third of the U.S. population will be minority. Success for any retail industry is not simply a question of serving its established markets but reaching out for new customers and turning them into profitable or more profitable relationships. In order to remain viable and relevant, the country's banking industry must develop relationships now with underserved or unserved customers and the fastest growing segments of our population. Another important trend is that the population distribution in the U.S. is shifting as the Baby Boomer population ages. Consumers demand different products as they enter new phases in their lives. As technological changes have improved the dissemination of information, for example, consumers have learned they have a variety of investment options and opportunities for their retirement savings. Correspondingly, there has been a migration of savings from insured deposits to mutual funds that offer an array of investment and risk/reward profiles. Last year, for the first time in the history of the United States, assets held in mutual funds exceeded assets held in insured deposits, as shown in Figure 1. Furthermore, the percentage of household financial assets invested in bank deposits decreased from 36 percent in 1975 to 18 percent in 1995, as shown in Figure 2. These represent major shifts in the primary source of bank funding. $ Billions Figure 1: Bank Time Deposits vs. Mutual Fund Assets 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 SOURCE: Investment Company Institute and various Call Reports. Figure 2: Household Financial Assets SOURCE: Flow of Funds Report, Board of Governors of the Federal Reserve Finally, for the last several decades, more and more of what used to be the core business of commercial banking-lending money to business-has declined, as businesses are accessing the capital markets directly (Figure 3). Growth in securitization, brought about by technological advancements, has eroded the comparative advantage once held by banks. The capital markets have appropriated the industry's most creditworthy business, because information is most readily available for this portion of the market. Now, U.S. banks face competition from non-U.S. banks and from domestic and foreign nonbank financial services companies, such as investment banks, securities houses, and insurance companies. As Figure 4 indicates, the share of assets of all financial institutions held by banks continues to decline. 95 84 85 86 87 88 89 90 91 92 93 94 SOURCE: Flow of Funds Report, Board of Governors of the Federal Reserve System, and various Call Reports. 20 Other institutions include credit unions, insurance companies, pension funds, finance companies, securities brokers and dealers, mortgage companies, and real estate in vestment trusts. SOURCE: Flow of Funds Report, Board of Governors of the Federal Reserve Banks have responded to these changes by seeking new sources of income. The banking industry today looks extremely profitable and competitive. What isn't clear from looking simply at the bottom line is the extent to which the composition of bank earnings today is different from the past. As an example, Figure 5 shows that fee income is a much higher percentage of revenue today than in the past. Figure 5: Noninterest Income to Total Income Percentage 30 20 10 0 87 88 89 90 91 92 93 94 95 96 84 85 86 NOTE: Total income is defined as the sum of interest and noninterest income. SOURCE: Call Reports. As the supervisor of the National Banking System, I am vitally interested that banks have the opportunity to respond to these changes and to continue to play their critical role in the Nation's economy. It is troubling, therefore, that a combination of forces impede the opportunities for banks to adapt their business practices prudently. Without those opportunities, banks will continue to face shrinking revenue prospects from their traditional lines of business. A lack of such opportunities creates incentives for banks to reach ever farther out on the risk curve to generate profits and attractive returns on capital and they can disrupt the safety and soundness of the National Banking System. Because prudent evolution is critical to long-term safety and soundness, every regulator must be concerned about these trends. We must consider the implications for our communities, our businesses, and the economy. The actions taken by the OCC over the past 4 years, which I will now summarize, were taken in this context, in order to make our supervision meaningful and ensure the banking industry remains relevant. OCC Actions As I noted previously, the OCC has four pillars that provide a framework to guide us in keeping pace with the evolution of the market in supervising the National Banking System. The pillars support and complement each other. For example, banks cannot fulfill their role in assuring access to financial services for all Americans if they act in an unsafe and unsound manner, nor can they be safe and sound if they are unable to compete in this changing environment. It is critical that policy makers not lose sight of these realities when determining the outcome of any financial modernization efforts. In addition, banks should not be unduly burdened by inefficient supervision and regulation, because it can weaken their competitive ability and detracts from their focus on assuring fair access to financial services in a safe and sound manner. Most important, safety and soundness is paramount if banks are to fulfill their fundamental role in the economy. Assure Fair Access to Financial Services for All Americans In the 4 years that I have been Comptroller, I have stated repeatedly that one of my goals for the OCC was to help ensure in this changing environment that all Americans receive fair access to financial services. That is the law, but, more fundamentally, it is the right thing to do. Banks perform a vital role in the economy, and, because of that, they remain closely connected to their communities. It is critical to preserve this linkage, especially in light of the changing demographics I mentioned earlier, so that all of our citizens have a safe haven for their savings and are able to participate fully in our economy. Under this pillar, we have revised our Community Reinvestment Act regulations, encouraged national bank involvement in community development activities, stepped up our enforcement of CRA and fair lending laws, and issued various types of guidance to protect the interests of con sumers. CRA Congress reaffirmed the important responsibility that banks have to serve their local communities when it passed the CRA in 1977. However, as noted earlier, the regulations to implement CRA that were in place when I became Comptroller were not as effective as they could have been. Though well-intentioned, they were in many respects counterproductive, primarily because they focused on process rather than performance. More important, no one was satisfied with how the agencies implemented CRA-not the banks, not the public, not our examiners. As you know, there were many who preferred that the regulators simply do away with CRA. I strongly believed that CRA could and should work for all of us, and so I led an interagency effort to improve the effectiveness of CRA. To revise the CRA regulations so they would be effective and accepted, we held town meetings across the country to hear from everyone with a stake in the new CRA, and we put our proposed solution out twice for public comment. In 1993, we held seven public hearings on CRA reform, and we received hundreds of comments from the public. This process enabled us to move beyond confrontation, and our efforts are being rewarded by the creation of effective partnerships-partnerships that are, today, growing in strength and helping to rebuild communities. We believe the new regulation will substantially ease the industry's compliance burden and lead to more consistent and more meaningful regulatory assessments of CRA performance. The increased attention given to this area has had concrete results, providing new opportunities for many to participate in the American dream of home ownership: home mortgage loans to low- to moderate-income census tracts increased 22 percent from 1993 to 1995, more than twice the 10 percent increase across all census tracts, as shown below in Figure 6.6 Also, in the past 3 years, banks' loan commitments have totaled $100 billion, representing 70 percent of all reinvestment commitments since enactment of the CRA. Similarly, in the community development area, we have worked hard to help move banks and community organizations from confrontation to partnership. Last fall, we 6 Source: HMDA data. revised the OCC's Part 24 regulation, which governs national bank investments in community development corporations and community development projects. The revised Part 24 facilitates bank community development investments by eliminating requirements for unnecessary applications in favor of a certification process in many instances and streamlining them in others. The final regulation also relaxed restrictions on the reinvestment of the proceeds of these investments in an effort to attract new capital. Early this year, we published a revised edition of the Community Development Finance: Tools and Techniques for National Banks, a reference document on community development first published by the agency in 1989. The booklet includes examples of the basic strategies national banks use to cultivate community development lending and investment opportunities. It also provides new information on safe and sound approaches to meeting community development credit and investment needs in today's marketplace, and a listing of community development resources. As well, we have sponsored various conferences and educational symposia on community development issues, including a conference with over 500 attendees in early 1996. The National Banking System can take pride in the results of these efforts. National banks of all sizes throughout the country are supporting a variety of community-based partnerships that provide special financing for low- and moderate-income housing, small and minority business development, neighborhood and commercial revitalization, and industrial development. As an example, one consortium of banks and thrifts in Detroit recently committed to lend $1 billion over the next 10 years in the city's empowerment zone. Since I became Comptroller in 1993, national banks and their community development partners have made targeted investments of over $4 billion in "public welfare" investments alone. In 1996 alone, we approved 187 national bank community development corporations and projects, with investments for the year totaling $1.4 billion. Fair Lending Over the past 4 years, the OCC also undertook a number of measures to improve our enforcement of fair lending laws. We issued new procedures to detect lending discrimination, and the OCC has conducted over 3,000 fair lending examinations using the new procedures. Along with new examination procedures, we have used mystery shoppers to test for the presence of discriminatory lending behavior, and we have encouraged banks to self-test. Also, as I noted earlier, since April 1993 the OCC has made 23 referrals to the Department of Justice, or notified the Department of Housing and Urban Development, of national banks in violation of the fair lending laws. Furthermore, the OCC economists have begun to participate in fair lending examinations, employing statistical models to supplement judgmental evaluations in checking for the presence of discriminatory behavior. These models increase the efficiency of our examination effort, both by pre-screening banks to find possible discriminatory behavior and then to guide us in completing our actual examinations in a highly efficient, objective manner. Along with the Secretary of the Department of Housing and Urban Development (HUD) and the Attorney General, in 1993, I initiated an Interagency Task Force on Fair Lending to deter lending discrimination.7 This Task Force has undertaken a comprehensive review of fair lending enforcement and issued a joint policy statement on lending discrimination. In addition, starting this past January, a separate interagency group of economists and statisticians have commenced meeting to exchange ideas regarding the approaches and statistical techniques they employ in their fair lending exams. Most important, these task forces have provided the agencies that are responsible for fair lending enforcement with a means to exchange information and enhance their ability to work together toward a common goal. As a result of the OCC's efforts to improve access to financial services, we have seen an increase in lending to minorities. Mortgage loans to all minorities increased 33 percent from 1993 to 1995, three times the increase in overall mortgage lending, as shown in Figure 7.9 7 In addition to the OCC, this group includes the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National Credit Union Association, the Office of Federal Housing Enterprise Oversight, the Federal Housing Finance Board, the Departments of Justice and HUD, and the Federal Trade Commission. 8 This interagency group includes representatives of the OCC, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the Federal Trade Commission. 9 Source: HMDA data. |