Regional President Speech

, r. BANKING'S PROFIT OUTLOOK FOR THE 1980'S: MORE OR LESS? REMARKS BY ROGER GUFFEY PRESIDENT, FEDERAL RESERVE BANK OF KANSAS CITY ANNUAL CONVENTION BANK MARKETING ASSOCIATION ATLANTA, GEORGIA OCTOBER 25, 1983 , BANKING'S PROFIT OUTLOOK FOR THE 1980's: MORE OR LESS? CONS IDERABLE COMMENTARY IS BE ING DEVOTED THESE DAYS TO THE JRANSITION OCCURRING IN BANKING AND TO WHAT THIS MEANS T~ANSITION FOR BANKERS IN THE ..1980' S. WE READ ABOUT BANKING SURVIV-AL STRATEGIES, AND WE SEE ARTICLES FORECASTING THE INDUSTRY'S FUTURE ! STRUCTURE. SOME OBSERVERS PREDICT LITTLE CHANGE IN BANK NUMBERS AND CLEARLY PRESERVE A PLACE FOR SMALL INSTITUTIONS IN BANKING'S --_/ ----­ FUTURE. COMMENTATORS SUGGEST THAT THERE MAY BE AS FEW AS ~OTHER 100 BANKS BY 1990. WHILE DO NOT BRING ANY SPECIAL INSIGHTS TODAY ABOUT TOMORROW'S FINANCIAL DO THINK THAT THIS TRANSITION STRUCTU~E, IcQWARP A MORE MARKET-OR IENTED FINANC IAL SERV ICES INDUSTRY HAS SOME IMPORTANT IMPLICATIONS. IN PARTICULAR, I BELIEVE THAT AS THE MARKETPLACE BEGINS TO DETERMINE THE FUTURE SUPPLIER.S OF ~ FINANCIAL SERVICES, BANKING PROFITABILITY WILL BE THE CRUCIAL VARIABLE THAT DETERMINES WHICH PREDICTIONS ABOUT INDUSTRY STRUCTURE/ BECOME FAC-r.: As WE ALL KNOW, R~ AT ! \IE PROF IT RATE S NOT ONL Y ENCOURAGE ENTRY OR CAUSE EX IT FROM THE INDUSTRY, BUT THEY ARE A KEY FACTOR IN DETERMINING WHICH BANKS EXPAND. THUS, IN MY JUDGMENT, PROF ITS ARE THE PR INC IPAL DETERM INANTS OF BANK ING' S FUTURE ROLE, AND BANK ING PROF ITS-W ILL HELP DEC IDE WH ICH BANKS SURVIVE. WITH THESE CONSIDERATIONS IN MIND, I WANT TO FOCUS THIS ,.A FTERNOON ON THE LONG-RUN PROF IT OUTLOOK FOR BANK ING. WILL # IDENTIFY SOME FINANCIAL INDUSTRY CHANGES THAT ARE AFFECTING BANK "., PROFITS, ANALYZE THE IMPACT OF THESE CHANGES ON CURRENT AND - 2 ­ 3 FUTURE BANK PROFITS, AND ~ONSIDER WITH YOU SOME ALTERNA:~ STRATEGIES.~"""..,r. .7h- d~ zgk ~ ~~. MANY FACTORS ARE CAUSING THE CHANGES WE SEE IN BANKING, BUT TWO APPEAR TO BE MOST SIGNIFICANT. ONE FACTOR IS THE INCREASE IN COMPETITION AMONG FINANCIAL INSTITUTIONS. A .. IS THE SHIFT S~COND IN REGULATORY POSTURE TOWARD BANKING. As FOR THE FIRST FACTOR, INCREASED COMPETITION FROM- BOTH - BANK AND NONBANK SOURCES HAS CAUSED BANKERS TO CHANGE THE WAY THEY DO BUSINESS. BANKING ORGANIZATIONS ARE USING IMPROVED TECHNOLO~lf'TO GEOGRAPHICAL~Y'I'.A:~ OFFER NEW SERVI CESt' EXPAND LOWER PERSONNEL AND FAC ILIT IES COSTS. THEY ARE US ING NONBANK HOLDING COMPANY SUBSIDIARIES AND THE RELAXATION OF STATE -::::=.. RESTR ICT IONS ON BANKS TO COMPETE IN NEW MARKETS AND OFE NEW PRODUCTS. Ar THE SAME T I ME, TECHNOLOGY,/ EXPANDED POWERS FOR THijJ FTS AND CREDIT UNIONSylA~ RES~ICTIONS ON BANK PRICING AND PRODUCTS ALSO HAVE PROVIDED OPPORTUNITIES FOR FIRMS TO OFFER ~ONBANK BANKING SERVICES. THE ADVENT OF NOWs, SHARE DRAFTS, CASH .. ",... MANAGEMENT, AND OTHER ACCOUNTS HAVE NEARLY TRIPLED THE NUMBER OF FIRMS THAT CAN OFFER TRANSACTION SERVICES. CLEARLY, COMPETITION • WITHIN THE FINANCIAL INDUSTRY WILL BE A POWERFUL DETERMINANT OF - ITS FUTURE STRUCTURE. A SECOND FACTOR COMPLEMENTING THE CHANGES IN THE COMPETITIVE I - ENVIRONMENT HAS BEEN THE MOVEMENT TOWARD LESS DIRECT REGULATORY - AND SUPERVISORY OVERSIGHT OF BANKING. MANY OF OUR BANKING LAWS WERE PASSED IN 1933, A YEAR WHEN APPROXIMATELY 4,000 BANKS FAILED. IN 1933, BANK SAFETY AND DEPOSITOR PROTECTION WERE THE - 3 ­ PREDOM INANT CONCERNS. TODAY, EVEN I N AN UNCERTA I N ENV IRONMENT, THE GOALS OF SAFETY AND PROTECT ION APPEAR TO HAVE BEEN LARGELY A - CCOMPLISHED. Now, REGULATORS PLACE MORE EMPHASIS ON THE . PERFORMANCE OF THE BANKING INDUSTRY IN MEETING THE PUBLIC'S NEEDS FOR 0 I VERSE AND COMPET IT IVE F I NANC cfS. I AI SERV I COMPETITIVE AND REGULATORY EVENTS HAVE LED TO WIDESPREAD FINANCIAL INNOVATION AND IMAGINATIVE NEW SERVICES. WHILE THESE DEVELOPMENTS HAVE CREATED EXCITING HEAD-LINES, THEY ALSO MAY HAVE .... -: DIVERTED ATTENT ION FROM THE TRAD I T I ONAL BANK I NG MA I NSTREAM, THE ~~K AREAS WH ICH MOST AFFECT BANK ING PROF ITS ING DEPOS ITS AND MAK ING LOANS. INDEED, A RECENT SURVEY OF F I NANC IAL INDUSTRY . - I NST ITUTE FOUND THAT THE CURRENT SOURCES OF BANK PROF ITS ARE EXPECTED TO UNDERGO LITTLE CHANGE THROUGH 1990. I_AGREE WITH • THIS CONSENSUS. THROUGH THE REMAINDER OF THIS DECADE, THE - " COMPETITIVE AND REGULATORY CHANGES WE SEE TODAY WILL MOST LIKELY AFFECT TRADITIONAL. BANK ACTIVITIES. THUS, THESE ACTIVITIES RE~AIN TH~c~;tF SHOULD BANKING'S FUTURE PROFIT STRATEGIES. THE PROFIT OUTLOOK FOR THE REST OF THE 1980's WILL BE DOMINATED BY THE THREE FACTORS THAT HAVE ALWAYS DETERMINED BANK ­ PROFITABILITY: REV ENUE , COSTS, AND CONTROL OF RISK. MOREOVER, I . BELIEVE HELPFUL INSIGHTS ABOUT PROFITS FOR THE REST OF THE DECADE CAN BE DEVELOPED BY EXAM IJlI N.G, TIJ.E EFFECTS OF DEREGULAT ION ON ~~ H ~d~J~ ~f5';;'bANIt(. - c:c $ + J HESE THREE FACTORS FO~ LARGE MONEY CENTER ="BANKS, REG IONAL OR MEDIUM-SIZED BANKS, AND SMALL COMMUNITY BANKS. As BACKGROUND FOR TH IS DISCUSSION OF PROFITABILITY, MOST OF US PROBABLY WOULD AGREE THAT F I NAN'C IAL DEREGULATION HAS BEEN - 4 ­ UNDER WAY FOR SOME TIME AND MANY ASPECTS, SUCH AS INTEREST RATE e 0­ DEREGULAT ION, HAVE LARGELY BEEN COMPLETED. FOR ,tERSPECT I VE ON THE IMPACT OF DEREGULAT ION ON BANK PROF I TAB I L I TY, THEN, WE CAN - . LOOK BACK TO 1978, WHEN DEREGULAT I ON BEGAN FOR MOST BANKS. IN THAT YEAR:/ WITH THE INTRODUCTION OF MONEY MARKET CERTIFICATES AND WIDENING EXPOSURE OF BANK DEPOSITS TO THE VAGARIES OF THE MARKET, ~el , C I ~P-+C.;T tJ;: WE BEGAN ~t1 :O:8iliT DEREGULATION. WHAT HAS HAPPENED TO BANK PROF I TAB I L ITY SINCE 1978? THE h"»>.qJ. INTEREST I. •NG ANSWER, FOR ~SAMPLE OF BANKS TAKEN FROM THE UN I FORM BANK PERFORMANCE REPOR-T, I S THAT BANK PROF I TAB I L I TY OUR I NG THE . 1978-1982 PERIOD WAS QUITE STABLE DESPITE DEREGULATION AND A -~--------- VOLAT I LE RATE ENV I RONMEN!.. WH I LE RETURN ON ASSETS ~ LARGE BANKS IN 1982 WAS ONLY SL I GHTL Y BELOW ITS 1978 LEVEL, ROAs FOR MEDIUM AND SMALL SIZED BANKS ACTUALLY INCREASED FROM 1978 LEVELS. TH I S STRONG EARN I NGS PERFORMANCE IS LARGELY ATTR I BUTEO TO THE -- AB I L I TY OF BANKS TO MA I NTA I N OR IMPROVE THE I R -NE INTEREST MARijlNSQDESPITE INCREASED MARKET RATE LIABILITI ES. To BE MORE SPEC I F I C/ BY THE END QF« 19~2, APPROX I MATEL Y 65 PERCENT OF LARGE BANK ASSETS WERE FUNDED BY MA~KET RATE LIABILITIES, UP FROM 55 PERCENT IN 1978. YET NET INTEREST MARG I NS FOR LARGE BANKS WERE AROUND 3 ~ERCENT FOR THE ENT IRE PER I 00. SMALLER BANK CATEGOR I ES EXPER I ENCED GREATER GROWTH IN ~ARKET RATE LIABILITIES, BUT THESE BANKS,-root'MANAGED TO IMPROVE THE I R NET INTEREST MARG INS. FOR THE REG I ONAL BANKS, I NTEREST -MARG I NS" ROSE FROM 4 PERC-ENT IN 1978 TO AROUND ­ 4.4 PERCENT IN 1982. COMMUNITY BANKS' MARGINS ROSE FROM 4.4 PERCENT IN 1978 TO ABOUT 5 PERCENT IN 1982. - 5 ­ IN ADDITION TO SOL ID NET INTEREST MARGIN~ DURING THIS -­ p PER I 00, I NCREASED NON I NTEREST INCOME, WH I CH I NCLUDES FEES, TRUST &#45;&#45;&#45; INCOME, AND OTHER REVENUE SERVICES, ALSO HELPED TO MAINTAIN BANK . EARN I NGS. N...O N I NTEREST I NCOME AS A PERCENT OF RE.VEWJE INCREASED 20 BY ABOUT PERCENT ACROSS ALL SIZE GROUPS, APPARENTLY REFLECTING AN 'NCREASED TENDENCY FOR BANKS TO CHARGE 0 I RECTL Y FOR THE I R .. SERVICES. By 1982, N. ON I NTEREST I NCOME AS A PERCENT OF TOTAL -R-EVENUE RANGED FROM 9 PERCENT FOR SMALL BANKS TO OVER 20 P­ E RCENT -........ FOR MEDIUM AND LARGE BANKS. *' ON THE COST S I DE, OVERHEAD LEVELS ROSE MODE'RATEL YIN ALL BANK CATEGORIES BETWEEN 1978 AND 1982, REFLECTING THE INABILITY OF BANKS TO FULLY APPLY THOSE COST-REDUC I NG ASPECTS OF DEREGULATION AND ELECTRONIC BANKING. ~---- No PROF I TAB I L ITY ANAL YS I SIS COMPLETE WITHOUT LOOK I NG AT ACCOMPANY I NG RISK, MEASURED, I N PART..:,) BY LO~ LO~~ES. FOR 1982 AND THE FIRST HALF OF 1983, LOAN LOSSES WERE AS HIGH OR HIGHER .. - THAN I N ANY OTHER PER I 00 I N THE LAST TWO DECADES, REFLECT I NG A .llliP BROAD SPECTRUM OF PROBLEMS I NVOLV I NG AGR I CUL TURE,/ ENER.§Y / FORE I GN LOANS • LOAN LOSSES AS A PERCENT OF TOTAL LOANS ROSE ... ....-= ,........ ACROSS ALL BANK SIZE GROUPS WITH THE GREATEST INCREASE, 180 PERCENT, OCCURRING AT SMALLER BANKS. OVERALL, THESE RECENT - 9 PROBLEMS HAVE ADVERSELY AFFECTED BANK ROAs BY AS MUCH AS PERg;NT. IN SUMMARY, DURING THE 1978 TO 1983 PERIOD, BANKS HAVE SEEN j A D!lAMATI C I NCREA;;E I N THE I R COST OF FUND S, SOME I NCREASES I N .. OVERHEAD COSTS, AND TROUBLESOME I NCREASES I N LOAN LOSSES. -YET ~ - BANKS HAVE BEEN ABLE TO MA I NTA I N THE I R MARG I NS, INCREASE - - 6 ­ A!:D, DESPITE PROBLEMS, N~ INTEREST REVEN~E ~N~~ASED #PRESERV~ THEIR PROFITABI LITY. THIS SUGGESTSATHAT BANKS SO FAR HAVE COPED WELL WITH DEREGULATION . MOREOVER, THESE FACTS PROVIDE SOME - .OPT IM I SM AS WE LOOK FORWARD TO BANK ING' S PROF ITAB IL I TY FOR THE REMAINDER OF THE 1980's. ~cr IN LOOKING FORWARD, WE SHOULD KEEP ONE SIGNIFICANT V~AetE IN MI NO. THE ECONOMIC CLIMATE TO 1990 IS LIKELY TO DIFFER ... SOMEWHAT FROM WHAT WE'VE EXPERIENCED FOR THE LAST FIVE YEARS, A PERIOD MANY OF US WOULD REGARD AS UNIQUE. THE RATE OF INFLATION • ROSE RAPI~LY J~EN F~LL, INTEREST RATES WERE HIGHLY VOLATILE~AND - THE ECONOMY PEAKED, MOVED INTO A PROTRACTED DOWNTURN, THEN RECOVERED STRONGLY. IN LIGHT OF THESE EVENTS, THE RECENT PROFIT 1(1f'T'ft-e-.. PERFORMANCE OF BANKS SEEMSAREMARKABLE. NEVERTHELESS, OUR RECENT FINANCIAL TURMOIL GENERATES UNCERTAINT.Y ABOUT HOW BANKS CAN - fi?5ID.17 ADJUST TO FUTURE FINANCIAL AND ECONOMIC EVENTS. IF, AS WE EXPECT, BANK PROF ITAB I L I TY ,(PNT INUES TO BE T I ED fIN4NCiAt.. /. PRINCIPALLY TO THE INDUSTRY'S ROLE AS AN ( THEN A INTERMEDIA~Y, BANK ING' S PERFORMANCE THROUGH THE REMA INDER OF THE 1980' S WILL DEPEND LARGELY ON HOW WELL IT CONTINUES TO MANAGE INTEREST MARG INS. WH ILE NO ONE KNOWS FOR CERTA I N WHAT INTEREST MARG INS WILL DO, THE GENERAL CONSENSUS SEEMS TO BE THAT F» RTHER -DEREGULAT ION AND COMPET I T I ON WILL PLACE INCREAS ING PRESSURE ON THESE MARGINS. I F INTEREST MARG INS DO COME UNDER FURTHER PRESSUREI WHAT I,:!;D( ..W I L L HAPPEN TO BANKS' ROAs HOW CAN PROF II S BE PRESERVE...o? .f J.e.-r ~ THOUGH THE POSS IBLE SCENARIOS ARE NEARLY L I TLESS, Lal9 /kff!.­ • ~ EVALUATE THE IMPACT OF SHRINKING MARGINS ON BANK PROFITS BY i1,,-e- ~ 1) " +- r: .~ ~, t:::..-eJK7f1 (J?1 Q ~~..... ~ ~,.-~ - 7 ­ ~ ASSUMING THAJJ\MARGINS DECLINE BY 10 PERCENT FROM CURRENT LEVELS FOR EACH BANK SIZE CATEGORY. TH I S COULD HAPPEN, FOR EXAMPLE, (ii) FROM A COMB INAT ION OF LOAN RATE DECREASES COST OF FUND - INCREAS..E S OF ONLY 30 TO 50 BASIS POINTS . OUR ANAL YS I S SHOWS THAT A 10 PERCENT DECL INE IN MARG INS WOULD --REDUCE THE RO..A OF LA - R GE AND REG IONAL BANKS BY ALMOST 30 PERCENT, AND ROAs OF SMALLER BANKS BY 22 PERCENT. THE MAGNITUDE OF THESE FIGURES INDICATES THE IMPORTANCE OF NET INTEREST MARGINS /01u6.e- TO THE INDUSTRY' PROF IT PICTURE. THEY ALSO PO INT OUT WHAT S~ INT-EREST RATE COMPET I T I ON COULD MEAN FOR THE INDUSTRY'S FUTURE HEALTH. DESPITE THE POTENTIAL PROFITABILITY IMPAC1 OF THI~~~ ~ ~Q" ~~.".z.- ~7 ~ MARGINS, I BELIEVE BANKERS HAVE SOME GOOD HELP OPTI~TO ~ ~ENGTHEN PROFITS. AMONG THESE ARE FEE INCOME, COST REDUCTION, tYV .. AND CONTROL OF RISK-. LET'S LOOK AT THE REVENUE SIDE FIRST. JUST AS THERE IS A - CONSENSUS THAT MARGINS WILL DECLINE, THERE ALSO IS A GROWING CONSENSUS THAT SOME OF THIS DECLINE CAN BE OFFSET BY- FE E INCOME . • As ALREADY NOTED, BANKS ARE BEG INN ING TO CHARGE FOR SERV ICES FORMERL Y GIVEN AWAY I N AN ERA OF NONPR ICE DEPOS I T COMPET I T I ON. - ALso, MANY NEW AND PROPOSED BANKING SERVICES WILL GENERATE INCOME, MOST NOTABLY BROKERAGE FEES, MANAGEMENT FEES, - COMMISSIONS, -AND I.N SURAN CE PREMIUMS. THUS, THERE IS REAL POTENTIAL TO AUGMENT BANK PROFITABILITY BY INCREASING FEE INCOME. PRESERV ING PROF ITAB IL I TY THROUGH INCREASED FEE INCOME, THOUGH, MAY BE A REAL CHALLENGE. FOR EXAMPLE, OUR ANAL YS IS SUGGESTS THAT TO RESTORE THE INCOME L..O ST FROM A 10 PERCENT MARGIN - DECLINE, SMALL BANKS WOULD HAVE TO DOUBLE THEIR NONINTEREST - 8 ­ INCOME. OUR ANALYSIS ALSO SHOWS THAT REGIONAL BANKS WOULD REQU IRE A 40 PERCENT INCREASE AND LARGE BANKS WOULD NEED TO US' INCREASE N,O N INTEREST INCOME BY 33 PERCENl TO RESTOR;E;7 A' INCOME. MOREOVER, AS A PERCENT OF BANK INCOME, NONINTEREST INCOME WOULD F NEED TO INCREASE FROM JUST OVER 20 PERCENT TODAY FOR LARGE AND - MEDIUM BANKS TO ABOUT 30 PERCENT IN THE FUTURE. FOR SMALL BANKS, THE RATIO WOULD NEED TO INCREASE FROM 9 TO 18 PERCENT. A SECOND -MAJOR AL TERNAT IVE FOR MA INTA IN ING PROF ITS I N THE FACE OF DECLINING MARGINS IS THE REDUCTION OF OVERHEAD COSTS. As , -< • BANKS SUBSTITUTE ELECTRONIC BANKING FACILITIES FOR BRICK AND MORTAR, AND AS NONPRICE COMPETITION FOR DEPOSITS WEAKENS, BANKS MAY HAVE OPPORTUNITIES ALSO TO REDUCE OR CONTROL OVERHEAD. --'ASSUMh"t~~T ~ANZs AGA I N : ET IS ALL E: PER IENCE A 10 PERCENT DECL INE IN NET INTEREST MARG INS. OUR ANAL YS I S SHOWS THAT LARGE AND MEDIUM SIZED BANKS WANTING TO MAINTAIN PROFITS WOULD NEED TO ;. CUT OVERHEAD BY 12 PERCENT; SMALL BANKS WOULD NEED TO CHOP 1.8 ~ ~ - PERCENT FROM THEIR OVERHEAD TO MAINTAIN CURRENT PROFITABILITY. ... FINALLY, IN MAINTAINING ~....--=T:H:!51;~... ......;I..;M.;,:P-O.:..:R..:.T.:..A....N T EM PHAS I S PROF ITAB IL I TY IS CONTEND ING WITH THE RISK FACTOR I N BANK ING IS FUTURE. THE RECENT EXPERIENCE WITH LOAN LOSS ES SHOWS CLEARLY HOW l OAN QUAI IlY CAN AFFECT BANK INCOME. MOREOVER, DEFAULT RISK PO~ MAY ACTUALLY INCREASE OVER TIME AS OTHER SECTORS OF THE ECONOMY ARE DEREGULATEr.~D SUBJECTED TO THE RIGORS OF THE MARKETPLACE. BANKERS ALSO WILL ENCOUNTER NEW SOURCES OF RISK AS THEY ENTER AREAS FROM WHICH THEY HAVE BEEN TRAD ITIONALLY EXCLUDED. As BANKS - 9 ­ EXPAND AND COMPETE, THEREFORE, THEY MUST ANALYZE EACH NEW OPPORTUNITY CAREFULLY TO SEE IF IT WILL MAKE A POSITIVE LONG TERM CONTRIBUTION TO PROFITS. , -­ THE IMPORTANCE OF THIS OBSERVATION CAN BE PUT INTO SOME - PERSPECT IVE BY CONS IDER ING THAT I F INDUSTRY LOAN LOSSES WOULD DECL INE FROM THE I R 1982 LEVEL TO RUN HI STOR ICAL LEVELS, ~ONGER BANK ROAs WOULD IMPROVE BY 5 TO 9 PERCENT. SUCH AN IMPROVEMENT WOULD BE WELCOME I N THE FACE OF ANT IC:I PATED PRE,SSURES ON .!::Nu4,IJ... - - INCOME. IN ANY EVENT, THE CONTROL OF RI INS A -OP-ERATI ~G ~REMA CRITICAL ELEMENT IN THE INDUSTRY'S STRATEGIC PLANS. WHETHER BY CONTROLLING RISKS, BOOSTING FEE INCOME, OR REDUCING COSTS, BANKERS DO APPEAR TO HAVE GOOD OPPORTUNITIES TO HELP RESTORE PROFITABI L ITY SHOULD INTEREST MARGINS ERODE FURTHER. MOREOVER, SOME GENERAL AND SPEC I F I C STRATEG IES ARE WORTH F • CONS IDER ING, I N MY JUDGMENT. FIRST, I N GENERAL, THE RESULTS DISCUSSED HERE TODAY INDICATE THAT BANKING CAN ILL AFFORD TO pc us EXPAND INTO .N. EW ACTIVITIES IF EXPANSION MEANS I . G NORING 7?{e TRAD I T I ONAL SOURCES OF PROF ITS. As WE HAVE SEEN, THE INDUSTRY IS VULNERABLE TO EVEN MODEST REDUCT IONS OF INTEREST MARGINS. ALso, - INCREASED ATTENTION MUST BE GIVEN TO ASSET QUALITY IN BOTH T_R_AD_ I T_I_O_NA_L_ L_E_ND_ I N_G_ FU_ N_C_T_IONS AND NEW ACT I VI T S . .. T I.E MORE SPECIFICALLY, THERE ARE STRATEGIES THAT APPEAR APPROPRIATE FOR THE VARIOUS SIZES OF BANKS. FOR EXAMPLE, LARGE ... - BANKS MIGHT WANT TO LOOK FIRST TO FEE AND SERV ICE RE VE NUE TO OFFSET INCOME LOST BECAUSE OF NARROW ING MARG INS. THE I R CURRENT i OVERHEAD TO ASSETS RATIO IS RELATIVELY LOW, AND REDUCING OVERHEAD - 10 ­ MAY NOT BE A PRACTICAL RESPONSE TO ANY SUBSTANTIAL DECLINE IN REVENUES. MEDIUM SIZED BANKS ALSO MAY FIND THAT INCREAS OME IS A PRACTICAL WAY TO REPLACE LOST REVENUES, BUT REDUCING OVERHEAD COSTS MAY OFFER THEM THE GREATESt POTENTIAL GAINS. THESE BANKS HAVE THE HIGHEST RATIOS OF OVERHEAD TO ASSETS WHICH, ON THE SURFACE, SUGGESTS AN AREA FOR POTENTIAL SAVINGS. SMALL BANKS APPEAR TO HAVE THE BIGGEST ADJUSTMENTS TO MAKE I F THEY ARE TO IMPROVE EARN INGS THROUGH FEE INCOME OR REDUCED - - OVERHEAD COSTS. OVERHEAD WOULD NEED TO BE REDUCED BY ABOUT ONE FIFTH, OR FEE INCOME WOULD NEED TO DOUBLE, TO RECOVER INCOME LOST FROM A 10 PERCENT DECL INE IN MARG INS. HOWEVER, SMALL BANKS ALSO HAVE BEEN MOST SUCCESSFUL AT MA INTA I NI NG THE I R MARG INS, AND SO FAR HAVE CLEARLY PERFORMED WELL THROUGH THE DEREGULATED ENVIRONMENT. IN CONCLUS ION, I AM CONF IDENT THAT THE ....BANK ING INDUSTRY'S • PROF IT OUTLOOK I S ~- AND WITH I N ITS CONTROL. THE CHI ( "EN LITTLE SYNDROME HAS NO PLACE IN BANKING. THE PROFITABILITY SKY IS NOT FALL ING, THOUGH DEREGULATION MAY INDEED PLACE PRESSURE ON INTEREST MARGINS AND INCREASE THE NEED FOR ALTERNATIVE SOURCES OF REVENUE. FURTHERMORE, THE NEED TO MON ITOR LOAN QUAL ITY WILL 4"~"" BECOMEI7MORE IMPORTANT BECAUSE OF THE IN.QUSTRY' S CURRENT ASSET PROBLEMS. ALso, CARE WILL BE NEEDED AS THE INDUSTRY FACES INCREASED POTENTIAL RISK FROM EXPANSION INTO NEW ACTIVITIES. EVEN SO, THE INDUSTRY HAS WEATHERED DEREGULATION REMARKABLY WELL AND PROFITS AMONG ALL SIZE GROUPS OF BANKS REMAIN STRONG~_ A / }v;ve (!/eAA. D ,PT-, ....,,;:$ R~4>,/AJH ~" rlf&ttt. ~ MOREOVER, LOOKING AHEAD, BAN~AN CHOOS~~TRATEG ~ TO HELP THEM A,pT7 '-e., A" ,4 t - 11 ­ ADJUST AND REMAIN PROFITABLE THROUGH THE REMAINDER OF THIS DECADE.

J. Roger Guffey (1983, October 24). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19831025_j_roger_guffey

@misc{wtfs_regional_speeche_19831025_j_roger_guffey,
  author = {J. Roger Guffey},
  title = {Regional President Speech},
  year = {1983},
  month = {Oct},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19831025_j_roger_guffey},
  note = {Retrieved via When the Fed Speaks corpus}
}