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Banking in the '80s:
Looking Toward a Constructive Evolution
by
E. Gerald Corrigan, President
Federal Reserve Bank of Minneapolis

presented at the
1980 National Correspondent Banking Conference
American Bankers Association
Atlanta, Georgia
November 17, 1980

I think many

of

you

know

that

over

the

past

15

to

18

months I have spent a considerable amount of time at meetings like
this

with

banker

groups

at the local,

state,

and national level.

It's quite natural, of course, that in the process of attending as
many meetings as I have,

impressions are quickly formed.

One such

impression that stands out is that there is a lot more serious work
being done at these meetings than was once the case.
pect,

That, I sus­

is both a sign of the times and a sign of things to come.
It is now almost a cliche to say that the banking busi­

ness

is changing,

whether

and changing rapidly.

The

in the form of technological advances,

forces

for change—

increased competi­

tion from within and outside banking circles, or the proliferation
of new instruments— embroil us in what at times seems to be an un­
structured and threatening metamorphosis.
The
sponse
change.

to

omnibus

those

banking

forces

for

legislation
change

and

of
a

1980

is

catalyst

both
for

a re­

further

In that context, I would like to spend a part of the time

available to me this morning to share with you some of my tentative
thoughts about the longer-run implications of the law.
Before I turn to that subject, however, I do want to say
a few words about a subject of more immediate concern to you— Fed
pricing.

In so doing,

I know you will

recognize that I am a bit

handicapped in that I cannot anticipate what changes in prices and
in the approach to pricing will emerge from the Board of Governor's
further

deliberations

of

this

subject.

I might

note

in passing

that the fact that no one seems particularly happy with the Fed's




2

-

prices— the

big

banks

say

the

-

prices

are

too

low

and

the

small

banks say they are too high— might mean that the prices are about
right.

Beyond

that general

and

somewhat facetious

impression,

I

would like to share with you some of my own personal perspectives
on several general areas which seem to loom large in the minds of
bankers and others.
Perhaps

the most

relates

to the ob­

implicit— that the Fed's approach

servation— sometimes

important of

these

to pricing

is designed to ensure a continued operational presence in all areas
of the payments mechanism.

In some circles the point has been made

that the Fed will even go so far as to use its rule-making authority
to guarantee that result.

I personally reject both of those views.

I would be the first to.concede that the payments services provided
by the Fed could and indeed should be provided by the private sec­
tor if the private sector can in fact provide them in a truly more
efficient fashion.

Stated differently,

I think we should be pre­

pared to lose volume if that is the result of the workings of the
market.
Having

said

that,

however,

I should hasten to add that

there ma y— and I emphasize may— be a threshold point beyond which
that process will not or should not proceed.
make my point.

Let me use extremes to

For example, nobody that I know would argue that the

Federal Reserve must provide wrapped coin services.

At the other

extreme, many— including many prominent private bankers— say that
as a practical matter the Fed must provide net settlement services.
If that is the black and the white of the spectrum, there are obvi­
ously many




shades

of grey

in between.

I can't predict which of

3

-

-

these shades of grey— if any— will, with the passage of time,
pear to be increasingly white or black.

But,

ap­

I can say that the

evolution of the payments system and of payment practices in this
new environment will require careful vigilance,

for what

is ulti­

mately at stake is more than the natural and appropriate thirst of
banking

institutions

to

enlarge

their

individual

share of the market for payments services.

and

collective

That is, as events un­

fold, we must ensure that the integrity essential to the function­
ing of the payments system is preserved regardless of which enti­
ties are providing the payments services.
To put it differently, the proposed Fed approach to pric­
ing is not designed or intended to maintain volume levels consis­
tent with
fact,
some

it

existing levels of resources
is the other

technical

way around.

questions

such

The

at the Reserve Banks.
fee

schedule— subject

In
to

as the private sector markup where

there may be legitimate grounds for some debate and updating of our
prices— reflect precisely what the laws require, our direct and in­
direct costs,

plus

a markup,

for

providing

priced

services.

If

volume changes over time, the resource base will, and indeed must,
be adjusted.
This

brings me to the second point I want to comment on

in the pricing arena.

That is, much of the comment I have seen—

including the ABA's own comment— relates to the four pricing prin­
ciples proposed by the Board over and above those contained in the
Act.

In retrospect,

I will concede there is room for some confu­

sion and misinterpretation in this area.
further




oversimplification,

let me

However, at the risk of a

say that

in a very real sense

-

4

-

those four additional principles can be viewed as nothing more than
an elaboration of the third principle contained
makes

clear

reference

to

"over

the

long

run,"

in the Act which
"competitive

tors," and "adequate levels of service nationwide."

As I see

fac­
it,

basic to the concerns expressed in some of the comments is an un­
derlying belief that the Fed will frustrate competition by somehow
"rigging" its prices.

Given the fishbowl in which we— unlike you—

must operate, and to say nothing of any measure of good faith on our
part, I simply don't see how that's possible.

At the same time, I

don't see why we should not use the flexibility available to us un­
der the law.
Let me again use an example.

Suppose a Fed office or the

Fed as a whole were to lose 20 percent of its check volume in the
first three months of pricing.

I do not believe,

in that event,

that Congress intended for us to immediately fire 20 percent of our
check workforce and increase our prices to reflect the spreading of
fixed costs over a smaller volume.

Nor do I believe that a typi­

cal— or even an atypical— private sector firm would respond in that
way.

That does

not mean

that adjustments

base or prices or both will not be made.
made

in an orderly manner

in

the Fed's

resource

Rather, that they will be

consistent with

the explicit

intent of

Congress that we cover our long-run costs.
I don't want to belabor the point.
the

impression

that

I think

we

are

Nor do I want to leave

faced with

an

insurmountable

problem in developing final rules and prices that are both consis­
tent with the intent of the law and sensitive to the commentary we
have received from you and others.




Having said that, I must hasten

5

_

-

to add that I do not think that a comprehensive "cookbook" can be
written at this time that will definitely answer all of your ques­
tions.

I say that in part because the master chef— in this case the

marketplace— will need some time to adjust the
ceed.

Beyond

that,

I

guess

I could

also

recipe

observe

as we pro­

that

"Macy's

doesn't tell Gimbels."
Let me now

turn my attention

implications of the Act.

to some of the longer-run

As I mentioned earlier, the law may pro­

perly be viewed as a reaction to change and a catalyst for further
change.

It's broad thrust is clear,

it is a major move in the di­

rection of banking deregulation which, by definition, also entails
the prospect of greater competition

in the provision of

the

full

range of banking and banking-related services.
To begin to judge the implications of this new and more
intense mode of competition,

it is useful to begin with a look at

the current "cast of characters"

on the banking scene.

I'm sure

you're familiar with the statistics, but let's quickly review them.
There are currently about 15,000 banks, 5,000 savings and loan as­
sociations, and 500 mutual savings banks in the United States.

In

addition,

in

there

are

about

22,000

credit

unions,

much

smaller

size to be sure, but they also share in some new market powers.
Maybe a better way to think about what's happening is in
terms

of

the

number

of

financial

outlets

Here, the numbers are even more startling.
called automatic teller outlets,
cial banking offices,

20,000

on the

street

Indeed, apart from so-

in 1979 there were 52,000 commer­

S&L outlets,

3,500

savings

fices, and in excess of 22,000 credit union offices.




corners.

bank of­

In short, de-

6

-

-

pository institutions had almost 100,000 offices spread around the
country.

To put that in perspective,

there are more banking of­

fices by a factor of one-third than there are franchised fast-food
restaurants in the United States.
Of course, it is not fair to look at absolute numbers of
banks and banking offices.

Many of the financial institutions are

highly specialized, either in terms of the market they serve or the
services they offer or both.

That specialization is in part a re­

flection of our heritage as a nation and is— or at least was— an
important force in structuring the laws and regulations that played
such an enormous role in influencing the growth of banking in the
United States.
the

rationale

For example, there can be no question that part of
for Regulation Q and part of the rationale for

the

limited ass.et powers for thrift institutions reflected the high na­
tional priority we as a nation have placed in housing.

Similarly,

intra- and interstate limits on branch banking reflect something of
a national political consensus that the credit needs of local com­
munities are best met by local institutions with local management.
Long before the omnibus banking bill of 1980 became re­
ality, market forces had begun to blur some of the historical dis­
tinctions

between

these

classes

stroke of a Presidential pen,

of

institutions.

broadened asset powers

with

those market and competitive

will be unleashed with a new thrust of energy.
counts,

Now,

for

thrifts,

Regulation Q can only work in that direction.

the

forces

Nationwide NOW ac­

and

the phase-out of

Indeed, that is the

fundamental premise of the legislation— "let the markets work" and
that is a sentiment and a philosophy that we can all embrace.




7

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Because the changes in the new law represent such a major
historical

turn

to market

discipline,

they

carry

with

them

some

deeper implications and questions about what this is going to mean
over the longer term.

These are the kinds of things we should be

thinking about from the start and watching very closely as our fu­
ture experience unfolds.
broad design of our

Any

economic

time we make major
institutions,

changes

the

we create a risk that

unintended consequences will turn into major new problems.
the bean-bag syndrome.

in

That's

You push in on an unseemly bulge here and a

new bulge appears over there.

Yet, the risk of unwanted,

costly,

and distorting consequences is much the less when the new blueprint
moves with, rather than against, the grain of the marketplace.
At least in general,
the directions

in which that grain of

the 1980s will take us.




Small

it is not terribly difficult to see
the

banking

environment of

For example—

economic

units— households

have greater opportunities

and

to earn

businesses— will

"market-like"

inter­

est rates on their cash balances and their savings.

This

result, while desirable from any number of viewpoints, is
particularly

welcome

in view

of

the

need

to

raise

the

level of savings and investment in our economy at large.
The lifting of Regulation Q should also enhance the com­
petitive

position

of

regulated

depository

institutions

relative to nondepository financial institutions includ­
ing money market mutual funds.
The already blurred distinctions between classes of depo­
sitory institutions will become less evident.

Speciali­

8

-

zation,
many,

I am sure,

-

will continue to be the hallmark of

if not most, depository institutions,

but the de­

gree of that specialization will change.
None

of

these

directions

troublesome on the surface.

of

change

To the contrary,

seem

particularly

they can easily be

viewed as healthy and constructive developments— symptomatic of the
positive benefits associated with the larger role of market forces
contemplated in the Banking Act of 1980.
has its application here too.

But the bean-bag syndrome

The evolution we will see is not one

that will be without its potential problems.

In a very real way,

the cutting edge for those potential problems will be the same com­
petitive forces which will produce
the new environment.

the benefits we can expect

in

That is, for many institutions, broader asset

powers and the need to adjust to a much more competitive environ­
ment in which virtually all sources of funding will have an expli­
cit

and potentially

variable

cost

will,

inevitably,

entail

more

risk.
There are real questions as to how well and how quickly
institutions
generous

can

adapt

phasing-in

to

these

provisions

changes,

provided

even
for

in

allowing
the

for

the

legislation.

And even if the adjustments are made with the adroitness that will
be

required,

it does

facing

the prospect

growth

in their

can— and

seem
of

likely

narrowing

profitability.

in many

instances

that

some

spreads
Any

will— be

institutions

which

tendencies
offset

and

could

will

impair

be
the

in that direction
overcome

by

the

countervailing forces of increased efficiencies via new technology
and innovation,

improved operations,

and improved pricing on both

the asset and liability sides of the balance sheet.




-

However,

9

-

under any reasonable scenario that I can fore­

see, I am inclined to the view that at least some degree of con­
solidation is likely.
far from clear

at this

How fast and how far that process will go is
time.

In light of

this,

the dictates

of

prudence and reason seem to me to imply the need to begin rethink­
ing now some of the "conventional wisdom," some of our regulations,
and some of our laws as they might apply to any market-induced ten­
dency toward consolidation of

banking

institutions.

I know that

the mere mention of this subject conjures up visions of the hotly
contested debate about McFadden and Douglas.
and

Douglas

are

among

the

things

that

And, surely McFadden

we must

look

at.

But we

should not lose sight of the need to consider other regulatory im­
pediments to the constructive evolution of our financial structure.
For example,

in a world of NOW accounts and a blending of lending

powers, I have to wonder if the notion that commercial banking is a
separate and distinct line of business will be appropriate for the
1980s.

Similarly,

vironment,

if we are to cope with a rapidly changing en­

it seems to me

that we must

take

a fresh

look

at the

whole question of economies of scale in banking as they pertain to
level and quality of services provided by individual banking insti­
tutions.

And, as has been observed by the Comptroller of the Cur­

rency and others, we must take a new look at our whole regulatory
posture,
tions.

particularly

not later

change

it

applies

to

smaller

banking

institu­

I could go on, but you know the agenda better than I.

real point, of course,
now,

as

The

is that the time to get on with the task is

on when we may be face-to-face

with

a process

of

that has outpaced our ability to respond intelligently and

effectively.




10

-

-

In closing, let me also mention one more unsightly bulge
that may

be

emerging

on

the

bean

bag.

The

impact

of potential

changes in our banking structure and institutions on the conduct of
monetary
thing,

policy

could

those changes

be
will

substantial
further

matter of defining and measuring

and

troublesome.

complicate

For

one

the already complex

the money supply.

We will,

for

example, witness that phenomenon in significant proportions during
1981 when the introduction of NOW accounts will
the growth patterns

of

the monetary

aggregates.

severely distort
That distortion

will, perhaps, be most evident in artifically bloating the measured
growth of MlB.
situation.

But the problem will not end with the NOW account

Surely we can anticipate that new instruments, and new

banking practices will make it increasingly difficult to be able to
single out and measure the things we now call transaction accounts.
The new challenges

for monetary policy in the banking environment

of the 1980s will not be limited to defining and measuring money.
For

example,

as larger

fractions of both the asset and liability

sides of balance sheets take on floating rate characteristics, and
as Regulation Q is phased out,

I have to wonder a bit as to where

the cutting edge of monetary policy will be.
In short,

we

are,

I suspect,

eyeball-to-eveball

period of enormous change and challenge in banking and
banking.

with

a

in central

One major hallmark of the process of change will be that

markets and market forces will play a larger

role in shaping

destiny, and regulation will play a smaller role.

our

As I said earli­

er, that is something we can all welcome, but it is also something
we must approach with caution and flexibility.




In the process, we

-

11

-

will have to adapt our thinking and our

institutions in ways that

are sensitive to sometimes conflicting or seemingly conflicting ob­
jectives.

There may be some growing pains associated with the pro­

cess, and there may even be some problems which we cannot foresee
at this time.

But I am more than confident that we can, and will,

meet the challenges.

After all, it has been said that fences are

only for those who cannot climb.




I know that we can climb.