Bankers in Boston

Northwestern Financial Review, Oct 18, 1997 by Bengtson, Tom

Annual ABA convention features legislative update, plus new looks at leadership and technology

Walter Dods, the American Bankers Association's first president from Hawaii, told bankers gathered in Boston for the association's annual convention Oct. 4-6, that the industry needs reform legislation. "With unitary thrifts out there, it's not a matter of keeping commerce and banking separate," he said. "It's already happening."

In his final speech as ABA president, Dods said the association opposes H.R. 10, the pending financial modernization legislation, but that it supports the bill's positive elements and ultimately would like to see a bill passed. Dods, who logged more than 277,000 frequent flyer miles on behalf of ABA this past year, said modernization legislation will only become more complicated next year when a credit union bill is likely to be introduced.

The Supreme Court heard oral arguments in the AT&T credit union case on the morning of Oct. 6, as bankers were hearing from industry leaders about technology, contingency planning, and innovation during the closing general session of their three-day meeting at the Hynes Convention Center. The session concluded with a telephone report from ABA's Michael Crotty who updated bankers on the credit union case from the steps of the Supreme Court building in Washington, D.C.

Although he said about 80 percent of the hearing was devoted to the question of whether banks even have standing in the case, Crotty said the questions asked by the judges lead him to be "quite optimistic" about a ruling in favor of the banking industry. He said a decision could come as early as Nov. 3, but it more likely will come at the end of the year or early in 1998.

If the credit unions lose, bankers can expect them to push legislation which would expand the. definition of the common bond. If the court rules in favor of the credit unions, the banking industry will push legislation to more narrowly define the common bond, Harry Argue explained to fellow ABA-affiliated state association executives at their annual meeting which coincided with the convention. Argue is executive vice president of the Wisconsin Bankers Association and served as head of the ABA State Association Division during the past year.

Argue, who was one of the organizers of ABA's strike force against credit unions, said, "our efforts must continue to achieve ultimate parity for banks with credit unions on common bond, income taxation and regulation."

Regulators Weigh In

Bankers picked up a qualified endorsement for financial modernization legislation from Federal Reserve Board Chairman Alan Greenspan, who addressed the convention along with two other regulators during the Sunday morning session. "The continuing evolution of markets suggests that it will be literally impossible to maintain some of the remaining rules and regulations established for previous economic environments," Greenspan said in his familiar, dry cadence. "Market forces will continue to make it impossible to sustain outdated restrictions.

"Current facts and expected future trends are creating market pressure to permit the common ownership of financial and nonfinancial firms. In my judgment, 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."

Greenspan, however, urged caution, saying, "it seems wise to move with caution in addressing the removal of the current legal barriers between commerce and banking since the unrestricted association of banking and commerce would be a profound and surely irreversible structural change in the American economy."

Although press reports after the speech said Greenspan supports modernization, he closed his speech with this warning: "If we act too quickly, we 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."

Comptroller of the Currency Eugene Ludwig agreed that modernization legislation is needed, but also urged caution. "One thing that keeps me awake at night is the strategic risk for banks inherent in the current legislative debate about financial modernization," he said. "I believe strategic risk - the risk of not being able to offer the products and services that the market demands - is the greatest risk facing the banking industry."

Ludwig, noticeably more comfortable in front of an ABA convention crowd than in past years, said reform legislation must provide meaningful change. "No bank should be forced to sacrifice the flexibility that current law already provides in exchange for a cosmetic reshuffling of existing activity restrictions," he said, moving out from behind the podium a number of times during his 15-minute speech.

Ludwig's main message, however, wasn't so much about the future as it was about the present. He warned banks that his agency is detecting a decline in credit quality throughout the industry. "Our examiners tell me that, over the past year, underwriting standards have continued to loosen in most lending categories. The trend is particularly pronounced in commercial lending."