Regulatory and Legal Issues Brewing in the Banking Industry

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Tennessee bankers will face many challenges in the coming year as the economic and regulatory environment remain uncertain. Potential changes in regulatory and legal restrictions and the possibility of a national recession in addition to existing weakness in real estate will affect financial institutions in the state.

Economists have been forecasting a recession or a "soft landing" for the national economy for some time, with the Federal Reserve maintaining a tight money stance to ward off inflation. The economy may have begun to show signs of a possible recession with recent slowing in manufacturing. Tennessee has had mixed results in recent years with certain sectors of the economy, such as real estate, showing extreme weakness. On the other hand, sectors such as trade and transportation have fared well.

Statewide total employment growth peaked in the last half of 1988 and has since dropped significantly reflecting, the general slowdown of activity statewide. Hardest hit have been Nashville and Knoxville, with total employment actually contracting in those metropolitan areas. Memphis, Chattanooga, and the Tri-Cities area will not be immune to an economic downturn but have so far maintained positive, albeit slow, growth. Banks are directly affected by the economy of the markets in which they operate. The credit quality problems experienced at the large Tennessee banks this year are reflections of economic weaknesses in Tennessee as well as other areas of the country.

On the regulatory and legal fronts, the biggest newsmakers may be the passage of national interstate banking in Tennessee, the repeal of the GlassSteagall Act, and the continued impact of the S&L crisis.

Since 1986, Tennessee law has allowed the acquisition of banks in Tennessee by out-of-state banks within the southeastern region. The Tennessee Bankers Association (TBA) recently agreed to support an amendment to that legislation that would allow banks anywhere in the country to acquire banks in the state. The bill is not a new topic, as it has been presented to the legislature in past years and has even been nicknamed the "Citibank Bill" after one of its more active lobbyists. However, what is causing renewed speculation in banking circles is the support of the bill by the Government Relations Committee of the TBA. …