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• APRIL
26, 1979
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FEDERAL RESERVE MEMBERSHIP AND THE
CHANGING FINANCIAL ENVIRONMENT
I
i~ULD LI KE TO ADD MY PERSONAL WELCOME TO ALL OF YOU I
I
AM
PLEASED TI-1AT YOU HAVE TAKEN 1HE TIME TO MEET WITH us--HOPEFULLY NOT ONLY
TO HEAR WHAT WE HAVE TO SAY BUT ALSO TO GIVE US THE BENEFIT OF YOUR
COUNSEL ON THE MAJOR ISSUES CONFRONTING THE FEDERAL RESERVE SYSTEM,
{
l HAVE ALWAYS BEEN PARTICULARLY PROUD OF THE ROLE THAT MEMBER BANKS
IN MICHIGAN HAVE PLAYED IN FEDERAL RESERVE SYSTEM AFFAIRS.
VIDED LEADERSHIP, NEW IDEAS AND,
l
HAVE PRO-
MUST ADMIT, YOU HAVE OFFERED, NOT IN-
FREQUENTLY, SOME INTERESTING CHALLENGES.
EVENING WILL NOT BE ANY DIFFERENT,
You
I KNOW TiiAT
THIS AffiRNOON AND
WE CAN EXPECT TO LEAVE Will-I A KEENER
APPRECIATION OF YOUR PROBLEMS AND NEW KNOWLEDGE ABOLIT TI-IE OPPORTUNITIES
WE HAVE TO tv1AKE THIS UNIQUE PARTNERSHIP OF OURS EVEN ~RE VITAL,
As
THE PROGRAM INDICATES, THIS PARTNERSHIP-MEfv'IBERSHIP ·IN THE FEDERAL ·· ·
RESERVE SYSTEM--IS WHAT
l
WANT TO TALK ABOUT.
IT COMES FIRST ON THE PRO-
GRAJv1 BECAUSE IT IS THE M:>ST IMPORTANT ISSUE CONFRONTING ALL OF US.
THE OTHER PART OF MY TITLE--THE CHANGING FINANCIAL ENVIRONMENT-IS
{
~
THERE BECAUSE THAT IS TI-IE REASON v'JHY tvEMBERSHIP HAS BECOME AN IMPORTANT
IN
ISSUE,
A WORD, THAT CHANGING ENVIRONMENT IS COMPETITION-COMPETITION
FROM NON-MEMBER BANKS, COMPETITION FROM OTHER NON-BANK FINANCIAL INSTITUTIONS
AND COMPETITION FRCTvl COMvlERCIAL FI~.
i:)ANKS NO LONGER HAVE A f'IONOPOLY ON f'IONEY AND CREDIT-- I F THEY EVER DID,
. . THE PQS ITION OF OUR BANKS HAS BEEN STEADILY ERODED AS Mt\RKET AFTER MARKET
HAS .BEEN INVADED OR .PRE~.EMPTED._
.I
WOULD BE FOOLISH, OF COURSE, TO ARGUE THAT APPROPRIATE MEMBERSHIP
LEGISLATION WOULD CH~NGE THE ENTIRE COMPETITIVE POSITION.
IT CAN'T,
THERE
ARE OTI1ER VERY .IMPORTANT REGULATORY AND LEGISLATIVE . IMPEDIMENTS THAT INFLUENCE WHAT YOUR BUSINESS CAN BE AND HOW AND WHERE YOU CONDUCT YOUR BUSINESS,
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Federal Reserve Bank of St. Louis
Bur REfv'OVAL OF THE INEQUITIES ASSOCIATED Willi RESERVE BALANCES ARE AN IMPORTANT STEP IN THE RIGHT DIRECTION,
ALJVOST EVERYONE, EVEN NON-MEMBER BANKS AND SAVINGS AND LOANS, AGREE
THAT THE LOSS OF MEMBERS IN THE FED IS A SERIOUS fv\l\TTER,
IT STRIKES AT
THE VERY HEART OF TI-HS UNIQUE CENTRAL &NK--BASED ON A REGIONAL STRLK:TURE
1
(TI-IE IMPORTANCE OF WHICH SHOULD NEVER BE DISCOUNTED) AND RELATIVELY INDEPENDENT OF DAY TO DAY POLITICAL PRESSURES, WHILE THERE ARE DISAGREEMENTS
AS TO THE MONETARY POLICY ACTIONS WE HAVE TAKEN, THE CONCEPT OF AN INSTITUTION WITii ONE FOOT PL.ANTED IN THE GOVERNfvlENT SECTOR AND THE OTHER PLANTED
IN THE PRIVATE SECTOR, IS ACCEPTED AND ENCOURAGED AS CONSISTENT WITH OUR
DEEPEST POLITICAL PHILOSOPHIES,
THERE IS NO OOUBT THAT THE LOSS-OF MEMBERSHIP IS A DIRECT RESULT OF
THE COST OF HOLDING RESERVES AT THE FED, TI-OSE COSTS HAVE BECQ\'lE RELATIVELY
GREATER AS ACCESS TO FED SERVICES HAVE BEEN PROVIDED TO NON-MEMBER BANKS,
I
Kf\10W
THAT YOU HAVE ARGUED THAT WE HAVE EXACERBATED THE MEMBERSHIP PROBLEM
BY ALLOWING THIS TO HAPPEN, l)LJT LET ME REMIND YOU AND EMPHASIZE 11-iE POINT
THAT JUSTICE DEPARTMENT PRESSURES FOR PROVIDINGICCESS TO ALL ARE VERY, VERY
REAL,
ANOTiiERFACTOR THAT HAS COMPLICATED THE MEMBERSHIP ISSUE AND HAS TiiE
POTENTIAL FOR FURTHER, SEVERE, EXACERBATION OF TiiE PROBLEM HAS BEEN THE
PRESSURES FOR PRICING FED SERVICES, ON THE GROUNDS OF ECOf'OMIC OR ALLOCATIVE EFFICIENCY, ACADEMICS, GOVERNMENT AND EVEN THE BANKING INDUSTRY ITSELF Hl\VE ARGUED FOR PRICING,
WE
HAVE REJv1AINED STEADFAST IN OUR COfVMITMENT
NOT _TO. PR ICE UNTIL 11-IE INEQUITIES OF MEMBERSH I.P ARE .RESOLVED, . . .
'--
Bur WHAT THEN IS THE SOLUTION? FIRST, THERE HAS BEEN THE ARGlJvlENT
THAT 1/JE SHOULD REDUCE RESERVE REQUIREMENTS WITHIN OUR CURRENT STATUTORY
LIMITATIONS, THAT SIMPLY WJN'T -CORRECT THE PROBLEM, THE Sfvl.l\LLER BANKS
v\OULD GAIN AlJIOST NOTHING SINCE THEY ARE ALREADY AT THE MINIMLJV1S,
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Federal Reserve Bank of St. Louis
AND THE
,
- 3GAIN FOR LARGE ,BANKS SIMPLY WILL NOT FLY IN CoNGRESS,
SIDERED A LARGE BANK GIVEAWAY,
IT WOULD BE CONI
IF YOU IDN'T BELIEVE ME JUST READ SOME OF
THE TESTif'IONY IN loNGRESS, THE VITRIOLICCOVMENT IS MU:H fvDRE THAN POSTURING.
ANOTHER SOLlJfION WOULD BE STRAIGITT FORWARD UN{VERSAL RESERVE REQUIREMENTS,
CoNGRESS HAS NEVER BOUGHT THIS AND NEITHER HAVE THE BANKING AND
THRIFT INDUSTRIES BEEN VERY SUPPORTIVE OF THIS CONCEPT.
MJsr OF THE OTHER
MEMBERSHIP PROPOSALS -COMING FROM INDUSTRY GROUPS
OR ORIGINATING FROM MEMBERS OF CoNGRESS ARE COMPRQ\1ISES ON UNIVERSAL RESERVE
REQUIREMENTS,
l KNOW THAT BY f\XJW THERE SEEM TO BE SO MANY DIFFERENT PRO-
POSALS THAT EVERYONE IS CONFUSED, BITT THE ESSENTIAL ASPECTS ARE NOT AS
..
CONFUSING AS lliEY APPEAR, THERE ARE
TIA.JO
IMPORTANT DISTINGUISHING CHARAC..
TERISTICS OF THE PROPOSALS, FIRST, SHOULD THERE BE fv1ANDATORY OR VOLUNTARY
.
.
.
RESERVE REQUIREMENTS? (Jjy THE WAY, NONE OF THE PROPOSALS HAS EVER INCLUDED
IWJIYITORY MEMBERSHIP,
~, PLEASE, \',ff-JEN YOU SEE PROPOSALS
. .. .
THAT DEFINE ALL
. . . . .. .
DEPOSITORY INSTITUTIONS AS BEING SUBJECT TO RESERVE REQUIREMENTS OON;T READ
THIS AS REQUIRING FEDERAL KESERVE MEMBERSHIP,)
THE OTHER Ml\JOR CHARACTERISTIC OF THE PROPOSALS DEALS Willi WHO IS
COVERED AND ON WHAT lYPES OF DEPOSITS, THE VOLUNTARY RESERVE REQUIREMEITT
• PROPOSALS COVER ONLY COM'v1ERCIAL BANKS AND IMPOSE RESERVE REQUIREMENTS ON
THE TRADITIONAL DEPOSIT FORMS IN BANKS THAT ARE MEMBERS, THE MANMTORY
RESERVE REQUIREMENT PROPOSALS PLACE REQUIREMENTS ON THE lYPE ·OF DEPOSIT-TRANSACTION ACCOUNTS--AT ALL DEPOSITORY INST!TlJfIONS AND WITH AN EXEMPTION.
OF $35, $40 OR $50 MILLION ON TRANSACTION ACCOUNTS AND A SIMILAR EXEMPTION
ON TIME AND SAVINGS ACCOUNTS, -
You Mt\Y ALSO FIND THE FED'S POSITION ON THESE VARIOUS BILLS CONFUSING.
l THINK l CAN SORT 11-iAT OlJf FOR YOU,
tiUT BEFORE 1 00, LET ME ASK YOU--HJW
~¼NY BANKS HERE HAVE TOTAL DEPOSITS OF UNDER $75 MILLION?
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Federal Reserve Bank of St. Louis
_ ()
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I
·
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c--'
~)l,rt~. •
- 4f'bNE OF YOU- WOULD HAVE A REQUIRED RESERVE BALANCE AT THE FED IF THE
LATEST VERSION OF THE REUSS Bill WERE TO PASS.
THIS BILL IS IN fvlARK-UP TODAY
AND PROVIDES- FOR A $7U MILLION EXEfv1PTION AND INITIAL RESERVE REQUIREMENTS
OF
7 PERCENT
FOR TRANSACTiON AND SHORT-TE~~ TIME ACCOUNTS AND
ON SAVINGS AND LONG-TERM TIME' ACCOUNTS,
ONLY
14
1 PERCENT
OF THE MEMBER BANKS IN
MICHIGAN \'K.JUL.D HAVE BALANCES AT THE I-ED AND FOR THOSE lLJ BANKS, TOTAL RESERVES WOULD BE REDUCED fVORE THAN
$4:6
MIU.ION,
(ONLY , CURRENT NON-MEMBER
BANKS WJULD HAVE REQUIRED BALANCES AT THE FED,)
So--FROM THE STANDPOINT OF THE COST OF RESERVES, THE GAIN IS LARGE
FOR ALL OF YOU,
AND IF RESERVE COST IS THE REASON FOR TI-IE LOSS OF MEMBER-
SH IP, \\OULD ALL OF YOU STAY IN THE SYSTEM AND SUPPORT THIS LATEST VERSION'?
OF COURSE,
I
KNOW TI-iAT THERE ARE OTHER ISSUES--PROBABLY f'l()RE PHILO-
SOPHICAL THAN POCKET BOOK,
AND l KNOW THAT IN A PERFECT WORLD WITHOUT Ar-N
CONSTRAINTS PERHAPS A _BETTER SOLUTION . COULD _BE FOUND,
BUT THERE ARE CON-
STRAINTS!
LET ME TELL YOU SOMETHING ABOUT THE CONSTRAINTS AND THE rED'S POSITION.
fVbsT IMPORTANT TO THE FED IS THE CONCEPT TI-iAT WE SHOULD Ht\VE SIMILAR
• TREATMENT OF TI-IE SAf'lf TYPE OF DEPOSITS AT ALL INSTITUTIONS--SAVINGS AND
LOANS, CREDIT UNIONS, ETC,
EQUITABLE COMPETITION,
THIS GOES BACK TO THE ORIGINAL ISSUE
OTHERS,
RAISED--
IHE ISSUE IS NOT ONLY EQUITY AfvONG BANKS BUT AfvONG
FINANCIAL INSTITUfiONS IN THE SAME ACTIVITIES,
CONCEPT ESTABLISHED,
l
IT IS IMPORTANT TO GET THIS
LOMPETITION IS GROWING WITH ~&Ls, CREDIT UNIONS AND
IHE CLOCK WON'T BE TURNED BACK,
So
WHY HAVE YOUR HANDS TIED'?
SIMILAR TREATMENT ALSO MAKES SENSE IN TERMS OF f'IONETARY .CONTROL, .
SHIFTS Af'IONG INSTITLITIONS WITH DIFFERENT RESERVE RATIOS ON SIMILAR TYPES
OF DEPOSITS CREATES ERRORS IN PREDICTION AND CONTROL OF f'IONEY AND CREDIT,
IHE RESERVE RATIO ITSELF IS NOT THE fvlAJOR PROBLEM, IT IS THE PROPORTION OF .
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Federal Reserve Bank of St. Louis
IS"~-;:;
(
v
~ ':)
- 5THE DEPOSITS COVERED BY A KNOWN AND STABLE RESERVE REQUIREMENT. You ALL
KNOW THAT RESERVE RATIOS ARE 1HE FULCRLMffiNNECTING RESERVES AND fv'ONEY.
SHIFfS FROM RESERVABLE TO NONRESERVABLE INSTITUTIONS CAUSE LARGE ERRORS IN
71 PERCENT OF DEPOSITS RESERVABLE, -1HE ERROR
FROM SHIFTS Afv'DUNTS TO PLUS OR MINUS 3 J/2 PERCENT IN M-1.
PREDICTION,
f'bv.~
WITH ABOLIT
WHY NOT VOLUNTARY. RESERVES? f~NY OF US CAN GIVE GCXm REASONS FOR
rv\L\INTAINING A VOLUNTARY RESERVE REQUIREMENT POSTURE . .tSUT THERE ARE SEVERAL
THINGS TO CONSIJER. FIRST, IS THE IMPORTANCE OF ESTABLISHING THE CONCEPT
OF SIMILAR REQUIREMENTS FOR ALL INSTITLITIONS--AS l MENTIONED EARLIER, A
FAILURE TO 00 THIS WILL LEAVE THIS UNFAIR COMPETITION UNTOUCHED.
Bur EVEN IF THAT CONCEPT OF INEQUITY COULD BE IGNORED, l THINK THAT
WE SHOULD PAUSE FOR A MINLITE AND ASK OURSELVES WHAT hOULD BE REQUIRED TO
MAKE A VOLUNTARY APPROACH WORK,
WHAT \\OULD BE REQUIRED TO KEEP MEMBERSHIP
INTACT OR GROWING? RESERVE REQUIREMENTS WOULD HAVE TO BE REDUCED SIGNIFICANTLY, ACCESS LIMITED COMPLETELY TO MEMBERS, NO PRICING OR, IF PRICING,
PAYMENT OF INTEREST ON RESERVES,
IHAT IS A FORMIDABLE PACKAGE TO GET
AGREEMENT ON IN LONGRESS,
RIGHT AT THE TOP, WE ~ULD HAVE TO ARGUE THAT ACCESS AND PRICING ARE
ISSUES THAT ARE NOT REALLY DEBATABLE IN A POLITICAL SENSE, THE JUSTICE
UEPARTMENT HAS ALREADY EMPHASIZED THE NEED FOR ACCESS AND ON PRICING EVEN
MEMBER BANKS ARE PUSHING IN TI-tAT DIRECTION,
lN 1HE ~RLD OF ACCESS AND PRICING THEN, RETENTION OF A STRONG VOLUNTARY MEMBERSHIP MUST REQUIRE LARGE REDUCTIONS IN RESERVE REQUIREfV1ENTS, PAYr~NT OF INTEREST ON RESERVES OR A SIMILAR TYPE OF INDUCEMENT,
FRANKLY, AND
I THINK OBVIOUSLY FRQ\1 THE DEMTE YOU HAVE HEARD, THE TREASURY IS UNWILLING
TO ACCEPT 11-IE LOSS OF REVENUES THAT ½OULD OCCUR AND CoNGRESS REFUSES TO 00
SO,
l QLOTE "HOW COULD WE SUPPORT THIS NEW PROGRAM TO HAND OUT HUNDREDS OF
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Federal Reserve Bank of St. Louis
1
iJ
r..,
- 6MILLIONS OF IDLLARS OF t'ONEY FROM THE TREASURY TO THE BANKS,
Ir's REALLY
WELFARE FOR THE BANKS, SUBSIDY FOR THE BANKS, ETC,, ETC,, ETC,"
f'.bw f
KNOW HOtl YOU FEEL ABOUT THIS,
. I'M JUST INDICATING TI,E FACTS OF LIFE,
l
FULLY APPRECIATE YOUR POSITION,
IHIS IS THE REALISM WE HAVE TO
LIVE WI1H,
AND SIMILARLY IT APPEARS THAT WE ARE FORECLOSED FROM UNILATERALLY
PAYING INTEREST ON DEPOSITS,
WE Ml\Y HAVE DIFFERENT LEGAL OPINIONS,
BLIT
CoNGRESS CAN AND APPARENTLY WOULD ACT TO KNOCK IT OOWN,
THERE lS ANOTHER AREA OF REALISTIC CONSTRAINT THAT REQUIRED A COMPROMISE,
IHAT WAS IN THE AREA OF PUTTING RESERVE REQUIREMENTS ON TIME AND
SAVINGS ACCOUNTS AT THRIFTS,
EQUITY DEfv1ANDS IT BLJf POLITICAL PRESSURES
FROM THRIFTS ~KE IT IMPRACTICAL
ING BETTER ALL OF THE TIME,
Bur
THE COMPROMISE IN THIS AREA IS LOOK-
IHE NEWEST VERSION OF THE KEUSS BILL SETS A
RESERVE REQUIREfVlENT RANGE ON SAVINGS AND LONG-TERM TIME DEPOSITS OF
WITH
1 PERCENT
INDICATED AS THE INITIAL PERCENT,
U TO 5
YOULD IT BE TOO BOLD TO
SAY, EQUITY IS COMING?
ALL IN ALL, THEN, THERE MAY BE A WORKABLE ALTERNATIVE IN THE OFFING,
NJT PERFECT, BUT GAl.XJING THE PRESSURES ON ALL SIIES, A REASONABLE APPROACH, •
WHAT ARE THE CHANCES FOR SUCCESS?
As THE HANDS RAISED EARLIER BY THIS
GROUP MIGHT SUGGEST, THE RESERVE REQUIREMENT BURDEN WI LL BE LIFTED FOR fvOST
BANKS AND SHARPLY REDUCED FOR THE FEW REfv1AINING,
WILL 00,
THE
IJ:AA
I OON'T KNOW WHAT THE
APA
POSITION TAKEN EARLIER SHOULD l-OLD SINCE THE BILLS ARE
SIMILAR,
AND WHAT ABOUT LoNGRESS? . WELL, THE CHANGES IN THE REUSS BILL AR~ TO BE PROPOSED BY CoNGRESSMEN
VOTED AGAINST
H.R,7
AND BARNARD,
AND BARNARD VOTED PRESENT,
GET OLJT OF Cofv'MITTEE
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Federal Reserve Bank of St. Louis
rt)oRHEAD
I
LAST TIME AROUND fvmRHEAD
IT LOOKS AS THOLK3H IT WILL
- 7-
Now, J HAVEN'T
GONE INTO ALL THE DETAILS ON THE NEWEST VERSION, LARGELY
BECAUSE I OON'T KNOW HOW THINGS WILL ACTUALLY TURN OUT TODAY, HUT THERE ARE
OTHER ELEMENTS AS WELL THAT SHOULD IMPROVE THE ACCEPTABILITY OF THE PROPOSAL,
A TEN-YEAR PHASE-IN FOR NON-M:MBERS SHOULD MAKE IT f'/ORE PALATABLE TO SOME,
Au.at/ING THE EXEMPTION UNUSED ON TRANSACTION ACCOUNTS TO BE APPLIED TO TIME
AND SAVINGS WOULD BE A PLUS TO SOME, AND THE ADDITION OF FLOAT TO THE
PRICING SCHEDULE--ALTHOUGH 1HAT WILL BE A BIG PROBLEM--HAS ATTRACTED SOME
OTHER BANKS,
THE NEED FOR RELIEF OF THE COST OF MEMBERSHIP IS UNQUESTIONABLE, WE
WILL ML\KE PROGRESS THIS YEAR--WE MUST,
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@FedFRASER