Financial Update (January-March 1996)

Former Fed Governor Urges
Unity on Bank Reform

By many measures, the condition of the banking industry is extraordinary today, said former Federal Reserve Governor John LaWare, but he urged the financial industry to unite in an effort to secure passage of banking reform legislation.

Speaking to the board of directors of the Federal Reserve Bank of Atlanta, LaWare said he is not optimistic that Congress will repeal the Glass-Steagall Act this year, in part because of the divisiveness among financial interests but also because the lawmakers are preoccupied with the budget stalemate and elections. The reform would benefit investment and commercial bankers alike, he said, by allowing them both to offer a full spectrum of services and remain competitive.

Here is a summary of some of the points LaWare, a former banker and a former governor of the Federal Reserve System, made about the industry's health, his concerns, and his suggestions.

John LaWare,
former governor of the Federal Reserve System's Board of Governors
Banking health:
  • Banking's capital position is the strongest it has been in three decades.
  • Earnings are higher than he has seen them in the 42 years he has spent in banking.
  • Asset quality is strong.
  • Reserves are at a higher level than they have been in perhaps 40 years.
Concerns:
  • International lending has started to grow again, but American bankers may not have the expertise needed for such an endeavor to be successful.
  • A lot of large, syndicated loans are being issued for pricey acquisitions, and the cash flow may not be available to meet those debts.
  • Financial institutions are staging a market share race. Some "extravagantly bad" procedures are being used to get at the consumer market, as reflected in the spread of unsolicited credit card offers.
  • The outlook is bleak for deregulatory legislation in Congress this year. That list includes Glass-Steagall reform, Community Reinvestment Act reform, and a rollback of parts of the Federal Deposit Insurance Corporation Improvement Act.
Suggestions:
  • Derivatives legislation is unnecessary because the problems that have arisen are with the people who trade them, not the instruments themselves.
  • Financial institutions should unite on Glass-Steagall reform. If Congress does not repeal Glass-Steagall, LaWare predicted, the Fed might ease up on its ratio of business that can be done in their securities affiliates.
  • Banks should be allowed to own real estate brokerage operations.
  • Deposit insurance should be privatized. Acknowledging that this is his most controversial proposal, LaWare said private consortiums could operate like a private insurance company offering risk-based premiums. Depositors would pay the premiums, under LaWare's proposal. Eventually, he said, regulators could relinquish supervision and regulation to the private entity.
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