Announcements.

FOMC DIRECTIVE

The Federal Open Market Committee decided on September 24, 2002, to keep its target for the federal funds rate unchanged at 1 3/4 percent.

The information that has become available since the last meeting of the Committee suggests that aggregate demand is growing at a moderate pace.

Over time, the current accommodative stance of monetary policy, coupled with still robust underlying growth in productivity, should be sufficient to foster an improving business climate. However, considerable uncertainty persists about the extent and timing of the expected pickup in production and employment owing in part to the emergence of heightened geopolitical risks.

Consequently, the Committee believes that, for the foreseeable future, 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.

Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; William J. McDonough, Vice Chairman; Ben S. Bernanke; Susan S. Bies; Roger W. Ferguson, Jr.; Jerry L. Jordan; Donald L. Kohn; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.

Voting against the action were: Edward M. Gramlich and Robert D. McTeer, Jr.

Governor Gramlich and President McTeer preferred a reduction in the target for the federal funds rate.

APPOINTMENT OF CHAIRMEN AND DEPUTY CHAIRMEN OF THE FEDERAL RESERVE BANKS

The Federal Reserve Board on October 11, 2002, announced the appointment of chairmen and deputy chairmen of the twelve Federal Reserve Banks for 2003.

Each Reserve Bank has a nine-member board of directors. The Board of Governors in Washington appoints three of these directors and designates one of its appointees as chairman and a second as deputy chairman.

Following are the names of the chairmen and deputy chairmen appointed by the Board for 2003:

Boston

James J. Norton, Vice President, AFL-CIO, Washington, D.C., named Chairman.

Samuel O. Thier, M.D., President and Chief Executive Officer, Partners HealthCare System, Inc., Boston, Massachusetts, named Deputy Chairman.

New York 

Peter G. Peterson, Chairman, The Blackstone Group, New York, New York, renamed Chairman.

John E. Sexton, President, New York University, New York, New York, named Deputy Chairman.

Philadelphia

Glenn A. Schaeffer, President Emeritus, Pennsylvania Building and Construction Trades Council, Harrisburg, Pennsylvania, named Chairman.

Ronald J. Naples, Chairman and Chief Executive Officer, Quaker Chemical Corporation, Conshohocken, Pennsylvania, named Deputy Chairman.

Cleveland

Robert W. Mahoney, Retired Chairman and Chief Executive Officer, Diebold, Incorporated, Canton, Ohio, named Chairman.

Charles E. Bunch, President and Chief Operating Officer, PPG Industries, Inc., Pittsburgh, Pennsylvania, named Deputy Chairman.

Richmond

Wesley S. Williams, Jr., Partner, Covington & Burling, Washington, D.C., named Chairman.

Irwin Zazulia, Retired President and Chief Executive Officer, Hecht's, Arlington, Virginia, named Deputy Chairman.

Atlanta

Paula Lovell, President, Lovell Communications, Inc., Nashville, Tennessee, named Chairman.

David M. Ratcliffe, President and Chief Executive Officer, Georgia Power Company, Atlanta, Georgia, named Deputy Chairman.

Chicago

Robert J. Darnall, Former Chairman, President, and Chief Executive Officer, Inland Steel Industries, Inc., Chicago, Illinois, renamed Chairman.

W. James Farrell, Chairman and Chief Executive Officer, Illinois Tool Works Inc., Glenview, Illinois, renamed Deputy Chairman.

St. Louis

Charles W. Mueller, Chairman and Chief Executive Officer, Ameren Corporation, St. Louis, Missouri, renamed Chairman.

Walter L. Metcalfe, Jr., Chairman, Bryan Cave LLP, St. Louis, Missouri, renamed Deputy Chairman.

Minneapolis

Ronald N. Zwieg, President, United Food & Commercial Workers, Local 653, Plymouth, Minnesota, renamed Chairman.

Linda Hall Whitman, Chief Executive Officer, QuickMedx, Inc., Edina, Minnesota, renamed Deputy Chairman.

Kansas City

Terrence P. Dunn, President and Chief Executive Officer, J.E. Dunn Construction Company, Kansas City, Missouri, renamed Chairman.

Richard H. Bard, Founder and Manager, IdeaSpring, LLC, Denver, Colorado, renamed Deputy Chairman.

Dallas

Ray L. Hunt, Chairman, President, and Chief Executive Officer, Hunt Consolidated, Inc., Dallas, Texas, named Chairman.

Patricia M. Patterson, President, Patterson Investments, Inc., Dallas, Texas, renamed Deputy Chairman.

San Francisco

Nelson C. Rising, Chairman and Chief Executive Officer, Catellus Development Corporation, San Francisco, California, renamed Chairman.

George M. Scalise, President, Semiconductor Industry Association, San Jose, California, renamed Deputy Chairman.

RELEASE OF DATA ON LARGE SYNDICATED BANK LOANS

The quality of large syndicated bank loans continued to deteriorate this year, but at a slower rate than was evident in 2001, according to the 2002 Shared National Credit (SNC) review, which federal bank regulators released on October 8, 2002. (1) The deterioration was consistent with general economic, sectoral, and credit market trends.

The results--reported by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation--are based on analyses that were prepared during the second quarter and reflect business and economic conditions that prevailed at that time.

For the 2002 review, total loan commitments classified as either substandard, doubtful, or loss rose by $39.4 billion, or 34 percent, over the previous year, compared with a net increase of $54.3 billion, or 86 percent, the year before. At the same time, commitments rated special mention rose $3.6 billion, or 5 percent, compared with $39.1 billion, or 108 percent, the year before.

Adversely rated credits are the total of loans classified substandard, doubtful, and loss and loans rated special mention. Under the agencies' Uniform Loan Classification Standards, classified loans have well-defined weaknesses, including default in some cases, while special mention loans exhibit potential weaknesses, which may result in further deterioration if left uncorrected.

Deterioration since the middle of last year was largely driven by the pronounced problems in the telecommunication sector, alleged corporate fraud, weakness from the recent recession, and the after-effects of September 11. Similar to last year, deterioration has been particularly evident for credits to leveraged and speculative-grade borrowers that are facing difficulty generating sufficient cash flow to service their debts because of overcapacity, weaker pricing, or slower-than-anticipated growth. At the same time, certain market segments have shown moderate improvement, with the professional, scientific, financial, insurance, and other service sectors showing lower classification levels relative to 2001.

In 2002, the SNC Program covered 9,328 credits totaling $1.9 trillion in loan commitments to 5,542 borrowers. Of the total commitments, $692 billion was advanced and outstanding. Classified credits totaled $157.1 billion, or 8.4 percent of total commitments, up from $117.6 billion, or 5.7 percent, in 2001. At the same time, loans listed for special mention rose to 4.2 percent of total commitments, from 3.7 percent in 2001. On a combined basis, special mention and classified loans represent 12.6 percent of total commitments, up from 9.4 percent a year ago but still below the peak of 16 percent in 1991. None of these figures include the effects of hedging or other techniques that individual organizations might have employed to mitigate risk.

Of particular note for 2002 was a record $19.6 billion in commitments characterized as loss, up $11.6 billion from the year before. Of that total, $7.6 billion, or 39 percent, was attributable to the telecommunication and cable industries.

Of the $1.9 trillion in total SNC commitments, U.S. banking organizations and foreign banking organizations (FBOs) each held 45 percent of the exposures, and nonbank firms held the remaining 10 percent. (2) Since 2000, the share of commitments held by U.S. banks has fallen somewhat, while the nonbank share has grown. For 2002, the rate of deterioration for credits held by these groups has differed markedly, with U.S. banking organizations experiencing an 11 percent increase in classifieds, compared with 39 percent for FBOs and 68 percent for nonbanks. Classifications as a percentage of commitments also showed a wide range, with U.S. banks exhibiting lower overall problems relative to FBOs or nonbanks.

The significantly higher classification rate for nonbanks is consistent with market observations that nonbanks have largely focused on sub-investment-grade investments and have been purchasers of distressed loans in the secondary market at discounts to par value; all dollar amounts in this release are par amounts. In addition, nonbanks and U.S. banks each held 27 percent of the loss classification, while FBOs held the remaining 46 percent.

Over the past year, the telecommunication and cable industries experienced the steepest decline in quality, with three-quarters of the $40 billion increase in SNC classifieds attributable to this segment. For 2002, total classifications for the sector soared to 27.0 percent of total commitments, compared with 3.9 percent the year before.

The second largest increase in classifications was attributable to the oil, gas, pipelines, and utilities industries, with a $12.7 billion increase and a classification rate of 7.5 percent, compared with 1.9 percent the year before. Special mention credits for this segment more than doubled and amounted to 6.9 percent of commitments. Although the manufacturing industry exhibits the largest dollar volume of classified and criticized assets within the SNC portfolio, the rate of deterioration has diminished markedly from the prior year, with classifieds growing just 5 percent. The 1.5 percentage point rise in the manufacturing classification rate, to 12.1 percent, is largely a function of an 8 percent decline in outstanding commitments, rather than a marked growth in problem credits. On the positive side, classifications in the professional, scientific, and other services industry fell by $3.9 billion, and classifieds for the financial services and insurance industries declined by $3.0 billion.

For the most part, banking organizations have been vigilant in identifying problem credits and reflecting deterioration in the quality of syndicated loans in their internal credit ratings. A combination of factors, including strong earnings and capital bases, coupled with diverse revenue sources and balance sheets have allowed U.S. banking organizations to absorb deteriorating credit conditions over the past three years without the disruption experienced a decade ago. Nevertheless, banking organizations must continue to be vigilant in the current environment to ensure that they promptly identify and address any continuation in credit quality deterioration and adjust allowance levels for loan losses appropriately. (3)

ADJUSTMENT OF DOLLAR AMOUNT OF FEE-BASED TRIGGER

The Federal Reserve Board on September 27, 2002, published its annual adjustment of the dollar amount that triggers additional disclosure requirements under the Truth in Lending Act for mortgage loans that bear rates or fees above a certain amount.

The dollar amount of the fee-based trigger has been adjusted from $480 for 2002 to $488 for 2003 based on the annual percentage change reflected in the consumer price index that was in effect on June 1, 2002. The adjustment is effective January 1, 2003.

The Home Ownership and Equity Protection Act of 1994 bars credit terms such as balloon payments and requires additional disclosures when total points and fees payable by the consumer exceed the fee-based trigger (initially set at $400 and adjusted annually), or 8 percent of the total loan amount, whichever is larger.

ANNUAL ADJUSTMENTS OF THE LOW RESERVE TRANCHE AND THE RESERVABLE LIABILITIES EXEMPTION

The Federal Reserve Board on October 3, 2002, announced the annual adjustments in the amount of net transaction accounts used in the calculation of reserve requirements and the cutoff level used to determine the detail and frequency of deposit reporting.

All depository institutions must retain a percentage of certain types of deposits in the form of vault cash, or as a deposit in a Federal Reserve Bank, or a pass-through account at a correspondent institution. Reserve requirements currently are assessed on the depository institution's net transaction accounts (mostly checking accounts).

For net transaction accounts in 2003, the first $6.0 million, up from $5.7 million in 2002, will be exempt from reserve requirements. A 3 percent reserve ratio will be assessed on net transaction accounts over $6.0 million to and including $42.1 million, up from $41.3 million in 2002. A 10 percent reserve ratio will be applied above $42.1 million.

These annual adjustments, known as the low reserve tranche adjustment and the reservable liabilities exemption adjustment, are based on growth in net transaction accounts and total reservable liabilities, respectively, at all depository institutions between June 30, 2001, and June 30, 2002.

For depository institutions that report weekly, the low reserve tranche adjustment and the reservable liabilities exemption adjustment will apply to the reserve computation period that begins November 26, 2002, and the corresponding reserve maintenance period that begins December 26, 2002.

For institutions that report quarterly, the low reserve tranche adjustment and the reservable liabilities exemption adjustment will apply to the reserve computation period that begins December 17, 2002, and the corresponding reserve maintenance period that begins January 16, 2003.

Additionally, the Board increased the deposit cutoff level that is used with the exemption level to determine the frequency and detail of deposit reporting.

MEETING OF THE CONSUMER ADVISORY COUNCIL

The Federal Reserve Board announced on September 27, 2002, that the Consumer Advisory Council would hold its next meeting on Thursday, October 24. The Council's function is to advise the Board on the exercise of its responsibilities under various consumer financial services laws and on other matters on which the Board seeks its advice.

RELEASE OF MINUTES OF BOARD'S DISCOUNT RATE MEETINGS

The Federal Reserve Board on October 4, 2002, released the minutes of its discount rate meetings from July 22, 2002, to August 12, 2002.

ENFORCEMENT ACTION

The Federal Reserve Board on September 30, 2002, announced the issuance of a Cease and Desist Order against Broadstreet, Inc., Atlanta, Georgia, a bank holding company, and Broadstreet's subsidiary bank, the AmTrade International Bank of Georgia, Atlanta, Georgia.

The consent Cease and Desist Order was jointly issued by the Federal Reserve Board and the state of Georgia's Department of Banking and Finance on September 20, 2002.

The Order incorporated the bank's voluntary liquidation plan, which was approved by the state's Department of Banking and Finance on August 9, 2002.

The Order also completed the Federal Reserve Board's enforcement proceeding against the bank, which was initiated by the issuance of a Notice of Charges and of Hearing and Temporary Order to Cease and Desist on July 1, 2002.

On Monday, September 30, the state of Georgia closed the bank and appointed the Federal Deposit Insurance Corporation as receiver after the state determined that the bank was unable to meet the provisions of its voluntary liquidation plan.

CHANGES IN BOARD STAFF

The Board of Governors announced on September 23, 2002, the following change of assignments in the Division of International Finance.

William Helkie will assume the position of Senior Adviser in the Division of International Finance.

Steven B. Kamin, Deputy Associate Director, will move his oversight to the Trade and Quantitative Studies Section and the International Financial Transactions Section.

Joseph Gagnon, Assistant Director, will have direct oversight responsibility for the Trade and Quantitative Studies Section and the International Financial Transactions Section. Mr. Gagnon will relinquish his position as Chief of the Trade and Quantitative Studies Section.

Nathan Sheets, Assistant Director, will have direct oversight responsibility for the International Development Section and World Payments and Economic Activity Section. Mr. Sheets will relinquish his position as Chief of the International Development Section.

(1.) The Shared National Credit (SNC) Program was established in 1977 by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency to provide an efficient and consistent review and classification of large syndicated loans. The annual program covers loans or loan commitments of at least $20 million that are shared by three or more financial institutions.

(2.) To better reflect ultimate ownership, in this year's press release U.S. banks are defined to exclude U.S.-chartered subsidiaries of FBOs for the years 2000 through 2002. Last year's press release data included those subsidiaries under U.S. banks, even if they were consolidated under an FBO's worldwide banking organization.

(3.) For further guidance, institutions should refer to the July 12, 1999, Joint Interagency Letter to Financial Institutions on the allowance for loan losses, as well as the December 1993 Interagency Policy Statement on the Allowance for Loan and Lease Losses.