Banks’ Role Still Crucial, Fed Governor Says
|Mark W. Olson
Even though payments system developments have changed the dynamics of banking over the years, banks still occupy a central role in the financial system, according to Federal Reserve Gov. Mark W. Olson. In a March speech to the Institute of International Bankers, Olson cited banks’ expanded range of services, federally insured checking and savings accounts, and access to payments networks as some of the factors that contribute to the important role banks play in the economy.
Banking then, banking now
As the banking industry was experiencing an identity crisis in the early 1980s—a crisis unlike any it had faced since the Depression era 50 years earlier—Olson said the industry’s resilience and innovation kept banks in a central position in the nation’s financial system.
In the 1980s, Olson noted, banks faced challenges such as a lack of products to compete with money market funds offered by investment firms and limits on interest rates for passbook savings accounts and certificates of deposit that favored thrifts over banks. Banks were also restricted from certain types of investment, securities, and insurance activities. In the 1990s, however, as the industry improved risk management and banking supervision evolved, the U.S. Congress redefined the types of businesses banks could engage in and “reaffirmed as a matter of public policy that banks continue to be regarded as special,” according to Olson. Congress’ moves put banks in a position to remain competitive in the marketplace.
Changing with the times
With changes in the payments system over time, banks have expanded their role in providing market liquidity with the rise of new financial products and services. “Banks have proven themselves to be formidable competitors and innovators, which only reinforces banks’ importance in the proper functioning of our financial system,” Olson said. “In short, the public’s trust and confidence in banking continue to be vital to our financial well-being.”
The marketplace exerts pull
Olson concluded his remarks by reiterating the influence of the marketplace on banking—influence that will require policy refinements. Regarding the role of public policy, Olson believes that the marketplace will lead the banking industry, and policymakers will make appropriate changes after careful deliberation.“Any changes must be informed by a careful study of both the role we want banks to play in our economy and the needs of the marketplace,” he said.