Full text of Statements and Speeches of Philip E. Coldwell : The Banking Challenges of the Mid-Seventies : Remarks Before Bank Administration Institute, 26th Southern Regional Convention, Convention Center, San Antonio, Texas

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

FOR RELEASE ON DELIVERY
MONDAY, APRIL 21, 1975
10:00 a.m. (C#D,T.) (11:00 a.m. E.D.T.)




THE BANKING CHALLENGES OF THE MID-SEVENTIES

Remarks of

Philip E. Coldwell
Member
Board of Governors
of the
Federal Reserve System

Before

Bank Administration Institute
26th Southern
Regional Convention

Convention Center
San Antonio, Texas
April 21, 1975

The Banking Challenges of the Mid-Seventies

It may be presumptuous of me to begin your convention with
a series of challenges to you to meet over the coming years.
all, my background is that of a regulator.

After

But perhaps it is that

background which enables me to oversee some of the problems of
commercial banking, and the challenges toward which bankers should
reach for solutions over the coming years.

It seems to me that the

challenges facing the banking industry today lie both in internal and
external areas with which bankers must engage.

Thus, bankers must

meet their internal bank problems and the challenges from the external
environment.
First in my view, banking must set its objectives.

Now I

do not mean to belabor you with a "management by objectives11 lecture,
but banking does not appear to have established its objectives either
in the clarity with which they should be expressed or in the relative
priorities which need expression.

It seems to me that banking must

decide whether asset growth, service to the community, or bottom-line
expansion, is to be the primary objective.

Now I know that most of you

would promptly answer that you want to serve your community, you want
to make good loans to people and businesses with good credit ratings,
and bring back a profit for your bank.




But too many times over the

-2

past few years it seemed as though banking's objective was growth
for growth's sake rather than growth for service to its community.
So it seems to me that the bankers of today need to set forth with
a great deal of clarity the primary and overriding objectives of
your bank.
After such an exercise, and I don't mean it to be just a
game in which you write these objectives and then lay them aside,
but after you have established them clearly in your mind, it seems
to me your next step needs to be to settle the structure of your bank
to meet these objectives.

Such a structural discussion could, of

course, range from the normal structural analysis of unit versus
branching and holding company approaches to a discussion of internal
structure within the bank to assure yourselves that your banks are
organized in a fashion to yield your objectives.

Structural

analysis should also include the desirable areas of concentration
and the provision of funds and personnel to those areas.

Structural

analysis could appraise ypur bank's organizational posture and
position in the community against your competition, whether bank or
nonbank, and where that competition is doing a better or a poorer
job than your bank.

Such competitive analysis could also include

the appraisal of personnel management, compensation, fringe benefits,
and other elements which yield the total of the ability of the
competitor to meet or exceed your own service to the community.




-3-

Planning ahead to meet the competition on his own grounds and where
possible to exceed him in meeting your objectives can be a worth­
while exercise.
Assuming that you have completed your objectives, structural
and competitive analyses, it is then time to look internally and see
if you have the management necessary to do the job.
on management is difficult.

Self analysis

But those of you growing up in the

ranks of banks must be able to look around and see the areas in which
management is deficient.

When you become the chief executive officers,

I hope you will devote considerable attention to the development of
management, to broadening of its scope and horizons, and to the need
for well-trained managers in the future banking world.
As we then go on in the internal development of the bank,
it seems to me your next step needs to be an appraisal of the sources
of funds available to your bank— the types of funds you are willing
to accept and those about which you have reservations or ultimately are
unwilling to accept.

Such "source of funds" analysis ought to not

only include the type of funds but the source from which those in­
dividual types of funds are drawn.

You should make sure that a

careful appraisal is made of the customer-oriented funds and those
with which you are reasonably comfortable in the expectation that
they will remain with your bank as

opposed to those which appear

to have the characteristics of volatility for small margins
of interest.




-4-

Developing these sources of funds then provides a base
from which you can develop your credit commitments primarily of
course to the local borrowers and, if you are large enough, to
regional customers.

Ultimately, you may wish to pirn for a

limited national credit demand
extent.

if your bank has grown to that

But your credit commitments should always be tied to a

firm foundation of available funds.

Excesses in commitments can

lead a bank down a primrose path requiring it to reach for highly
volatile funds.
Simultaneously, our banker of tomorrow must look with
great care at the capital and liquidity of his bank.

Capital

adequacy is a matter which has drawn a great deal of attention over
the past few years and is likely to draw even more as the banks re­
appraise their need for capital and as the regulators reappraise
their requirements for capital.

Similarly, "liquidity analysis"

makes good sense in today's banking and provides the means by which
a banker can avoid the liquidity traps so evident in 1974.
Our banker of tomorrow must then look with care as to the
growth of his bank and the adequacy of controls with which he can
measure that growth and measure the efficiency and effectiveness of
his back office operations. It makes little sense to build a bank
without back office protection, both for

security and efficiency.

If indeed the banker of tomorrow must face a growing challenge




-5-

to handle more and more credits through loans, checks, wire transfers,
and cash flows* it makes great sense to devise back office operational
arrangements which can handle a steadily growing volume with greater
effectiveness and efficiency.
Some of you have or will become involved in banks who have
made the step into multi-bank holding companies.

To you there are

special challenges for the 1970*s because we have already seen some
of the problems developing out of overeagerness to grow by reaching
for new markets or market penetration by acquisitions.

Similarly,

we have seen rather sizable problems develop from the acquisition of
nonbank companies where experienced management was lacking in the
handling of an unfamiliar business.

To you then the challenge is

to ensure your handling of the holding company so that it reinforces
the strengths of the bank and nonbank subsidiaries and so that it
can handle through adequate management and informational procedures a
warning system which will alert management to problems developing
downstream.

There is little doubt that the effectiveness by which

you accomplish this job will have a great effect upon the future of
multi-bank holding companies in the United States.
Of course, all of you have a responsibility for public
service--public service to your community, to your region, and to
your State.

A public service which has to be reckoned in the form

of time and leadership and even money to provide the base for adequate







-6-

growth.

And yet your attention needs to be directed also to the

efficient handling of local and State governmental units as well
as private nonfinancial, nonpolitical, and nonprofit organizations.
It is as true today as it has been for years that the banker should
be a leader in the community.

The communities which have made the

greatest progress appear to be those where the banks take the greatest
interest in the future of their community.
But the public service requirements and the economic
statesmanship responsibilities of banking extend beyond the borders
of your own city or your own State.

They move to Washington and

to the national interest and in this field bankers should act as a
banking industry.

Here the political base and the strength of that

base are a prime requirement and yet to a considerable extent the
bankers of today have fallen short of the strength of political
wisdom and participation that could have warded off some of the
more difficult and trying legislative crises for banking over the
past decade.

It will be a major challenge to you in this room to

so mobilize yourselves and your associates in the banking industry
so that your strengths of leadership in the local and State environ­
ment can be translated into stren3 -hs at the congressional level of
Government.

If such strengths can be achieved, ther. banking can

have a strong place in all of the economic and finsncir.1 legislation
of Government.

-7-

You should be expressing a strong voice on many current
matters--matters such as the question of regulatory reform--whether
there should be a single Federal banking regulator, or retention of
the present form of regulation, or a reassignment of responsibilities
between regulators?

Your voice in supporting regulatory improve­

ments is badly needed, but it needs to come as one voice, not a
fragmented voice which purports to represent a part of banking and
then have another part take the opposite side.

The examination, reg­

ulatory, supervisory, and enforcement activity by the principal bank
regulators does need improvement.

It needs, improvement to make sure

that the future of banking in this country is a safe, sound and
progressive industry.

You as the bankers of the future should have

a position from which you can support the proper monetary and fiscal
policies of Government.

On the monetary policy side we need your

voice— a voice which speaks strongly to the leaders of Congress.

A

voice which says, if you believe it, that the nation's central bank
should be an independent organization, to exercise its judgment to
counter those excesses of Government elsewhere, to restrain credit
when necessary, to supply the credit needs of the nation.

We need

your voice to say, if you believe it, that the intrusions of
Government, particularly of Congress, into the policy-making roles
of the central bank may prove to be a most expensive experiment.

If

Congress, through its banking committees, is to direct the policies




-8-

of the Federal Reserve, obviously the responsibility for those
policies passes to Congress.

We are only at the threshold of the

the start of such a committee activity but you bankers should have
a keen interest and a strong voice in the future of this
activity.
Similarly, I would hope that you in this room will work
toward the solution of the problem of Federal Reserve membership.
It is no secret for many of you that there are inequities of burden
in reserve maintenance between member and nonmember banks.

It makes

little sense to me that a national policy for the benefit of all is
to be effected through only a limited number of banks.

It seems to

me that a national policy should impact on all members of the
financial community.

Now I recognize that you and many others

believe that the dual banking system requires choice of membership.
But the choice given you last year in the form of universal require­
ments did not substantively challenge the dual banking system.

It

still permits State chartering, State supervision, and State examination
of State banks.

Now you may say that I am merely quibbling on the

outside fringes because the burden of Reserve membership is a primary
reason for withdrawal.

But I would say that if this nation is to

sustain a strong central bank which can provide an independent and
strong monetary policy, we are going to have to have the support of
the whole banking community--not just a part of it.




In numbers,




-9-

you represent probably a large share of State nonmember banks.
reserve maintenance is clearly less onerous than that

Your

of the members

of the Federal Reserve, and yet, you take unto yourselves the benefits
and the improvements which are created by the nation's central bank.
I can not shame you into joining the Federal Reserve and don't wish
to try to.

But I hope that you and your friends will think carefully

on this matter and see whether there is an acceptable method by which
the central bank can achieve its primary objectives and that you can
contribute along with the members of the Systen. to fewer inequities
and fewer differences in service.
Finally, in my opinion, the bankers of the United States
need to band together in a strong voice for the projection of the
fiscal system of this nation.

It seems as though we never learn.

We come back time and time again to deficit spending of a steadily
larger amount for every cyclical downturn.

Regardless of the merits

of the case in this particular situation, it is rather clear that our
Congress seems to think it is responding to the will of the majority
of the people when it attempts to spend its way out of every major
problem.

And Congress is willing to accept new responsibilities and

problems.

You and I and the rest of the people in the nation need to

examine this procedure of forwarding our problems to the Federal Govern­
ment.

If we send our problems there, and demand the funds to meet

those problems, the power and the authority will go with the funding.

-10-

If we want to maintain local control, then we must make our voice
heard throughout the land and, more particularly, in the halls of
Congress— that fiscal excesses, continually increasing
Federal programs, and higher and higher expenditures, are not— I
repeat not— a guarantee of reelection.

If this message can be

transmitted through you--the leaders of the communities— I believe
we can get a response in Congress.
Thus, you who are the future of banking have a number of
very important jobs to do.

I have not touched upon your inter­

national responsibilities, your need to express a strong stand on trade
and isolationist barriers, to express your voice on the development
of an international monetary control system, or to control your own
activities internationally.

But there are so many problems today

that I thought I would bring to you those that are on my mind at the
moment.

I wish you luck in the future and look forward to your

voices being added to the management strength of this great banking
industry.




Thank you.

**********