Statements to Congress - Transcript

Federal Reserve Bulletin, Sept, 1997

Current facts and future trends, in short, are creating market pressures to permit the common ownership of financial and nonfinancial firms. The Board, in fact, has concluded that it is quite likely that in future years it will be close to impossible to distinguish where one type of activity ends and another begins. Nonetheless, the Federal Reserve Board also has concluded that it would be wise to move with caution in addressing the removal of the current legal barriers between commerce and banking because the unrestricted association of banking and commerce would be a profound and surely irreversible structural change in the U.S. economy.

Were we fully confident of how emerging technologies would affect the evolution of our economic and financial structure, we could presumably develop today the regulations that would foster that evolution. But we are not, and history suggests we cannot. We thus run the risk of locking in a set of inappropriate rules that could adversely alter the development of market structures. Our ability to foresee accurately the future implications of technologies and market developments in banking, as in other industries, has not been particularly impressive. As Professor Rosenberg of Stanford University has pointed out, ". . . mistaken forecasts of future structure litter our financial landscape." Consider the view of the 1960s that the "cashless society" was imminent. Nonetheless, the public preference for paper has declined only gradually. Similarly, just a few years ago conventional wisdom argued that banks were dinosaurs that were becoming extinct. The reality today is far from it. Even more recently, it was argued that banks and nonfinancial firms had to merge to save the capital-starved banking system. Today, as you know, virtually all of our banks are very well capitalized.

All these examples, and more, suggest that if we dramatically change the rules now about banking and commerce under circumstances of great uncertainty about future synergies between finance and nonfinance we may well end up doing more harm than good. And, as with all rule changes by government, we are likely to find it impossible to correct our errors promptly, if at all. Modifications of such a fundamental structural rule as the separation of banking and commerce accordingly should proceed at a deliberate pace to test the response of markets and technological innovations to the altered rules in the years ahead.

Excessive delay would doubtless produce inequities. Expanded financial activities for banking organizations require, and the Banking Committee's Financial Services Competition Act provides, that those firms operating in markets that banks can enter, in turn, be authorized to engage in banking. However, some securities and insurance firms, as well as some thrift institutions, already own -- or are owned by -- nonfinancial entities. Continuing the commerce and banking prohibitions would thus require the divestiture or grandfathering of all nonfinancial activities by those organizations that wanted to acquire or establish banks.