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Federal Reserve Bank of St. Louis

I am honored to be here to address the mid-Winter meeting
of the New York State Bankers Association.

Last February in

my first appearance before this gathering as President of the
Federal Reserve Bank of New York, I shared with you my
thoughts on some long-term policy issues facing the banking
industry and the financial sector of the U.S. economy.


the past year, the condition of U.S. banks and banks in New
York has remained strong, while, at the same time, the banking
industry, on the whole, made further progress in the
management of risks.

The current strength and resilience of

the banking system bode well for the industry's future, a
future in which banks and their regulators will continue to
face challenges in adapting to new market practices, managing
risks and dealing with financial innovations.
The long-term future health and competitiveness of U.S.
banks will be enhanced by the implementation of the recently
enacted Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994.

The interstate banking and branching

provisions of this law, long overdue in my opinion, represent
the first "chipping away" at some of the boundaries,
geographic and otherwise, that have restricted banks'
activities, while, at the same time, preserving the dual
banking system that has served the nation so well for so long.
I think the opportunities for banks are numerous, although we
all recognize the risks that accompany them.

We in New York,

in particular, should welcome this development.
Federal Reserve Bank of St. Louis

Our history



has demonstrated that locally-based institutions have a
competitive advantage in terms of understanding the needs of
local businesses and residents that is not easily overcome by

Some of you perhaps remember firsthand what

happened in New York State when branching throughout the state
was permitted in 1975.

Many feared that the smaller

institutions outside New York City would be swallowed up.
But, a generation later, I am happy to say that New York State
continues to have a healthy and highly competitive banking
industry, with institutions of all sizes, from smaller
community banks to regional banks to money center banks,
offering a wide variety of services to a very diverse customer
Today, I want to step back from many of the important
banking and financial issues that have occupied so much of our
time and energy in recent years, and talk with you about
another important set of issues--the role of banks in the
regional economy and community development, and, more
generally, the challenge that we all face in promoting growth
and job opportunities in our communities.
Let me begin by noting some facts about the New York
State economy.

Since 1989, economic performance of the state

has lagged the average national performance.

The recession in

New York began a little earlier, cut a little deeper and
lasted a little longer than was the case for the nation as a
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And, by nearly all measures, the cyclical recovery in

New York has been weaker than the national expansion.


the last two years, job growth in New York averaged below
1 percent, less than half the 2 percent pace for the nation as
a whole.

The softness in job growth is not just a matter of

weakness in New York City and is, in fact, widely spread
across various regions of the state.

Taken as a whole, job

growth outside New York City has been only somewhat better
than in the Gity, although some areas such as Buffalo,
Rochester and Utica recently have done considerably better
than other places in the state.
On the surface, personal income growth--another broad
measure of economic performance--suggests that New York's
overall economic performance may have been stronger than
indicated by job growth figures.

Over the last two years,

personal income growth in New York was only modestly weaker
than the average national pace.
growth is somewhat misleading.

But the strength in income
Part of the strong personal

income growth reflected unusually high compensation in the
form of bonus payments for a relatively small number of people
in the securities industry.

The bulk of the state's

population has not benefited from those extraordinary
compensation gains in the securities industry.
The reasons for New York's poor performance relative to
the nation as a whole are not immediately apparent.
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There may


not be a single dominant cause of the state's subpar economic
performance in the last five or six years.

New York State has

experienced disproportionately greater problems than the
nation, either directly or indirectly, in several areas,
including (1) massive restructuring in some of the key
industries--banking and finance, and high-tech manufacturing,
in particular--(2) commercial real estate overbuilding, and
(3) the slower growth of exports.
On top of these essentially cyclical problems, several
structural difficulties have contributed to the lingering
weakness in the New York economy.

Perhaps most important

among the structural impediments to economic growth are much
higher tax burdens, especially in New York City, relative to
the rest of the nation, generally high costs of doing business
and living in the state, and low labor force growth and
participation rates--among the lowest of any state.

The low

labor force participation rate is a double-edged problem since
it causes the tax burden to be spread over a proportionately
smaller work force, on the one hand, and increases the
fraction of the state's population on public assistance, on
the other.

The increased demand for social services

associated with low participation rates aggravates the
structural pressures on the state's budget deficit.
I can assure you from personal experience that the wave
of restructurings will not last forever, and that New York
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will move into the positive side of the restructuring cycle-greater productivity, new investments and job creation.


you may know, I was born in the Midwest, and spent much of my
life there.

During the early and mid-1980s, the manufacturing

sector in the Midwest, especially heavy industry, went through
a huge restructuring cycle, much greater than the current
cycle in New York State.

Today, Midwest heavy industry is,

once again, a strong competitor in the world economy.


vast majority of displaced workers have been reemployed--many
of them earning more than if their old jobs were still in
place--and the region as a whole has been among the nation's
success stories.

Whether the end of restructuring in New York

will follow the Midwest experience and bring about as strong a



resurgence i~ economic growth is, of course, unclear at this
Structural problems of the New York State economy have
been around for many years and may have become less tractable
over time.

Yet, the recent election results in New York, as

in the rest of the country, suggest a clear trend toward a
voter preference for smaller government and a heightened
desire for lower taxes.

The new public sector initiatives to

accomplish these objectives will probably help, at the margin,
in reducing impediments to growth, but if history is a useful
guide to the future, I think the impact of such initiatives
will fall well short of expectations.
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While we are all against "wasteful" government and "high"
taxes, practical difficulties of defining and implementing
policies for lower taxes and lower spending at the same time
are enormous.

Elected public officials as policy makers must

confront tradeoffs and inconsistencies in policy choices that
may have eluded them as candidates for public office.

In the

end, reducing taxes and the role of government to any
significant extent, I believe, will inevitably require some

reductions in total public spending and social services, at
least in the short run.

This will be the case even if we

assume an optimistic scenario in which long-run benefits of
new policy initiatives more than fully offset their adverse
Whatever the contribution of any new public sector
initiatives, increased private sector efforts, in my view,
will be critical for strengthening New York State's economic

While the state has lost many corporate

headquarters and manufacturing companies over the years, its
economic base remains rich and diverse, and offers great
opportunities for enhancing economic growth.

The state's

economy has several sources of underlying strength:
Federal Reserve Bank of St. Louis


A major source of the strong potential is the
presence of several key industries that now lead the
world economy, including banking and finance, hightech manufacturing, high-value added business
Federal Reserve Bank of St. Louis


services such as advertising, and tourism.

Another important source of strength is an outward
looking, internationally oriented business

New York State's international ties

extend well beyond New York City's role as,
arguably, the most important international financial
center in the world.

For example, New York ranks

third behind California and Texas in exports of
goods, and would almost certainly be our largest
exporting state if data on service exports were
available on a state-by-state basis.

New York's

international orientation is well reflected in its
exports which come from establishments of all sizes,
from giant corporations to Buffalo stores which
specialize in selling to Canadian shoppers.

While a considerable fraction of New York's
population lacks essential skills and education to
participate in the labor force, the large size of
the highly educated and skilled work force is an
important source of underlying strength for the

The state has a larger share of more highly

educated residents than the nation, and, for years,
it has produced a dramatically disproportionate
number of the most scientifically talented high
school seniors in the United States.

For example,


in the last several years, about 1/3 of the winners
of the Westinghouse Talent Search competition have
come from the State of New York.
By taking greater advantage of these and other strengths
of the state, I believe it is possible not only to expand job
opportunities for all, but also to improve materially the lot
of weaker segments of our society, especially those in the
inner cities.

The banking industry is in a unique position to

play an important role in this process.

Its financial

condition is sound, its capacity to meet the growing credit
needs is strong, and its future looks bright.
In working to enhance growth and job opportunities around
the state, and the region more generally, the challenge we as
bankers and regulators face collectively is the challenge of
sustaining our communities that, in turn, sustain us and our

The Community Reinvestment Act and the current

efforts to "reform" the implementing regulation are certainly
sources of controversy.

In my view, it would be a serious

mistake if the efforts to make CRA assessments more objective
ended up with government credit allocation.

Such an outcome

would increase regulatory burden on banks, and could prove to
be both costly and ineffective.

Federal Reserve and other

regulators have worked to ensure that informed judgment
continues to play an important role in the credit-granting
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We have also tried to reduce the compliance burden,

Federal Res .... rve Bank

of St. Louis•·


particularly on the smaller banks.

I hope when the final

rules come out you will agree that we have been able to strike
a fair and reasonable balance.
But the importance of stable and vital communities to all
who live and do business in them transcends any debate about
legislation or regulation.

Even without regard to any

legislative imperative, each of us--and all of us--must find
the most effective role to play in meeting the problems posed
by the growing credit needs, particularly in the inner cities
and other poor communities.
For our part, we at the Federal Reserve Bank of New York
are taking a more active approach in reaching out to all of
the different elements of our community.

Last year, we

created an Office of Regional Strategies that began work on
identifying opportunities for better coordination with
community development organizations and act as a catalyst for
broadening our regional research and economic education

This year, we plan to further sharpen our focus on

regional matters and Second District community development and
urban issues.
I want to assure you that my commitment to these efforts
is real and enduring.

Beyond the initiatives that we have

undertaken at the New York Federal Reserve Bank, I am--and
have been since my days in Chicago--personally involved in
community development issues.
Federal Reserve Bank of St. Louis

For example, I have taken an


active role in the Neighborhood Housing Service, an
organization that arranges traditional and non-trad i tional
sources of funding for low- and moderate-income housing in the
inner cities.

In each of the three roles that I have played

over the past several years--as a banker, a private citizen,
and a bank supervisor--! have had the opportunity to witness
first hand the direct effects of community lending and the
efforts of organizations like the Neighborhood Housing

I encourage you to visit these neighborhoods, as I

have done, and get a sense of the dedication and commitment
that keeps them vital.

By just listening to the achievements

of those involved with and helped by the NHS and its community
lending programs, it is impossible not to be convinced about
the breadth of what can be achieved if we work together to
develop solutions for the problems confronting us today.
I have been troubled by charges of discriminatory lending
practices which directly limit the ability of potential
borrowers to build businesses and own homes, and on a broader
scale, which stifle economic development and job

It is discouraging, particularly after all

that has been written and discussed, to hear about cases in
which loan applications by racial minorities have received
rude and unfavorable treatment by bankers, apparently solely
for ethnic reasons.
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We should all be deeply offended by such


I recognize, of course, that most of you work hard on
enforcing fair lending regulations and ensuring equal credit
opportunity to all potential borrowers.

But unfair and

discriminatory lending practices, whether resulting from habit
and culture or from deliberate acts, cause great harm to our

Such lending practices result in credit decisions

that are not based on legitimate economic factors, and damage
our economy and reduce profit opportunities for banks.
Discriminatory lending practices are especially harmful for
our poor communities and neighborhoods where economic
development and job opportunities are so badly needed.
I want to -emphasize that banks' involvement in community
development efforts is not just good citizenship.

There are

numerous profit opportunities in poor communities and
neighborhoods waiting those surefooted and quick witted enough
to take advantage of them.

I can assure you ~hat

entrepreneurial spirit is as alive in the inner cities as it
is elsewhere.

Indeed, the potential for small businesses to

develop and grow may well be greater in our low-income
communities than it is in the rest of the economy.

By meeting

the legitimate credit needs of all communities, including the
inner cities, banks can play a vital role in stimulating small
business development.

As you may know, small businesses have

a particularly good historical record in creating jobs;
according to the Small Business Administration, small
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businesses, those with fewer than 500 employees, account for
more than half of private employment in the U.S. economy.
In addition to meeting the household and business credit
needs of their communities, banks can also help their
communities by doing other things that are also good business.
For example, banks can offer business and technical advice to
small businesses.

Many already do this but more can do so.

The large corporations will not pay you much for advice but
the small businessman can make it worth your while.


advice by bankers who understand the needs of their local
businesses would surely be more useful than that from a
government agency where information about those businesses is
likely to be limited.
It is not my objective to offer a complete agenda for
banks' community involvements.

My point is simply that banks

as institutions and all of us as individuals must do our part,
in whatever manner appropriate and effective, to help our

As I mentioned earlier, my own personal

experience in this area has been very rewarding and even
The challenge of sustaining our communities and
neighborhoods has never been greater or more important than it
is today.

It is a major issue not just for New York but for

the whole country, and, I emphasize, not just for the banking
industry but for the whole society.
Federal Reserve Bank of St. Louis

For a variety of reasons,


gains from advances in the economy over the last decade or so
have not been shared by weaker segments of our society, and
the working poor, in particular, have suffered a material

In fact, the real wages of low-skilled workers have

fallen sharply, both in absolute dollar terms and relative to
the wages of high-skilled workers.
These dramatic wage developments and growing economic
disparities raise profound issues for our society--issues of
equity and social cohesion that affect the very foundations of
our society.

If we are to go forward as a unified society

with a confident outlook rather than as a society of diverse

economic groups suspicious of each other and of the future,
the situation of weaker segments of our society must improve.
It is in this context that greater public and private sector
efforts are needed to bring about stronger and more balanced
economic performance, with widely shared economic benefits and
job opportunities for all groups.

The banking industry can,

and indeed must, play an important role in this process.


have made a point in my still short time in this job to travel
around the District and meet a number of you, including many
who are in this room.

I have always come away from those

sessions impressed with the knowledge, dynamism and concern
that has been expressed in regards to issues that confront you
locally and regionally.

I believe that all of us in the

financial sector have a special and critical responsibility to
Federal Reserve Bank of St. Louis



help develop solutions to the economic problems confronting us
today and I know that we are up to the job.
All social programs, and all training programs,
governmental or private, are doomed to fail if there are no
jobs in the community.

The focus of planning for any

institution must include recognition of the linkage between
job creation and a strong local economy.

As the public and

private sectors undertake new initiatives to deal with the
nation's economic and social problems, we at the Federal
Reserve remain firmly committed to providing a stable economic
and financial environment.

Our foremost policy task is to

maintain price stability, which is important not simply for
the usual macroeconomic reasons but also for social reasons.
I believe that a surge in inflation would aggravate the
problems of our poor communities disproportionately because of
its regressive tax aspects and other negative consequences for
the economy.

Low-income workers and fixed-income individuals

suffer most in an environment of high and rising inflation.
Let me conclude by returning to my theme on the regional

In recent years, the economic performance of the New

York State economy has been weaker relative to the nation, and
the economic difficulties facing the state will not be easily
eliminated over the coming years.

At the margin, public

sector initiatives may help reduce impediments to growth in
the long run, but any cutbacks in government employment and
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social services will add to the economic weakness in the short

If the state economy is to live up to its full

potential, the private sector will need to take on a greater
role in addressing the economic problems.

I feel very

strongly that banks can and must make significant
contributions to enhancing economic growth and job
opportunities by meeting the growing credit needs of their
communities, and, more generally, through involvement in
community development programs.
Federal Reserve Bank of St. Louis

Thank you for this opportunity to address you today.