Regional President Speech

SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 1 .(2A.AJ,•OvJ ,:V~ ~.s--~ ~'----,-,~'l~ --=-~~dV>~~ ~~~~~ ~~~ I. STATE THE'I OBVIOUS, SET STAGE FOR LATER t.--'J."i u:.s COMMENTS. A. BANKING REVIEW THE CHANGES IN INDUSTRY DECADE OR OVER THE PAST SO. 1. 1990s, IN THE EARLY THE INDUSTRY IS VERY DIFFERENT THAN IT WAS IN THE 1970s. LATE 2. THE REASONS FOR THE CHANGES ARE VERY UNDERSTANDABLE. A. HEAVY REGULATION FOLLOWED BY SOME -- NOT ENOUGH - DEREGULATION. B. RUINOUS LEVELS OF INFLATION FOLLOWED BY FIRST DISINFLATION AND NOW ASSET VALUE DEFLATION. C. THE INEXORABLE PRESSURE OF MARKET FORCES INTENSIFIED BY RAPID DEVELOPMENTS IN COMMUNICATION AND TECHNOLOGY. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 2 (1) THE HOMOGENIZATION OF THE BUSINESS -- ENORMOUS MARKET SHARE GAINS BY NON-REGULATED COM[E"!"ITORS. tJJ~ 3. BtJ:r NET~~SINESS IS VERY DIFFERENT. A. NOT SURE THAT THE FINANCIAL INTERMEDIATION PROCESS -- THE FUNDAMENTAL FUNCTION OF BANKING -- HAS THE SAME VALUE TODAY THAT IT DID A DECADE OR TWO AGO. 1980s B. THE 1. TREMENDOUS CONSOLIDATION IN THE 23 INDUSTRY -- A PERCENT REDUCTION IN THE NUMBER OF BANKING ORGANIZATIONS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 3 2. PROFITABILITY DECLINED: INDUSTRY ROA DECLINED FROM 69 IN 1980-82 TO 52 IN 1989-91, A REDUCTION OF 25 PERCENT. 3. RELATIVE PROFITABILITY CHANGED SIGNIFICANTLY. IN A PROTECTED, REGULATED ENVIRONMENT, SMALL BANKS (up TO $50 MILLION IN ASSETS) IN TERMS OF ROA WERE THE MOST PROFITABLE. A. Now MEDIUM-SIZED BANKS (OPTIMAL SIZE OPEN TO ARGUMENT) THE MOST PROFITABLE. 4. LARGE MONEY CENTER BANKS ONCE KINGPINS OF THE INDUSTRY NOW THE WEAK LINKS AND PRONE TO FURTHER TROUBLE. A. THEIR MARKETS BOTH IMPLODED AND EXPLODED -- NEED A NICHE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 4 ~,,._ B. TRADITIONAL COMMERCIAL LENDING ALL BUT LEFT THEM. C. REPLACEMENT MARKETS COLLAPSED. (1) COMMERCIAL REAL ESTATE. (2) HLT TRANSACTIONS. (3) ALL THIS ON TOP OF LDC DEBT PROBLEMS AND THE TREMENDOUS DRAIN THAT CAUSED ~ °<. fan.JJ-f'~\tJ, D. CONSUMER BUSINESS ERODED BY NON-BANK COMPETITORS -- AT&T UNIVERSAL CARD AND SEARS DISCOVER. 5. LOSSES SOARED. A. IN A RELATIVE SENSE LOSSES SUFFERED BY THE lWO DEPOSIT INSURANCE FUNDS DURING THE 1980s EXCEEDED DEPOSITOR LOSSES DURING THE 1930s. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 5 B. LOSSES AS A PERCENTAGE OF DEPOSITS PEAKED AT 2.3 PERCENT IN 1988 VS. 1.5 PERCENT IN 1933. C. THE LOSSES OF THE '30s DRIVEN BY A 30 PERCENT REDUCTION IN THE GNP IN CONTRAST TO A 28 PERCENT INCREASE IN THE GNP IN THE 1980s. 6. AN INDUSTRY THAT HAD BEEN WELL CAPITALIZED SUFFERED SERIOUS DETERIORATION. A. MARKET CAPITAL AT ALL BANKS: 8 PERCENT IN 1972, RAN DOWN TO 3 PERCENT IN 1982, THE LOW POINT. B. CERTAINLY THE REGULATORS REACTED FAR TOO SLOWLY IN DEALING WITH THE ALMOST ALARMING EROSION OF CAPITAL AS ASSETS. GREW Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 6 RAPIDLY -- INCLUDING BAD ASSETS THAT WOULD BECOME SO TROUBLESOME. 7. I'D HAVE TO ADMIT THAT BANK ~ SUPERVISION WAS SLOW TO RESPOND TO ½~~ii-' THE MASSIVE CHANGES THAT WERE OCCURRING IN THE INDUSTRY. A. BANK EXAMINATIONS WERE TOO INFREQUENT AND WERE IMPERFECT. (1) IN TEXAS, FOR EXAMPLE, IN 1986 FOR ALL THE BANKS THAT FAILED IN THE STATE, THE LAST EXAM BEFORE FAILURE OCCURRED MORE THAN TWO YEARS BEFORE THE EVENT. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION 7 APRIL 20, 1992 - PAGE (2) UNDERSTANDABLY THE SUPERVISORY RESPONSE IN EMERGING PROBLEMS NOW FAR MORE BRISK. B. THE CONTINENTAL FAILURE SET INTO CONCRETE THE 11TOO BIG TO FAIL" DOCTRINE. C. FORBEARANCE BECAME THE RULE OF THE DAY. 8. As WE CAME OUT OF THE 1980s A. INDUSTRY CLEARLY IMPAIRED. B. NON-PERFORMING ASSETS HAD RISEN TO VERY HIGH LEVELS. C. LOAN LOSS PROVISIONS TO DEAL WITH CLASSIFIED ASSETS AND LOSSES WERE A CONTINUING DRAG ON EARNINGS. D. CAPITAL POSITIONS WERE SERIOUSLY WEAKENED. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 8 E. THERE WERE COMMENTS, VASTLY OVERSTATED, THAT WE WERE FACING A COLLAPSE OF THE BANKING SYSTEM. II. HAPPILY, THE CURRENT OUTLOOK IS SIGNIFICANTLY IMPROVED. A. I WHILE IT'S EASY TO GENERALIZE, THINK WE HAVE STABILIZED AND ARE MOVING THROUGH A TRANSITION TO IMPROVEMENT. 1. NON-PERFORMING ASSETS HAVE LEVELED AND ARE BEGINNING TO MOVE DOWN A BIT. 2. LOAN LOSS PROVISIONS ARE NOT PUTTING THE PRESSURE ON EARNINGS THAT WAS THE CASE FOR SO MANY YEARS. 3. WIDER INTEREST RATE SPREADS ARE ALSO IMPROVING THE EARNINGS OUTLOOK. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 9 4. LOAN LOSS RESERVES IN MOST CASES, NOT ALL, SEEM ADEQUATE TO DEAL WITH THE CURRENT PROBLEMS. 8. As AN EXAMPLE OF THE CHANGE, THERE IS A RENEWED ATTITUDE OF CONSERVATISM IN BANK LENDING -- WE'VE RETURNED TO THE BASICS. 1. POLITICALLY REFERRED TO AS THE "CREDIT CRUNCH." 2. BANK MANAGEMENTS HAVE RAISED THEIR LENDING STANDARDS. 3. EXAMINERS/HIGHER CAPITAL STANDARDS ARE A PART OF THIS. 4. IMPORTANTLY A SELF-CORRECTIVE PROCESS.--~ rt V~ ~ c:.....," rt~.!,,.-~ C. PERHAPS THE BEST NEWS, 1. MARKET CAPITALIZATION, WHICH REACHED THE LOW POINT OF 3 PERCENT IN 1982 THAT I NOTED, HAD INCREASED TO OVER 11 PERCENT BY THE END OF LAST YEAR. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION 20, 1992 - 10 APRIL PAGE 2. NEW EQUITY O ERINGS WHICH WERE AT A 1990 MODEST AND DECLINING LEVEL IN 1991. A. INCREASED SIGNIFICANTLY IN B. ROSE TO ABOUT $1.3 BILLION THIS JANUARY. - &vs? $--rv-Jc m ev~vf. ~ rtir t ~ ~ f ~ ~ rt, c. SUf:ISEQUENT TO JANUA.tf, CHEMICAL Q"; rN Af CJ"t\.11{_ la-$Ett" ISSUED $1.5 BILLION IN NEW EQUITY IN CONNECTION WITH THEIR RECENT MERGER RAISING THEIR EQUITY TO ASSET RATIO BY A FULL PERCENTAGE POINT. D. OTHER WEAK INSTITUTIONS, BANK OF BOSTON, SHAWMUT AND EQUIBANK, HAVE SUCCESSFULLY ISSUED COMMON STOCK. 0. NET, THE INDUSTRY AS A WHOLE IS IN BETTER SHAPE THAN IT HAS BEEN IN PERHAPS TWO DECADES. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 11 III. WHILE IN A BROAD SENSE THERE HAS BEEN AN IMPROVEMENT IN OUR SYSTEM OF BANK SUPERVISION AND A DRAMATIC IMPROVEMENT IN THE FINANCIAL CONDITION OF THE INDUSTRY, CERTAINLY WE ARE NOT COMPLETELY OUT OF THE WOODS. A. WHILE THE WEAKEST BANKS ARE SOLVENT, THEY ARE STILL NOT WELL POSITIONED TO HANDLE ADDITIONAL SHOCKS. 1. WE CONTINUE TO BE VULNERABLE. 2. DURING THE LAST DECADE, THE REAL ECONOMY HAS BEEN SUBJECTED TO SEVERAL SERIOUS SHOCKS AND ASSET VALUES HAVE BEEN EXTREMELY VOLATILE. 3. THE CURRENT DEVELOPMENTS WITH OLYMPIA AND YORK ARE AN ILLUSTRATION OF THIS. 8. THE FINANCIAL MARKETS SEEM TO BE ALERT TO THESE RISKS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 12 1. THE IMPLIED VOLATILITY RATIOS OF SOME OF THE LARGER, POORLY CAPITALIZED BANKS SUGGEST THAT THESE INSTITUTIONS ARE EXPOSED TO SIGNIFICANT DOWNSIDE RISKS. 2. IN OTHER WORDS, THAT THERE IS A NOT INSIGNIFICANT RISK THAT THE STOCKHOLDERS OF THESE BANKS WILL BE EXPOSED TO A FAILURE WITHIN A ONE OR TWO-YEAR PERIOD. 3. THIS SUGGESTS THAT FOR THE REGULATORS, OUR FOCUS SHOULD NOT SO MUCH BE ON THESE BANKS THAT ARE ALREADY POSITIONED TO FAIL. 4. BUT RATHER ON THOSE BANKS THAT, WHILE SOLVENT, HAVE HIGH VOLATILITY RATIOS AND SHOULD USE EVERY POSSIBLE OPPORTUNITY TO RAISE ADDITIONAL CAPITAL. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 13 C. 1990s To BE REPETITIVE, FOR THE CAPITAL WILL BE KEY. 1. THE BETTER CAPITALIZED BANKS HAVE HAD AND WILL HAVE SUPERIOR GROWTH CHARACTERISTICS. 2. HAVE MUCH BETTER RECOGNITION IN THE MARKETS. 3. WILL BE ABLE TO EXPAND BOTH DE NOVO AND BY ACQUISITION -- THEY HAVE THE ~~~~,M~ WILL GET THE NECESSARY APPROVALS, WE SIMPLY AREN'T GOING TO APPROVE THE APPLICATIONS OF THE WEAKLY CAPITALIZED BANKS. 4. THE SORTING OF THE WEAK FROM THE STRONG WILL BE VERY DRAMATIC. IV. LET ME NOW SHIFT TO SOME OBSERVATIONS ABOUT THE REGULATORY/LEGISLATIVE OUTLOOK. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION 20, 1992 - 14 APRIL PAGE A. To SAY THAT THE BANKING LEGISLATION OF 1991 WAS A DISAPPOINTMENT IS A VAST UNDERSTATEMENT. 1. THE NEED AND THE OPPORTUNITY FOR BROAD SCALE LEGISLATION WAS ABSOLUTELY THERE. 2. THE TREASURY PROPOSAL, WHILE NOT PERFECT, WOULD HAVE PROVIDED MUCH NEEDED RELIEF. A. BUT IT GOT KILLED IN THE PROCESS. B. THE FDIC IMPROVEMENT ACT (IN ITSELF A MISNOMER) FELL FAR SHORT 1. AND IN MANY RESPECTS REPRESENTS RE-REGULATION. 2. SOME ASPECTS, IMPROPERLY ADMINISTERED, COULD BECOME DRACONIAN AND COULD PUT THE REGULATOR IN THE POSITION OF "MANAGING" AN Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 15 INSTITUTION TO A MUCH GREATER DEGREE THAN WOULD BE APPROPRIATE. STANDARDS: A. COMPENSATION, FEES AND BENEFITS. "EXCESSIVE" PROHIBITED. B. INTERNAL CONTROLS. C. INFORMATION SYSTEMS. D. LOAN DOCUMENTATION. E. CREDIT UNDERWRITING. F. INTEREST RATE EXPOSURE. G. ASSET GROWTH. H. ASSET QUALITY. I. EARNINGS. 3. AN ALL INCLUSIVE LIST -- THIS IS ~~----- WHAT MANAGING A BANK IS ALL ABOUT. C. BUT THERE ARE SOME POSITIVE ASPECTS TO THE BILL -- PARTICULARLY IF THE REGULATORS GET THEM RIGHT. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 16 1. AN IMPORTANT PROVISION CALLS FOR PROMPT CORRECTIVE ACTION. THE EXPERIENCES WITH THE THRIFT INDUSTRY AND WITH TEXAS BANKING CONVINCED CONGRESS OF THE IMPORTANCE OF FREQUENT EXAMINATION IN COMBINATION WITH QUICK ACTION TO FORCE THE RAPID RETURN OF CAPITAL TO REGULATORY MINIMUMS. A. FDICIA SPECIFIES THREE LEVELS OF PROMPT CORRECTIVE ACTION. B. THE FIRST LEVEL IS TRIGGERED WHEN THE BANK FALLS BELOW THE REGULATORY MINIMUM. (1) UNDERCAPITALIZED BANKS ARE REQUIRED TO SUBMIT A FEASIBLE PLAN TO REBUILD CAPITAL, ARE NOT ALLOWED TO PAY DIVIDENDS, AND Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 17 PROHIBITED FROM RAISING BROKERED DEPOSITS. A C. BANK WHOSE CAPITAL SLIPS EVEN FURTHER FACES ADDITIONAL RESTRICTIONS. (1) REGULATORS MAY REQUIRE IT TO RAISE ADDITIONAL CAPITAL BY ISSUING SHARES, SELL ASSETS, OR SELL OUT TO ANOTHER BANK. (2) RATES PAID ON DEPOSITS ARE CAPPED TO KEEP THE INSTITUTION FROM FUNDING A RUN BY ISSUING ADDITIONAL INSURED DEPOSITS BEARING HIGH RATES OF INTEREST. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 18 D. WHEN A BANK'S EQUITY FALLS TO 2 PERCENT OF ASSETS IT IS CONSIDERED CRITICALLY UNDERCAPITALIZED. (1) AT THIS POINT, PAYMENT OF INTEREST ON THE BANK'S SUBORDINATED DEBT IS NO LONGER PERMITTED. (DEPENDING ON THE TERMS OF THE CONTRACT, THIS COULD TRIGGER AN INSOLVENCY SINCE THE BANK IS NO LONGER ABLE TO SERVICE LIABILITIES AS THEY COME DUE.) Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 19 (2) ONCE AN INSTITUTION BECOMES CRITICALLY UNDERCAPITALIZED, THE REGULATOR ALSO IS FREE TO APPOINT A RECEIVER. {A) THE RECEIVER'S JOB IS TO DISPOSE OF THE INSTITUTION IN THE LEAST COST FASHION. {B) OTHER ALTERNATIVES INCLUDE LIQUIDATION, SALE OF THE FIRM AS IS, AND HAIRCUT AND SALE. {c) MAJOR -- PERHAPS CONSTITUTIONAL CHANGE -- PRIVATE PROPERTY. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 20 (3) BY TRIGGERING RECEIVERSHIP WHEN EQUITY FALLS TO 2 PERCENT OF ASSETS CONGRESS IS TRYING TO CLOSE THE FORBEARANCE OPTION AND ENSURE THAT INSTITUTIONS ARE RESOLVED WITHOUT EXPOSING THE FDIC TO LOSS. E. PROPERLY ADMINISTERED GIANT STEP IN UNDOING THE "TOO BIG TO - FAIL" DOCTRINE. - ::::,=->- 2. ALARMED AT THE BUDGETARY IMPACT THAT DEPOSIT INSURANCE PROGRAMS HAVE HAD, CONGRESS HAS ALSO SOUGHT TO RAISE THE POLITICAL COST OF BAILING OUT UNINSURED DEPOSITORS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 21 A. THE ACT REQUIRES THAT THE FDIC, THE FEDERAL RESERVE, THE TREASURY AND THE PRESIDENT ALL CERTIFY THAT FAILURE CONSTITUTES A RISK TO THE ENTIRE FINANCIAL SYSTEM BEFORE THE FDIC CAN MAKE UNINSURED DEPOSITORS WHOLE. B. THE FDIC WILL BE REQUIRED TO PROVIDE AN EXPLICIT DESCRIPTION OF THE THREAT TO THE FINANCIAL SYSTEM. C. IN ORDER TO MAKE SURE THAT THE DISCOUNT WINDOW IS NOT USED TO BAIL OUT UNINSURED DEPOSITORS, CONGRESS HAS DECIDED THAT THE FEDERAL RESERVE WILL BEAR A PORTION OF ANY ADDITIONAL LOSSES INCURRED BY THE FDIC AS A RESULT OF DISCOUNT WINDOW LOANS USED TO Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 22 FUND A RUN BY UNINSURED DEPOSITORS. D. ALL FAILURES INVOLVING SIGNIFICANT FDIC OUTLAYS WILL BE AUDITED BY THE GAO. (1) As PART OF THE AUDIT THE GAO WILL DETERMINE WHO IS -,, ~ TO BLAME FOR FAILING TO HEAD OFF THE PROBLEM EARLIER. E. CONGRESS IS ALSO DETERMINED TO MAKE SURE THAT THE BANKING INDUSTRY TAKES A DIM VIEW OF BAILOUTS. (1) IF UNINSURED DEPOSITORS ARE BAILED OUT, THE COST IS SUPPOSED TO BE OFFSET IMMEDIATELY (BILL SAYS "EXPEDITIOUSLY") BY A Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION 20, 1992 - 23 APRIL PAGE SPECIAL ASSESSMENT ON FOREIGN AS WELL AS DOMESTIC DEPOSITS. (2) THIS WILL BE ESPECIALLY PAINFUL FOR BANKS WITH LARGE FOREIGN DEPOSIT BASES SINCE THESE DEPOSITS ARE HIGHLY RATE SENSITIVE. F. CONGRESS' ATTEMPTS TO REDUCE THE PAYMENTS BY THE FDIC TO INSURED DEPOSITORS ALREADY APPEARS TO BE HAVING AN AFFECT. (1) THE FDIC ESTIMATES THAT 50 PERCENT OF THE BANK 1992 FAILURES IN WOULD RESULT IN A LOSS TO UNINSURED DEPOSITORS, UP 15 FROM PERCENT IN PREVIOUS YEARS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 24 (2) HOWEVER, THE FDIC HAS YET TO IMPOSE LOSSES ON DEPOSITORS AT A RELATIVELY LARGE INSTITUTION. 3. FINALLY, FDICIA REQUIRES REGULATORS TO TAKE TWO STEPS TO REDUCE THE RETURNS FROM RISK-TAKING BACK INTO LINE. A. THE FIRST IS TO INCORPORATE MEASURES OF INTEREST RATE RISK INTO RISK-BASED CAPITAL REQUIREMENTS. DONE CORRECTLY, THIS WOULD ELIMINATE A MAJOR FLAW IN CAPITAL REGULATION. B. FDICIA ALSO ORDERS THE FDIC TO DEVELOP AND IMPLEMENT A SYSTEM OF RISK-BASED PREMIUMS. To THE EXTENT THAT IT IS LINKED TO Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 25 CAPITAL LEVELS, RISK-BASED PREMIUMS CAN BE USED TO OVERCOME MANAGEMENT'S RELUCTANCE TO RAISE ADDITIONAL CAPITAL. 4. THE IMPORTANCE OF THESE CHANGES CANNOT BE OVERSTATED. A. WITH BANKS FACING RELATIVELY HIGH MIN.IMUM CAPITAL REQUIREMENTS AND SIGNIFICANT PENALTIES FOR VIOLATING THEM, THE NUMBER OF BANKS WITH EQUITY CLOSE TO ZERO WILL BE SMALL. B. WITH PROMPT CORRECTIVE ACTION IN PLACE, BANKS AND BANK SUPERVISORS HAVE A CLEAR ROAD MAP. c. As A BANK'S CAPITAL DETERIORATES, THE BANK, ITS CUSTOMERS, AND THE INDUSTRY AT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 26 LARGE WILL KNOW EXACTLY WHAT TO EXPECT. D. WITH HIGH OVERALL LEVELS OF CAPITAL AND A CLEAR ROAD MAP, WE WILL BE IN A MUCH BETTER POSITION TO IMPOSE LOSSES ON UNINSURED DEPOSITORS. V. WHAT ARE THE OPPORTUNITIES FOR ADDITIONAL LEGISLATION, AT LEAST IN THE NEAR TERM. A. POLITICAL YEAR. 1. EXHAUSTED FROM PRIOR EFFORT. 2. MORE IMPORTANT ISSUES IN A POLITICAL CONTEXT. 8. GROWING INDUSTRY EFFORT ON INTERSTATE BRANCHING (NOT BANKING) CAPABILITY. 1. COMPELLING AS IT MAY BE, WON'T GO ANYWHERE. C. LOOKING AHEAD, THE MAJOR CHANGES IN STRUCTURE AND COMPOSITION IN BANKING. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 27 1. CHANGES PUSHED BY MARKET FORCES. 2. CHANGES EMPOWERED AT THE STATE LEVEL. 3. CHANGES BROUGHT ABOUT BY REGULATORY INTERPRETATION. A. I.E., FED RULINGS. 4. CHANGES AT THE NATIONAL LEVEL WILL BE LATE AND LIGHT. A. BUT THAT'S THE WAY IT HAS BEEN THROUGHOUT THE WHOLE PROCESS. VI. FINALLY, LET ME CONCLUDE WITH SOME COMMENTS ABOUT THE FUTURE STRUCTURE OF THE BUSINESS. A. FIRST, AND MOST OBVIOUSLY, CONSOLIDATION WILL CONTINUE 1. DOWN TO WHAT -- WHO KNOWS. 4,000-5,000. A. SOME ARGUE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 28 B. MAYBE -- BUT CERTAINLY NOT THE 15-25 THAT SOME USED TO TALK ABOUT JUST A FEW YEARS AGO (A LA CANADA, EUROPE). 8. INTRA (NOT INTER) MARKET MERGERS WILL ACCELERATE . ~ ~ - 0-J f2,AAJ ~V 1..k_ 1. FRIENDLY WHERE POSSIBLE, BUT UNFRIENDLY IF NECESSARY (I.E., CINCINNATI JUST THIS WEEK). 2. THE COST SAVINGS WILL BE COMPELLING -- BUT ELUSIVE. 8 A. WELLS/CROCKER: PERCENT REDUCTION. SUCCESSFUL. B. BANK OF NEW YORK/IRVING: 25 PERCENT BUT THEY PAID TOO MUCH. No SYNERGIES YET. C. WE'LL SEE HOW CHEMICAL/MANNY HANNY WORKS OUT. (1) WILL TAKE REAL RESOLVE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 29 C. THE MAJOR REGIONALS WILL BE TOMORROW'S GIANTS, NOT THE LARGE NEW YORK BANKS WHO ARE IMPAIRED. 1. THEY HAVE BEEN CAUGHT FLAT-FOOTED AT JUST THE WRONG TIME. 2. WHO WOULD HAVE GUESSED THIS JUST 10 YEARS AGO. D. PLENTY OF ROOM FOR SMALL/MEDIUM-SIZED BANKS. 1. KNOW THEIR MARKETS/CUSTOMERS. 2. CAN BE HIGHLY RESPONSIVE. 3. BUT THEY WILL HAVE TO BE VERY COMPETITIVE. 4. THEY WILL BE NICHE PLAYERS. E. THE RESTRICTIONS ON BANK ACTIVITY WILL BE OVERCOME. 1. INVESTMENT BANKING. 2. INSURANCE. 3. FIREWALLS -- SAFETY NET. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION 20, 1992 - 30 APRIL PAGE 4. SUPERVISION OF THE COMPLEX ENTITY. A. FED'S INVOLVEMENT NECESSARY. F. MAJOR ACQUISITIONS IN UNRELATED (BUT STILL FINANCIALLY RELATED) ACTIVITIES WILL NOT BE SUCCESSFUL. 1. MICHAEL PORTER STUDY 50 A. PERCENT FAILURE RELATED. 75 B. PERCENT FAILURE UNRELATED. 2. THE LANDSCAPE LITTERED WITH UNSUCCESSFUL EFFORTS. A. SEARS -- SOCKS AND STOCKS. (1) DEAN WITTER, COLDWELL <;;-t BANKER. L- (2) ONE STOP FINANCIAL 300 CENTERS, AT PEAK - BASICALLY UNDONE - DIVESTITURES. (3) DISCOVER CARD EXTENSION. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 31 B. AMERICAN EXPRESS. (1) DIVESTED ONE INSURANCE COMPANY, BAILED OUT ANOTHER, PUT OVER $1 BILLION INTO SHEARSON WITH NO CROSS-MARKETING. B c. OF A/SCHWAB. ~~ (1) ONLY PERCENT OF 8 OF A CUSTOMERS POTENTIAL FOR DISCOUNT BROKERAGE. D. GE/KIDDER-PEABODY. (1) VERY EXPENSIVE MISTAKE. E. CITICORP. (1) SCRIMGEAR-VICKERS/BIG BANG. (2) QuoTRON. 6. THOSE EXPANSIONS THAT HAVE WORKED - CLOSELY RELATED FIELDS -- SUCCESS THROUGH INTERNAL GROWTH. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 32 1. J.P. MORGAN. A. FOUR YEARS AFTER RECEIVING AUTHORITY: 8TH LARGEST CORPORATE DEBT UNDERWRITER. B. 6TH LARGEST UNDERWRITER OF CONVERTIBLE BONDS. c. 3RD LARGEST IN PRIVATE PLACEMENTS. D. THEY'VE CAPITALIZED ON WHAT THEY KNOW BEST. 2. BANKERS TRUST. A. SIMILAR EXPERIENCE. 3. THIS PATH LIKELY TO BE MOST SUCCESSFUL. VII. WILL FINALLY CONCLUDE WITH STATEMENT THAT HAS LITTLE, IF ANY, EMPIRICAL EVIDENCE TO SUPPORT IT. A. THERE IS A GREAT DEAL AT STAKE HERE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO -- WORKSHOP ON FINANCIAL STRUCTURE, REGULATION AND COMPETITION APRIL 20, 1992 - PAGE 33 1. A STRONG, GROWING, PROSPEROUS ECONOMIC ENVIRONMENT. 2. ABSOLUTELY DEPENDENT ON A STRONG, WELL FUNCTIONING BANKING SYSTEM. 8. PART OF OUR LESS THAN SATISFACTORY ECONOMIC GROWTH IN '90 AND '91 ATTRIBUTABLE TO THE PROBLEMS IN THE BANKING SYSTEMS I'VE ENUMERATED. 1. IF WE DON'T GET CONTINUED IMPROVEMENT IN BANKING CONDITIONS 2. AND FUNDAMENTAL IMPROVEMENT IN THE MAJOR STRUCTURAL ISSUES, 3. THIS WILL HAVE SERIOUS IMPLICATIONS FOR THE ECONOMY OF THE 1990s. THANK YOU. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1992, April 19). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19920420_silas_keehn

@misc{wtfs_regional_speeche_19920420_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1992},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19920420_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}