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Remarks of

K. A. Randall, Chairman
Federal Deposit Insurance Corporation
Washington, D. C.

before the

National Instalment Credit Conference

of the


The Conrad Hilton
Chicago, Illinois

Tuesday, March 21,


The Federal deposit insurance system was authorized by
Congress in 1933 during the Great Depression to protect depositors
in banks and to help restore public confidence in our banking system.
At the outset, the Federal Deposit Insurance Corporation was chiefly
concerned with the rescue of failed or failing banks and resumption
of normal banking activities.

The sharp reduction of bank failures

in the years following the Corporation's establishment in 193** clearly
evidences the success of the Corporation's efforts to achieve its
major objective.

Bank failures dropped from **,000 bank closings in

1933 to an average of 5** per year in the 193**-**2 period.


the Corporation's activities were— and still are— considered an
important contribution to economic stability.
By the end of World War II, when the Employment Act was
placed on the statute books, the Corporation's role was viewed
narrowly as one of providing support for the banking system.


gressional hearings in 19**9 conducted by the Joint Committee on the
Economic Report included testimony by the Chairman of the Corporation
that the purposes of deposit insurance were:
"To protect small depositors, to maintain the
confidence of depositors in the banks, to raise
standards of bank management and increase the
soundness of the banking system, and to aid in
protecting the circulating medium. Accomplish­
ment of these purposes would contribute to
economic and financial stability and thus serve
to further the purposes of the Employment Act."

The Chairman also declared that since the Corporation was discharging
these duties in accordance with its statutory authority it was




"making a maximum contribution to furthering the purposes of the
Employment Act . . . ."
The Corporation’s purposes have not changed in essential
respects from those described some

17? years ago, but the environ­

ment in which the Corporation is operating today is significantly
different— and, as a consequence, its orientation also has changed.
The difference can be ascribed in large part to the impact of the
Employment Act of 191*6, which set forth the objectives of maximum
employment, production, and purchasing power.
The Enployment Act was significant primarily because it
symbolized the nation's acceptance for the first time of the role
that the Federal Government and its agencies could play in attaining
the Act's objectives.

Because the goals were phrased in general

terms, moreover, they have not become outmoded with the years but
instead have been broadened to include the objectives of price
stability and steady growth, as well as balance in the nation's
international accounts.

As a symbol of a major shift in economic

thinking, therefore, passage of the Employment Act of 19*46 marked


a strategic turning point in our history.
The recent steady progress toward attainment of the goals
of the Employment Act has broadened our sphere of activities and

The changed environment has necessitated adoption

of new ways of viewing problems and consideration of new ways of
solving them.

The change is one of significant import for banks

and other financial institutions as well as for bank supervisors.

- 3 -

The recent relative stability of the economy at high levels
of employment and production, such as we have today, depends on the
maintenance of full employment levels for its perpetuation.


these circumstances, there is less margin for error in bank decisions
and a greater need for flexibility in bank policies and practices in
order to adapt to an economy operating close to capacity levels.
Even if the problems currently encountered by the banking agencies
are basically unchanged in nature, they are greater in magnitude,
if not also in complexity, with the expansion of the economy and
growth in the size of financial institutions.

The responses of a

bank supervisory agency such as the Federal Deposit Insurance Corpo­
ration to these recent changes in the banking environment therefore
must be more imaginative, more adaptable, and more precisely tailored
to meet the particular situation and to anticipate future problems
than ever before.
The steady postwar expansion in consumer instalment credit
and the recent spurt of activity in bank credit card plans provide a
good example of a development that bank supervisory agencies such as
the Federal Deposit Insurance Corporation face in a constantly changing

As the aims of the Employment Act approached realization,

consumers became less reluctant to assume debt and commit future income
for current consumption.

They developed greater confidence in a con­

tinuing rise in income and employment and in the security of both jobs
and income.

Lenders likewise were more willing to extend credit to

- k -

consumers as fluctuations in economic activity and in personal income
were dampened.

As banks became active in consumer credit financing,

their policies and practices in this area as well as overall trends
in consumer credit were increasingly of interest to bank supervisors.
Over the past 20 years, the dollar volume of consumer
instalment credit outstanding has risen spectacularly from $U billion
at the end of


to almost $75 billion at the present time.


expansion occurred at a rapid yet fairly consistent rate, with only
a few exceptions.
Commercial banks have been a prime factor in the growth
of consumer financing.

Your share of the consumer credit market

has been increasing and now accounts for about half of consumer
instalment credit outstanding.

Moreover, your activities in this

field are more diversified than others extending credit to consumers
and include direct lending to individuals for various purposes, the
purchase of instalment paper from retailers, and the financing of
finance companies' and retailers' receivables.

Commercial banks

were responsible for more than 55 percent of the automobile credit
outstanding at the end of January


about one-fourth of the non­

auto credit, one-third of the personal loans, and 70 percent of the
repair and modernization loans.

Small banks have been particularly

active in auto financing; their auto loans have been rising much
faster than similar loans at the medium-sized and large banks.




Expansion in the volume of consumer instalment credit has
contributed importantly to economic growth in this country.


innovation in the financing of consumer goods purchases has fa­
cilitated substantial improvements in the standard of living for
most of our population, especially the lower income groups and
young married couples just starting a household.

Furthermore, it

has been of great advantage to the smaller retailer and manufacturer.
Of broad significance is the greater flexibility in timing accorded
the consumer in the purchase of "big-ticket” items, which in turn
helps to dampen fluctuations in consumer spending and likewise in
consumer durable goods production.
The postwar upsurge in the dollar volume of consumer
credit can be attributed to a number of factors, aside from the
technical change in payments methods.

Evidence suggests, for

example, that consumers are upgrading their purchases— buying
better quality goods at higher prices.

New demands have emerged

for high-priced goods such as mobile homes and boats and for
services such as travel and educational expenses.

In addition,

the financing of services on an instalment basis has more than
doubled in the last five years--a growth rate greater than for
any other type of consumer instalment credit.

The increasingly

widespread ownership of automobiles--the hallmark of an affluent
society— has further added to the consumer credit totals.


most important have been the increased willingness of consumers in




the postwar period to incur debt and the proliferation of institutional
facilities to extend consumer credit.
Since late 1965, the rate of increase in consumer instalment
credit has slackened to same extent.

There has been some weakening in

the demand for consumer credit as well as some diminution in the
availability of loanable funds.

The generally higher cost of money,

however, was not fully reflected in consumer credit costs and there­
fore had only a minimal effect on the demand for consumer credit.
Mach of the current weakness in the demand for such credit may be
ascribed to the slower pace of auto sales.


The recent behavior of Consumer instalment lending has
prompted questions about its impact on consumer spending in par­
ticular and on economic activity in general.

Once again, questions

have been posed with regard to the aggregate volume of consumer
instalment credit and its sustainability.

To be sure, the tapering

off in the demand for automobiles is not wholly unexpected after
three consecutive record sales years.

Viewed in perspective, the

fact that consumer instalment credit extensions and therefore con­
sumer spending were less buoyant was not a wholly adverse develop­
ment since our economy had been operating for a prolonged period
close to capacity levels.
Looking at the level of consumer instalment credit over a
longer period, there is little to indicate that the present levels
of consumer debt are excessive or that the economy is approaching

- 7 -

a ceiling for this type of credit.

The ratio of repayments on consumer

credit to disposable income rose to a postwar high of lU.5 percent in
the first quarter of 1966 but subsequently eased to lU.3 percent by
the final quarter of last year.

However, the decline in this ratio

since early 1966 can hardly be viewed as evidence of credit saturation.
No doubt a number of consumers have incurred progressively
heavier debt burdens over the years.

But there has also been a sig­

nificant increase in the number of consumers making commitments for
the first time.

For example, the number of households under 25 years

of age has been steadily rising.

Biis is the age group where the

need for consumer goods typically exceeds ability to pay out of
current income and where there is the greatest use of instalment

In addition, changes in forms of payment, such as the

substitution of instalment credit for the more traditional forms of
financing, were also a factor.
Within the field of consumer credit, a relatively new
development has lately been attracting much of the attention of
banks and bank supervisory agencies— bank credit cards.

A number

of banks in the Midwest are currently engaged, for example, in intro­
ducing credit card plans to the region.

In addition, there are other

banks in the area working on a cooperative basis with others in the
development of nationwide interchangeable credit card systems.




The credit card plans in effect have a large number of
variants, which I will not take the time to describe.

But they

can be roughly classified into bank credit card plans, check-credit
plans, and what might be termed the overdraft -travelers' check plan.
All these plans differ as to details, organization, and geographical
coverage, but they all generally feature granting of a line of re­
volving credit to the consumer.

The bank credit card plans, in

addition, involve financing of the merchant retailer.

The plans

are local, regional, or national in coverage.
Bank credit cards, however, are not a brand-new develop­

The first bank credit card plan was introduced in 1951*


subsequent history of bank credit cards is checkered and their
development proceeded in "fits and starts," with brief periods of
renewed interest in 1953 and again in 1959»

Many of the banks

that entered the field in those years dropped out because of un­
favorable experiences.

High start-up costs for equipment, personnel,

and advertising; inability to sustain losses in the initial years of
operation; and inadequate advance planning also took their toll.
In 1965, however, bank interest revived, and the number
of banks adopting plans grew rapidly.

Improved profit prospects

due in part at least to the cost-reducing potentialities of a com­
puterized operation--have probably been the major factor in the
resumption of bank activity in this area.

At the present time, it

is estimated that there are around 1,000 banks with some type of




credit card arrangement; about three-fourths of this total is
concentrated in the four-state region of Illinois, Michigan,
Indiana, and Wisconsin.
Of greater significance than the details of individual
plans are the implications that bank credit cards and related plans
hold for the economy as a whole, for the financial system, and for
the payments mechanism.

Bank credit cards are also of obvious con­

cern to the supervisors of financial institutions, the consumer, the
retailers, and, of course, the banks themselves— whether or not they
establish or participate in a credit card plan.
The bank credit card has been hailed as the forerunner of
the checkless and cashless society of the future.

Whether the present

plans will actually evolve in that direction remains to be seen.


payments mechanism of the future could develop an entirely different

Since that possibility does not seem imminent, we

might more profitably concern ourselves today with some of the
immediate problems and practical ramifications that confront the
bank supervisory authorities in the spread of bank credit card plans.
I am not going to attempt to offer solutions but only pose questions.
The answers will require careful thought and more experience.
Bank credit cards can have an impact, for example, on the
proportion of consumer spending based on credit and on current patterns
of consumer spending and saving.

More purchases might be made on

credit and more of current income spent.

As a consequence, personal



savings patterns could undergo some basic changes, and the flow of
individual savings to financial intermediaries could be sharply

Bank financing of business might be adversely affected

if the traditional avenues for channeling funds from individuals to
business through the intermediation of banks are disrupted.


policy actions, moreover, would have to take into account the pos­
sibility of offsetting actions by credit card holders to credit
The use of bank credit cards also has broad implications
for an individual bank's competitive situation vis-a-vis other banks
and those nonbank financial institutions offering consumer credit

Success of bank credit cards and related plans could

divert an increasing share of the consumer credit business to banks
and thus strengthen the competitive position of banks in this ex­
panding field.

On the other hand, the profit potentialities in the

credit card area have already encouraged nonbank credit card plans
to establish Joint ventures with banks, while some of the large,
diversified businesses with substantial retail and financing
activities may also decide to enter the credit card business
Further development of the credit card business could
result in significant shifts in the composition of bank loan port­
folios, with consumer credit increasing in importance.

The inter­

changeable card systems that utilize correspondent banking



relationships--as here in the Midwest— could also have important
implications for bank structure.

These possibilities indicate

just a few of the broad industry issues and the financial rami­
fications posed by credit card plans for bank supervisors.
The operations of an individual bank may be significantly
affected by its participation or nonparticipation in a bank credit
card or related plan.

For a bank contemplating participation in an

existing plan or establishment of its own credit card plan, the
decision should be based only on a careful consideration and assess­
ment of « n

factors involved.

Costs must be weighed against the

benefits that the bank expects to realize from introduction of a
credit card plan.
Bank management must make a number of major operating and
policy decisions.

In the first place, are the bank's customers—

both actual and prospective— receptive to the introduction of bank
credit cards and in need of additional credit facilities of this

Past experience indicates that a large volume of transactions

is needed to support a profitable operation.

If pressures to achieve

a volume operation are too great, there is some danger of a deterio­
ration in credit quality.
Secondly, is a credit card plan essential to the bank from
a competitive viewpoint alone?

The larger the number of competitors

engaging in the bank credit card business, the smaller is the com­
petitive advantage of any single institution.

Nevertheless, promotion

of this type of activity could divert substantial credit business
from large retailing firms that currently maintain their own credit

Such an outcome would be somewhat similar to the

situation that developed when banks successfully introduced the
large, negotiable certificate of deposit and attracted a sizeable
volume of corporate funds away from the money market.


business could be developed also from a shifting of a larger pro­
portion of a small retailer’s sales to a credit basis.

One by­

product would also be the opening-up of new sources of bank income
and increased potential markets for sale of other bank services.
Competitive pressures "to keep up with the times" could
overwhelm a smaller bank especially and lead to its involvement in
a credit card plan before it fully realized the extent of the costs
and burdens assumed.

Therefore, it is most important that a

detailed review of the pros and cons of bank credit cards be
undertaken before a decision is made.

Will the bank, for instance,

be able to bear the heavy start-up costs in terms of equipment,
personnel, and advertising needed to launch such a plan?

Is the

institution able to sustain losses for several years until the
break-even point is reached?

On the other hand, franchises should

not be purchased merely to forestall competition.
Not only must these initial decisions be made, but bank
management must remain aware of many other important implications
of bank credit card plans for bank operations.

A bank, for instance,

- 13 -

might be able to estimate fairly accurately the maximum potential
demand for credit under its credit card plan, but the use of these
credit facilities could vary sharply from month to month as well
as seasonally.

Consequently, a bank’s liquidity requirements

might have to be modified to accommodate possible new demands on
its liquidity position.

The intensity of usage could also vary

inversely with changes in monetary policy as more holders use their
credit lines in a period of credit restraint, thus adding to pres­
sures on a bank.

Because the profitability of a bank credit card

operation depends, moreover, only on the spread between costs and
income without the added mark-up which is available to the retailer,
a bank has a narrower margin in which to absorb credit losses.


credit standards are therefore even more important for banks than
for retailers offering consumer credit.
Bank credit cards and related plans hold both premise and
pitfalls for banks.

Greater stability of consumer spending through

the spreading out of consumer purchases over time has undoubtedly
contributed to economic growth and to a more dependable yet expanding
demand for bank credit.

Although there are risks in moving into the

credit card field--as in any new venture, the opening of this market
to banks appears to offer increased opportunities to serve the con­
venience and needs of the public.

It offers new challenges as well

as new problems for banks and bank supervisory agencies.

- Ik -

No matter what the problem or the challenge--whether bank
credit cards, consumer credit in general, or some other development
in the financial sector— the imperatives of the new environment
necessitate a continuous re-examination of old policies and practices
by banks and bank supervisors.

The banking industry as well as the

supervisory authorities must be willing to consider new policies and
approaches and to abandon or modify old policies and practices when
deficiencies are discovered to exist.

Only through such a continuous

selecting and sorting process can worthwhile financial innovations
be tested for their value in the further development of our financial
The responsibility to initiate innovations does not rest
with bank supervisors— but with bank management.

As bank super­

visors we do not want to inhibit innovation, but it is also our
clear duty to indicate to banks the difficulties as well as the
opportunities as they enter new fields of activity.