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7:30 p:m. e.d.t.


Address by

Philip E. Coldwell


Board of Governors
of the
Federal Reserve System

Before the
Graduating Class of the

Virginia-Maryland Bankers School

University of Virginia
Charlottesville, Virginia


As you complete the 1976 session at the Virginia-Maryland
Bankers School, it seems an appropriate time to direct your attention
to the changing environment of banking and the need for greater
awareness of public interest matters by the banking profession.
Clearly the political, economic, and financial arena for banking has
changed markedly in the past five years.

There is closer Congres­

sional scrutiny of the banking industry, required disclosure of in­
formation which most bankers held extremely confidential as recently
as two years ago, and a very sharp move toward greater competition.
One of the greatest changes in the environment within
which bankers must operate today is the changing picture of the credit
industry itself.

A part of this is the increased competition from

other financial institutions and, to an even greater extent, from
nonfinancial institutions.

But beyond the increased competition,

bankers are faced with a major shift in their credit-granting environ­

Included in such shifts are greater pressures for allocation

of credit, the reactions of the banking industry itself to the
excesses of the 1970 to 1973 period, especially in real estate
financial credit, the increased number of failures of large banks and
the disclosures of implied wrong-doing by members of the banking pro­

While increased public scrutiny and adverse reaction to

banking difficulties has developed, a form of conservatism has swept
over the banking industry, almost to the point where as one banker put


it to me the other day:


"Our loan officers are not making loans based

on their evaluation of the credit but basec on whether the examiner will
criticize them."

I suggest that this is a poor way of determining

whether or not to extend credit and probably means that the community
is not well served.
There indeed has been a series of significant shifts in the
environment for banking in the past five years.

Not only have changes

developed in attitudes toward credit and the willingness of people
to accept the banker's word for matters relating to finance, but
there has been a rather significant change in the structure of banking.
Banks shifted rather rapidly toward bank holding company structures
and toward enlarging their sphere of influence into permissible non­
bank activities.

Competition was and is the name of the game, and

with that competition has come an increased emphasis upon efficiency,
upon achieving greater equity among customers and depositors and a
continuing effort to improve the over-all financial position of the
banking units.
Let me start our discussion by reviewing some of the forces
which I think the students of the Virginia-Maryland Banking School
will soon face, if you have not already done so, in your future
banking careers.

Among the principal changes in the environment

for banking has been an increased public scrutiny and a new awakening
of the public interest in financial organizations.

The definition,

scope and intensity of that public interest are matters about which


you and your associates need to be greatly concerned.

If Congress,

or the President, or the bank regulators are the only ones to define
the public interest, banks and banking will have an entirely different
flavor than if you and your associates and organizations contribute
to the definition.

Recognize that more and more regulators are

becoming involved in the banking industry— the Securities and Exchange
Commission, Federal Trade Commission, and even the White House
Telecommunications Office have begun to make their influence felt in
the banking industry, in addition to the Justice Department and State
and Federal authorities who have traditionally played a role in
regulating banks.

For some of the new entrants into bank regulation,

banking is just another industry to be treated the same as other
industries in its dealing with the public.

One feature of this is the

requirement to disclose its position with sufficient clarity that
investors and depositors can make fully informed judgments on the
strengths and weakness of particular banks.

Some of these new

regulators discount the argument that banking data should be con­
fidential to protect customer relationships, or to maintain con­
fidence in the integrity of the institution.

So you, as the

bankers who must live under this environment should be actively
participating in the definition of the public interest in this field.
Is it true that investors need the kind of information which the SEC
is now considering?

Especially, is the potential reporting of all


non-conforming loans, and even those which management believes might
become nonconforming, necessary for a good evaluation of a particular

Or is it desirable or necessary to the public interest and to

an informed investor!s judgment that banks be required to provide
five-year weighted average reports on investments, deposits, loans,
and interest?

Should banks be required to report loans by country

of borrower or by industry within that foreign country?

Much of

whether it is decided if such information is needed is obviously con­
ditioned by the objectives of such regulation.

To some of the

regulators, the objective is clear--it must be full and complete dis­
closure; to others there are competing objectives of rights of privacy,
confidentiality of customer relations, burdens of reporting, and
potentials of excessive costs for credit and reduced numbers of
credit outlets.
Still another public interest problem lies in the pro­
cedures, monitoring, and policies needed to achieve non-discriminatory
access to credit.

The fundamental public interest objective is that

credit be extended without discrimination.
the means to assure this and

The problems arise in

the potentials for interference with

the legitimate measuring of credit worthiness, the degree and type
of monitoring required, and the responsibility and probable success
of isolating patterns of discrimination by aggregating the data.
To some the sole consideration seems to be total assurance of non­
discrimination, to others the degree of burden of reporting, the


measuring task, the problem of meaningful aggregation of data, and
the possibility of accentuation of racial, sex, or religious dis­
crimination by forced recordation are important.

Is it really

necessary that records of all potentially discriminatory characteristics
of each borrower be recorded?
To most bankers extension of credit includes evaluation of
a definable and acceptable risk at a price yielding a reasonable
and competitive rate of return.

Does the public interest demand

equal treatment even to the possibility of interference with sound
credit measurement?
Another public interest question lies in the desirability
or necessity for credit allocation.

Many of the more serious

challenges to banking recently have related to credit allocation.
To some in Congress and elsewhere, it is inconceivable that banks
should not allocate credit to the housing industry.

To others,

credit allocation for housing is merely a first step toward credit
allocation for other needy borrowers, including decaying downtown
neighborhoods, minority business, urban redevelopment, and environ­
mental programs.

Again whose perception of the objective is to govern?

Some believe the objective is the establishment of a public interest
priority and then the allocation of credit of that priority.


approach would mean that market factors will play a much reduced




role from those of the regulators, Congress, and others who are
defining the public interest.

So if you wish to have some input into

the future of your credit-granting processes, you should be actively
participating in the formulation o : the objectives and means
toward achieving them.
You should help determine the answers to the following:
should high priority credit needs be met by direct government
lending, subsidies of interest, tax exemption for borrower or lender,
or regulatory fiat?

Should market interest rate allocation be

subsidiary to legislative determination of credit extensions?
Should special-purpose financial institutions

be created to

serve the public interest priority categories?
Another significant change in banking environment has
been the pressure for increased competition in the financial industry.
This public interest movement has been manifested in a number of
different ways including the passage of the Bank Holding Company Act,
the administration of that Act by the Federal Reserve, the increased
competitive demands for disclosure to improve consumers1 ability to
shop for credit among different credit-granting institutions, the
Congressional push for the FIA and FINE bills and especially the
push for increased competitive authority for the nonbank financial

To some, competition is a substitution for regulation,

but to others, competition is an adjunct or complement to regulation.



For either group competitive pressures and the monitoring of
those pressures has increased the reporting burden of commercial
banks and other financial institutions, perhaps to the level
where the costs of credit are building a base of steadily higher
interest rates and perhaps even in a few instances to the
detriment of the over-all availability of credit.

As bankers,

you should be in the forefront of those attempting to shape the
destiny of your industry over the coming years.

You should be

participating with your associations in defining the limits of
erosion in your particular industry or evaluating the degree that
competitive forces should be held in check to assure continued
safety and soundness while still providing the benefits of a
competitive environment.

Competition means many things to many

It may mean to improve the return for the small saver

whose funds have been kept almost at hostage by the banking and
financial institutions.

It may mean an early return to payment of

interest on demand deposits to assure the consumer a return on
his funds no matter where they are kept.

Competition could be

viewed as the tool to achieve credit at the lowest possible rates
of interest in a truly nondiscriminatory environment.


may mean assuring the public that bankers are not making an
unreasonable profit and are participating in the support of their
community credit needs.

Competition could even be viewed as the



means of channeling credit into areas supported by governmental
subsidy to be the most attractive as a profit maximization
There are some who view competition with some severe
reservations in their minds.

They view competition as an adjunct

to regulation, not a substitution therefor.

They view competitive

forces as a means of keeping many banks in the field of community
support but they view certain elements of competition as dangerous
to the potential safety and soundness of the industry.

To others

competition and regulation are two parts of a total control program,
where regulation should deal with unsafe and unsound banking practices,
whereas competition in an on-going sense would ensure the funds for
continued growth of the economy and an improved credit channeling
system moving funds from areas of excess to areas of deficiency.
To others free competition raises a danger of concentrated
economic and credit power for a few.

Competitive forces to these

people mean the potential of excessive concentration and therefore
a force to be limited and severely controlled.
Perhaps I have not even touched your own position on

Perhaps it is, as a banker said to me, "Competition

determines my policies.

If the banker down the street makes loans

at five per cent, I must make them at five per cent, and if the
competitor rai
raise mine.1

l i b r a r y


of market protection so that you and those other financial institu­
tions in your immediate neighborhood will be able to compete for
the loans and deposits of the community without interference from
outside institutions.

Perhaps your view of competition is the

broadest one, with freedom of entry and freedom of failure in the
banking industry.

Whatever your definition or your position,

I urge you to make your voices heard in defining the competitive
environment within which the banking industry must operate in the
years to come because both banking competition and regulation are
to a considerable extent reflective of a well-defined, enunciated,
and evaluated public interest.
Finally, I would mention to you that public interest
challenge of the broader national interest to banking.

After all,

our economy is built on a credit base and only with the sound pro­
vision of credit, taking of acceptable risks and the prudent and
careful management of those risks will our economy advance and pro­
vide the wherewithal for an improved standard of living in our nation.
If bankers are to adopt, as many did over the past year, a
philosophy that contraction is our best policy, the economy of
the nation will suffer and those of us who deal with the broad data
on the nation's economic and financial health will see continued
slippage between that which the economy produces and that which the


economy could produce.

10 -

I urge you then to take a broader role and

a broader view of your banking industry and of your bank's role in
that industry.
I urge you to consider not only the narrow realm of your
own community's interest and your own profit picture but also the
sound and prudent expansion of credit for the growth of the economy
as a whole.

Part of that broader look must be a position with

regard to the monetary authority of the United States.


many of you in this room probably represent banks who are not
members of the Federal

Reserve System, you are still a member of

the banking industry and of the financial industry of the United
States, and perhaps more importantly, you are a member of an
industry whose future is inextricably entwined into the future
of our great nation.
the nation's

Critical to that future is the ability of

central bank to establish and maintain sound policies

and procedures for over-all credit control.

If the Federal Reserve

is to do its job to handle the nation's credit supplies in the
way which provides

for a noninflationary growth of the nation,

then it must remain an independent agency with strong and enduring
ties of over-sight by Congress but with an independence of policy
permitting it to render its best judgment of the credit needs of
the economy, not the political needs of a few.

Your voice and

continuing support of this independent evaluation and judgment


11 -

is needed more than ever because the political forces of interference
and influence seem to be growing while the nation's opportunities
for growth in a noninflationary pattern may be diminishing.
In summary, the banking challenges of tomorrow are, to a
great extent, the challenges of political participation in defining,
measuring and evaluating the public interest.

Your success in this

will bring enduring rewards to your industry, your bank, and you.