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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

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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

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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.

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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

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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

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—

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