Silas Keehn, President, Federal Reserve Bank of Chicago - Statements to the Congress - transcript

Federal Reserve Bulletin, July, 1991

Historically, the states in our District have had a unit banking orientation, which is to say that branching or at least extensive branching was not permitted. This meant that some local markets, on occasion, may have experienced greater credit restraint than others because funds did not flow freely across the region from surplus to deficit areas. This has been changing, but still it is a feature of our market that differentiates the region from others where statewide branching has been permitted for quite some while. I might say, however, that there is an interesting alternative argument to this point. Some of our smaller markets are served mainly by the banks in their particular areas. Many of these banks have been a "source of strength" to their markets because they have not been adversely affected by some of the problems that have had an impact on the larger institutions, and therefore they have not had to restrain the extension of credit. Adding to this, the smaller banks in our area quite frequently have had better capital positions and therefore have not had to restrain asset growth as a way of improving their capital positions--simply put, unit banking cuts two ways.

Conclusion

To conclude, it is my opinion that the credit restraint that we are experiencing in the Midwest reflects an adjustment in the marketplace, and it is entirely possible that we are coming to the end of this phase. Barring a more adverse economic experience than is generally anticipated, I would expect to see a stabilization in asset quality, and that at some reasonably near-term point, and as the market process continues we will see an improvement in bank earnings. Capital positions, already significantly better than they were at the beginning of the last decade, will continue to show improvement, and as we go through this period the safety and soundness of the banking sector will be enhanced. This is absolutely fundamental to the economy of this country. A well-functioning economy experiencing good rates of sustained economic growth is dependent on a sound banking system. While in the short run the credit restraint that we have been experiencing has been difficult, particularly for those who have been denied credit, in the long term the overall economy will benefit from this significant transition. In the interim, while legislation to deal with the broad question of restructuring the financial system has become absolutely compelling, any specific legislative initiatives to deal with the credit restraint in an attempt to override the market process would seem ill-advised and would probably result in unintended distortions.