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Remarks of
K. A. Randall, Chairman
Federal Deposit Insurance Corporation
before the
Annual Convention of the
Nebraska Bankers Association
in Lincoln, Nebraska
May 13, 1966

It is a pleasure to meet with you here in Lincoln and to participate
in your annual convention.

I

value this opportunity to discuss with you our

cordon interests and to talk to you about your aspirations as well as your
proteins and your plans for the future.
Because of the Corporation's responsibilities in the field of bank
supervision and in light of my own background, my interest in the impact of
current economic developments on banking practices and on your operations is
obvious.
and

Banks all across the country are broadening their loan portfolios

jqpanaixig the range of their services to meet the demands of a growing

economy.

The banks of Nebraska have kept in step with the times.
i>anks in all parts of the country today must look beyond their own

State and region to the national level because of the growing interrelation­
ship of financial markets and the pervasive influence of national economic
developments on regional economies.

The United State~ is in its sixth

consecutive year of general business expansion, the longest such period in
peacetime history.

Banks have played an important role in this unprecedented

economic growth and have proved highly adaptable to the changing circumstances.
As our economy continues to expand, this process of adjustment and adaptation
aust also continue•

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In the first quarter of this year, gross national product rose to
a high of slightly over




71^ billion dollars.

The productive capacity of

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our factories is currently being utilized at levels approaching the preferred
rate of 92 percent on the average, and the overall unemployment rate has
reached and fallen below the long-sought U percent interim target.

Almost

one million persons have been added to nonfarm payrolls since the end of
1965.

To date, the growth of the economy has been we}.! balanced.

It is

a balance we do not want to endanger and a growth we do not want to check.
The economy is experiencing some upward price pressures, but their
persistence depends on a number of imponderables.

The jobless rate is still

high for certain groups in our labor force that might be drawn into productive
employment, and few industries are operating above desired levels.

The

additional demands on output and manpower that might stem from the Vietnam
conflict, moreover, cannot be anticipated with any degree of certainty.

Some

of the strong expansionary forces could moderate as the Federal Reserve’s
credit restraint measures begin to take hold and as the recently enacted
wax measures and the increased Social Security deductions hold down income
growth.

New plants and new workers \fill add to supply capabilities.
Because the economy is operating close to full employment levels,

however, the margin of maneuverability has narrowed.

Financial institutions

are discovering that they have less leeway to respond to the credit demands
of the economy.

There is more intense competition for savings.

Banks are

finding their ability to satisfy private credit demands hampered by declining
liquidity.

They are also being called upon to fill a larger proportion of

the nation's credit requirements as more of the credit demands shift toward
banks.




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The situation represents a clear challenge to bank management.

The

margin of error that can be tolerated in bank management decisions is
necessarily smaller.

There is greater responsibility placed on management—

on its ability, understanding, and imagination.

The challenges that we face

provide a test of the inherent strength of our banking system and its capacity
to continue to grow and to sustain balanced economic expansion at high levels.
To a significant extent, a continual shifting of demands from sector
to sector and between various financial institutions is typical of a dynamic
economy— and can be intensified by the economy’s international responsibilities
But banks have also been able to strengthen their ability to supply a rising

share of credit demands through the development of diversified lending
facilities and services, supported by the liberalization of maximum rates
payable on time deposits.
the average of

As a result, commercial bank credit has risen on

8-1/2 percent per year since the end of i960.

It has accounted

for over one-third of the funds supplied by the credit markets in recent years,
compared to one-sixth in the immediate post-Korean period when credit demands
were also strong.

This higher rate of bank participation in the credit

markets can only be maintained as long as banks can satisfy efficiently the
financing requirements of the economy.
The increase in savings deposits and time deposits in banks in
recent years has been an important factor in enabling banks to expand their
operations.

But competition for savings among financial institutions has

become' much more intense, as we all know.

It therefore is essential that

banks compete effectively with other financial institutions for savings and
make maximum effective use of those savings--without losing sight of the princi
pies of prudent bank management and service in the public interest.




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A new element that must be taken into account by banks is the
significant change that has occurred in the nature of the savings market
over the past several years.

"Savings” are no longer the homogeneous balances

held by individuals and businesses in the form of savings and. time deposits
to provide the owner with some protection against unforeseen contingencies
or a means of accumulating funds to finance major expenditures.

"Savings"

held in various types of time deposits now include a substantial volume of
corporate funds, formerly Jield in inactive demand deposits, that are essen­
tially short-term balances seeking temporary employment.

This altered charac­

ter of time money has made time deposits as a whole more sensitive to changes
in interest rates.

As a result, savings funds in financial institutions have

become more volatile as they have become more responsive to interest-rate
differentials— shifting between various short-term assets in search of the
h_gnest yields.

In addition, banks are now finding that they have to aeapt

to a slower growth in these corporate idle balances— as corporations
increasingly draw on these balances to meet their own sizable credit
re quir ement s *
Mobilization of these idle short-term balances by banks as a
source of loanable funds was accomplished primarily through the introduction
of' large, negotiable time certificates of deposit and supplemented by the
use of repurchase agreements with corporations, the issuance of unsecured
notes, and similar innovations.

As a consequence, our financial resources

have been more fully utilized.

More recently, smaller denomination savings

instruments have been offered by a growing number of banks to attract the
interest-sensitive funds of smail severs*




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The advantages and disadvantages of many of these innovations are
still being discovered.

Until they have been fully' tested and their value

proved, each of them should be used with caution.

The unwise use of small-

denomination savings instruments, for instance, could, create numerous problems
for the unwary bank— whether large or small.
To develop more information in this vital area, the FDIC and the
Federal Reserve are simultaneously conducting surveys on the nature of the
market for various types of savings instruments— including rates, maturities,
and other terms.

The two surveys together include all insured commercial

banks, which are being requested to complete the questionnaires by May

18.

We hope to publish aggregate figures for all of the banks participating in
the survey as soon after the deadline date of the survey as possible.
At this time, banks might also undertake a réévaluation of
credit and investment policies that might be heavily dependent on a continuing
inflow of corporate balances— in light of these recent changes in the savings
market.

To avoid disruption of lending and investment policies, the liquidity

of banks may need to be strengthened to resist more effectively the variations
in savings inflows.

A determination of the proper balance between liquidity

and the maintenance of asset yields which will compensate for higher cost
money must take into consideration all relevant factors.

As a longer range

policy, dependence on these corporate idle balances, which have constituted
an important source of growth for financial institutions in the recent past,
might also be reduced.

These are but a few of the basic management decisions

that must be made in the present environment.




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Corapetition for loanable funds, in any event, should be determined,
as always, by the bank's ability to utilize those funds productively and
profitably.

Even those banks currently facing strong demands for credit must

exercise selectivity in extending credit for productive uses.
for loanable funds

The competition

should be pursued with full cognizance of the cost

burdens entailed, the possible volatility of the funds, the relative scarcity
of high-quality investments, and. the overall impact on the economy of
additional injections of credit.

This is a time for bank management to take

an objective look at the quality of loan portfolios and at the nature of the
funds being used.
These are interesting and challenging times.

In many respects,

the situations facing us are unique— and past experience provides only a
few guideposts to go by.

But the stakes involved are high and well worth

our extra efforts— sustainability of economic expansion, reasonable price
stability, and continued high rates of utilization of our plant and manpower
resources.

The banking community has responded with a high degree of states­

manship, Imagination, and responsibility.

Congratulations for a job well done.

New challenges, however, lie immediately ahead and call for
continued alertness.




But I am sure you will all rise to the challenge•