Regional President Speech

SK DRAFT (3) FINAL SILAS KEEHN REMARKS DELOITTE HASKINS & SELLS BANKING CONFERENCE CHICAGO MARRIOTT OCTOBER 9, 1985 I. 1. AS A FORMER BANKER AND NOW A REGULATOR - PLEASED TO GIVE YOU MY VIEWS REGARDING ENVIRONMENT IN e\J,,tuv~ FINANCIAL INSTITUTION BOTH NOW AND IN THE YEARS AHEAD I I. TO SUPR I SE YOU A- lol"i- A. LET ME START WITH A VERY BRIEF ECONOMIC REVIEW - NOT WHAT YOU CAME TO HEAR 1. YOU WILL BE HEARING FROM AN OUTSTANDING AUTHORITY ON THIS SUBJECT LATER TODAY 2. BUT THIS WILL PROVIDE AN APPROPRIATE CONTEXT FOR MY LATER COMMENTS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 2 B. THE ECONOMIC OUTLOOK FOR THE NEXT FEW QUARTERS IS POSIT IVE 1. WOULD ANTICIPATE REAL GNP GROWTH OF, SAY, 2-1/2 TO 3% FOR AT LEAST THE NEXT 3 OR 4 QUARTERS 2. THE EXACT MAGNITUDE OF THE INCREASE NOT AS IMPORT ANT AS THE RI SK OF A RENEWED RECESS ION IN THE NEAR TERM IS DIMINISHING 3. CONSUMPTION HAS BEEN MOVING AHEAD EVEN MORE RAPIDLY ~ T" cSrw-c.-l.flZ-<+,1,~pJ°' A. 3%/4% DURING THE FIRST HALF OF THIS YEAR VERSUS THE 1% GROWTH IN GNP B. FROM A CONSUMPTION POI NT OF VIEW THE CURRENT AND PROSPECTIVE ECONOMIC SITUATION IS STRONG C. IN FORMER TIMES (BEFORE THE ADVENT OF ENORMOUS TRADE DEFICITS) HIGH LEVELS OF CONSUMPTION WOULD BE PARALLELED BY HIGH LEVELS OF OUTPUT - GNP Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 3 D. WE All WOULD HAVE VIEWED THIS AS STRONG PERFORMANCE, PARTICULARLY IN LIGHT OF THE FACT THAT WE ARE ALMOST THROUGH THE THIRD YEAR OF THIS EXPANSION CYCLE Ill._ BUT AGAINST THIS POSITIVE BACKGROUND THERE IS, ON A GLOBAL BASIS, THE BU I LDUP OF SOME VERY UNSET Tl I NG IMBALANCES THAT POSE A RISK TO THE ECONOMY A. THE AGRICULTURAL SECTOR FOCUSED TO SOME CONSIDERABLE EXTENT IN THIS FEDERAL RESERVE DISTRICT S~-~s _ 1. FARM CREDIT SITUATION - GROWING PROBLEMS, WELL PUBLICIZED - PARTICULARLY DURING THE PAST WEEK OR so 2. AGRICULTURE BANKS - PROBLEM BANKS, AMONG THOSE CONCENTRATED IN AGRICULTURAL AREAS 3. RURAL AMERICA - MAIN STREET THE ENTIRE INTERNATIONAL SITUATION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE q 1. THE ENORMOUS TRADE DEFICIT - MOUNTING OVER PAST SEVERAL YEARS A. WITH DEVASTATING EFFECTS ON OUR EXPORTERS AS WELL AS ON SUPPLIERS TO DOMESTIC MARKETS THAT ARE BEING INUNDATED WITH IMPORTS 2. THE VERY HIGH VALUE OF THE DOLLAR ~Th,t.t.v~ Af A. BASED ON ACTIVITIES TWO WEEKENDS AGO, MAY BE IN THE PROCESS OF AMELIORATING (l} BUT WE WON'T FEEL THE DIRECT TRADE EFFECTS FOR QUITE SOME WHILE 3. EXTERNAL DEBTS OF LESSER DEVELOPED COUNTRIES A. AFTER A PERIOD OF IMPROVEMENT, THE SITUATION IS AGAIN SHOWING SIGNS OF STRAIN ,,.--0 (l} THE AMOUNT OF FOREIGN DEBT OWED ,.._ U.S. BANKS BY LATIN AMERICAN COUNTRIES NOW TOTALS SOME S76 BILLION, UP SLIGHTLY FROM THE S72 BILLION OF 2 YEARS AGO Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 5 ~~, ~ (2) SEllliiH 8fi =FIIE ililN LARGEST U.S. BANKS HAVE LOANS TO LATIN AMER I CAN COUNTRIES THAT 4 EXCEED THEIR CAPITAL T ,: ~ at-~ "'w,·~, ... ,._,, I 'YJI\JIAAl w ~~- """(_ B. ACTIVITIES THIS MAY PRODUCE NEW wtt~r1N ~uKtA INITIATIVES TO DEAL WITH THESE DIFFICULT DEBT ISSUES µ C. ONE THING HAS BECOME CLEAR - WE NOW OPERATE IN A GLOBAL ECONOMY - EVENTS TAKING PLACE ALL OVER THE WORLD HAVE A DIRECT IMPACT ON OUR • MARKETS AND OUR INSTITUTIONS ~r'$ k, r:'J~ /\.,~:~ ''- C. ,...,.-HE INEXORABLE BU I LOUP OF DEBT ACROSS ALL SEGMENTS OF OUR ECONOMY 1. PERSONAL DEBT - RISING TO RECORD LEVELS A. THE STRONG CONSUMPTION NUMBERS SUPPORTED BY SIGNIFICANT INCREASE IN CONSUMER DEBT B. IN THE FIRST HALF OF 1985 HOUSEHOLD DEBT ROSE AT AN ANNUAL RATE OF 131 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 6 2. CORPORATE DEBT - ALSO RISING A. TO SOME EXTENT, ACCELERATED BY MERGERS AND TAKEOVERS B. THERE HAS BEEN A SHIFT IN THE BALANCE TOWARD HIGHER DEBT IN RELATIONSHIP TO CAPITAL (1) IN 198q CORPORATE EQUITY ON AN AGGREGATE BASIS ACTUALLY DECLINED IN A SIGNIFICANT AMOUNT AND HAS CONTINUED TO DECLINE IN 1985 MEANWHILE, CORPORATE DEBT ROSE BY OVER ( 2) Sl80 BI LL I ON IN 198q AND HAS CONT I NUED TO RISE SO FAR IN 1985 C. SUBSTITUTION OF DEBT FOR EQUITY MAY FREQUENTLY REFLECT DELIBERATE RESTRUCTURING - AN EFFORT BY MANY COMPANIES TO FEND OFF CORPORATE RAIDERS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 7 ( 1) BUT THIS SHIFT INCREASES THE VULNERABILITY TO ECONOMIC SETBACKS (2) ESPECIALLY TRUE IF THE DEBT IS CONCENTRATED IN SHORT TERM MATURITIES 3. AND THEN THERE IS THE MASSIVE BUILDUP OF FEDERAL DEBT FUELED BY A. THE BUDGET DEFICIT - WHICH CONTINUES AT RECORD LEVELS (1) 5% OF GNP NOT USUAL IN RECESSION (2) BUT IS UNUSUAL THIS FAR INTO A RECOVERY B. THE ACCELERATION OF THE TREASURY S 1 OUTSTANDING DEBT LEVEL IS OF GREAT CONCERN CONGRESS CONS I DER I NG AN INCREASE IN THE ( 1) AUTHORIZED LEVEL (I) BUT IT WI LL PROBABLY JUST HOLD US UNTIL THE END OF THIS FISCAL YEAR Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 8 C. IN THE PROCESS THE U.S. HAS BECOME A NET DEBTOR NATION FOR THE FIRST TIME SINCE 1914 (1) FOREIGN MARKETS HAVE PROVIDED CAPITAL TO FINANCE OUR DOMESTIC DEFICITS (2) THESE CAPITAL INFLOWS, IN EFFECT, HAVE 1)/)A'J;W ~ ~ ~ ~ r ~Ab!LITAfE UR HIGH CONSUMPTION LEVELS (3) AT CURRENT RATES WE WILL BECOME THE LARGEST DEBTOR NAT ION IN THE WORLD SOMETIME NEXT YEAR ( 4) THEN WILL BE IN THE SAME UNCOMFORTABLE POSITION THAT LATIN AMERICAN COUNTRIES NOW FIND THEMSELVES IN (5) SERVICING THIS EXTERNAL DEBT HAS SOME ~ DRACONIAN IMPLICATIONS "' OUR DOMESTIC ~ rt:sJ-:r.-h~ CONSUMPTI~ LE~ELs"~ STANDARD OF LIVING (6) NOT SURE THAT AS A SOCIETY WE HAVE YET ~~Maj.~ FOCUSED ON~~ISSUE " Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 9 D. CONTINUING PROBLEMS IN THE THRIFT INDUSTRY AND WITH ~ h"-:'<f (.j&J THE BANKS ,N /\A. . ¢.1.rf i",rv ,--- 1. THRIFTS - HIO AND41ARYLAND ~ v->t...x-~~ ,....;:,;:-~ • ~~~,' A. MAIN PROBLEMS NO LONGER INTEREST RATE RELATED - NOW BAD LOANS AND INVESTMENTS--n'- r i .... . .Jo(. ff,J'A t,..r ~ ~ B. THREE YEARS AGO 80% OF F--.1~5D THRIFT ~TO RATE GAP PROBLEMS C. TODAY BAD LOANS ACCOUNT FOR 70% OF THE FAILURES 2. ASSET QUALITY ALSO DETERIORATING IN COMMERCIAL BANKING PORTFOLIOS - ENERGY - REAL ESTATE - AGRICULTURE 3. ALL OF THIS AGAINST A BACKGROUND OF DEREGULATION A. SOME WOULD ARGUE THAT DEREGULATION PER SE HAS CAUSED THESE PROBLEMS AND HAS UNDERMINED THE STABILITY OF THE FINANCIAL SYSTEM B. I WOULD DISAGREE - MANY OF THE SYSTEMIC ISSUES HAVE LITTLE OR NOTHING TO DO WITH DEREGULATION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 10 (1) INDEED, JUST THE OPPOSITE - CAUSED BY OUTDATED REGULATION THAT REMAINED IN PLACE LONG AFTER ITS DAY C. THE WHOLE FINANCIAL SERVICE INDUSTRY IS UNDERGOING ENORMOUS CHANGE AND AT A DIZZYING PACE (1) LARGELY MARKETPLACE DRIVEN ( 2) AND BROUGHT ABOUT BY NONBANK (NONREGULATED) COMPETITORS ~ (3) IN -@l' CATEGORIES OF ACTIVITY - MANY TRADITIONALLY THE EXCLUSIVE DOMAIN OF COMMERCIAL BANKS - THE INROADS HAVE BEEN ASTOUNDING ~-(#:t-~s~- <'-1> THE SEARS OF THE WORLD HAVE ESTABLISHED IMPORTANT MARKET POSITIONS IV. STEPPING BACK REVIEWING ALL OF THESE IMBALANCES SUGGESTS A CONDIT ION OF SOME ltiIIJiII JJ ./ Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 11 A. FROM A REGULATORY POINT OF VIEW, VERY LITTLE WE CAN DO TO DEAL WITH MOST OF THE RISK~ENUMERATED 1. THEY ARE VERY COMPLEX, DIFFICULT ISSUES 2. WE ARE GOING TO HAVE TO GO THROUGH A PHASE OF CONSIDERABLE ADJUSTMENT T"'4,J.. B. BUT MY POI NT, PARTICULARLY FOR BANK MANAGERS - TH IS I-\ IS A PERIOD IN WHICH A HIGH LEVEL OF CAUTION IS MER IT ED 1. PROBLEMS AND ISSUES THAT CAN BE CONTROLLED AND DEALT WITH SHOULD BE ••• V. THERE ARE SOME AREAS THAT LEND THEMSELVES TO FURTHER REGULATORY REVIEW AND ACTION - WHICH, PERHAPS, EVIDENCES CONCERN ON OUR PART r ,-< - - ,{ - }. - 5 - A. CAP IT AL - WE ARE MOVING TO AN EVEN GREATER EMPHASIS ON CAPITAL ~~~ 1. YOU HAVE HEARD THE EARLY COMMENTS INDICATING A SHIFT TO STRONGER CAPITAL POSITIONS - FROM 61 TO Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 12 2. WITH MUCH OF THE INCREASE TO BE PERMITTED IN THE FORM OF SUBORDINATED DEBT 3. AND WE WILL BE ASSESSING THE RISK PROFILE OF THE BANK BALANCE SHEET IN OUR CAPITAL CONSIDERATIONS A. A HARDER LOOK AT THE QUALITATIVE ASPECTS OF LOAN PORTFOLIOS AND, MOST IMPORTANTLY, THE WHOLE ISSUE OF OFF-BALANCE SHEET ACTIVITIES B. OUR CAPITAL GUIDELINES HAVE BEEN VERY ARITHMETIC IN THEIR APPROACH C. WE NEED TO FOCUS MORE ON THE RISK ELEMENTS RATHER THAN CONTINUING TO ENCOURAGE THE SHIFT OF ASSETS OFF OF THE BALANCE SHEET B. DIVIDENDS - OBVIOUSLY A COMMENT PERTAINING TO INSTITUTIONS THAT ARE DEALING WITH PROBLEM SITUATIONS 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 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 13 C. EARLIER THIS WEEK BOARD OF GOVERNORS ISSUED A NEW POLICY DIRECTIVE STRENGTHENING THE SUPERVISION OF STATE MEMBER BANKS AND BANK HOLDING COMPANIES 1. BASICALLY INCREASES THE FREQUENCY OF EXAMINATIONS 2. EMPHASIS ON LARGER INSTITUTIONS 3. INSTITUTIONS EXPERIENCING PROBLEMS OR WITH INDICATIONS OF POTENTIAL PROBLEMS D. WE WILL IMPROVE OUR PROCEDURES FOR COMMUNICATING ~ DEFICIENCIES AN"lJ lCSOE~ ~ SENIOR MANAGEMENT$ AND 1't:? Wi'1'R BANK BOARDS OF DIRECTORS 1. R~arn AJQRY REPRESENTATION IN THIS PROCESS WILL INVOLVE A HIGHER LEVEL OF SENIORITY~~~~ 2. WE WILL BE COVERING ISSUES BEYOND THE NARROW REVIEW OF THE EXAMINATION E. ALL OF THESE STEPS SEEM ENTIRELY APPROPRIATE GIVEN THE UNCERTAINTY OF THE TIMES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 14 ,. t.S 1. THE NUMBER OF PROBLEMSOME SITUATIONS Wf=tIRI 51.:C CLEARLY INCREASING F. THESE MAY SOUND LIKE MOVES BACK TOWARD RE-REGULATION - BUT THEY ARE NOT 1. RATHER THESE ARE ENHANCED SUPERVISORY STEPS TO SUIT THE CIRCUMSTANCES 2. NOT RE-REGULATION AS IT HAS APPLIED TO SPECIFIC BANKING ACTIVITIES - THERE IS AN IMPORTANT DIFFERENCE VI. IF DEREGULATION IS GOING TO CONTINUE AND IF MARKET COMPETITIVE FORCES ARE GOING TO INTENSIFY (AND WOULD ANYONE HERE QUEST I ON EITHER OF THESE BASIC TRENDS?) IT STANDS TO REASON THAT THE MANAGEMENT FUNCTION Will BECOME INCREASINGLY DIFFICULT AND IMPORTANT A. IN THE HIGHLY REGULATED ENVIRONMENT OF YESTERYEAR, UNDER REASONABLY BENIGN CIRCUMSTANCES EVEN A BADLY ~d- MANAGED INSTITUTE COULD DO REAS8PffcB~Y WELL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 15 1. HONESTLY, IT JUST WASN'T THAT COMPLICATED, BUT MARKET DEVELOPMENTS AND THE VAST STRUCTURAL MODIFICATIONS THAT HAVE AND CONTINUE TO OCCUR HAVE CHANGED ALL THAT B. MARKETPLACE DEVELOPMENTS HAVE BEEN THE MAJOR CAUSE OF c.fi..,.. ~JP.::, MANY OF THESE PEEt,MS - DEREGULATION HAS BEEN FOLLOWING ON A LAGGING BASIS 1. REGULATION, AT BEST, ONLY TEMPORIZES DEVELOPMENTS IN A FREE MARKET ENVIRONMENT (JJol/- c. l HAVE TRIED TO DESCRIBE AN ECONOMIC SITUATION THAT IS AT LEAST UNCERTAIN AND AM FIHDNCJAI £iAv1,,s INDUSTRY ENVIRONMENT THAT IS EQUALLY UNCERTAIN 1. GI VEN THESE CIRCUMSTANCES, IT SEEMS TO ME THAT BANK MANAGEMENTS HAVE AN EXCEPTIONALLY IMPORTANT RESPONSIBILITY IN OVERSEEING THE AFFAIRS OF THEIR INSTITUTIONS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 16 D. NONE OF THE CONCEPTS THAT l COULD SUGGEST TO PEOPLE SUCH AS YOU ARE NEW NOR CAN THEY COME AS A SURPRISE TO ANY OF YOU 1. YET, WE ARE GOING THROUGH A PERIOD IN WHICH THE NUMBER OF BANK FAILURES IS REACHING LEVELS UNSEEN SINCE THE 13OS A. AND WITH EACH OF THE INSTITUTIONS THAT IS EXPERIENCING THESE PROBLEMS, THERE SEEMS TO HAVE BEEN AN OBVIOUS FAILURE IN THE MANAGEMENT PROCESS 2. LET ME JUST REVIEW A FEW OF THE ISSUES THAT SEEM PARTICULARLY IMPORTANT Vil. CERTAINLY NOTHING NEW HERE BUT THEY BEAR REPEATING A'~r A. DEPOSITS - DEREGULATION HAS RE SUL TED IN THE PAYMENT OF INTEREST ON MOST DEPOSITS 1. BUT THOUGH A SUBSTANTIAL PART OF RETAIL ACCOUNTS INVOLVE THE PAYMENT OF INTEREST, THEY ARE STILL CORE DEPOSITS IN A FUNDAMENTAL SENSE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 17 2. THEY ARE NOT PURCHASED FUNDS IN A MARKET SENSE - AS A CONSEQUENCE, THERE IS A HIGHER LEVEL OF STABILITY INVOLVED A. CORE DEPOSITS SIMPLY DON'T SHIFT BECAUSE OF A VARIANCE OF A FEW BASIS POINTS - PURCHASED /d-0 O:MJ~ ~DS(DO AND WITH GREAT SPEED " 3. PURCHASED FUNDS CERTAINLY PLAY A VITAL ROLE IN OUR BANKING SYSTEM, BUT AS A MANAGER, YOU SHOULD TAKE SPECIAL CARE TO STRIKE A REASONABLE BALANCE BETWEEN PURCHASED FUNDS AND RETAIL DEPOSITS 4. ASSET GROWTH THAT IS NOT CONTROLLED AND CAREFULLY MANAGED AND THAT IS SUPPORTED BY AN OVER- DEPENDENCE ON PURCHASED FUNDS AS OPPOSED TO CORE DEPOSITS CAN AND DOES INTRODUCE A LEVEL OF INSTABILITY ~~ ';:-ENDING - CLEARLY, COMMERCIAL BANKING IS NOT AND CANNOT BE A HIGH RISK ACTIVITY IN THE APPROACH TO LENDING Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 18 ~ J 1. NET INTEREST MARGINS AND ftMIS ON ASSETS SIMPLY DO NOT PROVIDE ROOM FOR EXCESSIVE RISK TAKING 2. THE TOTAL LENDING MARKET, THE TOTAL CREDIT PIE, IF YOU WILL, MAY NOT HAVE AN ABSOLUTELY FINITE LIMIT, 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 3. GIVEN COMPETITIVE STRAINS, SPREADS ARE UNDER TREMENDOUS PRESSURE A. CERTAINLY, INCREASING COMPETITION FROM NONBANKING SOURCES ONLY EXACERBATES THE PROBLEM B. THESE VARIOUS COMPETITIVE FACTORS MAY WELL BE CAUSING A DETERIORATION IN LOAN QUALITY C. THESE\, ~ T LEND THEMSELVES TO REGULATORY SOLUTIONS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 19 VIII. LET ME SHIFT TO SOME MANAGEMENT CONCEPTS A. 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 1. 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 A. IN A FINANCIAL ORGANIZATION CHECKS AND BALANCES ARE VERY, VERY IMPORTANT B. PROCEDURES AND CONTROLS - GIVEN THE CHANGING NATURE OF THE ENVIRONMENT, INSTALLING APPROPRIATE PROCEDURES AND CONTROLS IS CRITICALLY IMPORTANT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 20 1. THESE PROCEDURES AND CONTROLS MUST BE WELL KNOWN, MUST BE UNDERSTOOD AND AGREED TO BY ALL INVOLVED 2. VAGUE UNDERSTANDINGS AS TO JUST HOW THINGS SHOULD WORK, DON'T WORK 3. EVERYONE MUST KNOW JUST WHAT THEY CAN DO, WHAT THEIR AUTHORITIES ARE, AND JUST HOW THE PROCESS WORKS C. MANAGEMENT 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 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 21 2. IT USED TO BE THAT ONLY LARGE INSTITUTIONS COULD~ DEVELOP, AND AFTERWARD MAINTAIN, SOPHISTICATED ~ MANAGEMENT INFORMATION SYSTEMS 3. NO LONGER THE CASE - WITH THE DRAMATIC REDUCTION IN THE COST OF COMPUTERS AND THE APPROPRIATE SYSTEMS, SOPHISTICATED M.I.S. PROGRAMS ARE AVAILABLE TO EVEN THE VERY SMALLEST BANKS D. PROFIT CENTER ACCOUNTING - THOUGH IT IS CERTAINLY IMPORTANT TO ESTABLISH ACCOUNTABILITY AND RESPONSIBILITY THROUGHOUT THE ORGANIZATION, EXCESSIVE EMPHASIS ON PROFIT CENTER PROFITABILITY HAS LED TO SOME QUESTIONABLE PRACTICES 1. WHEN THIS LEADS TO A HIGHLY, PERHAPS OVERLY, COMPETITIVE ENVIRONMENT AND WHEN COMPENSATION REWARDS ARE DIRECTLY DERIVED FROM SHORT TERM RESULTS, A DANGEROUS ELEMENT IS INTRODUCED. THIS SEEMS HIGHLY INAPPROPRIATE FOR INST I TUT IONS THAT HAVE A FUNDAMENTAL FIDUCIARY RESPONSIBILITY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 22 E. BANK BOARDS OF DI RECTORS WI LL PLAY AN I NCREAS I NGL Y IMPORTANT ROLE - NOT IN THE DAY-TO-DAY MANAGEMENT OF AN INSTITUTION BUT AT THE GOVERNANCE LEVEL 1. BOARDS CANNOT AND SHOULD NOT MANAGE A BANK 2. BUT THEY HAD BETTER UNDERSTAND THE GOVERNANCE PROCESS 3. MANAGEMENTS HAVE THE RESPONSIBILITY TO BRING THE LEVEL OF AWARENESS OF THEIR DIRECTORS UP TO THE POINT THAT THE BOARD CAN PROPERLY EXERCIZE ITS GOVERNANCE RESPONSIBILITY 4. IF A DI RECTOR IS UNABLE OR IS UNWILLING TO SPEND THE TIME, THE DI RECTOR SHOULD SERIOUSLY CONS I DER GETTING OFF THE BOARD 5. BOARDS OF DIRECTORS SHOULD HAVE THE APPROPRIATE COMMITTEES WHICH PROVIDE THE OPPORTUNITY TO REVIEW AND DISCUSS SPECIFIC AREAS OF ACTIVITY FREQUENTLY AND IN DEPTH Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 23 6. THE PRIMARY RESPONSIBILITY FOR THE SATISFACTORY OPERATION OF AN INSTITUTION MUST REMAIN WITH THE BOARD OF DIRECTORS, WHO, IN TURN, CHOOSE THE CHIEF EXECUTIVE OFFICER - CERTAINLY, THE MOST IMPORTANT DECISION THAT THE BOARD MAKES IX. BUT LET ME CONCLUDE ON WHAT I THINK IS A HIGHLY POSITIVE NOTE A. AS I HAVE SUGGESTED, THE NEAR TERM ECONOMIC OUTLOOK IS FAVORABLE B. BUT WE ARE DEALING WITH AN UNUSUAL ACCUMULATION OF SOME VERY SIGNIFICANT IMBALANCES 1. INDIVIDUALLY, NONE OF THESE ISSUES IS NEW TO US 2. BUT IN NUMBER AND IN MAGNITUDE, THE SITUATION IS DIFFERENT THAN ANY WE HAVE FACED IN THE PAST 3. BUT THE RECORD OF DEALING WITH THEM ON A ONE-BY-ONE BASIS HAS BEEN GOOD Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 24 4. WE HAVE MANAGED OUR WAY THROUGH SOME EXCEEDINGLY DIFFICULT CIRCUMSTANCES A. THE TRACK RECORD OVER THE PAST FEW YEARS IS ENCOURAGING 5. GIVEN THIS RECORD AND THE HEIGHTENED SENSITIVITY OF REGULATORS AND MANAGEMENTS ALIKE, I HAVE EVERY CONFIDENCE THAT WE WILL CONTINUE TO WORK OUR WAY THROUGH THESE VERY NECESSARY ADJUSTMENTS C. I HAVE SUGGESTED SOME STEPS THAT THE REGULATORS WILL vJg ~ BE TAK I NG AS T<Y RELATE TO T~ CONSTITUENT INSTITUTIONS 1. l WOULD HOPE YOU AGREE THAT THE TIMES MERIT THESE ADDITIONAL MEASURES D. AND I'VE ALSO SUGGESTED SOME STEPS AND GUIDELINES THAT ARE FUNDAMENTAL TO THE MANAGEMENT OF A BANK 1. THESE --y SEEM PARTICULARLY APPROPRIATE FOR TODAY AND TOMORROW BUT LOGIC WOULD SUGGEST THAT THEY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (3) 10/9/85 PAGE 25 WILL ALSO BE APPROPRIATE WELL INTO THE FUTURE - PERHAPS EVEN 1990 AND BEYOND \.......,p~ ~.--':'- 'E...~·~ ~,t)~ E. IMPORTANTLY, T IS ALWAYS FUN TO BE INVOLVED WHEN CIRCUMSTANCES ARE CHANGING, WHEN THINGS ARE MOVING 1. IT PROVIDES AN OPPORTUNITY FOR INNOVATION ~· ....... / 2. WHEN HARD WORK AND GOOD, CAREFUL MANAGEMENT SKILLS WILL BE REWARDED WITH EQUALLY GOOD RESULTS 3. CERTAINLY THE NEXT FEW YEARS WI LL PROV I DE TH IS TYPE OF EXCITING AND CHALLENGING ENVIRONMENT F. I LOOK FORWARD TO ALL OF THIS WITH GREAT ANTICIPATION AND I HOPE THAT YOU DO AS WELL * * * * * C: Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1985, October 8). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19851009_silas_keehn

@misc{wtfs_regional_speeche_19851009_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1985},
  month = {Oct},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19851009_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}