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BANKING ON THE EVE O F THE E IG H TIESA TIM E F O R S T R A T E G IC THINKING R em a rk s to C o rre sp o n d e n t Bank C o n fe re n ce o f the T ru s t C om p an y Bank A tlan ta, G e o rg ia F e b r u a r y 16, 1979 by M on roe K im b re l, P r e s id e n t F e d e r a l R e s e r v e Bank o f A tlanta Banking on the Eve o f the E ighties - A T im e fo r S tra te g ic Thinking Y ou ch o se a tim e ly su b je c t fo r you r c o n fe r e n c e : "B anking in the E ig h t ie s !" The d eca d e ahead p r o m is e s m o r e ch a llen g es and fru s tr a tio n s and ce rta in ly m o r e op portu n ities than any lik e p e r io d in m y m e m o r y . Inflation and the E co n o m y The E ig h tie s, I b e lie v e , w ill be c h a r a c t e r iz e d o f our n u m ber one e c o n o m ic p r o b le m --in fla t io n . by a continuation Y ou know its e ffe c t s : c u s to m e rs re q u ir e m o r e c r e d it to fin a n ce the sa m e p h y s ic a l v o lu m e ; op era tion a l c o s ts a r e d ifficu lt to c o n tr o l; funds b e co m e m uch m o r e e x p en siv e; and m o s t in te re s t ra te s , a fte r adju stm en t fo r e x p e cte d in fla tion , a re quite low d esp ite high y ie ld s . The c r u c ia l q u estion s a r e : in c r e a s e down to a lo w e r le v e l? b a n k ers? how do we b rin g the rate o f p r ic e and what a r e the co n s e q u e n ce s fo r We a ll hope fo r a " s o ft la n d in g "--th a t p r ic e in c r e a s e s can be brought to to le r a b le le v e ls w ithout a dam aging r e c e s s io n , high u n em p loym en t, and re su ltin g s o c ia l o r p o lit ic a l upheaval. Changed E n v ir o n m e n t--E s c a la tio n of C om p etition Even with continuing in fla tion , tutional en viron m en t, w e m u st fa c e a changing in s t i p ro b a b le fe a tu re s of w h ich w ill be e sca la tin g c o m p e tition and ev olv in g le g isla tio n and reg u la tion . C erta in ly you a lre a d y endure a m ple co m p e titio n . Savings and loan a s s o c ia tio n s and c r e d it unions a re com p etin g e ffe c t iv e ly fo r savings -2- d e p o s its . T hey a r e beginning to o ffe r ch eck in g s e r v ic e s in the fo r m of sh a re d ra fts and oth er "p a y a b le th rou gh " in stru m e n ts. the a u th oriza tion o f NOW a cco u n ts , A ided in p a rt by th rift institution s have m ade s e r io u s in roa d s into the m a rk et sh a re of c o m m e r c ia l banks in the N orth ea st. In r e c e n t days S e a rs, R oeb u ck & C o. announced plans to b eg in next y e a r the sa le of s e c u r it ie s in d en om inations as low as $1, 000 to the 2 6 -m illio n c u s to m e r s on its ch a rg e a cco u n t lis t. m a tu re fr o m The notes w ill 9 m onths to 10 y e a rs and in te re s t ra tes w ill p ro b a b ly be h ig h er than th ose a v a ila b le at banks o r th rift in stitu tion s. The S ea rs o ffe r a lon e m igh t not be sig n ifica n t w e r e it not fo r the p oten tia l im p a ct o f s im ila r m o v e s by oth er la rg e c o r p o r a tio n s . International banks a re p u rsu in g op p ortu n ities in our re g io n ; m any banks have opened loan p ro d u ctio n o f f ic e s . C on su m er c r e d it a f filia te s have expanded into you r m a rk et a re a s as have fin a n ce a ffilia te s and m o rtg a g e co m p a n ie s . a r e m o r e v is ib le . A ls o , a v a r ie ty o f in v estm en t a d v is o r y s e r v ic e s In this fo r m o f in c r e a s e d co m p e titio n , b r ic k and m o r ta r stru ctu re s is sig n ifica n t: the a b se n ce of a fin a n cia l in stitu tio n 's p r e s e n c e can be a d equ ately re p re s e n te d by a sin gle ca llin g o ffic e r . I look fo r th ese v a rio u s co m p e titiv e s o u r c e s to p o s e even m o r e th rea t in the y e a rs ahead. T h rifts The m o s t ob v iou s s o u r c e of in c r e a s e d co m p e titio n fo r c o m m e r c ia l banks a re the nonbank th rift in stitu tion s. V e r y lik e ly th ird - p a rty paym ent p o w e rs w ill even tu ally b e extended to a ll d e p o s ito r y -3- in s titu tio n s. c r e d it. They m ay be e m p o w e re d to extend ad d ition a l kinds o f In co m b in a tio n , this w ill r e p r e s e n t p o w e rfu l co m p e titio n to banks a c r o s s the co u n try both fo r d e p o sits and fo r lending o u tle ts. P erh a p s a id ed by the R egu la tion Q d iffe re n tia l during the la s t se v e n years, the rate of d e p o s it grow th at th rifts has ou tstrip p e d that of a ll c o m m e r c ia l banks by a fa c t o r of 2 to 1. F o r e ig n Banks A n oth er potent s o u r c e o f co m p e titio n is lik e ly to co m e fr o m fo r e ig n banks. A s o f M ay 1978, about 23 0 fo r e ig n bank b ra n ch e s and a g e n cie s w e r e op era tin g in this co u n try . F o r e ig n banking institution s continue to c h a rte r o r p u rch a s e d o m e s tic banks in g row in g n u m b e rs. They have grow n m o r e ra p id ly than the d o m e s tic banks with w h ich they co m p e te . F o r e ig n bank op era tion s in the U. S. w e r e sta rte d p r in c ip a lly to fin a n ce the fo r e ig n trade and b u sin e ss o f th eir h om e c o u n tr ie s . H ow ev er, they ra p id ly d iv e r s ifie d into the d o m e s tic banking b u sin e ss, p a r tic u la r ly by m aking lo w r is k , U. S. c o r p o r a t io n s . h ig h ly p ro fita b le b u sin e ss loans to In addition , fo r e ig n b ra n ch es have e x p e r ie n c e d a ra p id g row th in d e p o sits fr o m U. S. d e p o s it o r s . O c c a s io n a lly , c u s to m e r s , m o s tly c o r p o r a te the p rim e ra te has lo s t s o m e o f its punch b e ca u se o f fo r e ig n co m p e titio n w h e re te rm s a re quoted on a LIBOR (London Inter Bank O ffe r R ate) rate plus a p e rce n ta g e . -4- B ra n ch in g R a m ifica tio n s and the M cF ad den A c t In 1974, with a v ie w tow ard elim in a tin g in e q u itie s , the F e d e r a l R e s e r v e p r o p o s e d to the C o n g re ss le g is la t io n dealin g with U. S. a ctiv itie s o f fo r e ig n banks. Such e ffo r ts p ro b a b ly con trib u ted to p a s sa g e o f the Intern ation al B anking A c t o f 1978. The International Banking A c t w ill go a long w ay tow ard izin g the b a s is on w h ich d o m e s tic and fo r e ig n banks co m p e te . eq u a l The A c t is a p r im e e x a m p le o f the d ra m a tic w ays in w h ich law s and reg u la tion s w ill have to change to a cco m m o d a te the eq u a lly d ra m a tic ch an ges in the fin a n cia l in d u stry it s e lf. S p e c ific a lly , the A c t r e q u ir e s the P re s id e n t, in con su lta tio n with the banking a g e n c ie s , to r e v ie w the M cF a d d en A c t and r e p o r t to the C o n g re ss by S ep tem b er 1979, on the im p a ct it has on the n a tio n 's banking stru ctu re . The M cF a d d en A c t lim its the branch ing p o w e rs o f n ation al banks to th ose p ro v id e d u n der state la w s. In co n tra st, the bra n ch in g p o w e rs o f F e d e r a lly -c h a r t e r e d th rift in stitu tion s have not been lim ite d by statute (although they have been lim ite d som ew h at by F e d e r a l H om e L oan Bank B o a rd re g u la tio n ). Granting the th r ifts ' expanded p o w e r s , su m e r loan s and nationw ide NOW a c co u n ts , such as c o n w ould r e s u lt in a fu rth er su bstan tial c o m p e titiv e disadvantage fo r c o m m e r c ia l banks. L ib e r a liz a tio n of state bran ch in g r e s t r ic tio n s and the p ro v is io n s o f the M cF a d d en A c t w ould re d u ce co m p e titiv e in e q u itie s ; h o w e v e r, co m p e titio n in the in d u stry cou ld b e co m e even m o r e in te n se . O utside -5- banking in stitu tion s m igh t open th eir own o ffic e s in oth er r e g io n s . if a llow ed to expand through s u b s id ia rie s o f a holding com p an y, O r, they just m ight p u rch a se ex istin g in stitu tion s ou trigh t. S till, the bra n ch in g q u estion m a y soon b e co m e a m o o t p oin t. The d ep loy m en t of te rm in a ls nationw ide m a y be a u th o rize d w ithin a fe w years. T e rm in a ls o f the in c r e a s in g ly " s m a r t " v a r ie ty (fo r e x a m p le , th ose that open a ccou n ts and a c c e p t loan a p p lica tio n s) w ou ld ca u se r e t a il b r ic k and m o r ta r b ra n ch es to b e c o m e le s s im p o rta n t in the long run. F u r th e r, lim ite d -fu n c tio n fa c ilit ie s , such as loan p ro d u ctio n o ffic e s o r co n s u m e r fin a n ce com p a n ies w h o lly ow ned by the p aren t bank holding com p a n y , co u p le d w ith " s m a r t te rm in a ls , " co u ld be de fa cto nationw ide b ra n ch in g . The in d u stry se e m s to be m ovin g tow ard expanded in te rsta te c o m p e titio n . Bank h old in g co m p a n ie s c u r re n tly engage in "nonbank ing" a c tiv itie s a c r o s s state lin e s . o f f ic e s . Banks have m u lti-s ta te loan p ro d u ctio n E le c t r o n ic funds tr a n s fe r has in c r e a s e d d ra m a tic a lly the e a se with w h ich s e r v ic e fa c ilit ie s can be p la ce d in re m o te lo c a tio n s . end, In the the r u le -m a k e r s m ay be f o r c e d to a cco m m o d a te these ch a n g e s, not stand in th eir w ay. M e m b e rsh ip B ill S till another e le m e n t in the banking e n v iron m en t of the 1980's is le g is la tio n p r o p o s e d to sh o re up the F e d e r a l R e s e r v e S y s te m 's erod in g -6- m e m b e rs h ip b a se . A total of 551 banks have w ithdraw n f r o m m e m b e r ship o v e r the p a st ten y e a r s . fr o m the S ystem a re s m a ll, E ven though m any o f the banks w ithdraw ing th ere is a g row in g tren d am ong la r g e r m e m b e r banks to b e c o m e n o n m e m b e rs . F ifte e n o f the 69 banks that le ft the F e d e r a l R e s e r v e in 1977 had d e p o sits in e x c e s s o f $100 m illio n . B e ca u se of the d e clin e in m e m b e rs h ip , the p r o p o r tio n of total c o m m e r c ia l bank d ep osits h eld by m e m b e r banks was re d u ce d by 10 p e rce n ta g e p oin ts, to about 72 p e r c e n t in the nation, and about 60 p e r c e n t in this D is tr ic t. C o n g re ss is n ow co n s id e r in g two s im ila r b ills in tro d u ce d by Senator P r o x m ir e and b y C o n g re ssm a n R e u s s --t h e ch a irm e n of the Senate and H ouse Banking c o m m itte e s . T h ese b ills w ould re q u ir e both m e m b e r and n on m em b e r banks having d e p o sits in e x c e s s o f a ce rta in ex em p tion to m e e t F e d e r a l r e s e r v e r e q u ir e m e n ts . The ex em p tion is $50 m illio n fo r savings and tim e d e p o sits in the H ou se b ill. a $40 m illio n ex em p tion le v e l. The Senate b ill u se s O ther d e p o s ito r y in s titu tio n s --in c lu d in g savings and loan a s s o c ia t io n s and c r e d it unions - -w o u ld be re q u ir e d to m aintain r e s e r v e s if they have tra n sa ctio n a ccou n ts in e x c e s s o f the ex em p tion le v e l. A n oth er fe a tu re o f this le g is la tio n p r o p o s e s the re q u ire m e n t of p r ic in g of F e d e r a l R e s e r v e s e r v ic e s . has the m o r e e x p lic it re q u ir e m e n ts . Of the tw o, the P r o x m ir e b ill It r e q u ir e s the F e d e r a l R e s e r v e to p u b lish a se t of p r ic in g p r in c ip le s and a p r o p o s e d fe e sch ed u le by July 1, 1979. -7- S om e banks m ay co n clu d e , p ricin g sch e d u le , ch ea p er r a te s . A ls o , a fte r analyzing the F e d e r a l R e s e r v e 's that they can o ffe r so m e s e r v ic e s to other banks at If s o , this r e p re se n ts a new m a rk etin g op portu n ity. the p ricin g o f ch e ck and A u tom ated C le a rin g H ouse paym ents m ay a c c e le r a t e the lo n g -a w a ite d m ove to e le c t r o n ic paym ents s y s t e m s . The im p o rta n ce this le g is la tio n has fo r banking in the 1980's should not be u n d erra ted . C o n g re ss and C o n s u m e ris m A n oth er a s p e c t o f the changing r e g u la to r y d ile m m a is that a g e n cie s r e a lly do not a ct on th eir own in itia tiv e . The a g e n cie s g en u in ely try to en act what they b e lie v e to be the w ill o f C o n g r e s s . an ticip a te fu rth e r re g u la to ry r e a c tio n s , So, in o r d e r to w e n eed to exam in e the a c t io n - - and the d i r e c t i o n - - o f the C o n g r e s s . The 96th C o n g re ss is reputed to be m o r e co n s e r v a tiv e than its p red ecessors, th e le s s , p o s s ib ly m o r e in tune with the p u b lic. s e e m s e n a m o re d with s o c ia l le g is la tio n , C on gress, n ever an a re a of p o litic a l app ea l with little d ir e c t outlay o f p u b lic funds. E ven i f C o n g re s s did nothing e ls e - - w h ic h m an y o f us b e lie v e m igh t be an appealing a lt e r n a t iv e --a la r g e v olu m e o f s o c ia l le g is la tio n is a lre a d y w ith u s . w ill be w ithdraw n. It se e m s u n lik ely that any a p p re cia b le p a rt o f this -8- R egu la tion of In te re st Rates S om e o f the p re se n t reg u la tion s m a y o f c o u r s e change a p p r e c ia b ly . A p rim e candidate fo r p o s s ib le m o d ifica tio n in the n ext d eca d e is R egu lation Q . A ny ch an ges in it p ro b a b ly w ill take p la ce in the con tex t o f oth er c h a n g e s --e x p a n s io n o f NOW a cco u n ts , fo r ex a m p le. It se e m s lik e ly , h o w e v e r, that any m o d ifica tio n to Q w ill heighten co m p e titio n betw een banks and oth er in stitu tion s. m igh t se e the d e m is e o f the savin gs a cco u n t as it now e x is t s . We We m ight a ls o se e the e m e rg e n ce o f tim e d e p o sits b a sed m o r e fle x ib ly than now on the length o f tim e f o r w hich the c o n tr a c t is m a de. ductions in m in im u m re q u ire m e n ts m igh t w e ll take p la c e . R e C ould this m ean that the d e c a d e s -o ld p ro h ib itio n o f paym ent o f in te r e s t on dem and d e p o sits w ill p a ss into antiquity? The P r o b le m of C apital A d e q u a cy One oth er re g u la to ry is s u e that is lik e ly to be with us in the E igh ties is the m a tter o f ca p ita l a deq u a cy. It a p p ea rs ce rta in that bank s u p e r v is o r y a g e n cie s w ill fo cu s on ca p ita l a d eq u a cy as an in te g ra l p a rt of bank evalu ation . S o u rce s o f ca p ita l a v a ila b le to banks fo r grow th in a s s e ts and lia b ilit ie s a re lik e ly to be c r it ic a l. T his b rin g s us to the "b o tto m lin e " im p lica tio n o f m y re m a rk s about the co m p e titio n , tion, and in fla tion en v iron m en t. re g u la -9- P r e s s u r e on M anagem ent o f Funds The "b o tto m lin e " is the in c r e a s e d p re m iu m that w ill attach to m an agem en t of funds and p r ic in g o f s e r v ic e s in o r d e r to attain a re a so n a b le retu rn on in v estm en t. Bank p r o fits m u st in c r e a s e if m ean in gfu l am ounts o f new ca p ita l a re to be a v a ila b le eith er fr o m reta in ed earn in gs o r sa le o f equity s h a r e s . C le a r ly the em p h asis on funds m an agem en t and p r ic in g stra te g y w ill have to be a ce n tra l g oa l fo r bankers in the y e a rs ahead. With r e s p e c t to the s o u r c e o f funds, m y v iew is that in c r e a s e d co m p e titio n am ong banks and betw een banks and oth er fin a n cia l in s ti tutions w ill in te n s ify the s e a r c h fo r new funds. A s u c c e s s fu l p u rsu it in ou r stru g g le a g ain st in fla tio n w ould not m ean a re d u ctio n in the r e la t iv e ly high in te r e s t ra tes in the near te rm . T his w ill fu rth er com p ou n d the im p a ct of in c r e a s e d co m p e titio n fo r funds. In any event, "m a n a g ed lia b ilit ie s " and "m a rg in a l c o s t o f fu n d s" a re te rm s that w ill be around fo r a lon g tim e . With the tendency of y ou r "r a w m a t e r i a l " - - d e p o s i t s - - t o be high in c o s t and the s o u r c e s co m p e titiv e , c r it ic a l. p r ic in g you r s e r v ic e s b e c o m e s The a n a ly sis o f cu s to m e r a ccou n ts takes on added m eaning to en su re som eth in g equ ivalen t to f u ll- c o s t p r ic in g and a retu rn on in v estm en t. in c o m e , You w ill n eed to lo o k c a r e fu lly at y o u r n o n -a s s e t re la te d in c o m e fr o m fe e s and s p e c ia l s e r v ic e ch a r g e s . The com in g -10- co m p etitiv e thrust in p ricin g is to put ea ch a r e a on its own as a p r o fit c e n te r . E m p h a sizin g fe e in c o m e has a p e c u lia r advantage in that it d oes not depend on in c r e a s e s in d e p o sits o r a s s e t s , and h en ce d oes not r e q u ir e a d d ition al ca p ita l. D ev elop in g a S trategy to C ope The d eca d e of the S even ties has been c h a r a c t e r iz e d by ra p id ly changing f o r c e s that a ffe cte d y o u r a b ility to co m p e te , co m p e titio n , and y ou r a b ility to ea rn re a so n a b le retu rn s on in v estm en t. L ook in g ahead to the E ig h tie s, it is m y b e lie f that the e n v iron m en ta l f o r c e s m a y be a g o o d d e a l m o r e threatening. fu rth e r . the nature of y o u r But on the plus s id e , C om p etition w ill e s ca la te the c o m p e tito rs w ill be on a m o r e equitable fo o tin g as fin a n cia l in stitu tion s b e co m e m o r e s im ila r in te rm s o f s e r v ic e s o ffe r e d . S izin g up the m a rk e t en v iron m en t in the y e a r s ahead is le s s o f a p r o b le m than d eterm in in g what to do about it. In m y opin ion , e v e r y banker in the r o o m w ill n eed to do a lot o f h o m ew ork and c r it ic a l a n a ly sis as he d e v e lo p s a stra te g y fo r cop in g w ith the ch a llen g in g en v iron m en t. A s a sta rtin g point, each bank shou ld p au se to a s s e s s it s e lf. What kind o f in stitu tion is it? What s e r v ic e s is it s e llin g ? its c u s to m e r s and what do they r e a lly dem and? p e tito r s ? Who a re Who a re y o u r c o m What unique advantages d oes y o u r bank have in p rov id in g -11- s e r v ic e s co m p a r e d with, you r c o m p e tito rs and how m ig h t th ese a d vantages be e x p lo ite d ? A ll I am su ggestin g is the n eed to d e v e lo p a s tra te g ic plan to guide y ou r bank in cop in g with the changing en viron m en t during the y e a r s ahead. s t r a t e g ie s . E vid en tly so m e banks a r e w e ll along in d evelop in g th eir One ex a m p le m ay be the d e c is io n by B an k ers T ru st to s e ll its co n s u m e r banking b u sin e ss to the Bank of M o n tre a l, con cen tra tin g on w h o le s a le banking. thus A fe w oth er la rg e banks have ap p a ren tly d ecid e d to abandon the ch e ck p r o c e s s in g and accoun ting a re a s to s p e c ia liz e d data p r o c e s s in g f ir m s . A dapting to ou r new en v iron m en t w ill be a ch a llen g e fo r a ll o f u s --b a n k e r s , b a n k e rs. bank c u s to m e r s , and perh aps e s p e c ia lly , If w e c o n s id e r the op p ortu n ities a v a ila b le to us through e m b ra cin g and ch a rtin g co n s tr u ctiv e ch an ge, then we can m e e t the ch a llen g e. c e n tr a l ra th e r than r e s is tin g it, I b e lie v e we w ill do ju s t that.
@FedFRASER