The first thing they’ll have to do is order
new business cards. That’s because their titles will change
from “branch manager” to “senior branch executive.” And
that is just the first of a multitude of changes the Federal Reserve
Bank of St. Louis’ three branch managers will encounter in
the second half of 2004. New title. New mission. New era.
Greenspans? High school students opine about the
state of the economy in the Fed Challenge, a competition
in which students participate in a mock Federal Open Market
Committee meeting in front of a panel of judges. At its three
branches, the St. Louis Fed will increase its involvement
in these types of outreach events.
Indeed, everything will change in the Eighth District’s
Little Rock, Louisville and Memphis branches starting later this
year. If you live in these communities, expect to read, see and
hear more about the Fed’s expanded role in a number of local
initiatives. One might envision this involvement manifesting itself
in a number of ways:
Hopkins, Little Rock senior branch executive, welcoming attendees
to a Fed-sponsored urban planning conference;
Boone, Louisville senior branch executive, addressing high school
seniors about the Federal Reserve’s role in monetary policy
and the payments system;
Perine Beard, Memphis senior branch executive, making TV and radio
appearances to discuss economic and banking trends affecting the
Louis Fed economist appearing at a chamber of commerce luncheon
to present her research on employment trends in the community;
speaker’s program attracting high-profile business leaders
from around the country; or
meetings between lenders and community development groups—meetings
that are hosted by local Fed representatives and that address key
issues related to credit access.
“I think those of us in the Eighth District branches have
a great opportunity in our communities to make our presence felt
more broadly than ever before,” Boone says.
Following a year in which national and local consolidation decisions
led the Bank to change the role of its branches dramatically, the
St. Louis Fed will draw upon its intellectual capital in areas
such as community affairs, economic education, research and monetary
policy to increase its contributions to the branch cities and surrounding
This annual report will examine the decisions that prompted the
St. Louis Fed to redefine the traditional role of its branches
to focus more on outreach and less on operations. In addition,
it will review the evolving functions of the branch offices since
their inception. Finally, it will discuss in greater detail the
branches’ new and expanded responsibilities and functions.
CHECK: THE TRANSITION FROM PAPER TO ELECTRONICS
What the Federal Reserve announced on Feb. 6, 2003,
is the type of news that has become commonplace in most of the
business world. At the Fed, however, it was a jolting, paradigm-shifting
event. The Fed announced a consolidation of its check operations,
resulting in the elimination of 1,300 positions by the end of 2004.
Smaller consolidations in the past, in response to market conditions,
had resulted in some degree of employment shrinkage at the Fed.
A sweeping, nationwide wave of job cuts, however, was not something
common to the Fed or its employees.
To understand why the Fed is consolidating from 45 check-processing
sites to 32 and streamlining its check-adjustment functions from
43 locations to 12 is to understand the decline of checks themselves.1 It
is nothing short of precipitous.
Even though checks remain the most popular form of retail payment
outside of cash, they make up only 60 percent of all noncash retail
payments today compared with 85 percent in 1979. Federal Reserve
studies suggest that roughly 40 billion checks were written in
the United States in 2002, down from about 50 billion in 1995.
Federal Reserve banks handle about 16.5 billion of these checks
annually, and this volume is expected to decline as well. But the
bad news for the Fed’s check operations is actually evidence
of success given the Fed’s long-standing push for more electronic
On the day of the Fed’s check announcement, Cathy Minehan,
president and CEO of the Federal Reserve Bank of Boston and, at
the time, chair of the Fed’s Financial Services Policy Committee,
explained: “Nationwide, consumers and businesses have made
a significant shift in how they make payments, substituting electronic
payments for checks. This development is good news for the nation’s
payments system, and the Federal Reserve has strongly supported
this shift. But declining check volumes are requiring the Reserve
banks to make changes in their check operations to address the
challenges posed by the changing market. The changes we are announcing
today will help us meet these challenges.”
In light of the increased popularity of electronic payments at
the expense of check growth, the Federal Reserve had no choice
but to take action. Because the Fed has a goal to recover its check
costs (as stipulated in the Monetary Control Act of 1980), Reserve
banks must continually balance revenue and expenditures in its
financial services. With check volumes declining across the nation,
however, the Federal Reserve System has missed its cost-recovery
targets in recent years. The Fed’s Check Re-engineering Initiative
was launched to get the cost recovery effort back on track.
The initiative is expected to reduce the Fed’s operating
costs for check services by about $60 million in 2005 and about
$300 million over the next five years. The Eighth District is projected
to save $5 million annually.
THE IMPACT ON THE EIGHTH DISTRICT
The ramifications of the Fed’s check announcement were more
severe in the Eighth Federal Reserve District than in most other
districts in the Fed System. As a result of the decision, the following
actions will occur:
Rock, all of Check Operations will shut down, with processing moving
to the Memphis office in July 2004;
all of Check Operations will shut down. In August 2004, Check processing
will move to Cincinnati, and Check adjustments will move to Cleveland.
Check processing will expand with the addition of Little Rock’s
Louis will maintain its check-processing function.
of Check adjustments in Little Rock, Memphis and St. Louis will
be consolidated in Memphis.
About 160 Check employees, mainly in Little Rock and Louisville,
will lose their jobs once the consolidations are complete. Their
departure has nothing to do with performance. As St. Louis Fed
President Bill Poole and First Vice President LeGrande Rives were
quick to point out, the decision was primarily “a fact of
geography.” The city of Louisville sits only 100 miles from
Cincinnati. Little Rock is only 120 miles from Memphis.
“We are not blessed in the Eighth District with a branch
infrastructure that supports the kinds of changes we’ve seen,” Rives
says. “When these branches were established, it probably
made sense to have branches that were only 120 miles apart, in
terms of transportation, the banking environment, the way checks
were handled. ... But, obviously, a lot has changed in terms of
technology, transportation, economic conditions and population
growth. When you look at these changes since the 1920s and where
the population is now, it becomes very difficult for us to maintain
operations at branches that are only 120 miles apart.”
and Cash consolidations will result in the closure of the St.
Louis Fed’s buildings in Louisville (top) and Little
Rock (bottom), though the Fed will maintain a presence in both
TAKING IT ONE STEP FURTHER
For some Federal Reserve offices that are losing their Check operations—Little
Rock and Louisville among them—the announcement would translate
into the exodus of the majority of staff. At the time of the decision
in early 2003, Little Rock and Louisville each employed about 130
people, roughly two-thirds of whom worked in the Check Department.
The remaining operation function, Cash processing, employs far
fewer people than Check. Other employees work in support functions
such as protection, building maintenance, food services and housekeeping.
Each branch also has a Community Affairs representative.
With the absence of the main revenue generator, Check, the cost
of running the Little Rock and Louisville branches would be shouldered
almost entirely by Cash. To avoid shifting these costs to the U.S.
Treasury and to maintain the efficiency of operations, the District
made the following Cash restructuring decisions in July 2003:
operations and support services, including protection, building
and food services, would close in the Little Rock and Louisville
branches in late 2004.
night shift Cash operation in Louisville would move to Memphis
on Jan. 1, 2004.
Reflecting the reduced staffing, the Bank will also sell the Little
Rock and Louisville buildings. A small staff consisting of a senior
branch executive, community affairs representatives, economic education
specialists and support staff will be working in leased space and
maintaining contact with local banks, organizations and officials.
In addition, each branch will continue to have its own board of
directors to gather regional economic information.
Rives says: “We considered all kinds of alternatives that
could possibly either put in new operations or shore up how we
distributed costs at those branches. And, really, none of them
made good economic sense.
“We asked ourselves, ‘Is there anything on the horizon
that would make the answer different two years from now, or five
years from now?’ And the answer was, ‘no.’”
ORIGINS OF THE EIGHTH DISTRICT
The St. Louis Fed, importantly, is not closing its Little Rock
and Louisville branches. The current events represent the latest
in the evolution of the Eighth District branches, albeit the
most dramatic changes in the nearly 90-year history of the three
To learn how the branches came into existence, one must go back
nearly a century to the creation of the Eighth District. When the
Federal Reserve Act was enacted in 1913, St. Louis was the fourth-largest
city in the United States. In addition to being a major railroad
hub, St. Louis was the world’s largest fur market, the nation’s
third-largest manufacturing city, a major livestock market, a brewing
center, a leading distributor of dry goods, as well as a leading
The Federal Reserve Act called for between eight and 12 Reserve
districts. Competition among cities was fierce. A total of 37 cities
made formal pitches to the Federal Reserve Bank Organizing Committee.
Because of St. Louis’ size and economic significance to the
nation, city representatives were confident that St. Louis would
be selected. What concerned officials more was the size of the
territory St. Louis would be granted. They sought to be awarded
one of the four largest regional banks, hoping for all or parts
of 12 states to be within its boundaries, according to one newspaper
In the book A Foregone Conclusion: The Founding of the Federal
Reserve Bank of St. Louis, the St. Louis contingent was
said to be pushing for “a long north-and-south axis to
ensure a balance of economic interests. The cotton-belt bankers
from Tennessee through Arkansas, Mississippi and Louisiana to
Texas, with their heavy seasonal demands for credit, should press
the Organizing Committee to give St. Louis a self-sufficient
district with a variety of economic interests, such as mining
and manufacturing, and enough banking resources to absorb seasonal
Within the large territory St. Louis envisioned for its district,
eight other cities also were seeking selection: Kansas City, Memphis,
New Orleans, Indianapolis, Nashville, Dallas, Houston and Fort
Worth. In an attempt at gentle persuasion, those hoping to land
a Reserve bank in St. Louis sent a letter to bankers in many of
these cities to inform them that there would more than likely be
10 to 15 branches in a St. Louis district, each with local control
through a seven-member board.
Eighteen banks signed the letter, which was sent to their correspondent
banks. The bankers said that in a 12-state district headquartered
in St. Louis, “every point could be served more satisfactorily
through the branches of the St. Louis Reserve Bank than through
smaller banks or through banks located in districts not so diversified.
It is the evident and proper intent of the law to allow the free
use of branches so that all privileges could be carried near to
all the people, no matter where the district bank be located.”
In January 1914, St. Louis made its case to Organizing Committee
members William G. McAdoo, the secretary of the Treasury, and David
Houston, the secretary of Agriculture. In an ambitious proposal—though
one scaled back from the previously reported version—Festus
Wade, president of the St. Louis Clearing House Association, presented
St. Louis as “District Five” of a Federal Reserve consisting
of eight districts.
When the Organizing Committee made its announcement on April 2,
1914, 12 districts—the maximum allowed by the Federal Reserve
Act—were created, with St. Louis named as head office of
the Eighth District. The inclusion of districts headquartered in
Kansas City and Dallas cut into the west and southwest areas that
St. Louis desired for its district. Mainly, that included Texas,
Oklahoma and western Missouri. The Eighth District’s size,
nearly 150,000 square miles, was the fourth smallest among all
districts, behind Philadelphia, New York and Boston.
ALONG CAME THE BRANCHES
The notion of 10 to 15 branches sprinkled throughout the St. Louis
Federal Reserve District never materialized. But within four
years of the St. Louis Fed’s swinging open its doors in
November 1914, three branches were established. They were located
in Little Rock, Louisville and Memphis.
Louisville was the first branch to open, in December 1917. The
St. Louis Fed’s Board of Directors heard arguments from the
Louisville Clearing House Association for the establishment of
a branch in Louisville back in September 1916. Not until the following
summer did the board approve the establishment of the branch. The
Memphis Clearing House Authority petitioned the Bank to establish
a branch in that city in the spring of 1918. The St. Louis Board
approved the request in June 1918. Just a few weeks later, the
directors approved a request from Arkansas bankers to establish
a branch in Little Rock.
Before any of the branches could begin functioning, final approval
was needed from the Federal Reserve Board in Washington, D.C. Once
granted, the St. Louis Board could authorize the branches to perform
formal functions, which it did during board meetings in September
1918. The branches’ powers were heavy on the operational
side and included clearing checks, processing cash and handling
credit applications and wire transfers. The seven branch functions
and duties spelled out were:
1. To receive from
any member or clearing member bank in its territory for collection
and credit with it checks drawn on any bank on the par list of
the Federal Reserve banks.
2. To receive from
any member or clearing member bank or Federal Reserve bank or branch
thereof for collection and credit with or through the head office
checks on any bank in its territory on the par list of the Federal
3. To receive from
any member or clearing member bank in its territory for collection
and credit when paid, notes, drafts, coupons and other legitimate
4. To receive from
any member or clearing member bank or Federal Reserve bank or branch
thereof for collection and credit when paid with or through the
head office, notes, drafts, coupons and other legitimate collection
items which are payable within its territory.
5. To receive and
pass on applications for rediscount and transmit such applications
to the head office for approval.
6. To receive and
make wire transfers for the member and clearing member banks in
7. To receive and
transmit by wire to the head office for their approval and advice
of rate of discount, all applications of member or clearing member
banks to buy or sell mail transfers.
ROLE OF THE BRANCHES: HELPING TO KEEP
THE STOOL STEADY
The Federal Reserve is often referred to as a three-legged stool,
performing functions and offering expertise in three distinct areas:
POLICY – Basing its decisions on hard
data and anecdotal evidence, the Fed acts to keep the level
of overall prices stable and the economy growing at a sustainable
rate without igniting inflation.
AND REGULATION OF FINANCIAL INSTITUTIONS – The
Fed is one of several regulators monitoring the banking industry.
Fed examiners identify areas of risk that could affect a bank’s
safety and soundness, and ensure compliance with consumer regulations.
FINANCIAL SERVICES – A component of the
Fed’s mission is to foster the integrity, efficiency
and accessibility of the payments system. To support its mission,
the Fed offers financial services to banks and the U.S. government
to encourage competition, innovation and efficiency in the
Since the early days of the Eighth District, the Little Rock,
Louisville and Memphis branches have played a significant role
in the monetary policy and financial services arenas while supervision
and regulation functions have been carried out through the St.
MONETARY POLICY: A branch’s contribution
to the monetary policy leg of the stool comes primarily from its
board of directors. The Federal Reserve Act stipulates that each
Reserve bank branch be operated by a board whose members possess
the same qualifications as directors of the head office. The seven
directors who serve on each branch board represent the interests
of agriculture, commerce, industry, labor and consumers. Current
branch board members in the Eighth District hail from sectors of
the economy as diverse as banking, academia, health care, manufacturing
and affordable housing.
Like the St. Louis board, each branch board generally meets monthly.
The directors report on the latest developments in the local economy,
and those reports are shared with the Bank president and Bank economists.
The president then weighs this information with hard data before
attending meetings of the Federal Open Market Committee (FOMC).
The FOMC, which determines the target level of the federal funds
rate, meets eight times a year to review economic and financial
conditions, determine the appropriate stance of monetary policy
and assess the risks to its long-run goals of price stability and
sustainable economic growth.
St. Louis Fed President Bill Poole regards as critical the anecdotal
information provided by sources like board members because it is
more timely than formal data such as Gross Domestic Product (GDP)
or unemployment statistics. Quantitative measurements that are
released monthly or quarterly tend to lag current economic conditions.
“Anecdotal information helps us to see what is going on
in the economy almost as it is happening,” Poole says. “Also,
because it is collected from the people who are actually making
day-to-day decisions, it helps us to understand why trends in the
data are occurring.”
As an example, Poole describes the case of a branch director who
in the summer of 2000 reported that loan demand at his bank was
falling and that other firms in his area were beginning to experience
problems. At the time, the economy seemed to be growing rapidly,
and nearly all forecasts indicated that rapid growth would continue.
Reports of this sort surfaced throughout the rest of 2000 and into
2001, helping the Fed to get ahead of the recession by lowering
its federal funds rate target in early 2001, even though current
GDP data suggested that the economy was still growing.
Poole also notes that while most of the anecdotal information
collected by the Fed supplements other information at the Fed’s
disposal, the anecdotal reports at times become the primary source
of information. Tried and true standard data are not reliable guides
whenever history has not recorded a pattern for how the economy
is likely to respond. The Sept. 11, 2001, terrorist attacks, for
example, had immediate and dramatic economic consequences, but
nothing in history could be used to predict the consequences of
such an event. The Fed was able to use its network of contacts
to get a good idea of the sectors that were affected the most,
weeks before any formal data were available.
Poole says: “We found out very quickly that the Fed’s
injection of liquidity into the banking system had been successful,
in that few banks reported having liquidity problems despite the
near-complete shutdown of financial markets. We also found that
retail sales came to a halt in the two to three days after the
attacks but surged back to near-normal levels by the weekend and
that manufacturers in the District were anticipating that they
would be reducing their output by an average of 10 percent.
“All of this information was vital in the weeks immediately
following the attacks, when the Fed had to react very quickly while
navigating the uncharted waters of September and October. Indeed,
based on anecdotal reports and experience, but without any substantial
amount of formal data applying to the period after Sept. 11, the
FOMC cut the intended federal funds rate on Sept. 17 and again
on Oct. 2.”
Information from directors and sources is compiled and shared
with the public in a special report—informally called the Beige
Book—which is issued about two weeks before each FOMC
FINANCIAL SERVICES: Fewer than 30 employees were
on hand to open each of the St. Louis Fed’s three branches.
Quickly and steadily, however, the need for more workers and larger
facilities at each branch became obvious to accommodate the branches’ main
function, providing financial services to depository institutions.
The Louisville Branch moved into a new building less than two
years after opening its doors. The Branch stayed in growth mode
for many years to come: taking over check clearing on city banks
from the Louisville Clearing House Association in 1920; installing
machines for counting currency in 1928; taking over the issuance
and redemption of Defense Bonds (later known as War Bonds and Savings
Bonds) from the St. Louis office in the 1940s; moving again into
its current building in 1958; and installing an electronic check-handling
system in the 1960s.
In Memphis, the Branch’s employees moved to expanded offices
in 1920. During the decade, the Branch grew to serve 61 banks in
eastern Arkansas, northern Mississippi and western Tennessee. Business
growth necessitated the construction of a new two-story building
before the end of the decade. Even though a third story was added
in 1944, by the mid-’60s the building became increasingly
inadequate to serve the needs of Memphis financial institutions.
In 1972, the Branch moved to a new, four-story downtown building
from which it continues to serve more than 400 financial institutions
in its zone.
The Little Rock Branch exhibited similar growth since its inception.
On the first day the Branch opened in January 1919, clerks processed
750 checks. By December, the quantity had grown to more than 12,000
daily. Employees moved to a new building in 1925 and would stay
there for 42 years. With the number of member banks rising to 67
and check volume surging, the Branch moved into its current building
Employment at each branch peaked at more than 200 in the early
1970s. Trends such as interstate banking and advancements in technology
hastened the movement toward consolidated financial services among
Reserve banks. Since then, branch functions have gradually been
consolidated, culminating with the check and cash announcements
of 2003. (See
In 1980, Congress passed the Monetary Control Act, which required
the Fed to begin charging for its financial services. The act also
opened the Fed’s services to all depository financial institutions.
Previously, only member banks had direct access to Fed services.
“The Monetary Control Act was clearly a watershed event,” says
Karl Ashman, senior vice president, Administration, and Little
Rock branch manager between 1990 and 1995.
Louisville Branch Manager Tom Boone adds, “From an operations
perspective, the Monetary Control Act pushed us into the real world.
Not only did we quickly and dramatically improve our efficiency
and productivity, but we also began thinking strategically in terms
of competing for business.”
Now, in the midst of another historic turn of events, the St.
Louis Fed prepares to begin a new chapter.
St. Louis Fed will be more visible in its branch communities,
hosting events similar to this recent urban revitalization
conference in East St. Louis, Ill., which attracted acclaimed
speakers to address how distressed cities can reverse their
A NEW FED IN TOWN
Barring consumers en masse holstering their debit and credit cards,
logging off banking and commercial web sites, and canceling their
direct payment accounts, the large check-processing operations
employing scores of people will never return to Little Rock and
Louisville. Consumers have made it clear: They are increasingly
comfortable with electronic forms of payment. What’s more,
recent legislation like Check 21 is
expected to push the electronic payments trend further.
What is not certain at this point is how successful the District’s
new branch model will become. Can offices that once employed more
than 200 people make viable contributions to their communities
and the Fed with drastically reduced staffs?
Mary Karr, senior vice president of Legal, Public and Community
Affairs, is in charge of the effort to establish a new model for
an Eighth District branch office. If history is a barometer, Karr
believes the transition will be a success:
“The St. Louis Fed has a great tradition of conducting research
that supports monetary policy decisions,” Karr says. “We
are excited to build on that reputation as we strengthen our intellectual
presence in our branches. Shifting our focus from operations will
give us an opportunity to be more visible in programs designed
to increase the public’s understanding of monetary policy
and the economy.”
Little Rock Branch Manager Robert Hopkins is fully aware that
his branch is about to sail in uncharted waters.
“For the Little Rock and Louisville offices, outreach is
going to be the primary mission,” Hopkins says. “Memphis
will still have a huge operations facility, so that branch will
be important regardless of what happens on the outreach side.”
Many companies use the term outreach to mean charitable contributions
or employee volunteerism. What the Fed means by outreach is different.
Indeed, while plans for expanded outreach in the St. Louis Fed’s
branch cities continue to evolve, the outlines of the effort are
already taking shape:
EXPANDED EMPHASIS ON MONETARY POLICY: The
St. Louis Fed will deepen its knowledge of economic developments
across the District, with the effort managed from the four District
offices. Equally important, the Bank will increase its efforts
to communicate policy issues to improve general understanding of
how policy is made and its effects on the economy.
EXPANDED RESEARCH INTO REGIONAL
ECONOMIC ISSUES: To further aid in monetary
policy research, the St. Louis Fed will hire additional economists
who will specialize in studying regional issues affecting the
District and later present their findings to academic, business
and community audiences.
EXPANDED ECONOMIC EDUCATION PROGRAMS: These
programs demystify the Fed and explain money, banking and the Fed
in simple language for teachers and their students. With dedicated
economic education staff members located at a branch, the St. Louis
Fed will be able to work more effectively with teachers and students
in the branch cities. The Fed has a tremendous range of resources
available for use by teachers and students.
EXPANDED COMMUNITY AFFAIRS PROGRAMS: The
Bank’s Community Affairs Office links lenders with community
development organizations. By facilitating partnerships within
communities, employees in this department foster dialogue and understanding
on issues such as the Community Reinvestment Act, economic development,
affordable housing, and fair and equal access to credit. Community Affairs
publishes numerous materials on these topics and also hosts or
sponsors forums throughout the District. The St. Louis Fed will
expand Community Affairs’ role in all three branches by increasing
staff and sponsoring additional programs.
THE ADDITION OF A SUPERVISORY PRESENCE
IN MEMPHIS: Experienced examiners will relocate
to Memphis from St. Louis. Julie Stackhouse, the St. Louis
Fed’s senior vice president over Banking Supervision
and Regulation, plans for the operation to grow to about 10
members over time. Stackhouse says, “Our reason for establishing
this satellite office is simple: We want to become more accessible.
I believe we can be more effective as a Mid-South banking supervisor
if we establish a physical presence in Memphis.”
A COMMITTED AND PROFESSIONALLY DIVERSE
BOARD OF DIRECTORS AT EACH BRANCH: Maintaining
a strong board is perhaps the most critical piece of the new
branch model, for the District will need engaged directors
to make these ideas successful. Hopkins, for one, is optimistic
that business and community leaders will continue to want to serve
on a branch board, saying, “I think the directors are
tied to the Federal Reserve System more than they are to these
All of the evidence presented here indicates that the St. Louis
Fed’s branches had momentum in several areas of outreach
and monetary policy, even before last year’s decisions were
made. An intellectual presence at each branch was already in place,
co-existing as an essential element of a branch’s makeup,
along with operational services. By the end of 2004, however, an
intellectual presence will be what remains in two of the three
“Time will tell as to whether we’ll be successful,” Hopkins
says. “It depends on what we do and how we do it.”
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