Regional President Speech

S. KEEHN REMARKS SUPE & REG. MTG. SEPT. 17, 1987 I. A GREAT DEAL HAS HAPPENED SINCE I LAST HAD AN OPPORTUNITY TO ADDRESS THIS GROUP. A. THE DEREGULATION FORCES CONTINUE AT A BRISK PACE. 1. DESPITE NO FEDERAL LEGISLATION ON THE GEOGRAPHIC FRONT AND RESTRAINING LEGISLATION ON THE POWERS FRONT. 2. THE WHOLE STRUCTURE OF BANKING IS REALLY CHANGING BEFORE OUR VERY EYES. B. AT THIS POINT, I THINK THERE IS REALLY VERY LITTLE TO ADD ON THE GEOGRAPHIC ISSUE - IT SEEMS TO ME THAT IT IS ALL BUT DONE, AT LEAST IN A LEGAL, STRUCTURAL SENSE. 1. ALL THE STATES, OR ALL THAT MATTER, ARE IN A REGIONAL COMPAC. 2 . ALL THE STATES NOW IN COMPACS EITHER HAVE OR WILL SHORTLY HAVE TRIGGERS - BY 1990/91 WE WILL BE IN A PRETTY OPEN ENVIRONMENT. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3. AT THIS POINT (WITH APPROPRIATE REGULATORY AND MARKET CONCENTRATION RESTRAINTS) MARKET FORCES WILL SIMPLY PLAY OUT THE LAST PHASE OF THIS SIGNIFICANT SHIFT IN THE STRUCTURE OF BANKING. \&i ~ ; v,_raL L ~ ~c/..) C. THIS LEAVES TWO MAJOR QUESTIONS THAT BECOME MORE PRESSING AND MUST BE DEALT WITH. 1. POWERS 2. THE APPROPRIATE SUPERVISORY STRUCTURE TO DEAL WITH THE EMERGING FINANCIAL INDUSTRY. V'w,vu_ ~ ~ -z___~. II. POWERS A. THE ~ PASSAGE OF THE COMPETITIVE EQUALITY BANKING ACT OF 1987 - BAD NEWS - GOOD NEWS. 1. FURTHER DELAYS IN CHANGES THAT SEEM INCREASINGLY PRESSING. 2. THE SPECIFIC TERMINAL DATE DOES GIVE SOME HOPE. A. THE PROXMIRE RETIREMENT. ~ t,111,~ ~ ~ "'-~~ / ~ "? tv'-? B. ANY POSSIBLE SCENARIO YOU CAN IMAGINE CLEARLY SUGGESTS ENLARGED FINANCIAL ENTITIES WITH EXPANDED POWERS. 6~/ ~~,b)y ~~1 ~~ -~ PAGE 2 ~ ~P,'rc-4','<Wt; Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis C. THE QUESTION OF SEPARABILITY IN THE COMPLEX FINANCIAL STRUCTURE BECOMES IMPORTANT. I A. DISCOUNT WINDOW B. FDIC / ~ C. THE PAYMENTS MECHANISM D. 1. BANKS OWNING INDUSTRIAL COMPANIES. 2. INDUSTRIAL COMPANIES OWNING BANKS. ~~ l.,\fi>__~,-wl"' I 3. AGAIN, THE SEPARATION ISSUE. A. CURRENT JAPANESE PROBLEM. 4. COMPELLING REASONS - IF NOT, WHY DO IT? '~:A,:L:;.;.:.L.,..r:-:-1v~ A. •'(., t-1'1>-wJJ.lJ 'xi ~v--t_ i--o w-lJ I. -...o.. ILJ ~·_ru-,•._ ~ . PAGE 3 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis III. THE STRUCTURE OF SUPERVISION (REGULATION VS. SUPERVISION) - ,--- I J. ~ ~~ ' A. DEALING WITH MUCH LARGfR ~ COMPLEX EN~ITIES. A~in I ~ t.,vO. o,O.A.1 c.v-r:b:.. ,'fl;pC/ ~ ~ ~ ; b I , ; '." '~. ~ • ' - ~~ ~·be, .-~ - ~~ f-N ~ M I', ~ , 1. SAF~TY AND SOUNDNESS CONSIDERATIONS. ~ 1-JA-' - &tt'~ ~ ~ - t ~ . A. MONEY SUPPLY. 8. / / I \ ~ 6 \ o.k" cb>. o-JJ i ,;t__p - . . , ~ ~ ~ ft-CA~.~ ~Ji ct -~ ~~~ f~oO u - ~ ~~ /- -- p ,~-~ ~ t - v' 'o ..>--f (.__ 5I - at,y_ , PAGE 4 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN COMMENTS RELATING TO SUPERVISION AND REGULATION PAPER BY GOVERNOR JOHNSON o/ en ~~ ~ ~ r:t::;·a,.-4 "-- I. ~ CTURE OF THE FINANCIAL SYSTEM A. WON'T SPEND TIME FORECASTING OUTCOME OF CURRENT AND PROSPECTIVE DEVELOPMENTS 1. POSSIBLE SCENARIOS FULLY COVERED IN VARIOUS PAPERS (CORRIGAN L PARRY, EISENMENGER) PREPARED FOR CONFERENCE ALTERNATIVES OUTLINED IN VICE CHAIRMAN JOHNSON'S PAPER PROVIDE AN EXCELLENT BASIS FOR DEALING WITH ~u~-~ SUPERVISORY IMPLICATIONS OF ~E STRUCTURAL ALTERNATIVES ~ J*u,J/AJ f ;,&;tai,• ~ J) ,· ~----, ~ - -/4-----pe.A V' :s ~ ~ • ~d J.... '{ ~ 3. PAPER DOES MAKE THE POINT (P.3) THAT BANKS, I I I PARTICULARLY LARGE BANKS, HAVE BEEN LOSING MARKET I I I I SHARE. ACCEPTING THIS PREMISE, THIS SUGGESTS I THAT BANKING (IN A BROAD SENSE) ACCOUNTS FOR Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S&R PAPER BY GOV. JOHNSON PAGE 2 A SMALLER PROPORTIONATE SHARE OF THE FINANCIAL SYSTEi~ WHEN THE TRADITIONAL SAFETY NET AND (,UQ.. (2...A THE SUPERVISORY FRAMEWORK~ PUT IN PLACE A. AS A CONSEQUENCE, THIS ALSO SUGGESTS THAT SUPERVISORY STRUCTURE IS NOW, IN A RELATIVE SENSE. LESS ABLE rolEFFECT~ WITH A FINANCIAL SYSTEM THAT IS RAPIDLY EXPANDING AND OFFERING NEW (OR AT LEAST {J"t~W NON-TRADITIONAL) B:ANKT~G SERVICES THAT INVOLVE BW:EERE:NT RISKS 7/f.:ii.r 0/U. .11(~ (i..Ci:)tz UN w(,...-ci._ ~ ~up.JI;~~ ~ ~v ~ . B. THIS FURTHER SUGGESTS THAT WE WILL NEED TO CHANGE OUR SUPERVISORY APPROACH TO DEAL WITH p~~c__~· OUR RESPONSIBILITIES "' ~srtwt- I I. v I CE CH A I RM AN JOHN SON~!>. PE R pE F I &E~ TH E FE DER AL ~ RESERVE'S s-HttRVISOR.Y ROLE ..,A.;¥ ~o./ ~/.•~ A ..A s ONE eF ASSURING FINANCIAL 3TABILITY (f-l.10) IHRtJUGH ~~ """'? Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S&R PAPER BY GOV. JOHNSON PAGE 3 MAINTAINING A SOUND AND STABLE MONEY SUPPLY - (P.40) AND A SMOOTHLY FUNCTIONING PAYMENTS SYSTEM 2. THE FINANCIAL SYSTEM AGAINST CRISES BA , THAT BECOME SYSTEMIC - WHILE IF ONE LEANS TOW LATTER MIGHT BE FURTHER DEFINED AS A. BE LARGE ENOUGH IN (,~'h~~ TO E ~C (E.G. CONTINENTAL) B. OR EVENTS, THOUGH SMALLER IN TERMS OF INDIVIDUAL MAGNITUDE, NONETHELESS MIGHT BE LARGE ENOUGH THAT THEY COULD SPREAD AND BECOME DESTABILIZING B. PRESIDENT CORRIGAN 1S~°"'t-SUGGESTS THAT GIVEN THE STRUCTURAL CHANGES THAT SEEM TO BE UNDERWAY IN THE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S&R PAPER BY GOV. JOHNSON PAGE 4 FINANCIAL SERVICES INDUSTRY, CHANGES IN SUPERVISORY STRUCTURE SHOULD NECESSARILY BE EVOLUTIONARY (CORRIGAN I, P .42). WHILE IN NO WAY DISAGREEING, NONETHELESS, WE SHOULD HAVE SOME BASIC OBJECTIVES IN MIND AS WE GO THROUGH THE PROCESS. III. THE FUNDAMENTAL QUESTION - HOW MUCH SUPERVISORY INVOLVEMENT DOES THE FEDERAL RESERVE REALLY NEED TO HAVE TO DEAL WITH OUR CENTRAL BANKING RESPONSIBILITIES H-~ A. WE ARE FACED WI TH CON FL I CT I NG OBJECTIVES - VERY DIFFICULT BALANCE 1. ON ONE HAND MINIMIZING POTENTIALLY DESTABILIZING EVENT)WHICH SUGGESTS A RELATIVELY HIGH DEGREE OF SUPERVISORY AND REGULATORY INVOLVEMENT, (MORE, MUCH MORE IS BETTER) BUT THIS HAS COMPETITIVE AND EFFICIENCY IMPLICATIONS - ON THE OTHER HAND - Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S&R PAPER BY GOV. JOHNSON ro5t t PAGE 5 ,~ .-=a =cw.if &#45;&#45;&#45; ·-· - .• ·-----____._/ 2. (THi. NEED TO MINIMIZE THE REGULATORY BURDEN TO KEEP THE INDUSTRY WE SUPERVISE AS COMPETITIVE AS POSSIBLE (LESS IS BEST) A. TO THE EXTENT THAT BANKS AND OTHERS THAT WE SUPERVISE CARRY A DISPROPORTIONATE SHARE OF THE REGULATORY BURDEN, THE DIFFERENTIAL WILL RESULT IN THE CONTINUED DECLINE IN MARKET ~ ,,£,,✓ ~~ ~ /cJ SHARE Ci tti! ~N~- l)~ F IMPORTANT ISSUE ON THE REGULATORY WITH REGARD S'"'ft9.f. {RtA.t J n \:»v TO THE DUAL BANKING SYSTEM IS THE DEGREE OF LATITUDE TO BE GIVEN TO THE STATES IN SETTING THE SCOPE OF ACTIVITIES FOR STATE BANKS; CAN WE OR SHOULD WE INTERFERE WITH THAT PROCESS l. LATELY THE STATES HAVE BEEN LEADING THE WAY (E.G. fj ~ 9?c~ REAL ESTATE DEVELOPMENT AS A PERMITTED ACTIVITY 2. STILL ANOTHER ASPECT OF THE DUAL BANKING SYSTEM IS THE MATTER OF DUPLICATION OF SUPERVISORY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S&R PAPER BY GOV. JOHNSON PAGE 6 EFFORTS. SIGNIFICANT DUPLICATION EXISTS AND THE QUESTION WHICH I RAISE IS WHETHER WE HAVE OPTIMIZED OUR ABILITY TO AVOID DUPLICATION. C. USING THE DUPLICATION ISSUE AS A BASIS FOR AN OBSERVATION, PRACTICALLY, WE DO NOT NEED TO HAVE DIRECT SUPERVISORY RESPONSIBILITY FOR THE SMALL BANK/BHC EVEN THOUGH THEY DO HAVE ACCESS TO THE DISCOUNT WINDOW/PAYMENTS MECHANISM 1. INDIVIDUALLY, INDEED EVEN COLLECTIVELY, AT LEAST tfi;.,,:,p~cloNJ~_) TO A REASONABLE DEG~EY ARE NM SYSTEMIC 2. FAILURES AMONG SMALL BANKS HAVE AND WILL CONTINUE TO OCCUR WITHOUT DISRUPTING THE FINANCIAL FABRIC -I~ 3. WE SHOULD PLACE INCREASING RELIANCE ON THE STATE AUTHORITIES AND THE COMPTROLLER, AND TO THE EXTENT WE BECOME COMFORTABLE WITH THEIR RESPONSE AND CAPABILITY, REDUCE OUR SCHEDULES FOR THESE SMALLER ENTITIES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S&R PAPER BY GOV. JOHNSON PAGE 7 4. THIS l:tOULD BE POLITICALLY ACCEPTABLE TO THE STATES AND THE COMPTROLLER 5. THIS WILL REDUCE THE REGULATORY BURDEN FOR THIS CATEGORY OF BANKS, GIVE THE STATES GREATER AUTHORITY FOR THEIR INSTITUTIONS AND AT LEAST PARTIALLY DEAL WITH THE DUPLICATION NOTED ABOVE IV. ALTERNATIVELY THEN OUR PRINCIPAL SUPERVISORY FOCUS SHOULD BE ON THE LARGER FINANCIAL INSTITUTION THAT WILL BECOME , r GROWINGLY COMPLEX, I ID ENTS TO THE SUP rA PPR a ~-· A. THE SEPARATION BETWEEN THE FEDERAL RESERVE AND THE COMPTROLLER IN DEALING WITH NATIONAL BANKS/BHCS IS AT ~t;.J~. LEAST UNNATURAL AND n 0RGANIZATIONALLY U4PERF.[CT. T~5l( F~ /l9..pc~- e TH E BUS H O'M-PH SS 1 0 Noc PR O VI DE S A POL I TI CAL OP PO RT U N I TY TO CORRECT THIS WHICH SHOULD BE PURSUED tv,P-rJP ~ ~ ...-v---.p. M l---L.Jfr<.. t_~-t.tfa_/ 6 l .J. ~ / -t- ier-,,J_,_ C. • ,,) - ~ Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S&R PAPER BY GOV. JOHNSON PAGE 8 1. AS LARGER FINANCIAL ENTITIES CONTINUE TO EVOLVE, WE WILL NEED TO HAVE DIRECT SUPERVISORY all INVOLVEMENT WITH THE BANKS THAT ARE A PART OF ~ THESE ENTITIES RISK ORIENTED CAPITAL GUIDELINES, AS AN EXAMPLE, WILL REQUIRE A HIGHER LEVEL OF SUPERVISORY INVOLVEMENT IN THE NON-TRADITIONAL BANKING ACTIVITIES - I.E. THIS PROVIDES US WITH A LOGICAL BASIS TO EXPAND 3. THOUGH INITIALLY OUR ROLE WITH LARGE NATIONAL BANKS MAY WELL INVOLVE EXAMINATION FOR THE PURPOSE OF GATHERING INFORMATION RATHER THAN ENFORCEMENT, ENFORCEMENT SHOULD BE OUR ULT I MATE I OBJECTIVE. 1THIS WILL BE A SIGNIFICANT AND AN ,~ I MP OR TAN T CH ANGE WH I CH TH E COMP TR O LL E R WI LL RESIST. A POSSIBLE WAY INTO THE PROCESS MIGHT J THROUGH JOINT EXAMINATIONS WITH THE COMPTROLLER. \ Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S&R PAPER BY GOV. JOHNSON PAGE 9 B. TURNING TO THE SEPARATENESS ISSUE, WITHIN THE LARGE FINANCIAL ENTITY, ACTIVITIES THAT ARE VERY DIFFERENT W A SINGLE FINANCIAL STRUCTURE, IS AT LEAS1 OPEN TO QUESTION. VICE CHAIRMAN JOHNSON SUGGE S THAT SEPARATENESS CAN BE MAINTAINED BY ENFO SEC. 23-A BUT DOES ~~c..f<,v~ J- REC'tl-6N H~P RA I CAL PROBLEMS OF ACHIEVING • r ~ 1\ ~ _J) ,} ; -~ MEAN I NG F u L ( P . 19 ) ~ I , ,;J'.J 2,,,/ h" r;. HARDLY CERTAINLY EXAMPLES WHERE MAINTAINED - AT LEAST UNDER BEST OF CIRCUMSTANCES - BUT OTHERS, PARTICULARLY UNDER LESS THAN IDEAL CIRCUMSTANCES, r;t::;:;;. 64\J~ 4-t,v~ a ~ ~ WHERE IT MAY NOT WORK - f,.,Jcit; - ~ Q 6C 0-7 I• S;u;(;,' ~ ,A Pp ..,...,.t;,i ,J floe) I (I AA-t', ~ti;;;.,~ A. THE OVERALL CONDITION OF THE ENTITY 11.'; KEY TO dG r .. r;...,,,,,,.-, ~,1 roTt~~,~ (SStA--t.. ~~ ~~ TMig DETERMINATION TH'IS SUGGESTS WE ~Jllb ~AVE: TQ 1-1.0.\JE SOME • INVOLVEMENT WITH NON-BANKING SUBSIDIARIES IN Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ------ S&R PAPER BY GOV. JOHNSON PAGE 10 ADDITION TO THE BANKING SUBSIDIARIES, AS NOTED ABOVE, TO DETERMINE THE OVERALL 2. WHILE BROAD SUPERVISORY OVERSIGHT FOR ON WOULD BE A LOGICAL STARTING PLACE (F-JN,eJtE±A.LSEFtVICES O¥ERSI6tt B:0AiM) Gtl#RISAN- 1) A. WE WILL NEED TO BECOME MORE DIRECTLY INVOLVED WITH THE MAJOR ELEMENTS OF THE ENTITY, ,h,A-i'G'l4-r PARTICULARLY WITH THOSE ACTIVITIES THAT~ BE COVERED BY THE SAFETY NET - THE PRICE OF ADMISSION 3. THIS WILL INVOLVE DUPLICATION IN THE SUPERVISION OF NON-BANKING SUBSIDIARIES AND WILL INCREASE THE REGULATORY BURDEN A. THIS HAS UNFORTUNATE COMPETITIVE/EFFICIENCY I MP LI CAT I ON S , BUT AS 'v' I eE CH AI R,1 A N JON NS ON ' ) PAPER POINTS OUT, DOE 10 IRE DECLIIH~G MARKET Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S&R PAPER BY GOV. JOHNSON PAGE 11 SHARE OF BANKING, OUR SUPERVISORY ROLE IN THE ,r;t; OVERALL FINANCIAL SYSTEM HAS BECOME ~~ if&~ RELATIVELY LESS EFFECTIVE ~~ ~ B. THIS WILL Hf LP RESTORE THE BA''{ C,'ici:E; .... 0-., "[£ii C¥1-dv~ -,--~? ' c,~ V. THE IMPLifATIONS FOR THE FEDERAL RESERVE IN DEALING WITH THESE SUPERVISORY ACTIVITIES WILL BE SIGNIFICANT A. WE WILL BE DEALING WITH MUCH LARGER, MORE DIVERSIFIED AND VERY COMPLEX INSTITUTIONS WHICH WILL NORMALLY HAVE BROAD NATIONAL AND VERY FREQUENTLY INTERNATIONAL PRESENCE AND 1. OUR TRADITIONAL DISTRICT APPROACH WILL NOT WELL FIT THE COMPLEX AND GROW I NG STRUCTURE OF THESE LARGE ENTITIES 2 .0. RE8HHrntIZEO SR [\'EN A P10RE eEPHRALMELJ APPROACII P4AY DE MO~E AITIWI RI A~• , 3. CERTAINLY SPECIALIZED SKILLS AND HIGH LEVELS OF EXPERTISE WILL BE REQUIRED FOR~ EXAMINER;t~ - F~cXi-~ ~'"s,·~ ~ ~-~ ~~~ ~.,,. ~ ... Digitized for FRASER ~ alt .. v ~ ~, ·u, v 1 ·c. t'. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S&R PAPER BY GOV. JOHNSON PAGE 12 4. INCREASINGLY WE WILL GATHER THE INFORMATION TO CONDUCT EXAMINATIONS THROUGH ELECTRONIC METHODS - PHYSICAL PRESENCE WILL BECOME LESS IMPORTANT - THIS ALSO HAS SOME ORGANIZATIONAL IMPLICATIONS cG. ~ ,·.s~§~. ct FOR O~R EXAMINE"RS q(SV 5. WE M~WANT TO MODIFY OUR APPLICATION PROCESS AND NOT BE INVOLVED IN THE PRIOR APPROVAL OR EVEN EXTENSIVE AFTER THE FACT REVIEWS OF EVERY NEW UNDERTAKING OR FORMATION THAT COMES ALONG. THIS WOULD EASE THE REGULATORY BURDEN AND ALLOW US TO FOCUS ON THE MAJOR ISSUES. \j"Z) ~ VI . hJ t: QP 4P1 AFP( - GI VE N TH E LI KE LY DEVELOP ME NT S I N TH E 4-:> ~ ~~ F IN AN CI AL INDUSTRY Q..,v ~. ) ~ ~~ ~ ~~,'~,¥1,f:C.J ~ (~ 'f-o ~ , ~ A. DE-EMPHASIZE COVERAGE OF SMALLER INSTITUTIONS ~~ B. BE PREPARED TO EXPAND OUR SUPERVISION OF LARGER FINANCIAL ENTITIES ALONG THE LINES THAT I SUGGEST Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S&R PAPER BY GOV. JOHNSON PAGE 13 1. MOST PARTICULARLY BY DIRECT INVOLVEMENT WITH ALL BANKING SUBSIDIARIES - ~ No-N - ~~ ~s fAA.L<, ~ C. IF WE DON'T MAKE THIS CHANGE c,,, rid crl.V\. o-fJ t "c.,..) t; ~ J - 1. WE MAY WELL PLACE THE EMPHASIS OF O ESOURCES ON THE SECTOR OF THE INDUSTRY THAT REALLY DOESN'T MATTER 2. AND NOT HAVE INVOLVEMENT WITH THE OPERATING ASPECTS OF THE FINANCIAL ENTITIES THAT DO MATTER AND THAT CAN CAUSE DESTABILIZING CONDITIONS * Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1987, September 16). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19870917_silas_keehn

@misc{wtfs_regional_speeche_19870917_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1987},
  month = {Sep},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19870917_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}