November

The Role of Specialized Lenders in Extending Mortgages to Lower-Income and Minority Homebuyers Glenn B. Canner, Wayne Passmore, and Elizabeth Laderman Home-purchase lending to lower-income and minority households and neighborhoods has expanded significantly and at a faster rate than lending to other borrowers in recent years. Over the same period, however, an increasing proportion of applicants for conventional home-purchase mortgages, including lower-income and minority applicants, have had their applications denied. The first trend often has been taken as evidence that lenders' efforts to expand credit availability have been successful, whereas the second trend has contributed to concerns about access to credit and the fairness of the lending process. An important but little-recognized force behind the shift of credit toward lower-income and minority borrowers has been a rapid expansion of activity by subprime and manufactured-home lenders, lenders who are oriented toward lower-income and minority households. Using data collected under the Home Mortgage Disclosure Act (HMDA) from 1993 to 1998, this article finds that part of the growth in mortgage lending and most of the increase in denial rates are associated with the substantial and growing share of mortgage activity of institutions that specialize in subprime and manufactured-home lending. Full text (82 KB PDF)

October

The Launch of the Euro Carol C. Bertaut and Murat F. Iyigun The introduction on January 1, 1999, of the euro--the single currency adopted by eleven of the fifteen countries of the European Union--marked the beginning of the final stage of Economic and Monetary Union and the start of a new era in Europe. The creation of a single currency and a single monetary policy has provided both extraordinary challenges and exceptional opportunities within Europe. This article reviews the organization, objectives, and targets of the euro area's new central bank and discusses some of the early challenges it has faced in setting and implementing monetary policy with the new common currency. It discusses the initial functioning of the payment system and the interbank market and reviews the effects to date of the single currency on European bond and equity markets, on the banking system, and in euro-area transactions. Full text (77 KB PDF)

September

International Activities of U.S. Banks and in U.S. Banking Markets James V. Houpt The international activity of U.S. banks has grown relatively rapidly during the 1990s, as both the trading and derivatives activities of their foreign offices and their cross-border lending have increased. The growth has taken place mainly in relation to the Group of Ten and other industrial countries. Foreign bank activity in U.S. markets has also grown, but at a slightly slower pace than U.S. banking overall, resulting in a small decline in the foreign bank share of domestic commercial bank assets. The role of Japanese banks has declined sharply, and the role of European banks has expanded. Full text (92 KB PDF) Treasury and Federal Reserve Foreign Exchange Operations During the second quarter of 1999, the dollar appreciated 4.0 percent against the euro and was largely unchanged against the yen. Movements in the major currency pairs were influenced by shifts in growth outlooks for the United States, Japan, and Europe. The dollar benefited from the continued robust expansion of the U.S. economy, while the yen strengthened as prospects emerged for an economic recovery in Japan. The dollar received some support against the euro during much of the quarter from a widening differential between U.S. and European interest rates. Yield differentials, however, narrowed sharply toward the end of the quarter, helping to slow the rate of decline of the euro's exchange value. The U.S. monetary authorities did not intervene in the foreign exchange markets during the quarter. Full text (32 KB PDF)

August

Monetary Policy Report to the Congress The U.S. economy has continued to perform well in 1999. The ongoing economic expansion has moved into a near-record ninth year, with real output expanding vigorously, the unemployment rate hovering around lows last seen in 1970, and the underlying trends in inflation remaining subdued. Productivity-enhancing investments by businesses, spurred by the availability of new technologies at increasingly attractive prices, have held down the rise in costs and prices and have boosted living standards. Two of the major threats faced by the economy in late 1998--economic downturns in many foreign nations and turmoil in financial markets around the world--receded over the first half of this year. The Federal Open Market Committee was concerned that as economic activity abroad strengthened, the firming of commodity and other prices might foster a less favorable inflation environment. To gain some greater assurance that the good inflation performance of the economy would continue, the Committee decided at its June meeting to reverse a portion of the easing undertaken last fall, when global financial markets were disrupted, by raising its target for the overnight federal funds rate from 4¾ percent to 5 percent. Full text (198 KB PDF)

July

Banking Relationships of Lower-Income Families and the Governmental Trend toward Electronic Payment Jeanne M. Hogarth and Kevin H. O'Donnell In the past three years, the federal government and many states have lowered their costs of administering welfare and benefits programs by expanding the use of electronic payment. These initiatives promise to have their greatest significance, and meet their greatest challenge, among lower-income families, the demographic group with the lowest rate of bank account ownership and the least familiarity with electronic transactions. Although the payment programs do not require a banking relationship, the move to electronic transfer may change the financial practices of many recipients without a deposit account or with no banking relationship at all. For example, they may continue to obtain cash from check cashing outlets and grocery stores, but the attraction of a bank account may become heightened by a federal plan to make special accounts available at depository institutions primarily for the electronic transfer of federal payments. Moreover, the greater use of the banking system by lower-income families could harmonize with the emphasis that welfare reform has placed on asset-building, a goal that may be harder to achieve without the use of a bank account. This article examines the ways in which lower-income families obtain checking and credit services, the effects that the government move to electronic payment may have on these families and on depository institutions, and the promotional and educational efforts that may be needed to facilitate the move of the unbanked to electronic services. Full text

June

Profits and Balance Sheet Developments at U.S. Commercial Banks in 1998 Antulio N. Bomfim and William R. Nelson The performance of the U.S. commercial banking industry remained strong in 1998, but slipped a bit from the remarkable results of recent years. Both the return on assets and the return on equity edged down last year, although they remained high by historical standards. While supported by growth in fee income, profitability was damped by a large decline in the rates banks earned on their interest-bearing assets relative to the rates they paid on their liabilities, and also by higher noninterest costs, especially merger and restructuring expenses. Profitability was uneven last year across bank sizes: Whereas the largest and the smallest banks posted lower earnings, the profits of medium-sized banks--which account for almost two-thirds of industry assets--improved once again in 1998. Nevertheless, though these figures attest to the profitability of most banks, the share of bank assets at unprofitable institutions increased 2 percentage points, to 2.6 percent, the highest since 1994. Full text (104 KB PDF) Treasury and Federal Reserve Foreign Exchange Operations During the first quarter of 1999, the dollar appreciated 8.4 percent against the euro and 5.3 percent against the yen. The dollar's value was largely influenced by changes in market expectations for economic growth in the United States, Europe, and Japan. Against the euro, the dollar strengthened as the differential between U.S. and European interest rates moved increasingly in favor of the dollar. Against the yen, the dollar fell to a two-and-a-half-year low and then rebounded after the Bank of Japan reportedly intervened to counter yen appreciation and subsequently guided overnight interest rates to near zero. The U.S. monetary authorities did not intervene in the foreign exchange markets during the quarter. Full text (104 KB PDF)

May

U.S. International Transactions in 1998 Kathryn A. Morisse U.S. external deficits widened substantially in 1998 because of the disparity between the rapid pace of U.S. economic growth and sluggish growth abroad and also because of the decline in the price competitiveness of U.S. goods associated with the appreciation of the dollar. The nominal current account deficit reached $233 billion in 1998, compared with $155 billion in 1997; the 1998 deficit was 2.7 percent of U.S. gross domestic product, the largest share since 1987. Most of the widening in the deficit was in trade in goods and services. The financial crises in Asia that emerged in the second half of 1997 caused U.S. exports to drop sharply in the first half of 1998. Robust U.S. domestic demand was largely responsible for the brisk rise in imports during the year. Net investment income was negative in 1998 for the second consecutive year. Cumulative deficits in the current account, and the associated capital inflows that have persisted since 1982, have resulted in payments of income on foreign investment in the United States growing more rapidly than receipts of income on U.S. investments abroad. The fallout from the financial crises in emerging markets is likely to have further negative consequences for U.S. external balances in 1999. Full text (104 KB PDF)

April

Highlights of Domestic Open Market Operations during 1998 The Trading Desk at the Federal Reserve Bank of New York uses open market operations to implement the policy directives of the Federal Open Market Committee (FOMC). The FOMC expresses its short-term objective for open market operations as a target level for the federal funds rate--the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions. To keep the federal funds rate near the level specified by the FOMC, the Desk uses open market operations to bring the supply of balances at the Federal Reserve into line with the demand for them. In 1998, the level of balances that depository institutions were required to hold at the Federal Reserve continued to decline, to historic lows. The primary reason for this was the ongoing proliferation of retail "sweep" programs, which transfer depositors' funds from transaction accounts that are subject to reserve requirements into other deposit accounts that are not. In past years, declines in required balances had been associated with greater volatility in the federal funds rate because depository institutions have less flexibility in managing their daily balance positions. However, through the first three quarters of 1998, the funds rate behaved much as it had in 1997, even though required balances were lower. In the final quarter of 1998, funds rate volatility rose when market participants evinced greater concerns about the credit quality of their counterparties at a time of increased uncertainty in financial markets. Full text (154 KB PDF)

March

Monetary Policy Report to the Congress The U.S. economy performed impressively again in 1998. Output expanded rapidly, the unemployment rate fell to the lowest level since 1970, and inflation remained subdued. Monetary policy during the year balanced two major risks to the expansion. On the one hand, with the domestic economy displaying considerable momentum and labor markets tight, there was concern about the possible emergence of imbalances that would lead to higher inflation and would eventually put the sustainability of the expansion at risk. On the other hand, troubles in many foreign economies and the resulting financial turmoil at home and abroad seemed at times to raise the risk of an excessive weakening of aggregate demand. The members of the Board of Governors and the Federal Reserve Bank presidents expect the economy to expand moderately, on average, in 1999. With labor market tightness expected to persist and oil and import prices unlikely to be as weak as they were in 1998, inflation is expected to move up somewhat but to remain low by the standards of the past three decades. Full text (255 KB PDF) Treasury and Federal Reserve Foreign Exchange Operations During the fourth quarter of 1998, the dollar depreciated 17.4 percent against the Japanese yen and was virtually unchanged against the German mark. The U.S. monetary authorities did not intervene in the foreign exchange markets during the quarter. Full text (38 KB PDF)

February

Trends in Home Purchase Lending: Consolidation and the Community Reinvestment Act Robert B. Avery, Raphael W. Bostic, Paul S. Calem, and Glenn B. Canner Consolidation among banking institutions has substantially changed the structure of the banking industry. Between 1975 and 1997, the number of commercial banks and savings associations declined more than 40 percent. Over the same broad period, the market for home mortgage lending has also changed substantially. Notably, home mortgage lending is no longer primarily the province of banking institutions operating in the communities in which they have banking offices. In recent decades, mortgage and finance companies and banking organizations operating outside their local communities have gained a significant share of the mortgage market. These changes have fueled debate regarding their effects on the provision of home mortgage loans. One particular concern is that, as a consequence of these changes, lower-income and minority borrowers and borrowers in lower-income and minority neighborhoods may face reduced access to mortgage credit. This article examines the relationship between consolidation among banking organizations in local markets and changes in home purchase lending over the 1993-97 period, both in terms of total lending and lending to lower-income and minority borrowers and neighborhoods. Because credit availability is believed to be essential to the economic health and vitality of neighborhoods, the article also examines the relationship between consolidation and changes in home purchase lending by institutions in those areas where they have responsibilities under the Community Reinvestment Act. Full text (115 KB PDF)

January

Aggregate Disturbances, Monetary Policy, and the Macroeconomy: The FRB/US Perspective David Reifschneider, Robert Tetlow, and John Williams The FRB/US macroeconometric model of the U.S. economy was created at the Federal Reserve Board for use in policy analysis and forecasting. This article begins with an examination of the model's characterization of the monetary transmission mechanism -- the chain of relationships describing how monetary policy actions influence financial markets and, in turn, output and inflation. The quantitative nature of this mechanism is illustrated by estimates of the effect of movements in interest rates and other factors on spending in different sectors and by simulations of the effect of a change in the stance of policy on the economy as a whole. After the discussion of the transmission mechanism, the article considers the influence of monetary policy on the macroeconomic consequences of specific events by showing how the predicted effects of selected disturbances change under alternative policy responses. These examples illustrate an important policy tradeoff in the FRB/US model involving the variability (but not the level) of output and inflation: Past some point, lower variability in inflation can be obtained only at the expense of greater fluctuations in output and interest rates. Full text (108 KB PDF) Industrial Production and Capacity Utilization: 1998 Annual Revision Charles Gilbert and Richard Raddock In late 1998, the Federal Reserve published the results of an annual revision of its measures of industrial production, capacity, and capacity utilization, which cover the nation's manufacturing, mining, and electric and gas utilities industries. The revision involved both the incorporation of newly available and more comprehensive source data and, for some series, the introduction of modified methods for compiling the series. The revised figures show stronger growth of both production and capacity since 1996; however, the overall capacity utilization rate was little changed from the previous data. Full text (82 KB PDF)

Articles from the Federal Reserve Bulletin