Remarks by
Chairman Donald E. Powell
Federal Deposit Insurance Corporation
before the
American Bankers Association Annual Meeting
Phoenix, Arizona
October 8, 2002
Good morning.
I am glad to be with you here in Phoenix. This is a great setting for your conference, and
a wonderful time of year to be here.
I want to talk to you this morning about changes. About changes in the world and in the
financial services industry, and the need to keep changing ourselves in order to keep
ahead.
A cursory glance of the Fortune 500 in 1982 versus 2002 is revealing. In 1982, seven of
the top ten performers were oil companies. Two were automobile manufacturers and
one was a technology company. A simple list that reflected a simpler time.
In 2002, the list is a lot different. We were down to three "energy" companies. Two of
these, ExxonMobil and ChevronTexaco, are the product of mega-mergers and are
much different firms than their ancestors 20 years ago. The third energy firm on the list,
Enron, is in bankruptcy. Two automobile manufacturers, Ford and General Motors,
remain, as does the technology firm, IBM. But this year’s list also includes a financial
services giant (Citigroup), and two highly diversified manufacturer/retailers (General
Electric and Phillip Morris). The top performer? Wal-Mart.
This trend away from established, traditional industries and toward highly diversified
giants with a customer focus was mirrored in the banking industry over the last 20
years.
Here’s what has happened to banking since 1982. Deposit interest rates have been
deregulated. Geographic restrictions have been eliminated. Restrictions on permissible
activities and products have been loosened, as well as restrictions on bank structure.
There were profound advances in telecommunications and data-processing capabilities
that have empowered both banks and their nonbank competitors. This all resulted in a
profound transformation for both the broader economy and the banking industry.
The numbers tell the story.
Twenty years ago, there were 14,396 insured commercial banks. Today, there are
7,966 – a net reduction of 45 percent. In the past 20 years, there have been close to
1,500 bank failures and more than 9,100 mergers.
Chairman Donald E. Powell
Federal Deposit Insurance Corporation
before the
American Bankers Association Annual Meeting
Phoenix, Arizona
October 8, 2002
Good morning.
I am glad to be with you here in Phoenix. This is a great setting for your conference, and
a wonderful time of year to be here.
I want to talk to you this morning about changes. About changes in the world and in the
financial services industry, and the need to keep changing ourselves in order to keep
ahead.
A cursory glance of the Fortune 500 in 1982 versus 2002 is revealing. In 1982, seven of
the top ten performers were oil companies. Two were automobile manufacturers and
one was a technology company. A simple list that reflected a simpler time.
In 2002, the list is a lot different. We were down to three "energy" companies. Two of
these, ExxonMobil and ChevronTexaco, are the product of mega-mergers and are
much different firms than their ancestors 20 years ago. The third energy firm on the list,
Enron, is in bankruptcy. Two automobile manufacturers, Ford and General Motors,
remain, as does the technology firm, IBM. But this year’s list also includes a financial
services giant (Citigroup), and two highly diversified manufacturer/retailers (General
Electric and Phillip Morris). The top performer? Wal-Mart.
This trend away from established, traditional industries and toward highly diversified
giants with a customer focus was mirrored in the banking industry over the last 20
years.
Here’s what has happened to banking since 1982. Deposit interest rates have been
deregulated. Geographic restrictions have been eliminated. Restrictions on permissible
activities and products have been loosened, as well as restrictions on bank structure.
There were profound advances in telecommunications and data-processing capabilities
that have empowered both banks and their nonbank competitors. This all resulted in a
profound transformation for both the broader economy and the banking industry.
The numbers tell the story.
Twenty years ago, there were 14,396 insured commercial banks. Today, there are
7,966 – a net reduction of 45 percent. In the past 20 years, there have been close to
1,500 bank failures and more than 9,100 mergers.
These mergers led to an unprecedented consolidation in the industry, and resulted in
the concentration of industry resources in a few very large and very complex banking
firms. In 1982, the largest commercial bank had total assets of $118 billion; today, we
have eight banks larger than that. In 1982, the ten largest banking companies controlled
about 25 percent of total industry assets. Today, the ten largest control almost half of
the industry’s assets. Put another way, the combined assets of all community banks
with less than $1 billion are exceeded by the combined assets of the three largest
institutions in the land.
Over the past 20 years, we’ve also seen increased competition from nonbank
competitors for banks’ business.
First, there has been a dramatic rise in the use of money-market accounts and mutual
funds as a viable destination for the nation’s savings. In 1980, 93 percent of Americans’
money was held in insured depository accounts, while money-market funds and mutual-
fund shares accounted for the remaining 7 percent. By 2001, however, the share held
by insured depository institutions had fallen to approximately 45 percent of the overall
total.
And while this was happening, a similar trend was occurring in the credit markets. In
1980, about 45 percent of all credit-market liabilities were held by depository institutions.
By 2001, this figure had declined to about 25 percent. During the same timeframe, asset
pools, mutual funds, closed-end funds and money-market funds have seen their share
of the credit pie increase from less than 10 percent to approximately 35 percent.
These figures are impressive – and I must confess they sometimes keep me up at night.
Originally conceived as a way around the interest rate restrictions 20 years ago, money
market accounts have clearly established themselves in the marketplace. There are
several reasons for this: the technology developed which made this market possible, the
transaction costs were lower than traditional banking relationships, and the broader
marketplace was experiencing substantial growth. This all led to greater consumer
demand and the greater ability, on the part of some nonbank financial services firms, to
meet that demand.
It is important to remember, however, that banks were not entirely left behind by this
shift. A good portion of this transfer of money from demand deposits to money-market
accounts and mutual funds actually occurred within the banking system. The June 2002
Call Reports, for example, indicate about one-in-four banks offer these non-traditional
products. About that many also indicated they were using their businesses to sell third-
party investment products. At mid-year, just under 2,000 banks reported income from
investment-banking activities – including underwriting, investment advisory, and merger
and acquisition services. The total income from these activities in commercial banks
was $4.697 billion, or 2.3 percent of their net operating revenue on average. Further,
banks first-half 2002 net operating revenue that came from sales and servicing of
mutual funds was about 1.5 percent of their total.
the concentration of industry resources in a few very large and very complex banking
firms. In 1982, the largest commercial bank had total assets of $118 billion; today, we
have eight banks larger than that. In 1982, the ten largest banking companies controlled
about 25 percent of total industry assets. Today, the ten largest control almost half of
the industry’s assets. Put another way, the combined assets of all community banks
with less than $1 billion are exceeded by the combined assets of the three largest
institutions in the land.
Over the past 20 years, we’ve also seen increased competition from nonbank
competitors for banks’ business.
First, there has been a dramatic rise in the use of money-market accounts and mutual
funds as a viable destination for the nation’s savings. In 1980, 93 percent of Americans’
money was held in insured depository accounts, while money-market funds and mutual-
fund shares accounted for the remaining 7 percent. By 2001, however, the share held
by insured depository institutions had fallen to approximately 45 percent of the overall
total.
And while this was happening, a similar trend was occurring in the credit markets. In
1980, about 45 percent of all credit-market liabilities were held by depository institutions.
By 2001, this figure had declined to about 25 percent. During the same timeframe, asset
pools, mutual funds, closed-end funds and money-market funds have seen their share
of the credit pie increase from less than 10 percent to approximately 35 percent.
These figures are impressive – and I must confess they sometimes keep me up at night.
Originally conceived as a way around the interest rate restrictions 20 years ago, money
market accounts have clearly established themselves in the marketplace. There are
several reasons for this: the technology developed which made this market possible, the
transaction costs were lower than traditional banking relationships, and the broader
marketplace was experiencing substantial growth. This all led to greater consumer
demand and the greater ability, on the part of some nonbank financial services firms, to
meet that demand.
It is important to remember, however, that banks were not entirely left behind by this
shift. A good portion of this transfer of money from demand deposits to money-market
accounts and mutual funds actually occurred within the banking system. The June 2002
Call Reports, for example, indicate about one-in-four banks offer these non-traditional
products. About that many also indicated they were using their businesses to sell third-
party investment products. At mid-year, just under 2,000 banks reported income from
investment-banking activities – including underwriting, investment advisory, and merger
and acquisition services. The total income from these activities in commercial banks
was $4.697 billion, or 2.3 percent of their net operating revenue on average. Further,
banks first-half 2002 net operating revenue that came from sales and servicing of
mutual funds was about 1.5 percent of their total.