1996 Annual Report
Highlights of 1996
Keeping the nation's payments system operating smoothly and efficiently
continues to be a challenge to the regional Reserve Banks as the needs
of our customers change and expand rapidly. We are developing new technologies
and customized solutions to creatively tailor the banking services we
offer to depository institutions and the federal government. There were
several notable milestones in 1996.
It's our job to make sure there is enough coin and currency in circulation
to meet the public's demand. In fact, the warehousing, shipping, processing,
and handling of currency are major functions of the Reserve Banks. This
was an especially notable challenge in 1996 as we introduced the redesigned
$100 bill to the public in March. The redesigned bills include new or
modified features to improve security and stay ahead of counterfeiters
and advances in technology which make it easier to reproduce currency.
A seamless introduction of the new currency into the money stream was
We began storing the new notes at all of our five offices as early as
January to make sure we had enough on hand to release the end of March.
But before that, in the third quarter of 1995, we held 20 customer education
seminars in seven states throughout the Twelfth District. In addition
to the seminars, we distributed information kits; circulated an informational
video with reasons for the redesign, circulation plans, and recognizable
features of the redesigned currency; and staffed an information desk to
assist customers with any questions regarding the new currency.
To facilitate the smooth rollover of $100s in foreign markets, Extended
Custodial Inventories (ECIs) were established and managed by the Federal
Reserve Bank of New York in London, Frankfurt, and Zurich. These ECIs
strategically stockpiled inventories in key markets and geographic redistribution
centers to minimize inventory limitations imposed by flight schedules
and in-transit insurance ceilings.
Were we successful? Currently, approximately 60 percent of all $100s
flowing back to our Bank are the newly designed notes, and they now make
up 32.7 percent of the 2.6 billion notes in circulation.
But all transactions are not handled in cash. In fact, check volume,
contrary to forecasters' predictions, continues to increase, and handling
paper checks and the related movement of funds remain costly and labor
intensive. Approximately 63 billion checks are written each year in the
United States, a number which is expected to continue to grow over the
next several years.
Converting these paper checks to electronic data is one way to expedite
check clearing. Electronic Check Presentment (ECP), for example, provides
financial institutions with an electronic file of check data in advance
of the delivery of the physical checks from the Federal Reserve, allowing
earlier identification of fraud, decreased clearing times, and reduced
reliance on transportation.
During 1996, the Bank introduced check imaging as a complement to such
electronic products as ECP. Check imaging takes a digital picture of a
check and saves it in digital, computer-file form for retrieval when needed.
This process, in essence, turns a paper check into an electronic "picture"
which is easier to organize, distribute, store, and access. ECP, together
with check images, allows banks and their cash management customers to
address fraud and risk concerns up to 12 hours earlier than if they had
to wait for the arrival of physical checks. Retrieving check images from
computer storage systems also speeds response time in handling customer
balance inquiries, requests for check clearing information, and requests
for check copies, resulting in operational efficiencies and improved customer
service. The Bank's check image product line is flexible and can be easily
customized to meet a variety of needs.
funds transfer is a faster and more secure method of payment than either
cash or check. The automated clearing house (ACH) is an electronic funds
transfer system. This nationwide network processes electronically originated
credit and debit transfers such as direct deposit payroll payments and
corporate payments to contractors and vendors. During 1996 the Federal
Reserve System converted to a new centralized ACH application software,
Fed ACH. This software enabled us to significantly reduce fees and provide
depository institutions with greater control over how they access, process,
and settle ACH transactions. Because ACH transactions are processed from
one central computer site within the Federal Reserve System, items no
longer have to be transmitted from one Federal Reserve district to another.
In addition, customers have expanded file delivery options and enhanced
on-line access. This means they can have greater processing flexibility
and provide their customers with time-critical ACH payments more quickly.
The Federal Reserve also holds U.S. government securities in safekeeping
as book entries --electronic records rather than paper certificates--for
depository institutions. During 1996, the Federal Reserve Bank of San
Francisco also installed new software in this service. This software,
which is referred to as NBES (New Book-Entry System), provides for centralized
computer processing at a single site with standardized services to depository
institutions. NBES offers an increased number of accounts available to
users; improved contingency and disaster recovery capabilities; quick
wire transfers for all transactions; and enhanced reporting features.
Operational controls in the Los Angeles Branch Cash area received an
unusual amount of scrutiny in 1996. As a result of an internal compliance
team's findings of errors in a Los Angeles Cash administrative report,
the General Accounting Office reviewed the department's statistical reporting
processes and noted possible concerns regarding the integrity of cash
accounting and financial controls. By year-end, results of an internal
audit, a Board of Governors examination, an unannounced vault count, and
an independent, external accounting firm's review all pointed to the soundness
of our operational controls and the integrity of our overall cash operation.
Research during 1996 addressed policy-related issues, including U.S.
monetary policy, international topics, and the effects of banking industry
restructuring. Staff published extensively both in Bank publications and
outside academic journals.
Monetary policy studies covered such topics as the effect of policy on
the economy, indicators of future inflation, and the way in which the
Fed sets the stance of monetary policy in response to economic developments.
International topics included monetary policy targets in the United Kingdom,
New Zealand, and Japan; exchange rate risk and trade flows; and exchange
rate exposure and crises. Banking studies looked at efficiency, the pricing
of financial services, and the availability of credit. This research formed
the basis for extensive briefings of senior management on monetary and
regulatory policy, as well as economic developments in the western United
States and the Pacific Basin.
Furthering the Bank's ongoing efforts to promote cooperation and share
research among Pacific Basin countries, our Center for Pacific Basin Monetary
and Economic Studies held a conference, "Managing Capital Flows and
Exchange Rates: Lessons from the Pacific Basin." The department also
co-hosted an academic conference with the Center for Economic Policy Research
at Stanford University. Papers at that conference examined the measurement
and management of monetary policy.
Banking Supervision and Regulation
The supervision and regulation function in 1996 was significantly affected
by rapid changes in the industry brought on by increased industry consolidation,
interstate branching and banking, and the development of electronic banking
products and services. Specific emphasis was placed on risk management,
concentrating on increasing the value of the supervisory process and ensuring
its efficiency and effectiveness for our customers.
To achieve delivery of a more effective, risk-focused, and seamless supervisory
approach, the Consumer Compliance and Community Affairs and Bank Supervision
and Regulation departments were merged into one division.
At year-end there were 62 state member banks in the District. There were
also 210 holding companies with assets totaling $522 billion, 120 branches
and agencies of foreign banks, 8 Edge and Agreement corporation offices,
and 40 representative offices.
Overall applications activity declined as the total number of applications
filed during 1996 reached 291 as compared to 310 in 1995. This level,
while slightly reduced from the prior year's activity, continues to reflect
the expansion and consolidation of the industry. Applications to form
bank holding companies declined from 54 during 1995 to 26 in 1996, and
merger applications by state member banks declined by half in 1996.
The Twelfth District continued to provide guidance and direction on community
reinvestment throughout the nine Western states. Community Affairs co-sponsored,
with the American Bankers' Association and the Small Business Administration,
the 1996 National Community Development Lending Conference. Later in the
year, the unit sponsored its annual Community Reinvestment conference,
entitled "The New CRA: Focus on the Future." It also sponsored
two one-day small business lending conferences and a conference on electronic
banking and its implications for consumers, and facilitated numerous other
meetings. Staff also coordinated a series of seven public meetings on
the proposed merger between First Interstate Bank of California and Wells
Fargo Bank, with approximately 550 individuals providing their comments
on CRA activity of these banks.
In the area of community development, the Bank provided leadership to
the Association of Reinvestment Consortia for Housing, and consulted with
Seattle-based banks on the formation of the Seattle Small Business Lenders
Association's "One Stop Capital Shop." To assist banks in identifying
local investment opportunities, the unit held bi-monthly roundtables in
Boise, Las Vegas, Los Angeles, Salt Lake City, San Francisco, and Seattle.