Regional President Speech

EXPEDITED FUNDS AVAILABILITY LEGISLATION IOWA BANKERS ASSOCIATION GROUP MEETING FEBRUARY 20, 1988 IN OUR RECENT PAST, THE MOST DRAMATIC EFFECT ON THE FINANCIAL SERVICES INDUSTRY HAS BEEN LEGISLATION. IN 1980, THE DEPOSITORY INSTITUTIONS DEREGULATION AND MONETARY CONTROL ACT WAS PASSED WHICH ADDRESSED TWO MAJOR NEEDS: GREATER EFFECTIVENESS IN THE MONETARY POLICYMAKING PROCESS THROUGH UNIFORM RESERVE REQUIREMENTS; AND IMPROVEMENT OF THE COMPETITIVE BALANCE AMONG DEPOSITORY INSTITUTIONS AFTER A DECADE OF FINANCIAL INNOVATION AND RAPID TECHNOLOGICAL CHANGES. AS A RESULT OF THIS ACT, A NUMBER OF THINGS CHANGED. ONE OF THE MAJOR CHANGES WAS THAT THE FEDERAL RESERVE SYSTEM BEGAN TO COMPETE WITH THE PRIVATE SECTOR IN THE PROVISION OF PAYMENTS AND OTHER SERVICES. IT WAS A DIFFICULT TRANSIT ION, NOT ONLY FOR THE FEDERAL RESERVE, BUT FOR THE ENTIRE FINANCIAL COMMUNITY. TRADITIONAL ROLES WERE THROWN OUT THE WINDOW, AND WE ESTABLISHED NEW AND INTERESTING RELATIONSHIPS WITH FINANCIAL INSTITUTIONS OF ALL SIZES. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -2- IN MY OPINION, THESE HAVE BEEN HEALTHY CHANGES FOR THE FEDERAL RESERVE. IT FORCED US TO TAKE A CLOSER LOOK AT OUR OPERATIONS THAN WE HAD IN THE PAST. AS A RESULT OF THAT SCRUTINY, WE ALTERED OUR OPERATIONS: ENHANCING THE SERVICES WE PROVIDED TO OUR CUSTOMERS WHENEVER POSSIBLE, AND SEIZING EFFICIENCY OPPORTUNITIES WHEREVER POSSIBLE. THE NEXT MAJOR PIECE OF LEGISLATION WHICH DRAMATICALLY AFFECTED THE INDUSTRY WAS ACTUALLY SEVERAL PIECES OF INDIVIDUAL STATE LEGISLATION, COLLECTIVELY REFERRED TO AS INTERSTATE BANKING. THE STATE OF IOWA IS STILL WRESTLING WITH THIS ISSUE AND THERE ARE STRONG VIEWPOINTS ON BOTH SIDES OF THE MATTER. HOWEVER, OTHER SEVENTH DISTRICT STATES, PRIMARILY MICHIGAN AND INDIANA, HAVE BEGUN TO FEEL THE EFFECTS OF MERGERS AND ACQUISITIONS THAT HAVE RESULTED FROM INTERSTATE BANKING LEGISLATION. AS THESE TRENDS CONT I NUE, WE CAN EXPECT TO SEE EVEN MORE CHANGE IN THE BANKING INDUSTRY. IN RECENT MONTHS, THE LEGISLATION WHICH HAS BEEN FOREMOST IN OUR MINDS IS, OF COURSE, THE EXPEDITED FUNDS AVAILABILITY LEGISLATION, GIVEN BIRTH IN THE COMPETITIVE EQUALITY IN BANKING ACT OF 1987. THIS PARTICULAR PIECE OF LEGISLATION WAS DEBATED IN CONGRESS FOR QUITE SOME TIME BEFORE IT BECAME LAW. AND NOW WE ALL FIND OURSELVES STRUGGLING TO COME TO GRIPS WITH IT. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -3- BASICALLY STATED, THE LEGISLATION REQUIRES FINANCIAL INSTITUTIONS TO MAKE FUNDS AVAILABLE TO DEPOSITORS WITHIN CERTAIN PERIODS OF TIME. THESE PERIODS ARE GENERALLY MUCH SHORTER THAN THE TIME IT CURRENTLY TAKES FOR A CHECK TO BE COLLECTED AND, IF NECESSARY, RETURNED. BECAUSE THE RETURN PROCESS IS SO TIME CONSUMING, BANKERS FACE A NEW AND SUBSTANTIAL RISK OF LOSS BY MAKING FUNDS AVAILABLE FOR WITHDRAWAL BEFORE KNOWING WHETHER OR NOT CHECKS WILL BE RETURNED UNPAID. GIVEN THESE NEW AVAILABILITY REQUIREMENTS, IT IS IMPORTANT THAT THE RETURN ITEM PROCESS BE SUBSTANTIALLY IMPROVED IN ORDER TO REDUCE THAT RISK OF LOSS. IT HAS BEEN CLEAR FOR MANY YEARS THAT THERE ARE NUMEROUS OBSTACLES TO A MORE EXPEDITIOUS RETURN PROCESS. WITH THE PASSAGE OF THE EXPEDITED FUNDS AVAILABILITY LEGISLATION, THE FEDERAL RESERVE HAS CONSIDERED MANY ALTERNATIVES FOR ELIMINATING THOSE OBSTACLES, AND THE RESULTS OF THOSE DELIBERATIONS ARE CONTAINED IN THE FEDERAL RESERVE 1S PROPOSED REGULATION CC. BRIEFLY SUMMARIZED, WE ARE PROPOSING A MORE AUTOMATED AND DIRECT WAY OF HANDLING RETURNS WHICH SHOULD RESULT IN FASTER MOVEMENT OF RETURN ITEMS FROM THE PAYOR INSTITUTION TO THE INSTITUTION OF FIRST DEPOSIT. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -4- IN ADDITION, WE ARE PROPOSING ENHANCEMENTS TO OUR EXISTING RETURN ITEM SERVICES AND CONTINUED DEVELOPMENT OF LONGER-RANGE INITIATIVES TO STREAMLINE THE PROCESS EVEN FURTHER. THESE INITIATIVES INCLUDE ELECTRONIC ALTERNATIVES WHICH ARE POTENTIALLY MORE EFFICIENT AND COST EFFECTIVE THAN OUR CURRENT PAPER-BASED SYSTEM. I WOULD LIKE TO TAKE JUST A FEW MOMENTS TO BRING YOU UP TO DATE ON WHAT HAS BEEN HAPPENING WITH RESPECT TO THE EXPEDITED FUNDS AVAILABILITY LEGISLATION, AND THEN I WOULD LIKE TO COMMENT ON A FEW KEY ISSUES WHICH HAVE BEEN THE SUBJECT OF NUMEROUS DISCUSSIONS IN RECENT WEEKS. THE COMPETITIVE EQUALITY IN BANKING ACT OF 1987 WAS SIGNED INTO LAW BY PRESIDENT REAGAN ON AUGUST 10, 1987. AS I MENTIONED PREVIOUSLY, CONTAINED IN THIS ACT IS TITLE VI - EXPEDITED FUNDS AVAILABILITY. THIS TITLE REQUIRES THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM TO TAKE APPROPRIATE ACTION TO IMPLEMENT THE PROVISIONS OF THE TITLE. ON DECEMBER 3, 1987, THE BOARD ISSUED FOR PUBLIC COMMENT A NUMBER OF PROPOSALS RELATING TO THE LEGISLATION, INCLUDING A NEW REGULATION CC AS WELL AS AMENDMENTS TO REGULATION J. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -5- DURING THE MONTH OF JANUARY, FEDERAL RESERVE BANKS ALL ACROSS THE COUNTRY CONDUCTED INFORMATIONAL SEMINARS TO ENHANCE THE INDUSTRY'S UNDERSTANDING OF BOTH THE LEGISLATION AND THE BOARD'S PROPOSALS. IN THE SEVENTH DISTRICT ALONE, WE CONDUCTED 47 SEMINARS FOR NEARLY 2,300 BANKERS. WE ALSO MET WITH TRADE ASSOCIATIONS AND OTHER INDUSTRY GROUPS. IT WAS A VERY LARGE UNDERTAKING, BUT WE FELT IT WAS NECESSARY AND APPROPRIATE. THE COMMENT PERIOD ENDED ON FEBRUARY 8, 1988. WHILE THERE WAS GREAT VARIETY IN THE TYPES OF COMMENTS THE BOARD RECEIVED, THERE WERE A FEW RECURRING CONCERNS WHICH I WOULD LIKE TO BRIEFLY REVIEW. OF CONSIDERABLE CONCERN IS THE PER I OD OF TI ME FOR IMPLEMENTATION OF THE ACT'S PROVISIONS. THE FIRST CRITICAL DATE IS SEPTEMBER 1, 1988, WHICH IS JUST AROUND THE CORNER. UNFORTUNATELY, THIS DATE IS CALLED FOR IN THE CONGRESSIONAL LEG I SLAT I ON AND CAN ONLY BE CHANGED BY THE CONGRESS ITSELF. MANY PEOPLE HAVE COMMENTED THAT THIS DATE DOES NOT ALLOW NEARLY ENOUGH TIME TO ACCOMPLISH EVERYTHING THAT IS REQUIRED IN THE LEGISLATION. ABOUT ALL I CAN SAY IS THAT WE ARE ALL IN THE SAME BOAT WHEN IT COMES TO TIMING ISSUES. WE ARE STRUGGLING, JUST AS THE INDUSTRY IS, WITH THE TREMENDOUS AMOUNT OF WORK WHICH MUST BE DONE IN JUST A FEW SHORT MONTHS. AS SEPTEMBER 1 DRAWS NEAR, I AM SURE THESE TIMING PROBLEMS WILL BECOME MUCH MORE PRONOUNCED. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -6- ANOTHER MAJOR CONCERN RAISED IN THE COMMENT LETTERS IS THE POTENTIAL FOR FRAUDULENT CHECK SCHEMES TO BECOME MORE PREVALENT WHEN AVAILABILITY SCHEDULES ARE SO CLEARLY DISCLOSED AND STRICTLY ENFORCED. MANY BANKS HAVE COMMENTED ON THE NECESSITY TO PLAN FOR GREATER LOSSES DUE TO INCREASED VULNERABILITY TO CHECK FRAUD SCHEMES. WHILE THIS WAS SURELY NOT THE INTENT OF THE LEGISLATION, IT MAY BE ONE OF THE UNFORTUNATE BYPRODUCTS. WE HAVE ALSO RECEIVED MANY COMMENTS ABOUT THE PROPOSED ENDORSEMENT STANDARDS AND THE LAIBILITY ASSOCIATED WITH FAILURE TO COMPLY WITH THESE STANDARDS. MOST BANKERS FEEL THAT THE FEDERAL RESERVE IS OVERLY OPTIMISTIC ABOUT ANY DEGREE OF COMPLIANCE WITH THE STANDARDS BEING REALIZED BY SEPTEMBER 1, 1988. HOWEVER, OUR SENTIMENT IS THAT, AS WITH ANY CHANGE, THERE ARE A GREAT MANY DIFFICULTIES WHICH MUST BE OVERCOME AND RESISTANCE TO THE CHANGE IS TO BE EXPECTED. WE STRONGLY SUPPORT THE ENDORSEMENT STANDARDS SINCE COMPLIANCE WITH THE STANDARDS IS REQUIRED FOR ANY IMPROVEMENTS IN THE RETURN ITEM PROCESS TO BE REALIZED. MOVING ON, THE FINAL REGULATION SHOULD BE APPROVED BY THE BOARD OF GOVERNORS IN LATE MAY, AT WHICH TIME THE FEDERAL RESERVE WILL CONDUCT EDUCATIONAL SEMINARS TO HELP THE INDUSTRY PREPARE FOR THE SEPTEMBER 1 IMPLEMENTATION DATE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -7- 1 WOULD LI KE TO SAY A FEW WORDS ABOUT THE SEMINARS THAT WERE CONDUCTED IN JANUARY AND THOSE THAT WILL BE CONDUCTED IN JUNE. THE .s.o.L.E PURPOSE OF THESE SEMINARS IS TO HELP THE INDUSTRY DEAL WITH AN EXTREMELY COMPLEX AND TIME-CRITICAL ISSUE. CLEARLY, IT IS DIFFICULT TO THINK OF RECENT EVENTS WHICH HAVE HAD THE POTENTIAL TO SO DRAMATICALLY CHANGE THE MANNER IN WHICH THE INDUSTRY CONDUCTS ITS CHECK COLLECTION AND RETURN BUSINESS. THIS TYPE OF DRAMATIC CHANGE DEMANDS SPECIAL ATTENTION AND CONSIDERATION BY THE FEDERAL RESERVE, AND WE INTEND TO PROVIDE AS MUCH SUPPORT TO THE INDUSTRY AS WE POSSIBLY CAN. OUR ACT IONS ARE NOT IN ANY WAY INTENDED AS A MARKET ING VEHICLE FOR THE FEDERAL RESERVE TO ENHANCE ITS MARKET SHARE IN THE PAYMENTS BUSINESS. IN BOTH THEORY AND REALITY, GOOD, STRONG COMPETITION RESULTS IN BETTER PRODUCTS AND SERVICES AND LEADS TO MORE EFFICIENT AND EFFECTIVE OPERATIONS. WE, AT THE FEDERAL RESERVE, HAVE CERTAINLY FOUND IT INTERESTING AND HIGHLY CHALLENGING TO JOIN COMMERCIAL BANKS IN THE COMPETITIVE ARENA DURING THE PAST SEVEN YEARS SINCE THE MONETARY CONTROL ACT WAS PASSED. WE HOPE THAT THIS HEALTHY COMPETITION WILL CONTINUE TO BE FOSTERED IN THE FUTURE WITH THE EXPEDITED FUNDS AVAILABILITY LEGISLATION. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -8- WE DO NOT INTEND TO BE A SOLE PROVIDER OF RETURN ITEM SERVICES, AND WE HAVE NO GRAND STRATEGIES TO CORNER THE RETURN ITEM MARKET. REALISTICALLY, IT WOULD BE AN IMPOSSIBLE TASK. WE WOULD EXPECT THE PRIVATE SECTOR TO MEET THE CHALLENGE OF TH IS REGULATORY CHANGE AND DEVELOP ALTERNATIVE, COMPETITIVE RETURN ITEM SERVICES. FINALLY, I WOULD LIKE TO COMMENT ON THE CHANGES WE MIGHT EXPECT WI TH RESPECT TO PRICING OF FEDERAL RESERVE SERVICES. WE ARE CURRENTLY CONDUCTING AN EXTENSIVE REVIEW OF THE PRICING RAMIFICATIONS OF THE LEGISLATION. CLEARLY, WE HAVE TO SEPARATE RETURN ITEM COSTS FROM OUR AGGREGATE COMMERCIAL CHECK COSTS. SINCE RETURN ITEMS ACCOUNT FOR ABOUT 1% OF OUR CHECK VOLUME AND NEARLY 9% OF OUR CHECK COSTS, IT IS EVIDENT THAT THIS SEPARATION OF COSTS LENDS ITSELF TO HIGHER PRICES FOR RETURN ITEMS THAN FOR FORWARD COLLECTION ITEMS. IN ADDITION, THE COSTS USED TO DETERMINE FORWARD COLLECTION PRICES WILL, NATURALLY BE REDUCED, RESULTING IN A DECREASE IN OUR COLLECT I ON PRICES. ALL OF THESE ISSUES ARE CURRENTLY BEING VERY CAREFULLY REVIEWED BY THE SYSTEM'S CHECK PRODUCT DIRECTOR AND HIS STAFF, AND THE RESULTS WILL BE PUBLISHED IN PLENTY OF TIME FOR REACTION BY THE INDUSTRY. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -9- IN SUMMARY, I WOULD JUST LIKE TO SAY THAT WE ARE CLEARLY FACING A VERY CHALLENGING TIME IN THE HISTORY OF THE NATION'S PAYMENTS MECHANISM. THE INDUSTRY HAS FACED TREMENDOUS CHANGE IN ITS RECENT HISTORY AND HAS ALWAYS RISEN TO THE OCCASION AND SUCCESSFULLY MET THE CHALLENGES OF CHANGE. AS WE MOVE TOWARD THE END OF THE TWENTIETH CENTURY, WE CAN CERTAINLY EXPECT THAT THE CHANGES WILL CONTINUE. I, FOR ONE, AM PROUD TO BE A PART OF THAT CHANGE AND LOOK FORWARD TO AN EXCITING FUTURE FOR THE NATION'S BANKING INDUSTRY. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1988, February 19). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19880220_silas_keehn

@misc{wtfs_regional_speeche_19880220_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1988},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19880220_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}