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RECT -N RECORDS SECTIOIN M REMARKS BY STEPHEN S. GARD? VICE CHAIRMAN BOARD OF GOVERNORS OF THE FEDERAL AT THE ANNUAL DINNER FOR NATIONAL ECONOMISTS CLUB MARCH 4, 1976 GOOD EVENING. I A M HAPPY TO BE HERE. / I R E C E N T L Y JOINED ANOTHER EXCLUSIVE SOCIETY OF ECONOMISTS M Y S E L F . THE PROCESS OF THOROUGHLY CONFUSING ERUDITION. 2 319/9 THEY ARE IN ME WITH THEIR BUT I AM PLEASED AND F L A T T E R E D TO JOIN SUCH ABLE COLLEAGUES A T THE BOARD. HAVING BEEN USED TO HIRING ECONOMISTS IN P R I V A T E INDUSTRY AND A T THE TREASURY, THERE IS SOME ROLE CHANGING HERE. I AM NOW BEING ORDERED ABOUT BY MEMBERS OF YOUR DISTINGUISHED F R A T E R N I T Y . A L L THINGS CONSIDERED, THE ECONOMY IS GOING SURPRISINGLY WELL. THERE IS A CERTAIN CONSISTENCY IN THE EXPECTATIONS. WE'RE NOT HAVING AN ESOTERIC AND HEATED DEBATE ABOUT THE NEAR TERM. I TEND TO BE SURPRISED THAT THE INDICIES AND STATISTICS ARE CONTINUOUSLY POSITIVE ON BALANCE. THIS SURPRISE STEMS FROM WHERE WE WERE A YEAR AGO AND WHAT WE HAVE JUST BEEN THROUGH AND WHAT WE'RE STILL EXPERIENCING RATHER THAN ANY BASIC DISAGREEMENT WITH WHAT THE GOVERNMENT IS DOING, THIS UNDERLINES THE FACT THAT THERE IS STILL CONSIDERABLE V I T A L I T Y IN THE PRIVATE SECTOR. BUT I A M MORE CONCERNED ABOUT THE A B I L I T Y OF THE P R I V A T E AND PUBLIC SECTORS TO MANAGE LONGER T E R M PROBLEMS, SUCH AS ENERGY USES AND SUPPLIES AND ENVIRONMENTAL CONCERNS AND TO REINFORCE PRODUCTIVITY GAINS AS YOUR PRESIDENT, JOHN KENDRICK, POINTED OUT IN HIS SCHOLARLY STUDY ON ECONOMIC GROWTH AND T O T A L C A P I T A L FORMATION FOR THE JEC. BUT I DON'T INTEND TO T R Y TO T E L L THIS T A L E N T E D AND THOROUGHLY PROFESSIONAL AUDIENCE A N Y T H I N G ABOUT ECONOMICS. I DO INTEND TO T R Y TO INTEREST YOU IN A P R A C T I C A L PROBLEM THAT IS INTEGRAL TO THE ECONOMY AND PROPOSES TO MAKE SOME SIGNIFICANT CHANGES IN THE MACHINERY BY WHICH MONEY AND CREDIT IS SUPPLIED TO THE P R I V A T E SECTOR. W A Y BACK IN 1968, IT WAS THOUGHT TO BE A GOOD IDEA TO STUDY OUR FINANCIAL INSTITUTIONS AND THE HUNT COMMISSION CAME INTO BEING A YEAR OR SO T H E R E A F T E R A GREAT DEAL OF STUDY WAS UNDERTAKEN WITH RATHER MODEST .END RESULTS. ONE RESULT, THE FINANCIAL INSTITUTIONS A C T , WHICH ESSENTIALLY BROADENED COMPETITIVE POWERS OF VARIOUS FINANCIAL INTERMEDIARIES, WAS BROUGHT TO THE CONGRESS IN 1973. IT WAS SEASONED THROUGH SOME SENATE HEARINGS IN 1974 AND FURTHER -3HEARINGS AND ACTION IN 1975. ~ IN F A C T , IT WAS PASSED BY THE SENATE 79-14 IN DECEMBER OF LAST Y E A R . THE ACT ENVISIONED KATHER MODEST STRUCTURAL REFORM AND IT INCURRED BOTH PARTISAN SUPPORT AND OPPOSITION IN THE VARIOUS INDUSTRIES INVOLVED. PERHAPS THE MOST CONTROVERSIAL ISSUE WAS AND HAS ALWAYS BEEN THE ELIMINATION OF GOVERNMENT IMPOSED INTEREST RATE CEILINGS ON S M A L L SAVINGS AND TIME BALANCES. TODAY, LESS THAN THREE MONTHS A F T E R ITS PASSAGE, IT HAS DISAPPEARED INTO A SERIES OF PROPOSALS OF SWEEPING STRUCTURAL AND REGULATORY REFORM WHICH HAVE THE POSSIBILITY OF INCITING AS FIRERY A P O L I T I C A L AND PARTISAN DEBATE AS OCCURRED DURING THE TERM OF ANDREW JACKSON WHEN THE SECOND BANK OF THE UNITED STATES WAS ABOUT TO GO THE WAY THE FIRST BANK OF THE UNITED STATES. I AM SURE YOU HAVE NOTICED RECENT PRESS STORIES. IS THE BANKING SYSTEM SOUND? WHICH, OF COURSE, IT IS. REGULATORY STRUCTURE BE IMPROVED? CAN THE WHICH, OF COURSE, IT CAN. SHOULD WE A T T E M P T TO DO THIS TOMORROW, IN A L L ITS C O M P L E X I T Y ? I HONESTLY SUGGEST WE SHOULDN'T. ONE OF THE PROBLEMS IN DISCUSSING THE SPECIFIC LEGISLATIVE INITIATIVES THAT ARE INCORPORATED IN THE BILLS BEFORE THE SENATE AND THE HOUSE, IS THAT -4- I N E V I T A B L Y ONE COULD AGREE WITH A NUMBER OF THE PROPOSALS AS INDIVIDUAL ISSUES. ANOTHER MINOR P R O B L E M IN THIS COURSE IS THAT I A M A MEMBER OF A BOARD OF GOVERNORS THAT W I L L MAKE AN OFFICIAL STATEMENT OF THE SPECIFICS PROVISIONS OF THE LEGISLATION AND THE BOARD HAS NOT COMPLETED ITS DELIBERATIONS. FURTHERMORE, IF I T A L K TO YOU ABOUT A L T E R - NATIVES TO SOME PROPOSALS AND ENDORSE OTHERS WITHOUT CHANGE, W E ' L L MISS AN OPPORTUNITY TO R E F L E C T ON THE WHOLE SYSTEM AND THINK A L I T T L E BIT ABOUT THE IMPACT OF THE P L A N ON OUR ECONOMY, AND WE C E R T A I N L Y COULD BE SO CAUGHT UP IN THE COMPELLING LOGIC OF THOSE WHO ARGUE FOR CHANGE, THAT WE COULD MISS A REASONABLE AND THOROUGH ANALYSIS OF THE RECORD AND V I A B I L I T Y OF OUR PRESENT SYSTEM OF FINANCIAL INTERMEDIARIES. I THINK IT IS W E L L DOCUMENTED THAT THE UNITED STATES BANKING SYSTEM IS QUITE UNIQUE IN THE WESTERN WORLD AS CONTRASTED WITH THE BANKING SYSTEMS OF OUR TRADING PARTNERS. IT IS HIGHLY DIVERSE IN TERMS OF SIZE, FUNCTIONS AND NUMBERS, WITH OVER 14,000 BANKS RANGING FROM VERY LARGE M U L T I - N A T I O N A L CORPORATIONS TO SMALL L O C A L BANKS SERVING COMMUNITIES IN ALMOST EVERY TOWN OR C I T Y . THE AVERAGE DEPOSIT SIZE OF A BANK IN THE UNITED STATES RANGES BETWEEN 10 AND 25 MILLION, AND THIS IS A C T U A L L Y A VERY SMALL FINANCIAL INSTITUTION. OVER 300 OR MORE NEW BANKS ARE USUALLY FORMED EVERY Y E A R WHILE ABOUT THE SAME NUMBER ARE ACQUIRED BY OTHER BANKS OR DISAPPEAR INTO HOLDING COMPANIES. WHILE WE HEAR CONCERNS EXPRESSED ABOUT THE C A P I T A L ADEQUACY OF THE BANKING SYSTEM G E N E R A L L Y , T Y P I C A L L Y THE AMERICAN BANK HAS BEEN REQUIRED TO HAVE A MUCH STRONGER C A P I T A L RATIO TO DEPOSITS OR TO LOANS AND INVESTMENTS THAN THE BANKS IN BANKING SYSTEMS OUTSIDE OF THE UNITED STATES. DEPOSITOR INSURANCE IS AN AMERICAN INNOVATION. VERY FEW COUNTRIES PROVIDE COMPARABLE PROTECTION. CHECKING ACCOUNTS, AS WE KNOW THEM, ARE MUCH MORE EXTENSIVELY USED, READILY A V A I L A B L E , AND MORE SUBJECT HERE THAN IN OTHER NATIONS. TO PRICE COMPETITION AMERICANS HAVE GREATER ACCESS TO CONSUMER CREDIT BOTH THROUGH THE BANKING SYSTEM AND NON-BANK FINANCIAL INTERMEDIARIES THAN MOST PEOPLES OF THE WORLD. PERHAPS THIS IS THE REASON OUR CITIZENS SAVINGS ARE A SMALLER PERCENTAGE OF GNP THAN IN OTHER DEVELOPED NATIONS. FURTHER, TRUST SERVICES, AS W E L L AS MANY OTHER FORMS OF BANKING SERVICE, ARE G E N E R A L L Y MORE A V A I L A B L E HERE THAN ABROAD TO THE AVERAGE CONSUMER. HAVING VIEWED THE EVOLUTION OF MUCH OF WHAT I HAVE DISCUSSED OVER 25 TO 30 YEARS, I WOULD SUGGEST THAT THERE HAS BEEN SIGNIFICANT PROGRESS IN THE DEVELOPMENT OF BANKING SERVICES. THIS IS PROBABLY CHARACTERISTIC OF A COMPETITIVE ^ D U S T R Y WHERE THERE ARE MANY S M A L L UNITS. IT IS UNCHARACTERISTIC, HOWEVER, IN MY OPINION FOR ANY INDUSTRY T H A T IS SUBJECTED TO STRONG FEDERAL AND STATE REGULATION. I SUSPECT THAT THE EVOLUTION IN BUSINESS ANR INDIVIDUAL DEMANDS FOR BANKING SERVICES, THE INCORPORATION OF NEW TECHNOLOGY, AND THE FACT THAT MAJOR CHANGES IN THE REGULATORY STRUCTURE HAVE OCCURRED ONLY PERIODICALLY AND THEN WHEN IT A P P E A R E D WISE FOR THE CONGRESS AND THE STATE LEGISLATURES TO ADDRESS AN IMPORTANT PROBLEM, HAVE BEEN RESPONSIBLE FOR THIS RATHER UNUSUAL RESULT. IN OTHER WORDS, SIGNIFICANT REGULATORY CHANGE HAS EVOLVED IN MUCH THE SAME WAY THAT THE INDUSTRY ITSELF HAS EVOLVED, SPURRED ON BY THE CHANGING NEEDS OF OUR SOCIETY. SOME OF THE MOST FUNDAMENTAL CHANGES IN OUR REGULATORY PROCESS WERE MADE FOLLOWING THE FINANCIAL DISASTER THAT OCCURRED IN 1929. I WISH WE HAD THE TIME HERE TO PUT THAT PERIOD IN PERSPECTIVE. THE ACTIONS TAKEN THEN TO EXPAND THE REGULATORY AGENCIES' POWERS AND ESTABLISH THE FEDERAL DEPOSIT INSURANCE CORPORATION WERE SOUND. FOR MORE THAN 40 YEARS T H E R E A F T E R , BANK FAILURES HAVE BEEN UNCOMMON EVENTS AND OFJDE MINIMIS IMPORTANCE TO THE ECONOMY. THE STRAINS THAT THE BANKING SYSTEM HAS UNDERGONE IN RECENT YEARS ; DO NOT BEGIN TO COMPARE IN SEVERITY WITH THE PROBLEMS OF THE E A R L Y THIRITIES. SYSTEM, IN F A C T , THE FEDERAL DEPOSIT INSURANCE HAS BEEN SO EFFECTIVE THAT ALMOST WITHOUT EXCEPTION BOTH INSURED AND UNINSURED DEPOSITORS HAVE NOT LOST MONEY IN A MODERN BANK FAILURE. I DON'T WISH TO C VERLOOK THE RECENT DIFFICULTIES IN THE BANKING SYSTEM. I JUST WANT TO PUT TIIEM IN PERSPECTIVE. THERE HAS BEEN GROWTH, COMPETITION HAS BEEN INCREASED NOT DIMINISHED, INNOVATION HAS BEEN A CHARACTERISTIC OF THE SYSTEM, AND THE A C T U A L NUMBER OF FAILURE HAS BEEN MINIMAL. THE POINT I WOULD LIKE TO MAKE IS THAT GROWING OUT OF THE SENSATIONALIZED REVELATIONS ABOUT THE DECLINE IN ASSET QUALITY OF SOME OF OUR BANKS, WE ARE A P P A R E N T L Y DRIVING FORV/ARD WITH SOME PHILOSOPHICALLY CONTRADICTORY PROPOSALS WITHOUT HAVING REACHED A CONSENSUS ABOUT WHAT IS WRONG WITH OUR BANKING SYSTEM. IN MY OPINION THE COMPREHENSIVE LEGISLATION CONGRESS IS CONSIDERING IS R E P L E T E WITH LOGICAL INCONSISTENCIES. FOR E X A M P L E , COMPETITION, WHILE, A T LEAST SINCE THE 1930'S, CONSTRAINED BY THE BANKING LAWS OF BOTH THE STATE AND THE FEDERAL GOVERNMENT, LAWS THAT WERE ORIGINALLY DRAFTED TO PROTECT DEPOSITORS FROM A MASSIVE NUMBER OF -8SPECULATIVE FAILURES EXPANDED EXTRAORDINARILY IN THE POST-WAR YEARS. IT COULD EASILY BE CONSTRAINED AGAIN BOTII BY A MONOLITHIC FEDERAL BANKING COMMISSION AND AN INQUISITION INTO WHY THE Q U A L I T Y OF BANK ASSETS SUFFERED IN THE MOST DRAMATIC RECESSION SINCE THE 30'S. THE PRESENT REGULATORY SYSTEM DOES ENCOURAGE COMPETITION IN ADDRESSING CHANGE, I HAPPEN TO THINK THATS DESIRABLE. A COROLLARY OF THE CRITICISMS BEING L E V E L L E D A T THE REGULATORS IS THE DEMAND FOR MORE INFORMATION ABOUT THE REGULATED. THERE IS NO INDUSTRY IN OUR ECONOMY TO MY KNOWLEDGE THAT IS VISITED A N N U A L L Y OR B I A N N U A L L Y BY TROOPS OF FEDERAL AUDITORS CONDUCTING VOLUMINOUS EXAMINATIONS ON EVERY P A R T OF ITS BUSINESS, IN ADDITION, AS PUBLIC CORPORATIONS BANKS ARE SUBJECT TO A L L THE DISCLOSURE REQUIREMENTS OF THE SEC. THE BANK STOCK ANALYSTS T E L L US THEY KNOW MORE ABOUT THIS INDUSTRY AND THE FIRMS IN IT THAN ANY OTHER PUBLIC CORPORATIONS. INDIVIDUAL PRIVACY IS HARDLY EVER MENTIONED IN THE CURRENT DEBATE. OUR GOVERNMENT IS CONSCIENTIOUSLY AND INDUSTRIOUSLY ENACTING LAWS AND REGULATIONS TO ASSURE THAT INDIVIDUALS RETAIN THEIR PRIVACY IN OUR SOCIETY. Y E T THE BOOKS AND RECORDS OF BANKING INSTITUTIONS CONTAIN THE MOST INTIMATE FACTS ABOUT THE FINANCIAL AFFAIRS OF MOST OF US AND OUR BUSINESSES AND IT IS OF COURSE A CONTRADICTION TO FIND DEMANDS BEING MADE FOR DISCLOSURE OF THESE FACTS WHEN THE SUBJECTS OF THE INFORMATION HAVE P R E S E N T L Y NO PROTECTION FROM THE PROCESS. ANOTHER PARADOX, OF COURSE, IS THE DUAL BANKING SYSTEM. STATES HAVE RESERVED TO THEMSELVES THE RIGHT TO DETERMINE G E N E R A L L Y THE COMPETITIVE STRUCTURE OF BANKING WITHIN THEIR BORDERS, I HIS IS CURIOUS IN AN INDUSTRIALIZED NATION T H A T G E N E R A L L Y PERMITS THE FREE FLOW OF COMMERCE NATIONNATIONWIDE. THE ISSUE IS NOT DIRECTLY ADDRESSED IN THE NEW PROPOSALS AND PERHAPS IT SHOULD BE. FOR IT ALSO SEEMS TO ME THAT A POWERFUL ICC T Y P E FEDERAL REGULATOR IS L I K E L Y TO DIMINISH THE EFFECTIVENESS OF THE STATE REGULATORS. I THINK IT IS ALSO TRUE THAT THE PRESENT FEDERAL RESERVE SYSTEM, WITH ITS TWELVE REGIONAL BANKS AND 25 BRANCH OFFICES, HAS A UNIQUE A B I L I T Y FOR EVALUATING THE DIFFERING ECONOMIC CLIMATE AND NEEDS EN THE VARIOUS INDUSTRIAL AND AGRICULTURAL SECTORS OF THE COUNTRY. FEDERAL RESERVE SYSTEM BANKS AND BRANCHES HAVE C A R E F U L L Y STRUCTURED BOARDS OF DIRECTORS WITH PUBLIC MEMBERS, BUSINESSMEN, AND BANKERS FROM EACH REGION P L A Y I N G AN IMPORTANT ROLE IN THE OPERATIONS AND POLICY DELIBERATIONS OF THE SYSTEM, THIS IS AN IDEAL FORM OF FEDERAL GOVERNMENT PARTICIPATION IN NATIONAL P O L I C Y . IF THE ROLE OF REGULATING AND EXAMING THE LARGE BANKS AND HOLDING COMPANIES IN THE COUNTRY IS TAKEN FROM THE SYSTEM A DUPLICATE REGIONAL SYSTEM OUGHT TO BE RECREATED WHICH IS RIDICULOUS. THERE ARE MANY THINGS THAT NEED A T T E N T I O N AND THERE ARE RESPONSIBLE PROPOSALS BEFORE THE CONGRESS INCLUDING THE ORIGINAL FINANCIAL INSTITUTIONS A C T , THE PROPOSALS TO STRENGHTEN THE POWER OF THE PRESENT REGULATORS, THE PROPOSALS TO EXTEND NATIONAL REGULATION TO FOREIGN BANKS IN THE UNITED STATES, AND THE PROPOSALS TO IMPROVE BY STATUTE THE COORDINATING A C T I V I T Y THAT EXISTS BETWEEN THE PRESENT FEDERAL REGULATORS. BUT COMBINING THESE PROPOSALS INTO A MASSIVE BILL OR SERIES OF BILLS THAT WOULD CONCENTRATE AN EXTRAORDINARY GROUP OF POWERS IN ONE AGENCY WITH A MISSION THAT W I L L I N E V I T A B L Y , IN MY JUDGMENT, HAVE A N T I - C O M P E T I T I V E EFFECTS SEEMS THE WRONG WAY TO GO ABOUT THE FIRST MAJOR FEDERAL REGULATORY REFORM SINCE 1933. MY COLLEAGUES A T THE FEDERAL RESERVE HAVE A L R E A D Y TESTIFIED T H A T REMOVING A L L REGULATORY AND EXAMINATIONS FUNCTIONS FROM THE FEDERAL RESERVE WOULD DIMINISH THEIR ABILITIES TO MANAGE MONETARY P O L I C Y . SO INDICATED IN TREASURY TESTIMONY. I BELIEVE THIS AND HAVE I THINK THE OVERSIGHT OF THE MAJOR BANKS AND BANK HOLDING COMPANIES WHICH THE FEDERAL RESERVE POSSESSES IS A VERY SIGNIFICANT AID TO THE DEVELOPMENT OF MONETARY POLICY BECAUSE IT KEEPS THE FEDERAL RESERVE UNIQUELY IN TOUCH WITH CREDIT POLICY AND TRENDS. I ALSO THINK THAT WITHOUT REGULATION AND EXAMINATION RESPONSIBILITIES THE V I T A L I T Y OF THE REGIONAL BANKING SYSTEM OF THE FED WOULD WHITHER. IF ONE IS LOOKING FOR A FINAL PARADOX IT WOULD SEEM TO ME THAT WE, AS A SOCITY ANDILN BOTH CONGRESS AND THE ADMINISTRATION HAVE BEEN ENCOURAGING THE P R I V A T E BANKING SYSTEM TO SUPPORT AND CONFORM WITH THE EMERGING SOCIAL AND ECONOMIC GOALS IN THIS NATION AND I THINK THAT HAS L A R G E L Y HAPPENED. SOME OF THE PROPOSALS BEFORE THE CONGRESS TODAY COULD HAVE THE OPPOSITE E F F E C T AND I'M SIMPLY URGING THAT YOU TAKE AN INTEREST IN THE CONTROVERSY AND BECOME WITH THE LEGISLATION. FAMILIAR A VIABLE CENTRAL BANK AND BANKING SYSTEM ARE ESSENTIAL TO THE HEALTH OF AN ECONOMY. A T ANOTHER TIME WHEN THE BANKING SYSTEM WAS A T ISSUE AND THE WHOLE COUNTRY WAS ENMESHED IN A VIOLENT P O L I T I C A L DEBATE, ANDREW JACKSON WROTE TO THE SECRETARY OF THE TREASURY "THERE IS JUST GROUND TO FEAR, THAT IN THE CREATION OF A SUBSTITUTE, AS GREAT DANGER, IF NOT GREATER, MAY BE INCURRED, AS THAT WHICH NOW THREATENS THE AMERICAN P E O P L E . " JACKSON WAS DEAD WRONG ON THE ISSUE AND WE HAD FINANCIAL PANIC A F T E R FINANCIAL PANIC FOR F I F T Y YEARS FOLLOWING HIS REFUSAL TO RENEW THE CHARTER OF THE 2ND BANK OF THE UNITED STATES. BUT I LIKE THE QUOTE.
@FedFRASER