The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
TOWARD A MORE EFFICIENT FINANCIAL SYSTEM Remarks by MARK H. WILLES President Federal Reserve Bank of Minneapolis at the Montana Bankers Association 7^th Annual Convention Big Sky, Montana 3une 23, 1977 Introduction I am delighted to be in Montana again. trip here in two months since Reserve Bank of Minneapolis. This is my third I became president of the Federal That should give you some idea of how important I think Montana, her people and institutions are. My visits here have helped me to understand why you are all so proud people are of your equally state. The delightful. and gracious to me, scenery Everyone is fantastic, and the has been very friendly and considering some of the things that have been attributed to me in the press, your kindness has been all the more impressive and welcome. Even though I was born and raised in Utah, since I have spent the last 18 years in New York and Pennsylvania, people tend to assume that I have a rather particularly of agriculture. something about the farm jaundiced view of the West, and Perhaps that is why every time I say sector of our economy, there is a tendency to misread my statements and my intentions. Consequently, me to do today is to refrain from saying anything about agriculture. I am very I am concerned, deeply interested farmer or probably however, rancher. in, and that the you should sympathetic In addition, safest for understand toward, I think thing that the plight of there is an the important issue involved that has implications for the relationship between the Federal Reserve and banks. comments about agriculture. So I would like to make a few brief Let me begin by referring earlier this month headline: number of headline. in a Montana newspaper "Farmers not hurting, people to an article were that appeared that had the following says Minneapolis Fed chief." understandably upset when they saw A that And so was I, for it did not accurately reflect what I had said nor, for that matter, that followed. what was contained in the article What the article did say, and what I had said, was that: 1. Montana farmers and ranchers are in better shape year 2. than they had been earlier in the (because of the "miracle" of rain). Relatively having few farmers critical their to and us most they accommodate the farmers ranchers and ranchers difficulty operations, reported or are financing banks are financial without have able to needs of too much strain. Neither of these statements was intended to imply that I don't think farmers and ranchers very difficult situation. prices and drought, must really In in Montana and elsewhere the face of rising costs, lower there is no question that many in agriculture struggle. To say that some rain and accommodating bankers make the struggle a little less severe in no way that the struggle is not very hard. great admiration for those who strive so hard to do so. 2 implies I doubt very much that I could survive under these conditions as a farmer or a rancher. face a I have But I hope to do more than stand on the side and admire. like to see our Bank play a more farmers and ranchers find lasting, I would very much constructive long-run role in solutions helping to their problems. More Dialogue with Banks One of the lessons I learned from my recent experiences in Montana plete — is that I personally must do a better — job others. of my It also occurs to me — to make today — better communicating job bankers — and intentions to and this is the main point I want that we in the Federal Reserve System need to do a of and thoughts a more com communicating we in turn our might ideas profit and from intentions more to open and continuous communication from you. For example, Fed often appear to I have been told that actions taken by the be very abrupt and arbitrary. That is unfortunate, because I really think it is fair to say that a great deal of careful thought and analysis goes into our decisions. I'm afraid that once a decision is made, explain it to those who are affected we sometimes Yet fail to in such a way that they can understand and even support what we are doing. At the Minneapolis Fed, we are going to try very hard to improve in this area — to communicate with you clearly, completely, and early so that you can have a full understanding of what we are doing — is appropriate — time to prepare so you can impact on our decisions where that and for so you changes can have that we must world. the maximum possible 3 all make lead in a dynamic The Future World of Fed Services In that spirit, I would like to spend a few minutes today taking a look into the future at some possible changes in the service relationship between the Federal Reserve and banks. The things I discuss may never take place the way I outline them, but I want to explore with you some things that could have a significant impact on how you conduct some parts of your business, especially in your relationship to us. opportunity to impact on I do this now so you can have maximum the decisions that are ultimately made and to plan your own adjustments to changes that could take place. It's no surprise to you when I state that banking become an increasingly dynamic and competitive business. Montana, as elsewhere intermediaries away at the in the markets and profits banks themselves are competition among themselves. For two California weeks to other Here in financial including credit unions are aggressively chipping commercial Montana nation, has ago, handle I learned some of commercial engaging example, of financial the banks. in more during my effort services And fierce visit to in of a bank for a Montana retailer that are currently being handled by a Montana bank. This kind of competition, coupled with the tremendous amount of experimentation and innovation currently taking place in the development of electronic and other kinds of banking services, is all very good for those consumers and businesses that must buy banking services. But it makes commercial bankers. 4 life difficult indeed for The question, then, is how can banks and the Fed best work together to best meet the needs of both bank customers and the banks themselves? To explore that question, let me lay out several assump tions or principles about which I hope we can all agree. First, it competitive banking is in the public system. interest to have a highly That is true because we can rely on the forces of competition to help insure that bank customers have access to the widest possible set of services at the lowest possible cost. Second, ment where therefore, we want to create a banking environ competition among banks and between banks and other financial institutions is keen and widespread. But third, we don't want competition to significantly impair the soundness or safety of our financial structure. have very emotional severe disruption People feelings about their financial accounts, to the financial sector can cause and unfortunate economic consequences on a widespread basis. Fourth, significant role services growth. in we must depend on the banking system to play a in the provision of payments, addition Therefore, to helping finance savings and other economic activity and banks must be able to earn sufficient profits so that they can perform their services effectively. Finally, fifth, we should ensure that all participants in the financial arena operate under sets of rules that are fair and equitable, so that no one group advantage at the expense of another. 5 has an unfair competitive As these them I said, assumptions out, I think we could or principles. because I think they And can find it broad is help agreement important guide us to through on spell some difficult decisions that will have to be made in the days ahead. Nationwide NOWs Let me cite a current example of how I believe a clear recognition of the above principles can help actions should be taken. us all decide what There is much debate at the moment about whether or not Congress should authorize nationwide NOW accounts. Many banks are having out on that issue. a difficult time deciding where And yet, given the principles outlined above, the basic decision is really quite simple. more financial accounts. institutions intent and effect. I'm transfer sprouting up individuals all to and over make above — share-draft the equity of treatment of offering are course, type country. payments those but they referring, interest-bearing accounts. and already like NOW accounts, telephone outlined are First of all, more and They may not be called NOW accounts and operate exactly they come In (directly they may not very to NOW-like similar the payments essence, or in numerous that are they allow indirectly) from Given this fact, two of the principles having among to do with financial promoting competition institutions — make it clear that some form of national NOW account legislation should be passed. Such legislation would allow more institutions to compete directly with each other in providing that kind of service. is clearly would to the advantage also allow all of the institutions 6 consumer. The That legislation to compete on an equal, or at least substantially advantage simply equal, of commercial be taken away by basis. banks, And for other that is otherwise, financial clearly the to the business will institutions which are already authorized or which would likely be authorized to provide that type of service. So for commercial banks, it is not a question of whether such services will be available to the public. Instead, it is simply a question of whether or not banks will be able to provide the service under conditions or terms similar to those faced by other financial institutions. Now of course these terms are critical, for they will not only determine the competitive balance among financial insti tutions, but they will also determine the ability of banks to make a fair profit, thereby ensuring their soundness and vitality which are required by the other principles I outlined. that all commercial bankers would actively So, I would hope work to shape and promote some form of national NOW account legislation so that they can help ensure that the interests of consumers and the banks are both protected. Access and Pricing There principles difficult are other outlined above issues. remainder of my talk The one examples could help I would of us like how adherence see our way to focus on to the through for the is that complex set of questions concerning what services and upon what terms we in the Federal Reserve should supply services to banks and other financial nonmember banks and thrifts clamoring 7 to get institutions. into our ACHs, With and with some member banks clamoring to get out of the Federal Reserve System, the question of Fed services has taken on some very critical dimensions. Harking back to the basic principles I outlined earlier, however, certain things seem to fall into line. For example, if all financial institutions should allowed to operate under essentially the same ground rules, be then all financial institutions should probably have access to services provided by the Federal Reserve. very strongly, for B u t , and I want to emphasize this access should be on the same terms and conditions everyone. No institution should have to pay more than any I have not other institution for the same service. There thought of may well perhaps be some alternatives that someone here will write and let me know — but after a great deal of thought and study, I can really only see one way to ensure that all institutions are treated fairly in terms of access to our services, and that is for us to pay interest on whatever required reserve balances are held with us, and then charge on a use basis for the services we provide. The absolutely current payment essential inequity of in pleased would that allow problem. the us my between inequity has gone on for interest view, member to begin if in a has required we and too long and administration on are to nonmember reserves eliminate banks. is one reason why now introduced substantial way to is the That I am so a bill that rectify that Since that provision will not harm nonmember banks and 8 will appropriately banks, I would reduce hope that an undesirable all bankers position would work for hard member for its passage. The issue of pricing Federal Reserve services is more complicated and more controversial than the payment of interest on reserves. And yet, according to the principles we have been using in our discussion today, it is equally important. appropriately price our services, If we were to two things would happen. First, banks and other financial institutions would only use as much of our services as they really need. We might well find that some of our services are in greater demand than others. Consequently, most needed demand to the we would expand our provision of services which are and contract is small. our This would advantage of both provision of services where the improve the allocation of resources the financial sector and the general public. Some changes might ask in services now. why we don't The answer just make those is that without kinds of charging a specific price for a given service, we can't really tell how much of that service is really needed someone will pay for it) (as evidenced by the and how much fact is just used because that it is available. The second thing that might happen, for services, is that we might if we were to charge find that the private provide some services at a lower price than we can. happen, you would buy those services from other sector can Should that banks or other institutions, and we would then drop out of that line of business. 9 I'm not sure that such an occurrence is very likely. We are really quite efficient producers of services and are getting better the the time. For example, output per man-hour in all Fed's measurable functions increased by almost 12% in 1976, following an increase of 6% in 1975. Those numbers are considerably than what was accomplished on average by private those two years. great vigor, better industry during The Fed is pursuing operations improvement with for we feel we have a responsibility to provide our services in the most effective and efficient way. But, things with if the it should turn same quality at out that lower cost, someone else then is it can do in your interest and the public's for others to supply the service. That way you get the service at less cost, which would obviously be to your benefit and that of your customers. Under a pricing system, you would have the flexibility to choose the best possible source for what you need, and competition would work to keep the cost as low as possible. Summary What I have tried to say today can be lot of member line of communication summed follows: 1. Montana has want open an a you. You are important to us. keep you better informed share your ideas with us. 10 banks. and We with We want to have you up as 2. With the way the world is changing, we seem to be moving rapidly into an era when financial arrangements explicit and financial because e.g., equitable. it is reserves services — right. to be Equity institutions explicit achieve need is among required Explicitness — payment of interest and explicit charging is required in equity financial and more in order institutions on for order to to give all the maximum freedom of choice. The little choppy challenge road for squarely, ahead is going bankers and however, the to be challenging Fed. If we and even both face a the I'm convinced we can end up with a financial world that is not only different but better than the one we have today. And who knows, with your help, to get back into the good graces of farmers. 11 I may even be able
@FedFRASER