Inside the San Francisco Fed
Sometimes the correct response to sudden, cataclysmic change is the right
mix of stability and fluidity. As events unfolded on September 11, 2001,
the Federal Reserve System simply announced that it continued to operate,
that its discount window was available to meet liquidity needs. Behind
that concise statement lay an enormous effort by a great many people,
and, despite the tragedy, the economic system remained stable in this
country and throughout the world.
Even before September 11, however, the pace of change required dexterity
on the part of the Twelfth Federal Reserve District and its employees.
This article will focus on four major Bank functions, with comments from
some of the employees who are implementing changes within these functions.
Banking Supervision and Regulation
Financial modernization has changed banks' business, and technology
has changed the way they operate.
Technological innovation is a driving force behind economic growth in
the U.S. and the Twelfth District.
Intense competition in the marketplace means that excellent customer
service may be the single most important factor that retains a client's
There is a lot more cash than there used to be and many more places
where it may be obtained.
Banking Supervision and Regulation
The evolution of the banking industry has had wide-ranging implications
for the Division of Banking Supervision and Regulation (BS&R). Financial
modernization has changed the business that banks do, while technology has
changed the way banks do business. As banking supervisors, the Bank has
adapted to this change and helped the financial community respond to the
risks and challenges of the evolving environment.
|In the Twelfth District, more than four out of five
state member banks, which are mostly community banks, have a presence
on the Internet...
The financial landscape has changed remarkably over the years, with the
boundaries between banks and other types of financial companies becoming
increasingly blurred. While making loans and taking deposits still represent
the core business of most banks, many have expanded their activities into
asset securitization, mutual funds, insurance, and securities brokerage.
In a number of ways the Gramm-Leach-Bliley Financial Modernization Act
of 1999 merely recognized how far the banking industry already had evolved.
However, the Act also created the concept of financial holding companies
and granted the Federal Reserve a unique role as "umbrella"
supervisor in their oversight.
Banks long have moved to adopt better technology to modernize their information
systems, including back-office operations. Much more visible to the consumer
has been the dramatic growth of Internet banking. While some of the country's
biggest banks have pioneered on-line banking, even small banks are venturing
onto the Web. In the Twelfth District, more than four out of five state
member banks, which are mostly community banks, have a presence on the Internet,
and about three-quarters of these offer fully transactional on-line banking
services such as account transfers and bill payment.
|"I helped one of our supervised
institutions develop a more robust risk management process, which
was a rewarding experience..."
Implications for Bank Supervisors
In response to these evolving trends in the banking industry, bank examiners
have adjusted their approach to supervision and built an increasingly diverse
set of skills necessary to evaluate and monitor financial institutions.
Over the years they have moved from "point-in-time" evaluations
connected to on-site examinations to a more continuous supervision framework,
which has enabled a more timely response to change. Senior Examiner Keith
Coughlin comments: "I helped one of our supervised institutions develop
a more robust risk management process, which was a rewarding experience
for both me and the institution. Because the bank's activities are closely
tied to the venture capital market and the technology sector, its business
model poses some unique risks and issues."
BS&R has made a concerted effort to train staff in areas such as information
technology supervision. Financial Examinations Team Leader Marie Labat says,
"We've moved to integrate information technology assessments into our
overall safety and soundness examinations, a process that's required a considerable
amount of education for staff. We now address information technology risk
management during all phases of our exams, from the planning process to
the final report." And, according to Consumer Affairs Principal Bonita
Jones, "We've also developed a new set of skills to understand the
information technology processes at banks that deliver consumer products
over the Internet."
Another training effort involves economic capital modeling, as Senior Examiner
Peter Eggenberger explains: "Technology has made it possible to develop
models that banks can use to measure risk better. It's been an evolutionary
process, starting with market risk and moving to credit risk; in the future
we'll see quantification of operational risk. There's more homework for
examiners, since we need to understand the models as well as the regulatory
In building the necessary skills, the Federal Reserve has set up formal
and informal structures to leverage the expertise of individual Reserve
Banks for the benefit of the System. In addition, the Fed has worked to
develop a consistent approach to supervising nontraditional banking companies.
Efforts to reshape the supervisory process not only enrich Bank staff and
the organization, but also benefit the institutions that it supervises in
this dynamic banking environment. Examiner Tim Byun says, "I think
technology will continue to change the way we examine banks. We're getting
smarter, and we're doing our jobs better. For example, it's easier to monitor
banks between exams. Financial modernization will also require us to understand
how to monitor insurance and other activities that banks are becoming more
involved in." As the industry evolves, the Bank will continue to position
itself to respond.
Perhaps the most striking development in the economy as a whole has been
the tremendous surge in productivity, driven in large part by technological
innovationfrom advances in computing equipment and software to telecommunications.
The Economic Research department has taken into account the growing prominence
of technological innovation in the U.S., and particularly in the Twelfth
|...innovation and the application
of new technologies will set the tone for economic performance.
In 2001 high technology's luster seemed to fade as the country entered
a recession that was, at least initially, primarily based on a downturn
in information technology. This downturn acted as a reminder that much
of high technology sector growth is cyclical. Thus, there is little doubt
that, in the next expansion, innovation and the application of new technologies
will set the tone for economic performance.
This is especially true for the economy of the Twelfth District. Whether
measured by venture capital investment, number of patents, dollar value
of exports, or employment and payroll, the District has a large share
of the nation's top high technology centers.
Bolstering the Research Effort
In 2001 the Bank expanded the depth and breadth of its analysis of economic
issues related to innovation, the technology sectors, and productivity.
New staff joined the economists in the nonfinancial microanalysis group,
which conducts research and policy analysis on labor markets, industry sectors,
state and local government finance, and the regional economy more generally.
is the key to advancing our standard of living and having the resources
to enhance economic well-being more broadly."
New to the department is Economist Daniel Wilson, whose research is to
understand the sources of productivity growth and identify the policy
implications. "This area of research is extremely interesting and
as important as any in economics," Dan says. "Productivity growth
is the key to advancing our standard of living and having the resources
to enhance economic well-being more broadly."
It is widely understood that increasing investment in plants and equipment
- known as capital deepening - can lead to higher productivity. "The
research suggests that much of the gain in productivity in recent years
has come from improvements in the quality of capital equipment, not just
from adding more machines," Dan explains.
"That is, it has been the investment in new equipment that embodies
advanced technologies that has helped to boost productivity growth."
One of the research findings is that productivity gains appear to be
shared by both the firms using the new capital equipment and the firms
producing the equipment. Research Advisor Mary Daly, who joined the department
in 1996 and who also studies applied microeconomics, has applied her research
on the effects of information technology growth in the Twelfth District
to a broader area. "Looking nationwide," Mary says, "I
found that many regional development agencies believe that, in order to
be successful in the way that, say, Silicon Valley is successful, it's
necessary to attract information technology-producing firms to an area
in large numbers." However, Mary's findings show that this growth
stimulus is not exclusive to information technology producers, and that
attracting a concentration of information technology-using firms can have
a comparable effect on growth.
New employee and Regional Analyst Lily Hsueh is working on a comprehensive
analysis of the links between the IT sectors and the performance of regional
economies within the District. "With the IT sectors accounting for
up to a third of economic activity in metro areas in the District,"
Lily says, "it is important to understand how that dependence affects
the regional economies."
The work of Dan, Mary, and Lily complements the research agendas of other
economists in Economic Research. During the year the department published
several papers on high technology topics, including the use of computers
by small businesses and another on productivity gains in banking. Other
topics include a review of the links between unemployment and productivity.
In addition, economists are investigating how gains in productivity are
split between technology-producing sectors and other sectors in the economy.
The need for constant improvement in productivity and increased efficiency
in a competitive marketplace is not limited to high technology-related activity,
but extends across all areas of an organization's operations.
In 2001 the Bank created a new customer service department, its employees
dedicated strictly to customer support. When the new structure is fully
implemented, customer service employees will answer questions relating
to checks, cash, accounting, billing, funds transfer, book-entry securities,
Automated Clearing House (ACH), electronic connections, business development
follow-up, and certain Treasury services.
Formerly, questions relating to these matters were handled by the appropriate
Bank department. As Customer Service Supervisor Gwen Brame notes, "For
Los Angeles check inquiries alone, we average about 165 calls daily."
The new structure streamlines customers' interface with the Bank and allows
business areas to focus on their work.
The initiative began in the Twelfth District's Northern Region, where
customers of the Portland, Salt Lake City, and Seattle branches began
to use a toll-free telephone number that gives them a single point of
contact with knowledgeable staff. As Northern Region Manager of Customer
Support Colleen Everroad says, "The key to the rather quick and successful
transition was the staff, their enthusiasm, and great team focus."
Customer Service Representative Jennifer Scholting echoes this sentiment:
"I really like working with customers as well as the staff here -
we work as a team. I enjoy working with financial institutions of any
size. There is always something new to learn."
Portland-based Cheryl Bassett visited the Salt Lake City and Seattle
branches so that she could help customers better in her new customer service
role. "Each branch office has unique operational demands," she
says, "so if I know, for example, from which office a customer obtains
cash, I can handle an inquiry better."
Customer Service Training
To make the new department successful, the Twelfth District is implementing
a Bankwide customer service certification training program to improve
service for internal as well as external customers. The new structure
requires considerable cross-training. "Through this rather fast transition,
it has been a challenge to cross-train quickly enough," Colleen Everroad
says. "But it has been a great opportunity for the department, as
the analysts expand their knowledge of Federal Reserve Bank operations."
Account Coordinator Hisani Washington has trained two of the Customer Service
Help Desk staff; she now acts as a resource for any complex accounting questions
the Help Desk receives. With 16 years of experience in the Customer Accounting
department, Hisani's view of customer service is quite simple: "In
order to give good customer service, it's important to work with good people.
I've had wonderful people to work for - we've got a really good, tight-knit
group. We all work well together."
"...it has been a great
opportunity for the department, as the analysts expand their knowledge
of Federal Reserve Bank operations."
Hisani enjoys good relationships with customers as well as with colleagues.
"When you talk to customers over a long period of time, you get to
know them, and they get to know you. It's almost like family. We build
rapport, and I really like that." She added, "It's up to us
to help customers get any problems resolved and, we hope, ensure those
problems do not happen again."
Outreach - Virtual and Actual
The Bank is also improving customer service in cyberspace by developing
the "E-notice," piloted by the Corporate Services department in
2001. One of Corporate Services' duties is to dispatch customer announcement
letters and District circular letters generated by other Bank departments.
In the past, it often took a number of days for these communications to
reach their intended recipients by regular mail.
Corporate Services now posts letters or circulars directly to the Internet
and sends an e-mail to clients with a link to the information. Corporate
Services Project Analyst Erin McGowan believes that "e-mail is the
preferred method of communication for business. The customer receives
critical information quickly."
Customer response to the E-notice has been positive. As Erin says, "Some
financial institutions had already asked for reduced paper mailings from
the Bank, and now our customers appreciate the much more timely notice
of financial and regulatory information."
The importance of outreach to customers is further reflected by the Summer
Symposiums held in 18 different Twelfth District locations during 2001.
Each two-day symposium covered topics such as accounting and billing, as
well as key initiatives such as check modernization. The symposiums enabled
the Bank to contact a large number of customers - 970 participants total
- with excellent results. Additional outreach programs are planned for 2002.
An important element of the change in customer support is to monitor
progress, and so the Bank will poll customers to see if it is meeting
expectations and to find out what could be improved. As Northern Region
Manager of Customer Support Colleen Everroad says, "I believe that
once we have fully centralized customer support, our customers will see
very positive results."
|The value of U.S. currency in
circulation has risen from $30.4 billion in 1960 to $593 billion at
the end of 2001...
The first fixed-value coins were issued over 2,500 years ago, so we can
safely say that coin is a very old payment system. Even so, neither our
venerable coins nor our notes are immune to change, which comes from many
directions: users, technology, marketplace conditions, and the government.
The value of U.S. currency in circulation has risen from $30.4 billion
in 1960 to $593 billion at the end of 2001; about two-thirds of this is
held abroad. Over the same period, denomination preferences changed. In
1960 people held only 2 percent of their currency in hundred-dollar notes
compared to 19 percent in 2001, while one-dollar notes dropped from 46
percent to 35 percent of notes outstanding.
In the currency marketplace, technology also has driven change through
improvements in communication, software, hardware, and information management.
Technological development has made cash more readily available - perhaps
the most visible example is the ubiquitous presence of automated teller
machines, of which the country now has about 230,000. Another new way
to obtain cash is by using a debit card at the point of sale, making retail
establishments dispensers of cash as well as of goods. To process all
the additional coin and currency, counting equipment has become faster
and more sophisticated. Additionally, cash usage and inventory information
can be managed more efficiently because software and communications allow
prompt information access - for example, by using the telephone or Internet.
The government also initiates change. From 1996 to 2000 the United States
introduced redesigned currency with improved anti-counterfeiting capability,
the first such major change since the 1920s. In 1999 the U.S. Mint launched
its 50-State Quarter Program, and in early 2000 the Golden Dollar coin
began to circulate.
Cash Changes at the Fed
Changes in Reserve Bank operations reflect these changes in cash. The San
Francisco Bank became the Cash Product Office for the Federal Reserve System
in 2001, which means that the Bank's perspective on cash operations takes
on a national focus. The Bank collaborates with key government agencies
such as the U.S. Treasury, the Bureau of Engraving and Printing, and the
U.S. Mint to ensure proper inventory levels of notes and coin and an effective
distribution system are maintained. The Bank also cooperates with the Secret
Service to create effective deterrents to counterfeiting.
Senior Project Analyst Brian Coulter of the Cash Product Office says
that the popularity of the State Quarters program and the Golden Dollar
contributes to the need to manage coin more closely. "While you may
not often see Golden Dollars in supermarket cash registers, they are,
in fact, widely used," Brian says. "For example, you will find
them in post office and other vending machines, and they are used by transit
authorities as change from ticket machines and in toll road transactions.
More Golden Dollars have gone into circulation in two years than in the
entire life span of the Susan B. Anthony dollar coins, first introduced
Advanced Automation in the Phoenix Processing Center
In September 2001 the Bank opened the Phoenix Processing Center to serve
the cash needs of Arizona and surrounding Twelfth District communities.
Phoenix is the District's first highly automated cash processing center
and represents one of the most technologically advanced processing centers
in the country. The Center uses state-of-the-art robotic cranes and Automated
Guided Vehicles to move large amounts of currency safely, quickly, and
reliably. The elimination of some of the most dangerous and difficult
work has been well received by Center employees.
Standard Cash Automation
Standard Cash Automation (SCA) is an automated currency and coin inventory
tracking and reporting application, a unified platform that will meet
the needs of customers throughout the Federal Reserve System. "SCA
allows the Bank to be more efficient and to make customer-friendly changes
more quickly," says Cash Product Office Vice President Marla Borowski.
"Standardization also makes things easier for customers whose operations
span more than one District." The Salt Lake City Branch in the Twelfth
District was the first office in the country to implement SCA officially
in 2001; the program ultimately will be operational nationwide by 2003.