Statement by Paul A. Volcker before the Subcommittee on Consumer, Commerce and Monetary Affairs
Statement by Paul A. Volcker Before the Subcommittee on Consumer, Commerce and Monetary Affairs
MUCH CRITICISM OF THE present regulatory approach toward banking emphasizes the narrowness -- and arbitrariness -- of the definitions of activities that are "closely related to banking."
It is argued that the basic structure and the protections built into law can be maintained while expanding the permissible range of activities of the owners of banks to areas of related activity and expertise, thus allowing the owners of banks and other financial businesses to be more competitive with firms that offer a broad array of financial services to the public.
Essentially, this position recognizes on the one hand the need to maintain the protections of present arrangements and on the other hand the feasibility and desirability of expanding the scope of bank holding company activities. As I stressed at the outset, and will explain at the conclusion of my testimony, we strongly support legislation to adapt by that means the present system to a changing environment.
There are others who would go much further. They seem to question the basic premise of any limitations on the activities of owners of banks and would permit any enterprise to own a bank or bank-like thrift. They essentially question whether the safeguards built into the present system to protect depositors' funds and banks from abuse need to be implemented through limitations on ownership. I would like to analyze the major arguments that have been advanced in that connection:
1. That banking, as we know it now, is no longer competitive as evidenced by the trends in bank profitability and market share and, accordingly, banking must be combined with other businesses to make it successful;
2. That technology has made it impossible to segregate banking from other businesses;
3. That the synergies created by combining banking with other products are competitively too strong to resist;
4. That the present system has been irretrievably undermined by market developments such as nonbank banks, and the present situation is irreversible;
5. That it is essential to bring down the barriers between the linking of banking and commerce in order to obtain an infusion of commercial capital into the capital-strained thrift and banking industries.
Banking Performance in Perspective
With increasing frequency, some serious analysts of banking have expressed concern about the future viability of banks as effective competitors. They point to increased competition from other financial and "nonfinancial" institutions facilitated by improvements in computers and communications, to inroads into banking through loopholes and exploitation of other anomalies in the system, to statutory and regulatory restraints on banking, and to data on a decline in profitability and market share for banks.
Clearly banking is facing problems. One obvious symptom is the fact that bank failures have been running at record rates in the past few years and, overall, profitability has been declining, at least until 1985. These are serious problems that require careful attention, but it is, of course, necessary to examine the data carefully to diagnose accurately the problems and to develop effective remedies.
During the first half of the 1980s, commercial bank profitability slid rather persistently from the recovery peaks reached in 1979. During that period, overall bank profitability remained well below its 1979 level, and there were particularly acute problems for some very small and very large banking institutions.
To some extent, these developments may be cyclical, but both the deregulation of interest rates and the adjustments in the 1980s to disinflation clearly played a role. Certainly, banks have been adversely affected by a substantially changed economic climate; an unusually large number of borrowers, especially energy, agricultural, real estate and international borrowers, sustained reverses. …