"Narrow Banks: An Alternative Approach to Banking Reform"

Recent banking problems have prompted a variety of proposals for reforming deposit insurance and the banking system. Nearly all of these proposals, however, suffer from a common flaw - they would fail to create a banking system that is both stable and free to respond to market forces and financial developments. Narrow banking offers a possible means for accomplishing these objectives. Narrow banking would create a stable payments system by backing transaction deposits with only those assets that are truly appropriate for this task - marketable securities with virtually no interest rate or credit risk. As a result, narrow banks would essentially be "fail-safe" institutions and could operate without the inherent weaknesses of the current system. They would not pose a risk to depositors, taxpayers, or federal authorities and, unlike commercial banks, would not require extensive governmental support and intervention. These features of narrow banks would allow market forces to guide everyday banking decisions and the activities of any affiliated firms, thus returning the market to its proper role in allocating financial services. In many respects, narrow banking mirrors another banking reform that took place in the 1860s - the use of U.S. Government securities to back national bank notes. This earlier reform and the following change to Federal Reserve Notes collateralized largely by U.S. obligations have produced a stable currency and ended any public concern about its acceptability. This success provides strong evidence that narrow banking is a workable system that could stabilize our deposit system and its transactions function. Narrow banking, much like this earlier reform, appears to involve a dramatic change in the banking system. However, recent financial trends are making narrow banking a less radical change than commonly believed. In addition, most of the other approaches to recent banking problems entail a movement toward greater regulatory and governmental control of our financial system and its credit allocation functions - a response that is unlikely to make banking a vibrant, competitive industry. All of these factors thus suggest that narrow banking deserves careful consideration in efforts to reform the financial system.

Low and moderate-income home financing : what are the trends in Kansas City?

Over the last decade, many significant developments have influenced home lending. Among these developments are the longest expansion period in U.S. history, pathbreaking technological and financial innovations, new regulatory and legislative incentives for low- and moderate-income lending, and continued growth of community organizations and special home lending programs. ; This article takes a look at these trends and their possible effect on home purchase lending in the Kansas City metropolitan area between 1992 and 2001. The article examines changes in home financing across the entire metropolitan area, as well as among low- and moderate-income borrowers and within low- and moderate-income neighborhoods. Also analyzed are the contributions of different types of lenders—banks and thrifts with local banking offices, banks and thrifts with no Kansas City banking offices, and independent mortgage companies. ; Among the more noteworthy findings in this analysis is the substantial growth that has occurred in home purchase lending for the entire Kansas City metropolitan area, with an increasing share of this lending going to low- and moderate-income borrowers and neighborhoods. Of further interest is the growing importance of home lending by banking organizations without deposit-taking offices in Kansas City. In particular, the rapid emergence of such organizations in low- and moderate-income lending provides a strong signal that this lending is meeting many of the same market tests as other forms of lending, thus foreshadowing a more continuous flow of financing to lower income neighborhoods.Loans ; Federal Reserve District, 10th

The changing structure of banking : a look at traditional and new ways of delivering banking services

In the short span of just ten to fifteen years, Tenth District banking has made the dramatic leap from predominantly a unit banking or single office framework to one that encompasses both statewide branching and interstate banking. This article examines the major factors behind these changes and then looks at the District's evolving banking structure. Overall, the total number of banks operating in Tenth District states has declined by about 40 percent since 1985. This decline, though, has been accompanied by a significant increase in the number of bank branches and facilities. ; Other significant changes are also occurring. About one-third of all banking deposits in Tenth District states is now under the control of out-of-state organizations. In addition, banks are developing and expanding alternative ways for delivering services. For instance, the District's ATM population continues to grow rapidly and an increasing number of banks are opening branches in supermarkets and other retail locations. Moreover, the Internet Web sites of District banks have expanded quickly over the last year both in terms of number and the complexity of services offered. While all of these developments pose a variety of issues and challenges for District bankers and customers, this changing banking framework is opening up new opportunities and will likely lead to a more convenient and efficient banking system, with a broader choice of services.Federal Reserve District, 10th ; Banks and banking - Customer services

Industrial loan companies: a growing industry sparks a public policy debate

Industrial loan companies, or ILCs, are a small, but rapidly growing part of the financial industry. These state-chartered institutions operate in seven states and have nearly all of the same powers as commercial banks. However, ILCs differ greatly from banks in one characteristic--the type of companies that may own them. ILCs meeting certain conditions may be owned and operated by firms engaged in commercial activities, thus skirting the prohibitions on mixing banking and commerce that apply to virtually all other depository institutions. ; From a public policy standpoint, the proponents of commercially owned ILCs claim that such ownership will bring a new source of capital, innovation, and competition into banking, thus providing the public with a broader range of financial services. Critics, though, contend that ILCs owned by commercial entities may face significant conflicts of interest. Such ILCs, it is argued, would have strong incentives to lend to customers of the parent company on a favorable basis and without due regard for standards of creditworthiness. Another common argument is that the parent companies might be able to exploit their size and existing customer relationships in a manner that would give them a dominant role in banking markets, thereby reducing financial competition. ; Spong and Robbins examine the public policy issues that arise from mixing banking and commerce. First, they review the history of ILCs and the basic legal and supervisory frameworks under which they operate. Next, they look at the reemergence of ILCs under their new forms of ownership and take a close look at individual ILCs and the types of business they conduct. Finally, they explore the public policy issues.Industrial loan associations

Home financing in Kansas City and its contribution to low and moderate income neighborhood development

Loans ; Finance, Personal ; Loans, Personal ; Housing - Finance

Community bank performance in slower growing markets : finding sound strategies for success

A substantial number of community banks in the Tenth Federal Reserve District are located in rural areas that are experiencing slower economic growth, a less vibrant business environment, and little or no population increase. As a result, these banks face a variety of challenges, including how to maintain prosperous banking operations, find sound lending opportunities, and attract an adequate supply of deposits. Other possible challenges involve finding capable staff, growing and achieving an efficient scale of operations, and contributing to the health of their communities. ; This article looks at how banks that operate in slower growing markets are responding to these challenges. As a group, Tenth District banks in slower growing counties appear to be performing at a satisfactory level, but they fail to match the returns achieved by banks in faster growing markets, and they also fall short on several other performance measures. ; A portion of the banks in slower growing markets, though, are doing remarkably well. Telephone interviews with senior officers at these “high performing” banks revealed a number of strategies and keys to their success—all of which could provide an excellent focal point for other banks in low-growth markets. These successful strategies include: getting the basic business of banking down right as the first step; being open to new business opportunities that are consistent with the bank’s resources and expertise and then taking a slow and careful approach in entering these activities; and actively assisting the local community and the bank’s next generation of customers.Federal Reserve District, 10th ; Community banks

The decline in core deposits : what can banks do?

In recent years, growth in traditional deposit funding sources has failed to match the growth in assets at many banks. These funding shortfalls are raising a number of important concerns, including whether community banks will have to curtail lending to small businesses, farmers, and other local customers. This article takes a look at bank funding trends and their implications for community banks. The article also examines possible explanations for the trends, such as strong loan demand, shifts in household financial portfolios, new competition, comparative returns on other financial instruments, and changing demographics in community banking markets. The final section of the article then explores the options and strategies community banks can use to address their funding challenges.Federal Reserve District, 10th ; Banks and banking ; Bank deposits

Successful strategies in interstate bank acquisitions

Much of the recent consolidation in the banking industry has been across state lines, and this trend will accelerate due to recent federal legislation. As interstate banking expands further, the performance and success of banks that are acquired will be the key factor determining how much consolidation will occur and which organizations will be major participants. This article therefore examines a group of banks that were acquired on an interstate basis in 1986 and 1987, and tracks their performance after acquisition. It identifies strategies and characteristics that distinguish acquisitions with strong performance from those with weak performance. While strong and weak performing acquisitions were similar in many ways at the time they were acquired, strong performers expanded on an already significant presence in loan markets and avoided a deterioration in asset quality. Strong performers grew moderately overall, and improved net interest margins. Compared to weak performing acquisitions, strong performers were better at controlling expenses, and they widened this advantage after acquisition. Overall, the strong performers achieved success by applying sound banking techniques in a challenging new market, where previous experience and detailed insights into customers and competitors were limited.Interstate banking

The outlook for the U.S. banking industry : what does the experience of the 1980s and 1990s tell us?

In many respects, the 1980s appear to be the worst decade in banking since the Great Depression, while the 1990s could be rated as the best. Over 1,100 commercial banks failed or needed FDIC assistance during the 1980s, and significant parts of the thrift industry became insolvent and had to be resolved, costing taxpayers $125 billion. In contrast, the banking industry began a dramatic recovery in the first half of 1990s and has recently achieved record profitability, extremely low levels of loan losses, and the highest capital ratios since the early 1940s. As a result, the number of banks failing during the second half of the 1990s has averaged only four or five per year.> These two divergent experiences raise the question of what will happen during the next decade. One obvious forecast would be for recent favorable trends to continue, particularly since banks and the underlying economy have shown remarkable strength and resiliency in their recovery from the 1980s. The current environment is not without some concerns, however. Consumer debt has reached record levels, and a few sectors, such as agriculture, show signs of weakness. Also, bank supervisors have recently voiced concerns that bank credit standards are weakening. Moreover, the financial environment is changing rapidly with innovation, bank expansion and consolidation, and competition from new sources, thus opening the door for new problems.> Spong and Sullivan examine the outlook for the banking industry over the next few years, focusing on whether the prosperity and tranquility of the 1990s will continue, or whether the industry faces a return of the banking problems of the 1980s. They find that, because banks are in much better shape now than in the 1980s, the industry is unlikely to face the depth of problems suffered in the 1980s even if the economic environment becomes less favorable. Still, it appears that banks will be hard pressed to match their recent record performance.Banks and banking