Regional President Speech

SILAS KEEHN REMARKS ROBERT MORRIS ASSOCIATES CHICAGO, ILLINOIS DECEMBER 3, 1987 1. INTRODUCTION -- TO SAY THE LEAST THIS HAS BEEN AN INTERESTING YEAR -- AS ALWAYS A CHALLENGING PERIOD; SOMEHOW THIS PARTICULAR TIME SEEMS PARTICULARLY CHALLENGING--FINANCIAL SYSTEM RIGHT AT THE CENTER OF O THINGS "o.l{ r < ~ o.·._ ~ ~ (£:;: ~ ~~ U ~~~,. ~ ~ ,A,.u ~~- ~ ~tJllt-,v/C,,~G- A. FOR FINANCIAL INDUSTRY THE DEREGULATION PROCESS MOVING ALONG AT A RAPID PACE 1. HAVE MADE SIGNIFICANT PROGRESS ON THE FIRST PHASE 2. ON THE THRESHOLD OF THE SECOND PHASE B. THE FIRST PHASE--GEOGRAPHIC DEREGULATION 1. IN A REGULATORY/LEGISLATIVE SENSE, THE NECESSARY STEPS ALL BUT COMPLETE 2. SUBJECT TO THE RESTRAINTS OF THE APPLICATION PROCESS--RELEVANT MARKET CONSIDERATIONS--SAFETY AND SOUNDNESS 3. MARKET FORCES WILL PLAY OUT THE LAST STEPS IN THIS CHANGE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 2 - 4. INTERESTING THAT THE ENABLING STEPS TOOK PLACE ENTIRELY AT THE STATE LEVEL--NO FEDERAL ENABLING LEGISLATION 5. THIS MAY BE INSTRUCTIVE AS TO HOW THE SECOND PHASE MAY EVOLVE C. THIS NEXT PHASE, OF COURSE, ADDITIONAL POWERS FOR BANKING COMPANIES 1. THE ELIMINATION OR SUBSTANTIAL REVISION OF GLASS-STEAGALL D. OCTOBER FOR SOME MAY SEEM TO CAST ~.....,.,J. ~~,"""~ CHANGE IN A DIFFERENT LIGHT 1. THE FUNDAMENTALS HAVE NOT CHANGED 2. AL THOUGH THE ENORMOUS DECLINE IN THE VALUE OF EQUITY PRICES MAY HAVE CAUSED PEOPLE TO STEP BACK AND RECONSIDER THE GLASS-STEAGALL ISSUE, A QUICK AFTER-LOOK SUGGESTS THAT THE FINANCIAL SYSTEM HAS COME THROUGH SURPRISINGLY UNSCATHED. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3. THE TRAUMA HAS NOT RAISED ANY TROUBLING QUESTIONS "REGARDING THE WISDOM OF SUBSTANTIALLY MODIFYING OR ELIMINATING GLASS-STEAGALL. 4. TWO MONTHS AFTER THE CRASH, VIRTUALLY ALL REGULATORS, ARE SUPPORTING A RELAXATION OF THE ARCHAIC SEPARATION OF BANKING FROM THE REST OF THE FINANCIAL SERVICES INDUSTRY. 5. WHILE THE TIMING OF THE CHANGES MAY HAVE BEEN DEFERRED, THE ULTIMATE OUTCOME SEEMS REASONABLY ASSURED. 6. FOR PURPOSES OF MY COMMENTS THIS EVENING, LET US ASSUME THAT WE ARE MOVING FORWARD ON THE POWERS ISSUE. A. ANt~HAT THE FINANCIAL SERVICES INDUSTRY WILL BE STRUCTURED IN LARGER, HIGHLY DIVERSIFIED AND MUCH MORE COMPLEX ENTITIES OFFERING A BROADER ARRAY OF FINANCIAL SERVICES (1) NATIONAL/INTERNATIONAL PRESENCE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 4 - B. IDEALLY, THESE ADDITIONAL SERVICES WOULD AT LEAST ENCOMPASS INVESTMENT ACTIVITIES, INSURANCE, AND REAL ESTATE. (1) I WILL NOT DEBATE THE PRO'S AND CON'S OF THESE INDIVIDUAL SERVICES TONIGHT SINCE THE SPECIFICS OF EACH OF THEM DO NOT IMPACT THE CONTEXT OF MY REMARKS. I £. ~ ~-~ \S~/C~, j ~ II. WITH THAT AS BACKGROUND, I THOUGHT I WOULD COMMENT THIS EVENING ON SOME FUNDAMENTAL QUESTIONS THAT RELATE TO THIS CHANGING LANDSCAPE. A. FIRST, I NEED TO START WITH SOME COMMENTS REGARDING SAFETY AND SOUNDNESS. 1. BECAUSE ONE'S VIEW OF SAFETY AND SOUNDNESS AND ACCESS TO THE SAFETY NET HAS AN IMPORTANT BEARING ON THE STRUCTURAL QUESTION. B. NEXT AND INTERRELATED WITH THIS IS THE QUESTION OF SEPARATENESS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 5 - 1. CAN COMPLEX FINANCIAL ENTITIES BE STRUCTURED IN A WAY THAT ONE ACTIVITY CAN GENUINELY BE INSULATED FROM THE OTHERS. C. FINALLY, I WOULD LIKE TO TOUCH A BIT ON THE SUPERVISION OF THESE LARGER, DIVERSIFIED ENTITIES 1. JUST AS THE REGULATIONS WHICH GOVERN FINANCIAL INSTITUTIONS ARE OUTDATED 2. IT IS A FAIR COMMENT THAT THE SUPERVISORY STRUCTURE HAS NOT KEPT PACE WITH MARKETPLACE CHANGES. III. WITH THAT AS A ROADMAP, LET ME START WITH SOME COMMENTS ABOUT SAFETY AND SOUNDNESS AND ACCESS TO THE FEDERAL SAFETY NET A. THE PURPOSE OF THE SAFETY NET IS TO LIMIT TO THE EXTENT POSSIBLE THE DEVELOPMENT OF A FINANCIAL CRISIS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 6 - 1. A FINANCIAL CRISIS OR PANIC OCCURS WHEN SOME ·MAJOR EVENT SHOCKS THE SYSTEM CAUSING ASSET PRICES TO FALL (PRECIPITOUSLY) LEADING TO WIDESPREAD INSOLVENCY OF FINANCIAL FIRMS, ULTIMATELY DESTROYING THE MARKET'S ABILITY TO ALLOCATE CREDIT. B. Tl►!&- BRHdG3 IIQ IO F~ THE FEDERAL SAFETY NET ~ HAS TWO MAIN COMPONENTS, THE FEDERAL RESERVE, THE NATION'S CENTRAL BANK, AND DEPOSIT INSURANCE PROVIDED BY THE FDIC. C. THE FEDERAL RESERVE-- 1. CAN LIMIT THE EFFECTS OF FINANCIAL CRISES BY PROVIDING THE LIQUIDITY TO THE SYSTEM AS A WHOLE THROUGH OPEN MARKET OPERATIONS 2. AND WE CAN ALSO INJECT LIQUIDITY INTO THE SYSTEM BY LENDING TO SOLVENT BANKS THROUGH THE DISCOUNT WINDOW Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 9 - 3. WHILE IT MAY BE A SLIGHT OVERSTATEMENT THAT DEPOSIT INSURANCE GIVES THE BANKING INDUSTRY AN UNFAIR FUNDING ADVANTAGE A. IT IS A FAIR COMMENT THAT BANK MANAGEMENTS SOMETIMES ABUSE DEPOSIT INSURANCE AND ATTEMPT TO EXPONENTIONALLY INCREASE THEIR REACH BASED ON THIS UNIQUE FEATURE. IV. REVERTING TO THE FEDERAL RESERVE, IT IS IMPORTANT TO CONSIDER JUST HOW EXTENSIVE OUR RESPONSE SHOULD BE IN DEALING WITH THE SAFETY AND SOUNDNESS ISSUE A. SPECIFICALLY, HOW MUCH SHOULD WE INTERVENE TO MEET THESE CONCERNS B. THERE ARE THOSE THAT TAKE A VERY NARROW VIEW 1. THAT OUR RESPONSE SHOULD BE LIMITED TO THE MONEY SUPPLY AND THE PAYMENTS MECHANISM 2. THAT IF WE MAINTAIN THE INTEGRITY OF THE MONEY SUPPLY AND THE PAYMENTS MECHANISM WE SHOULD NOT PROVIDE SUPPORT TO ANY SINGLE INSOLVENT INSTITUTION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 10 - 3. AND THAT, THEREFORE, INDIVIDUAL INSTITUTIONS ARE NOT IN THEMSELVES LARGE ENOUGH TO CAUSE SYSTEMIC DAMAGE A. INDEED, EVEN THE VERY LARGEST WILL NOT CAUSE SAFETY AND SOUNDNESS RISKS 4. CONSEQUENTLY, THE OPERATION OF THE OPEN MARKET DESK TO PREVENT THE CONTRACTION OF THE MONEY SUPPLY OR THE OPERATION OF THE DISCOUNT WINDOW TO PROVIDE LIQUIDITY TO THE BANKING SYSTEM SHOULD BE OUR ONLY RECOURSE . C. OTHERS ARGUE THAT THE FEDERAL RESERVE AND THE FDIC MUST GO BEYOND THIS NARROW DEFINITION AND DEAL WITH INDIVIDUAL INSTITUTIONS THAT ARE LARGE ENOUGH TO CAUSE SYSTEMIC DAMAGE. ~ ~ ~~ 1. OUR MAJOR BANKS ARE SO INTERRELATED WITH EACH OTHER AND WITH THE REST OF THE BANKING SYSTEM THAT THE FAILURE OF ONE LARGE BANK WILL HAVE NEGATIVE RAMIFICATIONS FOR OTHER BANKS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 11 - D. I DON'T VIEW THESE ALTERNATIVES, THE NARROW DEFINITION AND THIS BROADER DEFINITION, AS MUTUALLY EXCLUSIVE l. WHILE IN A TECHNICAL SENSE ONE CAN DEVELOP A GOOD CASE FOR THE NARROW DEFINITION OF OUR RESPONSIBILITIES, EXPERIENCE TELLS ME THAT IN PRACTICAL CIRCUMSTANCES WE MUST EXTEND OUR SUPPORT TO INDIVIDUAL INSTITUTIONS AND, THEREFORE, TAKE ON A BROADER RESPONSE 2. WHILE IT IS IMPOSSIBLE TO FACTUALLY PROVE THE CASE CONCLUSIVELY FOR EITHER OPTION, CERTAINLY THE FEDERAL RESERVE MUST IN ALL CIRCUMSTANCES TRY AND PREVENT INDIVIDUAL EVENTS FROM SNOWBALLING INTO SYSTEMIC CALAMITIES A. IT MAY SOUND UNDULY CAUTIOUS BUT OVERKILL IS FAR PREFERABLE TO UNDERKILL--WE REALLY CAN'T TAKE A "CHANCE" V. WITH THIS AS BACKGROUND, LET ME NEXT COMMENT ON THE EVOLVING STRUCTURE OF LARGER, DIVERSIFIED FINANCIAL ENTITIES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 12 - A. I WOULD HOPE YOU WOULD AGREE THAT THE SAFETY NET OR THE BENEFITS INDIRECTLY DERIVED FROM THE SUPPORT OF THE SAFETY NET SHOULD NOT BE MADE AVAILABLE TO ALL PARTS OF THE LARGE DIVERSIFIED FINANCIAL INSTITUTIONS AND OF COURSE I AM REFERRING TO THE NON-DEPOSITORY PARTS 1. GLASS-STEAGALL HAS MADE THIS ISSUE EASY 2. INVESTMENT AND COMMERCIAL BANKING WERE LEGALLY SEPARATED--THE SAFETY NET DEALS WITH THE LATTER, NOT THE FORMER B. BUT HOW WILL IT WORK WHEN INVESTMENT AND COMMERCIAL BANKING ACTIVITIES ARE INTERMIXED IN THE SAME ENTITY? 1. THIS RAISES THE VERY THORNY ISSUE OF SEPARATENESS 2. CAN FIREWALLS BE ERECTED THAT WILL PREVENT CONTAMINATION THAT MAY OCCUR IN ONE PART OF THE ENTITY FROM SPREADING TO THE OTHER PARTS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 13 - :3. OR EVEN MORE IMPORTANTLY, WILL THEY PREVENT THE SAFETY NET SUPPORT THAT IS APPROPRIATELY PROVIDED • TO THE BANKING SEGMENT FROM SPREADING TO THE NONBANKING SEGMENT { (, d ( 4. CERTAINLY BANK REGULATORS DO NOT WANT THE FINANCIAL HEAL TH OF A BANK TO BE THREATENED BY ADVERSE CIRCUMSTANCES ELSEWHERE IN THE HOLDING COMPANY C. BUT JUST HOW TO BUILD THE FIREWALL 1. A NUMBER OF PROPOSALS HAVE TRIED TO SOLVE THIS PROBLEM, MOST BY HAVING DIFFERENT ACTIVITIES CONDUCTED IN SEPARATE SUBSIDIARIES OF THE BANK HOLDING COMPANY- -NOT SUBSIDIARIES OF THE BANK 2. PROPONENTS OF THIS APPROACH ARGUE THAT REGULATORS WILL NOT NEED TO EXTEND THE SAFETY NET BEYOND THE BANK A. REGULATIONS CAN BE DEVELOPED (IN ADDITION TO THOSE THAT NOW EXIST) TO LIMIT THE ABILITY OF THE BANK SUBS !DIARY TO PROVIDE SUPPORT TO NONBANKING AFFILIATES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 14 - B. BUT UNDER THIS SCENARIO, BY DEFINITION, REGULATORS WILL HAVE TO BE WILLING TO LET NONBANK SUBSIDIARIES IN THE ENTITY FAIL--WE MUST ASSUME THAT A NONBANK SUBSIDIARY IS NOT SO LARGE THAT ITS FAILURE WILL WASH BACK ON TO THE BANKING SUBSIDIARY C. REPORTING MECHANISMS MUST BE DEVELOPED TO PREVENT AND/OR DETECT FINANCIAL TRANSACTIONS THAT BREACH THESE INSULATING REGULATIONS D. FDIC FUNDS MUST NOT BE USED TO IMPROVE THE STATUS OF THE CREDITORS OF NONBANK SUBSIDIARIES OR HOLDING COMPANIES D. CAN WE DEPEND ON THE FIREWALLS? 1. CERTAINLY THE CONCEPT HAS INTELLECTUAL APPEAL - ALSO, CERTAINLY IT IS AN ISSUE THAT ONCE AGAIN DOES NOT LEND ITSELF TO CLEAR-CUT CONCLUSIONS (2) BUT AT THIS POINT, I ADMIT TO A LEVEL OF CONCERN THAT THE CURRENT PROPOSALS WILL DELIVER AS ADVERTISED Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 15 - (3) I HAVE THE UNEASY FEELING THAT FIREWALLS WILL WORK WHEN YOU DON'T NEED THEM BUT WON'T WORK WHEN YOU REALLY DO NEED THEM (4) WHEN THE WINDS OF ADVERSITY ARE BLOWING AND MANAGERS ARE REALLY IN A CORNER, THERE IS THE RISK THAT INAPPROPRIATE TRANSACTIONS WILL PENETRATE THE FIREWALLS (5) THIS IS NOT TO SAY THAT FIREWALLS ARE NOT USEFUL. INDEED THE PROPOSALS BY SENATOR PROXMIRE AND CHAIRMAN GREENSPAN WILL SHARPLY REDUCE THE RISK THAT PROBLEMS AT A NONBANK SUBSIDIARY WILL HAVE A DIRECT IMPACT ON BANKING SUBSIDIARIES. ( 6 ) HOWEVER~EW~ IF REGULATORS ARE WILLING TO LET NONBANK SUBSIDIARIES FAIL (7) TODAY, THERE ARE MANY IN CONGRESS AND THE REGULATORY AGENCIES WHO WOULD BE UNCOMFORTABLE PERMITTING THIS TO OCCUR Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 16 - (8) MOREOVER, CURRENT LAW GIVES REGULATORS A STRONG INCENTIVE TO TRY AND SHORE UP A TROUBLED HOLDING COMPANY (A) UNDER THE BANK HOLDING COMPANY ACT, HOLDING COMPANIES ARE OBLIGATED TO INJECT CAPITAL, IF AVAILABLE, INTO A TROUBLED BANK (B) THIS WILL PLACE THE REGULATOR IN A VERY AWKWARD POSITION--FORCING THE HOLDING COMPANY TO SUPPORT THE BANKING SUBSIDIARY BUT PREVENTING THE SUPPORT OF NON-BANKING SUBSIDIARIES--(YET PRESERVING THE RIGHT TO DO SO IF THE NON-BANKING SUBSIDIARY'S FAILURE MIGHT BE SYSTEMIC) (9) WITH THE PASSAGE OF TIME AND EXPERIENCE, REfilJL.A TORS MAY FE EL MORE COMFORTABLE '-- ~c..v,,J"~~ WITH \ENV Oe..c.J y SEPARATENESS. BUT AT THIS POINT, I 1D ARGUE THAT WE NEED ADDITIONAL TOOLS AND EXPERIENCE +N- DE AI I NG I:' J J II IR QU BL EQ BANK HQ I PING MOVING TOO FAR AND TOO FAST ON THIS ONE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 17 - VI. THIS LEADS TO THE QUESTION OF THE SEPARATION OF COMMERCE AND FINANCE--A LONG STANDING TRADITION IN THIS COUNTRY--AN IMPORTANT FACET OF THE SEPARATENESS QUESTION ~ J:'V; ~ +:, ~~ A. GIVEN THE CLEAR DIFFICULTIES OF DEALING WITH THE SAFETY NET ISSUES l. AND THE CONCERN THAT THE BENEFIT OF ACCESS TO THE SUPPORT OF SAFETY NET SUBSIDIES COULD SPREAD TO THE NONBANKING PARTS OF THE FINANCIAL ENTITY 2. I FEEL UNCOMFORTABLE WITH PROPOSALS THAT MIGHT PERMIT BANKS TO OWN OR BE OWNED BY NON-FINANCIAL CORPORATIONS B. THE EXPANSION OF POWERS MUST PROVIDE IDENTIFIABLE BENEFITS 1. SOMEHOW IN ALL THE RHETORIC, I FEEL THAT THIS ISSUE HAS BEEN LOST 2. WE SHOULD NOT SIMPLY ADD POWERS FOR THE SAKE OF ADDING POWERS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 18 - 3. THE BENEFITS OF ALLOWING THE OFFERING OF ·DIVERSIFIED FINANCIAL SERVICES BY HOLDING COMPANIES SEEM OBVIOUS A. TO USE AN OVERWORKED WORD, THE SYNERGIES INVOLVED ARE WELL UNDERSTOOD B. FOR EXAMPLE, TH IS CHANGE SHOULD INCREASE COMPETITION AND LOWER THE COST OF INVESTMENT BANKING SERVICES C. FEES, PRICES, ETC., WILL BE UNDER PRESSURE--A CLEAR PUBLIC BENEFIT 5. BUT THE CASE FOR PERMITTING FINANCIAL ORGANIZATIONS TO ENGAGE IN COMMERCIAL ACTIVITIES AND VICE VERSA IS LESS COMPELLING A. STUDIES FAIL TO PROVE THAT CROSS INDUSTRY SYNERGIES EXIST B. QUITE THE OPPOSITE; CROSS INDUSTRY PROFITABILITY IS THINNER THAN EXPECTED AND MANAGEMENT DIFFICULTIES GREATER Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 19 - C. l FIND THE INTERNATIONAL INSTANCES WHERE COMMERCE AND FINANCE ARE NOT SEPARATED LESS THAN COMPELLING (1) FOR EXAMPLE, GERMANY DOES PERMIT THE OWNERSHIP OF A CONTROLLING INTEREST IN A NON-FINANCIAL ENTITY BY A BANK--BUT THERE ARE VERY SIGNIFICANT DIFFERENCES BETWEEN THEIR SYSTEM AND OURS (2) TIME WILL TELL, AND IT'S PERSONAL CONJECTURE ON MY PART, BUT IT IS ENTIRELY POSSIBLE THAT SOME COUNTRIES WILL MOVE IN OUR DIRECTION AND THAT WE WOULD MAKE A GREAT MISTAKE IN TERMINATING THE LONGSTANDING SEPARATION BETWEEN COMMERCE AND FINANCE JUST AT THE POINT THAT FINANCIAL INSTITUTIONS ARE GIVEN THE BROADER CAPABILITY TO OFFER DIVERSIFIED SERVICES WHICH SEEMS SO VERY APPROPRIATE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 20 - VI I. AS TO HOW THESE LARGER MORE DIVERSIFIED INSTITUTIONS SHOULD BE SUPERVISED A. WHILE THE REGULATORY STRUCTURE OF BANKING HAS AND WILL CONTINUE TO CHANGE, AND ASSUMING THAT THIS POWERS ISSUE MOVES FORWARD AS I SUGGEST 1. THE SUPERVISORY STRUCTURE HAS NOT ONLY NOT MOVED FORWARD--INDEED WE WILL BE TAKING A STEP BACKWARD 2. AS INSTITUTIONS EXPAND GEOGRAPHICALLY AND DIVERSIFY THEIR ACTIVITIES, THEY WILL BE DEALING WITH AN EVER INCREASING NUMBER OF REGULATORS 3. IT IS CONCEIVABLE THAT A LARGE DIVERSIFIED HOLDING COMPANY WILL HAVE TO DEAL WITH THE FEDERAL RESERVE, THE COMPTROLLER, THE FDIC, THE SEC, THE CFTC, A MULTIPLICITY OF STATE BANKING AND INSURANCE REGULATORS, NUMEROUS CONSUMER REGULATORY BODIES, AS WELL AS REGULATORS IN EACH COUNTRY WHERE THE ENTITY HAS A PRESENCE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 21 - 4. MORE THAN ENOUGH--NOT ONLY WILL THE HANDLING OF · THESE VARIOUS RELATIONSHIPS RAISE THE POSSIBILITY OF A TRUE BUREAUCRATIC NIGHTMARE BUT THERE WILL BE OBVIOUS DIFFERENCES BETWEEN REGULATORS ON ISSUES WHERE EACH HAS RESPONSIBILITY 5. THE RECOMMENDATIONS OF THE BUSH COMMISSION PROVIDE A BASIS FOR RESOLVING THIS CONFLICT B. YOU MAY BE SKEPTICAL BUT MY VIEWS ON THIS ISSUE REALLY STEM FROM MONETARY POLICY CONSIDERATIONS, NOT TURF ISSUES 1. GOING BACK TO MY COMMENTS ABOUT THE SAFETY NET AND THE RESPONSIBILITY OF THE FEDERAL RESERVE (TM NAlION'S CLNI~} TO DEAL WITH QUESTIONS OF SAFETY AND SOUNDNESS 2. WE ARE SIMPLY GOING TO HAVE TO HAVE A BROADER SUPERVISORY PRESENCE C. WHILE I WOULD IN NO WAY SUGGEST THE REPLACEMENT OF PRIMARY SUPERVISORS IN DEALING WITH THE ENTITIES WHERE THEY HAVE A DIRECT RESPONSIBILITY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 22 - 1. THE FEDERAL RESERVE IS GOING TO HAVE TO HAVE SOME · INVOLVEMENT IN ALL SIGNIFICANT PARTS OF THE LARGE DIVERSIFIED ENTITY AT LEAST ON AN INFORMATIONAL BASIS D. IF AT THE END OF THE DAY WE MUST PROTECT AND PRESERVE THE FINANCIAL SYSTEM IN THE BROADEST SENSE 1. AND EVENTS OF THE LAST DECADE TEND TO SUPPORT THIS BROADER DEFINITION 2. THEN WE'RE GOING TO HAVE TO HAVE AN AWARENESS OF ACTIVITIES THROUGHOUT THE ORGANIZATION SO THAT WE CAN DEAL WITH THESE RESPONSIBILITIES 3. INFORMATIONAL INVOLVEMENT IN A DIRECT SENSE WILL ALLOW US TO REACT AND ON A TIMELY BASIS--WITHOUT THAT, OUR RESPONSE MAY NOT BE AS EFFECTIVE AS WOULD OTHERWISE BE THE CASE VIII. TO CONCLUDE, WHAT I HAVE TRIED TO SUGGEST THIS EVENING IS THAT THE COMING EVOLUTION OF FINANCIAL ACTIVITIES WILL RESULT IN LARGER MUCH MORE COMPLICATED AND DIVERSIFIED ENTITIES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 23 - A. IN THIS CONTEXT I HAVE SUGGESTED THAT: FIRST 1. SAFETY AND SOUNDNESS RESPONSIBILITIES CANNOT BE NARROWLY LIMITED BUT MUST INCLUDE LARGE DESTABILIZING EVENTS THAT HAVE SYSTEMIC RAMIFICATIONS A. WITH THE GROWING SIZE OF FINANCIAL ENTITIES, THIS WILL HAVE SIGNIFICANT IMPLICATIONS B. AN EVER INCREASING NUMBER OF COMPANIES WILL FIT INTO THIS DEFINITION--A TROUBLING THOUGHT SECONDLY 2. SEPARATENESS IS AN ELUSIVE CONCEPT--IT HAS A GREAT INTELLECTUAL RING ABOUT IT BUT BOYS BEING BOYS, I WORRY ABOUT THE GENUINE PROTECTION THAT FIREWALLS WILL PROVIDE WHEN THERE IS A FOUR ALARM FIRE IN PROGRESS A. GIVEN THIS CONCERN, l GREATLY FAVOR THE CONTINUATION OF OUR LONGSTANDING TRADITION OF SEPARATING COMMERCE AND FINANCIAL ACTIVITIES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 24 - THIRDLY 3. FINALLY, WHILE IT SOUNDS VERY SELF-SERVING, I SIMPLY DON I T SEE HOW THE FEDJftAL RESERVE ,CAN DEAL w,rt,tr,.J°/.-tl\,N111/G- WITH ITS RESPONSIBILITIES ANQ N8T IIAI/-E A BROADER SUPERVISORY PRESENCE B. TO CONCLUDE, I DO THINK THAT ALL OF THESE ISSUES ARE ARGUABLE 1. THESE HAPPEN TO BE MY CURRENT VIEWS, BUT AT THIS JUNCTURE THE REGULATORY BODY HAS A REASONABLY OPEN MIND ON ALL OF THEM 2. MY POINT IN RAISING THEM WITH YOU THIS EVENING IS SIMPLY TO SAY THAT THE TIME TO THINK ABOUT THESE ISSUES IS NOW BEFORE THE STRUCTURAL CONCRETE HAS BEGUN TO DRY--NOT WELL AFTER THE FACT 3. I WOULD FAR RATHER BE PROACTIVE IN REACHING CONSIDERED VIEWPOINTS THAN REACTIVE, DESPERATELY GRASPING FOR SOLUTIONS UNDER CIRCUMSTANCES THAT WILL BE LESS THAN IDEAL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 25 - ~~~ B ~ ~ K ~ o1"( ~ IJ.S~- '--~ ~~ u <-u-i:V ~- ·- ~ ~~ 4. HOPEFULLY MY COMMENTS WITH YOU THIS EVENING WILL PROVIDE SOME IMPETUS FOR STARTING THE DEBATE AMONG THIS GROUP THANK YOU VERY MUCH. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1987, December 2). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19871203_silas_keehn

@misc{wtfs_regional_speeche_19871203_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1987},
  month = {Dec},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19871203_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}