View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

V^^ '

^ors release on delivery
(Ap|roximately 9:00 a.m., EST)
, - lfe>bjay, April 6, 1970

4 1?7T

The Federal Reserve and the Banking System

Remarks of Arthur F* Burns,
Chairman, Board of Governors of the Federal Reserve System,
before the
59th Annual Meeting
of the
Association of Reserve City Bankers

Boca Raton, Florida

April 6, 1970

The Federal Rese&ve and the Banking System

It is a pleasure to be with you here in Boca Raton this

I am particularly pleased because this meeting gives me a

timely opportunity to discuss with leading representatives of the
banking community some of the concerns which have been uppermost in my
mind since February when I assumed my present position•
The principal concern of a central banker is, of course,
monetary policy,

I have already expressed my views on this subject at

some length in two recent appearances before committees of the Congress,
and I shall not return to it this morning. What I should like to do
instead is to discuss with you the Federal Reserve Board's administrative and regulatory policies.
Let me tell you, first, how we have altered our administrative
procedures. Almost all of the independent agencies of the Federal
Government, acting on the recommendations of the Hoover Commission, now
centralize administrative authority in the head of the agency.


keeping with this strong trend, the Board recently delegated the bulk of
its administrative responsibilities to me as Chairman.

I, in turn, have

redelegated some of this authority to Governor Sherrill, who in the past
has devoted considerable time and effort to this area.

1 expect that

centralization of administrative control will significantly improve the
efficiency of our procedures.
Other delegations of authority have been made to other members
of the Board, to Directors of its Divisions and to the Reserve Banks,
and still further delegations are contemplated.

The result has been that

relatively minor issues involving banking structure, foreign banking,
and internal personnel procedures no longer consume much of the Board's

We have been able to reduce our meetings from five days a week

to three* And we can now devote these meetings largely to monetary and
regulatory policy issues, besides attending to difficult or precedentsetting banking applications*
With regard to Federal Reserve actions affecting banking
structure, we are taking steps to arrive at prompter action where this
can be done without harm to the integrity of the regulative process*
To further this objective, the Board recently created the new post of
Program Director for Banking Structure, and named Mr* Brenton Leavitt,
Deputy Director of our Division of Supervision and Regulation, to that

He will be responsible for marshalling staff resources so as to

expedite decisions on bank merger and holding company applications•
I should point out that progress in this area is all the more
necessary because of the increasing number of banking applications coming
to us*

For example, during 1969, the Board issued decisions on 91

holding company applications, compared with 44 in 1968 and only 17 in

During the first three months of 1970, we issued decisions in

bank holding company cases at a rate in excess of 150 per year*


lined procedures have been introduced to process this increasing flow of
applications on a timely basis*

Our current goal is to handle all but

the most difficult cases within 90 days of acceptance.


progress has already been made in this direction, and we aim to reduce
processing time below 90 days as our procedures improve»

Let me add

that you can be of considerable help to us in reaching these goals by
submitting applications which give at the outset all the factual
information needed to reach a decision*

The Federal Reserve's current emphasis on centralization and
delegation of authority has already enabled us to discharge our responsibilities with increased efficiency and speed*

Even more important,

however, than these present results, is the improved capability these
arrangements have given us to deal with new problems flexibly and
I would like to convey to you now the trend of current thinking
at the Federal Reserve on regulatory policies*

There are three basic

strands in the Board's approach to regulatory issues. First» we
always aim to formulate policies that are consistent with the safety and
soundness of the banking system*

Innovations that significantly threaten

either of these elements are clearly undesirable in the long-run, whatever
their short-term attraction may be*

Second% as far as practicable, we

are attempting to develop policies that will be consistent with market

Wherever we can, we wish to avoid introducing artificial

constraints upon the free play of market forces*

In this way the over-

all efficiency of our economy will be furthered*



efforts are

being directed at building a structure of regulatory policies that are
consistent with effective monetary policy*

Regulatory policies should

provide a means for furthering, nor hindering, the execution of monetary
policy decisions. This is a basic and inescapable constraint within
which the Federal Reserve must work*
These efforts to improve our administrative efficiency and to
rethink our approach to regulatory decisions have been the result of a
continuing process*

This process did not suddenly commence on February 1st,

And, I can assure you it is one which will continue*

The changes within the Federal Reserve that I have been
describing are fundamentally a response to changes in the financial
environment during the past decade, especially the latter half of the

I would like to review with you what seem to me to be the major

factors which have led to the new emphasis in Federal Reserve policies,
Bankers have had to function under an extremely tight monetary
policy twice in the past five years*

Though the banking industry has

generally supported anti-*inflationary policies in those years, the
particular means and degree of the credit restraint to which the industry was subjected brought forth a stream of objections.


maneuvers by banks occurred not infrequently, and some of these elicited
an eventual Federal Reserve response in the form of regulatory counteraction.

These episodes were not calculated to endear either of our

groups to the other,

I shall explore with you a bit later what might

be done during periods of tight money to prevent a recurrence of such
Significant changes have also taken place in the competitive
environment of banking in the past ten years.
mercial banks has increased sharply.

Competition among com-

Moreover, savings and loan associa-

tions, finance companies, and commercial paper issuers have grown in both
size and number; new debt instruments hav$ proven highly successful in
drawing savers directly into the financial markets and away from such
traditional intermediary instruments as bank deposits.

This trend toward

increasing competition for funds seems likely to continue.

I suspect that

in the future you will have to work even harder to acquire the funds you

But, I am hopeful that your efforts to find new sources of funds

will not create the strains our relationship

has recently experienced.

-5The decade of the 1960!s has also been one of remarkable
change in the structure of banking*

We have seen a sharp rise in bank

mergers, an expansion of branch systems and of overseas banking activities,
and a notable increase in the number of bank-holding companies,
especially of the one-bank variety*
These rapid structural changes have been in part a cause and
in part a result of the increasing competition of which I have spoken*
They have also been both a cause and result of changes in the statutory
and regulatory environment. Liberalizations as well as restrictions have

But, where limitations on structural change have been imposed--*

as by the 1966 .amendments to the B$nk Merger and Holding Company Acts, the
imposition of interest rate ceilings and the expansion of the Reserve
Board's regulations, especially D and 0--*increased burdens have inevitably
been placed on the relationship between banks and the Federal Reserve.
I would hope that these strains will in the future be eased, where this
can be done without injury to the public interest.
Another factor which has been instrumental in transforming the
banking environment has been technology.

The new science of computers and

of data processing has had, and will continue to have, striking effects
upon our entire society. We have yet to experience the full impact of
this technological revolution,. The past decade contains some hints,
however, of the order of change we will be experiencing.

The present check

collection system, I am told, owes its survival to the advent of automated

The new technology has facilitated the growth of banks, but

it has also created problems*

Corporate treasurers have learned to


manage their cash flows better through the use of automated bookkeeping.

Demand balances have suffered as a result, placing additional

pressure on banks to seek new sources of funds.

In a comparatively

short time an electronic payments mechanism will be a reality.

As we

move towards such a payments system, even greater alterations can be
expected in the competitive environment and structure of the banking
At the Federal Reserve we are preparing our communications
system for the payments mechanism of the future.

At this moment, we

are in the final stages of installing a highly advanced computer
switching apparatus which will link all Federal Reserve Banks and
the Reserve Board.

This apparatus should be operating by mid-year.

It will provide banks and their customers with a means of moving
money and securities at a higher speed than ever before.


computerized operation will permit the gradual removal of limitations
on the volume of transfers now imposed on the Federal Reserve leased
wire network by manual operations and outdated equipment.


nationwide electronic grid will also be of considerable benefit to
the Federal Reserve itself.

High-speed communications with the

Reserve Banks will improve the timeliness and availability of our

We expect this improvement in the flow of information to aid

our assessment of economic and financial developments.

-7The changes I have been describing in the financial environment
and in the Federal Reserve1s efforts to meet these changes through
improvements in its equipment and its administrative and regulatory
policies? must be seen against the broader economic and social setting
which encompasses them.

Significant changes in the financial environ-

ment are usually a reflection of far-reaching economic, technological,
and social developments*

Thus, the types of economic and social demands

society will be making on the financial system will condition the types
of activities in which both banks and banking regulators will be engaging*

They will, therefore, partially determine the relationship

between the regulators and the regulated*

Within this setting, I

believe ways can be evolved to enable banks and the Federal Reserve to
interact more harmoniously in furtherance of the public interest.
Let me tell you then what I think bankers might do to help
our relationship in the future*

After that, I shall say a few words

about what the Federal Reserve Board can do on its part.



that these are not the official views of the Board, but simply my personal observations.

I trust that you will treat them as such.

One way to improve our relationship would be for you to pursue
policies which are more compatible with overall economic stabilization

As you know, these efforts require that restraints sometimes

be brought to bear on credit-financed spending.

In this connection,

the task of economic stabilization might be easier if bankers considered
reforming some of their lending techniquesc

I am referring in particular

to the practice, which appears to have grown of late, of making binding

-8commitments for large amounts of credit tied to a conventional "prime"

Such commitments tend to insulate a sizable sector of credit

from the effects of monetary policy*

If bankers were to limit their

commitments to totals they felt sure they could finance in periods of
tight money, and if they charged at least as much for commitment takedowns as they themselves were paying for additional funds, I suspect
that some of our nation1s battles against inflation would be easier
to win.
Another matter which I think deserves more attention is the
underlying trend in the quality of credit. The period since 1965 has
been of the kind which historically has given rise to deterioration in
credit quality, sometimes with unhappy consequences. It is hard to
tell to what extent the quality of credit has suffered in recent years,
for statistics in this area are fragmentary, and oftentimes of dubious

We at the Federal Reserve are trying to press ahead with

studies in this field. At this stage, however, those of you in the very
midst of the lending process are in the best position to perceive the
drift of credit quality.

I urge you to be watchful, and to share your

assessment of the situation with us.
Lastly, I would urge you to be extremely sensitive to the
importance of preserving a vigorous competitive environment both within
and outside the banking industry.

If you keep this caution in mind,

you may save yourselves a good deal of grief at the hands of the bank
supervisory agencies, the Jusl^e^^partment, and the courts. There is
much yet to be learned a b ^ ^ ^ ^ e ^ l ^ t i a l ingredients and prudent limits

of vigorous banking competitions and you can help to further understanding
by your comment and example.

But, progress in this area needs to be

conditioned by a deep awareness of the value that is placed upon truly
competitive banking alternatives being available to our citizenry.
The increasing demands on banks for new and improved services
create considerable pressure for increases in the size and diversity of
banking organizations*

It is vital, however, for bankers to remember

that public fears of undue concentration of economic power in banks
are easy to rouse and difficult to lay to rest.

Our nation1s economic,

social, and political philosophies are not congenial to the creation of
monolithic centers of power along the lines of Japan 1 s zaibatsu»


have done very little to allay the fears of the American public, and of
the Congress, that efforts to expand the scope of banking are leading
us in this direction.

Part of the problem here has been a seeming

unwillingness on your part to have a sharp line drawn between banking
and industry.

I personally believe that a reasonable distinction can

and must be made, difficult though that task may be«

The One-Bank

Holding Company Bill now before the Congress seems to me, however, to
confine banks too narrowly.

That it does so is at least partly a

result of a gap in communication between the banking industry and the
American people.
This communication failure is the greatest we have seen since
the '30's.

The banking industry has simply failed to win public under-

standing and acceptance of its lending practices,its charges, and its

The result has been a rising level of suspicion and even



I think the time has come, indeed is past due, for making

every possible effort to correct this unfortunate state of affairs.


urge you to take positive steps in this direction.
Now I should like to turn briefly to what I believe the
Federal Reserve can do to serve the banks and the public interest more

First, we need certainly to press forward with current

efforts to improve our administrative efficiency.

Next, I can assure

you that we shall try to be sensitive to the effects of changes in the
financial environment on the competitive position of the commercial
banking industry.

In that connection, let me remind you that in February

of last year, in a statement dealing with the proper scope of banking
activities, the Board expressed the view that "banks should be granted
greater freedom to innovate new services and procedures,••" when these
activities are not inconsistent with the purposes of the governing

I look forward to Board action in the spirit of this state-

ment of principle as we consider the bank regulatory issues ahead of us.
I have mentioned before the importance of permitting market
forces in banking as much free play as is consistent with the protection of the public interest.

This is the kind of generality that is

easier to express than to apply, for the pragmatic considerations of
the moment often press in an opposite direction.

In my view, however,

banking is burdened with too many regulatory legacies of past circumstances in which pragmatic concerns overrode market processes.

To cite

a specific example, I regard interest rate ceilings on deposits as one
device that is overdue for serious re-examination.

As a matter of

-11personal economic philosophy, I would like to see an evolution away
from reliance upon interest rate ceilings as an ancillary device of
monetary policy, at least as far as instruments of the money-market
type are concerned.

When and as circumstances permit, I believe an

element of greater economic rationality would be introduced into the
financial system if interest rates on such instruments were permitted
to find their own level as a result of market forces.
Finally, the Federal Reserve needs to explore means of achieving
a more equitable impact of monetary policy on all segments of the economy.
The strongly adverse effects of a tight money policy on the housing
industry, state and local government financing, and small businesses
need hardly be amplified.

The public, quite rightly, is especially

concerned about housing, which has borne a large portion of the burden
of tight monetary policy*

Efforts to alleviate this situation must be

Among the various proposals now before the Congress, one would
require the Federal Preserve to provide up to $3 billion a year to the
Federal Home Loan Bank system to support the middle-income housing

While the underlying intent is commendable, this proposal would

undermine the Federal Reserve's ability to stabilize the economy and
would eventually lead to our supporting other special segments of the

The consequence would be a drastic diversion of the Federal

Reserve System from its historic and essential role of protecting the
integrity of the dollar and promoting stable prosperity for our nation.
I need hardly tell you that I am doing everything I can to promote
.wiser legislation.

-12The Federal Reserve has been accused of insensitivity to the
nation's housing needs.

This is by no means true.

We are well aware

of the plight of the housing industry and we have underway at this
moment a major study of housing finance needs.

Its results, I hope,

will indicate what steps may dependably be taken to improve the housing

A great deal of study will have to be devoted also to other

sectors of the economy, particularly municipal finance.


changes are likely to be of a kind that take considerable time to put
into effect.

Some of them may make the banker's job easier, and some

may make it more difficult; but, like all the ideas I have been expressing, they will stand the test of time only if they promote the long-run
welfare of the nation as a whole.
Now seems to me a particularly apt time for us at the Federal
Reserve to be re-examining our relationship with the commercial banking

At this moment financial markets and institutions are under

somewhat less pressure than earlier,

Money, bank credit, and savings

flows are again beginning to expand moderately.

There is reason to

believe that changes in the financial environment will result in a
relaxation of some of the constraints under which banks and their
regulators have been operating.

The decade before us promises to bring

with it even greater changes in banking than the past ten years have

I firmly believe that we can learn from the hard-earned

lessons of the past—that we can find ways to discharge our responsibilities in a spirit of greater harmony and thus bring out the best in
f i c iu^y
both of our institutions. The ultimate benefactor will be not the
banks, nor the Federal Reserve, but the public we both serve.