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For release on delivery
Tuecdayj June 10, 1975
ApproxiMt«ly n a.m., c.d.t.
(Noon-, E.D.T)


Remarks of
Vice Chairman
Board of Governors
of the
Federal Reserve System

at the
Annual Convention
of the
Wisconsin Bankers Association
Milwaukee, Wisconsin
June 8-11, 1975


It would perhaps be most appropriate for me to be speaking
to you today about the banking weather— a perennial topic of continuing
interest to all of us and having to do with current monetary conditions,
the flows of funds, the demand for credit and the implications for
interest rates.

I have chosen, however, to speculate on what lies

ahead in the banking climate.

I have done so because I believe

many changes presently taking place in banking, and well within our
view, are being misread as banking weather phenomena and not as
fundamental changes in the climate of banking.

The distinction is

important in the formulation of both public and corporate policies;
let me illustrate the point by analogy.
In recent years, research into our weather patterns and
projections has stimulated scientific interest in the causes of longrun changes in the world's climate.

Explorations below the surface

of the oceans, into the jet streams in the upper atmosphere, the tilt
of the earth's axis, and variations in its orbit are involved in
search of the basic determinants of climate and weather.


this activity has led to speculation that we may now be on the verge
of entering another ice age or, equally disconcerting, a less-ice era.
Whichever speculation turns out to become a reality, none of us will
ever know because the projections run centuries beyond our life spans.

-2 -

Similarly, what we could observe in the banking environment
today involves far more than seasonal or cyclical changes in the
"banking weather."

The "banking climate" is being fundamentally

altered too; and not at an "ice age" speed either.

But our attention

more often than not is absorbed by day-to-day fluctuations in banking
conditions and the process of fundamental change is so gradual that
even though its impact is cumulative it does not receive the sub­
stantial analytical or management attention it merits.
Obviously, I cannot, within the limits of my time this
morning, identify the many forces of change gradually affecting the
banking climate nor trace the nature of their impact.

I can, however,

briefly touch on certain changes, how they are affecting banking,
the efforts that have been made by law or regulation to contain or
channel the forces involved and the way in which it seems to me banking
institutions, small and large, can cope with fundamental changes in
their environment.
In some areas of the nation, the most troublesome and
contentious feature of long-run change is what is often called the
"structure" of banking--the number and size of banking organizations
in a given State or banking market.
Sensitivity to structural characteristics is most apparent
in the unit-banking States in the midwest.

It is also evident in a

few States where the acquisitions by multi-bank holding companies
have been of such size and frequency as to incorporate into a holding


company affiliation within a few years a major share of a State's
banking resources.
By and large, States along both the eastern and western sea­
boards, in the western intermountain area, and along the Canadian
border have banking structures in which the presence of holding
companies and State-wide branching institutions no longer raises the
hackles of smaller institutions.

In these areas most of the smaller

institutions have learned how to compete successfully with the "big

In many of these States, concentration ratios for the very

largest banks have fallen in recent years as their managements have
tuned their growth objectives toward foreign business or, under the
Bank Holding Company Act, toward "bank related" enterprises.
Although bank merger and acquisition activity has abated in
recent months and although in well over half of the States the banking
structure could be said to have become stable, between the Appalachians
and the Rockies, branch and holding company banking are continuing
sources of anxiety for many bankers.
Holding company bank acquisitions over the past ten years
or so seem to me to have brought on significant changes in banking
structure of at least 12 States.

These States and the percentage of

total State banking assets now (June 30, 1974) included in holding
companies are: Alabama, 54; Colorado, 66; Florida, 74; Maine, 67;
Massachusetts, 78; Missouri, 57; New Jersey, 43; New Mexico, 50;
New York, 75; Tennessee, 49; Texas, 51; Virginia, 72.

This activity

4has had a lesser Impact, up to now, in six additional States, as

Connecticut, 25; Iowa, 19; Maryland, 21; Michigan, 29;

Ohio, 39; Wisconsin, 46.
The lull in acquisition activity over the past several
months seems to be linked primarily to the low levels of bank stock
prices, over-extended acquirers, and the current phase of the economic

However, there may be technological forces at work as well.

The rationale for some acquisitions has been to enter new markets;
in other cases it is to achieve greater penetration of markets in
which the acquirer already has a position.

In Florida, for example,

numerous acquisitions have resulted in patterns similar to branch
office networks in State-wide branching States.

Branches add sub­

stantially to operating costs but they are a means of increasing the
size and penetration of the bank's market area.
It should be evident today that branching is not the only
alternative method of supplying convenient banking service and thus
raising a bank's marketing effectiveness.

Trips to a banking office

to make deposits, to get cash or to pay bills are no longer necessary.
Direct deposit of salaries and other income payments is a reality;
it will spread rapidly from now on.

Teller machines have the capacity

to perform the most essential functions bank offices serve.

They can

be located in shopping areas and at places of work; they are less
costly to operate than branches.

Other electronic equipment, such

as POS terminals, have similar capabilities and involve truly
spectacular operating savings.

5POS-type devices in shopping areas, factories, office build­
ings and other places of work, when shared, entail minimal costs to
financial institutions, being well within the reach of small as well as
large banks in a given market area.

Thus, a banking management looking

into the future, as it must when the acquisition of a bank or branch is
being considered, would be weighing the cost-effectiveness of access to
customers by the use of electronic devices compared to the conventional
mode of another "bricks-and-mortaru banking office.
The ironic possibility which comes to mind in considering
the economics of providing basic banking services in the future is
the marketing outlook for institutions in unit-banking States.


electronic terminal devices, it is not unreasonable to expect them to
be able to realize the advantages of branching at a fraction of the
cost of branch networks and be spared, to boot, the prospect of dis­
mantling at least a portion of existing obsolete branching facilities.
This is a serendipitous fallout of huge dimensions for several decades
of non-conformance with the mainstream of structural change in U.S. bank­

Or, perhaps, the day will come when the long-run foresight shown

by the architects of banking structure in Illinois, Kansas, Nebraska,
Oklahoma, and West Virginia will be acknowledged.
The latter view seems a bit farfetched, however, in light
of the attempts now being made to prevent or hamper the use of
electronic terminals by legislation or regulation.

While I doubt

public authorities will long bar the utilization of devices which

-6 serve the public convenience, reduce the cost of banking service and
are adaptable to the resources of both small and large banking organi­
zations, it is possible that in the short run these tactics may have
the effect of shunting portions of banking-type services to unregu­
lated enterprises who are not so inhibited.
I have no doubt that some banks now continuously review
their branching policies in light of the development of electronic
substitutes for branches but the statistical evidence of such policies
is hard to find.

The banking system, according to the statistical

record, continues to dilute its earnings with the proliferation of
branch offices.

While the number of banks in the United States has

increased by only 7 per cent over the past 15 years, the number of
branch offices has risen by 170 per cent.

Relative to population,

the number of persons per banking office is now less than 5,000—
for the first time.

It was 7,500 15 years ago.

It appears to me

that the continued growth of banking offices indicates a clear mis­
reading of the trend in the banking technology climate, a misreading
that is likely to prove costly for some banking enterprises.
Another trend in the banking climate not clearly perceptible
today but potentially of great importance is a shift in banking
attitude toward consumer business.

This involves the re-evaluation

of consumers as both deposit and loan customers from the standpoint
of institutional stability and profitability.

Commercial banks have

traditionally looked to businesses and in some degree governments as
their prime customers.

As money and capital markets have become


larger and more accessible, such customers have often found these mar­
kets more attractive than banks for the placement of funds or as a
source of funds.

Thus, a clientele which in the past could be regarded

as providing a solid deposit and loan base has become increasingly
sensitive to alternative money and capital market opportunities and has
demonstrated steadily diminishing loyalty to its banking connections.
Increasingly, such banking services as are needed by corporations are
being paid for by fees rather than maintenance of deposit balances;
while business demands on banks for loans are tending to concentrate
in the tighter phases of general credit restraint.

The consequence has

been greater and greater bank dependence on interest-sensitive funds
involving banking policies euphemistically referred to as"liability
As the shortcomings of liability management have emerged,
some banks, in addition to those who have long been identified with
consumer or retail operations, have begun to cultivate a larger

consumer deposit and loan base.

This market is comparatively stable,

statistically predictable, comparatively insensitive to interest rate
changes, and can be made profitable by the use of electronic processing
and management.

However, it is not an unoccupied area.

Savings and

loan associations, mutual savings banks, and credit unions have large
and loyal consumer constituencies and are now seeking Congressional
authority to expand both deposit and loan services so as to blanket
the service possibilities for consumers, i.e., to become "full service"
institutions for individuals.

-8 It is possible that in the competitive struggle for the
consumer market banks are going to encounter a dramatic and sudden
change in banking climate.

Competition with the thrift industry has

been intense in most sections of the country for more than a decade.
But that competition has been held in check by differences in statutory
powers over deposit and lending activities and differential regulatory
ceilings on time deposits.

These statutory and regulatory restraints

are rapidly being eroded, step by step, for a number of reasons.


will mention only a few as the process is quite involved.
First, I would point to developments external to regulated
financial enterprises.

I consider that electronic data processing

technology and the structure of the service industry which has grown
up around it have given thrift institutions a capability to do for
themselves, or through non-bank contractors, certain vital processing
operations formerly done by banks.

Today, there are numbers of ex­

ceptionally skilled data handling concerns involved in deposit and
money transfer data processing; many are outside of the banking indus­

Some of these enterprises are cognizant of the enormous cost

savings to be realized by putting together systems of data handling
and transmission.

As applied to thrift institutions, or banks, such

systems can absorb the heavy front end costs and attain volumes capable
of reducing dramatically the overall costs of deposit and money trans­
fer operations.

These realizable economies will have a compelling and

overriding influence in the long run on relative shares in the consumer
market enjoyed by banks, thrifts and other entities.

-9 Another external influence affecting both banks and thrifts
is the growing role of the retailing industry in the extension of
consumer credit and in its aggressive development of many sophisticated
electronic systems for its internal operations.

The early introduction

of machine language in these systems affords the opportunity, at least,
to "flake o f f certain depository and money related operations at
costs which more elementary banking systems could not achieve.


is always the possibility that these capabilities would enable retailers
to offer credit balances to their regular customers on highly advan­
tageous terms.
Other external influences likely to impinge on market
opportunities of banks and thrift institutions are the activities of
bank and non-bank credit card companies, of equipment manufacturing
subsidiaries and of wire, short wave or satellite transmission

The primary importance attaching to external forces is

that they are not significantly held in check by the statutory and
regulatory paraphernalia that banks and thrifts must live by.
Internal forces within the thrift and banking industries are
sparked by competitive necessity in most instances but the innovative
efforts of industry leaders are probably more determinative of the
kind of climatic change in prospect.

It would be interesting to

trace step by step the way in which the thrift industry has steadily
moved toward the expansion of its deposit and lending services but I
doubt it would reveal much of which you are not already well aware.


The banking industry has been pushing for broader powers too, most
recently for no differential between banks and thrifts on Individual
Retirement Accounts deposits and for the authority to accept business
corporation savings accounts.
I do want to comment briefly on the status of money transfer
powers for thrifts and banks.

When Congress authorized the NOW account

experiment in Massachusetts and New Hampshire, I doubt anyone foresaw
the impact that it would have— not in Massachusetts and New Hampshire
but in the rest of the United States.
It was not long before non-Yankee ingenuity began offering
package deals involving savings deposits and money transfer accounts.
Some thrifts offered daily interest and transfer on any day by tele­
phone advice into a checking account in a local bank of the account
holder's choice up to bank closing hours.

In response, banks have

advertised, "Open a savings account with us with a $200, $300, or $500
balance and we will open an unlimited free checking account for you
with telephone transfers as needed from your savings account."


this arrangement included other personal-type services, the length
and character of which depended on the intensity of the competitive

Both banks and thrifts have moved beyond the NOW account

As competition for personal accounts increases, several
advantages for consumers are certain to be featured, among them savings
accounts which will, in effect, have money transfer services adapted


to account holders' needs.

The kinds of questions which remain to

be resolved are the scope and variations in terms and flexibility-inuse for such accounts; the nature of thrift access to the existing
clearing system and the universalization of reserve requirements.
It seems to me that all of these issues can be negotiated between the
banks and thrift industries and within a Congressional framework.


fact, I believe a great deal of that negotiation has already taken
place, as exemplified in the proposals for access arrangements for

The most unfortunate prospect from either industry's standpoint

would be a breakdown in communications between them and a failure to
reach an equitable settlement.

In such a case either or both industries

would fail to serve consumer needs and at least some of their functions
would be dispersed to non-depository concerns.
In brief, I am suggesting today that, as bankers, you
ignore the oft repeated advice of Hills Lane to "Think small!"

I do

not do so lightly because Mills is an extraordinarily astute banker.
But I have often known him to think big, too.

To concentrate more of

your attention on the viability of your institution three, five or ten
years ahead is essential today.

The banking climate then will be so

different from what it is today, you cannot afford to neglect facing
a permanent change in the weather.
In the past you may have been able to assume the competitive
climate would be controlled in one way or another so that your opera­
tions would not be buffeted by competitive inroads into your markets.


This is a hazardous assumption for the years ahead.

I believe Nebraska

bankers, for example, faced a concrete problem of this kind— electronic
terminal access— and made a decision looking to the future climate of
their industry.
My final word has to do with the opportunity for smaller

I do not see that size of an institution presents any particu­

lar problem of adaption to the kind of changes in banking climate
I have been talking about.

It is undoubtedly true that economies of

scale and specialization require that some banking operations will
have to be contracted out because of their very nature.


the essential feature of banking, as you well know, is the relation­
ship between the banker and his customers.

Customer allegiance can

be retained by favorable service and cost differentials.

It also

depends, in the case of smaller banks, on a personal touch.
function cannot be performed by any electronic gadget.
use depends on the banker himself.



Its effective