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George J, Kelly, Director
12 East 36 St., New York 16, N* Y.

SATURDAY, MAY 18 , 1963

President, The American Bankers Association, before
the South Dakota Bankers Association, Elks Club
B.P.O.E. # 838, Watertown, Saturday, May 18, 1963*
Mr. Kimbrel is chairman of the board, First National
Bank, Thomson, Ga.

In every industry there comes a time when concerted efforts at "taking1
stock" are in order.

We in banking provide no exception to this rule.


splendid Centennial activities in which all of us are engaged provide an ideal
opportunity for reviewing the past, for recognizing our mistakes, and for
building on our successes.

Surely, in this process of review, we can allow

ourselves the luxury of pointing to the economic progress which has been
underwritten by the nation*s banks.

At the same time, we also should measure

the dividends which have accrued to the banking industry as a result of its
investment in economic progress.
We can be proud of our past achievements, but we cannot be complacent
about them.

We will do ourselves a disservice if we fail to recognize the

challenge of the future.

For our future is only as secure as we make it.

And our ability to thrive is conditioned on our dedication to the free-market
principle that the success of business institutions stems from the efficient
performance of useful functions.
It often is said that the future belongs to those who earn it.


a free-enterprise society, it is worth remembering that neither commercial banking
nor any other group can claim an inherent right to grow, to remain healthy and
prosperous, or to participate in the nation*s over-all economic advance.
rights do not exist.





Virtually all businesses seek to grow, and there are few banks that
do not have growth targets*

Yet, unlike other businesses, the aggregate

supply of the product which banks have to offer-bank credit--is subject to
effective control by the nation*s monetary authorities; and the total volume
of demand deposits held in commercial banks is likewise closely regulated*
Whether the volume of demand deposits grows 10, 20, or 30 per cent over the
next decade depends not on the competitiveness of commercial banks or the
efficiency of their operations, but rather on the decisions of monetary authorities
as to what rate of increase will best serve the interests of sustainable
economic growth.
Within these limits of monetary growth established by monetary
authorities, individual bank competition for a larger share of the total supply
of demand funds merely leads to a reallocation of the existing money supply
among the nation*s banks*
As an industry, we reconcile ourselves to the need for economic
stability and to the necessity for close Government control over the total amount
of demand deposits available for spending*

But at the same time, we, as

individual bankers, also endeavor— each of us in our own way--to capture a
larger share of the demand deposits available.
In recent years, competition for loanable funds has grown increasingly
sharp among the nation*s banks--and this is not surprising.

During much

of the postwar period, the emphasis in banking was on the diversion of investment
funds into loan channels, and the lending capacities of commercial banks were
not so directly dependent upon their ability to attract new deposits.


the process of unwinding the heavy portfolios of Government securities
acquired during wartime led to a steady reduction in bank liquidity^ and by the
latter part of the


most commercial banks had begun to feel fairly



serious liquidity ^pressures.

Since that time, expansion in the lending

capacity of individual banks has been determined to a large extent by their
competitive success in attracting new deposits, and the result has been an
intensified drive among banks for increasing their share of the demand-deposit
In competing for these funds, bankers have been active in providing
additional services for their corporate customers.
their own way; some do not.

Some of these services pay

Although many other factors have been important

in explaining the increase in bank costs, one element in the picture has been
the competitive pressure for offering new bank services at less than costs.
At this point, I might add that I am puzzled at times when I hear
bankers talking about offering services at cost.

It seems to me that we

should offer services at a price that will add to net earnings.
are a factor.

Costs, of course,

But many of us have gotten into the habit of using the terms

"cost of service" and "price of service" interchangeably.

We can perform a

million new services at cost without increasing earnings by one nickel.
Looking again at the industry as a whole, the introduction of additional
banking services at cost or less than cost adds to the costs of banking
while, at the same time, it does not increase the volume of demand deposits or
provide the means through which these funds may be invested more profitably.
There are elements for concern here.

Banking must remain on guard against

tendencies for the persistent addition of cost-raising services which add neither
to the resources nor to the income of the industry.
Looking ahead, there is little prospect that the earnings position of
commercial banks will be strengthened significantly--if at all--by significant
increases in their demand balances.

It does appear reasonable to expect that

demand deposits over tb& foreseeable future may expand on the average, at a




rate of somewhere near three per cent per year.

But such an increase should

not lead us to conclude that rising hank costs can he met from the revenues
generated hy demand-deposit expansion alone.
Moreover, we do not have the opportunities today, as we did in the
early postwar period, for strengthening cur earnings position hy converting
a substantial volume of low-yielding Government securities into higher-yielding

All hankers must look more closely at the allocation of their assets,

and satisfy themselves that earnings are being sought in a manner which is
consistent with responsibilities for the safety of depositors* funds.
Even with significant gains in gross earnings stemming from improved
asset allocation and moderate expansion in demand deposits, the problem of
rising bank costs is likely to continue to plague us.

If we don’ want

the pressure of these costs to jeopardize the strength of our industry, we must
seek remedies in a number of areas.

Let’s consider a few of them.

First, commercial banks may become increasingly active in the savings
field by capturing a larger share of the savings funds now held by such thrift
institutions as savings and loan associations and other nonbank financial

These are higher-cost funds than demand deposits, of course,

but since they are relatively stable,

we can put them to work in markets

which provide a much higher rate of return.
Many people have the impression that savings funds are inherently
less profitable than demand deposits--a view which over-all banking statistics
appear to support.

These statistics show that the higher the proportion of

time and savings deposits to total deposits, the less profitable the bank is
likely to be.
It is important to note, however, that a breakdown of these
statistics shows that the totals are heavily weighted by the large number of




banks which manage their savings funds more or less in the same way as they
lend and invest their demand deposits.

Obviously, under these circumstances,

savings funds tend to be unprofitable,

Yet, opportunities for the profitable

employment of savings funds are not lacking, and the profitable employment of
these funds requires only that commercial banks employ them in those markets
for which they are particularly suitable— including, most notably, consumer
and mortgage lending.
If we are to concentrate more heavily on the savings markets than
we have in the past, perhaps we should also turn our attention to regulatory and
institutional arrangements which complicate the task of competing with
nonbank institutions for savings funds.

Tax inequality, of course, represents

perhaps the most serious barrier to our effectiveness in competing with
nonbank savings institutions*

While considerable progress has already been

made in reducing the disparity in competitive opportunities between commercial
banks and other types of financial intermediaries, there is still much room
for improvement.
In addition, some attention must also be given the system of reserve
requirements against savings funds held in banks and in competing institutions.
If savings inflows into commercial banks are relatively stable and represent
genuine long-term savings, what is the logic underlying the existence of a
financial system in which these savings flows into commercial banks produce a
different monetary impact than savings flows to other thrift institutions?


in time and savings deposits at commercial banks lead to a reduction in the
volume of demand deposits, whereas the build-up of savings funds in other
types of financial institutions does not.

In this area alone, are there not

important points to be analyzed and developed by the banking industry?
Fortunately, some inquiries along these lines are now being made.
Many of you know, I am sure, that the recent report of the Presidents




Committee on Financial Institutions--the so-called Heller Committee--requirements
which now apply against commercial bank time and savings deposits be made
applicable to shares at savings and loan associations and to deposits at
mutual savings banks*

If this recommendation were adopted, it would eliminate

one handicap which banks face in competing for savings funds*

However, there

are other considerations which suggest that the recommendation, on balance, must
be subject to extended appraisal before the representatives of organized banking
can comment in detail on its over-all desirability.
Aside from the need for more vigorous competition in the savings field,
bankers must also exercise considerable care in developing cost control programs
which will enable them to determine with accuracy the expenses involved in
providing specific services for their customers.

If banks are to maintain

adequate profit margins, the new bank services now being offered our customers
must pay their own way.

This means that individual banks must be in a position

to appraise the expenses involved in offering new attractions for bank
depositors, and that they must also be able to sell their customers on the
reasonableness of the charges imposed.
Finally, it should be noted that the adequacy of bank earnings--and
the future prospects for banking growth— are closely intertwined with the level
of reserve requirements imposed by Federal Reserve authorities against demand

Reserve requirements cannot be varied, it is true, for the purpose

of influencing bank earnings.

However, the level at which they are fixed does

exert an influence on the ability of the banking system to show a reasonable rate
of return on invested capital, and these considerations cannot be ignored.
In the long run, public policy can ill afford to ignore either
the issue of the adequacy of bank profits or the implications of developing cost
pressures for structural characteristics of the banking system.


Lower reserve



requirements against demand, deposits in commercial banks would permit substantial
earnings relief for an industry whose total size is regulated closely by
monetary authorities.

Such a reduction would allow banks to shift part of their

assets out of nonearning

balances with the Federal Reserve banks and put these

funds to work so they would make a contribution to bank profits.
The American Bankers Association takes the position that reserve
requirements against demand deposits should be reduced gradually to a level of
ten per cent.

Such a move would materially enhance the strength of the banking

system and contribute to the brightness of its future.
In banking, as in few other fields, the prospects for our growth depend
heavily upon the wisdom with which Government regulatory policies are applied.
I am personally convinced that, within the framework of appropriate public-policy
regulation, we can contribute to the national well-being while at the same time
adding to the vigor and growth of our own industry.

And I do not believe there

is any self-interest in my conviction that regulatory policies which unduly
hamper the growth of the banking system are also contrary to the national interest.
To the extent that banking is restricted, other types of lenders will assume an
increasingly active role in the nation*s finances.
In my judgment, we should avoid the further cultivation of a financial
system in which an increasing proportion of credit extension is in the hands
of specialized, single-purpose lenders, while a declining proportion is in the
hands of multi-functional lenders such as commercial, banks.

Such a development

interferes with the efficient allocation of credit among different types of
In closing, I would reemphasize my belief that banks will thrive and
prosper only so long as they provide useful services in an efficient way,
I am confident that we can do so and, in the process, build on the record of
progress and achievement which has marked our past.