Regional President Speech

SK DRAFT {1) ANNUAL PAYMENTS CONFERENCE SPONSORED BY CHICAGO CLEARING HOUSE ASSN. WESTIN HOTEL OCTOBER 7, 1985 ti I. INTRODUCTION - BRIEF ECONOMIC REVIEW A. ( TO SURPRISE YO~---- . NOT WHAT YOU CAME TO HEAR 1. BUT IT SETS AN ENVIRONMENT FOR MY LATER COMMENTS B. THE OUTLOOK FOR THE NEXT FEW QUARTERS IS POSITIVE 1. WOULD ANTICIPATE GNP GROWTH OF, SAY, 2-1/2 TO 3% FOR THE NEXT 3 OR 4 QUARTERS 2. RISK OF A RENEWED RECESSION IN NEAR TERM DIMINISHING 3. CONSUMPTION MOVING AHEAD EVEN MORE RAPIDLY A. 3%/4% DUR I NG FI RS T HALF OF THE YEAR VERSUS THE 1% GROWTH IN GNP B. FROM A CONSUMPTION POINT OF VIEW, CURRENT AND PROSPECTIVE ECONOMIC SITUATION IS STRONG Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT Cl) 9/27/85 PAGE 2 pu ; r, '_~~/ I I. BUT AGAINST T~;;-~KGROUND THERE IS, ON A GLOBAL BASIS, THE BUILDUP OF SOME VERY UNSETTLING IMBALANCES/._ A. THE AGRICULTURAL SECTOR - /Sf t<J.. L-1 ,..d.( k/Vv<--'-'fV - ~ t},_j,T,2-, <-Y 1. 2. 3. RURAL AMER I CA ~ Ji t ~ 5r 1 1.,a..{ ' - B. THE ENTIRE INTERNATIONAL SITUATION 1. THE ENORMOUS TRADE DEFICIT 2. VERY HIGH VALUE OF THE DOLLAR A. BASED ON ACTIVITIES TWO WEEKENDS AGO MAY BE IN THE PROCESS OF AMELIORATING ~------Lj) ~-~-:U-£·v 3. ~ EXTERNAL DEBTS/; AFTER A PERIOD OF , ~~ "-rf. 0 tµ'. 1•VJ .s:~s ~ S7'R.a, /\t1 IMPROVEMENT, THE SITUATION IS AGAIN DI-T!AfflttA~ING -C. THE INEXORABLE BUILDUP OF DEBT o-<----c-fl-Cf;..5 c£C ~e5,, 0 ~J-;, 0 .z«nuc~ ' ~ /l {, 1. PERSON AL DEBT - ~ l'k. 7 7u JLQ.-c,CL.cf ✓-- .. L iZ,,<...£ ,.j A. THE STRONG CONSUMPTION NUMBERS SUPPORTED BY SIGNIFICANT INCREASE IN CONSUMER DEBT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 9/27/85 PAGE 3 2. CORPORATE DEBT A. ACCELERATED BY MERGERS AND TAKEOVERS Ja_,,k___\\ \/ IL B. THE RE~ BALANCE TOWARD HIGHER DEBT ~E TO CAPITAL IS INCREASING 3. FEDERAL DEBT FAA.LI~~ A. THE DEFICIT B. THE ACCELERATION OF THE OUSTANDING DEBT LEVEL o F G-ae,qr CcJ\/ w2,i,r.LJ I I I H BCE I S AL Mi 5 c: RE O t D. GOVERNMENT SECURITIES DEALERS ~ l. SOME PROBLEMS AT THE SECONDARY DEALER LEVEL E. THRIFTS/BANKS ~ 1. OHIO/MARYLAND fu,[,' :i:vir ~ v.,»41l9 2. GI VEN SOME OF THE PROBLEMS N0TED ABO¥i, MANY BANKS DEALING WITH SOME DIFFICULT CIRCUMSTANCES 3. ASSET QUALITY HAS DETERIORATED - ENERGY - REAL ESTATE - AGRICULTURE 4. ALL OF THIS AGAINST THE BACKGROUND OF DEREGULATION - Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) [J~-:rfZ.. 9/27/85 ~·,<.,/7 t._ ;,__,,·It(;,? 4:{f ,,J _.,,,<-1 11,.6<-.,,~ rlcf/J PAGE 4 (; ~~~ -~ {{_ 7\-l Ill. ENVIRONMENT OF SOME INSTABILITY Ft2'-~ .+ ½,iclU)':) p ~ A. AS A REGULATOR,:-VERY LITTLE WE CAN DO TO DEAL WITH MOST OF THE RISKS ENUMERATED 1. THEY ARE COMPLEX, DIFFICULT ISSUES 2. WE ARE GO I NG TO HAVE -TO GO THROUGH A CONSIDERABLE ADJUSTMENT PHASE B. BUT IT IS A PERIOD IN WHICH A HIGH LEVEL OF CAUTION IS MERITED 1. AND AREAS/ISSUES THAT CAN BE CONTROLLED AND DEALT WITH SHOULD BE IV. THERE ARE SOME THINGS THAT LEND THEMSELVES TO REGULATORY REVIEW AND ACTION r ...___a,J v ..f "'Ni ~.JJ.f,,,._ "-~"'-, ,._, ,-rj,I A. CAPITAL - WE A I G ~-GHER LEltEL ~-CAPITAL c~ ~ 1~ts _/t-Ndl. •c <,Y. ~----/ 1. YOU HAVE SEEN THE EARLY ~ A SHIFT FROM 6% A. WITH MUCH OF THE INCREASE TO BE PERMITTED IN THE FORM OF SUBORDINATED DEBT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 9/27/85 PAGE 5 2. AND WE WILL BE ASSESSING THE RISK PROFILE OF THE BANK BALANCE SHEET IN OUR CAPITAL CONSIDERATIONS A. OFF BALANCE SHEET ACTIVll-'t Gv,-.:~i ; Tc7\.-'f <-"( c~~ 1 B. aY-A!;;::iTVOF LOAN PORTFOLIO, THE WHOLE ISSUE OF MOVING ASSETS OFF THE BALANCE SHEET TO DEAL WITH A CAPITAL GUIDELINE THAT HAS BEEN VERY ARITHMETIC IN ITS APPROACH B. DIVIDENDS 1. OUR APPROACH TO THE DIVIDEND ISSUE WITH REGARD TO TROUBLED BANKS HAS BEEN SOMEWHAT AD HOC 2. WE WILL BEGIN TO FORMALIZE OUR PROCEDURES C. INCREASED RELATIONSHIP OF THE REGULATORS WITH BANK BOARDS OF DIRECTORS 1. HIGHER LEVEL OF SENIORITY IN THE REPRESENTATION (!'I./?_ ;-?.. cstJJ, 2. COVERAGE OF ISSUES BEYOND TH~VIEW OF AN EXAMINATION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 9/27/85 PAGE 6 , 0e-e,,J -F/uC'-1~/ ~ ~--- 1 (, c~-0. /u1k V. THI$( BRING~ ME TO- THE PAYMENTS SYSTEM - it-{.v (~'- [t~ ( r'-'---- /~fis 'T\)1'~ Lt' A. THE PIPELINE THROUGH WHICH ALL FINANCIAL TRANSACTIONS ARE PROCESSED 1. ABSOLUTELY FUNDAMENTAL TO THE PROPER FUNCTIONING OF THE FINANCIAL MECHANISM 2. THE FED HAS AN APPROPRIATE AND VERY IMPORT ANT , t£ ;// c~-----_,/5 -1~/4¥,.,;f _g~ RESPONSIBILITY , 'I\/ fl ,;r~ -. • ~~r-~:~~{;fJ/ ~,~il .:; ~~E ~~: --- ~l~/ A. HANDS ON INVOLVEMENT ~~ ~ _1/ jUu,r6 ~ ~~ B. ~ ISSUES ARISING FROM OU~EGULATOP.i# ~ ~df-1'-~ AS WELL AS AN OPERATOR HAVE BEE~bVERCOME °'- vf-Jl"'v(._ CA.e'--7 l:P-t<-~ v1. ,!;ttf BUILDUP OF VOLUME IN THE EVOLVING PAYMENTS SYSTEM A. ALL SECTORS OF THE PAYMENTS MECHANISM HAVE EXPERIENCED SIGNIFICANT GROWTH OVER THE LAST 30 TO 35 YEARS 1. FROM 1950 THROUGH 1984, THE VOLUME OF ANNUAL PAYMENTS PROCESSED THROUGH THE PAYMENTS MECHANISM ROSE FROM 2 TIMES GNP TO 45 TIMES GNP Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 9/27/85 PAGE 7 A. A VERY SIGNIFICANT INCREASE IN PAYMENT VELOCITY B. FROM THE POINT OF VIEW OF VOLUME, MOST OF THE INCREASE CAN BE ATTRIBUTED TO WIRE TRANSFER CU-cci.A-Alr~l ~6~ WITH ONLY 5%~ CHECKS B. THE ADVANCEMENT OF THE MECHANICAL INFRASTRUCTURE HAS SUPPORTED THIS RAPID GROWTH IN THE PAYMENTS VOLUME 1. COMPUTER ADVANCEMENTS AND THE RESULT ING AUTOMATION OF THE PAYMENTS PROCESS HAS PROVIDED THE MECHANISM FOR THE INCREASE 2. BUT THE MACHINERY HAS GOTTEN WELL AHEAD OF SOME OF THE OTHER CRITICAL ISSUES - NAMELY, THE CONTROL OF RISK 3. OVER THE LAST DECADE OR SO GROUPS OF BANKS HAVE DEVELOPED A VARIETY OF PRIVATE WIRE TRANSFER SYSTEMS - CH I PS, CASHWI RE AND CHESS AND MOST RECENTLY A NEW SYSTEM IN CALIFORNIA CALLED PRESS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 9/27/85 PAGE 8 4. THE MONETARY CONTROL ACT OF 1980 PROVIDED ACCESS TO THE FEDWIRE BY All DEPOSITORY INSTITUTIONS 5. THE FOUR LARGEST NETWORKS ARE NOW HANDLING MORE THAN $6 HUNDRED BILLION IN WIRE TRANSFERS EVERY DAY C..,._., ~~~ e,c~JJLJi; V VII. INCREASE IN RISK FACTORS A. THE ELECTRONIC FUNDS TRANSFER NETWORKS HAVE CREATED A NEW SETTING FOR AN OLD BANKING RISK 1. RELEASING FUNDS BEFORE FINAL SETTLEMENT HAS TAKEN r PLACE J Fon_ ~~- .b """~ Nr.a;<... _g~~c_ Q-n--~ as Pa,t,rr w.Mi ~ U?r¥~ 2. THIS CREATES THE DAYLIGHT OVERDRAFT- - Ttf GARDEN VARIETY CREDIT RISK 3. THE DAYLIGHT OVERDRAFT IS SIMPLY THE RESULT OF AN INSTITUTION SENDING MORE PAYMENTS OVER THE WIRE THAN IT HAS RECEIVED OR HAS IN ITS ACCOUNT AT THE FEDERAL RESERVE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 9/27/85 PAGE 9 4. WITH THE DOLLAR VOLUME OF TRANSFERS ACCELERATING AND THE INCREASING NUMBER OF PARTICIPANTS IN THE SYSTEM, THE DAYLIGHT OVERDRAFT PROBLEM HAS BEEN ·- I J INC ff E 09 J tiG (<+/2_. 'v.n r/ B. MAGNITUDE OF THE RISK{ 4-{so G/L.c""Lv • ·1v G- 1. IN AGGREGATE ON A TYPICAL DAY DAYLIGHT OVERDRAFTS ON LARGE DOLLAR TRANSFER SYSTEMS AMOUNT TO $110 TO $120 BILLION CiWeA,Jv OVEIL A. EQUIVALENT TO~<cJF THE TOTAL CAPITAL OF ALL U.S. FINANCIAL INSTITUTIONS 'J::Z..i! C. CAUSES OF DAYL_IGH_T _OV_ERD_RA_FT S) / 1. T FOLLOW A TYPICAL PATTERN - 95% OF THE MAXIMUM DAYLIGHT OVERDRAFT AMOUNTS OCCUR BETWEEN 10 A.M. AND 4 P.M. A. MOST INSTITUTIONS ON FEDWIRE REACH THEIR MAXIMUM DAILY OVERDRAFT AROUND 1:30 P.M. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 9/27/85 PAGE 10 B. OVERDRAFTS ARE DR I VEN BY TRANSFERS OF BOOK ENT RY SECURITIES, TRANSFERS ON FE DWI RE AND TRANSFERS ON PRIVATE WIRE SYSTEMS C. IN AGGREGATE THE DISTRIBUTION IS NEARLY EVEN - ABOUT A THIRD -OF THE DAYLIGHT OVERDRAFTS RESULT FROM EACH or-- r,{~s'<- CA- c,, u~ ~~,. es- e_e,riJ'Cvt-M I( I D. FOR BANKS IN THE MIDWEST (AND THERE rs\ 'A _i__; A. PURCHASED FUNDS MESSAGE IN THIS COMMENT), THE MAIN CAUSE OF DAYLIGHT OVERDRAFTS IS THE UNFUNDING OF BORROWED POSITIONS AT THE OPENING OF BUSINESS W PRIOR TO RECEIPT OF NEWLY BORROWED FUNDS RESULTING FROM TRADING ACTIVITIES DURING THE DAY ------·-·· •• • -··- -~ VIII. THE SYSTEMIC RI!)- THE OVERRIDING CONCERN OF THE FEDERAL RESERVE SYSTEM~ A. WE WORRY ABOUT ANY DEVELOPMENTS THAT MAY DESTABILIZE FINANCIAL MARKETS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 9/27/85 PAGE 11 ~J 1. OUR CONCERN FOCUSf,J ON OUR RESPONSIBILITY FOR MAINTAINING THE SAFETY AND SOUNDNESS OF THE BANKING SYSTEM 2. AND THERE ARE SOME OBVIOUS MONETARY POLICY RESPONSIBILITIES INV~LVED HERE B. OUR CONCERN IS THAT GIVEN THE ~ {Jct{,~/ 1. SHEER VELOCITY O.f-- THE N11HB!ly'O/ F FUNDS IN THE OCCURRING 3. THAT AN ADVERSE EVENT COULD DRAMATICALLY IMPACT THE FINANCIAL SYSTEM C. OUR INITIAL FOCUS WAS ON PROBLEMS ASSOCIATED WITH DAYLIGHT OVERDRAFTS ON FEDWIRE 1. BUT LACKING A PROGRAM OF CONTROL THAT COVERED RISKS ON ALL WIRE. NETWORKS, THE SYSTEMIC RISK WOULD NOT BE REDUCED Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 9/27/85 PAGE 12 s If tU I ,5 (.,~ U--,'l. TA D. CTRTAINLY THIS IS*$ PBDBI EMATieAC IICA Wll-+i- SOME PRECEDENT 1. WE CAN ALL REMEMBER THE TRAUMA THAT THE COLLAPSE ,~~ OF 13i111ttAtJS•HERSTAT¥AusED di_~A.4'/~ 2. A SMALL INST~IO~-OME YEARS AGO WHEN VOLUMES WERE MUCH LOWER 3. THE FAILURE OF A LARGER INSTITUTION GIVEN -~1/fr-- CURRENT ENVIRONMENT COULD BE MUCH MORE TRAUMATIC E. THE FEDERAL RESERVE BELIEVES SEVERAL IMPORTANT GOALS CAN BE ATTAINED TH~;:: :a~RANSFER I 1-v.;r lvJJ! ~.v' c« ~o--t'L ~.: SYSTEM RISK RhDLlCTION ,ReGR~M 1. CONTAINMENT OF A SETTLEMENT FAILURE 2. REDUCTION OF VOLUME OF INTRA-DAY CREDIT EXPOSURE 3. RESTRAINT IN THE EXTENSION OF INTRA-DAY CREDIT 4. THE RESULT I NG SMOOTH OPE RAT I ON OF THE PAYMENTS MECHANISM Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 9/27/85 PAGE 13 IX. LET ME MOVE TO OUR APPROACHES TO REDUCE THE RISK ELEMENT A. THE PROPER FUNCTIONING OF THE FINANCIAL PIPELINE - THE PAYMENTS MECHANISM-IS AN ESSENTIAL INGREDIENT TO THE DEVELOPMENT OF THE ECONOMY 1. TOO HEAVY-HANDED AN APPROACH TO OUR REGULATORY CONCERN WOULD IMPEDE THE DEVELOPMENT OF THE ECONOMY 2. YET IT'S CLEAR THAT WE MUST REDUCE THIS EXPOSURE AND BRING IT UNDER BETTER CONTROL 3. OBVIOUSLY THE PROPER BALANCE WILL BE DIFFICULT TO ACHIEVE 4. PARTICULARLY WHEN ONE CONSIDERS THE DIVERSITY OF THE PARTICIPANTS INVOLVED IN THE SYSTEM B. THERE HAS BEEN A SHIFT IN THE ATTITUDE OF THE FINANCIAL SERVICES INDUSTRY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT {1) 9/27/85 PAGE 14 1. AT THE OUTSET THERE WAS THE CONCERN THAT PERHAPS 'i>f-,,, ~U.1...-...; t'- IU:-;:µ_/ . THE REGULATORS WERE ()UMf TRYING TO FIX SOMETHING ) THAT WAS NOT BROKE -Y.N:SUQTE 2. BUT I THINK THIS ATTITUDE HAS CHANGED VERY CONSIDERABLY 3. INDUSTRY GROUPS SUCH AS THE ASSOCIATION OF ~,-u~-rJ RESERVE CITY BANKERS, THE AMERICAN BANKE85; ROBERT MORRIS ASSOCIATES, THE CHICAGO CLEARING HOUSE AND OTHERS HAVE CONDUCTED STUDIES AND HAVE HELD SYMPOSIUMS TO UNDERSTAND THE PROBLEM AS WELL AS WORK TOWARD A SOLUTION 4. WITH THE PASSAGE OF TIME AND THESE INDUSTRY EFFORTS, FINANCIAL INSTITUTIONS HAVE DEVELOPED A MUCH HIGHER LEVEL OF SENSITIVITY TO THE PROBLEM 5. THROUGHOUT, THE FEDERAL RESERVE SYSTEM HAS TRIED TO USE A VOLUNTARY APPROACH TO THIS ISSUE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 9/27/85 PAGE 15 6. AND THE PROGRAM WE'VE ADOPTED IMPLIES VOLUNTARY PARTICIPATION WITH, ADMITTEDLY, A DEGREE OF EXAMINER OVERSIGHT LOOKING OVER THE SHOULDER 7. THE FED HAS BEEN SENSITIVE TO INDUSTRY COMMENTS - HAVE FORMED THE LAR.GE DOLLAR PAYMENT SYSTEM ADVISORY GROUP TO THE BOARD OF GOVERNORS TO PROVIDE THIS INPUT A. 2 REPRESENTATIVES FROM OUR DISTRICT SERVE ON THIS COUNCIL - DON HOLLIS, SENIOR VICE ,,,,. 01/ ' PRES I DENT, FI R?i,fu CAGO CORCOR1U I:ON. AND JAY TOMSON, A DIRECTOR OF OUR BANK AND PRESIDENT OF THE CITIZENS NATIONAL BANK OF CHARLES CITY, IOWA X. LET ME NOW SHIFT TO A DESCRIPTION OF THE PROGRAM A. ROLE OF THE PRIVATE NETWORKS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 9/27/85 PAGE 16 1. THE POL I CY ST AT ES THAT ANY LARGE DOLLAR NETWORK OBTAINING NET SETTLEMENT SERVICES FROM A FEDERAL RESERVE BANK A. MUST REQUIRE EACH OF ITS PARTICIPANTS TO ESTABLISH BILATERAL NET CREDIT LIMITS FOR ALL OTHER PARTICIPANTS OF THAT NETWORK B. A SYSTEM MUST BE I NS TA L LED THAT REJECTS OR HOLDS ANY PAYMENTS THAT WOULD BREACH SUCH LIMITS C. NETWORKS MUST ESTABLISH SENDER NET DEBIT CAPS FOR ITS PARTICIPANTS DESIGNED TO REDUCE INSTITUTION RISK EXPOSURE ON THAT NETWORK B. THESE LIMITS SHOULD ENABLE PARTICIPANTS TO BETTER IDENTIFY AND CONTROL THE EXPOSURE THEY WOULD FACE IN THE EVENT OF A SETTLEMENT FAILURE 1. IN EFFECT, IT BRINGS THE CREDIT RISK ASSESSMENT PROCEDURE INTO THE WIRE TRANSFER OPERATION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 9/27/85 PAGE 17 2. THE PROCEDURE EXTENDS RISK EVALUATION AND ASSESSMENT TO THIS ACTIVITY ON A BASIS SIMILAR TO OTHER ASPECTS OF BANKING 3. CHESS, THE CH I CAGO _CLEAR I NG HOUSE ELECT RON IC SETTLEMENT SYSTEM, IS, OF COURSE, ONE OF THESE PRIVATE NETWORKS THAT IS COMPLYING WITH THE POLICY d ~ C. /"f°HE ROLE OF FINANCIAL INSTITUTIONS IN THESE PROCEDURES~ FOR ANY INSTITUTION PARTICIPATING IN THESE ACTIVITIES AND THAT INCUR DAYLIGHT OVERDRAFTS 1. THE FIRST STEP IN THE PROCESS IS TO PERFORM A SELF-EVALUATION A. THIS PROCESS INVOLVES EXAMINATION OF CREDIT WORTHINESS 8. OPERATIONAL POLICIES AND PROCEDURES C. CREDIT POLICIES AND PROCEDURES 2. AFTER EVALUATING ITSELF IN EACH OF THESE 3 AREAS, THE INSTITUTION THEN DEVELOPS A RATING FOR EACH Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 9/27/85 PAGE 18 3. THE 3 RATINGS ARE COMBINED TO Y~ELD AN0 _ lA)-~-J,, / f2 1:1,tv 5 'jl-c,J}_ :;-. ,,<,fl/ 1 r(p ~ INST I TUT ION S OVERALL ASSESSMENT CAP I CLASSIFICATION 4 . --- T HE 1 MS.llI UI I QN MI I SI .. Jtf:KL. -~ S} ~ ~-L I SA I TS NE I s~~O:ft~aJ- L/ :It. ~ENDER NET DEBIT CAP IS THE MAXIMUM AGGREGATE NET DEBIT ON PRIVATE WIRE SYSTEMS PLUS THE MAXIMUM OVERDRAFT IN A FEDERAL RESERVE BANK ACCOUNT THAT AN INDIVIDUAL DEPOSITORY INSTITUTION CAN INCUR AT ANY TIME DURING THE DAY 5. THE CAP, IN EFFECT, PLACES AN AGGREGATE LIMIT ON ~ THE DAYLIGHT CREDIT AN INSTITUTION CAN PROVIDE TO OTHER I NS TI TUT IONS DUR I NG THE DAY ACROSS ALL NETWORKS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 9/27/85 PAGE 19 6. FINALLY, AN INSTITUTION 1 S BOARD OF DIRECTORS MUST /2.;u.,', ~ APPROVE ·-ANO: itlVltW THE SELF-EVALUATION PROCESS AND RESULTING CAPS A. THE INSTITUTION MUST THEN NOTIFY ITS FEDERAL '--Fi~ RESERVE BANK OF TH0LECTED CAP ~~ CLASSIFICATION ( c,_ \~ .'~~) c_'-13 IS /2.L~ ~ r~-~"'-'u B. AT LEAST SNEE IN EAet1 :f:I MONTH fl~" IOU I HE Fnwo.Ag{ JTW,'CA-.. ~ y~ ~ INSTITUTION S BOARD OF DIRECTORS MUST APPROVE 1 AND REVIEW THE CAP CLASSIFICATION C. THE INITIAL CAP CLASSIFICATION MUST BE REVIEWED BY INDIVIDUAL BOARDS OF DIRECTORS BY THE END OF FEBRUARY 1986 TO PROV I DE FOR POLICY IMPLEMENTATION ON MARCH 27, 1986 t XI. THE ROLE OF THE FEDERAL RESERVE A. FEDERAL RESERVE BANKS WILL MONITOR DAYLIGHT OVERDRAFT OCCURRENCES DAILY ON AN EX-POST BASIS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1. UNDER THIS MONITORING PROCEDURE,~N.l:fttiIIIIJI8N 16 J1 vJ ~ ~ 0,../,·.IMJ F/2.~ DAYLIGHT OVERDRAFT DATA W-11 I ,~ c-01:t,cTaD. F-ROM ALL WIRE SYSTEMS A~B RE¥IEWEB 2. REPORTS WILL BE PROVIDED TO ALL INSTITUTIONS INCURRING DAYLIGHT OVERDRAFTS Sh.a-W.tJ B. WUEHE'11Ef¼'AN INSTITUTION ~ INCURR\A. AN OVERDRAFT IN EXCESS OF I TS DETERMINED CAP, THE FEDERAL RESERVE BANK WILL COUNSEL WITH THE INSTITUTION TO DETERMINE/'\ __ , "'fo fCIZ,Q1'U-v JUST WHY THE EXCESSIVE OVERDRAFT OCCURRED AS ~~ -;'- IMPLEMENT AT ION ~ PROCEDURES TO REDUCE THE EXCESS 1YE USE OF INTRA-DAY CREDIT C. AS A PART OF THE EXAMINATION PROCESS, EXAMINERS WILL REVIEW THE CONTENTS OF THE CONFIDENTIAL f;~v~-~~~a,_g~ b~,·~~ .(, c:l-:.d'pURPOSE OF THE REVIEW IS TO ASSURE THAT AN ' INSTITUTION HAS REASONABLY PERFORMED THE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT Cl) 9/27/85 ~~ APPROPRIATE SELF-EVALUATION A~ TIIAT THE RfStlt.TS Of TH! S EV.OLUA.T ION ARE GENERALLY CONS I SJEN:P WI TH TH-E EXAMINER REP6RT 2. ANY COMMENTS THAT THE EXAMINER MAY HAVE REGARDING THE SELF-EVALUATION PROCESS AND THE RATING WILL BE FORWARDED TO THE INSTITUTION S BOARD OF 1 DIRECTORS XII. TO CONCLUDE A. THIS WHOLE ISSUE IS ONE THAT HAS GOTTEN THE ATTENTION AND INTEREST OF VERY SENIOR MANAGEMENT IN FINANCIAL INSTITUTIONS 1. WHEREAS, AS I SUGGESTED, THE INDUSTRY MIGHT HAVE BEEN SLIGHTLY BEHIND THE CURVE AT THE OUTSET 2. IT'S MY SENSE THAT MANY INSTITUTIONS ARE AT LEAST ON THE CURVE OR PERHAPS A BIT AHEAD A. THERE ARE GROWING INDICATIONS THAT MANY INSTITUTIONS ARE ALREADY MANAGING THEIR Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 9/27/85 PAGE 22 DAYLIGHT OVERDRAFTS AND REDUCING THEIR EXPOSURES B. AND I DON'T THINK THE MOTIVATION FOR DOING THIS HAS COME SOLELY FROM THE PROGRAM THAT IS BEING IMPLEMENTEU BY THE FED C. THERE HAVE BEEN ENOUGH SPECIFIC EXAMPLES THAT HAVE CAUSED MANAGEMENTS TO TAKE ACT ION ON THEIR OWN D. AGAIN, CREDIT RISK ASSESSMENT IS BEING BROUGHT INTO THE PROCEDURE IN AN APPROPRIATE MANNER 3. THERE IS ALSO THE REALIZATION ON THE PART OF OT HERS WHO MAY PERHAPS HAVE BEEN A LITTLE MORE RELUCTANT A. THAT THIS IS A NO-FOOLING ISSUE FOR THE FEDERAL RESERVE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT Cl} 9/27/85 PAGE 23 B. THAT A LACK OF PROGRESS BY THE INDUSTRY ON A VOLUNTARY BASIS WOULD RESULT IN A HEAVIER REGULATORY RESPONSE C. OPERATIONALLY THE PROCEDURE MIGHT BE A LITTLE LESS FLEXIBLE B. BUT, IF THE PROGRAM I HAVE OUTLINED DOES NOT ACHIEVE THE DESIRED GOALS. THE BOARD OF GOVERNORS MAY FEEL IT NECESSARY TO CONSIDER A MORE RIGOROUS APPROACH, •NCLUBING REGULATOftY LIMITS ANB 8VERQRA~TS 1. FROM OUR VIEW, DAYLIGHT OVERDRAFTS ARE AN OPERATIONAL ISSUE THAT IN SOME MAGNITUDE AND _/.,... a c:c~- ~tvU FR EQUENCE WE WI LL BE WI LL I NG TO UM:ri-RA--T E - v~~vu P~~~~::D (OVERDRAFTS ARE NOT A PRIVILEGE . ' h-, IHEBEFORE. WE MAY NEED TO iECOME A LITTLE BRISl+-ER 9crUL ~'Jc),, ™' l0 ~NCQURAGE ~ URTll~Rf:ftttCT Ie-N--t>F THESE 1t:beKS C. BUT, MORE POSITIVELY, SO FAR THE PROGRAM HAS ~EiH &QQD ~~~~ Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 9/27/85 PAGE 24 1. THERE IS THIS BROAD UNDERSTANDING BY THE INDUSTRY OF THE PROBLEM 2. THE PROGRAM THAT HAS BEEN DEVELOPED SO FAR IS A CONSTRUCTIVE APPROACH TO THE ISSUE 3. I FIND THE VOLUNTARY-ASPECT TO BE HIGHLY POSITIVE 4. THIS RECORD WOULD SUGGEST THAT THE REALIZATION OF THE GOALS OF THE FEDERAL RESERVE SYSTEM TO REDUCE THIS RISK, AGAIN IN AN ENVIRONMENT THAT IS FACING A VERY WORRYING BUILDUP OF OTHER RISKS, CAN BE ACHIEVED 5. AND THAT'S OBVIOUSLY IN THE BEST INTEREST OF THE FINANCIAL INSTITUTIONS THAT WE SERVE ~ ~ fru~ J{;,, ,u,J.,,> J,J c~ ,( , &,j Y,;2,, 1- ~-,ur./' {J~~, THANK YOU * * * * * Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1985, October 6). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19851007_silas_keehn

@misc{wtfs_regional_speeche_19851007_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1985},
  month = {Oct},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19851007_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}