Donald E. Powell
Chairman
Federal Deposit Insurance Corporation
Remarks Before The
National Association For Business Economics
March 26, 2004
Washington, DC
FOR IMMEDIATE RELEASE Media Contact:
PR-30-2004 (3-26-2004) David Barr (202) 898-6992
David Barr (202) 898-6992
Thank you very much for the opportunity to speak here today before this very
distinguished audience. You are the people who make economics both discernable and
useful to the wider world of business and policy.
I admire the work you’ve done and want to mention that our economists at the FDIC rely
on this organization for ideas, opinions, contacts and a thoughtful perspective on the
statistics and issues of the day. I’m grateful for the work the NABE provides and look
forward to continuing what we view as a very productive partnership.
We come together today at a pivotal time in our nation’s economic history. In the past
two decades, we’ve seen a free-market consensus develop around an agenda of broad
deregulation in our economy. As a result, we are witnessing a significant transformation
in the marketplace brought on by the revolutionary economic events that characterized
the end of the twentieth century.
Deregulation, globalization, and far-reaching technological innovation have profoundly
altered our economic landscape over the last 20 years.
This era of tremendous transformation had a significant impact on the way financial
services are provided. Looking back over the last two decades or so, you can identify
two distinct periods for banks: the near-death experience and the golden age.
The tipping point came in the early 1990s. By 1991, the taxpayers were on the hook for
problems in the savings and loan industry and hundreds of banks had high volumes of
troubled loans and weak capital positions. Banking was a big part of the problem in that
recession. Not long after this, Bill Gates was quoted as saying that “banks are
dinosaurs.”
As you’re probably aware, the banking industry’s turn-around was rapid and sustained.
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
Chairman
Federal Deposit Insurance Corporation
Remarks Before The
National Association For Business Economics
March 26, 2004
Washington, DC
FOR IMMEDIATE RELEASE Media Contact:
PR-30-2004 (3-26-2004) David Barr (202) 898-6992
David Barr (202) 898-6992
Thank you very much for the opportunity to speak here today before this very
distinguished audience. You are the people who make economics both discernable and
useful to the wider world of business and policy.
I admire the work you’ve done and want to mention that our economists at the FDIC rely
on this organization for ideas, opinions, contacts and a thoughtful perspective on the
statistics and issues of the day. I’m grateful for the work the NABE provides and look
forward to continuing what we view as a very productive partnership.
We come together today at a pivotal time in our nation’s economic history. In the past
two decades, we’ve seen a free-market consensus develop around an agenda of broad
deregulation in our economy. As a result, we are witnessing a significant transformation
in the marketplace brought on by the revolutionary economic events that characterized
the end of the twentieth century.
Deregulation, globalization, and far-reaching technological innovation have profoundly
altered our economic landscape over the last 20 years.
This era of tremendous transformation had a significant impact on the way financial
services are provided. Looking back over the last two decades or so, you can identify
two distinct periods for banks: the near-death experience and the golden age.
The tipping point came in the early 1990s. By 1991, the taxpayers were on the hook for
problems in the savings and loan industry and hundreds of banks had high volumes of
troubled loans and weak capital positions. Banking was a big part of the problem in that
recession. Not long after this, Bill Gates was quoted as saying that “banks are
dinosaurs.”
As you’re probably aware, the banking industry’s turn-around was rapid and sustained.
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.
I used to think that bank performance was closely tied to the economic cycle. But this
may have changed. Before, during, and after the 2001 recession, banks have been a
pillar of strength for the U.S. economy. As a sector, banks have added jobs consistently
since 2000. Most of their growth has been in mortgage and consumer lending, in
particular, because that’s where the loan demand has been. But the industry is primed
to make more business loans when demand turns up there as well.
This serves to remind us of something we all learned in undergraduate economics – a
healthy, well-functioning banking industry is key to the economic vitality of our nation.
We also learned that banking systems seem to function better when the government
provides a safety net with features such as a lender of last resort and deposit insurance.
At the same time, the presence of a safety net tends to undermine market discipline,
thus creating the need to supervise and regulate banks in order to prevent excess risk-
taking.
This leads to a classic economic trade-off between letting the market work and
appropriate government intervention. In banking, this trade-off has played out in how
banks are permitted to compete with other financial services providers, what products
and services banks can offer, how highly leveraged they can be, and even restrictions
on who can own banks.
In the crisis period of the1980s and early 1990s, this trade-off was out of kilter and we
saw the consequences of that imbalance. Over the past decade, a much more desirable
balance appears to have been struck. As we look to the future, the question is whether
we will continue to strike the right balance. Will bank regulators and policymakers
manage these trade-offs in a way that will allow banks to continue to play their dynamic
and essential role in our economy while maintaining financial stability?
This morning I want to talk to you about two major trends that we at the FDIC expect to
be extremely important in the future and how these trends will challenge our ability to
strike the right balance. The first trend is well underway and will continue: the
consolidation of the banking industry. The second trend is not as far along, but has the
potential over the next decade or two to bring fundamental changes – the mixing of
banking and commerce.
Let me start with consolidation of the banking industry, which as you may know, has
been dramatic over the past 20 years. During the crisis period, consolidation was
disorderly, with bank failures playing a significant role. During the post-crisis period,
consolidation was much more orderly as banks responded to the removal of restrictions
on interstate banking and sought to realize economies of scale and scope.
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
earned just over $100 billion.
I used to think that bank performance was closely tied to the economic cycle. But this
may have changed. Before, during, and after the 2001 recession, banks have been a
pillar of strength for the U.S. economy. As a sector, banks have added jobs consistently
since 2000. Most of their growth has been in mortgage and consumer lending, in
particular, because that’s where the loan demand has been. But the industry is primed
to make more business loans when demand turns up there as well.
This serves to remind us of something we all learned in undergraduate economics – a
healthy, well-functioning banking industry is key to the economic vitality of our nation.
We also learned that banking systems seem to function better when the government
provides a safety net with features such as a lender of last resort and deposit insurance.
At the same time, the presence of a safety net tends to undermine market discipline,
thus creating the need to supervise and regulate banks in order to prevent excess risk-
taking.
This leads to a classic economic trade-off between letting the market work and
appropriate government intervention. In banking, this trade-off has played out in how
banks are permitted to compete with other financial services providers, what products
and services banks can offer, how highly leveraged they can be, and even restrictions
on who can own banks.
In the crisis period of the1980s and early 1990s, this trade-off was out of kilter and we
saw the consequences of that imbalance. Over the past decade, a much more desirable
balance appears to have been struck. As we look to the future, the question is whether
we will continue to strike the right balance. Will bank regulators and policymakers
manage these trade-offs in a way that will allow banks to continue to play their dynamic
and essential role in our economy while maintaining financial stability?
This morning I want to talk to you about two major trends that we at the FDIC expect to
be extremely important in the future and how these trends will challenge our ability to
strike the right balance. The first trend is well underway and will continue: the
consolidation of the banking industry. The second trend is not as far along, but has the
potential over the next decade or two to bring fundamental changes – the mixing of
banking and commerce.
Let me start with consolidation of the banking industry, which as you may know, has
been dramatic over the past 20 years. During the crisis period, consolidation was
disorderly, with bank failures playing a significant role. During the post-crisis period,
consolidation was much more orderly as banks responded to the removal of restrictions
on interstate banking and sought to realize economies of scale and scope.
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