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Remarks By
L. William Seidman
Federal Deposit Insurance Corporation

Before The
Bank Admininistration Institute
Orlando, Florida
October 30, 1987

Good morning:
The Chinese have a famous saying:
interesting times."

"May you live during

must compliment the Bank Administration Institute for your
foresight in planning your annual meeting to occur just as one of
the most interesting two-week periods in recent economic history
draws to a close.
This is a good moment to take "a visionary look at the future of
the banking industry." Why? Because the stresses in the system can
indicate where repairs are necessary and where opportunities have
been created.
I know this brings to mind the stock markets and the future of
the economy, a subject of interest to most of us.
I'm happy to say
that, so far, we've seen no substantial adverse effect on the
banking system from the turmoil.
Since we have more than a normal number of crystal ball gazers
eating ground glass than usual, I'll just give you my two market
1. Will Rogers said, "The way to win in the market is to buy
good quality stocks and hold them till they go up.
If they don't go
up, don't buy them.
2. Perhaps more helpful is the most accurate forecasting tool:
The Super Bowl: In years when the National League team wins, as the
Giants did in 1987, the market finishes higher — this has always
been true.
So the market Dow Jones will be above 1900 at the end of
1987 — prediction not FDIC insured.
up —

When the length of ladies skirts go up, the market goes
they're going up fast now.

Let me now address the subject for today's banking future, what
we can do to improve the outlook?
It seems to me, banking's future depends most importantly on:
° A legislative restructuring of the system designed to provide
fair competition and the flexibility to meet changing technology and
° Bankers developing the quality customer oriented services
needed to meet the challenge of tomorrow's competitive world.

The performance of the US economy and the markets.


First/ restructuring of the laws governing financial institutions.
Evidence of the need for an improved structure is provided by
recent economic history.
Our economy is in its 59th month of
continuous expansion — the longest sustained period of peace time
growth recorded in 133 years.
During this period, the annual growth
rate for commercial banks has been the lowest of all kinds of
financial institutions.
The growth rates of credit unions, life
insurance companies, mutual funds, securities firms, and finance
companies — have all been higher than banks.
Our banks should mirror the vitality of our economy.
It is
clear they are not doing so.
For an insurer like the FDIC, this is
disturbing news because problems in the banking system increase
insurance costs.
The FDIC has just completed a study designed to develop
recommendations to help change these unfortunate trends.
I have
some copies with me if you would like them.
Let me summarize our
conclusions :
We believe banks should be carefully supervised for safety
because today banks are special. First, because of deposit
insurance, banks borrow, at least indirectly, on the credit of the
United States Government.
Second, banks are special because any
threat to the banking system is a threat to consumer services and
savings, the intermediation process, private-sector liquidity, the
payments system and, most importantly, the U.S. economy.
Because banks are essential to our economy, regulation by the
government is necessary.
However, the system also has to prosper to
be safe and sound.
Bank supervisors cannot order prosperity.
can be achieved only if a fair competitive structure is in place
that allows banks to compete and to attract capital.
The objective of any restructuring effort should be to find the
least burdensome way for the government to maintain a safe and sound
banking system.
If the bank itself can be made safe and sound by
supervision, then supervision beyond the bank is neither necessary
nor desirable.
Bank regulation and safety supervision could be
focused on the bank — and on the bank alone.
This leads us to THE PIVOTAL QUESTION: Can a bank be insulated
from those who might misuse or abuse it? Can we create a wall
around banks that insulates them and makes them safe and sound, even
from their owners, affiliates and subs?

We at t h e F D I C believe that such a "safety wall" can be
achieved.I This is a real regulatory supervisory wall# created by
law, not just a "Chinese wall" that is based on internal paper
Supervising conflicts of interest is the key to a real
Based on 54 years of experience, our professional supervisory
staff believes that conflicts can be regulated to ensure the safety
and soundness of the system.
The tools needed for the "safety wall" are only a logical
extension of safeguards that exist today to protect banks from
insider abuse and conflicts of interest.
These tools are identified
in my statement and described in greater detail in the study.
major area of increased regulation is the requirement that the
capital of nonbanking subs be excluded from banks' regulatory
capital, thus requiring such investment to be excess capital
FDIC bank supervisors and bank directors have effectively
safeguarded banks from conflicts of interest over the last 50
Inherent in our banking system is the conflict that exists
when directors of a bank are also borrowers of the bank. Potential
conflicts also can exist in the relationship between a bank holding
company and its subs or affiliates.
In both cases, history shows us
that supervision has been effective in preventing such conflicts
from jeopardizing the system.
While our supervision seeks to protect every bank, we know that
no system is foolproof.
Our goal must be to keep the overall system
safe and sound.
Our experience teaches us that when the rules are
reasonable the great majority of bankers will follow the rules.
Thus, the supervisory challenge in creating a safety and soundness
wa 11 is to identify and restrain the small percentage who will abuse
the system.
The view of our supervisory staff is that with the
right tools they will find most of the small number of abusers.
Thus, they will be able to preserve the system's safety and limit
the cost of failures.
With a better supervisory "wall" in place, direct banking
regulatory and supervisory authority over bank owners and nonbanking
subs and affiliates is largely unnecessary.
A wall would permit the
dismantling of banking laws that regulate the activities of
nonbanking subs and affiliates — namely, Glass-Steagall and the
activity restrictions of the Bank Holding Company Act — and allow
for functional supervision of those nonbanking entities.
This proposal permits nonbanking activities to be undertaken
either in bank subs or holding company affiliates.
There are
approximately 4,500 banks that are not in holding companies.

companies should not be forced to establish a holding company in
order to affiliate with nonbanking entities.
Furthermore, there are
advantages if the bank conducts business thru a sub rather than an
affiliate of a holding company.
Earnings of a bank sub's business
flow to the bank.
"It's heads I win, tails you lose."
If the bank
runs into financial difficulty, the sub can be sold to raise capital
for the bank.
If the sub runs into difficulty, under our proposal
its failure will not impair the capital of the bank.
Congress also should reassess what activities should be
considered "banking" and thus be allowed inside the bank.
believes that at least mutual funds, commercial paper,
securitization and municipal revenue bonds are "banking" and should
be permitted within the bank.
To summarize, the existing governmental framework for banking
mandates inefficiency and reduces competitiveness.
presence should be modernized so that banks can provide more and
better services to customers, at lower costs.
Bank supervision
should be strengthened and nonbanking supervision reduced.
Bankers, regulators, the Congress and the President, must come
together to ensure a new structure is put in place.
The second■requirement for banking to enjoy the future is the
development of customer-oriented services needed for future success.
Winston Churchill said "It is no use saying we are doing our
best, you have got to succeed in doing what's necessary."
This is a subject you will be focusing on tomorrow.
Let me give
you a few comments— which I hope will be useful.
Much of what I say
comes from a new book— Competitors Handbook, which I wrote.
It will
soon be out.
Naturally, I believe it has some useful information
for helping to insure that your vision of the future is a pleasant
Please consider whether the following Competitors Handbook
guidance for setting a strategy can be useful in your situation.

(1) Commit first and foremost to customer-oriented quality service.

The Latin motto over my dean's office at Arizona State
University— sine emptore, nullum negatium— without a customer
you don't have a business, is as sound as any university latin
I've been able to locate.

(2) Know your facts— your costs, your markets, and your people.


The most important thing I learned in three years at Harvard Law
School was, "get the facts, without them, you are helpless."
(3) Build on strength where you find it:
•Your experience
•Your geography
•Your employees
•Your capital
•Your reputation
•Your customers
•Your desire to win

(4) Find a niche or specialize— d o n ’t try to be in all markets in
all ways. Why do bankers so consistently ignore this advice which
is so well accepted in most of American industry?
Perhaps because
they have just begun to fully adjust to the new competitive
conditions created by technological and market changes.

(5) Reward innovation— try something new on a regular basis.
Encourage ideas, reward the good ones, and never penalize those who
try for creativity but don't succeed.

(6) Work as a team — use the team approach to decision- making.
The team approach takes time because it encourages discussion and
It will, however, develop a strategy based on the
commitment of those who participated in its development.
the team needs to be rewarded for accomplishment — not just a few
top people.
All of you know more about running banks than the old Dean does, but
I hope that these ideas on developing a strategy will be useful to
your planning for the future.
On thing is certain, strategic
planning will be a necessity for your vision of the future to be a
pleasant one.
Thank you for the chance to talk with you about these most important