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rwiT.T.ttMCKfi vnw Prrnt.Tff p o t .t c v IK FINANCIAL SYSTEM Remarks b y John P. LaWare Member, Board of Governors of the Federal Reserve System at the Atlanta Federal Reserve Bank Conference on The Banking Industry: Preparing for the Next Decade Atlanta, Georgia Thursday, December 8, 1988 — They are many — Several touched on yesterday and today ~ Among those which come to mind Industry consolidation , Operation of securities markets . Deposit insurance reform or restructure , LDC debt . Unfriendly takeovers 1992 European Economic Community integration . General issue: Deregulation vs. reregulation . Glass-Steagall revision . Debt: LBOs, takeovers, equity credit lines . States rights — Ambach decision. . Too-big-to-fail doctrine Reg Y 2 Federal Reserve doctrine of source of strength ! — Can't take them all — let's talk about a few. . Operation of securities markets. October 19 — Confidence vs. suspicion — Knee-jerk — needs more regulation to wit circuit breakers — limits on programmed trading — margin requirements — Do any restore general confidence — Do we run danger of exporting our capital markets because our operations are too restrictive . Deposit insurance reform — too big to fail — Heard a lot about yesterday — Won't revisit whole issue but two aspects touched on yesterday need comment from a public policy point of view. 1. Rapid cancellation of insurance . Reason would be examination result , Result would be a run and bankruptcy. Public policy questions . What happens to depositor? . What principle of insurance practice is involved? — Burning house — No alternative supplier Is this good administration of an insurance 3 program or a way of liability avoidance which leaves innocent depositors unprotected? In order to punish a wayward institution are we stranding the depositors w e were intended to protect? Wouldn't better supervision with more timely cease and desist orders and stronger capital requirements be a better way to go. Consistent with original intent of funds? Higher premiums for higher risk. 2. Second issue is much maligned "too-big-to fail" doctrine. Philosophically any institution has a right — maybe a duty to fail under certain circumstances. — But is that really valid regardless of the consequences. Again we seem to be intent on punishing managements and shareholders — but what are consequences to others innocent of any complicity and perhaps several times removed. Continental failure would have impaired dozens of correspondents, and seriously undermined confidence in whole system. 4 Should we have taken that risk to satisfy our moralistic scruples? Purpose of insurance to supply stabilizing element in times of stress. . Unfriendly takeovers — Very few so far in banking Most notable Bank of New York - Irving — Should safety net justify exemption or special treatment for banks? — What circumstances would justify intervention by regulators in free market function? 1. Safety net is basic rationale for regulation. 2. Regulation designed to assure safety and soundness — therefore only effects which threaten safety and soundness can be basis for internveiton. A. Resulting combination doesn't satisfy established criteria for approval. B. Fight is so costly to one or the other or both as to impair viability. C. Diversion of management time, energy, and attention threatens current operations. Tricky. — Is banking so special and so central to the 5 economy that it should be quarantined from unfriendly takeovers? Glass-Steagall revision or repeal. — Competitiveness of U.S. banks — do they need broad security powers to be competitive in U.S. markets — world markets? — What are public benefits? — Lower cost services? — Better access to capital markets for small companies? — Lower interest costs for municipalities? — Greater convenience for investors — What are possible drawbacks? — Greater risk to banking system - Boyd — Incompetence of bankers to manage — Access of investment bankers to banks and payments system — Who will regulate? — Functional vs. unitary — What organizational structure is best — Separate subsidiary of bank holding company — Separate bank subsidiary of investment firm — Does investment firm become a bank holding company — What kind of capital requirements 6 — Firewalls — How thick — do they defeat the purpose — do they include prohibitions on cross selling Regulation Y — States Rights — Ambach decision — Court - 4(c-5) - Controller State approved subsidiares of State chartered banks in B.A.C. — Expedited consideration
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