Highlights of 1997

By Karen Flamme

As the payments system of the country evolves technologically, regional Reserve Banks respond to the needs of their constituencies and look for innovative ways to achieve efficiencies, through both technology and an integration of Federal Reserve services across Districts.

The District Business Development office in Portland served as the national logistics coordinator for the important Rivlin study conducted during 1997, planning five national forums and eight regional meetings held in our District. During these meetings representatives of financial institutions were invited to discuss five hypothetical scenarios for the future role of the Federal Reserve in retail payments services. These alternatives ranged from exiting check collection and ACH services altogether to adopting a leadership role in spurring innovation and market acceptance of new payments services and products.

With information from these sessions, as well as from internal studies, the Rivlin Committee reached two major conclusions: first, it is important for the Federal Reserve to remain a provider of check collection and ACH services with the goal of enhancing the efficiency, effectiveness, and convenience of both systems, while ensuring access for all depository institutions; and second, the Federal Reserve should play a more active role, working closely with providers and users of the payments system, both to enhance the efficiency of check and ACH services and to help evolve strategies for moving to the next generation of payment instruments.

To further encourage the transition from paper to electronic payments, the District conducted a highly successful ACH Direct Payment campaign targeted initially at utility customers in portions of the San Francisco Bay Area, encouraging them to pay their utility bills through automatic deduction. The program was a partnership between our Bank, Western Payments Alliance, the utilities, and their financial institutions. More than 100,000 sign-ups were received, exceeding expectations based on similar projects in other Districts. Additional campaigns are planned for the Pacific Northwest and Southern California areas in 1998.

A variety of check imaging services were made available Districtwide during 1997. And our customers can now go to a page on the BankÌs web site at / and browse through our check product offerings.

To remind us of our roots and the ever-present demand for currency, in spring 1997 the Bank opened a stellar exhibition of American Currency in the lobby of the San Francisco headquarters. Featuring a premiere collection of historical currency, the exhibition is a resource for educators, numismatists, and the public through our tour program, as well as on a walk-in basis. A web version of the exhibition will be on-line by mid-1998.

Economic Research

Establishing and implementing the nationÌs monetary policy is one of the primary functions of Reserve Banks. Ongoing research is essential to providing a strong foundation for supporting this BankÌs monetary policy recommendations. Research conducted during 1997 focused on various policy-related issues. Among them were studies examining the merits of alternative policy rules for targeting inflation; the effects on economic performance of policies to reduce inflation; and the key features of the different policy regimes in place under Federal Reserve Chairmen Burns, Volcker, and Greenspan.

Several articles were written on labor markets. Staff economists examined job insecurity in the U.S. and the effects of welfare reform, health insurance, and family structure on the labor force. The banking unit studied financial modernization, including implications for efficiency, risk, and profitability in banking. Other research dealt with consolidation in banking and examining evidence on contagion effects from bank mergers, as well as the effect of bank mergers on the pricing of retail deposits and interstate banking in the District.

The Bank continued to serve as a focal point for analysis of Pacific Basin issues through the activities of our Pacific Basin Center. Research staff examined the causes and lessons of the 1997 East Asian financial crisis. International studies analyzed monetary policy issues in selected countries, including Korea, New Zealand, and Singapore. Research staff also looked at the implications of trade agreements and of budget and trade imbalances in the region. The department co-hosted an academic conference with the Center for Economic Policy Research at Stanford University. The conference featured papers by eminent academic and System economists on ÏRecent Developments in Macroeconomics.

The department also hosted a conference with the American Committee on Asian Economic Studies on ÏFinancial Liberalization and Development in the Pacific Basin.

Banking Supervision and Regulation

Risk-focused initiatives were the hallmark of activities in the Supervision and Regulation area during 1997. Risk-based functional reviews were implemented at the DistrictÌs largest institutions, procedures were developed and tested for conducting risk-focused compliance examinations, and mergers and acquisitions regulations were revised to speed the applications process for organizations that are well-managed and well-capitalized.

Federal Reserve Banks have primary responsibility for supervising all bank holding companies, their nonbank and foreign subsidiaries; state member banks and their foreign branches and subsidiaries; Edge Act and agreement corporations through which U.S. banking organizations conduct operations abroad; and U.S. activities of foreign banking organizations.

At year-end there were 60 state member banks in the District. There were also 203 holding companies with assets of 511 billion, 103 agencies and branches of foreign banks, 17 Edge and Agreement corporation offices, and 40 representative offices.

Overall applications activity declined by 39, approximately 13 percent, compared to the same period in 1996. This was partially offset by an increase in bank acquisitions, continuing the industryÌs trend of expansion and consolidation. Applications to form bank holding companies increased by 9 (from 26 to 35).

Community Affairs expanded its role of providing outreach and education on community reinvestment topics. Staff hosted a series of training sessions for Community Reinvestment Act (CRA) officers throughout the District to introduce them to local community reinvestment opportunities and provide education on technical CRA aspects. A conference announced recommendations of the San Francisco Mortgage Credit Partnership task forces, which had been convened to identify barriers that exist for low-income borrowers in the home purchase process. In addition, staff provided a week of intensive hands-on credit training for 60 community development professionals and community lenders in partnership with the University of Washington at the National Community Development Lending School.

In Hawaii, meetings were held to assist in the creation of a micro-loan pool for low-income entrepreneurs. To complement that effort, meetings were also held with representatives of local community-based organizations, a local bank, and the Department of Rehabilitation to discuss self-employment opportunities for people with disabilities.