Regional President Speech

-, o- u I ~ JI ~I - 1;oorr- SILAS KEEHN ' MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" 20, 1991 - 1 JUNE PAGE I. INTRODUCTION A. PLEASED TO BE HERE. 1. MACKINAC ISLAND 8. EARLY FEBRUARY -- READILY ACCEPTED -- ONE TOO MANY ARTICLE. 1. OPPORTUNITY TO COMMENT ON THE OUTLOOK FOR BANKING. A. THERE WAS A BASIS THEN FOR OPTIMISM, MORE SO NOW. B. I'D LIKE TO MAKE THE CASE FOR THIS MORE POSITIVE OUTLOOK THIS MORNING. C. As A START, THE ECONOMIC ENVIRONMENT SHOULD BE IMPROVING. 1. I WHILE DON'T PLAN TO COMMENT ON THE ECONOMY AT ANY LENGTH THIS MORNING, 2. DON'T NEED TO REMIND THIS AUDIENCE THAT WE HAVE BEEN EXPERIENCING A RECESSION 12 FOR NOW ALMOST MONTHS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" 20, 1991 - 2 JUNE PAGE 3. OUR EXPECTATION THAT WE ARE COMPLETING THE TRANSITION FROM RECESSION TO RECOVERY. 4. EXPECT POSITIVE ECONOMIC GROWTH AS WE MOVE INTO THE 3RD QUARTER OF THIS YEAR. 5. RECOVERY LIKELY TO BE MORE MODEST THAN OUR MORE RECENT RECOVERIES. 6. NONETHELESS, IN AN ECONOMIC CONTEXT, THE OPERATING ENVIRONMENT SHOULD PROVIDE A BASIS FOR IMPROVED CONDITIONS. 0. BUT THERE ARE MANY OTHER FUNDAMENTAL REASONS THAT SUPPORT A MORE POSITIVE OUTLOOK THAN GENERALLY ACKNOWLEDGED. 1. THE CURRENT CONDITION OF THE INDUSTRY WHILE SERIOUS IS MANAGEABLE. A. ASSET QUALITY IS STABILIZING. • B. PROVISIONS FOR LOAN LOSSES WHICH HAVE RECENTLY BEEN COMPARATIVELY HEAVY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 3 (I) HAVE BUILT LOAN LOSS RESERVES TO A LEVEL THAT PROVIDES MUCH BETTER COVERAGE FOR PROBLEMS. 2. THEREFORE, THE FOUNDATION FOR IMPROVED PROFITABILITY IS BEING LAID. 3. AND ENACTMENT OF THE MAIN ELEMENTS OF $~~ THE TREASURY'S REFORM PROPOSAL wtl..L MAKE SIGNIFICANT PROGRESS TOWARDS DEALING WITH THE THORNY PROBLEMS OF DEPOSIT INSURANCE AND 11TOO BIG TO FAIL." 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. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" 20, 1991 - 4 JUNE PAGE 2. I DON'T THINK I NEED TO GO THROUGH YET ONE MORE RECITATION OF PROBLEMS FOR A KNOWLEDGEABLE GROUP LIKE THIS. III. BUT AN OBJECTIVE LOOK AHEAD SUGGESTS THAT THE INDUSTRY'S PROSPECTS ARE BETTER AND THAT INDEED WE CAN LOOK FORWARD POSITIVELY. A. FIRST, BY NOW MOST OF THE TROUBLESOME ASSET 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 THE REGIONS OF THE COUNTRY THAT ARE THE MOST AFFECTED, THESE PROBLEMS SHOULD BE MANAGEABLE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 5 2. FOR THE MOST PART, CERTAINLY NOT ALL BUT MOST, THE BANKS INVOLVED WITH THESE PROBLEMS WOULD APPEAR TO HAVE SUFFICIENT CAPITAL TO WEATHER THE STORM. 3. IN THE MORE RAPIDLY GROWING MARKETS, THE REAL ESTATE PROBLEMS ARE ONES OF CURRENT IMBALANCES OF SUPPLY AND DEMAND THAT SHOULD BE CORRECTED WITH THE REASONABLE PASSAGE OF TIME. 4. THE FINANCIAL MARKETS SEEM TO SHARE THIS SENSE OF INCREASED OPTIMISM. 50% A. AFTER DECLINING BY SOME DURING 1990, SHARE PRICES OF REAL ESTATE INVESTMENT TRUSTS HAVE RISEN THIRTY PERCENT. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 6 B. AT THE SAME TIME, SALES OF PROPERTIES ARE ONCE AGAIN OCCURRING; THERE IS A GROWING FEELING THAT SOME OF THE CURRENT DEEPLY DISCOUNTED PRICES REPRESENT A BOTTOMING IN THE COLLAPSE OF REAL ESTATE VALUES. C. THESE TRANSACTION PRICES ARE CERTAINLY WELL BELOW ~EARLIER LEVELS, BUT THE MERE FACT THAT SALES ARE OCCURRING IS A CHANGE AND IS MAKING IT POSSIBLE FOR LENDERS TO ONCE AGAIN START EVALUATING PROJECTS. (1) WE ARE EMERGING FROM THE FREE FALL PHASE DURING WHICH IT WAS SIMPLY IMPOSSIBLE TO DETERMINE THE COLLATERAL VALUE OF MANY REAL ESTATE PROJECTS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 7 {II) THERE WAS JUST NO PRICE OR VALUE BASIS FOR ESTABLISHING REASONABLE PROPERTY VALUES. D. WHILE FAR TOO EARLY TO FORECAST EVEN A MODEST REBOUND IN COMMERCIAL CONSTRUCTION, ONCE WE WORK THROUGH THE NECESSARY ADJUSTMENT PROCESS, NEW BUILDING CAN'T BE FAR BEHIND. 8. SECONDLY, THERE HAS BEEN A TIGHTENING OF CREDIT STANDARDS AND PRICING, THUS CREATING ADDITIONAL REASONS FOR EXPECTING THE STABILIZATION IN CREDIT QUALITY AND PROFITABILITY TO OCCUR. 1. AFTER YEARS OF SLIPPAGE, AND CREDIT STANDARDS WERE SIGNIFICANTLY WEAKENED IN '80s, THE THERE IS A SELF-CORRECTING PROCESS TAKING PLACE IN WHICH BANK MANAGEMENTS HAVE RAISED THEIR CREDIT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" 20, 1991 - 8 JUNE PAGE STANDARDS AND SPREADS TO PREVENT A REPETITION OF THE EXPERIENCES OF SOME OF THE WEAKER PARTS OF THE COUNTRY. 2. CERTAINLY THE SUPERVISORY ELEMENT HAS BEEN A PART OF THIS CORRECTIVE PROCESS -- 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 -- MOST PARTICULARLY HLTs. 3. THIS HAS RESULTED IN A RESTRAINT ON CREDIT EXTENSION, GENERALLY REFERRED TO AS THE CREDIT CRUNCH. A. THIS IS DEFINITIONALLY INCORRECT. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 9 B. WHAT CONSTITUTES A CREDIT "CRUNCH" TO MY WAY OF THINKING IS WHEN CREDITWORTHY BORROWERS THAT WOULD NORMALLY FIND IT POSSIBLE TO OBTAIN CREDIT EVEN UNDER ADVERSE ECONOMIC CIRCUMSTANCES, CANNOT OBTAIN FINANCING. A C. "CRUNCH" IS MOST LIKELY TO OCCUR WHEN ALL LENDERS SERVING A PARTICULAR CLASS OF CUSTOMERS FIND THEIR LENDING CAPACITY CONTRACTING. D. WHILE IN THE PAST WE HAVE EXPERIENCED THIS TYPE OF CREDIT SHUT-DOWN -- (I) THIS IS NOT CURRENTLY THE CASE NATIONALLY (II) AND MOST DEFINITELY NOT THE CASE IN THE MIDWEST. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 10 4. WHILE NOT DENYING THAT THE REGULATORY PROCESS HAS PLAYED A ROLE IN THIS, MY POINT IS THAT THIS HAS NOT BEEN THE PRIMARY REASON FOR THE CREDIT RESTRAINT. 5. 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. A. MOREOVER, BORROWERS ARE ALSO RE-THINKING THEIR ATTITUDES ABOUT THE DESIRABILITY OF EXCESS LEVERAGE. B. WE ARE RETURNING TO BASICS -- YOU CAN JUST SENSE IT IN THE MARKETS. C. LET ME ENUMERATE SEVERAL OTHER REASONS FOR A MORE POSITIVE VIEW OF THE FUTURE. WHILE IT MAY NOT HAVE YET SHOWN UP IN THE NUMBERS, BANK PROFITABILITY IS ALSO LIKELY TO IMPROVE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 11 1. WHILE COMPETITIVE PRESSURES REMAIN INTENSE, NONETHELESS, SPREADS ARE WIDENING -- OUR RECENT SENIOR LOAN OFFICER OPINION SURVEY SUGGESTS THAT SPREADS ON LOANS TO HIGH QUALITY CORPORATE CUSTOMERS HAVE GONE UP BY SOME 40 BASIS POINTS IN THE LAST NINE MONTHS. 2. As ASSET QUALITY STABILIZES, THE NEED FOR CONTINUING LOAN LOSS PROVISIONS AT SUCH HIGH LEVELS WILL DIMINISH. A. THE LEVERAGE EFFECT OF ELIMINATING THIS DRAG WILL BE VERY BENEFICIAL. 3. COMPETITIVE PRESSURES FROM SOME INTERNATIONAL BANKS THAT DROVE SPREADS TO VERY NARROW MARGINS HAVE EASED. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 12 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 PROVIDE A BETTER OPPORTUNITY FOR IMPROVED PROFITABILITY ON TRANSACTIONS FOR BANKS BOTH HERE AND ABROAD. D. 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 ORGANIZATIONS AND THE EFFORT HAS CLEARLY PRODUCED RESULTS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 13 A. THERE HAS BEEN AN INCREASE IN THE EQUITY POSITIONS OF THESE BANKING ORGANIZATIONS MEASURED ON BOTH ACCOUNTING AND MARKET CAPITALIZATION BASES. B. AND IN ADDITION, MOST BANKS NOW HAVE II THE ADDED PROTECTION OF TIER CAPITAL WHICH JUST A DECADE AGO WAS RATHER NEGLIGIBLE. c. I II ADDING TIER AND TIER CAPITAL, THE REAL CAPITAL POSITIONS OF LARGE U.S. BANKS HAVE ABOUT DOUBLED IN THE LAST TEN YEARS. 1. As A RESULT, FOR THE FIRST TIME IN MANY YEARS THERE ARE A U.S. NUMBER OF BANKS, BOTH REGIONAL AND MONEY CENTERS, WITH MARKET CAPITALIZATION RATIOS AS HIGH OR HIGHER THAN THE TRADITIONALLY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" 20, 1991 - 14 JUNE PAGE WELL-CAPITALIZED SWISS, GERMAN AND JAPANESE BANKS. 2. INTERESTINGLY ENOUGH, MANY OF THESE BANKS WITH VERY STRONG CAPITAL POSITIONS ARE BASED IN THE MIDWEST. E. MEANWHILE, SMALLER BANKS HAVE BEEN ABLE TO MAINTAIN THEIR TRADITIONALLY HIGH LEVELS OF CAPITAL. IV. BY GOING THROUGH THIS ENUMERATION I AM TRYING TO MAKE THE POINT 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. A. INCREASED SPREADS ON CURRENT TRANSACTIONS WILL WORK THROUGH TO HIGHER EARNINGS. 8. AND CAPITAL POSITIONS ALREADY Stt&lileMH•LY IMPROVED WILL CONTINUE TO SHOW PROGRESS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 15 V. SIGNIFICANTLY AS WELL, THE OPERATING ENVIRONMENT FOR THE INDUSTRY WILL BE MORE FAVORABLE. THE 1980s DEREGULATION 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. 1. IF YOU THINK ABOUT THOSE THAT HAVE GONE THROUGH THIS PROCESS (BROKERAGE, TRUCKING, AIRLINES, ET AL.) IT HAS NOT BEEN AN EASY ROAD. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 16 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. A. GIVEN THE DEEP PUBLIC INTEREST AND 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. 2. FORWARD LOOKING STATES HAVE EASED THEIR BRANCHING LAWS AND HAVE MADE THE SHIFT TO INTERSTATE BANKING. 3. BANKS OPERATING IN THIS MORE OPEN ENVIRONMENT HAVE BEEN ABLE TO ACHIEVE A HIGH LEVEL OF OPERATING EFFICIENCY. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" 20, JUNE 1991 - PAGE 17 4. WELL-CAPITALIZED BANKS HAVE A CLEAR AND IMPORTANT ADVANTAGE IN THIS INCREASINGLY COMPETITIVE ENVIRONMENT. 5. NOT ONLY IS INTERSTATE CONSOLIDATION REDUCING OVERALL OPERATING EXPENSES AND PUSHING COSTS DOWN BUT IT IS INCREASING CAPITAL POSITIONS AND IS ALSO CREATING MORE DIVERSIFIED INSTITUTIONS. D. HERE IN MICHIGAN, YOUR BANKS ALREADY SEEM TO BE EVIDENCING THE BENEFITS OF THIS SIGNIFICANT ENVIRONMENTAL CHANGE. 1. As WE ENTERED THE 1980s, PROTECTION FROM COMP£: ITORS, RESTRICTIONS O~T RATES, AN UNDERPRICED DEPOSIT INSURANCE ~ WERE STILL PRIMA~ SOURCES OF PROFITABILI~ ~NY BANKS. 2. ToD/ ZD CREDIT CULTURE, ADEQUATE C PITAL, AND EFFICIENT PERATIONS ARE TO PROFITABILITY. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 18 3. BY ALL THE STANDARD CRITERIA, MICHIGAN BANKS COMPARE VERY FAVORABLY WITH BANKS ELSEWHERE IN THE NATION. A. AN EXCEPTIONALLY HIGH PROPORTION OF MICHIGAN BANKS ARE WELL-CAPITALIZED. B. GIVEN THE HIGHLY CYCLICAL NATURE OF THE STATE'S ECONOMY, YOUR BANKS HAVE SUCCESSFULLY DEVELOPED CREDIT POLICIES THAT HAVE RESPONDED TO THESE DIFFICULT CIRCUMSTANCES. C. DESPITE A SHARP DOWNTURN IN THE 1990, STATE'S ECONOMY DURING YOUR BANKS HAVE CONTINUED TO REPORT STRONG EARNINGS. D. IN CONTRAST TO THEIR COUNTERPARTS ELSEWHERE IN THE COUNTRY, SMALL BANKS IN MICHIGAN~ HAVE CONTINUED TO BE STRONG AND PROFITABLE COMPETITORS THROUGHOUT 1980s. THE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 19 4. IMPORTANTLY, YOUR STATE WAS EARLY AND PROGRESSIVE IN THE PROCESS OF LIBERALIZING RESTRICTIONS ON BRANCHING AND INTERSTATE BANKING. As A. A RESULT OF THE MOVE TO INTERSTATE BANKING, YOU HAVE BEEN ABLE TO EXPAND RAPIDLY INTO OTHER MARKETS. B. MEANWHILE, OUT-OF-STATE BANKS APPARENTLY VIEW YOU AS SUCH EFFECTIVE COMPETITORS THAT LITTLE INTERSTATE ENTRY INTO MICHIGAN HAS OCCURRED. 5. FINALLY, MICHIGAN BANK STOCKS AS A GROUP ARE PRICED WELL ABOVE THEIR BOOK VALUES INDICATING THAT THE MARKET IS CONFIDENT OF YOUR FUTURE PROSPECTS. VI. ON A NATIONAL BASIS, 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 MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 20 A. THE NUMBER OF INDIVIDUAL BANKING 20% ORGANIZATIONS DECLINED BY OVER IN THE '80s. DECADE OF THE 8. THE CONTINUATION OF THIS. REDUCTION HAS THE POTENTIAL BENEFIT OF CREATING MORE DIVERSIFIED AND BETTER STRUCTURED BANKING ORGANIZATIONS. C. BY NO MEANS SHOULD THIS SUGGEST THE DEMISE OF THE SMALLER AND MEDIUM-SIZED I INSTITUTION -- AND CAN'T MAKE THE POINT STRONGLY ENOUGH. 1. THERE WILL BE PLENTY OF OPPORTUNITIES FOR THESE BANKS TO THRIVE AND PROFIT IN THEIR OWN MARKETS. A. COMMUNITY BANKS KNOW THEIR MARKETS AND THEIR CUSTOMERS VERY WELL -- AND CAN BE PARTICULARLY RESPONSIVE TO THE NEEDS OF THEIR INDIVIDUAL COMMUNITIES. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" 20, 1991 - 21 JUNE PAGE D. BUT THE COMPETITIVE CONDITIONS FOR ALL BANKS ~ ~ ~ WILL INTENSIFY -- EFFICIENCY WILL REALLY MATTER. E. AND IT IS IMPORTANT TO REMEMBER THAT AS THIS PROCESS MOVES FORWARD, THERE IS A SIGNIFICANT PUBLIC INTEREST INVOLVED. 1. CUSTOMERS, BOTH RETAIL AND WHOLESALE WILL BE OFFERED A WIDER ARRAY OF SERVICES AND AT VERY COMPETITIVE PRICES. VII. BUT, AND I EMPHASIZE BUT, ALL OF THE GAINS OF THE PAST DECADE AS WELL AS MY OPTIMISM ABOUT THE FUTURE WILL BE ABSOLUTELY THREATENED IF WE FAIL TO REFORM OUR SYSTEM OF DEPOSIT INSURANCE. 1987, A. SINCE THE FDIC RESERVES HAVE DECLINED $18 FROM A HIGH OF BILLION TO A CURRENT OFFICIAL ESTIMATE OF APPROXIMATELY $8 BILLION. 1. INDEED SOME OTHER ESTIMATES WOULD PLACE THE FUND LEVEL MUCH LOWER THAN THAT. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 22 2. THE FINANCIAL TIDES ARE RUNNING VERY SWIFTLY. 3. RECAPITALIZATION AND REFORM OF DEPOSIT INSURANCE ARE ABSOLUTELY COMPELLING. 8. No SYSTEM OF DEALING WITH PROBLEM INSTITUTIONS WILL OR SHOULD BE FAIL SAFE - THE INSURANCE FUND WILL OCCASIONALLY FACE LOSSES, THAT'S ITS BASIC PURPOSE. 1. HOWEVER, THE SHEER MAGNITUDE OF SOME OF THE INDIVIDUAL CLAIMS AND THE ASTONISHINGLY RAPID 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. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 23 VIII. 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. A. FOR THIS REASON, THE CONCEPT OF PROGRESSIVE SUPERVISORY INTERVENTION AND PROMPT CORRECTIVE ACTION SEEM FUNDAMENTALLY SOUND. 1. BY ADOPTING A KNOWN, UNDERSTOOD AND ACKNOWLEDGED SYSTEM UNDER WHICH REGULATORS WILL TAKE PROGRESSIVELY SPECIFIC STEPS TO DEAL WITH DETERIORATING CAPITAL POSITIONS, 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 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 24 A. IN MY VIEW, THE EMPHASIS ON CAPITAL IS ABSOLUTELY APPROPRIATE AND IN THE END WILL RESULT IN REDUCED CLAIMS AGAINST THE INSURANCE FUND. (I) WHETHER OR NOT A CAPITAL DEFICIENT BANK RAISES NEW CAPITAL IS THE PRINCIPAL FACTOR DETERMINING WHETHER OR NOT IT WILL FAIL. (II) THE ABILITY TO RAISE NEW CAPITAL INDICATES THAT THE BANK IS INDEED SOLVENT. CAPITAL DEFICIENT BANKS THAT ARE UNABLE TO RAISE NEW CAPITAL ARE LIKELY TO ACTUALLY BE INSOLVENT -- THE ULTIMATE MARKET TEST. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 25 (111) THERE ARE ANY NUMBER OF VERY SPECIFIC EXAMPLES IN WHICH REGULATOR INSISTENCE THAT CAPITAL LEVELS BE INCREASED HAS MADE THE DIFFERENCE BETWEEN FAILURE AND SUCCESS. 8. ESTABLISHING LEVELS OF CAPITAL (OR ZONES) WILL PROVIDE BENCHMARKS AGAINST WHICH REGULATORS WOULD TAKE APPROPRIATE ACTION. 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. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 26 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. C. CERTAINLY THERE ARE SOME IMPORTANT CONSIDERATIONS IN THIS MAJOR CHANGE IN PROCEDURE. 1. THIS WILL INTENSIFY THE EXTENT OF SUPERVISORY INVOLVEMENT WITH SOME INSTITUTIONS A. BUT ONLY WITH THE WEAKER ONES WHICH SEEMS ENTIRELY APPROPRIATE -- QUITE THE OPPOSITE WOULD OCCUR FOR THE STRONGER BANKS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 27 (1) 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. , -L -. >-- , ~ 1f.ft.,p ~9~ C. BUT THIS I& ZN8€ RRECT. SHAREHOLDERS ON WOULD HAVE A CLAIM "JiO ANY SURPLUS ARISING FROM THE SALE OF THE BANK OR ITS ASSETS. (1) AND AS WE HAVE SEEN FROM RECENT EXPERIENCE, THE ULTIMATE COST TO THE INSURANCE FUND OF DEFERRING ACTION IS MUCH GREATER. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 28 (II) PROMPT CLOSURE WILL MINIMIZE COSTS. D. 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. 1. ONCE THE CONCEPT HAS BEEN ESTABLISHED THE APPROPRIATE CAPITAL LEVELS CAN THEN BE DETERMINED THROUGH A PROCESS OF CONSULTATION AND NEGOTIATION. A. THE RECENTLY ADOPTED RISK-BASED CAPITAL STANDARDS ARE AN EXAMPLE OF HOW THIS WOULD WORK. E. 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 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 29 2. I WOULD STRONGLY ARGUE FOR THE EXERCISE OF SUPERVISORY JUDGMENT -- PARTICULARLY AT THE OUTSET OF THIS NEW PROCEDURE. 3. WHILE THIS EXERCISE OF JUDGMENT WILL PUT FAR MORE PRESSURE ON THE SUPERVISORS (WE WON'T BE OPERATING ON AUTOMATIC PILOT), MY EXPERIENCE TELLS ME THAT MITIGATING CIRCUMSTANCES WILL FREQUENTLY DEVELOP WHICH WILL MAKE THE EXERCISE OF JUDGMENT TO SUIT THE SPECIFIC SITUATION APPROPRIATE AND IMPORTANT. IX. BY MAKING IT MORE LIKELY THAT BANKS ARE RECAPITALIZED BEFORE THEY BECOME INSOLVENT, PROGRESSIVE SUPERVISION MAKES IT MUCH LESS LIKELY THAT BANKS CONSIDERED "TOO BIG TO FAIL" WILL BECOME A BURDEN ON THE U.S. TAXPAYER OR THE BANKING INDUSTRY. A. SOME BANKS WILL INEVITABLY SLIP THROUGH THE NET. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 30 8. AND THIS MAY NOT ULTIMATELY RESOLVE THE THORNY ISSUE OF WHETHER OR NOT A BANK IS "TOO BIG TO FAIL." C. BUT THE CONTINUED .INVOCATION OF THE 11TOO BIG TO FAIL" DOCTRINE WILL HAVE SERIOUS EQUITY AND COMPETITIVE IMPLICATIONS FOR THE BANKING INDUSTRY AS A WHOLE. 1. SMALL AND WELL-CAPITALIZED BANKS ARE PARTICULARLY CONCERNED ABOUT THIS AND RIGHTLY SO. >~ 1v<l- D. ~T WE DON' ..l'==HA\"E TD ACCEPT THE STATUS QUO. 1. BY TOLERATING LOOSE INSTITUTIONAL PRACTICES IN THE INTERBANK MARKETS, REGULATORS ARE ALLOWING THEMSELVES TO BE HELD HOSTAGE BY THE UNCERTAINTIES CREATED BY IMPOSING LOSSES ON BANK CREDITORS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 31 2. IT IS CLEARLY TIME FOR REGULATORS AND . ~ ~ THE I~T~QS-SPEND MOR~ TIME )-UAMINJNG=WHY =tfAN&S,,~ TOO BIG TO FAIL ~ t--> u:=t.d. ~ S" ~5 AN9-.WE MIIST Tllkf StEes c1'6 CORRECT "Rte ~ -SITUATION., X. WHILE I COULD TALK AT SOME LENGTH ABOUT OTHER ASPECTS OF THE TREASURY'S RESTRUCTURING PROPOSAL, I WANTED TO USE THIS OPPORTUNITY TO FOCO~N SH E ISSUE OF DEPOSIT INSURANCE REFORM. ~w ~ ITA EEM$. PARTICULARLY PS!TINli:NT FOR MICHIGAN BANKERS TO BE FOCUSING ON THIS ISSUE. A. IT'S A TIME HONORED MAXIM THAT SURVIVORS PAY, AND SINCE MICHIGAN 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 MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 32 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 PROFITABILITY BUT IT WILL PERMIT FOREIGN BANKSAND NONBANK COMPETITORS TO ERODE YOUR CUSTOMER BASE. 2. ONCE YOU HAVE LOST THESE CUSTOMERS YOU vt1.,o MAY HAVE A HARD TIME GETTING THEM BACK. D. IIDi P EY R E(. _~~ 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. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 33 2. IT WOULD BE UNREALISTIC TO EXPECT OUR ECONOMY TO EVIDENCE GOOD, SUSTAINED GROWTH WITHOUT THE UNDERPINNING OF A STRONG WELL-POSITIONED BANKING SYSTEM. XI. LET ME CONCLUDE BY AGAIN MAKING THE POINT THAT WE SEEM TO BE GOING THROUGH SOMETHING OF A TRANSITION IN THE BANKING INDUSTRY. A. So MANY THINGS ARE COMING TOGETHER AT A PARTICULARLY CRITICAL TIME. 1. I'VE TRIED TO MAKE THE CASE THAT CONDITIONS IN THE INDUSTRY ARE STABILIZING. 2. THAT WITH AN IMPROVED ECONOMY THE OPERATING ENVIRONMENT SHOULD BE SIGNIFICANTLY MORE POSITIVE THAN HAS BEEN THE CASE DURING THE LAST YEAR. 3. IN A BROAD INDUSTRY CONTEXT, ASSET QUALITY PROBLEMS WILL MODERATE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN MICHIGAN BANKERS ASSOCIATION "LOOKING FORWARD -- POSITIVELY!" JUNE 20, 1991 - PAGE 34 4. EARNINGS WILL INCREASE LEADING TO FURTHER IMPROVEMENT IN CAPITAL POSITIONS. _,1_,.. 'V>~~~~ 8. -M9RE8¥ER, THE INDUSTRY COULD VERY WELL BE MOVING INTO AN EXCITING AND A REWARDING PERIOD. 1. THE DEREGULATION PROCESS WILL CONTINUE. 2. AT SOME POINT, REFORM LEGISLATION WILL BE ENACTED WHICH WILL ACCELERATE THIS PROCESS AND THE OPPORTUNITIES THAT WILL BE AVAILABLE TO BANKS. 3. FOR THE BANKS REPRESENTED IN THIS AUDIENCE, THE NEW BANKING ENVIRONMENT SHOULD BE PARTICULARLY FAVORABLE. //-. ;.,(-~~ ro ~~ R.. ~ C. AND BECAUSE OF ALL THIS, IT REALLY IS POSSIBLE TO LOOK FORWARD POSITIVELY! THANK YOU VERY MUCH. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1991, June 19). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19910620_silas_keehn

@misc{wtfs_regional_speeche_19910620_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1991},
  month = {Jun},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19910620_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}