Regional President Speech

SK DRAFT (3) ,.., l? m I~ 30 SILAS KEEHN REMARKS MICHIGAN BANKERS ASSOCIATION MACKINAC ISLAND1 MICHIGAN JUNE 22, 1984 I, INTRODUCTION A, GIVEN THE EVENTS OF THE PAST FEW MONTHS1 INDEED1 THE PAST FEW WEEKS1 WE SEEM TO BE IN ONE OF THOSE PERIODS WHEN THE BANKING INDUSTRY IS FACED BY PARTICULARLY DIFFICULT CIRCUMSTANCES 1, THE PACE OF CHANGE HAS SIGNIFICANTLY ACCELERATED A, TRITE -- BUT UNIQUELY TRUE 2. As A CONSEQUENCE1 WE ARE NOW DEALING WITH SOME VERY SIGNIFICANT PRESSURES AND PROBLEMS 3. FEDERAL RESERVE SYSTEM1 AS THE NATION'S CENTRAL BANK AND A REGULATOR OF MANY OF OUR FINANCIAL INSTITUTIONS1 \}-I~ S::,·!:;;J,·......J- ltkiQ. F~setm::rm I I asues tdffi CHALLENGES AS ~p~~ ,:S.rt..uv.3. WE TRY AND DEAL WITH THESE l~ -;,.:;::,.;c_t;, Jes Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 6/15/84 PAGE 2 B, JUST TO REFRESH YOUR MEMORY1 WOULD LIKE TO ENUMERATE SOME OF THE MORE IMPORTANT DEVELOPMENTS IN THE FINANCIAL SERVICES INDUSTRY SINCE LAST YEAR'S MBA MEETING HERE l, BANKAMERICA ACQUIRED SEAFIRST1 A MAJOR INTERSTATE DEVELOPMENT 2, CITICORP ACQUIRED FIRST FEDERAL IN CHICAGO AND NEW BISCAYNE FEDERAL IN MIAMI -- ANOTHER IMPORTANT INTERSTATE DEVELOPMENT 3, THE COMPTROLLER OF THE CURRENCY HA~PPROVED 'lj cs;'~ f-,i\/~'rA{ ~ APPLICATIONS FOR BANKS FILED BY DIMENSION, 1J+!tit 6\~r ~'Y:'i ~ ~C0M ........ _P . .- + ~ R ._ ... Q ........ L - .. ~ L •.. ,, £ ... it_J~&lsl.N6E9 iflfE 1 f18ffM'CiHHWf4 ON "NQ.liANK 4, THE FEDERAL RESERVE BOARD1 IN A WATERSHED DECISION1 ,GAVE APPROVAL TO U.S. TRUST Co~. TO CONVERT THEIR FLORIDA .TRUST COMPANY INTO A CONSUMER BANK A, THIS WAS FOLLOWED BY LITERALLY A FLOOD OF SIMILAR APPLICATIONS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 6/15/84 PAGE 3 ~,~ 5, GEORGIA PASSED A BILL TO ALLOW ~A BANKS TO MERGE WITH BANKS IN NINE OTHER SOUTHERN STATES ON A RECIPROCAL BASIS1 THUS LEADING THE WAY FOR A REGIONAL COMPACT IN THE SOUTHEAST, FZ 3 IE :t O&tli:0.it 5 n:, A 6, MAINE'S GOVERNOR SIGNED A BILL THAT ELIMINATES THE f4r tBE RECIPROCITY.,:~lt~ IN STATE'S INTERSTATE CONTRADICTS THE NEW ENGLAND ~r-n,,,,; REGIONAL COMPACT 7, EARLY THIS YEAR1 CITICORP GAINED ACCESS TO THE ATMS ~I CAA~~ IN CALIF8QIIWA SAFEWAY SUPERMARKETS FOR ITS MASTERCARD1 " VISA AND DINERS CLUB,CARmrotDERS 8, K-MART BEGAN OFFERING CDs AND MMDAs ISSUED BY A MICHIGAN S&L IN THREE OF ITS FLORIDA STORES 9, THE BUSH TASK FORCE FINISHED ITS FINAL REPORT ON THE REGULATION OF THE FINANCIAL SECTOR, -A MQUi Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3·) 6/15/84 PAGE 4 - ARf INCi flPfDtVfflttG I 1S7lUiG0iiUEtlPOlJ6iiS > 10. AND1 OF COURSE1 THE RECURRING PROBLEM OF DEALING WITH THE REFINANCING OF THE EXTERNAL DEBTS IN THE INTERNATIONAL MARKETS HAS ADDED A CONSIDERABLE AIR OF TENSION, 11, THESE ARE JUST A FEW OF THE HIGHLIGHTS BUT1 NET1 IT HAS BEEN A BUSY AND ACTIVE YEAR C, THE PESSIMISTS WOULD SUGGEST THAT THE BUILD-UP OF CONFLICTING PRESSURES IS TOO GREAT 1. WE ARE HEADING FOR A PERIOD OF DESTABILIZED CONDITIONS D. WITHOUT IN ANY WAY MINIMIZING THE MAGNITUDE OF THE ISSUES 1, THE FINANCIAL SYSTEM HAS DISPLAYED AN AMAZING DEGREE OF RESILIENCY IN DEALING WITH THESE CHALLENGES 2, THE LEVEL OF COOPERATION AMONG THE MAJOR PARTICIPANTS HAS BEEN EXCEPTIONALLY HIGH A, THE PROBLEMS AND CHANGE$1 INTERNATIONAL1 DOMESTIC1 ET AL1 HAVE BEEN MANAGED AND CONTAINED Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 6/15/S4 PAGE 5 3. THE REGULATORY RESPONSE1 WHERE NECESSARY1 HAS BEEN APPROPRIATE AND EFFECTIVE 4. THE ECONOMIC RECOVERY1 FIRST DOMESTIC AND NOW WORLDWIDE1 WILL INCREASINGLY PROVIDE A FAVORABLE ENVIRONMENT FOR THE SOLUTION TO THESE PROBLEMS I I. LET ME FIRST COMMENT ON DEREGULATION -- THE EVENTS o·F THE PAST YEAR HAVE BROUGHT US TO AN IMPORTANT CROSSROAD -- LOOKING FORWARD1 THERE SEEM TO BE THREE ALTERNATIVE COURSES OF ACTION A. REREGULATION -- THERE WILL BE GROWING POLITICAL PRESSURE TO IMPOSE NEW CONTROLS OR REIMPOSE OLD CONTROLS 1. AT THIS POINT1 GIVEN THE ENORMOUS CHANGES THAT HAVE TAKEN PLACE1 IT IS DIFFICULT TO IMAGINE HOW WE COULD POSSIBLY REVERT TO THE STRICTURES WHICH EXISTED UNTIL A FEW YEARS AGO A. THIS IS A CASE OF TOOTHPASTE BEING LARGELY OUT OF THE TUBE 2. WE WOULD BE ATTEMPTING TO UNDO THE VAST CHANGES THAT HAVE BEEN MADE OVER THE RECENT YEARS1 WHICH WOULD BE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 6/15/84 PAGE 6 A VERY DIFFICULT PROCESS 3, VERY UNEVEN AND UNFAIR 4, WITH SOME SIGNIFICANT EFFECT ON THE OUTLOOK FOR THE ECONOMY WHICH HAS BECOME ACCUSTOMED TO AND HAS ENJOYED THE BENEFITS OF A MORE FLEXIBLE FINANCIAL STRUCTURE B, A PAUSE IN THE DEREGULATION PROCESS -- PROVIDE FOR A COOLING OFF PERIOD l, THE MOMENTUM OF THE MARKETS IS DIFFICULT TO HALT 2, MORATORIUMS HAVE NOT WORKED IN THE PAST -- THEY DON'T HAVE ANY EFFECT OR IMPEDE THOSE THAT ARE NOT COVERED A, HERE AGAIN~ THE PROCESS WOULD BE VERY UNEVEN AND UNFAIR 3, THIS IS NOT A PRACTICAL RESPONSE TO THE CURRENT CIRCUMSTANCES 4, IN FACT~ THE TIMES CRY OUT FOR LEGISLATIVE ACTION SO THAT FURTHER CHANGES CAN BE MANAGED ON AN ORGANIZED AND ORDERLY BASIS RATHER THAN BY AD HOC MARKET RESPONSE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 6/15/84 PAGE 7 ~~ C, CONTINUED DEREGULATION ON A MANAGED BASIS JS THE ONLY PRACTICAL ALTERNATIVE X- 4, ~ ~ 1. THE PROBLEMS THAT WE HAVE BEEN EXPERIENCING ARE NOT THE RESULT OF DEREGULATION A, DEREGULATION MAY HAVE COMPLICATED THE ENVIRONMENT -- BUT HAS NOT1 PER SE1 CAUSED THE PROBLEMS 2. THE DIFFICULTIES HAVE NOT OCCURRED IN ACTIVITIES NEWLY UNDERTAKEN BY BANKS A, THESk~wa-,c ~NEW FINANCIAL SERVICES ~ , - . ~ /b?.GE•''C- ~~ '"c. ~ ~ ~, 3. RATHER1 BY AND LARGE1 THEY HAVE TAKEN PLACE IN THE TRADITIONAL AND FUNDAMENTAL AREAS OF BANKING. -- DEPOSIT TAKING AND LENDING 4, INDEED1 IN MANY INSTANCES THE PROBLEMS HAVE BEEN EXACERBATED BY THE CURRENT LEVEL OF REGULATION AN IMPORTANT OPPORTUNITY FOR THE LEGISLATIVE PROCESS TO MOVE FORWARD ON BOTH THE STATE AND NATIONAL LEVELS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT {3) 6/15/84 PAGE 8 Ill, MEANWHILE1 ALMOST SEPARATE AND APART FROM THE LEGISLATIVE ARENA1 MARKETPLACE CHANGES CONTINUE APACE A. OUR BANK SPONSORS A CONFERENCE ON BANK STRUCTURE AND COMPETITION EACH SPRING 1. IN MY OPENING COMMENTS THIS YEAR1 I SUGGESTED THAT MARKETPLACE DEVELOPMENTS1 WHICH JUST A FEW YEARS AGO WOULD HAVE SEEMED ALMOST INCREDIBLE1 HAVE NOW BECOME COMMONPLACE 2, WE HAVE BECOME ACCUSTOMED TO THE INVASION OF NONBANKS ONTO THE TURF PREVIOUSLY THE EXCLUSIVE DOMAIN OF THE COMMERCIAL BANKS 3, BANKS HAVE NOW BECOME ACCUSTOMED TO COMPETING WITH DREYFUS1 FIDELITY1 SEARS1 MERRILL LYNCH1 ET AL1 FOR NORMAL BANKING TRANSACTIONS 4, IN HIS APRIL 1984 TESTIMONY BEFORE THE SENATE COMMITTEE ON BANKING1 FINANCE AND URBAN AFFAIRS1 CHAIRMAN VOLCKER LISTED 61 NONBANKS THAT HAVE OPERATIONS IN 22 STATES B. IN STUDIES THAT WE HAVE DONE AT OUR BANK ON THE EFFECT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 6/15/84 PAGE 9 OF NONREGULATED COMPETITION IN THE FINANCIAL SERVICES AREA, THE GAINS ACHIEVED BY NONBANKING BASED COMPANIES l - • IN FINANCIAL SERVICES ARE IMPRESSIVE -- OR SCARY IF YOU ARE A REGULATED COMPETITOR 1, IN THE STUDIES THAT WE HAVE CONDUCTED OVER THE PAST SEVERAL YEARS, WE HAVE UTILIZED A BASE OF 32 COMPANIES INCLUDING A VARIETY OF INDUSTRIAL, COMMUNICATIONS AND TRANSPORTATION FIRMS SUCH AS GULF & WESTERN, NATIONAL STEEL, GENERAL ELECTRIC AND GENERAL MOTORS 2. IN 1972, THE BASE YEAR FOR THE STUDIES, THERE WERE 10 FIRMS WHOSE EARNINGS FROM FINANCIAL SERVICES WERE MOST IMPRESSIVE -- THE COMBINED EARNINGS OF THESE FIRMS FROM THEIR FINANCIAL SERVICE ACTIVITIES TOTALLED OVER $650 MILLION IN 1972 3, BUT BY 1983, THE FINANCIAL SERVICES EARNINGS OF THESE FIRMS HAD GROWN BY FOUR TIMES TO ALMOST $3 BILLION, ABOUT THE SAME AS THE TOTAL WORLDWIDE EARNINGS OF THE SIX LARGEST BANK HOLDING COMPANIES..,RANltED a,y -sA Rt dJ J419 S -- Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 6/15/84 PAGE 10 4, FURTHER, IN ALMOST ALL CATEGORIES OF LENDING AND DEPOSIT TAKING, NONREGULATED FINANCIAL ENTITIES HAVE ACHIEVED IMPRESSIVE GAINS AND NOW ENJOY SUBSTANTIAL MARKET POSITIONS A, THESE GAINS HAVE COME AT THE EXPENSE OF THE BANKS (1) THE MOST PROMINENT EXAMPLE IS IN AUTO LENDING WHERE BANKS' SHARE FELL FROM 60% IN 1978 TO 45% IN 1982, OVER THIS SAME TIME SPAN, GMAC DOUBLED ITS SHARE OF ALL AUTO LOANS OUTSTANDING FROM 13% TO 26 %, GIVEN THE IMPORTANCE OF THE AUTOMOTIVE INDUSTRY TO MICHIGAN, THIS STATISTIC SHOULD BE PARTICULARLY RELEVANT, 5, THERE WERE THOSE THAT SUGGESTED THAT ANY LOGICAL CONTINUATION OF THESE TREND LINES OVER TIME WOULD LEAD TO THE CONCLUSION THAT BANKS WOULD BE RELEGATED TO A MUCH LESS IMPORTANT ROLE AS FINANCIAL INTER- MEDIARIES IN OUR SYSTEM Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 6/15/84 PAGE 11 c. Bur, VERY IMPORTANTLY, AS THESE COMPETITIVE PRESSURES HAVE BUILT UP, THE BANKS, IN TURN, HAVE RESPONDED BY '. - EXPANDING THE SCOPE OF OFFERED SERVICES AND GEOGRAPHIC AREAS COVERED 1, MANY OF THE LARGEST BANK HOLDING COMPANIES ARE ACTIVELY PROVIDING A VARIETY OF SERVICES SUCH AS COMMERCIAL AND CONSUMER LENDING, LEASING, FACTORING, DATA PROCESSING, ETC,, THROUGH NONBANK SUBSIDIARIES 2. OFFERED ON AN INTERSTATE BASIS 3. BY CURRENT ESTIMATES SOME 140 BANK HOLDING COMPANIES CONTROL OVER 300 NONBANK SUBSIDIARIES WITH OVER 5,500 OFFICES IN STATES OTHER THAN THE HOME STATE 4. IN ADDITION, THEY OPERATE SOME 200 LOAN PRODUCTION OFFICES AND 140 EDGE ACT OFFICES IN THE MAJOR CITIES THROUGH THE U.S. 5. IMPRESSIVE EXPANSION, ESPECIALLY WHEN YOU CONSIDER THAT THE McFADDEN ACT AND DOUGLAS AMENDMENT REMAIN ON THE BOOKS BUT HARDLY EFFECTIVE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT {3) 6/15/84 PAGE 12 D, AND IN 1983 AND SO FAR IN 19841 THE BANKS1 LARGE AND SMALL ALIKE1 HAVE CONTINUED TO RESPOND IN A HIGHLY ' . • EFFECTIVE MANNER RATHER THAN RELYING ON COUNTERPRODUCTIVE PROTECTIONISM 1, FOR EXAMPLE1 BANKS ARE ESTABLISHING BROADER GEOGRAPHIC PRESENCE BY GIVING HOLDERS OF MASTERCARD~ND VISA CARDS' • tM THE ABILITY TO OBTAIN CASH AT ATMS OR SUPERMARKETS ,~ ' ~ OR OTHER RETAIL OUTLETS, IN 19831 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 As AN EXAMPLE OF A NEW AND POTENTIALLY REWARDING ~~~ SERVICE1 BANKS HAVE BEGUN TO OFFER DISCOUNT BROKERAGE ~ SERVICES j, MORE THAN ONE-FOURTH OF OUR STATES HAVE NOW ENACTED LEGISLATION TO PERMIT INTERSTATE BANKING IN SOME MANNER -- THIS IS LEGISLATION THAT COULD NOT POSSIBLY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 6/15/84 PAGE 13 COME ABOUT IF BANKS1 AND IMPORTANTLY BANKS OF ALL SIZES1 DID NOT AGREE THAT THEIR PROSPECTS WERE IMPROVED BY GREATER GEOGRAPHIC SCOPE ~r;z--;-c_~ A, I SENSE A TREMENDOUS ATTITUDE CHANGE IN WHAT ~ HAS BEEN A VERY SENSITIVE~RE~ ,QA.J,,A_{ 13', <D}JP~~ -~-<-~ C;1...czJFtt. ~~-r~- IV. IF DEREGULATION IS GOING TO CONTINUE AND IF MARKET c·oMPETITIVE FORCES ARE GOING TO INTENSIFY1 IT STANDS TO REASON THAT THE MANAGEMENT FUNCTION WILL BECOME INCREASINGLY DIFFICULT -- 1 SUGGESTED EARLIER THAT THE PROBLEMS THE BANKING INDUSTRY HAS EXPERIENCED ARE NOT THE DIRECT RESULT OF DEREGULATION A, THE VOLATILITY IN INTEREST RATES WHICH WE HAVE EXPERIENCED OVER THE PAST FEW YEARS HAS CERTAINLY COMPLICATED THE MANAGEMENT PROCESS; THE SEVERE RECESSION THAT ENDED IN LATE 1982 HAD A MAJOR IMPACT ON ASSET QUALITY1 BUT IMPORTANTLY1 THE COMMON DENOMINATO~1 AT LEAST IN MY VIEW1 THE CONSISTENT ELEMENT WHICH RUNS THROUGH ALL OF THE BANKING PROBLEMS WE HAVE EXPERIENCED1 IS A FAILURE IN THE MANAGEMENT P~OCESS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 6/15/84 PAGE 14 1, IN THE HIGHLY REGULATED ENVIRONMENT OF YESTERYEAR WITH A RELATIVELY RESTRICTED RIGHT OF ENTRY1 EV~N A BADLY MANAGED INSTITUTION COULD DO REASONABLY WELL A, IT JUST WASN'T THAT COMPLICATED 2, BUT MARKET DEVELOPMENTS AND VAST STRUCTURAL MODIFICATIONS HAVE CHANGED ALL OF THAT 3, IT IS IMPORTANT TO REMEMBER THAT ACTUAL ACTS OF DEREGULATION FOLLOWED ON A DE FACTO BASIS -- THE MARKETPLACE LED THESE CHANGES BY A VERY CONSIDERABLE PACE 4, THUS1 MY POINT IS THAT THE MARKETPLACE DEVELOPMENTS HAVE CAUSED THE PROBLEMS1 NOT DEREGULATION PER SE1 WHICH ONLY FOLLOWED ON A LAGGING BASIS A, REGULATION AT BEST ONLY TEMPORIZES DEVELOPMENTS IN THE FREE MARKET ENVIRONMENT B, EVERY ONCE IN AWHILE IT IS IMPORTANT TO REMIND OURSELVES JUST WHAT THE BANKING BUSINESS IS ALL ABOUT TO BE SURE THAT THE APPROPRIATE MANAGEMENT TOOLS ARE IN PLACE TO Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 6/15/84 PAGE 15 EFFECTIVELY DEAL WITH A BUSINESS THAT1 BY ALL STANDARDS1 HAS BECOME I Y COMPLICATED AND SOPHISTICATED. . i . 1. CERTAINLY THE CONCEPTS ARE PRETTY SIMPLE -- NO SURPRISES TO ANYONE HERE 2. YET WITH EACH PROBLEM THERE SEEMS TO HAVE BEEN SOME OBVIOUS FAILURE IN THE MANAGEMENT PROCESS C, SIMPLISTICALLY1 AND PLEASE BEAR WITH ME1 BANKING BUSINESS INVOLVES DEPOSIT TAKING ON ONE SIDE OF THE BALANCE SHEET AND LENDING ON THE OTHER l, NOTHING REVOLUTIONARY ABOUT THAT STATEMENT1 YET1 IMPORTANTLY1 IT IS IN THESE TWO VERY BASIC AREAS THAT MOST OF THE PROBLEMS HAVE ARISEN D, DEPOSITS -- WITH DEREGULATION THERE HAS BEEN A MOVE TOWARD THE PAYMENT OF INTEREST ON MOST DEPOSITS 1, BUT THOUGH A SUBSTANTIAL PART OF RETAIL ACCOUNTS NOW INVOLVE THE PAYMENT OF INTEREST1 THEY ARE STILL CORE DEPOSITS IN A FUNDAMENTAL SENSE 2, THEY ARE NOT PURCHASED FUNDS IN A MARKET SENSE -- Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 6/15/84 PAGE 16 AS A CONSEQUENCE, THERE IS A HIGHER LEVEL OF STABILITY INVOLVED . l . A, THE RETAIL CUSTOMER WITH AN MMDA HAS A FAR DIFFERENT ATTITUDE THAN THE DISPASSIONATE INSTITUTIONAL TRADER DEALING FROM A MONEY DESK IN SOME DISTANT SPOT OF THE WORLD 3, PURCHASED FUNDS CAN BE MUCH MORE VOLATILE; THE MARKETS AND TRADERS HAVE VAST ALTERNATIVES AND WILL MOVE FROM ONE INSTITUTION TO ANOTHER FOR A VARIETY OF REASONS INCLUDING YIELD, MATURITY AND PERCEIVED CREDIT QUALITY CCUR 4, ASSET GROWTH THAT IS NOT CONTROLLED AND CAREFULLY MANAGED AND THAT IS SUPPORTED BY AN OVERDEPENDENCE ON PURCHASED FUNDS AS OPPOSED TO CORE DEPOSITS CAN AND DOES INTRODUCE A LEVEL OF INSTABILITY 5, THE PURCHASED FUNDS TO EARNING ASSET RATIO IS A Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 6/15/84 PAGE 17 VERY IMPORTANT ITEM OF MANAGEMENT INFORMATION AND IS ONE THAT SHOULD BE CAREFULLY CONTROLLED l . • A. DIFFERENT TYPES OF INSTITUTIONS CAN FEEL COMFORTABLE WITH AND CAN MANAGE TO DIFFERENT Jl/"f.~·u-' LEVELS OF PURCHASED FUNDS -- BUT U ASSET GROWTH WITHOUT CAREFULLY THOUGHT THROUGH MANAGEMENT RESTRAINTS ON PURCHASED FUND LEVELS ~ / ~---~ SEEMS HIGHLY IN_APPF\Q!'RIATE p~-~C.... ~~Jtt~;X ~~ ~ v~~ ~~~ 7;-:ty "b ~ E, LENDING -- CLEARLY, COMMERCIAL BANKING IS NOT AND ~/ CANNOT BE A HIGH RISK ACTIVITY IN THE APPROACH TO LENDING 1. NET INTEREST MARGINS AND RETURNS ON ASSETS SIMPLY DO NOT PROVIDE ROOM FOR EXCESSIVE RISK TAKING 2. THE RISK-REWARD RELATIONSHIP WILL SIMPLY ~OT PERMIT THE INTRODUCTION OF HIGH RISK INTO THE LENDING PORTFOLIO 3. THE TOTAL LENDING MARKET1 THE TOTAL CREDIT PIE1 IF YOU WILL1 MAY NOT HAVE AN ABSOLUTELY FINITE LIMIT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 6/15/84 PAGE 18 BUT THERE MUST BE SOME PRACTICAL LIMITS AS TO THE VOLUME OF LOANS WITH REASONABLE RISKS THAT ARE .' • AVAILABLE TO THE BANKING MARKET FROM TIME TO TIME, WITH INCREASINGLY RAPID COMMUNICATIONS> INCREASED MOBILITY AND REDUCED GEOGRAPHIC RESTRAINTS> I THINK IT IS POSSIBLE THAT THE FINANCIAL SERVICES INDUSTRY MAY BE FACING SOME OVERCAPACITY CONSIDERATIONS IN f"T :!;" LENDING OPERATIONS, IN ORDER TO DEAL WITH RISING EXPENSE LEVELS AND TO KEEP EARNING ASSETS INCREASING AT REASONABLE RATES> SOME BANKERS SEEM TO BE WILLING TO ASSUME HIGHER THAN ORDINARY RISKS A, PERHAPS A EUPHEMISTIC WAY OF SUGGESTING THAT COMPETITIVE FACTORS MAY BE CAUSING A DETERIORATION IN LOAN QUALITY 4, HAVING NOTED BANKING'S FUNDAMENTAL ACTIVITIES> LET ME ENUMERATE JUST A FEW MANAGEMENT GUIDELINES THAT RECENT HISTORY WOULD SUGGEST BEAR REPEATING • .,cpK14vd~~~ ~gr,<'~ No Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 6/15/84 PAGE 19 ~ ( f, CHECKS AND BALANCES -- ANY ORGANIZATION THAT DOES NOT PROVIDE FOR REASONABLE CHECKS AND BALANCES AS A PART ' • • OF THE LENDING STRUCTURE MAY WELL BE EXPOSING ITSELF TO PROBLEMS l, PEOPLE ARE HUMAN AND HUMANS MAKE MISTAKES 2, TO ALLOW LENDING OFFICERS TO HAVE LARGE APPROVAL LIMITS WITHOUT THE CONCURRENT REVIEW AND APPROVAL BY A SEPARATE AUTHORITY CAN PLACE TOO MUCH RESPONSIBILITY ON THE SALES AND MARKETING SIDES OF THE LENDING PROCESS ~-µt- Gr-,yr A, CHECKS AND BALANCES ARE VERY IMPORTANT 'If~ G, PROCEDURES AND CONTROLS -- GIVEN THE CHANGING NATURE OF THE ENVIRONMENT1 INSTALLING APPROPRIATE PROCEDURES AND CONTROLS IS CRITICALLY IMPORTANT l, THESE CONTROLS AND PROCEDURES MUST BE KNOW~1 MUST BE UNDERSTOOD AND AGREED TO BY ALL INVOLVED 2, VAGUE UNDERSTANDINGS AS TO JUST HOW THINGS SHOULD WORK1 DON'T WORK Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 5/15/84 PAGE 20 3, EVERYONE MUST KNOW JUST WHAT THEY CAN DO, WHAT THEIR AUTHORITIES ARE, AND JUST HOW THE PROCESS - '. • WORKS r~NAGEMENT INFORMATION SYSTEMS -- AGAIN, OUR CHANGING ENVIRONMENT CRIES OUT FOR CURRENT DATA ON A RAPID BASIS SO THAT SENIOR MANAGEMENTS WILL KNOW JUST WHAT IS TAKING PLACE AND CAN FOLLOW EXPOSURES AND RISKS AS THEY DEVELOP NOT TOO LATE AND AFTER THE FACT 1. IF YOU DON'T HAVE THE INFORMATION, YOU CAN HARDLY MINIMIZE POTENTIAL OR DEVELOPING PROBLEMS, NOR CAN YOU TAKE THE RIGHT CORRECTIVE ACTION ON A TIMELY BASIS -- IT MAY BE TOO LATE 2. IT USED TO BE THAT ONLY LARGE INSTITUTIONS COULD DEVELOP AND AFFORD TO MAINTAIN SOPHISTICATED MANAGEMENT INFORMATION SYSTEMS -1- 3. BUT REDUCED COMPUTER/SYSTEM COSTS AND VERY MODERN I'~~~ MIS S¥Gifeit-15 MAKE THIS IMPORTANT MANAGEMENT TOOL AVAILABLE TO EVEN THE VERY SMALLEST BANKS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) ·5115/84 PAGE 21 I. PROFIT CENTER ACCOUNTING -- THOUGH IT IS CERTAINLY IMPORTANT TO ESTABLISH ACCOUNTABILITY AND RESPONSIBILITY ! - '--~~•Vll...~s-~:r d)-1__.,1 THROUGHOUT THE ORGANIZATION_:--y;ROFIT CENTER ACCOUNTING HAS LED TO SOME QUESTIONABLE PRACTICES 1, WHEN THIS LEADS TO A HIGHLY1 PERHAPS OVERLY1 COMPETITIVE ENVIRONMENT1 AND WHEN COMPENSATION REWARDS ARE DIRECTLY DERIVED FROM SHORT TERM RESULTS1 A DANGEROUS ELEMENT IS INTRODUCED, THIS SEEMS HIGHLY INAPPROPRIATE FOR INSTITUTIONS THAT HAVE A FUNDAMENTAL FIDUCIARY RESPONSIBILITY J, BOARDS OF DIRECTORS,HAVE A BROAD GOVERNANCE RESPONSIBILITY NOT A DAY-TO-DAY MANAGEMENT RESPONSIBILITY 1. BOARDS CANNOT AND SHOULD NOT MANAGE A BANK 2. BUT THEY HAD BETTER UNDERSTAND THE GOVERNANCE PROCESS a.,rv.~V 3. I GET A LITTLE ~~RECTORS WHO SAY THAT BANKING IS A VERY ESOTERIC ACTIVITY AND ONE THAT THEY REALLY DON'T UNDERSTAND A, THEY RUN COMPLICATED MANUFACTURING OPERATIONS WITH GREAT SKILL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 6/15/84 PAGE 22 4. MANAGEMENTS HAVE THE RESPONSIBILITY TO BRING THE LEVEL OF AWARENESS OF THEIR DIRECTORS UP TO THE . - POINT THAT THE BOARD CAN PROPERLY EXERCISE ITS GOVERNANCE RESPONSIBILITY 5. IF THE MANAGEMENT IS UNABLE TO DO THIS1 OR THE DIRECTORS ARE UNWILLING TO SPEND THE TIME1 THE DIRECTORS SHOULD GET OFF THE BOARD 6. BOARDS OF DIRECTORS SHOULD HAVE THE APPROPRIATE COMMITTEES WHICH PROVIDE AN OPPORTUNITY TO REVIEW AND DISCUSS SPECIFIC AREAS OF RESPONSIBILITY FREQUENTLY AND IN DEPTH 7. THOUGH I AM IN NO WAY GAINSAYING THE RESPONSIBILITY OF THE REGULATORS IN ALL THIS1 BOARDS OF DIRECTORS SHOULD NOT DEFER TO THE REGULATORS FOR ACTION A. THROUGH THE EXAMINATION PROCESS1 AND IN SOME CASES AS A RESULT OF DISCUSSIONS WITH BANK MANAGEMENTS AND DIRECTORS1 REGULATORS DO FOLLOW THE PROGRESS OF THE INSTITUTIONS FOR WHICH THEY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 6/15/84 PAGE 23 HAVE RESPONSIBILITY1 BUT IN MY VIEW1 REGULATORS SHOULD NOT INTERCEDE AND ASSUME CONTROL UNTiL THE MANAGEMENT-GOVERNANCE PROCESS HAS FAILED TO FUNCTION PROPERLY 8, THE PRIMARY RESPONSIBILITY FOR THE SATISFACTORY OPERATION OF THE INSTITUTION MUST REMAIN WI1H THE BOARD OF DIRECTORS WH01 IN TURN1 CHOOSE THE CHIEF EXECUTIVE OFFICER -- CERTAINLY THE SINGLE MOST IMPORTANT DECISION THAT THE BOA~D MAKES ~~ REVIEWING THESE FUNDAMENTAL MANAGEMENT ~R!'SEP~S SOUNDS MORE LIKE THE FIRST CLASS SESSION IN BANKING 101 RATHER ~ ~ THAN A MESSAGE THAT WOULD BE APPROPRIATE FOR THIS GROUP 1, No DOUBT YOUR BANK DEALS WITH ALL OF THESE MANAGEMENT TOOLS IN AN EXEMPLARY WAY 2. Bur SOMEBODY OUT THERE IN THAT BROAD BANKING ARENA ~~ IS NOT -A/c,r 3, VIRTUALLY ALL OF THE BANK PROBLEMS OR FAILURES THAT I HAVE REVIEWED SINCE BEING AT THE FEDERAL RESERVE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT {3) 6/15/84 PAGE 24 BANK OF CHICAGO HAVE INVOLVED ONE OR PERHAPS SEVERAL OF THESE VERY FUNDAMENTAL MANAGEMENT POLICIES . - . FGNtJ--ci',orv 4. DEREGULATION HAS NOT MADE THE MANAGEMENT ltESPONSJStLITY ANY SIMPLER 5, QUITE THE OPPOSITE1 IT HAS ELEVATED VERY SIGNIFICANTLY THE COMPLEXITY OF THE MANAGEMENT RESPONSIBILITY V. TO CONCLUDE1 I HAVE SUGGESTED A. GIVEN CIRCUMSTANCES1 DEVELOPMENTS ON REGULATORY FRONT MAY TAKE THREE ALTERNATIVE COURSES OF ACTION 1. DIFFICULT TO PREDICT 2. THE POLITICAL WINDS WILL BLOW PRETTY HARD 3, CONTINUED DEREGULATION IS MOST APPROPRIATE B. COMPETITIVE ASPECTS OF MARKETPLACE ARE CONTINUING TO + CHANGE ~~~/~, 1. NONREGULATED PROVIDERS OF FINANCIAL SERVICES~ ~~.r. Ul»\J1"t'"N~ 't--b ~ 2. BANKS HAVE RESPONDED WELL PARTICULARLY IN PAST YEAR OR SO C. BUT MY EMPHASIS HAS BEEN ON THE MANAGEMENT ASPECTS OF BANKING Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (4) 6/19/G4 PAGE 25 1. I HAVE COVERED THESE ITEMS WITH SOME RELUCTANCE 2, SKILLED MANAGERS SUCH AS YOU HARDLY NEED TO BE . b~ REMINDED HOW TO DO YOUR JOBS -- PARTICULARLY~ A REGULATOR -- BUT AS A FORMER MANAGER IN COMMERCIAL BANKING, I HAVE SEEN IT FROM BOTH SIDES 3, SOMEWHERE OUT THERE, NO DOUBT BEYOND THE BORDERS OF MICHIGAN, MANAGEMENT FAILURES HAVE RESULTED IN PROBLEMS 4, As ALWAYS, THER~ IS THE RISK THAT ONE INCIDENT WILL BE GENERALIZED INTO A PREVALENT TREND WHICH, OF COURSE, IS JUST NOT ACCURATE A, BANKING'S OPPONE~TS _W~- ~SE THE OPPORTUNITY~~,., ~ ~ ~ ~ ~~-, v~S 5, THE POLITICAL RISK A, THE FOES OF DEREGULATION WILL CHARGE THAT MANAGERS WHO CAN'T HANDLE THE BASICS CAN HARDLY MANAGE NEW AND ESOTERIC SERVICES -- TRY AND DECLARE HALT 6, MOST UNFAIR -- VAST MAJORITY EXTREMELY WELL MANAGED A, BY AND LARGE, R.O.A.'s AND R.O.E.'s EXCELLENT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (4) 6/19/64 PAGE 26 D. DID WANT TO USE THE OPPORTUNITY TO REVIEW THESE MATTERS WITH YOU 1, FROM A REGULATOR'S POINT OF VIEW1 THEY STRIKE AT THE HEART OF ONE OF OUR MAJOR RESPONSIBILITIES A, THE SAFETY AND SOUNDNESS OF THE FINANCIAL SYSTEM 2. Bur SAFETY AND SOUNDNESS ARE NOT THE SOLE RESPONSIBILITY OF THE BANK SUPERVISORY AGENCIES, As I HAVE STRESSED THROUGHOUT THIS TALK1 BANK SAFETY IS AS MUCH A MANAGEMENT AND DIRECTORS RESPONSIBILITY AS IT IS A REGULATORY PROBLEM 3, 0FTEN1 BY THE TIME REGULATORS FIND A PROBLEM1 THE DAMAGE HAS BEEN DONE AND IT IS TOO LATE TO TAKE CORRECTIVE ACTION ~- 4. FURTHER1 AND THIS IS A CRITICAL POINT1 REGULATION OF THE BANKING SYSTEM WILL NOT ALTER THIS FUNDAMENTAL FACT OF LIFE•-~ -- IT IS NOT AN APPROPRIATE .AE;sm:I ~ Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (4) 6/19/04 PAGE 27 5, THE FREE ENTERPRISE SYSTEM1 AND CERTAINLY BANKS ARE AN INTEGRAL PART OF THIS SYSTEM1 MUST1 BY DEFINITION1 PROVIDE THE OPPORTUNITY FOR RISKS AND r ak~, LtA.Nc.lltlJl.r~c~~u~s ~ Al~ M~ FOB FAJIIJRE b,..(, ~ , 0 6, REGULATIONS WILL NEVER BE ABLE TO PROVIDE AN h r-1 ',VAAV'-J ABSOLUTELY FAIL-SAFE Rll§fil 19RY SYSTEM A, WE CAN AND DO DEVELOP APPROPRIATE STANDARDS AND SAFEGUARDS TO DEAL WITH THE RISK ELEMENT B, BUT INNOVATION WILL FREQUENTLY FIND A WAY AROUND THESE SAFEGUARDS C, REGULATIONS THAT MIGHT BE SO BROAD AS TO PRECLUDE ANY RISK ELEMENT WOULD BE VERY BURDENSOME AND WOULD INHIBIT THE PERFORMANCE OF OUR ECONOMY D, WHICH IS TO SAY THAT THERE MUST BE TRADE-OFFS BETWEEN INDIVIDUAL BANK PERFORMANCE AND MACRO-ECONOMIC ACTIVITY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (4) G/19/o4 PAGE 2£ E, THIS INVOLVES A DIFFICULT BALANCE BUT ONE THAT IS EXCEPTIONALLY IMPORTANT F, WHICH IS ANOTHER WAY ·oF SAYING THAT MORE REGULATION IS NOT THE ANSWER \)~1~~~o·~ E. BUT LET ME END ON A POSITIVE NOTE ~ "l ,- ,· l'w\..a. I w v-... ,-.. 0 r::r--, ,i., ""'..r .t. ~ ~ 1 C. ~~d l, PARTICULARLY EXCITING AND CHALLENGING TIME1- ~""~ ~ PERHAPS THE MOST IN RECENT HISTORY tii:" 2. MOST OF YOU1 I AM SURE1 HAVE LOOKED FORWARD TO ~- THE TIME WHEN THE OPERATING ENVIRONMENT WOULD BE LESS RESTRICTIVE THAN IT WAS FOR SO VERY MANY YEARS A, CLEARLY1 IT IS WITH US NOW 3, IT IS ALWAYS FUN TO BE INVOLVED WHEN CIRCUMSTANCES ARE CHANGING1 WHEN THINGS ARE MOVING A, IT PROVIDES AN OPPORTUNITY FOR INNOVATION 4, WHEN HARD WORK AND GOOD1 CAREFUL MANAGEMENT SKILLS WILL BE REWARDED WITH RESULTS 5, AND1 WHEN CAPABLE MANAGERS1 AND CERTAINLY THAT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (4) 6/19/84 PAGE 29 INCLUDES THIS GROUP, HAVE THE OPPORTUNITY TO DEMONSTRATE JUST HOW VERY GOOD ALL OF YOU CAN BE F. WITH THAT, LET ME CONCLUDE * * * Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1984, June 21). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19840622_silas_keehn

@misc{wtfs_regional_speeche_19840622_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1984},
  month = {Jun},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19840622_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}