Regional President Speech

A. WARM WORDS OF WELCOME/GRACIOUS INTRODUCTION B. THOUGH PLEASED TO RESPOND TO QUESTIONS RE ECONOMIC CONDITIONS/MONETARY POLICY 1. Focus COMMENTS ON CHANGING STRUCTURE OF FINANCIAL SERVICES INDUSTRY 2. CHANGES LITERALLY .CASCADING DAY BY DAY C. U. S. TRUST DECISION 1. FLORIDA TRUST OPERATION INTO CONSUMER BANK 2. OPERATE CONSUMi:R BANK IN COMPLIANCE WITH CURRENT DEFINITION A, IN OTHER WORDS1 WILL NOT BE A COMMERCIAL BANK AS CURRENTLY DEFINED B, THUS NOT SUBJECT TO RESTRICTIONS OF McFADDEN/DOUGLAS 6o 3. lANDMAR K DECISION c) C:fvWL - ,,.£~-M~. __ A, Y'BANKS!'f OFFICES , D ~----r-r E~~ ~ . ·F~'(:_ Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis r . 4/13/64 q·~ ../ / SILAS KEEHN REMARKS EASTERN ILLINOIS UNIVERSITY CHARLESTON, ILLINOIS APRIL 19, 1984 I INTRODUCTION I A, THE LONG AWAITED uREVOLUTIONu IN FINANCIAL SERVICES SEEMS TO BE IN FULL SWING NOW, AND I'M PLEASED TO REPORT, THAT AT LEAST FROM MY PERSPECTIVE, IT LOOKS AS THOUGH BANKS WILL SURVIVE 1, WE ARE IN THE MIDST OF THE MOST EXCITING TRANSITION THE BANKING INDUSTRY HAS EXPERIENCED A, A FEW YEARS AGO, NONDEPOSIT-BASED FIRMS SUCH AS SEARS, PRUDENTIAL AND MERRILL LYNCH BEGAN TO POSE A VERY REAL THREAT TO THE BANKING INDUSTRY B, IT LOOKED AS IF THEY HAD THE BANKS ON THE RUN AND THAT THE BANKS' ONLY HOPE LIE IN THEIR ABILITY TO BECOME MORE AGGRESSIVE AND MORE INNOVATIVE 2, IN 1983 BANKS MADE IMPORTANT GAINS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 2 A, THEY BEGAN TO COMPETE EFFECTIVELY WITH THEIR NONBANK, NONREGULATED CHALLENGERS B, REGULATORS NOT ONLY RECOGNIZED THE NEW FINANCIAL STRUCTURE THAT HAD EVOLVED, BUT THEY ALSO BEGAN TO REACT POSITIVELY TOWARD IT 3, FINALLY, THOUGH THE EMPHASIS OF CURRENT DEVELOPMENTS SEEMS TO BE ON LARGER INSTITUTIONS A, I'D LIKE TO MAKE THE POINT THAT THE OPPORTUNITIES IN THIS NEW FINANCIAL ENVIRONMENT ARE PARTICULARLY EXCITING FOR SMALL AND MEDIUM SIZED BANKS II, LET ME BEGIN BY TALKING ABOUT THE ENORMOUS INROADS MADE BY NONREGULATED INSTITUTIONS A, ONE OF THE AREAS OF SPECIAL EMPHASIS OF OUR ECONOMIC RESEARCH ACTIVITIES AT THE BANK IS THE STUDY OF BANK STRUCTURE AND COMPETITION 1, Two MEMBERS OF MY RESEARCH STAFF HAVE RECENTLY UPDATED A STUDY THAT EXAMINES IN GREAT DETAIL THE COMPETITIVE INROADS OF NONBANKING-BASED COMPANIES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 3 B, THEY EXAMINED 32 COMPANIES, INCLUDING: 1, 15 INDUSTRIAL, COMMUNICATIONS, AND TRANSPORTATION BASED FIRMS SUCH AS GULF & WESTERN, NATIONAL STEEL, GENERAL ELECTRIC AND GENERAL MOTORS 2, 10 DIVERSIFIED FINANCIAL CONCERNS SUCH AS AMERICAN EXPRESS, E. F, HUTTON AND MERRILL LYNCH 3, FOUR INSURANCE-BASED FIRMS INCLUDING, OF COURSE, AETNA AND PRUDENTIAL 4. AND THREE RETAIL COMPANIES -- MONTGOMERY WARD, J, C. PENNEY AND SEARS C. LET ME SUMMARIZE A FEW OF THE KEY FINDINGS WHICH WILL CERTAINLY COME AS NO SURPRISE TO THIS GROUP 1, EARNINGS A, NONBANKING-BASED FIRMS HAVE BEEN INCREASING THEIR FINANCIAL SERVICES EARNINGS (I) IN 1972 THERE WERE 10 FIRMS WHOSE EARNINGS FROM FINANCIAL SERVICES WERE IMPRESSIVE, THEIR COMBINED EARNINGS TOTALED OVER $660 MILLION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 4 (II) BY 1983 THE FINANCIAL SERVICE EARNINGS OF THESE FIRMS HAD REACHED ALMOST $3 BILLION, FOUR TIMES THEIR 1972 TOTAL AND ABOUT THE SAME AS THE TOTAL WORLDWIDE EARNINGS OF THE SIX LARGEST BANK HOLDING COMPANIES RANKED BY EARNINGS, AND THIS GROUP OF 10 EXCLUDES AMERICAN EXPRESS, PRUDENTIAL AND MERRILL LYNCH (WHOSE COMBINED 1983 EARNINGS WERE ALSO ABOUT $3 BILLION) B, OF COURSE, IF THE FINANCIAL SERVICE ACTIVITIES OF MANUFACTURERS WERE SOLELY INVOLVED IN CAPTIVE LENDING TO FINANCE THE SALE OF GOODS THAT THEY PRODUCE, THEN ONE MIGHT SUSPECT THAT THEY DO NOT COMPETE VIGOROUSLY WITH COMMERCIAL BANKS, BUT THE FINANCE SUBSIDIARIES OF SEVERAL COMPANIES SUCH AS GE, BORG-WARNER AND WESTINGHOUSE, DEVOTE 9Q-100% OF THE CREDIT THEY ISSUE TO FINANCING THE PURCHASE OF GOODS UNRELATED TO THEIR Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/S4 PAGE 5 PARENTS' PRODUCTS -- THEY HAVE BECOME HIGHLY EFFECTIVE AND DIRECT COMPETITORS OF COMMERCIAL BANKS c. PERHAPS THE BEST WAY TO STUDY THE IMPACT OF / 4 \ NONBANK ENTRY IN THE FINANCIAL SERVICES INDUSTRY IS NOT BY EXAMINING THEIR EARNINGS BUT BY LOOKING AT WHAT HAS HAPPENED IN INDIVIDUAL / PRODUCT LINES ~CONSUMER LENDING A, IN CONSUMER INSTALLMENT LENDING1 NONDEPOSITORY INSTITUTIONS SEEM TO DOMINATE (I) OF THE TOP 10 CONSUMER LENDERS1 SEVEN ARE NONBANK FIRMS (11) FURTHERMORE1 THESE SEVEN FIRMS HELD OVER 20~ OF ALL CONSUMER INSTALLMENT CREDIT OUTSTANDING AT YEAR-END 1982 (nMICH 1-S- 1 ttERE ARE OVER 141000 COMMErteIAL LA141(31 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 6 N5T TO MENTIOti-l"HE NUMBiR OF CREDIT UNIONS, MUTUAL SA\'INGS BANKS ANB S&Ls) B, AUTO LENDING (I) A DECREASE IN DOMESTIC CAR SALES1 LIBERALIZED BANKRUPTCY LAWS1 SOARING COSTS OF FUNDS1 AND INTEREST RATE VOLATILITY INDUCED THE CAPTIVE FINANCE AFFILIATES OF THE AUTO MANUFACTURERS TO OFFER LOW COST CREDIT LARGELY AS A DEFENSIVE MEASURE TO SUPPORT THEIR DEALER NETWORKS, COMMERCIAL BANKS1 TRADITIONALLY THE DOMINANT LENDERS1 BEGAN TO AVOID AUTO LENDING OR WERE BECOMING MUCH MORE SELECTIVE IN WHO THEY LENT TO (II) OVER HE 1978-1982 PERIOD1 THE TOTAL OF it~~SIONS FELL BY ALMOST Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/34 PAGE 7 $14 BILLION, WHILE THE VOLUME OF NEW IVE DECLINES OCCURRED IONS, THUS ALLOWING SE THEIR SHARE NET NEW LENDING (III) COMMERCIAL BANKS AS A GROUP, HOWEVER, HAD THE LARGEST MARKET SHARE OF AUTO LOANS OUTSTANDING WITH 45% AT YEAR-END 1982, BUT THIS SHARE HAD FALLEN BY 15 PERCENTAGE POINTS FROM ITS PEAK REACHED ONLY FOUR YEARS EARLIER (IV) OVER THIS SAME 1978-1982 PERIOD, THE SHARE OF AUTO LOANS HELD BY THE CAPTIVE FINANCE COMPANIES OF GENERAL MOTORS, FORD AND CHRYSLER HAD INCREASED BY 13 PERCENTAGE POINTS . GMAC ALONE HELD OVER $33 BILLION OF AUTO LOANS, MORE THAN ONE-FOURTH OF ALL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 8 AUTO LOANS, DOUBLE ITS SHARE FOUR YEARS EARLIER IN CONTRAST, BANK OF AMERICA, THE LARGEST AUTO LENDER AMONG THE COMMERCIAL BANKS, HELD ONE-SIXTEENTH OF THE AUTO LOANS OF GM IN 1962 (V) BY 1983, HOWEVER, THE PICTURE IN AUTO LENDING WAS BEGINNING TO CHANGE: IN THE FIRST THREE QUARTERS OF 1983, COMMERCIAL BANKS ISSUED 65% OF THE NET NEW AUTO LOANS, IT IS PROBABLY NOT COINCIDENTAL THAT IN 1983 THERE WAS ALSO A RELATIVELY STABLE INTEREST RATE ENVIRONMENT C, EVEN THOUGH AUTO LENDING ACCOUNTS FOR NEARLY 407o OF TOTAL CONSUMER INSTALLMENT LENDING, THE SAME BASIC MARKET SHARE TRENDS SHOWN IN AUTO LENDING ARE APPARENT FOR TOTAL CONSUMER INSTALLMENT LENDING Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 9 ~~ D, IN THE CREDIT~ BUSINESS THE COMMERCIAL BANKING INDUSTRY HAS DONE QUITE WELL FOR ITSELF (I) A DECADE AGO, SEARS HAD A COMMANDING LEAD OVER BOTH BANK CARDS (11) Bur BY 1981, VISA AND MASTERCARD HAD TAKEN OVER THE LEAD IN NUMBER OF ACTIVE ACCOUNTS, CUSTOMER CHARGE VOLUME, AND TOTAL CUSTOMER ACCOUNT BALANCES HOWEVER, THE 3, COMMERCIAL LENDING A, MY RESEARCH STAFF ALSO FOUND, AS ONE WOULD HAVE EXPECTED, THAT COMMERCIAL BANKS ARE ESPECIALLY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 10 STRONG IN SHORT-TERM COMMERCIAL AND INDUSTRIAL (C&l) LENDING, IN FACT, OF THE TOP 10 C&l LENDERS, ONLY ONE -- GENERAL MOTORS -- IS NOT A BHC B, A DIFFERENT PICTURE EMERGES IN COMMERCIAL MORTGAGE LENDING WHERE THE FOUR INSURANCE MO!~ COMPANIES IN THE SAMPLE MAKE MORE COMMERCIAL MORTGAGE LOANS THAN THE 15 LARGEST BHCS C, ALSO, COMMERCIAL BANKS ARE OVERSHADOWED BY INDUSTRIAL COMPANIES IN LEASE FINANCING (I) 15 OF THE FIRMS SAMPLED HAD GREATER COMBINED LEASE RECEIVABLES THAN THE 15 LARGEST BHCS OR, FOR THAT MATTER, THE DOMESTIC OFFICES OF ALL U.S. BANKS D, ALTHOUGH NONBANKING-BASED FIRMS SEEM TO DOMINATE IN COMMERCIAL MORTGAGE LENDING AND LEASE FINANCING, COMMERCIAL BANKS ARE STILL THE DOMINANT BUSINESS LENDERS IN THE COUNTRY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 11 (I) AT YEAR-END 1982, THE DOMESTIC OFFICES OF ALL INSURED COMMERCIAL BANKS HELD OVER FIVE TIMES THE BUSINESS FINANCE RECEIVABLES OF THE 32 COMPANIES SAMPLED 4, DEPOSITS -- BANKS ARE EXPERIENCING COMPETITION FROM NONBANKING-BASED FIRMS IN DEPOSIT-TAKING AS WELL A, THE PAYMENT OF INTEREST ON CHECKABLE DEPOSITS IS OF RATHER RECENT VINTAGE, IT WAS NOT UNTIL MARCH 1£80 THAT CONGRESS FINALLY DECIDED THAT RESTRICTIONS ON THE PAYMENT OF INTEREST ON TIME AND SAVINGS DEPOSITS SHOULD BE PHASED OUT OVER A SIX-YEAR PERIOD, NOW ACCOUNTS WERE NOT PERMITTED UNTIL JANUARY 1981, ON A NATIONWIDE BASIS, INTEREST-BEARING CHECKING ACCOUNTS NOW TOTAL ABOUT $133 BILLION -- IMPRESSIVE RESPONSE, B, WHEN INTEREST RATES SOARED IN THE LATE 1970s, DEPOSITS FLED FROM BANKS AND OTHER DEPOSITORY INSTITUTIONS INTO THE HIGHER YIELDING MONEY MARKET FUNDS, BY DECEMBER 19Cl, MONEY FUNDS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 12 REACHED THEIR PEAK WITH OVER $230 BILLION IN ASSETS, MERRILL LYNCH ALONE MANAGED OVER $50 BILLION C, TEN OF THE 32 COMPANIES IN THE CHICAGO FED'S - ~ SAMPLE HAVE SPONSORED ONE OR MORE MONEY MARKET MUTUAL FUNDS AND THEY ACCOUNT FOR ABOUT 45% OF ALL Mt1F ASSETS D, !RONICALLY1 AT ITS INCEPTION1 REG Q WAS INTENDED TO PREVENT EXCESSIVE COMPETITION FOR DEPOSITS E, THE MMFs WOULD STILL BE GROWING WERE IT NOT FOR THE GARN-ST, GERMAIN ACT OF 19821 WHICH LET THE BANKS BACK INTO THE DEPOSIT-TAKING BUSINESS ON AN EQUAL FOOTING -- AND WITH GREAT SUCCESS1 MMDAs NOW TOTAL ABOUT $3~ BILLION 5, THE GEOGRAPHIC MARKET FOR MANY FINANCIAL SERVICES IS ~ <- NATIONAL IN SCOPE (AND MANY PRODUCTS ARE SOLD IN AN INTERNATIONAL MARKET) A, ONE THING THAT HAD ACTED TO ENLARGE THE GEOGRAPHIC SCOPE OF THE MARKET WAS THE DEPOSIT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 13 BROKERING ACTIVITIES OF MERRILL LYNCH., SHEARSON/AMERICAN EXPRESS., SEARS/DEAN WITTER., E, F, HUTTON AND PRUDENTIAL/BACHE., ALL OF WHOM HAVE ACTED AS BROKERS FOR RETAIL DEPOSITS, TOGETHER THESE FIRMS OPERATE OVER 1.,700 OFFICES THROUGHOUT THE UNITED STATES, BECAUSE OF THESE FIRMS., AND OTHERS LIKE THEM., NUMEROUS SMALL BANKS AND S&LS HAVE BEEN ABLE TO EXTEND THEIR MARKETS FOR INSURED RETAIL DEPOSITS BEYOND THEIR RESPECTIVE LOCAL AND STATE BOUNDARIES, CONCERN WITH THE SAFETY AND SOUNDNESS IMPLICATIONS OF UNLIMITED BROKERING ACTIVITY HAS RESULTED IN THE FDIC AND FSLIC TAKING ACTIONS TO CURTAIL DEPOSIT BROKERING, BUT I AM CONFIDENT THAT OTHER DELIVERY SYSTEMS WILL BE EFFECTUATED., ALLOWING THIS BROADER GEOGRAPHIC OUTREACH TO CONTINUE IN A MANNER THAT IS NOT DETRIMENTAL TO THE PUBLIC INTEREST Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 14 B, NOT ONLY ARE DEPOSITORY INSTITUTIONS EXTENDING THEIR REACH THROUGH BROKERS, BUT IN SPITE OF THE McFADDEN ACT AND THE DOUGLAS AMENDMENT, THEY ARE ALSO MAINTAINING A MULTITUDE OF OFFICES THROUGHOUT THE UNITED STATES (I) THIS GEOGRAPHIC EXPANSION IS LARGELY THE RESULT OF THE ACQUISITION AND FORMATION OF NONBANK SUBSIDIARIES (II) THERE ARE OVER 5000 OFFICES OF SUCH SUBSIDIARIES IN THE U.S. ~·,~~ c. TECHNOLOGICAL DEVELOPMENTS ARE .AttOWIMG NATIONWIDE NETWORKS OF AUTOMATED TELLER MACHINES rOJQDM, THUS GIVING CUSTOMERS ACCESS TO THEIR FUNDS FROM ANYWHERE IN THE COUNTRY D, MANY STATES HAVE PASSED INTERSTATE BANKING - ~~ ~ LAWS OF THEIR OWN --- E, MERGERS AND ACQUISITIONS OF FAILING INSTITUTIONS ARE BRINGING INTERSTATE BANKING CLOSER TO BECOMING A REALITY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 15 ( I ) A FEW MONTHS (AGO, CITICORP R CEIVED ACQ~IRE FIRS INGS Ill, IN SPITE OF THE ENCROACHMENTS OF THE NONBANK COMPETITORS TtiAT JWi.LfJWi B!IED, BANKS ARE NOT ALLOWING THEIR 1--:ffA'✓I! MARKETS TO BE OVERRUN BY NONBANK COMPETITORS A, 1983 WAS A YEAR IN WHICH THE ENTIRE BAf~KING INDUSTRY BEGAN TO REACT VIGOROUSLY TO THE COMPETITIVE THREATS OF NONBANKS, AND THEY SEEM TO BE CARRYING THIS COMPETITIVE STANCE INTO 1984 l, THE REACTION OF THE BANKS DID NOT TAKE THE FORM OF RHETORIC AND LOBBYING FOR INCREASED PROTECTIONISM; (ALTHOUGH, I MIGHT ADD, A GOOD DEAL OF SUCH COUNTERPRODUCTIVE EFFORTS ARE STILL GOING ON)p RATHER, BANKS OF ALL SIZES AND FROM A WIDE VARIETY OF GEOGRAPHIC REGIONS, BEGAN TO OFFER NEW SERVICES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 16 AND TO FIND OTHER WAYS TO COMPETE MORE EFFECTIVELY IN A NEW AND EVER-CHANGING ENVIRONMENT 2, FOR EXAMPLE: A, BANKS ARE WORKING TOWARD ESTABLISHING BROADER PRESENCE BY GIVING HOLDERS OF ITS MASTERCARD AND VISA CARDS THE ABILITY TO OBTAIN CASH AT ATMs IN SUPERMARKETS OR OTHER RETAIL OUTLETS B, IN 1983 DOZENS OF REGIONAL EFT NETWORKS, OWNED BY OR LICENSED TO THOUSANDS OF BANKS, GAINED INCREASED MARKET PRESENCE, AND A NATIONWIDE LINKAGE OF THESE NETWORKS BECAME A REALITY C, AND WHILE MERRILL LYNCH, E, F, HUTTON, DREYFUS AND FIDELITY -- NAMES TYPICALLY ASSOCIATED WITH THE SECURITIES BUSINESS -- WERE ORGANIZING OR ACQUIRING BANKS, BANKS AND S&LS WERE BEGINNING ~! ~ TO O~~AGE SERVICES IN THEIR OFFICES AND/OR BY PHONE D, AND WHILE THE U,S, CONGRESS DEBATED MORATORIUMS ON NONBANKS PARTICIPATING IN BANKING AND Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 17 VICE VERSA AND HELD HEARINGS ON WHETHER INTERSTATE BANKING SHOULD BE ALLOWED, MANY ~~ STATES -ACTEP -ON LEGISLATION TO PERMIT INTERSTATE ;-._I------- BANKING IN DIFFERENT WAYS, AND SUCH LEGISLATION -------- _, .. _, __ J COULD NOT HAVE COME ABOUT IF BANKS OF ALL SIZES DID NOT AGREE THEIR PROSPECTS WERE IMPROVED BY -._GREATER GEOGRAPHIC SCOPE B, CLEARLY, COMMERCIAL BANKING IS NO LONGER A DISTINCT LINE OF COMMERCE AND COMPETITION IS NOT RESTRICTED TO A LOCAL COMMUNITY LEVEL 1, BANKS COMPETE WITH MANUFACTURERS, RETAILERS AND DIVERSIFIED FINANCIAL CONGLOMERATES cJrv e,_ ~ " 2, FURTHERMORE, THEY COMPETE NAllONALLf AND OFTENTI~ ~ - ' - ~~ INTERNATIONAtLY C, BUT IS TODAY'S REGULATORY ENVIRONMENT APPROPRIATE FOR THIS EVOLVING FINANCIAL STRUCTURE? 1, IT GOES WITHOUT SAYING THAT REGULATORY CHANGES HAVE NOT ALWAYS KEPT PACE WITH THE CHANGES IN THE FINANCIAL SYSTEM Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 18 2. Bur THE BUSH COMMISSION {A TASK FORCE HEADED BY VICE PRESIDENT BUSH AND HAVING AS ITS MEMBERS THE HEADS OF ALL THE IMPORTANT REGULATORY AGENCIES DEALING WITH FINANCIAL INSTITUTIONS) HAS BEGUN TO ADDRESS THE PROBLEMS OF THE REGULATORY STRUCTURE IV. BUSH COMMISSION A. RECOMMENDATIONS: 1. A MOVE TOWARD nFUNCTIONAL" REGULATION: REGULATORY AGENCIES SUPERVISE INSTITUTIONS ACCORDING TO THEIR PRINCIPAL ACTIVITY RATHER THAN THEIR CHARTER A, THE FHLBB WOULD SUPERVISE THOSE INSTITUTIONS CLASSIFIED AS THRIFTS B, A NEW REGULATOR, THE FEDERAL BANKING AGENCY (fBA) WOULD SUPPLANT THE OFFICE OF THE COMPTROLLER OF THE CURRENCY AND BE RESPONSIBLE FOR ALL NATIONAL BANKS AND THEIR HOLDING COMPANIES (EXCEPT FOR 35 NATIONAL BANKING HOLDING COMPANIES) Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 19 C, THE FED WOULD SUPERVISE ALL STATE BANKS AND THEIR PARENT HOLDING COMPANIES AS WELL AS THE 50 LARGEST U.S. BANK HOLDING COMPANIES 2, INCREASED STATE SUPERVISORY POWERS OVER STATE CHARTERED INSTITUTIONS, AFTER BEING CERTIFIED BY THE FEDERAL GOVERNMENT, STATE BANKING AGENCIES WOULD SUPERVISE STATE-CHARTERED BANKS B, EFFECTS ON BANKS 1, AL BANKING 2. &#45;&#45;&#45; E OBTAINED FOR STATE A, INDIVIDUAL STATE REGULATORY AGENCIES ARE MORE ATTUNED TO THE NEEDS AND PROBLEMS OF THE FINANCIAL INSTITUTIONS IN THEIR OWN STATES (I) As I ALREADY MENTIONED, MANY STATES HAVE ENACTED INTERSTATE BANK LEGISLATION OF ONE KIND OR ANOTHER Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 '\ PAGE 20 ( I I ) l M{GHT REPEAT THAT SUCH STATE ACTIONS GENE~WERE ACCOMPANIED BY AGREE ---,. BETWEEN BOTH,~ARGE AND AGREEMENTS THAi't.oULD AVE BEEN FORGED "\,,., ONLY IF BOTH A ED T~T THE BEST WAY ,,, ,_ NEW COMPETITIVE RONMENT WAS THROUGH OPEN RATHER THAN RESTRAINED COMPETITION B, S01 THc NEW REGULATORY SYSTEM IS LIKELY TO BE MORE RESPONSIVE TO THE NEEDS OF SMALL AND MEDIUM SIZED BANKS SMALL AND MEDIUM SIZED BANKS A, IT IS IMPORTANT TO REMEMBER THAT SMALLER INSTITUTIONS HAVE SOME DECIDED ADVANTAGES 1, BY AND LARGE1 THEIR PROFIT RECORDS HAVE BEEN EXCELLENT, THOUGH THIS IS GENERALLY TRUE FOR ALL BANKS1 WHICH MAY EXPLAIN WHY SO MANY NONBANKS ARE ENTERING FINANCIAL SERVICES1 IT IS PARTICULARLY TRUE FOR SMALLER INSTITUTIONS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 21 2, WHEN I LOOK AT THE FREQUENCY DISTRIBUTION FOR EARNINGS OF EACH SIZE CLASS, I AM CONTINUALLY AMAZED AT HOW VERY PROFITABLE THE WELL-MANAGED SMALLER BANKS ARE, RETURNS ON ASSETS OF 160 TO 180 BASIS POINTS ARE NOT UNUSUAL FOR MANY INSTITUTIONS IN THIS GROUP 3, BANKS IN ILLINOIS CONFIRM THIS PATTERN; FOR HIGHER PERFORMANCE BANKS IN ILLINOIS, THE ROAs ARE INVERSELY RELATED TO ASSET SIZE A, THERE IS A CLEAR PATTERN OF PERFORMANCE BY SIZE CATEGORIES FOR ILLINOIS BANKS: BANKS IN THE SMALLER CATEGORIES HAVE PERFORMANCE RECORDS THAT FAR EXCEED THOSE IN THE LARGER CATEGORIES, IN 1982, 55% OF THE BANKS IN ILLINOIS THAT HAD LESS THAN $25 MILLION IN ASSETS HAD ROAs GREATER THAN 1% WHILE NO BANKS WITH MORE THAN $500 MILLION IN ASSETS FARED AS WELL B, Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 22 ~ Oo-.(~ AND M~,· BAN Ks4., LARGE AND }f:Dtl=t-.1 HAVE NOT BEEN HURT BY THE DEREGULATION THAT HAS ALREADY TAKEN PLACE., NOR WILL THEY NECESSARILY BE AFFECTED ADVERSELY BY FUTURE DEREGULATION B, ANOTHER ADVANTAGE., THE RELATIVE CAPITAL POSITIONS OF SMALL AND MEDIUM SIZED BANKS ARE EXCELLENT AND SIGNIFICANTLY BETTER THAN IS THE CASE WITH LARGER INSTITUTIONS 1, AND CAPITAL WILL BE AN INCREASINGLY IMPORTANT ISSUE FOR A NUMBER OF REASONS., INCLUDING THE INCREASED RISKS THAT WE ARE DEALING WITH AS A RESULT OF DEREGULATION 2, CAPITAL MAY VERY WELL BE THE MAJOR FACTOR THAT WILL LIMIT THE GROWTH OF THE VERY LARGE INSTITUTIONS C. ~,· - 'r ~ ~n.~t; -- $). TECHNOLOGY COSTS ARE NO LONGER RESTRICTIVE 1, COMPUTER COSTS HAVE DRAMATICALLY DECLINED, INSTALLATIONS THAT USED TO RUN INTO THE MANY MILLIONS OF DOLLARS ARE NOW AVAILABLE AT FAR REDUCED COSTS; DESK TOP COMPUTERS COST ONLY A Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 23 FEW THOUSAND DOLLARS AND CAN HANDLE THE REQUIREMENTS OF MANY SMALL BANKS 2, MOREOVER, LARGE SYSTEMS ARE AVAILABLE ON A SHARED BASIS THROUGH A VARIETY OF DATA CENTERS AND/OR COMPUTER SERVICE ORGANIZATIONS, SHARED REGIONAL NETWORKS OF AUTOMATED TELLER MACHINES ARE INCREASINGLY AVAILABLE TO FACILITATE THE PROVISION OF THIS I j) POPULAR ~ONSUMER- SERV!CE • ,-:--~ ~~ .. AJ@ ~(/~~~ µ../ ',/ 111-~ 5t Bur MOST SIGNIFICANTLY AND A CRITICALLY IMPORTANT CONSIDERATION, SMALL AND MEDIUM SIZED BANKS KNOW THEIR MARKETS AND THEIR CUSTOMERS 1, THEY HAVE CLOSE RELATIONSHIPS WITH THEIR CUSTOMERS THAT ARE OF GREAT VALUE 2, KNOWING THE LOCAL SITUATION AS WELL AS THEY DO, THEY CAN RESPOND QUICKLY AND EFFECTIVELY 3, SAY WHAT YOU WILL, IN MY VIEW, THERE IS NO SUBSTITUTE FOR THE VALUE OF THE RELATIONSHIP WHICH CAN DEVELOP BETWEEN THE LOCAL~NK AND ITS CUSTOMER IT'S AN ESSENTIAL INGREDIENT FOR SUCCESS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 24 VI. CONCLUSION A, IN THE LAST FIVE YEARS OR S01 THE FINANCIAL SERVICES INDUSTRY HAS EXPERIENCED MANY CHANGES l, NONBANK INSTITUTIONS -- MANUFACTURERS1 RETAILERS1 INSURERS AND DIVERSIFIED FINANCIAL FIRMS -- HAVE BECOME FORMIDABLE COMPETITORS 2, THE INDUSTRY HAS BEEN UNDERGOING DEREGULATION 3, BANKS1 LARGE AND SMALL1 HAVE BECOME MORE AGGRESSIVE AND MORE INNOVATIVE 4, AND1 IF ADOPTED1 THE BUSH COMMISSION RECOMMENDATIONS SHOULD REDUCE SOME OF THE REGULATORY BURDEN NOW BORNE BY DEPOSITORY-BASED INSTITUTIONS RELATIVE TO THE LESS REGULATED COMPETITION, AND IF IMPLEMENTED PROPERLY1 THE BUSH COMMISSION RECOMMENDATIONS SHOULD CREATE A REGULATORY ENVIRONMENT ATTUNED TO THE NEEDS OF SMALL AND MEDIUM SIZED BANKS B. S01 IT IS A VERY EXCITING TIME FOR THOSE IN THE FINANCIAL SERVICES INDUSTRY, AND FOR THOSE OF YOU IN OMICRON DELTA Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/13/84 PAGE 25 EPSILON WHO ARE CONTEMPLATING A CAREER IN FINANCIAL SERVICES, OR IN BANKING IN PARTICULAR, I CANNOT THINK OF A BETTER TIME TO BE GETTING ON BOARD, THIS IS A TIME OF TRANSITION, A TIME BETWEEN CLEARLY DEFINED PERIODS, A TIME WHEN YOU CAN EXERT AN IMPORTANT INFLUENCE ON WHAT THE NEXT ERA WILL BE, A TIME WHEN YOU CAN LEVERAGE THE POWER OF YOUR MIND AND YOUR EDUCATIONAL ACHIEVEMENTS IN A WAY THAT WAS NOT POSSIBLE A DECADE AGO, WHAT A FANTASTIC TIME TO BE LEAVING SCHOOL AND ENTERING THE BUSINESS WORLD!! ~ I Cvt.A/,.~ Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1984, April 18). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19840419_silas_keehn

@misc{wtfs_regional_speeche_19840419_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1984},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19840419_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}