Many of the 10,000 or more bankers at last week's annual convention in Chicago spent their time doing business, rather than listening to speechs. Numerous breakfasts, lunches, cocktail parties and dinners were held by individual banks for their actual or potential customers or business partners.
As an executive of Bankers Trust explained, a large number of corporations, as well as banks, attend the annual convention of the American Bankers Association. Bankers Trust, for example, took the opportunity to wine and dine several of their large corporate customers such as General Electric, who in turn came to Chicago to take advantage of all their bankers being in the same town.
One banker said that he had not even been to the convention center, the huge and sterile McCormick Place. But a lot of his fellow bankers did choose to spend at least some of their time listening to speeches about, and discussing among themselves, the more general concerns of the industry.
There are certainly many concerns at the moment. The banking system is undergoing enormous changes as a result of deregulation and technological innovation. It is also affected in its day-to-day operations by the dramatic increase in interest rate volatility over the last year.
Probably all the bankers agreed that inflation is the nation's major problem, and that the Federal Reserve Board's attempts to fight it with their money policy should be supported. But the rapid swings in both the money supply and interest rates since the Fed changed its method of money control last year, are making life much harder for banks which now have to adjust their rates more swiftly and more often than in the past.
The last 12 months have seen significant changes in the competitive environment of the banking industry itself. But even more dramatic shifts are likely to come in the future ranging from the introduction on Jan. 1 of nationwide NOW accounts (negotiable order of withdrawal), which will pay interest on what are effectively checking accounts, to possible relaxation of the restrictions on interstate banking.
Most bankers are apprehensive about the coming upheavals. The theme of change and the need to adapt to it, ran through most of the speeches given in the general sessions of the convention, and dominated many individual discussions.
There was widewpread agreement with the comment of John Heimann, comptroller of the currency, that "the financial services business will not only be different in the 1980s, it will be significantly more difficult."
Commercial banking is now faced with intense competition for much of its traditional business from both savings and loan institutions and non-depository financial intermediaries such as American Express or Merrill Lynch. The former have recently been given much more power by Congress to offer transactions accounts, credit cards and other personal credit. Other nonbanks such as money market mutual funds, which effectively compete for funds with the commercial banks, are advantaged because they are not subject to the same regulations as banks.
And as well as incursions from outside the industry into traditional banking business, it seems inevitable that during the 1980s there will be harsher competition between banks, which could lead to a dramatic reduction in their numbers.
It is easy enough for the bankers to agree on the question of outside competition: They want to stick together.
But according to one small community banker from Atlanta, "there are as many views on interstate banking as there are people at the convention."
Geographical limits on banking have lain "at the very heart of American banking tradition" in Heimann's words. They have enabled an extraordinarly large number of diverse banks to survive in what are effectively protected markets. But technological advances, coupled with growing competition from other financial institutions and from foreign banks, and eroding these limits. The concern in Chicago was that legislative changes, which would allow banks to cross state lines, are bound to come.
The new president of the ABA, Lee Gunderson, is himself the president of a small community bank in Osceola, Wis. He accepts that many small banks like his own will be threatened by legislative changes. But he insists that provided a bank is well managed, no matter how small it is, it should be able to survive.Both he and his predecessor as president, C.C. Hope, were unwilling to give a view on what should be done about interstate banking, as the ABA has yet to work out a united position.
Hope commented that in the past the ABA had supported states rights to make their own laws governing branching, but he admitted that change was inevitable. He thought that some of the almost 15,000 banks across the nation would disappear over the next decade, but predictions that there would be only 2,000 or 3,000 left would be proved wrong. "Eight, nine or 10,000 banks" could survive, he suggested.
Two key pieces of banking legislation which are under review are the MacFadden Act, which prohibits interstate branching, and the Douglas Amendment which restricts bank holding companies from purchasing banks across state lines. A White House study, not yet released, is believed to recommend relaxing the Douglas Amendment and leaving the MacFadden Act intact for the time being.
Many advocates of change believe that the oppostion to interstate branching from the many small- and medium-sized community banks, which would suddenly be faced with more competition, would ruin chances of legislative change if there were a threat to the MacFadden Act. Piecemeal changes in the Douglas Amendment, perhaps allowing holding companies to buy next-door states before freeing them to buy across the nation, are thought easier to achieve.
But this view was not shared by everyone in Chicago. Thomas G. Labreque, president-elect of Chase Manhattan, opposed step-by-step changes in the law.
Chairman of the Senate Banking Committee, William Proxmire (D-Wis.), told the bankers in one session that he was more vigorously against getting rid of the Douglas Amendment than the MacFadden Act. Allowing bank holding companies to expand across state lines would not be procompetetive. They would merely be buying up existing banks, not creating more services. This could lead to too much concentration of financial strength, he said.
On the other hand, some of the small community banks, which are in the firing line of geographical changes, would rather be wooed by holding companies newly able to buy across state lines, than be faced with the extra competition in their market places which would result from the abolition of the MacFadden Act.
President-elect of the ABA, Llewellyn Jenkins of Manufacturers Hanover, said in an interview that he thought the MacFadden Act would still be in place in 10 years time. He thought there would be a "a bit of a shambles" in the industry if the act were repealed "in the near term."
But Jenkins agreed that the industry was "quite threatened" by changes that were bound to come in the next decade. "It has been quite secure with its regulatory wrap around it," he commented.
Jenkins said there were two main expansion areas for banks: They can expand geographically, and they can expand their product range. He believes that the way to survive is through "putting more services on the shelves," thus competing directly for individual customer business. "If you're in the business, you've got to be in it all the way," he said. Jenkins added that even the big money center banks needed to develop their retail banking, or small customer business.
A different approach is being followed by Bankers Trust. The trust has recently got rid of all its retail banking, and is now exclusively in the wholesale business.
It is hard to imagine Congress changing the law so that the traditional U.S. community banker is forced out of business. But as Heimann pointed out, the limits on interstate banking are already being circumvented for almost all aspects of banking exept deposit talking.
Both he and Paul Volcker, chairman of the Federal Reserve Board, discussed changing the law to protect small banks and make it easier for them to compete against large banks. A move along these lines could be a way of softening the pill of the other changes in the offing. But nothing can insulate the industry from what Jenkins described as the "traumas" which it is undergoing.