 August 2009 prohibits the Board from approving a bank acquisition that Consummation of the acqUiSItIOn was consistent with would substantially lessen competition in any relevant Board precedent and within the thresholds in the DOJ banking market, unless the Board finds that the anticom Guidelines in the Metro New York banking market. On petitive effects of the proposal clearly are outweighed in the consummation, the banking market remained moderately public interest by the probable effect of the proposal in concentrated, and numerous competitors remained in the meeting the convenience and needs of the community to be market,lS servedY The DOJ also has reviewed the matter and has advised The Board has previously stated that one company need the Board that it does not believe that Morgan's ownership not acquire control of another company to lessen competi interest in Herald is likely to have a significant adverse tion between them substantially,lO The Board has found effect on competition in any relevant banking market. The that noncontrolling interests in directly competing deposi appropriate banking agencies have been afforded an oppor tory institutions may raise serious questions under the BHC tunity to comment and have not objected to the application. Act and has stated that the specific facts of each case will Based on all the facts of record, the Board has concluded determine whether the minority investment in a company that approval of Morgan's application would not have a would be anticompetitive,ll significantly adverse effect on competition or on the con Morgan and Herald compete directly in the Metro centration of resources in any relevant banking market. New York banking market.12 The Board has reviewed Accordingly, the Board has determined that competitive carefully the competitive effects of the proposal in the factors are consistent with approval. Metro New York banking market in light of all the facts of the record, In particular, the Board has considered the FINANCIAL, MANAGERIAL, AND SUPERVISORY number of competitors that remain in the banking market, CONSIDERATIONS the relative shares of total deposits in depository institu tions in the market (Hmarket deposits") controlled by Section 3 of the BHC Act requires the Board to consider the Morgan and Herald, 13 and the concentration level of market financial and managerial resources and future prospects of deposits and the increase in the level as measured by the the companies and depository institutions involved and Herfindahl-Hirschman Index ("HHI") under the Depart certain other supervisory factors. The Board has carefully ment of Justice Merger Guidelines ("DOJ Guidelines"),14 considered these factors in light of all the facts of record, including confidential supervisory and examination infor mation received from the relevant federal and state super 9. 12 U.S.c. § I 842(c)(I). visors of the organizations involved, publicly reported and 10. See. e.g. • Sun Trust Banks. [nc., 76 Federal Reserve Bulletin 542 (1990). other financial information, information provided by Mor II. See, e.g. . BOK Financial Corp., 81 Federal Reserve Bulletill gan, and public comments received on the application. 1052 (1995). In evaluating the financial factors in expansion proposals 12. The Metro New York banking market includes Bronx. Dutch by banking organizations, the Board reviews the financial ess, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond. Rockland, Suffolk, Sullivan, Ulster, and Westchester counties in condition of the organizations involved on both a parent New York; Bergen, Essex, Hudson, Hunterdon, Mercer, Middlesex, only and consolidated basis, as well as the financial condi Monmouth, Morris. Ocean, Passaic, Somerset. Sussex. Union. and tion of the subsidiary depository institutions and significant Warren counties and the northern portions of Mercer County in nonbanking operations. In this evaluation, the Board con New Jersey; Monroe and Pike counties in Pennsylvania; and Fairfield siders a variety of information, including capital adequacy, County and portions of Litchfield and New Haven counties in Con necticut. asset quality, and earnings performance, In assessing finan 13. Except for deposit data for Herald. which are based on its cial factors, the Board consistently has considered capital March 31, 2009. call report, deposit and market share data are based adequacy to be especially important. The Board also evalu on data reported by insured depository institutions in the summary of ates the financial condition of the applicant, including its deposits data as of June 30, 2008. The data are also based on calculations in which the deposits of thrift institutions are included at capital position, asset quality, earnings prospects, and the 50 percent. The Board previously has indicated that thrift institutions impact of the proposed funding of the transaction. have become, or have the potential to become, significant competitors The Board has carefully considered the financial factors of commercial banks. See. e.g.. Midwest Fillancial Group. Ille .. in this case. Morgan, its subsidiary depository institutions, 75 Federal Reserve Bulletin 386 (1989); National City Corporatioll, and Herald are well capitalized. Based on its review of the 70 Federal Reserve Bulletin 743 (1984). Thus, the Board regularly has included thrift institution deposits in the market share calculation on a record, the Board also finds that Morgan had sufficient 50 percent weighted basis. See. e.g., First Hawaiiall. Inc., 77 Federal capital and other resources to effect the acquisition. The Reserve Bulletill 52 (1991). 14. Under the DOJ Guidelines, a market is considered unconcen trated if the post-merger HHI is under 1000. moderately concentrated 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 (,,001") has informed the Board that a bank merger or 15. Taking into account the deposits of Mitsubishi UFJ Financial acquisition generally will not be challenged (in the absence of other Group. Inc. ("MUFG"), Tokyo, Japan, which controls approximately factors indicating anticompetitive effects) unless the post-merger HHI 21 percent of Morgan, the HHI would remain unchanged at 1357, with is at least 1800 and the merger increases the HHI more than 200 284 insured depository institutions competing in the Metro New York points. The DOJ has stated that the higher-than-normal HHI thresholds banking market. The combined deposits of MUFG, Morgan, and for screening bank mergers and acquisitions for anticompetitive effects Herald represent less than I percent of market deposits.

Legal Developments: Second Quarter; 2009 B95 transaction was structured as a cash purchase using Mor Mortgage, Inc. ("Saxon Mortgage"), a subsidiary Morgan gan's existing resources. acquired in 2006. Morgan represented that it currently does The Board also has considered the managerial resources not directly or indirectly originate subprime loans and that of the organizations involved.16 The Board has reviewed it has no plans to engage in such lending. the examination records of Morgan and its subsidiary depository institutions, including assessments of their man A. eRA Performance Evaluations agement, risk-management systems, and operations. In addition, the Board has considered its supervisory experi As provided in the CRA, the Board has considered the ences and those of the other relevant banking supervisory convenience and needs factor in light of the evaluations by agencies with the U.S. banking operations of Morgan and the appropriate federal supervisors of the CRA perfor their records of compliance with applicable banking law, mance records of the insured depository institutions of including anti-money-laundering laws. Morgan. An institution's most recent CRA performance Based on all the facts of record, the Board has concluded evaluation is a particularly important consideration in the that the financial and managerial resources and the future applications process because it represents a detailed, on-site prospects of Morgan, Herald, and their subsidiaries are evaluation of the institution's overall record of perfor consistent with approval of this application, as are the other mance under the CRA by its appropriate federal super supervisory factors the Board must consider under sec visor. 20 tion 3 of the BHC Act. Morgan Bank received an Houtstanding" rating at its most recent CRA performance evaluation by the Federal Deposit Insurance Corporation ("FDIC"), as of Janu CONVENIENCE AND NEEDS CONSIDERATIONS ary 30, 2006.21 Herald has not yet been evaluated under the In acting on a proposal under section 3 of the BHC Act, the CRA by the Office of the Comptroller of the Currency Board also must consider the effect'> of the proposal on the ("OCC"). convenience and needs of the communities to be served and take into account the records of the relevant insured B. HMDA and Fair Lending Record depository institutions under the Community R,einvestment The Board has carefully considered the fair lending records Act (HCRA").17 The CRA requires the federal financial and HMDA data of Morgan in light of public comments supervisory agencies to encourage insured depository insti received on the application. Those comments alleged, tutions to help meet the credit needs of the local communi based on 2007 HMDA data, that in certain metropolitan ties in which they operate, consistent with their safe and statistical areas (MSAs), Saxon Mortgage disproportion sound operation, and requires the appropriate federal finan ately made higher-cost loans to African American and cial supervisory agency to take into account a relevant Hispanic borrowers than to nonminority borrowers.22 The depository institution's record of meeting the credit needs Board's consideration of HMDA-related comments in of its entire community, including low- and moderate cluded a review of 2007 HMDA data reported by Saxon income neighborhoods, in evaluating expansionary propos als.ls Mortgage and Morgan Stanley Credit Corporation (HMSCC"). Morgan acquired Saxon Capital, Inc. ("Saxon The Board has considered carefully all the facts of Capital"), the parent of Saxon Mortgage, in 2006 and record, including reports of examination of the CRA perfor MSCC in 1997. Morgan now originates residential mort mance records of Morgan's subsidiary insured depository gage loans only through MSCC, which currently originates institutions, data reported by Morgan under the Home only prime mortgage loans. Morgan services mortgage Mortgage Disclosure Act (HHMDA"),19 as well as other loans through Saxon Capital, including subprime loans information provided by Morgan, confidential supervisory originated by Morgan and others. information, and public comment received on the proposal. A commenter alleged, based on HMDA data, that Morgan has engaged in disparate treatment of minority individuals in home mortgage lending. The commenter also expressed concern over subprime lending by Morgan and by Saxon 20. The Interagency Questions and Answers Regarding Commu nity Reinvestment provide that a CRA examination is an important and often control! ing factor in the consideration of an institution's CRA record. See Interagency Questions and Answers Regarding Commu 16, A commenter expressed concern about Morgan's role in the nity Reinvestment, 74 Federal Register 498 at 527 (2009). auction-rate securities market. The Board considered the August 2008 21, Morgan Bank became a national bank on September 23, 2008, settlement between Morgan and the Attorney General of the state of on its conversion from a Utah-chartered industrial bank, The 2006 New York and pending litigation involving these matters. As part of its evaluation was conducted before this conversion. MSTNA is nol an ongoing supervision of Morgan. the Board monitors the status of insured depository institution. and MS Trust is a limited-purpose government investigations, consults as needed with relevant regula savings association not subject to the CRA, See 12 CPR 563e.ll(c)(2). tory authorities, and periodically reviews Morgan's potential liability 22. Beginning January I, 2004, the HMDA dala required to be from material litigation. reported by lenders were expanded to include pricing information for 17. 12 U,S.c. §2901 et seq.; 12 U.S,c. §2903; 12 U.S,C. loans on which the annual percentage rate exceeds the yield for V,S. § 1842(c)(2). Treasury securities of comparable maturity 3 or more percentage 18. 12 U,S.c. §2903. points for first-lien mortgages and 5 or more percentage points for 19. 12 V.S,c. §2801 etseq. second-lien mortgages (12 CPR 203.4).

B96 Federal Reserve Bulletin 0 August 2009 Although the HMDA data might reflect certain dispari Morgan currently originates residential mortgage loans ties in the rates of loan applications, originations, denials, only through MSCC and services subprime loans only or pricing among members of different racial or ethnic through Saxon Capital. Morgan represented that MSCC groups in certain local areas, they provide an insufficient and Saxon Capital have policies and procedures to help basis by themselves on which to conclude whether or not ensure compliance with fair lending and other consumer Morgan is excluding or imposing higher costs on any racial protection laws and regulations, For example, MSCC uses or ethnic group on a prohibited basis. The Board recognizes an automated underwriting and loan-pricing system that that HMDA data alone, even with the recent addition of substantially limits discretionary criteria and, before deny pricing information, provide only limited information about ing a loan application, MSCC makes reasonable efforts to the covered 10ansP HMDA data, therefore, have limita gather additional information that could appropriately tions that make them an inadequate basis, absent other qualify an applicant. MSCC employees do not have over information, for concluding that an institution has engaged ride authority in pricing loans, and their compensation is in illegal lending discrimination. not based on loan pricing. Morgan has represented that The Board is nevertheless concerned when HMDA data Saxon Capital clearly discloses fees to consumers and for an institution indicate disparities in lending and believes monitors fees to ensure compliance with applicable law. In that aU lending institutions are obligated to ensure that their addition, MSCC and Saxon Capital provide training in fair lending practices are based on criteria that ensure not only lending and consumer protection law to employees in safe and sound lending but also equal access to credit by volved in originating and servicing loans and maintain creditworthy applicants regardless of their race or ethnicity. complaint resolution systems. MSCC's fair lending compli Moreover, the Board believes that all bank holding compa ance procedures include reviews of loan origination and nies and their affiliates must conduct their mortgage lend pricing data that use statistical and comparative file ing operations without any abusive lending practices and in analyses. compliance with all consumer protection law. Because of the limitations of HMDA data, the Board has C. Conclusion on Convenience and Needs and considered these data carefully and taken into account other CRA Performance information, including examination reports that provide on-site evaluations of compliance by Morgan's subsidiary The Board has carefully considered all the facts of record, insured depository institutions with fair lending laws. The including the evaluation of the CRA performance record of Board also has consulted with the FDIC and DCC, Morgan Morgan Bank, information provided by Morgan, comments Bank's former and current primary federal supervisors, received on the proposal, and confidential supervisory respectively. In addition, the Board has considered informa information. Morgan represented that its investment in tion provided by Morgan about its compliance risk Herald has helped provide consumers with additional management systems, choices for meeting their banking needs. Based on a review The record of this application, including confidential of the entire record, including the noncontrolling nature of the investment, the Board concludes that considerations supervisory information, indicates that Morgan has taken steps to ensure compliance with fair lending and other relating to the convenience and needs factor and the CRA consumer protection laws and regulations.24 As noted, performance records of the relevant insured depository institutions are consistent with approval of the transaction. 23. The data, for example, do not account for the possibility that an CONCLUSION institution's outreach efforts may attract a larger proportion of margin ally qualified applicants than other institutions attract and do not Based on the foregoing and all the facts of record, the provide a basis for an independent assessment of whether an applicant Board has determined that the application should be, and who was denied credit was. in fact, creditworthy. In addition, credit hereby is, approved.25 In reaching its conclusion, the Board history problems, excessive debt levels relative to income, and high has considered all the facts of record in light of the factors loan amounts relative to the value of the real estate collateral (reasons most frequently cited for a credit denial or higher credit cost) are not available from HMDA data. 24. A commenter expressed concern about Morgan's alleged ware affiliates to conduct their lending operations without any abusive house financing to subpri me lenders and securitization of subpri me lending practices and in compliance with all applicable laws. loans. Morgan represented that it does not provide warehouse lending 25. The Board also has approved the retention of the indirect or custodian services for subprime lenders. To the extent it provides interest in Herald held by MUFG. MUFG, a financial holding com servicing activities for subprime loans. Morgan asserted that it con pany within the meaning of the BHe Act, currently controls approxi ducts due diligence to promote compliance with fair lending laws. mately 21 percent of the voting shares of Morgan Stanley. The Board Morgan also has asserted that, to the extent it underwrites securities for notes that MUFG provided no funding for Morgan's acquisition of the or participates in commercial loans to subprime lenders, Morgan has Herald shares, and Morgan's retention of those shares would not alter no role in the lending or credit review practices of those lenders. In the current structure of MUFG's investment in Morgan. In addition, addition, Morgan has represented that, to the extent it underwrites MUFG's U.S. subsidiary banks remain well capitalized. The Board securities for subprime lenders, its due diligence procedures seek to previously has determined that the foreign banks controlled by MUFG ensure that mortgage pools supporting securitizations do not include are subject to comprehensive supervision on a consolidated basis by loans subject to the Home Ownership and Equity Protection Act of their home-country supervisor, the Japanese Financial Services Agency 1994 or loans with predatory lending features. As noted above, the ("FSA"). The Board has determined that these banks continue to be Board will continue to require all bank holding companies and their subject to comprehensive supervision on a consolidated basis by the

Legal Developments: Second Quarter, 2009 B97 that it is required to consider under the BHC Act and other will not, without the prior approval of the Board or its staff, applicable statutes.26 The Board's approval is specifically directly or indirectly conditioned on compliance by Morgan with the conditions I. Exercise or attempt to exercise a controlling influence imposed in this order and the commitments made to the over the management or policies of Herald National Board in connection with the applicationP For purposes of Bank ("Herald"), New York, New York, or any of its this action, the conditions and commitments are deemed to subsidiaries; be conditions imposed in writing by the Board in connec 2. Have or seek to have any representative of the Morgan Stanley Group serve on the board of directors of any tion with its findings and decision herein and, as such, may subsidiary of Herald; be enforced in proceedings under applicable law. 3, Have or seek to have more than one representative of By order of the Board of Governors, effective June 26, the Morgan Stanley Group serve on the board of 2009. directors of Herald or permit any representative of the Morgan Stanley Group who serves on the board of Voting for this action: Chairman Bernanke and Governors Warsh, directors of Herald to serve as (i) the chairman of the Duke, and Tarullo. Absent and not voting: Viee Chairman Kohn. board of directors of Herald, (ii) the chairman of any committee of the board of directors of Herald, or (iii) a ROBERT DE V. FRIERSON member of any committee of the board of directors of Deputy Secretary of the Board Herald if such representative occupies more than 25 percent of the seats on the committee; 4. Have or seek to have any employee or representative of Appendix Morgan Stanley Group serve as an officer, agent, or employee of Herald or any of its subsidiaries; 5. Take any action that would cause Herald or any of its PASSIVITY COMMITMENTS subsidiaries to become a subsidiary of Morgan; 6. Own, control, or hold with power to vote securities that Morgan Stanley ("Morgan"), New York, New York, and its (when aggregated with securities that the officers and subsidiaries (collectively, "the Morgan Stanley Group"), directors of the Morgan Stanley Group own, control, or hold with power to vote) represent 25 percent or more of any class of voting securities of Herald or any of its subsidiaries; FSA. All other factors are consistent with approval of MUFG's retention of its indirect interest in Herald. 7. Own or control equity interests that would cause the 26. A commenter requested an extension of the comment period on combined voting and nonvoting equity interests of the the application. Notice of the application was published in the Federal Morgan Stanley Group and its officers and directors to Register on November 7, 2008. Newspaper notices were published on equal or exceed 25 percent of the total equity capital of October 31 and November 4 in the appropriate newspapers of record. Herald or any of its subsidiaries; and the comment period ended on December 4. 2008. Accordingly, 8. Except in connection with the Morgan Stanley Group's interested persons had approximately 34 days to submit views. This representation on the board of directors of Herald period provided sufficient time to the commenter to prepare and consistent with paragraph 3 above, propose a director submit its comments and, as noted above, the commenter pruvided a or slate of directors in opposition to a nominee or slate written submission. which the Board considered carefully in acting on of nominees proposed by the management or board of the application. The Board also has accumulated a significant record in directors of Herald or any of its subsidiaries; this case, including reports of examination, confidential supervisory 9. Enter into any agreement with Herald or any of its information and public reports and information, in addition to public subsidiaries that substantially limits the discretion of comments. Moreover, the Board is required under applicable law and Herald's management over major policies and deci its regulations to act on applications submitted under the BHC Act sions, including, but not limited to, policies or deci within specified time periods. Based on all the facts of record, the sions about employing and compensating executive Board has concluded that the record in this case is sufficient to warrant officers; engaging in new business lines; raising addi action at Ihis time and that no extension of the comment period is tional debt or equity capital; merging or consolidating neeessary. 27. A commenter requested that the Board hold a public meeting or with another firm; or acquiring, selling, leasing, trans hearing on the proposal. Section 3 of the BHC Act does not require the ferring, or disposing of material assets, subsidiaries, or Board to hold a public hearing on an application unless the appropriate other entities; supervisory authority for the bank to be acquired makes a written 10, Except in connection with the Morgan Stanley Group's recommendation of denial of the application. The Board has not representation on the board of directors of Herald received such a recommendation from the OCC. Under its rules. the consistent with paragraph 3 above, solicit or participate Board also may, in its discretion, hold a public meeting or hearing on in soliciting proxies with respect to any matter pre an application to acquire a bank if necessary or appropriate to clarify sented to the shareholders of Herald or any of its material factual issues related to the application and to provide an subsidiaries; opportunity for testimony (12 CFR 22S.16(e) and 262.2S(d». The II. Dispose or threaten to dispose (explicitly or implicitly) Board has considered carefully the commenter's request in light of all of equity interests of Herald or any of its subsidiaries in the facts of record. As noted, the commenter had ample opportunity to any manner as a condition or inducement of specific submit its views and, in fact, submitted written comments that the action or non-action by Herald or any of its subsidiar Board has considered carefully in acting on the proposal. The com ies; or menter's request fails to demonstrate why written comments do not 12. Enter into any banking or nonbanking transactions present its views adequately or why a meeting or hearing otherwise with Herald or any of its subsidiaries, except that would be necessary or appropriate. For these reasons, and based on all (a) The Morgan Stanley Group may establish and the facts of record, the Board has determined that a public meeting or hearing is not required or warranted in this case. Accordingly, the maintain deposit accounts with Herald; provided, request for public meeting or hearing on the application is denied. that the aggregate balance of all such deposit

B98 Federal Reserve Bulletin D August 2009 accounts does not exceed $500,000 and that the Bank, with total consolidated assets of approximately accounts are maintained on substantially the same $435 billion,2 is the ninth largest bank in the United terms as those prevailing for comparable accounts Kingdom by asset size.} Bank engages in a broad range of of persons unaffiliated with Herald; and consumer banking and wholesale banking activities through (b) The Morgan Stanley Group and Herald may sell numerous offices and subsidiaries located throughout the loan participations to each other, provided that (i) the Morgan Stanley Group and Herald each are world. In the United States, Bank operates state-licensed free to enter into similar transactions with other branches in Pasadena, California, and New York, New York, parties; (ii) the Morgan Stanley Group and Herald and representative offices in San Diego and San Francisco, each use its own underwriting criteria to evaluate California; Miami, Florida; Atlanta, Georgia; and Jersey potential participations; (iii) any and all loan City and Newark, New Jersey. Bank also owns two Edge participation transactions between the Morgan corporation subsidiaries (Standard Chartered Overseas Stanley Group and Herald are at market terms and on an arm's-length basis; (iv) the aggregate bal Investment Inc. and Standard Chartered Bank International ance of all such loan participations purchased by (Americas) Limited ("SCBI"» and an agreement corpora Herald from the Morgan Stanley Group does not tion subsidiary, Standard Chartered International (USA) exceed the dollar amount equal to 5 percent of Ltd. Bank is wholly owned by Standard Chartered Hold Herald's total loans and leases, net of unearned ings Limited,4 which is wholly owned by Standard Char income; and (v) the aggregate balance of any such tered PLC ("Standard Chartered"), both of London, En loan participations sold by Herald to the Morgan Stanley Group does not exceed the dollar amount gland. Standard Chartered and its subsidiaries offer equal to 5 percent of Herald's total loans and international banking and financial services in over 50 leases, net of unearned income. countries and territories worldwide.s The proposed representative office would serve as a The terms used in these commitments have the same liaison between Bank and its customers.O The ollice would meanings as those set forth in the Bank Holding Company also solicit new business for Bank's wholesale banking Act of 1956, as amended, and the Board's Regulation Y. products and services from potential customers in the Morgan understands that these commitments constitute United States and serve as a point of contact for clients and conditions imposed in writing in connection with the prospective clients of such business in Texas and Latin Board's findings and decision on Morgan's application to America, with an initial focus on clients in the energy retain up to 9.9 percent of the voting shares of Herald, sector. 7 pursuant to 12 U.S.c. § 1842, and, as such, may be In acting on an application under the IBA and Regula enforced in proceedings under applicable law. tion K by a foreign bank to establish a representative ollice, the Board shall take into account whether the foreign bank ORDER ISSUED UNDER directly engages in the business of banking outside of the United States and whether the foreign bank has furnished to INTERNATIONAL BANKING ACT the Board the information it needs to assess the application adequately.H The Board shall also take into account whether Standard Chartered Bank the foreign bank is subject to comprehensive supervision on a consolidated basis by its home-country supervisor." London, England Order Approving Establishment of a 2. Unless otherwise indicated. data are as of December 31, 2008. Representative Office 3. Ranking data are as of December 31, 2007. 4. Standard Chartered Holdings Limited's only activity is holding 100 percent of the shares of Bank. Standard Chartered Bank ("Bank"), London, England, a 5. As of March 2, 2009, Temasek Holdings (Private) Limited foreign bank within the meaning of the International Bank (''Temasek''), Singapore. held 18.81 percent of the voting rights of ing Act ("IDA"), has applied under section lOCal of the Standard Chartered. Temasek does not have representation on the IDAl to establish a representative office in Houston, Texas. board of directors of Standard Chartered. The Foreign Bank Supervision Enhancement Act of 1991, 6. A representative office may engage in representational and administrative functions in connection with the banking activities of which amended the IDA, provides that a foreign bank must the foreign bank, including soliciting new business for the foreign obtain the approval of the Board to establish a representa bank, conducting research, acting as a liaison between the foreign tive office in the United States. bank's head office and customers in the United States, perrorming Notice of the application, affording interested persons an preliminary and servicing steps in connection with lending, and perrorming back-office functions. A representative office may not opportunity to comment, has been published in a newspa contract for any deposit or deposit-like liability, lend money. or engage per of general circulation in Houston (Houston Chronicle, in any other banking activity (\2 CFR 211 24(d)(\)). January 16, 2009). The time for filing comments has 7. Any transactions resulting from the activities of the representa expired, and all comments received have been considered. tive office will be conducted with Bank's branch in New York. 8. 12 U.S.C. §3107(a)(2) 9. Id.; 12 CFR 211.24(d){2). In assessing the supervision standard, the Board considers. among other indicia of comprehensive. consoli dated supervision. the extent to which the home-country supervisors 1. 12 U.S.c. §3107(a). (i) ensure that the bank has adequate procedures for monitoring and

Legal Developments: Second Quarter, 2009 B99 The Board also considers additional standards set forth in The United Kingdom is a member of the Financial the IBA and Regulation K.1O Action Task Force and subscribes to its recommendations As noted above, Bank engages directly in the business of on measures to combat money laundering. In accordance banking outside the United States. Bank also has provided with these recommendations, the United Kingdom has the Board with infonnation necessary to assess the applica enacted laws and created legislative and regulatory stan tion through submissions that address the relevant issues. dards to deter money laundering, terrorist financing, and With respect to supervision by home-country authorities, other illicit activities. Money laundering is a criminal the Board previously has detennined, in connection with offense in the United Kingdom, and credit institutions are applications involving other banks in the United Kingdom, required to establish internal policies, procedures, and that those banks were subject to home-country supervision systems for the detection and prevention of money launder on a consolidated basis by the Financial Services Authority ing throughout their worldwide operations. Bank has poli ("FSA"), the primary regulator of commercial banks in the cies and procedures to comply with these laws and regula United Kingdom.11 Bank is supervised by the FSA on tions that are monitored by governmental entities responsible substantially the same terms and conditions as those other for anti-money-laundering compliance. banks. Based on all the factors of record, including the With respect to access to information on Bank's opera above infonnation, it has been determined that Bank is tions, the restrictions on disclosure in relevant jurisdictions subject to comprehensive supervision on a consolidated in which Bank operates have been reviewed and relevant basis by its home-country supervisor. governmental authorities have been communicated with The additional standards set forth in section 7 of the IBA regarding access to information. Bank and Standard Char and Regulation K have also been ta~en into account. 12 The tered have committed to make available to the Board such FSA has no objection to the proposed representative office. information on the operations of Bank and any of its With respect to the financial and managerial resources of affiliates that the Board deems necessary to detennine and Bank, taking into consideration its record of operation in its enforce compliance with the IBA, the Bank Holding Com home country, its overall financial resources, and its stand pany Act of 1956, as amended, and other applicable federal ing with its home-country supervisor, financial and mana law. To the extent that the provision of such infonnation to gerial factors are consistent with approval. Bank appears to the Board may be prohibited by law or otherwise, Bank and have the experience and capacity to support the proposed Standard Chartered have committed to cooperate with the representative office and has established controls and pro Board to obtain any necessary consents or waivers that cedures for the proposed representative office to ensure might be required from third parties for disclosure of such compliance with U.S. law, as well as controls and proce infonnation. In addition, subject to certain conditions, FSA dures for its worldwide operations generally. 13 may share infonnation on Bank's operations with other supervisors, including the Board. In light of these commit ments and other facts of record, and subject to the condi controlling its activities worldwide; (ii) obtain information on the tions described below, it has been detennined that Bank and condition of the bank and its subsidiaries and offices through regular examination reports, audit reports, or otherwise; (iii) obtain informa Standard Chartered provided adequate assurances of access tion on the dealings with and the relationship between the bank and its to any necessary information that the Board may request. affiliates. both foreign and domestic; (iv) receive from the bank On the basis of the foregoing and all the facts of record, financial reports that are consolidated on a worldwide basis or and subject to commitments made by Bank and Standard comparable information that permits analysis of the bank's financial condition on a worldwide consolidated basis; and (v) evaluate pruden Chartered to the Board, as well as the terms and conditions tial standards, such as capital adequacy and risk asset exposure, on a set forth in this order, Bank's application to establish the worldwide basis. No single factor is essential, and other elements may representative office is hereby approved.14 Should any inform the Board's determination. restrictions on access to information regarding the opera 10. See 12 U.S.c. § 3105(d)(3}--(4); 12 CFR 211.24(c)(2). These tions or activities of Bank and its affiliates subsequently standards include (I) whether the bank's home-country supervisor has consented to the establishment of the office; the financial and manage interfere with the Board's ability to obtain information to rial resources of the bank; (2) whether the bank has procedures to detennine and enforce compliance by Bank or its affiliates combat money laundering, whether there is a legal regime in place in with applicable federal statutes, the Board may require the home country to address money laundering. and whether the home termination of any of Bank's direct or indirect activities in country is participating in multilateral efforts to combat money laundering; (3) whether the appropriate supervisors in the home the United States. Approval of this application also is country may share information on the bank's operations with the specifically conditioned on compliance by Bank and Stan Board; and (4) whether the bank and its U.S. affiliates are in dard Chartered with the conditions imposed in this order compliance with U.S. law; the needs of the community; and the bank's record of operation. II. See, e.g., Barclays pic, 91 Federal Reserve Bulletin 48 (2005); program. Separately. AEBL, now Standard Chartered International HBOS Treasury Services pic, 90 Federal Reserve Bulletin 103 (2004); (USA) Ltd., and the New York State Banking Department entered into The Royal Bank of Scotland Group, 89 Federal Reserve Bulletin 386 a Written Agreement for the same matters. SCBI and Standard (2003). Chartered International (USA) Ltd. are providing periodic reports 12. See supra note 9. required in their respective enforcement actions and are making 13. On August 3, 2007, American Express Bank International, now satisfactory progress in addressing the deficiencies. SCBI, came under a Cease and Desist Order from the Board and 14. Approved by the Director of Banking Supervision and Regula entered into a Deferred Prosecution Agreement with the U.S. Depart tion, with the concurrence of the General Counsel, pursuant to ment of Justice for persistent deficiencies in its anti-money-Iaundering authority delegated by the Board. See 12 CFR 265.7(d)(l2).

B 100 Federal Reserve Bulletin 0 August 2009 and the commitments made to the Board in connection with In a brief and conclusory pleading, Respondent asserted this application.I5 For purposes of this action, the commit that disclosure of the allegations in the Notice would ments and conditions are deemed to be conditions imposed "damage [Respondent's] reputation and good name" and in writing by the Board in connection with its finding and that it would "not be possible to undo the damage" if decision and may be enforced in proceedings under Respondent is vindicated. Respondent also noted that he 12 U.S.c. § 1818 against Bank and its affiliates. has not been affiliated with a Board-supervised institution By order, approved pursuant to authority delegated by since 2006, so that public disclosure "is unnecessary to the Board, effective May 7, 2009. protect the public interest." ROBERT DEY. FRIERSON DISCUSSION Deputy Secretary of the Board The enforcement provisions of the Federal Deposit Insur FINAL ENFORCEMENT DECISION ance Act provide that all administrative hearings must be public unless the Board, in its discretion, determines that a ISSUED BY THE BOARD public hearing would be "contrary to the public interest." The Board's regulations echo this requirement (12 CFR IN THE MATTER OF 263.33(a». In two cases in 1999, the Board set forth the Francesco Rusciano, standard by which requests for private hearings would be Former Institution-Affiliated Party of determined. Specifically, the Board ruled that Before the Board exercises its discretion to close a UBSAG, hearing, there should be a substantial basis for conclud Zurich, Switzerland ing that the case reflects unusual circumstances that overcome the presumption in favor of open hearings. In Docket Nos. 09-007-I-E, 09-007-I-CMP general, in light of the congressional requirement that the proceeding be open unless "contrary to the public Determination on Request for Private Hearing interest," those circumstances should involve serious BACKGROUND safety and soundness concerns flowing from a public hearing .... [A] party seeking a closed hearing should This is an enforcement proceeding brought by the Board of be required to demonstrate how the effects of this Governors of the Federal Reserve System (the "Board") proceeding differ so significantly from those involving against Francesco Rusciano pursuant to the Federal Deposit other banks in terms of the public interest as to warrant Insurance Act (the "FDI Act"). Rusciano traded foreign special treatment. exchange and debt instruments for the account of UBS AG. In the Matter of Incus Co., Ltd., 85 Federal Reserve In a Notice of Intent to Prohibit and Notice of Assessment Bulletin 284, 285 (1999); In the Matter of Fo nkenell, of a Civil Money Penalty (the "Notice") issued on Janu 85 Federal Reserve Bulletin 353 (1999) (same). ary 23, 2009, the Board alleged that Rusciano manipulated The reasons given by Respondent here for closing the UBS's trade recordation systems by falsifying information hearing to the public do not establish that an open hearing about actual transactions and entering fictitious trades in would be contrary to the public interest. The Board has order to conceal mounting losses in his trading book. The previously rejected the argument that reputational concerns Notice seeks civil money penalties and an order of prohibi of the respondent or third parties justify closing a hearing to tion against the Respondent. the public. See In the Matter of Zbinden, 80 Federal In accordance with section 8(u)(2) of the FDI Act, Reserve Bulletin 360 (1994); Fonkenell, 85 Federal Re 12 U.S.c. § 1818(u)(2), the Notice advised the Respondent serve Bulletin at 354; Incus, 85 Federal Reserve Bulletin at that any hearing held in this matter would be public, unless 285. Similarly, the fact that Respondent is not currently the Board determines that an open hearing would be employed by a Federal Reserve-regulated institution does contrary to the public interest. The Notice informed not mean that a public hearing is "contrary to the public Respondent that he could submit a statement detailing any interest." (12 u.s.c. § 1818(u)(2) (emphasis added». Ac reasons why the hearing should not be public. Respondent cordingly, these arguments fail to meet the standard duly filed a motion with the Board seeking a private required by the Board to close a hearing to the public. hearing in this matter. Board Enforcement Counsel opposed Accordingly, Respondent's request for a private hearing the motion. is denied. By order of the Board of Governors, this I st day of 15. The Board's authority to approve the establishment of the April, 2009. proposed representative office parallels the continuing authority of the BOARD OF GOVERNORS OF THE state of Texas to license offices of a foreign bank. The Board's FEDERAL RESERVE SYSTEM approval of this application does not supplant the authority of the state of Texas or its agent, the Texas Department of Banking. to license the proposed representative office of Bank in accordance with any terms ROBERT DEY. FRIERSON or conditions that it may impose. Deputy Secretary of the Board

BIO] November 2009 Legal Developments: Third Quarter, 2009 ORDER ISSUED UNDER California,S Bank is a qualifying foreign banking organiza INTERNATIONAL BANKING ACT tion under Regulation K.6 Bank operates a New York agency at 300 Madison Avenue, The 300 Madison Avenue agency engages in Canadian Imperial Bank of Commerce trading activities, such as securities investments and other treasury activities, and extends a small volume of credit Toronto, Canada products, Some agency activities were recently moved to 425 Lexington Avenue, including real estate financing and Order Approving Retention of an Agency commercial lending, necessitating this application under section 7(d) of the IDA to retain this location as an agency, Canadian Imperial Bank of Commerce ("Bank"), Toronto, Under the IDA and Regulation K, in acting on an Canada, a foreign bank within the meaning of the Interna application by a foreign bank to establish an agency, the tional Banking Act (HIDA"), has applied under section 7(d) Board must consider whether the foreign bank (I) engages of the IDA to retain an agency in New York, New York. 1 directly in the business of banking outside of the United The Foreign Bank Supervision Enhancement Act of 1991, States; (2) has furnished to the Board the information it which amended the IDA, provides that a foreign bank must needs to assess the application adequately; and (3) is obtain the approval of the Board to establish an agency in subject to comprehensive supervision on a consolidated the United States. basis by its home-country supervisor.7 Notice of the application, affording interested persons an As noted above, Bank engages directly in the business of opportunity to comment, has been published in a newspa banking outside the United States. Bank also has provided per of general circulation in New York (New York Post, the Board with information necessary to assess the applica May 11,2(09). The time for filing comments has expired, tion through submissions that address the relevant issues. and all comments recei ved have been considered. With respect to supervision by home-country authorities, Bank, with total consolidated assets of approximately the Board previously has determined that Bank is subject to $309 billion,2 is the fifth largest bank in Canada by asset comprehensive supervision on a consolidated basis.8 There size. Bank's shares are widely held, with no shareholder or has been no material change in the manner in which Bank group of shareholders controlling more than 10 percent of is supervised by Canada's Office of the Superintendent of its outstanding shares.3 Bank engages in a broad range of Financial Institutions ("OSFI"). Based on all the facts of retail banking, commercial banking, private banking, asset record, it has been determined that Bank is subject to management, and investment banking activities through numerous offices and subsidiaries located throughout the world. Outside Canada, Bank has operations in the United States, the Caribbean, the United Kingdom, Ireland, Austra 5. Bank downgraded its Los Angeles agency to a representative lia, Japan, and Singapore. office in May 2009, In the United States, Bank operates a branch in Chicago, 6. 12 CFR 211.23( a). IIIinois;4 two agencies in New York, New York; and 7. 12 U,S.c. §3105(d)(2); 12 CFR 211.24(c)(I). In assessing this standard, the Board considers, among other factors, the extent to which representative offices in Houston, Texas; and Los Angeles, the home-country supervisors (i) ensure the bank has adequate proce dures for monitoring and controlling its activities worldwide; (ii) obtain information on the condition of the bank and its subsidiaries and offices through regular examination reports, audit reports. or I. 12 U.S.c. §3l05(d). otherwise; (iii) obtain information on the dealings with and relation 2. Unless otherwise indicated, data are as of July 31, 2009, ship between the bank and its affiliates, both foreign and domestic; (iv) 3, As of July 31, 2009, Royal Bank of Canada, Montreal, Canada, receive from the bank financial reports that are consolidated on a holds, directly and indirectly in a fiduciary capacity, 10 percent of worldwide ba~is or comparable information that permits analysis of Bank's total shares outstanding. Harris Financial Corp., Wilmington, the bank's financial condition on a worldwide, consolidated basis; and Oclaware, a subsidiary of Bank of Montreal, Montreal, holds indi (v) evaluate prudential standards, such as capital adequacy and risk rectly 5,6 percent of Bank's total shares outstanding, of which asset exposure, on a worldwide basis. These are indicia of comprehen 5.1 percent are held in a fiduciary capacity. No other shareholder or sive, consolidated supervision. No single factor is essential. and other group of shareholders controls more than 5 percent of Bank's outstand elements may inform the Board's determination. ing shares. 8. Canadian Imperial Balik of Commerce, 87 Federal Reserve 4. The Chicago branch conducts limited activities and reports no Bulletin 678 (2001); Canadian Imperial Bank (!fCommerce, 85 Fed assets, eral Reserve Bulletin 733 (1999).

B 102 Federal Reserve Bulletin 0 November 2009 comprehensive supervision on a consolidated basis by its to make available to the Board such information on the home-country supervisor. operations of Bank and any of its affiliates that the Board The additional standards set forth in section 7 of the IBA deems necessary to determine and enforce compliance with and Regulation K have also been taken into accountY The the IBA, the Bank Holding Company Act, and other OSFI has no objection to the proposed agency. applicable federal law. To the extent that the provision of Canada's risk-based capital standards are consistent with such information to the Board may be prohibited by law or those established by the Basel Capital Accord. Bank's otherwise, Bank has committed to cooperate with the capital is in excess of minimum levels that would be Board to obtain any necessary consents or waivers that required of a U.S. banking organization. Managerial and might be required from third parties for disclosure of such other financial resources of Bank also are considered information. In addition, subject to certain conditions, the consistent with approval, and Bank appears to have the OSFI may share information on Bank's operations with experience and capacity to support the proposed agency. other supervisors, including the Board. In light of these Bank has established controls and procedures for the commitments and other facts of record, and subject to the proposed agency to ensure compliance with U.S. law and conditions described below, it has been determined that for its operations in general. Bank has provided adequate assurances of access to any Canada is a member of the Financial Action Task Force necessary information that the Board may request. and subscribes to its recommendations on measures to On the basis of the foregoing and all the facts of record, combat money laundering and terrorist financing. In accor Bank's application to retain an agency is hereby ap dance with those recommendations, Canada has enacted proved.1o Should any restrictions on access to information laws and adopted regulations to deter money laundering on the operations or activities of Bank and its affiliates and terrorist financing. Money laundering is a criminal subsequently interfere with the Board's ability to obtain offense in Canada, and financial institutions are required to information to determine and enforce compliance by Bank establish internal policies, procedures, and systems for the or its affiliates with applicable federal statutes, the Board detection and prevention of money laundering and terrorist may require termination of any of Bank's direct or indirect financing throughout their worldwide operations. Bank has activities in the United States. Approval of this application policies and procedures to comply with these laws and also is specifically conditioned on compliance by Bank regulations, and its compliance with applicable laws and with the conditions imposed in this order and the commit~ regulations is monitored by Bank's auditors and the OSFI. ments made to the Board in connection with this applica With respect to access to information about Bank's tion.!l operations, the restrictions on disclosure in relevant juris By order, approved pursuant to authority delegated by dictions in which Bank operates have been reviewed and the Board, effective September 17, 2009. relevant government authorities have been communicated with regarding access to information. Bank has committed ROBERT DEY. FRIERSON Deputy Secretary of the Board 9. See 12 U.S.c. §3105(d)(3)-(4); 12 CFR 211.24(c)(2). These standards include 0) whether the bank's home-country supervisor has consented to the establishment of the office; Oi) the financial and managerial resources of the bank; (iii) whether the bank has proce 10. Approved by the Director of the Division of Banking Supervi dures to combat money laundering, whether there is a legal regime in sion and Regulation, with the concurrence of the General Counsel, place in the home country to address money laundering, and whether pursuant to authority delegated by the Board. the home counlry is participating in multilateral efforts to combat II. The Board's authority to approve the agency parallels the money laundering; (iv) whether the appropriate supervisors in the continuing authority of the state of New York to license offices of a home country may share information on the bank's operations with the foreign bank. The Board's approval of this application does not Board; (v) whether the bank and its U.S. affiliates are in compliance supplant the authority of the state of New York to license Bank's with U.S. law; (vi) the needs of the community; and (vii) the bank's New York offices in accordance with any terms or conditions that it record of operation. may impose.

Index

Cl Index A Trends in consumer adoption of e-banking, AI04-114 ACCOUNT debits and overdrafts, AI06 University of Michigan Surveys of Consumers, A119-120 Articles Assets and liabilities, U.S. families, A I-56 Changes in U.S. Family Finances from 2004 to 2007: Evidence Avery, Robert B., article, A169-211 from the Survey of Consumer Finances, AI-56 Appendix, survey procedures and statistical measures, A52-55 B Assets, A 15--37 BANK Holding Company Act, orders issued under Checking accounts, decisions about, A21 AlIianz SE, B71-73 Data used in the article, A6 Allied Irish Banks, p.J.c" B81-85 Errata, A56 American Express Company, B20-23 Financial services, shopping for, A 12-13 American Express Travel Related Services, B20-23 Income, A3-10 Bank of America Corporation, B 13-19 Liabilities. A37 -52 Caja de Ahorros y Monte de Piedad de Madrid, B23-26 Net worth, AIO-15 Caja Madrid Cibeles SA, B23-26 Financial Crisis and U.S. Cross-Border Financial Flows, The, CIT Group Inc" B26-29 A147-167 CM Florida Holdings, Inc" B23-26 Banking developments, A 156-160 First Empire State Holding Company, B81-85 Conclusion and global overview: Similar porfolio shifts in GMAC LLC, B29-34 other country statistics?, AI64-167 M&T Bank Corporation, B81-85 Difficulties in assessing the market value of securities during Manufacturers and Traders Trust Company. B81-85 the financial turmoil, A 153 Mitsubishi UFJ Financial Group, Inc" B34-39 F1ight-to-safety shifts in portfolios during the crisis. A148-156 Morgan Stanley, B86-98 Reductions in foreign exposure in securities. banking, and PNC Financial Services Group, Inc" The. BI-13 nonbank positions, A 160-163 Protective Life Corporation, B64-80 Treasury International Capital (TIC) data reporting system, AI49 Southern Bancshares (N.C.), Inc., B66-70 HMDA 2008 Data, The: The Mortgage Market during a Wells Fargo & Company, B39-52 Turbulent Year, A169-211 Banking industry, U.S" A57-97 2008 HMDA data on loan pricing, A180-186 Bech, Morten L., article, A57-97 2008: A turbulent year, A 170 Bell, Catherine 1., article, A99-121 Changes in total lending by borrower and area characteristics. Bertaut. Carol c., article, A147-167 AI 94-200 Bhutta, Neil, article, A 169-211 Differences in lending outcomes by race. ethnicity, and sex of Brevoort, Kenneth P., article, A169-211 the horrower, A201-21O Bucks, Brian K., article, A I-56 Disposition of applications by loan characteristics in 2008, AI77-180 C Mortgage market trends from the HMDA data. AI7O-I77 Private mortgage insurance data, appendix B, A211 CANNER, Glenn 8., article, A 169-211 Requirements of Regulation C (Home Mortgage Disclosure). Capacity utilization, A125-145 appendix A, A210-211 Changes in US. Family Finances from 2004 to 2007: Evidence Surge in FHA and VA lending, A186-194 from the Survey of Consumer Finances, AI-56 Industrial Production and Capacity Utilization: The 2009 Annual Checking accounts, decisions about, A21 Revision, A125-145 Consumers, payment methods and trends, A99-121 Appendix tables, A137-145 Cross-border securities, purchases, A147-167 Results of the revision. A126-132 Current account deficit. US., A147-167 Technical aspects of the revision, A132-136 Profits and Balance Sheet Developments at U.S, Commercial D Banks in 2008, A57-97 DEMOGRAPHICS, income and net worth, AI-56 Adjustments to balance sheet data for structure activity, A62 Appendix tables, A87-97 E Balance sheet developments, A61-74 E-BANKlNG, A99-121 Developments in early 2009, A84-86 E-payment methods and trends, A99-121 International operations of U.S, commercial banks, A83-84 Economic indicators. industrial production and capacity utilization, Trends in profitability, A 74-83 A125-145 US. Households' Access to and Use of Electronic Banking, Economy, output, A125-145 1989-2007, A99-121 Electronic banking, A99-121 Accessibility of banking services, A99-104 Electronic payments and trends, A99-121 Appendix A: Sources of data, A118-119 Enforcement actions (See Litigation, final enforcement decisions) Changes in consumer attitudes toward e-banking over time, Errata notice, Changes in US. Family Finances from 2004 to 2007: AII4-118 Evidence from the Survey of Consumer Finances, A56 Expansion of e-banking, AI18 How would you like to pay for that?, AIOO F Identity theft, risk reduction, A 117 Mobile banking and payments. A 112·113 FANNIE MAE and Freddie Mac, agency debt, Al54 Policy challenges and opportunities, A I 18 Federal Reserve Act, orders issued under Survey of Consumer Finances, AI19 (see a/so Articles) ICE US Trust LLL, B73-76

C2 Federal Reserve Bulletin • 2009 Finances, US. families, A I-56 Second quarter, 2009, B81-100 Financial Crisis and US. Cross-Border Financial Flows, The, Third quarter, 2009, B101-102 A147-167 Lehman Brothers Holdings Inc., AI49 Financial crisis of 2007-2008, effect on cross-border investment, Litigation, final enforcement decisions A 147-167 Chupik, G. Craig, B79-8O Financial crisis, effect on housing market, A 169-211 Dulaney, Kelly M .. B61-63 Financial inflows and outflows, cross-border, A147-167 Rusciano, Francesco, and UBS AG, BIOO Financial services, shopping for, A 12 Loans, mortgages, A169-211 Foreign investment in the United States, A147-167 M G MACH, Tmci L., article, AI-56 GIBBS, Christa N., article, A169-211 Mobile banking and payments, A112 Moore, Kevin B., article, AI-56 H Mortgage data, A 169-211 HALL, Anne, article, A125-145 N HMDA 2008 Data, The: The Mortgage Market during a Turbulent Year, AI69-211 NATIONAL output, industrial production and capacity utilization, Hogarth, Jeanne M., article, A99-121 A125-145 Home Mortgage Disclosure Act of 1975 (HMDA), A 169-2 I I Noncash payments, United States, A99-121 Homeownership, A 169-21 1 o Housing data, A169-211 OUTPUT, manufacturing: Mining and electric and gas utilities, I A125-145 IDENTITY theft, risk reduction, AI17 P Income and net worth, US. families, AI-56 Industrial Production and Capacity Utilization: The 2009 Annual PHYSICAL output: Factories, mines, and utilities, A125-145 Revision, A125-145 Pounder, Laurie. article, A147-167 International Banking Act, orders issued under Profits and Balance Sheet Developments at US. Commercial Banks Banco Espfrito Santo de Investimento, S.A., B53-54 in 2008, A57-97 Canadian Imperial Bank of Commerce, BIOI-102 China Construction Bank Corporation, B54-57 R Corpbanca, B57-59 RICE, Tara. article, A57-97 DekaBank Deutsche Girozentrale, B77-78 Robbins, Eric, article, A99-121 Monte de Piedad y Caja de Ahorros San Fernando de Huelva, Jerez y Sevilla, B59-61 S Standard Chartered Bank, B98-100 SECURITIES, foreign and US. purchases, A147-167 International investment, A 147-167 Securities, market value assessment during financial turmoil, A 153 Survey of Consumer Finances, A 119 (see also Articles) K KENNICKELL, Arthur B., article, AI-56 T TREASURY International Capital (TIC) data reporting system. L AI49 LEGAL Developments u (See also Bank Holding Company Act, orders issued under; Federal Reserve Act, orders issued under; International Banking Act, US. banking industry, A57 -97 orders issued under) US. Households' Access to and Use of Electronic Banking, First quarter, 2009, B64-80 1989-2007, A99-121 Fourth quarter. 2008, B 1-63 University of Michigan Surveys of Consumers, A 119120

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