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For release on delivery
7:30 p.m. EDT
June 23, 1993

Banking in a Changing World

Remarks by
Susan M. Phillips
Member, Board of Governors of the Federal Reserve System

ABA's Stonier Graduate School of Banking
University of Delaware
Newark, Delaware
June 23, 1993

A Changing Social Landscape
Unless you've been sojourning in a cave for the last
few years, you've already heard a speech about the changing
environment for banking.

Such speeches address the effects of

financial restructuring, technological advances, competition,
globalization of banking, and, of course, regulatory burden.


fact, some of you may have given that talk, or perhaps, could
recite these new pressures from memory.

There appears to be

clear recognition by the banking community of the enormous
business implications of the changing environment.

It also

reflects the truly prodigious efforts that banks of all stripes
and sizes are making to respond.
Tonight, I will not replow that particular ground.
Instead I do want to talk about a related but less visible set of
changes facing banking today.

These are social and cultural

changes that are slowly but surely transforming our society.
Their short- and long-term impacts may not yet be readily
apparent, but they are coming down the pike nonetheless.
The social trends I will focus on here tonight will
dramatically influence how your institutions approach three
fundamental issues--who will be the bank customers of the future;
what products and services will they need and demand; and how
will those products and services be marketed and delivered?




When we think of change, we often tend to think in
terms of technological change.
advances can be dazzling.

And it's true that technological

It is startling to think that 300,000

written pages (or the entire 20-volume set of the Oxford English
Dictionary) can be captured in a single CD-ROM disk.

But isn't

it equally striking to realize that about one out of every four
U.S. residents now claim African, Asian, Hispanic or American
Indian ancestry?

In fact, racial and ethnic minority groups are

growing seven times as fast as the majority.

These social

realities will have as great an impact on our society, and
therefore banking, as do the miracles of CD-ROM technology.
Most social and cultural shifts occur relatively slowly
and, as a result, are not so obvious as technological changes.
Cultural changes are easy to miss.

But they can have

implications perhaps more profound than changes in technology or
industry consolidation.

And that is precisely why bankers must

be attentive, not only to the newest technological innovations
and systems, but also to the wider social landscape.
Such a vast and complex sociological topic is worthy of
a book, not a brief evening's talk.
the relevant aspects.

I won't pretend to cover all

My purpose is merely to peak your interest

and suggest that important societal changes are going to affect
us all.

Strategic planning that incorporates societal changes is

prerequisite to a successful business future.

- 3 -

Aging of America
Among the most significant of these societal trends is
the aging of the population.

The generation born during the baby

boom after World War II will soon be approaching retirement.


1990, there were 2.7 retirees over age 60 for every 10 workers.
By some estimates, that number will increase to 4.3 retirees for
every 10 people working by the year 2025.

Long before then, the

dramatic shift to an older population of customers will have
affected every type of business--including banking.

All phases

of planning will be touched--product development, physical design
of branch facilities, marketing and so on.
The full extent of how this aging of our population
will affect banking is not very clear--at least to me--but by any
measure it is likely to be significant.

For example, one aspect

of the aging of America is the transfer of wealth.

As the World-

War II generation dies, "boomers" will receive what Fortune
magazine calls "the biggest intergenerational transfer of wealth
in U.S. history."

Moreover, these boomer heirs will receive

their inheritances when they are in their 50s and 60s--which,
these days, is a comparatively young age.
Some believe that this windfall income will be used to
pay off existing debts. Others predict that a good deal of the
money will be used for business start-ups.
opportunities for financial institutions.

Both impact lending
And, of course, many

of these recipients of sizable assets will need financial advice

- 4

on a scale not typically provided to middle class customers.
An aging population also puts a focus on retirement

This will stimulate the market for financial planning

products and investment services.

Add to that the fact that more

and more companies are shifting the responsibility of retirement
financing to employees. The creation of 401(k) and other plans
are meant to replace or at least supplement traditional pension
As an aside, I might note that it's a bit worrisome to
realize that as of 19 88, only 57 percent of employees took
advantage of saving for retirement through employer-sponsored
401(k) plans.

And we've been told that 53.2 million Americans

work for employers who offer no pension coverage.

Even when

pension opportunities are available, "boomers" often seek out and
find better job opportunities sometimes leaving before they are

These statistics indicate there may be marketing

opportunities for both retirement products and financial advice.

Diversity in America
While the aging of America will have profound effects
on our economy, America's growing diversity could also reshape
our economic life.

It has been estimated that by the year 2056,

most U.S. residents will trace their roots to Africa, Asia,
Hispanic countries, the Pacific Islands, or American Indian

- 5 -


Conspicuously absent from this list is Europe.

And we

don't have to wait for the next century to witness vivid examples
of this dramatic shift in our national complexion.

In about 100

of the 500 or so largest U.S. cities, minorities are, in fact,
reported to be already in the majority.
Much has been written lately about ethnic and racial
change in the country and I won't belabor the point.

But these

trends will surely profoundly affect financial institutions in
virtually all areas including marketing, product development,
employee mix and

government regulations.

For example, in response to the growing diversity of
the population, I think we can expect many types of businesses to
increase efforts to meet the rising demand for consumer products
and services attractive to particular ethnic and cultural groups.
Bank lending to businesses with that type of market orientation
will be more common.

Obviously, understanding of those markets

will help assure more successful lending to those emerging
Moreover, the increasing racial and ethnic diversity of
our population will continue to stimulate minority business

A growing number of entrepreneurs representing a

multitude of racial, ethnic and cultural groups will be looking
to financial institutions for financing and other services.
Another dimension of our growing diversity is already
widely recognized--the dramatic emergence of women as active




participants in the nation's working economy.
may not be fully appreciated.

But its magnitude

Specifically, I mean the growth in

direct participation by women, not only in our workforce, but as

Government figures indicate that in the 5 years

between 1982 and 1987, the number of women-owned businesses grew
58 percent to a total of 4.1 million.
closer to 6.5 million businesses.

Others put the figure at

During that same period, it is

estimated that annual receipts for women-owned firms grew from
$98 billion to $278 billion.

Some institutions have begun to

focus on this market, but clearly others have not recognized
women business-owners as a significant market segment.
Ethnic diversity in our society will obviously
translate to our national workforce.

A high percentage of new

workers in the next decade will be blacks, Hispanics, and recent

Banks--in fact all of corporate America--will face

the challenge of diversifying a primarily white managerial team
to supervise a work force that will be increasingly Hispanic and

Over time, we hope and expect that the diversity in

the nation's work force will be mirrored throughout all
managerial levels of an organization, but we know from experience
that this will not be easy.
Businesses will also have to develop the wherewithal to
train a workforce that is capable of dealing effectively with a
diverse customer base.

Hopefully every banker in this room is

aware of--and concerned about--the racial disparities in mortgage




lending demonstrated by publication of the Home Mortgage
Disclosure Act data.

Our follow-up studies have suggested that

much of the problem may be due to subtle cultural bias.

No doubt

some of this problem could be diminished if lending officers
better match the diversity of bank customers.

But even further,

bank management must examine its practices and policies to assure
that the chances of mortgage discrimination are minimized.


can be done through intensified analysis of lending practices,
second review programs, self-testing, employee education and
outreach marketing efforts.
At the same time, of course, one can never forget the role
government policy plays in banking.

To the extent the industry

fails to adequately address diversity issues, I have no doubt
there will be a legislative response.
Overall, I am suggesting something rather straight

Those banks that anticipate and understand the dynamics

of social and cultural diversity will be ahead of the curve.
Those banks that respond effectively with appropriate research,
product development, marketing and employment practices will be
the leading institutions in the future.

The Environment
Turning yet to another major influence on business
development, some believe that environmentalism will be on the
cutting edge of change.

Bankers have already had a taste of this




in dealing with concerns about lender liability for environmental
clean up.

But I suspect this simply foreshadows greater impacts

--probably not in a league with the owl versus trees debate--but
not insignificant either.
And it would be a mistake to think that the public
necessarily favors what may appear to business people as the
obvious economic decision.

For example, a 1992 Roper survey

showed that nearly two-thirds of the population believe that
economic growth and environmental protection are compatible. But
when a conflict between the two cannot be resolved, environmental
concerns should be given priority.
My point here is that the environmental movement: is
much broader than the lender liability issue.

This movement is

likely to affect bank customers, create new growth industries,
and reshape consumer attitudes.

The Politics of Fairness
Obviously, the social changes I have briefly described
will continue to drive the political agenda.

Certainly, one

manifestation is the preoccupation with fairness in our society.
At a certain base level, we must applaud developing instincts of
fair play and equal treatment.

Blindness to this theme can have

serious economic consequences for all types of businesses.


are certainly some examples where poor perception of this trend
has hurt the banking industry.


For example, banks' failure to recognize the public's
irritation with delayed access to their deposits resulted in a
massive legislative response and, many would argue, extreme
regulatory overkill in the Expedited Funds Availability law.
More recently, this myopia assured passage of the Truth in
Savings law.

Some form of disclosure for depository products was

under consideration for a number of years in the Congress.
its passage was uncertain.


During this same period, some

institutions seized on the idea of advertising deposits but
paying the advertised rate only on so-called "investable
balances"--as compensation for reserve requirements.
the advertised rate was not the rate paid.

Simply put,

It should have

surprised no one that some in the Congress became outraged, and
used this to give Truth in Savings the boost it needed for

Today's climate of sensitivity and fair treatment will

assure that concern over the HMDA data disparities will remain a
major problem for the industry until measurable improvement can
be demonstrated.

Private Sector Expectations
Another discernible trend is the increasing reliance on
private sector resources to help deal with economic issues that
have social roots.

This trend has developed slowly over the last

20 years, but it has been inexorable.

And it is not just

community groups that have been pressing this theme.




The L.A. riots have taught us how quickly our social
fabric can be torn.

It has also taught us something about the

new social climate.

For it was private industry in the form of

"Rebuild L.A.," not the government, that was the focus of

The banking community has been prominent among the

This is not, however, just a crisis response.

On a

daily basis, the modus operandi of public officials in the 90s
and beyond will be the "public-private partnership."

State and

local governments will continue to seek focused private sector
financing, investment and expertise to help leverage scarce
public funds for housing, community and economic development

Certainly banks are not the only focus of interest;

the health and life insurance companies, the securities industry,
and private mortgage insurers are being challenged to increase
their involvement in community development.

But with their CRA

obligations and local presence, financial institutions continue
to be natural targets for those seeking private financing for
community projects.

State CRA laws and linked deposit programs

are just two manifestations of this growing trend.
In addition, the full impact of the Federal savings and
loan industry "bailout" will not be known for sure for many
years, but one result is certain.

Today, probably the public,

but certainly the Congress, think there is a bigger public stake
in private institutions, and will expect increased assumption of



social responsibilities in the future.

Federal deposit insurance

and the weakness of the insurance fund reinforce this perception.
In short, the spotlight is, and will remain, on
financial institutions as key players in meeting both social and
economic challenges.

A Word to the Wise
These are but a sampling of the social and cultural
trends to be incorporated into planning for the future.
are many others.


For example, the growing violence affecting our

society will probably scar us all in one way or another.
alarming trends in the breakdown of the family.

We see

And for many

young families, owning a home may never be more than a dream.
But all these trends are a reality and the banking industry must
take account of them.
These social trends are not just the purview of bank
strategic planners, economists, or senior management--and
certainly not just the marketing department.

Sensitivity on a

daily basis will be required at all levels for bankers and
How the banking industry responds to the social
developments occurring in America will to a large extent depend
on its emerging leadership.

It will depend on how well we all

perceive and react to the evolution of society as it affects our
economy and our politics.

It will depend on how bank services




are shaped to serve future customers and how services are
marketed and delivered.
Denying the existence of these realities will do more
than harm some bank customers and communities.

It could do

irreparable harm to the capacity of financial institutions to
survive and prosper.

An institution that's on the cutting edge

of technology, but on the dull edge of social change, may have a
hard time achieving success in the future.