2001 Articles from the Federal Reserve Bulletin
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Articles from the Federal Reserve Bulletin - 2001
Treasury and Federal Reserve Foreign Exchange Operations
Dino Kos
During the third quarter of 2001, the dollar depreciated 7.3 percent against the euro and 4.1 percent against the yen. On a trade-weighted basis, the dollar ended the quarter 2.6 percent lower. Economic data released even before the terrorist attacks on September 11 suggested that the U.S. economic slowdown would likely be more protracted than previously expected, which generally weighed on the dollar. The attacks heightened pre-existing concerns about the weakness of the U.S. economy and lent further momentum to the general trends that prevailed earlier in the quarter. The U.S. monetary authorities did not intervene in the foreign exchange markets during the quarter.
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The Economic Performance of Small Banks, 1985-2000
William F. Bassett and Thomas F. Brady
Several trends in the financial industry over the past decade and a half have potentially threatened the competitiveness of small banks. Among these developments are the numerous mergers that increased the size and scope of large banks and the increased competition from mutual funds and other nonbank financial institutions. This article examines the economic performance of small banks during the 1985-2000 period by focusing on their ability to attract and profitably intermediate insured and uninsured deposits. It finds that the expansion of deposits and assets at small banks, when adjusted to account for the effects of mergers on measured growth, has consistently exceeded the growth at large banks. Moreover, the profitability of small banks has risen to high levels over the period. These indications of strength among small banks as a whole also hold true for subgroups within the small bank sector. Aside from their success in attracting deposits, the key reasons for the generally good performance of small banks in recent years appear to be their ability to earn relatively high rates of return on their loans and an increase in the share of their portfolios devoted to loans.
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The U.S. System for Measuring Cross-Border Investment in Securities: A Primer with a Discussion of Recent Developments
William L. Griever, Gary A. Lee, and Francis E. Warnock
The tremendous growth in cross-border securities investment in recent years has called attention to the systems used by the United States and other countries to measure international securities flows and holdings. Ideally, the data gathered by the United States could tell us the extent to which foreign investors hold U.S. securities, the types of securities held, and the countries in which the securities are held, for example, and could identify trends in investment. This article looks at how well the data shed light on these topics. Special attention is given to the system's design and the implications of the design for data analysis. Also discussed are anticipated changes to the system and international efforts to improve data collection systems worldwide.
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Opportunities and Challenges of the U.S. Dollar as an Increasingly Global Currency: A Federal Reserve Perspective
Michael J. Lambert and Kristin D. Stanton
The rapid growth of demand for U.S. currency over the past two decades, especially the proportion estimated to be held abroad, has posed challenges for the Federal Reserve in meeting its congressionally mandated responsibilities for currency availability and distribution. Those challenges lie in making certain that the Bureau of Engraving and Printing (BEP) prints adequate amounts of currency; that overseas distribution channels have sufficient capacity to distribute U.S. currency when and where it is needed; and that the integrity of U.S. currency is maintained by monitoring counterfeiting activity. In the process of meeting these challenges, the Federal Reserve has improved its methods of forecasting demand for U.S. currency, expanded currency distribution channels, and worked with the BEP and the U.S. Secret Service to protect against counterfeiting threats.

This article gives an overview of the evolution of the Federal Reserve's responsibilities for U.S. currency, particularly in relation to the increase in foreign demand over the past two decades, and also discusses work on counterfeit deterrence.
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Treasury and Federal Reserve Foreign Exchange Operations
Krista Schwarz
During the second quarter of 2001, the dollar appreciated 3.3 percent against the euro and depreciated 1.2 percent against the yen. On a trade-weighted basis, the dollar ended the quarter nearly unchanged against the currencies of the United States' major trading partners. Over the quarter, market perceptions that the U.S. economy would emerge from its downturn sooner than the euro area provided underlying support for the dollar. The U.S. monetary authorities did not intervene in the foreign exchange markets during the quarter.
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Monetary Policy Report to the Congress
The weakness in the economy that emerged late last year has become more persistent and widespread. In response, the FOMC has lowered the target federal funds rate six times this year, for a cumulative total reduction of 2-3/4 percentage points. A number of factors account for this unusually steep reduction in the federal funds rate, including the magnitude and rapidity of the slowdown and the need to offset a stronger dollar and lower equity prices. At midyear the information available for the recent performance of both the U.S. economy and some of our key trading partners remains somewhat downbeat, on balance. Nonetheless, a number of factors are in place that should set the stage for stronger growth later this year and in 2002. Moreover, the outlook for productivity growth over the longer run remains favorable.
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The U.S. Flow of Funds Accounts and Their Uses
Albert M. Teplin
The U.S. flow of funds accounts compiled by the Board of Governors provide a broadly consistent set of time-series data for tracking funds as they move from economic sectors that serve as sources of capital to sectors that use the capital to acquire physical and financial assets. They present a wide range of data organized by financial instrument and by sector. With statistics extending back more than a half a century, the accounts document financial developments, provide means for studying macroeconomic behavior, and are used for policy purposes. This article briefly describes the accounts and shows how the data can be used to interpret major financial trends among households and nonfinancial corporate businesses.
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Profits and Balance Sheet Developments at U.S. Commercial Banks in 2000
William F. Bassett and Egon Zakrajsek
The profitability of the U.S. commercial banking industry remained robust in 2000, but returns on equity and on commercial bank assets fell back somewhat from the peak reached in 1999. The falloff reflected a continuation of the decline in net interest margin that dates from the extraordinarily high levels of the early 1990s, a significant increase in loan-loss provisions, and a notable slowing in noninterest income growth. The expansion of bank balance sheets was much stronger in 2000 than in the preceding year, as growth of both loans and securities accelerated. The pickup in loan growth resulted mainly from a marked decline in securitizations, which boosted the growth of consumer loans in bank portfolios, and from business and real estate lending. The faster growth of securities was due to a surge in trading accounts, as runoffs of U.S. Treasury securities damped the growth of investment accounts.
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Treasury and Federal Reserve Foreign Exchange Operations
During the first quarter of 2001, the dollar appreciated 7.3 percent against the euro and 10.3 percent against the yen in an atmosphere of increased market uncertainty about the extent and duration of global economic slowing. On a trade-weighted basis, the dollar ended the quarter 7.4 percent stronger against an index of major currencies. The U.S. monetary authorities did not intervene in the foreign exchange markets during the quarter.
Full text (49 KB PDF)

U.S. International Transactions in 2000
Joseph E. Gagnon
The U.S. current account deficit widened to $435 billion in 2000, a record 4.4 percent of gross domestic product, as the lagged effect of strong growth in the U.S. economy in late 1999 and early 2000 continued to drive up imports of goods and services faster than exports increased. To a lesser extent, a decline in U.S. price competitiveness also contributed to the expansion in the deficit. The $104 billion increase in the current account deficit was entirely accounted for by an equal-sized increase in the goods and services deficit. Other components of the current account moved in small and offsetting directions.

The current account deficit represents an excess of U.S. investment over U.S. saving of more than $400 billion. In addition, almost $300 billion of U.S. saving flowed abroad in the form of a continued increase in foreign direct and portfolio investment by U.S. residents. To finance the current account deficit and the capital outflow, the foreign private sector purchased a record amount--more than $700 billion--of U.S. securities and direct investment assets. The sharp slowdown in U.S. economic growth in late 2000 and early 2001 should reduce the rate of increase of the current account deficit in 2001 through a slowing of the rate of growth of goods and services imports.
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Financial Services Used by Small Businesses: Evidence from the 1998 Survey of Small Business Finances
Marianne P. Bitler, Alicia M. Robb, and John D. Wolken
Using newly available data from the 1998 Survey of Small Business Finances, this article offers preliminary findings regarding the characteristics of small businesses in the United States and their use of credit and other financial services. The main goals of the survey are to provide information on credit accessibility for small businesses, their use of financial services, and the sources of those services. The survey also provides a general-purpose database that can be used to study small business financing. Preliminary findings suggest that although the financial landscape has changed markedly since the previous survey in 1993, financing patterns and the use of particular suppliers have not.
Full text (136 KB PDF)

Monetary Policy Report to the Congress
When the Federal Reserve submitted its previous Monetary Policy Report to the Congress, in July 2000, tentative signs of a moderation in the growth of economic activity were emerging after several quarters of extraordinarily rapid expansion. Indications that the expansion had moderated from its earlier rapid pace gradually accumulated during the summer and into the autumn. For a time, this downshifting of growth seemed to have left the economy expanding at a pace roughly in line with that of its potential.

Over the last few months of the year, however, growth slowed even more, although the dimensions of the slowdown were obscured for a time by the usual lags in the receipt of economic data. Spending on business capital, which had been rising rapidly for several years, flattened abruptly in the fourth quarter. Consumers clamped down on their outlays for motor vehicles and other durables, the stocks of which also had climbed to high levels. Manufacturers adjusted production quickly to counter a buildup in inventories. Rising concern about slower growth and worker layoffs contributed to a sharp deterioration of consumer confidence. In response to the accumulating weakness, the Federal Open Market Committee (FOMC) lowered the intended interest rate on federal funds 1/2 percentage point on January 3 of this year. The FOMC lowered the rate again, by the same amount, at its meeting on January 31.

The less restrictive conditions in financial markets, and the underlying strengths of the economy, should lead to a rebound in economic growth. The most notable of the underlying strengths is the remarkable step-up in the growth of structural productivity since the mid-1990s, which seems to be closely related to the spread of new technologies. The impressive performance of productivity and the accompanying environment of low and stable underlying inflation suggest that the longer-run outlook for the economy is still quite favorable, even though downside risks may remain prominent in the period immediately ahead.
Full text (263 KB PDF)

Industrial Production and Capacity Utilization: The 2000 Annual Revision
Carol Corrado
In late 2000, the Federal Reserve Board published the annual revision of its index of industrial production and related measures of capacity and utilization for the period January 1992 through October 2000. The updated measures reflect the incorporation of newly available, more comprehensive source data, the introduction of new production series, and changes in methods. For this revision, two new years of comprehensive data on manufacturing output became available; otherwise, the updating of the data was typical of annual revisions.

Total industrial output has increased, on average, 5.1 percent per year since 1995, and industrial capacity has expanded 5.4 percent per year; these revised rates of increase are more rapid than those previously reported. The rate of industrial capacity utilization was little changed by the revision for the third quarter of 2000 but was revised up 0.6 percentage point, to 81.6 percent, for the fourth quarter of 1999.
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Treasury and Federal Reserve Foreign Exchange Operations
During the fourth quarter of 2000, the dollar appreciated 5.7 percent against the yen and depreciated 6.4 percent against the euro. On a trade-weighted basis, the dollar ended the quarter 1.0 percent weaker against an index of major currencies. U.S. monetary authorities did not intervene in the foreign exchange markets during the quarter.
Full text (42 KB PDF)

Supervision of Large Complex Banking Organizations
Lisa M. DeFerrari and David E. Palmer
The long-term trends of consolidation and innovation in the U.S. banking system have intensified over the past decade. A small number of banking organizations now hold a larger portion of the banking system's assets, and, at the same time, their activities have become more complex. As a result, the Federal Reserve has altered its approach to the supervision of the largest, most complex banking organizations (LCBOs). This new approach focuses on the most important risks facing U.S. banking organizations and the ways in which these risks are managed. This article discusses the Federal Reserve's risk-focused supervision program as applied to LCBOs.
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Retail Fees of Depository Institutions, 1994-99
Timothy H. Hannan
Under legislative mandate, the Federal Reserve Board has for many years sponsored annual surveys of the retail fees charged by depository institutions. Analysis of the data for the most recent six years (1994-99) shows that for the most common types of depository accounts surveyed, few of the fees and minimum balances changed by a statistically significant amount. However, the most common types of ATM fees and the fees for certain special actions, such as stop-payment orders, increased significantly and by more than the rate of consumer price inflation over the period. In addition, for almost all of the fees charged for seven common services and special actions, banks that were part of multistate banking organizations on average charged significantly higher fees than single-state banks, and large banks charged significantly more than small banks. Although they narrowed, the differences remained statistically significant after analyses that controlled for the general location of the institutions, for size (in the case of the multistate versus single-state comparison), and for multistate operations (in the case of the large versus small comparison).
Full text (117 KB PDF)

Articles from the Federal Reserve Bulletin

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Last update: January 8, 2003