Regional President Speech

Roger Guffey Panel Discussion On Supervisory Issues Colorado Bankers Association June 7-8, 1985 ---x " 1 I. Introduction Economic conditions and the impact regulJlted financial environment are having profound effects on the financial services industry. Economic problems in agriculture, real estate, and energy and problems with forei n loans have adversely affected the condition of many depository institutions. A record number of insured banks failed in 1984 (79 in the U.S., 23 in the District) and 43 banks <17 in the District) have fail~d through May 31 of this year. ..some ifl:di'liduals foreoast . Complicating matters is the uncertainty caused by widely publicized difficulties experienced by some of the larger banks in the country [Continental Illinois, Bank of America (mortgage .... pool fraud), Security Pacifi c (clearing agent for Bevill- Bresler), Worthen Financial Corp-- Little Rock (creditor of Bevill-Bresler)]. There are also the recent problems at various privately insured savings and l oans in Maryland and Ohio, and the questionable activities by a number of essentially unregulated government securities dealers. this backdrop, changes are continuing to within the industry making and more complex (Sears, Prudential-Bache, Dreyfus) continue their bank-like institutions are seeking new and 2 also are faced with the being asked to deal with ~_n~ew participants, they must a and competitive financial system. --;?' With this setting in mind, I want to comment briefly on some / of the issues that are receiving much of our attention today. Specifically, I want to discuss the use of increased disclosure· and market discipline, ~onbank banks, and interstate banking. I ----~~ ,,:;{ ~ -e ?t t4. also want to ~t w n - ___ Federal Reserve _ 0 improve coordination with state regulatory authorities. r/;) / p\ u"4 'J e. a ~ ziR ii; /It~ ~~ /y<~ ~ II. Increased disclosure and market discipline Issue: Market discipline in the form of disclosure of supervisory actions may force managers to be more cautious but also may be disruptive to our banking system. ~1';;Atu~ (j: -~c/ ~~k~ 22(,2./ ~ ~~~ D1 . SC ' USS . n t : . ... ~ . - - /J -' .A ~ d / ~ -. p~ ~~ ~ C9-a--~ · In our economy, the marke is _9,en~ya.lly Vi wed as the best r;l a c/d ~~ ~ r.-u ~ disciplinarian. _ ~ ba~!<ing should also be exposed to this discipline. lnElirrisl:lal banks should be all ow-ed .J:Q enter or:.. exjt markets as the sjtl1atioR ~larrants, dnd m9nagement and investors should profit or lose by their However, in terms of current efforts to require increasing levels of disclosure in banking, there are significant dangers that require further consideration before using it as a supervisory tool. 3 behind the move to disclosure in banking investors can bring an institution unsound practices. view, announced that the names of banks a such as cease and desist orders. ~~~~a~o~t~ions , ~ The Federal Reserve System, so far, has chosen not to move ~ its supervision of state member banks and bank holding companies in tbis direction. While it acknowledges that greater disclosure. and market discipline can be a positive force in financial regulation, it is concerned that disclosure of administrative actions in today's difficult banking environment may run counter to the policy objective of promoting a stable banking system. reasons. Some require operational requi re the complete Because of these differences, the is concerned that the public may not differentiating among actions and could is r elativel uninsured depositors, and perhaps insure incentive to move deposits from problems and is subj ect This is market discipline at work. movement of funds will also create for the bank and could lead to results objectives of the administrativ.e action. 1 S particularly likely I .' 4 ~ilGiC While increased disclosure might promote management 1 - discipline, it may also have destabilizing effects on financial markets. Thus, it may be more appropriate to conduct tests on the supervisory value of disclosure in a more stable banking 7/""-:::;;::;6 ~ .~ ~ ~~/'-H~7 .:Tk enVirO;& : , r t. R 71"" ~"!cn-tP:I- .£ ~~. '/"-tj ~ /'~" , n III. Nonpank banks ..<"l.. / /~ (.7"Z. 7t:fZ;)c!fI e~'f? ­ Issue: The acquisition of nonbank -Danks by nonbank organizations is bringing a new mixing of banking and commerce. Nonbank banks are also being used by banking· organizations to circumvent interstate banking restrictions. Discussion: Nonbank banks originated as a method for nonbank firms to expand into banking activities. By chartering or purchasing institutions that do not meet the definition of a bank under the Bank Holding Company Act, nonbank commercial firms are able to offer to the public a variety of deposit taking or lending services. More recently, banking organizations also have chartered nonbank banks as a convenient means to circumvent interstate banking laws. These uses of nonbank banks are inappropr iate. They are inconsistent with current national policy on banking and are permitting the financial system to carelessl Since July 1983, the Comptroller has approved over twenty , appl ications for nonbank banks by securi ties, insurance and -re-ta-i-l -fi-rm-s. Since September 1984, the Federal Reserve has approved nearl.y 300 bank holding company applications for nonbank 5 banks to be located in nearly forty states. While the courts C- have temporarily stopped the process, these ~cision~ be iSAun~ty reversed. This type of stop and go activity for our banking and financial system. Rather than the current administrative and court directed development of our banking system, we need a legislative program that clarifies our national pol icy toward banking. It should CLA,....~t.a.cJ,·'JO~ .L speak to f ~ / oundaries of banking and commerce, permit~ing some. expansion of banking into nonbank areas so long as it is. consistent with a stable banking system. It also might permi t interstate banking consistent with a safe, competitive industry. In both cases, however, the emphasis must be on setting national policy objectives for our banking industry. IV. Interstate banking Issue: The principal issues associated with interstate banking are its effect on competition and the concentration of resources in banking and the extent to which public benefits might flow from freer entry into banking markets. Discussion: The nation is moving - towards interstate banking. For example, fourteen states have passed regional interstate banking -laws and five others have passed interstate laws with no regional -- restrictions. Also, six states allow out-of-state banking organizations to establ ish I imited purpose banks. Interstate ----~----------------------- banking also has been promoted through the use of nonbank subsidiaries of bank holding companies and through nonbank banks. 6 - Currently, bank holding compani es operate more than 7,000 interstate offices, 1500 of which offer a f ull array of banking services. 1 interstate bankin into local banking markets, competition and the level and services to customers located In this sense, there is every reason to support inte - ate banking in this country. 1nterstate banking is its potential effect on the of financial resources. Moreover, it is deposit concentration in banking will increase with interstate banking. However, it does not appear concern justifies the continuation of our current the five largest banks hold less than domestic deposits. Also, and medium sized with the largest institutions and competition from foreign banks and nonbank firms sugge s that our financial services industry would remain competitive under interstate banking. Finally, the effectiveness of the nation's antitrust laws have · question recently, they represent a powerful force in rema1ns comp 7 It has been suggested that interstate banking would permit large organization to use local markets as a source of funding for other maj or customers and that they would ignore communi ty 7 needs. However, studies of branching and multibank holding company expansion show no evidence of such discrimination. ~ an..... eG-ooomjc perspect j ve.,.... &uoh actions also seem noJ i kely because they would greatly djminish an organi2ation' 5 abi-iity to ~act C1.lstomers and compete jn the community. l~al Other issues associated with include its interst~ankin 7 effects on the safety and soundness of the .bart,; '1'9 aystam. and dual banking system. While these are legitimate issues, they do .. not justify the wholesale prohibition of interstate banking • v. Proposal for increasing Federal Reserve cooperation with ,;:..ate banking agencies ~ .~.~ 4$~~ ¥"~ Current conditions in banking are placing a strain on supervisory resources at both the federal and state level. In response, the Federal Reserve is reviewing ways to improve cooperation with state banking agencies in the supervision of state member banks and bank holding companies. Our intention is to reduce the burden on banking institutions and reduce costs for both the states and the Federal Reserve. Currently, the Federal Reserve Bank of Kansas City has cooperative arrangements with six Tenth District states (Kansas - is the exception). These arrangements involve joint or alternate year examinations and the sharing of supervisory information. c ___ ____________- ---------------___ ~; ~-- These cooperative efforts have worked quite well and we are looking for ways to expand them further. For example, we are • 40.­ develop.~6grams to share training facilities and .. - , 8 data and monitoring systems. Such arrangements can not only save money for both the Federal Reserve and the states but also can improve the quality of bank supervision.

J. Roger Guffey (1985, June 6). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19850607_j_roger_guffey

@misc{wtfs_regional_speeche_19850607_j_roger_guffey,
  author = {J. Roger Guffey},
  title = {Regional President Speech},
  year = {1985},
  month = {Jun},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19850607_j_roger_guffey},
  note = {Retrieved via When the Fed Speaks corpus}
}