Regional President Speech

SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 1 I. STATE THE OBVIOUS, SET STAGE FOR LATER COMMENTS. A. REVIEW THE CHANGES IN BANKING INDUSTRY OVER THE PAST DECADE OR 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 FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 2 (1) THE HOMOGENIZATION, BLURRING OF LINES, OF THE BUSINESS - ENORMOUS MARKET SHARE GAINS BY NON-REGULATED COMPETITORS. 3. NET, THE BUSINESS 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. 198Os 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 J SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - 3 PAGE 2. PROFITABILITY DECLINED: INDUSTRY 69 1980-82 ROA DECLINED FROM IN TO 52 1989-91, IN 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 FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - 4 PAGE 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 OVER A LONG PERIOD. 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 TWO DEPOSIT 1980s INSURANCE FUNDS DURING THE EXCEEDED DEPOSITOR LOSSES DURING 1930s. THE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - 5 PAGE B. LOSSES AS A PERCENTAGE OF 2.3 DEPOSITS PEAKED AT PERCENT 1988 1.5 1933. IN VS. PERCENT IN '30s C. THE LOSSES OF THE DRIVEN BY 30 A PERCENT REDUCTION IN THE 28 GNP IN CONTRAST TO A 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 1972, PERCENT IN RAN DOWN TO 3 1982, PERCENT IN 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 FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 6 RAPIDLY -- INCLUDING BAD ASSETS THAT WOULD BECOME SO TROUBLESOME. 7. I'D HAVE TO ADMIT THAT BANK SUP-ERVISION IN AN EXAMINATION SENSE WAS SLOW TO RESPOND TO 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 FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 7 (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 198Os WE CAME OUT OF THE 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 FINANCIAL MANAGERS ASSOCIATION MAY 12, 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. I:? ~. "'--1'(> Pt "t..t~ v:::> ~ ~ t,ll,( J£b,,l. 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 FINANCIAL MANAGERS ASSOCIATION MAY 12, 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 -- APPROPRIATE GIVEN THE CIRCUMSTANCES. C. PERHAPS THE BEST NEWS, Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 10 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. 2. NEW EQUITY OFFERINGS WHICH WERE AT A MODEST AND ON A QUARTERLY BASIS 1990 DECLINING LEVEL IN 1991. A. INCREASED SIGNIFICANTLY IN B. ROSE TO ABOUT $1.3 BILLION THIS JANUARY -- GOOD STOCK MARKET CAME ALONG AT JUST THE RIGHT TIME. C. SUBSEQUENT TO JANUARY, CHEMICAL ALONE ISSUED $1.5 BILLION IN NEW EQUITY IN CONNECTION WITH THEIR RECENT MERGER RAISING THEIR EQUITY TO ASSET RATIO BY A FULL PERCENTAGE POINT. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 11 D. OTHER WEAK INSTITUTIONS, BANK OF BOSTON, SHAWMUT AND EOUIBANK, HAVE SUCCESSFULLY ISSUED COMMON STOCK. D. NET, THE INDUSTRY AS A WHOLE IS IN BETTER SHAPE THAN IT HAS BEEN IN PERHAPS TWO DECADES. 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. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 12 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 ~ O J I ~ ~ IV. LET ME NOW SHIFT TO SOME OBSERVATIONS ABOUT THE REGULATORY/LEGISLATIVE OUTLOOK. 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. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 13 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 11MANAGING11 AN INSTITUTION TO A MUCH GREATER DEGREE THAN WOULD BE APPROPRIATE. STANDARDS: ~u.,U f- th 'ac-t..fiii.5 A. COMPENSATION, FEES AND BENEFITS. "EXCESSIVE" PROHIBITED. (1) PUBLIC SERVICE DISCOUNT. B. INTERNAL CONTROLS. C. INFORMATION SYSTEMS. D. LOAN DOCUMENTATION. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - 14 PAGE 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. 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. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 15 ~ A. FDICIA SPECIFIE 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 PROHIBITED FROM RAISING BROKERED DEPOSITS. C. A BANK WHOSE CAPITAL SLIPS EVEN FURTHER FACES ADDITIONAL RESTRICTIONS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 16 (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. D. WHEN A BANK'S EQUITY FALLS TO 2 PERCENT OF ASSETS IT IS CONSIDERED CRITICALLY UNDERCAPITALIZED. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 17 (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.) (2) ONCE AN INSTITUTION BECOMES CRITICALLY UNDERCAPITALIZED, THE REGULATOR ALSO IS FREE TO APPOINT A RECEIVER. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 18 (A) THE RECEIVER'S JOB IS TO DISPOSE OF THE INSTITUTION IN THE LEAST COST FASHION. OTHER ALTERNATIVES LiauIDA"TioN, SALE. (c) MAJOR -- PERHAPS CONSTITUTIONAL CHANGE -- PRIVATE PROPERTY. (3) BY TRIGGERING RECEIVERSHIP WHEN EQUITY FALLS TO 2 PERCENT OF ASSETS CONGRESS IS TRYING TO CLOSE THE FORBEARANCE OPTION AND ENSURE THAT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - 19 PAGE INSTITUTIONS ARE RESOLVED WITHOUT EXPOSING THE FDIC TO LOSS. E. PROPERLY ADMINISTERED GIANT STEP IN UNDOING THE 11TOO 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. 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. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 20 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 FUND A RUN BY UNINSURED DEPOSITORS. D. ALL FAILURES INVOLVING SIGNIFICANT FDIC OUTLAYS WILL BE AUDITED BY THE GAO. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - 21 PAGE (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 SUR!.J'~T THE BANKING· INDUS~~iia:s 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 SPECIAL ASSESSMENT ON FOREIGN AS WELL AS DOMESTIC DEPOSITS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 22 (2) THIS WILL BE ESPECIALLY PAINFUL FOR BANKS WITH LARGE FOREIGN DEPOSIT BASES SINCE THESE DEPOSITS ARE HIGHLY RATE SENSITIVE. 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 FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 23 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 MINIMUM 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. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 24 As C. A BANK'S CAPITAL DETERIORATES, THE BANK, ITS CUSTOMERS, AND THE INDUSTRY AT 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. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 25 1. COMPELLING AS IT MAY BE, WON'T GO ANYWHERE. C. LOOKING AHEAD, THE MAJOR CHANGES IN STRUCTURE AND COMPOSITION IN BANKING. 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 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION 12, 1992 - 26 MAY PAGE 1. DOWN TO WHAT -- WHO KNOWS. 4,000-5,000. A. SOME ARGUE 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. REGIONAL -- NEW YORK. 1. FRIENDLY WHERE POSSIBLE, BUT UNFRIENDLY IF NECESSARY (I.E., CINCINNATI LAST MONTH). 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. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 27 C. WE'LL SEE HOW CHEMICAL/MANNY HANNY WORKS OUT. (1) WILL TAKE REAL RESOLVE. 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. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 28 1. INVESTMENT BANKING. 2. INSURANCE. 3. FIREWALLS -- SAFETY NET. 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 BANKER. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - 29 PAGE (2) ONE STOP FINANCIAL 300 CENTERS, AT PEAK - BASICALLY UNDONE DIVESTITURES. (3) DISCOVER CARD EXTENSION. B. AMERICAN EXPRESS. (1) DIVESTED ONE INSURANCE COMPANY, BAILED OUT ANOTHER, PUT OVER $1 BILLION INTO SHEARSON WITH NO CROSS-MARKETING. c. B OF A/SCHWAB. (1) 2 3 ONLY TO PERCENT OF 8 OF A CUSTOMERS POTENTIAL FOR DISCOUNT BROKERAGE. D. GE/KIDDER-PEABODY. (1) VERY EXPENSIVE MISTAKE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 30 E. CITICORP. (1) SCRIMGEAR-VICKERS/BIG BANG. (2) QuoTRON. G. THOSE EXPANSIONS THAT HAVE WORKED - CLOSELY RELATED FIELDS -- SUCCESS THROUGH INTERNAL GROWTH. 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. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 31 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. 1. A STRONG, GROWING, PROSPEROUS ECONOMIC ENVIRONMENT. 2. ABSOLUTELY DEPENDENT ON A STRONG, WELL FUNCTIONING BANKING SYSTEM. 8. PART OF OUR LESS THAN SATISFACTORY '90 '91 ECONOMIC GROWTH IN AND 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, Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN FINANCIAL MANAGERS ASSOCIATION MAY 12, 1992 - PAGE 32 3. THIS WILL HAVE SERIOUS IMPLICATIONS 199Os. FOR THE ECONOMY OF THE THANK YOU. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1992, May 11). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19920512_silas_keehn

@misc{wtfs_regional_speeche_19920512_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1992},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19920512_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}