Regional President Speech

SILAS KEEHN OPENING REMARKS CONFERENCE ON BANK STRUCTURE AND COMPETITION WESTIN HOTEL MAY 7, 1987 I. INTRODUCTION A. I AM PARTICULARLY PLEASED TO WELCOME ALL OF YOU TO OUR TWENTY-THIRD CONFERENCE ON BANK STRUCTURE AND COMPETITION 1. IT WOULD BE INTERESTING TO REFLECT BACK ON THESE MEETINGS OVER THE YEARS A. AT THE OUTSET, OUR DISCUSSIONS MUST HAVE BEEN A LITTLE TENTATIVE - IN THE MID-'6OS THE STRUCTURAL ISSUES HAD NOT REALLY BEGUN TO MOVE B. BUT, OF COURSE, IN RECENT YEARS THE OPPOSITE HAS BEEN THE CASE B. EACH YEAR AT THIS TIME I WORRY A LITTLE BIT ABOUT NEXT YEAR - WILL WE BE ABLE TO CONTINUE, INDEED, IMPROVE UPON OUR CONFERENCE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BANK STRUCTURE MAY 7, 1987 PAGE 2 1. THIS YEAR MY ASSOCIATES WHO HAVE ORGANIZED THIS CONFERENCE, LARRY MOTE AND GARY KOPPENHAVER, HAVE MORE THAN MET THE CHALLENGE 2. I DO THINK THAT THEY HAVE ASSEMBLED A SUPERB GROUP OF SPEAKERS AND AN EXCELLENT AGENDA TO ADDRESS THE MAJOR ISSUES FACING THE FINANCIAL SERVICES INDUSTRY TODAY I I. STRUCTURAL CHANGES - DEREGULATION - AT THIS POINT ARE MOVING RAPIDLY A. NO LONGER ARE WE TALKING ABOUT THE FUTURE - WE ARE TALKING ABOUT THE HERE AND NOW 1. THE CHANGES DIVIDE INTO TWO BROAD CATEGORIES - GEOGRAPHIC AND POWERS B. ON THE GEOGRAPHIC SIDE, THE PROCESS IS WELL UNDERWAY 1. FOR THOSE OF YOU THAT HAVE ATTENDED OUR CONFERENCE IN RECENT YEARS, YOU MAY REMEMBER THAT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BANK STRUCTURE MAY 7, 1987 PAGE 3 MARVELOUS PANEL THREE YEARS AGO DEALING WITH THE INTERSTATE ISSUE WITH TOM THEOBALD AND TOM STORRS AS TWO OF THE PANELISTS 2. TOM THEOBALD, OF CITIBANK, MADE THE CASE FOR FULL NATIONWIDE BANKING, WHILE TOM STORRS, FORMERLY OF NCNB, MADE THE CASE FOR A REGIONAL STRUCTURE AT LEAST ON AN INTERIM BASIS 3. WITHOUT IN ANY WAY OPINING ON EITHER OF THEIR ARGUMENTS, TOM STORRS SEEMS TO HAVE PREVAILED AT LEAST FOR NOW, BUT FOR THE LONG RUN, FEW OF US WOULD DOUBT THAT THE ENVIRONMENT THAT TOM THEOBALD ESPOUSED WILL EVENTUATE 4. AND IF YOU LOOK AT SOME OF THE CURRENT DEVELOPMENTS IN THE NORTHEAST AND SOUTHEAST, I FIND THEM QUITE EXCITING A. INSTITUTIONS OF SIGNIFICANT SIZE AND STRENGTH HAVE EMERGED AS THE REGIONAL CONCEPT GOES FORTH Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BANK STRUCTURE MAY 7, 1987 PAGE 4 5. AT THIS POINT, LITTLE THAT WE CAN ADD TO THE GEOGRAPHIC ISSUE - IT'S MOVING RAPIDLY - PERHAPS WE SERVE BEST BY STAYING OUT OF THE WAY C. OUR SUBJECT THEN, FOR TH IS CONFERENCE, ADDRESSES THE OTHER PHASE OF DEREGULATION - THE POWERS ISSUE 1. WITH EMPHASIS ON THE MERGING OF COMMERCIAL AND INVESTMENT BANKING ACTIVITIES 2. NOT QUITE SO EASY AS THE GEOGRAPHIC ISSUE, WHICH ALMOST SPEAKS FOR ITSELF 3. THE POWERS ISSUE INVOLVES THE EXPANSION OF COMMERCIAL BANKS INTO OTHER ACTIVITIES ALREADY PROVIDED BY COMPETITIVE INSTITUTIONS - CLEARLY A MAJOR TURF ISSUE INVOLVED HERE 4. EACH MOVE IN ANY DIRECTION, ANY ENCROACHMENT, BRINGS OUT CRIES OF ANGUISH AND HYPERACTIVITY BY THE LOBBYISTS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BANK STRUCTURE MAY 7, 1987 PAGE 5 Ill. I DON'T THINK I NEED SPEND MUCH TIME DESCRIBING JUST HOW WE GOT TO THIS POINT, WHY THE INDUSTRY IS STRUCTURED AS IT HAS BEEN - YOU ALL KNOW THE STORY VERY WELL A. FOLLOWING THE SENSATIONAL REVELATIONS OF THE CONGRESSIONAL HEARINGS IN 1933, THE PUBLIC BECAME VERY CONCERNED ABOUT THE POTENTIAL CONFLICTS OF INTEREST CREATED BY COMMERCIAL BANK I NG INVOLVEMENT IN THE SECURITIES MARKET 1. THAT LED TO THE BANKING ACT OF 1933 - THE FAMOUS, OR INFAMOUS, GLASS-STEAGALL ACT AS IT IS NOW CALLED 2. THE SEPARATION BETWEEN COMMERCIAL AND INVESTMENT BANKING ACTIVITIES WAS NEVER FULLY ACCOMPLISHED AS WAS INTENDED BY THE ACT 3. THE ACT EXPLICITLY ALLOWED BANKS TO CONTINUE TO UNDERWRITE GOVERNMENT AND AGENCY SECURITIES AND GENERAL OBLIGATIONS OF MUNICIPALITIES AS WELL AS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BANK STRUCTURE MAY 7, 1987 PAGE 6 TO PROVIDE BROKERAGE SERVICES TO EXISTING CUSTOMERS AS WELL AS TO OTHERS 4. NOR DID THE ACT PRECLUDE U.S. BANKS FROM ENGAGING IN FULL SERVICE INVESTMENT BANKING ACTIVITIES ABROAD B. DESPITE THE CLEAR CONGRESSIONAL INTENT TO PREVENT THE POTENTIAL CONFLICT OF INTEREST BETWEEN COMMERCIAL AND INVESTMENT BANKING ACTIVITIES AND THAT THAT LIMITATION SHOULD APPLY TO ALL BANKS 1. MOST PROVIS IONS OF THE ACT APPLY ONLY TO MEMBER BANKS 2. THE ACT ORIGINALLY REQUIRED THAT ALL INSURED BANKS EVENTUALLY BECOME MEMBERS, WHICH WAS THE METHOD THAT CONGRESS HAD INTENDED TO INCLUDE THE ENTIRE INDUSTRY 3. THIS REQUIREMENT WAS DROPPED IN THE LATE 130S, BUT EVEN THEN, IT WAS EXPECTED THAT VIRTUALLY ALL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BANK STRUCTURE MAY 7, 1987 PAGE 7 BANKS WOULD BECOME MEMBERS - BUT CLEARLY A LOOPHOLE EMERGED, AND THE SEPARATION OF COMMERCIAL AND INVESTMENT BANKING WAS NEVER COMPLETE IV. BOYS WILL BE BOYS AND LAWYERS WILL BE LAWYERS A. IN RECENT YEARS, EFFORTS TO EXPLOIT THE LOOPHOLES AND LINGUISTIC AMBIGUITIES OF THE ACT HAVE RESULTED IN A SIGNIFICANT EXPANSION OF COMMERCIAL BANKS INTO ACTIVITIES THAT HAVE BEEN CONSIDERED THE PROVINCE OF INVESTMENT BANKING 1. I WOULD NOTE PARTICULARLY THE RESTRICTION ON A COMMERCIAL BANK AFFILIATION WITH A COMPANY "ENGAGED PRINCIPALLY" IN SECURITIES ACTIVITIES AS A WAY OF OVERCOMING THE RESTRICTIONS IMPOSED BY THE GLASS-STEAGALL ACT B. BANKS OR BANK HOLDING COMPANIES NOW HAVE THE POWER TO ACT AS DISCOUNT BROKERS, INVESTMENT ADVISERS, FUTURES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BANK STRUCTURE MAY 7, 1987 PAGE 8 COMMISSION MERCHANTS, AND UNDERWRITERS OF COMMERCIAL PAPER 1. EQUALLY IMPORTANT IS THE DEVELOPMENT OF NEW SERVICES SUCH AS SECURITIZED LOANS AND NEW USES OF OLD SERVICES LIKE LOAN SALES THAT EFFECTIVELY BRIDGE THE GAP BETWEEN COMMERCIAL LENDING AND THE ISSUANCE OF SECURITIES C. AND IT SHOULD BE NOTED THAT U.S. BANKS HAVE BEEN ACTIVELY EXPANDING THEIR SECURITIES BUSINESSES OVERSEAS 1. U.S. BANKS PLAY A LEADING ROLE IN THE UNDERWRITING OF SHORT TERM EURO-SECURITIES AND HAVE RESPONDED AGGRESSIVELY TO THE RECENT DEREGULATION OF THE SECURITIES MARKETS IN THE UNITED KINGDOM D. WHILE THE LEGISLATIVE PROCESS HAS LANGUISHED, MARKET FORCES HAVE DRIVEN THE INDUSTRY AT A VERY FAST PACE V. BUT A WORD OF CAUTION, AND IT'S A FAIR COMMENT THAT REGULATORS ARE PAID TO BE CAUTIOUS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BANK STRUCTURE MAY 7, 1987 PAGE 9 A. WE HAVE BEEN OPERATING IN VERY, VERY GOOD MARKETS 1. THE MARKET CONDITIONS THAT HAVE PREVAILED FOR THE LAST FEW YEARS HAVE PROVIDED A SUPERB OPPORTUNITY FOR ALL OF THESE VARIOUS INVESTMENT ACTIVITIES TO GROW SO SPECTACULARLY AND PROFITABLY B. THE GROWTH OF LEVERAGED BUYOUTS, THE ISSUANCE IN SUCH LARGE QUANTITIES OF LESS THAN INVESTMENT QUALITY BONDS, THE ENORMOUS INCREASE IN CORPORATE DEBT HAVE PROVIDED THE RAW MATERIAL FOR THIS TREMENDOUS EXPANSION IN INVESTMENT ACTIVITIES BY INVESTMENT AND COMMERCIAL BANKS ALIKE C. BUT, SURELY, THE ECONOMIC CLOCK MUST BE TICKING - AT SOME POINT IT DOES FOLLOW THAT WE WILL EXPERIENCE DOWN MARKETS AND THAT WILL EXPOSE SOME OF THESE EXPANDING ACTIVITES TO HEAVY STRESS 1. WILL THE CONTROLS AND PROCEDURES THAT SHOULD BE IN PLACE NOW AND THAT SHOULD DEAL WITH UNDUE STRESS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BANK STRUCTURE MAY 7, 1987 PAGE 10 AND STRAIN IN TIMES OF ADVERSITY WORK - WE SHALL SEE 2. MY ONLY POINT IS THAT THERE ARE SOME UNEASY COMPARISONS OF SOME ASPECTS OF OUR CURRENT ERA WITH THOSE OF THE LATE 1920S WHICH LEAD TO THE SEPARATION OF INVESTMENT AND COMMERCIAL BANKING IN THE FIRST PLACE VI. AND THERE ARE SOME SIGNIFICANT PUBLIC POLICY ISSUES THAT EMERGE HERE - SAFETY AND SOUNDNESS, AN OVERRIDING RESPONSIBILITY FOR THE CENTRAL BANK, ARE VERY IMPORTANT CONSIDERATIONS AS ALL OF THESE CHANGES TAKE PLACE A. THERE ARE THOSE THAT WOULD ARGUE, FREE MARKET ADVOCATES, THAT THE REGULATORS OUGHT TO STAY OUT OF THE WAY AND LET MARKET FORCES PREVAIL 1. REGULATION IMPOSES A BURDEN WHICH SIMPLY MAKES THE REGULATED PART OF THE INDUSTRY LESS COMPETITIVE THAN THOSE NOT REGULATED Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BANK STRUCTURE MAY 7, 1987 PAGE 11 B. ALTERNATIVELY OTHERS WOULD ARGUE THAT AS FINANCIAL ENTITIES GROW AND BECOME MORE COMPLEX THAT REGULATORY INVOLVEMENT, AND ONE COULD DEBATE THE EXACT DEFINITION OF THE WORD "INVOLVEMENT", WILL HAVE TO INCREASE AND BECOME MORE PERVASIVE 1. SEPARABILITY WITHIN LARGE, DIVERSIFIED AND COMPLEX ENTITIES WILL NOT WORK, THEY WOULD ARGUE 2. SIGNIFICANT PROBLEMS IN ONE PART OF THE ENTERPRISE WILL CONTAMINATE THE OTHERS 3. CLEARLY REGULATORY REFORM WILL BE ONE OF THE MORE SIGNIFICANT AND DIFFICULT ISSUES THAT WILL NEED TO BE DEALT WITH IN THE COMING DAYS C. MANY OF YOU MAY HAVE READ THE EXCELLENT ESSAY THAT JERRY CORR I GAN PUBLISHED A MONTH OR SO AGO DEAL I NG WITH THE BROADER ISSUE OF REGULATORY REFORM 1. A VERY THOUGHTFUL PIECE WHICH HAS BROUGHT THE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BANK STRUCTURE MAY 7, 1987 PAGE 12 ISSUE INTO A BROADER CONTEXT AND WHICH SPELLS OUT SOME OF THE ALTERNATIVES VII. BUT THESE ARE SOME OF THE VERY IMPORTANT ISSUES OF THE DAY AND THE AGENDA OF OUR CONFERENCE HAS BEEN SHAPED TO DEAL WITH THEM A. BUT WHATEVER PATH PUBLIC POLICY FINALLY TAKES, SURELY IT SHOULD BE THE RESULT OF A CONSCIOUS CHOICE MADE ON THE BASIS OF CAREFUL ANALYSIS 1. NOT THE AD HOC RESULT OF A SERIES OF UNRELATED COURT DECISIONS AND REGULATORY RULINGS B. HOPEFULLY, OUR DISCUSSION OVER THE NEXT TWO DAYS WILL SHED IMPORTANT LIGHT ON THESE MATTERS AND WILL, ALONG WITH OTHER MEETINGS AND DISCUSSIONS, PROVIDE A BASIS FOR A CAREFUL DETERMINATION AS TO JUST HOW WE DEAL WITH THESE MAJOR ISSUES * * * * * Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1987, May 6). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19870507_silas_keehn

@misc{wtfs_regional_speeche_19870507_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1987},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19870507_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}