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THE BANKING ENVIRONMENT OF THE EIGHTIES Rem arks to 1980 C re d it C onference o f th e Tennessee B a n ke rs A ssociation N a s h v ille , Tennessee F e b ru a ry 12, 1980 by Monroe K im b re l, P re sid e n t Federal R eserve B ank o f A tla n ta T he tu r n o f each new decade b rin g s th e upcom ing ten y e a rs . a spate o f com m entaries on Maybe it is tim e ly to e xp re ss some view s on th e fo rce s th a t w ill a ffe c t b a n k in g . A lth o u g h n o t new , these fo rc e s c le a rly w ill b rin g one o f th e most tu r b u le n t decades in o u r h is to ry fo r b a n k in g . In fla tio n and th e Economy T he E ig h tie s w ill be c h a ra c te riz e d b y a c o n tin u a tio n o f o u r Num ber One economic problem — in fla tio n . D ire c t e n e rg y costs alone have become a massive in fla tio n a ry fa c to r, and th e y g e t w orse w ith each m eeting o f OPEC. T he d ra m atic increase in th e d ire c t cost o f e n e rg y has se riou s economic and social im p lica tio n s. H ig h e r o il and gasoline p ric e s a re d iv e r tin g consum er e x p e n d itu re s from o th e r goods and s e rv ic e s . T h is s h ift in sp e n d in g also d im inishes th e sa ving s p o te n tia l o f o u r c itiz e n s , w hich in tu r n reduces th e flow o f in ve stm e n t in o u r in d u s trie s . T he social im p lica tio n s from p ric e actions b y OPEC also c a r r y p o te n tia l economy im p acts: low income persons are a ffe c te d most s e v e re ly , and g o v e rn ments d evise p rogram s to o ffs e t some o f th e e ffe c t on th e ir incomes. A ls o , p rogram s designed to develop a lte rn a tiv e sources o f e n e rg y call fo r increased levels o f g o vern m e n t sp e n d in g . T h is could have an u n fa v o ra b le im pact on domestic p ric e s d e pe n d ing on how th e sp e n d in g is fin a n c e d , and w h e th e r th e program s are s u cce ssfu l. C oping w ith an in fla tio n a ry economy w ill s u re ly be th e challenge o f th e E ig h tie s fo r Federal R eserve p o lic y m akers. T h e measures we to o k on O ctob e r 6 w ere designed to e s ta b lis h c r e d ib ility in o u r c o n tin u in g d e te rm i n a tio n to combat in fla tio n a ry p re s s u re s . Federal R eserve a u th o ritie s m ust be w illin g to keep r e s tr ic tiv e p olicies in e ffe c t. T o be s u c c e s s fu l, m onetary p o lic y m ust be re in fo rc e d b y sound fis c a l p o lic ie s . - 2 - Escalation o f C om petition W ith p ro lo n g e d in fla tio n , we also face a c h a n g in g in s titu tio n a l e n viro n m e n t th a t w ill fe a tu re esca la tin g com petition in a d d itio n to legis lation and re g u la tio n w ith s tro n g im pacts on b a n k in g . You w on d e r i f com petition can grow much more in te n s e . S avings and loan associations and c r e d it unions are com peting e ffe c tiv e ly fo r sa vin g s d e p o s its . T h e y o ffe r ch e c k in g se rvice s in th e form o f share d r a fts and o th e r "p a ya b le th ro u g h " in s tru m e n ts . In th e N o rth e a s t, aided in p a rt b y NOW a cco u n ts, t h r i f t in s titu tio n s have p e n e tra te d de ep ly th e m a rket share o f commercial b a n ks. In te rn a tio n a l banks and th e in te rn a tio n a l d e pa rtm e n ts o f dom estic banks are p u rs u in g o p p o rtu n itie s in o u r re g io n . re g io n s have opened loan p ro d u c tio n o ffic e s . Many banks from o th e r Consum er c r e d it a ffilia te s have expanded in to local m arket areas as have business fin a n ce a ffilia te s and m ortgage com panies. A ls o , a v a r ie ty o f in ve stm e n t a d v is o ry se rvice s have become more a c tiv e . T h is form o f increased com petition in th e absence o f b r ic k and m o rta r s tru c tu re s is d e ce p tive because a fin a n c ia l in s titu tio n can be a dequately re p re se n te d b y a few o ffic e rs c a llin g on y o u r cu sto m e rs. I t is s o b e rin g to look th ro u g h th e telephone d ir e c to ry fo r o u r m ajor c itie s and see th e lis tin g s o f se rvice s o ffe re d b y m ajor money c e n te r b a n ks. In th e y e a rs ahead, I look fo r a t least tw o o f these c o m p e titive sources to escalate th e ir com petition w ith commercial b a n ks. 3 - O b v io u s ly , n o nbank t h r i f t in s titu tio n s w ill ge ne ra te th e most com p e titiv e p re s s u re on commercial b a n k s . V e ry lik e ly , t h ir d - p a r t y paym ent powers w ill be e xte n d ed to all d e p o s ito ry in s titu tio n s . powered to e x te n d a d d itio n a l k in d s o f c r e d it. T h e y may be em T he ease w ith w h ich C ongress passed th e b ill e x te n d in g ATS and share d r a ft a u th o rity fo r t h r if t s in d ica te s th a t e n la rg e d pow ers fo r those in s titu tio n s could be g ra n te d soon. T h is w ill re p re s e n t p o w e rfu l com petition b o th fo r d e po sits and fo r le n d in g o u tle ts . An e a rly in d ic a tio n o f th e co m p e titive s tra te g y is th e sw iftn e s s w ith w hich some S&L's moved to o ffe r b ill p a y in g s e rv ic e , and th e v ig o r w ith w h ich th e y are p u s h in g th e new 2 -1 /2 -ye ar money m a rket c e rtific a te . F oreign banks w ill become a n o th e r p o te n t source o f c o m p e titio n . As o f O ctober 1979, a b ou t 278 fo re ig n b a n k b ra nches and agencies w ere o p e ra tin g in th is c o u n try . F oreign b a n k in g in s titu tio n s c o n tin u e to c h a rte r o r pu rcha se dom estic banks in g ro w in g n um bers. In itia lly , fo re ig n ba nk o p e ra tio n s in th e U. S. w ere d ire c te d to fin a n c in g th e fo re ig n tra d e and business o f th e ir home c o u n trie s . H ow ever, th e y ra p id ly d iv e rs ifie d in to th e dom estic b a n k in g b u sin e ss, p a r tic u la r ly b y m aking lo w - r is k , h ig h ly p ro fita b le business loans to U . S. c o rp o ra tio n s . In a d d itio n , fo re ig n branches have e xp erie n ce d a ra p id g ro w th in d e po sits from U. S. cu sto m e rs, m ostly c o rp o ra te d e p o s ito rs . Word from several sources is th a t fo re ig n banks and in te rn a tio n a l d e partm ents o f dom estic banks are com peting fo r dom estic business loans. O cca sio n ally, it is stated th a t th e prim e ra te has lo st some o f its pu nch because o f fo re ig n com petition w here term s are qu ote d on a London In te r B a n k O ffe r R ate, o r LIB O R , p lu s a p e rce n ta g e . 4 In 1974, w ith a view to w a rd e lim in a tin g in e q u itie s , th e Federal R eserve proposed to th e C ongress le g is la tio n d e alin g w ith U. S. a c tiv itie s o f fo re ig n b a n ks. Such e ffo rts p ro b a b ly c o n trib u te d to passage o f th e In te r national B a n k in g A c t o f 1978. T h is A c t is an example o f th e changes needed in th e laws and re g u la tio n s to equalize tre a tm e n t and to accommodate d ra m atic in n o va tio n s in th e fin a n c ia l in d u s tr y . S p e c ific a lly , th e A c t re q u ire s th e P re s id e n t, in c o n s u lta tio n w ith th e b a n k in g agencies, to re view th e McFadden A c t and in fo rm C ongress on th e im pact it has on th e n a tio n 's b a n k in g s tr u c tu re . A re p o rt is due s h o r tly . T he McFadden A c t lim its th e b ra n c h in g pow ers o f national banks to those allowed to sta te c h a rte re d banks u n d e r sta te laws. In c o n tra s t, the b ra n c h in g pow ers o f F e d e ra lly -c h a rte re d S&L's have not been lim ited to state b ra n c h in g re g u la tio n s . A ls o , F e d e ra lly c h a rte re d c re d it u n io n s , such as th e N avy C re d it U nio n , may b ra n c h across sta te lin e s . L ib e ra liz in g th e p ro v is io n s o f th e McFadden A c t and th e sta te re s tric tio n s on b ra n c h in g w ould reduce c o m p e titive in e q u itie s . A t th e same tim e , h o w ever, com petition in th e b a n k in g in d u s tr y could become even more in te n s e . C le a rly , th e a d v e n t o f in te rs ta te "b ra n c h in g " w ould have fa r-re a c h in g ra m ific a tio n s fo r sta te lawm akers and fo r sta te and Federal b a n k in g a u th o ritie s . S till, th e b ra n c h in g q u e stio n may soon become a moot p o in t. T h e de ploym ent o f te rm in a ls n a tio nw id e may be a u th o riz e d w ith in a few y e a rs . T e rm in als o f th e in c re a s in g ly "s m a rt" v a r ie ty , those th a t open accounts and accept loan a p p lic a tio n s could cause re ta il b r ic k and m o rta r b ra nches to become less im p o rta n t in th e long r u n . F u r th e r , lim ite d -fu n c tio n fa c ilitie s , such as loan p ro d u c tio n o ffic e s o r consum er fin a n ce companies w h o lly owned - 5 - b y th e p a re n t b a nk h o ld in g com pany, coupled w ith s o p h istica te d te rm in a ls , m ig ht be co n sid e re d de fa cto na tio nw id e b ra n c h in g . These problem s a side, it is possible th e pace o f e ve n ts w ill o v e rta k e th e lawmakers and re g u la to rs . expanded in te rs ta te co m p e titio n . T he in d u s tr y seems to be m oving to w a rd B ank h o ld in g companies c u r r e n tly engage in "n o n b a n k in g " a c tiv itie s across sta te lin e s . E le c tro n ic fu n d s tr a n s fe r has increased d ra m a tic a lly th e ease w ith w h ic h s e rv ic e fa c ilitie s can be placed in remote location s. In th e e n d , th e ru le -m a k e rs may be fo rce d to accommodate these changes, n o t stand in th e ir w ay. L e g is la tiv e and R e g u la to ry E n viron m e n t L e g isla tio n proposed to shore up th e Federal R eserve S ystem 's e ro d in g m embership base is an element in th e e n viro n m e n t fo r b a n k in g in th e E ig h tie s . A to ta l o f 254 banks have w ith d ra w n from m em bership o v e r th e p a st fiv e y e a rs . Even th o u g h many o f th e banks w ith d ra w in g from th e System are sm all, th e re is a g ro w in g tre n d fo r la rg e r member banks to c o n v e rt. Eleven o f th e 99 banks th a t le ft th e Federal R eserve in 1978 had d e po sits in excess o f $100 m illio n . J u s t last m o n th , E q u ib a n k B ank o f P itts b u r g h , w ith d e po sits o f $2 b illio n , announced its in te n tio n to w ith d ra w . Because o f th e d e cline in m em bership, since 1974 th e p ro p o rtio n o f to ta l commercial b a n k depo sits held b y member banks in th e nation has d ro p p e d from 77 p e rc e n t to 72 p e rc e n t. T h is tre n d th re a te n s to weaken th e n a tio n 's fin a n c ia l system and poses an obstacle to th e e ffe c tiv e n e s s o f m onetary p o lic y . It is im p o rta n t th a t le g isla tio n be passed to place all banks on more equal c o m p e titive g ro u n d s , b o th w ith each o th e r and w ith t h r i f t in s titu tio n s . -6 M em bership le g isla tio n has become m erged w ith ge ne ra l le g isla tio n re la tin g to pow ers o f t h r i f t in s titu tio n s , in te re s t ra te c e ilin g s , a n d , in g e n e ra l, fin a n c ia l d e re g u la tio n . W hether co n sid e re d ju dg m e n t can be applied to all facets o f th is d iv e rs e le g is la tio n is y e t to be seen. The stage is set fo r major fin a n c ia l le g is la tio n . W hether C ongress th is ye a r w ill enact such a le g is la tiv e package is u n c e rta in . I f n o t, it u ltim a te ly w ill a c t, in my o p in io n , and th e im pact on fin a n c ia l in s titu tio n s w ill be enorm ous. C on sid e r a m arketplace w here th e d is tin g u is h in g lines between c re d it u n io n s , m utual in s titu tio n s , and banks a re more and more b lu rre d . Y o u r n o n b a n k in g com petition may a tta in much b ro a d e r asset p o w e rs, th e ra te d iffe re n tia l may pass o u t o f e x is te n c e , and b a n ke rs may have to cope w ith a ra p id ly g ro w in g n e tw o rk o f e le c tro n ic paym ent c a p a b ilitie s , p o s s ib ly shared b y o th e r fin a n c ia l in s titu tio n s . A n o th e r aspect o f th e c h a n g in g re g u la to ry dilemma is th a t re g u la to ry agencies lik e th e Federal R eserve B oard re a lly do not act on th e ir own in itia tiv e . T he agencies g e n u in e ly t r y to set g u id e lin e s th e y b e lieve re fle c t th e w ill o f C ongress. To a n tic ip a te fu r th e r re g u la to ry re a c tio n s , we need to examine th e action — and th e d ire c tio n — o f th e C on g re ss. T h e 96th C ongress is re p u te d to be more c o n s e rv a tiv e th a n its p re d e ce sso rs, p o s s ib ly more in tu n e w ith th e p u b lic . C o n g re s s , n e v e rth e le s s , seems enamored w ith social le g is la tio n , w h ich has p o litic a l appeal b u t re q u ire s little d ire c t o u tla y o f p u b lic fu n d s . Even i f C ongress d id n o th in g else — be an a p pealing a lte rn a tiv e — w ith us. w h ich many o f us believe m ig ht a la rg e volume o f social le g is la tio n is a lre a d y - 7 - A n o th e r re g u la to ry issue p e rs is tin g in th e E ig h tie s co n cerns c a p ita l adequacy to s u p p o rt th e g ro w th in b a n k assets. I t appears c e rta in th a t b a nk s u p e rv is o ry agencies w ill emphasize ca p ita l adequacy as an in te g ra l p a rt o f b a nk exam ination and e v a lu a tio n . Sources o f ca p ita l ava ila b le to banks fo r s u p p o rtin g g ro w th in assets and lia b ilitie s are lik e ly to be c r itic a l. T h e "bottom lin e " is th e increased premium th a t w ill a tta c h to manage ment o f fu n d s and p r ic in g o f se rvice s to a tta in a reasonable r e tu r n on in ve stm e n t. B ank p r o fits m ust increase to ge ne ra te m ea nin g fu l am ounts o f new ca p ita l e ith e r from re ta in e d e a rn in g s o r sale o f e q u ity sh a re s. C le a rly th e emphasis on fu n d s management and p ric in g s tra te g y w ill be a c e n tra l goal fo r b a n ke rs in th e y e a rs ahead. W ith re s p e c t to fu n d s fo r b a n k loans and in v e s tm e n ts , increased com petition between banks and o th e r fin a n c ia l in s titu tio n s w ill in te n s ify th e search fo r new fu n d s . A su ccessful p u r s u it in o u r s tru g g le a g a in st in fla tio n w ill n o t b rin g a low er level o f in te re s t ra te s , a t least in th e n e ar te rm . R e la tiv e ly h ig h in te re s t ra te s w ill fu r th e r compound th e im pact o f increased com petition fo r fu n d s . w ard tre n d in ra te s . O u r sustained e ffo r ts should b rin g an e v e n tu a l dow n In any e v e n t, "managed lia b ilitie s " and "m a rg in a l cost o f fu n d s " are term s th a t w ill be a ro u n d fo r a long tim e. W ith th e te n d e n cy o f y o u r "ra w m a te ria l" — d e po sits — to be h ig h in cost and th e sources c o m p e titiv e , p ric in g y o u r s e rvice s becomes c r itic a l. T he analysis o f custom er accounts takes on added m eaning. T h e coming co m p e titive th r u s t in p ric in g is to p u t each area on its own as a p r o fit c e n te r. Em phasizing fee income does not depend on increases in d e po sits o r assets, and hence does n o t re q u ire a d d itio n a l c a p ita l. - 8 - In th e S e ve nties, th e re w ere ra p id ly ch a n g in g fo rce s th a t a ffe c te d y o u r a b ility to com pete, th e n a tu re o f y o u r c o m p e titio n , and y o u r a b ility to earn reasonable re tu rn s on in v e s tm e n t. As to th e E ig h tie s , th e e n viro n m e n ta l fo rce s may be a good deal more th re a te n in g . f u r th e r . C om petition c e rta in ly w ill escalate B u t on th e p lu s s id e , yo u w ill compete on a more e q u ita b le fo o tin g as fin a n c ia l in s titu tio n s become more a lik e in term s o f s e rvice s o ffe re d . V ie w in g th e m a rket e n v iro n m e n t in th e y e a rs ahead is less o f a problem th a n d e te rm in in g w hat to do a b ou t it . P ro b a b ly e v e ry b a n k e r in th e room w ill do a lo t o f hom ework and c ritic a l a n alysis as he develops a s tra te g y fo r co p in g w ith th e c h a lle n g in g e n v iro n m e n t. his b a n k . As a s ta r tin g p o in t, each b a n k e r may w ell pause to assess What k in d o f in s titu tio n is it? What se rv ic e s is i t se llin g ? are its custom ers and w hat do th e y re a lly re q u ire ? Who Who are th e com petitors? What u n iq u e advantages does y o u r b a n k have in p ro v id in g s e rvice s compared w ith y o u r c o m p e tito rs , and how m ig h t these advantages be e xp lo ite d ? T h e developm ent o f a s tra te g ic plan b y each b a n k e r to cope w ith th e th re a te n in g fo rce s in th e E ig h tie s ta ke s on a new dim ension o f u rg e n c y . E v id e n tly some b a n k e rs are well along in d e ve lo p in g th e ir s tra te g ie s . A d a p tin g to o u r new e n v iro n m e n t w ill be a challenge fo r all o f us — b a n k e rs , ba nk cu sto m e rs, and especia lly c e n tra l b a n k e rs . I f we e x p lo it th e o p p o rtu n itie s ava ila b le to us th ro u g h em bracing c o n s tru c tiv e change, ra th e r th a n re s is tin g i t , we can meet th e cha lle n g e . ju s t th a t. I believe we w ill do
