Full text of Statements and Speeches of Frederick Henry Schultz : The Road Ahead : Remarks before the United States League of Savings Associations, San Francisco, California

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T h e Ro a d A h e a d
Re m a r k s
Fr e d e r i c k
V i c e Ch a i r m a n , B o a r d




of

H. S c h u l t z

Go v e r n o r s
Before

Un i t e d St a t e s Le a g u e

of

by

of the

Fe d e r a l Re s e r v e S y s t e m

the

Sa v i n g s A s s o c i a t i o n s

S a n F r a n c i s c o , Ca l i f o r n i a
No v e m b e r

20, 1980

TWO WEEKS AGO, AN EARTHQUAKE SHOOK NORTHERN CALIFORNIA.
Ge o l o g i s t s

t e l l us that two g re a t

sections of the

e a r t h 's c r u s t

ARE PASSING ONE ANOTHER ALONG A LINE THAT RUNS THROUGH THE CITY
WHERE WE ARE MEETING TODAY.
Sa n A n d r e a s

fault, but as

I

TlTANIC FORCES LIE BENEATH THE
look about

Sa n F r a n c i s c o ,

THRIVING COMMERCIAL AND FINANCIAL CENTER.

I

see a

THIS CITY IS A

TESTAMENT TO THE INNOVATIVE SKILLS AND SPIRIT OF DETERMINATION
THAT ARE THE
Re s e r v e

HALLMARKS OF OUR HISTORY.

and you

in t h e

savings and

loan

W e AT THE FEDERAL
industry can take a

LESSON FROM THIS, FOR WE WILL NEED SUCH SKILLS AND DETERMINATION
TO MEET THE POWERFUL FORCES OF CHANGE NOW MOVING THROUGH THE
FINANCIAL COMMUNITY.
WORKING TOGETHER, WE CAN BUILD A SOLID FUTURE FOR THE
HOUSING INDUSTRY AND THE MORTGAGE FINANCE THAT IS ITS LIFEBLOOD.
IN FACT, THE KEY TO OUR PROBLEMS MAY BE IN WORKING TOGETHER,
BUT IF SO, I AM AFRAID THAT WE ARE FALLING SHORT.
Re s e r v e
cation

Be i n g

and the

savings and

loan

THE FEDERAL

industry need better

communi­

ABOUT OUR COMMON CONCERNS AND GOALS THAN WE HAVE ACHIEVED.
at

loggerheads

in t h e

courts and the

Co n g r e s s

serves

NEITHER OURSELVES NOR THE COUNTRY, AND IT DOES NOT HELP US TO
COME TO GRIPS WITH THE FORCES OF CHANGE THAT WILL NOT BE TURNED
BACK.

A n AGENDA OF ANTI-INFLATIONARY POLICIES AND CHANGES IN

THE COMPETITIVE ENVIRONMENT WITH BANKS MEAN A DIFFICULT TRANSITION




-

2-

PERIOD AHEAD FOR SAVINGS AND LOAN ASSOCIATIONS, BUT IT IS A
PASSAGE THAT MUST BE TRAVELED.

THE PROSPECTS OF ACCELERATING

INFLATION ARE TOO DESTRUCTIVE TO CONTEMPLATE, ESPECIALLY FOR
THRIFT INSTITUTIONS, AND ONLY A MORE COMPETITIVE THRIFT
INDUSTRY CAN OVERCOME THE CYCLES OF DISINTERMEDIATION AND
EARNINGS SQUEEZES THAT HAVE CHARACTERIZED THE LAST 15 YEARS.

We
Ba n k s

across

on the
the

Bo a r d

and the

Pr e s i d e n t s

country would welcome

YOU IN THE SAVINGS AND LOAN INDUSTRY.

of the

Re s e r v e

more discussions

with

THE CHANNELS OF COMMUNI­

CATION BETWEEN US AND YOUR COUNTERPARTS AT MUTUAL SAVINGS BANKS
AND CREDIT UNIONS HAVE BEEN GOOD, BUT THESE, TOO, COULD BE
IMPROVED TO HELP THE BOARD IN DEALING WITH THE RANGE OF ISSUES
where

F e d e r a l Re s e r v e

Pr e s i d e n t Co r r i g a n

policy touches

at the

thrift

institutions.

M i n n e a p o l i s F e d e r a l Re s e r v e B a n k

has

INITIATED REGULAR MEETINGS WITH REPRESENTATIVES OF THE THRIFT
INDUSTRY IN HIS DISTRICT, AND SUCH AN APPROACH MIGHT BE USEFULLY
ADOPTED ELSEWHERE.
to the

A n ADVISORY GROUP OF THRIFT REPRESENTATIVES

F e d e r a l Re s e r v e Bo a r d

OUR COMMUNICATION.

would be a vehicle

for

improving

I AM WORKING ON SUCH A GROUP AND HOPE TO BE

ABLE TO ANNOUNCE SOMETHING SHORTLY.

BUT HOWEVER FORMAL OR

INFORMAL OUR CONTACTS MAY BE, WE SHOULD, I BELIEVE, HAVE MORE
OF THEM.




-3SO

IN

I

WELCOME THE OPPORTUNITY TO TALK WITH YOU TODAY.

THE SPIRIT OF AN OPEN DISCUSSION,

THREE CRITICAL ISSUES:
THE WORK OF THE

DIDC,

I

WOULD LIKE TO TALK ABOUT

THE CURRENT STANCE OF MONETARY POLICY,
AND THE APPLICATION OF RESERVE AND REPORT­

ING REQUIREMENTS TO THRIFT INSTITUTIONS.

THIS IS AN AMBITIOUS

LIST OF TOPICS, AND IT IS UNLIKELY THAT WE WILL ALL AGREE ON
THEM WHEN

I

FINISH SPEAKING.

MANY IN THE AUDIENCE HERE TODAY

WILL HAVE STRONGLY HELD VIEWS DIFFERENT

FROM MINE, BUT

I

LOOK

FORWARD TO OUR DEVELOPING A COMMON FRAMEWORK IN WHICH A DIALOGUE
CAN TAKE PLACE TO OUR MUTUAL BENEFIT.
IN RECENT YEARS, THROUGH A COMBINATION OF EXTERNAL
SHOCKS AND SOME OVERLY STIMULATIVE DOMESTIC POLICIES, INFLATION
HAS BECOME OUR MOST SERIOUS ECONOMIC PROBLEM.

THE WORSENING OF

INFLATION DURING THE FIRST QUARTER OF THIS YEAR LED TO EXTRA­
ORDINARY MEASURES BY THE FEDERAL GOVERNMENT TO REIN IN THE
RAMPAGING ADVANCE IN PRICES.

THE RESTRICTIVE POLICIES DID SLOW

GENERAL ECONOMIC ACTIVITY, AND THE INFLATION RATE HAS DECLINED
FROM THE HEIGHTENED LEVEL OF THE FIRST QUARTER.

BUT LOOKING

AHEAD, IT APPEARS LIKELY THAT SIGNIFICANT REDUCTIONS FROM THE
CURRENT INFLATION RATE MAY TAKE YEARS.

MEANWHILE, THE CRUEL TAX

OF INFLATION WILL OPPRESS THE POOR, THE ELDERLY, ALL THE WEAKEST
MEMBERS OF OUR SOCIETY.




-4INFLATION HAS ALSO TAKEN ITS TOLL ON THE THRIFT
INDUSTRY.

Th e

strategy of borrowing

short and

lending

long

THAT HAD SERVED THE THRIFT INDUSTRY SO WELL BEGAN TO BECOME
OBSOLETE IN THE MID-1960S WITH ACCELERATING INFLATION.

THE

PERSISTENT RISE IN INFLATION WAS FOLLOWED BY RISING INTEREST
RATES THAT CAUSED SEVERE EARNINGS SQUEEZES AT THRIFT INSTI­
TUTIONS WITH LONG-TERM, FIXED-RATE MORTGAGES.

As MARKET

INTEREST RATES ROSE OVER EACH SUCCESSIVE BUSINESS CYCLE.»
THRIFTS FACED LIQUIDITY PRESSURES, DISINTERMIDIATION, AND
SHARPLY FALLING EARNINGS.

THE BUSINESS OF

S&Ls TO LEND SAVINGS

INTO LONG-TERM MORTGAGE MARKETS HAS MEANT THAT S&LS, AMONG ALL
FINANCIAL INTERMEDIARIES, WERE PARTICULARLY HARD HIT BY INFLA­
TION.

Fa i l u r e

tinued

LOW RATES OF SAVINGS AND SUBSTANTIAL INTEREST RATE RISK

FOR

to

contain

and

reduce

inflation will mean

S&LS HOLDING AND MAKING FIXED-RATE MORTGAGES.

con­

REDUCING

INFLATION THROUGH MONETARY AND FISCAL POLICY, HOWEVER, IS NOT
EASY OR PAINLESS, BUT IT IS THE SINGLE MOST IMPORTANT THING
THAT CAN BE DONE TO HELP THE THRIFT INDUSTRY.
Ag a i n s t

the background

of a

severe

inflation that

STRAINED OUR FINANCIAL SYSTEM AND SAPPED THE STRENGTH OF THE
ECONOMY, THE FEDERAL RESERVE ADOPTED A NEW APPROACH TO THE
CONDUCT OF MONETARY POLICY JUST OVER A YEAR AGO.

THE OLD

APPROACH OF CONTROLLING MONEY GROWTH THROUGH MANAGEMENT OF




-5INTEREST RATES HAD PROVED UNSATISFACTORY.

THE RELATIONSHIPS

BETWEEN INTEREST RATES AND MONEY WERE CHANGING IN UNPREDICTABLE
WAYS AND, ON BALANCE, COULD NOT BE RELIED UPON IN OUR EFFORTS
TO KEEP MONEY GROWTH WHERE DESIRED.

IN PRACTICE, MONETARY

POLICY DID NOT ALWAYS RESPOND PROMPTLY AND DECISIVELY TO CHANGES
IN FINANCIAL AND ECONOMIC CONDITIONS, WITH THE RISK OF A PRO­
CYCLICAL MONETARY POLICY WHICH CREATED INFLATIONARY INCREASES
IN THE MONEY SUPPLY WHEN INTEREST RATES WERE HELD STABLE.
Dissatisfied
the

Fe d e r a l Re s e r v e

the

S y s t e m 's

with the

looked

old approach to monetary

for alternatives

control over the

that would

growth of m o n e y .

Th e

policy,

strengthen

alternatives

WERE NOT EASY TO CHOOSE FROM BECAUSE ALL HAD DRAWBACKS.

O n THE

ONE HAND, IT MIGHT BE POSSIBLE IN THEORY TO HAVE BOTH STABLE
INTEREST RATES AND THE DESIRED GROWTH OF MONEY BY MEANS OF COM­
PREHENSIVE CONTROLS OVER CREDIT GROWTH AND ITS DISTRIBUTION.
But

such draconian

measures

would

strike

at the

heart of the

EFFICIENCY OF FREE CAPITAL MARKETS AND FUNDAMENTALLY ALTER THE
ROLE OF THE GOVERNMENT IN THE ECONOMY.

SUCH CONTROLS WOULD

REQUIRE A HUGE BUREAUCRACY AND BE ENORMOUSLY CUMBERSOME TO
ADMINISTER.

ON THE OTHER HAND, MORE STABLE PROVISION OF RESERVES

by the

Sy s t e m

if t h e

supply of

would

reserves

money demands would
rates.
bilizing



Such

mean

be

interest

heightened
grew at a

promptly

interest
fixed

reflected

rate, any
in c h a n g e s

rate movements might be

IN THEMSELVES.

rate volatility;
changes
in

large and

in

interest
desta­

-

6-

T h E DECISION WAS DIFFICULT, BUT IT WAS MADE IN FAVOR
OF CONTROLLING THE GROWTH OF MONEY WITH RESERVE TARGETS, SUBJECT
TO A LIMIT ON THE INTEREST RATE FLUCTUATIONS THAT WOULD BE
PERMITTED.

THE NEW APPROACH IS DECIDEDLY MORE RESPONSIVE TO

CHANGES IN ECONOMIC AND FINANCIAL CONDITIONS, BUT IT IS NOT A
PURELY MECHANICAL POLICY.

THE LOGIC OF THE NEW STRATEGY IS THAT

INTEREST RATES SHOULD MOVE TO COUNTER DEVIATIONS IN MONETARY
GROWTH FROM THE PATH CONSISTENT WITH A GRADUAL WINDING DOWN OF
INFLATION.

HOW MUCH OR HOW FAST INTEREST RATES SHOULD RESPOND

TO UNDESIRED MONETARY GROWTH IS STILL SUBJECT TO THE REVIEW OF
the

F e d e r a l R e s e r v e 's O p e n M a r k e t C o m m i t t e e ,

and

the

experience

OF THE LAST YEAR HAS TAUGHT US THAT MONETARY GROWTH IS NOT AS
MANAGEABLE AS MANY HAD THOUGHT.
S ince

the

implementation

of

the

new

policy

last

fall,

REAL ECONOMIC ACTIVITY HAS MOVED OVER AN UNUSUALLY WIDE RANGE,
The SECOND QUARTER OF THIS YEAR SAW ONE OF THE SHARPEST QUARTERLY
DECLINES IN OUTPUT ON RECORD, AND IN THE THIRD QUARTER REAL GNP
SURPRISED MANY FORECASTERS BY REBOUNDING STRONGLY INTO POSITIVE
growth.

S ince

changes

in s p e n d i n g

and

income

are

an

important

DETERMINANT OF THE PUBLIC'S DEMAND FOR MONEY, THE RATE OF GROWTH
OF MONEY HAS FLUCTUATED WIDELY OVER THE LAST YEAR— DESPITE THE
EFFORTS OF THE FEDERAL RESERVE TO KEEP ITS GROWTH WITHIN BOUNDS.

IN

THE EARLY SPRING WHEN THE ECONOMY WAS EXPERIENCING AN INFLA­

TIONARY SURGE, INTEREST RATES ROSE TO HISTORIC HIGHS AS THE




-7Sy s t e m

moved to

credit.

Bu t

restrain the

subsequently

growth

interest

in d e m a n d s
rates

fell

for

money and

rapidly as

GENERAL ECONOMIC ACTIVITY PLUNGED IN THE SECOND QUARTER AND
CREDIT DEMANDS FELL.

THE DECLINE IN INTEREST RATES NO DOUBT

HELPED TO LIMIT THE CONTRACTION OF THE ECONOMY TO A SINGLE
QUARTER, AND THE RESPONSIVENESS OF THE NEW STRATEGY TO CHANGING
ECONOMIC CONDITIONS WAS GIVEN AN IMPORTANT TEST.

MORE RECENTLY,

OUTPUT REBOUNDED QUICKLY FROM THE SHARP CONTRACTION, AND INTEREST
RATES ROSE WITH IT.
T h e MOVEMENTS IN INTEREST RATES INDUCED BY FLUCTUATIONS
IN THE ECONOMY AND, IN PART, BY THE NEW OPERATING PROCEDURE HAVE
HELPED TO KEEP THE GROWTH OF THE KEY MEASURES OF MONEY IN OR
VERY NEAR THE GROWTH RANGES TARGETED FOR THE YEAR BY THE FEDERAL
Re s e r v e .

In

my view, keeping

monetary growth

in r e a s o n a b l e

ALIGNMENT WITH ITS LONG-RUN RANGES IS ESSENTIAL TO THIS NATION'S
FIGHT AGAINST INFLATION.
We

are well aware that the

n a t i o n 's

THRIFT INSTITUTIONS

HAVE BEEN PARTICULARLY HARD PRESSED BY FINANCIAL DEVELOPMENTS
OVER THE LAST YEAR.

CURBING INFLATION IS PROVING TO BE A TIME-

CONSUMING PROCESS, AND THE YEAR BEFORE US MAY BE NEARLY AS
DIFFICULT AS THE YEAR BEHIND US.

BUT IF WE STICK TO POLICIES OF

MONETARY AND FISCAL RESTRAINT, I BELIEVE THAT PROGRESS WILL BE
MADE ON REDUCING INFLATION.

WHEN INFLATION BEGINS TO SLOW, YOU

CAN LOOK FORWARD TO MUCH MORE CONGENIAL FINANCIAL CONDITIONS
THAN YOU HAVE SEEN FOR MANY YEARS.



-

8

-

ANOTHER AREA FOR OPTIMISM, I BELIEVE, IS THE CHANGING
COMPETITIVE LANDSCAPE FOR SAVINGS AND LOAN ASSOCIATIONS.

SOME

OF THE CHANGES ORIGINATED IN THE DEPOSITORY INSTITUTIONS
De r e g u l a t i o n
spring.

and

Th i s

M o n e t a r y Co n t r o l A c t

landmark

piece

of

that was

legislation

passed this

authorized

nationwide

sNOW ACCOUNTS FOR ALL DEPOSITORY INSTITUTIONS, PERMITTING THRIFTS
TO COMPETE ON AN EQUAL FOOTING WITH COMMERCIAL BANKS FOR THE
INTEREST-BEARING TRANSACTIONS BALANCES OF HOUSEHOLDS.

THE

LEGISLATION ALSO PROVIDED FOR THE GRADUAL PHASE-OUT OF CEILING
INTEREST RATES PAYABLE ON TIME AND SAVINGS DEPOSITS AND FOR
THE MAINTENANCE OF RESERVES WITH THE FEDERAL RESERVE BANKS ON
CERTAIN BALANCES AT ALL DEPOSITORY INSTITUTIONS,

THESE LATTER

TWO FEATURES OF THE LEGISLATION HAVE BEEN SUBJECT TO SOME
MISINTERPRETATION, AND I WOULD LIKE TO DISCUSS EACH OF THEM FROM
THE PERSPECTIVE OF THE FEDERAL RESERVE.

In 1970,
Burns

directed

the

FULLY A DECADE AGO, THEN-CHAIRMAN ARTHUR
F e d e r a l R e s e r v e 's

staff

to

study ways

that

FLUCTUATIONS IN HOUSING FINANCE OVER THE BUSINESS CYCLE COULD
BE REDUCED.

It

WAS OBVIOUS FROM THE EXPERIENCE WITH PERIODS

OF CREDIT RESTRAINT IN

1966

AND AGAIN IN

1969

THAT HOUSING

FINANCE WAS BEARING THE BRUNT OF ANTI-INFLATIONARY POLICIES.
Th e

vitality

and

strength

WERE BEING THREATENED.




of the

thrift

and

housing

industries

T h e SET OF STUDIES THAT RESULTED WAS

-9PUBLISHED IN

1972,

AND MANY OTHER STUDIES AND PROPOSALS HAVE

BEEN PUT FORWARD SINCE THEN BY STUDENTS OF THE HOUSING INDUSTRY.

We

at the

Fe d e r a l Re s e r v e

have

long been

committed to

finding

ANSWERS TO THIS PRESSING PROBLEM AND HAVE SOUGHT THE LEGISLATION
THAT WILL ALLOW THRIFT INSTITUTIONS TO ADJUST MORE QUICKLY TO
THE CHANGING FINANCIAL CLIMATE OVER THE BUSINESS CYCLE.

It

has been

our

past experience

that, with

the

present

INSTITUTIONAL STRUCTURES, A MONETARY POLICY DESIGNED TO AID THE
THRIFT INDUSTRY THROUGH LOW INTEREST RATES TENDS TO BE OVERLY
EXPANSIVE AND ULTIMATELY INFLATIONARY.

In THE DANGEROUSLY

INFLATIONARY TIMES THAT WE FIND OURSELVES, WE CANNOT AFFORD THE
LUXURY OF DESIGNING MONETARY POLICY TO THE PURPOSES OF ANY ONE
SET OF FINANCIAL INSTITUTIONS, HOWEVER IMPORTANT OR VITAL THEY
MAY BE.

THE ONLY FEASIBLE WAY OUT OF THIS DILEMMA FOR MONETARY

POLICY IS TO FIND WAYS TO MAKE THRIFT INSTITUTIONS STRONGER AND
BETTER ABLE TO ADJUST TO THE PRESSURES THAT ACCOMPANY RESTRICTIVE
MONETARY POLICY WHEN SUCH POLICY IS REQUIRED.
Th i s

year

Co n g r e s s

and

the

regulatory

agencies

agreed

THAT THE TIME HAD COME TO TAKE STEPS THAT PROMISE TO BRING AN
END TO THE REPEATED BOUTS WITH DISINTERMEDIATION AND EARNINGS
SQUEEZES THAT HAVE BEEN THE BANE OF THE THRIFT INDUSTRY SINCE
the mid -1960s .




Congress

decided that it was simply no longer

-10ACCEPTABLE THAT MAJOR FINANCIAL INTERMEDIARIES IN OUR COUNTRY
BE SO VULNERABLE TO INTEREST RATE PRESSURE; THE FEDERAL RESERVE
FIRMLY AGREED WITH THAT DECISION.

THE NEW LEGISLATION AND

VARIOUS RECENT REGULATORY ACTIONS BY THE FEDERAL HOME LOAN
Ba n k Bo a r d

and

other

regulators

give

S&Ls

more

flexibility

in

THEIR MORTGAGE CONTRACTS AND MORE FLEXIBILITY IN BIDDING FOR
deposits.

Ov e r

time, such

innovations as

NOW

accounts, variable

RATE MORTGAGES, AND ROLLOVER MORTGAGES WILL ENABLE

S&Ls TO MOVE

THROUGH THE INTEREST RATE CYCLE WITHOUT UNDULY SEVERE DISLOCATIONS,
AS COMMERCIAL BANKS FOR THE MOST PART ALREADY ARE ABLE TO DO.
I SUSPECT THAT SOME OF YOU MAY BELIEVE THAT OTHER
CONSIDERATIONS LED TO THE NEW LEGISLATION, PRINCIPAL AMONG THEM
BEING AN IMPROVEMENT IN COMMERCIAL BANKS* COMPETITIVE POSITION
AT YOUR EXPENSE.

I THINK WE CAN ALL AGREE, HOWEVER, THAT THE

EFFECTS OF BOTH INFLATION AND MEASURES TAKEN TO FIGHT INFLATION
HAVE BEEN SERIOUS FOR THRIFT INSTITUTIONS, AND SUBSTANTIAL CHANGES
IN YOUR ASSETS AND LIABILITIES ARE ESSENTIAL TO YOUR CONTINUED
growth.

Ot h e r

financial

intermediaries

such as ba n k s , life and

CASUALTY INSURANCE COMPANIES, AND PENSION FUNDS WERE BETTER SUITED
TO THE MORE VOLATILE CONDITIONS IN FINANCIAL MARKETS, BUT THEY
TOO HAVE BEEN FORCED TO ADAPT IN RECENT YEARS TO THE CHANGING
FINANCIAL CLIMATE.




-IIG e TTING FROM WHERE THRIFT INSTITUTIONS ARE TODAY TO
A FINANCIAL WORLD OF FREE COMPETITION WILL REQUIRE A LONG
TRANSITION PERIOD.

CONGRESS ALLOWED A SIX-YEAR PHASE-OUT PERIOD

FOR CEILING RATES ON SMALL TIME AND SAVINGS DEPOSITS, AND THE
LONG PERIOD WAS SET FOR GOOD REASON.

WlTH LARGE PORTFOLIOS

OF FIXED-RATE MORTGAGES MADE IN PERIODS OF LOW INTEREST RATES,
THRIFT INSTITUTIONS CANNOT QUICKLY ADJUST THE RATE OF RETURN
ON THEIR CURRENT PORTFOLIOS TO MATCH HIGH AND VOLATILE COSTS
of

funds.

Co n g r e s s

was

keenly aware

of this

ITS SOLUTION IN A NUMBER OF SEPARATE WAYS.
AH

problem and

It

approached

WISELY AVOIDED SETTING

EXPLICIT, STEP-BY-STEP SCHEDULE FOR REMOVAL OF THE CEILINGS

THAT COULD NOT BE RESPONSIVE TO CHANGING FINANCIAL CONDITIONS.
In s t e a d ,

it t r a n s f e r r e d

this

responsibility to

the

DIDC.

Th e

COMMITTEE WAS CHARGED WITH CARRYING OUT THIS TASK WITH AN EYE
ON FINANCIAL CONDITIONS AND THE STRENGTH OF THE THRIFT AND
HOUSING INDUSTRIES.

IT

WAS REQUIRED THAT MEMBERS OF THE

DIDC

SUBMIT ANNUAL REPORTS FOR CONGRESSIONAL REVIEW ON SUCH ISSUES
AS THE NEED FOR DIFFERENTIAL CEILING RATES AND THE VIABILITY
OF THE THRIFT INDUSTRY.

As YOU MAY KNOW, CONGRESSMAN REUSS

ASKED FOR INTERIM RCPORTS COVERING THE FIRST SIX MONTHS OF THE

DIPC'S

WORK FROM EACH MEMBER OF THE COMMITTEE, AND THESE WERE

SUBMITTED AROUND THE END OF $EPTEK1!ER.




Ch a i r m a n Vo l c k e r

in h i s

interim report again

EMPHASIZED THAT THERE ARE SIGNIFICANT LIMITATIONS ON THE ABILITY
OF THRIFT INSTITUTIONS TO PAY MARKET RATES OF RETURN OVER THE INTER­
EST RATE CYCLE.

PROGRESS ON ACHIEVING FAIR AND EQUITABLE TREAT­

MENT OF SMALL DEPOSITORS WILL TAKE TIME, BUT THE MANY INNOVATIONS
IN THRIFT ASSETS AND LIABILITIES WILL ULTIMATELY PERMIT FAIRER
RETURNS TO SMALL SAVERS, AS WELL AS REDUCE THRIFT VULNERABILITY
TO INTEREST RATE RISK.

THE FEDERAL RESERVE MONITORS DEVELOPMENTS

IN YOUR INDUSTRY VERY CLOSELY TO STAY ABREAST OF THESE DEVELOP­
MENTS.

F e d e r a l Re s e r v e

staff

remains

in c o n t i n u o u s

close touch

WITH THEIR COUNTERPARTS AT THE FEDERAL HOME LOAN BANK BOARD, THE
FDIC,

and the

Na t i o n a l C r e d i t U n i o n A d m i n i s t r a t i o n

REPORTS AND BRIEFINGS ON THE THRIFT INDUSTRY.
Bo a r d

members

need

such

close monitoring

and

to

help

prepare

FEDERAL RESERVE
consultation

with

THE HEADS OF THE OTHER REGULATORY AGENCIES TO GIVE THE CAREFUL
CONSIDERATION REQUIRED TO THE PRESSURES AFFECTING THRIFT INSTI­
TUTIONS.
The

journey

of thrift

institutions

to a world

of

freer

COMPETITION AND FAIRER TREATMENT OF SMALL DEPOSITORS DOES NOT
PROMISE TO BE EASY, BUT IT IS ESSENTIAL TO YOUR INDUSTRY TO MAKE
THE PASSAGE.

As I MENTIONED EARLIER, INFLATION HAS BEEN A SERIOUS

AND PERSISTENT PROBLEM FOR THRIFT INSTITUTIONS, AND IF PUBLIC
POLICY FAILS TO SLOW INFLATION, THRIFT INSTITUTIONS1 PROSPECTS
ARE NOT GOOD.




So ALTHOUGH RESTRAINING INFLATION MEANS HIGHER

-13NOW, IT OFFERS THE HOPE OF A LONG-RUN IMPROVEMENT IN YOUR

rates

industry,

Co n g r e s s

has acted to

of change, and

to adjust to the

forces

other

have a deep

regulators

tion.

Th e

cycle

provide

interest

Re s e r v e

is t r y i n g t o d o

its p a r t

F e d e r a l Re s e r v e

the

in y o u r

of disintermediation and

tions must be broken, and deregulation

you additional means

successful transi­

sharp

can do

and

reduc­

earnings

it.

Th e Fe d e r a l

in s m o o t h i n g t h e d e r e g u l a t i o n

PROCESS TO HASTEN THE DAY WHEN A STRONG AND VIABLE THRIFT
INDUSTRY CAN ADAPT TO CHANGING FINANCIAL CONDITIONS WITHOUT
THE DISLOCATIONS OF THE PAST.
Finally, I

would

like to discuss

the

reporting

and

RESERVE REQUIREMENTS THAT WERE AUTHORIZED IN THE NEW LEGISLATION.
Th i s

week marks

the

first

period of

reserve maintenance

on

TRANSACTIONS AND NONPERSONAL TIME DEPOSITS FOR THRIFT INSTITUTIONS
WITH OVER

$15 MILLION IN TOTAL DEPOSITS.

THE NEW RESERVE

AND

REPORTING REQUIREMENTS MASSIVELY EXPAND THE NUMBER OF INSTITUTIONS
WITH WHICH THE FEDERAL RESERVE DEALS.

W e HAVE PREPARED LONG AND

HARD, BUT INEVITABLY THERE WILL BE PROBLEMS IN AN UNDERTAKING OF
this

size.

Pl e a s e

bear

with

us

.

I

can assure

you

that

errors

WILL BE RECTIFIED AND THE FUTURE WILL BE SMOOTHER THAN THE PRESENT.
In A PERIOD WHEN MONEY AND CREDIT GROWTH IS BEING
REINED IN TO BRING ABOUT A GRADUAL REDUCTION IN INFLATIONARY PRES­
SURES, IT IS CRITICAL THAT THE CENTRAL BANK HAVE TIMELY AND ACCURATE




-14ON FINANCIAL DEVELOPMENTS, ESPECIALLY FOR THE

information

DEPOSIT COMPONENTS OF THE MONETARY AGGREGATES.

TOO OFTEN IN

RECENT YEARS, THE FEDERAL RESERVE HAS BEEN DISMAYED TO LEARN
THAT MONETARY GROWTH WAS SUBSTANTIALLY DIFFERENT FROM THE GOALS
OF POLICY— MONTHS AFTER THE POLICY WAS THOUGHT TO HAVE BEEN
IMPLEMENTED.

SOME ERRORS CAN BE RIGHTED LATER, BUT THE TIMING

OF POLICY CAN BE AS IMPORTANT AS ITS DIRECTION, AND TIMING
CANNOT BE CORRECTED LATER.
of

1980, Co n g r e s s

IN PASSING THE MONETARY CONTROL A d

required your

BE A SUBSTANTIAL REQUIREMENT.

cooperation with

us, and

it w i l l

IT IS REGRETTABLE THAT YOUR

REPORTING REQUIREMENTS WILL BE HEAVIER, BUT IT IS IN THE NATIONAL
INTEREST THAT OUR FINANCIAL DATA BE IMPROVED.

RECOGNIZING THE

BURDEN, WE HAVE POSTPONED REPORTING REQUIREMENTS FOR SMALLER

S&LS AND AUTHORIZED QUARTERLY REPORTS FOR INSTITUTIONS WITH
$2 TO $15 MILLION IN DEPOSITS.
Co n g r e s s

in a u t h o r i z i n g t h e

new reporting and

reserve

REQUIREMENTS ACKNOWLEDGED THE VALIDITY OF A POINT ARGUED BY THE
Fe d e r a l Re s e r v e

and other

F e d e r a l R e s e r v e 's

observers

control over

of mo n etary

the growth

of

policy:

money and

that

the

credit

was

BEING SERIOUSLY ERODED BY THE GROWTH OF NONMEMBER DEPOSITORY
INSTITUTIONS.

THE FEDERAL RESERVE MUST HAVE THE TOOLS AT HAND

TO INFLUENCE FINANCIAL DEVELOPMENTS OR IT CANNOT CARRY OUT ITS
BASIC RESPONSIBILITY TO CONDUCT MONETARY POLICY.




A t THE END OF

-15Wo r l d Wa r

II,

member

banks

of the

F e d e r a l Re s e r v e S y s t e m

held

ABOUT THREE-FOURTHS OF ALL DEPOSITS AT COMMERCIAL BANKS AND
THRIFT INSTITUTIONS.

THE FEDERAL RESERVE'S CONTROL OVER THE

GROWTH OF MONEY AND CREDIT IN THE ECONOMY WAS ACCORDINGLY CON­
SIDERABLE.

To d a y ,

the

picture

is s t a r t l i n g l y d i f f e r e n t :

MEMBER BANKS HOLD ONLY ABOUT 40 PER CENT OF THE $1.7 TRILLION
OF DEPOSITS AT BANKS AND THRIFTS IN OUR COUNTRY.

CONGRESS

AGREED WITH THE FEDERAL RESERVE THAT THE CENTRAL BANK NEEDED
MORE DIRECT CONTROL OVER THE GROWTH OF MONEY.

CONGRESS THERE­

FORE PROVIDED IN THE MONETARY CONTROL ACT THAT ALL DEPOSITORY
INSTITUTIONS PLACE RESERVES WITH THE FEDERAL RESERVE BANKS
AGAINST TRANSACTIONS BALANCES AND NONPERSONAL TIME DEPOSITS.
AS THE CENTRAL BANK OF THE UNITED STATES, THE FEDERAL
Re s e r v e

must have better and

more

timely

information

on

financial

MARKETS AND FINANCIAL INTERMEDIARIES AND THE NEW LEGISLATION GIVES
US THIS, AS WELL AS MORE DIRECT INFLUENCE OVER THE GROWTH OF THE
NARROW MONEY STOCK, BOTH BADLY NEEDED.
Re s e r v e

of

greater

control over

THE RETURN TO THE FEDERAL

the growth

of money

has

led to

APPREHENSIONS THAT WE ARE TRYING TO BECOME A SUPER-REGULATOR WITH
POWERS OVER ALL BANKS AND THRIFT INSTITUTIONS SIMILAR TO THOSE
EXERCISED OVER MEMBER BANKS TODAY.

THIS CONCERN, I BELIEVE, IS

FAR OFF THE MARK, BUT I CAN UNDERSTAND HOW REPORTING AND RESERVE




-16requirements

CAN BE CONFUSED WITH REGULATION.

BOTH CENTRAL BANKS

AND REGULATORS NEED INFORMATION ON ASSET AND LIABILITY GROWTH.
Bo t h

have an

interest

in h o w r a p i d l y o r

slowly

various

financial

INSTITUTIONS MAY BE GROWING,
Th e r e

are, nevertheless, important and

fundamental

DIFFERENCES BETWEEN THE CONTROL OF MONETARY GROWTH AND THE REGU­
LATION OF INDIVIDUAL INSTITUTIONS; LET THERE BE NO CONFUSION ABOUT
this.

The

only concerns

of the

F e d e r a l Re s e r v e

are

that thrift

INSTITUTIONS FILE THE NEW REPORTS ACCURATELY AND ON TIME AND
THAT THRIFTS MAINTAIN ANY RESERVES REQUIRED BY LAW.
WE ARE INTERESTED IN.

THIS IS ALL

THE FEDERAL RESERVE DOES NOT WANT SUPER­

REGULATOR STATUS, AND THE MONETARY CONTROL ACT DID NOT CONFER IT.
Th e

new

the

F e d e r a l H o m e Lo a n B a n k B o a r d ,

lator

legislation did

not dilute

OF THRIFT INSTITUTIONS.

the
the

regulatory

FSLIC,

authority

or any other

of

regu­

It DID NOT IN ANY WAY EXPAND THE

REGULATORY AUTHORITY OF THE FEDERAL RESERVE; THIS WAS NOT THE
PURPOSE OF THE ACT.

W e AT THE FEDERAL RESERVE, OF COURSE,

COOPERATE CLOSELY WITH OTHER REGULATORS OF DEPOSITORY INSTITU­
TIONS, AND ALL OF THE REGULATORS HAVE AN OBLIGATION TO WORK IN
CONCERT

WHEN SERIOUS PROBLEMS EMERGE.

F e d e r a l R e s e r v e 's
chartered
in t h e

direct

regulation

MEMBER BANKS, SOME

Un i t e d S t a t e s .

BUT IN PRACTICE, THE

is l a r g e l y

limited

to

state-

1,000 OUT OF THE OVER 14,000 BANKS

T h e B a n k Ho l d i n g C o m p a n y A c t

confers

ADDITIONAL AUTHORITY ON THE BOARD FOR CERTAIN BANK ACTIVITIES
AND ACQUISITIONS.

W e ARE FAR FROM A SUPER-REGULATOR AND WOULD

NOT WANT IT OTHERWISE.



-17L e t ME CONCLUDE MY REMARKS BY EXPRESSING THE HOPE
THAT IN THE COMING MONTHS AND YEARS, WE CAN WORK TOGETHER
TOWARD OUR MANY COMMON OBJECTIVES.

WE MUST REDUCE INFLATION.

WE MUST BRING ORDER TO OUR FINANCIAL MARKETS AND STABILIZE THE
GROWTH OF MONEY AND CREDIT.

WE MUST MEET THE NEEDS FOR CREDIT

BY HOUSEHOLDS, BUSINESS, AND GOVERNMENT IN EQUITABLE AND EFFICIENT
FINANCIAL MARKETS.

THE GOALS ARE HIGH, BUT WITH OUR BEST EFFORTS

AND A COOPERATIVE SPIRIT, I AM CONFIDENT THAT WE WILL MEET
THESE CHALLENGES AND PREVAIL.