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25–433 PDF 2017

S. HRG. 115–14 

THE SEMIANNUAL MONETARY POLICY REPORT 

TO THE CONGRESS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE FEDERAL RESERVE’S SEMIANNUAL REPORT TO 

CONGRESS ON MONETARY POLICY AND THE STATE OF THE ECONOMY 

FEBRUARY 14, 2017 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

MIKE CRAPO, Idaho, Chairman 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

BRIAN SCHATZ, Hawaii 

CHRIS VAN HOLLEN, Maryland 

CATHERINE CORTEZ MASTO, Nevada 

GREGG RICHARD, Staff Director 

MARK POWDEN, Democratic Staff Director 

ELAD ROISMAN, Chief Counsel 

TRAVIS HILL, Senior Counsel 

JOE CARAPIET, Senior Counsel 

JARED SAWYER, Senior Counsel 

GRAHAM STEELE, Democratic Chief Counsel 

LAURA SWANSON, Democratic Deputy Staff Director 

DAWN RATLIFF, Chief Clerk 

CAMERON RICKER, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

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C O N T E N T S 

TUESDAY, FEBRUARY 14, 2017 

Page 

Opening statement of Chairman Crapo ................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2 

WITNESS 

Janet L. Yellen, Chair, Board of Governors of the Federal Reserve System ...... 5 

Prepared statement .......................................................................................... 45 

Responses to written questions of: 

Senator Toomey ......................................................................................... 47 

Senator Reed .............................................................................................. 52 

Senator Sasse ............................................................................................ 53 

Senator Tester ........................................................................................... 59 

Senator Rounds ......................................................................................... 64 

Senator Tillis ............................................................................................. 68 

Senator Perdue .......................................................................................... 73 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

The February 2017 semiannual Monetary Policy Report ..................................... 78 

Wall Street Journal article entitled, ‘‘U.S. Banks Report Record Profit in 

Third Quarter,’’ dated November 29, 2016, submitted by Senator Warren .... 126 

FDIC Quarterly Report, Third Quarter 2016 ........................................................ 128 

(III)

(1) 

THE SEMIANNUAL MONETARY POLICY 

REPORT TO THE CONGRESS 

TUESDAY, FEBRUARY 14, 2017 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:02 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. The Committee will come to order. 

Today we will receive testimony from Federal Reserve Chair 

Janet Yellen regarding the Fed’s semiannual report to Congress on 

monetary policy and the state of the economy. 

It will come as no surprise to you, Chair Yellen, that improving 

economic growth is a key priority for Congress this year. 

Two thousand sixteen was the 11th consecutive year that the 

U.S. economy failed to grow by more than 3 percent. One way to 

improve economic growth is to study and address areas where regulations can be improved. 

Since the financial crisis, regulators have imposed thousands of 

pages of new regulations. We all need to better understand the 

combined impact of these rules on lending, liquidity, costs for small 

financial institutions, and broader economic growth. 

It is time to reassess what is working and what is not. I am encouraged by President Trump’s Executive Order on Core Principles 

for regulating the financial system. 

Directing the Treasury Secretary, in consultation with the heads 

of the other member agencies of Financial Stability Oversight 

Council, including you, Chair Yellen, to report on how well existing 

laws and regulations promote or inhibit economic growth will be a 

helpful step as we move forward. 

Financial regulation should strike the proper balance between 

the need for a safe and sound financial system and the need to promote a vibrant, growing economy. I expect the Vice Chairman for 

Supervision, once confirmed, will play an important role in striking 

this balance. 

We want our Nation’s banks to be well capitalized and well regulated, without being drowned by unnecessary compliance costs. 

This is especially important for the community banks and credit 

unions in America, which lack the personnel and infrastructure to 

handle the overwhelming regulatory burden of the past few years, 

2 

yet in many ways are treated the same as the world’s biggest 

institutions. 

At the last Humphrey-Hawkins hearing, Chair Yellen, you stated 

that simplifying regulations for the community banks continues to 

be a focus for the Fed, and I hope that remains the case. Our regulatory regime should be properly tailored and avoid a one-size-fitsall approach. 

The Fed recently took an encouraging step in that direction when 

it finalized changes to exempt certain banks from the qualitative 

portion of CCAR, and I appreciate that. Another area I would like to address is the $50 billion SIFI 

threshold for regional banks. In prior hearings, we have discussed 

whether $50 billion is the appropriate threshold, and I hope we can 

work together to craft a more appropriate standard. 

My goal is to work with Senators of this Committee and financial 

regulators to better strike the balance between smart, thoughtful 

regulation and promoting economic growth. 

It has also been nearly a decade since Fannie Mae and Freddie 

Mac were put into conservatorship. Housing finance reform remains the most significant piece of unfinished business following 

the crisis, and it is important to build bipartisan support for a 

pathway forward. For many years, the Fed expressed concerns 

about Fannie and Freddie, and I encourage you, Chair Yellen, and 

the Fed to work with this Committee to help find a solution. 

With respect to monetary policy, it has now been nearly a decade 

since the Fed began easing monetary policy in the fall of 2007 in 

response to the emerging financial crisis. Today the Fed still holds close to $4.5 trillion in assets on its balance sheet, which includes approximately 35 percent of the outstanding agency mortgage-backed security market. I look forward 

to hearing from you on how the Fed plans to normalize monetary 

policy and wind down its balance sheet. 

The Banking Committee has a lot of work to do this Congress. 

My goal is to work with Ranking Member Brown and other Members of the Committee to identify bipartisan approaches that we 

can quickly get signed into law. 

At the same time, we plan to start work on housing finance 

reform, flood insurance, sanctions, and legislation to boost economic 

growth in the country. 

I look forward to working with you, Chair Yellen, the Federal Reserve, and other Members of the Committee to tackle some of these 

critical issues that I have mentioned this morning, as well as a 

number of others. 

With that, Madam Chair, we look forward to your comments 

today, but first I turn to Ranking Member Brown. Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman. I appreciate the 

hearing today. And, Chair Yellen, thank you for—it is an honor always to have you here, and a pleasure, and your insight is always 

helpful to all of us. Thank you for that. 

Since your appearance, Madam Chair, last June, the economy 

has improved enough, as we know, that the Fed raised the Federal 

funds rate in December for only the second time since the financial 

3 

crisis. Businesses continue to create jobs on a slow but steady pace, 

some 70-plus months in a row, and there finally is some wage 

growth. 

Yet there are concerns. Too many Americans who want full-time 

work still cannot find it. Many workers have left the labor force. 

The gains have been not large enough and been uneven. Foreclosures and job losses hit African American and Latino communities particularly hard during the crisis. One study found that the 

average wealth of white families has grown 3 times faster than the 

rate for African American families and 1.2 times the growth rate 

for Latino families over the last three decades. At these rates, it 

will take hundreds of years for those families to match where white 

families are today. 

For affluent Americans, stock portfolios have recovered nicely 

since the crisis, but for most of Ohio and for most of our States, 

the story is very different. The State’s job growth last year was the 

lowest since 2009. We actually went backwards 5 out of 12 months. 

In many places, one in four homeowners is still underwater. 

As you have heard me say and as Members of this Committee 

have heard me say, in the Zip Code my wife and I live in in Cleveland, in the first half of 2007 there were more foreclosures than 

any Zip Code in the United States of America. For Ohio manufacturers, the strong dollar continues to hurt exports, and there is uncertainty, much of it injected into the economy by this Administration already and by the majority party. Can Americans continue to 

count on having health insurance? Will U.S. manufacturers and exporters have continued access to foreign markets? Will importers 

have to pay a 20-percent sales tax? Will immigrants to this country 

have access to jobs and to our universities? They do not even know 

what to expect tomorrow let alone to do any kind of long-range 

planning. All of that our country and our economy is dependent 

upon. 

Americans elected the new President based on his promises to 

drain the swamp, to take on Wall Street, and begin to bring manufacturing jobs back to the industrial heartland. We are all concerned, though, when you look at some of the nominees confirmed, 

with virtually every Republican virtually every time voting for 

amazingly ethically challenged nominees, nominees that would 

have stepped aside 8 years ago or 16 years ago with new Presidents, we are all concerned about that. 

Instead of focusing on infrastructure and real job creation and 

tax cuts for the middle class and education and workforce development, we have seen the new Administration target working Americans, furthering a billionaire’s special interest agenda, and 

threaten Wall Street reform based on the false promises that banks 

are not lending—false promises, some might call them lies. 

I think everyone on this dais can agree there are parts of Wall 

Street reform that could be improved and steps that can be taken 

to help small banks and credit unions. That is an ongoing process 

for both Congress and the regulators. 

I applaud the Fed decision, Madam Chair, its recent decision to 

remove banks below $250 billion in assets from part of its CCAR 

process. But many of my Republican colleagues are dead set on 

going beyond the reasonable, consensual, bipartisan adjustments 

4 

and seeking to repeal reforms that are key to preventing the next 

devastating financial crisis. Working Americans lost trillions of dollars in their retirement savings after large Wall Street firms made 

risky bets with other people’s money either failed or were bailed 

out during the crisis. That is why Congress put in place higher capital requirements for large banks, mechanisms to identify and regulate risky nonbank companies, and tools to make sure financial 

firms can fail without bailouts funded by taxpayers. 

Recent statements by top officials in the White House indicate 

they are specifically targeting these important safeguards, even 

though these parts of the law were supported by both parties back 

less than a decade ago. 

Now the Administration is putting Wall Street bankers in 

charge. Steve Mnuchin—again, every single Republican voted for 

him—was confirmed by the Senate last night. They are going after 

the rules that their former employers do not like. They are trying 

to take away the financial regulators’ freedom to make difficult decisions that will keep our financial system stable. 

These priorities are wrong. American voters agree: 80 percent— 

80 percent in one poll, that is Republicans and Democrats and 

Independents—agree we need tough rules and stronger, not weaker, penalties for Wall Street. 

I want to take a moment to recognize one person in particular 

who has been one of the chief architects of the stronger rules that 

have been put in place over the past several years to rein in Wall 

Street misbehavior and excess. Last week, Governor Tarullo announced he is leaving the Board of Governors. I want to thank Governor Tarullo for his service to our Nation over the last 8 years. 

He is one of a handful of dedicated public servants who have made 

our financial system safer for a generation to come. 

I also want to recognize Scott Alvarez, who is in his 36th year 

at the Federal Reserve. He is seated right behind—if he would put 

his hand up for a moment, Mr. Alvarez? He is in his 36th year at 

the Fed. He has been General Counsel at the Fed I believe for over 

a decade. Thank you for your service, Mr. Alvarez. 

Madam Chair, I look forward to hearing more from you about the 

current state of the economy, the importance—especially the importance of strong rules to guard against economic calamity—I know 

you are not going to be there forever, although I wish you were— 

and the importance of the strong rules that you have put in place 

and you will continue to put in place over the next dozen months 

or so, more than that, and what Congress can do to help the economy create jobs and make it easier for all Americans—and I underscore all Americans—to accumulate wealth, to buy a home, to pay 

for college, and to have a decent, honorable, dignified retirement. 

Madam Chair, it is a pleasure to see you. 

Chairman CRAPO. Thank you, Senator Brown. 

Again, Madam Chair, we appreciate you being here. We look forward to your opening statement at this point, and then we will 

engage in some important discussion. You may proceed. 

5 

STATEMENT OF JANET L. YELLEN, CHAIR, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Ms. YELLEN. Thank you. Chairman Crapo, Ranking Member 

Brown, and other Members of the Committee, I am pleased to 

present the Federal Reserve’s semiannual Monetary Policy Report 

to the Congress. In my remarks today I will briefly discuss the current economic situation and outlook before turning to monetary 

policy. 

Since my appearance before this Committee last June, the economy has continued to make progress toward our dual-mandate objectives of maximum employment and price stability. In the labor 

market, job gains averaged 190,000 per month over the second half 

of 2016, and the number of jobs rose an additional 227,000 in January. Those gains bring the total increase in employment since its 

trough in early 2010 to nearly 16 million. In addition, the unemployment rate, which stood at 4.8 percent in January, is more than 

5 percentage points lower than where it stood at its peak in 2010 

and is now in line with the median of the Federal Open Market 

Committee participants’ estimates of its longer-run normal level. A 

broader measure of labor underutilization, which includes those 

marginally attached to the labor force and people who are working 

part time but would like full-time jobs, has also continued to improve over the past year. In addition, the pace of wage growth has 

picked up relative to its pace of a few years ago, a further indication that the job market is tightening. Importantly, improvements 

in the labor market in recent years have been widespread, with 

large declines in the unemployment rates for all major demographic groups, including African Americans and Hispanics. Even 

so, it is discouraging that jobless rates for those minorities remain 

significantly higher than the rate for the Nation overall. 

Ongoing gains in the labor market have been accompanied by a 

further moderate expansion in economic activity. U.S. real gross 

domestic product is estimated to have risen 1.9 percent last year, 

the same as in 2015. Consumer spending has continued to rise at 

a healthy pace, supported by steady income gains, increases in the 

value of households’ financial assets and homes, favorable levels of 

consumer sentiment, and low interest rates. Last year’s sales of 

automobiles and light trucks were the highest annual total on 

record. In contrast, business investment was relatively soft for 

much of last year, though it posted some larger gains toward the 

end of the year in part reflecting an apparent end to the sharp decline in spending on drilling and mining structures; moreover, business sentiment has noticeably improved in the past few months. In 

addition, weak foreign growth and the appreciation of the dollar 

over the past 2 years have restrained manufacturing output. Meanwhile, housing construction has continued to trend up at only a 

modest pace in recent quarters. And while the lean stock of homes 

for sale and ongoing labor market gains should provide some support to housing construction going forward, the recent increases in 

mortgage rates may impart some restraint. 

Inflation moved up over the past year, mainly because of the diminishing effects of the earlier declines in energy prices and import 

prices. Total consumer prices as measured by the personal consumption expenditure, or PCE, index rose 1.6 percent in the 12 

6 

months ending in December, still below the Federal Open Market 

Committee’s (FOMC) 2-percent objective but up 1 percentage point 

from its pace in 2015. Core PCE inflation, which excludes the volatile energy and food prices, moved up to about 1 3⁄4 percent. 

My colleagues on the FOMC and I expect the economy to continue to expand at a moderate pace, with the job market strengthening somewhat further and inflation gradually rising to 2 percent. 

This judgment reflects our view that U.S. monetary policy remains 

accommodative, and that the pace of global economic activity 

should pick up over time, supported by accommodative monetary 

policies abroad. Of course, our inflation outlook also depends importantly on our assessment that longer-run inflation expectations will 

remain reasonably well anchored. It is reassuring that while market-based measures of inflation compensation remain low, they 

have risen from the very low levels they reached during the latter 

part of 2015 and first half of 2016. Meanwhile, most survey measures of longer-term inflation expectations have changed little, on 

balance, in recent months. 

As always, considerable uncertainty attends the economic outlook. Among the sources of uncertainty are possible changes in U.S. 

fiscal and other policies, the future path of productivity growth, 

and developments abroad. 

Turning to monetary policy, the FOMC is committed to promoting maximum employment and price stability, as mandated by 

the Congress. Against the backdrop of headwinds weighing on the 

economy over the past year, including financial market stresses 

that emanated from developments abroad, the Committee maintained an unchanged target range for the Federal funds rate for 

most of the year in order to support improvement in the labor market and an increase in inflation toward 2 percent. At its December 

meeting, the Committee raised the target range for the Federal 

funds rate by 1⁄4 percentage point, to 1⁄2 to 3⁄4 percent. In doing so, 

the Committee recognized the considerable progress the economy 

had made toward the FOMC’s dual objectives. The Committee 

judged that even after this increase in the Federal funds rate target, monetary policy remains accommodative, thereby supporting 

some further strengthening in labor market conditions and a return to 2 percent inflation. 

At its meeting that concluded early this month, the Committee 

left the target range for the Federal funds rate unchanged but reiterated that it expects the evolution of the economy to warrant further gradual increases in the Federal funds rate to achieve and 

maintain its employment and inflation objectives. As I noted on 

previous occasions, waiting too long to remove accommodation 

would be unwise, potentially requiring the FOMC to eventually 

raise rates rapidly, which could risk disrupting financial markets 

and pushing the economy into recession. Incoming data suggest 

that labor market conditions continue to strengthen and inflation 

is moving up to 2 percent, consistent with the Committee’s expectations. At our upcoming meetings, the Committee will evaluate 

whether employment and inflation are continuing to evolve in line 

with these expectations, in which case a further adjustment of the 

Federal funds rate would likely be appropriate. 

7 

The Committee’s view that gradual increases in the Federal 

funds rate will likely be appropriate reflects the expectation that 

the neutral Federal funds rate—that is, the interest rate that is 

neither expansionary nor contractionary and that keeps the economy operating on an even keel—will rise somewhat over time. Current estimates of the neutral rate are well below pre-crisis levels— 

a phenomenon that may reflect slow productivity growth, subdued 

economic growth abroad, strong demand for safe longer-term assets, and other factors. The Committee anticipates that the depressing effect of these factors will diminish somewhat over time, 

raising the neutral funds rate, albeit to levels that are still low by 

historical standards. 

That said, the economic outlook is uncertain, and monetary policy is not on a preset course. FOMC participants will adjust their 

assessments of the appropriate path for the Federal funds rate in 

response to changes to the economic outlook and associated risks 

as informed by incoming data. Also, changes in fiscal policy or 

other economic policies could potentially affect the economic outlook. Of course, it is too early to know what policy changes will be 

put in place or how their economic effects will unfold. While it is 

not my intention to opine on specific tax or spending proposals, I 

would point to the importance of improving the pace of longer-run 

economic growth and raising American living standards with policies aimed at improving productivity. I would also hope that fiscal 

policy changes will be consistent with putting U.S. fiscal accounts 

on a sustainable trajectory. In any event, it is important to remember that fiscal policy is only one of the many factors that can influence the economic outlook and the appropriate course of monetary 

policy. Overall, the FOMC’s monetary policy decisions will be directed to the attainment of its congressionally mandated objectives 

of maximum employment and price stability. 

Finally, the Committee has continued its policy of reinvesting 

proceeds from maturing Treasury securities and principal payments from agency debt and mortgage-backed securities. This policy, by keeping the Committee’s holdings of longer-term securities 

at sizable levels, has helped maintain accommodative financial 

conditions. 

Thank you. I would be pleased to take your questions. 

Chairman CRAPO. Thank you very much, Chair Yellen, and I 

want to get into that last issue you talked about with regard to the 

Fed’s balance sheet. But before that, I have got two or three quick 

questions I just wanted to go through with you. 

First, Dodd-Frank established a new position at the Federal Reserve, the Vice Chairman of Supervision. President Obama has 

never yet designated anyone for this role, and instead Fed Governor Dan Tarullo has acted as the de facto Vice Chairman for Supervision in various ways, including by chairing the Federal 

Reserve Board’s Committee on Supervision and Regulation, overseeing the Large Institution Supervision Coordinating Committee, 

and representing the Fed at the Financial Stability Board and in 

Basel, among other functions. 

What role do you envision for the Fed Vice Chairman for Supervision having? And how do you envision working with this person 

when we get one nominated? And is it your expectation that a 

8 

Presidentially appointed Federal Vice Chairman for Supervision 

will have the responsibilities that Governor Tarullo currently has, 

including, among other things, chairing the Committee on Supervision and Regulation and negotiating on behalf of the Federal Reserve in Basel? 

Ms. YELLEN. Chairman Crapo, I think, as you know, the entire 

Board has responsibility for approving new rules, but the Vice 

Chair would head our Supervision and Regulation Committee and 

would coordinate our efforts in this area. He or she would also represent the Board on international negotiations of financial regulatory standards, including representing the Fed in Basel. And 

beyond that, the new Vice Chair would fulfill any statutory obligations such as providing semiannual testimony to Congress on 

supervision. I look forward to working with that individual. 

Chairman CRAPO. Thank you very much. 

Second, President Trump recently issued an Executive order directing the Treasury Secretary to work with the member agencies 

of FSOC to review the extent to which existing laws and regulations promote certain core principles. First of all, do you agree that 

it is important to promote the core principles mentioned in this Executive order? And do you plan to work with the Treasury Secretary and other members of FSOC to ensure that this review 

occurs? 

Ms. YELLEN. So I certainly do agree with the core principles. 

They enunciate very important goals for our financial system and 

for supervision and regulation of it. And I look forward to working 

with the Treasury Secretary and other members of FSOC to engage 

in this review. 

Chairman CRAPO. Thank you very much. 

My third question before we get to the balance sheet is: Fannie 

Mae and Freddie Mac were put into conservatorship in 2008 and 

continue to dominate the mortgage market. I am not alone in calling for housing reform and considering it the most significant piece 

of unfinished business following the financial crisis. 

Do you believe that finding a durable, comprehensive legislative 

solution for the housing finance market is urgently needed? And 

are you willing to work with us to help achieve that? 

Ms. YELLEN. Yes, I think it is very important that Congress continue to deal with the GSEs and figure out what the Government’s 

role in housing finance should look like going forward. The goal of 

bringing private capital back into the mortgage market I think is 

important, and I would hope that Congress would decide explicitly 

on what the Government’s role is and, if there are guarantees, that 

they would be recognized and priced appropriately. And we look 

forward to continue working with you to help achieve these 

objectives. 

Chairman CRAPO. Well, thank you. And I just wanted to get your 

comments on those few issues before I go into this final question 

on the balance sheet. The Fed has said that it will not begin 

shrinking its balance sheet until normalization of the level of Federal funds rates is well underway. Recently, some Reserve Bank 

Presidents have suggested that it is time to consider beginning that 

process. What are the benefits of starting to let the balance sheet 

run off rather than relying solely on short-term rate hikes to 

9 

tighten policy? And as short-term rates rise, is it problematic to 

have the large balance sheet continuing to put downward pressure 

on longer-term rates? 

Ms. YELLEN. Well, Chairman Crapo, the Federal Reserve resorted to purchases of longer-term assets after the financial crisis 

at a time when the economy was very depressed, unemployment 

was very high, inflation running below our objectives, and extraordinary support was needed. But we would hope that that was a 

very unusual intervention and one that we would not frequently be 

relying on in the future. 

The FOMC has enunciated that its longer-run goal is to shrink 

our balance sheet to levels consistent with the efficient and effective implementation of monetary policy. And while our system 

evolves and I cannot put a number on that, I would anticipate a 

balance sheet that is substantially smaller than at the current 

time. 

In addition, we would like our balance sheet to again be primarily Treasury securities; whereas, as you pointed out, we have 

substantial holdings of mortgage-backed securities. 

Now, to adjust financial conditions in order to influence economic 

developments in line with our dual-mandate objectives, the Committee would like, to the maximum extent possible, to rely on variations in our short-term overnight interest rate to accomplish that 

objective. It is our traditional tool. It is the one that we have the 

most confidence in, that markets best understand how we set it, 

and we have the greatest confidence in our ability to calibrate it 

relative to the needs of the economy. So we do not want to use fluctuations in our balance sheet policy as an active tool of monetary 

policy management. 

So what we would like to do is to find a time when we judge that 

our need to provide substantial accommodation to the economy in 

the coming years is minimal, when we have confidence that the 

economy is on a solid course, and the Federal funds rate has 

reached levels where we have some ability to address weakness by 

cutting it. And once we have that confidence, we will begin to allow 

maturing principal from our investments to gradually and in an orderly way we will stop reinvestments or diminish them, and allow 

our balance sheet to shrink in an orderly and predictable way. 

The Committee has decided that it will not sell mortgage-backed 

securities, but as principal matures, we will begin to allow those 

assets to run off our balance sheet. So we do expect to be discussing in greater detail. We gave general guidance that we want 

to wait to start this process until the process of normalization is 

well underway, and the Committee in the coming months will be 

discussing issues pertaining to reinvestment strategy to try to provide some further guidance. 

Chairman CRAPO. Thank you very much. 

Senator Brown. 

Senator BROWN. Thank you, Senator Crapo, Mr. Chairman. 

Madam Chair, you testified last year that the banking system 

was more safe, more resilient. Is that still true? 

Ms. YELLEN. I believe so. Yes. I mean, there is much more capital in the banking system. The quantity of high-quality capital, 

Tier 1 capital, has more than doubled since before the financial 

10 

crisis. There is much more liquidity. I believe the financial system 

is much more resilient than it was. 

Senator BROWN. Thank you. Now that we know that—and I 

think we already knew that—I appreciate your assertion and convincing arguments that you have made for some time. Some have 

remarked that banks are not lending now. Is that true? 

Ms. YELLEN. Well, a recent survey by the National Federation of 

Independent Business, which is smaller businesses, indicated that 

only 4 percent of respondents were unable to get all of the loans 

that they needed, and the fraction of businesses ranking inadequate access to credit as their main problem stood at 2 percent, 

which is an extremely low number. 

Senator BROWN. So just because people—— 

Ms. YELLEN. Lending has expanded overall by the banking system and also to small businesses—— 

Senator BROWN. Thank you. Just because people in high places 

say it is true does not make it so. 

Are U.S. banks competing—others have said that U.S. banks 

cannot compete. Are U.S. banks competing relative to their international counterparts? 

Ms. YELLEN. U.S. banks are generally considered quite strong 

relative to their counterparts. They built up capital quickly, partly 

as a result of our insistence that they do so following the financial 

crisis and, as I mentioned earlier, are very well capitalized. And 

they are lending. Their price-to-book ratios are substantially higher 

than the ratios of banks headquartered in other areas. And they 

are gaining market share, and they remain quite profitable. 

Senator BROWN. So banks are safer and more resilient. Banks 

are lending. Banks are able to compete with international counterparts. Consumers—some have said consumers are worse off since 

the crisis. Are consumers better protected today from abusive and 

deceptive and fraudulent practices than they were? 

Ms. YELLEN. Well, certainly we have focused very much on protecting consumers in our implementation of strengthening the 

financial system. And, of course, consumers were very seriously 

harmed by the financial crisis, but I think we have seen a significant recovery. 

Senator BROWN. And the Fed is tailoring rules, as we have discussed personally and in this forum, the Fed is tailoring rules for 

communities and—for community banks, regional banks, the largest banks based upon factors including size and riskiness, correct? 

Ms. YELLEN. Yes. 

Senator BROWN. It seems to me that steps taken after the crisis 

with higher capital requirements, as you have said, with stress 

tests, with orderly liquidation authority, with the Consumer Financial Protection Bureau have made our economy stronger, our financial system more stable, our banks better capitalized, and our 

consumers better protected. I think that if the rules are removed, 

as one executive said during the crisis, if the music is playing, you 

have got to get up and dance. If the rules are removed, Wall Street 

will almost assuredly be right back to their risky and reckless 

behavior we experienced before you took this job, back before the 

crisis. 

11 

A couple of other lines of questions, if I could, Madam Chair, Mr. 

Chairman. Recent Executive action directs the Secretary of Treasury to chair the Financial Stability Oversight Council, FSOC, to review the rules and other activities of each member agency of 

FSOC, including the Fed, to determine if they are consistent with 

the certain core principles of the executive branch. I know the Fed 

and other agencies regularly review their work to make sure that 

the rules continue to enhance financial stability and promote safety 

and soundness and to protect consumers. 

To the extent that you provide any information or conclusions to 

Treasury or to FSOC about your agency’s rules as part of this process, could you provide those materials to the Banking Committee? 

Ms. YELLEN. So I do not yet have any clarity about what the 

process will involve, but we—— 

Senator BROWN. But when you do? 

Ms. YELLEN. We always try to work with our oversight committees to provide materials that are relevant to your oversight of us. 

Senator BROWN. Thank you. 

Ms. YELLEN. And we will strive to be cooperative. 

Senator BROWN. And we will count on that. Thank you. 

I have doubts about the Executive order that requires Federal 

agencies to eliminate two rules—in many cases, two consumer protections—for every new rule. I am particularly troubled by what 

that means for financial regulators. It is a little like telling the 

highway department to take down 2 feet of guardrails for every 

foot it puts up. 

Is it clear that—I have a series of questions, and I will put them 

together, if you would answer. Is it clear that financial regulators, 

including the Fed, are not covered by this rule? Does it make sense 

to remove two safety and soundness rules for every new safety and 

soundness protection? Does it make sense to remove two consumer 

protections for every new consumer protection? Will it make our 

system more stable and better protect consumers from bad actors? 

Ms. YELLEN. So I believe that the independent agencies are not 

covered explicitly by the rules, but let me just say that considering 

regulatory burden and looking for ways in issuing rules and reviewing outstanding rules, constantly looking for ways to mitigate 

burden I think is an important goal, and it is one that we have 

strived and will strive to achieve. And it is a legitimate and important goal. 

Senator BROWN. Understanding, of course, what some people call 

‘‘rules and regulatory overreach,’’ others call ‘‘consumer protection 

and environmental protection and work protections.’’ 

Chair Yellen—last question, Mr. Chairman—I want to follow up 

on an issue we have talked about: diversity in the Federal Reserve 

System. We see the least diverse President’s Cabinet than we have 

seen at any time in the last three decades. The Presidents of two 

of the most diverse Federal Reserve districts in the country, Richmond and Atlanta, have announced their retirement. Each bank 

has begun its search for the replacement. What is the Board of 

Governors doing to ensure that a diverse set of candidates is considered for these positions? 

Ms. YELLEN. The Board consults with the search committees that 

are charged with nominating individuals to serve as Presidents of 

12 

the Reserve Banks, and we consistently emphasize that diversity 

is an extremely important goal. We ensure that the search is inclusive, that robust efforts are made to identify diverse pools, and that 

the boards are focused on this important goal as they go about 

their searches. 

Senator BROWN. And the last connected question, significant racial disparities in unemployment and wages persist everywhere— 

not, of course, just Mississippi, Louisiana, Maryland, South Carolina, places in both of these districts. What is the Fed doing to 

ensure that these challenges are understood by the Board of Directors in these districts? What can be done by the Fed or others to 

address these issues? 

Ms. YELLEN. Well, I think we are trying to address issues of high 

minority unemployment by adopting policies that result in a robust 

labor market and strong overall job conditions. Over the last year, 

for example, the unemployment rate of African Americans I believe 

has come down about a percentage point, moved substantially more 

than that for white Americans. So a strong labor market does improve the situation of vulnerable minorities, although it is, as I 

mentioned, disturbing that such large disparities continue to exist. 

Senator BROWN. Thank you, Mr. Chairman. 

Chairman CRAPO. Senator Shelby. 

Senator SHELBY. Madam Chair, good to see you. 

Ms. YELLEN. Thank you. 

Senator SHELBY. I want to pick up on the theme that Chairman 

Crapo got into a minute ago dealing with the Vice Chairman of the 

Fed. We have been hoping that—we did at one time hope that 

President Obama would nominate someone, but he did not. But 

now, as I understand it, there are going to be three openings at the 

Fed. Tarullo—it will come in April, whenever it is he has resigned. 

Two other openings are there. And then your tenure, you are appointed to, what, next February? Is that correct? 

Ms. YELLEN. That is correct. 

Senator SHELBY. Do you intend to fulfill this last year of your appointment? 

Ms. YELLEN. I do intend to complete my term as Chair. 

Senator SHELBY. What will be the mechanics of how the Fed Vice 

Chairman will work—the Chairman got into that some—with the 

whole Board? You mentioned that he would come before the Committee to testify, he would represent people at the international— 

dealing with regulatory relief, regulatory affairs and so forth. Have 

you got anything else to add to that? 

Ms. YELLEN. Well, importantly, he would chair our Board Committee on Supervision and Regulation, and that Committee takes 

the lead on behalf of the full Board in working with the Division 

of Supervision and Regulation to craft rulemakings that are then 

brought to the full Board for a vote. The Vice Chair would head 

that Committee and would have oversight in that role for our Division of Supervision and Regulation and would also represent us in 

international supervision groups such as the Basel Committee. 

Senator SHELBY. So if we have three new appointments to the 

Fed Board of Governors, that will be three new people to deal with, 

and you will have to deal with that as the Chairman. Is that right? 

Ms. YELLEN. Of course. We have a diverse membership—— 

13 

Senator SHELBY. Sure. 

Ms. YELLEN.——which changes over time, and the role of the 

Chair is to work constructively with all the Governors to manage 

the matters that Congress has charged us with. 

Senator SHELBY. When you are getting into the area of monetary 

policy, inflation, deflation, and so forth, price stability, what is the 

biggest challenge as you are looking at all the data inside to see 

where inflation is rearing its head and so forth? Is it wages and 

salaries? Is that one of the big components? Energy is generally a 

component there, and food is a component. But sometimes you do 

not count that, you know. What is your biggest challenge in measuring, engaging, and configuring what inflation is doing or not 

doing? 

Ms. YELLEN. So we look at many measures of inflation. Our objective—we recognize that food and energy are very important 

parts—— 

Senator SHELBY. Volatile, isn’t it? 

Ms. YELLEN. Consumers spend a good share of their budgets on 

food and energy. We do not want to ignore movements in food and 

energy prices in measuring inflation. So in my testimony, I began 

by saying that an overall comprehensive measure of price increases 

that includes food and energy ran at 1.6 percent last year. There 

are many different measures. We have focused explicitly in saying 

that we have a 2-percent inflation goal on the measure we regard 

as the best measure we have of consumer prices, which is the personal consumption expenditure price index. It is less well known 

than the CPI, but we think it is actually a more comprehensive 

measure. 

Now, food and energy prices are very volatile, and in looking forward over a number of years and trying to estimate where inflation 

is going, we often look at measures called ‘‘core measures’’ that remove food and energy prices. 

Wage developments, it is unclear that they have much direct effect on inflation, but generally what we have found is that in a situation where labor and product markets are tight, inflation tends 

to move up. And movements in wage growth gives us a sense of 

just how tight labor markets are. 

Senator SHELBY. In the area of regulations, the last time you 

came before this Committee that you alluded to—I believe it was 

back in June—I asked you what the Federal Reserve’s plans were 

to tailor the CCAR process to provide much needed relief to smaller 

regional banks. On January 30th, the Federal Reserve issued its 

final CCAR rule, which tailored the process for institutions that 

have less than $250 billion in total consolidated assets and less 

than $75 billion of total nonbank assets. 

What is the significance of what you did there? And how will 

that help? 

Ms. YELLEN. I think that change will reduce burdens substantially for—— 

Senator SHELBY. Regulation? 

Ms. YELLEN. Yes, for a significant number of institutions. After 

engaging in a 5-year review of CCAR and our stress-testing methodologies, we decided that the capital planning processes of those 

smaller institutions could be adequately reviewed and commented 

14 

on through our normal supervisory processes, and that it was appropriate to exempt them from the qualitative portion of that capital review. But we still are subjecting them to our stress tests and 

requiring that they conduct stress tests themselves. That is an important component of our supervision. 

Senator SHELBY. But as a regulator, you will continue to monitor 

that, and if that needs to be tailored, you will do whatever it takes? 

Ms. YELLEN. Yes, we believe very strongly in tailoring to make 

sure that our regulations fit the risk profiles of particular institutions, and especially for smaller institutions, we are very well 

aware of the burdens that they face and are looking for every way 

we can find to mitigate those burdens. 

Senator SHELBY. Thank you. 

Chairman CRAPO. Senator Reed. 

Senator REED. Well, thank you, Mr. Chairman, and thank you, 

Madam Chair, for your leadership. Some of my colleagues in the 

Congress have called on the Federal Reserve to use a formula, a 

very strict formula in setting interest rates. Many times they refer 

to the Taylor rule. Could you explain to us how this would affect 

particularly working Americans? Would it be good or bad? And how 

do we explain its ramifications to our constituents? 

Ms. YELLEN. Well, right now the Taylor rule would call for a 

short-term interest rate somewhere between 3 1⁄2 and 4 percent, 

which is obviously a much higher value of the Federal funds rate 

than the FOMC has deemed appropriate given the needs of the 

economy. I believe we would have a much weaker economy if in the 

last number of years we had followed the dictates of that rule. Unemployment would be substantially higher. The labor market 

would be weaker. And instead of inflation which is running below 

2 percent—and we want to see it move up to our 2-percent objective—I believe inflation would likely be lower than it is now. 

Senator REED. So we would see fewer jobs, higher mortgage interest rates, a weaker economy if we were essentially just automatically following a formula? 

Ms. YELLEN. That is right. I recently, a few weeks ago, gave a 

speech at Stanford where I tried to explain why I thought it was 

appropriate to address the recommendations of rules like that, to 

take into account, for example, the fact that not only the FOMC 

but most outside forecasters believe that the so-called neutral rate 

of interest has been unusually low in the aftermath of the crisis. 

And the Taylor rule would assume that it is at 2 percent. Current 

estimates would put that estimate closer to zero. 

Senator REED. All right. Thank you. There is another aspect I 

have been working on for years, particularly incorporating some of 

the language in the Dodd-Frank bill, ensuring that clearing platforms are used, but there is a risk because systemic failure would 

be significant. Can you give us an update on what you are doing, 

and your colleagues, to ensure that the central clearing platforms 

are adequately protected from failure, i.e., the consumers are ultimately protected from failure? 

Ms. YELLEN. Well, we strongly believe that well-regulated and 

well-managed financial market infrastructures—and that would include central counterparties—play a positive financial stability 

role. They can help stem the propagation of disturbances, and they 

15 

reduce the volume of transactions among key financial institutions. 

And we think they play a financial stability role, but they can also 

be sources of risk to the financial system if they are not themselves 

well managed. Title VIII of Dodd-Frank created a structure in 

which the Federal Reserve, the CFTC, and the SEC have oversight 

responsibilities to make sure that these key infrastructures of our 

financial system are managing their own risks successfully, and we 

are cooperating with the other regulators in our examinations to 

make sure that appropriate risk management standards are in 

place. 

Senator REED. Thank you. A final question. Cybersecurity is the 

issue on everyone’s mind, and you recently have an Advanced Notice of Proposed Rulemaking which would require boards of directors to have adequate expertise. I have been involved in legislation 

that would apply not just to financial institutions but publicly held 

companies because the cyber threat is not limited. It is ubiquitous. 

Could you just briefly—very briefly—give us your sense of how 

important it is to get this cybersecurity expertise on boards? 

Ms. YELLEN. Well, I think cybersecurity is a major, major risk 

that financial firms face. I think they are very well aware of the 

risks, and my sense is that boards of directors generally appreciate 

the seriousness of cyber threats, but sometimes they do not have 

a comprehensive or enterprise-wide view of the institution’s capabilities in this area. And so it is very important for boards to have 

appropriate expertise. 

Senator REED. Thank you very much, Madam Chair. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman. And, Madam Chairman, thank you for your service and being here today. I, too, want 

to thank Mr. Tarullo. I did not always agree with every decision 

he made, but we had vigorous debate, and I do think he was a committed public servant, and I want to thank him for his service, 

along with Mr. Alvarez. We were in the foxhole many, many times 

back in 2008, and, again, I thank you for your service. 

Madam Chairman, I was interviewed earlier today, and, you 

know, people have always sort of hinged their futures on what you 

have to say and I guess are somewhat thankful now that it looks 

like you have a little bit of a partner. We knew at one time there 

probably were going to be no changes here—not being pejorative, 

it is just the environment we lived in. And yet now we look at potential tax reform, we look at potential changes to the health care 

policy, we look at things relative to infrastructure and all of that. 

As you see those possibilities occurring, is that affecting how you 

look at monetary policy decisions moving down the road? A stagnant situation before, again, just because of the environment, a 

very changing possibility policy environment here, is that something that is affecting your deliberations? 

Ms. YELLEN. So we recognize that there may be significant 

economic policy changes and that those changes could affect the 

outlook. We are very well aware of that. And we do not yet have 

enough clarity on what changes will be put in place to really clearly factor those policy changes into the economic outlook. 

16 

So we do not want to base current policy on speculation about 

what may come down the line. We will wait to gain greater clarity 

on policy changes and try to assess—— 

Senator CORKER. Well, those policy changes, once you develop 

greater clarity on what you think is coming down the pike, could 

affect monetary policy decisions. 

Ms. YELLEN. Well, it is one of many factors that could affect 

monetary policy decisions. So I think the answer is yes, they could. 

Exactly how depends on the timing—— 

Senator CORKER. I got it. 

Ms. YELLEN.——size, composition, and many factors—— 

Senator CORKER. And growth I guess would generate—growth 

could generate additional inflationary pressures, and so paying attention to that, and when that happens, it can happen fairly quickly, can it not? 

Ms. YELLEN. Well, we will certainly pay attention to it. I think 

some policies may have supply side impacts and raise productivity 

growth—— 

Senator CORKER. All right. 

Ms. YELLEN.——and sustainable growth in the economy, too. 

Senator CORKER. You mentioned something about sustainable 

trajectory; you are hoping the Administration will develop policies 

that cause a sustainable trajectory relative to fiscal issues. Is there 

anything that you are seeing coming down the pike or being debated that has caused you to raise that issue? I agree with you, by 

the way, but is there something you are looking at that caused you 

to put a note in there, or is that just a standard line that would 

be in a report like this? 

Ms. YELLEN. Well, I think we have known for many, many years 

that the U.S. fiscal trajectory is not sustainable, and the Congressional Budget Office’s most recent forecasts show deficits increasing over the next 10-year period under their baseline and the ratio 

of debt to GDP as rising. 

Senator CORKER. So nothing—it is just a standard, there is nothing that you are looking at coming out of the Administration or 

Congress that is causing you to raise that alarm. It is more just 

the standard concern that many of us have that we are really conducting ourselves in a totally inappropriate way as it relates to 

deficits. Nothing that is being discussed policy-wise right now. 

Ms. YELLEN. Well, I mean, some of the policies that are being 

discussed might well raise deficits, and in that context, they may 

also have impacts on economic growth—— 

Senator CORKER. Yeah. 

Ms. YELLEN.——and the economy’s growth potential. So it is not 

a simple matter to evaluate. But I do think it is worth pointing out 

that fiscal sustainability has been a long-standing problem and 

that the U.S. fiscal course, as our population ages and healthcare 

costs increase, is already not sustainable. 

Senator CORKER. I agree 100 percent. You gave a very fulsome 

answer to the balance sheet question, and I understand how the 

Fed’s fund rate is much more targetable and much more accurate. 

I guess what I have not understood is just allowing the maturity— 

in other words, allowing these securities, $4.5 trillion or so, just to 

mature and rolling off, it is hard to understand how that would 

17 

create vagaries, if you will, relative to monetary policy that would 

be hard to predict. Could you share—— 

Ms. YELLEN. Yes, I am sorry, I did not mean to say that it would 

create a problem. 

Senator CORKER. Yeah. 

Ms. YELLEN. We want to allow that process to occur in a gradual 

and orderly way in order to—— 

Senator CORKER. But wouldn’t just allowing them to mature, 

when they mature, they roll off, isn’t that orderly? 

Ms. YELLEN. Yes. Yes, it is orderly, and that is why we intend 

to do it that way. 

Senator CORKER. But you have not started yet. 

Ms. YELLEN. We have not—— 

Senator CORKER. You are reinvesting now. I am just curious 

why—it just does not seem to me—— 

Ms. YELLEN. So I agree it is orderly, and that is our desire, to 

have it be an orderly process, which is why we intend to allow 

those assets to run off as principal matures. So we recognize, however, that allowing that process to occur results in some tightening 

of financial conditions. And so before we turn that process on and 

start it, we want to make sure that we have adequate ability 

through our normal interest rate—overnight interest rate moves to 

meet the needs of the economy, particularly if it were to weaken 

some, which it would be a long process if it is running off, and we 

want to make sure we have enough scope and the economy is 

strong enough that that runoff would not create a problem for the 

economy. 

Senator CORKER. I just want to close with a statement. I know 

when you were coming in and interviewing for this post and being 

affirmed, you mentioned to me that when times called for it, you 

would allow interest rates to rise. And you are known as being a 

dove, but, in fact, you are—I know some people have criticized the 

rate at which those rises have taken place, probably me included, 

but I do want to thank you for allowing that to happen, hoping it 

will continue as we return to more normal circumstances. Hopefully the balance sheet will roll off, and I hope you will continue 

to criticize us if we allow deficit spending to continue more so than 

it already is today. Thank you so much. 

Ms. YELLEN. Thank you, Senator, and I think allowing that process to take place, that is something that will show that the economy is doing well and the increases have been a reflection of the 

strength we have seen in the economy. 

Senator SHELBY. [Presiding.] Senator Menendez. 

Senator MENENDEZ. Thank you. Chairman Yellen, thank you for 

your leadership at the Federal Reserve. Our economy, though not 

perfect, has made tremendous strides since the financial crisis and 

ensuing Great Recession, which wiped out nearly $13 trillion in 

household wealth and cost 9 million Americans their jobs. And I 

think these last 6 years have shown us how important and positive 

Wall Street reform and consumer protection has been to our economy, to strong markets, and, most importantly, to American families and businesses. 

Now, I want to ask you specifically, as you know, healthcare 

accounts for nearly 20 percent of U.S. GDP, including not only the 

18 

delivery of life-saving, life-enhancing health services, but also fueling innovations in patient care, in diagnostics, in preventative 

health, and research and development of cures to diseases. 

In response to the fiscal year 2017 budget resolution that Congress passed last month, the former Director of the Office of Management and Budget sent a letter to Congress saying that the resolution would add $9.5 trillion to the deficit. Recent studies have 

shown that a major market disruption would have a detrimental 

impact on the labor market, including a reduction in job growth by 

nearly 2.6 million jobs in 2019. 

My home State of New Jersey is estimated to be among the top 

of the list when it comes to potential job losses as a result of a 

spike in the number of uninsured. Furthermore, stripping nearly 

30 million people of their health insurance would have a significant 

impact on the productivity of the American workforce. 

Are you concerned about how this major increase in debt coupled 

with the downturn in the labor market and decreased productivity 

would have on the larger economy? 

Ms. YELLEN. Well, we would have to look at what the impact is 

of shifts in health care on the economic outlook. Health care, as 

you mentioned, does account for a very significant share of spending, and a loss of access to health insurance could have a significant impact on spending of households for other goods and services 

and, beyond health care itself, have impacts on the economy. 

In addition, access to health care has for some individuals likely 

increased their mobility and diminished the phenomenon called 

‘‘job lock,’’ where people are afraid to leave jobs because of losing 

health insurance, and that could have implications for the labor 

market as well that we would try to evaluate. 

Senator MENENDEZ. So we should tread lightly before we make 

major changes that create disruptions. 

Let me ask you this: In the years leading up to the financial 

crisis, many lenders and financial institutions exploited the uncoordinated enforcement of consumer protection laws and misled consumers into expensive and risky subprime mortgages even if they 

qualified for prime rates. As part of the landmark Wall Street Reform and Consumer Protection Act, we were finally able to 

empower a cop on the beat to protect hardworking Americans from 

unfair, deceptive, and abusive financial practices, and from my 

view it has been working. 

As an independent agency whose sole job is to enforce consumer 

protection laws, the CFPB has returned almost $12 billion in relief 

to more than 29 million consumers. And, more importantly, the Bureau helps level the playing field for hardworking American families, ensuring that consumers are protected when they purchase a 

home, open credit cards, take out student loans, and use prepaid 

cards. 

Do you believe that if an independent consumer-focused agency 

like the CFPB has existed to police mortgage markets prior to the 

financial crisis, much of the economic damage to working-class families would have been avoided? In addition to protecting individual 

families, would better enforcement of consumer protections also 

have enhanced national financial stability? 

19 

Ms. YELLEN. Well, I do agree that consumer abuses in the mortgage and securitization areas played a key role in the crisis. The 

Federal Reserve at that time had responsibility for enforcement of 

these regulations, and in retrospect, I wish the Fed had acted more 

aggressively and earlier to address those abuses. We have certainly 

learned from the financial crisis that it is critical to monitor this 

area and the potential for deceptive practices in consumer lending 

to create a financial crisis or financial stability issues. 

Senator MENENDEZ. So an entity like the Consumer Financial 

Protection Bureau, which has, in essence, done that since the Great 

Recession, has played a critical role in ensuring that. Certainly, I 

agree that had the Fed been more active, along with all our other 

regulators, about being the cop on the beat instead of being asleep 

at the switch, it would have been great. But in the absence of that, 

a bureau like the Consumer Financial Protection Bureau is actually playing a significant role in ensuring that consumers have a 

level playing field. Is that not a fair statement? 

Ms. YELLEN. Well, they have been focusing certainly on these 

issues. 

Senator MENENDEZ. Let me close by saying in the 104-year history of the Federal Reserve, it has had 134 different presidents of 

regional banks. Not one—not one—of those 134 presidents has 

been African American or Latino. That is pretty outrageous. And 

it is my hope that now that there are some openings, that we begin 

to change that reality. These are two communities that have an 

enormous part of contributing to the Nation’s GDP, and for them 

not to have any representation whatsoever in the process of these 

banks is not acceptable, and I hope we can begin to change the 

reality. 

Ms. YELLEN. Increasing diversity is a critical priority, and I 

share your hope. 

Senator SHELBY. Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman. 

Madam Chair, thank you very much for joining us yet again. I 

want to briefly ask you a question about the FOMC forecast for 

growth at the December meeting. As we all know, we had an election in November in which a President and a Congress were elected, and a very, very central part of the message of both the President and the Congress included a commitment to tax reform, a 

commitment to a very different regulatory approach, including a 

much lighter regulatory touch and rollback of existing regulation, 

and there was considerable discussion also about a fiscal stimulus 

in the form of an infrastructure bill. But I do not think anyone disputes that the President campaigned on tax reform, campaigned on 

lighter regulation, campaigned on this. 

It seems that most of the world responded with the view that 

that increases the likelihood—no certainty here, but increases the 

likelihood that we would have stronger economic growth. Equity 

markets responded powerfully and immediately. Bond markets sold 

off, which is consistent with the view of stronger economic growth. 

The IMF projected stronger economic growth. A poll of economists 

by the Wall Street Journal showed a very strong consensus that 

growth was likely to tick up. The World Bank suggested that tax 

reform alone would add eight-tenths of a percent to American GDP 

20 

in 2018. And yet at the December Fed meeting, the FOMC members had no change in their opinion at all, as far as I can gather, 

about the prospect for economic growth. In fact, the upper bound, 

the highest estimate, actually decreased. 

So it just looks on the surface like the FOMC members either believe it is unlikely that any of those things will actually happen, 

or they think that those things are not particularly pro-growth. 

And, obviously, the rest of the world is of a different opinion. 

Does the Fed have the view that the prospects for growth are not 

at all changed by the prospect of tax reform and regulatory reform? 

Ms. YELLEN. Well, we do not yet have clarity on what economic 

policy changes will be put in place—— 

Senator TOOMEY. I understand there is no certainty. This is 

about likelihoods. 

Ms. YELLEN. Most of my colleagues decided that they would not 

speculate on what economic policy changes would be put into effect 

and what their consequences would be. A few of my colleagues 

mentioned that in writing down those forecasts, they assumed that 

there would be a mild fiscal stimulus. But most of my colleagues 

have taken the view that we want greater clarity about the size, 

timing, and composition of changes to fiscal and other policies 

before trying to incorporate those into our forecasts. 

Senator TOOMEY. OK. That is what I suspected. Let me move on 

to CCAR. I sent you a letter last week outlining some of the big 

concerns that I have about CCAR, and let me just touch on a few 

of them briefly. 

First of all, compliance is enormously expensive for the banks 

who are subject to that. There is a recent GAO report that suggests 

that the CCAR models employed by the Fed and testing procedures 

are not transparent. Well, that is, I think, generally acknowledged. 

The GAO report goes on to suggest that the Fed does not engage 

in sufficient risk management of the systems of the models it uses. 

The GAO report also concludes that the Fed has not assessed 

whether CCAR is inadvertently procyclical despite the intent that 

it be countercyclical. 

I am concerned that CCAR might actually increase systematic 

risk in one important respect by correlating the risks of bank 

behavior and allocation of capital. And the CCAR’s implicit risk 

weighting, which we have to infer because they are not explicit, is 

very, very different from those of the banks and, for that matter, 

Basel III. 

Now, as you know, CCAR is not required by statute. DFAST is 

required by statute, but CCAR is not. And you mentioned earlier 

that there has been a huge increase in the capitalization of American banks post crisis, which is certainly the case. And the Fed 

already has other ways of boosting capital requirements like the 

countercyclical capital buffer and the G–SIB surcharge. 

So my question is: Given all of that, isn’t CCAR at least somewhat duplicative? And since it is very, very costly and not mandated by statute, would you consider bringing it to an end at some 

point in the foreseeable future? 

Ms. YELLEN. Well, I think it is a key part of our regulatory process. It is a very detailed and institution-specific and forward-looking assessment of the risks in the firm’s balance sheet, and I think 

21 

it has been a cornerstone of our efforts to improve supervision, especially of the largest banking institutions whose stability is really 

critical to overall U.S. financial stability. 

The GAO in their assessment found that the stress tests have 

been useful and played a useful role. They did not recommend that 

we end them. They made a number of specific recommendations 

which we agree with and are working on, and we will, of course, 

continue to review our practices as we recently changed CCAR to 

exempt most of the institutions under $250 billion from the qualitative part of the CCAR review. But I do think that stress testing 

has greatly strengthened our process of supervision. 

Senator TOOMEY. I appreciate that. I would just point out that 

in the absence of CCAR, that does not necessarily imply the end 

of stress testing. DFAST is a mandate for stress testing that occurs 

separately. Banks do their own stress testing. So I do think it is 

duplicative. 

Mr. Chairman, if I could just make one quick closing comment? 

That is, as we all know, we have had a de facto Acting Vice Chair 

of Supervision who never went through the nomination or the confirmation process but, nevertheless, exercised the powers of that 

position. It is my hope that the President will soon be able to nominate individuals to complete the Board of Governors, including a 

Vice Chair for Supervision who will go through the process, who 

will be vetted and confirmed by the Committee. And until such 

time, I hope the Fed will refrain from issuing major new regulations which I think really ought to benefit from the input of these 

new people. 

Thank you. 

Chairman CRAPO. [Presiding.] Thank you. Before I go to Senator 

Rounds, Senator Shelby had one quick question he wanted to ask. 

Senator SHELBY. I will try to be quick. We have not talked about 

this, Madam Chair, but the current account, our trade imbalance, 

would you share with us—and, of course, you are sharing this with 

the American people—the long-term danger of an imbalance in 

trade that we have been running for years and years as opposed 

to short-term and so forth? And where are we—you were an economics professor, but we were taught that is not a good thing in 

the long run. 

Ms. YELLEN. So we have a current account deficit that is—— 

Senator SHELBY. Tell the people what that is. Most people here 

know, but you have a nationwide audience here this morning. 

Ms. YELLEN. It is the difference between the amount that we 

spend on goods and services that we import from abroad—— 

Senator SHELBY. Import versus export, is it not? 

Ms. YELLEN. Correct, of goods and services. So we do have a current account deficit. It has increased in size, and ultimately it leads 

to a buildup of our indebtedness to foreigners. And so it can be a 

long-term concern if it is not on a sustainable course. 

Senator SHELBY. What is it roughly now? 

Ms. YELLEN. I believe it is—— 

Senator SHELBY. Roughly. You can furnish the exact figure for 

the record if you do not have it. 

Ms. YELLEN. I believe that in 2016 it amounted to about 2.6 percent of GDP. 

22 

Senator SHELBY. And in dollars, what would that be, roughly? 

Ms. YELLEN. At about close to $500 billion is the deficit, a little 

bit below that. 

Senator SHELBY. That is in 1 year, right? 

Ms. YELLEN. Correct. 

Senator SHELBY. What is our total indebtedness? 

Ms. YELLEN. I do not have that figure at my—— 

Senator SHELBY. Would you furnish that for the record? 

Ms. YELLEN. Yes. I mean, we have had deficits for some time, so 

substantially—— 

Senator SHELBY. Would that be in the trillions? 

Ms. YELLEN. Yes. I would be happy to furnish you with that figure. 

Senator SHELBY. Would you call that a troubling thing long 

term? 

Ms. YELLEN. It depends on what the long-term trend is. It also 

depends on what we earn on our foreign investments versus—— 

Senator SHELBY. Absolutely. 

Ms. YELLEN.——what we pay, and historically we have earned 

more on our assets that we hold abroad than we have paid to foreigners who hold our assets. But the trend there is important. 

Senator SHELBY. When was the last time that we had a surplus—small, I am sure—in our current account, roughly? 

Ms. YELLEN. I am not sure. 

Senator SHELBY. Will you furnish that for the record? 

Ms. YELLEN. Certainly. 

Senator SHELBY. Has it been a number of years? 

Ms. YELLEN. It has been. 

Senator SHELBY. OK. Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you, Senator. 

Senator Rounds. 

Senator ROUNDS. Thank you, Mr. Chairman. 

Madam Chairman, first of all, thanks for being here today. You 

have a difficult position, and you have a very important position, 

and I look forward to working with you in promoting sound economic policy in our country. 

As I am sure you are probably aware, the Ag sector of our economy is suffering. The Wall Street Journal recently pointed out that 

soon there will be fewer than 2 million farms in America for the 

first time since the Louisiana Purchase. We are rapidly approaching a crisis in the Ag sector. Commodity prices have been sinking. 

The Ag Department estimated that those who are still able to farm 

will see their incomes drop by nearly 10 percent in 2017, and the 

strength of the dollar is making it harder for American farmers to 

compete abroad. Our Nation’s farmers are being left behind. 

My question to you is: Recognizing that they need compromise to 

capital and need access to literally being able to borrow money and 

during a time in which we have made it a little bit more difficult 

to borrow money, a lot of these folks are now seeing an end in 

which they—because they work in an industry which is seasonal 

and depends upon the weather, some years they make it, some 

years they do not. Is there something that—could you just suggest 

to us, number one, what you see in terms of economic headwinds 

for our Ag economy and what we as policymakers should be 

23 

focusing on if we want to help them make it through this next couple of years? Colorado right now is setting up an emergency hotline 

for suicides for the farming and ranching communities. This is not 

something that is going to go away quickly, and clearly it is gathering momentum. 

Could you just talk to us in terms of what you see things that 

we can do to perhaps take some of the burden off of these farming 

families? 

Ms. YELLEN. So I cannot give you recommendations for what 

Congress should do to address the Ag issues. We are focusing on 

the fact that there is pressure on commodity prices and particularly on food prices after a number of years in which conditions 

were really very strong and land prices were pushed up. So in some 

cases, we are seeing increases in delinquency rates on loans. And 

certainly weak growth in the global economy coupled by a dollar 

that began to appreciate substantially around mid-2014 has pressured farmers and is putting pressure on agriculture as you 

indicated. 

Senator ROUNDS. I think more specifically farming moves from 

year to year. You can have a drought. You can have excessive moisture sometimes. And not every single year you are going to be consistently successful in your endeavor. Would it be fair to say, 

though, that with regard to our financial institutions and their 

ability to either loan or continue to carry debt, should there not be 

some understanding within the policy at the Federal level that the 

ability to survive not just a 12-month cycle but perhaps a 24-month 

cycle or a 36-month cycle, it would seem that that would be an appropriate policy to at least continue to explore? Would you see some 

value in that? 

Ms. YELLEN. Honestly, this is something that really is up to Congress to consider and to look into. You know, it is not something 

that the Federal Reserve has the ability to mandate. 

Senator ROUNDS. But the financial institutions, which are the 

source of that ability to borrow money—and during a year in which 

you have a bad year for crops or perhaps commodity prices even 

in a good year with yields may be down for a while, but in a cyclical manner, it seems rather illogical simply to base the ability to 

borrow money from a financial institution on a 12-month cycle, 

which seems to be what we do when we talk about balance sheets 

and so forth from one year to the next, should an operating loan 

be extended and so forth. 

What I am asking, I guess, is: Wouldn’t it make some economic 

sense to be able to allow this segment of the economy perhaps a 

different cycle to be considered in without having their loans being 

considered nonperforming assets in the auditing of those financial 

institutions that really do want to continue on and carry credit forward for more than a 1-year period or a short-term period of time? 

Ms. YELLEN. You know, it is something that we can look at, but, 

you know, I think financial institutions are trying to engage in safe 

and sound lending and want to be careful to protect themselves 

from losses. 

Senator ROUNDS. Thank you, Madam Chair. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you, Senator. 

24 

Senator Cotton. 

Senator COTTON. Thank you, Mr. Chair, and thank you, Madam 

Chair, for appearing before us once again. 

I would like to discuss with you today wage growth, or maybe I 

should put it better, lack of wage growth. The Federal Reserve 

tracks wage growth as a measure of economic progress and inflation. Over the past 8 years, wage growth has been largely stagnant, although fortunately we have seen a few positive trends in 

the last few months. 

But I also want to look back beyond just the last few years, starting in the 1970s, and I think we have a graphic that will display 

this. Wages for workers with college degrees have increased while 

wages for workers without college degrees have declined. For workers with less than a college degree, wages have declined by 17 percent, all in inflation-adjusted terms. 

Could you comment on what is driving the recent wage growth 

but also what is behind this phenomenon we see on the chart behind me? 

Ms. YELLEN. Well, over long periods of time, the general average 

nationwide trend in wage growth depends on productivity growth. 

And in recent years, productivity growth has been relatively depressed in comparison, say, with the very long period from, say, 

1949 to 2005, productivity growth was probably a percentage point 

or so higher than it has been subsequently. For different groups in 

the economy, as your chart focuses on, changes in wage growth depend on structural trends in the labor market and in the economy. 

And what we have seen importantly because of technological 

change that has raised the return to skill, raised the demand for 

skilled workers, and raised the rewards to people who are able to 

use technology, I think coupled with globalization that has made 

it easier to offshore or outsource jobs that involve routine work that 

can be done elsewhere or is subject to technological change. We 

have seen different trends for much faster wage growth for higherskilled individuals and much slower wage growth for those who are 

less skilled. The gap between the earnings of college-educated and 

high school-educated or less individuals continues to grow, and this 

has been a major source of the trends that you are describing in 

your chart. 

Senator COTTON. We have seen some improvement in recent 

months. Do you care to venture an assessment of why we are seeing that? 

Ms. YELLEN. So the labor market is pretty tight, and wage 

growth has picked up somewhat. For example, average hourly 

earnings were up 2 1⁄2 percent in the 12 months ending in January, 

and that would compare with around 2 percent from 2011 to 2015. 

Some other measures are rising somewhat faster. There is not a 

dramatic increase in wage growth in recent years. There is some 

evidence of a pickup, but not dramatic. In part, I think you are seeing a reflection of a healthy labor market, tight labor market conditions, but the fact that it remains so low is also related to weak 

productivity growth in the U.S. economy. 

Senator COTTON. And what has been contributing to a tighter 

labor market? 

25 

Ms. YELLEN. Well, you know, we are trying to do our job, and we 

have put in place conditions intended to lower the unemployment 

rate, improve labor market conditions. You have seen the unemployment rate come down. The pace of job growth really is strong 

and exceeds what is probably sustainable in the longer run, and 

the labor market has continued in a general sense to improve, although clearly the gains are not evenly distributed among different 

segments of the population. 

Senator COTTON. If the labor market were to continue to tighten 

through both more economic growth but also, say, through a gradual reduction in the number of unskilled and low-skilled immigrants or guest workers that we are bringing into our country, 

would we see continued wage growth in particular for those with 

a high school degree or less? 

Ms. YELLEN. So I am not certain. I expect the labor market to 

continue to improve somewhat further. We have to be careful not 

to allow conditions to become so tight that we push inflation above 

our 2-percent objective, and we will be attentive to that. But I do 

expect somewhat stronger labor conditions—— 

Senator COTTON. Is that a serious risk at the time when the 

workforce participation rate is still at a relatively elevated level? 

Ms. YELLEN. So the workforce participation rate has been 

trending down. 

Senator COTTON. But historically it is still high? 

Ms. YELLEN. It is relatively high, but it is over time going to be 

trending down. And immigration has been an important source of 

labor force growth, so that would be reduced if immigration were 

to diminish. 

Senator COTTON. Thank you. 

Chairman CRAPO. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. And it is good to 

see you again, Chair Yellen. 

So the 2008 financial crisis cost millions of people their jobs, 

their homes, and their savings. And in response, Congress passed 

the bipartisan Dodd-Frank Act which aimed to prevent big banks 

from blowing up the economy again. 

Now, President Trump has called Dodd-Frank Act a ‘‘disaster,’’ 

and he has vowed to ‘‘dismantle’’ it. He started down that road 2 

weeks ago when he issued an Executive order on financial regulation, and he has put two men, Steve Mnuchin and Gary Cohn, who 

have spent a combined 42 years at Goldman Sachs, in charge of 

rewriting the rules to help big banks like Goldman. 

Chair Yellen, I know you and the Fed spend an enormous 

amount of time looking at actual data about the economy and financial markets, so I want to follow up on Senator Brown’s questions and get your take on some of the Administration’s main reasons for calling Dodd-Frank a ‘‘disaster.’’ 

When he unveiled his Executive order, President Trump said he 

hoped to ‘‘cut a lot out of Dodd-Frank Act’’ because ‘‘friends of mine 

that have nice businesses cannot borrow money.’’ 

Now, I am aware of the small business survey that you cited earlier, but I want to look at the bigger range of data. What do the 

data show about business lending since Dodd-Frank was enacted in 

2010? 

26 

Ms. YELLEN. Well, C&I lending, at this point it has grown, and 

it exceeds—after declining, it exceeds its 2008 peak on an inflationadjusted basis. The same is true for total loans held by commercial 

banks. Since the end of 2010, total C&I loans outstanding have 

grown over 75 percent. 

Senator WARREN. Wow. 

Ms. YELLEN. And in the most recent period for which we have 

data, the recent 12-month period, C&I loans grew over 7 percent, 

and small C&I loans, which are usually sort of small business related, grew almost 4 percent. So we have seen healthy growth in 

actual lending in the economy. The survey that I mentioned to Senator Brown, I believe over half of small businesses indicated that 

they absolutely did not need to lend and had no desire for credit 

for a variety of reasons. 

Senator WARREN. You mean did not need to borrow? 

Ms. YELLEN. Did not need to borrow at all, including slow growth 

in the economy. 

Senator WARREN. Thank you very much. Very impressive. So the 

data do not back the President up here. 

Another claim, this from President Trump’s Economic Adviser, 

Gary Cohn, is that banks have been ‘‘forced to hoard capital’’ and 

have ‘‘been forced to literally build capital and build capital, instead of lending capital to their clients.’’ 

Now, Chair Yellen, when regulators impose a capital requirement on a bank, does that requirement prevent the bank from 

lending out that capital? Or, in other words, is a capital requirement a reserve requirement? Can banks do whatever they want 

with that capital, including lending it? 

Ms. YELLEN. It is not a requirement that they take money and 

stick it in a safe where it cannot be used. It is a requirement that 

they finance the lending that they want to do with a certain 

amount of capital and not only with debt. So the capital is used to 

make loans. 

Senator WARREN. Good. So the President’s Chief Economic Adviser is wrong about that pretty basic fact. 

Let us look at another statement by Mr. Cohn. He said, ‘‘We 

have the best, most highly capitalized banks in the world, and we 

should use that to our competitive advantage.’’ But on the flip side, 

we also have the most highly regulated, overburdened banks in the 

world. That sounds an awful lot like a contradiction to me. Either 

our banks have a competitive advantage because the world knows 

that we carefully regulate our banks, or our banks have a competitive disadvantage because of those requirements. 

So, Chair Yellen, which one is it? How have our banks done in 

comparison to their foreign competitors since we put our new rules 

in place? 

Ms. YELLEN. So I do not have all the numbers at my fingertips, 

but I believe that our banks are more profitable. As I mentioned, 

they have higher market values relative to their book values, and 

they are capturing market share, for example, from European 

banks. So I guess I see well-capitalized banks that are regarded as 

safe, sound, and strong as conferring a competitive advantage on 

those banks in competing for business. 

27 

Senator WARREN. Competitive advantage, taking away clients 

from other banks. In fact, our banks have thrived since we passed 

Dodd-Frank. Both big banks and community banks are making literally record profits. 

Mr. Chairman, I would like to submit for the record the most recent quarterly report from the FDIC to show that banks of all sizes 

are more profitable than ever, as well as this Wall Street Journal 

article from November entitled ‘‘U.S. Banks Report Record Profit in 

the Third Quarter.’’ May I do that? 

Chairman CRAPO. Without objection. 

Senator WARREN. Thank you, Mr. Chair. 

Senator WARREN. Look, on any issue, but especially on something as important as the rules in place to stop another financial 

crisis, we need to start with facts—real facts, not those alternative 

facts that the Administration has become known for—and the facts 

show that Donald Trump is wrong and his Chief Economic Adviser 

is wrong about every major reason that they have given to tear up 

Dodd-Frank. Commercial and consumer lending is robust, bank 

profits are at record levels, and our banks are blowing away their 

global competitors. 

So why go after banking regulations? The President and the 

team of Goldman Sachs bankers that he has put in charge of the 

economy want to scrap the rules so they can go back to the good 

old days when bankers could take huge risks and get huge bonuses 

if they got lucky, knowing that they could get taxpayer bailouts if 

their bets did not pay off. 

We did this kind of regulation before, and it resulted in the worst 

financial crisis since the Great Depression. We cannot afford to go 

down this road again. 

Thank you, Chair Yellen. Thank you, Mr. Chairman. 

Chairman CRAPO. Senator Scott. 

Senator SCOTT. Thank you, Mr. Chairman, and thank you, Chair 

Yellen, for being here this morning. 

I guess about a month ago you had a Teacher Town Hall meeting 

with postsecondary economic educators, and you had a question 

about Dodd-Frank as it relates to repealing it or changing it, and 

part of your answer was, ‘‘Community banks feel the burden of regulation is very great,’’ and ‘‘I really feel strongly that we should be 

looking for ways to mitigate the regulatory burden,’’ and we are 

looking for ways, ‘‘particularly for smaller institutions’’ to mitigate 

that burden. ‘‘There could be modifications to Dodd-Frank that 

could succeed in reducing regulatory burden for smaller institutions,’’ to quote you. 

I would love to hear your thoughts and your recommendations on 

ways to mitigate that regulatory burden for small banks, specifically small banks in places like South Carolina and other States. 

Ms. YELLEN. So, yes, let me reiterate what I said there. It is important to look for every way we can to mitigate the regulatory 

burden. What we have suggested previously and I would reiterate 

with respect to Dodd-Frank is that Congress might want to consider exempting community banks from the Volcker rule and some 

of the incentive compensation provisions that apply to them, and 

those would be examples. 

28 

There is quite a bit we see being able to do ourselves, and we 

have taken steps to extend the exam cycle for well-managed and 

well-capitalized banks. We are reducing the duration of our onsite 

loan reviews. We have heard from community bankers that when 

big teams of examiners come in and stay in the bank premises for 

a long time, it can be quite disruptive, and so we are doing much 

more work offsite. We are trying to reduce our documentation requests and tailor them to areas that we think are high risk that 

we want to examine. 

We do a lot to—many of the regulations that we put out apply 

to the largest banking organizations and not to community banks, 

and so we try to make clear to community banks this new reg, this 

just does not even apply to you, you do not have to worry about 

that. We try and make clear what does apply to community banks 

and what portions of our regulations do not apply to community 

banks. We are trying to reduce the frequency of our consumer compliance exams for banks that are well managed and low risk. 

So those are some of the things we are doing. We are attempting 

through our EGPRA review with the other banking regulators to 

identify provisions that can reduce burden. We have reduced—we 

have put out provisions that reduce the amount of information that 

we require on our call reports—— 

Senator SCOTT. Thank you, 

Ms. YELLEN.——and many other things. 

Senator SCOTT. Thank you very much. I look forward to seeing 

some of that in writing so that we can—— 

Ms. YELLEN. Sure. 

Senator SCOTT.——fuse it all together. Earlier you noted that 

there was a 1-percent drop in the unemployment rate of African 

Americans, which, of course, is a positive sign. I think that there 

is certainly a correlation between educational achievement and unemployment rates. Whether you live in Cleveland, Ohio, or Detroit, 

Michigan, black unemployment without a high school diploma is at 

least twice as high as any other demographic with the same level 

of education. What do you think drives the disparity? And what effects have your policies had on that specific demographic? 

Ms. YELLEN. So African Americans generally have unemployment 

rates and labor market experience that is more cyclical. In 

downturns, they tend to be very badly affected, and in a strong upturn, their gains, they are basically regaining ground that they 

lost, and so we can see stronger gains. 

So, for example, just over the last year, whereas the white unemployment rate remained stable at 4.3 percent, the African American rate dropped from 8.8 to 7.7. But, again, as you pointed out, 

that is a much higher rate, and the same is true at all education 

levels. So unemployment rates at lower education levels are much 

higher than those at higher education levels. For example, those 

with at least college had an unemployment rate of 2.5 percent in 

January; those with less than high school, 7.7 percent. 

Senator SCOTT. Yes. 

Ms. YELLEN. And, again, African Americans tend to have worse 

experience. 

Senator SCOTT. One of my concerns is, certainly, if you look at 

the 15.8 percent for African Americans without a high school 

29 

degree versus the 7.8 percent or the overall 8 percent for all demographics versus the unemployment rate of 2.4 percent or 4.4 percent for an African American versus white folks who have the 

college level of education, my concern long term is that as we examine the labor force participation rate, we know it is down to 62.8 

percent or so, so the real unemployment when you add all the numbers together, according to the U6, is around 9.2, 9.3 percent. Our 

entire financial system is still wired around a defined benefits platform. So your lower labor force participation rates means that it is 

incredible difficult for us to meet the obligations from Social Security to Medicare. So long term, if the growth in our economy from 

a people perspective or African Americans and Hispanics who are 

participating and having more kids in this Nation, the reality of it 

is that if 30 percent, 20 percent unemployment is persistent, 16 to 

20, it foreshadows a very difficult future for this Nation to meet 

our obligations. 

Ms. YELLEN. I agree with you, and I think it is appropriate for 

Congress to focus on policies that might mitigate the trends that 

we have discussed. Clearly, education and training, workforce development are part of that, but other things might be as well. 

Senator SCOTT. Thank you. 

Chairman CRAPO. Thank you. 

Senator Heitkamp. 

Senator HEITKAMP. Thank you, Mr. Chairman, and thank you, 

Chair Yellen. It is great to see you again. 

I want to associate myself with the remarks of Senator Scott, but 

I also want at least some consideration for the underemployment 

and unemployment of Native American citizens. I think where you 

will look at those numbers, I will tell you they are even worse in 

Indian country because of the isolation of the geography and additional education challenges. So I think we—I always want to point 

out that we cannot leave our Native American citizens behind. 

I also want to associate with the remarks on small community 

banks, but I do not want to spend all of my time talking about it 

because it gets eaten up pretty quickly. So mostly what I use my 

time for is to say: What is on the horizon? What are the challenges 

that we are going to have? We know that retirement security is a 

huge future burden in this country, but I want to focus on automation and what automation will mean for employment, especially 

employment in the categories that Senator Scott was talking about. 

In a 2015 speech, the chief economist of the Bank of England referenced a startling statistic that 47 percent of all U.S. jobs are likely to be replaced by technology over the next 10 to 15 years, and 

that would be more than 80 million all together. 

Obviously, we see this from automation in trucks; we see this 

from retail moving to online retail. So I am curious what steps the 

Fed has taken to study the issue of automation and the impact on 

the North Dakota economy and the U.S. economy moving forward. 

And I know you always say better training but, obviously, a lot of 

concern on how we implement that and how we move forward. So, 

automation. 

Ms. YELLEN. So we know that automation and technological 

change more generally has had very important effects on our economy over many decades, and, you know, we are not seers of the 

30 

future that know exactly where it is going, but certainly there are 

dramatic accounts of changes that are on the horizon that could 

have profound effects on the labor market and on productivity 

growth. 

Senator HEITKAMP. Do you think we are paying enough attention 

to this issue? I mean, you know, obviously, during the campaign a 

lot of talk about trade and the displacement that globalization has 

played. A lot less talk about automation, which I think has been 

a larger driver of displacement. 

So how do we get the public’s attention to this? How do we get 

the educators’ attention to this? And how do we change the labor 

market and the skill sets that we need to change so that eventually 

we end up with employment in our country? 

Ms. YELLEN. So, generally, automation and technological change 

more broadly has been a source of growth in incomes for America 

generally, but it has created huge disadvantages for those with less 

education and often for those in manufacturing in other areas that 

have seen outsourcing or affected by both automation and 

globalization. And I think we need to think about ways to address 

the needs of those workers because they have seen chronic, longstanding downward pressure on their wages and income that are 

making it very hard for them to cope. 

Senator HEITKAMP. Yeah, I think one thing that gets lost in this 

is when we talk about those workers, really talking about people 

in their 40s and 50s, they are less concerned about their livelihood 

than the opportunity that their children are going to have. And so 

I think we need to be having a major discussion about what the 

job of the future looks like, what the job market of the future looks 

like. 

I want to get in one more question, and this is about the lack 

of prosecutions after 2008 and what we can do about it to hold people more accountable. New York Fed President Bill Dudley put forward an interesting idea by requiring firms to adopt a so-called 

performance bond as a large portion of executive and senior management compensation. Under his proposal, any fines or penalties 

incurred by the firm would be paid directly by performance bonds, 

which would incentivize senior leaders to design and implement 

systemic changes to improve the firm’s culture. 

What is your view on the current incentive-based pay on Wall 

Street? Do you think firms rely too much on equity-based compensation? And what are the risks with the Dudley model? 

Ms. YELLEN. So I think that that was an important factor in the 

financial crisis, in inappropriate incentive schemes, and we have 

worked in our own supervision to insist that firms put in place 

compensation schemes that do not lead to inappropriate risk taking. They may include longer periods of deferral or clawback or forfeiture provisions if an individual who takes risk on behalf of the 

firm, if there are losses that are suffered. But I think it is important to strengthen incentive compensation practices. 

Senator HEITKAMP. One of the concerns that I have—and, you 

know, I am not a big believer always that enforcement is a strong 

deterrent, especially if someone is addicted, but I do believe that 

enforcement is a strong deterrent in white-collar crime, and I think 

there is way too often the sense that if I did not know about it, 

31 

I am not culpable. And so I think in order to really respond to people’s concerns about Wall Street and what is happening, we need 

to have a better system of not only civil enforcement but criminal 

enforcement. And so I will be looking at this in this Congress and 

am very interested in feedback from the Fed and from other regulatory agencies, because I think without that ability to prosecute, 

you know, a $1 million fine may shock a factory worker in Cleveland. It is not going to shock a Wall Street banker. And so we need 

to do a better job holding people accountable. 

Chairman CRAPO. Senator Tillis. 

Senator TILLIS. Thank you, Mr. Chair. Welcome, Madam Chair. 

I have a couple of questions. One relates back to a discussion 

earlier by some of the Members about, I think, a discussion around 

dispelling the myth that banks are not lending. I do not agree with 

that. I think that there are—we are comparing probably not the 

right data sets, so that people are absolutely valid in assuming 

that based on the data they are using. There is a fair amount of 

academic data that says increased capital requirements do have a 

negative effect on loan underwriting. And I will not debate the academics, but I think there is a fair amount of information out there. 

I think that what we see, particularly among households, household lending, and small business loans, it tends to have a downward trend. 

You referenced, I think, a survey by the NFIB that said all but 

4 percent of the people contacted were getting the loans they wanted. I am trying to square that with research that shows a substantial decrease in the amount of loans pre-crisis versus post crisis, 

and I am not going to talk about household loans or mortgages. We 

know why there is a lower number there, because they should not 

have been underwritten pre-crisis. But with the business loans, 

that is a different—I think that that is a different consideration, 

and I think that I am seeing a number here that says that the average growth rate post—2011 and beyond, so after Dodd-Frank reforms, that we are at about a 4 percent per annum for large banks, 

about 7 percent per annum for small banks. And that is somewhere 

around maybe 60 percent of pre-crisis for, again, business loans. 

So is it possible that the reason why 4 percent of the people 

would say—only 4 percent would say they are not getting the loans 

they wanted is because far fewer people are asking for loans, investing, and creating businesses? 

Ms. YELLEN. I think that is true, and we have had a slowly growing economy, and many small businesses say their sales growth 

does not justify significant expansion plans that would make it desirable to borrow. They are not looking to borrow. 

Senator TILLIS. So it is—— 

Ms. YELLEN. I mean—— 

Senator TILLIS. To me, though, Madam Chair, isn’t it problematic 

to have people leave this meeting thinking that all the small businesses that have business plans they think that they should move 

forward with to create jobs and take risk, to make us think that 

this is a phenomenon that only affects about 4 percent of all small 

businesses, that everybody else is getting the loans? I think that 

there is a pent-up demand out there, and please finish your 

thought. 

32 

Ms. YELLEN. Well, I was going to say that sometimes small business loans are underwritten by banks in a way that is similar to 

credit card or home equity loans, and small businesses may borrow 

against home equity lines of credit. So one thing that may be happening to some small businesses is that because there was a substantial reduction especially in some areas of the country in residential property values, their ability to finance business loans in 

that way—— 

Senator TILLIS. So in your professional opinion, do you think that 

the universe of potential small businesses that could be created are 

businesses that exist that want to expand, that they have unfettered access to capital given the current environment? 

Ms. YELLEN. Well, businesses that want to start up always need 

equity capital, and that can be quite difficult. 

Senator TILLIS. Do you think that when we are in an environment—now, I hear this at a community bank that I have exited 

any investments in since I have come on to the Banking Committee, but I speak with them and they say that the personal relationships that they had in the past, where they could get a loan, 

underwrite it, were pivotal to them being able to get a loan. Now 

they feel like they have to go in—and, of course, if you have roughly the same amount of assets that you can secure the loan, then 

you can get a loan. But there are a lot stricter requirements that 

have a chilling effect on small business lending in the Nation. Do 

you agree with that? 

Ms. YELLEN. So, you know, certainly our objective is to encourage 

banks to lend, safe and sound lending and not be caught up in bureaucratic obstacles. 

Senator TILLIS. I think what we have here—and I do want to ask 

another question, Mr. Chair. I will go as quickly as possible, and 

I apologize to Senator Kennedy, but I do want to touch on a second 

subject. But I think we are talking out of both sides of our mouth 

in Washington. And I am not criticizing you for it, but when I take 

a look at the movement of capital, on the one hand we say, of 

course, banks can lend to anybody. On the other hand, on any 

given day we could have five or six regulators in there saying you 

better not lend based on outside of these very narrow parameters 

because of what I consider to be overreaches in enforcement. 

And so to me, letting a comment stand that banks are lending 

to any commerce is not—and you did not say that. It was a supposition by a couple of the Members here on the Committee. I think 

it is just absolutely defiant what I am seeing in the small business 

community and the community banks, particularly the community 

banks but big banks in North Carolina, which leads me to my last 

question. 

The pre-crisis—and, incidentally, I think there were very important reforms that had to be implemented with Dodd-Frank. I just 

think what happened is you have a bill that is this big—that is this 

big—that expands into a regulatory framework that was enabled 

under Dodd-Frank that is that big. And, in particular, in North 

Carolina we had a very thriving financial services ecosystem 

pre-crisis. We had over 100 community banks. We have a couple 

regional banks in North Carolina and a couple of relatively big 

banks down in Charlotte where I live. Now we have seen a 

33 

substantial decline in the community banks in North Carolina, and 

I think that is a national trend. You know the numbers as well as 

I do. And since Dodd-Frank regulations have been implemented, 

we have had two de novo banks chartered. One is on an Indian reservation. The other one I think is primarily focused on serving the 

Amish community. So we have completely destroyed the lower 

foundations of the banking ecosystem, in my opinion, because it 

has to be—because the inflection point was after Dodd-Frank was 

implemented and CFPB and all the regulatory agencies started, I 

think, extending their reach. 

Do you believe that that is an area we need to be concerned 

with? You did say, I think, in response to one of the questions that 

the community banks probably do need some relief. You mentioned 

the Volcker rule. But can you talk a little bit more about that. 

Mr. Chair, I am sorry for going over my time. 

Ms. YELLEN. So I think community banks—I agree with some of 

the trends you just described. I think they have been under pressure. You had many years of a weak economy, very low interest 

rates, and pressure on net margins and compliance costs. I agree 

that it is very important for us to look for ways to relieve burden, 

and I am committed, the Federal Reserve is committed to doing everything that we can to mitigate the burdens on these institutions. 

They play a very important role, as you have indicated, in the economy and so many communities in supporting lending. 

Chairman CRAPO. Senator Schatz. 

Senator SCHATZ. Thank you, Mr. Chairman. Thank you, Chair 

Yellen, for your public service, and also thank you for enduring 

quite a long hearing and accommodating all of our questions. 

Before we get going on my questions, I want to echo the sentiments of my colleagues in terms of what Dodd-Frank has done for 

the economy and for the stability of our financial system. It has, 

in fact, strengthened our economy, and undermining Dodd-Frank is 

not, in my view, the correct course of action. 

I wanted to ask you, Chair Yellen, about climate change. It is affecting our economy in a number of ways, such as prolonged 

droughts that reduce agriculture yields, coastal flooding, increased 

severity of storms, and the unpredictability of weather forecasts on 

which many of our industries depend. 

In 2016, NOAA reported 15 separate billion-dollar climate 

events. Combined, these events cost the economy over $200 billion. 

And lest we think this is an aberration, it is important to remember that the number and the cost of these events has doubled over 

the last decade and has increased eightfold over the last 30 years. 

And so climate change events are taking a toll on our economy, and 

they are expected to become more and more intense going forward. 

And so my question for you is: To what extent does the Fed take 

into account the impacts of climate change in assessing our national economic outlook and future economic risks? 

Ms. YELLEN. So in monetary policymaking, our focus is on trying 

to achieve a strong labor market and price stability, and our 

forecasts usually go out a few years, but not over the decades in 

which climate change plays a role in changing—— 

Senator SCHATZ. Well, let me—— 

34 

Ms. YELLEN.——affecting the economic outlook, and sometimes a 

hurricane or a drought can have—some of which may be related to 

climate change, but also other factors may have a significant economic impact that we take into account that may result in a period 

of weakness or movements in GDP that we see. But there is not 

very much that we can do in incorporating that into our forecasts. 

Senator SCHATZ. Well, I would like to disagree here, and I understand that there is going to be a reticence to enter into anything 

that may be either political or unknowable or too long term for it 

to be meaningful in terms of your analysis. But that is actually not 

the case anymore when it comes to what is happening in terms of 

climate change. You know, the billion-dollar event is a threshold 

for financial markets, for insurance, for NOAA, for the National 

Weather Service. And we are not talking about 15 years from now 

there may be a higher frequency of severe weather events and they 

may be more severe. We are talking about over the last 4 or 5 

years we can actually measure this trajectory. So there is not a lot 

of debate in the scientific community—and you are all data-driven 

people—about what is happening. So actually in the private sector, 

in financial markets, especially in insurance companies, they are 

responding—the Department of Defense is responding to the reality 

of climate change and not in terms of a 10-, 20-, 30-year time horizon, but in terms of planning for, you know, Q3, Q4 2018. 

And so I would just offer to you that I think that analysis and 

that desire to stay on that which is knowable and that which is not 

in dispute is a good instinct. But we are now at a point where we 

know what is happening to the climate, and it is having material 

impacts on the economy now. Would you care to comment? 

Ms. YELLEN. So, you know, various international fora I think are 

looking into the economic aspects of climate change, for example, 

that could affect financial stability, the exposures of financial organizations. And I think that is appropriate. 

We recognize that risk events or severe weather or climate 

changes could have effects on the financial system. Our general approach since the financial crisis has been to try to build resilience 

among banking and financial organizations so they are well positioned to deal with risk events. And so, I mean, those are a couple 

of reactions. 

Senator SCHATZ. I appreciate what you are doing here, and I understand the difficulty of addressing something, but I would just 

like for you to consider the following proposition, which is just 

because we do not know the extent of the risk does not mean we 

should book it at zero. It is not zero. It is now material. It is also 

no longer 5, 10, 15 years from now. It is happening to us now. And 

you may need another couple of quarters of unfortunate events to 

be able to kind of assimilate that into your decisionmaking process. 

But at some point the Fed is going to have to recognize that climate change is real, and it is not merely an ecological issue or political issue but an economic one. And I thank you for your indulgence on this issue you may not have expected to talk about this 

morning. Thank you. 

Ms. YELLEN. Thank you. 

Chairman CRAPO. Thank you. 

Senator Heller. 

35 

Senator HELLER. Mr. Chairman, thank you, and thanks for holding this hearing. Dr. Yellen, thank you for being here. I appreciate 

your time and coming through and following through on some of 

these questions. And I have not been here for the whole hearing, 

and I apologize for that also. So I will just ask the question: Did 

you make a comment as to whether or not interest rates are going 

to rise in March? 

Ms. YELLEN. I indicated that in our upcoming meetings we will 

try to evaluate whether or not the economy is progressing, namely, 

labor market conditions and inflation, in line with our expectations. 

And if we find that they are, it probably will be appropriate to 

raise interest rates further. 

We have indicated that we think a gradual path of rate increases 

is likely to be appropriate if the economy continues on its current 

course. 

Senator HELLER. Is that the same answer for an interest rate increase for June? Same answer? Because I think those are the two 

most important questions that are going to come out of this hearing 

right now as to how you answer that particular question. 

Ms. YELLEN. So my colleagues and I, in writing down our economic projections, we last did that in September, and, of course, 

the economic outlook is uncertain, and it may change. But given 

our expectations at that time, most of us concluded that a few interest rate increases would be appropriate this year. The median 

was three at that time. And that means—we have eight meetings 

a year, and it means that at some meetings we would, if things remain on course, increase our target for the Federal funds rate and 

not act at others. And precisely when we would take an action, 

whether it is March or May or June, I think—I know people are 

focused on that. I cannot tell exactly—— 

Senator HELLER. They are. They are. Just so you know, they are. 

Ms. YELLEN.——which meeting it would be. I would say that 

every meeting is live and we—— 

Senator HELLER. And I would anticipate that the—or argue that 

the markets are anticipating rate increases and individuals are 

also. Would you agree with that? 

Ms. YELLEN. I am sorry. That they are? 

Senator HELLER. That they are anticipating rate increases this 

year. 

Ms. YELLEN. Well, it is our expectation that rate increases this 

year will be appropriate. 

Senator HELLER. OK. Let me tell you why I am asking the question. We have average sale prices of houses in southern Nevada 

right now of around $280,000. So I will shift over to housing markets for a minute. So $280,000, and at the peak they were selling 

for $315,000. So you can still see that some of these homes are still 

underwater, and we are a long way away from a full recovery in 

the housing markets in the State of Nevada. So as the housing 

markets continue to struggle, how does this impact your thoughts 

on future interest rate hikes? 

Ms. YELLEN. So housing has been recovering nationally, but at 

a very slow pace. And we recognize that higher interest rates can 

have a restraining impact on the recovery in housing. House prices 

have been moving up. So it is one of many factors that bear on our 

36 

thinking about the appropriate path of interest rates. But remember that employment growth is strong; consumers are doing well. 

That is an important support for housing, as well as the fact that 

there is so much potential for an increase in homeownership. 

So I expect housing to continue recovering, but overall we need 

to take account of all the different forces that affect job growth and 

inflation in the economy, and everything put together, we think 

that some removal of accommodation is likely to be appropriate. 

Senator HELLER. OK. How important is a fiscal stimulus to the 

next interest rate hike? 

Ms. YELLEN. So we do not know what fiscal plans Congress and 

the Administration will decide on. We are not basing our judgments about current interest rates on speculation about that. The 

economy has been making solid progress toward achieving our objectives. The unemployment rate is close to levels we regard as sustainable in the longer run. Inflation has moved up, and it is those 

trends that are driving our policy decisions and not speculation 

about fiscal policy. 

Also, remember there are many factors that affect the economy. 

Fiscal policy may matter, but it is only one of many things we need 

to consider. 

Senator HELLER. Let me ask you this question on a fiscal stimulus. What is better, a tax hike or spending cuts, in your opinion? 

Ms. YELLEN. I think this is squarely in your domain to prioritize 

and decide on. 

Senator HELLER. All right. Let me ask you this question: Is it 

better to cut corporate income taxes or personal income taxes? 

Ms. YELLEN. Again, this is a decision that Congress needs to 

make, and it is outside of our purview. 

Senator HELLER. Do you support a border tax or do you not? 

Ms. YELLEN. I am not going to tell you that either. 

[Laughter.] 

Senator HELLER. I am trying. I am trying here. Mr. Chairman, 

thank you. 

Chairman CRAPO. Thank you. 

Senator Cortez Masto. 

Senator CORTEZ MASTO. Thank you. Chair Yellen, nice to meet 

you. 

Ms. YELLEN. Nice to meet you. 

Senator CORTEZ MASTO. I am the new Senator from Nevada, and 

thank you for taking the time with us today. 

Ms. YELLEN. Thank you. 

Senator CORTEZ MASTO. So let me just ask you, because I am 

new to the Committee, and keeping on with fiscal policy, some 

would say that the resulting Budget Control Act of 2011 significantly depressed discretionary spending and in turn significantly 

slowed the pace of the recovery of our economy. Would you agree 

with that? 

Ms. YELLEN. Well, I would say that the data suggests that the 

support that fiscal policy provided during the period of recovery 

overall, both Federal and State, was substantially lower than 

would be typical—would have been typical historically in an expansionary period. During the downturn, there was quite a lot of support, but as the recovery proceeded until the last several years, 

37 

fiscal policy overall was relatively tight in comparison with past 

historical periods. 

Senator CORTEZ MASTO. Thank you. There are a lot of benefits 

to immigration in America. Our diversity is our strength, and the 

range of perspectives and cultures we have in this country are essential for innovation, competitiveness, and global leadership. 

Moreover—and I have said this time and again—immigration is 

important for our economic growth. We have proof that it contributes to our GDP and our economy. And there is a report out there 

from the National Academies of Sciences, Engineering, and Medicine that, in fact, revealed many important benefits of immigration, 

including on economic growth, innovation, and entrepreneurship. 

And those benefits came with little-to-no negative effects on the 

overall wages or employment of native-born workers in the long 

term. And the report also found that children of immigrants on 

average go on to be the most positive fiscal contributors in the 

population. 

But despite this and immigration’s importance, we are hearing 

information coming from the White House and particularly President Trump’s January 29th Executive order dramatically expanding the interior immigration enforcement and places an estimated 

8 million undocumented immigrants at risk for deportation, including families and long-time residents. 

The order has the effect of making every undocumented immigrant in the U.S. a priority for removal and directs the Department 

of Homeland Security to hire what is essentially a deportation 

force. 

Chair Yellen, in your view as a noted labor economist, what impact would that have on our growth in competitiveness as a Nation 

if we continue down the path of President Trump’s massively expanding immigration? And along with that, what would be the consequences for our labor market and the price of goods and services? 

Ms. YELLEN. So I am not going to comment in detail on immigration policy. I think that is for Congress and the Administration to 

decide. But I would say that labor force growth has been slowing 

in the United States. It is one of several reasons, along with slow 

productivity growth, for the fact that our economy has been growing at a slow pace, and immigration has been an important source 

of labor force growth. So slowing the pace of immigration probably 

would slow the growth rate of the economy. 

Senator CORTEZ MASTO. Thank you. And we are hearing a lot 

about proposals to impose a 20-percent tax on imports from Mexico 

in order to pay for a border wall, and I am concerned about the potential for a trade war with our third largest trading partner. If the 

Mexican economy were to go into a recession, how would that impact the average American? And, specifically, can you speak to any 

impact on our domestic economy? 

Ms. YELLEN. Well, our economies are closely tied. Both Mexico 

and Canada are important trade partners of the United States, and 

our economy is in many ways synchronous with the Mexican 

economy. Our developments here have a significance spillover effect 

to them, and there could be flows in the opposite direction as well. 

Senator CORTEZ MASTO. Thank you. Thank you so much for joining us today. I appreciate it. 

38 

Ms. YELLEN. Thank you. 

Chairman CRAPO. Senator Kennedy. 

Senator KENNEDY. Madam Chair, I am over here. 

Ms. YELLEN. Yes, I am with you. 

Senator KENNEDY. Why is the economy growing so slowly? 

Ms. YELLEN. So the economy’s potential to grow is largely determined by the growth of the labor force and by productivity growth, 

output per worker. And labor force growth has slowed. We have an 

aging population, and labor force growth is relatively slow, and productivity growth in recent years has been depressingly slow. So I 

guess over the last 6 years, business sector productivity has grown 

at an average of only one-half a percent per year. 

Senator KENNEDY. OK. So let me ask you—I do not mean to interrupt you, but I have just got 5 minutes. So it is labor. But we 

are almost at full employment, aren’t we? 

Ms. YELLEN. So the economy for a number of years has been 

growing faster than resource growth and productivity growth would 

have allowed, and the labor market has been tightening. Unemployment has been coming down, and labor market slack has been 

diminishing, and that—— 

Senator KENNEDY. Right. That should help the economy. 

Ms. YELLEN. Well, it has enabled us to grow at roughly 2 percent 

a year, and the fact that labor market slack has diminished in the 

face of 2 percent economic growth—— 

Senator KENNEDY. Well, we have grown at 1.9 percent. You consider that acceptable for the American economy, strongest economy 

in the history of the world? 

Ms. YELLEN. Well, when you say ‘‘acceptable,’’ I certainly wish it 

were faster. 

Senator KENNEDY. Yeah. 

Ms. YELLEN. But it is—we have seen, as I said, a slowdown in 

productivity growth. 

Senator KENNEDY. Why is that? 

Ms. YELLEN. I think nobody is certain exactly why that is. There 

are a number of elements that may play a role. We have seen a 

decline in dynamism in the U.S. economy, in new business formation. Some people think that the pace of underlying technological 

change has—— 

Senator KENNEDY. Do you think it could be that people do not 

have the money to invest, the capital? 

Ms. YELLEN. Well, capital investment has also been quite slow. 

Senator KENNEDY. Yeah. What blame, if any, does the Federal 

Reserve System have to play in the fact that growth is so slow? 

Ms. YELLEN. Well, our objectives that the Congress has assigned 

us are price stability, which we interpret as 2 percent inflation, and 

maximum employment. And we have put in place an accommodative monetary policy now over many years to get the economy operating at its potential. So with high unemployment, there was a lot 

of slack in the labor market. The economy was falling short of 

operating at the level of output that would be consistent with what 

a full-employment economy would produce. 

Senator KENNEDY. OK. 

Ms. YELLEN. And we have tried to remedy that, and I think we 

have now come close. 

39 

Senator KENNEDY. All right. 

Ms. YELLEN. So it is growth of labor supply and productivity that 

are going to—— 

Senator KENNEDY. I get it. I do not mean to interrupt you, but 

I do not have much time. Well, can we agree that 1.9 percent is 

not acceptable to most Americans? 

Ms. YELLEN. So I think it is a very disappointing level of performance. 

Senator KENNEDY. Yeah, we can agree on that. OK. 

Let me ask you this: I was not here in 2008. What did the community banks do wrong in 2008? 

Ms. YELLEN. The—— 

Senator KENNEDY. By community banks, I mean $50 billion or 

less. What did they do wrong? 

Ms. YELLEN. Well, community banks were not the reason for the 

financial crisis. It was larger institutions that took risks and risks 

that developed outside of the banking system—— 

Senator KENNEDY. Right. 

Ms. YELLEN.——that resulted in the financial crisis. 

Senator KENNEDY. I think I heard you say nothing. They did 

nothing wrong. I do not want to put words in your mouth. So how 

come they are subject to Dodd-Frank, the same rules that apply to 

the people who did do something wrong, either because of incompetence or greed? 

Ms. YELLEN. It is not the case that the same rules apply to community banks that apply to larger institutions, and the most severe 

requirements in Dodd-Frank apply to the very largest and most 

systemic institutions. The Fed and other banking regulators have 

tried to tailor our supervision of banks according to their risk profiles, and a large part of Dodd-Frank does not apply at all to community banks. 

Senator KENNEDY. I am going to go over a little bit, Mr. Chairman. You are not saying that Dodd-Frank has not imposed new 

regulations on community banks, are you? 

Ms. YELLEN. I said it has imposed some, but I said large parts 

of Dodd-Frank do not apply. 

Senator KENNEDY. Right, but many parts do. 

Ms. YELLEN. Some parts do. 

Senator KENNEDY. OK. So the water is not 12 feet deep; it is only 

10 feet deep. But you can still drown in 10 feet of water. 

Ms. YELLEN. So we have done our best to tailor our regulations 

so that they are appropriate to the risk profiles of banks. But the 

regulatory burden on community banks is high. I would agree with 

you. 

Senator KENNEDY. But why? You just said they did not do anything wrong in 2008. I do not understand why. 

Ms. YELLEN. So we think it is important for all firms to have 

strong capital standards, including community banks, but the most 

severe increases have been imposed on larger banking organizations with more complex activities. 

Senator KENNEDY. Did the insufficient capital among the community banks cause the meltdown in 2008? 

Ms. YELLEN. No, but a number failed. Many failed during the crisis because of the lending that they took on. 

40 

Senator KENNEDY. I am going to ask one more question, Mr. 

Chairman, with your indulgence. Does it bother you that nobody, 

no individual person really responsible for 2008 went to jail? 

Ms. YELLEN. I think those who were accountable should have 

had appropriate punishments. It has been up to the Justice Department to—the regulators cannot impose criminal sanctions. That is 

up to the Justice Department. And my understanding has been 

that in many cases they felt they could not get criminal convictions. 

Senator KENNEDY. Do you understand that—and this is an opinion. Let me put it this way: Can we agree that many Americans, 

rightly or wrongly, this is how they feel: They are angry in part 

because they feel there are too many undeserving—I want to emphasize ‘‘undeserving.’’ I do not want to paint with too broad a 

brush. They feel there are too many undeserving people at the top 

getting special treatment. 

Ms. YELLEN. I think that is how Americans feel. 

Senator KENNEDY. Do you think that is true? 

Ms. YELLEN. I think that we have tried to put in place following 

Dodd-Frank to greatly increase the safety and soundness and responsibility for risk management and sound compensation systems, 

especially at the largest and most systemic institutions, and in that 

sense are holding them accountable. 

Senator KENNEDY. I have gone way over. Thank you, Madam 

Chair. 

Thank you for your indulgence, Mr. Chairman. 

Chairman CRAPO. Thank you, Senator. 

And, Madam Chair, I know you need to leave by 12:30. We have 

two Senators left, so if you will allow us, we will let them have 

their time, and we can move forward. 

Ms. YELLEN. Yes, sure. Of course. 

Chairman CRAPO. Senator Donnelly. 

Senator DONNELLY. Madam Chair, thank you for your service. 

We appreciate it. 

Ms. YELLEN. Thank you. 

Senator DONNELLY. Madam Chair, when we look at some of the 

things that have caused damage over the years—you were here at 

a time about a day or two after the Carrier layoffs occurred, if you 

remember that. And those layoffs in my home State brought to 

light a troubling pattern of corporate executives prioritizing immediate profits over the long-term health of companies. This shortterm mindset may be due to the relentless pressure of activist investors or poorly constructed executive compensation goals. But it 

has resulted in executives spending trillions to placate shareholders with stock buybacks and dividends. It has also occurred at 

the expense of workers and communities and long-term economic 

value creation. And new research finds that companies focused on 

the long term by reinvesting in the company far outperform their 

short-term peers in economic and financial success. 

I am wondering if you agree that short-termism, for want of a 

better term, could hurt economic and financial value over the long 

term. 

Ms. YELLEN. So I do not know of any rigorous work on this, but 

I certainly agree with you that focusing on long-term investments 

41 

that have significant payoff for companies and for the economy is 

important to the health of companies and the economy. 

Senator DONNELLY. Do you agree that the management and 

boards of public companies should be stewards of the whole company, including its workers and its long-term health? Do you think 

that makes sense? 

Ms. YELLEN. Most companies understand that their workforce is 

a very important asset, and their success requires having a focus 

on their human capital that is a firm asset. 

Senator DONNELLY. At the same time that those workers were let 

go, the CEO made over $10 million; the previous CEO before him, 

when he left—and it was about 2 years before—on his last day received a payoff of over $150 million. And that is why the American 

people are so angry and they think the system is so rigged that you 

go we are going to fire—between Carrier and UTEC in Huntington, 

we are going to fire 2,100 people who have already agreed to a twotiered wage—they already agreed to a two-tiered wage structure, 

but we are going to pay $150 million to our CEO on his last day. 

Does that not seem like a perversion of the American economic system to you? 

Ms. YELLEN. I think it is something that makes people mad. 

Senator DONNELLY. Yeah. What would you recommend in your 

infinite wisdom to us here in Congress as some steps, if you have 

any ideas, to change the short-term thinking that we see? 

Ms. YELLEN. That is really outside the domain of our responsibilities, and I believe it is a set of policies that Members of Congress 

and the Administration should be thinking about. 

Senator DONNELLY. Well, I was thinking that with your experience and your abilities and talents, all good advice is welcome. 

When a small town is devastated by job losses, as has happened 

to so many towns across this country, where you look up and one 

day you have a company making windshields for one of the Big 

Three, and the next day that windshield company is in Mexico, it 

impacts the future of it, of that town. And it is not just the jobs 

that dry up but the economic development, the revenue base, the 

secondary impact on other businesses, gas stations, restaurants, 

grocery stores. How does a small town succeed when it feels like 

so many of these economic currents have been against them for so 

long? You have driven through some of these downtowns, I am 

sure, over the years and seen the devastation that has occurred. 

Ms. YELLEN. I mean, I think these are extremely difficult trends 

for towns to cope with, and many towns in rural areas have been 

very badly affected by these developments. 

Senator DONNELLY. Here is what also happens, just so you know 

when you make these decisions. You know, as these workers are 

laid off, their children who are dreaming about going to college, 

dreaming about the best schools, and dreaming about their chance 

to make it, you know, Mom or Dad comes home and the funds just 

are not there. The money just is not there to give them the shot 

to do it. And I worry about the intergenerational impact of this 

whole situation, too. 

Have you seen this intergenerational impact and its impact on 

success? And is there anything the Fed can do in terms of policies 

to try to make it so our next generation of leaders have a shot? 

42 

Ms. YELLEN. Well, I mean, our tools to deal with the issues that 

you are describing are limited, and we generally feel that the best 

contribution we can make is to use our tools to create overall 

strong economic conditions, a labor market that is generating 

enough jobs that there are opportunities there. But it does not always mean that the jobs are exactly what people want in the places 

that they are. And I think Congress and the Administration need 

to think about ways in which they can foster greater inclusion, 

greater mobility, provide people with the tools that, if your father 

lost his job, a good manufacturing job, that the child can get a 

strong education and can get a job maybe in a sector of the economy that is growing more strongly that has strong job opportunities. And there certainly are things we can do to foster greater 

equality across generations. 

Senator DONNELLY. And I will finish with this, and I guess this 

would be to the CEOs who are thinking about this, the shorttermism. One of my heroes in life—and you may have heard of 

him—was Father Hesburgh, and the advice he gave me was: Do 

not do what is always easy; just do what is right. Thank you, 

Madam Chair. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Van Hollen. 

Senator VAN HOLLEN. Thank you, Mr. Chairman, and thank you, 

Madam Chair, for your service. 

I am going to pick up on a little bit of what Mr. Donnelly was 

raising, but from a slightly different angle, and that is the issue 

of wage growth, because as you know, we have had for really a period of decades high productivity growth over time—not recently. 

As you say, it is disturbingly low, but we have had high productivity rates, and, unfortunately, those increases in productivity 

rates have not translated into large increases in real wages. And 

so I am trying to look forward from where we are now to see what 

the future holds for real wages. And as you indicate in your testimony, we have seen a tightening of the labor market, and we have 

seen a slight uptick in real wages. 

But as I listened to your testimony, it sounds like you may believe that there is not a lot of slack left in the labor market. And 

if that is the case, what are your projections with respect to real 

wage growth going forward? 

Ms. YELLEN. So I think that somewhat faster wage growth than 

we are seeing presently would be consistent with our inflation objective, and we are projecting—after all, monetary policy is still accommodative. Job growth remains strong. The labor market is still 

strengthening, and even if we move to gradually diminish monetary policy accommodation, we expect some further strengthening 

in the labor market. And I would expect that to push up wage 

growth somewhat more than we have seen so far, but ultimately 

real wage growth in the economy as a whole is limited by 

productivity growth, determined by productivity growth, and that 

is why I have lamented the fact that productivity growth has been 

so slow, and even over the last decade is so much slower than it 

was for much of U.S. post-war history and why I really urge 

43 

Congress to focus on policies—they may be fiscal policies or other 

policies—that would succeed in raising productivity growth. 

Beyond that, of course, as you indicated, the gains from aggregate productivity growth have been very unevenly distributed 

across the population, and we have had many decades of rising income inequality as a consequence, with those at the top of the income distribution seeing healthy increases in their incomes while 

those at the median or below have seen stagnation, and so that reflects adverse structural trends. 

But when you see that those with more education and skill are 

doing substantially better than those with less education and that 

the trends in the economy are adversely affecting those with less 

education, to my mind that is telling us that investing in education 

and training and workforce development, which can take many different forms depending on the population we are talking about, is 

an investment with a payoff, and we know that it does have an important payoff. 

Senator VAN HOLLEN. Well, thank you. I think you in part anticipated my question. I know you do not want to comment on specific 

policies that are before the Congress, but in terms of fiscal policies, 

actions the Congress can take that could increase productivity over 

time, investments in the area of education, is that the area you 

would most recommend? 

Ms. YELLEN. So, generally, there are a number of areas that impact productivity growth, and this could look to different kinds of 

policies. But policies that promote investment in people or human 

capital, fiscal capital, both public infrastructure and private investment, are also important in promoting productivity. And then policies that foster innovation, the formation of new firms, research 

and development, dynamism in the business climate, those things 

can also foster faster productivity growth. 

Senator VAN HOLLEN. Thank you. I think in addition to those 

policies—and I support those kinds of investments. As you indicated, a number of those policies were in place over the last decades, and, nevertheless, you had a very uneven distribution of the 

gains in productivity, and I think there are other things. 

Ms. YELLEN. Yes, we have. 

Senator VAN HOLLEN. Is there anything—Mr. Donnelly asked 

you about incentives within sort of the corporate sector. Are there 

things that are within the power of the Fed today that could influence those long-term versus short-term calculations that the Fed is 

not currently employing fully? 

Ms. YELLEN. Well, I think a strong economy and a sustainable 

economic growth so that business firms can look out and can see 

a favorable economic climate that they expect will be sustained 

with low inflation is a business climate that does foster investment, 

and that is the kind of backdrop for business decisionmaking that 

we would hope to provide. 

Senator VAN HOLLEN. All right. Thank you, Madam Chairman. 

Mr. Chairman, I just hope that as the Committee looks toward 

policy changes, we keep in mind the fact that over the last three 

decades we have seen over most of that period rising productivity 

rates, but the gains have been very unevenly distributed, which 

gives rise to what I think is a bipartisan sense that is shared by 

44 

so many of our constituents that, you know, folks who are doing 

really well have the rules stacked in their favor against the average American. I think we need to look at all our policies that are 

outside the purview of the Fed and change them. 

Thank you. 

Ms. YELLEN. Thank you. 

Chairman CRAPO. Thank you, Senator. And thank you, Chair 

Yellen. You have spent nearly 3 hours here with us. We appreciate 

the work that you do and also your taking the time to spend this 

time with us here today. 

Senator BROWN. Thank you, Madam Chair. 

Chairman CRAPO. Without anything further, this hearing is adjourned. 

[Whereupon, at 12:38 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

45 

PREPARED STATEMENT OF JANET L. YELLEN 

CHAIR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

FEBRUARY 14, 2017 

Chairman Crapo, Ranking Member Brown, and other Members of the Committee, 

I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report 

to the Congress. In my remarks today I will briefly discuss the current economic 

situation and outlook before turning to monetary policy. 

Current Economic Situation and Outlook 

Since my appearance before this Committee last June, the economy has continued 

to make progress toward our dual-mandate objectives of maximum employment and 

price stability. In the labor market, job gains averaged 190,000 per month over the 

second half of 2016, and the number of jobs rose an additional 227,000 in January. 

Those gains bring the total increase in employment since its trough in early 2010 

to nearly 16 million. In addition, the unemployment rate, which stood at 4.8 percent 

in January, is more than 5 percentage points lower than where it stood at its peak 

in 2010 and is now in line with the median of the Federal Open Market Committee 

(FOMC) participants’ estimates of its longer-run normal level. A broader measure 

of labor underutilization, which includes those marginally attached to the labor 

force and people who are working part time but would like a full-time job, has also 

continued to improve over the past year. In addition, the pace of wage growth has 

picked up relative to its pace of a few years ago, a further indication that the job 

market is tightening. Importantly, improvements in the labor market in recent 

years have been widespread, with large declines in the unemployment rates for all 

major demographic groups, including African Americans and Hispanics. Even so, it 

is discouraging that jobless rates for those minorities remain significantly higher 

than the rate for the Nation overall. 

Ongoing gains in the labor market have been accompanied by a further moderate 

expansion in economic activity. U.S. real gross domestic product is estimated to 

have risen 1.9 percent last year, the same as in 2015. Consumer spending has continued to rise at a healthy pace, supported by steady income gains, increases in the 

value of households’ financial assets and homes, favorable levels of consumer sentiment, and low interest rates. Last year’s sales of automobiles and light trucks were 

the highest annual total on record. In contrast, business investment was relatively 

soft for much of last year, though it posted some larger gains toward the end of the 

year in part reflecting an apparent end to the sharp declines in spending on drilling 

and mining structures; moreover, business sentiment has noticeably improved in the 

past few months. In addition, weak foreign growth and the appreciation of the dollar 

over the past 2 years have restrained manufacturing output. Meanwhile, housing 

construction has continued to trend up at only a modest pace in recent quarters. 

And, while the lean stock of homes for sale and ongoing labor market gains should 

provide some support to housing construction going forward, the recent increases in 

mortgage rates may impart some restraint. 

Inflation moved up over the past year, mainly because of the diminishing effects 

of the earlier declines in energy prices and import prices. Total consumer prices as 

measured by the personal consumption expenditures (PCE) index rose 1.6 percent 

in the 12 months ending in December, still below the FOMC’s 2 percent objective 

but up 1 percentage point from its pace in 2015. Core PCE inflation, which excludes 

the volatile energy and food prices, moved up to about 1 3⁄4 percent. 

My colleagues on the FOMC and I expect the economy to continue to expand at 

a moderate pace, with the job market strengthening somewhat further and inflation 

gradually rising to 2 percent. This judgment reflects our view that U.S. monetary 

policy remains accommodative, and that the pace of global economic activity should 

pick up over time, supported by accommodative monetary policies abroad. Of course, 

our inflation outlook also depends importantly on our assessment that longer-run 

inflation expectations will remain reasonably well anchored. It is reassuring that 

while market-based measures of inflation compensation remain low, they have risen 

from the very low levels they reached during the latter part of 2015 and first half 

of 2016. Meanwhile, most survey measures of longer-term inflation expectations 

have changed little, on balance, in recent months. 

As always, considerable uncertainty attends the economic outlook. Among the 

sources of uncertainty are possible changes in U.S. fiscal and other policies, the future path of productivity growth, and developments abroad. 

Monetary Policy 

Turning to monetary policy, the FOMC is committed to promoting maximum employment and price stability, as mandated by the Congress. Against the backdrop 

46 

of headwinds weighing on the economy over the past year, including financial market stresses that emanated from developments abroad, the Committee maintained 

an unchanged target range for the Federal funds rate for most of the year in order 

to support improvement in the labor market and an increase in inflation toward 2 

percent. At its December meeting, the Committee raised the target range for the 

Federal funds rate by 1⁄4 percentage point, to 1⁄2 to 3⁄4 percent. In doing so, the Committee recognized the considerable progress the economy had made toward the 

FOMC’s dual objectives. The Committee judged that even after this increase in the 

Federal funds rate target, monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 

percent inflation. 

At its meeting that concluded early this month, the Committee left the target 

range for the Federal funds rate unchanged but reiterated that it expects the evolution of the economy to warrant further gradual increases in the Federal funds rate 

to achieve and maintain its employment and inflation objectives. As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession. Incoming data 

suggest that labor market conditions continue to strengthen and inflation is moving 

up to 2 percent, consistent with the Committee’s expectations. At our upcoming 

meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment 

of the Federal funds rate would likely be appropriate. 

The Committee’s view that gradual increases in the Federal funds rate will likely 

be appropriate reflects the expectation that the neutral Federal funds rate—that is, 

the interest rate that is neither expansionary nor contractionary and that keeps the 

economy operating on an even keel—will rise somewhat over time. Current estimates of the neutral rate are well below pre-crisis levels—a phenomenon that may 

reflect slow productivity growth, subdued economic growth abroad, strong demand 

for safe longer-term assets, and other factors. The Committee anticipates that the 

depressing effect of these factors will diminish somewhat over time, raising the neutral funds rate, albeit to levels that are still low by historical standards. 

That said, the economic outlook is uncertain, and monetary policy is not on a preset course. FOMC participants will adjust their assessments of the appropriate path 

for the Federal funds rate in response to changes to the economic outlook and associated risks as informed by incoming data. Also, changes in fiscal policy or other 

economic policies could potentially affect the economic outlook. Of course, it is too 

early to know what policy changes will be put in place or how their economic effects 

will unfold. While it is not my intention to opine on specific tax or spending proposals, I would point to the importance of improving the pace of longer-run economic 

growth and raising American living standards with policies aimed at improving productivity. I would also hope that fiscal policy changes will be consistent with putting 

U.S. fiscal accounts on a sustainable trajectory. In any event, it is important to remember that fiscal policy is only one of the many factors that can influence the economic outlook and the appropriate course of monetary policy. Overall, the FOMC’s 

monetary policy decisions will be directed to the attainment of its congressionally 

mandated objectives of maximum employment and price stability. 

Finally, the Committee has continued its policy of reinvesting proceeds from maturing Treasury securities and principal payments from agency debt and mortgagebacked securities. This policy, by keeping the Committee’s holdings of longer-term 

securities at sizable levels, has helped maintain accommodative financial conditions. 

Thank you. I would be pleased to take your questions. 

(47) 

1https://www.theclearinghouse.org/∼/media/TCH/Documents/TCHWEEKLY/2017/ 

20170130lWPlImplicitlRisklWeightslinlCCAR.pdf. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM JANET L. YELLEN 

Q.1. You indicated that you disagreed with a recent study that attempted to derive the relative risk weightings and capital charges 

for assets under CCAR, when compared to the risk weightings imposed under capital methodologies. Please indicate whether the 

Board has conducted its own independent analysis of the relative 

risk weights implicit in the CCAR exercise and the potential impact thereof on bank lending activity. If so, please provide the analysis. If not, please undertake such analysis and provide it as 

promptly as possible. 

A.1. Although I agree with the spirit of the particular study you 

mention, which is to improve understanding of the benefits and 

costs of the Federal Reserve Board’s (Board) regulations, including 

the stress testing rules, I disagree with the study’s conclusions and 

methodology.1 The study attempts to derive an ‘‘average implicit 

risk weight’’ from the losses projected in the Board’s supervisory 

stress tests. This approach fundamentally mischaracterizes the nature and purpose of stress tests. Stress tests differ from capital regulations, where assets are allocated to relatively simple categories 

and then assigned risk weights that are roughly proportional to the 

average risk of these asset categories in order to establish a minimum capital standard at any given point in time. Instead, stress 

tests serve a complementary purpose, which is to determine the 

amount of a bank’s losses and revenues through severe recession, 

like the one we experienced in 2007–2009. Unlike the capital rules, 

which have as a chief aim making sure that banks have sufficient 

capital in normal times, the stress tests address whether a bank 

can remain a going concern and continue to make loans through a 

severe recession. 

Some examples highlight this point: 

In a stress test, a bank’s revenues and losses have to be projected—income is an important source of loss-absorbing capacity. 

However, many of the banks that are the focus of our supervisory 

stress tests earn significant income from activities that are not connected to particular assets on their balance sheet, such as asset 

management fees. An approach like the one taken in the study that 

attempts to convert the dynamic firm-wide path of revenues and 

expenses produced by the stress test into a single factor attached 

only to the firm’s assets at a single point in time, likely will 

misattribute the benefits from such income, producing potentially 

inaccurate results. 

An additional important feature of stress tests is their ability to 

use extremely granular, loan-level data. This results in projections 

48 

2These projected loss rates are determined by the relative amount of each risk portfolio within 

an asset class at a given bank. A bank that does not have any portfolios in a particular asset 

class will have a projected loan loss rate of zero for that class. 3 In addition to the conceptual arguments above, certain results from the study suggest that 

something other than implicit risk weights are being captured. An example is that the ‘‘implicit 

risk weight’’ for junior liens and HELOCs is estimated to be negative or zero, which is inconsistent with the actual CCAR loss rates (which are not zero) shown in Table 1. 

of losses that are quite sensitive to the risks of the underlying assets and thus will necessarily differ across banks depending on 

portfolio characteristics. In contrast, the study attempts to infer a 

single average ‘‘implicit risk weight’’ across banks for each asset 

category. Further, the study does not control for any difference in 

the riskiness of those portfolios across banks. Thus, the study 

treats a bank with a portfolio of auto loans weighted toward 

subprime borrowers as having the same risk profile as a bank with 

a portfolio of auto loans weighted toward prime borrowers. This 

has the potential to result in misleading results because loan loss 

rates in the stress tests for a particular asset class, such as auto 

loans, may differ substantially across banks, depending on how the 

risk profile of the banks differ for that asset class. 

Table 1 summarizes the projected loan loss rates across banks for 

eight of the asset categories considered in the supervisory stress 

test and Comprehensive Capital Analysis and Review (CCAR). The 

results show how the assumption of a single average implicit risk 

weight can be quite misleading. This is because the loss rates differ 

across banks due to differences in the relative riskiness of their 

portfolios for a given asset class.2 Thus, the appropriate way to calculate an ‘‘implicit risk weight’’ in CCAR would be to consider the 

riskiness of a specific loan or subportfolio of loans at a specific 

bank. As with point-in-time risk weights, an average risk weight 

across all loans of a certain broad type—such as ‘‘auto loans’’—that 

is bluntly applied to all banks will miss important differences in 

how the individual loan portfolios would perform in an actual economic downturn. For these reasons, the results from the study 

should not be interpreted as capturing ‘‘implicit risk weights’’ from 

the CCAR, as the study suggested.3

We also note the Federal Reserve closely monitors bank lending 

and credit availability as part of its bank supervision and research 

functions, including the distribution of credit across segments of 

the U.S. economy. For instance, the availability of credit to new 

and small businesses is an area of the economy that we pay particular attention to. The Federal Reserve’s most direct measures of 

the amount of credit provided to small businesses by banks are 

commercial and industrial (C&I) and commercial real estate (CRE) 

loans with balances under $1 million. If regulation is impeding the 

flow of credit to small businesses, we would expect slower growth 

in small business lending by banks that face greater regulation, for 

example, banks with assets over $50 billion. Since 2011, however, 

small C&I loans held at banks with assets over $50 billion have 

grown more quickly than at the smaller banks. Small CRE loans 

have declined somewhat in recent years at both large and small 

banks. Although we continue to study these trends, these results 

are not consistent with the view that either supervisory stress tests 

or the Board’s more stringent capital rules for large institutions are 

meaningful constraints on the provision of credit to small 

49 

4 At present, most research on the new regulations focuses on specific pockets of the economy 

or financial system. For example, Calem, Correa, and Lee (2016) find that the market share of 

jumbo mortgage originations at banks participating in the 2011 CCAR exercise declined after 

that exercise (Paul Calem, Ricardo Correa, and Seung Jung Lee (2016)), ‘‘Prudential Policies and 

Their Impact on Credit in the United States,’’ International Finance Discussion Papers 1186 

(Washington: Board of Governors of the Federal Reserve System, November, https://doi.org/ 

10.17016/IFDP.2016.1186). Morris-Levenson, Sarama, and Ungerer (2017) find that while recent bank regulation has contributed to a reduction in mortgage lending by large banks, counties most dependent on lending from the most heavily regulated banks have not experienced significantly slower mortgage origination or house price growth than less dependent counties (Joshua A. Morris-Levenson, Robert F. Sarama, and Christoph Underer (2017), ‘‘Does Tighter Bank 

Regulation Affect Mortgage Originations?’’ paper, January, available at Social Science Research 

Network, http://dx.doi.org/10.2139/ssrn.2941177). This suggests that the reduction in lending 

by the largest banks has been largely filled by expanded origination activity from small banks 

and nonbanks. 5See, for example, Mark Carlson, Hui Shan, and Missaka Warusawitharana (2013), ‘‘Capital 

Ratios and Bank Lending: A Matched Bank Approach,’’ Journal of Financial Intermediation, vol. 

22 (October), pp. 663–87; Seung Jung Lee and Viktors Stebunovs (2016), ‘‘Bank Capital Pressures, Loan Substitutability, and Nonfinancial Employment,’’ Journal of Economics and Business, vol. 83 (January–February), pp. 44–69; and Ozge Akinci and Albert Queralto (2014), 

‘‘Banks, Capital Flows and Financial Crises,’’ International Finance Discussion Papers 1121 

(Washington: Board of Governors of the Federal Reserve System, October), https:// 

www.federalreserve.gov/econresdata/ifdp/2014/files/ifdp1121.pdf. 6See Luca Guerrieri, Matteo Iacoviello, Francisco B. Covas, John C. Driscoll, Michael T. Kiley, 

Mohammad Jahan-Parvar, Albert Queralto Olive, and Jae W. Sim (2015), ‘‘Macroeconomic Effects of Banking Sector Losses across Structural Models; Finance and Economics Discussion SeContinued 

businesses. In addition, Federal Reserve staff continue to investigate the expanding role of nonbank providers of small business 

credit, who we estimate account for more than half of all credit provided to small businesses, based on available data. These firms, 

which include credit unions, finance companies, farm credit bureaus, and online platforms, could help to offset any reduction in 

credit availability from banks. 

More generally, however, quantifying the specific effects of capital regulation, and CCAR in particular, on credit provision is made 

more difficult by a number of confounding factors, which could also 

result in less credit provision by large banks. For instance, one of 

the goals of incentivizing large banks to fund assets with additional 

capital is to reduce the value of any remaining too-big-to-fail subsidy. With the reduction in that subsidy, the funding costs of large 

banks should rise relative to community banks, thus making the 

community banks more competitive in attracting new business. It 

will take some time to gain a more concrete understanding of the 

effects of new financial regulations, including capital regulation, on 

bank lending and the availability of credit, but the Federal Reserve 

is engaged and will continue to push ahead on this research 

agenda.4

Finally, undercapitalized banks are unlikely to be able to provide 

credit on a sustainable basis. Loans that are withdrawn at the first 

signs of a downturn exacerbate recessions with a ‘‘credit crunch.’’ 

Indeed, research by Federal Reserve economists has shown that 

banks with higher capital buffers (i.e., banks with capital ratios 

well above regulatory minimums) lend more freely during 

downturns, reducing both the severity of the downturn and the 

likelihood of a crisis.5 The supervisory stress tests and CCAR help 

to ensure that banks will be able to maintain such buffers above 

the regulatory minimums even during a downturn. Related research by Federal Reserve economists focuses on different channels 

through which bank capital levels affect the likelihood and severity 

of a financial crisis.6

50 

ries 2015–044 (Washington: Board of Governors of the Federal Reserve System, June), http:// 

dx.doi.org/10.17016/FEDS.2015.044; and Gazi I. Kara and S. Mehmet Ozsoy (2016), ‘‘Bank Regulation under Fire Sale Externalities,’’ Finance and Economics Discussion Series 2016–026 

(Washington: Board of Governors of the Federal Reserve System, April), http://dx.doi.org/ 

10.17016/FEDS. 2016.026. 

Q.2. Last year, the Federal Reserve agreed to implement a series 

of changes to its CCAR processes recommended in both an internal 

IG report and a GAO study. Please provide a detailed update identifying what progress the Federal Reserve has made in addressing 

each of these individual recommendations and, with respect to any 

item not yet fully addressed, please describe the Federal Reserve’s 

remediation plan to ensure its implementation and identify the resources dedicated to that remediation. 

A.2. The Federal Reserve is making progress on addressing the recommendations made in U.S. Government Accountability Office Report GAO–17–18, Additional Actions Could Help Ensure the 

Achievement of Stress Test Goals (GAO report). In a January 13, 

2017, letter to Members of the House of Representative’s Committee on Oversight and Government Reform and the Senate’s 

Committee on Homeland Security and Governmental Affairs, I provided an update on the Federal Reserve’s plans to address these 

recommendations. Additional information on these plans is provided below: 


21417086.eps
51 

Inter-agency Coordination 

The GAO report recommended that the Federal Reserve, Federal 

Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) (collectively, the agencies) harmonize 

their approach to granting extensions and exemptions from stress 

test requirements. 

Consistent with the plans outlined in the January 13 letter, Federal Reserve staff, in consultation with staff of the OCC and FDIC, 

have established a process to meet at least annually, and more frequently as needed, to coordinate regarding requests for extensions 

and exemptions from stress test rules. Federal Reserve staff met 

with staff of the OCC and FDIC on January 26, 2017, to review all 

the stress testing-related exemptions and extensions that the agencies granted to firms in 2016. The staff of the agencies have agreed 

to continue this practice. Federal Reserve staff will continue to 

work with the FDIC and OCC on a harmonized approach to granting extensions and exemptions from stress testing requirements. 

Exclusion of Company-Run Tests from CCAR 

The GAO report recommended that the Federal Reserve remove 

company-run stress tests from the CCAR quantitative assessment. 

As indicated in the January 13 letter, Federal Reserve staff continue to evaluate the benefits and costs of modifying its rules to 

remove company-run stress test results from the factors that are 

considered in the CCAR quantitative assessment. Before modifying 

its rules, the Board would provide notice and invite public comments regarding any proposed changes. 

Transparency of the Qualitative Assessment 

The GAO’s report recommended that the Federal Reserve publicly disclose additional information about the CCAR qualitative assessments; the basis for the Federal Reserve’s decisions to object or 

conditionally not object to a company’s capital plan on qualitative 

grounds; and information on capital planning practices observed 

during CCAR qualitative assessments, including practices the Federal Reserve considers stronger or leading practices. The GAO report also recommends that the Federal Reserve notify companies 

about timeframes relating to Federal Reserve responses to company inquiries. 

We continue to look for ways to further enhance the transparency of CCAR and respond to the GAO findings. For example, 

the Federal Reserve expects to publish a summary of the current 

range of capital planning practices after the completion of CCAR 

2017. 

In addition, consistent with the plans outlined in the January 13 

letter, effective with the first quarter of 2017, all firms that are 

subject to the Board’s capital plan rule, including FR–Y14 regulatory report filers, receive a confirmation email that acknowledges 

receipt of their question and provides an expected timeline for a response. Additionally, firms now receive a direct response to questions related to CCAR in accordance with the communicated 

timeline. Questions that the Federal Reserve receives regarding 

CCAR which pertain to all firms subject to the Board’s capital plan 

52 

rule are included in a general communication sent to all firms at 

least quarterly, or more frequently, as needed. 

Scenario Design Process 

The GAO’s report recommends the Federal Reserve take several 

actions to broaden the consideration of the types of scenarios to use 

in the stress tests and to better understand the implications of scenario choices. 

The Federal Reserve has procedures for generating and considering scenarios with severity that falls outside of post-war U.S. history, and that is reflected in the published scenarios. Federal Reserve staff continue to explore mechanisms in which the severely 

adverse scenario in the stress tests would include deteriorations in 

scenario variables that lie beyond those historically observed. Staff 

also are developing additional analytical tools, including exploring 

a stress testing model based on more aggregated, bank-level data, 

to assess the capital levels that will likely be implied by scenarios 

of differing severities. Finally, staff are developing a process to 

analyze the severely adverse scenario for potential procyclicality. 

Model Risk Management and Communication 

The GAO’s report recommends the Federal Reserve take several 

actions to improve its ability to manage model risk and ensure decisions based on supervisory stress test results are informed by an 

understanding of model risk, such as by applying model development principles to the entire system of models that are used to estimate losses and revenue in the stress tests. 

Consistent with the plans outlined in the January 13 letter, Federal Reserve staff have amended the principles used to develop 

models to explicitly state that the principles apply to the overarching system of models, in addition to each of its component 

models. In addition, Federal Reserve staff are developing separate 

documentation that describes the system of models. Several 

projects are currently underway to further test and document the 

sensitivity and uncertainty of the system of models, including reviewing the relevant finance and statistics literature and exploring 

various methods to test the sensitivity and measure uncertainty. 

Finally, the Supervisory Stress Test Model Governance Committee 

has issued a memo to the Board describing the state of model risk 

and plans to issue this memo annually at the conclusion of each 

year’s supervisory stress test. This memo describes the general outcomes of the model development and validation processes for the 

models used in the supervisory stress test exercise, and provides a 

more detailed discussion of the potential impact of modeling issues 

on the uncertainty of post-stress capital ratio estimates. 

RESPONSE TO WRITTEN QUESTION OF SENATOR REED FROM 

JANET L. YELLEN 

Q.1. You have said the United States is at or near full employment. You have also said that fiscal policy changes are not necessary to reach full employment under current economic conditions. 

There are, however, many long-term unemployed individuals in my 

home State of Rhode Island, and around the country, who would 

53 

take issue with the statement that we are at full employment. 

They would also argue that our unemployment system did not adequately adjust, as they continue to struggle in the wake of the 

Great Recession. How would you recommend that I answer my constituents whose experience leads them to question whether we are 

truly at full employment? What safeguards need to be put in place 

now to protect against job loss in the next economic downturn? 

A.1. The statement that the U.S. economy is at or near full employment pertains to the national economy. Within that overall national situation, there will be important variation by geographic 

location, industry, and skill set. As you correctly observe, it remains the case that not every willing worker in every location can 

currently find a job that she or he is qualified to fill. The policies 

(including monetary policy) that affect aggregate demand at the national level will generally not be well suited to address these sorts 

of more-localized and more-specialized situations, as real and as 

painful as they are for those experiencing them. 

To address the real and important aspects of unemployment that 

remain today, a more-detailed set of interventions will probably be 

more appropriate and effective. These interventions may be 

designed at the Federal, State or local level, and may involve Government actions at that level, private actions, or partnerships involving both the public and private sectors. In one of my earliest 

speeches as Chair of the Federal Reserve in October 2014, for example, I highlighted some potential ‘‘building blocks’’ for greater 

economic opportunity; these included strengthening the educational 

and other resources available for lower-income children, making 

college more affordable, and building wealth and job creation 

through strengthening Americans’ ability to start and grow 

businesses. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM JANET L. YELLEN 

Q.1. I’d like you to elaborate on your statement to Senator Reed 

during your Senate Banking testimony that ‘‘cybersecurity is a 

major, major risk that financial firms face.’’ 

Q.1.a. How could a large scale cyberattack on our financial system 

impact the U.S. economy and international economy? 

A.1.a. The global financial system has a heightened level of exposure to cyber risk due to the high degree of information technology 

intensive activities and the increasing interconnection between 

firms across the financial services sector. In addition, the presence 

of active, persistent, and sometimes sophisticated adversaries 

means that malicious cyber attacks are often difficult to identify or 

fully eradicate, may propagate rapidly through the system, and 

have potentially systemic consequences. 

Given the highly interconnected nature of the financial sector 

and its dependencies on critical service providers, all participants 

in the financial system face cyber threats. The potential scenarios 

and resulting impact are diverse in nature and scale. In some 

cases, attackers may seek to undermine public confidence and impact an institution’s and/or country’s reputation. In other cases, a 

cyber attack on a financial institution or a group of financial 

54 

institutions could impact liquidity, thereby causing insolvency 

issues at the affected firms which could lead to systemic consequences. 

Q.1.b. What is the most likely cyber-threat to our financial system? 

A.1.b. In general, cyber threats against financial institutions are 

becoming more frequent, sophisticated, and widespread. The rise in 

frequency and sophistication of cyber attacks can be attributed to 

numerous factors including nation-states that breach systems to 

seek intelligence or intellectual property, hacktivists making political statements through systems disruptions, and criminals seeking 

to breach systems for monetary gain. While Internet-based denialof-service attacks intended to disrupt or impede financial market 

activities are among the most frequent attacks on U.S. financial institutions, potential attacks that alter or destroy financial institution data are more likely to threaten U.S. financial stability. 

Q.1.c. When does the Federal Reserve expect to issue a proposed 

rule relating to cybersecurity? 

A.1.c. The Federal Reserve, Federal Deposit Insurance Corporation 

and the Office of the Comptroller of the Currency issued an advance notice of proposed rulemaking (ANPR) on October 20, 2016, 

inviting comment on a set of potential enhanced cybersecurity risk 

management and resilience standards that would apply to large 

and interconnected entities under their supervision. The agencies 

received substantial feedback from industry on the ANPR through 

the public comment period that ended on February 17, 2017. In 

general, the feedback emphasized the burden on firms of trying to 

comply with multiple cybersecurity frameworks and encouraged the 

agencies to adhere to a common approach to cybersecurity developed in collaboration with industry that leverages the work done 

by organizations such as the National Institute of Standards and 

Technology. The Federal Reserve is considering options for better 

integration with existing efforts and has not committed to a timeframe for any future notice of proposed rulemaking. 

Q.2. I’d like to continue our discussion about deficits and the debt. 

During your Senate Banking Testimony, you told Senator Corker 

that ‘‘fiscal sustainability has been a longstanding problem, and 

. . . the U.S. fiscal course, as our population ages and healthcare 

costs increase, is already not sustainable.’’ 

Q.2.a. In correspondence with me last year, you told me that ‘‘fiscal 

policymakers should soon put in place a credible plan for reducing 

deficits to sustainable levels over time.’’ What level of deficits and 

debt would the Federal Reserve consider sustainable over the long 

run? 

A.2.a. A sustainable level of Federal debt is when the ratio of debt 

to nominal gross domestic product (GDP) remains essentially constant or is decreasing over the longer run. Sustainability can potentially be achieved at different levels of the debt-to-GDP ratio. For 

example, the Congressional Budget Office (CBO) recently illustrated the fiscal policy changes necessary in two different scenarios 

to put the Federal debt on a sustainable path over the next 30 

years: one in which the debt-to-GDP ratio would remain constant 

at its current level of about 75 percent and another where the 

55 

debt-to-GDP ratio would be brought down to its 50-year average of 

around 40 percent. 

In regards to the deficit, a good rule-of-thumb is that the ‘‘primary’’ budget deficit—which is defined as Federal non-interest 

spending minus tax revenues—needs to be around zero, on average, 

for the debt-to-GDP ratio to remain constant over the longer run. 

A declining debt-to-GDP ratio usually requires primary budget surpluses—that is, tax revenues must be greater than non-interest 

spending—on average. 

Q.2.b. What metrics would the Federal Reserve consult in order to 

evaluate the impact of the U.S.’s debt and deficit levels? What levels must these metrics reach in order for the U.S. debt and deficit 

to be sustainable? 

A.2.b. The Federal Reserve uses monthly data produced by the Department of the Treasury to evaluate the current state of the budget deficit and the debt. We use the periodic Federal budget and 

debt projections provided by the CBO to inform our view of the expected future paths of Federal deficits and debt. As I described earlier, a sustainable fiscal policy is one in which projected budget 

deficits are at low enough levels such that the debt-to-GDP ratio 

is projected to remain constant or to be decreasing. 

Q.2.c. Assuming current policy and current demographic trends, 

how will population aging impact the U.S. fiscal situation over the 

next 10 years? 

A.2.c. As described in the CBO’s most recent budget outlook, population aging contributes importantly to the projected growth in 

Federal spending for retirement and healthcare programs over the 

next 10 years. Growth in these Federal spending programs is expected to outpace growth in tax revenues, which is reflected in the 

CBO’s projection of rising budget deficits over the next decade. 

Q.2.d. Assuming current policy and current demographic trends, 

how large does the Federal Reserve expect the shortfall to be between retiring workers and new entrants into the workforce, over 

the next 10 years? 

A.2.d. Most economic analysts expect that labor force growth will 

be slower over the next 10 years than it has been, on average, over 

the past several decades. This outlook reflects the well-known demographic trends of both a faster pace of workers retiring and a 

slower pace of new entrants. I do not think that our views on how 

these trends will evolve in the future—which are quite uncertain— 

differ materially from the projections of others, such as the CBO. 

Q.2.e. What policy changes could Congress consider to address the 

impact of population aging on our fiscal situation? 

A.2.e. In general, simple arithmetic indicates that the policy 

changes will need to include restraining Federal spending or increasing tax revenues or some combination of both. All other things 

being the same, policy changes that are more likely to help promote 

economic growth would ease the fiscal challenges somewhat, although it is quite unlikely that our economy could grow its way out 

of the long-run fiscal situation. Ultimately it is the responsibility 

of the Congress and the Administration to decide on the 

56 

appropriate policy changes to put the fiscal situation on a sustainable path in the long run. 

Q.2.f. How would the Federal Reserve evaluate the economic impact of an unfunded $1 trillion infrastructure spending package, 

especially in light of the Federal Reserve’s concerns about fiscal 

sustainability? 

A.2.f. Federal spending for public infrastructure can potentially increase productivity and the size of the economy, although the magnitude and timing of these potential gains would depend on the 

composition of the infrastructure spending. Moreover, as the CBO 

has reported, the overall gains to the economy and the effects on 

the budget would depend importantly on whether the increased infrastructure was financed by borrowing or by changes in other Government spending or revenues. 

Q.3. I’d like you to elaborate on your discussion with Senator Cotton during your Senate Banking testimony regarding depressed 

wage growth in particular fields. 

Q.3.a. You stated that the United States has seen ‘‘much faster 

wage growth for higher skilled individuals and much slower wage 

growth for those who are less skilled.’’ Are there any fields where 

less skilled workers have seen more robust wage growth? 

Q.3.b. What conditions must be present in the U.S. economy for 

lower-skilled wages to increase? 

Q.3.c. Typically, the barrier to entry for entering a high-skilled 

profession is high. Do you know of any high-skilled professions that 

lower-skilled workers have had an easier time transitioning into? 

If so, what conditions allow for this to occur? 

Q.3.d. What higher-skilled professions are currently facing a labor 

shortage? 

A.3.a.–d. The widening of the U.S. income distribution over the 

past several decades has been evident in the wage outcomes for 

people of different skill and educational levels. For example, on average over the past decade (according to data from the Current 

Population Survey), wages of people with a high school education 

but no college have just kept up with inflation, while wages of people with a college degree have exceeded inflation by about 1⁄2

percent per year. Similarly, wage gains for occupations typically 

classified as high-skill (managers, professionals, and technicians) 

have far outpaced wage gains for low-skill occupations (food preparation and serving, cleaning, and personal care services). 

This pattern changed somewhat over the past year or so, as we 

have seen relatively large gains for the lower-skill, lower-education 

portion of the workforce. For example, median usual weekly earnings were almost identical for workers with college degrees, some 

college, and high school graduates in 2016 (all between 2.2 and 2.4 

percent, not adjusting for inflation). This pattern is also visible in 

the wages for different industries; the leisure and hospitality sector, for example, is dominated by lower-paid workers who for the 

past decade have had the lowest wage gains of any major industry 

group, but wages in this sector rose well above average in 2016. A 

portion of the explanation for the differing results last year is probably that a number of States increased their minimum wages in 

57 

2016. But another portion of the explanation may be that the 

strengthening labor market, with ongoing solid rates of job creation 

and declining unemployment, has reached a point that it is benefiting these lower-skill workers more visibly. I am hopeful that continued gains in the labor market will further benefit workers 

throughout the income distribution. 

Despite this recent wage news, it remains the case that signs of 

labor shortages appear most prevalent in higher-skilled occupations. Data point to shortages primarily in management, business 

and financial services occupation, or in professional and related 

services occupations. Other anecdotal evidence points to labor 

shortages for some types of manufacturing and construction work, 

and in health care. 

As I noted, a strong labor market seems to be helping generate 

higher wages throughout the income distribution. Effective Federal 

Reserve policy can therefore contribute to further such progress, 

but I would emphasize that the primary forces leading to different 

economic outcomes for workers of different skill levels are beyond 

the realm of monetary policy. Most especially, I see education as 

a critical factor in enabling individuals to succeed in a labor market that increasingly rewards higher skills. And there are many 

aspects to improved education, from the quality of our primary and 

secondary schools, to the ability of high school graduates to afford 

college without incurring excessive debt, to improved job training 

opportunities for people of any age. Improved education, through 

any of these channels, is surely an important part of a strategy to 

help more Americans become qualified for these higher-skilled jobs. 

Q.4. I’d like to discuss the U–6 real unemployment rate. 

Q.4.a. What is the Federal Reserve’s estimation of the longer-run 

normal level U–6 rate? 

Q.4.b. Has the Federal Reserve’s estimation of this longer-run normal U–6 rate decreased since the 2008 financial crisis? If so, why? 

A.4.a.–b. Federal Open Market Committee participants do not submit an estimate of the longer-run normal level of the U–6 measure 

of labor underutilization. (This measure augments the official unemployment rate by also including the ‘‘marginally attached’’—individuals who would like to work, are available to work, and have 

sought employment within the past 12 months but not in the past 

4 weeks—and those who are working part-time, but say they would 

like to be working full-time.) As with other such measures, the U– 

6 rose substantially during the recession and has been coming 

down since then. However, the U–6 measure still remains a little 

above its pre-recession level, and the difference between the U–6 

measure and the official unemployment rate has widened by about 

1 percentage point since that time. Some economists think that the 

higher level of U–6 could reflect structural changes in the economy, 

for example, because employers in some growing service sectors 

may have a relatively high propensity to use part-time labor. But 

the somewhat elevated level of U–6 also may indicate some remaining labor market slack that is not captured by the official unemployment rate. 

Q.5. I’d like to discuss the U.S. agricultural markets. 

58 

Q.5.a. How would an interest-rate hike impact the agricultural sector, given current economic conditions? How will the Federal Reserve take this into account when evaluating current economic conditions? 

Q.5.b. According to the United States Trade Representative, Nebraska goods exports totaled $7.9 billion in 2014. This number is 

a 238 percent increase from export levels in 2004. A recent report 

released by the Department of Agriculture titled, ‘‘USDA Agricultural Projections to 2026’’ predicts that over the next 10 years the 

U.S. dollar will remain stronger than any year since 2006. According to the report, ‘‘A stronger U.S. dollar will increase the relative 

price of U.S. exports, thereby constraining export growth.’’ Does the 

Federal Reserve share this opinion about a stronger dollar and the 

impact on export levels? 

A.5.a.–b. The Federal Reserve considers all segments of the U.S. 

economy during the regular course of monetary policy deliberations. Our monetary policy mandate, given to us in law by the Congress, is to pursue price stability and maximum sustainable employment. The concepts that constitute the so-called dual mandate 

apply across the full economy. That is appropriate because our policy tools likewise have their effects across the full economy; they 

cannot be targeted to specific sectors. 

Turning to the agricultural sector, conditions there have softened 

in recent years. Many factors influence profitability in the agricultural sector, but a prolonged downturn in the prices of agricultural 

commodities has been the primary driver of the weakness in the 

farm economy over the past few years; in turn, the prices of many 

agricultural commodities are heavily influenced by global supply 

and demand conditions, not just domestic conditions. The nominal 

value of U.S. agricultural exports has declined modestly since 2014, 

on the tide of lower commodity prices and a stronger dollar. A modest increase in interest rates will affect economic and financial 

conditions in the agricultural sector through multiple different 

channels. For one thing, a modest increase in interest rates will 

often—as in the present circumstances—be accompanied by a 

strengthening overall economy, and so, generally speaking, will be 

accompanied by sustained domestic demand for the output of the 

agriculture sector. A modest increase in interest rates may also result in a possible increase in borrowing costs. However, interest expenses account for a relatively small portion of production costs in 

the U.S. farm sector and farm loan delinquencies remain historically low. As economic and financial conditions evolve, the Federal 

Reserve will continue to carefully monitor developments in the 

agricultural sector. 

Q.6. I’d like you to elaborate on your statement regarding automation to Senator Heitkamp during your Senate Banking testimony 

that ‘‘there are dramatic accounts of changes that are on the horizon that could have profound effects on the labor market.’’ 

a. What industries are most vulnerable to automation? 

b. What industries will see the most growth because of automation? 

59 

1https://obamawhitehouse.archives.gov/sites/default/files/page/files/20160620lceal 

primeagelmalellfp.pdf. 

c. Does the Federal Reserve expect automation to permanently 

increase unemployment for lower-skilled workers? Or will the 

impacts of automation primarily be transitional, as new entrants into the workforce adapt to new technologies? 

A.6.a.–c. The jobs that are most susceptible to automation appear 

to be those that involve routine tasks, either physical or cognitive. 

Many tasks in the manufacturing sector fall into this category, as 

machines or robots are able to carry out physical tasks. This is also 

the case for some services, where automation can substitute for 

routine cognitive tasks; prominent examples include banking, 

where ATMs have substituted for tellers, or sales workers who 

have been displaced by internet shopping. Conversely, tasks that 

require nonroutine skills appear least vulnerable to automation, 

and they may expand as other jobs are automated. These nonroutine tasks cut across the skill distribution, and include laborers and 

personal care providers along with higher-skilled workers such as 

managers and software developers. Of course, as technology 

changes, it may be that more types of occupations become susceptible to at least partial automation. As a result, demand and workers will shift to new occupations, some of which may not even exist 

today. 

Even though the likelihood of a job being automated cuts to some 

extent across the skill distribution, on balance, changes in technology appear to have reduced demand for lower-skilled workers 

and have contributed to the increased inequality of incomes that 

have been in train for several decades. Moreover, as a recent report 

from the Council of Economic Advisers 1 highlighted, reduced demand for lower-skilled workers also can help explain the ongoing 

decline in labor force participation of men 25–54 years old, which 

has been most concentrated among those with a high school degree 

or less. 

Knowing whether these trends will continue is of course difficult, 

and there is debate among economists about the pace of automation and its likely effects. But as I said in the response to question 

3, I see education as critically important for ensuring that new entrants to the labor force are prepared for a work environment dominated by new technologies. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER 

FROM JANET L. YELLEN 

Debt/Deficit 

Q.1. Chair Yellen, I want to start this morning by talking about 

our Nation’s debt and deficit. Now, it’s my belief that our Nation’s 

debt and deficit continues to be unsustainable. I think we refuse 

to actually take a long hard look at our Federal budget to see what 

simply doesn’t make sense anymore and at the same time we continue to hand out unpaid-for tax credits like candy. 

Now just recently my friends on the other side of the isle have 

proposed repealing the Affordable Care Act, which will reduce revenues by $350 billion over the next decade. On top of that, they 

60 

1 Congressional Budget Office, ‘‘The Budget and Economic Outlook: 2017 to 2027,’’ January 

2017, and ‘‘The 2016 Long-Term Budget Outlook,’’ July 2016. 

have proposed a tax plan that would reduce Federal revenue more 

than 2 trillion dollars. 

Q.1.a. So I guess my first question is, what sort of effect will that 

kind of new debt have on our economy? 

A.1.a. The current level of Federal debt is equal to more than 75 

percent of nominal gross domestic product (GDP), which is far 

higher than the average debt-to-GDP ratio of about 40 percent over 

the past 50 years. Moreover, the Congressional Budget Office 

(CBO) projects that Federal budget deficits and Federal debt will 

be increasing, relative to the size of the economy, over the next decade and in the longer run.1 Additional Federal borrowing would accelerate those unsustainable trends. The CBO appropriately 

describes several reasons why high and rising Federal Government 

debt could have serious negative consequences for the economy 

over time. First, because Federal borrowing eventually reduces 

total saving in the economy, the Nation’s capital stock would ultimately be smaller than it would be if debt was lower; as a result, 

productivity and overall economic growth would be slower. Second, 

fiscal policymakers would have less flexibility to use tax and spending policies to respond to unexpected negative shocks to the economy. Third, the likelihood of a fiscal crisis in the United States 

would tend to increase. However, there is no way to predict with 

any confidence whether and when such a crisis could occur; in particular, there is no identifiable level of Federal Government debt, 

relative to the size of the economy, indicating that this would be 

likely or imminent. 

Q.1.b. Do you believe our debt and deficit levels are unsustainable 

in the longer term? 

A.1.b. I agree, as do most economists, with the assessment that the 

Federal Government budget is on an unsustainable path, given current fiscal policies. As I noted earlier, the CBO projects that Federal budget deficits and Federal debt will be increasing, relative to 

the size of the economy, over the next decade and in the longer 

run, which is unsustainable. In the CBO’s projections, growth in 

Federal spending—particularly for mandatory entitlement programs and interest payments on Federal debt—outpaces growth in 

revenues in the coming years. The increases in entitlement programs, such as Social Security and programs providing health care, 

are mainly attributable to the aging of the population and rising 

healthcare costs per person. For fiscal sustainability to be achieved, 

whatever level of spending is chosen, revenues must be sufficient 

to sustain that spending in the long run. 

Q.1.c. Does it inhibit our labor market? 

A.1.c. As I mentioned earlier, increasing Federal borrowing reduces 

total savings in the economy over time, ultimately leading to the 

Nation’s capital stock being smaller than it would be if debt was 

lower. As a result, productivity and overall economic growth would 

be slower. As described by the CBO, lower productivity growth 

61 

2 Congressional Budget Office, ‘‘The 2016 Long-Term Budget Outlook,’’ July 2016. 

3For example, see the Tax Foundation, ‘‘Do Tax Cuts Pay for Themselves?’’ at https:// 

taxfoundation.org/do-taxcuts-pay-themselves; and the Tax Policy Center, ‘‘Do Tax Cuts Pay for 

Themselves?’’ at http://www.taxpolicycenter.org/briefing-book/do-tax-cuts-pay-themselves. 

would slow the pace of gains in labor compensation, which would 

tend to provide individuals less incentive to work.2

Q.1.d. During the course of several meetings with President 

Trump’s nominees, folks kept telling me that they believe we can 

grow the economy so much that it will offset $2 trillion in tax cuts. 

Do you believe this is possible? 

A.1.d. In general, I think most economists tend to agree that the 

historical evidence suggests that most tax cuts do not usually pay 

for themselves.3 Even though well-designed tax changes could increase household incentives to work and save, along with potentially enhancing business incentives to hire and invest, the positive 

effects of these changes on overall economic growth appear to usually not be large enough to offset the direct budgetary effects of a 

tax cut. Ultimately, the challenge for fiscal policymakers is that the 

tax policies chosen must generate revenue sufficient to sustain the 

level of Government spending that is also chosen. 

Economy 

Q.2. Chair Yellen, are there particular areas in the labor market 

that give you concern? Are there specific sectors you see strong 

growth in vs. others that are struggling? 

A.2. The solid gains in payroll employment that we have seen over 

the past several years have generally been fairly widespread across 

different sectors of the labor market. However, manufacturing employment has been relatively flat more recently, reflecting in part 

the effects of the higher foreign exchange value of the dollar, weak 

foreign economic growth, and tepid domestic demand for capital 

investment. Particularly as economic activity continues to strengthen, both domestically and abroad, the prospects for the U.S. manufacturing sector should improve. Indeed, the manufacturing 

employment has picked up in recent months as factory output has 

accelerated somewhat. 

Community Banks 

Q.3. Chair Yellen, I strongly believe that our community banks 

serve the folks that keep State’s like mine running. And I think everyone up here knows that our community banks weren’t involved 

in developing and selling exotic and risky financial products, and 

they didn’t stray from the products that have served them and 

their customers for generations. I think it’s time that we provide 

our community banks with some regulatory relief. I don’t believe 

they caused the financial crisis and they shouldn’t have to pay for 

it either. 

Over the last several years, I’ve seen dozens of mergers and 

acquisitions of community banks across Montana and its very concerning to me. If community banks continue to consolidate, the real 

losers will be folks living in rural America, States where a majority 

of our institutions are community banks, and I’m not so sure anyone will fill the void once they are gone. 

62 

4For consumer financial protection, the Federal Reserve has examination and enforcement authority for Federal consumer financial laws and regulations for insured depository institutions 

with $10 billion or less that are State member banks and not affiliates of covered institutions, 

as well as for conducting CRA examinations for all State member banks regardless of size. The 

Federal Reserve Board also has examination and enforcement authority for certain Federal consumer financial laws and regulations for insured depository institutions that are State member 

banks with over $10 billion in assets, while the Consumer Financial Protection Bureau has examination and enforcement authority for many Federal consumer financial laws and regulations 

for insured depository institutions with over $10 billion in assets and their affiliates (covered 

institutions), as mandated by the Dodd-Frank Act. 

Q.3.a. Can you give me a sense of what the Federal Reserve did 

in 2016 to ensure that we are protecting consumers, but at the 

same time differentiating regulations between community banks, 

regional banks, and global banks? 

A.3.a. In 2016, the Federal Reserve took a number of steps to reduce regulatory burden on community banks. For example, in response to bankers’ concerns about the burden imposed on small 

banks when large numbers of examiners participate in onsite examinations, the Federal Reserve issued guidance to encourage examiners to review loan files offsite for examinations of banks with 

less than $50 billion in total assets, if requested by the bank. Together with the other banking regulators, the Federal Reserve also 

reduced the regulatory filing requirements for banks with less than 

$1 billion in consolidated assets by eliminating about 40 percent of 

the items in the required quarterly financial reporting form known 

as the Call Report. In addition, the Federal Reserve enhanced its 

examination planning process to use updated statistical models to 

tier community banks by risk level. These enhancements allow examiners to better target their work and should result in less examination time being spent reviewing well-managed, lower-risk community banks. For regional banks with assets between $10 and $50 

billion, the Federal Reserve continued to refine its expectations for 

company-run annual stress tests required by the Dodd-Frank Wall 

Street Reform and Consumer Protection Act (Dodd-Frank Act). 

This included providing banks with additional flexibility with respect to required assumptions that must be included in the stress 

test and extending the length of time allowed to perform and report 

on the results of the tests. These actions are examples of how the 

Federal Reserve seeks to tailor its supervisory programs to reflect 

the lower systemic risks presented by community and regional 

banks. 

The March 2017 Joint Report to Congress on the results from the 

second Economic Growth and Regulatory Paperwork Reduction Act 

(EGRPRA) review highlights many of the actions that the Federal 

Reserve is undertaking to further reduce regulatory burden on 

community banks, including simplifying regulatory capital requirements, addressing challenges in obtaining appraisals, and further 

reducing items collected on the Call Report. 

With respect to protecting consumers in their banking activities, 

the Federal Reserve System conducts specialized examinations to 

ensure compliance with consumer protection laws and regulations 

in the institutions under its purview.4 During 2016, the Federal 

Reserve Banks completed 209 consumer compliance examinations 

and 206 examinations for the Community Reinvestment Act (CRA) 

of State member banks. The Federal Reserve is mindful of the importance to balance efforts to tailor our supervisory approach in 

63 

consumer compliance with our responsibility to ensure that banks 

are transparent and fair in their dealings with consumers, regardless of the size or type of institution involved. 

Toward this end, the Federal Reserve has adopted the following 

procedures to conduct risk-focused consumer compliance supervision, implementing this program in January 2014. Examination 

intensity is based on the individual bank’s risk profile and effectiveness of its compliance controls. In addition, more up-front work 

is completed offsite. This has improved the efficiency and effectiveness of our examinations and reduced regulatory burden for many 

community banks. In addition, we have lengthened time between 

consumer compliance examinations for community banks with 

lower-risk profiles. Banks with satisfactory consumer compliance 

ratings are now examined every 48 to 60 months if they have assets under $350 million (up from every 24 months). And banks 

with satisfactory ratings and assets between $350 million and $1 

billion are examined every 36 months instead of every 24 months. 

The Federal Reserve also works to support institutions in their 

consumer compliance efforts through guidance and outreach to 

clarify supervisory expectations. For example, the banking agencies 

have revised the CRA Q&As twice in the past 5 years. The agencies are also working together to update interagency examination 

procedures and other process improvements. With respect to fairlending examinations, the agencies issued revised Interagency Fair 

Lending Examination Procedures that provide more detailed information regarding current fair-lending risk factors that can aid a 

bank in its analysis of fair-lending risks and to prepare for fairlending exams. We have also increased our communications with 

banks during the exam process and engaged in a variety of outreach activities, such as regular participation in conferences 

sponsored by both industry and advocacy groups with the goal to 

highlight fair lending risks so that institutions can take steps to 

effectively manage compliance. 

Q.3.b. Is the Federal Reserve concerned about the consolidation we 

continue to see throughout the industry? 

A.3.b. The Federal Reserve recognizes the vital role community 

banks play in local economies and closely monitors consolidation 

trends at community banks. While several factors have contributed 

to the decline in the number of community banks, some have attributed a significant part of the decline to regulatory compliance 

costs. Recognizing that regulatory compliance costs may be a contributing factor to consolidation, the Federal Reserve seeks to ensure that its regulations are balanced and provide safety and 

soundness benefits that are relatively proportional to the resulting 

compliance costs. In addition, the Federal Reserve tailors its prudential standards and examination procedures to banks based on 

their risk profile, size and complexity. Doing so allows the Federal 

Reserve to achieve its goal of promoting a strong banking system 

and preventing or mitigating against the risk of bank failures while 

minimizing regulatory compliance costs to community banks. 

64 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS 

FROM JANET L. YELLEN 

Q.1. Small banks and community financial institutions are the cornerstones of cities and towns across the country, but they play an 

especially important part in the economy of my State, South Dakota. While South Dakotans are proud of the role that smaller financial institutions have, the rules and regulations promulgated by 

the Federal Government since the financial crisis are making it 

harder for smaller institutions to compete. 

The Economist recently pointed out that more rules and regulations were heaped on our financial institutions between 2010 and 

2014 than the total number of all financial regulations that existed 

in 1980. And a study by the Minneapolis Federal Reserve found 

that adding two extra staffers to the compliance department of a 

small bank would make the difference for one-third of all small 

banks between operating at a profit and operating at a loss. 

Recently I introduced legislation called the TAILOR Act to help 

ease regulatory overreach for our Nation’s small banks and community financial institutions. Is our regulatory framework for small 

banks and community financial institutions appropriate for the current macroeconomic environment? What further adjustments are 

needed by Congress? 

A.1. The Federal Reserve recognizes that the costs of regulation 

can be a significant challenge for small banks. Accordingly, it seeks 

to tailor prudential standards and supervisory guidance to community banks based on their risk, size, and complexity and to minimize unnecessary burdens whenever possible. Moreover, as discussed in the March 2017 Economic Growth and Regulatory Paperwork Reduction Act Joint Report to Congress, the Federal Reserve 

has taken a number of actions independently and jointly with the 

other regulatory agencies to address issues raised during the review that should reduce regulatory burden for community banks. 

These include leveraging technology to conduct as much of the 

examination work offsite as possible, significantly cutting the information collected from small banks on the Call Report, and improving examination planning efforts to better tailor examination work 

so that well-run, low-risk banks receive significantly less supervisory scrutiny. In addition, the agencies are initiating efforts to 

ease the conditions under which an appraisal is required to support 

a commercial loan and to develop a simplified regulatory capital regime for community banks. 

To help further ease regulatory burdens for small banks, Congress could consider exempting community banks from two sets of 

Dodd-Frank Wall Street Reform and Consumer Protection Act requirements: the Volcker rule and the incentive compensation limits 

in section 956. The risks addressed by these statutory provisions 

are far more significant at larger institutions than they are at community banks. In the event that a community bank engages in 

practices in either of these areas that raise heightened concerns, 

we believe that the banking agencies would be able to address 

them as part of the normal safety-and-soundness supervisory 

process. 

65 

Q.2. Congress has significant responsibilities with respect to cybersecurity, and I’m honored to chair the new Armed Services Subcommittee on Cybersecurity. With its advanced rulemaking notice 

on cybersecurity in October, the Federal Reserve rightly recognized 

that our financial infrastructure is a significant target for our Nation’s adversaries. 

Q.2.a. Can you comment on the threats that our financial sector 

faces and the vulnerabilities that exist in the system? 

A.2.a. In general, cyber threats against financial institutions are 

becoming more frequent, sophisticated, and widespread. The rise in 

frequency and sophistication of cyber attacks can be attributed to 

numerous factors including nation-states that breach systems to 

seek intelligence or intellectual property, hacktivists making political statements through systems disruptions, or bad actors seeking 

to breach systems for monetary gain. 

Despite the increasing level of attack sophistication, it is more 

apparent that a significant portion of successful breaches could 

have been avoided by adhering to basic information security tenets, sound technology governance and network administration 

practices. 

Q.2.b. Do you have the regulatory authority you need to keep this 

important part of our economy safe, or is additional action needed 

on the part of Congress? 

A.2.b. The Federal Reserve’s general safety and soundness authority is the primary source of its information technology requirements, including those for cybersecurity. In addition, the Federal 

Reserve, Federal Deposit Insurance Corporation, and the Office of 

the Comptroller of the Currency have authority under the Bank 

Service Company Act to examine the services that third parties 

provide to financial institutions that are supervised under each of 

the agency’s regulatory authorities. At the present time, the Federal Reserve is not seeking additional regulatory authority in this 

area. 

Q.3. The Federal Reserve recently issued a final rule in regards to 

its Comprehensive Capital Analysis and Review and stress testing 

rules. In September, Federal Reserve Board Governor Daniel 

Tarullo gave a speech on the next steps in stress testing. 

Governor Tarullo’s speech covered numerous areas of stress testing, but one particular aspect stood out: the stress capital buffer. 

Governor Tarullo noted that the Fed ‘‘will be considering adoption 

of a ‘stress capital buffer . . . ’ ’’ From his remarks, it appears that 

the stress capital buffer, which would include an additional riskbased capital requirement, would be substituted for the capital conservation buffer. 

A.3. Could you give us your take on the stress capital buffer? And 

is the Federal Reserve still considering its adoption? 

At this time, the Federal Reserve Board (Board) does not have 

plans to propose any significant rules. However, the Board continues to consider ways to more closely integrate CCAR and the 

Board’s regulatory capital rules. Before making any changes to the 

Board’s rules, we would provide notice of any proposed changes and 

invite public comment on them. 

66 

Q.4. President Trump’s recent Executive actions took a strong 

stance on financial regulatory reform, and Congress has started to 

revisit and in some cases rescind financial regulations proposed by 

the previous Administration. 

Given these developments, do you think that the Federal Financial Institutions Examination Council, including the Federal Reserve, should take up review of the Dodd-Frank Act and recommend to Congress what rules should be rolled back in light of 

the President’s recent Executive orders? 

A.4. The President issued an Executive order on February 3, 2017, 

that articulates his Administration’s core principles of financial 

regulation. The Executive order also instructs the Secretary of the 

Treasury to consult with the heads of the member agencies of the 

Financial Stability Oversight Council and report to the President 

within 120 days on (i) the extent to which existing laws and regulations promote the core principles; and (ii) any laws or regulations 

that inhibit Federal regulation of the U.S. financial system in a 

manner consistent with the core principles. 

I intend to participate in this Treasury-led review of U.S. financial law and regulation, which will include all the Federal agency 

members of the Federal Financial Institutions Examination Council and likely will include review of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

Q.5. I’m concerned that a number of factors abroad could be threatening our Nation’s economic recovery. The stalemate between 

Greece and its international creditors over the past week has been 

troublesome. And elsewhere around the world, major economies 

like China are grappling with trouble in their own real estate markets as well as with ballooning debt. 

Can you discuss the downside risks to the U.S. economy given 

continued slowdown in China’s economy and Europe’s debt crisis? 

Do you think China and Europe could become more of a problem 

for the U.S. economy? 

A.5. In our highly globalized economic and financial system, no 

economy can be fully insulated from developments outside its borders. Over the past several years, a series of foreign shocks have 

buffeted the U.S. economy—including the euro-area debt crisis, uncertainty about Chinese economic policy, and the sizable run-up in 

the dollar and sharp decline in oil prices. These developments have 

directly impacted the U.S. economy through their effects on trade 

and inflation and indirectly through confidence and financial 

channels. 

At present, the effects of these past headwinds appear to be waning. Oil prices have stopped falling, thereby easing pressure on energy companies and oil-reliant economies, concerns about financial 

stability in Europe and China have eased somewhat, and economies abroad have been recovering. These are hopeful signs for the 

U.S. economy. However, several foreign risks remain a concern, including those that you raise about China and Europe. 

Chinese economic growth has been on a general slowing trend 

over the past few years as a result of demographic changes and the 

moderation in growth typical of maturing economies. There are 

concerns, however, that the rapid credit growth in China in recent 

67 

years may have increased financial risks, and a materialization of 

those risks could trigger a much sharper slowdown in the economy. 

Specific concerns include mounting nonperforming corporate debts; 

a growing reliance on short-term sources of funding in the financial 

system; rapid growth in house prices; and the possibility that expectations of currency depreciation could cause an acceleration of 

capital outflows. Should the Chinese economy decelerate abruptly 

and severely, there would clearly be an impact on the global economy. China is an important market for the exports of other Asian 

economies as well as for commodity exporters, and these economies 

would be hit particularly hard. U.S. export growth also would be 

restrained, both directly, as China has accounted for a significant 

portion of U.S. export growth since 2007, and indirectly, as other 

markets for U.S. exports are hindered. 

While we are attuned to these risks, we do not view a Chinese 

financial crisis and sharp slowdown in GDP growth as the most 

likely scenario. Growth remains relatively solid. Chinese authorities have recently taken measures to curb the rapid rise in house 

prices and slow the growth of lending. Market participants seem 

more comfortable with the Chinese authorities’ current approach to 

their currency. And the government has sufficient resources to provide important support to the financial sector in case of distress. 

Regarding your concern about Greece, and Europe more generally, European economies have shown considerable improvement 

over the past few years. The economic recovery appears to be gaining momentum and unemployment rates have been falling. Moreover, the European Central Bank has taken a number of actions to 

help backstop sovereign debt, and the region has made substantial 

progress toward banking union. Thus, other European countries 

are better insulated from the situation in Greece than they were 

in 2010 when the debt crisis broke out. 

However, Greece still faces daunting financial and economic challenges, including its very high and growing level of public debt, the 

resolution of which will require further difficult steps—including 

additional Greek reforms and additional debt relief from Greece’s 

creditors. Developments in Greece continue to have the potential 

for disruptions that could spill over and affect the European economic outlook and global financial markets. It is encouraging that 

Greek and European authorities have reached a preliminary agreement on a package of economic reforms that Greece must implement to receive another disbursement of official financing. 

Europe faces other challenges as well, such as negotiating the 

United Kingdom’s withdrawal from the European Union (EU), following through on the EU’s structural reform agenda, and 

continuing to make progress on economic recovery and lowering unemployment. We will continue to monitor the European economy, 

as we consider how foreign developments may affect the achievement of our domestic objectives of price stability and maximum 

employment. 

Q.6. The Federal Funds rate has been at an extremely low, nearly 

zero level for quite some time since the financial crisis. On February 1, the Federal Open Market Committee (FOMC) decided to 

keep the target range for the Federal funds rate at a half to three 

quarters of 1 percent. The FOMC’s press release cited improving 

68 

conditions in the economy including a strengthening labor market, 

solid job gains and increasing inflation. 

Where would the Fed like to see additional improvements in the 

economy before raising the target rate? 

A.6. At the Federal Reserve, we are squarely focused on achieving 

our congressionally mandated goals of maximum employment and 

price stability. These goals guide our decisions regarding the appropriate level of the Federal funds rate. 

At our most recent meeting, on March 14–15, the Federal Open 

Market Committee (FOMC) did raise the target range for the Federal funds rate by 1⁄4 percentage point, to 3⁄4 to 1 percent. That decision was based in part on incoming data indicating that the labor 

market had continued to strengthen and that inflation had moved 

closer to the FOMC’s 2 percent objective. In addition, our decision 

in March reflected our expectation that, with gradual adjustments 

in the stance of monetary policy, economic activity will expand at 

a moderate pace, labor market conditions will strengthen somewhat further, and inflation will reach 2 percent on a sustained 

basis. 

The same factors that drove our decision in March will be key 

for our future deliberations about the appropriate path for the Federal funds rate. In particular, if the U.S. economy continues to 

evolve broadly as the FOMC anticipates—economic activity expanding at a moderate pace, labor market conditions strengthening 

somewhat further, and inflation reaching 2 percent on a sustained 

basis—additional increases in the Federal funds rate are likely this 

year. Indeed, the median assessment of FOMC participants at our 

March meeting was that an additional 1⁄2 percentage point cumulative increase in the Federal funds rate would likely be appropriate over the remainder of this year, which would bring the yearend target range for that rate to 1 1⁄4 to 1 1⁄2 percent. 

Nonetheless, as my FOMC colleagues and I have said many 

times, monetary policy cannot be and is not on a preset course. The 

FOMC stands ready to adjust its assessment of the appropriate 

path for the Federal funds rate if unanticipated developments materially change the economic outlook. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS 

FROM JANET L. YELLEN 

Q.1. Chair Yellen, in your testimony you stated that you expect inflation to ‘‘gradually [rise] to 2 percent;’’ ‘‘toward 2 percent;’’ ‘‘return 

to 2 percent;’’ etc. Can you expound on whether 2 percent inflation 

represents a target objective or is a ceiling? 

A.1. The Federal Open Market Committee (FOMC) sets monetary 

policy to achieve its statutory goals of maximum employment and 

price stability set forth in the Federal Reserve Act. As indicated in 

its Statement on Longer-Run Goals and Monetary Policy Strategy, 

which the Committee first agreed to in January 2012 and reaffirms 

each year, the FOMC judges that inflation at the rate of 2 percent, 

as measured by the annual change in the price index for personal 

consumption expenditures (PCE), is most consistent over the longer 

run with the Federal Reserve’s statutory mandate for price stability. The Committee’s 2 percent inflation objective is not a ceiling. 

69 

Indeed, the Committee indicates in the Statement of Longer Run 

Goals that it would be concerned if inflation were running persistently above or below 2 percent, and that its inflation goal is symmetric. Communicating this symmetric inflation goal clearly to the 

public is important because it helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and 

moderate long-term interest rates and enhancing the Committee’s 

ability to promote maximum employment in the face of significant 

economic disturbances. 

In communications with the public over the past year—the statement issued after FOMC meetings, the minutes of those meetings, 

the Chair’s quarterly post-meeting press conferences, and the Monetary Policy Report and testimony—the Federal Reserve has indicated that it expected headline inflation to rise over time to the 

Committee’s 2 percent objective. In the event, 12-month PCE price 

inflation rose to nearly 2 percent in January, up from less than 1 

percent last summer. That rise was largely driven by energy prices, 

which have been increasing recently after earlier declines. Core inflation, which excludes volatile energy and food prices and tends to 

be a better indicator of future inflation, has been little changed in 

recent months at about 1 3⁄4 percent. The Committee expects core 

inflation to move up and overall inflation to stabilize around 2 percent over the next couple of years, in line with its longer-run objective. The economic projections submitted by individual FOMC participants before the March 2017 FOMC meeting are consistent with 

this view, with projections for headline and core inflation in 2019 

ranging from 1.8 percent to 2.2 percent, with a median projection 

of 2.0 percent. 

Q.2. Chair Yellen, the Federal Financial Institutions Examination 

Council is supposed to coordinate the work of different regulators, 

but I am hearing that in practice this is not happening. Do you believe we need separate layers of examination at the holding-company level by the Fed and OCC? What added value is there for 

having both the Fed and OCC examine a bank—is one incapable 

of doing the job? Does the Fed not trust the OCC to conduct examinations or the OCC’s expertise? Do you believe that there is regulatory cooperation taking place as it should? 

A.2. The Federal Reserve has statutory responsibility for supervising bank and savings and loan holding companies on both a 

consolidated and parent-company-only basis. Holding company supervision complements the examination work completed by the 

other banking agencies, including the Office of the Comptroller of 

the Currency, but its focus is different than that of bank supervision. Specifically, holding company supervision aims to ensure 

that the parent serves as a source of strength to its depository institutions and that nonbank activities conducted by the holding 

company, many of which are supervised solely by the Federal Reserve and can be quite substantial for some complex holding companies, do not adversely affect the safety and soundness of insured 

depositories. Lastly, holding company supervision assesses the 

overall consolidated financial and managerial condition of the consolidated organization, including all subsidiary banks, nonbanks 

and the parent company. 

70 

1See Bruce Mizrach, ‘‘Analysis of Corporate Bond Liquidity,’’ Financial Industry Regulatory 

Authority (FINRA), Office of the Chief Economist Research Note, December 2015. 

In fulfilling its holding company supervision responsibilities, the 

Federal Reserve cooperates and coordinates closely with the Federal and State supervisors of insured depositories and nonbank entities and relies substantially on the work and expertise of these 

agencies in evaluating the condition of any banks or nonbanks they 

directly supervise. The principle of coordinating with the other regulatory agencies is required by statute and is a well-established 

tenet of the Federal Reserve’s supervisory process. For example, 

section 604 of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act, now codified in the Bank Holding Company Act, requires that the Federal Reserve rely to the fullest extent possible 

on the work of other regulators. The Federal Reserve reinforced 

this requirement by issuing SR 12–17, Consolidated Supervision 

Framework for Large Financial Institutions, and SR 16–4, Relying 

on the Work of the Regulators of the Subsidiary Insured Depository 

Institutions) of Bank Holding Companies and Savings and Loan 

Holding Companies with Total Consolidated Assets of Less than 

$50 Billion. Both of these supervisory directives require Federal 

Reserve examiners to work with the primary regulators of insured 

depositories to avoid duplication of effort and minimize regulatory 

burden. 

These directives and other Federal Reserve guidance also tailor 

expectations for examiners depending on an organization’s size, 

complexity, and degree of systemic risk. For smaller bank holding 

companies, where consolidated assets are composed principally of 

the assets of the subsidiary bank, nonbank activities are minimal, 

and parent company leverage is low, the Federal Reserve limits its 

work and relies substantially on the primary regulator’s examination of the insured depository to assess the condition of the holding 

company. As holding companies become larger and more complex, 

and nonbank activities become more important to the organization, 

inspection work correspondingly expands. However, regardless of 

the size, complexity and risk of the holding company, the Federal 

Reserve endeavors to avoid duplication by relying on primary regulators whenever possible, meeting regularly with them to ensure 

we are not duplicating efforts, and using their examination work 

to reach a consolidated supervisory view. 

Q.3. Chair Yellen, you have been asked in the past whether there 

are liquidity problems in the bond market—can you tell me whether or not there is a present or imminent problem? I think it is important to get the diagnosis right, so I want to understand whether 

you think there is a liquidity problem in the bond market, and that 

if you are merely monitoring the situation, whether or not that indicates a cause for concern in terms of what lies ahead. 

A.3. In corporate bond markets, estimated bid-ask spreads have declined and estimated price impacts are lower than in the early 

2000s, indicating that, if anything, liquidity may have improved despite the reduction in dealer holdings of these securities.1 Demand 

from buy-side market participants has been very high, which has 

likely helped to support market liquidity. Partly as a result of this 

high demand, corporate debt issuance has been quite robust, which 

71 

2http://libertystreeteconomics.newyorkfed.org/2016/02/continuing-the-conversation-on-liquidity.html#.Vs3HdXIUWmR. 3http://www.federalreserve.gov/newsevents/press/other/20150713a.htm. 

in turn can help to explain some of the decline in turnover as some 

of these investors may be more likely to buy and then hold the securities for some time. 

However, while acknowledging that some key measures do not 

show a decline in liquidity, we must recognize that our ability to 

measure market liquidity is imperfect. We have less data on dealer-to-customer trading in Treasury markets than in the interdealer 

market, and, given the nature of the corporate bond market, estimates of liquidity are based on transactions rather than on direct 

observations of quotes to buy or sell these bonds. We have heard 

the concerns from market participants that they may not be able 

to buy or sell large quantities of securities in a timely fashion. The 

Federal Reserve is taking these concerns about market liquidity seriously. We are committed to analyzing liquidity conditions across 

a wide array of financial markets as market liquidity is important 

for the conduct of monetary policy, the health of the financial system and financial stability. Federal Reserve staff regularly assess 

and monitor liquidity conditions on an ongoing basis for all of the 

reasons cited. 

Federal Reserve Board staff have also been involved in several 

projects on market liquidity both internally and with other U.S. 

Government agencies. Internally, staff have studied and are continuing to study whether there has been a decline in secondary 

market liquidity in the fixed-income markets. Although we have 

not found strong evidence of a significant deterioration in day-today liquidity, it is possible that changes in the structure of markets 

have made liquidity less resilient. This is more difficult to analyze 

because it involves the study of relatively infrequent events. 

Among the factors we have looked at, algorithmic traders have become more prevalent in the Treasury market, and the share of 

bond holdings held by open-end mutual funds, some of which provide significant liquidity transformation, has grown significantly in 

the post-crisis period. Internal work has explored the importance of 

these factors, and it has also focused on changes in the broker dealer business model and on the potential impact of regulatory 

changes on market liquidity. We note that staff at the Federal Reserve Bank of New York have also done a number of studies on 

market liquidity and have recently published some of this work 

online.2

Federal Reserve staff have also played a key role in the interagency work on the events of October 15, 2014, when fixed-income 

markets experienced a sudden and extreme increase in market 

volatility.3 Staff also continue to engage actively with the U.S. 

Treasury, the Commodity Futures Trading Commission, and the 

Securities and Exchange Commission (SEC) on work examining 

longer term changes in fixed-income market structure and their potential impact on market liquidity. 

Q.4. Chair Yellen, can you let me know Governor Tarullo’s precise 

responsibilities at the Fed, how you work with Governor Tarullo in 

his execution of those responsibilities, and can you commit to me 

72 

that you will work with whomever President Trump nominates to 

serve as the Vice Chair for Supervision at the Fed? 

A.4. As you know, among the duties assigned by Congress to the 

Federal Reserve Board (Board) is responsibility for promoting a 

safe, sound, and stable financial system that supports the growth 

and stability of the U.S. economy. The Board as a whole is charged 

with this important duty and is held accountable by Congress and 

the taxpayer for carrying out this responsibility continuously and 

under all circumstances. In order to better be able to carry out its 

responsibilities, the Board would welcome action by the President 

and the Senate to appoint and confirm a Vice Chairman for Supervision as well as to fill the other vacancies on the Board. 

To update you on our internal leadership, as you may know, Governor Jay Powell is now Chairman of the Federal Reserve Board’s 

Committee on Supervision and Regulation. As a longtime member 

of the committee and a Governor steeped with financial services experience, I believe Governor Powell will serve as an excellent chairman. As I have indicated in my testimony, upon confirmation, the 

new Vice Chairman for Supervision will assume the chairmanship 

of this committee. 

Q.5. Chair Yellen, aside from the Joint Agency Frequently Asked 

Questions document circulated with supervisory letter SR–16–19, 

has the Federal Reserve conducted any research into the impact 

that the Current Expected Credit Loss (CECL) standard will have 

on capital reserves, credit availability, and the potential for a reduction in credit during times of economic stress? If so, please detail. If not, why not? 

Q.5.a. While CECL is designed to help prevent the credit bubbles 

such as the one that fueled events surrounding the 2008 financial 

crisis, many have expressed concerns given the need for a financial 

institution to account for losses on the life of a loan at the time of 

origination and thus the capital reserves held against those lossesthat in times of economic stress, financial institutions may reduce 

lending exacerbating the economic stress. What has the Federal 

Reserve done to address this concern and has the Federal Reserve 

discussed this with the other Federal financial regulators? 

A.5.a. The Financial Accounting Standards Board (FASB) issued 

the final Current Expected Credit Loss (CECL) standard on June 

16, 2016, with the earliest mandatorily effective date of January 1, 

2020, for calendar year-end SEC registrants. We followed the 

FASB’s CECL standard during its development and will continue 

to do so through implementation. One of the stated intents of the 

CECL standard is to align the accounting with the economics of 

lending by requiring banks and other lending institutions to record 

the full amount of credit losses that are expected over the life of 

a loan on a more timely basis. There was a general belief that the 

existing accounting framework resulted in loan loss allowances that 

were ‘‘too little, too late’’ and that the accounting framework should 

be changed to address this weakness. This goal is accomplished in 

part by requiring that the allowance reflects losses a firm expects 

to experience over the remaining life of their loans instead of unduly delaying recognition until the point where losses have already 

been incurred. The CECL standard also requires incorporation of 

73 

a reasonable and supportable forecast of future conditions allowing 

firms to incorporate on a more timely basis early indicators of deterioration in credit quality such as loosening underwriting 

standards. 

Since the FASB’s final issuance of the CECL standard, we have 

established various groups to conduct research on the impact of the 

CECL standard on loan loss provisioning, regulatory capital, and 

the availability of credit through the economic cycle. We are in the 

earlier phases of our research given that FASB issued the CECL 

standard in June 2016. We are working closely with other U.S. 

Federal financial institution regulators to monitor the implementation of the CECL standard and its micro-prudential and 

macroprudential impacts. We meet on a regular basis to ensure 

consistent resolution of key issues and timely communication to the 

industry. 

Q.5.b. The annual Comprehensive Capital Analysis and Review 

(CCAR) and Dodd-Frank Stress Tests (DFAST) require a covered financial institution to project potential losses under each scenario 

for eight quarters into the future. Starting in 2018, this eight quarter projection will begin to run until January 2020, the date at 

which CECL would begin implementation. While CCAR does not 

currently require calculations based upon future changes to the accounting rules, there is uncertainty about whether the Federal Reserve will require institutions to essentially run two sets of calculations for each scenario, one under the Allowance for Loan and 

Lease Losses (ALLL) and one under CCAR. How does the Federal 

Reserve plan to implement CECL into CCAR in 2018? Will covered 

financial institutions need to prepare two sets of calculations based 

on differing accounting standards for each scenario? Please describe in detail how the Federal Reserve intends to address this 

matter. 

A.5.b. On January 6, 2017, we provided instructions to firms to exclude the effect of the CECL standard in 2018 Dodd-Frank Act 

Stress Tests/Comprehensive Capital Analysis Review (DFAST/ 

CCAR). In past CCAR submissions, bank holding companies were 

instructed not to reflect the adoption of new accounting standards 

in their projections unless a firm had already adopted the accounting standard for financial reporting purposes. For 2018 DFAST/ 

CCAR, consistent with previous guidance, we instructed firms to 

exclude the effect of the CECL standard. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR PERDUE 

FROM JANET L. YELLEN 

Q.1. Madame Chair, currently among all the financial institutions 

under the Federal Reserve’s supervision: 

Q.1.a. How much are all the member institutions combined holdings in Total Risk-Based Capital? 

A.1.a. The Federal Reserve is the consolidated supervisor of all 

U.S. bank holding companies and savings and loan holding 

companies (U.S. depository institution holding companies), as well 

as the supervisor for State member banks. The Federal Reserve 

Board’s (Board) capital rules, which include the requirement to 

74 

1Total capital is defined in the Board’s capital rules under 12 CFR 217.20. 

2This figure reflects the aggregate value of the total capital as reported by U.S. holding companies subject to consolidated capital requirements, including bank holding companies, savings 

and loan holding companies, and intermediate holding companies of foreign banking organizations, on Schedule HC–R of the Consolidated Financial Statements for Holding Companies report (FR Y–9C). 3This figure reflects the aggregate value of the total capital as reported by State member 

banks on Schedule RC–R of the Call Report (Consolidated Reports of Condition and Income for 

a Bank with Domestic and Foreign Offices (FFIEC 031) and Consolidated Reports of Condition 

and Income for a Bank with Domestic Offices Only (FFIEC 041)). 4 CET1 capital is defined in the Board’s capital rules under 12 CFR 217.20(b). 

5This figure reflects the aggregate value of the total capital as reported by U.S. bank holding 

companies that were subject to consolidated capital requirements on Schedule HC–R of the Consolidated Financial Statements for Holding Companies report (FR Y–9C), as of December 31, 

2007. The Board’s revised regulatory capital framework, adopted in 2013, amended the definition of total capital. Note that Title III of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act) transferred to the Board the supervisory functions of the Office 

of Thrift Supervision related to savings and loan holding companies beginning on July 21, 2011. 

Thus, 2007 data do not reflect capital requirements for these firms. In addition, intermediate 

holding companies of foreign banking organizations were formed pursuant to the Board’s Regulation YY, which implements the enhanced prudential standards mandated by the Dodd-Frank 

Act. Thus, 2007 data similarly do not reflect capital requirements for these firms. 6This methodology used to create this estimate is consistent with that used by the Federal 

Reserve in 2012 to estimate the impact of changes to the regulatorily capital rule. That methodology was made publicly available on November 14, 2012, as part of remarks made to the Senate 

Committee on Banking, Housing, and Urban Affairs by Michael Gibson, Director of the Division 

of Banking Supervision and Regulation at the Board. Those remarks and the methodology used 

by the Federal Reserve (see Attachment A) are available here: https://www.federalreserve.gov/ 

newsevents/testimony/gibson20121114a.htm. 7This figure reflects the aggregate value of the total capital as reported by State member 

banks on Schedule RC–R of the Call Report (Consolidated Reports of Condition and Income for 

a Bank with Domestic and Foreign Offices (FFIEC 031) and Consolidated Reports of Condition 

and Income for a Bank with Domestic Offices Only (FFIEC 041)). The Board’s revised regulatory 

capital framework, issued in 2013, amended the definition of what qualifies as total capital. 

hold a minimum amount of total (risk-based) capital, apply to all 

State member banks and to certain bank holding companies and 

savings and loan holding companies.1 The aggregate amount of 

total capital held by U.S. depository institution holding companies 

that are subject to the Board’s capital rules at the consolidated 

level is approximately $2.007 trillion as of December 31, 2016.2 The 

aggregate amount of total capital held by State member banks is 

approximately $272.3 billion as of December 31, 2016.3

Q.1.b. How much of it is comprised of Common Equity Tier 1? 

A.1.b. Approximately $1.554 trillion (77 percent of aggregate total 

capital) held by U.S. depository institution holding companies described above is in the form of common equity tier 1 (CET1) capital.4 Approximately $247.4 billion (91 percent of the aggregate 

total capital) held by State member banks is in the form of CET1 

capital. 

Q.1.c. Are there comparable figures that you can disclose from 

2007? 

A.1.c. U.S. bank holding companies reported an aggregate amount of approximately $1.017 trillion in total capital as of December 31, 

2007.5 The CET1 capital measure was not in effect as of year-end 

2007. However, we estimate that, as of December 31, 2007, approximately $523.8 billion (52 percent of the total capital) held by 

U.S. bank holding companies was in a form that would qualify as 

CET1 capital under the current capital rules of the Board.6 State 

member banks reported an aggregate amount of approximately 

$148.3 billion in total capital as of December 31, 2007.7 Using the 

same methodology as used for U.S. bank holding companies, we estimate that, as of December 31, 2007, approximately $114.6 billion 

75 

(77 percent of the total capital) held by State member banks was 

in a form that would qualify as CET1 capital under the current 

capital rules of the Board. 

Q.2. Madame Chair, I am grateful for all the hard work that you 

and your colleagues at the Federal Reserve have undertaken. However, I am concerned about the rising levels of global debt. Since 

2007, governments alone have added over $25 trillion in debt, with 

the advanced economics contributing to 75 percent of the increase. 

The combined global household, corporate, and government debt 

has exceeded $200 trillion. 

a. At $200 trillion in global debt, global debt is leveraged at 

nearly 3 times as much as the global economy. Do you have 

concerns that the world is overleveraged? 

b. Where do you see the systemic risks in the global economy? 

i. Chinese corporate debt? 

ii. Greek debt default? 

iii. Capital flight from emerging markets as the Fed and 

Bank of England raise rates? 

iv. Japanese governmental debt? 

A.2.a.–A.2.b. Rising debt levels are a concern to the extent that 

borrowers could face difficulty servicing that debt if their incomes 

decline or the interest rates that they pay increase. Debt servicing 

can also potentially crowd out other spending, thereby placing a 

drag on the economy. 

Since the global financial crisis, debt has grown in many countries. Much of that growth reflects increases in sovereign debt that 

were accumulated as governments supported their economies during the crisis, recession, and slow recovery. Such higher debt levels 

are a source of concern, both because they may signal diminished 

creditworthiness and because they may constrain governments in 

responding to future economic shocks. However, in most cases, debt 

remains on a sustainable path as evidenced by the very low level 

of sovereign bond yields. In some countries, however, sovereign 

debt and bond yields are at more worrisome levels, and more concerted efforts at debt reduction are needed. 

In addition to sovereign debt, corporate debt levels have also increased in a number of countries, especially emerging market 

economies. By many assessments, the risks associated with high leverage do not appear to be widespread across countries and sectors. 

In addition, rising interest rates in advanced economies by themselves should not be problematic for emerging market borrowers if 

they are associated with stronger global economic activity. However, a sudden reversal in sentiment that leads to a revaluation of 

risk-return tradeoffs and a rapid reversal in capital flows can certainly have adverse consequences, especially for highly leveraged 

emerging market firms. This is a risk that we continue to monitor, 

although U.S. investors’ direct exposures to the emerging market 

corporate sector remain fairly limited. 

U.S. investors’ direct exposures to China’s corporate debt are also 

low, but China is a significant part of the global economy, and its 

corporate debt has risen rapidly in recent years. China’s corporate 

debt is currently estimated to be about 170 percent of gross 

76 

domestic product (GDP), which is high for an emerging market 

economy. That poses a potential vulnerability for the Chinese economy, particularly to the extent that this debt has financed lowreturn investments. A mitigating factor is that policymakers have 

substantial resources and tools to address the issue, especially 

because the banks and most of the entities borrowing are 

state-owned. 

Greece still faces daunting financial and economic challenges, including its very high and growing level of public debt. European 

authorities acknowledge that Greek public debt sustainability remains a serious concern, and that a resolution will require further 

difficult steps—including additional Greek reforms and additional 

debt relief from Greece’s creditors. It is encouraging that Greek 

and European authorities have reached preliminary agreement on 

a package of economic reforms that Greece must implement to receive another disbursement of official financing. 

Japan’s government debt is equal to about 200 percent of GDP, 

the highest among the G–7 economies. Ratings agencies have cited 

that high debt level in downgrading the rating of Japanese government bonds over the past few years. The burden of that debt is 

currently reduced by the extremely low interest rates that the government pays, with 10-year Japanese government bond yields 

around zero. Domestic Japanese investors, including banks and insurance companies, are willing to hold most of this debt at those 

low interest rates. Eventual rises in Japanese bond yields would increase the burden of that debt, but if the yield rises are driven by 

improving economic growth and rising prices, tax revenues would 

rise as well. Eventually, action will be needed to reduce the debt. 

Q.3.a. Madame Chair, I want to focus on the issue of currency revaluations. With the election of President Trump and a likelihood 

of tax reform and an infrastructure package, the market is already 

building in higher inflation prospects into the value of the dollar. 

Now, we have discussions of a border-adjustment tax that some 

wish to implement. 

Do you believe that the authors of the Border Adjustment Tax 

are correct, that the imposition of a 20 percent tax on imports 

would result in an immediate 20–25 percent appreciation of the 

dollar or do you believe the effect of a border tax on the currency 

market is harder to both calculate and anticipate? 

A.3.a. There is now substantial literature on the potential effects 

of the border adjustment tax. While there is a logic for why the dollar might fully adjust to offset the effects on U.S. trade and import 

prices, it is unclear whether that would happen in practice. Based 

on experience looking at foreign exchange markets and the many 

factors that can affect them, there is considerable uncertainty 

about how exchange rates would evolve following the imposition of 

a border adjustment tax. 

Q.3.b. What is the effect of an overnight 20 percent appreciation 

of the dollar on the global economy, especially the emerging markets? 

A.3.b. The economic effects of exchange rate movements will depend in part on the factors behind those movements. For example, 

if dollar appreciation were caused by a stronger outlook for U.S. 

77 

economic growth, then one might expect a relatively favorable 

impact on the global economy. All else equal, however, dollar appreciation makes U.S. goods more expensive abroad and foreign 

goods cheaper in the United States. Over time this should have 

several effects. First, it should restrain U.S. exports and boost U.S. 

imports, reducing U.S. aggregate demand and economic activity. 

Second, it should put some downward pressure on import prices in 

the United States and eventually may put some upward pressure 

on prices of some consumer goods. The counterpart of dollar appreciation is the depreciation of foreign currencies. Currency depreciation would tend to boost the net exports of our trading partners, 

but that positive effect on their economies could be offset by negative impacts from a tightening of financial conditions, especially in 

emerging market economies, as capital inflows slow and some central banks are forced to tighten monetary policy to resist rising inflation. In addition, some emerging-market corporations that have 

debt denominated in dollars could face difficulties. 

Q.3.c. If the dollar appreciates as anticipated, would there be substantial risks to U.S. pension funds and other U.S. investors that 

hold foreign assets? 

A.3.c. U.S. investors hold nearly $8 trillion in foreign-currency denominated financial assets and nearly $4 trillion in foreign-currency denominated foreign direct investment. Thus a 20 percent 

appreciation of the dollar, were it to occur, could generate significant wealth losses. These foreign-currency assets are held by a variety of U.S. investors, including households in the form of mutual 

fund investments, as well as by pension funds, insurance companies, and other financial intermediaries. For pension funds specifically, foreign-currency assets are a relatively small portion of their 

$19 trillion in total financial assets. However, for U.S. investors 

more generally, a decline in wealth would be expected to have some 

effect in reducing spending. Again, it is worth noting, there is much 

uncertainty about these potential outcomes. 

78 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD


21417038.eps

MoNETARY Poucv REPORT 

February 14, 2017 

Board of Governors of the Federal Reserve System 

for use al l 0:00 a.m., EST 

Froruaty 14, 2017 
79 


21417039.eps

lETIER OF T RANSMITIAL 

BOARD OF GOVERNORS OF TfiE 

fEDERAL RESERVE SYSlF.M 

Washington. D.C.. February 14, 2017 

Tue PResiOENTOI'Tfm SENA1'E 

TnE SPr:AKF.R OF Ti lE HouSE OF REPRF.SENTATtves 

The lloard of Governors is pleased to submit its Monetary Policy Report pursuant to 

section 21) of tbe Federal Reserve Act. 

~{~ Janet L. Yellen. Chair 
80 


21417040.eps

STATEMENT oN LoNGER-RuN GoALS AND M oNETARY Poucv STRATEGY 

Adoptc>d ei(ecuve January 24, 20 12; as amended eiiective January J I 2017 

The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory 

mandate from the Congress of promoting maximum employment, stable prices. and moderate 

long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public 

as clearly as possible. Such clarity facilitates weU-informed decisionmakiog by households and 

businesses, reduces economic and financial uncert:tinty, increases the e!Tectiveness of monetary 

policy, and enhances transparency and aceountability, which are essential in a democratic society. 

Inflation, employment, and long-term interest rates fluctuate over time in response to economic and 

financial disturbances. Moreo~~r, monetary policy actions tend to influence economic activity and 

prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its mediumterm outlook. and its assessments of the balance of risks. including risks to the financial system that 

could impede the attainment of the Committee's goalo;. 

l11e inflation rate over the longer run is primarily determined by monetary policy, and hence the 

Committee has the ability to specify a longer-run goal for ioDation. The Committee reaffirm> its 

judgment that inllation at the rate of2 percent, as measured by the annual change in the price 

index for personal consumption expenditures, is most consistent over the longer run with the 

Federal Reserve's statutory mandate. llle Committee would he concemed if inflation were running 

persistently above or below this objective. Communicating this symmetric inflation goal clearly to the 

public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability 

and moderate long-term interest rates and enhancing the Committee's ability to promote maximum 

employment in the face of significant economic disturbances. The maximum level of employment 

is largely determined by nonmonetary factors that afiect the structure and dynamics of the labor 

market. These factors may change over time and may not he directly measurable. Consequently, 

it would not be appropriate to specify a fixed goal for employment; ra th e~ the Committee's policy 

decisions must be informed by assessments of the ma.\imum level of employment, recognizing that 

such assessments are necessarily uncertain and subject to revision. The Committee considers a 

wide range of indicators in making these assessments. Information about Committee participants' 

estimates of the longer-run normal rates of output growth and unemployment is published four 

times per year in the FOMC's Summary of Economic Projection~ For example. in the most 

recent projections, the median of FOMC participants' CJ;timates of the longer-rnn normal rate of 

unemployment was 4.8 pen:ent. 

In setting monetary policy. the Committee seeks to mitigate deviations of inflation from its 

longer-run goal and deviations of employment from the Committee's assessments of its maximnm 

level. These objectives are generaUy complementary. However. onder circum>tances in which the 

Committee judges that tbe objectives are not comp~men ary, it foUows a balanced approach in 

promoting them, taking into aceount the magnitude of the de,~atio s and the potentially dilferent 

time horizons over which employment and inflation are projected to return to lm ls judged 

consistent with its mandate. 

111e Committee intends to reaflirm these principles and to make adjustments as appropriate at its 

annual organizational meeting each January. 
81 


21417041.eps

CoNTENTS 

Summary .................................................. 1 

Part 1: Recent Economic and Financial Developments ....... . ........ 3 

Domestic Developmems .. ..... . .. .... . . ...... .. .... . .. .... . ..... .. .. .... . .. . 3 

Financial Developments .............. ... .. .. . .. . ........... ... ... ... . .... .. 19 

International Developments ........................................ ....... . . 24 

Part 2: Monetary Policy ....................................... 29 

Part 3: Summary of Economic Projections ................... . ..... 33 

The Outlook for Economic Activity .. .. . .. . ...... ... .... .. .. . .. .... .. . ..... .. .. 34 

The Outlook for Inflation .. .. . .. .•.... •.•..• .•. .. .. .. .•.. . .. . ..... •..... .•.• 36 

Appropriate Monetary Policy .......... ........ ....... .. . .. .. ..... .. ....... . . 39 

Uncertainty and Risks ... ..... .. ...... . . ... ... ... . ... ..... .. .. . .. .. . ... ..... 39 

Abbreviations .............................................. 4 7 

List of Boxes 

The Recovery from the Great Recession and Remaining Challenges. . . .. .. . 6 

Homeownership by Race and ~tn idty . .. . .. .. .. . .. .. .. . .. .. . .. . . 14 

Developments Related to Financial Stability .. .. .......... .... .. ..... ... ..... .. .. 22 

Forecast Uncertainty .. .. . .. .. .. .. .. . .. .•... .•.. .. . .. . ... . .. .. .. . .•. ..... •.. 4 5 

Non: Unless staled odlMvise, the time series in the ligures e<teod lhroogh. fO< daily data, februa~· 9, 2017; for 

monthly data, January 2017; and, ior quarterly data, 201 &:Q4. 1n bar charts, except as noted, the change ior a gii'Eil 

period is measured to iB final quarte< from the final quar~ of !he pr«:c;ding penod. 

for figures 14, 33, and 37, nolethatthe S&P 500 lnde< and the Dow Jones Bank todex are produe1s oi S&P Dow 

Jones lndicesllC an<l'or its affiliates and ha"e been licensed for use by the Board. Copyright" 2017 S&f' Dow Jones 

lndicesllC. a !Ubsidiary of the McGraw Hill Finaodallnc., and/or its afriliates. All rig ~ resen-..1. Redistribution, 

reproduction, and/or photocowing in whole "'in part are prohibited without written penrission of S&P Dow jones 

Indices LLC. for more information on any of S&P Dow Jones lndioes llC's indices please 1isit """v.spdji.com. S&~ is 

a regiSiered traden1.1rl< of Standard & Poofs financial Ser\icesllC, and Dow Jone9® is a registered tl3derrorl< of Dow 

Jones Tr.~de<nark Holdings LLC. Neither S&P Dow jones lodices LLC, Dow Jones Tr.~demark Hol<fngs LLC, their affiliates 

nor their third pa1ty licensors 0\lke any representation or wa!T3rlty, express 0< iflllied, as to the abilit)' of aoy Index to 

accurately represent the assel class or market sector that it purports to rep eseo~ aod n6ther S&f' Dow Jones Indices 

LLC, Oow Jones Trademark Holdings LLC, Iheir affiliates nor d>eir third party licensors shall ha~~ aoy lia ~y for any 

errors, omissions, or interruptions ol an}' index or the data included thecein. 
82 


21417042.eps

SUMMARY 

Labor market conditions continued to 

strengthen over the second half of 2016. 

Payroll employment has continued to post 

solid gains. averaging 200.000 per month since 

last June. a touch higher than the pace in the 

ftJSt half of2016, though down modestly 

from its 225,000-per-month pace in 2015. The 

unemployment rate bas dedined slightly since 

mid-20 16; the 4.8 percent reading in January 

of this year was in line with the median of 

Federal Open Market Committee (Fm1C) 

participants' estimates of its longer-run 

normal level. The labor force participation 

r.lte has edged higlter, on net, since midyear 

despite a stn1ctural trend that is moving down 

as a result of changing demographics of the 

population. In addition. wage groll'lhsecms to 

have picked up somewhat relative to its pace of 

a few years ago. 

Consumer price inOatiou moved higher last 

year but remained below the FOMC's longerrun objecth~ of 2 percent. The price index for 

personal consumption expenditures {PCE) 

increased 1.6 percent over the 12 months 

ending in December, I percentage point more 

than in 2015, importantly reftecting that 

energy p~ have turned back up and declines 

in non-oil import prices have waned. The 

PCE price index excluding food and energy 

it ~ which provides a better indication than 

the headline index of where overall inflation 

wiU be in the future, rose 1.7 percent over 

the 12 months ending in December, about 

Y. percentage point more than its increase 

in 2015. Meanwhile, survey-based measures 

of longer-run inftation expectations ha'-e 

remained generally stable, though some are at 

relatively low levels; market-based measures 

of inflation compensation have moved up in 

recent months but also are at low e,~ls. 

Real gross domestic product is estimated to 

have increased at an annual rate of 2Y.. percent 

in the second half of the year after rising 

only I percent in the first half. Consumer 

spending has been expanding at a moderate 

pace, supported by solid income gains and 

tbe ongoing effects of increases in w~al h. 

The housing market has continued its gradual 

recovery, and fiSCal policy at aU levels of 

government has provided a modest boost 

to economic activity. Business investment 

had been weak for mnch of2016 but posted 

larger gains toward the end of the year. 

Notwithstanding a transitory surge of exports 

in the third quarter, the underlying pace of 

exports has remained weak, a reflection of the 

appreciation of the dollar in recent years and 

the subdued pace or foreign economic groMh. 

Domestic financial conditions have generaUy 

been supportive of economic growth since 

mid-2016 and remain so despite increases in 

interest rates in recent months. Long-term 

TreasUI)' yields and mortgage rates moved 

up from their low le\<els earlier last year but 

are still quite low by historical standards. 

Broad measures of stock prices rose. and the 

financial sector outperformed the broader 

equity market. Spre.ads of yields of both 

speculative-and investment-grade corporate 

bonds over yields of comparable-maturity 

Treasury securities declined from levels that 

were somewhat elevated relative to the past 

several years. Even with an ongoing easing in 

mortgage credit standards, mortgage credit is 

still relatively difficult to aecess for borrowers 

with low credit scores, undocumented income, 

or high debt-to-income rati o~ Student and 

auto loans are broadly available. including 

to borrowers with non prime credit scores. 

and the availability of credit card loans for 

such borrowers appears to have expanded 

somewhat over the past several quarters. In 

foreign financial markets, meanwhile, equities, 

bond yields, and the exchange value of the 

U.S. doUar hal"e all risen, and risk spreads have 

generally declined since June. 

Financial vulnerabilities in the U.S. financial 

system O\'eraU have continued to be moderate 
83 


21417043.eps

2 Sl!M'MRY 

since mid-2016. U.S. banks are well capitalized 

and have sizable liquidity l>uffers. Funding 

markets functioned smoothly as money market 

mutual fund reforms took effect in October. 

The ratio of household del>tto income bas 

changed lillie in recent quarters and is still 

far below lhe peak level it reached about a 

decade ago. Nonfinancial corporate business 

leverage bas remained elevated l>y historical 

standards even though outstanding riskier 

corporate del>! declined slightly last year. In 

addition, valuation pressures in some asset 

classes increased, particularly late last year. 

The Federal Reserve bas continued to take 

steps to strengthen the financial system, 

including finalizing a rule that imposes total 

loss-absorbing capacity and long-term del>t 

requirements on the largest internationally 

active bank holding companies as well as 

concluding an extensive review of its stress· 

testiug and c.apital planning programs. 

In Dectmber, the FOMC raised the target 

for the federal funds rate to a range of 

~ to '/. percent after maintaining it at Y. to 

Y, percent for a year. The decision to increase 

the federal funds rate refiected realized 

and expected labor market conditions and 

inflation. With the stance of monetary policy 

remaining accommodative. tbe Committee has 

anticipated some further strengthening in labor 

market conditions and a return of infiation to 

the Committee's 2 peroent objective. 

The Commillee has continued to emphasize 

that, in determining the timing aud size of 

future adjustments 10 the target range for 

the federal funds rate, itwiU assess realized 

and expected economic conditions relative 

to its objectives of maximum employment 

and 2 percent inllation. The Committe~ has 

expected that economic conditions 11ill evolve 

in a manner that will warrant only gradual 

increases in the federal funds rate. and that the 

federal funds rate 11~1l lik-ely remain, for some 

time, below levels that are expected to prevail 

in the longer run. Consistent with this outlook, 

in the most recent Summary of Economic 

Projections (SEP), which was compiled at 

the time of the December meeting of the 

FOMC, most participants projected that the 

appropriate level of the federal funds rate 

would be below its longer-nm leYel through 

2018. (Tbe December SEP is included as Part 3 

of this report.) 

With respect to its securities holdings, the 

Committee has stated that it 11ill continue to 

reinvest principal payments from its securities 

portfolio, and that it expects to maintain this 

policy until normalization of the level of 

the federal funds rate is well under way. This 

policy of keeping the Committee's holdings 

of longer-term securities at sizal>le lmls 

should help sustain accolfUilodative financial 

conditions. 
84 


21417044.eps

PART 1 

RECENT EcONOMIC AND fiNANCIAL DEVELOPMENTS 

Labor market conditions continued to improve during the second half of last year and early this 

)l!ar. Payroll employment has increased 200,000 per month, on average, since june, and the 

unemployment rate has declined slightly further, reaching 4.8 percent in january\ in line with 

the median of Federal Open Market Committee (FOMC) partidpants' estimates of its longer·run 

normal/eve/. The labor force participation rate has edged higher, on net, which is a// the more 

notable given a demographically induced downward trend. 

The 12·month change in the price index for overall personal consumption expenditures (PCE) 

3 

was 1.6 percent in December- still below the Committee's 2 percent objective but up noticeably 

from 2015, when the increase in top·line prices was held down by declines in energy prices. The 

12-month change in the index excluding food and energy prices (the core PC£ price index) was 

1.7 percent last year. Measures of longer·term inflation expectations have been generally stable, 

though some survey-based measures remain/ower than a few years ago; market·based measures 

of inflation compensation moved higher in recent months but also remain be/cf.v their levels from a 

few years ago. 

Real gross domestic product (COP) is estimated to have increased at an annual rate of 2¥< percent 

over the second half of 2016 after increasing just I per cell! in the first half. The economic 

expansion continues to be supported by accommodative financial conditions-including the stiiJ. 

/cf.v cost of borrowing for many households and businesses - and gains in household net wealth, 

which has been boosted further by a rise in the stock market in recent months and by increases in 

households' real income spurred by colltinuing job gains. However, net exports were a moderate 

drag on C DP gr01vth in the second half, as imports picked up and the rise in the exchange value of 

the dollar in recent years remained a drag on export demand. 

Domestic Developments 

The labor market has continued to 

tighten gradually ... 

Labor market conditions strengthened over the 

second half of 2016 and early this year. Payroll 

employment has continued to post sotid gains, 

averaging 200,000 per month since last June 

(figure 1). This rate of job gains is a bit higher 

than that seen during tbe first half of 2016, 

though it is a little slower than the 225,000 

monthly pace in 2015. The unemployment rate 

has declined slightly further. on net. since the 

middle of last year. Afier dipping as tow as 

4.6 percent in November, the unemployment 

rate stood at4.8 percent in Janual)', in line 

with the median of FOMC panicipants' 

estimates of its longer-run normal level. 

The labor force participation rate, at 

62.9 percent, is up slightly since June 2016. 

Changing demographics and other longer.run 

structural changes in the labor market likely 

""''"""'"'" 

- lOG 

-200 

- <00 

-600 

- 100 

II I I I I I I I I I I 

2009 2010 2011 2»>12 lOll 1.014 201S 2016 1017 
85 


21417045.eps

4 PART 1: R(C!NT £CONO.YICAN0 FlNIINOAI. ()[VUOP.\IINTS 

2. L3bor force p3rtkip.t1ion r.rte nOO 

aq>lo)lDmt-to-popubtioo ratio 

r~~~ 

..... 

-6$ 

-66 

- 6< 

- 6l 

- 60 

-Si 

I I I I I I I I I I I I I I I I I I I I I 

2001200> 200$ 26»2®2011 :!613 2015 2017 

have continued to put downward pressure 

on the participation rate. A Hat or increasing 

trajectory of the participation rate should 

therefore be viewed as a cyclic.'ll improvement 

relative to that downward trend. Reflecting 

the slightly higher participation rate and the 

small drop in the unemployment rate, the 

employment-to-population ratio has moved 

up about Y. percentage point since mid-2016 

(figure 2). (For additional historical context 

on the economic recovery. see the box "l'he 

Reco~t ry from the Great Recession and 

Remaining Challenges.") 

... and is close to full employment 

Other indicators are also consistent with 

a healthy labor market. Layoffs as a share 

of private employment. as measured in the 

Job Opening, and Labor Turnover Survey 

(JOLTS), remained at a low level through 

~mbcr, and recent readings on initial 

claims for unemployment insurance, a more 

timely measure, point to a very low pace of 

involuntary separations. The JOLfS quits 

rate bas generally continued to trend up and 

is now close to pre--crisis levels. indicating 

that workers feel increasingly confident 

about their employment pportunitie~ In 

addition, tbe rate of job openings as a share 

of private employment has remained near 

record-high level~ The share of workers 

who are employed part time but would like 

to work fulltime-w ic.~ is part of the U-6 

measure of underutilization from the Bureau 

of Labor Statistics {BLS)-is still somewbat 

elevated, however. even though it has declined 

further; as a result, the gap between U-6 and 

the headline unemployment rate is somewl1at 

111der than it was in the years before the Great 

Recession (figure 3). 

The jobless rate for African A mecic.ans also 

continued to edge lower in the second half of 

2016. while the rate for Hispanies remained 

Oat as with the overall unemployment rate. 

tbese rates are near levels seen leading into 

the recession. Despite these gains, the a1<erage 

unemployment rates for these groups of 

Americans have remained high relative to the 

aggregate. and those gaps ha1<e not narrowed 

over tlte past decade (figure 4). 
86 


21417046.eps

M0N£TARY POliCY R£~: F(Bit\JARY 1017 5 

3. M=uts oflab<T undtrutiliz:1tim 

-II 

- 16 

- 14 

- 12 

-10 

-' 

lOOS 1011 20ll lOIS 1011 

No1!: l~ioy:m;ILMt~II.UI tmeql oytdua~eor~ ~b. U~manu~l ~'tdFblitecY.zqt.d or'tm,ua 

~ofOtltb:!t!Ofttpi'JS~w<d:m.Discoqcd 'I.'Otkc:sareadee'!.of~ly~dMii'mQoL~ :.etC'!l!'MIItyb)i-m&f'«wcck 

bemsctbeybckvoe•)-'obst~tMillblefutlhct..U·Stet.tSlltUoxa ~plu.aD~ya:-..ICMIIOfllelabarfortt.as•~or(lle11bot 

fOlOCp lliipus<Qma:glt.lyllladiN:olhebborfot'Qt.Ma:tgitdy~wukcn~tc~DfiC!lbc«f«t<.v.Wlta:sdwtl\'lilal:lkttrwock,llldbt.vtioohd 

forajcba~p.tll~U-'mc:u:.aa~1ZX!Ilf!loyatpbalua;gillllly~wo.impbiCCillcmplo),.edpntG.c5of~rQI(:Qf;.l$& 

~ o(tbt labor fott< rlllf aD flllliin&ly 11tadd n®s. Tile Wdcd bar mdic:l:q;a pciqd o41rJSbca ;~:ocssm aslic!IDC4by6c N~ hw.l or 

E«.oorr.i:R.tSa:Ch. 

~ Dqlt."UU:Cl.o!"Ltb«,&.nnoft.aborSo.ati!l!ie&. 

4. Unemplo)1llell! rnte by race and ethnioity 

-II 

-16 

- 14 

- 12 

- 10 

1011 lOll lOIS 2011 

No!!: U~tlltt~w:alllla:lflYfni&St~of~b.botfortt.l'cncawbosefl!oit«yiti&u:i:ltduHispb::«l.ati!loaykof 

anycaoc. Tht WdcdW ~ apcriodolb:mcss~u dtfaedbytbeNcio:.al Btru.:~ol"S:uJo:ni.:: RuccdL 

5o.3a: IJ<!>o.""""oiUbor,B:.mooi'LoborS*'"-
87 


21417047.eps

6 PAAT I: R(QNT ECONO\UCANO fL'IANOAl OEVELOP~~NTS 

The RecoveryfromtheGreat Recession and Remaining Challenges 

The Creal Recession severely affected the U.S. economy ... 

The Great Recession of 2008 and 2009, and 

the nancial cri ~ that precipitated i' rest.lted in 

rrossh~ job looes and falling incomes for An1<'rican 

households. The Great Recession was, along rmny 

dimensions, the most se•'Ot'edowntum since the Great 

Depression almost 80 )~ars earlie<. Economic output 

declined ou~ight for 18 months, leaving real gross 

domesli<: product(GDP)4V> petcenl belowi~ previous 

peak. MOte than 8'/: mi!Jion jobs were Josl, on net. 

and the une,..,loyment rate soared from 4 Y, percent 

in 2007 to a peak of I 0 pe<een in late 2009 (teld 

frgure l). The labo< fO<Ce participation rate (lfPR), the 

fraction of the pojlulation either e"l'IO)-ed or counted 

as unempiO)'ed, l steeply, from 66 percent in 2007 to 

6l percent in 2014 (text figure 2~ Household inoomes 

lurroled, with real income for the median family 

declining more than 8 pertentfrom 2007 to 2012. 

The hald!hips were p>rtlcularly acute for wt:ain 

grout)$ of 1\mericans. As text fogure 4 shows, 

unempiO)'ment rntes for blacks and Hispanics rose 

oonsiderably more during the recession than did such 

rates for the nation as a whole. (1 partiwlar note, 

inflation-adjusted median household incomes for black 

households declined more than 11 peroent from peak 

10 ouglt, substantially more in percenl:agetenns than 

for while, Hispanic. Of Asian households (f.g<..e A).' 

. .. but considerable progress has been made 

In the eight years !lnce the crisis, the U.S. economy 

has m>de considerable progress acroo a broad range 

of measures; ~>is prog<ess has occurred while the 

resilieoceof Ure fllancial system has been shored 

up. More than IS rrillion jobs have been created, on 

n<1, sioce the fall of 1009, and the unemplofment rate 

has fallen by half. In addition, the LFPR has fl\0'>-ed 

roughly sideways since 2014, which should be ,;.,,-Ed as a cyclical improvennent gi>-en thederrographic 

changes and other secular trends that have put 

da.vmvard pres..,re on participation for the pa~ 

10)-ears. The robult job gains seen during theament 

I. MNsurescfhou:seholdincon"t>defi,'ecfliomsur\'e)'$--

wdr" !he Cu11eo1 Pq>wtSonSu"<fsAnn"'l Soci•larod EcOI\Ofric Sl!lpi«<Ol~ which irOo<ms !he C.OSus Bur.,o's official suli-Siia-rroy not f!Jiy capu.~ earned income(such JS from the s<lf-errplo)-.di and unearned inco,.,{OJdr » uans(e.-s and f(iirfflll"'ntiocoo~. Th('S(' b-sues are lil:efy to be 

m.Jdl m:> epr«~ouocOO b lht\arious stbgroq>J than ttl(!)' 

Jre ff.lf the national mediu1. 

A. M<diM bo\J$tboldincoore,bymeandelhoicity 

- ~ 

- so.eee 

~ 

-iO.OOO 

-60.000 

~ 

-lO.OOO 

_,, .... 

---- Blt..-k«Af:i.-cA:attnl! - lo.eeo 

I I I I I I I I I '/JIJJ 1W1 1011 lOll lOll 

Na ~rrfa»~~d~btad.oC~b<ti lUBispcatoa 

Lt:ino ~iry re.d !l.'t ~tt<rirs ttf ~~II)' n~t. Scot m:!i\'1bk, (or ~ an- bclb Ugpmr md wbilt, ~ e.,. Cl! 

~illbol.ll iou. 

~ ~tofCoczl::r.t:e.&.~JGol~Ceca(Z(t 6}.kO!It 

4RJ IWrr} ur rlrt U.lfJ Sbto.. NIJ. t.tV A·J: lmar~lb bf To:a.l t.foely11cw:nt,lao!,mdH~SpJmtO:f!molH~I96710101S 

(WU:.p: ~ll'Uk-tlll. ~).-w~p·.~ti:· 

lM®l6!&::».'p(b-t!6.hS. 

expansion are all the...,.. noteworthygi,oen these 

derrographic pressures. 

The labor 1113rket at present is likely dose to being 

at full employment. The UOO"l'loyment rate is near the 

median d Federal ClpE» Marlcet Cormrittee tFOMC) 

par1icipan~' assessmen~ ol ~ longe<-run normal \lllue. 

In addition, real GOP <M~ sunds I I pE<CEnt abo>~ i~ 

pre.recessJon peal(. and it is approaching, though still 

a bit bei<M~, the Congressional Budg« Offroe's eslimate 

ol potential output-#lat is, the maximum su!lainable 

level of oconorric Output.> 

lncorres fO< the median iarrily have mosdy 

reco•oered from the Great Recession. Of note, real 

median income is repo<ted to ha•·e risen 5.1 percent 

in 2015 (figure B). 

The rf!C.OVf!f'( oompares favotably with those of 

other adva1lced economies. GDI' has increased faster 

and uncf1'4lloyment has declined 010<e quickly in the 

lJnited St<lles than in olhet rrojor achonced OC<lllOrries 

(figures C and D~ And the Federal Resen'<!'s challenges 

in getting inflation bad< up to l:arget are similar to, 

but not as se'l<re as, those faced by some ~rer 01ajor 

monet~ry authorities in the past few years. Although 

2. .,...rol ~Office(20t7), The Budge< .00 (conomicOutlcck: 2017., 20271WasliJ181Dll: CBO, jaooo~l, p. 41, •ww.<bo~lsi O!Id<>la h.fo .V Il lh

conu,..·l0 7·lOI:Vr~1JIQ-o<.<iool;.pdf. 
88 


21417048.eps

B. Indexed howtb<Jid income, by peK<ntile 

- 106 

- too - 101 

- lot 

n 

% 

- ~ 

92 

90 

$$ 

It I I I I t I I I I I 

<lKli 200:9 2011 20H lOIS 

SoMa: Dtt""'''"lC........J>"""eltlrC.....~OI6)L<­

WPawrlfindtt l.lrdtJSI~a.:~WJ. Tliii:-A.J:.Seb.~Wtu-."'('Jft 

Kxatbo~ i:=1c ~ 19€1 1o l015 (\\'·~CUll b.u, 

~WII'Wma:l,Qir>tia.')'·'pcl'l11.~1fldeo:f~'=:IL 

consumer price inilalio<l, as measured by the price 

index for personal consumption expenditures. has run 

below the FO~\C's 2 l"fC"lt objective through most ol 

the e.pa n~on, in recent months inOation has n10''t!d 

closer to the Conmittee'slarget (text figure 7). 

Nonetheless, challenges remain 

While rruch p<ogress has been made, important 

challenges remain for the U.S. ecooomy. GOP gro.vlh 

C. 1\tali!JOSS Oolll<Sti< produ<t ill mtaaatioaal cont<xt 

"""" ~llllld..-.6ce.2009 

-It 

- II 

-II 

- 9 

- 6 

- I 

I I I I If 

2010 1011 101' 2016 

\IONfTARY POliCY REI'Ottl: HBit\JARY 1017 7 

has a'>erag«< only about2 percent pe1 year d .. ing this 

expansion, the slo\vest pace ol any postwar reco .. -ety 

(flgure f). In pari, >at subduod pa<:e is due to slower 

growth in the labor force in recent decades compared 

with rruch ol U>e pos~var period.' 

Another source of slow GOP gCOivlh has been 

lackluster law productivity ~011'1h (fA>.xt figure 6). 

Sinoe 2008, ooipul per hour in the business sector 

hasrisen about I l"fC"lt pe1 year. far below the pace 

that prevailed Wore the recession. Cyclical factors. 

like weak business ln,-estn>enl and flnns rebuilding 

worldorces after culling musually deeply during 

the crisis, likely explain some ol the sl01v rise in 

prodllCiivily during this expansion. But slru tur.~l factors 

may also be at play, $UCh as declines in inRO\\ltion, 

reduced business dynall'ism. Of decreased produa 

market oompelition.• The productivity sl01vd01vn has 

taken place in nl061advanced eoonorries, which 

suggestS a rcle forSIJUctui31 faClors not specific to the 

United States. 

J. In p;>ni<IJI.lr, il>e C<lflgfesionoiBWger Offke .,.;,., 

thao ohe coouib<Jtioo oo p01!1lli>l COf> growlh from uend 

1.00. lorctgro•lh is 2 percenoagepoims k>wefloday INn il was40 )@>~ago. Thisdwl!lopmentr<&:osa ~01\ite ol pcpulation gtowlh and a S\\hch from a risi!Y6LFPR ~ .. falling 

one, •"""& otlx< f•<1rl~. See Coreres6ionof 8udget Off <e. 

BudgE< >rrd EcoocmicOUdock. oable 2·3, p. 53, in..,. 2. 

4. SeeRobMJ.Cor<lon(lOI~), TheR.'<o>rrdfallol 

M>ericln CrvMir: The U.S. StmdlrdcftNhg 5incet1e Civil 

W.u il'>illCft<lr\ NJ.: Princeton ~riveni y Press); S"""' !. 

D. Unemployment rate in internatioaal context 

...... -l 

-2 

- I 

- I 

-2 

- l 

_, 

_, 

"" l01' 2.016 

SOI.Irtt ~ rn &<COC:MC to.opem1011 a l)e_<,~ S<Ma: ();p:l~Uia;)Q ror Soo:4m~ co-~ t:~4 0:~ 

f2017A ~CD lk«!otr~tr: Ck.1ook. No.. 100 (Ea'.10e 201M:~· OEOl flOii}. "'O£CD Etoocolc Ottbli: No. 100 (Fd'lOCI 20W2)," OECO E.~~ S~t.'t cd fto~ (~}. Cllp;lldx.doi. ~ o.tt:xt: S-.::alastiC~ cd.Pto~ (k.abl~). llilp:l'dxd.ourc 

O!)f!OJ1S1n&;tibfc.(arettJStdb:D:)'2011). no. mn&l 7bt~ r~~1011). 
89 


21417049.eps

8 PAAT I: R(QNT ECONO\UCANO fL'IANOAl OEVElOP~~NTS 

The Recovery from the Great Recession and Remaining Challenges rcCiltilt.re<fl 

Meanwhne, despite the notable piclcup in 2015, real 

incomes for the median family are still a bit lower than 

they were pri<l< to the re:ession. Mor..,.-e<, thegaiM 

have not been unifomiy distributed; families at the 

10th percentile of the income distribotion earned about 

4 percenlles< in 2015 than they did in 2007, while 

families at the 90th percentile eomed about 4 percent 

rrx><e than before the Great Recessioo (frgure 8). 

Oawund )ohn Halo••nger (2014), 'labor M>riocot fluidity aoo £conoo1c l'o<loomn<t,' NBERWorling P.oper Series 

20419 fCani>ridg<, M>S<: N>oona18ur .. u ol Econorric Reseor<~ S<pc<ni>erl; ard l'llilippeAglliO<l, ~ick Bl«lm. 

llichard Bluncl<ll. Rachel Crilfrth, "-.1 Peoe< tmi• (2005), 'Co"f>"i1i0<1 and ln.,..tion: Anlrn.,l«i-U Relatiol'6hip, • 

QJ>nedylo<rmalo(f(O(l()rni<s, '""· Jl0~1)'),pp.70 -28. 

Economis~S aredrvi<k:"<< abo\lt !he causes oldie productivity 

!lowdown and !heir coosequences f« the oudool<. f« an q>tin'is,tic \1t"o\~ see £nk Sr)'njollsson al'ldAOOrewMeAfee- (1014), Thes..:..d Mo1Chi1eJise:Wo.i, Prog,.,,md l'msperity il a Tinod8rii/JJm T~(NewYO<I:IV.IV. 

Norton & C""1'3nyt. f« a less<lJltirrillic Jl'f'l"'"''-,.. 

C..don, Roemd f>Jf of Amerkan Crc...V., .,rli<r in !his note. Others''"" argue <I lflat diffko.lties aS600al«l " ilh roonomic etOOnt n'll)' ~ggerat.e IN slowdown: see. b 

e>""lJJe, o";dM.8yrne,)ohnG fomold,aooMo~lull B. 

R<insdorf(2016), 'OoestheUnit<dStatesliaVI!al'loducovity 

SJQ.d.,.n «a Me""'r"""'t Ptoblern!" ll<ockhgs Pipers on EcOO<>!Ii<:Aaivjy,Sprire pp.I09-57. i"<Jps.:lhlww.btool<ings. eru'\\p..:on...V~lr.'Ollby"""""Pri ngl6bpea.pdf. 

A~. mJre ()f)bnistic e~na ~on is thJ.lthe owd<W~TI 

inproduclivity rellocts a "coi'611UCcivepause• as fi~ adc:p1 

""• p<Oductivi~4'nhancing t>dlnology and «ganiutional practice; soe, for e<a"lJJe, Pao.IA. David 0 m• "The ll)mmo and tlleComputtr.An Hi•orical Pffijl<'Ctivoon !he 1\b:iern Productivity P.aradox,." Nr.Mc.atl kMI>f-r.ic Rft~ 

vot. so ''Aoy), 119.Jss-6t. 

Similarly, the ECOOOn'lic circurnslai1C<!5 ol blaclcs 

and Hispanics have improved since !he dep~hs ol the 

recession, but they remain worse, on a\·erage, than 

tha<e of whites rx Asians. Unemployment rates for 

blaclcs and Hispanics continue to be well a~ !hose 

ior their white and Asian oounlerparts(lexl i'igute 4), 

~>ilile incomes f<>< these groups ha\'e sb)..d noticeably 

lower (figure A). 

lhese challeng<s lie S~tbsttntiall y be)'QI'Id the reach 

of mooebty policy to addres<. Mooetny poli<y cannot. 

for instance. gene<ale tE<:hnologrcal breaklluoughs or 

add res< the r001 causes ol inequalil)'. 

E. Real gross domtstic predict in historical tonte:<a 

- _., 

1~1- .II) 

-ll 

-» 

-tl 

_,. _., -10 

Non: R.ell g!OU dotlu'.a: pc*f. lldtxtd iO balats C)\'lt IP:IU8b a 41!td.byibeNJb:)al!9encvf£0CI:l~ltt.w~ Tb!x<Ud~~ 

~(l{~Jitl:('tbtbi:A::Icac,tle~ 

~ ~~otCooamt:~.-t.Bu:r.a:oiF~APyul 
90 


21417050.eps

Labor compensation growth is 

picking up . .. 

The impro1~ng labor madet appean; to be 

contributing to some111latlarger gains in labor 

compensation. Major BLS measures of hourly 

compensation posted larger increases last year. 

Of these, tbe measures that include the costs 

of benefi ts have posted smaller gains than 

wage-only measures beeause of a slowdown 

in the gro111h of employer health-care costs. 

A compensation measure computed by the 

Federal Reserve Bank of Atlanta. which tracks 

only the wages of worken; who were employed 

attwo points in time spaced 12 momhsapart, 

shows even more pickup than these BLS 

measures (figure 5). 

... amid persistently slow productivity 

growth 

As in the previous se\'eral yean;. gains in labor 

compe11sation last year occurred against a 

backdrop or pen;istently slow productivity 

growth. Since 2008,1abor productivity gains 

have averaged around I percent per year, 

well below the pace that prevailed from the 

mid-1990s to 2007 and somewhat below 

the 1974-95 average of ~ percent per year 

(figure 6). Since 20 I I, output per hour has 

averaged only a little more than percent per 

)'l:ar. The relatively slow pace of productivity 

gro111h in recent years is in part a consequence 

of the slower pace of capital accumulation; 

diminishing gains in technological innov-ations 

and down1111rd trends in business formation 

also may have played a role. 

Price inflation has picked up over the 

past year ... 

In recent years inflation has been pen;isteolly 

low. in part beeause the drop in oil prices and 

the rise in the exchange v<~ ue of the dollar 

since mid-2014 have Jed to sharp declines in 

energy prices and relatively weak non-energy 

import prices. The cft'ects or these earlier 

dev-elopments bave been waning, howevet and 

ov~ mll inflation has been moving up toward 

the FOMC's 2 percent target; the 12-month 

\IONfTARY POliCY ltfi'Ottl: HBit\JAR\' 1017 9 

5. Mea.<U~tSofclnng<inboU'IyoompmsatiOD 

: t tnlp o)~c;h'Oit cld: _ Ul 

A\'mtt~ftl!"'_ql 

I I I I I I I 

lOU lOll 2015 

No:l: &-..sc~~ist.eliktt~.n~~ 

oldt ~MO\i:!&tvtnat F«~~totti:J&x,clqtit 

ovtr lhe 12 :'IIOIIb m!q b b!: lulaonlh oreacbqaa."!e; iot l'lt!l&t 

t«utrtamiccJ.~isfooca l~e&dc;; «teAllwahd'•W• 

~'l'!:adtt:t,~d&tat:t.:o--asa~{ll(cil*l'li!!&a~&!l! 

mmde..~~2 l6. 

~ ~tor~.ato:.~UJ..&borS".slln"S;F~Rtsaw 

BW«" Atla:a, W~tt<hla~ Tra.."ir:!:. 

6. Cbangc in tm<;i..,·scctor ootput pa bo'" 
91 


21417051.eps

10 PART 1: R(C£1ff(CONO CAN0 fi ~~OAI. OtvtLOPM£1ffS 

7. Clunge intbe priceind<x rorpmooal COIIStllllptiOO 

c~n.es 

1\QrE: Tbt6:a~!h:\q)0~~ 6:1tcqp~ftuno:t}$ 

"""'- !«.>a: Dqor.ooll<l"""""""Bllnou<l!Jo=....,.. •. 

- llO 

- 120 

- 110 

- 100 

90 

10 

-10 

6ll 

lO 

- •o 

30 

lO I I ! ! , I I! t " " ! I I I " I I ! I I 

.2012 :Wil 201' lOIS M16 2011 

NoTJ:lbe~r:t~r~.:so(Qa ~Ut.t.date:lr.!tll:wP 

tdmu..")'t,l011. 

sr..uta:: N'l1o££X "" BIO<atq. 

9. lion-oil imp«! prices :md U.S. dollar e>dlonge rate 

_, 

- ll 

- 10 

- l 

-l 

- 10 

2011 2012 2013 l(ll.t lOIS 2016 2011 

~lbtdata{ot !IO:I ~pri:u~~Ort«::be2 6. 

SCt-x-t: ~ofUb«,&.""tG:r/t...borS:)tm ftdmi ~ 

Bot.-t,Sut:it.jt:tJ JtdWt LI ,•f~~RAitS.." 

change in overnll PCE prices reached 

1.6 peroent in Dec~mber. compared with 

only0.6 percent ovcr2015. The PCE pric~ 

index excluding food and energy items. which 

provides a better indic-ation than the headline 

figure of where overall inflation will be in the 

future, rose 1.7 percent over the 12 months 

ending in December. somewhat greater than 

the 1.4 peroeot increase in the prior year, as 

prices for a wide range of core goods and 

services accelerated. Nonetheless. the rate 

of inJlation for both to!JI and core PCE 

prices remains below the Committee's target 

(figure ?). 

... as oil and other commodity prices 

moved up moderately 

The similar readings for headline and core 

PCE inflation last year partly reflect an upturn 

in crude oil in 2016 following the sharp decline 

in the prior two years. Since July, oil prices 

traded mostly in the S45 to SSO per barrel 

range until the November OPEC agreement 

regarding production cuts in 2017 (figure 8). 

I nthe wake of that agreement, prices moved 

up to about$55, roughly $15 per barrel higher 

since late 2015. Retail gasoline prices also rose 

after the November OPEC agreement, bntthat 

increase has partially reverned in rec~o t weeks 

After falling during 2014 and 2015, non-oil 

import prices stabilized in late2016. supported 

by the rise in noofuel commodity prices as well 

as by an uptick in foreign inflation (fig.ure 9). 

In panicular, prices of metals have increased 

in the past few months, boosted by production 

cuts combined 11ith improved prospects for 

demand both in the United States and abroad. 

However. f.1ctors holding non-oil imporl prices 

down include dollar apprecialion in the second 

half of2016 and lower prices or agric.ullural 

goods last fall, as U.S. harv~ts hit record-high 

ie>·els for many crops. 
92 


21417052.eps

Survey measures of longer-term inflation 

expectations have been 

generally stable . .. 

Wage- and price-seuing decisions are likely 

influenced by expectations for inflation. 

Surveys of profe~ional foremten; outside 

tbe Federal Reserve S}~tem indicate that 

their longer-term inflation expectations have 

remained stable and wnsistent with the 

FOMC's 2 percent objective for PCE inflation. 

In wntrast, the median inflation expectation 

over the next 5 to 10 yean; as reported by the 

University of Michigan Surve)~ of Consumers 

has generally trended downward over the past 

few years, though it is little changed from a 

year ago; this measure was at 2.5 percent in 

early February (figure 10). It is unclear bow 

best to interpret that downtrend; this measure 

of inllation expectations has been above actual 

inflation for much of the past 20 years. 

. . . and market-based measures of 

inflation compensation have moved up 

notably in recent months but also remain 

relatively low 

TIPS-based inHation compensation (5 to 

10 yean; forward), after declining to very 

low le\>els through the midd.leof2016, has 

risen to nearly 2 percent and is about20 basis 

points higher than it was at the end of 2015. 

liowever. this level is stiU below the 2\4 to 

3 percent range that persisted for most of the 

10 yean; prior to 2014 (figure II). 

Real GDP growth picked up in the 

second half of 2016 

Real GOP is reported to have increased at an 

annual rate of 2Y. pen:ent in the second half of 

2016 after increasing just I pen:ent in tbe first 

half (figure 12). Much of the step. up reflects 

the stabilization of inventocy investment, 

which held down GDP g,rowth considerably in 

the fi.n>t half of last year, as well as a pickup 

in government pun:hases of goods and 

sef\ices. Private domestic fi.oal purchasesthat is, final putt:hases by U.S. households 

MOI'<CTARY I'OliCV RER:>Rl: fE8RUARY l017 II 

10. MC<Iian ioOatioo expecbtions 

).lic:Qp=Cfl'(lf ~OD$ 

ror::nt5 1010)'nlfS 

-3 

- 1 

- I 

I I 1! 1 tt 1 1 1; ft l l ft! I 1 I 

))OJ 200:S 2007 2009 lOll 2013 201S 2017 

NT.i:lbt ~~ CNtjtal! ~·~ dtxlt!ld throuah fftlnazy; ibc .-~ ciA~\' ~. 'nc SPF dQ Co: im\:lo:l ~io::.t{(l:pesoa&J~~OD~i:udctqta:Urlfd~ 

mll)l)lQte.-.lOil:QL 

S«.aa li-.:n~o(Mi;bip;!$;."\~olC~F~ *"''e 

Bd:olPhi ak~S;rwyciProft$$iocdfoct\ues{SPF). 

It. S.to·IO·rou·forwaro inflation romprnsatioo 

. .... 

-B 

- l.o 

- 15 

- u 

- IJ 

-1.0 

I ,,,,,,,,,,,,,,,,,,,,,,,,,, "'''''' ,, I 

2001 lOll lOU 201S 2011 

Nm:t'tlt&!attt~l'ft':I:&Uoldattj61lda~!h:ouah 

f~10.M11 TIPSis ~IIIO&:m·~~in. 

~ te!ml Rtse;\'C &;I tJNew\ or\;Scdcys:f~~ 

Bocd.sdn::~:Dale$. 

12. Change in ,..li!JOS$OOmestie procl•ctll>d gnl!S 

d.lmest:ic: income 

l ll:os"''""""""" ~~~ _, 

HZ'- 3 

_, 

_, 

• O.O.~rc:.omelt~)'tllniltble ~lO l 

$(oa ~IO'Ctt~~!t~t!tt.,81t'SUO £..'(I()Cica:'~'kl. 
93 


21417053.eps

12 PART 1: R(C£1ff(C0NO CAN0 fi ~~OAI. O(V[lOf>M(IffS 

13. O>aoge io r<al p<rlOilal consum~ <:q><o:!ilur<S 

:md disposable pmooa1 incame 

I ettaa!c0fli'!.'11ptioe!~ 

Otipol;&blt~ U..-ome 

- 6 

- s 

Sew:£ Dtpat:aeu!oiC~.Btm~~<-t&:-OIIOC!IicA!!d)ft 

14. i'rices of e:cistiog single-family houses 

- - lO 

- IS 

- 10 

- s 

- 10 

- IS 

- ~0 

It I I I I I I I I I I I I 

200S WI& 2010 2012 2014 Ml6 

Non: The dlt.l foe IDe S&f.{'.uo.sh•k Cdc:t =oar.:~::ouF No\obcr 

2016. 1\t da I« tt ZillOIN ted Cud..o&k i:dtns ettd ihrou&l ~20 ~ 

sowo: C...Loc"""" Pri<ell>la: Zilow; ~~"" us. Nllimlllo:o!: P!i.'tl*. TbtS&PlC...shdlet:d.aistpro('.:rtoiS&:P 

Dow Jcic:a ~ u.c .oo.w D a.ftihlkS. tr« J).y.v mes JnSm 

ll."e:S ~iti~ttt!htetl'.teo~Co:ttrupeJt.) 

I 5. Namirol hoUSt prices ao:! prlct-<<nt rolio 

-100 

- 110 

- 110 

- llll 

- 110 

~ 

_,., - 130 

- 120 

liD 

- 100 

10 

Ill 

- - )1) 

I !llfiiiiiiiiiiiii!!IIIIIIJJII 

IWl lm 1998 2001 »l4 lro1 1010 lOB 2016 

Nm: lbc: da:& QUrl4 ~ I>t.x:Dbc: 10-16. 1k C«ri.ock: ~ 

.i:dt:K is~yldJ.:.ndbyFC'dm!Rt:sen~Bon~~zr.fu~ 

n:aou tbc: tdOofiiOI:IIi:Jiho:atprimtoti:croor.::~~rtpo.e =xorre:~ 

c(p:iml.oy~ Ttc"-'a."' i:ldaed. :o 100inhma:y lOOO. SOl'lct: Forpeicu.f.«tl..oP:;"'m~'ll,~oiUbo-.,Btrta~of Lobor-. 

and businesses-trew more steadily than 

GOP last year and posted a fairly snlid gain 

in tbe second half. PCE gr0111h was bolstered 

by rising incomes and weal ~t. while private 

fixed investment was weak despite the low 

costs or borrowing ror many households and 

businesses. Although the FOMC has increased 

the rederal roods rate twice as this expansion 

bas progressed--illtce in December 2015 and 

again in December2016--in Y. percentage 

point steps. overall financial conditions have 

been sufficiently accommodative to support 

somewhat-raster-than-trend growth in 

real activity. 

Gains in income and wealth have 

continued to support consumer spending .. . 

Real consumer spending rose at an annual rate 

of 2¥. percent in the second half of 2016, a 

solid pace similar to tbe one seen in the first 

hair. Consumption has been supported by 

the ongoing improvement in the labor market 

and the assnciated increases in real disposable 

personal income l}-~tat is. income after 

taxes and adjusted for price changes Real 

DPI increased 214 percent in 2016 follo11~ng 

a gain of 3 percent in 2015, wbeo purchasing 

power was boosted by falling energy prices 

(figure 13). 

Consumer spending has also been supported 

by rurther increases in household net worth. 

Broad measures or U.S. equity prices rose 

snlidly over the past ye ~ and bouse prices 

continued to move up (figure 14). {In 

nominalterllli, national house prices are 

approaching their peaks or the mid-2000s. 

though relative to rents or income, bouse 

price valuations are much lower than a decade 

ago (figure 15).) Buoyed by these cumulative 

increases in home and equity prices, aggregate 

household net worth has risen appreciably 

from its level during tbe recession, and the 

ratio or household net worth to income 

remains well above its historical average 

(figure 16). The benefits of homeownership 

have not been distributed evenly; see the box 

"Homeownership by Race and Ethnicity." 
94 


21417054.eps

.. . as does credit availability 

Consumer credit has continued to expand 

somewhat faster than income amid stable 

delinquencies on consumer debt (figure 17). 

Auto and student loans remain widely 

available even to borrowers 11~ th lower credit 

scores, and outstanding balances on these 

types of loans continued to expand at a robust 

pace. Credit card balances continued to grow 

and were 6 percent higher than one year earlier 

in December. That said, credit card standards 

have remained tight for non prime borrowers. 

As a result, delinquencies on credit cards are 

still near low historical levels. 

Consumer confidence is strong 

Household spending has also been supported 

by favorableconsumersentiment. ln 2015 

and through most of2016. readings from the 

overall index of consumer sentiment from the 

Michigan survey were solid, likely reOecting 

rising incomes and job gains. Sentiment has 

improred further in the past couple of months 

(figure IS). The share of households expecting 

real income gains over the next year or two 

is now c.Jose to its pre-recession level despite 

a~ing lagged improvements in the headline 

sentiment measure earlier in the recorery. 

Housing construction has been sluggish 

despite rising home demand 

Residential investment spending appears to 

have only edged higher in 2016 following a 

larger gain in the previous year. Single-lamily 

housing starts registered a moderate inc.rease 

in 2016, while multifamily housing starts 

flattened out on balance (figure 19). The pace 

of construction activity in 2016 remained 

sluggish despite solid gains in house prices and 

ongoing improvements in demand for both 

new and existing homes (figure 20). As a result. 

tbe months' supply of inventories of homes for 

sale dropped to low e,~ls, and the aggregate 

vacancy rate moved to its lowest level since 

2005. Reportedly, tight supplies of skilled 

labor and de\~ oped lots hal'e been restraining 

home constntction. 

MOI'<CTARY I'OliCV RER:>Rl: fE8RUAR\' l017 13 

16. W eoltl>lo· income ratio 

- .... 

-6.S 

- .. 

- l.S 

- iO 

IIJ! I!I! If l !l l lllf l!lll!! ll 

1996 2000 200A 100e 1t1a 2016 

Nott 1bt i&t rxiOl ~ bl16:Ql. Tbt t«its is 1bt tltit of 

d:tilr'011ito~pmw&C:oclt. 

Soo1o: for ott~ F«5mmltstrw. &etc!. Str.irietl Rtkw l.l, •ficmritl At.."'ttll!S ol ~ I?~ Stan"; lix ictocllt, {)qclnad of 

('~~of~ ~ 

- 1.000 

"" 600 

I I I I I I I I I I I !I 

2007 lfm W/JlOlO l011 l01l2013 ))14 )liS :016 

400 

lllO 

+ 

0 

lllO 

.100 

600 

Nr."E: ~ m ~Clrd ~ ysd ~ )U'·ald t'X.-. 2016 cbqc$. wb1d& a:e c.alcuJcN l!o:;DQ} :.Ql.. 

Sr.w:2 J'o!ml Jl.dt':'o"e Boar4 Sl!!15bcal Rduse %.1, "fm&l);id At«r-:Uo '~Ucikcf~• 

LS. lDdexesof~umcrstfttimen.tand incomecxpWatKIIS 

, ... 

I I !! II II II I I'"T'i'I'"Tt 1 j I 

zoot m 21m ~u 2011 

Non.. 1U d.u n·.= tlr<qh fcb:uaty ~17; W ftbn:.cy tbia ~ 

rrd~ nt~s=IM:'l~C'tiiiOCilhlydt.oei:wiQt410 

100 111 19r66. nt ttal ~ tx~ d.cl a:r takab:td Mille ttl 

~t:O(SI!I'W)'tr.~!Sb:pte:E:&&mdy~~-lli'aot't 

~pri::c$~ ibtllt'r.}'tlt«tvo-o plw IOOIIIllart ~-• 

~'H·mr:d mt1i II& J.\'fl9. 

~lflli\'ttSi/fofM'a:·cbi8lC&:t\'f')'$olCOCS'CtWn. 
95 


21417055.eps

14 PART 1: R!C~~TICONOMICANOfiNiiNCIAL OMLOPM£~'1> 

Homeownership by Race and Ethnicity 

Most househ<Jids in the United Slates own their 

homes, and among !hose ~>ilo do nol, m:my conlinue 

to aspire 10 own their homes.' The J)OtXIIarily of 

homeownership may sltm from lheamtnilies and 

financial benEI"llS that are associated with o:r.'nership. 

for example, on lhe Onanc~l side, owning a ~ 

prorects households against YOla tilily in renl31 prices 

and may help them b<Jild wealth as they repay their 

m>r(g3ge.' HiSiorically, we have seen disparities in 

homert.vnership across racial and ethnic g<oops, and 

these disparities are an important dimtnsion of racial 

inequalily in the Unitoo Slates.' 

I. A 2014 SUM)' indical<dthatOI<r 90 pert"'tolyoong ll'flterS ~It'd d1.1t they iMended to purchase a home in che r,.uoe. S.. l'onnieMoetl014), flffl,~MleN.oon./ 

Hoosilg Sow')':"""" 1'o<."8"t RRmM v.~m and lhe Fil...:at Cazsu~illts They Set' {\Vashingu)lt f.tt~n e MaP, Map, wv.w. 

hnniemJe.oom~..,.r<es'fil~ .... rchihoosing><ffl!'/pdfl 

nmnayl014presentauon¢t .S..T~Sinaiand ct.obsS ~(lOOS), 'Ownet· O<cup;ed Housi'@" o H<dgo ag>inst Root Rill<,' 11,. 

Ql>netlyJoomalo/Erooomicr, YOI.120(2), pp. 76!-89: 

,..,lsoD•vid Laibson(l99n, 'Colden £118s.nd H)p«b<!ic 

Oiscoundng • Qlanetly JoomllofEcon<;micr, YOf. 112 (24 

pp. «:1-73. 01 COOrs<\ as tn.fonanci.ll <risis ""dec ... r, .. ,., •• ,.,,.,.hi> carries risb .... u. For eocanvle. highly 

le\'('fa_ged ho~TW\\'fl('f'S .Jre ~t risk of neg.ui\-e equi1yd house 

pric~de(lint, which ~«ids 10 in~ mcbilit)'; see ~nardo 

rena,., Joseph C)llu•ko. andlo"Ph r,.cytzoiO), 'Houong 

&osos and H- Mobility.' Joo""l <I Urf»n loonomicr, YOI. 63 OoA)?, pp.l4-4l. 

l. fol!().,ing "'nd>rdprlt!JCO, che ...._,..,tip""' is caiOJial<d htre as !he lraclionofhoUS<loolds !hot ""n cheir llorrw.llws, ll'Mds ln household fofrnation i.nfiUMCe tteOOs in che ~ • .,hi> rate, and declining hoosehold fomution 

tn "'""' )'e>O hash~ "W"'' dle hon"""'n«Ship rate. See Andrew l':lciorek tlO 16), 'The l~ and Shon of 

Hous<hold For nation; Rerl I""• fconomks, YOI. 44 (I), 

pp.l-40. 

A. Hom...,enhip ntts, by "" and <lhnicil)' 

..... 

- iS 

-61 

- ss 

-•s 

-)j 

- zs 

- >S 

II I I I I I II 

1900 1910 lj;l) 1960 1980 10.."0 1020 

Xore lhtdon.MtY 0)"tL'\~~artptl9~a~2())), 

!be • a.<t= ice' 1006. 2009.1lm. ll3d Wti Pmom •W tb.,ty • llt~~116r11•11.t!pl:rorl.wo l!ll)'~d.my:m. 

SOIAa: ~"UUM:aadCo:::acr.'t.&.m!ifJI.(bt(.Qua. 

Nationally reprolSefl~lil'e data from 1900 through 

2015 indicate thatlheOI'erall homeownership rate 

-sharply from 1940 10 19W (f~ el\). • Research 

suggests that this surge in homeownership re{le(ted 

a combination of faciO<$, including the postwar 

economic boom and an easingolterm; for mortgage 

credit (such 3$ reruced down poymtnt requiremet\IS 

and longer terms 1o maturity) through go>'('{nn>enl· 

backed lending programs run by the Federal Housing 

Adnlnistration and theVeteransAdninistration.slhe 

homeownership rate then ooged up sligl'lly lurtloer, on 

net, boM'eEfll9Wand 2006. Howe>..; sincelheooset 

ol ~>e housing crash and lhe financial crisis in 2007, 

the ~vne!Ship rate has declined as foreclosures 

became elevated for several years and forst-time 

homebuying dropped and remained subdued.' 

these post<Jisis declines in homoownership have 

been similar for white, black. and Hispanic hoosdlolds 

and somewhat smaller for Asian households! Thus, 

the large gaps between the homert.vnership rates d 

white housEholds and those of black and Hisponic 

households ha1>e held steady, while the smaller gap 

between while and Asian households has narrowed 

slightly. Perhaps the most striking f<Giufe d the dal3 is 

the per$i~ence of the bi:Kic-white homert.vnership gap, 

which has measured aboui2S to 30 pera.'nl3ge poin~ 

throughout the po~ II 5 )'Oa"- Potmlial reasons lcx this 

persistence will be discussed shortly. 

The likelihood of owning one's home riSES with age. 

lhu~ lhc aging of the u.s. JlOIXIIation cwtributoo to 

increasing homert.vnership before 2006 and would 

4. The do ~ "edecenrial '"""' dato from 1900 thro.mo 2000 3S .-ell as Amorican COII'fOlOOity Stney (ACS) data rrom 2006, 2009, lOll, •nd lOIS. For indi>id\oal-l"'fl cenws andACScbu.,.. 51<'1.., Ruggles, Kotiec.n.dek Rooold Goeken, Josiah Cro~<r, and Matthew SOOek 120 I S), lroegraod Plill~ l!seMicrcxt.t. s.ries: Version 6.0 lnuehine-reodallle d.~l V\Oinneapoli>linil'efSil)l<iMion<.'!Q\0). TheACS 

h.lsto..n coolucl<d annually by cheU.S. c ...... &or.,~~..,. 

1000. Oa1a onhomeownMhip arenotaV<tilab&eoin~ ~iO 

C('0$11$ dJU, 

5. S..Oanicl K. f<tt<r(2014~ 'Thelwer<i«h-Centuty 

lner~se in US. Home Ow~rship: F~ and Hypodleses: in Eugtne N. Wflite, Kennedt SnowdEn, and Price F'IS~ 

ods., H""'ilglfxl Mor'8.tgeMitkro i:> H,'s<oricil P~• 

(Chieago ll<lil'efSity <:(Chicago Press). 6. S..Noil8ooltl!20I54 'The lnsand O.~ol"~'ll'a< 

D<l>tduring dle Hoosing Boom and s..,· Joomlf <I MOt>«>ry 

fOO<JM>icr, YOI. 76, pp. 284-93. 

7. Ho!Mhofch .ue classified by ~eand ethnk~y 

accoo&'@l> the r><eandethroi<ity of the tooos.hold head, 

df.liood htr• as fiche< !he ""'"l' rt>SpOO<Ient 0< che !pOll!<> 

ol t~ respoodent if older. The Hisp.1nic «hnicit)• and faCe 

catepies.uenot mutually exclusi\'e, So""irdvid~l$ are, 

fOf ~xa"lllf, both Hispanic and \\hite. The Asian category ineluclosP.ocifoc ~landers. Homeo.,•••<l>i> rateSIO< Hlspan!.: andAsi.in OOu~;ue notshGwn bebe 1980 beause, prior to 1980, H~nic status \\dS notash>dabouldiroclfy 

and the Asian population was Cf:Jrlt im!U. 
96 


21417056.eps

have caused lhe home<7.vnership rate lo contlnue rising 

after 2006, all else being equal. fx.1rrining the dat> 

"'lJOrately by age group reveals homeownmhip ~ends 

that diffe< from ove<all averages, with suonger dedines 

in homeown<rship obser\'ed for young and niddleaged households. For exa"l'le, among households 

headed by a person 30 to 39 r•a~ old, homeowr>E<Ship 

raleS fdl more than 10 pe<cent>ge points between 2006 

and 2015 for all major races and E'lhnicities (fogure B).' 

For bod> white and black households in this age range, 

the homeownership rate pe.1ked in 1980, n>Xh earlier 

than theo,-erallnational average; by20t5, it stood 

well below i~ t~'CI in 1960. 01'0<the past century. the 

black-~>Me homeowne<ship gap hu actually widened 

lor households in dtis age range. 

In ligl'l of tbegajns in education, income, and 

ac.:ess 1o credit and housing Ol'ef the long term for 

rrinorities in the United Slates, the perliste<>ee of the 

black-while gap is surprising. A considerable armunt 

of academic research has sought to better understand 

diifermces in homoownership rates across racial 

and ethric g<oups' Many fac o~ ha\'e been found 

to influenc.e the likelihood of homeownership, and 

3. for"""'"""'"" do" oo h"""""neohip taoesb)' age sincet900,seelaurieGcodma~ Rolfl'fndall,.,'<l)unZhu 

(lOIS). HI'Od3hpzmiHcme<~~>nMh/p: IVh.lt Doe< II» f<~t<;r. 

Heidi ~Vaslli~ U.,.n tns>tu>e, Junol. w•w.ulbon.o'»' sitWdE/aullifiles110002S7 .OO.dship->nd.Jlom!ownershipwhot-does-tbel,.ure-holdl><f. 

9. forare~;.woltbefit"'"''"·""'OooakiR Hauri~ Clvi•q>he< E. Hab«t, and Stuan S. R....-.1\al (2007). •HomeowllEflllipGopsa~ l"".tncom .. nd Mino<ity Households; Cir)S<ip('. , .. 1. 9 (l), pp. 5-52. 

B. Homeo\\11mhip rllte$, by rre and e(hnicity~ for 

hoosebolr!s h<id<d by""""" aged 30., 39 

-~-70 -60 

- '-AJlr./\ - 50 

1:1~ ---.1'\. \ 

=~ =: ----J K".a:ot AL'UI.AI:m.~ 20 

- 10 

II I I I I I JgoQ J920 ~ 1960 19$0 21)()) 2lllO 

N<nl: ,_dace~·trtiO)IfCJI!wi.:PlOOO..o;ccp:ltso.lt.ftZOOO. 

lbt d.D ~ (« 2006. 200'). 2012, d 1011 ~ wbou tdltid:y b 

16t:!d&e.!ll Kifpll:lrorl..all:lo:aybtoC~ra.ooe 

S<:w:t-Dcpa.~oCCoaunttN,.Brart-..oC~Ctt~Pa. 

MOI'<CTARY I'OliCV RER:>Rl: fE8RUAR\' l017 15 

some or these may hal'e had offsetting effects on the 

black-white gap. forecample, from 1940 to 1960, 

the rrigration d many blade families from the Sooth to 

nor1he<n un~l cilies(whereowning a home was le<s 

likely 1egardle<s of rau) tended to offset the positive 

rJfeds on the homcowne<ship rate from gains in 

income And education. to 

In more recen1 decades, the relative rise in the fraction of blade households headed by a single parent 

may haveoffsec factors that orherwlsewould ha1'0 

generated incre3ses in bomeownet~hip rates, including 

the iWmluction and enforcement of anti-discrimination 

131>>, such as the Equal Credit Opportmity ACt •nd 

the Fair HousingACI. Research on the black-white 

and Hispar>c-white gaps indiClles Uta! a large po<1ion 

of these gaps in recent)-ears can be attributed to 

socioecononic di~erences-such as age, income, 

and farrily Slructure--across groups." That sajd, some of the 0\'erall gap is nO! explainable on the basis ol 

those variables and could reflecl O!her facta<s such 

as location and housing prEferences; it also could 

reOect continued discrirrination in hous.ing and credit 

nwkets.11 finally, recent research has also documented 

larger differences in ctedil scores t>ooveen whites and 

minorities than can be explained by income disparities; 

dtus,lhe tighter morlgage credit en•ironment lhal 

prevails today relative Loa dozen or more rears ago 

could cause the homeownership gap to widen in the 

nearterm.n 

10. See William 1. Collinsand Roo.rtA.M.Irgo (1001), ·Race and Home0•1lEish4>: A Century-long Vi .. :bplcrJri<xls 11> EconcmicHi<:<!l)', \01.38 Oonwryt pp. 68-91. I f. See StiWIA. Cobr;,.i andStuan S. RostrAAol (2005), 'H..,..,..,.,.,.hip in dte 1900<and t990<:Aggreg.ore Tr<M< and Racial Caps; lc<;ma/ ol Vrb.Jn f<rmmics, \01. S7 0."'3<)'), pp.IOI-l7;and[ricft>sseirre)Ot KienT. l..,nd KiatYing S.ah (2012). 'A H-d~""" O.Corrposition ol lhe ll'hi~t-Biack Homeowneohip Cop; R<giooal Sdettce >nd 

Ul6arl koocmics, \01. 41 Oanua~), pp. S~2. 

12. See KM\in Koli Chari"' and £rikHur• (2002), 'The 

Transition to lion'~!' Owr.ership and !he Blad-White Weallfl Qp; Rev;,.vol Eco.""'ics and Swislks, vol. 34 tMa)l, 

pp.231-97. 1). See N<il8hull3 and Daniel Ringo(20161 'Credrt Av.nl3bilit)·a~ !he DEcline in ~~ lending lO Mnorittes 

af"' tbe Housing 8oom,' FEOS Notes (1\\lshingiOO: B"'rd oiGove<nor>oflhe r.derat ...,..s~ Sepl«li>« 29), h1~ps:Nwww.f~lre$('n'('.g<>'t'+~onresd.1talno~· 

notwl016'cr<'<il availability~nd~inl'in·mortg.~gc· 

let'<ling..,.rriooritiewf"'<tt.-houling.boom-201609l9.hm. fa< adrlilion.tlr...,n:h on h<igllt<fled credit S<ore th<e>hol<fs in recent yws, seeSle\'en l>ul« and Andrew Paciorel: (2016), 'The [ffe<tsof MorrgageCredttAvailability: £vidence from MiniJmmCredit Score Lending Rules,• Finall(e aOO 

Ecooomics Oiscr.o""" Series l016-o98 (Washington: Boord o/Cov"""" of lhe r.deral Re«'f\<e System, O.Cent.rt l'«lps:ilwww.federal ,..,..,...go.I«<nresdata!ledl'l0161 ~Q01609llpoppdf. 
97 


21417057.eps

16 PART 1: R(C£1ff(CONO CAN0 fi ~~OAI. OtvtLOPM£1ffS 

- - 1.6 

_ .. - 1.0 

I! I I I I I I I I I I I I I I 

~ 2006 »)8 ZOIG lOll l(ll.a !016 

Nm: n.;.•mo<~<lr ..... O..-..t.:))l~ 

S<A>a: o.,.-ol~a-..-c.c ...... 

20. New ond "<istiog borne sales 

JJ -

s.s 

l A -

..,_ 

.. -

!.lIt I I I I I I I I 

- 1.8 

- 1.6 

- " - l l 

1.0 

l'ilm: lbtdoa~t-..dihr«<eb~c:n~MI6.1'i~t«ntlllct~"biet 

Co:~ly ql~bily Jdos b:~.i.Da beat aiel crha!es tq md ~ 

IO'NliUxn~d"C~XVMkl. 

SCUCI: for ~:~ew bo:ne t&kJ. Ct:i":f '9-.. "tn; for CW'I::& ~ ale$, 

NtbOC:l!AJ*'iallceotlc&l'DI"S. 

21. Mortgage DI<S and bousiog afford1bilily 

l:lotainc~cdt'J: - 20S 

- ISS 

- 16S 

l - - l•l 

·- - Ill 

- IOl 

3- - ss 

II I I I I I I I I I I I I I 

111/i 2009 lOll 2J)!l :!OlS 2017 

Nom: The""""' df.ut.lcy .... <1o"' IIOOttll)' ~ N~'t:!'l'lber.dt!ll'l'l«f8at !nbct tt:dytbr'-&! tttnz:)·9, 21ll 1. 

Alatt iodo:''tl!lt ofi OO,a~-i:c«ae bly~t:D.~~ 

~~~ll)'Wa~.prktdb(,mt~~ ltlw!:oa tl~ 

-~.q,«<!by&d<W: 

&ua: «~qaftot&b C,· t:Ctx,Nui.9AIIO.'irioc!. ofRttl~ 

o: ~.-F' I'!-imuy o:-~ ~k'"'ol!f. 

J-lomebuying and residential construction 

have been supponed by low interest rates 

and ongoing easing of credit standards 

for mortgages. Banks indicated in the 

October 2016 Senior Loan Officer Opinion 

Survey on Bank Lending Practices (SLOOS} 

that they eased standards on se,·eral categories 

of residential home purchase loans.' Even so, 

mortgage credit is still relatively difficult io 

access for borrowers with low credit scores, 

harder-to-document income, or high debtto-income ratios. Although mortgage rates 

moved up from their all-time low levels O\tr 

the socond half of last yta~ they remain quite 

low by historical standards, and. consequently, 

housing affordability remains favorable 

(figure 21\. 

Business investment may be turning up 

after a period of surprising weakness 

Real outlays for business investment- that is, 

private nonresidential fixed investment- were 

generally weak in 2016 but posted larger gains 

toward the end of the year (figure 22). Last 

year's ~~~almess occurred despite moderate 

increases in aggregate demand and generally 

favorable financing conditions, and it was 

11idespread across categories of equipment 

investment. Investment in equipment and 

intangibles n10, d down Ol'er most of the year. 

likely reftocting the effects of the combination 

of low oil prices, weak export demand. and 

a muted longer-run demand outlook among 

businesses. Although such declines are unusual 

outside of a recession, spending on these items 

did tum up in the fourth quarter. Investment 

in drilling and mining stmctures. which had 

been falling sharply since the drop in oil prices 

in 2014, fe ll further through most of2016 but 

seems to be bottoming out. Outside of the 

energy sector, investment in nonresidential 

strucmres increased moderately in 2016. 

Finally, afier having been snbdued for much of 

2016. a widespread set of business sentiment 

indicators improved notably near the end of 

last year. 

I. The SLOOS is 01'3ilal:le oo Jbe Board's websiJe a1 

hllps11w•w.federal=rve.g0\'lboanldocslsnloonsurvey. 
98 


21417058.eps

Financing conditions for nonfinancial 

firms have generally remained favorable 

Nonfinaocial businesses have continued to 

raise funds through bond issuance and bank 

loans, albeit at a somewhat slower pace than 

in the first half of 2016 (figure 23). The pace 

of such borrowing was supported in part 

by continued low interest rates: Corporate 

bond yields for speculative-grade borrowers 

ha\~ declined since last June. and those for 

in,~stmen t-grade borrowers have increased 

but a fair bit less than those on comparablematurity Treasury securities (figure 24). 

Banks indicated in the October2016 and 

January2017 SLOOS that tl1eyeased lending 

terms on commercial and industrial loans in 

the second half of the year, but that standards 

on such loans remained unchanged relative 

to earlier in 2016; bankscontinue.d to tighten 

standards on commercial real estate loans over 

the second half of last year. 

Net exports held down second-half real 

GDPgrowlh 

The rise in the dollar since mid-2014 and 

subdued foreign economic gro111h have 

continued to weigh on U.S. exports (figure 25). 

Nevertheless, exports increased at a moderate 

pace in the second half of 2016. but 11ith much 

of the iocrease a result of rising agricultural 

exports. In particular. soybean exports surged 

in the third quarter before falling back toward 

a more normal level in the fourth quarter. 

Consistent with the stronger exchange value 

of the dollar. imports jumped in the second 

half of the year after having been about Hat 

in the first half, when investment demand lOr 

imported equipment was very weak. Overall, 

real net exports 11~re a moderate drag on 

real GDP growth in the second half of2016. 

Although the trade balance and current 

aceount deficit narrowed slightly in the second 

and third quarters of 2016, the trade balance 

widened in the fourth quarter. as imports 

significantly outpaced exports (figure 26). 

MOI'<CTARY I'OllCV RER:>Rl: fE8RUARY l017 17 

·-

fl\;ipotcm.r.;d~lblttEpi:d -ll 

-10 

I I I 

2010 b'lll lOIZ lOI~ 201-' lOU 2016 

23. S<l<ct«l<MipOO<ol$ of net d<bo fioa11ting for 

ooafmmcialbu.\-inesses 

I I I I I I I I I I I I !fl I 

21X62l'm:OOS200920102011 2912:0111014 :ZOIS2016 

S'4CI: Fo!ml R~e 8o1r6. Stl::istle&l Rd~ Z.l. "fiw:.J;i&l 

A~or~ucttc!SUL"' 

24. Col)lOI'tc bood yields, by S«Uriti« rating 

I !! I I I I I t I I I I I II I II II I I 

1999 2002 11))5 lOOS 2011 l014 .b>l7 

Nm: Tbc )lel!ubov.il If( )1tl!s I'CIIf.)-cc-\Kiodl;, 

S'.o.a: So(A~ ciiLyn.i!GkhalR~'&'dwil!l~ia:. 
99 


21417059.eps

18 PART 1: R(C£1ff(CONO CAN0 fi ~~OAI. OtvtLOPM£1ffS 

25. Change in «•I impmsand expoi1S of goods 

aOOsc[\·i;es 

.,..,.,. 

~ 

Hl 

- ll QJ <)'_ ' 

- l 

2011 2012 2013 l014 lOIS 2016 

26. U.S inde :mdcurrmt:ICCOUDi b>l:mcts 

- - I 

- l 

-l 

- s 

- 6 

- 7 

I I I I I I I I I I I I I I I I I I I J 

I))) l002 ~ ).106 lOGS ~10 lOU 1014 l016 

~ l'btbt& for ee t"'...:mt tCQI1and 16:Q3. GOP. 

crcudo:otS!ic~ 

$Q.;t.a: ~o(C~ 9wm~o E.."':QQIaa cN.d)11$ 

27. Clungt in Ral gowrnnxot ~prndituf($ on 

eoosumption tod im·esi:IOOU 

. ,cd<:>l _, ~~&:ll! ~..,) 

=11 I d "'m_: I. 0 I p ll I I I - - l 

-· -I 

Federal fiscal policy was a roughly neutral 

inAuence on GOP growth in 2016 .. . 

After being a drag on aggregate demand 

during much of the expansion, discretionary 

changes in federal fiscal policy have had a 

more neutral influence over the past two 

ye;~rs. During 2016, policy actions bad little 

effect on taxes and transfers, and federal 

purchases of goods and services are little 

changed over this period (figure 27). The 

federal budget deficit increased in fiscal year 

2016 to 31 percent of GDP from 2.4 percent 

in fiscal2015. Revenues rose only I percent 

last year in nominal terms and fe ll as a share 

of GOP because of soft personal income tax 

revenues and a decline in corporate income 

tax collections. Outlays rose 5 percent, edging 

up as a share of GDP, owing to increases in 

m.1ndatory spending and interest payments as 

well as a shift in the timing of some payments 

that ordinarily would have been made in fiscal 

2017 (figure 28). Tite Congressional Budget 

OJlke forecasts the deficit to be about the 

same size (as a share of GOP) in fiscal201 7 

and in the next couple of years before rising 

thereafter. Consequently. the ratio of debt held 

by the public to nominal GOP is projected to 

remain near its current level of 77 pen:enl of 

GDP for the om couple of years and then 

b.ogin to rise (fig.ure 29). 

... and real purchases at the state and 

local level continue to increase, albeit at 

a tepid pace 

The fiscal conditions of most state and loc.aJ 

governments have continued to improve, 

though tbe pace of impro•~ment bas been 

slower in recent quarters than it had been 

pre1~0us . The ongoing imprO\'ement 

facilitated a step-up in the average pace of 

employment gain in the sector to the strongest 

rate since 2008. At the same time, however, 

real investment in structures by state and local 

governments bas declined. on net. since the 

first quarter of 2016 after trending up during 

the prior two years (figure 30). All told. total 

real state and local purchases rose anemically 

in 2016. On the other side of the ledger, 
100 


21417060.eps

revenue gr0111h was subdued overall, 11~th liHie 

groll1h in tax collections at the state level but 

moderate gains at the local level. 

Financial Developments 

The expected path for the federal funds 

rate over the next several years steepened 

Against the b.1ckdrQl> of continued 

strengthening in the labor market and an 

increase in inOation over the course of 2016, 

the path of the federal funds rate implied by 

market quotes on interest rate derivatires has 

moved up, on net, since the middle of last year. 

Following the U.S. elections in November, 

the expected policy path iutbe United States 

steepened significantly, apparently reflecting 

inl'llstors' expectations of a more expansionary 

fiscal policy. Mean111lile, market-based 

measures of uncertainty about the policy rate 

appro;<imately one to two years ahead also 

increased, on balance, suggestiug that some of 

the firming in market rates may reftect a rise in 

term premiums. 

Survey-based measures of the expected path 

of policy also moved up in recent months. 

In the Survey of Primary Dealers that was 

conducted by the Federal Resem Bank of 

New York just prior to tlte January 2017 

FOMC meeting. the median dealer expected 

two rate hikes in 2017 and three rate hikes in 

2018 as the most likely outcome.' 

U.S. nominaiTreasury yields increased 

considerably 

Arter dropping significantly during the first 

half of 2016 and reaching near-historical lows 

in the aftermath of the U.K. referendum on 

exit from the European Union, or Brexit, 

in June, yields on medium· and longer-term 

nominal Treasury securities rebounded 

strongly in the second half of last year. 

with a substantial rise following the U.S. 

2. The Ftdernl ese ·e Bani: of New rk u~-.yof 

Primary D<a!ers is "'~ able at bttps;/l..,.w.neW}orlcfed. 

org/mart tslprimarydeal -.y_ u<Stioo<h onL 

MOI'<CTARY I'OltCV RER:>Rl: fE8RUARY l017 19 

I 11 !1 1 11 !1 11111111111111 

1996 20)) 10): )))& ))12 )1)16 

Nr.s: nt rt..'tV.sa!l!. apdilllftSdn. rtto uni ~·~basit t:1! 

m (~ iia l )"C'IN;(O...~tb:wcb ~ "*~): ~ 

(ODP)&t&L."C"fc:tlbtf.r.:qoo..artme:dq cQl 

~ ftl:tof~ ~etttd:Budgel 

29. Fedml gov"""" '" d<bt b<ld by the public 

- -80 

->l 

- !0 

- l<l 

_.., - 30 

- l!J 

I I I I I I ! I I I 

1967 1911 19$1 1991 l001 1017 

- fu d&> ~ ~ l!J ~W lbt(o• r« -- ((Odl.l.--t(GDP) &.~It a: m:lW n:t. f._, aft. bd! b)• fbc publk opll 

kdmldtbtltu l!WW')'Sie.~ bdd irl frdml t:llployer: dtlbed br:lrfl 

ttdmncnl.IIXOUW.n..Wa~¢:tdoi !m ql*rttr. 

SooJ:G! For GD~. ~(If C«n~ 8utdl1 oi &coo:na:. 

A:al)~ for fto.nl &ln. Ftd«aa l tterYt BoW. Sla!W:-.al Rtlme ZJ, TC.·ialArt«lllts lbrli:J:I!d$~ M 
101 


21417061.eps

20 PART 1: R(C£1ff(CONO\UCAN0fi~~OAI. OtvtLOPM£1ffS 

30. State and local <Ulploymcnt and struclli'<S in•-

I I ! I ! I I I I I I I I 

lOt» ))II 201) S lOll 

No:I:lht~ymt!!!&llart~,d!lltlll"'l"ru!t$6:t.an 

qoa::crly. 

~ f'o: ~ymtut cia~ IXprtmd tl !Mot, Bu.-e&.:; ot Llbor 

S'.!!dlics:l«~'tl!!ttbll..~tof'Co!lcee:tt, B~cltco!omit 

A:al)sis. 

31. Yields oo oomim:l Treasury sec:witic:s 

, .... 

_, 

- 6 

-s 

-l 

- l 

- I 

-0 

It I I I I I I I I I I It I I I I I I I 

2001 200.3 200S !0011009 2011 21113 201$2017 

No!'t: tbtT~tmrd,-~ '~ lj).)W~!Mnri!y 

k'mlocfebc';&:y $,Z001,CII!~Ibll.tt:~tsocf'dlna!y9,~. 

Sa.w:~<llh<T-.y. 

elections (figure 31 ). Markel participants have 

attributed the increase in yields following !be 

eleclions primarily 10 expeclalions of a more 

expansionary fiscal policy. The boost in longerterm nominal yields in recent months reHects 

roughly equal increases in real yields and 

intla1ion compensalion. Consistenl 11i1h !he 

changes in Treasury yields. yields on 30-year 

agency mongage-backed securities (MBS}-an 

imponanl determinanl of mongage inleresl 

rales- increased significaolly over I he second 

half of Jbe year (figure 32). Howeve~ Treasury 

and MBS yields remain quite low by hislorical 

slandards. 

Broad equity price indexes increased 

notably ... 

U.S. equity markets 11~re volalile around 

lhe llrexil vole in I he United Kingdom 

bu1 operaled without disruptions. Broad 

equity price indexes have increased notably 

si ne~ late June, with a sizable portion of the 

gain occ.urringafter the U.S. elections in 

November (figure 33). Reportedly, equity 

prices have been supported in part by tbe 

perception !hat corporate tax rates may be 

reduced. Stock prices of banks. which tend to 

benefit from a steepening in the yield curve. 

outperformed tbe broader market. Moreover, 

market participants pointed to expectations 

of changes in the regulatory environment as 

a factor con1ributing to the ontperformance 

of bank stocks. By contrast, stock prices of 

firms tbattend to benefit from lower interest 

rates, such as ulilities, doc.lined moderately 

on net The implied volatility of the S&P 500 

index- the VJX- fell, ending the period close 

to the bottom of its historical range. (For a 

discussion of financial stability issues om this same period, sre !he box '·Developments 

Related to Financial Stability.") 

... while risk spreads on corporate bonds 

narrowed 

Bond spreads in tbe nonfinancial corporate 

S<."Ctor declined significantly across the credit 

spectrum, suggesling increased investor 

confidence in the outlook for the corporate 
102 


21417062.eps

sector since the middle of last year. Declines 

in spreads were particularly large for firms 

in the energy sector, likely reflecting improved 

prospects for U.S. producers as they continue 

to increase efficiency and benefit from 

higher prices. 

Treasury market functioning and liquidity 

conditions in the mortgage-backed securities market were generally stable 

Indicators of Treasury market functioning 

remained broadly stable over the second half 

of2016 and early2017. A variety of liquidity 

metrics-including bid-asked spreads and 

bid sizes- have displayed minimal signs of 

liquidity pressures overall, with a modest 

reduction in liquidity following tbe U.S. 

elections. ln addition. Tre<~s ry auctions 

generally continued to be well received by 

investor.;. Liquidity conditions in the agency 

MBS market were also generally stable. 

The compliance deadline for money 

market mutual fund reform passed in 

mid-October wilh no market disruption 

In the weeks leading up to the 

October 14.2016. deadline for money 

market mutual funds (also referred to as 

money market funds, or MMFs) to comply 

11ith a variety of regulatory reforms, shifts in 

01~s ments from prime to government MMFs 

were substantial. However, the transition was 

smooth and without any market disruptions. 

Overnight Eurodollar deposit volumes 

fell significantly and have remained low as 

prime fnnds pulled back from lending in this 

market Meanwhile. the rise in total assets 

of govemment funds appeared to contribute 

to modestly higher levels of tal-e-up at the 

overnight reverse repurchase agreement (ON 

RRP) facility through late2016. <fttmight 

money market rates were little affected, 

although the spread between the three-month 

LI.BOR (London interbank offered rate) 

and the OIS (overnight index swap) rate has 

remained elevated. likely reOecting MMFs' 

reduced appetite for term lending. 

MOI'<CTARY I'OliCV RER:>Rl: fE8RUARY l017 21 

32 Yield and '!"<>d oo agency mongagc·bailid 

securities 

,_ -.00 

- llO 

- lOO 

-llO 

- lO 

- 0 

I I I I If I II I II II I If II II I 

1999 lOOi lOOllOOSUI07l009))11201l201S201J 

NWI: The b!a &rt t&ily, Yt:ld .;.':I ~ (w ~ Fc::.~e ).flo: JO•}"<*f 

cerd~~~;J.ttii.W'bidi~~ ~.UC...'"lld 

.,v-Jaw~,;par.o:flct.vWr.SJmd~is&o~~oltioc 

$• tDd 10.)lU ::omi;d T:u$Wl' )'lela. 

SMct: ~o lhtlm~wy.Btrelays. 

-16» 

I!J !! III II I!!! ' "' " """ I 1996 1999 lt»llOOS )))8 2011 lOll :011 

S«a.cr:~k oot'•O\'IW.io;esiz&cs, 8~(ForD<r ... · 

Jocts~ ~i:fo:mlblla.werlAto:t«:.lbtCoc::mupaat.) 
103 


21417063.eps

22 PART 1: R!C~~TICONOM CANOf NiiNCIAL OMLOPM£~'1> 

Developments Related to Financial Stability 

Financial vulnerabilities in lhe U.S. frnan(lal 

syslem 01'""11 have continued to be moderate ~nee 

rrid-2016. U.S. banks are well capitalized and hm 

sizable liquidily buffers. Nonfinan(lal OO<porate 

busine<s leverage has remained Ele,~ted by historical 

standards, and household borrowing has increased 

rrodesdy, Jea,;ng lhe household deb!-to-inOO<ne ratio 

about url(hangoo. On balance, the ratio of aggregate 

noofanancial credit to 81'065 domestic product (GOP) 

has 100\00 up alitUe in recent year> to about ils la'<'l in 

the mid-2000s but remains \Yell bEIC1oV its recent peak. 

Valuation pressures in scme asset classes have been 

rising, particularly late last year. 

Vulnerabilities stemming from le.mge in lhe 

financial sector appear low: Regulatorycapilal has 

rerminoo at historically high la'Ois for rmst large 

domeslk banks, and all33 iinns participating in the 

federal Reserves superviSO<y stress tests I<>' 2016 

\\"ere able to maintain capital ratios abo\'e required 

ninimums through the severely ad\me rec~on 

se«~ario.' Moreo\'tt, rm~et b.lscd measures of 

leverage for domestic banks ha~-edecreased somewhat 

since NO\'Cmber. Howe\'«, \'aluatioos of rmny of the 

large<~ foreign banks remain depressed. Oespile the 

settlement on December 23 be~'- Deutsche Sank 

and lhe U.S. Department of Justice and some progrESS 

toward addr~ng problerro in the lllllian banking 

sedor, 'Se\rera:l large European financial institutions 

have continuEd to be vtJin.,.ble to unexpected 

developmenls. Available data .uggestthatlhe levtrage 

of nonbank iinanciaJ institutions was relatively s1able in 

lhe><Cond half d 2016. 

On balance, vulnerabilities associated ~ith liquidity 

and mah1rity llansfoonation are also somt.Y..tlat below 

~r longer-run a'-erage. The rEliance t:l.large bartk 

holding companies on short-term funding rerruins 

subdued, and their holdings ol high-quality liqtld 

assets are robust, owing in part to I he imp1f'OY!ntalion 

of lhe liquidity Coverage Ratio. Money market mutual 

fund {also referred to as money market fund, 01 MMF) 

rel01ms d~gned to reduce lhe advantages associated 

with being the first to exit a fund in times of financial 

stresoloo to large declines in pnmeM\IF assets under 

rrunageme ~ with rrtJSt oflhese funds n1grating lo 

governmenl M\IFs. While the ...._.ting smaller size ol 

prime funds and the new regulations should make !he 

induslly mo<e stable, the longer-term effect ,.;11 depend 

on lhe degree to which such activity migrales to other 

t)1l<'S of short·lerm in,~nl \-.hides that may be 

subject to sirrilar fragilities. 

I. TheiO t6 "4'6'i sory s•e«est merflodologpnd resli;s are .waibble on the Board's website at hups'iM'WW. 

lederalroo\._80"banlinforr.fsrress.....not6.,.,._;!<lf)'- stress·~l-lesults.Mm. 

Asset valuation prCSS<rres have incre:Jsed, on 

balance, since rrid-10t6, along with se\etal indicators 

ol investors' risk appetite. Although )ields on Treasury 

securities and term prffl'iums increased as m.uket 

expectations abool future growth shifted higher in lhe 

fall, they both rermin low. In addition. !he spread d 

)ields on corporate bonds oset those on comparablematurity Treasury securities narrf1oved. Es6m3tes 

ol risk ptemiums in equity markets also declinEd. 

Outstanding riskier corporate dEI>t edgEd dOII'O over 

the P'l~ year. but gross issuance of leveraged loans 

was strong and the share of bond issuance rated B or 

below remained in the fourth qua net atthe high end 

of its range over the past few years. Commercial real 

estate (CR£) valuations, which ha\'e been an area of 

growing concem 0\'ef the past year, rose further, with 

p<operty prices continuing to climb and capitali li n 

rates decreasing to hi~orically IC1oV les<els. While CRE 

deb! renlains modc<trelativetolheos.,..ll si~eolthe 

economy and lhe tighlening in bank lending stmdards 

f01 CR£ loans in the second half of last )~" may rcilect 

sotre reduction in the appetite lor CRE lending. the 

~ght<.11ing of \Oiuatioo pressores may leave some 

snlaller banks vulnerable to a sizable CR£ price 

decline. Also, r~dentia l home prices continued to rise 

briskly through Nm"'""". Although most measures of 

residential \Oiuation have 100\00 up SOtlle\>ha' they 

are still ooly modestly above the le,.ts thatii'OUid be 

rxedided, gi\'OO rents and in\'es1menl costs. The resulls 

d the federal Rt-se<Ve's 2017 stress tests. fO< slhich the 

scenarios were released on February 3, will help gauge 

thevulnerabilityofla~U S. banks to all ollheseassci 

\•aluationpressl.l'es. 

Vul~bilities ~emming from pri\Ote nonfinancialsector borrowing remain moderate. The credil-to-GDP 

ratio f<>' the oorporale ><Ctor is elevated after ses-eral 

)'<'<l<S d rapid growth. Despite tl-ls higllle.-erage, 

int!.1est·Cxpet'&'! ratios are l<»v by historical standards 

even among hithE<-rislc finns, as are measures of 

expected default based on ao:oonting and s~ock return 

data, especially outside of !heal sect01. Tuming to 

households, debt growth was modest through the 

third quart!.1 of 2016, and the debl·to-inrome ratio 

has changEd little Ol'ef the pa~ few years. Excep1 for 

a recenl increase in early payment delinquencies 

in subprime auto loans-a small segment of O\<rall 

indEI>t~btoad indicalo<s of household soh"ncy 

ha\<erermined \Yithin historical norms. On balance, 

the private nonfinancial-sector credi o-GDP ratio is far 

below the levels""" late last decade and lies nearils 

levEl in the mid·2000s (rrgureA). 

Last fall, the Federal Resers'l! Soard finalizEd its 

framewotic f01 setting theCounterC)'dical Capital8uifer 
104 


21417064.eps

... 

<O 

<0 

~; lbtWoa~~·»-GDf'~~;!J)Jedtl)~~tf')sS:O~ 

ceq-.'".td)·W~~~I6'Q} T'..cJWe4W:t.blit.:eptliods 

ol tmmro m."t'SSIOD u &rl:ll!il! b)• I# K~JJ 91::-Wl or Etoooaa: 

""'•'"' ~ Ftdtnl ldtt\t &.d. Sto..~'ll ltttt. Z.J, .,.'0:1.'»1 

Nt:oc:~J. or lbt Umlt'd $tJttt'"'; bw ollitoo<O: Aaal;u,. mbO:al 

"""'..Opcodo;t""""'il>1PA~IIoonlsWI<ol....,._ 

(CCyB) and later '"'ted to rminlain lhe CCyB at ze<o.' 

In foming its view about the appropriate size oi the 

U.S. CCy8, the Soard intcn<k to monitor a wide range 

of financial and eo:>nomic ndicato~ and oonsider 

their in-plications lor financial S)'Siem wlnerabilities, 

including but not limited to a$$EI valuation pressures, 

risk appetitC1 leverage in the financial and nonfinaocial 

sectors, and rmturity and liquidity lr.lnslo<n\ltion in the 

financial secle<. The decision to mainlain the CCyB at 

zero in part rellected an assessment that vulnerabilities 

associatecl with financial-sector le\'efage were al the 

lower end of lhar historical ranges. 

As part oi its eifort 10 impro'" the resilience ol 

frnancial instilutions and O\<erall financial stability, the 

Soard has also tlkm several fut1her regulatO<)' ~epo. 

Among those ~epsis thai the B<>ard finalized a rule that 

would impose totll loss-absorbing capacity and long. 

tE<m debt requirements on U.S. globll systen"ically 

importlnl bank holding companies (G.SIBs) and on 

the U.S. opE<aUOflS ol cerlain fe<eign G-SIBS' The final 

rule \vould require eadl covered firm lo maintain a 

2. S..Soirdof w«no• ol tho r.der>l ReserveS)""" 

(2016), "federal Resem Boord AllnooOC<'S It Has Voted 

ooAifrmCoomerC)dicat Clpital8uff« {0::)8) a1 Current ltl\<l ol 0 Pe<ce"-' pr"' ~ ..... Octobt< 24, hup,;.-.ww. 

f..,.,a r'''"·~-~"'"""'~!prcswcf(>g/20 6102 ... hun. 

l. S..8oirdofw«no•olthtf«<eral R""'~S)'•em 

(1016). 1ederal R""'e 80>rdAdq>U fino I Rut. to SUt"flglhm lhtAbilil)• of C<wc101ll(fltAuthoritic-s to Resoh<ein 

Orderly Way largest ~<and f«<ign Banks Op"'ting 

in the United S..teS,' P'"' "''"'· Dec"""' 15, ht~:/1 wv.w.fedtr.lllc-serve.gov·'nc<WS('Vfflts.l'prts6-bcrcf} 

:Nl161215a.hun. 

MOI'<CTARY I'OliCV RER:>Rl: fE8RUAR\' l017 23 

minimum amount of unsecured long·tl'Jm debt thai 

could be COO\'erted into equity in a possible resoltrtion 

ol that firm. thereby recapit.llizing lhe frm without 

putting 13Xpa)'er funds 31 risk and din"inishing ~>e threat 

that ~ failure would pose to financial Slabilit)'. 

In addition, the Soard complaed an extensive 

r~iew d its statutory stress-test and <Anlx'ehensive 

Caplal Analysis and Re-iew (CCAR) programs 

and rrode some related modirocalions to !he rules 

associated with those programs fe< the 2017 cyde.' 

Among other changes, lhe Soard remG\'ed certlin large, 

onc~ ex fil'fffi from the qualitath-e asse-ssment oi 

lhe CCAR.' Mor.,.,.·er, the Board, logether with lhe 

other federal banlring agencies. issued an advance 

notice of proposed rulernal<ing, inviong putlic 

Ctlf!'lrenl "" a ~ ol potential enhanced C)bcrsocurity 

islc·rro~land resilience mndards thai would 

apply to depo<itO<)' inslitutioos and regulated holding 

con'!)3nies with O\'E< SSO billion in asseiS and to 

CEttain financial market infrastructuce COf'll).)Aies.' 

lhe standards would be tiered, "ith an addmonaJ 

set of highE< standards for systems that p<ovide key 

functionality to lhe financial secte<. 

The B<>ard and the federal Deposit Insurance 

Corporation (FOIQ also h"c continued to adhdy 

engage in the re501uUOfl·planning process with lhe 

largest banks. As part ofthat process, the Board and 

the FDIC announced thatBanlr ol America, BNY 

MeiiOfl, JPMorgan Chase, and Slate Stre<l adequately 

remediated defiCiencies in their 2015 resolution plans. 

lhe two agencies also announced thai Weils Fargo did 

not adequate!)' remedy all ol its deliciencies and will 

be subject to rMrictions on c«tain acti\·ities until the 

def.ciencies are remedied.' 

4. S..Ooni~K. TarulloU016), ~ ... s.epsinthtE..tooon oiStr"' Testing• !p<!<Ch de!ii'Ofed>t tht\'at.UniW<>ity School ol Man~t leaders Fo....., NewHa\'('1\ Com., 

Scjl4fll'b« 26, htipit,..wwJ«k<alres"'•P""'""'"'"' speedl.'laNIIo:Nl160926a.oon. 

s. s.. S..rd olw.....,ollhe r.deral ReserveSymm 

{lOIn, ·rc-deral Restn• Boord Announces htuliz<d 

Stress Tesli11g Rules R@IT(Iving f\.~ ~ firms from 

Qualr~ti-. A>pect o/CCAA Effooi" f0<1017: pr.,. ~-. 

January JO, https:l"""'.federalr""'"·&O'Inewse\Ofl~tpreS61 

bcr'lj'101701llla.htm. 6. S..lloordoiC-ofthtr.tleoaiReserveSysoetl\ 

Olf"" olth<COI11'uolle< oltlleCurrecq andr.deral ~)<posit lnsttanC< C«p<>ration (2016), 'Agencies Is.<"' 

Advanced Notic>ol Proposed Rulenuking O<l Enh>n<ed C)bet Risk M>rogetneol Stul<brds; jointpr"' rele.,.., 0C100H 19, ~h-ww. edoo!J <')('I\'(J.g<W/n("'o'S('\'flliSlp essl 

bcref10161019a.i'«m. 

7. S.. Boord ol c-..., ol lhe f«<eral Reserve Syoem 

and Ft>dr!<alllqlositlr•tn""'Corpootion(2016i 'Agencies 

Annou~OE!IefmiootioosonOctoOO' Resohltion Pla:n 

Submi"i""' ol row S)'llenlcally I"''''ont Domestic 8anki ~ 

lf'6tiMions, • joor< press"'""'· Dec..OO I J, htiJS:/1\\ww. 

federalr""'"-80"'""'""""5'pres;1>r:reg/201612lla.htm 
105 


21417065.eps

24 PART 1: (C£1ff(CONO CAN0 fi ~~OAI. OtvtLOPM£1ffS 

H, Ratio of t01al oommacial bonk =lit to nominal gross 

oomestic p-oduCI 

..... 

- IS 

-

-~-'I) -6S 

- - 60 

- ss 

l!tte!ttt!tto!tttl!!tltto!,u l udut!ttlfwlw!l 

~ 200& !010 lOll ~ 1416 

St.uct foiml le:scM Boa.-d. Sllo~i.:1.1 RelAx fU, "Me') a::4 

Lilbli'Jes ol C~l Bd.$ c fM \ini:t4 :Rr~ D~ of 

Com:·u~ 8·.t."((;.. o(£."'000."18: /.:&b...._ 

35. Prormbili1yofoonk holding ccuupanics 

Ju -

IJ -

Lo-

- 30 

- lO 

- tO 

- 10 

-lO 

-30 

l!lll!!flltlll!lllll!lll 

'"' zoo1 ~ 2.001 Mto um l016 

lbe6a:a. lli ~ttlei:ICICII.Ita!p;:ti!.L.~ Ifl&t'.trlr~~ 

~"0"-ib lOI&QJ. 

S<Qct Fok!ai ~BoR. ona FR Y·9C.C«:$$ ~f~lll 

$)lemataiorW cll.iq . 

Bank credit continued to expand, and 

bank profitability improved 

Aggregate credit provided by collUllCrtial 

banks continued to grow at a solid pace in the 

second balf of2016 (figure 34). The expansion 

in bank credit was driven by strong growth in 

core loans coupled with an increase in banks' 

holdings of securities. Measures of bank 

profitability improved since the n~ddle of 

last year but remained below their historical 

a~erages (figure 35). 

Municipal bond markets continued to 

function smoothly 

Credit conditions in municipal bond markets 

have genemlly renmined stable since late June. 

01~r that period. the MCDX- an index 

of credit default swap spreads for a broad 

portfolio of municipal bonds-d.ecreased 

moderately, white yield spreads on 20-year 

general obligation municipal bonds over 

comparable-maturity Treasury securities 

were little changed on balance. llte Puerto 

Rico Oversight. Management, and Economic 

Stability Act was passed into law in late June, 

providing the commonwealth with a cl~arer 

path toward debt restructuring. Although 

Puerto Rico missed a small amount of debt 

payments on general obligation bonds in 

August, this default appeared to have bad no 

significant eft'ect on the broader municipal 

bond market. 

International Developments 

Foreign financial market conditions 

improved despite global political 

uncertainties 

Financial market conditions in both the 

advanced foreign economies (APEs) and 

the emerging market economies (EMEs) 

have generally improved since June. Ln 

the AFEs, increasing distance from the 

Brexit vote, beuer-than-expectedeconomic 

data for Europe, and the continuation 

of aecornmodative monetary policies by 

advanced-economy central banks have 
106 


21417066.eps

contributed to improved risk sentiment. 

Ad\'llnccd-economy bond yields rewrsed their 

downward trend seen in the fitst balf of the 

year and increased notably following the U.S. 

elections, in part on expectations of a more 

expansionary U.S. fiscal policy (figure 36). 

Equity prices in the AFEs have generally risen 

since June, with financial stocks outperforming 

broader stock indexes as third-quarter 

earnings largely beat expectations, several 

major risk events passed, and the steepening 

of yield curves was expected to boost profits 

going fOiward (figure 37). Despite some 

widening of curo-arca corporate spreads in 

the last months of 2016, corporate credit 

conditions in the advanced foreign economies 

have remained accommodative, with the 

continuation of corporate asset purchase 

program; by several AFE central banks and 

with low corporate spreads. 

In EMEs. equities have risen significantly and 

sovereign yield spreads have na ro\\~d since 

June, supported in pan by higher commodity 

prices Financial conditions did tighten briefly 

following the U.S. elections, with increased 

capital outflow~ and wider sovereign spreads. 

on concerns that higher global interest rates. 

as well as the possibility of more protectionist 

trade policies, would weigh on EME growth 

(figure 38). Howevtr. the favorable risk 

sentiment seen in the summer and early fall 

of2016 resumed by the end of the year for 

most EMEs. 

After depreciating slightly in the first half 

of last year, the dollar strengthened in 

the second half 

llle dollar has strengthened since June, with 

the broad dollar index- a measure of tbe 

trade-weighted value of the dollar against 

foreign currencies- rising about 4 percent on 

balance (figure 39) . .Much of this strengthening 

of the U.S. dollar reftects the combined 

influences of the large depreciation of the 

Mexican peso, expectations of fisc.al and trade 

policy changes after the U.S. elections, and 

MOI'<CTARY I'OliCV RER:>Rl: fE8RUARY l017 25 

36. tO-yw nominal bcncblll>lk yields insel«!cd 

advaoccdecooomi<S 

-l.O 

-l.l 

-10 

- Ll 

- I,D 

- j 

- j 

I I! I I I! I I I ! I I I I I 

lOIJ NU l016 l917 

N!r.t:TbtW.-cv.'tetly•Tt:aCO ofdai}fQI&Iod~~ 

f<Wt,;my9,llHT. 

So.oa< .... ~ 

l7. Equity iodc:<<S for S<lectcd forrign ccQllOillieS 

M~~ip<'i.'Ofi.O::I~r:t 

I £. "'"*_,._- •l.S 

' 1 - us 

' -ll)l 

- !)l 

-" lS 

- " - JJ 

I I I' I I I I I I I I ' I I I I 

201' 201S 1016 2017 

Nm: lbt&a art 11'td:IY"~ ofdr.i~dall &:JC!n:..sd through fftlr.al:)·9,lOIJ. 

S«.ila: F« ~'l»d. lbttip ~. !ISCI £-\FE le&:x ~ 

~ ~.:m Dlwntlnt; for er.ging !Vlo f\'000!'11~ MSCt 

£:w:ai:a: ~!a:h'.J to&x vit ~..otldCO ltt".:.tes Dt"ti!!'!l!.-.; for a,u-o.~ 

tel\ Dow Jo:ti £u:oSTOXX 8ck r::«t"' BJooallq.(For~ .Jcas 

lndi.ub.-uall& e.foo..:i011. 1t.:lbe:nooe ooi#CCJC.tO~~) 

38, Emaging ID>Ikrt mutuol fund Do•> and sprca<l; 

I S..di'.Jldn..,(nglux¥) 

l<lO- I Eq<o~ftm.! •>t(ri;)!W.) 

201' :MIS 

-JO 

-I! 

- I! 

-JO 

10!6 Mli 

Nm: 1bt El!Bt+ U~a m wrtkly ·~ of Qily de• w1 tnod 

~Fdrl.wy9,10 7.TceEPI-'Rd&lla:e~·f3S({"'«kJYcid. 

Tbef:=i tklwtb!lc:d!U. ftmds ~b Cbi::a. 

SGtJ.ct: F«t«dt:!d~f.mdilows.,EPfRG ct.l; forEMBI+.lJ. M~£."ffeti:aM~~~P :$\'it8~ 
107 


21417067.eps

26 PART 1: R(C£1ff(CONO CAN0 fi ~~OAI. OtvtLOPM£1ffS 

39. U.S. dollar mb3nge rateiodu"' 

- 110 

- 160 

- I SO 

- 1'0 

- 130 

- 120 

I t 

~0. Real gross domcoti< product gJo\'1h in ~tl<t!od 

adv:IOOOd fot<ign <OOCIOOli<s 

--.. -s 

Ql 

_._..._._...__..._Uf: 

- I 

liO!l liOI' lOll 11016 

~ llltc!a:a*ll:tUnr~Kitpmi::..~dlttlubef".C.!e fot 20l6:Q{ ne en tOt llw-trz:o ~ ~"'!'p(n:l ~ ;ttlilni::3ty ~ 

tstimttt ror 2016..-QJ. Tbt c.u for J•pc a QeD oun1 lbro~ 

lOI6ql. 

So..'iC£ Fotd!t1Jl!iud.~Ot"6oefot Nnoeal~; 01!._ 

r.et.c.~on'~«.C~othptn: t«ttC'Il:OIJ\'e. e:.."'SSII;t«Ccm. 

b!A."SC&:!Ida;aD vit. Ht\!'t ~· 

market expectations of tighter Federal Rese1ve 

monetary policy. The Chinese renminbi also 

weakened notably against the dollar, on net, 

as capital outflows from China picked up: 

Chinese authorities tightened capital controls 

in tesponse. 

In general, AFE economic growth 

was moderate and inflation remained 

subdued 

In Canada, oconomic growth picked up 

sharply in the third quarte~ following a 

contraction in the ptevious quarter, as oil 

extraction rocovered from the disruptions 

caused bywildfi tesin May (figure40).Jn 

contrast, oconomic growth in Japan in the 

second and third quarters slowed after a 

ron~ first quarter, returning to a more typical 

moderate pace. Euro-area growth firmed in 

the second half, and, in the United Kingdom, 

ocooomic activity was resilient in the aftermath 

of the Brexit refet:endum in June. Available 

indicators suggest that growth in most AFEs 

was moderate nearthe end of2016aod early 

tltis year. 

Headline inftation in most AFEs inct:eased 

over the second half of 2016, in part driven 

by higher oil prices. ln the United Kingdom, 

the substantial sterling depreciation after 

the Brexit referendum also exerted upward 

pressure on consumer prices. Even so. core 

inflation read in~ in AFEs remained generally 

subdued, and headline inflation stayed helow 

central bank targets in Canada, tbe euro area, 

Japan, and the United Kingdom (6gut:e 41 ). 

AFE central banks maintained highly 

accommodative monetary policies 

In August. the Bank of England cut its policy 

rate 25 basis points. announced additional 

purchase-s of government and corporate 

bonds, and introduced a term funding scheme. 

In Septemher, the Bank of Japan committed 

to expanding the monetary base until ioDation 

exceeds 2 percent in a stable manner and 

adopted a new policy framewort aimed at 

controlling the yield curve by targeting short-
108 


21417068.eps

and long-term interest rates. In December, 

the European Central Bank announced an 

extension of the intended duration of its asset 

purchases throug)t at least December 201 7. 

albeit 11ith a slight reduction in those 

purchases beginning in April201 7. 

In EMEs, Asian growth was solid ... 

Chinese economic activity remained robust 

in the second half of 2016, as earlier policy 

easing supported stable manufacturing growth 

and a strong property market (figure 42). 

Howeve~ the property market cooled 

somewhat toward the end of the year foUowiug 

the introduction of new macroprudential 

measures aimed at curbing rapidly rising house 

prices. Elsewhere in emerging Asia, growth 

held steady in the third quarter but stepped 

down in some countries in the fourth, even 

though exports and manufacturing improved. 

And in India, a surprise mandatory exchange 

of large-denomination bank notes- a move 

aimed at bauling tax evasion and corruptionbas disrupted activity . 

. . -but many Latin American economies 

continued to struggle 

In Mexico, after considerable weakness in the 

first half of2016, growth surged in the third 

quarter, supported in part by a recovery in 

exports to tbe United States. However, activity 

weak-ened again in the fourth quarter. as 

consumer and business confidence dropped. 

Furthermore, inftation in Mexico jumped over 

the second half of the )~ . pressured in pan 

by the peso's sizable depreciation, prompting 

the Bank of Mexico to hike its policy rate 

sharply. Brazil's recession deepened in tbe third 

quarter, reflecting in part tight macroeconomic 

policies, although the central bank began to 

ease monetary policy as inflation dropped 

in response to the weak ec<>nomy. Elsewhere 

in the region, activity in the third quarter 

was mixed; Chile's economY rebounded. but 

Argentina's GDP contracted and the crisis in 

Venezuela deepened. 

MOI'<CTARY I'OliCV RER:>Rl: fE8RUARY l017 27 

41. fnlbtioo in selected advnll«d foreigo e<XIOOmi<S 

-l 

- l 

_, 

- I 

It' . ' I ' ' ' I I I I I 'I I 1014 201S Xll& 2<111 

NT.£: lbtda!l f« ~ttre ta~thtihshtt:i:!Mu iklm!MY 

1017, r~ ~ !~~r CmCr. ~&o.1 !be IJuhe6 Kqdq:n ~ di.-wgb 

~10 6. 

SCUtt f«~~ Ot'li.'ei« I\Ra:.& SIU-:i~Jtl"«~ 

Wuty (~ Aff.Ln dCo:ll:u.Q:ioo$; (e~<~ ~.;o ._~ 

s-.u,...a Offi.'<' of lht E'ltopet:G Co:n::m&ties: for Cwda. S:.tib:'$ 

Cwd.l;-lll\1lll;J\'G'A:oalytiel. 

42. Re3l gross domestic prodllet growth in selected 

emttgil1g nurkt:t tcanmnics 

201! 

Nott' nc 4&:a ror Mm.1o ~:t ~flub. tt.i:dt fo: lO l~. 

Th<w il>t ru. .. .....nyll;:s><lbyllotnlsilll Thoc!al>il>t 

Mal\\\ ~ and Rena n ~I)' ldp:td. lly 4u mpt\'ti\<t 

O\'e'"-3iet ~ 'l'btbi«R."Uil mmd~20 6: l 

S.:..to: fot Ch:a. Chi:a NIOOcd bl:lel ~Iisti"t;l« K«n. BW oi Ko:ea; for a~ ltis':~.o 1\;):IO:Ili& ~';1. y ~a; bBtcL bs:lw10 BDMiroik Gql:af~a ~ &:&-..ti.~ all 'il ~u .bl)U. 
109 


21417069.eps

PART 2 

MONETARY Poucv 

29 

In December, t~ Federal Open Market Committee (FOMC) raised the target for the federal funds 

rate by V. percentage point to a range of~ to* percent The fOMC's decision reflected realized 

and expected labor market conditions and inflation. Moreover, tiJe decision to raise ~ target range 

was consistent with the Committee's expectation that, 11ith gradual adjustments in ~ stance of 

monetary policy, economic activity would expand at a moderate pace, labor market conditions 

would strengthen somewhat fu ~r, and inflation would rise to the FOMC's 2 percent objective 

ert~ medium term. T~ Committee expects that economic conditions will evolve in a manner 

that will warrant only gradual increases in ~ federal funds rate; the federal funds rate is likely 

to remain, for some time, below levels that are expected to prevail in the longer run. How!!ver, 

the actual path of the federal funds rate will depend on the economic outlook as informed 

b)' incoming data.ln addition, the Committee anticipates reinvesting principal payments of its 

securities holdings until normalization of the level oft~ federal flmds rate is well under way. 

The FOMC raised the federal funds rate 

target range in December 

About a year ago, in December 2015, the 

FOMC raised the target range for the federal 

funds rate after holding the range at near zero 

since late 2008 to support economic activity 

and stem disinftationary pressures in the wake 

of tbe Great Recession. At that time. the 

Committee judged that it bad seen sufficient 

impro, rm t in the labor market and was 

reasonably confident that inflation "'Ould move 

back to its2 percent objective, which would 

warrant an initial increase in the federal funds 

rate. Through most of 2016, the Committee 

maintained the target range of Y. to Yz percelll. 

43. S<lect<d int<r<St 1111.s 

""' 

It 

pending further evidence of continued 

progress toward its objectives In December, 

in riewof realized and expce.ted labor market 

conditions and inftation, the FOMC raised 

the target range for the federal funds rate 

another Y. percentage poin~ to a range of 

Y, to Y. percent (figure43).' The Committee 

kept that same target range at its most recent 

meeting, which concluded on February t. 

3. See BoanlofGowrnorsof the Federal 

R.serve System (:WI6), "Fedml R.s<rw l<sues 

FOMC Statement," press release. Dooember 14, hnp;J/wv.w.!<deralreseo·e.plnew5el·entslpressl 

mooetaryl2016t2t4a.htm. 

"""' 

- s 

-· 

_, 

- l 

- I 

- o 

I I 1(117 

Ntm: The l·yqr cud 10·rw ~~~ld m tkewf'.aal"""-'"::a:itr ,iddst-1! on :be: ~attn-e y titdo41Mritia. So.llG: ~.mo!olthc:TftU.'%'Yiftdcn R.ne\-c8d 
110 


21417070.eps

30 PAATl: MON£TARY POLICY 

Monetary policy continues to support the 

economic expansion 

The Committee has continued to see the 

federal funds rate as likely to remaill, for 

some time, below the lerels that are expected 

to prevail in the longer run. With gradual 

adjustments in the stance of monetary policy. 

the FOMC expects that economic activity 

will expand at a m<xlerate pace, labor rmrket 

conditions will strengthen somewhat further, 

and inflation will rise to 2 percent over the 

medium term. 

Consistent with this outlook, in the most 

recent Summary of Economic Projections 

{included as Part 3 of this report). which was 

compiled at the time of the December 2016 

meeting, most participants projected that 

the appropriate level of the federal funds 

rate would be below its longer-run level 

through 2018. 

Future changes in the federal funds rate 

will depend on the economic outlook as informed by incoming data 

Although the Committee has expected that 

economic conditions 11111 evolve in a manner 

that will warrant only gradual increases in 

the federal funds rate, the Commiuee has 

continued to emphasize that the actual path of 

monetary policy will depend on tbe evolution 

of the economic outlook. In determining 

the timing and size of future adjustments 

to the target range for the federal funds 

rate, the Commiuee will assess realized and 

expected economic conditions relative to its 

objectives of maximum employment and 

2 percent inftation. This assessment will take 

into account a wide rnnge of information, 

including measures of labor market 

conditions, indicators of in Oat ion pressures 

and inflation expectations, and readings on 

financial and international del'elopments.ln 

light of the current shortfall of inflation from 

2 per:cent. the Conmuttee has indicated that 

it will carefully monitor actual and expected 

progress toward its inDation goal. 

The size of the Federal Reserve's balance 

sheet has remained stable 

To help maintain accomm<xlati~~ financial 

conditions, tbe Committee bas continued 

its existing policy of rolling over maturing 

Treasury securities at auction and reinvesting. 

principal payments on all agency debt and 

agency mortgage-backed securities in agency 

mortgage-backed securities. The Federal 

Reserve's total assets have held steady at 

around S4.5 trillion, with holdings of U.S. 

Treasury securities at S2.5 trillion and holdings 

of agency debt and agency mortgage-backed 

securities at approximately $1.8 trillion 

(figure 44). The Committee has for some time 

stated that it anticipates maintaining this 

policy until normali7.ation of the level of the 

federal funds rate i~ well under way. 

Interest income on tbe System Open Market 

Aecount, or S0~1A, portfolio has continued 

to support substantial remittances to the U.S. 

Treasury. Preliminary results indicate that 

the Reserve Banks provided for payments 

of$92 billion of their estimated 2016 net 

income to the Treasury. The Federal Reserve-s 

remittances to the Treasury hill'e averaged 

about $80 billion a year since 2008, wmpared 

"~ th about S25 billion a year om the decade 

prior to 2008.' 

The Federal Reserve's implementation of 

monetary policy has continued smoothly 

As in December 2015, the Federal Reserve 

successfully raised the elfective federal funds 

rate in December 2016 using the interest 

rate paid on reserve balances, together with 

an Ol<ernight reverse repurchase agreement 

4. Tow rtmiuanoesindude aont·time transferor 

$19.3 billion in D«:ember 1015ro reduce theawegate 

Rese"< Bank capital surplllS toStO billion. as requin'd 

by the PixingAmerica-sSorfaceTransportatioo 

Act. Set Boasd of Gc,-emorsof the Fcd<ml Rese" ·' 

S)stem (2016), "Federal Resef\·e System Pablishes 

Annual Pinancial Sratemen~~· press releast. March 18, 

htt'(>S1J>.ww.federalrestrv<.g01'/ne.WS<\ .. tslpresrl 

otherll0t603lia.bll)). 
111 


21417071.eps

MONETARY POliCY REII:JRT: fEBRUARY lOll 31 

44. F«<tml escn~ assetS and liabilities 

Asstll 

.-.;"'&hvlft.~HC>Rr·~ 

OOu!Wil ~ 

2009 1010 2011 2012 1013 

No1J; ~Q'C~md ir:pdllyrtoiliic."Wl!f AO:FJA'Y.~,&:d5CihOil&ldtla:m(I:.VT.IOllctedi&;OCOIIIIbcnltqadt."YJ",;*JI$;qlpOrtkM&lkn 

l,Qc, BewS~ md AI(); md«bcr;:redit !aa1-b.+Jdia&tbc P:irr.cy })Wa~F~~;ill.y,lbc A.c:~ComllCWII Pcpa }.Swcy Mckd. MlWal k:xiU1J1idir.yfacility, t!lt Co~ .. F~P.aci :y. d ~ fa'l'll A.actkk<d~IIC$ i,.ccQ ~~:ii:)· ~ 1$$Q" Q: ildq~ 

~i'!!at:lddisoo:r.sor~s«o.Jtitinhdd<r~ ~a::d~lillbitir.ies" o..i:desft'<--otrq:et:hueq:tt..11CJ'.t., W:U.S. ~Gefml~ 

l!ldOt U.S. 'l'!ul.~-y~ cttdr.I."Y fioaci:D&A~ 'l'htba coddaulgllFdo&ryt,20 . 

SaJla: <den. ~<tBOI!Il.S.:.ori:a!Rdmc A. , ~MnecR.t:tcrVt& o:o." 

(ON RRP) facility.s Spec.ifically, the Federal 

Reserve raised the interest rate paid on 

required and excess reserve balances to 

perce t and the ON RRP offering rate 

to !h percent. In addition, the Board of 

Governors approved an increase in the 

discount rate (the primary credit rate) to 

1.25 percent. The effective federal funds rate 

rose into the new range amid orderly trading 

conditions in money markets. Increases in 

interest rates in other money markets were 

similar to the rise in the federal funds rate 

following tbe December meeting. 

5. See Boord of Govtmoi> of lh< Fod<ral R<S<n< 

Syst<m (20t4), "Fodml R<Serve Issues FOMC Statement 

oo fl:>licy Nonnalil31ioo Principles and Plan~ • pms 

releao; Sept<mber 17, http<1/w"w.fodtralres<rve.govl 

newsmnt5/p~<'monetaryl20 409 icJI(I)I. 

The total take-up at the ON RRP facility 

increased modestly in the second half of2016 

as a result of higher demand by government 

money market mutual funds in the wake 

of money fund reform that took effect in 

mid-October. 

Althou&IJ the implementation of monetary 

poticy has been smooth, the Federal Reserve 

has continued to test the operational readiness 

of other policy tools as pan of prudent 

planning. Two operations of the Term Deposit 

Facility were conducted in the second half of 

2016; seven-day deposits were offered at both 

operations with a Hoating rate of I basis point 

o,·er the interest rate on excess reserves. In 

addition, the Open Market Desk condncted 

several small-value exercises solely for the 

purpose of rmintainiog operational readiness. 
112 


21417072.eps

33 

PART 3 

SuMMARY oF EcoNOMIC PROJECTIONS 

The following material appeared as an addendum to the minutes of the Docember 13-14, 2016, 

meeling of the Federal Open Market Commiuee. 

In conjunction 11ith the Federal Open 

Market Committee (fOMC) meeting held on 

December 13-14.2016. meeting participants 

submitted their projections of tbe most 

likely ontc()mos for real output growth, the 

unemployment rate, and inHation for each 

year from 2016to 2019 and over the longer 

run.

6Each participant's projection was based 

on information a1•ailable at the time of the 

meeting. together with his or her assessment of 

appropriate monetary policy, including a path 

for the federal funds rate and its longer-run 

value, and assumptions about other factors 

likely to affect economic outcomes. The longerrun projections represent each participant's 

assessment of the value to which each l'llriable 

would he e~pected to converge, over time, 

under appropriate monetary policy and in tbe 

absence of further shocks to the economy. 

"'Appropriate monetary policy·• is defined as 

the future path of policy that eacb participant 

deei!IS most likely to foster outcomes for 

economic activity aud inflation tbat best 

satisfy his or her individual interpretation of 

the Federal Reserve's objectives of maximum 

employment and stable prices. 

Most FOMC participants expected that, under 

appropriate monetary policy. growth in real 

gross domestic product (GDP) would pick 

up a bit next year and run at or slightly above 

their individual estimates of its longer-run 

rate through 2019. Almost aU participants 

projected that tbe unemployment rate would 

run below their estimates of its longer-run 

normalle11tl in 2017 and remain below that 

6. One participant did not submit longer-run 

projections for r<al OUlput &IC\\111, the piOjment 

tate. or the f«<ctal funds 101< 

leveltbrougb 2019. All participants projected 

that in Hat ion, as measured by the four-quarter 

pettentage change in the price index for 

personal consumption expenditures (PCE). 

would increase over the next two years, and 

several expected inflation to slightly exceed 

the Commiuce's2 percent objective in 2018 or 

2019. Table I and figure I pro\~de summary 

statistics for the projections. 

As showu in figure 2, almost all participants 

expected that the evolution of economic 

conditions would warrant only gradual 

increases in the federal funds rate to achieve 

and sustain maximum employment and 

2 percent inflation. Many participants judged 

that the appropriate level of the federal 

funds rnte in 2019would he close to their 

estimates of its longer-run nomml level. 

However, the economic outlook is uncertain, 

and participants noted that their economic 

projections and assessments of appropriate 

monetary policy may change in response to 

incoming inlormation. 

A majority of participants viewed the lew I of 

uncertainty associated 11ith their indi1idual 

forecasts for economic growth, unemployment, 

and inflation as broadly similar to the norms 

of the pre\~ous 20 years, though some 

participants saw uncertainty associated with 

their forecasts as higher than ao.erage. Most 

participants also judged the risks around 

their projectious fOr economic activity, the 

unemploymelll rale, and inflation as broadly 

balanced, while several participants saw tbe 

risks to their forecasts of real GDP growth 

as weighted to the upside and the risks to 

their unemployment rate forecasts as tilted to 

the downside. 
113 


21417073.eps

34 PART l: SUMMARY Of ECONOMIC PROJECTIONS 

Table 1. Economic projections of Federal RestJ''e lloaro m~n and Federal Rese!Ve Bank pr<SideniS, under lhrir 

indhidual asstSSmenls of projee1ed appropriale monelary policy, ecem r 2016 

"'"''" 

~,, lllin ll!liS ll>l19 · ~~~ 1l0!1 12011 121)191 "::!" l!)l! 1 lll" lll19 1 "::r "-in~G P 

Stp~em p«.'je<1ioe 

1.9 l.l lO IS U I.S-1.9 U-ll L&-ll 1.$-lOif.&-lO 1.$-lO Ll-l< 1.1-ll 1.5-ll L~-ll 

I.S l.G 2.0 U 1.S 1.1-1.9 1.9-12 1.8-11 1.7-1011.1-1.0 1.7-lO U-lS 1.5-13 1.6-11! U-12 

U~Wmpjo,·IIIC'fl n~t. 

Stttt'mkc pcojcc1io. 

PCEitdlation 

Stpltmher ce 

CortPCBilllbiioa' 

Stpttm.krpclljl«iee 

4.1 4.S .f.S 4J U 4.14-S (.S....f;.6 U-4.1 4.3-4.Sj4J-S..O .f.7-lS 4.4-4.7 4.2-4.7 4 1...UJ-t.>-5.0 

~~ 4$ 4J '"' U <7..U 4.l-47 4.4-t7 H-4,$!<.7-M 1.7-49 4,4-4,$ <J-4.9 42·S.O j4.5-S.O 

Ll 19 2.0 211 2.0 IJ 1.1-lO 19-10 ll).1fi 211 15-U 1.7-10 1-S-12 1.&-U i lO 

1.3 1.9 tO U M JJ .. U 1.7-1.9 I.S..lO lj..lOj 1.0 I.J .. l.i 1.5-10 I.S.10 U··ll j l O 

1.7 U 2.0 l.O 1.7-U I.S..t9 1.9-10 10 ! U-1.8 1.7-10 1.&-12 1-S-<2 ! 

1.7 U 2.0 lO lk-U 1.1-U t9-l0 l.O i 1.5-lO L!-10 1.&-lO 1-S-lli 

M~oao:Projtel(d 

IC'I*lpri•policy palti 

f'Nt111radsrw 

&p~tnlkc P«F!io. 

N:m'Pf'oje<.1lOI;Jdeh~amiJ1011dccl!•ic:~((IDP)•Dt~F~forbochna.mofislliiOit:tl'!f\'Otd.ueuhomdlcfa~bqartttofl.ttprniov,cuto 

tk t.l~qtvtttot tlrrc >W lc.-f«td PC!IIIt!»a ud eouPtt!llllftr:ol tn dlt pcrna~n..-u~ <b~~JS; a, r~ctocO~It.. ~ aculcc: pcriiOO&I(OMIII;~ICao;pc.idaO!Ir 

tpCS:)u4Ctprl«MallcPC!GCh4~fooltuAt~~f«tilt':.~ttUtl\11~~dK*"'C'CM\AUIU~*=«Jtnll*~bri'{U;tU~IIK~ 

~Klelt.$ Ed J~tdcipn('IJ'fOjta11:4Uitbatd ~U«lu&~Wcl•~Jofi·IC ln:ll-dU)'pol~loqton!l:,;llt(6ou"'~~r.IU.C:.,pttlki~ft~lof6t fU 

ttw1ild.adi":nbk-oeldlicopcdc4to~IM~U6r.~liltlt»fKilt)'r*'JU16 •tM~olfllrtl«kbiOfu«<CCIOUI).'fl.t~~bub'Chfo6mfh~ 

nl1&ntlll*-oltiKSid~;~oft.•~·~•ttl:tJI'Irv.ttf«IM~ti&HIAII«It.~~lWI'CoprluitlfV!tlt._,.Uxtk~!11t.~n."t&:tl1udot0. 

tPtC&6ctlrttlt)UIOtowtllltSot.ttttulkl\t~~~lft!t~il~iolwu)l,)ciCJI~..IDIOfdc~~O~aW.ut.ttc-r.wotfcpt~)C..ll, 

lOSt Ott ~14..ati)IR\41i$oq:M1tt'Q',*II(INf«IIK~Iartii00P.tk •t~ftl!M.,OIIkft4<ft!~41n!clt..,_ ... "!\Mft.Qc$c9fdllblt »-ll, 20!,,~DD~bq.c.d~~~d~O':(ntd•~~~·Q,!U!:tool'llllltMDt~rU .. J4,lG!O..a:cli!liil P>fct~~C.tUIJdl\.1 ite;MiiQII!.'i!kp)jdotwt,olbc;~«tk06U:U!N1'4fiO•Jcwu!IOM&btA 'A\cttkt~of~~-..nq. tk-~it·U'C~el 

w twro.WittiiOJI¢1*1. 

2 nr«Unlltll'kMJad~UI~tl:l'!~~~uddett-~~ut~~tr;"},ovill>leilud)'(•· 

) i'kNJtfwt~kiiiiJMl)Qr~li~~I(PtO~fiOIIIw.uttOW&kA.fotlhl'I'\MbkDllla!)Ul. 

' l.oe-i!!to('Uf.IIOSJb«ttPCE8!rior.t.ttaotcol«~ 

The Outlook for Economic Activity 

The median of participants' projections for 

the growth rale of re.al GOP. conditional on 

their individual assumptions about appropriate 

monetary policy, was I .9 percent in 2016, 

2.1 pertent in 2017, 2.0 percent in 2018, and 

1.9 pcrtent in2019: the median of projections 

for the longer·run normal rate of re.al GOP 

growth was I .8 percent Most participants 

projected that economic growth would pick 

up a bit in 2017 from the current year's pace 

and run at or slightly above their individual 

esti111<1tes of its longer-run rate through 2019. 

Compared 111th the September Summary of 

Economic Projections (SEP), the medians 

of the projections for real GOP growth were 

slightly higher overthe period from201 7 to 

2019, while the median assessment of the 

longer-run growth rate was unchanged. Since 

September, almost half of the participants 

revised up their projections for real GDP 

growth in 2018 or 2019, generally only slightly. 

Those increasing their projections for output 

gro111h in tbose years cited expected changes 

in fiscal. regulatory, or other policies as factors 

contributing to their revisions. However, 

many participants noted that the effects 

on the economy of such policy changes, if 

implemented, would likely be partially offset 

by tighter financial condit ion~ including 

higher longer-tenn interest rates and a 

strengthening of the dollar. 

The median of projections for the 

unemployment rate in the fourth quarter of 

2016 was 4.7 percent, slightly lower than in 

September. Based on the median projections. 

the anticipated path of the unemployment 

rate for coming years also shifled down a 

bit, with the median for the end of2019 at 

4.5 percent, 0.3 percentage point below the 

median assessment of the longer-run normal 

rate of unemployment, 1111ich was unchanged 

from September. 
114 


21417074.eps

MONETARY POliCY REII:JRT: fEBRUARY lOll 35 

Fig11re I. M<dians, cm!ral tendenaes, and ranges of eoonoouc projeotioos, 2016-19 and om the looger run 

PttO!nl 

Cllanteillrea!GDP 

- Mediuof ~jltl)o)U 

_ cnuall>fldtacyor~ 

~ Ill -.-- C5 -l - ~ 

"'"~ - I 

21111 2012 lOB 21114 llliS 2016 2017 2018 2019 Looger 

rutl 

Pt.etnl 

U~meotra~e _, 

~ -· -' 

_, 

!!!!::! - s 

-- m e!! - ' 

lllll 2012 lOB 2014 lOIS 2016 2017 2018 2019 Looger 

""' Pccotnt 

PC£inflauoo 

- l 

~ EB !!!!! = _.__ 

- -I 

lOll 2012 lOll 2014 lOIS 2016 2017 2018 2019 Looger 

11111 

P<rotot 

Corei'CEinlldlioo 

- l 

~ 

------ - ... !!!!'! ~ 

-I 

2011 2012 lOB 2014 lOIS 2016 2017 2018 2019 Looger 

TWJ 

Nom Defuritioos of l'tliaNes ud o1her exp:&nalicons min 1he DOleS to tal* I. Tht(fjta for tbe a.:tual l'lllX!S of the l'ariaNet 

arewual 
115 


21417075.eps

36 PART 3: SUM\IAAV Of !CONOMIC I'ROj(CfJONS 

Figure 2. FOMC panicipants' asse>sment; of appropriate monetary policy: Midpoint of target range or target 

level for the federal fund• rate 

ht=L 

----------------------------------------~----------- M _,, ....................................................................................................... ; .......................... _ ·!····· ...... -4.5 

' ' ' 'I' 

----------------------------------------~~----------~ . .. , ' .... ...... ... . ' - ................................ ................. .............. .......... ................ ................ , ............ u ........... -15 

_ . ' .................................................................. ........................ a ........... , .......................... _ 

---------------------------- --------~-._--~-- ._----10 • 

• 

• -• 

·· ~ 

···:· ··········['···· ·······-lS 

• •• 1 

········ ··r···· ·····················-O.S I 

------------------------------------~----------M 

2016 2017 2013 2019 Long<J run 

Non: Each shaded circle indicat« the value (rOilllded to Lb< """"' II per«ntlg< point) of an indi'idual Jl'Lnio:ipanf• j odgmmt oflh< ~int of the appropriatt rarttt ran8' for Lh< fedttal funds rate or Lh<aP.I:fopriatt tlr&<J kvel for the federal 

~~~;:::~~unds ~f.~ spe<ilitd <Okndar yw or O\OCr the loog<J run. One participant did not suboit loog<J·nm proje<tioos 

Figures 3.A and 3.B show tbe distribulions 

of participants' projections for real GDP 

growth and the unemployment rate from 

2016 to 2019 and in the longer run . The 

distributions of individual projections of real 

GDP growth shifted slightly higher relative to 

the distribution of the Seplember projoclions 

for 2017 through 2019. The distributions 

of projections for tbe unemployment rate 

shifted modestly ow~r for 2016 through 2019, 

while 1he distribution of projections for the 

longer-run normal rale of unemployment 

was unchanged. 

The Outlook for Inflation 

In the December SEP, the median of 

projections for headline PCE pri~ inflation 

in 2016 was 1.5 percent, a bit higherthao in 

September. 11le median of projoctions for 

headline PCE price inOatioo was 1.9 percent 

in 2017 and 2.0 peroent in 2018 and 2019, 

unchanged from Septemher. Several 

participants projecled tbal in Oat ion will 

slightly ex~ed the Commiuee's objective in 

2018 or 2019. The medians of projections for 

core PCE price inflation were the same as in 

September, rising from 1.7 peroent in 2016 to 

1.8 percent in 2017 and 2.0 percent in 2018 

and 2019. 
116 


21417076.eps

MONETARY POliCY REII:JRT: fEBRUARY lOll 37 

Figure J.A. Disrributioo of partici~ts' projtetioos for the d!ang< in r<a1 GOP. 2016-19 and over lhe la>ger Clln 

c 

_ 2017 

c 

2018 

"

1J · 

r ----J -- ____ _ 

' lA-- u. 10-

17 u l l 

Ptn."ttllrantf 

u. 

" 

_rr==-=:r I r - - - - _,..,.. , ----.," ~ j...=J . , 1.&- It- 10- U1.7 lt Ll lJ 

t~te~~r rante 

- -~ 

~ .. ----.r~.,.~ D F"="=b 

2019 

c 

u . 

i$ 

_......, .... 

c ... 

u 

"· " 

:.:;;: ,_Br:t~ '"- Jt- l0- 1.7 It 11 

Pertet~tra.ore 

r - - -- ..r~·.----n •r:==d ~I ~ ,.. u. 2.0-

1.1 l.t 1.1 

Ptrce11t rauge 

Norr: Oftlnitionsoh'triables and other t:tplao1tioos are in lhe tiNtS 10 a~ 1. 

u. 

" 

12· 

" 

u . 

u 

"· " 

... 

u 

-II -" 

- II 

- ll - 10 -

_, 

I 

--, 1 · 

- II 

-- " II - ll - 10 -I 

_, 

I 1-· --, l 

- II 

-- " 14 - 12 - 10 -

_, 

I 

-· -, l 

Numkrdf*rli-ipants 

I<· 

u 

.. 

u 

- 11 

-- II " -ll 

=_, 'I 

--, · 2 

-

_,

I

, I 

-II 

- ll 

=_', I 

-..., · 2 
117 


21417077.eps

38 PARI 3: SUMIMRY Of !CONOMIC PROI!CTIONS 

Figure lB. Dislribulioo ofportiaJl'Ults' projectioos for the uo<mplo)meot rale, 2016-19 aod over thelmger "'" 

Nt*c~~llb 

r 

r 

r 

2016 a~rpro~ 

•• St""'""".;..o... 

21)17 

U - '-2- 41 ,, 

<J. ., . ..., 

r----, 

4.4-

an,,_ U-: H 41 •J 

Jl,rc:eolfiDC' 

----- -- -~ : ~----, ... 

•• 

~nc= l.- ----~ 

21)19 

... ., U-

'' 

M-

" 

s•-

u 

M· 

II 

- II - 16 -14 

- ll - 10 -

_ , 

I 

-· -, l 

- II -16 

- 14 - 12 - 10 -

_, s 

- 4 

.,l 

-

_IS ,, - 14 - ll -10 

-I 

_, _, 

.,l 

- II - 16 

-·· - ll - 10 -s 

r ..---_,..,.~"E3 --, i 

r 

u. 

., 

... 

" ... 

., .. !I ... 

l$ 

-- I' I ,,_ 

" 

... 

., 

... 

., 

- II - 16 -14 

- ll - 10 -I 

_ , 

c::J;::;l MIl 
118 


21417078.eps

Figures 3.C and 3.0 provide inform:uion on 

the distribution of participants' ~iews about 

the outlook for inftation. The distributions 

of projections for headline and core PC~ 

price inflation shifted up slightly relative to 

projections for the September meeting. Some 

participants attributed the upward shift in 

pro)CCled inllation this year and next to recent 

data that sbo\1-ed somewhat higher inflation 

than they had expected. A few S3W higher 

inftnt1on in 2019 in conjun<:tion with somewhat 

greater undershooting of the unemployment 

rate below its longer-run normal level. 

Appropriate Monetary Policy 

Figure 3.E prol'ides the distnootion of 

participants' judgments regarding the 

appropnate ta~t for the federal funds rate at 

the end of each }Ur from 2016to 2019 and 

Ol'er the longer run.' All participants S3W an 

increase of 25 basis points in the federal funds 

rate at the December meeting as appropriate. 

The distributions for2017through 2019 

shifted up modestly. The median projections 

of the federal funds rate continued to show 

gntdual increases. to 1.4 percent at the end 

of2017, 2.1 percent at the end of2018. and 

2.9 percent at the end of 2019; the median 

of the longer-run projections of the federal 

funds mte was 3.0 pem:nt. The medians of 

the projections for the lel'el of the federal 

funds rnte for201 7through 2019 were 1111 

25 basis points higher than in the September 

projections. A few participants re~ised up their 

assessments of the longer-run federal funds 

7. One potQapanJ's proj<CQODS ilf lbe r«l<nll 

runds me. lUI GOP grt>IV!h,lhe unemplo)menr raJ<, 

and rnftatioo ll'trt inbnn«l by lhe ,;ew lhar lhere are 

mutliple possible mt<Jium·ttrm rtpm<S for the U.S. 

toonomy, rhar lhese rePmesare persist.nr, and rharlhe 

eoonomy shifts.,...,....., rePro<> in a way rhat cannor be 

IOrecas~ Under dus ,; .. ·,lhe <eonomy cuntOdy 11 in 1 

,..,;,.. dranoc(<nzod by e:xpansioo or tCIOOOIDIC actJ\11)' 

•>lh lao pooct-=\11)' &roo1h and a low shon-rtm~IUI 

iotms~ rare. bot IODJ<r·tmn Ollalm<S il< ''lnllies 

«her lhan inll>tooo tallDOI bt as<fll!ly ptOJ«J«l 

MONITARYI'OUCYR£POIU: H8RUARY2017 39 

rate 25 basis poiniS. resulting in an in<:rease in 

the median of 13 basis poiniS. 

In discussing their December forecasts. many 

participants expressed a 11ew that increases in 

the federal funds rate over the next few years 

would tikely be gntdual in light of a short· 

term neutral real interest rate that currently 

was i<M'-a phenomenon that a number of 

participants annbuted to the persiste~ of 

low productivity grow1h. continued strength 

or the dollar, a weak outlook for economic 

gro111h abroad. strong demand for safe longerterm assets, or other factors- and that was 

likely to rise only sl0111y as the effects of these 

factors faded 0\'er time. Some participants 

noted the continued proximity of short· 

term nominal interest rates to the effective 

10\1-er bound, e1-en Wlth an increase at this 

meeting, as limiting the Committee's ability to 

increase monetary accommodation to counter 

possible adverse shocks to the ecouomy. 

These participants judged that, as a result, the 

Committee should take a cautious approach 

to removing policy accommodation. Many 

participants noted that there was currently 

substantial u~nainty about the size. 

co~ition. and t1ming of prospectio.-e fiscal 

policy changes, but they also commented that 

a more expansionary fiscal policy might raise 

aggregate demand above sustainable leYels. 

potentially necessitating somewhat tighter 

monetary policy than currently anticipated. 

Furthermore, several participants indicated 

that recent inftation data and the continued 

strengthening in labor mar:ket conditions 

increased their confide~ that inOation 

would 1110\'t t0\111rd the 2 percent objective, 

making a slightly firmer path of monetary 

policy appropriate. 

Uncertainty and Risks 

The left-hand column of figure 4 shows that, 

for ta(h variable, a majority of participants 

judged the lmls of un<:enainty associated 

ll'ith their December p~ns for real GOP 

grtmh. the unemployment rate. headline 
119 


21417079.eps

40 PARI 3: SUMIMRY Of !CONOMIC PROI!CTIONS 

Figurt lC. DiSlriburim oC participants projections for PCE inflation, 2016-19aod over the longer ruo 

lllllero penidpa~IS 

-

-2016 , .. s..o-~·-__ [l ~ ----,_ ----, r . -. - --- - - - - .... 

c 

2018 

II• 

ll 

11-

ll 

IJ. 

" 

IJ· 

" 

... 

" 

;----er:A 'J: lS- 1.1- 11-

U U tt 

l'«<letlraoto 

I I 

c ... 

I 

-'0 ~ r====J 

c 

c 

11-

ll 

u. 

1.1 

1 .• 

11 

IJ-

" 

IJ-

" 

IJ-

" 

IS16 1.1- U - 11-

U 1t U 

J.i-

" 

1.1-

" 

in· I I 

I I 

I I , , U -

>t •• u 

Non:: De6aitioos of variables and otbeaxpJaDabOnure iD the OOCeJ I.:t ~ 1. 

- II - II -I~ 

- II - 10 -

_ , a 

--,l · 

- II - II - I< - 12 - 10 -I 

_, 

- ~ 

.., I 

-II 

-

_II ,. - ll 

- JO _- , I 

- ~ 

..., 1 

- I! - II 

I~ 

- II - 10 -

_ , 

I 

~ 

1 
120 


21417080.eps

MONETARY POliCY REII:JRT: fEBRUARY lOll 41 

Figure 3.0. D~lributioo of par1icipan1S' projectims for core PCE inflatim, 2016-19 

2016 

• ~kcpro~IIOM 

~ltrobuptojectto• 

------ ----- l _______ , 

2017 

15-

" 

,.,_ 

u ltu 

------r ·---- ----- : ,_ ,,.. ,. 

" " ,. Pt'rctolr&ny: 

2018 

,_ :------- ,_ T ,_ l ,. " 10 

1\!«tnlranst 

2019 

,_ 

u 

- II 

- 16 

-H 

-11 

-10 

-! 

_, 

_, 

- 1 

I 

Numl-tr f1 pubdpanlt 

tl· 

u 

- 11 

-16 

-14 

-)2 

-10 

-s 

_, 

-· I I 1 

- IS 

-16 

-14 

- u -If 

-8 

_, 

-· 

- ! 
121 


21417081.eps

42 PARI 3: SUMIMRY Of !CONOMIC PROI!CTIONS 

Figure 3.E. Distribution of partiaponiS' jud!l1lleniS oftbt midpoint of !he appropriate large~ 111oge for !he f<deral 

fuods rate or the appropriaretargetlcvol for the federal funds rate. 2016-19 and over !he IOllger run 

2016 -

=8 I ri- J - - t _. 0.3C· 0"· Oa- . l.U· IJ8· UJ. O.Q OJ1 I.U U1 142 1.11 

2011 

c 

us- w- ua. lll 117 1Q 

l'n«nt r3llt" 

US- O.Q. ta- 1U- tJ&- 1.4S- US- 1"- HI- Ul-

~ ~ w w ~ w w m w w l'n«ntrattt" 

:!018 

W- SU- 'J:S- HS- U!-

.t.n u1 162 1t1 n 

CQ U1 Ut IJJ 

Ut- 1#- 18$- l-IS- lJI- :t.Q- JM- I.Q Uf 112 1.37 lQ lt1 lU 

!Tr«ntr3llp 

201? 

- IS - 16 -II 

- 12 - 10 -

_ , s 

--, · 2 

- 18 - 16 - II - 12 - 10 -s 

_ , 

-· -, 2 

- IS - 16 -II 

- 12 - 10 -

_, s 

--,· 2 

- IS - 16 - II - 12 - IO -s --, -' 

_r,=l.Or:J. - ! 

c Olt- OM- 0#- I Ue.£2 UJ IU UJ 

1.0- Ut- 113- Ul- Uh ut- ).1). JJ8. UJ- US- 111 112 1J1 l..Q W Ul U? U2 U7 411 

IJ8- 1.£tl"l 111 

Pn«ntrante 

US- 1U- Ul- W- 1.8*- JU- Ut- US- Ul- 1.12 U1 tQ U7 lU U7 lQ .U7 ~ll 

l'n«nt rante 

Nom: De:m:titioosoCv-ariablesand olbert:q)J&~S~tioDS are in l.heootes to table 1. 

- IS -16 

-II 

- 12 - 10 -

_ , 

8 

--, · 2 
122 


21417082.eps

Fig~~re4. Uncertainty and risks in ecooaoic proj<COoos 

Un001ainoyabooo GOP uo>lh 

-

- ~!:':: - IS - 16 -----1 -1< - ~ =:; I I - S 

= I r~ : r,.----I !.J.--- ·1.1 2 

Hi!)l<r 

- IS 

- -16 -·

I n: :-10 :: - I I - i 

- I - 6 - I - 4 fr·---1 0 112 

Broaclly 

similat 

Uncenru:nty about PCEin11aOOD 

Higher 

- IS 

-16 r1: =:: I -10 I - s I 1 - 6 I - 4 

. LE3.Jl 

Broaclly 

similar Higher 

MONETARY POliCY REII:JRT: fEBRUARY lOll 43 

RiwloGDPuo•lh 

0 ~bupto,ccciow 

: '"" S¢p~tlllb«pojcdB -IS 

• 16 

-14 - nI · ... - 10 

- I I - t 

- I - 6 

~ 

-- ~~ -• • •• •12 

Wriglll<doo 

do~de 

Jtis.k,s 10 lht Wlmlploymml (11ft> 

-It 

-16 

- n - -- I .

-ll 

-10 .. - I I - t 

- I I -' - -. 

[ --- ~ -----· 11 2 

\Veiglli«< IO dOWDEide 

Ri>ks 10 PCE iuJalioo 

\Veigbi<d lo dOIIollsidt 

RiwoororePCEinllalioa 

-IS 

-16 

... - 12 

-10 

-. -' -. 2 

-IS 

- 16 

-14 

-

• n I -

... 10 

- I I - $ 

- - - --- 1 I -6 "I -. [ a r==J a.r:;;:J ,] 2 

\Vrigll!Mio dOWD!ide 

Nort: For defioitiont of Ul'IOMaintyand risks intoooomk P'ojcctioon~ set lht boi "'Foreeastlhlctrtainly.'' Definitions l'lf variablesareiDtbeoOW$totable I. 
123 


21417083.eps

44 PAATJ: SU><.w.RYOHCI:WO.IOCFI(()j(CIIOM 

inflation. and core inflation to be broadly 

similar to the average of the past 20 years.' 

However, more participants than in September 

saw uncertainty surrounding re~l GOP growth, 

tbe unemployment rate. or inflation as higher 

than average. Many participants mentioned an 

increase in uncertainty associated with fi.scal, 

trade, immigration, or regulatory policies as 

a factor influencing their judgments about 

tile degree of unc.:rtainty surrounding their 

projections. Participants cited the difficulty of 

predicting the size. composition, and timing of 

tllese policy changes as we-ll as the magnitude 

aod liming of their effects on the economy. 

As can be seen in the right-band column of 

figure 4. a majority of participants continued 

to see the risks to real GOP g!OI\lb. the 

uoempiOjment rate. lleadline ioftation. aod 

core ioDation as broadlv balaoced: ~-e\-et 

fCI\lr particip;lnts saw risks to economic 

g!OI\1h and ioftatioo as \\lighted to the 

dOI'oside or saw risks to the unemplo)ment 

rate as weighted to the upside than in 

September. A number of participants noted 

that the prospect of expansionary fiscal 

policy had increased the upside risks to 

economic acti\1ty and ioftation. and a few 

a~ the possibility of a reduction in 

regulation as posing upside risks to their 

forecasts of economic activity. Moreover. 

8. Tabte2 pr<Widesestimates oflhefom•st 

un<t~ainty IQr the cllao'' in real GDP, the 

unempiO)mmt ra1~ and total consumer prioe inHatioo 

om tbe period from 1996 throuV.20t5. At the end 

of lhissummaJ)',tbebox "For«:ast Unoenainty" 

di""sses !.be souroes and interp,..laJioo of uncertain~· 

to the economic forecastt and explains dte approa<:b 

""" to ._...,.the uncertainty and risl<s anendin: the 

paniapocts'projeccioos. 

Table 2 Aw~t hiscoricll proje<tion error,..,., 

1\tm~poinb 

\'a11itW lO" ))17 lOll 

<lA•p:•W'"IlODP' lU !1.7 lll 

u • ., ~M«~tntr ~~· IU tl.4 

Toui~M« ~-J 10 ~ !II I ll 

some participants judged that the recent 

))19 

!ll 

"' .,, 

rise in nurl:et·based measures of mHat1on 

compell$1tion suggested that d~l!Side risks 

to inftation had dc<:lined.ll~~·lr, rn.:~ny 

also pointed to various sources of dow11side 

risk to economic actil-1ty. such as the linuted 

potentia) for monetary policy to respond to 

ad>e~ shocks when the federal funds rate is 

near the effoctile 101\~r bound. d01111side risks 

in Europe and China, a possible increase in 

trnde barriers, and the possibility of a sharp 

rise in financial market I'Oiatility in tbe e•·eot 

that fiscal and other policy changes diverged 

from marl:et expectations. In addition. some 

participants pointed to f.1c o~s cb as global 

disinHationary trends and downward pressure 

on impon prices from further strengthening 

of the dollar as sources of downside risk 

to inHation. 
124 


21417084.eps

Forecast Uncertainty 

The economic projections pro,;ded by the ,..,mbers 

ol the Board ol Governors and the es deo~ ol 

the federal Rese~·e Banl:s inform diSOJS$/ons ol 

monelary policy among policyn13kers and can aid 

public undffitlnding ollhe basis for policy action• 

Considerable uncertainty attends these projedioos, 

however. lhe economic and statistical models and 

relationships used to help produce ecooon'ie iO<ecasts 

are necessarily imp.."ffect descriptions oi lhe real world, 

and the future path of lhe eoonomy can be affected by 

myriad urlo<ese<n de'eloprnenls and E!'tenK lhus, 

in sating the Slanoe or monetary policy. partidpan~ 

consider not only what app<ar> to be the most likely 

ec:ooomic outcome as embodied in their projedions, 

but aiS(IIhe ra~eof alternatiw• possibilities, the 

likelihood of thEir occurring, and the potential c® to 

the eoonomy should they occur. 

Tallie 2 summarizes the average historical accuracy 

of a raoge of foreeaols, inducing those rePO<ted in 

past Mcr.el<lry Policy Reporls and those prep.lred 

by the Federa I Reseo;e Board's staff in advance o/ 

meetings ol the Federal Open Maiket Committee. 

The projection error ranges shown in the table 

illustrate the considerable uncertainty 3!SO<.iated 

.,;th econcmic forecas~. For exa"'4'le, suppose a 

participant projoru that real gross domestic product 

(GOP) and toW consumer prices will rise steadily at 

annual rates o/, respecth'ely, 3 pe<centand 2 pe<cenl 

If the uncertainty attending !hose proJections is sin'ilar 

to that experienced in the past and the risks around 

the projections are broadly balanced, the nun>ber> 

reported in table 2would imply a probability or about 

70 perca>tthatactual GDf' would expand within a 

ra~eof 2. t ID 3.9 percent in the wrrent )~ar, IJ to 

MOI'<CTARY I'OliCV RER:>Rl: fE8RUAR\' l017 45 

4.7 pe<cent intheseoondyear. and0.9 to5.1 pe<cent 

in the third and fourth years. The cooesponding 

70 pe<cent confidence inten~ls for overall inflation 

would be t.8 to 2.2 pe<cent in thecurrenl year, 1.0 to 

3.0 in the second rear, and 0.9 to 3.1 pe<cent in the 

third and fourth )<ears. 

Because current conditions may differ from !hose 

that p-evailed, on ~weage, 0\'t'f history, participants 

pt'OVide ju~ as to whether the uncertainty 

atladled 10 their projectioosoleach variable is gre>ter 

than, smaller than, or broadly similar to typical lf\'els 

oi forec.:tst uncertainty in the past, as shown in table 2. 

ParticiP<l n~ also provide judgrn<.11~ as to whe-ther the 

ri!lcs ID their proJections are •veigh ted to the up$ide, 

are wcigflted to the &wmside, ot are broadly balanced. 

That is, parUcipants judge whether each variable is 

mO<e li~.ely to be above or below their projections 

ol the most likely outco,..,. These judgments 

about the uncerlainty and the ri•ks attending eacll 

partidpanrs projections are distinct from the di•~rsity 

of participan~· views about the most likely outcomes. 

Forecast uncertainly is conoemed 1vith the risks 

associated with a particular projection r.uher than "ith 

divergences aero» a nurrber ol different projedioos . 

As with realaaivity and inflation, the oudook 

for the futile path ol the federal funds rate is subject 

to considerable uncertainty. This uncertainty arises 

pt'irmrily because each pa~icipanl's """'sment or the appropriate stance of monetary policy depends 

importantly on the evolution o/ real activil)' and 

Inflation over ti,..,. If ecor>omic conditions evol•-e in an unexpected manner1 then assessments of the 

appropriate setting ol the federal funds rate would 

change from that poinl fonvard. 
125 


21417085.eps

ABBREVIATIONS 

AFE 

BLS 

DPl 

EME 

FOMC 

GDP 

JOLTS 

UBOR 

MBS 

Michigan survey 

MMF 

01s 

ONRRP 

OPEC 

PCE 

SEP 

SLOOS 

SOMA 

S&P 

TIPS 

advanced foreign economy 

Bureau of Labor Statistics 

disposable personal income 

emerging ma ~'llt economy 

Federal Open Market Committee; also, the Committee 

gross domestic product 

Job Opening5 and Labor Turnover Survey 

London interbank offered rote 

mortgage-backed securities 

Uni>ersity of Michigan Surve~; of Consumers 

money market mutual fund 

overnight index ~wap 

overnight reverse repurchase agreement 

Organi7,ation of the Petroleum Exporting Countries 

personal consumption expenditures 

Summary of Economic Projections 

Senior Loan Oflker Opinion Survey on Bank Lending Practices 

System Open Market Aoc<>unt 

Standard & Poor's 

Treasury Inflation-Protected Securities 

47 
126 


21417001.eps

! 1.1!017 

THE WALL STREET JOURNAL. Home World U.S. Politics Economy Business Tech Markets Opinion Arts Life Real Estate 

BUSINESS 

U.S. Banks Report Record Profit in Third 

Quarter 

Institutions' profits soared and expenses moderated 

iht .S.SCD:mBOiltlilrfu fd~ faW10"6 :t'~d rl.ns&ntlll noo'!llfttfoeflt:I'QJ-*,ti F'DCs.cl. 

PhO:O SS~TEDPRtss 

By DONNA BORAK 

Updated Nov. 29, 201610:49 a.m. ET 

WASHIIiGTO!\-The nation's com merrill banks and ,.,;ng.< institutions reported al3~ 

rise in net inrome in tlte third quarter, hilling a record as institutions' profits soared 

and expenses moderated. 

lie! income at the 5.980 banks insured by the Federal Deposit Insurance Corp. rose SS.2 

billion. to S45.6billion. in the tltird quarter. compared with a year earlier, acrordingto 

data releasedTu~aybythe FDIC. 

"The bankingindustl)' reported anolherpositi\'e quarter." said f'DIC Chairman Martin 

Gruenberg. ... Revenue and net income were up from a ye\lrago, Joan balances incrtas~ 

osset quality impro\'ed, and Ute number of unprofitable and 'problem banks' continued 

to fall." 

Theri~in net inconlCwasdue inpart to aSIObiJlion inC'rease in net interest income, up 

9.2% from nyearearlier,and a 81.2 billion gain in noninterest income. al.9 increase as 

tradingrev~nue imprO\'ed at L1l'ge banks. One-timeacrountingand expense items ::tt 

three institutions also had an impact on thegrowthofincome, the agency said. 

hap..: ,.,. ... ,.";; .rotn'~tck• -."' ;I'J !<-r:por1 t«'((tJ.f'OIIH&Ihild~:at:cr· l"~)l\ -IS9 1'2 
127 


21417002.eps

!ll.l12011 US.IIoobR-Rmrdl'!o"•rudo.-.·~'SJ 

Stil~ Mr. Gruenbe!g cautioned banks cootinue to operate in a 'ciW!enging 

envirorunent• Low interest rates for an extended period have led someinstituti0111 to 

reach for yield, increasingtheirexposures to interest rate risk, liquidity risk, and credit 

risk, he said. 

"These challenges will only Intensify as interest rates norma111e,' said Mr. Gruenberg. 

'Banks must manage risks prudently to ensure that growth is on al011g-run. sustainable 

path.' 

During the third quarter, ended Sept. 30, more than half of banks reported year-aver• 

year growth and less than 5'.11\ of banks said tlleywereunprclitab~. It was the lowest 

pertentage of unprofitable banks since the third quarter of t997. 

Communltybanks, Mlicll account for5,521 ol'the insured institutions, in particular 

reported a positive quarter with tbeir net lncomerisingSS93 million, or 11.8%from the 

2015 period. Community banks' net operating revenue totaled S23 billion. up &5'.11\ from 

a year earlier. Loan growth was led by commercial real estate, residential mortgages and 

commercial and industrial loans. 

•eommunltybanks, Mlichaccount for4~ of the industry's small loans to bwinesses, 

continued togrowtlleir small business loansata faster pace than the rest of the 

industry." said Mr. Gruenberg. 

Thenumberoffinandal institutions on theFDIC's 'problem list" shrank to 132 &om 147 

the year before, tbe fewest nuni>trof institutions since the third quarter of2008. There 

were two bank failures in the latest quarter. 

The federal fund that protects consumers' US. bank deposits grewS2.8 biUion during 

the third quarter toSB0.7billion.lts insurance fund reserve retio roseto LUI% of the 

institutions' estimated insured deposits. 

Write to Douna llorakat donnaborak@wsj.com 

e.,.p~GoJr2017Cift ..... a.. ecno..,ll'c./ID~t~ 

na .,aw"",.,--.~-..., Tocre~c:wn•~·,_~._•eus~neo• _......,....... ... 
128 


21417003.eps

QUARTERLY BANKING PROFILE Third Quarter 2016 

INSURED INSTITUTION PERFORMANCE 

Banking l.nduslty Net Income Is S5.2 BiiUon Hightr Than a Yw EarU<r 

CormnuttityBank Revenue and Loan Gr011'1h Outpace lnduslty 

Total Loan alanc~ Rise 6.8 Percent During lhe Past Year 

Net Income Registers 

Strong Increase 

Netlnttr"t Maegill$ 

Dedintat a Majority of 

Banks 

txpense r~1h Is Modest 

Char1 1 

Quarterly Net Income 

... 

lncreaso:l n<l interest income helped boost operoting revenues at FDIC. insured institutions 

in tbe third quarter. Tbe indusltyreported net income o( S4S.6 billion for the quarter, an 

increaseofSS.2 billion (12.9 percent) compared with the year before. More than 60 perc:ent of 

all banks reporto:l year-over-year increa~ in quarterly earnings. Only 4.6 percentofbanks 

~·ere unprofittblt for the quarter, down from S.2 peruntlhe previOui year. The ••~rage 

return on assets (ROA) rose to IJO percen~ from t.O> percent in third quarter20JS. 

Net ope111ting revenue-the sum of net interest income and total noninl<rl/$1 incometObled $183.> billion, up $11.2 billion (6.5 percent). Net inl<r<$t income wasSlO biltion 

(9.2 percent) higher. whilenonintert$t income rose by SL2 billion (1.9 percent). The increase 

''"s attributable to growlb in inrerest-bearinga$$<!U (up 6.7 peruntover the pastl2 monlbs) 

and impro\tment in the industry'uggregate net interest margin (NIM), wbitb rose !0 

>.18 percent, from ).08 percent in tbird quarter 2015. Tbe NIM improwmentwas not broad· 

based..~ majority oibanks- S>.S percent- reported bwer NIMs than tbe year earlier. In 

addition, an accounting change at one large bank r~ulted in a sizable incteast ln lts lnrert$t income for the quarter that contributed to tbe size oflhe lmpro"ement in tbe industry's 

quarttrly NIM. The rise in noninter~t income~ .. , driwn byaSI.I billion increase in 

trading revenue and a Sl.6 biiUon rise in smictng income. 

Total noninterestexpenses ~~re $1.1 biUion (I perunl) higher lban theJwr before. Expenses 

for goodwill impairment '"re S6i8 million (97.8 rerunt) lower, wbile item :~td Uligation 

expenses ~~re S248 million lcl$. Salary and emploJ~• benefit expenses were up S2A biUion 

(5 percent). lhe avmge efficiency rotlo-noninlert$t expense as a percentage of net opel1ll· 

ing te\-enue-improved to S7.5 percent in lhe third quarter, from 60.2 percent a J~ar earlier. 

This~ the lo~t le\~1 for the ratio since second quarter 20t0. 

l!«&."iild"OOoii~ N!f 

l.'-:flO(f!M1!1tt'lo:ml 

Chart 2 

Unprofitable Institutions and Institutions With 

I ncreasod Earnings 

... _ 

10 

II t41 )) 4 111 4 1 P1 f l )l 4 t I l 4 11l 

'2(11iJ Mill !9U lOU :ol4 lOIS lO" 

... ~1'!100 

FDIC QUARTERLY I 
129 


21417004.eps

2016 • Volume 10 • ~umber ·I 

Loss Prol'isions Absorb a 

RisinsShar< of Rmnuts 

Charge-Offs Rise for • 

fourth Constru i\~ Qu•rttr 

hnproYcment in R~l Eslat< 

Loans Ilelps RNucc Total 

Cl'oncurr<nt Loan Baltnces 

l,oan-tO<S R<Sm~s Po>t a 

Small locrme 

Chart) 

Loan-lou provilions roseyearm·tryear fora ninth oonse.:uti,~quarteriO Sll.4 billion, a 

$2.9billion (34 percenQ increase m~rthira quarter2015. Only 39 percent ofbanks reportoo 

increases in their plll\;sions, while 30 percent repOrted reduced pro,ision expense>. For the 

indu>lly, quarterly provi>iOns represented 6.2 ptrcent of the quarttr's net operating revenue, 

up from 4.9percentthe previous year. 

Net loan iosse!totaled SIO.I billion, up Sl.5 billion (16.9 ptrcenl) from a )WI earlier. Th~ 

is the fourth quarter in a row thalnetcharge-offs haw posted a )~ar· \'t'r-yw increase. 

Net cbarge-offs of loons to commercial ana industrial {C&I) borrowers rose S946 million 

{82.7 perrent~ whil<mdit card charge-<lffs were $658 million (ll4 percent) higher. Charge· 

offs of rtsidential aoo commercial rea.l estate loans "~re 5371 million (39.1 percent) below 

year·earlitrlevels. The average net charge-<>ff rate rose to 0.44 perren• from 0.40 percent the 

year before. 

Noncurrent l<lans aoo lease!-those90 days or more past-ducor in nonaccrual ttatusdecliocd fort he 25th time in the last26 quarters. falling by S2.S billion (1.8 percent) during 

the thret montbsended Septtmber 30. During the quarter, noncurrent residential mort· 

gage loon balances fell by $2.7 billion (3.8 per<ent~ while noncurrent home equity loons 

declined b)• S386 million. and noncurrent nonfarm nonresidential real estate loons fell by 

$367 milliOn ().7 perU'Ilt). These improwments e.lceeded the Sl billion increase in noncur· 

rent credit cards. Noncurrent C&lloans increased fora seventh cooseculivcquarter, rising 

b)•SlS4 miUiOJL This is tbesmal~stofthese,~nquarterly increases in noncurrent C&l 

loans. Thea,~rage noncurrent loon rate fell from l.SO percent to 1.45 perren• the 10\\'tll 1<\~1 

>iflC<)Wr-end 2007. 

Sanks iocrea!ed their resen~s for loan aoo lease losses k>r a fourth consecuti\~ quarter. as loan loss pro,isions exceeded net charge-oils. Loss reserm rose by S3i2 million 

{OJ percent). At banks tbat itemize their rcsen·es, representing 90 percent of total industry 

resen'l'l, the increase "~s driwn by higher reserws forcredit canllosset which rose by 

Sl.7 billion (6.1 percent). In contrast with the pr~·ious se~~n quarttrs, itemized re.en·es iot 

lo>se<on commercialloansdeclined, falling by sm million (2.1 percent). The increase in 

industiy reserw~ combined witb the reduction in noncurrent loan balance.. cau!ed the 

cowrage ratio of res«,ocs 10 noncurrent loons 10 rise from 89.2 per<ent to 91.1 percent during 

thequarter.tbe higbcstlml ~n<eyear-end2007. 

Cbart4 

Quarterly Net Operating Re<enue Quarterly Loan-l.ou Provisions 

IQucw-.~l«en~: 

QwWl!~rot!"te-.,. 

2 FDIC QUARTERLY 

"""" 10 

10 
130 


21417005.eps

Retilintd fArnings 

Account for Most of 

EquityGrowlh 

t oanGrowlh 

Remains St,.dy 

Depooits RiS< by 

$271 Billion 

ChartS 

QUARTERLY BANKING PROFILE 

Total equit)' capital incm!Eii by SI6J billion (0.9 percent) in third quarter 2016. Relaine<l 

earnings contributed Sl S.l billion toequitygrowth in tbe third quarter, S4S8 million 

(OJ pe<cent) more than a )-ear earlier. Bank$ declared $}0.5 billion in quarterly dividend~ a 

S4.8 billion (18.5 percent) increase over thirJquarter 20tS. A $3.7 billion decline in accumu 

latooothercomprcbeMive income limited the g~owth inequity. The awrageequity·to·asseu 

ratio for the industry dcdinoo from 11.28 per<ent to 11.22 percent. At the end of lhequar· 

ter, more than99 percent of all banks. representing 99.9 percentofindullry asset~ met or 

excee<led tbe roqukements for the highest regulatory capital categoryasdefu!Eii for Prompt 

Corrective Action purposes. 

Total assm rose by $232.6 billion (1.4 per<ent) during the third quarter. Total loan and lease 

balances increased by SIIZ billion (1.2 pe"ent), wbilt im~stment securities portk>liosrose 

by $86.8 billion (2.S percent), and balances at F<detal Reserve banks grew by $41.5 billion 

(lS percent). Assets in trading accounts dedined by S27 billion (4A pen:tnQ. Growth in 

loaM was led by residential mortgage lOOM (up $28.6 billion, 1.5 percent), loans secured by 

noniarm non,.siJential real estate properties (up $22.4 billion, 1.8 percent~ and creditcard 

balances (up $15.7 billion, 2.1 percenQ. For lhe 12 months ended Septtrnber 30, tolalloan 

and lease balances were up $590.8 billion (6.8 per.ent). The growth in securities "~satlrib· 

utable to a S5SJ billion (2.9pe<cent) rise in mortgage·backoo !eCUrilie~ and a $37 billion 

(8.5 pe<cent) incm.se in U.S. Treasury securitit'S. Unrealized gains on banks' al-ailab~fcc

"'"' securities fell by $5 billion (11.4 percenl~ whilt unreal11,ed gains on securities in held to· 

maturit)' accounts decbned by $2.8 billion (1 1.7 percent). 

Dtposit gr01<1h "~•strong in the lhird quarter. Total deposits rose by S270.7 t>iUion 

(2.2percent) in the third quarter. Deposits in dom<>tic offices increased by$259.6 billion 

(2.3 percent~ with balances in intmst·bearingacoountsrisingby Sl40 billion (IJ percenl~ 

01\d balan<e$ in noninterest·bearingacoounts up b)• Sll9.S billion (ol perce11t~ BalaOc;e$ in 

consumer·oriented account! increa!Eii by$103.8 billion (2.6 percenQ, while all other domf!· 

tic oflke deposits rose by Sl 56.8 billion (2.2 per.ent~ Deposits in foreign oHkes increa!Eii 

by $11.2 billion (0.8 pere<nt~ Banks J'duced tbeirnondeposit liabilities by SS4J billion 

(2.5 percent~ astradingaccountllabiliti<S fell by $44.4 billion (147 percent~ 

Chart 6 

Noncuncnt Loan Rate and Qua~erl)' Net Charge.OtfRate 

!;() 

lOO 

150 

1!111 

;o 

"""" 110 

110 

... 

1!11 

100 

20M Z!rJi ~ ~ ~10 Mll ZOU 2013 1014 ~GIS 201-6 

St.!«:!lttC 

~~~ll*ll'fttbnlt~ 

FDIC QUARTERLY 3 
131 


21417006.eps

2016 • Volume I 0 • :-;umber 1 

1\umW..ofFDIC.Insurtd 

Institutions Is 5,980 

Char1 7 

The numberoiFDIC-insurtdcornmerclal bonkt and savings iruUtutions reporting quarterly 

financial rt!ults li>llto 5,980 in thetbirJ quarter, from 6,058 in the S«<nd quartl'tof2016. 

Therowere 71 ml'tg<rs ofinsurtd institutions. while two insur<d banks failed. No new charters were added during the quarl<'l'. Banks repor.ed 2,04M80 full-timeequivaltnt employ· 

ets, an increase of 4,990 from !bird quarter201~ The numberofinsurcJ irutitutionson the 

FDIC's "Problem List" dedined from 147 to 132,astotalaS$tUof problem banks fell from 

$29 billion toS14.9 billion. 

Author. 

Ross Waldrop 

Senior Banking a~s t 

Division of Insurance and Rese<~rch 

(202) 898-39Sl 

Char18 

Twdl't-~lonlh Gro•1h Rate, Total Loans and~ 

., .. 

IS 

·10 

2006 b101 !In l009 !0::•10 !011 Nil !GU :VH !OIS 201, 

S.:..«tiOIC4 FDIC QUARTERLY 
132 


21417007.eps

QUARTERLY BAN KI NG PROFILE 

TABLE I·A. Seleoted lndk;ators, All FDIC·Insured ln•titutions• ,.,. .. , .. ,., ""' ""' = fttllmmMMtt~ ... ""' ~ . .. ~ '" ... Rttl.nontqOII_yN >19 >33 92' "' ·~ tSI ,,. m C«t(.UOf'l'fftOrimol%} .,, "' ,.S! , .. NW"Wffl't*« -orhf .W 1U ~IO:lt$11U00 ... ... '" '" '" .,, ,,. ,., 2lf l.i1 

N.c<h3r~·ofl~wtNnt~ (1.4!> OQ 

'" ... .... '" ... AtMI9'~"1hrat D'! .., t!< , .. ~ ... ... NtCII'I tr~!Nr9"N 311 "' "' ·~ 301 '" ,,. '" , .. ~OC*ilnOIIQMttpl'fenQ '" ... "' ., IW 17M .. .. ~,, ... '**ffi)Oitr'q ~ ... ..,,. .,., ~ ... 1.~ 1;1'>1 

C~,lllbris $.110 tliO 

- SJO) $.3<1 Mn ti>S ~-.ll 'Aonl ••• "" ... "" ... .... .., Ptf(4QJ~~oh.r""orc""' roel.l0b>ntf%1 3.90 .,. .,. w til .... 19.23 Hlmbtfo ~.,.lbcn Ul 

At~omofPtotlttn.•,fll.•wntnhiiOMJ "" "' ·~ "' '" '" .,, ~ofbdtdlllstJI~ s "' '" "' "" "" ''" • • .. Hl.mltror-.s~td mm...,,.,. 0 • • • " • " • " 0 

•[~ .... td:tnndlttoll .. bri'fiBA.II1. 

••nr~~t!Mc3Q. MIOt~~*btr••opr ct -'*""IOfCM1hr.Jttt.ctbUMonchu~VinQS.p~ti'I'W30. 

TABLE II·A Aggregate Condition and Income Ooto All FOIC·Inoured Institutions 

(Ma'ligtrn lnmi!O!W) """"""' 21d0Wflilf )lcf<hQrlM ,.,. ""'- ""' "" 150Hi03 

Hu'nbero .....c~ tpO!tt'q ""' - til'() To lieftllky..etlhA..,_~IJ'fiNI1) tOU,.aG tol!V" too8.' !<1 " ., toffOi hOtH».U 

ot.JI~• 1~-7 

·~ $1s,IOO.II$ .. l0¥15ttOJI'tdtrfrultttllt U$7.12'0 _ .. ,4)11,101 

J!nir~fll(lf~ U$9,.1Q •• ,_ teet<tl~ Sl on ~n«Y.,..III 1.3\1>.$11 un.m 1,199.663 .. eoo.wecj.)ft..t•wloPMtfl' >03,~ "'"' """" 11.1 HM~t• vitltt HUU ~51.231 en.~ 40 (OfJ'fi'M(I.ll ~lo- ~3,2$3 .~2& ...... '"' .. l~lbll'dwdullh I,.~U.tGa 1,5'6,1'..6 ... .,,., ., c. ... _ l~ ,._ 11'.1'0 " ,..,_ ...... Olhtrlon&l.-e. 1.,«m,&3! 1,0!12,0i """ 1 UIO""" I,tc31 " •• l~UM•Ilf4noorn. Z.0J1 UO£ .... , .. J(IUIUI.t8(1tJMt t.m~ t.lltm wtm u t .. Rtten.-.JCflo•• ·- U'l$ ....... HtUowa'ldl..,.• 9)11,i121 8,m.3~ o.sn)lO " u 

- ts07,CW 120.~ UOUOt ;I Oltltf~ ..... (IWtltd 11.180 1).1$1 16.11$ ·1<.9 

Goo6NI!Mid01twwungclll• l63~C 

~" ' 3S<9S> 

OIIwaMet~ :tm.MO 3,1&1,Ui 3~«6 " Totll'libMH.WldcJI)Ibl 16)'M.9)1 1Wl,.91i! " '""'.11< .. o.,... 1V!4.71& O.S2~ 11_.$90.43:) <I I)Mlftlllcoi!Kt ~l:f u.•rn 11.~.\86 10fot!I)Ot 

r(lll9o flu~· " l.l)OJ>)G IJIU4! 1,3UJ;tl ~~ 

Olhtrborr•-.dbX!s t.,.s.m t •S7fi6t ,.....,. .. S.tfdNrtdMII: 8'JJ131 809l Allotbwbbllill• ""'IU "·"' ~· "'·"' w.sco ,, lCICtltCf,JilyQPil~fthtb$fffl'ICII'A'C)',.t$ttl ,,.;~ 1,81~-' 1.,7,«6 SP !Un ttpty~al ..... .161 IMUU 1.~- ..• low.tt'ldlfl$tt31>-3$da'ftpM(dut 00.071 ...... •t"' ·18 

HMCwr«tlowtnd~ ,,..., 136,.371 ,., ... ., RtfiNthndioMII ~n lu-. '1.&1 "AIO 71.1~ ., ~9f ~a.tCU~ tt 1,97$.611 1.$2W1 ,.....,., .. ~~-'"' 15,111,156 N,3ll)S1 1l1t.ll,li:n 

ht.8Advancn SU,.tl1 S..S.'1l " "'"" '" u....o .... _ 1.181.8$): 1A1lJlO! f.ssl.~ 

Truc...u 17..S13A64 11)t.lht2 ~~~· .. " Awtl~11M1ndi<U 

~:·: ~· ... ~ 

NOOMal aniOift Ill dtnYafNM ~:1YI.W 1!6~,13 ~· " ""'"- ........ 31 l 31dQultllr ........ IHCO.-OAIA 

-- _..,, ~ ,.,. "" 100>.., 

loi.Jll'llttftln:mw $38',.b"!it S3'-",356 " $13'$31 

TOIIIRtr_.~ 39,73\ '"'"' "' ,...., '" .)1, t1,54S 

Ntt nlttfCIIICOMt "' ,....., w.m .. '"'"' 140 ., P,~(l:(5Nn¥1d t.lM-f IS.<U 11>1$ u• 11.400 a,st4 , .. Totalnonrtwescl'lcomt 190.237 190.SJO <>I $<.190 G3JOt TOI.liROCWCtrt:lo1upen. )U)U 3U,Sl2 01 IOifil' " '"'""' •• $Kvllwspns0otst~ 3J6S 1,0!6 " ... .,. ,. .Aclfilt.lbl. t•te Si,iCl " .U " 20.311 ...,., Ewtrinaryprw.ntt' .,., .. .... . ,; ... N '" 

.. 

Te<t4...crrocor •~ffiMI'Ittrtttt$W 12Ml3 123.348 " •s.oss 40.-n 

bitnet ...... 12111l llt,!l~l lO •s.s... ..... "' Ntc.c:hlrQt·ofli "' ,.,, """' HI 'O_US M .. C.ashdiVtdtnds 11,11! 11;)1)1 •• "' ..... , """ ... JWI*Nd • .,.. .,...., IS,&JJ "' .... , .. ..,. Htt(l(lffU!Qint6fl't " '""" mm " f!-.111 "·~' IU 

'S.• olts o\htrt~913CO ottt;~ NMNol~ 

FDIC QUARTERLY 
133 


21417008.eps

20J6 • Volume 10 • umber ·I 

TABLE Ill-A Third Quarter 2016 All FDIC-Insured Institutions 

Aiw!Co110tiCJ~bti G!041Pl' 

'ORQU\RT£R ........ W.Uio~ ·Ql ~--~ MM ~ ~~ ::l ll ~~ AIOthw llltw:w lt ~ ~ilvtlon• bDb tt.b bDb ltiiCW$ ........ ~ 4 18JIIo• <$1 .. >St ... 

Hurnbtrol~ .pottn1 ... 13 s 1,461 """ .,. " , .. ,.. ., (Ofl'lll«(ulhlnb .. ,., " s t.H4 ...... "' II 110 "" .. Smnp$tNOliAIOR$ '" ' 0 II ... f$1.-.•IN'Iblion~ $1t1&Ui "' " " " ' ., ..... St S~ sua $U1U ... ,,, .. $'"A il 

'""' $6,4171 

COil'f'l'*'(~blnb ls.6312 "'' 4,U$.3 ''" ~"'-' HS1 1001 1 ... Ul3.0 $wftpin6cJ ~on. Ult.4 ... .. ,, ·~· 2R1 , .. , .. •t• ~8 

Toul~sti'IW~ U,i'!U h.,_, 2,m.1 "'' '-"'' 310.1 ma ... .... <.211.0 

C~ulb'b 11,.$01.5 !10.3 2.!m l , .. 1,(1&$.3 llH '" ... IU t0l9o ~W..,.f'IAIIAIOM ''" '" 00 " ,,., '"-' 881 33 Ill 113.0 

l:rintt flCIOMIIinm~ '""" l,W $.214 ~ 1.4,111 ,. "' "' , .. ,.,., COIM'MCIII bril <l.l31 ,..,. 9,211 .. , 12.111 "" "' m ~· ...... 8wJipMIW9M 3;J$0 

'"' 0 3S "''' SIS "' 186 " 113 

Pwfof ~~fil>f;~~ 

Y.Won.-nng~D ISS ttn 210 Ul ... '" <11 , .. ... '-10 C06lof~ arr.l'l(lhHII .,, "' ... ... ... "' ... 032 •• Hti ..,Htf'Nflln "' '" .... ,,. 313 .,, 116 31$ , .. '" , .. NOf'lltltl"*'€~ otMtU "' til "' ., U& "' ... '" ,., .... Horuttrut aptnM lo D '" "' t3l lSI '" ua lSl "' af!! ttl lo.tand"- o•~ro~l$ oil ,, "' t.l3 . , ... "' ... 010 011 

Nt~tGPtt..-.o ~eow.~• 

"' ,. ... "' 100 101 '" 1!0 U l Ul ft-lltUUII!.m«<IIUelt "' ·~ ,_, 1&3 "' "'' "' ,., &11.rft~..-~ 110 '"' "' ,_,. OlO ,,. 101 1 .. "" u• •~G 122 

IWMI\OIItq.ll'f "' .... "' H14 ... t11 ll\11 1721 ,. tO!.Cl 

N.-cb¥~·QflltaolNrl$.-nd n+n ... '" ooa ... Ol:) ... 0.6$ 016 01, ... l 0¥1lltld!NMIOWl)IM!IIM'O 

ntt~-"''l IU31 Ull> .... ~·eo 101Jil Hi&!P~ HUJ IO<l:) .... .. <a ( 16QtnqtUI)O "" .... ""' "'" ~ .. .... ~,. "" "" . ..of ... t~tbltl'l-.c\D:olll 

'" '"' . ., ... ... "' . ., ·~ "' ,., ol wt!ht)llllrlgl;pnt 0)10 .... ""' 160< 4111$ S..OJ ... .... &3lS ,., Str.cv,•U:Jt,afl;. 

....,,.p(lttff$ 0 0 0 0 0 0 0 0 • 0 

~at.cwbtdbylfWQ41'1 n • 0 " .. • • 1 

fntd~MU:uoot'& ' ' ' • 0 • ' • • • ' 0 

PRI.lRTMIRDCl».RfERS 

lll l'.y it J 

~onltiiii•N "" ,., ,., ... 031 1.00 051 ... "" '" 1 .. 

"" "' '" 013 "' ... U2 "' 1 .. ... ,., ''" ,., ,., lOI 1,. on .,. " . Ill IOl . .. NeC.dwQt.olltftlow lt••Cit 101!> 010 '" ... ... 010 . , ... '" . .. 031 

"" ... "' ... ... '" ... ... . .. ... '" ''" "' SOl "' "' Ill 011 

'" "' ... •S.t ablt V-A. J!* <fb~ "' 

6 FDIC QUARTERLY 
134 


21417009.eps

QUARTERLY BANKING PROFILE 

TABLE Ill-A Third Quarter 2016 All FDIC-Insured Institutions 

AMittSCr.tmcibul»tt GNiJaphicfA;io.a' le6$"11 ':I ~B~~ S~Bim: l ~ = l .... ..lc ..... l ";;I ... I.L..t n.DOU4RTER ,._,. $100 Milio111o to$'10 to$250 TIIH$250 

1Tlltw¥titlf.J .......... ~ S11il1M 8i~ .. 8iloa 

Hlmbtrot,_!AOCII,tpOrt"9 ..... ..... 3 ... "' 101 10 "' no 1.>$1 ,..,. IJ$0 

(onYn«uJitunb "' · ... 1,391 3,1"11 ... 18 10 ,,, ... ...,. 1.•u '"" m S"""'!MIIl...,one · "' .. , "' " • "' ,. ,. " ., ,. focliMNtt!JIIbill~ $16.1ti:O$ ..... $1,111& st,UIO Sl,96)0 ...,., SlJS&& S1,mt Sl,iafi!. tl,,n1 SIMIG SJ.'-'<&a COII'f'MKLIIblt..f 1S.Q)l 831 ..,, 1,tl16 t,356.6 >./)" UlU ..,.., l.612t UtU 8138 1.3817 

s~~Oflt 1,.1lt4 lo..t 178J ~" .,., Ot "" ... 1ll.i '"' .,,. 3111 

Totll~l l)bililtoNl U,1'86.8 "' "'' ...,., 3.7!18.8 "'~'5 vnn :.nu. 2,7!11.1 2.7111 .,., ,,, .. c""""""bm ti.!IOJS "' ooos 1,N15 1,29$0 ~9$ l.J1.>1• 2,<$66 2.11S.8 1,6'$6 mr 1.100~ 

$wf91'1Sbii.GOI'II ,,,. •• 1116 ,., ... •• ,._, .,, .. , "' ·~· ,.., &n\M! Ikon'lt!,lnll'l~ ISJ>$3 !to 3)01 '·"' I), liS !>AI ~,., oo.on UJ.I "-'"' 2Ul sm c ............ 41.131 "' "" I,Oia 11,31!.1 ,.... ~"' ...... &911 U11 .,., ~02 

SJIII!'Ifl:mhhi!OM lJ" " 1$1 '" t iQ) • ,,. ,,., "' 1)1 116 1,4.&1 

PlolfotiiNM•lltiN Mef,,., 

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FDIC QUARTERLY 7 
135 


21417010.eps

20J6 • Volume 10 • ~umber ·I 

TABLE IV-A First Thr&e Quanors 2016 All FDIC-Insured Institutions 

Aiw!Co110tiCJ~bti G!041Pl' 

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8 FDIC QUARTERLY 
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21417011.eps

QUARTERLY BAN KI NG PROFILE 

TABLE IV-A First Thr .. Quaners 2016 All FDIC-Insured Institutions 

~SU.Datrkiolt GNiJaphicr..;io.a' lab':l ':I ~ .. :l''ow:J ~ =I o. ~oo l 'C:I o• ~-f: FF:STJHREtQlM.P.TUS ......... $1(1) Milil:l11 to to$l0 to$250 TIPcl$250 

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FDIC QUARTERLY 9 
137 


21417012.eps

20J6 • Volume 10 • ~umber ·I 

TABLE Y·A loan Performance All FDIC·Insured Institutions 

bwtCooc.Mutio. · 

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10 FDIC QUARTERLY 
138 


21417013.eps

QUARTERLY BAN KI NG PROfiLE 

TABLE V·A loan Perfonnance All FOIC-Jns;ured Institutions 

AMtSU.~• eo.,.. ........... 

~~: I s,'': 1'10 sam l c~ I ...... L>&J 1 ... 1-t bN)O,M ,. ..... $lCO Milf!Oftto 10 IDtaiO Tbl$2!0 

e.titatioal Alllio• $1811bi S*GBilin Billi:MI 8i6o• 

Pt~e ... to-~t.tD~ AtDu. 

Al~~~ Mtt~ lllt Q11 Ill OS. "' Q!1 106 ... 0$8 .,. ... Oil OlO 

tonM.NCbManddMI .... N ., 103 '" "" 031 ou "' ... .,, ., ... NoMwmnoc..-t"MOal O.N> ... '" "' 02$ '" 021 "' 02!> . , ... 030 012 

Mtllrbmfyrfltdtfti•Airdt*•• '" ... "' '" 0 11 001 ... ., 010 .. , ... 0 11 

~tQIJC)tiOIIIII '" U3 '" ... .. , 014 

'" 011 OJ$ ... '" olO 

Olhttl-4~1--~ t23 160 "' ,., 101 1 .. '" .. .. l it .... 1., ... CocMww .wl •~n.lllloAnt ... "' . ., ., ·~I ... '" '" 016 "' ... ., l Oif'ltiOII\Ch1$;. 111 '" "' "' IV Ill "' "' "' 117 "' 120 

C)tdd.,•diOJN 1)$ <SO II» 1/0 13~ Ill 11)6 "' 1"' II> "I OllwiNrl•~~ 130 '" "' "' 11$ 006 l .i1 us t1! 1.0) "' Ill .,, Mocfwtlow.-.diNMI(ftdudnobrmt ., ... ... '" '" .,, ... 011 '" '" 03! 

fotll lowls~luws ... 100 "' "' .. , ... on '" .,. . .. 011 ... . .. PlfKent ~HoiiCIIIItllt'' 

g,~ ........ ,.. I" IQl '"' .... '" 1 .. 151 ,,. ,., 126 

Con!UUdJOn..:~dd !'ll ... 1 .. 131 ·~ ·~ .. , '" 0$8 Ill 061 ... 01' ... H*-m(IOIW'tto~~l ,,, 1$2 ,., O)l ... 0 .. . ., "' "" 071 ., .. ,A.tt*blfit~.ai NI"'c' 0 1! '" ... on 011 QIS ... on 020 021 ., tfomttQIJIIYIOW '" '" '" ,., '" 1 .. ... '" '" "' "' .. .. . ., ther14~rf!lldtnltal '" 1<1 1.11 LU 1<1 ... IJI "' "' .... "' ... Cofrmtfcultnd "'lon ... 10$ 13? HI IIJ ..,, 01$ 13$ Ill 11$ "' I~ 

l OWIOinciYI.- , .. .... .,. OJO ... .,. ... ... 1l11 . .. . .. t'rfdlturdlon ... u• '" "' 1&8 100 Ill) 101 Ill l o; "' !U 1.9 

OUw~Nn••~ ... ••• .,, OS> 056 ... '" 0$1 ''* .., 01$ ., . Aloefwt'low nJ it2ttt~bnrf 012 •t: OQ "' on '" OlO us o .. ... "' 013 TcuiiNMWidlf•• "' 131 IQl ... "' , .. liS 1$1 I. I> "' 1:)1 .,. Phtnt loMt~ttci·Off t. YTOi 

l.lrelll..-alo,Vlf ... 00!> oo; 003 0" ... ... . .. '" ... 001 .om (~a'ldd~f11 ·Of6 ~ .. 000 ~ .. ... ... . .. . .. ... .. ~ .. 0" ..(l_l!j 

HonhttnMIV .. Ikft:QI ... ... "'' 000 ... ..... . .. . .. . .. ..... 000 001 

M*bmlrr•• cltnhllrt.llnl(t ... OQl ... .... .... .... 000 . .. ·001 , .. 000 om 

--- .,. 010 ... 010 011 OJ> G. I !I 042 on 03) 016 ,., Otlwi-Cbrntft .. ~ 0.07 '" '" ... ... . ., ... 000 .., ., 000 000 

Co«rmttaa wl fldutln~IOW ... ... 0!1 .... .... ... "' ... . .. ... . .. . .. owto •ndh1~ ... 011 on "' "' "' 101 ,., l iS "' 1.3!. 1 .. 

Ot~Jl.qrd ~ 3.<6 

""' •11 3.61 "' , .. ,, no t$1 11S >il 311 

o~twt••tli).O.'d.t* . , "' ... ., ... ... '" 011 ., IOJ o .. .., .. .,. ..... 11\d ...... _bmll 012 Oil ... m oil '"' '" '"' ... Oil 0!9 0.11 ~ ... ¥1dlt•• ••• • •• 011 '" ... ••• 0 .. 0.53 ., OSI 000 016 

o.~ OvtstMfiMjtil biloflll 

AlrelletUW~ S<,WI S:l81 ,.,. ..,., SUN.a ""'' smo S.'ttO "'" '"" -· ...... c~.-ddr.....,._nl 30)1 " ... ... '" '" Sf) ,, "' 161 

NonlwmM~V .. d4mal "" "' ,.. !.S "" 3M.6 "'" ,.., 2!£0 "" 1 ... ... ~U.a .... M!Ab"*ffttldtnh.lfrtlit*M :t1U II "" .,. "'' IUO I)S;6 IH ,,. »I .. , "' --- "'" .., IS6 ... uu 2/SS Ul 11t4 1\'90 '" ... 2&! 

Othtr1· ~ftttdtooal ...... 112 .. , 286.2 ""' ... 3 .... 4219 ""' «J;);S .. , ,.., ¥1111N!uatn.allon 1-"U .. !'$,4 1 ... /(I'H '"' ""' .... .... ""' "'' zns onto f'd';,~ I.SUS " "" !32 "'" ,,. ,,., .... 2207 3153 '" 13tl 

Crtlllurdlolf'll 1M 01 11 

'" ·~ · m• "'' ,., '" "" "' .... Ott.'*'•~ "'-' " ,., "-1 .... .... "" ''" 1&16 .,., "' Ill> 

A"!OI'*Ioll'll r.dlt.iMt~bmi 1,130.3 .. S11 

"'' ''" 146.3 .... ""' 21H nil ToUIWttandlt*t: '" '" 

I!IM..ntwnf4ftt(JI'N• 0)3!,2 !4.1 ''" U li.6 J,(l(lo76 .Olrll ..,.,. l,OH~ 1,8 31 1,tl9.1 .. ,!> "''" W..O.OtJIMIINbuotOI!Intd lil•.ili)at) 

tl(llt\ttrtli--.OWMd 11)300 31)).S 3,1~0 2,(012 tms t~U l,$t4.3 ...... 2;s1r !.Of> I 1,7?S.1 3")H 

COf'llllluCtiOI'an d~lll vm• uu 1)031 I,MJ.O 4SI-3 ) 01 2 ""' 1,cms ..... 1116 

Hoti!Wil)m!Vt$d4rQI! 3.1011 11U 1,111 1 036.3 6.1'9.$ IIOC ""' "'" 'll' "'' "" ~1S() s•u )lSI 

M!Abft'iyfftldtnll•r.atfll!ttt 10>0 IS) , .. '" ~~ "' "' us ISO 4!'S ,., 116 

t mlt 11t~d«U un• "'I .,... "" IJ62'3 l.ml 1,<0&1 ~13 "'' S>O) :us.s ,., 

'""""' 1tl6 .. ,., ... 10> 12 .. <01 , .. ISS ... 1>6 GNM.I-• "" ., .. 1'1 '"' .,.. "' "'' ,.., ....... ''" '" "'' N.wYOit·C~~.OtiMltt.D.6cnct of~a,t.t.n.,WII)!~Mw;.sathuttttt. M~t.NMJwtt')', fwtY~.~v.~t~~a,f'u« ollilto,PIIodt lti N.\'trtntfW. 

USVi ~bl:.ndJ 

AlWIII ~,._fb1dJ,Gt«QII ,HotlhC.41~SouchCu'Oii\a,.VrftW,\Vt V"Ir9f'llt 

OKaoo lll:»>t. dw.~lcy.M~t~OIM.Witl*Wft 

X,.nQ~Qiy owa.Ka~ l.t!mt$01J, IItOUn.Ntb <ib,hlhebt~SN 01tob 

0. ·A~Col<of-..».lOI.Ifii.Wla l4ttl$!iipew;,W.WMtxlco.OO~ ftMe:Mtt, T.xu 

S..rrtnPttO Albb.Anton~,Ciilfono..t.Kwr.lll ldaho,UOtt...._ wncb.Orf901\haiK t&ancft Uiafl,W~~ 

••HMCU'r.rlll• r .. •~!h. wt.n~lll'ollowltl'ltaeh~lhll•ep._._SOdlyt«Mo>reOithai¥el'lt'lOI'laccn.WUI.IlFDIC QUARTERLY U 
139 


21417014.eps

20J6 • Volume 10 • ~umber ·I 

Table VI-A Derivatives All FDIC-Insured Call Repon Filer1 

,b~ Si::•latribtll!io• 

• ,_ 1100 ~ $10 eo .... 

'"' ... · .. '"'"' ... ''" .... tllloo ... .... fd*r"'f'flinml~ O..rtM a.. ... -· O..rtoo 0~&:afe.r 150J. "" .. ~ ""' ...... .... IICOoftj MIOU!CI"*'-0!'*-tt .... tlt ... "" "" '"' "" ""' -· .... .... ... .... AUWIIYA.n\'IH<X.OOIS 

Nwnberoill'lti(D:ottp«t~dtnrr.Wift \110 ,.., 1,q!l Ulf ..... " " .. , "' SJ 

IOUI....,otr .. lfllllonlrtpO!llf'IOdmtJIIitS Slt.W.9U $1!>,.003)31 ifl,i~,799 S1t.U2.442: tU,l'11)58 '-' st!l3 sm.S33 SUlm'l s.t.na.uo W11i.1f1 " TotJI""'**of.-...liQ'W!~-ata-... ti.SU)$3 11.3"13$8 11,1-B$',$AS t0.$'33)76 ~417 

·~ U«l 27J.$)6 IJ)CJA\2 '-'"'""' ~.Sll TOI~dn-- 11),!11R,2$0 l$'l;M,4&G ~~ "'..st4QO 1~913 , "' ,. .. JJ0.616 ts.m.ua 131,.0tlJ1S 

OMinli'ftC<tftllxC.bftlndttfriolt~l£~r t 

"""'"" 132.9$Z.,., 113J!It.m 1H.n&.m U&.3Q..~ 148.'(£.3$7 ·lOS !Jl ,.~ UV#l\114,.tll $3'.t~ 

·-- l6,m,111 37)01)88 31.,12!1Jll'$ nm,m 31,$3&.ln •• • I .., .. 5.4U.~ 30.W:.o1• 

fool! ~"'PII ,...,_,.. >.$>J>n l)f6.1?0 ,...,n " • ' "' 11&"' ......,, COifllllotdly6c:fwtmhdngutdcdtnvDtlt 1-"'""' l.mJO> U09JU 1,101,7&9 1.3&.'.1'56 ·S· • ' n amo 1.moil 

'""' _ ... OJI1l;m 1,.411.&3) $,!f.l;,t93 &.1!>1.611 "' • • Nil '""" ~tU.M3 , .. 11)J(l2,2$0 I~.M-'&6 1~.8:2$ .,1,~ l~st.$13 " II> """ 130..$16 C$,ilJ.I&a 131))ll,J1S 

o.rintiwC.trxtt!Jrlr~iontyPt 

'"'"' 1!0,913.$'11 nl.900.1i::e.l 11~14.419 I07.m.,'87 tU,W.l$$ ... 10 1,$4l )$.5&J~1$ ~,$1.1 1). 

futbm&bwwdt ,,.....,., ,..,., ... 37,1~t£61 """" ,.,.., .. "'' "' "" 2$.111 iJIU37~6,3Jii 

-- tt,4Qi.143 K,2U)39 le,l£7)'76 1S,IGt,$M li,&11,3&1 ... ' ;<I 

~·" l.Jt1)12 IO,f&,2'..& ...... _. 15.45t.9ilt 

.... _ IG,IO&.$S 1S..IlMI6 16.23:1.111 " ,,. "'' ,.,.,. Uls.llS "'""'" , .. 110J$3,Jll la2)80;UG ~~.M) 13,~ 131.m.SJ1 -7S m ,. ... 1l~SSSI~I~~.t63 

f•V••etOMN_..C«itacb 

hM..tM(:Of((ach nm ~ l$..1&1 $1)2> 1'-692 .. • ~ "' ,..,., tl)13 

r0fll9\a~«W*att• u;m '""' lt!.311 12A&& •iS.l$1 "" • 0 • M13 1)119 

{q.ff'COI'fJIICh ,..., ...,, .... ..,. '""' m 0 0 • ... IJS1 

C~&:ordwtodlldlnQatdedtnv•ttt .... .. .. 1 .... ~.S11 ~ .... "" • 0 I 1!8 ·UI3 Crtdt4Mr.-... ,..-nor o..an 1,031 2,!01 ·U$1 ,..,. ~· 0 ·I ·• .l')l) 

Credil ......... btnti6.W)' ·11~ ·161 .s;; 1,016 ~_.u .... ~~· • 0 ... ... ...., O..irili'lttoftlli\<biJr~itt '' h.mcrltt~l <I)..V .s3,3J~,t& ~l2UU 

~·" !.6.0C),361 00,7$4,3$? 41 " 8,7~ 21_11& U.llt": IS)ll)IS 

HytJn .e&,382)'18 U.«JJW S0..714.61t 19,t(II;.M-f Sl)"5&.~2 us ,. ""0 18.~ 1tGi&.~~ 3t.li!Utt .)s., .... 3!.Sn .... 33.!.\lO,SIO ,.,...,., ,...,... 34,613,00& ~1 n ~~~~ U,t1110,J~:t~ 

f..,.«<(c:Nnvt.wwfQI)Id(ll)l'(tJcl' <I'( .. IS.l»M l',Ql,)34 2'-2'31,1t5 2UZ$,&U lSJO<,"" " 0 • ,_ ... uu.181i nJn/111 1·SVMI ••rn U ll)S4 ·-~ ~~.U$ ,.,,,., us 0 0 1;1 301,51$ tJO$.~ 

>Syt., 1,81:J1;331 l)00,431 1,&19,31i0 1,i47,.801 uoo,us "' • 0 l<l ,,..,. l,lOl,2!& 

(quffe«Cnctlo <I,.. 1.9Sll!O 1$7 ... 1IU,Oi19 1,Jt3.2Q t$1Q.f11). 21< 0 0 lO .,,., 1$1,<11 

1·S)ut 

~· J~.$47 614]10 Q>.VS ·~-"' '" 0 0 "' t$.111 >JS.U> )~~.... m,m IJI!)<3 1aan ·~,.. m,539 .,, • 0 l ·~ ... IIJ.QC 

C...ociry&CIItwcon~raCtJtntWn;altlil 

dwMtti-.•dldnQQddootmc2tl ( 11'• ~)IS 3,(Utl37 UU.G!S tfl61,tll ......... 101 • ' " .,,.,. 2,1U,lf.-' 

1.£y.w. •,609.1U l,lSI.l$0 •Am .&9t1!i3 !i,ni,O(S ..,, • ' ~ 151,1l9 JAI63.218 l>~'( ... $10,"" .....I , ,,_1$6 ... ~1 ~.W$ ... 1 0 0 110 31..,. !I:M3 

RI~Cipitli:Ot61£qjilnr411tknou~t 

"' "' 301 '" Toblcwhftt)'$10111f'ti01Jcr lcapd(%1 ,._, ... .. ,, TeulrY.(«!!JJII'-ett«qmu~tiOIIttldi)Calnif " ~· "' '" "' ... .. , ., 03 •• I" Totll~wrtta.dil~lieni;MIOUI'(I '" IOIHJluptiiN 1<! .. , a:o ~· 3'' ., " 1& '" 1(31 

Cttditlou~o.cltriV)tJVn''' ,., llO •• ••• 110 ., .. .. .. I" II 

HllDFOiiTRADIHG Htmber of~Miflb,Qttp«tl')9 dd'*t• 1!>1 l$1 "" "' "' .. • ,. .. " • lot.IIMMbolrnttf~~d«wJims 1U3:&..n3 U,!«i_li6 n.m.w n,c.;o,w 11.3&'.Ut .. ,. IQ219 m.£>2.8 3.2W.4&1 8.S1U'It Totll~«ft!OO.IIiMI~~ '·'~ ~j$.$(10 un.oo; a,'6Q$U &.&13.010 " 1!J 13.390 l$,,!>16 l.Sit~S ., .. ,Ml 

o.rinli'ftCorlllxbbt'Un~tR4lili:$0Ui t 

lr(trtt~ •• 130.,490$H 111,3\6,4$$ U-4,$S.;,M!I t);..{Q9.."63 1116.1lU17 I <I • 1,!1» 31,2» ~.111.8JS $1.119,.8(:& 

f~o:-. lJ~.3KI a-.QI.OU ...... ) .. 3t~ ll,1tii.OU .. • 0 l,.'US $,2U_,M6 28.00l..2AO 

l<p!f l)W&I 2.~J3 tsiQ.439 UJO.t&$ U&U27 •• 0 • ' l&.t.$46 l,!03.311 

C~yAIAw 1,31G,l$9 UX.&U I,X$.<6t UO!i..1e9 l,W,AH •s • I " ,.,,.. U31,lt0 T<UI 167_&tJ.H1 ,,,,X\SJ1 182.,U1.iS8 nunJ:l011&1.17W ~· • 1.6t6 3$.~41~8J7 U,U'1.1!6. 

.. Tl.tRIMoa:tt _ ;ca.lt l O..iqlinlttll'llmMt1 .... ~ l,lO< !.on 155 >,!31 14.$ 0 I " '" ,.. f«"f9'1tl:~ 2)01 3,n6 1.40] ..... 1,!¢1 IU 0 0 l 112 tll8 1 ... ,"" '" <RJ 111 so 1,3f40 • 0 3 " ... c~ractMrWldr6noChlkdw!Yt¥tttl ... .. o ... 1S ,.. . .,. 0 0 ' .,. 512 Tol;llndngrw_... ~Ill I,I!Jl ~ .. U11 ..,, ,., • I " "' ..... Sll•toi'AI<rtnut 

Tr.m,rft..,...tt(JO.ttfttn.~•N ., $$ .. " . .. ~0 ., " " .. Tr.,~tfMI(If)tl'~,....,...ty,l '" ,., '" ,., IU .. .. .. Ill w 

HilDFORPIAIPOstSOTitERlWANmACINO 

Htfnberol"te~ttpc.'t f!OdntaiHts 1,319 U!S 1;1ll1 1-"' .... " • 112 ,.. " " TOUI.MH~Ioft .. llluuon.l'fi)Mf"'!!do_,m ~~-.sa; 11)'54,&i1 11..5J3,1!!8 ,,.._001 13.9SO.S&i •• t,11S l21,1SI 1,22(.31» ......... s.n$.w Totil~tlol ll"lttAllbtc'd~derr,a,. 11.211.29& IU$1.1$$ ,..,..531 IOXU$$. 10.$1$.$00 12 U>3 ..... ., !JtAOO 3.1St.!IG1 ~ 

Otcin!i'ftC«itrx~bfU~dtttyfltRill£QOMI!t 

.trtt~ntt t.sot)30 U~tlf tSI!.3&0 U33.4U 2.~0 " "' 2.fA;t1 !1').4Jt; .,...,, 1 .... .$<1 

-- SOUS'I ~U.919 l08.Sa> 433,i11 ..,,.. "' • 0 "' 111'.9/3 ~..81S 

~ .. ~ 1$,QO 15.»1 """' '""' ll.$0$ , .. • • "' U,.•S ,..,. c~v&otw 1;.1 ..... 1,nl ,,,u:: , .. , -ns • ' " ":::: '" TOUIMII!NiamM!t ...... ,I 3.toob>6 3.0MJt9 ...... Jtl ... "' ..... ...... 51 ....... 

AJIIir'led«ntll'eUJ!OI1.clot'l.ll~tttlyi>Mil H,M NOIMt~ 

'ltlchdttpOC or•«~roM XUAI«tttfr.Jw-.'Sl9"'•fXd\wloec.n.)(UII'Iwflidtnc.rioNI'I1btore.rvabs.,rtporWuduJttPI)Ikwq\etcNnofcotel*d1. 

''0tnvJCJwcotCrxt:$~tothtnii~IJit6Up1(.1i tq,Wtrnt!Ok.rdonv.lbWS 

•"lhe!lflcnA90iuNt 5Mwon6tiMIMt!fJPP'ubltlo .. bddl~lhtffi(CG31nportlolm¥ldlolhottbt.ttlflll!lldltrfi(CGUr~bn'I IIYthMS1001!'111onl)l' 

~·ntcol~ 

12 FDIC QUARTERLY 
140 


21417015.eps

QUARTERLY BAN KI NG PROFILE 

TABLE VII A Servicing S.Curitization and Asset Sales Activities tAll FDIC lnsur&d Call Report Fit.rs) 

.b'MtSi•DiwkiM 

< ''" 1100 S1 SW CtiNIC., 

•• "" "' .. .. c...,. "" -.... .... "" ""'"" """"' .,._ ....... o.. .... 

-..,. lo$1 ""' ...... .... dol.wluit~ mllont;) 

- "" "" ,.,. "" 1GQ:l Milio11 lliliM .... ...,, ailiotl 

A.mtJ Sta td~nd s.M•fiS.C ki119 1tttMit4« -.ilh 

RK«< t.tor OIMfSell«•tfO'tit..!C!.dit b 

Nwnbtro,JVIUII~~Yna tPMJ!Otl(:tlfllil.II.Ko~lltt ~ 1$ " 13 " u 0 ,. 1) Jl 1 Ouut»,IIIPtiflti!*U..br.bwtlrPt 1-CMiitfr~.,,.. sose.tta ua:~.oet S10UJ6: sns.t~.- sn .s'' ·tO so stn7 $11,$19~1$;&!6$ 

H~»M«JJfV~ " " " .. " ·12.!1 0 0 0 " 0 

CrtdiC*dtiC*Idilt ...... li,.t86 13,400 u .... U,.1U . ..0 • 0 U)>/ $4 AIAolon ~~~~ ...,. ~ ... $,0!£ ~"' m • • U<9 0.11& • 0..-~lon 1,rn UO$ ~.., ~21$ t"' ~ .. • I 0 1US U$1 

c-t~lllllnll•I!UIIolflS "' 1 .. 104 1S " 10&>) 0 • 0 • ... .UOIW~ ....... tfldl'll:her-..., 6$.33) Jl,lfG 14,711 1t.81.C OIJ.l)l ~ll • " t1.1&1 "" ~.$11 

Tol:1!~tdwldt<tJ 163)U 18UW 603)19 Q(l,r.tl$ 316.00!. ... • 2,11 • ltOCO 110.32$ 62&00& 

M».'inu• CIMiill._.t brA.lwclrPt 1-IM!Ih'r.-.w.. 2.111 r.su l!ill ,. .. !.$) ~ .. • . 0 I .... Ill H.-.~cy~N'-. • • 0 • 0 •o • • 0 • • O.dle.droHiileos 1.20' l.lOI 1,151 1JC$ 1.1&1 " 0 • ' ,,., AtAob.n .,. • • ' • 0 •o 0 • 0 ... Ofl•~ • -- " .. 1$ .. .. " 0 • 0 

t.m~..Snil\lrullolflS • 0 • 0 • .. 0 • 0 • 0 " • Al*!ow.WM\hfot~m.b .. , >11 "" ""' "'"' ->ll • • ' • .,, T<tlllettdilfXPO'IWt ...,. '·"' 4.1$1 ...... '"" ... 0 ' 0 ~ .. , I,... 

Tct.altillMdkJI..tlvoo.n~~MC~,.,.-vwto...-.OM'•Hn 

" ... ~~li.Kta Z184 "' "' "' 31 • • 0 • ... ~t.o.,Lm.s. lftdOt!.Autb JNtDar•P ttu. l\1 

t-4farnt,ot~~ 31 

'·' 31 H " .. I! " ... u H<JM~cy~ ss .. ., .. .. .. .. •o ~· • Crt4t~ tQfWMtl .. u .. .. 0< •• •• .. u It A~obn IS 13 " IS 11 00 .. IS 12 Odl•~ on II ,. .. • " .. 00 .. 00 to c-..o,w!rdi~IOn .. .. •o .. 00 •o .. 00 .. " Al_.loi'IC.It..._and«'*aM• • •• .. OS .. OJ .. " •• .. •• ld~ QR.....,,..dolhtr..._, " " ,, ,. " •• " " ,. 3S 

.wriw..dlo~~n• ~"atd iwt AutbiO~crMor IIIt!N f\1 

" .. " l~bmi(t..cllfUiow ,. .. " ,. ll 11 13 H(I!Mfql,l ~ ,,, <SI tU '" ,,, 00 .. .. <14 Ctt.il.ud,._& ., ., ., Ol ., .. 00 0.0 03 II • ........ .. ., ., " ., .. .. '' " • Cdl•~lon ,. " .. " " •• .. .. .. .. Cc.n..oi"~I!Miow .. 01 01 1,0 II 00 00 0 0 .. .... ao... ....... andcllw.MMr• IS 13 • " 12 " 00 '' ., " " fd iii WIII.l~Mel,.dOIJ;Itr.wll " " " " 10 00 " .. 11 IS ~l.o..l~IIUIOtbMAh UOur ..; olf 

...-~~~-=~., ., ., .. .. .. 00 01 .. .. .. H-.~«rbft " " 10 Sl " 00 00 00 ,. • ~e:r r...Wtin " " 30 " " .. .. 00 37 .. Alfobn .. ., 0.3 .. 01 00 .. 11 .. • 0111·~- 01 .. ., 0$ .. Ot 00 .. o• 0$ c.men:dn:lir&~lon 00 .. .. 00 00 .. 00 00 .. Al-loh..h*""-andflCb:llf...U 0) 01 01 • •• .. .. .. •o ., •• lttall--. ....... aniocbtt...., .. ., " .. •• •• 01 •• •• .. '•tl*t~:11illti~'OwdtcuriliulioM MIIx o. 

HOflf••t~ • 0 0 • 0 .. • • 0 c:r.dladrtl*tli*t II)!>S • • """ lU ll ~~"' 13) .. Ill • • 0 11,2!.6 • ~a'ldNislnallon l1' "' "' 0 • "" 0 • 0 • '" S•'•" *Kbilh;!itllti<mOv.fls.c.riOD'liOM-c.n.iMSt<VroK 

Hoow-..~W. • • 0 • • .. • • 0 ~ad tuH_. • • • • • • • .. • • CWI\tfQ aNI~InW 

0 • • • • • • • •• • • 0 • • A•~SoWwiiiRt«.,....Noc~ 

H~~Y~bttofii'G~~M~t~..c• IJ))O ""' 1.., 1 .... ..... .,, 112 11< "' .. • Oll!=~~=::bfA"'tlrPt l1)fi1 '~"' .... ,. ...... l!l.h!J " .~ ,..., ~"" t,a ~ .., .. ==-~~~:et..,.rdoclttrOCI'IIIIfllefioft "' '" ... 112 n1 123 0 • " ., ... "' "' '" !IS n1 "'' 0 ,. 13< IIQ ,, AJ;ofMtlon,'-IM\Jnd:«IIM.tUt~• 8<.1'0 !llW ""' 13,,t$ 1!.101 I" 0 " 1.110 ,,..,. $1;nl f.C ilholdnfnt~tMOI'IWtel ln,9]' uu.o n7,041 """" nt_HS " .. ,. 1$.<11 10.Ul ,.610 ~"" MaimuaCt.&hpolillt bf""wtT)i'f 1-tfwrl)f~~ ..... , 11>,033 f.rm 1 .... , 10,.~~ .. " ""' J,O)I "'" 1,,02 

H,..~()'.Cftdtewfr~aH-..-.II"dtbwOIInMIMtt~ 110 "' "I 101 "' 104 • • ~RrOI•IMIIow ... " ' '" "' 101 lSI lSI 1U • " s 101 0 .u-..lon.ltaMl.M'Id<Chw .... ,,.. 1.U!O "·"' ,.,.,. """' ~· 0 " ., uu ........ llcndil~ ..,.,, 3U4G 31,529 ,.,.., ,~.,. ,, " 3,301 ..... ,,S«J 18. ~ 

Su~f«Stcu! IOUiiod!Facl5lltt$p:ln.a .. t,Oihwl,.t11u~CII.t 

104 "" 110 HI 11 0 

~· I " " • ltarr.hwof~r.-..~1---~flw'«btn " l«11atditeocPMt• .... , "'" u.on ...... U.211 •• • 1)1 "' , .. , ,,,., f<C I1 \Ina.td~ccam!IIMC• 1,411 !)Q 1.3$1 all 1$1 '" • ,. I 101 

o "' •· AM«tNW:tdlor<dlln' • • • • • 00 0 • 0 0 AI:Mt.flo.dCO*III..:ill•tonlllcJ • 

'""' ·~ 13;)" 13.90> ... • • OMI«JX~~Qtttocrodl.it•~l¥~Wid«1Mn I!J>!O 0 0 , ... t.h.IMd .... V(OIIIII-.nb~~~bt(nt~JOJbMI 

.wld011141't 1~.l11 11)81 -""" 17.i:J1 II£ 0 • ' , .... 2\,&l:S 

Htf;Mf"j~n:u eOcrlh•=«) '-"" l.JOS ... ,,. ..... ISIO ' "' "' .., t•~ 

~::.~--:r!~=~· '" ~~ ,., 110 , .. "' • 10 " "' " " " " ., " 08 ,. " 30 ,. 'Theii'I'IOin.o ft'lanca.itw.tt .,.,lttdlor~oct. n.doetd·fl'd1-t .,.,.twdtno.at~.._.,..,.tv.t~en~t-..•*'* .. ••""•slon:wtiC!n .. foll6mdtl•~•tnducSt•fhtun'-'11,.11wMint tffNMtd.Totlllutdll:aPQM~r1• tpOittdJbo_.. 

FDIC QUARTERLY 13 
141 


21417016.eps

QUARTERLY BA:-IKING PROFILE 

COMMUNITY BANK PERFORMANCE 

Community banks a.re identltlailxued on criteria d~fi M in the PDIC's Community Batt king Study. When comparing 

community bank perfonnanct across qua rt.,.~ prior-quarter dollar a moun!! are based on community banks designated 

in the current quarter. adjusted for mergers. In contrast, prior·quartl'1 f"rfonnance nllios are based on community banks 

designatM during the previous quarter. 

Quuttrly Net Income Increases 11.8 Percent to $5.6 Billion From the Previous Ytar 

)let Interest tncome RiscsSI.2 Billion From 2015, Ltd by Strong Loan Growth 

"'ttlntercst Marpn of3.58 P<rcent OedineS From Third Quarter2015 

Loan-Loss Provisions RiseS ISS Million From 2015 to S718.2 Million 

)loncumnt and :-let Charge-OffRateslnaease for Commercial and Industrial Loans 

Close to 60 Percent of 

Community Banks lncre.st 

ThcirQuart<rlyNet Income 

Ket Operating Re.-.nu• 

lncrnses 8.5 Perctnt From 

Last Year 

Chil11 

Quarterly net Income lor tbe 5,521 community banks totaled $5.6 billion in third quarter 

2016, an increaseofS592.6 million (ll.S percent) compared with the 2015 quarter. Higher 

net operating rf\·enue (the sum of net interest income and total noninterest income) helped 

lift quarterly net income. wbicb was partlroffset by higher loan-los$ pt~Wisions and nooin- tmstexpet\se. Noncommunity banks increased their quarterly net income by $4.9 billion 

(13.8 percent) from third quarter201S.Ied by a few latgt' noncommunity banks. Pretax return on assets for community bankSI•¥sl.38 percent. up 4 basis points from second quartl'1 2016 and & basis poinl3 from a ytar earUer. The numberofFDIC-InsurM community 

banksdeclinoo from 5.602 in thtsecond quarter to 5.521 (down 811 with two community 

bank failures. 

Improvement in net interest income (up S1.2 billioll. or 7.2 percent) and noninterest income 

(ur SQI3.S million, or 13.1 ptrccnt) belpM lifi third-quarter netoper:ttingm·enue to 

m billion, a $1.8 billion (8.5 percent) increase from the pr<!l'ious year. The benefitofhighl'1 

interest incomt from non 1-t<>-4 family real estate loans (up S75LS miUion,or 10.1 pereenl) 

drove tbe in<rease in net interest income from the 2015 quarter' Close to67 percent of 

theyeaN)\'ef year increase in noninteresl incoffit'was led by net gains on loon sales (up 

$410.1 million. or 3M percent). 

1Nolll•too4 ftmUy rt!le!ilt~a&l.:»tDtlndlkkt<oll1!n&;:bc)tl.uaddtw:lof'll'ltlll.&nltlaod, rmibG•IIy, and 110116.rm 

Molllt~tbl. 

Chart 2 

Cootributonto the Year-Om-Year Change in lncom• tid lntert.st Matgin 

FDICI.tWm!CoouuWI'f Buk:s 

Sllihs Poiilb'tF*Ck~c ~>lfiln't.T1d(lf 

Ll 

Sl.l9 StU9 So.fl SCl91 """' >)10 

.,. l.O I of< 

•Ull I ts I •llli •ll" • .... • ... 

"" "" llolll.t.a~ "'*'lt-l:•-4 I= 

'"""' """" ....... - b:P!':-.t <:tblcc ""' SOI!tctFtt"! - ...... 

"""'' 4h 

FDIC QUARTERLY 15 
142 


21417017.eps

2016 • Volume 10 • umber ·I 

N<t lntenst Maf'8in Dedi nos .llodesUy 

From a Year Ago 

1\'onint«est El:p<nS< 

lnatasos for 

Community Banks 

Loan and Least Bdancos 

lncruse9.4 Percent From 

Third Quarter 2015 

Chart) 

The averagt net lntereu margin (lliM) Mdine.l from 3.62 per .:tnt in third quarttr 2015 to 3.58 perctnt,asasS<'t yields decrtaled (dO\\'n > l>asis poinU) aod fuodi.ngcosts increased (up 

lbouis point). NIM at community banks was 46 basis point> higher than tbatoi noncommu 

nity banks. The differenct narrowed from third quarter 20!S. as NIM for community banks 

decUnedand NIM for noncommunity banks improved (up 13 basi! points). 

01~r the past 12 month~ noninterest e>'J>ense grew by S909.S million (6.4 percent) 10 

SIS.! billion. Close to 70 pl'm'nt of community banks increased their nonint11rest expenS<' 

from theytar before. Tbe annual i.ncteale in nonintete!texp<nse was led b)' higher salary 

and emplo)·ee benefit~ which <OS<' by $676 million (8.5 percent). Ful time employees at community banks were 12,SSS (3 percent) higher than third quarter 2015. Thea1·erage asS<'t 

per emplo)~e totaled SS million tOr the third quarter, up from S4.8 miiJion a year earlier. 

Nonintemt expense as a perc<nt of net operating re-.nue dedined 10 6$.8 percent- the 

lowest le\~1 since third quarter 2007. 

Total assets of S2.2 trillion rose by S37.S biUion (1.8 percent) from second quarter 2016. as 

loon and leaS<> balances grewbySll.l billion(2.1 perctnQ.CIOJe to71 perctntofcommu· 

nitybanksgrewtbeirloanand leaS<'balancMirom thepte\•iousquarter. Thelargestquar· 

terly increase ~'liS among nonfarm nonresidential loans (up S9.7 billion, or 2.3 percent~ 

t·to-4 family residential mortgages (up $6.3 billion, or 1.6 percent\ construction and dml· 

opmeotloans (up SM billion, or 3.6 percent~ multifamily residential loans (up$3.-1 billion, 

or 3.4 percent), and comme"ial and industrial loons (up S2.4 bHUon. or 1.2 pctcent). Loan 

and leaS<' oolanct~ role by $127.6 billion (9.4 percent) ,~r the pte\'ious 12 months. exct«<· 

ing6.S pen:eot growth at noncornmunit)' banks. Close to62 pe"entoftbeannual increase 

in loon and lease balances was led by nonfarm nonresidential loans (up S40 t>illion, or 

10.2 percent~ Ho-4 family residential JOOttgages (up S22.4 billion, or 6.2 percent\ and 

multifamily residential loans (up $16.5 billion, or 19.1 percent~ Unused loancornmitroenu 

were S6.2 billion (2.3 percent) higher than in third quarter 2015, with commercial real 

estate, mdudingconstru.:tionand development, riling by $11.9 biiUon (16.6 percent). 

Cbart4 

an~ein Loan Balanmand Unused Commitments Noncnrrent Loan Rates forfDI~In ~11ed Communi!)' Banks 

- 1.10-fAomlyU: ·· CitdiC.:Il 

st!llo .. 

'" 

16 FDIC QUARTERLY 

I CbqdQ20:tn)():l!S 

•OqdQ~~nlQ:£~6 

ctn:..... ~u 

Pmfllcf!.Otnrd:io~ ·- ~I.GMI -- &:ntsqoq ,, 

::~ $ /\ 

' 
143 


21417018.eps

Small Loans to 8U>in~ses 

lncmse Almost 3 Ptrctnt 

From the Ym Before 

l\onrurrenl Kate 

Continues to lmpr<rl'e 

Net Charge· Off Rate 

R<mains Relatively Stable 

From the Ym Befor< 

QUARTERLY BAN KI NG PROFILE 

In third quarttr2016, small loans to businesses ofS298.3 billion rost by $1.6 billion 

(0.5 percent) from the p.wiousquarter while de<:lining by $1.7 billion (0.4 percent) for 

noncommunity banh1Tbe increase at COmmunity banks was led byagricuhural produv 

lion loons (up $1.2 billion, or 4.3 percent). while commercial and industrial loans de<:lined 

(down $4n.J miUion. orO.S ptrcent). The 12-month increase in small loans to busintssesat 

community banks (up SSJ billion,or2.9 percenO "~'led b)' nonfarm nonresidential loons 

(up S3.4 billion, or 2.4 percent) and commercial and industrial loans (up $3.2 billion. or 

3.5 percent). Commun.it)' bG.nks held 43 ptrcent of small loans to businesses. 

Slightly more than balf(S0.4 ptrcent)of community banks rl\luud their noncurrent 

loan and lease balances from seoond quarter 2016, resulting in a decline of $87.6 million 

(0.6 percent~ Tbe noncurrent rate "~s 0.99 percent, down 7 basis points from the previ· 

ousquart<rand SS basis points below the 1.$4 percent for noncommunity banks. All major 

loan categories at oommunl.ty bGnks bad l01,·er noncurrent rates compared with the pm•i· 

ousquarttr exe<>pt for oommettialand industrial loans (up 1 oosis point~ Rlr the past fiVe 

conseculivequart<n, the noncurrent rate for oommerdal and industrialloanl\\'aS IS basis 

points above the third quarter 201S rate. Tbe largest quarterly impro,~ment in the noncurrent rate "~s amongconstriiCtion and development loans and l·t<H family residential mort· 

gages, with both declining by 10 basis points. 

For community bankt the net charge-off rate rose by 1 basis point from the p.wlous year 

toO. IS )lfrctn~ for noncommunity bank~ the r<te increased by 4 bash points to O.S percent 

The net charge· off rate for all major loan categories at community banks impro,·ed from 

third quarttr 20IS,except for commeKial and industrial loans. which rose by 17 basis points 

to0.4S percent. 

Author. 

Benjamin Tik'\ina 

Senior Financial Analyst 

Division oi Insurance and Research 

(202) S9S..6S78 

FDIC QUARTERLY 17 
144 


21417019.eps

2016 .Volum•IO .1\umbtr •I 

TABLE I·B. Selected Indicators, FDJC.Insured Community Banks 

-· ""' 2015 ,.,. Rtblnoni$1M(sfY.I ""' ""' ""' '" ... ... '" '" 0$3 051> P.tb.tl'ltnttp:yf") lU1 . ., ... us .,, "' ... C«t(lpbi0MO'JI'lr:a11o~ oon oon 1061 IO.Sl IOU HilS. ... Noncmen.-..up Jeoihe N~tUeownedb)a~tt~ ... "' '"' 131 "' ,.,. , .. Nt hp>OIIsto o.w~Sr-:.1 '" '" ... Oll 0:12 ... .., AMtt.,.owfaf11t~ U) ~" 271 1.2! '" I!S ... Nt l n1erftllmi\JII'Il'l't , .. , .. .. , "' . .. HtlC1*.1IIIt\9~9-'owlhf'l') '" '" "' '"' 'S3 . ., .. ., .. , IOJ.&I N~oi .... WOMtfi)Ottll\9 ...,1 ... , ~ns ..... .,., <,$<1 "" 

TABLE II·B Aggregate Condition and Income Data FDIC·Insured Community Banks 

ol•f.-eS 'HI'II~ ~ ....... 2-.d0Nr1tr 

"'""'"" """- "" "" "" I!Q>.IIQ) 

N .... ol ..... IA!OI'I$ ~ ..., ..... 5,,312: ·SO OUf~s!ftA-Irrnl.,q~.~~• ,,.,.., 13<.000 f,Jt,19$ .. COfiDUlOHDAU. 

out~ $tiSI!..Git S2.U'-40l S1.0!'5,<30 

low~M:Urtdbyrul•••• 1,131)6' I,IZS.,.'l6J t.O~re!l " ., ·~f~f-~ motl09t ~"' 3$to0: m ... , ) I 

oNarmtiOtlf'~ 131)01 130.1f0 Ul_G71 .. C~ctKII.vlddt~l 9SW .,,..,, 90.29) •• ~tqllty(M so.s~ ,.,... ...... •• Comwrwl ~liu'ILII 1$Ut9 lOI .... - II 

Lon .. wl~ ..... ;1),81l 59,911 ·l8 

Crtddcinh lA&' 2,U9 t)t! ,.., .... .,.,. SUll '" '"'"" 38 

Ofltf~ k..- IOJJ68 ")" I•Unurf'ofdlfiCICII'tle "'"' '" '" ... 68$ 

TtUI~s<Mtt tW)M l_l13,.451 U 14,369 " S2 t .. ,........,Oflo"" .. ..,. ,...., IUOo ·» Ntllon3nd...,._, 1,46!1.(188 1 •• ~.6} 1 1)$S.711 .. Sto...,_, m.m m,aoo .... ,,. •• Obtrtllt$Uitowntd 5,306 Mil m• ·1$• 

COO!tfllandotlwr~ttangtiblet u .... u;n n.w ,. ltlottw••• 2H.8SO ""'ll 210$$ " r~u• Ubill•ues .ardqp~ut 2.1!.1.$W 1.110.40' ~0 21 

-· 1,7$tC&t I.J'SV$' 1,1J7.3&0 H Ooo'leSII!to.fllOII dfCIO~ V\12.431 IJW,3S5 l) i,..~ltU ,. Fort~gnoflic.~ • t21 100 "' ~v 

llrok.trtd6fpo.u l<t& >S>OI .,,., .. ~-mal4-d..,444t~t 1.3"-•00 1,318)19 1,3«..$71 .. Ohrb«rO'Iro'fdbld• 1!:1..686 131.151 '""" u s.JxtliiWII.ddtbt .., .,, ISS ,., AlolbtrbJbU•• 11.SU IUGG I..,. 

ToUitQIIIV • .e(l'ldodt$tnlll<lnfylnt•t81tl " ,....,. 2•3JS6 ....,.. ,. blt.qooyupc~ m.ue 2U,Iga 

·~· u 

low~hlutXl.a9di)'SpMtfM '"'' , ... .,.. •• NonN'I'Mtlon¥\dlmtf 11,1$5 t$,672 16.$)0 ·107 

fttttNt:ltrtd loans JhdltHtt 8,311 ..... ..... Ill 

MOfiQ.J~·~cb4$tW' Ott 11&123 183,3t$ l&•Mt ., E•I'Wif*"-' 2.001)$1 l~l ,,.5J23 , fii.8Adva-.tn loo,3 •• 100..013 .. .... UI'IUM4~«1m'M,...,.. 119 .... 2$1)5$ 2'U.SI1 .tl " tu~~~•Mt• 251)56 hi'1,0.S 241)69 .. A....U•..,.:tdanddd ·- 1i.6\$ ,..,., ISO 

ObONi ltnCU'llold.nw~YM ,...., ,...., 53.239 31!1 

Ffttt\t .. .... "" .. 311d0wrt• lld<l¥M1tt """- INCOME DATA .......... Ou."-'20t5 ....... "" 2015 1!()>.1103 

fOIJill'lltrtSlltlt'OI'YW ....., $67,U::J " Sl0,04S $1!.~.8 

tl;l(Jirtff..C«q)tl'lelt 6Ji' ~$!> 31 1,314 " ,,.. .. ff.dlni«MI......, ...... """ " 17,1ll tT,fSO 

Prowtlon I\( 1o .. .m ltaM loht• 1))31 " '·"' ,., "' 100 l$1 

Tculf'HWittf.CI'I(IOft'lt ...... """ .. .,., '·"" ) I 

OI:.InMI'(tr~aptnM U,()J .. .., ... 15,1!.0 15.151 0.0 

Stc\m!npnttoMM! "' "' '" 1 .. 100 ... Awtut••ntOintUX•• ~ .. , •.•n 101 l}ll 

'·'"' &I 

&1r.ao«kurypns,ntt' 0 ,. ... , • 1 II·Y 

T$1twtlflC'tfl'lf{ilcWtt fn~l'lt.t.rMIS! ,,,081 '""' Sb ,..., ""' 8ri &I .... _ 

''"' '"'" .. ""' ..... .. Htt<Nroulf& ,..,. 1,301 to $04 lib laO 

Calft~ct.ncls 7,151 ..... ·~ 7,151 ,..., .,. ""-- Mil &331 70 3,m >.m 16.6 

Ntc Jb\i ~ ... ~ 1U6l .. 5.~83 S.11! " 

18 FDIC QUARTERLY 
145 


21417020.eps

QUARTERLY BAN KI NG PROFILE 

TABLE 11-8. Aggregate Condit ion and Income Data, FDIC-Insur&d Comnwnfty Banks 

Prior Period-s Adjusted for Merge11 

fdobrfiotltt l'lm~ 31d ~ ... a.-. 

'"' ,. ~ot;.ct~K~Mr~ ~'" ...,, JGhl~tifuftrot.q~• """' 421-'11 

COIIDITJONo.l.D 

lCIUI.MNCt »JS1,~ S;t,1Uft)!l 

l~•<Wfdbyll-11•••• 1,.U1.1'-l 1,11tfS 

... f~l«tt~liltl'leltg!Qt'S )&;.4» ,..), Honf.-rt~MN_..Ill .an,101 m.m c...wa...-. ..... """" 18.801 ""' .. --""' ...... 19,750 

(lllml«cul & 1n<kMrullo- 1$9)1!4 t'4.':M 

l~ro~ ...... Si,i3ti' 

"""'""" ,..., I .all .......... SU10 ~ .... Ollwi-Jo.wM.-. """ J8,}0J 

lHklb¥Mdncomt 

toul~• <*' 1,1!1)1< '" USU20 '" lfWAttttwk4'1o•• "·"' 15)6! 

HtUOMlUndluttl 1,"'. t~l$,1$ 

s...c .. 411.!19t u1,m. Otwrd,..:.Ctown.d ,.,.,. ~l.andOIIMfWCW'II)ti!M H,ZOI> ""' .,., Allolhoer~:!Mll ?U,&OO zu .. o:u 

TOUii ..... .lfld'IP'ul t.ISI.W 1.114,.03t 

O.poflilt l762,ell I)N.~ 

~o<ctd ... ts l,.JQ.t31 tm.& 

f~OifiOildiJI~t 

Brobrtd~l N.!&l "' mn "' ~dif*tfd.•Pl*J.• 1316,,00 t,ntn ()thtrbocrow.dbldt m.- ~(fdMIJI.tddlk .. ""''" ll otbw'-a~•les "' .,..., ...... l01lleq..l'(tapllal(r'IC:kl6tti'M'A)'lttfl'ftttf Ul.,&O ......, B¥llc t~P~Y~II m.xe 

l.wandltMM'JN$dr;t~b 1.~1 -7.611 

HMNffi"Jkwafldamte ,. .... . .... , lt.Ctuchndl.,... .. dltun 4.311 4.311 

M~~HMbt& 17&,;123 1-eQ.Oi$ 

t.MV*ett U01.1'7 l.Sti.81).1 

HUAdv~ 10,3~ 1\U,18$ 

llt'I!Mdlwtlt«rmtmennt ,..., lH.alS 

lrWII.ahlrtt ....... 1''-0!12 

Alai$ MN~IIltd alliS dd 13.<U 11107 

HocialltOOtr'fofdwl~ 1U61 .. ,v ....... Fin;l fhtM )rdOurler 

UICOMEOAU """"""" """'•""' ........ ct.lln•tte.:~Uifl'll soa.m Sl>~.~ ,. "" ,.,.., f«lllfUrttl.,.,.. 6.11~ $,1~ ,, 2,3'11 

Hte.nlttdl~ '""" ...,., " t1.n1 

~JH~ald .-.'-" ,.,, 1.$10 1<1 118 TtUit'IOIWllttf~l'\amf """ ll,35> 

fOlalfiMII'lt41..rtl¥' ... " "'"' "·"' ~ .... u t$.150 

~o-nt~ 

AP!JiubltlnComtl&'(es "' "' "' "' '-'~' ·~ I!L 1,m (xtradt'lolry,..,_JMI• • ' KU 

lot.j n.4.......,. ~new.. I'WIMIY Wltw.ul 1$,08.1 11)1$ ' •• U3! 8rilllll'lt01N IG,Q61 """ .. ~ ... Htt~rte,.llt t.3t.e. UOI "'' 50< CllitiO>IIdends 1)51 s;oc <1 Z,IS1 

Rti.Wit4tJ!1'11119'1' ~~~ ,,.., Ill 3,.-1'1 Mtl~lftt(JMI IS.i(6 """ ., "'' 

wo.. .... ... 150>10Q3 

~ 

S.Sll 

ttS.96i " " WH1.1tS " l.o3G.tm t1 ,....,, ., 3!0.)11 ,., --$10 ISS 41)01 .. ,.,.., ., ....,. •• 1,311 " """ " """ ,., "'' .. 1,35$,112 

11,< " O)ll,oo) " OS 

u•.no ... ...,, .U! Q)J< ., .....,. •• ,,ou.u' ... usu.n 

1,.653,(33 .. "1!$ 111 

"''" "' ,......., " '"'"" ..• .,. 

1'-0!5 "' .. ,.,.,. 

m.31S 70 " 1.7Gt .,. ''"' US! 11 · 11.;.&11 

1~11,2'10 " •• 1.~ .. , , .. , .., 

"'"" .. 11,$$2 

49)&1 "' .. , lrd(hutW ........ .... 15Q3..1«ll 

St.a,&40 

1.0<'1 IQS " I&,.SA.S " "" 15S 

..... 13.1 

1'.2~0 •• tSU "' "' 131 

I 

SM "" ... ""' ... '" ~u 

?,U! 01 

1M3 !OS 

""" "' 

FDIC QUARTERLY 19 
146 


21417021.eps

20J6 • Volume 10 • umber ·I 

TABLE 111-B Aggregate Condition and lnc<Mne Data by Geographic Region FDIC-Insured Community Banks 

T\i dOiu!11120te """'""'..,;...· fdc;f•lip"'"m~Jontol AICotnlallllilyiMib ....... ·- ....... """''"' ..... Sa.fl'~ 

NIA'I"'btfofiMMIAI*If()OIU'IIJ ...,, "" "' 1,liS 1.40 1,1tla "-" Tot.!i~tj t~mttqt.-~ .,..., $))(6 ~ !10,140 ~t.m """ 37.1Q 

COHDinotfl».U 

TO..ct Sl.Jtl.!i(Q SU$.i92 ,,..,., ,,.))),. $)34,.1~ ,.,,., ,,..m l0¥1SM'attdbytui•U• U3t1£1 2l01l$ ~ ""''" •!ii.J47 11l,.OG1 10io ~ 

~Mnit'MdfOO..-~ ~132 121.1&1 '"'' n.IOl 10,017 «,in 1ASIO Nonftm~I'Kt't.-..~ •3UOl nu:~1 $$301 ,,_., Sll!ol eo."' l'UIS 

~Jnd.vt~Qpmt~~t $0-"7 a,7fl 15.50> U,4S! !lOll •~m a.m Hacne.ryintt .. ~~ 1&.9i~ uo• 11.414 4.310 ...,. ~on 

OI'M'l«tUU &~Iow ~~.m ''.132 18.'19 l1,21~ 33,120 .,.., l,..lh~ ..... "·"' "-"' .... tl,lbi 10.ti1 IJ,.i61 "" ""'""' I~ 111 '" <n "' "' "" """""" Q ,410 M9 '"' US4 ,..,.. ''-"' ,..,. Othtl'lo•&l• ... 'IVl" """ 1,151 ""' 5)~& ..,., '-"' lti~o'thJrntdftCCit!W '" ,., 110 " " llS 

raullwtlt&:i"*' t,f.S7,31li , . ..., 1.;s."o 26'5,1!(1 "' ,_,,., 21t~ 111.~& 

h-. P.w.rw foe lo{ISJft IUlll W2 1.(1;1 3.400 ""' ,.., ...., Htllow.andl ... 1,4G9.Ge$ ·~,m 1~,$79 2(t.XI$ no.w 1'67,$43 13S,~1 

s-... •n.m ,..,. 46.133 81.511 "'"0 ,.., 39.0U 

Otltr nlesiAC•~d s.m 101 .... ...,. m I PI< 

Coo6.-dld01"*~'' "' "-'"' "" ..... '-"' 1,811 ''"' .... AUOIIw••• 2U,6.of() sz .... ,.,,. I~>Sl """' SI,OI! zus Touli_.....rld~ 1.1!.1.$02 569-"' W,e$9 - 33~ 139 111.3$l ""JI' "'""'' 1.1$l~ 4C$,10f 1111.15> 3:24.081 2n.sz:s 315.!00 ,,.,,.; Ooti'IMCofJK.d .. l1 1.h.'7,UI . ...., ....... 32~.061 m.wa "~"" 170.313 

F~olfio.•o.~• 2l1 '" 5 11 0 • )J) 

&obrtd~$ ~,t.$3 1U17 1,116 Q,&$ I><•• ll tn 8.191 

Efitfr\.) tdr~SII.cldtP<""" U'll.IW 3:29,3"1$ 1t.l.H1 lS3,D03 lf5,f'li lSl,/10 ffi.&Z8 

Ohrboftowtdbld& 121.G.'!G U.!l~ 1"'1 l'l.IS '"'I 19.46-1 .... St.tlcrdlnaltd41U "" ... " ., 11 • IS 

Allot.l'lel'ilbl•1.s 17,SU ~,. .... , "'" tll8 tl& 1,1!0 

loul•tyap~ulfwkd.tfrfMfllil'l'ltl'tetil 2U,320 6t,S&8 moe Ufill 3J~ ·~"' ,,_,. lbnk~~· 1U)m 6:l,&!e "-"' "-"' 37,liCII 6S.611 U,317 

loowii .... 3NS.,.,_dot 7,547 1)61 ., l,tS1 1,1~ ,..,. N(lnti.IJtiiiiO-lll••n4t.M "" 1f)'.4 t418 1,173 1)1); 1.811 ).JlO& 

Jt."-Ntl~~tdlo.wandlnta ~11 un 1,11) lP" "' '"" 1.1'..4 G~6 

l.t~~fdMCOOilts 113)28 Sl)" 1:0,1?6 31.101 lUIS l4.11S llt'OO 

b'M9»Mt' 2,001,291 Slllt<) 22$.!111 3&UI» 31f.U1 l3UU l").U 

RUAdYJ~Kt& ,.,_,., >1~13 10,3;1 IS,C97 ls.M$ lS.Cl& s .... UMfldiMI~• 21$M9 11.111 30,..S "-"' "·"' ID)>1 ,.,sa TMt.-s ZStl$ ~ 10)11 ..,.. 1UQ 42,4~ JO.lU 

Aneutew~rittdand.U """ l,ll)i " 5$1 ... m a,m No!l(ft)l~ofdtt!VIItte:s 11,., "'"" .... ll,ll& ~"' ,.,. «n INCOJ4:0.AlA 

TOUin•••fti:'M'It ,.,0., S&,!I'.A ''-'"' ., ... $3)'» ,..,, TOIAIR«tlltt;ltOM '-'" m """ "' 3$0 311l .,, 1')5 

Ntl.....,f«it"'ttO'''W 11)11 1,112 1,016 ~"' ,..., '"" 1,131 

Ptoo.uM bloin a'ld 16)A .,., 

·~ "' " ,., ... '"' ., lot.lll~ttftltll(I)ITW SJ<)) '"' ~ 1.3 .. "" $9l Sl3 

To1.1II'IOI'WitertSI«~;ptOW lS.lSil l.ISI '-"' '·"' ,..., '"'' US4 

$t(U'JIIIt$pnl0\) .. t3 "' Sl II 1< .. " 13 

~c:abltlnc:on'lelaH 1)11 "' "' '" '" "' ,._.. 

btrarin.vypnt.IMf•• ~ • 0 • 0 ' 0 

ot~l\tCI(l(OINftnc~Wttfi'WIOftll dtr~ ~"' t.O)S. Sll lfl!l I,OJl Ull .,, B.lntnttn«n~ ~615 ,.,, S10 lP" 1.00"1 I)!< 

HfCchQf.ofk w "' '" 13 .. S1 m I 

c..o•- l.JI1 "" liS Sit 0$1 '" 1 .. 

~.-wdttrfW9$ un "' .,.. '" ... "' 1 .. 

Nif!II*DI!iii'W»ff'Jt ~~ .. 11)ll;~ !.16 '''" .,. '"' 6lS 

20 FDIC QUARTERLY 
147 


21417022.eps

QUARTERLY BAN KI NG PROFILE 

TablaiV-B Third Quarter 2016 FDIC-Insured Community Banks 

AICo.-.itySMb fhild , .. 2l)M.GM9r l'bitlltcjo~a' 

1Wor~•utio:li-IQ&a4 ~ 

"'""'"" .......... ,.,. ,._~ ""' llowYO<t ....... ....... I»>I»SM!Ft•li.ot 

Ytefdonfli'IWIQtMttt "" 101 ,,., "' '" 111 .,, til 

C.of~tR~OVIINCt ... 00$ OSl '" 0 11 '" ... Htl-*'ftllm:J191n "" , .. "' ,,. '" ISO , .. NMiltfMtnCOIN Oa~ "' '" "'' ,., &71 100 "' '" '" Ill 

NQN'UfMlfXI*IMIO-.b , .. "' "' ~.19 '"' , .. >>1 ,, lmalldlt•lot~t~IOm.~ 013 (1.11 011 ... 011 01) "' ... Ht401*~DIJWICC!mt~l*" 10) "" OJS '" 110 110 "' Ill 

ft'tiiUfilt!Jm~~IJ ,,. 131 113 U< IC1 ISO Ill 

RfllmM••u I.Gi I ill 0.16 0.91 '" "' '" 1.19 '-" fttll.nOOf411'( ... '-" '" . .. 'a~ "" "" 1UJ 

Ntld\qt·ollttolow.lfldlt .. 01$ ... .,. 013 ... ... ... 0~ 

lo.~~lt• Mtp~ront~61Yei .. rfll 121.13 ~~~iJS ~ .. 11196 ""' ... ,. US01 1"'01 

{I,CitrKYdiiO .. ,. "" .. ~ .,], "'I "" 0$;)1 OUI 

f'l «~ll'ltOMfeo~t .. IWIIU. 1bM nso 81 13 n31 "" 1111 , .. , ... , ~~~~~o!Ubltt~lii•WOM. "' 180 ... 3.21 "' "' "' S31 

i(.ofll'llbUM$'tllbtam~l'IOJGW8 .... .... ' "1 '"' "' '0 '"' 51>0 OU1 

Table V-8 First Thre• Quarters 2016 FOIC-Insuretd Comroonity Banks 

AICo.-'tJBa.b Fint Th-Olu!M~~J\9om.' 

I'M ~M•uti031 ~ "'"""' Fibtlbr .. 

o.:.r.o~n2016 Ch.wttn201S NewYort ...... ...... ..... ca. lblbi blk•• 

Y'iMMdi1'Wl9*Wl'S ... "" '" HG 3>1 "' ll3 

c..ot~•:mno ..-$ 04& "' "' 0.14 0<$ ... ... 0<0 0>3 

Ktt'*tlltfNIVIn .... "' 3l!> u• "' "' ,., >n 

""""'mtltiCOINI98twll ... '"' '" ... "' ·~ ... N«wttrt~d,_...I0.-1$ 1.&3 "" ,_, !!.0 '" "'' 2J6 2.S , .. lmw:lltMtlowp,.,...tow...tt ... 011 OH on ... ., "' . .. Ntcop«'.llr:w.JIOCIM'ItiOa•t• ... . ., 0.11 '" "' "' Ill Ill 

A'flUf"!Jm:(WI-'• '" 1>8 "' 1lll "' "' "' 1$ 

ftttlnMttMil ,., .,, o.n 090 100 119 111 Uti 

~otlf'QIA'( , 13 au ... "' .... 10-'1 '"' 10,15 

Ht4:d\w0f·olhtolowandltaete "' O.U ... '" ., ... "' 003 

t.anwllt.- o.~ton.t <hqt·<o ll 112 .. 1l9.U ,,._,. OOii 122!0 ... .. IS .. , 313.11 

(ltatflcy o " 10 "" li$.!i& 1010 CS11 .. ., .. ., Ill <I 

t~l'l «tQI'\COII'ItiO .. nlft\llmnut "'' '"' &IS• ,.,. "" '"' ~00 1<11 

•of~o!Ublt.,ii<I.CICIM 

"' '" "" . ., "' 113 "ofii'IIUb)Miiltlh~O*M "' "' .,_,. '"' .,,. '"' '"' i(l~ <l§l 68 1i 

FDIC QUARTERLY 21 
148 


21417023.eps

2016 • Volume I 0 • ~umber ·l 

Table VI 8 loan Perfonnance FDIC Insured Community Banks 

C..,. ... · 

~niltr)).mG '"""""'"" ..... lkwYotk Atbllb ._, of~s»ttD.~ttPal 0.. 

"IIIMN$t<Vtdbyfdt$l:ilt . ., 039 ... '" ~" Con!INdiM aM clMbptntnt ... ,,. ,,. ••• . .. Nonbftnnonrn.dtetcal 031 030 033 .., .,. MIA•brnittrndtma!l~t-..• 011 ... Olt ., ... HctM..,.r,k.w ... . .. ... ... Ohrl-41~rndtrcRI OJ$ ... 0!0 "' ·~ ... C~andndWn:ll oq ... 0)1 "~ ... 051 

lo.anstowdvdu.lll 10 171 1CI ., 10! 

Ctcke.wdlo- "' "' 151 

Ofltf lonll)ft<tvloki• 1" Ill "' '" "' .. , ... NIO!n.tlow¥16k~•~~~IWI) .,. on 011 tl2 ... fot~~Widlt~ ... ... "' . ... t.SS . .. l'fli:..Co.flNn¥No11Cun•nt .. 

,t.lllonMQ~..Sby"~"'•" .. , 117.1 Ill 111 

Con.NciiiOI'Iand~t "' "' "' ll\S IU 110 

Nonf.mnorwttit~ ... ... . .. 100 ... fA'-* ~ttt~dtMal Nit•~• ••• 017 0,7& ... ... HM'III.q;iftkiW ... OJS ... 011 . ,. Ohi 141Jn'lt(rt•dtntlll 

"' "' u• "' on COin'l'oercUiandf'lckhllnaiiOM'I& Ill "' o .. "' 101 

LMI'!Sto~llduti on oss ... ... ~ .. Oeck<Wio• ,., '" .... ... , .. ONrlow~~ .~ 068 ou U7 . ., AIIOI,_.kJnt-.ttu ... ~nQbm(l .,. 1$1 068 oss 071 

louflo~an4 S..ttts ... 107 107 "' .... l,o,n~Cl.atttd.oll(elt..Yltl! 

,ldiiOWMCU'tdbyrtaldtlt ... 006 ., 007 Oil? 

eon.NCIIOI'Itrld~t ... OJ» ... 000 ... Nonbmlnonr.sid«tut ... 001 o .. "' 0" 

Ml<llieMfvrduStnr~alrt.lfttlllt 0.01 ... 010 ... ... H(lfl'lt.-fYlo¥l$ '" 007 007 ... ... Obl'l-~1-"lldenbal ... o .. OM 0.10 ... COII'\'IMI'u.llr)l$1'!du!tn:.wilon on .... '"' Oll ... lOM!t;IOWICbdUJk .,. 066 0 .. . ., 0!!1 

CttCktardiOJN "' .. o u• "' UIO 

Ohr lonto~l~Ci\·~• 0$2 ... 013 o .. 0.)) 

AIIOII'Mfk.JnrandltJWsi«bblngbm'l.l '" ·~I .,. '" ... Jolaf~Widlt.litt 011 011 011 011 ... u-~ • ...,.. AUio.w.MC~#tofbyr~-~tt $1.,13?2 $310') S13U ""·' $156.1 

ContiNaiMatld~t ... 197 155 1" 131 

Nonf.wmnonttM~ "'' 11t7 .. , 12.1 !.U 

M~twnlvr•~lrtJitiUtt 102.$ ... u ,,, ~1 

liotntfO;ItylO.W ... llO 77 II' .. Ohr t.f IM!'ott tt.tldtni:J;II ,, .. 1112 .., 717 

CO!!m«WW and tldu!Cn11 low '" "" '-2 IU m low.IOII'IItlduak ... 11 7 .. 111 '" 101 

Otdlle.ardlow " ., Ol •• o5 

Oiwl'loJnl101'16vdJ1h $70 liS .. 117 

AJIOIJ.~W .. JM:IIt,n::bllrttlffl'\1 " '" U6 •• 1~· ... 1o1JIIoanU'ICUU .. t UNO m• IOU 116! m• U..O:UII-...c!C:O.tniuM~ !lfiMIIioMJ fC1141Unr~.t~CWc.nm.Mtf'lb 21tm 71,117 3(1,31S. ...... ,.,., Con&wccionarddtvel~t I·~ brMyrtiJMIII Wt$ .... UIO z.m . .... CQtlltNdi«<tod~tCR£nf(lfMr $7 .... n.m .... ....,, '""' C~uiJndl\dQtnll !0,1" n;llll 500 1Un 14,m 

•SMT~V..AI~11)kr~ 

••Non«ntnll* 1CttttPI'WIIfltp~JOJOIIionlllntht.Mtgoryitlxitt~ttdl.lt90cbytttf'llo)ftOII~Mtfi~Uut 

22 FOIC QUARTERLY 

..... S.Jf.Mti>co 

"' .,. "' ., OJS 

., ... '" 

"' .,. ICil ... 0)1) ... ll2 0$2 

"' 101 114 ... 00) 0.>3 0 .. .,. o .. 00> 

... ., 0.82 ... ... . .. .., ... Ill ... 200 0!6 

lSI . .. . ., 0)1) 

1$1 0)) 

OSI 0$1 

111 ... .ell .()0> 

001 ·010 

. .. ..... .... '"... ... Olli .. .. .., . ., "' O(li 

137 

. .. "" 010 

... on 017 ... $1>71 ,,.., ,. . ., 001 ,., " 107 

" " '" ... •• 1!1 

IU 

u " u11.1 .. .. , 

2113 " "'' 00,311 ...... ..... , .... ~ .. ,. 

..... 
149 


21417024.eps

QUARTERLY BAN KI NG PROFILE 

Insurance Fund Indicators 

ll\$urtd Deposits Grow by 2.1 Percent 

DIF Resen • Ratio Rises I Basis Point to 1.18 Percent 

Sm ral Changes to Assessments Began in Third Quarter 2016 

Cb•nge$ in Assessments 

Total auets of the 5,980 FDIC-insured institutions increa!OO by 1.4 percent (S232.6 billion) 

during tbe third quarler of20161 Total deposits iocreased by 22 pmc11t (S270.7 billion~ 

domestic ofllct deposits increased by 2.3 percent (S259.6 billion), and foreign offlcedepO$· 

its increased by 0.8 perctnt ($11.2 billion). Domestic interest-bearing deposits increased 

by 1.7 percent ($140.1 billion~ while noninterest-bearing deposits increa!OO by 4 percent 

(Sli9.S billion). For the tweh·e months ending September 30.total domesti>: deposits grew 

by 7.6 percent (SSIIJ billion), 1<ith interest-bearingdeposiu increasing by 81 percent 

(S627.3 billion) and noninterest·bearing deposits increasingby61 percent (SI84A billion). 

Other borrowed money increased by 7.8 percen~ securiti<!s .old under agreements 10 repurchase declined bj· 12.5 percen~ and foreign office deposits declined by 0.2 perctnt 01~r the .arne twelve-month period.l 

Total estimated insured deposits increa!OO br 2.1 percent in the third quarter of2016.1 For 

institutions existing attbe start and the end oftbe most recent quarler, insured deposits 

increased during the quarter at 3,588 inllitutions (60 percen ~ decrea!OO at2,371 insUtutions (40 percent~ and remained unchanged at30 institutions. Estimated in~ured deposits 

increased by6.4 percent a.-er the 12 montb<ending September 30,2016. 

The Deposit hssurance Fund (OJ F) increa!OO by S2.8 billion during the third quarter of 

2016 to S80.7 billion (unaudited). Assessment income ofS2.6 billion and a negath~ provision for insurance losses ofSS66 million were the main dri1~rs of the fund bal3nce increase. 

lnterl'Ston investmenu and other mil(t!Janoous income added another $174 million 10 the 

fund. Third quarler operating expenses and unrealrad losses on available-for-sate securities 

reduced the fund balan:e by SS89 million. Two insured institutions, "ith combined assets 

ofS88 million, failed during the third quarter. The DJF's reserve ratio (the fund balance 

as a percent of estimattJ insured deposits) wu 1.18 peramton S'l'tember 30, up from 

1.17 percent at june 30. 2016. and 1.1:11 percent four quuten ago. 

Effecth·e April!, 201 ~ tbe depo~t insuranceasseswent base changed to awragecoD!Oiidated total assets minusawrage taoglble equity.'Table I shows the distribution of the assessment base as of September 30.2016. by institution asset size category. 

FDIC regulatiom provide that sevtfal changes to the assessment system ue to take effu<t 

beginning thequarlerafter the Dlf reser ~ ratio first reaches or exceeds 1.15 percent. The 

reserve ratio surpas!OO 1.15 percent and stood at 1.17 percent on june 30.2016. Therefore. 

significant changes to deposit insurance assessments went into effect in the third quarter 

of2016. 

1

'1hf01l$b6lll ibt a18.111l(tfunddi$(UJiiOo A> il'"'ltdiMii tuli011Sitld~ ll'IOxdt~tdJibukl•.tSJ\111$J 

u.:buoo•toJ.a.:tpttfbrrtJOitd.a.i~JeiiUlllfdbrt~hrt6 fttdp blab. lOihtfbotMIICd moneyt.duJtsRUBaJo.•UK'ti.ttrmttdtr.Jf~mortg:asrlndtbttdom.•adothtJborroor. Jogs. 

FlJ•uufo tslllaaltd&Lr.6.i~l th~di«u.Sooiodudtinmrtdht~olitt'So~lllu. ttd.lt!Ottoialllttd 

<ommtrdalhobi.&U.'t1.,intllfllliou inne lfto.t.t.!Aionjf .... ~~~a~l k>lbttJtf•mtt.~bt1e fof Noktr'•bub tod <u$tOdiaiNW. urcrmltkduNet Do6$. 

f rUikW•UStr«lkbmandConAimcrPtotto;IIODA<t. 

FDIC QUARTERLY 23 
150 


21417025.eps

2016 • Volume 10 • ~umber ·I 

Table I 

Distribution of the Assessment Base for FDIC-Insuted n~titutions• 

by Asset Size Data as of September 30, 2016 

Percenl of A$sessmet~t Base" 

A.ue!Sile Nlllllleroi iiiSiilltioos TOiallns6!UiioiiS ($BiLl Perceotol Base 

less Than Sl Billion 5,245 87.7 $1,111.7 7.8 

Sl -S10 Billion 621 10.4 1,536.9 10.7 

$10 • SSO lllllion 74 1.2 1,482.5 10.4 

SSO · $100 Billion 12 0.2 741.2 5.2 I 

Over $100 BiniOil 28 0.5 9.448.7 66.0 

To1al 5,980 100.0 14.322.0 100.0 

• Exelucfest.nSt.Wed U.S. bt~neiles ol fioc'e.gl'l b.tr.tt 

·~ A\'$rage eot~soida ed IO!al assetsfllinusavorage t-angibSeequity, With adpstme-nts tor b3nto(s b31'1l:sand Ql1~ial banh. 

24 FDIC QUARTERLY 

Decrease in Overall ASS<$Snrtnt Rates 

Ol'etall initial auessment rates ~lined from a range of5 lxlsis points 10 35 lxlsis points to a range ofl basis points 10 30 basis poinu beginning in tbe tbird quarltr, puC$uant 1o regul:r 

tions appi'OI'ed b)' the FDIC Boon! of Directors (Boord) in February :!011 and April2016. As 

a mult oilhis change. FDIC estimates tbat regular assessments~llned by about one third. 

New Pricing Method for F,stoblisheli Small Bnnks 

The April2016flnal rule adopted brthe Board amends the way insuranceaueismentrnlts 

are calculaitJ for established small banks."The rule updates tbedata and methodology that 

the FDIC uses to determine risk-based assessm<nt ralts ior these institutions to better reflect 

risks and 10 help ensure that banks Ural take on greater risks pay more for depo$it insurance 

than their lts$-risky counterpart& 

Tbt rule revises the llnandal rnUos method used todttermintaslessmentrates ior thele 

banks so that it is basa:! on a stati>tical model that estimates tbe probabilityoffailureol'" 

three years. The ruleeliminalt$ r~kcategories for established small banks and uses the 

financ.ial ratios method for all sucb banks (subject to minimum or maximum aS!tssment rates based on a bank's CAMELS composite ratin8). 

Changesto asSts!mentsapprored in tbe April final rule are rerenue neutr•~ thali~ they 

lea1~ aggregate aS!tssment rewnue collected from small banks approximate~· tbt same as it 

would have been ablent the final rule. 

Table 2 shows tbe scheduleofiniti:al and total assessm<nt rateSlhatapp~· beginning in tbe 

third quarierof2016. The rate schedule incO<porates both the reduction in initial assessment 

rates from a rangeofSbasls poinu to3Sbasis pointstoarangeof3basis poinu to30lxlsis 

points and tbt new pricing method for estabU!he>l small banks. FDIC estimates that as~essment rates tOr upproximately 93 p~?rcent of small banks have de< lined with tbe adoption of 

the new rate schedule. 

Gtoenlly.kolalba bl'l'¢bslhlnSIVbilion1nUf<bduttu~b«nWcfall)·l:cNfed~atlwtit.'t)ttrs. 

Mrpd"w•'W fPO.f?V fJs:)'f'Jt;:&Jf'NOIO·O$-lfJJffGO~. JIISlrdf 
151 


21417026.eps

QUARTERLY BAN KI NG PROFILE 

Tabid 

Initial and Total Base Assessment Rates• 

lin basts points per annum) After the Reserve Rauo Reaches 115 Percent•• 

h tatli$JledS•all llanu 

CAMELS C001posite large& Hithly 

1or2 3 4orS C011plex lostitotioiiS 

lnrnal Base Assessment Rate 3 to t6 6to 30 16to30 3 to30 I Un~ured Debt Adjustment"* ·5 toO ·StoO ·Sto 0 ·StoO 

Brokered DepoSit Adjustment N/A N/A NIA Oto 10 1 

Total Base Assessment Rate 1.5 to 16 3 to 30 11 to30 1.5 to40 

'Toul bas.o usmmeftt retn IB tM ub&&do not tnclude cit-e Dtposflory IMbtu·IJon Oebt A.dpruntnt(OIOAJ. 

'• Tht tCU1YO rltio fOf tho immcdift(lfv pfiOf usc»monl period mu,t•lso be I~ then2 pcr,cn.L 

.-..Tho IMISCWroddobt~j.lstmont Rn£101 cx'cod the lo;~r cl S b.sia points« SO pcrunt ot 811 iDWroddtl)OJilory iNUU1JOn'; initi.l buo.uoumcnt R1c; tlwt,. for cxarnplo. an insurod dopoJitory inttitutjof'l with an iBitAI ktcnsoumtnt moof 3 basis pointfwill hove • ma>umumun~rod dtbl tdjus1tn""tof 1.5 ba:$is poinU and c.4nnot hovo ttotAI b.atoaStonmont rt!O lowortban l.5 buia points. 

Lnrge Blllri Surcharges and Small Bank AS5f<SIIItnt Crtrlils 

In Marth 2016, tbe FDIC Board approved atlnal rule to increase the DIFto the statutorily 

required minimumoi!JS rertentof estimated insuredderosits.' C<lngres~ in the Dodd· 

Frank Wall Str«t Reform and C<lnsumer Prol«tion Act {the Dodd-Frank Act). increased 

the minimum DIF r""n-e ratio from I. IS percent to US percent anJ required tbatthe ratio 

reacl! that level by September 30,2020. Further. the DodJ·Frank Act required tba~ in setting 

aSS<'Ssments,tbe FDIC offset tbeeffectofthe increase in the minimum reser\'eratiofrom 

1.15 to IJS percent on lr•nks with Jess than SIObillion m assets. 

To satisfy these requirements. the final rule imposes on large banks a surcharge of 4.5 basis 

points of their assessment base, after making certain adjustmeots.uTbe rule prescribes that 

surcharges begin the quarter after the rtse!l'e ratio first reacbesorsurpasses 1.15 percent. 

Therefore, large banks"'" subject to quarterlpurtharges in addition to lower regular 

risk-baled assessments beginning in the third quarter of2016. The surcha'b"" amounted to 

Sl.2 billion for tbequarttr. 

The FDIC expecutbat surcharges will last eight quarter~ In any mnt,surcharges will 

continue tbrougb the quarter in which the reset\~ ratio fint meet.s or exceeds t.3S percem, 

but not past the fourth quarter of20!8.1ftbe resen< ratio has not reached !.35 rercent by 

the end of101$, a shortfall assessment will be imp<>sed on large banks to close the gap. 

Small hanks wiD recti1·ecredits to offset the p<>rlion oftbeirassessments that help to raise 

the rtse!l'e ratio from LIS percent to 1.35 percenL Wben the reserve ratio isat or ahol"e 

l.lS percent, the FDIC "'illautomaticaUyarply a small bank's credits to reduce iU rtgular 

assessment up to tbe entire amount o( the al$eSSmenl 

Author: 

Ke~i n Brown 

Sen.ior Financial Analyst 

Divisionofinsuranceand Research 

{202)89&.6817 

M~pt,-.gfedtrd$PskttoV.'jtli&s b}~ 'QJJ2SJ2016.~tiitt!WIIli. 

u~Nnlatrt.pttllly.blakJwlhts•b f$lOtlilho.o«MTt. 

Thea~~~Q,ttlc5arduq~tltth.lp~ak. utplntuw~*ftJ~t,SIOW 1oD u4~~,._11)(01 

fOfJtl'lh.tl(JbJnb\-

FDIC QUARTERLY 25 
152 


21417027.eps

2016 • Volume 10 • ~umber ·I 

Table 1-C. InS-urance Fund Balances and Selected Indicators 

~·liiiMMCtftfld' 

.. ... "' ... •• ... hi • • •• ... I. .. .. ........ ...... ""'"" ........ ...... ""'"" ........ ""''"' Qooo1oo ""'"" ""'"" ""'"" ....... ~,fgvlw,l!lliMS,l ,.,. ,... "" ,.,, t.ow.oflllldli'-t SJJ-"0 $1!.,1!0 $J),COO SlO,.US S$1.58t "'' S<O.l!G "" $01,1$) '"' SSUto "" l~! "" $<WI '"" Sll,l!t "'' $40.1Sa '"" $3lJ"" J1 

ill r.tbbM« 

A~IIJMY*I '·"' .... l.ll8 tlGO W t '"" t "' '·"' '"" U tt ,,., 1,211 W9 ll'llfl't'ilt.wntd otl 

ii!Wtt'nti'IISfW'flt!l 171 1 .. 111 "' Ill IU .. ,. .. 87 IS n P.uh?tdf.Wlonsaltor " *'"fUI'Itnlt • • • • • • • • • • • .. , ()ptr'M~fX1!fftM$ ~ "' Ill "' 117 ... 131 .... ~ "' .,. U2 "' ,., Pr l'lf ii* ilQt ,_ .... <;>I u ... ...,. ,11 "' -i)81 ...., . ,.. ,. . 1 .... 

.l,lcehettlltOint. "" ntttiiA~ II ., ntUii:.d9•1\'~on " .w,JI\a;blt-ft.f.foalt .. CU'Illt$ IQ '" "' ,., " ,, "' ,. ~ " ,. ., 11 

T«JJIl.Jidbablctdgngt 1)91 tm 2.1>11 2.43& Ul< UO> 1.£16 .... 3.N1 t1~ "'' "" l.W 

Endi~Fwdba.c. ..... 11.910 "'"' n.IO> 10JIS """ li6.lS ....... ..... .. .. .... ,...., 0.191 ,q,.-,.e 

f'.tcent cfl.ntthm 

'* r l!i14) lS.tJ ""' "" ~ 31)1 '"' , .. "" "" )$/> 

'"' 6118 

S......ftmo('lol IM Ill I U I ll 

'"' ,., IOl ~ ... ... ... "' ... hciMI.Wa.lll9d ....... 6,1:1/itb t"'~ '-~.!I I &.~US i41U8l C.ll1)6 i,lU,rol 6,20UI5 S,UJ,ol9 6,.101,M1 6.111.983 5..!00)!\ S,9S2,ftt 

Pttwl'ltdlMft hnt ».r ~ttf r "' .,. ... ... ... , .. 3}~ , .. "' , .. ,,. ·1&!'5 ms 

--h "·""'"" IWD,rn 1t,1SI,i..<IS O.MC® ~"""I 0.62Ml7 IO.i1i.t&l t0.'£8.'31 1o,m.m 10,0'*1,~15 !1,.$61,543 J,82S,ut U31.W 

~~~tom 

W41.*t.._ .. ,"' Sl$ "" Sll <n '" <lol "' jOt '" S>l ,,. &Ht·· 073.~ 1..1~.011 14.G21.4Q 13li6$m 13.W.$11 J.GlO.<I&!> ._, U.36G.17t "· IJ.1n.£'' .......... ll,l;OO.,. 1l.1!J.OU 11.,..., 

PtRtn ~tom 

lw~ r SOl "' .,. J1• Ill $.~1 

~·· .n "' J3S >II lSI "' HltmbwoiWillltOn• 

- S,!«J i!J01 ""' ... , 6)!9 051 . .,. i.fil8 

""" .;so ..,, G,lt21 .... 

DIFRes<n·eRatios Deposil Insurance Fund BalaJ1ce 

IIJ LJ# !.IS 

1.01 LOJ lQi I.W l 11 

9!U ll1U JJU Ml4 9!11 WU JIS 6tlS 9iiS IV1S JiU 6.'16 tll6 

Table 11-C Problem Institutions and Failed Institutions 

2015'' ' 

Plo**-llhtltvtilllt "'' Wl4U Oil$ m l03 ra3 toulaut SJI)U SSI,Ct38 s.t6,l'M 

~~~~~ ....,tito--l..ol\.Ga ~ ,; & 

fOIIIasui~HH $}17 StiA16 S6)N 

•au.-t..tyli~Mift!Td '"'-'•• \lltuiftd 11

Av.r.~td ota U:WIIn'IIUitf9blt e.pl'f',Wltl\~~•tc.rbrief'"sbrisand~odi banb­

'" 1~o>JoSool"""'" •••• rGt• "*nNM ~WC.RtPGt~t~td~fa.dl'"*l~ 

26 FDIC QUARTERLY 

9n3 

12113 

Jn • 

· 9n4 

12114 

3115 

6115 

911S 

12115 

3/16 

6116 

9/16 

.... 

m IN)U 

,. SJ.!IIt 

and Insured DeposiiS 

(S.IIiltions) 

Glf Glf~ ..m 

811Met Oeposi!J 

140,158 SS,96Z,2!11 

47,191 5,999,191 

48,893 6,111,983 

S!,t69 5,101.961 

S(320 6.)33,019 

6Z.2SO ~1 915 

&5,296 6,341 SO> 

67,5$9 6,34!,745 

70,11S 6,4l4,3S1 

n,60o 6,52S.12S 

7S.120 6,669,911 

77,$10 6,6$0,8(16 

80,10J e.sn.sss 

""' 2012 ''" 

'" 4$1 

Slst&$1 SW.JOI S31MJ2 '" 

St\OU " S11.6U " Slt.!lll " 
153 


21417028.eps

QUARTERLY BAN KING PROFILE 

Table III·C. Estinated FDIC-Insured Deposits by Type of Institution 

~blbM)d~lt!JfifvfiOOI 

FOIC in$1.,...d~teiJI8ri» 

roo:_ .. oo:.-.. f••Rt$liM·~ 

fOIC·Invtd ~INotullOM oo:.""""""-..-

fCI:~Md~lt.otuOOM 

fedtt.l!Ruecw·~ 

OO!trfDICJuurtdlmeiMK. 

U$bcheloff«et1Jft811*t 

TotJII~•fdltljf.IIUrionJ 

5.110 

l,Cfl 

... 

,.. 

... 

"' '" ,. 

..... 

""' ...... $1$,f3JJ11 

Utt.oe& 

10.i1MJS 

tS3,.m 

t,t-29,43$ 

nl,$11 

31!1,53.1 

,..,.. 

6,.~8)1 

...... 1S.&&&J5& 

Table IV-C. Distribution of Institutions and Assessment Base by Assessment Rate Range ONI•bditl;-30.2016 (flollt~il&.f~ 

Hllmbtlof '-*'ollo\11 

[))IM61it &t. ...... ........ ....... $l0.$6M3l SM7t93S 

1.9CtVIl ,.....,, ~....,, 3,8U;JS 

t,)4i,U$ 91U1b 

39t)40 115.11& 

.. .., ,,.,.., 

"""' ,...., It,'"' 'lb.J'S 

11.460)11 ..,...,. 

u.nt 3U36 

11.5f:6.<.6l ..., ... 

-·· PloiC*lto l 

A.lllo~ lbttiii.,_PoiM$ Wit ...... ..... A~~~ ~ ... UO·S<IO ,,.,. "" ,_, 1130 

Stl·l5o0 3,101 Sl li lt.WO 1JIO 

75\.1000 .. Ull IllS! $.11 

IOOt.,S.OO , "' ,... tll 

1S.Ot10C:O " ... ,., ., M.Ol.$06 01 "' '" .,. lSot-3009 0 000 .. 000 

3t.014S." l$ O,U Sl 001 

QI'UI«fun3S00 . ., •• ... 

FDIC QUARTERLY l1 
154 


21417029.eps

20J6 • Volume 10 • ~umber ·I 

Notes to Users 

This puNl."1tion wtnim fioandal data aod oth~r information f'or 

depo<itOI)' inllituti""' lnsur<d by tht Ftdenl D<pOSi lns11tanct 

CO<pOration (FDIC). Thest JlO(es areao integr~ part of this public• 

tion and pl\)\'idt iofor.,.tion r<gan!ing the CIOmp<U11binyof .,ur,·e 

dot• and reporu" diffmn<es o1<r time. 

Tables 1-A through VIll-A. 

The information pmented in Talmi·A tbro<Ogh VIll-A of lh< FDIC Quarrtrly &nbng'P.ofilt is oggrtgated for all FDIC insured 

Call rq>Ort f&n. both commer<UI bri3 and laving> lnstitatiom. 

Somt tables are am)•d by groop< of FDIC-lnsured inst~Uiiom 

basol 00 predootin31ll m,..or .... t cooo:<ntratioo. while other tab!" 

"SS"S"• institutions by ...a size and 8"'81"Phl: r<gion. Quart my and full-rear daa are provided foutlected iodlaton. indudi" 

aggrtgate condition ;~od income data. pubmaoce r.t~ coodilion 

ntios, aodstruct~ dtloges," wdlas pMt dut. OOll<WTtD1,3Dd 

clwg<-otTioformatioo for loans outstanding and other'""" 

Tables 1-B through VI-B. 

The ioformationpmeoted in Talmi·B through VI·B u oggr<gat<d 

lor all FDIC insured romm<tcUI OOnb and savings instltotiom 

m~ tht criteria for coromunilybrulb th• .-.re dtwloped for 

the FDIC'• Communi(¥ &nkiogSrrtdy, poblisbed in D<t.mber, 20 ~ 

bttp:J/fdl:.govlrcgulatioos/rt$0Ur<n/<bV!!!!Ortl<bi-full.p<lf. 

Th~ determioatkm o( .,,,-'hid! insured iwtituti()(IS m considered com· 

mWJily bonb it bar«! on five $1ep<. 

Th~ Mt i1ep in defining a commun~)' bart i$ to agg.regJtt aD 

chartor·l"•l d.i> report«! under tach holding comranr into 

a •• bonki" O!poi.z.atioo. TbisoggrcgatiooappUes both to b~n<Nbeet tneasures and the number ond locotion ofbaddng 

off<"' Under the FDIC deftoition. ~the~ o't'niu.tioo is 

de>ignated as • commuolty brulk. every dtlrter reporting under thai 

otgani2:9tioo ts alsorons-ide·red 3 rommWlity bank "·ben "''odiing 

with data 3l the cbartet level 

The s«ond step~ to exclude aD)' bonking Otf<oixJlion wbore mort 

thao SO pen:eot oft01al...as are held in <ertain sp«Uity blnking 

chartm. indlldiog: m.Ut a;rd '!'"iolists. ""'''""" """''"'~ &a•b. ir.dustrial Jean comJXlnies, trust OOI'f!Jif~ Nr.ktrs' bdttks, ,_od banks 

belding 10 ptr«ot or more of tool..,., in foreign offices 

On:• tht sp«Uityo~•oi.z.ation< are rrmovecl, tht third st"'' in'""" 

inc I~ o~aniutioll! that engage u1 bask bonki" octiviti<s os meosur<d by the tolalloaos·to-OSS<U rotio (gre•ter than}} perwll) 

and the ntio of rore d<posi~ to assets (gcutor than SO percenl). Core 

d<posus m ddlned" DOO·brok<r<d d<posos in dome>ti< olf<<S. 

Wy!lsof the underl}ing data sbo-. tha thest threshold.! establbh 

mesniogfullevcls olbosk le~ aod d<pOSi g>tbtriog and still 

allow for a degree of diwrs~)' in bow lndlvid~ banb <<>ll>iN<t their 

~ocesll<<ts. 

The fou llh step ioduder otganiutioos that operote wilhio a Umited 

gt081'pb~ S<ept. This limntioo of ""P' is uso:l "a proxy mOISart 

lor a bank's relatlonshlp approodlto bonldog. Banb that operate 

within a Umlted marktl area have mort taSt i.n mAl.l38~ relation· 

ships at a P<f"'mllmL Uoder this st<p. four <ril<m art appli<d 

to ..:b bonki~ orgoni.zation. They indude both • minunum and 

moxiroum oumberoft01al~ollic<s,omaximum lewlof 

d<pOSks lilraoyooe olf.-., ""' locaJioo-bar<d "'<ria. ThtlimiUoo 

th• DII!Ober ofand d<posits pero&ktar<gradoall)' adju!ted upward 

ovtr tlm~ For '""'lf'l<, ior ~ offie<s, banb mllSI have mort 

28 FDIC QUARTERLY 

than one ollke. and tht maximum number of ollk" """at 40 in 

19$Sand reachts?; in ZOIO. Tht maldmum lml of dqxi<i~ for 

3.11)' Oil< oil'JC< is su; bilion in depooib in 19$5 and $5 biDion in 

d<posks in 2010. Tbt """iningg<csnpbl: liml,.ions art abobasol 

on 1!13Ximums for the number of sblte> (fixed at J) aod big< metropolhanareas (f.xed ot l) in whi.:b tbt organization mainl>im ob 

Bnn<h olti«~ ,,.. bar«! on the mool re«ot <bt> from !he anooal 

JW>< 30 Summary of Dqmiu Sumrthat aruvailable • the timeol 

pubt<otion. 

finally, tht <kllnmn <stablisb" an a.s.<et·O::< l11tlll,al$0 adju~ed 

"~"''"' ovmlmt, tor rump!<. from sz;o millioo in 1985 to $1 bil· 

lion in lOIO,bclowwbkb ibtlimits on~ activ1iesand g«> 

g"!'ltk ""P' ate wai\'\!d, ThU lioal step ac"-iedg<s tbt faa that 

111011 of th<>Se •maU barl<s that art not excludod as spe<ialty banks meet the "'!•it< meats lor banking oaMties aod gt081'pbic limks in 

a.tl)'t\'('l1t 

Summary of FDIC Research Definition of Community 

Banking Organizations 

Community boola ore deoigmted 3t thel"•l oftht boOOng 

organiz3tX>n. 

(AD chort<n under d"ignated holding companies "e <on>idered 

communi1y banking charters.) 

ExcbSe: Anyorganilarion with: 

- No loans or oo cort dtposirs 

- Foreign Asset•~ Ill% of tot~""'' 

- Morethao 5096 of""'' in certain sp«Uityblnks. includi~ 

· <reditardspecialills 

• consunttr nonbank ball.k$1 

• u>d<lll rial loon companl<s 

lnlStcotnpani~ 

• bo.Un'bonb 

lncltJde: All remaining bonking org.ruzatioos with: 

- Tot~ assets < indtxed oil< threshold' 

- otalassets~iodaedsiJlctbmbold.•ner<: 

• Loan to assets> 3316 

• Cor< dopom to ossets> 5096 

• More than I offict but no more than tbt indexed maximlllD 

numbt:r of oAict>S. l 

, 1\umbtr oflargo MSAs •ilh oRI<es S l 

• l'lllDberolstat<>•ithoil'Kes ~l 

• No si"8ie offi« •ilh dqxi<it> >indexed maximwn bn10cb deposit size.• 

1¢oiiJUIOQ'IIQnbaakbnJautflullrillbi'IJful••id!limik441nlrl:r$cll11CJII 

mab«W~~Il'ltfdlll-»ut>~~4rpofu.bttaotbolb. 

1 AUt1$i#thrtshoidtode:xcd totqOJI $250mVIiotllll!l$Stllol $1 bill loti. 2010. 

~1ulmam-* oloft1..-al~lotqll.lllol01t 9&Sstld7Sioltll0. 

'~Ut!dlltlllibu.&depotil sbtlt1&stdl0tquai$J.UY:Iioolt119Maa! SSY!ion 

•~ >l 
155 


21417030.eps

Tablesi·Cthrough IV·C. 

A "!'<nit<"' oltablts (Tables l·C duoogft JV.C) prmits compa11· 

til•qoartmrc!JC• ..Wtdtoth< D<po<itlnsumOC< Fund IDIF~ prob- ltm iNtitutiom. faitdl..,ot«i imtk" io••· ,.;,..cd FOIC.lruw<d 

deposils.u wtU 3$ :wmtntnl ratt lnfonnation. Otpos~ory lns tu~ 

tiooJ thm "'not in!u!tdl>y tht FDIC throogft tht DIF art not lndudtd In th< FDIC Qu.11itly B~~r.!:~r.t Prcfilt. U.S. braod!t! ofinltiutlons 

beodquo~•r«i io fore~o """"""and ooo-depolit tJwt compw!i<l 

'"not indudol Wll<" ocht!Wist iotlkatoi Elfoonrt l1l3dt lo®in 

firvncill rqxH'ts &;,rail a..-6\'t irutiiUii:lcls. H~·C'\'fr. W$0mt CUt$, 

~IDI fupo.i~ "f<llU :ut notavalbblt li>r inltkution< thatlu><cbtd 

or """"~ol thrlr dwtm. 

DATA SOURCES 

Tht !Uwxid information '!'~""ring io th~ pctNi.:aOOo is ®io<d 

p1'111>'111y boll tht ffi!tral r ..... ~ lmttlulioos W..O.O.a 

Cotto.:ftmECJC..S..iui.JidR.1'<'t1Jo/Ccrodrw•.Wisc""" 

(C.I RtporulandtbtOlS 11lr{rfi.....,.J Rqora..tbmltttdby 

• FD!Cilmu<d dqoooilorrinlliretioos. (TFR filtn btgan llhag c.t Rtpocu decm.•"th thtqaarttt <odiog Mar.:h Jl.XIlll Th» 

•-• l<omloa aod t<!rlmd !rom tht FDIC'• Raatdl I alontutJoo S)'IICS (IUS) dottbaot. 

COMPUTATION METHODOLOGY 

l'utat ........... .,. "'JJmdto iilt~rq'<llU.""" 

MsobridWy &mtldllinol-lltSiill requmdto lilt"!'<· 

raft r<p0rt1. Db froll ..oodiuy lostilutioG rtpOIU Itt iodoGtd 

.. t11t Qumlf &ut.ilrfPrcfilc!Jitleo. ru'!IC2111..dtodoolf.,. 

~ !'o~artl!lldtforO!I)'dooN<·~olsul> 

sidurydot•M!>rionllly,,,...,.rJUS1m<martmac!ttotbtOTS 

Thni F"""'"'IIIJ><w torr Mit cb<r e<>nforaw>Ct •ilh tht r~anrl ~ requiremeruoltbt FFIEC c.l Rrpom. 

(ll'R rum bq;ao filiog c.n Rtpom d«tive with tht quarttr 

mllngM&rcb Jl.lOil) 

All condlioa and ptrfo""""' rotioo "J'Itf<lll .. .;pttd "•"S"-

Lt.,tbt""" oftbt indn-l:!..r nummtomlut$ dJvidol bj· tht own 

ofindlvi:lu>l dtnomirutomlu<s. All•"" at>lli>bd•ty ~" u<td 

in akubi!Jl! ptriormanct r.lliol rtpmtlllavmg< amOIIllb lot thr 

ptriod ~ning-<>i·p<riod ll!l<lWlt pillS tnd-of·ptriod amount plus 

any illl<rim ptriocb. <Iii idol bj· the totalwmbtr of ptriods). For 

"poding-of·intmSI" m<rg<ll, th• .,..~of tbt "'JWrtd iollitutlon(s) 

nrt inr.:lU<kd in a,'t.~si.nct the )"CCll·tc>-da1t hxomt includts 

the resulu or all me lied inlliutloos. No odjustmert.! arelll3dt for 

·purchase occounti< mtrgtrs.. GIO'I\tb rates reprmnt tbt rtrcrnt 

oge ,ru.ng,ovu all· month ptriod io totals lor itl!tilutioos in tbe 

baseptrlodtot<llals for iNtitulions intbtcurrent ptri>d. Forlbt 

rQIImuti~Y bank subgroup. growth "'"will tt6«t dtaoga 0\., tim< in tht number aod ldtruitles ofiostitutloos d<sig""td • com 

m11111ry bonb, "~..u., dWlges io tht ""''and lllbiilts. and 

incomt aod ''f"""' of group rntlllhtn. Ualm iodi.:ottd Olbttwist. 

growth nits m not odjult..t br ltlt!g<D or other cb>nga in the 

'""'P"'k"" or tbt "'"""'"'!)'bulk Olbpoor. 

All dJta mooll«ttd anrl pltf<llltd based o• tbt location ol tor:h 

"f<ld!Jl! UlSillutloo's....., oftl.'t. Rtpontd daJ may indnde II1CIJ 

and~loatol001>icltoltht rq>OIIinsiastitutioa'sbomut.a~ 

laaddil._-Ill)' tdr.>:au """'sutelioa «<haag< 

thnrdwtm,~ioaiator·~oriatu ialrutt!'"'P 

,_..,_ ""''""""""' _. thtir borntolf~a b<lwwG """"' .....,_ .... CJll_toCOI!Illlt!dalbds,ot<n~~~~~t~till 

barb may<....., ooariagrinstitttti>m. 

Ql:ARTERLY BANKI NG PROFILE 

ACCOUNTING CHANGES 

Accotl'ltinQ lew Mtasure~~ent Periocl Adjuoents Relaled to a Business C.O.binMioo 

In ScJl(•mbtr XI IS. tb• fin•n<lal A<C<>utlli'l! StRl!d.lrd! Board 

(FASB) bu<td Accoumir~Stondords Up<blo (.ISU) No.XIIS·i6. 

"Slmplifyblg tht A@urdulg li>r M..,uren~lll Ptriod Adjustmtnt•• 

UnJtr Aw>wlling Standards Codillonion Tq>l< 30S,Illuu"" Combinatio01 (formtdy PAS8Stattmtrlr No.I~ I(RI. "flluln"' 

Cornbirutiolll"),lftbt iniial ""'""ti'l!lo" bwin"' combinmioa 

is ln<ompl<1t h)'thttnd o[tht tt('Ortillg ptriod in wbi<h the <onJbi 

Mllon <X <UN,. tbt kqul:ttr rtf«tl rro'risionaJ IIIOOWilS in its 61\.111· 

dal statttn""' for tbt Itt .. ~r whi<b tho """''"intl k il>:omplttt. DwioJ tht .......,,,. ... ptri>d. the "'!uirtr II rtqulrtd to adjust tbt 

proo'ruo..J amouots "'OSI'iztd" tht "'!ulsiloa <lot<, •'lib • ront· 

~ adjUIIm<ot 10 pdwilL to ttil«t -lllform>tM>aobtaintd 

al>oul rx., and ""'"'"ta"'" !bot -rd uoftht "<rJisrtiOCI dote tb.ot.~"-n,woddbmali<.ttdtht......,.,.r11o[rbtamOUI1U 

n<<>glllrtduoftb<ilk. AJ pmttlluodtrToplcM,an""JW'ttit 

rcqoutd to rtiJOOF"11\<ly adlGfl tht p<OV!IIod ........ r<a>piztd 

ottht~datttottil«ttht ""'"""-"" Tosiltfhlrtht """"""""lor tht adjarultalj mdt 10 ptOV\Iiollll-ASl: 

l01~16dlll'"""tht""""-"'"'""P"'Imt)'a<collllllortltt 

odjooo.D<"" A<"""""'.tht ASl: -ads TOft' M"' uqo!rua _.,o,....,-+-atstopmisiooal.-.utlulart 

idallieddunoa tht --ptnod Ia tbt "J''Ohhlll ptriod 11-.id ·--••aredrtmtuool. l:adsrtbt ASC,tbt 

"'!W"'alooll•r«.,-iothtliaaa<illswrn•a:sfortht..,., 

~ptriodtbt&oat1111111p.tfaay.~froottht 

adjulta>taljiOtht!""'·ioiaoal-•tfthta.""""!Jl!fortbt bu._,......,...., bad b«o•OIDplrttd" oltbta<qulslloo dolt. 

Ia grnml. tbt .,....,.meat ptriod Ia a bu.tn<t1 combtnatloo il 

th• ptnod d<r tht •:qwstloo dolt d""'t whl.:h tbt "'~""" may 

adJWI rro1'11loaal .., .. .., rt('Odtd f« icltt1 d'ubl• """ a<quirol. 

bah~• let mumol. anrl <or»ldtl1lioa '""'ltr!td lor tbt ""!WI« br 

•ill.:h tbt ln~W """""'"for tbt bwinm comlin>uon illn.."Om 

rltt• a th«od o1 th< ltJ'()dl'l! r<riod In •ilkh tht combllUiioo 

"'"'"· Tq>k 80S p101ldu oddrllorul guld.tnce on the mwurem<m 

ptriod. wbkh shaD not a,ttd on< >•" from tht a..quilnion dot•. 

""' adjwtm<nu to provl&io!DI amoun~ duri" thil ptri>d. 

For inltkuUool thot all puN!. bwlnts1 tlllkits,., dtfintd und<s U.S. 

GMP, ASU lOIS 16 b tWMlw forf1S<>I )'elrt.aod Interim ptrlrxh 

wkbin thooe f11<ol ran. btghwingafter Oe.<1nbtr ~ lOiS. For 

inllltuuoru that'" not p<d>ll bwin<» onritl" (L<. U>ill art priwl< 

con>f''"lts~ the ASU b t!TC\1rvt for IU<ol !'"" btguu>lt!G ofttr 

On-.mbtr I S.l016. and lnt<rln> ptriods w.hln f"'-.1 l"" btgin· 

ning afttr Ottembtr IS. 2017. Tht ASU'• am•nJmer11s to Topk IIOS 

should h< appUed p""Jl«lll•lr, to ad)ullmtnu ro p.,.ll\o!DI 

amounts thai O«urafttr tht etfr,111• ditto[ tbt ASU. Thw. irut~•· 

tioOiwlthacaloo.l"y"rl\o.;d)'tMth.t or<pcl>iio; bwlnmt1111l><S 

mU!Iarply tb• ASU toaoyadllbtawnu topi\WIIioct>l altiOWilf th3l 

"'"" aliu lanlW)' l,l\)16, begin~ wllh thtw C.U Rtpons for 

M.ot<h Ji,l0i6.llll~utlo• ..-haaltr>lu r<v ils<1ll )<>rth31m rlll'>lt COflli"AAIo ... ,. opply tht ASU to aayad•ustmtllb to prorisiooll.-..• that"""'''" lotawy i, Mi, brpoaiag W1ll> tlW Cal Rtpons "'Dn-ttlbtr Jl,l017. udy ~·of ASl' WIS. 

16 • pclllllltd ioCall Rtpon• tiNt liA-r Ml>«a sobllal<\t 

Forlllilaiooal """""'""' ...... _ sboulJ .... toASl' 

l01~16......,.b'omrWl<a~r.L"" ... ~")Ir!FASB.1'!:<' 

Sci."!!D!!P!s<Stnl ll>6156JI610&. 

FOIC QUARTERLY 19 
156 


21417031.eps

20J6 • Volume 10 • ~umber ·I 

Oebt l""""eCost• 

loAprillOIS.theFASBi!su«<ASU No.WIS.O~ "Simpl!f)ingthe 

Pr....,tst;,n of Debe I""' oct Colt .. This ASU r«juirtS debt l<>u· 

:mte costs ~S()I.iltcd with 3 r«osnUed dtb: liabilil}'IO be presenttd 

as a dirtd dtduaion from lhe fattamooot of tht rdated ~ lilbU· 

~y.!imilartod<btdi><ounts. 1ne ASU is limh«i toth< pmtntation 

of dtbc JS$u.:u)ttcosts; tbert"rt, tht f't00£nitioo and mtaSUn.'-

ment g~~icbD<e for >Ucb '"'~is unJfected.IJ pr<$tn!, A«OIIn~ 

St.ndruds Codifi<:atl>o (ASC) Subtopk SlS. 30. lnter<st-lmput.>tioo 

oflllltml, rtquir« dtbo ""''"'""'II to bt reponed on the balance med" m ""'<t (i.e., a dtftrr<d charg<). For Call Ro:pon P•'l"""'-

thecosiS of issuing debt .:urrtotlpre reponed. n<t of ".:umulat«l 

amonization. in 'Other -.s: For imtkutiom that ..-e puNk bU>in"' entili<s, as dttln«i under U.S. 

GAAJ>, ASU 2015-03;, eliectivt for &cal 1...,., and interim periods 

•ithin theo< llsal you>. begir~ M<1 O..:trnber IS. 2015. For 

exsmplt, iiJStiutions "'ith acaltll!br )'roJ fis..-'3) )'t'.ar lbat 3rc rub!'=' 

bwinm entifu must apply the ASU ln their Call Reports~ 

Mar<h 31,1016. For imt~utions tim ar< no< puNk bwinm entili<s 

(ie., that are prii'Ole companies), the ASU is ell'ecti,. for As..-.1 l''"' 

begiMing after De"mbtfl 5,2015, •nd interim periods •itbin llscal )Ufl ~aft" Dec<~ob<r IS.l016. Thus. imtilutions •itb 

acalendar).ar lb.-a! l"" that are private companies must apply 

the ASU in thrir De«mbtf 31, 2016, and suh!equem quarterly Call 

Ro:pom. J:.dyodoptioooftheg~~i<laoce in ASU 201>03 is perm~ted. 

Enao<dinaty~•$ 

lo)amouy 2015. the FASB i>su!dASU lio.lOIHI, "Simp!!f)iog 

ltl'ome St•ernent Preoent•ioo by Eliminating the Concept of 

Extraordio:II)' lttms." Thi• ASU diminates from U.S. GAAP th< 

coo«pC of extnordioory ~""'At P"""'- ASC Subtopi< 225·20. 

lo:omeSllleromt- Extnordinaryand liDIIWOIIIems (formerly 

Accoun~ Prir>:iples Boord Opinion No. 30. "Ro:poning the Result> 

ofOperotioos"~ r<quim an <mit)' to "''"f'lely doss~, p~mot and 

disd* o:tDOrdiruuy t\>eots mitr.msactiom. An e\'tnt or tf3.Jl$3C· 

lion is presutn<dto b< an ordinary 3lld usua1 .. 11v~yofthe reponing 

emily unless el'idenct dearly "'~'!""~ its cla&il\;ation as an "''"'"' dioary item. I fan twnt or tr.ansaction cururlty roms the criteria for 

extroordi.nat)·<bssifntion. an institution must ~regatt the ext.raor~ 

dioary ittm from the rmt!ts of itsordin:II)'operatioound ro:pon the 

extraotdlnat)· itt.tn in is income Sbtement as -e.xtraordinaty ltem.1 

-and other adjustments. ntt ofiocome taxa. • 

.>\SU 2015-01 is tff«tivt for &cal yrus. 3lld interim periods within 

tho« f..,.) l'""- beginning olter De<embtr I;, 201l. Thus. for 

exam pi~ iml~utio .. •ith. weodilr )'W fiscal year mull begin 

to apply the ASU in thcirCall Rtpom for Mar<h 31,2016. Early 

ad<>ptloo of ASU 2015-01 is pennitt«l pr<Wid«i that thtguicb"'e 

is appiW from tht beginning of the &cal )'eat of ad<>ptlon For Call 

Ro:pon PWJX""- an imtitution with • caltndar )W &cal y.... must 

apply the ASU prooptdively,lhat it, ingeneral,toe~•m• or uamactk>ns(}XUrrins afterthe<b1fo( adopciorL Hown'(:c~an itJStituzioo 

•·ith • f..,.) yearothor tbao aaltodaryw maydM to awlr ASU 

Jl)IS.j)l p!C>!P"1ivelyor. alttrDJtively. ~may''"' to •pply the ASU 

retrospe<1lvely to all prior caltodar quarten iodudtd in tht lnstitu· 

lion'• )'W·to-date Call Rtpon incorot ltaleJt>tnt thal indudes the 

begiMing of the AS<al rear of adoption. 

Afttr an im1itull¢t! adopiJ ASU 2015·01,anyNtnl ortrJJlS:t."tion 

that would ha\'t Mtt tht trite ria for ~I30rdiJnry d4lSSltkation 

btfor< the adoption of th• ASU should bt repon«l in 'Oth<r nooiJ> temt income: or "Other noninttmt txptnst," » ~roprlatt, unless 

tht C'\'tnl or Cian$;Ktion would othtTVtist be reportable i.n tbe income 

30 FDIC QUARTERLY 

>12temtot )AI a mull of the r«eol accowuing dt""Se, l""·t<>date 

Third Quarter 2016 'Extmrdinary gain>. n<t' on the QBP iJ>.-ludes 

only Di!<Qillinu«l operation• t!Cpfns<. A«ordin~y. comparisons 

to ptrlxls prior to September2016are ~meaningful. $n-et prior 

periods indud«l all Exttaordinarygainund Di><ontinu«l opera· 

tions expens•) For additional information. institutioos should r<ftr 

to ASU lOI 5-01, •·bidt is available at ht!rJ/.-,.w.lasb.olifup/FASB/ 

Pm/SectionP3!l<&<id•lli6156316498. 

AccOUilling by Priv>le Cotnjtlllies b lde<diable lrla111Jiltle Asset• 

in a Business Coltbinarion 

lnDetemb<r20B,the FASB i>suedASUNo. 201~-13, "Actoot•ing 

for ldtnti&ble Intangible Alsets in a BwioosCombination. • wltich 

il aco""""" of the Private CompanyCOUD<D (PCC). This ASU 

pro~ an a«OWlting alterm.th-e that ptnoits a priv,.e company, 

as defm«! in [).$. GMP (3lld di><u""' in a later $«<ion of these 

Suprl.,.entallmtru<tioo•),to•irnpli&lheacwuntu'S for """'in 

intangible assets.. TheacrountiDg alteroatn·e appllt$ "''ben a pri\'ltt 

company is required to rt<OSDiuorotherwise comi<kr the fair v~a.e 

of intangible assets 3S 3 multo( ctrtain transartiom. in.:hld~ wbtn 

:Jp¢)"1 the ~KqWsition lll(thod to a bwioess combi.~»tioo WK:Itr 

ASC T q>i<SOS, Bwinm Comblll3lioot(f011Dtdy FASB Statttll<ol 

No> 141 (rms.d 2007~ "BusinmCombinatloo!"). 

Under ASU roJ4-18, • privlie rompany that elects the """""ting 

alte""'h• !ltoold no looser "'"'SJliu"!"rolely from goodwill: 

• Customer·rdat«l irnngihle asseu unl"' lheym copable of b<ing 

$0[d or licensed ind<pendently li<>m the otherassds of a busin"'-

and 

• Noncomp<t~ion agretroeol$. 

H<M'trtr, l:«::.\l$t mortgast strvk'ins rights and tort ~it intangibks :J.Jt rtgardtd ~apabkofbe:ingsold or lke!)$ed ilxlq.:'t'ndend)'. 

a prl\'31t rompa.n)' !hat tltd& this accoUJ'lling nhtmatlvt mu.n rc.'Cog· 

nize th"' intangible meb separately from goodwill. ~wly measure 

thm ll fair 1-alu~ 3lld •uboequently me"ure them in O<cordar>:e 

with ASC Topic 350, lol""Sibks-Goodwllhod Other (formerly 

FASB Stattment No. llZ. "Goodwill and Oth" Jma"Sibk A"eb"). 

A prh·.ait CCifliPJn}' tba1 drctslht> :k-<0\lnli~ alttntalivt in 

ASU 2014-13 ~"'must adopt the privatt company goodwiii:I('('Ouol· 

ing altemativede.cribed in ASU 2014·01, • Accounting for Goodwill • 

Howt\'tf, a pri\''<llt .:ompany Urn t1eds lht goodwill a"oultiog 

a.~emati>< in ASU lOJ4.j)l ;, not r<quir<d to adopt the"counting 

alte!ll3liw '" ldelllift:Jble inl>llgiblt ""tt in ASU 2014·13. 

A pri»t• comp:my'sdecision to adopt ASU WI~· IS must b< mad< 

upon tht ""'"'""'of the fint bwinmcomblrutioo (or other 

traota<1ion within th"copeofthe ASU) in &cal,. .. , beginning 

Mer Decembtr 15.101 ;. Theefl'e<th• date of th< pri»tecompaoys 

db:ilion to adopt the accounting olttr,.tiYe lor idellli&ble int~ible 

assdS depeods on tbe timing of that ~nt trntsactioll 

lflht 6rst.lrall$3dion occun in lht private comp:my's ~l$l fuel) ye.n 

btgirunng M« Ot<.,nbtr 15.201 S.lht adoption will b< effo.'livt for 

that &cal re•r's aMualfioan:ial reponing period and all interim and 

aWlual periods ther..fter.lfthefit>t t......aion "'""'in as .. -.~ 

rear beginning after Decetnber 15,11116. the adqition wil b< effec. th't in the inlerim period tb-at iodudts tbtdate of tht! lrnltsa.."t.lon aDd 

suimquent irtttrim and annual periods thereafter. 

Early ~L--atioo oi lhc htl<uJSibtes a«o.u)rirrgaltwtalivt is penni!.· 

ted tOr any31lllualor i~erim pe:riod forwhkb a pril'3lt: comp3.D)''' 

fiwncial staterom" bave 001 y<t b<en mad< available for ""''"'~ 

Coltomer·relat!d intangible""" and ooncornp<t~ioo agJ«-

mentl that ai!t"' of th< beginning of the period of adoptl>nshoold 
157 


21417032.eps

continue to b< acCOWIIed for S<pantelr from goo<!wil. l•.su<h 

exis11ng iota'1;ible ""'' .oo.Jd ool b< combined •ith goodwill 

A bank Q1 savln!;$ ass«"iati<>D tba( metU the prh'lte companydefinitO>nin U.S.CMPis pemtitted. 001 ootr<quired.to:>dqlc ASU2014· 

18li>r Call Rtport I"''J'OS<S and 1113)' choose totarlradopt the ASli, 

pro1ided I also odopt> the pm·ate company goodwill a:counti'1; 

oltemati-..lf a pri;'Jle institutioo "'"" U.S. CMP fwaocbl ""'' menu and adopl> ASU 201'1-IS. it sbouldappl)• the /.SU's int..plt 

asset acwuntingaltematiw io its Call Rtport io a rnaru'ltr cornistt.Ol 

with its rrpot1ingofi01~ibk assets inks finaocW $btellltJts. 

For addilioRII informa.lion on I he pth'att compaJIY a«oumitls alttr· 

.. u,. lor identifiablt intangible"""· imtlutions •booid refer to 

ASU lOH·IS. •t>:h is avaioble at htte//www.fusb.oJK!'•piFASB/ 

Pas<iS<ctionPageS;dd=l 176156)16198. 

Private C..pany Acclllllring Akematives 

lo M.y 201 t the FU..ncW Acrountl'1; Fowt<btion,tht indcpend<JC 

pri>at< '"'or "'i"nitllioo "''"'••ibl• lor tht M<rsigbt of the FASB. 

approved tbttstablisbtnt!ll <>i tht PCC t<> itnptO\•tthe pro..*t:Ssof !tf· 

ting acoountiog standards lor prlv>lt OOIDJ"lni« The PCC is cb:uged 

with working jointly with tbt FiiSB toddermioewbether sod in 

"''hat dr.:umstaoca to provide alttrD3~\'t rK<Jgnilion. me-asurement. 

disdll$ur• dilplay, elf«U-.dale,ondtmnsilioo gullao« for pri1'Jlt 

companies. rtpo~ undtr U.S. GAAP. Alttroal.h-t guida.D't ror pri· 

vatt compam may indll& moditi""tiom or e:xctptk>ns tootht.J'\'ise 

appliotble ai>ting U.S. CAAP stoodatds. 

The banking asencie> bm coodllded that. baJil"' saving< mociation thot is a pm'3le compaoy,., deSned in U.S. CMP (as di«USS<d 

io a ht-.S<ttioooftbeS< s..pr!eme••~ Instructions). orermitted 

to U$t priv:tlr comp3.Il')' ~'X'OO.!tli.ng nhen~a h-n issuai b)· the FASB 

wben prep~ iLSCaD R<p<>rts. '"'q>t as pro~ided in 12 U.S.C. 

ISJin(•)asd""ril>ed in the followi'1; S<nten,•lftheagmdes 

determin< that a partkular accounting principle •'lhin U.S. CMP. 

indudi~ a private company accountiog altero3tive. is i.o.;onsiste:nl 

•ith the statutorily sp<cif•d snpervUo<y OOj«t ives. the agencies moy pr<o:ril>un aooruntingprinciple for r<gllhloly reporting pU!J>O"S 

that Is no less stringent than U.& CMP.In>~J<b " il"'lion.an imtl· 

tution woold not b< pnmattd to use that porti<ubrprivatecompany 

accowting altemniveorother ac00Witi'1; prin<fle •itbin U.S. 

CMP for Call Rtport PIIIJ>O'"- The agencies •'llllld provide 3j>pn> 

priate notkt if they 'ft'ttt to disallow any accoull!lng alttrtJ:ativt uodtr 

themtutol)'proc& 

Accounling by l'liville CollpMie$ for Goo<Mill 

Onfatml)' It\ 2014,thtFAS8ios~~tdASUNo. 2014·02. 

"Acoouoti'1; lor Coodwill. • •itich is a COll$<11$11$ of the PC C. This 

ASU g<norally penn[s a pri~>te <OffiJ"lDY to elect to omortiz• good· 

will on a stmgbt·lin< bosb 0'" a p<tiod of teo l"'" (or less thao ten 

l""" II mort appropmt<) and apply a ~mplitled impairmtll mOOd 

to goodwill In addition, II a prh'Jle company cboosa to adopt the 

AS\fs goo<i'-iU accounting ~temativ<, the 1\SU rtquir<S the priv>t< 

companr to rook< an a<counti'1; pol~1· elt\iion to tnt good-ill 

for impairrneal jl tilhtr l.bt ertity ltvd or the- rtpOrting uhltltwl 

Goodwill mU$1 b< ""ed for impainnelt •-hen a t~<riog """' 

occw< that ind>:at,.tha th•lairvolue ol an tllity(or a r<p<>rting 

wtit) may be below ils carr)ing amool1.1nconua., U.S. CMP does 

DOl odtetwist J"rmll goodwill to be amortized, U.tead requiring 

gocxlwUI to bt tc~ed br impairmC'~ at tbr rq»rting unitln-tl annu~ 

aDyand J::,tn...·cm aruutal tfSI$ in certain cirtu.mstath."'tS. Tht ASl.i"s 

good•iU accollflling altermth-e, II dt<ted by a private ooropaoy, l! 

eflt<til·< prosptctlvdy lor""' good•111 reoogni1.ed in aJmualr<riods 

begiMing ofier De<<rnb<s I;, 2014, and in interim periods wilhin 

QUARTERLY BAN KI NG PROFILE 

aoniiSI periods b<ginning•iier ll«emb<r IS. lOIS. Goodwill exist· 

iog as of the beginni'1;ofthe period o( odq>eion;, to be mortiltd 

prospecth-tly O\'tr 1en )-nr$ (or less lhan trn )Un if more-apprwfi. 

at<~ The ASUs<at" th<11 earlpppijcntion o( the goodwUJ a=tntlns 

altemaiw is permioed fo< any anrnw or interim period for wbi<h a 

pri~>te COIDJ"lny's finonciol mtemeou have not )'<l been made 3\>U· 

3blt ~r issU3JXe 

A baJil or "'vings association that m«ts the pril'3le compaoy dtl\nitioo io ASU 201!-0t as dOOJssed in thefollowi'1; S<Ctiooofthese 

Supplemffital hmructions (<e. a private institution). is p<rmhted. 

but not required. to odqlt this ASU for Call Report PUf!lO"' and 

""Y <h..,.. to early odopt the ASU. If • priv31e institution"'"" U.S. 

CMP fioaocial statemenu and adopts the ASU. ~ .boold 3fll'ly the 

ASlfs goodwill acco11Jlti'1; olte""'tive in its Call Report io a monner 

oonsisteot '1\'itb its rtpc>rting of goodwill io its 6naudal st-attmtnl$. 

Thus, lor tiWllplt. a pri1>te imtilutlon with a alendar Y"' fi• 

colye>rtbatcb....,toadopt ASU 2014 Ol muupplytheASlh 

pro>isO>m inks Dmmb<s Jl. 201 S. :ondsubs<qurot quanerlyCall 

Reports unless e1rly appllcutionolthe ASU "'-" dected. This •..Wd 

requln the privote instoution to ~'P"• in is Dt..-.mb<s 31, 201S.CaD 

Report one )<at's amortization of goodwill tldsting" oljanu.uy I. 

2015, and the amortization olany new goodwill ro:ogniud ln2015. 

For addilional inl'onnOlion oo the pri~>te company a.:tountl'1; 

altemali~< fOr good•·ill, institutions sbould rtferto ASU 2014· 

02, •ti<h ;, m~oble at btqrJ(I.,.-.·.fasb.<>rg["PIFASBIP!ll!L 

Se<tiooP@Jd• II76156JI6198. 

Oefin«ions of Private C..pany anti Public Busine .. &tity 

A«ording to ASU No. 2014·0~ • Accounli'1; li>r Goodwill," a pri•>te 

company is a busimss <ntity that is nota publk busiD<SS truly. ASU 

No. 2013·12, "Definition of a Public811Si""'Entity,"wbi<h•"' 

is•ued in ll«emberZOil, added this term to the MasterCloswy 

in the A""""till! St>ndatds Codi&atioll This ASU """that' buslnm tr'ltit)'. s:ocb as a bank or savings Msociation.that mttt:s an)' 

one of fi,. criteri> "' forth in theASU b a J"lhlic business eruity for 

r<p<>rting pOrpos<S under U.& GMP,lnduding lor Call Rtport pur· P""'· An imtitutloo thai b a puNic busimss entity is 001 permlnol 

to owlY tht private COIDJ"lD)' goodwill accounting alter .. til'e dis· 

CUS!ed !nth< pr«eding!Ortion whtn preparing bsCaD Rtport. 

For additional inlOnnation oo the &finit.ion of a public busL'Iffl 

eruity,lmtHutO>ns.oo.Jd r<f<r to ASU ZOil-12., wbkh ls avaUable at 

Reporting 

hnp:/,..'WWiasb.orgllsp/FASB/Page/SertionJ'm&dd= 

~ 

~in CO¥ern•ent-Golaranteed Mortgage lt>all$ 

Upon Ferecfostl'e 

In Ausust 2014, the FASB iosuedA<coonti'1; Stmdortb l;pdate 

(ASU) No. 2014-H. "Cias<ilication of Certain C<wernmert· 

Cuanmeed Mortg•ge Loar. UJ"ll For«losure. ·to add"" dh•nit)' 

in practke tor howgowrnmenc.guannr«d IDOf1Meko.m ate 

r«<>.W upon lon<lo!ure. The ASU updatts gullan<t contained in 

ASCSubq>ic ~10, Receiw.bl"- Troubled Deb! Re.tructuringt b1· 

Creditott (formerly FASB Stattmem No. I 5, • Accounting by Deb!"" 

nJ>:i CrtdiO<s forT roublol Deb! Re.trudurin[!!." at amtoded), 

becaust U.S. CAAP pr<Violllly did not prov!& sp«if~ guidar><< on 

bow to 'ot<gorize or meosuttloredooed mortgogt looru that are government g"'nntttd. The ASU d:~rili<s the conditions und<rwbkh a 

trtdi1or rntlSt dtrt'l.-ognizt a govtmmttt·gua.nuuffll mortg:.~ge loan 

and r~nizt a stparnu ·omn r«ti\oable• upon fortdasurt (d!alls, 

whtn a tttditor r«th't'S physical J>OS$t$$ion of real tstate property 

collateralizing a mort gag< loon in accordaott with tbt gui<hn<e in 

ASCSubtopk 310--10). 

FDIC QUARTERLY 31 
158 


21417033.eps

20J6 • Volume 10 • ~umber ·I 

UOO<r the ASU, imtkutiom .bould dtrec<JSlliu a mortgos<loon and 

r«<rd a wpante othtr rt\'"tivable upoo (oredosurt o( the real estate 

cdlattral if the (oU~ing coodhlons are met: 

• The l<:on has a go-.•tmmenl guaranttt that 6 not StparaNe from 1lw 

loan bttorr lor<dOIUI< 

. At tht tbne o( tOr«:IOGurt, tht institutioo hu the Uttnt to con\'t')' 

the proptrty to the guarantor .. d milia daim on lh< guattnt« 

and it b" tilt abi!i1y to r•:<rm undtr tbot cl.>im. 

• At lhetimtoflor"lo<ur<, 3J1)' amount oflhe daim tb>t isd<termillal on th< ~ ofthe 6ir VJ!11t ofth• rod osl>tt;, fixtd (that 

b.'"' r.al .... t. proptrty "" "'''" appraOal '" rllf!'O"S of tbt dum .ndtbus tht irul~ution;, liOC "'PP"<' to chaoS" in lht fair 

VJ!utoftheproptrty). 

Thls guidanctisappliooblt to fuDy.nd portlallygo~tmmerugu.r.lll\«<1 mortgog< loom pro>ided the thr« conditio"' idemilkd 

aboo."t ha\'t' btm mtt.ln w..-h situatbns. tq;tOn for «burt. the stpa· 

rare olher ra:ti\'able shoukl bt- mcasurN bastJ on the :UilOulll of the loon hoL>nC< (principal and ha<t..,.)<xr<"td to bt rtco~tr<d &om 

Lheguanntor. 

For inllitullom that artpul:lk bull"'" <rllfle$, as dtfilltd Wld<r 

US. GAAP (., discusstd in ao earlier ..,.1ion of lh<>< Suppltmtntal 

lnstru<tiom). ASU 2014-14 i1<ffta.ivt for &seal yun. aod interim 

ptriods within thor< &al )...,..., btgiMing aft« Otctmbtr 15. 20Jt 

For t·xamplc. h~~utions -.lth a caltndar )tar tlsc:al )~.ar that art 

pubUc bu!i""' entbi<s """ apply the ASU In thtbCalll\qx>ns btginning Mardi 31. 101 S. Howtl'er, imt~utiom that ar< oc< publk 

businm totkies (Le.. that arc prh-..le C"ompanies) art not required 

toapplylhtguidm:t in ASU 2014-14 Wllu annuol p<riods eodi~after Otctmbor IS, 201S.Wldinterim p<riods btginni~afttr 

D"embtr IS. 2011. Thus. institutiollSwith a "ltndar yw fa r<>r 

thot mprivotecompooits mvst apply the ASU in their o..;.,nbtr }I, 

lOIS. andsub<oqutm quartedyCalll\qx>JU. Eod~r ad"l(ionoftht 

guidaoct in ASU 2014-14 is p<nnitttd ~the institution h., olready 

adopled lht aromdmtnts in ASU No. lOIHl-1, "R.d,ril\-.,.tlon of 

Re$id<ntial Rod &tat< C<>llat...Uud Con•wn<r Mong>g< Loom 

upon Forecburt. • 

For additional information. institutions should r<fer to ASU 

201+ H. •ilicb h available a ht1!1<1f•......,.fa>b.org/j•p!FASB/Pagel 

S.ctioo!'!st&dd•l I 7615631~!18. 

ReclassifJCalion ol Residential Real Eslate Colloteralized 

eons.- Mortgage !Dans Upon Forecloswe 

lni3Jiuary liJI4.1ht FASB O.utdAccounliri!Staodards lipd.>te 

(ASl;) No.l014·1>1. "R.d..,ifkatioll ofR.iw!tnrW Rnl F.siatt 

CoU3leraliud Conswner Mortgoge Low upon Fo"dosiiJ'~· to 

add.re$$ dh-e-rsity in pOOKe for "'·beo certain loon receiwbla shoWd 

bt derecognizal and lht real ntatecollotml r«<~SDized. The ASU 

updaltd guidm:«omaintd in AccOWiting Standards Codifka1ioo 

Subtopic 310.40. R.ctiv:ibk.s-Troubltd Me R"'Ncturin[!l by 

Cr<dbon (k>rmtrly FASB Sl>ttmeot No. IS. "Acc<lWlting b)' Dd>tor> 

and Creditors for Trool:ltd O.b< fkacructwing>."" amended). 

UOO<r prior >:OOWltiJ'I! gllilbo<e. all loon r«ei»bk.s "''"red.,. 

sifi<d to oth<r real fStote owotd (OREO) "boo tbt imthmion." 

crtd~or. obtained ph)'ical J'O'S'SSionof tbt prop<rt)' • ..gardl"' of 

•iloher k>rmal foredoelltt P'"'""""' had tol:tn :~«. The.,.. 

ASU darilies when o md<or Js oonsidertd to ha" "'rived pbysk:ll 

possess too (res.ultiDg from an in-subftatn rtpoomion or lOredo 

sur<) of midential ml-ecollateralizing o cowumet mortgoge 

JOQo. UOO<rthe new guidano~ physical po!S<S'i<>n k>r thes< "'ideotlal ... J t<1>!t proptrll" kconsldtr<d to haveorour<d .nd a loan 

r«<ivatlewould bt rt<l.>$$ifled coO REO only upon: 

32 FDIC QUARTERLY 

• Theimtitutionob<ainiog legal tide upoo completion of a fore· 

dowse even if the borrow""" rtdtmption ~" th3l pro>id<tht 

borrow<rwhba legal rigJu fora ptriodoftlmtafttfforedosiiJ'<to 

I'O<bim tbt pr~l1y br payi~ ctnain amOOJ\1> spt<if1<d b)· law, or 

• The oontplttioo of adetd in lifu of fora.iosurt or similar ltgal 

agrtement uDder which the borrower conveys aD internt in the 

residenti>l real ntate proptrty to the institution to ..US~' tbt loan. 

Loons stcured by rod est.>t< otbtr than comwner mortg~~g< loans col· 

!.ttr.~lizal br residelllial rod est>te .bould comillue to bt reclas>ilkd 

to OREO wben !ht institulioa bas r«tinod ph}'skal posStSSion of a 

bor!O\\'tr•s rt.d tstatt, regardlts.s of whether iormal fortdosurt proc«ding> takt pla«. 

For irulhutio"' tbot m ptlhlic bu!i1"" ento~~ osdtfilltd Wider U.S. geomllyaccepted a<<OOrllingprincipl.,,ASl} 2014-0-1 beff"1iv<for 

!lscal yoaro. ond int<rim p<riods within thor< !lscal )'....., btginning 

a!ler Otcember 15, l<l14. For txampk. inst ~ utioos 'A'il.h a calendar 

)"t.ar ~ yt.arthat art public bus11)tS.S eoti1ies m~ aprlytht ASU 

ill thrirCaU R<ports btginning Mardi 31.101;. """"·i""~u

tions thot are nc< publ.i< bwinm tntiti" art not «qUired to opply the guidan<e in ASU 2014·C)! Wllil annuol ptriods btgiMinga&er 

December IS. 20H,.ndinterim periodswitbinannwlp«iodsbtginni~ oittr December 1$, 201;. Thut, instoutions ~a calendar year 

&cal)"1rtb>t moot publkbiUillmtntities must'f'l'lythtASU 

in thtlr De<tmbor 31. 101;. and sui>l<q11t01 quantrly Call R<ports. 

Eaditr odq>tlon of tht guidm:e in ASU 201 4-0·l is ptrmitted. 

Em~;., CJQ eltct to opply the ASU on eaber a modit\td retrospe<m·e 

transition~ or aproopt\iil't uamilion ba<ls. Appl)ing the .o\Su on 

o proopt\1n~11Wilionbasis !hoold bt Jess oompl"' for innitufio"' 

than appl)'ing lht ASU oo a modilkd ret""fl"li'• ttwiion basis. 

Und<r tht prospoctiw transition method. an irulitmion mould apply 

tht newguidancttoall instances •·here < "'""' pb)>>:al po!S<S'ioD of rtslckntial rt:al t.sUte propttty rolbter.dizitlgtonsumer mortgagt 

loons tb>t occur aft" the dote <>f adoplion of the ASU. Und<r tht 

modilkd "'roop«<lv< tr.wiion mttbod. an lmtitmioo should apply 

a rumulativt-effect adjustmt'Jt to midtntial oonswntr mortg:agt 

[.,..and OREO exist~ as ofth•btginoing oftht annuol p<riod 

k>r •i>.\:h tht ASU b tft<cth<. As a result oladopli<t~ tht ASU on a 

rnodilkd rd""Jl<''h• basis..,., redassifled from OREO to loons 

d10uld bt m..,urtd ar tht ar~ing volue of tht"" "'~' ar the date of odoption wlill< as•tt• mbssilltd &om loam to OREO !OOuld bt 

me3$.Uitd at the lower of the Det amount of the Joan mriwbtt or the OREO proptrty's &~ vn!u< 1.,. «><b to !dl at tbt lim• of adoption. 

For odd~io•w iok>noation, institutiom should rel<r to ASU 2014-0-1. 

"hkil i• 3\>Uabi< at lu!p! t-w.f>lb.org{•p/FASBJl'.gt/St~ionPags 

&cid•l 17615631&19$. 

True-Up lial>iliy Under *' FDIC loss-Sharing A,--en~ 

An insurtddepusitor)' instltlllion tbot acquirtsa falltd illsurtd iM.ltution may ent<r into a lo.. Wri<t~ agr«m<nt •·itb the FDIC Wider 

"hi..'h tbt FDIC'S...., to absorb a porllooofthe "'-on• sptdfitd 

pool oi d~ fU«l institution•s as.sttsdurms a sptriA~ Lime peri«~. 

lbt acquiring lnstitutk>sl cypkally t~."''rd:s an indtmnif~ on asset 

rq>r,..nring its right to rt<tivt paymtmt from th< FDIC for"""' 

during the sptdlled tim< ptriod oo asstu cover«! Wldtr thelossdwing agr,.m .. t 

Sin« 2009. mO<t losNiwing agmments bm indii<W • IJU,.ttp 

provision that may rcquiu tht acquirins instilwion 10 rrimburst lhe 

FDIC if cwnularivt IMes io th< acquirtd Jo...wre ponk>lio are ltss 

than the amOWit ofioo8" <bimtd by tht instaution througbow the 

loos-.baring ptried. T)pkall)', • trot-up lbbiit)' roar muh btt>ust 

th• """~'ptr\od on tho (06$-Wrt""'' (<.g.. •iSfd !=)is 
159 


21417034.eps

l~er than 1he period during •ilidt 1he FDIC ag"" to "imoo"' 

the JC<luising ln<litution for IOSS<Son the losHbare podiOJio(<s. 

fll'e)'eanl. 

Coosistenl•ith U.S. GMP aod bank gu;lan<e for "Offsettifl;," 

imiMions ar< penui\ted tooft>d assru and liabililito mognized 

io tbe Report of Condition wbeo a "r¢t of setolf' exists. Under 

ASCSublopk 210.20. Balaoct :lt«t-Oili<t1ing (~ll$oedy FASB 

hl!erpr<totion No. 39, "Offstning of Am<lWl1S R&ted to C<rtaw 

Contracts"). iogener.U. a ~t of ..toff tldst$ when a tq'OI1illg 

lostl utioo and -her pany t:~<h owes the olher dctermill>bk 

3J!tounts.lbe rtp:>rtiJ' itiS1itul.ion b-1he riJ!ttoitt off ~M> amouou 

eodt p>rty""" and also Intends to"' ol{ and 1he riglu of sttofi'is 

enfor<nble 01 law. B<ausethecoodliont forlhe exlsttr>:eof ar¢t 

of offset io ASC ~op< 110.20 M<mally woold not b< md •ilh 

mped to an illdtmllif"'tioo-.nd a true-up liabaity Wlder ''""' 

wring .gr«m<Dt with the FDIC. this- and liability •bould Dot b< 

n<tted fO<C:oll Rtpon p"""""' Therefore, imlitutioos showd r<pOrt 

lh( indenudtlcati:)nassrt gross (Lt., wi1h0U1 ~rd to any trut·up 

Uabiliy) in Other Ms<u. and any trut·up liabiily In Otbtt luMhl.._ 

Ia addition. an insti11llion should 00: contirtue to rtpo-rt assets cowred by I""'.Jlaring agretmtms after the "'Pintion of the Jo... 

marlrlg period e~•n if the ttrms of the los>· wring agr«menl require 

rtimbu.rsemenh from tbt imtitution tolhe FDIC for certa.inarnouots 

du~dl•rt<Q\•ryperiod. 

lndetnnifico6oo As..u andAccllllllling Slaodards Updale 

No. L012·06- In0ctobtr201l. tbe FASB issutd ActOWiling 

Standard! Updatt (1.$1!) L'>o. l012.(;6, "Subsequent Accounting 

forao lodemnil'atioo A>s<l R«"!Jnlztd at the Acqlllshion Date 

"a Rault of a Go~tnta~tnt A.,isted Acquisiioo o{' Fimoda! 

lnsti utioo," to oddr"' the •ub«<!U<ot me3$UI<Ill<llt of •• iodemoili· 

cation 3$Sd fKOglli.z..>d in an :t.."qui:ril.ion o( :1 financial ins:tilution that in<ludes"' FDIC I= .baring 'Sr«menL Thi! ASU amends ASC 

Topic 80S. Business Co.mbimtioru (formerlv FASB Suttmem No.l•l (revlsed 1007), ·ausinessCO<Obimtlons·~ ~ili<h io:ludesguidonce 

applicalJ!e to FDIC.3SSisted acquis~ioos of tilled imi~Ulio"" 

U1.1tr \h~ ~SU. wh~n a11 i1~lbtion n:peri~net$ a change in~~ 

casb o .. , t"P"'ed to bt ooll«ted oo an FDIC ,..,.,baring lndem· 

nii'..U.oa>set b<couS<ofa<haog<inthtaoh 6o•HJ<pectedtob< 

coll<cttd on the"""' co\Or<d by tht los>·.barifll ljlr«roeol tht 

lnstiMion.Jlould aro>u<l forthe<hllJ\!< In dlt mw11r<me<1 ofdle 

iodemnilkOiion asset oo 1he 13m< bo.sis as the change In dle amu 

"''*"to lndtmnlintioa. Any amortl.uion of changts io the value 

oftbe indtrnniJkation""" shoold be limited to the''''" of the Ierro o( the indtmniJ>:alioo '@le<m<nt "'d the remaining life oflhe 

indemnitled -~. 

The ASU is et!Mh·e for ftSCal )'e3.rS. and inttri1n ptrJ:xb "'ithill !host 

fis<al yean.b<girutlngonorali<t Dr<emb<r 15,2011. For lnslitu· 

tio,. with a calendu r•ar fucalym.lhe ASU t<l<e<tfft<t Januarr I, 

201l. Early adoption oithe ASU ispennitted. The ASif• pn>~i<iOil! 

.JlouJd b< aprlied proop«tiv<ly to any """ iockmllif•..OOo """ a<quised aJ\er lhedote of adq>tiooood to iodemnilkOiion asse~ 

exilllngas of the <ht• of adoption :uiliog from an FDIC·.,sisted 

acquisiioo of alioaoo.J iostitu!ioo.lnslitU!ioM with in<lemnift..-.. 

tiooasstts :uising from FDIC '""·Wring agreemeut> m expo.1ed 

to adq>t ASU 2012-(16 for Call Rlport pUI]l<lkS in o:OO«J..ncr with 

the efi<Ctl~t date of thl! oandard. Fot additloll>i lnfonnatioo, ref or 

to ASU 2012·06. "'Uabl• at bup:Joow.f.rsb.orgJ'•piFASB/Page/ 

Stdioi!P>gt&dd•II76156JI6l98. 

Goodwilllntpairmenll e$\ing • In S<pttmb<r 2011, the fASB issutd 

AcQ)Wl(ingSt>ndatds Updalt(ASU) No.lOII·OS. 'testing Goodwill 

QUARTERLY BAN KI NG PROfit£ 

for lmpairm«ll.• toacSdm$ concerm about tbe CQSl aod compltx· 

~yofthe ~good~'il lmpainm"" tmlnASC Topic 350, 

lntaogibles·GoodwiD and Otbtt (fO<merly FASB Stattmtlll 1'1<>.142. 

"GoodWilond Other I nlaogibk AlS<ts). The ASU$ amendments to 

ASC Tori< 350au efft<th< for annual and inlerim goodwill impair· 

m<lll '""performed for f"'all""' b<glnnifll after Dr<emb<r IS. 2011 (le., foranoualorim<tim t..tsperformed0<1orafttt )anual)' I, 

2012, for inst~utiorn •ith acaleodar )-.atliscal )'<2r). Eadyadoptioo 

of the ASU ""permitted. Under ASU 201l·C6.an lnstitatioo bas thtoption offim """'ing qualitative facto, to determine wh<thtt 

~ b lle(t.SSal)' to pr.rfomt the IWO.JiqJ quanlilaJiw goodwdl intp~ir

melllltstde.crib<d inASCTopic350. Kalierconsldningall rde· 

\'Jilt t\ttats and cit\"UUIUtances.an imtilutkm determines it is unlikely 

(that is. a hkdihood of 50ptrtent orl"') that the fair valueoi a 

r<pOrtlrlg unit iJ lw thaolts carrying amount (il>:ill<lifll goodwil~ 

then thelostirutiondoet not netd to perform 1he two-stcp goodwill 

impainment t"'- If the imlitutioo inst<ad condudet thot the opposite 

il true (thai is. II is likelyth31 the fait value of a r<po<tlog Wilt ill"' 

th3ll it$ OllJ)iog amount).lhen his <tquisd toptrrorm 1he fim lltp 

and, if D«""'ty. the so:ood lt<p oftbetwo·st<p goodwill imp:Ur· 

mtlllt"L Uockr ASU2011~anlll$1~ution maycbOOOttOb)l"$' 

thequalltati~< """melt for any r<portlng unit In any period and 

proceed di"'llytoperfonoingtht 1\t<t sttpofthe "''0-stepgoodwll 

impairment ttst. 

Accot.nting for Loan Participaliom • Ameoded ASC Topk 860 

(fO<merly FAS 1661 modified lbtcrherio that must b< mct In order 

fora traoskr of a portion of a fUWJ'ial as.set. sLKh a$ a loan plrtnpalion. toquaJifyfouale :t«<Wlting-.,krto pJt\'louslypllblisbed 

Q<tMkrly B•rrkir.g Profiie nold: hltp:/,.._.Hdis.sov/gl!p!201 hoar/ 

gbpnothto~. 

Other· Than· T .,.porary .. painlent • ll'ltto tbe &It value ofan 

ioveslmtol in an individual a'11iW>k·for.,.Je"' hdd·lo-m:rlurily 

S«urity i$lm dun ils 00$1 ba.sb.,tht lmptitmtot is titbn- wopont)' 

orolher·tlwHtmporary. Tht 3JDOWII oithetota!olher·than·ttmpor.al}' lmpai.rmtru !flat~ to<rtdit loss muss bt ~ind in eunif~Ss. 

but the amoont o{ tmal lmpalrroem tt!ated 10 other fa. ion mwt b< 

r«<gJliled in other comprehensi-. income. ntl of aprlicablt tam. 

To cletnmiot •ildherdle illljl<irmento other·than·tempO<Ory."' 

ln•itutioo mu~ apply dle awli<able a<ooWltifll guldaoc.-r<fer to 

pr<Yiow!ypubli>bed QMMUrly Banting it•fot no!<" http<ll>"wS. 

fdigo,·/<R>/101 lmar/gl!onothtml. 

Accotrlling Slandards c.d~iclllion . r<fer to pmiously publlshed 

Quanerly Banking Profllt ""'"' bnp.Joo..-;.fd~j[JW qbp/20II!<p/ 

gbpnot.btml. 

DEFINITIONS (in alphabetical order) 

All ndttt assecs · total cash. balances dut from depos~Of)' iootJ. 

tutk:ms. rTeroi:si!S, (JXrcf .SdS.. dirtct itsvtstmt(IU in rtJ.! f$blt, 

i:Wt$lment it! UA."'osolidattd subS"icUari.."S. customtn' U3blliyon 

""''"anc<$OUU13nding. -·hEld In t<>ding ae<ounu. ftdel'lll 

funds sold,...:urilies purdta.ecJ w~h agr<tment• to ttsdL fair mar· 

ket \>lutof derivatlm, prepaid cltpo<it ln•urance .,...meol>,and 

olhtr3SS((s. 

All other ial>~dies • baok'aliabaityoo '"''JlWlC"'Iim~ed·(ife P"' 

femd st«k. aDO\\~f'Kt for esfjnl3tt.•d oft'.bmnct·sh~ crtdi bses. 

talr m:uket valutof dtril·~i\w.and other lbbiliti« 

Asse$$1111!111 base · eff<>-tiY< AprU I, 2011. thecltpo<it iosunnce wtssmtni bastclw!gtdto ·a,~ragt oonsdidattd tocal a.uas minU! 

awrage tangible equit)' witlun additional a<ljwtmenl to 1he ..,.... 

mont bose for b3Ji<tr'• baol<.and QIStndi:IJ ooih .. permitted under 

FDIC QUARTERLY 33 
160 


21417035.eps

2016, Volumt 10 • ~umber ·I 

Dodd· Frank Pr""""'IY lhe "'"'m<nt b"' "' '.......ble dtposi•' and consis1cd ofDIF dtpo<iU (dtpo<its in>urtd by tht FDIC D<po<it 

lmunnce Fund) In bank&' dom.,tk offi"' wab ctrtalu adjnstmellt& 

A~ rate schedule - lniti>l b3Sl,....ment rat" lOr sm.U 

iostituliom art bGscd on a comb-ination o( tioanc'-t! ratios aod 

CAMELS component~· lniial nt<S for brge iost.lltiomg<D<r>lly thoot with at lean $10 bDiion In US<ts-arubo b3Sld 

on CA.>.tilS compontnl nlillgs andrtrtain &:m:-ial meu:um 

comblotd imo I:W'O$COrta.tds--oot for mon 1argt 1ns~ itutiom and 

MOiher for the remai~ very large Institutions lhat art "ructunlly and optratior131lycompl"' or thM poot UJJiquc dl.tlltog<S and risks 

in"" o{ f.lllurt (highly com pi"' instnutiom). The FDIC may take 

3dditioml inforlltlt.ioo intoac<'OWlt tomakealimi«iadjwtmeot to 

a largt institutioo'u~""Or«ard mWts. whkb mused to detennine a 

large institutloo's ~ial b3Sl "'"""ent rat< 

\\'Me risk cattgOM lor smaD iostkutiom (<x<<J" ntw ~ilu· 

tio »)~<<Rdlmioatcd ell'tctivt july 1,!016. iniful OJI<Sior smaD 

hl$dtutions art subjn-c to minitrultiU and n'l3.Ximwns bastd on aJ1 

in>UMioo's Ct~,I!EI.S com posit< nniog (Risk ""gories for large 

instlMioll$ "'"eliminated in 2011.) 

Thecurrent ,....m<nt nt< .tcdule b«ame elleak·e july 1.2016. 

Undtrthtcurmlf Kb«luJt, initial bast 3$S(SSmtnl r11ts raJJSt 

(rom 3to 30 lnsls poinu. An iostilution's totall:we8i5e$$ment rnte 

maydill'or f11>m as inkial1'31< due to lhret po<Sibl• o:ljustm<nl$: 

(I) l!rll«<lrtd O.bt Adluruntnt An iostitutioo'• rne may deer.,. 

by up tO 5 bosis poinU for Wl!fCUicddtb<. The WUKurtd <J.bt 

'Od)wwentcaM<It a<«d th< (..,.roflbosbpok!tsor 50 p<n:tnt 

of"' ~~ution's inllal baS< '""'ment nrte (IBAR). Thus. lor 

txMnple.an ~iiUilon with an lBAR ofl bosis points •~uld have o 

moxiroum Wl!mtrtd dd>l adj\l.ltment oil.; boils poino lllld could 

noC havu Iota! base 3S$t$SIDtnt rate lower than I.S baii$ poUts. 

(1) Ott!OSilory lostiturk>n Debt Adju.sthltllt: For iostitutio~ that 

bolclloog·t"m uns«urtd <kbt Issued by &OOthtr inrurtd dtposJ. 

tory ~ution, a 50 boiis point <haJi< is applied to tht amount oi 

such d<b( h<ld in excmofl pt~<ent of an institution's Tier I C3j>Oal 

(J) Broketcd 0.00.1 Adjustru<nt Rates forlorst in>tltutlooslhat "' 

not woB capit~ilcd or do oot b"• a<ompo<itt CAMELS nting of 

I or l mil)' lnmo" (noc to exceed IObalb poino) if their blliertd 

d<po<os "'<ted 10 p<r<tnt of domestic d<po<ir< 

The ,...ssmeru nte KhcduiHftecth• July 1,1016, iubown in the 

fdl .... ingt>ble: 

haiS•t M.,..,Iltwf' 

- ... SII.III8 .... 

CAJ«lSC.polite '"""" "ttil c"""" t • l ) ••• ..,._ .. lrlitiaiS..e ••• 16 6tol0 10to30 lto30 Assessment Rata 

Ull$0CUr~Oet. 

M,uttmcnt ·StoO -5100 ·StoO .StoO 

Brokef\ld0$po$11 NIA N/A NIA Oto 10 AdJU$tmef'l1 

Tot318aso 1.5to 16 3to30 ttto30 1.Sto40 Asto$&rnot'l1 Rato 

• Al~•forthtt~t!MWtlll~H*ntatnnu.,. ToulbJHUtHlNt "'* fltMirllmli~O l'l'ltlll'rNM t.ttt-.llvwybfM._.tlltMIU .. foUl but 

~trxetdoMI!ttdudtltlt~wyiMOWuon6tbt:.Jdiu:stll'IIMl 

" ( 1Ncbvt.J\t1 1, l<n$.1.-QtlnSlltl.JIIOI\t .Vt al50tWjt«IO l~llfY 

*""'*l~•n«dorlottMMihtr...,..,.r.Jilothm11SptR«Cto 

115 pttcftll Thtudlltl'9ft1ll'IN'II O'!ibnupo~ntJo ab gu'l$btUbon • 

~ battlafurmabnogt«U~t~ad!uta"*ltsi. 

Yl FDIC QUARTERLY 

Each institlltioo is as:signtd a risl<·bosed nrte for' qu.rt•rlr """' 

mttll period near the end of tht quarter ollowi~ tbt a$$t$Smtnt 

ptriod Payment I! geomlly due on the 30<b day of the last molllh 

o( thtqu.rttr following tht """me Ill p<riod Supervisory rating 

changes art effecth~ for asses:smet• purposes as of the: mml..lntion 

tnnsminaldat~ 

Assets se<urdi!ed and sold - ootal ouu1aodiog prin<ip<l bolaoct 

o( US<ts securitilJ«! and sold with S<rvidng rtt2incd or lllhmeller· 

provi<kd credit enbarK.emmts.. 

Capital Pllrdoase Plogram (CPI'l -as aorroun.:td in Oaobtt 2003 

under the TARP,the T """'Y ll<p<artmeot pui<base of oonrumub- tlw ptrpttual prtferrcd •ockand rtlatcd ,.,mnts that lstrm<das 

Toer 1 capaalO>r r<guiatorycapaol JlWI'O"' is included in "Total 

tqllil}' capital. • Sucb \'1-aNanU to pure base common stock or non· 

rumulatl>< pr<ferrcd otod< il$ued by publidy·trad<d bank& art 

rclle(ttd as weD in "Surplus. • Warrmts to purchMtcommonsto.:k or 

ooncumulativt prtferrcd stock of nlll·pubiid)'·lrndcd l»nk •ock are 

cb.uiJW in a bank's bai3JI<t shtd ""Oth" IW>iiit<" 

Commoo equity tier 1 capdal ratio - ratio of common oquity t~r I 

"l'ital to risk·weigbtcd """'Common equity tier I <>pitol in<ludes 

common $lOCk i.nstJwnenls and rclattd. su.rpiU$, retained wnings. 

~"('Ufflulattd 01hn compubtnsh~ iBcome (AOCI), aad limitd 

amowtJ of oommon tqujly1ler l minority inltml, minus applicaNt 

rtgubtory adjustmcnts :ud dMw:tions. hems that rut fu!Jy tkductlod 

lrorn rommonoquityt~r I apltal indudtgcodwill. otherin!3JlSilll< 

ass<ts (txcluding mortgag• strvlcing asS<ts) and «rUin dtf<rrcd tax 

m-ets:; hems th3t ate s-ub}ea to limits in comroonequ.i.ty tier J a.pibl 

include mortgage mvklng asS<ts, digible d&rrtd tu auet.o, and e<r· 

t1in sjgnifirni im·estmelis. 

Cooslruetion and dmlopotert loans- indud" loons for .U 

rropert)' t)pn un:ltr construdion, as wd) asloa(lS for lard acqu.isiti<>o and dMI~m.eot 

C..e • ..,ilal- common equityapital pi"' nonrumulati" perpetual 

pref<rrcd llod<plus minority inter"t in coosolidatcd subsidiar;., 

It$$ goodwill and «he inrhgiblt inlar~il:ft 3$$ds. Tht amoWll of 

digible intangibles (including "rvl:lng rigi>U) induded locoree>pl· 

tal is llmticd in ac<crdaoct witb SllJ"rvi>ofy up ito! r<gulation< 

Cost o! fur•ling earning assets- total interm expense poid oo 

deposits and other borrOI\·td moDe')' 3$ 3 pth."t!Ugt or ;a~~rase e:JIDingWtt< 

Cttdil emancelleots- t«hniqU<S wbmbyacompanyattemr• to 

rtduu tbe<rtdit risk of~s obligllliom. Crtdit rnhancemtr.'lt may be 

provided by a third porty (external ertdD tnhaocement) or by the 

originator (intenul crtdit ntban-:~melll~ aod mort than ODt-t)pt o( 

ttlhaocemeot may btassodattd wltb a g_hWl tssuaoce. 

Deposit lnsuCliiK:e f»nd (Difl-the Bar* (BIF) and Sa>lngs 

Associarion (SA!F) lnslltall<e Funds""' merged in 2006bj· the 

Fcdml Deposit '"""'"" Rtform Act to form the DlF. 

Oeriva6ves nocionala11ollll- the ootlorul, or coruractual. amounts 

of ckri\'ativ" "!'"""' lhe lm! olimdvement in th< l)jl<S of dtri\'atiVd Lrn.OSa..1ioN :and art not a quantification of marktl risk or 

crtdit rbk. }\()(.ional amounts rtpre$tnt tb~ amounts wtd to c.akubte 

contractual <osb fto•> to bt exdlangcd. 

Deoivatives crtdit OCJ~italtnl aooourt- th< &it \Oiueoflhe derh>tivt 

plus an adddioual amowt for pctonti:ll "-""credit "'JJIlUlf bas«! 011 

lht ootionalatnO<llll, tht r<mainlng maturity and ~'P' ollheoomract 
161 


21417036.eps

Oeriv1tives transaction ljpeS: 

Ftnurt$ and forward colltracts- concncts inwhkh lht buytr 

agrees to pwdlase and the seDer agrees to ..U..r a'!""&! 

lirturt dat~ a 'J><(if~tquant~yof an w!deriylng vari.lb!t or indtx 

ala'!""llWprictOr)idd. Theseoontmtsexl• foravari<tyof 

"""'bl" or in<lk"' (tnditioml ogri<Uitur.d or physi<al oommod· •itt. 3S wtllas nu:rtn>."ie:J and in1emt r:Jtn). Futures contra.:ts are 

staodardiltd aod are tradtd on organiltd txcha~ '1\·hidt $d. 

Iimas on <OOOI<'!"rtY mclit apoou" foiWlrd rontrods do noc 

ha\'t $1aoda.rdi:ud ttnm and art 1 faded ewer tbt COiltlter. 

Optio• C4nlfiC/$ • COOlrA"'s in wbi<b dtt buy<r a<quim lbt right 

to buy from Of sdJ to anolh" party some 'J"<l!W amOWll of an 

w!dtrlyillg variabl< or illd<x at a sb<td prke (su\kt prkt) dwi~ 

a ptriod or onalp<clf.ed fututtdate.ln retwo forrompt,.tlon 

(such as a ftt Of premium~ The seller Is ob~ated to purdw< or 

sdJ the vuiabltor index at the dlscretionoftht bu)'<Ofthe 

CODiract. 

$WIIflS • oblig;ltioos l><lw«n two pam.. to exdt~ a S<ries of 

cob a.,., at periodic inten•als (!<ttl<m<nt dates). for a specified 

ptriod. 1Dt tub flO"i\1 of a swar art either tbctd. or determinrd 

for ncb settltm,.t dale by mult~g the qu.nt<y (oodonal 

priodp31) of th• undtri)it'!l »ri.lble or index by sp<>.ified rtf<r· 

etl<t rn.tt$ orprkt$. E.xctpr for currt.ncys""·.aps, the ooctonal principal is used to cakulale '"b payso<OS bulls not mbang<d 

OerM!tives tllclerlying risk exposure- tbepotenti>le"'""ure<har· 

acttrlled by dtel<Vd oll>lnks' eooceotnllon ill parti<Ubr undorl)ing 

imtrumtrus., in gt:ntral Etposurt C3J\ mult from markt1 rhk. cmi!t 

ri$k. and openlioo~ risk," wdlas, inter<~~ r.tl< ri$k. 

0011estic deposits to total assets- total dom~tk off" ICe ckposil$ as 

a ptr«lll of tot>I....U on a eonsolidat<d ball• 

Earning assets - all1oans and other iuvt$lmtllU that ea.rn inte-mt or 

divldendlncom< 

Efficiency ralio . Nooiotete<t aptOS< I"' amorti2alion ofilllangible 

assets 8$ a rer..:e.nt of net intert$t iocome plm ooointerest iocome. 

This ratio mcas.u.ru the rroportion of nd operating mrmu.ql.ha1 

:ue aboorbed by Ol'<rhead '"~'<"'"· oo that • lo-o·<r value in<li<ates greattfd!kitocy. 

Estinated insured deposib - in gtntr.d, insured dq>osia arc toul 

dom<Ok dq>os<s mlnus "t imattd unlnsured deposill. B<g'mnl~ 

Mmh 31,2008. for imtitutions that 61tColl Reports, imurtd deposits'" toto! ""'!able dq>osit> minuse<tim;lted unimureddepooi~. 

Bq;lnningSq'1embes 30.2009. u•ured depooil> indudedq>osbs in 

accowis of S I 00.000 to $2;0,00(1 that are cowred by a t<mpo"')' 

irxre.ase in tbe FDIC~ $bndard ma~usn deporit insurance amQU.l)l, 

(S~IDIA~ The Dodd·Fnnk \Vall Su.,r Rtform atd Coosumtr 

Prot«tioo Act tnacted on)ulyll, 2010, toarl<ptrm>nent tbt stan· 

dard maximumdtposh inswancumoont (SliDIA)of$150,000. 

Also, tbt Dodd-Frank Act am,.<led the Feder.d Deposit llllUI1ntt 

A\1. t<1lodude ooninlem:t·btari!l lrausactioo a«owlHUJ new 

l«Dpor.uy dq>osit imllt.lB't acrowt at"Of)'. AD funds hdd in 

noninl:erm-bearq tr.lllS3ttion 1KC()W)U wm hilly insur~ "itbout 

limit, from O..:.mbtt 31,2010, th.oogb Do:trDber 31, lOll. 

railed/misted institutions. anlO!litulion faib wb .. regulator< 

tal<e roll!d ol the imtitution. placing tbe alStlund llol>iliti" Into o 

bridgt bonk ron,.tv.ttonbip, rectwmltip, or :mothtr hnltby iwtl· 

tutio11 This action m~rtqui~tht FDJCtoprovidt fundstorortr 

1~. An institution D de6ned as ~aMtrted• "''hen the institution 

«mainsoptoand rwi\u ;wistance iD order to continue ope~iog. 

QUARTERLY BAN KI NG PROfiLE 

Fair Value . theval .. ti<>nof variow """ andli>bilitles on the baJ. we sht<~-includi~ tndiog.,..~ and liabillti<o, avalla!J!t.for-ult 

SKUritl"' loans hdd for salt, assets and llabiitiu accowtled fot 

under the &ir volut optioo, and foredOS<d "'''"-il\"'1'.., the use of fair""""' Ouri~ periods o( matkd "'""the fair volues of aome lioandal illstrumtw and nonlinaociol ....u moy dedi..,, 

FHLB advances-.n borrow~1 by FDIC insured imtitutioos from 

the Ftd"'l Home leon BankS)st<rn (FHtB) . ., reported brCaD 

Rtport l1l•"· and byTFR flit" prlot to lta ... :h 31,2012. 

Goodwill 111d othe< irlangibleo - inta~i~• alStl! include sen•idng 

risbts, purdt>sed credit curd ttlation.<hlp<. and othtt W.mif .. ble 

intangib!t '''"' Goodwillb dtea<t!S of the pur<bost pn.-eowr dte lair tnarktt \'alut of lht nd a$$dS acquirtd.lcs:s substqutnt impair· 

mtDI adj<tstm<DI< Other uu•ngible alStls art r<rordtd at falr \olu~ 

Jt.s subsequ<OS ~<rly amortizati<>n and impalrmttl adjustment• 

l.oMs secured by real eSillte . illdudes bomt equityloaos.junlor 

Utos S«urrd by I 1 fumi!y mldeotial proptrtiet, and aD otber low 

secured by real ...... 

l.oMsto individuals • illducks out.u.nding crtdi cud bolances aod 

other $t<Urtdaod UllK\."Ufed ~r l~m. 

l.ong-t!rm mels (» yeonl- loans aod dobt ~«Uritle$ wilh remain· 

illg maturities 0)' rtpridng itlrtrvab of 0\'tr fh.·t ytars. 

MaxiiiU• creel~ exposure - the nuximum rontm..iu:.tl credit 

t:q>O$u.rt rtmtining u.Ddtr rcoourst arrt:ngtnttnu and other 5tlkr+ 

pro,;ded credl enhatXtmtnO provldtri by dte rtpOrti~ bonk to 

S«uriti:za1ions.. 

MOitgage-backed SOCIIKieo • <trtlfKater of patfidpati<>n in pool! 

of rtsideDiiAL111«1g'S"and«&ter.diud mortgogeoblig;ltions 

Issued or gu:arantetd b)·goverrunttt·.sroosortd or privatttnltr· 

pris<s. Also..,. "S<<wiiet." hdOI\'. 

Net chargHfts • total loans and ltastl <hatged off (relllO\'td &om 

balanct sbeot t.-':1"'' of uncollt<Ubllay).l"' amounu r<C<I\'ntd on 

looos and ;,..., previou~y charged oli 

Net n erest margin . thedift'ertoct b<lweeo inttmt and cl'l'lidtnds 

01rotd on lolffiSt ~ alStls and int<rat paid todtpositor"nd 

other cr«iitms. fXPress«< as a ptrctntagtof awrage earning assets. 

No adjust me ott art made for interest i.Jx:ome that is t-ax exempt. 

Net loans to tO!> I assets- loaos and lease finaocing n<eivabltS. II<\ 

of WlW1led iocomt, allo"n<e aod rtS<NtS. as a per<eol of total 

assd.s on 2 comolid.ltcd b3$i$, 

Net operating illC01Jie -iB."'C''Ie txcludltJS dJKrtlioMr)' lrnnsactiom sucb as g:iliu (or IC4$($) on the $!I.e oliavot$Untnt $«urillt$ aDd 

txiraordinll)' item.s. locol'llf taxts$ubtracttd (rom q>frating iD:ome 

ba\• been adju1ttd to tl<.:ludt the portion appllcabk to S«uriti<s 

gains (orlossto). 

Noncurrent.,.eu • the sum ofloa.,, J....., dobt SKUritie.t, and 

otbtr assets that att 90 days or more past due. 011lo nona.:-crual Shtus. 

Nonc111ent loans& leases - the swn of""""andkases90 da).or 

mort past due, and"""" and le"" in "'"''"rual status. 

Number of instillJiioos reportii'Q - lbe number ofimtitutioiiS dtot 

actuaDy fled a fw.mcial rtporl 

New reporters· imwed inoihltionsliillg ~erlyl\nancial rtpO<U 

lOrtbe ftn~timt. 

Other borrowed funds - fedenl hmds purdo"'d.•«umes .old •ith ogrements to repu!<hast,dtmand notes isiUtd to the u.S. Treaswy. 

FHLB ad'"""' other bo.-ed money, mortgag< indobtedn"" 

FDIC QUARTERLY 35 
162 


21417037.eps

2016, Volumt 10 • ~umber ·I 

ob~os un<kr "!'itaiU<d )...,., and u.di~ liabilili<>.l•" revalu· axionbm:onas$tU bcldintradblgac('OUnts. 

Other real e11111e owned - primarily l'oro:k>s<d prop<ny. 0\"'1 and 

indirect itt\'t:Stm~ in rtal estMt \'tllurt:s art txcludtd 1'ht a.mou.m 

;, re6ro<d oa of valuatioo aii""'3J>."<~. For ln~kutiom 1!1.1 fit a Thrift Fi••nciol Rtpcn (TFR), the valuation allowrux• •ubtrnct<d •i>o 

incl.W.. :ollo•·anc" for other repo!Sm<dm<ts. Abo,l'or TFR lite" the componeots of other real estate O\\'oed ate reported gtoS$ of \'alU· 

atioo all..-.o"" (I'FR lilen beg>n liliog Call Rq>o<ts effroivewith 

lhequartermdingMnch 31. 2011) 

l'ercenl ol institutions with earnings gains- the P"""' ofiostilu· 

lbns that Uxrt'J$ed their net income (or decrnsed thtir loss~) com· 

partd rotht samt ptriod a yearnditt. 

"Problem· instiiOOons - leder.J r<glllatofi "'ign a<OmJ'O'ile rating 

to each fiiDnciallnstitulioo, bo$td upon an cv:olu.tion of financial 

atldoper.1tional crite-ria The ratingls based on a Kale of I to S io 

ascending ol"\kr of wpervi5or)' con: ern. •probk;m • institutions art 

thost instiiUiioos wkb lio.OOal. opentiooal, or ma~Dg<rillweak· 

• ..,.. thai rhmttn their 0011tlou<d finallCid viability. Depending 

upon the dtgrttof risk and supervisory conwo, they are"'"' 

e~ra .. .r· <1r ·s.• The owoberand l$$dtof"problem" imtituUons 

ait bo$td on FDIC compos(< rati~ Priorro M"'h ll. 2(1(6. l'or 

institutions wbo«pri'"")' foder.J regu!OlOr was the OTS. theOTS 

cornposilt r.tling wu uud.. 

RecOO"se - an aJrangtJnt!l in whit.-h a bank ~taint.. in form or in 

substao:e, any u<dl risl: dire.11)'or in<lm<tl)':mociatod with an 

''"' il !~.a sold (In .. -cordan<c •ilb goner.Jiya<«p<..S accounting 

prin<ipks) rhat e:o:eeds a pro nlll shm of the book's dalm on the 

""'-If a bonk bas no claim on,...,., it h" sold, then tbe reltlllion 

of any credi1 risk b rexw"-

Re....,.. for losses- rh• allowan« for loon and '''"to.... on a coosollcbt<dbosls. 

Restrudllrtd loons and leases - loon and 1,.... financing rt<tiv· 

ab!a wi1h ""'"restructured from theo~ cootr¥t Exclude! 

~rurtured loans and"'""' that art not in compliolnce wah the 

modilkd terms. 

Retained earnings • net lllCOmt Ins <3>1! div\dtods on common and 

pr<ftrrod >10<1< l'or rbe rt~ period. 

Return on ....U- b:ui oet incom• (including gains or losS<S oo 

S«Uthi<s and <X1I>ordiJWy ~ems) as a ptt«llt'S' of a-.rage lOt~ 

(consolida!td) "'el' The bos~ yardstick ofba~'l< profdalnlity. 

Return on e"'ily - bank D<t Income Oncbuling gal"' or loss" oo 

s«Urilies and extraordiwry ~ems) as a percentage of a"t~ total 

tquilyapilaL 

Risk-wei;.ted asstls. ""'' adju<led lor risk·bo$td "''iW dtlioi· li:ms "'t.kh iocludt on-Wancc--.shm II$ ..,.dJ • oft:bdanct·sh«t 

iltms mul!ipUod br rlsk-•·rifltiS thai range irom "'o 10 200 p<r<eru. 

A ronvtrs.ion factor is used to asslgn alxdanct Ui.M tquival<DI. 

amounl for sd«tedoff·bul•n<t-shtttaccowt•. 

Sewr•ie$ ·ad !Ide! "curii<s held In uading accouru Banks',..... 

rill<$ portiolio< coosist of $0.-urili" de!ign>tod as "bdd·to-m31uriry," 

•l>>:b '" "J'((ftod a1 amortiud cost (book \'3/ut), and S«urili<$ d.,. 

igt>ated" "availab!t-for...Jt," rtportodar falr(market)valut. 

Sewr•ie• gains (lo,...)- renJilod gains (1....,) oo bdd·tom31urity and avallablc.for..salt $t'Curltlts, btfort ad,i~mtnl1 for 

inconlt raxa Thtifr F""' ,c;.r Rtporl (TFR) film al5o include g>ll• 

(to....) on th< ..1" of ""U bcld lor ..I<. (TI'R 6ltrs began filing 

Call R<pomdft<ti><wdb thequarrertodlngMarch 31,2012) 

36 FDIC QUARTERLY 

Seller's intett$1 il iml~ution' sown seeuritizations- rbt repottiog 

bank"s owntrsb' intt11$1 in lorans and odltr a.utts Wt b.a\'! btel'l 

S«'Uritiwi. ex«pt an inttte$.t t.lut is a form of ~"'O.ltSeor odlcr 

sdle"provided mdil enb311Cemtllt. S.Otr's illttt"t' differ irom 

l.ht~ks issutd to ill\'tSton by tht se..:urkizatioD structure. Tht 

prin:ipahmount of a stUdslnteM isg<nmlly <quallo the total 

prill<ipol amouol of the pool of m<ts inclodtd in the se<uriti:r.tion 

WU<\Uie Ins lh• prill<ipal amount of thost.,..u attributablero 

inYe$10rs, i.t., in tbt formo(S«Uri1i« issutd to Uwntors. 

Small8t1Sineosl.ending rmd. Th< Small Busintu l<odiog FW>d 

(SBLF)w.lSeno<t«lintobwinStpternbtr lQIO., Jl'rloftheSmaU 

Burin"' Jobs Act oflOIO to eocoorage k-nding1osmaU bosi"""' 

by pro\idlng 01pWal1oqual16od oommunily illltiiUiions •·kb""" 

ofkss than SIO billion. TheSBLF Prognm io adminlrtertd by the 

U.S. Tr=uy O<p3rt.meot (httyJ/•""'""wy.gov/....,w«·ctlll<r/ 

sbp!O!!rams/Pagts/SmaD-BusultS$-I.trullng.fund.!!!>x). 

Under rh< SBLF Program. the Treasury O.partmtnt putdustd 

non<ullllUIUiW pel)'<tual prtierred oo.:k &oon qu~ifylog dcpos~ory 

institutions and holding companies (nthtt than Sub.:bapter Sand 

mutual inst~utions). When tbil stod< bos been issued b)· a dqx<~ory 

~hutioo. ~ i> rtportod as "Pe!pdual preferred ~ocl< and rdatod 

$urplus.. • For rtgu1atory capital p~ this noncumulaU\'t 

pttpttua1 p..ten<dsrockqualiOOasacompooentofTi<r I "!'ital. 

Qualilj·ing SubchapW S coljlO<ations and mutuol lostiluti""' issue 

wt$«urtd subordia.tttd ckbtnturd 10 the T ~UI)' Department 

throogb the SBI.f. O.posllory lrulilutions ib.u IS!ued th"' 

ckberuures uport them as "Subordinattd ootts aod dlbtnlu.res. • 

For r<gulatory"i'ilal P•IJ'O!"· rht deberuur« art tlipbl< for 

inclusion In an lrullMion's Tltr2 caplral lo :100>rdan.."t •'orb their 

primaryfodtr.J reguloto?•"''~alstan&.rds. ToJl<'.oop.!t in the 

SBI.f Pros ram. an imlilutioo with out~tand!og $tcurili<s l"ued 

to th• T ""ury Dcp.rtmoru ut~dtr the C.pial Pur<ha!e Progoam 

(CPP) '"' r<quit<d to rtfiiW!(t or It)")' in full1ht CPPsecurillts 

al the time of the SBLF fundiog. Any <lU!Jianding ,.,,.,., rhat an 

imlilutioo issued. to the Treasury O.p;ortm.ellt under rheCPP rtmoio 

out•anding atitr 1bt mllllllkingof the CPP A <><I< through th• SBLF 

Progrnm uolm the imlilulion dloom to repor<h,.. them. 

Sul>chaprer S ecrporalion -a Subchapter S coopor:uioo is trtat<d 

as a p3SS·through tnli)'. similar 10 a partntrsb.,_ for it& raJ incocnt 

tax PWJ'OS"' It Is g<nerally 001subjt.1 to any feder.J 1noom<laxtS at 

theoooporattln•l This can ba-. theeff«t of red!rdng inslilllliolll' 

rqx>rtai. laxtS and kntrt3.$iog thtir afttr·tax tarai~ 

Trust assets- ma&d vnluc, or othtr rt.asQ~Jal:ty availalie valutor 

lidu<imaod rel:atod asseltiO inclodt marl<ttoble S<CiltiOO, and 

other funncial and ph)>ical """'Common Jlhyskalasset• hdd In 

6du.1aryaccounts l"'lud. rod mate, <quipmtru, colle<~iblo, and 

bowthrld good< Sud! fidu.'hry ....a art not iocludtd in tho......, 

ofthtAnmclalimtilution. 

Unearned inc,..e & contra accOUI'IIS - ...,.med lnconl< ilr CaY 

RIP""' lilmonl)'. 

Ullllsed loan C<MIMitments - in<ludes mdit card 1;.,., bomt <quil)' 

lioo. rommitmt.nts to make l03J'I$ for cooS1Juctic>n.loans st~--urtd 

byc»IMitrtitl retlesta.tt,aod wlt.l$tdComlaimtmtoorlgio!tt 

or pur<haseloaJlS. (Exdudtdart oommilmenu after Jun• 2003 for 

originated mong.tgtloans h<ld l'or ..Jt. wbidr art:I«<ulltod for., 

d.riYatk., on tht bol.tnce sb..r.) 

Yield on earning assds • toto! lntt~. dividend, and let iocome 

earned on loans aod im't'$tmtnts as a ptf'tDtJgtof averagt 

tamingasscts.