November

Credit Risk Rating at Large U.S. Banks William F. Treacy and Mark S. Carey Large banks use internally developed credit rating systems to differentiate the riskiness of their commercial loans. Internal ratings are an essential ingredient of effective credit risk management for such banks, whose commercial borrowers may number in the tens of thousands. This article describes these rating systems, how their design varies across institutions, and how they are used in risk management. The article also outlines conceptual and practical difficulties currently faced by banks in achieving accurate and consistent ratings and describes ways in which some institutions have attempted to deal with these difficulties. This article is based on a detailed review of policy documents and internal management reports from the fifty largest U.S. bank holding companies and interviews by the authors at a selection of these institutions. Full text (71 KB PDF)

October

New Summary Measures of the Foreign Exchange Value of the Dollar Michael P. Leahy The multilateral trade-weighted index of the foreign exchange value of the U.S. dollar against the currencies of the other countries in the Group of Ten (G-10), developed at the Federal Reserve Board in 1971, has played an important role in staff analysis of foreign influences on the U.S. economy for more than twenty-five years. However, changes in international trading relationships and in the structure of international financial markets have led to increased interest in the currencies of U.S. trading partners outside the G-10 countries. Furthermore, the establishment of the European Economic and Monetary Union (EMU) is bringing about significant changes inside the G-10 countries, with the euro, which will be introduced in January 1999, ultimately replacing five of the G-10 currencies. As a result, members of the Board's staff have developed several new indexes of the dollar's overall foreign exchange value. Full text (71 KB PDF)

September

Bank Merger Policy and the New CRA Data Anthony W. Cyrnak Data now being collected under the Community Reinvestment Act can be used to examine several issues related to analyses of the competitive effects of proposed bank mergers and bank holding company acquisitions. This article looks at two of those issues: whether locally based commercial banks and savings institutions face significant competition in small business lending from institutions based outside local banking markets, and whether measured levels of market concentration differ significantly when calculated on the basis of small business loan originations rather than bank deposits, as has traditionally been done. Full text (67 KB PDF) Treasury and Federal Reserve Foreign Exchange Operations Throughout the second quarter of 1998, the Japanese yen weakened consistently, depreciating 4.1 percent against the U.S. dollar and 6.2 percent against the German mark. Continued pessimism about the outlook for the Japanese economy pressured the yen to eight-year lows against the dollar. This contrasted with the relatively positive outlooks for the United States and Europe, with the dollar benefiting from continued low inflation and a strong domestic economy while the mark benefited from optimism toward European monetary union. During the first two weeks of June, the yen's decline accelerated, a development that put downward pressure on other regional currencies as market participants increasingly doubted that effective reforms of the Japanese banking system and stimulus of the economy would be forthcoming. Then, on June 17, the U.S. monetary authorities intervened in the foreign exchange markets by selling a total of $833 billion against the Japanese yen. The operation was conducted in cooperation with the Japanese monetary authorities. Full text (48 KB PDF)

August

Monetary Policy Report to the Congress The U.S. economy posted significant further gains in the first half of 1998. The unemployment rate dropped to its lowest level in nearly thirty years, and inflation remained subdued. Real output rose appreciably, on balance, although much of the advance apparently occurred early in the year. The turmoil that erupted in some Asian countries last year has created considerable uncertainty and risk for the U.S. economy. Even so, the members of the Board of Governors and the Federal Reserve Bank Presidents expect the economy to expand moderately, on average, over the next year and a half. With labor markets remaining tight and some of the special factors that helped restrain inflation in the first half of 1998 unlikely to be repeated, inflation is anticipated to run somewhat higher in the second half of 1998 and in 1999. Full text (106 KB PDF) Recent Changes to the Federal Reserve's Survey of Terms of Business Lending Thomas F. Brady, William B. English, and William R. Nelson The Federal Reserve's quarterly Survey of Terms of Business Lending, which has been conducted for more than twenty years, collects information on interest rates and other characteristics of commercial bank business loans. The survey has been changed from time to time to recognize innovations in bank lending practices and to improve the measurement of the desired information. The most recent changes took effect with the May 1997 survey. The major improvement was the addition of an item measuring loan risk. In addition, the reporting panel, which had been limited to domestically chartered commercial banks was expanded to include a sample of U.S. branches and agencies of foreign banks, which now account for a significant proportion of business lending to U.S. firms. This article discusses the most recent changes made to the survey and presents some information now available from the new items being reported. It also summarizes information about the use of loan risk ratings from consultations conducted with a sample of the survey respondents during the process of planning the revisions to the survey. Full text (70 KB PDF)

July

Open Market Operations during 1997 In 1997 the Trading Desk at the Federal Reserve Bank of New York managed reserve conditions with the objective of maintaining the federal funds rate around the level desired by the Federal Open Market Committee. In 1997 the portfolio of domestic securities in the System Open Market Account expanded by a record $41 billion (excluding all temporary operations), ending the year at $448 billion. Outright purchases of Treasury securities totaled $44 billion, offset to a small degree by redemptions of some Treasury and federal agency issues. The growth in the portfolio during 1997 was significantly higher than the $15 billion increase recorded in the preceding year. The Desk closely observed the behavior of the federal funds rate for any indication that the decline in operating balances associated with the spread of retail sweep programs or any other development was impeding its ability to control the funds rate or contributing to volatility in the rate. Volatility in the federal funds rate did not increase from the previous year, but it remained above the levels that had characterized earlier years. Full text (123 KB PDF)

June

Profits and Balance Sheet Developments at U.S. Commercial Banks in 1997 William B. English and William R. Nelson U.S. commercial banks had another excellent year in 1997. Their return on equity remained in the elevated range that it has occupied for five consecutive years, and their return on assets reached a new high. Banks maintained their profitability while also adding significantly to assets. The year's strong economic growth increased the demand for credit; banks more than met that demand, gaining market share. In addition, banks departed from the pattern of recent years by sharply increasing their holdings of securities. Compared with 1996, banks earned a somewhat lower average rate on their interest-earning assets and paid a bit more on their liabilities, but these developments were more than offset by higher fee income and increased efficiency. Loan losses remained low relative to loans. Full text (175 KB PDF) Treasury and Federal Reserve Foreign Exchange Operations During the first quarter of 1998, the dollar appreciated 2.8 percent against the German mark and 2.2 percent against the Japanese yen. On a trade-weighted basis against Group of Ten currencies, the dollar appreciated 1.9 percent. Although the dollar was little changed on net over the period, other asset prices experienced significant appreciation. Global bond and equity markets reached record highs, and many Asian markets rebounded from earlier weakness. The U.S. monetary authorities did not intervene in the foreign exchange markets during the quarter. Full text (53 KB PDF)

May

International Transactions in 1997 Lois E. Stekler The U.S. current account deficit widened further in 1997, reaching $166 billion. U.S. imports of goods continued to exceed exports by a substantial margin. However, goods trade accounted for only a small part of the deterioration in the current account balance last year. The shift of investment income from positive to negative (the first time since 1914) was the major contributing factor; it reflected the cumulative effect of deficits in the current account that have persisted since 1982 and the balancing net capital inflows. The financial crises in Asia in the second half of 1997 visibly affected U.S. capital flows but influenced the U.S. current account in only a limited way in that year. Their effect on the U.S. current account is likely to be more apparent in 1998. Full text (110 KB PDF)

April

Recent Developments in Home Equity Lending Glenn B. Canner, Thomas A. Durkin, and Charles A. Luckett The equity that has accumulated in homes is one of the largest components of U.S. household wealth. In recent years, many homeowners have borrowed large amounts against that equity, frequently to finance new consumption expenditures or pay down outstanding consumer debt. In view of the growing importance of home equity credit in household finances, the Federal Reserve has for a number of years participated in nationwide surveys of the use of home equity loans. This article presents findings from a 1997 survey and from other sources of information on home equity lending. Full text (63 KB PDF)

March

Monetary Policy Report to the Congress   The U.S. economy turned in another excellent performance in 1997. Growth was strong, the unemployment rate declined to its lowest level in nearly a quarter-century, and inflation slowed further. Impressive gains were also made in other important respects: The federal budget moved toward balance, capital investment rose sharply further, and labor productivity displayed notable vigor. Although economic problems in Asia are adding uncertainty to the outlook, the members of the Board of Governors and the Reserve Bank presidents think that the most likely outcome for 1998 will be one of moderate growth, low unemployment, and low inflation. Full text (101 KB PDF) Treasury and Federal Reserve Foreign Exchange Operations Over the fourth quarter of 1997, a period marked by dramatic developments in Asia, the dollar appreciated 8.3 percent against the Japanese yen and 2.2 percent against the German mark. On a trade-weighted basis against other Group of Ten currencies, the dollar appreciated 2.7 percent. The U.S. monetary authorities did not intervene in the foreign exchange markets during the quarter. Full text (48 KB PDF)

February

Industrial Production and Capacity Utilization: Annual Revision and 1997 Developments Richard Raddock In December 1997, the Board of Governors published the results of an annual revision of its measures of industrial production and capacity utilization, which cover the nation's manufacturing, mining, and electric and gas utilities industries. The revision entailed primarily the incorporation of new and more comprehensive source data, the most important of which were annual figures on industry real output in 1995 and survey information on industry utilization rates for the fourth quarters of 1995 and 1996. The revised measures show stronger growth of production and capacity and lower rates of capacity utilization since 1992 than did earlier estimates. The revised production indexes and the new source data on utilization rates implied that manufacturing capacity growth was stronger than previously estimated. Full text (95 KB PDF)

January

New Information on Lending to Small Businesses and Small Farms: The 1996 CRA Data Raphael W. Bostic and Glenn B. Canner As a consequence of recent revisions to the regulations that implement the Community Reinvestment Act (CRA), new information is now publicly available on the geographic distribution of small loans to businesses and farms and on community development lending. Because small businesses and small farms are more likely than larger ones to borrow small amounts, the CRA data on small loans are likely to provide a reasonable measure of the extension of credit to such businesses. Thus, the CRA data provide new opportunities to gauge the flow of credit to communities with differing economic and demographic characteristics. This article presents an initial assessment of the new CRA data on originations and purchases of small business and small farm loans during 1996. The focus of the analysis is on the broad patterns that emerge when the data are reviewed from a national perspective rather than on the lending activities of any individual institution. Full text (106 KB PDF)

Articles from the Federal Reserve Board