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FDIC Banking Review


Recent Developments Affecting Depository Institutions
by Benjamin B. Christopher and Valentine V. Craig



REGULATORY AGENCY ACTIONS
Inter-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. These joint initiatives concern capital adequacy for derivatives; interest-rate risk; retail sales of nondeposit investment products; "suspicious activity" reporting; and regulatory relief in storm-damaged areas.

Risk-Based Capital: Derivatives

The federal banking agencies the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (FRB), and the Federal Deposit Insurance Corporation (FDIC) amended, effective October 1, 1995, risk-based capital standards for banks and bank holding companies to implement a revision to the Basle Accord. The Accord established a risk-based capital framework for assessing capital adequacy, implemented by the U. S. banking agencies in 1989. Under this framework, off-balance-sheet transactions were incorporated into the risk-based structure by converting each item into a credit-equivalent amount that was assigned to the appropriate credit-risk category according to the obligor or counterparty, or if relevant, the guarantor or the nature of the collateral. The credit-equivalent amount of an off-balance-sheet interest-rate or exchange-rate contract was determined by adding together the current replacement cost (current exposure) of the contract and an estimate of the possible increase in the future replacement cost (potential future exposure) in view of the volatility of the current exposure of the contract. The maximum risk category for rate contracts is 50 percent.

The effects of this final rule are: a) long-dated interest-rate and exchange-rate contracts are subject to higher conversion factors and new conversion factors are set forth that specifically apply to derivative contracts related to equities, precious metals, and other commodities; b) institutions are permitted to recognize a reduction in potential future credit exposure for transactions subject to qualifying bilateral netting arrangements; and c) derivative contracts related to equities, precious metals and other commodities may be recognized in bilateral netting arrangements for risk-based capital purposes. FR, 9/5/95, p. 46170; FIL-59-95, FDIC, 9/8/95.

Additionally, the Bank for International Settlements, in July 1996, released a draft proposal to require derivatives dealers worldwide to record the notional and replacement cost of all derivative contracts. Public comment is due by September 30, 1996, with reporting expected to begin on December 31, 1997. AB, July 19, 1996.

Capital Standards For Interest-Rate Risk

The OCC, the FRB, and the FDIC issued a final rule, effective September 1, 1995, implementing the FDICIA provision requiring banking agencies to revise risk-based capital standards to take adequate account of interest-rate risk. The final rule amended capital standards to specify that the banking agencies include in their evaluations of a bank's capital adequacy an assessment of the exposure to declines in the economic value of the bank's capital due to changes in interest rates.

Subsequently, in May 1996, the three regulatory agencies approved a scaled-back approach for considering bank interest-rate risk. The agencies adopted guidelines that advised bank directors to establish interest-rate-risk limits, to appoint officials to oversee policy, and to monitor management compliance. The agencies will continue to consider interest-rate risk when setting a bank's capital requirement, but agreed to examine each bank individually rather than apply a standardized interest-rate model across-the-board. The joint policy statement on interest-rate risk became effective on June 26, 1996. FR, 8/2/95, pp. 39490, 39495; AB, 5/24/96; FR, 6/26/96, pp.33166; AB, 7/17/96.

Retail Sales of Nondeposit Investment Products

The FDIC, the FRB, the OCC and the Office of Thrift Supervision (OTS) issued joint interpretations of their Inter-Agency Statement, released on February 15, 1994, on retail sales of mutual funds and other nondeposit investment products by federally insured financial institutions (see this Review, Winter 1995, p. 31). The interpretations give the inter-agency position regarding abbreviated disclosures and clarify instances where it is not necessary to provide disclosures.

There are limited situations in which the disclosure guidelines need not apply or where a shorter logo format may be used in radio broadcasts of 30 seconds or less, electronic signs, and other signs (such as banners and posters) used only as location indicators. Third-party vendors not affiliated with the depository institution need not make the Inter-Agency Statement disclosures on nondeposit investment product confirmations and in account statements that may incidentally, with a valid business purpose, contain the name of the depository institution. The interpretations state that with respect to shorter logo format disclosures that can be used in visual media, such as television broadcasts, ATM screens, and signs, the text of an acceptable logo format disclosure would include the statements "Not FDIC Insured," "No Bank Guarantee," and "May Lose Value," which would be boxed, set in bold face type, and displayed conspicuously. FIL-61-95, FDIC, 9/13/95; with "Joint Interpretations of the Inter-Agency Statement," and response letter to the American Bankers Association, 9/12/95.

On May 5, 1996, the FDIC issued the results of a nationwide survey it funded of approximately 1,200 FDIC-insured institutions to determine their compliance with inter-agency guidelines on the sale of uninsured investment products. The survey found that banks were more likely to make required disclosures in face-to-face discussions than over the phone. Required disclosures were also found to be made more frequently by investment personnel who were members of the National Association of Securities Dealers (NASD) or employed by third-party affiliates than by investment representatives affiliated with an internal banking group. Survey of Nondeposit Investment Sales at FDIC-Insured Institutions, prepared by Market Trends, 5/5/96.

Suspicious Activity Reports (SARs)

The Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury and the federal financial institutions' supervisory agencies issued new regulations requiring centralized filing with FinCEN of reports of suspicious transactions under the Bank Secrecy Act (BSA). A uniform "Suspicious Activity Report" (SAR) is to be used to report suspicious transactions and known or suspected criminal violations. Essentially the same rule was issued or is being issued by the five federal supervisory agencies for depository institutions.

The regulation raises the mandatory reporting thresholds for criminal offenses and reducing bank reporting burdens. For the reporting of known or suspected criminal activity when a bank has a substantial basis for identifying a non-insider suspect, the reporting threshold based on asset involvement is raised from the existing $1,000 to $5,000; where the bank has no substantial basis for identifying a suspect, the reporting threshold rises from the existing $5,000 to $25,000. Banks may file the referral form in several ways: they may submit an original form, a photocopy, or they may file by magnetic means, such as by computer disk. The regulatory agencies are also developing computer software to assist banks in preparing and filing the reports. FR, 9/14/95, p. 47719; FIL-71-95, FDIC, 10/16/95; Comptroller of the Currency, News Release, OCC, NR96-12, 2/5/96.

The designation of a single government recipient of all depository institution suspicious transaction reports is required under the Riegle Community Development and Regulatory Improvement Act of 1994. Previously, banks reported violations or suspected violations to their primary federal regulators and several law enforcement agencies using non-uniform criminal referral forms. They also filed currency transaction reports (CTRs) for transactions in currency of more than $10,000. FR, 9/7/95, p. 46556; BBR, 9/11, p. 377; CEO Memo 53, OTS, 3/19/96.

Record keeping For Funds Transfers

The FRB and the Department of the Treasury jointly proposed amendments to their rules requiring enhanced Record keeping on certain wire transfers by financial institutions in accordance with the Bank Secrecy Act. The proposed amendments were made to conform the meanings of the definitions of international funds transfer to the Uniform Commercial Code.

In January, the FRB and the Department of the Treasury adopted a final rule that required each domestic financial institution involved in a wire transfer to collect and retain certain information depending upon the type of financial institution, its role in the transfer, the amount of the transfer, and the relationship of the parties to the transaction. The rule exempted wire transfers below $3,000. The effective date was to have been January 1996, but postponements delayed the new Record keeping rules until May 1996.

FinCEN reports that electronic wire transfer systems move funds between financial institutions and handle a daily volume in excess of 500,000 transactions, moving more than $2 trillion around the world each day. Wire transfers have provided money launderers with an efficient and secure method of transferring huge sums of money over a very short period of time. Because wire transfer messages often are sent through several banks and wire transfer systems, launderers have been able to confuse the money trail and make it difficult for law enforcement to trace the criminal proceeds. FR, 1/3/95, pp. 220, 231; 8/24, pp. 44144, 44146; Press Release, FRB, 12/22/94; 8/18/95; BBR, 8/28/94, p. 330; AB, 3/21/96.

Bank Lending to Areas Subject to Floods

The OCC, the FRB, the FDIC, the OTS and the National Credit Union Administration (NCUA) are amending regulations regarding loans in areas having special flood hazards to implement the provisions of the National Flood Insurance Reform Act of 1994. Among the proposed amendments are new escrow requirements a lending institution that requires the escrow of taxes, property insurance premiums, fees or other charges must require the escrow of flood insurance premiums; explicit authority for lenders and servicers to "force-place" flood insurance under certain circumstances; and a requirement that lending institutions notify purchasers or lessees if the property securing the loan is located in a special flood hazard area (SFHA).

Additionally, the proposal requires each agency to assess compliance with the National Flood Insurance Program when examining the institutions it supervises, and to use a new standard form developed by the Federal Emergency Management Agency for recording whether a security property for a given loan is located in an SFHA. FR, 10/18/95, p. 53962; PR-57-95, FDIC, 9/26/95.

Federal Financial Institutions Examination Council Appraisal Regulation

The inter-agency Federal Financial Institutions Examination Council (FFIEC) is soliciting comment on how it should implement a section of Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which was amended by the Riegle Community Development and Regulatory Improvement Act of 1994. The amendment added the requirements that: a) state appraiser certifying or licensing agencies are not to impose excessive fees or burdensome requirements for temporary practice; and b) the states are encouraged to develop reciprocity agreements that readily authorize appraisers who are licensed or certified in one state, and who are in good standing, to perform appraisals in other states. Since January 1, 1993, Title XI, as amended, has required all federally regulated financial institutions to use state-licensed or certified real-estate appraisers, as appropriate, to perform appraisals in federally related transactions. In response to the Title, each state, territory and the District of Columbia has established a regulatory program for certifying, licensing and supervising real-estate appraisers. Press Release, Appraisal Subcommittee, FFIEC, 9/8/95; FR, 9/12, p. 47365.

GAAP Approved For Call Reports

The FFIEC adopted the generally accepted accounting principles (GAAP) as the reporting basis for the balance sheet, income statement, and related schedules in the bank Reports of Condition and Income (Call Report), effective with the March 1997 report date. Adoption of GAAP as the reporting basis will eliminate existing differences between bank regulatory reporting standards and GAAP, among which are the accounting treatment of assets sold with recourse, futures, forwards, and option contracts. The reporting basis being adopted already is used for savings association Thrift Financial Reports and Federal Reserve bank holding company FR Y Reports, and is consistent with the objectives of Section 307 of the Riegle Community Development and Regulatory Improvement Act of 1994, which requires the federal banking agencies to develop a single form for the filing of core information by banks, savings associations, and bank holding companies.

The FFIEC believes that adopting GAAP will reduce reporting burden as well as any confusion on the part of users about differences in the reporting principles governing regulatory reports and financial statements. GAAP does not require the disclosure of all of the information needed by federal banking agencies and does not address all of the agencies' supervisory concerns, thus institutions would still have to report, in supplemental schedules and items, some information needed for supervisory and other purposes. The Council and the agencies will continue when necessary to issue specific reporting guidance that falls within the range of acceptable practice under GAAP (for example, as is currently the case for the allowance for loan and lease losses), and each agency will retain existing authority to require an institution to report a transaction in regulatory reports in accordance with the agency's interpretation of GAAP. Press Release, FFIEC, 11/3/95.

Mortgage Lending Reports

The FFIEC made available the reports of 1994 mortgage lending activity in metropolitan statistical areas (MSAs) for public inspection at a central depository in each MSA, and the agency headquarters. The reports, which are available almost two months earlier than last year, include individual disclosure statements and aggregate data for each MSA. They reflect the lending activity of the more than 9,800 lending institutions covered by the Home Mortgage Disclosure Act (HMDA) that reported data for 1994 to member agencies of the FFIEC and to the Department of Housing and Urban Development. The reports contain data about loan originations, loan purchases, and applications that did not result in a loan. Also, they give information about the race or national origin, gender, and annual income of the applicants or borrowers. For most loans relating to property located in MSAs, the reports identify the geographic location, usually by Census tract.

Data from the HMDA reports released in July indicated that the number of conventional home purchase loans went up 54.7 percent for blacks and 42.0 percent for Hispanics since 1993. Press Release, FFIEC, 9/1/95.

Proposed Revisions to CAMEL Rating System

The FFIEC proposed revisions to its Uniform Financial Institutions Rating System (commonly referred to as the CAMEL rating system) on July 9, 1996. Comments are due by September 16, 1996. The proposed changes include clarifying the component rating descriptions; addition of a sixth component to address market risk; and increased emphasis on risk management. FIL-56-96; 7/24/96; FR, 7/18/96; p. 37472.

Risks to Computer Systems in the New Millenium

The FFIEC issued a statement on July 12, 1996, alerting financial institutions to the need to address risks involving their computer systems as the industry enters the new century. Examiners will review each institution's 2000 plan during regular supervisory reviews. The risks arise from the programming code in existing computer systems that may cause the system to function improperly due to the two digit year field containing "00." FIL-50-96, 7/12/96.

Federal Deposit Insurance Corporation Assessments

The FDIC Board of Directors voted on August 8, 1995, to reduce significantly the deposit insurance premiums paid by most banks but to keep existing assessment rates intact for savings associations. Under the new rate structure, the best-rated institutions insured by the Bank Insurance Fund (BIF) would pay four cents per $100 of domestic deposits, down from 23 cents per $100. The weakest institutions would continue to pay 31 cents per $100. The FDIC announced in September 1995, that the BIF was fully recapitalized and that it would refund to banks insurance overpayments for the period of June through September. The FDIC estimated the aggregate BIF assessment refund at $1.49 billion, plus $19.9 million in interest. PR-50-95, FDIC, 8/89/95; PR-54, 9/5.

On September 26 1995, the FDIC amended its regulation on assessments to delay the regular payment date for the first quarterly payment for the first semiannual period from December 30 of the prior year to January 2 (or the first business day thereafter). At the same time, insured institutions were given the option of making the first payment on December 30 (or the prior business day). The FDIC's purpose in making these changes was to relieve certain institutions of the regulatory burden of having to make an extra assessment payment in 1995, while also affording flexibility to other institutions to make such a payment if they so desired.

The amendments approved in late September 1995, also give insured institutions the option of paying double the amount of any quarterly payment, when the payment is made on a payment date (regular or alternate) that comes before the start of the quarter to which the payment pertains on the March, June, September, and December payment dates.

The interest rate to be applied to under payments and overpayments of assessments is replaced with a new, more sensitive rate derived from the 3-month Treasury bill discount rate. Rates set under the prior standard have rapidly become obsolete in volatile interest-rate markets.

The timetable for announcing the semiannual assessment rate schedule is shortened from 45 days to 15 days prior to the invoice date. This change enables the FDIC to use the most up-to-date information available for computing assessments, thereby benefitting both the agency and the depository institutions. The rule is effective September 29, 1995, except some amendments are effective October 30, 1995. FR, 9/29/95, p. 50400; 8/10, p. 40776; FIL-67-95, FDIC, 10/6/95.

The FDIC Board of Directors voted on May 14, 1996, to maintain the existing assessment rates on deposits by the BIF and the SAIF for the second semiannual assessment period of 1996. Insured institutions will continue to pay annual assessment rates of from zero to $.27 per $100 of BIF-assessable deposits, subject to a quarterly minimum of $500. Based upon year-end 1995 data, it is expected that these rates will result in an average annual BIF rate of approximately $.0029 per $100 of deposits and annual revenues of about $72 million. The BIF reserve ratio was 1.30 percent as of December 31, 1995.

Institutions insured by the Savings Association Insurance Fund (SAIF) will continue paying premiums on a risk-related basis of between $.23 per $100 to $.31 per $100 of assessable deposits. It is expected that these rates will result in an average annual SAIF rate of approximately $.234 per $100 in assessable deposits. SAIF-insured institutions will continue to pay higher rates than BIF-insured banks because the SAIF remains seriously undercapitalized. At December 31, 1995, the SAIF had reserves of approximately $3.4 billion and is not expected to reach the minimum reserve level of 1.25 percent until the year 2002, given the current circumstances and reasonably optimistic assumptions. PR-70-95, FDIC, 11/14/95; FIL-40-96, 6/11/96.

Thrifts Allowed to Transfer Deposits to Affiliates

The FDIC has decided that thrifts may transfer deposits to newly chartered bank affiliates, if the deposit shift is initiated by the depositor. This decision will allow thrifts to take advantage of cheaper deposit insurance available to banks. The FDIC ruling is expected to accelerate the outflow of funds from the thrift industry, thereby reducing the FICO payment base. WSJ, 7/3/96.

Assessments For Oakar Institutions

On July 3, 1996, the FDIC proposed to amend its assessment regulations regarding the so-called Oakar institutions institutions that belong to one insurance fund, but hold deposits that are treated as insured by another insurance fund. The changes would affect particularly calculations of the Adjusted Attributable Deposit Amount (AADA). The AADA is used to determine the allocation of an Oakar institution's deposits between the BIF and the SAIF.

The proposed amendments are intended to eliminate anomalies in the assessment of these institutions' deposits. One amendment would change the AADA adjustment for an institution's overall deposit growth. The FDIC has found that the current treatment of deposit sales for Oakar institutions has resulted in an increase in the total amount of primary fund deposits reported and assessed and a decrease in the total amount of secondary fund deposits reported. The proposed rule would correct this anomaly for all deposit sale transactions occurring after June 30, 1996; and would adjust the AADA for growth or shrinkage on a quarterly basis. The FDIC is also proposing to eliminate the requirement that Oakar institutions submit growth worksheets to adjust the AADAs. Finally, public comment is requested on two options for allocating funds to the BIF or the SAIF at the time of deposit sales. One option would treat deposit sales by Oakar institutions as sales of primary fund deposits only (unless the deposits sold exceeded the amount of primary fund deposits available); the second alternative would treat the deposits as a pro rata blend of the institutions' primary and secondary fund deposits. FIL-54-96, 7/19/96; FR,3/3/96, p. 34751.

BIF and SAIF First-Quarter 1996 Financial Highlights

The BIF earned $295 million in net income in the first quarter of 1996, significantly below the $1.3 billion earned the same period a year earlier. The decrease is primarily due to the reduction in premium rates. The fund's estimated liability for anticipated failures decreased to $240 million from $279 million at year-end 1995. The fund balance at the end of the quarter was $25.748 billion. One BIF-insured bank failed during the quarter. The SAIF earned $292 million in net income in the first quarter of 1996, $13 million more than it earned in the same quarter a year earlier. Net assessment revenue came to $251 million through the first quarter of 1996 after payments of $393 million to service Financing Corporation (FICO) obligations. The fund balance at the end of the quarter rose to $3.650 billion. Federal Deposit Insurance Corporation, First-Quarter 1996 Financial Results, Bank Insurance Fund, 3/31/96.

Capital Maintenance

The FDIC adopted an interim rule and requested comments to implement Section 208 of the Riegle Community Development and Regulatory Improvement Act of 1994 which provides that a qualifying insured depository institution that transfers small-business loans and leases on personal property with recourse need include only the amount of retained recourse in its risk-weighted assets when calculating its capital ratios if certain conditions are met. The transaction must be treated as a sale under GAAP; and the transferring institution must establish a non-capital reserve sufficient to meet the reasonably estimated liability under the recourse arrangements. A qualifying institution is one that is well-capitalized or, with the approval of the appropriate federal banking agency, adequately capitalized. For these institutions, the rule, which is effective August 31, 1995, will result in lower capital requirements for affected loans and leases. PR-52-95, FDIC, 8/25/95; FR, 8/31, p. 45606; p. 45612 (FRB notice); p. 45618 (OTS notice).

Final Rules on Golden Parachutes, Internal Audits and Foreign Bank Deposits

The FDIC issued a final rule, effective April 1, 1996, prohibiting with certain exceptions golden parachute payments to executives of troubled holding companies, banks and thrifts. Exceptions to the prohibition include payments to qualified pension and retirement plans. The rule provides guidance on what constitutes legitimate payments. The new rule also limits holding companies or FDIC-insured institutions from paying the legal expenses or liabilities of their employees or directors who are subject to enforcement proceedings. PR-8-96, FDIC, 2/6/96; BBR, 2/12/96, pp. 205-206.

Court Supports Agency on Cross-Guaranty

The U.S. Court of Appeals for the Second Circuit upheld the FDIC's power, granted to the agency by FIRREA in 1989, to charge losses from a bank failure to another bank in the same corporate organization (Meriden Trust and Safe Deposit Co. v. FDIC). It rejected claims that such action amounts to an unconstitutional taking under the Fifth Amendment. In 1994, a federal claims court judge held that the agency's use of the cross-guaranty power might be a violation of the takings clause (Branch v. U.S.). BBR, 8/14/95, p. 308.

On July 24, 1996, First Coastal Corporation of Westbrook, Maine, paid the FDIC $9.75 million to settle a cross-guaranty assessment levied against its subsidiary, Coastal Savings Bank of Portland, Maine, in 1993. FDIC, PR-55-96. 7/24/96.

Court Rules Government Breached Contracts With Savings-and-Loan Associations

On July 1, 1996, the U. S. Supreme Court ruled in the United States v. Winstar Corp., No 95-865, that Congress erred in changing industry accounting rules concerning supervisory goodwill in 1989. The plaintiffs were Glendale Federal Bank of California, and two since-closed thrift companies, Statesman Savings Holding Corporation and Winstar Corporation, who acquired weak savings institutions at the government's behest in the 1980s and in return were given assurances that the supervisory goodwill created in the transactions could be counted as capital and written off over time. The regulators subsequently refused to honor the agreements that they claimed were repudiated under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).

The Federal Circuit Court of Appeals had previously ruled that the government violated contracts with the three plaintiffs. In this most recent ruling, the U.S. Supreme Court concluded that "it would have been madness" for the institutions to have taken over the weak institutions if they had known that the government could cancel the current accounting "gimmicks" at its will. The Court ruled that the government was liable for damages, and sent the case back to a lower court to determine those amounts. Breach-of-contract suits have been filed by at least one hundred thrifts. BBR, 9/11/95, p. 403; AB, 8/31, p. 1, AB, 7/26/96, WSJ, 7/2/96, NYT, 7/2/96.

Subsequent to the Supreme Court ruling, the FDIC took steps to appear as plaintiff in two cases involving supervisory goodwill pending in the U.S. Court of Federal Claims, and is investigating other cases with possible goodwill claims to determine whether it will become a plaintiff. In these cases, the FDIC is acting as a receiver for the failed institutions. FDIC, PR-56-96, 7/24/96, AB, 7/26/96.

D'Oench Duhme Doctrine Rulings

The U.S. Court of Appeals for the District of Columbia ruled in August 1995, that the FDIC might use the D'Oench Duhme doctrine to void secret agreements that would cause a loss in a failed bank's assets, but could not use it as a protection against fraud claims. In this case, an investor in a bankrupt Florida resort sued the developers and Southeastern Bank, charging that the bank secretly controlled the development and was responsible for fraudulent statements about the project's financial condition.

In another recent case, the U. S. Court of Appeals for Atlanta found that Congress did not eliminate the D'Oench Duhme doctrine in passing the thrift bailout law in 1989. In this case, the 11th Circuit Court concurred with a May 1996, FDIC ruling that the D'Oench Duhme doctrine prevented a car dealership from suing for breach of contract against Southeast Bank of Florida.

The D'Oench Duhme doctrine began with a 1942 Supreme Court decision and legislation enacted in 1950. It required that the FDIC recognize only written agreements by banks that subsequently fail and was intended to force bankers to put agreements in writing so that examiners could more accurately evaluate an institution's financial condition. AB, 8/9/95, p. 2; 5/31/96, p. 2.

Court Rules Examination Reports Accessible During Discovery

The U.S. Court of Appeals for the Sixth Circuit, rejecting an attempt by Bankers Trust Company to shield its examination results, ruled that parties to a lawsuit can seek examination reports from banks during the discovery process. As a result of the decision, which affects banks in Ohio, Michigan, Kentucky and Tennessee, a litigant can ask the bank for a report directly, and if refused can ask the trial judge to order the bank to comply. The judge must first give the regulator a chance to object. Previously, a litigant's request for an examination report had to be made through the bank's regulator, and if refused, which usually occurred in respect to the examiner's subjective comments, the plaintiff could seek compliance through the court. AB, 8/10/95, p. 3.

Improvement in Real-Estate Markets Reported

The FDIC's July 1996 Survey of Real Estate Trends reported continued improvements in both commercial and residential real-estate markets during the second quarter of 1996. The latest results represented the second consecutive quarter of reported improvements and were the most positive in over a year.

The quarterly survey asks field personnel from all federal bank and thrift regulatory agencies about developments during the prior three months in their local real-estate markets. The survey reflected positive trends in market activity in many areas of the nation, with the Northeast and the West reporting the most gains. The proportion of respondents seeing better market conditions in the South and the Midwest remained the same or declined following reports in April of significant progress.

The national composite index, summarizing assessments of real-estate markets, edged up to 68 in July from 67 in April. Values above 50 indicate that more examiners and asset managers at federal bank and thrift regulatory agencies thought conditions were improving than declining. The July report represents the second consecutive increase in the summary index from its recent low of 60 in January. Although the gains reported in the last three months were not as strong as those observed in the February-April period, the July composite index is the highest reading in two years.

Survey respondents reported continued confidence in the residential markets. Forty-five percent observed better conditions in their local housing markets the same proportion reported previously. However, those noting worsening conditions in July fell to eight percent. The national summary index for residential markets inched up to 69 from 68 in April, with a substantial boost from gains in the West, where 66 percent of the respondents reported better housing conditions, up from 54 in April.

Overall assessments of commercial real-estate trends continued to be positive as well. An increasing proportion of survey participants observed improving conditions (38 percent) while reports of worsening conditions were very few (one percent). As a result, the composite index for commercial markets rose to 68 in July from 66 in April. Survey of Real Estate Trends, July 1996.

Online Press Release Service Via Internet

The FDIC has established an online subscription service that allows subscribers to receive over the Internet and World Wide Web press releases and copies of key Congressional testimony and major speeches by agency officials. The new service will send the material directly to subscribers via e-mail. Released materials will continue to be available via fax modem, postal service mail and from information racks in FDIC buildings. PR-59-95, FDIC, 10/4.

Disclosure of Information

The FDIC revised the procedures used by the public in requesting records under the Freedom of Information Act (FOIA) and the Freedom of Information Reform Act (FOIRA). Among its provisions, the final rule sets forth the conditions under which exempt records may be disclosed to third parties, including such conditions as are necessary to protect the confidentiality of the records. The rule contains procedures by which the agency would charge appropriate fees as required under FOIRA and guidelines established by the Office of Management and Budget. The FOIRA significantly amended the fee provisions of FOIA by establishing classes of FOIA requesters and a framework under which fees could be charged to the individual categories of requesters. FR, 7/6/95, p. 35148; 11/30, p. 61465.

New FDIC Board Member

Former Mississippi Banking Commissioner Joseph H. Neely was sworn in as a member of the five-person FDIC Board on January 29, 1996. As Mississippi's Banking Commissioner, a position he occupied since 1992, Mr. Neely served as the primary regulator and supervisor of state-chartered banking and thrift institutions. He was also responsible for supervising state-chartered credit unions and consumer finance companies. Additionally, Mr. Neely served on the faculty of the Mississippi School of Banking from 1993 to 1995. PR-6-96, FDIC, 1/29/96.

Stored-Value Cards

On July 16, 1996, the FDIC issued an opinion on whether federal deposit insurance applied to stored-value cards. Stored-value cards look like a credit card or ATM card and store electronic value on either a magnetic stripe or a computer chip, and can be used to pay for purchases. The FDIC concluded that in most cases stored-value cards are not protected by deposit insurance. However, if the funds represented by the card were maintained in the customer's own account, rather than a single pool, deposit insurance would apply. The FDIC scheduled a hearing for September 12, 1996, on stored-value cards, Internet banking and other electronic payment systems. FDIC PR-52-96, 7/16/96; PR-53-96, 7/16/96.

FDIC Review of Regulations

The FDIC is conducting a systematic review of its regulations and policies to identify and revise regulations that might be inefficient, cause unnecessary burden, or contain outmoded, duplicative or inconsistent provisions. In one action, the FDIC issued an inter-agency proposal to remove inconsistencies in the way regulators assign risk-based capital requirements to certain loans and other collateralized transactions. The agency also proposed that publicly traded FDIC-supervised banks use Securities and Exchange Commission (SEC) rules for registration of securities and reporting instead of separate but similar FDIC rules. Final action was also taken eliminating outmoded policies on the submission of quarterly Reports of Condition and Income and the advertising of Negotiable Order of Withdrawal (NOW) accounts. FDIC, PR-44-96, 6/17/96; FIL-48-96, 7/12/96; FR, 7/3/96, p. 34814.

Resolution Trust Corporation Thrift Depositor Protection Oversight Board Will Continue

The Thrift Depositor Protection Oversight Board (TDPOB) continues in operation following termination of the Resolution Trust Corporation (RTC) on December 31, 1995. It is responsible for preparing final reports on the resolution of the thrift crisis and for overseeing the Resolution Funding Corporation, which between 1989 and 1991 issued long-term bonds to finance the resolution. The Board's membership will be reduced to three the Secretary of the Treasury, Chairman of the Federal Reserve Board, and Secretary of the Department of Housing and Urban Development. AB, 12/6/95, p. 2.

Last RTC Auction

At its eighth and final national auction, the RTC sold performing and nonperforming loans with a book value of $577 million. It recovered $404 million on the sale, approximately 70 percent of book value. The three-day auction was held in Kansas City beginning December 13, 1995. National Mortgage News, 1/2/96, pg. 3.

Final Cost of Thrift Bailout

The GAO reported that the thrift cleanup cost the taxpayer $160.1 billion in direct costs or $480.9 billion, if interest costs are included. Direct costs consist of $87.9 billion spent by the RTC; $64.7 billion spent by the FSLIC; and $7.5 billion in tax breaks to acquirers of ailing institutions. Interest costs consist of $111.8 billion of interest expenses on two bond issues, and $209 billion in interest computed on Congressional appropriations. Interest costs are not generally counted in government allocations. The New York Times. 7/13/96; WSJ, 7/15/96; The Washington Post, 7/13/96.

Federal Reserve Board Derivatives Transaction Standards

The Federal Reserve Bank of New York and five securities industry groups released final transaction standards for derivatives market participants. The standards cover such issues as the definition of a participant, a client's reliance on a dealer's advice, confidentiality, valuation, distribution of the standards, information, and disputes, but do not include any provision for dealers to determine a client's suitability for a particular transaction. BBR, 8/28/95, p. 329.

International Operations of Banks

The FRB proposed to amend its Regulation K to provide additional general consent authority for de novo investments in foreign countries by U.S. banking organizations that are strongly capitalized and well-managed. Banks meeting these requirements would be permitted to make certain investments without the need for prior approval or review. In order to strike a reasonable balance between reduced regulatory burden and continued FRB oversight, limits would be imposed on the total amount of general consent investments that may be made in a year. In addition, certain investments or activities would not be eligible for the expanded authority. Investors making use of the expanded authority would be required to provide the FRB with a post-investment notice. The Board's proposal is part of an overall review of the regulation. FR, 9/25/95, p. 49350; Press Release, FRB, 9/22.

Proposed Amendments to Leasing Regulation

The FRB proposed amendments to its Regulation M, implementing the Consumer Leasing Act, which was enacted into law in 1976 as an amendment to the Truth in Lending Act (TILA). Generally, the CLA applies to consumer leases of personal property such as automobiles and furniture involving $25,000 or less, and a term of more than four months. Among the disclosures required of lessors are the amount of the initial charges to be paid, a payment schedule, the responsibilities for maintaining the leased property, and the liability for terminating a lease early. Among the proposed amendments are: additional disclosure requirements about early termination charges; disclosure of the gross costs of leases, the residual value, and the estimated lease charge; and, pursuant to a statutory change, new advertising provisions for radio and television.

The Board also proposed changes to the official staff commentary on Regulation M. Press Release, FRB, 9/13/95; FR, 9/20, pp. 48752, 48769; BBR, 9/18, p. 438.

Investment Advisory Powers Expanded

The FRB granted authority for Credit Suisse of Zurich to provide discretionary portfolio management services for futures and options on nonfinancial commodities. The service, to be provided through a New York-based subsidiary, will be limited to institutional customers who specifically request it. The FRB said the approved activity is similar to other investment advisory services that bank holding company affiliates provide. AB, 7/7/95, p.2.

Banks Permitted to Purchase Education Finance Firm

The FRB granted approval for four North Carolina-based bank holding companies to purchase the shares of a company that will provide services to North Carolina and other state governments in programs to assist parents in financing higher education for their children. Among the firm's activities will be developing and managing an education savings and loan plan, designing and providing software, providing marketing materials, and training state employees. BBR, 10/2/95, p. 532.

Changes in Fedwire Access Policy

The FRB has modified its Fedwire third-party access policy to clarify its applicability and to reduce the administrative burden of several provisions. Some depository institutions have entered into arrangements under which a third party provides operating facilities for their Fedwire services; under such arrangements, the third party's actions may result in a debit to the institution's reserve or clearing account at a Federal Reserve Bank. The policy provides important safeguards to both depository institutions participating in third-party access arrangements and to the Reserve Banks. Among other things, the policy requires depository institutions to impose prudent controls over Fedwire funds transfers and book-entry securities transfers initiated, received, or otherwise processed on their behalf by a third-party service provider. These policy modifications are on an interim basis pending the completion of a broader review of supervisory policies that should be applicable to outsourcing arrangements. The changes become effective August 10, 1995; existing Fedwire third-party arrangements should be in compliance by March 1, 1996. Press Release, FRB, 8/10/95.

Access to Automated Clearing House Service

The FRB is requesting comment on the benefits and costs of adopting a policy to control access to the Federal Reserve Banks' automated clearing house (ACH) service by entities other than the depository institution whose Federal Reserve account will be debited. The controls would apply to ACH credit transactions sent by third-party processors (service providers) and respondent depository institutions directly to a Reserve Bank or a private ACH operator that exchanges transactions with a Federal Reserve Bank. Controlling access to the ACH service will help to ensure the safety and soundness of the ACH system.

The FRB is requesting comment on the specific provisions of the proposed policy and the cost and operational impact of providing risk-monitoring capabilities for controlling access to the Federal Reserve Banks' ACH service. The risk-monitoring capabilities are intended to permit the depository institutions that are responsible for funding ACH credit transactions to control the potential credit risk and reduce the risk of fraud created by their customers and respondent depository institutions. The proposed policy provisions and monitoring alternatives do not cover ACH debit transactions. Press Release, FRB, 8/10/95; FR, 8/15, p. 42413.

Survey of Consumer Finances

The FRB is sponsoring a statistical study of household finances that will provide information on the economic condition of a broad array of American families. The study, which is undertaken every three years, is being conducted by the National Opinion Research Center at the University of Chicago through November 1995. Participants in the study are chosen at random using a scientific sampling procedure in 100 areas across the U.S. Participation is voluntary. Summary results will be published in the Federal Reserve Bulletin. Press Release, FRB, 8/7/95.

Mortgage Loan Software Program

The FRB announced the availability, free of charge, to member banks of a computer software program designed to serve as an analytic tool for financial institutions in offering affordable mortgage loans to low- and moderate-income applicants. The software program, entitled "Partners" can determine within seconds if potential home buyers can qualify, mathematically, for a home purchase loan, given the underwriting criteria and financial information provided. In addition to determining loan eligibility, "Partners" offers loan amortization schedules, equity build-up calculations, and secondary market analysis. The program also can be utilized by community groups, government agencies, and other community development practitioners who offer home purchase loans. Press Release, FRB, 10/19/95.

Regulatory Review Timetable

The FRB published a schedule for review of its major regulations, policy statements, and regulatory guidances as required under Section 303 of the Riegle Community Development and Regulatory Improvement Act of 1994. Section 303 requires that each federal banking agency review its regulations and written policies to accomplish certain goals. These goals are to streamline and modify regulations and policies to improve efficiency, reduce unnecessary costs, and eliminate unwarranted constraints on credit availability; to remove inconsistencies and outmoded and duplicative requirements; and to work jointly with the other federal banking agencies to make uniform all regulations and guidelines implementing common statutory or supervisory policies.

The FRB noted that it has undertaken over 20 separate measures since the passage of Section 303 to reduce the burden and simplify regulations, written policies and procedures. Additionally, several proposals were out for comment which will further these efforts. FR, 10/16/95, p. 53546.

Federal Reserve Board Appointments

President Clinton reappointed Federal Reserve Chairman Alan Greenspan to his third four-year term as Federal Reserve Board Chairman. White House Budget Director Alice M. Rivlin and Washington University professor Laurence H. Meyer were also nominated to fill the two remaining vacancies on the Board. John P. LaWare left the Board in April of 1995 and Alan Blinder in January of this year. All three individuals are economists. BBR, 2/26/96, p. 291; AB, 2/26/96, p 1-2.

Office of the Comptroller of the Currency "Supervision by Risk" Program

The OCC is expanding, enhancing and standardizing the way examiners evaluate risk in national banks. The agency has defined nine specific categories of risk it will use in assessing risks in bank activities. The program focuses on evaluating the quantity of risk exposure in an institution and determining the quality of the risk-management systems in place to control that risk. The nine definitions, among which are credit risk, interest-rate risk, liquidity risk, and price risk, will enable the agency to treat the same risks consistently in all banks and across various products and activities, and they clarify for bankers the kinds of risk the OCC will be assessing in their institutions. Risk profiles prepared for each bank will help focus examiner attention on the most serious concerns within a bank and direct the agency's resources to institutions where the need is greatest. News Release, OCC, 9/26/95.

Examiner Guidance on Establishing Reserves

The OCC released a new Comptroller's Handbook section "Allowance For Loan and Lease Losses" (ALLL). This new section replaces the ALLL examination section that has been in effect since 1992. It requires no changes in basic examination objectives and procedures but consolidates a number of ALLL-related materials and identifies specific categories of risk. NR 96-75, OCC, 6/19/96.

Bank Examiner Guidance on Futures Brokerage

The OCC issued to its examiners guidance on derivatives that is applicable to subsidiaries that operate as futures commission merchants (FCM) registered with the Commodity Futures Trading Commission. Among the several elements of the guidance are: a) FCMs are expected to have a risk control unit that is separate from the unit that trades in derivatives futures; b) the independent risk control unit is to report to executive management, the bank's board of directors or a designated management committee, and is to communicate findings periodically to senior management and the bank's board; and c) capital to support risk exposures of the futures brokerage subsidiary should reflect the level and complexity of the risk and not be limited to meeting regulatory requirements. An FCM's compliance program should include at least one designated compliance officer, and include also standards for disclosure of risk to customers, and a plan for ethics training for FCM employees. News Release, OCC, 11/9/95.

Disclosure of Fair-Lending Self-Assessments

The OCC issued interim policy guidelines on banks' disclosure of the results of fair-lending self-assessments, identifying two types of self-assessments that national banks will not be routinely required to report to the agency. The two types of assessments are 1) where a bank uses "testers" or "mystery shoppers" to pose as loan applicants ("self test"); and 2) where the bank reviews actual loan files or related information, internal policies and procedures, training materials or audit reports and makes assessments based on information about actual loan applicants ("self evaluation"). The OCC will generally not take enforcement action against a national bank that discovers a fair-lending violation through self-assessment, when the bank takes appropriate, timely and complete corrective action in response. OCC examiners will not require or request any information about a bank's self- assessments, unless the agency has independently determined that the bank has unlawfully discriminated and is using the results of the self tests to defend itself.

Although the OCC will not take enforcement action in the situations outlined above, the agency will make referrals to the Department of Justice or notify the Department of Housing and Urban Development as required by statute or executive order. News Release, OCC, 9/28/95.

Risk-Based Capital Model

The OCC sent to all national banks a revised risk-based capital (RBC) planning model that can assist bank management in the calculation of, and planning for, supervisory capital. The revised model augments the previous version by highlighting the calculation of a bank's legal lending limit. The OCC notes that since the initial shift to the RBC framework in 1989, the supervisory role of the RBC has increased considerably. For example, the RBC ratio is a principal trigger under prompt corrective action for regulatory intervention into a bank's activities. It also is one of the two variables used in the FDIC's approach to deposit insurance premiums. In addition, the ratio is a component of other supervisory policies and statutory requirements, such as those relating to interbank liabilities, pass-through insurance, and brokered deposits. Bul. 95-62, OCC, 11/16/95.

Small Banks' Compliance Examinations

The OCC issued new streamlined examination procedures for assessing small banks' compliance with fair-lending laws, the Home Mortgage Disclosure Act, and a number of other banking-related consumer protection laws. The new procedures, effective January 1, 1996, apply to all community banks with total assets of less than $250 million and no regional or multinational affiliation, and under certain circumstances, may be used in banks with total assets of up to $1 billion. News Release, OCC, 9/18/95.

Income From Sales of Credit Life Insurance

The OCC proposed to revise its regulation governing credit life insurance to eliminate unnecessarily detailed provisions, reorganize sections of the rule, and refocus the regulation to areas of greatest safety-and-soundness concerns. The rule would provide that directors, officers, employees, and shareholders owning five percent or more of the bank's stock are not allowed to retain commissions or otherwise profit from the sale of credit life insurance to the bank's customers. Also, it would state for the first time that bank officials and insiders who sell credit life for personal profit are engaging in an unsafe and unsound banking practice. Banks would not be permitted to structure incentive or bonus programs in a way that creates incentives for bank officials to make inappropriate recommendations or sales to bank customers. Among other issues is whether dual employees who work for a bank and a non-bank company should be treated like bank employees, subject to the same limitations on bonuses and incentive arrangements, when they sell credit life insurance to bank customers. FR, 9/13/95, p. 47498; AB, 9/14, p. 4; News Release, OCC, 9/13/95.

Lease Financing Transactions

The OCC proposed to revise its regulation governing the personal property lease financing transactions of national banks, under the agency's Regulation Review Program. Comments are requested on allowing banks to rely more on the residual value of leased property, and less on the creditworthiness of the lessor, in deciding whether to enter into a lease. Another issue is the time period that banks have to dispose of property after the lease expires. FR, 9/6/95, p. 46246; News Release, OCC, 9/6; AB, 9/6, p. 2.

Profits From Community Development Investments

The OCC finalized a rule allowing national banks to keep profits from community development corporation and project investments. Previously, banks were required to reinvest dividends and other distributions received from community development investments into other activities that promoted the public welfare. The OCC found that this provision effectively discouraged investments in these types of projects. AB, 2/1/96. FR, 10/26/95, p. 54819.

Lending Bias Charges Settled

The U.S. Justice Department has gained settlements involving, for the first time, charges of bias in a bank's overage practices, and lending discrimination against Hispanics. Huntington Mortgage Co., a subsidiary of Huntington Bancshares Inc., agreed to pay $420,000 to settle charges that the company imposed higher up-front fees (overages) on loans to black borrowers than it charged other borrowers in the Cleveland area. Huntington denied past wrong-doing, but agreed to continue to limit its overages to one percent of the loan amount, and also it will make available all loan applications to Justice annually for the next three years. Security State Bank, Pecos, Texas, agreed to pay $510,000 in damages and penalties to resolve charges that a loan officer charged Hispanic borrowers higher interest rates on consumer loans than white customers paid. Security State said the officer involved in the charges has since left the bank, and that it does not discriminate in lending activities. The referral to Justice in the Huntington case resulted from an OCC fair-lending examination in 1993; in the Security State case the referral was made by the FRB from an examination by the Federal Reserve Bank of Dallas. AB, 10/19/95, p. 2.

Supreme Court Upholds Expanded Bank Insurance Powers

The U.S. Supreme Court ruled unanimously on March 26 in Barnett Bank of Marion County, N.A. v. Nelson (USSupCt No. 94-1837) that states must allow nationally-chartered banks to sell insurance as permitted under federal law. In a ruling on a case brought by Barnett Banks of Jacksonville against the state of Florida, the justices ruled that Section 92 of the 1916 National Bank Act, which allows banks in communities with less than 5,000 persons to sell insurance, preempted a Florida statute barring bank insurance activity. The ruling effectively voids bank insurance restrictions in 15 states.

This Supreme Court decision upholds the 1986 interpretation by the OCC that Section 92 of the National Bank Act authorized banks to sell insurance through branches located in small towns. Since it issued that interpretation, about 200 national banks have begun selling insurance. While the ruling only applies to nationally chartered banks, most states grant state-chartered banks the same powers as national banks.

The justices did not decide who will regulate bank insurance sales the OCC or state officials. Currently, legislation is pending in the House that would require state regulation of bank insurance sales and would prohibit the OCC from expanding bank insurance powers for five years.

Subsequent to the Barnett decision, the Supreme Court refused to hear an appeal from Kentucky's Insurance Commissioner, who had been overturned in barring Owensboro National Bank from selling insurance. The Court also overturned a Louisiana decision that prevented a subsidiary of First National Bank of Benham from selling insurance. AB, 3/27/96, 4/2/96; NYT, 3/27/96; WSJ, 3/27/96.

The OCC is finishing guidelines for insurance sales by banks. The guidelines cover where insurance can be sold; disclosures; anti-tying regulations; use of customer information; handling of complaints; director and manager oversight; applicability of state law in appropriate sales recommendations; guidance on promotional and sales literature; employee compensation; employee qualification and training. AB, 2/1/96, 6/19/96.

"30-Mile Rule"

The OCC has allowed 59 national banks to branch into other states since January 1994, under the authority of Section 30 of the National Bank Act (the so-called "30-mile rule"), which allows national banks to move their headquarters anywhere within a 30-mile radius. In May 1996, the U. S. District Court for the Northern District of Texas overturned an OCC decision to permit Commercial National Bank of Texarkana, Arkansas, to branch into Texas under the 30-mile rule. It ruled that the OCC, in relying on Section 30 of the Act, had ignored Section 36, which allows national banks only the same branching rights as state banks. The OCC is appealing the decision.

Thirteen states, including Arkansas, Colorado, Connecticut, Delaware, Iowa, Maine, Massachusetts, Michigan, New Hampshire, North Dakota, Oklahoma, Virginia, West Virginia; the District of Columbia; and the Conference of State Bank Supervisors supported Texas in its challenge.

Recent 30-mile rule approvals by the OCC include: The OCC granted approval for Embry National Bank, Atlanta, to move its main office across a county line under the 30-mile rule. The Community Bankers Association of Georgia had argued that the federal law did not apply and that the Embry branching decision violated state law and would result in state banks with restrictive charters converting to national charters. Some state banks in Georgia in recent years have converted to thrift charters that have nearly unlimited branching rights in the state. In February of 1995, it approved the Bank Midwest of Kansas move to Missouri; in March 1995, it approved the American National Bank and Trust move from Wisconsin to Illinois, and the headquarters relocation of NationsBank from Maryland to Virginia; and in January of 1996, it approved the relocation of Society Bank of Michigan to Indiana. None of these approvals will be affected by the Texas decision, but state banking departments in Michigan and Connecticut are pursuing legal remedies similar to the Texas case against the OCC. AB 8/17/95, AB, 2/2/96, AB, 5/24/96, BBR, Vol. 66, No. 21, p. 948, 5/27/96, AB, 7/10/96.

Revisions to Regulations

The OCC has proposed and adopted revisions to its regulations to further the goals of the Regulation Review Program by updating, clarifying, reorganizing, and streamlining regulations where appropriate to promote better and more efficient interaction between the OCC and the banking industry and the public at large. The intent is to eliminate unnecessary regulatory burdens that do not contribute to the safety and soundness of national banks or to accomplishing the OCC's other statutory responsibilities. FR, 11/15/95, p. 57315.

Interpretive Rules Updated, Codified in Regulation: The OCC issued a final regulation on February 9, codifying its interpretive letters in a single ruling. The final rule affirms that national banks may perform electronically all services that they are otherwise authorized to perform; adds new provisions clarifying the circumstances under which a main office or a branch office may be used for lending activities; and clarifies and codifies current OCC letters and case authority to include late fees, insufficient funds fees, annual fees and cash advance fees as components of interest. The final rule also clarifies rules regarding the lease or sharing of excess space with non-financial businesses; permits national banks to rely on corporate law, including state laws where the main office is located or incorporated; and updates letter of credit provisions. The OCC is continuing to study the issue of state licenses for national banks operating under federal law, and its prior rulings against this practice were therefore not codified in the final rule. News Release, OCC, NR 96-13, 2/9/96.

Security Devices and Procedures: The OCC is proposing to revise its regulation on minimum security devices and procedures for banks, reports of crimes and suspected crimes, and the Bank Secrecy Act for compliance. This proposal implements the new inter-agency suspicious activity referral process and updates and clarifies various portions of the regulation. FR, 7/3/95, p. 34476; p. 34481 (FRB notice).

International Banking: The agency is proposing to revise its regulations governing the international operations of national banks and the operation of foreign banks through federal branches and federal agencies in the U.S. The proposal updates, streamlines and consolidates various provisions and simplifies certain requirements. The proposal implements a requirement of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 for reducing an existing exemption to the prohibition on the acceptance by U.S. federal branches and agencies of foreign banks of retail deposits under $100,000. The exemption that allows acceptance of certain minimal ("de minimis") deposits up to five percent of branch deposits would be reduced to one percent, which is consistent with a similar FDIC proposal. A five-year phaseout period would be applied to deposits held in existing five percent de minimis accounts.

Real-Estate Lending and Appraisals: The OCC proposed to revise its rules governing real-estate lending, in order to modernize and clarify the real-estate lending rules and accomplish other objectives of the Regulation Review Program. FR, 7/5/95, p. 35353.

New Appeal Procedures Finalized: The OCC published its final rule modifying and clarifying national bank appeal procedures to comply with the requirements of the Riegle Community Development and Regulatory Improvement Act of 1994, which requires that all federal financial institution regulatory agencies establish an independent appeals process. National banks may request reviews through their immediate supervisory office or the OCC's ombudsman. Appeals must be submitted in writing, and the supervisory office or ombudsman has 45 calendar days to respond. Matters not subject to appeal are the appointment of receivers and conservators; preliminary exam conclusions; enforcement-related decisions; Freedom of Information Act requests for agency records; and rulemakings subject to the Administrative Procedures Act. BBR, p. 294, 2/26/96.

Proposal Allowing Banks to Exceed Loan Limits to One Borrower: The OCC has proposed that national banks be allowed to exceed the limits on loans to one borrower if two conditions are met. The loan must be secured by either personal property or real estate; and extension of additional credit puts the bank in a better position than foreclosing on the collateral. The proposal was published in the Federal Register on July 17, 1996, with comments due by September 16. AB, July 17, 1996.

New Bank Examinations Said to Reduce Regulatory Burden

In a survey of 725 community banks examined under the OCC's streamlined examination procedures for noncomplex community national banks, 83 percent of bankers said that the new examinations reduced their regulatory burden from prior examinations. Three-fourths or more of the surveyed banks examined between October 1, 1994 and June 30, 1995, said that the time required to prepare requested materials in support of the examination was reduced, that the examiners took up less of the bank's staff time with discussions, and that examiners were more focused in their reviews.

In a separate survey of Minnesota and North Dakota national banks, 95 percent strongly agreed that the exam scope and goals were clearly communicated prior to the exam, that the examination team acted professionally and provided useful information, and that their findings were clearly and effectively communicated at the completion of the exam. In this survey, 93 percent strongly agreed that examiners were responsive to bank needs over the past year without placing undue burden on banks, 88 percent strongly agreed that examiners presented accurate conclusions, their recommendations for corrective action were reasonable, and the report of examination was consistent with verbal discussions. Also, 82 percent strongly agreed that examination information requests were reasonable. The survey results are based on responses by 56 banks out of a total of 62 that were sent the questionnaire. Press Release, OCC, 8/21/95.

Pilot Project For Bank Auditor/Examiner Cooperation

Comptroller of the Currency Eugene A. Ludwig announced plans for a pilot program to test coordination of the respective review activities of national bank examiners and certified public accountants at ten large national banks. Once the banks are identified, examiners and auditors involved in each bank will share auditing and examination plans for the coming year. One possible outcome might be identification of a specific risk area upon which to focus and develop a plan for cooperation. The program is intended to generate: a) better coordination of procedures for reviewing common areas of concern to reduce examination and audit time; and b) opportunities to share information and data, which should assist in improving the efficiency of examinations and audits and in eliminating duplicative information requests. News Release, OCC, 11/16/95.

Treasury Study of Consumer and Small-Business Credit

The Department of the Treasury requested comment on the processes, and the effect of federal laws on those processes, by which credit is made available for consumers and small businesses. The request was issued pursuant to Section 330 of the Riegle Community Development and Regulatory Improvement Act of 1994, which requires the Treasury to conduct the study in consultation with the FRB, the Small Business Administration, the Department of Housing and Urban Development, OCC, OTS, FDIC, and NCUA, and submit a report to Congress. The purpose of the study is to identify procedures and federal laws that have the effect of reducing the availability of credit to consumers or small businesses, increasing the level of consumer inconvenience, cost, and time delays in connection with the extension of consumer and small-business credit, and the increasing costs and burdens on insured depository institutions, insured credit unions, and other lenders. FR, 8/22/95, p. 43647.

Pacific Northwest Flood Damages

The OCC is encouraging national banks to work with borrowers in the Pacific Northwest affected by floods by extending loan repayment terms, restucturing debt obligations, and easing loan documentation or credit extension terms for new loans, consistent with prudent banking policy. The OCC will also use expedited procedures to approve temporary facilities for national banks with branches that have been damaged by the flooding. The OCC district office in San Francisco has been designated the contact point for national banks in need of assistance. OCC NR 96-15, 2/12/96.

Thrift Becomes National Bank

On July 18, 1996, the OCC approved an application by the $7.5 billion Minneapolis thrift, TCF Financial Corp., to create four national banks to operate in the states of Minnesota, Illinois, Wisconsin, and Michigan. TCF stated that the 23-cent difference between the premiums charged by the BIF and the SAIF forced this action. Six other thrifts have also applied to the OCC for bank charters. The OCC decision followed an earlier decision by the FDIC to allow thrifts to shift deposits out of the SAIF, if the action was initiated by the customer. AB, 7/19/96; FDIC PR-58-96, 7/31/96.

Office of Thrift Supervision Review of OTS-Calculated Interest-Rate Risk

The OTS adopted new procedures for eligible thrifts to request an adjustment to their interest-rate-risk (IRR) component, as calculated by the OTS, or calculate their IRR exposure using their own computer models. An eligible institution may request an adjustment to its capital requirement if it can demonstrate that the accuracy of OTS' estimate of IRR exposure can be materially improved through the use of more-refined data or more-appropriate assumptions tailored to the specific institution. To be eligible, an institution must show that imposition of the IRR capital requirement as calculated by the OTS would cause the institution to move to a lower prompt corrective action category. The OTS intends to process requests for IRR adjustments within 75 calendar days from the date of their receipt. To allow for the implementation and evaluation of the new procedures, the OTS will delay invoking its IRR rule requiring thrifts with above-normal IRR exposure to adjust their regulatory capital requirement.

Thrift institutions with assets of more than $300 million, of which there are currently approximately 500, are required to file quarterly data with the OTS for calculation of their IRR exposure. They represent about one-third of the OTS-regulated industry. Any institution in this group that is well-capitalized may request to use its own internal IRR model in place of the OTS model in calculating its IRR capital requirement. An internal model must meet certain standards; for example, the model must use reasonable assumptions regarding future interest rates, prepayment rates for assets, and attrition rates for liabilities. The OTS intends to process such requests within 20 calendar days of their receipt. For thrift institutions with assets of $300 million or less, filing the quarterly IRR is voluntary. More than 85 percent of the approximately 1,000 thrifts in this group are voluntary filers. NEWS, OTS, 8/23/95; Thrift Bulletin 67, 8/21/95.

Regulatory Capital

The OTS adopted a rule that substitutes the term "available-for-sale equity securities with readily determinable market values" used in Statement of Financial Accounting Standard No. 115 for the current reference to "marketable equity securities" in the OTS definition of "common stockholders' equity." The OTS, in consultation with the other federal banking agencies, decided not to adopt its June 1994, proposal to include the SFAS No. 115 equity component in computing regulatory capital (see this Review, Winter 1995, p. 47). Savings associations, however, must follow this Standard for regulatory reporting purposes, as required by statute. The decision leaves in effect the OTS' requirement that nontrading debt securities be valued at amortized cost and nontrading marketable equity securities be valued at the lower of fair value or amortized cost for computing regulatory capital. This decision is consistent with the recommendation of the Task Force on Supervision of the FFIEC and the policies of the other agencies. FR, 8/15/95, p. 42025.

Policy on Independent Audits

The OTS provided the first detailed guidance on independent audits since the agency revised its audit regulation in November 1994. That regulation, designed to make audit rules for savings associations more consistent with those for commercial banks, takes into account an FDIC rule requiring annual independent audits for thrifts and banks with assets of $500 million or more. OTS retained authority to require an independent audit of any savings association or thrift holding company, regardless of size, if an audit is needed to address safety-and-soundness concerns. Associations with an examination rating of CAMEL 3, 4, or 5 are automatically required to obtain an independent audit. Otherwise, associations can expect to get a written notice from OTS when an independent audit is required for other safety-and-soundness purposes. An institution with the above ratings may request a waiver of the audit requirement. OTS will consider granting a waiver if the audit is not likely to help solve the problem that led to the poor rating. For those institutions not required to have an annual independent audit, the practice is encouraged by the OTS. Thrift holding companies must have an annual independent audit if the holding company controls subsidiaries that have aggregate consolidated assets of $500 million or more. Regulatory Bulletin 32-1, OTS, 8/16/95; NEWS, 8/18/95.

Examination Performance Evaluated

The OTS surveyed the institutions it regulates to determine how well the agency is living up to standards of service that it adopted in September 1994, in response to the comments received from thrift institution managers and directors on areas where the OTS needed to improve the examination process. The agency scored almost a 90-percent success rate in meeting most of its targets. For example, 91 percent of surveyed institutions said the OTS had met its goal of meeting with them at least semiannually between examinations and making a supervisory team available to meet on an as-needed basis. In other categories, 98 percent of surveyed institutions agreed that OTS' examiner-in-charge scheduled a meeting with the thrift's chief executive officer on the day the examination commenced, and that meetings were held at least weekly with institution personnel to convey findings and discuss concerns as the examination progressed. The lowest score a 69-percent success rate related to examination staff continuity from one examination to the next. The OTS said the logistics of deploying examiners and the location of thrifts and examiners will make it hard to improve, but the agency will do its best to provide greater staff continuity. NEWS, OTS, 11/25/95.

Examination Strategies Revised

The OTS revised its examination strategy and work paper documentation, pursuant to the Riegle Community Development and Regulatory Improvement Act of 1994, to apply an 18-month cycle to smaller insured institutions that: a) are not currently subject to a formal enforcement proceeding or order by the OTS or the FDIC; b) have a composite 1-CAMEL rating and total assets of less than $250 million, or a composite 2-CAMEL rating with total assets of $100 million or less; c) are well-capitalized; d) have a management component rating of 1 or 2; e) have had no change in control of the institution since completion of the last full-scope examination; and f) have had a full-scope safety-and-soundness examination or alternating state examination report submitted since November 1, 1994. The OTS will continue to conduct full-scope safety-and-soundness examinations in all other institutions on a 12-month examination cycle. Full-scope, on-site examinations conducted by state authorities may be accepted on an alternating basis in lieu of an OTS examination when such examinations meet OTS requirements. The Preliminary Examination Response Kit (PERK), which is sent to institutions prior to examinations, was revised in several respects to reduce regulatory burden, update references, and eliminate redundancies. Regulatory Bulletin 32-2, OTS, 8/22/95.

Actions to Reduce Regulatory Burden

As part of an initiative to reduce regulatory burden and to implement the Community Development and Regulatory Improvement Act of 1994, the OTS proposed eliminating regulations that are either outdated or duplicative, these constituting eight percent of all OTS sections in the Code of Federal Regulations. Among the regulations and policy statements the agency proposes to eliminate are requirements for counter statements, which duplicate information available elsewhere; unnecessary procedures for savings withdrawal requests; and outdated limitations on the sale of merchandise in connection with soliciting savings accounts. The OTS expects to issue over the next year a series of proposals to make significant burden-reducing changes in a number of key areas of its regulations, including regulations governing lending, subsidiaries, insurance, preemption, and adjustable mortgages. NEWS, OTS, 8/28/95; FR, 8/28/95, p. 44442.

The OTS proposed streamlining the Thrift Financial Report (TFR), including a 40-percent reduction in its content. The TFR is filed quarterly by 1,500 savings-and-loan associations to report their financial condition. As proposed, the consolidated report that institutions presently file would be retained, but the separate reports for the parent institution and subsidiaries would be eliminated. Additionally, only data critical to meeting supervisory needs or statutory mandates would be collected. The proposed changes would also make the data more comparable to the information contained in the commercial bank Call Report. The agency would use the revised TFR beginning with the June 1996, reporting cycle. NEWS, OTS, 8/24/95; FR, 8/24, p. 44116.

The OTS is discontinuing an attorney letter that is used to obtain certain information prior to the examinations of thrift institutions. The OTS had been the only banking agency to use an attorney letter. Essential information on foreclosures, litigation, legal fees and documents and funds controlled by the attorney will be obtained directly from the institution during the examination process. The agency will continue to request information on contingent liabilities, such as the feasibility of settling law suits and the probable time of settlements, as part of its pre-examination package, but directly from the institution. NEWS, OTS, 8/4/95.

On June 25, 1996, the OTS proposed a rule to update, shorten and make more flexible the rules governing the charters and bylaws of federal associations. The proposal seeks to reduce charter and bylaw rules and policy statements on corporate governance from 33 to 24, a reduction of 27 percent. Comments are due by August 26, 1996. Transmittal 151, OTS, 7/9/96; FR, 6/25/96, pp. 32713 - 32728.

Electronic Banking Task Force

The OTS created an Electronic Banking Task Force, which will look at "the whole range of electronic banking issues from the Internet to smart cards," an official said, and will identify the risks to financial institutions and to their customers. It is noted that the first financial institution to offer banking services on the Internet, Cardinal Bancshares, Inc., through its subsidiary, Security First Network Bank, Pineville, Ky., received approval from the OTS last May and began electronic operations on the Internet in October. Customers can open new accounts and transact business such as transferring funds between accounts and paying bills. Cardinal was not required to ask the OTS for permission to operate on the Internet, but did so as part of its application to set up the new subsidiary, Security First. In approving the application, the OTS stipulated that the thrift had to address a number of electronic security issues. NEWS, OTS, 11/20/95.

Minority-Owned Thrifts

Assets of minority-owned federal savings banks and savings-and-loan institutions rose 26 percent by $5.9 billion in 1995, according to the OTS. This compares with a decline of 0.4 percent for all 1,437 federal savings banks and savings-and-loans in 1995. The OTS attributes the rise to growth in consumer lending and small-business lending in minority communities. AB, 5/24/96.

Courts Restrict OTS' Ability to Enforce Net-Worth Agreements

The Supreme Court refused to consider an OTS appeal of a U.S. Court of Appeals decision restricting the OTS' ability to enforce net-worth maintenance agreements against owners of thrifts. In this case, United States vs. Rapaport, the U. S. Court of Appeals for the District of Columbia ruled that the OTS could enforce net-worth agreements against only those thrift owners who recklessly disregarded the law or personally profited by signing net-worth agreements. AB, 1/25/96.

National Credit Union Administration Field of Membership and Chartering Policy

The NCUA proposed amending its policies so that senior citizen and retiree groups will be required to meet the same conditions as other associational groups in order to qualify for a federal credit union charter or addition to an existing charter. In determining whether a group satisfies the normal common bond requirement, NCUA will consider the totality of the circumstances, such as whether the members pay dues, have voting rights, hold office, hold meetings, whether there is interaction among members and whether the group has its own bylaws.

Until the Board approves a final policy, it is continuing its moratorium on FCUs adding self-created senior citizen/retiree groups to their field of membership. The moratorium has no effect on groups that are already in an FCU's field of membership and it does not apply to the addition of senior citizens groups that have the characteristics of an association.

The Board proposes that FCUs continue to be allowed to add low-income groups formed solely for the purpose of seeking credit union service. FR, 10/4/95, p. 51936.

Investment and Deposit Activities

The NCUA proposed a rule that would add restrictions on some securities that have been determined to be too risky for credit unions, broaden authority in certain areas, and require that a credit union's staff and board of directors fully understand the potential risk characteristics of its investment options. The agency has concluded that investment policies with well-defined parameters and enhanced monitoring and reporting of investment risks are needed to strengthen credit union investment-risk management. The proposed rule recognizes that credit union investment risk is largely interest-rate, rather than credit (default) risk, and that a regulation designed to prohibit particular securities can fail to reflect the changing financial environment. The proposed rule allows a credit union to operate on one of three levels. A credit union could invest in fully-insured CDs and shares and deposits in corporate credit unions, and, if limited to these investments, the institution would not have to meet certain requirements, among which are conducting collateralized mortgage obligations (CMO) testing, establishing a trading policy and reporting on these activities, reporting monthly on the fair value of each investment, and calculating the impact on its portfolio of a 300-basis point parallel shift in interest rates. At the next level, a credit union could invest in potentially more-risky securities in an amount up to capital and would have to comply with most of the proposed rule's policy and reporting requirements, but not the 300-basis-point shift analysis. Finally, at the most sophisticated level, a credit union investing in potentially more-risky securities in an amount exceeding capital would be subject to all of the policy and the reporting requirements. NCUA News, 11/16/95; FR, 11/29/95, p. 61219.

Incentive Pay For Lending Activities

To reduce regulatory burden, the NCUA is amending its regulations to give member-elected credit union boards more flexibility to determine compensation policies, including incentive pay, for certain activities related to credit union lending. Currently, the agency's rules prohibit officials and certain employees of federally insured credit unions from receiving either incentive pay or outside compensation for these activities. The final rule will allow federal credit unions to pay: 1) to any employee, including a senior management employee, an incentive or bonus based on the overall financial performance of the credit union; and 2) to any employee, except a senior management employee, an incentive based on a loan made by the credit union, provided that the board of the credit union has established written policies and internal controls in connection with the incentive or bonus and monitors compliance with them at least annually. In addition, a credit union's volunteer officials and non-senior management employees, and family members of officials and all employees, may receive compensation from an outside party for a service or activity performed outside the credit union, provided that neither the credit union nor the official, employee, or family member has "steered" anyone to the other party.

The NCUA reserves the right to take exception to any compensation plan for safety-and-soundness reasons. The amendments are effective October 4, 1995. FR, 10/4/95, p. 51886.

Supervisory Committee Audits

The NCUA is proposing to amend its regulations governing credit union supervisory committee audits and verifications to clarify audit requirements in targeted risk areas. Most of the additional requirements are not applicable to credit unions that do not employ a compensated auditor. The expanded scope is intended to provide credit unions an enhanced audit product in several areas, among which are internal controls, cash, loans, related-party transactions, and the detection and reporting of errors and irregularities. The more definitive audit scope is designed to address and to reduce confusion that occurs when the supervisory committee and the compensated auditor agree that the audit engagement will consist of less than the full scope of a supervisory audit. For example, the supervisory committee may not realize that it remains responsible for performing the additional work needed to "fill the gaps" and produce a complete supervisory audit. Credit unions that employ compensated auditors would be required to memorialize the terms and conditions of the engagement in a comprehensive engagement letter that would constitute an enforceable contract.

Along with the existing requirement for a written audit report would be a requirement for two additional written reports where applicable: 1) a report of internal control exceptions or reportable conditions noted, if any, and 2) a report of irregularities or illegal acts noted during the audit, if any. These requirements do not necessitate any additional work, as they report information already obtained in the normal course of the supervisory committee audit. FR, 11/2/95, p. 55663.

Appraisals

Pursuant to Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, the NCUA amended parts of its real-estate appraisal regulation that are concerned with minimum appraisal standards, safety and soundness, unavailable information, appraiser independence and other aspects. The aim was to simplify compliance and reduce costs. For example, credit unions will be permitted to use an appraisal that was prepared for a different type of financial institution, including a mortgage bank. The agency will continue to require credit unions to get appraisals on any residential real-estate loan of more than $100,000, while banking regulators have set a $250,000 minimum. FR, 10/4/95, p. 51889; AB, 10/5/95, p.8.

Truth in Savings

The NCUA extended the compliance date to January 1, 1997, in respect to Part 707 of its regulations for nonautomated and insufficiently automated credit unions that have assets of $2 million or less. The extension gives these credit unions continued immunity from compliance until Congress has acted on its contemplated regulatory relief initiatives, which might ultimately exempt their compliance with TIS. The agency has twice before extended the Part 707 compliance date for certain small, underautomated credit unions. The compliance date for all other credit unions remained January 1, 1995. FR, 11/14/95, p. 57173; 8/3/94, p. 39425.

Management Interlock Rule Upheld

A U.S. district court in Virginia upheld an NCUA rule approved last fall that prohibits shared management between the Credit Union National Association (CUNA), which is the industry's largest trade group, and corporate credit unions (see this Review, Spring 1995, p. 44). The decision cited conflicts of interest and deference to the NCUA's contention that such conflicts could threaten the safety and soundness of the nation's credit union system. About half of the 43 corporate credit unions across the country are affected by the NCUA's rule. AB, 10/2/95, p. 8.

Federal Housing Finance Board Affordable Housing Program

The Federal Housing Finance Board (FHFB) adopted a rule, effective October 25, 1995, to authorize a Federal Home Loan Bank (Bank) to set aside a portion of its Affordable Housing Program (AHP) contribution to assist low- and moderate-income, first-time home buyers to purchase homes. In addition, the final rule permits a Bank to establish a home ownership set-aside program, with other requirements, subject to prior approval of the Board. Section 10 of the Federal Home Loan Bank Act requires each Bank to establish a program to subsidize the interest rate on advances to members of the Federal Home Loan Bank System engaged in lending for long-term, low- and moderate-income, owner-occupied and affordable rental housing at subsidized interest rates. The Board's regulation requires each Bank to make a specified annual contribution to fund its AHP. During each calendar year, each Bank accepts applications for funds from its members during two of four quarterly funding periods. AHP funds are awarded to applicants through a competitive scoring process set forth in the AHP regulation. FR, 9/25/95, p. 49327.

Mortgage Rates

The FHFB reported that interest rates on conventional 30-year fixed-rate mortgages increased in April 1996, to 8.05 percent, and is higher than in any month since May 1995. Similarly, rates on 15-year fixed-rate loans increased to 7.77 percent in April, 23 basis points higher than in the previous month. Thirty-one percent of conventional loans closed in May were adjustable-rate loans, the highest percentage since last May.

The data were based on 12,839 reported loans from 245 lenders and excluded FHA-insured and VA-guaranteed mortgages, refinancing loans, and balloon loans. FHFB 96-28, 6/27/96.

STATE LEGISLATION AND REGULATION Interstate Banking/Branching

Alabama: A new law permits acquisitions of banks by out-of-state banks or bank holding companies, effective September 29, 1995. Interstate branching is allowed, effective March 31, 1997. Alabama banks may establish and operate one or more branches in another state. An out-of-state bank may branch into Alabama only by acquiring a bank in the state that has operated for five or more years. After entry, an out-of-state bank with branches in Alabama may branch de novo or by acquisitions to the same extent that in-state banks may branch. The bill also provides for licensing, application and other requirements for foreign bank branches, offices, or agencies operating in the state. BBR, 8/28/95, p. 344.

California: Banks are permitted to branch through acquisitions into California under a law enacted in response to the Riegle-Neal Act. A bank must be at least five years old before it can be acquired by an out-of-state banking organization. BBR, 11/13/95, p. 795.

Illinois: An opt-in law permits state banks to establish out-of-state branches, and out-of-state banks to branch in Illinois, beginning June 1, 1997. State banks will be permitted to merge with out-of-state banks; however, the law does not allow direct branch acquisitions or de novo branching. Several restrictions relating to the acquisition of Illinois banks by out-of-state bank holding companies are eliminated. Among other provisions, the state Commissioner of Banks is authorized to examine branches of out-of-state banks and to participate in reciprocal arrangements concerning examinations of banks. The law sets no age limit on banks being acquired and allows banks to act as agents for out-of-state affiliates. BBR, 8/7/95, p. 262; Northwestern Financial Review, 8/19/95, p. 15.

New Hampshire: The Governor signed opt-in legislation permitting interstate branching, effective June 1, 1997, but not allowing de novo branching or partial bank acquisitions. As permitted under the Reigle-Neal Act, the law prohibits the interstate acquisition of banks in the state that are less than five years old. A 20-percent cap on the portion of the market an institution may control through an acquisition is retained. BBR, 7/31/95, p. 209.

Wisconsin: A new law allows out-of-state banking organizations to branch into the state by acquisition of existing banks and bank holding companies, but not by de novo branching. Only banks operating for five years or longer may be acquired by out-of-state firms. Previously, only banking firms within a nine- state region could acquire banks in Wisconsin. BBR, 11/6/95, p. 757.

Intrastate Branching

Nebraska: One bank has received regulatory approvals, and two others have filed applications, to branch within the state by means of creating a savings-and-loan charter and merging the proposed office or offices into the bank. The state's law allows banks to branch through the purchase of an existing bank that is at least 18 months old, but not through de novo bank branches. Northwestern Financial Review, 8/5/95, p. 24.

Court Rulings on Fee and Service Charges

The U.S. Supreme Court ruled unanimously on June 3, 1996, that national banks can charge any late-payment fees permitted by their home state, regardless of the law of the state where the cardholder lives. The ruling, Smiley v. Citibank, upholds a 1995 ruling by the California Supreme Court dismissing a suit against Citibank by California residents charging that Citibank late fees were illegal under California law. Citibank conducts its credit-card operations from South Dakota, which has no cap on late fees or other credit-card charges.

The U.S. Supreme Court ruling applies explicitly to nationally chartered banks regulated by the OCC, but it is expected to be applied to federally insured state-chartered banks as well. Previous to this decision, the Comptroller of the Currency, the state of Delaware, and the Colorado Supreme Court had ruled that fees on credit cards represented interest and were therefore allowable. A Pennsylvania superior court in 1994 and the New Jersey Supreme Court in November 1995 had ruled otherwise.

The California Supreme Court ruled that out-of-state credit-card banks are not governed by the state's restrictions on fee and service charges, because the National Bank Act gives a bank's home state the power to impose these restrictions. The ruling was based on the definition of "interest," which the Court said includes late fees and all other money paid to the creditor. AB, 9/6/95; 11/22/95; Federal Reserve Bank of Philadelphia, Banking Legislation and Policy, Volume 14, Number 4, pp. 1-2; The New York Times, 6/4/96.

Annuities Brokerage

Connecticut: The Department of Insurance, in a partial settlement of a lawsuit challenging state restrictions, gave approval for Shawmut National Corp. to sell annuities throughout the state. The state Attorney General said his office will propose legislation to give state banks the same power. Under the settlement, Shawmut agreed that all employees who sell annuities will apply for licenses from the Department, and the state agreed that all currently licensed employees will not need to reapply. AB, 7/28/95, p.2.

Florida: A proposed rule provides guidelines for insurance agents and deposit-taking financial institutions in the sale of annuities. The rule would affect Florida-chartered banks, savings-and-loan associations, and savings banks, and federally chartered savings-and-loan associations and savings banks. National banks already are permitted to sell annuities under federal law. Consumer protections include a requirement that institutions disclose orally, in writing, and with signs, that annuities are not insured by the FDIC or the Securities Investor Protection Corp. (SIPC), and are subject to investment risk. Sales could only be made by a licensed insurance agent, and employees would not be permitted to perform annuities services and banking services for a customer at the same time. BBR, 8/28/95, p. 341.

A state appeals court ruling that allows state-chartered banks to engage in any activity permitted to national banks opens the way for state banks to sell annuities in Florida. At least two national banks have started selling annuities in the state following the U.S. Supreme Court's ruling in January in the Valic case, in which the Court upheld a decision of the OCC that selling annuities is "incidental" to banking and a permissible activity under the National Bank Act (see this Review, Spring 1995, p. 39). AB, 8/25/95, p. 2.

Compliance Self-Testing Privilege

Illinois: Under a bill passed by the legislature, information obtained or discovered by a bank or thrift in the course of conducting an internal audit or review cannot be used as evidence against the bank or thrift in a civil action. Documents that are prepared in connection with a review conducted by a compliance review committee would remain confidential and would not be discoverable as evidence against a bank or thrift in any civil action, other than a civil action initiated by a state or federal regulator. Illinois Banker, 9/95, p. 17.

EFT Networks

Illinois: A bill passed by the legislature, amending a 1979 law, eliminates restrictions on the kinds of transactions and other banking-related activities that may be carried out by customers of financial institutions at various electronic funds transfer facilities, and authorizes EFT networks to process deposits on an interstate basis, consistent with the powers of brick-and-mortar branches and with other laws applicable to financial institutions. The revised law retains the right of the Banking Commissioner to audit networks but the networks no longer would be required to make quarterly and annual filings with the Commissioner. Illinois Banker, 9/95, p. 25.

State Regulator Accredited

Kansas: The Conference of State Bank Supervisors has issued its accreditation to the Office of the Bank Commissioner. The Office supervises 323 state-chartered financial institutions with assets of more than $14.8 billion, and over 80 trust departments and independent trust companies. Thirty-four state banking departments thus far have received CSBS accreditation. Bank News, July 1995, p. 45.

Examination Cycle Extended

New York: Effective January 1, 1996, the Banking Superintendent is permitted to examine certain state-chartered banks every 18 months, instead of once a year. To be eligible for the longer cycle, a bank's total assets must be less than $250 million, and the institution must be well-capitalized and well-managed. These requirements parallel the criteria for the longer cycle applicable to federally examined banks under the Riegle Community Development and Regulatory Improvement Act of 1994, except that the state law applies also to safe deposit companies, uninsured limited-purpose trust companies, and other uninsured entities holding state banking charters. BBR, 8/7/95, p. 263.

Feedback From Examinations

New York: The Banking Department has developed a follow-up questionnaire by which banks can evaluate the examination process and identify problems. The feedback will assist the Department in monitoring the effectiveness of its communications with state-chartered banks, the reasonableness of its examination requests, and other aspects of the program. AB, 8/16/95, p. 7.

Regulatory Reorganization

Wisconsin: Government departments that regulate banking, savings-and-loans, and securities will be transferred to a new Department of Financial Institutions, beginning July 1, 1996. Among other changes, the new Department will take over regulation of mortgage banking, and will administer the Wisconsin Consumer Act. The Department also will have certain administrative responsibilities with respect to credit union regulation that otherwise will remain in a separate Office. Savings on salary costs alone from the consolidation are estimated at nearly $900,000 annually. Northwestern Financial Review, 10/7/95, p. 36.

State Legislative Activity on Mergers

Kansas: The Kansas state legislature is considering legislation authorizing the state to block bank mergers that would result in the loss of jobs. Under the current bill, acquirers would be required to file a statement with the Banking Ccommissioner concerning likely job losses resulting from the merger. The Commissioner would be empowered to block the merger if job loss would be severe. AB, 2/1/96.

Mississippi: The legislature is considering a bill that would provide tax credits to institutions that maintain banking jobs following a merger. AB, 2/1/96.

Limits on Credit Union Membership

Utah: The Utah State Supreme Court reversed a lower court's dismissal of a suit brought by the Utah Bankers Association against the Credit Union Service Centers of Utah and Utah's Commissioner of Financial Institutions. The suit sought to block credit unions from having members from more than one county of the state. The case has been remanded to District Court and will be refiled. AB, 3/19/96.

State Savings Bank Charter

Michigan: Michigan became the 30th state to create a state savings bank charter. The new charter requires that at least 50 percent of the institution's assets be concentrated in mortgage-related loans and investments. The new charter will permit the state's 27 federally chartered savings institutions to continue to operate as thrifts regardless of federal action, and removes the OTS as their primary regulator. Those thrifts operating under the new charter will have the state as their primary regulator with the FDIC as a secondary regulator. AB, 7/19/96.

State Credit Union Deposit Insurance to End

Washington: The Washington Credit Union Share Guaranty Association, a Washington state corporation providing deposit insurance for 74 state credit unions, voted to dissolve the insurance fund within the next three years. The affected credit unions must submit applications to the National Credit Union Administration for federal deposit insurance by the end of 1996. AB, 1/29/96.

BANK AND THRIFT PERFORMANCE Commercial Banks' Earnings in 1995

Insured commercial banks reported a record $48.8 billion in net income for 1995, an increase of 9.4 percent over 1994's previous record earnings of $44.6 billion. Fourth-quarter 1995 net income was $12.1 billion, the second-highest quarterly net income ever after third-quarter 1995 record net income of $13.8 billion. All but three percent of commercial banks reported positive earnings in 1995, and 68 percent reported higher earnings than in the previous year. Industry 1995 ROA increased to 1.17 percent, a slight improvement over the 1.15 percent ROA reported in 1994. This was the third consecutive year that the ratio exceeded one percent.

Contributing to the growth in earnings in 1995 were lower deposit insurance premiums, made possible by the recapitalization of the BIF. The higher earnings reflected the banks' emphasis on expanding their loans, particularly home mortgage loans and other loans to consumers, compared to other assets. The higher proportion of loans has given support to average yields and net interest margins.

Contributing to 1995 record earnings was a 5.2-percent increase in net interest income over 1994 levels. The industry's 1995 seven-basis-point decline to 4.29 percent in net interest margins was more than offset by a 7.7-percent increase in interest- earning assets. Additionally, 1995 results showed an increase in noninterest revenue of $6.2 billion over previous year revenues, an 8.1-percent increase, resulting from strong 1995 growth in fee income. Securities sales also contributed $545 million in gains in 1995, a $1.1-billion increase over 1994 net losses of $572 million.

Delinquency measures overall showed improvement. Noncurrent assets and other real estate owned to assets fell to .85 percent in 1995 from a level of 1.01 percent in 1994. This represented the fourth consecutive year of decline in this ratio. Noncurrent loans (more than 90 days past due or not accruing interest) fell by 1.1 percent and real estate owned fell by 36.6 percent in the fourth quarter of 1995 from fourth-quarter 1994 levels. Short-term delinquencies (loans and leases 30-89 days past due) rose during the same period, however, increasing 20.2 percent over fourth-quarter 1994 levels. Net charge-offs increased 8.2 percent, and the provision for loan losses increased 14.5 percent in the fourth quarter of 1995 over fourth-quarter 1994 levels.

Banks' equity capital rose to 8.11 percent of total assets in 1995. Total assets grew to $4,313 billion in the fourth quarter of 1995, a 7.5-percent increase over the $4,011 billion in assets four quarters earlier.

Six insured commercial banks failed in 1995, compared to 11 in 1994. The number of commercial banks on the FDIC's "Problem List" for 1995 dropped to 144 institutions from 247 in 1994. Assets of "problem" banks fell by $16 billion during the year, to $17 billion in 1995.

FDIC-insured savings institutions earned $1.8 billion in the fourth quarter of 1995, bringing full-year 1995 earnings to a record $7.6 billion. Net income for the quarter was $181 million higher than in the fourth quarter of 1994. Full-year average return on assets rose to .79 percent, the highest ratio since 1962. Profits were $1.3 billion higher in 1995 than in 1994. Net interest margins experienced their first quarterly increase since 1993, rising seven basis points to 3.12 percent in the fourth quarter. Thrift institutions' total assets increased by $1 billion during the quarter, and in the 12-month period grew by a modest 1.7 percent. The industry's equity capital as a percent of assets, 8.39 at quarter end, was the highest since 1951. The number of "problem" institutions in 1995 dropped by 22 to 49, and their assets declined to $14 billion. The total number of insured savings associations in operation fell by 31 to 2,029 in the fourth quarter, a loss of 5.7 percent during the 12-month period, and represented a continuation of the downtrend beginning in 1990. The FDIC Quarterly Banking Profile, Third Quarter, 1995 and Fourth Quarter, 1995.

First-Quarter 1996 Preliminary Earnings

Insured commercial banks reported net income of $12.0 billion in the first quarter of 1996, an 8.2 percent increase over the first quarter of 1995. This was the third consecutive quarter that net earnings exceeded $12 billion. More than two-thirds of banks reported higher earnings than a year ago. Higher net interest income was primarily responsible for the increased earnings. Net interest income rose $2.2 billion over levels a year earlier, reflecting a significant increase in interest-earning assets over the year. Higher noninterest revenues also contributed to the strong earnings. The average return on assets was 1.12 percent for the quarter. One negative, however, was that noncurrent loans rose for only the second time in the last five years, increasing $659 million during the quarter.

Savings institutions reported net earnings of $2.5 billion in the first quarter of 1996 and an annualized ROA of 1.01 percent. These results represented the highest quarterly net income and ROA ever reported by the industry, and the first time ROA has exceeded one percent. However, exluding gains on the sale of branches and securities, average ROA for the industry for the quarter declined to 0.83 percent. This lower ratio still represents an improvement over previous quarters. Net interest margins rose to 3.19 percent from 3.12 percent the previous quarter, the second consecutive quarterly increase in margins. Almost 80 percent of thrifts with more than $1 billion in assets reported improved earnings over earnings a year ago. Less than half (49 percent) of smaller thrifts reported higher earnings. The FDIC Quarterly Banking Profile, First Quarter, 1996.

Depository Institutions' Retail Fees Surveyed

Few cases were found of statistically significant nationwide increases in fees in 1993-1994 for either banks or savings associations, the FRB said in its fifth annual report to Congress on retail fees and services of depository institutions. With respect to individual services, the changes in the proportion of institutions that charge a fee were about equally divided between increases and decreases. The report was based on surveys of 1,050 institutions (650 banks and 400 savings associations) in 1994, and 330 institutions in 1993. The fee and availability data from surveyed institutions covered noninterest checking accounts, NOW accounts, savings accounts, money orders involving insufficient funds, overdrafts and automated teller machines.

Among the changes detailed in the report, the average minimum balance for the single-fee NOW account to avoid a monthly fee required by banks increased from $971 to $1,055. The proportion of savings associations offering no passbook accounts increased from just under 18 percent to 20 percent. The nationwide proportion of banks offering ATM services remained at approximately 70 percent, while the proportion of savings associations offering the service increased from 45 percent to 61 percent. The proportion of banks charging an annual fee on credit cards increased from four percent to 13 percent, while savings associations levying an annual charge increased from nine percent to 18 percent.

The report found that in most cases the average fees charged by out-of-state banks defined as banks headquartered or owned by an organization headquartered in a state different from that of the surveyed bank are significantly higher than those charged by in-state banks. In some cases, however, out-of-state banks require lower minimum balances to open some types of accounts and are more likely to offer free checking. It is noted that out-of-state banks tend to be larger than in-state banks and are probably more concentrated in large urban areas, where costs can be higher. Annual Report to the Congress on Retail Fees and Services of Depository Institutions, FRB, 9/95.

Consolidation in Banking

Recent banking consolidation in California, a state whose banking structure is relatively free of restrictions on branching and other artificial barriers, may be an indicator of the consolidation that may eventually occur nationally after the elimination of these barriers. The number of banks in California rose sharply in the early 1980s and then remained relatively stable during the second half of the decade and into the early 1990s, largely because of the strong economy. But from mid-1990 through early 1993 the state experienced a severe recession, which affected in particular the smaller community banks in the southern part of the state. Fewer new banks, more failures, and a number of voluntary mergers caused the number of banks operating in California to fall from 516 at the end of 1990 to 399 in 1994, or 23 percent. Banking offices in the state, totaling 5,555 in 1991, declined by 20 percent to about 4,400 in the next two years.

Nationally, the number of banking institutions decreased from approximately 15,000 in 1984 to 10,740 in 1994, a 29-percent decline. There were failures during the period of about 1,300 banks, most of which were absorbed into other banking firms; however, the decrease resulted mostly from other voluntary mergers and acquisitions. The number of banks declined as the industry adjusted to changing competitive conditions, and in response to a changing regulatory environment including the liberalization of state branching laws. The number of banking offices continued to increase into the early 1990s. Over 65,500 banking offices were in operation at the end of 1992, nearly 9,000 more than in 1984, and the number per population unit was slightly higher in 1994 than ten years earlier. It is suggested that the contraction of the thrift industry, wherein from 1988 to 1993 the number of savings-and-loan offices fell from about 26,000 to 16,000, may have temporarily eased pressures on some banks to trim branch networks. Bank employment nationally declined by about 6.3 percent between 1985 and 1995, during a time of rapid advances in bank services automation.

The California experience suggests that if interstate branching restrictions and other artificial barriers are eliminated, the number of U.S. banking institutions could eventually be further reduced by one-half or more; and demonstrates that substantial reductions in bank offices across a state can occur over a relatively short period of time, especially when large banks are involved. Weekly Letter, Federal Reserve Bank of San Francisco, 10/27/95.

Boston Banks Increase Minority Lending

Since the publication of several reports dating from about six years ago on banks' lending to minorities in the Boston area, there have been significant improvements in mortgage lending to black borrowers and to persons with low- and moderate-incomes, according to a recent study by J. T. Campen. The share of black borrowers grew from 16.2 percent of all loans in 1990 to 20.1 percent in 1993. For Hispanic borrowers, the increase in the share of total loans was much less, from 5.1 percent to 5.7 percent. Denial rates for blacks and Hispanics were each reduced by almost half between 1990 and 1993: blacks, from 32.7 percent to 17.5 percent; and Hispanics, from 25.3 percent to 13.8 percent. Denial rate ratios for blacks and Hispanics, to whites, in the Boston area dropped from 2.00/1 to 1.49/1, and from 1.55/1 to 1.18/1, respectively. The national black/white denial ratio in 1993 was 2.22/1, and the Hispanic ratio, 1.64/1. Loans to low- and moderate-income borrowers in the study area rose from 27.3 percent of all loans in 1990 to 38.9 percent in 1993.

Among other results, the study found that virtually all of the increase in the mortgage lending to minority and low- and moderate-income borrowers came from Boston's six largest banks. It is noted that during the study period, the smaller banks in the area lost substantial total market share due to bank failures and intensified competition from the larger banks and unaffiliated mortgage companies. The increased lending to low- and moderate-income groups may have resulted in part, the report says, from the prevailing economic conditions during the study period, wherein housing prices fell, unemployment declined as the nation and region recovered from recession, and interest rates for 30-year, fixed-rate mortgages fell to less than seven percent, the lowest level in over 25 years. The improved performance, however, by the large banks reflects their strong initiatives to increase lending to under served borrowers and neighborhoods. A Progress Report, Massachusetts Community and Banking Council, July 1995, pp. 60-67.

Interstate Banking and Small-Business Lending

A recent report issued by the OCC is concerned with whether subsidiaries of out-of-state bank holding companies (OSHCs) will make fewer, possibly higher priced, small-business loans than other banks. The study also examines whether smaller independent banks are able to compete effectively against subsidiaries of larger out-of-state and in-state holding company organizations in this product line. Small-business lending levels, prices, and margins for a sample of 1,377 banks located in Illinois, Kentucky, and Montana are analyzed.

The volume of small-business lending by out-of-state bank holding company subsidiaries was found to compare favorably with both independent banks and in-state bank holding company subsidiaries. Out-of-state holding company subsidiaries do not systematically discourage small-business borrowing through their loan pricing. Small-loan rates at OSHC bank subsidiaries generally are lower than those at other types of banks. Although their marginal costs are higher, OSHC subsidiaries appear to be willing to accept lower margins on small commercial loans. The results also demonstrate that independents do not appear to be at a competitive disadvantage relative to OSHC subsidiaries, at least in this particular product line. Their marginal loan costs are typically below, and their margins typically exceed, those at either class of holding company subsidiary. Economic and Policy Analysis Working Paper 95-4, OCC, 9/95.

Smaller Banks Less Affected in Banking Downturns

From 1990 to the end of 1994, a decline occurred in the number of banking organizations in the U.S., from 12,385 to 7,998, concentrated in the smaller banks. In 1980, there were over 12,200 banking firms in the U.S. having assets under $1.3 billion, and as a group they controlled about one-third of the nation's banking assets, while in 1994 the number of organizations of this size (measured in 1980 dollars) had droppped to about 7,850 and their asset share had fallen to 22 percent. In these trends there are differences between regions, and in the regions that experienced severe banking sector difficulties, small banks are seen to have more successfully maintained their market share. In the Eleventh Federal Reserve District which consists of Texas, southern New Mexico, and northern Louisiana nearly one-third of regional bank assets were controlled by banking organizations with under $220 million in total assets (in 1980 dollars) in both 1980 and 1994.

As an indication of the smaller banks' ability to operate under unfavorable economic conditions, the return on assets of organizations with assets under $1.3 billion tended to remain above that for large banks in all except four years of the 1980-94 period. In addition, the return on assets of large banks has fluctuated more over time than it has for small banks. These differences between small and large banks have been even greater in the Eleventh District, and also in the First Federal Reserve District (New England states) which experienced a severe regional banking downturn following the collapse of its real-estate market at the end of the 1980s.

Recent cycles in bank profitability have tended to mirror cycles in asset quality, as measured by the troubled-asset ratio, ratio of past-due loans, nonaccrual loans and other real estate owned to gross assets. At the national level, from 1982 through 1994 the troubled-asset ratio for small banks tended to remain below the ratio for large banks. Moreover, the large banks' ratio exhibits relatively wide fluctuations. These data support the impression that banking downturns have tended to take a relatively more severe toll on large banking organizations. And, more importantly, during periods of banking difficulties, when the troubled-asset ratio for large banks rose relatively to the ratio for small banks, declines in small-bank market share slowed or stabilized. It appears that large banks' relatively severe financial struggles mitigated the downward trend in the small-bank market share. The relationship between banking difficulties and small-bank market share observed at the national level is even more pronounced at the regional level.

The article concludes that although the market share of small banks might continue to decline, the relative stability of their financial performance indicates that they should continue to prosper and grow along with the larger organizations in a dynamic banking economy. Financial Industry Issues, Federal Reserve Bank of Dallas, Second Quarter 1995.

Bank Card Delinquencies Rise

According to the American Bankers Association, 3.53 percent of credit-card accounts were past due for two or more months during the first quarter of 1996, the highest delinquency rate in 15 years, and preliminary second-quarter figures show a continuing problem. According to preliminary results of an OCC survey of large national banks, banks are responding by tightening credit-card criteria. BBR, p. 1073, 6/17/96; WSJ, 7/24/96.

Derivatives Record Set

The OCC reported that banks engaged in $17.85 trillion in derivative activity during the first quarter of 1996, a record level. Trading revenues were approximately $2 billion, and credit exposure declined $7 billion in the quarter. The notional amount of derivatives rose $987 billion during the quarter. Derivative activity continued to be concentrated in the largest banks. OCC News Release, NR96-67, 6/10/96.

ABA Survey

According to the 1995 Retail Banking Survey Report, a survey of 180 banks conducted by the American Bankers Association, the total number of bank branches grew by over 1,200 in 1994. Only banks with assets of $1 billion or more registered a decrease in the number of branches per bank. The survey also reported a significant increase in electronic banking services by small and mid-size banks, with six percent of banks with less than $300 million in assets offering such services in 1994, compared to three percent a year earlier. Northwest Financial Review, p. 6, 1/27/96.

RECENT ARTICLES AND STUDIES Retail Banking Will Restructure

The study addresses the key factors, from a global perspective, behind changes observed in retail banking that foretell extensive restructuring of the industry. While many studies have concluded that banking economies of scale eventually reach limits, this report argues that retail banks will increasingly be susceptible to scale economies in the future. These banks currently experience scale economies in some activities, such as credit-card processing, check processing, consumer-loan processing and statement preparation. They are subject to diseconomies in numerous other activities, for example, the banks' management costs as a percentage of income appear to rise as their branch networks increase in size. Also, unit management costs rise with increases in their different types of products, and given that the numbers of products offered by banks in many countries have been growing rapidly, management costs have been rising disproportionately from this source.

The report draws comparisons between the future of retail banking and other industries, notably the airlines and communications industries, in which in many cases the activities that formerly were carried out by a single provider have been disaggregated to numerous different providers. These disaggregated activities are increasingly being performed in quasi-autonomous divisions of single companies, or by independent subcontractors. The report predicts similar trends in the retail banking industry.

Under the scenario for the traditional retail bank foreseen here, these institutions will take on more of the appearance of a cluster of businesses, in which the holding company makes "portfolio" type decisions on such issues as whether to enter a new product area, close down a business, or outsource. The new alignment of activities is seen in the future role of branches. Reduced greatly in numbers, they will cease their role as "minibanks," and will be used mainly as gateway sales and counseling centers for upscale or high-net-worth customers. They will support product cross-selling to that minority of customers for which extensive cross-selling can be profitable. The Future of Retail Banking, A Global Perspective, Deloitte Touche Tohmatsu International, 1995.

Changing Banking Activities and Regulatory Policies

This article by F. R. Edwards and F. S. Mishkin discusses how banks have shifted from their "traditional" activities and more into off-balance-sheet operations, and the implications for financial stability and regulatory policies. Evidence of the decline in traditional banking is found in the shrinkage in commercial banks' share of funds provided to nonfinancial borrowers, from 35 percent in 1974 to 22 percent at present, as well as the decline in their share of total financial intermediary assets from approximately 40 percent in 1960-1980 to below 30 percent at year-end 1994.

Banks have experienced growing competition that has diminished their cost advantage in acquiring funds, and also has undercut their position in loan markets. They have adjusted to the intensified market competition in part through attempting to maintain their traditional lending activities, but in more-risky types of lending. Examples include a higher percentage of their funds going into commercial real-estate loans, and increased lending for corporate takeovers and leveraged buyouts. As a result, banks' loan-loss provisions relative to assets rose substantially in the 1980s, peaking in 1987, and even in the strong economy of 1994 had declined only to the level of the worst years of the 1970s. A second way banks have sought to maintain profit levels is through new, off-balance-sheet activities that are more profitable than traditional activities.

The risk implications of banks' derivatives activities are examined in this article. Large banks, in particular, have moved aggressively to become worldwide dealers in over-the-counter derivatives, such as swaps. Overall, the authors do not see the risks from derivatives as so different from the other risks in banking as to render inadequate the supervisory policies and procedures that are available. Finally, banks should inform the public of their risks from trading activities, both derivatives and on-balance-sheet activities, and their ability to manage those risks. Reference is made to a discussion paper issued in 1994 by a committee of the G-10 Central Banks which recommended that estimates of financial risk generated by firms' own internal risk-management systems be adapted for public disclosure purposes. "The Decline of Traditional Banking: Implications For Financial Stability and Regulatory Policy," Economic Policy Review, Federal Reserve Bank of New York, July 1995, pp. 27-45.

Multi-Office Bank Lending to Small Business

With federal legislation having been enacted in the fall of 1994 authorizing full interstate banking, William R. Keeton examines the relationship between multi-office banking and small-business lending in the Tenth Federal Reserve District. This District includes: Colorado, Kansas, Missouri, Nebraska, New Mexico, Oklahoma, and Wyoming. There are several suggested reasons why large multi-office banks might lend less to small businesses than other banks. First, they do not have to rely as heavily on small borrowers to achieve a desired level and composition of commercial lending. In addition, there are structural factors, such as the fact that large multi-office organizations tend to give loan officers less autonomy than their counterparts have in smaller banks and are required to follow more rigid rules in lending, this suggesting fewer loans being granted to small businesses. From another viewpoint, multi-office banks might make more small-business loans because their greater diversification and access to open-market borrowing enable these institutions to invest more of their funds in loans, in the aggregate and to small businesses, and less in safe, liquid investments such as government securities. Also, while previously existing restrictions on geographic expansion may have confined larger banks mainly to urban areas and making large loans, the relaxation of these limits on expansion will result in these institutions entering more of the smaller, rural markets and expanding their small-business lending.

A study of the Tenth District is of interest because these states have recently lessened their geographic restrictions on bank expansion. Since the mid-1980s all seven states have allowed statewide branching, and also they have laws allowing entry in some form by out-of-state holding companies. Because loan data are not available by branch, the impact of branching on small-business lending is examined by comparing the aggregate loan-deposit ratio of the bank with the average loan-deposit ratio of unit banks comparable to the branches. The data indicate that a moderate degree of branching does not, but a high degree of branching does, reduce small-business lending. In respect to the multi-bank holding companies, the lead banks of in-state firms tend to lend the same percent of deposits as comparable independent banks, but the other banks in in-state and out-of-state companies lend a smaller percent of deposits than their peers, and the differences are greater for banks in out-of-state companies. There are, it is noted, numerous individual bank exceptions to these aggregate patterns.

The overall results of the analysis confirm the conclusions of earlier surveys that multi-office banks tend to lend less to small businesses than other banks. This finding does not suggest, however, that multi-office banking should be curtailed. The lending gap may, after a temporary period, be filled by other banks, and also, any disadvantages may be outweighed by benefits. For example, there is substantial evidence that multi-office banking improves service to depositors and increases competition in local markets. Multi-office banking also makes banks less vulnerable to downturns in the local economy by helping them diversify their loan portfolios. The article suggests, instead, that regulators should follow policies to promote competition by ensuring that multi-office banks do not dominate local markets by absorbing smaller banks, and they should continue progress in reducing regulatory burden, which tends to hurt small banks more than large banks. Economic Review, Federal Reserve Bank of Kansas City, Second Quarter 1995, pp. 45-57.

Banks' Disclosure of Derivatives Activities

Banks' derivatives activities have become more apparent as institutions are disclosing more information needed by the public and regulators to make better judgments about companies' activities in this area, according to this study by FRB staff of the 1993 and 1994 annual reports of the top ten U.S. bank dealers in derivatives. The article summarizes the accounting standards and recommendations of industry groups and regulators, and reviews the improvements in qualitative and quantitative disclosures since 1993. Approximately 600 banks were involved in derivatives as of March 31, 1995, though the top 15 banks held more than 95 percent of the derivatives contracts of the banking industry.

In 1994, banks expanded their managements' discussion and analysis of their derivatives activities and provided more quantitative information about these activities than in 1993. The experimentation encouraged by the FASB, regulators, and industry groups is reflected in the diversity of methods used by the top ten banks in presenting information about their derivatives activities. Further improvements in disclosure should be anticipated, including more extensive coordination in this area with national supervisors from other countries. Federal Reserve Bulletin, 9/95, pp. 817-831.

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