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B A N K IN G OPPORTUNITIES FROM NOW TO THE TW ENTY-FIRST C E N T U R Y
Remarks o f
M r. Robert P. Forrestal
President
Federal Reserve Bank o f Atlanta
to the Annual Convention o f the
National Association o f Urban Bankers
Miami, Florida
June 13, 1985
I t ’s a real pleasure fo r me to be here with you this morning at your annual
convention.
become
The fast pace o f change and the intense level o f competition that have
prevalent
in
today’s
financial
opportunities to bankers everywhere.
service
industry
present
challenges
and
I would like to talk about the changes that are
likely to occur in banking from now until the end o f the century, including the types
o f services that probably will emerge and the kinds o f skills that will be needed to
succeed in banking.
I ’ll also have some comments on the implications o f these changes
for urban bankers in tomorrow’ s financial services industry.
Financial Services—Today Versus Yesterday
In order to see where banking is headed, I think it ’ s a good idea to look around
and see where we stand today compared with, say, the situation 10 or 20 years ago.
From the tim e o f the Great Depression until quite recently competition among banks
was restricted in three broad areas:
geographic markets, products lines, and interest
rates. Rigid limitations restricted banks’ freedom to establish branches or other offices,
and most banks’ markets were generally confined to their own states or even to certain
counties or regions within those states. Other restrictions, long thought to be inflexible,
regulated their ability to expand product lines.
Legal ceilings placed a cap on the level
o f interest rates banks could pay on various kinds o f deposits, dampening any competition
that might emerge.
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Over the last decade the situation has changed considerably. Interest rate ceilings
began to erode in the early 1970s, when savers discovered government securities,
commercial paper, and other assets paying market rates and when nonbanking financial
service companies began offering money market mutual funds.
As you know, the
popularity o f these interest-bearing accounts, which in many respects serve as substitutes
fo r bank deposits, accelerated sharply in the latter half o f the 1970s.
As banks and
other depository institutions began to lose deposits permanently, or so it seemed,
pressures mounted for deregulation o f interest rate ceilings.
o f interest rates on deposits is virtually complete.
Today, the deregulation
Banks and thrifts now have money
market deposit accounts and Super NOW accounts with which to compete against money
market funds, and they have had considerable success in regaining deposits formerly
lost to nonbank financial institutions.
Only passbook savings accounts, NOW accounts,
and, o f course, demand deposits are limited by interest ceilings. Ceilings on all interest
earning accounts w ill be eliminated on or before March 31, 1986.
The waning o f interest rate ceilings occurred along with some product expansion.
Banks have found ways to o ffe r discount brokerage services in this country and to
underwrite insurance and securities abroad. Thrifts and credit unions o ffe r transactions
accounts and loans to consumers and businesses.
Many banks are clamoring for powers
to underwrite and sell insurance, securities, and real estate.
Although legislative barriers to full interstate banking still stand, banking across
state lines has, nonetheless, emerged as a marketplace reality.
Through a variety o f
strategems—including such devices as loan production offices, bank holding company
subsidiaries, and the so-called ’’nonbank banks’’ and ’’nonthrift thrifts’’--firm s ranging
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from banks and S&Ls to supermarkets and general merchandisers are offering a mixture
o f financial services through o ffices scattered from the Atlantic to the Pacific.
If we
count the number o f offices o f foreign banks, Edge A c t corporations, loan production
offices, and other nonbanking subsidiaries o f banks and bank holding companies as well
as grandfathered interstate banking offices that are operating across state lines, the
number o f interstate o ffices offering various types o f banking services totals almost
8,000!
When you compare this figure to the number o f commercial banks in the United
States—a total o f 15,000 with 55,000 offices engaged in full-service banking, you can
see that we already have a significant amount o f what is essentially interstate banking.
What’s more, many individual states have adopted laws that allow out-of-state
banks to operate within their borders, further weakening geographic limitations.
In all,
about half the states have approved laws o f this type, and more than one-fifth have
adopted regional reciprocal interstate banking laws.
primarily in New England and the Southeast.
These states are concentrated
Many thrifts are also marketing their
services across state lines, not just in contiguous states but throughout the country,
having purchased other, ailing thrifts under special legislation.
By the end o f next year,
if nonbank banks win appeals from a pair o f adverse decisions, we may find banks from
about one-third o f the states operating deposit-taking o ffices in at least 40 states.
Forces o f Change
How did all this happen?
How and why did our traditionally conservative sector
o f the economy undergo such dramatic changes in so short a time?
fundamental forces account for these changes.
the natural forces o f competition.
As I see it, three
These are inflation, technology, and
Inflation and its interaction with market forces
deserve much of the credit—or blame, depending on your perspective—for interest-rate
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deregulation.
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The acceleration o f inflation in the 1970s made traditional savings
accounts, with their interest rate ceilings, less appealing to depositors.
The buying
power o f their deposits was shrinking faster than the interest earned on them. Investors
sought and found opportunities to earn more lucrative
depository institutions.
returns outside traditional
In response to this increased competition from outside the
banking industry, banks and other depository institutions sought re lie f from interest
rate ceilings.
Large banks found ways o f raising funds abroad, in an environment free
o f constraints, and others began to press for the deregulation that was finally enacted.
The national and international linking o f markets that occurred, when combined
with competition, also found a way to erode barriers to interstate banking and product
diversification.
Some o f the latest proliferation o f interstate banking offices has
occurred as a result o f an ambiguity in the Bank Holding Company A ct, defining a bank
as an institution that accepts deposits and makes commercial loans. Some bank holding
companies interpreted that clause to mean that subsidiaries which engage in one, but
not both, o f these two functions could legally operate insured commercial banks in
more than one state.
Other, nonbank, firms have used the device to enter banking,
thus combining banking with businesses such as insurance and securities underwiritng
which have been prohibited to banks by other federal laws. This either/or interpretation
gave rise to the term Tfnonbank bank,” with which youTre all now quite familiar.
I
sometimes awaken from a dream, or perhaps a nightmare, in which a non-Fed Fed is
trying to oversee these nonbank banks.
A fte r a lengthy period o f legal wrangling, and
a fter it became apparent that Congress was not likely to address the issue anytime
soon, last fa ll the Comptroller o f the Currency approved a number o f long-pending
applications fo r nonbank bank charters.
Over 200 were subsequently approved by the
Comptroller, the chief regulator o f national banks.
However, a suit by the Florida
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Independent Bankers Association challenging the jurisdiction o f the Comptroller and a
recent federal court ruling ruling in Atlanta disallowing the Fed’s reluctant approval o f
a nonbank bank acquisition by a bank holding company have brought approvals for bank
holding companies to a standstill.
A t this point, the status o f nonbank banks remains
in legislative and judicial limbo.
Our legislators in Washington and in state capitals may debate the merits of
these trends for a few more years, and they may influence the speed and course o f
interstate banking.
Nonetheless, it is probably too late for legislators to effectively
stem the tide o f interstate banking that is being propelled by market forces.
A few
days ago the U.S. Supreme Court ruled that state banking laws limiting interstate
mergers to certain other states are within the bounds o f the constitution and federal
banking statutes.
The case before the Supreme Court had been filed by Citicorp and
New England Bancorp o f New Haven, Connecticut.
They had challenged the Federal
Reserve Board’ s approval o f mergers under state laws that lim it such mergers to states
participating in the New England regional interstate compact.
That decision is o f
particular interest to us here in the Southeast, o f course, but it has been watched
closely by legislators from other states such as Oregon, where regional interstate banking
is under consideration.
It could have implications for the merger of Florida’ s Sun Banks
and Trust Company o f Georgia as well since Citicorp has also filed suit in the U.S.
Court o f Appeals for the Second District in New York to block the SunTrust merger.
As a result o f this decision we will probably see further expansion o f interstate
banking, particularly by regional banks rather than by the large money center banks.
The latter now are more limited to such legal devices as nonbank banks and to technical
devices such as computers and telephone lines as means o f widening their geographic
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markets, and the future o f nonbank banks rests largely with Congress and possibly the
Supreme Court.
Even if either o f these countermands nonbank banks, though, I doubt
that com petitive pressures will rest on a plateau o f regional interstate compacts.
Rather, I would not be surprised to see the arena o f competition shift to the product
area.
Large banks in New York, California, and elsewhere might lobby harder to be
allowed to o ffe r various services now deemed outside the proper realm o f banking.
The market forces that led to the erosion o f interest rate ceilings will lead many
institutions to look fo r ways to surmount remaining restraints on full nationwide
competition, and I suspect that they will find avenues to do so.
At
the same time that environmental and com petitive pressures have been
transforming the financial services industry, a technological revolution has been taking
place in our payments system.
This technological revolution has amplified these other
changes taking place in the industry.
ATMs and other computerized services put
customers and financial institutions in touch more quickly without the personnel and
capital expense o f bricks-and-mortar branches.
Thus, the physical branch system of
banks and S<5cLs, one o f their unique features, has become less significant.
Although
checks and cash will remain important into the foreseeable future, paperless transactions
involving wire transfers and automated clearinghouses are growing far more rapidly.
Networks linking automated teller machines are offering
convenience.
consumers unprecedented
Nonbank financial firms and bank credit card operations allow for
immediate access to cash.
Travelers several thousand o f miles away from home can
withdraw or borrow cash after regular business hours or 24 hours a day for that matter.
When you stop to think o f it, you cannot help but be amazed by the sweeping changes
that have taken place.
Those ahead may be still more amazing.
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The Future o f Financial Services
Where are financial services going, and what will it be like to do business in
banks o f the future?
As I see it, four major forces w ill shape the course o f tomorrow’ s
financial services industry.
These are the macroeconomic environment, continued
pressures from competition, regulatory changes, and even more exciting technological
innovations.
Clearly, macroeconomic factors will play an important and, I believe,
positive role in determining the direction taken by banks, thrifts, and other financial
institutions.
Provided progress can be made toward lowering the very large federal
budget d eficit, the U.S. economy is likely to grow at a healthy pace over the next
decade.
Such growth should help mitigate problems such as the high incidence of
failures we have experienced in the past few years.
This expected economic expansion
w ill also increase demand for all kinds of financial services, thereby creating an
environment o f growth and opportunities for financial institutions in general.
Since this sort o f macroeconomic growth will require a stable as well as a highly
developed and responsive financial system, we will probably experience some changes
in the regulatory environment to ensure the continuing soundness o f our financial system.
Increases in bank capital ratios have already been enacted.
deposit insurance.
We may see a change in
Critics o f the present system have proposed deposit insurance fees
based on risk, strict limits on payoffs for failed institutions, private co-insurance, and
more intense supervision.
The thrust o f recommendations put forth by regulatory
agencies other than the Federal Reserve is to place more risk on depositors.
Under
these various proposals, depositors would bear more o f the cost o f risk either because
institutions would be charged fo r their riskiness and pass the added costs along to
customers or because insurance coverage would be limited.
the burden o f assessing risk would fall on customers.
In either case, more of
None o f the proposals is free
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from bugs; none is terribly attractive.
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I believe that there will be some reform,
however.
In addition, we are likely to see the termination o f state-based insurance
systems.
Recent events in Ohio and Maryland have dramatized the fact that such
systems are not truly workable over the long run.
Notwithstanding the probability o f some regulatory reform, in my opinion, the
major thrust will be toward further deregulation.
Laws and regulations, no matter how
well thought out, are proving to be flimsy indeed when pitted against market forces
that push money flows into their most profitable uses.
External competition will
continue from Sears, Kroger, M errill Lynch, and other nonbanking companies as well
as from foreign institutions. Personally, I believe that Congress should close the nonbank
bank and nonthrift thrift loopholes and provide a comprehensive statutory framework
fo r interstate banking.
Y e t whatever happens, within five to seven years I fe e l banks
w ill be able to operate across state lines nationwide.
On the question o f new powers,
I believe there must be a serious consideration o f the risks involved even though it is
likely that banks will steadily broaden the services they offer.
In addition, consolidation o f institutions will continue or even accelerate, although
I doubt that financial services in this country will be dominated by a handful o f large
institutions as is the case in Canada and certain other developed countries.
The type
and size o f Am erica’s financial institutions will remain varied because, beyond the
range
of
$75-$100
million
in
assets,
economies
of
scale
diminish
significantly.
Furthermore, large institutions have not significantly penetrated the markets or slowed
the growth o f smaller ones when they have entered into direct competition. One reason
is that small institutions can o ffer many o f the same high volume services as large
institutions by buying services at wholesale and acting as distributor; this practice
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enables small institutions to provide many o f the low-cost services available at larger,
more bureaucratic financial institutions without diminishing the special features that
distinguish small institutions from larger ones.
Finally,
technological
changes are
Advances in computers will continue to
economically feasible.
certain
make
to
continue
even
more
or even accelerate.
services
available
and
Home banking through a fam ily’ s personal computer is likely to
prove popular as soon as technological advances bring prices down to a more affordable
le v e l and as children growing up with computers as both toys and educational tools
become bank customers. Technology will also probably continue to erode the importance
o f branch systems while fostering the growth of alternatives that o ffe r more convenience
to the customer. One such alternative might be limited banking services in nontraditional
locations like grocery stores.
Another could be multiple services available through a
single institution such as a general merchandiser or retail store.
It is hard to predict which services will prove technologically feasible and most
popular.
Y e t, one thing is certain—new financial products and services are bound to
proliferate in tomorrow’ s financial services industry.
My confidence in this prediction
is due to the fa c t that the changes we have seen in the past decade or two derive
largely from com petitive pressures, and these pressures are unlikely to abate through
the end o f this century.
Moreover, the direction o f recent technological innovation
lends itself to the development o f new financial products as a means o f competing
more e ffe c tiv e ly .
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Tom orrow’s Skills
These expected changes in banking suggest that the types o f skills necessary for
success w ill also continue to evolve.
for the skills o f generalists.
The profession o f bankers has traditionally called
The reason for the predominance o f this attribute was
that bankers had to deal with people in so many walks o f life and in such diverse
economic circumstances. Bankers have always needed broad "people" skills to deal with
a diverse clientele ranging from the young couple buying their first home to a growing
business with expanding financial demands.
However, in recent years technical skills
have become increasingly important. To get ahead, bankers and banks have incorporated
an enormous amount o f new technology into their day-to-day activities.
Computers
are now part o f almost every aspect o f banking, and those bankers and banks who have
been able to learn to use them and to see new applications have done well. In addition,
products offered by the banking industry have become more complex and sophisticated.
Consequently, financial and other analytical skills have become even more important
than ever.
I see no change in this trend. Bankers will continue to need breadth of background
and an understanding o f human nature in all its diversity. Solutions that seem technically
appealing and e fficien t can sometimes put o ff or even offend customers if they are
made to fe e l like mere appendages o f a machine.
On the other hand, bankers need to
have at their sides a "sharpened pencil" and the training and perseverance to use the
analytical knowledge which this term implies.
Competition has simply become too
intense for bankers to skimp on technical, financial, and analytical skills.
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o f black banks have assests o f $25 million or less although at least one is above $100
million in assets.
However, unlike many smaller banks that achieve consistently strong
financial performance by identifying and serving a profitable market niche, urban banks
depend primarily on inner city minorities as their primary source o f business.
Since
this segment of the population is economically disadvantaged to begin with and tends
to suffer disproportionately during times o f recession, it is understandable that blackowned banks tend to underperform relative to other small- to medium-sized institutions.
Black-owned banks might improve their financial performance by working harder to
earn and retain the loyalty o f the rising number o f affluent black households, who are
moving into the suburbs, as well as that o f black-owned businesses.
However, money
tends
token,
to
flow
to
its
most
profitable
use,
and,
by
the
same
informed
customers—both businesses and households—tend to look for the best products at the
lowest prices, regardless o f the social characteristics o f the organization’ s owners.
Thus, the future for most black bankers seems to lie primarily outside the fold o f
minority-owned banks.
Here, I believe, the future o f black bankers generally seems brighter.
In the
last two decades black bankers in all financial institutions have made enormous strides
in terms o f professional advancement.
The number o f black bank officers has grown
considerably in a relatively short time. The question on the mind o f many blaek bankers
today, though, is whether these gains will continue.
A recent survey conducted by Ed
('
.
Irons at Atlanta University revealed substantial frustratroif among black bankers with
their current status as well as their career prospects.
A number o f those polled fe lt
their chances o f being promoted into the ranks o f senior management were very poor.
Other believe that, regardless o f their technical know-how or educational qualifications,
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they were being overlooked even for intermediate promotions because o f remaining
vestiges o f exclusion from the inner circles o f power.
What does the future hold for you and your colleagues as individuals in the
banking industry? A re these feelings o f frustrations misplaced, or do they signal looming
losses o f hard-won gains?
In my opinion, your future, like that o f aspiring bankers o f
all ethnic groups and races will be influenced heavily by the new spirit o f competition
that has come to dominate the financial services industry.
In this more competitive
environment there will be more emphasis than ever on recruiting the best, most
innovative, and most efficien t talent available, the talent that is likely to help a
particular institution’ s profitability and growth. In this environment, the personnel skills
I mentioned earlier apply equally to blacks as to all racial, ethnic, and gender groups.
To get ahead in banking will require making a contribution, whether in the form of
technical skills, financial analysis, or having the foresight and vision regarding new
applications and products.
In the years ahead all banks will need plenty o f people with
sharpened pencils in order to compete against both banks from other geographic areas
and nonbanking financial institutions. Current demographics, however, may make things
even more difficult for younger black bankers for a while.
Because of the post-war
baby-boom, tl>e number o f candidates for lower level o ffic e r jobs has swelled far beyond
normal levels. This occurrence suggests that it will be harder for aspiring bank officers,
both black and white, to achieve the promotions they desire and probably deserve.
In
this situation we must be sure that merit, and merit alone, determines who, among
this much larger pool o f qualified candidates, is promoted.
If, as this recent survey suggests, subtle yet signficant vestiges o f discrimination
persist in our industry, then it is the responsibility o f organizations such as the National
Association o f Urban Bankers to identify in specific terms the dimensions o f this
problem, to suggest remedies, and to petition decision makers in banking for redress
o f legitim ate grievances.
to
make sure that
Obversely, it is the responsibility o f those already in power
progress
toward
equitable
treatment o f minorities and other
disadvantaged groups is not once again impeded.
Their interest in doing so stems in
part from basic economic incentives.
Any business leader must attempt to conserve
resources and allocate them as efficien tly as possible.
Since banks are highly labor
intensive, it makes good business sense to avoid underutilization o f outstanding human
resources and to avoid wasting its most precious assets in positions that do not bring
out their fullest potential as individuals and members o f the organization.
Even more
importantly, the interest of banking leaders should also stem from fundamental ethical
considerations.
They
must
guard against
and extirpate
whatever
conscious
and
unconscious vestiges o f discrimination still remain in the financial services industry.
Will there be a special role for black bankers?
As society becomes more
integrated, the need diminishes for special institutions dealing with those who have
been victims o f exclusion in the past.
Thus, I fe e l the special role that black bankers
in minority-owned banks is also likely to wane.
that black bankers will play in banking generally.
However, there are important roles
First, black bankers such as many
o f you in this audience can serve as role models and mentors to those now entering
and coming up through the ranks.
during your careers in banking.
Many o f you have experienced trying situations
Your insight and advice regarding how you triumphed
over these circumstances is invaluable to a younger generation o f urban bankers.
In
addition, as you develop more experience in the broad areas o f banking and with the
myriad o f new financial instruments coming on stream, you could bring to black banks
a greater wealth o f experience than some have enjoyed in the past.
This experience
cm
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could help such institutions improve their profitability .and overall financial performance.
Finally, you may o ffe r your institutions a better understanding o f how to market to a
clientele which many banks have overlooked but whom nonbanking financial institutions
and even nonfinancial companies are now attempting, with some success, to woo.
Conclusion
L e t me conclude by reminding you o f the challenges in the financial services
industry today.
In the case o f urban banks, the paramount challenge is to steer a
course toward diversification.
For black bankers more generally the future will depend
largely, as it does fo r all bankers, on how well you can adapt to today’s more competitive
banking environment, on how flexible you are in developing your skills to change with
the times.
Despite the sometimes intimidating nature o f the developments taking place
and the problems you confront, all banks and bankers have greater opportunities than
ever before as the financial services industry becomes less regulated, more diversified,
^
and more dynamic.
P™
In moving to take advantage o f those opportunities, I am hopeful
that urban bankers, through diversification o f your skills and a positive attitude toward
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today’s opportunities, will find ways to prosper, and in the process, I am sure, you will
provide better, more efficien t financial services to the public at large.
@FedFRASER