Vol. 8 No. 3 - Article III - Published: February, 1996 - Full Article
Recent Developments Affecting Depository Institutions
by Benjamin B. Christopher
(a financial economist in the FDIC's Division of Research and Statistics.)
Reference sources: American Banker (AB); Wall Street Journal (WSJ); BNA's Banking Report (BBR); and Federal Register (FR).
REGULATORY AGENCY ACTIONS
The federal bank and thrift regulatory agencies are engaging in joint or coordinated efforts in a
number of regulatory areas that are mentioned specifically in this issue of the Review, among which
are: risk-based capital standards, safety-and-soundness standards, supervision of U.S. operations of
foreign banks, CRA regulations, single-borrower lending limits, affordable housing loan appraisals,
and HMDA reporting requirements. For full information on the inter-agency actions included in this
issue, reference is necessary to the pages devoted to each of the agencies and the Federal Financial
Institutions Examination Council.
Federal Deposit Insurance Corporation
Assessments to Be Reduced For Most BIF-Insured Banks
The FDIC Board of Directors voted to reduce significantly the deposit insurance premiums paid by
most banks but to keep existing assessment rates intact for savings associations. The decision closely
resembles a proposal issued for public comment earlier this year (see this Review, Spring
1995, p. 25). The reduction in premium rates for banks is required by current law based on the
anticipated recapitalization of the Bank Insurance Fund (BIF). Under the new rate structure, the
best-rated institutions insured by the BIF will pay four cents per $100 of domestic deposits, down
from the current rate of 23 cents per $100. The weakest institutions will continue to pay 31 cents
per $100. Approximately 92 percent of the nearly 11,000 BIF-insured institutions would pay the
lowest rate. The reductions in premiums will decrease the expenses of BIF members by
approximately $4.4 billion annually.
Chairman Ricki Helfer said that widening the spread between the rates paid by the strongest and the
weakest BIF-insured institutions (eight basis points under the current system, and 27 basis points
under the new one) promotes the fundamental goals of a risk-related insurance system. "The wider
range of insurance rates gives weak banks a big incentive to get healthy and encourages all banks to
avoid unnecessary risk-taking," she said.
The latest FDIC projections indicate that the BIF likely was recapitalized, with reserves of $1.25 for
every $100 of estimated insured deposits (or a reserve ratio of 1.25 percent), during the second
quarter of 1995. The new BIF assessment rates will apply from the first day of the month after the
BIF is recapitalized. The soonest the recapitalization of the BIF can be confirmed is in early
September, when the agency finishes processing banks' "Call Reports" for the period ended June 30,
1995. Assuming that the BIF recapitalized during the second quarter, BIF members that have
overpaid their assessments based on the newly-adopted premium rate schedule can expect to receive
a refund of any overpayment plus interest.
In connection with the new rate schedule, the FDIC Board established a process for quickly raising
or lowering all rates for BIF-insured institutions if changing conditions warrant a timely change.
Under this new system, the Board would have the flexibility to adjust the entire BIF assessment rate
schedule twice a year without having to seek public comment first, but only within a range of no more
than five cents per $100 above or below the premium schedule adopted. PR-50-95, FDIC, 8/8/95.
The BIF Increased to 1.22 Percent of Insured Deposits in First Quarter
During the first quarter of 1995, the BIF rose by $1.3 billion to $23.2 billion. This growth reflects
continuing high levels of assessment income, increased investment income, and continuing minimal
bank failures. The fund balance amounted to 1.22 percent of estimated insured deposits at year-end
1994, about $516 million below the legislatively mandated level of 1.25 percent. Total revenues to
the BIF in the first quarter were $1.65 billion, which included net assessment revenues of $1.4 billion
and interest income on fund investments of $221 million. Non-assessment income amounted to 80
percent of the first quarter's expenses and losses. The fund's liquid assets comprise 79 percent of the
The Savings Association Insurance Fund (SAIF) continued to grow slowly in the first quarter of
1995. Total revenues amounted to $283 million, and operating expenses were $4 million, resulting
in the net income added to the fund of $279 million. The SAIF balance increased to $2.2 billion, or
0.32 percent of estimated insured deposits, from $1.9 billion and 0.28 percent at year-end 1994.
First Quarter 1995 Financial Management Report, FDIC, 5/30/95.
Recapitalization of the SAIF
In testimony in late July, Chairman Ricki Helfer described the difficulties facing the SAIF, and
discussed recommendations, which reflect discussions and analyses by the Department of the
Treasury, the OTS, and the FDIC, for resolving those difficulties. At the current pace, and under
reasonably optimistic assumptions, the SAIF is unlikely to reach the minimum designated reserve ratio
of 1.25 percent until the year 2002.
A principal reason the SAIF is undercapitalized is that SAIF assessments have been diverted to
purposes other than building the fund. Since 1989, $7.4 billion --- approximately three-quarters of
SAIF assessments --- have been diverted from the fund to pay off obligations arising from the
government's efforts to handle the thrift failures of the 1980s. The Resolution Funding Corporation
(REFCORP) received $1.1 billion, the Federal Savings and Loan Insurance Corporation Resolution
Fund (FRF) received $2 billion, and the Financing Corporation (FICO) has received $4.3 billion.
Without these diversions, the SAIF would have reached its designated reserve ratio of 1.25 percent
last year. Only the FICO obligation remains, but under current law it has an annual call of up to the
first $793 million in SAIF assessments until the year 2017, with decreasing calls for two additional
years thereafter. In 1995, the FICO draw is expected to amount to approximately 45 percent of all
SAIF assessments. On July 1, 1995, the SAIF's potential obligations increased when it assumed
responsibility from the RTC for resolving all new failures of SAIF-insured thrifts.
The FDIC strongly supports a proposal developed on an inter-agency basis for resolving the problems
of the SAIF. Under this proposal, briefly summarized, the SAIF would be capitalized through a
special up-front cash assesssment on SAIF-assessable deposits. The special assessment would
amount to approximately 85 to 90 basis points, or 85 to 90 cents for every $100 of assessable
deposits. A special assessment of this magnitude would produce approximately $6.6 billion,
increasing the SAIF's balance to $8.8 billion and the reserve ratio to 1.25 percent. The special
assessment would be based on SAIF-assessable deposits held as of March 31, 1995, and would be
due on January 1, 1996. After the SAIF is capitalized, it's risk-related assessment schedule would
be similar to the final schedule adopted for the BIF. Among other elements of the proposal are: the
responsibility for the FICO payments would be spread proportionally over all FDIC-insured
institutions; the BIF and the SAIF would be merged as soon as practicable, after a number of
additional issues related to the merger are resolved. The FDIC and the OTS also recommended
making unspent RTC funds available as a kind of reinsurance policy against extraordinary,
unanticipated SAIF losses to limit the potential future costs to taxpayers from the existing full faith
and credit guarantee of the U.S. Government that the SAIF enjoys. Testimony, Chairman Ricki
Helfer, Committee on Banking, Housing and Urban Affairs, U.S. Senate, 7/28/95.
The U.S. General Accounting Office, reporting on its audits of the financial statements of the BIF,
the SAIF, and the FRF on December 31, 1993 and 1994, said the statements, taken as a whole, were
reliable in all material respects. FDIC management fairly stated that internal controls in place on
December 31, 1994, were effective in safeguarding assets against unauthorized acquisition, use or
disposition. There was no reportable noncompliance with laws and regulations that were tested.
The report presents the GAO's recommendations to improve the FDIC's internal controls, discusses
the improvements in the banking and savings association industries that have significantlyaccelerated
the recapitalization of the BIF, and discusses the agency's concerns about the capitalization of the
SAIF. Financial Audit Federal Deposit Insurance Corporation's 1994 and 1993 Financial
Statements, U.S. General Accounting Office, March 1995.
Bank Exposure to Interest-Rate Risk
The FDIC is amending its risk-based capital standards to include a bank's exposure to changes in
interest rates as a factor in evaluating the institution's capital adequacy, implementing Section 305 of
the FDIC Improvement Act of 1991. The revised rule is scheduled to take effect 30 days after it
appears in the Federal Register. The FDIC's rule applies only to state-chartered commercial
banks that are not members of the Federal Reserve System and FDIC-supervised savings banks. The
Board of Governors (FRB) and the Office of the Comptroller of the Currency (OCC) are expected
to issue similar revisions to their capital standards for the commercial banks they supervise. A policy
statement is being proposed that would serve as the basis for measuring and monitoring interest-rate
risk. After an evaluation of the reliability and the accuracy of this framework, the regulators will
consider proposing a regulation that would set definitive capital requirements. To avoid unnecessary
regulatory burden, low-risk institutions, primarily small banks, would be exempted from having to
complete the additional paperwork required to monitor interest-rate exposure. The FDIC estimates
that approximately 7,025 out of the 10,847 commercial banks and FDIC-supervised savings banks
nationwide would be exempt from additional reports. PR-42-95, FDIC, 6/27/95.
The FDIC is amending its risk-based capital standards for insured state nonmember banks to
implement a provision of the Riegle Community Development and Regulatory Improvement Act of
1994 (RCDRIA) of 1994 which states that the amount of risk-based capital required to be maintained
by any insured depository institution, with respect to assets transferred with recourse, may not exceed
the maximum amount of recourse for which the institution is contractually liable under the recourse
agreement. The amendment is effective on April 27, 1995. FR, 3/28/95, p. 15858; 4/10, p. 17986
Policy Statement on Collateralized Letters of Credit
The FDIC issued a policy statement assuring the financial markets that certain collateralized letters
of credit issued by insured banks and thrifts prior to the enactment of FIRREA on August 9, 1989,
will continue to be treated substantially the same by the agency, as conservator or receiver for an
insured depository institution, as they are now being treated by the RTC. The policy statement,
effective immediately, is intended to remove doubts the financial markets may have about the FDIC's
treatment of these instruments when the agency assumes responsibility for thrift receiverships from
the RTC on July 1, 1995. These letters of credit include those issued by banks and thrifts as collateral
for state or municipal bonds that finance low- and moderate-income housing developments and
similar projects. The policy statement explains the limited circumstances when the FDIC would seek
to repudiate a collateralized letter of credit issued by an insured institution that fails. PR-36-95,
FDIC, 5/19/95, and Policy Statement.
Management Official Interlocks
The FDIC is withdrawing a proposed amendment to its regulations that implement the Depository
Institution Management Interlocks Act. The proposal would have created limited exceptions to the
prohibition on management official interlocks for depository institutions that control only a small
percentage of the total deposits in the community or relevant metropolitan statistical area in which
the institutions are located (see this Review, Winter 1995, p. 33). Section 338 of the
RCDRIA modified the authority of the federal banking agencies to create regulatory exceptions to
the bar on management interlocks. The FDIC Board believes the proposed amendment is not
consistent with the limited authority to create exceptions on a bank-specific and case-by-case basis
given the FDIC under the Interlocks Act as amended. FR, 2/7/95, p. 7139.
Limits on "Golden Parachutes" Proposed
The FDIC issued a proposal under which troubled holding companies, banks and thrifts would be
prohibited from making "golden parachute" payments, which are typically large cash amounts paid
to executives who resign just before an institution is closed or sold, subject to certain exceptions.
Also, any holding company or FDIC-insured institution would be limited in its payments for an
employee's or director's liabilities or legal expenses when that person is the subject of an enforcement
proceeding. The proposed regulation would provide guidance to the industry on which payments
would be considered legitimate and which would be considered abusive or improper. The regulation
would implement anti-fraud legislation enacted in 1990, pursuant to which the FDIC issued an initial
proposal in 1991. PR-24-95, FDIC, 3/21/95.
Payable Through Accounts
The FDIC issued guidelines that include more information about "payable through" accounts and
suggested internal controls and procedures. Also called "pass by" accounts, these generally are
checking accounts marketed to foreign banks that otherwise would not have the ability to offer their
customers access to the U.S. banking system. U.S. banking entities that process large numbers of
checks on accounts where signature cards have been completed abroad and submitted in bulk may
have undertaken little or no effort independently to obtain or verify information about the individuals
and businesses who use the accounts. Regulators are concerned that the use of these accounts may
contribute to unsafe and unsound banking practices and other misconduct, including money
laundering and related criminal activities. It is noted that the traditional use of "payable through"
accounts by financial organizations in the U.S., such as by credit unions and investment companies,
has not been a cause for concern. FIL-30-95, FDIC, 4/7/95.
FDIC's Right to Revoke Deposit Insurance Upheld
The U.S. Court of Appeals for the 4th Circuit upheld the FDIC's decision to terminate the deposit
insurance of Doolin Security Savings Bank, New Martinsville, W. VA., for the bank's refusal to pay
its insurance premium in full. Doolin protested in 1993 its not being placed in the FDIC's lowest
risk-based premium category, citing the agency's failure to base its decision on objective criteria. In
deciding for the FDIC, and upholding the decision of an administrative law judge, the court said the
agency's decision was not unreasonable "that the subjective supervisory reports of primary regulators
are relevant to determining whether an institution would cause the insurance fund to incur a loss."
Following a 15-day period in which Doolin could ask for a rehearing, the bank will have 60 days to
pay the remaining $15,000 on its assessed premium before its deposit insurance would be withdrawn.
AB, 5/22/95, p.2.
Recordkeeping For Securities Transactions
The FDIC amended its regulation that establishes recordkeeping and confirmation requirements for
securities transactions undertaken by an insured state nonmember bank for its customers. The action
responds to reports from some banks of practical difficulties in complying with the requirements. The
amendment, effective February 7, 1995, provides for a waiver of the requirements for good cause,
affording the FDIC more flexibility in applying its requirements. FR, %-4 2/7/95, p. 7111.
The FDIC is waiving under certain circumstances its requirement that state nonmember banks
carrying out securities transactions for customers disclose on the confirmation statement or separately
the portion of the fee charged to customers represented by the amount of the bank's commission.
This action, effective immediately, will eliminate a disparity in the rules for state nonmember banks
in relation to state member and national banks, which are not required to provide the disclosures.
Bank customers will continue to receive information about their transactions under existing securities
industry standards, including disclosure of the total fees paid in connection with securities
transactions. PR-22-95, FDIC, 3/21/95.
Housing Recovery Continuing at Slower Pace
The FDIC's latest quarterly survey of real-estate markets showed continuing improvement in many
areas of the country, particularly for commercial properties. While the assessments of local housing
markets across the country remained favorable overall, some continuing loss of momentum in that
sector was indicated.
The national composite index of survey results fell to 61 in April from 62 in January and 72 in July
1994. Values of the index above 50 indicate more respondents believed conditions were improving
than declining, compared to the previous quarter, while values below 50 indicate the opposite. The
surveys, which began in April 1991, are based on interviews across the country with senior examiners
and asset managers of federal bank and thrift regulatory agencies. The 401 participants in the latest
survey were polled in late April.
The composite index for housing fell in April to 57 from 58 in January, continuing a decline in the
index that began with the July 1994, survey. The proportion of respondents observing worsening
conditions --- 18 percent --- was the highest to date. Thirty-two percent of the respondents reported
excess supply of residential real estate in April, up from 28 percent in January. Declining from 69
percent in April 1991, this percentage reached a low of 27 percent in July 1994. Among other
indicators of housing markets, 73 percent of the respondents in April reported new-home
construction at "average" or "above-average" levels, down from 1994's average of 76 percent. The
proportion of respondents who thought home sales were "above-average" --- 19 percent --- has
declined in four consecutive surveys.
For commercial real estate, the composite index in April was 68, unchanged from January, and down
by a moderate 5 percent from its survey high of 73 in April 1994. This index registered a low of 46
in January 1992. In April, 38 percent of the respondents thought conditions in their local commercial
real-estate markets were better than three months earlier, the same percentage as in January, while
the three percent seeing worsening conditions was down slightly. Fifty-three percent of respondents
nationally reported excess supply in commercial real-estate markets, up from 52 percent in January,
following consecutive declines since July 1993, when the figure was 82 percent.
Regionally, the indexes in April for both residential and commercial real-estate markets were equal
to or off by not more than one point from the national indexes, except in the Northeast and West.
The most significant improvement in April occurred in the Midwest, this being the only region where
improvements were seen in both the commercial and residential real-estate markets. It may be noted
that the Midwest's indexes had dropped sharply in January from the October 1994, survey. The
indexes for the South, which were several points above the national data in January, declined to near
those figures in April. In the Northeast, following significant gains in late 1993 and early in 1994,
the indexes began a decline that continued for commercial markets in April. The proportion of
respondents there reporting excess supply conditions in both commercial and residential markets
continued to be the highest of any region. In California, 26 percent of the respondents saw
improvements in commercial markets in April, and 18 percent in residential, representing small
increases from January. Excess supply in commercial real estate was reported by 93 percent of the
respondents. In contrast, for the West outside of California, 61 percent reported improvement in
commercial real estate, compared to 38 percent nationally, and only 29 percent reported excess
supply. Residential markets also were seen as stronger than average in those states. Survey of
Real Estate Trends; FDIC, April 1995.
Reorganization and New Division of Insurance
The FDIC has created a Division of Insurance, whose mission will include identifying and assessing
existing and emerging risks to the deposit insurance funds. Chairman Ricki Helfer said that
"establishing this new division as a formal element in the structure of the organization is the next
logical step in our effort to shift the FDIC from an agency that resolves bank failures to an agency
working to keep banks open and operating safely and soundly." The new division is one of several
organizational changes approved by the FDIC Board to enhance the Corporation's decision-making
processes and to achieve the goals established by the agency's strategic plan which the Board adopted
on April 24, 1995. Under the revised organizational structure, the Corporation's divisions and offices
will generally report to one of the three deputies to the Chairman. A number of management changes
were also announced, effective June 18, 1995. PR-30-95, FDIC, 4/24/95; PR-33, 5/17.
Bankers to Be Surveyed on Ways to Improve Examination Process
The FDIC will conduct surveys among bankers across the country aimed at improving the quality of
safety-and-soundness examinations, detecting and changing aspects of the agency's examination
process that may be inefficient, and reducing regulatory burden. The program, which is expected to
run for one year, builds on previous informal surveys conducted on a regional basis by the Division
Chairman Ricki Helfer said "the emphasis in this program is on two-way communication, timely
analysis and effective follow-up ... these elements are essential if the FDIC is to maintain
an efficient supervisory program and work effectively with bankers to encourage safe and sound
banking operations." PR-25-95, FDIC, 3/24/95.
As of early May, the Office of Thrift Supervision (OTS) had begun a similar program for evaluating
its examiners, and the OCC was planning to start a program in June. AB, 5/9.
Final Guidelines For Appeals Process
The FDIC approved final guidelines establishing an appeals process for material supervisory
determinations made by agency examiners and regional supervisory officials, implementing a
requirement applicable to the federal banking agencies and the NCUA under the RCDRIA of 1994.
Under the new guidelines, institutions have 60 days following receipt of written notice of a material
supervisory determination to appeal that determination to a special Supervision Appeals Review
Committee established in the Washington office. This Committee will consider and decide the appeal,
and notify the institution of its decision within 60 days.
Institutions may appeal a variety of material supervisory determinations, including those relating to:
examination ratings, such as CAMEL, compliance, and Community Reinvestment Act ratings; the
adequacy of loan-loss reserve provisions; disputed asset classifications exceeding ten percent of total
capital; and violations of law or regulations. Decisions to take prompt corrective action pursuant to
Section 38 of the Federal Deposit Insurance Act, determinations for which other appeals procedures
exist, and decisions to initiate formal or informal enforcement actions are not appealable under the
new guidelines. There are also provisions designed to protect institutions from possible retaliation
as a result of filing an appeal. PR-21-95, FDIC, 3/21/95; FIL-28-95, 4/4; FR, 3/28, p. 15923.
Deposit Activities of Foreign Banks
Pursuant to Section 107 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994,
the FDIC proposed to amend its regulations to restrict the amount and types of initial deposits of less
than $100,000 that could be accepted by an uninsured, state-licensed U.S. branch of a foreign bank.
The proposal is intended to afford equal competitive opportunity to foreign and domestic banks.
FIL-48-95, FDIC, 7/19/95; FR, 7/13, p. 36074.
Examinations Workshop For Minority Bankers
The FDIC will conduct a workshop at the National Bankers Association Annual convention this year
on how bankers can prepare for examinations and how they can work with examiners in addressing
any problems they may have. The convention will be held in New York City in September.
Announcing the FDIC's participation which responded to a request from the NBA, Chairman Ricki
Helfer said the workshop is an example of how the agency's focus has changed from resolving failed
banks to concentrating on helping banks and other financial institutions to stay open and operate
safely and soundly. Section 308 of the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 calls on the FDIC to provide minority-owned banks with technical assistance and educational
programs. PR-17-95, FDIC, 3/6/95.
Deposit Insurance Seminars
Beginning in May and through August 1995, the FDIC will conduct 22 seminars in 11 cities
nationwide for bank officers and employees who have oversight responsibilities relating to the
dissemination of accurate deposit insurance information. Instruction will be presented also on
uninsured deposit-like products and how to assist employees and customers to distinguish them from
insured deposits. FIL-33-95, FDIC, 4/28/95.
Information Availability Is Enhanced
To improve public access to information, the FDIC is now offering a new telephone service, "Action
Update," which provides a recorded message about the most recent press releases and directives to
institutions (Financial Institution Letters), as well as brief descriptions of the FDIC Board of
Directors' most recent actions, a description of new publications, and a list of significant events.
Callers can access the new service by dialing 202-898-7210, and can obtain copies of the documents
referenced by calling 202-898-6996. FDIC press releases and certain other documents also are
available through a fax retrieval system. PR-41-95, FDIC, 6/19/95.
Study of Bidder Competition and Resolution Policies
This study, by three FDIC staff members, investigates whether the changes in the FDIC's
failure-resolution policies mandated by the FDIC Improvement Act of 1991 (FDICIA) decreased
failure-resolution costs. Prior to FDICIA, the winning bid for a failed bank's assets and liabilities was
not required to be the bid that minimized the FDIC's resolution costs. Generally, bids were divided
into three categories according to whether the bidder proposed assuming virtually all, some, or few
of the failed bank's assets. These three types of bids are termed whole-bank bids,
purchase-and-assumption (P&A) bids, and deposit-transfer bids, respectively. Whole-bank bids were
considered first, and if the most competitively priced whole-bank bid was less costly than a deposit
payoff, that whole-bank bid was selected. If no whole-bank bid passed the cost test, the P&A bids
were considered. Finally, if no P&A bids passed the cost test, the deposit-transfer bids were
considered. If no bids passed the cost test, the FDIC conducted a deposit payoff.
FDICIA eliminated the preference to select whole-bank bids over P&A bids and P&A bids over
deposit-transfer bids. The Act required that the winning bid be chosen solely on the basis of
minimizing the FDIC's resolution costs. The least-cost resolution rule went into effect immediately
upon passage of FDICIA on December 19, 1991. Because competition among bidders for failed
banks prior to FDICIA was based not only on the cost to the FDIC, but also on the type of bid, it is
possible that winning bids were not always cost minimizing to the FDIC. Based on the FDIC's actual
and estimated losses on resolutions in the study period, the aggregate resolution costs were found to
have decreased substantially after enactment of FDICIA. "Acquirer Gains in FDIC-Assisted Bank
Mergers: The Influence of Bidder Competition and FDIC Resolution Policies," Matthew T. Billett,
Jane F. Coburn, and John P. O'Keefe, May 1995.
Resolution Trust Corporation
Agency on Schedule to Sunset at Year-end
Established on August 9, 1989, to deal with the failure of much of the U.S. savings-and-loan industry,
the RTC is completing its mission and is scheduled to terminate on December 31, 1995. The agency
was created by amendments to the Federal Home Loan Bank Act made by the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (FIRREA). This legislation, as subsequently
amended, gives the RTC responsibility for resolving savings institutions that were previously
FSLIC-insured and that became insolvent before July 1, 1995; and liquidating the assets of those
institutions. Savings associations that become insolvent after July 1, 1995, become the responsibility
of the Savings Association Insurance Fund (SAIF) administered by the FDIC.
At sunset, all RTC assets and liabilities will be transferred to the FSLIC Resolution Fund (FRF), a
fund administered by the FDIC, and the FDIC will succeed the RTC as conservator and receiver for
any institutions under RTC control at that time. All RTC staff will also be returned to the FDIC, as
provided by FIRREA. As required under the RTC Completion Act, the FDIC/RTC Transition Task
Force was established in February of 1994 to effectuate this transfer in a coordinated manner. The
Task Force is required by statute to resolve differences in the operations of the two corporations; to
recommend which systems of the RTC should be preserved for use by the FDIC; to recommend
procedures that would promote an orderly transfer; and to recommend which management
enhancement goals and reforms applicable to the RTC should apply to the FDIC.
From its inception on August 9, 1989 to June 16, 1995, the RTC resolved all 747 institutions taken
over through that date, protecting 25 million deposit accounts and $221 billion in deposits. Through
April 30, the RTC had disposed of assets with a book value of $445 billion, leaving $20 billion (book
value) of assets in its inventory. Recoveries from sales and collections totaled $388 billion, averaging
87 percent of original book value. The Congress has authorized $105 billion in loss funds for the
RTC. The estimated total resolution costs, as of June 20, 1995, were $87 billion to $95 billion. =
Testimony, Committee on Banking, Housing and Urban Affairs, U.S. Senate, June 20, 1995, J.E.
Ryan, Acting CEO, RTC; FDIC/RTC Transition Task Force.
Federal Reserve Board
Evaluating the Risk Management of Derivative Contracts
The FRB issued a guidance for evaluating the risk-management practices used by banking institutions
in acquiring and managing securities and off-balance-sheet (OBS) derivative contracts for nontrading
purposes. It focuses on institutions' investments in cash securities and "end-user" derivatives
activities, supplementing existing guidances and directives. Nontrading activities in this guidance
involve the use of securities (both available-for-sale and held-to-maturity) and OBS derivative
contracts that involve longer time periods than typically are associated with trading activities.
Nontrading activities involve the full array of cash securities (including fixed- and floating-rate notes
and bonds, structured notes, mortgage pass-through and other asset-backed securities, and mortgage
derivative products), money-market instruments, and OBS derivative contracts (including swaps,
futures, and options).
The overview of the guidance identifies basic factors that examiners should consider in evaluating the
elements of a sound risk-management process, and contains specific guidance for evaluating an
institution's management of each of the risks involved in these activities, including credit, market,
liquidity, operating and legal risks. In evaluating an institution's risk-management process, examiners
should consider the nature and size of its holdings. Examiners should focus particular attention on
evaluating an institution's understanding of the risks involved in the instruments it holds. Banking
organizations should ensure that their capital positions are sufficiently strong to support all the risks
associated with nontrading activities on a fully consolidated basis and should maintain adequate
capital in all affiliated entities engaged in these activities. In evaluating the adequacy of an
institution's capital, examiners should consider any unrecognized net depreciation or appreciation in
an institution's securities and derivative holdings. SR 95-17 (SUP), Division of Banking
Supervision and Regulation, FRB, 3/28/95.
The FRB requested comment on a proposal to amend its risk-based capital requirements to
incorporate a measure for market risk in foreign-exchange and commodity activities and in the trading
of debt and equity instruments. The effect of the proposed rules would be that, in addition to existing
capital requirements for credit risk, certain institutions would be required to hold capital based on the
measure of their market risk exposure. The proposed rule is based on a proposal issued by the Basle
Committee on Banking Supervision and would go into effect at the end of 1997.
The FRB also is requesting comment on a possible approach to setting capital requirements for
market risk that would require a bank to specify the amount of capital it chose to allocate to support
market risks. If cumulative losses over some subsequent trading interval exceed the commitment, the
bank would be subject to regulatory penalties, such as fines, higher capital requirements, or
restrictions on trading activities. Press Release, FRB, 7/14/95; FR, 7/25, p. 38142; p. 38082
The FRB is amending, effective March 22, 1995, its risk-based capital guidelines for state member
banks and bank holding companies to implement Section 350 of the RCDRIA. Section 350 states
that the amount of risk-based capital required to be maintained by any insured depository institution,
with respect to assets transferred with recourse, may not exceed the maximum amount of recourse
for which the institution is contractually liable under the recourse agreement. Currently, under the
guidelines an institution could be required to hold capital in excess of the maximum amount of loss
possible under the contractual terms of the resource obligation. Press Release, FRB, 2/7/95; FR,
2/13, p. 8177.
The FRB issued a proposal, implementing Section 208 of the Riegle Act, that would have the effect
of lowering the capital requirement for small-business loans and leases on personal property that have
been transferred with recourse by qualifying banking organizations. For the general purpose of
calculating risk-based and leverage capital ratios, qualifying institutions that transfer small-business
obligations with recourse would be required to maintain capital only against the amount of recourse
retained, subject to certain conditions. Press Release, FRB, 1/26/95; FR, 2/1, p. 6043.
The FRB, the OCC, the FDIC and the OTS issued an interim final rule, effective August 1, 1995,
amending the capital adequacy guidelines for banks, bank holding companies, and savings associations
to treat originated mortgage servicing rights (OMSRs) the same as purchased mortgage servicing
rights (PMSRs) for regulatory capital purposes. Under the interim rule, which was developed in
response to Financial Accounting Standards Board Statement No. 122, both OMSRs and PMSRs are
included in regulatory capital when determining Tier 1 (core) capital for purposes of the agencies'
risk-based and leverage capital standards, and in calculating tangible equity for purposes of prompt
corrective action subject to the regulatory capital limitations that previously applied only to PMSRs.
Press Release, FRB, 7/27/95; FR, 8/1, p. 39226.
The FRB issued final guidelines and a final rule, both effective August 9, 1995, regarding
safety-and-soundness standards for state member banks as required by Section 132 of the FDICIA.
As amended by the Community Development Act, Section 132 no longer requires the FRB, the OCC,
the FDIC and the OTS to prescribe quantitative standards relating to asset quality and earnings but
rather, mandates that the agencies prescribe standards that they deem appropriate. The agencies are
therefore proposing asset quality and earnings standards, in guidelines form, that emphasize
monitoring, reporting and preventive or corrective action. The guidelines set forth broad,
principle-based standards that establish the objectives that proper operations and management should
achieve, while leaving the methods for achieving those objectives to each institution. The rule
establishes deadlines for submission and review of safety-and-soundness compliance plans that the
federal bank regulatory agencies may require for insured depositories that fail to meet the guidelines.
Press Release, FRB, 7/7/95; FR, 7/10, p. 35674 (inter-agency proposal).
Supervision of Foreign Banks' U.S. Operations
The FRB advised the Federal Reserve Banks that the banking supervisory authorities whose
responsibilities include the U.S. operations of foreign banking organizations have developed a
program of supervision relating to FBOs. The Board said that Reserve Banks should fully coordinate
their FBO supervision activities with the appropriate state banking departments and regional offices
of the other federal agencies in their districts. The FRB will designate a foreign bank's entire U.S.
operation a single rating, regardless of how many units exist, which will diminish the negative impact
on the entire institution of a poor rating at a small unit. Greater emphasis will be given to the foreign
bank's risk-management, internal controls, and compliance activities. The guidelines require foreign
banks to be a source of strength to their U.S. operations. AB, 4/19/95, p. 3; SR 95-22 (Sup. IB),
Div. of Banking Supervision and Regulation, FRB, 3/31.
Tying Restrictions Are Revised
The FRB is adopting, effective May 26, 1995, a regulatory "safe harbor" from the anti-tying
restrictions of Section 106 of the Bank Holding Company Act Amendments of 1970 and the Board's
Regulation Y. The safe harbor permits any bank or nonbank subsidiary of a bank holding company
to offer a "combined-balance discount," which is a discount based on a customer maintaining a
combined minimum balance in products specified by the company offering the discount.
The BHC Act Amendments of 1970 generally prohibit a bank from tying a product or service to
another product or service offered by the bank or any of its affiliates. The Board is authorized to
grant exceptions to its restrictions by regulation or order. FR, 4/25/95, p. 20186.
Community Reinvestment Act Revised Regulations
The FRB issued a revised Regulation BB, and related conforming amendments to its Home Mortgage
Disclosure Act regulation (Regulation C). Parallel regulations are being issued by the OCC, the FDIC
and the OTS for institutions they supervise. The new CRA rule emphasizes performance over
process and documentation. The 12 old CRA assessment factors for large retail banks and thrifts are
replaced with three tests: for lending, services, and investments.
Institutions will no longer have to maintain extensive documentation of directors' participation in
formulating and reviewing CRA policies, will no longer have to prepare a formal CRA statement, and
will not have to document their efforts to market services in low- and moderate-income communities.
Banks and thrifts will be evaluated based on loans made, services provided and investments in their
communities. The rule emphasizes direct lending. A streamlined examination process is provided
for independent banks and thrifts with assets under $250 million, or banks and thrifts with assets
under $250 million that are members of a holding company with assets of under $1 billion. Larger
institutions will collect and report to regulators aggregated data on their small-business and
small-farm loans by census tract. They will not collect or report data on race and gender of
small-business borrowers. HMDA data collection will be expanded for large institutions to include
collection and reporting of mortgage loans outside the metropolitan statistical areas (MSAs) where
the institutions have branch offices.
Under the final rule, there are no "safe harbors" from CRA protests. Institutions will continue to
make their CRA ratings public, and the public will have an opportunity to comment on CRA
performance before the start of a scheduled examination. The FRB, the FDIC, the OCC and the OTS
will work together to develop and adopt uniform examination procedures. Joint examiner training
programs will be developed and implemented. The rule becomes effective on July 1, 1995; some
provisions become operational on January 1, 1996, and July 1, 1997. Press Release, FRB,
4/14/95; NEWS and "CRA Regulation Facts," OTS, 4/19; FR, 5/4, pp. 22156, 22223; FIL-35-95,
Equal Credit Opportunity
The FRB proposed amending its Regulation B to eliminate the general prohibition on collecting data
relating to an applicant's race, color, sex, religion, and national origin, giving creditors the option to
ask applicants to provide the information on a voluntary basis.
Creditors have expressed a variety of reasons for wanting to collect these data: to better audit their
lending programs to ensure that they are in compliance with fair lending laws; to respond more
effectively to CRA protests; and to collect data so that they can better evaluate their community
outreach programs and the effectiveness of their marketing programs. Some regulatory agencies and
community groups say the data may increase their ability to detect discrimination.
The proposal would allow data collection only; consideration of an applicant's race, color, sex,
religion, and national origin in a credit decision would still be prohibited. FR, 4/26/95, p. 20436;
Press Release, FRB, 4/21.
The FRB revised, effective June 5, 1995, the official staff commentary to its Regulation B. The
commentary applies and interprets the requirements of the Regulation and is a substitute for individual
staff interpretations. Issues on which the revisions provide guidance include disparate treatment,
special purpose credit programs, credit scoring systems, and marital status discrimination. FR,
6/7/95, p. 29965.
Information on Banks' Selling Mutual Funds
The Federal Reserve will soon begin a nationwide education campaign about the sale of mutual funds
and annuities at banks. The campaign will begin with a series of seminars for retirees and those
planning for retirement. The seminars will be hosted by the 12 Federal Reserve Banks and will
emphasize that mutual funds and annuities, unlike certificates of deposit, are not insured by the FDIC
or in any way guaranteed by the banks that sell them. The Federal Reserve developed the program
in cooperation with the American Association of Retired Persons, and conducted pilot seminars in
the Boston area in late 1994. Press Release, FRB, 3/20/95.
Truth in Lending
The FRB amended its Regulation Z to implement changes made to the Truth in Lending Act by the
RCDRIA, which imposes new disclosure requirements and substantive limitations on closed-end
home-equity mortgage loans bearing rates or fees above a certain percentage or amount. The law
also imposes new disclosure requirements to assist consumers in comparing the cost of reverse
mortgage transactions, which provide periodic advances primarily to elderly homeowners and rely
principally on the home's value for repayment. The rule is effective March 22, 1995, with compliance
optional until October 1, 1995. Press Release, FRB, 3/16/95; FR, 3/24, p. 15463.
The FRB revised the official staff commentary to its Regulation Z to clarify regulatory provisions and
provide further guidance on certain issues of general interest, such as the treatment of various fees
and taxes associated with real-estate-secured loans and a creditor's responsibilities when investigating
a claim of the unauthorized use of a credit card. The rule is effective April 1, 1995, with compliance
optional until October 1, 1995.
The Truth in Lending Act requires creditors to disclose credit terms and the cost of credit as an
annual percentage rate (APR). The Act requires additional disclosures for loans secured by a
consumer's home, and permits consumers to cancel certain transactions that involve their principal
dwelling. It also imposes limitations on some credit transactions secured by a consumer's principal
dwelling. Press Release, FRB, 3/28/95.
Pursuant to requirements of the RCDRIA, the FRB requested comment on how rules for credit
advertising could be modified to increase consumer benefit and decrease creditor costs, and on how
current rules could be modified, if at all, for radio and television advertisements without diminishing
consumer protection. Under present law, creditors that state a rate in an advertisement must state
the APR. Stating the APR or other terms triggers additional disclosure requirements such as annual
fees imposed on a credit line or the repayment terms for an installment loan. FR, 6/27/95, p.
Home Mortgage Disclosure
The FRB published for comment a staff commentary to its Regulation C. The proposed commentary
provides guidance on various issues including the treatment under the Regulation of prequalifications,
participations, refinancings, home-equity lines, mergers, and loan applications received through a
broker. FR, 6/7/95, p. 30013.
Loans to Bank Officers
The FRB is revising, effective immediately, its Regulation O to implement a provision of the RCDRIA
that eliminates a requirement for prior approval of the board of directors before a member bank may
make a loan to an executive officer that is secured by a first lien on the officer's residence. FR,
4/7/95, p. 17635.
Insider Lending Limits
The National Bank Act and Regulation O establish the limit for single-borrower loans to any insider
of a member bank and insider of the bank's affiliates to be 15 percent of the bank's unimpaired capital
and unimpaired surplus for loans that are not fully secured, and an additional ten percent for loans
that are fully secured by certain readily marketable collateral. The FRB amended its regulation to
conform the definition of unimpaired capital and unimpaired surplus to the definitions recently
adopted by the OCC in calculating the limit on loans by a national bank to a single borrower. Under
that revised definition, a national bank's "capital and surplus" are equal to Tier 1 and Tier 2 capital
included in the calculation of the bank's risk-based capital together with the amount of the bank's
allowance for loan and lease losses not included in this calculation. FR, 4/20/95, p. 19689; Press
Release, FRB, 6/8.
Suspicious Activity Reports
The FRB proposed to revise its regulations on reporting of suspicious activities by the domestic and
foreign banking organizations supervised by the Federal Reserve, including the reporting of suspected
violations of the Bank Secrecy Act (BSA). The principal proposed changes to the FRB's current
criminal referral reporting rules include: a) simplifying and shortening the referral form; b) raising the
mandatory reporting thresholds for criminal offenses, thereby reducing banking organizations'
reporting burdens; c) filing only one form with a single repository, rather than submitting multiple
copies to several federal law enforcement and banking agencies, thereby further reducing reporting
burdens; and d) clarifying the criminal referral and suspicious financial transaction reporting
requirements of the FRB, the OCC, the FDIC, the OTS, and the National Credit Union
Administration and the Treasury Department associated with suspicious financial transactions. The
above supervisory agencies, working with the Treasury's Financial Crimes Enforcement Network
(FinCEN), are developing computer software to assist financial institutions in preparing and filing
Suspicious Activity Reports (SARs). FR, 7/3/95, p. 34481; 7/17, p. 36366 (OTS notice).
Required Reporting Is Reduced For BHCs
The FRB adopted several revisions to its FR Y-6 which is an annual report filed by large bank holding
companies, excluding foreign banking organizations. The report consists of consolidated and parent
company financial statements in the company's own format, and is the Federal Reserve's principal
source of internally generated and independently audited financial data on individual bank holding
companies and their banking and nonbanking subsidiaries. Among the burden-reducing changes are:
1) eliminating the requirement to submit consolidated and parent company financial statements; 2)
revising the requirement for audited financial statements to include only holding companies with
assets of $500 million or more (raised from $150 million) and 3) eliminating the requirement to
submit nonbank subsidiary financial statements which, as currently proposed, would be incorporated
into an expanded standardized FR Y-11 report (financial statement of nonbank subsidiaries). Holding
companies must still make available their annual reports and their Securities and Exchange
Commission reports of financial condition. FR, 3/6/95, p. 12215; AB, 3/14, p. 3.
Establishment of Loan Production Offices
The FRB issued, effective April 6, 1995, an interpretation of its Regulation H that allows a state
member bank to establish a back office facility that is not accessible to the public without such a
facility being considered to be a branch. Loans originated by a loan production office may be
approved at a back office location, rather than at the main office or a branch of the bank, without the
loan production office being considered to be a branch, if the proceeds of those loans are received
by customers at locations other than a loan production office or back office facility. This
interpretation is intended to provide parity between state member banks and national banks with
respect to the establishment of loan production offices and back office facilities. FR, 4/6/95, p.
Mortgage Unit May Sell Employment Histories
The FRB granted approval for an Iowa-based mortgage unit of Norwest Corp., Minneapolis, to sell
employment histories to third-party depository institutions and affiliates for use in their banking
activities. While the decision is the first of its kind, the expansion of banking powers is said to be
small. A 1994 decision of the Board allowed Comerica Corp. to provide employment information
and histories to depository institutions in connection with career counseling services. The mortgage
firm's release of certain information, which it will gather from state employment departments and
other sources, will depend upon the individual's prior consent. The firm will be subject to the Fair
Credit Reporting Act. BBR, 5/15/95, p. 951.
Title Abstracting Approved as Banking-Related Activity
The FRB granted approval for First National Co., Storm Lake, Iowa, to engage in realty title
abstracting through an acquisition. For the first time this activity as a source of fee income would
be available to bank holding companies. Normally the realty title abstracting business involves
recreating each county's title records, often converting them to electronic form, and then charging a
fee for the title search. Permission for national banks to acquire title abstractors was granted by the
OCC seven years ago. AB, 7/5/95, p. 2.
Data Processing Limits Under Reg. Y Are Broadened
The FRB gave approval for BNCCORP Inc. of Bismarck, ND to acquire a data processing firm and
to include providing non-financial information in its data processing services. Under Regulation Y,
bank holding companies can provide data processing and transmission services, databases, and access
facilities, if the data are "financial, banking, or economic" in nature. The FRB said that in this case
the non-financial information would be provided only as a part of a larger package of data processing
services to a financial institution, and would not be offered on a stand-alone basis or to customers
other than financial institutions. BBR, 1/16/95, p. 98.
Geographic Market Defined For EPT Network Services
The FRB granted approval for Electronic Payment Services Inc., Wilmington, Delaware, a joint
venture subsidiary of four large bank holding companies, to acquire the ATM assets and some POS
assets of National City Corp., a Cleveland-based bank holding company, and also approved National
City to become a member of the joint venture. EPS provides data processing and transmission
services to banks and retail merchants who are members of the ATM and POS network MAC. The
four members of the joint venture are Bank One Corp., Columbus, CoreStates Financial Corp.,
Philadelphia, PNC Bank Corp., Pittsburgh, and KeyCorp, Cleveland. The FRB defined the
appropriate geographic market in this case to be MAC's Mideast region, consisting of western
Pennsylvania, Ohio, Indiana, Kentucky and West Virginia. A FRB study suggests that the geographic
market for network access is an area significantly larger than local markets, and the markets for
network services and ATM processing are thought to be at least regional. The FRB rejected
arguments that the geographic markets should be defined on the basis of the boundaries of cities or
states. BBR, 3/16/95, p. 517.
Electronic Fund Transfers
The FRB amended, effective April 24, 1995, its Regulation E to eliminate the requirement that an
electronic terminal receipt disclose a number or code that uniquely identifies the consumer,
the consumer's account, or the access device. This requirement posed a significant security risk to
consumers and financial institutions by making information accessible to criminals that could be used
to make fraudulent fund withdrawals. Press Release, FRB, 3/16/95.
Payments System Risk; Daylight Overdrafts
The FRB revised the increase in the fee charged to depository institutions for daylight overdrafts
incurred in their accounts at the Reserve Banks that had been scheduled to take effect on April 13,
1995. The current effective daily fee of ten basis points was implemented in April 1994, with
scheduled increases to 20 basis points on April 13, 1995, and to 25 basis points on April 11, 1996.
In the aggregate, daylight overdrafts in Federal Reserve accounts have fallen by roughly 40 percent
in response to the initial ten-basis-point fee. As a result of the sizeable reductions, as well as concerns
about the possible effects of further rapid fee increases, the Board approved an increase in the fee to
an effective daily rate of 15 basis points rather than 20 basis points. (The 15-basis-point fee equals
an annual rate of 36 basis points, quoted on the basis of a 360-day year and a 24-hour day.) The
Board will evaluate the desirability of any further increases in the daylight overdraft fee, based on the
objectives of the payments system risk program, two years after the implementation of the
15-basis-point fee. Press Release, FRB, 3/2/95; FR, 3/7, p. 12559.
Fed Acts to Cut Costs of Services, Improve Efficiency
The FRB and the Federal Reserve Banks are undertaking a number of major consolidation and other
budget-cutting measures. For example, a majority of the Federal Reserve Banks have implemented
early-retirement programs during the last few years. Other recent or ongoing actions include: a)
consolidation of mainframe data processing from the previous 12 sites to three: a hub in East
Rutherford, NJ, with backup facilitates at the Dallas and Richmond Federal Reserve Banks; b)
consolidation of supervision and decision-making on financial services such as check clearing and
funds transfer at the St. Louis Federal Reserve Bank; and c) replacement of varied software used by
the different Federal Reserve Banks with standardized systems. Individual Federal Reserve Banks
are centralizing a number of operations, for example, the Atlanta Bank has brought its check
processing sites down to five from 12. AB, 5/17/95, p. 1.
"Purposes and Functions" Is Updated
The FRB is publishing the eighth edition of Purposes and Functions, a paperback book first
published in 1939 that explains the structure and operations of the Federal Reserve System. The
revised and updated edition has been designed to appeal to a general audience and can supplement
college-level classroom texts on the Federal Reserve's role in monetary policy and the global
economy. Press Release, FRB, 3/2/95.
Office of the Comptroller of the Currency
Enhancing the Supervision of Bank Lending
Comptroller of the Currency Eugene Ludwig said that the agency's supervisory activities for safety
and soundness in the credit area will be strengthened because of warning signs of slippage of credit
quality. Among the steps being planned, a National Credit Committee, whose members include some
of the agency's most senior and experienced credit analysts, will work with examiners in charge of
supervision at larger national banks to ensure that adequate credit quality supervision is in place.
Among the warning signals noted is a recent decline in the standard minimum payment on credit cards
from five percent to two percent of the outstanding balance, and significant increases in high
loan-to-value second-mortgage and home-equity lending. Some of the questions for bank
managements and the examiners are the extent that the bank: 1) is taking risk into account in the
pricing of loans; 2) is making exceptions to credit standard policies; 3) has compensation or other
policies that encourage lending officers to lower credit standards; and 4) has significant credit
concentrations in its portfolio. Also, how independent and effective is the credit review function; and
are stress tests being performed on all or a portion of the credit portfolio to determine how loans will
be repaid when the customer, the industry and/or the economy turn down. News %0 Release,
In February 1995, the OCC decided to include information about concentrations of credit in the
reports of examination of national banks. Examiners will report such concentrations amounting to
over 25 percent of the bank's capital structure in the report of examination. Effective May 19, 1995,
this reporting was extended to federal branches and agencies of foreign banks where credit
concentrations exceed ten percent of the total assets of the branch or agency. Bulletin No. 95-7,
OCC, 2/8/95; Bulletin No. 95-26, 5/19.
Reaffirming and updating its statement issued in January 1990, the OCC said that during the past five
years national bank managers have improved their interest-rate-risk management systems, in
particular by: 1) advancing from measuring risk in simple repricing ("gap") reports to using
simulation models to quantify and control the amount of short-term earnings that may be at risk; and
2) developing or enhancing ways to measure and control exposures arising from medium- and
long-term positions. The agency's statement notes that the value of many banks' medium- and
long-term instruments are highly sensitive to changes in interest rates, particularly those containing
option features, such as the possibility of loan prepayments or the withdrawal of funds. Financial
instruments such as collateralized mortgage obligations (CMOs), structured notes, credit-card lines,
indexed CDs, and off-balance-sheet derivative instruments provide financial institutions with more
services to offer customers and more tools for risk management, but the complexity of many of these
instruments makes it more difficult to determine the sensitivity of their values to changes in interest
Risk measurement systems should be able to identify and quantify the major sources of a bank's
interest-rate-risk exposure on a timely basis. Where there are significant medium- and long-term
positions, managers should be able to assess the longer-term impact of changes in interest rates on
the earnings and capital of the bank. Senior management and the board or a committee thereof
should receive reports on the bank's interest-rate risk on at least a quarterly basis, but more frequently
as appropriate to the level of current and potential risk. The board's tolerance for interest-rate-risk
exposure should be clearly communicated to senior management. Clear lines of responsibility should
be established for measuring and managing risk exposures. Advisory Letter 95-1, OCC, 2/8/95.
In June, the agency provided question-and-answer information regarding its guidance issued on
February 8. Bulletin No. 95-28, OCC, 6/20/95.
More Information Provided on Derivatives Activity
Bank Call Report data for the first quarter of 1995 include new information that provides a better
measure of the market size, credit risk exposure, and revenue from bank derivatives activity. The
notional amount of derivatives in commercial bank portfolios, which is an indicator of the level of
derivatives activity, increased by 14 percent in the quarter. Nine commercial banks account for 93
percent of the total notional amount. First-quarter Call Report data include, for the first time, the
gross negative and positive fair values of derivative positions, credit risk exposure in the form of
"bilaterally netted" current exposure, the distribution of derivatives contracts by type, revenue from
derivatives transactions and the diversification of earnings sources, and information on high-risk
mortgage securities and on structured note holdings. News Release, OCC, 3/31/95; 6/14.
OCC and SEC Agree on Joint Examinations
The OCC and the Securities and Exchange Commission agreed to conduct joint examinations of
certain entities in which both agencies have regulatory and supervisory interests. These entities are
mutual funds advised by national banks or their subsidiaries and national banks and national bank
subsidiaries providing advisory and other investment services to mutual funds. Among the areas of
common interest to be evaluated are: systems of internal control used to ensure compliance with
regulatory requirements, including disclosures to investors; risk management systems used by the
adviser to monitor and control the risks in light of the fund's objectives; and management of conflicts
of interest between the adviser and the advised funds or other advisory clients and the advised funds.
The scope and staffing of particular examinations will be determined by both agencies on a
case-by-case basis. Documents prepared or obtained by either agency in connection with a joint
examination will be treated as confidential. Coordination of these examinations will enable the
agencies to reduce the regulatory burden on banks involved in mutual fund activities, minimize
government intrusion into bank operations, and also protect the interests of bank depositors and
investors. Joint Release, OCC and SEC, 6/12/95.
The OCC, effective March 17, 1995, revised its rules governing national bank lending limits, in order
to eliminate inefficient and unduly burdensome requirements and refocus the lending limit rules on
the areas of greatest safety-and-soundness concern. The final rule alters the definition of "capital and
surplus" upon which lending limits are based. The new lending limit calculation draws upon
risk-based capital components that a bank must already calculate for Call Report purposes. Thus,
most national banks generally will be required to calculate their lending limit only once every quarter,
rather than every time they propose to make a loan. A new exception to the lending limits will allow
a bank to advance funds to renew and complete the funding of a qualifying loan where the additional
advance will protect the position of the bank. The final rule also allows a bank to advance funds to
pay taxes, insurance and other necessary expenses to protect its interest in the collateral securing a
loan, and clarifies when a loan is considered "nonconforming." FR, 2/15/95, p. 8526.
The FRB adopted a conforming amendment to its Regulation O. FR, 6/13/95, p. 31053.
Court Upholds State Limits on Bank Insurance Activities
The U.S. Court of Appeals for the Eleventh Circuit denied a petition by Barnett Bank of Marion
County, N.A. to rehear a ruling that would allow Florida's insurance commissioner to block Barnett's
ownership of an insurance agency under state law (Barnett Bank of Marion County, N.A. v.
Gallagher). A panel of the Court, affirming a trial court's decision, ruled in January that the
McCarran-Ferguson Act overrides other federal laws and gives states the right to regulate bank
insurance sales. The denial of the petition appears to conflict with a decision of the Sixth Circuit that
federal law preempts a Kentucky anti-affiliation law (Owensboro National Bank v. Stephens),
and a review by the U.S. Supreme Court is expected.
The Louisiana Court of Appeals upheld a state law that limits bank insurance sales in the state
(First Advantage Insurance, Inc. v. Green). The court held that McCarran-Ferguson protects
a state law that prohibits banks from selling insurance (except for credit life, credit health, and
accident insurance) from preemption by the National Bank Act. AB, 4/12/95, p. 3; BBR, 4/3, p.
693; 3/13, p. 541.
Courts Rule on Retirement Account
A federal judge in New Mexico prohibited the state insurance regulator from interfering with a
national bank's sale of the retirement CD (First National Bank of Santa Fe v. Chavez). The
retirement certificate of deposit is a FDIC-insured product that is similar to an uninsured annuity. A
customer makes one or a series of payments into a tax-deferred account and after reaching a
designated age receives regular lifetime payments from the bank. In January the U.S. Supreme Court
ruled in the Valic case (see this Review, Spring 1995, p. 39) that selling annuities is
"incidental" to banking and a permissible activity under the National Bank Act. AB, 2/21/95, p.
A judge in the U.S. District Court in Illinois ruled that the retirement CD is an annuity, and therefore
should be regulated as an insurance product. AB, 6/6/95, p. 18.
Loans to Distributor of Bank's Mutual Funds
The OCC issued a no-objection letter with respect to a proposed financing arrangement under which
Crestar Bank, N.A., Washington, DC, would provide loans to the distributor of the bank's mutual
funds to finance the payment of brokerage commissions to a brokerage affiliate of the bank. The
OCC's decision was made contingent upon the loans being structured on terms and conditions
substantially the same as loans and extensions of credit provided to other nonaffiliates, and that any
such loan be fully collateralized by a cash deposit or an equivalent amount of U.S. Government
securities. Letter Regarding Proposed Financing Arrangement, OCC, 3/13/95.
Decision on Bank Officer's Services Not Reviewable
The U.S. District Court for Kansas ruled (Hammond v. OCC) that it lacked jurisdiction to
review an OCC decision disapproving a proposed appointment of an executive to serve as president,
chief executive officer, and a board member of a national bank. The OCC said the individual lacked
the necessary integrity for the positions, having engaged in a tying violation while president of another
bank. BBR, 4/17/95, p. 795.
The OCC reminded national banks of their obligations under the antitying law, whose purpose is to
keep banks from using bank credit and other services to coerce customers and reduce competition.
The guidance includes, among other things, examples of tying arrangements that, unless exempted
by the Board, are prohibited. For example, a bank may not condition the extension of credit or the
reduction of the price of credit on the customer purchasing credit-related insurance from the bank.
Also included are suggested systems and controls, and suggested audit and compliance programs.
Bulletin No. 95-20, OCC, 4/14/95.
Bank Reports Do Not Violate Privacy Laws
A U.S. district court in Texas ruled that Marfa National Bank, Marfa, TX, was not violating financial
privacy laws, but was complying with the Bank Secrecy Act when it reported two depositors
suspected of engaging in actions to avoid coverage by the bank's currency transaction reports.
AB, 6/22/95, p. 9.
Community Development Bank Chartered
The OCC issued a charter to Neighborhood Development Bank, N.A., which will serve the low- and
moderate-income and minority neighborhoods of southeast San Diego, CA. The institution is the first
bank focusing on community lending to be federally chartered, and an application has been filed with
the Federal Reserve to establish a holding company, Neighborhood Bancorp. The bank will seek
funding as a community development financial institution under the CDFI Fund, which was created
by the RCDRIA. The OCC has granted approval for Wells Fargo Bank, N.A. to make an equity
investment in both the bank and the proposed holding company. BBR, 2/13/95, p. 316.
Appraisals For Affordable Housing Loans
In a joint policy statement, the OCC, the OTS, the FDIC, and the FRB clarified that federally
regulated financial institutions should ensure that appraisals of affordable housing projects consider
and discuss the effect of certain types of financial assistance, such as low-income housing tax credits,
subsidies and grants on the estimate of market value for such projects. Such financial assistance
creates an incentive for developers and investors to undertake the project. When the benefits of such
financial assistance are not appropriately reflected in the project's appraisal, the estimated cash flow
of the project is negatively affected, resulting in a lower market value, and a loan-to-value ratio that
may be too low to meet supervisory standards. The apppraisal should discuss the value of the
financial assistance that would survive sale or foreclosure, and consider the effect of financial
assistance that does not necessarily transfer to new ownership, when applicable. Joint Release,
OCC, FDIC, FRB, OTS, 3/10/95.
Agency to Request Feedback on Examination Process
The OCC will begin surveying bankers at the conclusion of each examination to get their immediate
feedback on how well the agency is doing its job in areas such as the effectiveness of its
communications with banks, the reasonableness of agency requests for data and information, the
quality of examiners' decision-making during the exam process, and quality of written exam reports.
Completing the survey is voluntary; however, bankers will be asked to fill in their name in order to
facilitate follow-up work by the OCC. The survey forms will be sent directly to the agency's
Ombudsman, who will be responsible for analyzing and summarizing the responses. News
Release, OCC, 4/17/95.
Approvals For Interstate Branching
Federal banking law dating from 1886 allows a national bank to move its main office up to 30 miles,
even across a state line, and the OCC has approved the operation of the former main offices,
following the moves, as branches. Among the recent approvals under this authority were: PNC
Bank, Northern Kentucky, will move from Ft. Mitchell, Kentucky to Cincinnati, Ohio, combining two
subsidiaries into a single Ohio bank with> ten Kentucky branches and 60 Ohio branches; NationsBank
Middle Atlantic will move from Bethesda, Maryland to McLean, Virginia, consolidating subsidiaries
into a single Virginia bank with branches in Virginia, Maryland and the District of Columbia;
American National Bank and Trust Company of Wisconsin will move its main office from Genoa
City, Wisconsin to Libertyville, Illinois, merging into an Illinois bank that will have 20 branches in
Illinois and Wisconsin. The 30-mile rule has been used by about a dozen banks in the past year, and
the OCC expects about the same number of applications in 1995. In recent approvals the OCC has
argued that state laws prohibiting out-of-state banks from owning branches violates the U.S.
Constitution's commerce clause, and also that these laws are preempted by federal law. AB,
3/13/95, p. 2; 3/20, p. 2.
The OCC is proposing to revise the interpretive rulings that appear in part 7 of Title 12 of the Code
of Federal Regulations. This proposal updates and streamlines OCC regulations and seeks to
eliminate regulatory requirements that impose ineffective, inefficient and costly regulatory burdens
on national banks. FR, 3/3/95, p. 11924.
Comments Sought on Various Issues
Among the issues on which the OCC is seeking comments are permitting banks to sell their excess
data processing capacity, whether to prohibit states from barring national banks from engaging in
actions permitted by federal rules through the use of restrictive licensing laws, and expanding the
definition of interest rates that national banks may charge by including annual fees, late fees, and other
fees. AB, 3/3/95, p. 1.
Disclosures of Information
The OCC proposed clarifications and technical amendments to its rules relating to the availability and
release of information to update and streamline its regulations and reduce unnecessary regulatory
costs and other burdens. FR, 3/27/95, p. 15705.
History Text Reissued
First published in 1968, The Comptroller and Bank Supervision: A Historical Appraisal has
been reissued. The updated version includes a discussion of the changes in banking that have
occurred over the past 30 years and the many legislative and regulatory changes that have shaped the
current banking environment. News Release, OCC, 6/12/95.
Treasury Shortens Currency Transaction Report
The Treasury Department has revised the report that banks must file on their currency transactions
exceeding $10,000, effective October 1 of this year. The new report will be more than one-third
shorter than the former one. The box item used for reporting suspicious transactions will be
eliminated, and instead banks will use for this purpose the criminal referral form, which also is being
revised. Banks will no longer be required to identify the number of $100 bills involved in transactions
covered by the report. While the old form required the signatures of two employees, in the future
only one signature will be needed. AB, 5/18/95, p. 9.
Office of Thrift Supervision
Simplified Application For New Thrifts
The OTS proposed a simplified rule that would reduce the paperwork and administrative costs
imposed on organizers of new federal savings associations and federal savings banks. The standard
initial capitalization would formally decrease from $3 million to $2 million, the same as the
requirement for deposit insurance imposed by the FDIC. The OTS would reserve the right to impose
higher or lower initial capital requirements on a case-by-case basis. NEWS, OTS, 3/6/95; FR,
3/6/95, p. 12103.
Calculations For Loan Limits Are Simplified
The OTS is amending, effective March 28, 1995, its loans-to-one-borrower rule, to reflect recent
changes to the OCC's lending limits regulation. The Home Owners' Loan Act requires that savings
association lending limits parallel those applicable to national banks. This interim final rule amends
OTS' regulation so that thrifts, like national banks, will use regulatory capital as the starting point for
determining "unimpaired capital and unimpaired surplus" for LTOB purposes. The revised rule
allows savings associations to figure loan limits by using the same calculations they already make to
determine capital adequacy. Thus, thrifts avoid having to complete a complex extra worksheet and
like national banks will find it substantially easier to calculate lending limits. The changes also remove
other outdated or redundant provisions. NEWS, OTS, 3/28/95; FR, 3/28. p. 15861.
Community Development Investments
The OTS will not take enforcement action against thrift institutions for making investments in
projects outside areas receiving "concentrated development assistance" under Title 1 of the Housing
and Community Development Act (HCDA), provided certain standards are met. Federal associations
no longer need to apply to the OTS for case-by-case no-action letters for investments that meet the
investment standards. Associations may participate directly in real-estate investments that meet the
standards and in a limited partnership or corporation that invests exclusively in real-estate investments
that meet the standards. Among the standards set forth are: the investment must be located in a Title
1 Community Development Block Grant entitlement community, in a nonentitlement community that
has not been specifically excluded by the state in statewide submissions for CDBG funds, or in an area
that participates in the Small Cities Program; and the investment must be made in a residential
housing project that benefits low- and moderate-income persons. In regard to investments that do
not meet the standards, but that are consistent with program objectives embodied in the Home
Owners' Loan Act, associations may continue to seek case-by-case OTS no-action review by the chief
counsel. NEWS, OTS, 6/7/95.
Court Rules on Capital Agreements
The U.S. Court of Appeals for the District of Columbia, in a case involving the failed Great Life
Savings Association of Sunrise, Florida, ruled that the OTS cannot compel compliance with capital
infusion agreements made with buyers of troubled thrifts unless it shows that the buyer has been
"unjustly enriched." Before 1990, purchasers of thrifts were required by regulators to guarantee that
the institutions would always be fully capitalized. AB, 7/19/95, p. 4.
Release of Unpublished Information
The OTS issued a final rule describing the procedures that requesters must follow to obtain
unpublished information by document or testimony and the criteria on which the agency will evaluate
requests for such information. The rule includes requests for release of records that are exempt from
disclosure under the Freedom of Information Act (FOIA), such as examination and related reports,
and information relating to the business operations and finances of individual savings associations.
Requesters who obtain unpublished OTS information may not disclose such information without the
agency's authorization. The final rule, for the first time, authorizes savings associations to release
their examination reports and related supervisory correspondence to their holding companies, and
similarly authorizes holding companies to release their examination reports and related supervisory
correspondence to their subsidiary savings associations. Reports and other information released
under this rule remain the property of the OTS, regardless of where such reports or information are
physically located. FR, 5/30/95, p. 28027.
Filing Fee Changes
The OTS has reduced fee levels for certain applications to more accurately reflect the agency's actual
processing costs. Fees are lowered for Permission to Organize applications and Holding Company
applications, and the fee is eliminated for processing service corporation applications for participation
in Community Development Corporations. OTS' policy on the waiver of filing fees is clarified.
Thrift Bulletin 48-13, OTS, 3/31/95.
Thrift to Offer Services on the Internet
The OTS gave approval for Cardinal Bancshares, Lexington, KY, to change a subsidiary, Security
First Network Bank, Pineville, into an on-line bank serving customers on the Internet. The bank will
offer services similar to those available from some banks by telephone. While a number of banks now
offer information about their services on the Internet, Security First is unique in that it plans to do
most of its business on-line, and will use the Internet for actual checking account transactions, not
just information. Requirements to be imposed by the OTS include company-paid independent tests
of certain security systems, and a report from the bank in six months on its lending to low- and
moderate-income applicants, and precise definition of the community it is serving. Security First
plans to make checking accounts the focus of its Internet operations and restrict its lending chiefly
to the rural southeastern Kentucky county where it will maintain its only brick-and-mortar branch.
AB, 5/12/95, p. 3.
Federal Financial Institutions Examination Council
Guidelines For Relying on State Examinations
The FFIEC adopted guidelines, effective on June 27, 1995, that establish standards for determining
the acceptability of state reports of examination. A federal banking agency may conduct an annual,
on-site examination of an insured depository institution in alternate 12-month periods (except those
insured institutions with total assets of less than $250 million for which an 18-month examination
cycle is permitted) if the federal banking agency determines that a state examination of that institution
conducted during the intervening period is adequate.
The federal and state banking agencies have worked together, to varying degrees, in several areas,
among which are conducting alternate, joint and concurrent safety-and-soundness examinations;
processing examination reports and applications; using common examination report and application
forms; and developing and issuing informal and formal enforcement actions. Currently, the federal
banking agencies, individually, have entered into formal or informal arrangements or working
agreements with most state banking departments in a number of supervisory areas, among which are
the number of institutions to be examined on an alternating basis; the frequency of
safety-and-soundness examinations; the type of examinations to be conducted (independent, joint, or
concurrent) by each agency; and the responsibilities of each agency for processing reports of
examination, and for conducting specialty examinations (compliance, information systems, trust,
Under the guidelines, the federal banking agencies will accept and rely on state reports of examination
in all cases in which it is determined that state examinations enable the federal banking agencies to
carry out effectively their supervisory responsibilities. Among the criteria that may be considered in
determining the acceptability of a state report of examination are the completeness of the examination
report; adequacy of documentation; and the adequacy of any formal or informal arrangement or
working agreement between a state banking department and a federal banking agency. FR,
6/27/95, p. 33206.
Home Loans to Minorities Up Sharply in 1994
Disclosure statements from more than 9,800 lenders (including commercial banks, savings
associations, credit unions, and mortgage companies) covered by the Home Mortgage Disclosure Act
(HMDA) show that the number of their conventional home purchase loans rose in 1994 from 1993
by 27.0 percent for lower-income households, and 12.5 percent for the highest income households,
the FFIEC reported. The numbers increased by 54.7 percent for blacks, 42.0 percent for hispanics,
23.8 percent for native Americans, 18.6 percent for Asians, and 15.7 percent for whites. Denial rates
for those loans in 1994 were 33.4 percent for blacks (34.0 percent in 1993), 31.6 percent (27.8) for
native Americans, 24.6 percent (25.1) for hispanics, 16.4 percent (15.3) for whites, and 12.0 percent
(14.6) for Asians. The data suggest that the affordable home loan programs that mortgage
originators have initiated in recent years --- to benefit low-income, moderate-income, and minority
households and neighborhoods --- may be having an impact, the FFIEC said.
The FFIEC prepared and distributed the individual disclosure statements for lenders on behalf of its
five member agencies and HUD. Upon request, lenders are required to make the statements available
at their home office within three business days of receipt, and at certain branch offices in other
metropolitan areas within ten business days of receipt. Press Release, FFIEC, 7/18/95.
Guide to HMDA Reporting
The FFIEC prepared an interim edition of the Guide to take account of amendments that the
FRB adopted to its Regulation C in December 1994. The amendments require reporting in
machine-readable format (except for institutions reporting 25 or fewer line entries), require
institutions to update their loan application registers quarterly during the year as data are being
collected, and make a number of other changes. The FFIEC will publish and distribute a more
comprehensive edition of the Guide to HMDA respondents by year-end for use with 1996
data. The Guide was developed by the Department of Housing and Urban Development and
member agencies of the FFIEC. A Guide to HMDA Reporting --- Getting it Right!, FFIEC,
National Credit Union Administration
Corporate Credit Unions
The NCUA proposed a rule to strengthen the capital of corporate credit unions, reduce the risk of
their investments, and improve asset-liability management. The rule would return corporate credit
unions to their primary functions of serving as liquidity centers and service providers.
Specifically, the proposed rule would, among other things, limit corporate credit union membership
to credit unions and other specified groups; restrict lending to member credit unions and limit lending
to 100 percent of primary capital; set borrowing limits to meet liquidity needs at ten times capital or
50 percent of shares, whichever is less; and establish minimum primary capital at four percent, phased
in over the next three and one-half years. Also, the proposal would require that 75 percent of
overnight investments be matched with assets of similar terms; allow up to 25 percent of investments
to be matched with variable-rate securities, with up to three-years maturity, that reprice monthly;
require that term accounts be fully matched; and provide specific divestiture requirements.
"Letter to Credit Unions No. 168," NCUA, 4/24/95; FR, 4/26, p. 20438; 5/23, p. 27240; BBR, 4/17.
The assets, liabilities, and field of membership of Capital Corporate Federal Credit Union were
acquired by Mid-Atlantic Corporate Federal Credit Union, of Harrisburg, PA. CapCorp had been
operating under NCUA conservatorship since January 31, 1995 (see this Review, Spring
1995, p. 44). Losses from CapCorp's investment portfolio are estimated at about $61 million, all of
which will be absorbed by its primary and secondary capital, with no loss to the National Credit Union
Share Insurance Fund. BBR, 4/17/95, p. 787.
Divestitures of Risky Investments
The NCUA issued a clarification of its position on divestiture of Collateralized Mortgage Obligations
(CMOs) and Real Estate Mortgage Investment Conduits (REMICs) that fail one or more parts of the
high-risk securities test (HRST). A review by the agency of credit unions that have reported large
investments in CMOs and REMICs indicated that 57 percent of these credit unions were holding at
least one security that failed one or more parts of the HRST; 29 percent of these credit unions ran
the HRST semiannually or less often; and 39 percent of the managers did not have an adequate
understanding of the risks involved in these investments.
Federal credit unions are prohibited from purchasing fixed-rate CMOs or REMICS that fail any one
of the three parts of the HRST, which are the average life test, average life sensitivity test, and price
sensitivity test. When a credit union is holding securities that fail one or more parts of the HRST, it
should immediately dispose of them or, within five business days of discovery, submit to the
NCUA a written action plan. A credit union will be required to sell HRST-failed assets, in
accordance with a written directive, if the examiner does not feel that a suitable action plan has been
developed. Letter to Credit Unions No. 169, NCUA, April 1995.
Mergers or Conversions of Federally Insured Credit Unions to Non-Credit Union Status
The NCUA adopted with minor change the interim rule it issued in September 1994 (see this
Review, Spring 1995, p. 44) with additional requirements to ensure an informed membership
vote, to safeguard against potential safety-and-soundness problems and to prevent breaches of
fiduciary duty. Key provisions are: NCUA Board approval is required in advance of any transaction
whereby a federally insured credit union transfers all or any part of its members' shares or similar
accounts to any non-credit union institution; a majority of all members of record must vote to approve
the transaction; directors must agree to receive no benefits in excess of those available to the
members; notice to members must be preapproved by the NCUA Board and must include all pertinent
information required by the rule as well as any additional information deemed necessary on a
case-by-case basis; FISCUs may only engage in the transaction if they obtain approval from the state
authority to proceed with the merger or conversion; and FISCUs must follow the rule's provisions
(part 708a) unless they obtain a waiver from the NCUA. FR, 3/8/95, p. 12659.
Credit Union Conversion to Savings Bank Approved
The NCUA approved the application of the $52.9 million-asset Lusitania Federal Credit Union,
Newark, NJ, to convert to a federal mutual savings bank. It was the first such approval granted by
the NCUA for a charter change, which would be transacted under the agency's rules in effect before
the amendments that were adopted late last year. Only 20 percent of the credit union's total
membership will be required to approve the conversion, while under the new rules a majority vote
would have been necessary. If Lusitania's membership approves the conversion, the institution will
be supervised by the OTS, and its deposits insured under the SAIF. BBR, 5/29/95, p. 1054.
Court Restricts CU Expansion
A U.S. District Court judge in Washington, DC ruled that the NCUA exceeded its authority when
it permitted Communicators Federal Credit Union to expand its membership to anyone over 50 years
old living or working within 25 miles of Houston, TX. In this case brought in 1994 by the Texas
Bankers Association, the judge said NCUA's broad interpretation would render the common bond
limitation meaningless. The NCUA has won previous court decisions involving credit unions taking
into membership existing unrelated groups, each comprised of persons having a common bond within
the group. The judge upheld the NCUA in allowing Communicators to add seven unrelated
occupational groups, stating that where the law is "ambiguous" the courts must defer to the
regulatory agencies. Communicators, originally sponsored by Southwestern Bell Telephone Co., now
serves 93 different groups with a membership of over 38,000. AB, 6/5/95, p. 1.
Banks Can Sue Over CU Expansion
A judge in the U.S. District Court in Montana ruled that a group of seven banks in Montana can sue
to negate an expansion in 1992 by the Missoula Federal Credit Union over a 3,600 square mile area
in the western part of the state. The NCUA argued in the suit brought in 1993 that bankers did not
have the right to sue because the Federal Credit Union Act was not designed to protect banks. The
banks have " a competitive interest in limiting the expansion of MFCU pursuant to the common bond
provision," the judge wrote. AB, 4/17/95, p. 15.
The NCUA proposed amending its regulation regarding the appraisals of real estate, adopted
pursuant to Title XI of FIRREA, to clarify and expand the circumstances in which a Title XI appraisal
is not required. The Board proposes to eliminate standards that parallel standards issued by the
Appraisal Foundation, and to amend the regulation concerning appraiser independence to permit
credit unions to use appraisals prepared for other financial-service institutions. Other parts of the
proposal would simplify compliance for both credit unions and appraisers and reduce costs without
affecting the reliability of appraisals used in connection with federally related transactions. FR,
3/13/95, p. 13388.
Incentive Compensation For CU Employees
The NCUA proposed to clarify its regulations that prohibit officials and certain employees of federally
insured credit unions from receiving either incentive pay or outside compensation for certain activities
related to credit union lending, and to authorize lending-related compensation in certain situations
where it is currently prohibited, and to prohibit it in other situations.
The structure of the regulation would be changed to a broad prohibition, with specific exceptions,
against an official or employee receiving compensation in connection with any loan made by the credit
union. The proposal would allow loan officers to receive incentive pay; however, the incentives for
making recommended or final decisions to approve or disapprove loans could not be based on the
number or dollar amount of loans approved. The regulation also would require that the board of
directors establish written policies and controls for any incentive plan and monitor compliance on at
least a quarterly basis. FR, 4/20/95, p. 19690.
Guidelines For the Supervisory Review Committee
The NCUA issued a final Interpretive Ruling and Policy Statement, pursuant to the RCDRIA,
concerning the establishment of an independent appellate process to review material supervisory
determinations. In the final IRPS, which is effective March 22, 1995, a three-member supervisory
review committee, and the time frames for committee action, are provided. FR, 3/20/95, p.
Operating Fee Exemptions
The NCUA proposed to exempt natural-person federal credit unions with assets of $500,000 and less
from paying operating fees, and fees assessed on credit unions with assets between $500,000 and
$750,000 would be cut by 40 percent. The NCUA currently does not assess operating fees on credit
unions with assets of up to $50,000, which exempts only 59 institutions. The restructured operating
fees would exempt a total of 839 credit unions, 780 of which currently pay an average fee between
$100 and $117. An additional 349 institutions with assets of $500,000 to $750,000 would pay a
minimum fee of $100, instead of the current average fee of $167. The total projected revenue
shortfall from the proposed cuts in operating fees would be spread among all other federal
natural-person credit unions. A $100 million-asset credit union is currently assessed $26,890 in
operating fees, while a $500 million-asset credit union pays $265,000, which amounted to only .73
percent of their total operating expenses for 1994. NCUA NEWS, 6/14/95.
STATE LEGISLATION AND REGULATION
Interstate Regulatory Plan Developed
A plan developed by the Conference of State Bank Supervisors and approved by 45 state banking
supervisors, would establish mechanisms to enable state-chartered banks to take advantage of the
interstate banking provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, and be subject in respect to these activities to a single regulator. Implementation of the plan
would be dependent upon states enacting the enabling legislation. Primary responsibility for
conducting safety-and-soundness and compliance examinations would belong to an institution's
home-state regulator, but the home state would coordinate its activities with the host states and
federal authorities, and would use host-state examiners. The home state would share examination
information and reports with the host state and federal regulators. The home state would have
authority over applications for new branches, bank powers and mergers, subject to certain
requirements involving analysis of the antitrust impact in the host state and compliance with its laws,
and consultation with other regulators before approving any actions in other states. AB, 5/9/95,
Alabama: A new law enacted pursuant to the Riegle-Neal Act allows nationwide banking,
effective September 29, 1995. It permits interstate branching through merger and acquisition as of
May 1997. BBR, 6/5/95, p. 1089.
Colorado: The Governor signed a bill that allows interstate branching in the state after June
1, 1997. The new law prohibits "de novo" interstate branching, and allows out-of-state banks
to buy only branches that have existed for at least five years. BBR, 5/29/95, p. 1050.
Connecticut: The Governor signed legislation that "opts-in" under the Riegle-Neal Act,
permitting merger transactions between in-state and out-of-state banks, and allowing de novo
interstate branching. A five-year age limitation is imposed on target institutions, and a 30-percent
limit on concentration of deposits in both interstate and intrastate acquisitions, mergers, and
consolidations. BBR, 7/17/95, p. 107.
Idaho: A new law, to be effective July 1, 1995, allows out-of-state banking firms to convert
banks they own in the state into branches. Under the Riegle-Neal Act, a bank holding company may
convert a bank into a bank branch unless the state in which the bank is located enacts "opt-out"
legislation before June 1, 1997. Continuing existing Idaho banking provisions, the new law does not
permit de novo entry, only entry by acquisition. Also, it does not allow the purchase of
branches only, the entire bank must be purchased. BBR, 3/20/95, p. 589.
Maryland: The legislature passed an "opt-in" bill which, if signed by the Governor, would
become effective on September 29, 1995. Contingent upon reciprocity, an out-of-state bank could
branch in Maryland either de novo or by acquiring an existing branch. AB, 4/13/95, p.
Minnesota: A new law requires banks to be at least five years old before they are eligible to
be purchased by out-of-state banking organizations. The law also places a 30-percent deposit cap
on interstate banking operations. Northwestern Financial Review, 6/3/95, p. 21.
North Dakota: A recently enacted law "opts-in" under the Riegle-Neal Act by allowing
interstate branching by consolidation after May 31, 1997. The law removes certain existing
restrictions on interstate banking, including requirements for reciprocity, and lending commitments
from out-of-state bank holding companies acquiring in-state banks. The legislation also expands
intrastate banking by permitting banks to establish a "facility" anywhere in the state, starting August
1, 1996, and with no limit on the number of "facilities" a bank may have. "Facilities" will include
bank paying and receiving stations, drive-in/walk-up facilities and banking offices. In-state
commercial banks are permitted to purchase branches of savings-and-loan associations that were in
existence on March 1 of this year and convert them into their own branch facilities. BBR,
5/1/95, p. 869.
Oregon: Oregon became the first state to enact "opt-in" legislation under the Riegle-Neal
Act. The state's law went into effect on February 28, 1995. BBR, 3/13/95, p. 535.
Pennsylvania: An "opt-in" law, taking effect immediately, allows out-of-state banks to branch
into the state either by acquisition or de novo, with a reciprocity requirement until June 1,
1997. State-chartered banks are given the same rights as national banks to branch into other states
that allow interstate branching. AB, 7/25/95, p. 10.
Tennessee: The legislature voted "opt-in" legislation to be effective June 1, 1997, under the
Riegle-Neal Act. BBR, 4/24/95, p. 820.
Texas: The Governor signed legislation that prohibits out-of-state banks from branching into
Texas until at least September 1999, when the issue again will be taken up by the legislature. Texas
allows out-of-state banking organizations to operate in the state through separately chartered banks.
Texas banks will be able to branch outside the state in cases where federal regulators approve national
bank 30-mile relocations. BBR, 5/1/95, p. 868; AB, 5/12, p. 6.
Utah: The Governor is expected to sign an "opt-in" bill that would take effect June 1, 1995.
The bill prohibits de novo branching, and requires that an institution be at least five years old
before being acquired by an out-of-state bank. BBR, 3/13/95, p. 535.
Virginia: New legislation creates a procedure for out-of-state banking firms to establish
branches in the state beginning July 1, 1995, if those banks' home states have similar procedures
allowing entry by Virginia banks. BBR, 4/10/95, p. 747.
Iowa: Revisions in the state's banking code, now awaiting the Governor's signature, set the
lending limit for state-chartered banks at 15 percent of their aggregate capital, defined as common
and preferred stock, surplus, undivided profits, and loan-loss reserves. Banks could use another ten
percent of aggregate capital to make loans on breeder livestock, in addition to the 15 percent general
lending limit. AB, 4/17/95, p. 9.
Interest-Rate Restrictions Eliminated
Maine: A new law allows the state's banks to export interest rates into other states, and also
deregulates bank credit-card fees. The revised credit code is now similar to Delaware's, putting
Maine in a position to become a location for credit-card issuers. The new law identifies specific
allowable credit-card charges, such as periodic charges, transaction charges, and late fees, and treats
them as interest so they can be exported. A major reform law last year eliminated an 18-percent
ceiling on interest rates, and the $12 maximum on annual fees, and replaced a prohibition on late fees
with a five percent or $10 maximum fee. BBR, 6/5/95, p. 1087.
Lenders Allowed to Own Insurance Agencies
Michigan: A new law regulates the relationship between insurance firms and financial
institutions, and in some cases allows lenders to own agencies and sell insurance. A lender may not
require a borrower to buy any policy through a particular agency, nor may a lender fix or vary the
terms of a loan as an inducement to purchase insurance. A lender generally is not allowed to require
a person to buy any insurance product from the lender or an affiliate as a condition of making a loan.
Among other provisions, lenders are allowed to provide names, addresses and similar information to
agents or affiliated agencies, but cannot disclose account information or documents such as credit
reports and financial statements. BBR, 1/23/95, p. 176.
Savings Bank Powers
Minnesota: The Governor signed a bill that updates state-chartered savings association laws.
The state has 16 federal savings banks and no state-chartered savings banks. Savings banks are
granted powers similar to powers possessed by the state's commercial banks. Northwestern
Financial Review, 6/3/95, p. 21.
Securities Losses Cause For Concern
Minnesota: The Commerce Commissioner warned the 411 state-chartered banks that those
with unusually high depreciation in securities portfolios or suspected of speculating "will receive
special attention in examinations or targeted visitations." In part because of rising interest rates, the
banks' portfolios shrank in 1994 by 3.5 percent. State officials emphasized that no individual banks
are in danger at this time. They are concerned, however, that some banks have invested in
sophisticated products such as financial derivatives without adequate knowledge about these
instruments. AB, 3/1/95, p. 9.
Loan Limits, Charter Conversions
Mississippi: The Governor signed legislation, effective March 8, 1995, designed to clarify,
modernize and improve various regulations that apply to commercial banks chartered by the state.
Among the regulations involved are those governing loans to insiders, single-borrower loan limits,
conversions of national banks to state-chartered banks, requirements applicable to the acquisition of
branches, and conversion from federal savings associations to state-chartered associations. The
mandatory examination cycle is lengthened from 12 months to 18 months. The Mississippi
Banker, May 1995, p. 6.
Subsidized Loan Program
New York: Recently enacted legislation extends the state's linked-deposit loan program until
April 1, 1998, and allows savings banks and savings-and-loan associations to participate. Under the
program the state accepts below-market interest rates on certain state deposits in commercial banks
that agree to make low-interest loans to small businesses. The program thus far has provided 155
small-business loans amounting to $66 million. BBR, 4/24/95, p. 821.
Constraints on Accountant Liability Suits
New Jersey: A new law makes accountants liable only for those financial statements they
approve in writing for a specific user. Thus, each time anyone other than the client intends to use
such a financial statement, the written verification procedure would be required. AB, 4/20/95,
Michigan: A new law, revising legislation enacted in 1989-1990, changes the focus from
ownership status to causation in creating environmental liability. Among other changes, the law
revises the degree of cleanup that will be required based on the intended use of the property.
Legislative-Legal Bulletin, Michigan Bankers Association, 6/5/95, p. 2.
Mississippi: The Governor signed legislation, effective July 1, 1995, that addresses lender
liability and creates a limited environmental self-evaluation privilege. The limited privilege concerns
the discovery or admissibility of information relating to voluntary self-evaluations in judicial and
administrative proceedings. The state's existing penalty policy is amended to include a new and
substantial mitigating policy for voluntary self-disclosure of non-compliance. The privilege does not
apply in cases of fraud and in certain other cases. Mississippi became the eleventh state to enact
environmental self-evaluation privilege/voluntary self-disclosure legislation, and the fourth state to
allow voluntary self-disclosure to count as a mitigating factor. BBR, 4/17/95, p. 782.
Pennsylvania: Under a new law, lender environmental liability is changed from strict, joint
and several liability to a direct causation standard. Instead of a "participation in management"
concept, the new law holds a bank liable if the lender or its agents directly cause an immediate release
or directly exacerbate a release of a regulated substance, or the lender or its agents knowingly and
willfully compelled the borrower to take an action that caused an immediate release or violated a state
environmental law. BBR, 6/12/95, p. 1153.
Texas: A new law, effective on signing, will protect companies that voluntarily disclose
environmental violations found in self-audits from criminal, civil, or administrative penalties, provided
they correct the non-compliance within a "reasonable" period of time. A decision by an
administrative hearing officer that an audit is, or is not, privileged may be appealed in state district
court. Thirteen other states have environmental audit privilege laws, including eight that have taken
action in 1995. BBR, 6/5/95, p. 1103.
Banking Laws Updated
Texas: A new law, effective September 1, 1995, generally updates and recodifies the existing
banking code. Among substantive changes is the elimination of the three-member Banking Board and
transfer of its bank-chartering authority to the banking Commissioner. BBR, 7/3/95, p. 18.
West Virginia: Citizens Southern Bank, Beckley, opened for business on June 12, the first
new bank in the state in the past thirteen years. At least three more banks are being organized and
expect to open soon. Among the reasons for the renewed interest in new banks is the turnaround in
the economy of the state. The number of banks in West Virginia has declined to 140 from 235 a
decade ago. The fact that most communities are now being served by branches of regional
institutions has created opportunities for more locally owned banks, the organizers believe. AB,
6/16/95, p. 7.
BANK AND THRIFT PERFORMANCE
Commercial Banks' Earnings Strong in First Quarter
FDIC-insured commercial banks reported net income of $11.1 billion (preliminary) in the first quarter
of 1995, an increase of nearly $400 million from the previous three months. This followed record
earnings of $44.7 billion for the year 1994, up by 3.7 percent from 1993. The main contributors to
the improved earnings in the quarter were reductions in certain expense items, including noninterest
expenses, securities losses, and provision for loan losses. Net interest income declined slightly, but
still was $2.5 billion higher than in the same quarter a year ago.
Assets of insured commercial banks grew by 2.6 percent in the first quarter to $4.1 trillion. The
increase in commercial and industrial loans of $32.7 billion was the largest quarterly increase in the
more than 20 years that banks have reported quarterly loan data. The C&I loan growth was evident
in all regions, but the largest share occurred at banks in the Northeast Region, while overall loan
growth was strongest in Southeast Region banks. Banks' securities holdings declined for the fourth
consecutive quarter, falling by $9.7 billion, most of which was in mortgage-backed securities.
Noncurrent loans were up by $1.6 billion to $32.2 billion, the first quarterly rise since the first quarter
of 1991. Most of the increase was in noncurrent real- estate loans, a substantial portion of which
resulted from a new accounting rule (FASB 114) that caused some banks to report as nonaccrual
loans assets that were previously reported as other real estate owned (OREO).
Total deposits at insured commercial banks fell slightly in the quarter, due to declines in demand and
savings deposits in domestic offices, while deposits in foreign offices and time deposits in domestic
offices both increased. A $105-billion rise in nondeposit liabilities was attributable mostly to higher
trading account liabilities concentrated in a few large banks. Equity capital climbed by $12.1 billion
in the first quarter to $324.2 billion, one-third of the increase resulting from new GAAP accounting
rules. Banks' unrealized losses on available-for-sale securities, which under the new rules are
deducted from equity capital, fell by $6.3 billion during the quarter, producing a $4.1 billion rise (net
of tax effects) in equity capital. The ratio of equity capital to assets was 7.88 percent at the end of
The number of insured commercial banks reporting financial results declined by 209 during the first
quarter to 10,241. The number of banks absorbed through unassisted mergers and consolidations
rose to 228, a quarterly high, over four-fifths of which resulted from consolidations within bank
There were 215 commercial banks on the FDIC's "Problem List" on March 31, down from 247 at
year-end 1994, and 383 a year ago. The assets of the problem banks totaled $27 billion, compared
to $33 billion at year-end 1994 and $53 billion on March 31, 1994. Six insured banks, with assets
totaling $867 million, have failed in 1995 (through July 31). FDIC Quarterly Banking Profile,
First Quarter 1995; PR-40-95, FDIC, 6/14/95.
FDIC-insured, private-sector savings institutions earned $1.7 billion (preliminary) in the first quarter
of 1995, up by $122 million from the fourth quarter and $448 million higher than in the first quarter
of 1994. Earnings for the year 1994 totaled $6.4 billion. Over 94 percent of all savings institutions
were profitable in the first quarter.
Industry assets rose by $5.2 billion in the quarter to $1.0 trillion, marking the third consecutive
quarterly increase. The largest growth category was loans secured by 1-4 family residential
properties. Deposits rose by $7.4 billion, the first quarterly increase since 1988. Other borrowed
funds declined for the first time since 1992. Equity capital rose by $1.8 billion during the quarter, as
thrifts retained over $900 million of their earnings, and also they reported an increase of $1.1 billion
in the fair value of available-for-sale securities. The industry's first-quarter capital ratio of 8.07
percent was the highest since 1952. Noncurrent real-estate loans as a percent of total real-estate
loans declined to 2.10 from 2.19 at the end of 1994, and 3.18 in the first quarter of 1994.
The number of savings institutions declined during the first quarter by 34 to 2,118, as takeovers by
commercial banks and consolidation within the industry continued. Following 27 conversions from
mutual to stock ownership, the number of stock-owned thrifts exceeded mutuals, with 1,066
institutions holding $830 billion in assets, compared to 1,052 mutuals holding $184 billion in assets.
Seventy-one savings institutions with $39 billion in assets were on the FDIC's "Problem List" on
March 31, both numbers unchanged from year-end 1994, and down from 118 institutions with assets
of $89 billion in the first quarter of 1994.
Banks' Loans Grew Faster Than Securities in 1994
Half of the 117 bank investment managers surveyed by the American Bankers Association reduced
their securities portfolios as a percentage of total assets last year, while only 23 percent increased the
securities percentage. Analysts said that excess liquidity and low loan demand in the banking system
in 1990-1993 were reversed in 1994. AB, 4/3/95. p. 1.
Banks Raise Mutual Funds Market Share
The assets of bank-managed mutual funds grew 7.3 percent in the first quarter of this year, exceeding
the 6.2 percent growth rate of the mutual funds industry. The first-quarter increase brought the
banks' share of the $2.3 trillion mutual fund business to 14.3 percent, up from 10.5 percent in March
1994. Most banks reportedly have been building mutual fund assets by reorganizing trust assets and
acquiring mutual fund management companies. According to a survey prepared for the American
Banker, Mellon Bank Corp., PNC Bank Corp., and NationsBank are the top three bank mutual
fund management companies.
While the recent growth in mutual funds managed by banks, and the industry, has been strongest in
equity funds, money-market mutual funds represent 57.8 percent of bank-managed mutual fund
assets, compared to 29.5 percent for the mutual funds industry. Banks generally are said to be
attempting to move closer to the industry average because of the higher potential profits in stock and
bond funds. Of the 115 banks with proprietary mutual funds, 55 had less than $1 billion in fund assets
under management at the end of March. Some of the smaller organizations may depart from the
industry because of insufficient diversification and other reasons. AB, 5/10/95, pp. 1, 23.
Small Banks to Reduce Derivatives Investments
While 84 percent of more than 800 community banks recently surveyed currently invest in financial
derivatives, less than 60 percent plan to invest in these instruments in the future. The complexity of
financial derivatives and sharp declines in portfolio values with rising interest rates are seen as
principal reasons for the decline. The largest decline expected is for structured notes, which is one
of the more complex kinds of derivatives, and which also has had the most growth in the past year.
AB, 5/16/95, p. 1.
Bank Fee Increases Exceed Inflation, Study Says
The annual maintenance costs to consumers for interest-bearing checking accounts rose by 11
percent, to $219, between 1993 and April 1995, and the costs for regular checking accounts rose ten
percent, to $202, according to a study by the U.S. Public Interest Research Group. Among other
findings, maintenance fees for savings accounts increased nine percent, to $31 a year, and the average
checking-account balance required to avoid fees increased by 30 percent, to $1,242. Surveying 271
banks in 25 states and the District of Columbia, the highest fee states were reported to be Maryland,
Florida, North Carolina, and Illinois, and also the District of Columbia, while the lower fees were
found in Hawaii, Idaho, New Mexico, Maine and Washington. The American Bankers Association
disputed the study's results, noting the survey's limited coverage, and the fact that the data do not
reflect service quality improvements, and also the rising costs of administering consumer deposits
which are making some accounts unprofitable. WSJ, 8/9/95, p. A2.
Credit Unions' Asset Growth Slows
Total assets of federally insured credit unions increased 4.5 percent in 1994, the smallest rate of
growth since 1948. In the last six months, assets fell slightly, from $289.7 billion at midyear to
$289.5 billion at year-end. The profitability of federally insured credit unions declined during 1994,
as measured by a fall in the ratio of net income to average assets to 1.2 percent from 1.4 percent in
1993. There were 588 credit unions reporting a net loss in 1994, an increase of 58 from 1993.
First-quarter 1995 data for the 1,160 federally insured credit unions with assets over $50 million show
a two percent increase in assets to $206.4 billion. These institutions experienced a slight decline in
return on assets in the quarter, from 1.2 percent to 1.1 percent, while their capital-to-assets ratio rose
to 10.1 percent from ten percent. Letter to Credit Unions No. 166, NCUA, March 1995; NCUA
Bankers Surveyed on Regulatory Burden
According to the results of a recent survey by KPMG Peat Marwick, the Community Reinvestment
Act and Fair-Lending are at the top of regulations that bankers consider to be the most burdensome.
The three regulatory areas next in order of perceived burden are asset quality, truth-in-lending and
truth-in-savings. Ninety-one percent of bank CEOs said the CRA was their first choice for regulatory
reform, and 96 percent believed the Act should be extended to nonbank financial-service companies.
Eighty percent of the CEOs said they had reviewed fair-lending policies and procedures for
discrimination, however only 23 percent have tested their bank by using mystery shoppers, while 43
percent have done a quantitative analysis of application and loan files. A total of 1,311 banker
questionnaires were sent out and 660 were completed and returned. AB, 3/23/95, p. 16.
Minority Discrimination Case Settled
Northern Trust Co., Chicago, and three suburban affiliates agreed to pay $566,500 to minorities to
settle a Justice Department complaint that, in 1992 and 1993, Northern's employees made special
efforts to qualify white applicants for mortgage loans but did not give similar assistance to minority
applicants. The firm does not believe it violated the law, an official said. It was the sixth major
fair-housing case filed and settled by the Justice Department, and is said to be unique in that Justice
documented it with a review of individual loan files, rather than with statistical analyses. A Justice
official said the message from the case is that "institutions should look at the procedures they use to
process applications for financing and make sure they are affording minority applicants an opportunity
to present qualifications that is comparable to the opportunity being afforded to white applicants."
AB, 6/2/95, p. 1.
ATM Use Continues Growth
A telephone survey in six states --- Arkansas, Louisiana, Texas, Oklahoma, New Mexico and
Colorado --- found that 60 percent of persons having a checking or savings account with a financial
institution have an ATM card, up from 49 percent in 1993. The increase occurred in all states
surveyed, among all age categories, both genders, and in all types of financial institutions.
Cardholders used their card 3.47 times during a two-week period to make purchases this year, up
from 1.62 times during the same period in 1993. Texas Banking, June 1995, p. 9.
RECENT ARTICLES AND STUDIES
Efficiency Improvement From Mergers Is Questioned
This study by Tanya Azarchs, published by Standard & Poor's, analyzes the results of mergers
involving the nation's 30 largest banking companies, to determine whether these transactions resulted
in increases in efficiency in the surviving institutions. Comparing institutions that merged with those
that did not, using data for 1990 through 1994, the study found no advantages in efficiency, as
defined here, that could be attributed specifically to the mergers. While cost savings occured in many
cases, the author generally believes these benefits could have been realized by management
implementation without mergers.
Expense/income ratios for the general population of banking organizations show that the ratios each
year of firms having assets of $100 million or less were much higher than the industry average of
about 70 percent. Beyond $1 billion in assets, increasing size does not appear generally to result in
further cost efficiencies. The firms in the study group that had undergone significant mergers were
not more efficient than those not involved in mergers, and the most efficient institutions were not
more likely to be among those that merged. The non-merging firms generally experienced the
greatest improvement in efficiency during the period. One of the benefits from mergers is that they
can provide a politically acceptable justification and opportune situation for implementing what are
otherwise very difficult cost cuts. However, the "real" benefits are more likely to be those that can
result from a company's diversification --- an important factor in S&P ratings --- or the enhancement
of market position where being a leader in a product line has tangible benefits such as enabling the
firm to charge premium prices or attract clients. Standard & Poor's Creditweek, January 2, 1995.
Interstate Banking: Experience in Three States
This GAO report to Congress discusses interstate banking in three states --- California, Washington
and Arizona --- that have allowed both interstate and intrastate banking for a number of years. The
report evaluates the experience in these states, for the period 1985 through mid-1993, to determine
whether their interstate banking laws have had any effect on the market share and number of large
banks, the viability of the smaller banks, and the availability of credit to small businesses.
Interstate Banking: Experiences in Three States, U.S. General Accounting Office, December 1994.
Outlook For Debit Cards
Debit cards have been the greatest disappointment thus far in the payments revolution but may be
turning the corner, say Gordon H. Sellon, Jr. and John P. Caskey in this article. The authors analyze
the factors that have limited the success of debit cards and examine prospects for their future growth.
The failure of debit cards to reach their usage potential has resulted largely from, first, coordination
issues among payments system participants that affect incentives to adopt new payments technology,
and second, the inefficient pricing of existing methods of payment.
For the debit card to replace existing payment methods, not only must the merchant accept it,
consumers must be willing to use it for retail purposes. Based on convenience and other non-cost
factors, debit cards could replace cash transactions for some consumers, for example, because they
find carrying a debit card to be more secure compared with checks. A debit card can be faster in
checkout time, while checks have an advantage in delayed clearance, and they also permit more
detailed recordkeeping. Some convenience users of credit cards could find advantages in debit cards
in avoiding having to write monthly settlement checks, and making it easier to enforce personal
budgets. Also, some retail stores permit personal debit card holders to receive cash, which is rarely
permitted with credit cards. In summary, the outlook for acceptance of debit cards by consumers is
believed to be the most favorable where they value its convenience, and with consumers who have
limited access to existing payments media.
The acceptance of debit cards by merchants is more likely to be based on cost factors. But if debit
cards are seen as a way to increase sales volume or as necessary to maintain market share, they may
be adopted even with a cost disadvantage. Promotional programs of an informational or educational
nature could be a key factor in determining the speed of debit card growth in the future. Also critical
are technological developments, for example, the falling cost of debit card readers has influenced
merchants' decisions to offer debit cards. Developments affecting alternative payments methods ---
for example, check imaging and truncation may make checking more automated and less costly ---
could also importantly affect debit card usage. Economic Review, Federal Reserve Bank of
Kansas City, 4th Quarter 1994, pp. 79-94.
The Electronic Purse
This article by John Wenninger and David Laster discusses how an electronic purse system might
work, the advantages of the system for consumers, merchants, and issuers, and the difficulties that
could arise. The electronic purse, which is a multipurpose prepaid card the size of a credit card,
could if successful bring fundamental change in the U.S. payments system.
In contrast to "closed system" cards which have one or a few possible uses, such as transportation
cards, the electronic purse is in an "open system" card that can be used in a variety of locations for
a broad range of purchases. In this system, a bank issues the cards to customers who then transfer
value from their accounts to the cards at an ATM, a personal computer, or a specially equipped
telephone. Funds are deducted directly from the cards and transferred to the terminals of the vendors,
who in turn move the funds into their bank accounts whenever they wish to do so. As funds are spent
from the cards, consumers can replace these funds from their accounts. Systems of the above type,
while not in existence currently in the U.S., are operating in other countries, for example, Denmark
For the electronic purse to have sufficient flexibility and protection against fraud they would probably
require smart-card technology employing a plastic card in which one or more computer chips are
embedded and having a capability of storing, retrieving and manipulating data. Regarding usage of
such systems in the U.S., various issues are unsettled, for example, whether the transactions should
be traceable, requiring a consideration of the benefits for law enforcement against the recordkeeping
requirements which could be quite burdensome and expensive.
The advantages to consumers would appear to derive mainly from the convenience factor in the use
of the card for small transactions, reducing the need for carrying cash and speeding transactions
because the customer would always have the "exact change." Among the possible obstacles could
be the creation of numbers of incompatible systems requiring consumers to carry several different
cards. Similar advantages in respect to time-saving and enhanced security from reducing the handling
of cash would also apply for merchants. Other benefits to them would be that prepaid cards will
likely have lower transactions fees than on-line debit cards and unlike checks, offer assured payment,
and perhaps open new markets such as pay-per-view television. If merchants, however, were
required to pay transaction fees and purchase new card readers or retrofit existing ones, they could
be reluctant to accept electronic purses unless their use generates enough new business to justify the
Regarding the issuers of the cards, a significant advantage, with increased uses for electronic purses
and the number of cards issued, could be the "float" from their earnings on investment of customer
balances held in electronic purses. Among other issues involved in establishing the electronic purse
is whether organizations other than banks would issue the cards. Some potential is seen for
facilitating some kinds of money laudering. For example, if card systems allow person-to-person
transfers of value and transfers over specially equipped phone lines, it would enable holders of prepaid
card value to move funds rapidly to remote locations where they could make several smaller,
undetected deposits. Current Issues in Economics and Finance, April 1995, Federal Reserve Bank
of New York.