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INSIDE: 2 • The Check Re-engineering Initia- 3 • Upcoming Changes to 4 • Regional Roundup 5 • The Condition of 6 • Calendar/Events

tive: It Really Is Business as Usual Regulation W Simplify • Fed Implements Two Banks: What Are
• Fed Announce Enhancements to Compliance for Bankers Lending Programs Examiners Finding?
FedLine® for the Web

SPRING 2003

News and Views for Eighth District Bankers

Cleveland and St. Louis Feds


Form Regional Partnership
T he Cleveland and St. Louis Federal Reserve
banks recently entered into a partnership com-
bining local customer support. Account executives
now travel across district lines and potentially service
financial institutions located outside their Reserve
bank. In addition, some functions, such as product
development and communications, have been com-
bined. While these activities are mostly transpar-
ent to customers, the partnership allows both
districts to better align internal resources and This partnership
become more efficient. will not affect any
The Cleveland and St. Louis Feds also will jointly other business you conduct
sponsor special events and educational seminars. with the Fed, such as check pro-
Pooling these resources will enhance the quality of cessing, cash orders or regulatory activities. The St.
events offered and give customers more options to Louis Fed will continue providing these services for
choose from when they select event locations. your institution. In addition, national and local sup-
The first opportunity to attend a regional event will port centers will continue to answer questions on
come this spring when we introduce Fed Exchange, a various Fed services, such as FedACH®.
new educational forum that will be held throughout For more information about this partnership, see the
April and May. All Fourth and Eighth District insti- special edition of Payments Quarterly, or contact your
tutions will receive an invitation soon. local account executive.

Fed Announces Check Re-engineering Initiative


The Federal Reserve System Louisville’s to the Cincinnati • ability to handle additional
has announced it will reduce its Branch of the Cleveland Fed. volume;
check-processing sites from 45 The plan was approved by • proximity to other Fed check
to 32 and its check-adjustment the Fed’s Conference of Presi- processing sites;
sites from 43 to 12. Among the dents in January after a team • current and historical check
sites that will no longer process of Federal Reserve check volumes; and
checks are the Little Rock and operations experts worked • physical presence in markets
Louisville branches. with consultants from Accen- with relatively large check
While some Fed offices will ture—a leading management volumes.
transition beginning this year, consulting and technology ser- In the Feditorial on page two,
1

Little Rock and Louisville will vices company—to analyze the St. Louis Fed First Vice President
www.stlouisfed.org

continue processing checks until Fed System’s existing check LeGrande Rives offers Fed cus-
sometime in late 2004. At that infrastructure. tomers his reassurance that check
point, Little Rock’s check-pro- In making its recommendations, service levels will remain high.
cessing function will be shifted the team considered several crite-
to the Memphis Branch and ria, including an office’s:
Fed itorial
The Check Re-engineering Initiative:
It Really Is Business as Usual
By LeGrande Rives, First Vice President of the Federal Reserve Bank of St. Louis

e have a lot to be proud of in the 2004, Reserve bank check-processing sites will be
W Eighth District. Our check-pro-
cessing sites in Little Rock, Louisville,
reduced from 45 to 32, and check-adjustment sites
will be reduced from 43 to 12.
Closing our District’s Little Rock and Louisville
Memphis and St. Louis are among the check-processing sites will allow our District to save
$4.9 million a year. That’s a number we couldn’t walk
most efficient in the Federal Reserve Sys- away from, but we have not forgotten our mission to
tem. But every prudent business, includ- provide high-quality service.
ing the Federal Reserve, must adapt to Throughout the transition, all Reserve banks will
work to maintain deposit times and availability as close
significant changes in the marketplace. as possible to current service levels, and our new
check-imaging and check-adjustments technology
Nationwide, we know consumers are choosing the will allow us to offer additional services.
efficiency of electronic payments, such as ACH and Likewise, because we care about our affected employ-
debit cards, over checks. One of the Fed’s objectives ees and we want them to remain with us throughout
is to promote an efficient payment system, so we the transition, we’ve offered them generous severance
endorse these trends. and retention benefits. This will ensure that our sites
As consumers adopt electronic payment alterna- continue operating fully and efficiently.
tives, recent definitive research indicates check usage You have my promise that for the next 18 months
is declining, and we must re-engineer our check it really will be business as usual at the St. Louis Fed.
operations. So last fall, the Fed’s Conference of Pres- We have not yet worked through all the details of the re-
idents met to develop a plan for boosting revenues and engineering initiative, but we will communicate any
cutting costs. After much debate, a final decision was changes as soon as we know them. For upcoming
announced in February. Between now and the end of announcements, visit our web site, www.stlouisfed.org.

Fed Announces Enhancements to FedLine® for the Web

T he Federal Reserve System will


introduce two new web-based
informational tools during the sec-
to achieve a zero net position. The
calculator automatically updates
every day after the Federal Reserve
is a new web-based service that
will be rolled into the Account
Management Information system.
ond and third quarters of 2003. records an institution’s close-of- Five reports will be available:
Eventually, these enhancements will business account balance and 1) Two Week Daylight Overdraft
replace DOS-based FedLine®. processes as-of adjustments. Summary,
ReserveCalc allows financial The calculator also will function 2) Advice of Daylight Overdraft
institutions to check reserve as an interactive decision-making Charges,
requirements, access position tool. Institutions will be able to: 3) Statement of Daylight Over-
reports and drill-down on various • enter estimated future account draft Charges,
report items, such as as-of adjust- balances to determine net positions 4) revised advices and
2

ments data and close-of-business under different scenarios or 5) revised statements.


www.stlouisfed.org

account balances. • calculate the effect of an antici- If you have any questions about
An additional feature is the Bal- pated as-of adjustment on required these two new services, contact
ance Calculator, which institutions balances. your account executive.
can use to determine the balances Daylight Overdraft Reporting
they should hold each day in order and Pricing System (DORPS)
Upcoming Changes to Regulation W
Simplify Compliance for Bankers

T he Board of Governors of the Federal


Reserve System has published a final Regula-
tion W, which takes effect April 1. Regulation W
implements sections 23A and 23B of the Fed-
eral Reserve Act, imposing limits on trans-
actions between a bank and its affiliates.
For the first time, all of the Board’s inter-
pretations, staff opinions and comments
on those sections have been consolidated
into one public document.
Section 23A restricts certain “covered transactions” between a
bank and any of its defined affiliates to an amount equal to 10 per-
cent of the bank’s capital stock and surplus. The aggregate limit for
a bank’s transactions with all its affiliates is 20 percent. In addition,
Section 23A imposes requirements for collateral on certain transactions, ther defines a financial
requiring covered transactions—and other exempted transactions—to be subsidiary as any subsidiary of
on terms “consistent with safe and sound banking practices.” a national or state bank that engages (directly or indirectly) in an
Section 23B requires market terms not only for covered transactions activity not permissible for a national bank to conduct directly.
with defined affiliates but also for certain other transactions. (The 23B Insurance agency subsidiaries of both national and state banks, how-
definition of “affiliates” varies from the 23A definition.) ever, are exempt, so they are not considered affiliates. Subsidiaries
The original laws were designed to prevent banks from being abused of a state bank are exempt if they only engage in activities that either:
as a funding source for their affiliates. The laws’ broad scope, however, • are permissible for a state bank to conduct directly or
often made application somewhat complicated. • were conducted lawfully by a subsidiary before the final rule
The new regulations clarify how the Board will treat a number of was implemented.
transactions of concern and provide exemptions that ease the compli- General Purpose Credit Card Transactions: Under 23A,
ance burden. Four treatments identified as among the most significant transactions—including extensions of credit—with nonaffiliates of a
are summarized below. bank are deemed covered transactions if the proceeds were transferred
Derivative Transactions: The revised Regulation W: to or used for the benefit of the bank’s affiliate. The new rule includes
• stipulates that derivative transactions between banks and their affili- an exemption where any nonaffiliated entity can use a general-purpose
ates be subject to the 23B market terms requirement and credit card issued by a bank to purchase products or services from the
• requires banks to adopt policies and procedures to manage credit issuing bank’s affiliate.
risk resulting from those transactions. Although those extensions of credit meet the 23A standard for cov-
Most derivative transactions, however, will not be subject to the 23A ered transactions, they are considered exempt if:
quantitative and collateral limitations. • the credit card used is widely accepted by merchants not affiliated
Intraday Credit: Similarly, under new rules required by Graham- with the bank and
Leach-Bliley, intraday credit extensions from a bank to an affiliate will • less than 25 percent of purchases (by all cardholders) are with
be subject to 23B market terms requirements; however, these exten- bank affiliates.
sions will be exempt from the percentage limits and collateral require- To ease the compliance burden, a bank is deemed to meet the 25 per-
ments under 23A, if the bank: cent test if it has no commercial affiliates and has no reason to believe it
• adopts policies and procedures to manage the credit exposure that wouldn’t meet the test. A bank with commercial affiliates beyond those
3

may arise and authorized by Bank Holding Company Act subsection 4 must either pre-
• has no reason to believe that the affiliate would have difficulty sent information to the Federal Reserve Board showing that its card is
www.stlouisfed.org

repaying the credit according to its terms. expected to always comply with the 25 percent test or establish systems
Financial Subsidiaries: Consistent with 23A, the new rule defines a to calculate and validate compliance.
bank’s financial subsidiaries as affiliates; therefore, transactions between a For more information, visit the Board of Governors web site,
bank and its financial subsidiary are subject to 23A and 23B. The rule fur- http://www.federalreserve.gov/regulations/regref.htm#w.
RegionalRoundup
Eighth District Announces • Lunsford W. Bridges, presi- Associates, Inc., Danville, Ky.,
Changes to Boards of Directors dent and CEO of Metropolitan re-appointed to a three-year term
National Bank, Little Rock, re- on the Louisville Board.
The Federal Reserve Bank of elected to a three-year term on • Marjorie Z. Soyugenc,
St. Louis has announced the fol- the St. Louis Board. executive director and CEO of
lowing changes to its boards of • Rogers Yarnell II, president Welborn Foundation, Evansville,
directors: of Yarnell Ice Cream Co. Inc., Ind., re-appointed to a three-year
• Charles W. Mueller, chair- Searcy, Ark., re-appointed to term on the Louisville Board.
man and CEO of Ameren Corp., three-year term on the Little • (Mr.) Meredith Baird Allen,
St. Louis, re-appointed as chair- Rock Board. vice president of Staple Cotton
man of the St. Louis Board. • David R. Estes, president and Cooperative Association, Green-
• Walter L. Metcalfe Jr., CEO of First State Bank, Lonoke, wood, Miss., appointed to a three-
chairman of Bryan Cave LLP, Ark., re-appointed to a three-year year term on the Memphis Board.
St. Louis, re-appointed as deputy term on the Little Rock Board. • James A. England, chairman,
chairman of the St. Louis Board. • Everett Tucker III, chairman president & CEO of Decatur
• Gayle P.W. Jackson, manag- of Moses Tucker Real Estate County Bank, Decaturville, Tenn.,
ing director of FondElec Clean Inc., Little Rock, re-appointed re-appointed to a three-year term
Energy Group Inc., St. Louis, re- to a three-year term on the Little on the Memphis Board.
appointed to a three-year term on Rock Board. • Tom A. Wright, Chairman,
the St. Louis Board. • Scott T. Ford, president and President & CEO of Enterprise
• J. Stephen Barger, executive CEO of ALLTEL Corp., Little National Bank, Memphis, Tenn.,
secretary-treasurer of the Ken- Rock, appointed to fill the unex- re-appointed to a three-year term
tucky State District Council of pired portion of a three-year term on the Memphis Board.
Carpenters, Frankfort, Ky, elected on the Little Rock Board.
to a three-year term on the • Thomas W. Smith, presi-
St. Louis Board. dent of Thomas W. Smith &

Fed Implements Two New Lending Programs

T he Federal Reserve has replaced adjustment


credit and extended credit with two new
programs: primary credit and secondary credit.
asked” basis at an initial rate of 100 basis points
above the Federal Open Market Committee’s
target for the federal funds rate.
The same types of depository institutions that Generally, primary credit will be extended on a
previously qualified for adjustment or extended very short-term basis—typically overnight—but
credit—such as commercial banks, savings and small institutions that cannot obtain temporary
loans and credit unions—will now qualify for funds in the market at reasonable terms may
primary or secondary credit. extend their credit for up to a few weeks, as
The restructuring of the Federal Reserve’s long as they are in sound financial condition.
credit programs is designed to improve the func- Secondary credit is for institutions that do
tioning of the discount window. It does not rep- not qualify for primary credit, and it will entail
resent a change in either the stance of monetary increased administration. The rate is 50 basis
policy or the process by which the discount rate points above the primary credit rate.
is set. For more information about both programs,
4

Primary credit will be available to financial please see the Credit office’s web site,
www.stlouisfed.org

institutions that Reserve Banks deem to be in www.stlouisfed.org/banking/Credit/credit.html,


generally sound financial condition. Normally, or contact an analyst in the Credit office,
primary credit will be granted on a “no questions 1-866-666-8316, then press 1.
The Condition of Banks: What Are Examiners Finding?
By R. Alton Gilbert, vice president and economist, Research isfactory condition could change over time if the downgraded
banks (CAMELS 3-5) recover to ratings of 1 or 2 either faster
ederal law
F
requires super-
visory agencies to
or more slowly than in the past.
Figure 2 illustrates another method of measuring banking
industry condition: the percentage of banks rated 1 or 2 at the
examine each beginning of a quarter that were downgraded to 3-5 during
bank at least once examinations begun that same quarter. The denominator of
every 18 months. the ratio equals the number of banks that entered the quarter
Most examina- rated 1 or 2 and were subject to examinations that began dur-
tions assess six ing the quarter. The numerator is the number of these banks
aspects of a bank’s operations (spelling that received ratings of 3, 4 or 5 on the examinations that
the word “CAMELS”): began during the quarter. The percentages reflect the results of
• C capital protection, examinations conducted during each quarter.
• A asset quality, Figures 1 and 2 illustrate different pictures of banking indus-
• M management competence, try condition during recent quarters. Figure 1 indicates deteri-
• E earnings strength, oration—a rising percentage of both large and small banks
• L liquidity risk and being rated less than satisfactory by supervisors during recent
• S sensitivity to market risk. years. In contrast, figure 2 indicates that the examinations
All banks receive a rating of 1 (best) conducted since around the end of 2000 have resulted in rel-
through 5 (worst) on each of these six atively small percentages of banks being downgraded to
aspects along with a composite rating. unsatisfactory condition. Regardless, both Figures 1 and 2
A composite CAMELS rating of 1 or suggest that the condition of the banking industry during
2 indicates that the supervisors con- recent quarters has been much stronger than during the
sider a bank to be in satisfactory con- 1990-91 recession.
dition. Supervisors use a 3 rating
for banks that exhibit some degree
of concern in one or more areas; a FIGURE 1: Percentage of Banks Rated CAMELS 3-5
rating of 4 or 5 indicates more seri- 50
ous problems.
While the CAMELS ratings 40
Percentage of Banks

Large Banks
assigned to individual banks are confi- 30
dential, a comparison of CAMELS
20
ratings across all banks over time may Small Banks
provide useful information about the 10
condition of U.S. banks as a whole. 0
Figure 1 illustrates one method of Dec. 1990 Dec. 1992 Dec. 1994 Dec. 1996 Dec. 1998 Dec. 2000
measuring banking industry condi- Quarterly data Dec. 31, 1990, through Sept. 30, 2002
tion: the percentage of banks rated Note: Small banks are banks with less than $1 billion in total assets, and large banks are banks with assets greater
as being in unsatisfactory condition. than or equal to $1 billion.
According to this measure, banking
industry condition has worsened
slightly since the mid-1990s for FIGURE 2: CAMELS Downgrade from 1 or 2 to 3, 4 or 5
both large and small banks. This
Percentage of Exams Resulting in a Downgrade

35
measure, however, remains much 30
stronger in recent quarters than dur- 25
ing the recession period of 1990-91. Large Banks
20
Figure 1 has limitations as a method 15
for measuring current condition. 10
Given the timing of examinations, Small Banks
5

5
the percentages reflect the results of 0
www.stlouisfed.org

examinations conducted at various 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

points in time during the prior 18 Quarterly data ending in September of each year
months. Additionally, the percent- Note: Small banks are banks with less than $1 billion in total assets, and large banks are banks with assets greater
age of banks rated as being in unsat- than or equal to $1 billion.
CalendarEvents
UPCOMING FED-SPONSORED EVENTS FOR EIGHTH DISTRICT DEPOSITORY INSTITUTIONS

2003 SPRING SEMINAR SERIES

2003 Evansville Small Business Meeting ference, “Sustainable Community FOURTH DISTRICT:
MARCH 20—EVANSVILLE, IND. Development: What Works, What
Doesn’t and Why.” This conference APRIL 8, 2003
What can urban areas do with vacant, will bring together a diverse audience PITTSBURGH, OHIO
deteriorating buildings in their down- from academia, financial institutions, MAY 8, 2003
town areas, and how can they entice res- community organizations, foundations COLUMBUS, OHIO
idents to move there? This will be the and government to learn about
topic of a quarterly meeting sponsored MAY 13, 2003
research being done in the community
by the St. Louis Fed. Developers and CLEVELAND, OHIO
development arena.
interested parties from both the public MAY 22, 2003
Information is available at www.federalre-
and private sectors are invited to attend. LEXINGTON, KY.
serve.gov/communityaffairs/national.
For information, call Faith Weekly
at (502) 568-9216. EIGHTH DISTRICT:
There’s a Lot to Learn about Money
APRIL 1—COLLINSVILLE, ILL. APRIL 8, 2003
Economic Development in the ST. LOUIS, MO.
Minority Community The Community Affairs office of the
St. Louis Fed is sponsoring this financial MAY 6, 2003
MARCH 25—LOUISVILLE MEMPHIS, TENN.
education program. Its purpose is to
This community affairs forum is make bankers, community organizations MAY 15, 2003
co-sponsored by the St. Louis Fed and other interested parties aware of the LITTLE ROCK, ARK.
and the University of Louisville’s financial education programs that are
School of Urban and Public Affairs. MAY 21, 2003
offered in Illinois.
LOUISVILLE, KY.
For information, call Faith Weekly
at (502) 568-9216. How to Work with the Latino Community Fed Exchange is a new edu-
MAY 14—ST. LOUIS cational forum for financial
2003 Community Affairs This Community Affairs program is for institutions and is co-spon-
Research Conference: Sustainable bankers, government agencies and com- sored by the St. Louis and
Community Development munity organizations that serve Latino Cleveland Feds.
MARCH 27-28—WASHINGTON, DC immigrants, and is sponsored by the For information, call Debbie
The Community Affairs officers of St. Louis Fed and the FDIC. Boren at (314) 444-8946,
the Federal Reserve System are spon- For information on the above programs, or 1-800-333-0810,
soring their third biennial research con- contact Diana Zahner at (314) 444-8761. ext. 44-8946.

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