Atlanta Fed President Lockhart Addresses Bankers' Challenges - Transcript

August 10, 2012

The following are excerpts from Atlanta Fed President Dennis Lockhart's welcome remarks at the Atlanta Fed Banker Outreach Forum in Chattanooga, Tennessee, on August 10, 2012.

I wanted to spend a few minutes talking about my views as to some of the issues in banking. I see five kinds of predictable realities or trends; you might call them challenges.

The first is pressure to achieve economic scale. There is, and I think increasingly will be, a scale below which it's going to be very difficult to compete; difficult to deploy a staff with the necessary skills, expertise, and experience; difficult to invest in technology; and need I say, cover the costs of compliance. So scale, I think, is an important issue going forward.

Crafting a business model that delivers growth with safety and earnings power is a continuing challenge. Diversification of risk, differentiation from competitors, balancing relationships with lending and pricing discipline, and—after these challenges—developing sustainable revenue streams and capturing sufficient margins.

The third challenge I see is higher regulatory and prudential capital requirements. Clearly capital requirements are going to be higher or are already higher. The experience of the recent years has brought on an era of larger capital buffers against risk and against insolvency and, importantly, to avoid public assistance. Many community banks have a need for more capital while having limited access to capital, and higher margin contraction constrains earning a sufficient return on capital. So access to capital is going be a key consideration and in all likelihood will drive consolidation.

And that leads me to the fourth point, and that is consolidation. When I was a banker in the Southeast in the late '70s and '80s, there were over 14,000 banks in the country, and now there are a little over 7,000 banks. So clearly there has already been a lot of consolidation. Some amount of consolidation will make the banking system healthier by concentrating resources and organizations with depth of management and more resilient competitive positions.

The fifth point I want to make—and the last point—is that deeper appreciation of technology is coming, including the relationship with regulators. The demands of capital markets with adequate returns on investment are going to continue to require an intense focus on cost structure as an element of a bank's earnings equation. Technology will play a big role in getting as lean and as efficient as possible. I can also foresee moves to bring more technology into the interface between a bank and the bank's regulators for mutual benefit. An investment in technology, I think, is simply a fact of life going forward.

So those are five trends or five challenges for the future.