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Monetary Policy Report to the Congress
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2004 Background on FOMC Meeting Minutes Trends in the Use of Payment Instruments in the United States Community Banks and Rural Development: Research Relating to Proposals to Revise the Regulations That Implement the Community Reinvestment Act Report on the Condition of the U.S. Banking Industry: Fourth Quarter, 2004 Announcements Legal Developments
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Spring |
Monetary Policy Report to the Congress
The year 2004 was marked by continued expansion in economic activity and appreciable gains in employment. With fiscal policy stimulative, monetary policy accommodative, and financial conditions favorable, household spending remained buoyant and businesses increased investment in capital equipment and inventories, despite the restraint imposed by sizable increases in oil prices. Labor market conditions improved significantly, albeit at an uneven pace, and productivity rose notably further. Consumer price inflation moved higher with the surge in energy prices, but core consumer price inflation (that is, excluding food and energy) remained well contained, and measures of expected inflation over longer horizons held steady or edged lower. Although economic activity had increased substantially in 2003, the expansion nevertheless appeared somewhat tentative as 2004 opened, in large measure because businesses still seemed to be reluctant to boost hiring. Over the course of the spring, however, it became clearer that the expansion was solidifying. With slack in labor and product markets somewhat diminished, the Federal Open Market Committee at its June meeting began to reduce the substantial degree of monetary accommodation that was in place. The gradual removal of monetary policy stimulus continued in the second half of the year as the economy expanded at a healthy clip on balance. The fundamental factors underlying the continued strength of the economy last year should carry forward into 2005 and 2006, promoting both healthy expansion of activity and low inflation. Full text (266 KB PDF) Elizabeth C. Klee and Fabio M. Natalucci U.S. commercial banks continued to be highly profitable in 2004. Return on assets and return on equity declined moderately, but the economy's continued expansion and supportive financial conditions helped keep bank profits in the elevated range that has prevailed since the mid-1990s. Profits were trimmed a bit by a narrowing of banks' net interest margins as the yield curve flattened and competition put pressure on loan spreads. In addition, gains in non-interest income were less pronounced than in 2003, and non-interest expenses increased. However, the continued improvement in the overall credit quality of business and household loans allowed banks to reduce their provisioning for loan and lease losses, and delinquency and charge-off rates for all loan categories trended down. Bank balance sheets also expanded. A robust housing sector and generally low interest rates supported residential mortgage lending, and increases in demand along with an easing of lending standards and terms throughout the year boosted commercial and industrial loans. Banks also reported easing their standards and terms on commercial real estate loans, and such loans increased despite soft conditions in some markets. Still-low interest rates supported the continued growth of core deposits, but the greater rise in bank assets required banks to rely more heavily on managed liabilities, which rose strongly last year. Full text (217 KB PDF) Deborah J. Danker and Matthew M. Luecke On December 14, 2004, the Federal Open Market Committee (FOMC) decided to move up the publication of its minutes to three weeks after the end of each meeting. That action has cut in half the average time between the meeting and publication of the minutes. It has also apparently heightened public attention to the FOMC minutes. To give additional context to the Committee's decision, this article outlines previous changes to the release schedule for the minutes and provides a brief overview of the content of the minutes and the way they are now produced. Full text (56 KB PDF) Geoffrey R. Gerdes, Jack K. Walton II, May X. Liu, and Darrel W. Parke In 2003, for the first time, the number of electronic payments in the United States exceeded the number of check payments--a result of substantial growth in electronic payments (especially by debit card) and a decline in check payments. The shift toward electronic payments suggests that, as with other large economies, many payments formerly made by check are now being made with electronic payment instruments. As in past years, however, the value of checks far exceeded the value of commonly used electronic payments. Comparisons among groups of depository institutions of different types and sizes suggest that the distribution of payments of different types is linked in part to the types of customers those institutions tend to serve. For example, at credit unions, which generally serve individuals rather than businesses, checks accounted for a smaller proportion of account debits, and debit card payments and ATM withdrawals accounted for a larger proportion, than at institutions of other types. Overall, "on us" check payments, those for which the payer and payee used the same institution, declined slightly. The rate at which checks are returned also declined, while the rate of returned ACH payments--almost twice that of checks--increased, in part because of new types of ACH payments, including ACH transactions initiated with a check. Data gathered in 2004 also reveal some differences among geographic regions. Debit card use was substantially greater, and check use substantially lower, in the West than in other regions. In contrast, debit card use was considerably less common in the Northeast, and the decline in check payments since 2000 was less pronounced in that region. Indirect evidence--data on ATM withdrawals and cash back from debit card payments--suggests that cash remains a popular means of making payments. Industry data showing increases in ATMs and ATM transactions appear to reflect a shift toward greater use of ATMs and less use of checks to obtain cash, and do not necessarily indicate an increase in the use of cash. Full text (149 KB PDF) Robert B. Avery, Glenn B. Canner, Shannon C.Mok, and Dan S. Sokolov Since 1977, the Community Reinvestment Act (CRA) has required that federally insured banking institutions be evaluated on their records of helping to meet the credit needs of their local communities. In 1995, the agencies responsible for bank supervision substantially revised the regulations that implement the CRA. The revisions were intended to emphasize performance rather than process, to reduce unnecessary regulatory burden, and to increase consistency in CRA evaluations. Since 1995, "large" institutions, generally those with assets of $250 million or more, have been evaluated under a three-part test, whereas "small" institutions, generally those with assets of less than $250 million, have been subject to comparatively streamlined evaluations. In 2004 and 2005, the agencies put forth several proposals to extend the eligibility for streamlined examinations and an exemption from data reporting to more institutions by raising the asset-size threshold from $250 million to $500 million or $1 billion. A related issue that the agencies raised was how to define which bank activities in rural areas should be considered community development in CRA evaluations. In this article, the authors, having evaluated data to gain insight into the potential effects of these proposals, report the findings of their research. Full text (56 KB PDF) Assets of reporting bank holding companies rose $393.2 billion (or 4.0 percent), exceeding $10.0 trillion for the first time. Loans, which accounted for roughly half the increase, rose 3.5 percent, led by the commercial real estate, home equity, and credit card categories. Nearly all the growth occurred at the fifty large institutions. The increase of 4.7 percent in securities and money market assets was largely attributable to the addition of a single large foreign-owned securities-oriented firm with significant portfolios of trading and short-term money market assets. Deposits increased 3.7 percent, while nondeposit borrowings increased 2.5 percent; the latter influenced by the addition of the large securities-oriented bank holding company. Net income declined 1.4 percent from the previous quarter despite the increases in loans and other interest-earning assets, in part because a flatter yield curve and heightened competitive pressure in loan pricing eroded net interest margins. Provisions for loan losses declined 2 percent as nonperforming assets fell to 0.82 percent of loans and related assets. For 2004, net income of reporting bank holding companies increased 5.1 percent over 2003. Full text (53 KB PDF) Press releases and Board staff changes for the previous quarter. Full text (101 KB PDF) Various bank holding company, bank service corporation, and bank merger orders. Full text (273 KB PDF) |
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