w w w . s t l s . f r b . o r g
BanksandFedMust Work Together
DemographicDataComein All ShapesandSizes
FocusGroupsZeroinon Customer Service
DoWeSeeaRisein Problem Loans?
merican consumers and
businessesmake 80 billionretail paymentsannually, accord-ing to a market research report just released by the Fed. Nearly50 billion of these paymentsaremade by check, and the remain-
ing 30 billion are handled by
electronic instruments, such ascredit cards, debit cardsand ACH.Overall, Americansare increas-
ingly using electronic forms of payment; checks have declined
from approximately 85 percent of
non-cash payments in 1979 toabout 60 percent today.This information is part of acomprehensive retail paymentsresearch project, the first of itskind in more than 20 years. Thedata collection effort was com-missioned by the Reserve banksand consisted of three mainstudies—the Depository Finan-cial Institution (DFI) Check Study, the Check Sample Studyand the Electronic PaymentInstrumentsStudy.The DFI Check Study wasdesigned to count the totalnumber of checks processedin the United States for a 12-month period. The Check Sample Study gathered infor-mation on the compositionof the check market, namely,who (consumers, businessesor government) writes checksto whom (consumers, businessesor government) and why (remit-tance,point-of-sale, income orcasual payment). The ElectronicPayment InstrumentsStudy gath-ered data on the volume andvalue of electronic paymentsprocessed during 2000.More than 1,300 financial in-stitutionsand 89 electronic pay-ment processors responded tothe surveys. Additional detailsare available on the FederalReserve System’s web site,www.frbservices.org.
Fed Releases Comprehensive Retail Payments Study
News and Views forEighth District Bankers
Community andLender Luncheon
Topicoftheprogramiscreditscoring. Formoreinformation, contactFaithWeekly at(502)568-9216.
2002 Federal Reserve Holiday Schedule
TuesdayJan. 1MondayJan. 21MondayFeb. 18MondayMay27ThursdayJuly4
MondaySept. 2MondayOct. 14MondayNov. 11ThursdayNov. 28WednesdayDec. 25
UPCOMINGFED-SPONSORED EVENTSFOR EIGHTH DISTRICTDEPOSITORY INSTITUTIONS
Fed Offers One-Stop Shoppingfor Check Clearing
Earlierthisyear, theFederal ReserveSystemunveiledaconsolidatedforeigncheck clearingservice. Thisnew servicemakesit possibleforfinancial institutionstousetheFedtoprocesschecksdrawnondepository institutionsany-whereoutsidethe12 Federal Reservedistricts.Previously, foreigncheck clearingthroughtheFedwasavailableonlyforCanadianpayments.Foreigncheck clearingisprovidedby theFederal ReserveBank of Richmond’sCharlotteoffice. Per-item pricesrangefrom $1.75 to$55, dependingonthecountry inwhichthepayingbank islocated. Pleasecontact yourlocal account executiveif youareinterestedinthisservice.
CRALending, HMDADataNow Available
TheFFIEChasmadeavailable2000 dataonsmall business, small farm andcommunitydevelopment lendingreportedby commercialbanksandthrifts. Datacanbefoundonlineatwww.ffiec.gov/cra. 2000 HMDAdataisalsoavailableonlineat www.ffiec.gov/hmda.
via ground hub and spoke network. On that and thefollowing nights, the Fed delivered about 75 percentof its normal volume by truck.Meanwhile, the Fed worked closely with the FAAand the U.S. Air Force to resume flight of courierplanes, and by late Wednesday, these jetsreturned tothe air, even though commercial airportswere not yetopen. On Thursday, the Fed began working withvarious check transportation vendors, and throughthe weekend patched together a network of Fed andcharter flightsthat represented what one Fed employeedescribed as a “whirlwind of improvisation.”And then there were the liquidity and credit issues.(See Feditorial, Page 2.) Aslender of last resort, theFed’sdiscount window not only remained open late,but loansSept. 12 rose to $45.5 billion, up from $99million the Wednesday before. The Fed absorbedbillionsof dollarsof float during the two daysthat itcontinued to provide credit to depositing banksonmoney that had not yet been collected. Some banksalso reported increased demandsfor currency, whichwere honored to maintain public confidence.Despite our successat providing liquidity, we under-estimated the urgency of sending a reassuring messageto the public. Should a crisis strike again, banks andthe public will not want to wait four hoursfor officialconfirmation that the Federal Reserve is up andrunning, and that the discount window is open.
Testing...One, Two, Three
As we were reminded on Sept. 11, we can never“over test” a contingency plan. And each crisispresentsan opportunity to learn and improve. What lessonswill the Fed and the banking industry take away? Hereare some considerations we may all want to revisit:• Do contingency plans go beyond technologyfunctions?• Isthere more than one alternative site for conduct-ing business, including back-end operations?• Isthere a central location from which to deployplansof action?• Are planstested regularly?• Are newer staff membersfamiliar with the plans?• Are contingency plansin writing and easy to find?• Are data storage and backup effortsup to date withtoday’stechnology and operating environment?• Isthere a network of vendorswith whom tocoordinate alternative plans?• Is there a clear plan for communicating withyour constituents?
Contingency Plans TestedSept.11. Did the Fed Pass?
he FAA grounding of all flights on Sept. 11added an unimaginable dimension to disasterscenarios and could have crippled the nation’spayments system. Thanks to contingency planningand a strong network of vendor partnerships, theFederal Reserve overcame this obstacle and keptthe payments system running—not always ondeadline, but effectively nonetheless. Lookingback, the Fed must now evaluate its overallresponse. Here are some thingswe learned.
What Worked; What Didn’t
As expected, electronic payments operatedsmoothly. Unlike the Y2K scare, it wasthe lack of air transportation that impaired the paymentssystem,asevery weeknight the Fed relieson thissystem tomove about 43,000 pounds of checks among the45 Fed processing sites. Aside from the physicaldisruption, the lag posed settlement andfloat issues for banks nationwide.In thisrespect, the Fed responded quickly. By earlyafternoon on Sept. 11, ground transportation wasorganized for the evening—the Fed dispatched severalhundred check-filled trucks,
t doesn’t take an economist to conclude that the paceof economic activity has slowed sharply during thepast year. We hear about this on the news, see thechanges in our businesses and may have even felt theeffectsof a sluggish economy first-hand. Asthe tablebelow shows, the annual growth rate of real GDP fellfrom 5.69 percent to 1.34 percent between the secondand third quartersof 2000.Historically, when the pace of economic activityslows, problem loansof bankstend to rise. Thisarticlelooksat one measure of problem loans—the percent-age of commercial and industrial (C&I) loansthat arenonperforming—to see whether there has been anincrease in problem loans in the past year, as onemight expect.We identify nonperforming loans as those that are90 daysor more past due or no longer accruing interest.Banksreport the amount of loansthat are nonperform-ing on a quarterly basis.
The table reportsnonperfor-ming C&I loansasa percentage of total C&I loansbybank size over the past decade. To examine both thedecade-long trend and some recent changes, we’ll look at annual nonperforming loan ratios(the meansof thequarterly numbers) for 1991 to 1999, and quarterlyrates for 2000 and the first half of 2001.Going back 10 years, we see that nonperformingloan ratiosfor banksin each size category were higherin 1991—a recession year—than in any subsequentperiod. Aswe recovered from the recession, the datashow that banksin each size group reported declinesin their nonperforming loan ratios through 1997.Since 1997, banks with total assets above $1 billionhave experienced a slight rise in nonperforming loanratios; however, these ratiosremain substantially belowthe 1991 levels. Nonperforming loan ratios amongrelatively large banks began rising well before theeconomic slowdown of the past year.The rise in the nonperforming C&I loan ratio since1997 has been especially pronounced among bankswith total assetsin excessof $20 billion. Much of theincrease for thisgroup can be attributed to involve-ment with syndicated loans. A syndicated loan,identified as a loan included in the Shared NationalCredit program of the federal bank supervisors, isanyloan or loan commitment that exceeds$20 millionand isshared by three or more nonaffiliated institu-tions.
Syndicated loansare classified in one of fourcategories (substandard, doubtful, loss or specialmention) if, during routine examination, there isdetermined to be a relatively high risk of default orother credit concerns. The percentage of loanswithadverse classificationshasbeen increasing over the pastfew years.
At the same time that nonperforming C&I loan ratiosat the larger banksbegan to increase after 1997, non-performing C&I loan ratios continued to decreaseamong bankswith assetsbelow $1 billion—the smallesttwo categories in the table. This pattern began tochange for banksin one of these size categories, how-ever, as the growth of GDP slowed in the last year:Among the bankswith total assetsbetween $300 mill-ion and $1 billion, nonperforming loan ratios wereabout 30 percent higher during the first two quartersof 2001, after the economy began to slow, than during thefirst two quartersof 2000. It appearsthat the slowingpace of economic activity during the past year hasbegun to adversely affect the ability of the customersof relatively small banksto repay their bank loans. So far,there has been no corresponding rise in the nonper-forming loan ratios among the smallest banks—thosewith total assetsbelow $300 million.During economic slowdowns, problem loansat bankstend to rise. As one would expect, we have indeedseen increasesin one measure of problem loansat banksof different total asset sizes. Some of these increasesoccurred before the recent economic slowdown; othersoccurred concurrently with the slowdown. Whilethe newsisnot bright for banksaffected, it isimportantto note that the increases in nonperforming C&Iloan ratios remain below the levels seen during thelast recession.
Nonperformingloanstendtohaveaseasonal pattern at bankswithtotal assetsbelow$1 billion. Thesebankstendtochargeoff moreloansin thefourth quarterto“clean uptheirbalancesheets”foryear-end accountingstatements. Loanschargedoff aslossesarenolonger reportedasnonperforming.
Priorto1999, syndicatedloanswerecomprisedof all loansorloancommitmentsof $20 million ormoreheldby twoormoresupervised institutions.
Formoreinformation on theSharedNationalCredit Program, seethewebsiteoftheBoardofGovernorsoftheFederalReserveSystem,www.federalreserve.gov/Releases/SNC/.
As EconomyFlounders, Do WeSee a Rise inProblem Loans?
isavicepresident andeconomist, and
isaresearchanalyst at theFederal ReserveBank of St. Louis.
w w w . s t l s . f r b . o r g
Post Office Box 442St. Louis, Missouri 63166
Editor: AliceC. Dames(314)firstname.lastname@example.orgCentralBanker
ispublishedquarterlybythePublicAffairsDepartmentoftheFederalReserve Bank ofSt. Louis. Viewsexpressedarenot necessarilyofficialopinionsoftheFederalReserveSystemortheFederalReserveBankofSt. Louis.
1991 – 0.47% 4.30% 3.24% 4.06% 5.02% 5.37%1992 3.05 3.99 2.85 3.24 4.01 4.631993 2.65 3.21 2.13 2.17 2.52 2.891994 4.04 2.52 1.35 1.27 1.36 1.371995 2.67 2.18 1.05 0.95 1.15 1.191996 3.57 2.25 1.16 1.02 0.87 0.971997 4.43 2.13 1.12 0.92 0.72 0.751998 4.28 2.13 1.01 0.92 0.78 0.841999 4.09 2.05 0.99 1.00 1.15 1.082000:1 2.35 1.85 0.99 1.04 1.21 1.272000:2 5.69 1.84 1.00 1.15 1.30 1.432000:3 1.34 1.85 1.06 1.23 1.35 1.562000:4 1.91 1.73 0.99 1.32 1.56 1.752001:1 1.32 1.81 1.30 1.52 1.64 1.952001:2 0.31 1.91 1.31 1.58 1.65 2.24
Total assetsof banks
Percentageof CommercialandIndustrialLoansThat AreNonperforming
Note: Nonperformingloanratesarecalculatedasthesumof nonperformingC&I loansasapercentage of total C&I loansineachsizecategory. Banksareplacedinasizecategorybasedontheirtotal assets forthat quarter. Annual nonperformingloanratesarethemeansof thequarterlynumbers.
Upto$300million$300millionto$1 billion$1 billionto$10billion$10billionto$20billionMorethan$20 billion