Regional President Speech

fedeial Reserve Bank of Prepared for American Banker Philadelphia February 20, 1976 a~ LIBRARY E~ "Banking Activity in Washington ~y Overshadow Economic News in '76" by ' David P./Eastburn, President Federal Reserve Bank of Philadelphia Our wishes to the contrary, the economy isn~t going to be all we'd like this year. Economists say so, the unemployment statistics say so, and the inflation figures say so. For banking, the prospect of a lethargic recovery portends a time for further consolidation. With no dramatic growth of loan demand in sight, there will be more time in 1976 for working out old problems rather than making new commitments. Yet, an absence of economic excitement hardly 'dooms the banking community to an uneventful year. Regulators and legislators will be busy considering changes in the codes under which bankers must ply their trade. There's a good chance the industry will see additional supervision of its activities, further,efforts to protect the rights of consumers, and new competitive powers for nonbank institutions. Added Supervision The last two years have been rpugh ones for the regulatory frater- nity. The public is distressed at news of large bank failures, big loan portfolio losses, and published lists of institutions subject to intensified regulatory scrutiny. The coming year almost surely will bring intensified pressure on the regulatory authorities to tighten bank supervision and curb risktaking by banks • . . Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -2- In the face of this pressure, one response might be a continued tightening in the constraints placed .on bank expansion. For example, regulators can be expected to view with great care any pr,oposed additions to the list of permissible activities for bank holding companies. In addition, regulatory concern over inadequate bank capital will probably breed continuing reluctance to approve the expansion plans of thinly cap italized banks and bank holding companies. Regulators will also be wary of allowing banks engaged in international financing activities to expand their risk exposure overseas. At a minimum, regulators will be compelled to intensify. their supervision efforts and upgrade the techniques applied to this task. "Early warning systems" to identify banks with potential problems are ~ell beyond the "idea" stage. H9wever, such systems can only be effective if regulators can get detailed, timely information about the condition of individual banks. A recent stemming from the need for more and better information ~evelopment is the revision of the Call Report and the requirement that Income and Dividend reports be filed more frequently. The.future is apt to hold more of the same, especially as information transfer technologies are developed which enable banks to send information to the regulators electronically, thus mini mizing the cost of the reporting burden. Expanded disclosure of information on the financial condition of banks is another topic high on the agenda of the regulatory authorities. Both t~e SEC and the accounting profession are demanding that better and more de financial data be made available to the investment community. Govern t~led ment agenc~es apparently have little choice but to work together to define ... Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -3- groundrules for disclosure that will be consistent with the spirit of moving toward making investors better informed and protecting rights to privacy. MOre Consumer Protection Legislative concern about protecting the interests of borrowers parallels other consumer protection developments of the last several years. New laws .are on the books which outlaw discrimination on grounds of sex or marital status and require disclosure of "closing·cost" estimates and 11redlining" data. The next twelve months ·are apt to see eontinued legislative interest in issues of this sort. Further restrictions .on. the applicability of '~older­ in-due-course" defenses are a possibility:. Legislatioi_t·prohibiting credit discrimination on the basis of age, race, or religion could also be in the cards. Regulators are sensitive to the cost burdens of extensive documentation and reporting requirements under this kind·of law and will strive to hold them to manageable levels. But the mood of the country and the Congress are such that there is almost no chance .that further protection of consumer rights will die out as an issue in 1976. Heightened Competition The final development that may significantly affect the banking industry in 1976 is the continuing growth:of nonbank competitors capable (both legally and technically) of attracting business that has traditionally been the domain of commercial banks. The last five years have seen both banks and nonbanks offer an expanded array of financial services.. Thrifts are developing EFT capabilities and have been granted expanded lending authority. NOW accounts are· f~rmly established in two New England states. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -4- Further homogenization of the industry seems inevitable as long as housing can be assured continued A pessible vehicle for change pro~ection. in 1976 could come from a synthesis of the Senate and House bills dealing with restructuring financial institutions and regulations. The two proposals for reform differ in their specifics, but the intent of both is clearly to stimulate competition between thrifts·and commercial·banks by reducing their differences. Recap What 1976 lacks in economic excitement may be more than offset by a new round of regulatory and legislative activity. Bankers may find this prospect dismaying, but the fundamental economic and social forces stimu lating change are not likely to go· away. The·indust~y's best response,· under the circumstances, is creative participation in the supervisory/legis lative process to help officials in the public sector find s0lutions to the underlying problems--solutions which hopefully serve society and are not inordinately burdensome to banking • . . . Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

David P. Eastburn (1976, February 19). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19760220_david_p_eastburn

@misc{wtfs_regional_speeche_19760220_david_p_eastburn,
  author = {David P. Eastburn},
  title = {Regional President Speech},
  year = {1976},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19760220_david_p_eastburn},
  note = {Retrieved via When the Fed Speaks corpus}
}