Regional President Speech

'SI LAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD~- POSITIVELY!" APRIL 12, 1991 - PAGE 1 ~ - ,r-IY-.~-~ -" '~ , D~ -~~ ~ ~ ~ s ~·;~ ~~ ~ ~ °'- ~~-~ ~-~,,~, /. :r:;,~ • I . I NTRODU CTI ON ~~ A. THE BANKING INDUSTRY IS CLEARLY RECEIVING A GREAT DEAL OF ATTENTION -- NO DOUBT MORE THAN ALL OF US WOULD LIKE -- IN THE MEDIA, AS WELL AS IN THE HALLS OF CONGRESS, AS DEBATE ON THE FINANCIAL SYSTEM REFORM LEGISLATION BEGINS -- 1. ENACTMENT OF THE MAIN ELEMENTS OF THE U.S. TREASURY'S PROPOSAL WILL BE VERY IMPORTANT TO THE FUTURE SUCCESS OF THE INDUSTRY. A. WHILE THE NEED FOR BROAD-BASED REFORM IS COMPELLING -- DEPOSIT INSURANCE REFORM AND THE RELATED AND VERY THORNY QUESTION OF "TOO BIG TO FAIL" ARE CRITICALLY IMPORTANT. 2. I CERTAINLY WANT TO COMMEND THE CHICAGO CLEARING HOUSE FOR HOLDING THIS CONFERENCE AND FOR LEADING A DEBATE ON THESE TWO IMPORTANT ISSUES. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 2 3. As BACKGROUND TO THAT DEBATE, I THINK IT WOULD BE USEFUL TO TAKE A FEW MOMENTS TO EVALUATE THE BANKING INDUSTRY'S CURRENT CONDITION AND FUTURE PROSPECTS. , II. UNQUESTIONABLY THE NEWS OF THE PAST FEW YEARS 1990, AND PERHAPS MOST PARTICULARLY HAS BEEN VERY ADVERSE. A. IF WE WEREN'T ALREADY AWARE OF THE PROBLEMS 1. THE INCESSANT DRUM BEAT OF NEGATIVE COVERAGE BY THE MEDIA HAS KEPT THE ISSUES IN THE FRONT OF THE MINDS OF THE PUBLIC. 8. ASSET QUALITY HAS BADLY DETERIORATED. 1. 1990 As PROGRESSED, IT BECAME INCREASINGLY CLEAR THAT BANKS WITH HEAVY CONCENTRATIONS IN COMMERCIAL REAL ESTATE LOANS WERE LIKELY TO TAKE BIG LOSSES - AND THEY DID. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 3 A. THIS, IN TURN, OF COURSE, HAS HAD A MAJOR EFFECT ON THE LIQUIDITY PROBLEMS FACED BY THE BANK DEPOSIT INSURANCE FUND. 2. MEANWHILE, OTHER PARTS OF MANY LOAN PORTFOLIOS HAVE ALSO SHOWN SIGNS OF WEAKNESS. THE RISKS ASSOCIATED WITH THE VERY LARGE SPREADS ON SOME HIGHLY LEVERAGED TRANSACTIONS ARE BEGINNING TO EMERGE IN THE FORM OF PROBLEM ASSETS. 3. As A CONSEQUENCE OF THIS DETERIORATION IN LOAN PORTFOLIOS WE HAVE SEEN RISING LEVELS OF NONPERFORMING ASSETS AND CRITICIZED LOANS. C. THIS HAS RESULTED IN PRESSURE ON EARNINGS 1. As PROVISIONS AND CHARGE-OFFS HAVE RISEN, 2. AND AS OPERATING EXPENSES HAVE BECOME INCREASINGLY DIFFICULT TO MANAGE, Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 4 3. STOCK PRICES OF MONEY CENTER BANKS HAVE COME UNDER PRESSURE AND ARE CURRENTLY 30% SOME LOWER THAN THEY WERE IN THE 1990. BEGINNING OF A. IT IS GENERALLY ACKNOWLEDGED THAT BILLIONS OF DOLLARS OF ADDITIONAL CAPITAL WILL BE NEEDED BY THE MAJOR BANKS AND THIS HAS AND WILL CONTINUE TO PUT AOwlilOaAL PRESSURE ON BANK STOCK PRICES. 0. As WE HAVE GONE THROUGH THIS DIFFICULT PERIOD, THE FAILURE RATE IN THE INDUSTRY HAS RISEN TO VERY HIGH LEVELS. E. AND THERE IS THE AWKWARD ANALOGY OF DEVELOPMENTS IN THE COMMERCIAL BANKING INDUSTRY WITH THE RECENT EXPERIENCE IN THE SAVINGS AND LOAN INDUSTRY. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" 12, 1991 - 5 APRIL PAGE III. WHILE ADMITTEDLY THE NEWS HAS BEEN BAD, AN OBJECTIVE LOOK AHEAD SUGGESTS THAT THE INDUSTRY'S PROSPECTS ARE BETTER THAN THE CURRENT STATISTICS WOULD SUGGEST -- INDEED THAT WE CAN r rt"""°-'2...c( 0 LOOK Afl£AD POSITIVELY. A. - MOREOVER THE LEVEL OF OPTIMISM WILL ONLY BE ENHANCED BY ENACTMENT OF SOME OF THE MORE IMPORTANT ASPECTS OF THE TREASURY'S PROPOSAL ~ ~ ~~~~~ ~ J\-.S $,~...A--~F~;Jc.,~<f- o-vvt" J k....) ~ ~ ·r.1 AX TIIIS POIN.J.,. MOST OF THE TROUBLESOME ASSET O l) 0 PROBLEMS HAVE ALREADY BEEN IDENTIFIED. IT SEEMS REASONABLE TO EXPECT THAT WE ARE APPROACHING THE POINT AT WHICH WE WILL SEE SOME STABILIZATION IN THE QUALITY ASPECTS OF LOAN PORTFOLIOS. 1. WHILE THERE COULD BE MORE BAD NEWS ABOUT COMMERCIAL REAL ESTATE FROM PARTS OF THE WEST COST, NEW YORK, AND THE SOUTHEAST, THESE PROBLEMS SHOULD BE MANAGEABLE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 6 2. FOR THE MOST PART, CERTAINLY NOT ALL BUT MOST, THE BANKS INVOLVED WOULD APPEAR TO HAVE SUFFICIENT CAPITAL TO WEATHER THE STORM. 3. IN THE MORE RAPIDLY GROWING MARKETS, THE REAL ESTATE PROBLEMS ARE ONES OF IMBALANCES OF SUPPLY AND DEMAND THAT SHOULD BE CORRECTED WITH THE REASONABLE PASSAGE OF TIME. C.~1'7THERE HAS BEEN A TIGHTENING OF CREDIT STANDARDS, A POSITIVE BASIS FOR D CY\.)~ ·,"-c EXPECTING THiS STABILIZATION TO OCCUR. I\ 1. AFTER YEARS OF SLIPPAGE, THERE IS A SELF-CORRECTING PROCESS TAKING PLACE IN WHICH BANK MANAGEMENTS HAVE RAISED THEIR CREDIT STANDARDS TO PREVENT A REPETITION OF THE EXPERIENCES OF SOME OF THE WEAKER PARTS OF THE COUNTRY. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 7 2. CERTAINLY THE SUPERVISORY PROCESS HAS BEEN A PART OF THIS -- LENDING OFFICERS ARE QUITE AWARE THAT EXAMINERS ARE LOOKING OVER THEIR SHOULDERS. A. AND AS A CONSEQUENCE, THERE HAS BEEN A HEAVY FOCUS ON SOME SPECIFIC CATEGORIES OF LENDING. 3. THIS HAS RESULTED IN THE RESTRAINT ON CREDIT EXTENSION_,.,POPULARLY REFERRED TO AS THE CREDIT CRUNCH. A. DEFINITIONALLY INCORRECT -- PLENTY \).\JJ OF LIQUIDITY IN THE SYSTEM. 'rJ ~ , C\ ~ ~ j" ~ ~ ' N'\ \_ ~,v.1 ~ 1-l \Y C,.~r1---H(IH)~ 0 THIS CREDIT RESPONSE HAS NOT ~~ ~:i;~~ei_ ~. BEEN Y,._ IMPOSED. 4. t(jr RATHER, THE DRIVING FORCE HAS BEEN THE MARKET -- THE INDUSTRY IS REACTING TO THE ADVERSE CREDIT CIRCUMSTANCES AND THIS IS JUST THE WAY THAT THE PROCESS SHOULD WORK. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 8 D. LET ME ENUMERATE SEVERAL OTHER REASONS FOR A POSITIVE VIEW OF THE FUTURE. WHILE IT MAY NOT HAVE YET SHOWN UP IN THE NUMBERS, PROFITABILITY IS ALSO LIKELY TO IMPROVE. 1. SPREADS ARE WIDENING -- OUR RECENT SENIOR LOAN OFFICER OPINION SURVEY SUGGESTS THAT SPREADS ON LOANS TO HIGH QUALITY CORPORATE CUSTOMERS HAVE GONE UP 30 BY SOME BASIS POINTS IN THE LAST SIX MONTHS. 2. COMPETITIVE PRESSURES FROM SOME INTERNATIONAL BANKS THAT DROVE SPREADS TO VERY NARROW MARGINS HAVE EASED. As A. UNIFORM AND CONSISTENT RISK-BASED CAPITAL STANDARDS GO INTO PLACE, PRESSURE FOR HIGHER EARNINGS -AND CAPITAL WILL INCREASE ON AN INTERNATIONAL BASIS AND THAT SHOULD Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 9 PROVIDE A BETTER OPPORTUNITY FOR IMPROVED PROFITABILITY ON U.S. TRANSACTIONS FOR BANKS. B. THERE ARE INCREASING COMMENTS ABOUT THE WIDENING OF SPREADS BETWEEN THE PRIME RATE AND OTHER SHORT-TERM RATES -- JUST ADDITIONAL EVIDENCE OF THE INTENSE PRESSURE FOR INCREASED EARNINGS. 0. VERY IMPORTANTLY, CAPITAL POSITIONS HAVE BEEN STRENGTHENED. 1. You ARE ALL AWARE THAT THE REGULATORS HAVE BEEN ON A MAJOR CAMPAIGN TO IMPROVE THE CAPITALIZATION OF THE NATION'S LARGEST BANKING ORGANIZAT~~~S AND THE ec h6..5 EFFORT~ CLEARLY PRODUC:Hitfl. RESULTS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" 12, 1991 - 10 APRIL PAGE A. THERE HAS BEEN AN INCREASE IN THE EQUITY POSITIONS OF THE NATION'S LARGEST BANKING ORGANIZATIONS MEASURED ON BOTH ACCOUNTING AND MARKET CAPITALIZATION BASES. B. AND IN ADDITION, MOST BANKS NOW HAVE THE ADDED PROTECTION OF TIER II CAPITAL WHICH JUST A DECADE AGO WAS RATHER NEGLIGIBLE. c. ADDING TIER I AND TIER II CAPITAL, THE REAL CAPITAL POSITIONS OF LARGE U.S. BANKS HAVE ABOUT DOUBLED IN THE LAST TEN YEARS. E. MY POINT IS THAT SO FAR THE BANKING SYSTEM HAS BEEN ABLE TO COPE WITH SOME VERY MAJOR PROBLEMS -- MORE THAN MANY WOULD HAVE IMAGINED A DECADE OR TWO AGO -- AND THAT HAVING COME THROUGH THIS DIFFICULT PERIOD A FOUNDATION IS BEING LAID FOR IMPROVED PROFITABILITY. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 11 1. INCREASED SPREADS ON CURRENT TRANSACTIONS WILL WORK THROUGH TO HIGHER EARNINGS. 2. AND CAPITAL POSITIONS ALREADY SIGNIFICANTLY IMPROVED WILL CONTINUE TO SHOW PROGRESS. IV. SIGNIFICANTLY AS WELL, THE OPrERA~TING, EN VI.R ONMENT ~ ~<./?..R__ FOR THE INDUSTRY WILL lt'PPOVE. THE DEREGULATION 198Os OF THE IS PRODUCING THE EXPECTED BENEFITS. A. I WOULD ALMOST LIKE TO SAY THE DESIRED BENEFITS RATHER THAN EXPECTED BENEFITS, BUT THOSE OF YOU DEALING WITH ALL OF THE TUMULT THAT WE HAVE BEEN EXPERIENCING MAY NOT NECESSARILY FIND THIS A DESIRABLE ENVIRONMENT. 8. IT IS WELL TO REMEMBER THAT THE EXPERIENCE OF OTHER INDUSTRIES THAT HAVE GONE THROUGH THE DEREGULATION PROCESS SHOULD BE INSTRUCTIVE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 12 1. IF YOU THINK ABOUT THOSE THAT HAVE GONE THROUGH THIS PROCESS (BROKERAGE, · TRUCKING, AIRLINES, ET AL.) IT HAS NOT BEEN AN EASY ROAD. 2. THERE WAS NO REASON TO EXPECT THAT THE TRANSITION FOR THE BANKING BUSINESS WOULD OR SHOULD HAVE BEEN ANY DIFFERENT AND IT HASN'T. 0 A. GIVEN THE DEEP PUBLIC INTEREST~D AWARENESS INVOLVED IN BANKING/ AS WELL AS THE POTENTIAL TAXPAYER EXPOSURE, THE CONCERNS ARE CLEARLY DIFFERENT, BUT THE ADJUSTMENT PROCESS IS NOT. C. AT THIS POINT, MUCH OF THE REGULATORY STRUCTURE THAT IMPEDED THE BUSINESS HAS BEEN REMOVED. 1. INTEREST RATE CEILINGS ARE GONE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 13 2. STATE BRANCHING LAWS HAVE EASED AND THE SHIFT TO INTERSTATE BANKING HAS BEEN LARGELY ACCOMPLISHED. 3. As A CONSEQUENCE)WEL~CAPITALIZED BANKS HAVE BEEN ABLE TO ACQUIRE WEAK AND UNDERCAPITALIZED BANKS IN OTHER STATES. 4. NOT ONLY IS THIS REDUCING OVERALL OPERATING EXPENSES AND PUSHING COSTS DOWN BUT IT IS INCREASING CAPITAL POSITIONS AND IS ALSO CREATING MORE DIVERSIFIED INSTITUTIONS. 5. As THIS PROCESS MOVES AHEAD THIS WILL MEAN THAT REGIONAL DOWNTURNS LIKE THOSE WE HAVE SEEN IN THE SOUTHWEST AND NORTHEAST WILL POSE LESS AND LESS OF A THREAT TO THE HEALTH OF THE U.S. BANKING SYSTEM. D. IT'S A SAFE PREDICTION THAT THE CONSOLIDATION THAT HAS BEEN TAKING PLACE WILL CONTINUE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 14 1. THE NUMBER OF BANKING ORGANIZATIONS 20% DECLINED BY OVER IN THE DECADE OF THE 80s. · - ~µ~,',\J~, Uy,..)~~ ~J--,~ 2. »IIS PR6C!SS HAS THE POTENTIAL BENEFIT OF CREATING MORE DIVERSIFIED AND BETTER STRUCTURED BANKING ORGANIZATIONS. 3. BY NO MEANS SHOULD THIS SUGGEST THE DEMISE OF THE SMALLER AND MEDIUM-SIZED INSTITUTION. A. THERE WILL BE PLENTY OF OPPORTUNITIES FOR THESE BANKS TO THRIVE AND PROFIT IN THEIR OWN MARKETS. B. BUT THE COMPETITIVE CONDITIONS FOR ALL BANKS WILL INTENSIFY - EFFICIENCY WILL REALLY. MATTER C. BUT IMPORTANTLY, AS THIS PROCESS MOVES FORWARD, THERE IS A SIGNIFICANT PUBLIC INTEREST INVOLVED. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 15 (I). CUSTOMERS, BOTH RETAIL AND WHOLESALE WILL BE OFFERED A WIDER ARRAY OF SERVICES AND AT VERY COMPETITIVE PRICES. V. I BUT, AND EMPHASIZE¥ BUT, ALL OF THE GAINS ...__ OF THE PAST DECADE AS WELL AS MY OPTIMISM ABOUT THE FUTURE WILL BE ABSOLUTELY THREATENED BY~ CO~IINUING PROBLEMS WITH DEPOSIT INSURANCE~ ~ ( ~ ~ THEREFORE, THE ISSUES THAT THIS CONFERENCE WILL ADDRESS, THE REFORM OF THE DEPOSIT INSURANCE SYSTEM AND THIS VERY DIFFICULT QUESTION OF "TOO BIG TO FAIL," ARE CRITICALLY IMPORTANT. A. 1987, SINCE THE FDIC RESERVES HAVE DECLINED FROM A HIGH OF $18 BILLION TO A CURRENT LEVEL APPROXIMATELY $8 BILLION. 1. THE TIDES ARE RUNNING VERY SWIFTLY. 2. RECAPITALIZATION AND REFORM ARE ABSOLUTELY COMPELLING. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 16 wJ1... .,,,,;,, 0 F ~ I 'N) ~ r; 'f-, • r-.... 11,•'u)t S 8. WHILE NO SYSTEM WILL OR SHOULD BE FAIL j-\ SAFE -- THE INSURANCE FUND WILL OCCASIONALLY FACE LOSSES, THAT'S ITS BASIC PURPOSE. 1Jn" 1. CLEARLY THE SHEER MAGNITUDE OF SOME OF THE INDIVIDUAL CLAIMS AND THE ~d"Nt ~L, ,,....,.~ ( ~ (2.~ ,·ct STl.iR"fLIHCLY [AltGE DEPLETION OF THE BANK INSURANCE FUND IN JUST THE LAST THREE YEARS 2. ARE INDICATIVE OF A DEEPER STRUCTURAL PROBLEM WITH OUR SYSTEM OF REGULATING AND INSURING THE DEPOSITS IN COMMERCIAL BANKS. VI. FINDING A WAY TO DEAL WITH PROBLEM INSTITUTIONS BEFORE THEY DETERIORATE TO THE POINT THAT THEY PUT SUCH LARGE CLAIMS AGAINST THE INSURANCE FUND IS FUNDAMENTAL TO ANY SOLUTION OF THIS PROBLEM. I A. WOULD LIKE TO START OFF TODAY'S DISCUSSION AND DEBATE BY STRONGLY ENDORSING THE CONCEPT OF PROGRESSIVE SUPERVISORY INTERVENTION AND PROMPT CORRECTIVE ACTION. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 17 1N($.. ~ 1 1. BY ?l.3'PIIILL!N6 A KNOWN, UNDERSTOOD AND ACKNOWLEDGED SYSTEM UNDER WHICH REGULATORS WILL TAKE PROGRESSIVELY SPECIFIC STEPS TO DEAL WITH DETERIORATING CAPITAL POSITION~ THE ULTIMATE IMPACT ON THE FUND WILL BE SIGNIFICANTLY MITIGATED. 2. WHILE SOME MIGHT ARGUE THAT THE EMPHASIS ON CAPITAL DUCKS THE NARROWER ISSUE OF DEPOSIT INSURANCE REFORM A. IN MY VIEW, THE EMPHASIS ON CAPITAL IS ABSOLUTELY APPROPRIATE AND IN THE END WILL RESULT IN REDUCED CLAIMS AGAINST THE INSURANCE FUND. C. ESTABLISHING LEVELS OF CAPITAL (OR ZONES) WILL PROVIDE BENCHMARKS AGAINST WHICH REGULATORS WOULD TAKE APPROPRIATE ACTION. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" 12, 1991 - 18 APRIL PAGE 1. PROGRESSIVE CAPITAL DETERIORATION WOULD RESULT IN INCREASINGLY SEVERE SUPERVISORY ACTION AS AN ENTITY MOVED DOWN IN THE ZONES. A. IT WILL BE UNDERSTOOD BY ALL. PARTIES THAT WHEN AN INSTITUTION FALLS INTO A LOWER THAN SATISFACTORY ZONE B. THERE WILL BE A LINE LIST OF SPECIFIC ACTIONS THAT WILL BE CALLED FOR, SOME OF WHICH MAY SEEM PRETTY DRACONIAN, AT LEAST AT THE OUTSET. 2. IN THE EVENT THAT CORRECTIVE ACTION BY THE INSTITUTION FAILS TO RESTORE AN ADEQUATE LEVEL OF CAPITAL, FORCED MERGER OR CLOSURE WOULD RESULT. A. AND THIS WOULD OCCUR BEFORE ACTUAL INSOLVENCY. D. CERTAINLY THERE ARE SOME IMPORTANT CONSIDERATIONS IN THIS MAJOR CHANGE IN PROCEDURE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 19 1. THIS WILL INTENSIFY THE EXTENT OF SUPERVISORY INVOLVEMENT WITH SOME INSTITUTIONS A. BUT ONLY WITH THE WEAKER ~.J>,,0 APPROPRIATE -- QUITE THE OPPOSITE WOULD OCCUR FOR THE STRONGER BANKS. (I) FOR SOME REGULATORY ACTIVITIES) STRONGER BANKS WOULD SHIFT TO NOTIFICATION RATHER THAN THE FILING OF AN APPLICATION. B. THERE IS ALSO THE CONCERN THAT IN THE EVENT OF EARLY CLOSURE THE PRIVATE ASSETS OF STOCKHOLDERS AND CREDITORS WILL BE TAKEN IN THE PROCESS. I Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 20 C. BUT THIS SEEMS TO BE A TECHNICAL ISSUE RATHER THAN A PRACTICAL ONE IF THE CAPITAL LEVEL CALLING . FOR CLOSURE IS SET AT A REASONABLY LOW LEVEL, IN ALL LIKELIHOOD THESE PRIVATE ASSETS WOULD HAVE BEEN DISSIPATED ANYWAY. (I) AND AS WE HAVE SEEN FROM RECENT EXPERIENCE, THE ULTIMATE COST TO THE INSURANCE FUND OF DEFERRING ACTION IS MUCH GREATER. (II) PROMPT CLOSURE WILL MINIMIZE COSTS. E. AT THIS EARLY JUNCTURE IT SEEMS PREMATURE TO TRY AND BE TOO SPECIFIC ABOUT THE EXACT CAPITAL LEVELS THAT SHOULD BE ASSOCIATED WITH EACH ZONE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 21 1. ONCE THE CONCEPT HAS BEEN ESTABLISHED THE APPROPRIATE CAPITAL LEVELS CAN THEN ~ ~~ ~ BE DETERMINEDffi~ ~t ~~ 0-r..:4 /1'-.J 'U(\/ Sl-~( ~, A. THE RECENTLY ADOPTED RISK-BASED CAPITAL STANDARD IS AN EXAMPLE OF l ~ ~ ~ ~ , TIIE PROCESS THAT CAN BE USEB :ro DEVELOP THESE LEVE-LS. • F. THERE IS ALSO THE DIFFICULT ISSUE OF .WHETHER THE APPROPRIATE SUPERVISORY RESPONSE SHOULD BE ABSOLUTELY SPECIFIC AND ABSOLUTELY MANDATORY FOR EACH ZONE. 1. WHILE A MANDATORY RESPONSE HAS APPEAL TO SOME 2. I WOULD STRONGLY ARGUE FOR THE EXERCISE OF SUPERVISORY JUDGMENT -- PARTICULARLY AT THE OUTSET OF THIS NEW PROCEDURE. \...H~~~-· 3. WHILE THIS 7WILL PUT FAR MORE PRESSURE ON /\ THE SUPERVISORS{ WE WON'T BE OPERATING Mv ON AUTOMATIC PILo,)) EXPERIENCE TELLS ME THAT MITIGATING CIRCUMSTANCES WILL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 22 FREQUENTLY DEVELOP WHICH WILL MAKE THE EXERCISE OF JUDGMENT TO SUIT THE SPECIFIC SITUATION APPROPRIATE AND IMPORTANT. VII. WHILE I COULD TALK AT SOME LENGTH ABOUT OTHER ~~ : ~ f&..Sf'tl.. u c}l'\A f2 1' JJ' ~ ASPECTS OF THE TREASURY's:=1~;1/~NG PROPOSAL, I WANTED TO USE THIS OPPORTUNITY TO FOCUS ON ONE ASPECT OF DEPOSIT INSURANCE REFORM. IT SEEMS PARTICULARLY PERTINENT FOR THE CHICAGO CLEARING HOUSE TO BE FORGING A CHICAGO CONSENSUS ON THIS ISSUE. A. IT'S A TIME HONORED MAXIM THAT SURVIVORS PAY, AND SINCE MIDWESTERN BANKS ARE AMONG THE MOST CONSISTENTLY PROFITABLE BANKS IN THE COUNTRY, AND BANKING CONDITIONS HERE ARE CURRENTLY COMPARATIVELY FAVORABLE, BANKS IN THIS AREA WILL BE AMONG THE SURVIVORS. B. BUT UNFORTUNATELY FOR THE SURVIVORS, AS OF YET THERE IS STILL NO STRONG CONSTITUENCY FOR DEPOSIT INSURANCE REFORM. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" 12, 1991 - 23 APRIL PAGE C. UNLESS MORE INDUSTRY GROUPS LIKE THIS ONE START PUSHING FOR MEANINGFUL CHANGE, YOU WILL BE THE ONES PICKING UP THE DEPOSIT INSURANCE CHECK. 1. NOT ONLY WILL THIS REDUCE YOUR ROAs BY SOME ESTIMATES THE INCREASE IN DEPOSIT INSURANCE PREMIUMS COULD HAVE AN 40 IMPACT ON ROAs OF AS MUCH AS BASIS ~M POINTS -- IT WILL PERMIT FOREIGN BANK AND NONBANK COMPETITORS TO ERODE YOUR CUSTOMER BASE. 2. ONCE YOU HAVE LOST THESE CUSTOMERS YOU MAY HAVE A HARD TIME GETTING THEM BACK. D. THIS IS PARTICULARLY IMPORTANT FOR A MAJOR FINANCIAL CENTER LIKE CHICAGO WHERE BANKING 60,000 DIRECTLY EMPLOYS PEOPLE AND ALSO PLAYS A CRUCIAL ROLE IN MAKING CHICAGO THE COUNTRY'S SECOND FINANCIAL CENTER. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" APRIL 12, 1991 - PAGE 24 E. HOWEVER, . THE ISSUE OF DEPOSIT INSURANCE HAS IMPLICATIONS WHICH EXTEND BEYOND THE NARROW BOUNDARIES OF THE BANKING INDUSTRY AND THIS REGION. 1. IT IS ABSOLUTELY CLEAR THAT A HEALTHY, PROSPEROUS BANKING SYSTEM IS A PREREQUISITE FOR A STRONG AND GROWING ECONOMY. 2. IT WOULD BE UNREALISTIC TO EXPECT OUR ECONOMY TO EVIDENCE GOOD, SUSTAINED GROWTH WITHOUT THE UNDERPINNING OF A STRONG WELL-POSITIONED BANKING SYSTEM. VIII. CLEARLY, THE PROBLEMS WITH OUR CURRENT SYSTEM OF DEPOSIT INSURANCE CAN BE FIXED; THERE ARE SEVERAL WAYS TO DO IT; I'VE ELABORATED ON JUST ONE AND THERE ARE OTHER ASPECTS OF THE ISSUE THAT SHOULD BE RELATIVELY EASY TO CORRECT THE PROBLEMS ARE NOT THAT COMPLICATED! Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" 12, 1991 - 25 APRIL PAGE A. OVER THE COURSE OF THE NEXT FEW HOURS, WE'LL BE HEARING SOME OF THESE PROPOSED SOLUTIONS LAID OUT BEFORE YOU BY A GROUP OF HIGHLY QUALIFIED AND INSIGHTFUL SPEAKERS. IX. AT THIS POINT, IT IS MY PLEASURE TO SET THIS DISCUSSION IN MOTION ON A VERY HIGH NOTE BY INTRODUCING OUR FIRST AND DISTINGUISHED SPEAKER, J. SENATOR ALAN DIXON. A. SENATOR DIXON IS A MEMBER OF THE SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS AS WELL AS THE ARMED SERVICES COMMITTEE AND THE SMALL BUSINESS COMMITTEE. 1949 B. SINCE FIRST WINNING ELECTIVE OFFICE IN HE HAS HELD A NUMBER OF POSITIONS INCLUDING STATE REPRESENTATIVE, STATE SENATOR, ILLINOIS STATE TREASURER, AND ILLINOIS SECRETARY OF STATE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN CHICAGO CLEARING HOUSE ASSOCIATION PUBLIC POLICY CONFERENCE "LOOKING FORWARD -- POSITIVELY!" 12, 1991 - 26 APRIL PAGE 1980, C. SINCE BEING ELECTED TO CONGRESS IN SENATOR DIXON HAS PLAYED A KEY ROLE IN THE LEGISLATIVE DEBATES ON THE REPEAL OF GLASS-STEAGALL, THE RESTRUCTURING OF THE THRIFT INDUSTRY AND THE REGULATION OF THE FUTURES INDUSTRY. HE HAS BEEN PUSHING AGGRESSIVELY FOR THE REFORM OF THE NATION'S SYSTEM OF DEPOSIT INSURANCE AND HAS SINGLE-HANDEDLY REINVIGORATED THE SUBCOMMITTEE ON CONSUMER AND REGULATORY AFFAIRS. D. DURING HIS TENURE IN THE SENATE, HIS SKILLS IN FORGING COALITIONS AND CREATING CONSENSUS HAVE WON HIM INCREASED RECOGNITION IN THE SENATE, MOST RECENTLY REFLECTED IN HIS APPOINTMENT AS CHIEF DEPUTY WHIP. E. LADIES (IF THERE ARE ANY) AND GENTLEMEN, IT IS MY HONOR AND GREAT PLEASURE TO PRESENT J. AND INTRODUCE SENATOR ALAN DIXON. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1991, April 11). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19910412_silas_keehn

@misc{wtfs_regional_speeche_19910412_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1991},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19910412_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}