Regional President Speech

SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA, WISCONSIN 8, 1991 - 1 AUGUST PAGE sl,' .ac.. \1'" /t/1-' I. (TURN PROJECTOR ON) INTRODUCTION A. (SLIDE) II. INTRODUCTION -- LET ME START WITH AN EASY PREDICTION -- WE WILL GET SIGNIFICANT LEGISLATIVE REFORM AT SOME EARLY POINT. INDEED INCREASING COMPETITION MAKES THE CONTINUED REFORM OF BANKING REGULATION INEVITABLE. A. WHILE I HARDLY NEED TO REVIEW ALL THE DETAILS WITH THIS GROUP, IT IS ALWAYS INSTRUCTIVE TO REMEMBER THAT THE BUSINESS HAS UNDERGONE VERY SIGNIFICANT COMPETITIVE AND STRUCTURAL CHANGES. 1. '80s IN THE DECADE OF THE THE LEVEL OF COMPETITION WITHIN THE INDUSTRY AND FROM NONBANKS INCREASED DRAMATICALLY EFFECTS SHOWN ON THIS SLIDE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 2 2. IN THE FIELD OF CONSUMER LENDING CURRENTLY ONLY FOUR OF THE LARGEST TEN INSTITUTIONS ARE BANKS. (SLIDE) 3. DURING THE 1980s, MMMFs GREW FROM 4% OF HOUSEHOLD LIQUID ASSETS TO 12% -- GIVEN THE SIZE OF THIS MARKET, IN ABSOLUTE TERMS THIS IS AN ENORMOUS SHIFT IN MARKET POSITION. A. REFLECTED IN THE DECLINE OF CONSUMER SAVING AT BANKS. 4. As A RESULT OF THIS AND OTHER CHANGES, BANKS HAVE SEEN THEIR SHARE OF CONSUMER SAVINGS FALL FROM 75% IN 1976 TO 55% IN 1990. (SLIDE) 8. WHILE BANKS STILL PLAY A DOMINANT ROLE IN THE AREA OF COMMERCIAL LENDING EVEN WITH THIS BREAD AND BUTTER ACTIVITY, THE MARKET SHARE HAS BEEN ERODED. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN 3 AUGUST 8, 1~91 - PAGE 1. BANK PARTICIPATION IN COMMERCIAL LENDING TO CORPORATIONS HAS DECLINED. 2. THE SHARE OF C&I LENDING BY FINANCE COMPANIES INCREASED FROM 14% TO 18% IN THE 1980s. 3. THE DIRECT ISSUANCE OF COMMERCIAL PAPER BECAME INCREASINGLY IMPORTANT. (SLIDE) C. PROFITABILITY HAS BEEN UNDER GREAT PRESSURE AND RELATIVE EARNINGS HAVE DECLINED. 1. ROAs EARLY-LATE 1980s. 2. EX-ENERGY STATES. (SLIDE) 3. SMALLER BANKS ARE NO LONGER THE MOST PROFITABLE BANKS. 0. l COULD GO ON AT SOME CONSIDERABLE LENGTH BUT REALLY DON'T NEED TO MAKE THE CASE THAT THESE ENORMOUS MARKETPLACE CHANGES HAVE OCCURRED. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA, WISCONSIN 8, 1991 - 4 AUGUST PAGE 1. LOOKING AHEAD, IT SEEMS REASONABLE TO EXPECT THAT THIS TREND WILL ONLY ACCELERATE. (SLIDE) III. LEGISLATIVE UPDATE. A. WILL NOT PREDICT JUST WHEN LEGISLATION WILL BE ENACTED 1. OR EXACTLY WHAT THE BILL WILL PROVIDE ( -~ FOR ~ri_~~~ ~ • I ~ I,~ (V'-U'""(/ o ..J - .!'LAI ...,0 r)w,,,,,un11) 2. MUCH MORE OPTIMISTIC ABOUT THE POSSIBILITY OF PASSAGE OF AT LEAST SOME BILL THIS YEAR AND JUST A FEW MONTHS AGO. 8. BUT IT SEEMS REASONABLE TO EXPECT THAT IN ANY PLANNING HORIZON THE FOLLOWING WILL VERY LIKELY PROVIDE THE ENVIRONMENT IN WHICH YOU WILL BE MANAGING AND OPERATING. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 5 1. WE WILL MOVE FROM INTERSTATE BANKING TO NATIONWIDE BRANCHING, NOT JUST BANKING. 3-5 A. INTRODUCTORY TIMING YEARS -- NOT IMPORTANT. 2. WE WILL MOVE TO BROADER POWERS. A. INVESTMENT BANKING ACTIVITIES FOR SURE. B. SOME INSURANCE SERVICES VERY LIKELY. (I) SENATE BANKING COMMITTEE. C. WITH TIME EXPANSION INTO A BROADER ARRAY OF FINANCIALLY-RELATED SERVICES. D. fOR PRACTICAL PURPOSES ALL ACTIVITIES THAT BANKS WILL WANT TO BE INVOLVED IN. (I) FROM AN ACTIVITY PERSPECTIVE REGULATIONS WILL NOT BE CONSTRAINING. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 6 3. FINALLY, WE WILL HAVE DEPOSIT INSURANCE REFORM AND RECAPITALIZATION OF THE INSURANCE FUND. A. THIS PRESSING ISSUE VERY, VERY HIGH ON THE LEGISLATIVE PRIORITY LIST. B. THE BAILOUT, IF YOU WILL, WILL BE FINANCED BY THE BANKING INDUSTRY AND IT WILL BE EXPENSIVE. (I) BY SOME ESTIMATES DEPOSIT INSURANCE PREMIUMS MAY RISE TO 40 AS HIGH AS BASIS POINTS BY 1993 AND FOR SOME BANKS THIS PREMIUM INCREASE MAY WELL SPELL THE DIFFERENCE BETWEEN JUST SURVIVING AND PROSPERING. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 7 C. DEPOSIT INSURANCE WILL BE REFORMED TO DEAL WITH THE THORNY "TOO BIG TO FAIL" QUESTION -- MORE ON THIS IN JUST A MOMENT. 4. WHAT WE WILL NOT SEE -- RESTRUCTURING OF THE FEDERAL REGULATORY SYSTEM WILL NOT OCCUR. I A. WILL SPARE YOU A FEDERAL RESERVE COMMERCIAL. B. BUT OUR CONTINUING INVOLVEMENT IN THE SUPERVISORY PROCESS IS VERY IMPORTANT FROM A MONETARY POLICY rAJ PERSPECTIVE. [/~ WE WILL NOT SEE THE ELIMINATION OF THE CURRENT BARRIER BETWEEN COMMERCE AND FINANCE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 8 (SLIDE) IV. REFORM OF DEPOSIT INSURANCE WILL BRING TO A CLOSE THE ERA OF BENIGN SUPERVISION. A. WHILE SOME BANK MANAGEMENTS THAT HAVE BEEN THE MOST AFFECTED MAY NOT FEEL THAT THE SUPERVISORY ENVIRONMENT HAS BEEN ALL THAT BENIGN. 1. '8Os DURING THE REGULATORY DECISIONS AFFECTING POORLY CAPITALIZED BANKS WERE ONLY TAKEN ONCE THERE WAS NO REASONABLE DOUBT THAT THEY WERE NECESSARY. 2. '9Os IN THE REGULATORS WILL BEGIN TAKING ACTION AS SOON AS THE DANGER OF FUTURE INSOLVENCY BECOMES SIGNIFICANT. 3. WHY THE CHANGE? QUITE FRANKLY, CONGRESS AND THE PUBLIC HAVE LOST PATIENCE WITH COSTLY BAILOUTS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA, WISCONSIN AUGUST 8, 1991 - PAGE 9 4. THE REGULATORS WILL BE UNDER INCREASED PRESSURE TO STEM FUTURE PROBLEMS BEFORE THEY EXPLODE INTO ENORMOUSLY COSTLY CORRECTIVE PROGRAMS. B. IN RESPONSE, CONGRESS WILL PROBABLY MANDATE SOME FORM OF PROGRESSIVE AND EARLY INTERVENTION. 1. ZONES OF CAPITAL WILL BE ESTABLISHED. 2. As DETERIORATION OCCURS AND CAPITAL IS ERODED THE REGULATORS WILL TAKE INCREASINGLY STRICT STEPS TO BRING CORRECTIVE ACTION -- THE OBVIOUS ONES ARE DIVIDEND REDUCTION OR ELIMINATION, MANDATORY RECAPITALIZATION PLANS, REPLACEMENT OF MANAGEMENT AND/OR DIRECTORS. 3. BUT THE LIST WILL BE LONG AND SPECIFIC. A. FAIRLY PRECISE ROAD MAP. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA, WISCONSIN AUGUST 8, 1991 - PAGE 10 4. THE OPEN QUESTION -- MANDATORY OR DISCRETIONARY RESPONSES ON THE PART OF THE REGULATORS. C. USE OF THE DISCOUNT WINDOW WILL CHANGE CONSIDERABLY. 1. THE FED HAS HAD BROAD DISCRETION IN LENDING TO DISTRESSED INSTITUTIONS 2. AND WE HAVE USED THE WINDOW TO BRIDGE TROUBLED SITUATIONS WHILE ALTERNATE SOLUTIONS WERE BEING SOUGHT. 3. IT IS LIKELY THAT GREATER RESTRICTIONS WILL BE IMPOSED AND THAT MISTAKES WILL BE FOR THE ACCOUNT OF THE FED, NOT THE BANK INSURANCE FUND. 4. THIS ONLY SEEMS REASONABLE -- IF 11TOO BIG TO FAIL" INVOLVES A PUBLIC POLICY AND A PUBLIC INTEREST Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 11 A. THEN IT SEEMS WRONG FOR THIS EXPENSE TO BE BORNE BY THE BANK INSURANCE FUND OR IN EFFECT THE BANKS THEMSELVES -- THIS CHANGE APPROPRIATELY PLACES THE COST WITH THE TAXPAYER (AS OUR EARNINGS ARE PAID TO THE TREASURY). 5. WHILE ONE CAN ARGUE WITH SOME OF THE DETAILS, IF THE LEGISLATION COMES THROUGH IN A WAY THAT DOES PROVIDE STRONG PROVISIONS FOR EARLY INTERVENTION AND MODIFIED USE OF THE DISCOUNT WINDOW, A. THEY WILL GO A LONG WAY TOWARD RESOLVING THE THORNY ISSUE OF 11TOO BIG TO FAIL. 11 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 12 L ~ \c ,' "--'S ~ - ~~ (SLIDE} 0 C:,..V...,,.. V. THE SINE QUA NONS OF BANKING IN THE FUTURE -- SK A REGULATOR NOT A COMMERCIAL BANKER -- THE VIEWS OF AN OBSERVER -- NOTHING HERE THAT YOU DON'T ALREADY KNOW A. COST CONTROL AND OPERATING EFFICIENCY WILL REALLY MATTER. 1. SOME SAVINGS WILL BE ACHIEVED THROUGH ECONOMIES OF SCALE. 2. As THE CONSOLIDATIONS TAKE PLACE THE POTENTIAL FOR ELIMINATING EXPENSES CAN PRODUCE RELATIVE OPERATING EFFICIENCIES. 3. OUR RESEARCH INDICATES THAT FOR EACH N~--~•\JV'~ TEN-FOLD INCREASE IN BANK SIZE, AVERAGE ~~~(' COSTS FALL SOMEWHERE BETWEEN ~~U" 5 15% -- AND THIS HOLDS TRUE UNTIL BANKS REACH THE LEVEL OF ABOUT $10 BILLION. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 13 4. BUT THESE NUMBERS DO NOT YET CAPTURE THE COST SAVINGS THAT CAN BE ACHIEVED WHEN THE MERGING BANKS SHARE A CUSTOMER BASE -- INTRA-MARKET MERGERS WHICH ARE REALLY JUST BEGINNING. A. MERGERS BETWEEN BANKS SERVING OVER-BANKED RETAIL OR WHOLESALE MARKETS OFFER THE POSSIBILITY OF GENERATING IMPORTANT COST SAVINGS. (SLIDE) 5. BUT WHILE ECONOMIES OF SCALE ARE IMPORTANT TO ACHIEVING LOWER COSTS SO ALSO IS EFFICIENT MANAGEMENT. A. SOME BANKS HAVE HIGHER COSTS SIMPLY BECAUSE THEY ARE POORLY MANAGED AND THE OPERATING EXPENSES OF THESE BANKS ARE SIGNIFICANTLY HIGHER THAN THE INDUSTRY NORMS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA, WISCONSIN AUGUST 8, 1991 - PAGE 14 B. UNTIL RECENTLY, RESTRICTIVE BRANCHING LAWS PROTECTED THESE BANKS AND TENDED TO OBSCURE THESE INEFFICIENT MANAGEMENTS. ~ C. THIS WILL NO LONGER BE THE CASE. 6. (SLIDE) RESEARCH BY THE BANK ADMINISTRATION INSTITUTE AND FIRST MANHATTAN CONSULTING GROUP SUGGESTS THAT COST-CONSCIOUS FIRMS ARE IN FACT THE ONES THAT ARE MAKING THE BIG MARKET GAINS. A. THIS RESEARCH COMPARED THE STOCK PRICE PERFORMANCE OF THE BANKS WITH 25%) THE LOWEST (BOTTOM AND HIGHEST NONINTEREST EXPENSE RATIOS (TOP 25%). Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA, WISCONSIN AUGUST 8, 1991 - PAGE 15 1988 B. THEY FOUND THAT BY THE END OF THE SHARE PRICES OF THE EFFICIENT 45% FIRMS HAD APPRECIATED BY OVER THE SHARE PRICES OF THE INEFFICIENT FIRMS. C. CLEARLY THE MARKETS HAVE FOCUSED ON EFFICIENT MANAGEMEN"'5AND HAVE REWARDED THEM ACCORDINGLY. B. (SLIDE) CAPITAL WILL BE ANOTHER CRUCIAL INGREDIENT 199Os. FOR SUCCESS IN THE 1. BANKS THAT ARE WELL-CAPITALIZED WILL BE ABLE TO TAKE ADVANTAGE OF OPPORTUNITIES OR ACQUISITIONS. 2. ENTIRELY POSSIBLE THAT THE IMPROVED I LEGISLATIVE ENVIRONMENT THAT HAVE COMMENTED ON CAN ONLY BE ACCESSED BY THOSE INSTITUTIONS THAT HAVE THE HIGHEST CAPITAL POSITIONS -- ONLY THE BEST WILL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 16 BE ABLE TO TAKE ADVANTAGE OF THE NEW OPPORTUNITIES. 3. HIGH LEVELS OF CAPITAL ARE ALSO ABSOLUTELY ESSENTIAL FOR OPERATING IN A GLOBALIZED BANKING ENVIRONMENT. A. THE INTERNATIONAL MARKETS HAVE CLEARLY SORTED OUT THE WELL-CAPITALIZED BANKS FROM THOSE THAT ARE WEAKLY-CAPITALIZED. B. WEAKLY-CAPITALIZED INSTITUTIONS HAVE SEEN THEIR ACCESS TO THE FOREIGN EXCHANGE AND INTEREST RATE SWAP MARKETS RESTRICTED. THEY HAVE ALSO ·// FOUND THAT FEWER AND FEWER CUSTOMERS ww•~tv~ THEIR STANDBY LETTERS OF ~ CREDIT. C. LITTLE BY LITTLE THEY ARE BEING EDGED OUT OF THE MARKETS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN 8, 1~91 - 17 AUGUST PAGE J~ a.(l-J1~ D. THE INTERNATIONAL MARKETS HAD FOCUSED ON THE PROBLEMS OF BCCI LONG BEFORE THEY BECAME SO PUBLIC. U,S, ~ (SLIDE) C. How DO AUEPIE\'S BANKS SJACIC UP IN TERMS OF CAPITAL? 1. BECAUSE OF ACCOUNTING DIFFERENCES BETWEEN COUNTRIES, COMPARISONS INVOLVING ACCOUNTING OR BOOK CAPITAL CAN ALWAYS BE TRICKY. 2. COMPARISONS USING MARKET CAPITAL CAN EVEN OUT THESE DIFFERENCES AND IT IS CLEAR THAT MANY U.S. MONEY CENTER BANKS DO NOT COMPARE FAVORABLY. 3. THE MARKET PRICES IN THIS SLIDE ARE AS 1991. OF JULY A. AT THAT TIME TWO-THIRDS OF THE MONEY CENTER BANKS HAD MARKET 5%. CAPITALIZATION BELOW Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 18 4. 40% IN CONTRAST, ONLY OF THE FOREIGN 16% BANKS AND OF THE REGIONAL BANKS IN 35 THE SALOMON BROTHERS INDEX HAD MARKET 5%. CAPITALIZATION RATIOS BELOW 5. INTERESTINGLY THOUGH, THE JAPANESE BANKS HAVE BEEN VIEWED AS VERY HIGHLY LEVERAGED IN THE PAST. IN FACT, ON A MARKET BASIS THEY HAD BEEN COMPARATIVELY VERY WELL-CAPITALIZED. A. BUT WITH THE RECENT CORRECTION IN THE VALUE OF JAPANESE REAL ESTATE AND THE STOCK MARKETS, THEIR MARKET CAPITAL POSITIONS HAVE COME DOWN SOMEWHAT -- BUT THEY ARE STILL °" Po\ ,. . , ~ ""-' T ~ '-a-'° ~~"(\+-,'o.., RELATIVELY STRONG. ~ . 6. U.S. MEANWHILE, BANK SUPERVISORS HAVE HAD A PROGRAM UNDERWAY FOR SOME YEARS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 19 A. TO INCREASE CAPITAL POSITIONS AND IT IS NOW PRODUCING POSITIVE RESULTS. CAPITAL POSITIONS HAVE CLEARLY IMPROVED. 7. FOR THE FIRST TIME IN MANY YEARS THERE ARE A NUMBER OF U.S. BANKS, BOTH REGIONALS AND MONEY CENTERS, WITH MARKET CAPITALIZATION RATIOS AS HIGH OR HIGHER THAN THE TRADITIONALLY WELL-CAPITALIZED SWISS, GERMAN AND JAPANESE BANKS. 8. To EMPHASIZE THE POINT -- THE IMPORTANT RELATIONSHIP BETWEEN RELATIVE CAPITAL POSITION AND OPERATING EFFICIENCY IS CLEARLY UNDERSTOOD AND REFLECTED BY THE MARKETS. (SLIDE) 0. THE REWARDS FOR THE HIGHLY CAPITALIZED BANKS ARE EVIDENT IN TERMS OF GROWTH AS WELL. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 20 1. 1980s DURING THE THERE HAS BEEN A DIRECT CORRELATION BETWEEN CAPITALIZATION AND GROWTH AS CAN BE SEEN FROM THIS SLIDE. 2. As A CONSEQUENCE OF THEIR SLOW GROWTH, THE MARKET SHARE OF MONEY CENTER BANKS 20% 1980 ACTUALLY DECLINED FROM IN TO 15% 1989 -- IN IN A BROAD PERSPECTIVE THIS IS REALLY A DRAMATIC SHIFT IN MARKET POSITIONS. (SLIDE) 3. IN AN INCREASINGLY COMPETITIVE INTERNATIONAL ENVIRONMENT, CAPITAL WILL MAKE A CRITICAL DIFFERENCE. (s;t..aj E. THE FINAL SINE QUA NON IS THE EFFECTIVE MEASUREMENT AND MANAGEMENT OF RISK. ~Cl.lOJ~ 1 . .CkBftLYRISK IS AN UNDERLYING ELEMENT IN THE FINANCIAL PROCESS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 21 2. RISK IS ABSOLUTELY ENDEMIC TO FINANCIAL INSTITUTIONS. SOME RISK IS WHAT THE PROCESS IS ALL ABOUT. 3. NONETHELESS, UNDERSTANDING THE MEASUREMENT AND MANAGEMENT OF RISK IS QUITE A DIFFERENT QUESTION. 4. GIVEN THE PAST, CURRENT AND EMERGING PROBLEMS IN VARIOUS SEGMENTS OF THE FINANCIAL INDUSTRY, SOMEHOW THE DOWNSIDE POTENTIAL OF THE RISK ISSUE HAS NOT BEEN FULLY UNDERSTOOD OR APPRECIATED. PERHAPS BECAUSE THE ECONOMY IN GENERAL HAS BECOME MORE VOLATILE, MAKING HISTORICAL EXPERIENCE LESS USEFUL. 5. 198Os IN THE EARLY PART OF THE OPERATING EARNINGS TENDED TO FLOW THROUGH TO THE BOTTOM LINE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 22 As A. LOAN PROBLEMS EMERGED, EARNINGS WERE ERODED BY THE NEED FOR HIGHER PROVISIONS. B. ALL SORTS OF NEW AND ESOTERIC SERVICES WON'T PROVIDE ENOUGH EARNINGS TO OVERCOME FUNDAMENTAL RISK PROBLEMS IN LOAN PORTFOLIOS. 6. BREAKING THE BROAD SPECTRUM OF THE RISK QUESTION INTO ITS IMPORTANT COMPONENTS AND THEN DEVELOPING MANAGEMENT CONTROL AND PRICING STRATEGIES TO APPROPRIATELY PROVIDE FOR THESE VARIOUS RISK COMPONENTS WILL BE ESSENTIAL. /,,._o.e, t(j'.,..,i ~ __. (SLIDE} VI. How SHOULD INDIVIDUAL BANKS POSITION THEMSELVES? A. AFTER DECADES OF PUSHING AT FAIRLY NARROW LEGISLATIVE AND REGULATORY BARRIERS -- WHICH FRANKLY DIDN'T TAKE TOO MUCH IMAGINATION -- Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN 8, 1~91 - 23 AUGUST PAGE MANAGEMENTS WILL NOW BE FACED WITH THE AWKWARD DECISIONS OF WHAT THEY REALLY WANT TO DO. 1. IN AN OPEN COMPETITIVE ENVIRONMENT PRIORITIES WILL NEED TO BE ESTABLISHED AND STRATEGIES AND PLANS PUT IN PLACE. 2. IN A REGULATED ENVIRONMENT THESE KINDS OF DECISIONS WEREN'T NECESSARY BUT NOW THEY WILL BE AND THE DECISIONS WILL REALLY MATTER. VII. WITHOUT TRYING TO ANSWER THE VERY DIFFICULT QUESTIONS AS TO HOW INDIVIDUAL BANKS SHOULD POSITION THEMSELVES, LET ME BEGIN TO CONCLUDE BY REVIEWING WHAT I REFER TO AS 11THE GREAT TRUTHS OF BANKING." (SLIDE) A. MEGA-MERGERS ARE THE KEY TO INDUSTRY DOMINATION AND SUCCESS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA, WISCONSIN AUGUST 8, 1991 - PAGE 24 1. HERE THE TRACK RECORD ON MEGA-MERGERS IS AT BEST MIXED -- SUCCESS IS NOT A GIVEN. 2. IN CONTRAST TO ME~ INVOLVING PARTNERS OFgt~t.v DIFFERENT SIZE THE ECONOMIES OF SCALE RESULTING FROM A MERGER OF EQUALS IS LIKELY TO BE SMALL. 3. THE SAVINGS CAN BE EASILY EATEN UP BY TRANSITION COSTS AND INEFFICIENT MANAGEMENT. 4. SIGNIFICANT COST SAVINGS WILL ONLY OCCUR WHERE THE ACQUIRING COMPANY IS CLEARLY MORE EFFICIENT THAN THE TARGET OR WHERE THERE IS SUBSTANTIAL CUSTOMER OVERLAP AND SIGNIFICANT EXCESS CAPACITY. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 25 5. THE WELLS/CROCKER MERGER AND THE BANK OF NEW YORK/IRVING TRUST MERGER CLEARLY FIT THIS MOLD BUT OTHER EXAMPLES COME TO MIND WHERE THE RESULTS HAVE BEEN PARTICULARLY DISAPPOINTING. 6. MY POINT -- WHILE THE CONSOLIDATION THAT HAS BEEN TAKING PLACE WILL CERTAINLY CONTINUE AND INTRA-MARKET MERGERS WILL BECOME INCREASINGLY PREVALENT, AGAIN, SUCCESS WILL NOT BE A GIVEN -- IT WILL TAKE A LOT OF TOUGH AND CAREFUL PLANNING AND MANAGEMENT TO ACHIEVE THE DESIRED RESULTS. (SLIDE) 8. MOVING DOWN INTO A BROADER SCOPE OF RETAIL SERVICES WILL PRODUCE GREATER SOURCES OF PROFITABILITY. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN 8, 1~91 - 26 AUGUST PAGE 1. WHILE RETAIL BANKING IS CURRENTLY THE PRINCIPAL SOURCE OF PROFITS FOR MANY BANKS THE ENTRY OF NEW COMPETITORS, MOST FREQUENTLY NONBANKING COMPETITORS, WILL INEVITABLY BRING THE PROFITABILITY OF RETAIL ACTIVITIES TO MUCH LOWER LEVELS. 2. THE RECENT AND SUCCESSFUL INTRODUCTION OF CREDIT CARDS BY AT&T AND SEARS ARE EXAMPLES OF NEW COMPETITION THAT HAS REDUCED THE PROFITABILITY LEVEL OF LONG-TIME BANKING PARTICIPANTS. 3. SIMILAR SHIFTS IN THE INCREASINGLY COMPETITIVE DEPOSIT MARKET WILL HAVE A NEGATIVE EFFECT ON THAT PART OF THE BUSINESS AS WELL. (SLIDE) C. RETAIL CUSTOMERS WILL REWARD FIRMS THAT > ~ OFFER ONE-STOP FINANCIAL SERVICES. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA, WISCONSIN AUGUST 8, 1991 - PAGE 27 1. '7Os '8Os DURING THE AND THE IT BECAME WIDELY ACCEPTED THAT SYNERGIES WOULD BE IMPORTANT IN THE MARKETING OF RETAIL FINANCE SERVICES. 2. MANY FIRMS ATTEMPTED TO IMPLEMENT A BROADER RETAIL MARKET STRATEGY BY ACQUIRING IMPORTANT PARTICIPATION IN INSURANCE, SECURITIES BROKERAGE, AND REAL ESTATE, ALONG WITH BANKING. 3. NOT ONLY CAN IT BE SAID THAT IN THE MAIN THE EXPERIMENTS HAVE NOT SUCCEEDED, INDEED IN MANY CASES THEY HAVE CLEARLY FAILED. 4. SEARS IS PERHAPS A CLASSIC EXAMPLE OF A FIRM THAT TRIED TO BUILD ON ITS SUCCESS IN RETAIL, CREDIT AND INSURANCE AND BECOME A FULL-SERVICE PROVIDER OF FINANCE SERVICES. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA, WISCONSIN AUGUST 8, 1991 - PAGE 28 A. THEY ACQUIRED DEAN WITTER, COLDWELL BANKER AND SEVERAL SAVINGS AND LOANS IN SOUTHERN CALIFORNIA. B. AFTER SOME EXPERIMENTATION, SEARS ADOPTED THE ONE-STOP FINANCIAL CENTER IN ITS RETAIL STORES AS A MODEL OF MARKETING THE FULL RANGE OF FINANCIAL SERVICES AT A SINGLE LOCATION (SOCKS AND STOCKS). 0. AT THE PEAK THEY HAD OVER 300 IN-STORE FINANCIAL CENTERS. E. BUT IT BECAME CLEAR THAT THE STRATEGY WAS NOT WORKING, THE NUMBER OF IN-STORE CENTERS WAS DRASTICALLY REDUCED. THE COMMERCIAL REAL ESTATE ACTIVITIES OF COLDWELL BANKER ~db WERE SOLD AND THE BRICK AND MORTAR BRANCHES OF THE SOUTHERN CALIFORNIA THRIFTS WERE TERMINATED. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 29 F. WHERE SEARS SUCCEEDED, THE SYNERGIES APPEAR TO HAVE PLAYED A RELATIVELY SMALL ROLE. 1. THE DISCOVER CARD IS A STRAIGHT-FORWARD EXTENSION OF SEARS' OWN CREDIT CARD AND THEIR SUCCESS WITH DEAN WITTER WOULD SEEM TO BE THE RESULT OF DEAN WITTER'S OLD-FASHIONED CONSERVATIVE MANAGEMENT AND EXPERTISE RATHER THAN THE EXPLOITATION OF THE SYNERGIES DREAMED OF BETWEEN THE TWO ORGANIZATIONS. G. (SLIDE) MONEY CENTER BANKS WILL CONTINUE TO DOMINATE ef t-1 WHOLESALE BANKING. 1. FOR NEARLY A CENTURY MONEY CENTER BANKS OF NEW YORK, ILLINOIS AND CALIFORNIA HAVE BEEN THE MOST PROMINENT BANKS IN THE U.S. FINANCIAL SYSTEM. 2. THAT PROMINENCE, ALREADY ERODED, WILL 199Os. DECLINE EVEN MORE DURING THE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis .··-:: :-···: -;:":::: Percent change, annual rate 15 12 \ 9 \ Inflation 6 _________,,, 3 Growth 0 -3 .._....._.__._ _____________________ .___.........._......_._ _________ _ 1969 '72 '75 '78 '81 '84 '87 '90 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Real activity relatively well balanced Consumer spending Foreign trade contribution to GNP trillions of 1982 dollars billions of 1982 dollars 3-r---------------------~ 50-r----------------------, 25 Goods 2 Services -25 Q,__ 1986 1987 1988 1989 1990• 1986 1987 1988 1989 • First 3 quarters of 1990 at an annual rate. • First 3 quarters of 1990 at an annual rate. Business fixed investment Inventory to sales ratio billions of 1982 dollars ratio Structures Equipment 1986 1987 1988 1989 1990• • First 3 quarters of 1990 at an annual rate. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 30 3. CAPITAL PRESSURES, REGULATORY TAXES AND THE CONTINUED INNOVATION IN THE SECURITIES MARKETS WILL MAKE IT INCREASINGLY DIFFICULT FOR THESE BANKS TO HOLD ON TO THEIR PRICE-SENSITIVE WHOLESALE CUSTOMERS. G. (SLIDE) THE ADDITION OF INVESTMENT BANKING SERVICES ¥5<'4!5' WILL SOLVE ALL THE PROBLEMS, 1. BANKS HAVEN'T LOST MONEY BECAUSE THEY WERE PRECLUDED FROM INVESTMENT BANKING ACTIVITIES -- THEY HAVE LOST MONEY IN THE FUNDAMENTAL, GARDEN VARIETY BANKING FUNCTION -- COMMERCIAL LENDING. 2. MOREOVER, THE ATTEMPTS BY INSURANCE COMPANIES AND FINANCE COMPANIES TO BUILD A PROFITABLE WHOLESALE INVESTMENT BANKING BUSINESS THROUGH ACQUISITIONS HAS BEEN MUCH LESS THAN SUCCESSFUL. THE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 31 PRUDENTIAL ACQUISITION OF BACHE, THE GENERAL ELECTRIC (CREDIT) ACQUISITION OF KIDDER PEABODY, AND THE AMERICAN EXPRESS ACQUISITION OF SHEARSON COME TO MIND AS VERY EXPENSIVE EXAMPLES. 3. WHILE THE POST-'87 PERIOD HAS BEEN TOUGH ON ALL INVESTMENT BANKS, NONETHELESS, THOSE INVESTMENT BANKS WITH THE RICHEST PARENTS SEEMED TO HAVE SUFFERED THE DEEPEST LOSSES. 4. MANY OF THE LARGE BANK FORAYS INTO INVESTMENT-TYPE ACTIVITIES HAVE ALSO PROVED TO BE DISAPPOINTING. A. CITICORP'S ACQUISITIONS OF QuoTRON, AMBAC AND SCRIMGOR-VICKERS HAVE BEEN GREAT DISAPPOINTMENTS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA, WISCONSIN 8, 1991 - 32 AUGUST PAGE 5. BUT THERE ARE ALSO SOME GREAT SUCCESS STORIES BY BANKS THAT HAVE BUILT ON AN EXISTING STRENGTH AS THEY HAVE EXPANDED INTO INVESTMENT ACTIVITIES RATHER THAN BY MERGER OR ACQUISITION. J.P. A. MORGAN AND BANKERS TRUST HAVE ESTABLISHED MAJOR POSITIONS IN THE UNDERWRITING OF SECURITIES AS WELL AS IN PRIVATE PLACEMENTS. 6. WHILE CERTAINLY THE INVESTMENT BUSINESS OFFERS INTERESTING POTENTIAL, THE ROUTE TO SUCCESS SO FAR HAS NOT BEEN BY MERGER OR ACQUISITION. (SLIDE) VII. CONCLUSION -- WHAT I'VE TRIED TO COVER THIS EVENING IS TO SUGGEST Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA, WISCONSIN AUGUST 8, 1991 - PAGE 33 A. WHILE THE OPERATING AND LEGISLATIVE ENVIRONMENTS MAY SEEM VERY DIFFERENT IN THE 199Os THAN THEY HAVE BEEN IN THE PAST 1. AND CERTAINLY THEY WILL BE DIFFERENT 1960.J 197Os THAN THE AND 2. IT WILL REALLY BE AN EXTENSION OF WHAT HAS BEEN UNDERWAY FOR THE BETTER PART OF A DECADE. 8. IN AN OPEN, MUCH MORE COMPETITIVE ENVIRONMENT, SOME MANAGEMENT PRINCIPLES WILL BECOME ESSENTIAL AND WILL SPELL THE DIFFERENCE BETWEEN SUCCESS AND FAILURE. 1. THE SINE QUA NONS THAT I HIGHLIGHTED. C. FOR THE FIRST TIME, REALLY, MANAGEMENTS WILL HAVE TO PLAN IN A VERY STRATEGIC SENSE, WHAT THEY WANT TO DO AND WHERE THEY WANT TO DO IT. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA~ WISCONSIN AUGUST 8, 1~91 - PAGE 34 1. IN A REGULATED ENVIRONMENT, THE PLANNING PROCESS WASN'T THAT DIFFICULT -- THERE JUST WASN'T THAT MUCH LATITUDE. 2. BUT NOW SUCCESSFUL MOVES WILL BE REWARDED AND FAILURES WILL BE EXPENSIVE, PERHAPS EVEN FATAL. 0. THE COMMONLY PERCEIVED WISDOMS OR THE GREAT TRUTHS AS I'VE LABELED THEM 1. MAY NOT BE THE ASSURED PATHS TO SUCCESS THAT MANY HAVE BELIEVED THEM TO BE. 2. IT HAS ALREADY BEEN A ROCKY ROAD FOR SOME. E. BUT TO LEAVE THIS ON A POSITIVE NOTE, WHAT AN EXCITING TIME TO BE IN THE BANKING BUSINESS. 1. OVER THE COMING YEARS THE INDUSTRY WILL BE RESTRUCTURED AND RESHAPED. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN ABN/LA SALLE NATIONAL BANK SENIOR MANAGERS CONFERENCE LAKE GENEVA, WISCONSIN AUGUST 8, 1991 - PAGE 35 2. AND WHAT DOES GO INTO PLACE WILL BE IN PLACE FOR A LONG TIME. 3. To PARTICIPATE IN THE PLANNING AND MANAGEMENT OF AN INSTITUTION THAT IS GOING THROUGH THIS TRANSITION WILL BE CHALLENGING, REWARDING -- AND A LOT OF FUN. <;£1·c1~) THANK YOU VERY MUCH. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1991, August 7). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19910808_silas_keehn

@misc{wtfs_regional_speeche_19910808_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1991},
  month = {Aug},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19910808_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}