Federal Reserve Bulletin August 1998

VOLUME 84 • NUMBER 8 • AUGUST 1998

FEDERAL RESERVE

BULLETIN

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, WASHINGTON, D.C.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Table of Contents

585 MONETARY POLICY REPORT TO THECONGRESS

The U.S. economy posted significant furthergains in the first half of 1998. The unemploy-ment rate dropped to its lowest level in nearlythirty years, and inflation remained subdued.Real output rose appreciably, on balance,although much of the advance apparentlyoccurred early in the year. The turmoil thaterupted in some Asian countries last year hascreated considerable uncertainty and risk for theU.S. economy. Even so, the members of theBoard of Governors and the Federal ReserveBank Presidents expect the economy to expandmoderately, on average, over the next year and ahalf. With labor markets remaining tight andsome of the special factors that helped restraininflation in the first half of 1998 unlikely to berepeated, inflation is anticipated to run some-what higher in the second half of 1998 and in1999.

604 RECENT CHANGES TO THE FEDERALRESERVE'S SURVEY OF TERMS OFBUSINESS LENDING

The Federal Reserve's quarterly Survey ofTerms of Business Lending, which has beenconducted for more than twenty years, collectsinformation on interest rates and other character-istics of commercial bank business loans. Thesurvey has been changed from time to time torecognize innovations in bank lending practicesand to improve the measurement of the desiredinformation. The most recent changes tookeffect with the May 1997 survey. The majorimprovement was the addition of an item mea-suring loan risk. In addition, the reporting panel,which had been limited to domestically char-tered commercial banks was expanded toinclude a sample of U.S. branches and agenciesof foreign banks, which now account for a sig-nificant proportion of business lending to U.S.firms. This article discusses the most recentchanges made to the survey and presents someinformation now available from the new itemsbeing reported. It also summarizes information

about the use of loan risk ratings from consulta-tions conducted with a sample of the surveyrespondents during the process of planning therevisions to the survey.

616 INDUSTRIAL PRODUCTION AND CAPACITYUTILIZATION FOR JUNE 1998

Industrial production declined 0.6 percent inJune, to 128.1 percent of its 1992 average, aftera revised gain of 0.3 percent in May. Capacityutilization dropped 0.8 percentage point in June,to 81.6 percent.

619 STATEMENTS TO THE CONGRESS

Laurence H. Meyer, Member, Board of Gover-nors, discusses antitrust issues related to merg-ers and acquisitions between U.S. banks andbetween banking organizations and other finan-cial services firms and says that the Boarddevotes considerable resources to the case-by-case evaluation of merger proposals. Further, theFederal Reserve's (along with the Departmentof Justice's) administration of the antitrust lawsin banking has helped to maintain competitivebanking markets in the midst of the most signifi-cant consolidation of the banking industry inU.S. history, before the House Committee on theJudiciary, June 3, 1998.

627 Edward M. Gramlich, Member, Board of Gover-nors, speaking as past chair of the 1994-96Quadrennial Advisory Council on Social Secu-rity, testifies on social security reform and saysthat the approach he advocates preserves theimportant social protections of social securityand achieves long-term financial balancethrough benefit cuts that would be felt mainly byhigh wage workers, with no reliance at all on thestock market to finance social security benefitsand no worsening of the finances of the HealthInsurance Trust Fund, before the Subcommitteeon Social Security of the House Committee onWays and Means, June 3, 1998.

628 Roger W. Ferguson, Jr., Member, Board of Gov-ernors, discusses the Federal Reserve's perspec-tive on the implications of developments in


electronic commerce generally and electronicpayments specifically and says that the FederalReserve anticipates minimal impact in the nearterm from emerging electronic payments andfrom electronic commerce more broadly on itscore central banking responsibilities, includingits ability to implement monetary policy, itssupervisory responsibilities, and its operationalrole in the clearing and settlement of payments,before the Subcommittee on Finance and Haz-ardous Materials of the House Committee onCommerce, June 4, 1998.

632 Alan Greenspan, Chairman, Board of Gover-nors, presents an update on economic conditionsin the United States and says that the U.S. econ-omy has remained strong this year despite evi-dence of substantial drag from Asia, and at thesame time, inflation has remained low. This setof circumstances is not what historical relation-ships would have led us to expect at this point inthe business expansion, and the Federal Reserveremains watchful for signs of potential inflation-ary imbalances even as the economy continuesto perform more impressively than it has in avery long time, before the Joint Economic Com-mittee, June 10, 1998.

636 The Board of Governors, in a written statement,submits its views on issues relating to the poten-tial application of the Commodity Exchange Act(CEA) to over-the-counter (OTC) derivativestransactions and says that it believes that theapplication of the CEA to institutional transac-tions in OTC derivatives would be inappropriateand unnecessary to achieve public policy objec-tives with respect to such transactions. More-over, the application of the CEA to such trans-actions would call into question the legalenforceability of at least some, and perhapsmany, of those transactions. In those circum-stances, the potential losses to counterpartiescould be so large as to pose a threat to thefinancial condition of the counterparties and pro-vide a significant shock to the financial systemas a whole, before the Subcommittee on RiskManagement and Specialty Crops of the HouseCommittee on Agriculture, June 10, 1998.

639 Herbert A. Biern, Associate Director, Divisionof Banking Supervision and Regulation, Boardof Governors, discusses the Federal Reserve'srole in the government's anti-money-launderingefforts and interagency efforts to develop andissue effective "Know Your Customer" rules for

the banking industry and says that the FederalReserve's efforts to attack the money launderingproblem continue to be one of its highest banksupervisory priorities and that it will continuecooperative efforts with other bank supervisorsand the law enforcement community to developand implement effective anti-money-launderingprograms, before the House Committee onBanking and Financial Services, June 11, 1998.

643 Chairman Greenspan discusses the currentmerger wave that is affecting a wide range ofindustries in the American economy—the fifthsuch wave in this country during the pastcentury—and says that the regulatory climate inantitrust has moved in a more market-orienteddirection. Further, in reacting to the currentmerger wave, we need to appropriately accountfor the complexity and dynamism of modernfree markets and to enhance conditions in ourmarket system that will foster the competitionand innovation so vital to a prosperous econ-omy, before the Senate Committee on the Judi-ciary, June 16, 1998.

647 Chairman Greenspan presents the views of theFederal Reserve on the need to enact legislationto modernize the U.S. financial system andexpresses the Board's strong support forH.R. 10, the Financial Services Act of 1998,which achieves this objective by removing out-dated restrictions that currently limit the abilityof U.S. financial service providers, includingbanks, insurance companies, and securitiesfirms, to affiliate with each other and enter eachother's markets. Further, H.R. 10 uses the hold-ing company structure, and not the universalbank, as the appropriate structure to allow thenew securities and insurance affiliations, whichis critical because it provides better protectionfor our banking and financial system withoutdamaging the national or state bank charters orlimiting in any way the benefits of financialmodernization, before the Senate Committee onBanking, Housing, and Urban Affairs, June 17,1998.

659 Ernest T. Patrikis, First Vice President, FederalReserve Bank of New York, discusses the impli-cations of the Year 2000 (Y2K) computer prob-lem for international banking and finance, in hiscapacity as chairman of the Joint Year 2000Council, and says that the international financialcommunity has much work to do to prepareitself for the challenges posed by the Y2K prob-


lem. Further, one of the Federal Reserve's majorconcerns will be the possible impact of the Y2Kproblem on the functioning of the internationalfinancial system as a whole, although only firmsthemselves have the ability to address the Y2Kproblems that exist within their own organiza-tions, before the House Committee on Bankingand Financial Services, June 23, 1998.

668 ANNOUNCEMENTS

Adoption of a revised Policy Statement onPrivately Operated Multilateral SettlementSystems.

Proposal to restrict the last fifteen minutes of theoperating day for Fedwire funds transfers tofunds transfers sent and received by depositoryinstitutions for their own account; requestfor comments on an interpretation and twoproposed rules exempting certain transactionsbetween an insured depository institution andits affiliates under section 23A of the FederalReserve Act.

Issuance of guidance for bank examinersin evaluating banking organizations' riskmanagement.

Scheduling of a public meeting on the proposedacquisition of BankAmerica Corporation byNationsBank Corporation.

Scheduling of a public meeting on the proposedacquisition of Citicorp by Travelers Corp.

Sponsorship by the Federal Reserve of a statisti-cal study of consumer finances.

Publication of Directory: Community Develop-ment Investments.

Publication of the June 1998 update to the BankHolding Company Supervision Manual.

673 LEGAL DEVELOPMENTS

Various bank holding company, bank servicecorporation, and bank merger orders; and pend-ing cases.

701 MEMBERSHIP OE THE BOARD OFGOVERNORS OF THE FEDERAL RESERVESYSTEM, 1913-98

List of appointive and ex officio members.

Al FINANCIAL AND BUSINESS STATISTICS

These tables reflect data available as ofJune 26, 1998

A3 GUIDE TO TABULAR PRESENTATION

A4 Domestic Financial StatisticsA42 Domestic Nonfinancial StatisticsA50 International Statistics

A63 GUIDE TO STATISTICAL RELEASES ANDSPECIAL TABLES

A76 INDEX TO STATISTICAL TABLES

A78 BOARD OF GOVERNORS AND STAFF

A80 FEDERAL OPEN MARKET COMMITTEE AND

STAFF; ADVISORY COUNCILS

A82 FEDERAL RESERVE BOARD PUBLICATIONS

A84 MAPS OF THE FEDERAL RESERVE SYSTEM

A86 FEDERAL RESERVE BANKS, BRANCHES,AND OFFICES

PUBLICATIONS C O M M I T T E E

Lynn S. Fox, Chairman • S. David Frost • Donald L. Kohn • J. Virgil Mattingty, Jr.• Michael J. Prell • Dolores S. Smith • Richard Spillenkothen • Edwin M. Truman

The Federal Reserve Bulletin is issued monthly under the direction of the staff publications committee, This committee is responsible for opinions expressedexcept in official statements and signed articles. It is assisted by the Economic Editing Section headed by S. Ellen Dykes, the Multimedia Technologies Centerunder the direction of Christine S. Griffith, and Publications Services supervised by Linda C. Kyles.


Monetary Policy Report to the Congress

Report submitted to the Congress on July 21, 1998,pursuant to the Full Employment and BalancedGrowth Act of 1978

MO\LI\\KY l-'oiICY \xn inr

/:.( v.i.Yr/.u/< Or-1 LOOK

The U.S. economy posted significant further gains inthe first half of 1998. The unemployment ratedropped to its lowest level in nearly thirty years, andinflation remained subdued. Real output rose appre-ciably, on balance, although much of the advanceapparently occurred early in the year. Householdspending and business fixed investment, supported bythe ongoing rise in equity prices and the continuedlow level of long-term interest rates, appear to havemaintained considerable momentum this year. Thesizable advance in capital spending and the resultingadditions to the capital stock should help bolsterlabor productivity—the key to rising living standards.

Yet the news this year has not been uniformlygood. The turmoil that erupted in some Asian coun-tries last year has generated major concerns about theoutlook for those economies and the repercussionsfor other nations, including the United States. SeveralAsian countries have had sharp contractions in eco-nomic activity, and others have experienced distinctlysubpar growth. Heightened uneasiness among inter-national investors has induced portfolio shifts awayfrom Asia and, to some extent, from other emergingmarket economies.

These difficulties have created considerable uncer-tainty and risk for the U.S. economy, but they havealso helped to contain potential inflationary pressuresin the near term by reducing import prices andrestraining aggregate demand. In particular, the sub-stantial rise in the foreign exchange value of thedollar has boosted our real imports and—togetherwith the slower growth in Asia—depressed our realexports. At the same time, the runup in the dollar andslack economic conditions in Asia have helpedproduce a sharp drop in the dollar prices of oil andother commodities and have pushed down other

NOTE. The charts for the report are available on request fromPublications Services, Mail Stop 127, Board of Governors of theFederal Reserve System, Washington, DC 20551.

import prices. Shifts in preferences toward dollar-denominated assets in combination with downwardrevisions to forecasts of inflation and demand havehelped to reduce our interest rates; the lower interestrates have boosted household and business spending,offsetting a portion of the damping of demand fromthe foreign sector.

The Asian crisis is likely to continue to restrainU.S. economic activity in coming quarters. The sizeof the effect will depend in large part on how quicklythe authorities in the Asian nations can put theirtroubled financial systems on a sounder footing andcarry out other essential economic reforms. Deterio-rating conditions in many countries during the pastfew months created added pressures for reform, andthey underscored the depth and scope of the problemsthat must be addressed.

Despite the pronounced weakening of our tradebalance, the already tight U.S. labor market has comeunder further strain this year owing to robust growthof domestic demand. As a result, the outlook forinflation has taken on a greater degree of risk. Con-sumer prices actually rose a bit less rapidly in the firsthalf of 1998 than they did in 1997, but transitoryfactors—the drop in oil prices, the runup in the dollar,and weak economic activity in Asia—exerted consid-erable downward pressure on domestic prices. Thesefactors will not persist indefinitely. Meanwhile, thepool of individuals interested in working but who arenot already employed has continued to shrink. Theextraordinary tightness in labor markets has gener-ated a rising trend of increases in wages and relatedcosts, although faster productivity growth hasdamped the effect on business costs so far.

In conducting monetary policy in the first half of1998, the Federal Open Market Committee (FOMC)closely scrutinized incoming information for signsthat the strength of the economy and the taut labormarket were likely to boost inflation and threaten thedurability of the expansion. However, despite slightlylarger increases in the consumer price index (CPI) insome months, inflation remained moderate on thewhole. Moreover, the FOMC expected that aggregatedemand would slow appreciably because of a risingtrade deficit and a considerable slackening in domes-tic spending. Although the Committee was acutelyaware of the uncertainties in the economic outlook, it


586 Federal Reserve Bulletin I August 1998

believed that the deceleration in demand—and theassociated modest easing of pressures on resources—could well be sufficient to limit any deterioration inunderlying price performance. On balance, theFOMC chose to keep the intended federal funds rateat 5'/2 percent.

./'<'/.''. T . / // n I j1, 1,11 ,-\ / , / ,'7, ( 7 V. lili

Output grew rapidly in the first quarter, with realgross domestic product (GDP) estimated to haverisen 5'/2 percent at an annual rate. Business fixedinvestment soared after a weak fourth quarter, andconsumption and housing expenditures expanded at astrong clip. In addition, contrary to the expectationsof many forecasters, inventory investment rose sub-stantially from its already hefty fourth-quarter pace,with the rise contributing more than 1 Vi percentagepoints to overall GDP growth. At the same time, thecumulative effect of the appreciation of the dollar andthe faster growth of demand here than abroad resultedin a sharp drop in real net exports, with both rapidimport growth and the first quarterly drop in exportsin four years. Employment continued to advancebriskly, and the unemployment rate held steady at43/4 percent. Hourly compensation accelerated some-what when measured on a year-over-year basis, butimpressive productivity growth once again helped torestrain the increase in unit labor costs. The CPI roseonly lA percent at an annual rate over the first threemonths of the year, as a sharp drop in energy pricesoffset price increases elsewhere.

Falling long-term interest rates and rising equityprices over the previous year provided substantialimpetus to household and business spending in thefirst quarter. Interest rates dropped sharply further inearly January, and although they moved up a littleover the remainder of the quarter, nominal yields onlong-term Treasury securities were among the lowestin decades. Interest rates continued to benefit fromthe improvement in the federal budget and the pros-pect of reduced federal borrowing in the future; rateswere also restrained to a significant extent by theeffects of the Asian crisis. Equity prices increasedsharply in the first quarter, extending their remark-able gains of the previous three years in spite ofdisappointing news on corporate profits. Householdsand firms borrowed at a vigorous pace in the firstquarter, and growth in the debt of domestic nonfinan-cial sectors picked up from the fourth quarter of1997, as did the growth of the monetary aggregates.

At their March meeting, the members of the FOMCconfronted unusual crosscurrents in the economic

outlook. On the price side, the FOMC noted that,although the incoming data were quite favorable,transitory factors were possibly masking underlyingtendencies toward higher inflation. Moreover, theavailable data on household and business spend-ing confirmed the impressive strength of domesticdemand and highlighted the possibility that develop-ments in the external sector might not provide suffi-cient offset in coming quarters to avoid a buildupof inflation pressures. At the same time, the FOMCnoted the substantial uncertainty surrounding theprospects for the Asian economies. Balancing theseconsiderations, the FOMC kept its policy stanceunchanged but noted that recent information hadaltered the inflation risks enough to make tighteningmore likely than easing in the period ahead.

The second quarter brought both a marked furtherdeterioration in the outlook for Asia and some indi-cations that the U.S. economy might be cooling. InAsia, evidence of steep output declines in severalcountries was combined with mounting concern thateconomic and financial problems in Japan were notlikely to be resolved as quickly as many observershad hoped or expected. One result was a further risein the exchange value of the dollar and a decline inlong-term U.S. interest rates. Increasing investor con-cern about emerging market economies raised riskspreads on external debts in Asia, Russia, and LatinAmerica.

The higher value of the dollar and the depressedincome in many Asian countries continued to taketheir toll on U.S. exports and to boost imports in thesecond quarter. In addition, a marked slackeningin the pace of inventory accumulation, which wasamplified by the effects of a strike in the motorvehicle industry, was reflected in a sharp slowingin domestic demand. Nonetheless, the utilization oflabor resources remained very high: In the secondquarter, the unemployment rate averaged a bit lessthan 4'/2 percent, its lowest quarterly reading innearly thirty years. The twelve-month change in aver-age hourly earnings indicated that wages were risingsomewhat more rapidly than they had a year earlier.And the CPI rose faster in the second quarter than inthe first, mainly reflecting a smaller drop in energyprices.

Financial conditions in the second quarter and intoJuly remained supportive of domestic spending.Yields on private securities declined, although lessthan Treasury yields, as quality spreads widened abit. Equity prices rose further in early April beforefalling back over the next two months in responseto renewed earnings disappointments. Prices thenrebounded substantially, with most major indexes


Monetary Policy Report to the Congress 587

hitting record highs in July. The growth of moneyand credit slowed a little on balance from the first-quarter pace but remained buoyant. Banks and otherlenders continued to compete vigorously, extendingcredit on generally favorable terms as they respondedin part to the sustained healthy financial condition ofmost businesses and households.

The FOMC left the intended federal funds rateunchanged at its May and June-July meetings. At theMay meeting, the FOMC reiterated its earlier con-cern that the robust expansion of domestic finaldemand, supported by very positive financial con-ditions, had raised labor market pressures to a pointthat might precipitate an upturn in inflation over time.Yet the FOMC believed that the growth of economicactivity would slow. It also judged that the risk ofsignificant further deterioration in Asia, which coulddisrupt global financial markets and impair economicactivity in the United States, was rising somewhat.

Economic Projections for 199H and 1999

The members of the Board of Governors and theFederal Reserve Bank Presidents, all of whom par-ticipate in the deliberations of the FOMC, expecteconomic activity to expand moderately, on average,over the next year and a half. For 1998 as a whole,

1. economic pi"u|cciiPercent

Indicator

Change, fourth quarterto fourth quarter'Nominal GDPReal GDPConsumer price index2 ..

Average levelin the fourth quarterCivilian unemployment

rate

Change, fourth quarterto fourth quarter'Nominal GDPReal GDPConsumer price index2 . .

Average levelin the fourth quarterCivilian unemployment

rate

m^ lor IWN

Federal Reserve governorsand Reserve Bank presidents

Range Centraltendency

Administration

1998

4'/i-5 416-5 4.22VJ-3'/* 3-3'A 2.4114-2'/* WA-2 1.6

1999

4-5'« 4'/4-5 4.12-3 2-2'/2 2.0

P/4-3 2-2 'A 2.1

4'/4-4% 41/2-4% 5.0

1. Change from average for fourth quarter of previous year to average forfourth quarter of year indicated.

2. All urban consumers.

the central tendency of their forecasts for real GDPgrowth spans a range of 3 percent to 3 lA percent. For1999, these forecasts center on a range of 2 percent to2'/2 percent The civilian unemployment rate, whichaveraged a bit less than 4'/2 percent in the secondquarter of 1998, is expected to stay near this levelthrough the end of this year and to edge higher in1999. With labor markets remaining tight and someof the special factors that helped restrain inflation inthe first half of 1998 unlikely to be repeated, inflationis anticipated to run somewhat higher in the secondhalf of 1998 and in 1999.

The economy is entering the second half of 1998with considerable strength in household spending andbusiness fixed investment. Consumers are enjoyingexpanding job opportunities, rising real incomes, andhigh levels of wealth, all of which are providing themwith the confidence and wherewithal to spend. Thesefactors, in conjunction with low mortgage interestrates, are also bolstering housing demand. Businessfixed investment appears robust as well: Financialconditions remain conducive to capital spending, andfirms no doubt are continuing to seek out opportuni-ties for productivity gains in an environment of rapidtechnological change, falling prices for high-techequipment, and tight labor markets.

Nonetheless, a number of factors are expected toexert some restraint on the expansion of activity inthe quarters ahead. The demand for U.S. exports willcontinue to be depressed for a while by weak activityabroad, on average, and by the strong dollar, whichwill also likely continue to boost imports. The effectsof these external sector developments on employ-ment and income growth have yet to materializefully. In addition, although financial conditions aregenerally expected to be supportive, real outlays onhousing and business equipment have reached suchhigh levels that gains from here are expected to bemore moderate.

With the plunge in energy prices in early 1998unlikely to be repeated, most FOMC participantsexpect the CPI for all urban consumers to rise morerapidly in the second half of 1998 than it did inthe first half, resulting in an increase in the CPI ofVA percent to 2 percent for 1998 as a whole. Thepickup in the second half should be limited, however,by further decreases in non-oil import prices, ampledomestic manufacturing capacity, and low expectedinflation. Looking ahead to next year, the centraltendency is for an increase in the CPI of 2 percent to2'/2 percent. Absent a further rise in the dollar, the fallin non-oil import prices should have run its course.Moreover, even with the expected edging higher ofthe unemployment rate next year, the labor market


588 Federal Reserve Bulletin • August 1998

will remain tight, suggesting potential ongoing pres-sures on available resources that would tend to raiseinflation a bit. The FOMC will remain alert to thepossibility of underlying imbalances in the economythat could generate a persisting pickup in inflation,which would threaten the economic expansion.

As noted in past monetary policy reports, theBureau of Labor Statistics is in the process of imple-menting a series of technical adjustments to make theCPI a more accurate measure of price change. Theseadjustments and the regular updating of the marketbasket are estimated to have trimmed CPI inflationsomewhat over 1995-98, and a significant furtheradjustment is scheduled for 1999. All told, the pub-lished figures for CPI inflation in 1999 are expectedto be more than V2 percentage point lower than theywould have been had the Bureau retained the meth-ods and formulas in place in 1994. In any event,the FOMC will continue to monitor a variety of pricemeasures besides the CPI as it attempts to gaugeprogress toward the long-run goal of price stability.

Federal Reserve officials project somewhat fastergrowth in real GDP and slightly higher inflationin 1998 than does the Administration. The Adminis-tration's projections for the growth in real GDP andinflation in 1999 are around the lower end of theFOMC participants' central tendencies.

Money ami Debt Ranges for I99H and 1999

At its most recent meeting, the FOMC reaffirmed theranges for 1998 growth of money and debt that it hadestablished in February: 1 percent to 5 percent forM2, 2 percent to 6 percent for M3, and 3 percent to7 percent for the debt of the domestic nonfinancialsectors. The FOMC set these same ranges for 1999on a provisional basis.

Once again, the FOMC chose the growth rangesfor the monetary aggregates as benchmarks forgrowth under conditions of price stability and histori-cal velocity behavior. For several decades before1990, the velocities of M2 and M3 (defined as theratios of nominal GDP to the aggregates) behavedin a fairly consistent way over periods of a year or

2. RaiiL'cs lor growth ul" monetary and ilobt ugarvsates

Percent

Aggregate

M2M3Debt

1997 1998 Provisional for1999

1-5 1-5 1-52-6 2-6 2-63-7 3-7 3-7

NOTE. Change from average for founh quarter of preceding year lo averagefor fourth quarter of year indicated.

more. M2 velocity showed little trend but variedpositively from year to year with changes in a tradi-tional measure of M2 opportunity cost, defined as theinterest forgone by holding M2 assets rather thanshort-term market instruments such as Treasury bills.M3 velocity moved down a bit over time, as deposi-tory credit and the associated elements in M3 tendedto grow a shade faster than GDP. In the early 1990s,these patterns of M2 and M3 behavior were dis-rupted, and the velocities of both aggregates climbedwell above the levels that were predicted by pastrelationships. However, since 1994 the velocities ofM2 and M3 have again moved roughly in accord withtheir pre-1990 experience, although their levelsremain elevated.

The recent return to historical patterns does notimply that velocity will be fully predictable or eventhat all movements in velocity can be completelyexplained in retrospect. Some shifts in velocity arisefrom household and business decisions to adjust theirportfolios for reasons that are not captured by simplemeasures of opportunity cost. Some shifts in velocityarise from decisions of depository institutions tocreate more or less credit or to fund credit creationin different ways. All these decisions are shaped bythe rapid pace of innovation in financial institutionsand instruments. Between 1994 and early 1997, M2velocity drifted somewhat higher, probably owing tosome reallocation of household savings into bond andequity markets. But M2 velocity has declined overthe past year despite little change in its traditionallydefined opportunity cost. One explanation may bethat the flatter yield curve has reduced the return onlonger-term investments relative to the bank depositsand money market mutual funds in M2. Another partof the story may be the booming stock market, whichhas reduced the share of households' financial assetsrepresented by monetary assets and may have encour-aged households to rebalance their portfolios byincreasing their M2 holdings. M3 velocity hasdropped more sharply over the past year, with stronggrowth in large time deposits and in institutionalmoney funds that are increasingly used by businessesfor cash management.

If the velocities of M2 and M3 follow their averagehistorical patterns over the remainder of 1998 and thegrowth of nominal GDP matches the expectations ofFederal Reserve policymakers, these aggregates willfinish this year above the upper ends of their respec-tive ranges. Part of this relatively rapid money growthreflects nominal GDP growth in excess of that consis-tent with price stability and sustainable growth of realoutput; the rest represents a decline in velocity.Absent unusual changes in velocity in 1999, policy-



makers' expectations of nominal GDP growth implythat M2 and M3 will be in the upper ends of theirprice-stability growth ranges next year. The debt ofthe domestic nonflnancial sectors is expected toremain near the middle of its range this year and in1999.

In light of the apparent return of velocity changesto their pre-1990 behavior, some FOMC membershave been giving the aggregates greater weight inassessing overall financial conditions and the thrustof monetary policy. However, velocity remains some-what unpredictable, and all FOMC members monitora wide variety of other financial and economic indica-tors to inform their policy deliberations. The FOMCdecided that the money and debt ranges are best usedto emphasize its commitment to achieving price sta-bility, so it again set the ranges as benchmarks forgrowth under price stability and historical velocitybehavior.

The

Spending

ONOMIC A.\l) ])[-\'hl.<>lJMI-:\TS

/.v

The U.S. economy continued to perform well in thefirst half of the year. The economic difficulties inAsia and the strong dollar reduced the demand forour exports and intensified the pressures on domesticproducers from foreign competition. But these effectswere outweighed by robust domestic final demand,owing in part to supportive financial conditions,including a higher stock market, ample availability ofcredit, and long-term interest rates that in nominalterms were among the lowest in many years. Sharpswings in inventory investment were mirrored inconsiderable unevenness in the growth of real GDP,which appears to have slowed markedly in the secondquarter after having soared to nearly 5 V2 percent at anannual rate in the first quarter. Nonetheless, over thefirst half as a whole, the rise in real output was largeenough to support sizable gains in employment andto push the unemployment rate down to the range of4'/4 percent to 4'/2 percent, the lowest in decades.

The further tightening of labor markets in recentquarters has been reflected in a more discernibleuptilt to the trend in hourly compensation. But priceinflation remained subdued in the first half of theyear, held down in part by a sharp decline in energyprices and lower prices for non-oil imports. Intensecompetition in product markets, ample plant capacity,ongoing productivity gains, and damped inflationexpectations also helped to restrain inflation pres-sures in the face of tight labor markets.

The factors that fueled the sizable increase in house-hold expenditures in 1997 continued to spur spendingin the first half of 1998: Growth in employment andreal disposable income remained very strong, andhouseholds in the aggregate enjoyed significant fur-ther gains in net worth. Reflecting these develop-ments, sentiment indexes suggest that consumers con-tinued to feel extraordinarily upbeat about the currentand prospective condition of the economy and theirown financial situations.

In total, real consumer outlays rose at an annualrate of 6 percent in the first quarter, and the availabledata point to another large increase in the secondquarter. Increases in spending were broad-based, butoutlays for durable goods were especially strong.Declining prices and ongoing product innovationcontinued to stimulate demand for personal comput-ers and other home electronic equipment. In addition,purchases of motor vehicles were sustained by a com-bination of solid fundamentals and attractive pricing.Indeed, since 1994, sales of light vehicles have beenrunning at a brisk pace of 15 million units (annualrate), and in the second quarter, a round of veryattractive manufacturers' incentives helped lift salesto a pace of 16 million units.

Spending on services also remained robust in thefirst half of the year, with short-run variations reflect-ing in part the effects of weather on household energyuse; outlays on personal business services, includingthose related to financial transactions, and on recre-ation services continued to exhibit remarkablestrength. In addition, real outlays for nondurablegoods, which rose only moderately last year, grewabout 6V2 percent at an annual rate in the first quarter,and they appear to have posted another sizableincrease in the second quarter.

Real disposable income—that is, after-tax incomeadjusted for inflation—remained on a strong uptrendin early 1998: It rose about 4 percent at an annual ratebetween the fourth quarter of 1997 and May 1998.This increase in part reflected a sharp rise in aggre-gate wages and salaries, which were boosted bysizable gains in both employment and real wagerates; dividends and nonfarm proprietors' incomesalso rose appreciably. However, growth in after-taxincome (as measured in the national income andproduct accounts) was restrained by large increasesin personal income tax payments—likely owing inpart to taxes paid on realized capital gains; capitalgains—whether realized or not—are not included


590 Federal Reserve Bulletin Tl August 1998

in measured income. Reflecting the movements inspending and measured income, the personal savingrate fell from an already low level of about 4 percentin 1997 to 3'/2 percent during the first five months of1998.

RcMiL'iilial InwMincnt

Housing activity continued to strengthen in the firsthalf of 1998, especially in the single-family sector,where starts rose noticeably and sales of both newand existing homes soared. Indeed, the average levelof single-family starts over the first five months of theyear—1 VA million units at an annual rate—was 9 per-cent above the pace for 1997 as a whole. Moreover,surveys by the National Association of Homebuilderssuggested that housing demand remained vigorousat midyear, and the Mortgage Bankers Associationreported that loan applications for home purchaseshave been around all-time highs of late.

The strong demand for homes has contributed tosome firming of house prices, which are now rising inthe neighborhood of 3 percent to 5 percent per year,according to measures that control for shifts in theregional composition of sales and attempt to mini-mize the effects of changes in the mix of the struc-tural features of houses sold. In nominal terms, theseincreases are well within the range of recent years;however, in real terms, they are among the largestsince the mid-1980s—a development that shouldreinforce the investment motive for homeownership.Of course, rising house prices may make purchasinghomes more difficult for some families. But, withincome growth strong and mortgage rates around7 percent (thirty-year conventional fixed-rate loans),homeownership is as affordable as it has been at anytime in the past thirty years. Moreover, innovativeprograms that relax the standards for mortgage quali-fication are helping low-income families to financehome purchases. Also, stock market gains have prob-ably boosted demand among higher-income groups,especially in the trade-up and second-home segmentsof the market.

After having surged in the fourth quarter of 1997,multifamily starts settled back to about 325,000 units(annual rate) over the first five months of 1998, apace only slightly below that recorded over 1997 asa whole. Support for multifamily construction con-tinued to come from the overall strength of the econ-omy, which undoubtedly has stimulated more indi-viduals to form households, as well as from lowinterest rates and an ample supply of financing. Inaddition, real rents picked up over the past year, and

the apartment vacancy rate appears to be edgingdown.

[ li H I M l i i>kl Tp in.mi.v

Household net worth rose sharply in the first quarter,pushing the wealth-to-income ratio to another recordhigh. Although the flow of new personal saving wasquite small, the revaluation of existing assets addedconsiderably to wealth, with much of these capitalgains accumulated on equities held either directly orindirectly through mutual funds and retirementaccounts. Of course, these gains have been distrib-uted quite unevenly: The 1995 Survey of ConsumerFinances reported that 41 percent of U.S. familiesown equities in some form, but that families withhigher wealth own a much larger share of totalequities.

In the first quarter of this year, the runup in wealth,together with low interest rates and high levels ofconfidence about future economic conditions, sup-ported robust household spending and borrowing.The expansion of household debt, at an annual rateof 73/4 percent, was above last year's pace and onceagain outstripped growth in disposable income. Theconsumer credit component of household debt grew4'/2 percent at an annual rate in the first quarter, apace roughly double that for the fourth quarter of lastyear but near the 1997 average. Preliminary data forApril and May point to a somewhat smaller advancein the second quarter.

Mortgage debt increased 8!/i percent at an annualrate in the first quarter, the same as its fourth-quarteradvance and a little above its 1997 growth rate.Fixed-rate mortgage interest rates were 15 basispoints lower in the first quarter than three monthsearlier and 75 basis points lower than a year earlier,which encouraged both new home purchases anda surge of refinancing of existing mortgages. Withintotal gross mortgage borrowing, the flattening of theyield curve made adjustable-rate mortgages lessattractive relative to fixed-rate mortgages, and theirshare of originations reached the lowest point inrecent years. Net borrowing can be boosted by refi-nancings if households "cash out" some housingequity, but the magnitude of this effect is unclear. Inany event, continued expansion of bank real estatelending and a high level of mortgage applications forhome purchases suggest a further solid gain in mort-gage debt in the second quarter. Home equity creditat banks increased only 2 percent at an annual ratefrom the fourth quarter of 1997 through June 1998after having posted a 15'/2 percent gain last year;



this slowdown may reflect a diminished substitutionof mortgage debt for consumer debt or simply theincrease in mortgage refinancings, which allowedhouseholds to pay down more expensive home equitydebt or to convert housing equity into cash in a moreadvantageous manner.

Despite the further buildup of household indebted-ness, financial stress among households appears tohave stabilized after several years of deterioration. Inthe aggregate, estimated required payments of loanprincipal and interest have held about steady relativeto disposable personal income—albeit at a highlevel—since 1996. Over this period, the effect ondebt burdens of faster growth of debt than income hasbeen roughly offset by declining interest rates and theassociated refinancing of higher interest-rate debt, aswell as by a shift toward mortgage debt (which has alonger repayment period). Various measures of delin-quency rates on consumer loans leveled off ordeclined in 1997, and delinquency rates on mort-gages have been at very low levels for several years.Personal bankruptcy filings reached a new recordhigh in the first quarter of 1998, but this representedonly 6 percent more filings than four quarters earlier,which is the smallest such change in three years.

These developments have apparently suggestedto banks that they have sufficiently tightened termsand standards on consumer loans. In the FederalReserve's May Senior Loan Officer Opinion Surveyon Bank Lending Practices, relatively few banks, onnet, reported tightening standards on credit card orother consumer loans. Little change was reported inthe terms of consumer loans.

I Iw liiisuii'ss Sccloi'

i i\k'd In \L ' s invm

Real business fixed investment appears to haveposted another hefty gain over the first half of 1998as spending continued to be boosted by positive salesexpectations in many industries; favorable financialconditions; and a perceived opportunity, if not anecessity, for firms to install new technology in orderto remain competitive. The exceptional growth ofinvestment, since the early 1990s has been facilitatedin part by the increase in national saving associatedwith the elimination of the federal budget deficit.It has resulted in considerable modernization andexpansion of the nation's capital stock, which havebeen important in the improved performance of laborproductivity over the past few years and which shouldcontinue to lift productivity in the future. Moreover,

rapid investment in the manufacturing sector in recentyears has resulted in large additions to productivecapacity, which have helped keep factory operatingrates from rising much above average historical lev-els in the face of appreciable increases in output.

Real outlays for producers' durable equipment,which have been rising more than 10 percent peryear, on average, since the early 1990s, movedsharply higher in the first half of 1998. All majorcategories of equipment spending recorded sizablegains in the first quarter; but, as has been truethroughout the expansion, outlays for computers roseespecially rapidly. Real computer outlays receivedparticular impetus in early 1998 from extensive price-cutting. Purchases of communications equipmenthave also soared in recent quarters; the rise reflectsintense pressures to add capacity to accommodate thegrowth of networking; the rapid pace of technologi-cal advance, especially in wireless communications;and regulatory changes. As for the second quarter,data on shipments, coupled with another steep declinein computer prices, point to a further substantialincrease in real computer outlays. Spending on motorvehicles apparently continued to advance as wellwhile demand for other types of capital equipmentappears to have remained brisk.

In total, real outlays on nonresidential constructionflattened out in 1997 after four years of gains, andthey remained sluggish in early 1998. Constructionof office buildings remained robust in the first half ofthis year, after having risen at double-digit rates in1996 and 1997, and outlays for institutional buildingscontinued to trend up. However, expenditures forother types of structures were lackluster. Nonethe-less, the economic fundamentals for the sector asa whole remain quite favorable: Vacancy rates foroffice and retail space have continued to fall; realestate prices, though still well below the levels of themid-1980s in real terms, have risen appreciably inrecent quarters; and funding for new projects remainsabundant.

l n \ c i i i i a \ l n \ L'Mmu'H

The pace of stockholding by nonfarm businessespicked up markedly in 1997 and is estimated to haveapproached $100 billion (annual rate) in the firstquarter of 1998—equal to an annual rate increase of8'/2 percent in the level of inventories and accountingfor more than 1 Vi percentage points of that quarter'sgrowth in real GDP. The first-quarter accumulationwas heavy almost across the board. Among otherthings, it included a large increase in stocks of petro-



leum as the unusually warm weather reduced demandfor refined products and low prices provided anincentive for refiners and distributors to accumulatestocks. However, overall sales were also very strong,and with only a few exceptions—notably, semicon-ductors, chemicals, and textiles—stocks did not seemout of line with sales. In any event, fragmentary datafor the second quarter point to a considerable slowingin inventory investment that is especially evident inthe motor vehicle sector, where stocks were depletedby the combination of strong sales and GeneralMotors production shortfalls. In addition, petroleumstocks appear to have grown less rapidly than theydid in Ihe first quarter, and stockbuilding elsewhereslowed sharply in April and May.

Businesses have financed a good part of their invest-ment this year through continued strong cash flow,but they have also increased their reliance on finan-cial markets. Economic profits (book profits afterinventory valuation and capital consumption adjust-ments) have run at 12 percent of national incomeover the past year, well above the 1980s peak ofroughly 9 percent. However, the strength in profitshas resulted partly from the low level of net interestpayments, leaving total capital income at roughly thesame share of national income as at the 1980s peak.Overall, a major portion of the increase in profitsbetween the 1980s and the 1990s represents a realign-ment of returns from debt-holders to equity-holders.

Although their level remains high, the growth ofprofits has slowed: Economic profits rose 4% percentat an annual rate in the first quarter, compared with9'/2 percent between the fourth quarter of 1996and the fourth quarter of 1997. This slowdown mayhave resulted from various causes, including risingemployee compensation and the Asian financialcrisis. Quantifying the effect of the Asian turmoil isdifficult: Although only a small share of the profits ofU.S. companies is earned in the directly affectedAsian countries, the crisis has reduced the prices ofU.S. imports and thereby put downward pressure ondomestic prices.

Nonfinancial businesses realized annualized eco-nomic profit growth of only 1 VA percent in the firstquarter. Because capital expenditures (includinginventory investment) grew much faster, the financ-ing gap—the excess of capital expenditures overretained earnings—widened. As a result, these busi-nesses used less of their cash flow to retire outstand-ing equity and continued to borrow at the rapid pace

of the fourth quarter of 1997, with debt expanding atan annual rate of 9 percent in the first quarter of 1998.Outstanding amounts of both bonds and commercialpaper rose especially sharply. The decline in long-term interest rates around year-end encouragedcompanies to lock in those yields, and gross bondissuance reached a record high in the first quarterof 1998. Borrowing by nonfinancial businessesincreased at a slightly slower but still rapid clip in thesecond quarter, with little change in outstanding com-mercial paper but very strong net bond issuance andsome rebound in bank loans.

Despite persistent high borrowing, external fund-ing for businesses remained readily available onfavorable terms. The spreads between yields oninvestment-grade bonds and yields on Treasury bondswidened a little from low levels, with investors favor-ing Treasury securities over corporate securities as ahaven from Asian turmoil and, perhaps, with disap-pointing profits leading to some minor reassessmentof the underlying risk of private obligations. Thespreads on high-yield bonds also increased, in partbecause of heavy issuance of these bonds this spring,but they remain narrow by historical standards. In theFederal Reserve's May survey on bank lending prac-tices, banks reported negligible change in businessloan standards; moreover, yield spreads on bank loansremained low for both large and small firms. Surveysby the National Federation of Independent Businesssuggest that small firms have been facing little diffi-culty in obtaining credit.

The ready availability of credit has stemmedimportantly from the healthy financial condition ofmany businesses, which have enjoyed an extendedperiod of economic expansion and robust profits.The aggregate debt-service burden for nonfinancialcorporations, measured as the ratio of net interestpayments to cash flow, dropped substantially between1990 and 1996 and remains modest, despite edgingup in the first quarter of this year. In addition, mostmeasures of financial distress have shown favorablereadings. The delinquency rate on commercial andindustrial bank loans has stayed very low since 1995,preserving the dramatic decline that occurred in thefirst half of the decade. After moving up a little in1996 and 1997, business failures decreased in thefirst five months of 1998; the liabilities of failedbusinesses as a share of total liabilities was less thanone-quarter the value reached in the early 1990s. Atthe same time, Moody's upgraded significantly moredebt than it downgraded, and the rate of junk bonddefaults stayed close to its low 1997 level.

Net equity issuance was less negative in the firstquarter of this year than in the fourth quarter of last



year, but nonfinancial corporations still retired, onnet, about $100 billion of equity at an annual rate.The wave of merger announcements this spring willlikely generate strong share retirements over theremainder of the year. Gross equity issuance in thefirst half of 1998 was close to its pace of the pastseveral years, although investors seemed somewhatcautious about initial public offerings.

///<' (jovcnwieiii Sait>r

Federal

The incoming news on the federal budget continuesto be very positive. Over the twelve months ending inMay 1998, the unified budget registered a surplus of$60 billion, compared with a deficit of $65 billionduring the twelve months ending in May 1997. Soar-ing receipts continued to be the main force drivingthe improvement in the budget, but subdued growthin outlays also played a key role. If the latest projec-tions from the Office of Management and Budget(OMB) and the Congressional Budget Office (CBO)are realized, the unified budget for fiscal year 1998 asa whole will show a surplus of roughly $40 billion to$65 billion.

With the federal budget having shifted into sur-plus, the federal government is now augmenting,rather than drawing on, the pool of national saving. Infact, the improvement in the government's budgetposition over the past several years has been largeenough to generate a considerable rise in grossdomestic saving despite a decline in the private sav-ing rate; all told, gross saving by households, busi-nesses, and governments increased from about14!/2 percent of gross national product in the early1990s, when federal saving was at a cyclical low, tomore than 17 percent of GNP in recent quarters. Thisincrease in domestic saving, along with increasedborrowing from abroad, has financed the surge indomestic investment in this expansion. Moreover,this year's budgetary surplus will continue to paybenefits in future years because it allows the govern-ment to reduce its outstanding debt, which impliessmaller future interest payments and, all else equal,makes it easier to keep the budget in surplus. If, infact, the budget outcome over the next several yearsis as favorable as the OMB and the CBO now antici-pate under current policies, the reduction in the out-standing debt could be substantial.

Federal receipts in the twelve months ending inMay 1998 were 10 percent higher than in the sameperiod a year earlier—roughly twice the percentage

increase for nominal GDP over the past year. Indi-vidual income tax receipts, which have been rising atdouble-digit rates since the mid-1990s, continued todo so over the past year as the surge in capital gainsrealizations likely persisted and sizable gains in realincome raised the average tax rates on many house-holds (the individual income tax structure beingindexed for inflation but not for growth in realincomes). In contrast to the ongoing strength in indi-vidual taxes, corporate tax payments increased onlymoderately over the past year, echoing the decelera-tion in corporate profits.

Federal expenditures in the twelve months endingin May 1998 were only 1 Vi percent higher in nominalterms than during the twelve months ending in May1997, with restraint evident in most categories. Out-lays for defense were about unchanged, as were thosefor income security programs. In the latter category,outlays for low-income support fell as economicactivity remained robust, welfare reform capped out-lays for family assistance, and enrollment rates inother programs dropped. In the health area, spendingon Medicaid picked up somewhat after a period ofextraordinarily smalJ increases, whereas growth inspending for Medicare slowed, in part because of theprogrammatic changes that were legislated in 1997.And, with interest rates little changed and the stockof outstanding federal debt no longer rising, net inter-est payments stabilized.

Real federal outlays for consumption and grossinvestment, the part of federal spending that iscounted in GDP, fell about 2 percent between the firstquarters of 1997 and 1998. The decrease was con-centrated in real defense spending, which fell about23/4 percent, roughly the same as over the preced-ing four quarters; real nondefense spending wasunchanged, on balance. In the first quarter, real fed-eral outlays fell at a 10 percent annual rate; the dropreflected a plunge in defense spending, which appearsto have been reversed in the second quarter.

With debt held by the public close to $4 trillion,the government will continue to undertake substantialgross borrowing to redeem maturing securities. Thegovernment will also continue to adjust its issuanceof short-term debt to accommodate seasonal swingsin receipts and spending. The surplus during the firsthalf of calendar year 1998—boosted by the hugeinflow of individual income tax receipts—enabledthe Treasury to reduce its outstanding debt $57 bil-lion while augmenting its cash balance $40 billion.The reduction in debt included net paydowns ofcoupon securities and bills.

Looking ahead to projected surpluses for comingyears, the Treasury announced that it will no longer



issue three-year notes and will auction five-year notesquarterly rather than monthly. Over the past severalyears, the Treasury has accommodated the surprisingimprovement in federal finances by substantiallyreducing both bill and coupon issuance. The Treasuryhopes that concentrating future coupon offerings inlarger, less-frequent auctions will maintain the liquid-ity of these securities while still allowing for suffi-cient issuance of bills to maintain their liquidity aswell. These changes are also intended to preventfurther upcreep in the average maturity of the out-standing debt held by private investors, now standingat sixty-five months. The Treasury continues to workon encouraging the market for inflation-indexed secu-rities, issuing a thirty-year indexed bond in Aprilto complement the existing five-year and ten-yearindexed notes.

Stale and Local

The fiscal position of state and local governments inthe aggregate has also remained quite favorable.Strong growth of household income and consumerspending has continued to lift revenues, despitenumerous small tax cuts, and governments have con-tinued to hold the line on expenditures. As a result,the consolidated current account of the sector, asmeasured by the surplus (net of social insurancefunds) of receipts over current expenditures in thenational income and product accounts, held steady inthe first quarter at around $35 billion (annual rate),roughly where it has been since 1995. State govern-ments, which have reaped the main benefits of risingincome taxes, have fared especially well: Indeed, allof the forty-seven states whose fiscal years ended byJune 30 appear to have achieved balance or to haverun surpluses in their general funds budgets in fiscalyear 1998.

Real expenditures for consumption and grossinvestment by states and localities have been risingabout 2 percent per year, on average, since the early1990s, and the increase in spending for the first halfof 1998 appears to have been a bit below that trend.These governments added jobs over the first half ofthe year at about the same rate as they did over 1997as a whole. However, real construction outlays, whichhave been drifting down since early 1997, posted asizable decline in the first quarter, and monthly datasuggest that spending dropped further in the spring.The weakness in construction spending over the pastyear has cut across the major categories of construc-tion and is puzzling in light of the sector's ongoinginfrastructure needs and the good financial shape ofmost governments.

State and local governments responded to the lowinterest rates during the first half of the year byborrowing at a rapid rate, both to refinance outstand-ing debt and to fund new capital projects. Becausedebt retirements eased in the first quarter relative tothe fourth quarter of 1997, net issuance increasedsubstantially. Meanwhile, credit quality of state andlocal debt continued to improve, with much moredebt upgraded than downgraded in the first half of theyear.

External Scclnr

Trade and lite Current Account

The nominal trade deficit on goods and serviceswidened to $140 billion at an annual rate in the firstquarter from $114 billion in the fourth quarter of lastyear. The current account deficit for the first quarterreached $189 billion (annual rate), 2lA percent ofGDP, compared with $155 billion for the year 1997.A larger deficit on net investment income as well asthe widening of the deficit on trade in goods andservices contributed to the deterioration in the firstquarter of the current account balance. In April andMay, the trade deficit increased further.

The quantity of imports of goods and servicesagain grew vigorously in the first quarter. The annualrate of expansion at 17 percent exceeded that for1997 and reflected the continued strength of U.S.economic activity and the effects of past dollar appre-ciation. Imports of consumer goods, automotive prod-ucts, and machinery were particularly robust. Prelimi-nary data for April and May suggest that real importgrowth remained strong. Non-oil import prices fellsharply through the second quarter, reflecting the risein the exchange value of the dollar over the past year.

The quantity of exports of goods and servicesdeclined at an annual rate of 1 percent in the firstquarter, the first such absolute drop since the firstquarter of 1994. The weakness of economic activityin a number of our trading partners, with absolutedeclines in several economies in Asia, and thestrength of the dollar, which also partly resulted fromthe Asian financial crises, largely account for theabrupt halt in the growth of real exports after a10 percent rise last year. Declines were recorded formachinery, industrial supplies, and agricultural prod-ucts. Exports to the emerging market economies inAsia, particularly Korea, as well as exports to Japanwere down sharply while exports to western Europeand Canada rose moderately. Preliminary data for



April and May suggest that real exports declinedfurther.

I he Capital Account

Foreign direct investment in the United States andU.S. direct investment abroad continued at nearrecord levels in the first quarter of 1998, spurred bystrong merger and acquisition activity across nationalborders.

In the first quarter, the booming U.S. stock marketcontinued to attract large foreign interest. Net pur-chases by private foreigners were $29 billion, follow-ing record net purchases of $66 billion in the year1997. Foreign net purchases of U.S. corporate bondsremained substantial, and net purchases of U.S. gov-ernment agency bonds reached a record $21 billion.In contrast, net sales of U.S. Treasury securities byprivate foreigners, particularly large net sales bookedat a Caribbean financial center, were recorded in thefirst quarter. U.S. net purchases of foreign stocks andbonds were modest.

Foreign official assets in the United Statesincreased $10 billion in the first quarter. However, thenet increase in the second quarter was limited bylarge dollar sales by Japan.

Tin1 labor Market

h i n p l i ) \ and I ;ibur Supply

Labor demand remained robust during the first half of1998. Growth in payroll employment averaged243,000 per month, only a little less than in 1997 andwell above the rate consistent with the growth in theworking-age population. The unemployment rate heldsteady in the first quarter at 4% percent but droppedto the range of 4'/4 percent to AVi percent in thesecond quarter.

The services industry, which accounts for about30 percent of nonfarm employment, continued to bethe mainstay of employment growth over the firsthalf of 1998, posting increases of 115,000 per month,on average. Within services, hiring remained brisk atcomputer and data-processing firms and at firms pro-viding engineering and managerial services, but pay-rolls at temporary help agencies rose much less rap-idly than they had over the preceding few years—apparently in part reflecting difficulties in findingworkers, especially for highly skilled and technicalpositions. Sizable increases were also posted atwholesale and retail trade establishments and in the

finance, insurance, and real estate category. Construc-tion payrolls were bounced around by unusual winterweather but, on average, rose a brisk 21,000 permonth—about the same as in 1997.

In contrast to the robust gains elsewhere, manufac-turing firms curbed their hiring in the first half of1998 in the face of slower growth in factory output.After having risen a torrid 6VA percent in 1997,factory output increased at an annual rate of about2!/2 percent between the fourth quarter of last yearand May 1998; the deceleration reflected the effectsof the Asian crisis as well as a downshift in motorvehicle assemblies and the completion of the1996-97 ramp-up in aircraft production. In June,factory output is estimated to have fallen V2 percent;the GM strike accounted for the decline.

The labor force participation rate—which mea-sures the percentage of the working-age populationthat is either employed or looking for work—trendedup mildly over the past couple of years and stood at67.1 percent, on average, in the first half of 1998,slightly above the previous cyclical highs achieved inlate 1989 and early 1990. Participation among adultwomen has picked up noticeably in recent years, afterhaving risen only slowly in the first half of the 1990s,and participation among adult men, which had beenon a gradual downtrend through mid-decade, appearsto have leveled out. In contrast, participation rates forteenagers, for whom school enrollment rates haverisen, have continued to sag after having droppedsharply in the early 1990s. Strong labor demandclearly contributed importantly to the rise in overallparticipation over the past several years, but theexpansion of the earned income tax credit andchanges in the welfare system probably providedadded stimulus.

I .iibur CosK and Productivity

Firms no doubt are continuing to rely heavily ontargeted pay increases and incentives like stockoptions and bonuses to attract and retain workers. Butthe tightness of the labor market also appears to beexerting some upward pressure on traditional mea-sures of hourly compensation, which have exhibiteda somewhat more pronounced uptrend of late. Indeed,the twelve-month change in the employment costindex (ECI) for private industry workers picked upto V/7 percent in March, compared with 3 percentfor the twelve months ending in March 1997 and2% percent for the twelve months ending in March1996. Hourly compensation accelerated especiallyrapidly for employees of finance, insurance, and real



estate firms, some of whom received sizable bonusesand commissions. However, the acceleration wasfairly widespread across industries and occupationsand, given the relatively small rise in consumer pricesover the past year, implies a solid increase in real payfor many workers.

The acceleration in hourly compensation costs overthe past year resulted mainly from faster growthof wages and salaries, which rose 4 percent overthe twelve months ending in March; this increasewas about V2 percentage point larger than the onerecorded over the preceding twelve months. Separatedata on average hourly earnings of production ornonsupervisory workers also show an ongoingacceleration of wages: The twelve-month change inthis series was 4.1 percent in June, Vz percentagepoint above the reading for the preceding twelvemonths.

Benefits costs have generally remained subdued,with the increase over the year ending in Marchamounting to only about 2!/t percent. According tothe ECI, employer payments for health insurancehave picked up moderately in recent quarters afterhaving been essentially flat over the previous coupleof years, and indications are that further increasesmay be in the offing. Insurers whose profit marginshad been squeezed in recent years by pricing strate-gies designed to gain market share reportedly areraising premiums, and many managed care plans areadding innovations that, while offering greater flex-ibility and protections to consumers, may boost costs.Additional upward pressure on premiums apparentlyhas come from higher spending on prescription drugs.Among other major components of benefits, risingequity prices have reduced the need for firms topay into defined benefit plans, and costs for stateunemployment insurance and workers' compensationhave fallen sharply.

Labor productivity in the nonfarm business sectorposted another sizable advance in the first quarter of1998, bringing the increase over the year ending inthe first quarter to an impressive 2 percent.' Taking aslightly longer perspective, productivity has risen abit more than 1V2 percent per year, on average, overthe past three years, after having risen less than

1. According to the published data, productivity rose 1.1 percent atan annual rate in the first quarter. However, these data are distorted byinconsistencies in the measurement of hours associated with varyinglengths of pay periods across months. Although the Bureau of LaborStatistics has already revised the monthly hours and earnings data toaccount for these inconsistencies, it will not update the productivitystatistics until August. All else being equal, adjusting the productivitydata to reflect the Bureau's revisions to hours would substantiallyraise productivity growth in the first quarter, but it would have littleeffect on the change over the four quarters ending in the first quarter.

1 percent per year, on average, over the first halfof the decade. At least in part, the recent strongproductivity growth has likely been a cyclicalresponse to the marked acceleration of output. But itis also possible that the high levels of business invest-ment over the past several years—and the associatedrise in the amount of capital per worker—are translat-ing into a stronger underlying productivity trend. Inaddition, productivity apparently is being buoyed bythe assimilation of new technologies into the work-place. In any event, the faster productivity growth oflate is helping to offset the effects of higher hourlycompensation on unit labor costs and prices, therebyallowing wages to rise in real terms.

Prices

Price inflation remained quiescent in the first half ofthis year. After having increased 1% percent in 1997,the consumer price index slowed to a crawl in early1998 as energy prices plummeted, and it recorded arise of only about Wi percent at an annual rate overthe first six months of the year. The increase in theCPI excluding food and energy—the so-called "coreCPI"—picked up to 2'/2 percent (annual rate) overthe first half of the year. However, this pickup followssome unusually small increases in the second half of1997, and the twelve-month change has held fairlysteady at about 2'/i percent since late last summer.The chain-type price index for personal consumptionexpenditures on items other than food and energyrose only 1 Vi percent over the year ending in the firstquarter of 1998—the most recent information avail-able; this measure typically rises less rapidly thandoes the core CPI, in part because it is less affectedby so-called "substitution bias."

The relatively favorable price performance in thefirst half of 1998 reflected a number of factors that,taken together, continued to exert enough restraint tooffset the upward pressures from strong aggregatedemand and high levels of labor utilization. One was

3. Alternative measures of price changePercent

Price measure

Fixed-weightConsumer price index

Excluding food and energy

Chain-typePersonal consumption expenditures . . .

Excluding food and energyGross domestic product

1996:Q1to

I997:Q1

1997:Q1to

1998:Q1

2.9 1.52.5 23

2.6 1.02.3 1.42.2 1.4

NOTE. Changes are based on quarterly averages.



the drop in oil prices. In addition, non-oil importprices continued to fall, thus further lowering inputcosts for many domestic industries and limiting theability of firms facing foreign competition to raiseprices for fear of losing sales to producers abroad.Prices of manufactured goods were also held in checkby the sizable increase in domestic industrial capacityin recent years and by developments in Asia, which,among other things, led to a considerable softeningof commodity prices. Moreover, the various surveysof consumers and forecasters suggest that inflationexpectations stayed low—even declined in somemeasures. For example, according to the Michigansurvey, median one-year inflation expectationsdropped a bit further this year, after having held fairlysteady over 1996 and 1997, and inflation expecta-tions for the next five to ten years edged down fromabout 3 percent, on average, in 1996 and 1997 to23A percent in the second quarter of 1998.

The CPI for goods other than food and energy roseat an annual rate of 1 percent over the first six monthsof 1998, only a bit above the meager Vi percentrise over 1997 as a whole. In the main, the step-upreflected a turnaround in prices of used cars andtrucks, and prices of tobacco products and prescrip-tion drugs also rose considerably faster than theyhad in 1997. More generally, prices continued to berestrained by the effect of the strong dollar on pricesof import-sensitive goods. For example, prices ofnew vehicles fell slightly over the first half of theyear, while prices of other import-sensitive goods—such as apparel and audio-video equipment—wereflat or down. In the producer price index, prices ofcapital equipment were little changed, on balance,over the first half of 1998; they, too, were damped bythe competitive effects of falling import prices.

The CPI for non-energy services increased 3 per-cent over the first six months of 1998, about the sameas last year's pace. After having fallen somewhat lastyear, airfares picked up in the first half of the year,and owner's equivalent rent seems to be rising abit faster than it did in 1997. In addition, increasesin prices of medical services, which had slowedto about 3 percent per year in 1996-97, have beenrunning somewhat higher so far this year. Pricechanges for most other major categories of serviceswere similar to or smaller than those recorded in1997.

Energy prices fell sharply in early 1998, as theprice of crude oil came under severe downward pres-sure from weak demand in Asia, a decision by keyOPEC producers to increase output, and a relativelywarm winter in the Northern Hemisphere. After hav-ing averaged about $20 per barrel in the fourth quar-

ter of 1997, the spot price of West Texas intermediatedropped to a monthly average of $15 per barrel inMarch, where it more or less remained through thespring. Crude prices dropped sharply in June follow-ing reports of high levels of inventories and revisedestimates of oil consumption in Asia but have sincefirmed in response to an agreement by major oilproducers to restrict supply in the months ahead; theynow stand at $14'/2 per barrel. Reflecting the declinein crude prices, retail energy prices fell at an annualrate of 12 percent over the first half of the year, led bya steep drop in gasoline prices.

Developments in the agricultural sector also helpedto restrain overall inflation in the first half of thisyear. Excluding the prices of fruits and vegetables—which tend to be bounced around by short-termswings in the weather—food prices have been risinga scant 0.1 percent per month, on average, since late1997. Although farmers in some regions of the coun-try are experiencing more prolonged weather prob-lems, conditions in the major crop-producing areasof the Midwest still look relatively favorable, and itappears that aggregate farm production will be suffi-cient to maintain ample supplies over the comingyear, especially in the context of sluggish exportdemand.

Credit iiiid ilw MciH'tary A^^rc^iiles

Credit and Depositor* Intermediation

The total debt of U.S. households, governments, andnonfinancial businesses increased at an annual rate of53/4 percent from the fourth quarter of 1997 throughMay of this year. Domestic nonfinancial debt nowstands a little above the midpoint of the 3 percent to7 percent range established by the FOMC for 1998.Debt growth has picked up since 1997, as anacceleration of private credit associated with strongdomestic demand and readily available supply hasmore than offset reduced federal borrowing. Indeed,federal debt declined 1 lA percent at an annual ratebetween the fourth quarter of 1997 and May 1998,whereas nonfederal debt increased 8 lA percentannualized over the same period. The growth ofnonfederal debt has slowed only slightly over the pastseveral months.

Credit on the books of depository institutions roseat roughly the same pace as total credit in the firsthalf of the year. Commercial bank credit advancedrapidly in the first quarter and at a more subdued ratein the second. This slowdown was especially acutein securities holdings, which had surged in both the



fourth quarter of 1997 and the first quarter of thisyear. Responses to the Federal Reserve's May surveyon bank lending practices suggest that the earlierrunup in securities reflected the efforts of banks toboost returns on equity by increasing leverage; muchof the rise in securities holdings was concentrated atbanks that were constrained by recent mergers fromusing their profits to repurchase shares. Loan growthalso slowed in the second quarter, although the vari-ous loan categories behaved quite differently: Realestate lending expanded most slowly in May andJune, whereas business lending rebounded in thosemonths after having stalled out in March and April.Outstanding loans at branches and agencies of for-eign banks declined in the second quarter, and surveyresponses identified an actual or expected weakeningin the capital position of the parent banks as theprimary impetus for a tightening of loan terms andstandards.

The Report of Condition and Income (the CallReport) showed that banks' return on equity wasabout unchanged in the first quarter, staying inthe elevated range it has occupied since 1993. CallReport data also indicated that delinquency andcharge-off rates on commercial and industrial loansand on real estate loans remain quite low, whiledelinquency and charge-off rates on consumer loanshave leveled off after their previous rise. Indeed,bank profits have benefited importantly in recentyears from a low level of provisioning for loan losses.Nevertheless, bank supervisors have been concernedthat intense competition and favorable economic con-ditions might be leading banks to ease standardsexcessively. They reminded depositories that credit

assessments should take account of the possibility ofless positive economic circumstances in the future.

The trend toward consolidation in the bankingindustry continued in the first half of the year. Someof the announced mergers involve combinations ofbanks and nonbank financial institutions, such asthrifts and insurance companies. Many of the mergerswere designed to capitalize on the economies of scaleand diversification of risk in nationwide banking;other mergers were undertaken to expand the rangeof services offered to customers. Although someobservers are concerned that consolidation mightraise banks' market power, greater national con-centration in banking over the past several years hasnot increased banking concentration in most localmarkets.

The

The broad monetary aggregates grew more rapidly inthe first half of 1998 than they did in 1997, althoughthe pace of their expansion has slowed noticeably inrecent months. M2 grew 11A percent at an annual ratebetween the fourth quarter of last year and June ofthis year, placing it well above the top of its 1 percentto 5 percent growth range. When the FOMC estab-lished this range in February, it noted that annualranges represented benchmarks for money growthunder conditions of stable prices and velocity behav-ior in accordance with its pre-1990 historical expe-rience. In fact, nominal spending and income havegrown more rapidly than is consistent with pricestability and sustainable real growth, and the velocity

• I . ( i rnw i l i HI

Percent

>trul

Period

Annual'19881989

199019911992 . . . . .19931994

199519961997

Quarterly (annual rale) -1998:1 .'

2

Year-to-dale'1998

Ml M2 M3 Domesticnonflnancial debl

4 3 S.7 6.3 9.1.5 5.2 4.0 7.5

4.2 4.1 1.8 6.77.9 3.1 1.2 4.5

14.4 1.8 .6 4.510.6 1.3 I.I 4.92.5 .6 1.7 4.9

-1.6 3.9 6.1 5.4-4.5 4.6 6.8 5.3-1.2 5.7 8.8 5.0

3.0 8.0 11.0 6.2.3 7.3 9.6 n.a.

.9 7.3 9.8 5.8

1. From average for fourth quarter of preceding year to average for fourthquarter of year indicated.

2. From average for preceding quarter to average for quarter indicated.

3. From average for fourth quarter of 1997 lo average for June (May in thecase of domestic nonfinancial debt).

n.a. Not available.



of M2 (defined as the ratio of nominal GDP to M2)has fallen relative to the behavior predicted by thepre-1990 experience.

For several decades before 1990, M2 velocityshowed little overall trend but varied positively fromyear-to-year with changes in M2 opportunity cost,which is generally defined as the interest forgoneby holding M2 assets rather than short-term marketinstruments such as Treasury bills. The relationshipwas disturbed in the early 1990s by a sharp increasein velocity; however, since mid-1994, M2 velocityand opportunity cost have again been moving roughlytogether, though not in lockstep. Indeed, velocity hasdeclined recently despite almost no change in thestandard measure of opportunity cost. The dip invelocity may be partly attributable to the flatter yieldcurve, which has reduced the return on longer-terminvestments relative to M2 assets—bank deposits andmoney market mutual funds. Money demand mayalso be bolstered by the efforts of households torebalance their portfolios in the face of a boomingstock market. By the end of 1997, households' mone-tary assets had ebbed to the smallest share of theirtotal financial assets in many years, and householdsmay want to reduce the concentration of their assetsin relatively risky equities and increase their holdingsof less volatile M2 assets. However, in spite of boththe flatter yield curve and the rebalancing motive,flows into both bond mutual funds and stock mutualfunds have been quite heavy this year.

M2 increased IV* percent at an annual rate in thesecond quarter, compared with 8 percent in the firstquarter. A buildup in household liquid accounts inpreparation for individual income tax payments sub-stantially boosted money growth in April; the clear-ing of these payments depressed May growth bya roughly equal amount. At an annual rate, M2increased about 6 percent on average over April andMay and about 5 percent in June, suggesting a largerdeceleration than is shown by the quarterly averagefigures.

M3 grew 93/4 percent at an annual rate between thefourth quarter of last year and June, placing it farabove the top of its 2 percent to 6 percent growthrange. As with M2, the FOMC chose the growthrange for M3 as a benchmark for growth under condi-tions of price stability and historical velocity behav-ior. The components of M3 not included in M2increased YlVi percent at an annual rate over the firsthalf of the year, following an even faster runup in1997. Rapid expansion of large time deposits in thefirst quarter was driven importantly by strong creditgrowth at depository institutions. More recently,gains in this category have diminished as bank credit

growth has slowed. Holdings of institutional moneymarket mutual funds climbed more than 20 percentin each of the past three years, and that strength hasmounted in 1998 as businesses' interest in outsourc-ing their cash management evidently has intensified.Because in-house management often involves short-term assets that are not included in M3, the shift tomutual funds boosts M3 growth.

Ml rose 1 percent at an annual rate between thefourth quarter of 1997 and June of this year. Currencyexpanded 6'/2 percent annualized over that period, abit below its increase last year. Foreign demand forU.S. currency apparently weakened substantially inthe first five months of the year, with an especiallylarge decline in shipments to Russia. Deposits in Mldeclined in the first half of the year owing to thecontinued introduction of "sweep" programs. Mlgrowth has been depressed for several years by thespread of these programs, which sweep balances outof transactions accounts, which are subject to reserverequirements, and into savings accounts, which arenot. Depositors are unaffected by this arrangementbecause the funds are swept back when needed; banksbenefit because they can reduce their holdings ofreserves, which earn no interest. New sweeps ofother checkable deposits have slowed sharply, butsweeps of demand deposits into savings deposits—anactivity that has become popular more recently—continue to spread. Because many banks have alreadyreduced their required reserves to minimal levels, thetotal flow of new sweep programs is tapering off,although it remains considerable.

The drop in transactions accounts in the first halfof the year caused required reserves to fall 33/4 per-cent at an annual rate, a much slower decline thanin 1997. The monetary base grew 5'/2 percent overthe same period, as the runoff in required reserveswas more than offset by the increased demand forcurrency.

The substantial decline in required reserves overthe past several years has raised concern that thefederal funds rate might become more volatile.Required reserves are fairly predictable and must bemaintained on only a two-week average basis. As aresult, the Federal Reserve has generally been ableto supply a quantity of reserves that is close to thequantity demanded at the federal funds rate intendedby the FOMC, and banks have accommodated manyunanticipated imbalances in reserve supply by vary-ing the quantity demanded across days. Banks alsohold reserve balances to avoid overdrafts after mak-ing payments to other banks. But this precautionarydemand is more variable and difficult to predict thanrequirement-related demand, and it cannot be substi-


600 Federal Reserve Bulletin D August 1998

tuted across days. As required reserves drop, morebanks will hold deposits at the Federal Reserve onlyto meet these day-to-day demands, reducing thepotential for rate-smoothing behavior.

So tar, however, the federal funds rate has notbecome noticeably more volatile on a maintenance-period average basis. This outcome has occurredpartly because the Federal Reserve has responded tothe changing nature of reserve demand by conductingopen market operations on more days than had beencustomary and by arranging more operations withovernight maturity, thereby bringing the daily reservesupply more closely in line with demand. At the sametime, banks have borrowed more reserves at thediscount window and have improved the manage-ment of their accounts at Reserve Banks. Between1995 and 1997, banks also significantly increasedtheir required clearing balances, which they pre-commit to hold and which earn credits that can beapplied to Federal Reserve priced services. Likerequired reserve balances, required clearing balancesare predictable by the Federal Reserve and can besubstituted across days within the two-week mainte-nance period. Going forward, the Federal Reserve'srecent decision to use lagged reserve accountingrather than contemporaneous reserve accountingwill increase somewhat the predictability of reservedemand by both banks and the Federal Reserve. Still,further declines in required reserves might increasefunds-rate volatility. Moreover, one-third of the banksresponding to the Federal Reserve's recent SeniorFinancial Officer Survey report that reserve manage-ment is more difficult today than in the past. One wayto diminish these problems would be to pay intereston reserve balances, which would reduce banks'incentives to minimize those balances.

Interest R:iu-

Yields on intermediate- and long-term Treasury secu-rities moved in a fairly narrow band during the firsthalf of 1998, centered a little below the levels thatprevailed in the latter part of 1997. The thirty-yearbond yield touched its lowest value since the bondwas introduced to the regular auction calendar in1977; it was also lower than any sustained yield onthe twenty-year bond (the longest maturity Treasurysecurity before the issuance of the thirty-year bond)since 1968. Meanwhile, the average yield on five-year notes in the first half of the year was the lowestsince early 1994.

Several factors have contributed to the decline inintermediate- and long-term interest rates over thepast year. For one, developments in the U.S. economyand overseas reduced expected inflation and, perhaps,uncertainty about future inflation. Between the sec-ond quarter of 1997 and the second quarter of 1998,the median long-term inflation expectation in theMichigan Survey Research Center survey of house-holds dropped lA percentage point, and the averageexpectation in the Philadelphia Federal Reserve'sSurvey of Professional Forecasters fell almost V2 per-centage point. Over the same period, the variance oflong-term inflation expectations in the Michigan sur-vey was halved. This greater consensus of expecta-tions suggests that people may now place less weighton the possibility of a sharp acceleration in prices; areduction in perceived inflation risk would tend toreduce term premiums and thereby cut long-terminterest rates. A damping of expected growth in realdemand here and abroad, triggered importantly bythe Asian financial crisis, also has probably pulledrates lower, as has an apparent shift in desired port-folios away from Asia and, to some extent, fromother emerging market economies. Lastly, dimin-ished borrowing by the federal government has re-strained interest rates by reducing the competition forprivate domestic saving and for borrowed funds fromabroad.

Assessing the relative importance of some of thesefactors might be aided, in principle, by comparingyields on nominal and inflation-indexed Treasurynotes. Between the second quarters of 1997 and1998, the nominal ten-year yield fell more than 1 per-centage point, whereas the inflation-indexed ten-yearyield increased a bit. Unfortunately, the relativelyrecent introduction of inflation-indexed securities andthe thinness of trading makes interpreting their yieldlevels and movements difficult. In particular, lighttrading may lead investors to view these new securi-ties as providing less liquidity than traditional Trea-sury notes, and investors may value liquidity espe-cially highly now in the face of uncertainty aboutdevelopments in Asia.

The yield curve for Treasury securities has recentlybeen flatter than at any point since the beginning ofthe decade. For example, the difference between theten-year-note yield and the three-month-bill yieldwas smaller in the first half of 1998 than in any otherhalf-year period since early 1990. In that earlier epi-sode, the yield curve had been flattened by a sharprunup in short-term interest rates as the FederalReserve tried to check an upcreep in inflation. In thecurrent episode, short rates have held fairly steady,while long-term rates have declined significantly.



Some of the current flatness of the term structureprobably stems from the apparent reduction in termpremiums noted above. But the flat yield curve mayalso reflect the expectation that short-term real inter-est rales, which have been boosted by the decline ininflation over the past year, will drop in the future.Supporting that notion, the yield curve for inflation-indexed debt has become inverted this year, as thereturn on the five-year indexed note has risen abovethe return on the ten-year indexed note, whichexceeds the return on the new thirty-year indexedbond.

Hqintv Prices

Equity markets have remained ebullient this year.The S&P 500 composite index rose sharply in thefirst several months of 1998; it then fell back a littlebefore moving up to a new record in July. TheNASDAQ composite, NYSE composite, and DowJones Industrial Average followed roughly similarpatterns, and these indexes now stand about 17 to28 percent above their year-end marks. Small capi-talization stocks have not fared so well this year, withthe Russell 2000 index up about a third as much onnet.

The increase in equity prices combined with therecent slowdown in earnings growth has kept manyvaluation measures well above their historical ranges.The ratio of prices in the S&P 500 to consensusestimates of earnings over the coming twelve monthsreached a new high in April and has retreated onlyslightly from that point. At the same time, the reallong-term bond yield—measured either by the ten-year indexed yield or by the difference betweenthe ten-year nominal Treasury yield and inflationexpectations in the Philadelphia Federal Reserve'ssurvey—is little changed since year-end. As a result,the forward-earnings yield on stocks exceeds the realyield on bonds by one of the smallest amountsin many years. Apparently, investors share analysts'expectations of robust long-term earnings growth, orthey are content with a much smaller equity premiumthan the historical average.

International Developments

Events in Asia, including in Japan, have continued todominate developments in global asset markets so farin 1998. During the first months of the year, manyfinancial markets in Asia appeared to stabilize, andprogress in implementing economic and financialreform programs was made in most of the countries

seriously affected by the crises. In early April, theagreement between Korean banks and their externalbank creditors to stretch out short-term obligationswas implemented, ending an interval of rollovers bycreditors that was endorsed by the authorities incountries that had pledged to support the Koreanprogram. Indonesia reached a second revised agree-ment with the International Monetary Fund (IMF) inApril on a reform program, which was subsequentlyderailed by political strife and the resignation of thepresident in late May; the change in political regimewas followed by calm, and a new agreement wasreached with the IMF management in late June andapproved by the IMF Executive Board on July 15.

After having risen sharply during the final monthsof 1997 through mid-January of 1998, the exchangevalue of the dollar in terms of the currencies ofKorea, Indonesia, Thailand, and other ASEAN coun-tries partly retraced those gains during February,March, and April. Since then, however, market pres-sures have again led to further sharp increases in theexchange value of the dollar in terms of the Indone-sian rupiah while the dollar has changed little againstmost of the other Asian emerging-market currencies.Since the end of December, the dollar has declined,on balance, 24 percent against the Korean won andnearly 14 percent against the Thai baht and has risenmoderately in terms of the Taiwan dollar andincreased about 130 percent in terms of the Indo-nesian rupiah.

During the first weeks of the year, the dollar depre-ciated in terms of the Japanese yen as improvedprospects elsewhere in Asia and market uncertaintyregarding potential intervention by the Japanesemonetary authorities lent support to the yen. Indica-tions that significant measures for economic stimulusmight be announced also put upward pressure on theyen. In February, the dollar resumed its appreciationwith respect to the yen. The rise in the dollar wasonly temporarily interrupted by sizable interventionpurchases of dollars by Japanese authorities in April.Upward pressure on the dollar relative to the yenintensified in late May and June. Renewed signs ofcyclical weakness in the Japanese economy and lackof market confidence in the announced programs foraddressing the chronic problems within the financialsector contributed to pessimism toward the yen. Per-sistent weakness in the Japanese economy and theyen, in turn, heightened concerns about prospectselsewhere in Asia; the lower yen adversely affectedthe competitiveness of goods produced in the Asianemerging-market economies and raised questionsabout the sustainability of current exchange rate poli-cies in China and Hong Kong.



On June 17, the monetary authorities in the UnitedStates and Japan cooperated in foreign exchangeintervention purchases of yen for dollars. This inter-vention operation was the first by U.S. authoritiessince August 1995. In announcing the market inter-vention, Treasury Secretary Rubin cited Japanesegovernment plans to restore the health of theirfinancial system and to strengthen Japanese domesticdemand. He pointed to the stake of Asia and theinternational community as a whole in Japan's suc-cess. The yen rose somewhat following the exchangemarket intervention and has since partially givenback that gain. In the wake of the recent election,which cost the Liberal Democratic Party numerousseats in the upper house of the Diet and precipitatedthe resignation of Prime Minister Hashimoto, the yenchanged little. On balance, the dollar has appreciatedabout 7 percent in terms of the yen since the end ofDecember.

Equity prices in the Asian emerging-market econo-mies have been volatile so far this year as well. Theseprices recovered somewhat in the first weeks ofthe year in response to the market perception that thecrisis was easing; after having fluctuated narrowly,they began moving back down in March and April,reaching new lows in June in Korea, Thailand, andHong Kong. On balance, these equity prices havemoved down about 25 percent (Singapore and Malay-sia) to up about 20 percent (Indonesia) since the endof last year. Equity prices in Japan also rose early inthe year on improved optimism but then gave backthose gains over time with the release of indicatorssuggesting additional weakness in the Japanese econ-omy. Since the middle of June, Japanese equity priceshave rebounded on the perception that significantfiscal stimulus is now more likely. On balance, Japa-nese equity prices are up about 9 percent from theirlevel at the end of last year. Japanese long-terminterest rates continued through May on their down-ward trend that began in mid-1997, declining anadditional 50 basis points during the first five months.Since then, long-term interest rates have retracedmore than half of that decline, in part in response tothe announcement of the plan for financial restruc-turing and in part in response to the outcome ofthe recent election, which heightened expectationsof additional fiscal stimulus.

The Asian financial crises have resulted in a sharpdrop in the pace of economic activity in the region.Output declined precipitously in the first quarter inthose countries most affected, such as Korea, Indo-nesia, and Malaysia, and slowed in other Asianeconomies, such as China and Taiwan, that havesuffered a loss of competitiveness and reduced exter-

nal demand as a consequence of the crises. Data forrecent months suggest that additional slowing hasoccurred and that the risk of further spread and deep-ening of cyclical weakness throughout the regioncannot be ruled out. Depreciation of their respectivecurrencies has led to acceleration of domestic pricesin several of these economies, particularly in Indo-nesia and Thailand.

Real GDP in Japan also fell sharply in the firstquarter, and output indicators suggest a furtherdecline in the second quarter. Consumer price infla-tion remains very low. Japanese authorities haveannounced a series of fiscal measures that areexpected to boost domestic demand during thesecond half of this year. In addition, officials haveannounced a package of steps directed at restoringthe soundness of the financial sector, including(1) introduction of a bridge bank mechanism to facili-tate the resolution of failed banks while permittingsome of their borrowers to continue to receive credit,(2) measures to improve the disposal of bad bankloans, (3) enhanced transparency and disclosure bybanks, and (4) strengthened bank supervision. Theseactions are intended to restore confidence in Japanesefinancial institutions and in the prospects for theeconomy more broadly.

In the other major industrial countries, economicdevelopments so far this year have generally beenfavorable. The exchange value of the dollar in termsof the German mark has fluctuated narrowly and, onbalance, is little changed since the end of December.Market perceptions that progress toward the start ofthe final stage of European Monetary Union (EMU)is going smoothly and signs of momentum in the U.S.and German economies resulted in little pressure ineither direction on the exchange rate. The dollar alsofluctuated narrowly against the U.K. pound with littlenet change so far this year. Moves to tighten mone-tary conditions in the United Kingdom lent support tothe pound, countering some tendency for weak exter-nal demand to depress the currency. The Canadiandollar rebounded following a tightening of monetaryconditions by the Bank of Canada on January 30.Since early March, however, it has tended to movedown as market participants have come to believethat further upward shifts of official interest rates areunlikely and as weakness in global commodity mar-kets, partly the result of reduced economic activity inAsia, have weighed on the currency. The exchangevalue of the U.S. dollar in terms of the Canadiandollar reached new highs in July and, on balance sofar this year, has risen about 4 percent.

Long-term interest rates have declined, and equityprices have generally risen strongly in European and



Canadian markets this year. Despite signs of strength-ening activity in Germany and other continentalEuropean countries and continued healthy expansionin the United Kingdom and Canada, long-term rateshave moved down since December; long rates areabout 60 basis points lower in Germany and less thanhalf that amount lower in Canada. Shifts of interna-tional portfolios away from Asian assets and towardthose perceived to be safer have probably contributedto rate declines in Continental Europe and in theUnited States. Stock prices have also continuedto rise in Europe and Canada. Since December, thegains have ranged from about 40 percent in Germanyand France to about 10 percent in Canada.

The pace of real economic activity improved some-what in the first quarter in Germany and on averagein the eleven countries slated to proceed with cur-rency union on January 1, 1999.2 Production andemployment data for more recent months suggestcontinued expansion. Business confidence has firmedas progress toward EMU has continued. Domesticdemand is becoming more buoyant in several of thesecountries, offsetting weakening of external demandarising from events in Asia. On average, inflationremains subdued within the euro area. In the UnitedKingdom and Canada, real output continues toexpand at a relatively rapid rate. U.K. inflation threat-ens to exceed the government's target of 2'/2 percent,and the Bank of England raised its official lendingrate 25 basis points in June in order to lessen pricepressures. Consumer price inflation in Canadaremains very low.

Events in Asia have spilled over to affect devel-opments in Latin American countries. Declines in

2. Those countries are Austria, Belgium, Finland, France, Ireland,Italy, Germany, Luxembourg, the Netherlands, Portugal, and Spain.

global oil prices have contributed to downward pres-sure on the exchange value of the Mexican peso. Thepeso declined sharply in terms of the dollar at thestart of the year but then stabilized in Februarythrough May as Asian markets partially recovered. Itdepreciated further in May and June, resulting in anet decline of about 9 percent in terms of the dollarso far this year. The Brazilian exchange rate regimeof a controlled crawl and the Argentine regime ofpegging the peso to the dollar remain in place, andBrazilian short-term interest rates have been loweredfrom the very high levels to which they were raisedwhen the Asian crisis intensified in late 1997. Equityprices in these three Latin American countries havebeen volatile, rising early in the year and giving backthose gains since April. On balance this year, equityprices have declined about 10 percent in Mexico andArgentina and have risen about 8 percent in Brazil.

Real output growth remains strong in Mexico andArgentina, but the rate has slowed somewhat fromlast year's vigorous pace. In Brazil, economic activ-ity has weakened more sharply, in part in response tothe tightening of monetary conditions that followedthe outbreak of the Asian crisis.

Lower global oil prices have combined with apoorly functioning domestic tax system to trigger afinancial crisis in Russia. Russian officials havereached agreement with IMF management on arevised program that includes proposed increasedfunds from the IMF and other sources. To helpfinance this program, the General Arrangements toBorrow are being activated in light of the inadequacyof IMF resources to meet actual or expected requestsfor financing and a need to forestall impairment ofthe international monetary system. The GeneralArrangements to Borrow provide the IMF withsupplementary lines of credit from the G-10countries. •


604

Recent Changes to the Federal Reserve'sSurvey of Terms of Business Lending

Thomas F. Brady, William B. English, and William R.Nelson, of the Board's Division of Monetary Affairs,prepared this article. Thomas C. Allard assistedin the preparation of the data. Lisa X. Chen andAdrian R. Sosa provided research assistance.

The Federal Reserve's quarterly Survey of Terms ofBusiness Lending, which has been conducted formore than twenty years, collects information on inter-est rates and other characteristics of commercial baakloans to businesses. The survey has been changedfrom time to time to recognize innovations in banklending practices and to improve the measurementof the desired information. The most recent changestook effect with the May 1997 survey.1 The majorimprovement was the addition of an item measuringloan risk. The addition of this item was possiblebecause a large and increasing percentage of bankshave adopted the practice of assigning internal riskratings to their "pass" loans—that is, loans otherthan those to troubled borrowers. (Loans to troubledborrowers are generally part of workout arrange-ments.) Further changes were made to the survey toimprove the measurement of other important loancharacteristics. In addition, the reporting panel, whichhad been limited to domestically chartered com-mercial banks, was expanded to include a sample ofU.S. branches and agencies of foreign banks. Thesebranches and agencies now account for a significantproportion of business lending to U.S. firms.2

1. Details on the proposed changes to the survey were publishedfor public comment in Board of Governors of the Federal ReserveSystem, "Agency Information Collection Activities: Proposed Collec-tion; Comment Request," Federal Register, vol. 61 (July 23, 1996),pp. 38202-203. Announcement of the final Board action was pub-lished in Board of Governors of the Federal Reserve System, "AgencyInformation Collection Activities: Submission to OMB Under Dele-gated Authority," Federal Register, vol. 61 (October 24, 1996),pp. 55151-152.

Changes like those made to the business survey were made at thesame time to a survey of farm loans (Survey of Terms of BankLending to Fanners).

2. As a result of the inclusion of the branches and agencies offoreign banks, the name of the survey was changed from the Surveyof Terms of Bank Lending to Business to the Survey of Terms ofBusiness Lending. In this article we refer to both the old and newversions of the survey as the STBL.

This article discusses the most recent changesmade to the survey and presents some informa-tion now available from the new items beingreported. It also summarizes information about theuse of loan risk ratings from consultations with asample of the survey respondents. These consulta-tions were conducted in the process of planningthe revisions to the survey and provided much use-ful information, particularly with respect to riskratings.

ri.\ck<;iu>t:\D oi- nil-. Si AV/_)

Since its inception in 1977, the Survey of Termsof Business Lending (STBL) has provided uniqueinformation concerning the terms (both price andnonprice) of commercial and industrial loansmade to U.S. nonfinancial businesses by commer-cial banks. The STBL replaced the Quarterly Inter-est Rate Survey and portions of the Survey ofSelected Interest Rates. It was designed to pro-vide more accurate and detailed information thanthese surveys on business loans, especially con-cerning maturity and nonprice terms. (See the box,"A History of Federal Reserve Surveys of BusinessLending Terms.")

The STBL collects detailed data on individualloans from a stratified random sample of about 300institutions. The survey respondents provide infor-mation on the stated rate of interest on each loanextended during the survey week and the frequencywith which interest is compounded or paid, therebyallowing calculation of the effective interest rate. Therespondents also report other important loan charac-teristics, including loan size, loan maturity, the fre-quency of repayments, collateralization status, andthe size of the commitment (if any) under which theloan was extended.

Data are collected for the first full business weekof the middle month of each quarter (February, May,August, and November). These sample data are usedto construct estimates of the terms of business loansextended during the reporting week at all domesti-


605

cally chartered commercial banks and U.S. branchesand agencies of foreign banks.3

3. These estimates are published in the Federal Reserve Bulletinand in the Federal Reserve's E.2 Statistical Release, "Survey ofTerms of Business Lending," which is available on the Board's website (www.bog.frb.fed.us/releajses/E2). The results of the most recent

RECENT CHANGES TO THE SURVEY

The most recent changes to the survey involved theaddition of items on loan risk, the introduction ofother new items, the revision or deletion of someitems, and an expansion of the coverage of the survey.

survey, conducted in May, are published in this issue of the Bulletin onpages A67-A71.

A History of Federal Reserve Surveys of Business Lending Terms

The Federal Reserve has collected and published informa-tion on business loan rates at commercial banks since 1919.Between 1919 and 1939 the Federal Reserve collectedmonthly data on the average prevailing rate charged onprime (high-quality) commercial loans as part of its surveyof rates on loans to customers. By 1930 the survey includedabout 200 large banks in thirty-six "principal" cities,although the panel had been smaller in earlier years. Calcu-lations of the published estimates of regional and nationalaverage rates were based on the volume of lending at thesurveyed banks and at other large banks.

One problem with this survey was that rather than provid-ing information on the average rate actually paid by allbusiness borrowers, it covered only the rate paid by primeborrowers, which tended to be relatively large. In 1939 theFederal Reserve introduced a new survey (the QuarterlyInterest Rate Survey, or QIRS) and discontinued the previ-ous survey. The new survey collected information from apanel of about ninety large banks in nineteen cities on thedistribution of actual loan rates charged on all new commer-cial and industrial loans with maturities of between thirtydays and one year during the first half of the final month ofeach quarter. This information was used to calculate theweighted-average rate on new business loans at large banksby region and for the nation as a whole. Starting in 1948,the QIRS collected data on the terms of individual loanswith maturities of less than one year, and weighted-averagerates on such loans were calculated and reported by loansize.

The QIRS was substantially revised in 1967. The panelsize was increased to 126 large banks in thirty-five cities. Atthe same time, the timing of the survey was shifted to themiddle month of each quarter. The Federal Reserve contin-ued to publish weighted-average loan rates for loans withmaturities of less than one year and provided average ratesfor more regions and for larger size categories than hadbeen the case before the revisions.

Starting in 1971 and continuing until the survey wasdiscontinued in 1977, separate weighted-average loan rateswere published for three types of loan:1 term loans (those

1. Data allowing these three rales to be calculated had been collectedsince 1967. Historical data for the new series were published for 1967-71.See Mary F. Weaver and Edward R. Fry, "Bank Rates on Business Loans-Revised Series," Federal Reserve Bulletin, vol. 57 (June 1971), pp. 468-77.

with maturities of more than one year), loans made underrevolving credit arrangements, and other loans with maturi-ties of less than one year. These rates were published bysize category and region as well as for the entire nation.

Starting in January 1972 the Federal Reserve began amonthly survey of interest rates on a variety of bank loansfor the Committee on Interest and Dividends (the CIDsurvey). The committee, which was chaired by FederalReserve Chairman Arthur Burns, was established by Execu-tive Order in October 1971 to formulate and execute aprogram for voluntary restraint on interest rates anddividends. The CID survey, which was conducted inaddition to the QIRS, collected monthly data on selectedloan interest rates from a panel of about 350 banks of allsizes. One portion of this survey gathered data on the "mostcommon" rate on small, short-term, noninstallment busi-ness loans. Another portion of the survey collected dataon the prime rates applicable to small and large businessloans. Averages of these rates, calculated on an unweightedbasis, were published in a Federal Reserve statisticalrelease.

In 1977 the Federal Reserve replaced the QIRS and thebusiness loan portion of the CID survey with the Survey ofTerms of Bank Lending to Business (STBL). The newsurvey was similar to the QIRS, but the panel of respon-dents was expanded considerably and included banks of allsizes. The respondents reported the terms on loans extendedin the first full business week of the middle month of eachquarter. The responses were used to estimate the averagerate and terms on all business loans and on loans of varioussizes and maturities that were extended by all U.S. commer-cial banks during the survey week.

Three significant changes to the STBL preceded thecurrent revision. First, in 1982 the reporting of loan matu-rity was changed from months to days to allow overnightloans, which were becoming much more common at thattime, to be detected. Second, starting in 1986 the respon-dents were asked to report the base rate used in the settingof loan interest rates because banks were increasingly usingmarket rates rather than the prime rate to price businessloans. Finally, in 1989 construction and land developmentloans secured by real estate, which had been included as aseparate category on the STBL until that time, were droppedfrom the survey.



Adilinx Information on Loan Risk

The ability to distinguish among possible reasons fora movement in loan interest rates could contribute toimproved monetary policy. If, for example, banksraise or lower loan interest rates for borrowers ofunchanged quality, this change could have implica-tions for spending and aggregate demand that wouldbe important in setting monetary policy. Alterna-tively, a change in the average loan rate resultingfrom a shift in the composition of bank loans couldsuggest that banks have modified their lending stan-dards, again with possible implications for monetarypolicy. For example, a lowering of standards couldinduce a rise in the average loan rate, as a largernumber of risky borrowers received loans at rela-tively high interest rates.

In the past, however, using the survey data tomonitor developments in business loan pricing washampered by a lack of information on loan risk. Forexample, when spreads of loan rates over base ratesrose sharply in the early 1990s, the increase mayhave arisen from tighter loan pricing by banks asa result of their desire to limit credit extensions, aworsening of the average quality of new borrowers,or both.

In recent years, an increasing share of banks haveassigned internal risk ratings to their business loans.This development provided the Federal Reserve withan opportunity to collect information on banks'assessment of loan riskiness. For this information to

be useful, however, three conditions had to be met:First, the proportion of banks assigning risk ratingsto new loans reported on the STBL had to be suffi-ciently large; second, banks had to use more than onerating for acceptable new loans; and, third, the defini-tions of the ratings had to be independent of the stateof the economy.

To determine whether these criteria could be met,Reserve Bank staff members consulted with 114STBL respondents. Of these, about 85 percentreported assigning risk ratings to new business loansor business borrowers (table I).4 All of the largebanks (those with outstanding commercial and indus-trial loans of more than $1 billion) assigned internalrisk ratings, and virtually all of the medium-sizedbanks (commercial and industrial loans between$100 million and $1 billion) did so. Even among thesmall banks (commercial and industrial loans of lessthan $100 million), about two-thirds reported havinga risk rating system. More detailed interviews withpersonnel from eight STBL respondents indicatedthat definitions of risk-rating categories did not gener-ally change in the face of changing economic condi-tions, at least at those institutions.

At most banks, ratings varied enough across loansto make the information provided on loan risk valu-able. Most commonly, banks used between three and

4. A bank thai had only a single rating for acceptable new loanswas not counted as having a rating system.

I. [ i i lomiali im i in IIDIIICSIK' b a n k s ' inkTlial rut I nir s\ steins tor business loans. h\ size ol hank, N o v e m b e r

Item All Large Medium Small

Percentage rating either loans or borrowers

Average percentage of new loans rated at banks that rated loansBy number ,By dollar volume

Average number of internal rating categoriesFor classified loans'For pass loans'

Average number of rating categories, with each having 10 percentor more of the dollar volume of new loans

Percentage of banks with 75 percent or more of the dollar volumeof new loans in one rating category

Average share of new loan volume in the rating categorywith the largest share

Average rating category assigned to a borrower withan unsecured bond rating of BBB2

MEMONumber of respondents

85.1

95.296.6

7.793.704.00

2.49

37.7

64.8

3.29

114

100.0

97.498.0

8.663.634.77

3.04

12.0

53.6

3.66

32

94.1

93.995.9

7.564.003.77

2.22

47.8

68.4

2.96

34

68.8

94.595.8

7.183.483.43

2.24

51.7

71.6

3.20

48

NOTE. The data were compiled from consultations with 114 respondents tothe STBL. These consultations were conducted lo collect information to be usedin deciding on the revisions to the survey. The size of bank is based on thevolume of commercial and industrial loans on the bank's books as of Septem-

ber 30. 1995: For large banks, more than $1 billion; medium-sized banks,between $100 million and $1 billion; and small banks, less than $100 million.

1. For definition, see text.2. On an ascending scale in which I is the rating with the lowest risk.


Recent Changes to the Federal Reserve's Survey of Terms of Business Lending 607

five ratings for new pass loans, with larger bankshaving more pass ratings on average. Although inpractice most banks assigned the bulk of their loansto a smaller number of rating categories, they gener-ally placed at least 10 percent of new loans in eachof two or three rating categories. Many banks alsoassigned smaller, but still significant, proportionsof new loans to another one or two rating categories.Small banks tended to assign their loans to fewerrating categories. Indeed, more than half of the smallbanks indicated that they assigned the same rating to75 percent or more of their new loans, while only12 percent of the large banks did so.

The substantial differences among the rating sys-tems of different banks posed a major obstacle to thecollection on the STBL of useful information on loanrisk. Some of the banks included in the consultationsused only one pass rating, while others had as manyas eleven. Even banks that used the same number ofratings were likely to have differing definitions of theindividual categories. In addition, banks labeled thecategories in different ways, some with numbers,others with letters, and a few with a mix of numbersand letters. Although most banks had adopted theconvention that a rating of 1 represented the lowestrisk, a small number of banks used that number fortheir highest risk category.

Given these differences, it was necessary to mapthe risk ratings of each respondent into a singlesystem. Two approaches for this mapping procedurewere considered. Under the first, the Federal Reservewould collect and maintain a concordance for eachrespondent, showing how that respondent's risk rat-ings mapped into a common rating system. Alterna-tively, the respondents would do the mapping them-selves before submitting their data.

The first method appeared to be impractical,whereas the second offered some advantages. Underthe first method, Federal Reserve staff memberswould have had to gather and maintain a considerableamount of information on each respondent's ratingsystem to make the translations. In addition, banksthat had recently merged might have more than onerating system, and so for these respondents the ratingsystem applied to each loan would have to be iden-tified. In contrast, under the second method, bankswould likely find it easier to construct concordancesthemselves rather than provide descriptions of theirrisk ratings in sufficient detail to allow the FederalReserve staff to construct them. Similarly, althoughchanges in a bank's rating system over time wouldrequire an adjustment to the concordance, the bankwould not need to provide information about suchchanges to the Federal Reserve.

With these considerations in mind, the FederalReserve decided on the second method: The surveyasks respondents to translate their internal ratingsinto one of five rating categories provided in thesurvey instructions, including four pass categories:"minimal risk," "low risk," "moderate risk," and"acceptable risk." The moderate-risk category isdefined to cover the average loan under averageeconomic conditions at the typical bank. The fifthrating is a "classified" category for risky loans—likely part of workout arrangements for troubledborrowers—that the respondents judge belong in theexamination categories "special mention," "substan-dard," "doubtful," or "loss."5 The survey also allowsfor unrated loans because some of the banks con-sulted indicated that they did not usually rate sometypes of business loans, most often those to smallbusinesses.

< Hlit'r . W u ' i>r Rt:vi\t'<l hems

A second important change to the survey wasdesigned to allow an assessment of the sensitivity ofloan rates to changes in market rates and to improvethe Federal Reserve's ability to match loan rates tomarket rates of an appropriate maturity when calcu-lating spreads. To accomplish these aims, banks areasked to report the first date on which rates onvariable-rate loans are scheduled to adjust. (Fre-quently, loans are priced so that the interest rateadjusts at specified intervals over the life of the loan,typically with respect to market rates such as those onlarge time or Eurodollar deposits.)

The revised survey also asks banks to providemore information about the options available toterminate a loan. Previously, the survey addressedthis concept by asking respondents to classify a loanas a "demand loan" if the bank had the right to call it(that is, demand immediate repayment) or renegotiateits terms at any time. Loans were also classified asdemand loans if the borrower had the option toprepay it without cost (that is, without a prepaymentpenalty or "breakage fee"). Banks were instructed toidentify demand loans by leaving the reported matu-rity date blank. This reporting method resulted in theloss of maturity information for demand loans andprovided no information on whether the option toterminate the loan belonged to the borrower, thebank, or both. In contrast, the revised survey asks

5. The appendix contains the definitions of the risk-rating cate-gories as presented in the survey instructions.



banks to report the date of maturity for every loanhaving a stated maturity and to report separatelywhether the loan can be called and whether it has aprepayment penalty.

Items Dropped from the Survey

Two items were dropped from the survey as of May1997. One asked banks to report the size of the largerloan syndication or participation, if any, of which areported loan was a part. This information appliedto only a small share of loans, and many banks hadnoted that it was difficult to provide. The other itemasked banks whether the commitment under which aloan was extended was formal or informal. This itemwas dropped because some banks found it difficult toreport and because the increased use of informalcredit lines by high-quality firms blurred the distinc-tion between the two types of commitments.

Expansion of the Survey Panel

Until the most recent revision, the STBL panel con-sisted entirely of domestic banks.6 However, sincethe inception of the STBL, the share of the volumeof all U.S. domestic business loans held by U.S.branches and agencies of foreign banks has increasedfrom about 7 percent to about 25 percent (chart 1). Asa result, the exclusion of these institutions from theSTBL panel resulted in a progressively less repre-sentative measure of business loan conditions inthe United States because lending terms at foreignbranches and agencies may be influenced by foreigndevelopments that do not directly affect domesticinstitutions. To remedy this shortcoming, the surveywas expanded to include a sample of up to fifty U.S.branches and agencies of foreign banks. Collection ofinformation from these institutions allows the estima-tion and publication (in the Federal Reserve Bulletinand in the E.2 statistical release) of separate estimatesof terms on loans extended in the United States byforeign branches and agencies.

Two criteria were used in the selection of the panelinstitutions from the universe of more than 450 U.S.branches and agencies of foreign banks: the insti-tution's size and the nationality of its parent bank.Because larger institutions make more and largerloans than smaller institutions, they have a larger

1. Shaiv of l.'.S. business loans held by U.S. brandies andagencies of foreign banks. 1977-May IWK

— 10

1 I I I I I I I I I I I 1 I I I I I I I I 111978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

NOTE The data are monthly.

effect on the rates, maturities, and other loanterms available in the market. The nationality of theparent bank was considered important because evi-dence from the Report of Assets and Liabilitiesof U.S. Branches and Agencies of Foreign Banks(FFIEC 002) indicates that the behavior of the bal-ance sheet items of U.S branches and agencies ofJapanese banks can differ significantly from that ofnon-Japanese (primarily European) institutions.

The classification of the panel by size and national-ity resulted in five groups. The first group comprisedthe fifteen largest foreign branches and agencies(regardless of nationality), as measured by the vol-ume of commercial and industrial loans outstanding.All of these institutions were selected for inclusion inthe panel. The remaining universe of institutions wasthen split into two size classes, large and small, andthe two size classes were split into Japanese andnon-Japanese subclasses; the remaining panel institu-tions were then selected randomly from these fourgroups. The number of panel members selected fromeach of the four groups was chosen to provide thebest possible estimates of loan terms at all foreigninstitutions.7

PRELIMINARY RESULTS I-ROM THE REVISEDSURVEY

Although the new items should have their main pay-off in helping to explain changes in loan pricing over

6. Currently, ihe domestic panel consists of a stratified randomsample of up to 348 U.S. commercial banks intended to represent theentire domestic banking universe.

7. About thirty of the fifty institutions originally selected for theforeign panel participated in the May 1998 survey. Some of the othershave been unable to participate thus far but have indicated that theywill be able to report on future surveys. When selected institutions areunable to participate, new panel members are substituted.



time, the results from the initial surveys incorporat-ing the revisions have also provided interesting infor-mation on risk ratings and pricing patterns for loansand their relationship to capital market spreads.

Reporting of Loan Risk Ratings

In the May 1998 survey, nearly 85 percent of thedomestic respondents and more than 95 percent ofthe foreign branches and agencies reported risk rat-ings for some or all of their loans (table 2). Amongthe domestic banks, medium-sized banks were mostlikely to provide ratings, but the differences by sizeof bank were small compared with those found in theconsultations. The explanation for this divergencemay be that some small banks without internal riskratings used the definitions provided in the STBLinstructions to rate the small number of loans theymade in the survey week. Moreover, some largebanks that do have internal risk ratings may not beable to provide ratings on the survey because auto-mated systems are not yet in place for this survey orhave not been updated to incorporate the changesto the survey. Because of the large number of loansreported by the larger respondents, providing riskratings manually may be prohibitively expensive.

Those banks that reported risk ratings in theMay survey provided them for nearly all—

98 !/2 percent—of the loans they reported. A seconddivergence between the consultations and the STBLresults was that small loans appeared to be almost aslikely to receive a rating as large loans. This differ-ence may reflect increased efforts to apply ratings, orit may arise from improvements in technology sincethe consultations took place that allow ratings to beassigned to these loans at lower cost.

Consistent with the results of the consultations wasthe finding that a respondent's loans tended to beconcentrated in relatively few of the STBL ratingcategories, especially at the smaller domestic banks.The number of rating categories receiving more than10 percent of new loans averaged 2.5 for the largedomestic banks but just 1.5 for the small banks.Similarly, while one-fifth of the large banks gave thesame rating to 75 percent or more of new loans (bydollar volume), about half of the medium-sized banksand two-thirds of the small banks did so. As might beexpected, given that the parent institutions of theforeign branches and agencies are generally fairlylarge, the distributions of their ratings were similarto those of the larger domestic banks. On average,the foreign branches and agencies had 2.2 cate-gories, each with at least 10 percent of new exten-sions; only 31 percent of them assigned 75 percent ormore of the dollar volume of new loans to a singlerisk class.

S T B L FL'SQIIS lor risk rat ings, by type i>l insti iution. May 199S

Item AllDomestic

All Large Medium SmallForeign

Percenlage of respondents providing ratings'SamplePopulation

Average percentage of new loans with a ratingat institutions providing ratings

By numberBy dollar volume

Average percentage of loans with a rating,by size of loan (thousands of dollars)

1-99100-9991,000-9,99910.000andmore

Average number of rating categories, with each having10 percent or more of the dollar volume of new loans

Percentage of institutions with 75 percent or moreof the dollar volume of new loans in one rating category .

Average share of new loan volume in the rating categorywith the largest share

MEMONumber of respondents2

84.276.0

98.498.3

93.894.697.697.0

1.61

64.7

79.5

283

82.775.6

98.498.3

93.793.595.091.5

1.59

66.1

80.1

254

84.582.9

92.992.0

86.691.894.691.5

2.49

20.0

56.3

70

88.988.7

96.897.8

97.197.595.8

1O0.0

1.81

50.1

75.8

72

77.774.9

98.698.4

96.994.8

100.0

1.53

69.4

81.4

112

96.696.6

99.9100.0

99.799.699.8

100.0

2.19

30.8

63.5

29

NOTE. The size categories for domestic banks are based on the volume ofcommercial and industrial loans on the bank's books as of December 31, 1997;see the general note to table 1 for categories.

1. The sample figures show unweighted results for the survey respondents.Other figures are estimates for the population of all domestically charteredcommercial banks and U.S. branches and agencies of foreign banks.

2. In addition, 24 respondents, mostly small domestic banks, had no newbusiness loans in the survey week.



2. Distribution ol loan originations and average interestrates, by risk ratina. May I99S STB],

Volume of originations

— 50

- 40

— 30

— 20

— 10

Average interest rate

Minimal Low Moderate Acceptable Classified

NOTE. See Ihe appendix for definitions of the risk ratings.

The larger number of categories actively employedby the larger domestic banks and the U.S. branchesand agencies of foreign banks could be the result ofmore detailed internal risk-rating systems at theseinstitutions, which could yield a wider range of rat-ings in the common system. Alternatively, the largerdomestic and foreign institutions may make loanswith a greater range of risk than the smaller domesticbanks do.

Loan Pricing and Risk Ratings

The largest percentage of loan originations—morethan 40 percent by volume—were classified as hav-ing moderate risk (the middle-risk category). Rela-tively small percentages—less than 10 percent—ofloans were reported in the minimal-risk and classifiedcategories (chart 2). About 25 percent of the loanswere classified as having low risk, and less than20 percent were in the acceptable-risk category.

As expected, effective loan rates generally increaseon average with risk, although the rate on classifiedloans (the highest-risk category) is relatively low,perhaps because of the low rates on some workoutloans (chart 3). To separate the effect of risk ratingson loan rates from the effects of other loan character-istics, we used multiple regression analysis. Regres-

Averagc interest rale, by type of institution and risk ratine. May 1WH STBL

Large domestic banks Medium-sized domestic banks— 10

U.S. branches and agencies Of foreign banks

Minimal Low Moderate Acceptable Classified Minimal Low Moderate Acceptable Classified

NOTE. See the general note to table 1 for size definitions and Ihe appendix fordefinitions of [he risk ratings.Digitized for FRASER

http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis


sion results that control for the loan characteristicsmeasured by the survey show that the estimateddifference in rates between loans in the minimal-riskcategory and those in the acceptable-risk category isabout 75 basis points—about 50 basis points less thanthe difference between the average rates on loans inthese categories shown in chart 2 (table 3).

The risk premiums indicated by the regressionresults are roughly in line with yield spreads on ratedsecurities, at least for higher-quality loans. The low-

risk category is defined to include loans to firms withBBB-rated debt. Rates on loans in this category areestimated to be 15 basis points higher than those onloans in the minimal-risk category. This spread issomewhat smaller than that between the yields onAA-rated and BBB-rated bonds, but it is similar tothe spread between the rates on medium-grade andprime, one-month commercial paper. At the lower-quality end, the estimated premium on loans in thehighest-risk category (classified) relative to loans in

1. Coefficients from m r e g r e s s i o n e q u a t i o n 1 , l o r i h e e i t i x t i v e l o a n r a t e , h y t y p e o f i i i s t i i u t u m , .May ] lWK

Independent variable AllDomestic

Large Medium SmallForeign

Constant

Risk raring.,Minimal ..LowModerate ..AcceptableClassified .Missing -..

Repricing interval...ZeroDaily2-30 days31-365d»ysMore than 365 days .Missing

MaturityOvernight2-30 days31-365daysMore than 365 days .None

Size of loan1

SmallMedium . . .LargeJumbo

Base ratePrimeFederal funds..Other domesticForeignOther

Termination optionsCallablePrepayment penalty .

Other termsUnder commitment .Secured

Tvpe of institution*SmallMediumLargeForeign

Number of observations .

MEMONumber of respondents4

7.83

-.64-.49

.12

.14

.57

.31

.20

.09

.20-.11

.15-.54

-.52-.09.13.08.40

.15-.30-.73

.98-.89-.18-.44

.53

-.09.02'

-.06.04

.59

.01'-.28-.31

.45

44,529

283

7.46

-.85-.51

.17

.15

.66

.38

,27.13.26

-.22.15

-.59

-.51-.11

.12

.07

.42

.94

.2!-.32-.84

.92-.90-.11-.38.47

-.13.09

-.04'.02'

.41

33.889

70

8.59

-.38-.53

.09

.21

.44

.17

- .06'.24

-.02'.00'.17

-.33

.31'-.09'-.03'-.17-.03'

.87

.23'-.40-.71'

.82-.51

.36-.93

.26

.08-.55

-.21-.11

.20

6.775

72

9.63

-1.31-.16'

.2i

.381.04-.16'

.04'-.24'- . 11 '

.10'

.21'

-.67'.52'.30'.05'

-.19'

.80

.05'-.85'

.21'

.76'-.46'-.38'-.13'

.07'-.13'

.02'-.62

.17

1,155

112

6.69

-.33-.26

.09

.34

.42-.25'

.08'-.13- .01 '- . 01 '-.00'

.08'

-.10'.17.34

-.13-.27

.06'-i03'

.09-.12

2.30-.77-.74-.39-.40

.04'

.13

.11'

.40

.69

2.710

29

NOTE. The regressions are unweighled.The coefficients on each sel of dummyvariables thai are exhaustive (risk rating, repricing interval, maturity, size ofloan, base rate, and type of institulion) are restricted to sum to zero.

1. This coefficient is not statistically significant at the 5 percent level. Unlessotherwise noted, the remaining coefficients are significant at that level.

2. The loan st^e dummy variables are defined as follows: Small loans arethose less than or equal to $100,000; medium-sized, larger than $100,000 butless than or equal to $1 million; large, larger than $1 million but less than orequal to SI0 million; and jumbo, larger than $10 million.

3. For the definitions of size of bank, see the general note to table I.4. See note 2 to table 2.Digitized for FRASER



the lowest-risk category (minimal risk) is 121 basispoints. This result is well below the difference inyield between AA-rated bonds and junk bonds at thetime of the May survey. This difference may reflectthe better protections that bank loans can offer in theevent of difficulties, as well as the inclusion of rela-tively low-interest-rate workout loans in the classi-fied category.

The regression coefficients on the dummy vari-ables for risk ratings indicate that small banks chargethe largest rate premiums for increased loan riskwhile medium-sized banks charge the smallest. Rateson loans rated as having minimal risk and acceptablerisk differ by 100 basis points at large domesticbanks, 59 basis points at medium-sized banks, and169 basis points at small banks; at the foreign institu-tions, this spread is 67 basis points. The coefficientson risk ratings generally rise in step with risk for boththe domestic and foreign institutions.

Loan Pricing and Re/vicing Intervals

An examination of the distribution by repricing inter-val of the volume of loan originations in the Maysurvey reveals that loans with a repricing interval ofzero (primarily prime-rate-based loans, which byindustry practice are subject to repricing at any time)accounted for about 15 percent of the dollar volumeof new loans (chart 4).8 Because these loans tend tobe relatively small, however, they accounted for morethan 40 percent of the number of loans originated.Conversely, loans that reprice daily, which tend tobe large, accounted for nearly half the dollar vol-ume but only about 15 percent of the number ofnew loans. Loans with repricing intervals longer thana year accounted for only a small proportion oforiginations.9

The average rate on zero-interval loans, which, asalready noted, are typically prime based, is higherthan the average rate on loans that reprice every day(chart 4, bottom panel). Aside from prime-basedloans, loan rates in the May survey rose on averagewith the length of the repricing interval. The regres-

4, Distribution of loan originations ;md average interest rale,by repricing interval. May IW8 STBL

8. The repricing interval is the time between the date the loan ismade and the next date on which the loan interest rate can change.

9. The distributions reported here are for originations and so arenot representative of the outstanding amounts of business loans onbanks' books. Loans with shorter maturities will make up a largershare of originations than of outstandings. Repricing intervals andmaturities tend to move together (indeed, for fixed-rate loans they arethe same), and so the distribution of originations by repricing intervalis more heavily weighted toward shorter-interval loans than would bethe distribution of outstandings.

Perccnl

Volume of originations

Average interest rate

— 8

Zero DailyMore than365 days

NOTIL. Loans with a zero repricing interval can reprice at any time andlargely have prime-based rates.

sion results show, however, that once the effects ofother loan terms are taken into account, changes inthe repricing interval did not have a consistent effecton loan interest rates despite the slight upward tilt tothe yield curve during the survey week (table 3, firstcolumn). In part, this apparent lack of influence mayreflect imprecise measurement of risk. As noted, theratings reported on the survey do appear to provideinformation on banks' assessment of loan risk. How-ever, with only five risk-rating categories, manybanks may find it difficult to map their internal rat-ings into those used for the survey. As a result ofthese difficulties, some portion of loan risk is likelynot accounted for by the risk rating and may becorrelated with loan terms. For example, if banks aremore willing to make fixed-rate loans with long matu-rities to low-risk borrowers or to those with high-quality collateral, then the regression results for therepricing interval variables may be capturing both theslope of the yield curve and also the lower averagerisk of those receiving loans with long repricingintervals.



Termination Options

During the May survey week about 10 percent ofloan originations, by volume, were callable and about30 percent were subject to a prepayment penalty.Larger loans were more likely to have a prepaymentpenalty, however; by number, more than 90 percentof the loan originations did not have a penalty.10

The regression results suggest little relationshipbetween loan interest rates and termination options.The coefficients on the dummy variables designatingloans that can be called and those with prepaymentpenalties are generally small and of differing signsacross the subsamples. Negative coefficients wouldindicate that lenders were accepting lower loan inter-est rates in order to obtain the option to call a loanor to restrict the option to repay the loan. However,banks may be more likely to impose these conditionswhen the borrower has undesirable characteristicsthat are not fully captured by the risk ratings, result-ing in positive or zero coefficients.

Lending Terms at the U.S. Branches andAgencies of Foreign Banks

The addition of the foreign branches and agencieshad a substantial effect on the estimated averageterms on new business loans (table 4). The foreign-related institutions accounted for nearly half of thegross commercial and industrial loan extensions inthe survey week—about twice the share of such loanson their books (chart 1). This high proportionreflected the larger average size and shorter averagematurity of the loans made by these institutions. Theaverage loan at foreign branches and agencies wasmore than $5.8 million—roughly twelve times theaverage loan size at domestic banks. The averagematurity of new loans at the branches and agencieswas 115 days, less than one-third of the averagematurity at domestic banks. The loans at branchesand agencies were about as likely to be made undercommitment, to be secured with collateral, or to becallable but far more likely to have a prepaymentpenalty than loans at domestic institutions. The aver-

4 Average loan terms .il dnmost ic ami foreign inst i tut ions,

by dol lar vo lume ol loan ex tens ions . May I'J9S

Term

Size (thousands of dollars)Average maturity (days)Average reprieing interval (days)Percentage secured by collateralTermination options (percent)

CallablePrepayment penally

Made under commitment (percent) . . . .Average risk rating'Effective rate (percent)

MEMO:Gross extensions (billions of dollars) ..Number of respondents2

All Domestic Foreign

805 453 5,817269 419 11547 69 22

36.6 37.1 36.1

11.7 13.8 9.431.0 9,9 53.973.5 73.3 73.62.97 2.96 2.986.80 7.23 6.34

134.7 70.7 63.9283 254 29

NOTE. The figures shown are estimates for all domestically chartered com-mercial banks and U.S. branches and agencies of foreign banks.

1. Risk ratings range from 1 (least risk) to 5 (highest risk). See the appendixfor definitions of the rating categories.

2. See note 2 to table 2.

age risk rating for loans at the foreign-related institu-tions was about the same as that at domestic banks.Nonetheless, the average loan interest rate was about90 basis points lower at the branches and agencies.As shown by the coefficient on the dummy variablefor foreign institutions (table 3, first column), how-ever, rates at these lenders are similar to those at largedomestic banks once the effects of other loan charac-teristics are taken into account.

CONCLUSION

The addition to the STBL of an item on loan riskrating provides a unique source of information on theriskiness of new business loans. This informationshould improve the interpretation of trends in loanpricing and so contribute to the formulation of mone-tary policy. The information also improves the Fed-eral Reserve's knowledge of banks' use of riskratings. The addition of U.S. branches and agenciesof foreign banks to the survey panel makes the dataon loan pricing more comprehensive, and thereforethe data should provide better information onloan interest rates and other terms available in themarket.

10. Largely because of the infrequency of prepayment penalties.90 percent of the volume of loans reported by domestic banks on theMay 1997 survey should properly have been classified as demandloans under the instructions before the revisions. Only 23 percent ofthe loans on the February 1997 survey, the last before the surveychanges, were reported as demand loans, suggesting that in the pastmany banks were incorrectly reporting maturities for loans that shouldhave been classified as demand loans.

AL'I'LNDIX: INSTRUCTIONS FOR THEREPORTING OF THE NEW ITEMS ON THE.SUR\EY OF TERMS OF BUSINESS LENDING

The following excerpts from the STBL instructionsare for the items that became part of the survey inMay 1997. The new items are the following: the next



date on which the loan rate may be recalculated, thetermination options, and the risk rating."

\c.\f Dah' mi \\ liich the loan Rate \Liy AYRcculculu.icd

Enter the first date on which the rate on the loan willbe recalculated to reflect changes in the base rate, ifany.

For a loan rate that can be recalculated at any time(as with many prime-based loans), enter the datemade.

If the interest rate on the loan is fixed for a periodless than the maturity of the loan (for example, a loanthat matures in 90 days but has a rate that is recalcu-lated every 30 days relative to the 30-day LIBOR),enter the date on which the interest rate can first berecalculated.

If the interest rate is fixed for the life of the loan,enter the loan's date of maturity.

If the interest rate is fixed and the loan has nostated date of maturity, enter "0 ."

Do not enter your institution's own internal riskrating.

If your institution rates loans, but a particular loanis unrated, or not yet rated, enter " 0 " for that loan.

If your institution does not assign internal riskratings to business loans, either (a) leave this columnblank or (b) use the categories presented below tomake the assignment.

The definitions provided here take account of boththe characteristics of the borrower and the protectionsprovided in the loan contract. Note that the defini-tions are intended to characterize ranges of risk;hence the definition of your institutions's internalrating for a loan probably will not exactly match anyof the provided definitions. Enter the numerical des-ignation that corresponds most closely to the internalrating of your institution.

The risk rating categories provided here are notintended to establish a supervisory standard for themaintenance or reporting of internal risk ratingsystems.

M i n i m a l R i s k ( F i l l e r

Ivnnniottoii ()pu<>n.\

a. Check "yes" under "Callable" when, accord-ing to the terms of the agreement, the lender can callor renegotiate the terms of the loan before maturity.Otherwise, check "no" under "Callable."

Check "no" if the lender's ability to call or renego-tiate the loan is contingent on a change in the statusof the borrower (for example, an increase in theborrower's debt-equity ratio).

b. Check "yes" under "Prepayment penalty"when the borrower must pay a penalty or fee (some-times called a "breakage fee") in order to repay orreprice the loan before its scheduled maturity or thenext scheduled date on which the rate is recalculated(if any). If there is no such fee or penalty, check "no"under "Prepayment penalty."

If your institution assigns internal risk ratings tobusiness loans, enter the numerical designation fromthe list provided below that most closely matches thedefinition of the internal rating assigned to this loan.

11. The report form and a complete sel of instructions are availableon request from the Financial Reports Section, of the Board's Divisionof Research and Statistics, at 202-452-3829.

Loans in this category have virtually no chance ofresulting in a loss. They would have a level of risksimilar to a loan with the following characteristics:

• The customer has been with your institution formany years and has an excellent credit history.

• The customer's cash flow is steady and well inexcess of required debt repayments plus other fixedcharges.

• The customer has an AA or higher public debtrating.

• The customer has excellent access to alternativesources of finance at favorable terms.

• The management is of uniformly high qualityand has unquestioned character.

• The collateral, if required, is cash or cash equiva-lent and is equal to or exceeds the value of the loan.

• The guarantor, if required, would achieveapproximately this rating if borrowing from yourinstitution.

I .<<\v R i s k ( L n k T " J " )

Loans in this category are very unlikely to result in aloss. They would have a level of risk similar to a loanwith the following characteristics:

• The customer has an excellent credit history.



• The customer's cash flow is steady and comfort-ably exceeds required debt repayments plus otherfixed charges.

• The customer has a BBB or higher public debtrating.

• The customer has good access to alternativesources of finance at favorable terms.

• The management is of high quality and hasunquestioned character.

• The collateral, if required, is sufficiently liquidand has a large enough margin to make very likelythe recovery of the full amount of the loan in theevent of default.


Moderate Kisk (tinier "}")

Loans in this category have little chance of resultingin a loss. This category should include the averageloan, under average economic conditions, at thetypical lender. Loans in this category would havea level of risk similar to a loan with the followingcharacteristics:

• The customer has a good credit history'.• The customer's cash flow may be subject to

cyclical conditions but is adequate to meet requireddebt repayments plus other fixed charges even after alimited period of losses or in the event of a somewhatlower trend in earnings.

• The customer has limited access to the capitalmarkets.

• The customer has some access to alternativesources of finance at reasonable terms.

• The firm has good management in importantpositions.

• Collateral, which would usually be required, issufficiently liquid and has a large enough margin to

make likely the recovery of the value of the loan inthe event of default.


Acceptable Risk fbuler "4")

Loans in this category have a limited chance ofresulting in a loss. They would have a level of risksimilar to a loan with the following characteristics:

• The customer has only a fair credit rating but norecent credit problems.

• The customer's cash flow is currently adequateto meet required debt repayments, but it may notbe sufficient in the event of significant adversedevelopments.

• The customer does not have access to the capitalmarkets.

• The customer has some limited access to alterna-tive sources of finance possibly at unfavorable terms.

• Some management weakness exists.• Collateral, which would generally be required, is

sufficient to make likely the recovery of the value ofthe loan in the event of default, but liquidating thecollateral may be difficult or expensive.

• The guarantor, if required, would achieve thisrating or lower if borrowing from your institution.

Special Mention 01 Classified Asset ft'nier "5")

Loans in this category would generally fall into theexamination categories "special mention," "substan-dard," "doubtful," or "loss." They would primarilybe workout loans, as it is highly unlikely that newloans would fall into this category. •


616

Industrial Production and Capacity Utilizationfor June 1998

Released for publication July 16

Industrial production declined 0.6 percent in Juneafter a revised gain of 0.3 percent in May. Ongoingstrikes, which have curtailed the output of motorvehicles and parts, accounted for the decrease inindustrial production. Excluding motor vehicles, theoutput of business equipment posted a strong gainin June; the output of most other major market

groups weakened or remained about unchanged. At128.1 percent of its 1992 average, industrial produc-tion in June was 3.7 percent higher than it was inJune 1997; excluding the output of motor vehiclesand parts, the twelve-month increase was 4.1 percent.Capacity utilization dropped 0.8 percentage point inJune, to 81.6 percent.

For the second quarter, industrial output rose2.5 percent at an annual rate after a gain of 1.2 per-

Industrial production indexesRatio scale, 1992= 100

_ Consumer goods

Durable /

- v

_ Equipment

Business

Defense and space N.

1 1 1 1 1 1

A / ^ _

Nondurable

1 1

1

130

120

110

100

90

150

130

110

- 90

_ Intermediate products

Construction supplies

J L

Materials

Durable goods

J I

Ratio scale, 1992= 100

Business supplies —

Nondurable goodsand energy

130

120

110

100

90

150

130

110

90

1990 1992 1994 1996 1998 1990 1992 1994 1996 1998

Capacity utilizationPercent of capacity

- 85

- 80

- 75

Percent of capacity

- 85

- 80

- 75

1984 1986 1988 1990 1992 1994 1996 1998 1984 1986 1988 1990 1992 1994 1996 1998

All series are seasonally adjusted. Latest series, June. Capacity is an index of potential industrial production.Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

617

Industrial production and capacity utilization, June 1998

Category

Industrial production, index, 1992=100

1998

Mar.' Apr.' May' Junep

Percentage change

1998'

Mar.' Apr.' May' June

June 1997to

June 1998

Total

Previous estimate

Major market groupsProducts, total2

Consumer goodsBusiness equipmentConstruction supplies

Materials

Major industry groupsManufacturing

DurableNondurable

MiningUtilities

Total

Previous estimate

ManufacturingAdvanced processingPrimary processing ..

MiningUtilities

128.0

127.8

121.3116.0148.7124.2138.7

130.8148.6112.6108.0114.3

Average,1967-97

82.1

81.180.582.487.587.3

128.5

128.2

121.9116.7150.2124.0139.2

131.6149.6113.3107.0113.5

128.9

128.8

122.1116.9150.5125.3139.7

131.7150.3112.7108.0116.2

128.1

121.4115.5150.6125.0138.8

130.9148.8112.6105.8116.7

.5

.4

.6

.81.3

-1.6.4

.2

.5-.3-.75.7

.4 .3 -.6

.3 .5

.5

.61.0-.2

.4

.6

.7

.6- .9- .7

.2

.2

.31.1.3

.0

.5-.5

.92.4

Capacity utilization, percent

Low,1982

High,1988-89

1997

June

1998

Mar.' Apr.' May'

71.1

69.070.466.280.375.9

85.4

85.784.288.988.092.6

82.3

81.379.485.889.687.7

82.4

82.2

81.279.585.191.289.6

82.4

82.1

81.479.785.390.388.9

82.4

82.2

81.179.584.791.091.0

- .6-1.2

.0-.3-.6

-.6-1.0-.1

-2.0

June

81.6

80.378.584.389.191.3

3.7

3.21.87.42.34.4

3.85.41.9.1

5.3

MEMOCapacity,

per-centagechange,

June 1997to

June 1998

4.6

5.26.03.3

.71.1

NOTE. Data seasonally adjusted or calculated from seasonally adjustedmonthly data.

1. Change from preceding month.

2. Contains components in addition to those shown,r Revised,p Preliminary.

cent in the first quarter. The improvement in thesecond quarter was largely attributable to a reboundin utility output as temperatures throughout the coun-try returned to more normal levels. However, manu-facturing production decelerated from a 2.3 percentrate of increase in the first quarter to a 1.7 percentrate in the second quarter; manufacturing outputexcluding motor vehicles also slowed.

MARKET GROUPS

The output of consumer goods declined 1.2 percentin June, with the decline in motor vehicles account-ing for much of the loss. The production of otherconsumer durables also fell noticeably and reversedmost of the 1.8 percent increase in May. The outputof consumer nondurable goods was unchanged inJune. The production of non-energy products hasremained sluggish for several months; energy prod-ucts, a category that was quite volatile earlier in theyear, was also little changed last month.

The production of business equipment was un-changed; it was restrained by the drop in assembliesof business vehicles that led to a 5.2 percent declinein the output of transit equipment. Excluding motorvehicles, the production of business equipmentadvanced sharply in June. Led by a sharp increase inthe production of construction machinery, the outputof industrial equipment rebounded 2.2 percent afterfalling in May. The production of other equipment—notably farm machinery and equipment and officefurniture and fixtures—also bounced back and morethan reversed the decline in May. The output ofinformation processing equipment advanced further,mainly on the strength of gains in the productionof computing and office equipment and telephoneapparatus.

The output of construction supplies edged down0.3 percent after having increased 1.1 percent in Mayand remained close to the high level seen in the firstquarter. The production of materials declined 0.6 per-cent, with weakness both in the durable goods



materials used to make motor vehicles and in energymaterials. The production of nondurable goods mate-rials was flat, as activity in paper materials declinedfurther and the output of textiles and chemicals con-tinued to be sluggish.

INDUSTRY GROUPS

Manufacturing output declined 0.6 percent, largelybecause of the 11 percent drop in production in themotor vehicle and parts industry. Although the strikein the motor vehicle and parts industry contributedsignificantly to the 1.0 percent drop in production indurable manufacturing, weakness was evident inother industries as well. Output rose in only threeindustry groups within durables: stone, clay, and glassproducts; industrial machinery and computing equip-ment; and electrical machinery. The output of non-durables was little changed, as gains in chemicals andproducts and in petroleum products were offsetby declines in all other industries. Mining activitydecreased 2 percent, and output at utilities rose0.4 percent.

The factory operating rate decreased 0.8 percent-age point, to 80.3 percent. The rate for advanced-processing industries fell 1.0 percentage point, to78.5 percent; the operating rate for motor vehiclesand parts fell 8.4 percentage points, a decrease mostlyreflecting effects of strikes. The rate for primary-processing industries declined 0.4 percentage point,to 84.3 percent, and has fallen 2 percentage pointssince the end of last year. The operating rate at minesdropped 1.9 percentage points, to 89.1 percent, whilethe rate at utilities increased 0.3 percentage point, to91.3 percent.

This release contains revised estimates of capacityfor selected industries for the period March throughDecember 1998. The revision lowered the estimatedgrowth of aggregate capacity 0.5 percentage pointbetween December 1997 and December 1998. Inaddition, the industrial production indexes wererevised to reflect the semiannual revision to seasonalfactors for motor vehicle assemblies and for seriesthat use production-worker hours as their monthlyindicator. Seasonal factors were not changed for theperiod before March 1998. •


619

Statements to the Congress

Statement by Laurence H. Meyer, Member, Board ofGovernors of the Federal Reserve System, before theCommittee on the Judiciary, U.S. House of Represen-tatives, June 3,1998

I am pleased to appear before this committee onbehalf of the Federal Reserve Board to discuss anti-trust issues related to mergers and acquisitionsbetween U.S. banks and between banking organiza-tions and other financial services firms. Under U.S.law, when considering the competitive effects of aproposed bank merger or acquisition, the Board isrequired to apply the competitive standards containedin the Sherman and Clayton antitrust acts. Underthese standards, the Board may not approve a pro-posal that would result in a monopoly or that maysubstantially lessen competition or tend to create amonopoly in a particular market. In the case of pro-posals that involve the acquisition of a nonbankingcompany by a bank holding company, the Boardmust consider whether the acquisition can reasonablybe expected to produce benefits to the public, such asgreater convenience, increased competition, or gainsin efficiency, that outweigh possible adverse effects.My statement today will discuss how the FederalReserve implements these requirements. I will alsotry to provide some broad perspective on the ongoingconsolidation of the U.S. banking system and thepotential effects of bank mergers.

It is important to understand that the Bank HoldingCompany Act does not give the Board unfettereddiscretion in acting on merger and acquisition propos-als and that competition is not the only criterion thatthe Board must consider when assessing such a pro-posal. Other factors that the Bank Holding CompanyAct requires that the Board consider include thefinancial and managerial resources and future pros-pects of the companies and banks involved in theproposal and the effects of the proposal on the con-venience and needs of the community to be served,including the performance record of the depositoryinstitutions involved under the Community Reinvest-ment Act. The Bank Holding Company Act also

NOTE. The attachments to this statement are available from Publi-cations Services. Mail Stop 127, Board of Governors of the FederalReserve System, Washington, DC 20551, and on the Board's site onthe World Wide Web (http://www.bog.frb.fed.us).

establishes nationwide and individual state depositlimits for interstate bank acquisitions and consoli-dated home country supervision standards for foreignbanks. In my testimony before the Committee onBanking and Financial Services on April 29, I dis-cussed each of these topics in some detail.1 Lastly,if a bank holding company proposes to acquire afiim that is engaging in an activity not previouslyapproved for bank holding companies, the Boardmust determine whether such activities are so closelyrelated to banking or to managing or controllingbanks as to be a "proper incident" to banking.

TIIENDS IN MERGERS AND BANKINGSTRUCTURE

It is useful to begin a discussion of the Board'santitrust policy toward bank mergers with a briefdescription of recent trends in merger activity andoverall U.S. banking structure. The statistical tablesat the end of my statement provide some detail thatmay be of interest to the committee.

BANK MERGERS

There have been more than 7,000 bank mergers since1980. The pace accelerated from 190 mergers with$10.2 billion in acquired assets in 1980 to 649 with$123.3 billion in acquired assets in 1987. In the1990s, the pace of both the number and dollar vol-ume of bank mergers has remained high. So far thisyear, the rapid rate of merger activity has continued.For example, if only the five largest mergers oracquisitions approved or announced since Decemberare completed, a total of more than $500 billion inbanking assets will have been acquired.

The incidence of "megamergers," or mergersamong very large banking organizations, is a trulyremarkable aspect of current bank merger activity.But it is useful to recall that very large mergers beganto occur with growing frequency after 1980. In 1980,there were no mergers or acquisitions of commercialbanking organizations in which both parties had

1. See Federal Reserve Bulletin, vol. 84 (June 1998), pp. 438-51.



$1.0 billion in total assets. The years 1987 through1997 brought growing numbers of such acquisitionsand, reflecting changes in state and federal laws,an increasing number of these involved interstateacquisitions by bank holding companies. The larg-est mergers in U.S. banking history took placeor were approved during the 1990s—includingChase-Chemical, Wells Fargo-First Interstate,NationsBank-Barnett, and First Union-CoreStates.And while these mergers set size precedents, therecently proposed mergers of Citicorp and Travelers,and NationsBank and BankAmerica, if consummated,would set a new standard for sheer size in U.S.banking organizations.

National Banking Structure

The high level of merger activity since 1980, alongwith a large number of bank failures, is reflected in asteady decline in the number of U.S. banking organi-zations from 1980 through 1997. In 1980, there weremore than 12,000 banking organizations, denned asbank holding companies plus independent banks;banks (independent banks plus banks owned by hold-ing companies) in total numbered nearly 14,500. By1997, the number of organizations had fallen to about7,100 and the number of banks to just more than9,000. The number of organizations had declinedmore than 40 percent and the number of banks bymore than one-third.

The trends I have just described must be placed inperspective because taken by themselves they hidesome of the key dynamics of the banking industry.There are some other important characteristics ofU.S. banking. While there were about \ ,450 commer-cial bank failures and more than 7,000 bank acquisi-tions between 1980 and 1997, some 3,600 new bankswere formed. Similarly, while more than 18,000 bankbranches were closed, the same period saw the open-ing of nearly 35,000 new branches. Perhaps evenmore important, the total number of banking officesincreased sharply from about 53,000 in 1980 tomore than 71,000 in 1997, a 35 percent rise, and thepopulation per banking office declined. This includesformer thrift offices that were acquired by bankingorganizations. Fewer banking organizations clearlyhas not meant fewer banking offices serving thepublic.

These trends have been accompanied by a substan-tial increase in the share of total banking assetscontrolled by the largest banking organizations. Forexample, the proportion of domestic banking assetsaccounted for by the 100 largest banking organiza-

tions went from just more than one-half in 1980, tonearly three-quarters in 1997. The increase in nation-wide concentration reflects, to a large degree, aresponse by the larger banking organizations to theremoval of state and federal restrictions on geo-graphic expansion both within and across states. Theindustry is moving from many separate state bankingstructures toward a nationwide banking structure thatwould have existed already had legal restrictions notstood in the way. The increased opportunities forinterstate banking are allowing many banking organi-zations to reach for the twin goals of geographic riskdiversification and new sources of "core" deposits.

As I will discuss shortly, it may well be that theretail banking industry is moving toward a structuremore like that of some other local market industriessuch as clothing and department store retailing. As inretail banking, clothing and department store custom-ers tend to rely on stores located near their home orworkplace. These stores may be entirely local or maybe part of regional or national organizations. Thus, itshould perhaps not be surprising that banks, nowfreed of barriers to geographic expansion, are takingadvantage of the opportunity to operate in local mar-kets throughout the country as have firms in otherretail industries.

But it would be a mistake to think that adjustmentto a new statutory environment—and the increasedopportunities for geographic diversification—werethe only reasons for the current volume of bankmerger activity. Each merger is somewhat unique andlikely reflects more than one motivation. For exam-ple, a recent study of scale economies in bankingsuggests that efficiencies associated with larger sizemay be achieved up to a bank size of about $10 bil-lion to $25 billion in assets. In addition, some lines ofbusiness, such as securities underwriting and marketmaking, require quite large levels of activity to beviable.

Increased competitive pressures caused by rapidtechnological change and the resulting blurring ofdistinctions between banks and other types of finan-cial firms, lower barriers to entry due to deregulation,and increased globalization also contribute to mergeractivity. Global competition appears to be especiallyimportant for banks that specialize in corporate cus-tomers and wholesale services, especially among thevery largest institutions. Today, for example, almost40 percent of the U.S. domestic commercial andindustrial bank loan market is accounted for byforeign-owned banks.

More generally, greater competition has forcedinefficient banks to become more efficient, acceptlower profits, close up shop, or—in order to exit a


Statements to the Congress 621

market in which they cannot survive—merge withanother bank. Other possible motives for mergersinclude the simple desire to achieve market power orthe desire by management to build empires andenhance compensation. Some mergers probably occuras an effort to prevent the acquiring bank itself frombeing acquired, or, alternatively, to enhance a bank'sattractiveness to other buyers.

Many of these factors are also motivating mergersbetween bank and nonbank financial firms. However,in these cases, a key causal factor is the ongoingblurring of distinctions between what were, not verylong ago, quite different financial services. Today, asthe Board has testified on many occasions, anddespite the fact that banks continue to offer a uniquebundle of services for retail customers, it is increas-ingly difficult to differentiate between many productsand services offered by commercial banks, invest-ment banks, and insurance companies. Thus, weshould not find it surprising that firms in each ofthese industries should seek partners in the others.

Local Market Banking Structure

Given the Board's statutory responsibility to applythe antitrust laws so as to ensure competitive bankingmarkets, it is critical to understand that nationwideconcentration statistics are generally not the appro-priate metric for assessing the competitive effectsof mergers. Moreover, the extent to which mergerscan increase national concentration is limited by theprovisions in the Riegle-Neal Act of 1994, whichamended the Bank Holding Company Act and estab-lished national (10 percent) and state-by-state(30 percent) deposit concentration limits for inter-state bank acquisitions. States may establish a higheror lower limit, and initial entry into a state by acqui-sition is not subject to the Riegle—Neal statewide30 percent limit.

Beyond this, the Board has a statutory responsibil-ity to apply the antitrust laws so as to ensure competi-tive local banking markets. Evidence indicates that inthe vast majority of cases the relevant concern forcompetition analysis is competition in local bankingmarkets. This is based partly on survey findings thatindicate that households and small businesses obtainmost of their financial services in a very local area. Inaddition, it is based on empirical research that showsdeposit rates tend to be lower and some loan rates,particularly those on loans to small businesses, arehigher in local markets with relatively high levels ofconcentration.

While concentration has increased in some localmarkets, it has decreased in others, from 1980

through 1997, in both urban and rural markets, so thatthe average percentage of bank deposits accountedfor by the three largest firms has remained steady oractually declined slightly, even as nationwide concen-tration has increased substantially. Essentially similartrends are apparent when local market bank concen-tration is measured by the Herfindahl-HirschmanIndex (HHI), defined as the sum of the squares of themarket shares. Because of the importance of localbanking markets, I would like to provide somewhatmore detail on the implications of bank mergers forlocal market concentration.

Metropolitan Statistical Areas (MSAs) and non-MSA counties are often used as proxies for urban andrural banking markets. The average three-firm de-posit concentration ratio for urban markets decreased3 percentage points between 1980 and 1997. Averageconcentration in rural counties declined 1.7 percent-age points. Similarly, the average bank-deposit-basedHHI for both urban and rural markets fell between1980 and 1997. When thrift deposits are given a50 percent weight in these calculations, average HHIsare sharply lower than the bank-only HHIs in a givenyear, but the HHIs trend slightly upward since 1984.On balance, the three-firm concentration ratios andthe HHI data indicate that, despite the fact that therewere more than 7,000 bank mergers between 1980and 1997, local banking market concentration hasremained about the same.

Why haven't all of these mergers increased aver-age local market concentration? There are a numberof reasons. First, many mergers are between firmsoperating primarily in different local banking mar-kets. While these mergers may increase national orstate concentration, they do not tend to increase con-centration in local banking markets and thus do notreduce competition.

Second, as I have already pointed out, there is newentry into banking markets. In most markets, newbanks can be formed fairly easily, and some keyregulatory barriers, such as restrictions on interstatebanking, have been all but eliminated.

Third, the evidence overwhelmingly shows thatbanks from outside a market usually do not increasetheir market share after entering a new market byacquisition. Studies indicate that when a local bank isacquired by a large out-of-market bank, there is nor-mally some loss of market share. The new owners arenot able to retain all of the customers of the acquiredbank. Anecdotal evidence suggests that some otherbanks in the market mount aggressive campaigns tolure away customers of the bank being acquired.

Fourth, it is important to emphasize that smallbanks have been, and continue to be, able to retain



their market share and profitability in competitionwith larger banks. Our staff has done repeated studiesof small banks; all of these studies indicate that smallbanks continue to perform as well as, or better than,their large counterparts, even in the banking marketsdominated by the major banks. This may be due, inpart, to more personalized service. But whatever thereason, based on this experience, we expect that therewill continue to be a large number of banks remain-ing in the future.

Despite a continued high level of merger activity,studies based on historical experience suggest that inabout a decade there may still be about 3,000 to4,000 banking organizations, down from about 7,000today. Although the top ten or so banking organiza-tions will almost certainly account for a larger shareof banking assets than they do today, the basic sizedistribution of the industry will probably remainabout the same. That is, there will be a few very largeorganizations and an increasing number of smallerorganizations as we move down the size scale. Itseems reasonable to expect that a large number ofsmall, locally oriented banking organizations willremain. Moreover, size does not appear to be animportant determining factor even for internationalcompetition. Only very recently have U.S. banksbegun to appear, once again, among the world'stwenty largest in terms of assets. Yet those U.S. banksthat compete in world markets are consistently amongthe most profitable and best capitalized in the world,as well as being ranked as the most innovative.

Finally, administration of the antitrust laws hasalmost surely played a role in restricting local marketconcentration. At a minimum, banking organizationshave been deterred from proposing seriously anti-competitive mergers. And in some cases, to obtainmerger approval, applicants have divested bankingoffices with their assets and deposits in certain localmarkets where the merger would have otherwiseresulted in excessive concentration.

Overall, then, the picture that emerges is that ofa dynamic U.S. banking structure adjusting to theremoval of long-standing legal restrictions on geo-graphic expansion, technological change, and greatlyincreased domestic and international competition.Even as the number of banking organizations hasdeclined, the number of banking offices has contin-ued to increase in response to the demands of con-sumers, and measures of local banking concentrationhave remained quite stable. In such an environment,it is potentially very misleading to make broad gener-alizations without looking more deeply into what liesbelow the surface. In part for the same reasons thatmake generalizations difficult, the Federal Reserve

devotes considerable care and substantial resourcesto analyzing individual merger applications.

FEDERAL RESERVE'S APPLICATION OFANTITRUST STANDARDS

The Federal Reserve Board is required by the BankHolding Company Act (1956) and the Bank MergerAct (1960) to review specific statutory factors arisingfrom a transaction when (1) a holding companyacquires a bank or a nonbank firm or merges withanother holding company, or (2) the bank resultingfrom a merger of two banks is a state-charteredmember bank. The Board must evaluate, among otherthings, the likely effects of such mergers on competi-tion. This section of my statement discusses in somedetail the methodology the Board uses in assessingthe competitive effects of a proposed merger.

Competitive Criteria

In considering the competitive effects of a proposedbank acquisition, the Board is required to apply thesame competitive standards contained in the Shermanand Clayton antitrust acts. The Bank Holding Com-pany (BHC) Act and the Bank Merger Act do containa special provision, used primarily in troubled-bankcases, that permits the Board to balance public bene-fits from proposed mergers against potential adversecompetitive effects. The law also requires that theBoard consider the potential effects on competition inthe relevant market when bank holding companiesacquire nonbank firms, as will be discussed later.

The Board's analysis of competition begins withdefining the geographic areas that are likely to beaffected by a merger. Under procedures establishedby the Board, these areas are defined by staff at thelocal Reserve Bank in whose District the mergerwould occur, with oversight by staff in Washington.In mergers where one or both parties are in twoFederal Reserve Districts, the Reserve Banks cooper-ate, as necessary. To ensure that market definitioncriteria remain current, and in an effort to betterunderstand the dynamics of the banking industry, theBoard has recently sponsored several surveys, includ-ing national Surveys of Small Business Finances, atriennial national Survey of Consumer Finances, andtelephone surveys in specific merger cases, to assist itin defining geographic markets in banking. Thesesurveys are particularly useful because electronictechnology and banks with widespread branch net-works are becoming more prevalent. The surveys andother evidence continue to suggest that small busi-



nesses and households most often obtain their bank-ing services in their local area. This implies using alocal geographic market definition for analyzing com-petition. Local markets would, of course, be lessimportant for the financial services obtained by largebusinesses.

With this basic local market orientation of house-holds and small businesses in mind, the staff con-structs a local market index of concentration, theHHI, which is widely accepted as a useful measure ofmarket concentration, in order to conduct a prelimi-nary screen of a proposed merger. The HHI is calcu-lated based on local bank and thrift deposits. Themerger would generally not be regarded as anticom-petitive if the resulting market share, the HHI, andthe change in that index do not exceed the criteria inthe Justice Department's merger guidelines for bank-ing. However, while the HHI is an important indica-tor of competition, it is not a comprehensive one. Inaddition to statistics on market share and bank con-centration, economic theory and evidence suggestthat other factors, such as potential competition, thestrength of the target firm, and the market environ-ment, may have important influences on bank behav-ior. These other factors have become increasinglyimportant as a result of many recent procompetitivechanges in the financial sector. Thus, if the resultingmarket share and the level and change in the HHI arewithin Justice Department guidelines, there is a pre-sumption that the merger is acceptable, but if they arenot, a more thorough economic analysis is required.

To conduct such an analysis of competition, theBoard uses information from its own major nationalsurveys noted above, from telephone surveys ofhouseholds and small businesses in the market beingstudied, from on-site investigations by staff, and fromvarious standard databases with information on mar-ket income, population, deposits, and other variables.These data, along with results of general empiricalresearch by Federal Reserve System staff, academics,and others, are used to assess the importance ofvarious factors that may affect competition. To pro-vide the committee with an indication of the range ofother factors the Board may consider in evaluatingcompetition in local markets, I shall outline thesefactors.

Potential competition, or the possibility that otherfirms may enter the market, may be regarded as asignificant procompetitive factor. It is most relevantin markets that are attractive for entry and wherebarriers to entry, legal or otherwise, are low. Thus,for example, potential competition is of relativelylittle importance in markets where entry is unlikelyfor economic reasons.

Thrift institution deposits are now typically ac-corded 50 percent weight in calculating statisticalmeasures of the impact of a merger on market struc-ture for the Board's analysis of competition. In someinstances, however, a higher percentage may beincluded if thrift institutions in the relevant marketlook very much like banks, as indicated by the sub-stantial exercise of their transactions account, com-mercial lending, and consumer lending powers.

While the merger guidelines provide a significantallowance for nonbank competition, competitionfrom other depository and nonbank financial institu-tions may be given some additional consideration ifsuch entities clearly provide substitutes for the basicbanking services used by most households and smallbusinesses. In this context, credit unions and financecompanies may be particularly important.

The competitive significance of the target firm canbe a factor in some cases. For example, if the bankbeing acquired is not a reasonably active competitorin a market, the loss of competition would not beconsidered to be as severe as would otherwise be thecase.

Adverse structural effects may be offset somewhatif the firm to be acquired is located in a decliningmarket. This factor would apply where a weak ordeclining market is clearly a fundamental and long-term trend, and there are indications that exit bymerger would be appropriate because exit by closingoffices is not desirable, and shrinkage would lead todiseconomies of scale. This factor is most likely to berelevant in rural markets.

Competitive issues may be reduced in importanceif the bank to be acquired has failed or is about to fail.In such a case, it may be desirable to allow someadverse competitive effects if this means that bankingservices will continue to be made available to localcustomers rather than be severely restricted or per-haps eliminated.

A very high level of the HHI could raise questionsabout the competitive effects of a merger even if thechange in the HHI is less than the Justice Departmentcriteria. This factor would be given additional weightif there has been a clear trend toward increasingconcentration in the market. The possibility of effi-ciency gains, especially via scale economies, is con-sidered when appropriate, although this has generallynot been a significant factor.

Finally, other factors unique to a market or firmwould be considered if they are relevant to the analy-sis of competition. These factors might include evi-dence on the nature and degree of competition in amarket, information on pricing behavior, and thequality of services provided.



Some merger applications are approved only afterthe applicant proposes the divestiture of offices inlocal markets and when the merger cannot be justi-fied using any of the criteria I have just discussed. Webelieve that such divestitures have provided a usefulvehicle for eliminating the potentially anticompeti-tive effects of a merger in specific local marketswhile allowing the bulk of the merger to proceed.

Remedies: Divestitures and Denials

The Board makes a concerted effort to provide theindustry and other market participants with clearcompetition standards in order to make the regulatoryprocess as efficient as possible. This is accomplishedespecially through published Board Orders on indi-vidual merger decisions. Furthermore, staff at theReserve Banks and the Board often provide guidanceto banks and bank holding companies that are consid-ering a merger even before the filing of a formalapplication as well as after an application is filed. Inthis way, applicants learn very early in the processwhether their application is likely to raise antitrustconcerns. In fact, because this information regardingthe principles applied by the Board in its competitiveanalysis is so readily available, applicants are able tostructure proposals so that few merger applicationsare denied on competitive grounds.

Some potential applicants choose not to file anapplication after having been advised of the Board'spolicy and standards. Other potential applicants, whorecognize that their application raises serious con-cerns about competition, choose to make divestituresof offices to remedy the competition problem. As Iindicated above, divestitures have proven to be aneffective way for applicants to resolve a competitionproblem without jeopardizing the entire deal. Indeed,the Board has approved forty-eight merger applica-tions involving divestitures during the 1990s.

Board denials of applications on competitivegrounds are rare. Nevertheless, despite the Board'sefforts to inform the industry of its antitrust policyand standards, the Board has denied four applicationsbecause of adverse competitive effects during the1990s.

Reviews of Policies and Procedures

Given the rapid pace of change in the U.S. bankingand financial system, the Board and its staff reviewpolicies and procedures for assessing competition ona nearly continuous basis. Periodically, more formalreviews are conducted, the most recent of which was

completed by Board staff early last year. This reviewessentially confirmed the continued appropriatenessof our existing methodology. I would like to highlightfive aspects of that review that might be of particularinterest to the committee.

Since at least the mid-1960s, the cluster of prod-ucts and services that constitutes commercial bankinghas been used, and reaffirmed by the courts, as therelevant product line for bank merger analysis. Thecluster is meant to encompass the set of products andservices that is purchased primarily from banks, a setthat technological and other market developmentshave clearly changed over time. However, extensivereview of available data, including our practical expe-rience in analyzing cases, indicated that there stillexists a core of such activities for both householdsand small businesses. Such activities certainly includefederally insured deposits and, for small businesses,likely encompass certain credit products and servicesas well. Thus, the cluster continues to be the productline used by the Board for bank merger analysis.

The staff's review also indicated very strong sup-port for the continued use of local geographic mar-kets for the cluster of bank services as the primaryconcern of competition analysis. Survey data indi-cate, for example, that 98 percent of households and92 percent of small businesses use a local depositoryinstitution. In addition, it is estimated that almost90 percent of services consumed at depositories byhouseholds and 95 percent of services consumed bysmall business are provided by local depositories. Ona closely related issue, our staff considered whether itmight be appropriate to use somewhat different com-petition standards in urban and rural markets. Thisquestion was motivated by the fact that, because ruralmarkets tend to be more concentrated than urbanmarkets, it is frequently more difficult for banks in agiven rural market to merge with each other than it isfor banks in an urban market. However, no objectivebasis was discovered for treating urban and ruralmarkets fundamentally differently in the analysis ofpotential competitive effects of a merger. Thus, allproposals continue to be evaluated on a case-by-casebasis using common standards.

Our staff also reviewed whether continued use ofthe Department of Justice's merger guidelines wasappropriate or whether, in light of institutional andtechnological changes, a more liberal initial screenshould be applied. While the market for bankingservices certainly has become more competitive sincethe existing guidelines were established in 1984, thecurrent guidelines continue to provide a useful initialscreen for deciding whether a proposed merger islikely to have anticompetitive effects. In particular,



the more generous allowance in the guidelines forthe effects of nonbank competition were deemedto remain sufficient for the vast majority of cases.Exceptions can be dealt with on an individual basis.Moreover, there is considerable virtue in having boththe Federal Reserve and the Department of Justiceuse the same initial screen. In the end, there appearsto be no substitute for a careful case-by-case analysis,of the type that I discussed above, of proposals thatviolate the Board's and the Department of Justice'sinitial guidelines.

Lastly, in light of a substantial body of evidenceaccumulated over the 1980s, economies of scale areconsidered as a potential mitigating factor in ouranalysis of merger proposals. Many studies usingdata from the 1970s and 1980s indicated only smalleconomies of scale in banking, economies that wereexhausted at about $100 million in total assets. How-ever, recent research using data from the 1990ssuggests that significant scale economies may existfor much larger firms, perhaps for banks as large as$10 billion to $25 billion in assets. If these resultshold up to additional scrutiny, we will clearly need toevaluate once again the weight given to economies ofscale in competition analysis.

A significant amount of information is also sharedon an ad hoc basis. Direct staff-to-staff communica-tions, including conversations and meetings, play animportant role in the resolution of difficult competi-tive issues. Communications between the staffs of theDOJ and the Federal Reserve can be frequent andmay occur without limit at any stage of the appli-cation process, including pre-application and post-approval. In the past, a range of issues has beendiscussed and resolved informally, including bothgeographic and product market definitions and dives-titure requirements. Such informal interactions occurroutinely in both banking and nonbanking cases andare probably the single most important means bywhich the Federal Reserve and the DOJ coordinatetheir competitive analyses.

The DOJ places substantial weight on the potentialeffect of a merger on lending to small businesses. TheBoard also considers small business lending but inthe context of the more general analysis of the clusterof banking services. Because of these differences inemphasis, the Board and DOJ may, in occasionalcases, reach different conclusions regarding the com-petitive effects of a merger.

Coordination with Department of Justice

The Federal Reserve and the Department of Justice(DOJ) coordinate their antitrust analysis of bankingconsolidations through a combination of formal andinformal procedures. These procedures have twoobjectives. First, they ensure that the two agenciesshare information that is relevant to the competitionanalysis of all bank merger proposals that raise aserious competitive issue. Second, they ensure thatthe analysis of each agency is known to the other.

A number of procedures have been developed atvarious stages of the application process. Largely,they entail the exchange or sharing of documents.The DOJ, for example, is provided a copy of all bankapplications made to the Federal Reserve. The geo-graphic markets used to conduct the competitiveanalysis are provided by the Federal Reserve to theDOJ. Also, the DOJ regularly (about every twoweeks) sends the Federal Reserve and other bankingagencies a document listing those mergers that theDOJ believes are not likely to have significantlyadverse competitive effects. Finally, in cases involv-ing DOJ-required divestitures, the DOJ typicallysends the Federal Reserve a copy of the "letter ofagreement" that identifies the terms of the requireddivestitures.

Recent Cases

As I noted earlier, the Board has always believed thatit is important to make its antitrust policy clear to theindustry and other members of the public. One way itattempts to accomplish this is by providing a detailedanalysis of competitive issues in its public Order oneach case. In a number of recent large and complexcases, the Board has reinforced its policy and meth-odology for analyzing competition and remindedapplicants of the need for noticeable and possiblyincreasing, "mitigators" in cases that exceed theDOJ screening guidelines. This was done becauseduring the past couple of years an increasing numberof applicants came very close to the Board's limits, interms of structural effects and strength of mitigatingfactors, for approving bank mergers. It appeared asthough some applicants had concluded that the Boardhad relaxed its competition standards. That conclu-sion is incorrect.

For example, in one recent Order the Board noted,

As the Board has indicated in previous cases, in a marketin which the competitive effects of a proposal as measuredby market indexes and market share exceed the DOJGuidelines, the Board will consider whether other factorstend to mitigate the effects of the proposal. The numberand strength of factors necessary to mitigate the competi-



tive effects of a proposal depend on the level of marketconcentration and size of the increase in marketconcentration.2

The Board has recently also considered cases inwhich Department of Justice guidelines wereexceeded in a large number of local markets. In thosecases as well, the Board indicated that mitigatingfactors should exist in each local market beingaffected. There, the Board stated,

In these cases, the Board believes that it is important togive increased attention to the size of the change in marketconcentration as measured by the HHI in highly concen-trated markets, the resulting market share of the acquirorand the pro forma HHIs in these markets, the strength andnature of competitors that remain in the market, and thestrength of additional positive and negative factors thatmay affect competition for financial services in eachmarket.3

In summary, at a time when the banking industry isundergoing an unprecedented merger movement thatis likely to continue for a considerable period, it isparticularly important to have a public policy thatwill maintain a competitive banking marketplace andthat is well understood by all market participants.The Board seeks to accomplish these public policyobjectives in an efficient and effective manner bymaintaining a relevant and up-to-date policy, cooper-ating closely with the Department of Justice, keepingthe industry and other members of the public wellinformed, and providing information and guidancethrough staff at the Board and Reserve Banks.

Nonbank Acquisitions

The ability of bank holding companies to engage in awide range of nonbanking activities was made pos-sible by the 1970 amendments to the Bank HoldingCompany Act. Permissible nonbanking activities arethose that satisfy a two-part test delineated in sec-tion 4(c)(8) of the Bank Holding Company Act. Thistest first requires the Board to find that a nonbankingactivity is "closely related to banking." Second, theBoard must determine that the performance of theactivity "can reasonably be expected to producebenefits to the public, such as greater convenience,increased competition, or gains in efficiency, thatoutweigh possible adverse effects, such as undue

2. "First Union Corporation." Federal Reserve Bulletin, vol. 84(June 1998), p. 494.

3. "NationsBank Corporation," Federal Reserve Bulletin, vol. 84(February 1998), pp. 134-35.

concentration of resources, decreased or unfair com-petition, conflicts of interest, or unsound bankingpractices."

The Board has determined that nonbanking activi-ties are closely related to banking if they meet anyone of three criteria: (1) Banks generally have in factprovided the proposed services; (2) banks generallyprovide services that are operationally or functionallyso similar to the proposed services as to equip themparticularly well to provide the proposed services; or,(3) banks generally provide services that are so inte-grally related to the proposed services as to requiretheir provision in a specialized form.

The competitive effects of a proposal must bereviewed as part of the "net public benefits" test thatgoverns nonbanking acquisitions. Unlike the case inbanking acquisitions, however, in every nonbankingacquisition, the Board must also weigh other possibleeffects—such as undue concentration of resourcesand the existence of unfair competition—against pub-lic benefits and find that public benefits are predomi-nant in order to approve the proposal.

Generally, the Board's competitive analysis of non-banking acquisitions is very similar to that used inbanking mergers. In particular, the economic analysisbegins with determining the product market in ques-tion and then the relevant geographic area for assess-ing competition. The relevant market area may belocal, regional, national, or international, dependingon the product under review and the exact nature ofthe marketplace. Then, proposed changes in marketstructure are examined along with other factors, suchas potential competition, to determine the extent towhich competition may be reduced. Over the years,nonbanking acquisitions generally have raised fewercompetitive concerns than banking mergers. This isbecause nonbanking activities have generally beenconducted in markets where industry concentrationwas low or moderate and where numerous competi-tors existed (for example, consumer finance andmortgage banking).

CONCLUSION

The Federal Reserve is required by law to assess thecompetitive implications of proposed bank mergersand acquisitions. In order to fulfill its statutoryresponsibilities, the Federal Reserve devotes consid-erable resources to the case-by-case evaluation ofmerger proposals. The Board normally focuses itsanalysis on a proposed merger's potential impact oncompetitive conditions in local markets for bankingservices. In some cases, particularly those involving



the acquisition of nonbank firms, broader geographicareas are used. The Federal Reserve's (along with theDepartment of Justice's) administration of the anti-trust laws in banking has helped to maintain competi-

tive banking markets in the midst of the most signifi-cant consolidation of the banking industry in U.S.history. It is the Board's intention and expectationthat this will continue to be the case in the future.

Statement by Edward M. Gramlich, Member, Boardof Governors of the Federal Reserve System, beforethe Subcommittee on Social Security of the Commit-tee on Ways and Means, U.S. House of Representa-tives, June 3,1998

I am pleased to appear before the committee to testifyon social security reform. I speak for myself, as pastchair of the 1994-96 Quadrennial Advisory Councilon Social Security, and not in my current status as amember of the Federal Reserve Board.

Let me first engage in some retrospection. At thetime I and other members of the Advisory Councilspoke before your committee last year, our report wasjust out and there was much publicity about the factthat we couldn't agree on a single plan but had threeseparate approaches. Since that time, it strikes methat there has been a coalescence around the middle-ground approach I advocated. After our report, boththe Committee for Economic Development (CED)and Senator Moynihan came out with plans thatadopted some of the features of my plan. Two weeksago the National Commission on Retirement Policy(NCRP) came out with a similar plan, again adoptingsome features of my plan. In political terms thecenter seems to be holding—since our report, therehas been increased interest in sensible middle-groundapproaches, and I would encourage this committee towork in that direction.

In trying to reform social security, the middle-ground approach has two goals. The first is to makeaffordable the important social protections of thisprogram that have greatly reduced aged poverty andthe human costs of work disabilities. The second is toadd new national saving for retirement both to helpindividuals maintain their own standard of living inretirement and to build up the nation's capital stockin advance of the baby boom retirement crunch.

My compromise plan, called the IndividualAccounts (IA) Plan, achieves both goals. It preservesthe important social protections of social security andstill achieves long-term financial balance in the sys-tem by what might be called kind and gentle benefitcuts. Most of the cuts would be felt by high wageworkers, with disabled and low wage workers beinglargely protected from cuts. Unlike the other twoplans proposed in the Advisory Council report, there

would be no reliance at all on the stock market tofinance social security benefits and no worsening ofthe finances of the Health Insurance Trust Fund.

The IA plan includes some technical changes suchas including all state and local new hires in socialsecurity and applying consistent income tax treat-ment to social security benefits. These changes gosome way to eliminating social security's actuarialdeficit.

Then, beginning in the twenty-first century, twoother measures would take effect. There would be aslight increase in the normal retirement age for allworkers, in line with the expected growth in overalllife expectancy (also proposed by the CED, SenatorMoynihan, and the NCRP). There would also be aslight change in the benefit formula to reduce thegrowth of social security benefits for high wageworkers (also proposed by the CED and NCRP).Both of these changes would be phased in verygradually to avoid actual benefit cuts for presentretirees and "notches" in the benefit schedule(instances when younger workers with the same earn-ings records get lower real benefits than older work-ers). The result of all these changes would be amodest reduction in the overall real growth of socialsecurity benefits. When combined with the risingnumber of retirees, the share of the nation's outputdevoted to social security spending would beapproximately the same as at present, eliminating thispart of the impending explosion in future entitlementspending.

These benefit cuts alone would mean that highwage workers would not experience rising real bene-fits as their real wages grow, so I would supplementthese changes with another measure to raise overallretirement (and national) saving. Workers wouldbe required to contribute an extra 1.6 percent oftheir pay to newly created individual accounts. Theseaccounts would be owned by workers but centrallymanaged. Workers would be able to allocate theirfunds among five to ten broad mutual or index fundscovering stocks and bonds. Central management ofthe funds would cut down the risk that funds wouldbe invested unwisely, would cut administrative costs,and would mean that Wall Street firms would not findthese individual accounts a financial bonanza. Thefunds would be converted to real annuities on retire-



ment, to protect against inflation and the chance thatretirees would overspend in their early retirementyears.

Some observers have objected to mandating newretirement contributions now, when there is a wel-come prospect of federal budget surpluses. TheNCRP, for example, uses both the surpluses and theHealth Insurance Fund to help finance individualaccounts. I see some problems with that approach,though it does lessen the political difficulty of man-dating additional pension coverage. Another optionmight be to rely on the already extensive privatepension system to fill gaps in the existing pensioncoverage of workers. Tax qualification rules might bechanged to include a provision that requires the fullparticipation of all corporate employees in order toqualify for favorable tax treatment.

The social security and pension changes togetherwould mean that approximately the presently sched-

uled level of benefits would be paid to all wageclasses of workers, of all ages. The differencebetween the outcome and present law is that underthis plan these benefits would be affordable, as theyare not under present law. The changes would elimi-nate social security's long-run financial deficit whilestill holding together the important retirement safetynet provided by social security. They would reducethe growth of entitlement spending. They would sig-nificantly raise the return on invested contributionsfor younger workers. And the changes would movebeyond the present pay-as-you-go financing schemeby providing new saving to build up the nation'scapital stock in advance of the baby boom retirementcrunch.

As the Congress debates social security reform,I hope it will keep these goals in mind and con-sider these types of changes in this very importantprogram.

Statement by Roger W. Ferguson, Jr., Member, Boardof Governors of the Federal Reserve System, beforethe Subcommittee on Finance and Hazardous Mate-rials of the Committee on Commerce, U.S. House ofRepresentatives, June 4, 1998

It is a pleasure to be here today to discuss the FederalReserve's perspective on the implications of develop-ments in electronic commerce generally and elec-tronic payments specifically. In my testimony, I willfocus on addressing the questions posed in ChairmanBliley's letter of April 9 to Chairman Greenspan.

In the past several years, an unprecedented varietyof new electronic banking and payment services havebeen developed. The Federal Reserve has beenfollowing these developments closely, meeting anumber of times with industry participants to learnmore about the products and technologies that maybe offered to banking customers. Of course, many ofthese new products and technologies are still in thevery early phases of development and implementa-tion, and they are likely to change considerably overthe coming years as the market evolves.

NEW BANKING AND PAYMENT PRODUCTS ANDSERVICES

It is important to recognize that many of what aredescribed as new forms of money or payment simplyinvolve delivering or gaining access to existing retailbanking products and services in new ways. The

ability to send an electronic message from a personalcomputer that instructs a bank to pay a bill fromthe consumer's checking account using traditionalpayment systems is one example. A protocol forsending encrypted messages containing credit cardinstructions—the most common means of paymenton the Internet today—is another. Many of theseservices can also be viewed as similar, in concept, tocommunications and payment arrangements that havebeen available to banks and large corporations formany years. Increasingly, this technology is becom-ing cost effective at the consumer level, as personalcomputer prices have fallen and widespread access tothe Internet has opened the way for low-cost elec-tronic data communications between individuals andtheir financial institutions.

Emerging payment products that have been thesubject of considerable publicity in recent yearsinclude stored-value cards and "electronic cash" foruse on the Internet. These new forms of paymenthave been referred to collectively as "electronicmoney" in a number of different studies, includingthose conducted over the past few years by the Groupof Ten countries.1 Although electronic money prod-ucts have some novel features, they are generallybased on the prepaid payment concept familiar fromtravelers checks and money orders. With many of

1. See, for example, Group of Ten, Electronic Money: Consumerprotection, law enforcement, supervisory and cross border issues(Bank for International Settlements, 1997); Committee on Paymentand Settlement Systems and the Group of Computer Experts, Securityof Electronic Money (Bank for International Settlements, 1996).



these products, a prepaid balance of funds availableto the consumer (a liability of the issuing institution)is recorded on a magnetic strip, smart card chip, orthe consumer's personal computer. A wide rangeof potential operational forms, product features,financial and legal structures, and intended usage andmarkets have been proposed for these products,however.

Certain types of stored-value cards are marketed asalternatives to cash in making small-value payments,such as at parking meters, public transport, and fastfood restaurants. Other new payment technologieshave been developed specifically for making "micro-payments," or very small-value purchases of articles,games, or other electronic information, over the Inter-net. Federal and state governments are testing differ-ent types of stored-value cards for making electronicpayments to food stamp recipients, for example, andfor other purposes.

It is already becoming clear that many consumersand businesses, particularly those that are technologi-cally sophisticated, find the new electronic deliverymethods an attractive option for gaining accessto familiar banking and payment services. Growingnumbers of financial institutions are offering servicesover the Internet, and transactions initiated over theInternet are widely reported to be on the increase. Atthe same time, most would agree that the growth ofwholly new payment technologies, such as electronicmoney, has been slower than many observers antici-pated several years ago. This should not be surpris-ing. It is important to keep in mind that these newpayment products are designed to substitute for exist-ing payment methods, such as cash, checks, and debitand credit cards, and so must offer consumers andbusinesses materially improved features in terms ofcost and convenience in order to gain their accep-tance. In addition, for some of these products, newtechnical infrastructure must be put in place. Whilethese technologies are thus likely to spread onlygradually, for the nation's central bank, issues ofimportance include the potential implications formonetary policy, for the banking and payment sys-tem, and for consumers.

IMPLICATIONS FOR MONETARY POLICY ANDSEIGNIORAGE

As with financial innovations in the past, the FederalReserve expects to be able to adjust to future chang-ing circumstances. We do not anticipate that theemergence of electronic money will impair our abil-ity to pursue legislated objectives for the perfor-mance of the economy.

New forms of money, such as those held as stored-value card balances, are expected to make up a verysmall portion of the money supply and are unlikely toinfluence aggregate payment flows materially, par-ticularly in the near-to-medium term. The FederalReserve has been monitoring these flows in the largerstored-value card pilots involving banks. We mightalso need to consider establishing other monitoringchannels if amounts issued by nondepository institu-tions were to become significant in the future.

Moreover, it is unlikely, as some have suggested,that alternative currencies will emerge in the UnitedStates along with the introduction of new forms ofelectronic money. The U.S. dollar is supported by awell-established operational, legal, and economicfoundation in this country, and it is very likely thatelectronic payments made between U.S. residents andbusinesses will continue to be denominated in U.S.dollars.

Similarly, because the usage of electronic money islikely to grow relatively slowly, its introduction isunlikely to affect materially the seigniorage revenuesreceived by the Treasury Department in the nearterm. "Seigniorage" is a term often used to describethe direct and indirect revenue the Treasury receiveson U.S. currency and coin. The most significantportion of this revenue is received indirectly viathe Federal Reserve's annual earnings. The FederalReserve is required to hold collateral, typically gov-ernment securities, in an amount at least adequateto cover its outstanding currency obligations. In 1997,the Federal Reserve transferred approximately$21 billion in earnings to the Treasury, largely attrib-utable to interest on these government securities hold-ings. If the usage of electronic money were to reducethe outstanding amounts of currency, and the FederalReserve's holdings of securities were correspond-ingly reduced, the Federal Reserve's annual earningsremitted to the Treasury would fall. The other, muchsmaller, source of seigniorage revenue—the issuanceof coins—could be similarly affected. Of course, itshould be recognized that the increasing use of elec-tronic retail payment methods more generally mightbe expected to have an effect on the use of bank notesand coin over time.

IMPLICATIONS FOR PAYMENT SYSTEMS ANDTHE FEDERAL RESERVE

We also do not expect the development of electronicmoney and electronic commerce more broadly tonecessitate significant changes in the nation's pay-ments and settlement systems. Many transactions



initiated on the Internet, for example, are likely toflow through existing interbank clearing and settle-ment channels. In fact, credit card payments over theInternet, as well as certain types of stored-value cardtransactions, are now routinely cleared and settledthrough the existing facilities operated by the creditcard associations. Likewise, most Internet bill-payment systems plan to utilize the existing auto-mated clearing house (ACH) system for clearing andsettlement of individual payments. As you may know,the ACH is an electronic payment system that sup-ports direct deposit of payroll and numerous othertypes of routine payments. The Federal Reserveclears and settles the majority of these transactions.

In addition, the Federal Reserve Banks provideinterbank settlement services for a number of retailpayment clearinghouses, including private check andACH clearinghouses, as well as several bank cardclearing arrangements. We are currently upgradingthese services to make them more efficient andsecure. These settlement services could become use-ful for a range of emerging electronic payment meth-ods in the future.

In the longer term, it is possible that new clearingand settlement methods will need to be developed.Development of new interbank systems typicallyrequires substantial initial investments, planning, andorganization among a large group of financial insti-tutions. The financial industry has considerable expe-rience in this regard, having developed clearing andsettlement systems for credit card, ATM, and ACHtransactions. The private-sector New York ClearingHouse Association also operates the Clearing HouseInterbank Payments System (CHIPS). CHIPS, likethe Federal Reserve's Fedwire system, is used prima-rily for large-value funds transfers. In fact, CHIPS isnow the largest U.S. dollar payment system in termsof dollar volume, handling $1.4 trillion in paymentsper day.

The Federal Reserve believes that private-sectorinnovation and competition that has the potentialto shift retail payment users to potentially more effi-cient and secure electronic alternatives is beneficial,regardless of the impact on Federal Reserve paymentservices. The use of electronic payment services pro-vided by the private sector is likely to continue tolead to relatively slower growth, or even a decline, inretail payment services in which the Federal ReserveSystem is involved operationally, notably checkclearing. As discussed in the recent report by theSystem's Committee on the Federal Reserve in thePayments Mechanism, we are exploring how theFederal Reserve can play a more active role inencouraging innovation in and usage of electronic

payment methods.2 These efforts may include help-ing to reduce regulatory or legal barriers, encour-aging the development of open technical standards,promoting consumer education, and providing effi-cient interbank settlement services, as I noted earlier.

To a large extent, the impetus for the developmentof new payment systems will originate in the privatesector, where consumer and business needs can mostreadily be addressed. Consistent with this view,the Federal Reserve has no plans to issue electronicmoney at this time. Direct competition in this areabetween the government and the private sector couldwell stifle the current environment of experimen-tation and innovation. Moreover, the public benefitsand acceptance of these types of payment instru-ments, as well as the evolution of their underlyingtechnologies, are highly uncertain.

IMPLICATIONS FOR CONSUMERS

I would like to turn to recent developments in thearea of consumer protection issues as they relate tonew electronic payment and banking technologies.Competitive market forces should create incentivesfor financial institutions and other suppliers of newelectronic payment products to provide protectionsto consumers in order to promote confidence andencourage usage and acceptance of their products.Moreover, the existing legal framework provides con-siderable incentives to disclose the terms of theseproducts and to avoid unconscionable or unfair terms.Although we cannot predict whether these incentiveswill address all potential problems, industry efforts inthis area are likely to be more effective than prema-ture and potentially costly new regulations at thistime. This is consistent with the approach advocatedin the recently released report of an interagency taskforce, on which my colleague, Governor Kelley,was a member, which recommended limiting govern-ment action to monitoring of industry developmentsand providing consumer financial education whereappropriate.3 In any case, we believe that the desir-ability of any potential new statutory consumer pro-tections should be based on a demonstrated need toaddress specific problems or abuses, rather than on anattempt to promote the future growth of any particu-lar form of payment or other service.

2. Board of Governors of the Federal Reserve System, Committeeon the Federal Reserve in the Payments Mechanism, The FederalReserve in the Payments Mechanism (Board of Governors, 1998).

3. Consumer Electronic Payments Task Force, Report of the Con-sumer Electronic Payments Task Force, April 1998.



It is evident, however, that certain existing regula-tions need to be updated to avoid unintended barriersto the provision of new electronic products and ser-vices to consumers. Federal Reserve Regulation Eprovides a prime example in this regard. One require-ment of Regulation E is that authorizations for recur-ring electronic payments must be signed by the con-sumer. To eliminate the delay and expense of paper-based authorization, the Federal Reserve amendedRegulation E in 1996 to allow preauthorized transfersin an electronic system to be authenticated by anelectronic method that provides the same assuranceas a signature in a paper-based system. Similarly, inMarch 1998, the Board adopted an interim rule thatamended Regulation E to allow financial institutionsto provide disclosures and other information requiredby the regulation electronically, rather than in paperform, if the consumer agrees.

The Federal Reserve and the Congress have alsobeen weighing the more difficult issue of how theElectronic Fund Transfer Act (EFTA), and its imple-menting Regulation E, should apply to stored-valueproducts, if at all. The EFTA includes elements ofboth disclosures and substantive requirements regard-ing product terms and conditions, such as liability forunauthorized transactions. In April 1996, the Boardissued proposed amendments to Regulation E thatwould apply selected provisions of the regulation,such as disclosures, to certain types of electronicstored-value cards. In September 1996, the Congressimposed a nine-month moratorium on the issuance offinal regulations affecting stored-value products anddirected the Federal Reserve to conduct a study ofthese products.

The Board's resulting March 1997 report to theCongress evaluated whether the EFTA could beapplied to stored-value products without adverselyimpacting their cost, development, and operation.4

At the request of the Congress, the Board also con-sidered whether alternatives to regulation—such asallowing competitive market forces to shape thedevelopment and operation of the products—couldmore efficiently achieve the objectives of the EFTA.The report did not recommend any specific course ofaction but did consider at length the benefits and risksof regulatory action in a rapidly changing environ-ment. For example, the disclosure model is often seenas the least intrusive form of government inter-vention. However, given the variety of existing andplanned stored-value products and the rapid evolu-

tion of this industry, it seems unlikely that one set ofdisclosures or other consumer protection require-ments would be appropriate for all such products.

The Federal Deposit Insurance Corporation hasdetermined that most types of stored-value cards,even if issued by federally insured depository institu-tions, do not meet the definition of a deposit underthe Federal Deposit Insurance Act, for purposes ofinclusion within federal deposit insurance coverage.5

From the point of view of the government, thisdetermination would have the effect of limiting theextension of the federal safety net to these new prod-ucts. The FDIC expects banks to disclose to consum-ers whether or not their cards are federally insured,however.

PRIVACY AND SECURITY IN ELECTRONICBANKING

One of the most sensitive issues raised during discus-sions of electronic money and banking is the privacyof consumers' financial information. The issue ofprivacy in a world of ever-growing access to informa-tion through computer and telecommunications tech-nology is by no means limited to financial informa-tion, but it is increasingly cited as a concern withrespect to the security of retail transactions. Althoughwe have no recommendations to make at this time, Iwould like to make a few observations that may behelpful for discussions on this important issue.

Last year, in response to a congressional directive,the Board conducted a study concerning the availabil-ity to the public of sensitive information about con-sumers. This study was narrowly focused on thepotential for financial fraud that could flow from theuse of sensitive information and the associated risksto depository institutions. The report concluded thatthe losses attributable to "identity theft" did not, atthat time, pose a significant risk to the banking indus-try.6 Given the pace of technological change andthe relatively widespread access to personal informa-tion, however, this risk appears to be a growingconcern for consumers and financial institutions.More broadly, the report highlighted the importanceof balancing individuals' important privacy interestswith the legitimate needs for information by lawenforcement agencies, businesses, and others in boththe public and private sectors.

4. Board of Governors of the Federal Reserve System, Report toCongress on the Application of the Electronic Fund Transfer Act toElectronic Stored-Value Products (Board of Governors, 1997).

5. Federal Deposit Insurance Corporation, "General Counsel'sOpinion No. 8; Stored Value Cards," 61 FR 40490, August 2, 1996.

6. Board of Governors of the Federal Reserve System, Report toCongress Concerning the Availability of Consumer Identifying Infor-mation and Financial Fraud (Board of Governors, 1997).



This study highlighted the fact that many considerthe issues of privacy and security to be closelyrelated. Although some surveys indicate that securityconcerns are still a barrier to the growth of electroniccommerce, there has been a considerable amountof promising private-sector activity with respect toaddressing the security and reliability of paymenttransactions transmitted over the Internet. Severaltechnologies are already available for protectingtransaction information against unauthorized disclo-sure while in transit. Some new payment methodshave specifically incorporated technologies to safe-guard the privacy of consumers' transaction informa-tion. Of course, consumers and businesses will needto select the technologies and payment arrangementsthat are most appropriate, given their preferences andthe risks in different types of transactions.

Security is likely to remain a primary concern offinancial institutions, which most often bear the lossesassociated with fraudulent transactions. The FederalReserve and the other federal banking agencies havebeen actively reviewing and upgrading our supervi-sory policies and procedures in the area of electronicbanking and information security to help ensure thatrisks to banks in providing services that supportelectronic commerce are appropriately managed. TheFederal Reserve recently participated in an interna-tional effort under the Basle Supervisors Committeeto provide preliminary supervisory guidance on riskmanagement for electronic banking activities, result-ing in a study published earlier this year. Goingforward, information security risk management willcontinue to increase in importance as banks' relianceon information technology grows and greater atten-tion is focused on the need to safeguard customerinformation.

GLOBAL IMPLICATIONS FOR BANKING

Finally, it is important to note that the potentialimpact of increasingly linked global communications

on financial services offered in this country andabroad in the coming years is very difficult to predict.However, it is possible that significant changes couldoccur in the way that products and services are mar-keted and delivered. In general, these developmentsshould be positive for users of financial services,offering them greater flexibility and the potential toobtain financial services at the lowest cost, regardlessof location or provider.

A significant expansion of the solicitation and pro-vision of financial services across jurisdictionalboundaries could raise cross-border legal and regula-tory issues. Of course, such activities also occur withcurrent technology, including via telephones andpaper-based communications. The resulting jurisdic-tional and enforcement issues relating to legal uncer-tainties, compliance with different national laws andregulations, or abusive practices by offshore entities,have arisen in the past in many different contexts.Although new technologies could spur greater activ-ity in this regard, it would appear premature at thistime to predict that wholesale changes in legal orregulatory approaches will be needed.

CONCLUSIONS

In summary, the Federal Reserve anticipates minimalimpact in the near term from emerging electronicpayments, and from electronic commerce morebroadly, on our core central banking responsibilities,including our ability to implement monetary policy,our supervisory responsibilities, and our operationalrole in the clearing and settlement of payments.Nevertheless, technological change and the growthof electronic commerce could raise complex policyissues that may require careful monitoring and studyover the coming years by the Federal Reserve, theCongress, and the private sector. We look forward toworking with you to assess the implications of theseimportant developments.

Statement by Alan Greenspan, Chairman, Board ofGovernors of the Federal Reserve System, before theJoint Economic Committee, U.S. Congress, June 10,1998

I am pleased to have the opportunity to present anupdate on economic conditions in the United States.

Such an assessment cannot be made in isolationbut rather depends critically on what is happening inthe rest of the world and how those developments

affect the performance of the American economy. Inmy previous appearance before this committee lastOctober, my remarks focused mainly on the turbu-lence that was then evident in world financial marketsand, in particular, on the problems that had emergedin a number of Asian economies. The tentativeassessment offered then was that the economies ofAsia were in for some trying times but that thesituation did not seem likely to threaten the expan-sion of this country's economy.



That assessment, I believe, still is essentially cor-rect, although uncertainties about the degree ofrestraint that will be coming from abroad remainsubstantial. Earlier this year, the situations in most ofthe Asian countries seemed to be stabilizing in somerespects, but, as the events of the past few weekshave demonstrated, the restoration of normally func-tioning economies will not necessarily go smoothly.In some cases, the adjustments that are needed toimprove external balances and to correct existingmisallocations of resources have been accompaniedby sharp increases in inflation, rising unemployment,abrupt cutbacks in living standards, and increases inuncertainty and insecurity. The heightened social andpolitical pressures that can develop in such circum-stances not only introduce added complications intoeconomic policymaking but also make it even moredifficult to foresee how the processes of adjustmentwill play out across the afflicted economies.

That the American economy would be affected tosome degree by spillover from the problems in Asiawas never in doubt, even though the timing andmagnitude of the impact have been difficult to predictwith much confidence. Many months ago, businessesin this country began anticipating a worsening of ourtrade balance with the Asian countries, and incomingeconomic data have since confirmed those expecta-tions. Meanwhile, other influences on trade—such asthe strength of demand growth in the United Statesand a dollar that has been strong against a wide arrayof currencies—have persisted. In total, U.S. exportsof goods and services turned down in real terms inthe first quarter of 1998, the first such decline in fouryears, and real imports of goods and services contin-ued to rise very rapidly. The combined effect of thesechanges exerted a drag of 2Vi percentage points onthe annual growth rate of real gross domestic productlast quarter. Weaknesses in Asia appear to accountfor approximately one-half of that deterioration. Notonly have export volumes been affected, but produc-ers in both industry and agriculture also are havingto adjust to the lower product prices that have comewith slower economic growth abroad and the increasein the competitiveness of foreign producers inducedlargely by depreciations of their currencies.

But even with substantial drag from the externalsector, the U.S. economy has continued to expand at arobust pace. In the first quarter, real GDP grew evenfaster than it had in 1997. Employment has continuedto increase rapidly this year, and the unemploymentrate has fallen further, reaching its lowest level since1970. Incomes have continued to climb, and gainsin household and business expenditures have beenexceptionally strong. Although the data on hours

worked suggest that growth of the economy haslikely slowed this quarter from the first quarter'storrid pace, the degree of slowdown remains in ques-tion. Evidence to date of a moderation in underlyingdomestic spending still is sparse.

The strength of domestic spending has been fueled,in part, by conditions in financial markets. Althoughreal short-term interest rates have been rising, equityprices have moved still higher, credit has been readilyavailable at slender margins over Treasury interestrates, and nominal long-term interest rates haveremained near the lowest levels of recent decades.Rapid growth of money this year is a further indi-cation that financial conditions are accommodatingstrong domestic spending, although we still areuncertain how reliable that relationship will prove tobe over time.

In short, our economy is still enjoying a virtuouscycle, in which, in the context of subdued inflationand generally supportive credit conditions, risingequity values are providing impetus for spendingand, in turn, the expansion of output, employment,and productivity-enhancing capital investment. Thehopes for accelerated productivity growth have beenbolstering expectations of future corporate earningsand thereby fueling still further increases in equityvalues.

The essential precondition for the emergence, andpersistence, of this virtuous cycle is arguably thedecline in the rate of inflation to near price stability.Continued low product price inflation and expecta-tions that it will persist have brought increasing sta-bility to financial markets and fostered perceptionsthat the degree of risk in the financial outlook hasbeen moving ever lower. These perceptions, in turn,have reduced the extra compensation that investorsrequire for making loans to, or taking ownershippositions in, private firms.

To a considerable extent, investors seem to beexpecting that low inflation and stronger productivitygrowth will allow the extraordinary growth of profitsto be extended into the distant future. Indeed, expec-tations of per share earnings growth over the longerterm have been undergoing continuous upward revi-sion by security analysts since 1994. These risingexpectations have, in turn, driven stock prices sharplyhigher and credit spreads lower, perhaps to levels thatwill be difficult to sustain unless economic conditionsremain exceptionally favorable—more so than mightbe anticipated from historical relationships. In anyevent, primarily because of the rise in stock prices,about $12 trillion has been added to the value ofhousehold assets since the end of 1994. Probablyonly a few percent of these largely unrealized



capital gains have been transformed into the pur-chase of goods and services in consumer markets.But that increment to spending, combined with thesharp increase in equipment investment, which hasstemmed from the low cost of both equity and debtrelative to expected profits on capital, has propelledthe economy forward. The current economic perfor-mance, with its combination of strong growth andlow inflation, is as impressive as any I have wit-nessed in my near half century of daily observation ofthe American economy.

The consequences for the American worker havebeen dramatic and, for the most part, highly favor-able. A great many chronically underemployedpeople have been given the opportunity to work, andmany others have been able to upgrade their skills asa result of work experience, extensive increases inon-the-job training, or increased enrollment in techni-cal programs. Welfare recipients appear to have beenabsorbed into the work force in significant numbers.

Government finances have improved as well. Thetaxes paid on huge realized capital gains and otherincomes related to the stock market, coupled withtaxes on markedly higher corporate profits, havejoined with restraint on spending to produce a unifiedfederal budget surplus for the first time in nearlythree decades. April's budget surplus of $125 billionwas the largest monthly surplus on record. Wide-spread improvement also has been evident in thefinancial positions of state and local governments.

The fact that economic performance strengthenedas inflation subsided should not have been surprising,given that risk premiums and economic disincentivesto invest in productive capital diminish as productprices become more stable. But the extent to whichstrong growth and high resource utilization have beenjoined with low inflation over an extended period isnevertheless extraordinary. Indeed, the broadest mea-sures of price change indicate that the inflation ratemoved down further in the first quarter of this year,even as the economy strengthened. Although declin-ing oil prices contributed to this result, pricing lever-age in the goods-producing sector more generallywas held in check by rising industrial capacity;reduced demand in Asia, which, among other things,has led to a softening of commodity prices; and astrong dollar, which has contributed to bargain priceson many imports. Some elements in this mix clearlywere transitory, and the very recent price data suggestthat consumer price inflation has moved up in thesecond quarter. But, even so, the rate of rise remainsquite moderate overall. At this point, at least, theadverse wage-price interactions that played so cen-tral a role in pushing inflation higher in many past

business expansions—eventually bringing thoseexpansions to an end—do not appear to have gained asignificant toehold in the current expansion.

There are many reasons why the wage-price inter-actions have been so well contained in this expan-sion. For one thing, increases in hourly compensationhave been slower to pick up than in most other recentexpansions, although, to be sure, wages have startedto accelerate in the past couple of years as the labormarket has become tighter and tighter.

In the first few years of the expansion, the subduedrate of rise in hourly compensation seemed to be, inpart, a reflection of greater concerns among workersabout job security. We now seem to have movedbeyond that period of especially acute concern,though the flux of technology may still leave manyworkers with fears of job skill obsolescence and awillingness to trade wage gains for job security. Thismay explain why, despite the recent acceleration ofwages, the resulting level of compensation has fallenshort of what the experience of previous expansionswould have led us to anticipate given the currentdegree of labor market tightness. In the past couple ofyears, of course, workers have not had to press espe-cially hard for nominal pay gains to realize sizableincreases in their real wages. In contrast to the patternthat developed in several previous business expan-sions, when workers required substantial increasesin pay just to cover increases in the cost of living,consumer prices have been generally well behavedin the current expansion. Changes this past year inprices of both goods and services have been amongthe smallest of recent decades.

In addition, the rate of rise in the cost of benefitsthat employers provide to workers has been remark-ably subdued over the past few years, although agradual upward tilt has become evident of late. Avariety of factors—including the strength of theeconomy and rising equity values, which have re-duced the need for payments into unemploymenttrust funds and pension plans, and the restructuring ofthe health care sector—have been working to keepbenefit costs in check in this expansion. But, in themedical area at least, the most recent developmentssuggest that the favorable trend may have run itscourse. The slowing of price increases for medicalservices seems to have come to a halt, at least for atime, and, with the cost-saving shift to managed carehaving been largely completed, the potential for busi-nesses to achieve further savings in that regardappears to be rather limited at this point. There havebeen a few striking instances this past year ofemployers boosting outlays for health benefits bysubstantial amounts.



A couple of years ago—almost at the same timethat increases in total hourly compensation begantrending up in nominal terms—evidence of a long-awaited pickup in the growth of labor productivitybegan to show through more strongly in the data;and this accelerated increase in output per hour hasenabled firms to meet workers' real wage demandswhile holding the line on price increases. Gains inproductivity usually vary with the strength of theeconomy, and the favorable results that we haveobserved during the past two years or so, when theeconomy has been growing more rapidly, surely over-state the degree of pickup that can be sustained. Butevidence continues to mount that the trend has pickedup, even if the extent of that improvement is as yetunclear. Signs of a major technological transforma-tion of the economy are all around us, and the bene-fits are evident not only in high tech industries butalso in production processes that have long been partof our industrial economy.

Notwithstanding a reasonably optimistic interpreta-tion of the recent productivity numbers, it would notbe prudent to assume that rising productivity, byitself, can ensure a noninflationary future. Certainlywage increases, per se, are not inflationary. To beavoided are those that exceed productivity growth,thereby creating pressure for inflationary priceincreases that can eventually undermine economicgrowth and employment. Because the level of pro-ductivity is tied to an important degree to the physicalstock of capital, which turns over only gradually,increases in the trend growth of productivity prob-ably also occur rather gradually. By contrast, thepotential for abrupt acceleration of nominal hourlycompensation is surely greater. Still, a strong signalof inflation pressures building because of compensa-tion increases markedly in excess of productivitygains has not yet clearly emerged in this expansion.Among nonfinancial corporations, our most reliablesource of consolidated costs, trends in costs seem tohave accelerated from their lows, but the rates ofincrease in both unit labor costs and total unit costsare still quite low.

Nonetheless, as I have noted in previous appear-ances before the Congress, I remain concerned thateconomic growth will run into constraints as thereservoir of unemployed people available to work isdrawn down. The annual increase in the working agepopulation (from 16 to 64 years of age), includingimmigrants, has been approximately 1 percent a yearin recent years. Yet employment, measured by thecount of persons who are working rather than by thecount of jobs, has been rising 2 percent a year since1995 despite the acceleration in the growth of output

per hour. The gap between employment growth andpopulation growth, amounting to about 1.2 milliona year on average, has been made up, in part, by adecline in the number of individuals who are countedas unemployed—those persons who are activelyseeking work—of approximately 700,000 a year, onaverage, since the end of 1995. The remainder of thegap has reflected a rise in labor force participationthat can be traced to a decline of more than 500,000a year in the number of individuals (age 16 to 64)wanting a job but not actively seeking one. Presum-ably, many of the persons who once were in thisgroup have more recently become active and success-ful job seekers as the economy has strengthened,thereby preventing a still sharper drop in the officialunemployment rate. In May, the number of personsaged 16 to 64 who wanted to work but who did nothave jobs was 9.7 million on a seasonally adjustedbasis, slightly more than 5 Vi percent of the workingage population. This percentage is a record low forthe series, which first became available in 1970.

The gap between the growth in employment andthat of the working age population will inevitablyclose. What is crucial to sustaining this unprec-edented period of prosperity is whether that closingoccurs in a disruptive or gradual, balanced manner.The effects of the crisis in Asia will almost certainlydamp net exports further, potentially moderating thegrowth of domestic production and hence employ-ment. The strength of domestic spending that hasbeen bolstering output growth and the demand forlabor also could ebb if recent indications of a narrow-ing in domestic profit margins were to prove to be theforerunner of a reassessment of the expected rates ofreturn on plant and equipment. Reduced prospects forthe return to capital would not only affect investmentdirectly but could also affect consumption as stockprices adjusted to a less optimistic view of earningsprospects. Finally, the clearly unsustainable rise ofinventories that has been evident in recent quarterswill be slowing at some point, perhaps abruptly. Aneasing of the demand for labor would be an expectedconsequence of a slowdown in either final sales orinventory accumulation. Of course, the demand forlabor that is consistent with a particular rate of outputgrowth also could be lowered if productivity were tocontinue to accelerate. And, on the supply side of thelabor market, faster growth of the labor force couldemerge as the result of delayed retirements orincreased immigration.

If developments such as these do not bring labordemand into line with its sustainable supply, tightereconomic policy may be necessary to help guardagainst a buildup of pressures that could derail the



current prosperity. Fortunately, fiscal policy has beenmoving toward restraint to some degree, althoughrecent budgetary discussions do not appear to befocused on extending that tendency. Monetary policymight need to tighten if demand were to continue toexhibit few signs of abating noticeably, therebythreatening to place still further strains on our labormarkets. We at the Federal Reserve, recognizing thepowerful forces of productivity growth and globalrestraint on inflation, have not perceived to date theneed to tighten policy in response to strong demandbeyond what has occurred through falling inflation'supward pressure on the real federal funds rate and themodest increase in the nominal rate that we initiatedin March of 1997. But we are monitoring the evolv-ing forces very closely to determine whether therecent acceleration of costs, albeit moderate, is likely

to prove transitory or the start of a more worrisomepattern that may well require a response.

In summary, our economy has remained strong thisyear despite evidence of substantial drag from Asia,and, at the same time, inflation has remained low. AsI have indicated, this set of circumstances is not whathistorical relationships would have led us to expect atthis point in the business expansion, and while it ispossible that we have, in a sense, moved "beyondhistory," we also have to be alert to the possibilitythat less favorable historical relationships will even-tually reassert themselves. That is why we areremaining watchful for signs of potential inflationaryimbalances, even as the economy continues to per-form more impressively than it has in a very longtime.

Statement submitted by the Board of Governors ofthe Federal Reserve System, to the Subcommittee onRisk Management and Specialty Crops of the Com-mittee on Agriculture, U.S. House of Representatives,June 10, 1998

The Board appreciates the opportunity to submit itsviews on issues relating to the potential applicationof the Commodity Exchange Act (CEA) to over-the-counter (OTC) derivatives transactions. The Boardhas been participating actively in discussions of theseissues for the past ten years. As the subcommittee isaware, the markets for OTC derivatives have grownenormously during this period and are now large andglobally significant. For this reason, the legal andregulatory framework for these markets is unques-tionably important. The Board is deeply concernedabout any legal or regulatory development that callsinto question the enforceability of a significant vol-ume of such transactions.

A particular concern for many years has been thepotential application of the CEA to OTC derivatives.Because the CEA generally requires instruments cov-ered by the act to be traded on an exchange, if OTCderivatives were covered, they might be illegal andunenforceable. The Futures Trading Practices Act(FTPA) of 1992 tried to address this concern byauthorizing the Commodity Futures Trading Com-mission (CFTC) to exempt OTC derivatives frommost provisions of the CEA, to the extent that the actmight apply. Nonetheless, concerns have persistedthat the CEA could jeopardize the enforceability ofcertain OTC derivatives transactions.

These concerns have been heightened by theCFTC's recent concept release on regulation of OTC

derivatives. In particular, the underlying premise ofthe release is that such transactions are subject tothe CEA unless clearly and explicitly excluded orexempted. This marks an important departure fromprecedent. Neither the Congress nor the CFTC has todate made a determination that OTC derivatives aresubject to the CEA. Indeed, in early 1993, when thecommission used the FTPA authority to exempt manyOTC transactions from most provisions of the CEA,it stated explicitly that its action should not be con-strued as reflecting any determination that the instru-ments covered by the exemption were subject to theact.

The reason the Board has been keenly interested inthese issues is because of the potential consequencesif significant volumes of OTC derivatives were deter-mined to be illegal and unenforceable under the CEA.In those circumstances, the potential losses to coun-terparties, including those large U.S. banks that areleading derivatives dealers, could be so large as topose a threat to the financial condition of the counter-parties themselves and to provide a significant shockto the financial system as a whole. The Board is alsodismayed by the prospect that legal uncertainties orunnecessary regulatory burdens could undermine theposition of U.S. institutions in what are intenselycompetitive global markets. We see no social benefitsand clear social costs from pushing OTC derivativesactivity offshore.

Some may characterize the issues under consider-ation as nothing more than regulatory turf fights. Webelieve this misses the point. The issues under con-sideration really are not so much issues of whichgovernment agency should regulate these transac-tions as they are issues of whether government regu-



lation is necessary and, if so, what types of regula-tions are appropriate. Moreover, as we have indicated,considerably more is at stake—the safety and sound-ness of banks, the competitiveness of U.S. marketsand institutions, and possibly even the stability of thefinancial system—than would be the case if the issueswere limited solely or even primarily to regulatoryturf.

POTENTIAL APPLICATION OF THE CEA TOOTC DERIVATIVES

Governor Phillips presented the Board's views on thepotential application of the CEA to OTC derivativesin testimony to this subcommittee in April 1997.Since then the Board's views have not changed.Indeed, subsequent developments have reinforced ourearlier position.

The Board believes that application of the CEAto institutional transactions in OTC derivatives isunnecessary to achieve public policy objectives withrespect to these transactions. The public policy objec-tives of the CEA are to ensure the integrity of com-modity markets, especially to deter market manipu-lation, and to protect market participants from lossesresulting from fraud or the insolvency of contractcounterparties. In the case of institutional OTCderivatives transactions, private market disciplineappears to achieve these objectives quite effectivelyand efficiently.

Counterparties to privately negotiated transactionshave limited their activity to contracts that are verydifficult to manipulate. The vast majority of privatelynegotiated contracts are settled in cash rather thanthrough delivery. Cash settlement typically is basedon a rate or price in a highly liquid market with avery large or virtually unlimited deliverable supply,for example, LIBOR or the spot dollar yen exchangerate. Furthermore, the costs of default or of failing todeliver typically are limited to actual damages. Thus,attempts to corner a market, even if successful, couldnot induce sellers in privately negotiated transactionsto pay significantly higher prices to offset their con-tracts or to purchase the underlying assets. Mostimportant, prices established in privately negotiatedtransactions are not used directly or indiscriminatelyas the basis for pricing other transactions, so anyprice distortions would not affect other buyers orsellers of the underlying asset. In these respects,privately negotiated contracts have different charac-teristics than exchange-traded contracts generally andagricultural futures in particular.

Institutional counterparties to privately negotiatedcontracts also have demonstrated their ability to

protect themselves from losses from fraud and coun-terparty insolvencies. They have insisted that dealershave financial strength sufficient to warrant a creditrating of A or higher. Consequently, dealers are estab-lished institutions with substantial assets and signifi-cant investments in their reputations. When suchdealers have engaged in deceptive practices, institu-tions that have been victimized have been able toobtain redress by going to court or directly nego-tiating a settlement with the dealer. The threat oflegal damage awards provides dealers with incen-tives to avoid misconduct. A far more powerfulincentive, however, is the fear of loss of the dealer'sgood reputation, without which it cannot competeeffectively, regardless of its financial strength orfinancial engineering capabilities. Institutional coun-terparties to privately negotiated transactions alsohave demonstrated their ability to manage creditrisks quite effectively through careful evaluation ofcounterparties, the setting of internal credit limits,and the judicious use of netting agreements andcollateral.

Although an October 1997 report by the GeneralAccounting Office (GAO) suggested that there havebeen substantial losses to end-users of OTC deriva-tives, a careful inspection of the report's data revealsthat the vast majority of those losses were in invest-ments in mortgage-backed securities and structurednotes, for which federal sales practices regulationseither were in place or have since been implemented.Indeed, we feel the most revealing data in the GAO'sreport were the results of its survey of end-users.When asked if they were satisfied with derivativesdealers' sales practices, 85 percent of users of plainvanilla derivatives and 79 percent of users of morecomplex derivatives indicated satisfaction. The greatmajority of the remainder responded neutrally ratherthan indicating that they were dissatisfied. In theBoard's view, these results call into question the needfor additional government regulation of sales prac-tices of OTC derivatives dealers.

In the future, counterparties to OTC derivativestransactions may seek to establish new facilities forcentralized clearing of such transactions. Such facili-ties potentially could make management of counter-party credit risks and liquidity risks even more effec-tive. At the same time, however, clearing facilitiesoften concentrate and mutualize risk. The Boardbelieves that if counterparties were to choose todevelop such facilities, some type of governmentoversight generally may be appropriate to supple-ment the private self-regulation that the counterpar-ties would provide. However, it is not obvious thatregulation of such clearing facilities under the CEA



would be the best approach. For example, the Boardsees no reason why a clearing agency regulatedby the Securities and Exchange Commission shouldnot be allowed to clear OTC derivatives transactions,especially if it already clears the instruments under-lying the derivatives. More generally, the Boardbelieves that in many circumstances, regulation ofOTC clearing might best be conducted by the Secu-rites and Exchange Commission (SEC), or by one ofthe federal banking agencies, rather than by theCFTC. Furthermore, if a clearing facility is locatedabroad and regulated effectively by a home countryregulator, U.S. regulators should rely primarily on thehome country regulator to address U.S. public policyconcerns, rather than attempting to force the clearingfacility to conform to the rules of multiple jurisdic-tions, which may well conflict.

In general, even in those cases in which regulationof OTC derivatives may be necessary, the Board seesserious problems with applying the CEA to suchtransactions. By far the most significant problem isthe uncertainty created by the act's exchange tradingrequirement. To be sure, there are some specificexclusions of OTC transactions from the act, andCFTC policy statements and exemptions have beenintended to create legal certainty for other OTC trans-actions. Experience has repeatedly demonstrated,however, that these exclusions and exemptions havenot provided legal certainty for OTC derivatives. Inevery case, the exclusions and exemptions includeterms or conditions that are ambiguous or that, evenif seemingly unambiguous, have been made the sportof litigators. The CFTC's recent issuance of a con-cept release on regulation of OTC derivatives hasmade matters worse by presuming that such trans-actions are covered unless specifically excluded orexempted and by underscoring that, whatever theterms of various existing policy statements andexemptions, these can be altered or reinterpreted bythe commission.

As things stand, some interpret the language of theexisting exclusions and exemptions in ways that, ifaccepted by the courts, could call into question theenforceability of at least some, and perhaps a signifi-cant share of, outstanding OTC transactions. In theBoard's view, the potential that such interpretationsmight be accepted places the financial system atrisk and therefore is an unacceptable state of affairs.The Board continues to believe that the only way toachieve legal certainty is through a broad statutoryexclusion of institutional OTC derivatives transac-tions, perhaps using the definitions of a "swap agree-ment" and an "eligible swap participant" that theCFTC currently uses in its exemption.

While the legal uncertainty associated with thepotential application of the CEA for OTC derivativesis the Board's most serious concern, it is also troubledby the potential implications of a provision of theCEA that provides the CFTC with exclusive jurisdic-tion over instruments subject to the act. Recently, theCFTC has claimed that this provision may imposerestrictions on the SEC's ability to impose regula-tions, including capital regulations on the activitiesof a new class of broker-dealers, on instruments ortransactions that the CFTC asserts are subject to theCEA. Banking regulators apply capital requirementsto a wide variety of instruments that either areunquestionably subject to the CEA (futures traded onU.S. commodity exchanges) or that the CFTC hasasserted are subject to the act (many OTC deriva-tives). The Board cannot believe that the Congressintended the exclusivity provision of the CEA topreclude other federal regulators from imposingsafety and soundness regulations on activities of insti-tutions over which they have authority, even if thoseactivities involve transactions subject to the CEA.

NEED FOR LEGISLATION

The Board believes that the issues relating to govern-ment regulation of OTC derivatives, including thepotential application of the CEA to those transac-tions, deserve further study and ultimately should berevisited by the Congress. In the interim, however,the Congress should do as much as possible toremove the legal clouds hanging over the OTCderivatives markets.

Accordingly, the Board supports the proposal forimmediate but temporary legislation that was recentlytransmitted to Speaker Gingrich by ChairmanGreenspan, Secretary Rubin, and Chairman Levitt.The proposal calls for the President's Working Groupon Financial Markets to study the markets for OTCderivatives and for hybrid debt instruments (whosepotential regulation under the CEA raises broadlysimilar issues and concerns), to make recommenda-tions for changes to statutes and regulations, and tosubmit a report to the Congress containing its resultsand recommendations within one year. Such a studyby the Working Group undoubtedly would produce athorough airing of the issues that would be quiteuseful to the Congress in deciding how best to resolvethe existing legal and regulatory uncertainties.

The proposal would enhance legal certainty in twoways. First, it includes a standstill provision thatwould temporarily eliminate the risk that changes inCFTC regulations, policies, or interpretations could



raise new questions about the enforceability of anyOTC derivatives transaction (or hybrid debt instru-ment) that was exempt from the CEA under theCFTC's existing exemptions as of January 1, 1998.This standstill provision would also temporarilypreclude the CFTC from unilaterally imposing anew, comprehensive regulatory regime for the OTCderivatives markets without the explicit consent ofthe Congress and before the Congress has had achance to consider carefully the potential ramifica-tions. Second, the proposal would remove the legalcloud over certain securities-indexed transactions(including equity swaps and equity-indexed hybriddebt instruments). These securities-indexed trans-actions are subject to additional legal uncertaintybecause of a provision that prohibits the CFTC fromexempting such transactions from the CEA to theextent that they might be considered to be covered.The proposal would, in effect, extend the CFTC'sexisting exemption for OTC derivatives to cover

these securities-indexed transactions, thereby reduc-ing legal uncertainty.

SUMMARY

In summary, the Board believes that application ofthe CEA to institutional transactions in OTC deriva-tives would be inappropriate. It is unnecessary toachieve public policy objectives with respect to suchtransactions. Moreover, if the CEA is applied to suchtransactions, as assumed by the CFTC in its recentconcept release, it would call into question the legalenforceability of at least some, and perhaps many, ofthose transactions. This threat undermines the com-petitiveness of U.S. firms and markets and couldplace the stability of the financial system at risk. Forthese reasons, the Board supports the proposal forimmediate but temporary legislation that was recentlytransmitted to the Congress.

Statement by Herbert A. Biern, Associate Director,Division of Banking Supervision and Regulation,Board of Governors of the Federal Reserve System,before the Committee on Banking and Financial Ser-vices, U.S. House of Representatives, June 11, 1998

I am pleased to appear before the Committee onBanking and Financial Services to discuss the Fed-eral Reserve's role in the government's anti-money-laundering efforts and our interagency efforts todevelop and issue effective "Know Your Customer"rules for the banking industry. As you requested,I will also describe in general terms the FederalReserve's participation in Operation Casablanca andthe issuance of enforcement orders against the for-eign banking organizations with U.S. offices iden-tified in the operation. Finally, I will provide somecomments on proposed anti-money-laundering legis-lation that you and the members of the committee areconsidering.

First, I want to emphasize that the Federal Reserveplaces a high priority on participating in the govern-ment's programs designed to attack the launderingof proceeds of illegal activities through our nation'sfinancial institutions. As a result, over the past sev-eral years Federal Reserve staff has engaged exten-sively in anti-money-laundering endeavors on itsown and in coordination with U.S. and internationalbank supervisory agencies and law enforcementauthorities.

As bank supervisors, the Federal Reserve believesthat it is necessary to take reasonable and prudent

steps to ensure that banking organizations do notknowingly engage in money laundering. For thisreason, and to support our law enforcement agenciesin their efforts to combat money laundering, theFederal Reserve's efforts to attack the money laun-dering problem continue to be one of our highestbank supervisory priorities. As I will describe inmore detail, the Federal Reserve has played, and willcontinue to play, a prominent role in the federalgovernment's program to reduce and we hope elimi-nate money laundering activities through U.S. finan-cial institutions.

FEDERAL RESERVE ROLE

Banking organizations and their employees are thefirst and strongest line of defense against financialcrimes and, in particular, money laundering. It is forthis reason that the Federal Reserve emphasizes theimportance of financial institutions putting in placecontrols to protect themselves and their customersfrom illicit activities. A banking organization's bestprotection against criminal activities is its own poli-cies and procedures designed to identify and under-stand with whom it is conducting business andhaving the capability to identify and then rejectpotentially illegal or damaging transactions. For thisreason, the Federal Reserve and the other regulatorshave implemented various directives for bankingorganizations to establish internal controls and proce-dures designed to detect unusual or suspicious trans-



actions that, if unchecked, could lead to criminalmisconduct, including money laundering.

To understand and properly evaluate the effective-ness of a banking organization's controls and pro-cedures, Federal Reserve staff has developed com-prehensive examination procedures and manuals. InNovember 1997, the Federal Reserve issued its newlyrevised risk-focused Bank Secrecy Act examinationprocedures. These enhanced examination proceduresspecifically address anti-money-laundering compli-ance. For example, the examination procedures directexaminers to review written policies of an institutionto assess whether senior management has includedanti-money-laundering procedures in all of the insti-tution's operational areas, including retail operations,credit, private banking, and trust. Examiners are alsodirected to review existing Know Your Customerpolicies as a preventive measure and as a meansto detect and report suspicious money-laundering-related activities. In addition, specific examinationprocedures direct the examiner to determine the effec-tiveness of systems used by the institution to identifyunusual or suspicious activities with regard to cashtransactions, exemptions, the sale of monetary instru-ments, and funds transfers. Examiners are alsodirected to review audit testing procedures to deter-mine if audits are being used to detect, deter, andreport money laundering activities. Training pro-grams for relevant bank staff in the areas of BankSecrecy Act compliance and anti-money-launderingcontrols are also evaluated.

Federal Reserve examiners are provided with com-prehensive training to assist them in identifyingappropriate bank policies and procedures. We alsoprovide training to our examiners on the latest trendsin money laundering, as well as techniques for iden-tifying suspicious or unusual transactions. Examin-ers evaluate the viability of a bank's anti-money-laundering policies and procedures designed toenable the bank to, among other things, detect andreport unusual or suspicious transactions. However,even with appropriate training, it is still difficultfor even the most experienced examiners to detectsophisticated money laundering schemes during thecourse of an examination. In this regard, I mustemphasize that we do not expect our examiners to actas criminal investigators. As a federal bank super-visory agency, we view the Federal Reserve's role asauxiliary to the legitimate law enforcement duties ofcriminal justice agencies. Our examiners do not, norshould they, possess the necessary tools requiredto fully investigate and prosecute criminal conduct.If money laundering transactions are identified orstrongly suspected during the course of an examina-

tion, we immediately notify our law enforcementcolleagues.

Having said this, however, in recent years theFederal Reserve has determined that in someinstances it is necessary to go beyond the scope of anordinary bank examination to determine if violationsof law have occurred. For this reason, in 1993 theSpecial Investigations Section was created in theBoard's bank supervision division. This unit's func-tion, in part, continues to be that of reviewing infor-mation developed during the course of an exam-ination and conducting a specialized inquiry todetermine what, if any, laws have been violatedthrough activity conducted at a banking organization.Section staff notifies the appropriate law enforce-ment agency when apparent criminal violations aredetected and provides support and technical assis-tance whenever requested. Recent undertakings ofthis section include uncovering information that ledto the conviction for criminal activity related tomoney laundering and fraud of the Bangkok Metro-politan Bank, a foreign banking organization thatsubsequently was ordered by the Federal Reserve tocease all operations in the United States, and coordi-nating the Federal Reserve's recent involvement inOperation Casablanca.

COORDINATED ANTI-MONEY-LAUNDERINGEFFORTS

In addition to the Federal Reserve's efforts to developappropriate anti-money-laundering-related policiesand procedures for the domestic and foreign financialinstitutions that we supervise and our examination forcompliance with those policies and procedures, staffof the Federal Reserve has taken an active role amongfederal bank supervisors in the law enforcement com-munity's battle to deter money laundering by provid-ing expertise for law enforcement initiatives andtraining to various government agencies.

The Federal Reserve routinely coordinates withfederal law enforcement agencies with regard topotential criminal matters, including anti-money-laundering activities. The scope of this coordinationranges from our significant work on the developmentand implementation of the new interagency Suspi-cious Activity Reporting system to the referral ofillicit activities on a case-by-case basis to lawenforcement agencies resulting from examinations ofbanking organizations.

Training provided by Federal Reserve staff to lawenforcement agencies continues to include programsat the U.S. Department of the Treasury's Federal Law



Enforcement Training Center and at the FBI Acad-emy, as well as training for the U.S. Secret Serviceand the U.S. Customs Service. Additionally, FederalReserve staff has provided training in anti-money-laundering procedures to foreign law enforcementofficials and central bank supervisory personnel insuch countries as Russia, Poland, Hungary, the CzechRepublic, and a number of the emerging Baltic states,as well as Brazil, Ecuador, Argentina, China, andseveral other countries in the Middle East and FarEast.

The Federal Reserve's foreign initiatives alsoinclude our staff's active participation in the Finan-cial Action Task Force (FATF), which was estab-lished by the Group of Seven (G-7) countries. Boardstaff has contributed significantly to the FATF's mis-sion of educating countries around the world in anti-money-laundering and fraud prevention efforts. TheFederal Reserve also participated in the developmentof guidance related to serious financial crimes,including money laundering, that was adopted atthe recently concluded G-7 ministerial meeting atBirmingham, England.

In addition, the Federal Reserve is a foundingmember and an active participant in the well-regardedinteragency Bank Fraud Working Group, whichconsists of representatives of thirteen federal lawenforcement and bank and securities supervisoryagencies. Among other things, this group, which hasbeen meeting on a monthly basis since the mid-1980s, has coordinated the dissemination of relevantand timely information concerning criminal miscon-duct involving various banking organizations andtheir officials.

KNOW YOUR CUSTOMER

The Federal Reserve believes that the most prudentand effective means by which banking organizationscan protect themselves from allowing criminal trans-actions to be conducted at, or through, their institu-tions are for the institutions to adopt what has becomeknown as Know Your Customer policies and pro-cedures. Illicit activities, such as money laundering,fraud, and other transactions designed to assist crimi-nals in their illegal ventures, pose a serious threat tothe integrity and reputation of financial institutions.When transactions at financial institutions involvingillicit funds, such as money laundering activities, arerevealed, such transactions invariably damage thereputation of the institution involved. While it ispractically impossible to identify every transaction ata financial institution that is potentially illegal or is

being conducted to assist criminals in the movementof illegally derived funds, it is fundamental for safeand sound operations that financial institutions takereasonable measures to identify adequately who theyconduct business with, understand the legitimatetransactions to be conducted by those customers, and,consequently, identify those transactions conductedby their customers that are unusual or suspicious innature.

In February 1996, Governor Kelley directed Fed-eral Reserve staff to begin the development of aKnow Your Customer regulation. The first step in thisprocess was an extensive Federal Reserve effort in1996 and 1997 to gain a comprehensive understand-ing of the current Know Your Customer policies andprocedures of banking organizations operating in theUnited States and abroad, including the private bank-ing activities of large domestic and foreign bankingorganizations. Among the actions taken by FederalReserve staff during this period were the examina-tions of several private banking operations in order todetermine, among other things, how they have imple-mented their own Know Your Customer policies andprocedures. As a result of the yearlong private bank-ing review, the Federal Reserve developed and issueda "sound practices" paper on private banking in July1997. Information gathered from the private bankingexaminations provided staff with some basic informa-tion that was necessary before draft regulations cov-ering banking organizations' relationships with theircustomers could be prepared.

In the late summer of 1997, the staff of the FederalReserve prepared a preliminary draft regulation, andthen began discussions with the other federal bankregulators in an effort to design a coordinated regula-tion that would address the Know Your Customeractivities of all federally supervised banks, thrift insti-tutions, and credit unions. Representatives of the fivefederal bank supervisory agencies, along with a repre-sentative from Treasury's Financial Crimes Enforce-ment Network (FinCEN), have been meeting over thepast year. It is hoped that we are nearing the endof what has been a complex process. Barring anyunforseen complications, we expect that the regula-tors should be able to issue coordinated notices ofproposed rulemaking for Know Your Customer regu-lations that would be applicable to bank as well asnonbank financial institutions within the next fewmonths.

The objective of the Know Your Customer regula-tion will be quite simple. The regulation is designedto protect the reputation of the bank, facilitate thebank's compliance with all applicable statutes andregulations and with safe and sound banking prac-



tices, and protect the bank from becoming a vehiclefor, or a victim of, illegal activities perpetrated byits customers. One of the benefits of developingand implementing a Know Your Customer programis that having an effective program should enhancethe relationship between the bank and its legitimatecustomers.

As the regulators' staff now envisions the require-ments of the regulation, banking organizations wouldbe required to develop a Know Your Customerprogram that would allow them to identify their cus-tomers at the inception of the customer relationship,and understand the source of funds and the normaland expected transactions of their customers. Theprogram should also be designed to allow bankingorganizations to monitor the transactions of theircustomers to ensure that they are consistent withtheir expected transactions and identify and report,as necessary, those transactions that are unusual orsuspicious.

The requirements of the Know Your Customerprogram are expected to be set out in general terms,reflecting the view that a Know Your Customer pro-gram that is appropriate for one institution may notbe appropriate for another. Under the proposed regu-lation, we would expect each banking organizationto design a program that is appropriate to that orga-nization, given its size and complexity, the natureand extent of its activities, its customer base, and thelevels of risk associated with its various customersand their transactions. The Federal Reserve has longadvocated this approach as opposed to a detailedregulation that imposes the same list of requirementson every organization regardless of its specific cir-cumstances and the scope of its business activities.

OPERATION CASABLANCA

As the members of the committee are aware, Opera-tion Casablanca was recently made public with theannouncement of criminal indictments that includedcharges of money laundering being brought againstnumerous bankers, as well as three Mexican banks—two of which operate offices in the United States. AsI am sure the committee will understand, I cannotprovide specific operational information about Opera-tion Casablanca because the law enforcement agen-cies responsible for the operation are still working onvarious aspects of the case. Similarly, confidentialityrequirements preclude me from discussing supervi-sory information about the banking organizations thatallegedly may have been involved in improper activi-ties identified during Operation Casablanca. Within

these parameters, I would like to describe briefly theFederal Reserve's involvement in the operation.

The Federal Reserve was first made aware ofOperation Casablanca in late 1995 when staff mem-bers were approached by Special Agents of the U.S.Customs Service, the lead agency for OperationCasablanca. The agents requested technical assis-tance with regard to certain banking aspects of anundercover money laundering sting operation. Fromthat time on, Federal Reserve staff members haveprovided, and continue to provide, assistance to theU.S. Customs Service and the Department of Justiceas they complete the investigation and as they nowprepare for the various prosecutions resulting fromthe recently announced indictments. Some of theassistance that we provided included verification asto the existence of banking organizations and thegeographic location of their operations, explanationsof procedures for the movement of currency betweenbanking organizations and within the Federal ReserveSystem, training on check clearing and funds transferprocedures, describing the various procedures banksfollow in complying with regulatory reportingrequirements such as the filing of Suspicious ActivityReports and Currency Transaction Reports, and pro-viding assistance in the post arrest interviews of thebankers who were arrested in the United States.

On May 18—when the Departments of Justice andTreasury jointly announced the indictments of sev-eral banks and bankers resulting from OperationCasablanca—the Board issued enforcement actions,in this case temporary cease and desist orders, againstfour Mexican banks and one Spanish bank with aMexican bank subsidiary. Two days later, when sev-eral Venezuelan bankers and alleged money launder-ers were arrested, the Board took a similar enforce-ment action against a Venezuelan bank with U.S.operations. In total, the Board issued six temporarycease and desist orders resulting from OperationCasablanca.

Specifically, the Board ordered each of the finan-cial institutions to provide a detailed description ofthe anti-money-laundering policies and proceduresthat it had in place, as well as a detailed descriptionof its understandings regarding the deficiencies insuch policies and procedures that could have givenrise to the apparent illegal actions taken by its em-ployees. Additionally, the Board ordered each institu-tion to submit an acceptable plan detailing the stepsthat have been and will be implemented to ensure thatconduct, such as that which has already occurred, isnot occurring and will not occur in the future. Inconjunction with the responses expected from thesix banking organizations, the Federal Reserve has



begun in-depth targeted reviews of their anti-money-laundering policies and procedures, and staff contin-ues to monitor each of the implicated banks with U.S.operations.

PROPOSED LEGISLATION

Finally, you have asked us to comment on legislationyou proposed, entitled the "Money LaunderingDeterrence Act of 1998,"' as well as legislation pro-posed by Congresswoman Velazquez, entitled the"Money Laundering and Financial Crimes StrategyAct of 1998." While the Board has not had an oppor-tunity to review either proposal, as a general proposi-tion the Federal Reserve has always supported con-structive efforts to better and more efficiently attackmoney laundering activities. From the staff's reviewof the proposals, it appears that the legislation, amongother things, would increase the tools available to lawenforcement authorities to combat money launder-ing on the one hand and establish a coordinatedgovernment-wide effort against money laundering onthe other.

With specific regard to the "Money LaunderingDeterrence Act of 1998," the staff is particularlypleased with the clarification of some issues relatedto the disclosure of Suspicious Activity Reports. Thefiling of Suspicious Activity Reports by bankingorganizations is a vital tool for the government'santi-money-laundering efforts, and your legislativeproposal enhances the organizations' ability to com-municate with law enforcement and bank supervisorsin a timely and effective manner without the threatof inappropriate legal challenges. We also appreciatethe importance that the proposed legislation placeson Know Your Customer regulations as an integralcomponent of an effective government anti-money-laundering program.

With respect to the Money Laundering and Finan-cial Crimes Strategy Act of 1998, we believe thatcoordination already exists among and between thevarious governmental bodies that participate in anti-money-laundering efforts. If the Congress were todetermine that the development of a national strategyin this area is appropriate, then we would welcomethe opportunity to participate in such an initiative.

CONCLUSION

Over the past several years, the Federal Reserve hasundertaken extensive efforts to develop programs,procedures, and systems to better detect and deterillegal money laundering activities at individualbanking organizations as well as address systemicissues related to financial institutions' compliancewith applicable anti-money-laundering laws andregulations, including the Bank Secrecy Act. TheFederal Reserve has also provided training and tech-nical assistance to law enforcement agencies partici-pating in the government's anti-money-launderingefforts and to international banking and law enforce-ment authorities.

These actions underscore the Federal Reserve'ssignificant commitment to the bank regulatory com-munity's anti-money-laundering mission. The Fed-eral Reserve has a vital interest in protecting thebanking system from criminal elements. Conse-quently, we will continue our cooperative efforts withother bank supervisors and the law enforcement com-munity to develop and implement effective anti-money-laundering programs addressing the ever-changing strategies of criminals who attempt tolaunder their illicit funds through banking organiza-tions here and abroad.

Statement by Alan Greenspan, Chairman, Board ofGovernors of the Federal Reserve System, before theCommittee on the Judiciary, U.S. Senate, June 16,1998

It is my pleasure to appear today to discuss thecurrent merger wave that is affecting a wide range ofindustries in the American economy. This nation hasalways viewed concentrations of power, whether ingovernment or the private sector, as a threat to indi-vidual political freedoms and the equality of opportu-nity. In the public sector we seek democratic institu-tions and a rule of law to tether excessive politicalpower. In the private sector we encourage competi-

tion as the perceived most effective way to containthe undue concentration of power. Such poweris presumed to thwart individual initiative and toprevent the efficient allocation of resources, whichwould interfere with the creation of wealth and itswide distribution. The acceleration of megamergersin recent months across a broad range of industrieshas once again stirred these latent concerns.

Waves of mergers are, of course, not new. Thecurrent one is the fifth in this country during the pastcentury. Previous waves occurred at the turn of thecentury, in the late 1920s, the late 1960s, and, mostrecently, in the early 1980s. The first two almostcertainly did produce significant increases in eco-



nomic concentration in manufacturing as industrial-ization accelerated with the shift of resources out ofagriculture into many new budding industries. Themore recent merger waves, however, do not appear tohave materially altered industry structure, perhapsowing, in large part, to the increased adaptability ofour more mature and competitive industrialized econ-omy. Other countries have also experienced mergerwaves in recent decades with no perceptible increasein concentration overall.

The effects of the present merger wave on concen-tration have yet to be determined, but there is littlereason to expect their influence will differ substan-tially from the merger wave of the early 1980s, whichproduced at most a slight increase in manufacturingconcentration.

To be sure, recent bank mergers have led to asubstantial rise in national concentration measures.Nonetheless, they have had little or no evident impacton average concentration measured at the more rele-vant local market level. This stability of local marketconcentration owes, in part, to the dynamic natureof American banking, with substantial entry ofnew firms as well as exit of others. In any event, onbalance, while the average number of competitorswithin local banking markets has not materiallychanged in recent years, they tend to be the samecompetitors in an increasing number of markets.Beyond banking, useful studies on the effects ofmergers on concentration in other nonmanufacturingsegments of our economy are regrettably few.

Evidence concerning the effects of mergers oneconomic efficiency is mixed. While some studiesfind no evidence of profit and efficiency improve-ments following mergers, others indicate that, onaverage, mergers have led to significant productivitygains. In the banking industry, the data suggest thatwhile some mergers have engendered improvedoperations, others have not. Thus, there are no clear-cut findings that suggest bank mergers uniformly leadto efficiency gains. However, the evidence suggeststhat there are considerable differences in the costefficiencies of banks within all bank size classes,implying that there is substantial potential for manybanks to improve the efficiency of their operations,perhaps through mergers.

Numerous empirical studies, nonetheless, havefound a statistically significant positive relationshipbetween market concentration and profits, which,upon closer examination, appears to derive from alink between market share and profits. Economistshave differed in their interpretations of this finding.While one group argues that high levels of concentra-tion allow firms to exercise market power, resulting

in above-normal profitability, another group arguesthat high concentration levels and high profits areboth the consequence of greater efficiency. Studies ofthe relationship between concentration and pricestend to support the market power interpretation, butthe magnitudes of the positive, statistically significantcoefficients relating prices to concentration measurestend to be fairly small.

Some empirical studies also suggest that high con-centration and presumed lack of competitive pressuremay also be associated with the failure of firms toproduce efficiently.

More generally, it is concern over the lack of theleveling force of competition in highly concentratedmarkets that has fostered the fear of bigness. Butunless a relationship between bigness and marketconcentration can be more firmly rooted in anticom-petitive behavior, bigness, per se, does not appear tobe an issue for national economic policy. Rather, itappears that bigness should be primarily the concernof shareholders, whose returns could be muted bylarge company inefficiencies, and their customers,who may face bureaucratic inflexibility.

There is an evident general consensus in this coun-try that competition, in the abstract, is good for theconsumer, for economic growth, and standards ofliving. This notion is buttressed by studies that sug-gest the more open to competitive forces, the greaterthe growth of an economy. Much more immediatelyand directly, the areas of greatest growth in outputand productivity in this country—Silicon Valley andits counterparts around the country—are extremelycompetitive judging from the turnover of businessand the evidence of a high degree of what JosephSchumpeter many decades ago called creative de-struction. Many new products emerge with great fan-fare and soaring stock prices only to flare out whenconfronted with a still newer competitive innovation.

There are, nonetheless, differences at the margin(some would go further) of what constitutes appropri-ate competitive behavior and what the role of govern-ment in this country should be in enforcing it. Atroot, what differences exist stem from varying viewsof precisely how our economy functions and whichactivities are wealth producing and which are not.

The notion of what we mean by competition is notaltogether without dispute. Most would agree thatproducers try to emphasize their new products or thecomparative advantages of existing products. Whenthey sense that improved quality will enhance salesmore than costs, they will direct resources to qualityimprovement and try to differentiate their product,often through brand name advertising. All seek, or atleast hope, to achieve market dominance. When they



cannot differentiate their product from others becausethey choose to produce, for example, electrolyticcopper or any other so-called commodity, they willendeavor to improve their market share and spreadoverhead through innovative improvements in ser-vice. Other producers may turn to mergers and acqui-sitions to increase market share. Acquirers mayseek to enhance efficiency, but they may also seek toincrease their market power, and hence their profits,through practices that are often considered less thansportsmanlike, to use an analogy to another promi-nent arena of competition. When producers cannotachieve a profitable market niche, some, but fortu-nately few, will seek political protection from mar-kets through subsidies, tariffs, quotas, or outrightgovernment franchised monopolies.

Through skill, perseverance, luck, or political con-nections, competitors have always pressed for marketdominance. It is free, open markets that act to thwartachievement of such dominance and in the processdirect the competitive drive, which seeks economicsurvival, toward the improvement of products, greaterproductivity, and the amassing and distribution ofwealth. Adam Smith's invisible hand does apparentlywork.

To be sure, markets do not always work fully to thestandards of our abstract notions of perfection, whichin turn rest on particular notions of the way humanbeings do, or should, behave in the marketplace.There appears to be general agreement among econo-mists that the test of success of economic activity iswhether, by directing an economy's scarce resourcesto their most productive purposes, it makes consum-ers as well off as is possible. Moreover, it is generallyagreed that the chances of achieving these goals aregreatest if prices are determined in competitive mar-kets and reflect, to the fullest extent that is feasible,the costs in real resources of producing goods andservices. While relatively straightforward to state intheory, how such a standard should be applied inpractice is often subject to dispute.

The focus of much debate in recent years is justwhat constitutes a "market failure," or the tendencyfor market prices not to reflect appropriately all rele-vant production costs. In addition, what constitutesthe interest of consumers in the abstract is, of course,by no means self-evident in a large number of cases.As a result of certain transactions, some consumerswill benefit; others will not. Moreover, conditions candiffer with respect to whether it is the short- orlong-term interest of consumers that is at stake.

Any notion of market failure, of course, presup-poses a concept of market perfection. In that sense,perhaps the only market that achieves this standard of

unequivocal benefit to consumers is the outcome ofan auction market with very tight bid-ask spreads.Such markets represent a very small share of bilateraltransactions.

In one sense, markets generally are always in somestate of imperfection in that businesses never fullyexploit, perhaps can never fully exploit, all opportuni-ties for profitable, productive, investment. Consum-ers do not always seek out the lowest prices or thebest quality, owing to the costs of searching acrosssellers. Rationally acting individuals may choose notto exert the additional effort that they perceive willonly marginally enhance their state of well-being.Then, of course, people do not always act rationally.

In addition, market effectiveness is clearly a func-tion of the degree of market participants' state ofknowledge. The critical signals that make marketsfunction—product and asset prices, interest rates,bid-ask spreads, and so on—depend on market par-ticipants' perceptions of the state of demand andsupply and future prospects, to the extent they arediscernable. There is inevitably considerable asym-metry of information among producers and consum-ers, and buyers and sellers. Moreover, any voluntarytransaction comprises not only a good or a service buta representation, explicit or otherwise, of the natureof the product being transferred. Misrepresentation toinduce an exchange is theft, in that the transactionwas not voluntary. Laws against fraud are demonstra-bly a necessary fixture of any free market economy.

But what information is a seller obligated to con-vey to a buyer in an exchange? Misrepresenting alead brick for a gold one is unambiguous. But areproducers required to divulge information aboutpotential new products that would make obsolete anoffered product and depreciate its value? More gener-ally, how far does protection of intellectual propertyrights go in protecting what is, or what is not, divul-gable to a counterparty to a transaction? Clearly, thisdilemma is only one of many such conundrumsresulting from the awesome complexity of the opera-tions of free markets. In this case, too heavy a handof government regulation will surely stifle innovationand wealth creation. Too little will infringe the legalproperty rights of counterparties.

Still more difficult is the relevance of the effects onthird parties from the actions of two individuals act-ing voluntarily, with or without conspiratorial intent,in their mutual interest through exchange. In the mostgeneral sense, all bilateral transactions, to a greateror lesser extent, affect the markets with which thirdparties deal for good or ill. Some actions open newmarkets for unrelated third parties. Other actionsincrease competitive pressure. Indeed, that is an



inevitable consequence of the division of labor in asociety. But it is almost impossible in the vast major-ity of cases to judge with any confidence that one actcreates wealth or another destroys it. Nonetheless,while certain aggressive, competitive behaviors may,as the evidence suggests, enhance wealth creation,our society has, in addition to taking actions againstpresumed failings in the marketplace, chosen to setnoneconomic limits to competitive behavior. Ineffect, we have established a set of Marquis ofQueensberry rules for the marketplace, that is, non-economic criteria for the types of behavior that arejudged tolerable in business relationships. We may inthe process, of course, be losing some wealth cre-ation, but the value of market civility, at varioustimes in our history, appears to have tempered ourdrive for maximum efficiency. Nonetheless, that mar-kets, however faulted, are a productive means tocoordinate human behavior for most remains beyonddoubt.

Markets enforce a degree of trust among partici-pants that may not be so prevalent in other aspects oflife. People cannot be untruthful without cost in amarket context where credibility has distinct com-mercial value. A reputation for an inferior productmight not be damaging in a centrally planned econ-omy but has heavy consequences in markets wherechoice is available. But above all, by constructinginstitutions that enable the value preferences of con-sumers to be reflected in prices and other marketsignals, a society can produce far greater wealth thanany of the nonmarket alternatives.

One of those essential institutions is a rule of lawthat protects property rights, both real and intellec-tual, against force or fraud, enforces contracts, andadjudicates the bankrupt. More controversial are thelaws that endeavor to improve the workings of themarketplace, the Sherman and Clayton acts being themost prominent.

While no one, I presume, is against improvingmarkets, the issue is clearly what constitutes improve-ment and by what means, if any, it can be achieved.How this issue has been addressed since the passageof the Sherman Antitrust Act of 1890 has ebbed andflowed with evolving theories and empirical evidenceabout how markets function and the degree of accep-tance in our society of free markets to determine thedistributions of income and wealth.

In the 1970s and 1980s, there was a significantshift in emphasis from a relatively deterministic anti-trust enforcement policy to one based on the belief(under the aegis of the so-called Chicago School) thatthose market imperfections that are not the result ofgovernment subsidies, quotas, or franchises would be

assuaged by heightened competition. Antitrust initia-tives were not seen as a generally successful remedy.More recently, limited avenues for antitrust policyare perceived by policymakers to enhance marketefficiencies.

That markets, on occasion, can be shown to bebehaving in a manner presumed inferior to somepresubscribed optimum is not a difficult task. Forexample, suboptimal product or operational standardsare seen by some to persist because, once in place,they are difficult to dislodge. Often cited is the word-processor keyboard whose key placement still reflectsthe manual typewriter's need to prevent its keys fromsticking rather than convenience to the typist. A morerecent example pointed to by some is the universaladoption of VHS-based VCR technology. The moregeneral proposition is that the success of competingtechnologies depends more on the relative size oftheir initial adoptions than on the inherent superiorityof one over the other (what economists term "pathdependence"). I should point out, however, that theseexamples, and the more general proposition, are notwithout challenges.

To demonstrate that a particular antitrust remedywill improve the functioning of a market is also oftenfraught with difficulties. For implicit in any remedy isa forecast of how markets, products, and companieswill develop.

Forecasting how technology, in particular, willevolve has been especially daunting. The problem isthat the various synergies of existing technologiesthat account for much of our innovation have beenexceptionally difficult to discern in advance. Forexample, according to Charles Townes, a Nobel Prizewinner for his work on the laser, the attorneys forBell Labs initially refused, in the 1960s, to patent thelaser because they believed it had no applications inthe field of telecommunications. Only in the 1980s,after extensive improvements in fiber optics technol-ogy, did the laser's importance for telecommunica-tions become apparent.

Moreover, almost by definition, antitrust remediesare applied mainly to firms dominant in their indus-tries. Yet the evidence of sustained dominance wheremarkets are generally open are few. There has been atendency for one firm to dominate in the early devel-opment of many of our industries where economiesof scale enabled significant reductions in unit costsand hence prices. U.S. Steel, General Motors, andIBM are only the more prominent cases of marketshare erosion after early virtual dominance of theirindustries was achieved. One wonders how long theStandard Oil Trust's near monopoly of refining wouldhave prevailed, even without the landmark antitrust



breakup in 1911, as upstart competitors Royal DutchShell, British Petroleum, Gulf, and the Texas Com-pany (Texaco) undercut Standard.

I am not saying that dominant positions in indus-tries cannot be maintained for extended periods, but Isuspect in free competitive markets that it is possibleonly if dominance is maintained through cost effi-ciencies and low prices that competitors have diffi-culty matching. By the measure of what benefitsconsumers, such enterprises should not be discour-aged. Natural monopolies are an exception, but tech-nology is increasingly reducing the areas of our econ-omy where such monopolies can prevail. Bankingand other regulated industries are of course a furtherexception.

The possibility of economies of scale leading tovery large firms relative to any one nation's economyillustrates and emphasizes the importance of interna-tional free trade policies in maintaining domesticcompetition. In some industries, free trade may beessentially the only way to maintain truly competitivemarkets to the benefit of consumers in all of thenations involved. Nevertheless, it is also interestingto note that some, such as Professor Michael Porter atHarvard, have found that the most successful export-ers have evolved out of domestically competitiveindustries.

In any event, we have come a long way in attitudesabout market power and antitrust enforcement fromthe days, more than a half century ago, when aFederal Appeals Court opined in the Alcoa case, that

"we can think of no more effective exclusion [ofcompetitors] than progressively to embrace each newopportunity as it opened, and to face every newcomerwith new capacity already geared into a great organi-zation, having the advantage of experience, tradeconnections and the elite of personnel."

If competitors are excluded because of a compa-ny's excellence in addressing consumer needs, shouldsuch activity be constrained by law? Such a standard,if generally applied to business initiatives, wouldhave chilled the type of competitive aggressivenessthat brings efficiencies and innovation to the market-place. Fortunately, that principle was subsequentlyabandoned by the Supreme Court. More important,antitrust actions of recent years have sought toenhance efficiencies and innovations. I leave it toothers to judge their degree of success. But the regu-latory climate in antitrust, indeed throughout govern-ment, has moved in a more market-oriented direction.I believe that is good for consumers and the nation.

In conclusion, the United States is currently experi-encing its fifth major corporate consolidation of thiscentury. When trying to understand and deciding howto react to this development, I would hope that weappropriately account for the complexity and dyna-mism of modern free markets. Foremost on theagenda of policymakers, in my judgment, should beto enhance conditions in our market system that willfoster the competition and innovation so vital to aprosperous economy.

Statement by Alan Greenspan, Chairman, Board ofGovernors of the Federal Reserve System, before theCommittee on Banking, Housing, and Urban Affairs,U.S. Senate, June 17, 1998

It is a pleasure to appear before this committee topresent the views of the Federal Reserve on the needto enact legislation to modernize the U.S. financialsystem and to express the Board's strong support forH.R. 10, which achieves this objective.

THE NEED FOR FINANCIAL REFORM

U.S. financial institutions are today among the mostinnovative and efficient providers of financial ser-vices in the world. They compete, however, in amarketplace that is undergoing major and fundamen-

NOTE. The attachments to this statement are available from Publi-cations Services, Mail Stop 127, Board of Governors of the FederalReserve System, Washington, DC 20551, and on the Board's site onthe World Wide Web (http://www.bog.frb.fed.us).

tal changes driven by a revolution in technology, bydramatic innovations in the capital markets, and bythe globalization of the financial markets and thefinancial services industry.

The Federal Reserve believes that it is essentialthat the nation act promptly to modernize the rulesthat govern our financial institutions in order toensure their continued competitiveness and to fostertheir ability to innovate, to operate efficiently, and toprovide the best and broadest possible services toconsumers as well as to maintain this nation's roleas the preeminent world financial center. We believethat it is important for the Congress to set the rulesfor this industry, which is so important to our nation'shealth and prosperity. Only the Congress has theability to fashion rules that are comprehensive andequitable to all participants and that guard the publicinterest.

That is why the Federal Reserve strongly supportsH.R. 10 and urges the Senate to consider and passthis legislation as soon as feasible.



The market will continue to force change whetheror not the Congress acts. The strength and viability ofour financial institutions, the effectiveness of ourregulatory structure, and the role and status of ourfinancial services industry in the international systemare in play as a result of the aforementioned marketforces as well as regulatory actions. Without congres-sional action, changes will occur through exploitationof loopholes and marginal interpretations of the lawthat courts feel obliged to sanction. This type ofresponse to market forces leads to inefficiencies,expansion of the federal safety net, potentiallyincreased risk exposure to the federal deposit insur-ance funds, and a system that will undermine thecompetitiveness and innovative edge of major seg-ments of the financial services industry. Delay inacting on financial modernization legislation wouldonly limit the Congress's options as these develop-ments proliferate and complicate, increase the diffi-culty of enacting protections included in H.R. 10 toprotect safety and soundness and the public interest,and deny to consumers the benefits that immediatechanges in our outdated banking laws will surelybring.

Of course, financial modernization involves com-plicated and sometimes divisive issues because itrequires easing rules and opening options for somewhile increasing competition for others, redrawinglines that create new limits, and applying somepre-existing regulatory structures to new institutions.However, these issues are not new to the Senate.

The Senate Banking Committee has on three pre-vious occasions led the way in developing financialmodernization legislation, and the full Senate hastwice followed this committee's recommendation inadopting such legislation. (A summary of these finan-cial modernization proposals is provided at attach-ment I.) In 1991, the committee passed S. 543, whichrepealed the Glass-Steagall Act and allowed banksto affiliate with securities firms using the holdingcompany structure to ensure safety and soundness, alevel competitive playing field, and protection ofthe taxpayer. H.R. 10 uses that same holding com-pany framework from S. 543 but expands the rangeof permissible financial affiliations to include insur-ance underwriting and merchant banking. Senateaction at this time to enact H.R. 10 would be ahistoric achievement that would establish a soundand much-needed framework for launching ourfinancial services industry into the twenty-firstcentury.

There has been much—perhaps too much—arguing over details contained in H.R. 10. H.R. 10 isa comprehensive approach to the issues of financial

modernization, and it is fundamentally a sound bill.No legislation that endeavors to address financialmodernization will be considered ideal by all, buttime will allow its rough spots to be worked out.

What is most important is that for the first timethere is an extraordinary amount of agreement onnearly all of the key principles in the bill. There is nodisagreement—and there has been no disagreementfor many years—that the Glass-Steagall Act must berepealed. There is now finally no disagreement thatinsurance companies and banks should be permittedto affiliate, and virtual unanimity that banks shouldbe permitted to sell insurance. There is no disagree-ment that financial holding companies should be per-mitted to engage in a broad range of other activitiesthat are financial in nature, including merchant bank-ing. And there is no disagreement that new affilia-tions must be permitted on a level playing field andin a manner that permits a realistic two-way streetbetween banking organizations that seek to affiliatewith insurance and securities firms, and betweeninsurance and securities firms that seek to acquirebanks. Moreover, there is no disagreement that finan-cial modernization must not place insurance andsecurities firms that choose to remain independent ata disadvantage in competing against those firms thatchoose to affiliate with banks.

In addition, there is strong agreement that newaffiliations must be permitted within a frameworkthat maintains the safety and soundness of our finan-cial system in general and the banking systemin particular without imposing unnecessary regula-tory burden or intrusion. That means strong func-tional regulation and reasonable, but not banklike,umbrella oversight of financial holding companies.

A consensus has also developed that banking andcommerce should not be mixed at this time beyondthe limited level needed to allow a realistic two-waystreet for financial firms that are predominantly secu-rities and insurance companies to acquire banks.There is also agreement that the new law must pro-vide regulators with adequate means to protect theconsumer and ensure that consumers are carefullyinformed about the differences between products thatare backed by federal deposit insurance and thosethat are not.

These are the fundamental principles embodied inH.R. 10, save one. There are some details surround-ing these aforementioned principles that are stillunder discussion. These surrounding details areimportant, but not so important that they should beallowed to defeat the consensus that has developedaround these principles themselves. It would be adisservice to the public and the nation if, in the



fruitless search for a bill that pleases everyone, thebenefits of this vital legislation are lost or delayed.

There is, however, as I indicated, one fundamentalprinciple embodied in H.R. 10 upon which there isdisagreement between the Federal Reserve and thecurrent Treasury Department, although there is agree-ment among the Federal Reserve and many in theaffected industries as well as earlier Treasury Depart-ments. That is the considered decision of the Houseto use the holding company structure, and not theuniversal bank, as the appropriate structure to allowthe new securities and insurance affiliations. Thatdecision, which is fundamental to the way in whichthe financial services industry will develop, is criticalbecause it provides better protection for our bankingand financial system without damaging the nationalor state bank charters or limiting in any way thebenefits of financial modernization. Importantly, thatdecision also prevents the spread of the safety net andthe accompanying moral hazard to the securities andinsurance industries and ensures a level playing fieldwithin the financial services industry and thus full,open, and fair competition as we enter the next cen-tury. The other route toward universal banking fornational banks will, in our view, lead to greater riskfor the deposit insurance funds and the taxpayer. Itwill also inevitably lead to a weakening of the com-petitive strength of our financial services industry asindependent securities, insurance, and other financialservices providers operate at a disadvantage to thoseowned by banks. It is for these reasons that theFederal Reserve, the Securities and Exchange Com-mission (SEC), many state functional regulators, andmany in the affected industries support the holdingcompany framework and have opposed the universalbank approach.

In virtually every other industry, the Congresswould not be asked to address issues such as these,which are associated with technological and marketdevelopments; the market would force the necessaryinstitutional adjustments. Why is it so different forthe financial system? I believe the difference reflectsthe painful experience that has taught us that devel-opments in our financial system—especially, but notsolely, in our banking system—can have profoundeffects on the stability of our whole economy, ratherthan the limited impact we perceive from difficultiesin individual nonfinancial industries.

Moreover, as a society we have made the choice tocreate a safety net for depository institutions, notonly to protect the public's deposits but also to mini-mize the impact of adverse developments in financialmarkets on our economy. Although we have clearlybeen successful in doing so, the safety net has pre-

dictably created a moral hazard: The banks determinethe level of risk-taking and receive the gains there-from but do not bear the full cost of that risk; theremainder is borne by the government. Because thesovereign credit of the United States ultimately guar-antees the stability of the banking system and theclaims of insured depositors, bank creditors do notapply the same self-interest monitoring of banksto protect their own position as they would with-out discount window access and deposit insurance.Instead, this moral hazard requires that the guarantor,the U.S. government, supervise and regulate entitieswith access to the safety net to protect its own, that isthe taxpayers', interest—the cost of making good onthe guarantee.

Put another way, the safety net requires that thegovernment replace with law, regulation, and super-vision much of the disciplinary role that the marketplays for other businesses. Our experience in the1980s with insured thrift institutions illustrates thenecessity of avoiding expanding risks to the depositinsurance funds and lax supervisory policies andrules. But this necessity has an obvious downside:These same rules limit innovative responses and theability to take the risks so necessary for economicgrowth. The last thing we should want, therefore,is to widen or spread this unintended but never-theless corrosive dimension of the safety net toother financial and business entities and markets.It is clear that to do so would not only spread asubsidy to new forms of risk-taking but ultimatelyrequire the expansion of banklike supervision aswell.

In our judgment, the holding company approachupon which H.R. 10 is premised avoids this pitfall;the universal bank approach does not.

While financial modernization represents a muchneeded reform, we should not forget that this modern-ization will, by itself, introduce dramatic changes inour financial services industry. We feel confident thatthe risks of this type of reform are manageable withinthe holding company framework set out in H.R. 10.We believe that the magnitude of the reform to ourfinancial system represented by allowing new andbroad affiliations counsels that this is not the time toexperiment with these broad new affiliations throughoperating subsidiaries, an approach that has failed thetaxpayer in other contexts and has other serious con-sequences. Instead, we believe the Congress is bestadvised to retain the existing holding company struc-ture, which achieves the full benefits sought by finan-cial modernization and has a proven track record ofprotecting safety and soundness, insulating the fed-eral safety net, and providing competitive equality



among companies that choose to affiliate with banksand those that choose to remain independent.

There are two final points I want to make becausethey appear to drive Treasury's opposition toH.R. 10. First, as I will discuss in more detail later,H.R. 10 would not diminish—but would in factenhance—the national bank charter.

Second, H.R. 10 would not diminish the ability ofthe executive branch to continue to play its meaning-ful role in the development of banking or economicpolicy. Currently, the executive branch influencessuch policy primarily through its supervision ofnational banks and federal savings associations.H.R. 10 would not alter the executive branch'ssupervisory authority for national banks or federalsavings associations, nor would it result in any reduc-tion in the predominant and growing share of thisnation's banking assets controlled by national banksand federal savings associations.

Furthermore, the Congress for sound public policyreasons has purposefully apportioned responsibilityfor this nation's financial institutions among theelected executive branch and independent regulatoryagencies. H.R. 10 retains this balance, and the Fed-eral Reserve does not believe it would be appropriateto alter this balance in favor of increased executivecontrol of financial institution policy. Such actionwould be contrary to the deliberate steps that theCongress has taken to ensure independence in theregulation of this nation's financial institutions, bothbanking and nonbanking.

THE FINANCIAL SERVICES ACT OF 1998(H.R. 10)

Although H.R. 10 is almost 300 pages in length, itsobjective is simple and can be stated concisely—H.R. 10 removes outdated restrictions that currentlylimit the ability of U.S. financial service providers,including banks, insurance companies, and securitiesfirms, to affiliate with each other and enter eachother's markets.1 This objective—permitting theaffiliation of financial service providers and therebyallowing open and free competition in the financialservices industry—is supported by the banking, insur-ance, and securities industries as well as the threefederal banking agencies, the Treasury Department,and the Securities and Exchange Commission.

For the most part, the remaining provisions ofH.R. 10 are designed to implement and complement

1. For the committee's assistance, attachment 2 to this testimonyprovides an executive summary of H.R. 10.

this change and to ensure that these new affiliationsoccur in a manner that is consistent with the safetyand soundness of the banking and financial systemand the protection of investors and other consumersof financial services. H.R. 10 requires that these newaffiliations occur within a holding company structure,which the Federal Reserve believes is sound policybecause it best protects the federal deposit insurancefunds by limiting the additional risks permitted toinsured depository institutions. Arguably of evengreater importance, the holding company structurelimits the spread of the federal safety net and itsrelated subsidy and moral hazard to entities or activi-ties beyond the insured depository institutions it wasintended originally to support. H.R. 10 builds on theprotection afforded by the holding company structureby relying on strong functional regulation of thesecurities, insurance, and banking components of theholding company. It also provides flexibility to autho-rize restrictions on transactions between depositoryinstitutions and their newly authorized affiliates whennecessary to protect the safety and soundness ofaffiliated depository institutions and the federaldeposit insurance funds. H.R. 10 grants access tothese new affiliations only to those organizations thathave and maintain well-capitalized and well-managedsubsidiary depository institutions.

H.R. 10 also includes provisions designed to ensurethat these new affiliations occur in a manner that isconsistent with the protection of consumers. Forexample, the bill requires that the federal bankingagencies issue consumer protection regulations gov-erning the retail sale of securities and insurance prod-ucts by depository institutions. And H.R. 10 empha-sizes the obligation of depository institutions to helpmeet the credit needs of their entire community bylimiting the new affiliations to only depository institu-tions that have at least a satisfactory performancerecord under the Community Reinvestment Act.

Umbrella Supervision and FunctionallyRegulated Entities

H.R. 10 for the first time would permit broad affilia-tions among financial service providers that are cur-rently supervised by different agencies. As a result,H.R. 10 builds on the principle of functional regula-tion and includes important provisions that encourageand facilitate cooperation among the functional regu-lators. It also reduces overlap between the variousregulators and clearly allocates responsibility andaccountability for supervising the different parts ofnew financial holding companies. At the same time,



H.R. 10 retains a meaningful, albeit streamlined,level of umbrella oversight of the entire organizationto ensure that some agency has a complete view of,and accountability for, new financial holding compa-nies and can serve a facilitating role in relationshipsamong functional regulators.

The Federal Reserve believes that H.R. 10 hasconstructed a good balance that provides the variousregulators, including the umbrella supervisor, withthe tools needed to supervise financial holding com-panies adequately. In addition, H.R. 10 is helpful inenhancing the ability of the relevant state and federalsupervisory agencies to share information on a confi-dential basis.

The focus of H.R. 10 on functional regulation isperhaps best illustrated through an example. UnderH.R. 10, responsibility would be allocated for super-vising a new financial holding company composedof an insurance company, a securities firm, severalfinancial companies such as a mortgage lender and afinancial data processing company, and an insuredbank. H.R. 10 contemplates that responsibility forsupervising and regulating the insurance company,securities firm, and insured bank would, as undercurrent law, rest respectively with the relevantstate insurance authorities, with the Securitiesand Exchange Commission and the securities self-regulating organizations, and with the appropriatestate and federal bank supervisory agencies. Each ofthese agencies would retain the full authority that itcurrently has to examine firms under its jurisdictionand to interpret and enforce the law applicable to thetype of company that the agency is charged withsupervising.

The Federal Reserve, as umbrella supervisor,would be required to the fullest extent possible to relyon regulatory reports required and examinations con-ducted by, using our example, the state insurancecommissioner, the SEC (and appropriate securitiesself-regulatory agencies), and the appropriate state orfederal banking agency, [n a problem bank situation,the Federal Reserve also would be prohibited fromrequiring that the insurance company or securitiesfirm provide financial resources to the bank if thefunctional regulator determines that such actionwould have a materially adverse effect on the finan-cial condition of the insurance company or securitiesfirm. Instead, the Federal Reserve could order divesti-ture of the bank or affiliate in order to recapitalize thebank.

At the same time, H.R. 10 preserves the importantauthority of the umbrella supervisor to apply consoli-dated capital standards to the financial holding com-pany, to examine the holding company and—under

specified circumstances—any subsidiary that poses amaterial risk to the insured bank, and to enforcecompliance by the organization with the federal bank-ing laws. This ensures that, while the functionalregulators are supervising various parts of the organi-zation, someone is overseeing the organization as awhole as well as subsidiaries that are not subject toother functional regulation.

Enhanced Functional Regulationof Financial Products

Consistent with the bill's emphasis on functionalregulation, H.R. 10 also would repeal the blanketexemptions provided banks from the definitions of"broker" and "dealer" in the Securities ExchangeAct of 1934, requiring banks to register with the SECif their securities activities fall outside specified cate-gories of transactions. These categories are broad andwould permit banks to continue engaging in securi-ties activities in connection with their traditional trust,custody, safekeeping, and derivatives operations andin a limited amount of retail securities transactionswithout registering as a broker or dealer.

The bill also establishes procedures for determin-ing which functional regulator would have primaryresponsibility for supervising the provision of new orhybrid financial products that may be developed inthe future. In the securities area, for example, H.R. 10would authorize banks, to the extent consistent withapplicable banking law, to offer and sell new orhybrid products that are developed in the futureunless the SEC determines, after a formal rulemak-ing process and after consultation with the federalbanking agencies, that the new or hybrid product isa security for purposes of the securities laws. Ifthe SEC makes such a determination, the bill wouldrequire that the product be sold by an SEC-registeredentity, such as a subsidiary of the bank, subject tofunctional regulation as a security product.

The bill establishes a similar, although more com-plex, procedure for determining whether future prod-ucts that are classified as insurance by a state may beunderwritten by a bank within the framework of bankregulation or only by a functionally regulated insur-ance underwriting affiliate. This process seeks toensure that banks will continue to have the ability toprovide any product banks are providing today. Inaddition, it ensures that banks may, as principal,provide any new form of a traditional banking prod-uct that may in the future be characterized as insur-ance by state law unless the product is treated asinsurance for purposes of the federal Internal Reve-



nue Code. There is also a procedure to resolve dis-putes between insurance and banking regulators overfuture products with final decisions by the courts"without unequal deference" to either the relevantfederal or state regulators and after having reviewedthe history of the regulation of the product.

Although any attempt to devise rules for the classi-fication and regulation of future products is bound toencounter difficulties and improvements could bemade in some marginal provisions, the substantiveprovisions of H.R. 10 governing the division of regu-latory responsibility for future products are carefullybalanced in our judgment.

Competitive Flexibility

Importantly, H.R. 10 provides banking organiza-tions—both large and small—substantial flexibilityin determining how to respond to the market forcesso rapidly changing the industry. Many large bankingorganizations that meet applicable criteria may electto affiliate with full-service insurance and securitiesunderwriting firms and thereby become comprehen-sive providers or "manufacturers" of financial prod-ucts. Similarly, small banking organizations wouldremain free to engage in currently authorized activi-ties or to expand into newly authorized principalactivities at the pace most consistent with the organi-zation's competitive strategy. Small banking organi-zations also would be free to focus their efforts in anarea in which they have a demonstrable competitiveadvantage—the sale of any type of financial productas agent.

One of the areas of great interest to banks—andone likely to increase consumer options and benefitsgreatly—is insurance sales. Importantly, H.R. 10would expand the insurance sales opportunities forbanks by authorizing subsidiaries of national banks tosell virtually any type of insurance product, whetherunderwritten by an affiliate or a third party, from anylocation on a nationwide basis. National banks alsowould retain their current ability to sell insurance asagent in any place with a population of 5,000 or less.One detail in this area that we do not support is theprovision in H.R. 10 that requires a national bank, forthe next five years, to expand its insurance activitiesin additional states only by buying an existing insur-ance agency.

H.R. 10 would also provide depository institutionsimportant protections against state laws that mightconflict with the ability of these institutions to sellfinancial products as authorized by federal law. Someconfusion and controversy, however, have arisen in

this area, particularly as to whether H.R. 10 wouldscale back the Supreme Court's decision in theBarnett case concerning the ability of states to regu-late the sale by national banks of insurance as agent.It is my understanding that H.R. 10, in fact, seeks tocodify the Barnett decision by incorporating thephraseology used by the Supreme Court and a spe-cific citation to the Supreme Court's opinion inBarnett into a new federal statute that would preemptany state law that "prevents or significantly inter-feres" with the ability of any national bank or otherdepository institution to engage in insurance salesactivities authorized by federal law.

H.R. 10 does provide that a state law will not bepreempted under the Barnett standard if the law is nomore restrictive than an existing Illinois statute thatgoverns insurance sales by banks. This statute, amongother things, requires the licensing of agents and thedisclosure that insurance products sold by the bankare not guaranteed or insured by the Federal DepositInsurance Corporation (FDIC). This provision alsoprohibits the tying of insurance products to creditproducts, the payment of commissions to unlicensedpersons, and the unauthorized disclosure of customerinformation. The statute's requirements are not oner-ous, and the Comptroller of the Currency has recog-nized that the statute's requirements do not on theirface conflict with the Barnett decision.

In short, the controversy in this area appears tostem largely from confusion concerning the bill'sintent, which can be addressed through clarifyingamendments designed to make plain that the bill doesnot scale back, and is fully consistent with, theBarnett decision.

ENHANCEMENTS TO THENATIONAL BANK CHARTER

There has been some concern that H.R. 10 maydamage the national bank charter. The FederalReserve believes that it is important that the nationalbank charter not be impaired or diminished in view ofits significance to the nation's financial system. Onthe other hand, we do not believe the national bankcharter should be fundamentally transformed andenlarged into a universal bank charter by allowingnational banks directly or indirectly to engage inunderwriting life and property and casualty insur-ance, underwriting and dealing in securities, mer-chant banking and direct equity investing, or realestate investment and development. For the reasonslaid out in this testimony, we believe such an expan-sion of the national bank charter would be a mistake



for bank safety and soundness, the deposit insurancefunds and safety net, the financial services industry(consumers and businesses alike), and the taxpayer.

In the Federal Reserve's view, the concern aboutH.R. 10's effect on the national bank charter appearsbased on a misunderstanding of the bill. Our reviewof H.R. 10 indicates that it preserves the existingbenefits of the national bank charter and includessignificant provisions that actually enhance the pow-ers of national banks. First, H.R. 10 does not reducethe current powers of national banks to conduct bank-ing activities or indeed limit the present activitiesconducted by national banks. In fact, H.R. 10 con-tains several provisions that specifically preservethese powers. Moreover, there is nothing in H.R. 10that limits the authority of the Office of the Comptrol-ler of the Currency (OCC) to authorize new powersfor national banks as within the business of bankingor incidental to a banking business under the NationalBank Act other than those activities prohibited fornational banks and future, as yet unauthorized, insur-ance underwriting activities.

As I mentioned earlier, H.R. 10 contains, as hasevery prior version of financial modernization legis-lation for the past fifteen years including the recentTreasury proposal, provisions that encourage allbanks to conduct securities activities through anaffiliate or, where authorized, a subsidiary of thebank, rather than in the bank. These provisions, how-ever, include significant exceptions that allow banksto continue to conduct in the bank securities activitiesthat are part of or incidental to traditional bankingservices or that are conducted in limited numbers.And, as in the Treasury's recent modernization pro-posal, the provisions of H.R. 10 apply equally to allnational and state banks.

Second, H.R. 10 improves the national bank char-ter. H.R. 10 empowers national banks to conduct anyfinancial activity as agent through an operating sub-sidiary. Under this provision, national banks may,through a subsidiary, sell any type of insurance at anylocation (including in cities with a population over5,000). This provision also allows a subsidiary of anational bank to sell any financial product as agent,and to engage in any financial agency activity thatis permitted for a financial holding company. Suchactivity, as best we can judge, because it is rarelyasset intensive and hence requires minimal equity,transfers little subsidy to the bank subsidiary.

H.R. 10 also authorizes national banks for the firsttime to underwrite any type of municipal security,including municipal revenue bonds, directly orthrough a subsidiary. At the same time, H.R. 10removes the current advantage that state banks have

over national banks in the securities area. H.R. 10prohibits state banks from engaging in underwritingor dealing in securities, either directly or throughan operating subsidiary, to the same extent that anational bank is prohibited from underwriting anddealing in securities.

H.R. 10 would clarify that national banks shouldnot in the future underwrite life or property andcasualty insurance beyond that currently permissiblefor national banks. State banks are already prohibitedby the Federal Deposit Insurance CorporationImprovement Act of 1991 from commencing insur-ance underwriting activities or making equity invest-ments. Thus, under H.R. 10, the only financial activ-ity of which we are aware that state banks in somestates could conduct, either directly or in an operatingsubsidiary, that national banks cannot is real estateinvestment and development. Treasury's recent bill,however, would wisely, in our view, also have pro-hibited that activity to national banks and theirsubsidiaries.

As I explained earlier, H.R. 10 also includes pro-visions that guarantee national banks the right toaffiliate—through holding companies—with securi-ties firms, insurance companies, and other financialservices providers, and to sell and market the prod-ucts of those affiliates notwithstanding any state law.In addition, H.R. 10 preserves the rule of law estab-lished in Barnett.

Together, these provisions allow national banks toremain strong and vibrant competitors. H.R. 10 alsodoes nothing to encourage national banks to convertto state charters. Nor does H.R. 10 tarnish in any waythe appeal that many see in the national bank charter,particularly as a vehicle for conducting interstatebranching. Indeed, nearly 90 percent of all interstatebranches are operated by national banks, which oper-ate under one set of rules and with one regulator at alltheir locations—the OCC.

The heart of the concern about H.R. 10's applica-bility to national banks does not appear to be that itfails to enhance the national bank charter but that itfails to enhance the national bank charter enough forsome. However, the record does not demonstrate thatthe national bank charter is in decline. In fact, theopposite is true. In the postwar years, national bankshave controlled more than 50 percent of total bankassets. In fact, the share of assets controlled bynational banks rose sharply last year and early in1998, reflecting the increased attractiveness of thenational charter as interstate branching has beenauthorized, and assets held by national banks are atthe highest level this decade and near the postwarhigh relative to state banks. Attachment 3 provides



additional data on the relative strength of the nationalbank charter.

In any event, the issue that is facing the Congressis not whether we need to provide an edge to aparticular type of bank charter. The record is repletewith evidence that what is really needed is reform ofthe laws that prevent the affiliation of banks of alltypes with securities firms, insurance companies, andother financial services providers, and thereby allowthe financial services industry to adjust to a rapidlychanging market. That is the deficiency that H.R. 10is designed to address and does address very well. Ifthe future finds, contrary to the past and present, thatfurther adjustments are needed to the national bankcharter to allow it to remain competitive and viable,those concerns can, and should, be addressed moreclearly once an actual deficiency is shown.

OPERATING SUBSIDIARIESvs. HOLDING COMPANIES

One area in which some have argued that H.R. 10does not go far enough is in authorizing nationalbanks to own so-called operating subsidiaries, whichare subsidiaries of the bank that engage in activitiesthat national banks are forbidden by federal law toconduct directly. This is not a detail or a technicalissue, but one that we believe is critical to determin-ing the shape, soundness, and competitive fairness ofour financial system as it develops into the twenty-first century and will have profound ramifications forour federal safety net.

There are two reasons why the Board believes thatit is not wise or necessary to expand the ability ofbanks to engage in new principal activities throughoperating subsidiaries that are prohibited to the bank.These are (1) extension of the safety net subsidyto activities beyond what the Congress originallyintended and resultant harm to the vibrancy of com-petition in our financial services industry and (2) thesafety and soundness implications for banks and riskexposure of the deposit insurance funds.

Extension of the Safety Net

In my introductory remarks, I noted that a majorreason the Congress is called upon to involve itself ina legislative response to technical innovation in finan-cial markets is the safety net. Institutions covered byit receive a subsidy because insured depositors cor-rectly perceive their risk exposure as virtually zero.These depositors—and other creditors who benefit

from the stability brought to the banking system bythe safety net—are willing therefore to provide fundsto banks at much lower rates than are availableto competing institutions. Moreover, the insuredcreditors—and many of the uninsured ones aswell—do not feel the necessity to monitor their creditexposure because of the government guarantee andthe other implications of the safety net. As a result,the government is required to monitor the risk-taking—to put itself in the shoes of the creditors—inorder to protect the taxpayers and maintain financialmarket stability.

The existence of this subsidy is clear in debtratings—which are virtually always higher at banksthan at their parent holding company. It is clear in thehigher capital ratios required of nonbanking financialfirms, even those that receive the same debt rating asbanks. It is clear in the tendency for banking organi-zations, when geographic restrictions were eased,to shift back to the bank and its subsidiaries thoseactivities that, while authorized for banks, had beenconducted in holding companies. Bank holding com-panies, the owners of most banks, have no doubt alsogained by the higher debt ratings and lower cost ofcapital that comes from having as their major asset anentity—the bank—with access to the safety net. Butholding companies also own nonsubsidized entitiesthat have no direct access to the safety net. Accord-ingly, both bank holding companies and their non-bank subsidiaries have a higher cost of capital thanbanks that cannot be credibly explained by the hold-ing companies' responsibilities to their insureddepository institutions. Moreover, any benefit thatholding companies might currently be experiencingfrom ownership of an insured bank can be expectedto decline as the holding company's ability to expandits affiliations causes the insured bank to become asmaller part of the total organization.

Virtually all nonbank subsidiaries of bank holdingcompanies, with the exception of section 20 securi-ties affiliates, were historically put in the holdingcompany, not because the holding company couldconduct broader activities than the bank, but for otherreasons, such as geographic restrictions on the bank.As these restrictions have been eased over the pastdecade, the share of consolidated assets of bankholding companies associated with nonbankactivities—other than section 20s, whose purpose isto conduct a business that is not permissible for thebank itself—has declined about 50 percent. Bankholding companies tell us that the primary reason forshifting back to banks those operations that can beshifted is to obtain cheaper funding and avoidlimitations on funding transactions contained in



sections 23A and B of the Federal Reserve Act.Activities that have stayed in holding company sub-sidiaries, we are told, remain there for tax reasons,inertia, and established names separate from the bank.In time, inertia will fade.

It is critical that the subsidy implicit in the federalsafety net be limited to those activities that a bankcan conduct directly. The Federal Reserve is con-cerned that operating subsidiaries would be a funnelfor transferring the sovereign credit subsidy directlyfrom the bank to finance any new principal activitiesauthorized by either the Congress or by OCC regu-latory action—imparting a competitive advantage tosuch entities. We approve of new principal activi-ties, but we believe they should be financed com-petitively in the marketplace. Moreover, we do notbelieve that it is possible to bring to bear the separa-tion of an operating subsidiary from its parent bankthat one can introduce between a bank and its sisteraffiliates.

Rules can be devised to limit the aggregate equityinvestment made by banks in their subsidiaries. Butone cannot eliminate the fact that the equity investedin subsidiaries is funded by the sum of insured depos-its and other bank borrowings that directly benefitfrom the subsidy of the safety net. Thus, inevitably,a bank subsidiary must have lower costs of capitalthan an independent entity and even a subsidiaryof the bank's parent. Indeed, one would expect that arational banking organization would, as much as pos-sible, shift its nonbank activity from the bank holdingcompany structure to the bank subsidiary structure.Such a shift from affiliates to bank subsidiaries wouldincrease the subsidy and the competitive advantageof the entire banking organization relative to its non-bank competitors.

I am aware that these are often viewed as onlyhighly technical issues, and hence ones that are in theend of lesser significance. I do not think so. The issueof the use of the sovereign credit is central to how ourfinancial system will allocate credit, and hence realresources, the kinds of risk it takes, and the degree ofsupervision it requires. If the use of the sovereigncredit is to be extended, that decision ought to bemade by the Congress in full recognition of theconsequences of the subsidy on the financial system.But it should not, in the name of some technicalchange, or in search of some minor efficiency, inad-vertently expand significantly the use of the sover-eign credit.

This issue would not be so important were we notin the process of addressing what must surely be awatershed in the revamping of our financial structure.But we are at such a watershed, and the Federal

Reserve believes that we must avoid inadvertentlyextending the safety net and its associated subsidywithout a thorough understanding of the implicationsof such an extension on the competitive balance andsystemic risks of our financial system.

The safety net subsidy is difficult to measure, andseveral observers have doubted its existence net ofregulatory costs. Subsidy values—net or gross—varyfrom bank to bank; riskier banks clearly get a largersubsidy from the safety net than safer banks. Inaddition, the value of the subsidy varies over time. Ingood times, such as now, markets demand a low riskpremium, and it is difficult to discern the safety netsubsidy. But when markets turn weak, financial assetholders demand to be compensated by higher yieldsfor holding claims on riskier entities. It is at this timethat subsidy values are the most noticeable, asspreads open up between bank and nonbank claims.What was it worth in the late 1980s and early 1990sfor a bank with a troubled loan portfolio to havedeposit liabilities guaranteed by the FDIC, to beassured that it could turn illiquid to liquid assets atonce through the Federal Reserve discount window,and to tell its customers that payment transfers wouldbe settled on a riskless Federal Reserve Bank? Formany, it was worth not basis points but percentagepoints. For some, it meant the difference betweensurvival and failure.

The Federal Reserve has no doubt that the costs ofregulation are large, too large in our judgment, andwe wish to reduce the degree of regulatory burden.But no bank has turned in its charter in order tooperate without the cost of banking regulation, whichwould require that it operate also without depositinsurance or access to the discount window or pay-ments system. To do so would require both higherdeposit and other funding costs and higher capital. Itis also instructive that there are no private depositinsurers competing with the FDIC. For the sameproduct offered by the FDIC, private insurers wouldhave to charge premiums far higher than those ofgovernment insurance and still not be able to matchthe certainty of unlimited payments in the event ofdefault, the hallmark of a government insurer backedby the sovereign credit of the United States.

The Federal Reserve has a similar status withrespect to the availability of the discount window andriskless final settlement during a period of nationaleconomic stress. Providing such services is out of thereach of all private institutions. The markets placesubstantial values on these safety net subsidies,clearly in excess of the cost of regulation. To repeat,were it otherwise, some banks would be droppingtheir charters.



Safety and Soundness

Even if there were no subsidy issue, engaging inprincipal activities in an operating subsidiary exposesthe bank—and hence the safety net—to greater risks.I am not arguing that the new financial activities thatfinancial modernization would permit to banking or-ganizations are unusually risky. But they do presentadditional risk as principal and any losses associatedwith these activities would have to be absorbed. Ifsuch losses were suffered by a bank holding companysubsidiary, the loss would be consolidated into theholding company parent—an entity without directaccess to the safety net. In contrast, if the lossoccurred at a subsidiary of a bank, the loss would falldirectly on the bank parent, increasing the risk expo-sure of the deposit insurance funds and the safety net.This difference is neither small nor technical. It lies atthe heart of the matter.

The Treasury, as you know, has proposed andsupported new principal activities in the operatingsubsidiary. It argues that potential losses in the oper-ating subsidiary could be capped in such a way as toeliminate the exposure of the safety net. Under theTreasury plan, investment by a bank in its operatingsub must be deducted from the regulatory capital ofthe bank, after which the bank's regulatory capitalposition must still be deemed "well capitalized."Moreover, the bank would be prohibited from mak-ing good any of the debts of the failed subsidiary.

I should note that it is necessary that all of theseprohibitions be statutory, since generally acceptedaccounting principles—GAAP—require that the sub-sidiaries' operations be consolidated with its parentand that courts determine if a parent is responsible forthe claims on its failed subsidiaries. I should furthernote that what may be viewed as a regulatory matteras excess capital—the maximum amount that is to beinvested in the subsidiary under this proposal—mayor may not be excess in an economic or real sense.Regulatory accounting principles—RAP—are notoften designed to reflect economic realities, as wesaw last in the savings and loan crisis of the 1980s.Moreover, as I understand it, the RAP capital deduc-tion for purposes of computing the level of a bank'sinvestment in its operating subsidiaries would not bemirrored by a capital deduction for other regulatorypurposes—like loans-to-one-borrower or dividendlimit purposes.

And I can assure you it will not be deducted for theGAAP bank statements that uninsured creditors andlarge loan customers will insist on reviewing beforethey conduct business with the bank. Thus, a capitaldeduction may matter for the regulators for some

purposes, but it is not the way the market will viewthe organization.

In addition to being inconsistent with soundaccounting standards (GAAP), the proposed deduc-tion treatment also runs counter to the way that banksmanage their subsidiaries, the way regulators havesupervised subsidiaries, and the way financial mar-kets are likely to perceive the bank as a whole.Historically, both bank management and supervisorshave considered subsidiaries of the bank to be anintegral part of the bank (in fact they have beentreated as departments of the bank) whose operations,if material, could have a significant impact on thebank's risk profile. Bank managers have invariablysought to support their subsidiaries in the past, andsupervisors have carefully examined the operationsof material subsidiaries in view of the difficulty ininsulating the parent bank from problems in itssubsidiaries.

Even if statutory barriers are erected that attemptto limit the impact of subsidiary losses on the parentbank, substantial losses in a subsidiary will likelyerode the market's confidence in the managementand health of the bank. This would be a criticaldevelopment in the case of a bank whose stability—and whose level of risk to the federal deposit insur-ance funds—depends in large measure on its reputa-tion and standing in the financial markets. A law mayendeavor to mandate accounting and regulatory treat-ment, but it is not so easy to alter perceptions ofcounterparties or the reality of financial markets.

It is worth noting that a dividend payment by abank to its holding company results in a real declinein bank capital. This is a genuine constraint on thesubsidy transfer from banks to their holding companyaffiliates and helps explain the reality that bank divi-dends historically have not chronically exceeded thedividends paid out by holding company parents plusdebt service. The use of bank dividends to fundholding company expansion would, of course, incor-porate a modest safety net subsidy because bankearnings are higher than they otherwise would bebecause of the safety net. But the capital constraint—plus the supervisor's natural tendency to guardagainst significant capital reductions—has limitedsuch transfers. It is unlikely that a capital adjustmentfor regulatory purposes that is in conflict with GAAPwould be as effective a constraint on the investmentsthat a bank may make in its subsidiary.

Moreover, losses in, for example, securities deal-ing or fire and casualty insurance underwriting con-ducted in an operating subsidiary could occur sorapidly that they could overwhelm the bank parentbefore actions could be taken by the regulator. Put



differently, losses in an operating subsidiary caneasily far exceed a bank's original equity investmentlong before the supervisor has any such knowledge.The resulting bank safety and soundness concerns areonly deepened by the extent to which past retainedearnings of the operating subsidiary would havestrengthened the capital of the parent bank—an osten-sible reason for operating subsidiaries. Such a buildupin capital could be used to support other bank activi-ties and then eliminated by subsequent losses in theoperating subsidiary, leaving the bank in an under-capitalized position.

The argument that operating subsidiaries are desir-able because of the organizational flexibility theyprovide to bank management seems less than compel-ling. Having two options is better than one. But thereis no real choice here. From the purview of bankingorganization profitability, the operating subsidiaryis far superior to a holding company affiliate becauseof the funding advantage gained from access to thesafety net. Hence, if profitability is the gauge, there isno increase in managerial flexibility. Rational man-agement will always select the operating subsidiary.

Some observers have argued that operating subsid-iaries should be allowed to conduct broad activitiesas principal in the United States because Edge cor-porations, which are congressionally authorized cor-porations chartered to conduct a banking businessoutside the United States and are largely owned bybanks, have conducted a broader range of activitiesas principal outside the United States without damageto banks. As an initial matter, it is important to realizethat there are only a handful of banks that engageto any significant extent through Edge corporationsin activities not permissible to their parent bank, andthese banks engage primarily in various securitiesactivities. Importantly, the Congress authorized theEdge corporation as a means to allow our banks to becompetitive abroad. In order to do so, Edge corpo-rations had to be able to conduct outside the UnitedStates activities that are somewhat broader than thosepermitted domestically, provided the activities areusual in connection with the conduct of banking inthe country in which the Edge corporation operated.The Edge corporation, therefore, conducts broaderactivities not because the Congress believed that itwas, as a general matter, prudent to permit subsidi-aries of banks to conduct broad powers. Instead,Edge corporations may conduct broader activitiesbecause they must be allowed to be as competitive aspossible in the arena in which they compete—whichis in foreign markets where the rules governing theactivities of banks and other financial service provid-ers differ from the rules in the United States.

This same principle—allowing competitiveequity—argues against authorizing operating subsidi-aries to conduct broad activities within the UnitedStates. As discussed above, the universal bankapproach would allow banks and their subsidiaries acompetitive advantage over U.S. securities and insur-ance firms that remain independent of banks—thereby inevitably impairing their competitivestrength. Thus, given the structure of the financialservices industry inside the United States, the prin-ciple of competitive equity that gave rise to the Edgecorporation as a vehicle for conducting a bankingbusiness outside the United States argues against asimilar vehicle within the United States.

Others have concluded that the Federal Reserve'sobjection to operating subsidiaries is solelyjurisdictional—solely turf. If by such comments,these critics believe that our concern is simply tomaintain our status or prerogatives, they are mis-taken. This has certainly not been our approach tobank powers. The Board was an early and strongsupporter of interstate banking, knowing that it wouldinduce shifts from state to national bank charters,reducing the Federal Reserve's supervisory role. Inter-state banking was right for the economy, and wesupported it. Operating subsidiaries are not, and thatis why we oppose them.

H.R. 10 AND THECOMMUNITY REINVESTMENT ACT

It has also been argued that H.R. 10 damages theCommunity Reinvestment Act (CRA). The Boardbelieves that this argument is incorrect. In fact, enact-ment of H.R. 10 would strengthen the CRA in verymaterial ways.

The Board believes that the CRA has played animportant role in encouraging banks to identify lend-ing markets that may be underserved and to developcredit products and services in response to identifiedneeds of their communities. H.R. 10 provides a com-pelling incentive for financial holding companies tocontinue these efforts by requiring as a prerequisite tothe expanded powers and affiliations authorized bythe bill that all of the subsidiary depository institu-tions have at least a "satisfactory" CRA rating.

Moreover, H.R. 10 adds teeth to the CRA. Cur-rently, the CRA is enforced through the applicationprocess. But there is no current requirement that adepository institution divest a bank once a merger isapproved if the bank fails to maintain adequate CRAperformance levels after the merger. H.R. 10, how-ever, requires that satisfactory CRA ratings be main-



tained as a condition for continued affiliation withcompanies authorized under the bill. Thus, a financialholding company has a strong incentive to ensure thatits depository institution subsidiaries continue to meettheir CRA obligations. H.R. 10 also would expandthe CRA to wholesale financial institutions, a newform of depository institution authorized by the bill.

There exists some confusion, however, as towhether the CRA would be further benefited if bankswere permitted to engage, either directly or through asubsidiary, in securities and insurance activities asprincipal. The CRA by its terms requires that thefederal banking agencies assess the record of deposi-tory institutions in meeting the credit needs of theirentire community, including low- and moderate-income communities. While the CRA relates to thelending activities of depository institutions, it doesnot apply to securities or insurance underwritingactivities—whether conducted by a bank, a subsidi-ary of a bank, or an affiliate of a bank. Accordingly,authorizing a bank to directly or indirectly conductthe securities and insurance underwriting activitiesauthorized by H.R. 10 for financial holding compa-nies would not increase a bank's obligations underthe CRA, although it would expose the bank and itsCRA-related lending activities to the earnings fluc-tuations and possible losses associated with suchprincipal activities.

Under H.R. 10, banks would remain free todevelop and offer the type of innovative or targetedlending products, either directly or through a subsidi-ary, that are designed to meet the identified creditneeds of their communities and that are relevant tothe bank's CRA assessment. Moreover, if a bankingorganization elected to engage in CRA-related activi-ties through a holding company subsidiary, the orga-nization would remain free under the CRA regula-tions issued by all of the federal banking agencies tohave the activities of the holding company subsidiarycount toward the CRA performance of an affiliatedbank.

COMMERCE AND BANKING

Last year, the Board, in testimony before the HouseBanking and Commerce Committees, recommendedcaution about authorizing banking and commerceaffiliations. We noted that technology was already inthe process of eroding any bright line between com-merce and banking. Nonetheless, we concluded thatthe free and open legal association of banking andcommerce would be a profound and surely irrevers-ible structural change that should best wait while we

absorbed the significant changes called for by finan-cial modernization.

Recent events have, if anything, strengthened ourview on the desirability for caution in this area. TheAsia crisis has highlighted some of the risks that canarise if relationships between banks and commercialfirms are too close. It is not so much that U.S. entitieswould face structures like those in Indonesia, Thai-land, or Korea. Rather it is the experience that inter-actions of complex structures can make it extremelydifficult to monitor, analyze, and manage financialexposures. In short, the Board would prefer moreexperience with financial change as a prelude toconsidering further and more profound structuralchanges. We thus support the H.R. 10 provisions oncommerce and banking.

H.R. 10, as passed by the House, prohibits theaffiliation of banking and commerce, with threeexceptions. Companies, such as securities and insur-ance firms, that engage predominantly in financialactivities and that acquire an insured depository insti-tution may continue to own commercial firms butmust divest them within ten years (with the possibil-ity of a further five-year extension). Financial hold-ing companies that own only uninsured wholesalefinancial institutions also are permitted to retain lim-ited grandfathered investments made as of the date ofenactment of the bill but are not required to divestthem at the end of a specified period.

Unitary thrift holding companies—holding com-panies with only one thrift subsidiary—now maybe affiliated with commercial entities. Only a feware, but H.R. 10 would grandfather the ability of allunitary thrift holding companies to establish commer-cial affiliations. For securities firms and insurancecompanies that acquire banks, however, H.R. 10would not permit new commercial affiliations.

In light of the dangers of mixing banking andcommerce, the Board supports elimination of theunitary thrift loophole, which currently allows anytype of commercial firm to control a federally insureddepository institution. Failure to close this loopholenow would allow the conflicts inherent in bankingand commerce combinations to further develop inour economy and complicate efforts to create afair and level playing field for all financial serviceproviders.

Accordingly, the Federal Reserve strongly supportsthe provisions of H.R. 10 that would prohibit newunitary thrift holding companies from having non-financial affiliations on a prospective basis. However,H.R. 10 would also permit existing unitary thriftholding companies to retain their current commercialaffiliations, to expand those commercial affiliations,



and to sell those rights to do so. Equity and fairnessdo not justify providing these grandfathered organi-zations such unique economic benefits. The Board,therefore, strongly supports an amendment toH.R. 10 that would at least prohibit or significantlyrestrict the ability of grandfathered unitary thrift hold-ing companies to transfer their legislatively createdgrandfather rights to another commercial organiza-tion through mergers or acquisitions.

CONCLUSION

The markets are demanding that we change outdatedstatutory limitations that stand in the way of moreefficiently and effectively delivering financial ser-vices to the public. Many of these changes will occureven if the Congress does not act, but only the

Congress can establish the ground rules designedto ensure the maximum net public benefits and afair and level playing field for all participants andto ensure the continued primacy of U.S. financialmarkets.

The Senate has a historic opportunity to modernizeour financial system by passing a bill that creates anunusually desirable framework. The Federal Reserveurges the committee to establish a wider scope for thedelivery of financial services through the holdingcompany vehicle. This is the best way to minimizethe spread of the safety net subsidy and its resultingcompetitive inequities, to minimize risks for deposi-tory entities and their insurance funds, and to facili-tate a safe and sound banking and financial systemthat is able to serve the American public and maintainthe leadership role of the American financial systemin the global economy.

Statement by Ernest T. Patrikis, First Vice President,Federal Reserve Bank of New York, before the Com-mittee on Banking and Financial Services, U.S. Houseof Representatives, June 23, 1998

I am pleased to appear before the committee today todiscuss the implications of the Year 2000 (Y2K)computer problem for international banking andfinance. I am appearing in my capacity as chairmanof the Joint Year 2000 Council, which is sponsoredjointly by the Basle Committee on Banking Supervi-sion, the Group of Ten (G-10) central bank gover-nors' Committee on Payment and Settlement Sys-tems, the International Association of InsuranceSupervisors, and the International Organization ofSecurities Commissions (collectively referred to asthe Sponsoring Organizations).

The international financial community has muchwork to do to prepare itself for the challenges posedby the Year 2000 problem. While much good work isbeing done and progress in many areas is evident,more needs doing. The Sponsoring Organizationsbelieve that mutual cooperation and information shar-ing can play a key role in helping individual marketparticipants carry out these preparations and limit thescope of Y2K-related disruptions. Our major con-cern, of course, will be the possible impact of theY2K problem on the functioning of the internationalfinancial system as a whole.

Federal Reserve Governor Edward W. Kelley, Jr.,has recently elaborated on the activities of the Fed-eral Reserve System in connection with the Y2Kproblem as well as on possible macroeconomic impli-

cations.1 I will not attempt to cover those topics againhere. Instead, this morning I will begin with somebackground on the possible implications of the Y2Kproblem for international banking and finance. Sec-ond, I will describe how various supervisory initia-tives led to the formation of the Joint Year 2000Council a little more than two months ago. Third, Iwill discuss the actions being taken by the JointYear 2000 Council, particularly in the areas of raisingawareness, improving preparedness, and contingencyplanning.

BACKGROUND ON THE INTERNATIONALIMPLICATIONS OF THE Y2K PROBLEM

The Y2K bug potentially affects all organizations thatare dependent on computer software applications oron embedded computer chips. In other words, nearlyall financial organizations worldwide are potentiallyat risk. Even those whose own operations remainstrictly paper-based are likely to be dependent onpower, water, and telecommunications utilities thatmust themselves address possible Y2K problems.Also, many nonfinancial customers have dependen-cies on technology.

All countries of the world, therefore, need toaddress the Y2K problem and its potential effects on

1. See Statement by Edward W. Kelley, Jr., Member, Board ofGovernors of the Federal Reserve System, before the Committee onCommerce, Science and Transportation, U.S. Senate, April 28, 1998,Federal Reserve Bulletin, vol. 84 (June 1998), pp. 433-38.



their domestic financial markets. In some cases, it issaid that computer systems in particular countries arenot much affected because their national calendarsare not based on the conventional Gregorian calendarused in the United States and many other countries.T do not derive much comfort from these statementsbecause in most cases operating systems and thesoftware applications running on them count inter-nally with a conventional date system that may not beY2K-compliant. These systems typically also needto connect and interact with other systems that useconventional dates, and so these interfaces mustbe tested for Y2K-compliance. More broadly, mereassertions that computer applications are unaffectedcannot be seen as a substitute for the rigorousassessment, remediation, and testing efforts thatshould be undertaken by financial market participantsworldwide.

The increasing extent of cross-border, financial-market activity has been much remarked on in recentyears. Perhaps less well known is the fact that thisactivity is dependent on a large, geographicallydiverse, and highly computer-intensive global infra-structure for each of the key phases of this activity—from trade execution through to payment andsettlement.

As an example, consider the daily financial marketactivities of a hypothetical U.S.-based mutual fundholding stocks and bonds in a number of foreignjurisdictions. Such a mutual fund would likely exe-cute trades via relationships with a set of securitiesdealers, who themselves might make use of othersecurities brokers and dealers, including some out-side the United States. The operational integrity ofthe major securities dealers in each national securitiesmarket is critical to the smooth functioning of thosemarkets. In addition, securities trading in most coun-tries is reliant on the proper functioning of the respec-tive exchanges, brokerage networks, or electronictrading systems and the national telecommunicationsinfrastructure on which these all depend. Financialmarkets today are also highly dependent on the avail-ability of real-time price and trade quotations pro-vided by financial information services.

For recordkeeping, administration, and trade settle-ment purposes, our hypothetical mutual fund wouldalso likely maintain a relationship with one or moreglobal custodians (banks or brokerage firms), whothemselves would typically maintain relationshipswith a network of subcustodians located in variousdomestic markets around the world. Actual settle-ment of securities transactions typically occurs overthe books of a domestic securities depository, suchas the Depository Trust Company or the Fedwire

National Book-Entry System in the United States, orat one of the two major international securitiesdepositories, Euroclear or Cedel. Additional clearingfirms, such as the National Securities Clearing Cor-poration and the Government Securities ClearingCorporation in the United States, may also occupycentral roles in the trade clearance and settlementprocess.

Payments and foreign exchange transactions onbehalf of the mutual fund would involve the use ofcorrespondent banks, both for the U.S. dollar and forother relevant currencies. These transactions wouldtypically settle over the books of domestic wholesalepayment systems, such as the Clearing House Inter-bank Payments System (CHIPS) or Fedwire in theUnited States, and the new TARGET system for theeuro. Correspondent banks are also heavily depen-dent on the use of cross-border payments messagingthrough the network maintained by the Society forWorldwide Interbank Financial Telecommunications(S.W.I.F.T.) to advise and confirm payments. To pro-vide some sense of the magnitudes involved here,consider that the Fedwire and CHIPS systems pro-cess a combined $3 trillion in funds transfers on anaverage day (split roughly evenly between the twosystems). While S.W.I.F.T. itself does not transferfunds, its messaging network carries more than 3 mil-lion messages per day relating to financial transac-tions worldwide.

The many interconnections of the global financialmarket infrastructure imply that financial market par-ticipants in the United States could be affected byY2K-related disruptions in other financial markets. Inassessing the scope of any such potential problems,we should be realistic in accepting that some disrup-tions are inevitable, while also recognizing that notall countries confront Y2K problems of similar mag-nitudes. The problem simply affects too many organi-zations and too many systems to expect that 100 per-cent readiness will be achieved throughout the world.Nor are the best efforts of supervisors and regulatorscapable of completely eradicating the risk of disrup-tion. Ultimately, the work of fixing the Y2K problemrests with firms themselves, and even some of themost determined and well-funded Year 2000 effortsmay miss something.

GLOBAL YEAR 2000 ROUND TABLE

Recognizing the global nature of the issues surround-ing the Y2K problem, each of the Sponsoring Organi-zations undertook initiatives in 1997 to raise aware-ness, enhance disclosure, and prompt appropriate



action within the financial industry. Their decisionlast fall to organize a Global Year 2000 Round Tablewas motivated by a growing sense of the seriousnessof the Y2K challenges posed in many countries andof the potentially severe consequences for financialmarkets that fail to meet these challenges. The GlobalYear 2000 Round Table was held at the Bank forInternational Settlements on April 8, 1998. It wasattended by more than 200 senior executives fromfifty-two countries, representing a variety of privateand public organizations in the financial, informationtechnology, telecommunications, and business com-munities around the world.2

The discussions at the Round Table confirmed thatthe Y2K issue must be a top priority for directors andsenior management and that the public and privatesectors should increase efforts to share information.The importance of thorough testing, both internallyand with counterparties, was emphasized as the mosteffective way to ensure that Y2K problems are mini-mized. Round Table participants identified the needto continue the widening and strengthening of exter-nal testing programs in many countries.

The communique issued by the four SponsoringOrganizations at the close of the Round Table recom-mended that market participants from regions thathave not yet vigorously tackled the problem shouldconsider the need to invest significant resources inthe short time that remains. The Sponsoring Organi-zations further recommended that external testingprograms be developed and expanded and that allfinancial market supervisors worldwide should imple-ment programs that enable them to assess the Y2Kreadiness of the firms and market infrastructures thatthey supervise. The Sponsoring Organizations urgedtelecommunications and electricity providers to shareinformation on the state of their own preparations andencouraged market participants and supervisors andregulators to consider the need to develop appropriatecontingency procedures.

At the Round Table, a new private-sector initiativeknown as the Global 2000 Coordinating Group wasannounced. The aims of the Global 2000 effort areto identify and support coordinated initiatives by theglobal financial community to improve the Y2K

2. A videotape containing highlights of the Global Year 2000Round Table is available free of charge from the Bank for Interna-tional Settlements. Please contact the Joint Year 2000 Council Secre-tariat at the Bank for International Settlements, Centralbahnplatz 2,CH-4002 Basle, Switzerland (telephone: 41 61 2808432, fax: 41 61280 9100, email: jy2kcouncil.bis.org).

The Federal Financial Institutions Examinations Council (FFIEC)has also placed the entirety of this video tape on its web site, whereit is available for downloading in whole or in part. Please seehttp://www.bog.frb.fed.us/y2k/video_index.htm#19980408.

readiness of financial markets worldwide. For exam-ple, current Global 2000 projects include the develop-ment of recommendations for financial infrastructuretesting and guidelines for addressing Y2K compli-ance issues related to vendors and service providers.The Global 2000 Coordinating Group, which includesrepresentatives from more than seventy-five finan-cial institutions in eighteen countries, represents anextremely valuable private-sector attempt at coopera-tion on this important issue. At the same time, how-ever, the international financial supervisory commu-nity recognized that it would be useful to establish apublic sector group, called the Joint Year 2000 Coun-cil, that would work with the private sector and alsomaintain a high level of attention on the Y2K prob-lem among financial market supervisors and regula-tors worldwide.

JOINT YEAR 2000 COUNCIL

The formation of the Joint Year 2000 Council wasannounced at the end of the Global Year 2000 RoundTable on April 8, 1998. The Joint Year 2000 Councilconsists of senior members of the four SponsoringOrganizations. Every continent is represented by atleast one member on the council. The Secretariat ofthe Council is provided by the Bank for InternationalSettlements. I am honored to serve as the chairman ofthe Joint Year 2000 Council.

The mission of the Joint Year 2000 Council hasfour parts: first, to ensure a high level of attention onthe Y2K computer challenge within the global finan-cial supervisory community; second, to share infor-mation on regulatory and supervisory strategies andapproaches; third, to discuss possible contingencymeasures; and fourth, to serve as a point of contactwith national and international private-sector initia-tives. After their meetings on May 8-9, 1998, theGroup of Seven finance ministers called on the JointYear 2000 Council and its Sponsoring Organizationsto monitor the Y2K-related work in the financialindustry worldwide and to take all possible steps toencourage readiness.

The council has met twice since being formedin early April and plans to meet frequently, almostmonthly, between now and January 2000. At ourfirst meeting, we organized our work projects andapproved our mission statement. At our second meet-ing, we met for the first time with an External Con-sultative Committee consisting of internationalpublic-sector and private-sector organizations. Meet-ing with this External Consultative Committee isintended to enhance the degree of information shar-



ing and the raising of awareness on different aspectsof the Year 2000 problem by both public and privatesectors within the global financial markets.

The External Consultative Committee includes rep-resentatives from international payment and settle-ment mechanisms (such as S.W.I.F.T., Euroclear,Cedel, and VISA), from international financial mar-ket associations (such as the International Swaps andDerivatives Association, the International Institute ofFinance, and the Global 2000 Coordinating Group),from multilateral organizations (such as the Inter-national Monetary Fund, the Organization for Eco-nomic Cooperation and Development, and the WorldBank), from the financial rating agencies (such asMoody's and Standard & Poor's), and from a numberof other international organizations (such as theInternational Telecommunications Union, Reuters,the International Federation of Accountants, and theInternational Chamber of Commerce). This diversityof perspectives led to an extremely valuable discus-sion with the Joint Year 2000 Council and stimulatedwork on several projects to be taken forward withinput from both the public and private sectors, forexample, the initiatives on Y2K testing and self-assessment that I will describe shortly. Further ses-sions with the External Consultative Committee areplanned on a quarterly basis.

It is important at the outset for me to be clear thatthe Joint Year 2000 Council is not intended tobecome a global Y2K regulatory authority, withsweeping powers to coordinate international action orto take responsibility for ensuring Y2K readiness inevery financial market worldwide. Through our abil-ity to serve as a clearinghouse for Y2K information,however, I believe that the Joint Year 2000 Councilwill play a positive role in three areas: (1) raisingawareness, (2) improving preparedness, and (3) con-tingency planning. In the next portion of my remarks,I would like to address each of these roles in turn.

EFFORTS TO PROMOTE AWARENESS

The Joint Year 2000 Council is undertaking a seriesof initiatives that may be described under the headingof promoting awareness. By this term, I do not meanto include only those initiatives aimed at raisinggeneral awareness, although that too is still neededin some cases. I mean to include efforts to promotebetter awareness of the many efforts currently underway to tackle the Y2K problem. 1 have found that,while many organizations are working hard on vari-ous aspects of the Y2K challenge, in many casesthese efforts would be enhanced by a greater degree

of information sharing with others. For example, atthe Federal Reserve Bank of New York, we havebeen holding quarterly Y2K forums with a diverse setof financial organizations in the area. Participantshave requested that we continue to hold thesemeetings—in fact, to hold them even morefrequently—because they believe that the contactsand the exchange of views are broadly beneficial. Wehope to use the Joint Year 2000 Council to achievesimilar goals.

Each of the members of the Joint Year 2000 Coun-cil has committed to help play a leading role inpromoting awareness of Y2K initiatives within theirregion. Each of us will help in coordinating regionalY2K forums or conferences and will publicly pro-mote the goals of the Joint Year 2000 Council inspeeches and on conference programs.

The Joint Year 2000 Council will also maintainextensive World Wide Web pages that can beaccessed freely over the Internet.3 These pages arebeing maintained through the support the council hasreceived from the Bank for International Settlements,in particular from the General Manager, AndrewCrockett. These web pages will maintain currentinformation on the activities of the Joint Year 2000Council.

The most extensive aspect of the council's web sitewill be a series of country pages, one for each coun-try in the world. For each country, the page willcontain contact information for government entities(including national coordinators), financial industrysupervisors and regulators (including central banks,banking supervisors, insurance supervisors, and secu-rities regulators), financial industry associations, pay-ment, settlement, and trading systems, chambersof commerce, and major utility associations or super-visors. For each of these organizations, a name,address, phone number, fax number, electronic mail,and web site address will be provided. Other relevantinformation on an organization's Y2K preparationsmay also be included, for example, whether it has adedicated Y2K contact or has taken specific actionwith respect to the Y2K problem.

The motivation for developing these country pagesis to increase awareness of the work that is beingdone to address the Y2K problem and to enablemarket participants to easily find out more informa-tion about the state of preparations worldwide. Estab-lishing these national contacts will also help todevelop the informal networks and arrangements

3. The web pages of the Joint Year 2000 Council can be reached atthe web site of the Bank for International Settlements (www.bis.org).These pages will also be registered under the name jy2kcouncil.org inthe near future.



that may be needed in addressing other Y2K-relatedissues, for example, in formulating contingency mea-sures. Finally, of course, the presence of the countrypages may exert pressure on those countries in whichmore vigorous action is needed. A blank or uninfor-mative country listing would probably not be seen asa good sign by some financial market participants.

In addition, the web pages of the Joint Year 2000Council will also provide summaries of the effortsbeing undertaken by its Sponsoring Organizations aswell as links to the relevant web sites. For example,reports on Y2K surveys of supervisors and regulatorsbeing undertaken by the Basle Committee on Bank-ing Supervision and by the International Organi-zation of Securities Commissions are planned to bemade available on the Joint Year 2000 Council website. Public papers produced by the Joint Year 2000Council will also be available on the web site. Alisting of international conferences and seminarsrelated to Y2K will be posted on the web site,together with links to other Y2K web sites anddocuments.

At this stage, each member of the Joint Year 2000Council is in the process of finalizing the countrypage for its respective country. Last week, I wroteto every contact provided by the four SponsoringOrganizations (almost 600 contacts in more than170 countries), asking for assistance in coordinatingthe development of their country page. This alsoprovided a further opportunity to raise the awarenessof the Year 2000 problem at the most senior levelsof financial market authorities and supervisors incountries around the world. Through the effort todevelop this web site and other similar efforts bythe Joint Year 2000 Council, I believe we can suc-ceed at keeping the awareness of the issue at a veryhigh level within the global financial supervisorycommunity.

EFFORTS TO IMPROVE PREPAREDNESS

Of course, awareness of the Year 2000 problem isonly the first step in addressing it. Global efforts toprepare for Year 2000 vary widely, and many coun-tries believe that more coordinated national actionwill be necessary to tackle the problem as effectivelyas possible. At our second meeting of the JointYear 2000 Council, a strong consensus emerged thata national government body in each country couldplay a helpful role in coordinating preparations forY2K. While the council did not have a strong viewon what particular form or what specific authoritysuch a body would require in each specific country,

the council members felt strongly that involvement insome fashion by the national government could bebeneficial.

Accordingly, the Joint Year 2000 Council plans toissue a statement in the near future providing generalsupport for the concept of a national-level coordinat-ing body for the Y2K problem. In the United States,of course, the White House has established the Presi-dent's Council on Year 2000 Conversion, headedby John Koskinen. This effort, as well as those of thiscommittee under the leadership of Chairman Leach,and of the other congressional committees that haveaddressed the Y2K problem, has shown that nationalgovernment bodies have a very important and usefulrole to play in encouraging progress in addressing theY2K problem.

Turning now to the question of how financialsupervisors can implement effective Y2K programs,the Joint Year 2000 Council intends to promote thesharing of strategies and approaches. For example,the Basle Committee on Banking Supervision hasprepared a paper containing "Supervisory Guidanceon Independent Assessment of Bank Year 2000Preparations." This document is aimed at movingsupervisors worldwide from a level of general aware-ness to a specific, concrete program of action foroverseeing Y2K preparations, both on an individualbank basis and on a system-wide basis.

The Joint Year 2000 Council intends to adapt thispaper for use by financial market regulators andsupervisors more broadly and to issue it as rapidly aspossible with the endorsement of all four SponsoringOrganizations. The goal will be to provide guidancein developing specific Year 2000 action plans for alltypes of financial market authorities. Supervisors incountries that have gotten a head start on the issuecan thereby provide the benefit of their experience tothose who are starting later. Those supervisors get-ting a late start have a need for tools of this type.

The Joint Year 2000 Council will also be workingwith the members of our External Consultative Com-mittee, particularly the Global 2000 CoordinatingGroup, to build on this effort and develop a Y2Kself-assessment tool that could be used broadly by thefinancial industry in countries around the world. Wealso intend to develop additional papers on a varietyof Y2K topics that might be of interest to the globalfinancial supervisory community.

At this point, I am sure that members of the com-mittee have questions regarding the state of Y2Kpreparations in various parts of the world. I think thatit is fair to say that most believe a spectrum exists,with the United States at one end of the spectrum,and emerging market and undeveloped countries at



the other end. There are likely exceptions of course;some developed countries are probably less far alongthan they should be. Some emerging market coun-tries, on the other hand, appear to be quite advancedin their preparations.

Overall, however, there is still not nearly enoughconcrete, comparable information on the preparationsof individual institutions to be able to make anyconfident statements about the state of global prepara-tions in any detail. Over the time remaining untilJanuary 2000, we hope to use the Joint Year 2000Council as a means of gathering a better picture ofthe state of global preparations and to help directresources and attention to those regions that appear tobe faltering in their efforts. We will use the informa-tion provided for our web site and the discussionswith members of our External Consultative Commit-tee as our primary resources in seeking to identify"hot spots" where more urgent efforts are needed.

If we identify regions in which more needs to bedone, our first step will be to work through therelevant national financial supervisors and regulatorsto increase the urgency of efforts in their jurisdiction.We may also involve multilateral institutions, such asthe World Bank, to help increase national attentionon the issue. I do not believe that calling publicattention to problems in specific countries would be aconstructive step for us to take at this stage, as we arestill trying to build cooperation and our current infor-mation is incomplete. In this context, I would alsopoint out that the market itself will begin to bringstrong pressures to bear on specific firms and marketsthat exhibit signs of being ill-prepared during thecourse of 1999.

In conjunction with preparations for Y2K, therecent discussion of the Joint Year 2000 Council withthe External Consultative Committee raised severalimportant issues. First, in every national market thereis the question of the dependence of the banking andfinancial sectors on core infrastructure such as tele-communications, power, water, sewer, and transporta-tion. In all cases, it seems that it is not an everydayoccurrence for representatives of these differing sec-tors to get together with financial sector represen-tatives and discuss their mutual concerns. Yet, thismust be made a priority if financial firms and theircounterparties are to achieve comfort that their ownefforts to prepare for Year 2000 will not be compro-mised by the failures of systems beyond their control.

A representative of the International Telecommuni-cations Union is a member of our External Consulta-tive Committee. At our meeting earlier this month, heprovided useful factual information on the prepara-tions being undertaken by telecommunications firms

and indicated that a further global survey and reporton this topic is due to be completed soon. This is thetype of information sharing that helps all partiesunderstand the scope of the problem as well as theefforts that others are undertaking. We intend toencourage further information sharing between thefinancial sector and core infrastructure providers atfuture meetings of the Joint Year 2000 Council andthe External Consultative Committee. I would alsostrongly encourage such mutual cooperation on Y2Kpreparations within each national jurisdiction.

Another issue that some participants in our JointYear 2000 Council are concerned about in regard topreparations in their countries relates to the availabil-ity of human resources. In some regions, the supplyof available information technology professionalsmay be hard pressed to meet the challenges posedby Y2K. For each organization facing resource con-straints, this situation clearly indicates the need todevelop action plans for Y2K that set clear prioritiesamong systems and projects.

More broadly, we must also recognize that the lackof available programming resources will be a signifi-cant overall constraint on the scale of Y2K remedia-tion efforts globally. As a result, the cost of hiringcomputer professionals capable of addressing theproblem will continue to rise. Wealthy countries areundoubtedly in a better position to bear these increas-ing costs than are poor countries.

A number of participants from our External Con-sultative Committee cited the recent grant of £10 mil-lion sterling by the British government to the WorldBank as a positive development. Among otherprojects, the World Bank intends to use this grant tofund a variety of educational and awareness-raisingevents related to Y2K over the next several months.Given the potential consequences of a failure toprepare for Y2K, the World Bank indicated to theJoint Year 2000 Council that it intends to take onan aggressive role in promoting and assisting Y2Kefforts in countries around the world. The JointYear 2000 Council intends to work closely with theWorld Bank to enhance our mutual efforts on theY2K problem.

The subject of appropriate Y2K disclosure wasalso discussed by members of the External Consulta-tive Committee. Many of those present agreed thatgreater disclosures would be helpful. However, therewas skepticism that a standardized disclosure formatwould be effective in eliciting meaningful informa-tion for a wide class of financial firms, given thecomplexity and variety of Y2K issues facing thesefirms worldwide. It was also noted that disclosurewhich relies primarily on a firm's own subjective



assessments of its Y2K problems inevitably willsuffer from an optimistic bias.

In addition, most Y2K efforts will not reach theserious testing phase until 1999. The purpose of thetesting will be to uncover areas in which additionalwork is required, so that the first round of tests can beexpected to encounter problems. In this environment,it may be difficult for firms themselves to assess thetrue state of their Y2K preparations. Also, firms thatbelieve that they are going to be ready will bedirected by legal counsel not to make too strong astatement to avoid liability claims in case of unfore-seen problems. On the other hand, firms that do notbelieve they can get ready in time will seek to avoidstating this clearly to protect their activities during1999. For all of these reasons, I am doubtful thatspecific, reliable information on the state of Y2Kpreparations by individual firms worldwide willbecome publicly available.

Finally, in the area of improving preparedness,I have saved the most important topic for last—namely, testing. Testing programs, particularly exter-nal testing programs, are universally regarded as themost critical element of serious Y2K preparations inthe financial sector. The Joint Year 2000 Councilencourages all firms and institutions active in thefinancial markets to engage in internal and externaltesting of their important applications and interfaces.To this end, many major payment and settlementsystems around the world have developed extensivetesting programs and procedures for their partici-pants. In the United States, for example, Fedwire,CHIPS, and S.W.I.F.T. have coordinated shared test-ing days for the purpose of testing the major inter-national wholesale payments infrastructure for theU.S. dollar. The Securities Industry Association(SIA) has been at the forefront of an ambitious pro-gram to develop a coordinated industrywide test ofall aspects of the trading and settlement infrastruc-ture for the U.S. stock market. The FFIEC's effortshave also been extremely beneficial in stressing theimportance of testing within the banking sectorgenerally.

Yet, external testing programs globally need to bedramatically extended and expanded. To that end, theG-10 Committee on Payment and Settlement Sys-tems last year started to collect information on thestate of preparedness and testing of payment andsettlement systems worldwide. To date, more than150 systems in forty-seven countries have respondedto the framework and posted such plans.4 The Joint

4. The relevant information can now be found on the pages of theJoint Year 2000 Council.

Year 2000 Council intends to expand the coverage ofthis framework to exchanges and trading systems, aswell as to major financial information services pro-viders, and hopes to expand the number of countriesand systems that are included. We will also collateand present the information graphically to help high-light anomalies in testing schedules and to facilitatethe efforts of systems to coordinate test schedulingwhen feasible.

Primarily, I see this as an exercise in peer pressure.If we list every country in the world on our web siteand the public can see that some countries havescheduled mandatory external tests of their majortrading and settlement systems, while other coun-tries do not provide any information, that secondcountry may come under greater pressure to orga-nize an external testing program. This is our statedgoal. We will simply have blanks for those coun-tries that do not respond to our requests forinformation.

Of course, if the Joint Year 2000 Council is goingto encourage testing to such an extent, then it is onlyappropriate that we also help provide some tools forthose countries trying to get a serious testing effortunder way in a short amount of time. This is anotherof our high priority projects. We will be working withmembers of the External Consultative Committee—including representatives of the Global 2000 Coordi-nating Group, S.W.I.F.T., and the World Bank—torapidly develop a series of documents that help coun-tries set up testing programs and overcome commonobstacles. We intend to issue these documentsbroadly by the end of the summer, and some partswell before that.

In closing this section of my statement, I do notthink it is possible to overemphasize the importanceof testing to help improve readiness. To illustrate thispoint, I would like to draw on our experiences withFedwire, the Federal Reserve's wholesale interbankpayments system. Much of the current Fedwiresoftware application was written in the past fiveyears, with the Y2K problem in mind. Nevertheless,some of the older software code that was carried overinto the new application was not Y2K-compliant.Without the rigorous internal Y2K testing programthat the Federal Reserve adopted, our Y2K remedia-tion efforts might, therefore, have been incomplete.I think of this experience whenever I hear it saidthat some countries are immune to Y2K becausethey have only recently introduced informationtechnology and that recent software programs areless affected by Y2K. I ask whether those pro-grams have truly been thoroughly tested for Y2Kcompliance.



CONTINGENCY PLANNING EFFORTS

The third major role of the Joint Year 2000 Councilwill relate to contingency planning. In this context, Ishould note that contingency planning is somethingthat most financial market authorities, particularlycentral banks, undertake regularly with regard to awide variety of potential market disruptions. Mostprivate-sector financial firms, as well, have welldeveloped contingency and business continuity plansin place for their operations.

Nevertheless, it is clear that contingency planningfor Y2K problems has a number of unique character-istics. First, of course, is the fact that one cannot relyon a backup computer site for Y2K contingency ifthat site also uses the same software that is the causeof the Y2K problem at the main site. In some cases, itis impractical to build a duplicate software systemfrom scratch simply to provide for Y2K contingency.In these cases, as a senior banker explained at one ofour New York Y2K forums, contingency planningamounts to, "Testing, testing, and more testing."

Contingency planning can also be separated intocomponents that are firm-specific and those that aremarketwide. Each individual firm will need todevelop its own contingency plans designed to main-tain the integrity of its operations during thechangeover to the Year 2000. The FFIEC has recentlyissued guidance to banks in the United States regard-ing the core elements of their own contingency plan-ning.5 The Joint Year 2000 Council will also bedeveloping a paper on contingency planning for thebenefit of the global financial supervisory commu-nity. This paper will seek to address firm-level contin-gency as well as issues of marketwide contingency.

Marketwide contingency refers to the planning byparticipants and supervisors done to ensure that indi-vidual disruptions can be managed in ways that willprevent them from causing disruptions to criticalmarket infrastructures. For instance, we at the Fed-eral Reserve have gone to great lengths to ensure thatbarriers are in place to prevent Y2K problems with aFedwire participant from causing problems on theFedwire system itself. We are also now activelyresearching additional steps that the Federal Reservecould take to better prepare the financial markets as awhole to function in spite of disruptions at individualfirms.

It is also important to realize that contingencyplanning for Y2K is not solely an operational issue.Financial firms may seek to adopt a defensive posturein the marketplace well ahead of Monday, January 3,

5. See www.ffiec.gov/y2k/contplan.htm.

2000 (the first business day of the new year in theUnited States). For example, market participants mayseek to minimize the number of transactions thatwould be scheduled for settlement on January 3 orJanuary 4 or that would require open positions to bemaintained over the century date change weekend.

Contingency planning involves a series of ele-ments, many of which must be put in place wellbefore January 2000. For example, we must considermany possible sources of disruption and determinewhat approaches could be available to limit theimpact of each possible disruption. The sooner suchthinking occurs, the more opportunity we have toplan around the possible disruptions. In this context,members of our External Consultative Committeenoted that one of the key obstacles to effective contin-gency planning is the inability to list and consider allpossible disruption scenarios. Several of these partici-pants noted that their firms were engaging consult-ants or other procedures to expand the number ofscenarios for inclusion in their Y2K contingencyplanning.

In New York, we will be using our Y2K forumnext month to discuss contingency planning with adiverse set of market participants. These local marketparticipants will provide helpful insights for the JointYear 2000 Council. Clearly, more work is needed oncontingency planning for Y2K, especially at the inter-national level. Once we get beyond the early fall ofthis year, I believe that these efforts will begin toreceive much greater focus and attention and—together with testing—will dominate our discussionsof Y2K during 1999.

CLOSING REMARKS

In closing, I would like to thank the committee forthe opportunity to appear and submit a statement onthis important issue. I hope that the efforts of theJoint Year 2000 Council will help to make a differ-ence in improving the state of Y2K preparations inthe international financial community. Realistically,however, I believe that it is important to understandthe limits of what financial market supervisors canaccomplish, either individually or collectively. Onlyfirms themselves have the ability to address theYear 2000 problems that exist within their own orga-nizations. Only firms working together can ensurethat local markets will function normally. Supervisorsand regulators cannot guarantee that disruptions willnot occur.

Given the sheer number of organizations that arepotentially at risk, it is inevitable that Y2K-related



disruptions will occur. Today it would be impossibleto predict the precise nature of these disruptions.However, we do know that financial markets havein the past survived many other serious disruptions,including blackouts, snow storms, ice storms, andfloods. We will also have a very interesting case atthe end of this year with the changeover to monetaryunion in Europe. We will all be watching carefullyto see whether the extent of operational problemsrelated to this event is greater or less than expected.

I would also like to say at this point that mydiscussions with other members of the JointYear 2000 Council and with members of the ExternalConsultative Committee have convinced me that suc-cessful efforts to address the Y2K problem will bedependent on the credibility of those calling foraction. Those of us—such as members of this com-mittee as well as others in the Congress—who areseriously engaged and concerned need to be able to

persuade others of the need to take appropriateactions promptly. It would be unfortunate if generalperceptions of the Y2K problem are driven primarilyby unofficial commentators whose rhetoric is seen toexceed the facts on which it is based, and thereforeeasily dismissed.

As a central banker and bank supervisor, my majorconcern must be with the system as a whole. At thispoint, I believe that we are doing everything possibleto limit the possibility that Y2K disruptions will havesystemic consequences in our markets. However, wemust all continue to work hard—both individuallyand cooperatively—in the time that remains to ensurethat this threat does not become more concrete.

In that spirit, I would like to end my remarks bycommending the committee for organizing thesehearings on the implications of the Year 2000computer problem for international banking andfinance. •


668

Announcements

ADOPTION OF A REVISED POLICY STATEMENTON PRIVATELY OPERATED MULTILATERALSETTLEMENT SYSTEMS

The Federal Reserve Board on June 19, 1998,announced that it had adopted a revised Policy State-ment on Privately Operated Multilateral SettlementSystems. The statement updates and integrates theBoard's risk management policies for privately oper-ated large-dollar multilateral netting systems andprivate small-dollar clearing and settlement systemsinto a single, comprehensive policy statement. Therevised policy statement becomes effective January 4,1999.

The policy statement will apply to privately oper-ated multilateral settlement systems that are expectedto settle transactions with an aggregate gross value of$5 billion or more on any day during a rolling,twelve-month period. The policy statement will applyto systems or arrangements for the settlement ofchecks, automated clearinghouse (ACH) transfers,credit, debit, and other card transactions, large-valueinterbank transfers, or foreign exchange contractsinvolving the U.S. dollar. However, only a few ofthese systems currently settle transactions with agross daily aggregate value in excess of $5 billionand thus will be subject to the requirements of thepolicy at this time.

The systems that are covered by the policy state-ment will be required to address the credit, liquidity,operational, and legal risks associated with theirsettlement activities using an analytical and flexibleapproach to risks and risk management. In addition,a few of these systems may be required to meetthe Lamfalussy Minimum Standards based on theBoard's determination, for example, that such sys-tems settle a high proportion of large-value interbankor other financial market transactions, generate verylarge liquidity exposures that have potentially sys-temic consequences, or generate systemic creditexposures relative to participants' financial capacity.

In general, such systems are already subject to theBoard's policy on privately operated large-dollarmultilateral netting systems, which is being inte-grated into the revised policy statement.

The revised policy statement is not intended toalter the Board's policy with respect to these large-

dollar systems. Further, the revised policy statementis not intended to alter approvals by the Board forspecific clearinghouses to use the Federal ReserveBanks' Fedwire-based net settlement service.

PROPOSED ACTIONS

The Federal Reserve Board on June 5, 1998,requested comment on whether the last fifteen min-utes of the Fedwire funds transfer operating day(from 6:15 p.m. to 6:30 p.m. eastern time) should berestricted to funds transfers sent and received bydepository institutions for their own account. Thiswould facilitate the end-of-day management of theirbalances held at the Federal Reserve. Comments wererequested by August 12, 1998.

The Federal Reserve Board on June 11, 1998,requested public comment on an interpretation andtwo proposed rules exempting certain transactionsbetween an insured depository institution and itsaffiliates under section 23A of the Federal ReserveAct. Comments were requested by July 21, 1998.

ISSUANCE OF GUIDANCE FOR BANKEXAMINERS IN EVALUATING BANKINGORGANIZATIONS' RISK MANAGEMENT

The Federal Reserve on June 30, 1998, issued addi-tional guidance to assist bank examiners in theirevaluations of the quality of banking organizations'credit risk management processes.

The guidance is the result of an intensive studyconducted by Federal Reserve supervision staff toassess the current state of bank lending terms andstandards for domestic commercial and industrialloans. The study compared loans made in late 1995with loans made in late 1997 and involved severalhundred loans across the country.

The study identified noteworthy and measurableeasing in bank lending terms and, to some extent,bank lending standards. However, the overall qualityof loans did not deteriorate significantly over thetwo-year period.


669

The guidance to examiners indicates that this is acritical time for banks to maintain their lending disci-pline, and it highlights particular areas of concern,including the need for formal, forward-looking analy-sis in the loan-approval process.

PUBLIC MEETING SCHEDULED ON THEPROPOSED ACQUISITION OE BANKAMERICACORPORATION BY NATIONSBANKCORPORATION

The Federal Reserve Board on June 19, 1998,announced a public meeting for Thursday, July 9,in San Francisco on the proposal by NationsBankCorporation, Charlotte, North Carolina, to acquireBankAmerica Corporation, San Francisco, California.

The purpose of the meeting was to collect informa-tion relating to factors the Board is required to con-sider under the Bank Holding Company Act. Thesefactors are the effects of the proposal on the financialand managerial resources and future prospects of thecompanies and banks involved in the proposal, com-petition in the relevant markets, and the convenienceand needs of the communities to be served. Conve-nience and needs considerations include consider-ation of the records of performance of NationsBankand BankAmerica under the Community Reinvest-ment Act.

The meeting was held at the Federal Reserve Bankof San Francisco, 101 Market Street, San Francisco,California, at 9:00 a.m. PDT.

Persons who wished to testify at the meeting wererequired to submit a written request by 5:00 p.m.PDT, Monday, June 29, containing a brief statementof the nature of the expected testimony and theestimated time required for the presentation (togetherwith their address, telephone number, and facsimilenumber if available), to Joy Hoffman-Molloy, Com-munity Affairs Officer, Federal Reserve Bank ofSan Francisco, Division of Banking Supervision andRegulation, Mail Stop 620, 101 Market Street,San Francisco, California 94105 (facsimile: 415-393-1920). Persons interested only in attending the meet-ing did not need to submit a written request to attend.

On the basis of the requests to testify, the presidingofficer of the public meeting established a schedule ofappearances and prescribed all necessary proceduresto ensure that the meeting proceeded in a fair andorderly manner. An agenda for the meeting, includingthe scheduled time for each person's testimony, wasprovided to participants at a later date.

The Federal Reserve Board also announced that itwould extend the period for public comment on theproposal through July 9, 1998.

NOTICE OF PUBLIC MEETING ON THEPROPOSED ACQUISITION OF CITICORP BYTRAVELERS CORP.

The Federal Reserve Board on June 4, 1998,announced a public meeting for Thursday, June 25,1998, in New York, New York, on the proposal byTravelers Group Inc. to acquire Citicorp, both locatedin New York, New York. This transaction involves aproposal to combine the second largest bank holdingcompany in the United States with one of the largestfinancial conglomerates in the United States. TheBoard received a number of requests to hold a publicmeeting in this case. The meeting was held at theFederal Reserve Bank of New York, 33 LibertyStreet, New York, New York, and began at 9:00 a.m.EDT.

The purpose of the meeting was to collect informa-tion relating to factors the Board is required to con-sider under the Bank Holding Company Act. Thesefactors are the effects of the proposal on the financialand managerial resources and future prospects of thecompanies and banks involved in the proposal, com-petition in the relevant markets, and the convenienceand needs of the communities to be served. Conve-nience and needs considerations include consider-ation of the records of performance of TravelersGroup and Citicorp under the Community Reinvest-ment Act.

The transaction also involves the proposed acquisi-tion or retention of a number of nonbanking com-panies engaged in activities permissible for bankholding companies as well as a proposal to divest orotherwise conform a number of other activities thatare not permissible for bank holding companiesunder current law. With respect to the proposal toconduct permissible nonbanking activities, the Boardalso must determine whether conducting the pro-posed nonbanking activities can reasonably beexpected to produce benefits to the public that out-weigh possible adverse effects, such as undue con-centration of resources, decreased or unfair com-petition, conflicts of interest, or unsound bankingpractices.

Persons who wished to testify at the meeting wererequired to submit a written request no later than5:00 p.m. EDT, June 12, 1998, containing a briefstatement of the nature of the expected testimonyand the estimated time required for the presentation(together with their address, telephone number, andfacsimile number if available) to Elizabeth RodriguezJackson, Community Affairs Officer, Federal ReserveBank of New York, 33 Liberty Street, New York,New York 10045 (facsimile: 212-720-7841). Persons



interested only in attending the meeting did not haveto submit a written request to attend.

On the basis of the requests to testify, the presidingofficer of the public meeting established a schedule ofappearances and prescribed all necessary proceduresto ensure that the meeting proceeded in a fair andorderly manner. An agenda for the meeting, whichincluded the scheduled time for each person's testi-mony, was provided to participants. The FederalReserve Board also announced that it would extendthe period for public comment on the proposalthrough June 25, 1998.

The Federal Reserve Board on June 18, 1998,announced the scheduling of an additional day,June 26, and a time change, to 8:00 a.m. EDT, for thepublic meeting in New York City on the proposal byTravelers Group Inc. to acquire Citicorp.

Additional information about the public meetingwas contained in the Notice of Public Meeting issuedby the Board on June 4, 1998.

STUDY OF CONSUMER FINANCESUNDER WAY

The Federal Reserve Board is currently sponsoring astatistical study of household finances that will pro-vide policymakers with information on the economiccondition of a broad array of American families.

The study, which is undertaken every three yearsas part of the Survey of Consumer Finances, is beingconducted for the Board by the National OpinionResearch Center (NORC) at the University of Chi-cago through December of this year.

Participants in the study are chosen at randomusing a scientific sampling procedure in 100 areasacross the United States. A representative of NORCcontacts each potential participant personally toexplain the project and request time for an interview.

Names and addresses of each participant are confi-dential. Participation in the study is completely vol-untary, and summary results will be published by theBoard in the Federal Reserve Bulletin after all datahave been assessed and analyzed.

ers, community development groups, and othersinterested in community development finance.

The 1998 directory consists of 159 profiles ofcommunity development investments made throughlate 1997 by bank holding companies and state-chartered banks supervised by the Federal ReserveSystem. The profiles highlight the activities of com-munity development corporations (CDCs), limitedliability companies, and limited partnerships inwhich institutions have invested. Each profileincludes information on the amount of initial capitalinvested by an institution, a description of the com-munity development projects or activities undertakenor planned, and contact persons who can provideadditional information on the organization and opera-tions of the CDC or other community developmentinvestment activity.

Under certain circumstances, regulations govern-ing community development investments allow bankholding companies and state member banks to makeequity investments in CDCs or in limited liabilitycompanies and limited partnerships devoted tocommunity development, without prior regulatoryapproval. However, institutions supervised by theFederal Reserve are encouraged to consult with boththe Community Affairs staff and Applications staff attheir local Federal Reserve Bank before initiatinginvestment activity.

The directory of community development invest-ments is periodically updated and published andis available to bankers and the public. It can alsobe downloaded from the Board's web site(www.bog.frb.fed.us/DCCA/Directory).

Printed copies of the directory may be obtained byfinancial institutions and others by contacting theCommunity Affairs office of their local FederalReserve Bank. For further information, contact theDivision of Consumer and Community Affairs, Boardof Governors of the Federal Reserve System, Wash-ington DC 20551, or at (202) 452-3378.

PUBLICATION OF THE JUNE 1998UPDATE TO THE BANK HOLDING COMPANYSUPERVISION MANUAL

PUBLICATION OF DIRECTORY: COMMUNITYDEVELOPMENT INVESTMENTS

The Federal Reserve Board on June 18, 1998,announced the publication of its Directory: Commu-nity Development Investments, a resource for bank-

The June 1998 update to the Bank Holding CompanySupervision Manual, Supplement No. 14, has beenpublished and is now available. The Manual com-prises the Federal Reserve System's bank holdingcompany inspection procedures and supervisoryguidance. The supervisory information includes thefollowing.


Announcements 671

Control and Ownership

Certain revisions were made to a general control andownership section for bank holding company forma-tions. This section includes information pertaining tothe Small Bank Holding Company Policy Statementincluded in Regulation Y (Bank Holding Companiesand Change in Bank Control), effective on April 21,1997.

Nonbanking Activities

Changes involving the 1997 laundry list of nonbank-ing activities for Regulation Y were made to severalsections. These new or revised sections include suchactivities as providing financial and investmentadvice, management consulting, securities brokerage,acting as futures commission merchants, and thearranging of real estate equity financing.

Antitying Rules

the Board's decision to rescind the extension of bankantitying rules to bank holding companies and theirnonbank subsidiaries.

Risk-Focused Supervision

Revisions were made to the Board bank holdingcompany inspection policies pertaining to the risk-focused supervision of small shell bank holdingcompanies.

The Manual's new or revised sections includeinspection guidance, inspection objectives and proce-dures, and, in some cases, inspection checklists. TheManual and updates, including pricing information,are available from Publications Services, Mail Stop127, Board of Governors of the Federal ReserveSystem, Washington, DC 20551 (or facsimile: 202-728-5886). The Manual is also available on theBoard's web site (www.bog.frb.fed.us) under Super-vision Manuals. •

These rules pertain to the Board's changes to theantitying provisions of Regulation Y. They include


Legal Developments

673

FINAL RULE—AMENDMENT TO REGULATION Y

The Board of Governors is amending 12C.F.R. Part 225,its Regulation Y (Leverage Capital Standards: Tier 1Leverage Ratio). The Board is amending its Tier 1 leveragecapital standard for bank holding companies. The effect ofthis final rule is to simplify the Board's leverage capitalstandard for bank holding companies and to incorporatethe market risk capital rule into the leverage standard.

Effective June 30, 1998, Part 225 is amended as follows:

Part 225—Bank Holding Companies and Change inBank Control (Regulation Y)

1. The authority citation for Part 225 is revised to read asfollows:

Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 18311,1831p-l, 1843(c)(8), 1844(b), 1972(1), 3106,3108, 3310, 3331-3351, 3907, and 3909.

2. In Appendix D to Part 225, section Il.a. is revised toread as follows:

APPENDIX D TO PART 225—CAPITAL ADEQUACYGUIDELINES FOR BANK HOLDING COMPANIES:TIER I LEVERAGE MEASURE

The Board has established a minimum ratio of Tier 1capital to total assets of 3.0 percent for strong bankholding companies (rated composite " 1 " under theBOPEC rating system of bank holding companies), andfor bank holding companies that have implemented theBoard's risk-based capital measure for market risk as setforth in Appendices A and E of this part. For all otherbank holding companies, the minimum ratio of Tier 1capital to total assets is 4.0 percent. Banking organiza-tions with supervisory, financial, operational, or mana-gerial weaknesses, as well as organizations that areanticipating or experiencing significant growth, are ex-pected to maintain capital ratios well above the mini-mum levels. Moreover, higher capital ratios may berequired for any bank holding company if warranted byits particular circumstances or risk profile. In all cases,bank holding companies should hold capital commensu-rate with the level and nature of the risks, including thevolume and severity of problem loans, to which they areexposed.

ORDERS ISSUED UNDER BANK HOLDING COMPANYACT

Orders Issued Under Section 3 of the Bank HoldingCompany Act

Eagle Bancorp, Inc.Bethesda, Maryland

Order Approving Formation of a Bank HoldingCompany, Membership in the Federal Reserve System,and the Establishment of Branches

Eagle Bancorp, Inc. ("Eagle") has requested the Board'sapproval under section 3(a)(l) of the Bank Holding Com-pany Act ("BHC Act") (12 U.S.C. § 1842(a)(l)) to be-come a bank holding company by acquiring all the votingshares of EagleBank, Bethesda, Maryland ("Bank"), ade novo bank chartered under the laws of Maryland. Bankalso has applied pursuant to section 9 of the FederalReserve Act (12 U.S.C. § 321) to become a member of theFederal Reserve System and to establish branches at 8677Georgia Avenue, Silver Spring, Maryland, and 110 NorthWashington Street, Rockville, Maryland.

Notice of the applications, affording interested personsan opportunity to submit comments, has been published(59 Federal Register 35,122 (1994)) and given in accor-dance with applicable law. The time for filing commentshas expired, and the Board has considered the applicationsand all comments received in light of the factors set forthin section 3 of the BHC Act and the Federal Reserve Act.

Eagle is a newly formed nonoperating corporation thatwould acquire Bank. The addition of a new bank in therelevant banking market would increase the number ofalternative sources of banking products and services avail-able to customers in the market and increase competition.The Board previously has stated that the promotion ofcompetition through de novo entry is a positive consider-ation in an application under section 3 of the BHC Act.1

Accordingly, the Board concludes that consummation ofthe proposal would not have a significantly adverse effecton competition or on the concentration of banking re-sources in any relevant banking market, and that competi-tive considerations are consistent with approval.

The Board has reviewed examination reports and othersupervisory information, including information regardinginstitutions with which Eagle's principals previously were

1. See Wilson Bank Holding Company, 82 Federal Reserve Bulletin568 (1996).


674 Federal Reserve Bulletin El August 1998

affiliated. In light of all the facts of record, the Boardconcludes that the financial and managerial resources andfuture prospects of Eagle and Bank, the convenience andneeds of the communities to be served, and other supervi-sory factors that the Board is required to consider undersection 3 of the BHC Act, are consistent with approval ofthe proposal.

In addition, Bank has applied under section 9 of theFederal Reserve Act to become a member of the FederalReserve System and to establish branches. The Board hasconsidered the factors it is required to consider whenreviewing applications pursuant to section 9 of the FederalReserve Act and finds those factors to be consistent withapproval.

Based on the foregoing and all the facts of record, theBoard has determined that these applications should be,and hereby are, approved. The Board's approval is ex-pressly conditioned on compliance with all the commit-ments made by Eagle in connection with the applications.For purposes of this action, the commitments and condi-tions relied on by the Board in reaching this decision aredeemed to be conditions imposed in writing by the Boardin connection with its findings and decision, and as such,may be enforced in proceedings under applicable law.

This transaction shall not be consummated before thefifteenth calendar day following the effective date of thisorder, or later than three months following the effectivedate of this order, and Bank shall be open for businesswithin six months following the effective date of this order,unless such periods are extended for good cause by theBoard or by the Federal Reserve Bank of Richmond, actingpursuant to delegated authority.

By order of the Board of Governors, effective June 1,1998.

Voting for this action: Chairman Greenspan, Vice Chair Rivlin, andGovernors Meyer, Ferguson, and Gramlich. Absent and not voting:Governors Kelley and Phillips.

ROBERT DEV. FRIERSONAssociate Secretary of the Board

The Fuji Bank, LimitedTokyo, Japan

Order Approving Retention of an Interest in a BankHolding Company

The Fuji Bank, Limited ("Fuji"), a registered bank holdingcompany, has requested the Board's approval under sec-tion 3 of the Bank Holding Company Act ("BHC Act")(12 U.S.C. § 1842) to retain 16.8 percent of the votingshares of The Yasuda Trust and Banking Co., Ltd., Tokyo,Japan ("Yasuda"), and thereby to retain an interest in thewholly owned U.S. bank subsidiary of Yasuda, YasudaBank and Trust Company (U.S.A.), New York, New York("Yasuda Bank").

Notice of the proposal, affording interested persons anopportunity to submit comments, has been published (63

Federal Register 16,538 and 17,873 (1998)). The time forfiling comments has expired, and the Board has consideredthe proposal and all comments received in light of thefactors set forth in section 3 of the BHC Act.

Fuji, with total consolidated assets of approximately$453 billion, is the third largest banking organization inJapan.1 In the United States, Fuji owns The Fuji Bank andTrust Company, New York, New York. Fuji also operates abranch office in New York, New York; and Chicago, Illi-nois; an agency office in Los Angeles and San Francisco,California; Atlanta, Georgia; and Houston, Texas; and arepresentative office in New York, New York; Miami,Florida; and Washington, D.C. In addition, Fuji engagesthrough its nonbanking subsidiaries in a number of activi-ties in the United States that are permissible under sec-tion 4(c)(8) of the BHC Act.

Yasuda, with total consolidated assets of approximately$69 billion, is the 16th largest banking organization inJapan. In the United States, Yasuda operates Yasuda Bank,which has assets of approximately $201 million, and abranch office in New York, New York, which has assets ofapproximately $1.7 billion.2

Competitive Considerations

The BHC Act provides that the Board may not approve aproposal submitted under section 3 of the BHC Act if theproposal would result in a monopoly or if the effect of theproposal may be substantially to lessen competition in anyrelevant banking market, unless the Board finds that theanticompetitive effects of the transaction are clearly out-weighed in the public interest by the probable effect of thetransaction in meeting the convenience and needs of thecommunity to be served.3

Fuji and Yasuda compete directly in the MetropolitanNew York-New Jersey banking market.4 Fuji controls de-posits of approximately $160 million, representing lessthan 1 percent of the total deposits in depository institu-tions in the market.5 Yasuda controls deposits of approxi-

1. Asset data are as of March 31, 1997, and are based on exchangerates then applicable. Ranking data are as of December 31, 1996.

2. U.S. asset data are as of March 31, 1998.3. 12 U.S.C. § 1842(c)(l)(B).4. The Metropolitan New York-New Jersey banking market in-

cludes New York City; Nassau, Orange, Putnam, Rockland, Suffolk,Sullivan, and Westchester Counties in New York; Bergen, Essex,Hudson, Hunterdon, Middlesex, Monmouth, Morris, Ocean, Passaic,Somerset, Sussex, Union, Warren, and a portion of Mercer Counties inNew Jersey; Pike County in Pennsylvania; and portions of Fairfieldand Litchfield Counties in Connecticut.

5. In this context, depository institutions include commercial banks,savings banks, and savings institutions. Market share data are as ofJune 30, 1996, and are based on calculations in which the deposits ofthrift institutions are included at 50 percent. The Board previously hasindicated that thrift institutions have become, or have the potential tobecome, significant competitors of commercial banks. See WM Ban-corp, 76 Federal Reserve Bulletin 788 (1990); National City Corpora-tion, 70 Federal Reserve Bulletin 743 (1984). Thus, the Board hasregularly included thrift deposits in the calculation of market share ona 50-percent weighted basis. See, e.g., First Hawaiian, Inc., 77 Fed-eral Reserve Bulletin 52 (1991).


Legal Developments 675

mately $42 million, representing less than 1 percent of thetotal deposits in depository institutions in the market. IfFuji and Yasuda are considered as a combined entity, theHerfindahl-Hirschman Index ("HHI") for the bankingmarket would remain unchanged at 796. The bankingmarket would remain unconcentrated and numerous com-petitors would remain in the market.6 Thus, any potentialelimination of competition between the two entities is notexpected substantially to lessen competition in the Metro-politan New York-New Jersey banking market or in anyother relevant banking market.

Financial, Managerial, and Other SupervisoryConsiderations

Under section 3 of the BHC Act, the Board may notapprove an application involving a foreign bank unless thebank is "subject to comprehensive supervision or regula-tion on a consolidated basis by the appropriate authoritiesin the bank's home country."7 The Board previously hasdetermined in applications under the BHC Act that certainJapanese banks were subject to comprehensive supervisionon a consolidated basis by their home country authorities.8

The Board has determined that Fuji is supervised on sub-stantially the same terms and conditions as those otherJapanese banks. In addition, Japanese banking authoritiesrecently have taken steps intended to enhance the supervi-sion of Japanese banks, including Fuji. These measures arepart of an ongoing effort to strengthen the Japanese banksupervisory framework. Based on all the facts of record,the Board has concluded that Fuji is subject to comprehen-sive supervision and regulation on a consolidated basis byits home country supervisor.

The BHC Act also requires the Board to determine thatthe foreign bank has provided adequate assurances that itwill make available to the Board such information on its

6. Under the revised Department of Justice Merger Guidelines, 49Federal Register 26,823 (1984), a market in which the post-mergerHHI is less than 1000 is considered to be unconcentrated. The Depart-ment of Justice has informed the Board that a bank merger oracquisition generally will not be challenged (in the absence of otherfactors indicating anticompetitive effects) unless the post-merger HHIis at least 1800 and the merger increases the HHI by more than200 points. The Department of Justice has stated that the higher thannormal threshold for an increase in HHI when screening bank mergersand acquisitions for anticompetitive effects implicitly recognizes thecompetitive effects of limited-purpose and other nondepository finan-cial entities.

7. 12 U.S.C. § 1842(c)(3)(B). As provided in Regulation Y, theBoard determines whether a foreign bank is subject to consolidatedhome country supervision under the standards set forth in Regula-tion K. See 12 C.F.R. 225.13(a)(4). Regulation K provides that aforeign bank may be considered subject to consolidated supervision ifthe Board determines that the bank is supervised or regulated in such amanner that its home country supervisor receives sufficient informa-tion on the worldwide operations of the foreign bank, including therelationship of the bank and it affiliates, to assess the foreign bank'soverall financial condition and compliance with law and regulation.

8. See The Mitsubishi Bank, Limited, 82 Federal Resen-e Bulletin436 (1996). See also The Bank of Tokyo, Ltd., 81 Federal Resen'eBulletin 279 (1995).

operations and activities and those of its affiliates that theBoard deems appropriate to determine and enforce compli-ance with the BHC Act and the International Banking Act("IBA") (12 U.S.C. § 3101 et seq.). The Board hasreviewed restrictions on disclosure in jurisdictions whereFuji has material operations and has communicated withrelevant authorities concerning access to information. Fujihas committed that, to the extent not prohibited by applica-ble law, it will make available to the Board such informa-tion on the operations of Fuji and any of its affiliates thatthe Board deems necessary to determine and enforce com-pliance with the BHC Act, the IBA, and other applicablefederal law. Fuji also has committed to cooperate with theBoard to obtain any waivers or exemptions that may benecessary to enable Fuji to make any such informationavailable to the Board. In light of these commitments andother facts of record, the Board has concluded that Fuji hasprovided adequate assurances of access to any appropriateinformation that the Board may request. For these reasons,and based on all the facts of record, the Board has con-cluded that the supervisory factors it is required to considerunder section 3(c) of the BHC Act are consistent withapproval.

The Board also has carefully considered the financialand managerial resources and future prospects of Fuji,Yasuda, and their respective subsidiaries, and the effect theproposal would have on these factors in light of all thefacts of record. Fuji has submitted information indicatingthat the proposal, which is incidental to a corporate restruc-turing in Japan, would not affect the existing U.S. opera-tions of Fuji, and would require no funding or other sup-port from the U.S. operations of Fuji. In addition, the Boardhas reviewed supervisory information from the home coun-try authorities responsible for supervising Fuji and Yasudaconcerning the proposal and the condition of the parties,confidential financial information from Fuji and YasudaBank, and reports of examination from the appropriatefederal and state supervisors of the affected organizationsassessing the financial and managerial resources of theorganizations. Based on all the facts of record, the Boardhas concluded that the financial and managerial resourcesand future prospects of the organizations are consistentwith approval. Factors related to the convenience and needsof the community to be served that the Board is required toconsider also are consistent with approval, as are the othersupervisory factors that the Board must consider undersection 3 of the BHC Act.

Conclusion

Based on the foregoing and all the facts of record, theBoard has determined that the application should be, andhereby is, approved. The Board's approval is expresslyconditioned on compliance with all the commitments madeby Fuji in connection with the application. The commit-ments and conditions relied on by the Board in reachingthis decision are deemed to be conditions imposed inwriting by the Board in connection with its finding and



decision, and, as such, may be enforced in proceedingsunder applicable law.


Voting for this action: Chairman Greenspan and Governors Kelley,Meyer, Ferguson, and Gramlich. Absent and not voting: Vice ChairRivlin and Governor Phillips.

ROBERT DEV. FRIERSON

Associate Secretary of the Board

Norwest CorporationMinneapolis, Minnesota

Order Approving Acquisition of a Bank HoldingCompany

Norwest Corporation ("Norwest"), a bank holding com-pany within the meaning of the Bank Holding CompanyAct ("BHC Act"), has requested the Board's approvalunder section 3 of the BHC Act to acquire MountainBancshares, Inc., Newport, Minnesota ("Mountain"), andthereby acquire Mountain Bank, Eagle, Colorado.

Notice of the proposal, affording interested persons anopportunity to submit comments, has been published(63 Federal Register 18,021 (1998)). The time for filingcomments has expired, and the Board has considered theproposal and all comments received in light of the factorsset forth in section 3 of the BHC Act.

Norwest operates banks in Arizona, Colorado, Illinois,Indiana, Iowa, Minnesota, Montana, Nebraska, Nevada,New Mexico, North Dakota, Ohio, South Dakota, Wiscon-sin, and Wyoming. Norwest is the largest commercialbanking organization in Colorado, controlling approxi-mately $7.1 billion in deposits, representing approximately22.1 percent of total deposits in commercial banking orga-nizations in Colorado ("state deposits").1 Mountain is the66th largest commercial banking organization in Colorado,controlling approximately $70 million in deposits, repre-senting less than 1 percent of state deposits. On consumma-tion of the proposal, Norwest would remain the largestcommercial banking organization in Colorado.

Interstate Analysis

Section 3(d) of the BHC Act allows the Board to approvean application by a bank holding company to acquirecontrol of a bank in a state other than the home state ofsuch bank holding company, if certain conditions are met.For purposes of the BHC Act, the home state of Norwest isMinnesota, and Mountain controls a bank in Colorado.2 Allof the conditions for an interstate acquisition enumerated

in section 3(d) are met in this case.3 In view of all the factsof record, the Board is permitted to approve the proposalunder section 3(d) of the BHC Act.

Competitive Considerations

The BHC Act prohibits the Board from approving anapplication if the proposal would result in a monopoly or ifthe proposal would substantially lessen competition in anyrelevant market, unless the Board finds that the anticom-petitive effects of the proposed transaction are clearlyoutweighed in the public interest by the probable effect ofthe transaction in meeting the convenience and needs ofthe community to be served.4 Norwest and Mountain com-pete in the Montrose County and the Eagle County bankingmarkets, both in Colorado.5

In the Montrose County banking market, Norwest wouldremain the largest depository institution in the market,controlling $173.4 million in deposits, representing38.5 percent of deposits in depository institutions in themarket ("market deposits") after consummation of theproposal.6 Concentration in the banking market as mea-sured by the Herfindahl-Hirschman Index ("HHI") underthe Department of Justice Merger Guidelines ("DOJGuidelines") would increase by 82 points to 2134.7 Twelve

1. State deposit data are as of June 30, 1997.2. A bank holding company's home state is that state in which the

operations of the bank holding company's banking subsidiaries areprincipally conducted on July 1, 1966, or the date on which thecompany became a bank holding company, whichever is later.12U.S.C. § 1841(o)(4)(C).

3. See 12 U.S.C. §§ 1842(d)(l)(A) and (B) and 1842(d)(2)(A) and(B). Norwest is adequately capitalized and adequately managed, asdefined by applicable law, and Mountain Bank has been in existenceand operated for the minimum period of time necessary to satisfy agerequirements established by applicable state law. See Colo. Rev. Stat.Ann. § U-6.4-103(2)(1997) (five years). On consummation of theproposal. Norwest would control less than 10 percent of the totalamount of deposits of insured depository institutions in the UnitedStates. Norwest would control less than 25 percent of the total amountof federally insured deposits in Colorado, as calculated under applica-ble Colorado law. See Colo. Rev. Stat. Ann 1 l-6.4-103(4)(l997). Allother requirements of section 3(d) of the BHC Act also would be meton consummation of the proposal.

4. 12 U.S.C. § 1842(c)(l)(B).5. The Montrose County banking market is defined as Montrose,

Ouray, and San Miguel Counties in Colorado. The Eagle Countybanking market is defined as Eagle County, Colorado, excluding thetowns of El Jebel, Basalt, and Emma.

6. In this context, depository institutions include commercial banks,savings banks, and savings associations. Market share data used toanalyze the competitive effects of the proposal are as of June 30, 1997.These data are based on calculations in which the deposits of thriftinstitutions are included at 50 percent. The Board previously hasindicated that thrift institutions have become, or have the potential tobecome, significant competitors of commercial banks. See MidwestFinancial Group, 75 Federal Reserve Bulletin 386 (1989); NationalCity Corporation, 70 Federal Reserve Bulletin 743 (1984). Thus, theBoard has regularly included thrift deposits in the calculation ofmarket share on a 50-percent weighted basis. See, e.g., First Hawai-ian, Inc., 77 Federal Reserve Bulletin 52 (1991).

7. Under the revised Department of Justice Merger Guidelines, 49Federal Register 26,823 (June 29, 1984), a market in which thepost-merger HHI exceeds 1800 is considered highly concentrated. TheDepartment of Justice has informed the Board that a bank merger oracquisition generally will not be challenged (in the absence of otherfactors indicating anticompetitive effects) unless the post-merger HHIis at least 1800 and the merger increases the HHI by more than200 points. The Department of Justice has stated that the higher thannormal HHI thresholds for screening bank mergers and acquisitions



competitors, including Norwest, would remain in the Mon-trose County banking market after consummation of thisproposal. The second largest competitor would control19.7 percent of market deposits, and five other competitors,not including Norwest, each would control more than 5percent of market deposits after consummation of the pro-posal.

In the Eagle County banking market, Norwest wouldbecome the third largest depository institution after con-summation of the proposal, controlling $71 million indeposits, representing approximately 15.1 percent of mar-ket deposits. The HHI would increase by 35 points to 4014.Five competitors, including Norwest, would remain in themarket. Two competitors would control a larger percentageof market deposits than Norwest, including the largestcompetitor in the market which controls 58.7 percent ofmarket deposits.

Consummation of the proposal in both banking marketswould be consistent with the DOJ Guidelines and Boardprecedent. In addition, the Department of Justice reviewedthe proposal and advised the Board that consummation ofthe proposal would not likely have a significantly adverseeffect on competition in any relevant banking market.Based on all the facts of record, including the small in-creases in market concentration as measured by the HHI,the number of competitors remaining, and the marketshares controlled by the remaining competitors, the Boardconcludes that consummation of the proposal is not likelyto result in any significantly adverse effects on competitionor on the concentration of banking resources in any rele-vant banking market.

Other Considerations

The BHC Act requires the Board, in acting on an applica-tion, to consider the financial and managerial resources andfuture prospects of the companies and banks involved, theconvenience and needs of the communities to be served,and certain supervisory factors. The Board has reviewedthese factors in light of the record, including supervisoryreports of examination assessing the financial and manage-rial resources of the organizations. Based on all the facts ofrecord, the Board concludes that the financial and manage-rial resources and the future prospects of Norwest, Moun-tain, and their respective subsidiary banks are consistentwith approval, as are the other supervisory factors theBoard must consider under section 3 of the BHC Act. Inaddition, considerations related to the convenience andneeds of the communities to be served, including therecords of performance of the institutions under the Com-munity Reinvestment Act, are consistent with approval ofthe proposal.

for anticompetitive effects implicitly recognize the competitive effectof limited-purpose lenders and other non-depository financial entities.

Conclusion

Based on the foregoing, and in light of all the facts ofrecord, the Board has determined that the applicationshould be, and hereby is, approved. The Board's approvalis specifically conditioned on compliance by Norwest withall the commitments made in connection with the applica-tion. For the purposes of this action, the commitments andconditions relied on by the Board in reaching its decisionare deemed to be conditions imposed in writing by theBoard in connection with its findings and decision and, assuch, may be enforced in proceedings under applicablelaw.

This transaction shall not be consummated before thefifteenth calendar day following the effective date of thisorder, or later than three months after the effective date ofthis order, unless such period is extended for good cause bythe Board or by the Federal Reserve Bank of Minneapolis,acting pursuant to delegated authority.


Voting for this action: Chairman Greenspan. Vice Chair Rivlin, andGovernors Meyer. Ferguson, and Gramlich. Absent and not voting:Governors Kelley and Phillips.


Orders Issued Under Section 4 of the Bank HoldingCompany Act

Fifth Third BancorpCincinnati, Ohio

Order Approving Notice to Engage in NonbankingActivities

Fifth Third Bancorp ("Bancorp"), a bank holding com-pany within the meaning of the Bank Holding CompanyAct ("BHC Act"), has requested the Board's approvalunder section 4(c)(8) of the BHC Act (12 U.S.C.§ 1843(c)(8)) and section 225.24 of the Board's Regula-tion Y (12 C.F.R. 225.24) to acquire all of the voting sharesof The Ohio Company ("Company"), and thereby indi-rectly acquire Cardinal Management Corp., both in Colum-bus, Ohio. Bancorp would thereby engage in the followingnonbanking activities:

(1) Performing functions or activities that may be per-formed by a trust company, pursuant to section225.28(b)(5) of Regulation Y (12 C.F.R.225.28(b)(5));

(2) Providing financial and investment advisory ser-vices, pursuant to section 225.28(b)(6) of Regula-tion Y (12 C.F.R. 225.28(b)(6));

(3) Providing securities brokerage, riskless principal,and private placement services, pursuant to section225.28(b)(7)(i)-(iii) of Regulation Y (12 C.F.R.



(4) Underwriting and dealing in government obliga-tions and money market instruments in which statemember banks may underwrite and deal under 12U.S.C. §§ 335 and 24(7) ("bank-eligible securi-ties"), pursuant to section 225.28(b)(8)(i) of Regu-lation Y (12 C.F.R. 225.28(b)(8)(i));

(5) Providing employee benefit consulting services,pursuant to section 225.28(b)(9)(ii) of RegulationY (12 C.F.R. 225.28(b)(9)(ii)); and

(6) Underwriting and dealing in. to a limited extent, alltypes of debt and equity securities other than inter-ests in open-end investment companies ("bank-ineligible securities").

Notice of the proposal, aifording interested persons anopportunity to submit comments, has been published (63Federal Register 17,181 (1998)). The time for filing com-ments has expired, and the Board has considered the noticeand all comments received in light of the factors set forthin section 4(c)(8) of the BHC Act.

Bancorp, with total consolidated assets of approximately$21.4 billion, is the 39th largest banking organization inthe United States.1 Bancorp operates subsidiary banks infour states, and engages through other subsidiaries in abroad range of permissible nonbanking activities. Com-pany is, and after consummation of the proposal willcontinue to be, registered as a broker-dealer with the Secu-rities and Exchange Commission ("SEC") under the Secu-rities Exchange Act of 1934 (15 U.S.C. § 78a et seq.), anda member of the National Association of Securities Deal-ers, Inc. ("NASD"). Accordingly, Company is, and willcontinue to be, subject to the record-keeping and reportingobligations, fiduciary standards, and other requirements ofthe Securities Exchange Act of 1934, the SEC, and NASD.Cardinal Management Corp. ("Cardinal Management") isregistered with the SEC as an investment adviser underthe Investment Advisers Act of 1940 (15 U.S.C. § 80b-1et seq.) ("Advisers Act") and is, and will continue to be,subject to the recordkeeping and reporting obligations,fiduciary standards, and other requirements of the AdvisersAct and the SEC.2

Underwriting and Dealing in Bank-Ineligible Securities

The Board has determined that—subject to the frameworkof prudential limitations established in previous decisionsto address the potential for conflicts of interests, unsoundbanking practices, or other adverse effects — underwritingand dealing in bank-ineligible securities is so closely re-lated to banking as to be a proper incident thereto within

the meaning of section 4(c)(8) of the BHC Act.3 The Boardalso has determined that underwriting and dealing in bank-ineligible securities is consistent with section 20 of theGlass-Steagall Act (12 U.S.C. § 377), provided that thecompany engaged in the activity derives no more than25 percent of its gross revenues from underwriting anddealing in bank-ineligible securities.4

Bancorp has committed that Company will conduct itsunderwriting and dealing activities using the methods andprocedures and subject to the prudential limitations estab-lished by the Board in the Section 20 Orders. Bancorp alsohas committed that Company will conduct its bank-ineligible securities underwriting and dealing activitiessubject to the Board's revenue limitation. As a condition ofthis order, Bancorp is required to conduct its bank-ineligible securities activities subject to the revenue limita-tion and Operating Standards established for section 20subsidiaries ("Operating Standards").5

Other Activities Approved by Regulation or Order

The Board previously has determined that trust companyactivities; financial and investment advisory activities; se-curities brokerage, riskless principal, and private place-ment activities; bank-eligible securities underwriting anddealing activities; and employee benefits consulting ser-vices are closely related to banking within the meaning of

1. Asset and ranking data are as of December 31, 1997.2. Company currently owns certain subsidiaries other than Cardinal

Management. Bancorp has committed that Company will divest itsownership of such subsidiaries prior to consummation of the proposalor that Bancorp will otherwise conform its ownership and the activi-ties of such subsidiaries to the requirements of the BHC Act immedi-ately on consummation.

3. See J.P. Morgan & Co. Inc., et. al, 75 Federal Reserve Bulletin192 (1989), aff'd sub nom. Securities Industry Ass'n v. Board ofGovernors of the Federal Resen'e System. 900 F.2d 360 (D.C. Cir.1990); Citicorp, 73 Federal Reserve Bulletin 473 (1987), aff'd subnom. Securities Industry Ass 'n v. Board of Governors of the FederalReserve System, 839 F.2d 47 (2d Cir.), cert, denied, 486 U.S. 1059(1988), as modified by Review of Restrictions on Director, Officer andEmployee Interlocks, Cross-Marketing Activities, and the Purchaseand Sale of Financial Assets Between a Section 20 Subsidiary and anAffiliated Bank or Thrift, 61 Federal Register 57,679 (1996), Amend-ments to Restrictions in the Board's Section 20 Orders. 62 FederalRegister 45,295 (1997); and Clarification to the Board's Section 20Orders, 63 Federal Register 14,803 (1998) (collectively, "Section 20Orders").

4. Compliance with the revenue limitation shall be calculated inaccordance with the method stated in the Section 20 Orders, asmodified by the Order Approving Modifications to the Section 20Orders, 75 Federal Reserve Bulletin 751 (1989); 10 Percent RevenueLimit on Bank-Ineligible Activities of Subsidiaries of Bank HoldingCompanies Engaged in Underwriting and Dealing in Securities, 61Federal Register 48,953 (1996); and Revenue Limit on Bank-IneligibleActivities of Subsidiaries of Bank Holding Companies Engaged inUnderwriting and Dealing in Securities, 61 Federal Register 68,750(1996) (collectively. "Modification Orders"). In light of the fact thatBancorp proposes to acquire a going concern, the Board believes thatallowing Company to calculate compliance with the revenue limita-tion on an annualized basis during the first year after consummation ofthe acquisition and thereafter on a rolling quarterly average basiswould be consistent with the Section 20 Orders. See Dauphin DepositCorporation, 11 Federal Reserve Bulletin 672 (1991).

5. 12 C.F.R. 225.200. Company may provide services that arenecessary incidents to the proposed underwriting and dealing activi-ties. Unless Company receives specific approval under section 4(c)(8)of the BHC Act to conduct the activities independently, any revenuesfrom the incidental activities must be treated as ineligible revenuessubject to the Board's revenue limitation.



section 4(c)(8) of the BHC Act.6 Bancorp has committedthat it will conduct these activities in accordance with thelimitations set forth in Regulation Y and the Board's ordersand interpretations relating to each of the activities.7


In order to approve this notice, the Board also must deter-mine that the proposed activities "can reasonably be ex-pected to produce benefits to the public, such as greaterconvenience, increased competition, or gains in efficiency,that outweigh possible adverse effects, such as undue con-centration of resources, decreased or unfair competition,conflicts of interests, or unsound banking practices."8 Aspart of its review of these factors, the Board considers thefinancial and managerial resources of the notificant and itssubsidiaries and the effect the transaction would have onsuch resources.9

In considering the financial resources of the notificant,the Board has reviewed the capitalization of Bancorp andCompany in accordance with the standards set forth in theSection 20 Orders and finds the capitalization of each to beconsistent with approval. This determination is based on allthe facts of record, including Bancorp's projections of thevolume of Company's underwriting and dealing activitiesin bank-ineligible securities.

The Board also has reviewed the managerial resourcesof each of the entities involved in the proposal in light ofexamination reports and other supervisory information. Inconnection with the proposal, the Federal Reserve Bank ofCleveland ("Reserve Bank") has reviewed the policies andprocedures of Company to ensure compliance with thisorder and the Section 20 Orders, including Company'soperational and managerial infrastructure, computer, audit,and accounting systems, and internal risk managementprocedures and controls. On the basis of the ReserveBank's review and all other facts of record, including thecommitments provided in this case and the proposed man-agerial and risk management systems of Company, theBoard has concluded that financial and managerial consid-erations are consistent with approval of the notice.

The Board also has carefully considered the competitiveeffects of the proposal. To the extent that Bancorp andCompany offer different types of products and services, theproposed acquisition would result in no loss of competi-

6. See 12 C.F.R. 225.28(b)(5), (6), (7)(i)-(iii), (8)(i), and (9)(ii).7. Cardinal Management currently serves as adviser, administrator

and distributor of the Cardinal Funds, a family of open-end invest-ment companies ("mutual funds"). Bancorp has committed that Car-dinal Management will cease its mutual fund distribution activitiesprior to consummation. In addition, Bancorp has stated that theCardinal Funds will be merged with and into Bancorp's existingfamily of proprietary mutual funds shortly after consummation of theproposal and that, after such merger, Cardinal Management will notprovide administrative services to mutual funds. In light of the pro-posed merger, Bancorp has not requested authority for Company toprovide administrative services to mutual funds under section 4(c)(8)of the BHC Act.

8. 12U.S.C. § 1843(c)(8).9. See 12C.F.R. 225.26(b).

tion. In those markets where the product offerings of Ban-corp's nonbanking subsidiaries and Company overlap, suchas securities brokerage and investment advisory activities,there are numerous existing and potential competitors.Consummation of the proposal, therefore, would have ade minimis effect on competition in the market for theseservices, and the Board has concluded that the proposalwould not have any significantly adverse competitive ef-fects in any relevant market.

In order to approve the proposal, the Board also mustfind that the performance of the proposed activities byBancorp can reasonably be expected to produce benefitsthat would outweigh possible adverse effects under theproper incident to banking standard of section 4(c)(8) ofthe BHC Act. Under the framework established in this andprior decisions, consummation of the proposal is not likelyto result in any significantly adverse effects, such as undueconcentration of resources, decreased or unfair competi-tion, conflicts of interests, or unsound banking practices.The Board expects that consummation of the proposalwould provide added convenience to the customers ofBancorp and Company. Bancorp has indicated that con-summation of the proposal would expand the range ofproducts and services available to its customers and thoseof Company and has stated that the acquisition wouldpermit Bancorp to further diversify its nonbanking opera-tions, thereby making it less vulnerable to economic fluctu-ations in individual business lines.

Based on all the facts of record, the Board has deter-mined that performance of the proposed activities by Ban-corp can reasonably be expected to produce public benefitsthat outweigh any adverse effects of the proposal. Accord-ingly, the Board has determined that the performance of theproposed activities by Bancorp is a proper incident tobanking for purposes of section 4(c)(8) of the BHC Act.

Conclusion

On the basis of all the facts of record, the Board hasdetermined that the notice should be, and hereby is, ap-proved, subject to all the terms and conditions described inthis order. The Board's approval of the proposal extendsonly to activities conducted within the limitations of thisorder, including the Board's reservation of authority toestablish additional limitations to ensure that Company'sactivities are consistent with safety and soundness, avoid-ance of conflicts of interests, and other relevant consider-ations under the BHC Act. Underwriting and dealing inany manner other than as approved in this order is notwithin the scope of the Board's approval and is not autho-rized for Company.

The Board's determination is subject to all the terms andconditions set forth in Regulation Y, including those insections 225.7 and 225.25(c) (12 C.F.R. 225.7 and225.25(c)), and to the Board's authority to require modifi-cation or termination of the activities of a bank holdingcompany or any of its subsidiaries as the Board findsnecessary to ensure compliance with, or to prevent evasionof, the provisions and purposes of the BHC Act and the



Board's regulations and orders issued thereunder. TheBoard's decision is specifically conditioned on compliancewith all the commitments made in connection with thenotice, including the commitments and conditions dis-cussed in this order and the Board regulations and ordersnoted above. The commitments and conditions are deemedto be conditions imposed in writing by the Board in con-nection with its findings and decision, and, as such, may beenforced in proceedings under applicable law.

The proposal shall not be consummated later than threemonths after the effective date of this order, unless suchperiod is extended for good cause by the Board or theReserve Bank, acting pursuant to delegated authority.


Voting for this action: Chairman Greenspan, Vice Chair Rivlin, andGovernors Meyer, Ferguson, and Gramlich. Absent and not voting:Governors Kelley and Phillips.


Societe GenerateParis, France

Order Approving Notice to Engage in NonbankingActivities

Societe Generale ("SoGen"), a foreign bank subject to theprovisions of the Bank Holding Company Act ("BHCAct"),1 has requested the Board's approval under section4(c)(8) of the BHC Act (12 U.S.C. § 1843(c)(8)) andsection 225.24(a) of the Board's Regulation Y (12 C.F.R.225.24(a)) to acquire Cowen & Co. and Cowen Incorpo-rated, both of New York, New York (together "Cowen"),and thereby engage in the following nonbanking activities:

(1) Underwriting and dealing in, to a limited extent,all types of debt and equity securities that a statemember bank may not underwrite and deal in("bank-ineligible securities"), except ownershipinterests in open-end investment companies;

(2) Making loans or other extensions of credit, pursu-ant to section 225.28(b)(l) of Regulation Y(12 C.F.R. 225.28(b)(l));

(3) Activities related to extending credit, pursuant tosection 225.28(b)(2) of Regulation Y (12 C.F.R.225.28(b)(2));

(4) Providing fiduciary services, pursuant to section225.28(b)(5) of Regulation Y (12 C.F.R.225.28(b)(5));

(5) Providing financial and investment advisory ser-vices, pursuant to section 225.28(b)(6) of Regula-tion Y (12 C.F.R. 225.28(b)(6));

(6) Providing agency transactional services for cus-tomer investments, pursuant to section225.28(b)(7) of Regulation Y (12 C.F.R.225.28(b)(7));

(7) Underwriting and dealing in government obliga-tions and money market instruments ("bank-eligible securities"), pursuant to section225.28(b)(8)(i) of Regulation Y (12 C.F.R.225.28(b)(8)(i));

(8) Investing and trading activities, pursuant to sec-tion 225.28(b)(8)(ii) of Regulation Y (12 C.F.R.225.28(b)(8))(ii));

(9) Providing cash management services;(10) Providing certain administrative services for open-

end investment companies ("mutual funds"); and(11) Acting as general partner for certain private in-

vestment limited partnerships that invest in assetsin which a bank holding company is permitted toinvest.

Notice of the proposal, affording interested persons anopportunity to submit comments, has been published (63Federal Register 17,874 (1998)). The time for filing com-ments has expired, and the Board has considered the noticeand all comments received in light of the factors set forthin section 4(c)(8) of the BHC Act.

SoGen, with total consolidated assets of approximately$413 billion, is the third largest banking organization inFrance and the 15th largest banking organization in theworld.2 In the United States, SoGen operates branches inNew York, New York, Chicago, Illinois, and Los Angeles,California; an agency in Dallas, Texas; and representativeoffices in San Francisco, California, Atlanta, Georgia, andHouston, Texas. SoGen also engages through subsidiariesin a broad range of nonbanking activities in the UnitedStates. Cowen, with total consolidated assets of $3.7 bil-lion, engages in a broad range of securities underwritingand dealing, brokerage, investment advisory, and otheractivities.3

SoGen plans to transfer the business of Cowen toSociete Generale Securities Corporation, New York, NewYork ("SGSC"), a subsidiary of SoGen that engages in awide range of securities-related activities, including securi-ties underwriting and dealing.4 After consummation of theproposal, SGSC will change its name to SG Cowen Securi-ties Corporation, New York, New York ("SG Cowen").

1. As a foreign bank operating branches and an agency in the UnitedStates. SoGen is subject to certain provisions of the BHC Act byoperation of section 8(a) of the International Banking Act of 1978(12 U.S.C. § 3IO6(a)M"IBA").

2. Asset and foreign ranking data are as of December 31, 1997, andare based on foreign exchange conversion rates as of that date. Worldranking data are as of December 31,1996.

3. Cowen currently engages in certain insurance and real estateactivities and controls certain limited partnerships that have invest-ments that are not permissible for bank holding companies. SoGen hascommitted to conform the activities, investments, and relationships ofCowen to those permissible for bank holding companies within twoyears of acquiring Cowen.

4. SoGen controls SGSC pursuant to the "grandfather" provisionsof section 8(c) of the IBA (12 U.S.C. § 3106(c)). On consummation ofthe proposal. SoGen's grandfather rights relating to SGSC would end.



SG Cowen would continue to engage in most of the currentactivities of SGSC and the permissible activities of Cowen.

SGSC is currently and, after consummation of the pro-posal, SG Cowen will continue to be registered with theSecurities and Exchange Commission ("SEC") as abroker-dealer under the Securities Exchange Act of 1934(15 U.S.C. § 78a et seq.) ("1934 Act") and a member ofthe National Association of Securities Dealers, Inc.("NASD"). Accordingly, SGSC is and SG Cowen will besubject to the recordkeeping and reporting obligations,fiduciary standards, and other requirements of the 1934Act, the SEC, and the NASD.

Underwriting and Dealing in Bank-Ineligible Securities

The Board previously has determined that — subject to theframework of prudential limitations established in previousdecisions to address the potential for conflicts of interests,unsound banking practices, or other adverse effects — theproposed underwriting and dealing activities involvingbank-ineligible securities are so closely related to bankingas to be proper incidents thereto within the meaning ofsection 4(c)(8) of the BHC Act.5 The Board also hasdetermined that underwriting and dealing in bank-ineligiblesecurities is consistent with section 20 of the Glass-Steagall Act (12 U.S.C. § 377), provided that the companyengaged in the activity derives no more than 25 percent ofits gross revenues from underwriting and dealing in bank-ineligible securities.6

SoGen has committed that SG Cowen will conduct itsunderwriting and dealing activities using the methods andprocedures and subject to the prudential limitations estab-

5. See Canadian Imperial Bank of Commerce, et al., 76 FederalReserve Bulletin 158 (1990); J.P. Morgan & Co. Incorporated, et al,75 Federal Reserve Bulletin 192 (1989). aff'd sub nom. SecuritiesIndustries Ass'n v. Board of Governors of the Federal Reserve System,900 F.2d 360 (D.C. Cir. 1990); Citicorp, et al., 73 Federal ReserveBulletin 473 (1987), aff'd sub nom. Securities Industry Ass 'n v. Boardof Governors of the Federal Reserve System, 839 F.2d 47 (2d Cir.),cert, denied, 486 U.S. 1059 (1988); as modified by Review of Restric-tions on Director, Officer and Employee Interlocks, Cross-MarketingActivities, and the Purchase and Sale of Financial Assets Between aSection 20 Subsidiary and an Affiliated Bank or Thrift, 61 FederalRegister 57,679 (1996); Amendments to Restrictions in the Board'sSection 20 Orders, 62 Federal Register 45,295 (1997); and Clarifica-tion to the Board's Section 20 Orders, 63 Federal Register 14,803(1998) (collectively, "Section 20 Orders").

6. Compliance with the revenue limitation shall be calculated inaccordance with the method stated in the Section 20 Orders, asmodified by the Order Approving Modifications to the Section 20Orders, 75 Federal Reserve Bulletin 751 (1989), and 10 PercentRevenue Limit on Bank-Ineligible Activities of Subsidiaries of BankHolding Companies Engaged in Underwriting and Dealing in Securi-ties, 61 Federal Register 48,953 (1996) (collectively, "ModificationOrders"). SoGen has requested that SG Cowen be permitted tocalculate compliance with the revenue limitation on an annualizedbasis during the first year after consummation of the proposed acquisi-tion. The Board believes that allowing SG Cowen to calculate compli-ance with the revenue limitation on an annualized basis during the firstyear of its operations and thereafter on a rolling quarterly averagebasis is consistent with the Section 20 Orders. See Dauphin DepositCorporation, 11 Federal Reserve Bulletin 672 (1991).

lished by the Board in the Section 20 Orders and otherprevious cases. SoGen also has committed that Companywill conduct its bank-ineligible securities underwriting anddealing activities subject to the Board's revenue restriction.As a condition of this order, SoGen is required to conductits bank-ineligible securities activities subject to the reve-nue restrictions and Operating Standards established forsection 20 subsidiaries ("Operating Standards").7

Mutual Fund Activities

The Board previously has determined that providing ad-ministrative services to mutual funds is closely related tobanking within the meaning of section 4(c)(8) of the BHCAct.8 SoGen proposes to provide investment advisory, bro-kerage, and administrative services through SG Cowen thatpreviously have been approved by the Board, and SoGenhas committed that the proposed activities will be con-ducted in compliance with Regulation Y and subject to theprudential and other limitations established by the Board.9

Cowen provides administrative, advisory, brokerage, andother services to mutual funds. SoGen proposes that SGCowen would continue to provide these services to thefunds.10 However, SoGen has committed that distributionactivities of mutual funds would be the responsibility of anindependent distributor, which would enter into contractualagreements with the mutual funds to serve as "principalunderwriter."" The independent distributor also would beresponsible for supervising sales as the principal under-writer for purposes of the federal securities laws.12

7. 12 C.F.R. 225.200. SG Cowen may provide services that arenecessary incidents to the proposed underwriting and dealing activi-ties. Unless SG Cowen receives specific approval under section4(c)(8) of the BHC Act to conduct the activities independently, anyrevenues from the incidental activities must be treated as ineligiblerevenues subject to the Board's revenue limitation.

8. See, e.g., Bankers Trust New York Corporation, 83 FederalReserve Bulletin 780 (1997) ("BTNT'); Commenbank AG, 83 Fed-eral Reserve Bulletin 679 (1997).

9. See, e.g., BTNY. The administrative services that SoGen wouldprovide to mutual funds through SG Cowen and other SoGen subsid-iaries include computing the fund's financial data, maintaining andpreserving the records of the fund, providing office facilities andclerical support for the fund, and preparing and filing tax returns forthe funds. The services are listed in the Appendix.

10. The Board previously has determined that the Glass-SteagallAct does not prohibit a bank holding company from providing advi-sory and administrative services to a mutual fund. See 12 C.F.R.225.125. Although SoGen does not own a member bank, SoGen issubject to the limitations applicable to domestic banking organizationsunder the principle of national treatment. See, e.g., Canadian ImperialBank of Commerce, et al., 76 Federal Reserve Bulletin 158 (1990).

11. As defined under the Investment Company Act of 1940 ("1940Act"), a principal underwriter is any underwriter who, as principal,purchases from a mutual fund any security for distribution, or who asagent for such fund sells or has the right to sell the fund's securities toa dealer and/or to the public. 15 U.S.C. § 80a-2(a)(29).

12. An independent distributor would enter into any sales agree-ments with brokers or other financial intermediaries to sell shares ofmutual funds. The independent distributor also would have legalresponsibility under the rules of the NASD for the form and use of al)advertising and sales literature and also would be responsible for filingthese materials with the NASD or the SEC.



SoGen also proposes to have certain director and officerinterlocks with the funds. In particular, SoGen proposesthat up to 25 percent of the directors of a mutual fundwould be employees, officers, or directors of SoGen or oneof its subsidiaries, including SG Cowen. SoGen proposesthat one of these directors may serve as chairman of theboard of the fund. In addition, SoGen seeks to have up tothree directors, officers, or employees of SoGen or itssubsidiaries, including SG Cowen, serve as senior officersof the fund and have other SoGen personnel serve asjunior-level officers of the fund.13

The Board previously has authorized a bank holdingcompany and its nonbank subsidiaries to have limiteddirector and officer interlocks with mutual funds that thebank holding company advises and administers.14 In eachof these cases, the Board found that the funds would becontrolled by their independent directors.15 The Boardnoted that the independent directors would be responsiblefor the selection and review of the investment adviser, theunderwriter, and the other major service contractors of thefund.16

In this case, SoGen's personnel would not comprisemore than 25 percent of any fund's board of directors.Accordingly, all of the funds to which SoGen providesadvisory and administrative services would have boards ofdirectors in which 75 percent of the directors are unaffili-ated with SoGen, and the funds would be controlled bythose independent directors. In addition, any director of afund who also serves as a director, officer, or employee ofSoGen would be an "interested person" under the 1940Act and, therefore, would be required to abstain fromvoting on investment advisory and other major contracts ofthe fund.

The director and officer interlocks proposed by SoGenwould not appear to aifect the independence of the otherdirectors on the boards of directors for the funds. Theindependent members of the boards of directors wouldcontinue to have authority to review brokerage, advisory,administrative and other major contracts and would retainauthority to change the distributor of fund shares. Based onthe foregoing, the Board concludes that control of themutual funds would rest with the independent members ofthe boards of directors of the funds and that the proposed

13. Senior officers include the president, secretary, treasurer, andvice presidents with policy-making functions. Junior officers includeassistant secretaries, assistant treasurers, or assistant vice-presidents ofthe funds. Junior officers are fund employees who have no authority orresponsibility to make policy.

14. See, e.g.. BTNY; Lloyds TSB Group pic, 84 Federal ReserveBulletin 116 (1998); BankAmerka Corporation, 83 Federal ReserveBulletin 913 (1997); The Governor and Company of the Bank ofIreland, 82 Federal Reserve Bulletin 1129 (1996).

15. Under the 1940 Act, at least 40 percent of the board of directorsof a mutual fund must be individuals who are not affiliated with themutual fund, investment adviser, or any other major contractor to thefund.

16. The 1940 Act and related regulatory provisions require thatindependent directors annually review and approve the mutual fund'sinvestment advisory contract and any plan of distribution or relatedagreement.

director and officer interlocks would not compromise theindependence of the boards of the funds or permit SoGento control the funds.

Other Activities Approved by Regulation or Order

The Board previously has determined that making loans orother extensions of credit and engaging in activities relatedto extending credit, providing fiduciary services, providingfinancial and investment advisory services, providingagency transactional services for customer investments,underwriting and dealing in bank-eligible securities, engag-ing in investing and trading activities, providing cash man-agement services, and acting as general partner to privateinvestment limited partnerships that make investments thata bank holding company may make are all closely relatedto banking within the meaning of section 4(c)(8) of theBHC Act.17 SoGen has committed that it will conductthese activities in accordance with the limitations set forthin Regulation Y and the Board's orders and interpretationsrelating to each of the activities.


In order to approve the proposal, the Board also mustdetermine that the proposed activities are a proper incidentto banking, that is, that the proposed transaction "canreasonably be expected to produce benefits to the public. . . that outweigh possible adverse effects, such as undueconcentration of resources, decreased or unfair competi-tion, conflicts of interests, or unsound banking practices."18

As part of its evaluation of these factors, the Board consid-ers the financial and managerial resources of the notificant,its subsidiaries, and any company to be acquired, and theeffect the transaction would have on such resources.19

SoGen's capital ratios satisfy applicable risk-based stan-dards under the Basle Accord and are considered equiva-lent to the capital levels that would be required of a UnitedStates banking organization. The Board also has reviewedthe capitalization of SGSC and Cowen in accordance withthe standards set forth in the Section 20 Orders and findsthe capitalization of each to be consistent with approval.This determination is based on all the facts of record,including projections of the volume of SG Cowen's under-writing and dealing activities in bank-ineligible securities.The Board also has reviewed other aspects of the financialcondition and resources of SoGen, Cowen, and their re-spective subsidiaries, including the effect of the proposalon the financial condition and resources of these entities.

The Board also has reviewed the managerial resourcesof each of the entities involved in this proposal in light of

17. See 12 C.F.R. 225.28(b)(l), (2), (5), (6), (7), (8)(i), (8)(ii);Sovran Financial Corporation, 73 Federal Reserve Bulletin 225(19&7); Dresdner Bank AG, 84 Federal Reserve Bulletin 361 (1998).

18. See 12U.S.C. § 1843(c)(8).19. See 12 C.F.R. 225.26(b); see also The Fuji Bank, Limited, 75

Federal Reserve Bulletin 94 (1989); Bayerische Vereinsbank AG, 73Federal Reserve Bulletin 155 (1987).



examination reports and other supervisory information. Inconnection with the proposal, the Federal Reserve Bank ofNew York has reviewed the policies and procedures ofSoGen, SGSC, and Cowen to ensure compliance with thisorder and the Section 20 Orders, including computer, audit,and accounting systems, internal risk management con-trols, and the necessary operational and managerial infra-structure. On the basis of this review and the Board'ssupervisory experience with SoGen and SGSC, the com-mitments provided in this case, and the proposed manage-rial and risk management systems of SG Cowen, the Boardhas determined that financial and managerial consider-ations are consistent with approval.

The Board also has carefully considered the competitiveeffects of the proposal. SoGen represents that SGSC andCowen offer largely complementary services with fewoverlaps. To the extent that SGSC and Cowen offer differ-ent types of products and services, the proposed acquisitionwould result in no loss of competition. In those marketswhere the product offerings of SGSC and SoGen's othersubsidiaries and Cowen do overlap, there are numerousexisting and potential competitors. As a result, consumma-tion of the proposal would have a de minimis effect oncompetition for these services, and the Board has con-cluded that the proposal would not result in a significantlyadverse effect on competition in any relevant market.

Under the framework established in this and prior deci-sions, consummation of the proposal is not likely to resultin any significantly adverse effects, such as undue concen-tration of resources, decreased or unfair competition, con-flicts of interests, or unsound banking practices that out-weigh the public benefits of the proposal. The Boardexpects that the proposal would enable SoGen to competemore effectively, particularly in underwriting activities, byincreasing efficiencies and enabling SoGen to offer abroader range of products and services to its customers.

Accordingly, based on all the facts of record, the Boardhas determined that the balance of public benefits that itmust consider under the proper incident to banking stan-dard of section 4(c)(8) of the BHC Act is favorable andconsistent with approval of the proposal.

Conclusion

Based on the foregoing and all other facts of record, theBoard has determined that the notice should be, and herebyis, approved. This determination is subject to all the termsand conditions discussed in this order, including theBoard's reservation of authority to establish additionallimitations to ensure that SoGen's activities are consistentwith safety and soundness, conflicts of interests, and otherrelevant considerations under the BHC Act. Underwritingand dealing in any manner other than as approved in thisorder and the Section 20 Orders, as modified by the Modi-fication Orders, is not within the scope of the Board'sapproval and is not authorized for SG Cowen.

The Board's determination also is subject to all the termsand conditions set forth in Regulation Y, including those insections 225.7 and 225.25(c) of Regulation Y (12 C.F.R.

225.7 and 225.25(c)), and to require such modification ortermination of the activities of a bank holding company orany of its subsidiaries as the Board finds necessary toensure compliance with, and to prevent evasion of, theprovisions of the BHC Act and the Board's regulations andorders issued thereunder. The Board's decision is specifi-cally conditioned on compliance with all the commitmentsmade in connection with the notice and related correspon-dence, the conditions established in this order, and theBoard's regulations and other orders noted above. Thecommitments and conditions relied on by the Board inreaching this decision are deemed to be conditions im-posed in writing by the Board in connection with itsfindings and decision and, as such, may be enforced inproceedings under applicable law.

The proposal shall not be consummated later than threemonths after the effective date of this order, unless suchperiod is extended for good cause by the Board or by theFederal Reserve Bank of New York, acting pursuant todelegated authority.


Voting for this action: Chairman Greenspan, Vice Chair Rivlin, andGovernors Phillips, Meyer, and Gramlich. Absent and not voting:Governors Kelley and Ferguson.

ROBERT DEV. FRIERSON

Associate Secretary of the Board

Appendix

List of Administrative Services

1. Maintaining and preserving the records of mutualfunds, including financial and corporate records.

2. Computing net asset value, dividends, performancedata, and financial information regarding mutual funds.

3. Furnishing statistical and research data to mutualfunds.

4. Preparing and filing with the SEC and state securitiesregulators registration statements, notices, reports, andother materials required to be filed under applicablelaws.

5. Preparing reports and other informational materialsregarding mutual funds, including prospectuses, prox-ies, and other shareholder communications.

6. Providing legal and other regulatory advice to mutualfunds.

7. Providing office facilities and clerical support for mu-tual funds.

8. Developing and implementing procedures for monitor-ing compliance with regulatory requirements and com-pliance with mutual funds' investment objectives, pol-icies, and restrictions as established by the boards ofdirectors of the funds.

9. Providing routine accounting services to mutual fundsand liaison with outside auditors.

10. Preparing and filing tax returns, and monitoring taxcompliance.



11. Reviewing and arranging for payment of expenses formutual funds.

12. Providing communication and coordination serviceswith regard to mutual funds' investment advisers,transfer agent, custodian, distributor, and other serviceorganizations that render distribution, recordkeeping,or shareholder communication services.

13. Reviewing and providing advice to the distributor,mutual funds, and investment advisors regarding salesliterature and marketing plans for the mutual funds.

14. Providing information to the distributor's personnelconcerning performance and administration of mutualfunds.

15. Providing marketing support with respect to sales ofmutual funds through financial intermediaries.

16. Participating in seminars, meetings, and conferencesdesigned to present information concerning mutualfunds.

17. Assisting in the development of additional mutualfunds.

18. Providing reports to the board of directors of mutualfunds.

19. Providing telephone shareholder services through atoll-free number.

UBSAGZurich and Basel, Switzerland

Union Bank of SwitzerlandZurich, Switzerland

Order Approving Acquisition of Nonbanking Companiesand Establishment of U.S. Branches, Agencies, andRepresentative Offices

Union Bank of Switzerland ("UBS") and UBS AG ("NewUBS"), foreign banking organizations subject to the provi-sions of the Bank Holding Company Act ("BHC Act"),have requested the Board's approval under section 4(c)(8)of the BHC Act (12 U.S.C. § 1843(c)(8)) and section225.24 of the Board's Regulation Y (12 C.F.R. 225.24),and New UBS has applied under sections 5(a), 7(d), and10(a) of the International Banking Act (12 U.S.C.§§ 31O3(a), 31O5(d) and 3107(a)) ("IBA") and section211.24 of the Board's Regulation K (12 C.F.R. 211.24), inconnection with the proposed merger of UBS and SwissBank Corporation, Basel, Switzerland ("Swiss Bank").

The proposal involves the merger of two large foreignbanks that are predominantly engaged in banking activitiesoutside the United States and, particularly, in Switzerland.The banking and nonbanking operations of UBS and SwissBank in the United States represent a relatively smallproportion of their overall banking and nonbanking assets.The Swiss Federal Banking Commission ("Swiss BankingCommission") and the Swiss Federal Competition Com-mission, which are the primary supervisors of UBS andSwiss Bank, have approved the proposed merger of thebanks. The combination of UBS and Swiss Bank would beaccomplished through the merger of both banks into a

newly formed entity (New UBS) that currently is jointlyowned by UBS and Swiss Bank.1 New UBS would be thesurvivor of these mergers and, after consummation of thetransaction, would operate the current businesses of UBSand Swiss Bank.

In connection with these transactions, UBS and NewUBS (collectively, "Notificants") have sought the Board'sapproval under section 4(c)(8) of the BHC Act to acquirethe existing nonbanking subsidiaries of Swiss Bank, in-cluding SBC Warburg Dillon Read Inc., New York, NewYork ("SBC Warburg"). New UBS also has sought theBoard's approval under section 4(c)(8) of the BHC Act toacquire the existing nonbanking subsidiaries of UBS, in-cluding UBS Securities LLC, New York, New York ("UBSSecurities"). After consummation of the proposed transac-tion, New UBS proposes to conduct the following non-banking activities nationwide:

(1) Extending credit and servicing loans, in accor-dance with section 225.28(b)(l) of Regulation Y(12 C.F.R. 225.28(b)(l));

(2) Engaging in activities related to making, acquir-ing, brokering or servicing loans or other exten-sions of credit, including acquiring debt that is indefault at the time of acquisition, in accordancewith section 225.28(b)(2) of Regulation Y(12 C.F.R. 225.28(b)(2));

(3) Leasing personal or real property or acting asagent, broker, or adviser in leasing such property,in accordance with section 225.28(b)(3) of Regu-lation Y (12 C.F.R. 225.28(b)(3));

(4) Performing trust company functions, in accor-dance with section 225.28(b)(5) of Regulation Y(12 C.F.R. 225.28(b)(5));

(5) Providing financial and investment advisory ser-vices, in accordance with section 225.28(b)(6) ofRegulation Y (12 C.F.R. 225,28(b)(6));

(6) Providing securities brokerage, riskless principal,private placement, futures commission merchant,and other agency transactional services, in accor-dance with section 225.28(b)(7) of Regulation Y(12 C.F.R. 225.28(b)(7));

(7) Underwriting and dealing in government obliga-tions and money market instruments that statemember banks may underwrite or deal in under 12U.S.C. §§ 335 and 24(7) ("bank-eligible securi-ties"), engaging in investment and trading activi-ties, and buying and selling bullion, and relatedactivities, in accordance with section 225.28(b)(8)of Regulation Y (12 C.F.R. 225.28(b)(8));

1. Under the terms of the merger agreement, Swiss Bank will mergewith and into New UBS and, shortly thereafter, UBS will merge withand into New UBS. UBS has indicated that the merger of UBS intoNew UBS is expected to occur one business day after the merger ofSwiss Bank into New UBS. After consummation, current shareholdersof UBS would own approximately 60 percent of the shares of NewUBS, and current shareholders of Swiss Bank would own approxi-mately 40 percent of the shares of New UBS.



(8) Engaging in community development activities, inaccordance with section 225.28(b)(12) of Regula-tion Y (12 C.F.R. 225.28(b)(12));

(9) Serving as general partner of certain private in-vestment limited partnerships that invest in assetsin which a bank holding company is permitted toinvest; and

(10) Underwriting and dealing in, to a limited extent,all types of securities that a member bank may notunderwrite or deal in ("bank-ineligible securi-ties"), except for ownership interests in open-endinvestment companies.2

Swiss Bank currently operates two state-licensedbranches in New York, New York; a state-licensed branchin Chicago, Illinois, and Stamford, Connecticut; a federalbranch in San Francisco, California; a state-licensedagency in Miami, Florida; and a representative office inLos Angeles, California, and Houston, Texas.3 UBS cur-rently operates a federal branch in Los Angeles. California;a state-licensed branch and a limited state-licensed branchin New York, New York; a state-licensed agency in Hous-ton, Texas; and a representative office in San Francisco,California, and New York, New York.

Notice of the proposal under section 4 of the BHC Act,affording interested persons an opportunity to submit com-ments, has been published in the Federal Register (63Federal Register 6939, 9234 (1998)). In addition, notice ofthe application under the IBA, affording interested personsan opportunity to submit comments, has been published ina newspaper of general circulation in each community inwhich New UBS proposes to establish a branch, agency, orrepresentative office.4 The time for filing comments hasexpired, and the Board has considered the application andnotices and all comments received in light of the factors setforth in the BHC Act and the IBA.

UBS, with approximately $401 billion in consolidatedassets, is the 17th largest banking organization in theworld.5 Swiss Bank, with approximately $305 billion inconsolidated assets, is the 27th largest banking organiza-tion in the world. On consummation of the proposal. New

2. UBS, through UBS Securities, also currently engages in a varietyof nonbanking activities in the United States under grandfather rightsclaimed under section 8(c) of the IBA (12 U.S.C. § 3106(c)).

3. In addition, Swiss Bank has a subsidiary bank in Switzerland,Banca della Svizzera Italiana ("BSI"), that operates a limited state-licensed branch in New York. New York. New UBS has representedthat BSI will operate in the same corporate form after the merger.Accordingly, the Board views New UBS's application as fulfilling thenotice requirement under section 211.24(a)(4)(i) of Regulation K(12 C.F.R. 211.24(a)(4)(i)).

4. Notices were published in the following communities: Chicago,Illinois (The Chicago Sun-Times, March 23, 1998); Houston, Texas(The Houston Chronicle, March 23, 1998); Los Angeles, California(The Los Angeles Times, March 23, 1998); Miami, Florida (The MiamiHerald, March 23, 1998); New York, New York (The New York Post,March 23. 1998); San Francisco, California (The San FranciscoChronicle, March 23, 1998); and Stamford, Connecticut (The Advo-cate, March 23, 1998).

5. Asset data are as of December 31. 1997, and ranking data are asof December 31, 1996.

UBS would become the second largest banking organiza-tion in the world. UBS and Swiss Bank are qualifyingforeign banking organizations under section 211.23(b) ofthe Board's Regulation K (12 C.F.R. 211.23(b)), and NewUBS would become a qualifying foreign banking organiza-tion on consummation of the proposal.

Nonbanking Activities

The Board previously has determined that credit and credit-related activities; leasing activities; trust company activi-ties; financial and investment advisory activities; securitiesbrokerage, riskless principal, private placement, futurescommission merchant, and other agency transactional ac-tivities; bank-eligible securities underwriting and dealing,investment and trading, and buying and selling bullion andrelated activities; and community development activitiesare closely related to banking within the meaning of sec-tion 4(c)(8) of the BHC Act.6 In addition, the Boardpreviously has determined by order that private investmentlimited partnership activities are permissible for bank hold-ing companies.7 Notificants have committed that they willconduct each of these activities in accordance with thelimitations set forth in Regulation Y and the Board's ordersand interpretations relating to each of the activities.8

6. See 12 C.F.R. 225.28(b)(l), (2), (3), (5), (6), (7), (8), and (12).The Board received comments from Inner City Press/Community onthe Move ("ICP") contending that UBS Community DevelopmentCorporation ("UBS-CDC"), a nonbanking subsidiary of UBS autho-rized to engage in community development activities under Regula-tion Y. has not engaged in any community development activities andthat Notificants must disclose their future plans for the subsidiary. ICPalso alleges that UBS has not complied with the representations that itmade to the Federal Reserve System in connection with the establish-ment of UBS-CDC. Notificants have stated that UBS-CDC has madeinvestments consistent with its authority and have requested approvalto engage in community development activities in the future throughUBS-CDC. The Board notes that the Community Reinvestment Actby its terms does not apply to the section 4 notice and IBA applicationfiled by Notificants. Furthermore, based on all the facts of record,including a review by the Federal Reserve Bank of New York ofUBS's notice to establish UBS-CDC, the Board concludes that nomisrepresentations were made in connection with that notice.

7. See Dresdner Bank AC, 84 Federal Reserve Bulletin 361 (1998);Meridian Bancorp, Inc.. 80 Federal Resen-e Bulletin 736 (1994).Notificants also have requested approval to continue to trade inderivative products to the extent permissible for Swiss Bank underSwiss Bank Corporation, 81 Federal Reserve Bulletin 185 (1995).Notificants have committed to engage in such activities in accordancewith the commitments and limitations discussed in that order.

8. As a result of prior acquisitions, Swiss Bank currently controlsseveral limited partnerships that invest in debt and equity securitiesbeyond the levels permissible for bank holding companies undersection 4 of the BHC Act. Swiss Bank previously has committed toconform these relationships to the requirements of section 4 of theBHC Act within certain time limits. See Swiss Bank Corporation, 83Federal Reserve Bulletin 786 (1997) ("Swiss Bank 1997"), and Let-ters, dated March 28. 1995, and March 30, 1995, from John S.Cassidy, Assistant Vice President, Federal Reserve Bank of NewYork, to Mario Cueni. Notificants have committed to conform theserelationships to the requirements of section 4 within the time periodspreviously committed to by Swiss Bank.



Bank-Ineligible Securities Activities

Swiss Bank currently is engaged in underwriting and deal-ing in bank-ineligible securities, to a limited extent,through SBC Warburg.9 UBS also currently is engaged inunderwriting and dealing in bank-ineligible securitiesthrough UBS Securities in reliance on grandfather rightsestablished by section 8(c) of the 1BA.10 After consumma-tion of the proposal, SBC Warburg would be merged intoUBS Securities. Accordingly, New UBS has requestedapproval under section 4(c)(8) of the BHC Act for UBSSecurities to engage in underwriting and dealing in bank-ineligible securities, to a limited extent, after its mergerwith SBC Warburg.

UBS Securities is, and will continue to be, a broker-dealer registered with the Securities and Exchange Com-mission ("SEC"), a futures commission merchant regis-tered with the Commodity Futures Trading Commission("CFTC"), and a member of the National Association ofSecurities Dealers, Inc. ("NASD"). Accordingly, UBSSecurities would remain subject to the recordkeeping andreporting obligations, fiduciary standards, and other re-quirements of the Securities Exchange Act of 1934(15 U.S.C. § 78a el seq.), the Commodity Exchange Act(7 U.S.C. § 2 et seq.), the SEC, the CFTC, and the NASD.

The Board has determined that, subject to the frameworkof prudential limitations established in previous decisionsto address the potential for conflicts of interests, unsoundbanking practices, or other adverse effects, underwritingand dealing in bank-ineligible securities is so closely re-lated to banking as to be a proper incident thereto withinthe meaning of section 4(c)(8) of the BHC Act." TheBoard also has determined that underwriting and dealing inbank-ineligible securities is consistent with section 20 ofthe Glass-Steagall Act (12 U.S.C. § 377), provided thatthe company engaged in the activities derives no more than25 percent of its gross revenues from underwriting anddealing in bank-ineligible securities over a two-year peri-od.12 Notificants have committed that, following consum-

9. See Swiss Bank 1997.10. See 12 U.S.C. § 3106(c).11. See J.P. Morgan & Co. Inc., et. at, 75 Federal Reserve Bulletin

192 (1989), aff'd sub nom. Securities Industry Ass'n v. Board ofGovernors of the Federal Reserve System, 900 F.2d 360 (D.C. Cir.1990); Citicorp, 73 Federal Reserve Bulletin 473 (1987), aff'd subnom. Securities Industry Ass 'n v. Board of Governors of the FederalReserve System. 839 F.2d 47 (2d Cir.), cert, denied, 486 U.S. 1059(1988), as modified by Review of Restrictions on Director, Officer andEmployee Interlocks, Cross-Marketing Activities, and the Purchaseand Sale of Financial Assets Between a Section 20 Subsidiary and anAffiliated Bank or Thrift, 61 Federal Register 57.679 (1996), Amend-ments to Restrictions in the Board's Section 20 Orders, 62 FederalRegister 45,295 (1997V, and Clarification to the Board's Section 20Orders, 63 Federal Register 14,803 (1998) (collectively, "Section 20Orders'").

12. See Section 20 Orders. Compliance with the revenue limitationshall be calculated in accordance with the method stated in the Sec-tion 20 Orders, as modified by the Order Approving Modifications tothe Section 20 Orders, 75 Federal Reserve Bulletin 751 (1989), and10 Percent Revenue Limit on Bank-Ineligible Activities of Subsidiariesof Bank Holding Companies Engaged in Underwriting and Dealing in

mation of the transaction, UBS Securities will conduct itsbank-ineligible securities underwriting and dealing activi-ties subject to the 25-percent revenue limitation and theprudential limitations previously established by the Board,and this order is conditioned on compliance by Notificantswith the revenue restriction and Operating Standards estab-lished for section 20 subsidiaries.13

Comments on the Proposal

The Board received timely comments on the proposal froma member of the United States Senate, ICP, and two indi-viduals. Commenters contend that UBS and Swiss Bankhave failed to take adequate steps to locate and preservedocuments and other information relating to accounts andassets that may belong to victims of the Holocaust or theirheirs and to other accounts that have been dormant sincethe end of World War II. The commenters also contend thatUBS and Swiss Bank have acted improperly, fraudulently,or without sufficient alacrity in handling claims to accountsthat may be owned by victims of the Holocaust or theirheirs.14 In addition, the commenters contend that UBS andSwiss Bank have failed to cooperate with domestic andforeign governmental authorities, international organiza-tions, and private individuals that are seeking to obtaindocumentary and other information concerning accountsthat may belong to victims of the Holocaust or their heirsand resolve claims to such accounts.15

The Board also received comments from the New YorkState Banking Department ("NYSBD") detailing concernsthat the NYSBD initially had regarding the manner inwhich UBS and Swiss Bank have handled accounts ofvictims of the Holocaust or their heirs and the steps takenby the banks to address these concerns. The NYSBD hasindicated that in December 1997, Swiss Bank and its NewYork branch entered into a consent order with the NYSBD

Securities, 61 Federal Register 48,953 (1996); and Revenue Limit onBank-Ineligible Activities of Subsidiaries of Bank Holding CompaniesEngaged in Underwriting and Dealing in Securities, 61 FederalRegister 68,750 (1996) (collectively. "Modification Orders").

13. 12 C.F.R 225.200. UBS Securities may provide services that arenecessary incidents to the proposed underwriting and dealing activi-ties. Unless UBS Securities receives specific approval under sec-tion 4(c)(8) of the BHC Act to conduct the activities independently,any revenues from the incidental activities must be treated as ineligi-ble revenues subject to the Board's revenue limitation.

14. One commenter also contends that UBS and Swiss Bank servedas depositories for gold and other funds seized by the Nazi govern-ment from individuals and nations during World War II and otherwisecollaborated with the Nazis. This commenter contends that the bankshave sought to conceal their actions in this regard and to prevent thereturn of stolen assets.

15. One commenter also noted that several states and municipalitieshave threatened to terminate their relationships with Swiss banks ifthe banks do not take additional steps to resolve claims by victims ofthe Holocaust and their heirs and that UBS and Swiss Bank are partiesto several pending lawsuits concerning the disposition of assets thatmay belong to victims of the Holocaust or their heirs. The Board notesthat these lawsuits remain pending and that Swiss banks, includingUBS and Swiss Bank, recently have entered into negotiations with theplaintiffs and other parties to seek a negotiated and comprehensivesettlement of the pending actions.



that required Swiss Bank's New York branch to initiate anumber of steps designed to improve the branch's ability totrack and retrieve information concerning pre-1945 ac-counts and respond to inquiries from the NYSBD regard-ing such accounts. In April 1998, UBS and its New Yorkbranch entered into a similar consent order with theNYSBD.16 The NYSBD has stated that Swiss Bank andUBS are in compliance with the terms of the consentorders, and that the NYSBD believes that the managementof Swiss Bank and UBS are committed to cooperating withthe Department and ensuring the bank's continued compli-ance with the consent order. The NYSBD also has statedthat both banks have established extensive search and auditprocesses to identify and organize data relating to accountsfrom the wartime period and to investigate claims to suchaccounts. Based on its review of these and other actionstaken by UBS and Swiss Bank, the NYSBD has approvedthe proposed establishment by New UBS of the branchesand representative office of UBS and Swiss Bank in NewYork.

The Board also sought the views of the IndependentCommittee of Eminent Persons ("Volcker Commission"),an independent committee established to oversee a compre-hensive, investigative audit of Swiss banks, including UBSand Swiss Bank.17 The Volcker Commission audit processis designed to identify all dormant accounts or other finan-cial assets held by Swiss banks during the 1933-1945period that may belong to victims of Nazi persecution ortheir heirs ("dormant accounts").18 The Board notes thatSwiss law requires that all Swiss banks cooperate fullywith the audit being conducted by the Volcker Commis-sion, which is being conducted in two phases by four largeinternational audit firms retained by the Commission.

The Volcker Commission has stated that during the firstphase of the audit the Commission's auditors conducted apilot audit of Swiss Bank and a review of the programs at

16. The consent order requires that UBS and its New York branchcooperate with the NYSBD and its Holocaust Claims ProcessingOffice ("HCPO") and hire an independent accounting or consultingfirm to investigate, inventory, catalog, and review all documents heldby Swiss Bank relating to assets transferred by Swiss Bank to NewYork prior to and during World War II. The HCPO is a branch of theNYSBD established to assist Holocaust survivors and their heirsrecover assets held by Swiss banks.

17. One commenter contends, without providing any supportingevidence, that UBS illegally confiscated large quantities of gold andother financial assets from a number of individuals represented by thecommenter in violation of state, federal, and Swiss law. Commenterhas filed a lawsuit in U.S. district court to recover the assets thatallegedly were confiscated by UBS. The Board notes that there hasbeen no final adjudication of this lawsuit or finding of wrongdoing onthe part of UBS. The courts, moreover, have adequate authority toprovide commenter with redress if commenter's allegations can besupported.

18. The Volcker Commission was established in May 1996, under amemorandum of understanding between the Swiss Bankers Associa-tion ("SBA") and the World Jewish Congress. The Commissionconsists of seven persons, three of whom were selected by the WorldJewish Restitution Organization and three of whom were selected bythe SBA. The members jointly selected Paul A. Volcker to serve aschairman of the committee.

UBS for the retention of documents related to dormantaccounts.19 The Volcker Commission also has stated thatboth UBS and Swiss Bank cooperated with these investiga-tions. Furthermore, the Volcker Commission has indicatedthat the investigations concluded that Swiss Bank and UBShad adequate internal procedures to safeguard documentsrelated to dormant accounts under Swiss law.20

The second phase of the audit process, which currently isongoing, involves the on-site investigations of Swiss banksby the Volcker Commission auditors to locate and identifyall dormant accounts held by the banks. The VolckerCommission has stated that the auditors have been on-siteat UBS and Swiss Bank since September 1997 preparingfor and conducting the second phase of the audit and thatthe major elements of this phase are expected to be com-pleted by the end of 1998. In addition, the Volcker Com-mission has reported that both banks are cooperating withthe auditors and have devoted substantial personnel andphysical resources to assist the audit firms in locating,cataloging, and establishing databases of the documentaryrecords relating to dormant accounts.21

The Volcker Commission and the SBA also have jointlyestablished an independent Claims Resolution Tribunal toresolve all claims to dormant accounts opened by non-Swiss customers and identified on lists of dormant ac-counts published by the SBA in July and October 1997.22

The Claims Resolution Tribunal reviews claims to pub-

19. The pilot audit of Swiss Bank involved a preliminary investiga-tion into dormant accounts held by the bank as well as an investigationinto the bank's procedures for retaining documents that may relate todormant accounts. The document retention investigation at UBSexamined the bank's document retention policies and procedures,archive and storage procedures, document destruction procedures, anddormant account recordkeeping practices.

20. Swiss law prohibits Swiss banks from destroying any docu-ments that relate to accounts in existence prior to the end of WorldWar II, including dormant accounts that may belong to victims of theHolocaust or their heirs. Certain commenters contend that in January1997, a UBS employee improperly destroyed documents that wereprotected by Swiss law. These allegations have been investigated bySwiss authorities, who determined that no legal action against UBS orthe employee was warranted. UBS has stated that its management didnot order or authorize the destruction of documents by the employeeand has taken steps to prevent the destruction of protected documents.Furthermore, as noted above, the Volcker Commission's auditorsconcluded that UBS has adequate policies and procedures in place topreserve documents related to dormant accounts and protected bySwiss law.

21. The Swiss federal government also has established the SwissHistorical Commission — Second World War ("Bergier Commis-sion"), an independent commission charged with investigating theextent and fate of all assets that entered Switzerland as a result of theNazi regime, including assets owned by or seized from victims of theHolocaust. The Bergier Commission has the authority to review allrecords in the possession of the Swiss government and companiesrelevant to its investigation. The Bergier Commission recently pre-sented a detailed interim report to the Swiss government concerninggold transactions between Swiss entities, including the Swiss NationalBank and Swiss commercial banks, and the German Reichsbankduring World War II.

22. The published lists contained more than 5,000 names connectedwith dormant accounts identified by the Volcker Commission auditorsor independently by Swiss banks.



lished dormant accounts free of charge and uses relaxedstandards of proof that take into consideration the difficul-ties Holocaust victims or their heirs may have in presentingevidence of legal or beneficial ownership to an account.23

The Swiss Banking Commission has informed the Boardthat UBS and Swiss Bank have cooperated with the SwissBanking Commission, the SBA, and the Volcker Commis-sion during the claims resolution process, and that theSwiss Banking Commission is fully satisfied with the ef-forts of the two banks in connection with the ClaimsResolution Tribunal.24

The Board also sought the views of the United StatesDepartment of State on the matters raised by the comment-ers. Although the State Department stated that it took noposition on the merits of the proposal, the Departmentnoted that it has supported the several initiatives taken bythe Swiss government and Swiss banks to address theissues related to dormant accounts that may belong toHolocaust victims or their heirs and has expressed confi-dence that these initiatives and the commitments under-taken so far will be fully carried out. The State Departmentfurther noted that sanctions against Swiss banks are notjustified and would only retard ongoing progress on theseissues.

The Board has carefully reviewed the comments submit-ted by the commenters in light of all the facts of record,including the information received from the Volcker Com-mission, the State Department, UBS and Swiss Bank, andconfidential supervisory information received from theNYSBD and the Swiss Banking Commission.25 Althoughthe matters raised by commenters involve subjects of pub-lic concern, the Board believes that many of these mattersinvolve disputes that are not within the Board's limitedjurisdiction to adjudicate or do not relate to the factors thatthe Board may consider in reviewing an application ornotice under the BHC Act or the IBA.26 To the extent that

23. The Tribunal consists of 16 arbitrators from several countriesand is overseen by a Board of Trustees consisting of Mr. Volcker(Chairman), a member of the Swiss Parliament and a representative ofthe World Jewish Congress. The Volcker Commission has stated thatthe Tribunal is currently processing 6,000 of the 8,736 claims submit-ted.

24. One commenter raised questions concerning UBS and SwissBank's handling of three accounts that are included on the dormantaccount lists published by the SBA in 1997. The Board has consideredthese comments in light of confidential supervisory information re-ceived from the Swiss Banking Commission concerning the opening,handling, and closing of these accounts and actions taken by the banksto resolve claims to the accounts as well as information provided bythe NYSBD.

25. The NYSBD submitted confidential information to the Boardconcerning the Department's investigation into the activities of Swissbanks in New York State prior to and during World War II and theDepartment's supervisory experience with Swiss banks during theconduct of this investigation.

26. The factors that the Board may consider in reviewing anapplication under section 4 of the BHC Act and the IBA are limited bythose acts. Moreover, the Board previously has noted and the courtshave held that the Board's limited jurisdiction to review applicationsunder the BHC Act and the IBA does not authorize the Board toadjudicate disputes involving an applicant that do not arise under laws

the matters raised by commenters relate to the factors thatthe Board is authorized to consider, the Board concludes,based on all the facts of record and for the reasons dis-cussed above and in this order, including the cooperation ofUBS and Swiss Bank with the appropriate investigatingand supervisory authorities, that such matters do not war-rant denial of the proposal.

Evaluation under the IBA

In order to approve an application by a foreign bank toestablish a branch, agency, or representative office in theUnited States, the IBA and Regulation K require the Boardto determine that the foreign bank engages directly in thebusiness of banking outside the United States and hasfurnished to the Board the information it needs to assessthe application adequately. The Board also generally mustdetermine that the foreign bank is subject to comprehen-sive supervision or regulation on a consolidated basis by itshome country supervisor (12 U.S.C. § 3105(d)(2),(6);12 C.F.R. 211.24(c)(l)).27 The Board also may take intoaccount additional standards set forth in the IBA (12 U.S.C.§ 3105(d)(3), (4)) and Regulation K (12 C.F.R.211.24(c)(2)).

On consummation of the merger, New UBS would en-gage directly in the business of banking outside the UnitedStates through its banking operations in Switzerland andelsewhere. UBS, Swiss Bank, and New UBS have pro-vided the Board with the information necessary to assessthe application through submissions that address the rele-vant issues.

The Board also has carefully considered, in light of allthe facts of record and the comments received on theproposal, whether the foreign banks involved in the pro-posal are subject to comprehensive supervision or regula-tion on a consolidated basis.28 Regulation K provides that aforeign bank will be considered to be subject to compre-hensive supervision or regulation on a consolidated basis ifthe Board determines that the bank is supervised andregulated in such a manner that its home country supervi-sor receives sufficient information on the worldwide opera-tions of the foreign bank, including its relationship to anyaffiliate, to assess the bank's overall financial condition and

administered and enforced by the Board. See Nonvest Corporation, 82Federal Reserve Bulletin 580 (1996); see also Western Bancshares v.Board of Governors, 480 F.2d 749 (10th Cir. 1973).

27. In acting on an application to establish a representative office,the IBA and Regulation K provide that the Board shall take intoaccount whether the foreign bank is subject to comprehensive supervi-sion or regulation but a determination on this factor is not required.See 12 U.S.C. § 3107(a)(2); 12 C.F.R. 211.24(d)(2).

28. Certain commenters questioned whether UBS and Swiss Bankare subject to comprehensive consolidated supervision and regulationin light of the ongoing investigations into the banks' handling ofaccounts owned by victims of the Holocaust and claims to suchaccounts, and losses recently incurred by the equity derivatives busi-ness of UBS.



its compliance with law and regulation (12 C.F.R.

The primary supervisor of New UBS will be the SwissBanking Commission. The Board previously has deter-mined, in connection with applications under the IBAsubmitted by Swiss Bank and UBS, that both banks weresubject to home country supervision on a consolidatedbasis.30 The Board has determined that New UBS will besupervised by the Swiss Banking Commission on substan-tially the same terms and conditions as Swiss Bank andUBS. Based on all the facts of record, the Board hasconcluded that New UBS would be subject to comprehen-sive supervision and regulation on a consolidated basis byits home country supervisor.

The Board also has taken into account the additionalstandards set forth in the IBA (12 U.S.C. § 3105(d)(3), (4))and Regulation K (12 C.F.R. 211.24(c)(2)). The SwissBanking Commission has consented to the establishmentby New UBS of the branches, agencies, and representativeoffices in the United States referenced in this order. Inaddition, the record indicates that New UBS has estab-lished controls and procedures in each of the proposed U.S.offices to ensure compliance with applicable U.S. law, aswell as controls and procedures for its worldwide opera-tions generally.

With regard to access to information, the Board hasreviewed the restrictions on disclosure in relevant jurisdic-tions in which New UBS would operate and has communi-cated with relevant government authorities about access toinformation. New UBS has committed to make available tothe Board such information on the operations of New UBSand any affiliate of New UBS that the Board deems neces-sary to determine and enforce compliance with the IBA,the BHC Act, and other applicable federal law. To theextent that the provision of such information may be pro-hibited or impeded by law or otherwise, New UBS hascommitted to cooperate with the Board to obtain anynecessary consents or waivers that might be required fromthird parties in connection with disclosure of certain infor-mation. In addition, subject to certain conditions, the Swiss

29. In assessing this standard, the Board considers, among otherfactors, the extent to which the home country supervisors:

(i) Ensure that the bank has adequate procedures for monitor-ing and controlling its activities worldwide;

(ii) Obtain information on the condition of the bank and itssubsidiaries and offices through regular examination re-ports, audit reports, or otherwise;

(iii) Obtain information on the dealings with and relationshipbetween the bank and its affiliates, both foreign anddomestic;

(iv) Receive from the bank financial reports that are consoli-dated on a worldwide basis, or comparable informationthat permits analysis of the bank's financial condition ona worldwide consolidated basis; and

(v) Evaluate prudential standards, such as capital adequacyand risk asset exposure, on a worldwide basis.

These are indicia of comprehensive consolidated supervision; nosingle factor is essential and other elements may inform the Board'sdetermination.

30. See Swiss Bank Corp., 83 Federal Reserve Bulletin 214 (1997);Union Bank of Switzerland, 82 Federal Reserve Bulletin 370 (1996).

Banking Commission may share information on the opera-tions of New UBS with other supervisors, including theBoard. In light of these commitments and other facts ofrecord, and subject to the condition described below, theBoard has concluded that New UBS has provided adequateassurances of access to any necessary information theBoard may request.31

Establishment of Interstate Branches. Section 5(a) of theIBA establishes additional criteria that must be met for theBoard to approve the establishment of branches outside aforeign bank's home state. On consummation, New UBSwill designate Connecticut as its home state.32 New UBSproposes to establish the following branches outside Con-necticut: Swiss Bank's two state-licensed branches in NewYork, New York, and its state-licensed branch in Chicago,Illinois; and UBS's federal branch in Los Angeles, Califor-nia, and its state-licensed branch in New York, New York.

Under section 5(a) of the IBA (12 U.S.C. § 31O3(a)), asamended by section 104 of the Riegle-Neal InterstateBanking and Branching Efficiency Act of 1994 ("Riegle-Neal Act"), a foreign bank, with the approval of the Boardand the Office of the Comptroller of the Currency ("OCC")or the appropriate state banking supervisor, may establishand operate a branch in any state outside its home state tothe extent that a bank with the same home state as theforeign bank could do so under section 44 of the FederalDeposit Insurance Act ("FDI Act"). Section 44 of the FDIAct permits approval of a merger transaction under theBank Merger Act between banks with different homestates, provided that neither of the states has elected toprohibit interstate merger transactions. Connecticut andCalifornia law satisfy this requirement.33 All other applica-ble conditions of section 44 of the FDI Act also have beenmet by the proposal.34

The Board has determined that all of the other criteriareferred to in section 5(a)(3) of the IBA,35 including the

31. One commenter questioned whether New UBS has providedother appropriate commitments to the Board. New UBS has made thecommitments required in connection with its application.

32. Because Connecticut will be the home state of New UBS, NewUBS does not need approval under section 5(a) of the IBA to establishSwiss Bank's state-licensed branch in Stamford, Connecticut.

33. See Conn. Gen. Stat. Ann. § 36a-411 (West 1996); Cal. Fin.Code § 3754(c) (West 1998). Currently, Swiss Bank's home state isConnecticut, and UBS's home state is California.

34. Section 5(a) of the IBA requires that certain conditions ofsection 44 of the FDI Act be met in order for the Board to approve aninterstate banking transaction under section 5(a)(l) of the IBA. See12 U.S.C. § 31O3(a)(3)(C) (referring to sections 44(b)(l), 44(b)(3),and 44(b)(4) of the FDI Act (12 U.S.C. §§ 1831u(b)(l), (b)(3), and(b)(4)). The Board has determined that New UBS is in compliancewith state filing requirements. Community reinvestment consider-ations also are consistent with approval. As discussed more fullyelsewhere in this order, each of Swiss Bank and UBS was adequatelycapitalized as of the date the application was filed, and, on consumma-tion of this proposal, New UBS would continue to be adequatelycapitalized and adequately managed.

35. The Riegle-Neal Act provides that a bank resulting from aninterstate merger may, with Board approval, retain and operate, as abranch, any office that any bank involved in the merger transaction



criteria in section 7(d) of the IBA, have been met. Inparticular, the Board has determined, after consultationwith the Secretary of the Treasury, that the financial re-sources of New UBS are equivalent to those required for adomestic bank to receive approval for interstate branchingunder section 44 of the FDI Act. In view of all the facts ofrecord, the Board is permitted to approve the establishmentof interstate branches by New UBS under section 5(a) ofthe IBA.

Establishment of Agencies and Limited Branches. Undersection 5(a)(7) of the IBA (12 U.S.C. § 3103(a)(7)), asamended by section 104 of the Riegle-Neal Act, a foreignbank, with the approval of the Board, may establish anagency or limited branch outside its home state, providedthe establishment and operation of the agency or limitedbranch is expressly permitted by the state in which theagency or limited branch is to be established. Outside itshome state, New UBS proposes to establish a limitedfederal branch in San Francisco, California; a limited state-licensed branch in New York, New York; and a state-licensed agency in Miami, Florida, and Houston, Texas.Based on a review of the relevant law of each of thesestates, the Board has determined that New UBS may estab-lish the agencies and limited branches discussed above,subject to the condition that New UBS also receive theapproval of the OCC for the limited federal branch and ofthe relevant state supervisors for the two state-licensedagencies and the limited state-licensed branch.

Financial, Managerial, and Other Considerations

In order to approve the proposal, the Board also mustdetermine that the proposed nonbanking activities are aproper incident to banking, that is, that the proposed trans-action "can reasonably be expected to produce benefits tothe public . . . that outweigh possible adverse effects, suchas undue concentration of resources, decreased or unfaircompetition, conflicts of interests, or unsound bankingpractices."36 As part of its evaluation of these factors, andthe standard set forth in section 211.24(c) of Regulation K,the Board considers the financial condition and managerialresources of the notificant and its subsidiaries and the effectthe transaction would have on such resources.37 The Boardhas carefully considered the financial and managerial re-sources of the organizations involved in light of all thefacts of record, including comments received on the pro-posal,38 the responses of UBS and Swiss Bank, and confi-

was operating as a main office or branch immediately before themerger transaction. See 12 U.S.C. § I831u(d)(l). Therefore, NewUBS may retain and operate the state-licensed branches outside ofConnecticut currently being operated by Swiss Bank and UBS, pro-vided the criteria in section 5(a)(3) of the IBA have been met.

36. 12 U.S.C. § 1843(c)(8).37. See 12 C.F.R. 225.26; see also The Fuji Bank, Limited, 75

Federal Reserve Bulletin 94 (1989); Bayerische Vereinsbank, 73 Fed-eral Reserve Bulletin 155 (1987).

38. These comments include contentions that:(1) Merger-related costs will reduce the profits of New UBS;

dential examination and other supervisory information.The supervisory information considered by the Board in-cludes information provided by the Swiss Banking Com-mission and the Bank of England assessing the internalcontrols and risk-management policies and procedures thatwould govern the equity derivatives business of New UBSin London. After consummation of the proposal New UBSwill use the existing risk management policies, proceduresand systems of Swiss Bank in connection with the opera-tion of the bank's worldwide equity derivatives business,and the Board has considered the comments on the pro-posal in light of the Board's supervisory experience withthe risk management systems of Swiss Bank.

Switzerland is a signatory to the Basle risk-based capitalstandards, and Swiss risk-based capital standards meetthose established by the Basle Capital Accord. On consum-mation of the merger, the capital of New UBS would be inexcess of the minimum levels that would be required bythe Basle Capital Accord and is considered equivalent tothe capital that would be required of a U.S. banking organi-zation. New UBS, furthermore, appears to have the experi-ence and capacity to support its proposed branches, agen-cies, and representative offices in the United States.

The Board also has reviewed the capitalization of NewUBS, UBS, SBC Warburg, and UBS Securities in light ofthe standards set forth in the Section 20 Orders. The Boardfinds the capitalization of each to be consistent with ap-proval of the proposal and the Section 20 Orders. TheBoard's determination is based on all the facts of record,including New UBS's projections of the volume of bank-ineligible securities underwriting and dealing activities tobe conducted by UBS Securities.

The Board also has carefully reviewed the managerialresources of the organizations involved in light of examina-tion reports and the Board's supervisory experience withUBS, Swiss Bank, and SBC Warburg.39 The Board hasconsidered that Swiss Bank has established policies andprocedures to ensure compliance with this order and theSection 20 Orders, including computer, audit, and account-

(2) UBS has suffered large losses in its equity derivatives businessthat have not been fully disclosed by the bank;

(3) UBS does not have adequate internal controls to properlymanage its global equity derivatives business; and

(4) The financial resources of New UBS will be adversely af-fected by the boycott of Swiss banks by clients, states, andmunicipalities and pending litigation related to the banks'handling of accounts of Holocaust victims.

39. One commenter contended that Swiss Bank has improperlydenied his daughter access to funds held in an account at branch of thebank in Zurich, Switzerland, and that Swiss Bank has provided falseinformation to commenter and the Board concerning the current statusand monetary holdings of the account. The Board has forwarded thesecomments to the Swiss Banking Commission, which is the primarysupervisor of Swiss Bank's activities in Switzerland. The Board notesthat the Swiss Banking Commission has adequate supervisory author-ity to investigate commenter's claims and provide redress if theCommission determines that such action is necessary or appropriate.The Board also has considered commenter's contentions in light of allthe facts of record, including confidential examination and othersupervisory information assessing the managerial resources of SwissBank.



ing systems, internal risk management controls, and thenecessary operational and managerial infrastructure. NewUBS has stated that these policies and procedures will beused by UBS Securities following its merger with SBCWarburg to ensure compliance with this order and theSection 20 Orders. On the basis of these and all the facts ofrecord, including the commitments provided in this case,the proposed managerial structure and risk managementsystems of New UBS and UBS Securities, and informationreceived from the NYSBD, the Volcker Commission, andthe Swiss Banking Commission, the Board has concludedthat financial and managerial considerations are consistentwith approval of the notice.

The Board also has carefully considered the competitiveeffects of the proposed transaction under section 4 of theBHC Act. To the extent that UBS and Swiss Bank offerdifferent types of nonbanking products, the proposed acqui-sition would result in no loss of competition. In thosemarkets in which the nonbanking product offerings of UBSand Swiss Bank overlap, such as securities brokerage,underwriting and dealing in bank-ineligible securities, andinvestment advisory activities, there are numerous existingand potential competitors. Consummation of the proposal,therefore, would have a de minimis effect on competition inthe market for these services. Based on all the facts ofrecord, the Board has concluded that the proposal wouldnot result in any significantly adverse competitive effects inany relevant market.

As noted above, Notificants have committed that, follow-ing the proposed acquisition, UBS Securities will conductits bank-ineligible securities underwriting and dealing ac-tivities in accordance with the prudential framework estab-lished by the Board's Section 20 Orders. Under the frame-work and conditions established in this order and theSection 20 Orders, and based on all the facts of record, theBoard concludes that the underwriting and dealing activi-ties in bank-ineligible securities proposed by Notificantsare not likely to result in significantly adverse effects thatwould outweigh the public benefits. Similarly, the Boardconcludes that the conduct of the other proposed nonbank-ing activities by Notificants under the framework and con-ditions established in this order, prior orders and Regula-tion Y is not likely to result in any significantly adverseeffects that would outweigh the public benefits of theproposal.

The Board expects that the proposed acquisition wouldprovide added convenience to customers of both UBS andSwiss Bank. Notificants have indicated that the transactionwould allow the combined organization to expand therange of products and services available to customers ofUBS and Swiss Bank. Notificants also have stated that theproposed transaction would allow the combined organiza-tion to achieve economies of scale and operational efficien-cies through the combination of the distribution structure,product development efforts, and back office and techno-logical infrastructure of UBS and Swiss Bank. In addition,Notificants have stated that the transaction is expected toproduce cost savings, allow the combined organization tomore profitably allocate its equity, and permit the com-

bined organization to make additional banking and non-banking investments in the United States and overseas.Based on all the facts of record, the Board has determinedthat performance of the proposed activities by Notificantscan reasonably be expected to produce public benefits thatoutweigh any adverse effects of the proposal. Accordingly,the Board has determined that performance of the proposedactivities by UBS and New UBS is a proper incident tobanking for purposes of section 4(c)(8) of the BHC Act.

Grandfathered Nonbanking Activities

UBS currently engages through UBS Securities in mer-chant banking activities in the United States that are notpermissible under section 4 of the BHC Act.40 UBS claimsauthority to engage in these activities under section 8(c) ofthe IBA, which permits an eligible foreign bank to con-tinue to engage in nonbanking activities in the UnitedStates that the foreign bank conducted directly or throughan affiliate on July 26, 1978, or that were covered by anapplication filed by the foreign bank or an affiliate on orbefore July 26, 1978. New UBS has requested that it bepermitted to continue to engage in merchant banking activ-ities in the United States after consummation of the pro-posal in reliance on the grandfather rights provided insection 8(c) of the IBA.41

The Board believes that the grandfather rights providedby section 8(c) of the IBA should be construed narrowly toensure a fair competitive playing field to the extent consis-tent with statutory requirements. After careful review ofthe IBA in light of the facts of this case, the Boardconcludes that New UBS does not qualify for grandfatherrights under section 8(c) of the IBA and that any grandfa-ther rights that UBS currently may have under section 8(c)terminate on consummation of the proposal.42 In connec-tion with the proposal UBS will merge with and into NewUBS. Accordingly, after consummation, a new top-tiercorporate entity would exist, New UBS. Because New

40. 12 U.S.C. § 3106(c)(l). UBS filed an application with the SECto register UBS Securities as a broker-dealer prior to July 26, 1978.

41. ICP contends that UBS does not currently have grandfatherrights under section 8(c) of the IBA to engage in merchant bankingactivities in the United States, and that any grandfather rights thatUBS may have under section 8(c) of the IBA would terminate onconsummation of the proposal because Swiss Bank would be the truesurvivor of the proposed transaction. Alternatively, ICP requests thatthe Board hold a hearing and exercise its authority under section 8(c)to terminate the grandfather rights of UBS.

42. To sustain the argument that New UBS may make merchantbanking investments, New UBS must meet two requirements: thatUBS has grandfather rights to make merchant banking investmentsand that any such grandfather rights of UBS transfer to New UBS.New UBS argues that UBS has grandfather rights to make merchantbanking investments because UBS had applied to engage in securitiesbrokerage, underwriting, and dealing activities in the United States onthe grandfather date and that these activities have evolved in themarketplace since that time to include making merchant bankinginvestments. Consistent with principles of statutory construction, theBoard has narrowly interpreted grandfather rights and, in any event,for the reasons discussed in this order, has determined that New UBSis not entitled to any grandfather rights.



UBS is a newly formed entity, New UBS does not meet thecriteria for grandfather rights under section 8(c) of theIBA.43

Notificants contend, however, that any grandfather rightsthat UBS currently may have under section 8(c) of the IBAshould transfer to New UBS on consummation of theproposal. The Board previously has permitted one corpo-rate entity to receive the section 8(c) grandfather rights ofanother entity in the case of an internal corporate reorgani-zation of a foreign bank with grandfather rights.44 In thiscase, New UBS results from the merger of two large andnearly equal-sized foreign banking organizations and NewUBS would operate under the existing banking charter ofSwiss Bank, rather than UBS.45 After consummation of theproposal, a new organization (New UBS) will exist thatcontrols all of the existing banking and nonbanking assetscurrently owned by UBS and Swiss Bank and that, as aresult, will be significantly larger than UBS in terms ofassets, capital, market capitalization, and number of bank-ing and nonbanking offices in the United States and over-seas. Unlike the previous case, the shareholders of NewUBS will include a substantial number of shareholderswho did not own shares of UBS prior to the transaction,and current directors of Swiss Bank will represent50 percent of the board of directors of New UBS.46 NewUBS, moreover, is an entity that currently is jointly ownedby UBS and Swiss Bank and is not, as in the previous case,a company beneficially owned solely by the shareholdersof the grandfathered foreign company.47

Based on these and all the facts of record, and viewingthe proposed transaction as a whole, the Board concludes

43. To be eligible for grandfather rights under section 8(c) of theIBA, a foreign bank or other company must either (i) have operated abranch or agency in a state or controlled a commercial lendingcompany organized under state law on the date of enactment of theIBA, or (ii) have established a branch in a state after the date ofenactment of the IBA under an application that was filed on or beforeJuly 26, 1978. See 12 U.S.C. 3106(c)(l). New UBS did not operate abranch or agency in a state or control a commercial lending companyorganized under state law on the date of enactment of the IBA, nor didNew UBS have an application to establish a branch pending before astate on July 26, 1978.

44. See Letter from J. Virgil Mattingly, General Counsel of theBoard, to Allen I. Isaacson, Esq., dated March 8, 1989.

45. The Board also notes that New UBS has selected the currenthome state of Swiss Bank, rather than UBS. as its home state forpurposes of Federal banking laws.

46. In this case, 40 percent of the shares of New UBS would beowned by existing shareholders of Swiss Bank.

47. Notificants contend that the proposed transaction is similar to atransaction reviewed and permitted by the Board under section 4(f) ofthe BHC Act. See Letter from William W. Wiles, Secretary of theBoard, to Harvey N. Bock, Esq., dated May 28, 1997 (involvingmerger of Dean, Witter, Discover & Co. ("Dean Witter") and MorganStanley Group, Inc.). The statutory grandfather rights are not the sameunder section 8(c) of the IBA as under section 4(f) of the BHC Act,and the form and substance of the two transactions are different. Inthis transaction, for example. UBS will merge with and into NewUBS, the corporate existence of UBS will cease after consummationof the proposal, and New UBS will operate under the banking charterof a nongrandfathered company (Swiss Bank), while in the DeanWitter transaction, the company with grandfather rights (Dean Witter)was at all times the ultimate parent and surviving company.

that New UBS does not qualify for grandfather rights toengage in nonbanking activities in the United States undersection 8(c) of the IBA. Section 8 of the IBA grants atwo-year period in which to conform nonbanking activitiesconducted under that section.48 Accordingly, New UBSmust conform all investments made in reliance on sec-tion 8(c) of the IBA to the requirements of the BHC Actwithin two years of the date of this order.

Conclusion

On the basis of all the facts of record, the Board hasdetermined that the notice and application should be, andhereby are, approved, subject to all the terms and condi-tions in this order and the Section 20 Orders, as modifiedby the Modification Orders.49

The Board's approval of the nonbanking aspects of theproposal extends only to activities conducted within thelimitations of those orders and this order, including theBoard's reservation of authority to establish additionallimitations to ensure that Notificants' activities are consis-tent with safety and soundness, avoidance of conflicts ofinterests, and other relevant considerations under the BHCAct. Underwriting and dealing in any manner other than asapproved in this order and the Section 20 Orders (asmodified by the Modification Orders) is not within thescope of the Board's approval and is not authorized forUBS Securities. The Board's determination is subject to allthe terms and conditions set forth in Regulation Y, includ-ing those in sections 225.7 and 225.25(c) of Regulation Y(12 C.F.R. 225.7 and 225.25(c)), and to the Board's author-ity to require such modification or termination of theactivities of a bank holding company or any of its subsid-iaries as the Board finds necessary to ensure compliancewith, and to prevent evasion of, the provisions of the BHCAct and the Board's regulations and orders issued thereun-der.

In addition, should any restrictions on access to informa-tion on the operations or activities of New UBS or any ofits affiliates subsequently interfere with the Board's ability

48. See 12 U.S.C. § 3106(c)(2).49. Certain commenters contend that the Board should delay action

on the proposal until other authorities, organizations or independentcommissions, including the Volcker Commission, complete their in-vestigations into matters related to the retention and disposition bySwiss banks of assets owned by Holocaust victims, or should conductits own investigation into these matters. One commenter also contendsthat the Board should conduct an investigation into the global deriva-tives activities of UBS. The Board is required under applicable lawand its regulations to act on applications submitted under the BHC Actand the IBA within specified time periods. As discussed above, theBoard has carefully reviewed the record in this case, including infor-mation received from the Volcker Commission, the State Departmentand the NYSBD and confidential examination and other supervisoryinformation assessing the financial and managerial resources of theorganizations involved, in light of the Board's limited jurisdictionunder the BHC Act and the IBA. Based on all the facts of record, theBoard concludes that the record is sufficient to act on this proposalunder the factors the Board is required to consider under the relevantstatutes and that delay of this proposal or an independent investigationby the Board is not warranted.



to determine and enforce compliance by New UBS or itsaffiliates with applicable federal statutes, the Board mayrequire termination of any of the direct or indirect activitiesof New UBS in the United States or, in the case of an officelicensed by the OCC, recommend termination of suchoffice.

The Board's decision is specifically conditioned on com-pliance with all the commitments made in connection withthis notice and application, including the commitmentsdiscussed in this order, and the conditions set forth in thisorder and the above-noted Board regulations and orders.™These commitments and conditions are deemed to be con-ditions imposed in writing by the Board in connection with

50. The Board's authority to approve the establishment of theproposed offices parallels the continuing authority of the OCC tolicense federal offices, or of the various states to license state offices,of a foreign bank. The Board's approval of this application does notsupplant the authority of the OCC to license the federal offices of New

its findings and decision, and, as such, may be enforced inproceedings under applicable law.

The proposal shall not be consummated later than threemonths after the effective date of this order, unless suchperiod is extended for good cause by the Board or by theFederal Reserve Bank of New York, acting pursuant todelegated authority.


Voting for this action: Chairman Greenspan and Governors Kelley,Meyer, Ferguson, and Gramlich. Absent and not voting: Vice ChairRivlin and Governor Phillips.


UBS or the authority of the various states and their agents, therelevant state supervisors, to license the various state offices, inaccordance with any terms or conditions that the OCC or the relevantstate supervisors, as the case may be. may impose.

APPLICATIONS APPROVED UNDER BANK HOLDING COMPANY ACT

By the Secretary of the Board

Recent applications have been approved by the Secretary of the Board as listed below. Copies are available upon request tothe Freedom of Information Office, Office of the Secretary, Board of Governors of the Federal Reserve System,Washington, D.C. 20551.

Section 3

Applicant(s) Bank(s) Effective Date

BankFirst Corporation,Knoxville, Tennessee

Compass Bancshares, Inc..Birmingham, Alabama

First American Corporation,Nashville, Tennessee

Norwest Corporation,Minneapolis, Minnesota

First Franklin Bancshares, Inc., June 3, 1998Athens, Tennessee

First National Bank and Trust Company,Athens, Tennessee

Compass Banks of Texas, Inc., June 25, 1998Birmingham, Alabama

Compass Bancorporation of Texas, Inc.,Wilmington, Delaware

Hill Country Bank,Austin, Texas

Peoples Bank, June 5, 1998Dickson, Tennessee

MidAmerica Bancshares, Inc., June 2, 1998Newport, Minnesota

Minnesota Bancshares, Inc.,Newport, Minnesota

Wisconsin Bancshares, Inc.,Newport, Minnesota

Charter Bancorporation, Inc.,Scottsdale, Arizona

The Bank of New Mexico HoldingCompany,Albuquerque, New Mexico



Section 4


Norwesl Corporation,Minneapolis, Minnesota

Norwest Corporation,Minneapolis, Minnesota

Norwest Financial Services, Inc,Des Moines, Iowa

Norwest Financial, Inc.,Des Moines, Iowa

State Street Corporation,Boston, Massachusetts

SSB Investments, Inc.,Boston, Massachusetts

Emjay Corporation,Milwaukee, Wisconsin

Fidelity Funding, Inc.,Dallas, Texas

Askari, Inc.,New York, New York

June 3, 1998

June 30, 1998

June 23, 1998

Sections 3 and 4


Mercantile Bancorporation Inc.,St. Louis, Missouri

Ameribanc, Inc.,St. Louis, Missouri

Firstbank of Illinois Company,Springfield, Illinois

June 2, 1998

By Federal Reserve Banks

Recent applications have been approved by the Federal Reserve Banks as listed below. Copies are available upon request tothe Reserve Banks.

Section 3

Applicant(s)

1st Brookfield, Inc. Employee StockOwnership Plan,Brookfield, Illinois

Avon State Bank Employee StockOwnership Plan and Trust,Avon, Minnesota

BB&T Corporation,Winston-Salem, North Carolina

Cambridge Financial Group, Inc.,Cambridge, Massachusetts

Central Bancompany, Inc.,Jefferson City, Missouri

Central Trust Company,Lander, Wyoming

CNB Holdings, Inc.,Atlanta, Georgia

ComBanc, Inc.,Delphos, Ohio

Bank(s)

1st Brookfield, Inc.,Brookfield, Illinois

The First National Bank of Brookfield,Brookfield, Illinois

Avon Bancshares, Inc.,Avon, Minnesota

BB&T Bankcard Corporation,Columbus, Georgia

Cambridge Savings Bank,Cambridge, Massachusetts

Higginsville Bancshares, Inc.,Higginsville, Missouri

First State Bank of Higginsville/Odessa,Higginsville, Missouri

VH Bancorporation,Edina, Minnesota

Chattahoochee National Bank,Alpharetta, Georgia

The Commercial Bank,Delphos, Ohio

Reserve Bank

Chicago

Minneapolis

Richmond

Boston

St. Louis

Kansas City

Atlanta

Cleveland

Effective Date

May 29, 1998

May 28, 1998

May 22, 1998

June 19, 1998

June 17, 1998

June 1, 1998

May 29, 1998

June 12, 1998



Section 3—Continued

Applicant(s) Bank(s) Reserve Bank Effective Date

Commerce Bancorp, Inc.,Cherry Hill, New Jersey

Community Bankshares, Inc.,Orangeburg, South Carolina

Community First Bankshares, Inc.,Fargo, North Dakota

Dauphin Bancorp, Inc.,Harrisburg, Pennsylvania

Diamond Bancorp, Inc.,Washington, Missouri

Exchange Bancshares, Inc.,Luckey, Ohio

Farmers Bancshares, Inc.,Lincoln, Kansas

First Commerce Bancshares, Inc.,Lincoln, Nebraska

First National Bank at St. JamesESOP,St. James, Minnesota

First TeleBanc Corporation,Sanford, Florida

Florida Banks, Inc.,Jacksonville, Florida

Frandset Financial Corporation,Forest Lake, Minnesota

Gold Bane Corporation,Leawood, Kansas

Guaranty Capital Corporation,Belzoni, Mississippi

Heritage Financial Corporation,Olympia, Washington

Hometown Bancshares, Inc.,Middlebourne, West Virginia

InterWest Bancorp, Inc.,Oak Harbor, Washington

The K&Z Company, LLC,Brooklyn, New York

Merchants Holding Company,Winona, Minnesota

Commerce Bank/Delaware, NationalAssociation,Wilmington, Delaware

Florence National Bank,Florence, South Carolina

Western Bancshares of Las Cruces, Inc.,Carlsbad, New Mexico

First National Bank of Liverpool,Liverpool, Pennsylvania

Cardinal Bancorp II, Inc.,St. Louis, Missouri

United Bank of Union,Union, Missouri

Towne Bank,Perrysburg, Ohio

The Exchange Bank,Luckey, Ohio

Beverly Bankshares, Inc.,Beverly, Kansas

Beverly State Bank,Beverly, Kansas

Western Nebraska National Bank,Valentine, Nebraska

First National Agency at St. James, Inc.,St. James, Minnesota

Boca Raton First National Bank,Boca Raton, Florida

First National Bank of Tampa,Tampa, Florida

Taylor Bancshares, Inc.,North Mankato, Minnesota

Farmers State Bancshares of Sabetha,Inc.,Sabetha, Kansas

Hollandale Capital Corporation,Hollandale, Mississippi

Bank of Hollandale,Hollandale, Mississippi

North Pacific Bancorporation,Tacoma, Washington

North Pacific Bank,Tacoma, Washington

Union Bank of Tyler County,Middlebourne, West Virginia

Pacific Northwest Bank,Seattle, Washington

The Upstate National Bank,Lisbon, New York

BRAD, Inc.,Black River Falls, Wisconsin

Black River Country Bank,Black River Falls, Wisconsin

Philadelphia June 22, 1998

Richmond

Minneapolis

Philadelphia

St. Louis

Cleveland

Atlanta

Atlanta

Minneapolis

Kansas City

St. Louis

Cleveland

San Francisco

New York

Minneapolis

May 28, 1998

June 10, 1998

June 16, 1998

June 17, 1998

June 18, 1998

Kansas City June 11, 1998


Minneapolis June 16, 1998

June 15, 1998

June 17, 1998

June 24, 1998

June 18, 1998

May 22, 1998

San Francisco May 28, 1998

June 1, 1998

May 20, 1998

June 15, 1998

June 17, 1998





M.I.F. Limited,Chisholm, Minnesota

NW Bancorp Inc.,Prospect Heights, Illinois

Ploetz Investments LimitedPartnership,Prairie du Sac, Wisconsin

Portage Bancshares, Inc.,Ravenna, Ohio

Premier Financial Bancorp, Inc..Georgetown, Kentucky

Premier Financial Bancorp, Inc..Georgetown, Kentucky

PSB Bancorp, Inc.,Philadelphia, Pennsylvania

Regions Financial Corporation,Birmingham, Alabama




Rigler Investment Co.,New Hampson, Iowa

RVB Bancshares, Inc.,Russellville, Arkansas

Salisbury Bancorp, Inc.,Lakeville, Connecticut

Spring Hill Holdings Corporation,Longview, Texas

Spring Hill (Delaware), Inc.,Wilmington, Delaware

Star Bane Corporation,Cincinnati, Ohio

Town Bankshares, Ltd.,Delafield, Wisconsin

Triangle Bancorp, Inc.,Raleigh, North Carolina

UB&T Financial ServicesCorporation,Rockmart, Georgia

Chisholm Bancshares, Inc.,Chisholm, Minnesota

Billage Bank and Trust,North Barrington, Illinois

Bank of Prairie du Sac,Prairie du Sac, Wisconsin

Portage Community Bank,Ravenna, Ohio

The Bank of Philippi, Inc.,Philippi, West Virginia

Boone County Bank, Inc.,Madison, West Virginia

Pennsylvania Savings Bank,Philadelphia, Pennsylvania

Etowah Bank,Canton, Georgia

First Community Banking Services,Peachtree City, Georgia

First Community Bank,Peachtree City, Georgia

Jacobs Bank,Scottsboro, Alabama

Villages Bankshares, Inc.,Tampa, Florida

The Village Bank of Florida,Tampa, Florida

Figge Bancshares, Inc.,Ossian, Iowa

River Valley Bank,Russellville, Arkansas

Salisbury Bank and Trust Company,Lakeville, Connecticut

Spring Hill State Bank,Longview, Texas

Trans Financial, Inc.,Bowling Green, Kentucky

Trans Financial Bank, NationalAssociation,Bowling Green, Kentucky

Trans Financial Bank Tennessee,National Association,Nashville, Tennessee

Delafield State Bank,Delafield, Wisconsin

United Federal Savings Bank,Rocky Mount, North Carolina

United Bank & Trust Company,Rockmart, Georgia

Minneapolis

Chicago

Chicago

Cleveland

Cleveland

Cleveland

Philadelphia

Atlanta

Atlanta

June

May

June

May

June

June

June

June

June

24, 1998

29, 1998

12, 1998

28, 1998

9, 1998

10, 1998

15, 1998

11, 1998

11, 1998

Atlanta

Atlanta

Cleveland

June 11, 1998

June 11, 1998

Chicago

St. Louis

Boston

Dallas

June 10, 1998

June 25, 1998

June 18, 1998

June 24, 1998

May 29, 1998

Chicago June 19, 1998

Richmond June 24, 1998

Atlanta May 22, 1998





Union Bankshares Corporation,Bowling Green, Virginia

Union Planters Corporation,Memphis, Tennessee

Union Planters Holding Corporation,Memphis, Tennessee

United Security Bancorporation,Spokane, Washington

WTSB Bancorp, Inc.,Snyder, Texas

WTSB Delaware Bancorp, Inc.,Dover, Delaware

Rappahannock Bankshares, Inc.,Washington, Virginia

The Rappahannock National Bank ofWashington,Washington, Virginia

Alvin Bancshares, Inc.,Alvin, Texas

Alvin Bancshares Delaware, Inc.,Alvin, Texas

Alvin State Bank,Alvin, Texas

Grant National Bank,Ephrata, Washington

West Texas State Bank,Snyder, Texas

Richmond June 11, 1998

St. Louis June 10, 1998

San Francisco June 24, 1998

Dallas June 15, 1998

Section 4

Applicant(s) Nonbanking Activity/Company Reserve Bank Effective Date

The Bank of Nova Scotia,Toronto, Ontario, Canada

The Bank of Nova Scotia New YorkTrust Company,New York, New York

BB&T Corporation,Winston-Salem, North Carolina

CITBA Financial Corporation,Mooresville, Indiana

CBOT Financial Corporation,New Waverly, Texas

CBOT Financial Corporation ofDelaware,Wilmington, Delaware

FirstMerit Corporation,Akron, Ohio

Great Southern Bancorp, Inc.,Springfield, Missouri

Investors Financial Services Corp.,Boston, Massachusetts

Orchard Valley FinancialCorporation,Englewood, Colorado

American Securities Transfer & TrustIncorporated,Denver, Colorado

Dealers Credit, Incorporated,Menomonee Falls, Wisconsin

Independent Bankers Life InsuranceCompany of Indiana,Phoenix, Arizona

CBOT Mortgage,Conroe, Texas

Security First Corp.,Mayfield Heights, Ohio

Great Southern Bank, FSB,Springfield, Missouri

Great Southern Capital Management,Inc.,Springfield, Missouri

AMT Capital Services, Inc.,New York, New York

AMT Capital Advisors, Inc.,New York, New York

MegaBank Financial Corporation,Englewood, Colorado

MegaBank,Englewood, Colorado

New York May 29, 1998

Richmond May 28, 1998

Chicago June 12, 1998

Dallas

Boston

June 22, 1998

Cleveland June 17, 1998

St. Louis June 15, 1998

May 29, 1998






Palm Desert Investments,Palm Desert, California

Republic Bancshares, Inc.,St. Petersburg, Florida

Republic Bancshares, Inc.,St. Petersburg, Florida

United Community Bancshares, Inc.,Eagan, Minnesota

To engage de novo, directly, in an San Francisco June 9, 1998incidental data processing activity

Bankers Savings Bank, FSB, Atlanta June 4, 1998Coral Gables, Florida

Republic Bank, F.S.B., Atlanta June 15, 1998St. Petersburg, Florida

United Trust Company, National Minneapolis June 24, 1998Association,Eagan, Minnesota

Sections 3 and 4


FMB Bankshares, Inc.,Madison, South Dakota

Canton Bancshares, Inc.,Canton, South Dakota

First American Bank, Canton,South Dakota

Fairview Insurance Agency,Canton, South Dakota

Minneapolis June 3, 1998

APPLICATIONS APPROVED UNDER BANK MERGER ACT

By the Secretary of the Board

Recent applications have been approved by the Secretary of the Board as listed below. Copies are available upon request tothe Freedom of Information Office, Office of the Secretary, Board of Governors of the Federal Reserve System,Washington, D.C. 20551.


Bank of Cushing and Trust Company,Cushing, Oklahoma

Compass Bank,Houston, Texas

BancFirst,Oklahoma City, Oklahoma

Compass Bancorporation of Texas, Inc.,Wilmington, Delaware

Hill Country Bank,Houston, Texas

June 29, 1998

June 25, 1998



By Federal Reserve Banks

Recent applications have been approved by the Federal Reserve Banks as listed below. Copies are available upon request tothe Reserve Banks.


Alpha Community Bank,Washburn, Illinois

The Bank of Belton,Belton, South Carolina

Colonial Bank,Montgomery, Alabama

The First Security Bank,Fort Lupton, Colorado

Peninsula Trust Bank,Gloucester, Virginia

Huron Community Bank,East Tawas, Michigan

RCB Bank,Claremore. Oklahoma

Republic Security Bank,West Palm Beach, Florida

Triane Bank,Raleigh, North Carolina

Wesbanco Bank Wheeling,Wheeling, West Virginia

Western Bank of Cody,Cody, Wyoming

WestStar Bank,Vail, Colorado

Citizens National Bank of Toluca, Chicago May 28, 1998Toluca, Illinois

Minonk State Bank,Minonk, Illinois

Carolina First Bank, Richmond May 29, 1998Greenville, South Carolina

Commercial National Bank, Atlanta June 10, 1998Daytona Beach, Florida

The First Security Bank, Kansas City May 27, 1998Craig, Colorado

First Virginia Bank-Commonwealth, Richmond June 11, 1998Grafton, Virginia

First of America Bank, Chicago June 22, 1998Kalamazoo, Michigan

Bank of Inola, Kansas City June 2, 1998Broken Arrow, Oklahoma

UniFirst Federal Savings Bank, Atlanta May 21. 1998Hollywood, Florida

United Federal Savings Bank, Richmond June 24, 1998Rocky Mount, North Carolina

Wesbanco Bank Barnesville, Cleveland June 3, 1998Barnesville, Ohio

First National Bank, Kansas City May 26, 1998Worland, Wyoming

Glenwood Independent Bank, Kansas City June 10, 1998Glenwood Springs, Colorado

PENDING CASES INVOLVING THE BOARD OF GOVERNORS

This list of pending cases does not include suits against theFederal Reserve Banks in which the Board of Governors is notnamed a party.

Board of Governors v. Carrasco, No. 98 Civ. 3474 (LAK)(S.D.N.Y., filed May 15, 1998). Action to freeze assets ofindividual pending administrative adjudication of civilmoney penalty assessment by the Board. On May 26, 1998,the court issued a preliminary injunction restraining thetransfer or disposition of the individual's assets and appoint-ing the Federal Reserve Bank of New York as receiver forthose assets.

Research Triangle Institute v. Board of Governors, No. 97-1719 (U.S. Supreme Court, filed April 28, 1998). Petitionfor writ of certiorari to review dismissal by the UnitedStates Court of Appeals for the Fourth Circuit of a contractclaim against the Board.

Inner City Press/Community on the Move v. Board of Gover-nors, No. 97-1514 (U.S. Supreme Court, filed March 12,1998). Petition for writ of certiorari to review dismissal by

the United States Court of Appeals for the District ofColumbia Circuit of a petition for review of a Board orderdated May 14, 1997, approving the application of Bane OneCorporation, Inc., Columbus, Ohio, to merge with FirstUSA, Inc., Dallas, Texas. On June 22, 1998, the SupremeCourt denied certiorari.

Logan v. Greenspan, No. l:98CV00049 (D.D.C., filed Janu-ary 9, 1998). Employment discrimination complaint.

Goldman v. Department of the Treasury, No. 1-97-CV-3798(N.D. Ga., filed December 23, 1997). Declaratory judgmentaction challenging Federal Reserve notes as lawful money.On March 2, 1998, the Board filed a motion to dismiss theaction.

Kerr v. Department of the Treasury, No. CV-S-97-01877-DWH (S.D. Nev., filed December 22, 1997). Challenge toincome taxation and Federal Reserve notes.

Allen v. Indiana Western Mortgage Corp., No. 97-7744 RJK(CD. CaL, filed November 12, 1997). Customer disputewith a bank.



Patrick v. United States, No. 97-75564 (E.D. Mich., filedNovember 7, 1997). Action for damages arising out of taxdispute.

Leuthe v. Office of Financial Institution Adjudication, No.97-1826 (3d Cir., filed October 22, 1997). Appeal of districtcourt dismissal of action against the Board and other Fed-eral banking agencies challenging the constitutionality ofthe Office of Financial Institution Adjudication. On June 8,1998, the court of appeals affirmed the district court'sdismissal of the action.

Patrick v. United States, No. 97-75017 (E.D. Mich., filedSeptember 30, 1997). Action for damages arising out of taxdispute.

Artis v. Greenspan, No. 97-5235 (D.C. Cir, filed Septem-ber 19, 1997). Appeal of district court order dismissingemployment discrimination class action.

Towe v. Board of Governors, No. 97-71143 (9th Cir., filedSeptember 15, 1997). Petition for review of a Board orderdated August 18, 1997, prohibiting Edward Towe andThomas E. Towe from further participation in the bankingindustry.

In re: Subpoena Duces Tecum Served on the Office of theComptroller of the Currency, No. 97-5229 (D.C. Cir, filedSeptember 12, 1997). Appeal of district court order denyingmotion to compel production of pre-decisional supervisorydocuments and testimony sought in connection with anaction by Bank of New England Corporation's trustee inbankruptcy against the Federal Deposit Insurance Corpora-tion. On June 26, 1998, the court of appeals reversed andremanded the case to the district court.

Clarkson v. Greenspan, No. 97-CV-2035 (D.D.C., filed Sep-tember 5, 1997). Freedom of Information Act case. OnJanuary 20, 1998, the Board filed a motion to dismiss theaction.

Bettersworth v. Board of Governors, No. 97-CA-624 (W.D.Tex., filed August 21, 1997). Privacy Act case.

Wilkins v. Warren, No. 98-1320 (4th Cir. 1998). Appeal ofDistrict Court dismissal of action involving customer dis-pute with a bank.

Greeff v. Board of Governors, No. 97-1976 (4th Cir., filedJune 17, 1997). Petition for review of a Board order datedMay 19, 1997, approving the application by Allied IrishBanks, pic, Dublin, Ireland, and First Maryland Bancorp,Baltimore, Maryland, to acquire Dauphin Deposit Corpora-tion, Harrisburg, Pennsylvania, and thereby acquire Dau-phin's banking and nonbanking subsidiaries.

Maunsell v. Greenspan, No. 97-6131 (2d Cir, filed May 22,1997). Appeal of district court dismissal of action for com-

pensatory and punitive damages for alleged violations ofcivil rights by federal savings bank. On May 12, 1998, thecourt of appeals affirmed the district court's dismissal.

The New Mexico Alliance v. Board of Governors, No. 98-1049 (D.C. Cir, transferred as of January 21, 1998). Peti-tion for review of a Board order dated December 16, 1996,approving the acquisition by NationsBank Corporation andNB Holdings Corporation, both of Charlotte, North Caro-lina, of Boatmen's Bancshares, Inc., St. Louis, Missouri. OnJanuary 21, 1998, the United States Court of Appeals forthe Tenth Circuit ordered the petition transferred to theUnited States Court of Appeals for the District of ColumbiaCircuit. On May 27, 1998, the court of appeals granted theBoard's motion to dismiss the petition.

American Bankers Insurance Group, Inc. v. Board of Gover-nors, No. 96-CV-2383-EGS (D.D.C., filed October 16,1996). Action seeking declaratory and injunctive relief in-validating a new regulation issued by the Board under theTruth in Lending Act relating to treatment of fees for debtcancellation agreements. On October 18, 1996, the districtcourt denied plaintiffs' motion for a temporary restrainingorder. On April 13, 1998, the district court granted theBoard's motion for summary judgment.

Board of Governors v. Pharaon, No. 98-6101 (2d Cir, filedMay 4, 1998). Appeal of partial denial of Board's motionfor summary judgment in action to freeze assets of individ-ual pending administrative adjudication of civil money pen-alty assessment by the Board. On May 22, 1998, the appel-lee filed a cross-appeal from the partial final judgment.

FINAL ENFORCEMENT ORDERS ISSUED BY THEBOARD OF GOVERNORS

Faisal Saud Al-Fulaij

A Former Institution-Affiliated Party ofCredit and Commerce American Holdings, N.V.Netherland Antilles

The Federal Reserve Board announced on June 23, 1998,the issuance of an Order of Prohibition against Faisal SaudAl-Fulaij, a former institution-affiliated party of Credit andcommerce American Holdings, N.V., formerly the parentbank holding company over the First American bankingorganization.


701

Membership of the Board of Governorsof the Federal Reserve System, 1913-98

APPOINTIVE MEMBERS'

Name Federal ReserveDistrict

Date of initialoath of office

Other dates and information relatingto membership -

Charles S. Hamlin Boston Aug. 10, 1914

Paul M. Warburg New York Aug. 10, 1914Frederic A. Delano Chicago Aug. 10, 1914W.P.G. Harding Atlanta Aug. 10, 1914Adolph C. Miller San Francisco Aug. 10, 1914

Albert Strauss New York Oct. 26, 1918Henry A. Moehlenpah Chicago Nov. 10, 1919Edmund Platt New York June 8, 1920David C. Wills Cleveland Sept. 29, 1920John R. Mitchell Minneapolis May 12, 1921Milo D. Campbell Chicago Mar. 14, 1923Daniel R. Crissinger Cleveland May 1, 1923George R. James St. Louis May 14, 1923Edward H. Cunningham Chicago May 14, 1923Roy A. Young Minneapolis Oct. 4, 1927Eugene Meyer New York Sept. 16, 1930Wayland W. Magee Kansas City May 18, 1931Eugene R. Black Atlanta May 19, 1933M.S. Szymczak Chicago June 14, 1933J.J.Thomas Kansas City June 14, 1933Marriner S. Eccles San Francisco Nov. 15, 1934

Joseph A. Broderick New York Feb. 3. 1936John K. McKee Cleveland Feb. 3. 1936Ronald Ransom Atlanta Feb. 3, 1936Ralph W. Morrison Dallas Feb. 10, 1936Chester C. Davis Richmond June 25, 1936Ernest G. Draper New York Mar. 30, 1938Rudolph M. Evans Richmond Mar. 14, 1942James K. Vardaman, Jr. St. Louis Apr. 4, 1946Lawrence Clayton Boston Feb. 14, 1947Thomas B. McCabe Philadelphia Apr. 15, 1948Edward L. Norton Atlanta Sept. 1, 1950Oliver S. Powell Minneapolis Sept. 1, 1950Wm. McC. Martin, Jr New York April 2, 1951A.L. Mills, Jr San Francisco Feb. 18, 1952J.L.Robertson Kansas City Feb. 18, 1952C. Canby Balderston Philadelphia Aug. 12, 1954Paul E. Miller Minneapolis Aug. 13, 1954Chas. N. Shepardson Dallas Mar. 17, 1955G.H. King, Jr Atlanta Mar. 25, 1959George W. Mitchell Chicago Aug. 31, 1961J. Dewey Daane Richmond Nov. 29, 1963Sherman J. Maisel San Francisco Apr. 30, 1965Andrew F. Brimmer Philadelphia Mar. 9, 1966William W. Sherrill Dallas May 1, 1967Arthur F. Burns New York Jan. 31, 1970John E. Sheehan St. Louis Jan. 4, 1972Jeffrey M. Bucher San Francisco June 5, 1972Robert C. Holland Kansas City June 11, 1973Henry C. Wallich Boston Mar. 8, 1974Philip E. Coldwell Dallas Oct. 29, 1974

Reappointed in 1916 and 1926. Served untilFeb. 3, 1936.3

Term expired Aug. 9, 1918.Resigned July 21, 1918.Term expired Aug. 9, 1922.Reappointed in 1924. Reappointed in 1934 from the

Richmond District. Served until Feb. 3, 1936.3

Resigned Mar. 15, 1920.Term expired Aug. 9, 1920.Reappointed in 1928. Resigned Sept. 14, 1930.Term expired Mar. 4, 1921.Resigned May 12, 1923.Died Mar. 22, 1923.Resigned Sept. 15, 1927.Reappointed in 1931. Served until Feb. 3, 1936.4

Died Nov. 28, 1930.Resigned Aug. 31, 1930.Resigned May 10, 1933.Term expired Jan. 24, 1933.Resigned Aug. 15, 1934.Reappointed in 1936 and 1948. Resigned May 31, 1961.Served until Feb. 10, 1936.1

Reappointed in 1936, 1940. and 1944. ResignedJuly 14, 1951.

Resigned Sept. 30, 1937.Served until Apr. 4, 1946.'Reappointed in 1942. Died Dec. 2, 1947.Resigned July 9, 1936.Reappointed in 1940. Resigned Apr. 15, 1941.Served until Sept. 1, 1950.'Served until Aug. 13, 1954.1

Resigned Nov. 30, 1958.Died Dec. 4, 1949.Resigned Mar. 31, 1951.Resigned Jan. 31, 1952.Resigned June 30, 1952.Reappointed in 1956. Term expired Jan. 31, 1970.Reappointed in 1958. Resigned Feb. 28, 1965.Reappointed in 1964. Resigned Apr. 30, 1973.Served through Feb. 28, 1966.Died Oct. 21, 1954.Retired Apr. 30, 1967.Reappointed in 1960. Resigned Sept. 18, 1963.Reappointed in 1962. Served until Feb. 13, 1976.1

Served until Mar. 8, I974.3

Served through May 31, 1972.Resigned Aug. 31, 1974.Reappointed in 1968. Resigned Nov. 15, 1971.Term began Feb. I, 1970. Resigned Mar. 31, 1978.Resigned June 1, 1975.Resigned Jan. 2. 1976.Resigned May 15, 1976.Resigned Dec. 15, 1986.Served through Feb. 29, 1980.



NameFederal Reserve

DistrictDate of initialoath of office

Other dates and information relatingto membership2

Philip C. Jackson, Jr Atlanta July 14, 1975J. Charles Partee Richmond Jan. 5, 1976Stephen S. Gardner Philadelphia Feb. 13, 1976David M. Lilly Minneapolis June 1, 1976G. William Miller San Francisco Mar. 8, 1978Nancy H. Teeters Chicago Sept. 18, 1978Emmett J. Rice New York June 20, 1979Frederick H. Schultz Atlanta July 27, 1979Paul A. Volcker Philadelphia Aug. 6, 1979Lyle E. Gramley Kansas City May 28, 1980Preston Martin San Francisco Mar. 31, 1982Martha R. Seger Chicago July 2, 1984Wayne D. Angell Kansas City Feb. 7, 1986Manuel H. Johnson Richmond Feb. 7, 1986H. Robert Heller San Francisco Aug. 19, 1986Edward W. Kelley, Jr Dallas May 26, 1987Alan Greenspan New York Aug. 11, 1987John P. LaWare Boston Aug. 15, 1988David W. Mullins, Jr. St. Louis May 21, 1990Lawrence B. Lindsey Richmond Nov. 26, 1991Susan M. Phillips Chicago Dec. 2, 1991Alan S. Blinder Philadelphia June 27, 1994Janet L. Yellen San Francisco Aug. 12,1994Laurence H. Meyer St. Louis June 24, 1996Alice M. Rivlin Philadelphia June 25, 1996Roger W. Ferguson, Jr. Boston Nov. 5, 1997Edward M. Gramlich Richmond Nov. 5, 1997

Chairmen4

Charles S. Hamlin Aug.W.P.G. Harding Aug.Daniel R. Crissinger MayRoy A. Young Oct.Eugene Meyer SeptEugene R. Black MayMarriner S. Eccles Nov.Thomas B. McCabe Apr.Wm. McC. Martin, Jr Apr.Arthur F. Burns Feb.G. William Miller Mar.Paul A. Volcker Aug.Alan Greenspan Aug.

10, 1914-Aug. 9, 191610, 1916-Aug. 9, 19221, 1923-Sept. 15, 19274, 1927-Aug. 31, 1930. 16, 1930-May 10, 193319, 1933-Aug. 15, 193415, 1934-Jan. 31, 1948515, 1948-Mar. 31, 19512, 1951-Jan. 31, 19701, 1970-Jan. 31, 19788, 1978-Aug. 6, 19796, 1979-Aug. 11, 198711. 1987-6

EX-OFFICIO MEMBERS '

Secretaries of the TreasuryW.G. McAdoo '...Dec. 23, 1913-Dec. 15, 1918Carter Glass Dec. 16, 1918-Feb. 1, 1920David F. Houston Feb. 2, 1920-Mar. 3, 1921Andrew W. Mellon Mar. 4, 1921-Feb. 12, 1932OgdenL. Mills Feb. 12, 1932-Mar. 4, 1933William H. Woodin Mar. 4, 1933-Dec. 31, 1933Henry Morgenthau Jr Jan. 1, 1934-Feb. 1, 1936

1. Under the provisions of the original Federal Reserve Act, the FederalReserve Board was composed of seven members, including five appointivemembers, the Secretary of the Treasury, who was ex-officio chairman of theBoard, and the Comptroller of the Currency. The original term of office was tenyears, and the five original appointive members had terms of two, four, six,eight, and ten years respectively. In 1922 the number of appointive members wasincreased to six, and in 1933 the term of office was increased to twelve years.The Banking Act of 1935. approved Aug. 23, 1935, changed the name of theFederal Reserve Board to the Board of Governors of the Federal Reserve Systemand provided that the Board should be composed of seven appointive members;that the Secretary of the Treasury and the Comptroller of the Currency shouldcontinue to serve as members until Feb. 1. 1936; that the appoint-

ResignedNov. 17, 1978.Served until Feb. 7, 1986.3

Died Nov. 19, 1978.Resigned Feb. 24, 1978.Resigned Aug. 6, 1979.Served through June 27, 1984.Resigned Dec. 31, 1986.Served through Feb. 11, 1982.Resigned August 11, 1987.Resigned Sept. 1, 1985.Resigned April 30, 1986.Resigned March 11, 1991.Served through Feb. 9, 1994.Resigned August 3, 1990.Resigned July 31, 1989.Reappointed in 1990.Reappointed in 1992.Resigned April 30, 1995.Resigned Feb. 14, 1994.Resigned Feb. 5, 1997.Served through June 30, 1998.Term expired Jan. 31, 1996.Resigned Feb. 17, 1997.

Vice Chairmen4

Frederic A. Delano Aug. 10, 1914-Aug. 9, 1916Paul M. Warburg Aug. 10, 1916-Aug. 9, 1918Albert Strauss Oct. 26, 1918-Mar. 15, 1920Edmund Platt July 23, 1920-Sept. 14, 1930J.J. Thomas Aug. 21, 1934-Feb. 10, 1936Ronald Ransom Aug. 6, 1936-Dec. 2, 1947C. Canby Balderston Mar. 11, 1955-Feb. 28, 1966J.L. Robertson Mar. 1, 1966-Apr. 30, 1973George W. Mitchell May 1, 1973-Feb. 13, 1976Stephens. Gardner Feb. 13, 1976-Nov. 19, 1978Frederick H. Schultz July 27, 1979-Feb. 11, 1982Preston Martin Mar. 31, 1982-Apr. 30, 1986Manuel H. Johnson Aug. 4, 1986-Aug. 3, 1990David W. Mullins, Jr. July 24, 1991-Feb. 14, 1994Alan S. Blinder June 27, 1994-Jan. 31, 1996Alice M. Rivlin June 25, 1996-

Comptrollers of the CurrencyJohn Skelton Williams Feb. 2, 1914-Mar. 2, 1921Daniel R. Crissinger Mar. 17, 1921-Apr. 30, 1923Henry M. Dawes May 1, 1923-Dec. 17, 1924Joseph W. Mclntosh Dec. 20, 1924-Nov. 20, 1928J.W. Pole Nov. 21, 1928-Sept. 20, 1932J.F.T. O'Connor May 11, 1933-Feb. 1, 1936

ive members in office on the date of that act should continue to serve until Feb. 1,1936. or until their successors were appointed and had qualified; and thatthereafter the terms of members should be fourteen years and that thedesignation of Chairman and Vice Chairman of the Board should be for a term offour years.

2. Date after words "Resigned" and "Retired" denotes final day of service.3. Successor took office on this dale.4. Chairman and Vice Chairman were designated Governor and Vice

Governor before Aug. 23, 1935.5. Served as Chairman Pro Tempore from February 3, 1948, to April 15,

1948.6. Served as Chairman Pro Tempore from March 3, 1996, to June 20. 1996.


Al

Financial and Business Statistics

A3 GUIDE TO TABULAR PRESENTATION

DOMESTIC FINANCIAL STATISTICS

Money Stock and Bank Credit

A4 Reserves, money stock, liquid assets, and debtmeasures

A5 Reserves of depository institutions and Reserve Bankcredit

A6 Reserves and borrowings—Depositoryinstitutions

Policy Instruments

A7 Federal Reserve Bank interest ratesA8 Reserve requirements of depository institutionsA9 Federal Reserve open market transactions

Federal Reserve Banks

A10 Condition and Federal Reserve note statementsAl 1 Maturity distribution of loan and security

holding

Monetary and Credit Aggregates

A12 Aggregate reserves of depository institutionsand monetary base

A13 Money stock, liquid assets, and debt measures

Commercial Banking Institutions—Assets and Liabilities

A15 All commercial banks in the United StatesA16 Domestically chartered commercial banksA17 Large domestically chartered commercial banksA19 Small domestically chartered commercial banksA20 Foreign-related institutions

Financial Markets

A22 Commercial paper and bankers dollaracceptances outstanding

A22 Prime rate charged by banks on short-termbusiness loans

A23 Interest rates—Money and capital marketsA24 Stock market—Selected statistics

Federal Finance

A25 Federal fiscal and financing operationsA26 U.S. budget receipts and outlaysA27 Federal debt subject to statutory limitation

Federal Finance—Continued

A27 Gross public debt of U.S. Treasury—Types and ownership

A28 U.S. government securitiesdealers—Transactions

A29 U.S. government securities dealers—Positions and financing

A30 Federal and federally sponsored creditagencies—Debt outstanding

Securities Markets and Corporate Finance

A31 New security issues—Tax-exempt state and localgovernments and corporations

A32 Open-end investment companies—Net salesand assets

A32 Corporate profits and their distributionA32 Domestic finance companies—Assets and

liabilitiesA33 Domestic finance companies—Owned and managed

receivables

Real Estate

A34 Mortgage markets—New homesA35 Mortgage debt outstanding

Consumer Credit

A36 Total outstandingA36 Terms

Flow of Funds

A37 Funds raised in U.S. credit marketsA39 Summary of financial transactionsA40 Summary of credit market debt outstandingA41 Summary of financial assets and liabilities

DOMESTIC NONF1NANC1AL STATISTICS

Selected Measures

A42 Nonfinancial business activityA42 Labor force, employment, and unemploymentA43 Output, capacity, and capacity utilizationA44 Industrial production—Indexes and gross valueA46 Housing and constructionA47 Consumer and producer pricesA48 Gross domestic product and incomeA49 Personal income and saving


A2 Federal Reserve Bulletin • August 1998

INTERNATIONAL STATISTICS

Summary Statistics

A50 U.S. international transactionsA51 U.S. foreign tradeA51 U.S. reserve assetsA51 Foreign official assets held at Federal Reserve

BanksA52 Selected U.S. liabilities to foreign official

institutions

Reported by Banks in the United States

A52 Liabilities to, and claims on, foreignersA53 Liabilities to foreignersA55 Banks' own claims on foreignersA56 Banks' own and domestic customers' claims on

foreignersA56 Banks' own claims on unaffiliated foreignersA57 Claims on foreign countries—Combined

domestic offices and foreign branches

Reported by Nonbanking BusinessEnterprises in the United States

A58 Liabilities to unaffiliated foreignersA59 Claims on unaffiliated foreigners

Securities Holdings and Transactions

A60 Foreign transactions in securitiesA61 Marketable U.S. Treasury bonds and

notes—Foreign transactions

Interest and Exchange Rates

A61 Discount rates of foreign central banksA61 Foreign short-term interest ratesA62 Foreign exchange rates

A63 GUIDE TO STATISTICAL RELEASES ANDSPECIAL TABLES

SPECIAL TABLES

A64 Assets and liabilities of commercial banks,March 31, 1998

A67 Terms of lending at commercial banks, May 1998A72 Assets and liabilities of U.S. branches and agencies

of foreign banks, March 31, 1998

A76 INDEX TO STATISTICAL TABLES


Guide to Tabular Presentation

A3

SYMBOLS AND ABBREVIATIONS

cen.a.Pr

*

0

ATSBIFCDCMOFFBFHAFHLBBFHLMCFmHAFNMAFSLICG-7

CorrectedEstimatedNot availablePreliminaryRevised (Notation appears on column heading

when about half of the figures in that columnare changed.)

Amounts insignificant in terms of the last decimalplace shown in the table (for example, less than500,000 when the smallest unit given is millions)

Calculated to be zeroCell not applicableAutomatic transfer serviceBank insurance fundCertificate of depositCollateralized mortgage obligationFederal Financing BankFederal Housing AdministrationFederal Home Loan Bank BoardFederal Home Loan Mortgage CorporationFarmers Home AdministrationFederal National Mortgage AssociationFederal Savings and Loan Insurance CorporationGroup of Seven

G-10GNMAGDPHUD

IMFIOIPCsIRAMMDAMSANOWOCDOPECOTSPOREITREMICRPRTCSCOSDRSICVA

Group of TenGovernment National Mortgage AssociationGross domestic productDepartment of Housing and Urban

DevelopmentInternational Monetary FundInterest onlyIndividuals, partnerships, and corporationsIndividual retirement accountMoney market deposit accountMetropolitan statistical areaNegotiable order of withdrawalOther checkable depositOrganization of Petroleum Exporting CountriesOffice of Thrift SupervisionPrincipal onlyReal estate investment trustReal estate mortgage investment conduitRepurchase agreementResolution Trust CorporationSecuritized credit obligationSpecial drawing rightStandard Industrial ClassificationDepartment of Veterans Affairs

GENERAL INFORMATION

In many of the tables, components do not sum to totals because ofrounding.

Minus signs are used to indicate (1) a decrease, (2) a negativefigure, or (3) an outflow.

"U.S. government securities" may include guaranteed issuesof U.S. government agencies (the flow of funds figures also

include not fully guaranteed issues) as well as direct obliga-tions of the Treasury.

"State and local government" also includes municipalities,special districts, and other political subdivisions.


A4 Domestic Financial Statistics • August 1998

1.10 RESERVES, MONEY STOCK, LIQUID ASSETS, AND DEBT MEASURES

Percent annual rate of change, seasonally adjusted1

Monetary or credit aggregate

Q2 Q3 Q4' Ql '

1998'

Jan. Feb. Mar. Apr May

Reserves of depository institutions2

1 Total2 Required3 Nonborrowed4 Monetary base'

Concepts of money, liquid assets, and debt*5 Ml6 M27 M38 L9 Debt

Nontransaction components10 In M25

11 In M3 only6

Time and savings depositsCommercial banks

12 Savings, including MMDAs13 Small time7

14 Large time89

Thrift institutions15 Savings, including MMDAs16 Small time7

17 Large time8

Money market mutual funds18 Retail19 Institution-only

Repurchase agreements and Eurodollars20 Repurchase agreements10

21 Eurodollars"

Debt components22 Federal23 Nonfederal

-15.2-15.9-16.9

3.8

-4.54.47.78.45.0

7.918.9

11.05.6

24.1

6.0-3.0 r

4.3

13.518.0

6.832.7'

.9'6.4'

-3.0-3.7-4.7

6.2

.35.6'8.2'7.2'4.5'

7.6r

16.8'

9.68.1'

17.2

1.0-5.210.0'

16.3

19.7

13.418.6

.0'6.1'

- 2 7-5.6

.97.1

10.09.25.8

9.419.3

16.34.59.9

1.4-3.1

5.4

16.0

22.0

38.324.2

.47.6

-1.9-1.8- .76.9

11.212.36.2

9.921.1

13.61.5

19.8

7.6- .414.4

19.618.9

32.816.9

.08.3

-4 .3-7.1-1.4

6.7

-2.67.6

10.612.55.9

11.319.9

14.6.8

6.2

6.44.9

29.5

23.3

14.7

54.219.0

- .58.0

-20.1-14.0-16.3

3.5

3.19.69.4

12.06.7

11.98.7

13.2.4

36.5

13.6-2.8

4.1

28.7

12.3

-26.9-32.5

-1 .29.4

8.514.59.04.1

5.18.3

14.812.26.5

9.434.5

12.1- . 2

45.9

11.6-5.6-8.2

21.6

22.5

88.5-36.8

1.48.1

- 2 . 3

- 3 . 1-3.1

3.4

- . 39.5

10.83.04.9

12.914.5

25.9.6

-6.9

10.6-10.8

13.8

ISO51.7

-2 .822.4

- 2 . 7

7.4

-9.5-4.5

-11.64.7

-3.02.86.3

4.816.9

.2- 4 . 0

7.4

16.3-6.0

-17.7

19.838.7

6.528.8

n.a.n.a.

1. Unless otherwise noted, rates of change are calculated from average amounts outstand-ing during preceding month or quarter.

2. Figures incorporate adjustments for discontinuities, or "breaks." associated withregulatory changes in reserve requirements, (See also table 1.20.)

3. The seasonally adjusted, break-adjusted monetary base consists of (1) seasonallyadjusted, break-adjusted total reserves (line 1), plus (2) the seasonally adjusted currencycomponent of the money stock, plus (3) (for all quarterly reporters on the "Report ofTransaction Accounts, Other Deposits and Vault Cash" and for all weekly reporters whosevault cash exceeds their required reserves) the seasonally adjusted, break-adjusted differencebetween current vault cash and the amount applied to satisfy current reserve requirements.

4. Composition of the money stock measures and debt is as follows:Ml: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of

depository institutions, (2) travelers checks of nonbank issuers, (3) demand deposits at allcommercial banks other than those owed to depository institutions, the U.S. government, andforeign banks and official institutions, less cash items in the process of collection and FederalReserve float, and (4) other checkable deposits (OCDs), consisting of negotiable order ofwithdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions,credit union share draft accounts, and demand deposits at thrift institutions. Seasonallyadjusted Ml is computed by summing currency, travelers checks, demand deposits, andOCDs, each seasonally adjusted separately.

M2: Ml plus (1) savings (including MMDAs), (2) small-denomination time deposits (timedeposits—including retail RPs—in amounts of less than $100,000), and (3) balances in retailmoney market mutual funds (money funds with minimum initial investments of less than$50,000). Excludes individual retirement accounts (IRAs) and Keogh balances at depositoryinstitutions and money market funds. Seasonally adjusted M2 is calculated by summingsavings deposits, small-denomination time deposits, and retail money fund balances, eachseasonally adjusted separately, and adding this result to seasonally adjusted Ml.

M3: M2 plus (1) large-denomination time deposits (in amounts of $100,000 or more). (2)balances in institutional money funds (money funds with minimum initial investments of$50,000 or more), (3) RP liabilities (overnight and term) issued by all depository institutions,and (4) Eurodollars (overnight and term) held by U.S. residents at foreign branches of U.S.banks worldwide and at all banking offices in the United Kingdom and Canada. Excludes

amounts held by depository institutions, the U.S. government, money market funds, andforeign banks and official institutions. Seasonally adjusted M3 is calculated by summing largetime deposits, institutional money fund balances, RP liabilities, and Eurodollars, eachseasonally adjusted separately, and adding this result to seasonally adjusted M2.

L: M3 plus the nonbank public holdings of U.S. savings bonds, short-term Treasurysecurities, commercial paper, and bankers acceptances, net of money market fund holdings ofthese assets. Seasonally adjusted L is computed by summing U.S. savings bonds, short-termTreasury securities, commercial paper, and bankers acceptances, each seasonally adjustedseparately, and then adding this result to M3.

Debt: The debt aggregate is the outstanding credit market debt of the domestic nonfinancialsectors—the federal sector (U.S. government, not including government-sponsored enter-prises or federally related mortgage pools) and the nonfederal sectors (state and localgovernments, households and nonprofit organizations, nonfinancial corporate and nonfarmnoncorporate businesses, and farms). Nonfederal debt consists of mortgages, tax-exempt andcorporate bonds, consumer credit, bank loans, commercial paper, and other loans. The data,which are derived from the Federal Reserve Board's flow of funds accounts, are break-adjusted (that is, discontinuities in the data have been smoothed into the series) andmonth-averaged (that is, the data have been derived by averaging adjacent month-end levels).

5. Sum of (1) savings deposits (including MMDAs), (2) small time deposits, and (3) retailmoney fund balances, each seasonally adjusted separately.

6. Sum of (1) large time deposits, (2) institutional money fund balances, (3) RP liabilities(overnight and term) issued by depository institutions, and (4) Eurodollars (overnight andterm) of U.S. addressees, each seasonally adjusted separately.

7. Small time deposits—including retail RPs—are those issued in amounts of less than$100,000. All IRA and Keogh account balances at commercial banks and thrift institutionsare subtracted from small time deposits.

8. Large time deposits are those issued in amounts of $100,000 or more, excluding thosebooked at international banking facilities.

9. Large time deposits at commercial banks less those held by money market funds,depository institutions, the U.S. government, and foreign banks and official institutions.

10. Includes both overnight and term.


Money Stock and Bank Credit A5

1.11 RESERVES OF DEPOSITORY INSTITUTIONS AND RESERVE BANK CREDIT1

Millions of dollars

Average ofdaily figures

Apr. May

Average of daily figures for week ending on date indicated

1998

Apr. 15 Apr 22 Apr. 29 May 6 May 13 May 20 May 27

SUPPLYING RESERVE FUNDS

1 Reserve Bank credit outstandingU.S. government securities2

2 Bought outright—System account3 Held under repurchase agreements

Federal agency obligations4 Bought outright5 Held under repurchase agreements6 Acceptances

Loans to depository institutions7 Adjustment credit8 Seasonal credit9 Extended credit

10 Floal11 Other Federal Reserve assets

12 Gold stock13 Special drawing rights certificate account14 Treasury currency outstanding

ABSORBING RESERVE FUNDS

15 Currency in circulation16 Treasury cash holdings

Deposits, other than reserve balances, withFederal Reserve Banks

17 Treasury18 Foreign19 Service-related balances and adjustments20 Other21 Other Federal Reserve liabilities and capital . .22 Reserve balances with Federal Reserve Banks4

SUPPLYING RESERVE FUNDS

1 Reserve Bank credit outstandingU.S. government securities3

2 Bought outright—System account3

3 Held under repurchase agreements . .Federal agency obligations

4 Bought outright5 Held under repurchase agreements6 Acceptances

Loans to depository institutions7 Adjustment credit8 Seasonal credit9 Extended credit

10 Floal11 Other Federal Reserve assets

12 Gold stock13 Special drawing rights certificate account .14 Treasury currency outstanding

ABSORBING RESERVE FUNDS

15 Currency in circulation16 Treasury cash holdings

Deposits, other than reserve balances,Federal Reserve Banks

17 TreasuryForeignService-related balances and adjustments

with

Otheri.\l VJUICl

21 Other Federal Reserve liabilities and capital .22 Reserve balances with Federal Reserve Banks4

467,483

431.7672.313

6411.245

0

6220

46431,026

11,0499,200

25,761

473,771254

5,455174

6.993369

16,17610.303

474,688'

437,5253.566

6670

44400

446'31.817

11,0499,200

25,823

476,390273

9,708177

6,800375

16,17710.859'

471,940

438,825442

551660

58950

60631,297

11,0489.200

479,109247

5,474165

6,721364

16,6179,374

471,693

436,4361,899

586787

0

14310

31631,623

11,0489,200

25.816

477.195276

6.218183

6,633383

16.22310.645

476.123

440,6022,338

565687

0

14430

30831,566

11,0499,200

25,830

476,953277

7,894185

6,859349

16,32813,356

481,388'

439,5807,459

559536

0

1553

0392'

32,795

11,0499,200

25,844

475,910277

17,944173

6,801'366

16,3049.706'

473,751

437,6542,247

551279

0

24690

52032.407

11,0489.200

25.858

477,103271

8.442160

6.751384

16,7699,977

469,098

434.6000

55100

15373

01.069

32,653

11,0489,200

25,872

478.436248

6.055166

6,644377

16,6916.600

473,983

441,514421

551150

0

697

0746

30,499

11,0489,200

25,886

478.490247

5,428167

6.782368

16,46312,172

End-of-month figures Wednesday figures

475.593

433,1826.846

6251,450

0

270

1.50231.959

I 1.0499.200

25.788

475,091265

5,490167

6.845354

15,70817,709

Apr.

441,32215,731

5511.955

0

2561

0-478 '

33.874

11,0489,200

25,858

476.806275

28,014162

6,751360

16,8949,885'

May Apr. 15

440.9802.997

551230

0

4132

0254

30,709

11,0499,200

25,914

480,845226

5,693156

6,674309

16.74311,372

440 2773.095

5651.958

0

2370

-29631.358

11.0489.200

25,816

478,416277

9,457163

6,633344

16,10711,662

Apr. 22

487,623

441,82410.225

5652,617

0

96470

-34432,594

1I.O499,200

25,830

477.306278

12,950162

6,859350

16,15619,641

Apr. 29 May 6 May 13

442,40626,047

0

4560

645'35.278

11.0489.200

25.844

477.038275

41,801199

6,801343

16,13510,293'

470,786

437.6820

55100

168

0228

32,258

11,0489,200

25,858

478,834248

4,107154

6,751375

16,4509.974

471.338

437,6440

55100

10790

24032.814

I 1.0489,200

25,872

479,285248

5.127155

6.644373

16,1689,457

May 20

478,366

442.8202,945

5511,050

0

25110

0554

30,312

11,0489,200

25.886

479.942238

4,697174

6,782371

16,25116,044

471,968

440,5830

55100

75117

0296

30,346

11,0499,200

25.900

480,928237

5,179172

6.738359

16,5057.999

May 27

474,437

442,6430

55100

1124

0629

30,490

11,0499,200

25,900

482.307226

5,013179

6,738311

16.2949,517

1. Amounts of cash held as reserves are shown in table 1.12, line 2.2. Includes securities loaned—fully guaranteed by U.S. government securities pledged

with Federal Reserve Banks—and excludes securities sold and scheduled to be bought backunder matched sale-purchase tram;actions-

3. Includes compensation that adjusts for the effects of inflation on the principal ofinflation-indexed securities.

4. Excludes required clearing balances and adjustments to compensate for float.



1.12 RESERVES AND BORROWINGS Depository Institutions'

Millions of dollars

Reserve classification

1 Reserve balances with Reserve Banks2 Total vault cash'3 Applied vault cash4

4 Surplus vault cash5

5 Total reserves6

6 Required reserves7 Excess reserve balances at Reserve Banks7 . . .8 Total borrowings at Reserve Banks9 Seasonal borrowings

10 Extended credit

1 Reserve balances with Reserve Banks"2 Total vault cash1

3 Applied vault cash4 . .4 Surplus vault cash5

5 Total reserves6

6 Required reserves7 Excess reserve balances at Reserve Banks8 Total borrowings at Reserve Banks*9 Seasonal borrowings

10 Extended credit4

Prorated monthly averages of biweekly averages

1995

Dec.

20,44042,28137,4604,821

57,90056,622

1,27825740

I)

1996

Dec.

13,39544,52537,8486,678

51,24349,819

1.42415568

0

B

1997

Dec.

10.67344 70737.2067 500

47,88046,196

1,683324

790

1997

Nov.

10.55942,85135,8926.959

46,45144,834

1,617153115

0

Dec.

10,67344,70737,206

7,50047,88046.196

1.683324

790

1998

Jan.

9.73347,33637,762

9,57447.49545,714

1.780210

180

Feb

9.39443,16735,580

7.58744.97443,450

1.52458120

Mar.

10.14041,59835,3706,228

45,50944,193

1,317'4122

0

Apr.'

11,05341,21635,4235,793

46,47645.131

1.3457241

0

May

9.64641,48535,1636,322

44,80943,659

1.15015394

0

weekly averages of daily figures for two week periods ending on dates indicated

1998

Jan. 28

8,17649,44437,82711,61746,1X1344,213

1,790242

160

Feb. 11

8,75045.16536,4628,703

45,21243,648

1,56367

o0

Feb 25

9.72641.80434.892

(\9I244 61843.132

1,48559130

Mar. 11

10,21042.20235,5556,647

45,76544,209

1,55619170

Mar. 25

9,87841,19935,1546,046

45,03143,893

1,1383423

0

Apr. 8

10.62341.42035.535'

5,885'46,158'44,865

1,293'10130

0

Apr. 22'

11.99140.81535,185

5.62947,17645.736

1.4415137

0

May 6'

9,84141,71535,7275.988

45,56844,339

1,2308161

0

May 20

9.36541,54835,0666,482

44,43043,409

1,02216585

0

June 3

9.89S41.28034.9806,299

44,87843,608

1,270178123

0

1. Data in this table also appear in the Board's H.3 (502) weekly statistical release. Forordering address, see inside front cover. Data are not break-adjusted or seasonally adjusted.

2. Excludes required clearing balances and adjustments to compensate for Moat andincludes other off-balance-sheet k'as-of" adjustments,

3. Total "lagged" vault cash held by depository institutions subject to reserverequirements Dates refer to the maintenance periods during which the vault cash may be usedlo satisfy reserve requirements. The maintenance period for weekly reporters ends sixteendays after the lagged computation period during which ihe vault cash is held. Before Nov. 25.1992, the maintenance period ended thirty days after the lagged computation period.

4. All vault cash held during the lagged computation period by "bound" institutions (thatis, those whose required reserves exceed their vault cash) plus the amount of vault cashapplied during the maintenance period by "nonbound" institutions (that is. [hose whose vaultcash exceeds their required reserves) to satisfy current reserve requirements.

5. Total vault cash (line 2) less applied vault cash (line 3).6. Reserve balances with Federal Reserve Banks (line 1) plus applied vault cash

(line 3).7. Total reserves (line 5) less required reserves f line 6h8. Also includes adjustment credit.9. Consists of borrowing ai the discount window under the terms and condition-, estab-

lished for the extended credit program to help depository institutions deal with sustainedliquidity pressures. Because there is not the same need to repay such borrowing promptly aswith traditional short-term adjustment credit, the money market effect of extended credit issimilar to that of nonborrowed reserves.


Policy Instruments A 7

1.14 FEDERAL RESERVE BANK INTEREST RATES

Percent per year

Current and previous levels

Federal ReserveBank

Adjustment credit

On7/17/9K

Seasonal credit

On7/17/98

Previous rate

Extended credit'1

On7/17/98

BostonNew YorkPhiladelphia .Cleveland. . .Richmond. . .Atlanta . . .

ChicagoSt. LouisMinneapolis . .Kansas City . .DallasSan Francisco

2/1/%1/31/%1/31/961/31/962/1/961/31/%

2/1/962/5/961/31/962/1/961/31/%1/31/96 5.25

Range of rates for adjustment credit in recent years

Effective date

In effect Dec. 31. 1977

1978—Jan. 920

Mav IIi :

Julv 1Ml

Aug. 21Sept. 22Oct. 16

20Nov. 1

3

1979—July 20Aug. 17

20Sept. 19

21Oct. S

10

19S0—Feb. 1519

May 2930

June 1316

Julv 2829

Sept. 26Nov. 17Dec. 5

8IS>81 — Mav 5

8

Range (orlevel)—AMF.R Banks

6

6-6 56.5

6.5-77

7-7.257.257.75

88-8.5

8.5S.5-9.5

9.5

1010-10.5

10.510.5-11

1111-12

12

12-1313

12-1312

11-12II

10-1110II12

12-1313

13-1414

F.R. Bankof

NY.

6

6.56.5777.257.257.7588.58.59.59.5

1010.510.5II111212

131313i :11II1010II1213131414

Effective dale

1981—Nov. 26

Dec. 4

1982—Julv 2023

Aug. 23

162730

Oct. 1213

Nov 2226

Dec. 141517

1984—Apr 913 . . . .

Nov. 2126

Dec. 24

1985—May 2024

1986—Mar 7 . . .10

Apr. 2123

July 11Aug. 21

22

19X7—Sept. 411

Range (orlevel)—AllF.R. Banks

13-141312

11.5-1211.5

11-11.5II

10.510-10 5

11)9.5-11)

9.59-9 5

98.5-98.5-9

8.5

8.5-99

8.5-98.58

7.5-87.5

7-7 57

6.5-76 56

5.5-65.5

5.5-66

F.R. Bankof

N.Y.

131312

11.511.5111 ]10.510109.59.5999S.58.5

998.58.58

7.57.5

776.56.565.55.5

66

Effective date

1988—Aug. 9] ]

1989—Feb. 2427

1990—Dec. 19

1991—Feb. 14

Apr. 30May 2Sept. 13

17Nov. 6

7Dec. 20

24

1992—Julv 27

1994—May 1718

Aug. 1618

Nov. 1517

1995—Feb. 19

1996—Jan. 31Feb. 5

In effect July 17. 1998

Ranne(orlevel")—AllF.R Banks

6-6.56.5

6.5-77

6.5

6-6.56

5.5-65.5

5-5 55

4.5-54.5

3.5^1.53.5

3-3.53

3-3.53.5

3.5^14

4-4 754.75

4.75-5.255.25

5.1)0-5.255.00

5.00

F.R. Bankof

NY

6.56.5

77

6.5

665.55.5554.54 53.53.5

33

3.53.5444 754.75

5.255.25

5.005.00

5.00

!. Available on a short-term basis to help depository institutions mccl temporary needs forfunds that cannot be met through reasonable alternative sources. The highest rate establishedlor loans to depository institutions may be charged on adjustment credit loans of unusual sizethat result from a major operating problem at the borrower's facility

2. Available to help relatively small depository institutions meet regular seasonal needs forfunds that arise from a clear pattern of intrayearly movements in their deposits and loans andthat cannot be met through special industry lenders. The discount rate on seasonal credit takesinto account rates charged by market sources of funds and ordinarily is reestablished on thefirst business day of each two-week reserve maintenance period; however, it is never less thanthe discount rate applicable to adjustment credit.

3. May be made available to depository institutions when similar assistance is notreasonably available from other sources, including special industry lenders Such credit maybe provided when exceptional circumstances (including sustained deposit drains, impairedaccess to money market funds, or sudden deterioration in loan repayment performance) orpractices involve only a particular institution, or to meet the needs of institutions experiencingdifficulties adjusting to changing market conditions over a longer period (particularly at timesof deposit disinlermediation). The discount rate applicable to adjustment credit ordinarily ischarged on extended-credit loans outstanding less than thirl) days: however, at the discretion

of the Federal Reserve Bank, this lime period may be shortened. Beyond this initial period, aflexible rate somewhat above rales charged on market sources of funds is charged. The rateordinarily is reestablished on the first business day of each two-week reserve maintenanceperiod, hut it is never less rhan the discount rate applicable to adjustment credit plii* 50 basispoints.

4. For earlier data, see the following publications of the Board of Governors: Bunking andMonetary Statistics, 1914-1941, and 1941-1970; and the Annual Statistical Digest, 1970-1979.

In 1980 and 1981, the Federal Reserve applied a surcharge to short-icrm adjustment-creditborrowings by institutions with deposits of $500 million or more lhat had horrowed insuccessive weeks or in more than four weeks in a calendar quarter. A 3 percent surcharge »asin effect from Mar. 17, 1980. through May 7. 1980. A surcharge of 1 percent was reimposedon Nov. 17, 1980; the surcharge was subsequently raised to 3 percent on Dec. 5, 1980, and to4 percent on May 5, 1981. The surcharge was reduced to 3 percent effective Sept. 22, 1981,and to 2 percent effective Oct. 12. 1981. As of Oct. I, 1981, the formula for applying thesurcharge was changed from a calendar quarter lo a moving thirteen-week period Thesurcharge was eliminated on Nov 17, 19K1.



1.15 RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS'

Type of deposit

Net transaction accounts1 $0 million-$47.8 million3

2 More than $47.8 million4

3 Nonpersonal lime deposits . . . . .

4 Eurocurrency liabilities6

1/1/981/1/98

12/27/90

12/27/90

1. Required reserves must be held in the form of deposits with Federal Reserve Banksor vault cash. Nonmember institutions may maintain reserve balances with a FederalReserve Bank indirectly, on a pass-through basis, with certain approved institutions. Forprevious reserve requirements, see earlier editions of the Annual Report or the FederalReserve Bulletin. Under the Monetary Control Act of 1980, depository institutionsinclude commercial banks, mutual savings banks, savings and loan associations, creditunions, agencies and branches of foreign banks, and Edge Act corporations.

2. Transaction accounts include all deposits against which the account holder is permittedto make withdrawals by negotiable or transferable instruments, payment orders of with-drawal, or telephone or preauthorized transfers for the purpose of making payments to thirdpersons or others. However, accounts subject to the rules that permil no more lhan sixpreaulhorized, automatic, or other transfers per month (of which no more than three may beby check, draft, debit card, or similar order payable directly to third parties) are savingsdeposits, not transaction accounts.

3. The Monetary Control Act of 1980 requires that the amount of transaction accountsagainst which the 3 percent reserve requirement applies be modified annually by 80 percent ofthe percentage change in transaction accounts held by all depository institutions, determinedas of June 30 of each year. Effective with the reserve maintenance period beginning January 1,1998. for depository institutions that report weekly, and with the period beginning January 15.1998. for institutions that report quarterly, the amount was decreased from $49.3 million to$47.8 million.

Under the Garn-St Germain Depository Institutions Act of 1982, the Board adjusts theamount of reservable liabilities subject to a zero percent reserve requirement each year for the

succeeding calendar year by 80 percent of the percentage increase in the total reservableliabilities of all depository institutions, measured on an annual basis as of June 30. Nocorresponding adjustment is made in the event of a decrease. The exemption applies only toaccounts that would be subject to a 3 percent reserve requirement. Effective with the reservemaintenance period beginning January 1, 1998, for depository institutions that report weekly,and with the period beginning January 15. 1998, for institutions that report quarterly, theexemption was raised from $4.4 million to $4.7 million.

4. The reserve requirement was reduced from 12 percent to 10 percent onApr. 2, 1992, for institutions that report weekly, and on Apr. 16, 1992, for institutions thatreport quarterly.

5. For institutions that report weekly, the reserve requirement on nonpersonal time depositswith an original maturity of less than 1 l/i years was reduced from 3 percent to 1 l/2 percent forthe maintenance period that began Dec. 13, 1990, and to zero for the maintenance period thatbegan Dec. 27, 1990. For institutions that report quarterly, the reserve requirement onnonpersonal time deposits with an original maturity of less than 1 x/i years was reduced from 3percent to zero on Jai\. 17, 1991

The reserve requirement on nonpersonal time deposits with an original maturity of 1 '/5years or more has been zero since Oct. 6, 1983.

6. The reserve requirement on Eurocurrency liabilities was reduced from 3 percent to zeroin the same manner and on the same date;, as the reserve requirement on nonpersonal timedeposits with an original maturity of less than I '/2 years (see note 5).


1.17 FEDERAL RESERVE OPEN MARKET TRANSACTIONS1

Millions of dollars

Policy Instruments A9

Type of transactionand maturity

1998

Apr.

U.S. TREASURY SECURITIES2

Outright transactions (excluding matchedtransactions)

Treasury bills1 Gross purchases2 Gross sales3 Exchanges4 For new bills5 Redemptions

Others within one year6 Gross purchases7 Gross sales8 Maturity shifts9 Exchanges

10 RedemptionsOne to five years

11 Gross purchases12 Gross sales13 Matunty shifts14 Exchanges

Five to ten years15 Gross purchases16 Gross sales17 Maturity shifts18 Exchanges

More than ten years19 Gross purchases20 Gross sales21 Maturity shifts22 Exchanges

All maturities23 Gross purchases24 Gross sales25 Redemptions

Matched transactions26 Gross purchases27 Gross sales

Repurchase agreements28 Gross purchases29 Gross sales

30 Net change in U.S. Treasury securities

FEDERAL AGENCY OBLIGATIONS

Outright transactions31 Gross purchases32 Gross sales33 Redemptions

Repurchase agreements34 Gross purchases35 Gross sales

36 Net change in federal agency obligations

37 Total net change in System Open Market Account.

10,9320

405,296405,296

900

3900

43,574-35,407

1,776

5,3660

-34,64626,387

1,4320

-3,0937,220

2.5290

-2.2531,800

20,6490

2,676

2.197,7362,202.030

331.694328,497

00

1.003

36,85136,776

-928

15,948

9,9010

426,928426,928

0

5240

30,512-41,394

2,015

3,8980

-25,02231,459

1,1160

-5,4696,666

1,6550

-203,270

17,0940

2,015

3.092,3993,094,769

457,568450,359

00

409

75,35474,842

103

20,021

9,1470

419,347418,997

0

5,7480

43,473-27,499

1,996

20.2990

-39,74420,274

3,1010

-1,9545.215

5,8270

-1,7752,360

44,1220

1,996

3,586,5843,588,905

810.485809,268

41,022

00

1,540

160.409159,369

-500

40.522

00

39,31339,313

0

00

3,193-1.267

416

00

-3,1931,267

770000

648000

1,4180

416

316.425318,485

75,32378,157

-3,893

00

215

15,63915,157

267

-3,626

00

33,48533,485

0

1.4620

5.231-4,126

0

3,3230

-4,8831,651

4850

311,295

9540

-3791.180

6,22400

272,474269.586

73,61873,064

9,666

00

26

23,05420,976

11,718

4,5450

26,90526,905

0

1,9470

1.748-2,329

0

4,4710

-1,7482,329

613000

1,214000

12,79000

353,726355,668

97,93287,160

20,05621.186

-1,130

20.490

00

41.73141,7312.000

00

3,447-400

478

00

- 3 4470

000

400

0000

00

2,478

332,581332,795

45,54465,932

-23.079

12,48813,872

-1,384

-24,463

00

29,29029,290

0

00

6.098-6,128

0

00

-3,2133,383

00

-2.8841,420

000

1.325

000

326,812326.245

33.42830,583

3,412

9,6158,776

829

4,241

00

28,18028,180

0

00

1,964-5,736

0

3,7630

-1,9645,736

283000

743000

4,78900

364,307364.537

40,21137,010

7,760

00

50

17,68518,342

-707

7,053

3,5500

36,09736,097

0

1.3690

4,369-2.601

286

2,9930

-4,3692,201

495000

000

400

8,4070

286

372.587372,572

59.54850,663

17,021

00

74

13,54713.042

431

17,452

1. Sales, redemptions, and negative figures reduce holdings of the System Open MarketAccount; all other figures increase such holdings.

2. Transactions exclude changes in compensation for the effects of inflation on the principalof inflation-indexed securities



1.18 FEDERAL RESERVE BANKS Condition and Federal Reserve Note Statements'

Millions of dollars

Account

ASSETS

1 Gold certificate account1 Special drawing rights certificate account3 Coin

Loans4 To depository institutions5 Other6 Acceptances held under repurchase agreements

Federal agency obligations7 Bought outright8 Held under repurchase agreements

11 Bills12 Notes13 Bonds14 Held under repurchase agreements

15 Total loans and securities

16 Hems in process of collection

Other assets18 Denominated in foreign currencies19 All other4

LIABILITIES

21 Federal Reserve notes

22 Total deposits

24 U.S. Treasury—General account

26 Other . .

27 Deferred credit items

29 Total liabilities

CAPITAL ACCOUNTS

30 Capital paid in

33 Total liabilities and capital accounts

MEMO34 Marketable U.S. Treasury securities held in custody for

foreign and international accounts

35 Federal Reserve notes outstanding (issued to Banks)36 LESS: Held by Federal Reserve Banks37 Federal Reserve notes, net

Collateral held against notes, net38 Gold certificate account39 Special drawing rights certificate account40 Other eligible assets41 U.S. Treasury and agency securities

42 Total collateral

Wednesday

1998

Apr. 29 May 6 May 13 May 20 May 27

End of month

1998

Mar. 31 Apr. 30 May 31

Consolidated condition statement

11,0489,200

457

6000

5511.808

468,453

442.406199,906180,58661,91326,047

470,871

7.7431.284

16.74417 243

534.591

451.926

59.716

17,37241,801

199343

6,8144,838

523,294

5,4755 220

602

534,591

604,030

11,0489.200

457

6900

5510

437,682

437.682195,181180.58761.913

0

438,301

8,5431,285

17,13913 904

499,877

453,681

22,365

17,7294,107

154375

7,3814,802

488,229

5,4875,220

941

499,877

605,791

11.0489,200

449

8900

5510

437,644

437,644195,143180,58861,914

0

438,284

6,7491,287

17,14714 231

498,395

454,110

21,776

16,1205,127

155373

6.3414.771

486,999

5,5635,220

613

498,395

606,862

11,0489,200

434

13500

5511.050

445,765

442,820200,318180,58961,914

2,945

447,500

7,1871,288

17,15611 769

505,582

454,728

27,968

22.7264.697

174371

6,6354,715

494,046

5,6585,220

658

505,582

608,700

11,0499.200

404

12500

5510

442,643

442,643200,140180.59061,914

0

443319

10,1061,287

17,16411 979

504,508

457,038

22,159

16,6565,013

179311

9,0164,639

492.853

5.7205.220

714

504,508

606,305

11,0499,200

527

2900

6251,450

440,028

433.182195.258176.43661.4886.846

442,131

9,6911,279

16,71113,930

504,519

450,095

30,456

24,4455,490

167354

8,2604,601

493,412

5,4715.202

434

504,519

613,236

11,0489,200

463

8600

5511,955

457,053

441,322198,823180,58661,91315,731

459,645

4,9971,284

17,13215,417

519,187

451,687

45,106

16,57028.014

162360

5,5005.155

507,449

5,4755,2201,043

519,187

604.758

11,0499,200

407

13600

551230

443,977

440,980198,476180,59061,914

2,997

444,893

5,1651,287

16.99512 356

501352

455,565

24,112

17,9545,693

156309

4,9314,993

489,602

5,7215,218

811

501,352

606.393

Federal Reserve note statement

560,370108.444451.926

11.0489,200

0431,677

451,926

561,661107,980453,681

11.0489.200

0433,433

453,681

563,638109,528454,110

11.0489,200

0433,862

454,110

564,878110,149454,728

11,0489,200

0434,480

454,728

565.846108.807457,038

11,0499,200

0436,790

457,038

553,090102,995450,095

11,0499.200

0429,846

450,095

560,384108,697451,687

11,0489,200

0431.438

451,687

566,773111,209455,565

11,0499,200

0435,316

455,565

1. Some of the data in this table also appear in the Board's H.4.1 (503) weekly statisticalrelease. For ordering address, see inside front cover.

2. Includes securities loaned—fully guaranteed by U.S. Treasury securities pledged withFederal Reserve Banks—and includes compensation that adjusts for the effects of inflation onthe principal of inflation-indexed securities. Excludes securities sold and scheduled to bebought back under matched sale-purchase transactions.

3. Valued monthly at market exchange rates.4. Includes special investment account at the Federal Reserve Bank of Chicago in Treasury

bills maturing within ninety days.5. Includes exchange-translation account reflecting the monthly revaluation at market

exchange rates of foreign exchange commitments.


1.19 FEDERAL RESERVE BANKS Maturity Distribution of Loan and Security Holding

Millions of dollars

Federal Reserve Banks Al 1

Type of holding and maturity

Wednesday

1998

Apr. 29 May 6 May 13 May 20 May 27

End of monlh

Mar. 31

1998

Apr. 30 May 31

1 Total loans

2 Within fifteen days1

3. Sixteen days to ninety days

4 Total U.S. Treasury securities2

5 Within fifteen days'6 Sixteen days to ninety days7 Ninety-one days to one year8 One year to five years9 Five years to ten years

10 More than ten years11 Total federal agency obligations

12 Within fifteen days'13 Sixteen days to ninety days14 Ninety-one days to one year15 One year to five years16 Five years to ten years17 More than ten years

564

468,453

41,30397.214139.52199,01640,62250.776

2,359

017512622525

762

437,682

12,91788,524146,06898.77240,62350,777

551

00

17512622525

2069

437,644

13,31287.861146.29898,77240,62350,777

551

05012512622525

12312

445,765

17,74791,940145,42096,86843,01350,777

1,601

1,0505012512622525

125

1169

442,643

16,21196,740139,03396,86843,01350,777

551

05012512622525

1712

440.028

20.42394,170137.83897.09540.12650,376

2,075

1,5101417512622525

6224

457,364

21.35091,141154,70398,77240,62250,777

2,209

1,6580

17512622525

7858

443,976

5,745102.385145,188

43,01350,777

781

2307512512620025

1. Holdings under repurchase agreements are classified as maturing within fifteen days iaccordance with maximum maturity of the agreements.

2. Includes compensation that adjusts for the effects of inflation on the principal ofinflation-indexed securities.



1.20 AGGREGATE RESERVES OF DEPOSITORY INSTITUTIONS AND MONETARY BASE1

Billions of dollars, averages of daily figures

1994Dec.

1995Dec.

1996Dec.

1997Dec.

1997

Oct. Nov. Dec.

1998

Jan. Mar. Apr.' May

ADJUSTED FORCHANGES IN RESERVE REQUIREMENTS

1 Total reserves3

2 Nonborrowed reserves4

3 Nonborrowed reserves plus extended credit"4 Required reserves5 Monetary base

Seasonally adjusted

59.4159.2059.2058.24

418.12

56.4056.1456.1455.12

434.17

50.0849.9349.9348.66

452.38

46.6746.3546.3544.99

480.15

45.9645.6945.6944.56

471.98

46.3146.1646.1644.69

476.19

46.6746.3546.3544.99

480.15

46.5046.2946.2944.72

482.85

45.7245.6645.6644.20

484.24

46.0546.0146.0144.73

485.90

45.9645.8945.8944.61

487.27

Not seasonally adjusted

6 Total reserves7 Nonborrowed reserves8 Nonborrowed reserves plus extended credit5. . .9 Required reserves8

10 Monetary base9

NOT ADJUSTED FORCHANGES IN RESERVE REQUIREMENTS10

11 Total reserves11

12 Nonborrowed reserves13 Nonborrowed reserves plus extended credit5

14 Required reserves15 Monetary base16 Excess reserves13

17 Borrowings from the Federal Reserve

61.1360.9260.9259.96

422.51

61 3461.1361.1360.17

427.251,17.21

45.6045.4445.4444.45

489.19

58.0257.7657 7656.74

439.03

57.9057.6457.6456.62

444.451.28.26

51.5251.3751.3750.10

456.72

51.2451,0951.0949.82

463.49142.16

47.9747.6547.6546.29

485.11

47.8847.5647.5646.20

491.921.68.32

45.6945.4245.4244.30

470.41

45.6245.3545.3544.23

477.281,40.27

46.5346.3846.3844.91

476.62

46.4546.3046.3044.83

483.501.62.15

47.9747.6547.6546.29

485.11

47.8847.5647.5646.20

491.921.68.32

47.4947.2847.2845.71

484.42

47.5047.2947.2945.71

491.621.78.21

44.9944.9444.9443.47

481.36

44.9744.9244.9243.45

488.431.52.06

45.5545.5045.5044.23

484.04

45.5145,4745.4744.19

491.001.32.04

46.5346.4546.4545.18

487.42

46.4846.4046.4045.13

494.171.35.07

44.8744.7244.7243.72

488.37

44.8144.6644.6643.66

495.041.15

15

1. Latest monthly and biweekly figures are available from the Board's H.3 (502) weeklystatistical release. Historical data starting in 1959 and estimates of the effect on requiredreserves of changes in reserve requirements are available from the Money and ReservesProjections Section, Division of Monetary Affairs, Board of Governors of the Federal ReserveSystem, Washington, DC 20551.

2. Figures reflect adjustments for discontinuities, or "breaks." associated with regulatorychanges in reserve requirements. (See also table 1.10.)

3. Seasonally adjusted, break-adjusted total reserves equal seasonally adjusted, break-adjusted required reserves (line 4) plus excess reserves (line 16).

4. Seasonally adjusted, break-adjusted nonborrowed reserves equal seasonally adjusted,break-adjusted total reserves (line 1) less total borrowings of depository institutions from theFederal Reserve (line 17).

5. Extended credit consists of borrowing at the discount window under the terms andconditions established for the extended credit program to help depository institutions dealwith sustained liquidity pressures. Because there is not the same need to repay suchborrowing promptly as with traditional short-term adjustment credit, the money market effectof extended credit is similar to that of nonborrowed reserves.

6. The seasonally adjusted, break-adjusted monetary base consists of (1) seasonallyadjusted, break-adjusted total reserves (line 1), plus (2) the seasonally adjusted currencycomponent of the money stock, plus (3) (for all quarterly reporters on the "Report ofTransaction Accounts, Other Deposits and Vault Cash" and for all diose weekly reporterswhose vault cash exceeds their required reserves) the seasonally adjusted, break-adjusteddifference between current vault cash and the amount applied to satisfy current reserverequirements.

7. Break-adjusted total reserves equal break-adjusted required reserves (line 9) plus excessreserves (line 16)

8. To adjust required reserves for discontinuities that are due to regulatory changes inreserve requirements, a multiplicative procedure is used to estimate what required reserveswould have been in past periods had current reserve requirements been in effect. Break-adjusted required reserves include required reserves against transactions deposits and nonper-sonal time and savings deposits (but not reservable nondeposit liabilities).

9. The break-adjusted monetary base equals (1) break-adjusted total reserves (line 6), plus(2) the (unadjusted) currency component of the money stock, plus (3) (for all quarterlyreporters on the "Report of Transaction Accounts, Other Deposits and Vault Cash" and for allthose weekly reporters whose vault cash exceeds their required reserves) the break-adjusteddifference between current vault cash and the amount applied to satisfy current reserverequirements.

10. Reflects actual reserve requirements, including those on nondeposit liabilities, with noadjustments to eliminate the effects of discontinuities associated with regulatory changes inreserve requirement-,.

11. Reserve balances with Federal Reserve Banks plus vault cash used lo satisfy reserverequirements.

12. The monetary base, not break-adjusted and not seasonally adjusted, consists of (1) totalreserves (line 11), plus (2) required clearing balances and adjustments to compensate for floatat Federal Reserve Banks, plus (3) the currency component of the money stock, plus (4) (forall quarterly reporters on the "Report of Transaction Accounts, Other Deposits and VaultCash" and for all those weekly reporters whose vault cash exceeds their required reserves) thedifference between current vault cash and the amount applied to satisfy current reserverequirements. Since the introduction of contemporaneous reserve requirements in February1984, currency and vault cash figures have been measured over the computation periodsending on Mondays

13. Unadjusted total reserves (line 11) less unadjusted required reserves (line 14).


Monetary and Credit Aggregates A13

1.21 MONEY STOCK, LIQUID ASSETS, AND DEBT MEASURES1

Billions of dollars, averages of daily figures

1994Dec.

1995Dec.

1996Dec.

1997'Dec.

1998'

Feb. Mar. Apr. May

Seasonally adjusted

1,150.73,503.04,333.65,315.8

13,003.1r

354.38.5

384.0403.9

2,352.3830.6

752.6503.2298.7

397.3314.264.7

385.0203.1

183.380.8

3.492.4r

9,510.7'

1,128.73,651.24,595.65,702.2

13,702.3'

372.48.9

391.0356.4

2.522.6944.4

775.0575.8345.4

359 7357.2

74.2

454 9253.9

182.488,6

3,638.9'10,063.4'

1,082.83.826.14,931.1'6,083.9'

14.4322'

394.98.6

403.6275.9

2,743.21,105.0'

904.8594.5413.2

366.9354.378.0

5228310.3

194.2109.2'

3.780.6'10,651.6'

1,076.04,045.85,374.96,609.4

15.170.7

425.58.2

397.1245.2

2,969.71,329.1

1,020.9625.7487.5

376.6343.985.4

602.6376.2

234.8145.2

3,798.411.372.3

1,076.54,103.95,464.86,744.9

15.330.8

431.08.1

391.9245.5

3.027.41,360.9

1,044.7626.3504.9

382.9344.5

87.8

629.0384.7

239.9143.5

"i.792.911,537.9

1,081.14,132.35,532.36.813.6

15.413.4

432.48.1

391.2249.5

3.051.21,400.0

1.055.2626.2524.2

386.6342.9

87.2

640.3391.9

257.6139.1

3.797.311.616.1

1,080,84,165.05,581.96,830.9

15,476.9

433.78,0

388.6250.5

3,084.11.416.9

1,078.0626.5521.2

390.0339.8

88.2

649 9408.8

257.0141.7

3.788.911.688 0

1,078.14,174.65,611.4

n.a.n.a.

435.68.0

388.0246.5

3.096.51,436.8

1,078.2624.4524 4

395.3338.186.9

660.6422.0

258.4145.1

n a.


1.17443.523.44.353.25,344.6

13,004.5'

357.58.1

400.3408.6

2,349.0829.7

751.7501.5298.9

396.8313.264.8

385.9204.6

179.681.8

3,499.09,505.5'

1,152.43.672.04,615.25,732.7

13.702.5'

376.28.5

407.2360.5

2,519 6943.2

774 15718345.8

359.2355.974.3

456.4255.8

178.089.4

3,645.910,056.6'

1,104.93,845.44,948.9'6,111.9'

14,431.0'

397.98.3

419.9278.8

2,740.51.103.5'

903.3592.7413.6

366.4353.2

78.1

524.8312.7

188.8110.3'

3,787.910,643 1'

1,097.64,064.75,392.16,634.9

15,168.8

429.079

413.0247.7

2,967.11,327.4

1,019.0624.1487.9

375.9343.085.4

605.1378.9

228.2146.9

3,805.811,363.1

1,063.94.090.65,462.66,737.3

15.294.1

428.97.8

383.1244.1

3,026.61.372.1

1,040.2626.5501.5

381.2344.787.2

634.0397.7

239.9145.8

3,795.311,498.8

1.074,64,143.55,551.16,835.9

15,390.6

431.57.9

385.4249.9

3.068.91.407.6

1,060.2626.6522.9

388.4343.187.0

650.5400.2

256.5141.0

3,820.711.569.9

1.086.24.185 75,596.46,852.3

15,450.2

433 77.9

388.7255.9

3,099.51,4107

1.083 3627 2517.7

391.9340.287.6

656.9405.8

257.4142.2

3,800.511,649.7

1.068.74,154.05,589.4

n.a.n.a.

436.27.9

3SO.3244.4

3,085.31,435.4

1,076 7625.0525.6

394.7318587 1

650.4414.1

262.4146.1

n.a.n.a.

Measures'1 Ml2 M23 M34 L5 Debt

MI components6 Currency"7 Travelers checks4

8 Demand deposits5

9 Other checkable deposits6


11 InM3 only8

Commercial banks12 Savings deposits, including MMDAs . . .13 Small time deposits9

14 Large time deposits10" M

Thrift institutions15 Savings deposits, including MMDAs. . .16 Small time deposits9

17 Large time deposits10


Repurchase agreements and Eurodollars20 Repurchase agreements'"21 Eurodollars12

Debt components22 Federal debt23 Nonfederal debt

Measures24 Mi25 M226 M327 L28 Debt

Ml components29 Currency30 Travelers cheeks'*31 Demand deposits3

32 Other checkable deposits". , ,


34 In M3 only*

Commercial banks35 Savings deposits, including MMDAs36 Small time deposits37 Large time deposits10" "

Thrift institutions38 Savings deposits, including MMDAs . .39 Small time deposits9

40 Large time deposits10


Repurchase agreements and Eurodollars43 Repurchase agreements'"44 Eurodollars

Debt components45 Federal debt . . . .46 Nonfederal debt..

Footnotes appear on following page.



NOTES TO TABLE 1.21

1. Latest monthly and weekly figures are available from the Board's H.D (50S) weeklystatistical release Historical data starting in 1959 are available from the Money and ReservesProjections Section, Division of Monetary Affairs, Board of Governors of the Federal ReserveSystem, Washington. DC 20551.

2. Composition of the money stock measures and debt is as follows:Ml: (I) currency outside (he U.S. Treasury, Federal Reserve Banks, and the vaults of

depository institutions. {2\ travelers checks of nonbank issuers, (3) demand deposits m allcommercial banks other than those owed to depository institutions, the U.S. government, andforeign banks and official institutions, less cash items in the process of collection and FederalReserve Moat, and (4) other checkable deposits (OCDs), consisting of negotiable order ofwithdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions,credit union share draft accounts, and demand deposits at thrift institutions. Seasonallyadjusted Ml is computed by summing currency, travelers checks, demand deposits, andOCDs. each seasonally adjusted separately.

M2: Ml plus (1) savings deposits (including MMDAs), (2) small-denomination timedeposits (lime deposits—including retail RPs—in amounts of less than $100,000), and (3)balances in retail money market mutual funds (money funds with minimum initial invest-ments of less than $50,000). Excludes individual retirement accounts (IRAs) and Keoghbalances at depository institutions and money market funds. Seasonally adjusted M2 iscalculated by summing savings deposits, small-denomination time deposits, and retail moneyfund balances, each seasonally adjusted separately, and adding this result to seasonallyadjusted Ml.

M3' M2 plus (I) large-denomination time deposits (in amounts of $100,000 or more)issued by all depository institutions, (2) balances in institutional money funds (money fundswith minimum initial investments of $50,000 or more), (3) RP liabililies (overnight and term)issued by all depository institutions, and (4) Eurodollars (overnight and term) held by U.S.residents at foreign branches of U.S. banks worldwide and at all banking offices in the UnitedKingdom and Canada. Excludes amounts held by depository institutions, the U.S. govern-ment, money market funds, and foreign banks and otricuil institutions. Seasonally adjustedM3 is calculated by summing large time deposits, institutional mone> fund balances. RPliabilities, and Eurodollars, each seasonally adjusted separately, and adding this result toseasonally adjusted M2.

L: M3 plus the nonbank public holdings of U.S. savings bonds, short-term Treasurysecurities, commercial paper, and bankers acceptances, net of money market fund holdings of

these assets. Seasonally adjusted L is computed by summing U.S. savings bond?,, short-termTreasury securities, commercial paper, and bankers acceptances, each seasonally adjustedseparately, and then adding this result to M3.

Debt: The debt aggregate is the outstanding credit market debt of the domestic nonhnancialsectors—the federal sector (U.S. government, not including government-sponsored enter-prises or federally related mortgage pools) and the nonfederal sectors (state and localgovernments, households and nonprofit organizations, nonlinaiKial corporate antl nontarmnoncorporate businesses, and farms). Nonfederal debt consists of mortgages, tax-exempt andcorporate bonds, consumer credit, bank loans, commercial paper, and other loans. The data,which are derived from the Federal Reserve Board's flow of funds accounts, are break-adjusted (that is, discontinuities in the data have been smoothed into the series) andmonth-averaged (that is, the data have been derived by averaging adjacent month-end levels)

3. Currency outside the U.S. Treasury, Federal Reserve Banks, and vaults of depositoryinstitutions.

4. Outstanding amount of U.S. dollar-denominated travelers checks of nonbank issuers.Travelers checks issued by depository institutions are included in demand deposits

5. Demand deposits at commercial banks and foreign-related institutions other than thoseowed to depository institutions, ihe I1 S. government, and foreign banks and official institu-tions, less cash items in the process of collection and Federal Reserve float.

6. Consists of NOW and ATS account balances at all depository institutions, credit unionshare draft account balances, and demand deposits at thrift institutions.

7. Sum of (I) savings deposits (including MMDAs), <2) small time deposits, and (3) retailmoney fund balances.

8. Sum of (1) large time deposits, (2) institutional money fund balances, (3) RP liabilities(overnight and term) issued by depository institutions, and (4) Eurodollars (overnight andterm) of U.S. addressees.

9. Small time deposits—including retail RPs—are those issued in amounts of less than$100,000. All IRAs and Keogh accounts at commercial banks and thrift institutions aresubtracted from small time deposits.

10. Large time deposits are those issued in amounts of $100,000 or more, excluding thosebooked at international banking facilities.

1 I. Large time deposits at commercial banks less those held by money market funds,depository inscicutions, the U.S. government, and foreign banks and official institutions.

I 2. Includes both overnight and term.


1.26 COMMERCIAL BANKS IN THE UNITED STATES

A. All commercial banks

Billions of dollars

Commercial Banking Institutions—Assets and Liabilities A15

Assets and Liabilities'

Account

Assets1 Bank credit2 Securities in bank credit3 U.S. government securities4 Other securities5 Loans and leases in bank credit- . .6 Commercial and industrial7 Real estate8 Revolving home equity9 Other

10 Consumer1 1 Security1

12 Other loans and leases13 Interbank loans14 Cash assets4

15 Other assets-^

1 6 Total assets'1

Liabilities17 DepositsIK Transaction19 Nontransaction20 Large time21 Other22 Borrowings2.1 From banks in the U.S24 From others25 Net due to related foreign offices26 Other liabilities


28 Residual (assets less liabilities)7

Assets29 Bank credit30 Securities in bank credit3] U.S. government securities32 Other securities33 Loans and leases in bank credit-34 Commercial and industrial . . . .35 Real estate36 Revolving home equity37 Other ' . . .38 Consumer39 Security'40 Other loans and leases41 Interbank loans42 Cash assets4

43 Other assets^

44 Total assets'

Liabilities45 Deposits46 Transaction47 Nonlransaction48 Large time49 Other50 Borrowings5 1 From banks in the U.S52 From others^} Net due to related foreign offices. .54 Other liabilities


56 Residual (assets less liabilities)' . . . .

M E M O

57 Revaluation gains on off-balance-sheetitems*

58 Revaluation losses on off-balance-sheet items*

Monthly averages

1997

May

3,907.41,012.0

714.4297.6

2,895.3812.5

1,180.290.6

1,089.6517.9

89.8295.0217.9246.3281.9

4396.9

2.941.0691.5

2,249.5566.7

1.682.8766.03 1 1 /454.4'231.3268.9

4207.2

389.7

1997'

Nov. Dec.

4.069.51.075.9

742.2333.7

2,993.6844.1

1 225 696.7

1.128.8507.399.3

317.3204.0274.3290.3

4.781.5

3.104.8693.0

2.411."633.2

1.778.781.5.9300.35157192.32846

4J97.7

383.8

4.090.71.082.7

746.7336.0

3,008.0851.8

1 229297.6

1,131.6507.396.8

322.9211.8263.6289.5

4,799.0

3,110.9686.8

2.424.0636.5

1.787.5821.2304.1517.1202.4282.9

4,417.5

381.5

1998'

Jan.

4,148.21,104.5

760.3344.1

3,043.8861.7

1,232.998,0

1,134.9504.6116.2328.3201.2265.4290.6

4*48.9

3,113.8678.4

2.435.4643.4

1.791.9828.8291.3537.62.30.7294.8

4,468.2

380.7

Feb.

4,179.61,108.6

767.8340.8

3,071.0868.9

1.247.998.2

1,149.7503.0117.9333.4199.8269.2293.3

4,885.2

3,150.2684.9

2.465.2659.4

1.805.9829.02923536.722.1(1298.7

4500.8

384.4

Mar.

Seasonall

4,217 41,127.0

779 4347.6

3.090.4870.5

1.259.298.3

1.160 8502.1116.81418216.7281.0292.2

4,950.3

3.189.3695.7

2.493.6673.5

1,820.1859.7307.2552.5201.1293 9

4,543.9

4063

Apr.

^ adjusted

4.203.11,106.7

762.0.344.7

3,096.6868.8

1 267 798.6

1,169.1496.6111.9351.6212.6274.1305.9

4,938.8

3.201.2693.6

2.507.6670.2

1.837.4870.7307.7563.017.1.9288.5

4,5343

404.4

May

4.234.31.122.2

769.3352.9

3,112.1876.7

1.269.198.1

1.171.0496.6120.0349.7201.8257.1313.7

4,949.8

3.197.1684.5

2,512.6672.3

1.840.3867.9286.5581.5167.0293.5

4,525.6

424.2

Wednesd y figures

1998

May 6

4,232 21,117.7

771 9345.8

3,114.5873.7

1,272.198.4

1.173.6497.1117.8351.8200.325.1.7308.2

4.937J

3,192.6673.3

2,519.3671.6

1,847.7872.1291.9580.1171.2290.4

4,526.2

411.0

May 13

4.229 11.116.3

764.4351.9

3.112.8874.1

1,269.798.3

1,171.3495.6125.2348.3201.7252.6.117.8

4.944.1

3.194.9682.4

2.512.4671.2

1,841.2862.2284.2578.0167.6292.4

4317.1

427.0

May 20

4.230.31.125.5

770.2355.3

3,104.8876.0

1.266.098,1

1,167.94966117.6348.7205.8261.0314.5

4,954.3

3.185.1681.1

2.504.0671.1

1.832.9874.0288.2585.8170.4294.7

4324.2

430.1

May 27

4.2JO.71.127.8

771.(13568

3.112.9878.1

1.268.498.0

1.170.3497.8119.4349.2196.8271.3312.9

4,964.6

3.210.5712.9

2.497 7668.2

1.829.58663279.3587.0162.4295.9

4335.1

429.5


3,903.81,017.1

718.S298.3

2.8866817.6

1,174 990.3

1,084.6512.9S9.2

292 0213.9242.1281.4

4,585.0

2,926.7680.0

2,246.7567.4

1.679.3770.331 Iff457.3'236.5268.4

4319

383.1

S2.4

85.5

4.077 21.075.5

743.7331.7

3.001 7842.8

1.231.797.4

1.134.35(19.9100.1317.1209.3284.3291.4

4,805.4

3,122.9703.8

2,419.2638.9

1.780.3813.4300.65I2.S188.4286.2

4,411.0

394.5

84.2

85.4

4.100.51,077.9

744.7333.2

3.022.6850.1

1.232.797.9

1,134.8513.699.3

327.0221.2282.8289.9

4,837.7

3.143.2721.0

2.422.2641.1

1,781.1819.2307.9511.3200.3283.9

4,446.6

391.1

82.5

85.8

4.155.51.104.9

757.0347°

3.050.5859.4

1,233.098,3

1.134.7511.4116.4330.4208.1276.4289.1

4,872.8

3,119.9690.4

2,429.5641.7

1,787.8835.3294.7540.5231.0294.9

4,481.1

391.7

93.1

95.6

4,177.01,112.0

766.7345.3

3.065.0868.8

1.242.697.8

1.144.8502.5119.4311.7202.8269.3294.4

4.887.0

3.137.4678.2

2,459.2658.3

1.800.9829.7293.3536.4221.1299.9

4.488.1

398.9

87.5

89.8

4,207.81.128.3

782.7345.6

3,079.58740

1,252.797.3

1.155.3495.6117.7339.6216.2269.4292.1

4,928.6

3.180.1683.4

2,496 7671.0

1.825.7851 7304.8546 9199.4294.2

4325J

403.3

872

89.4

4.207.91.117.3

770.4147 0

1.090.6876.3

1.261.297.7

1.163.5491.8113.5347.8215.3269.3303.9

4.939.8

3.200.7698.8

2.501.9664.7

1,837.2870.8307.0561.8173.1287.6

43327

407.6

83.5

84.6

4.229.21,126.8

773.8353.0

3,102.4882.1

1.262.897.8

1,165.0491.5119.6346.4197.4252.7313.1

4,935.4

3,180.8672.8

2,508.0672.6

1.835.4873.4287.6585.8177.4292.9

4324-5

410.9

85.5

85.0

4,243.01,132.3

780.8351.5

3,110.7883.5

1,265.598.1

1.167.4492.0119.6350.1199.6248.4309.8

4,943.7

3,183.7669.6

2,514.1670.8

1,843.3885.5295.8589.7174.9289.8

4333.9

409.8

84.3

82.8

4,221.71,121.2

768.7352.4

3,100.6879.6

1.263.498.0

1.165.4489.9124.2141.4195.5244.8317.4

4JI22.4

3,173.1666.2

2,507.0670.6

1,836.3868.3284.5583.7176.8292.2

4310.4

411.9

84.3

83.2

4.218.61.125.3

773.7351.6

3.093.3881.4

1.259.097.8

1.161.3491.2117.4344.3199.3245.6311.6

4,918.1

3,154.8657.9

2.496.9671.0

1.825.9877.2288.8588.5181.2293.9

4307.2

410.9

85.0

86.1

4,222.81,125.3

771.6151.7

3.097.4880.1

1.261.597.7

1.163.8492 7117.7345.4188.9271.1311.5

4,9373

3,184.8693.8

2.491.0670.1

1.820.8868.0279.7588.3179.5295.3

4327.7

409.8

86.7

86.5

Footnotes appear on p. A21.



1.26 COMMERCIAL BANKS IN THE UNITED STATES Assets and Liabilities'—Continued

B. Domestically chartered commercial banks

Billions of dollars

Account

Assets1 Bank credit2 Securities in bank credit3 US. government securities4 Other securities5 Loans and leases in bank credit2... .6 Commercial and industrial7 Real estate8 Revolving home equity9 Other

10 Consumer11 Security^12 Other loans and leases13 Interbank loans14 Cash assets4

15 Other assets5

16 Total assets6

Liabilities17 Deposits18 Transaction19 Nontransaction20 Large time21 Other22 Borrowings23 From banks in the US24 From others25 Net due to related foreign offices . . . .26 Other liabilities



Assets29 Bank credit30 Securities in bank credit31 U.S. government securities32 Other securities33 Loans and leases in bank credit-34 Commercial and industrial35 Real estate36 Revolving home equity37 Other '38 Consumer39 Security3


43 Other assets5

4 4 T o t a l a s s e t s 6 . . . .

Liabilities45 Deposits46 Transaction47 Nontransaction48 Large time49 Other50 Borrowings51 From banks in the ILS52 From others53 Net due to related foreign offices. .54 Other liabilities


56 Residual (assets less liabilities!7

MEMO57 Revaluation gains on off-balance-srieel

itemss

58 Revaluation losses on off-balance-sheet items*

59 Mortgage-backed securities9

Monthly averages

1997

May

1997'

Nov. Dec.

1998'

Jan. Feb. Mar. Apr. May

Wednesd jy figures

1998

May 6 May 13 May 20 May 27

Seasonally adjusted

3,373.1843.2631.8211.4

2.529.9591.2

1,149.490.6

1.058.9517.945.9

225.4197.8212.3242.8

3,969.7

"•693 7680.8

2,013.0331.9

1.681.1b24.3279.3'345.01

87.9177.7

3.583.6

386.1

3.521.0883.6663.0220 6

2.637.4622.6

1.198.996.7

1.102.2507.3

57.6250.9180.3239.4245.1

4,129.4

2.812.0682.7

2,149.3373.9

1.775.3659.6271.3388.375.2

188.6

3,755.5

373.9

3.546.7895.5670.5225.1

2,651.2630.5

1.203.397.6

1,105.7507.353.0

257.1180.5230.1247.2

4,148.1

2,838 3677.0

2,161.4376.7

1,784.7671.7278.3393.4

80.8187.4

3.778.2

369.8

3,579.5911.4679.1232 2

2,668.2638.5

1,206.498.0

1,108.3504.661.4

257.3173.2232.6250.0

4,179.0

2,840.3668.2

2,172.1381.9

1,790.2679 1267.7411.491.1

198.3

3,808.8

370.1

3,611.0915.6684.0231 6

2.695.4646.4

1,222.098.2

1,123.8503.063.1

261.0175.0236.5250.9

4,217.0

2,865.3674.8

2,190.6386.5

1,804.0684.2269.6414.6

88.3201.1

3,838.9

378.2

3,651.5929.6691.9237 7

2,721.9650.2

1.234.598.3

1.136.2502.1

68.0267.1195.8246.9249.3

4,286.9

2 900 4685.1

2.215.3396.9

1,818.4705.7281.3424.4

82.6199.7

3,888.4

398.4

3,648.7915.5674.8240 7

2,733.2654.2

1,243.698.6

1,145.0496.6

63.8274.9192.4238.8263.5

4,286.6

2 909 4682.6

2,226.8390.3

1.836.5705.7281.1424.7

75.5197.9

3,888.5

398.1

3,670.1928.1681.3246.8

2,742.0663.2

1,246.098.1

1,147.9496.6

62.0274.2181.2222.6271.8

4,288.8

2 902.9673.9

2.228.9388.6

1.840.4699.7262.4437.3

70.0200.0

3,872.6

416.2

3,663.5920.6679.5241.1

2,742.9658.7

1,248.598.4

1,150.0497.1

61.4277.3178.4219.4267.3

4,271.7

2.896.8662.9

2,234.0386.6

1.847.37064270.5435.9

63.9198.5

3,865.6

406.1

3,668.6927.9681.6246.3

2,740.7661.4

1.246.698.3

1,148.2495.6

64.5272.7182.4217.3272.4

4,283.7

2 900 0672.0

2.227.9387.2

1,840.8691.7259.5432.2

79.0195.5

3,866.2

417.5

3.668.2931.7683.6248.1

2,736.5662.0

1,243.198.1

1.145.0496.6

60.9273.8184.0226.7273.5

4,295.1

2,892.7671.4

2,221.4388.6

1,832.8704.3263.5440.7

73.9202.1

3,873.1

422.0

3,674.8931.7681.5250.2

2,743.1665.7

1.245.398.0

1,147.3497.8

61.1273.2177.5237.0272.8

4305.2

2,920.3700.7

2.219.6389.7

1,830.0699.9256.6443.3

65.2203.9

3,889.2

416.0


3,368.5845.0635.8'209.2

2,523.5596.8

1,144.390.3

1.054.0512.946.0

223.5193.92086241.9

3,956.8

2,677.3669.6

2,007.7330.9

1,676.7628.6'280.6'347.91

92.3177.7

3,575.9

3809

42.0

4V4252.0

3,533.8886.7663.4223.3

2,647.1621.6

1,204.897.4

1.107.4509.958.6

252.2185.6248.6245.5

4,157.1

2,850.6693.6

2,157.1378.4

1.778.7657.1271.6385.570.6

188.6

3,767.0

390.1

41.3

43.4275.1

3,557.4894.5668.7225.8

2,662.9627.9

1,206.697.9

1,1 OR.7513654.3

260.5189.9247.7246.8

4,185.3

2.867.6710.7

2.156.8376.9

1.779.9669.7282.0387.673.8

187.4

3,798.4

386.9

41.1

44.0281.0

3,589.9917.2677.8239.4

2,672.7635.3

1,206.498.3

1,108.2511461.5

258.1180.0243.6248.1

4,205.5

2,848.3680.3

2,168.1381.2

1,786.8685.5271.2414.4

86.5198.3

3,818.8

386.8

49.9

52 6289.7

3,609.0922.1683.7238.4

2.686.8645.1

1,216.597.8

1.118.7502.564.4

258.3178.0237.3250.5

4,218.4

2,854.8668.3

2,186.6386.9

1,799.6684.9270.6414.3

85.1201.1

3,825.9

392.5

47.0

49.2293.8

3.642.3932.9694.5238.5

2.709.3653.0

1.228.097.3

1.130.7495 668.2

264.5195.3236.4249.2

4,266.7

2,890.0672.9

2,217.1392.3

1,824.7697.7278.8418.9

81.8199.7

3,869.2

397.5

47.3

49.6299.5

3.653.6924.7684.6240.1

2,728.9661.7

1X17.497.7

1,139.7491 8

65.9272.1195.1235.8263.9

4,291.9

2,910.5688.1

2,222.3386.1

1.836.3705.8280.4425.4

76.3197.9

3,890.4

401.5

44.2

45 6293.4

3,663.4928.8685.3243.5

2,734.6669.2

1.239.897.8

1,142.0491.5

62.1272.0176.8218.5270.8

4,272.7

2,883.7662.5

2,221.2386.8

1,834.4705.2263.5441.7

79.4200.0

3,868.3

404.4

45.9

46.5294.7

3,671.5930.3686.6243.7

2.741.2668.7

1,242.098.1

1.143.9492 063.2

275.3177.7215.1268.9

4,276.3

2,886.6659.5

2,227.1384.8

1.842.3719.8274.4445.4

68.7198.5

3,873.5

402.9

45.5

45 2294.6

3,660.4929.3686.0243.3

2,731.1667.4

1,240.498.0

1.142.4489 9

64.2269.1176.1210.2271.2

4,261.1

2,876.7656.2

2,220.5385.1

1,835.4697.8259.9438.0

85.5195.5

3,855.5

405.5

45.7

45.7296.9

3.656.4928.7686.7242.0

2,727.7668.1

1,236.397.8

1,138.5491 2

61.4270.8177.5211.8270.0

4,258.8

2,860.4648.5

2.211.9387.0

1,824.9707.5264.1443.5

83.7202.1

3,853.8

404.9

45.1

47.4296.9

3.657.1926.4682.4244.0

2,730.7669.2

1,238.697.7

1,140.9492.7

59.7270.5169.6236.9271.1

4,278.1

2,889.4681.8

2,207.5387.6

1,819.9701.6257.0444,6

80.4203.9

J.875.2

402.9

46.3

47.1291.5




1.26 COMMERCIAL BANKS IN THE UNITED STATES Assets and Liabilities1—Continued

C. Large domestically chartered commercial banks

Billions of dollars

Account

AssetsI Bank credit2 Securities in bank credit3 U.S. government securities4 Trading account5 Investment account6 Other securities7 Trading account8 Investment account9 State and local government..

10 Other11 Loans and leases in bank credit2 . . .12 Commercial and industrial13 Bankers acceptances14 Other15 Real estate16 Revolving home equity17 Other18 Consumer19 Security'20 Federal funds sold to and

repurchase agreementswith broker—dealers

21 Other22 State and local government23 Agricultural24 Federal funds sold to and

repurchase agreementswith others

25 All other loans26 Lease-financing receivables27 Interbank loans28 Federal funds sold to and

repurchase agreements withcommercial banks

29 Other30 Cash assets4

31 Other assets5

32 Total assets'

Liabilities33 Deposits34 Transaction35 Nontransaction36 Large time37 Other38 Borrowings39 From banks in the US40 From others4] Net due to related foreign offices42 Other liabilities


44 Residual (assets less liabilities)'

Monthly averages

1997

May

1997'

Nov. Dec.

1998'


Wednesd y figures

1998


Seasonally adjusted

2,026.6'444.6'315.7

19.4296.3128.963.265.721.444.4

1,582.0'420.0

1.6418.4

64.0'584.9308.741.6

24.217.511.29.4

6.064.871.3

151.9

97.254.7

147.6188.9

2,477.7r

1,507.3'387.7

1,119.6'178.3941.3'475.8200.9274.9

83.7152.4'

y i w

258.5

2,094.4473.8337.8

26.7311.2135.963.572.522.350.2

1,620.6438.9

1.3437.6651.067.5

583.5296.452.1

35.716.410.99.6

8.973.479.5

124.5

81.942.6

166.8180.4

23293

1,554.5382.7

1,171.8206.7965.1505.5200.6304.970.2

159.9

2,290.0

239.4

2,108.6482.7343.127.4

315.8139 663.476.222.154.1

1,625.9445.7

1.2444.5650.1

68.1582.0295.047.3

30.916.410.89.6

11.174.981.3

124.4

82.242.2

158.5184.3

2339.1

1,555.4378.7

1,176.7209.0967.8513.8205.8308.076.5

158.3

2304.0

235.2

2,138.2501.1354.1

29.1325.0147.069.677.422.554.9

1,637.1451.9

1.2450 7647.5

68.6578.9293.9

55.8

39.416410.79.5

7.776.283.9

116.8

76.340.5

160.5186.5

2365J

1,553.9371.2

1,182.7213.6969.2520.9195.3325.6

86.9169.5

2331.2

234.0

2,164.2506.9360.728.0

332.8146.267.578.722.756.0

1.657.3458.3

1.2457.1658.068.6

589.4292.657.3

41.116210.79.5

6.179.984.9

117.7

68.948.8

163.7185.9

23947

1.572.8375.5

1,197.2216.0981.2525.0197.0328.0

82.1171.7

2351.6

243.2

2,199.6518.7368.8

27.5341.4149.971.078.922.856.2

1,680.9461.9

1.3460.7668.1

68.9599.2294.1

61.8

43.718.110.59.6

7.181.186.7

130.7

80.450.3

173.3184.8

2,651.4

1,600.2383.0

1,217.2225.9991.3544.3208.9335.478.5

169.3

23923

259.1

2,192.4506.1355.523.7

331.8150.569.780.923.057.9

1,686.3464.2

1.2463.0672.769.3

603.4290.657.4

39.717.810.69.7

7.184.589.5

125.9

74.451.5

164.2194.9

2,04(1.4

1,601.9381.4

1,220.5218.3

1,002.2542.3208.1334.272.1

166.9

2383.2

257.2

2,206.1515.0359.1

25.7333.4155.974.681.322.858.5

1.691.1471.0

1.2469.8672.768.6

6O4.0290.0

56.1

37.518.510.79.7

5.982.992.1

114.4

63.351.1

148.1200.4

2,631.9

1.587.6373.4

1,214.1214.7999.5534.3188.5345.866.2

168.8

2356.8

275.2

2,202.3509.0358.2

23.5334.7150.969.881.022.958.1

1,693.3467.1

1.2467.3676.369.0

607.3290.455.4

37.218.210.69.7

6.985.990.9

113.9

63.250.7

145.6198.1

2,622.9

1.587.4367.0

1,220.4214.8

1,005.6543.5197.5346.060.5

167.0

2358.4

264.4

2,208.2515.5359.9

23.7336.2155.674.980.622.857.9

1,692.7469.7

1.1470.0674.7

69.0605.7289.858.5

39.019.510.89.7

6.082.191.4

114.9

63.451.5

144.1200.7

2,631.0

1,589.5374.2

1,215.2214.8

1,000.5528.8187.5341.475.0

163.8

2357J

273.8

2,202.9517.4360.4

24.5335.9157.175.281.922.859.1

1.685.4470.1

1.2470.2669.568.6

600.9289.5

55.1

36.019.110.79.7

6.382.092.5

118.0

67.650.4

151.6202.7

2^38.1

1,581.0370.5

1,210.5215 9994.6536.6187.6349.070.3

170.8

2358.8

279.3

2,208.2517.6358.327.5

330.8159.378.281.022.758.3

1,690.6472.8

1.2473.0670.968.4

602.5291.155.3

37.717.710.69.7

5.382.292.7

110.7

59.551.2

159.2199.5

2,640.8

1,595.5390.6

1,204.92131991.8532.4182.8349.660.9

173.3

2362J

278.6

Footnotes appear on p, A21.



1.26 COMMERCIAL BANKS IN THE UNITED STATES Assets and Liabilities1—Continued

C. Large domestically chartered commercial banks—Continued

Monthly averages

May Dec. Mar. Apr. May

Wednesday figures

1998



Assets45 Bank credit46 Securities in bank credit47 U.S. government securities . . . .48 Trading account49 Investment account50 Mortgage-backed securities.51 Other52 One year or less53 Between one and five years54 More than five years . . . .55 Other securities56 Trading account57 Investment account58 State and local government . .59 Other60 Loans and leases in bank credit- . .61 Commercial and industrial62 Bankers acceptances63 Other64 Real estate65 Revolving home equity66 Other67 Commercial68 Consumer69 Security3

70 Federal funds sold to andrepurchase agreementswith broker-dealers.. . .

71 Other72 State and local government73 Agricultural74 Federal funds sold to and

repurchase agreementswith others

75 All other loans76 Lease-financing receivables . . . .77 Interbank loans78 Federal funds sold to and

repurchase agreementswith commercial banks

79 Other80 Cash assets4

81 Other assets5

82 Total assets6

Liabilities83 Deposits84 Transaction85 Nontransaction86 Large time87 Other88 Borrowings89 From banks in the US90 From nonbanks in the U.S91 Net due to related foreign offices . . . .92 Other liabilities

93 Total liabilities .

94 Residual (assets less liabilities)7.. .

M E M O95 Revaluation gains on off-balance-

sheet items8

96 Revaluation losses on off-balance-sheet items8

97 Mortgage-backed securities9

98 Pass-through securities99 CMOs, REMICs, and other

mortgage-backed securities.100 Net unrealized gains (losses) on

available-for-sale securities10

101 Offshore credit to U.S. residents11 .

2,015.4'442.3'316.4

18.9297.5189.9107.628.959.219.4

125.860.665.221.443.9

1,573.1'423.2'

1.6421.6642.3

63.6358.7220.0304.941.7

24.217.511.19.3

6.063.870.9

150.9

96.854.2

144.0188.9

2/1*2.1'

1,490.4'379.ff

1.111.4'177.3934.1'479.5'201.4278.088.1

152.4'

2J10Jr

251.8

42.0

43.4209.3142.6

66.7

-0.133.6

2,107.8480.0341.028.0

313.0207.1105.929.453.622.9

139.065.773.322.351.0

1,627.8439.0

1.4437.6655.068.2

361.4225.4297.353.1

36.616.511.09.6

8.974.579.5

126.5

83.642.9

173.5180.4

155\A

1.566.6389.2

1,177.5211.2966.3503.4201.8301.565.6

159.9

1295.5

255.9

41.3

43.4225.1154.4

70.7

2.334.4

2,118.7483.5342.9

27.0315.9211.9104.028.153.322.6

140.663.777.022.254.8

1,635.1443.6

1.3442.3652.6

68.4358.7225.4298.948.6

31.317.310.99.6

11.178.281.6

129.8

86.343.4

172.5184.3

2 ^ 5

1,576.9401.8

1,175.1209.2965.8511.0209.4301.669.5

158.3

2315.6

252.8

41.1

44.0229.9157.5

72.4

2.134.2

2,153.7508.5354.228.2

326.1220.2105.827.152.226.5

154.376.278.022.555.6

1,645.2449.5

1.2448.3650.668.9

358.2223.5299.055.9

39.516.410.79.4

7.776.885.7

122.2

80.341.9

170.4186.5

2,5963

1,563.3380.8

1,182.5212.9969.6526.4198.3328.1

82.3169.5

2341.6

254.7

49.9

52.6238.6162.7

75.9

3.035.5

2,170.7515.5362.528.4

334.1222.8111.229.151.330.9

153.074.278.822.756.1

1,655.2457.5

1.2456.3656.3

68.2363.6224.5292.358.6

42.416.310.79.1

6.178.486.2

116.7

68.148.6

164.6185.9

2.60U

1,565.2372.4

1.192.8216.4976.5527.5198.7328.8

79.0171.7

2343.4

257.8

47.0

49.2242.3164.9

77.4

3.336.2

2,194.0520.6370.2

28.3341.9227.4114.529.851.233.5

150.471.479.022.756.3

1,673.4463.8

1.2462.6663.9

67.9371.6224.4289.5

61.9

43.918.010.59.2

7.180.287.3

126.4

77.149.3

164.5184.8

lfi}2.9

1,588.2373.9

1.214.3221.3993.0539.5207.6331.977.7

169.3

2374.7

258.2

47.3

49.6247.4169.4

78.0

2.935.2

2,191.5509.7360.2

23.9336.4220.7115.631.050.534.1

149.569.380.222.957.3

1,681.8469.3

1.2468.1666.868.2

372.8225.8286.7

59.5

41.617.910.49.3

7.183.489.3

126.6

75.551.1

161.8194.9

2,6382

1,594.7383.4

1,211.3214.1997.2544.1207.7336.472.8

166.9

2378.6

259.6

44.2

45.6240.8164.5

76.3

3.035.5

2,192.3511.6359.824.9

334.9220.2114.729.649.136.1

151.871.180.622.757.9

1,680.7474.6

1.2473.4664.9

68.2370.2226.5286.156.1

37.518.610.59.5

5.981.691.4

113.7

62.950.8

144.0200.4

2,613.6

1,567.9364.1

1,203.9212.9990.9539.3188.9350.5

75.6168.8

2351.6

262.0

45.9

46.5241.4163.7

Til

2.836.0

2,202.8513.7361.022.7

338.3219.9118.432.351.334.8

152.772.480.322.857.5

1,689.1474.3

1.2473.1669.0

68.5373.8226.7286.3

57.2

39.118.110.59.5

6.985.190.4

114.2

64.749.5

141.3198.1

2.619.6

1,571.5361.5

1,210.1212.9997.1555.8200.5355.365.3

167.0

2359.7

259.9

45.5

45.2241.1163.0

78.1

2735.6

2,191.7512.0360.3

22.6337.7222.0115.631.349.934.5

151.771.780.022.757.3

1,679.7473.1

1.1472.0666.8

68.4371.8226.6285.158.3

39.019.310.69.5

6.079.890.6

112.4

61.950.6

138.4200.7

2,606.4

1,565.6361.7

1,203.9212.7991.2533.5186.8346.7

81.5163.8

23444

262.0

45.7

45.7243.4165.1

78.3

2.736.1

2,184.4511.0360.924.5

336.3222.3114.128.549.036.5

150.169.181.122.758.3

1,673.4473.5

1.2472.3660.768.1

366.3226.3285.355.6

36.119.410.69.5

6.380.091.7

116.4

66.150.3

139.4202.7

2,606.0

1,553.2354.4

1,198.9214.3984.6539.3187.3352.1

80.2170.8

2343.6

262.5

45.1

47.4243.7166.1

77.6

2.736.1

2,183.9508.5356.425.3

331.0217.5113.528.1ill37.7

152.171.880.322.857.5

1,675.4474.1

1.2472.9662.168.0

367.1227.0287.5

54.0

36.018.010.59.6

5.380.392.0

110.2

58.651.6

158.2199.5

A615.2

1,568.9377.3

1,191.6211.1980.5534.2182.6351.676.2

173.3

235Z6

262.6

47.1238.7161.3

2.735.7



1.26 COMMERCIAL BANKS IN THE UNITED STATES

D. Small domestically chartered commercial banks

Billions of dollars


Assets and Liabilities1—Continued

Account 1997

May Nov.

1997

Dec.

Monthly a

Jan.

verages

Feb.

1998'

Mar. Apr.

Seasonally adjusted

May

Wednesday figures

1998


Assets1 Bank credit2 Securities in bank credit3 U.S. government securities .4 Other securities5 Loans and leases in bank credit2.6 Commercial and industrial .7 Real estate8 Revolving home equity . .9 Other

10 Consumer11 Security'12 Other loans and leases13 Interbank loans14 Cash assets4

15 Other assets5

16 Total assets*

Liabilities17 Deposits18 Transaction19 Nontransaction20 Large time21 Other22 Borrowings23 From banks in the U.S24 From others25 Net due to related foreign offices26 Other liabilities


28 Residual (assets less liabilities)7.

Assets29 Bank credit30 Securities in bank credit31 U.S. government securities . .32 Other securities33 Loans and leases in bank credit2. .34 Commercial and industrial . .35 Real estate36 Revolving home equity . . .37 Other38 Consumer39 Security'40 Other loans and leases41 Interbank loans42 Cash assets4

43 Other assets5

44 Total assets6

Liabilities45 Deposits46 Transaction47 Nontransaction48 Large time49 Other50 Borrowings51 From banks in the U.S52 From others53 Net due to related foreign offices.54 Other liabilities


56 Residual (assets less liabilities)7. .

MEMO57 Mortgage-backed securities9

1,346.5'398.6'316.1

82.6947.9171.2500.626.6

474.0209.2

4.362.646.064.753.9

1,492.1'

1,186.4'293.O1

893.4'153.6739.8148.578.4'70.1'4.2

25.3

1364^'

127.6

1,426.6'409.8325.2

84.61,016.8'

183.8547.91

29.2518.7'210.9

5.568.755.872.664.6

1,277.5'300.1977.4'167.2810.2'154.270.7'83.5'5.0

28.8

1,438.1'412.8327.4

85.51,025.3'

184.8553.229.6

523.6'212.3

5.769.3'56.071.662.9

1,608.9'

12X2.9298.3984.6'167.7816.91

157.972.5'85.4'4.3

29.1

l,474.2r

134.7

1,441.4410.3325.085.3

1,031.1186.5558.829.5

529.4210.7

5.669.556.472.063.6

1,613.8

1,286.4297.1989.4168.4821.0158.272.485.84.2

1,477.6

136.1

1,446.8'408.7323.385.4

1,038.1'188.0T563.91

29.6534.4210.3'

5.870.ff57.372.8

1,6223'

L292.61

299.2'993.3'170.5'822.8'159.272.6'86.6'6.1

29.4

1/1873'

135.0

1,451.9410.9323.187.8

1,041.0188.3566.4

29.5536.9208.0

6.372.165.173.664.5

1,635.5

1,300.2302.1998.1171.0827.1161.472.489.04.1

30.5

1,496.1

139.4

1,456.3409.4319.390.2

1,046.9190.0571.0

29.3541.6206.0

6.373.566.574.668.6

1,646.2

1,307.4301.1

1,006.3172.0834.3163.573.090.5

3.531.0

1,5053

140.8

1,464.1413.1322.290.8

1,051.0192.1573.329.5

543.8206.6

6.073.066.874.571.4

1,656.9

1,315.3300.5

1,014.8173.9840.9165.573.991.5

3.831.2

1,515.8

141.1

1,461.2411.6321.390.3

1,049.6191.6572.229.4

542.8206.7

6.073.264.573.969.2

1,648.9

1,309.4295.9

1,013.6171.8841.8162.973.090.0

3.431.4

1,507.2

141.7

1.460.4412.4321.790.7

1.048.0191.6571.829.3

542.5205.8

6.072.867.473.171.7

1.65Z7

1,310.5297.8

1.012.7172.4840.3162.972.090.84.0

31.7

1,509.1

143.7

1,465.3414.2323.391.0

1,051.1192.0573.7

29.5544.1207.1

5.872.566.075.070.7

1,657.0

1,311.8300.9

1,010.9172.7838.2167.675.991.73.6

31.3

L5143

142.8


1,353.2'402.8319.4

83.4950.4'173.6xaff

26.7'475.3207.9

4.362.543.064.653.0

1,187.(7290.7896.3153.6742.7149.179.2'69.9"4.2

25.3

1365.6'

129.1

1.426.0'406.7322.4

84.31,019.3'

182.6549.8'

29.3520.6212.6

5.568.7'59.275.165.1

l,605.7r

U84.0'304.4979.6'167.2812.4153.769.8'84.01

5.028.8

134.2

50.0

1.438.7'411.0325.8

85.11,027.8'

184.2554.1

29.5524.6214.7

5.769.1'60.175.262.5

1,290.7'308.9981.8'167.7814.1'158.672.6'86.^4.3

29.1

1,482.8'

134.01

1,436.2408.7323.685.1

1,027.5185.7555.829.4

526.5212.4

5.667.957.873.261.6

1.609J

1,285.0299.4985.6168.4817.2159.172.986.24.2

28.8

1,477.2

132.1

1,438.3'406.6321.2

85.41.031.7'

187.7560.229.5

530.6'210.2

5.867.8'61.372.664.6

1,617.2'

1,289.6'295.9993.7'170.5'823.2157.471.8'85.5'6.1

29.4

1,482.5'

134.7

1,448.3412.3324.288.1

1,035.9189.2564.1

29.4534.7206.1

6.370.368.971.964.4

1,633.8

1,301.7299.0

1,002.7171.0831.7158.271.287.04.1

30.5

1,494.5

139.3

1,462.0415.0324.390.6

1,047.0192.4570.6

29.5541.2205.1

6.372.668.674.069.0

1,653.7

1,315.8304.7

1,011.0172.0839.1161.772.789.03.5

31.0

1,511.8

1,471.1417.2325.591.7

1,053.9194.7575.0

29.6545.3205.3

6.073.063.074.470.4

1,659.0

1,315.8298.4

1,017.4173.9843.5165.974.691.2

3.831.2

1,516.7

142.3

1,468.7416.6325.691.0

1,052.1194.4573.129.6

543.4205.8

6.072.963.473.770.8

1,656.7

1,315.0298.0

1,017.0171.8845.2164.073.990.1

3.431.4

1,513.8

142.9

1.468.7417.3325.791.7

1,051.3194.4573.629.6

544.0204.8

6.072.663.771.770.5

1,654.7

1,311.1294.5

1,016.6172.4844.2164.373.191.24.0

31.7

L511.1

143.6

53.5

1,472.0417.7325.891.9

1,054.3194.5575.629.7

545.9205.8

5.872.661.172.367.3

1,652.7

1,307.2294.1

1,013.1172.7840.4168.276.891.4

3.631.3

1,5103

142.4

53.2

1,466.6414.1323.290.9

1,052.5192.8574.429.6

544.8206.8

5.772.766.877.873.3

1,664.5

1,324.8310.1

1,014.7176.6838.2167.573.893.64.2

30.5

1,527.1

137.4

1,473.2417.9326.091.9

1,055.3195.1576.529.7

546.8205.2

5.772.859.478.771.6

1,662.9

1,320.5304.6

1.015.9176.6839.4167.474.493.04.2

30.5

1,522.6

140.3




1.26 COMMERCIAL BANKS IN THE UNITED STATES Assets and Liabilities'—Continued

E. Foreign-related institutions

Billions of dollars

Monthly averages

May

1997

Apr. May

Wednesday figures


Seasonally adjusted

Assets1 Bank credit2 Securities in bank credit3 U.S. government securities4 Other securities5 Loans and leases in bank credit3 .6 Commercial and industrial . . . .7 Real estate8 Security'9 Other loans and leases

10 Interbank loans11 Cash assets4

12 Other assets5

13 Total assets6

Liabilities14 Deposits15 Transaction16 Nontransaction17 Large time18 Other19 Borrowings20 From banks in the US21 From others22 Net due to related foreign offices23 Other liabilities


25 Residual (assets less liabilities)7. . .

Assets26 Bank credit27 Securities in bank credit28 U.S. government securities . .29 Trading account30 Investment account31 Other securities32 Trading account33 Investment account34 Loans and leases in bank credit35 Commercial and industrial . .36 Real estate37 Security3


41 Other assets5

42 Total assets6

Liabilities43 Deposits44 Transaction45 Nontransaction46 Large time47 Other48 Borrowings49 From banks in the US50 From others51 Net due to related foreign offices .52 Other liabilities

534.3168.882.786.2

365.5221.330.743.869.620.034.039.1

627.2

247.210.7

236.5234.8

1.7141.732.4

109.3143.491.2

623.5

3.6

548.5192.379.2

113.1356.2221.426.641.766.423.734.945.2

652.1

272.810.3

262.6259.3

3.3156.329.0127.3117.196.0

642.2

9.9

544.0187.276.3

110.9356.8221.325.943.865.831.333.542.3

650.9

272.59.8

262.7259.9

2.8149.525.9

123.6121.795.5

6392

568.7193.181.2

111.9375.6223.226.554.871.028.032.940.6

670.0

273.510.2

263.3261.5

IS149.723.6

126.2139.696.5

659.4

10.6

568.6193.083.8

109.2375.6222.525.954.872.424.832.642.4

668.2

284.810.1

274.7112.9

1.8144.822.7

122.1134.797.6

661.9

6.3

565.9197.387.5

109.8368.5'220.324.748.874.720.934.142.9

663/4r

288.910.6

278.3276.6

1.7154.025.9

128.1'118.4'94.2

554.5'191.287.2

104.0363.4214.624.048.176.6'20.235.342.4

652.1r

291.9"11.0

280.8'279.91

0.9165.026.7

138.398.3'90.6

645.8'

564.2194.188.0

106.1370.1213.523.158.075.520.734.641.8

661.0

294.310.6

283.7283.7

0.0168.224.1

144.197.093.5

653.0

8.0

568.7197.192.4

104.7371.5215.023.656.476.521.934.340.9

665.5

295.810.4

285.3285.0

0.4165.721.4

144.2107.391.9

660.6

4.9

560.5188.482.8

105.6372.1212.723.160.775.519.335.345.5

660.4

294.910.4

284.5284.1

0.4170.524.7

145.888.696.9

650.8

9.5

562.1193.886.5

107.2368.3213.922.856.774.921.834.441.1

659.2

292.49.7

282.6282.5

0.1169.724.7

145.096.592.5

651.1

8.0

565.9196.289.5

106.6369.8212.423.158.376.019.334.340.1

659/1

290.212.2

278.1278.5-0.5166.422.7

143.797.392.0

645.9

13.5




MEMO

55 Revaluation gains on oif-balance-sheetitems*

56 Revaluation losses on off-balance-sheet items8

535.2172.183.016.666.489.150.938.2

363.1220.830.643.268.520.033.739.5

628.2

249.410.4

239.0236.4

2.6141.732.4

109.3144.290.7

626.0

2.2

40.4

42.1

543.3188.780.316.064.3

108.460.947.5

354.6221.226.941.665.023.735.745.8

648.3

272.310.2

262.1260.5

1.6156.329.0

127.3117.897.6

644.0

4.4

42.8

42.0

543.1183.475.913.762.2

107.460.047.4

359.7222.226.045.066.531.335.143.1

652.4

275.610.3

265.3264.2

1.2149.525.9

123.6126.596.5

64&2

41.4

41.8

565.6187.779.214.664.6

108.562.945.6

377.8224.126.654.972.328.032.841.0

6672

271.610.1

261.5260.5

1.0149.723.6

126.2144.596.5

662.3

4.9

43.2

42.9

568.0189.983.014.168.9

106.961.345.6

378.1223.626.154.973.424.832.043.9

668.6

282.69.9

272.6271.4

1.2144.822.7

122.1136.0

662.2

6.4

40.4

40.6

565.5195.388.217.670.6

107.159.747.4

370.2221.024.749.575.020.933.042.9

662.0

290.110.5

279.6278.7'

1.0154.025.9

128.1'117.6'94.4

656.1'

5.8

40.0

39.8

554.3'192.6'85.818.467.4

106.858.448.4

361.7214.623.847.675.720.233.5'40.1

647.^

290.2'10.6

279.6'278.6'

1.0165.026.7

138.396.9"89.7

64L8r

39.3

38.9

565.8198.088.620.468.2

109.459.849.6

367.8212.923.057.574.420.734.242.3

662.7

297.110.3

286.7285.8

1.0168.224.1

144.198.092.9

656.2

6.6

39.7

38.4

571.5202.094.224.569.7

107.857.949.9

369.5214.823.556.474.821.933.340.9

6674

297.110.1

287.0286.0

1.0165.721.4

144.2106.391.4

660.4

7.0

38.9

37.6

561.4191.982.814.468.3

109.158.450.7

369.5212.123.060.074419.334.646.2

661J

296.510.0

286.5285.5

1.0170.524.7

145.891.396.7

654.9

6.4

38.6

37.5

562.2196.787.020.466.6

109.660.049.7

365.6213.422.756.073.421.833.941.6

659.3

294.49.4

285.0284.0

1.0169.724.7

145.097.591.8

6533

39.9

38.7

565.7198.989.222.267.0

109.761.348.5

366.8210.922.958.074.919.334.240.4

659.4

295.512.0

283.5282.5

1.0166.422.7

143.799.291.4

65Z5

6.9

40.4

39.4




NOTES TO TABLE 1.26

NOTE. Tables 1.26. 1.27, and 1.28 have been revised to reflect changes in the Board's H.8statistical release, "Assets and Liabilities of Commercial Banks in the United States." Table1.27, "Assets and Liabilities of Large Weekly Reporting Commercial Banks," and table 1.28,"Large Weekly Reporting U.S. Branches and Agencies of Foreign Banks," are no longerbeing published in the Bulletin. Instead, abbreviated balance sheets for both large and smalldomestically chartered banks have been included in table 1.26, parts C and D. Data are bothmerger-adjusted and break-adjusted. In addition, data from large weekly reporting U.S.branches and agencies of foreign banks have been replaced by balance sheet estimates of allforeign-related institutions and are included in table 1.26, part E. These data are break-adjusted.

The not-seasonally-adjusted data for all tables now contain additional balance sheet items,which were available as of October 2, 1996.

I. Covers the following types of institutions in the fifty states and the District ofColumbia: domestically chartered commercial banks that submit a weekly report of condition(large domestic); other domestically chartered commercial banks (small domestic); branchesand agencies of foreign banks, and Edge Act and agreement corporations (foreign-relatedinstitutions). Excludes International Banking Facilities. Data are Wednesday values or prorata averages of Wednesday values. Large domestic banks constitute a universe; data forsmall domestic banks and foreign-related institutions are estimates based on weekly samplesand on quarter-end condition reports. Data are adjusted for breaks caused by reclassificationsof assets and liabilities.

The data for large and small domestic banks presented on pp. AI7-19 are adjusted toremove the estimated effects of mergers between these two groups. The adjustment formergers changes past levels to make them comparable with current levels. Estimatedquantities of balance sheet items acquired in mergers are removed from past data for the bank

group that contained the acquired bank and put into past data for the group containing theacquiring bank. Balance sheet data for acquired banks are obtained from Call Reports, and aratio procedure is used to adjust past levels.

2. Excludes federal funds sold to, reverse RPs with, and loans made to commercial banksin the United States, all of which are included in "Interbank loans."

3. Consists of reverse RPs with brokers and dealers and loans to purchase and carrysecurities.

4. Includes vault cash, cash items in process of collection, balances due from depositoryinstitutions, and balances due from Federal Reserve Banks.

5. Excludes the due-from position with related foreign offices, which is included in "Netdue to related foreign offices."

6. Excludes unearned income, reserves for losses on loans and leases, and reserves fortransfer risk. Loans are reported gross of these items.

7. This balancing item is not intended as a measure of equity capital for use in capitaladequacy analysis. On a seasonally adjusted basis this item reflects any differences in theseasonal patterns estimated for total assets and total liabilities.

8. Fair value of derivative contracts (interest rate, foreign exchange rate, other commodity andequity contracts) in a gain/loss position, as determined under FASB Interpretation No. 39.

9. Includes mortgage-backed securities issued by U.S. government agencies, U.S.government-sponsored enterprises, and private entities.

10. Difference between fair value and historical cost for securities classified as available-for-sale under FASB Statement No. 115. Data are reported net of tax effects. Data shown arerestated to include an estimate of these tax effects.

1 ]. Mainly commercial and industrial loans but also includes an unknown amount of creditextended to other than nonfinancial businesses.



] .32 COMMERCIAL PAPER AND BANKERS DOLLAR ACCEPTANCES OUTSTANDING

Millions of dollars, end of period

Year ending December

1993Dec.

1994Dec.

1995Dec.

1996Dec.

1997Dec.

1997

Apr.

1 All issuers

Financial companies'2 Dealer-placed paper", total3 Directly placed paper \ total. . .

4 Nontinancia! companies

5 Total.

By holder6 Accepting banks7 Own bills8 Bills bought from other banks

Federal Reserve Banks6

9 Foreign correspondents10 Others

Sv basis11 Imports into United States12 Exports from United States. . . .13 All other

Commercial paper (seasonally adjusted unless noted otherwise}

555,075

218.947180,389

595,382

223.038207.701

674,904

275.815210,829

361.147229.662

513.307252,536

940,524

4S3.475249.781

207,268

966,699

513,307252,536

200,857

973,761

509,950254,926

1,004,662

520,940268,001

1,049,222

550,670282.083

216,469

1,041,681

558,817275.415

207,449

Bankers dollar acceptances (nol seasonally adjusted)5

32348

12,421111,707

1,714

72519,202

10,2177.293

14.838

29,835

11,78310,4621,321

410

17,642

10,0626,355

13.417

29,242 25,754

1 Institutions engaged primarily tn commercial, savings, and mortgage banking; sales,personal, and mortgage financing: factoring, finance leasing, and other business lending:insurance underwriting; and other mveslment activities.

2. Includes all financial-company paper sold by dealers in the open market.3. As reported by financial companies that place their paper directly with investors.4. Includes public utilities and firms engaged primarily in such activities as communica-

tions, construction, manufacturing, mining, wholesale and retail trade, transportation, andservices.

5 Data on bankers dollar acceptances are gathered Irom approximately 100 institutions.The reporting group is revised every January. Beginning January 1995. data for Bankersdollar acceptances arc reported annually in September

6 In 1977 the Federal Reserve discontinued operations in bankers dollar acceptances forits own account.

1.33 PRIME RATE CHARGED BY BANKS Short-Term Business Loans1

Percent per year

Date of change

1995—Jan. 1Feb. 1July 7Dec. 20

1996—Feb. 1

19i)7_Mar 26

Rate

8.509.008.758.50

8.25

8.50

Period

199519961997

1995—JanFebMarAprMayJuneJulyAugSeptOctNovDec

Averagerate

8.838.278.44

S.5O9.009.009.009.009.008.808.758.758.758.758.65

Period

1996—JanHebMarAprMavJuneJulyAugSeptOctNovDec

Averagerate

8.508.258.258.258.258.258.258.258.258.258.258.25

Period

1997—JanHebMarAprMayJuneJulyAugSeptOctNovDec

1998—JanFebMarAprMayJune

Averagerate

8.258.258.108.508.508.508.508.508.508.508.508.50

8.508.508.508.508.508.50

I. The prime rate is one of several base rates that banks use lo price short-term businessloans. The table shows the diitc on which a new rate came to be the predominant one quotedby a majority of ibe twenty-live largest banks by assel size, based on the most recent Call

Report Data in this table also appear in the Board's H.15 (519) weekly and G.I3 (415)monthly statistical releases. For ordering address, see inside front cover.


Financial Markets A23

1.35 INTEREST RATES Money and Capital Markets

Percent per year; figures are averages of business day data unless otherwise noted

Item

MONEY MARKET INSTRUMENTS

1 Federal funds123

2 Discount window borrowing2'4

Commercial paper'•4-^-t>

Non financial3 1 -month4 2-month5 3-month

Financial6 1 -month7 2-month8 3-month

Commercial paper (historical) " ' J

9 1-month10 3-month11 6-month

Finance paper, directly placed ihistorical) ~ -7'1 ^12 1-month13 3-month14 6-month

Bankers acceptances'" •IS 3-nionth16 6-month

Certificates of deposit, secondary market''17 1 -monthIS 3-month19 6-month

20 Eurodollar deposits, 3-month •

V. S- Treasury billsSecondary market1'5

21 3-month22 6-month23 1-year

Auction average^'5'12

24 3-month25 6-month26 1 -year

U.S. TREASURY NOTES AND BONDS

Constant maturities '27 1-year28 2-year29 3-year30 5-year31 7-vear32 10-year13 20-ycar34 30-year

Composite35 More than 10 years (long-term)

STATE AND LOCAL NOTES AND BONDS

Mottdy's series**36 Ami37 Baa38 Bond Buyer series'5

CORPORATE BONDS

39 Seasoned issues, all industries16

Rating group40 Aaa41 Aa42 A43 Baa44 A-raled. recently offered utility bonds17

MHMODivhIeiul-prUe ratio"

45 Common stocks

1995

5.835.21

n.a.n.a.

n.a.n.a.n.a.

5.935.935.93

5.815.785.68

5.815.80

5.875.925.98

5.93

5.495.565.60

5.515.595.69

5.946.156.256.386.506.576.956.88

6.93

5.S06.105.95

7.83

7.597.727.838.207.86

2.56

1996

5.305.02

n.a.n.a.

n.a.n.a.n.a.

5.435.415.42

5.315.295.21

5.315.31

5.355.395.47

5.38

5.015.085.22

5.025.095.23

5.525.845.996.186.346.446.836.71

6.80

5.525.795.76

7.66

Til7.557.698.05111

2.19

1997

5.465.00

5.575.575.56

5.595.595.60

5.545.585.62

5.445.485.48

5.545.57

5.545.625.73

5.61

5.065.185.32

5.075.185.36

5.635.996.106.226.336.356.696.61

6.67

5.325.505.52

7.54

7.277.487.547.877.71

1.77

1998

Feb.

5.515.00

5.475.445 42

5.4<)5.475.45

n.a.n.a.n.a.

n.a.n.a.n.a.

5.465.41

5.535.545.55

5.53

5.095.075.04

5.115.074.97

5.315.425.435.495.605.575.965.89

5.94

4.925.095.10

6.95

6.676.887.017.257.02

1.55

Mar.

5.495.00

5.515.495.46

5.535.515.49

n.a.n.a.n.a.

n.a.n.a.n.a.

5.505.46

5.585.585.61

5.56

5.035.045.11

5.035.045.13

5.395.565.575.615.715.656.015.95

6.00

5.035.255.21

7.00

6.726.937.057.327.11

1.48

Apr.

5.455.00

5.495.485.46

5.515.495.48

n.a.n.a.n.a.

n.a.n.a.n.a.

5.4S5.44

5.565.585.63

5.56

4.955.065.10

5.005.085.12

5.385.565.585.615 705.646.005.92

5.98

5.005.215.23

6.99

6 696.907.037.337.10

1.43

May

5.495.00

5.495.495.48

5.505.505.50

n.a.n.a.n.a.

n.a.n.a.n.a.

5.485.44

5.565.595.67

5.57

5.005.145.16

5.035.155.15

5.445.595.615.635.725.656.015.93

5.99

n.a.n.a.5.20

6.98

6.696.917.037.307.16

1.45

1998, weekending

May 1

5.405.00

5.495.495.49

5.515.505.50

n.a.n.a.n.a.

n.a.n.a.n.a.

5.475.43

5.575.605.69

5.57

4.915.095.17

4.945.125.13

5.455.665.695.725.815.756.106.02

6.08

5.055.275.32

7.07

6.786.987.117.407.19

1.47

May 8

5.355.00

5.485.485.47

5.505.495.49

n.a.n.a.n.a.

n.a.n.a.n.a.

5.495.46

5.565.585.66

5.57

4.975.115.15

4.995.11n.a.

5.435.595.625.635.745.686.035.96

6.01

5.015.235.26

7.01

6.726.937.067.347.19

1.46

May 15

5.495.00

5.495.485 48

5.515.515.50

n.a.n.a.n a.

n.a.n.a.n.a.

5.485.44

5.565.595.67

5.57

5.015.165.18

5.015.17n.u.

5.465.625.645.675.765.706.065.98

6.04

5.095.295.23

7.04

6.746 957.077.357.18

1.43

May 22

5.605.00

5.495.505.49

5.515.515.51

n.a.n.a.n.a.

n.a.n.a.n.a.

5.485.43

5.565.605.67

5.57

5.085.185.17

5.085.16n.a.

5.455.605.605.635.725.646.005.92

5.98

n.a.n.a.5.16

6.97

6.696.927.027.277.18

1.43

May 29

5.455.00

5.505.505.48

5.515.505.49

n.a.n.a.n.a.

n.a.n.a.n.a.

5.485.44

5.565.595.66

5.57

4.955.155.15

5.025.175.15

5.435.565.565.575.655.575.935.83

5.91

n.a.n.a.5.13

6.91

6.616.866.957.217.04

1.46

1. The daily effective federal funds rate is a weighted average of rates on trades throughNew York brokers.

2. Weekly figures are averages of seven calendar days ending on Wednesday of thecurrent week; monthly figures include each calendar day in the month.

3. Annualized using a 360-day year for bank interest.4. Rate for the Federal Reserve Bank of New York.5. Quoted on a discount basis.6. An average of offering rates on commercial paper for firms whose bond rating is AA or

the equivalent.7. Series ended August 29, 1997.8. An average of offering rales on paper directly placed by finance companies.9. Representative closing yields for acceptances of the highest-rated money center banks.

10. An average of dealer offering rates on nationally traded certificates of deposit.11. Bid rates for Eurodollar deposits al approximately 11:00 a.m. London time. Data are

for indication purposes only.12. Auction date for daily data; weekly and monthly averages computed on an issue-date

basis.

13. Yields on actively traded issues adjusted to constant maturities. Source: U.S. Depart-ment of the Treasury.

14. General obligation bonds based on Thursday figures; Moody's Investors Service.15. State and local government general obligation bonds maturing in twenty years arc used

in compiling this index. The twenty-bond index has a rating roughly equivalent to Moodys"AI rating. Based on Thursday figures.

16. Daily figures from Moody's Investors Service. Based on yields to maturity on selectedlong-term bonds.

17. Compilation of the Federal Reserve. This series is an estimate of the yield on recentlyoffered, A-rated utility bonds wilh a thirty-year maturity and five years of call protection.Weekly data are based on Friday quotations.

18. Standard & Poor's corporate scries. Common stock ralio is based on the 500 stocks inthe price index.

NOTE. Some of the data in this table also appear in the Board's H.I5 (519) weekly andG.I3 (415) monthly statistical releases. For ordering address, see inside front cover.Digitized for FRASER



1.36 STOCK MARKET Selected Statistics

Indicator

Common slock prices (indexes)1 New York Stock Exchange

(Dec. 31, 1965 = 50)2 Industrial3 Transportation4 Utility5 Finance

6 Standard & Poor's Corporation(1941-43 = 10)2

7 American Stock Exchange(Aug. 31, 1973 = 50)'

Volume of trading (thousands of shares)8 New York Stock Exchange9 American Stock Exchange

10 Margin credit at broker-dealers4

Free credit balances at broker:?11 Margin accounts6

12 Cash accounts

13 Margin slocks14 Convertible bonds15 Short sales

1995 1996 1997

1997

Sept. Oct. Nov. Dec.

1998


Prices and trading volume (averages of daily figures)1

291.18367.40270.14110.64238.48

541.72

498.13

145,72920,387

357.98453.57327.30126.36303.94

670.49

570.86

409,74022.567

456.99574.97415.08143.87424.84

873.43

628.34

523.254n.a.

489.74617.94451.63145.96459.86

937.02

678.05

541,20428,252

499.25625.22466.04157.83476.70

951 16

702.43

606,513

32,873

492.14615.65453.56153.53465.35

938.92

674.37

531,44927,741

504.66623.57461.04165.74490.30

962.37

667.89

541,13427,624

504.13624.61458.49146.25479.81

963.36

665.72

632.89528.199

532.15660.91485.73170.96508.97

1,023.74

685.73

610,95826,808

560.70693.13508.06191.67539.47

1,076.83

722.37

619.36628,943

578.05711.89523.73207.32563.07

1,112.20

742.33

647,11029,544

574.46712.39505.02198.25551.28

1.108.42

735.02

569,23927,004

Customer financing (millions of dollars, end-of-period balances)

76,680

16.25034.340

»7,400

22,54040,430

126,090

31.41052,160

126,050

23,63043,770

128,190

26,95047,465

127,330

26,73545,470

126,090

31,41052,160

Margin requirements (percent of market va i

Mar. 11, 1968

705070

June 8. 1968

806080

May 6. 197(1

655065

127,790

29,48048,620

135,590

27,45048,640

140,340

27,43051,340

140,240

28,16051.050

143,600

26,20047,770

e and effective date)

Dec. 6, 1971

555055

Nov. 24. 1972

655065

Jan. 3. 1974

505050

1. Daily data on prices are available upon request to the Board of Governors. For orderingaddress, see inside front cover.

2. In July 1976 a financial group, composed of banks and insurance companies, was addedto the group of slocks on which the index is based. The index is now based on 400 industrialstocks (formerly 425), 20 transportation (formerly 15 rail), 40 public utility (formerly 60), and40 financial.

3. On July 5, 1983, the American Stock Exchange rebased its index, effectively cuttingprevious readings in half.

4. Since July 1983, under the revised Regulation T, margin credit at broker-dealers hasincluded credit extended against stocks, convertible bunds, stocks acquired through theexercise of subscription rights, corporate bonds, and government securities. Separate report-ing of data for margin stocks, convertible bonds, and subscription issues was discontinued inApril 1984.

5. Free credit balances are amounts in accounts with no unfulfilled commitments tobrokers and are subject to withdrawal by customers on demand

6. Series initiated in June 1984.7. Margin requirements, stated in regulations adopted by the Board of Governors pursuant

to the Securities Exchange Act of 1934, limit the amount of credit that can be used topurchase and carry "margin securities" (as defined in the regulations) when such credit iscollateralized by securities. Margin requirements on securities are the difference between themarket value (100 percent) and the maximum loan value of collateral as prescribed by theBoard. Regulation T was adopted effective Oct. 15, 1934; Regulation U, effective May 1,1936; Regulation G, effective Mar. 11, 1968; and Regulation X, effective Nov. I, 1971.

On Jan. I. 1977. the Board of Governors for the first time established in Regulation T theinitial margin required for writing options on securities, setting it at 30 percent of the currentmarket value of the stock underlying the option. On Sept, 30, 1985. the Board changed therequired initial margin, allowing it to be ihe same as the gption maintenance margin requiredby the appropriate exchange or self-regulatory organization; such maintenance margin rulesmust be approved by the Securities and Exchange Commission,


1.38 FEDERAL FISCAL AND FINANCING OPERATIONS

Millions of dollars

Federal Finance A25

Type of account or operation

Fiscal year Calendar year

Dec. Jan. Feb. Mar. Apr. May

US. budget1

1 Receipts, lotal2 On-budget3 Off-budget4 Outlays, total5 On-budget6 Off-budget7 Surplus or deficit ( - ) , total .8 On-budget9 Off-budget

Source of financing (total)10 Borrowing from the public11 Operating cash (decrease, or increase (-)) .12 Other2

MEMO13 Treasury operating balance (level, end of

period)14 Federal Reserve Banks15 Tax and loan accounts

1,351,8301,000,751

351,0791.515,7291,227,065

288,664-163,899-226,314

62,415

171,288-2,007-5,382

37,9498,620

29,329

1.453.0621,085,570

367,4921,560,5121,259,608

300,904-107,450-174.038

66,588

129.712-6,276

-15,986

44,2257,700

36,525

1.579,2921,187,302

391,9901,601,2351,290,609

310,626-21,943

-103,30781,364

38,171604

-16,832

43,6217,692

35,930

168,000135,34232,658

154,361146,649

7,71213,639

-11,30724,946

-1.771-12,107

239

31,8855,444

26,441

162,610123,36739,243

137,231108,84328,38825,37914,52410,855

-24,807-8,422

7,850

40,3075,552

34,756

97,95265,05132,901

139,701109,39330,309

-41,750-44,342

2,592

30.56524,027

-12,842

16,2805,037

11,243

117,93080,64737,283

131,743101.96729,775

-13,813-21.320

7,508

20,137-11,352

5,028

27,6325,490

22,141

261,002216,98844,014

136.400108,56927,830

124,603108,41916,184

-60.S87-60,398

-3,618

88,03028.01460,016

95,27861,79033.488

134,057102,38131.676

-38.779-40,591

1,812

-8,59751,899-4,523

36,1315,693

30,438

1. Since 1990, off-budget items have been the social security trust funds (federal old-agesurvivors insurance and federal disability insurance) and the U.S. Postal Service.

2. Includes special drawing rights (SDRs); reserve position on the U.S. quota in theInternational Monetary Fund (IMF); loans to the IMF; other cash and monetary assets;accrued interest payable to the public; allocations of SDRs; deposit funds; miscellaneousliability (including checks outstanding) and asset accounts; seigniorage; increment on gold;

net gain or loss for U.S. currency valuation adjustment; net gain or loss for IMF loan-valuation adjustment; and profit on sale of gold.

SOURCE. Monthly totals: U.S. Department of the Treasury, Monthly Treasury Statement ofReceipts and Outlays of the U.S. Government; fiscal year totals: U.S. Office of Managementand Budget, Budget of the U.S. Government.



1.39 U.S. BUDGET RECEIPTS AND OUTLAYS1

Millions of dollars

Source or type

RECEIPTS

1 All sources

2 Individual income taxes, net3 Withheld4 Nonwithheld

Corporation income taxes6 Gross receipts

8 Social insurance taxes and contributions, net . . .9 Employment taxes and contributions

10 Unemployment insurance11 Other net receipts3

12 Excise taxes13 Customs deposits

15 Miscellaneous receipts4

OUTLAYS

16 All types

17 National defense18 International affairs19 General science, space, and technology20 Energy21 Natural resources and environment

23 Commerce and housing credit24 Transportation25 Community and regional development26 Education, training, employment, and

social services

27 Health28 Social security and Medicare29 Income security

30 Veterans benefits and services31 Administration of justice32 General government33 Net interest5

34 Undistributed offsetting receipts'1

Fiscal year

1,453,062

656,417533.080212.168

88.897

189,05517,231

509,414476,361

28.5844,469

54.01418,67017,18925,534

1,560,512

265,74813,49616.7092.844

21,6149,159

-10,47239,56510,685

52,001

119,378523.901225.989

36,98517,54811.892

241.090-37,620

1,579,292

737,466580,207250,75393,560

204,49322,198

539,371506,751

28,2024,418

56.92417.92819.84525.465

1,601,235

270,47315.22817.174

1,48321,3699.032

-14,62440,76711,005

53,008

123,843555,273230,886

39,31320,19712,768

244,013-49,973

Calendar year

1996

HI

767,099

347.285264,177162,78279.735

96,4809,704

277.767257.446

18,0682,254

25,6828,7318,775

12,087

785,368

132,5998,0768,8971,356

10,25473

-6.88518,2905.245

25,979

59,989264,647121,186

18,1409,0154,641

120.576-16.716

H2

707,552r

323,884279,98853,4919,604

95,36410,053

240,326227,777

10,3022,245

27.0169,2948,835

12,889'

800,177

139,4028,5328,260

69510,30711.037

-5,89921,5125,498

27,524

61,595269,412107,631

21,1099,5836,546

122,573-25,142

1997

HI

845,527

400,436292,252191,05082,926

106,4519,635

288,251268,357

17,7092,184

28,0848,619

10,47712,866

797,418

132,6985,7408,938

8039,628r

1,465

-7,57516,8475,678'

25,080

61,809278,863124,034

17,697'10,670'6,623

122,655'-24.235

H2

773,812r

354,072306.86558.06910.869

104.65910.135

260,795247.794

10,7242.280

31.1329.679

10.26213,348'

824,370'

140.8739,420

10,040411

11.10610,590

-3.52620,4145.749

26.851

63.552283.109106.353

22.07710.2127.302

122.620-22,795

1998

Mar.

117,930

39,66255,2907.332

22,973

23,1533,66)

48,02747,389

301337

4.4991,4121,8452,994

131,743

20,326979

1,61740

1,556283

-9722,734

503

2,888

10,87645,81522,853

1,8831,7641,012

20.651-3.064

Apr.

261,002

158.28451.811

129,52023,059

29,9102,549

61.46556.5444,589

332

5,7421,4284,1982,525

136,400

22,0651,4601.702- 3 4

1,575119

-8142,5111,121

4,428

11,25948,35120,757

4,0561,7571.178

20.961-6.054

May

95,278

29,97449,8544,196

24,086

4,7061,447

51.23942.560

8,273406

4.8411.2971,8452,823

134,057

23.212720

1.54842

1.574-451

7912,746

873

2.798

10,41946,83118,705

3,6041,781

92520,855-2,916

1. Functional details do not sum to total outlays for calendar year data because revisions tomonthly totals have not been distributed among funclions. Fiscal year total for receipts andoutlays do not correspond to calendar year data because revisions from the Budget have notbeen fully distributed across months.

2. Old-age, disability, and hospital insurance, and railroad retirement accounts.3. Federal employee retirement contributions and civil service retirement and

disability fund.

4. Deposits of earnings by Federal Reserve Banks and other miscellaneous receipts.5 Includes interest received by trust funds.6. Rents and royalties for the outer continental shelf, U.S. government contributions for

employee retirement, and certain asset sales.SOURCE. Fiscal year totals: U.S. Office of Management and Budget, Budget of the US.

Government, Fiscal Year 1999: monthly and half-year totals: U.S. Department of the Trea-sury, Monthly Treasury Statement of Receipts ami Outlays of the U.S. Government.


Federal Finance A27

] .40 FEDERAL DEBT SUBJECT TO STATUTORY LIMITATION

Billions of dollars, end of month

Item

1 Federal debl outstanding

2 Public debt securities3 Held by public

5 Agency securities6 Held by public7 Held by agencies

8 Debt subject ta statutory limit

9 Public debt securities10 Other debt . .

MEMO11 Statutory debt limit

Mar. 31

5,153

5.1183,7641 354

36288

5,030

5.0300

5,500

1996

June 30

5,197

5,1613.739

1628

8

5,073

5,0730

5,500

Sept. 30

5,260

5,2253,778

3527

8

5,137

5,1370

5.500

Dec. 31

5,357

5,1233.8261 497

3427

8

5,237

5,2370

5,500

Mar. 31

5,415

5.3813.8741 507

3426

8

5,294

5,2940

5,500

1997

June 30

5,410

5,3763,8051 572

34267

5,290

5.2900

5,500

Sept. 30

5,446

5,4133,8151 599

33267

5,328

5,3280

5.950

Dec 31

5,536

5,5023.8471 656

3427

7

5,417

5,4160

5,950

1998

Mar. 31

5,573'

5,5423,872'1 670'

31'26'

5'

5,457

5,4560

5,950

I. Consists of guaranteed debt of US- Treasury and other federal agencies, specifiedparticipation certificates, notes to international lending organizations, and District of Colum-bia stadium bonds.

SOURCE US. Department of the Treasury, Monthly Statement of the Public Debt of theUnited States and Treasury Bulletin.

1.41 GROSS PUBLIC DEBT OF U.S. TREASURY Types and Ownership

Billions of dollars, end of period

Type and holder

1997

02 Q3 Q4 Ql

1 Total gross public debt

By type2 Interest-bearing3 Marketable4 Bills5 Notes6 Bonds7 Inflation-indexed notes and bonds8 Nonmarketable2

9 State and local government series10 Foreign issues3

11 Government12 Public13 Savings bonds and notes14 Government account series J

15 Non-interest bearing

By holder'16 U.S. Treasury and other federal agencies and trust funds17 Federal Reserve Banks18 Private investors19 Commercial banks20 Money market funds21 Insurance companies22 Other companies23 State and local treasuries '

Individuals24 Savings bonds25 Other securities26 Foreign and international27 Other miscellaneous investors7'9

4,800.2

4,769.23.126.0

733.81.867.0

510.3n.a.

1,643.1132.642.542.5

.0177.8

1,259.831.0

1,257.1374.1

3,168.0290.467.6

240.1224.5541.0'

180.5150.7688.7'784.6'

4,988.7

4,964.43,307.2

760.72.010.3

521.2n.a.

1,657.2104.540.840.8

.0181.9

1,299.624.3

1,304.5391.0

3,294.9278.771.5

241.5228.8469.6'

185.0162.7862.2794.9'

5,323.2

5.317.23,459.7

777.42.112.3

555.0n.a.

1.857.5101.337.447.4

.0182.4

1.505.96.0

1.497.2410.9

3.411.2261.8'91.6'

214.1258.5482.5'

187.0169.6

1,135.6610.5'

5,502.4

5,494.93.456.8

715.42,106.1

587.333.0

2,038.1124.136.236 2

.0181.2

1,666.77.5

1,655.7451.9

3,393.4269.8'

88.9'224.9'265.0493.0'

186.5168.4

1.278.0'418.8'

5,376.2

5,370.53.433.1

704.12.132.6

565.415.9

1.937.4107.935.435.4

.0182.7

1,581.55.7

1,571.6426.4

3,361.7265.9'77.4

217.7'261.0488.3'

186.3169.1

1.221.9"474.2'

5,413.2

5,407.53,439,6

701.92.122.2

576.224.4

1,967.9111.934.934.9

.0182.7

1,608.55.6

1.598.5436.5

3.388.9261.8'

75.5222.7'266.5486.6'

186.2168.6

1.266.0'454.5'

5,502.4

5,494.93,456.8

715.42.106.1

587.333.0

2,038.1124.136.236.2

.0181.2

1,666.77.5

1,655.7451.9

3,393.4269.8'88.9'

224.9'265.0493.0'

186.5168.4

1,276.0'418.8'

5,542,4

5,535.33,467.1

720.12.091.9

598.741.5

2,068.2139.135.436.4

.0181.2

1,681.57.2

1,670.4400.0

3,430.7275.084.8

225.5268.1494.6

186.3165.8

1,288.0442.5

1. The U.S. Treasury first issued inflation-indexed securities during the first quarter of1997.

2. Includes (not shown separately) securities issued to the Rural Electrification Administra-tion, depository bonds, retirement plan bonds, and individual retirement bonds.

3 Nonmarketable series denominated in dollars, and series denominated in foreign cur-rency held by foreigners.

4. Held almost entirely by U.S. Treasury and other federal agencies and trust funds.5. Data for Federal Reserve Banks and U.S. government agencies and trust funds are actual

holdings; data for other groups are Treasury estimates.6. Includes slate and local pension funds.

7. In March 1996, in a redefinition of series, fully defeased debt backed by nonmarketablefederal securities was removed from "Other miscellaneous investors" and added to "State andlocal treasuries." The data shown here have been revised accordingly.

8. Consists of investments of foreign balances and international accounts in the UnitedSlates.

9. Includes savings and loan associations, nonprofit institutions, credit unions, mutualsavings banks, corporate pension trust funds, dealers and brokers, certain U.S. Treasurydeposit accounts, and federally sponsored agencies.

SOURCE. U.S. Treasury Department, data by type of security, Monthly Statement of thePublic Debt of the United States; data by holder, Treasury Bulletin.



1.42 U.S. GOVERNMENT SECURITIES DEALERS Transactions'

Millions of dollars, daily averages

Item

OUTRIGHT TRANSACTIONS2

By type of security1 U.S. Treasury bills

Coupon securities, by maturity2 Five years or less3 More than five years4 Inflation-indexed

Federal agency5 Discount notes

Coupon securities, by maturity6 One year or less7 More than one year, but less than

or equal to five years8 More than five years9 Mortgage-backed

By type of counterpartyWith interdealer broker

10 U.S. Treasury11 Federal agency12 Mortgage-backed

With other13 US Treasury14 Federal agency15 Mortgage-backed

FUTURES TRANSACTIONS'

By type of deliverable security16 US. Treasury bills '.





OPTIONS TRANSACTIONS*

By type of underlying security25 US. Treasury bills





1998

Feb.

39.988'

120.542'82.796'

493

36,835

1,738

3,4522,676

64,305

138.024'1,987

21,100

105,795'42,71543,204

244'

2,549'16.512'

0

0

0

000

0

2,6526,080"

0

o0

00

636

Mar.

35,701'

119,974'64,952'

412

38,968

2,086

4,0512,425

62,728

125,029'2,101

19,793

96,010'45,42942,934

289'

2,555'15,909"

0

0

0

000

0

2,3055,422'

0

o0

00

602

Apr.

38,290'

112,975'65,132'

1,720

39,114

1,620

4,0413,118

67.799

120,163'2,417

21,335

97,954'45.47646,463

173r

2,084'14,015'

0

0

0

000

0

2,407'5,815'

25

o0

00

750

1998, week ending

Apr. 1

43.584'

134,927'67,180'

696

46,898

2,913

3,8733,103

55,006

133.994'2.681

15.069

112,392'54,10639.937

133'

2.375'13.120'

0

0

0

000

0

1.7546.002

0

o0

00

587

Apr. 8

36,486'

116,132'84,844'3,346

40,084

987

3.9405.277

96,057

135,974'3,115

28,495

104,834'47,17367,562

83'

2,598'17,193'

0

0

0

000

0

1,8566,382

0

o0

00

745

Apr. 15

47,926

98,45654,609

1,316

40,436

1,481

4,5122.598

70,033

109,8972.558

21,460

92,41046.46848.572

530

1,84413,302

0

0

0

000

0

2.7754,438

0

0

0

n.a.0

914

Apr. 22

32,172

93,50052,391

1,381

38,736

1,683

4,1661,968

52,683

97,0732,070

20,433

82,37244,48332,250

114

1.34710.835

0

0

0

000

0

2,3084,917

100

o0

n.a.0

447

Apr. 29

38,463

132,33763,256

1,083

36,834

2,141

3,7742,354

55,953

129,9301,831

16,318

105,21043 27239,635

39

2,41714,885

0

0

0

000

0

2,8287,365

0

o0

00

990

May 6

33,191

133,88079,709

1.101

34,486

1,130

3.5353,988

65,172

134,9552.759

20,903

112,92640,38144.269

202

2.19913,430

0

0

0

000

0

2,7355.044n.a.

0

0

00

603

May 13

26,997

125,66780,015

871

30,572

1,189

2,6063,540

89,857

134,6252,428

30,793

98,92635,47959.064

231

1.66712,396

0

0

0

000

0

2,1196,318

240

0

0

00

618

May 20

28,682

90,08067,683

552

38,697

974

2,3251,520

45,313

103,9421,384

16,107

83,05442,13229,206

74

1,78812,057

0

0

0

000

0

1,4577,135n.a.

0

0

n.a.0

427

May 27

35.436

112.80577,873

298

36.436

1.569

2,5212,109

40,504

127.8821,456

12,525

98,53041,17827.979

57

3.04017.433

0

0

0

000

0

1.9577,112

0

0

0

00

539

1. Transactions are market purchases and sales of securities as reported to the FederalReserve Bank of New York by the U.S. government securities dealers on its published list ofprimary dealers. Monthly averages are based on the number of trading days in the month.Transactions are assumed to be evenly distributed among the trading days of the report week.Immediate, forward, and futures transactions are reported at principal value, which does notinclude accrued interest; options transactions are reported at the face value of the underlyingsecurities.

Dealers report cumulative transactions for each week ending Wednesday.2. Outright transactions include immediate and forward transactions. Immediate delivery

refers to purchases or sales of securities (other than mortgage-backed federal agency securi-ties) for which delivery is scheduled in five business days or less and "when-issued"securities that settle on the issue date of offering. Transactions for immediate delivery of mortgage-backed agency securities include purchases and sales for which delivery is scheduled in thirty businessdays or less. Stripped securities are reported at market value by maturity of coupon or corpus.

Forward transactions are agreements made in the over-the-counter market that specifydelayed delivery. Forward contracts for U.S. Treasury securities and federal agency debtsecurities are included when the time to delivery is more than five business days. Forwardcontracts for mortgage-backed agency securities are included when the time to delivery ismore than thirty business days.

3. Futures transactions are standardized agreements arranged on an exchange. All futurestransactions are included regardless of time to delivery.

4. Options transactions are purchases or sales of put and call options, whether arranged onan organized exchange or in the over-the-counter market, and include options on futurescontracts on U.S. Treasury and federal agency securities.

NOTE, "n.a." indicates that data are not published because of insufficient activity.Major changes in the report form filed by primary dealers induced a break in the dealer data

series as of the week ending January 28, 1998.


Federal Finance A29

1.43 U.S. GOVERNMENT SECURITIES DEALERS Positions and Financing'

Millions of dollars

Item

NET OUTRIGHT POSITIONS3

Bv type of security1 US Treasury bills





NET FUTURES POSITIONS4

Bv type of deliverable security10 U.S. Treasury bills





NET OPTIONS POSITIONS

Bv type of deliverable security19 U.S.'Treasury bills '.





Reverse repurchase agreements28 Overnight and continuing29 Term

Securities borrowed3 0 O v e r n i g h t a n d c o n t i n u i n g . . . . . .3 1 T e r m

Securities received as pledge32 Overnight and continuing33 Term

Repurchase agreements34 Overnight and continuing35 Term

Securities loaned36 Overnight and continuing37 Term

Securities pledged38 Overnight and continuing39 Term

Collateralized loans40 Total

Feb.

1998

Mar. Apr. Apr. 1 Apr. 8 Apr. 15

1998, week ending

Apr. 22 Apr. 29 May 6 May 13 May 20

Positions

8,517

-7,847-21,431

1,422

18,759

3,013

5,7538,898

50,013

-4.872

-752-18.954

0

0

0

000

0

-1,3662,729n.a.

0

0

0n.a.

907

16.723

-11,431-23,667

1.099

16.943

3,593

7.3789,095

51,110

-2,503

2,023-15,929

0

0

0

000

0

1,2153,020n.a.

0

0

0n.a.1,119

16,747

-17,750-27,081

2,058

18,148

3.215

8,39411,58855.843

-1,040

698-15.744

0

0

0

000

0

6281,561

70

0

0

0n.a.

435

21,969

-11,646-21,115

1,097

15,215

2,824

7,3728,280

51,988

-103

565-16,718

0

0

0

000

0

1,1101.771

n.a.

0

0

0n.a.

415

23,704

-11,992-21,661

2,536

17,680

3.553

7,93511,53063.690

-86

-1.069-21.091

0

0

0

000

0

1,6953.691

0

0

0

0n.a.

-34

21.401

-14,310-25,413

2,132

20,726

3,276

8.62911,82358,167

-1,581

-696-17,265

0

0

0

000

0

3881,749

0

0

0

n.a.n.a.

55

13,518

-20,678-26,804

1.592

18,940

3.580

8.55612,38552,983

-1,325

329-15,953

0

0

0

000

0

4951,011

154

0

0

n.a.n.a.

288

8,359

-23,201-34,907

2,092

16,103

2.538

8,69410,98449,240

-1,312

3,898-8.843

0

0

0

000

0

-319-145

126

0

0

n.an.a.1,413

11,566

-29,578-29,821

2,176

15,075

2.982

7,74612.31554,756

-966

3.129-13.543

0

0

0

000

0

1.903929

n.a.

0

0

n.a.n.a.

566

9.031

-25,584-29.783

2,098

18,257

2,603

8,04511,71862,528

-466

1,858-16,865

0

0

0

000

0

2.147453

n.a.

0

0

n.a.n.a.

659

3,450

-28.624-23,874

2.132

16,571

2,443

8,14111.33855.492

-217

2,967-22,468

0

0

0

000

0

1,21452

n.a.

0

0

n.a.n.a.

667

Financing5

352,692'722,028

215,207'80,881

3,842'

735,077'639,985

8,566'3,883'

54,500'2.838r

9,536

359,012'758,517

213.254'89,659'

2.526'

740,803671,254

9,825'4,240'

52,797'5,181'

12,421

365,357822,709

208,55899.303

2,591

788,452726,216

11,6402.120

48,7735.693

11,714

368,925'746,266

206.231'92.064

2,700'

750,037651,398

10.8162,987'

50,636'6,111'

12,865

374,177799.086

207 28495,425

2,598

773.282708.229

11,6692.509

49,1895,947

16.152

357,521801,292

211,26995.220

2.745

808,266703,484

11,5331,917

50,0955,668

11,822

358.878836.706

205,611104.223

2,496

810.360727.513

12,0622,024

48,3715,888

13,481

370,855862,109

209,488102.952

2.491

771,881773,149

11,4461,934

47,0595,292

5,580

361.782840.643

214 956102.290

2,732

757.011748.465

11,4261,915

49,5555.102

9.297

141,254875,843

214,832104.623

3.288

752,310791,540

11,5941,890

49,2175,137

11,466

390,603732,919

218,56099,240

3.394

781,666654.576

10,6533.429

50,6134,856

10,618

1. Data for positions and financing are obtained from reports submitted to the FederalReserve Bank of New York by the US government securities dealers on its published list ofprimary dealers. Weekly figures are close-of-business Wednesday data Positions for calendardays of the report week are assumed to be constant. Monthly averages are based on thenumber of calendar days in the month.

2. Securities positions are reported at market value.3. Net outright positions include immediate and forward positions. Net immediate posi-

tions include securities purchased or sold (other than mortgage-backed agency securities) thathave been delivered or are scheduled to be delivered in five business days or less and"when-issued" securities that settle on the issue date of offering. Nel immediate positions formortgage-backed agency securities include securities purchased or sold that have beendelivered or are scheduled to be delivered in thirty business days or less.

Forward positions reflect agreements made in the over-the-counter market that specifydelayed delivery. Forward contracts for U.S. Treasury securities and federal agency debt

securities are included when the time to delivery is more than five business days. Forwardcontracts for mortgage-backed agency securities are included when the time to delivery ismore than thirty business days.

4. Futures positions reflect standardized agreements arranged on an exchange. All futurespositions are included regardless of time to delivery.

5. Overnight financing refers to agreements made on one business day that mature on thenext business day; continuing contracts are agreements that remain in effect for more than onebusiness day but have no specific maturity and can be terminated without advance notice byeither party; term agreements have a fixed maturity of more than one business day. Financingdata are reported in terms of actual funds paid or received, including accrued interest.

NOTE, '"n.a." indicates that data are not published because of insufficient activity.Major changes in the report form filed by primary dealers induced a break in the dealer data

series as of the week ending January 28, 1998.



1.44 FEDERAL AND FEDERALLY SPONSORED CREDIT AGENCIES Debt Outstanding


Agency

1 Federal and federally sponsored agencies

2 Federal agencies,3 Defense Department^1

4 Export-Import Bank"5 Federal Housing Administration4

6 Government National Mortgage Association certificates ofparticipation

7 Postal Service'1

8 Tennessee Valley Authority9 United States Railway Association6

10 Federally sponsored agencies7

11 Federal Home Loan Banks12 Federal Home Loan Mortgage Corporation13 Federal National Mortgage Associaiion14 Farm Credit Banks8

15 Student Loan Marketing Association16 Financing Corporation10

17 Farm Credit Financial Assistance.,Corporation18 Resolution Funding Corporation12

MF.MO19 Federal Financing Bank debt13

Lending in federal ami federally sponsored agencies20 Export-Import Bank1

21 Postal Service6

22 Student Loan Marketing Association23 Tennessee Valley Authority24 United States Railway Association6

Other lending"25 Farmers Home Administration26 Rural Electrification Administration27 Other

1994

738,928

39.1866

3.455116

n a.8,073

27,536n.a.

699,742205.817

93,279257,23053,17550,335

8,1701,261

29,996

103,817

3.4498.073n.a.3,200n.a.

33,71917J9237,984

1995

844,611

37,3476

2,05097

n.a.5,765

29,429n.a.

807,264243.194119,961299,17457,37947,529

8,1701,261

29.9%

78,681

2,0445,765n.a.3,200n.a.

21,01517J4429,513

1996

925,823

29,3806

1,44784

n.a.n.a.

27,853n.a.

896,443263,404156,980331,27060.05344.763

8.1701.261

29,996

58,172

1,431

n.a.n.a.n.a.

18,32516J0221,714

1997

1,022,609

27,7926

552102

n.a.n.a.27,786n.a.

994,817313.919169,200369,77463,51737,7178.1701,261

29,996

49,090

552

n.a.n.a.n.a.

13,530K89820.110

1997

Nov.

1,014,907

27.5006

1,29593

n.a.n.a.27.494n.a.

987,407308,745174,900361,60261,09340,321

8,1701,261

29,996

32,523

1,295

n.a.n.a.n.a.

13,530148192,879

Dec.

1,022,609

27,7926

552102

n.a.n.a.27,786n.a.

994,817313,919169,200369,77463.51737,717

8,1701,261

29,996

49,090

552

n.a.n.a.n.a.

13.53014^89820,110

Jan.

1,032,486

27,1106

682133

n.a.n.a.27,104n.a.

1,005,376311,385181,948370,52461,31739.3758.1701,261

29.996

48,321

549

n.a.n.a.n.a.

13,53014^84119,401

1998

Feb.

1,038,348

27,1016

54979

n.a.n.a.27,095n.a.

1,011,247312,017184,100373,57461.17739,570

8,1701,261

29,996

47,341

549

n.a.n.a.n.a.

13,16014A5218,780

Mar.

1,059,043

27,2276

54997

n.a.n.a.27.221n.a.

1.031,816117,%7193,300381,09362,32736,3108,1701,261

29,996

45,487

549

n.a.n.a.n.a.

13,030I4J1517,593

1, Consists of mortgages assumed by the Defense Department between 1957 and 1963under family housing and homeowners assistance programs.

2, Includes participation certificates reclassified as debt beginning Oct. 1, 1976.3, On-budgct since Sept 30, 1976.4 Consists oi debentures issued in payment of Federal Housing Administration insurance

claims. Once issued, these securities may be sold privately on the securities market.5. Certificates of participation issued before fiscal year 1969 by the Government National

Mortgage Association acting as trustee for ihe Farmers Home Administration, the Departmentof Health. Education, and Welfare, the Department of Housing and Urban Development, lheSmall Business Administration, and the Veterans Administration

6 Off-budgfl.7. Includes outstanding noncontingent liabilities: notes, bonds, and debentures. Includes

Federal Agricultural Mortgage Corporation, therefore details do not sum to total. Some dataare estimated.

8 Excludes borrowing by the Farm Credit Financial Assistance Corporation, which isshown on line 17.

9. Before late 1982. the association obtained financing through the Federal Financing Bank(FFB). Borrowing excludes that obtained from the FFB. which is shown on line 22.

10. The Financing Corporation, established in August 1987 to recapitalize the FederalSavings and Loan Insurance Corporation, undertook its first borrowing in October 1987.

11. The Farm Credit Financial Assistance Corporation, established in January 1988 toprovide assistance to the Farm Credit System, undertook its first borrowing in July 1988.

12. The Resolution Funding Corporation, established by ihe Financial Institutions Reform,Recovery, and Enforcement Act of 1989. undertook its first borrowing in October 1989.

13. The FFB, which began operations in 1974, is authorized to purchase or sell obligationsissued, sold, or guaranteed by other federal agencies. Because FFB incurs debt solely for thepurpose of lending to other agencies, its debt is not included in the mam portion of the table toavoid double counting.

14. Includes FFB purchases of agency assets and guaranteed loans; the latter are loansguaranteed by numerous agencies, with the amounts guaranteed by any one agency generallybeing small. The Farmers Home Administration entry consists exclusively of agency assets,whereas the Rural Electrification Administration entry consists of both agency assets andguaranteed loans.


Securities Markets and Corporate Finance A31

1.45 NEW SECURITY ISSUES Tax-Exempt State and Local Governments

Millions of dollars

Type of issue or issuer,or use

1 AH issues, new and refunding1

By type of issue2 General obligation

Bv tvpe of issuer4 State5 Special district or statutory authority2

6 Municipality, county, or township

7 Issues for new capital

By use of proceeds8 Education9 Transportation

10 Utilities and conservation11 Social welfare12 Industrial aid13 Other purposes

1995

145,657

56,98088 677

14,66593.50037.492

102390

23,96411,8909,618

19.5666,581

30.771

1996

171,222

60,409110 813

13,651113,22844,343

112,298

26,85112,3249,791

24,5836,287

32,462

1997

214.694'

69,934114 989

18,237134,91970.558

U5,S19r

31,86013.95112,21927.7946,667

35.095

1997

Oct.

21,898

7,83714 061

2,39213,19513,920

12,981

2,6471,2151,4022,341

7294,642

Nov.

20,207

5,713

50913.5865.920

12,979

2,9731.4201.2174,090

5742.705

Dec.

21342

8,00513 337

1,70215,6004.098

13,487

2,9811.144

6832.940

8974,842

1998

Jan.

16,770

5,608

1,26811,7943,708

9,696

2,3381,521

5981,540

4483,251

Feb.

21,306

9.89311 413

2,42014,2284.65B

12.538

3.5251,760

6872.903

5813,082

Mar.

27,859'

9,59718 261

2,37519,6295.859

15,134

4.297771

1,8663,1041,2363,860

Apr.

20,271

8.154'

3.54812.5044.219

12,616

4,0801.089

7492.820

6783.255

May

22,862

4,827[8 035

1,14616,8654.851

15,281

2,8191,0435 9712.390

5762.482

1. Par amounts of long-term issues based on date of sale.2. Includes school districts.

SOURCE. Securities Data Company beginning January 1990; Investment Dealer'sDigest before then.

1.46 NEW SECURITY ISSUES U.S. Corporations

Millions of dollars

Type of issue, offering,or issuer

1 All issues'

2 Bonds

By type of offering3 Pubiic. domestic4 Private placement, domestic3

5 Sold abroad

By industry group

7 Financial

8 Stocks2

Bv tvpe of offering9 Public

10 Private placement3

Bv industry group

12 Financial

1995'

673,779

573,206

408.80487.49276,910

231,941739.069

100.573

146,44632,100

52,70720.516

1996'

n.a.

n.a.

465,489n.a.

83,433

239,530858.313

n.a

244,(112n.a.

80.46041,546

1997'

n.a.

n.a.

537.810n.a.

103.188

260,0911,021.905

n.a.

235,760n.a.

60,38657.494

1997'

Sept.

85,001

75,166

60,226n.a.

14.941

11,34663,820

10,401

10,401n.a.

6.3834,018

Oct.

71,219

58,166

46.967n.a

11.199

15,97742,189

13,965

13.965n.a.

6.8977.068

Nov.

58,350

46,543

42,969n.a.3.574

6,79439,750

12.416

12,416n.a.

6,8615,555

Dec.

63,992

55,973

54.443n.a.1,530

7,69648,276

8.490

8,490n.a.

3.0395.451

1998

Jan.'

73.614

66.198

55,647n.a.

10.551

21,03945,159

7,667

7.667n.a.

1,7615,906

Feb.'

68,361

57396

50,453n.a.6,943

12,13345,263

11,181

11,181n.a.

5,7365.445

Mar.'

108,094

89,723

81.778n.a7.946

17,30172.422

18,399

18,399n.a.

10.6047,795

Apr

75,973

64,329

55,452n.a.8.878

16,98547,345

12,469

12.469n.a

5.5506.919

I. Figures represent gross proceeds of issues maturing in more than one year; they are theprincipal amount or number of units calculated by multiplying by the offering price. Figuresexclude secondary offerings, employee stock plans, investment companies other than closedend. intracorporate transactions, and Yankee bonds. Stock data include ownership securitiesissued by limited partnerships.

2. Monthly data cover only public offerings.3. Monthly data are not available.SOURCE. Beginning July 1993, Securities Data Company and the Board of Governors of

the Federal Reserve System.



1.47 OPEN-END INVESTMENT COMPANIES Net Sales and Assets'

Millions of dollars

hem

1 Sales of own shares2

2 Redemptions of own shares3 Net sales3

4 Assets4

5 Cash5

6 Other

1996

934,595

702,711231,885

2,624,463

138,5592.485,904

1996

1,190,900

918,728272.172

3,409,315

174,1543,235.161

1997

Oct.

VI 5,343

91.65423,689

3484,252

179,9093,104,343

Nov.

94,478

66,13528,343

3,356,347

186,5823,169,765

Dec.

110,452

89,98220,471

3,409,315

174,1543,235,161

1998

Jan.

119,488

92.62126.867

3,459,354

183,6483.275,706

Feb.

114,219

81,68832,532

3,675,392

180,4153,494,977

Mar.

128,348

97,24831,100

3,843,971

174,0583.669,913

Apr.r

128,828

97,08731,741

3,909,932

170,0453.739,887

May

112,668

84,15828.510

3,878,148

173,3773,704,771

1. Data include stock, hybrid, and bond mutual funds and exclude money market mutualfunds.

2. Excludes reinvestment of net income dividends and capital gains distributions and shareissue of conversions from one fund to another in the same group.

3. Excludes sales and redemptions resulting from transfers of shares into or out of moneymarket mutual funds within the same fund family.

4 Market value at end of period, less current liabilities.5. Includes all U.S. Treasury securities and other short-term debt securities.SOURCE. Investment Company Institute. Data based on reports of membership, which

comprises substantially all open-end investment companies registered with the Securities andExchange Commission. Data reflect underwriting s of newly formed companies after theirinitial offering of securities.

1.48 CORPORATE PROFITS AND THEIR DISTRIBUTION

Billions of dollars; quarterly data at seasonally adjusted annual rates

Account

1 Profits with inventory valuation andcapital consumption adjustment

2 Profits before taxes3 Profits-tax liability4 Profits after taxes5 Dividends6 Undistributed profits

7 Inventory valuation8 Capital consumption adjustment

1995

650.0622.6213.2409.4264 4145.0

-24 351.6

1996

735.9676.6229.0447.6304 8142.8

-2 .561.8

1997

805.0729,8249.4480.3336 1144.2

5.569.7

Q2

738.5682.2232.2450.0303 7146.4

-5.461.6

1996

03

739.6679.1231.6447.5105 7141.8

-2.763.2

Q4

747.8680.0226.0454.0309 1144.9

3.364.4

Ql

779.6708.4241.2467.2126 8140.3

3.567.7

1997

Q2

795.1719.8244.5475.3333 0142.3

5.969.4

03

827.3753.4258.2495.2339 1156.1

3.670.3

Q4

818.1737.3253.6483.7345 6138.1

9.271.6

1998

Ql '

8">7 7723.8246.0477.9352 2125.7

30.173.7

SOURCE. U.S. Department of Commerce, Survey of Current Business.

1.51 DOMESTIC FINANCE COMPANIES Assets and Liabilities1

Billions of dollars, end of period; not seasonally adjusted

Account

ASSETS

1 Accounts receivable, gross"2 Consumer3 Business4 Real estate

5 LESS: Reserves for unearned income6 Reserves for losses

7 Accounts receivable, net

9 Total assets

LIABILITIES AND CAPITAL

10 Bank loans

Debt12 Owed to parent13 Not elsewhere classified14 All other liabilities15 Capital, surplus, and undivided profits

16 Total liabilities and capital

1995

607.0233.0301.6

72.4

60.712.8

5335250 9

784 4

15.3168 6

51.1300.0163.685.9

784.4

1996

637.1244 9309.5

82.7

55.613.1

568.3290 0

858.3

19.7177 6

60.3332.5174.793.5

858.3

1997

663.3256.8318.5

87.9

52.713.0

597.63124

910.0

24.1201 5

64.7328.8189.6101.3

910.0

1996

Q3

628.1244.4301.4

82.2

54.812.9

560.5268 7

829.2

18.3173 1

57.9322.3164.892.8

829.2

Q4

637.1244.9309.5

82.7

55.613.1

568.3290 0

858.3

19.7177 6

60.3.332.5174.793.5

858.3

1997

Ql

648.0249.4315.2

83.4

51.312.8

583.9289 6

873.4

18.4185 3

61.0324.6189.294.9

873.4

Q2

651.6255.1311.7

84.8

57.213.3

581.2306 8

887.9

18.8193 7

60.0345.3171.498.7

887.9

Q3

660.5254.5319.5

86.4

54.612.7

593.1289 1

882.3

20.4189 6

61.6322.8190.197.9

882.3

Q4

663.3256.8318.5

87.9

52.713.0

597.63124

910.0

24.1•>01 5

64.7328.8189.6101.3

910.0

1998

Ql

666.8251.3325.9

89.6

52.113.1

601.6329 9

931.5

22.0•>11 7

64.6338.1193.0102.0

931.5

1. Includes finance company subsidiaries of bank holding companies but not of retailersand banks. Data are amounts carried on the balance sheets of finance companies; securitizedpools are not shown, as they are not on the books.

2. Before deduction for unearned income and losse


Securities Market and Corporate Finance A3 3

1.52 DOMESTIC FINANCE COMPANIES Owned and Managed Receivables'

Billions of dollars, amounts outstanding

Type of credit

Nov. Dec. Apr.

I Total

Seasonally adjusted

2 Consumer3 Real estate4 Business

5 Total

6 Consumer7 Motor vehicles loans8 Motor vehicle leases9 Revolving2

10 Other'Securitized assets4

11 Motor vehicle loans12 Motor vehicle leases . . . .13 Revolving14 Other15 Real estate16 One- to four-family17 Other

Securitized real estate assets4

18 One- to four-family19 Other20 Business21 Motor vehicles22 Retail loans23 Wholesale loans5

24 Leases25 Equipment26 Loans27 Leases28 Other business receivables6. .

Securitized assets4

29 Motor vehicles30 Retail loans31 Wholesale loans32 Leases33 Equipment34 Loans35 Leases36 Other business receivables6

682.4

281.972.4

328.1

762.4

306.6111.9343.8

810.4

326.9121.1362.4

805.7

323.7121.7360.3

810.4

326.9121.1362.4

811.0

324.9121.9364.3

821.1

326.2123.7371.1


689.5

285.881.180.828.542.6

34.83.5

n.a.14.772.4n.a.

n.a.331.266.521.836.68.08.08.08.08.0

8.08.08.08.08.08.08.08.0

769.7

310.686.792.532.533.2

36.88.70.0

20.1111.952.130.5

28.90.4

347.267 125.133.09.09.09.09.09.0

9.09.09.09.09.09.09.09.0

818.1

330.987.096.838.634.4

44.310.80.0

19.0121.159.028.9

33.00.2

366.163.525.627.710.210.210.210.210.2

10.210.210.210.210.210.210.210.2

806.9

325.486.096.434.835.5

42.511.00.0

19.2121.759.429.0

33.00.2

359.862.026.325.8

9.8198.949.6

149.454.0

32.42.5

29.80.09.94.15.82.6

818.1

330.987.096.838.634 4

44.310.80.0

19.0121.159.028.9

33.00.2

366.163.525.627.710.2

203.951.5

152.351.1

33.02.4

30.50.0

10.74.26.54.0

812.2

326.287.494.537.634.5

42.810.70.0

18.7121.959.829.1

32.80.2

364.061.826.125.610.1

204.250.7

153.552.1

31.52.3

29.20.0

10.43.96.54.0

819.6

324.884.794.736.934.1

45.310.60.0

18.5123.762.229.0

32.30.2

371.164.826.428.210.2

204.749.9

154.855.6

31.22.2

29.00.0

10.84.36.54.0

818.3'

326.7'121.6369.9

819.4'

325.01

86.8'95.236.3'33.01

45.010.50.0

18.2121 661.528.1

31.80.2

372.767.827.330.210.2

206.5508

155.751.6

32.12.0

30.00.0

10.54.26.342

328.9121.9372.8

824.9

326.390.695.929.933.4

42.810.45.3

18.1121.962.428.1

31.20.2

376.768.228.329.510.4

207.851.2

156.754.0

31.61.9

29.60.0

10.34.16.24.7

NOTE. This table has been revised to incorporate several changes resulting from thebenchmarking of finance company receivables to the June 1996 Survey of Finance Compa-nies. In that benchmark survey, and in the monthly surveys that have followed, more detailedbreakdowns have been obtained for some components. In addition, previously unavailabledata on securitized real estate loans are now included in this table. The new information hasresulted in some reclassification of receivables among the three major categories (consumer,real estate, and business) and in discontinuities in some component series between May andJune 1996.

Includes finance company subsidiaries of bank holding companies but not of retailers andbanks. Data in this table also appear in the Board's G.20 (422) monthly statistical release. Forordering address, see inside front cover.

I. Owned receivables are those carried on the balance sheet of the institution. Managedreceivables are outstanding balances of pools upon which securities have been issued: thesebalances are no longer carried on the balance sheets of the loan originator. Data are shown

before deductions for unearned income and losses. Components may not sum to totalsbecause of rounding.

2. Excludes revolving credit reported as held by depository institutions that are subsidiar-ies of finance companies.

3. Includes personal cash loans, mobile home loans, and loans to purchase other types ofconsumer goods such as appliances, apparel, boats, and recreation vehicles.

4. Outstanding balances of pools upon which securities have been issued; these balancesare no longer carried on the balance sheets of the loan originator.

5. Credit arising from transactions between manufacturers and dealers, that is, floor planfinancing.

6. Includes loans on commercial accounts receivable, factored commercial accounts, andreceivable dealer capital; small loans used primarily for business or farm purposes; andwholesale and lease paper for mobile homes, campers, and travel trailers.



1.53 MORTGAGE MARKETS Mortgages on New Homes

Millions of dollars except as noted

Hem

PRIMARY MARKETS

Terms1

2 Amount of loan (thousands of dollars)3 Loan-to-price ratio (percent)4 Maturity (years)5 Fees and charges (percent of loan amount)2

Yield (percent per year)

7 Effective rate1 '8 Contract rate (HUD series)4

SECONDARY MARKETS

Yield (percent per year)9 FHA mortgages (Section 203)5

10 GNMA securities6

FEDERAL NATIONAL MORTGAGE ASSOCIATION

Mortgage holdings (end of period)11 Total12 FHA/VA insured13 Conventional

14 Mortgage transactions purchased (during period)

Mortgage commitments (during period)15 Issued7

16 To sell8

FEDERAL HOME LOAN MORTGAGE CORPORATION

Mortgage holdings (end of period)8

17 Total18 FHA/VA insured19 Conventional

Mortgage transactions (during period)

21 Sales

22 Mortgage commitments contracted (during period)9

1995

175.8134.578.627.71.21

7.657.858.05

8.187.57

1996

182.4139.278.227.21.21

7.567.778.03

8.197.48

1997

180.1140.180.428.21.02

7.577.737.76

7.897.26

1997

Nov. Dec. Jan. Feb.

Terms and yields in primary and secondary markets

184.0143.580.828.60.95

7.267.407.38

7.516.84

190.7149.881.028.20.96

7.257.407.25

7.176.74

184.1142.380.528.50.91

7.13in7.16

7.086.56

195.3148.578.628.00.99

7.097.247.22

7.066.63

1998

Mar.

191.7149.581.028.30.95

7.037.177.16

7.096.66

Apr.

189.5147 180.428.40.87

7.057.197.20

7.376.63

May

195.6150.279.128.30.85

7.057.187.11

7.076.63

Activity in secondary markets

253.51128,762

224,749

56,598

56.092360

107,424267

107,157

98,47085,877

118,659

287,05230,592

256,460

68,618

65.859130

137.755220

137,535

125,103119,702

128,995

316.67831,925

284.753

70,465

69,9651,298

164.421177

164,244

117,401114,258

120,089

314,62731,878

282.749

8,166

5.123139

160.974180

160,794

11,15210,832

12,047

316,67831,925

284.753

6,692

6.275140

164,421177

164,244

15,97914,587

15,805

320,06231,621

288,441

7,647

12.19960

169.142173

168,969

13,12012,702

15,638

322,95731,650

291,307

8.630

10.5870

175,770170

175,600

13,61012,481

17,397

327,02531,965

295,060

12.095

14,05792

185,928166'

185,762'

21,01119,085

23,060

333,57132,734

300,837

14,668

17,5560

189,471162'

189,309'

25,13224,479

24,468

343,92232,771

311,151

17,423

10,6120

192,603160

192,443

23,74323,338

26.100

1. Weighted averages based on sample surveys of mortgages originated by major institu-tional lender groups for purchase of newly built homes; compiled by die Federal HousingFinance Board in cooperation with the Federal Deposit Insurance Corporation.

2. Includes all fees, commissions, discounts, and "points" paid (by the borrower or theseller) to obtain a loan.

3. Average effective interest rate on loans closed for purchase of newly built homes,assuming prepayment at the end of ten years.

4. Average contract rate on new commitments for conventional first mortgages; from U.S.Department of Housing and Urban Development (HUD). Based on transactions on the firstday of the subsequent month.

5 Average gross yield on thirty-year, minimum-downpayment first mortgagee insuredby ihe Federal Housing Administration (FHA) for immediate delivery in the privatesecondary market. Based on transactions on first day of subsequent month.

6. Average net yields to investors on fully modified pass-through securities backed bymortgages and guaranteed by die Government National Mortgage Association (GNMA),assuming prepayment in twelve years on pools of thirty-year mortgages insured by theFederal Housing Administration or guaranteed by the Department of Veterans Affairs.

7. Does not include standby commitments issued, but includes standby commitmentsconverted.

8. Includes participation loans as well as whole loans9. Includes conventional and government-underwritten loans. The Federal Home Loan

Mortgage Corporation's mortgage commitments and mortgage transactions include activityunder mortgage securities swap programs, whereas the corresponding data for FNMAexclude swap activity.


Real Estate A35

1.54 MORTGAGE DEBT OUTSTANDING1


Type of holder and property

Ql Q2 Q4 Ql"

1 All holders

By type of property2 One- to four-family residences3 Multifamily residences4 Nonfarm, nonresidential5 Farm

By type of holder6 Major financial institutions7 Commercial banks'8 One- to four-family9 Multifamily

10 Nonfarm. nonresidential11 Farm12 Savings institutions3

13 One- to four-family14 Mullifamily15 Nonfarm. nonresidential16 Farm17 Life insurance companies18 One- to four-family19 Mullifamily20 Nonfarm, nonresidential21 Farm

22 Federal and related agencies23 Government National Mortgage Association . . .24 One- to four-family25 Multifamily26 Farmers Home Administration4

27 One- to four-family28 Multifamily29 Nonfarm, nonresidential30 Farm31 Federal Housing and Veterans' Administrations32 One to four-family33 Multifamily34 Resolution Trust Corporation35 One- to four-family36 Multifamily37 Nonfarm, nonresidential38 Farm39 Federal Deposit insurance Corporation40 One- to four-family41 Multifamily42 Nonfarm. nonresidential43 Farm44 Federal National Mortgage Association45 One- to four-family46 Multifamily47 Federal Land Banks48 One- to four-family49 Farm50 Federal Home Loan Mortgage Corporation51 One- to four-family52 Multifamily

53 Mortgage pools or trusts5

54 Government National Mortgage Association . . .55 One- to four-family56 Multifamily57 Federal Home Loan Mortgage Corporation58 One- to four-family59 Multifamily60 Federal National Mortgage Association61 One- to four-family62 Multifamily63 Farmers Home Administration4

64 One- to four-family65 Mullifamily66 Nonfarm, nonresidential67 Farm68 Private mortgage conduits69 One- to four-family6

70 Multifamily71 Nonfarm. nonresidential72 Farm

73 Individuals and others7

74 One- to four-family75 Multifamily76 Nonfarm, nonresidential77 Farm

4,395,888'

3,355,868'275.005'682,044'82,971

1,819,8061,012,711615,86139,346334,95322,551

596,191477.62664,34353,933

289210,9047,01823,902170,4219.563

315.580660

41,78118,09811,3195,6706,69410,9644,7536,21110,4285,2002,8592.369

0

7,8211.0491.5955,177

0174,312158,76615,54628,5551.671

26,88541,71238,8822,830

1,732,347450,934441,1989,736

J90.851487,725

3,126530,343520,7639.580

193097

260,200208,50014,92536,774

0

528,155'368,749'69,686'72,738'16,983

4,608,162r

3.530,400'287,483'705,719'84.561

1,894.4201.090,189669,43443,837353,08823,830596.763482.35361,98752,135

288207,468

7,31623,435167.0959.622

306,774220

41,79117.70511,6176,2486,2219,8095,1804,6291.8646916475250

4,303492428

3,3830

176,824161.66515,15928,4281,673

26.75543.75339,9013,852

1.866,763472,283461,43810.845

515.051512,238

2,813582.959569,72413,235

II2054

296,459227,80021,27947,380

0

540,206'372,786'73,719'75,859'17,841

4,936,041r

3,761,560'312,388'774,960'87,134

1,979.1141,145.389698,50846.675375,32224,883628,335513,71261.57052,723

331205,3906,77223,197165,39910,022

300,935220

41,59617,30311,6856,8415.7686,2443,5242,719

00000

2,431365413

1,6530

174,556160,75113,80529,6021,742

27,86046,50441,7584,746

2.070,436506.340494.15812,182

554.260551,5132,747

650,780633,21017,570

30003

359.053261,90033.68963.4 64

0

585.556'376.341'81,389'109.558'18,268

4,991,477'

3,806,060'315,282'782 482'87,653

1,993,0461.160.136708,80247,618378,47425,242

626,381513,39360.64552,007

336206,5296,79923,320166,27710.133

295.203660

41.48517,17511,6926,9695,6494,3302,3351,995

00000

2,217333377

1,5080

172,829159,63413,19529,6681,746

27,92244,66839.6405.028

2.113,770513,471500,59112,880

562.894560.3692,525

663,668645.32418,344

30003

373,734271,10035.60767,027

0

589,458'378,815'82,054'110,220'18.368

5,070,645'

3,860,806'320,601'800,560'88.678

2.033,662'1,196,524'733.737'49.118'387,608'26,061

629,062516,52160,07052,132

338208,0776,84223,499167,54810,188

292.966770

41.40017,23911.7067,1355,3214,2002,2991,900

00000

1,816272309

1.2350

170,386157,72912,65729,9631,763

28,20045,19440,0925,102

2,153,812520,938507,61813,320

567.187564,4452,742

673,931654,82619.105

20001

391,753279,45038,99273.312

0

590.206'377,966'82.081'111,591'18,567

5.189,141'

3.958,109'323,349'817,924'89,759'

2.068.022'1,227,151'752,334'49,169'398,847'26,800'631,444'519.564'60,348'51,187'

346'209,4267,08023,615168.37410.358

291,410770

41,33217.45811.7137.2464,9163,4622,81065200000

1,476221251

1,0040

168.458156.36312,09530,3461,786

28,56046.32940.9535,376

2.210.930529,867516,21713,650

569.920567,340

2,580690,919670,67720,242

20002

420,222299,40041.97378,849

0

618,779'405,900'81,684'112,418'18.777'

5,288.301

4.030.312332,200835,37290.417

2,086.7471.244,146762.58050.643

403,94526.978631.809520.66059,54351.251

354210 792

7,18623,755169,37710.473

292,581

041.19517,25311.7207,3704,8523,8213,09173000000

724109123J920

167,722156,24511,47730,6571,804

28,85348.45442,6295,825

2,282,566536,810523,15613,654

579.385576,8462,539

709,582687,98121,601

20002

456,787318,00048,26190.526

0

626,408412,76382,329112,41118.905

5,383,193

4,097,033339,789854,94991,422

2,118.9681,269,973779,92451,777410,81827,453636.759526,98458.88450.522

369212,235

7,32123,902170,42310,589

293.499

040,97217,16011,7147.3694.7293,6942,966729

00000

786118134534

0166,670155,87610.79431,0051,824

29,18150,36444,4405.924

2,334,416533.011519,15213,859

583,144580,7152,429

730.832708,12522.707

->

0002

487,427330,30054,6S0102,447

0

636.310422,12082,257112.83419,099

1. Mullifamily debt refers to loans on structures of five or more units.2. Includes loans held by nondeposit trust companies but not loans held by bank trust

departments,3. Includes savings banks and savings and loan associations.4. FmHA-guaranteed securities sold to the Federal Financing Bank were reallocated from

FmHA mortgage pools to FmHA mortgage holdings in 1986:04 because of accountingchanges by the Fanners Home Administration.

5. Outstanding principal balances of mortgage-backed securities insured or guaranteed bythe agency indicated.

6. Includes securitized home equity loans.7. Other holders include mortgage companies, real estate investment trusts, state and local

credit agencies, state and local retirement funds, norunsured pension funds, credit unions, andfinance companies.

SOURCE. Based on data from various institutional and government sources. Separation ofnonfarm mortgage debt by type of property, if nol reported directly, and interpolations andextrapolations, when required for some quarters, are esiimated in part by the Federal ReserveLine 69 from Inside Mortgage Securities and other sources.



1.55 CONSUMER CREDIT'

Millions of dollars, amounts outstanding, end of period

Holder and type of credit

1 Total

2 Automobile

4 Other

5 Total

By major holder6 Commercial banks

8 Credit unions9 Savings institutions

10 Nonfinancial business3

11 Pools of securitized assets4

By major type of credit5

12 Automobile

14 Finance companies15 Pools of securitized assets4

17 Commercial banks18 Finance companies19 Nonfinancial business

20 Pools of securitized assets21 Other

23 Finance companies24 Nonfinancial business3

25 Pools of securitized assets

1995 1996 1997

1997

Nov. Dec.

1998

Jan. Feb. Mar.' Apr.

Seasonally adjusted

1,094,197

364,231442,994286,972

1,179,892

392,370499,209288.313

1,230,695'

413,453530,801286,441'

1,226,947

406,892529,800290,255

1,230,695'

413,453530,801286,441'

1,235,669'

415,485532,864287.320'

1,242,912'

416,755536,592289,565'

1,244,920

419,717537,055288,148

1,250,369

420,887539,381290,101


1,122,828

501,963152,123131,93940,10685,061

211,636

367,069151,43781,07344,635

464,134210,298

28,46053,525

147,934291,625140,22842,59031,53619,067

1,211,590

526,769152,391144,14844,71177,745

265,826

395,609157,04786,69051,719

522,860228,615

32,49344,901

188.712293.121141,10733,20832,84425.395

1,264,103'

512,563'160,022152,36247,17278,927

313,057

416,962155,25487,01564,950

555,858219.826

38,60844,966

221,465291,283'137,483'34,39933,96126,642

1,234,477

506,497156,375150,64947,61170,464

302,881

411,097156,23286,04660,378

532,897212,726

34,78938,865

216,411290,483137,53935,54031,59926,092

1,264,103'

512,563'160.022152.36247,17278,927

313,057

416,962155,25487,01564,950

555.858219,826

38,60844,966

221,465291,283'137,483'34.39933,96126,642

1,245,726'

501,975'159,493151,02446,73375,355

311,146

413,727154,41387,37963,066

541,386208.750

37,60342,689

221.805290,613'138,812'34,51132,66626,275

1,237,687'

497,804'155,675149,80446,29572,772

315,337

412,461152,74784,68565,957

535,936204,564

36,85140,976

223,400289,290'140,493'34,13931,79625.980

1,233,469

492,221156,140149,33445,85672,669

317,249

415,656153,62786,83465,062

531,092197,26436,27341,246

226.562286,721141,33033,03331,42325,625

1,239,056

502,412153,857149,06445.41865,012

323,293

415,889150,65190,56463.596

532,446205.316

29,92733,487

233,986290,721146,44533,36631,52525,711

1. The Board's series on amounts of credit covers most short- and intermediate-term creditextended to individuals. Data in this table also appear in the Board's G.19 (421) monthlystatistical release. For ordering address, see inside front cover.

2. Comprises mobile home loans and all other loans that are not included in automobile orrevolving credit, such as loans for education, boats, trailers, or vacations. These loans may besecured or unsecured.

3. Includes retailers and gasoline companies.4. Outstanding balances of pools upon which securities have been issued; these balances

are no longer carried on the balance sheets of the loan originator.5. Totals include estimates for certain holders for which only consumer credit totals are

available.

1.56 TERMS OF CONSUMER CREDIT1

Percent per year except as noted

Item

INTEREST RATES

Commercial banks1

1 48-month new car2 24-month personal

Credit card plan

Auto finance companies5 New car

OTHER TERMS3

Maturity (months)

8 Used car

Loan-to-value ratio

10 Used car

Amount financed (dollars)] 1 New car12 Used car

1995

9.5713.94

16.0215 79

11.1914.48

54.152.2

9299

16,21011,590

1996

9.0513.54

15.6315 50

9.8413.53

51.651.4

91100

16,98712,182

1997

9.0213.90

15.7715 57

7.1213.27

54.151.0

9299

18,07712,281

Oct.

n.a.n.a.

n.a.

7.2713.22

54.450.6

92101

18,77912,287

1997

Nov.

8.9614.50

15.6515.62

6.8513.14

53.750.5

9199

18.92312,389

Dec.

n.a.n.a.

n.a.

5.9313.16

53,550.5

9299

19,12112,547

Jan.

n.a.n.a.

n.a.

6.1212.77

52.852.2

9298

18,94412,391

1998

Feb.

8.8714.01

15.6515 33

6.9812.87

52.652 5

9297

18,82512,356

Mar.

n.a.n.a.

n.a.

5.9412.79

51.552.6

9297

18,93212,431

Apr.

n.a.n.a

6.2012.76

50.752 9

9198

18,92213,490

1. The Board's series on amounts of credit covers most short- and intermediate-term creditextended to individuals. Data in this table also appear in the Board's G.19 (421) monthlystatistical release. For ordering address, see inside front cover.

2 Data are available for only the second month of each quarter.3. At auto finance companies.


Flow of Funds A37

1.57 FUNDS RAISED IN U.S. CREDIT MARKETS1

Billions of dollars; quarterly data at seasonally adjusted annual rates

Transaction category or sector

Q3 Q4

1997

Ql Q2 Q3 Q4

1998

QI

1 Total net borrowing by domestic nonflnancial sectors.

By sector and instrument2 Federal government3 Treasury securities4 Budget agency securities and mortgages

5 Nonfederal

fly instrument6 Commercial paper7 Municipal securities and loans .8 Corporate bonds9 Bank loans n.e.c

10 Other loans and advances11 Mortgages12 Home13 Multifamily residential14 Commercial15 Farm16 Consumer credit

By borrowing sector17 Household18 Nonfinancial business19 Corporate20 Nonfarm noncorporate21 Farm22 State and local government

23 Foreign net borrowing in United States .24 Commercial paper25 Bonds26 Bank loans n.e.c27 Other loans and advances

28 Total domestic plus foreign

29 Total net borrowing by financial sectors . .

By instrument30 Federal government-related31 Government-sponsored enterprise securities .32 Mortgage pool securities33 Loans from US. government

34 Private35 Open market paper36 Corporare bonds37 Bank loans n.e.c38 Other loans and advances39 Mortgages

By borrowing sector40 Commercial banking41 Savings institutions42 Credir unions43 Life insurance companies44 Government-sponsored enterprises45 Federally related mortgage pools46 Issuers of asset-backed securities (ABSs)47 Finance companies48 Mortgage companies49 Real estate investment trusts (REITs)50 Brokers and dealers51 Funding corporations

256.1248.3

7.8

10.074.875.2

6.4-18.9123.7156.2-6.8

-26.71.0

60.7

205.951.345.5

3.22.6

74.7

69.8-9.682.9

.7-4 .2

657.8

165.380.684.7

.0

129.1-5.5

123.1-14.4

22.43.6

13.411.3

.2

.280.684.783.6

-1.4.0

3.412.06.3

Nonrinancial sectors

574.6

155.9155.7

2

418.7

21.4-35.9

23.375.234.0

175.8178.5

1.9-6.9

2.2124.9

309.3141.7134.1

3.34.4

-32.3

-14.0-26.1

12.21.4

-1.5

560.5

702.8

144.4142.9

1.5

558.3

18.1-48.2

73.3102.367.2

206.7174.5

10.619.9

1.6138.9

348.9245.5218.6

23.92.9

-36.0

71.113.549.7

8.5- .5

773.8

727.8

145.0146.6-1.6

582.8

- .92.6

72.566.233.8

320.0264.9

18.633.9

2.688.8

372.7195.8146.544.5

4.814.3

70.511.349.4

9.1.8

798.3

764.2

23.123.2- .1

741.1

13.771 490.7

101.566.8

344.5268.8

17.255 2

3.352.5

350.3311.3241.5

63.56.4

79.5

51.53.7

41.38.5

-2.0

815.7

685.5

155.3158.4-3.1

530.2

-14.2-64.7

67.8138.363.0

258.1239.7

12.93.32.2

81.9

355.2224.919.3.430.9

.6-49.9

105.7.37.560.2

4.73.4

791.2

625.4

112.3115.6-3.3

513.1

-24.141.689.927.2

3.9336.0249.927.157.4

1.638.6

298.5163.392.961.2

9.251.4

87.94.4

78.57.8

-2.7

713.3

712.3

64.966.3-1.4

647.4

7.243.479.4

143.137.5

266.0228.4

9.525.9

2.170.8

339.2252.9200.348.3

4.355.3

26.315.511.0- .7

.5

738.6

624.4

-43.5-43.8

.2

667.9

20.396.786.1

105.018.5

281.4191.218.867.3

4.160.0

292.5274.7199.668.5

6.7100.7

56.410.434.311.5

.2

680.8

786.9

30.331.2- 9

756.6

14.556.4

122.916.876.3

419.2344.5

7.762.7

4.350.5

381.4311.6242.8

65.73.1

63.6

87.8-11.6

94.67.3

-2.5

874.7

933.4

40.839.0

1.7

892.6

12.889.374.4

141.0134.9411.4310.9

33.064.9

2.628.8

388.0406.0323.4

71.311.398.6

35.5.7

25.315.7

-6.1

968.9

Financial sectors

468.4

287.5176.9115.4-4.8

180.940.5

121.8-13.7

22.69.8

20.112.8

.2

172J115.472.948.7

-11.513.7

.523.1

456.4

204.1105.998.2

.0

252.342.7

196.73.93.45.6

22.52.6- .1- . 1

105.998.2

141.150.2

45.7

-5.034.9

556.2

231.590.4

141 1.0

324.792.2

179.716.927.9

7.9

13.025.5

.11.1

90.4141 1153.645.912.411.0

-2.064.1

649.2

212.898.4

114.4.0

436.5166.7206.8

19.735.6

7.8

46.119.7

.12

98.4114.4203.3

48.74.8

24.88.1

80.7

456.5

222.980.0

142.9.0

233.684.4

104.0.9

33.311.0

14.725.8

.3- .4

80.0142.9109.630.7

1.711.85.7

33 7

664.0

252.8123.3129.6

.0

411.1162.0187.925.131.24.9

26.823.0

.32.0

123.3129.6160.243.812.115.24.9

123.0

342.5

105.7-8.9114.6

.0

236.8175.963.411.4

-20.16.2

13.7-16.8

_ 2.8

-8^9114.684.5

7.25.9

15.1-2.9129.4

679.6

286.2198.188.1

.0

393.477.8

234.810.363.0

7.5

77.331.9

.2

.1198.188.1

116.5123.8

5.019.834.9

-16.1

603.1

161.046.4

114.6.0

442.1168.2202.0

24.337 510.1

32.022.3

2'.2

46.4114.6231.0- 2 9

3.632.0

-6.9130.7

971.7

298.1157.9140.3

.0

673.5244.6327.0

32.861 7

7.3

61.441.7

.3- . 3

157.9140.3381.2

66.54.9

32.17.0

78.71

- 3 0 . 0-27 .6

-2 .4

53.9124.3157.263.794.8

420.5315.8

27.772.9

4.056.9

426.94197323.8

88.97.0

124.6

60.356.0

8.45.5

-9.6

1,001.5

227.3142.484.8

.0

601.2236.7304.6

19.232.78.0

83.29.8

!b142.484.8

239 882.2

8.336.3

- I . I142.1



1.57 FUNDS RAISED IN U.S. CREDIT MARKETS'—Continued


52 Total net borrowing, all sectors

53 Open market paper54 U.S. government securities55 Municipal securities56 Corporate and foreign bonds

58 Other loans and advances59 Mortgages60 Consumer credit

62 Corporate equities

64 Foreign shares purchased by U.S. residents

66 Mutual fund shares

1993 1994 1995 1996 1997

1996

Q3 Q4

1997

Ql Q2 Q3 Q4

1998

Ql

All sectors

952.2

-5.1421.4

74.8281.2-7.2

-.8127.360.7

429.7

137.721.363.453.0

292.0

1.028.9

35.7448.1-35.9157.362.950.3

185.6124.9

125.2

24.6-44.9

48.121.4

100.6

1,230.2

74.3348.5-48.2319.6114.770.1

212.3138.9

1».9

-3.5-58.3

50.44.4

147.4

1,354.5

102.6376.5

2.6301.792.162.5

127.988.8

1,464.9

184.1235.971.4

338.8129.6100.4352.352.5

1.247.7

107.7378.2-64.7232.0143.899.7

269.181.9

1,377.3

142.3365.141.6

356.260.132.4

140.938.6

Funds raised through mutual funds and

230.5

-7.0-64.2

58.8-1.6

237.6

184.5

-79.0-114.8

38.0-2.1263.4

71.9

-100.1-127.6

32.7-5.1171.9

156.0

-20.3-56.0

42.3-6.7176.3

1,081.1

198.6170.643.4

153.8153.8

17.9272.270.8

1,360.4

108.5242.696.7

155 2126.881.7

288.960.0

corporate equities

186.1

-67.3-90.4

47.0-23.9253,4

131.8

-109.1-141.6

53.0-20.6240.9

1,477.8

171.1191.356.4

419.548.4

111.34293

50.5

291.1

-12.6-83.2

62.28.4

303.7

1,940.5

258.1338.989.3

426.6189.5190.5418.7

28.8

128.8

-126.9-144 1

-10.427.6

255.7

1,830.0

346.6197.2124.3470.3

88 4117.8428.5

56.9

258.1

-78.2-109 6

9.322.1

336.2

1. Data in this table also appear in the Board's Z.I (780) quarterly statistical release, table*F.2 through F.4. For ordering address, see inside front cover.


Flow of Funds A39

1.58 SUMMARY OF FINANCIAL TRANSACTIONS'

Billions of dollars except as noted; quarterly data at seasonally adjusted annual rates


NET LENDING IN CREDIT MARKETS2

1 Total net lending in credit markets

2 Domestic nonfederat nonfinancml sectors3 Household4 Nonfinancial corporate business5 Nonfarm noncorporate business6 State and local governments7 Federal government8 Rest of the world9 Financial sectors

10 Monetary authority11 Commercial banking12 US -chartered banks13 Foreign banking offices in United States14 Bank holding companies15 Banks in U S.-affiliated areas16 Savings institutions17 Credit" unions18 Bank personal trusts and estates19 Life insurance companies20 Other insurance companies21 Private pension funds22 State and local government retirement funds23 Money market mutual funds24 Mutual funds25 Closed-end funds26 Government-sponsored enterprises27 Federally related mortgage pools28 Asset-backed securities issuers (ABSs)29 Finance companies30 Mortgage companies31 Real estate investment trusts (RElTs)32 Brokers and dealers33 Funding corporations

RELATION OF LIABILITIESTO FINANCIAL ASSETS

34 Net flows through credit markets

Other financial sources35 Official foreign exchange36 Special drawing rights certificates37 Treasury currency38 Foreign deposits39 Net interbank transactions40 Checkable deposits and currency41 Small time and savings deposits4^ Large time deposits43 Money market fund shares44 Security repurchase agreements45 Corporate equities46 Mutual fund shares47 Trade payable*48 Security credit49 Life insurance reserves50 Pension fund reserves51 Taxes payable52 Investment in bank personal trusts53 Noncorporate proprietors' equity54 Miscellaneous

55 Total financial sources

Liabilities not identified as assets (—)56 Treasury currency57 Foreign deposits58 Net interbank liabilities59 Securilv repurchase agreements60 Taxes pavable61 Miscellaneous

Floats not included in assets ( - )62 Federal government checkable deposits63 Other checkable deposits64 Trade credit

65 Total identified to sectors as assets

1993

952.2

41.61.09.1

-1.132.6

-18.4129.3799.7

36.2142.2149.6-9.8

.02.4

-33.321.79.5

100.927.749.522.720 4

159.520.087.884.781.0

-20.9.0.6

14.8-.35.3

952.2

.8

.0

.4-18.5

5o!s117.3

-70.3-23.5

20.271.3

137 7292.052.061.436.0

255.611.4

.925.5

346.6

2,319.3

- 2-5.7

4.246.415.8

-164.2

-1.5-1.3-4.3

2,430.0

1994

1,028.9

241.1277.8

n.i.6

-55.0-27.5132.3683 0

31.5163.4148.1

11.2.9

3.36.7

28.17.1

66.724.945.522.330.0-7.1-3.7117.8115.465.848.3

-24.04.7

-44.2-16.2

1,028.9

-5.8.0.7

52.989's-9.7

-39.919.643.378.224.6

100.693.7-.134.5

246.12.6

17.857.5

251.0

2,086.4

- .243.0-2.769.416.6

-144.2

-4.8-2.8

.3

2,111.8

1995

1,230.2

-92.62 8

-8.84.7

-91.4_ t

273.91.049.1

12.7265.9186.575.4- . 34.2

-7.616.2

- 8 399.221 561.327.586.552.510.584.798.2

119.349 9-3.4

2 290 1

-29.7

1,230.2

8.82.2

.635.39.9

- 1 2 796.665 6

142.3110 4-3.5147 4101.926.744.9

233.45.14 0

53.8444 3

2,747.2

- .525 1

-3.122.917 8

-211.7

-6.0-3.8

-12.2

2,918.8

1996

1,354.5

7.211.515.64.4

- 23.7-7.7

409.3945.8

12.3187.5119.663.3

3.9.7

19.925.5-7.772.522.548.345.988.848.9

2.292.0

141.1123.418.48.22.0

-15.79.8

1,354.5

-6.3- .5

.082.0

-51.615.897.2

114.0145.840.0-7.0

237.672.152.443.6

232.115.0

-8.630.8

434.9

2.893.8

-1.055 4: 3 3- 716 3

-89.8

.5-4.0

-32.2

2,952.6

1997

1,464.9

-97.3-109.5

9.92.7- .34.9

320.41,236.9

38.3324.8274.940.25.44.2

-4.716.87.6

113.223.367.636.684579.3

1.295.0

114.4164.921.916.4

-2.013.724.4

1.464.9

.7- . 5

.089.0

-46.341.597 1

122.5157.6115.2-79.0263.496.3

110 1560

290.213.975.022.5

584.4

3,474.5

- . 671.5

-19.871.914.1

-249.7

-2.7-3.9

3.8

3,589.7

1996

Q3

1,247.7

-202.6-106.5

-10.04.4

-90.5-7.1

485 3972.1

11.5196.1119.571.1

4.8.7

49.721.1

-14.8123.214.242.745.583.027.52 2

8L4142.983.613.23.43.4

35.57.0

1,247.7

-26.6-1.8

2.3] [9.7

-97.2105.994.2

180 2145J-16.7

-100.1171.9

-14.75.3

59.2225.0

13.5-17.4

51.3406.1

2,552.9

1..386.1-4.4

-101.220 3

-124.5

27.1-4.7

-102.5

2,755.5

Q4

1,377.3

-145.2-36.6-33.2

4.4-79.9

-4.1532 29945

8.4248.3158.980.510.5

-1.6-47.9

24.3-2.5118.127.734.141.981.325.32.2

137.9129.6111.2-6.2

4.1-2.182.7

-24.0

1,377.3

.7

.0-2.3104.517.6

-53.390.1

135.4187.584.3

- 20..3176.3109.3125.266.7

283.917.6

-4.217.6

572.6

3,286.6

-3.136 14̂ 2

114.721.6-8.2

-21.4-3.7

-41.2

3,187.5

1997

Ql

1,081.1

-193.4-245.9

77.92.5

-27.91.9

373 6898.9

37.4308.1195.9104.0

2 26.\

-5.318.53.4

94.3-.1

55.03.6

65.261.9

2.745.1

114.660.944.9-1.3-2.1

-14.56.5

1,081.1

-17.6-2.1

.4188.6

-86.185.3

157.949.9

182.436.5

-67.3253.463.1

117.139 8

256.831.068.S33.1

632.3

3,104.4

- . 3178.726.9

-91.512.2

-104.2

-9.4-2.613.1

3,081.5

Q2

1,360.4

-21.4-10.3-53.3

2.739.55.6

301.21,075.0

47.2309.2301.1

1.15.11.8

23.828.310.7

175.027.958.539.219.791.6

1.3119.288.1

101.71.9

-24.4-2.1

-11.7-30.0

1,360.4

.4

.0

.218.8

-46.464.224.5

176.358.5

198.0-109.1

240.963.1

137.477.5

337.32.4

71.825.7

529.8

3,231.6

- .5-10 5-24.4172.128 3

-372.5

16.1-4.8

-72.0

3,499.8

Q3

1,477.8

-164.4-158.9

34.42.8

-42 73.0

405 4L23V7

14.3209.8209.5

- .6-5.0

5.8-35.3

14.47.3

107.032.466.290.6

123.6103.6

•355.5

114.6168.465.282.9-2.115.8- .7

1,477.8

24.0

1.3105.4

-42.6-49.2

53.8194.1243.6121.1

-12.6303 7135.579.762.8

321.830.580.828.5

531.1

3,669.4

.883.1

-51.627.411 2

-212.1

2.1-3.468.6

3,743.2

Q4

1,940.5

-9.8- 2 3 0-19.5

2.929.89.1

201.41,739.8

54.3472.2393.156.419.43.2

- 2 05.88.8

76.432.890.713.0

129.360.0

.4160.0140.3328.4-24.3

8.3-1.765.3

121.7

1,940.5

17.5.0

-1.943.1

-10.065.6

152.369.9

146.0105.3

-126.9255.7123.3106.343.7

244.7-8.478.4

2.8644.6

3,892.7

-2.434.7

-30.0179.9

4.9-310.0

-19.5-4.8

5.5

4,034.6

1998

Ql

1,830.0

-145.3-228.6

86.23.0

-5.S13.8

242 31.7192

30.5291.8257.5

13.515.25.68.1

16.92.4

104.125.572 638.2

174.6118.2

.6166.284.8

190.733.610.4

-2.0253.4

98.5

1,830.0

- .8.03

52.261.972 5

165.6105 02832253.2-78.2336.284 4

150.752.9

281.224.025 712.9

841.2

4,554.0

- .4

10T4171.5

- 9-382.8

.9-9.3

-26.2

4,697.6

I. Data in this table also appear in the Board's Z.I (780) quarterly statisticaF. I and F.5. For ordering address, see inside front cover.

il release, tables 2. Excludes corporate equities and mutual fund shares,



1.59 SUMMARY OF CREDIT MARKET DEBT OUTSTANDING1


Transaction category or sector 1995

Q3 04 Ql Q2 Q3 Q4 Ql

Nonfinancial sectors

29 Total credit market debt owed by

1 Total credit market debt owed bydomestic nonfinancial sectors

By sector and instrument2 Federal government3 Treasury securities4 Budget agency securities and mortgages . . .

5 Nonfederal

By instrument6 Commercial paper7 Municipal securities and loans8 Corporate bonds9 Bank loans n.e.c

10 Other loans and advances11 Mortgages12 Home13 Multifamily residential14 Commercial15 Farm16 Consumer credit

By borrowing sector17 Household18 Nonfinancial business19 Corporate20 Nonfarm noncorporate21 Farm22 State and local government

23 Foreign credit market debt held inUnited Stales

24 Commercial paper25 Bonds26 Bank loans n.e.c27 Other loans and advances

28 Total credit market debt owed by nonfinancialsectors, domestic and foreign

13,016.8

3.492.33,465.6

26.7

139.21,341.71,253.0

759.9669.6

4,377.23,355.9

268.8669.5

83.0983.9

4,446.23,927.12,663.11.121.8

142.21,151.1

371.8

42.7242.3

26.160.8

13,388.7

By instrument30 Federal government-related31 Government-sponsored enterprise securities32 Mortgage pool securities33 Loans from U.S. government34 Private35 Open market paper36 Corporate bonds37 Bank loans n.e.c38 Other loans and advances39 Mortgages

By borrowing sector40 Commercial banks41 Bank holding companies42 Savings institutions43 Credit unions44 Life insurance companies45 Government-sponsored enterprises46 Federally related mortgage pools47 Issuers of asset-backed securities (ABSs)48 Brokers and dealers49 Finance companies50 Mortgage companies51 Real estate investment trusts (REFTs)52 Funding corporations

53 Total credit market debt, domestic and foreign

54 Open market paper55 U.S. government securities56 Municipal securities57 Corporate and foreign bonds58 Bank loans n.e.c59 Other loans and advances60 Mortgages61 Consumer credit

3,822.2

2,172.7700.6

1,472 1.0

1,649.5441.6

1,008.848.9

131.618.7

94.5133.6112.4

.5

.6700.6

1,472.1579.0

34.3433.7

18.731.1

211.0

17,210.9

623.55.665.01,341.72,504.0

834.9862.0

4,395.9983.9

13,719.6

3,636.73,608.5

28.2

157.41.293.51,326.3

862.1736.9

4.5S3.93.530.4

279.5689 4

84.61.122.8

4,800.44,167.32,876.51,145.8

145.11,115.1

442.9

56.2291.9

34.660.2

14,162.5

14,447.4

3,781.83 755.1

26.6

10,665.6

156.4I 296.01,398.8

928.3770.6

4,903.83,761.6

301.7753.4

87.11.211.6

5 143.94,392.33,052.11.190.2

149.91,129.4

513.4

67.5341.343.761.0

14,960.8

15,210.1

3,804.93,778.3

26.5

11.405.2

168.61,367.51,489.51,029.8

837.45,248.34,030.3

319.0808.690.4

1.264.1

5.497.04,699.33,289.31.253.7

156.31,209.0

558.8

65.1382.6

52.159.0

15,768.9

14,252.1

3,733.13,705.7

27.4

10,519.0

173.01.281.71.376.4

920.5769.4

4,824.63,703.8

295.0739.0

86.71.173.5

5,043.74,361.93,038.11,174.3

149.51,113.4

490.2

65.8321.741.761.0

14,447.4

3.781.83.755.1

26.6

10.665.6

156.41.296.01.398.8

928.3770.6

4,903.83.761.6

301.7753.4

87.11.211.6

5.143.94.392.33,052.11,190.2

149.91.129.4

513.4

67.5341.343.761.0

14,960.8

14,613.7

3,829.83,803.5

26.3

10,783.9

168.71,305.11,418.7

962.9784.4

4,957.73,806.1

304.1759.9

87.71,186.4

5,174.64,466.93,116.31,202.2

148.31,142.4

517.8

69.3344.143.560.9

15,131.5

14,729.1

3.760.63,734.3

26.3

10,968.5

179.31.326.81,440.2

994.2788.0

5.035.03,860.8

308.8776.7

88.71,205.0

5,260.74,543.03,170.21,219.3

153.41,164.8

531.6

71.3352.746.461.2

15,260.7

14,933.9

3,771.23,745.1

26.1

176.61,340.21.470.9

994.2803.1

5.151.03,958.1

310.7792.489.8

1.226.7

5.374.44,608.23,217.61,235.2

155.41,180.1

548.7

64.3376.348.259.9

15.482.6

15,210.1

3,804.93,778.3

26.5

168.61,367.51,489.51,029.8

837.45,248.34,030.3

319.0808.6

90.41,264.1

5,497.04,699.33,289.31.253.7

156.31,209.0

558.8

65.1382.652.159.0

15,768.9

Ftnancial sectors

4,281.2

2,376.8806.5

1,570.30

1,904.4486.9

1,205.452.8

135.024.3

102.6148.0115.0

.4

.5806.5

1,570.3720.1

29.3483.9

19.136.8

248.6

4,837.3

2.608.3896.9

1.711.4.0

2.229.1579.1

1,385.169.7

162.932.2

113.6150.0140.5

.41.6

896.91,711.4

873.827.3

529.831.547.8

312.7

5,453.5

2,821.0995.3

1,825.8.0

2,632.5745.7

1,558.989.4

198.540.0

140.6168.6160.3

.61.8

995.31,825.81,088.1

35.3554.5

36.472.6

373.8

4,672.0

2,545.1866.1

1,679.0.0

2,126.9538.6

1,339.462.8

155.131.0

107.7149.1134.8

.41.1

866.11,679.0

830.526.1

513.728.544.0

291.0

4.837.3

2.608.3896.9

1,711.4.0

2.229.1579.1

1,385.169.7

162.932.2

113.6150.0140.5

.41.6

896.91,711.4

873.827.3

529.831.547.8

312.7

4,918.2

2,634.7894.7

1,740.0.0

2,283.5623.0

1,396.572.2

157.933.8

115.3151.6136.3

.41.8

894.71,740.0

889.926.6

528.433.051.6

348.6

5,090.9

2,706.2944.2

1,762.1.0

2,384.7642.5

1.457.775.2

173.735.6

125.7160.5144.3

.41.8

944.21,762.1

918.035.3

557.834.356.6

350.0

5.211.8

2.746.5955.8

1,790.7.0

2,465.3684.7

1,478.680.7

183.038.2

130.0164.0149.8

.51.9

955.81,790.7

989.633.6

532.735.264.6

363.4

5,453.5

2,821.0995.3

1,825.8.0

2,632.5745.7

1.558.989.4

198.540.0

140.6168.6160.3

.61.8

995.31,825.81,088.1

35.3554.5

36.472.6

373.8

18,443.7

700.46,013.61,293.52,823.6

949.6932 1

4,608.21,122.8

19,798.2

803.06,390.01.296.03,125.31,041.7

994.54,936.01,211.6

21,222.4

979.46,625.91,367.53,431.01,171.31.094.95,288.31,264.1

19,414.3

777.46,278.21,281.73,037.51,025.0

985.44,855.61,1735

19,798.2

803.06,390.01.296.03,125.31,041.7

994.54.936.01,211.6

20,049.6

861.16.464.51,305.13,159.31,078.61,003.24,991.51,186.4

20,351.6

893.16.466.81,326.83,250.61,115.71.022.95,070.61,205.0

20,694.4

925.76.517.71.340.23,325.91,123.11,046.05.189.11.226.7

21,222.4

979.46,625.91,367.53,431.01,171.31,094.95,288.31,264.1

15.435.2

3,830.83.804.8

25.9

193.11.397.11,528.81,045.1

865.75.341.24,097.0

325.9826.891.4

1,233.5

5,546.54,818.33,387.11,275.9

155.31,239.6

571.3

76.7384.7

53.556.4

16,006.5

5,655.7

2,877.91,030.91,847.0

.02,777.9

804.91.630.3

94.0206.642.0

148.7181.3162.7

.71.8

1,030.91,847.01.142.7

35.1571.8

38.581.7

412.9

21,662.2

1,074.86,708.61,397 13,543.81,192.61.128.75,383.21.233.5

1. Data in this table also appear in the Board's Z.I (7801 quarterly statistical release, tablesL.2 through L.4. For ordering address, see inside front cover.


Flow of Funds A41

1.60 SUMMARY OF FINANCIAL ASSETS AND LIABILITIES1

Billions of dollars except as noted, end of period


CREDIT MARKET D E B T OUTSTANDING 2

1 Total credit market assets

2 Domestic nonfederal nonfinancial sectors3 Household4 Nonfinancial corporate business5 Nonfarm noncorporate business6 State and local governments7 Federal government8 Rest of the world9 Financial sectors

10 Monetary authority11 Commercial banking12 U.S.-chartered banks13 Foreign banking offices in United States14 Bank holding companies15 Banks in U.S.-affiliaied areas16 Savings institutions17 Credit unions18 Bank personal trusts and estates19 Life insurance companies20 Other insurance companies21 Private pension funds22 State and local government retirement liinds23 Money market mutual funds24 Mutual funds25 Closed-end funds26 Government-sponsored enterprises27 Federally related mortgage pools28 Asset-backed securities issuers (ABSs)29 Finance companies30 Mortgage companies . . . . . .31 Real estate investment trusts (RElTs)32 Brokers and dealers33 Funding corporations

RELATION OF LIABILITIESTO FINANCIAL ASSETS

34 Total credit market debt

Other liabilities35 Official foreign exchange36 Special drawing rights certificates37 Treasury currency38 Foreign deposits39 Net interbank liabilities40 Checkable deposits and currency41 Small lime and savings deposits42 Large time deposits43 Money market fund shares44 Security repurchase agreements45 Mutual fund shares46 Security credil47 Life insurance reserves48 Pension fund reserves49 Trade payables50 Taxes payable51 Investment in bank personal trusts52 Miscellaneous


Financial assets not included in liabilities (+)54 Gold and special drawing rights55 Corporate equities56 Household equity in noncorporate business

Liabilities not identified as assets ( —)57 Treasury currency58 Foreign deposits59 Net interbank transactions60 Security repurchase agreements61 Taxes payable62 Miscellaneous

Floats not included in assets ( -)63 Federal government checkable deposits64 Other checkable deposits65 Trade credit

66 Total identified to sectors as assets

1994

17,210.9

3,002.41,945.7

289.237.6

729.9204.4

1,254.812.749.2

368^23,254.32,869.6

337.118.429.2

920.8246.8248.0

1,482.6446.4656.9455^8459.07188

86.0663.3

1,472.1541.7476.2

36.513.393.3

109.3

17,210.9

53.28.0

17.6324.6280.1

1.242XJ2 183 2

411.2602.9549.5

1,477.3279.0505.3

4,880.11.141.5

101.4699.4

5,397.3

37,364.7

21.16.237.93,422.6

- 5 . 4276.2- 6 . 567.848.8

-983.1

3.438.0

-245.8

47,852.8

1995

18,443.7

2,874.61,913.3

280.442.3

638.6204.2

1,563.113,801.8

380^83,520.13,056.1

412.618.033.4

913.3263.0239.7

1,581.8468.7718.24833545.5771.3

96.4748 0

1,570.3661.0526.2

33.015.5

183.482.2

18,443.7

63.710.218.2

359.2290.7

1,229.32.279.7

476.9745.3659'9

1.852.8305.7550.2

5,599.61,243.4

106.5803.0

5,767.7

40,805.7

22.18,331.33,647.5

- 5 . 8300.6- 9 . 090.761.3

-1,260.8

3.134.2

-258.1

53,850.5

1996

19,798.2

2,926.91,979.3

286.046.7

614.8196.5

1,953.614,721.2

393 A3,707.73,175.8

475.822.034.1

933.2288.5232.0

1,654.3491.2766 5529.2634.3820.298 7

813.61,711.4

784.4544.5

41.217.5

167.792.0

19,798.2

53.79.7

18.2438.1240.8

1,245.12,377 0

590.9891.1699.9

2,342.4358.1593.8

6,329.51,315.5

121.5871.7

6.082.7

44,377.7

21.410,061.13,863.3

- 6.8353.1

-10 .690.074.7

-1,650.8

- 1 . 630.1

-290.3

59,735.7

1997

21,222.4

2,793.61,833.8

295.949.4

614.5201.4

2,274.015,953.4

431.44,032.53.450.7

516.127.438.3

928.5305.3239.5

1,767.4514.4834 2565.8718.8899.5

99.8908.6

1.825.8949.2566.4

57.615.5

181.4111.7

21,222.4

48.99.2

18.2527.0192.8

1,286.62,474.1

713.41 048 7'815.1

2.994.7468 2649 7

7,452.21,411.8

135.41,082.86,489.0

49,040.3

21.112.958.64,156.7

- 7 4424.6-32.1162.088.5

-1.960.4

-8.126.2

-297.5

67,780.8

1996

Q3

19,414.3

2,911.51,955.9

275.745.6

634.4197.5

1,844.814,460.5

386^23,643.33,135.3

454.219.334.5

945.2282.6232.6

1,627.0484.2758.0517.7606.6818.398.1

779.31,679.0

753.4538.3

40,218.0

147.1105.4

19,414.3

54.39.7

18.8415.1225.8

1,220.82,357.9

557.2838 1686.9

2,211.6317.8577.1

6,039.81.260.6

119.1843.1

5,972.2

43,140.3

21.29,340.53,817.7

- 6 . 0347.0

-11 .672.168.9

-1,492.7

- 1 723.1

-359.7

57,680.3

Q4

19,798.2

2,926.91,979.3

286.046.7

614.8196.5

1,953.614.721 2

393.13,707.73,175.8

475.822.034.1

933.2288.5232.0

1,654.3491.2766 5529.2634.3820.2

98.7813.6

1.711.4784.4544.541.217.5

167 792^0

19,798.2

53.79.7

18 2438.1240 8

1,245.12,377.0

590.9891.1699.9

2,342.4358.1593.8

6,329.51,315.5

121.5871.7

6,082.7

44,377.7

21.410.061.13.863.3

- 6 . 8353.1

-10 .690.074.7

-1.650.8

- 1 . 630.1

-290.3

59,735.7

01

20,049.6

2,854.71,920.2

281.847.4

605.4196.9

2,052.714,945.4

'397.13,775.73,218.1

499.522.535.6

931.9291.2232.8

1,680.2491.2780.3531.6659.0838.3

99.3824.3

1,740.0794.6552.4

40.917.0

164.1103.6

20,049.6

46.39.2

18 3485.2210.9

1,220.02,427.1

606.0950 8713.8

2,411.5380.0603.7

6,417.11,300.4

134.8888 7

6,276.5

45.150.1

20.910,072.33,947.1

- 6 . 9397.8- 1 . 668.472.3

-1,606.0

-9 .725.6

-345.8

60,596.4

1997

Q2

20,351.6

2,812.51,873.7

271.948.0

618.9198.3

2.126.415.214.3

41243,856.83,295.2

501.823.836.1

937.8299.9235.5

1,724.1498.1794.9542.7656.5860.6

99.7854.8

1,762.1819.0553.1

34.816.5

161293.8

20,351.6

46.79.2

18.3489.9197.1

1.265.32,432.3

646.7952 4766.7

2,719.6414.8623.1

6.942.51.321.9

130.7982.9

6,224.3

46,536.0

21.111.719.84,030.7

- 7 . 0395.2-8 .1109.274.3

-1,745.9

- 6 . 827.9

-371.8

63,840.5

Q3

20,694.4

2,758.31,822.7

280.348.7

606.6199.1

2,229.115,507.8

412.73,912.93,351.9

501.022.537.5

929.0303.9237.3

1,750.4506.2811.5562.0678.7889.2

99.7868.7

1,790.7863.9564.4

55 515.9

165 190.1

20,694.4

46.19.2

18.7516.2186.9

1,234.22,438.8

696.11 005 1'795.4

2,977.0432.2638.8

7,331.81,351.9

139.51,058.96,396.9

47,968.1

21.012,804.64,093.1

- 6 . 8416.0

-22.1126.084.2

-1.789.5

- 7 . 819.5

-380.2

66,447.6

Q4

21,222.4

2,793.61,833.8

295.949.4

614.5201.4

2.Z74.015,953.4

43 L44,032.53,450.7

516.127438.3

928.5305.3239.5

1,767.4514.4834.2565'8718.8899.5

99.8908.6

1,825.8949.2566.4

57.615.5

181.4111.7

2U22.4

48.99.2

18.2527.0192.8

1,286.62.474.1

713.41 048 7'815.1

2,994.7468.2649.7

7,452.21.411.8

135.41,082.86,489.0

49,040.3

21.112,958.64,156.7

-7 .4424.6

-32.1162.088.5

-1.960.4

-8.126.2

-297.5

67,780.8

1998

Qi

21,662.2

2.736.51,783.5

292.350.2

610.5204.8

2,340.016,381.0

433 84.095.83,507.1

517.731.239.7

930.53075240.1

1,795.7520.8852.3577^0770.1931.6100.0949.5

1.847.0991.5571.6

60 ">15.0

244.8145.9

21,662.2

48.29.2

18 3540^1201.2

1.259.82,526.0

742.41 IS'' 9

88L13,348.4

49R.6663.0

8.036.21,401.7

147.11,173 16,725.1

51,014.5

21.214,618.64.203.9

- 7 5425.2- 2 . 2

203.884.9

-2,070.6

- 1 0 419.9

-364.2

71,579.2

1. Data in this table also appear in the Board's Z. 1 (780) quarterly statistical release, tablesL, 1 and L.5. For ordering address, see inside front cover.

2. Excludes corporate equities and mutual fund shares.


A42 Domestic Nonfinancial Statistics • August 1998

2.10 NONFINANCIAL BUSINESS ACTIVITY Selected Measures

Monthly data seasonally adjusted, and indexes 1992 = 100, except as noted

Measure

1 Industrial production1

Market groupings

3 Final, total4 Consumer goods

6 Intermediate7 Materials

Industry groupings8 Manufacturing

9 Capacity utilization, manufacturing (percent)2. .

10 Construction contracts"*

11 Nonagricultural employment, total4

12 Goods-producing, total13 Manufacturing, total14 Manufacturing, production workers15 Service-producing16 Personal income, total)7 Wages and salary disbursements18 Manufacturing19 Disposable personal income5

20 Retail sales5

Prices'"21 Consumer (1982-84=100)22 Producer finished goods (1982=100)

1995

114.5

110.6111.3109.9113.8108.3120.8

116.0

82.8

122.1'

114.998.397.599.0

120.2158.2150.9130.4158.7151 5

152.4127.9

1996

118.5

113.7114.6111.8119.6110.8126.2

120.2

81.4

130.7

117.299.097.298.4

123.0167.0159.8135.7166.2159 6

156.9131.3

1997

124.5

118.5119.6114.4128.8115.1134.1

127.0

81.7

141.0'

119.9100.397.698.9

126.2176.8170.6142.0174.4166 9

160.5131.8

Sept.

125.6

119.1120.3114.5130.6115.2136.1

128.0

81.6

141.0

120.9'101.3'98.4'99.7'

127.2'178.3172.3142.8175.8168 0

161.2131.8

1997

Oct.

126.5

120.2121.5115.9131.3116.3136.7

129.1

81.9

141.0

121.2'101.5'98.5'99.9'

127.5'179.2173.5144.4176.6167 8

161.6132.3

Nov.

127.5

121.2122.5116.7132.8117.3137.7

130.4

82.3

142.0'

121.6'101.7'98.7'

100.1'127.9'180.5175.6145.7177.7168 4

161.5131.7

Dec.

127.9

121.0122.2115.9133.4117.4138.9

130.9

82.3

142.01

121.9'102.1'98.9'

100.41

128.2'181.3176.4146.4178.4169 1

161.3131.1

Jan.

127.8

121.3122.6116.6133.1117.4138.2

131.1

82.1

141.0

122.3102.599.1

100.5128.6182.3177.7146.6179 0170 8

161.6130.3

Feb.

127.3

120.6121.5115.1133.1117.6138.2

130.6

81.4

143.0

122.4102.699.1

100.6128.8183.4179.2147.0179.917 '2

161.9130.1

1998'

Mar.

127.8

121.2122.4116.0133.6117.5138.5

130.6

81.0

138.0

122.5102.499.1

100.5128.9184.0179.7147.1180.517? 4

162.2129.7

Apr.

128.2

121.7123.1116.5134.8117.5138.5

131.2

81.1

139.0

122.8102.799.1

100.4129.2184.8180.5146.7181.1173 6

162.5130.0

May

128.8

122.2123.7117.0135.5117.9139.2

131.5

80.9

135.0

123.1102.599.0

100.2129.7n.a.n.a.n.a.n.a.

175 2

162.8130.4

1. Data in this table also appear in the Board's G.17 (419) monthly statistical release. Forthe ordering address, see the inside front cover. The latest historical revision of the industrialproduction index and the capacity utilization rates was released in December 1997. The recentannual revision is described in an article in the February 1998 issue of the Bulletin. For adescription of the aggregation methods for industrial production and capacity utilization, see•'Industrial Production and Capacity Utilization: Historical Revision and Recent Develop-ments," Federal Reserve Bulletin, vol. 83 (February 1997), pp. 67-92. For details about theconstruction of individual industrial production series, see "Industrial Production: 1989Developments and Historical Revision," Federal Reserve Bulletin, vol. 76 (April 1990), pp.187-204.

2. Ratio of index of production to index of capacity. Based on data from the FederalReserve, DRI McGraw-Hill, U.S. Department of Commerce, and other sources.

3. Index of dollar value of total construction contracts, including residential, nonresiden-tial, and heavy engineering, from McGraw-Hill Information Systems Company, F.W. DodgeDivision.

4. Based on data from U.S. Department of Labor, Employment and Earnings. Series coversemployees only, excluding personnel in the armed forces.

5. Based on data from U.S. Department of Commerce, Survey of Current Business.6. Based on data not seasonally adjusted. Seasonally adjusted data for changes in the price

indexes can be obtained from the U.S. Department of Labor, Bureau of Labor Statistics,Monthly Labor Review.

NOTE. Basic data (not indexes) for series mentioned in noles 4 and 5, and indexes for seriesmentioned in notes 3 and 6, can also be found in the Survey of Current Business.

Figures for industrial production for the latest month are preliminary, and many figures forthe three months preceding the latest month have been revised. See "Recent Developments inIndustrial Capacity and Utilization," Federal Reserve Bulletin, vol. 76 (June 1990), pp.411-35. See also "Industrial Production Capacity and Capacity Utilization since 1987,"Federal Reserve Bulletin, vol. 79 (June 1993), pp. 590-605.

2.11 LABOR FORCE, EMPLOYMENT. AND UNEMPLOYMENT

Thousands of persons; monthly data seasonally adjusted

Category

HOUSEHOLD SURVEY DATA1

Employment2 Nonagricultural industries1

3 AgricultureUnemployment

4 Number5 Rate (percent of civilian labor force)

ESTABLISHMENT SURVEY DATA

6 Nonagricultural payroll employment4

7 Manufacturing8 Mining

10 Transportation and public utilities11 Trade12 Finance13 Service

1995

132,304

121,4603,440

7,4045.6

117,191

18,524581

5,1606,132

27,5656,806

33,11719,305

1996

133,943

123,2643.443

7,23654

119,523

18,457574

5.4006,261

28,1086,899

34,37719,447

1997

126,297

126,1593.399

6.7394.9

122.257

18,538573

5.6276,426

28,7887.053

35.59719,655

Oct.

136,406

126,5833.327

6,4964.8

123,568

18,718592

5,7226,453

28,8027,151

36,48419,646

1997'

Nov.

136,864

127,1913.384

6,2894.6

123.944

18,758591

5.7506,456

28,9177,172

36.63819.662

Dec.

137,169

127.3923,385

6,3924.7

124,289

18,791592

5,8106,451

28,9767.194

36,79519,680

Jan.

137,493

127,7643,319

6,4094.7

124,640

18,824592

5,8816,473

29,0397,213

36,93219,686

Feb.

137.557

127,8293.335

6,3934.6

124.832

18,822590

5.9026,494

29,0527,232

37.02019,720

1998'

Mar.

137,523

127.8623,132

6,5294.7

124,914

18,829587

5,8606,504

29,0427,258

37,10619,728

Apr.

137,242

128,0333,350

5,8594.3

125,216

18,826582

5,9266.512

29,1257,286

37,19519,764

May

137,364

128,1183,335

5,9104.3

125,512

18,800581

5,9176,534

29,2237,306

37.34619,805

1. Beginning January 1994, reflects redesign of current population survey and populationcontrols from the 1990 census.

2. Persons sixteen years of age and older, including Resident Armed Forces. Monthlyfigures are based on sample data collected during the calendar week that contains the twelfthday; annual data are averages of monthly figures. By definition, seasonably does not exist inpopulation figures.

3. Includes self-employed, unpaid family, and domestic service workers.

4. Includes all full- and part-time employees who worked during, or received pay for. thepay period that includes the twelfth day of the month; excludes proprietors, self-employedpersons, household and unpaid family workers, and members of the armed forces. Data areadjusted to the March 1992 benchmark, and only seasonally adjusted data are available at thistime.

SOURCE. Based on data from U.S. Department of Labor, Employment and Earnings.


Selected Measures A43

2.12 OUTPUT, CAPACITY, AND CAPACITY UTILIZATION1

Seasonally adjusted

Series

1 Total industry

2 Manufacturing

3 Primary processing'4 Advanced processing11

5 Durable goods6 Lumber and products7 Primary metals8 Iron and steel9 Nonferrous

10 Industrial machinery and equipment) 1 Electrical machinery12 Molor vehicles and pans13 Aerospace and miscellaneous

transportation equipment

14 Nondurable goods15 Textile mill products16 Paper and products17 ChemicaK and products18 Plastics materials19 Petroleum products

20 Mining21 Utilities22 Electric

1 Total industry

2 Manufacturing

3 Primary processing3

4 Advanced processing

5 Durable goods6 Lumber and products7 Primary metals8 Iron and steel9 Nonferrous

10 Industrial machinery andequipment

11 Electrical machinery12 Motor vehicles and parts13 Aerospace and miscellaneous

transportation equipment

14 Nondurable goods13 Textile mill products16 Paper and products17 Chemicals and products18 Plastics materials19 Petroleum products

20 Mining21 Utilities22 Electric

197,1

High

1997

Q2 Q3 04

1998

Ql '

Output (1992=100)

123.3

125.7

117.7129.7

140.2116.4123.8122.6125.3168.2226.6130.5

92.8

110.7108.5112.2114.8127.6111.0

106.0111.7111.3

1975

Low

125.1

127.6

118.5132 1

143.7114.9125.5122.8128.8173.9236.6136.7

95.6

111.1110.9114.1114.8130.6109.5

106.4114.0114.2

127.3

130.1

119.8135.3

147.2114.7127.8126.5129.4177.6246.0144.0

98.6

112.6111.5113.5117.1131.4109.8

105.9115.5115.7

Previous cycle

High Low

127.6

130.8

120.1136.1

148.0115.6128.1127.2129.2180.9253 6136.8

101.2

113.1110.0113.0118.2130.8113.0

108.3110.6112.1

1997

Q2 Q3 Q4

1998

Ql

Capacity (percent of 1992 output)

149.6

154.3

136.9163.2

173.8138.6136.0135.4136.4199.0276.7182.6

123.4

134.3131.1125.5145.1138.1114.7

117.9126.3124.6

Latest cycle6

High Low

Capacity ut

89.2

88.5

91.287.2

89.288.7

100.2105.890.8

96.089.293.4

78.4

87.891.497.187.6

102.096.7

94.396.299.0

72.6

70.5

68.271.8

68.961.265.966.659.8

74.364.751.3

67.6

71.760.069.269.750.681.1

88.282.9827

87.3

86.9

88.186.7

87.787.994.295.891.1

93.289.495.0

81.9

87.591.296.184.690.990.(1

96.089.188.2

71.1

69.0

66.270.4

63.960.845.137.060.1

64.071.645.5

66.6

76.472.380.669.963.466.8

80.375.978.9

85.4

85.7

88.984.2

84.693.692.795.289.3

85.484.089.1

87.3

87.390.493.5«6.297.088.5

88.092.695 0

78.1

76.6

77.776.1

73.175.573.771.874.2

72.375.055.9

79.2

80.777 785.079.374.885.1

87.083.487 1

151.3

156.3

138.0165.7

177.2140.0137.2136.6137.7204.4289.1184.7

124.1

135.0131.7126.0146.3140.0115.2

118.1126.7125.0

1997

May

153.0

158.3

139.2168.1

180.6141.3138.5137.9138.9210.0301.9186.7

124.8

135.7132.3126.7147.5I4L9115.7

118.2127.1125.4

1997

Dec.

154.8

160.4

140.4170.7

184.2142.2140.1139.4140.7215.9315.618S.8

125.4

136.5132.9127.4148.7143.7116.2

118.4127.4125.7

1997

Q2 Q3 Q4

1998

Ql'

Capacity utilization rate (percent)2

82.4

81.5

86.079.5

80784.091.090.691.884.581 971.4

75.2

82.482.889.479.192 496.8

89.988.589.3

82.7

81.6

85.879.8

81 182.191.589.993.585.181.974.0

77.1

82.384.390.578.593.395.1

90.190.091.4

83.2

82.2

86.080.4

81.581.292.391.893.284.681.577.1

79.0

82.984.389.679.492.694.9

89.690.992.3

82.5

81.5

85.679.7

80.481.391.491.291.883.880.472.4

80.7

82.982.888.779.591.097.3

91.586.889.2

1998

Jan. Feb.' Mar.' Apr. Mayn

lization rate (percent)"

82.4

81.4

86.079.4

80.684.091.491.691.3

84.581.870.8

75.1

82.581.889.779.092.297.2

90.588.588.6

83.3

82.3

86.380.5

81 780.791.691.292.3

84.381.678.2

80.5

83.083.489.979 993.794.6

89.489.991.0

82.9

82.1

86.180.3

81.080.892.792.293.6

84 381.473.5

81.3

83.484.388.480.193.996.7

91.685.487.7

82.2

81.4

85579.6

80.282.091.491.192.0

83.180.572.4

80.6

82882.590.079.190.396.3

91.984 987.9

82.2

81.0

85.079.2

79.981.090.190.489.9

84.079.271.4

80.2

82.481.687.879.388.998.7

91.090.291.8

82.1

81.1

84.979.4

79.881.589.088.889.5

83.878.972.9

79.2

82.781.388.479.4

98.8

90.888.189 6

82.2

80.9

84.679.2

79.681.688.988.989.0

8<678.473.1

79.9

82.482.688.379.0

97.5

91.990.5929

1. Data in this table also appear in the Board's G.I7 (419) monthly statistical release. Forthe ordering address, see the inside front cover. The latest historical revision of the industrialproduction index and the capacity utilization rates was released in December 1997. The recentannual revision is described in an article in the February 1998 issue of the Bulletin. For adescription of ihe aggregation methods for industrial production and capacity utilization, see"Industrial Production and Capacity Utilization: Historical Revision and Recent Develop-ments," Federal Reserve Bulletin, vol 83 (February 1997), pp. 67-92. For details about theconstruction of individual industrial production series, see "Industrial Production: 1989Developments and Historical Revision," Federal Reserve Bulletin, vol. 76 (April 1990), pp.187-204.

2. Capacity utilization is calculated as the ratio of the Federal Reserve's seasonally adjustedindex of industrial production to the corresponding index of capacity.

3. Primary processing includes textiles; lumber; paper; industrial chemicals; syntheticmaterials; fertilizer materials; petroleum products; rubber and plastics, stone, clay, and glass;primary metals; and fabricated metals.

4. Advanced processing includes foods: tobacco: apparel; furniture and fixtures: printingand publishing: chemical products such as drugs and toiletries; agricultural chemicals; leatherand products; machinery; transportation equipment, instruments; and miscellaneous manufac-tures.

5. Monthly highs, 1978-80; monthly lows, 1982.6. Monthly highs, 1988-89; monthly lows, ) 990-91.



2.13 INDUSTRIAL PRODUCTION Indexes and Gross Value1

Monthly data seasonally adjusted

Group

MAJOR MARKETS

1 Total index

2 Products3 Final products4 Consumer goods, total5 Durable consumer goods6 Automotive products7 Autos and trucks8 Autos, consumer9 Trucks, consumer

10 Auto parts and allied goods11 Other12 Appliances, televisions, and air

conditioners13 Carpeting and furniture14 Miscellaneous home goods15 Nondurable consumer goods16 Foods and tobacco17 Clothing18 Chemical products19 Paper products20 Energy21 Fuels22 Residential utilities

23 Equipment24 Business equipment25 Information processing and related26 Computer and office equipment27 Industrial28 Transit29 Autos and trucks30 Other31 Defense and space equipment32 Oil and gas well drilling33 Manufactured homes

34 Intermediate products, total35 Construction supplies36 Business supplies

37 Materials38 Durable goods materials39 Durable consumer pans40 Equipment parts41 Other42 Basic metal materials43 Nondurable goods materials44 Textile materials45 Paper materials46 Chemical materials47 Other48 Energy materials49 Primary energy50 Converted fuel materials

SPECIAL AGGREGATES

51 Total excluding autos and trucks52 Total excluding motor vehicles and pacts53 Total excluding computer and office

equipment54 Consumer goods excluding autos and trucks55 Consumer goods excluding energy56 Business equipment excluding autos and

trucks57 Business equipment excluding computer and

office equipment58 Materials excluding energy

1992pro-por-tion

100.0

60.546.329.1

6.12̂ 61.7.97.9

3.5

1.0.8

1.623.010.32.44.52.92.9

.82.1

17213.25.41.14.02.51.21.333

.6

14.25.38.9

39.520.8

4.07.6923.18.91.11.83.92.19.76.33.3

97.195.1

98.227.426.2

12.0

12.129.8

1997avg.

124.5

118.5119.6114.4131.3129.9136.5115.2159.1119.3132.3

168.6117.0120.0110.2109.395.9

119.1109.3111.3109.3112.0

128 8141.9168.1385.6133.3111.2119.7135.075^2

149.7139.1

115.1121.8111.1

134.1158.2139.2221.9125.5120.6113.0109.3112.6115.2110.3103.9101.7108.3

124.3123.8

121.9

114.8

144.5

129.1143.7

May

123.3

117.7118.6113.9128.8124.6127.6112.4147.3119.1132.1

166.5117.7120.2110.1108.995.8

119.3108.9112.8111.3113.0

126 8139.0164.4365.3131.5106.7114.6135.275^6

150.7141.9

114.9122.2110.6

132.4155.4134.7216.7124.5119.9111.8106.1112.6113.8109.5103.7102.1106.8

123.4123.0

120.9

114.0

141.9

126.9141.4

June

123.5

117.6118.6113.5129.8126.7130.3110.8154.2120.3132.3

165.4119.0120.3109.4108.195.4

119.1109.8109.7111.5108.3

127.7140.2166.8375.8131.7107.3113.6136.376.0

150.9139.1

114.7122.2110.2

133.0156.9136.2220.0125.0121.2111.9108.1110.9113.8110.8103.2101.0107.3

123.6123.1

121.1112^5114.0

143.4

127.7142.5

July

124.5

118.1119.2113.9]2S 11203120.2113.0131.9119.3134.4

174.8116.4122.1110.3109.695.8

117.3110.8112.4108.8113.7

128.6141.6169.3391.6133.7106.9111.5136.374.9

152.1143.5

114.6121.2110.6

134.9159.3139.2224.6125.9121.1113.5112.3113.8115.1110.1104.6102 3109!o

124.8124.3

122.0113^5114 1

145.2

128.6144.6

1997

Aug.

125.2

119.2120 5114.6132 1131.6137.6118.6161.2121.8132.5

169.8117.7119.8110.3108.996.0

119 4109^8112.8111.0113.2

130 9144.6171.1407.1135.8113 31203137.975.0

153.2139.5

115.3122.7111.0

134.9160.3140.3227.6126.0121.81123108.4114.3113.9108.6103.9102.4

125.1124.6

122.6113.4114.9

147.5

131.2144.8

Sept.

125.6

119.1120.3114.5131.9132.8140.9119.9166.5120.1131.1

166.0116.2119.4110.2108.696.0

119 4110.1112.4110.8112.8

130.6144.4172.9414.6133.8114 2120.2135.174.7

153.1137.2

115.2120.4112.2

136.1161.3140.7229.6126.6121.7113.3111.4112.7115.6109.5105.5102 211L8

125.4124.8

122.9113.0114.7

147.3

130.8145.8

Oct. Nov.

Index (1992 =

126.5

120.2121.5115.9131.4131.21397115.2168.6117.9131.5

169.4116.5118.6112.1109.796.4

123 0111.3116.2112.0117.8

131.3145.517434203135.9113.0117.0137.574.7

149.1136.9

11631213113.4

136.7163.2141.82333127.8122.5113.1111.9113.4115.0109.0104.7101 7110.6

126.5125.9

123.8114.6115.9

149.0

131.8147.0

127.5

121.2122.5116.7136.5138.4147.8120.3179.8123.8135.0

177.2122.1119.2111.8110.795.1

121 3111.7113.9106.7117.1

132.8147.5174.7427.31363119.9128.2137 374.5

150.0138.1

1173123.6113.5

137.7165.01423237.9128.8124.9114.4111.0112.2116.51137103.9101 4108.6

127.2126.6

124.8115.0117.0

149.7

133.5148.6

Dec.

100)

127.9

121.0122.2115.9134.7133.8142.7113.9175.7120.11353

178.7116.8122.1111.3110.095.1

121.8110.1113.5109.3115.1

133.4148.6176.0440.1137.8121.2124.6136 274.5

145.9132.4

117.4123.2113.9

138.9166.5146.9240.9128.3122.2116.0112.5113.7119.1113.3104.21007110.9

127.7127.0

125.1114.4116.2

151.5

134.4150.2

Jan.

127.8

121.3122 6116.6135.6132.6139 9116.0168.2120.9138.0

186.4122.5121.0112.0113.095.2

122 9110.2107.4110.5105.4

133 1147.3175.4457.1136.4119.8

133 675J

154.0144.0

117.4125.2112.9

138.2166.2138.5245.5128.8125.0114.5107.9112.3119.2109.4103.7102 8105^5

127.7127.3

124.9115^4117.9

150.5

132.7149.4

Feb.'

127.3

120.6121.5115.1134.3131.0137 2105.7172.7121.0136.9

188.6117.7120.7110.4111.893.5

121 8107.8104.6110.0101.5

133 1146.8178.0476.1134.2117.9116.4132.775.9

158.9148.6

117.6126.2112.6

138.2165.8139.3245.7127.7125.4114.8108.5114.0117.6112.5103.7103 0105X1

127.3126.9

124.3113.9116.5

150.5

131.71493

1998

Mar.'

127.8

121.2122.4116.0134.6131.3135.8105.2170.3123.7137.3

192.6115.8120.9111.5111.5943

122.2106.0113.7111.3114.4

133.6147.8179.3499.2136.4116 31147134.575.2

158.6145.4

117.5124.9113.1

138.5166.1138.8246.9127.8122.6113.5107.6111.1116.7111.6105.7103 6109.6

127.9127 4

124.7114^9116.3

151.9

132.1149.0

Apr.

128.2

121.7123.1116.5135.7132.1139.3107.7174.8120.6138.7

198.2117.5120.5111.8112.294.0

123.7106.8111.1111.7110.4

134.8149.9183.2515.6136.1119.2121.7136.475.1

150.5

117.5124.7113.2

138.5166.5139.5247.6127.9121.311331073110.8116.7111.4105.3103.5108.9

128.1127.6

125.0115^2117.2

153.3

133.7149.2

Mayp

128.8

122.2123.7117.0137.2134.3141.1108.8177.3123.4139.5

202.3118.8119.8112.1112.593.7

123.7106.5113.2109.8114.4

135.5150.5184.2529.0135.5121.5124.5135776^2

151.2

117.9125.4113.4

139.2166.5137.7249.8127.6121.4113.6108.5111.1116.4112.2107.7105.9111.1

128.6128.2

125.5I15J117.5

153.6

134.01493



2.13 INDUSTRIAL PRODUCTION Indexes and Gross Value1—Continued

Group

MAJOR INDUSTRIES

59 Total index

60 Manufacturing61 Primary processing62 Advanced processing

63 Durable goods64 Lumber and products65 Furniture and fixtures66 Stone, clay, and glass

products67 Primary metals68 Iron and steel69 Raw 5leel70 Nonferrous71 Fabricated metal products. .72 Industrial machinery and

equipment73 Computer and office

equipment74 Electrical machinery75 Transportation equipment. .76 Motor vehicles and parts .77 Autos and light trucks .78 Aerospace and

miscellaneoustransportationequipment

79 Instruments80 Miscellaneous

81 Nondurable goods82 Foods83 Tobacco products84 Textile mill products85 Apparel products86 Paper and products87 Printing and publishing88 Chemicals and products . . . .89 Petroleum products90 Rubber and plastic products .91 Leather and products

92 Mining93 Metal. . ,94 Coal95 Oil and gas extraction% Stone and earth minerals . . . .

97 Utilities98 Electric99 Gas

SPECIAL AGGREGATES

100 Manufacturing excluding motor

vehicles and parts101 Manufacturing excluding office

and computing machines . . .

M41OR MARKETS

102 Products, total

103 Final104 Consumer goods105 Equipment106 Intermediate

SICcode

2425

3233

331.233IPT

333-6.934

35

3573637

37137IPT

372-6,93839

20212223262728293031

10121314

491.493PT492 493PT

1992pro-por-tion

100.0

85.426.558.9

45.02.01 4

2.13.11.7

I1.45.0

8.0

1.87.39.54 92.6

4.65.41.3

40.494161.82.23.66.79.91.43.5

.3

6.9.5

1.04.8

.6

7.76.21 6

80.5

83.6

2,001.9

1.552.11,049.6

502.5449.9

1997avg.

124.5

127.0118.1131.4

142.3114.9122.5

120.5124.5122.8115^9126.4122.9

171.4

382.3231.5115.6137.2128.3

94.4108.0125.9

l l l . l109.6112.7109.699.6

112.9104.9115.3109.4126.473.7

106.0106.9109.9103.2118.8

112.5113.11110

126.4

124.1

2,373.2

1,855.81,195.5

660.0518.1

May

123.3

125.71177129.6

140.1116.4123.3

119.4124.2123.9115.4124.6122.7

168.0

361.4226.3110.8129.2120.6

92.7107.6125.5

110.7109.2111.5107 299.8

112.6104.5114.5111.4125.475.3

106.7105.9115.9103.4118.2

111.8110.4117.1

125.5

122 9

2,345.8

1.844.41.194.1

649.8521.7

June

123.5

126.1117.7130.2

141.2117.0123.5

120.0124.9122.6114.9127.7121.9

168.8

372.3229.7113.0132.5122.4

93.8107.9126.0

110.5108.8109.0109.199.6

111.7104.1114.6111.3125.674.0

105.7109 9107.4102.9120.9

110.9110.7111.9

125.7

123.2

2,365.3

1,844.61,190.2

654.1521.0

July

124.5

126.9118.3131.2

142.4116.1124.2

120.9125.2122.2115.5128.8122.4

172.2

388.5235.5112.2130.0115.0

94.6108.0127.0

110.9110.01105110.799.7

114.2104.1114.3108.9126.074.0

106.5105.2112.1103.9117.8

113.S113.8111.5

126.7

123.9

1997

Aug.

125.2

127.9118.5132.5

144.3115.4121.1

120.5125.5121.8116J129.9122.8

175.9

403.9236.8117.0138.9129.5

95.5109.2126.7

111.0108.9112.5110.799.1

114.4104.4114.5109.7127.971.2

106.3106.0107.7104.1119.9

113.0113.1112.5

127.2

124.8

Gross value (billi

2,368.'!

1,849.11.191.0

657.8519.9

2,402.0

1,879.31,205.2

674.0523.7

Sept.

125.6

128.0118.6132.7

144.4113.3122.0

121.2125.9124.5119.2127.7122.7

173.7

412.0237.5118.8141.2132.3

96.8108.9126.1

111.3108.6112.0111.499.1

113.7105.1115.6110.1127.670.9

106.5105.3109.5104.3117.7

115.1115.7112.7

127.3

124.9

Oct. Nov

Index 11992 =

126.5

129.1118.9134.1

145.5112.9123.0

121.0127.4126.41177128.6124.4

176.5

418.0240.8118.3139.6130.4

97.3109.7126.5

112 2109^2118.8111.699.3

112.8106.7116.7111.2127.472.4

105.9l l l . l109.6103.1116.2

116.9118.11 11.9

128.4

125.9

tins of 1992 dollars

2,396.9

1,875.61,203.3

672.3522 2

2,416.1

1,890.61,215.9

674.5526.5

127.5

130.4120.0135.5

147.7117.0124.1

122.1128.9127.0120.9131.1124.7

177.7

425.7247.4121.6145.9137.7

97.9109.5126.2

112.6110.9115.9112598.6

113.6107.4116.5108.6129.671.0

106.1113.2111.2102.6119.2

115.3114.7117.8

129 4

127.2

Dec.

100)

127.9

130.9120.5136.1

148.6114.4124.4

123.4127.2126.1119^2128.5126.7

178.6

438.3249.9123.4146.6132.5

100.6109.0128.5

112.9110.9110.1110.499.3

114.1107.1118.2109.7129.371.3

105.7103.8117.4101.7120.2

114.3114.2115.0

130.0

127.6

, annual rates)

2,442.2

1,911.01.224.1

686.9532.3

2,435.3

1,904.91,215.7

689.4531.4

Jan.

127.8

131.1120.6136.4

148.3114 8122.5

122.3129.3127.9122.8131.0125.6

180.3

457.1252.9119.9138.3130.8

101 8109.0128.0

113.6112.9116.9111.899.1

112.4106.5118.7112.3129.3694

108.4105.3116 0105.(1124.3

108.7110.2103.0

130.7

127 8

2,442.8

1,911.91,224.6

687.3532.0

Feb.'

127.3

130.6120.1135.8

147.8116.7120.4

121.4128.1127.0I23J129.4124.3

179.4

476.6254.1118.8136.7126.7

101.1109.6128.4

113.0112.0115.9109.697.7

114.6105.6117.6111.9129.470.8

108.8119.5108.4105.9122.6

108.2110.699.0

130.2

127.1

2,427.7

1,895.01,209.6

685.5533.3

1998

Mar'

127.8

130.6119.7136.0

148.1115.4122.0

121.8126.9126.6119.5127.2124.7

182.9

500.5253.8117.9135.3125.5

100.7109.9128.5

112.6111.6114.9108.698.1

112.1104.5118 1114.8129.669.7

107.8106.2109.4106.0118.3

115.0115.61 12 7

130.3

126.9

2,439.6

1.907 21,2190

688.4531.2

Apr.

128.2

131.2119.9136.9

148.9116.2122.7

121.0126.0124.9122.8127.4124.6

184.4

517.5256.5119.0138.7128.7

99.7110.6128.8

113.2112.5114.2108.498.0

113.0104.7118.5115.1131.267.9

107.6103.1110.6105.2123.2

112.5112.8l l l . l

130.8

127.5

2,455.5

1.923.11,225.8

697.5533.6

Mayp

128.8

131.5119.8137.4

149.6116 5122.1

121.7126.4125.6122.6127.3124.6

185.7

531.5258.9120.0139.5130.3

100.7110.8127.0

113.1112.8114.7110.197.4

113.2104.8118.2113.7129.767 4

108.9102.4118.21058122.9

115.7117.0110.2

131.1

127.7

2,466.2

1,932.01.230.2

702.2535.4

1. Data in this table also appear in the Board's G. 17 (419) monthly statistical release. Forthe ordering address, see the inside front cover. The latest historical revision of the industrialproduction index and the capacity utilization rates was released in December 1997. The recentannual revision is described in an article in ihe February 1998 issue of the Bulletin. For adescription of the aggregation methods for industrial production and capacity utilization, see"Industrial Production and Capacity Utilization: Historical Revision and Recent Develop-

ments," Federal Resen>e Bulletin, vol. K3 (February 1997), pp. 67-92. For details about theconstruction of individual industrial production series, see "Industrial Production: 1989Developments and Historical Revision," Federal Reserve Bulletin, vol 76, (April 1990), pp,187-204.

2. Standard industrial classification.



2.14 HOUSING AND CONSTRUCTION

Monthly figures at seasonally adjusted annual rates except as noted

Item

NEW UNITS

1 Permits authored2 One-family3 Two-family or more4 Started5 One-family6 Two-family or more7 Under construction at end of period1

8 One-family9 Two-family or more

10 Completed11 One-family12 Two-family or more13 Mobile homes shipped

Merchant builder activity inone-familv units

14 Number sold15 Number for sale at end of period1

Price of units sold (thousandsof dollars)2

16 Median17 Average

EXISTING UNITS (one-family)

18 Number sold

Price of units told (thousandsof dollars?

19 Median20 Average

CONSTRUCTION

21 Total put in place

22 Private23 Residential24 Nonresident! al25 Industrial buildings26 Commercial buildings27 Other buildings28 Public utilities and other

29 Public30 Military31 Highway32 Conservation and development33 Other

1995

1.333997335

1,3541,076

278lib

554222

1.3191,073

247341

667374

133.9158.7

3,812

113.1139.1

534,463

407.370231.230176,14032.50568 22127.0S948,323

1 2 7 0<i">2.983

36.3196,391

81,399

1996

1.4261,070

3561,4771,161

316820

584235

1,4051.123

283361

757326

140.0166.4

4,087

118.2145.5

567,179

435,929246,659189,27131,99774.59130,52552 156

131 2502.541

37.8985,807

85,005

1997

1.4421.056

3871,4741,134

340834570264

1.4071.122

285354

803287

145.9175.8

4,215

124.1154.2

600.U6

461,401259.575201,82630.70780 82136.99853 298

138 7152.553

41.1485.467

89,547

1997

July Aug.

Private residential n

1.4411.052

3891,4611,144

317836

570266

1.3311,074

257356

808288

145.9175.5

4,180

126.5157.6

1.4451.059

386

1.3831,076

307834

567267

1.3351.062

273

354

799286

144.0170.7

4,280

127.5159.1

Sept. Oct. Nov. Dec.

1998

Jan.

al estate activity (thousands of units except as noted)

1.4751.084

3911.5011.174

327843

571272

1.4331.133

300351

809284

146.3177.5

4,300

125.8155.4

1.5021.106

3961,5291,124

405

853574279

1.1841.063

321349

805284

141.5172.9

4,380

124.4154.7

Value of new construction (rr

603,002

464.326258.803205.52331,79682.34636,67254,709

118 6762.738

4I.U875 002

89,849

603,684

465.236259.958205,27831,48081,55237.27454,972

138 4482,767

41.7155,469

88,497

605,748

468.822263.799205.02330,67580,55138.72955.068

136 9262.451

40,1266,177

88,172

611,742

469.560265.422204,138

30,04881.48937,70754,894

142 1822.H27

39.4844,859

95.012

1.4751.102

3731.5231,167

356862575287

1.4321.145

287352

875280

145.0175.4

4,390

124.3155.0

1.4671.094

3731,5401,130

410

872580292

1.4131.094

319153

805282

145.9175.8

4.370

125.9157.5

illions of dollars)3

610,933

470.041267.207202.83429,35281.51137.68154.290

140 8932.740

44.2715,209

88,673

616,027

475,262270,822204,440

29,69782.10438.34554,294

140 7652.234

42.1145.910

90.507

1.5531.142

411

1,5451,225

320888593295

1.1141.007

307362

853'281'

148.0178 6'

4.370

126.1156.8

619,733

483,253275,667207,58629,88584,52837,78755,386

136 4802,483

41,7185,270

87,009

Feb.

1.6351 176

459

1 6161,263

353

907'609

298'1.461'1.142'

319'377

881'281'

155.6'180.4'

4,770

124.5153.9

624,635

486,346279,229207,117

30.85080.50938,52057,238

138,2892.918

42,9866,193

86.192

Mar.

1 5691.136

433

1,585'1,239'

346'911'616'295'

1.489'1.131'

358'374

844'285'

151.5'180.1'

4,890

127.1157.2

624,995

489,255283.292205,963

31,40981.17638,06055,318

135,7402.865

42,0125,449

85,414

Apr.

1.5171.145

372

1,5411,233

308908616

2921,5301,212

318370

888287

147.0173.2

4,770

128.2159.7

630.142

493.799285.789208,010

30,78383,89039.14854.189

136.3432,484

42.8054.920

86.134

1. Not at annual rates.2. Not seasonally adjusted,3. Recent data on value of new construction may not be strictly comparable with daia for

previous periods because of changes by [he Bureau of the Census in its estimating techniques.For a description of these changes, see Construction Reports (C-30-7f>-5), issued by theCensus Bureau in July 1976.

SOURCE. Bureau of the Census estimates for all series except (1) mobile homes, which areprivate, domestic shipments as reported by the Manufactured Housing Institute and season-ally adjusted by the Census Bureau, and (2) sales and prices of existing units, which arepublished by the National Association of Realtors. All back and current figures are availablefrom the originating agency. Permit authorizations are those reported to the Census Bureaufrom 19.000 jurisdictions beginning in 1994.



2.15 CONSUMER AND PRODUCER PRICES

Percentage changes based on seasonally adjusted data except as noted

Item

CONSUMER PRICES'(1482-84=100)

1 All items

3 Energy items4 All items less food and energy5 Commodities

PRODUCER PRICES(1982=100)

9 Consumer energy10 Other consumer goods11 Capititl equipment

Intermediate materials12 Excluding foods and feeds13 Excluding energy

Crude materials14 Foods] 5 Energy16 Other

Change from 12months earlier

1997May

2.2

3.0-2.7

2.51.13 2

.42.8

-2.8.4

- .1

- .6.1

-8.1-3.0

- 7

1998May

1.7

24-5.6

1 7

T, 1

- . 9-1.3-7.2

1.4- .6

-1.2- .1

-9.5- 1 0 9

-6.5

Change from 3(annua

months earate)

1997

June

1.5

2.1-11.8

2.6.6

3 1

-3.0-3.5

-13.0- .6-.9

-1.6.3

-I0.S11.3

-3.7

Sept.

2.J

2.88.31 7

- .32 6

1.2-1.5

6.01.7.6

.6

.6

-5.021.8

.3

Dec.

1.5

1.5-7.7

2.4.6

3 3

-1.21.5

-5.7- .3

-2.0

- . 6.0

4.154

-8.2

lier

1998

Mar.

.2

1.3-21.1

2.4.8

3 0

-4.2-2.1

-26.2.6

-.3

-4.4-1.2

-13.4-54.6-14.7

Change rom 1 month earlier

1998

Jan.

.0

3-2.4

2i2

- . 6 '- . 4 '

-3 .7 '.0'

-A'

- .5- I

-3.4-11.2'-1.9'

Feb.

.1

.0-2.2

.323

_ i'T

- i ' y 'i

.0'

- , i

- .7-3.5 '

-,r

Mar.

.0

0-1.2

1-.1

2

- .3- .4

-1.9.1.0

- . 4- .1

.7-4.3-1.9

Apr.

.2

.1- .1

.3I4

.2

.4- .1

.3

.1

.1

.0

.33.5- 9

May

.3

.6

2.11

2-.3

.8

.5- .2

-.1

- 1 46.5

Indexlevel.May1998'

162.8

160 3103.S173.1143.6189 8

130.4133.576.3

146.9137.3

12.3.8134.0

106.2720

1475

t. No! seasonally adjusted.2. Figures tor consumer prices are for all urban consumers and reflect a rental-equivalence

measure of homeownership.

SOURCE. U.S. Department of Labor, Bureau of Labor Statistic:



2.16 GROSS DOMESTIC PRODUCT AND INCOME

Billions of current dollars except as noted; quarterly data at seasonally adjusted annual rates

Account

GROSS DOMESTIC PRODUCT

I Total

By source2 Personal consumption expenditures3 Durable goods4 Nondurable goods5 Services

6 Gross private domestic investment7 Fixed investment8 Nonresidential9 Structures . . . . . . . . .

10 Producers' durable equipment11 Residential structures

12 Change tn business inventories13 Nonfarm

14 Net exports of goods and services15 Exports16 Imports

17 Government consumption expenditures and gross investment18 Federal19 State and local

By major type of product20 Final sales, total21 Goods22 Durable23 Nondurable24 Services25 Structures

26 Change in business inventories27 Durable goods . . .28 Nondurable goods

MEMO29 Total GDP in chained 1992 dollars

NATIONAL INCOME

30 Total

31 Compensation of employees32 Wages and salaries33 Government and government enterprises34 Other35 Supplement to wages and salaries36 Employer contributions for social insurance37 Other labor income

38 Proprietors' income39 Business und professional'40 Farm1

41 Rental income of persons2

42 Corporate profits43 Profits before tax3

44 Inventory valuation adjustment45 Capital consumption adjustment

46 Net interest

1995

7,265.4

4,957.7608.5

1,475.82,873.4

1,038.21,008.1

723.0200.6522.4285.1

30.138.1

-86.0818.4904.5

1,355.5509.6846.0

7.235.32.637.91.133.91,503.93,980.7

616.8

30.129.1

I.I

6,742.1

5,912.3

4.215.43,442.6

623.02,819.6

772.9366.0406.8

489.0465.5

23.4

132.8

650.0622.6-24.3

51.6

425.1

1996

7,636.0

5,207.6634.5

1,534.73,038.4

1,116.51.090.7

781.4215.2566.2309.2

25.923.0

-94.8870.9965.7

1.406.7520.0886.7

7.610.22.759.31.212.01.547.34,187.3

663.6

25.916.99.0

6,928.4

6,254.5

4,426.93,633.6

642.62,991.0

793.3385.7407.6

520.3483.1

37.2

146.3

735.9676.6-2.561.8

425.1

1997

8,079.9

5,485.8659.3

1,592.03,234.5

1,242.51,174.1

846.9230.2616.7327.2

68.461.7

-101.1957.1

1.058.1

1,452.7523.8928.9

8.011.52.876.71.284.01,592.84.430.4

704.4

68.433.035.4

7,188.8

6,649.7

4,703.63.878.6

665.33.213.3

825.0408.4416.6

544.5503.840.7

147.9

805.0729.8

5.569.7

448.7

1997

01

7,933.6

5,405.7658.4

1,587.43.159.9

1.193.61,127.5

811.3227.4583.9316.2

66.162.2

-98.8922.2

1,021.0

1,433.1516.1917 0

7,867.42,838.41.248.01.590.44.138.2

690.8

66.131.834.3

7,101.6

6,510.0

4,606.33,792.7

657.83.134.9

813.6401.3412.3

534.6494.4

40 2

149.0

779.6708.4

3.567.7

440.5

Q2

8,034.3

5,432.1644.5

1,578.93,208.7

1,242.01,160.8

836.3226.8609.5324.6

81.174.9

-88.7960.3

1.049.0

1,449.0526.1923.0

7,953.22,854.91,275.31,579.64,400.1

698.2

81.146.834.4

7,159.6

6,599.0

4.663.43,842.7

662.03,180.8

820.7405.6415.1

543.6500.043.6

148.7

795.1719.8

5.969.4

448.1

Q3

8,124.3

5.527.4667.3

1,600.83,259.3

1.250.21.201.3

872.0232.9639.1329.3

48.940.9

-111.3965.8

1,077.1

1,457.9525.7932.3

8,075.32,903.21.305.31.597.94,462.3

709.8

48.918.630.3

7,214.0

6,699.6

4.725.23,897.3

667.73,229.6

827.9410.2417.7

547.2506.340.9

148.0

827.3753.4

3.670.3

451.8

04

8,227.4

5.577.8666.8

1,600.93,310.0

1,284.11.206.8

868.0233.9634.2338.8

77.268.7

-105.3980.0

1.085.4

1,470.9527.3943.6

8.150.22.910.41.307.31,603.14,521.0

718.8

77.234.842.4

7,280.0

6,790.1

4.819.63.981.6

673.73.307.9

837.9416.6421.4

552.5514.3

38.2

145.7

818.1737.3

9.271.6

454.2

1998

01

8J44.9

5,666.5688.8

1.621.23.356.5

1.352.11,248.6

896.3230.9665.4352.3

103.596.5

-136.8960.4

1.097.2

1,463.1515.3947.7

8,241.32,951.51,335.11,616.44.560.7

729.1

103.547.356.3

7,365.6

6,902.9

4,916.74.066.2

682.13.384.1

850.5425.5425.1

556.7524.2

32.5

143.6

822.5718.4

30.273.9

463.3

1, With inventory valuation and capital consumption adjustments,2. With capital consumption adjustment.

3. For after-tax profits, dividends, and the like, see table 1.48.SOURCE. U.S. Department of Commerce, Sunev of Current Business.



2.17 PERSONAL INCOME AND SAVING

Billions of current dollars except as noted; quarterly data at seasonally adjusted annual rates

Account

PERSONAL INCOME AND SAVING

1 Total personal income

2 Wage and salary disbursements3 Commodity-producing industries4 Manufacturing5 Distributive industries6 Service industries7 Government and government enterprises

8 Other labor income9 Proprietors' income

10 Business and professional1

11 Farm .12 Rental income of persons2

13 Dividends14 Personal interest income15 Transfer payments16 Old-age survivors, disability, and health insurance benefits

17 LESS' Personal contributions for social insurance

18 EQUALS: Personal income

19 LESS: Personal tax and nontax payments

20 EQUALS: Disposable personal income

21 LESS: Personal outlays

22 EQUALS: Personal saving

MEMOPer capita (chained 1992 dollars)

23 Gross domestic product24 Personal consumption expenditures25 Disposable personal income

26 Saving rate (percent)

GROSS SAVING

27 Gross saving

28 Gross private saving

29 Personal saving30 Undistributed corporate profits1

31 Corporate inventory valuation adjustment

Capital consumption allowances32 Corporate33 Noncorporate

34 Gross government saving35 Federal36 Consumption of fixed capital37 Current surplus or deficit ( - ) , national accounts38 State and local39 Consumption of fixed capital40 Current surplus or deficit ( - ) , national accounts

41 Gross investment

42 Gross private domestic investment43 Gross government investment44 Net foreign investment

45 Statistical discrepancy

1995

6,150.8

3,429.5864.4648.4783.1

1,159.0623.0

406.8489.0465.5

23.4132.8251.9718.9

1,015.0507.8

293.1

6,150.8

795.1

5,355.7

5,101.1

254.6

25,615.717.459.218,861.0

4.8

1,165.5

1,093.1

254.6172.4

-24.3

428.9224.1

72.4-103.6

70.9-174.4

176.072.9

103.1

1,137.2

1,038.2213.4

-114.4

-28.2

1996

6,495.2

3,632.5909.1674.7823.3

1,257.5642.6

407.6520.3483.1

37.2146.3291.2735.7

1,068.0537.6

306.3

6,495.2

886.9

5,608.3

5,368.8

239.6

26.085.817,748.719,116.0

4.3

1,267.8

1,125.5

239.6202.1-2.5

452.3230.5

142.3-39.3

71.2-110.5

181.576.2

105.3

1,207.9

1,116.5224.3

-132.9

-59.9

1997

6,873.9

3,877.4960.3706.0876.3

1,375.5665.3

416.6544.5503.840.7

147.9321.5768.6

1,121.1566.7

323.7

6,873.9

988.7

5,885.2

5,658.5

226.7

26,834.018,168.919.493.0

3.9

1394.3

1.164.2

226.7219.5

5.5

475.6241.2

230.142.871.6

-28.8187.379.5

107.8

1,308.3

1,242.5226.0

-160.2

-86.0

Ql

6,746.2

3,791.5942.9694.1856.8

1,334.1657.8

412.3534.6494.4

40.2149.0312.5757.2

1,107.2558.9

318.2

6,746.2

955.7

5,790.5

5.574.6

215.9

26,597.818.045.219.331.0

3.7

1,332.9

1,134.0

215.9211.5

3.5

467.4238.0

198.915.971.4

-55.5182.978.2

104.7

1,268.6

1,193.6223.3

-148 4

-64.3

1997

Q2

6,829.1

3,841.6952.8700.3867.0

1,359.8662.0

415.1543.6500.043.6

148.7318.3766.1

1.117.0564.4

321.3

6,829.1

979.2

5,849.9

5.602.8

247.0

26,765.018,053.919,439.0

4.2

1396.9

1.178.1

247.0217.6

5.9

472.6239.7

218.834.771.5

-36.8184.179.2

104.9

1,323.4

1.242.0227.4

-146.0

-73.5

03

6,906.9

3,896.1961.4706.0880.8

1,386.3667.7

417.7547.2506.340.9

148.0324.5772.6

1,125.7569.4

324.8

6.906.9

998.0

5,908.9

5,700.8

208.2

26.897.918,255.719,518.0

3.5

1,411.6

1,159.6

208.2230.0

3.6

478.0242.4

251.960.871.6

-10.8191.179.7

111.4

1308.4

1,250.2227.1

-168.9

-103.2

Q4

7,013.5

3,980.4984.1723.4900.6

1,422.0673.7

421.4552.5514.3

38.2145.7330.7778.4

1.134.8574.2

330.4

7.013.5

1,022.1

5,991.4

5,755.6

235.8

27,073.318,319.619.681.0

3.9

1,435.8

1,185.2

235.8218.9

9.2

484.5244.9

250.659.771.8

-12.1190.980.8

110.1

1,332.7

1,284.1226.1

-177.4

-103.1

1998

Ql

7,125.9

4,065.0997.9730.4919.0

1,466.1682.1

425.1556.7524.2

32.5143.6336.8783.3

1,153.6584.9

338.2

7,125.9

1,059.7

6,066.3

5,844.1

222.1

27.340.918,558.019,865.0

3.7

1,493.6

1,184.2

222.1224.930.2

489.7246.4

309.3120.471.549.0

188.981.3

107.6

1379.2

1,352.1223.8

-196.7

-114.4

1. With inventory valuation and capital consumption adjustments.2. With capital consumption adjustment.

SOURCE. U.S. Department of Commerce, Survey of Current Business.


A50 International Statistics • August 1998

3.10 U.S. INTERNATIONAL TRANSACTIONS Summary

Millions of dollars; quarterly data seasonally adjusted except as noted1

Item credits or debits

1 Balance on current account"̂ N4erchandise trade balance3 Merchandise exports4 Merchandise imports5 Military transactions, net6 Other service transactions, net7 Investment income net8 U.S. government grants9 U.S. government pensions and other transfers

10 Private remittances and other transfers

11 Change in U.S. government assets other than officialreserve assets, net (increase. - )

12 Change in U.S. official reserve assets (increase. - )13 Gold14 Special drawing rights (SDRs)15 Reserve position in International Monetary Fund16 Foreign currencies

17 Change in U.S. private assets abroad (increase. - )18 Bank-reported claims3

19 Nonbank-reported claims20 U.S. purchases of foreign securities, net21 U.S. direct investments abroad, net

22 Change in foreign official assets in United States (increase, f)23 U.S. Treasury securities24 Other U.S. government obligations25 Other U.S. government liabilities4

26 Other U.S. liabilities reported by U.S. banks'27 Other foreign official assets5

28 Change ui foreign private assets in United States (increase. +}29 U.S. bank reported liabilities3

30 US. nonbank-reported liabilities31 Foreign private purchases of U.S. Treasury securities, net32 Foreign purchases of other U.S. securities, net33 Foreign direct investments in United States, net

34 Allocation of special drawing rights35 Discrepancy36 Due to seasonal adjustment37 Before seasonal adjustment

MEMOChanges in official assess

38 U.S. official reserve assets (increase, - )39 Foreign official assets in United States, excluding line 25

(increase, +)

40 Change in Organization of Petroleum Exporting Countries officialassets in United States (part of line 22)

1995'

-115.254—173.729

575^845-749.574

4.76969.06919.275

- 1 U 7 0-3.433

-20.035

-589

-9,7420

-808-2,466-6,468

-317,122-75,108-45,286

-100,074-96,654

109,76868,977

3,735-217

34,0083,265

355.68130.17659.63799.54896.36757.653

0-22.742

-22.742

-9,742

109,985

4,239

1996'

-134.915— 191 337

6IL983- 803.320

4,68478,07914,236

-15!o23-4,442

-21,112

-708

6,6680

370-1,280

7,578

-374,761-91,555-86,333

-115.801-81,072

127,344115,671

5,008-3625.7041,323

436.01316,47839.404

154.996130,15177.622

0-59,641

-59.641

6,668

127,706

14,911

1997'

-155,215-197,954

679!.325-877.279

6.78180,967-5,318

-12,090-4,193

-23.408

174

-1,0100

-350-3.575

2,915

-477.666-147.439-120,403-87,981

-121,843

15.817-7.270

4.134-2.52121.928

-654

717.624148.059107.779146.710196,84593.449

0-99.724

-99.724

-1,010

18,338

10.822

Ql

-36,990-49,723163^499

-213,2221,542

20.05114

-2.241-1.013-5.620

- 2 2

4,4800

721.0553.353

-149.597-63.698-37,880-15.521-32.498

26.94922.311

754-5877,696

-3,225

154,78617,74328,84033,36345,47725,879

0394

5,812-5,418

4,480

27.536

7.103

1997'

Q2

-35,090-49,096169240

-218,3362,191

20,390460

-2,274-1,055-5,706

-269

-2360

-13354

-157

-86,101- 26,625-9,825

-23,263-26,388

-5,411-11,689

827-5235,043

931

155.18428,0675,274

42,61454,25820,149

0-28,077

685-28,762

-236

-4.888

1,970

Q3

-38,094-49,296172302

-221,5981,945

20,246- 1 544-2,362-1,056-6,027

436

-7300

-139-463-128

-123,023-29.577-24.791-41.167-27.488

21,2586,6862.667

-1,16712,439

633

160,18012.60626.27535,43260.32718.964

0-20,027-10,018-10,009

-730

22,425

3,031

Q4

-45.043-49.839174.284

-224,1231,103

20,277-4,247

-5,213-1,069-6,055

29

-4,5240

-150-4,221

-153

-118,946-27,539-47,907

-8,030-35,470

-26,979-24.578

86-244

-3,2501.007

247.47089.64347.39035.30136.78328,453

0-52.007

3.528-55.535

-4,524

-26,735

-1.282

1998

Qlp

-47.210-55,69817L469

-227.1671,530

19,306-3,124-2,257-1.071-5.896

-426

-4440

-182-85

-177

-43,87712,903

-5,173-30,924

10,18111,3372,610

-1,059-1.751

-956

80,712-41.199

-1,36376,65625.020

01,0646,260

-5,196

-444

11,240

348

1. Seasonal factors are not calculated for line?. 12-16. 18-20. 22-34. and .18-40.2. Data are on an international accounts- basis. The daia differ from the Census basis data.

shown in table 3.11, for reasons of coverage and liming. Military exports; are excluded frommerchandise trade data and are included in line 5.

3. Reporting banks include all types- of depository institution!, as well as some brokers anddealers.

4. Associated primarily with military sales contracts and other transactions arranged withor through foreign official agencies.

5. Consists of investment in U.S. corporate stocks and in debt securities of privatecorporations and slale and local governments.

SOURCE. U.S. Department of Commerce. Bureau o1 Economic Analysis, Survey of Current


Summary Statistics A51

3.11 U.S. FOREIGN TRADE1

Millions of dollars; monthly data seasonally adjusted

Item

1 Goods and services, balance2 Merchandise3 Services

4 Goods and services, exports5 Merchandise6 Services

7 Goods and services, imports8 Merchandise9 Services

1995

-101,857-173,560

71,703

794.610575.871218,739

-896,467-749,431-147,036

1996

-111,040-191.170

80.130

848,833612,069236,764

-959,873-803,239-156,634

1997

-113,684-198,975

85,291

931.370678,150253,220

-1,045.054-877,125-167,929

1997'

Oct.

-8,651-16.271

7.620

80.58958.46722,122

-89,240-74.738-14,502

Nov.

-9 ,600-16.605

7,005

79,08857,48221,606

-88,688-74,087-14,601

Dec.

-10.205-16.962

6.757

79.78458,33621,448

-89,989-75,298-14,691

1998

Jan.'

-9,935-17,075

7,140

79,57157,90221,669

-89,506-74,977-14,529

Feb.'

-11,720-18.120

6,400

77.68456,35021.334

-89,404-74,470-14,934

Mar.

-13 ,209 '-20,504 '

7,295

79,14857,21721,931

-92,356-77,720-14,636

Apr.p

-14.274-21,115

7.061

77.21955.31521.884

-91.493-76,670-14.823

1. Data show monthly values consistentpayments accounts.

with quarterly figures in the U.S. balance of SOURCE, FT900, U.S. Department of Commerce, Bureau of the Census and Bureau ofEconomic Analysis.

3.12 U.S. RESERVE ASSETS


Asset

1 Total

2 Gold stock, including ExchangeStabilization Fund1

3 Special drawing rights 3

4 Reserve position in Internationa] MonetaryFund2 '. . . .

5 Foreign currencies

1994

74,335

11,05110,039

12,03041,215

1995

85,832

11,05011,037

14,64949,096

1996

75,090

11,04910,312

15,43538.294

1997

Oct.

68,036

11,05010.132

14,24332,611

Nov.

67,112

11.05010.120

14.57131.371

Dec.

69,954

11,05010,027

18,07130,809

1998

Jan.

70,003

11,0469,998

18.03930.920

Feb.

70,632

11,05010,217

18,13531.230

Mar.

69,354

11,05010.108

17.97630.220

Apr.

70,328

11,04810.188

18,21830,874

May1"

70,723

11,04910,296

18,95730,421

1. Gold held "under earmark" at Federal Reserve Banks for foreign and internationalaccounts is not included in the gold stock of the United States; see table 3.13, line 3. Goldstock is valued at $42.22 per fine troy ounce.

2. Special drawing rights (SDRs) are valued according to a technique adopted by theInternational Monetary Fund (IMF) in July 1974. Values are based on a weighted average ofexchange rates for the currencies of member countries. From July 1974 through December1980. sixteen currencies were used; since January 1981, five currencies have been used. U.S.

SDR holdings and reserve positions in the IMF also have been valued on this basis since July1974,

3. Includes allocations of SDRs by the International Monetary Fund on Jan. 1 of the yearindicated, as follows: 1970—$867 million; 1971—5717 million; 1972—$710million; 1CJ79—$1,139 million; 1980—$1,152 million; 1981—$1,093 million; plus net transactions in SDRs.

4. Valued at current market exchange rates.

3.13 FOREIGN OFFICIAL ASSETS HELD AT FEDERAL RESERVE BANKS1


Asset

1 Deposits

Held in custody2 U.S. Treasury securities"3 Earmarked gold3

1994

250

441,86612.033

1995

.186

522.17011.702

1996

167

638,04911.197

1997

Oct.

190

638,10010.793

Nov.

167

635,09210,793

Dec.

457

620,88510.763

1998

Jan.

215

625,21910,709

Feb.

24.1

621,95610,705

Mar.

167

630,60210,664

Apr.

162

622,22010,651

May r

156

622,55710,641

1. Excludes deposits and U.S. Treasury securities held for international and regionalorganizations.

2, Marketable U.S. Treasury bills, notes, and bonds and nonmaskable U.S. Treasurysecurities, in each case measured at face (not market) value.

3. Held in foreign and international accounts and valued at $42.22 per fine troy ounce; notincluded in the gold stock of the United States.



3.15 SELECTED U.S. LIABILITIES TO FOREIGN OFFICIAL INSTITUTIONS


Item

1 Total1

By type2 Liabilities reported by banks in the United States2

3 U.S. Treasury bills and certificates3

U.S. Treasury bonds and notes

5 Nonmarketable4

6 U.S. securities other than U.S. Treasury securities

By area7 Europe1

8 Canada9 Latin America and Caribbean

10 Asia11 Africa

1995

630,918

107,394168,534

293,6906.491

54.809

222.40619.47366.721

311,0166,2965.0O4

1996

758,624

113,098198,921

379,4975,968

61,140

257,91521,29580.623

385,4847,3795,926

1997

Oct.

798,696

153,804153,283

421,4125,919

64,278

280,58919,41890,190

391,5419,8127,144

Nov.

791,668

147,796150,102

423,2435,955

64,572

272,68019,27594,135

390,2039,5425,831

Dec.

776,986

135,026148,301

422,8765,994

64,789

263,07818,74997,316

381,19610,1186,527

1998

Jan.

778,915

140,511145.609

421.6876,031

65,075

261,50518,33996,697

386,00710,2136,152

Feb.

778,873'

139.471'144.324

422,9296,069

66.080

260,84019,06599,381r

384,15110,5184,916

Mar.

788,925

134,075153,335

428,9626,110

66,443

258,38420,28098,028

395,95611,4404,835

Apr.p

786,920

144,929138,418

430,4786,149

66,946

268,82320,254

101,191380,662

11.2814,707

1. Includes the Bank for International Settlements.2. Principally demand deposits, time deposits, bankers acceptances, commercial paper,

negotiable time certificates of deposit, and borrowings under repurchase agreements.3. Includes nonmarketable certificates of indebtedness and Treasury bills issued to official

institutions of foreign countries.4. Excludes notes issued to foreign official nonreserve agencies. Includes current value of

zero-coupon Treasury bond issues to foreign governments as follow-,: Mexico, beginningMarch 1988, 20-year maturity issue and beginning March 1990, 30-year maturity issue;

Venezuela, beginning December 1990, 30-year maturity issue: Argentina, beginning April1993, 30-year maturity issue.

5. Debt securities of U.S. government corporations and federally sponsored agencies, andU.S. corporate stocks and bonds.

SOURCE. Based on US. Department of the Treasury data and on data reported to thedepartment by banks (including Federal Reserve Banks) and securities dealers in the UnitedStates, and on the 1989 benchmark survey of foreign portfolio investment in the UnitedStates.

3.16 LIABILITIES TO, AND CLAIMS ON, FOREIGNERSPayable in Foreign Currencies


Reported by Banks in the United States'

Item

I Banks' liabilities2 Banks' claims

1994

89,25860,71119.66141,05010.878

1995

109,71374,01622,69651,3206.145

1996

103,38366,01822,46743.55110.978

1997

June

110,22485,30528,90056.40510.265

Sept.

120,10591,15832.15459,00410,210

Dec.

116,73882,73228,35554.3778.476

1998

Mar.

100,10182,14328,07654,0677,926

I. Data on claims exclude foreign currencies held by U.S. monetary authorities. 2. Assets owned by customers of the reporting bank located in the United States thatrepresent claims on foreigners held by reporting banks for the accounts of the domesticcustomers.


Bank-Reported Data A53

3.17 LIABILITIES TO FOREIGNERSPayable in U.S. dollars



1995

Feb. Mar. Apr.p

BY HOLDER AND TYPE OF LIABILITY

1 Total, all foreigners

2 Banks" own liabilities3 Demand deposits4 Time deposits2

5 Other1

6 Own foreign offices

7 Banks' custodial liabilities5


9 Other negotiable and readily transferableinstruments7

10 Other

11 Nonmonetary international and regional organizations*12 Banks' own liabilities13 Demand deposits14 Time deposits2

15 Other3


17 U.S. Treasury bills and certificates''18 Other negotiable and readily transferable

instruments7

19 Other

20 Official institutionsg

21 Banks' own liabilities22 Demand deposits23 Time deposits2

24 Other3


26 U.S. Treasury' bills and certificates6


28 Other

29 Bank; 10

30 Banks' own liabilities31 Unatnliated foreign banks32 Demand deposits33 Time deposits34 Other3

35 Own foreign offices




39 Other

40 Other foreigners41 Banks' own liabilities42 Demand deposits

Ti d ip

Time depositsOther'

4344

45 Banks' custodial liabilities46 U.S. Treasury bills and certificates6


48 Other

MEMO49 Negotiable time certificates of deposit in custody for

foreigners

1,099,549

753.46124,448192,558140,165396,290

346,088197,355

52.20096,533

11.03910.347

214,6565,670

692350

3411

275,92883,4472,098

30.71750,632

192.481168.534

23,603344

691 412567,834171,54411.758

103,47156.315

396.290

123.57815.872

13,03594.671

121.17091,83310.57153.71427.548

29.33712,599

15,2211,517

9.103

1,162,148

758.99827,034186,910143,510401,544

403,150236,874

72,01194.265

13,97213,355

295,7847,542

617352

2650

312,01979,4061,511

33,33644,559

232,613198,921

33,266426

694,835562,898161,35413,69289.76557.897

401.544

131.93723.106

17.02791,804

141.322103,33911,80258,02533,512

37,98314,495

21.4532,035

14.573

1,283^34

883,23832,104

198.S07167,676484,951

400.096193,325

93.604113.167

11,39011,186

165,4665,704

20469

133

283,327101,610

2,31441,12058,176

181,717148,301

33,211205

816,263642,523157,57217,52783,77056,275

484,951

173.74031,915

35.333106.492

172,354127,91912,24768,15147,521

44.4351.1,040

24.9276,468

16.046

1,226.033

824,67733,503

193,751193,950403.473

401,356200,215

95,108106,033

13,91413.509

365,1618,312

405148

2570

307,087118,154

2,03441,77074,350

188,933153,283

35,236414

732,963568,367164,89418,35483,16263,378

403,473

164.59633.085

32,06599,446

172.069124,647

13,0796.3,65847.910

47,42213,699

27,5506,173

15.485

1.240,488

834,23735,690

191,970180,925425,652

406.251196,476

99,882109.893

12.46912,205

436,3105,852

26446

217I

297,898109,988

1,89139,71668,381

187,910150,102

37,374434

765,574595,667170,01521,31684,62164,078

425,652

169.90732.995

3.3,826103,086

164,547116,37712.44061.32342,614

48,17013.333

28,4656,372

16,553

1,283,334

883,23832,104198,507167,676484,951

400,096193.325

93.604113.167

11,39011.186

165,4665,704

20469

1332

283,327101,6102,314

41,12058,176

181,717148.301

33,211205

816,263642,523157,57217,52783,77056,275

484,951

173.74031,915

35,333106.492

172,354127,91912,24768,15147.521

44,43513,040

24,9276,468

16,046

1,264,391

864,36229,716187,719184,826462,101

400,029184,881

96,945118,203

11,24011,048

1755,0235,850

192

1070

286,120110.607

1,68238,30670,619

175,513145,609

29,614290

792,291618,053155,95215,97479.57360.405

462,101

174.23827,607

35,266111,365

174,740124,65411,88564,81747,952

50,08611.580

31,9586,548

17,038

1,283,416'

879,659'29,691'183,494'189,318477,156'

403,757186.564

99.370117,823

16,45216,123

745,41610,633

329149

1800

283.795'109,691'1,910

37,142'70,639

174,104144,324

29,643137

799,916'62.1,186'146,030'16,08475,464'54.482

477.156'

176.73030,620

35,107111,003

183,253'130,659'11,623'65,472'53.564

52,59411.471

34,4406,683

20.791

1,254,843

843,90632,588183,109188,425439,784

410,937191,571

96,332123,034

15,89015,569

986,0629,409

321247

722

287,410103,3622,051

40.16061.151

184.048153,335

.10,183530

763,349585.083145,29918,35070,06056.889

439,784

178.26628,499

34,962114,805

188,194139,89212,08966,82760,976

48,3029,490

31,1157,697

22,384

1,270,297

861,38032,149

186,179203,856439,196

408,917174.252

111.420123.245

14,79314,377

3656,6467,366

416344

720

283 347105,731

2.53238.79764.402

177.616138.418

38,745453

776,137596,327157.13117,15273,10866,871

439.196

179,81026,650

37,992115,168

196,020144,94512.10067.62865.217

51.0758.840

34,6117.624

22.472

1. Reporting banks include all types of depository institutions as well as some brokers anddealers. Excludes bonds and notes of maturities longer tban one year.

2. Excludes negotiable lime certificates of deposit, which are included in "Other negotia-ble and readily transferable instruments."

3. Includes borrowing under repurchase agreements4. For U.S. banks, includes amounts owed to own foreign branches and foreign subsidiar-

ies consolidated in quarterly Consolidated Reports of Condition filed with bank regulatoryagencies. For agencies, branches, and majority-owned subsidiaries of foreign banks, consistsprincipally of amounts owed to the head office or parent foreign bank, and to foreignbranches, agencies, or wholly owned subsidiaries of the head office or parent foreign bank.

5. Financial claims on residents of the United States, other than long-term securities, heldby or through reporting banks for foreign customers.

6. Includes nonmarketable certificates of indebtedness and Treasury bills issued to officialinstitutions of foreign countries.

7. Principally bankers acceptances, commercial paper, and negotiable time certificates ofdeposit.

8. Principally the International Bank for Reconstruction and Development, the InterAmerican Development Bank, and the Asian Development Bank. Excludes "holdings ofdollars" of the International Monetary Fund.

9. Foreign central banks, foreign central governments, and the Bank for InternationalSettlements.

10, Excludes central banks, which are included in "Official institutions."



3.17 LIABILITIES TO FOREIGNERS Reported by Banks in the United States'—Continued

50

51

5253545556575859606162636465666768697071

72

73747576777879808182838485868788899091

92

93949596979899

100101102103104

105106107108109110111

112113114

115[16117118

Item

AREA

Total, all foreigners

Foreign countries

EuropeAustriaBelgium and LuxembourgDenmarkFinlandFranceGermanyGreeceItalyNetherlandsNorwayPortugalRussiaSpainSwedenSwitzerlandTurkeyUnited KingdomYugoslavia1' ^Other Europe and other former U S.S.R.1"

Canada

Latin America and CaribbeanArgentinaBahamasBermudaBrazilBritish West IndiesChileColombiaCubaEcuadorGuatemalaJamaicaMexicoNetherlands AntillesPanamaPeruUruguayVenezuelaOther

Asia

MainlandTaiwanHong Kong

IndiaIndonesiaIsraelJapanKorea (Soulh)PhilippinesThailandMiddle Eastern oil-e\portinc countries11

Other "

AfricaEgyptMoroccoSoulh AfricaZaire . . . .Oil-exporting countries14

Other

OtherAustraliaOther

Nonmonetary international and regional organizations.. .International15

Latin American regional111

Other regional

1995

1,099,549

1,088,510

362,8193.537

24,7922^9212,831

39,21824.035

2,01410.8681 ?,7451,3942,7617,948

10.0113.246

43.6254,124

139.183177

26.389

30.468

440,21312.23594,991

4,89723,797

239,0832.8263.659

81,3141,276

48124.5604,6734.264

9741.836

11,8087.53]

240.595

33,75011 71420J973,3732,7084.041

109,1935.7493.092

12.27915.58218,917

7.6412.136

104739

101.7972.855

6,7745.6471,127

11.0399.300

893846

1996

1,162,148

1,148,176

376,5905.128

24 0842'.5651.958

35.07824.660

1.83510.94611.110

1.2883.5627.623

17.7071.623

44.5386.738

153,420206

22.521

38.920

467,52913,87788,895

5.52727.701

251.4652,9153,256

211.7671.282

62831,2406,0994.099

R141.890

17.3638 670

249.083

30.43815.99518,789.1,9302 2986.051

117.3165,9493 378

10,91216.28517.742

8,1162,012

112458

102.6262.898

7 9386,4791.459

13,97212,0991 339

534

1997

1,283,334

1,271,944

420,4872,717

41,0071.5142.246

46.60723.737

1.51511,3787,385

3172.2627,968

1H.9891.628

39.2584.054

181,904239

25.762

2S.34I

536,36520,199

112,2176,911

31.037276,389

4,0723.652

662.0781.494

45033,972

5,0854.241

8932,382

21,6019,626

269.198

18,25211 76017/7224,5673,5546.281

143.40112,9593,2506.501

14.95925.992

10,3471.663

1382.I5R

103,0603.318

7.2066.304

902

11.39010.217

424749

1997

Oct.

1,226,033

1,212,119

418,9882,679

46,0672.3591.997

45,05722,1172.075

11.4498.1191,0221,888

11,72221,934

1,34837.0754.661

165.199233

31,987

30.282

502,09917,70089.631

6.20931,680

269,9973,5793.47S

711.6711,399

48132.7496,0694.109

9172,184

20,6999,476

242.064

16,23415 20719/7555,1314.5684,21X1

116,8528,5972.5056.988

14,43627.591

10.3101.742

1052.028

33.1943.238

8 3767,2841.092

13.91411.9431.277

694

Nov.

1,240,488

1,228,019

425,5842.319

46.2582J571,969

45,65323,040

1,22910,7137.0101,7931,9876,938

20.9211,614

39.6654,218

177,781234

30,085

30.921

499.51318.35892.390

6.01232,614

263,7633,2833.341

571.7041,361

44532.6784 9954.293

9072.247

22.1118,954

255.000

17,43313,58618*8864.9133.0923,745

133,6909,9822.5585.824

14,01727,274

9.5201.836

691.615

52,9483.047

7.4816.2831.198

12,46910,926

1.053490

Dec.

1,283,334

1,271,944

420,4872,717

41,0071.5142,246

46,60723,737

1,51511,3787.385

3172,2627,968

18,9891,628

39,2584,054

181,904239

25,762

28,341

536.36520.199

112.2176.911

31.037276.389

4,0723,652

662.0781,494

45033.9725.0854.241

8932,382

21,6019,626

269.198

18,25211,76017,7224.5673,5546,281

143,40112,9593,2506 501

14,95925.992

10.3471.663

1382,158

103,0603.318

7.2066.304

902

11,39010.217

424749

1998

Jan.

1,264,391

1,253,151

401.4542.787

39,018U6252,177

44,77.321,988

1,6769,8546.287

9551,5155,573

19,4131,415

37,3403,659

176,457292

24.650

29.035

530,58919.215

117.4576.279

31,857266,023

4,5143,584

6.31.8671,492

44933,2305,7773.921

8762.201

22,3399.445

274.301

20.15312.93618.0025.3312,9097,190

138.68511.7032.5305.858

16.05932,945

10,2911,949

131I.6S5

73,4703,049

7,4816,3851,096

11,24010,016

975249

Feb.

1,283,416'

l,266,964r

419,718'2,774

38,1781,2152,136

44,99023.290

1,6639,8047.043

8451.4376 118

20.1372,055

.37,157'4,047

191,181244

25,404

29,470

533,680'18,278

110,882'8,283

33,026273,264'

4,4503,904'

581,9971,382

43733,6115.4174,087

9122,247

21,8879,558

267.957

18.57512.94217.7975.2652,9897,197

140,42612.5302.8724.676

14.14626.736

9,6701,670

731,825

42,9592,619

6,4695,4661,003

16,45214.859

1,217376

Mar.

1,254,843

1,238,953

390,0742,375

33,244L0941,549

44,02720,971

1,9889,6318,208

3461.4266.466

16.3151.967

35,4634,154

174,198236

26,416

27.121

529,20418,835

109,0418,273

34,017261,300

3,9754,200

551,8141,438

43135.70811,3513,958

8782.228

21,47410,228

275.215

20.74313.61917.8255,5864,0157.589

137.70011,2333,0099,073

14,61328,606

11.3851.449

882,547

103,5153.016

5.9544,989

965

15,89014.975

536379

Apr.p

1,270,297

1,255,504

406,1773,000

38,4872,5881,768

48,46824,8952,351

10,6008,051

5142.2735.381

18.0711,785

32,3414,340

172.647246

28,371

27,398

552.88217,766

112,5106,657

36,777273.747

4,1984,212

571,7371.478

44937.55917,5694,211

8782.097

20,69610,284

251,423

20.28113.71219^6624.8134,2667,348

113,18313,8112,8707,928

14,77626.449

11,1601,236

1312,556

33,6222,902

6,4645,4501.014

14.79313,330

762701

11. Since December 1992, has excluded Bosnia, Croatia, and Slovenia.12. Includes the Bank for International Settlements Since December 1992, has

included all parts of the former US.S.R. (except Russia), and Bosnia. Croatia, and Slovenia.13. Comprises Bahrain. Iran, Iraq, Kuwait, Oman. Qatar, Saudi Arabia, and United Arab

Emirates (Trucial States).14. Comprises Algeria, Gabon, Libya, and Nigeria.

15. Principally the International Bank for Reconstruction and Development. Excludes"holdings of dollars" of the International Monetary Fund.

16. Principally the Inter-American Development Bank.17. Asian. African. Middle Eastern, and European regional organizations, except the Bank

for International Settlements, which is included in "Other Europe."


3.18 BANKS' OWN CLAIMS ON FOREIGNERS Reported by Banks in the United States'Payable in U.S. Dollars



Area or country

Oct. Feb. Mar. Apr.1

1 Total, all foreigners

2 Foreign countries

3 Europe4 Austria5 Belgium and Luxembourg6 Denmark7 Finland8 France9 Germany

10 Greece11 Italy12 Netherlands13 Norway14 Portugal15 Russia16 Spain17 Sweden18 Switzerland19 Turkey20 United Kingdom21 Yugoslavia-22 Other Europe and other former U.S.S.R.1

23 Canada

24 Latin America and Caribbean25 Argentina26 Bahamas27 Bermuda28 Brazil29 British West Indies30 Chile31 Colombia32 Cuba33 Ecuador34 Guatemala35 Jamaica36 Mexico37 Netherlands Antilles38 Panama39 Peru40 Uruguay41 Venezuela42 Other

43 AsiaChina

44 Mainland45 Taiwan46 Hong Kong47 India48 Indonesia49 Israel50 Japan51 Korea (South)52 Philippines53 Thailand54 Middle Eastern oil-exporting countries"1

55 Other

56 Africa57 Egypt58 Morocco59 South Africa60 Zaire61 Oil-exporting countries5

62 Other

63 Other64 Australia65 Other

66 Nonmonetary international and regional organizations"

532,444

530,513

132.150565

7.624403

1,05515,03.39,263

4695,3705.346

665888660

2,1662,0807,474

80367,784

1474.355

20.874

256,9446.439

58,8185,741

13,297124,037

4.8644.550

0825457323

18,0249.2293,0081,829

4661,6613,376

115.336

1.0231,713

12.8211.8461.696

73961,46813,9751,3182,6129.6396,486

2,742210514465

1552

1,000

2,4671,622

845

1.931

599,925

597,321

165,7691,6626.727

492971

15,2468,472

5686,4577,117

808418

1,6693,2111,739

19,7981,109

85,234115

3.956

26.436

274.1537,400

71,8714,129

17.259105,510

5,1366.247

I)1,031

620345

18,42525,209

2,7862,720

5891,7023.174

122.478

1,4011,894

12,8021,9461.762

63359,96718.9011.6972,679

10.4248,372

2,776247524584

0420

1,001

5,7094,5771,132

2.604

708,233

705,770

199,880

1,3546,641980

1,23316,23912,676

4026,2306,141555777

1,2482.9421,854

28,8461.558

103,14352

7,009

27,176

343,8208,92489,3798,782

21,696145,4717,9136,945

01,311886424

19,51817,8384,3643,491629

2.1294.120

125.024

1.579921

13.9902,2002.634768

59.54018.1231.6892,25910,79010,531

3 5302475118050

1.212755

6,3405,2991.041

681,287

679,539

213,4721,9138.347

8961,808

16,83111,617

4637,145

11,5031.419

6152,0546,6251,838

29.7791.424

102,40575

6,715

22,815

303,9178,129

73,8388,008

20.134133,309

7,3046,869

01,307

761364

18,58412,2743,9583,185

7091.6423.542

129.622

2.3451,271

15,3382.3602.7311,539

59,43719,9271.4552,3178.49012,412

3,342245599557

0I.Ill830

6,3715,2961,075

1.748

699,095

696,609

215,077

2,0347,475844

1.25919.81713.245

4016.87111,4962,080695

2,2076,3391,804

29,3991.572

100.87074

6.595

24,765

317,5088,761

72,7396,55220,390141,8017,7836,976

3

1,292787405

18,90417,0644,0893,457651

1,9213.933

129.760

2,1021,00015,1512,5012,7741,201

60,19519,2581,5332,1808.90912,956

3.3322824127430

1.091804

6,1674,9621.205

2,486

708,233

705,770

199,880

1,3546,641980

1.2.3316.23912.676

4026,2306,141555777

1,2482,9421,854

28.8461,558

103.14352

7,009

27.176

343,8208,924

89,3798,782

21,696145,4717.9136,945

01,311886424

19,51817.8384.3643,491629

2,1294.120

125,024

1.579921

13.9902,2002.634768

59,54018,1231,6892,25910,79010,531

3,5302475118050

1,212755

6.3405.2991.041

2,463

703,148

700,231

204,7631,9175,7141,5311,492

21.47410,849

5046.6555,384989655

1,2976,9261,736

28,5151.648

99,30253

8,122

25,155

345,7879,076

90.8239.385

22.541145.9357.9106.733

01,390863410

20,51516.0264.0743.413588

2,2573.848

114,415

2,534847

14.5482,2992.361946

52,90414,4291,7942,1649,13310,456

3,580279498694

01,324785

6.5315.4191,112

2,917

703,808'

701,053'

212,249'1,9346,021907

1,55418,96310,752

5045,9745,4471,296533

1,1436,2552,184

29,006'1,675

110,30753

7,741

24,872

345,639'9,402

84,9828,917

23.987149.516'8.2496,729

01,198868401

21.10715.5944.2323.550594

2,3343.779

108,927

1,988820

13,4772,1722.266987

51,89112,7411,6452,1389,1019.701

3 403304514573

01.219793

5.9635.139824

2.755

687,571

684,623

205,5251,5666,145895

1,68618,20613,047

5036,6016,618850589

1,1155.7782,798

31,3061.914

97,58861

8.259

29,827

338.8578,726

77,5338,997

25.283147,9108.1716.783

01,476904364

20,68017,6184,1083,538920

2,1693,677

101,331

2,762740

12,6081,9272.289812

46,66011,5201,8132,1448,9219,135

3 567289518559

01.364837

5,5165,011505

2,948

701,266

697,973

208,4971,8275,527968

1.01817,18216,730

4426,9385,851662935

1,1537,4382,975

25,0672,324

103,27459

7.927

25,784

354,2538,540

82.6599,46226.140159,5348,4496.772

01.522955385

20,90714,0734.4223,644773

2.1943.822

99.121

2.965895

10.1291.8072.212874

44.93910.8521.5221,971

1 1.0289.927

1310294483490

01,194869

6,9886,513475

3,293

1. Reporting banks include all types of depository institutions as well as some brokers anddealers.

2. Since December 1992, has excluded Bosnia, Croatia, and Slovenia.3. Includes the Bank for International Settlements. Since December 1992. has included all

parts of the former U.S.S.R. (except Russia), and Bosnia, Croatia, and Slovenia.

4. Comprises Bahrain. Iran. Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and United ArabEmirates (Trucial States).

5. Comprises Algeria, Gabon, Libya, and Nigeria.6. Excludes the Bank for International Settlements, which is included in "'Other Europe."



3.19 BANKS' OWN AND DOMESTIC CUSTOMERS' CLAIMS ON FOREIGNERSPayable in U.S. DollarsMillions of dollars, end of period


Type of claim

1 Total

2 Banks' claims3 Foreign public borrowers4 Own foreign offices2

5 Unaffiliated foreign banks6 Deposits7 Other8 All other foreigners

9 Claims of banks' domestic customers1

11 Negotiable and readily transferableinstruments4

12 Outstanding collections and otherclaims

MEMO13 Customer liability on acceptances

14 Dollar deposits in banks abroad, reported bynonbanking business enterprises in theUnited States5

1995

655,211

532,44422,518

307,427101,59537,77163.824

100,904

122,76758,519

44,161

20,087

8,410

30,717

1996

743,919

599,92522,216

341,574113,68233,82679,856

122,453

143,994

77,657

51,207

15.130

10,388

39,661

1997

857,967

708,23320,660

431,685109,22431,04278,182

146,664

149,73473,110

53,967

22,657

9,624

34,046'

1997

Oct.

681,28729,795

400,207115,09531,71183,384

136,190

39,091'

Nov.

699,09527,739

409.314122,35033.85088.500

139.692

37,541'

Dec.

857,967

708,23320,660

431,685109,22431,04278.182

146,664

149,73473,110

53,967

22,657

9,624

34,046'

1998

Jan.

703,14830,184

415,690111,01530,76880,247

146,259

35,831'

Feb.'

703,80827,041

421,633106,57726,55980,018

148,557

36,615

Mar.

842,384

687.57128.226

402,367107,75025,60582,145

149,228

154,81385,406

51,594

17,813

7,496

32.028

Apr.p

701,26632,840

411,514104,12524.29679,829

152,787

31.789

1. For banks' claims, data are monthly; for claims of banks' domestic customers, data arefor quarter ending with month indicated.

Reporting banks include all types of depository institution as well as some brokers anddealers.

2. For U.S. banks, includes amounts due from own foreign branches and foreign subsidiar-ies consolidated in quarterly Consolidated Reports of Condition filed with bank regulatoryagencies For agencies, branches, and majority-owned subsidiaries of foreign banks, consists

principally of amounts due from the head office or parent foreign bank, and from foreignbranches, agencies, or wholly owned subsidiaries of the head office or parent foreign bank.

3. Assets held by reporting banks in the accounts of their domestic customers.4 Principally negotiable time certificates of deposit, bankers acceptances, and commercial

paper5. Includes demand and time deposits and negotiable and nonncgotiable certificates of

deposit denominated in US. dollars issued by banks abroad.

3.20 BANKS' OWN CLAIMS ON UNAFFILIATED FOREIGNERSPayable in U.S. Dollars


Reported by Banks in the United States1

Maturity, by borrower and area 1995 1996

Sept. Mar.p

1 Total

fly borrower2 Maturity of one year or less . .3 Foreign public borrowers . . . .4 All other foreigners5 Maturity of more than one year .6 Foreign public borrowers7 All other foreigners

8910II1213

141516171819

y areaMaturity of one year or less

EuropeCanadaLatin America and Caribbean..AsiaAfricaAll other5

Maturity of more than one yearEuropeCanadaLatin America and Caribbean.AsiaAfricaAll other3

202,282

170,41115,435

154,97631,8717,838

24,033

56,3816,690

59,58340,567

1,3795,811

4,3583,505

15,7175,3231,5831,385

224,932

178,85714.995

163.86246,075

7.52238.553

55,6226,751

72,50440,296

1,2952,389

4,9952,751

27,6817,9411,4211.286

258,106

211,85915.411

196,44846,247

6,79039.457

55.6908.339

103,25438.078

1,3165,182

6,9652,645

24,9439.3921.361

941

272,014

210,88217.979

192,90361,13211,40649,726

69,23310,38187,05938,435

1,8993,875

11,8843,174

31,00112,5091,2641,300

280,968

217,94920.123

197.82663.019

8,75254.267

69,2048,460

99,91834,629

2,1573,581

11,2023,842

34,98810,393

1,2361.358

276,558

205,85912,134

193.72570.699

8.52562.174

58.2949.917

97,27733,9722,2114.188

13,2402,512

42,06910,1591,2361,483

285,440

214,77716,945

197,83270,66311,31259,351

69,2459,304

100,95828,746

2,2394.285

15.1182,752

39,33810,708

1,2431,504

1. Reporting banks include all types of depository institutions as well as some brokers anddealers.

2. Maturity is time remaining until maturity.3. Includes nonmonetary international and regional organizations.


3.21 CLAIMS ON FOREIGN COUNTRIES Held by U.S. and Foreign Offices of U.S. Banks1



Area or country

Mar. June Sept. Dec. Sept.

1998

1 Total

2 G-10 countries and Switzerland3 Belgium and Luxembourg4 France5 Germany6 Italy7 Netherlands8 Sweden9 Switzerland

10 United Kingdom11 Canada12 Japan

13 Other industrialized countries .14 Austria

DenmarkFinlandGreeceNorwayPortugalSpainTurkeyOther Western EuropeSouth AfricaAustralia

25 OPEC"26 Ecuador

Venezuela282930

31 Non-OPEC developing countries .

Indonesia .Middle East countriesAfrican countries

394041424344454647

Latin AmericaArgentinaBrazilChileColombiaMexicoPeruOther

AsiaChina

MainlandTaiwan

IndiaIsraelKorea (South)MalaysiaPhilippinesThailandOther Asia

AfricaEgyptMoroccoZaireOther Africa3

52 Eastern Europe..53 Russia4

54 Other

55 Offshore banking centers56 Bahamas57 Bermuda

Cayman Islands and other British West Indies5859606162636465 Miscellaneous and unallocated7 .

Netherlands Antilles . . .Panama5

LebanonHong Kong, ChinaSingaporeOther*. ..

499.5

191.27.2

19.124.711.83.62.75.1

85.810.021.1

45.71.11.3.9

4.52.01.2

13.61.63.21.0

15.4

24.1.5

3.73.8

15.3.9

96.0

11.28.46.12.6

18.4.5

2.7

1.19.24.2

.416.23.13.32.14.7

2.7.8

1.9

72.910.28.4

21.41.61.3.1

20.010.1

.166.9

551.9

206.013.619.427.311.53.72.76.7

82.410.328.5

50.2.9

2.6.8

5.73.21.3

11.61.94.71.2

16.4

22.1.7

2.74.8

13.3.6

112.6

12.913.76.82.9

17.3

1.89.44.4

.519.14.44.14.94.5

.4

.7

.0

.9

4.21.03.2

99.211.06.3

32.410.31.4.1

25.013.1

.157.6

574.7

203.411.017.931.513.23.13.35.2

84.710.822.7

61.31.33.4.7

5.62.11.6

17.52.03.81.7

21.7

21.2.8

2.94.7

12.3.6

118.6

12.718.36.42.9

16.1.9

3.1

3.39.74.7

.519.35.23.95.24.3

6.31.44.9

101.313.95.3

28.811.1

1.6.1

25.315.4

.162.6

612.8

226.911.418.031.414.94.72.76.3

101.612.223.6

55.51.23.3

.65.62.31.6

13.62.33.42.0

19.6

20.1.9

2.34.9

11.5.5

126.5

14.121.76.72.8

15.41.23.0

2.99.84.2

.621.75.34.75.44.8

5.11.04.1

106.117.34.1

26.113.2

1.7.1

27.615.9

.172.7

586.2

220.011.317.433.915.25.93.06.3

90.514.821.7

62.11.01.7.6

6.13.01.4

16.12.84.81.7

22.8

19.2.9

2.35.4

10.2.4

15.017.86.63.1

16.31.33.0

2.610.43.8

.521.9

5.55.44.84.1

.67.0

1.0

5.31.83.5

105.214.24.0

32.011.71.7.1

26.015.5

.150.0

645.3

228.311.716.629.816.04.02.65.3

104.714.023.7

65.71.11.5.8

6.78.0

.913.22.74.72.0

24.0

19.7II2.45.2

10.7.4

14.320.77.04.1

16.21.63.3

2.510.34.3

.521.56.05.85.74.1

.7

.7

.1

.9

6.93.73.2

134.720.34.5

37.226.12.0.1

27.916.7

.159.6

688.4

255.915.221.534.016.44.63.46.1

112.717.025.1

67.42.01.7.7

6.35.31.0

15.02.86.31.9

24.5

22.11.12.05.0

13.3.7

131.9

14.922.7

7.13.9

17.91.73.6

2.710.54.91.0

14.96.56.16.84.4

.9

.6

.0

.9

9.03.65.4

142.521.16.7

41.220.0

2.2.1

30.920.3

.159.6

718.7

274.010.819.335.123.17.13.65.5

119.917.532.1

72.71.62.81.46.14.71.2

16.23.45.51.9

27.8

22.51.02.15.7

12.61.2

144.8

16.928.37.93.6

17.41.63.7

3.610.65.31.1

16.66.47.07.34.8

1.1.7.0.9

7.24.23.0

140.017.27.9

43.115.92.7

I35.217.7

.357.6

747.8

268.412.521.637.322.47.74.14.9

115.915.826.2

74.71.83.71.96.24.61.4

14.64.46.11.9

28.1

23.21.32.36.6

11.81.2

141.4

17.527.48.33.6

17.12.03.8

4.39.75.01.5

16.55.65.76.24.6

.9

.7

.0

.9

9.95.14.7

149.620.5

9.852.121.8

2.3.1

27.315.9

.1

764.9

261.611.517.632.417.56.73.37.2

119.914.031.6

65.51.52.41.35.13.61.1

12.34.58.22.2

23.2

26.31.32.66.8

14.41.2

143.7

18.829.99.23.7

18.32.14.3

3.29.05.01.2

15.95.15.75.44.4

9.25.14.0

159.431.19.8

51.514.73.4.1

32.316.7

.199.1

I. The banking offices covered by these data include U.S. offices and foreign branches ofU.S. banks, including U.S. banks that are subsidiaries of foreign banks. Offices not coveredinclude U.S. agencies and branches of foreign banks. Beginning March 1994, the data includelarge foreign subsidiaries of U.S. banks. The data also include other types of U.S. depositoryinstitutions as well as some types of brokers and dealers. To eliminate duplication, the dataare adjusted to exclude the claims on foreign branches held by a U.S. office or another foreignbranch of the same banking institution.

These data are on a gross claims basis and do not necessarily reflect the ultimate countryrisk or exposure of U.S. banks. More complete data on the country risk exposure of U.S. banksare available in the quarterly Country Exposure Lending Survey published by the FederalFinancial Institutions Examination Council.

2. Organization of Petroleum Exporting Countries, shown individually; other members ofOPEC (Algeria, Gabon, Iran, Iraq. Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, and UnitedArab Emirates); and Bahrain and Oman (not formally members of OPEC).

3. Excludes Liberia. Beginning March 1994 includes Namibia.4. As of December 1992, excludes other republics of the former Soviet Union.5. Includes Canal Zone.6. Foreign branch claims only.7. Includes New Zealand, Liberia, and international and regional organizations.



3.22 LIABILITIES TO UNAFFILIATED FOREIGNERS Reported by Nonbanking Business Enterprises inthe United States


Type of liability, and area or country 1996

Sept. Sept.

1 Total

2 Payable in dollars3 Payable in foreign currencies

By type4 Financial liabilities5 Payable in dollars6 Payable in foreign currencies

7 Commercial liabilities8 Trade payables9 Advance receipts and other liabilities

10 Payable in dollars11 Payable in foreign currencies

By area or countryFinancial liabilities

12 Europe13 Belgium and Luxembourg14 France15 Germany16 Netherlands17 Switzerland18 United Kingdom

19 Canada

20212223242526

272829

Latin America and CaribbeanBahamasBermudaBrazilBritish West Indies . . .MexicoVenezuela

AsiaJapanMiddle Eastern oil-exporting countries

30 Africa

31 Oil-exporting countries

32 All other1

Commercial liabilities33 Europe34 Belgium and Luxembourg35 France36 Germany37 Netherlands38 Switzerland39 United Kingdom40 Canada

41 Latin America and Caribbean42 Bahamas43 Bermuda44 Brazil45 British West Indies46 Mexico47 Venezuela

48 Asia49 Japan50 Middle Eastern oil-exporting countries1. . .

51 Africa52 Oil-exporting countries

53 Other3

54,309

38,29816,011

32,95418,81814,136

21,35510,00511,350

19,4801,875

21,703495

1,7271,961552688

15,543

629

2,03410180

207998

05

8.4037,314

35

135123

6,773241728604722327

2,444

1.037

1.85719

34516123

574276

10,7414,5551,576

428256

46,448

33,90312,545

24,24112,90311,338

22,20711,01311,194

21,0001.207

15,622369999

1,974466895

10,138

632

1,7835914757866122

5,9885,436

27

150122

7,700331481767500413

3,568

1,040

1,7401

2059856

416221

10,4213.3151.912

619254

54,798

38,95615,842

26,06511,32714,738

28,73312,72016,013

27,6291,104

16,195632

1,0911,834556699

10,177

1.401

1,6682365078

1,030171

6,4235,869

25

380

9.767479680

1,002766624

4,303

1,090

2,5746329719614

665328

13,4224,6142.168

1,040532

51,604

36,37415,230

25.44511,27214,173

26,15911,79114,368

25,1021,057

16,086547

1,2202,276519830

9.837

973

1,169502552

764131

6,9696,602

25

15312)

8,680427657949668405

3,663

1,144

2.38633

35519815

446341

12,2274,1491,951

1,020490

54,798

38,95615,842

26,06511,32714,738

28,73312,72016,013

27,6291.104

16,195632

1,0911,834556699

10,177

1,401

1,6682365078

1,030171

6,4235,869

25

380

340

9,767479680

1,002766624

4,303

1,090

2,5746329719614

665328

13,4224,6142,168

1,040532

58,667'

39,861'18,806

29,63311,84717,786

29,034'11,432'17,602

28,014'1.020

20,081769

1,2051,589507694

13,863

602

1,8762932775

96516I

6,3705,794

72

290

9,524'639'679'

1,043'551'480'

4,158'

1,068

2,562'43

479200'14

633318

13,915'4,465'2,495

1,037479

928'

55,J41r

38,651'16,690

27.103'11,442'15,661

28,238'

17,198

27,209'1,029

18,530238

1,2801,765466591

12,968

456

1,285'1245597

775r

15I

6,248'5,668'

39

290

8,683'736'708'845'288'429'

3,818'

1,136

2,500'33

39722526594304

13,875'4,430'2.420

941423

1,103'

55,639r

39,746'15,893

26,209'11,487'14,722

29.430'10,885'18.545

28,259'1,171

18,01989

1,3341,730507645

12,165

399

1,067'106452

6691

761

6,239'5,725'

23

330

9,343'703'782'945'452'400'

3,829'

1,150

2,224'3818023323

562322

14,628'4,553'2,984

929504

1,156'

58,295

41,88816,407

27,79012,97514,815

30,50510,90419,601

28,9131,592

19.121186

1.6842,018494776

12,201

1,186

1,386141229143604261

5,3945,085

32

600

10,228666764

1,274439375

4,086

1,175

2,17616

20322012

565261

14,9664,5003,111

874408

1,086

1. Comprises Bahrain. Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and United ArabEmirates (Tnicial States).

2. Comprises Algeria. Gabon, Libya, and Nigeria.3. Includes nonmonetary international and regional organizations.


Nonbank-Reported Data A59

3.23 CLAIMS ON UNAFFILIATED FOREIGNERSthe United States


Reported by Nonbanking Business Enterprises in

1

23

456789

10

1213

1415

16171819202122

23

24252627282930

313233

3435

36

37383940414243

44

45464748495051

525354

5556

57

Type of claim, and area or country

Total

Payable in dollarsPayable in foreign currencies

By lypeFinancial claims

DepositsPayable in dollarsPayable in foreign currencies

Other financial claimsPayable in dollarsPayable in foreign currencies

Commercial claimsTrade receivablesAdvance payments and other claims

Payable in dollarsPayable in foreign currencies

By aren or toiinrn'Financial claims

EuropeBelgium and LuxembourgFianceGermanyNetherlandsSwitzerlandUnited Kingdom

Canada

Latin America and CaribbeanBahamasBermudaBrazilBritish West IndiesMexicoVenezuela

AsiaJapanMiddle Eastern oil-exporting countries1

Africa . . .Oil-exporting countries

All other^

Commercial claimsEurope

Belgium and LuxembourgFranceGermanyNetherlandsSwitzerlandUnited Kingdom

Canada

Latin America and CaribbeanBahamasBermudaBrazilBritish West IndiesMexicoVenezuela

AsiaJapanMiddle Eastern oil-exporting countries'

AfricaOil-exporting countries2

Other'

1994

57.888

53.8054,083

33,89718,50718,026

48115,39014,306

1,084

23,99121,158

2,833

21,4732,518

7.93686

800540429523

4.649

3,581

19,5362.424

27520

15.228723

35

1.871953141

3730

600

9.540213

1.8811,027

311557

2.556

1.988

4,1179

234612

831,243

348

6,9822,655

708

45467

910

1995

52,509

48,7113.798

27,39815,13314,654

47912,26510,976

1.289

25,11122,998

2,113

23,0812,030

7,609193803436517498

4,303

2,851

14,5001.965

81830

10,393554

32

1,579871

3

2765

583

9.824231

1.8301.070

452520

2.656

1,951

4,36430

272898

79993285

7,3121,870

974

65487

1,006

1996

63.642

58.6305.012

35.26821,40420,631

77313.86412.069

1.795

28.37425,751

2,623

25,9302 444

9.282185694276493474

6.119

3,445

19.5771.452

1401,468

15,182457

31

2,2211,035

22

17414

569

10 443226

1.6441,337

562642

2.946

2.165

5,27<i35

2751.303

1901,128

357

8.3762.003

971

746166

1.368

Sept.

59,092

55,0144,078

34,20019,87719,182

69514,32312,2342.089

24,89222,454

2.438

23.5981,294

9,777126733272520432

6,603

4.502

17,2411,746

1131,438

12.819413

20

1,8341,001

13

17713

669

9.288213

1,5321.250

424594

2,516

2,083

4,40914

290968119936316

7,2891,919

945

731142

1,092

1996

Dec.

63.642

58.6305.012

35,26821,40420,631

77313.86412.069

1.795

28.37425.751

2,623

25.9302.444

9 282185694276493474

6,119

3,445

19.5771.452

1401.468

15.182457

31

2.2211,035

22

17414

569

10,443226

1,6441,337

562642

2.946

2.165

5.27635

2751.303

1901.128

357

8.3762,003

971

746166

1,368

Mar.

68,102'

62,126'5,976

40,547'22,150'20,499'

1,65118,39715,3813,016

27,55524,801

2.754

26,2461,309

13,076'119760324567570

9.837'

4.917

19,7421,894

1571,404

15,176517

22

2,068831

12

18214

562

9,863364

1,5141,364

582418

2,626

2,381

5,06740

1591,216

1271,102

330

8,3482,0651,078

718100

1.178

June

68,266'

62,082'6,184

40,717'24,106'22,615'

1,49116,611'13,354'3,257

27,54924,858

2,691

26,1131,436

12,904'203680281519447

9.814'

6.422

18.7252.064

1881.617

13,553497

21

1,934766

20

17915

553

9,603327

1,3771,229

613389

2,836

2,464

5,24129

1971,136

981,140

451

8.4602.0791.014

61881

1.163

1997

Sept.

70,760'

64,144'6,616

42,059'23,951'22,392'

1,55918,10814,7953,313

28,70125,110

3.591

26.9571,744

15,862'360

1,112352754448

11.254'

4.279

19.176'2.442

1901,501

12,957'508

15

2.015999

15

17416

553

10.486331

1,6421,395

573381

2,904

2.649

5,02822

1281,101

981.219

418

8,5762,048

987

764207

1,198

Dec.

70,077

62,1737,904

38,90823,13921,290

1,84915,76911,5764,193

31,16927.536

3.633

29.3071.862

16,948406

1.015427677434

12.286

3,313

15.5432.459

1081,313

10.311537

36

2.133823

11

31915

652

12.120328

1,7961,614

597554

3.660

2,660

5.75027

2441,162

1091.392

576

8.7131,9761.107

680119

1,246

I. Comprises Bahrain, Iran, Iraq, Kuwait. Oman, Qatar, Saudi Arabia, and United ArabEmirates (Trucial States).

2. Comprises Algeria, Gabon, Libya, and Nigeria,3. Includes nonmonetary international and regional organizations.



3.24 FOREIGN TRANSACTIONS IN SECURITIES

Millions of dollars

Transaction, and area or country 1996Jan.-Apr. Nov. Dec. Feb. Mar. Apr.p

U.S. corporate securities

STOCKS

1 Foreign purchases

2 Foreign sales

3 Net purchases, or sales (—)

4 Foreign countries

5 Europe6 France7 Germany8 Netherlands1 Switzerland

10 United Kingdom11 Canada12 Latin America and Caribbean13 Middle East1

14 Other Asia15 Japan16 Africa17 Other countries18 Nonmonetary international and

regional organizations . . . .

BONDS2

590.714578.203

12,511

12,585

5,367-2,402

1,1041,4152,7154,4782,2265,816

-1.600918

-372-85-57

19 Foreign purchases

20 Foreign sales

21 N e t p u r c h a s e s , o r s a l e s ( - ) . . .

2 2 Foreign countries

23 Europe24 France25 Germany26 Netherlands27 Switzerland28 United Kingdom29 Canada30 Latin America and Caribbean . .31 Middle East1

32 Other Asia33 Japan34 Africa35 Other countries36 Nonmonetary international and

regional organizations . . .

37 Stocks, net purchases, or sales (—)38 Foreign purchases39 Foreign sales40 Bonds, net purchases, or sales ( - )41 Foreign purchases42 Foreign sales

43 Net purchases, or sales (—), of stocks and bonds

44 Foreign countries

45 Europe46 Canada47 Latin America and Caribbean48 Asia49 Japan50 Africa51 Other countries

52 Nonmonetary international andregional organizations

393,953268,487

125,466

125,295

77,5704,4604.4392.1071,170

60,5094,486

17,7371.679

23,76214,173

624-563

171

-59,268450,365509,633-51,369

1,114,035

1,165.404

-110,637

-109,766

-57,139-7,685

-11,507-27,831

-5.887-1.517-4,087

-871

963,885897,850

66,035

66,175

59,0413,1349,0753,8337,845

22,215-1.174

5,264171

2,0614,780

471341

-140

614,253477,786

136,467

135,875

74,301

3,3002,7423,576

18756,8046,264

34,8211,656

17,0179,3541,005

811

434,953401.620

33,333

33,400

32,9802,4373.3941.4714,74511,343-92

3,251-263

-2,255-2,646

258-479

-67

270,734196,655

74,079

73,633

44,678

1,1062.132650

2,55434,0602,28617,9431,4896,1653,582151921

446

106,673105,668

1,005

1,023

5,910-80538757848

i 444

-520-4,091

78-5082298074

58,46244,435

14,027

13,500

3,598

142120369

-1092,611866

3,712-1835,6345,207

II-138

85,14980,133

5,016

5,024

5,318

-65857579

1,0431,875-344-627

15888709-36-190

52,63248,772

3,860

3,948

2,395

546165185712

-104459

3.884199

-3,193-2.883

88116

90.99485,670

5,324

5,358

5,832

299788409

1,4741,232-304

-1,22421

1,0715517

-45

52,48443,171

9,313

9,302

4,575

-67-474425733

3,069677

7,220142

-3,526-3,764

49165

90,10683,839

6,267

6,319

6.637

665546613683

2,755-2542,646-166

-2,693-1,112

34115

57,47944,334

13,145

13,113

5,41674289

-433760

4,1631,4095,339

78485

-958142244

32

99,164'89,137'

10,027'

10,017'

9,625

492768140

1,1324.588-459'2,184-273-944-667

13-129

10

67,41449,991

17,423

17,354

8,249272419199266

6,243114

5,512820

2,42888636195

69

124.730111,960

12,770

12,774

10,499

831627557

1,9563,406566

2,110-171-201

-1,42283

-112

69,75850,174

19,584

19,445

12,374727249364358

9,538400

4,835522

1,174750-72212

139

Foreign securities

-40,243719,145759,388-47,2411,466,784

1,514.025

-87,484

-87,428

-28,060

-3,794-25,043-24,972-10.014-3.296-2.263

-56

-2,801292,881295,682-13,108447.759460,867

-15,909

-15,786

- 9 3 0

-592-3,759-9,596-1.945

-739-170

- 1 2 3

-2,82079,54982,369

-739163,626164,365

- 3 4 5 9

-3,394

-5,227412

1,899889

1.828-1,027

-340

-165

2,04570,28668,241-4.468111,000115,468

-2,423

-2J75

-2,528557

-2 ,1601,6842.261-380

452

1,54164,32862,787-3,062115,302118,364

-1,521

-1,435

909

-78-2,918

9361,862-74-210

-86

15662,33362,177-3,72595,48199,206

-3,569

-3,480

-3,963

842829

-1,119-413-114

45

-1,211'68,620'69,831'-2,691'102,429'105,120'

-3,902'

-3,860'

-1,821'

600"510'

-3,098'-1,831'

-151'100'

-42

-1,59681,34282,9382,797

132,741129,944

1,201

1,229

-1,561569

-2,598-1,732-169100

-28

120.953116.684

4,269

4,290

6,219449

1,45316197459455

-3,689347

1,583555128

-353

-21

76,08352,156

23,927

23,721

18,63933

1,175520

1,17014,116

3632,257

692,0782,904

45270

206

-15080,58680.736-9,489117,108126,597

-9,639

-9,675

-34

-473-5,667-2,7812,031-305-415

36

1. Comprises oil-exporting countries as follows: Bahrain, Iran, Iraq, Kuwait, Oman, Qatar,Saudi Arabia, and United Arab Emirates (Trucial States).

2. Includes state and local government securities and securities of U.S. governmentagencies and corporations. Also includes issues of new debt securities sold abroad by U.S.corporations organized to finance direct investments abroad.


Securities Holdings and Transactions/Interest and Exchange Rates A61

3.25 MARKETABLE U.S. TREASURY BONDS AND NOTES Foreign Transactions1

Millions of dollars; nel purchases, or sales ( —) during period

Area or countryJan.-Apr. Nov. Apr.P

1 Total estimated

2 Foreign counlries

3 Europe

4 Belgium and Luxembourg5 Germany6 Netherlands7 Sweden8 Switzerland9 United Kingdom

10 Other Europe and former U.S.S.R11 Canada

12 Latin America and Caribbean13 Venezuela14 Other Latin America and Caribbean15 Netherlands Antilles16 Asia17 Japan18 Africa19 Other

20 Nonmonetary international and regional organization;21 International22 Latin American regional

MEMO23 Foreign countries24 Official institutions25 Other foreign

Oil-exporting countries26 Middle East2

27 Africa'

232,241

234.083

118,7811,429

17.980-5822.242

32865,65831,726

2,331

20.785-69

8,43912,41589,73541,366

1,0831.368

-1,842-1.390

-779

234,08385,807

148.276

10,2321

183,596

183,179

144.9203,427

22,4711,746-4656,028

98,25313.460

-811

-2.541655

-536-2 ,66039,04720,360

1,5231,041

417552173

183,17943,379

139.800

7,116-13

17,360

16.721

30.7061,0951,079

-1,992-1503,796

19,8347,0441.205

-17.K6O-13

4,017-21,864

4,211413269

-1.810

639316

25

16,7217,6029.119

16,858

17,094

23,102357

4,847334302690

18,779-2.207

-730

-1 .434107

-3,7232.182

-5,3944.160

451,505

-236-74

78

17,094-12,848

29,942

-3,8770

15,909

15.489

10,158384

5,255375

- 6 71.3955,640

-2.824730

6.512397

-7236.838

-1,002-4,784

-82-827

420451-24

15.4891.831

13,658

3,1750

-9,398

-7,788

-37161

3,052-1,525

- 1 2 42.847

-1.792-2.656-2,132

3.737- 3 6

2.4851,288

-10.359-7.860

268735

-1 ,610-1,025

-131

-7,788-367

-7,421

-1,5060

5,512

4,990

18,215304

-1,085403

822.419

11,8794,213

-3,6194

1,711-5,334-8,757-6,484

-4.3-805

522445

32

4.990-1,189

6,179

-2,4111

9.957

10.091

6.798252

1.096-792-4301,6905.875-893

266

2.12397

2,949-9231,348

764176

- 620

-134-223-29

10,0911,2428,849

4090

-4,091

-5.287

-857704

1.897-1.733

400170

-3,7051,410-517

-8,383-128

- I I-8,244

3,522-168

154794

1,196900

10

-5,2876,033

-11,320

1,3250

5.982

6,927

6,550-165-829

130-202-4835 7852.3141.457

-7.98114

-632-7,363

8 0986,301

-18-1 .179

-945-806

i:

6.9271.5165,411

- 2030

1. Official and private transactions in marketable U.S. Treasury securities having anoriginal maturity of more than one year. Data are based on monthly transactions reports.Excludes nonmarketable U.S. Treasury bonds and notes held by official institutions of foreigncountries.

2, Comprises Bahrain, Iran. Iraq, Kuwait, Oman, Qatar. Saudi Arabia, and United ArabEmirates (Trucial States)

3. Comprises Algeria, Gabon, Libya, and Nigeria

3.26 DISCOUNT RATES OF FOREIGN CENTRAL BANKS1

Percent per year, averages of daily figures

Country

AustriaBelgiumCanadaDenmarkFrance2

Rate on June 30, 1998

Percent

2.52.755.03.753.3

Montheffective

Apr. 1996Oct. 1997Jan. 1998May 1998Oct. 1997

Country

GermanyItalyJapanNetherlandsSwitzerland

Rate on June 30, 1998

Percent

2.55,0

,52,51.0

Montheffective

Apr. 1996Apr. 1998Sept. 1995Apr 1996Scpl 1996

1. Rates shown are mainly those at which the central bank eiiher discounts or makesadvances against eligible commercial paper or government securities for commercial banks orbrokers. For counlries with more than one rate applicable to such discounts or advances, therate shown is the one at which it is understood that the central bank transacts the largestproportion of its credit operations.

2. Since February 1981, the rate has been that at which the Bank of France discountsTreasury bills for seven to ten days.

3.27 FOREIGN SHORT-TERM INTEREST RATES1

Percent per year, averages of daily figures

Type or country

2 United Kingdom3 Canada4 Germany

6 Netherlands7 France8 Italy

10 Japan

1995

5.936.637.144.432,944.306.43

10.434.731.20

1996

5.385.994.493.211,922.913.818.793.19

58

1997

5.616.813.593.241.583.253.356.863.40

.58

1997

Dec.

5,797.604.613.671.563.613.576.073 61.78

1998

Jan.

5.537.494.683.511.273.423.506.053.47

.77

Feb.

5.537465.023.45.98

3.363.456.123.53

.84

Mar.

5.567,474,933.441.063.423.455.593.61

.74

Apr.

5.567.414.943.561.393.523.505.093.69

.66

May

5.577 375.093.551.523.533.504.983.67

.56

June

5.577.615.103.49LSI3.513.474.993.62

57

1. Rates are for three-month interbank loans, with the following exceptions; Canada,finance company paper; Belgium, three-month Treasury bills; and Japan, CD rale.



3.28 FOREIGN EXCHANGE RATES'

Currency units per dollar except as noted

Counlry/eurreiKy unit

1 Australia/dollar2 Austria/schilling3 Belgium/franc4 Canada/dollar5 China, P.R./yuan6 Denmark/krone7 Finland/markka8 France/franc9 Germany/deulsche mark

10 Greece/drachma

11 Hong Kong/dollar12 India/rupee. . s13 Ireland/pound"14 Italy/lira15 Japan/yen16 Malaysia/ringgit17 Netherlands/suiilder18 New Zealand/dollar2

19 Norway/krone20 Portugal/esiudo

21 Singapore/dollar22 South Africa/rand23 South Korea/won24 Spain/peseta25 Sri Lanka/rupee26 Sweden/krona27 Switzerland/franc28 Taiwan/dollar29 Thailand/baht30 United Kingdom/pound2

MEMO.31 United States/dollar1

[995

74.07310.07620.472

1 37258.37005.59994.37634.98641.4321

231.68

7 735732.418

160.351,629.45

93.96150731.6044

65.6256.3355

149.88

1.41713.6284

772.69124.6451.047

7.14061.1812

26.49524.921

157.85

84.25

1996

78.28310.5S910.970

1.3638S33S95 80034.59485.11581.5049

240.82

7.734535 506

159.951.542.76

108.782.51541.6863

68.7656.4594

154.28

1.41004.3011

805.00126.6855.289

6.70821.2361

27.46825.359

156.07

87.34

1997

74.36812.206.15.807

1.38498.31936.60925.19565.81931.7148

273.28

7.743136.365

151.631,703.81

121 062.81731.9525

66.2477.0857

175.44

1.48574.6072

950.77146.5359.026

7.64461.4514

28.77531.072

163.76

96.38

1998

Jan.

65.65912.76537.536

1.44098.30946.91905.50066.08321.8165

287.24

7.742539.391

138.191,787.87

129554.40932 0472

57.9257.5007

185.80

1.74774.9417

1,707.30153.9362.281

8.01931.4748

34.11752.983

163.50

100.52

Feb.

67.43612.73537.417

1.43348.30726.90895.49996.07441.8123

286.70

7.741239.008

137.711.788.28

125.853.81482.0432

58.2867.5530

185.54

1.65094.9337

1.628.42153.6162.363

8.07231.4631

32.94845.987

164.08

99.93

Mar.

66.96312.85237.699

1.41668.30766.96615.54676.12571.8272

306.05

7.745839.569

136.721,799.07

129.083.74562.0598

57.2617.5833-

187.03

1.61884.9746

1.489.36154.9562.083

7.96771.4901

32.52441.366

166.19

100.47

Apr.

65.23112.76037.424

1.42988.30586.91745.50536.07821.8132

315.82

7 749739.703

138.941.791.24

131.753.73762.0422

55.3397.5315

185.81

1.60075.0459

1.391.551539962 903

7.82381.5051

33.01639.654

167.23

100.30

May

63 12412.49136.624

1.44528.30846 7662539665.95281 7753

307.22

7.749040.469

141 741.750.79

134.901.82042.0005

53.8767.4539

181.87

1 63745.0927

1.399.05150.8164.261

7.70261.4790

33.46639.198

163.82

99.61

June

60.45612.61536.981

1.46558.31006.82945.45036.01181.7928

304 24

7.747142.367

140.511,766.32

140.334.00062.O2OS

51.2317.5785

183.58

1.69415.3910

1,397.77152 1865.150

7.91741.4949

34.55342.332

165.04

100.90

1. Averages of certified noon buying rates in New York for cable transfers. Data in thistable also appear in the Board's G.5 (405) monthly statistical release. For ordering address,see inside from cover.

2 Value in US. cents.

3. Index of weighted-average exchange value of U.S. dollar againindustrial countries. The weight for each of the ten countries is the 1972-76 average worldtrade of that country divided by the average world trade of all ten countries combined. Seriesrevised as of August 1978 (see Federal Reserve Bulletin, vol. 64 (August I97X), p. 700).

nst the currencies of ten1972-76 average world


A63

Guide to Statistical Releases and Special Tables

STATISTICAL RELEASES—List Published Semiannually, with Latest Bulletin Reference

Issue PageAnticipated schedule of release dates for periodic releases June 1998 A72

SPECIAL TABLES—Data Published Irregularly, with Latest Bulletin Reference

Title and Date Issue Page

Assets and liabilities of commercial banksJune 30, 1997 November 1997 A64September 30, 1997 February 1998 A64December 31, 1997 May 1998 A64March 31, 1998 August 1998 A64

Terms of lending at commercial banksAugust 1997 November 1997 A68November 1997 February 1998 A68February 1998 May 1998 A66May 1998 August 1998 A67

Assets and liabilities of U.S. branches and agencies of foreign banksJune 30, 1997 November 1997 A72September 30, 1997 February 1998 A72December31, 1997 May 1998 A70March 31, 1998 August 1998 A72

Pro forma balance sheet and income statements for priced service operationsJune 30, 1997 October 1997 A68September 30, 1997 January 1998 A64March 31, 1998 July 1998 A64

Residential lending reported under the Home Mortgage Disclosure Act1994 September 1995 A681995 September 1996 A681996 September 1997 A68

Disposition of applications for private mortgage insurance1996 September 1997 A76


A64 Special Tables • August 1998

4.20 DOMESTIC AND FOREIGN OFFICES Insured Commercial Bank Assets and LiabilitiesConsolidated Report of Condition, March 31, 1998


Domestictotal

Banks with foreign offices Banks with domesticoffices only2

1 Total assets3

2 Cash and balances due from depository institutions3 Cash items in process of collection, unposted debits, and currency and coin4 Cash items in process of collection and unposted debits5 Currency and coin6 Balances due from depository institutions in the United States7 Balances due from banks in foreign countries and foreign central banks8 Balances due from Federal Reserve Banks

MEMO9 Non-interest-bearing balances due from commercial banks in the United States

(included in balances due from depository institutions in the United States)

10 Total securities, held-to-maturity (amortized cost) and available-for-sale (fair value)11 U.S. Treasury securities12 U.S. government agency and corporation obligations (excludes mortgage-backed

securities)13 Issued by U.S. government agencies14 Issued by U.S. government-sponsored agencies15 Securities issued by states and political subdivisions in the United States16 General obligations17 Revenue obligations,18 Industrial development and similar obligations19 Mortgage-backed securities (MBS)20 Pass-through securities21 Guaranteed by GNMA22 Issued by FNMA and FHLMC23 Privately issued24 Other mortgage-backed securities (includes CMOs, REMICs, and stripped MBS)25 Issued or guaranteed by FNMA, FHLMC or GNMA26 Collateralized by MBS issued or guaranteed by FNMA. FHLMC, or GNMA27 All other mortgage-backed securities28 Other debt securities29 Other domestic debt securities30 Foreign debt securities31 Equity securities32 Investments in mutual funds and other equity securities with readily determinable

fair value33 All other equity securities

34 Federal funds sold and securities purchased under agreements to resell

35 Total loans and lease-financing receivables, gross36 LESS: Unearned income on loans37 Total loans and leases (net of unearned income)38 LESS: Allowance for loan and lease losses39 LESS: Allocated transfer risk reserves40 EQUALS: Total loans and leases, net

Total loans and leases, gross, by category41 Loans secured by real estate42 Construction and land development43 Farmland44 One- to four-family residential properties45 Revolving, open-end loans, extended under lines of credit46 All other loans47 Multifamily (five or more) residential properties48 Nonfarm nonresidential properties44 Loans to depository institutions50 Commercial banks in the United States51 Other depository institutions in the United States52 Banks in foreign countries53 Loans to finance agricultural production and other loans to farmers54 Commercial and industrial loans55 U.S. addressees (domicile)56 Non-U.S. addressees (domicile)57 Acceptances of other banks58 U.S. banks59 Foreign banks60 Loans to individuals for household, family, and other personal expenditures (includes

purchased paper)61 Credit cards and related plans62 Other (includes single payment and installment)63 Obligations (other than securities) of slates and political subdivisions in the United States

(includes nonrated industrial development obligations)64 All other loans65 Loans to foreign governments and official institutions66 Other loans67 Loans for purchasing and carrying securities68 All other loans (excludes consumer loans)69 Lease-financing receivables

70 Assets held in trading accounts7! Premises and fixed assets (including capitalized leases)72 Other real estate owned73 Investments in unconsolidated subsidiaries and associated companies74 Customers' liability on acceptances outstanding75 Net due from own foreign offices. Edge Act and agreement subsidiaries, and IBFs76 Intangible assets77 All other assets

5,075,292

329,431

4,361,320

254.877

893,268

158,005

148,0166,250

141,76677,83758,02318,969

845398,410265,85679,119184,796

1,940132,554104,7662,50425,28484,067n.a.n.a.26,933

9,001

17.933

275.712

3.006.232

3.9233,002.309

54.88923

2.947,396

1.263,945

n.a.n.a.n.a.42,883815,532n.a.n.a.1,779

n.a.n.a.

536,022210,877325,146

18,071130,270n.a.n.a.n.a.n.a.103,105

304,96567,4544,2585,67515,053n.a.65,996166,084

202,830

2,712,2353,117

2,709,118

1,235,06090,02827,453

731,38896,769

634,61942,090

344,10068,660n.a.n.a.n.a.42,153

651,615n.a.n.a.

781n.a.n.a.

500,407n.a.n.a.

18,06695,702n.a.n.a.n.a.n.a.99,791

tn.a.

I43,542

3,400.105

249.500117.659n.a.n.a.41,61873,12517.099

492,24979,118

41,3273,400

37,92722,89016,3316,011548

258,705179,50754,917123,182

1,40879,19860.488

80017,90973,52321.86851,65516.686

5.99310,693

205,028

1,947,6501,675

1,945,97535,112

231,910.840

697,626

91,58649,02811,85030,7089,521

636,817497,688139,129

1.548331

1.217

285,593100,555185,038

10,655121,6417,029

114,612n.a.n.a.92,663

303,67640,7722,4675,22514,849n.a.50,655124,844

2,686,133

174.946115.01390,51724.49633.0629,87516,996

9,954

1,653,653870

1,652,784

668,74142,8643,903

432,73666,972

365,76422,525166,71465,62048,29911,7505,5718,792

472,901466,391

6,509550330220

249,977n.a.n.a.

10,65087,073

61886,45518,94767,50889,349

43,542n.a.n.a.

133,401

65,84535.393

23,76711,62619.8992,2348,318

14,634

325,673

62,509

78,4042,047

76,35741,78632,1039.438245

124,82776,86221,04155,316

50647,96539,1791,5497,2379,2659,080185

8,881

2,5796.301

52,460

892,7171,644

891,07417,365

0873,709

472,67840,298

12,400250,31427,475

222,83917,582

152,0852,9622,614

91258

15,667150,784150,089

694179

n.a.

226,178108,948117.230

6,6117,833

307,8031,6106,1939.824

1,235

21,4271,425414

198n.a.14,55536.460

281,787

14,086

5,362

75,346

16,378

28,285803

27,48213,1619,5893.520

5214,8789,4863,1616.298

27

5,3915,098155138

1,279n.a.n.a.1,367

428938

18,224

165,864604

165,2602,412

0162,848

93,6406,86611,15148,3392,322

46,017

1.98425.301

77n.a.n.a.n.a.17,69427,931n.a.n.a.

52n.a.n.a.

24,2511,373

22.878

805796

n.a.n.a.

n.a.n.a.618

5.25536636

7n.a.785

4.780


Commercial Banks A65

4.20 DOMESTIC AND FOREIGN OFFICES Insured Commercial Bank Assets and Liabilities—ContinuedConsolidated Report of Condition, March 31. 1998


Domestictotal

Banks with foreign offices1

Total

Banks with domesticoffices only'

Over 100 Under 100

78 Total liabilities, limited-life preferred stock, and equity capital


80 Total deposits81 I d i i d lIndividuals, partnerships, and corporations

U.S. governmentStates and political subdivisions in the United StatesCommercial banks in the United StatesOther depository institutions in the United StatesForeign banks, governments, and official institutions

BanksGovernments and official institutions

Certified and official checks

Total transaction accountsIndividuals, partnerships, and corporationsU.S. governmentStates and political subdivisions in the United StatesCommercial banks in the United StatesOther depository institutions in the United StatesForeign banks, governments, and official institutions



Demand deposits (included in total transaction accounts) .Individuals, partnerships, and corporationsU.S. governmentStates and political subdivisions in the United States.. .Commercial banks in the United StatesOther depository institutions in the United StatesForeign banks, governments, and official institutions. . .



818283848586878889

90919293949596979899

100101102103104105106107108109

110111112113114115116117118

119 Federal funds purchased and securities sold under agreements to repurchase120 Demand notes issued to the U.S. Treasury121 Trading liabilities122 Other borrowed money123 Banks' liability on acceptances executed and outstanding124 Notes and debentures subordinated to deposits125 Net due to own foreign offices, Edge Act and agreement subsidiaries, and IBFs126 All other liabilities

127 Total equity capital

MEMO128 Trading assets at large banks4

129 U.S. Treasury securities (domestic offices)130 U.S. government agency corporation obligations131 Securities issued by states and political subdivisions in the United States132 Mortgage-backed securities133 Other debt securities134 Other trading assets135 Trading assets in foreign banks136 Revaluation gains on interest rate, foreign exchange rate, and other

commodity and equity contracts137 Total individual retirement (IRA) and Keogh plan accounts138 Total brokered deposits139 Fully insured brokered deposits140 Issued in denominations of less than $100.000141 Issued in denominations of $100,000, or in denominations greater than $100,000 a

participated out by the broker in shares of $100,000 or less142 Money market deposit accounts (MMDAs)143 Other savings deposits (excluding MMDAs)144 Total time deposits of less than $100,000145 Total time deposits of $100,000 or more146 All negotiable order of withdrawal (NOW) accounts

147 Number of banks

Total nontransaction accountsIndividuals, partnerships, and corporationsU.S. governmentStates and political subdivisions in the United StatesCommercial banks in the United StatesOther depository institutions in the United StatesForeign banks, governments, and official institutions


5,075,292

4,648,087

3,444,7663,069,809

n.a.n.a.65.476

145,024n.a.n.a.16,626

421,60119,935

206,401343,975

15,22465,968n.a.

130.219

427,206

304.655

t

210.403

44.180

9,007

3,934,115

2,916,3452,716,452

4,743125.69235,8278,2869,455

n.a.n.a.15,890

727,528630,344

1,75739,30427,935

3,7858,512

n.a.n.a.15,890

563,361489.692

1.63915.94727,920

3,7658,508

n.a.n.a.15,890

2,188.8172,086,107

2,98686,3887,8924,500943

n.a.n.a.

376.98119,935n.a.

302.93511,568n.a.86,896n.a.

94,25217,5612,572828

7,3108,78113,020

0

44,180151,43556,48646,3079,740

36,567684.572361,266744,055398,924161,426

9,007

3,400,105

3,138,239

2,157,5051.883,404

n.a.55,087n.a.

144,581100,98443.5978,280

348.13817,283

206,320230,60215.01960,881n.a.102.491

261,866

303,604

tn.a.

210,403

44,175

2,424,267

1,629,0841,530,046

3,84649,26325,4383,9359,0117,7951,2177,544

409,113351,058

1,24016.53521,6742,8808.1807,462718

7,544

360.484309,475

1,1879,54921,6742,877

8,1787,462716

7,544

1,219,9711,178,988

2,60632,7283,7631,055831333498

303.51817.283n a.189,56111,363n.a.86,896n.a.

93.20117,1492,303765

7.1698,62213,017

0

44,17578,49434,01525,6284.845

20.783471,180196,822325,590226,380

48,272

163

1,393,401

1,258,330

1.044,911

967,240736

57,0709,5483,15343540630

6,729

249,011218,656

43316,1065,9488123273225

6,729

167,388148,129

3805,0895.935799326322

56,729

795,900748.584

30340,9643,6002,3411098425

71,1102,558

80109,376

1985,069n.a.25,028

135,071

1,0514122686314115930

559,89820,98719,2693,776

15,492188,390140,297326,095141,118

80,060

2.961

281,787

251,518

242.350219,165

16119,359

8411.198

n.a.n.a.1,617

69.40460,630

846,663

31293

5n.a.n.a.1.617

35,48832,087

721,308

31190

1,617

172,946158.536

7812.696

5291.104

3n.a.n.a.

2,35393

I3,997

718

n.a.2,699

30,268

13,0431,4851.4111,118

29325.00324,14792,37031.42633,094

5,883

NOTE. Table 4.20 has been revised; it now includes data that was previously reported intable 4.22, which has been discontinued.

The notation "n.a." indicates the lesser detail available from banks that don't have foreignoffices, the inapplicability of certain items to banks that have only domestic offices or theabsence of detail on a fully consolidated basis for banks that have foreign offices.

1. All transactions between domestic and foreign offices of a bank are reported in "net duefrom" and "net due to" lines. All other lines represent transactions with parties other than thedomestic and foreign offices of each bank. Because these intraoffice transactions are nullifiedby consolidation, total assets and total liabilities for the entire bank may not equal the sum ofassets and liabilities respectively of the domestic and foreign offices.

Foreign offices include branches in foreign countries, Puerto Rico, and U.S. territories andpossessions; subsidiaries in foreign countries; all offices of Edge Act and agreement corpora-tions wherever located; and IBFs.

2. "Over 100" refers to banks whose assets, on June 30 of the preceding calendar year,were $100 million or more. (These banks file the FFIEC 032 or FFIEC 033 Call Report.)"Under 100" refers to banks whose assets, on June 30 of the preceding calendar year, wereless than $100 million. (These banks file the FFIEC 034 Call Report.)

3. Because the domestic portion of allowances for loan and lease losses and allocatedtransfer risk reserves are not reported for banks with foreign offices, the components of totalassets (domestic) do not sum to the actual total (domestic).

4. Components of "Trading assets at large banks" are reported only by banks with eithertotal assets of $1 billion or more or with $2 billion or more in the par/notional amount of theirotF-balance-sheet derivative contracts



4.23 TERMS OF LENDING AT COMMERCIAL BANKS Survey of Loans Made, May 4-8, 1998

A. Commercial and industrial loans made by all commercial banks1

Weighted-averageeffectiveloan rate(percent)

Amount ofloans

(millionsof dollars)

Average loansize

(thousands ofdollars)

Weighted-average

maturity

Days

Amount of loans (percent)

Secured bycollateral

Subject toprepayment

penalty

Made undercommitment

Mostcommon

base pricingrate4

LOAN RISK5

1 AH commercial and industrial loans2 Minimal risk3 Low risk4 Moderate risk5 Other

By maturity/repricing intervalb

6 Zero interval7 Minimal risk8 Low risk9 Moderate risk

10 Other

11 Daily12 Minimal risk13 Low risk14 Moderate risk15 Other

16 2 to 30 days . . .17 Minimal risk18 Low risk . .19 Moderate risk20 Other

21 31 to 365 days22 Minimal risk23 Low risk . . .24 Moderate risk25 Other

26 More than 365 days.. .27 Minimal risk28 Low risk29 Moderate risk30 Other

6.806.136.266.867.08

8.467.897.348.519.16

6.195.886.036.276.28

6.686.276.206.507.32

6.966.206.506.997.23

7.977.777.537.788.63

SIZE OF LOAN(thousands of dollars)

31 1-9932 100-99933 1,000-9,999 . . .34 10,000 or more.

9.688.657.256.29

BASE RATE OF L O A N 4

35 Prime7

36 Fed funds37 Other domestic.38 Foreign39 Other

8.966.036.176.596.89

134,6647,025

30,54949,98931,379

19,319331

2.4387,2863,696

60,6754,191

17,94819,02814,086

26,1801,3134.951

11.1545,578

24,8771,1084,49610,8497,381

2,92344591

1,495474

2,77911.23334,49786.155

21,16336,18616,88640,55019,880

8051,2951,692655852

268251ill199173

2,2936,2437,5241,5982,716

1,2121,9102,6861,7531,384

763547679736

1,800

245109484269287

Weighted-average risk

rating5

3.23.13.12.9

3.23,42.92.72.8

269109158349237

697517485836684

83534913273

15483210143165

381135213500310

4893444255

Weighted-averagematurity/repricinginterval

1491197424

84101647

102

36.649.324.434.142.5

56.314.734.450.059.0

34.573.020.837.439.7

24.311.116.315.942.0

35.412.537.432.737.8

62.384.563.657.161.9

84.569.038.130.3

62.930.815.342.525.4

1174.07.2

16.311.0

13.623.414.520.614.1

10.31.25.9

18.96.5

12.67.95.4

17.18.2

11.43.8

8.65.44.15.5

19.4

32.623.014.28.5

20.76.6

34.74.85.7

31.067.050.921.931.6

8.442.3

9.610.510.3

37.379.658.514.139.9

29.069.448.226.522.7

37 128.353.436.433.7

-26.7.7

1.241.430.5

73.591.681.577.066.3

70.496.788.190.597.1

63.392.577.260.536.7

83.098.787.480.686.6

91.080.889.693.891.4

ForeignForeignForeignForeign

Fed funds

PrimePrimeOtherPrimePrime

Fed fundsForeignForeign

Fed fundsFed funds

ForeignDomesticForeign

DomesticForeign

ForeignForeignForeignForeignForeign

66.222.470.069.366.2

4.914.029.234.9

9.226.531.048.626.1

OtherOtherOtherOtherPrime

78.586.583.267.7

77.839.877.794.683.5

PrimePrime

ForeignFed funds

Average size(thousandsof dollars)

1959,3673,2773,917

506

Footnotes appear at the end of the table.




B. Commercial and industrial loans made by domestic banks1

Weighted-averageeffectiveloan rate(percent)2

Amount ofloans


Average loansize


Weighted-average

maturity

Days




penalty


Mostcommon

base pricingrate4

LOAN RISK'

1 All commercial and industrial loans2 Minimal risk3 Low risk4 Moderate risk5 Other

By maturity/repricing inter\alb


10 Other


16 2 to 30 days17 Minimal risk18 Low risk19 Moderate risk20 Other


26 More than 365 days27 Minimal risk28 Low risk29 Moderate risk30 Other

7.236.416.587.147.81

8.417.857.298.449.13

6.576.116.266.557.25

6.726.186.096.507.40

7.086.166.867.117.17

7.997.777.537.848.72


31 1-9932 100-99933 1,000-9,999 . . .34 10,000 or more.

9.718.817.476.52

BASE RATE OF LOAN4

35 Prime7

36 Fed funds37 Other domestic38 Foreign39 Other

8.916.076.086.867.08

70,7412,686

11,28029,98612.737

18,186318

2,3496,6803,272

21.9321.1033.6429,8112.736

15,504660

3,0386,1582,998

11,926529

1,5435,8033.195

2,69044

5901,364

372

2,7139,621

20,47837,929

19,38410,11911,95913,65115,628

453524710417386

260251424187161

9222,0552,344898605

7951,0912,2021,133874

412269256440

1,171

230109

248251


rating5

3.23.13.02.9

3.22.82.83.02.9

419265331492356

693523471825693

185197204231158

165152181179152

491189299665249

Months

4793

4152

Weighted-averagematurity/repricinginterval

Days

1501289137

85201562

129

37.112.524.136.147.2

57.115.332.651.360.8

28.45.0

20.237.440.2

22.39.8

10.616.043.6

33.919.333.030.538.0

66.384.563.762.269.8

15.117.19.1

12.221.513.518.613.0

21.54.5

24.727.211.6

10.615.34.8

11.05.0

6.33.3

13.85.94.5

7.95.44.15.6

15.7

85.472.941.622.1

32.722.511.611.4

64.026.5

8.038.531.6

17.322.320.15.57.1

9.938.817.78.48.2

8.444.2

9.011.110.1

4.825.510.93.0

.6

13.860.735.46.76.8

13.541.919.09.9

13.2

21.8.7

1.036.220.5

4.48.9

11.69.6

8.34.7

14.015.56.7

73.380.180.976.087.6

68.696.588.389.796.8

60.876.366.751.964.8

86.098.094.085.993.4

88.459.881.291.995.0

PrimeOtherOtherPrimePrime


Fed fundsDomesticDomesticDomestic

Prime

OtherDomesticDomesticDomestic

Other


63.322.469.966.357.0


78.285.479.966.4

76.046.869.086.679.0

PrimePrimePrime

Domestic


1845,3642,7132,588

398



4.23 TERMS OF LENDING AT COMMERCIAL BANKS Survey of Loans Made, May 4-8. 1998

C. Commercial and industrial loons made by large domestic banks1

item

L O A N R I S K 5

1 All commercial and industrial loans . . . .2 Minimal risk3 Low risk4 Moderate risk5 Other

By maturity/repricing interval6 Zero interval7 Minima! risk8 Low risk9 Moderate risk

10 Other



21 31 «i 365 days22 Minimal risk23 Low risk24 Moderate risk25 Other

26 More than 365 days27 Minimal risk28 Low risk29 Moderate risk30 Othei

SIZE OF LOAN{thousands of dollars)

31 1-9932 100-999.1.1 1,000-9.99934 10.000 or more

BASE RATE OF LOAN4

35 Prime'36 Fed funds37 Other domestic38 Foreign39 Other


7.046.206.326.917.69

8.247.726.998.148.98

6.506.066.246.517.24

6.616.036.026.417.33

6.885.976.206.897.21

7.39*6.577.348.51

9.428.647.446.51

8.736.056.066.876.91

Amount ofloans


60,4412,2639.035

26.34010.624

14.619224

1.7195.0042,497

20.2201,0103,2179,3702.566

14.020566

2.7695.8362.580

9.718458963

5,0312,706

1,667

3281.002

220

1.1125.95Z

17,25236.125

14.5399,612

11,78911,17013,330

Average loansize


9523.0422.324

969586

536816

1,057387242

1,1354,0323,1501,059

661

1.2447,5644,9843,1371.388

2,3755.0912.2932.5582.148

1.018*

2.5201.390

495


rating5

3.43 31.02.9

3.22.92.83.12.9

Weighted-

maturity

Days

192216313463315

714702447868742

184182227231161

159130191174127

501195341678176

Months

38*

443249

Weighted-averagematurity/repricinginterval''

Days

44536837

6318126271



32.14.4

19.231.138.6

52.713.125.342.950.7

27 71.4

22.037.336.8

18.51.98.1

13.235.9

26.09.3

21.724.229.9

50.9*

44.250.049.3

84.067.238.321.8

59.026.77.0

36.225.5

Callable

12.73.0

14.715.88.2

8.13.19.5

13.412.6

22.21.0

27.727.311.5

10.38.43.8

10.64.0

4.6*

12.84.13.6

.7**

24.4

41.220.510.111.7

13.122.720.1

5.75.4


penalty

9.645421.27.65.6

7.963.811.011.56.5

5.027.812.32.7

.3

13.269.437.4

5.04.1

12.347.229.07.99.0

33.3*1,2

47,132.3

5.28.2

10.39.7

8.01.7

14.214.07.3


71.981.480.675.887.1

64.699.791.791.197.6

58.776.362.851.762.8

85.2100.093.885.993.0

90.461.080.394 695.1

72.2*

83.270.278.7

91.890.378.065.2

74.546.268.984.379.7

Mostcommon

base pricingrate4

PrimeDomestic

OtherDomestic

Prime


Fed fundsDomesticDomesticDomes

Prim

OiheDoniesDomesDomes

Othe

tic

lielielie


Other*

OtherForeignPrime

PrimePrimePrime

Domestic


3267,9805,6162,9691,126





D. Commercial and industrial loans made by small domestic banks'

Item

L O A N R I S K S


By maturitv/repricing inten-alb


10 Other




26 More than 365 days27 Minimal risk28 Low risk29 Moderate risk30 Other

SIZK OF LOAN(thousands of dollars)

31 1-9932 100-99933 1,000-9,99914 10,000 or more

BASE RATE OF LOAN4

35 Prime7

36 Fed funds37 Other domestic38 Foreign39 Other


8.347.527.608.828.39

9.12S.148.099.339.62

7.376.716.427.557.36

7.767.096.878.227.83

7.977.387.968.556.94

8.977.818.729.209.03

9.929.077.656.71

9446.377.976 848.12

A -,. ln( ..[

loans(millions

of dollars)

10,300423

2 2453.6472.112

3.56694

6301,676

775

1.71293

426440170

1,48494

269322418

2,20971

580772489

1,02342

262362153

1,6013,6693,2251,804

4,845507169

2,4812^298

Average loansize


11197

18782

142

8395

1617377

286324799212267

18117832690

266

8938

1046S

333

10210624376

147


rating5

3.02.93.02.8

3.12.52.33.02.7

Weighted-

maturity'

Days

579561402710575

599158538691537

19236251

235122

222332

78284302

448149229575654

Months

6497446756

Weighted-averagematurity/repricinginterval6

Days

222250219

36

15465

22562

481


66.355.543.971.990.6

75.420.552.576.293.0

36.343.9

6.140.790.3

58.057.035.765.590.9

68.783.651.871.283.0

91.484.188.295.899.2

86.382.159.129.3

79.121.679.749.066.9


Callable

20.339.916.826.613.7

29.059.724.534.214.3

13.342.5

2.124.613.8

13.656.815.218.311.5

13.924.415.4

n.o9.6

19.75.89.3

20.431.8

26.825.619.64.8

30.015.823.94.9

17.1


penalty

11.24.03.8

14.521 4

10.13.63.6

10.021.2

3.0.2.1

9.55.3

19.48.2

14.537.023.4

19.08.11.7

23.136.0

3.0*.8

6.13.7

3.810.018.27.6

8.919.7

.421.8

3.3


82.073 182.377.090.0

85.389.179.185.594.1

85.076.596.355.994.7

94.185.896.187.096.1

80.051.682.774.594 7

48 818.553.155.525.8

68.777.390.188.8

80.557.876.996.874.9

Mostcommon

base pricingrate4

PrimeOther

ForeignPrimePrime

PrimePrimePrimePrimePrime

PrimeForeignForeign

Fed fundsForeign

ForeignOther

ForeignForeignForeign

ForeignOther



PrimePrime

ForeignForeign


8074373

1.640' 84



Financial Markets A 71

4.23 TERMS OF LENDING AT COMMERCIAL BANKS Survey of Loans Made, May 4-8. 1998

E. Commercial and industrial loans made by U.S. branches and agencies of foreign banks'

Item

LOAN RISK5


By malurity/reprU'ing inrcivitl0


10 Other




26 More than 365 davs27 Minimal risk28 Low risk29 Moderate risk30 Other


31 1-9932 100-99933 1,000-9.99934 10.000 or more

BASE RATE OF LOAN4

35 Prime'36 Fed funds37 Other domestic38 Foreign39 Other

Weighted-a%erageeffectiveloan rate(percent)5

6.345.956.086.446.57

9.29t

8.819.299 40

5.985.805.975.986.05

6.626356.376.497.22

6.846 256.316.857.27

7.64

7 178.27

8.507.736.9.36.11

9.576.016.386 466.15

Amount ofloans


63,9234,339

19,26920.00318.642

1.133

89606424

38.7433.089

14J069.218

11,351

10,676653

1.9124,9962,581

12.950578

2,9535,0-174,186

234

131101

661,612

14,01948,226

1.77926.0674,927

26,8994,252

size(thousands of

dollars)

5.81714,3868,8574,5254,917

530*

355691431

14,55822,91317,2059,396

17.043

5,0507.8914,1295 37(14.287

.3,5739,6314,8733.2343,054

973

2,189602

Weighled-average risk

rating'1

3.3

1.25.9

3.33 53.1252.6

Weighted-

maturity

Days

1151566

151160

827

11371156604

331

164754

13816

25898

181

28185

167313357

Months

59*

5467

Weighted-averagematurity/repricinginterval6

Days

91614814

715

19397



36.172.124.631.239.2

42.4

82.035.445.1

3S.097.221.037.439.5

27.112.425.315.740.1

36.76.3

39.735.437.5

16.7*

4.432.8

51.146.033.036.6

50.432.532.944 5

2.6

Callable

9.41.02.6

15.212.2

35.5*

40.443.222.5

4.3*.1.1

10.05.2

15.54

6.424.611.8

16.04.36.3

12.129.8

16.7•

4.432.8

30.726 117.96.4

56.21.3

70.24.5

.4


penalty

53.984.370.242.147 4

8.8

24.64.1

12 4

54.698.970.725.849.3

50.978.168.650.840.9

58.615.970 6665490

83.3*

95.667.2

23.844.154.454.1

19.333.972.265 497.5


73.698.781.878.551.8

98.5*

83.599.799.8

64.798.379.969 629.9

78.699 577.074.073.7

93.4100.094.095 988.6

100 0

100.0100.0

91.493.687.868.8

97.937.099.098.7

100.0

Mostcommon

base pricingraleJ


Fed fundsFed funds

Prime*

PrimePrimePrime

Fed fundsForeignForeign

Fed fundsFed funds



Foreign

ForeignPrime

Prime

ForeignFed funds


56K13,1876,6165,297

75.847

NOTE. This table has been revised to reflect several changes in the E.2 statistical release,the "Survey of Terms of Business Lending." This survey collects data on gross loanextensions made during the first full business week in the mid-month of each quarter. Theauthorized panel size for the survey is 348 domestically chartered commercial banks and fiftyU.S. branches and agencies of foreign banks. The sample data are used to estimate the termsof loans extended during that week ai all domestic commercial banks and all U.S. branchesand agencies of foreign banks. Note thai the terms on loans extended during the survey weekmay differ from those extended during other weeks of the quarter. The estimates reported hereare not intended io measure the average terms on all business loans in bank portfolios.

1. As of December 31, 1996, assets of most of the large banks were at least $7.0 billion.Median total assels for all insured banks were roughly $62 million. Assets at all U.S. branchesand agencies averaged 1.3 billion.

2. Effective (compounded) annual interest rates are calculated from the stated rate andother terms of ihe loans and weighted by loan amount. The standard error of the loan rate forail commercial and industrial loans in the current survey (line I. column 1) is 0.11 percentagepoints. The chances are about two out of three that the average rate shown would differ by lessthan this amount from the average rate that would be found by a complete survey of theuniverse of all banks.

3. Average maturities are weighted by loan amount and exclude loans with no statedmaturities.

4. The most common base pricing rate is that used to price the largest dollar volume ofloans. Base pricing rales include the prime rate (sometimes referred io as a bank's "base" or•"reference" rate); the federal funds rate, domestic money market rate.i other than the primerate and the federal funds rate; foreign money market rates; and other base rates not included

5. A complete description of these risk categories is available trom the Banking andMoney Market Statistics Section, Mail Stop 81, Board of Governors of the Federal ReserveSystem, Washington, DC 20551. The category "Moderate risk" includes the average loan,under average economic conditions, at the typical lender. The category "Other" includes loansrated "acceptable" as well as special mention or classified loans. The weighted-average riskratings published for loans in rows 31-39 are calculated by assigning a value of "I1" tominimal risk loans; "2" to low risk loans; "3" to moderate risk loans, "4" to acceptable riskloans; and "5" to special mention and classified loans. These values are weighted by loanamount and exclude loans wuh no risk rating. Some of the loans in lines 1,6, II. 16. 21, 2fi,and 31-39 are not rated for risk.

6. The maturity/repricing interval measures the period from the date the loan is made until nfirst may reprice or it matures. For floating-rate loans that are subject to repricing at anytime—such as many prime-based loans—the maturity/repricing interval is zero. For floating-rateloans thai ha\e a scheduled repneing interval, the maturity/repricing interval measures the numberof d;iys between the date the loan is made and the dale on which it is next scheduled to reprice Forloans having rates that remain fixed until the loan matures (fixed-rate loans), the matunty/repricinginterval measures the number of days between the date the loan is made and the date on which itmatures. Loans that reprice daily mature or reprice on the business day after they are made. Owingto weekends and holidays, such loans may have maturity/repricing intervals in excess of one day;such loans are not included in the "2 to 30 day" category.

7. For the current survey, the average reported prime rate, weighted by the amount ofloans priced relative to a prime base rate, was 8.53 percent for all banks; 8.50 percenl forlarge domestic banks, tf.64 percent for small domestic banks; and 8.50 percent for USbranches and agencies of foreign banks.


A72 Special Tables D August 1998

4.30 ASSETS AND LIABILITIES of U.S. Branches and Agencies of Foreign Banks, March 31, 19981


1

234567

89

10111213

14

15161718

19

20

21

222324

252627

282930

323334353637

38394041424344

4546

474849505152535455565758

59

60

Item

Total assets

Claims on nonrelated partiesCash and balances due from depository institutions

Cash items in process of collection and unposted debitsCurrency and coin (U.S. and foreign)Balances with depository institutions in United Slates

U.S. branches and agencies of other foreign banks(including IBFs)

Other depository institutions in United States (including IBFs) . . . .Balances with banks in foreign countries and with foreign central

banksForeign branches of U.S. banksBanks in home country and home-country central banksAll other banks in foreign countries and foreign central banks . . .

Balances with Federal Reserve Banks

Total securities and loans

Total securities, book valueU.S. TreasuryObligations of U.S. government agencies and corporationsOther bonds, notes, debentures, and corporate stock (including state

and local securities)Securities of foreign governmental unitsAll Other

Federal funds sold and securities purchased under agreements toresell

U.S branches and agencies of other foreign banksCommercial banks in United StatesOther

Total loans, grossLESS: Unearned income on loansEQUALS: Loans, net

Total htans, gross, by categoryReal estate loansLoans to depository institutions

Commercial banks in United States (including IBFs)U S branches and agencies of other foreign banksOther commercial banks in United States

Other depository institutions in United States (including IBFs)Banks in foreign countries

Foreign branches of U.S. banksOther banks in foreign countries

Loans to other financial institutions

Commercial and industrial loansU S addressees (domicile)Non-U.S. addressees (domicile)

Acceptances of other banksU S banksForeign banks

Loans to foreign governments and official institutions (includingforeign central banks)

Loans for purchasing or carrying securities (secured and unsecured) . . .All other loans

Lease financing receivables (net of unearned income)U.S. addressees (domicile)Non US addressees (domicile)

Trading assetsAll other assets

Customers" liabilities on acceptances outstandingU.S. addressees (domicile)Non-U S addressees (domicile)

Other assets including other claims on nonrelated partiesNet due from related depository institutions5

Net due from head office and other related depository institutions5. . .Net due from establishing entity, head office, and other related

depository institutions5

Total liabilities4

Liabilities to nonrelated parties

All

Totalincluding

IBFs3

918,559

761.54487,9683.777

1951,370

46,5194,851

32.050840

7.76723,443

752

478,718

117,83626,20542,769

48,86316,75232,110

64,69813,1236,009

45,567

361,126245

360,882

22,94833,372

7,8636,390L473

3825,472

73924,73353.591

224,482184 84239^640

32123

298

3,46216,3925,811

747747

0

98,59131,5684,9693,0581,911

157^015157.015

n.a.

918,559

772,311

states2

IBFsonly3

249,561

112.79754,835

0n.a.

26.519

25,674845

28.316744

6,92620,646n.a.

49,227

6,122n.a.n.a.

6,1223,1512,971

6,3394.131

2761.932

43.13934

43,105

13223,2794,4394,125

3140

18,840507

18,3331,679

15,81673

15,74332o

32

2,0812497

000

4001,996n.a.n a.

1.996136.764

n a.

136,764

249,561

224,361

New

Totalincluding

IBFs

727,489

595,97083.1493.638

1448.304

44,1584.146

30,551'777

7,54422,229

641

346,189

110,18624,29942.375

43.51316,05627.457

54.66012.0405.288

37.331

236.168165

236.003

14 46619,6254.8943,766U 28

1414.717

59814,11843,740

136,532107,61628^916

13613

123

2,73015,0243,515

400400

085,19026J833.8252.4071418

22:958131.519131,519

n.a.

727.489

659,004

York

IBFsonly

217.860

96,64452,445

0n.a.

25,299

24,457841

27,146699

6,80019,647n.a.

36,131

5.216n.a.n.a.

5,2162,8652,351

5,9573,824

2761,857

30.94126

30,914

6414,4772,8062,526

2800

11,671389

11,2831,525

12,86672

12,793320

32

1,9152340

000

3981,713n.a.n.a.

1,713121,216

n.a.

121,216

217,860

197,862

Califom

Totalincluding

IBFs

49,897

469191,249

191

795

577218

4030

14389

30

43,452

1 94795

189

1,663412

1,251

737483122132

41.54136

41,505

5,5243.0211.9781,816

1630

1,0431

1,0432,177

29.38926.889

2^500]7

15

250437725

000

681.414

654508146760

2.9782.978

n.a.

49,897

19,406

ta

IBFsonly

9,297

4,656652

0n.a.286

2860

3660

14352

n.a.

J.765

650n.a.n.a.

650165485

134840

50

3.1161

3.115

682,1351,1821,182

00

9541

9530

844

84?000

380

31

0000

104n.a.n.a

1044,641n.a.

4,641

9,297

8,575

I

Totalincluding

IBFs

62,149

62,0831,644

321

1,200

916284

3982850

32013

46,381

3,753888

21

2,844214

2,630

7,552360203

6,989

42,6368

42,628

1,1021,294

339201138

0955

0955

6,210

32.16929.755

1580

158

8973

1.195

346346

05 004L502

263102161

1,2396666

n.a.

62,149

40,548

linois

IBFsonly

7,522

2,4901,005

0n.a.624

6240

3812850

302n.a.

1,237

219n.a.n.a.

219107112

200200

00

1.0191

1,018

0744197167300

5470

54713

2600

260000

300

000

46n.a.n.a.

465.032n.a

5,032

7,522

7,030


U.S. Branches and Agencies A73

4.30 ASSETS AND LIABILITIES of U.S. Branches and Agencies of Foreign Banks, March 31, 1998'—Continued


Item

61 Total deposits and credit balances62 Individuals, partnerships, and corporations63 U.S. addressees (domicile)64 Non-U.S. addressees (domicile)65 Commercial banks in United States (including IBFs)66 U.S. branches and agencies of other foreign banks67 Other commercial banks in United States68 Banks in foreign countries69 Foreign branches of US banks70 Other banks in foreign countries71 Foreign governments and official institutions

(including foreign central banks)72 All other deposils and credit balances73 Certified and official checks

74 Transaction accounts and credit balances (excluding IBFs)75 Individuals, partnerships, and corporations76 US addressees (domicile)77 Non-US, addressees (domicile)78 Commercial banks in United States (including IBFs)79 U.S. branches and agencies of other foreign banks80 Other commercial banks in United States81 Banks in foreign countries82 Foreign branches of U S banks83 Other banks in foreign countries84 Foreign governments and official institutions

(including foreign central banks)85 All other deposits and credit balances86 Certified and official checks

87 Demand deposits (included in transaction accountsand credit balances)

88 Individuals, partnerships, and corporations89 U.S. addressees (domicile)90 Non-U S addressees (domicile)91 Commercial banks in United States (including IBFs)92 U.S. branches and agencies of other foreign banks93 Other commercial banks in United States94 Banks in foreign countries95 Foreign branches of U S banks96 Other banks in foreign countries97 Foreign governments and official institutions

(including foreign central banks)98 All other deposits and credit balances99 Certified and official checks

100 Nontransaction accounts (including MMDAs, excluding IBFs)101 Individuals, partnerships, and corporations102 U.S. addressees (domicile)103 Non-U.S. addressees (domicile)104 Commercial banks in United States (including IBFs)105 U.S. branches and agencies of other foreign banks106 Other commercial banks in United States107 Banks in foreign countries108 Foreign branches of U.S. banks109 Other banks in foreign countries110 Foreign governments and official institutions

(including foreign central banks)I l l All other deposits and credit balances

112 IBF deposit liabilities113 Individuals, partnerships, and corporations114 US. addressees (domicile)115 Non-U.S. addressees (domicile)116 Commercial banks in United States (including IBFs)117 US. branches and agencies of other foreign banks118 Other commercial banks in United Stales119 Banks in foreign countries120 Foreign branches of U.S. banks121 Other banks in foreign countries122 Foreign governments and official institutions

(including foreign central banks)123 All other deposils and credit balances

All states2

Totalexc uding

IBFs3

295,863211,325195,30716,01852,15017,37934,77212,1534,1348,019

6,95713,083

194

9,6247,7635 5372,226

771166

9649

955

435191194

8.9777.2305.3291.901

626

57911

902

425154194

286,238203,562] 89,77013,79252,07317,36834,70511,1894,1257,064

6,52212,892

n.a.

IBFsonly

169,03412,792

18512,60728,03025,7232,307

83,8123,568

80,243

44,253147

j

n.a.

1

169,03412.792

18512,60728,03025,7232,307

83,8123,568

80,243

44,253147

New York

Totalexc uding

IBFs

252,146173,766164,937

8,82948,86115,99732,86410,8273,3557,472

5,54212,986

164

7,6146,1984,9121,286

729

64636

5631

369174164

7,2645,9494.737

213'~58

454

5855

579

365143164

244,532167,568160,025

7,54348,78915,98932,80110,1913,3506.841

5,17312,812

n.a.

IBFSonly

154.6777.287

207,168

27,00024,7702,230

80,0653.305

76,759

40,188136

1

n.a.

1

154,6777,287

1207,168

27,00024,770

2,23080,065

3,30576,759

40,188136

California

Totalexcluding

IBFs

6,3974,6992,4802,219

617396221842720122

2161410

406377191186

10I

140

14

13

10

28826217389000

14o

14

11

10

5,9914.3222,2892,033

616396220828720108

21511

n.a

IBFsonly

1.298487

04S71127735

1075

102

58210

,

n.a.

1,298487

04871127735

1075

102

58210

Illinois

Totalexcluding

IBFs

14,71312,80412.271

533896176720

243094

84145

2

3423343W

2000202

202

340332330

20002o2

20

14,37112,47011,939

531895176719

3092

83945

n.a.

IBFsonly

4.749936528

698691

71.935

2581,677

2,0221

n.a.

4,749936528

698691

71.935

2581,677

2.0221

Footnotes appear at end of table.



4.30 ASSETS AND LIABILITIES of U.S. Branches and Agencies of Foreign Banks, March 31, 1998'—Continued


All states

Totalincluding

IBFs1

IBFsonly3

Totalincluding

IBFs

IBFsonly

Totalincluding

IBFs

IBFsonly

Totalincluding

IBFs

IBFsonly

124 Federal funds purchased and securities sold under agreements torepurchase

125 U.S. branches and agencies of other foreign banks126 Other commercial banks in United States127 Other128 Other borrowed money129 Owed to nonrelaled commercial banks in United Slates (including

IBFs)130 Owed to U.S. offices of nonrelated U.S. banks131 Owed to U.S. branches and agencies of nonrelated

foreign banks132 Owed to nonrelated banks in foreign countries133 Owed to foreign branches of nonrelated U.S. banks134 Owed to foreign offices of nonrelated foreign banks135 Owed to others

136 All other liabilities137 Branch or agency liability on acceptances executed and

outstanding138 Trading liabilities139 Other liabilities to nonrelated parties

140 Net due to related depository institutions141 Net due to head office and other related depository institutions3

142 Net due to establishing entity, head office, and other relateddepository institutions

MEMO143 Non-interesi-bearing balances with commercial banks

in United States144 Holding of own acceptances included in commercial and

industrial loans145 Commercial and industrial loans with remaining maturity of one year

or less (excluding those in nonaccrual status)146 Predetermined interest rates147 Floating interest rates148 Commercial and industrial loans with remaining maturity of more

than one year (excluding those in nonaccrual status)149 Predetermined interest rates150 Floating interest rates

130,48913,15010,292

107,04787.371

13.9754,855

9,12021.299

86120,43852,097

89,555

5,24860,26924,038

146,248146,248

995

4,434

128.29280,15748,135

94,93721.73973.197

19,9854,397156

15.43232.875

6,796725

6.07119.490

75618,7356.588

2,467

n.a.139

2,329

25,201n.a.

25,201

118,15110,3799,182

98,59062,813

9,5444,037

5,50714.700

45914,24138,569

71.217

4,12347,66319,431

68,48568,485

2,828

74,29246,42327,869

61,43316,17445,259

18,4013,996

9814,30722.508

3,882404

3,47813.206

38512,8215,420

2.276

n.a.

1392.138

19,997n.a.

19,997

1.646618665363

8,934

3,057510

2,5464,662263

4.3991,216

1.132

68556390

30.49130.491

50

1,148

16,7797,7519,028

12,5542,02210,531

40824258109

6,798

2,148278

1,8704,511261

4,250138

72

n.a.072

722n.a.

7.5681,178108

6,2817,813

16

26495260892

6,581

5,705

1864,3661,152

21,60121,601

23.00719,3563,651

9,1222,2836,839

9361600

7761,298

1310

13194860888219

048

491n.a.


U.S. Branches and Agencies A75

4.30 ASSETS AND LIABILITIES of U.S. Branches and Agencies of Foreign Banks. March 31, 1998'—Continued


Item

151 Components of total nontransaction accounts,included in total deposits and credit balances(excluding IBFs)

152 Time deposits of $100,000 or more153 Time CDs in denominations of $100,000 or more

with remaining maturity of more than 12 months

154 Immediately available funds with a maturity greater than one dayincluded in other borrowed money

155 Number of reports filed6

All states2

Totalexcluding

IBFs1

285,603277,193

8.411

IBFsonly3

n.a.n.a.

n.a.

All states2

Totalincluding

IBFs

39,586457

IBFsonly

n.a.0

New York

Totalexcluding

IBFs

246.812239,654

7.159

IBFsonly

n.a.n.a.

n.a

New York

Totalincluding

IBFs

29,864229

IBFsonly

n.a.0

California

Totalexcluding

IBFs

3,3773,311

67

IBFsonly

n.a.n.a.

n.a.

California

Totalincluding

IBFs

5,15197

IBFsonly

n.a.0

Illinois

Totalexcluding

IBFs

14,42714.047

380

IBFsonly

n.a.n.a.

n.a.

Illinois

Totalincluding

IBFs

2.86336

IBFsonly

n.a.0

] Data are aggregates of categories reported on the quarterly form FF1EC 002, "Report ofAsseti and Liabilities of U.S. Branches and Agencies of Foreign Banks." The form was firstused for reporting data as of June 30, 1980, and was revised as of December 31, 1985. FromNovember 1972 through May 1980, U.S. branches and agencies of foreign banks had filed amonthly FR 886a report. Aggregate data from that report were available through the FederalReserve monthly statistical release G.I 1, last issued on July 10, 1980. Data in this table and inthe G.I I tables are not strictly comparable because of differences in reporting panels and indefinitions of balance sheet items.

2. Includes the District of Columbia.3. Effective December 1981, the Federal Reserve Board amended Regulations D and Q to

permit banking offices located in the United States to operate international banking facilities(IBFs). Since December 31, 1985, data for IBFs have been reported in a separate column.These data are either included in or excluded from the total columns as indicated in theheadings. The notation "n.a." indicates that no IBF data have been reported for that item,

either because the item is not an eligible IBF asset or liability or because that level of detail isnot reported for IBFs. From December 1981 through September 1985, IBF data wereincluded in all applicable items reported.

4. Total assets and total liabilities include net balances, if any, due from or owed to relatedbanking institutions in the United States and in foreign countries (see note 5). On the formermonthly branch and agency report, available through the G.ll monthly statistical release,gross balances were included in total assets and total liabilities. Therefore, tutal asset and totalliability figures in this table are not comparable to those in the G.I 1 tables.

5. Related depository institutions includes the foreign head office and other U.S. andforeign branches and agencies of a bank, a bank's parent holding company, and majority-owned banking subsidiaries of the bank and of its parent holding company (includingsubsidiaries owned both directly and indirectly)

6. In some cases two or more offices of a foreign bank within the same metropolitan areafile a consolidated report.


A76

Index to Statistical Tables

References are to pages A3-A75 although the prefix "A" is omitted in this index

ACCEPTANCES, bankers (See Bankers acceptances)Assets and liabilities (See also Foreigners)

Commercial banks, 15-21, 64, 65Domestic finance companies, 32, 33Federal Reserve Banks, 10Foreign banks, U.S. branches and agencies, 72-75Foreign-related institutions, 20

AutomobilesConsumer credit, 36Production, 44, 45

BANKERS acceptances, 5, 10. 22, 23Bankers balances, 15-21, 72-75. (See also Foreigners)Bonds (See also U.S. government securities)

New issues, 31Rates, 23

Business activity, nonfinancial, 42Business loans (See Commercial and industrial loans)

CAPACITY utilization, 43Capital accounts

Commercial banks, 15-21, 64, 65Federal Reserve Banks, 10

Central banks, discount rates, 61Certificates of deposit, 23Commercial and industrial loans

Commercial banks, (5-21, 64, 65, 67-71Weekly reporting banks, 17, 18

Commercial banksAssets and liabilities, 15-21, 64, 65Commercial and industrial loans, 15-21, 64, 65, 67-71Consumer loans held, by type and terms, 36, 67-71Number, by classes, 64, 65Real estate mortgages held, by holder and property, 35Terms of lending, 67-71Time and savings deposits, 4

Commercial paper, 22, 23, 32Condition statements [See Assets and liabilities)Construction, 42, 46Consumer credit, 36Consumer prices, 42Consumption expenditures, 48, 49Corporations

Profits and their distribution, 32Security issues, 31,61

Cost of living (See Consumer prices)Credit unions, 36Currency in circulation, 5, 13Customer credit, stock market, 24

DEBT (See specific types of debt or securities)Demand deposits, 15-21Depository institutions

Reserve requirements, 8Reserves and related items, 4, 5, 6, 12, 64, 65

Deposits (See also specific types)Commercial banks, 4, 15-21, 64, 65Federal Reserve Banks, 5, 10

Discount rates at Reserve Banks and at foreign central banks andforeign countries (See Interest rates)

Discounts and advances by Reserve Banks (Sec Loans)Dividends, corporate, 32

EMPLOYMENT, 42Eurodollars, 23,61

FARM mortgage loans, 35Federal agency obligations, 5, 9, 10, 11, 28, 29Federal credit agencies, 30Federal finance

Debt subject to statutory limitation, and types and ownershipof gross debt, 27

Receipts and outlays, 25, 26Treasury financing of surplus, or deficit, 25Treasury operating balance, 25

Federal Financing Bank, 30Federal funds, 23, 25Federal Home Loan Banks, 30Federal Home Loan Mortgage Corporation, 30, 34, 35Federal Housing Administration, 30, 34, 35Federal Land Banks, 35Federal National Mortgage Association, 30, 34, 35Federal Reserve Banks

Condition statement, 10Discount rates (See Interest rates)U.S. government securities held, 5, 10, 11, 27

Federal Reserve credit, 5, 6, 10, 12Federal Reserve notes, 10Federally sponsored credit agencies, 30Finance companies

Assets and liabilities, 32Business credit, 33Loans, 36Paper, 22, 23

Float, 5Flow of funds, 37^41Foreign banks, U.S. branches and agencies, 71, 72-75Foreign currency operations, 10Foreign deposits in U.S. banks, 5Foreign exchange rates, 62Foreign-related institutions, 20Foreign trade, 51Foreigners

Claims on, 52, 55, 56, 57, 59Liabilities to, 51, 52, 53, 58, 60, 61

GOLDCertificate account, 10Stock, 5, 51

Government National Mortgage Association, 30, 34, 35Gross domestic product, 48, 49

HOUSING, new and existing units. 46

INCOME, personal and national. 42, 48, 49Industrial production, 42, 44Insurance companies, 27, 35Interest rates

Bonds, 23Commercial banks, 67-71Consumer credit, 36Federal Reserve Banks, 7Foreign banks, U.S. branches and agencies, 71Foreign central banks and foreign countries, 61Money and capital markets, 23Mortgages, 34Prime rate, 22

International capital transactions of United States, 50-61International organizations, 52, 53, 55, 58, 59Inventories. 48Investment companies, issues and assets, 32


A77

Investments (See also specific types)Commercial banks, 4, 15-21, 64, 65Federal Reserve Banks, 10, 11Financial institutions, 35

LABOR force, 42Life insurance companies (See Insurance companies)Loans (See also specific types)

Commercial banks, 15-21. 64, 65, 67-71Federal Reserve Banks, 5, 6, 7, 10, 11Financial institutions, 35Foreign banks, U.S. branches and agencies, 71Insured or guaranteed by United States, 34, 35

MANUFACTURINGCapacity utilization, 43Production, 43, 45

Margin requirements, 24Member banks (See also Depository institutions)

Reserve requirements, 8Mining production, 45Mobile homes shipped, 46Monetary and credit aggregates, 4, 12Money and capital market rates, 23Money stock measures and components, 4, 13Mortgages (See Real estate loans)Mutual funds, 13, 32Mutual savings banks (See Thrift institutions)

NATIONAL defense outlays, 26National income, 48

OPEN market transactions, 9

PERSONAL income, 49Prices

Consumer and producer, 42, 47Stock market, 24

Prime rate, 22Producer prices, 42, 47Production, 42, 44Profits, corporate, 32

REAL estate loansBanks, 15-21,35Terms, yields, and activity, 34Type of holder and property mortgaged, 35

Reserve requirements, 8Reserves

Commercial banks, 15-21Depository institutions. 4, 5. 6, 12Federal Reserve Banks, 10U.S. reserve assets, 51 Residential mortgage loans, 34, 35

Retail credit and retail sales, 36, 42

SAVINGFlow of funds, 37-41National income accounts, 48

Savings institutions, 35, 36, 37-41Savings deposits (See Time and savings deposits)Securities (See also specific types)

Federal and federally sponsored credit agencies, 30Foreign transactions, 60New issues, 31Prices, 24

Special drawing rights, 5, 10. 50, 51State and local governments

Holdings of U.S. government securities, 27New security issues, 31Rates on securities, 23

Stock market, selected statistics, 24Stocks (See also Securities)

New issues, 31Prices, 24

Student Loan Marketing Association, 30

TAX receipts, federal, 26Thrift institutions, 4. (See also Credit unions and Savings

institutions)Time and savings deposits, 4, 13, 15-21, 64. 65Trade, foreign, 51Treasury cash, Treasury currency, 5Treasury deposits. 5, 10, 25Treasury operating balance, 25

UNEMPLOYMENT, 42U.S. government balances

Commercial bank holdings, 15-21Treasury deposits at Reserve Banks, 5, 10, 25

U.S. government securitiesBank holdings, 15-21,27Dealer transactions, positions, and financing, 29Federal Reserve Bank holdings, 5, 10, 11, 27Foreign and international holdings and

transactions, 10,27,61Open market transactions, 9Outstanding, by type and holder, 27, 28Rates, 23

U.S. international transactions. 50-62Utilities, production, 45

VETERANS Administration, 34, 35

WEEKLY reporting banks, 17, 18Wholesale (producer) prices, 42, 47

YIELDS (See Interest rates)



Federal Reserve Board of Governorsand Official Staff

ALAN GREENSPAN, Chairman

ALICE M. RIVLIN, Vice ChairEDWARD W. KELLEY, JR.LAURENCE H. MEYER

OFFICE OF BOARD MEMBERS

LYNN S. FOX. Assistant to the BoardDONALD J. WTNN, Assistant to the BoardTHEODORE E. ALLISON, Assistant to the Board for Federal

Reserve System AffairsWINTHROP P. HAMBLEY, Special Assistant to the BoardBOB STAHI.Y MOORE, Special Assistant to the BoardDIANE E. WERNEKE, Special Assistant to the Board

LEGAL DIVISION

J. VIRGIL MATTINGLY. JR., General CounselSCOTT G. ALVAREZ, Associate General CounselRICHARD M. ASHTON, Associate General CounselOLIVER IRELAND, Associate General CounselKATHLEEN M. O'DAY, Associate General CounselKATHERINE H. WHEATLEY, Assistant General Counsel

OFFICE OF THE SECRETARY

JENNIFER J. JOHNSON, Secretary

ROBERT DEV. FRIERSON, Associate SecretaryBARBARA R. LOWREY. Associate Secretary and Ombudsman

DIVISION OF BANKINGSUPERVISION AND REGULATION

RICHARD SPILLENKOTHEN, Director

STEPHEN C. SCHEMERING, Deputy DirectorHERBERT A. BIERN, Associate DirectorROGER T. COLE, Associate DirectorWILLIAM A. RYBACK. Associate DirectorGERALD A. EDWARDS, JR.. Deputy Associate DirectorSTEPHEN M. HOFFMAN, JR., Deputy Associate DirectorJAMES V. HOUPT, Deputy Associate DirectorJACK P. JENNINGS, Deputy Associate DirectorMICHAEL G. MARTINSON, Deputy Associate DirectorSIDNEY M. SUSSAN, Deputy Associate DirectorMOLLY S. WASSOM, Deputy Associate DirectorHOWARD A. AMER, Assistant DirectorNORAH M. BARGER, Assistant DirectorBETSY CROSS, Assistant DirectorRICHARD A. SMALL, Assistant DirectorWILLIAM SCHNEIDER, Project Director,

National Information Center

DIVISION OF INTERNATIONAL FINANCE

EDWIN M. TRUMAN. Staff DirectorLEWIS S. ALEXANDER, Associate DirectorDALE W. HENDERSON, Associate DirectorPETER HOOPER III, Associate DirectorKAREN H. JOHNSON, Associate DirectorDAVID H. HOWARD, Senior AdviserDONALD B. ADAMS, Assistant DirectorTHOMAS A. CONNORS, Assistant Director

DIVISION OF RESEARCH AND STATISTICS

MICHAEL J. PRELL, Director

EDWARD C. ETTIN, Deputy DirectorDAVID J. STOCKTON, Deputy DirectorWILLIAM R. JONES, Associate DirectorMYRON L. KWAST, Associate DirectorPATRICK M. PARKINSON, Associate DirectorTHOMAS D. SIMPSON. Associate DirectorLAWRENCE SLIFMAN, Associate DirectorMARTHA S. SCANLON, Deputy Associate DirectorPETER A. TINSLEY, Deputy Associate DirectorDAVID S. JONES, Assistant DirectorSTEPHEN D. OLINER, Assistant DirectorSTEPHEN A. RHOADES, Assistant DirectorJANICE SHACK-MARQUEZ, Assistant DirectorCHARLES S. STRUCKMEYER, Assistant DirectorALICE PATRICIA WHITE. Assistant Director

JOYCE K. ZICKLER, Assistant DirectorGLENN B. CANNER, Senior AdviserJOHN J. MINGO, Senior Adviser

DIVISION OF MONETARY AFFAIRS

DONALD L. KOHN, Director

DAVID E. LINDSEY, Deputy DirectorBRIAN F. MADIGAN. Associate DirectorRICHARD D. PORTER, Deputy Associate DirectorVINCENT R. REINHART, Assistant DirectorNORMAND R.V. BERNARD, Special Assistant to the Board

DIVISION OF CONSUMERAND COMMUNITY AFFAIRS

DOLORES S. SMITH, Director

GLENN E. LONEY, Deputy DirectorSANDRA F. BRAUNSTEIN. Assistant DirectorMAUREEN P. ENGLISH. Assistant DirectorADRIENNE D. HURT, Assistant DirectorIRENE SHAWN MCNULTY, Assistant Director


ROGER W. FERGUSON, JR.EDWARD M. GRAMLICH

A79

OFFICE OFSTAFF DIRECTOR FOR MANAGEMENT

S. DAVID FROST, Staff DirectorSHEILA CLARK, EEO Programs DirectorJOHN R. WEIS, Adviser

MANAGEMENT DIVISION

S. DAVID FROST, Director

STEPHEN J. CLARK, Associate Director. Finance FunctionDARRELL R. PAULEY, Associate Director, Human Resources

Function

DIVISION OF SUPPORT SERVICES

ROBERT E. FRAZIER, Director

GEORGE M. LOPEZ, Assistant DirectorDAVID L. WILLIAMS, Assistant Director

DIVISION OF INFORMATION RESOURCESMANAGEMENT

STEPHEN R. MALPHRUS, Director

MARIANNE M. EMERSON, Assistant DirectorPo KYUNG KIM, Assistant DirectorRAYMOND H. MASSEY, Assistant DirectorEDWARD T. MULRENIN, Assistant DirectorDAY W. RADEBAUGH, JR., Assistant DirectorELIZABETH B. RIGGS, Assistant DirectorRICHARD C. STEVENS, Assistant Director

DIVISION OF RESERVE BANK OPERATIONSAND PAYMENT SYSTEMS

CLYDE H. FARNSWORTH, JR.. Director

DAVID L. ROBINSON, Deputy Director (Finance and Control)LOUISE L. ROSEMAN. Associate DirectorPAUL W. BETTGE, Assistant DirectorJACK DENNIS. JR.. Assistant DirectorEARL G. HAMILTON. Assistant DirectorJOSEPH H. HAYES. JR., Assistant DirectorJEFFREY C. MARQUARDT, Assistant DirectorMARSHA REIDHILL, Assistant Director

OFFICE OF THE INSPECTOR GENERAL

BARRY R. SNYDER, Inspector GeneralDONALD L. ROBINSON, Assistant Inspector General



Federal Open Market Committeeand Advisory Councils

FEDERAL OPEN MARKET COMMITTEE

MEMBERS

ALAN GREENSPAN, Chairman

ROGER W. FERGUSON, JR.

EDWARD M. GRAMLICH

THOMAS M. HOENIG

JERRY L. JORDAN

EDWARD W. KELLEY, JR.

LAURENCE H. MEYER

CATHY E. MINEHAN

WILLIAM J. MCDONOUGH, Vice Chairman

WILLIAM POOLE

ALICE M. RIVLIN

ALTERNATE MEMBERS

EDWARD G. BOEHNE

ROBERT D. MCTEER, JR.

MICHAEL H. MOSKOW GARY H. STERN

STAFF

DONALD L. KOHN, Secretary and EconomistNORMAND R.V. BERNARD, Deputy SecretaryLYNN S. FOX, Assistant SecretaryGARY P. GILLUM, Assistant SecretaryJ. VIRGIL MATTINGLY, JR., General CounselTHOMAS C. BAXTER, JR., Deputy General CounselMICHAEL J. PRELL, Economist

EDWIN M. TRUMAN, Economist

LYNN E. BROWNE, Associate EconomistSTEPHEN G. CECCHETTI, Associate EconomistWILLIAM G. DEWALD, Associate EconomistCRAIG S. HAKKIO, Associate EconomistDAVID E. LINDSEY, Associate EconomistMARK S. SNIDERMAN, Associate EconomistTHOMAS D. SIMPSON, Associate EconomistDAVID J. STOCKTON, Associate Economist

PETER R. FISHER. Manager, System Open Market Account

FEDERAL ADVISORY COUNCIL

THOMAS H. JACOBSEN, President

CHARLES T. DOYLE, Vice President

WILLIAM M. CROZIER, JR., First DistrictDOUGLAS A. WARNER III, Second DistrictWALTER E. DALLER, JR., Third DistrictROBERT W. GILLESPIE. Fourth DistrictKENNETH D. LEWIS, Fifth DistrictSTEPHEN A. HANSEL, Sixth District

NORMAN R. BOBINS, Seventh DistrictTHOMAS H. JACOBSEN, Eighth DistrictRICHARD A. ZONA, Ninth DistrictC. Q. CHANDLER, Tenth DistrictCHARLES T. DOYLE, Eleventh DistrictDAVID A. COULTER, Twelfth District

HERBERT V. PROCHNOW. Secretary Emeritus

JAMES ANNABLE. Co-Secretary

WILLIAM J. KORSVIK, Co-Secretarx


A81

CONSUMER ADVISORY COUNCIL

WILLIAM N. LUND, Augusta, Maine, ChairmanYVONNE S. SPARKS, St. Louis, Missouri, Vice Chairman

RICHARD S. AMADOR. LOS Angeles, CaliforniaWALTER J. BOYER, Garland, TexasWAYNE-KENT A. BRADSHAW, LOS Angeles, CaliforniaJEREMY EISLER, Biloxi, MississippiROBERT F. ELLIOT, Prospect Heights, IllinoisHERIBERTO FLORES, Springfield, MassachusettsDWIGHT GOLANN, Boston, MassachusettsMARVA H. HARRIS, Pittsburgh, PennsylvaniaKARLA IRVINE, Cincinnati, OhioFRANCINE C. JUSTA, New York, New YorkJANET C. KOEHLER, Jacksonville, FloridaGWENN KYZER, Allen, TexasJOHN C. LAMB, Sacramento, CaliforniaERROL T. LOUIS, Brooklyn, New York

MARTHA W. MILLER, Greensboro, North CarolinaDANIEL W. MORTON, Columbus, OhioCHARLOTTE NEWTON, Washington, DC

CAROL PARRY, New York, New YorkPHILIP PRICE, JR., Philadelphia, PennsylvaniaDAVID L. RAMP, Minneapolis, MinnesotaMARILYN ROSS, Omaha, NebraskaMARGOT SAUNDERS, Washington, D.C.

ROBERT G. SCHWEMM, Lexington, KentuckyDAVID J. SHIRK, Eugene, OregonGAIL SMALL, Lame Deer, MontanaGREGORY D. SQUIRES, Milwaukee, WisconsinGEORGE P. SURGEON, Chicago, IllinoisTHEODORE J. WYSOCKI, JR., Chicago, Illinois

THRIFT INSTITUTIONS ADVISORY COUNCIL

CHARLES R. RINEHART, Irwindale, California, PresidentWILLIAM A. FITZGERALD, Omaha, Nebraska, Vice President

GAROLD R. BASE, Piano, TexasDAVID A. BOCHNOWSKI, Munster, IndianaDAVID E. A. CARSON, Bridgeport, ConnecticutRICHARD P. COUGHLIN, Stoneham, MassachusettsSTEPHEN D. HAILER, Akron, Ohio

F. WELLER MEYER, Falls Church, VirginiaEDWARD J. MOLNAR, Harleysville, PennsylvaniaGUY C. PINKERTON, Seattle, WashingtonTERRY R. WEST, Jacksonville, FloridaFREDERICK WILLETTS, III, Wilmington, North Carolina



Federal Reserve Board Publications

For ordering assistance, write PUBLICATIONS SERVICES,MS-127, Board of Governors of the Federal Reserve System,Washington, DC 20551, or telephone (202) 452-3244, or FAX(202) 728-5886. You may also use the publications orderform available on the Board's World Wide Web site(http://www.bog.frb.fed.us). When a charge is indicated, paymentshould accompany request and be made payable to the Board ofGovernors of the Federal Reserve System or may be ordered viaMastercard, Visa, or American Express. Payment from foreignresidents should be drawn on a U.S. bank.

BOOKS AND MISCELLANEOUS PUBLICATIONSTHE FEDERAL RESERVE SYSTEM—PURPOSES AND FUNCTIONS.

1994. 157 pp.ANNUAL REPORT, 1997.ANNUAL REPORT: BUDGET REVIEW, 1998-99.FEDERAL RESERVE BULLETIN. Monthly. $25.00 per year or $2.50

each in the United States, its possessions, Canada, andMexico. Elsewhere, $35.00 per year or $3.00 each.

ANNUAL STATISTICAL DIGEST: period covered, release date, num-ber of pages, and price.

198119821983198419851986198719881980-89199019911992199319941990-95

October 1982December 1983October 1984October 1985October 1986November 1987October 1988November 1989March 1991November 1991November 1992December 1993December 1994December 1995November 1996

239 pp.266 pp.264 pp.254 pp.231 pp.288 pp.272 pp.256 pp.712 pp.185 pp.215 pp.215 pp.281 pp.190 pp.404 pp.

$ 6.50$ 7.50$11.50$12.50$15.00$15.00$15.00$25.00$25.00$25.00$25.00$25.00$25.00$25.00$25.00

SELECTED INTEREST AND EXCHANGE RATES—WEEKLY SERIES OFCHARTS. Weekly. $30.00 per year or $.70 each in the UnitedStates, its possessions, Canada, and Mexico. Elsewhere,$35.00 per year or $.80 each.

REGULATIONS OF THE BOARD OF GOVERNORS OF THE FEDERALRESERVE SYSTEM.

ANNUAL PERCENTAGE RATE TABLES (Truth in Lending—Regulation Z) Vol. I (Regular Transactions). 1969. 100 pp.Vol. II (Irregular Transactions). 1969. 116 pp. Each volume$5.00.

GUIDE TO THE FLOW OF FUNDS ACCOUNTS. 672 pp. $8.50 each.FEDERAL RESERVE REGULATORY SERVICE. Loose-leaf; updated

monthly. (Requests must be prepaid.)Consumer and Community Affairs Handbook. $75.00 per year.Monetary Policy and Reserve Requirements Handbook. $75.00

per year.Securities Credit Transactions Handbook. $75.00 per year.The Payment System Handbook. $75.00 per year.

Federal Reserve Regulatory Service. Four vols. (Contains allfour Handbooks plus substantial additional material.) $200.00per year.

Rates for subscribers outside the United States are as followsand include additional air mail costs:

Federal Reserve Regulatory Service. $250.00 per year.Each Handbook, $90.00 per year.

FEDERAL RESERVE REGULATORY SERVICE FOR PERSONAL

COMPUTERS. CD-ROM; updated monthly.Standalone PC. $300 per year.Network, maximum 1 concurrent user. $300 per year.Network, maximum 10 concurrent users. $750 per year.Network, maximum 50 concurrent users. $2,000 per year.Network, maximum 100 concurrent users. $3,000 per year.Subscribers outside the United Slates should add $50 to cover

additional airmail costs.THE U.S. ECONOMY IN AN INTERDEPENDENT WORLD: A MULTI-

COUNTRY MODEL, May 1984. 590 pp. $14.50 each.INDUSTRIAL PRODUCTION—1986 EDITION. December 1986.

440 pp. $9.00 each.FINANCIAL FUTURES AND OPTIONS IN THE U.S. ECONOMY.

December 1986. 264 pp. $10.00 each.FINANCIAL SECTORS IN OPEN ECONOMIES: EMPIRICAL ANALY-

SIS AND POLICY ISSUES. August 1990. 608 pp. $25.00 each.RISK MEASUREMENT AND SYSTEMIC RISK: PROCEEDINGS OF A

JOINT CENTRAL BANK RESEARCH CONFERENCE. 1996.578 pp. $25.00 each.

EDUCATION PAMPHLETSShort pamphlets suitable for classroom use. Multiple copies areavailable without charge.

Consumer Handbook on Adjustable Rate MortgagesConsumer Handbook to Credit Protection LawsA Guide to Business Credit for Women, Minorities, and Small

BusinessesSeries on the Structure of the Federal Reserve System

The Board of Governors of the Federal Reserve SystemThe Federal Open Market CommitteeFederal Reserve Bank Board of DirectorsFederal Reserve Banks

A Consumer's Guide to Mortgage Lock-InsA Consumer's Guide to Mortgage Settlement CostsA Consumer's Guide to Mortgage RefinancingsHome Mortgages: Understanding the Process and Your Right

to Fair LendingHow to File a Consumer ComplaintMaking Deposits: When Will Your Money Be Available?Making Sense of SavingsSHOP: The Card You Pick Can Save You MoneyWelcome to the Federal ReserveWhen Your Home is on the Line: What You Should Know

About Home Equity Lines of CreditKeys to Vehicle Leasing


A83

STAFF STUDIES: Only Summaries Printed in theBULLETIN

Studies and papers on economic and financial subjects that are ofgeneral interest. Requests to obtain single copies of the full text orto be added to the mailing list for the series may be sent toPublications Services.

Staff Studies 1-157 are out of print.

158. THE ADEQUACY AND CONSISTENCY OF MARGIN REQUIRE-MENTS IN THE MARKETS FOR STOCKS AND DERIVATIVEPRODUCTS, by Mark J. Warshawsky with the assistance ofDietrich Earnhart. September 1989. 23 pp.

159. NEW DATA ON THE PERFORMANCE OF NONBANK SUBSIDI-ARIES OF BANK HOLDING COMPANIES, by Nellie Liang andDonald Savage. February 1990. 12 pp.

160. BANKING MARKETS AND THE USE OF FINANCIAL SER-VICES BY SMALL AND MEDIUM-SIZED BUSINESSES, byGregory E. Elliehausen and John D. Wolken. September1990. 35 pp.

161. A REVIEW OF CORPORATE RESTRUCTURING ACTIVITY,1980-90, by Margaret Hastings Pickering. May 1991.21pp.

162. EVIDENCE ON THE SIZE OF BANKING MARKETS FROM MORT-GAGE LOAN RATES IN TWENTY CITIES, by Stephen A.Rhoades. February 1992. 11 pp.

163. CLEARANCE AND SETTLEMENT IN U.S. SECURITIES MAR-KETS, by Patrick Parkinson, Adam Gilbert, Emily Gollob,Lauren Hargraves, Richard Mead, Jeff Stehm, and MaryAnn Taylor. March 1992. 37 pp.

164. THE 1989-92 CREDIT CRUNCH FOR REAL ESTATE, byJames T. Fergus and John L. Goodman, Jr. July 1993.20 pp.

165. THE DEMAND FOR TRADE CREDIT: AN INVESTIGATION OFMOTIVES FOR TRADE CREDIT USE BY SMALL BUSINESSES, byGregory E. Elliehausen and John D. Wolken. September1993. 18 pp.

166. THE ECONOMICS OF THE PRIVATE PLACEMENT MARKET, byMark Carey, Stephen Prowse, John Rea, and Gregory Udell.January 1994. I l l pp.

167. A SUMMARY OF MERGER PERFORMANCE STUDIES IN BANK-ING, 1980-93, AND AN ASSESSMENT OF THE "OPERATINGPERFORMANCE" AND "EVENT STUDY" METHODOLOGIES,by Stephen A. Rhoades. July 1994. 37 pp.

168. THE ECONOMICS OF THE PRIVATE EQUITY MARKET, byGeorge W. Fenn, Nellie Liang, and Stephen Prowse. Novem-ber 1995. 69 pp.

169. BANK MERGERS AND INDUSTRYWIDE STRUCTURE, 1980-94,by Stephen A. Rhoades. February 1996. 29 pp.

170. THE COST OF IMPLEMENTING CONSUMER FINANCIAL REGU-LATIONS: A N ANALYSIS OF EXPERIENCE WITH THE TRUTHIN SAVINGS ACT, by Gregory Elliehausen and Barbara R.Lowrey, December 1997. 17 pp.

171. THE COST OF BANK REGULATION: A REVIEW OF THE EVI-DENCE, by Gregory Elliehausen, April 1998. 35 pp.

REPRINTS OF SELECTED Bulletin ARTICLESSome Bulletin articles are reprinted. The articles listed below arethose for which reprints are available. Beginning with the Janu-ary 1997 issue, articles are available on the Board's World WideWeb site (http://www.bog.frb.fed.us) under Publications, FederalReserve Bulletin articles.

Limit of ten copies

FAMILY FINANCES IN THE U.S.: RECENT EVIDENCE FROM THE

SURVEY OF CONSUMER FINANCES. January 1997.



Maps of the Federal Reserve System

irto.,.

EW YORK

:ADELPHIA

HAWAII

LEGEND

Sor/z pages

• Federal Reserve Bank city

• Board of Governors of the FederalReserve System, Washington, D.C.

Facing page

• Federal Reserve Branch city

— Branch boundary

NOTE

The Federal Reserve officially identifies Districts by num-ber and Reserve Bank city (shown on both pages) and byletter (shown on the facing page).

In the 12th District, the Seattle Branch serves Alaska,and the San Francisco Bank serves Hawaii.

The System serves commonwealths and territories asfollows: the New York Bank serves the Commonwealth

of Puerto Rico and the U.S. Virgin Islands; the San Fran-cisco Bank serves American Samoa, Guam, and the Com-monwealth of the Northern Mariana Islands. The Board ofGovernors revised the branch boundaries of the Systemmost recently in February 1996.


A85

ME

VT

NH

MA

BOSTON

2-B

^Buffalo , ' •*

.< NY

NEW YORK

3-C

PHILADELPHIA

4-DPittsburgh

• Cincinnati

CLEVELAND

5-EBaltimore MD

NC

- •Charlotte

sc

RICHMOND

6-F

ATLANTA

7-G

IA

WI

1L

MI

Detroit •

IN

CHICAGO

8-H

VL

KY

isville

AK• Memphis

ST. LOUIS

9-1 MET •

MN

Mi

MINNEAPOLIS

10-JWY

.' M

Denver

NMOklahoma Cit\

OK

KANSAS CITY

11-K

NM

El Paso

San Antonio

DALLAS

12-L

ID

Sdt Lake City

•Los Angeles

AZ

SAN FRANCISCODigitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis


Federal Reserve Banks, Branches, and Offices

FEDERAL RESERVE BANK Chairmanbranch, or facility Zip Deputy Chairman

PresidentFirst Vice President

Vice Presidentin charge of branch

BOSTON* 02106 William C. BrainardWilliam O. Taylor

NEW YORK* 10045 John C. WhiteheadThomas W. Jones

Buffalo 14240 Bal Dixit

PHILADELPHIA 19105 Joan CarterCharisse R. Lillie

CLEVELAND* 44101 G. Watts Humphrey, Jr.David H. Hoag

Cincinnati 45201 George C. JuilfsPittsburgh 15230 John T. Ryan III

RICHMOND* 23219 Claudine B. MaloneRobert L. Strickland

Baltimore 21203 Daniel R. BakerCharlotte 28230 Dennis D. Lowery

ATLANTA 30303 David R. JonesJohn F. Wieland

Birmingham 35283 Patricia B. ComptonJacksonville 32231 Judy JonesMiami 33152 R. Kirk LandonNashville 37203 Frances F. MarcumNew Orleans 70161 Lucimarian Roberts

CHICAGO* 60690 Lester H. McKeever, Jr.Arthur C. Martinez

Detroit 48231 Florine Mark

ST. LOUIS 63166 John F. McDonnellSusan S. Elliott

Little Rock 72203 Betta M. CarneyLouisville 40232 Roser ReynoldsMemphis 38101 Carol G. Crawley

MINNEAPOLIS 55480 David A. KochJames J. Howard

Helena 59601 William P. Underriner

KANSAS CITY 64198 Jo Marie DancikTerrence P. Dunn

Denver 80217 Peter I. WoldOklahoma City 73125 Barry L. EllerOmaha 68102 Arthur L. Shoener

DALLAS 75201 Roger R. HemminghausJames A. Martin

El Paso 79999 Patricia Z. Holland-BranchHouston 77252 Edward O. GaylordSan Antonio 78295 H. B. Zachry, Jr.

SAN FRANCISCO 94120 Gary G. MichaelCynthia A. Parker

Los Angeles 90051 Anne L. EvansPortland 97208 Carol A. WhippleSalt Lake City 84125 Richard E. DavisSeattle 98124 Richard R. Sonstelie

Cathy E. MinehanPaul M. Connolly

William J. McDonoughVacant

Edward G. BoehneWilliam H. Stone, Jr.

Jerry L. JordanSandra Pianalto

J. Alfred Broaddus, Jr.Walter A. Varvel

Jack GuynnPatrick K. Barron

Michael H. MoskowWilliam C. Conrad

William H. PooleW. LeGrande Rives

Gary H. SternColleen K. Strand

Thomas M. HoenigRichard K. Rasdall

Robert D. McTeer, Jr.Helen E. Holcomb

Robert T. ParryJohn F. Moore

Carl W. Turnipseed1

Charles A. Cerino1

Robert B. Schaub

William J. Tignanelli1

DanM. Bechter1

James M. MckeeFredR. Herr1

James D. Hawkins1

James T. Curry 111Melvyn K. PurcellRobert J. Musso

David R. Allardice'

Robert A. HopkinsThomas A. BooneMartha L. Perine

John D.Johnson

Carl M. Gambs'Kelly J. DubbertSteven D. Evans

Sammie C. ClayRobert Smith, [II'James L. Stull'

MarkL. Mullinix1

Raymond H. Laurence1

Andrea P. WolcottGordon R. G. Werkema-

*Additional offices of these Banks are located at Windsor Locks, Connecticut 06096; East Rutherford, New Jersey 07016; Utica at Oriskany, New York 13424;Columbus, Ohio 43216; Columbia, South Carolina 29210; Charleston, West Virginia 25311; Des Moines, Iowa 50306; Indianapolis, Indiana'46204, Milwaukee,Wisconsin 53202; and Peoria, Illinois 61607.

1. Senior Vice President.2. Executive Vice President


Federal Reserve Bulletin August 1998

Documents

Transcript of Federal Reserve Bulletin August 1998