Announcements.

FEDERAL OPEN MARKET COMMITTEE DIRECTIVE AND A DECREASE IN THE DISCOUNT RATE

The Federal Open Market Committee at its meeting on May 15, 2001, decided to lower its target for the federal funds rate by 50 basis points to 4 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 3 1/2 percent.

A significant reduction in excess inventories seems well advanced. Consumption and housing expenditures have held up reasonably well, though activity in these areas has flattened recently. Investment in capital equipment, however, has continued to decline. The erosion in current and prospective profitability, in combination with considerable uncertainty about the business outlook, seems likely to hold down capital spending going forward. This potential restraint, together with the possible effects of earlier reductions in equity wealth on consumption and the risk of slower growth abroad, continues to weigh on the economy.

With pressures on labor and product markets easing, inflation is expected to remain contained. Although measured productivity growth stalled in the first quarter, the impressive underlying rate of increase that developed in recent years appears to be largely intact, supporting longer-term prospects.

The Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.

In taking the discount rate action, the Federal Reserve Board approved requests submitted by the boards of directors of the Federal Reserve Banks of New York, Richmond, Chicago, and San Francisco, effective immediately, and of the Bank of St. Louis, effective May 16, 2001.

In addition, the Board approved on May 16, 2001, similar requests by the boards of directors of the Federal Reserve Banks of Boston, Atlanta, Kansas City, and Dallas, effective immediately. On May 17, 2001, the Board approved the requests submitted by the boards of directors of the Federal Reserve Banks of Philadelphia, Cleveland, and Minneapolis.

GOVERNOR KELLEY ANNOUNCES INTENTION TO RESIGN

The Federal Reserve Board released on June 4, 2001, the following statement from Governor Edward W. Kelley, Jr., announcing his plans to resign from the Board after at least one of the current vacancies is filled:

After fourteen highly rewarding years of service on the Board of Governors of the Federal Reserve System, I want to focus on family and other interests. I intend to resign, but I will remain at the Board for as long as necessary to accommodate the need for a minimum of five active members. I am announcing my plans now to provide substantial notice to my colleagues and the Administration and to facilitate scheduling the work of the Board over the period ahead.

It has been a great privilege to be a part of the Federal Reserve System, an institution for which I have the most profound respect. I look forward to working in the coming months with my friends on the Board and the staff, and in the Reserve Banks, to accomplish the continuing work of the organization and ensure a smooth transition.

Kelley said he will submit a formal letter of resignation to the President when an additional Governor has been nominated and confirmed and is at work at the Board.

Kelley, 69, was first appointed to the Board by President Reagan, taking office on May 26, 1987. President Bush reappointed him in 1990 to a term that expires on January 31, 2004. The Board of Governors consists of seven members, but it has been operating with two vacancies since July 1999.

STATEMENT BY CHAIRMAN GREENSPAN ON GOVERNOR KELLEY'S ANNOUNCEMENT

Federal Reserve Board Chairman Alan Greenspan released the following statement on June 4, 2001:

Governor Kelley is a man of the highest principle. I will miss his wise counsel. In his fourteen years on the Board, he has given more than sound judgment and hard work; he has given us the gift of his friendship.

2001 SURVEY OF CONSUMER FINANCES TO BEGIN

The Federal Reserve Board announced on May 16, 2001, that it will begin a statistical study of household finances that will provide policymakers with important insight into the economic condition of a broad segment of American families. The Survey of Consumer Finances, undertaken every three years since 1983, is being conducted for the Board by the National Opinion Research Center (NORC) at the University of Chicago through November of this year.

The data collected will provide a representative picture of what Americans own--from houses and cars to stocks and bonds--how and how much they borrow and how they bank. Past study results have been important in policy discussions regarding pension and social security reform, tax policy, deposit insurance reform, and a broad range of other areas.

"Although good overall information on the state of the major sectors of the economy is available regularly, our knowledge about the financial circumstances faced by different types of households is much more limited," Alan Greenspan, Chairman of the Board of Governors of the Federal Reserve System, said in a letter to prospective survey participants. "Our survey is intended to fill a key part of this gap," he said.

The 2001 survey will contain a new question regarding the degree to which saving decisions are affected by the availability of informal financing options, such as borrowing from a friend or relative. Responses to this question will help to identify the contribution that "precautionary savings" make to total savings.

Participants in the study are chosen at random by using a scientific sampling procedure in 100 areas across the United States. A representative of NORC contacts each potential participant personally to explain the project and request time for an interview.

Names and addresses of each participant are confidential. Extraordinary steps are taken to uncouple the identities of the respondents from the information they provide.

"Our data collection systems are designed with extensive safeguards to protect the anonymity of the survey participants," Mr. Greenspan said. "Indeed, neither I nor anyone else at the Federal Reserve is allowed to know the names of the survey participants."

Summary results for 2001 will be published in early 2003 after all data have been assessed and analyzed.

CONSUMER ADVISORY COUNCIL MEETING AND CALL FOR NOMINATIONS

The Federal Reserve Board announced on May 29, 2001, that the Consumer Advisory Council would hold its next meeting on Thursday, June 28, 2001.

The Council's function is to advise the Board on the exercise of its responsibilities under the Consumer Credit Protection Act and on other matters on which the Board seeks its advice.

The Board also announced that it is seeking nominations for appointments to its Consumer Advisory Council. The new members will be appointed to serve three-year terms beginning in January 2002.

Nominations should include a resume and the following information about nominees:

* Complete name, title, address, telephone and fax numbers

* Organization name, brief description of organization, address, and telephone number

* Past and present positions

* Knowledge, interests, or experience related to community reinvestment, consumer protection regulations, consumer credit, or other consumer financial services 

* Positions held in community and banking associations, councils, and boards.

Nominations should also include the complete name, organization name, title, address, and telephone and fax numbers for the nominator.

Letters of nomination with complete information must be received by August 13, 2001, and should be mailed (not sent by facsimile) to Sandra F. Braunstein, Assistant Director, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, Washington, DC 20551.

REQUEST FOR COMMENT ON PROPOSED CHANGES TO PAYMENTS SYSTEM RISK POLICY AND RESCISSION OF INTERAFFILIATE TRANSFER POLICY

The Federal Reserve Board announced on May 30, 2001, that it is requesting comment on a proposed interim policy statement and a package of short- and long-term proposals pertaining to its Payments System Risk (PSR) policy. In addition, the Board is rescinding the interaffiliate transfer policy.

The proposed actions take into account the significant changes that have occurred in the banking, payments, and regulatory environment in recent years and reflect ongoing efforts by the Board to balance the costs, risks, and benefits associated with the provision of Federal Reserve intraday credit.

More specifically, the Board is issuing and requesting comment on an interim policy that allows depository institutions with self-assessed net debit caps to pledge collateral voluntarily to the Federal Reserve Banks to gain access to daylight credit in excess of their net debit caps. The interim policy should provide flexibility to depository institutions in meeting any increased intraday liquidity needs brought about by payment system initiatives. The interim policy is effective immediately, with comments due by August 6, 2001.

The Board is also requesting comment on other potential changes to its PSR policy. In particular, the Board proposes to increase the percentage of capital used in the net debit cap calculation for most U.S. branches and agencies of foreign banks, to modify the posting time of electronic check presentments to depository institutions' Federal Reserve accounts for measuring daylight overdrafts, and to retain the current book-entry securities transfer limit. Comment is requested by August 6, 2001.

In addition, the Board is requesting comment on the benefits and drawbacks to several potential longer-term changes to its PSR policy, including lowering self-assessed net debit caps, eliminating the two-week average caps, implementing differential pricing for collateralized and uncollateralized daylight overdrafts, and rejecting payments with settlement-day finality that would cause an institution to exceed its daylight overdraft capacity level. Comment is requested by October 1, 2001.

Finally, the Board is rescinding its interaffiliate transfer policy, effective January 1, 2002. The Board believes that the risks associated with the interaffiliate transfer policy are appropriately addressed through the existing supervisory process.

REQUEST FOR COMMENT ON REGULATIONS FOR ON-LINE BANKING

The Federal Reserve Board requested on May 16, 2001, public comment on how the Board's regulations may be adapted to on-line banking and lending. Comments are due by August 20, 2001.

Section 729 of the Gramm-Leach-Bliley Act of 1999 requires federal banking regulators to conduct a study of regulations pertaining to the on-line delivery of financial services and to submit a report about adapting existing legislative or regulatory requirements to on-line banking and lending.

The Board is currently reviewing pertinent regulations to assess their suitability for transactions that are conducted through the Internet. The Board plans to consult with other federal banking agencies regarding the report.

The public comment provided will help the Board assess whether any existing regulations should be amended to facilitate on-line banking and how particular statutory provisions affect the on-line delivery of financial products and services.

The Board recently requested comment on five interim rules to establish uniform standards for the electronic delivery of notices to consumers, namely: Regulations B (Equal Credit Opportunity), E (Electronic Fund Transfers), M (Consumer Leasing), Z (Truth in Lending), and DD (Truth in Savings).

Any comments submitted in connection with the review of these regulations will also be considered for the study and report required by section 729 of the Gramm-Leach-Bliley Act.

INTERAGENCY TASK FORCE VIDEO ON PROTECTION AGAINST IDENTITY THEFT

The Federal Reserve Board announced on May 14, 2001, the availability of a new video "Identity Theft: Protect Yourself." The fifteen-minute video explains how easily someone can obtain your personal financial information and unlawfully use that information to obtain credit or other financial information under your name. Included in the video are interviews with identity theft victims, law enforcement officers, and industry representatives. Valuable information on what to do if you become a victim is also provided.

The video was produced by the Federal Reserve Bank of Boston and was developed in conjunction with an interagency identity fraud task force. It is VHS format and available for $7.50. Orders should be sent to the following:

Public and Community Affairs Department Federal Reserve Bank of Boston Attention: Identity Theft Video P.O. Box 2076 Boston, MA 02106-2076.

Checks or money orders should be made payable to the Federal Reserve Bank of Boston and must be sent with the order. For more information, contact the Public and Community Affairs Department of the Federal Reserve Bank of Boston at 1-800-409-1333.

The Board recently announced the issuance of supervisory guidance addressing how banking organizations should protect customer information against identity theft. This release is available on the Board's web site at http://www.federalreserve.gov/boarddocs/ press/general/2001/20010430/default.htm.

PUBLICATION OF THE MAY 2001 UPDATE TO THE COMMERCIAL BANK EXAMINATION MANUAL

The May 2001 update to the Commercial Bank Examination Manual, Supplement No. 14, has been published and is now available. The Manual comprises the Federal Reserve System's state member bank supervisory and examination guidance. The new supplement includes the following:

1. Supervisory Guidance on Limited Investing in Equities and Equity Interests in Nonpublic Companies and Lending to Private-Equity-Financed Companies. The statutory and regulatory authority for these types of limited investments is discussed, along with safety-and-soundness issues on the management of those investments. Sound investment and risk-management practices are identified. Supervisory guidance is provided on implementing and maintaining adequate internal controls and disclosure practices--information that is particularly important for an institution's board of directors, management, and supervisors. See Supervision and Regulation (SR) Letter 00-9 (SUP). (SR letters are the Federal Reserve's primary means of communicating key policy directives to its examiners, supervisory staff, and the banking industry. SR letters can be viewed on the Board's web site: www.federalreserve.gov/boarddocs/srletters.)

2. Supervisory Guidance on "Complex Wholesale Borrowings." The guidance supplements and expands the general existing supervisory guidance on bank funding and borrowing. Funding instruments for complex wholesale borrowing can have embedded options that may significantly increase over time a bank's sensitivity to market and liquidity risks. Maturity mismatches or the embedded options themselves can, in some circumstances, adversely affect a depository institution's financial condition. This guidance collectively calls for an analysis of the purpose, effectiveness, concentration exposure, funding stability, and bank management's understanding of the liquidity and interest rate risks associated with borrowing and funding strategies. Examination objectives and procedures are provided. See SR Letter 01-8 (SUP).

3. Gramm-Leach-Bliley Act Changes That Pertain to Bank-Related Organizations. The changes include regulatory and supervisory guidance with regard to the ownership and control of financial subsidiaries, financial holding companies (FHCs), and operating subsidiaries of state member banks. The approval requirements and permissible activities are discussed, as applicable, as well as any limitations on transactions with affiliates (sections 23A and 23B of the Federal Reserve Act). The Federal Reserve's supervisory role as the umbrella supervisor for FHCs is also discussed.

4. FFIEC Interagency Policy Statement on the Risk Management of Outsourced Technology Services. The guidance focuses on the risk-management process of identifying, measuring, monitoring, and controlling the risks associated with outsourcing technology services. It includes four key supervisory elements to address those risks: risk assessment, service-provider selection, contract provisions and review, and ongoing service-provider monitoring. The policy statement includes an appendix that provides examples of considerations that may be relevant when performing due diligence in selecting a service provider, contracting with service providers, and conducting ongoing service-provider monitoring. See SR Letter 00-17 (SPE).

A more detailed summary of changes is included with the update package. The Manual and updates, including pricing information, are available from Publications Services, Mail Stop 127, Board of Governors of the Federal Reserve System, Washington, DC 20551 (or charge by facsimile: 202-728-5886). The Manual is also available on the Board's public web site at www.federalreserve.gov/boarddocs/ supmanual/.

PUBLICATION OF THE JUNE 2001 UPDATE TO THE BANK HOLDING COMPANY SUPERVISION MANUAL

The June 2001 update to the Bank Holding Company Supervision Manual, Supplement No. 20, has been published and is now available. The Manual comprises the Federal Reserve System's bank holding company supervisory and inspection guidance. The supplement includes new or revised supervisory information and examiner guidance on the following:

1. A Substantially Revised Foreword. A broad Overview is provided on the Federal Reserve's risk-focused inspection program for bank holding companies (BHCs) and financial holding companies (FHCs). Risk-focused inspections focus on the various types of high risk, the risk-management processes, and the necessary involvement of management and directors in the organization's risk-management oversight.

2. An Updated Introduction to Nonbanking Activities. The introduction to nonbanking activities has been revised to discuss FHCs (authorized by the Gramm-Leach-Bliley Act). A general overview is also provided of permissible financial and nonfinancial activities that are available to BHCs that qualify as FHCs.

3. The December 2000 Final and Other Interim or Final Regulation Y Changes for Foreign Banks and BHCs that Qualify as FHCs. The changes apply to the following:

a. U.S. Bank Holding Companies Operating as FHCs. This revised section includes changes involving the

(1) "well-managed" criteria that apply to all depository institutions that are controlled by a company that desires to qualify as an FHC; (2) timing of FHC declarations that are informationally complete; (3) simultaneous filing of an application to become a BHC and (upon consummation) to also become an FHC; (4) Federal Reserve's responses to complete FHC declarations; and (5) the requirements for an FHC to acquire more than 5 percent of the voting shares or control of a company that is "substantially engaged" (as defined) in activities that are financial in nature, incidental to financial activities, or otherwise permissible under section 4(c) of the BHC Act.

b. Foreign Banks Qualifying as FHCs. The revised section includes changes for (1) the factors used to determine the comparability of capital and management of a foreign bank; (2) the requirements for assigning a "combined ROCA rating" derived from the examination of a foreign banking organization's (FBO's) U.S. branch, agency, and commercial lending operations (this rating is factored into the FBO's overall combined U.S. operations [banking and nonbanking] composite rating); and (3) the required assurances of the home-country supervisor that the foreign bank's capital and management are considered satisfactory (using a comprehensive, consolidated supervision framework and preclearance process) before the Board will consent to an expansion of the foreign bank's U.S. operations as an FHC. See Supervision and Regulation (SR) Letter 00-14. (SR Letters are the Federal Reserve's primary means of communicating key policy directives to its examiners, supervisory staff, and the banking industry. SR Letters can be viewed on the Board's web site at www.federalreserve.gov/boarddocs/srletters.)

c. Permissible Activities for Qualifying FHCs. The revised section lists and discusses the activities found to be financial in nature, as listed in sections 4(k)(4) of the BHC Act. A January 2001 interim rule revision to Regulation Y is also discussed that pertains to section 4(k)(5) of the BHC Act. A mechanism is provided for FHCs to request the Board or the Secretary of the Treasury to determine whether a particular activity falls into one of three specific categories of permissible activities under section 4(k)(5). The detailed informational requirements for such a request are included. Also provided are the interim rule's procedures to request a determination as to whether an activity is financial in nature or incidental to a financial activity. The amended section also gives guidance on how to obtain approval to engage in an activity that is complementary to an identified financial activity.

d. An FHC Acting as a Finder. A new section discusses the Board's decision, in consultation with the Secretary of the Treasury, that authorizes FHCs to act as a finder, a limited activity that is considered incidental to a financial activity. A finder brings together buyers and sellers of products and services for transactions that buyers and sellers themselves negotiate and consummate.

4. Equity Investment and Merchant Banking Investment Activities. The new section discusses the following:

a. The Authority and Requirements for Merchant Banking Investments. The joint final rule of the Board and the Secretary of the Treasury, effective February 15, 2001, is discussed governing merchant banking investments made by FHCs. Under section 4(k) of the BHC Act, FHCs may make investments as part of a bona fide securities underwriting or merchant or investment banking activity. The investments may be made in any type of ownership interest, in any type of nonfinancial entity (portfolio company), and they may represent any amount of the equity of a portfolio company. The section discusses: (1) permissible investments; (2) prohibitions on routinely managing or operating a portfolio company; (3) portfolio company holding periods; (4) private equity funds, including restrictions on their management and operation; (5) automatic sunset provisions for aggregate investment thresholds in portfolio companies; (6) risk management, reporting, and recordkeeping policies; (7) cross-marketing restrictions; and (8) presumptions of control under sections 23A and 23B of the Federal Reserve Act and the safe harbors to the rebuttable presumption.

b. Federal Reserve Supervisory Guidance for Equity Investment and Merchant Banking Activities. Basic safety-and-soundness issues are discussed concerning the management of such investments. The section provides useful management infrastructure and control benchmarks for organizations engaged in such activities. The guidance identifies sound investment and risk-management practices that merit the attention of both management and supervisors. Examples are provided of the scope of appropriate public disclosures that banking organizations are encouraged to make of their equity investment activities. Sound practices in providing traditional lending-based banking services to portfolio companies, to portfolio company management, and to general partners of equity investment ventures and funds are also discussed. The potential risks and returns of equity investment and merchant banking activities exceed those of more traditional banking activities. Banking organizations and FHCs engaged in such activities are required to have strong capital positions that are well above current minimum regulatory requirements, along with robust internal methods for allocating capital that are commensurate with the inherent risks of those activities. See SR Letter 00-9.

A more detailed summary of changes is included with the update package. The Manual and updates, including pricing information, are available from Publications Services, Mail Stop 127, Board of Governors of the Federal Reserve System, Washington, DC 20551 (or charge by facsimile: 202-728-5886). The Manual is also available on the Board's public web site at www.federalreserve.gov/boarddocs/ supmanual/.

ENFORCEMENT ACTION

The Federal Reserve Board announced on May 31, 2001, the settlement of its administrative enforcement proceeding against Incus Co., Ltd., and Carlos Hank Rhon of Mexico City, Mexico, Incus's registered owner.

Incus, a bank holding company chartered in the British Virgin Islands, owns a majority of Laredo National Bancshares, the parent of Laredo National Bank and South Texas National Bank, all of which are in Laredo, Texas.

Incus and Hank Rhon have agreed to the following:

1. They will pay to the U.S. Treasury $10.75 million now and an additional $29.25 million within the next seven years.

2. Incus's shares of Laredo National Bancshares will be placed into a voting trust. Independent trustees, proposed by Incus and Hank Rhon and approved by the Board, will vote the shares.

3. Hank Rhon will resign as chairman of the board and as director of Laredo National Bancshares and will not be otherwise involved in its management or operation. He has also agreed not to serve in those capacities or as a controlling shareholder with other banking organizations in the United States without the Board's prior approval.

The settlement is enforceable under the Board's cease-and-desist and civil money penalty authority.

The Board's Notice of Charges, issued in December 1998, alleged that Incus and Hank Rhon had committed various violations of the Bank Holding Company Act, the Change in Bank Control Act, and other laws involving the ownership of Incus and Laredo National Bancshares, as well as lending transactions at Laredo National Bank. Incus and Hank Rhon have denied that they committed the violations alleged in the Notice of Charges.

The settlement does not relate in any manner to the condition of Laredo National Bank or South Texas National Bank.