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Central Banker - Spring 2003

Central Banker - Spring 2003

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Published by: Federal Reserve Bank of St. Louis on Aug 13, 2010
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 The Check Re-engineering Initia-tive: It Really Is Business as Usual
Fed Announce Enhancements toFedLine
for the Web
Upcoming Changes toRegulation W SimplifyCompliance for Bankers
Regional Roundup
Fed Implements TwoLending Programs
 The Condition ofBanks: What AreExaminers Finding?
he Cleveland and St. Louis Federal Reservebanks recently entered into a partnership com-bining local customer support. Account executivesnow travel across district lines and potentially servicefinancial institutions located outside their Reservebank. In addition, some functions, such as productdevelopment and communications, have been com-bined. While these activities are mostly transpar-ent to customers, the partnership allows bothdistricts to better align internal resources andbecome more efficient.The Cleveland and St. Louis Feds also will jointlysponsor special events and educational seminars.Pooling these resources will enhance the quality of events offered and give customers more options tochoose from when they select event locations.The first opportunity to attend a regional event willcome this spring when we introduce Fed Exchange, anew educational forum that will be held throughoutApril and May. All Fourth and Eighth District insti-tutions will receive an invitation soon.This partnershipwill not affect anyother business you conductwith the Fed, such as check pro-cessing, cash orders or regulatory activities. The St.Louis Fed will continue providing these services for  your institution. In addition, national and local sup-port centers will continue to answer questions onvarious Fed services, such as FedACH
.For more information about this partnership, see thespecial edition of 
Payments Quarterly
, or contact your local account executive.
Cleveland and St. Louis FedsForm Regional Partnership
The Federal Reserve Systemhas announced it will reduce itscheck-processing sites from 45to 32 and its check-adjustmentsites from 43 to 12. Among thesites that will no longer processchecks are the Little Rock andLouisville branches.
While some Fed offices willtransition beginning this year,Little Rock and Louisville willcontinue processing checks untilsometime in late 2004. At thatpoint, Little Rock’s check-pro-cessing function will be shiftedto the Memphis Branch andLouisville’s to the CincinnatiBranch of the Cleveland Fed.
The plan was approved bythe Fed’s Conference of Presi-dents in January after a teamof Federal Reserve checkoperations experts workedwith consultants from Accen-ture—a leading managementconsulting and technology ser-vices company—to analyze theFed System’s existing checkinfrastructure.
In making its recommendations,the team considered several crite-ria, including an office’s:• ability to handle additionalvolume;• proximity to other Fed checkprocessing sites;• current and historical checkvolumes; and
• physical presence in marketswith relatively large checkvolumes.
In the Feditorial on page two,St. Louis Fed First Vice PresidentLeGrande Rives offers Fed cus-tomers his reassurance that checkservice levels will remain high.
Fed Announces Check Re-engineering Initiative
News and Views for Eighth District Bankers
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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
he Federal Reserve System willintroduce two new web-basedinformational tools during the sec-ond and third quarters of 2003.Eventually, these enhancements will
replace DOS-based FedLine
allows financialinstitutions to check reserverequirements, access positionreports and drill-down on variousreport items, such as as-of adjust-ments data and close-of-businessaccount balances.An additional feature is the Bal-ance Calculator, which institutionscan use to determine the balancesthey should hold each day in order to achieve a zero net position. Thecalculator automatically updatesevery day after the Federal Reserverecords an institution’s close-of-business account balance andprocesses as-of adjustments.The calculator also will functionas an interactive decision-makingtool. Institutions will be able to:• enter estimated future accountbalances to determine net positionsunder different scenarios or • calculate the effect of an antici-pated as-of adjustment on requiredbalances.
Daylight Overdraft Reportingand Pricing System (DORPS)
is a new web-based service thatwill be rolled into the AccountManagement Information system.Five reports will be available:1) Two Week Daylight OverdraftSummary,2) Advice of Daylight OverdraftCharges,3) Statement of Daylight Over-draft Charges,4) revised advices and5) revised statements.If you have any questions aboutthese two new services, contact your account executive.
Fed Announces Enhancements to FedLine
for the Web
e have a lot to be proud of in theEighth District. Our check-pro-cessing sites in Little Rock, Louisville,Memphis and St. Louis are among themost efficient in the Federal Reserve Sys-tem. But every prudent business, includ-ing the Federal Reserve, must adapt tosignificant changes in the marketplace.
Nationwide, we know consumers are choosing theefficiency of electronic payments, such as ACH anddebit cards, over checks. One of the Fed’s objectivesis to promote an efficient payment system, so weendorse these trends.As consumers adopt electronic payment alterna-tives, recent definitive research indicates check usageis declining, and we must re-engineer our checkoperations. So last fall, the Fed’s Conference of Pres-idents met to develop a plan for boosting revenues andcutting costs. After much debate, a final decision wasannounced in February. Between now and the end of 2004, Reserve bank check-processing sites will bereduced from 45 to 32, and check-adjustment siteswill be reduced from 43 to 12.Closing our District’s Little Rock and Louisvillecheck-processing sites will allow our District to save$4.9 million a year. That’s a number we couldn’t walkaway from, but we have not forgotten our mission toprovide high-quality service.Throughout the transition, all Reserve banks willwork to maintain deposit times and availability as closeas possible to current service levels, and our newcheck-imaging and check-adjustments technologywill allow us to offer additional services.Likewise, because we care about our affected employ-ees and we want them to remain with us throughoutthe transition, we’ve offered them generous severanceand retention benefits. This will ensure that our sitescontinue operating fully and efficiently.
 You have my promise that for the next 18 monthsit really will be business as usual at the St. Louis Fed.We have not yet worked through all the details of the re-engineering initiative, but we will communicate anychanges as soon as we know them. For upcomingannouncements, visit our web site, www.stlouisfed.org.
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he Board of Governors of the FederalReserve System has published a final Regula-tion W, which takes effect April 1. Regulation Wimplements 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 commentson those sections have been consolidatedinto one public document.
Section 23A restricts certain “covered transactions” between abank 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 fora bank’s transactions with all its affiliates is 20 percent. In addition,Section 23A imposes requirements for collateral on certain transactions,requiring covered transactions—and other exempted transactions—to beon terms “consistent with safe and sound banking practices.”Section 23B requires market terms not only for covered transactionswith defined affiliates but also for certain other transactions.
(The 23B definition of “affiliates” varies from the 23A definition.)
The original laws were designed to prevent banks from being abusedas a funding source for their affiliates. The laws’ broad scope, however,often made application somewhat complicated.The new regulations clarify how the Board will treat a number oftransactions of concern and provide exemptions that ease the compli-ance burden. Four treatments identified as among the most significant are summarized below.
Derivative Transactions:
The revised Regulation W:
stipulates that derivative transactions between banks and their affili-ates be subject to the 23B market terms requirement and
requires banks to adopt policies and procedures to manage credit risk resulting from those transactions.Most derivative transactions, however, will not be subject to the 23Aquantitative and collateral limitations.
Intraday Credit:
Similarly, under new rules required by Graham-Leach-Bliley, intraday credit extensions from a bank to an affiliate willbe subject to 23B market terms requirements; however, these exten-sions will be exempt from the percentage limits and collateral require-ments under 23A, if the bank:
adopts policies and procedures to manage the credit exposure that may arise and
has no reason to believe that the affiliate would have difficultyrepaying the credit according to its terms.
Financial Subsidiaries:
Consistent with 23A, the new rule defines abank’s financial subsidiaries as affiliates; therefore, transactions between abank and its financial subsidiary are subject to 23A and 23B. The rule fur-ther defines a financialsubsidiary as any subsidiary ofa national or state bank that engages (directly or indirectly) in anactivity not permissible for a national bank to conduct directly.Insurance agency subsidiaries of both national and state banks, how-ever, are exempt, so they are not considered affiliates. Subsidiariesof a state bank are exempt if they only engage in activities that either:
are permissible for a state bank to conduct directly or
were conducted lawfully by a subsidiary before the final rulewas implemented.
General Purpose Credit Card Transactions:
Under 23A,transactions—including extensions of credit—with nonaffiliates of abank are deemed covered transactions if the proceeds were transferredto or used for the benefit of the bank’s affiliate. The new rule includesan exemption where any nonaffiliated entity can use a general-purposecredit card issued by a bank to purchase products or services from theissuing bank’s affiliate.Although those extensions of credit meet the 23A standard for cov-ered transactions, they are considered exempt if:
the credit card used is widely accepted by merchants not affiliatedwith the bank and
less than 25 percent of purchases (by all cardholders) are withbank affiliates.To ease the compliance burden, a bank is deemed to meet the 25 per-cent test if it has no commercial affiliates and has no reason to believe it wouldn’t meet the test. A bank with commercial affiliates beyond thoseauthorized by Bank Holding Company Act subsection 4 must either pre-sent information to the Federal Reserve Board showing that its card isexpected to always comply with the 25 percent test or establish systemsto calculate and validate compliance.For more information, visit the Board of Governors web site,http://www.federalreserve.gov/regulations/regref.htm#w.
Upcoming Changes to Regulation WSimplify Compliance for Bankers

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