Regional President Speech

SILAS KEEHN - UNIVERSITY OF WINDSOR - MARCH 1, 1989 . e - PAGE 1 () -'"'\ - T - ~~.t-C /4/\I -C- r~~ .Lr- $ I. INTRODUCTION A. VERY PLEASED TO BE INVITED TO PARTICIPATE IN THIS CONFERENCE. 1. ADDRESS THIS GROUP THIS EVENING. B. PARTICULARLY TIMELY THAT PROFESSOR CHACKO (CHOCK - 0) ORGANIZED SESSION TO FOCUS ON CANADIAN AND U.S. FINANCIAL SERVICES. 1. THESE SERVICES ARE GOING THROUGH A PHASE OF CONSIDERABLE CHANGE. 2. INTERESTING TO CONSIDER ACTIVITIES OF OUR TWO FINANCIAL SYSTEMS AS THEY BECOME MORE INTER-RELATED. 3. AND ON AN EVEN BROADER SCALE, GI VEN THE MAJOR TRADE AND FINANCIAL DEVELOPMENTS .X c;i(,~lc._ BETWEEN OUR TWO COUNTRIES, THE INTER-RELATIONSHIP OF OUR TWO MARKETS FOLDS VERY NEATLY INTO THE LARGER WORLD-WIDE DEVELOPMENTS THAT ARE TAKING PLACE. C. IN MY REMARKS WILL COVER: 1. HISTORICAL DEVELOPMENTS AND TRENDS OVER THE LONG PERIOD OF TIME. 2. SOME OF THE RESULTS OF THIS GLOBALIZATION PROCESS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 2 3. FINALLY, HIGHLIGHT SOME OF THE PUBLIC POLICY ISSUES THAT HAVE EMERGED AND, TO SOME EXTENT, REMAIN UNANSWERED. II. IN AN HISTORICAL SENSE A. THE GLOBALIZATION OF THE WORLD'S FINANCIAL SYSTEM IS NOT A NEW DEVELOPMENT. 1. PROCESS STARTED CENTURIES AGO. 2. FOREIGN LENDING DATES BACK AT LEAST TO GENOA IN 12TH CENTURY. 3. IN THOSE EARLY DAYS TOOK THE FORM OF TRADE FINANCING. v..,~J 1 B. INTEGRATIO~ROUGH THE Jtt}.-R€ NATI6N~L TRADE OF PRODUCTS AND GOODS PRECEDED FINANCIAL INTEGRATION. 1. THERE HAS BEEN AN HISTORIC RELATIONSHIP BETWEEN THE MOVEMENT OF PRODUCTS AND THE FLOW OF FUNDS -- BUT NOT TOTAL. IC f-J-i' 2. MEDICI (MED - 1-t!m) FAMILY IN FLORENCE == ENGAGED IN SOVEREIGN LENDING IN 15TH CENTURY THAT WAS COMPLETELY DIVORCED FROM TRADE. 3. DEVELOPING COUNTRIES HAVE LONG DEPENDED ON FOREIGN LENDING TO FI NANCE INVESTMENT IN MANUFACTURING AND AGRICULTURE, AS IN U.S. IN 19TH CENTURY. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 3 4. THE CURRENT PROBLEMS THAT THE LDC S ARE I HAVING IN MANAGING THEIR EXTERNAL DEBT POSITIONS -- AN EXAMPLE OF THE PROCESS WORKING WITH PERHAPS A LITTLE TOO MUCH VIGOR. 5. HISTORICALLY, EVEN THOUGH THESE DEVELOPMENT LOANS WERE MADE PRIMARILY FOR PURPOSES OTHER THAN TRADE FINANCING, THE ULT I MATE RESULT HAS BEEN AN INCREASED LEVEL OF TRADE. C. MOVING FROM THE HISTORIC TO A MORE CURRENT PERIOD, FINANCIAL INTEGRATION AND THE SHEER VOLUME OF TRANSACTIONS HAVE BEEN ACCELERATING AT A BREATHTAKING PACE. 1. MUCH MORE RAPIDLY THAN TRADE MOVEMENTS. A. ON TRADE SIDE, IT IS ESTIMATED THAT WORLD TRADE HAS INCREASED AT AN ANNUAL RATE OF ABOUT 4% SO FAR IN 80 S. 1 B. THE DATA FOR VARIOUS FINANCIAL TRANSACTIONS ARE VERY SOFT. 1. BUT THE VOLUME OF FOREIGN EXCHANGE TRANSACTIONS MAY BE A GOOD PROXY. 2. WHICH HAVE INCREASED AT AN ANNUAL RATE OF ABOUT 23% SO FAR IN THE 80 1S. C. CONT I NUED TO RI SE EVEN DUR I NG THE 1981-82 RECESSION. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 4 D. CLEARLY SHOWS THAT THE FINANCIAL MARKET IS LEADING A LIFE OF ITS OWN AND HAS BEEN EXPANDING AT 0\. ~ ~-"'LRATEL MA-N-¥ M~ OF THE VOLUME OF TRADE. 2. NEW MARKETS AND NEW SERVICES SEEM TO APPEAR ALMOST DAILY -- VIRTUAL EXPLOSION OF OFFERINGS. _o_ ~er"-~~ A. OUTSTANDINGS UNDER A VARIETY OF NOTE :s ' c:ro ISSUANCE ARRANGEMENTS. l.. 'Y'- ~ W - ~ 1"- l. GREW TENFOLD IN JUST A TWO-YEAR PERIOD TO $75 BILLION. B. CURRENCY AND INTEREST RATE SWAPS. 1. INCREASED FROM $3 BILLION IN 1982 TO $150 BILLION BY 1986. C. WHOLE HOST OF OTHER INNOVATIONS 2. 3. lNNOVATIO CURRENCY INSTRU-MENT 4. I NS UMENT~,,,_,,,CREATED BY N~(O~s TOGETHER. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 5 D. IN 1985 ALONE, 20 NEW CREDIT MARKET SERVICES INTRODUCED. D. PACE OF ACCELERATION HAS BEEN CLEARLY HIGHLIGHTED O'p_!iS. BY THE INTERNATIONAL EXPANSION BANKS. 1. AS LATE AS 1960, ONLY 8 U.S. MEMBER BANKS~ Ce:pERAL ~ESEBVE MAINTAINED FOREIGN BRANCHES. 2. TOT AL NUMBER OF BRANCHES WAS 131, ASSETS WERE ONLY $3.5 BILLION. 3. IN 1960 s AND 1970 s, U.S. BANKS 1 1 AGGRESSIVELY EXPANDED ABROAD MAINLY TO SERVI CE THE INTERNATIONAL REQUIREMENTS OF THEIR CORPORATE CUSTOMERS. A. I OPENED A BRANCH OF A U.S. COMMERCIAL BANK IN LONDON WI TH THAT VERY NARROW, SPECIFIC OBJECTIVE IN MIND. 4. BY 1981, 159 MEMBER BANKS OPERATED 840 BRANCHES IN FOREIGN COUNTRIES WITH ASSETS OF OVER $340 BILLION. J:,. '-d.. C-L ~ Q.+..t) 5. THERE HAS BEEN SOME RETRENCHMENT I'ft J98G...!...~- Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 6 6. BY YEAR-END 1987, THE NUMBER OF Mfi:A8i~ BANKS WI TH FOREIGN BRANCHES HAD DECLINED TO 153 AND ASSETS HAD FALLEN TO $300 BILLION.~ 7. PERHAPS AN EARLY I ND I CAT I ON OF EVENTS TO COME. E. WHILE THE U.S. BANKS WERE BUSILY EXPANDING ABROAD, DESPITE LIMITATION~ FOREIGN BANKS ESTABLISHED A LARGE PRESENCE IN THE UNITED STATES. 1. WHILE NEW YORK AND CALIFORNIA WERE EXCEPTIONS, DUE TO A VARIETY OF STATE LIMITATIONS, THERE WAS VERY LITTLE FOREIGN ACTIVITY IN OTHER STATES PRIOR TO 1960 S. 1 A. FOR EXAMPLE 1. NOT UNTIL 1973 DID ILLINOIS PERMIT ESTABLISHMENT OF BRANCHES OF FOREIGN BANKS AND THEN ONLY IN CHICAGO LOOP. 2. INTERNATIONAL ACTIVITIES, WHICH ARE NOW VERY EXTENSIVE (SOME 56 FOREIGN BANKS WITH SOME PRESENCE) CONTINUE TO BE PHYSICALLY LIMITED TO THE IMMEDIATE DOWNTOWN CHICAGO AREA WHILE THE BALANCE OF THE STATE MAINTAINS A SOMEWHAT UNIT-BANKING ATTITUDE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 7 3. BUT TWO OF OUR LARGER CI TY BANKS OWNED BY FOREIGN INSTITUTIONS - BANK OF MONTREAL. 4. IN STATES PROHIBITING BRANCHES, FOREIGN BANKS COULD ENTER ONLY BY ACQUIRING STATE BANKS SINCE; DIRECTORS OF NATIONAL BANKS HAD TO BE U.S. CITIZENS. 5. AS LATE AS 1978, 16 STATES STILL ~~B~!ID(l.~~~~~. .N ~:RY. 2. NONETHELESS, FOREIGN ACTIVITY ROSE SHARPLY IN 196O'S. A. BY END OF 1965, BRANCHES OF 41 FOREIGN BANKS HELD ASSETS OF $7 BILLION OR 2% OF U.S. TOTAL. 8. MOVING TO 1978, THE DATE u. s. INTERNATIONAL BANKING ACT WAS PASSED, HELD $116 BILLION OR OVER 8% OF U.S. TOT AL. F. BY THIS TIME U.S. BANKS WERE SHOCKED INTO ALMOST DISBELIEF BY THE INROADS THAT FOREIGN BANKS WERE MAKING IN MARKETS THAT HAD BEEN VIEWED AS TOTALLY DOMESTIC AND SAFE -- ALMOST SACROSANCT. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 8 sr~d.rJ?-'o, v-,r!-~ 1. BEGAN TO COMPLAIN THAT THEY WERE DISADVANTAGED IN COMPETING WITH FOREIGN-OWNED INSTITUTIONS. ~ 2. BRANCHES OF FOREIGN BANKS NOT SUBJECT TO GLASS-STEAGALL OR MCFADDEN ACT. 3. WERE EXEMPT FROM U.S. RESERVE REQUIREMENTS. 4. PERCEIVED AS BE I NG SUBJECT TO LESS ONEROUS CAPITAL REQUIREMENTS AND OTHER SAFETY AND SOUNDNESS RULES. 5. FOREIGN BRANCHES ALSO NOT BURDENED BY FDIC INSURANCE; -BUT TII IS WAS NOT I MPORTANf--FOR • ~OLESALE LENIH_~£]ffi.£Tu1ss WHERE n,R'f::t§_N MNKS MPS I A~ PJ-E. G. INTERNATIONAL BANKING ACT OF 1978 ADDRESSED THESE CONCERNS. 1. GRANDFATHERED GEOGRAPHIC EXPANSION AND ACTIVITIES OF FOREIGN BANKS ALREADY HERE. 2. MADE BRANCHES OF FOREIGN BANKS ELIGIBLE FOR FDIC INSURANCE. 3. IMPOSED THE SAME GEOGRAPHIC AND PRODUCT RESTRICTIONS AS ON NATIONAL BANKS. ~-s 4. BUT DID NOT VISIBLY SLOW EITHER THE INFLUX /\ OF FOREIGN BANKS OR THEIR AGGRESSIVE EXPANSION. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 9 A. AS THEIR U.S. ACTIVITIES ESCALATED SIGNIFICANTLY B. SO ALSO DID THE ASSETS THEY OWNED OR J! CONTROLLED -- INCREASING TO DIL~ION $-1:~Q ~ //IJ.;f...J,/1. 20% OF U.S. TOTAL, ~r ' H. GROWTH OF MARKET SHARES OF FOREIGN INSTITUTIONS NOT /. LIMITED TO UNITED STATES -- RECIPROCAL PROCESS. 1.,. TO SOME EXTENT IHJS HAS QCCPRRfQ EVEft'l'WIIERE N-flT PRE'o'ENTEB BY ENTRY RESTRICTIQN-S. 2. IN GERMANY AND JAPAN, FOREIGN SHARl:)OF BANKING ASSETS HAVE INCREASED AT LEAST SOMEWHAT FROM ADMITTEDLY LOW BASES. 3. IN U.K., WHICH HAS LONG CULTIVATED ITS ROLE AS INTERNATIONAL FINANCIAL CENTER, FOREIGN MARKET SHARE INCREASED FROM ABOUT 7% IN 1960 TO ALMOST 65% IN 1985. k{!1- IN CANADA, OF COURSE, IT WAS VERY DI FF I CULT FOR A FOREIGN BANK TO OBTAIN A BANK CHARTER Af'I.Cf PRIOR TO 1967. FROM THEN UNTIL 1980, FOREIGN OWNERSHIP OF BANKS WAS SEVERELY LIMITED. BUT REVISIONS TO YOUR BANK ACT HAVE PROV I DE D OPPORTUNITIES FOR FOREIGN BANKS TO GROW ---. ~ AND OUR NUMBERS SUGGEST THAT MARKET SHARE HELD BY FOREIGN BANKS INCREASED TO ABOUT 10% IN 1988. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 10 III. WHILE IT WOULD BE DIFFICULT TO ATTRIBUTE THIS TREMENDOUS CHANGE THAT WE VE EXPERIENCED OVER THE PAST 1 FEW DECADES TO ANY ONE FACTOR -- IF I WERE TO CHOOSE ONE IT WOULD BE THE CREATION OF THE EUROCURRENCY MARKETS. A. EURODOLLAR MARKET STARTED IN LONDON IN 1950 S. 1 1. THESE DOLLAR-DENOMINATED DEPOSITS IN BANKING OFFICES OUTSIDE U.S. WERE FIRST OFFERED BY LONDON BANKS TO SATISFY DEMAND OF EASTERN BLOCK COUNTRIES FEARFUL OF EXPROPRIATION BY u. s. 2. WHILE THERE ARE PROBABLY 99 VERSIONS OF HOW THIS ACTUALLY STARTED -- LONDON LATE 1960 S. 1 A. AT THE TIME, AT LEAST ONE VERSION HAD IT THAT IT WAS THE INNOVATIVE MINDS OF THE CHA I RMAN AND THE CH I EF EXCHANGE DEALER OF THE BANK OF LONDON AND SOUTH AMERICA THAT SENSED THIS MARKET OPPORTUNITY AND INITIATED TRANSACTIONS WITH THE MOSCOW NARODNY BANK. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 11 B. WHETHER THIS IS ABSOLUTELY ACCURATE NOT AS IMPORTANT AS THE FACT THAT INNOVATIVE MINOS WILL ALWAYS SEIZE THESE KI NOS OF OPPORTUNITIES ANO IT WILL BE IMPORTANT TO PROVIDE THE CIRCUMSTANCES ANO ENVIRONMENT IN WHICH THESE DEVELOPMENTS CAN OCCUR. 3. SINCE THEN, EUROCURRENCY MARKETS HAVE GROWN TO ENCOMPASS SEVERAL CURRENCIES ANO FINANCIAL CENTERS. 4. BY ENO OF 1986, VALUE OF EUROCURRENCY OEPOS I TS VERY ROUGHLY EST !MATEO AT ASTOUNDING $3.5 TRILLIO~-r I .r """'-~ 5. THIS~ A MARKET THAT DEVELOPED ENTIRELY OUTSIDE U.S. SINCE OUR REGULATIONS PROHIBITED FOREIGN-DENOMINATED DEPOSITS IN U.S. BANKING Of£ICES. ~:s~ 6. ~-J] EARLY ~9, FEDERAL RESERVE BOARD RULED BANKING OFFICES IN U.S. MAY BEGIN TO HOLD g~(r ',vµJ 'NG,.. FOREIGN CURRENCY DEPOSITS NEXT YEAR. /) A. AS A MINI-COMMERCIAL, PLEASED THAT IT WAS A REQUEST BY THE FEDERAL RESERVE BANK OF CH I CAGO THAT PROMPT ED THAT REVISED RULING. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 12 B. ANOTHER MARKET THAT HAS GROWN RAPIDLY IS THE MARKET FOR EUROBONDS. 1. 1980 1985, U.S. BETWEEN AND WHEN DOMESTIC /'- 15%, BONDS OUTSTANDING INCREASED EUROBONDS 160%. OUTSTANDING INCREASED BY OVER IV. WHILE IT WAS THE CREATION AND DEVELOPMENT OF THE EUROCURRENCY MARKETS THAT PROVIDED THE ENVIRONMENT IN WHICH THIS VERITABLE EXPLOSION OF FINANCIAL TRANSACTIONS COULD TAKE PLACE, THERE WERE OTHER FACTORS THAT ALSO PLAYED A PART IN THIS. A. CERTAINLY THE EXISTENCE OF RESTRICTIVE U.S. REGULATIONS IN THE PROV I OED CONSIDERABLE ~ ~'~~~• IMPETUS. 1. MUCH OF GROWTH OF EURODOLLAR MARKET/DUE TO A <di-~_) REGULATION'AS -JI- A. E;rreRTS U.S. BANKS AND D~O ESCAPE BURDEN OF RESERVE REQUIREMENTS, r/J.. INTEREST RATE CEILINGS, AND INTEREST EQUALIZATION TAX. 2. FOR A WHILE IN 1960 1S, BANKS COULD AVOID THESE BY BORROWING FROM lHEIR BRANCHES IN LONDON. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 13 A. AFTER FED DEFINED THESE BORROWIN~ DEPOSITS, U.S. BANKS COULD STILL D~ ~ THEIR CUSTOMERS TO DEPOSIT DIRECTLY IN THEIR FOREIGN BRANCHES. 3. LONG-RUN EFFECT OF REGULATORY BURDEN HAS BEEN TO ENCOURAGE DEVELOPMENT OF SUBSTITUTES. A. GENERALLY AGREED TODAY THAT REGULATION HAS BEEN A MAJOR FACTOR BACK OF TH IS PROCESS. 4. I RON I CALLY, SOME OF RECENT DEVELOPMENTS IN GLOBAL FINANCIAL INTEGRATION DRIVEN BY D.EREGULATION. A. UNEVEN PACE OF DEREGULATION IN DIFFERENT MARKETS CREATED OPPORTUNITIES FOR NEW INSTRUMENTS. B. NICE TO BE REMINDED -- MARKET FORCES DO WORK. B. ANOTHER CRITICALLY IMPORTANT ELEMENT IN GLOBAL FINANCIAL INTEGRATION HAS BEEN THE TREMENDOUS TECHNOLOGICAL ADVANCES IN COMMUNICATIONS AND INFORMATION PROCESSING. 1. FINANCIAL INTEGRATION WOULD SIMPLY NOT HAVE BEEN POSSIBLE WITHOUT THE FASTER AND CHEAPER COMMUN I CAT I ON THAT HAS BEEN DEVELOPED OVER THE PAST DECADE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 14 2. GIVEN THE LARGE REDUCTION IN THE COST OF COMMUN I CAT I ON, MANY TRANSACTIONS PROFIT ABLE TODAY WOULD HAVE BEEN PROHIBITIVELY COSTLY TEN YEARS AGO. 3. WHILE THESE TECHNOLOGICAL CH~UOES MUST BE VIEWED AS A MAJOR POSIT I VE DEVELOPMENT THERE IS A DOWNSIDE -- OUR MARKETS ARE NOW EXPOSED TO INSTANTANEOUS REACTIONS. A. OCTOBER '87 EVENTS -- PROV I OED A CHILLING REMINDER. V. ECONOMIC IMPACT OF GLOBAL FINANCIAL INTEGRATION IS PROFOUND. A~~ A. I fCQIGK@lTUIIJ HAS CLEARLY RESULT ED IN INCREASED COMPETITION AND EFFICIENCY -- VIVIDLY CLEAR WITHIN THE U.S. 1. BANKS ONCE PROTECTED BY SEVERE ENTRY RESTRICTIONS. 2. FIRST CAME UNDER ATTACK FROM DOMESTIC NONBANK FINANCIAL INSTITUTIONS OFFERING BANKLIKE SERVICES. 3. THEN OTHER DOMESTIC BANKS INVADED THEIR MARKETS AS BRANCHING RESTRICTIONS WERE REMOVED, BARRIERS TO INTERSTATE BANKING CIRCUMVENTED. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 15 4. TODAY U.S. BANKS FACE DIRECT COMPETITION FROM A WHOLE HOST OF SOURCES -- BANK AND NONBANK AND IMPORTANTLY FROM A VARIETY OF FOREIGN BANKING ENTITIES. B. BENEFITS TO CUSTOMERS BOTH RETAIL AND WHOLESALE J ARE R1: f: DI k t ii BS ER V A B.b..E . .J..rU.J, ~ 1. VARIETY OF FINANCIAL PRODUCTS HAS MULTIPLIED. 2. DEPOSITORS NOW RECEIVE COMPETITIVE RATES ON SAVINGS. 3. HAVE ACCESS TO MORE ALTERNATIVE SOURCES (#' ,.., ~ CREDIT. c. MNMISTAKABLE sIGN oF INCREASED coMPETITioN HAS BEEN LONG-RUN DECLINE IN THE PROFITABILITY OF THE WHOLESALE COMMERCIAL BUSINESS. 1. A STUDY ON TRENDS IN COMMERCIAL BANK PROFITABILITY PUBLISHED BY THE FEDERAL RESERVE BANK OF NEW YORK IN 1986 SHOWED THAT: 2. WHILE NET INTEREST MARGINS SHOWED A MODEST INCREASE BETWEEN 1979 AND 1985 3. ROA'S DECLINED FROM 80 BASIS POINTS TO 70 BASIS POINTS. 4. RETURNS ON EQUITY DECLINED FROM 14% TO SOMETHING OVER 11%. 5. GIVEN COMPETITIVE FORCES THE BUSINESS HAS BECOME LESS PROFITABLE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 16 ~,·c. A. HIGHER QUALITZ-:-:RE BEING FINANCED BY LOWER COST SOURCES - COMMERCIAL PAPER AND FOREIGN BANKS. 8. COMMERCIAL BANKS HAVE REACTED BY REACHING OUT FOR LOWER QUALITY CREDITS. C. LOAN LOSS PROVISIONS HAVE INCREASED SIGNIFICANTLY. 6. ANECDOTALLY TREASURERS OF LARGE CORPORATIONS REPORT FIERCE COMPETITION FOR THEIR BUSINESS. A. ONE COMPANY, ONE WITH A HIGHLY LEVERAGED BALANCE SHEET CURRENTLY BORROWS FOR ITS SHORT-TERM REQUIREMENTS AT 25 BASIS POINTS OVER LIBOR -- DOWN FROM 50 BASIS POINTS TWO YEARS AGO. 8. IRONICALLY AS THEIR LEVERAGE HAS INCREASED, THEIR BORROW I NG MARG IN HAS DECREASED. C. THIS COMPANY SAYS -- THE FOREIGN BANKS HAVE PROVIDED THE COMPETITIVE ELEMENT THAT HAS REDUCED THEIR BORROWING MARGIN. D. MULTINATIONAL COMPANIES SEARCHING FOR CHEAPEST SOURCE OF FINANCING AND INVESTORS LOOKING FOR GREATEST RETURN HAVE CEASED TO THINK IN TERMS OF NATIONAL CURRENCIES. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 17 1. ARE GENERALLY INDIFFERENT BETWEEN MAJOR TRADING CURRENCIES. 2. COMMITTED TO GLOBAL OPERATIONS IN LONG-RUN. 3. REPATRIATION OF PROFITS AT ONE TIME FOREFRONT IN THE TREASURER I S MIND, OFTEN POSTPONED TO INDEFINITE FUTURE. 4. MANY LARGE CORPORATIONS HAVE SH IF TED THEIR APPROACH TO THE WORLD MARKETS FROM PURELY ~ VI. WHILE THESE DEVELOPMENTS OVER THE PAST SEVERAL DECADES HAVE PRODUCED SOME CLEAR, MEASURABLE PUBLIC GAINS AND BENEFITS. ~ ........... ~ b, Ne,:fS',,Jf A. Al SQ RAISE AND I EAVE IINUJ~WERED SOME SIGNIFICANT PUBLIC POLICY ISSUEsffeA~~Aec-,~ /1A.NIJf11Jtw-e/U.. B. CERTAINLY ONE OF THE MAJOR CONSEQUENCES OF THE INTEGRATION OF THE WORLD MARKETS. 1. RE SUL TS IN THE VERY RAPID TRANSMISSION OF ECONOMIC AND FISCAL IMBALANCES THROUGHOUT THE GLOBAL SYSTEM. A. SHARP RISE IN OIL PRICES IN 197O S 1 CLASSIC EXAMPLE. B. VERY QUICKLY RESULTED IN ESCALATING RATES OF INFLATION IN THE MAJOR ECONOMIES OF THE WORLD. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 18 2. CURRENT U.S. FEDERAL BUDGET DEFICIT PROBLEM ANOTHER EXAMPLE. A. WHAT MIGHT HAVE BEEN A REASONABLY ISOLATED ISSUE AT ONE TIME -- NO LONGER IS. • 'J B.f'WA' DOMESTIC IMBALANCE THAT IS ABSOLUTELY EXPOSED TO THE CRUCIBLE OF THE INTERNATIONAL MARKETS ON A CONTINUING BASIS. C. THERE IS AT LEAST A QUARTERLY OPPORTUNITY TO TEST THE TOLERANCE OF THE MARKETS TO THIS ISSUE. 3. SOMEHOW WE WI LL NEED TO FI ND A MET HOD, FORUM, OR WHAT HAVE YOU, TO DEVELOP A HIGHER LEVEL OF COORDINATION IN FISCAL AND MONETARY POLICIES AMONG THE MAJOR NATIONS. A. WHILE THAT HAS A LAUDATORY RING ABOUT IT -- G7/1O MEETINGS PROVIDE AN OPPORTUNITY. B. WHEN INTERNATIONAL COOPERATION BACKS UP AGAINST THE HOT PIPES OF DOMESTIC SOCIAL AND POLITICAL ISSUES, ALL TOO FREQUENTLY THE WARM FEEL I NG SUD DE NL Y GETS PRETTY HOT. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 19 ~ ~o~ C. AS WE GO FURTHER IN THE GLOBALIZATION PROCESS OVER CAPACITY PROBLEMS IN THE FINANCIAL SERVICES BUSINESS WILL BECOME INCREASINGLY APPARENT. 1. THE CORRECTIVE PROCESS WILL BE LUMPY AT BEST. 2. ~ DER EG ULATI ON P~ S WITHIN THE U. S . SYSTEM IS CAUSING VERY DIFFICULT ADJUSTMENT PROBLEMS. A. BANKING INDUSTRY -- CONSOLIDATION - INTERSTATE, ET AL. B. THRIFT INDUSTRY QUESTION OF VIABILITY OF A VERY SPECIALIZED SEGMENT OF THE FINANCIAL SERVI CE BUS I NESS TO SURVIVE ON A STAND-ALONE BASIS. C. SECURITY INDUSTRY INTENSIFIED COMPETITION. D. SIMPLY TOO MUCH CAPACITY TO DEAL WITH MARKET NEEDS. 3. WHAT IS TRUE FOR THE U.S. MUST ~•LY BE TRUE IN A GLOBAL CONTEXT. A. DOWN-SIZING IN THE INTERNATIONAL MARKETS WILL BE A RUGGED PROCESS. 8. CERTAINLY SOME OF THE MORE CURRENT DEVELOPMENTS IN LONDON ARE INDICATIVE OF HOW DIFFICULT THIS PfiOGM,S WILL BE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis r · cf"'/ l) SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 19~89 PAGE 20 • ~ / D. WHICH LEADS TO -- LENDER OF LAST RESORT AND NOW SUPERVISOR OF LAST RESORT. 1. WHICH SUPERVISORY AUTHORITY BEARS THE ULTIMATE RESPONSIBILITY FOR THE VARIOUS ~IA)VUc:_ PARTS OF THE FINANCIAL ._£¥SJE:1'1 IN A TRULY GLOBALIZED SYSTEM. 2. SOME VERY LARGE INSTITUTIONS THAT WILL BECOME INCREASINGLY DIVERSE IN THEIR ACTIVITIES WILL HAVE IMPORTANT PRESENCE IN A VARIETY OF ACTIVITIES IN EACH OF THE MAJOR MONEY CENTERS AND MARKETS OF THE WORLD. 3. THE SUPERVISORS IN THE HOST AND PARENT COUNTRIES WILL HAVE TO WORK OUT SOME COOPERATIVE ARRANGEMENTS AND TO COMPLICATE IT EVEN FURTHER FREQUENTLY A VARIETY OF SUPERVISORY AGENCIES IN EACH OF THE COUNTRIES WILL BE INVOLVED. 4. MINI PART OF PROBLEM EVEN NOW -- ONE THAT IS OPERATIVE BETWEEN TWO COUNTRIES -- WHILE WE EXAMINE THE U.S. SUBSIDIARY OF A FOREIGN ENTITY WE DON'T INSPECT OR EXERT REGULATORY CONTROL OVER THE FOREIGN PARENT -- THE PARENT'S SUPERVISOR WOULD BE SENSITIVE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 21 5. RATHER DRAMATICALLY DEMONSTRATED LAST YEAR A. MAJOR ITALIAN BANK FILED APPLICATION FOR THE FRIENDLY ACQUISITION OF A BANK ~y IN NEW YORK.c.:.ry' -..... B. WHEN THE FED INDICATED TH~ REQUIREMENTS AND REGULATIONS WOULD EXTEND TO THE ITALIAN BANK'S PARENT, A GOVERNMENT AGENCY~~ rr~ '1-,•,i,,,Q ~,·u; f",•e r • ~~Co\.'..J. C. RATHER THAN SUBMIT TO WHAT WAS VIEWED V AS AN INFRINGEMENT ITALIAN SOVEREIGNTY -- THE APPLICATION WAS WITHDRAWN. E. ELECTRONIC SETTLEMENT SYSTEMS -- EXPANDING IN NUMBER AND IN TRANSACTION VOLUME. 1. WHO IS RESPONSIBLE FOR THE PROPER FUNCTIONING -- FOR FINALITY OF SETTLEMENT AND FOR SYSTEMS AND PROCEDURES. A. GIVEN THE MAGNITUDE OF TRANSACTIONS INTERRUPTIONS OR FAILURE DESTABILIZING -- CAN'T LEAVE TO CHANCE. 2. MERCANTILE -- GLOBEX -- 24-HOUR TRADING. Jl,111\tr-,'r"'~Q.. o11: A. SECURITIES IN A VARIETY OF CURRENCIES. B. THIS CONCEPT LIKELY TO BECOME PREVALENT -- ONLY INTENSIFIES A DIFFICULT PROBLEM. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 22 C. WHOSE LAWS GOVERN, WHICH CENTRAL BANK STEPS IN AND WHEN. F. RECIPROCITY -- CURRENTLY VERY TOPICAL IN TERMS OF THE COMING DEVELOPMENTS IN EUROPE IN 1992. 1. BUT THE ISSUE IS MUCH BIGGER THAN JUST THAT. 2. A TRULY GLOBALIZED FINANCIAL SYSTEM WON'T REALLY FUNCTION WELL IF SOME OF THE MAJOR COMPONENTS WON T PERMIT ENTRY RIGHTS ON A I REASONABLY EQUAL BASIS. - VJ_ - ~Wl~~~"-"" G. T+te- CHANGES I 'VE HIGHLIGHTED THIS EVENING HAVE FAR OUT-PACED THE APPROPRIATE REGULATORY/SUPERVISORY CHANGES THAT WILL BE NEEDED TO DEAL WI TH THE CRITICAL SAFE TY AND SOUNDNESS ISSUES. 1. WHILE IT SEEMS ENTIRELY LOGICAL THAT THE REGULATORY FRAMEWORK SHOULD LAG MARKETPLACE INNOVATIONS. 2. THE PROCESS CAN'T LAG TOO FAR WITHOUT EXPOSING THE SYSTEM TO SOME PRETTY RUDE SHOCKS. 3. WHILE ALL/OR MOST WOULD PREFER A FREE MARKET APPROACH. 4. THERE MUST BE SOME REASONABLE BALANCE BETWEEN INNOVATION AND REGULATION. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE 23 A. FUNDAMENTAL CONT I NU I NG QUEST I ON -- HOW BEST TO ACHIEVE THIS BALANCE. B. PROVIDE THE NECESSARY MINIMUM OF PRUDENTIAL · RE GU LAT I ON WITHOUT ST I FL I NG INNOVATION OR PRODUCING UNEXPECTED OR UNDESIRABLE DISTORTIONS. 5. CONFERENCES LIKE THIS CAN PLAY AN IMPORTANT PART IN DEVELOPING THIS CRITICAL BALANCE. H. I VE HIGHLIGHTED JUST A FEW OF THE PUBLIC POLICY 1 ISSUES. 1. DAUNTING LIST. 2. REASON FOR OPTIMISM. 3. RISK-BASED CAPITAL -- A. CAPITAL STANDARD DIFFERENT. B. BALANCE SHEETS VERY DIFFERENT. C. ACCOUNTING STANDARDS AND PROCEDURES DIFFERENT. D. YET DESPITE THESE ENORMOUS DIFFERENCES, THE MAJOR CENTRAL BANKS HAVE COME TO AGREEMENT ON VERY THORNY ISSUE. I. CANADIAN-U.S. FREE TRADE AGREEMENT PROVIDES ANOTHER EXCELLENT EXAMPLE OF RESOLVING NATIONAL DIFFERENCES IN AN INTERNATIONAL CONTEXT. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF WINDSOR - MARCH 1, 1989 PAGE~ 1. VERY SPECIFIC REASON TO BELIEVE THAT NAT I ONAL DIFFERENCES REGARD I NG COMPETITION IN FINANCIAL SERVICES CAN BE OVERCOME. 2-~Y==-:S-tGNIFIEANT=lffLESlOmE IN w~otr PRO~~~. - . . - -·-- -- ------- --- -· J. THEREFORE, IT ONLY SEEMS REASONABLE THAT THE OTHER PUBLIC POL I CY ISSUES AND QUESTIONS THAT REMAIN UNANSWERED LEND THEMSELVES TO THE SAME KIND OF PROCESS. K. ONE HAS TO BE OPTIMISTIC THAT WE WILL FIND A WAY AROUND SOME OF THESE VERY TOUGH OBSTACLES. L. IF WE DO, THEN GOOD LIKELIHOOD THAT WE WILL HAVE PROV I OED THE TYPE OF FINANCIAL ENVIRONMENT IN WHICH IT WILL BE POSSIBLE THAT THE COMING DECADE WI LL BE EVERY BIT AS EXCITING AND REWARD I NG AS THE PAST SEVERAL DECADES, DECADES THAT HAVE WITNESSED THE TREMENDOUS CHANGES THAT I'VE HIGHLIGHTED THIS EVENING. &#45;&#45;&#45; ,,,...,-- --- AND ON THAT POSITIVE NOTEY LET ME CONCLUDE BY AGAIN EXPRESSING MY APPRECIATION TO THE CENTER FOR CANADIAN-AMERICAN STUDIES FOR GIVING ME THE OPPORTUNITY TO CONVEY MY THOUGHTS TO YOU THIS EVENING. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1989, February 28). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19890301_silas_keehn

@misc{wtfs_regional_speeche_19890301_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1989},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19890301_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}