Remarks
By
FDIC Chairman Don Powell
ABA Annual Convention
New York, New York
FOR IMMEDIATE RELEASE Media Contact:
PR-101-2004 (10-4-2004) Frank Gresock (202-898-663
Greetings from the Federal Deposit Insurance Corporation. It's very nice to be here
today and it's great to see so many friends. I want to thank you for giving me this
opportunity to speak with you. Over my many years as a banker and more recently as
Chairman of the FDIC, I've gotten to know many of you well, and I look forward to these
chances to meet with you.
I am often struck, when I speak to bankers these days, by the marvelous contrast
between the golden age of banking we've lived in for the past decade and the near-
death experience that preceded it in the late 1980s and early 1990s.
Some of you experienced first-hand what banking is like when the only management
plan is day-to-day survival.
Fortunately for all of us, the prosperity that followed the banking crisis has lasted for a
long time. A simple comparison drives this home. The decade of the 1980s saw virtually
no growth in total earnings for the commercial banking industry-the figure hovered
around $15 billion. By contrast, during the 1990s annual earnings grew almost five-fold
to just over $70 billion. And the golden era continues in this decade; last year
commercial banks earned just over $100 billion. This represents about 40 percent of the
profits in the financial services sector and almost 17 percent of the profits of all U.S.
firms.
But living through an experience like that made me realize-I think it made all of us
realize-that the regulatory and economic environment that banks operate in makes an
enormous difference. It also made me realize that tomorrow won't necessarily be like
today for the banking industry.
So I'd like to share my thoughts with you on what that future might look like.
I think that there are four key trends driving the future of the industry.
First, traditional banking has become a smaller part of the financial system and of
banking organizations themselves. But banks remain critical players in the modern flow
of funds that has made credit available to more businesses and consumers.
By
FDIC Chairman Don Powell
ABA Annual Convention
New York, New York
FOR IMMEDIATE RELEASE Media Contact:
PR-101-2004 (10-4-2004) Frank Gresock (202-898-663
Greetings from the Federal Deposit Insurance Corporation. It's very nice to be here
today and it's great to see so many friends. I want to thank you for giving me this
opportunity to speak with you. Over my many years as a banker and more recently as
Chairman of the FDIC, I've gotten to know many of you well, and I look forward to these
chances to meet with you.
I am often struck, when I speak to bankers these days, by the marvelous contrast
between the golden age of banking we've lived in for the past decade and the near-
death experience that preceded it in the late 1980s and early 1990s.
Some of you experienced first-hand what banking is like when the only management
plan is day-to-day survival.
Fortunately for all of us, the prosperity that followed the banking crisis has lasted for a
long time. A simple comparison drives this home. The decade of the 1980s saw virtually
no growth in total earnings for the commercial banking industry-the figure hovered
around $15 billion. By contrast, during the 1990s annual earnings grew almost five-fold
to just over $70 billion. And the golden era continues in this decade; last year
commercial banks earned just over $100 billion. This represents about 40 percent of the
profits in the financial services sector and almost 17 percent of the profits of all U.S.
firms.
But living through an experience like that made me realize-I think it made all of us
realize-that the regulatory and economic environment that banks operate in makes an
enormous difference. It also made me realize that tomorrow won't necessarily be like
today for the banking industry.
So I'd like to share my thoughts with you on what that future might look like.
I think that there are four key trends driving the future of the industry.
First, traditional banking has become a smaller part of the financial system and of
banking organizations themselves. But banks remain critical players in the modern flow
of funds that has made credit available to more businesses and consumers.
Second, continuing consolidation of the banking industry has lead to a two-tiered
industry. This will have implications for how the FDIC insures, supervises, and resolves
banks.
Third, financial services companies are becoming global. And the distinctions between
the kinds of financial service companies are blurring.
These trends raise questions about the financial regulatory structure in the U.S. In the
past, we have seen changes in the marketplace drive major changes in the law. The
deregulation of interest rates, the elimination of branching restrictions, and the repeal of
the depression era Glass-Steagall restrictions come to mind. The next wave in this
evolution is likely to be the mixing of banking and commerce.
Finally, technology will continue to drive consolidation of the industry. It will also
continue to be a major focus of risk management, presenting banks with both new
opportunities and new challenges in serving consumers and businesses.
Today, I want to focus on consolidation and the implications of a two-tiered industry. I
will share some of the steps we've taken in the past few years in response to these
trends and my thoughts on what more needs to be done.
In recent remarks to the National Association for Business Economists, I said that the
story of banking in the U.S. is fast becoming a tale of two industries. At one end are the
dozen or so large complex banking organizations whose size is measured in the
hundreds of billions of dollars. Some have assets in the range of one trillion dollars. At
the other end are thousands of community banks, which typically have less than one
billion dollars in assets.
At the FDIC, we have asked ourselves how this bifurcation of the industry should affect
how we do our business.
Let me start with community banks as the first of the two tiers.
By our count, in the past 20 years the number of these banks has declined from 14,000
to under 7,000. Will this trend continue? If you believe, as I do, that community banking
is important to the country, this is an important question.
There are two ways of looking at this question. In the optimistic view, the decline in the
number of community banks over the past two decades had two main causes: the
banking crisis and the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994. In this optimistic view, there is no longer a banking crisis to cause any further
decline and Riegle-Neal will eventually lead to a somewhat lower but relatively stable
number of community banks, unless something else comes along to cause a decline.
industry. This will have implications for how the FDIC insures, supervises, and resolves
banks.
Third, financial services companies are becoming global. And the distinctions between
the kinds of financial service companies are blurring.
These trends raise questions about the financial regulatory structure in the U.S. In the
past, we have seen changes in the marketplace drive major changes in the law. The
deregulation of interest rates, the elimination of branching restrictions, and the repeal of
the depression era Glass-Steagall restrictions come to mind. The next wave in this
evolution is likely to be the mixing of banking and commerce.
Finally, technology will continue to drive consolidation of the industry. It will also
continue to be a major focus of risk management, presenting banks with both new
opportunities and new challenges in serving consumers and businesses.
Today, I want to focus on consolidation and the implications of a two-tiered industry. I
will share some of the steps we've taken in the past few years in response to these
trends and my thoughts on what more needs to be done.
In recent remarks to the National Association for Business Economists, I said that the
story of banking in the U.S. is fast becoming a tale of two industries. At one end are the
dozen or so large complex banking organizations whose size is measured in the
hundreds of billions of dollars. Some have assets in the range of one trillion dollars. At
the other end are thousands of community banks, which typically have less than one
billion dollars in assets.
At the FDIC, we have asked ourselves how this bifurcation of the industry should affect
how we do our business.
Let me start with community banks as the first of the two tiers.
By our count, in the past 20 years the number of these banks has declined from 14,000
to under 7,000. Will this trend continue? If you believe, as I do, that community banking
is important to the country, this is an important question.
There are two ways of looking at this question. In the optimistic view, the decline in the
number of community banks over the past two decades had two main causes: the
banking crisis and the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994. In this optimistic view, there is no longer a banking crisis to cause any further
decline and Riegle-Neal will eventually lead to a somewhat lower but relatively stable
number of community banks, unless something else comes along to cause a decline.