Regional President Speech

SILAS KEEHN REMARKS WAYNE HUMMER & CO. THE CHICAGO CLUB NOVEMBER 6, 1985 I. INTRODUCTION A. DELIGHTED TO BE HERE - HONORED THAT I HAVE BEEN ASKED 2. PLEASED TO GIVE YOU MY VIEWS REGARDING ENVIRONMENT IN WHICH WE LIVE - CURRENTLY, PROSPECTIVELY 3. AS A FORMER BANKER, I CERTAINLY CAN UNDERSTAND THE PROBLEMS AND CHALLENGES THAT YOU FACE 4. AS A REGULATOR, WE'RE NOT WITHOUT OUR CHALLENGES AS WELL II. TO SURPRISE YOU A BIT A. LET ME START WITH A VERY BRIEF ECONOMIC REVIEW 1. NOT WHAT YOU CAME TO HEAR Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) W. HUMMER & CO PAGE 2 2. BUT THIS WILL PROVIDE AN APPROPRIATE CONTEXT FOR MY LATER COMMENTS B. THE ECONOMIC OUTLOOK FOR THE NEXT FEW QUARTERS IS POSITIVE 1. WOULD ANTICIPATE REAL GNP GROWTH OF, SAY, 2-1/2% TO 3% FOR AT ~EAST THE NEXT 3 OR 4 QUARTERS 2. THE EXACT MAGNITUDE OF THE INCREASE NOT AS IMPORTANT AS THE RISK OF A RENEWED RECESSION IN THE NEAR TERM IS DIMINISHING 3. CONSUMPTION HAS BEEN MOVING AHEAD EVEN MORE RAPIDLY THAN THE GROWTH IN OUTPUT - AND THIS IS .. ~ REALLY Tj:t:E CRITICAL ISSUE A. 3%/4% DURING THE FIRST HALF OF THIS YEAR VERSUS THE 1% GROWTH IN GNP CfL ~~ B. FROM A CONSUMPTION POINT OF VIEW, THE CURRENT AND PROSPECTIVE ECONOMIC SITUATION IS STRONG Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT Cl} W. HUMMER & CO PAGE 3 C. IN FORMER TIMES {BEFORE THE ADVENT OF ENORMOUS TRADE DEFICITS}, HIGH LEVELS OF CONSUMPTION WOULD BE PARALLELED BY HIGH LEVELS OF OUTPUT - GNP D. WE ALL WOULD HAVE VIEWED THIS AS STRONG PERFORMANCE, PARTICULARLY IN LIGHT OF THE tJCYvJc~p,~~ ·, 1~12. FACT THAT ~RE -M.MOST JHRDIIG!-1 THE THIRD YEAR OF THIS EXPANSION CYCLE Ill. BUT AGAINST THIS POSITIVE BACKGROUND THERE IS, ON A GLOBAL BASIS, THE BUILDUP OF SOME VERY UNSETTLING IMBALANCES THAT POSE A RISK TO THE ECONOMY THE AGRICULTURAL SECTOR - FOCUSED TO SOME CONSIDERABLE EXTENT IN THIS FEDERAL RESERVE DISTRICT ~ 1. FARM CREDIT SITUATION - GROWING PROBLEMS, WELL ,...._ PUBLICIZED /.p__·, t,.cfl.-yT2Nf' ) ~b ~cfh...( ___ .---- .-·· •• -· •..... ___. ...._ ~ 2. AGRICULTURE BANKS - PROBLEM BANKS, AMONG THO.SE ~ CONCENTRATED IN AGRICULTURAL AREAS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) W. HUMMER & CO PAGE 4 3. RURAL AMERICA - HAIN STREET - r-1-s_lt.,·3/ ··..JJ·-·--::. P--~-L{.,,-::::8,,,,, - --~c ..-;:-_,, .., ------- THEN THERE IS THE ENTIRE INTERNATIONAL SITUATION ,.-- L , ...'.::::,Lt,..;O- (;~, •."S·::; 1. THE ENORMOUS TRADE DEFICIT - MOUNTING OVER PAST SEVERAL YEARS 2. THE VERY HIGH VALUE OF THE DOLLAR - INTERWOVEN WITH TRADE DEFICIT A. GIVEN INTERVENTION EFFORTS SINCE RECENT MEETING OF THE G-5 MINISTERS, MAY BE IN THE PROCESS OF FALL I NG INTO BETTER AL I GNMENT - BUT WE WON'T FEEL THE DIRECT TRADE EFFECTS FOR QUITE SOME WHILE - .·.:: -~ ·:--'.,...:-~ 1 ~- r -_(- - 1·· ., • ~-- ►· -Ta .,( t'--·.1 r ,·, •. ,:~•.:ti. c).......v_ .::: r• ' • • •-· -:- \ --_.. ., V '""' r -· , ... , ' !"' "'- 3, EXTERNAL DEBTS OF LESSER DEVELOPED COUNTRIES A. AFTER A PERIOD OF IMPROVEMENT, THE SITUATION IS AGAIN SHOWING SIGNS OF STRAIN THE AMOUNT OF FOREIGN DEBT OWED U.S. ( 1) BANKS BY LATIN AMER I CAN COUNTRIES NOW Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT Cl) W. HUMMER & CO PAGE 5 TOTALS SOME S76 BI LL I ON, UP SLIGHTLY FROM THE S72 BILLION OF 2 YEARS AGO (2) MANY OF THE LARGEST U.S. BANKS HAVE LOANS TO LATIN AMERICAN COUNTRIES THAT EXCEED THEIR CAPITAL B. ACTIVITIES LAST MONTH AT THE ANNUAL MEETING OF THE IMF/WORLD BANK IN KOREA, AND DEVELOPMENTS SINCE THEN, MAY PRODUCE NEW INITIATIVES TO DEAL WITH THESE DIFFICULT DEBT ISSUES C. BUT ONE THING HAS BECOME CLEAR - THE RAMIFICATIONS NOT FULLY APPRECIATED - WE NOW - , ~ - , 1 1 - - ,- ,. ic:;,.-, - ,/t - 1 :'_ 1 •r c,✓· I \- .I ' .,., ~ • 1 \} ~.I v ,.l_,c.; / ,v. ri I , ·- ~• j ; .._,,,,,. /\..,.,,, ,/ -------- ~ ··---. 'W' OPERATE IN A GLOBAL ECONOMY - EVENTS TAKING PLACE ALL OVER THE WORLD HAVE A DIRECT IMPACT ON OUR MARKETS AND OUR INSTITUTIONS (1) PERHAPS THE MOST SIGNIFICANT DEVELOPMENT OF OUR MORE RECENT EXPERIENCE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) W. HUMMER & CO PAGE 6 THE INEXORABLE BUILDUP 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 13% 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 1984 CORPORATE EQUITY ON AN AGGREGATE BASIS ACTUALLY DECLINED IN A SIGNIFICANT AMOUNT AND HAS CONTINUED TO DECLINE IN 1985 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) W. HUMMER & CO PAGE 7 (2) MEANWHILE. CORPORATE DEBT ROSE BY OVER $180 BILLION IN 1984 AND HAS CONTINUED TO RISE SO FAR IN 1985 C. SUBSTITUTION OF DEBT FOR EQUITY INCREASES THE VULNERABILITY OF CORPORATIONS TO ECONOMIC SETBACKS. ESPECIALLY 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 {l) 5% OF GNP NOT USUAL IN RECESSION {2) BUT IS UNUSUAL THIS FAR INTO A RECOVERY {3) CURRENT RHETORIC INTERESTING - TANGIBLE RESULTS VERY DISAPPOINTING B. IN THE PROCESS THE U.S. HAS BECOME A NET DEBTOR NATION FOR THE FIRST TIME SINCE 1914 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) W. HUMMER & CO PAGE 8 AT CURRENT RATES WE WI LL BECOME THE ( 1) LARGEST DEBTOR NATION IN THE WORLD SOMETIME NEXT YEAR {2) SERVICING THIS EXTERNAL DEBT HAS SOME DRACONIAN IMPLICATIONS FOR OUR DOMESTIC CONSUMPTION LEVELS - BY THAT I MEAN OUR STANDARD OF LIVING {3) NOT SURE THAT, AS A SOCIETY, WE HAVE YET FOCUSED ON THIS VERY MAJOR POLICY ISSUE 4. IN SHORT, ACROSS ALL SEGMENTS OF OUR ECONOMY/SOCIETY A. HAVE BECOME VERY LEVERAGED B. RATHER ODD - UNDERSTANDABLE IN PER I ODS OF HIGH INFLATION - BUT INFLATION NOW UNDER MUCH BETTER CONTROL C. INTRODUCED AN ELEMENT OF CONSIDERABLE INSTABILITY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) W. HUMMER & CO PAGE 9 (1) VULNERABLE TO ADVERSE DEVELOPMENTS D. CONTINUING PROBLEMS IN THE THRIFT INDUSTRY AND WITH THE BANKS 1. THRIFTS - PROBLEMS HIGHLIGHTED IN OHIO AND THEN IN MARYLAND 2. WHAT MAY NOT BE FULLY APPRECIATED A. HAIN PROBLEMS NO LONGER INTEREST RATE RELATED - NOW BAD LOANS AND INVESTMENTS B. THREE YEARS AGO 80% OF THE THRIFTS THAT FAILED DID SO ~ p PROBLEMS C. TODAY BAD LOANS ACCOUNT FOR 70% OF THE FAILURES 3. ASSET QUALITY ALSO DETERIORATING IN COMMERCIAL BANK I NG PORT FOL I OS - ENERGY - REAL EST ATE - AGRICULTURE 4. ALL OF THIS AGAINST A BACKGROUND OF DEREGULATION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT Cl) W. HUMMER & CO PAGE 10 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 INDEED, JUST THE OPPOSITE - CAUSED BY ( 1) 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) ~ CHANGES ARE LARGELY MARKETPLACE DRIVEN (2) AND BROUGHT ABOUT BY NONBANK (NONREGULATED) COMPETITORS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) W. HUMMER & CO PAGE 11 (3) IN SOME CATEGORIES OF ACTIVITY - MANY TRADITIONALLY THE EXCLUSIVE DOMAIN OF COMMERCIAL BANKS - THE INROADS HAVE BEEN ASTOUNDING (4) SUFFICE IT TO SAY, THAT THE SEARS OF THE WORLD HAVE ESTABLISHED IMPORTANT MARKET POSITIONS STEPPING BACK REVIEWING ALL OF THESE IMBALANCES SUGGESTS AN ENVIRONMENT OF CONSIDERABLE FRAGILITY A. MOST OF THE RISKS ENUMERATED ARE VERY COMPLEX, DIFFICULT ISSUES - NO EASY OR QUICK SOLUTIONS 1. WE ARE GO I NG TO HAVE TO GO THROUGH A PHASE OF VERY DIFFICULT ADJUSTMENT 2. VERY LITTLE THE FED CAN DO TO EASE THE ADJUSTMENT PROCESS A. NOR WOULD IT BE APPROPRIATE TO INTERFERE WITH IT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT Cl) W. HUMMER & CO PAGE 12 B. BUT MY POINT, FOR BANK MANAGERS AND FOR REGULATORS - THIS IS A PERIOD IN WHICH A HIGH LEVEL OF CAUTION IS MERITED 1. PROBLEMS AND ISSUES THAT ARE WITHIN OUR CONTROL AND CAN BE 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 A. CAPITAL - WE ARE MOVING TO AN EVEN GREATER EMPHASIS ON CAPITAL 1. You HAVE HEARD THE EARLY COMMENTS FROM CHIEF REGULATORS INDICATING A SHIFT TO STRONGER CAPITAL POSITIONS - FROM 6% TO 9% 2. WITH MUCH OF THE INCREASE TO BE PERMITTED IN THE FORM OF SUBORDINATED DEBT 3. THE EXPERIENCE WI TH SMALL AG BANKS HAS BEEN INSTRUCTIVE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) W. HUMMER & CO PAGE 13 A. START WITH A RELATIVELY STRONG CAPITAL POSITION B. HAVE BEEN ABLE TO WITHSTAND THE PRESSURE 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 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT Cl) W. HUMMER & CO PAGE 14 WE Will BEGIN TO FORMALIZE OUR PROCEDURES LAST MONTH THE BOARD OF GOVERNORS ISSUED A NEW POLICY DIRECTIVE STRENGTHENING THE SUPERVISION OF STATE MEMB~~ BANKS AND BANK HOLDING COMPANIES _r= __ ~~,s (A)c,~s~ ~~r 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 TO SENIOR MANAGEMENT AND TO BANK BOARDS OF DIRECTORS 1. REGULATORY REPRESENT AT I ON IN TH IS PROCESS WI LL INVOLVE A HIGHER LEVEL OF SENIOR I TY BY THE REGULATORS 2. WE WILL BE COVERING ISSUES BEYOND THE NARROW REVIEW OF THE EXAMINATION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT Cl} W. HUMMER & CO PAGE 15 E. ALL OF THESE STEPS SEEM ENTIRELY APPROPRIATE GI VEN THE UNCERTAINTY OF THE TIMES 1. THE NUMBER OF PROBLEMSOME SITUATIONS IS CLEARLY INCREASING F. THESE MAY SOUND LIKE MOVES BACK TOWARD RE-REGULATION - BUT THEY ARE NOT 1. RAT HER 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 I NT ENS I FY ( AND WOULD ANYONE HERE QUESTION EITHER OF THESE BASIC TRENDS?}, IT STANDS TO REASON THAT THE MANAGEMENT FUNCTION WILL BECOME INCREASINGLY DIFFICULT AND IMPORTANT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) W. HUMMER & CO PAGE 16 A. IN THE HIGHLY REGULATED ENVIRONMENT OF YESTERYEAR, UNDER REASONABLY BENIGN CIRCUMSTANCES, EVEN A BADLY MANAGED INSTITUTE COULD DO PRETTY WELL 1. HONESTLY, IT JUST WASN'T THAT COMPLICATED, BUT MARKET DEVELOPMENTS AND THE VAST STRUCTURAL MOD IF I CAT IONS THAT HAVE AND CONT I NUE TO OCCUR HAVE CHANGED ALL THAT ' MANY o'is-,,_ THE SE CHANGES - DEREGULATION HAS FOLLOWING 0~.A LAGGING BASIS \ 1. TEMPORl-ZES DEVELOPMENTS ----- / -,, 1· T&l~EE MARKET NVIRONMENT '- ,, __ ~_:_.~~~ - . ····-··-·---·~- •• • ----------~ I r-9 WELL, l HAVE lRIED TO DESCRIBE AN ECONOMIC SIT.llATION [()~/ C. THAT, WHILE FUNDAMENTALLY STRONG, IS FRAUGHT WITH UNCERTAINTIES AND AN INDUSTRY ENVIRONMENT THAT IS EQUALLY UNCERTAIN Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) W. HUMMER & CO PAGE 17 1. GI VEN THESE CIRCUMSTANCES, IT SEEMS TO ME THAT BANK MANAGEMENTS HAVE AN EXCEPTIONALLY IMPORTANT RESPONSIBILITY IN OVERSEEING THE AFFAIRS OF THEIR INSTITUTIONS D. NONE OF THE CONCEPTS THAT I COULD SUGGEST TO PEOPLE SUCH AS YOU ARE NEW NOR CAN THEY COME AS A SURPRISE TO ANY OF YOU VII. BUT LET ME BRIEFLY COMMENT ON SOME BASIC MANAGEMENT ISSUES: A. DEPOSITS - DEREGULATION HAS RESULTED 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 2. THEY ARE NOT PURCHASED FUNDS IN A MARKET SENSE - AS A CONSEQUENCE, THERE IS A HIGHER LEVEL OF STABILITY INVOLVED Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) W. HUMMER & CO PAGE 18 A. CORE DEPOSITS SIMPLY DON'T SHIFT BECAUSE OF A VARIANCE OF A FEW BASIS POINTS - PURCHASED FUNDS CAN AND DO WITH GREAT SPEED 3. PURCHASED FUNDS 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 A. CERTAINLY WE HAVE LEARNED THAT SOME PRETTY EGREGIOUS PRACTICES HAVE DEVELOPED IN THE BROKERED DEPOSIT BUSINESS 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 B. LEND I NG - CLEARLY. COMMERCIAL BANK I NG 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 (1) W. HUMMER & CO PAGE 19 1. NET INTEREST MARGINS AND RETURNS 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 GOOD 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 ISSUES SIMPLY DO NOT LEND THEMSELVES TO REGULATORY SOLUTIONS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) W. HUMMER & CO PAGE 20 VIII. 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 1. IN THE THIRD QUARTER REAL GNP ROSE AT A RATE OF u u--e,;~_ u/.,) 3M AND MOST OBSERVERS BELIEVE THAT IT WILL CONTINUE AT ABOUT THAT RATE THROUGH THE FOURTH QUARTER 2. EMPLOYMENT, NATIONALLY, ROSE IN SEPTEMBER TO 107.5 MILLION A. OVER 9 MILLION NEW JOBS CREATED SINCE END OF 1982 - 3. IN Ml 0-0CTOBER THE DOLLAR WAS 17% BELOW I TS FEBRUARY HIGH RELATIVE T.8 18 OT MER MA JQR ~ • , l -- ... - ~ .J--O1~ 't • ·.,1:, ,~ 1:..ai. .... ~ ;_ p•r~ ,.-_, .::. ..... -1,_,f 7 CAPITAL SPENDING'HAS BEEN STRONG /1 A. STRONGEST OF THE POST-WAR RECOVERIES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT Cl) W. HUMMER & CO PAGE 21 ~i ra..-e,l'\/'I... -~~~r-4, Mr.11 L~-JJ...() -L-r 1 ~1A ;· N 6- r-'-~~ 5. TMERi IS EVEN 1. iR!GHI SIDE IQ TIIE FARM SITUATlf>N A. WHILE SHORT -RUN OPERATING PERFORMAN.CE AMONG AG BANKS HAS BEEN DISMAL, AG BANKS HAVE A LOT OF STAYING POWER ( 1) AS I NOTED, THEY TEND TO BE VERY WELL CAPITALIZED (2) MOST OF THEIR DEPOSITS ARE INSURED SO THEY SHOULDN'T RUN INTO LIQUIDITY (3) PROBLEMS 6. THE BUILDUP IN HOUSEHOLD DEBT ALSO MAY NOT BE AS OMINOUS AS IT FIRST APPEARS A. THE RECENT SURGE IN CONSUMER DEBT DOES NOT SEEM 10 HAVE WEAKENED THE FINANCIAL POSITION OF THE HOUSEHOLD SECTOR RATIOS OF DEBT TO TOTAL ASSETS A~ ( 1) Afiers F.INANCllL HAVE NOT RISEN SIGNIFICANTLY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT Cl) W. HUMMER & CO PAGE 22 t2~ HOUSEHOLDS--th\:~~ UBS TAftllAl: l;_'f_ _ lqJ Ql l J_!) (3) CONSUMER LOANS DELINQUENCY RATE IS AT A ~ ~IVELY LOW LEVEL B. WE ARE, NEVERTHELESS, OPERATING IN A DIFFERENT ENVIRONMENT THAN WE DID 10 OR 20 YEARS AGO 1. INDIVIDUALLY, NONE OF TODAY'S CHALLENGES ARE 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 DEAL I NG WI TH THEM ON A ONE-BY-ONE BASIS HAS BEEN GOOD 4. WE HAVE MANAGED OUR WAY THROUGH SOME EXCEEDINGLY DIFFICULT CIRCUMSTANCES A. THE TRACK RECORD OVER THE PAST FEW YEARS IS ENCOURAGING B. THE BANKING INDUSTRY HAS SHOWN AMAZING RESILIENCY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT Cl) W. HUMMER & CO PAGE 23 (1) ROA FOR ALL COMMERCIAL BANKS WAS .781 IN 1975 AND .901 IN 1984 - /6..t.t',_,c:,,_f ( u·rvr-- V2._u• c{ S f+c, ~ J-fl~ru-u/ , 1/- .' /\-1 1 BANKS IN EVERY SIZE CLASS. EXCEPT THE ( 2) SMALLEST CATEGORY. WERE ABLE TO MAINTAIN THEIR 1980 LEVEL OF NET INCOME 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 {f;t:;; ~~,·~~ THRouGfinHESE VERY NECESSARY ADJUSTMENTS C. I HAVE SUGGESTED SOME STEPS THAT THE REGULATORS WILL BE TAKING AS WE RELATE TO OUR CONSTITUENT INSTITUTIONS 1. I 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 SEEM PARTICULARLY APPROPRIATE FOR TODAY AND Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT Cl) W. HUMMER & CO PAGE 24 TOMORROW BUT LOGIC WOULD SUGGEST THAT THEY WILL ALSO BE APPROPRIATE WELL INTO THE FUTURE E. IMPORTANTLY, PUT IN A BRIGHTER PERSPECTIVE, IT IS ALWAYS FUN TO BE INVOLVED WHEN CIRCUMSTANCES ARE CHANGING, WHEN THINGS ARE MOVING 1. IT PROVIDES AN OPPORTUNITY FOR INNOVATION 2. TIME WHEN HARD WORK AND GOOD, CAREFUL MANAGEMENT SKILLS WILL BE REWARDED WITH EQUALLY GOOD RESULTS 3. CERTAINLY THE NEXT FEW YEARS WILL PROVIDE THIS 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 • * * * * Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1985, November 5). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19851106_silas_keehn

@misc{wtfs_regional_speeche_19851106_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1985},
  month = {Nov},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19851106_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}