Fed Letter. Studies show electronic payments exceed check payments. Traveling historical currency exhibit available. Beige Book released

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1 Colorado Kansas Missouri Nebraska New Mexico Oklahoma Wyoming FEDERAL RESERVE BANK OF KANSAS CITY January 2005 Fed Letter Studies show electronic payments exceed check payments Traveling historical currency exhibit available Beige Book released Holiday reminder Surveys conducted by the Federal Reserve indicate that electronic payment transactions have exceeded check payments in the United States for the first time. The number of electronic payment transactions totaled 44.5 billion in 2003, while the number of checks paid totaled 36.7 billion, according to recent surveys of U.S. depository financial institutions and electronic payments organizations. For more information about the survey, visit the Board Web site ( click News and Events, then Other Announcements, and then December 6, 2004 Federal Reserve studies confirm electronic payments exceed check payments for first time. A traveling exhibit, detailing the history of U.S. currency, will be available for loan to Tenth District financial institutions beginning Jan. 10. The exhibit features samples of historical currency and coin that can be displayed for two to four weeks. This museum-quality display is a stand-alone circular unit approximately 6 feet tall and 4 feet in diameter. The exhibit is shipped in two cases and, once assembled, weighs about 100 pounds. The exhibit is being offered at no charge; however, each participating institution will be responsible for paying shipping costs for transporting the exhibit to the next location. The exhibit will be booked on a first-come, firstserved basis. To reserve this exhibit, contact the Public Affairs Department in our Kansas City office at (800) , extension 2683 ( locally), or by at publicaffairsinfo@kc.frb.org. The latest edition of the Beige Book was released Dec. 1. The Beige Book is a summary of current economic conditions in each Federal Reserve district. Nationally, economic activity continued to expand from mid-october to mid- November in most districts, with increases in manufacturing and service sector activity and robust residential real estate activity. Furthermore, nonresidential activity, while still slow in some districts, appeared to be improving. Locally, the Tenth Districtʼs economy also showed positive movement during the same period. The districtʼs retailers reported gains, manufacturing activity increased, and labor markets continued to improve. For details about national and Tenth District economic activity, visit our Web site at In the left column, under Economic News, click Beige Book. The Fed will be closed Monday, Jan. 17, for Martin Luther King Jr. Day. A listing of the holidays observed by the Federal Reserve System is available at In the left column, click Holiday Schedules.

2 Manufacturing survey released The monthly manufacturing survey for the Tenth Federal Reserve District was released Dec. 13. The survey asks plant managers about a variety of manufacturing indicators. The information is compiled into a snapshot of manufacturing in the District. Manufacturing activity in the Tenth District remained at a solid pace in November. Although price pressures continued, the expectations for future factory activity remained strong. To view the current survey, visit our Web site ( In the left column, under Economic News, click Manufacturing Survey, and then Current Survey (December 13, 2004). Board of Directors members elected Welcome new member banks Robert C. Fricke and Frank Moore have been elected to the Federal Reserve Bank of Kansas Cityʼs Board of Directors. Fricke is the president and CEO of Farmers & Merchants Bank in Ashland, Neb. He began serving a three-year term as a Class A director on Jan. 1, Moore is the president of Spearhead Ranch Company in Douglas, Wyo. He began serving a second three-year term as a Class B director on Jan. 1, Reserve Bank directors meet monthly to oversee the Bankʼs operations and policies, and to confer on economic and banking developments. The Board includes nine directors, six of whom are elected by member banks in the seven states of the Tenth Federal Reserve District. The remaining three directors are appointed by the Board of Governors of the Federal Reserve System to represent the general public. The Kansas City Fed is pleased to welcome the following state member banks to the Federal Reserve System in the Tenth District: First State Bank Lincoln, Neb. Dec. 3 Kaw Valley State Bank Wamego, Kan. Dec. 17 and Trust Company Regulatory developments New regulation slipsheets available Slipsheets containing amendments to Regulation D, Reserve Requirements of Depository Institutions; the Official Staff Commentary for Regulation Z; and the Rules of Practice for Hearings are now available. To request copies of these slipsheets, contact our Omaha office at (800) or by at helgard.g.elliott@kc.frb.org. Revisions to Policy on Payments System Risk On Nov. 26, the Federal Reserve Board announced the approval of proposed revisions to its Policy on Payments System Risk (PSR Policy) addressing risk management in payments and securities settlement systems. The revisions update the policy in light of current industry and supervisory risk management approaches as well as new international risk management standards for payments and securities settlement systems. In addition, they provide further clarification regarding the policyʼs objectives, scope, and application. The key revisions include an expansion of the policyʼs scope to include those Federal Reserve Bank payments and securities settlement systems that meet the policyʼs application criteria, revised general risk management expectations for systems subject to the policy, and incorporation of both the Core Principles for Systemically Important Payment Systems and the Recommendations for Securities Settlement Systems. Questions pertaining to this matter may be directed to Kathy Lathrop in our Kansas City office at (800) , extension 2439 ( locally), or by at kathy.k.lathrop@kc.frb.org.

3 FFIEC guidance on the use of free and open source software The Federal Financial Institutions Examination Council (FFIEC) has published guidance for examiners, financial institutions, and technology service providers on the acquisition and use of free and open source software (FOSS). FOSS refers to software that users are permitted to run, study, modify, and redistribute without paying a licensing fee, such as the Linux operating system and Apache Web server. The use of FOSS is increasing within the information technology and financial services industries. The agencies believe that the use of FOSS does not pose risks that are fundamentally different from risks presented by proprietary or self-developed software. However, the acquisition and use of FOSS necessitates implementation of unique risk management practices. This guidance supplements the FFIEC IT Examination Handbook, Development and Acquisition Booklet, by addressing strategic, operational, and legal risk considerations in acquiring and using FOSS. The guidance is available on our Web site at Point to Banking Information, then click Banking Publications/Info, then click Supervision Manuals in the right-hand column, and then Information Technology Examination Handbooks. Questions pertaining to this matter may be directed to Ken Boldt in our Denver office at (800) , extension 2526 ( locally), or by at ken.g.boldt@kc.frb.org. Revised bank holding company rating system The Federal Reserve Board has issued a revised bank holding company (BHC) rating system through its Supervision and Regulation (SR) Letter The revised system more closely aligns the BHC rating process with current supervisory practices by placing an increased emphasis on risk management, providing a more flexible and comprehensive evaluation of financial condition, and requiring an explicit determination of the likelihood that the nondepository entities of a BHC will have a significant negative impact on the depository subsidiaries. The policy also contains guidance on implementing the revised rating system based on BHC size and complexity. The revised rating system replaces the current BOPEC/F-M rating system (Bank subsidiaries, other subsidiaries, parent, earnings, capital, financial composite, management composite) with the rating system RFI/C(D). Under the revised system, each BHC is assigned a composite rating (C) based on an evaluation and rating of three essential components of the institutionʼs financial condition and operations: risk management (R); financial condition (F); and potential impact (I) of the parent company and nondepository subsidiaries on the subsidiary depository institutions. A fourth component in the rating system, depository institution(s) (D), generally mirrors the primary supervisorsʼ assessment of the subsidiary institutions. Two of the components, risk management and financial condition, are additionally supported by four separate subcomponents. Because the revised system incorporates factors that have been routinely considered by examiners for many years in evaluating a BHCʼs condition, the revised system should not have a significant effect on the conduct of BHC inspections or on the regulatory burden of supervised institutions. In addition, the Federal Reserve will continue to rely to the extent possible on the work of the primary bank and other functional nonbank regulators. Questions pertaining to this matter may be directed to Todd Offenbacker in our Kansas City Office at (800) , extension 2657 ( locally) or by at todd.a.offenbacker@kc.frb.org.

4 Finalized Basel II survey documents The U.S. banking agencies have made available survey materials for the fourth Quantitative Impact Study (QIS-4) and a related Loss Data Collection Exercise (LDCE) in preparation for the U.S. implementation of the Basel II Capital Framework. QIS-4 is intended to provide the agencies a better understanding of how the implementation of a more risk-sensitive approach for regulatory capital standards might affect minimum required capital at the industry, institution, and portfolio level. The LDCE is intended to provide insight, based on detailed loss event data, into the implications of the proposed Basel II standards regarding the Advanced Measurement Approaches for evaluating operational risk. Materials for the U.S. survey are available on the Web site of the Federal Financial Institutions Examination Council at and The agencies had requested responses for the LDCE by late November 2004 and for the QIS-4 by late January The information received should help them by mid-year 2005 prepare a joint Notice of Proposed Rulemaking for implementing Basel II in the United States. Interagency Statement on the Purchase and Risk Management of Life Insurance The staffs of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Office of Thrift Supervision (the agencies) have issued an Interagency Statement on the Purchase and Risk Management of Life Insurance. The Federal Reserve is issuing the guidance through Supervision and Regulation (SR) Letter This guidance discusses the safety and soundness and risk management implications of purchases and holdings of life insurance by banks and savings associations (institutions). Institutions may purchase life insurance on their employees or others for several appropriate business purposes. The most common purposes for which institutions purchase bank-owned life insurance (BOLI) are to recover the cost of providing preretirement and postretirement employee benefits, to recover losses associated with the death of a key person, and to obtain insurance on borrowers. Over the past several years, purchases of BOLI by institutions have increased steadily and significantly. This has given rise to concerns among the agencies that some institutions may not have an adequate understanding of the full array of risks posed by BOLI, including liquidity, operational, reputational, and compliance/legal risks. The agencies also are concerned that some institutions may have committed a significant amount of capital to BOLI holdings without properly assessing the associated risks. This guidance is for institutions and examination staff to help ensure that risk management practices for BOLI are consistent with safe and sound banking practices. Federal Reserve review of openend credit rules, Regulation Z On Dec. 3, the Board issued for public comment an advance notice of proposed rulemaking (ANPR) announcing a review of the open-end (revolving) credit rules of the Boardʼs Regulation Z. Open-end credit generally refers to a revolving line of credit (such as a credit card account), where repeated transactions are expected, the available credit is replenished as unpaid balances are repaid, and finance charges are assessed on unpaid balances. The ANPR seeks comment on a variety of specific issues relating to three broad categories: 1) the format of openend credit disclosures; 2) the content of the disclosures; and 3) the substantive protections provided under the regulation. The ANPR solicits comments on the scope of the review and also requests responders identify other issues that the Board should consider addressing in the review. Comments must be received on or before March 28, Questions may be directed to the Consumer Affairs Department in our Kansas City office at (800) , extension 2488 ( locally), or in our Denver office at (800) , extension 2605 ( locally).

5 FFIEC advisory on Home Mortgage Disclosure Act On Nov. 29, the Federal Financial Institutions Examination Council (FFIEC) issued an advisory memorandum to all Home Mortgage Disclosure Act (HMDA) reporters. Based upon the review of preliminary 2004 HMDA data, there appears to be a number of concerns relating to the correct application of the transition rules, ethnicity, race, and gender data, preapprovals, property location, lien status, Home Ownership and Equity Protection Act (HOEPA) status, and the reporting of loans sold and purchased. This interagency memorandum was issued to inform HMDA reporters of the correct methods of collecting and reporting these data fields so any required corrective action may be taken before the data is due to be submitted on March 1, The press release and memorandum can be found on the FFIEC Web site at Revised formats for public disclosure of HMDA data On Dec. 10, the Federal Reserve Board announced changes to the tables used to publicly release data collected by lenders under the Home Mortgage Disclosure Act (HMDA), which is implemented by the Boardʼs Regulation C. The changes reflect revisions to Regulation C, adopted by the Board in 2002, that require lenders to collect and report new loan pricing and other loan data, beginning Jan. 1, These revisions to the public disclosure tables do not affect the data collection and reporting requirements applicable to lenders subject to Regulation C; the revised disclosure tables merely show the format that will be used by the federal financial regulatory agencies for public disclosure of the data collected and reported by lenders. Data from institutions are due no later than March 1, 2005, and the data will be reflected in the public disclosures scheduled to be released in the summer or fall of Questions may be directed to the Consumer Affairs Department in our Kansas City office at (800) , extension 2488 ( locally), or in our Denver office at (800) , extension 2605 ( locally). Proposed data collection changes for Shared National Credits On Dec. 16, the federal banking and thrift regulatory agencies requested public comment on proposed changes to the data collection process that supports the Shared National Credit review of large syndicated loans. The program, which has been in place since 1977, is an interagency examination and supervision effort designed to evaluate loan commitments aggregating $20 million or more that are shared by three or more supervised institutions. The program provides a process to assign uniform credit ratings for shared national credits in addition to collecting and analyzing data that regulators use to monitor credit conditions and trends at the nationʼs largest banks. The proposed data collection changes would enable the agencies to improve the efficiency and effectiveness of credit reviews, support continued risk-focusing efforts in the program, and provide comparative credit risk information to banks and regulatory supervisors. Under the proposal, the data collection changes would be implemented with the 2007 review, employing data as of Dec. 31, The interagency notice is available on the Boardʼs Web site at Comments are requested by Feb. 15, Questions pertaining to the proposal may be directed to Todd Offenbacker in our Kansas City office at (800) , extension 2657 ( locally) or by at todd.a.offenbacker@kc.frb.org.

6 Internet Access Regulatory developments like those above can be obtained from our Web site at Point to Banking Information on the home page, then click Regulations/Guidance, and select either of the first two categories, as appropriate. Fed Letter January 2005 Fed Letter is published by the Public Affairs Corporate Communications Group of the Federal Reserve Bank of Kansas City, 925 Grand Boulevard, Kansas City, Missouri, , (800) Editor: Susan Nenonen Supervisor: Tim Todd Graphic Designer: Beth Norman

HMDA FACT SHEET YOUR MAP TO REGULATORY CHANGE

FACILITATE THOUGHT ENGAGE DIALOGUE ENCOURAGE SMART RISK CULTIVATE A NETWORK BUILD KNOWLEDGE HMDA FACT SHEET YOUR MAP TO REGULATORY CHANGE Regulation C implements the Home Mortgage Disclosure Act (HMDA),