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American Enterprise Institute

Conference on International Competitiveness
In Financial Services

Washington, D.C.
June 1, 1990

Good afternoon, ladies and gentlemen.

It's a great pleasure

to be here again with my friends from the American Enterprise

One of the major problems facing the U.S. financial industry
is the topic you chose for this conference —

our ability to

compete effectively in international markets.

Globalization of business, finance and even politics is now
a fact.

Broad international markets have been developed for

products that were once restricted by geographic considerations.
Increased competition from abroad has resulted in the
restructuring of major U.S. industries.

The U.S. auto industry is a good example.


competition from Japan and Europe radically changed the way the
"Big Three" auto makers do business.

A decade of investing in

new plants and products has created a more efficient industry.
Further, joint ventures and equity exchanges have created a truly
international auto industry.

It's logical for banks, foreign and domestic, to follow
commercial customers into international activities.
certainly the case with foreign banks in the U.S.


And that is

However, a recent GAO report on the European Community says
U.S. financial firms are not expanding —

at least not in Europe.

A majority of the U.S. bank officials interviewed for that report
believe U.S. bank laws and regulations place them at a
competitive disadvantage in relation to banks abroad.


they're right!

The Banking system is outdated and inefficient. It hampers
the ability of our financial institutions to effectively compete
both at home and abroad.

Banks have had to go into riskier business ventures because
their traditional business customers have found new and less
expensive providers.

Banks cannot provide similar services

because of regulatory restrictions.

Thus, we see the recent downgrading of our major
institutions by the rating agencies.

Third world loans, highly

leveraged transaction loans and concentrations in real estate
lending have been the primary cause of this fall from credit

All of the above lending resulted from riskier

activities, sought to replace traditional lending, and the result
is a weakened industry.

Unfortunately, this weakness becomes

evident just as international competition really gets underway.


It is true that certain foreign regulations limit the
ability of our banks to compete effectively. Recent actions by
other governments to modernize their domestic financial systems
will help create a more level playing field.

But even a level

playing field won't help us if we continue to handicap our
players with an antiquated banking system.

In order for our banks to become more competitive, we are
going to have to lower their handicap by adopting a more
efficient financial system.

With proper safeguards in place to

ensure safety and soundness, our financial institutions can
prosper if they are free to attract capital and compete
effectively, at home and abroad.

The position of the FDIC is

that fundamental structural reform of our entire financial system
is necessary to achieve that goal.

We will have to take some positive steps that will require
legislative action.

We can't depend on luck to change our


We believe four basic changes must be made to achieve a more
competitive industry:


First, banking laws that regulate the activities of
nonbanking entities —

primarily, the Glass-Steagall Law —

should be dismantled and replaced with a system that provides
regulation along functional lines.

Other major countries

currently allow banks to engage in a wider range of activities
than permitted by the U.S.


is necessary for our

banks to better diversify risk.

Functional supervision would also eliminate costly layers of
regulation necessary when financial institutions are subject to
the jurisdiction of both the banking agencies and the functional

No other country has such a costly regulatory system

imposed on their banks.

Second, the banks holding company regulatory structure,
designed to achieve separation of commerce and finance
concentrations should be eliminated.

It is not necessary to

protect the financial system from abuse and in fact? the converse
is true.

Commerce and finance should be combined in order to

provide financial resources to the banking system. Our
corporations should be allowed to own banks.

The way our present

system works like asking one Siamese twin to hold the net while
the other twin swings on the trapeze.


Third, geographic restrictions on bank expansion must be

They have contributed to greater risk in the system

because they discourage diversification.

These restrictions

create an inefficient system and should be removed.
have no truly national banking organization.

Right now we

We have New York or

Illinois banks, but no all-American banks.

Finally, deposit insurance must be reformed and the^ "too big
to fail" doctrine reviewed in a global context.

As banks

continue to operate across international borders, we will have to
determine whether the way we handle major bank failures needs to
be or should be changed.

Does the ABA plan for required failure

and loss by uninsured depositors when a big bank fails help or
hurt international safety and soundness?

Does it help or hurt

our competitive position?

Next fall, the FDIC plans to sponsor a meeting of
representatives from the major financial centers around the

We*11 discuss international policies on deposit insurance

and the "too big to fail" doctrine in the U.S. and

As the chairman, Paul Volcker said recently in

an address before The Institute of International Bankers:

"I feel it would be useful if the debate were not confined
largely to the United States.

What will logically be needed is a

broad international consensus on how to reconcile the compelling
need for banking flexibility and competitive force with the
equally compelling needs to avoid contagious and destructive
financial breakdowns and to maintain prudent lending standards."

We agree with Paul and we hope the FDIC sponsored conference
will be the beinning of that consensus.

I'm not certain we'll

find much agreement in the way we view the concept of "too big to
fail" but perhaps we'll all realize

that it is "too big" to


Our banking system needs improvement and needs it now.


it is to be truely competitive in the financial world of

If we make the four changes I've suggested, we'll have

a system that will hold its own with the best.

AEI is the birthplace of many of the best ideas in use in
government today.

I hope this conference spawns some real

winners for the U.S. financial system.
good work and leadership role.

The system needs AEI's

Even if you lead to us to an

agreed solution to improving the system's basic economics,
getting it done politically will still be the challenge of the
90' s.

Thank you