The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
DOING W H A T Y O U C A N Presented by M o n r o e K i m brel President Federal Reserve B a n k of Atlanta to The A l a b a m a Bankers Association M a y 21, 1976 Several years ago, A l a b a m a bankers w e r e giving m e m o r e than the n o r m a l share of headaches that go with a Federal R e s erve B a n k President's job. M o r e recently, though, you bankers f r o m A l a b a m a have gone about your business in such a competent fashion that w e have heard very little f r o m you. So, I a m pleased to see you today, to praise you, and to offer s o m e c o m m e n t s and suggestions which I hope m a y be useful. Only five years ago, s o m e of us in the Federal Re s e r v e S y s t e m w e r e concerned with conjectures that banking in A l a b a m a w a s showing signs of an inability to serve the public adequately. Moreover, A l a b a m a banks w e r e generally smaller than those in surrounding states. T he state's largest banks w e r e really only m e d i u m sized, and they w e r e indeed few in number. E v e n those few, with one exception, could operate only in a single county. Today, however, banking in your state is vastly different. As a whole, A l a b a m a banks have m o r e than twice the assets they had five years ago. T h e average bank has also doubled in deposit size; employs about 25 percent m o r e personnel; and has one and a half times as m a n y offices. Further, there are m o r e than twenty n e w banks in the state, and several banking organizations there are comparable in size to the large organizations in neighboring states. F our of these operate state wide, and the four largest each have assets well in excess of one billion dollars. -2- A n increase in quality accompanied these increased quantities. Nonpar banking has been abolished. Y o u apparently operate m o r e conveniently for your customers than before, because relatively the n u m b e r of banking offices in your state has increased considerably faster than the state's population. Deposits are m o r e equally spread a m o n g banks in m o s t of your local markets than five years ago, despite the growth of large statewide organizations. Your capital-asset ratios have fallen by less than those of banks in the United States as a whole or the rest of the Sixth Federal Reserve District. M o r e than other banks in the United States or the rest of the Sixth District, you have shifted assets f r o m U. S. G o v e r n m e n t securities to loans and to state and local government securities. Yet, your loan losses have remained moderate, and your loan portfolios, as our examiners express it, are very "clean. " A l a b a m a banking has not wholly changed, though, and you are to be congratulated for that. Bankers in your state, on the whole, kept their heads during the swing to "go-go" banking in the early 1970's. Your growth demonstrates that you took advantage of your opportunities, but you did not press your luck or overreach your skill. While in m o s t of your neighboring states the proportion of assets committed by banks -3 - to real estate loans w a s rising, this proportion in your banks remained nearly constant. Your loan losses also rose less than those of your neighbors. Further, you depended less on Federal funds and large CD's for loanable funds. Clearly, all the evidence w e have indicates that while you followed prudent banking practices, you kept alert to opportunities for advancement S o m e could say that because you had fewer opportunities in your state, your good record is a result of a perverse kind of good fortune. W e do not agree entirely with that point of view. W e do k n o w that even the larger A l a b a m a banks concentrated on banking expansion in their o w n backyards, so to speak; while those banks in states w h e r e opportunitie abounded ranged far afield in terms of geography and nonbanking activities The records of these banks speak for themselves. It m a y be that a lack of opportunity played a m i n o r part in your good record; but it's major cause w a s prudent and sound judgment. T he results are here for all to see. you have maintained relative stability. Along with advancement, Alabama's banks have not staggered under the spectacular difficulties that have been the lot of a few banks in other states. Although there have been problems, you have been able to cope with them. Here, let m e say that w e are aware that activities at the Federal Reserve B a n k of Atlanta and in the Federal Reserve System, in general, directly influence s o m e of you. Consequently, a few w o r d s about our -4 - stance m a y be helpful. In m o s t matters of supervision and regulation, Federal Reserve Banks act within a general f r a m e w o r k of goals, procedures, and over sight established by the Congress and the B o a r d of Governors. We attempt to m a k e m o s t decisions at the Reserve B a n k level without recourse to the administrative machinery at the B o a r d of Governors. In supervising banks and bank holding companies, w e follow principles similar to those m a n y of you have followed in recent years: approval of actions prudent and beneficial to the public and disapproval of actions that might lessen competition and endanger banking stability. Our efforts are directed toward balancing these objectives w h e n they are in conflict. In processing applications for expansion of banks, w e take a close look at financial performance. Maintenance of sound, adequately capitalized banking subsidiaries is fundamental to holding c o m p a n y and bank m a n a g e m e n t . Capitalization is still a prominent topic in the published opinions of the Bo a r d of Governors. Therefore, any applications for additional subsidiaries or activities are studied to determine their impact on the strength and flexibility of the parent c o m p a n y or bank. Adequate equity capital support is required for future expansion. L o a n losses, non-earning assets, and w e a k loan d e m a n d have eroded -5- and continue to erode the capital bases of m a n y banks. Capital markets and possibly earnings will have to be tapped not only to replenish capital but to provide support for expanding operations. T h e issue of capital will b e c o m e increasingly important in future applications for expansion. A further concern which grows out of our responsibilities to the public is competition. Directions f r o m Congress in the B a n k Holding C o m p a n y and B a n k M e r g e r Acts m a k e it clear that w e should not allow the dimunition of competition through holding c o m p a n y acquisitions or bank mergers. T h e only instances in which the Federal Reserve m a y approve acquisitions or m e r g e r s that diminish competition are those that will avoid large costs to the public, such as in the saving of a failing bank. Here, there are two related problems that concern us greatly. First, w e allow little latitude for direct competitors interested in c o m bining. T h e B o a r d of Governors has denied only four applications for bank holding c o m p a n y acquisition in Alabama. A m a j o r concern of the B o a r d in each of these cases w a s loss of direct competition if the applications w e r e approved. Second, w e are mindful of our influence on the longer-term development of a state's banking structure. of expansion has g r o w n over the years. Our attention to this aspect Thus, larger organizations that are likely to b e c o m e competitors will have difficulty combining even if they do not compete now. - 6 - A l m o s t fifteen years ago, a majority of the m e m b e r s of the B o a r d of Governors expressed concern with state banking structure in a Florida case, and a similar concern about cases in Tennessee, Maryland, and Texas surfaced m o r e recently. Too, on m o r e than one occasion, a minority of B o a r d m e m b e r s have voiced concern about Alabama's banking structure. O n the positive side, the Federal R e s erve has favored c o m binations of noncompetitors and the extension of bank activities that strengthen banks or add to the quality and variety of banking services offered to the public. Over the past five years, the Federal Reserve has approved m o r e than fifty A l a b a m a holding c o m p a n y acquisitions in which these aspects w e r e dominant. W e realize that you have not always agreed with every one of these approvals. Nevertheless, the evidence is clear that Alabama's smaller independent banks have remained competitive with the larger banks and bank holding companies. I think it is likely that independent bankers m a k e up the majority of this audience today. A n d I a m sure that all of you--in holding companies and out--have had to w o r k harder in recent years to satisfy your customers. Y o u will have to keep on working hard if you are to keep your customers contented and m e e t your competition. Let m e say that competition will c o m e probably m o r e and m o r e f r o m outside the -7- banking industry. N o n bank thrift institutions are m o v i n g through their regulators and through legislatures to add d e m a n d deposits and a broader potential assortment of assets. Recent securities m a r k e t innovations such as m o n e y m a r k e t mutual funds and small-transactions markets for G o v e r n m e n t securities are competing for funds of m e d i u m - a n d large-sized depositors. Large nonbank lenders, particularly c o m m e r c i a l finance mortgage, leasing, and factoring companies, are expanding the range of their services. Several of these have the backing of large banks. S o m e are already operating in Alabama. E c o n o m i c recovery c a m e to A l a b a m a earlier and has advanced further than in other Southeastern states. Only one state other than A l a b a m a in the Southeast presently has m o r e people employed than w e r e employed before the recession began. With your sound condition, you are in an excellent position to help your state sustain this lead. But you will not be able to stand pat. A s an ex-country banker turned Federal Reserve B a n k President, let m e speak of s o m e of the decisions you face. W h e n you design lending policies, include objectives of soundness and liquidity, but do not neglect flexibility to m e e t the needs of your community, state, and nation. Lending for c o m m e r c i a l and industrial development m u s t be supported by c o n s u m e r lending. -8- W h e n you plan goals for asset mix, emphasize activities that can enhance economic development in your area. Participations in loans to national concerns and Federal funds sales have their attractions in maintaining liquidity or producing high yields. But s o m e of these investments provide little stimulus for growth in your o w n region. O n the other hand, dependence on Federal funds purchases and large CD's for loanable resources can be treacherous in certain circumstances. Short- and long-term planning should fully consider the alternative strategies available to you. Planned growth enables an entire organization to react in support of the plan. F o r example, capital planning m u s t include consideration of future positions required to support an expanded level of operations. Agricultural lending d e m a n d s accompanying liquidity m a n a g e m e n t to m e e t cyclical demands. Industrial needs for capacity expansion often require innovative bank financing if growth is to occur. R e f o r m s of traditional lending practices for construction and mortgage loans should be considered as a response to recent experience with con struction lending and to the impact of economic pressures on consumers. D o not overlook technological advances in the transfer of funds. Development of electronic payments m e c h a n i s m s is m o v i n g us toward a "less-checks" society if not a checkless society. Change has been slow, but the days are n u m b e r e d w h e n m a r k e t expansion is synonymous -9- with buying bricks and mortar. A c o m m i t m e n t to the development of electronics funds transfer systems is vital if a bank is to serve its customers and maintain its place a m o n g financial institutions. These days, m a n y bankers are acting as if "slow-slow" banking is the only alternative to "go-go" banking. m u s t share the b l a m e for this. Perhaps Federal regulators T h e regulators have emphasized prudence, urging that present operations be put into order. Their purpose is not to stifle but to r e m i n d bankers w h o m a y have gone out on a limb that they should turn cautious and get an overall view of their opportunities, responsibilities, and abilities. Over the years, changes in banking have caused businesses, consumers, and governments to place increasing reliance on banks. Bankers have a vital role in financing the economic recovery n o w in process. W e m u s t not neglect this role, nor m u s t w e m iss opportunities for the extension of n e w services to our communities. Fail in this and the recovery will be slower and the public will be poorly served. In the future, w e should act as bankers, on the whole, have acted in the past: practice prudence but w e l c o m e acceptable opportunities for advancement.
@FedFRASER