Regional President Speech

I o ~ 1 Luncheon Comments The New Global Realities May 16, 1991 I. GREAT PLEASURE. A. DELIGHTED TO HAVE YOU HERE TODAY. If.ow ~ ~t,·.14 p#~ ~v,..-1 ...,___ II. FEDERAL RESERVE AND JOINT COUNCIL HAVE HISTORY OF PRODUCTIVE PARTNERSHIP. A. INTERESTING TO NOTE THAT MANY OF THE FED PARTICIPANTS IN THIS CONFERENCE ARE ACTIVELY ~ ~ INVOLVED IN THE STATE COUNCIL~ 1. 1. AM MYSELF A MEMBER OF THE GOVERNING BOARD OF THE ILLINOIS COUNCIL ON ECONOMIC EDUCATION. 2. KARL SCHELD, OUR SENIOR VICE PRESIDENT IN CHARGE OF ECONOMIC RESEARCH, WHO WILL BE TALKING TO YOU TOMORROW, IS A DIRECTOR OF THE ILLINOIS COUNCIL. 3. ROBY SLOAN, THE HEAD OF OUR DETROIT BRANCH, WHO WILL BE GIVING A PRESENTATION LATER TODAY, IS A DIRECTOR OF THE MICHIGAN ECONOMIC EDUCATION COUNCIL. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 4. NANCY GOODMAN, OUR VICE PRESIDENT IN CHARGE OF INFORMATION SERVICES, IS A DIRECTOR FOR THE COUNCIL IN WISCONSIN. 5. AND, OUR ECONOMIC EDUCATION SPECIALIST TIM SCHILLING (SHILLING) HAS BEEN NOMINATED TO SERVE AS A DIRECTOR OF THE INDIANA COUNCIL. 6. CLOSE TO HAVING THE DISTRICT COVERED. ~u.)A- 111. MOST RECENT EXAMPLE OF THIS ONGOING COOPERATION IS JOINT PROJECT BETWEEN THE FEDERAL RESERVE SYSTEM AND THE COUNCIL TO PRODUCE A SERIES OF FOUR VIDEOS ON THE FEDERAL RESERVE, SUPPORTED BY A COMPREHENSIVE SET OF EDUCATIONAL MATERIALS AND A NATIONWIDE TEACHER TRAINING PROGRAM. A. AS YOU MAY KNOW, PROJECT RECENTLY RECEIVED UNANIMOUS APPROVAL BY THE FED'S CONFERENCE OF RESERVE BANK PRESIDENTS--SURE YOU'LL TALK ABOUT IT DURING THE COURSE OF THE CONFERENCE. IV. IN PAST DECADE THE FED SYSTEM, AND OUR BANK, HAVE HAD AN ACTIVE INTEREST IN ECONOMIC EDUCATION. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3 A. MUST CONFESS WE HAVE A SOMEWHAT VESTED INTEREST IN THE EFFORT. 8. BELIEVE THAT PEOPLE THAT UNDERSTAND ECONOMICS AND THE FEDERAL RESERVE WILL BE ABLE TO MAKE MORE INFORMED JUDGEMENT REGARDING THE FED'S ACTIONS. C. OVER THE YEARS, THERE HAS BEEN A FAIR AMOUNT OF CONFUSION OR MISUNDERSTANDING ABOUT THE FEDERAL RESERVE. 1. SOME OF YOU MAY BE FAMILIAR WITH THE FILM SPEAKING ABOUT ECONOMICS, IN WHICH JUNIOR HIGH SCHOOL STUDENTS WERE ASKED ABOUT THE FEDERAL RESERVE. 2. MORE THAN ONE STUDENT THOUGHT THE FED WAS A PART OF THE ARMED FORCES. 3. WORSE YET, BACK IN THE MID-1970S, FEDERAL RESERVE CONDUCTED A STUDY IN WHICH A SURPRISING NUMBER OF ADULTS THOUGHT THE FED WAS A NATIONAL PARK, A GAME RESERVE, OR EVEN A BONDED BOURBON. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 D. FROM A WIDER PERSPECTIVE, ECONOMIC LITERACY IN GENERAL IS CRUCIAL--ESSENTIAL IN A DEMOCRACY TO HAVE AN INTELLIGENT, INFORMED ELECTORATE. V. THIS UNDERSTANDING IS MORE IMPORTANT THAN EVER, GIVEN Qr~ {) ~ Y _ THE RAPID PACE OF CHANGE. ,, A. NESE CURSE 11MAYYOU LIVE IN INTERESTING B. C. CLICHE TO NOTE THE ACCELERATING PACE OF CHANGE, BUT IF ANYTHING THE PACE HAS INCREASED. D. GIVEN THE TENOR OF THE TIMES ECONOMIC EDUCATION IS PARTICULARLY ESSENTIAL. VI. GLOBALIZATION CERTAINLY ONE OF THESE MAJOR FORCES OF CHANGE. A. THE POSTWAR PERIOD--AND PARTICULARLY THE PAST TEN YEARS--HAVE SEEN MARKEDLY CLOSER TIES AMONG THE WORLD'S ECONOMIES. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 5 B. INCREASINGLY COMPLEX INTERACTIONS BETWEEN DEVELOPMENTS IN THE U.S. ECONOMY AND FINANCIAL MARKETS AND THOSE IN THE OTHER MAJOR INDUSTRIAL COUNTRIES. C. MARKETS FOR GOODS HAVE BECOME INCREASINGLY--AND IRREVERSIBLY--INTEGRATED AS THE RESULT OF THE EXPANSION OF INTERNATIONAL TRADE. 1. TREND THAT HAS HAD DRAMATIC IMPLICATIONS FOR OUR REGION AS l'M SURE YOU'LL DISCUSS DURING SESSION ON THE MIDWEST ECONOMY. VII. PAST DECADE, IN PARTICULAR, HAS ALSO WITNESSED THE GROWING INTEGRATION OF THE WORLD'S FINANCIAL MARKETS. A. AS TECHNOLOGY HAS ADVANCED, WE'VE SEEN THE UNBUNDLING AND TRANSFER OF RISK. 1. IN TURN A PROLIFERATION OF NEW FINANCIAL PRODUCTS. B. CROSS-BORDER FINANCIAL FLOWS HAVE ACCORDINGLY ACCELERATED AT A PACE IN EXCESS OF GLOBAL TRADE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6 C. EVENTS IN ONE MARKET OR IN ONE COUNTRY CAN AFFECT MARKETS THROUGHOUT THE WORLD WITHIN MINUTES. <n.A t18!> 1. PHENOMENON THAT ROBY AND HIS PANELISTS WILL EXPLORE IN MORE DEPTH LATER TODAY. IX. FEDERAL RESERVE IS GOING THROUGH A PARTICULARLY INTERESTING PERIOD. A. REFLECTION OF TREMENDOUS CHANGE IN THE ENVIRONMENT IN WHICH WE OPERATE. 8. GREAT DEAL AT STAKE FOR ECONOMY AND FOR THE STRUCTURE OF OUR FINANCIAL SERVICES INDUSTRY. C. ALL OF OUR MAJOR AREAS--MONETARY POLICY, SUPERVISION AND REGULATION, AND OPERATIONS- AFFECTED. X. SUPERVISION AND REGULATION. A. GLOBAL REALITIES RESULT IN NEW COMPLEXITIES. 1. GEOGRAPHIC BOUNDARIES WITHIN THE U.S.- ALREADY BLURRED--ARE ON THE VERGE OF COMPLETELY DISINTEGRATING. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 7 2. AND AS FOREIGN BANKS PLAY AN INCREASINGLY IMPORTANT ROLE IN OUR NATIONAL ECONOMY, THE NATIONAL BOUNDARIES BECOME FUZZIER. 3. WHAT DOES THIS MEAN FOR OUR SUPERVISORY RESPONSIBILITIES THAT HAVE BEEN HISTORICALLY DEPLOYED ON A REGIONAL BASIS? 4. DEALING WITH INSTITUTIONS THAT HAVE ACTIVITIES IN THREE, FOUR, OR EVEN MORE FED DISTRICTS IS COMPLICATED ENOUGH--EVEN MORE SO WHEN INSTITUTION IS BASED IN A FOREIGN COUNTRY. B. IMPLICATIONS FOR FED, WHICH IS RESPONSIBLE FOR SUPERVISING FOREIGN BANKING ORGANIZATIONS IN U.S. 1. IN GENERAL, HAVE HAD POLICY OF NATIONAL TREATMENT FOR FOREIGN BANKS OPERATING IN U.S. 2. FOREIGN BANKS GIVEN SAME OPPORTUNITIES TO ESTABLISH OPERATIONS AND SUBJECT TO SAME REGULATIONS AS DOMESTIC INSTITUTIONS. 3. HOWEVER, FOREIGN BANKS TYPICALLY NOT ORGANIZED INTO HOLDING COMPANIES IN THE U.S. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 SENSE, WHICH LEADS TO DIFFICULTIES IN INTERPRETING NATIONAL TREATMENT. C. FROM THE OTHER PERSPECTIVE, HOW SHOULD WE TREAT U.S. BANKS IN FOREIGN COUNTRIES? 1. RELATIVE TO U.S, FOREIGN COUNTRIES ALLOW BANKS A WIDER ARRAY OF POWERS AND REQUIRE LESS SEPARATION BETWEEN BANKING AND AFFILIATED LINES OF BUSINESS. 2. DO WE ALLOW U.S. BANKS TO OPERATE UNDER SAME RULES OUTSIDE THE U.S.IN ORDER TO COMPETE WITH THEIR LOCAL RIVALS? 3. UNDER PRESENT FINANCIAL STRUCTURE, WOULD THIS RISK EXTENDING THE FEDERAL SAFETY NET- SPECIFICALLY DEPOSIT INSURANCE--TO NON-BANK ACTIVITIES? 4. NO PERFECT ANSWER, NOT ALWAYS POSSIBLE TO BE PERFECTLY CONSISTENT GIVEN COMPETITIVE PRESSURES ON U.S. BANKS AND NEED TO PROTECT THE SAFETY NET. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 9 D. ONE ADJUSTMENT TO INCREASED GLOBALIZATION IS MORE COMMUNICATION AND INTERACTION AMONG U.S. SUPERVISORS AND THE MAJOR INDUSTRIAL COUNTRIES THAN THERE WAS JUST TEN YEARS AGO. ~ - ~ . a ~ . E. GOOD EXAMPLE IS THE BASLE COMMITTEE'S AGREEMENT ON BANK CAPITAL GUIDELINES. 1. UNDER AGREEMENT, BANKS IN 12 MAJOR INDUSTRIAL COUNTRIES WOULD HAVE IDENTICAL MINIMUM CAPITAL REQUIREMENTS BY NEXT YEAR. 2. AGREEMENT ALLOWS FURTHER IMPROVEMENT IN CAPITALIZATION OF U.S. BANKS AND HELPS REDUCE THE COMPETITIVE INEQUITIES RESULTING FROM VARYING SUPERVISORY REQUIREMENTS IN DIFFERENT NATIONS. 3. STILL A LOT OF WORK TO BE DONE IN THIS AREA. XI. ECONOMIC RESEARCH A. KARL SCHELD'S AREA--WILL BE DISCUSSING THIS TOPIC TOMORROW. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 10 B. VARIETY OF FACTORS TO CONSIDER: CONDITIONS IN THE DISTRICT; BROAD NATIONAL OUTLOOK; STRUCTURAL QUESTIONS AS THEY RELATE TO THE BANKING INDUSTRY. C. BUT CERTAINLY--MORE THAN EVER--HAVE TO CONSIDER MONETARY POLICY IN THE CONTEXT OF A WORLD MARKET AND A WORLD FINANCIAL SYSTEM. 1. NOT A NEW PHENOMENON, BUT SAFE TO SAY PROCESS HAS ACCELERATED. 2. ONCE AGAIN, INCREASED COMMUNICATION ESSENTIAL. D. IN RECENT YEARS, A FORMALIZED PROCESS OF POLICY COORDINATION AMONG THE MAJOR INDUSTRIAL COUNTRIES HAS DEVELOPED. 1. PURPOSE OF SUCH COORDINATION IS TO HELP POLICYMAKERS ACHIEVE BETTER PERFORMANCE IN THEIR NATIONAL ECONOMIES. 2. BEGINS WITH IMPROVED COMMUNICATION AMONG AUTHORITIES ABOUT ECONOMIC DEVELOPMENTS WITHIN EACH COUNTRY. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 11 3. INCLUDES SYSTEMATIC ANALYSIS OF THE LIKELY IMPACT OF THESE DEVELOPMENTS ON THE ECONOMIES OF VARIOUS COUNTRIES AND ON VARIABLES SUCH AS EXCHANGE RATES. 4. WITHIN SUCH A FRAMEWORK, POSSIBLE TO CONSIDER ALTERNATIVE CHOICES FOR ECONOMIC POLICIES AND TO ACCOUNT EXPLICITLY FOR IMPACT OF LIKELY POLICY MEASURES IN ONE COUNTRY ON THE OTHER ECONOMIES. E. DEVELOPMENT OF A WORLDWIDE FINANCIAL MARKET AN IMPORTANT CONSIDERATION, ESPECIALLY FOR US HERE IN CHICAGO. 1. BOTH OUR ECONOMIC RESEARCH AND SUPERVISION AND REGULATION AREAS HAVE BEEN STUDYING THE LOCAL FUTURES MARKETS MUCH MORE CLOSELY IN THE PAST FEW YEARS. 2. DETERMINE AS MUCH AS POSSIBLE WHO BEARS RISK AND WHAT POSSIBLE DANGERS, IF ANY, EXIST FROM THESE WORLDWIDE MARKETS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 12 XII. OPERATIONS. A. EVER-EXPANDING GLOBAL FINANCIAL MARKET DEPENDS IMPORTANTLY ON PAYMENTS SYSTEM. B. ESPECIALLY FED'S ELECTRONIC TRANSFER SYSTEM. 1. FEDERAL RESERVE'S WIRE TRANSFER SYSTEM, FEDWIRE, TRANSFERS SOME $200 TRILLION ANNUALLY--MANY TIMES THE ANNUAL GNP OF THE U.S. 2. INTERNATIONAL DOLLAR PAYMENTS THROUGH C.H.I.P.S. ELECTRONIC NETWORK. C. MORE IMPORTANT THAN EVER TO CONTINUE RECORD OF VERY HIGH RELIABILITY ON FEDWIRE--ANY MAJOR DISRUPTION IN PAYMENTS SYSTEM CAN HAVE WORLDWIDE REPERCUSSIONS. 1. FED SYSTEM HAS BEEN STUDYING NEW TECHNOLOGY FOR ITS NATIONWIDE COMMUNICATIONS NETWORK TO ENSURE AN EVEN HIGHER LEVEL OF RELIABILITY. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 13 2. AS OPERATOR OF THE SYSTEM'S COMMUNICATION NETWORK, THE CHICAGO FED HAS BEEN VERY MUCH INVOLVED IN THIS EFFORT. D. ALSO STUDYING ISSUE OF EXPANDED HOURS FOR FEDWIRE TO ACCOMMODATE GROWING DEMAND FOR NIGHT-TIME PAYMENTS RESULTING FROM MARKET ACTIVITY IN DIFFERENT TIME ZONES. XII. AS YOU KNOW, THE CHALLENGES POSED BY GLOBALIZATION AND OTHER TRENDS HAVE LED TO SOME STIRRINGS OF CHANGE ON THE LEGISLATIVE FRONT. A. BECAUSE OF A NUMBER OF FACTORS, INCLUDING THE NEED TO ENSURE THAT OUR DOMESTIC INSTITUTIONS CAN COMPETE ON A GLOBAL BASIS, THE NECESSITY FOR LEGISLATION TO DEAL WITH THE BROAD QUESTION OF RESTRUCTURING THE FINANCIAL SYSTEM HAS BECOME ABSOLUTELY COMPELLING. B. WOULD LIKE TO MAKE A LAST POINT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1 C. SOME ARGUE THAT FED'S ONLY FUNCTION SH MONETARY POLICY. 1. D. URTHER FROM THE TRUTH--GIVEN THEC GES IMPOSED BY GLOBALIZATION AND CES OF CHANGE--THE NEED FOR STABILITY IN HE FINANCIAL SYSTEM IS PARAMOUNT. E. I FREQUENTLY CHARACTERIZE OU VERY SIMPLY AS THREE L 1. FINANCI YSTEM STABILITY LIKE SUCH A STOOL NOS ON ALL THREE LEGS. F. CHANGES SHOULD BE MADE IN LIGHT OF THE IMPORTANT RELATIONSHIP AMONG THESE FUNCTIONS. ~ ~l 14 _,t-l~ G. HOPE THE SESSIONS OVER THE NEXT TWO DAYS WILL HELP DEVELOP A SENSE OF THE CHALLENGES THAT ALL OF US WILL BE FACING AS WE RESPOND TO GLOBALIZATION AND OTHER CHANGES. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 15 XIII. AGAIN, A VERY GREAT PLEASURE TO HAVE YOU HERE FOR THIS CONFERENCE. A. HOPE YOU FIND NEXT TWO DAYS TO BE USEFUL AND INTERESTING. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1991, May 15). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19910516_silas_keehn

@misc{wtfs_regional_speeche_19910516_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1991},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19910516_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}